\n\nBorrower also agrees to reimburse the Paying Agent and the Lenders for any and\nall reasonable costs, internal charges and out-of-pocket expenses (including\nattorneys' fees and time charges of attorneys for the Paying Agent and the\nLenders, which attorneys may be employees of the Paying Agent or the Lenders)\npaid or incurred by the Paying Agent or any Lender in connection with the\ncollection and enforcement of the Loan Documents and the protection of rights\nthereunder. The Borrower further agrees to indemnify the Paying Agent and each\nLender, its directors, officers and employees against all losses, claims,\ndamages, penalties, judgments, liabilities and expenses (including, without\nlimitation, all expenses of litigation or preparation therefor whether or not\nthe Paying Agent or any Lender is a party thereto) which any of them may pay or\nincur arising out of or relating to this Agreement, the other Loan Documents,\nthe transactions contemplated hereby or the direct or indirect application or\nproposed application of the proceeds of any Loan hereunder, provided, however,\nthat the Borrower shall not have an obligation pursuant to this Section to\nindemnify any Person for any such amounts which result from the willful\nmisconduct or gross negligence of such Person, as determined by a court of\ncompetent jurisdiction. The obligations of the Borrower under this Section shall\nsurvive the termination of this Agreement, the cancellation of the Commitments,\nand the payment of all outstanding Obligations.\n\n 9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing documents,\nand requests hereunder shall be furnished to the Paying Agent with sufficient\ncounterparts so that the Paying Agent may furnish one to each of the Lenders.\n\n 9.9. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document\nthat is held to be inoperative, unenforceable, or invalid in any jurisdiction\nshall, as to that jurisdiction, be inoperative, unenforceable, or invalid\nwithout affecting the remaining provisions in that jurisdiction or the\noperation, enforceability, or validity of that provision in any other\njurisdiction, and to this end the provisions of all Loan Documents are declared\nto be severable.\n\n 9.10. NONLIABILITY OF LENDERS. The relationship between the Borrower\nand the Lenders and the Paying Agent shall be solely that of borrower and\nlender. Neither the Paying Agent nor any Lender shall have any fiduciary\nresponsibilities to the Borrower. Neither the Paying Agent nor any Lender\nundertakes any responsibility to the Borrower to review or inform the Borrower\nof any matter in connection with any phase of the Borrower's business or\noperations.\n\n 9.11. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A\nCONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH\nTHE LAWS OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE\nTO NATIONAL BANKS.\n\n 9.12. CONSENT TO JURISDICTION. The Borrower hereby irrevocably submits\nto the non-exclusive jurisdiction of any United States federal or New York state\ncourt sitting in New York, New York in any action or proceeding arising out of\nor relating to any Loan Document and the Borrower hereby irrevocably agrees that\nall claims in respect of such action or proceeding \n\n 54\n\n\nmay be heard and determined in any such court and irrevocably waives any\nobjection it may now or hereafter have as to the venue of any such suit, action\nor proceeding brought in such a court or that such court is an inconvenient\nforum. Nothing herein shall limit the right of the Paying Agent or any Lender to\nbring proceedings against the Borrower in the courts of any other jurisdiction.\nAny judicial proceeding by the Borrower against the Paying Agent or any Lender\nor any Affiliate of the Paying Agent or any Lender involving, directly or\nindirectly, any matter in any way arising out of, related to, or connected with\nany Loan Document shall be brought only in a court in New York, New York.\n\n 9.13. WAIVER OF JURY TRIAL. THE BORROWER, THE PAYING AGENT AND EACH\nLENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY\nOR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN\nANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE\nRELATIONSHIP ESTABLISHED THEREUNDER.\n\n 9.14. CONFIDENTIALITY. The Paying Agent and each Lender agrees to hold\nany confidential information which it may receive from the Borrower pursuant to\nthis Agreement or in the course of an inspection pursuant to Section 6.10 in\nconfidence, except for disclosure (i) to other Lenders and their respective\nAffiliates, each of whom shall be made aware of the terms of this Section 9.14\nand shall agree to abide thereby, (ii) to legal counsel, accountants, and other\nprofessional advisors to the Paying Agent or that Lender, (iii) to regulatory\nofficials (provided that, to the extent practicable and permissible, the Paying\nAgent and each Lender shall give the Borrower prior notice of such disclosure),\n(iv) as required by law, regulation, or legal process, (v) in connection with\nany legal proceeding to which the Paying Agent or that Lender is a party, and\n(vi) permitted by Section 12.4; provided that, in connection with any disclosure\npermitted under clause (iv) or (v) hereinabove, the Paying Agent or such Lender,\nas appropriate, shall give the Borrower prior notice of such disclosure unless\nsuch notice is prohibited by law, regulation, or process.\n\n 9.15. ACCOUNTING. Except as provided to the contrary herein, all\naccounting terms used herein shall be interpreted and all accounting\ndeterminations hereunder shall be made in accordance with GAAP.\n\n 9.16. RELEASE OF GUARANTORS. Upon the consummation of any liquidation,\ndissolution, merger, consolidation, sale or other transfer of a Guarantor other\nthan Caliber, FedEx or RPS (collectively, a \"Transfer\"), and provided (i) no\nDefault or Unmatured Default has occurred and is continuing or would occur as a\nresult of such Transfer, and (ii) the Liens and security interests contemplated\nby the Security Documents are not then in effect or purported to be in effect,\nsuch Guarantor shall automatically be released from all of its obligations under\nthe Guaranty, and, if the Borrower so requests, the Lenders shall promptly\nexecute an instrument, in form and substance reasonably satisfactory to the\nBorrower and the Paying Agent, evidencing such release.\n\n 55\n\n ARTICLE X\n\n THE PAYING AGENT\n\n 10.1. APPOINTMENT. Morgan Guaranty is hereby appointed Paying Agent\nhereunder and under each other Loan Document, and each of the Lenders\nirrevocably authorizes the Paying Agent to act as the contractual representative\nof such Lender with the rights and duties expressly set forth herein and in the\nother Loan Documents. The Paying Agent agrees to act as such contractual\nrepresentative upon the express conditions contained in this ARTICLE X. The\ndefined terms \"Paying Agent\", \"Co-Arranger\", \"Documentation Agent\",\n\"Co-Syndication Agent\" and Administrative Agent\" are used in this Agreement\nsolely as a matter of market convention. Each Lender expressly understands and\nagrees that none of such Persons shall have any fiduciary responsibilities to\nany Lender by reason of this Agreement and that the Paying Agent is merely\nacting as the representative of the Lenders with only those duties as are\nexpressly set forth in this Agreement and the other Loan Documents. In its\ncapacity as the Lenders' contractual representative, the Paying Agent does not\nassume any fiduciary duty to any of the Lenders and is acting as an independent\ncontractor, the rights and duties of which are limited to those expressly set\nforth in this Agreement and the other Loan Documents. Each of the Lenders hereby\nagrees to assert no claim against the Paying Agent on any agency theory or any\nother theory of liability for breach of fiduciary duty, all of which claims each\nLender waives. None of the Co-Arrangers or the Administrative Agent, as such,\nshall have any duties under or in connection with this Agreement or the other\nLoan Documents.\n\n 10.2. POWERS. The Paying Agent shall have and may exercise such powers\nunder the Loan Documents as are specifically delegated to the Paying Agent by\nthe terms of each thereof, together with such powers as are reasonably\nincidental thereto. The Paying Agent shall have the right to negotiate and\napprove the form, terms and provisions of the Security Documents, and to enter\ninto the Security Documents for the benefit of the Lenders, in accordance with\nSection 6.26 (but in any event subject to Section 8.2). Any action taken by the\nPaying Agent in accordance with the provisions of this Agreement, the Security\nDocuments or the other Loan Documents, and the exercise by the Paying Agent of\nthe powers set forth herein or therein, together with such other powers as are\nreasonably incidental thereto, are hereby authorized by, and shall be binding\nupon, each of the Lenders. The Paying Agent shall have no implied duties to the\nLenders, or any obligation to the Lenders to take any action thereunder except\nany action specifically provided by the Loan Documents to be taken by the Paying\nAgent. Without limiting the generality of the foregoing, the Paying Agent shall\nnot be required to take any action with respect to any Default except as\nexpressly provided in Article VII.\n\n 10.3. GENERAL IMMUNITY. None of the Paying Agent or its Affiliates, nor\nany of their respective directors, officers, agents or employees, shall be\nliable to the Borrower, the Lenders or any Lender for any action taken or\nomitted to be taken by it or them hereunder or under any other Loan Document or\nin connection herewith or therewith except that any such Person shall not have\n\n 56\n\n\nsuch immunity for acts or omissions it takes which are both (i) not at the\nrequest or with the consent of the Required Lenders, and (ii) instances of its\nown gross negligence or willful misconduct.\n\n 10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. The Paying Agent\nshall be deemed not to have knowledge of any Default or Unmatured Default unless\nand until written notice thereof is given to the Paying Agent by the Borrower or\na Lender, and neither the Paying Agent or its Affiliates, nor any of their\nrespective directors, officers, agents or employees shall be responsible for or\nhave any duty to ascertain or inquire into (i) any statement, warranty or\nrepresentation made in or in connection with this Agreement, (ii) the contents\nof any certificate, report or other document delivered hereunder or in\nconnection herewith, (iii) the performance or observance of any of the\ncovenants, agreements or other terms or conditions set forth herein, (iv) the\nvalidity, enforceability, effectiveness or genuineness of this Agreement or any\nother agreement, instrument or document, or (v) the satisfaction of any\ncondition set forth in Article IV or elsewhere herein, other than to confirm\nreceipt of items expressly required to be delivered to the Paying Agent.\n\n 10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Paying Agent shall in all\ncases be fully protected in acting, or in refraining from acting, hereunder and\nunder any other Loan Document in accordance with written instructions signed by\nthe requisite number of Lenders, and such instructions and any action taken or\nfailure to act pursuant thereto shall be binding on all of the Lenders and on\nall holders of Loans. The Paying Agent shall be fully justified in failing or\nrefusing to take any action hereunder and under any other Loan Document unless\nit shall first be indemnified to its satisfaction by the Lenders pro rata\nagainst any and all liability, cost and expense that it may incur by reason of\ntaking or continuing to take any such action.\n\n 10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Paying Agent may execute\nany of its duties as Paying Agent hereunder and under any other Loan Document by\nor through employees, agents, and attorneys-in-fact and shall not be answerable\nto the Lenders, except as to money or securities received by it or its\nauthorized agents, for the default or misconduct of any such agents or\nattorneys-in-fact selected by it with reasonable care. The Paying Agent shall be\nentitled to seek advice of counsel (who may be counsel for the Borrower)\nconcerning all matters pertaining to its duties hereunder and under any other\nLoan Document.\n\n 10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Paying Agent shall be\nentitled to rely upon any notice, consent, certificate, affidavit, letter,\ntelegram, telex, telecopy, telefacsimile, statement, paper or document believed\nby it to be genuine and correct and to have been signed or sent by the proper\nperson or persons, and, (i) in respect to legal matters, upon the opinion of\ncounsel selected by the Paying Agent, which counsel may be employees of the\nPaying Agent, (ii) in respect of accounting and related matters, upon\naccountants selected by the Paying Agent, and (iii) in respect of other matters,\nupon experts selected by the Paying Agent.\n\n 57\n\n\n 10.8. PAYING AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders\nagree to reimburse and indemnify the Paying Agent, its Affiliates and their\nrespective directors, officers, agents and employees, as applicable, ratably in\nproportion to their respective Commitments (i) for any amounts not reimbursed by\nthe Borrower for which the Paying Agent is entitled to reimbursement by the\nBorrower under the Loan Documents, (ii) for any other expenses incurred by the\nPaying Agent or any of such Persons on behalf of the Lenders, in connection with\nthe preparation, execution, delivery, administration and enforcement of the Loan\nDocuments to the extent such expenses are or may be obligations of the Borrower\nto the Paying Agent or any of such Persons and (iii) for any liabilities,\nobligations, losses, damages, penalties, actions, judgments, suits, costs,\nexpenses or disbursements of any kind and nature whatsoever which may be imposed\non, incurred by or asserted against the Paying Agent or any such Persons in any\nway relating to or arising out of the Loan Documents or any other document\ndelivered in connection therewith or the transactions contemplated thereby, or\nthe enforcement of any of the terms thereof or of any such other documents,\nprovided that no Lender shall be liable for any of the foregoing to the extent\nthey arise from the gross negligence or willful misconduct of the Paying Agent.\nThe obligations of the Lenders under this Section 10.8 shall survive payment of\nthe Obligations and termination of this Agreement.\n\n 10.9. RIGHTS AS A LENDER. With respect to its Commitment and the Loans\nmade by it, the Paying Agent shall have the same rights and powers hereunder and\nunder any other Loan Document as any Lender and may exercise the same as though\nit were not the Paying Agent, and the term \"Lender\" or \"Lenders\" shall, at any\ntime when the Paying Agent is a Lender, unless the context otherwise indicates,\ninclude the Paying Agent in its individual capacity. The Paying Agent may accept\ndeposits from, lend money to, and generally engage in any kind of trust, debt,\nequity or other transaction, in addition to those contemplated by this Agreement\nor any other Loan Document, with the Borrower or any of its Subsidiaries in\nwhich the Borrower or such Subsidiary is not restricted hereby from engaging\nwith any other Person. The Paying Agent, in its individual capacity, is not\nobligated to remain a Lender except as provided under Article XII.\n\n 10.10. LENDER CREDIT DECISION. Each Lender acknowledges that it has,\nindependently and without reliance upon the Paying Agent or any other Lender and\nbased on the financial statements prepared by the Borrower and such other\ndocuments and information as it has deemed appropriate, made its own credit\nanalysis and decision to enter into this Agreement and the other Loan Documents.\nEach Lender also acknowledges that it will, independently and without reliance\nupon the Paying Agent or any other Lender and based on such documents and\ninformation as it shall deem appropriate at the time, continue to make its own\ncredit decisions in taking or not taking action under this Agreement and the\nother Loan Documents.\n\n 10.11. SUCCESSOR PAYING AGENT. The Paying Agent may resign at any time\nby giving written notice thereof to the Lenders and the Borrower, and the Paying\nAgent may be removed at any time with or without cause by written notice\nreceived by the Paying Agent from the Required Lenders. Upon any such\nresignation or removal, the Required Lenders shall have the right to \n\n 58\n\n\nappoint, on behalf of the Borrower and the Lenders and with the consent of the\nBorrower (which shall not be unreasonably withheld), a successor Paying Agent.\nIf no successor Paying Agent shall have been so appointed by the Required\nLenders and consented to by the Borrower and shall have accepted such\nappointment within thirty days after the retiring Paying Agent's giving notice\nof resignation, then the retiring Paying Agent may appoint, on behalf of the\nLenders, a successor Paying Agent, provided that the Borrower shall have the\nright to remove such successor Paying Agent and replace it with a successor of\nits own designation with the consent of the Required Lenders (which shall not be\nunreasonably withheld). Such successor Paying Agent shall be a commercial bank\nhaving capital and retained earnings of at least $250,000,000. Upon the\nacceptance of any appointment as Paying Agent hereunder by a successor Paying\nAgent, such successor Paying Agent shall thereupon succeed to and become vested\nwith all the rights, powers, privileges and duties of the retiring or removed\nPaying Agent, and the retiring or removed Paying Agent shall be discharged from\nits duties and obligations hereunder and under the other Loan Documents. After\nany retiring or removed Paying Agent's resignation or removal hereunder as\nPaying Agent, the provisions of this Article X shall continue in effect for its\nbenefit in respect of any actions taken or omitted to be taken by it while it\nwas acting as the Paying Agent hereunder and under the other Loan Documents.\n\n 10.12. DISTRIBUTION OF INFORMATION. The Borrower authorizes the Paying\nAgent, as the Paying Agent may elect in its sole discretion, to discuss with and\nfurnish to the Lenders or to any other Person having an interest in the\nObligations (whether as a guarantor, pledgor of collateral, participant,\npurchaser or otherwise) all financial statements, audit reports and other\ninformation pertaining to the Borrower and its Subsidiaries whether such\ninformation was provided by the Borrower or prepared or obtained by the Paying\nAgent, subject to Section 9.14. Neither the Paying Agent nor any of its\nemployees, officers, directors or agents makes any representation or warranty\nregarding any audit reports or other analyses of the Borrower's and its\nSubsidiaries condition which the Paying Agent may elect to distribute, whether\nsuch information was provided by the Borrower or prepared or obtained by the\nPaying Agent, nor shall the Paying Agent or any of its employees, officers,\ndirectors or agents be liable to any person or entity receiving a copy of such\nreports or analyses for any inaccuracy or omission contained in or relating\nthereto. Except as expressly set forth herein, the Paying Agent shall have no\nduty to disclose, and shall not be liable for the failure to disclose, any\ninformation relating to the Borrower or any of the Subsidiaries that is\ncommunicated to or obtained by the bank serving as Paying Agent, or any of such\nbank=s Affiliates, in any capacity.\n\n\n ARTICLE XI\n\n SETOFF; RATABLE PAYMENTS\n\n 11.1. SETOFF. In addition to, and without limitation of, any rights of\nthe Lenders under applicable law, if the Borrower becomes insolvent, however\nevidenced, or any Default or \n\n 59\n\n\nUnmatured Default occurs, any and all deposits (including all account balances,\nwhether provisional or final and whether or not collected or available) and any\nother Indebtedness at any time held or owing by any Lender to or for the credit\nor account of the Borrower may be offset and applied toward the payment of the\nObligations owing to such Lender, whether or not the Obligations, or any part\nhereof, shall then be due.\n\n 11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,\nhas payment made to it upon its Loans (other than payments received pursuant to\nSection 3.1, 3.2 or 3.4) in a greater proportion than that received by any other\nLender, such Lender agrees, promptly upon demand, to purchase a portion of the\nLoans held by the other Lenders so that after such purchase each Lender will\nhold its ratable proportion of Loans. If any Lender, whether in connection with\nsetoff or amounts which might be subject to setoff or otherwise, receives\ncollateral (other than pursuant to the Security Documents) or other protection\nfor its Obligations or such amounts which may be subject to setoff, such Lender\nagrees, promptly upon demand, to take such action necessary such that all\nLenders share in the benefits of such collateral ratably in proportion to their\nLoans. In case any such payment is disturbed by legal process, or otherwise,\nappropriate further adjustments shall be made to accomplish the intent of this\nSection.\n\n\n ARTICLE XII\n\n BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS\n\n 12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan\nDocuments shall be binding upon and inure to the benefit of the Borrower and the\nLenders and their respective successors and assigns, except that (i) the\nBorrower shall not have the right to assign its rights or obligations under the\nLoan Documents and (ii) any assignment by any Lender must be made in compliance\nwith Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may\nat any time, without the consent of the Borrower or the Paying Agent, assign all\nor any portion of its rights under this Agreement to a Federal Reserve Bank;\nprovided, however, that no such assignment shall release the transferor Lender\nfrom its obligations hereunder. The Paying Agent may treat each Lender as the\nowner of the Loans made by such Lender for all purposes hereof unless and until\nsuch Lender complies with Section 12.3 in the case of an assignment thereof or,\nin the case of any other transfer, a written notice of the transfer is filed\nwith the Paying Agent. Any assignee or transferee of a Loan agrees by acceptance\nthereof to be bound by all the terms and provisions of the Loan Documents. Any\nrequest, authority or consent of any Person, who at the time of making such\nrequest or giving such authority or consent is the owner of any Loan, shall be\nconclusive and binding on any subsequent holder, transferee or assignee of such\nLoan.\n\n 12.2. PARTICIPATIONS.\n\n 12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in\n the ordinary course of its business and in accordance with applicable\n law, at any time and from time to time \n\n 60\n\n\n sell to one or more banks or other entities (\"Participants\")\n participating interests in any Loan owing to such Lender, any note held\n by such Lender evidencing any such Loan, any Commitment of such Lender\n or any other interest of such Lender under the Loan Documents. In the\n event of any such sale by a Lender of participating interests to a\n Participant, such Lender's obligations under the Loan Documents shall\n remain unchanged, such Lender shall remain solely responsible to the\n other parties hereto for the performance of such obligations, such\n Lender shall remain the owner of all Loans made by it for all purposes\n under the Loan Documents, all amounts payable by the Borrower under\n this Agreement shall be determined as if such Lender had not sold such\n participating interests, and the Borrower and the Paying Agent shall\n continue to deal solely and directly with such Lender in connection\n with such Lender's rights and obligations under the Loan Documents.\n\n 12.2.2. VOTING RIGHTS. Each Lender shall retain the sole\n right to approve, without the consent of any Participant, any\n amendment, modification or waiver of any provision of the Loan\n Documents other than any amendment, modification or waiver with respect\n to any Loan or Commitment in which such Participant has an interest\n which requires the approval of all of the Lenders pursuant to Section\n 8.2.\n\n 12.2.3. BENEFIT OF SETOFF. Upon selling any participating\n interest to a Participant pursuant to Section 12.2.1, each Lender will\n have the option to, but shall not be required to, give the Borrower and\n the Paying Agent written notice of the fact that it has made such a\n sale (without being required to specify the amount or any other\n information concerning the participating interest sold) and the name of\n the purchasing Participant (each Participant named in such a notice is\n hereinafter referred to as an \"Acknowledged Participant\"). The Borrower\n agrees that each Acknowledged Participant shall be deemed to have the\n right of setoff provided in Section 11.1 as of the date of the\n Borrower's receipt of the aforementioned notice in respect of its\n participating interest in amounts owing under the Loan Documents to the\n same extent as if the amount of its participating interest were owing\n directly to it as a Lender under the Loan Documents, provided that each\n Lender shall retain the right of setoff provided in Section 11.1 with\n respect to the amount of participating interests sold to each\n Acknowledged Participant. The Lenders agree to share with each\n Acknowledged Participant, and each Acknowledged Participant, by\n exercising the right of setoff provided in Section 11.1, agrees to\n share with each Lender, any amount received pursuant to the exercise of\n its right of setoff, such amounts to be shared in accordance with\n Section 11.2 as if each Acknowledged Participant were a Lender.\n\n 12.3. ASSIGNMENTS.\n\n 12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the\n ordinary course of its business and in accordance with applicable law,\n at any time and from time to time, make one or more assignments to one\n or more banks or other entities (each a \"Purchaser\") of all or any part\n of its rights and obligations under the Loan Documents. Any assignment\n\n 61\n\n\n under this Section 12.3 shall be substantially in the form of Exhibit\n \"C\" hereto or in such other form as may be agreed to by the parties\n thereto. Unless an acceleration of the Obligations has occurred and is\n continuing, the consent of the Borrower and the Paying Agent shall be\n required prior to an assignment becoming effective with respect to a\n Purchaser which is not a Lender or an Affiliate thereof. Such consent\n shall not be unreasonably withheld. Notwithstanding anything in this\n Article XII to the contrary, (a) nothing in this Agreement shall\n prohibit or limit the right of any Lender to make assignments (and no\n consent shall be required in connection with such assignments) of all\n or any part of its interests under the Loan Documents (i) to a\n Purchaser which is a Lender or an Affiliate thereof and (ii) after the\n occurrence and during the continuance of an acceleration of the\n Obligations, to any Purchaser, and (b) any Lender (a \"Granting Lender\")\n may grant to a special purpose funding vehicle (a \"SPC\") identified as\n such in writing from time to time by the Granting Lender to the Paying\n Agent and the Borrower, the option to provide to the Borrower all or\n any part of any Loan that such Granting Lender would otherwise be\n obligated to make to the Borrower pursuant to this Agreement; PROVIDED\n that (i) nothing herein shall constitute a commitment by any SPC to\n make any Loan, (ii) if an SPC elects not to exercise such option or\n otherwise fails to provide all or any part of such Loan, the Granting\n Lender shall be obligated to make such Loan pursuant to the terms\n hereof. The making of a Loan by an SPC hereunder shall utilize the\n Commitment of the Granting Lender to the same extent, and as if, such\n Loan were made by such Granting Lender. Each party hereto agrees that\n no SPC shall be liable for any indemnity or similar payment obligation\n under this Agreement (all liability for which shall remain with the\n Granting Lender). In furtherance of the foregoing, each party hereto\n agrees (which agreement shall survive the termination of this\n Agreement) that, prior to the date that is one year and one day after\n the payment in full of all outstanding commercial paper or other senior\n indebtedness of any SPC, it will not institute against, or join any\n other person in instituting against, such SPC any bankruptcy,\n reorganization, arrangement, insolvency or liquidation proceedings\n under the laws of the United States or any State thereof. In addition,\n notwithstanding anything to the contrary contained in this Section\n 12.3, any SPC may (i) with notice to, but without the prior written\n consent of, the Borrower and the Paying Agent and without paying any\n processing fee therefor, assign all or any part of its interests in any\n Advances to its Granting Lender or to any financial institutions\n (consented to by the Borrower and the Paying Agent) providing liquidity\n and/or credit support to or for the account of such SPC to support the\n funding or maintenance of Loans and (ii) disclose on a confidential\n basis any non-public information relating to its Loans to any rating\n agency, commercial paper dealer or provider of any surety, guarantee or\n credit or liquidity enhancement to such SPC.\n\n 12.3.2. REQUIRED ASSIGNMENTS. The Borrower shall have the\n right, by giving at least 15 Business Days' prior written notice to the\n affected Lender and the Paying Agent, at any time when no Default or\n Unmatured Default has occurred and is continuing, to require any Lender\n to assign all of its rights and obligations under the Loan Documents to\n a Purchaser approved by the Borrower. Such assignment shall be\n substantially in the form of Exhibit \"C\" hereto or in such other form\n as may be agreed to by the parties thereto but \n\n 62\n\n\n shall be on terms and conditions reasonably satisfactory to the\n affected Lender. If the affected Lender is a Reference Lender, the\n Paying Agent, with the consent of the Borrower (which shall not be\n unreasonably withheld), shall appoint a new Reference Lender from among\n the Lenders. The Borrower shall remain liable to the affected Lender\n for any indemnification provided under Section 3.4 with respect to\n Loans of such Lender outstanding on the effective date of an assignment\n required under this Section 12.3.2, as well as for all other\n Obligations owed to such Lender under this Agreement as of such\n effective date.\n\n 12.3.3. EFFECT; EFFECTIVE DATE. Upon (i) delivery to the\n Paying Agent of a notice of assignment, substantially in the form\n attached as Exhibit \"I\" to Exhibit \"C\" hereto (a \"Notice of\n Assignment\"), together with any consents required by Section 12.3.1,\n and (ii) payment by the assignor or assignee of a $4,000 fee to the\n Paying Agent for processing such assignment, such assignment shall\n become effective on the effective date specified in such Notice of\n Assignment. On and after the effective date of such assignment, such\n Purchaser shall for all purposes be a Lender under this Agreement and\n any other Loan Document executed by the Lenders and shall have all the\n rights and obligations of a Lender under the Loan Documents, to the\n same extent as if it were an original party hereto, and no further\n consent or action by the Borrower, the Lenders or the Paying Agent\n shall be required to release the transferor Lender with respect to the\n Commitments and Loans assigned to such Purchaser and such Lender shall\n be immediately so released. Upon the consummation of any assignment to\n a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the\n Paying Agent and the Borrower shall make appropriate arrangements so\n that, to the extent one or more notes have been issued to evidence any\n of the transferred Loans, a replacement note is issued to such\n transferor Lender and, if so requested by such Purchaser, a new note\n or, as appropriate, replacement note, is issued to such Purchaser, in\n each case in principal amounts reflecting their respective Commitments,\n as adjusted pursuant to such assignment.\n\n 12.4. DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender\nto disclose to any Participant or Purchaser or any other Person acquiring an\ninterest in the Loan Documents by operation of law (each a \"Transferee\") and any\nprospective Transferee any and all information in such Lender's possession\nconcerning the creditworthiness of the Borrower and its Subsidiaries; provided\nthat each Transferee and prospective Transferee agrees to be bound by Section\n9.14 of this Agreement.\n\n 12.5. TAX TREATMENT. If any interest in any Loan Document is\ntransferred to any Transferee which is organized under the laws of any\njurisdiction other than the United States or any State thereof, the transferor\nLender shall cause such Transferee, concurrently with the effectiveness of such\ntransfer, to comply with the provisions of Section 2.18.\n\n 63\n\n\n ARTICLE XIII\n\n NOTICES\n\n\n 13.1. GIVING NOTICE. Except as otherwise permitted by Section 2.13 with\nrespect to borrowing notices, all notices and other communications provided to\nany party hereto under this Agreement or any other Loan Document shall be in\nwriting or by telex or by facsimile and addressed or delivered to such party at\nits address set forth below its signature hereto or at such other address as may\nbe designated by such party in a notice to the other parties. Any notice, if\nmailed and properly addressed with postage prepaid or if delivered to the\nBorrower's delivery service and properly addressed, shall be deemed given when\nreceived; any notice, if transmitted by telex or facsimile, shall be deemed\ngiven when transmitted (answerback confirmed in the case of telexes).\n\n 13.2. CHANGE OF ADDRESS. The Borrower, the Paying Agent and any Lender\nmay each change the address for service of notice upon it by a notice in writing\nto the other parties hereto.\n\n\n ARTICLE XIV\n\n COUNTERPARTS\n\n\n This Agreement may be executed in any number of counterparts, all of\nwhich taken together shall constitute one agreement, and any of the parties\nhereto may execute this Agreement by signing any such counterpart. This\nAgreement shall be effective upon receipt by the Paying Agent of original or\nfaxed copies of such counterparts executed by the Borrower, the Paying Agent and\nthe Lenders.\n\n\n 64\n\n\n\n IN WITNESS WHEREOF, the Borrower, the Lenders and the Paying Agent have\nexecuted this Agreement as of the date first above written.\n\n\n FDX CORPORATION\n\n\n By: /s/ Charles M. Buchas, Jr.\n -------------------------------------------\n Charles M. Buchas, Jr.\n Corporate Vice President and Treasurer\n\n FDX Corporation\n 2600 Thousand Oaks Boulevard\n Suite 3110\n Memphis, Tennessee 38118\n Attn: Treasurer\n\n Telephone: 901-224-7040\n Telecopy: 901-224-7061\n\n\nCopy all notices and credit matters to:\n\n FDX Corporation\n 6075 Poplar Avenue\n Suite 300\n Memphis, Tennessee 38119\n Attn: General Counsel\n\n Telephone: 901-395-3382\n Telecopy: 901-395-5034\n\n\n\n\n\nCO-ARRANGERS:\n\n MORGAN GUARANTY TRUST\n COMMITMENT: COMPANY OF NEW YORK,\n $60,000,000 Individually and as Paying Agent\n\n\n By: /s/ Diana H. Imhof \n -------------------------------------------\n Diana H. Imhof\n Vice President\n\n 60 Wall Street\n 5th Floor\n New York, New York 10260-0060\n Attn: Diana H. Imhof\n Telephone: 212-648-1356\n Telecopy: 212-648-5018\n\n\n Copy all notices and credit matters to:\n\n Morgan Guaranty Trust Company of New York\n 60 Wall Street\n 5th Floor\n New York, New York 10260-0060\n Attn: Diana H. Imhof\n Telephone: 212-648-1356\n Telecopy: 212-648-5018\n\n\n\n Copy all Borrowing Notices to:\n\n Morgan Guaranty Trust Company of New York\n c/o J. P. Morgan Services, Inc.\n 500 Stanton-Christiana Road\n Newark, Delaware 19713-2107\n Attn: Thomas Lazlo/Scott Kasprenski\n Telephone: 302-634-1893/1874\n Telecopy: 302-634-1852\n\n 67\n\n\n\n\n\n THE FIRST NATIONAL BANK OF\n COMMITMENT: CHICAGO\n $60,000,000\n\n By: /s/\n -------------------------------------------\n Authorized Agent\n\n One First National Plaza\n Mail Suite 0362\n Chicago, Illinois 60670\n Attn: Transportation Division\n Administrative Coordinator\n\n Telephone: 312-732-8142\n Telecopy: 312-732-3885\n\n\n Copy all notices and credit matters to:\n\n The First National Bank of Chicago\n One First National Plaza\n Mail Suite 0336\n Chicago, Illinois 60670-0362\n Attn: Christina Jamieson\n\n Telephone: 312-732-1336\n Telecopy: 312-732-7455\n\n\n Copy all Borrowing Notices to:\n\n The First National Bank of Chicago\n One First National Plaza\n Mail Suite 0634\n Chicago, Illinois 60670-0634\n Attn: Mattie Reed\n\n Telephone: 312-732-5219\n Telecopy: 312-732-4840\n\n 68\n\n\n\n\n THE CHASE MANHATTAN BANK\n COMMITMENT:\n $60,000,000\n By: /s/ Matthew H. Massie\n --------------------------------------------\n Matthew H. Massie\n Managing Director\n\n 270 Park Avenue\n 38th Floor\n New York, New York 10017\n Attn: Matthew H. Massie\n\n Telephone: 212-270-5432\n Telecopy: 212-270-5100\n\n\n Copy all notices and credit matters to:\n\n The Chase Manhattan Bank\n 270 Park Avenue\n 38th Floor\n New York, New York 10017\n Attn: Vilma Francis\n\n Telephone: 212-270-5484\n Telecopy: 212-270-4016\n\n\n All Borrowing Notices to:\n\n The Chase Manhattan Bank\n One Chase Plaza\n 8th Floor\n c/o The Loan & Agency Services Group\n New York, New York 10081\n Attn: Mo-Lin Sum\n\n Telephone: 212-552-7312\n Telecopy: 212-552-5650\n\n 69\n\n\n\n\n CITIBANK, N.A.\n COMMITMENT:\n $60,000,000\n By: /s/\n -------------------------------------------\n Name:\n Title:\n\n 399 Park Avenue\n 12th Floor/Zone 2\n New York, New York 10043\n Attn: Portfolio Management\n Telephone: 212-559-6413\n Telecopy: 212-793-3734\n\n\n Copy all notices and credit matters to:\n\n Citibank, N.A.\n 399 Park Avenue\n New York, New York 10043\n Attn: Tom Boyle\n Telephone: 212-559-6149\n Telecopy: 212-793-1246\n\n\n Copy all Borrowing Notices to:\n\n Citibank, N.A.\n Global Loan Support Services\n Two Penns Way Suite 200\n New Castle, DE 19720\n Attn: Timothy E. Smith\n Telephone: 302-894-6059\n Telecopy: 302-894-6120\n\n 70\n\n\n\n\n CREDIT SUISSE FIRST BOSTON\n COMMITMENT:\n $60,000,000\n\n By: /s/Thomas G. Muoio /s/Robert N. Finney\n -------------------------------------------\n Thomas G. Muoio Robert N. Finney\n Title: Vice President Managing Director\n\n Eleven Madison Avenue\n New York, New York 10010-3629\n Attn: Thomas G. Muoio\n\n Telephone: 212-325-9098\n Telecopy: 212-325-8319\n\n\n Copy all notices and credit matters to:\n\n Credit Suisse First Boston\n Eleven Madison Avenue\n New York, New York 10010-3629\n Attn: Thomas G. Muoio\n\n Telephone: 212-325-9098\n Telecopy: 212-325-8319\n\n\n Copy all Borrowing Notices to:\n\n Credit Suisse First Boston\n Eleven Madison Avenue\n New York, New York 10010-3629\n Attn: Patti Matos\n\n Telephone: 212-325-9754\n Telecopy: 212-325-6508\n\n 71\n\n\n\n\nSENIOR MANAGING AGENTS:\n\n BANK OF AMERICA NATIONAL TRUST\n COMMITMENT: AND SAVINGS ASSOCIATION\n $55,000,000\n\n By: /s/ Mary Therese Carlson\n ---------------------------------------------\n Mary Therese Carlson\n Vice President\n\n 231 South LaSalle Street\n 10th Floor\n Chicago, Illinois 60697\n Attn: Mary Therese Carlson\n Telephone: 312-828-7968\n Telecopy: 312-828-1997\n\n\n Copy all notices and credit matters to:\n\n Bank of America National Trust\n and Savings Association\n 231 South LaSalle Street\n 10th Floor\n Chicago, Illinois 60697\n Attn: Lee Nunery\n Telephone: 312-234-5621\n Telecopy: 312-234-5601\n\n Copy all Borrowing Notices to:\n\n Bank of America National Trust\n and Savings Association\n Corporate Service Center #5693\n 1850 Gateway Boulevard\n Concord, California 94520\n Attn: Kelsey Robinson\n Telephone: 925-675-7719\n Telecopy: 925-675-7531\n\n 72\n\n\n COMMERZBANK AKTIENGESELLSCHAFT,\n COMMITMENT: ATLANTA AGENCY\n $55,000,000\n\n By: /s/ Eric Kagerer\n ---------------------------------------------\n Name: Eric Kagerer\n Title: Vice President\n\n By: /s/ Subash Viswanathan\n --------------------------------------------\n Name: Subash Viswanathan\n Title: Vice President\n\n\n 1230 Peachtree Street, N.E.\n Suite 3500\n Atlanta, GA 30309\n Attn: Eric Kagerer\n Telephone: 404-888-6517\n Telecopy: 404-888-6539\n\n\n Copy all notices and credit matters to:\n\n 1230 Peachtree Street, N.E.\n Suite 3500\n Atlanta, GA 30309\n Attn: Eric Kagerer/Amy Greiner\n Telephone: 404-888-6517/404-888-6510\n Telecopy: 404-888-6539\n\n\n Copy all administrative/ operational matters to:\n\n 2 World Financial Center\n 33rd Floor\n New York, NY 10281-1050\n Attn: Dianne Morgenegg/Christine Scaffidi\n Telephone: 212-266-7562/212-266-7204\n Telecopy: 212-266-7593\n\n 73\n\n\n\n\nCO-AGENTS:\n\n\n BANCA COMMERCIALE ITALIANA,\n COMMITMENT: NEW YORK BRANCH\n $50,000,000\n\n By: /s/ C. Dougherty\n --------------------------------------------\n Name: C. Dougherty, VP\n Title:\n\n By: /s/ Karen Purelis\n --------------------------------------------\n Name: Karen Purelis, VP\n Title:\n\n One William Street\n New York, NY 10004\n Attn: John Michalisin\n Telephone: 212-607-3918\n Telecopy: 212-809-2124\n\n\n\n Copy all Borrowing Notices to:\n\n Banca Commerciale Italiana\n One William Street\n New York, NY 10004\n Attn: Tony O'Mahony\n Telephone: 212-607-3852\n Telecopy: 212-809-2124\n\n\n 74\n\n\n\n THE BANK OF NOVA SCOTIA\n COMMITMENT\n $50,000,000\n By: /s/ A.S. Norsworthy\n --------------------------------------------\n Name: A.S. Norsworthy\n Title: Sr. Team Leader Loan Operations\n\n The Bank of Nova Scotia\n Atlanta Agency\n 600 Peachtree Street N.E.\n Suite 2700\n Atlanta, Georgia 30308\n Attn: Phyllis Walker\n Telephone: 404-877-1552\n Telecopy: 404-888-8998\n\n\n With a copy to:\n\n The Bank of Nova Scotia\n Houston Representative Office\n 1100 Louisiana, Suite 3000\n Houston, Texas 77002\n Attn: Paul G. Gonin\n Telephone: 713-759-3443\n Telecopy: 713-752-2425\n\n 75\n\n\n\n\n\n BANK OF TOKYO-MITSUBISHI TRUST COMPANY\n COMMITMENT\n $50,000,000\n By: /s/ Joseph P. Devoe\n --------------------------------------------\n Name: Joseph P. Devoe\n Title: Vice President\n\n 1251 Avenue of the Americas, 12th Floor\n New York, NY 10020-1104\n Attn: Joseph P. Devoe\n Telephone: 212-782-4318\n Telecopy: 212-782-4979\n\n\n Copy all Borrowing Notices to:\n\n Bank of Tokyo-Mitsubishi Trust Company\n 1251 Avenue of the Americas, 12th Floor\n New York, NY 10020-1104\n Attn: Rolando Uy, Operations Officer\n Telephone: 212-782-5637\n Telecopy: 212-782-5635\n\n\n 76\n\n\n\n\n FIRST UNION NATIONAL BANK\n COMMITMENT\n $50,000,000\n\n By: /s/\n --------------------------------------------\n Name: \n Title: V.P.\n\n 1339 Chestnut St.\n 11th Floor Widener Bldg.\n Philadelphia, PA 19107\n Attn: Michael J. Labrum,\n Vice President\n Telephone: 215-973-7045\n Telecopy: 215-786-7704\n\n\n Copy all administrative/operations matters to:\n\n First Union National Bank\n 1339 Chestnut St.\n 11th Floor Widener Bldg.\n Philadelphia, PA 19107\n Attn: John McDonald\n Assistant Vice President\n Telephone: 215-973-3961\n Telecopy: 215-973-6054\n\n\n 77\n\n\n\n\n\n\n UNION PLANTERS BANK, N.A.\n COMMITMENT:\n $50,000,000.00\n By: /s/ Leonard L. McKinnon\n ---------------------------------------------\n Leonard L. McKinnon\n Senior Vice President\n\n\n 6200 Poplar Avenue\n 4th Floor\n Memphis, TN 38119\n Attn: Leonard L. McKinnon\n Telephone: 901-580-5481\n Telecopy: 901-580-5451\n\n\n Copy all notices and credit matters to:\n\n Union Planters Bank, N.A.\n 6200 Poplar Avenue\n HQ4\n Memphis, TN 38119\n Attn: Leonard L. McKinnon\n Telephone: 901-580-5481\n Telecopy: 901-580-5451\n\n\n Copy all Borrowing Notices to:\n\n Union Planters Bank, N.A.\n 6200 Poplar Avenue\n HQ4\n Memphis, TN 38119\n Attn: Shea Buchignani\n Telephone: 901-580-5583\n Telecopy: 901-580-5451\n\n 78\n\n\n\n\n\n WACHOVIA BANK, N.A.\n COMMITMENT:\n $50,000,000\n\n By: /s/ Karin E. Reel\n --------------------------------------------\n Name: Karin E. Reel\n Title: Vice President\n\n 191 Peachtree Street, N.E.\n Atlanta, GA 30303\n Attn: Karin E. Reel\n Telephone: 404-332-5187\n Telecopy: 404-332-5016\n\n\n Copy all notices and credit matters to:\n\n Wachovia Bank, N.A.\n 191 Peachtree Street, N.E.\n Atlanta, GA 30303\n Attn: Karin E. Reel\n Telephone: 404-332-5187\n Telecopy: 404-332-5016\n\n Copy all Borrowing Notices to:\n\n Wachovia Bank, N.A.\n 191 Peachtree Street, N.E.\n Atlanta, GA 30303\n Attn: Jay Corbett\n Telephone: 404-332-1039\n Telecopy: 404-332-5016\n\n\n 79\n\n\n\nPARTICIPANTS:\n\n THE FUJI BANK, LIMITED,\n COMMITMENT: NEW YORK BRANCH\n $34,000,000\n\n By: /s/ Raymond Ventura\n --------------------------------------------\n Name: Raymond Ventura\n Title: Vice President & Manager\n\n Two World Trade Center, 79th Floor\n New York, NY 10048\n Attn: Raymond Ventura, U.S. Corporate Finance\n Telephone: 212-898-2062\n Telecopy: 212-321-9407\n\n\n Copy all notices and credit matters to:\n\n The Fuji Bank, Limited, New York Branch\n Two World Trade Center, 79th Floor\n New York, NY 10048\n Attn: Felix Amerasinghe/U.S. Corporate Finance\n Telephone: 212-898-2597\n Telecopy: 212-488-8216\n\n\n\n Copy all Borrowing Notices to:\n\n The Fuji Bank, Limited, New York Branch\n Two World Trade Center, 79th Floor\n New York, NY 10048\n Attn: Tina Catapano/Loan Administration\n Telephone: 212-898-2099\n Telecopy: 212-488-8216\n\n 80\n\n\n\n\n\n INTERNATIONAL TRANSPORT FINANCE LIMITED\n COMMITMENT\n $34,000,000\n By: /s/ Constance Laudenschlager\n --------------------------------------------\n Constance Laudenschlager\n Title: Director\n\n By: /s/ Lori Nabhan\n --------------------------------------------\n Lori Nabhan\n Title: Marketing Representative\n\n c/o LTCB\n 165 Broadway\n New York, NY 10006\n Attn: Constance Laudenschlager/Lori\n Nabhan\n Telephone: 212-335-4596/4537\n Telecopy: 212-608-3058\n\n Copy all notices and credit matters to:\n\n International Transport Finance Limited\n c/o LTCB\n 165 Broadway\n New York, NY 10006\n Attn: Constance Laudenschlager/Lori\n Nabhan\n Telephone: 212-335-4596/4537\n Telecopy: 212-608-3058\n\n Copy all Borrowing Notices to:\n\n International Transport Finance Limited\n c/o LTCB\n 165 Broadway\n New York, NY 10006\n Attn: Constance Laudenschlager/Lori\n Nabhan\n Telephone: 212-335-4596/4537\n Telecopy: 212-608-3058\n\n 81\n\n\n\n KBC BANK N.V.\n COMMITMENT\n $34,000,000\n By: /s/ Robert Snauffer /s/ Michael V. Curran\n --------------------------------------------\n Name: Robert Snauffer Michael V. Curran\n Title: First Vice President Vice President\n\n KBC Bank N.V.\n New York Branch\n 125 West 55th Street\n New York, NY 10019\n Attn: Lynda Resuma, Loan Administration\n Telephone: 212-541-0657\n Telecopy: 212-956-5581\n\n\n Copy all notices and credit matters to:\n\n KBC Bank N.V.\n Atlanta Representative Office\n 1349 West Peachtree Street, Suite 1750\n Atlanta, GA 30309\n Attn: Jackie Brunetto, Vice President\n Telephone: 404-876-2556\n Telecopy: 404-876-3212\n\n\n Copy all Borrowing Notices to:\n\n KBC Bank N.V.\n Atlanta Representative Office\n 1349 West Peachtree Street, Suite 1750\n Atlanta, GA 30309\n Attn: Jackie Brunetto, Vice President\n Telephone: 404-876-2556\n Telecopy: 404-876-3212\n\n 82\n\n\n\n\n MELLON BANK, N.A.\n COMMITMENT\n $34,000,000\n By: /s/ Mark F. Johnston\n --------------------------------------------\n Name: Mark F. Johnston\n Title: A V.P.\n\n Three Mellon Bank Center - Room 1203\n Pittsburgh, PA 15259-0003\n Telecopy: 412-209-6138\n\n\n Copy all notices and credit matters to:\n\n Mellon Bank, N.A.\n Three Mellon Bank Center - Room 1203\n Pittsburgh, PA 15259-0003\n Attn: Mark Johnston\n Telephone: 412-236-2793\n Telecopy: 412-236-1914\n\n\n Copy all Borrowing Notices to:\n\n Mellon Bank, N.A.\n Three Mellon Bank Center - Room 1203\n Pittsburgh, PA 15259-0003\n Attn: Lloyd Martin-Loan Administration\n Telephone: 412-234-9448\n Telecopy: 412-209-6138\n\n\n 83\n\n\n\n\n THE BANK OF NEW YORK\n COMMITMENT\n $34,000,000\n By: /s/ Ann Marie Hughes\n --------------------------------------------\n Name: Ann Marie Hughes\n Title: Vice President\n\n One Wall Street\n 22nd Floor\n New York, NY 10286\n Attn: Ann Marie Hughes\n Telephone: 212-635-1339\n Telecopy: 212-635-6434\n\n\n Copy all administrative and operations matters to:\n\n The Bank of New York\n One Wall Street\n 22nd Floor\n New York, NY 10286\n Attn: Annette Megargel\n Telephone: 212-635-6780\n Telecopy: 212-635-6399\n\n\n\n 84\n\n\n\n\n\n THE NORTHERN TRUST COMPANY\n COMMITMENT:\n $34,000,000\n By: /s/ James E.T. Monhart\n --------------------------------------------\n Name: James E.T. Monhart\n Title: S VP\n\n 50 S. LaSalle Street, 11th Floor\n Chicago, IL 60076\n Attn: James Monhart\n Telephone: 312-444-5646\n Telecopy: 312-444-5055\n\n\n Copy all administrative and operational matters to:\n\n The Northern Trust Company\n 50 S. LaSalle Street, 11th Floor\n Chicago, IL 60076\n Attn: Linda Honda\n Telephone: 312-444-3532\n Telecopy: 312-630-1566\n\n\n\n\n 85\n\n\n\n\n\n SUNTRUST BANK, NASHVILLE, N.A.\n COMMITMENT\n $30,000,000\n By: /s/ Bryan W. Ford\n ---------------------------------------------\n Name: Bryan W. Ford\n Title: Vice President\n\n 6410 Poplar Avenue, Suite 320\n Memphis, Tennessee 38119\n Telephone: 901-762-9868\n Telecopy: 901-766-7565\n\n\n Copy all notices and credit matters to:\n\n Suntrust Bank, Nashville, N.A.\n 6410 Poplar Avenue, Suite 320\n Memphis, Tennessee 38119\n Attn: Renee DeRubeis Drake\n Telephone: 901-762-9868\n Telecopy: 901-766-7565\n\n\n Copy all Borrowing Notices to:\n\n Suntrust Bank, Nashville, N.A.\n P.O. Box 305110\n Commercial Loan Operation\n Nashville, Tennessee 37230-5110\n Attn: Leigh Anne Gregory/Tina Marie Edwards\n Telephone: 615-748-5461/4031\n Telecopy: 615-748-4611\n\n 86\n\n\n\n\n\n FIRST TENNESSEE BANK\n COMMITMENT NATIONAL ASSOCIATION\n $26,000,000\n By: /s/ James H. Moore, Jr.\n --------------------------------------------\n Name: James H. Moore, Jr.\n Title: Vice President\n\n 165 Madison Avenue, 9th Floor\n Memphis, TN 38103-2723\n Attn: Sonel Patel\n Telephone: 901-523-4118\n Telecopy: 901-523-4267\n\n\n Copy all notices and credit matters to:\n\n First Tennessee Bank National Association\n 165 Madison Avenue, 9th Floor\n Memphis, TN 38103-2723\n Attn: Jim Moore\n Telephone: 901-523-4108\n Telecopy: 901-523-4267\n\n\n 87\n\n\n\n THE SUMITOMO BANK, LIMITED\n COMMITMENT\n $20,000,000\n By: /s/ Gary Franke\n ---------------------------------------------\n Name: Gary Franke\n Title: Vice President and Manager\n\n Suntrust Plaza\n Suite 4420\n 303 Peachtree Street\n Atlanta, GA 30308\n Attn: Gary Franke\n Telephone: 404-526-8511\n Telecopy: 404-521-1187\n\n\n Copy all administrative/ operational notices to:\n\n The Sumitomo Bank, Limited\n 277 Park Avenue\n New York, NY 10072\n Attn: Yvette Dowling\n Telephone: 212-224-4069\n Telecopy: 212-224-4537\n\n\n 88\n\n\n\n\n\n FIRST AMERICAN NATIONAL BANK\n COMMITMENT:\n $10,000,000\n\n By: /s/ William R. Stutts\n --------------------------------------------\n Name: William R. Stutts\n Title: Senior Vice President\n\n 6000 Poplar Ave., Suite 300\n Memphis, TN 38119\n Attn: William R. Stutts\n Telephone: 901-762-5675\n Telecopy: 901-762-5665\n\n\n\n Copy all administrative and operational matters to:\n\n First American National Bank\n 490 Metroplex Drive\n Nashville, TN 37211\n Attn: Frenisa Joy\n Telephone: 615-365-5683\n Telecopy: 615-365-5684\n\n\n 89\n\n\n\n\n EXHIBIT \"A\"\n\n FORM OF GUARANTY\n\n\n THIS GUARANTY (this \"Guaranty\") is made as of the 10th day of December,\n1998, by Federal Express Corporation, a Delaware corporation, RPS, Inc., a\nDelaware corporation, Caliber System, Inc., an Ohio corporation, Viking Freight,\nInc., a California corporation, and Roberts Express, Inc., an Ohio corporation\n(collectively, the \"Initial Guarantors\" and along with any Significant\nSubsidiaries which become parties to this Agreement by executing an Addendum\nhereto in the form attached as Annex I, the \"Guarantors\") in favor of the Paying\nAgent, for the ratable benefit of the Lenders, under (and as defined in) the\nCredit Agreement referred to below. Unless otherwise defined herein, capitalized\nterms used herein shall have the meanings ascribed to them in the Credit\nAgreement.\n\n WITNESSETH:\n\n WHEREAS, FDX Corporation, a Delaware corporation (the \"Borrower\"),\nMorgan Guaranty Trust Company of New York, as paying agent (the \"Paying Agent\"),\nand certain Lenders have entered into a certain Credit Agreement dated as of\nDecember 10, 1998 (as the same may be amended, modified, supplemented and/or\nrestated, and as in effect from time to time, the \"Credit Agreement\"),\nproviding, subject to the terms and conditions thereof, for extensions of credit\nto be made by the Lenders to the Borrower;\n\n WHEREAS, it is a condition precedent to the initial extensions of\ncredit by the Lenders under the Credit Agreement that each of the Guarantors\nexecute and deliver this Guaranty, whereby each of the Guarantors shall\nguarantee the payment when due, subject to SECTION 8 hereof, of any and all of\nthe Obligations; and\n\n WHEREAS, in consideration of the financial and other support that the\nBorrower has provided, and such financial and other support as the Borrower may\nin the future provide, to the Guarantors, and in order to induce the Lenders and\nthe Paying Agent to enter into the Credit Agreement, each of the Guarantors is\nwilling to guarantee the obligations of the Borrower under the Credit Agreement;\n\n NOW, THEREFORE, in consideration of the premises and other good and\nvaluable consideration, the receipt and sufficiency of which are hereby\nacknowledged, the parties hereto agree as follows:\n\n SECTION l. DEFINITIONS. Terms defined in the Credit Agreement and not\notherwise defined herein have, as used herein, the respective meanings provided\nfor therein.\n\n SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the\nGuarantors represents and warrants (which representations and warranties shall\nbe deemed to have been renewed at the time of the making of any Advance) that:\n\n\n (a) It is a corporation, limited liability company,\npartnership or other commercial entity duly incorporated or formed, validly\nexisting and in good standing under the laws of its jurisdiction of\nincorporation or formation and has all requisite authority to conduct its\nbusiness as a foreign Person in each jurisdiction in which its business is\nconducted, except where the failure to have such requisite authority would not\nhave a Material Adverse Effect.\n\n (b) It has the power and authority and legal right to execute\nand deliver this Guaranty and to perform its obligations hereunder. The\nexecution and delivery by it of this Guaranty and the performance by it of its\nobligations hereunder have been duly authorized by proper proceedings, and this\nGuaranty constitutes a legal, valid and binding obligation of such Guarantor\nenforceable against such Guarantor in accordance with its terms, except as\nenforceability may be limited by bankruptcy, insolvency or similar laws\naffecting the enforcement of creditors' rights generally.\n\n (c) Neither the execution and delivery by it of this Guaranty,\nnor the consummation by it of the transactions herein contemplated, nor\ncompliance by it with the terms and provisions hereof, will violate any law,\nrule, regulation, order, writ, judgment, injunction, decree or award binding on\nit or its certificate or articles of incorporation or by-laws, limited liability\ncompany or partnership agreement or the provisions of any indenture, instrument\nor material agreement to which it is a party or is subject, or by which it, or\nits property, is bound, or conflict with or constitute a default thereunder, or\nresult in the creation or imposition of any Lien in, of or on its property\npursuant to the terms of any such indenture, instrument or material agreement.\nNo order, consent, approval, license, authorization, or validation of, or\nfiling, recording or registration with, or exemption by, any governmental\nauthority, is required to authorize, or is required in connection with the\nexecution, delivery and performance by it of, or the legality, validity, binding\neffect or enforceability of, this Guaranty.\n\n In addition to the foregoing, each of the Guarantors covenants\nthat, so long as any Lender has any Commitment outstanding under the Credit\nAgreement or any amount payable under the Credit Agreement or any other\nObligations shall remain unpaid, it will, and, if necessary, will enable the\nBorrower to, fully comply with those covenants and agreements of the Borrower\napplicable to such Guarantor set forth in the Credit Agreement.\n\n SECTION 3. THE GUARANTY. Subject to SECTION 8 hereof, each of the\nGuarantors hereby unconditionally guarantees, jointly with the other Guarantors\nand severally, the full and punctual payment when due (whether at stated\nmaturity, upon acceleration or otherwise) of the Obligations, (the foregoing,\nsubject to the provisions of SECTION 8 hereof, being referred to collectively as\nthe \"Guaranteed Obligations\"). Upon failure by the Borrower to pay punctually\nany such amount, each of the Guarantors agrees that it shall forthwith on demand\npay such amount at the place and in the manner specified in the Credit Agreement\nor the relevant Loan Document, as the case may be. Each of the Guarantors hereby\nagrees that this Guaranty is an absolute, irrevocable and unconditional guaranty\nof payment and is not a guaranty of collection.\n\n 2\n\n\n SECTION 4. GUARANTY UNCONDITIONAL. Subject to SECTION 8 hereof, the\nobligations of each of the Guarantors hereunder shall be unconditional and\nabsolute and, without limiting the generality of the foregoing, shall not be\nreleased, discharged or otherwise affected by:\n\n (i) any extension, renewal, settlement, indulgence, compromise,\n waiver or release of or with respect to the Guaranteed\n Obligations or any part thereof or any agreement relating\n thereto, or with respect to any obligation of any other\n guarantor of any of the Guaranteed Obligations, whether (in\n any such case) by operation of law or otherwise, or any\n failure or omission to enforce any right, power or remedy with\n respect to the Guaranteed Obligations or any part thereof or\n any agreement relating thereto, or with respect to any\n obligation of any other guarantor of any of the Guaranteed\n Obligations;\n\n (ii) any modification or amendment of or supplement to the Credit\n Agreement or any other Loan Document, including, without\n limitation, any such amendment which may increase the amount\n of the Obligations guaranteed hereby;\n\n (iii) any release, surrender, compromise, settlement, waiver,\n subordination or modification, with or without consideration,\n of any collateral securing the Guaranteed Obligations or any\n part thereof, any other guaranties with respect to the\n Guaranteed Obligations or any part thereof, or any other\n obligation of any person or entity with respect to the\n Guaranteed Obligations or any part thereof, or any\n nonperfection or invalidity of any direct or indirect security\n for the Guaranteed Obligations;\n\n (iv) any change in the corporate, partnership or other existence,\n structure or ownership of the Borrower or any other guarantor\n of any of the Guaranteed Obligations, or any insolvency,\n bankruptcy, reorganization or other similar proceeding\n affecting the Borrower or any other guarantor of the\n Guaranteed Obligations, or any of their respective assets or\n any resulting release or discharge of any obligation of the\n Borrower or any other guarantor of any of the Guaranteed\n Obligations;\n\n (v) the existence of any claim, setoff or other rights which the\n Guarantors may have at any time against the Borrower, any\n other guarantor of any of the Guaranteed Obligations, the\n Paying Agent, any Lender or any other Person, whether in\n connection herewith or in connection with any unrelated\n transactions, PROVIDED that nothing herein shall prevent the\n assertion of any such claim by separate suit or compulsory\n counterclaim;\n\n (vi) the enforceability or validity of the Guaranteed Obligations\n or any part thereof or the genuineness, enforceability or\n validity of any agreement relating thereto or with respect to\n any collateral securing the Guaranteed Obligations or any part\n thereof, or any other invalidity or unenforceability relating\n to or against the Borrower or any other guarantor of any of\n the Guaranteed Obligations, for any reason related to the\n Credit Agreement, any other Loan Document, or any provision of\n applicable\n\n 3\n\n\n law or regulation purporting to prohibit the payment by the\n Borrower or any other guarantor of the Guaranteed Obligations,\n of any of the Guaranteed Obligations;\n\n (vii) the failure of the Paying Agent to take any steps to perfect\n and maintain any security interest in, or to preserve any\n rights to, any security or collateral for the Guaranteed\n Obligations, if any;\n\n (viii) the election by, or on behalf of, any one or more of the\n Lenders, in any proceeding instituted under Chapter 11 of\n Title 11 of the United States Code (11 U.S.C. 101 et seq.)\n (the \"Bankruptcy Code\"), of the application of Section\n 1111(b)(2) of the Bankruptcy Code;\n\n (ix) any borrowing or grant of a security interest by the Borrower,\n as debtor-in-possession, under Section 364 of the Bankruptcy\n Code;\n\n (x) the disallowance, under Section 502 of the Bankruptcy Code, of\n all or any portion of the claims of any of the Lenders or the\n Paying Agent for repayment of all or any part of the\n Guaranteed Obligations;\n\n (xi) the failure of any other Guarantor to sign or become party to\n this Guaranty or any amendment, change, or reaffirmation\n hereof; or\n\n (xii) any other act or omission to act or delay of any kind by the\n Borrower, any other guarantor of the Guaranteed Obligations,\n the Paying Agent, any Lender or any other Person or any other\n circumstance whatsoever which might, but for the provisions of\n this SECTION 4, constitute a legal or equitable discharge of\n any Guarantor's obligations hereunder.\n\n SECTION 5. DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN\nCERTAIN CIRCUMSTANCES. Except as otherwise provided in Section 9.16 of the\nCredit Agreement, each of the Guarantors' obligations hereunder shall remain in\nfull force and effect until all Guaranteed Obligations shall have been paid in\nfull and the Commitments under the Credit Agreement shall have terminated or\nexpired. If at any time any payment of any portion of the Obligations is\nrescinded or must be otherwise restored or returned upon the insolvency,\nbankruptcy or reorganization of the Borrower or otherwise, each Guarantor's\nobligations hereunder with respect to such payment shall be reinstated as though\nsuch payment had been due but not made at such time.\n\n SECTION 6. GENERAL WAIVERS. Each of the Guarantors irrevocably waives\nacceptance hereof, presentment, demand or action on delinquency, protest, the\nbenefit of any statutes of limitations and, to the fullest extent permitted by\nlaw, any notice not provided for herein, as well as any requirement that at any\ntime any action be taken by any Person against the Borrower, any other guarantor\nof the Guaranteed Obligations, or any other Person.\n\n 4\n\n\n SECTION 7. SUBORDINATION OF SUBROGATION RIGHTS. Until the Obligations\nhave been indefeasibly paid in full in cash, the Guarantors (i) shall have no\nright of subrogation with respect to such Obligations and (ii) waive any right\nto enforce any remedy which the Lenders or the Paying Agent now have or may\nhereafter have against the Borrower, any endorser or any guarantor of all or any\npart of the Obligations or any other Person, and the Guarantors waive any\nbenefit of, and any right to participate in, the security or collateral given to\nthe Lenders and the Paying Agent, if any, to secure the payment or performance\nof all or any part of the Obligations or any other liability of the Borrower to\nthe Lenders. Should any Guarantor have the right, notwithstanding the foregoing,\nto exercise its subrogation rights, each Guarantor hereby expressly and\nirrevocably (a) subordinates any and all rights at law or in equity to\nsubrogation, reimbursement, exoneration, contribution, indemnification or setoff\nthat the Guarantor may have to the indefeasible payment in full in cash of the\nObligations and (b) waives any and all defenses available to a surety, guarantor\nor accommodation co-obligor until the Obligations are indefeasibly paid in full\nin cash. Each Guarantor acknowledges and agrees that this subordination is\nintended to benefit the Paying Agent and the Lenders and shall not limit or\notherwise affect such Guarantor's liability hereunder or the enforceability of\nthis Guaranty, and that the Paying Agent, the Lenders and their respective\nsuccessors and assigns are intended third party beneficiaries of the waivers and\nagreements set forth in this SECTION 7.\n\n SECTION 8. LIMITATION. Notwithstanding any provision herein contained\nto the contrary, each Guarantor's liability under this Guaranty (which liability\nis in any event in addition to amounts for which such entity may be primarily\nliable) shall be limited to an amount not to exceed as of any date of\ndetermination the greater of:\n\n (a) the net amount of all Loans advanced to the Borrower\nunder this Agreement and then re-loaned or otherwise transferred to, or for the\nbenefit of, such Guarantor; and\n\n (b) the amount which could be claimed by the Paying Agent and\nthe Lenders from such Guarantor under this Guaranty without rendering such claim\nvoidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or\nunder any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent\nConveyance Act or similar statute or common law after taking into account, among\nother things, such Guarantor's right of contribution and indemnification from\neach other Guarantor under SECTION 9.\n\n SECTION 9. CONTRIBUTION WITH RESPECT TO GUARANTY OBLIGATIONS.\n\n (a) To the extent that any Guarantor shall make a payment\nunder this Guaranty (a \"Guarantor Payment\") which, taking into account all other\nGuarantor Payments then previously or concurrently made by any other Guarantor,\nexceeds the amount which such Guarantor would otherwise have paid if each\nGuarantor had paid the aggregate Obligations satisfied by such Guarantor Payment\nin the same proportion that such Guarantor's \"Allocable Amount\" (as defined\nbelow) (as determined immediately prior to such Guarantor Payment) bore to the\naggregate Allocable Amounts of each of the Guarantors as determined immediately\nprior to the making of such Guarantor Payment, THEN, following indefeasible\npayment in full in cash of the Obligations and termination of the Commitments,\nsuch Guarantor shall be entitled to receive contribution and\n\n\n\n 5\n\n\nindemnification payments from, and be reimbursed by, each other Guarantor for\nthe amount of such excess, PRO RATA based upon their respective Allocable\nAmounts in effect immediately prior to such Guarantor Payment.\n\n (b) As of any date of determination, the \"Allocable Amount\"\nof any Guarantor shall be equal to the maximum amount of the claim which could\nthen be recovered from such Guarantor under this Guaranty without rendering such\nclaim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy\nCode or under any applicable state Uniform Fraudulent Transfer Act, Uniform\nFraudulent Conveyance Act or similar statute or common law.\n\n (c) This SECTION 9 is intended only to define the relative\nrights of the Guarantors and nothing set forth in this SECTION 9 is intended to\nor shall impair the obligations of the Guarantors, jointly and severally, to pay\nany amounts as and when the same shall become due and payable in accordance with\nthe terms of this Agreement.\n\n (d) The parties hereto acknowledge that the rights of\ncontribution and indemnification hereunder shall constitute assets of the\nGuarantor to which such contribution and indemnification is owing.\n\n (e) The rights of the indemnifying Guarantors against other\nGuarantors under this SECTION 9 shall be exercisable upon the full and\nindefeasible payment of the Obligations and the termination of the Commitments.\n\n SECTION 10. STAY OF ACCELERATION. If acceleration of the time for\npayment of any of the Obligations is stayed upon the insolvency, bankruptcy or\nreorganization of the Borrower, all such amounts otherwise subject to\nacceleration under the terms of the Credit Agreement, or any other Loan Document\nshall nonetheless be payable by each of the Guarantors hereunder forthwith on\ndemand by the Paying Agent.\n\n SECTION 11. NO WAIVERS. No failure or delay by the Paying Agent or any\nLender in exercising any right, power or privilege hereunder shall operate as a\nwaiver thereof nor shall any single or partial exercise thereof preclude any\nother or further exercise thereof or the exercise of any other right, power or\nprivilege. The rights and remedies provided in this Guaranty, the Credit\nAgreement, and the other Loan Documents shall be cumulative and not exclusive of\nany rights or remedies provided by law.\n\n SECTION 12. SUCCESSORS AND ASSIGNS. This Guaranty is for the benefit of\nthe Paying Agent and the Lenders and their respective successors and permitted\nassigns and in the event of an assignment of any amounts payable under the\nCredit Agreement, or the other Loan Documents in accordance with the respective\nterms thereof, the rights hereunder, to the extent applicable to the\nindebtedness so assigned, may be transferred with such indebtedness. This\nGuaranty shall be binding upon each of the Guarantors and their respective\nsuccessors and assigns.\n\n SECTION 13. CHANGES IN WRITING. Neither this Guaranty nor any provision\nhereof may be changed, waived, discharged or terminated orally, but only in\nwriting signed by each of the \n\n\n\n 6\n\n\nGuarantors and the Paying Agent with the consent of the Lenders required for\nsuch change, waiver, discharge or termination pursuant to the terms of the\nCredit Agreement.\n\n SECTION 14 GOVERNING LAW. ANY DISPUTE BETWEEN ANY GUARANTOR AND THE\nPAYING AGENT OR ANY LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR\nINCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS\nGUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT,\nTORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL\nLAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW\nYORK.\n\n SECTION 15. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL.\n\n (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH\nOF THE PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF,\nCONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG\nTHEM IN CONNECTION WITH, THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS\nWHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED\nEXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN NEW YORK, BUT THE PARTIES\nHERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A\nCOURT LOCATED OUTSIDE OF NEW YORK. EACH OF THE PARTIES HERETO WAIVES IN ALL\nDISPUTES BROUGHT PURSUANT TO THIS SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE\nTO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.\n\n (B) OTHER JURISDICTIONS. EACH OF THE GUARANTORS AGREES THAT THE PAYING\nAGENT, ANY LENDER OR ANY INDEMNITEE SHALL HAVE THE RIGHT TO PROCEED AGAINST SUCH\nGUARANTOR OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO\n(1) OBTAIN PERSONAL JURISDICTION OVER SUCH GUARANTOR OR (2) ENFORCE A JUDGMENT\nOR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. EACH OF THE GUARANTORS\nAGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING\nBROUGHT BY SUCH PERSON TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF\nSUCH PERSON. EACH OF THE GUARANTORS WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE\nLOCATION OF THE COURT IN WHICH SUCH PERSON HAS COMMENCED A PROCEEDING DESCRIBED\nIN THIS SUBSECTION (B).\n\n (C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES\nANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING\nIN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR\n\n\n 7\n\n\nINCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS\nGUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN\nCONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY\nSUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL\nWITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A\nCOPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE\nPARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.\n\n (D) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER\nPARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE\nPROVISIONS OF THIS SECTION 15, WITH ITS COUNSEL.\n\n SECTION 16. NO STRICT CONSTRUCTION. The parties hereto have\nparticipated jointly in the negotiation and drafting of this Guaranty. In the\nevent an ambiguity or question of intent or interpretation arises, this Guaranty\nshall be construed as if drafted jointly by the parties hereto and no\npresumption or burden of proof shall arise favoring or disfavoring any party by\nvirtue of the authorship of any provisions of this Guaranty.\n\n SECTION 17. TAXES, EXPENSES OF ENFORCEMENT, ETC. All payments required\nto be made by any of the Guarantors hereunder shall be made without setoff or\ncounterclaim and free and clear of and without deduction or withholding for or\non account of, any present or future taxes, levies, imposts, duties or other\ncharges of whatsoever nature imposed by any government or any political or\ntaxing authority thereof, PROVIDED, HOWEVER, that if any of the Guarantors is\nrequired by law to make such deduction or withholding, such Guarantor shall\nforthwith pay to the Paying Agent or any Lender, as applicable, such additional\namount as results in the net amount received by the Paying Agent or any Lender,\nas applicable, equaling the full amount which would have been received by the\nPaying Agent or any Lender, as applicable, had no such deduction or withholding\nbeen made. The Guarantors also agree to reimburse the Paying Agent and the\nLenders for any reasonable costs, internal charges and out-of-pocket expenses\n(including reasonable attorneys' fees and time charges of attorneys for the\nPaying Agent and the Lenders, which attorneys may be employees of the Paying\nAgent or the Lenders) paid or incurred by the Paying Agent or any Lender in\nconnection with the collection and enforcement of amounts due under the Loan\nDocuments, including without limitation this Guaranty.\n\n SECTION 18. SETOFF. At any time after all or any part of the Guaranteed\nObligations have become due and payable (by acceleration or otherwise), each\nLender and the Paying Agent may, without notice to any Guarantor and regardless\nof the acceptance of any security or collateral for the payment hereof,\nappropriate and apply toward the payment of all or any part of the Guaranteed\nObligations (i) any indebtedness due or to become due from such Lender or the\nPaying Agent to any Guarantor, and (ii) any moneys, credits or other property\nbelonging to any Guarantor, at any time held by or coming into the possession of\nsuch Lender or the Paying Agent or any of their respective affiliates.\n\n 8\n\n\n SECTION 19. FINANCIAL INFORMATION. Each Guarantor hereby assumes\nresponsibility for keeping itself informed of the financial condition of the\nBorrower and any and all endorsers and/or other Guarantors of all or any part of\nthe Guaranteed Obligations, and of all other circumstances bearing upon the risk\nof nonpayment of the Guaranteed Obligations, or any part thereof, that diligent\ninquiry would reveal, and each Guarantor hereby agrees that none of the Lenders\nor the Paying Agent shall have any duty to advise such Guarantor of information\nknown to any of them regarding such condition or any such circumstances. If any\nLender or the Paying Agent, in its sole discretion, undertakes at any time or\nfrom time to time to provide any such information to a Guarantor, such Lender or\nthe Paying Agent shall be under no obligation (i) to undertake any investigation\nnot a part of its regular business routine, (ii) to disclose any information\nwhich such Lender or the Paying Agent, pursuant to accepted or reasonable\ncommercial finance or banking practices, wishes to maintain confidential or\n(iii) to make any other or future disclosures of such information or any other\ninformation to such Guarantor.\n\n SECTION 20. SEVERABILITY. Wherever possible, each provision of this\nGuaranty shall be interpreted in such manner as to be effective and valid under\napplicable law, but if any provision of this Guaranty shall be prohibited by or\ninvalid under such law, such provision shall be ineffective to the extent of\nsuch prohibition or invalidity without invalidating the remainder of such\nprovision or the remaining provisions of this Guaranty.\n\n SECTION 21. MERGER. This Guaranty represents the final agreement of\neach of the Guarantors with respect to the matters contained herein and may not\nbe contradicted by evidence of prior or contemporaneous agreements, or\nsubsequent oral agreements, between the Guarantor and any Lender or the Paying\nAgent.\n\n SECTION 22. EXECUTION IN COUNTERPARTS. This Guaranty may be executed in\nany number of counterparts, all of which taken together shall constitute one\nagreement, and any of the parties hereto may execute this Guaranty by signing\nany such counterpart.\n\n SECTION 23. HEADINGS. Section headings in this Guaranty are for\nconvenience of reference only and shall not govern the interpretation of any\nprovision of this Guaranty.\n\n 9\n\n\n\n IN WITNESS WHEREOF, each of the Guarantors has caused this Guaranty to\nbe duly executed by its authorized officer as of the day and year first above\nwritten.\n\n\n FEDERAL EXPRESS CORPORATION\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n RPS, INC.\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n CALIBER SYSTEM, INC.\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n VIKING FREIGHT, INC.\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n ROBERTS EXPRESS, INC.\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n 10\n\n\n\n ANNEX I TO GUARANTY\n\n\n Reference is hereby made to the Guaranty (the \"Guaranty\") made as of\nthe 10th day of December, 1998 by Federal Express Corporation, a Delaware\ncorporation, RPS, Inc., a Delaware corporation, Caliber System, Inc., an Ohio\ncorporation, Viking Freight, Inc., a California corporation, and Roberts\nExpress, Inc., an Ohio corporation (collectively, the \"Initial Guarantors\" and\nalong with any Significant Subsidiaries which have become parties thereto and\ntogether with the undersigned, the \"Guarantors\") in favor of the Paying Agent,\nfor the ratable benefit of the Lenders, under the Credit Agreement. Capitalized\nterms used herein and not defined herein shall have the meanings given to them\nin the Guaranty. By its execution below, the undersigned [NAME OF NEW\nGUARANTOR], a ____________________, agrees to become, and does hereby become, a\nGuarantor under the Guaranty and agrees to be bound by such Guaranty as if\noriginally a party thereto. By its execution below, the undersigned represents\nand warrants as to itself that all of the representations and warranties\ncontained in SECTION 2 of the Guaranty are true and correct in all respects as\nof the date hereof.\n\n IN WITNESS WHEREOF, [NAME OF NEW GUARANTOR], a ______________, has\nexecuted and delivered this Annex I counterpart to the Guaranty as of this\n__________ day of _________, ____.\n\n\n [NAME OF NEW GUARANTOR]\n\n\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n\n\n\n\n\n\n\n 11\n\n\n\n EXHIBIT \"B\"\n\n\n OPINION OF COUNSEL\n\n\n\n\nThe Paying Agent and the Lenders who are parties to the Credit Agreement\ndescribed below.\n\n\n December 10, 1998\n\n\nLadies and Gentlemen:\n\n This is in regard to the Credit Agreement dated as of December 10, 1998\namong FDX Corporation, the Lenders named therein and Morgan Guaranty Trust\nCompany of New York, as Paying Agent (the \"Agreement\"). Unless the context\notherwise requires, all terms used in this opinion which are specifically\ndefined in the Agreement shall have the meanings given such terms in the\nAgreement.\n\n I am the Corporate Vice President and Corporate Counsel of the Borrower\nand have acted as such in connection with the Agreement. I, or attorneys under\nmy supervision, have made such examination and investigation as I or they have\ndeemed necessary in order to give the following opinion.\n\n Based upon the foregoing, it is my opinion that:\n\n 1. The Borrower is a corporation duly incorporated and validly\n existing in good standing under the laws of the State of Delaware. The\n Borrower is duly authorized to execute and deliver the Agreement and\n perform its obligations under the Agreement and to borrow under the\n Agreement. The Borrower has all corporate power required to carry on\n its ordinary course of business.\n\n 2. Each Significant Subsidiary, and each Guarantor as of the\n date hereof, is a corporation duly incorporated and validly existing in\n good standing under the laws of the jurisdiction of its incorporation.\n\n 3. Each of the Borrower and each Significant Subsidiary and\n Guarantor as of the date hereof is duly qualified as a foreign\n corporation in good standing to do business in all jurisdictions where\n the failure to so qualify would have a material adverse effect on the\n business of the Borrower and the Significant Subsidiaries taken as a\n whole.\n\n \n\n\n 4. The execution and delivery of the Loan Documents by the\n Borrower and each of the Guarantors, the borrowings by the Borrower\n under the Agreement and the performance by the Borrower and the\n Guarantors of their respective obligations under the Loan Documents\n have been duly authorized by all necessary corporate action and\n proceedings on the part of the Borrower and each Guarantor and do not\n at this time:\n\n (a) require any consent of the Borrower's or any\n Guarantor's shareholders; or\n\n (b) contravene, or constitute a default under, any\n provision of any law or regulation applicable to the Borrower\n or any Guarantor or of the certificate or articles of\n incorporation or by-laws of the Borrower or any Guarantor or\n of any material contract, agreement, judgment, order, decree,\n adjudication or other instrument, including, without\n limitation, the 1996 Caliber Indenture, binding upon the\n Borrower or any Guarantor, or by which the Borrower or any\n Guarantor or any of their respective property may be bound or\n affected, or result in the creation of any Lien (other than\n the Liens created pursuant to the Security Documents) on any\n property now owned by the Borrower, any Guarantor or any\n Significant Subsidiary pursuant to the provisions of any\n agreement, indenture or other instrument binding upon it.\n\n 5. The Loan Documents delivered as of the date hereof have\n been duly executed and delivered by the Borrower and each of the\n Guarantors, and constitute the legal, valid and binding obligations of\n the Borrower and the Guarantors, respectively, to the extent each is a\n party thereto, enforceable in accordance with their terms, except as\n such enforceability may be limited by bankruptcy or similar laws\n relating generally to the enforcement of creditors' rights and subject\n also to the availability of equitable remedies if equitable remedies\n are sought.\n\n 6. There is no action, suit, proceeding or investigation of\n which I am aware pending or threatened against or affecting the\n Borrower, any Guarantor or any Significant Subsidiary before any court,\n regulatory commission, arbitration tribunal, governmental department,\n administrative agency or instrumentality which, if such action, suit,\n proceeding or investigation were determined adversely to the interest\n of the Borrower, the Guarantors and the Significant Subsidiaries, would\n have a material, adverse effect on the business, condition (financial\n or otherwise) or operations of the Borrower, any Guarantor or any\n Significant Subsidiary, except as discussed in the Borrower's Annual\n Report on Form 10-K for the fiscal year ended May 31, 1998 as updated\n in the Borrower's Quarterly Report on Form 10-Q for the quarter ended\n August 31, 1998.\n\n 7. Neither the Borrower nor any Guarantor or Significant\n Subsidiary is in default or violation in any respect which would have a\n material adverse effect on the business or condition (financial or\n otherwise) of the Borrower, any Guarantor or any Significant Subsidiary\n with respect to any law, rule, regulation, order, writ, judgment,\n injunction, decree, adjudication, determination or award presently in\n effect and applicable to it.\n\n 2\n\n\n 8. No approval, authorization, consent, adjudication or order\n of any governmental authority, which has not been obtained by the\n Borrower or any Guarantor, is required to be obtained by the Borrower\n or any Guarantor in connection with the execution and delivery of the\n Loan Documents delivered as of the date hereof, the borrowings under\n the Agreement or in connection with the performance by the Borrower or\n any of the Guarantors of their respective obligations under the Loan\n Documents.\n\n 9. The Borrower is not engaged principally or as one of its\n important activities in the business of extending credit for the\n purpose of purchasing or carrying any \"margin stock\" (as such term is\n defined in Regulation U of the Board of Governors of the Federal\n Reserve System).\n\n 10. The Borrower is not an \"investment company\", within the\n meaning of the Investment Company Act of 1940, as currently in effect.\n\n 11. The laws of the State of Tennessee which limit interest\n rates or other amounts payable with respect to borrowed money or\n interest thereon are not applicable to the Agreement.\n\n 12. FedEx is not a national of any foreign country designated\n in Presidential Executive Order No. 8389 or 9193, as amended, and the\n regulations issued thereunder, as amended, or a national of any foreign\n country designated in the Foreign Assets Control Regulations or in the\n Cuban Assets Control Regulations of the United States Treasury\n Department, 31 C.F.R., Subtitle B, Chapter V, as amended.\n\n 13. The certificates issued to FedEx pursuant to 49 U.S.C.\n Section 41102(a) and 49 U.S.C. Section 41103 and the operating \n certificates issued to FedEx pursuant to Part 121 of the Federal \n Aviation Regulations are in full force and effect and are adequate \n for the conduct of the business of the Borrower and its Subsidiaries \n as now conducted. There are no actions, proceedings or \n investigations pending or, to my knowledge, threatened (or any basis \n therefor known to me) to amend, modify, suspend or revoke any such \n certificate in whole or in part which would have any material \n adverse effect on any such certificate or the operations of the \n Borrower and its Subsidiaries.\n\n This opinion is limited to the effect of the laws of the State of\nTennessee, the General Corporation Law of the State of Delaware and the laws of\nthe United States of America, and I express no opinion with respect to the laws\nof any other jurisdiction. As a result, I have with your permission assumed for\npurposes of this opinion that, notwithstanding the contrary choice of law\nprovisions contained therein, the Loan Documents are governed by the laws of the\nState of Tennessee.\n\n 3\n\n\n This opinion may be relied upon by the Paying Agent, the Lenders, and\ntheir respective permitted participants, assignees, and other transferees. It is\nunderstood that this opinion speaks as of the date given, notwithstanding any\ndelivery as contemplated above on any other date.\n\n\n 4\n\n\n\n EXHIBIT \"C\"\n\n ASSIGNMENT AGREEMENT\n\n This Assignment Agreement (this \"Assignment Agreement\") between________\n______________ (the \"Assignor\") and _________________ (the \"Assignee\") is dated\nas of ___________________,____. The parties hereto agree as follows:\n\n 1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement\n(which, as it may be amended, modified, renewed or extended from time to time,\nis herein called the \"Credit Agreement\") described in Item 1 of Schedule 1\nattached hereto (\"Schedule 1\"). Capitalized terms used herein and not otherwise\ndefined herein shall have the meanings attributed to them in the Credit\nAgreement.\n\n 2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to\nthe Assignee, and the Assignee hereby purchases and assumes from the Assignor,\nan interest in and to the Assignor's rights and obligations under the Credit\nAgreement such that after giving effect to such assignment the Assignee shall\nhave purchased pursuant to this Assignment Agreement the percentage interest\nspecified in Item 3 of Schedule 1 of all outstanding rights and obligations\nunder the Credit Agreement relating to the facilities listed in Item 3 of\nSchedule 1 and the other Loan Documents. The aggregate Commitments (or Loans, if\nthe applicable Commitments have been terminated) purchased by the Assignee\nhereunder are set forth in Item 4 of Schedule 1.\n\n 3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the\n\"Effective Date\") shall be the later of the date specified in Item 5 of Schedule\n1 or two Business Days (or such shorter period agreed to by the Paying Agent)\nafter a Notice of Assignment substantially in the form of Exhibit \"I\" attached\nhereto has been delivered to the Paying Agent. Such Notice of Assignment must\ninclude any consents required to be delivered to the Paying Agent by Section\n12.3.1 of the Credit Agreement. In no event will the Effective Date occur if the\npayments required to be made by the Assignee to the Assignor on the Effective\nDate under Sections 4 and 5 hereof are not made on the proposed Effective Date.\nThe Assignor will notify the Assignee of the proposed Effective Date no later\nthan the Business Day prior to the proposed Effective Date. As of the Effective\nDate, (i) the Assignee shall have the rights and obligations of a Lender under\nthe Loan Documents with respect to the rights and obligations assigned to the\nAssignee hereunder and (ii) the Assignor shall relinquish its rights and be\nreleased from its corresponding obligations under the Loan Documents with\nrespect to the rights and obligations assigned to the Assignee hereunder.\n\n 4. PAYMENT OBLIGATIONS. On and after the Effective Date, the Assignee\nshall be entitled to receive from the Paying Agent all payments of principal,\ninterest and fees with respect to the interest assigned hereby. The Assignee\nshall advance funds directly to the Paying Agent with respect to all Loans and\nreimbursement payments made on or after the Effective Date with respect to the\ninterest assigned hereby. [In consideration for the sale and assignment of Loans\nhereunder, (i) the Assignee shall pay the Assignor, on the Effective Date, an\namount equal to the principal amount of the portion of all Floating Rate Loans\nassigned to the Assignee hereunder and (ii) with respect to each Eurodollar Loan\nmade by the Assignor and assigned to the Assignee\n\n\n\nhereunder which is outstanding on the Effective Date, (a) on the last day of the\nInterest Period therefor or (b) on such earlier date agreed to by the Assignor\nand the Assignee or (c) on the date on which any such Eurodollar Loan either\nbecomes due (by acceleration or otherwise) or is prepaid (the date as described\nin the foregoing clauses (a), (b) or (c) being hereinafter referred to as the\n\"Payment Date\"), the Assignee shall pay the Assignor an amount equal to the\nprincipal amount of the portion of such Eurodollar Loan assigned to the Assignee\nwhich is outstanding on the Payment Date. If the Assignor and the Assignee agree\nthat the Payment Date for such Eurodollar Loan shall be the Effective Date, they\nshall agree to the interest rate applicable to the portion of such Loan assigned\nhereunder for the period from the Effective Date to the end of the existing\nInterest Period applicable to such Eurodollar Loan (the \"Agreed Interest Rate\")\nand any interest received by the Assignee in excess of the Agreed Interest Rate\nshall be remitted to the Assignor. If interest for the period from the Effective\nDate to but not including the Payment Date is not paid by the Borrower with\nrespect to any Eurodollar Loan sold by the Assignor to the Assignee hereunder,\nthe Assignee shall pay to the Assignor interest for such period on the portion\nof such Eurodollar Loan sold by the Assignor to the Assignee hereunder at the\napplicable rate provided by the Credit Agreement. If a prepayment of any\nEurodollar Loan which is existing on the Payment Date and assigned by the\nAssignor to the Assignee hereunder occurs after the Payment Date but before the\nend of the Interest Period applicable to such Eurodollar Loan, the Assignee\nshall remit to the Assignor the excess of the prepayment indemnity paid with\nrespect to the portion of such Eurodollar Loan assigned to the Assignee\nhereunder over the amount which would have been paid if such prepayment\nindemnity had been calculated based on the Agreed Interest Rate. The Assignee\nwill also promptly remit to the Assignor (i) any principal payments received\nfrom the Paying Agent with respect to Eurodollar Loans prior to the Payment Date\nand (ii) any amounts of interest on Loans and fees received from the Paying\nAgent which relate to the portion of the Loans assigned to the Assignee\nhereunder for periods prior to the Effective Date, in the case of Floating Rate\nLoans, or the Payment Date, in the case of Eurodollar Loans, and not previously\npaid by the Assignee to the Assignor.]1 If either party hereto receives any\npayment to which the other party hereto is entitled under this Assignment\nAgreement, then the party receiving such amount shall promptly remit it to the\nother party hereto.\n\n 5. FEES PAYABLE BY THE ASSIGNEE. The [Assignee shall pay to the\nAssignor a fee on each day on which a payment of interest or facility fees is\nmade under the Credit Agreement with respect to the amounts assigned to the\nAssignee hereunder (other than a payment of interest or facility fees for the\nperiod prior to the Effective Date or, in the case of Eurodollar Loans, the\nPayment Date, which the Assignee is obligated to deliver to the Assignor\npursuant to Section 4 hereof). The amount of such fee shall be the difference\nbetween (i) the interest or fee, as applicable, paid with respect to the amounts\nassigned to the Assignee hereunder and (ii) the interest or fee, as applicable,\nwhich would have been paid with respect to the amounts assigned to the Assignee\nhereunder if each interest rate were of 1% less than the interest rate paid by\nthe Borrower or if the facility fee were of 1% less than the facility fee paid\nby the Borrower, as\n\n\n- ---------------------\n (1) Each Assignor may insert its standard payment provisions in lieu \nof the payment terms included in this Exhibit.\n\n 2\n\n\napplicable. In addition, the] Assignee agrees to pay % of the processing fee\nrequired to be paid to the Paying Agent in connection with this Assignment\nAgreement.\n\n 6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S\nLIABILITY. The Assignor represents and warrants that it is the legal and\nbeneficial owner of the interest being assigned by it hereunder and that such\ninterest is free and clear of any adverse claim. It is understood and agreed\nthat the assignment and assumption hereunder are made without recourse to the\nAssignor and that the Assignor makes no other representation or warranty of any\nkind to the Assignee. Neither the Assignor nor any of its officers, directors,\nemployees, agents or attorneys shall be responsible for (i) the due execution,\nlegality, validity, enforceability, genuineness, sufficiency or collectability\nof any Loan Document, including without limitation, documents granting the\nAssignor and the other Lenders a security interest in assets of the Borrower or\nany guarantor, (ii) any representation, warranty or statement made in or in\nconnection with any of the Loan Documents, (iii) the financial condition or\ncreditworthiness of the Borrower or any guarantor, (iv) the performance of or\ncompliance with any of the terms or provisions of any of the Loan Documents, (v)\ninspecting any of the Property, books or records of the Borrower, (vi) the\nvalidity, enforceability, perfection, priority, condition, value or sufficiency\nof any collateral securing or purporting to secure the Loans or (vii) any\nmistake, error of judgment, or action taken or omitted to be taken in connection\nwith the Loans or the Loan Documents.\n\n 7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it\nhas received a copy of the Credit Agreement, together with copies of the\nfinancial statements requested by the Assignee and such other documents and\ninformation as it has deemed appropriate to make its own credit analysis and\ndecision to enter into this Assignment Agreement, (ii) agrees that it will,\nindependently and without reliance upon the Paying Agent, the Assignor or any\nother Lender and based on such documents and information as it shall deem\nappropriate at the time, continue to make its own credit decisions in taking or\nnot taking action under the Loan Documents, (iii) appoints and authorizes the\nPaying Agent to take such action on its behalf and to exercise such powers under\nthe Loan Documents as are delegated to the Paying Agent by the terms thereof,\ntogether with such powers as are reasonably incidental thereto, (iv) agrees that\nit will perform in accordance with their terms all of the obligations which by\nthe terms of the Loan Documents are required to be performed by it as a Lender,\n[and] (v) agrees that its payment instructions and notice instructions are as\nset forth in the attachment to Schedule 1, [and (vi) attaches the forms\nprescribed by the Internal Revenue Service of the United States certifying that\nthe Assignee is entitled to receive payments under the Loan Documents without\ndeduction or withholding of any United States federal income taxes].(2)\n\n 8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor\nharmless against any and all losses, costs and expenses (including, without\nlimitation, reasonable attorneys' \n\n- --------------------------\n\n (2) To be inserted if the Assignee is not incorporated under the laws \nof the United States, or a state thereof.\n\n\n 3\n\n\nfees) and liabilities incurred by the Assignor in connection with or arising in\nany manner from the Assignee's non-performance of the obligations assumed under\nthis Assignment Agreement.\n\n 9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall\nhave the right or obligation pursuant to Article XII of the Credit Agreement to\nassign the rights which are assigned to the Assignee hereunder to any entity or\nperson, provided that (i) any such subsequent assignment does not violate any of\nthe terms and conditions of the Loan Documents or any law, rule, regulation,\norder, writ, judgment, injunction or decree and that any consent required under\nthe terms of the Loan Documents has been obtained and (ii) unless the prior\nwritten consent of the Assignor is obtained, the Assignee is not thereby\nreleased from its obligations to the Assignor hereunder, if any remain\nunsatisfied, including, without limitation, its obligations under Sections 4, 5\nand 8 hereof.\n\n 10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the\nAggregate Commitment occurs between the date of this Assignment Agreement and\nthe Effective Date, [the percentage interests specified in Item 3 of Schedule 1\nshall remain the same, but the dollar amount purchased shall be recalculated\nbased on the reduced Aggregate Commitment] [the dollar amounts specified in Item\n4 of Schedule 1 shall remain the same, but the percentage interests purchased\nshall be recalculated based on the reduced Aggregate Commitment].(3)\n\n 11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice\nof Assignment embody the entire agreement and understanding between the parties\nhereto and supersede all prior agreements and understandings between the parties\nhereto relating to the subject matter hereof.\n\n 12. GOVERNING LAW. This Assignment Agreement shall be governed by the\ninternal law, and not the law of conflicts, of the State of New York.\n\n 13. NOTICES. Notices shall be given under this Assignment Agreement in\nthe manner set forth in the Credit Agreement. For the purpose hereof, the\naddresses of the parties hereto (until notice of a change is delivered) shall be\nthe addresses set forth in the attachment to Schedule 1.\n\n\n- ---------------------------\n(3) At option of parties.\n\n 4\n\n\n\n IN WITNESS WHEREOF, the parties hereto have executed this Assignment\nAgreement by their duly authorized officers as of the date first above written.\n\n [NAME OF ASSIGNOR]\n\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n\n [NAME OF ASSIGNEE]\n\n\n By:\n ----------------------------------\n Name:\n --------------------------------\n Title:\n -------------------------------\n\n\n 5\n\n\n\n\n SCHEDULE 1\n to Assignment Agreement\n\n1. Description and Date of Credit Agreement:\n\n Credit Agreement dated as of December 10, 1998 by and among FDX\n Corporation, the Lenders party thereto, and Morgan Guaranty Trust Company\n of New York, as Paying Agent\n\n2. Date of Assignment Agreement:______________ ,_____ \n\n3. Amounts (As of Date of Item 2 above):\n\n a. Total of Commitment\n (Loans)(4) under\n Credit Agreement $_____________ \n\n b. Assignee's Percentage\n purchased under the\n Assignment Agreement(5) _____________%\n\n4. Assignee's (Loan Amount)\n Commitment Amount\n Purchased Hereunder: $_____________ \n\n\n5. Proposed Effective Date: _________, _____\n\n\nAccepted and Agreed:\n\n[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]\n\n\nBy: By: \n ------------------------------ ---------------------------\nTitle: Title: \n --------------------------- ------------------------\n\n\n\n- ----------------------------------\n (4) If the Commitment has been terminated, insert outstanding Loans in\nplace of Commitment.\n\n (5) Percentage taken to 10 decimal places.\n\n\n 6\n\n\n\n\n Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT\n\n Attach Assignor's Administrative Information Sheet, which\n must include notice address for the Assignor and the\n Assignee\n\n\n\n 7\n\n\n\n\n EXHIBIT \"I\"\n to Assignment Agreement\n\n NOTICE\n OF ASSIGNMENT\n -------------\n\n\n , \n ------------- -------\n\nTo: FDX CORPORATION\n 2600 Thousand Oaks Boulevard\n Suite 3110\n Memphis, Tennessee 38118\n Attn: Treasurer\n\n MORGAN GUARANTY TRUST COMPANY OF NEW YORK\n 60 Wall Street\n 22nd Floor\n New York, New York 10260-0060\n Attn: James Condon\n\n\nFrom: [NAME OF ASSIGNOR] (the \"Assignor\")\n\n [NAME OF ASSIGNEE] (the \"Assignee\")\n\n\n 1. We refer to the Credit Agreement (the \"Credit Agreement\") described\nin Item 1 of Schedule 1 attached hereto (\"Schedule 1\"). Capitalized terms used\nherein and not otherwise defined herein shall have the meanings attributed to\nthem in the Credit Agreement.\n\n 2. This Notice of Assignment (this \"Notice\") is given and delivered to\nthe Borrower and the Paying Agent pursuant to Section 12.3.3 of the Credit\nAgreement.\n\n 3. The Assignor and the Assignee have entered into an Assignment \nAgreement, dated as of , (the \"Assignment\"), pursuant to which, among \nother things, the Assignor has sold, assigned, delegated and transferred to \nthe Assignee, and the Assignee has purchased, accepted and assumed from the \nAssignor the percentage interest specified in Item 3 of Schedule 1 of all \noutstanding, rights and obligations under the Credit Agreement relating to \nthe facility identified in Item 3 of Schedule 1, including, without \nlimitation, such interest in the Assignor's Commitments (if applicable) and \nthe Loans owing to the Assignor relating to such facilities. The Effective \nDate of the Assignment shall be the later of the date specified in Item 5 of \nSchedule 1 to the Assignment (\"Schedule 1\") or two Business Days (or such \nshorter period as agreed to by the Paying Agent) after this Notice of \nAssignment and any consents and fees required by Sections 12.3.1 and 12.3.3 \nof the Credit Agreement have been delivered to the Paying Agent, provided \nthat the Effective Date shall not occur if any condition precedent agreed to \nby the Assignor and the Assignee has not been satisfied.\n\n\n 8\n\n\n 4. The Assignor and the Assignee hereby give to the Borrower and the\nPaying Agent notice of the assignment and delegation referred to herein. The\nAssignor will confer with the Paying Agent before the date specified in Item 5\nof Schedule 1 to determine if the Assignment Agreement will become effective on\nsuch date pursuant to Section 3 hereof, and will confer with the Paying Agent to\ndetermine the Effective Date pursuant to Section 3 hereof if it occurs\nthereafter. The Assignor shall notify the Paying Agent if the Assignment\nAgreement does not become effective on any proposed Effective Date as a result\nof the failure to satisfy the conditions precedent agreed to by the Assignor and\nthe Assignee. At the request of the Paying Agent, the Assignor will give the\nPaying Agent written confirmation of the satisfaction of the conditions\nprecedent.\n\n 5. The Assignor or the Assignee shall pay to the Paying Agent on or\nbefore the Effective Date the processing fee of $4,000 required by Section\n12.3.3 of the Credit Agreement.\n\n 6. If notes evidencing the Assignor's Loans are outstanding on the\nEffective Date, the Assignor and the Assignee request and direct that the Paying\nAgent prepare and cause the Borrower to execute and deliver new notes or, as\nappropriate, replacement notes, to the Assignor and the Assignee. The Assignor\nand, if applicable, the Assignee each agree to deliver to the Paying Agent the\noriginal notes received by it from the Borrower upon its receipt of new notes in\nthe appropriate amounts.\n\n 7. The Assignee advises the Paying Agent that its notice and payment\ninstructions are set forth in the attachment to Schedule 1.\n\n 8. Each party consenting to the Assignment in the space indicated below\nhereby releases the Assignor from any obligations to it which have been assigned\nto and assumed by the Assignee.\n\n\nNAME OF ASSIGNOR NAME OF ASSIGNEE\n\n\nBy: By: \n ------------------------------ ---------------------------\nName: Name: \n --------------------------- ------------------------\nTitle: Title: \n --------------------------- ------------------------\n\n\n\n\nAcknowledged by and Acknowledged by and\nConsented to: Consented to:\n\nMORGAN GUARANTY TRUST FDX CORPORATION\nCOMPANY OF NEW YORK,\nas Paying Agent\n\n\nBy: By: \n ------------------------------ ---------------------------\nName: Name: \n --------------------------- ------------------------\nTitle: Title: \n --------------------------- -----------------------\n\n\n 9\n\n\n\n\n\n\n\n [Attach photocopy of Schedule 1 to Assignment]\n\n\n\n\n\n\n\n 10\n\n\n\n\n\n\n EXHIBIT \"D\"\n\n FORM OF RELEASE OF SECURITY DOCUMENTS\n\n\n\n --------- --, ----\nFDX CORPORATION\n2600 Thousand Oaks Boulevard\nSuite 3110\nMemphis, Tennessee 38118\nAttn: Treasurer\n\n[Insert any applicable Subsidiaries]\n\nLadies and Gentlemen:\n\n Reference is hereby made to the Credit Agreement dated as of December\n10, 1998 among FDX Corporation, the Lenders named therein and Morgan Guaranty\nTrust Company of New York, as Paying Agent (the \"Agreement\"). Unless the context\notherwise requires, all terms used in this release which are specifically\ndefined in the Agreement shall have the meanings given such terms in the\nAgreement.\n\n The Borrower and certain of its Subsidiaries have granted to the Paying\nAgent for the benefit of (i) the Lenders and (ii) the lenders under each of the\nExisting Revolving Credit Documents and the Existing L/C Facility Documents, a\nLien in certain Property (the \"Specified Property\") of such Persons, which\nProperty constitutes Designated Collateral, pursuant to the Security Documents\nspecified on Schedule \"1\" attached hereto (the \"Specified Security Documents\").\nThe Paying Agent, on behalf of itself, each of the Lenders, and the lenders\nunder each of the Existing Revolving Credit Documents and the Existing L/C\nFacility Documents, hereby releases all Liens held by the Paying Agent for the\nbenefit of such Persons on the Specified Property pursuant to the Specified\nSecurity Documents.\n\n The Paying Agent further agrees to execute and deliver to you such\nother documents, instruments and agreements, and to take such other action, as\nyou may request, from time to time, to give effect to the provisions of this\nletter.\n\n MORGAN GUARANTY TRUST\n COMPANY OF NEW YORK,\n as Paying Agent\n\n\n By:\n --------------------------------\n\n\n\n\n Schedule \"1\"\n to Release of Security Documents\n\n LIST OF SPECIFIED SECURITY DOCUMENTS \n ------------------------------------ \n\n\n\n\n\n\n\n\n\n 2\n\n\n\n\nEX-10.2\n3\nEXHIBIT 10.2\n\n\n\n\n AMENDMENT NO. 1\n DATED AS OF DECEMBER 10, 1998\n TO\n CREDIT AGREEMENT\n DATED AS OF JANUARY 15, 1998\n\n THIS AMENDMENT NO. 1 TO THE CREDIT AGREEMENT (the \"Amendment\") is made\nas of December 10, 1998 by and among FDX Corporation, a Delaware corporation\n(the \"Borrower\"), the Lenders and The First National Bank of Chicago, in its\ncapacity as agent (\"Agent\"). Defined terms used herein and not otherwise defined\nherein shall have the meanings given to them in that certain Credit Agreement\ndated as of January 15, 1998 by and among the Borrower, the Lenders, First\nChicago Capital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as\nCo-Arranger and Syndication Agent, Chase Securities Inc., as Co-Arranger and\nDocumentation Agent, and the Agent (the \"Credit Agreement\").\n\n WITNESSETH\n\n WHEREAS, the Borrower, the Lenders and the Agent are parties to the\nCredit Agreement;\n\n WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend\nthe Credit Agreement on the terms and conditions set forth herein;\n\n NOW, THEREFORE, in consideration of the premises set forth above, the\nterms and conditions contained herein, and other good and valuable\nconsideration, the receipt and sufficiency of which are hereby acknowledged, the\nBorrower, the Lenders and the Agent agree as follows:\n\n 1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of December 10, 1998\nsubject to the satisfaction of the conditions precedent set forth in SECTION 4\nbelow, the Credit Agreement is hereby amended as follows:\n\n 1.1. Article I is amended as follows:\n\n (a) The definitions of \"Applicable Tranche A Facility Fee\n Percentage\" and \"Applicable Tranche B Facility Fee Percentage\" are\n amended in their entirety to read as follows:\n\n \"'Applicable Tranche A Facility Fee Percentage' means, subject\n to the following provisions of this definition, the per annum\n rate corresponding to the Level in effect from time to time,\n as set forth in the following table:\n\n\n\n\n\n\n\n
\n\n Each change in the Applicable Tranche A Facility Fee\n Percentage resulting from a change in a Rating shall take\n effect at the time such change in such Rating is publicly\n announced by the relevant rating agency.\"\n\n \"'Applicable Tranche B Facility Fee Percentage' means, subject\n to the following provisions of this definition, the per annum\n rate corresponding to the Level in effect from time to time,\n as set forth in the following table:\n\n\n
\n\n Each change in the Applicable Tranche B Facility Fee\n Percentage resulting from a change in a Rating shall take\n effect at the time such change in such Rating is publicly\n announced by the relevant rating agency.\"\n\n (b) The definitions of \"Applicable Tranche A Margin\" and\n \"Applicable Tranche B Margin\" are amended in their entirety to read as\n follows:\n\n \"'Applicable Tranche A Margin' means, subject to the following\n provisions of this definition, the per annum rate of interest\n corresponding to the Level in effect from time to time, as set\n forth in the following table:\n\n 2\n\n\n\n\n\n\n
\n\n Each change in the Applicable Tranche A Margin resulting from\n a change in a Rating shall take effect at the time such change\n in such Rating is publicly announced by the relevant rating\n agency.\"\n\n \"'Applicable Tranche B Margin' means, subject to the following\n provisions of this definition, the per annum rate of interest\n corresponding to the Level in effect from time to time, as set\n forth in the following table:\n\n\n
\n\n Each change in the Applicable Tranche B Margin resulting from\n a change in a Rating shall take effect at the time such change\n in such Rating is publicly announced by the relevant rating\n agency.\"\n\n (c) The definition of \"Consolidated Cash Flow\" is amended in\n its entirety to read as follows:\n\n \"'Consolidated Cash Flow' means, on a consolidated basis for\n the Borrower and its Consolidated Subsidiaries for the twelve\n most recent complete fiscal months, the sum of (i) Adjusted\n Net Income, PLUS (ii) Interest Expense, PLUS (iii) Rent\n Expense, in each case as determined in accordance with GAAP.\"\n\n (d) The definition of \"Material Adverse Effect\" is amended in\n its entirety to read as follows:\n\n 3\n\n\n\n\n\n \"Material Adverse Effect\" means a material adverse effect\n (excluding the effects of an actual or threatened business\n interruption, including but not limited to self-help actions\n or a strike, by members of the FedEx Pilots Association in\n late 1998 or 1999, or contingency plans related thereto) on\n (i) the business, Property, condition (financial or\n otherwise), results of operations, or prospects of the\n Borrower and its Subsidiaries taken as a whole, (ii) the\n ability of the Borrower to perform its obligations under the\n Loan Documents, or (iii) the validity or enforceability of any\n of the Loan Documents or the rights or remedies of the Agent\n or the Lenders thereunder.\n\n (e) The definitions of \"Moody's Rating\" and \"S&P Rating\" are\n amended to add the phrase \"non-credit enhanced\" after the word\n \"unsecured\" in the second line of each such definition.\n\n (f) The following definitions are added to Article I in\n appropriate alphabetical order:\n\n \"Adjusted Net Income\" means, on a consolidated basis, for the\n Borrower and its Consolidated Subsidiaries for the twelve most\n recent complete fiscal months, income (loss) before income\n taxes MINUS, to the extent included in determining income\n (loss) before income taxes, any net loss or gain realized in\n connection with any sale or disposition of any asset (other\n than in the ordinary course of business) or any extraordinary\n or non-recurring loss or gain resulting from an actual or\n threatened business interruption relating to any self-help\n actions or strike, by members of the FedEx Pilots Association\n in late 1998 or 1999, or contingency plans related thereto,\n provided that the aggregate amount of the foregoing reductions\n to income (loss) before income taxes shall not exceed\n $1,000,000,000.\n\n \"L/C Facility\" means the Syndicated Revolving Standby Letter\n of Credit Facility dated as of July 7, 1998, among the\n Borrower, the issuing banks named therein, The Sumitomo Bank,\n Limited, as agent thereunder, and the co-agents named therein,\n and all instruments, agreements and contractual obligations\n entered into in connection therewith, as amended by that\n certain First Amendment and Second Amendment (Temporary)\n thereto, each dated as of December 10, 1998, and as the same\n may be further amended, modified or supplemented from time to\n time.\n\n \"Year 2000 Problem\" means the risk that computer applications\n used by the Borrower or any of its Subsidiaries (or their\n respective suppliers and vendors) may be unable to recognize\n or properly perform date-sensitive functions involving certain\n dates prior to and any date after December 31, 1999.\n\n 1.2 Section 2.5 is amended to add the following at the end\n thereof:\n\n 4\n\n\n\n\n\n \"(e) The Borrower agrees to pay to the Agent, for the\n account of each Lender, for each calendar month in which the\n average daily amount of all Advances outstanding hereunder\n during such calendar month exceeds 25% of the average daily\n Aggregate Commitment during such month, a utilization fee on\n the average daily amount of Advances outstanding during such\n calendar month, at a per annum rate equal to 0.125%. Such\n utilization fee shall be payable in arrears on each Payment\n Date hereafter and on the Tranche A Facility Termination Date\n and the Tranche B Facility Termination Date.\"\n\n 1.3 The first sentence of Section 5.4 is deleted and the\n following is substituted therefor:\n\n \"5.4. FINANCIAL STATEMENTS. The May 31, 1998 audited\n consolidated financial statements and August 31, 1998\n unaudited consolidated financial statements of the Borrower\n and its Consolidated Subsidiaries heretofore delivered to the\n Lenders were prepared in accordance with GAAP in effect on the\n dates such statements were prepared and fairly present the\n consolidated financial condition and operations of the\n Borrower and its Consolidated Subsidiaries at such dates and\n the consolidated results of their operations for the periods\n then ended (except, in the case of such unaudited statements,\n for normal year-end adjustments).\"\n\n 1.4 The Credit Agreement is amended to add the following after\n Section 5.17:\n\n \"5.18 YEAR 2000 COMPLIANCE. The Borrower has (i)\n initiated a review and assessment of all areas within the\n business and operations of the Borrower and any of its\n Subsidiaries (including those areas affected by suppliers and\n vendors) that could be adversely affected by the Year 2000\n Problem, (ii) developed a plan and timeline for addressing the\n Year 2000 Problem on a timely basis and (iii) to the date\n hereof, implemented such plan in accordance with such\n timetable. The Borrower reasonably believes that all computer\n applications (including those of suppliers and vendors) that\n are material to the business or operations of the Borrower or\n any of its Subsidiaries will, on a timely basis, be able to\n properly perform date-sensitive functions for all dates before\n and from and after January 1, 2000, except to the extent that\n a failure to do so could not reasonably be expected to have a\n Material Adverse Effect.\"\n\n 1.5 Section 6.13 is amended in its entirety to read as\n follows:\n\n \"6.13. FIXED CHARGE COVERAGE. The Borrower will at\n all times maintain a ratio of (a) Consolidated Cash Flow to\n (b) the sum of Interest Expense and Rent Expense, in an amount\n not less than 1.20 to 1 through May 31, 2000, and 1.25 to 1\n thereafter.\"\n\n 5\n\n\n\n\n\n 1.6 Section 6.18 is amended to delete the \"and\" at the end of\n clause (c) and the period at the end of clause (d), and add the\n following immediately thereafter:\n\n \"; and\n\n (e) Guaranties included or required under the L/C\n Facility.\"\n\n 1.7 Section 6.20 is amended to:\n\n (a) add \"(other than Federal Express Canada Ltd. or\n Federal Express (Hong Kong) Limited)\" after the\n phrase \"Significant Subsidiary\" in the second line\n thereof.\n\n (b) add \"(a)\" after the words \"Section 4.1\" in the sixth\n line of clause (a) and in the seventh line of clause\n (b).\n\n 1.8 Section 6.21 is amended in its entirety to read as\n follows:\n\n \"6.21. NEGATIVE COVENANTS IN SUBSIDIARY AGREEMENTS.\n The Borrower will not permit any of its Subsidiaries to enter\n into, after the date hereof, any agreement, instrument or\n indenture that, directly or indirectly, contains negative\n covenants restricting any of the following (or otherwise\n prohibits or restricts, or has the effect of prohibiting or\n restricting, any of the following):\n\n (i) the incurrence or payment of Indebtedness\n owed to the Borrower or any other Subsidiary\n of the Borrower;\n\n (ii) the granting of Liens;\n\n (iii) the declaration or payment of dividends; and\n\n (iv) the making of loans, advances or other\n Investments to or in the Borrower or any\n other Subsidiary of the Borrower.\"\n\n 1.9 Schedule 2 of the Credit Agreement is hereby replaced with\n Schedule 2 attached to Amendment No. 1 hereto.\n\n 2. WAIVER. Subject to the satisfaction of the conditions precedent set\nforth in SECTION 4 of this Amendment and the accuracy of the representations and\nwarranties set forth in SECTION 5 of this Amendment, the Agent and Lenders waive\nthe Borrower's noncompliance with Section 6.21 of the Credit Agreement as a\nresult of the execution of guaranties by certain of the Borrower's Subsidiaries\nin connection with the L/C Facility. The foregoing waiver is only effective to\nthe extent set forth in this SECTION 2. Nothing herein constitutes a waiver of\nany other Default or Unmatured Default under the Credit Agreement or of any\nother provision of the Credit\n\n 6\n\n\n\n\n\nAgreement, and except as provided in this SECTION 2, the foregoing waiver does\nnot affect or diminish the right of the Lenders and the Agent to require strict\nperformance by the Borrower of each provision of the Credit Agreement and the\nLoan Documents.\n\n 3. EXTENSION OF TRANCHE B FACILITY TERMINATION DATE. Each of the\nLenders listed on EXHIBIT B attached hereto consents to the extension of the\nTranche B Facility Termination Date to January 14, 2000, subject to Section 2.19\nof the Credit Agreement, and waives its right under Section 2.19 to revoke such\nconsent.\n\n 4. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective\nas of the date set forth above when the Agent shall have received:\n\n (i) a counterpart of this Amendment executed by the Borrower,\n the Agent and Lenders constituting the Required Lenders; PROVIDED,\n HOWEVER, that as to each Lender listed on EXHIBIT B, Section 3 hereof\n shall become effective only when the Agent shall have received a\n counterpart of this Amendment executed by each such Lender;\n\n (ii) a counterpart of the Acknowledgment attached hereto as\n EXHIBIT A executed by each of the Guarantors; and\n\n (iii) such documents evidencing corporate existence, action\n and authority of the Borrower and the Guarantors as the Agent may\n reasonably request.\n\n 5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower\nrepresents and warrants that:\n\n (a) This Amendment, and the Credit Agreement as previously\n executed and as amended hereby, constitute legal, valid and binding\n obligations of the Borrower and are enforceable against the Borrower in\n accordance with their terms.\n\n (b) Upon the effectiveness of this Amendment, the Borrower\n reaffirms all covenants, representations and warranties made in the\n Credit Agreement.\n\n (c) No Default or Unmatured Default has occurred and is\ncontinuing.\n\n 6. EFFECT ON CREDIT AGREEMENT.\n\n (a) During the period that this Amendment is effective, each\n reference in the Credit Agreement to \"this Agreement,\" \"hereunder,\"\n \"hereof,\" \"herein\" or words of like import shall mean and be a\n reference to the Credit Agreement as amended hereby.\n\n (b) Except as specifically amended above, the Credit Agreement\n and all other Loan Documents, instruments and agreements executed\n and/or delivered in connection therewith, shall remain in full force\n and effect, and are hereby ratified and confirmed.\n\n 7\n\n\n\n\n\n (c) The execution, delivery and effectiveness of this\n Amendment shall not, except as expressly provided herein, operate as a\n waiver of any right, power or remedy of the Agent or the Lenders, nor\n constitute a waiver of any provision of the Credit Agreement or any\n other Loan Documents, instruments and agreements executed and/or\n delivered in connection therewith.\n\n (d) In the event of any inconsistency between the provisions\n of this Amendment and the provisions of that certain Amendment No. 2\n (Temporary) dated as of December 10, 1998 among the Borrower, the Agent\n and the Lenders (the \"Temporary Amendment\"), the Temporary Amendment\n shall govern and control, so long as such Temporary Amendment is in\n effect.\n\n 7. GOVERNING LAW. This Amendment shall be governed by and construed in\naccordance with the laws of the State of Illinois.\n\n 8. HEADINGS. Section headings in this Amendment are included herein for\nconvenience of reference only and shall not constitute a part of this Amendment\nfor any other purpose.\n\n 9. COUNTERPARTS. This Amendment may be executed by one or more of the\nparties to the Amendment on any number of separate counterparts and all of said\ncounterparts taken together shall be deemed to constitute one and the same\ninstrument.\n\n 8\n\n\n\n IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have \nexecuted this Amendment as of the date first above written.\n\n FDX CORPORATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE FIRST NATIONAL BANK OF\n CHICAGO, as Agent\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n MORGAN GUARANTY TRUST\n COMPANY OF NEW YORK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE CHASE MANHATTAN BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n KREDIETBANK N.V., GRAND\n CAYMAN BRANCH\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n BANK OF AMERICA NATIONAL\n TRUST AND SAVINGS ASSOCIATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n BANK OF TOKYO-MITSUBISHI\n TRUST COMPANY\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n CITICORP USA, INC.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n COMMERZBANK\n AKTIENGESELLSCHAFT, ATLANTA\n AGENCY\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n NATIONSBANK, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n CIBC INC.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE FUJI BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n MELLON BANK, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n KEYBANK NATIONAL ASSOCIATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n FIRST AMERICAN NATIONAL BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n BANK OF HAWAII\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n THE BANK OF NEW YORK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n THE BANK OF NOVA SCOTIA\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n CREDIT SUISSE FIRST BOSTON\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n DEUTSCHE VERKEHRS BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE SANWA BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n SUNTRUST BANK, NASHVILLE, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n BANCA NAZIONALE DEL LAVORO\n SPA\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE SUMITOMO BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n\n EXHIBIT A\n TO\n AMENDMENT NO. 1\n DATED AS OF DECEMBER 10, 1998\n TO\n CREDIT AGREEMENT\n DATED AS OF JANUARY 15, 1998\n\n ACKNOWLEDGMENT\n --------------\n\n\n Each of the undersigned hereby (i) acknowledges receipt of a copy of\nAmendment No. 1 dated as of December 10, 1998 to the Credit Agreement dated as\nof January 15, 1998 by and among the Borrower, the Lenders, First Chicago\nCapital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as Co-Arranger\nand Syndication Agent, Chase Securities Inc., as Co-Arranger and Documentation\nAgent, and the Agent (the \"Credit Agreement\"), (ii) reaffirms the terms and\nconditions of that certain Guaranty dated as of January 27, 1998 (the\n\"Guaranty\") and (iii) acknowledges and agrees that the Guaranty (A) remains in\nfull force and effect and (B) is hereby ratified and confirmed.\n\n\n FEDERAL EXPRESS CORPORATION\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n RPS, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n CALIBER SYSTEM, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n\n\n\n\n VIKING FREIGHT, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n ROBERTS EXPRESS, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\nDated as of December 10, 1998\n\n\n\n\n\n\n EXHIBIT B\n\n LENDERS CONSENTING TO\n TRANCHE B FACILITY TERMINATION DATE EXTENSION\n\n\nTHE FIRST NATIONAL BANK OF CHICAGO\nMORGAN GUARANTY TRUST COMPANY OF NEW YORK\nTHE CHASE MANHATTAN BANK\nKREDIETBANK N.V.\nBANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION\nBANK OF TOKYO-MITSUBISHI TRUST COMPANY\nCITICORP USA, INC.\nCOMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY\nNATIONSBANK, N.A.\nTHE FUJI BANK, LIMITED\nMELLON BANK, N.A.\nKEYBANK NATIONAL ASSOCIATION\nFIRST AMERICAN NATIONAL BANK\nBANK OF HAWAII\nTHE BANK OF NEW YORK\nTHE BANK OF NOVA SCOTIA\nCREDIT SUISSE FIRST BOSTON\nDEUTSCHE VERKEHRS BANK\nTHE SANWA BANK, LIMITED\nSUNTRUST BANK\nBANCA NAZIONALE DEL LAVORO SPA\nTHE SUMITOMO BANK, LIMITED\n\n \n \n\nEX-10.3\n4\nEXHIBIT 10.3\n\n\n\n\n AMENDMENT NO. 2 (TEMPORARY)\n DATED AS OF DECEMBER 10, 1998\n TO\n CREDIT AGREEMENT\n DATED AS OF JANUARY 15, 1998\n\n THIS AMENDMENT NO. 2 (TEMPORARY) TO THE CREDIT AGREEMENT (the\n\"Amendment\") is made as of December 10, 1998 by and among FDX Corporation, a\nDelaware corporation (the \"Borrower\"), the Lenders and The First National Bank\nof Chicago, in its capacity as agent (\"Agent\"). Defined terms used herein and\nnot otherwise defined herein shall have the meanings given to them in that\ncertain Credit Agreement dated as of January 15, 1998 by and among the Borrower,\nthe Lenders, First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan\nSecurities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc., as\nCo-Arranger and Documentation Agent, and the Agent (as amended by that certain\nAmendment No. 1 dated as of the date hereof, the \"Credit Agreement\").\n\n WITNESSETH\n\n WHEREAS, the Borrower, the Lenders and the Agent are parties to the\nCredit Agreement;\n\n WHEREAS, the Borrower wishes to enter into a new Credit Agreement of\neven date herewith among the Borrower, the lenders parties thereto and Morgan\nGuaranty Trust Company of New York, as Paying Agent, as the same may be amended,\nmodified or supplemented from time to time (the \"New Credit Agreement\"), to\nfinance, among other things, the working capital needs of the Borrower in the\nevent of an actual or threatened business interruption and to finance\ncontingency plans related thereto;\n\n WHEREAS, the New Credit Agreement will terminate on the date (the \"New\nFacility Termination Date\") when (i) all of the \"Obligations\" (as defined in the\nNew Credit Agreement) have been paid in full and (ii) all of the \"Commitments\"\n(as defined in the New Credit Agreement) have been terminated in accordance with\nthe terms of the New Credit Agreement;\n\n WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend\nthe Credit Agreement on the terms and conditions set forth herein;\n\n NOW, THEREFORE, in consideration of the premises set forth above, the\nterms and conditions contained herein, and other good and valuable\nconsideration, the receipt and sufficiency of which are hereby acknowledged, the\nBorrower, the Lenders and the Agent agree as follows:\n\n\n\n\n\n 1. TEMPORARY AMENDMENTS TO CREDIT AGREEMENT. Effective as of December\n10, 1998 subject to the satisfaction of the conditions precedent set forth in\nSECTION 2 below, and remaining in effect only until the New Facility Termination\nDate, the Credit Agreement is hereby amended as follows:\n\n 1.1. Article I is amended as follows:\n\n (a) The definitions of \"Applicable Tranche A Margin\" and\n \"Applicable Tranche B Margin\" are amended in their entirety to read as\n follows:\n\n \"`Applicable Tranche A Margin' means, subject to the following\n provisions of this definition, the per annum rate of interest\n corresponding to the Level in effect from time to time, as set\n forth in the following table:\n\n\n\n
\n\n Each change in the Applicable Tranche A Margin resulting from\n a change in a Rating shall take effect at the time such change\n in such Rating is publicly announced by the relevant rating\n agency.\"\n\n \"`Applicable Tranche B Margin' means, subject to the following\n provisions of this definition, the per annum rate of interest\n corresponding to the Level in effect from time to time, as set\n forth in the following table:\n\n\n\n
\n\n\n 2\n\n\n\n\n\n Each change in the Applicable Tranche B Margin resulting from\n a change in a Rating shall take effect at the time such change\n in such Rating is publicly announced by the relevant rating\n agency.\"\n\n (b) The definition of \"Loan Documents\" is amended in its\n entirety to read as follows:\n\n \"Loan Documents\" means this Agreement, the Guaranty and, after\n the execution and delivery thereof and before the release\n thereof in accordance with Section 6.26, the Security\n Documents.\n\n (c) The definition of \"Material Adverse Effect\" is amended in\n its entirety to read as follows:\n\n \"Material Adverse Effect\" means a material adverse effect\n (excluding the effects of an actual or threatened business\n interruption, including but not limited to self-help actions\n or a strike, by members of the FedEx Pilots Association, or\n contingency plans related thereto) on (i) the business,\n Property, condition (financial or otherwise), results of\n operations, or prospects of the Borrower and its Subsidiaries\n taken as a whole, (ii) the ability of the Borrower to perform\n its obligations under the Loan Documents, or (iii) the\n validity or enforceability of any of the Loan Documents or the\n rights or remedies of the Agent or the Lenders thereunder.\n\n (d) The following new definitions are added to Article I in\n appropriate alphabetical order:\n\n \"Adjusted Net Income\" means, on a consolidated basis, for the\n Borrower and its Consolidated Subsidiaries for the twelve most\n recent complete fiscal months, income (loss) before income\n taxes MINUS, to the extent included in determining income\n (loss) before income taxes, any net loss or gain realized in\n connection with any sale or disposition of any asset (other\n than in the ordinary course of business) or any extraordinary\n or non-recurring loss or gain resulting from an actual or\n threatened business interruption relating to any self-help\n actions or strike, by members of the FedEx Pilots Association,\n or contingency plans related thereto, provided that the\n aggregate amount of the foregoing reductions to income (loss)\n before income taxes shall not exceed $1,000,000,000.\n\n \"Aircraft Mortgage\" means an Aircraft Mortgage and Security\n Agreement to be executed by FedEx pursuant to Section 6.26,\n substantially in the form approved pursuant to Section 6.27.\n\n \"Amendment No. 2\" means that certain Amendment No. 2\n (Temporary), dated as of December 10, 1998, by and among the\n Borrower, the Lenders party thereto and the Agent.\n\n\n 3\n\n\n\n\n \"Appraisal Report\" means, with respect to any aircraft or\n engine, an extended desktop appraisal of the Appraiser, which\n does not include any on-site inspection of such aircraft or\n engine or its maintenance records, but may include\n consideration of maintenance status information that is\n provided to the Appraiser from the client and/or aircraft\n operator, and may include adjustments from the mid-time,\n mid-life baseline to account for the actual maintenance status\n of such aircraft or engine.\n\n \"Appraiser\" means BK Associates, or another independent\n appraiser selected by the Borrower with the prior written\n consent of Morgan.\n\n \"BK Associates\" means BK Associates, Inc., an independent\n aircraft appraisal firm.\n\n \"Caliber Collateral\" is defined in Section 6.26.\n\n \"Caliber Operating Income\" means, as of any date, the\n operating income (or loss) of Caliber and its consolidated\n Subsidiaries for the four most recent fiscal quarters then\n ended, determined on a consolidated basis in accordance with\n GAAP.\n\n \"Caliber Stock\" means the capital stock of Caliber and the\n Subsidiaries of Caliber other than the Designated Immaterial\n Subsidiaries.\n\n \"Collateral\" means all the Property and interests in Property\n now owned or hereafter acquired by the Borrower and its\n Subsidiaries upon which a Lien is granted or purported to be\n granted under any of the Security Documents.\n\n \"Collateral Trust Agreement\" means a Collateral Trust\n Agreement to be executed pursuant to Section 6.26,\n substantially in the form approved pursuant to Section 6.27.\n\n \"Designated Collateral\" means (i) all now owned and hereafter\n acquired or arising (a) capital stock of Caliber and its\n domestic operating Subsidiaries (other than any Designated\n Immaterial Subsidiaries), (b) accounts receivable of FedEx and\n its Subsidiaries, (c) intercompany indebtedness owed to the\n Borrower by its Subsidiaries and (d) motor vehicles (other\n than passenger vehicles) and real estate of FedEx and its\n Subsidiaries), except such motor vehicles and real estate\n which are subject to Liens as of the date of Amendment No. 2\n (such real estate to include, without limitation, the real\n estate listed on SCHEDULE 1 attached to such Amendment No. 2),\n and (ii) all aircraft (including airframes and engines) of\n FedEx listed on SCHEDULE 1 attached to Amendment No. 2 hereto\n and such additional unencumbered aircraft (including airframes\n and engines) as the Borrower may designate in writing to the\n Agent from time to time.\n\n\n 4\n\n\n\n \"Designated Immaterial Subsidiaries\" means, during each fiscal\n year of the Borrower, any Subsidiary of Caliber which had\n revenues (determined in accordance with GAAP) for the\n immediately preceding fiscal year of Caliber not in excess of\n 2.0% of the consolidated revenues (determined in accordance\n with GAAP) of Caliber and the consolidated Subsidiaries of\n Caliber for such immediately preceding fiscal year.\n\n \"Eligible Receivables\" means, at any date of determination\n thereof, and with respect to any Person, the aggregate of all\n Receivables of such Person at such date (net of maximum\n discounts, allowances, retainage and any other amounts\n deferred with respect thereto), which is not, except as\n otherwise agreed by Morgan in its sole discretion exercised in\n a commercially reasonable manner, of any of the following\n types:\n\n (i) (A) it arises out a sale the original terms\n of which provide for payment more than 90\n days after the date of the original invoice\n issued by such Person in connection with\n such sale or (B) it is more than 60 days\n past due according to the original terms of\n sale; or\n\n (ii) it arises out of a sale not made in the\n ordinary course of such Person's business or\n a sale to a Person which is an Affiliate of\n such Person or controlled by an Affiliate of\n such Person; or\n\n (iii) it fails to meet or violates any warranty,\n representation or covenant contained in this\n Agreement or any of the other Loan\n Documents; or\n\n (iv) the account debtor is also a supplier or\n creditor of any Borrower or Guarantor and\n the Receivable is subject to any contractual\n right of setoff by the account debtor, and\n such account debtor has not entered into an\n agreement with Morgan with respect to the\n waiver of rights of setoff, or the account\n debtor has disputed liability with respect\n to such Receivable, or made any claim with\n respect to any other Receivable due from\n such account debtor to such Person, in which\n case the Receivable shall be ineligible to\n the extent of such dispute, claim or setoff\n (without duplication); or\n\n (v) the account debtor has filed a petition for\n bankruptcy or any other petition for relief\n under the federal bankruptcy code or similar\n statute, or made an assignment for the\n benefit of creditors, or any petition or\n other application for relief under the\n federal bankruptcy code or any similar\n statute has been filed against the account\n debtor, or the account debtor has failed,\n suspended its business operations, become\n insolvent, suffered a receiver or a trustee\n to be\n\n\n 5\n\n\n\n appointed for any of its assets or affairs,\n or is generally failing to pay its debts as\n they become due; or\n\n (vi) the sale is to an account debtor which is\n not located in the United States or Canada,\n unless the account debtor's obligations with\n respect to such sale are secured by a letter\n of credit, guaranty or eligible bankers'\n acceptance having terms, and from such\n issuers and confirmation banks, as are\n acceptable to Morgan in its sole discretion\n exercised in a commercially reasonable\n manner; or\n\n (vii) the sale is on a bill-and-hold, guaranteed\n sale, sale-and-return, sale on approval,\n consignment, or any other repurchase or\n return basis; or\n\n (viii) Morgan believes, in the exercise of its\n reasonable credit judgment, that collection\n of such Receivable is insecure or that such\n Receivable may not be paid by reason of the\n account debtor's financial inability to pay;\n or\n\n (ix) the account debtor is the United States of\n America or any department, agency or\n instrumentality thereof, unless such Person\n assigns its rights to payment of such\n Receivable to Morgan pursuant to the\n Assignment of Claims Act of 1940, as amended\n (31 U.S.C. Section 3727); or\n\n (x) the goods, the delivery of which has given\n rise to such Receivable, have not been\n delivered to or, if delivered, have been\n rejected by the account debtor or the\n services, the performance of which has given\n rise to such Receivable, have not been\n performed by such Person and accepted by the\n account debtor; or\n\n (xi) the amount of the Receivable(s) owing to\n FedEx and its Subsidiaries in the aggregate\n by any account debtor exceeds (A) a\n concentration limit of ten percent (10%) of\n the aggregate amount of the Receivables of\n FedEx and its Subsidiaries at such time, or\n (B) such other credit or concentration limit\n determined by Morgan, in the exercise of its\n reasonable credit judgment, at any time or\n times hereafter, in which case such\n Receivable(s) shall be ineligible to the\n extent such Receivable(s) exceed(s) such\n limits; or\n\n (xii) to the extent such Receivable constitutes\n Collateral, Morgan, as collateral agent as\n contemplated by Section 6.26, does not have\n a senior, perfected security interest in\n such Receivable or such\n\n\n 6\n\n\n\n Receivable is subject to a Lien which is not\n permitted under Section 6.19; or\n\n (xiii) the sale is to an account debtor with\n respect to which fifty percent (50%) or more\n of all Receivables owing by such account\n debtor are ineligible for any reason (except\n with respect to those categories of\n ineligibility where Morgan determines in its\n sole discretion exercised in a commercially\n reasonably manner that this clause shall not\n apply); or\n\n (xiv) such Receivable arises out of or in\n connection with a retainage or similar\n arrangement (I.E., the payment of such\n Receivable is subject to further\n performance), in which case that portion of\n such Receivable subject to such arrangement\n shall be ineligible until such time as the\n requisite performance has been completed.\n\n \"FDX Collateral\" is defined in Section 6.26.\n\n \"FDX Rating\" means the Moody's FDX Rating or the S&P FDX \n Rating.\n\n \"Investment Grade Rating\" means an S&P FDX Rating greater than\n or equal to BBB- or a Moody's FDX Rating greater than or equal\n to Baa3.\n\n \"Moody's FDX Rating\" means, at any particular time, the rating\n issued by Moody's with respect to the Borrower's senior\n unsecured non-credit enhanced long-term public debt.\n\n \"Morgan\" means Morgan Guaranty Trust Company of New York, and\n its successors.\n\n \"New Credit Agreement\" means the Credit Agreement, dated as of\n December 10, 1998, by and among the Borrower, the lenders\n party thereto and Morgan, as Paying Agent, as amended,\n modified or supplemented from time to time.\n\n \"New Credit Agreement Documents\" means the New Credit\n Agreement and all instruments, agreements and contractual\n obligations entered into in connection therewith, as amended,\n modified or supplemented from time to time.\n\n \"Paying Agent\" means the \"Paying Agent\" (as defined in the New\n Credit Agreement.)\n\n \"Pledge Agreements\" means the pledge agreements to be executed\n by the Borrower and certain Subsidiaries pursuant to Section\n 6.26, substantially in the form approved pursuant to Section\n 6.27.\n\n 7\n\n\n\n \"Real Estate Mortgages\" means the mortgages and deeds of trust\n to be executed by FedEx pursuant to Section 6.26,\n substantially in the form approved pursuant to Section 6.27.\n\n \"Receivable\" means all present and future \"accounts\", as such\n term is defined in section 9-106 of the Uniform Commercial\n Code as in effect in the State of Illinois, and shall include,\n without limitation, all accounts receivable, related contract\n rights and all forms of obligations whatsoever owing, whether\n now existing or hereafter arising and wherever arising, and\n whether or not they have been earned by performance; together\n with all promissory notes, instruments and documents of title\n representing any of the foregoing, all rights in merchandise\n or goods (including returned goods) which any of the same may\n represent, all right, title, security and guaranties with\n respect to any of the foregoing, including any right of\n stoppage in transit and all insurance proceeds and corporate\n and other business records relating to any of the foregoing;\n together with all proceeds thereof.\n\n \"S&P FDX Rating\" means, at any particular time, the rating\n issued by S&P with respect to the Borrower's senior unsecured\n non-credit enhanced long-term public debt.\n\n \"Security Agreements\" means the security agreements to be\n executed pursuant to Section 6.26, substantially in the form\n approved pursuant to Section 6.27.\n\n \"Security Documents\" means the Collateral Trust Agreement,\n Pledge Agreements, the Aircraft Mortgage, the Real Estate\n Mortgages and the Security Agreements.\n\n 1.2 Section 2.7 of the Credit Agreement is amended to add the\n following sentence at the end thereof:\n\n \"Notwithstanding any provision of this Section 2.7 to the\n contrary, when no Default exists, the Borrower shall make no\n prepayments of any Advance hereunder unless all 'Advances' (as\n defined in the New Credit Agreement ) have been repaid in\n full.\"\n\n 1.3 The following new Section 4.3 is added immediately after\n Section 4.2:\n\n \"4.3 ADDITIONAL CONDITION TO EACH ADVANCE. The\n Lenders shall not be required to make any Advance, unless on\n the applicable Borrowing Date, the 'Aggregate Commitment' (as\n defined in the New Credit Agreement) shall have been fully\n utilized. Each Borrowing Notice with respect to each such\n Advance shall constitute a representation and warranty by the\n Borrower that the condition contained in this Section 4.3 has\n been satisfied.\"\n\n 1.4 Section 5.3 is amended in its entirety to read as follows:\n\n\n 8\n\n\n\n\n\n \" 5.3. NO CONFLICT; GOVERNMENT CONSENT. Neither the\n Borrower's nor any Guarantor's execution and delivery of the\n Loan Documents, nor the consummation of the transactions\n therein contemplated, nor compliance with the provisions\n thereof will violate any law, rule, regulation, order, writ,\n judgment, injunction, decree or award binding on the Borrower,\n any Guarantor or any of the Significant Subsidiaries or the\n Borrower's, any Guarantor's or any Significant Subsidiary's\n articles or certificate of incorporation or by-laws or the\n provisions of any indenture, instrument or agreement to which\n the Borrower, any Guarantor or any of the Significant\n Subsidiaries is a party or is subject, or by which it, or its\n Property, is bound, or conflict with or constitute a default\n thereunder, or, except pursuant to the Security Documents,\n result in or require the creation or imposition of any Lien\n in, of or on the Property of the Borrower, any Guarantor or\n any Significant Subsidiary pursuant to the terms of any such\n indenture, instrument or agreement. Except for (i) that\n certain Indenture between Caliber and The Chase Manhattan\n Bank, as Trustee, dated as of August 1, 1996 (the \"Caliber\n Indenture\") and (ii) certain additional Indebtedness in an\n aggregate amount of not greater than $50,000,000, none of the\n Borrower, any Guarantor or any Subsidiary is a party to any\n indenture, instrument or agreement that requires the\n Indebtedness governed thereby to be equally and ratably\n secured with the Obligations as a result of the execution and\n delivery of any of the Security Documents. No order, consent,\n approval, license, authorization or validation of, or filing,\n recording or registration with, or exemption by, any\n governmental or public body or authority, or any subdivision\n thereof, is required to authorize, or is required in\n connection with the execution, delivery and performance of, or\n the legality, validity, binding effect or enforceability of,\n any of the Loan Documents (other than filings in connection\n with the Security Documents).\n\n 1.5 Section 5.17 is amended in its entirety to read as \n follows:\n\n \"5.17. PARI PASSU. All the payment obligations of the\n Borrower and the Guarantors arising under or pursuant to the\n Loan Documents will at all times rank pari passu with all\n other unsecured and unsubordinated payment obligations and\n liabilities (including contingent obligations and liabilities)\n of the Borrower and the Guarantors (other than obligations\n under the New Credit Agreement Documents, PROVIDED that no\n Default has occurred thereunder, and obligations mandatorily\n preferred by laws or regulations of general application).\"\n\n 1.6 The Credit Agreement is amended to add the following after\n Section 5.18:\n\n \"5.19 MATERIAL ADVERSE EFFECT. Since May 31, 1998,\n there has been no change in the business, Property, prospects,\n condition (financial or otherwise) or results of operations of\n the Borrower and its Subsidiaries taken as a whole which could\n reasonably be expected to have a Material Adverse Effect.\"\n\n\n 9\n\n\n\n 1.7 Section 6.1 is amended in its entirety to read as follows:\n\n \"6.1. FINANCIAL REPORTING. The Borrower will\n maintain, for itself and each Subsidiary, a system of\n accounting established and administered in accordance with\n GAAP, and furnish to the Lenders:\n\n (i) Within 90 days after the close of each of its\n fiscal years, an unqualified audit report\n certified by independent certified public\n accountants of recognized national standing\n acceptable to the Lenders, prepared in\n accordance with GAAP on a consolidated basis\n for itself and the Consolidated Subsidiaries,\n including a balance sheet as of the end of such\n period, related profit and loss and\n reconciliation of surplus statements, and a\n statement of cash flows, accompanied by (a) any\n management letter prepared by said accountants,\n and (b) a certificate of said accountants that,\n in the course of their examination necessary\n for their certification of the foregoing, they\n have obtained no knowledge of any Default or\n Unmatured Default, or if, in the opinion of\n such accountants, any Default or Unmatured\n Default shall exist, stating the nature and\n status thereof.\n\n (ii) Within 45 calendar days after the end of each\n of the first three quarters of each fiscal year\n of the Borrower, for itself and the\n Consolidated Subsidiaries, an unaudited\n consolidated balance sheet as at the close of\n such period and consolidated profit and loss\n and reconciliation of surplus statements and a\n statement of cash flows for the period from the\n beginning of such fiscal year to the end of\n such quarter, all certified as complete and\n accurate and prepared in accordance with GAAP\n by its Chief Financial Officer, Treasurer or\n Controller.\n\n (iii) Within 45 calendar days after the end of each\n of the first three quarters of each fiscal year\n of the Borrower and within 90 calendar days\n after the end of the fourth quarter of each\n fiscal year of the Borrower, and from time to\n time as reasonably requested by Morgan, for\n Caliber and its Subsidiaries on a consolidated\n basis, a certificate signed by the Borrower's\n Chief Financial Officer, Treasurer or\n Controller, certifying as to (i) for such\n period, the Caliber Operating Income and (ii)\n at the end of such period, the aggregate\n principal amount of all outstanding\n Indebtedness of Caliber and its Subsidiaries.\n\n (iv) Together with the financial statements required\n hereunder, a certificate signed by its Chief\n Financial Officer or Treasurer stating\n\n\n 10\n\n\n\n that no Default or Unmatured Default exists, or\n if any Default or Unmatured Default exists,\n stating the nature and status thereof, and\n stating the steps the Borrower is taking to\n cure such Default or Unmatured Default.\n\n (v) As soon as available, and in any event within\n 45 calendar days after the end of each of the\n first three quarters of each fiscal year of the\n Borrower and within 90 calendar days after the\n end of the fourth quarter of each fiscal year\n of the Borrower, a schedule in substantially\n the form of Schedule \"2\" hereto, certified as\n accurate by the Borrower's Chief Financial\n Officer, Treasurer or Controller, showing, as\n of the end of such quarter, the Borrower's\n calculation, in form and detail satisfactory to\n the Agent, of the calculations required to be\n made to determine compliance with each of\n Sections 6.12, 6.13 and 6.24.\n\n (vi) Promptly upon becoming available, copies of:\n\n (a) All financial statements, reports, notices\n and proxy statements sent by the Borrower,\n any Guarantor or any Significant\n Subsidiary to its public stockholders (if\n any).\n\n (b) All prospectuses (other than on Form S-8\n or a similar form) of the Borrower or any\n Consolidated Subsidiary filed with the\n Securities and Exchange Commission or any\n other governmental agency succeeding to\n the jurisdiction thereof.\n\n (c) All regular and periodic reports filed by\n the Borrower or any Consolidated\n Subsidiary with any securities exchange or\n with the Securities and Exchange\n Commission or any other governmental\n agency succeeding to the jurisdiction\n thereof.\n\n (vii) As soon as possible and in any event within 10\n days after receipt by the Borrower, a copy of\n (a) any notice or claim to the effect that the\n Borrower or any of its Subsidiaries is or may\n be liable to any Person as a result of the\n release by the Borrower, any of its\n Subsidiaries, or any other Person of any toxic\n or hazardous waste or substance into the\n environment, and (b) any notice alleging any\n violation of any federal, state or local\n environmental, health or safety law or\n regulation by the Borrower or any of its\n Subsidiaries, which, in either case, could\n reasonably be expected to have a Material\n Adverse Effect.\n\n\n 11\n\n\n\n\n\n (viii) Promptly after any Authorized Officer learns\n thereof, notice of any change in any Rating or\n any publicly-announced decision by Moody's or\n S&P to consider a change in any Rating.\n\n (ix) On or before January 15, 1999, and thereafter\n from time to time as reasonably requested by\n Morgan within 15 Business Days after each such\n request, an Appraisal Report setting forth the\n fair market value of the airframes and engines\n of FedEx included in SCHEDULE 1 attached to\n Amendment No. 2 hereto.\n\n (x) Not more than 15 Business Days after the end\n of each calendar month following the Effective\n Date (as defined in the New Credit Agreement),\n or more frequently as Morgan may reasonably\n request from time to time, a report\n summarizing the Eligible Receivables of FedEx\n and its Subsidiaries as of the end of such\n month or such other date.\n\n (xi) Within 15 Business Days after Morgan may\n reasonably request from time to time, an\n appraisal setting forth the fair market value\n of all or any part of the Designated\n Collateral described in clause (iv) of Section\n 6.26(b).\n\n (xii) Such other information (including\n non-financial information) as the Agent or any\n Lender may from time to time reasonably\n request.\"\n\n 1.8 Section 6.4 is amended to add \"(except for changes in the\n conduct of business resulting from an actual or threatened business\n interruption, including but not limited to self-help actions or a\n strike, by members of the FedEx Pilots Association, or contingency\n plans related thereto)\" after the word \"conducted\" in the fourth line.\n\n 1.9 Section 6.15 is amended to add the phrase \"(other than\n Caliber)\" after the word \"Subsidiary\" in the first line of clause (a),\n clause (b), and clause (d), and to add \"Caliber,\" before the word\n \"FedEx\" in clause (c).\n\n 1.10 Section 6.16 is amended to add the following immediately\n after clause (f):\n\n \"Notwithstanding any provision of this Section 6.16 to the\n contrary, the Borrower will not, nor will it permit any\n Consolidated Subsidiary to, make any such sale, transfer,\n conveyance or lease of any Collateral or Designated Collateral\n without the prior written consent of the Required Lenders,\n except that the Borrower and its Consolidated Subsidiaries may\n sell, transfer, convey or lease, in accordance with the\n foregoing provisions of Section 6.16, Designated Collateral\n consisting of motor vehicles and real estate without such\n written consent, provided that after giving effect thereto,\n the Borrower is in compliance with Section 6.24.\"\n\n 12\n\n\n\n 1.11 Section 6.18(e) is amended in its entirety to read as\n follows:\n\n \"(e) Guaranties included or required under the \n New Credit Agreement Documents and the L/C Facility.\"\n\n 1.12 Section 6.19 is amended to:\n\n (a) delete paragraph (l) in its entirety and substitute the\n following therefor:\n\n \"(l) Liens on Designated Collateral granted in\n accordance with Section 6.26; and\"\n\n (b) add the following immediately after clause (l):\n\n \"(m) Liens not otherwise permitted by Sections 6.19(a)\n through (l) provided that at all times the sum of (i) the\n aggregate principal amount of all outstanding Long Term\n Debt of the Consolidated Subsidiaries (excluding the\n Current Maturities of any such Long Term Debt and any Long\n Term Debt of a Consolidated Subsidiary owing to the\n Borrower) which is unsecured, plus (ii) the aggregate\n principal amount of all outstanding Long Term Debt of the\n Borrower or any Consolidated Subsidiary (excluding the\n Current Maturities of any such Long Term Debt and any Long\n Term Debt of a Consolidated Subsidiary owing to the\n Borrower) which is secured as permitted by this Section\n 6.19(m), does not exceed 8% of Consolidated Adjusted Total\n Assets.\n\n Notwithstanding any provision of this Section 6.19 to the\n contrary, the Borrower will not, and will not permit any\n Consolidated Subsidiary to, create, incur, assume or suffer to\n exist, any Lien on any of the Designated Collateral except in\n accordance with clause (l) of this Section 6.19, or enter\n into, or make any commitment to enter into, any arrangement\n for the acquisition of any Designated Collateral through\n conditional sales, lease-purchase or other title retention\n agreements, except Liens securing a principal amount of not\n more than $200,000,000 in the aggregate.\"\n\n 1.13 Section 6.21 is amended to delete the words \"The\n Borrower\" at the beginning thereof and replace them with \"Except for\n the New Credit Agreement Documents, the Borrower\".\n\n 1.14 The following provisions are added after Section 6.21:\n\n \"6.22 INDEBTEDNESS OF CALIBER AND SUBSIDIARIES. None\n of Caliber or its Subsidiaries will directly or indirectly\n create, incur, assume or otherwise become or remain liable\n with respect to (a) any Indebtedness of the types set forth in\n clauses\n\n 13\n\n\n\n (i), (iii), (iv), (v), (vi), (vii) and (viii) of the\n definition of \"Indebtedness\", or (b) Indebtedness consisting\n of purchase-money obligations representing the deferred\n purchase price of Property, except:\n\n (i) all such Indebtedness existing under the\n Caliber Indenture or otherwise existing on the\n date hereof and reflected in the consolidated\n financial statements of the Borrower and its\n Consolidated Subsidiaries;\n\n (ii) such Indebtedness owed to the Borrower; and\n\n (iii) other Indebtedness in an aggregate principal\n amount not to exceed $50,000,000.\n\n 6.23 NEW CREDIT AGREEMENT DOCUMENTS. At any time when\n no Default exists, the Borrower shall not voluntarily reduce\n the \"Commitments\" (as defined in the New Credit Agreement) in\n part. Nothing in this Section 6.23 shall prohibit the Borrower\n from terminating the \"Commitments\" (as defined in the New\n Credit Agreement) in full.\n\n 6.24 VALUE OF DESIGNATED COLLATERAL AND COLLATERAL;\n AIRCRAFT CASUALTY. (a) The aggregate value of the Designated\n Collateral shall at all times equal or exceed 1.75 TIMES the\n sum of (i) the Aggregate Commitment, or if the Aggregate\n Commitment has been terminated, the aggregate outstanding\n principal amount of the Obligations, (ii) the \"Aggregate\n Commitment\" (as defined in the New Credit Agreement), or if\n such \"Aggregate Commitment\" has been terminated, the aggregate\n outstanding principal amount of the \"Obligations\" (as defined\n in the New Credit Agreement) and (iii) the aggregate amount of\n the \"Commitments\" (as defined in the L/C Facility), or if such\n \"Commitments\" have been terminated, the aggregate outstanding\n principal amount of the \"Obligations\" (as defined in the L/C\n Facility).\n\n (b) The Borrower and its applicable Subsidiaries\n shall be required to grant Liens on Designated Collateral as\n provided in Section 6.26(a) only to the extent necessary so\n that the value, as determined pursuant to Section 6.26(b), of\n all such Collateral as to which a Lien is granted, equals or\n exceeds, at all times prior to the release of such Liens\n pursuant to Section 6.26(c), 1.75 TIMES the sum of (i) the\n Aggregate Commitment, or if the Aggregate Commitment has been\n terminated, the aggregate outstanding principal amount of the\n Obligations, (ii) the \"Aggregate Commitment\" (as defined in\n the New Credit Agreement), or if such \"Aggregate Commitment\"\n has been terminated, the aggregate outstanding principal\n amount of the \"Obligations\" (as defined in the New Credit\n Agreement) and (iii) the aggregate amount of the \"Commitments\"\n (as defined in the L/C Facility), or if such \"Commitments\"\n have been terminated, the aggregate\n\n 14\n\n\n\n outstanding principal amount of the \"Obligations\" (as defined\n in the L/C Facility), provided that, if at any time the\n aggregate value of such Collateral is less than the amount\n required by this sentence, then the Borrower shall (i)\n promptly notify the Agent of such shortfall, and (ii) promptly\n grant Liens to Morgan on additional Designated Collateral, in\n accordance with Section 6.26(a), to the extent necessary to\n reduce such shortfall to zero.\n\n (c) If any airframe or engine set forth on SCHEDULE 1\n attached to Amendment No. 2 hereto shall be destroyed or\n materially damaged, regardless of the cause of such\n destruction or damage, then the Borrower shall promptly notify\n the Agent thereof and, within 45 days thereafter, designate in\n writing one or more airframes and/or engines, as applicable,\n in each case free and clear of any Lien, to be added to such\n SCHEDULE 1, as provided in the definition of \"Designated\n Collateral\", having an aggregate value, in accordance with\n Section 6.26 hereof, equal to or exceeding the value of the\n destroyed or damaged airframe or engine. If the damaged or\n destroyed airframe or engine constitutes part of the\n Collateral, then the Borrower shall, or shall cause its\n Subsidiaries to, enter into such amendments to the Aircraft\n Mortgage as Morgan may reasonably request in order to grant to\n Morgan, as the collateral agent for the Lenders and for the\n lenders under the New Credit Agreement Documents and the L/C\n Facility (the \"Collateral Agent\"), a first priority Lien on\n such replacement airframes or engines.\n\n 6.25 NO NEGATIVE PLEDGE. From and after the date\n hereof, neither the Borrower nor any of its Subsidiaries shall\n limit, restrict or delay, its right or power to sell, assign,\n pledge, grant any Lien on, transfer, dispose of or otherwise\n encumber the Designated Collateral or any part thereof,\n including, without limitation, any such restriction on capital\n stock, except as provided on the date hereof in the Loan\n Documents, the New Credit Agreement Documents or the L/C\n Facility.\n\n 6.26 GRANT OF SECURITY INTEREST IN COLLATERAL. (a)\n Promptly (but in any event within 10 Business Days) after any\n one or more dates on which either FDX Rating ceases to be an\n Investment Grade Rating, the Borrower shall, to the extent\n provided for in Section 6.24 (b), (i) grant, and cause its\n Subsidiaries to grant, to the Collateral Agent, a first\n priority Lien on the Designated Collateral other than\n Designated Collateral owned by Caliber and its Subsidiaries\n (the \"FDX Collateral\"), which Lien shall equally and ratably\n secure the Obligations under the Loan Documents and the\n obligations under each of the New Credit Agreement Documents\n and the L/C Facility, and (ii) cause Caliber and Caliber's\n Subsidiaries to grant, to a collateral trustee designated by\n Morgan, a first priority Lien on all the capital stock of\n Caliber's Subsidiaries which constitute part of the Designated\n Collateral (the \"Caliber Collateral\"), which Lien shall\n equally and ratably secure the Obligations under the Loan\n Documents, the obligations under each of the New Credit\n Agreement Documents and the L/C Facility and the notes issued\n under the \n\n 15\n\n\n Caliber Indenture. All such Liens granted pursuant to this\n Section 6.26 shall be granted in the following order: first,\n on the capital stock of Caliber and all Caliber Collateral;\n second, on the airframes and engines of FedEx; third, on all\n (and not part) of the accounts receivable of FedEx and its\n Subsidiaries; and fourth, as designated by Morgan, on the\n motor vehicles and real estate of FedEx and its Subsidiaries,\n and the intercompany indebtedness owed to the Borrower by its\n Subsidiaries, in each case, to the extent constituting part of\n the Designated Collateral. From time to time, the Borrower and\n its Subsidiaries shall execute and deliver, or cause to be\n executed and delivered, such additional agreements,\n instruments, certificates (including without limitation any\n good standing certificates), legal opinions or documents, and\n take all such actions, as Morgan may reasonably request, for\n the purposes of implementing or effectuating this Section 6.26\n or the Security Documents, or of more fully perfecting,\n preserving or renewing the rights of Morgan and the Lenders\n with respect to the Collateral (or with respect to any\n additions thereto or replacements or proceeds thereof or with\n respect to any other Property or assets hereafter acquired by\n the Borrower or its Subsidiaries which is or may be deemed to\n be part of the Collateral) pursuant hereto or thereto.\n\n (b) Designated Collateral and Collateral shall at all\n times be valued as follows:\n\n (i) the value of the Caliber Stock shall equal\n 9.0 times Caliber Operating Income, less the\n aggregate principal amount of all\n outstanding Indebtedness (including, without\n limitation, intercompany indebtedness) of\n Caliber and its Subsidiaries;\n\n (ii) the value of the airframes and engines\n listed on SCHEDULE 1 attached to Amendment\n No. 2 hereto shall equal the fair market\n value thereof set forth in the most recently\n delivered Appraisal Report delivered\n pursuant to Section 4.1 or 6.1, and prior to\n the delivery of the first such Appraisal\n Report, such Property shall be valued at\n $1,892,600,000.\n\n (iii) the value of the accounts receivable of\n FedEx and its Subsidiaries shall equal 0.75\n TIMES the aggregate amount of Eligible\n Receivables of FedEx and its Subsidiaries,\n as determined on the report of Eligible\n Receivables most recently delivered pursuant\n to Section 4.1 or Section 6.1; and\n\n (iv) the value of the motor vehicles and real\n estate of FedEx and its Subsidiaries and the\n intercompany indebtedness owed to the\n Borrower by its Subsidiaries shall equal the\n fair market value thereof as determined in\n the most recent appraisal provided by a\n\n 16\n\n\n nationally recognized firm of appraisers\n pursuant to Section 6.1, and prior to the\n delivery of the first such appraisal with\n respect to any such Property, such Property\n shall be valued at $633,300,000.\n\n (c) Any Liens granted under this Section 6.26 shall\n be released at the written request of the Borrower in\n accordance with the Security Documents if the S&P FDX Rating\n and Moody's FDX Rating both become Investment Grade Ratings,\n but shall be reinstated on any one or more additional dates\n thereafter on which either FDX Rating ceases to be an\n Investment Grade Rating. Notwithstanding the foregoing, (i)\n all such Liens shall be released when all of the \"Obligations\"\n (under and as defined in the New Credit Agreement) have been\n paid in full and the \"Commitments\" (under and as defined in\n the New Credit Agreement) have been terminated, and (ii) the\n Lien on any asset sold or otherwise disposed of in accordance\n with Section 6.16 shall be released promptly after the\n Borrower's written request therefor.\n\n 6.27. APPROVAL OF FORMS OF SECURITY DOCUMENTS. The\n Borrower shall, as soon as practicable, and in any event no\n later than the later of (i) January 15, 1999 and (ii) seven\n Business Days after Morgan delivers drafts of such documents\n to the Borrower, give written notice to Morgan that it has\n approved a final form of each Security Document which is in\n form and substance satisfactory to the Agent and the agents\n under the New Credit Agreement Documents and under the L/C\n Facility.\"\n\n 1.15 Section 7.3 is amended to delete such section in its\n entirety and substitute the following therefor:\n\n \" 7.3. BREACH OF CERTAIN COVENANTS. The breach by the\n Borrower of any of the terms or provisions of Section 6.2,\n 6.3, 6.5, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, 6.18,\n 6.19, 6.22, 6.23, 6.24, 6.25 or 6.26.\"\n\n 1.16 Section 7.4 is amended in its entirety to read as \n follows:\n\n \" 7.4. BREACH OF OTHER COVENANTS, LOAN DOCUMENTS, NEW\n CREDIT AGREEMENT DOCUMENTS OR L/C FACILITY. The breach by the\n Borrower (other than a breach which constitutes a Default\n under Section 7.1, 7.2 or 7.3) of any of the terms or\n provisions of this Agreement or any other Loan Document which\n is not remedied within five days after written notice from the\n Agent or any Lender; or the occurrence of any \"Default\" (as\n defined in the New Credit Agreement) or any \"Event of Default\"\n (as defined in the L/C Facility).\"\n\n 1.17 Section 7.12 is amended in its entirety to read as\n follows:\n\n 17\n\n\n \"7.12. INVALIDITY, ETC. OF LOAN DOCUMENTS; FAILURE OF\n SECURITY. At any time, for any reason (i) any provision of any Loan\n Document shall at any time for any reason cease to be valid and binding\n and enforceable against the Borrower or any Guarantor, or the validity,\n binding effect or enforceability thereof against the Borrower or any\n Guarantor shall be contested by any Person, or the Borrower or any\n Guarantor shall deny that it has any or further liability or obligation\n thereunder, or any Loan Document shall be terminated, invalidated or\n set aside, or be declared ineffective or inoperative or in any way\n cease to give or provide to the Lenders and the Agent the benefits\n purported to be created thereby, or (ii) Liens in favor of the Lenders\n or any collateral agent for the Lenders shall, while the Security\n Documents are in effect or purported to be in effect pursuant hereto,\n be invalidated or otherwise cease to be in full force and effect, or\n such Liens shall be subordinated or shall not have the priority\n contemplated hereby or by the Security Documents.\"\n\n 1.18 Section 8.2 is amended in its entirety to read as\n follows:\n\n \"8.2. AMENDMENTS. Subject to the provisions of this Article\n VIII, the Required Lenders (or the Agent with the consent in writing\n of the Required Lenders) and the Borrower may enter into agreements\n supplemental hereto for the purpose of adding or modifying any\n provisions to the Loan Documents or changing in any manner the rights\n of the Lenders or the Borrower hereunder or waiving any Default\n hereunder; provided, however, that no such supplemental agreement\n shall, without the consent of each Lender affected thereby:\n\n (i) Extend the maturity or the time of payment\n of any Loan or reduce the principal amount\n thereof, or reduce the rate or extend the\n time of payment of interest thereon or fees\n hereunder.\n\n (ii) Reduce the percentage specified in the\n definition of Required Lenders or amend,\n modify or waive any provision requiring\n action by the Required Lenders to require\n action by any other Person in lieu of the\n Required Lenders.\n\n (iii) Extend the Tranche A Facility Termination\n Date, extend the Tranche B Facility\n Termination Date other than as provided in\n Section 2.19, or reduce the amount or extend\n the payment date for, the mandatory payments\n required under Section 2.2, or increase the\n amount of the Commitment of any Lender\n hereunder, or permit the Borrower to assign\n its rights under this Agreement.\n\n (iv) Amend, modify, or waive Section 2.2(a),\n Section 4.1, Section 4.2, Sections 6.24(a)\n or (b), this Section 8.2, or Section 12.1.\n\n 18\n\n\n (v) Release FedEx or RPS from any of their\n material obligations, respectively, under\n the Guaranty.\n\n (vi) Release all or substantially all of the\n Collateral, or release the Borrower or any\n Guarantor from any of its material\n obligations under the Security Documents, in\n each case other than pursuant to Section\n 6.26(c) or 9.16;\n\n No amendment of any provision of this Agreement relating to\n the Agent shall be effective without the written consent of\n the Agent. The Agent may waive payment of the fee required\n under Section 12.3.3 without obtaining the consent of any\n other party to this Agreement.\"\n\n 1.19 Section 9.16 is amended in its entirety to read as\n follows:\n\n \"9.16. RELEASE OF GUARANTORS. Upon the consummation\n of any liquidation, dissolution, merger, consolidation, sale\n or other transfer of a Guarantor other than Caliber, FedEx or\n RPS (collectively, a \"Transfer\"), and provided (i) no Default\n or Unmatured Default has occurred and is continuing or would\n occur as a result of such Transfer, and (ii) the Liens and\n security interests contemplated by the Security Documents are\n not then in effect or purported to be in effect, such\n Guarantor shall automatically be released from all of its\n obligations under the Guaranty, and, if the Borrower so\n requests, the Lenders shall promptly execute an instrument, in\n form and substance reasonably satisfactory to the Borrower and\n the Agent, evidencing such release.\"\n\n 1.20 Section 10.2 is amended in its entirety to read as \n follows:\n\n \"10.2. POWERS. The Agent shall have and may exercise\n such powers under the Loan Documents as are specifically\n delegated to the Agent by the terms of each thereof, together\n with such powers as are reasonably incidental thereto. The\n Agent shall have the right to negotiate and approve the form,\n terms and provisions of the Security Documents, and to enter\n into the Security Documents for the benefit of the Lenders, in\n accordance with Section 6.26. Any action taken by the Agent in\n accordance with the provisions of the Security Documents, and\n the exercise by the Agent of the powers set forth therein,\n together with such other powers as are reasonably incidental\n thereto, are hereby authorized by, and shall be binding upon,\n each of the Lenders. The Agent shall have no implied duties to\n the Lenders, or any obligation to the Lenders to take any\n action thereunder except any action specifically provided by\n the Loan Documents to be taken by the Agent.\"\n\n 1.21 Section 11.2 is amended to add \"(other than pursuant to\nthe Security Documents)\" after the word \"collateral\" in the sixth line.\n\n 19\n\n\n 1.22 SCHEDULE 2 of the Credit Agreement is hereby replaced\nwith SCHEDULE 2 attached to Amendment No. 2 hereto.\n\n 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective\nas of the date set forth above when each of the following conditions has been\nsatisfied:\n\n (a) the Agent shall have received a counterpart of this\n Amendment executed by the Borrower, the Agent and Lenders, and a\n counterpart of the Acknowledgment attached hereto as Exhibit A,\n executed by each of the Guarantors; PROVIDED, however, that SECTION\n 1.18 of this Amendment shall only become effective when the Agent shall\n have received a counterpart of this Amendment executed by the Borrower,\n the Agent and each of the Lenders;\n\n (b) the Borrower has furnished to the Agent such documents\n evidencing corporate existence, action and authority of the Borrower\n and the Guarantors as the Agent may reasonably request;\n\n (c) the L/C Facility shall have been amended to permit the\n execution, delivery and performance of the Loan Documents;\n\n (d) the New Credit Agreement shall have been executed and\n delivered by the parties thereto and shall have become effective in\n accordance with its terms; and\n\n (e) the Agent shall have received a summary of the Eligible\n Receivables of FedEx and its Subsidiaries as of November 30, 1998, and\n a calculation of the value of the Designated Collateral (determined in\n accordance with Section 6.26(b)), in each case in form satisfactory to\n the Agent.\n\n 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower\nrepresents and warrants that:\n\n (a) This Amendment, and the Credit Agreement as previously\n executed and as amended hereby, constitute legal, valid and binding\n obligations of the Borrower and are enforceable against the Borrower in\n accordance with their terms.\n\n (b) Upon the effectiveness of this Amendment, the Borrower\n reaffirms all covenants, representations and warranties made in the\n Credit Agreement.\n\n (c) No Default or Unmatured Default has occurred and is\ncontinuing.\n\n 4. EFFECT ON CREDIT AGREEMENT.\n\n 20\n\n\n (a) During the period that this Amendment is effective, each\n reference in the Credit Agreement to \"this Agreement,\" \"hereunder,\"\n \"hereof,\" \"herein\" or words of like import shall mean and be a\n reference to the Credit Agreement as amended hereby.\n\n (b) Except as specifically amended above, the Credit Agreement\n and all other Loan Documents, instruments and agreements executed\n and/or delivered in connection therewith, shall remain in full force\n and effect, and are hereby ratified and confirmed.\n\n (c) The execution, delivery and effectiveness of this\n Amendment shall not, except as expressly provided herein, operate as a\n waiver of any right, power or remedy of the Agent or the Lenders, nor\n constitute a waiver of any provision of the Credit\n Agreement or any other Loan Documents, instruments and agreements\n executed and/or delivered in connection therewith.\n\n (d) In the event of any inconsistency between the provisions\n of this Amendment and the provisions of that certain Amendment No. 1\n dated as of December 10, 1998 among the Borrower, the Agent and the\n Lenders, this Amendment shall govern and control so long as this\n Amendment remains in effect.\n\n 5. GOVERNING LAW. This Amendment shall be governed by and construed in\naccordance with the laws of the State of Illinois.\n\n 6. HEADINGS. Section headings in this Amendment are included herein \nfor convenience of reference only and shall not constitute a part of this \nAmendment for any other purpose.\n\n 7. COUNTERPARTS. This Amendment may be executed by one or more of the\nparties to the Amendment on any number of separate counterparts and all of said\ncounterparts taken together shall be deemed to constitute one and the same\ninstrument.\n\n [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]\n\n\n 21\n\n\n IN WITNESS WHEREOF, the undersigned have executed this Amendment as \nof the date first above written.\n\n FDX CORPORATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE FIRST NATIONAL BANK OF\n CHICAGO, as Agent\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n MORGAN GUARANTY TRUST\n COMPANY OF NEW YORK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE CHASE MANHATTAN BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n KREDIETBANK N.V., GRAND\n CAYMAN BRANCH\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n BANK OF AMERICA NATIONAL\n TRUST AND SAVINGS ASSOCIATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n BANK OF TOKYO-MITSUBISHI\n TRUST COMPANY\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n CITICORP USA, INC.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n COMMERZBANK\n AKTIENGESELLSCHAFT, ATLANTA AGENCY\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n NATIONSBANK, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n CIBC INC.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n THE FUJI BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n MELLON BANK, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n KEYBANK NATIONAL ASSOCIATION\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n FIRST AMERICAN NATIONAL BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n BANK OF HAWAII\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE BANK OF NEW YORK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n THE BANK OF NOVA SCOTIA\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n CREDIT SUISSE FIRST BOSTON\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n DEUTSCHE VERKEHRS BANK\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n THE SANWA BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n SUNTRUST BANK, NASHVILLE, N.A.\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n BANCA NAZIONALE DEL LAVORO\n SPA\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n THE SUMITOMO BANK, LIMITED\n\n By: /s/\n ----------------------\n Name:\n ----------------------\n Title:\n ----------------------\n\n\n\n\n\n EXHIBIT A\n TO\n AMENDMENT NO. 2 (TEMPORARY)\n DATED AS OF DECEMBER 10, 1998\n\n ACKNOWLEDGMENT\n --------------\n\n\n Each of the undersigned (i) acknowledges receipt of a copy of \nAmendment No. 2 (Temporary) dated as of December 10, 1998, to the Credit \nAgreement dated as of January 15, 1998 by and among the Borrower, the \nLenders, First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan \nSecurities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc., \nas Co-Arranger and Documentation Agent, and the Agent (the \"Credit \nAgreement\"), (ii) reaffirms the terms and conditions of that certain Guaranty \ndated as of January 27, 1998 (the \"Guaranty\") and (iii) acknowledges and \nagrees that the Guaranty (A) remains in full force and effect and (B) is \nhereby ratified and confirmed.\n\n FEDERAL EXPRESS CORPORATION\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n RPS, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n CALIBER SYSTEM, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n\n\n\n\n VIKING FREIGHT, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\n ROBERTS EXPRESS, INC.\n\n\n By: \n -------------------------------\n Name:\n -----------------------------\n Title:\n -----------------------------\n\n\nDated as of December 10, 1998\n\n\n \n \n\nEX-12.1\n5\nEXHIBIT 12.1\n\n\n\n\n EXHIBIT 12.1\n\n FDX CORPORATION\n COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES\n (Unaudited)\n\n\n
\n\n \n \n\nEX-15.1\n6\nEXHIBIT 15.1\n\n\n\n EXHIBIT 15.1\n\n\n\n\n\nDecember 16, 1998\n\n\n\n\nFDX Corporation\n6075 Poplar Avenue\nMemphis, Tennessee 38119\n\nWe are aware that FDX Corporation will be incorporating by reference in its\npreviously filed Registration Statement No. 333-45037 its Report on Form 10-Q\nfor the quarter ended November 30, 1998, which includes our report dated\nDecember 16, 1998 covering the unaudited interim financial information contained\ntherein. Pursuant to Regulation C of the Securities Act of 1933, that report is\nnot considered part of this registration statement prepared or certified by\nour firm or a report prepared or certified by our firm within the meaning of\nSections 7 and 11 of the Act.\n\n\n\n Very truly yours,\n\n\n /s/ Arthur Andersen LLP\n\n Arthur Andersen LLP\n\n \n \n\nEX-27\n7\nEXH 27\n\n\n
\n \n \n\n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":187,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"GAS"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/1004155/0001004155-99-000002.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n GHlEIokWeDPJ1AP0I3UG2dCaawR4KFAU7M8nDm0eiNIEAmu4BVECE99HiF0FsJXV\n ijQfzX3HgzpPIz5Ig5rAvg==\n\n0001004155-99-000002.txt : 19990217\n0001004155-99-000002.hdr.sgml : 19990217\nACCESSION NUMBER:\t\t0001004155-99-000002\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t6\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990216\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tAGL RESOURCES INC\n\t\tCENTRAL INDEX KEY:\t\t\t0001004155\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tNATURAL GAS DISTRIBUTION [4924]\n\t\tIRS NUMBER:\t\t\t\t582210952\n\t\tSTATE OF INCORPORATION:\t\t\tGA\n\t\tFISCAL YEAR END:\t\t\t0930\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-14174\n\t\tFILM NUMBER:\t\t99539897\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t303 PEACHTREE ST NE\n\t\tCITY:\t\t\tATLANTA\n\t\tSTATE:\t\t\tGA\n\t\tZIP:\t\t\t30308\n\t\tBUSINESS PHONE:\t\t4045849470\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t303 PEACHTREE ST\n\t\tSTREET 2:\t\tSTE 400\n\t\tCITY:\t\t\tATLANTA\n\t\tSTATE:\t\t\tGA\n\t\tZIP:\t\t\t30308\n \n\n10-Q\n1\n\n\n\n UNITED STATES\n SECURITIES AND EXCHANGE COMMISSION\n Washington, D. C. 20549\n\n FORM 10-Q\n\n QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF\n THE SECURITIES EXCHANGE ACT OF 1934\n\n For the Quarterly Period Ended December 31, 1998\n\n\n\n\n\n\n\n\n\nCommission Registrant; State of Incorporation; I.R.S. Employer\nFile Number Address; and Telephone Number Identification Number\n\n1-14174 AGL RESOURCES INC. 58-2210952\n (A Georgia Corporation)\n 303 PEACHTREE STREET, NE\n ATLANTA, GEORGIA 30308\n 404-584-9470\n\n\nIndicate by check mark whether the registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months and (2) has been subject to such filing requirements for\nthe past 90 days. Yes |X| No\n\n\nIndicate the number of shares outstanding of each of the issuer's classes of\ncommon stock, as of December 31, 1998.\n\n\nCommon Stock, $5.00 Par Value\nShares Outstanding at December 31, 1998 ............................57,524,148\n\n\n\n\n\n\n\n AGL RESOURCES INC.\n\n Quarterly Report on Form 10-Q\n For the Quarter Ended December 31, 1998\n\n\n Table of Contents\n\n Item Page\nNumber Number\n\n\n PART I -- FINANCIAL INFORMATION\n\n\n 1 Financial Statements\n Condensed Consolidated Income Statements 3\n Condensed Consolidated Balance Sheets 4\n Condensed Consolidated Statements of Cash Flows 6\n\n Notes to Condensed Consolidated Financial Statements 7\n\n 2 Management's Discussion and Analysis of Results of\n Operations and Financial Condition 11\n\n 3 Quantitative and Qualitative Disclosure About Market Risk 25\n\n PART II -- OTHER INFORMATION\n\n 1 Legal Proceedings 26\n\n 5 Other Information 26\n\n 6 Exhibits and Reports on Form 8-K 26\n\n SIGNATURES 27\n\n\n\n Page 2 of 27 Pages\n\n\n\n\n PART I -- FINANCIAL INFORMATION\n\nItem 1. Financial Statements\n\n\n AGL RESOURCES INC. AND SUBSIDIARIES\n CONDENSED CONSOLIDATED INCOME STATEMENTS\n FOR THE THREE MONTHS ENDED\n DECEMBER 31, 1998 AND 1997\n (MILLIONS, EXCEPT PER SHARE DATA)\n (UNAUDITED)\n\n\n
\n Page 3 of 27 Pages\n\n\n\n\n\n AGL RESOURCES INC. AND SUBSIDIARIES\n CONDENSED CONSOLIDATED BALANCE SHEETS\n (MILLIONS)\n\n (Unaudited)\n December 31, September 30,\n ---------------------------------------------------\n
\n Page 4 of 27 Pages\n\n\n\n\n AGL RESOURCES INC. AND SUBSIDIARIES\n CONDENSED CONSOLIDATED BALANCE SHEETS\n (MILLIONS)\n\n (Unaudited)\n December 31, September 30,\n
\nPage 5 of 27 Pages\n\n\n\n\n\n\n\n AGL RESOURCES INC. AND SUBSIDIARIES\n CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS\n FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997\n (MILLIONS OF DOLLARS)\n (UNAUDITED)\n\n Three Months\n -----------------------------\n -----------------------------\n
\n Page 6 of 27 Pages\n\n\n\n\n AGL RESOURCES INC. AND SUBSIDIARIES\n NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)\n\n\n\n 1. General\n\n AGL Resources Inc. is the holding company for Atlanta Gas Light\n Company and its wholly owned subsidiary, Chattanooga Gas Company\n which are local natural gas distribution utilities. Additionally,\n AGL Resources Inc. owns several nonutility subsidiaries and has\n interests in several nonutility joint ventures. We collectively\n refer to AGL Resources Inc. and its subsidiaries as \"AGL Resources.\"\n We refer to Atlanta Gas Light Company as \"AGLC.\"\n\n In the opinion of management, the unaudited consolidated financial\n statements included herein reflect all normal recurring adjustments\n necessary for a fair statement of the results of the interim periods\n reflected. These interim financial statements and notes are condensed\n as permitted by the instructions to Form 10-Q, and should be read in\n conjunction with the financial statements and the notes included in the\n annual report on Form 10-K of AGL Resources for the fiscal year ended\n September 30, 1998. Due to the seasonal nature of AGL Resources'\n business, the results of operations for a three-month period are not\n necessarily indicative of results of operations for a twelve-month\n period.\n\n We make estimates and assumptions when preparing financial statements\n under generally accepted accounting principles. Those estimates and\n assumptions affect various matters, including :\n\n - reported amounts of assets and liabilities in our Condensed\n Consolidated Balance Sheets as of the dates of the financial\n statements;\n - disclosure of contingent assets and liabilities as of the\n dates of the financial statements; and\n - reported amounts of revenues and expenses in our Condensed\n Consolidated Income Statements during the reporting periods.\n\n Those estimates involve judgments with respect to, among other things,\n future economic factors that are difficult to predict and are beyond\n management's control. Consequently, actual amounts could differ from\n our estimates.\n\n Certain amounts in financial statements of prior years have been\n reclassified to conform to the presentation of the current year.\n\n 2. Impact of New Regulatory Rate Structure and Deregulation\n\n Due to changes in the regulatory rate structure and the enactment of\n Georgia's Natural Gas Competition and Deregulation Act (the\n Deregulation Act), AGLC has begun to unbundle, or separate, the various\n components of its services to its customers. As a result, numerous\n changes have occurred with respect to the services being offered by\n AGLC and with respect to the manner in which AGLC prices and accounts\n for those services Consequently, AGLC's future revenues and expenses\n will not follow the same pattern as they have historically.\n\n Page 7 of 27 Pages\n\n\n\n\n 2. Impact of New Regulatory Rate Structure and Deregulation (Continued)\n\n New Regulatory Rate Structure\n Beginning July 1, 1998, AGLC's charges for delivery service to utility\n customers in Georgia have been based on a straight fixed variable (SFV)\n rate design. Under SFV rates, fixed delivery service costs (as opposed\n to gas commodity sales costs discussed below) are recovered evenly\n throughout the year consistent with the way those costs are incurred.\n The effect of the rate structure is to levelize throughout the year the\n revenues collected by AGLC for gas delivery services. Prior to July 1,\n 1998, rates to provide delivery service were based principally on the\n amount of gas customers used. Therefore, delivery rates were typically\n lower in the summer when customers used less gas, and higher in the\n winter when customers used more gas. Going forward AGLC will collect\n such rates evenly throughout the year regardless of volumetric summer\n and winter differences in gas usage. Consequently, substantial changes\n to the quarterly results of operations are expected when compared to\n the historical quarterly results due to the transition to this new\n regulatory approach.\n\n Deregulation\n Pursuant to the Deregulation Act, regulated rates for natural gas\n commodity sales service to AGLC customers (as opposed to delivery\n service rates discussed above) ended on October 6, 1998. In the\n deregulated environment, AGLC intended to price deregulated gas sales\n in a manner that, at a minimum, would have allowed it to recover its\n annual gas costs.\n\n On January 5, 1999, the GPSC issued a Procedural and Scheduling Order\n for the purpose of hearing evidence to consider whether unregulated\n prices charged by AGLC for gas sales services subsequent to October 6,\n 1998 were constrained by market forces. The GPSC initiated the\n proceeding in response to numerous complaints from customers who\n received gas sales service from AGLC in November and December 1998.\n Those complaints stemmed primarily from the effects of record warm\n weather on November and December bills that, in many cases, reflected\n higher fixed costs associated with gas sales and lower gas usage than\n historical comparisons.\n\n AGLC's gas sales rates were designed to enable the Company to recover\n its fixed costs associated with gas sales from the customers for whom\n the costs were incurred. AGLC intended to bill much of those fixed\n costs during the winter, when consumption is typically higher, and\n fewer of those fixed costs in the summer, when consumption is typically\n lower. Under normal weather conditions, this billing approach would\n have produced monthly bills in amounts similar to bills of\n corresponding months in recent years. However, unseasonably warm\n weather resulted in fixed costs comprising a higher percentage of\n customers' bills due to lower gas usage by many customers in November\n and December.\n\n On January 26, 1999, AGLC entered into a joint stipulation with the\n GPSC to resolve certain gas sales service issues. Among other\n requirements in the stipulation, the Company has implemented a new rate\n structure for gas sales, beginning with February 1999 bills, that more\n closely reflects customers' actual gas usage which includes a demand\n charge for fixed costs associated with gas sales that is entirely\n volumetric. The new rate structure for gas sales service is intended to\n ensure AGLC's recovery of its purchased gas costs incurred from October\n 6, 1998 to September 30, 1999 as accurately as possible without\n creating any significant income or loss. The joint stipulation\n agreement provides for a true-up of gas costs and revenues for fiscal\n 1999 for any amounts over or under a relatively small adjustable dead\n band. To the extent that such overage or underage exceeds the\n applicable dead band, AGLC will either refund to or collect from its\n customers the applicable overage or underage that exists on September\n 30, 1999.\n\n\n Page 8 of 27 Pages\n\n\n\n 2. Impact of New Regulatory Rate Structure and Deregulation (Continued)\n\n As part of the joint stipulation, AGLC also agreed to issue checks to\n customers or credits to customer bills in the total amount of\n approximately $14.7 million to lessen the effects of the Company's\n earlier rate methodology. Of that amount, $8.2 million will be refunded\n to AGLC customers based on the over-collection of gas costs during\n fiscal 1998 before deregulation began and as reported in our balance\n sheet as of December 31, 1998. The remaining $6.5 million will be\n allocated during the second quarter to certain AGLC customers who were\n most adversely affected by the change in AGLC's rate structure for gas\n sales service.\n\n Regulatory Accounting\n We have recorded regulatory assets and liabilities in our Consolidated\n Balance Sheets in accordance with Statement of Financial Accounting\n Standards No. 71, \"Accounting for the Effects of Certain Types of\n Regulation\" (SFAS 71).\n\n In July 1997, the Emerging Issues Task Force (EITF) concluded that once\n legislation is passed to deregulate a segment of a utility and that\n legislation includes sufficient detail for the enterprise to determine\n how the transition plan will affect that segment, SFAS 71 should be\n discontinued for that segment of the utility. The EITF consensus\n permits assets and liabilities of a deregulated segment to be retained\n if they are recoverable through a segment that remains regulated.\n\n Georgia has enacted legislation, the Deregulation Act, which allows\n deregulation of natural gas sales and the separation of some ancillary\n services of local natural gas distribution companies. However, the\n rates that AGLC, as the local gas distribution company, charges to\n deliver natural gas through its intrastate pipe system will continue to\n be regulated by the GPSC. Therefore, we have concluded that the\n continued application of SFAS 71 remains appropriate for regulatory\n assets and liabilities related to AGLC's delivery services.\n\n Pursuant to the Deregulation Act, regulated rates ended on October 6,\n 1998 for natural gas commodity sales to AGLC customers. Consequently,\n SFAS 71 was discontinued as it relates to natural gas commodity sales\n on October 6, 1998. In accordance with the EITF consensus, the\n following represents the utility's operating revenues, cost of gas and\n operating margin between regulated and non-regulated operations for the\n three months ended December 31, 1998 (in millions):\n\n\n Operating Revenues\n Nonregulated $ 173.8\n Regulated 143.4\n ============\n Total Utility $ 317.2\n ============\n Cost of Sales\n Nonregulated $ 172.7\n Regulated 12.2\n ============\n Total Utility $ 184.9\n ============\n Operating Margins\n Nonregulated $ 1.1\n Regulated 131.2\n ============\n Total Utility $ 132.3\n ============\n\n\n Page 9 of 27 Pages\n\n\n\n 3. Earnings Per Share and Equity\n\n Basic earnings per share excludes dilution and is computed by dividing\n income available to common stockholders by the weighted average number\n of common shares outstanding for the period. Diluted earnings per share\n reflects the potential dilution that could occur when common stock\n equivalents are added to common shares outstanding. AGL Resources' only\n common stock equivalents are stock options whose exercise price was\n less than the average market price of the common shares for the\n respective periods. Additional options to purchase 22,252 and 509,189\n shares of common stock were outstanding as of December 31, 1998 and\n 1997, respectively, but were not included in the computation of diluted\n earnings per share because the exercise price of those options was\n greater than the average market price of the common shares for the\n respective periods.\n\n During the three months ended December 31, 1998, we issued 211,379\n shares of common stock under ResourcesDirect, a direct stock purchase\n and dividend reinvestment plan; the Retirement Savings Plus Plan; the\n Long-Term Stock Incentive Plan; the Nonqualified Savings Plan; and the\n Non-Employee Directors Equity Compensation Plan. Those issuances\n increased common equity by $3.7 million.\n\n 4. Change in Inventory Costing Method\n\n In Georgia's new competitive environment, certificated marketing\n companies, including AGLC's marketing affiliate, began selling natural\n gas to firm end-use customers at market-based prices in November 1998.\n Part of the unbundling process that provides for this competitive\n environment is the assignment of certain pipeline services that AGLC\n has under contract. AGLC will assign the majority of its pipeline\n storage services that it has under contract to the certificated\n marketing companies along with a corresponding amount of inventory.\n\n Consequently, the GPSC has approved AGLC's tariff provisions to govern\n the sale of its gas storage inventories to certificated marketers.\n Following the rules of the tariff, the sale price will be the\n weighted-average cost of the storage inventory at the time of sale.\n AGLC changed its inventory costing method for its gas inventories from\n first-in, first-out to weighted-average effective October 1, 1998. In\n management's opinion, the weighted-average inventory costing method\n provides for a better matching of costs and revenue from the sale of\n gas.\n\n Because AGLC recovered all of its gas costs through a PGA mechanism\n until October 6, 1998, there is no cumulative effect resulting from the\n change in the inventory costing method.\n\n 5. Comprehensive Income\n\n In June 1997, the Financial Accounting Standards Board issued Statement\n of Financial Accounting Standards No.130, \"Reporting Comprehensive\n Income\" (SFAS 130) which establishes standards for the reporting and\n display of comprehensive income and its components in the financial\n statements. SFAS 130 is effective for fiscal years beginning after\n December 15, 1997 and was adopted by AGL Resources in October 1998.\n Comprehensive income includes net income and other comprehensive\n income. SFAS 130 presently identifies only the following items as\n components of other comprehensive income:\n\n - foreign currency translation adjustment;\n - minimum pension liability adjustment; and\n - unrealized gains and losses on certain investments in debt and\n equity securities classified as available-for-sale securities.\n\n Because AGL Resources does not have any components of other\n comprehensive income for any of the periods presented, there is no\n difference between net income and comprehensive income and the adoption\n of SFAS No. 130 has no impact on AGL Resources' consolidated financial\n statements.\n\n\n Page 10 of 27 Pages\n\n\n\n ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS\n AND FINANCIAL CONDITION\n\n Forward-Looking Statements\n\n Portions of the information contained in this Form 10-Q, particularly\n in the Management's Discussion and Analysis of Results of Operations\n and Financial Condition, contain forward-looking statements within the\n meaning of Section 27A of the Securities Act of 1933 and Section 21E of\n the Securities Exchange Act of 1934, and we intend that such\n forward-looking statements be subject to the safe harbors created\n thereby. Although we believe that our expectations are based on\n reasonable assumptions, we can give no assurance that such expectations\n will be achieved.\n\n Important factors that could cause our actual results to differ\n substantially from those in the forward-looking statements include, but\n are not limited to, the following:\n\n - changes in price and demand for natural gas and related products;\n - the impact of changes in state and federal legislation and\n regulation on both the gas and electric industries;\n - the effects and uncertanties of deregulation and competition,\n particularly in markets where prices and providers historically\n have been regulated;\n - changes in accounting policies and practices; - interest rate\n fluctuations and financial market condition; - uncertainties about\n environmental issues; and - other factors discussed in the following\n section: Year 2000\n Readiness Disclosure - Forward-Looking Statements.\n\n Nature of Our Business\n\n AGL Resources Inc. is the holding company for:\n\n - Atlanta Gas Light Company (AGLC) and its wholly owned subsidiary,\n Chattanooga Gas Company (Chattanooga), which are local natural gas\n distribution utilities;\n - AGL Energy Services, Inc., (AGLE) a gas supply services company;\n and\n - several nonutility subsidiaries.\n\n AGLC conducts our primary business: the distribution of natural gas in\n Georgia, including Atlanta, Athens, Augusta, Brunswick, Macon, Rome,\n Savannah, and Valdosta. Chattanooga distributes natural gas in the\n Chattanooga and Cleveland areas of Tennessee. The Georgia Public\n Service Commission (GPSC) regulates AGLC, and the Tennessee Regulatory\n Authority (TRA) regulates Chattanooga. AGLE is a nonregulated company\n that buys and sells the natural gas which is supplied to AGLC's\n customers during the transition period to full competition in Georgia.\n AGLC comprises substantially all of AGL Resources' assets, revenues,\n and earnings. When we discuss the operations and activities of AGLC,\n AGLE, and Chattanooga, we refer to them, collectively, as the\n \"utility.\"\n\n\n Page 11 of 27 Pages\n\n\n\n AGL Resources also owns or has an interest in the following nonutility\n businesses:\n\n - AGL Interstate Pipeline Company, which owns a 50% interest in\n Cumberland Pipeline Company; Cumberland Pipeline Company was\n formed for the purpose of providing interstate pipeline services\n to customers in Georgia and Tennessee;\n - AGL Peaking Services, Inc., which owns a 50% interest in Etowah\n LNG Company LLC; Etowah LNG Company LLC is a joint venture with\n Southern Natural Gas Company and was formed for the purpose of\n constructing, owning, and operating a liquefied natural gas\n peaking facility;\n - SouthStar Energy Services LLC (SouthStar), a joint venture among\n a subsidiary of AGL Resources and subsidiaries of Dynegy, Inc.\n and Peidmont Natural Gas Company. Southstar was established to\n sell natural gas, propane, fuel oil, electricity, and related\n services to industrial, commercial, and residential customers in\n Georgia and the Southeast. SouthStar began marketing naturalgas\n to all customers in Georgia during the first quarter of fiscal\n 1999;\n - AGL Investments, Inc., which was established to develop and\n manage certain nonutility businesses including:\n - AGL Gas Marketing, Inc., which owns a 35% interest in Sonat\n Marketing Company, L.P. (Sonat Marketing); Sonat Marketing\n engages in wholesale and retail natural gas trading;\n - AGL Power Services, Inc., which owns a 35% interest in Sonat\n Power Marketing, L.P.; Sonat Power Marketing, L.P. engages\n in wholesale power trading;\n - AGL Propane, Inc., which engages in the sale of propane and\n related products and services;\n - Trustees Investments, Inc., which owns Trustees Gardens, a\n residential and retail development located in Savannah,\n Georgia; and\n - Utilipro, Inc., which engages in the sale of integrated\n customer care solutions to energy marketers.\n\n Results of Operations\n\n In this section we compare the results of our operations for the\n three-month periods ended December 31, 1998 and 1997.\n\n Operating Margin Analysis\n (Dollars in Millions)\n\n Three Months Ended\n 12/31/98 12/31/97 Increase/(Decrease)\n ---------- ---------- ----------------------\n Operating Revenues\n Utility $ 317.2 $ 377.6 $ (60.4) (16.0%)\n Non Utility 6.7 21.5 (14.8) (68.8%)\n ========== ========== ============\n Total $ 323.9 $ 399.1 $ (75.2) (18.8%)\n ========== ========== ============\n Cost of Sales\n Utility $ 184.9 $ 236.6 $ (51.7) (21.9%)\n Non Utility 2.1 17.4 (15.3) (87.9%)\n ========== ========== ============\n Total $ 187.0 $ 254.0 $ (67.0) (26.4%)\n ========== ========== ============\n Operating Margins\n Utility $ 132.3 $ 141.0 $ (8.7) (6.2%)\n Non Utility 4.6 4.1 0.5 12.2%\n ========== ========== ============\n Total $ 136.9 $ 145.1 $ (8.2) (5.7%)\n ========== ========== ============\n\n\n\n Page 12 of 27 Pages\n\n\n Operating Revenues\n Our operating revenues for the three months ended December 31, 1998\n decreased to $323.9 million from $399.1 million for the same period\n last year, a decrease of 18.8%.\n\n Utility. Utility revenues decreased to $317.2 million for the three\n months ended December 31, 1998 from $377.6 million for the same period\n last year. The decrease of $60.4 million in utility revenues was\n primarily due to the following factors:\n\n - The utility's cost of gas decreased by $51.7 million. (See\n discussion of the utility cost of sales below regarding the\n effect of warmer weather and migration of customers to\n marketers). Prior to deregulation, AGLC passed the actualcost of\n gas through to its customers on a dollar for dollar basis under\n the PGA mechanism contained in its rate schedule. Now that the\n sale of gas by AGLC has been deregulated, AGLC intends to\n continue to recover only its actual gas costs from its customers\n within the parameters of the joint stipulation agreement of\n January 26, 1999. The reduction in gas costs therefore results\\\n in a corresponding reduction in revenue.\n - The utility's base revenue decreased by $4.8 million when\n compared to last year primarily due to the new SFV rate\n structure for AGLC delivery service that became effective\n July 1, 1998. (See Note 2 to the Condensed Consolidated\n Financial Statements)\n - The Integrated Resource Plan (IRP) was phased out during fiscal\n 1998 and did not exist during the first quarter of fiscal year\n 1999, resulting in a $3.6 million decrease in revenue associated\n with the plan. AGLC passed through to its customers, on a dollar\n for dollar basis, IRP expenses incurred, which were included in\n operating expenses. Therefore, the phase out of IRP had no effect\n on net income .\n\n Nonutility. Nonutility operating revenues decreased to $6.7 million for\n the three months ended December 31, 1998 from $21.5 million for the\n same period last year. The decrease of $14.8 million in nonutility\n revenues was primarily due to the formation of SouthStar in July 1998.\n Prior to the formation of SouthStar (including the first quarter of\n fiscal year 1998) we had a wholly owned subsidiary which was engaged in\n this same business. Upon the formation of SouthStar, the customers and\n operations of this business unit became the customers and operations of\n SouthStar. Since the formation of the joint venture, the results of our\n interest in SouthStar have been accounted for under the equity method\n and our portion of their results of operations is contained in Other\n Income for the three months ended December 31, 1998.\n\n Cost of Sales\n Our cost of sales decreased to $187.0 million for the three months\n ended December 31, 1998 from $254.0 million for the same period last\n year, a decrease of 26.4%.\n\n Utility. The utility's cost of sales decreased to $184.9 million for\n the three months ended December 31, 1998 from $236.6 million for the\n same period last year. The decrease of $51.7 million in the utility's\n cost of sales was primarily due to the following factors:\n\n - The utility sold less gas to its customers due to weather that was\n 44% warmer for the three months ended December 31, 1998 as compared\n with the same period last year. This resulted in less volume of gas\n sold as compared with last year.\n - Beginning November 1, 1998, customers began to switch from AGLC to\n certificated marketers for gas purchases. As a result, AGLC sold less\n gas.\n\n Page 13 of 27 Pages\n\n\n\n Nonutility. Nonutility cost of sales decreased to $2.1 million for the\n three months ended December 31, 1998 from $17.4 million for the same\n period last year. The decrease of $15.3 million was primarily due to\n the formation of SouthStar as described above under nonutility\n operating revenues.\n\n Operating Margin\n Our operating margin decreased to $136.9 million for the three months\n ended December 31, 1998 from $145.1 million for the same period last\n year, a decrease of 5.7%.\n\n Utility. The utility's operating margin decreased to $132.3 million for\n the three months ended December 31, 1998 from $141.0 million for the\n same period last year. The decrease of $8.7 million was primarily due\n to the following factors as mentioned above under utility operating\n revenues:\n - The utility's base revenue decreased by $4.8 million when compared\n with the same period last year primarily due to the new SFV rate\n structure for AGLC delivery service that became effective on July\n 1, 1998.\n - A $3.6 million decrease in revenue associated with the phase-out\n of the IRP.\n\n Nonutility. Operating margin for the nonutility business increased by\n $0.5 million to $4.6 million for the three months ended December 31,\n 1998 as compared with $4.1 million for the same period last year. This\n increase is primarily attributable to Utilipro, our customer care\n subsidiary which was acquired during the first quarter of fiscal 1998.\n\n Other Operating Expenses\n Other operating expenses decreased slightly to $89.2 million for the\n three months ended December 31, 1998 compared to $92.7 million for the\n same period last year. The components of other operating expenses are\n as follows (dollars in millions):\n\n Three Months Ended\n 12/31/98 12/31/97 (Increase/(Decrease)\n -------- -------- -------------------\n Operations $53.1 $58.6 $(5.5) $(9.4%)\n Maintenance 9.0 9.3 (0.3) (3.2%)\n Depreciation &\n Amortization 20.2 17.7 2.5 14.1%\n Taxes Other than Income\n Taxes 6.9 7.1 (0.2) (2.8%)\n -------- -------- --------\n Total $89.2 $92.7 $(3.5) (3.8%)\n ======== ======== ========\n\n Operations expenses decreased primarily due to the phase out of the IRP\n during fiscal 1998 which resulted in $3.6 million less expense than the\n same period last year. AGLC passed through to its customers, on a\n dollar for dollar basis, IRP expenses incurred. Therefore, the phase\n out of IRP had no effect on net income .\n\n Depreciation and amortization expenses increased primarily due to\n increased depreciable property and increased depreciation rates for\n AGLC ordered by the GPSC.\n\n\n Page 14 of 27 Pages\n\n\n\n Other Income/(Loss)\n Other losses totaled $7.9 million for the three months ended December\n 31, 1998 compared with other income of $5.2 million for the same period\n last year. The decrease in other income of $13.1 million is primarily\n due to:\n - Our portion of the loss recorded by Sonat Marketing, a joint\n venture in which we own a 35% interest. The loss by Sonat\n Marketing was the result of a combination of significantly warmer\n weather than last year and charges recorded in December 1998\n associated with changes in certain accounting estimates. We\n recorded a pre-tax loss related to our interest in Sonat of\n approximately $6.5 million for the three months ended December 31,\n 1998 as compared with pre-tax income of approximately $3.3 million\n for the same period last year.\n - Our portion of SouthStar's loss was approximately $1.4 million for\n the three months ended December 31, 1998. SouthStar was not formed\n until July 1998, therefore there was no income or loss for this\n joint venture for the three months ended December 31, 1997.\n\n Income Taxes\n Income taxes decreased to $8.2 million for the three months ended\n December 31, 1998 from $15.4 million for the same period last year. The\n effective tax rate (income tax expense expressed as a percentage of\n pretax income) for the three months ended December 31, 1998 was 34.0%\n as compared to 37.5% for the same period last year. The reduction in\n the effective income tax rate is primarily due to a reduction in tax\n expense resulting from our Leveraged Employee Stock Ownership Plan.\n\n Preferred Stock of Subsidiaries\n Dividends on preferred stock decreased to $1.5 million for the three\n months ended December 31, 1998 compared to $2.4 million for the same\n period last year. This decrease is due to the redemption of $44.5\n million of 7.70% preferred stock of AGLC on December 1, 1997.\n\n Financial Condition\n\n Our utility business is seasonal in nature which typically results in a\n substantial increase in accounts receivable from customers from\n September 30 to December 31 as a result of higher billings during\n colder weather. The utility also uses gas stored underground to serve\n its customers during periods of colder weather resulting in a\n substantial decrease in gas inventories when comparing September 30\n with December 31. Consequently, accounts receivable increased $92.9\n million and inventory of gas stored underground decreased $31.7 million\n during the quarter ended December 31, 1998. Accounts payable increased\n $22.6 million during the quarter ended December 31, 1998, primarily due\n to an increase in accounts payable to gas suppliers.\n\n Our deferred PGA asset was $3.3 million as of December 31, 1998\n compared to $33.1 million as of December 31, 1997. The PGA mechanism\n and regulated rates ended on October 6, 1998 for natural gas commodity\n sales to AGLC customers. Beginning in October 1998, AGLC priced\n deregulated gas sales in a manner that more closely matched gas costs\n and revenues. The deferred PGA asset that remains as of December 31,\n 1998 relates to Chattanooga.\n\n We generally meet our liquidity requirements through our operating cash\n flow and the issuance of short-term debt. We also use short-term debt\n to meet our seasonal working capital requirements and to temporarily\n fund capital expenditures. Lines of credit with various banks provide\n for direct borrowings and are subject to annual renewal. Availability\n under the current lines of credit varies from $230 million in the\n summer to $260 million for peak winter financing.\n\n\n Page 15 of 27 Pages\n\n\n\n Short-term debt increased $36.5 million to $113.0 million as of\n December 31, 1998, from $76.5 million as of September 30, 1998, to meet\n our normal seasonal working capital requirements for the three months\n ended December 31, 1998. Short-term debt decreased $37.5 when comparing\n December 31, 1998 to December 31, 1997 due to less borrowing needs\n during the first quarter of this year as compared to last year. We\n generated operating cash flow of $3.0 million for the three months\n ended December 31, 1998 as compared to $(29.9) million for the same\n period last year. This increase in operating cash flow is primarily due\n to the decrease in our deferred PGA asset as a result of AGLC designing\n its prices for deregulated gas sales in a manner that more closely\n matched gas costs and revenues for the three months ended December 31,\n 1998.\n\n We believe available credit will be sufficient to meet our working\n capital needs both on a short and a long-term basis. However, our\n capital needs depend on many factors and we may seek additional\n financing through debt or equity offerings in the private or public\n markets at any time.\n\n Capital Expenditures\n Capital expenditures for construction of distribution facilities,\n purchase of equipment, and other general improvements were $29.4\n million for the three-month period ended December 31, 1998. Typically,\n we provide funding for capital expenditures through a combination of\n internal sources and the issuance of short-term debt.\n\n Common Stock\n During the three months ended December 31, 1998, we issued 211,379\n shares of common stock under ResourcesDirect, a direct stock purchase\n and dividend reinvestment plan; the Retirement Savings Plus Plan; the\n Long-Term Stock Incentive Plan; the Nonqualified Savings Plan; and the\n Non-Employee Directors Equity Compensation Plan. Those issuances\n increased common equity by $3.7 million.\n\n Ratios\n As of December 31, 1998, our capitalization ratios consisted of:\n\n - 47.4% long-term debt; \n - 5.3% preferred securities; and \n - 47.3% common equity.\n\n State Regulatory Activity\n\n Deregulation\n The Deregulation Act became law on April 14, 1997. It provides a legal\n framework for comprehensive deregulation of many aspects of the natural\n gas business in Georgia and provides for a transition period before\n competition is fully in effect. AGLC will unbundle, or separate, all\n services to its natural gas customers; allocate delivery capacity to\n approved marketers who sell the gas commodity to residential and small\n commercial users; and create a secondary market for large commercial\n and industrial transportation capacity.\n\n Approved marketers, including our marketing affiliate, will compete to\n sell natural gas to all end-use customers at market-based prices. AGLC\n will continue to deliver gas to all end-use customers through its\n existing pipeline system, subject to the GPSC's continued regulation.\n The GPSC's order acknowledges that under the Deregulation Act, the PGA\n mechanism will be deregulated when at least five nonaffiliated\n marketers are authorized to serve an area of Georgia. The GPSC issued\n more than five such authorizations on October 6, 1998.\n\n\n Page 16 of 27 Pages\n\n\n Going forward, AGLC intends to price deregulated gas sales in a manner\n that, at a minimum, will allow it to recover its annual gas costs. Even\n though the recovery of gas costs is not currently subject to price\n regulation, the GPSC continues to regulate delivery rates, safety,\n access to AGLC's system, and quality of service for all aspects of\n delivery service.\n\n Generally, under the Deregulation Act, the transition to full-scale\n competition occurs when residential and small commercial customers who\n represent one-third of the peak day requirements for a particular\n delivery group have voluntarily selected a marketer. When the GPSC\n determines such market conditions exist, there will be a 120-day\n process to notify and assign customers who have not selected a\n marketer. Following the 120-day period, residential and small\n commercial customers who have not yet selected a marketer will be\n randomly assigned a marketer under the rules issued by the GPSC.\n\n The Deregulation Act provides marketing standards and rules of business\n practice to ensure the benefits of a competitive natural gas market are\n available to all customers on our system. It imposes on marketers an\n obligation to serve end-use customers, and creates a universal service\n fund. The universal service fund provides a method to fund the recovery\n of marketers' uncollectible accounts, and it enables AGLC to expand its\n facilities to serve the public interest.\n\n Retail marketing companies, including our marketing affiliate, filed\n separate applications with the GPSC to sell natural gas to AGLC's\n residential and small commercial customers. On October 6, 1998, the\n GPSC approved 19 marketers' applications to begin selling natural gas\n services at market prices to Georgia customers on November 1, 1998.\n\n As of December 31, 1998, more than 168,000 residential and small\n commercial customers had elected to purchase natural gas services from\n one of the 11 active approved marketers in Georgia. As of February 5,\n 1999, more than 367,000 residential and small commercial customers had\n elected to purchase natural gas services from those same marketers.\n\n Commodity Sales Service Rate Issues\n Pursuant to the Deregulation Act, regulated rates for natural gas\n commodity sales service to AGLC customers (as opposed to delivery\n service rates discussed above) ended on October 6, 1998. In the\n deregulated environment, AGLC intended to price deregulated gas sales\n in a manner that, at a minimum, would have allowed it to recover its\n annual gas costs.\n\n On January 5, 1999, the GPSC issued a Procedural and Scheduling Order\n for the purpose of hearing evidence to consider whether unregulated\n prices charged by AGLC for gas sales services subsequent to October 6,\n 1998 were constrained by market forces. The GPSC initiated the\n proceeding in response to numerous complaints from customers who\n received gas sales service from AGLC in November and December 1998.\n Those complaints stemmed primarily from the effects of record warm\n weather on November and December bills that, in many cases, reflected\n higher fixed costs associated with gas sales and lower gas usage than\n historical comparisons.\n\n AGLC's gas sales rates were designed to enable the Company to recover\n its fixed costs associated with gas sales from the customers for whom\n the costs were incurred. AGLC intended to bill much of those fixed\n costs during the winter, when consumption is typically higher, and\n fewer of those fixed costs in the summer, when consumption is typically\n lower. Under normal weather conditions, this billing approach would\n have produced monthly bills in amounts similar to bills of\n corresponding months in recent years. However, unseasonably warm\n weather resulted in fixed costs comprising a higher percentage of\n customers' bills due to lower gas usage by many customers in November\n and December.\n\n Page 17 of 27 Pages\n\n\n\n On January 26, 1999, AGLC entered into a joint stipulation with the\n GPSC to resolve certain gas sales service issues. Among other\n requirements in the stipulation, the Company has implemented a new rate\n structure for gas sales, beginning with February 1999 bills, that more\n closely reflects customers' actual gas usage which includes a demand\n charge for fixed costs associated with gas sales that is entirely\n volumetric. The new rate structure for gas sales service is intended to\n ensure AGLC's recovery of its purchased gas costs incurred from October\n 6, 1998 to September 30, 1999 as accurately as possible without\n creating any significant income or loss. The joint stipulation\n agreement provides for a true-up of gas costs and revenues for fiscal\n 1999 for any amounts over or under a relatively small adjustable dead\n band. To the extent that such overage or underage exceeds the\n applicable dead band, AGLC will either refund to or collect from its\n customers the applicable overage or underage that exists on September\n 30, 1999.\n\n As part of the joint stipulation, AGLC also agreed to issue checks to\n customers or credits to customer bills in the total amount of\n approximately $14.7 million to lessen the effects of the Company's\n earlier rate methodology. Of that amount, $8.2 million will be refunded\n to AGLC customers based on the over-collection of gas costs during\n fiscal 1998 before deregulation began and as reported in our balance\n sheet as of December 31, 1998. The remaining $6.5 million will be\n allocated during the second quarter to certain AGLC customers who were\n most adversely affected by the change in AGLC's rate structure for gas\n sales service.\n\n Risk Management\n AGLCs Gas Supply Plan for fiscal 1998 included limited gas supply\n hedging activities. AGLC was authorized to begin an expanded program to\n hedge up to one-half its estimated monthly winter wellhead purchases\n and to establish a price for those purchases at an amount other than\n the beginning-of-the-month index price. Such a program creates an\n additional element of diversification and price stability. The\n financial results of all hedging activities were passed through to\n residential and small commercial customers under the PGA mechanism of\n AGLC's rate schedules. Accordingly, the hedging program did not affect\n our earnings.\n\n During the first quarter of fiscal 1999, AGLC entered into certain\n hedge agreements that will continue until the end of February 1999.\n However, as part of the joint stipulation with the GPSC entered into in\n January 1999 to resolve certain gas sales service issues, AGLC will not\n participate in hedging activities for the remainder of the fiscal year\n and all costs incurred for the fixed-price option agreements prior to\n the date of the joint stipulation will be included in gas costs which\n will be recovered from AGLC's customers.\n\n AGLC Pipeline Safety\n On January 8, 1998, the GPSC issued procedures and set a schedule for\n hearings about alleged pipeline safety violations. On July 21, 1998,\n the GPSC approved a settlement between AGLC and the Adversary Staff of\n the GPSC that details a 10-year replacement program for approximately\n 2,300 miles of cast iron and bare steel pipelines. Over that 10-year\n period, AGLC will recover from customers the costs related to the\n program net of any cost savings resulting from the replacement program.\n During the three months ended December 31, 1998, AGLC spent\n approximately $5.4 million related to the pipeline replacement program.\n\n Environmental\n Before natural gas was available in the Southeast in the early 1930s,\n AGLC manufactured gas from coal and other materials. Those\n manufacturing operations were known as manufactured gas plants. Because\n of recent environmental concerns, we are required to investigate\n possible contamination at those plants and, if necessary, clean them\n up. Additional information relating to environmental matters and\n disclosures is contained below in the section entitled \"Environmental\n Matters\".\n\n Page 18 of 27 Pages\n\n\n\n We have two ways of recovering investigation and cleanup costs. First,\n the GPSC has approved an \"Environmental Response Cost Recovery Rider.\"\n It allows us to recover our costs of investigation, testing, cleanup,\n and litigation. Because of that rider, we have recorded an asset in the\n same amount as our investigation and cleanup liability. The second way\n we can recover costs is by exercising the legal rights we believe we\n have to recover a share of our costs from other potentially responsible\n parties - typically former owners or operators of the MGP sites.\n Previously we also recovered costs by exercising legal rights we\n believed we had to recover a share of our costs from various insurance\n companies. We settled our final insurance company claim in January\n 1999.\n\n Federal Regulatory Activity\n\n Information related to federal regulatory activity is contained in our\n Form 10-K for the year ended September 30, 1998 under the caption\n \"Federal Regulatory Matters\".\n\n Environmental Matters\n\n Before natural gas was available in the Southeast in the early 1930s,\n AGLC manufactured gas from coal and other materials. Those\n manufacturing operations were known as \"manufactured gas plants,\" or\n \"MGPs.\" Because of recent environmental concerns, we are required to\n investigate possible contamination at those plants and, if necessary,\n clean them up.\n\n Through the years, AGLC has been associated with twelve MGP sites in\n Georgia and three in Florida. Based on investigations to date, we\n believe that some cleanup is likely at most of the sites. In Georgia,\n the state Environmental Protection Division supervises the\n investigation and cleanup of MGP sites. In Florida, the U.S.\n Environmental Protection Agency has that responsibility.\n\n For each of those sites, we estimated our share of the likely costs of\n investigation and cleanup. We used the following process to do the\n estimates: First, we eliminated the sites where we believe no cleanup\n or further investigation is likely to be necessary. Second, we\n estimated the likely future cost of investigation and cleanup at each\n of the remaining sites. Third, for some sites, we estimated our likely\n \"share\" of the costs. We developed our estimate based on any agreements\n for cost sharing we have, the legal principles for sharing costs, our\n evaluation of other entities' ability to pay, and other similar\n factors.\n\n We currently estimate that our total future cost of investigating and\n cleaning up our MGP sites is between $47.0 million and $81.3 million.\n Within that range, we cannot identify a single number as the \"best\"\n estimate. We therefore have recorded the lower value, or $47.0 million,\n as a liability as of December 31, 1998. We are in the process of\n reviewing our estimates of the cost of investigation and clean up of\n our MGP sites. We believe that the estimates will increase. At the\n present time, however, we do not have sufficient information to\n estimate the magnitude of that increase with a reasonable degree of\n certainty.\n\n We have two ways of recovering investigation and cleanup costs. First,\n the GPSC has approved an \"Environmental Response Cost Recovery Rider.\"\n It allows us to recover our costs of investigation, testing, cleanup,\n and litigation. Because of that rider, we have recorded an asset in the\n same amount as our investigation and cleanup liability. On December 3,\n 1997, the GPSC issued a Rule Nisi ordering AGLC to show cause why the\n GPSC should not take certain actions with respect to the rider.\n Following hearings, the GPSC Staff and AGLC entered into a settlement\n agreement on December 3, 1998, resolving the outstanding issues in the\n Rule Nisi. On January 6, 1999, the GPSC issued an order approving the\n settlement. The settlement is not expected to have a material effect on\n the recovery of costs under the rider.\n\n\n Page 19 of 27 Pages\n\n\n\n The second way we can recover costs is by exercising the legal rights\n we believe we have to recover a share of our costs from other\n potentially responsible parties - typically former owners or operators\n of the MGP sites. Previously we also recovered costs by exercising\n legal rights we believed we had to recover a share of our costs from\n various insurance companies. We have been actively pursuing those\n recoveries. We settled our final insurance company claim in January\n 1999. For the quarter ended December 31, 1998, we recovered $4.3\n million from other potentially responsible parties and insurance\n companies. As required by the rider, we retained $2.2 million of that\n amount, and we credited the balance to our customers.\n\n Year 2000 Readiness Disclosure\n\n The widespread use by governments and businesses, including us, of\n computer software that relies on two digits, rather than four digits,\n to define the applicable year may cause computers, computer-controlled\n systems, and equipment with embedded software to malfunction or\n incorrectly process data as we approach and enter the year 2000.\n\n Our Year 2000 Readiness Initiative\n In view of the potential adverse impact of the \"Year 2000\" issue on our\n business, operations, and financial condition, we have established a\n cross-functional team to coordinate, and to report to management on a\n regular basis about, our assessment, remediation planning, and plan\n implementation processes directed to Year 2000. We also have engaged\n independent consultants to assist us in the assessment, remediation,\n planning, and implementation phases of our Year 2000 initiative. Our\n Year 2000 initiative is proceeding on a schedule that management\n believes will achieve Year 2000 readiness.\n\n The mission of our Year 2000 initiative is to define and provide a\n continuing process for assessment, remediation, planning, and plan\n implementation to achieve a level of readiness that will meet the\n challenges presented to us by the Year 2000 in a timely manner.\n Achieving Year 2000 readiness does not mean correcting every Year 2000\n limitation. Achieving Year 2000 readiness does mean that critical\n systems, critical electronic assets, and relationships with key\n business partners have been evaluated and are expected to be suitable\n for continued use into and beyond the Year 2000, and that contingency\n plans are in place.\n\n Our Year 2000 readiness initiative involves a three-phase process. The\n initiative is a continuing process with all phases of the initiative\n progressing concurrently with respect to both IT and non-IT assets, as\n defined below, and with respect to key business relationships. The\n three phases of our Year 2000 initiative are as follows:\n\n 1. Assessment -Assessment involves identifying and inventorying\n business assets and processes. It also involves determining the\n Year 2000 readiness status of our assets and of key business\n partners. Key business partners are those customers and suppliers\n who we believe may be material to our business, results of\n operations, or financial condition. In appropriate circumstances,\n pre-remediation testing is conducted as a part of the assessment\n phase. The assessment phase of our Year 2000 initiative includes\n assessment for Year 2000 readiness of the following:\n\n - information technology (IT) assets - Computer systems and\n software maintained by our Information Systems (IS) Department;\n - noninformation technology (non-IT) assets - including\n microprocessors embedded in equipment, and information\n technology purchased and maintained by business units other than\n our IS Department; and\n - key business partners (customers and suppliers).\n\n Page 20 of 27 Pages\n\n\n\n 2. Preparation of Remediation Plans - The purpose of this phase is to\n develop plans which, when implemented, will enable assets and\n business relationships to be Year 2000 ready. This phase involves\n implementation planning and prioritizing the implementation of\n remediation plans.\n\n 3. Implementation - This step involves the implementation of\n remediation plans, including post-remediation testing and\n contingency planning.\n\n\n State of Readiness\n We continue to assess the impact of the Year 2000 issue throughout our\n business and operations, including our customer and supplier base. The\n scope of our Year 2000 initiative includes AGL Resources and its\n subsidiaries. Sonat Power Services, L.P., and Sonat Marketing, are not\n within the scope of our Year 2000 initiative. We plan to address the\n Year 2000 readiness of those joint ventures using the same processes we\n use to assess the Year 2000 readiness of key business partners. (See\n \"Key Business Partners\" below) The following is a description of the\n progress of our Year 2000 initiative in all business units that are\n within the scope of our Year 2000 initiative, with the exception of\n SouthStar, and of Utilipro, Inc., a recently acquired subsidiary. With\n respect to SouthStar, we have completed the assessment phase and are\n beginning remediation planning. Management expects SouthStar's business\n and operations to achieve Year 2000 readiness. The Year 2000 initiative\n recently commenced with respect to Utilipro, Inc., and management\n expects Utilipro's business and operations to achieve Year 2000\n readiness.\n\n IT Assets\n Assessment of IT assets is complete. Remediation planning and\n implementation are underway. As part of our IT assessment process, we\n completed the assessment of our 79 mainframe and personal computer\n systems. We deem 13 of those 79 systems to be critical systems. The\n results of our Year 2000 initiative with respect to IT assets indicate\n that, to date:\n\n - 29 systems now are ready for Year 2000, including 12 of the 13\n critical systems;\n - nine systems are in testing to verify Year 2000\n readiness;\n - three systems, including one critical system, are in\n remediation for purposes of correcting noncompliant Year 2000\n code;\n - three systems have been eliminated;\n - five systems have been replaced, and\n - 30 systems are scheduled for either testing, replacement,\n remediation, or elimination in the future.\n\n We expect our one critical IT asset that is not yet Year 2000 ready to\n be Year 2000 ready by April 30, 1999. Remediation completion schedules\n for achieving Year 2000 readiness of noncritical IT assets are expected\n to extend through September 1999.\n\n Non-IT Assets\n Assessment of non-IT assets is complete. Our non-IT asset assessment\n process involved the following:\n\n - identifying business processes;\n - identifying non-IT assets and defining the business process or\n processes to which such assets relate;\n - identifying the mission criticality of each non-IT asset and\n business process; and\n - documenting in a tracking database the existence, and the\n mission-criticality, of each non-IT asset and business process.\n\nPage 21 of 27 Pages\n\n\n\n We expect to complete remediation planning for critical non-IT assets\n by March 15, 1999. The expected completion date for remediation plan\n implementation for critical non-IT assets will depend on the results of\n the remediation planning phase for non-IT assets, but is not expected\n to extend beyond June 30, 1999.\n\n Key Business Partners\n We are contacting key business partners, including suppliers and\n customers, to evaluate their Year 2000 readiness plans and status of\n readiness. We have contacted over 1,400 suppliers by letter. That group\n of suppliers includes suppliers whom we consider key business partners\n as well as other selected suppliers. However, to date, we have not\n received responses from the majority of suppliers we contacted. We have\n begun following up by telephone with those key suppliers from whom we\n have not yet received responses. We also initiated contact with more\n than 2,500 commercial and industrial customers by personal or telephone\n interview or by fax survey. That group of customers includes customers\n whom we consider key business partners as well as other selected\n customers. To date, we have not received responses from most of those\n customers. Our first step in the process of following up with those key\n customers who did not respond by January 1, 1999, was to categorize\n those customers based on the amount of gas used and the revenue\n generated by each of them. We have completed the categorizing process\n and are about to begin following up by fax or telephone with key\n customers.\n\n We are assessing the state of readiness of key business partners who\n have responded to our request for information and will continue to do\n so as we receive additional responses. As a general matter, we, like\n other businesses, are vulnerable to key business partners' inability to\n achieve Year 2000 readiness. We cannot predict the outcome of our\n business partners' readiness efforts. However, we plan to develop\n contingency plans to mitigate risks associated with the Year 2000\n readiness of certain business partners, including key business\n partners. At this stage of our review of key business partners, we do\n not have sufficient information to determine whether the Year 2000\n readiness of key business partners is likely to have a material impact\n on our business, results of operations, or financial condition.\n\n Costs to Address Year 2000 Issues\n Management intends to devote the resources necessary to achieve a level\n of readiness that will meet our Year 2000 challenges in a timely\n manner. Through December 31, 1998, our cumulative expenses in\n connection with our Year 2000 assessment, remediation planning, and\n plan implementation processes were approximately $ 3.8 million. Through\n December 31, 1998, we had spent an additional $7.4 million for the\n replacement of our general ledger and human resources information\n systems. Our primary reason for replacing those systems was to achieve\n increased efficiency and functionality. An added benefit of replacing\n those systems was the avoidance of the costs of remediating Year 2000\n problems associated with our previous general ledger and human\n resources information systems. We have capitalized the costs of our new\n general ledger and human resources information systems, in accordance\n with our accounting policies and with generally accepted accounting\n principles.\n\n\n We expect to spend approximately $6 million in fiscal 1999 in\n connection with our Year 2000 initiative. That estimate includes costs\n associated with the use of outside consultants as well as hardware and\n software costs. It also includes direct costs associated with employees\n of our IS Department who work on the Year 2000 initiative. It does not\n include costs associated with employees of other departments such as\n Legal and Internal Audit, and of other business units, who are\n involved, on a limited basis, in the Year 2000 initiative. Nor does the\n estimate include our potential share of Year 2000 costs that may be\n incurred by partnerships and joint ventures, other than Southstar, in\n which we participate. The fiscal 1999 estimate is subject to change,\n based on the results of our ongoing Year 2000 processes.\n\n On June 30, 1998, the GPSC issued a rate case order in response to a\n filing by AGLC. The GPSC provided for the deferral and amortization of\n some Year 2000 costs over a five-year period, beginning\n\n \n Page 22 of 27 Pages\n\n\n July 1, 1998. The portion of those costs that will be deferred in this\n way includes costs that are required to be expensed under \n generally accepted accounting principles and that are attributable to \n AGLC. Going forward, we estimate that approximately 90% of our Year\n 2000 costs will be attributable to AGLC. At December 31, 1998, AGLC \n had deferred total costs of approximately $2 million.\n\n At present, the cost estimates associated with achieving Year 2000\n readiness are not expected to materially impact our consolidated\n financial statements. We will account for costs related to achieving\n Year 2000 readiness in accordance with our accounting policies, with\n regulatory treatment, and with generally accepted accounting\n principles.\n\n Risks of Year 2000 Issues\n We are in the process of finalizing our most reasonably likely worst\n case Year 2000 scenarios. As such, we are not yet able to comment on\n whether the consequences of such scenarios could have a material impact\n on our business, results of operations, or financial condition. The\n process of defining our most reasonably likely worst case scenarios is\n part of the contingency planning effort that is currently underway. Our\n process for identifying our most reasonably likely worst case scenarios\n includes the following:\n\n - identifying core business processes;\n - identifying key business partners (including suppliers and\n customers);\n - conducting Year 2000 business impact analyses; and - reviewing\n experts' views of factors likely to contribute to such a\n scenario.\n\n To date, we have identified our core business processes. We have also\n completed the majority of our Year 2000 business impact analyses for\n the core business processes. We are in the process of finalizing our\n contingency planning assumptions, including our most reasonably likely\n worst case scenarios.\n\n Although we are finalizing our most reasonably likely worst case\n scenarios and our contingency planning assumptions, the contingency\n planning process and the process of refining our most reasonably likely\n worst case scenarios will be ongoing processes, requiring continuing\n development and modification as we obtain additional information\n regarding (a) our internal systems and equipment during the\n implementation phase of our Year 2000 initiative, and (b) the status,\n and the impact on us, of the Year 2000 readiness of others.\n\n\n Page 23 of 27 Pages\n\n\n\n Business Continuity and Contingency Planning\n We are developing Year 2000 contingency plans. Those plans, which are\n intended to enable us to deliver an acceptable level of service despite\n Year 2000 failures, include performing certain processes manually,\n changing suppliers, and reducing or suspending certain noncritical\n aspects of our operations. We expect our contingency planning effort to\n focus on our potential internal risks as well as potential risks\n associated with our suppliers and customers. Identifying our most\n reasonably likely worst case scenarios as described above will define\n the boundaries of our contingency planning effort. The contingency\n planning process also includes, but is not limited to the following:\n\n - identifying the nature of Year 2000 risks to understand the\n business impact of those risks;\n - identifying our minimal acceptable service levels; - identifying\n alternative providers of goods and services; - identifying\n necessary investments in additional back-up\n equipment such as generators and communications equipment; and\n - developing manual methods of performing critical functions\n currently performed by electronic systems and equipment.\n\n From February through June 1999, we expect to be testing and refining\n our contingency plans, with a planned testing completion date of June\n 30, 1999. Although the expected completion date for our contingency\n planning effort is June 30, 1999, during the last half of 1999 we will\n update and refine our contingency plans, as needed, to reflect system\n and business changes as they evolve.\n\n Presently, management believes that its assessment, remediation\n planning, plan implementation and contingency planning processes will\n be effective to achieve Year 2000 readiness in a timely manner.\n\n Forward-Looking Statements\n The preceding \"Year 2000 Readiness Disclosure\" discussion contains\n various forward-looking statements that represent our beliefs or\n expectations regarding future events. When used in the \"Year 2000\n Readiness Disclosure\" discussion, the words \"believes,\" \"intends,\"\n \"expects,\" \"estimates,\" \"plans,\" \"goals,\" and similar expressions are\n intended to identify forward-looking statements. Forward-looking\n statements include, without limitation, our expectations as to when we\n will complete the assessment, remediation planning, and implementation\n phases of our Year 2000 initiative as well as our Year 2000 contingency\n planning; our estimated cost of achieving Year 2000 readiness; and our\n belief that our internal systems and equipment will be Year 2000 ready\n in a timely and appropriate manner. All forward-looking statements\n involve a number of risks and uncertainties that could cause the actual\n results to differ materially from the projected results. Factors that\n may cause those differences include availability of information\n technology resources; customer demand for our products and services;\n continued availability of materials, services, and data from our\n suppliers; the ability to identify and remediate all date-sensitive\n lines of computer code and to replace embedded computer chips in\n affected systems and equipment; the failure of others to timely achieve\n appropriate Year 2000 readiness; and the actions or inaction of\n governmental agencies and others with respect to Year 2000 problems.\n\n\n\n\n Page 24 of 27 Pages\n\n\n\n ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK\n\n All financial instruments and positions held by AGL Resources described\n below are held for purposes other than trading.\n\n Interest Rate Risk\n AGL Resources' exposure to market risk related to changes in interest\n rates relates primarily to its borrowing activities. A hypothetical 10%\n increase or decrease in interest rates related to AGL Resources\n variable rate debt ($113.0 million as of December 31, 1998) would not\n have a material effect on our results of operations or financial\n condition over the next year. The fair value of AGL Resources'\n long-term debt and capital securities are also affected by changes in\n interest rates. The carrying value of AGL Resources' long-term debt and\n capital securities has been the same for the past two years. A\n hypothetical 10% increase or decrease in interest rates would not have\n a material effect on the estimated fair value of our long-term debt or\n capital securities. Additionally, the fair value of our long-term debt\n and capital securities has not materially changed since September 30,\n 1998.\n\n\n Page 25 of 27 Pages\n\n\n\n PART II -- OTHER INFORMATION\n\n \"Part II -- Other Information\" is intended to supplement information\n contained in the Annual Report on Form 10-K for the fiscal year ended\n September 30, 1998, and should be read in conjunction therewith.\n\n ITEM 1. LEGAL PROCEEDINGS\n\n With regard to legal proceedings, AGL Resources is a party, as both\n plaintiff and defendant, to a number of suits, claims and counterclaims on\n an ongoing basis. Management believes that the outcome of all litigation in\n which it is involved will not have a material adverse effect on the\n consolidated financial statements of AGL Resources.\n\n ITEM 5. OTHER INFORMATION\n\n Information related to State Regulatory Activity, Federal Regulatory\n Activity, and Environmental matters is contained in Item 2 of Part I under\n the caption \"Management's Discussion and Analysis of Results of Operations\n and Financial Condition.\"\n\n ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K\n\n\n (a) Exhibits\n\n\n 3 Bylaws, as amended and restated on January 15, 1999.\n\n 10.1 Seventh Amendment to the AGL Resources Inc. Long-Term\n Stock Incentive Plan of 1990.\n\n 10.2 Extension of Service Agreements #904480 under Rate\n Schedule FT; #904481 under Rate Schedule FT-NN; and\n #S20140 under Rate Schedule CSS, all dated November 1,\n 1994, between Atlanta Gas Light Company and Southern\n Natural Gas Company (Exhibits 10.30; 10.32 and 10.33,\n respectively, AGL Resources Inc. Form 10-K for the\n fiscal year ended September 30, 1998).\n\n 18 Independent Auditor's preferability letter concerning a\n change in accounting method.\n\n 27 Financial Data Schedule.\n\n (b) Reports on Form 8-K.\n\n There were no reports on Form 8-K filed during the quarterly\n period ended December 31, 1998.\n\n\n\n\n Page 26 of 27 Pages\n\n\n\n\n SIGNATURES\n\n\n Pursuant to the requirements of the Securities Exchange Act of 1934,\n the registrant has duly caused this report to be signed on its behalf\n by the undersigned thereunto duly authorized.\n\n\n AGL Resources Inc.\n (Registrant)\n\n\n Date February 15, 1999 /s/ J Michael Riley\n J. Michael Riley\n Senior Vice President and Chief Financial\n Officer\n (Principal Accounting and Financial Officer)\n\n\n\n Page 27 of 27 Pages\n \n \n\nEX-3\n2\nEXHIBIT 3\n\n\n\n\n Exhibit 3\n\n BYLAWS\n\n OF\n\n AGL RESOURCES INC.\n\n\n ARTICLE I\n\n SHAREHOLDERS\n\n\n SECTION 1.1. Date, Time and Place of Meetings. Annual and special\nmeetings of the Shareholders shall be held on such date and at such time and\nplace, within or without the State of Georgia, as may be stated in the notice of\nthe meeting, or in a duly executed waiver of notice thereof. If no designation\nis made, the place of the meeting shall be the principal executive offices of\nthe Corporation.\n\n SECTION 1.2. Annual Meetings. The annual meeting of the Shareholders of\nthe Corporation shall be held each year for the purposes of electing Directors\nand of transacting such other business as properly may be brought before the\nmeeting. To be properly brought before the meeting, business must be brought\nbefore the meeting (i) by or at the direction of the Board of Directors or (ii)\nby any Shareholder of the Corporation entitled to vote at the meeting who\ncomplies with the procedures set forth in Section 1.2 of this Article; provided,\nin each case, that such business proposed to be conducted is, under the law, an\nappropriate subject for Shareholder action.\n\n For business to be properly brought before an annual meeting by a\nShareholder, the Shareholder must give timely notice thereof in writing to the\nSecretary of the Corporation. To be timely, a Shareholder's notice must be\nreceived by the Secretary at the principal executive offices of the Corporation\nat least 120 calendar days before the first anniversary of the date that the\nCorporation's proxy statement was released to Shareholders in connection with\nthe previous year's annual meeting of Shareholders. However, if no annual\nmeeting of Shareholders was held in the previous year or if the date of the\nannual meeting of Shareholders has been changed by more than 30 calendar days\nfrom the date contemplated at the time of the previous year's proxy statement,\nthe notice shall be received by the Secretary at the principal executive offices\nof the Corporation not fewer than the later of (i) 150 calendar days prior to\nthe date of the contemplated annual meeting or (ii) the date which is 10\ncalendar days after the date of the first public announcement or other\nnotification to the Shareholders of the date of the contemplated annual meeting.\n\n Such Shareholder's notice to the Secretary shall set forth with respect\nto any proposal such Shareholder proposes to bring before the annual meeting (i)\na brief description of the business desired to be brought before the annual\nmeeting and the reasons for conducting such business at the annual meeting; (ii)\nthe name and address, as they appear on the Corporation's books, of the\nShareholder proposing such business; (iii) the class and number of shares of the\nCorporation which are beneficially owned by such Shareholder; (iv) the dates\nupon which the Shareholder acquired such shares; (v) documentary support for any\nclaim of beneficial ownership; (vi) any material interest of such Shareholder in\nsuch business; (vii) a statement in support of the matter and, for proposals\nsought to be included in the Corporation's proxy statement, any other\ninformation required by Securities and Exchange Commission Rule 14a-8; and\n(viii) as to each person whom the Shareholder proposes to nominate for election\nor reelection as Director all information relating to such person that is\nrequired to be disclosed in solicitations of proxies for election of Directors\nin an election contest, or is otherwise required, in each case pursuant to\nRegulation 14A under the Securities Exchange Act of 1934, as amended (including\nsuch person's written consent to being named in the proxy statement as a nominee\nand to serving as a Director if elected, and evidence satisfactory to the\nCorporation that such nominee has no interests that would limit their ability to\nfulfill their duties of office).\n\n\n\n In addition, if the Shareholder intends to solicit proxies from the\nshareholders of the Corporation, such Shareholder shall notify the Corporation\nof this intent in accordance with Securities and Exchange Commission Rule 14a-4\nand/or Rule 14a-8.\n\n SECTION 1.3. Special Meetings. The Corporation shall hold a special\nmeeting of Shareholders on call of the Board of Directors or the Executive\nCommittee, the Chairman of the Board of Directors, the President, or, upon\ndelivery to the Corporation's Secretary of a signed and dated written demand for\nthe meeting describing the purpose or purposes for the meeting, on call of the\nholders of 100% of the votes entitled to be cast on any issue proposed to be\nconsidered at the proposed special meeting. Only business within the purpose or\npurposes described in the notice of special meeting required by Section 1.5\nbelow may be conducted at a special meeting of the Shareholders.\n\n For business to be properly brought before a special meeting by a\nShareholder, the Shareholder must give timely notice thereof in writing to the\nSecretary of the Corporation. To be timely, a Shareholder's notice must be\nreceived by the Secretary at the principal executive offices of the Corporation\nat least 120 calendar days prior to the date of the special meeting.\n\n Such Shareholder's notice to the Secretary shall set forth with respect\nto any proposal such Shareholder proposes to bring before the special meeting\n(i) a brief description of the business desired to be brought before the special\nmeeting and the reasons for conducting such business at the special meeting;\n(ii) the name and address, as they appear on the Corporation's books, of the\nShareholder proposing such business; (iii) the class and number of shares of the\nCorporation which are beneficially owned by such Shareholder; (iv) the dates\nupon which the Shareholder acquired such shares; (v) documentary support for any\nclaim of beneficial ownership; (vi) any material interest of such Shareholder in\nsuch business; (vii) a statement in support of the matter and, for proposals\nsought to be included in the Corporation's proxy statement, any other\ninformation required by Rule 14a-8; and (viii) if the Shareholders requesting\nthe special meeting propose to nominate one or more persons for election or\nreelection as Director, all information relating to such person that is required\nto be disclosed in solicitations of proxies for election of Directors in an\nelection contest, or is otherwise required, in each case pursuant to Regulation\n14A under the Securities Exchange Act of 1934, as amended (including such\nperson's written consent to being named in the proxy statement as a nominee and\nto serving as a Director if elected, and evidence reasonably satisfactory to the\nCorporation that such nominee has no interests that would limit their ability to\nfulfill their duties of office).\n\n In addition, if the Shareholder intends to solicit proxies from the\nshareholders of the Corporation, such Shareholder shall notify the Corporation\nof this intent in accordance with Securities and Exchange Commission Rule 14a-4\nand/Rule or 14a-8.\n\n SECTION 1.4. Determination of Validity of Notice of Shareholder\nProposal for Business. The chairman of a meeting may, if the facts warrant,\ndetermine and declare to the meeting that business was not properly brought\nbefore the meeting in accordance with the provisions of Sections 1.2 and 1.3 of\nthis Article, and, if he should so determine, he shall so declare to the meeting\nand any such business so determined to be not properly brought before the\nmeeting shall not be transacted, or in the case of persons so nominated, not be\neligible for election.\n\n SECTION 1.5. Notice of Meetings. The Secretary or an Assistant\nSecretary shall deliver, either personally or by mailing it, postage prepaid, a\nwritten notice of the place, day, and time of all meetings of the Shareholders\nnot less than ten (10) nor more than sixty (60) days before the meeting date to\neach Shareholder of record entitled to vote at such meeting. Unless otherwise\nrequired or permitted by law, written notice is effective when mailed, if mailed\nwith postage prepaid and correctly addressed to the Shareholder's address shown\nin the Corporation's current record of Shareholders. It shall not be necessary\nthat notice of an annual meeting include a description of the purpose or\npurposes for which the meeting is called. In the case of a special meeting, the\npurpose or purposes for which the meeting is called shall be included in the\nnotice of the special meeting. If an annual or special Shareholders' meeting is\nadjourned to a different date, time, or place, notice of the new date, time, or\nplace need not be given if the new date, time, or place is announced at \n\n\n\n\nthe meeting before adjournment. However, if a new record date for the adjourned\nmeeting is or must be fixed under Section 1.9 herein, notice of the adjourned\nmeeting must be given to persons who are Shareholders as of the new record date.\n\n\n SECTION 1.6. Record Date. The Board of Directors, in order to determine\nthe Shareholders entitled to notice of or to vote at any meeting of the\nShareholders or any adjournment thereof, or to express consent to corporate\naction in writing without a meeting, or to receive payment of any dividend or\nother distribution or allotment of any rights, or to exercise any rights in\nrespect of any change, conversion or exchange of stock, or for the purpose of\nany other lawful action, shall fix in advance a record date that may not be more\nthan seventy (70) days before the meeting or action requiring a determination of\nShareholders. Only such Shareholders as shall be Shareholders of record on the\ndate fixed shall be entitled to such notice of or to vote at such meeting or any\nadjournment thereof, or to receive payment of any such dividend or other\ndistribution or allotment of any rights, or to exercise any such rights in\nrespect of stock, or to take any such other lawful action, as the case may be,\nnotwithstanding any transfer of any stock on the books of the Corporation after\nany such record date fixed as aforesaid. The record date shall apply to any\nadjournment of the meeting except that the Board of Directors shall fix a new\nrecord date for the adjourned meeting if the meeting is adjourned to a date more\nthan 120 days after the date fixed for the original meeting.\n\n SECTION 1.6. Shareholders' List for Meeting. After fixing a record date\nfor a meeting, the Corporation shall prepare an alphabetical list of the names\nof all Shareholders who are entitled to notice of the Shareholders' meeting. The\nlist shall be arranged by voting group (and within each voting group by class or\nseries of shares) and show the address of and number of shares held by each\nShareholder. The Corporation shall make the Shareholders' list available for\ninspection by any Shareholder, his agent, or his attorney at the time and place\nof the meeting.\n\n SECTION 1.8. Quorum. Subject to any express provision of law or the\nArticles of Incorporation, a majority of the votes entitled to be cast by all\nshares voting together as a group shall constitute a quorum for the transaction\nof business at all meetings of the Shareholders. Whenever a class of shares or\nseries of shares is entitled to vote as a separate voting group on a matter, a\nmajority of the votes entitled to be cast by each voting group so entitled shall\nconstitute a quorum for purposes of action on any matter requiring such separate\nvoting. Once a share is represented, either in person or by proxy, for any\npurpose at a meeting other than solely to object to holding a meeting or\ntransacting business at the meeting, it is deemed present for quorum purposes\nfor the remainder of the meeting and for any adjournment of that meeting unless\na new record date is set for the adjourned meeting.\n\n SECTION 1.9. Adjournment of Meetings. The holders of a majority of the\nvoting shares represented at a meeting, or the Chairman of the Board or the\nPresident, whether or not a quorum is present, shall have the power to adjourn\nthe meeting from time to time, without notice other than announcement at the\nmeeting. At such adjourned meeting at which a quorum shall be present or\nrepresented, any business may be transacted which might have been transac__d at\nthe meeting as originally notified. If after the adjournment a new record date\nis fixed for the adjourned meeting, a notice of the adjourned meeting shall be\ngiven to each Shareholder of record entitled to vote at the adjourned meeting.\n\n SECTION 1.10. Vote Required. When a quorum exists, action on a matter\n(other than the election of Directors) by a voting group is approved if the\nvotes cast within the voting group favoring the action exceed the votes cast\nopposing the action, unless the Articles of Incorporation, a bylaw authorized by\nthe Articles of Incorporation or express provision of law requires a greater\nnumber of affirmative votes. Unless otherwise provided in the Articles of\nIncorporation, Directors are elected by a plurality of the votes cast by the\nshares entitled to vote in the election at a meeting at which a quorum is\npresent. Shareholders do not have the right to cumulate their votes unless the\nArticles of Incorporation so provide.\n\n SECTION 1.11. Voting Entitlement of Shares. Unless otherwise provided\nin the Articles of Incorporation, each Shareholder, at every meeting of the\nShareholders, shall be entitled to cast one vote, either in person or by written\nproxy, for each share standing in his or her name on the books of the\nCorporation as of the record date. A\n\n\n\nShareholder may vote his shares in person or by proxy. An appointment of proxy\nis effective when received by the Secretary of the Corporation or other officer\nor agent authorized to tabulate votes and is valid for eleven (11) months unless\na longer period is expressly provided in the appointment of proxy form. An\nappointment of proxy is revocable by the Shareholder unless the appointment form\nconspicuously states that it is irrevocable and the appointment is coupled with\nan interest.\n\n\n ARTICLE II\n\n BOARD OF DIRECTORS\n\n SECTION 2.1. General Powers. Subject to the Articles of Incorporation,\nand Bylaws approved by the Shareholders, all corporate powers shall be exercised\nby or under the authority of, and the business and affairs of the Corporation\nmanaged under the direction of, the Board of Directors.\n\n SECTION 2.2. Number and Tenure. The Board of Directors shall consist of\nat least five (5) members and not more than fifteen (15) members, the exact\nnumber of Directors to be fixed from time to time by resolution of the Board of\nDirectors of the Corporation. No decrease in the number or minimum number of\nDirectors, through amendment of the Articles of Incorporation or of the Bylaws\nor otherwise, shall have the effect of shortening the term of any incumbent\nDirector. The Board of Directors shall be divided into three classes as nearly\nequal in number as possible, with the term of office of one class expiring each\nyear. At the first annual meeting of shareholders, the Directors shall be\ndivided into three classes, as nearly equal in size as may be, with the\nDirectors of one class to be elected to hold office for a term expiring at the\nthird annual meeting following the election and until their successors shall\nhave been duly elected and qualified; with the Directors of the second class to\nbe elected to serve for a term expiring at the second annual meeting following\nthe election and until their successors shall have been duly elected and\nqualified; and the Directors of the third class to be elected to serve for a\nterm expiring at the first annual meeting following the election and until their\nsuccessors shall have been duly elected and qualified. Thereafter, Directors\nshall be elected for terms of three years, and until their successors have been\nduly elected and qualified or until there is a decrease in the number of\nDirectors.\n\n SECTION 2.3. Qualifications of Directors. Directors shall be natural\npersons who have attained the age of 18 years who shall own at least 100 shares\nof the Common Stock of the Corporation but need not be residents of the State of\nGeorgia.\n\n SECTION 2.3.1. Re-election After Termination of Principal Employment.\nIf any Director ceases to hold the position in his or her principal employment\nprofession, trade or calling that he or she held at he beginning of the current\nterm for which he or she was elected a Director, such person shall not be\neligible for re-election to the Board of Directors after the expiration of such\ncurrent term unless the Board of Directors decides that such person should be\neligible for re-election.\n\n SECTION 2.3.2. Terminating Events; Honorary Directors. Any Director who\neither (i) attains his or her seventieth (70th) birthday or (ii) retires from or\ndiscontinues his or her employment with the Corporation, whichever first occurs,\nshall thereafter, upon completion of the term for which he or she was elected a\nDirector, cease to be an active Director; provided, however, anyone who, upon\nhis or her retirement is Chairman of the Board or President of the Corporation\nmay, notwithstanding the above provisions of this Section, continue to serve as\nan active Director until his attains his seventieth (70th) birthday, and\nthereafter until completion of the term for which he or she was elected a\nDirector.\n\n SECTION 2.3.3. Honorary Directors. Upon appointment by the Board of\nDirectors, a Director who ceases to be an active Director because of age or\nretirement, or any other person who shall be so elected by the Board of\nDirectors, shall become an Honorary Director for such term or terms as the Board\nof Directors may determine, but subject to removal from the position of Honorary\nDirector at any time at the pleasure of the Board. Except for the regular\n\n\n\nNovember meeting of the Board of Directors, Honorary Directors will not be\nexpected to attend meetings of the Board unless specially invited. The expenses\nof Honorary Directors in attending such November meeting or any other meeting of\nthe Board of Directors to which they are specially invited will be reimbursed by\nthe Corporation but they will not receive fees for attending such meetings.\nHonorary Directors may participate in an advisory capacity in all discussions\nand deliberations of the Board of Directors, but shall have no vote at the\nmeetings which they attend in accordance with the foregoing provisions. An\nHonorary Director shall not be included in any calculation of the number of\nactive Directors authorized and serving under Section 2.2.\n\n SECTION 2.4. Vacancies. Unless the Articles of Incorporation provide\notherwise, if a vacancy occurs on the Board of Directors, including a vacancy\nresulting from an increase in the number of Directors, the vacancy may be filled\nonly by the Board of Directors, or, if the Directors remaining in office\nconstitute fewer than a quorum of the Board, by the affirmative vote of a\nmajority of all Directors remaining in office. If the vacant office was held by\na Director elected by a voting group of Shareholders, only the remaining\nDirectors elected by that voting group are entitled to vote to fill the vacancy.\n\n SECTION 2.5. Meetings. The Board of Directors shall meet annually\nimmediately following the annual meeting of Shareholders. The annual meeting of\nthe Board of Directors shall be held at the time and place, within or without\nthe State of Georgia, as may be stated in the notice of the meeting or in a duly\nexecuted waiver of notice thereof. If no designation is made, the place of the\nannual meeting shall be the principal executive offices of the Corporation.\nRegular meetings of the Board of Directors or any committee may be held between\nannual meetings without notice at such time and at such place, within or without\nthe State of Georgia, as from time to time shall be determined by the Board or\ncommittee, as the case may be. A majority of the Board of Directors, the\nChairman of the Board, the President or the Executive Committee may call a\nspecial meeting of the Directors at any time by giving each Director two (2)\ndays notice of the date, time and place of the meeting. Such notice may be given\norally or in writing in accordance with the provisions of Section 4.1. Unless\notherwise provided in the Articles of Incorporation, these Bylaws or by law,\nneither the business to be transacted at, nor the purpose of, any regular or\nspecial meeting need be specified in the notice or any waiver of notice.\n\n SECTION 2.6. Quorum and Voting. At all meetings of the Board of\nDirectors or any committee thereof, a majority of the number of Directors\nprescribed, or if no number is prescribed, the number in office immediately\nbefore the meeting begins, shall constitute a quorum for the transaction of\nbusiness. The affirmative vote of a majority of the Directors present at any\nmeeting at which there is a quorum at the time of such act shall be the act of\nthe Board or of the committee, except as might be otherwise specifically\nprovided by statute or by the Articles of Incorporation or Bylaws. In the\nabsence of a quorum, the Directors present by majority vote may adjourn the\nmeeting from time to time without notice other than by verbal announcement at\nthe meeting until a quorum shall attend. At any such adjourned meeting at which\na quorum shall be present, any business may be transacted which might have been\ntransacted at the meeting as originally notified.\n\n SECTION 2.7. Action Without Meeting. Unless the Articles of\nIncorporation or Bylaws provide otherwise, any action required or permitted to\nbe taken at any meeting of the Board of Directors or any committee thereof may\nbe taken without a meeting if the action is taken by all members of the Board or\ncommittee, as the case may be. The action must be evidenced by one or more\nwritten consents describing the action taken, signed by each Director, and filed\nwith the minutes of the proceedings of the Board or committee or filed with the\ncorporate records.\n\n SECTION 2.8. Remote Participation in a Meeting. Unless otherwise\nrestricted by the Articles of Incorporation or the Bylaws, any meeting of the\nBoard of Directors may be conducted by the use of any means of communication by\nwhich all Directors participating may simultaneously hear each other during the\nmeeting. A Director participating in a meeting by this means is deemed to be\npresent in person at the meeting.\n\n\n SECTION 2.9. Compensation of Directors. The Board of Directors may fix\nthe compensation of the Directors for their services as Directors. Compensation\nshall be fixed from time to time by a resolution of the Board of Directors, and\nmay be on the basis of an annual sum or a fixed sum for attendance at each\nregular or special meeting and every adjournment thereof, or a combination of\nthese methods. Members may be reimbursed for all reasonable traveling expenses\nincurred in attending meetings. No provision of these Bylaws shall be construed\nto preclude any Director from serving the Corporation in any other capacity and\nreceiving compensation therefor.\n SECTION 2.10. Removal of Directors by Shareholders. Subject to the\nrequirements of Section 14-2-808 of the Georgia Business Corporation Code (the\n\"Code\") for the removal of Directors elected by cumulative voting, voting group\nor staggered terms, any one or more Directors may be removed from office, only\nwith cause, at any meeting of Shareholders with respect to which notice of such\npurpose has been given, by the affirmative vote of the holder or holders of a\nmajority of the outstanding shares of the Corporation.\n\n SECTION 2.11. Nomination of Directors. Only persons who are nominated\nin accordance with the following procedures shall be eligible for election as\nDirectors. Nominations of persons for election to the Board of Directors of the\nCorporation may be made at a meeting of Shareholders (i) by the Board of\nDirectors or at the direction of the Board by any nominating committee or person\nappointed by the Board or (ii) by any Shareholder of the Corporation entitled to\nvote for the election of Directors at the meeting who complies with the notice\nprocedures set forth in Sections 1.2 and 1.3 of Article I of these Bylaws. Such\nnominations, other than those made by or at the direction of the Board of\nDirectors, shall be made pursuant to timely notice in writing to the Secretary\nof the Corporation. Such notice to the Secretary shall set forth the information\nrequired in Section 1.2 and 1.3 of Article I of these Bylaws. The Corporation\nmay require any proposed nominee to furnish such other information as reasonably\nmay be required by the Corporation to determine the eligibility of such proposed\nnominee to serve as a Director of the Corporation. The chairman of the meeting\nmay, if the facts warrant, determine and declare to the meeting that a\nnomination was not made in accordance with the foregoing procedures, and if he\nshould so determine, he shall so declare to the meeting and the defective\nnomination shall be disregarded.\n\n SECTION 2.15. Indemnification. The indemnification authorized\nin the Articles of Incorporation shall be subject to the following provisions\nand procedures:\n\n SECTION 2.15.1. Determination of Eligibility for Indemnification. In\nthe case of actions brought by or in the right of the Corporation, a Director's\nright to indemnification as authorized in the Articles of Incorporation shall be\ndetermined:\n\n (i) If there are two or more directors not at the time parties\n to the proceeding (\"Disinterested Directors\"), by the board of\n directors by a majority vote of all the Disinterested Directors (a\n majority of whom shall for such purpose constitute a quorum), or by a\n majority of the members of a committee of two or more Disinterested\n Directors appointed by such a vote;\n\n (ii) By special legal counsel:\n\n (a) Selected in the manner prescribed in\n paragraph (i) of this subsection; or\n\n (b) If there are fewer than two\n Disinterested Directors, the Board of\n Directors (in which selection directors who\n do not qualify as Disinterested Directors\n may participate); or\n\n (iii) By the shareholders, but shares owned by or voted under\n the control of a director who at the time does not qualify as a\n disinterested director may not be voted on the determination.\n\n SECTION 2.15.2. Rights Not Exclusive. The rights to indemnification and\nadvance of expenses granted in the Articles of Incorporation and in these Bylaws\nare not exclusive, and do not limit the Corporation's power to pay or\n\n\nreimburse expenses to which a Director may be entitled, whether by agreement\nvote of shareholders or Disinterested Directors or otherwise, both as to action\nin his official capacity and as to action in another capacity while holding\noffice, and do not limit the Corporation's power to pay or reimburse expenses\nincurred by a Director in connection with his appearance as a witness in a\nproceeding at a time when he has not been made a named defendant or respondent\nto the proceeding.\n\n SECTION 2.15.3. Insurance. The Corporation and its officers shall have\nthe power to purchase and maintain insurance on behalf of an individual who is\nor was a Director, officer, employee or agent of the Corporation or who, while a\nDirector, officer, employee, or agent of the Corporation, is or was serving as a\nDirector, officer, partner, trustee employee, or agent of another foreign or\ndomestic corporation, partnership, joint venture, trust, employee benefit plan,\nor other enterprise against liability asserted against or incurred by him in\nthat capacity or arising from his status as a Director, officer, employee or\nagent, whether or not the Corporation would have the power to indemnify him\nagainst the same liability under the provisions of these Bylaws.\n\n SECTION 2.15.4. Reports to Shareholders. If the Corporation indemnifies\nor advances expenses to a Director, otherwise than by action of the shareholders\nor by an insurance carrier pursuant to insurance maintained by the Corporation\nshall report the indemnification or advance in writing to the shareholders with\nor before the notice of the next annual shareholders' meeting.\n\n ARTICLE III\n\n COMMITTEES\n\n SECTION 3.1. Committees. The Board of Directors may, by resolution,\ndesignate from among its members one or more committees, each committee to\nconsist of one or more Directors, except that committees appointed to take\naction with respect to indemnification of Directors, Directors' conflicting\ninterest transactions or derivative proceedings shall consist of two or more\nDirectors qualified to serve pursuant to the Code. Any such committee, to the\nextent specified by the Board of Directors, Articles of Incorporation or Bylaws,\nshall have and may exercise all of the authority of the Board of Directors in\nthe management of the business affairs of the Corporation, except that it may\nnot (i) approve or propose to Shareholders action that the Code requires to be\napproved by Shareholders; (ii) fill vacancies on the Board of Directors or any\nof its committees; (iii) amend the Articles of Incorporation; (iv) adopt, amend,\nor repeal Bylaws; or (v) approve a plan of merger not requiring Shareholder\napproval. All action by any committee shall be reported to the Board of\nDirectors at its meeting next succeeding such action, and shall be subject to\nrevision and alteration by the Board of Directors, except that no rights of\nthird person shall be affected by any such revision or alteration. Vacancies in\nany committee shall be filled by the Board of Directors.\n\n SECTION 3.2. Meetings of Committees. Regular meetings of any committee\nmay be held without notice at such time and at such place, within or without the\nState of Georgia, as from time to time shall be determined by such committee.\nThe Chairman of the Board of Directors, the President, the Board of Directors or\nthe committee by vote at a meeting, or by two members of any committee in\nwriting without a meeting, may call a special meeting of any such committee at\nany time by giving each such committee member two (2) days notice of the date,\ntime and place of the meeting. Such notice may be given orally or in writing in\naccordance with the provisions of Section 4.1. Unless otherwise provided in the\nArticles of Incorporation, these Bylaws or by law, neither the business to be\ntransacted at, nor the purpose of, any regular or special meeting of any such\ncommittee need be specified in the notice or any waiver of notice.\n\n SECTION 3.3. Quorum of Committee. At all meetings of any committee a\nmajority of the total number of its members shall constitute a quorum for the\ntransaction of business. Except in cases in which it is by law, by the Articles\nof Incorporation, by these Bylaws, or by resolution of the Board of Directors\notherwise provided, a majority of such quorum shall decide any questions that\nmay come before the meeting. In the absence of a quorum, the members of the\ncommittee present by majority vote may adjourn the meeting from time to time,\nwithout notice other than by verbal announcement at\n\n\n\nthe meeting, until a quorum shall attend.\n\n SECTION 3.4. Compensation of Committee Members. The Board of Directors\nmay fix the compensation of the Directors for their services as members of\ncommittees of the Board of Directors. Compensation shall be fixed from time to\ntime by a resolution of the Board of Directors, and may be on the basis of an\nannual sum or a fixed sum for attendance at each regular or special meeting and\nevery adjournment thereof, or a combination of these methods. Members of\ncommittees shall be reimbursed for all reasonable traveling expenses incurred in\nattending meetings. No provision of these Bylaws shall be construed to preclude\nany Director from serving the Corporation in any other capacity and receiving\ncompensation therefor.\n\n SECTION 3.5. Executive Committee. The Board of Directors, by resolution\nadopted by a majority of the whole Board of Directors, may designate an\nExecutive Committee of three or more Directors, which designation shall include\nthe Chairman of the Board of Directors and the President. Each Director of the\nCorporation who is not designated as a member of the Executive Committee hereby\nis designated as an alternate member of the Executive Committee, who may act in\nthe place and stead of any absent member or members at any meeting of such\nExecutive Committee in the event (i) a quorum of the Executive Committee is not\npresent and (ii) the Chairman of the Board or, in his absence, the President,\nappoints such alternate member to act for that meeting as a member of the\nExecutive Committee; and such alternate member shall serve only at the meeting\nfor which such appointment is made, but shall have at that meeting all the\npowers of a regular member of the Executive Committee. During the intervals\nbetween the meetings of the Board of Directors the Executive Committee shall\nhave and may exercise all of the authority of the Board of Directors in the\nmanagement of the business affairs of the Corporation to the extent authorized\nby the resolution providing for such Executive Committee or by subsequent\nresolution adopted by a majority of the whole Board of Directors, except that it\nmay not (i) approve or propose to Shareholders action that the Code requires to\nbe approved by Shareholders; (ii) fill vacancies on the Board of Directors or\nany of its committees; (iii) amend the Articles of Incorporation; (iv) adopt,\namend, or repeal bylaws; or (v) approve a plan of merger not requiring\nShareholder approval.\n\n SECTION 3.5.1. Honorary Members of Executive Committee. Upon\nappointment by the Board of Directors, a Director who ceases to be an active\nDirector because of age or retirement, and who at the time has been a member of\nthe Executive Committee for twelve or more years, shall become an Honorary\nMember of the Executive Committee for such term or terms as the Board of\nDirectors may determine, but subject to removal from the position of Honorary\nMember of the Executive Committee at any time at the pleasure of the Board.\nHonorary Members of the Executive Committee shall receive the customary fees for\nattending regular meetings, and may participate in an advisory capacity in all\ndiscussions and deliberations of the Executive Committee, but shall have no vote\nat the meetings which they attend in accordance with the foregoing provisions.\nAn Honorary Member shall not be included in any calculation of the number of\nactive Directors authorized and serving under Section 3.5.\n\n SECTION 3.6. Audit Committee. The Board of Directors, by resolution\nadopted by a majority of the whole Board of Directors, may designate an Audit\nCommittee of four (4) or more Directors. The members of the Audit Committee\nshall serve at the pleasure of the Board of Directors or until their successors\nshall be duly designated. Each Director of the Corporation who is not designated\nas a member of the Audit Committee hereby is designated as an alternate member\nof the Audit Committee, who may act in the place and stead of any absent member\nor members at any meeting of such Audit Committee in the event (i) a quorum of\nthe Audit Committee is not present and (ii) the Chairman of the Board or, in his\nabsence, the President, appoints such alternate member to act for that meeting\nas a member of the Audit Committee; and such alternate member shall serve only\nat the meeting for which such appointment is made, but shall have at that\nmeeting all the powers of a regular member of the Audit Committee. The Audit\nCommittee shall consider the choice of the independent public accountants for\nthe Corporation, shall review the planned scope of the audit and the results of\ntheir examinations of the financial statements of the Corporation, their\nopinions thereon and their recommendations with respect to accounting, internal\ncontrols and other matters, shall convey information to and from the Board of\nDirectors and its independent public accountants and auditors, shall be\navailable for discussions of internal auditing problems and procedures, and\nshall make their report to the Board of Directors or the Executive Committee, or\nto both. The Audit Committee shall keep full and fair accounts of its\ntransactions. All action by the Audit Committee shall\n\n\n\nbe reported to the Board of Directors at its meeting next succeeding such\naction, and shall be subject to revision and alteration by the Board of\nDirectors; provided that no rights of third persons shall be affected by any\nsuch revision or alteration. Vacancies in the Audit Committee shall be filled by\nthe Board of Directors.\n\n SECTION 3.7. Nominating and Compensation Committee. The Board of\nDirectors, by resolution adopted by a majority of the whole Board of Directors,\nmay designate a Nominating and Compensation Committee of four (4) or more\nDirectors. The members of the Nominating and Compensation Committee shall serve\nat the pleasure of the Board of Directors or until their successors shall be\nduly designated. Each Director of the Corporation who is not designated as a\nmember of the Nominating and Compensation Committee hereby is designated as an\nalternate member of the Nominating and Compensation Committee, who may act in\nthe place and stead of any absent member or members at any meeting of such\nNominating and Compensation Committee in the event (i) a quorum of the\nNominating and Compensation Committee is not present and (ii) the Chairman of\nthe Board or, in his absence, the President, appoints such alternate member to\nact for that meeting as a member of the Nominating and Compensation Committee;\nand such alternate member shall serve only at the meeting for which such\nappointment is made, but shall have at that meeting all the powers of a regular\nmember of the Nominating and Compensation Committee. The Nominating and\nCompensation Committee shall review and develop, with the Chief Executive\nOfficer, management succession and executive development plans; recommend to the\nBoard for election the officers of the Corporation and Atlanta Gas Light\nCompany, and the presidents of each of the other principal subsidiaries of the\nCorporation; and review the performance of and recommend to the Board of\nDirectors the appropriate compensation level for such officers, including base\nsalaries, stock based compensation, other incentive compensation, and\nperquisites. The Nominating and Compensation Committee also shall review and\nrecommend to the Board of Directors any changes in the various benefit programs\nof the Corporation; and shall review the level of fees paid and the manner in\nwhich fees are paid to members of the Corporation's Board of Directors and shall\nmake recommendations for adjustments as appropriate. The Nominating and\nCompensation Committee also shall identify and recommend to the Board of\nDirectors the nominees for the Board. The Nominating and Compensation Committee\nshall keep full and fair accounts of its transactions. All action by the\nNominating and Compensation Committee shall be reported to the Board of\nDirectors at its meeting next succeeding such action, and shall be subject to\nrevision and alteration by the Board of Directors; provided that no rights of\nthird persons shall be affected by any such revision or alteration. Vacancies in\nthe Nominating and Compensation Committee shall be filled by the Board of\nDirectors.\n\n SECTION 3.8. Corporate Responsibility Committee. The Board of\nDirectors, by resolution adopted by a majority of the whole Board of Directors,\nmay designate a Corporate Responsibility Committee of four (4) or more\nDirectors. The members of the Corporate Responsibility Committee shall serve at\nthe pleasure of the Board of Directors or until their successors shall be duly\ndesignated. Each Director of the Corporation who is not designated as a member\nof the Corporate Responsibility Committee hereby is designated as an alternate\nmember of the Corporate Responsibility Committee, who may act in the place and\nstead of any absent member or members at any meeting of such Corporate\nResponsibility Committee in the event (i) a quorum of the Corporate\nResponsibility Committee is not present and (ii) the Chairman of the Board or,\nin his absence, the President, appoints such alternate member to act for that\nmeeting as a member of the Corporate Responsibility Committee; and such\nalternate member shall serve only at the meeting for which such appointment is\nmade, but shall have at that meeting all the powers of a regular member of the\nCorporate Responsibility Committee. The Corporate Responsibility Committee shall\nmake periodic reviews of pension plans (including the investment of funds); it\nshall identify and monitor broad governmental, social and environmental trends\nthat could affect the Corporation's performance and the related interests of its\nemployees, shareholders, customers and the general public; it shall review and\nmonitor matters relating to employee and community health and safety; and it\nshall review and monitor corporate policy with respect to charitable giving. The\nresults of said reviews shall be reported to the Board of Directors. The\nCorporate Responsibility Committee shall keep full and fair accounts of its\ntransactions. All action by the Corporate Responsibility Committee shall be\nreported to the Board of Directors at its meeting next succeeding such action,\nand shall be subject to revision and alteration by the Board of Directors;\nprovided that no rights of third persons shall be affected by any such revision\nor alteration. Vacancies in the Corporate Responsibility Committee shall be\nfilled by the Board of Directors.\n\n\n\n SECTION 3.9. Strategy and Finance Committee. The Board of Directors, by\nresolution adopted by a majority of the whole Board of Directors, may designate\na Strategy and Finance Committee of four (4) or more Directors. The members of\nthe Strategy and Finance Committee shall serve at the pleasure of the Board of\nDirectors or until their successors shall be duly designated. Each Director of\nthe Corporation who is not designated as a member of the Strategy and Finance\nCommittee hereby is designated as an alternate member of the Strategy and\nFinance Committee, who may act in the place and stead of any absent member or\nmembers at any meeting of such Strategy and Finance Committee in the event (i) a\nquorum of the Strategy and Finance Committee is not present and (ii) the\nChairman of the Board or, in his absence, the President, appoints such alternate\nmember to act for that meeting as a member of the Strategy and Finance\nCommittee; and such alternate member shall serve only at the meeting for which\nsuch appointment is made, but shall have at that meeting all the powers of a\nregular member of the Strategy and Finance Committee. The Strategy and Finance\nCommittee shall consider and make recommendations to the Board relating to short\nand long term business objectives and strategies; strategic business\ncombinations; entry into new businesses; the Corporation's operating plans and\nbudgets for each fiscal year; the Corporation's capitalization; financing plans,\nincluding short and long term needs for capital; and dividend policy. The\nresults of said reviews shall be reported to the Board of Directors. The\nStrategy and Finance Committee shall keep full and fair accounts of its\ntransactions. All action by the Strategy and Finance Committee shall be reported\nto the Board of Directors at its meeting next succeeding such action, and shall\nbe subject to revision and alteration by the Board of Directors; provided that\nno rights of third persons shall be affected by any such revision or alteration.\nVacancies in the Strategy and Finance Committee shall be filled by the Board of\nDirectors.\n\n\nARTICLE IV\n\n NOTICES\n\n SECTION 4.1. Notice. Whenever, under the provisions of the Articles of\nIncorporation or these Bylaws or by law, notice is required to be given to any\nDirector or Shareholder, such notice may be given in writing, by mail; by\ntelegram, telex or facsimile transmission; by other form of wire or wireless\ncommunication; or by private carrier. Unless otherwise required or permitted by\nlaw, such notice shall be deemed to be effective at the earliest of when\nreceived, or when delivered, properly addressed, to the addressee's last known\nprincipal place of business or residence; or five days after the same shall be\ndeposited in the United States mail if mailed with first-class postage prepaid\nand correctly addressed; or on the date shown on the return receipt, if sent by\nregistered or certified mail, and the receipt is signed by or on behalf of the\naddressee. Notice to any Director or Shareholder may also be oral if oral notice\nis reasonable under the circumstances. Oral notice is effective when\ncommunicated if communicated in a comprehensible manner. If these forms of\npersonal notice are impractical, notice may be communicated by a newspaper of\ngeneral circulation in the area where published, or by radio, television, or\nother form of public broadcast communication.\n\n SECTION 4.2. Waiver of Notice. Whenever any notice is required to be\ngiven under provisions of the Articles of Incorporation or of these Bylaws or by\nlaw, a waiver thereof, signed by the person entitled to notice and delivered to\nthe Corporation for inclusion in the minutes or filing with the corporate\nrecords, whether before or after the time stated therein, shall be deemed\nequivalent to notice. Attendance of a person at a meeting shall constitute a\nwaiver of notice of such meeting and of all objections to the place or time of\nthe meeting or the manner in which it has been called or convened, except when\nthe person attends a meeting for the express purpose of stating, at the\nbeginning of the meeting, any such objection and, in the case of a Director,\ndoes not thereafter vote for or assent to action taken at the meeting. Neither\nthe business to be transacted at nor the purpose of any regular or special\nmeeting of the Shareholders, Directors or a committee of Directors need be\nspecified in any written waiver of notice; provided, however, that any waiver of\nnotice of a meeting of Shareholders required with respect to a plan of merger or\na plan of consolidation shall be effective only upon compliance with Section\n14-2-706(c) of the Code or successor provisions.\n\n\n ARTICLE V\n\n\n OFFICERS\n\n SECTION 5.1. Appointment. The Board of Directors at its first meeting\nfollowing the Annual Meeting of Shareholders shall elect such officers as it\nshall deem necessary, including, for the Corporation and Atlanta Gas Light\nCompany, a Chairman of the Board, a President, a Secretary, a Treasurer, one or\nmore Vice Presidents (one or more of whom may be designated Executive Vice\nPresident or Senior Vice President), Assistant Vice Presidents, Assistant\nSecretaries and Assistant Treasurers. The Board of Directors at its first\nmeeting following the Annual Meeting of Shareholders also shall elect, for each\nof the Corporation's major subsidiaries, a President. Each of the officers\nelected by the Board shall exercise such powers and perform such duties as shall\nbe determined from time to time by the Board of Directors. Each such officer\nshall hold office until the corresponding meeting of the Board of Directors in\nthe next year and until his successor shall have been duly elected and qualified\nor until he shall have resigned or shall have been removed in the manner\nprovided in Section 5.2 of this Article V. Any number of offices may be held by\nthe same person unless the Articles of Incorporation or these Bylaws otherwise\nprovide. The appointment of an officer does not itself create contract rights.\n\n SECTION 5.2. Resignation and Removal of Officers. An officer may resign\nat any time by delivering notice to the Corporation and such resignation is\neffective when the notice is delivered unless the notice specifies a later\neffective date. The Board of Directors (except in the case of an officer elected\nby the Board of Directors) or the Executive Committee or an officer upon whom\nsuch power of removal may have been conferred may remove any officer at any time\nwith or without cause.\n\n SECTION 5.3. Vacancies. Any vacancy in office resulting from any\ncause may be filled by the Board of Directors at any regular or special meeting.\n\n SECTION 5.4. Powers and Duties. Each officer has the authority and\nshall perform the duties set forth below or, to the extent consistent with these\nBylaws, the duties prescribed by the Board of Directors or by direction of an\nofficer authorized by the Board of Directors to prescribe the duties of other\nofficers.\n\n SECTION 5.4.1. Chairman of the Board of Directors. The Chairman of the\nBoard of Directors may be chosen from among the Directors of the Corporation and\nneed not be an Executive Officer or employee of the Corporation. The Chairman\nshall preside at all meetings of the Board of Directors. He shall have the usual\npowers and duties incident to the office of the chairman of the board of\ndirectors of a corporation and such other powers and duties as from time to time\nmay be assigned to him by the Board of Directors.\n\n SECTION 5.4.2. Chief Executive Officer. The Board of Directors may\ndesignate as the Chief Executive Officer of the Corporation the President or any\nother officer of the Corporation including the Chairman if the Chairman is a\nfull-time officer and employee of the Corporation. The Chief Executive Officer\nof the Corporation shall have general and active management responsibility for\nthe business of the Corporation and shall see that all orders and resolutions of\nthe Board of Directors are carried into effect. The Chief Executive Officer\nshall preside at all meetings of the shareholders. The Chief Executive Officer\nshall be the Chairman of the Executive Committee and preside at all meetings of\nthat committee. Except where by law the signature of the President is required,\nthe Chief Executive Officer shall have the same powers as the President to sign\nall authorized certificates, contracts, bonds, deeds, mortgages and other\ninstruments. He shall have the usual powers and duties incident to the position\nof chief executive officer of a corporation and such other powers and duties as\nfrom time to time may be assigned by the Board of Directors. The Board of\nDirectors may, or if it does not, the Chief Executive Officer may, from time to\ntime designate an Executive Officer of the Corporation to assume and perform the\nduties and powers of the Chief Executive Officer during the absence or\ndisability of the Chief Executive Officer.\n\n SECTION 5.4.3. President. The President shall be responsible for the\ngeneral supervision of the affairs of the Corporation and general and active\nmanagement of the financial affairs of the Corporation. He shall have the power\nto make and execute certificates, contracts, bonds, deeds, mortgages and other\ninstruments on behalf of the Corporation,\n\n\nexcept in cases in which the signing thereof shall have been expressly delegated\nto some other officer or agent of the Corporation and to delegate such power to\nothers. He also shall have such powers and perform such duties as are\nspecifically imposed on him by law and as may be assigned to him by the Board of\nDirectors. In the event there is no Chairman of the Board, the President shall\nalso have all the powers and authority that the Chairman is given in these\nBylaws or otherwise. During the absence or disability of the Chairman of the\nBoard, the President shall preside at all meetings of the Shareholders, the\nBoard of Directors and the Executive Committee. He shall have the usual powers\nand duties incident to the office of a president of a corporation and such other\npowers and duties as from time to time may be assigned to him by the Board of\nDirectors. If the Board of Directors designates the President as the Chief\nExecutive Officer of the Corporation, the President shall also have the powers\nand duties of the Chief Executive Officer.\n\n SECTION 5.4.4. Vice Presidents. The Executive Vice Presidents shall be\nsenior in authority among the Vice Presidents. During the absence or disability\nof the President, the Board of Directors shall designate which of the Executive\nVice Presidents shall exercise all the powers and discharge all of the duties of\nthe President, provided, however, that if he is not a Director he shall not\npreside at any meetings of the Board of Directors or the Executive Committee.\nThe Vice Presidents, shall perform such duties as vice presidents customarily\nperform and shall perform such other duties and shall exercise such other powers\nas the President or the Board of Directors may from time to time designate.\n\n SECTION 5.4.5. Secretary. The Secretary shall attend all meetings of\nthe Shareholders and all meetings of the Board of Directors and shall record all\nvotes and minutes of all proceedings in books to be kept for that purpose, and\nshall perform like duties for the standing committees when required. He shall\nhave custody of the corporate seal of the Corporation, shall have the authority\nto affix the same to any instrument the execution of which on behalf of the\nCorporation under its seal is duly authorized and shall attest to the same by\nhis signature whenever required. The Board of Directors may give general\nauthority to any other officer to affix the seal of the Corporation and to\nattest to the same by his signature. The Secretary shall give, or cause to be\ngiven, any notice required to be given of any meetings of the Shareholders, the\nBoard of Directors and of the standing committees when required. The Secretary\nshall cause to be kept such books and records as the Board of Directors, the\nChairman of the Board or the President may require and shall cause to be\nprepared, recorded, transferred, issued, sealed and canceled certificates of\nstock as required by the transactions of the Corporation and its Shareholders.\nThe Secretary shall attend to such correspondence and shall perform such other\nduties as may be incident to the office of a Secretary of a Corporation or as\nmay be assigned to him by the Board of Directors, the Chairman of the Board or\nthe President.\n\n SECTION 5.4.6. Treasurer. The Treasurer shall be charged with the\nmanagement of financial affairs of the Corporation and shall have charge of and\nbe responsible for all funds, securities, receipts and disbursements of the\nCorporation, and shall deposit or cause to be deposited, in the name of the\nCorporation, all moneys or other valuable effects in such banks, trust\ncompanies, or other depositaries as shall from time to time be selected by the\nBoard of Directors. He shall render to the President and to the Board of\nDirectors, whenever requested, an account of the financial condition of the\nCorporation. In general, he shall perform such duties as treasurers usually\nperform and shall perform such other duties and shall exercise such other powers\nas the Board of Directors, the Chairman of the Board or the President may from\ntime to time designate and shall render to the Chairman of the Board, the\nPresident and to the Board of Directors, whenever requested, an account of the\nfinancial condition of the Corporation.\n\n SECTION 5.4.7. Controller. The Controller shall have charge of and be\nresponsible for preparation of financial and management reports, budgeting, rate\nmaterial, property accounting, taxes and such other duties as are commonly\nincident to the office of Controller. The Controller shall have such power and\nduties as from time to time may be properly delegated by the President and such\nother powers and duties as may from time to time be assigned by the Board of\nDirectors.\n\n SECTION 5.4.8. Assistant Vice President, Assistant Secretary and\nAssistant Treasurer. One or more Assistant Vice Presidents, Assistant\nSecretaries and Assistant Treasurers, in the absence or disability of any Vice\nPresident, the Secretary or the Treasurer, respectively, shall perform the\nduties and exercise the powers of those offices, and, in general, they shall\nperform such other duties as shall be assigned to them by the Board of Directors\nor by the \n\n\nperson appointing them. Specifically the Assistant Secretaries may affix the\ncorporate seal to all necessary documents and attest the signature of any\nofficer of the Corporation.\n\n SECTION 5.4.9. Subordinate Officers. The Board of Directors may elect\nsuch subordinate officers as it may deem desirable. Each such officer shall hold\noffice for such period, have such authority and perform such duties as the Board\nof Directors may prescribe. The Board of Directors may from time to time\nauthorize any officer to appoint and remove subordinate officers and prescribe\nthe powers and duties thereof. The Board of Directors may from time to time\nauthorize the Chairman of the Board of Directors or the President to appoint any\nemployee or officer of the Corporation (except the President, the Secretary or\nan Assistant Secretary elected by the Board of Directors) as an Assistant\nSecretary of the Corporation, to prescribe the powers, term, duties and salary,\nif any, of such Assistant Secretary, and to remove any Assistant Secretary thus\nappointed.\n\n SECTION 5.5. Officers Holding Two or More Offices. Any two of the above\nmentioned offices, except those of President and Secretary or Assistant\nSecretary, may be held by the same person, but no officer shall execute,\nacknowledge or verify any instrument in more than one capacity if such\ninstrument be required by statute, by the Articles of Incorporation or by these\nBylaws to be executed, acknowledge or verified by any two or more officers.\n\n SECTION 5.6. Compensation. The Board of Directors shall have power to\nfix the compensation of all officers of the Corporation. It may authorize any\nofficer, upon whom the power of appointing subordinate officers may have been\nconferred, to fix the compensation of such subordinate officers.\n\n ARTICLE VI\n\n CAPITAL STOCK\n\n SECTION 6.1. Share Certificates. Unless the Articles of Incorporation\nor these Bylaws provide otherwise, the Board of Directors may authorize the\nissue of some or all of the shares of any or all of its classes or series with\nor without certificates. Unless the Code provides otherwise, there shall be no\ndifferences in the rights and obligations of Shareholders based on whether or\nnot their shares are represented by certificates.\n\n In the event that the Board of Directors authorizes shares with\ncertificates, each certificate representing shares of stock of the Corporation\nshall be in such form as shall be approved by the Board of Directors and shall\nset forth upon the face thereof the name of the Corporation and that it is\norganized under the laws of the State of Georgia, the name of the person to whom\nthe certificate is issued, and the number and class of shares and the\ndesignation of the series, if any, the certificate represents. The Board of\nDirectors may designate any one or more officers to sign each share certificate,\neither manually or by facsimile. In the absence of such designation, each share\ncertificate must be signed by the President or a Vice President and the\nSecretary or an Assistant Secretary. If the person who signed a share\ncertificate, either manually or in facsimile, no longer holds office when the\ncertificate is issued, the certificate is nevertheless valid.\n\n SECTION 6.2. Record of Shareholders. The Corporation or an agent\ndesignated by the Board of Directors shall maintain a record of the\nCorporation's Shareholders in a form that permits preparation of a list of names\nand addresses of all Shareholders, in alphabetical order by class or shares\nshowing the number and class of shares held by each Shareholder. The Corporation\nshall be entitled to treat the person in whose name shares are registered in the\nrecords of the Corporation as the owner thereof for all purposes unless it\naccepts for its records a nominee certificate naming a beneficial owner of\nshares other than the record owner, and shall not otherwise be bound to\nrecognize any equitable or other claim to or interest in such shares except as\nmay be provided by law.\n\n SECTION 6.3. Lost Certificates. In the event that a share certificate\nis lost, stolen, mutilated or destroyed, the Board of Directors may direct that\na new certificate be issued in place of such certificate. When authorizing the\nissue of a new certificate, the Board of Directors may require such proof of\nloss as it may deem appropriate as a condition precedent to the issuance\nthereof, including a requirement that the owner of such lost, stolen or\ndestroyed certificate, or his legal \n\n\nrepresentative, advertise the same in such manner as the Board shall require\nand/or that he give the Corporation a bond in such sum as the Board may direct\nas indemnity against any claim that may be made against the Corporation with\nrespect to the certificate alleged to have been lost, stolen or destroyed.\n\n SECTION 6.4. Transfers of Shares. Transfers of shares of the capital\nstock of the Corporation shall be made only upon the books of the Corporation by\nthe registered holder thereof, or by his duly authorized attorney, or with a\ntransfer clerk or transfer agent appointed as provided in Section 6.5 hereof,\nand, in the case of a share represented by certificate, on surrender of the\ncertificate or certificates for such shares properly endorsed and the payment of\nall taxes thereon. The Corporation shall be entitled to recognize the exclusive\nright of a person registered on its books as the owner of shares to receive\ndividends, to vote as such owner, and for all other purposes, and shall not be\nbound to recognize any equitable or other claim to or interest in such share or\nshares on the part of any other person, whether or not it shall have express or\nother notice thereof, except as otherwise provided by law.\n\n SECTION 6.5. Transfer Agents and Registrars. The Board of Directors may\nestablish such other regulations as it deems appropriate governing the issue,\ntransfer, conversion and registration of share certificates, including\nappointment of transfer agents, clerks or registrars.\n\n\n ARTICLE VII\n\n GENERAL PROVISIONS\n\n SECTION 7.1. Indemnification of Officers, Employees and Agents. The\nCorporation shall indemnify any officer who was or is made a party to or is\notherwise involved in any threatened, pending or completed action, suit or\nproceeding, whether civil, derivative, criminal, administrative or investigative\n(hereinafter, a \"proceeding\") to the same extent as it is obligated to indemnify\nany Director of the Corporation, but without being subject to the same\nprocedural conditions imposed for the indemnification of Directors. The\nCorporation may indemnify and advance expenses to an employee or agent who is\nnot a Director or officer to the extent permitted by the Articles of\nIncorporation, the Bylaws or by law.\n\n SECTION 7.2. Seal. The Corporation may have a seal, which shall be in\nsuch form as the Board of Directors may from time to time determine. In the\nevent that the use of the seal is at any time inconvenient, the signature of an\nofficer of the Corporation, followed by the word \"Seal\" enclosed in parentheses,\nshall be deemed the seal of the Corporation.\n\n SECTION 7.3. Voting Shares in Other Corporations. In the absence of\nother arrangements by the Board of Directors, shares of stock issued by another\ncorporation and owned or controlled by the Corporation, whether in a fiduciary\ncapacity or otherwise, may be voted by the President or any Vice President, in\nthe absence of action by the President, in the same order as they preside in the\nabsence of the President, or, in the absence of action by the President or any\nVice President, by any other officer of the Corporation, and such person may\nexecute the aforementioned powers by executing proxies and written waivers and\nconsents on behalf of the Corporation.\n\n SECTION 7.4. Amendment of Bylaws. These Bylaws may be amended or\nrepealed and new bylaws may be adopted by the Board of Directors at any regular\nor special meeting of the Board of Directors unless the Articles of\nIncorporation or the Code reserve this power exclusively to the Shareholders in\nwhole or in part or the Shareholders, in amending or repealing the particular\nbylaw, provide expressly that the Board of Directors may not amend or repeal\nthat bylaw. Unless the Shareholders have fixed a greater quorum or voting\nrequirement, these Bylaws also may be altered, amended or repealed and new\nbylaws may be adopted, unless such action has been recommended by the Board of\nDirectors, by an affirmative vote of the holders of at least two-thirds of all\noutstanding shares entitled to vote.\n\n\n SECTION 7.5. Execution of Bonds, Debentures, Evidences of Indebtedness,\nChecks, drafts and other Obligations and Orders for Payment. The signatures of\nany officer or officers of the Corporation executing a corporate bond, debenture\nor other debt security of the Corporation or attesting the corporate seal\nthereon, or upon any interest coupons annexed to any such corporate bond,\ndebenture or other debt security of the Corporation, and the corporate seal\naffixed to any such bond, debenture or other debt security of the Corporation,\nmay be facsimiles, engraved or printed, provided that such bond, debenture or\nother debt security of the Corporation is authenticated or countersigned with\nthe manual signature of an authorized officer of the corporate trustee\ndesignated by the indenture or other agreement under which said security is\nissued by a transfer agent, or registered by a registrar, other than the\nCorporation itself, or an employee of the Corporation. If the person who signed\nsuch, bond, debenture or other debt security of the Corporation, either manually\nor in facsimile, no longer holds office when the certificate is issued, the\ncertificate is nevertheless valid.\n\n SECTION 7.6. Business Combinations. All of the requirements of Sections\n14-2-1131 to 1133, inclusive, of the Code, as now in effect and as hereafter\nfrom time to time amended, shall be applicable to this Corporation and to any\nbusiness combination approved or recommended by the Board of Directors.\n\n ARTICLE VIII\n\n EMERGENCY BYLAWS\n\n SECTION 8.1. Emergency Bylaws. This Article shall be operative during\nany emergency resulting from some catastrophic event that prevents a quorum of\nthe Board of Directors or any committee thereof from being readily assembled (an\n\"emergency\"), notwithstanding any different or conflicting provisions set forth\nelsewhere in these Bylaws or in the Articles of Incorporation. To the extent not\ninconsistent with the provisions of this Article, the bylaws set forth elsewhere\nherein and the provisions of the Articles of Incorporation shall remain in\neffect during such emergency, and upon termination of such emergency, the\nprovisions of this Article shall cease to be operative.\n\n SECTION 8.2. Meetings. During any emergency, a meeting of the Board of\nDirectors or any committee thereof may be called by any Director, or by the\nPresident, any Vice President, the Secretary or the Treasurer (the \"Designated\nOfficers\") of the Corporation. Notice of the time and place of the meeting shall\nbe given by any available means of communication by the person calling the\nmeeting to such of the Directors and/or Designated Officers as may be feasible\nto reach. Such notice shall be given at such time in advance of the meeting as,\nin the judgement of the person calling the meeting, circumstances permit.\n\n SECTION 8.3 Quorum. At any meeting of the Board of Directors or any\ncommittee thereof called in accordance with this Article, the presence or\nparticipation of two Directors, one Director and a Designated Officer, or two\nDesignated Officers shall constitute a quorum for the transaction of business.\n\n SECTION 8.4. Bylaws. At any meeting called in accordance with this\nArticle, the Board of Directors or committee thereof, as the case may be, may\nmodify, amend or add to the provisions of this Article so as to make any\nprovision that may be practical or necessary for the circumstance of the\nemergency.\n\n SECTION 8.5. Liability. Corporate action taken in good faith in\naccordance with the emergency bylaws may not be used to impose liability on a\nDirector, officer, employee or agent of the Corporation.\n\n SECTION 8.6. Repeal or Change. The provisions of this Article shall be\nsubject to repeal or change by further action of the Board of Directors or by\naction of Shareholders, but no such repeal or change shall modify the provisions\nof the immediately preceding section of this Article with regard to action taken\nprior to the time of such repeal or change.\n\n\n \n \n\nEX-10\n3\nEXHIBIT 10.1\n\n\n\n\n SEVENTH AMENDMENT TO THE\n AGL RESOURCES INC.\n LONG-TERM STOCK INCENTIVE PLAN OF 1990\n\n\n This Seventh Amendment to the AGL Resources Inc. Long-Term Stock\nIncentive Plan of 1990 (the \"Plan\") is made and entered into this 6th day of\nNovember 1998, by AGL Resources Inc. (the \"Company\").\n\n W I T N E S S E T H:\n\n WHEREAS, the Company sponsors the Plan to provide incentive and to\nencourage proprietary interest in the Company by its key employees, officers and\ninside directors; and\n\n WHEREAS, the Company believes that it is in the best interest of the\nCompany and its employees to amend the Plan to increase the number of shares\nwhich may be subject to the Plan; and\n\n WHEREAS, the Company desires to increase the number of shares available\nunder the Plan from 3,200,000 shares to 3,520,000 shares; and\n\n WHEREAS, the Company desires that the maximum number of shares\navailable for issuance with respect to incentive stock options under the Plan\nshall remain at 3,200,000; and\n\n WHEREAS, Section 10 of the Plan provides that the Company may amend the\nPlan at any time; and\n\n WHEREAS, the Board of Directors of the Company has adopted a resolution\nauthorizing the amendment of the Plan;\n\n NOW, THEREFORE BE IT RESOLVED, that, effective as of November 6, 1998,\nthe Plan hereby is amended as follows:\n\n 1.\n\n Section 3 of the Plan is hereby amended by replacing the second\nsentence thereof with the following sentence:\n\n \"Subject to readjustment in accordance with the provisions of\n Section 8, the total number of shares of Common Stock for which Stock\n Rights may be granted to persons participating in the Plan shall not\n exceed in the aggregate 3,520,000 shares of Common Stock, less any\n shares used as payment for SARs pursuant to Section 6(a); provided,\n however, that no person participating in the Plan shall be granted\n options and SARs with respect to more than 250,000 shares of Common\n Stock (as adjusted) in any fiscal year; provided, further, that ISOs\n may not be granted with respect to more than 3,200,000 shares of Common\n Stock (as adjusted).\"\n\n\n\n\n\n\n 2.\n\n Except as specifically set forth herein, the terms of the Plan shall\nremain in full force and effect.\n\n IN WITNESS WHEREOF, the Company has caused this Seventh Amendment to\nthe Plan to be executed by its duly authorized officer as of the date first\nabove written.\n\n\n AGL RESOURCES INC.\n\n\n By: /s/ Melanie M. Plat\n Title: Vice President and Corporate Secretary\n\n \n \n\nEX-10\n4\nEXHIBIT 10.2\n\n\n\nSouthern Natural Gas Company\nPost Office Box 2563\nBirmingham AL 35202 2563\n205 325 7410\n\nSOUTHERN NATURAL GAS\n\n December 3, 1998\n\nMr. Mike Wingo\nAtlanta Gas Light Company\nPost Office Box 4569\nAtlanta, Georgia 30302-4569\n\nDear Mr. Wingo:\n\n Atlanta Gas Light Company (\"Atlanta\") and Southern Natural Gas Company\n(\"Southern\") are parties to a firm transportation agreement dated November 1,\n1994 (#904480) for 5,173 Mcf/day (\"FT Agreement\"), a firm transportation\nno-notice agreement dated November 1, 1994 (#904481) for 6,764 Mcf/day (\"FT-NN\nAgreement\"), and a contract storage service agreement dated November 1, 1994\n(#S20140) for 334,997 Mcf (\"CSS Agreement\"), as amended by Amendatory Agreement\ndated March 1, 1995 (collectively, the \"Agreements\"). Pursuant to Section 4.1 of\neach agreement, the agreement is effective through February 28, 1998, and may be\nextended for successive terms of one year each year thereafter if the parties\nmutually agree in writing to each yearly extension at least 60 days prior to the\nend of the primary term or any subsequent yearly extension. Southern herewith\nstates its election to extend the Agreements for an additional term of one year,\ncommencing on March 1, 1999, and terminating on February 29, 2000. If Atlanta is\nin agreement, please so indicate by signing both originals and returning one\noriginal to Southern.\n\n Very truly yours,\n\n /s/ Larry E. Powell\n\n\n\n\nAccepted and agreed to this 4th day of Accepted and agreed to this 3rd day of\nDecember, 1998. December, 1998.\n\n\nATLANTA GAS LIGHT COMPANY SOUTHERN NATURAL GAS COMPANY\n\nBy: /s/ Mike P. Wingo By: /s/ Larry E. Powell \n ---------------------------------- ----------------------------------\n\nIts:: Vice President Its: Sr. Vice President\n\n\n\n\n\nA SONAT COMPANY\n \n \n\nEX-18\n5\nEXHIBIT 18\n\n\n\n\nFebruary 12, 1999\n\nAGL Resources Inc.\n303 Peachtree Street, N.E.\nAtlanta, Georgia 30303\n\nDear Sirs/Madams:\n\nAt your request, we have read the description included in your Quarterly Report\non Form 10-Q to the Securities and Exchange Commission for the quarter ended\nDecember 31, 1998, of the facts relating to the change in accounting for natural\ngas inventories from first-in, first-out to weighted average cost. We believe,\non the basis of the facts so set forth and other information furnished to us by\nappropriate officials of AGL Resources Inc. (the Company), that the accounting\nchange described in your Form 10-Q is an alternative accounting principle that\nis preferable under the circumstances.\n\nWe have not audited any consolidated financial statements of the Company and its\nsubsidiaries as of any date or for any period subsequent to September 30, 1998.\nTherefore, we are unable to express, and we do not express, an opinion on the\nfacts set forth in the above-mentioned Form 10-Q, on the related information\nfurnished to us by officials of the Company, or on the financial position,\nresults of operations, or cash flows of the Company as of any date or for any\nperiod subsequent to September 30, 1998.\n\nYours truly,\n\n/s/ Deloitte & Touche LLP\n\nDeloitte & Touche LLP\nAtlanta, Georgia\n\n \n \n\nEX-27\n6\nEXHIBIT 27\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":188,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"GIS"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/40704/0000040704-99-000004.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n O9sp+5VrjFZe5qFOk4bKdIGrqOo/XRE26HNnyAFiqa2GErwUJZLw5okjJRCdgKQb\n 5ujY9bFGjeeL/qISo3Uw8g==\n\n0000040704-99-000004.txt : 19990111\n0000040704-99-000004.hdr.sgml : 19990111\nACCESSION NUMBER:\t\t0000040704-99-000004\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t5\nCONFORMED PERIOD OF REPORT:\t19981129\nFILED AS OF DATE:\t\t19990108\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tGENERAL MILLS INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000040704\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tGRAIN MILL PRODUCTS [2040]\n\t\tIRS NUMBER:\t\t\t\t410274440\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0525\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-01185\n\t\tFILM NUMBER:\t\t99503362\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\tNUMBER ONE GENERAL MILLS BLVD\n\t\tCITY:\t\t\tMINNEAPOLIS\n\t\tSTATE:\t\t\tMN\n\t\tZIP:\t\t\t55426\n\t\tBUSINESS PHONE:\t\t6125402311\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\tP O BOX 1113\n\t\tCITY:\t\t\tMINNEAPOLIS\n\t\tSTATE:\t\t\tMN\n\t\tZIP:\t\t\t55440\n \n\n10-Q\n1\nFORM 10-Q FOR QUARTER ENDED NOVEMBER 29, 1998\n\n\n\n SECURITIES AND EXCHANGE COMMISSION\n Washington, D.C. 20549\n FORM 10-Q\n\n\n(Mark One)\n/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES\n EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 29, 1998\n\n/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES\n EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____\n\n\nCommission file number: 1-1185\n\n\n GENERAL MILLS, INC.\n (Exact name of registrant as specified in its charter)\n\n\n\n Delaware 41-0274440\n(State or other jurisdiction of (I.R.S. Employer\nincorporation or organization) Identification No.)\n\n\n\nNumber One General Mills Boulevard\n Minneapolis, MN 55426\n (Mail: P.O. Box 1113) (Mail: 55440)\n(Address of principal executive offices) (Zip Code)\n\n (612) 540-2311\n (Registrant's telephone number, including area code)\n\n\n\nIndicate by check mark whether the registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months (or for such shorter period that the registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days. Yes X No ___\n\n\nAs of December 18, 1998, General Mills had 153,352,325 shares of its $.10 par\nvalue common stock outstanding (excluding 50,801,007 shares held in treasury).\n\n\n\n Part I. FINANCIAL INFORMATION\n\n\nItem 1. Financial Statements\n\n\n
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\n\n\n\n\n\n GENERAL MILLS, INC.\n NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS\n (Unaudited)\n\n(1) Background\n\nThese financial statements do not include certain information and footnotes\nrequired by generally accepted accounting principles for complete financial\nstatements. However, in the opinion of management, all adjustments considered\nnecessary for a fair presentation have been included and are of a normal\nrecurring nature. Operating results for the twenty-six weeks ended November 29,\n1998 are not necessarily indicative of the results that may be expected for the\nfiscal year ending May 30, 1999.\n\nThese statements should be read in conjunction with the financial statements and\nfootnotes included in our annual report for the year ended May 31, 1998. The\naccounting policies used in preparing these financial statements are the same as\nthose described in our annual report.\n\nCertain amounts in the prior year financial statements have been reclassified to\nconform to the current year presentation.\n\n(2) Unusual Items\n\nIn the second quarter of fiscal 1999, we recorded restructuring charges of $51.6\nmillion pretax, $32.3 million after tax ($.21 per diluted share) primarily\nrelated to streamlining manufacturing and distribution activities that are\nexpected to deliver significant cost savings and contribute to future earnings\ngrowth. The restructuring actions primarily reflect further streamlining of our\nsupply chain as part of the broad consolidation of these activities announced in\nMay 1998. Actions include consolidating manufacturing of certain products into\nfewer locations, and consolidating warehouse, distribution and sales activities\nacross the company's packaged food, foodservice and milling operations. In\naddition, the second-quarter charge includes our share of restructuring by Snack\nVentures Europe, our joint venture with PepsiCo, to improve its manufacturing\ncost structure. Slightly more than half of the total charge reflects write-down\nof assets; the remaining cash portion is primarily related to severance and\nasset redeployment expenses. We expect that these restructuring activities will\nbe substantially completed by the end of fiscal 1999. Annual cost savings\nbeginning in fiscal 2000 are estimated at $16.8 million after tax ($.11 per\ndiluted share).\n\nIn the first quarter of fiscal 1998, we recorded several unusual items resulting\nin a net after-tax charge of $.1 million. We received an insurance settlement\nfrom one of our carriers related to costs incurred in fiscal 1995 and 1996\n(charged against fiscal 1994) from the improper use of a pesticide by an\nindependent contractor in treating some of the company's oat supplies. Our Snack\nVentures Europe joint venture recorded restructuring charges for productivity\ninitiatives primarily related to production consolidation. We also recorded\ncharges associated with restructuring our sales regions and our trade and\npromotion organization.\n\nIn the second quarter of fiscal 1998, we recorded restructuring charges of\n$166.8 million pretax, $100.1 million after tax ($.62 per diluted share)\nprimarily related to improving the cost structure of our North American cereal\noperations. We shut down one cereal system at our Lodi, California facility and\nclosed our two smallest plants, located in South Chicago, Illinois and\nEtobicoke, Ontario. The charges included approximately $137 million in non-cash\ncharges primarily related to asset write-offs, and approximately $30 million of\ncash charges, primarily related to costs to dispose of assets and pay severance.\nWe expect that these restructuring activities will be substantially completed by\nthe end of fiscal 1999.\n\n(3) Statements of Cash Flows\n\nDuring the first six months, we made interest payments of $67.1 million (net of\namount capitalized) and paid $167.9 million in income taxes.\n\n(4) Comprehensive Income\n\nWe adopted Statement of Financial Accounting Standards (SFAS) No. 130,\n\"Reporting Comprehensive Income,\" effective June 1, 1998. SFAS No. 130\nestablishes standards for reporting and display of comprehensive income and its\ncomponents, including all changes in equity during a period except those\nresulting from investments by owners or distributions to owners. The following\ntable summarizes total comprehensive income for the periods presented (in\nmillions):\n\n Thirteen Weeks Ended Twenty-Six Weeks Ended\n Nov. 29, Nov. 23, Nov. 29, Nov. 23,\n 1998 1997 1998 1997\n\nNet Earnings $143.6 $ 64.6 $288.6 $198.9\nOther comprehensive \n income (loss):\n Unrealized gain\n on securities 1.3 3.6 4.0 5.9\n Foreign currency\n translation adjustments 4.4 4.0 3.0 (3.6)\n ------ ------ ------ ------\n 5.7 7.6 7.0 2.3\n ------ ------ ------ ------\nTotal comprehensive income $149.3 $ 72.2 $295.6 $201.2\n ====== ====== ====== ======\n\n\nITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION\n AND RESULTS OF OPERATIONS\n\n\nFINANCIAL CONDITION\n\nContinuing operations generated $118.3 million less cash in the first half of\nfiscal 1999 than in the same prior-year period. The decrease in cash provided by\noperations as compared to last year was caused by a $93.7 million increase in\nthe unfavorable working capital change and by a $24.6 million decrease in cash\nfrom operations, after adjustment for non-cash items.\n\nFiscal 1999 capital expenditures are estimated to be approximately $215 million.\nDuring the first six months, capital expenditures totaled $123.8 million.\n\nOur short-term outside financing is obtained through private placement of\ncommercial paper and bank notes. Our level of notes payable fluctuates based on\ncash flow needs.\n\nOur long-term outside financing is obtained primarily through our medium-term\nnote program. Activity through six months under this program consisted of the\nissuance of $52.5 million in notes and debt payments of $50.0 million.\n\nIn the first half of fiscal 1999, we acquired 2.5 million shares of common stock\nfor our treasury for $169.7 million.\n\nRESULTS OF OPERATIONS\n\nAll per share references in the following discussion are based on diluted\nshares, except where indicated.\n\nSecond quarter sales of $1,677.4 million grew 2 percent from the prior year.\nFirst half sales of $3,150.5 million grew 3 percent. Second quarter earnings\nfrom operations of $175.9 million ($1.12 per share) before restructuring charges\nof $32.3 million ($.21 per share) (See Note (2) Unusual Items), increased by 7\npercent from $164.7 million ($1.01 per share) before restructuring charges of\n$100.1 million ($.62 per share) (See Note (2) Unusual Items), reported last\nyear. Including restructuring charges, second quarter earnings this year and\nlast year were $143.6 million ($.92 per share), and $64.6 million ($.40 per\nshare), respectively. Cumulative earnings from operations of $320.9 million\n($2.04 per share) before unusual items of $32.3 million ($.21 per share), were\nup 7 percent from last year's $299.1 million ($1.83 per share) before unusual\nitems of $100.2 million, ($.62 per share). Including unusual items, first half\nearnings this year and last year were $288.6 million ($1.84 per share), and\n$198.9 million ($1.22 per share), respectively. Earnings per share of $1.12 and\n$2.04 for the second quarter and first half were both up 11 percent from $1.01\nand $1.83 before unusual items. Basic earnings per share of $1.15 and $2.09 for\nthe second quarter and first half were also both up 11 percent from $1.04 and\n$1.88 before unusual items.\n\nThe second-quarter earnings gain reflected good unit volume growth for our major\nbusinesses, including a 5 percent increase in Big G cereal volume, as well as\nstrong productivity gains. Results for the quarter met our expectations. Through\nthe first half of fiscal 1999, our earnings per share grew at a double-digit\nrate.\n\nDuring the quarter, we announced restructuring actions, primarily related to\nstreamlining supply chain activities, that are expected to deliver annual cost\nsavings beginning in fiscal 2000 of approximately 11 cents per share. Charges\nassociated with these actions totaled $32.3 million after-tax, or 21 cents per\nshare. Last year's second-quarter results included an unusual charge of $100.1\nmillion after tax, or 62 cents per share, primarily related to restructuring our\nNorth American cereal operations.\n\nIn the United States, our total retail unit volume was up 3 percent for both the\nsecond quarter and first half. Big G cereals led second-quarter performance,\nwith 5 percent volume growth that reflected strong gains for Cheerios, Total,\nand other established brands. New Honey Nut Chex cereal, available in 20 percent\nof the U.S. since August 1998, also contributed to the volume increase. This new\nextension of the Chex brand family is recording consistently strong market\nshares where available, and distribution will be expanded nationally in March\n1999. Big G's second-quarter performance outpaced the industry. Category pound\nvolume in all measured outlets was down for the period, versus 2 percent growth\nin the prior year. Through six months, Big G cereals' pound market share was\n25.5 percent and dollar share was 31.1 percent.\n\nCombined unit volume for our other retail food businesses grew 1 percent in the\nquarter and 3 percent in the first half. Convenience foods volume (yogurt and\nsnacks) was up 1 percent in the second quarter, following a 9 percent\nfirst-quarter increase. Yoplait and Colombo yogurt, Chex Mix snacks and Pop\nSecret microwave popcorn led the second-quarter growth. Volume for the Betty\nCrocker baking, dinner and side dish mix businesses also grew 1 percent in the\nquarter. Foodservice volume was down 5 percent, as growth in core cereal\nsegments and snacks was offset by declines in frozen yogurt and baking mixes.\n\nUnit volume for our international operations grew 5 percent in the second\nquarter. Cereal Partners Worldwide, our joint venture with Nestle, achieved 7\npercent volume growth. Strong performance in western Europe, Poland and Mexico\nmore than offset market-related softness in Russia, Brazil and the ASEAN\ncountries. Volume for Snack Ventures Europe was down 4 percent overall,\nreflecting divestiture of the BN cookie business as well as sharp volume\ndeclines in Russia. However, volume for continuing businesses was up 8 percent.\nSecond quarter volume in Canada was up 14 percent, with cereal volume growing at\nan even stronger rate. Through six months, total international volume was up 7\npercent.\n\nDuring the second quarter, General Mills repurchased .6 million shares of common\nstock. Through six months, share repurchases totaled 2.5 million shares at an\naverage price of approximately $66 per share. Average shares outstanding\n(diluted) totaled 156.7 million for the second quarter compared to 162.3 million\nin the prior year, reflecting shares issued in the February 1997 Ralcorp\nacquisition. Interest expense in the second quarter totaled $29.4 million, up\nfrom $27.3 million last year reflecting higher debt levels primarily associated\nwith share repurchase activity.\n\nOur tax rates (excluding unusual items) for the second quarter and first half of\nfiscal 1999 were 36.6 percent and 36.7 percent, respectively, compared to 37.3\npercent and 37.5 percent in last year's second quarter and first half. Our\nreported tax rates for the first six months of fiscal 1999 and 1998 were 36.7\npercent and 36.3 percent, respectively.\n\n\n\n\n\nYEAR 2000\n\nThe year 2000 issue is the result of computer programs written using two digits\n(rather than four) to define years. Computers or other equipment with\ndate-sensitive software may recognize \"00\" as 1900 rather than 2000. This could\nresult in system failures or miscalculations. If we, or our significant\ncustomers, suppliers or other third parties fail to correct year 2000 issues,\nour ability to operate our businesses could be adversely affected.\n\nWe have completed the assessment, inventory and classification of year 2000\nissues on all of our information systems infrastructure and non-technical assets\n(e.g., plant production equipment). Any systems which are year 2000 deficient\nwill be modified, upgraded or replaced (and if replaced, tested for compliance).\nProject plans anticipate all existing, critical information systems\ninfrastructure to be year 2000 compliant by early in calendar 1999 and all plant\nproduction equipment to be year 2000 compliant by the middle of calendar 1999.\nCurrently we are on schedule to meet this timetable. Based on assessments and\ntesting to date, we do not expect the financial impact of addressing internal\nsystem year 2000 issues to be material to our financial position, results of\noperations or cash flows. Total costs are estimated to be approximately $26\nmillion, of which about half has been incurred to date.\n\nWe have surveyed significant customers, suppliers and other third parties\ncritical to our business operations to determine their year 2000 compliance.\nContingency plans will be in place by the middle of calendar 1999 to address any\nthird party failures that may disrupt our operations. These plans will continue\nto be evaluated and modified through the year 2000 transition period as\nadditional information becomes available. However these contingency plans will\nnot guarantee that circumstances beyond our control will not adversely impact\nour operations.\n\nOur year 2000 compliance program is an ongoing process and the risk assessments\nand timetable described above are forward-looking statements which are subject\nto change. Factors that may cause such changes include, among others, the\nability to timely remediate all date-sensitive computer-related assets; the\nactions of third parties, such as public utilities; and the occurrence of\nbroad-based systemic failures.\n\n\n\n\n\n PART II\n\nItem 4. Submission of Matters to a Vote of Security Holders.\n\n (a) The Annual Meeting of Stockholders was held on September 28, 1998.\n\n (b) All directors nominated were elected at the Annual Meeting.\n\n (c) For the election of directors, the results were as follows:\n\n Richard M. Bressler For 130,429,685\n Withheld 1,174,146\n\n Livio D. DeSimone For 130,517,700\n Withheld 1,086,131\n\n William T. Esrey For 130,422,188\n Withheld 1,181,643\n\n Charles W. Gaillard For 130,514,606\n Withheld 1,089,225\n\n Raymond V. Gilmartin For 130,756,461\n Withheld 847,370\n\n Judith R. Hope For 130,452,972\n Withheld 1,150,859\n\n Kenneth A. Macke For 130,454,286\n Withheld 1,149,545\n\n Michael D. Rose For 130,438,445\n Withheld 1,165,386\n\n Stephen W. Sanger For 130,505,851\n Withheld 1,097,980\n\n A. Michael Spence For 130,487,198\n Withheld 1,116,633\n\n Dorothy A. Terrell For 130,488,867\n Withheld 1,114,964\n\n Raymond G. Viault For 130,533,174\n Withheld 1,070,657\n\n C. Angus Wurtele For 130,511,484\n Withheld 1,092,347\n\n\nThe ratification of the appointment of KPMG Peat Marwick LLP as auditors for\nfiscal 1999 was approved:\n\n For: 131,132,272\n Against: 302,846\n Abstain: 168,713\n\nThe proposal to adopt the 1998 Senior Management Stock Plan (the \"1998 Plan\")\nwas approved:\n\n For: 96,862,271\n Against: 33,608,062\n Abstain: 1,133,498\n\nThe stockholder proposal requesting that the directors take action to adopt\ncumulative voting was rejected:\n\n For: 29,157,667\n Against: 82,179,238\n Abstain: 8,279,940\n Broker Non-Vote: 11,986,986\n\nThe stockholder proposal requesting that the directors refrain from making\ncharitable contributions was rejected:\n\n For: 4,598,148\n Against: 111,971,565\n Abstain: 3,047,132\n Broker Non-Vote: 11,986,986\n\n\nItem 5. Other Information.\n\nThis report contains certain forward-looking statements which are based on\nmanagement's current views and assumptions regarding future events and financial\nperformance. These statements are qualified by reference to the section\n\"Cautionary Statement Relevant to Forward-Looking Information\" in Item 1 of our\nAnnual Report on Form 10-K for the fiscal year ended May 31, 1998, which lists\nimportant factors that could cause actual results to differ materially from\nthose discussed in this report.\n\nItem 6. Exhibits and Reports on Form 8-K.\n\n (a) Exhibits\n\n Exhibit 11 Statement of Computation of Earnings per Share.\n\n Exhibit 12 Statement of Ratio of Earnings to Fixed Charges.\n\n Exhibit 27 Financial Data Schedule.\n\n (b) Reports on Form 8-K\n\n The Company did not file any reports on Form 8-K during the second\n quarter of fiscal 1999.\n\n\n SIGNATURES\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n GENERAL MILLS, INC.\n (Registrant)\n\n\nDate January 8, 1999 /s/ S. S. Marshall\n --------------- -------------------------------------\n S. S. Marshall\n Senior Vice President,\n General Counsel\n\n\nDate January 8, 1999 /s/ K. L. Thome\n --------------- -------------------------------------\n K. L. Thome\n Senior Vice President,\n Financial Operations\n \n \n\nEX-11\n2\nEXHIBIT 11 TO 2ND QUARTER FORM 10-Q, FISCAL 1999\n\n\n\n Exhibit 11\n\n\n GENERAL MILLS, INC.\n COMPUTATION OF EARNINGS PER SHARE\n (In Millions, Except per Share Data)\n\n\n
\n \n \n\nEX-12\n3\nEXHIBIT 12 TO 2ND QUARTER FORM 10-Q, FISCAL 1999\n\n\n Exhibit 12\n\n\n\n
\n \n \n\nEX-27\n4\nFDS, 2ND QUARTER 10-Q, FISCAL 1999\n\n\n
\n \n \n\nEX-27\n5\nRESTATED FDS FOR QUARTER ENDED NOVEMBER 23, 1997\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":189,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"HNZ"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/46640/0000950132-99-000210.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n BEA4bw/Ikh9QW3yHAmu+yP0LR+mFpORFXe1FP74mcEk0wP8wC9NHEZAag/NZO2ar\n +XpO6F8uCeU4wMToQppA7A==\n\n0000950132-99-000210.txt : 19990316\n0000950132-99-000210.hdr.sgml : 19990316\nACCESSION NUMBER:\t\t0000950132-99-000210\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t3\nCONFORMED PERIOD OF REPORT:\t19990127\nFILED AS OF DATE:\t\t19990315\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tHEINZ H J CO\n\t\tCENTRAL INDEX KEY:\t\t\t0000046640\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tCANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030]\n\t\tIRS NUMBER:\t\t\t\t250542520\n\t\tSTATE OF INCORPORATION:\t\t\tPA\n\t\tFISCAL YEAR END:\t\t\t0430\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-03385\n\t\tFILM NUMBER:\t\t99564668\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t600 GRANT ST\n\t\tCITY:\t\t\tPITTSBURGH\n\t\tSTATE:\t\t\tPA\n\t\tZIP:\t\t\t15219\n\t\tBUSINESS PHONE:\t\t4124565700\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 2:\t\tP O BOX 57\n\t\tCITY:\t\t\tPITTSBURGH\n\t\tSTATE:\t\t\tPA\n\t\tZIP:\t\t\t15230\n \n\n10-Q\n1\nFORM 10-Q\n\n\n\n \n SECURITIES AND EXCHANGE COMMISSION\n WASHINGTON, D. C. 20549\n \n FORM 10-Q\n \n[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE\n ACT OF 1934\nFor the quarterly period ended January 27, 1999\n \n OR\n \n[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES\n EXCHANGE ACT OF 1934\nFor the transition period from to\n \nFor the Nine Months Ended January 27, 1999 Commission File Number 1-3385\n \n H. J. HEINZ COMPANY\n (Exact name of registrant as specified in its charter)\n \n PENNSYLVANIA 25-0542520\n (State or other jurisdiction of (I.R.S. Employer\n incorporation or organization) Identification No.)\n \n \n 600 Grant Street, Pittsburgh, 15219\n Pennsylvania (Zip Code)\n (Address of Principal Executive\n Offices)\n \n Registrant's telephone number, including area code: 412-456-5700\n \n Indicate by check mark whether the registrant (1) has filed all reports\nrequired to be filed by section 13 or 15(d) of the Securities Exchange Act of\n1934 during the preceding 12 months (or for such shorter period that the\nregistrant was required to file such reports), and (2) has been subject to\nsuch requirements for the past 90 days. Yes X No\n \n The number of shares of the Registrant's Common Stock, par value $.25 per\nshare, outstanding as of February 26, 1999 was 359,477,782 shares.\n\n \n PART I--FINANCIAL INFORMATION\n \nItem 1. Financial Statements.\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n CONSOLIDATED STATEMENTS OF INCOME\n \n\n
\n \n See Notes to Condensed Consolidated Financial Statements.\n ------------\n \n 2\n\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n CONSOLIDATED STATEMENTS OF INCOME\n \n\n
\n \n See Notes to Condensed Consolidated Financial Statements.\n ------------\n \n 3\n\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n CONDENSED CONSOLIDATED BALANCE SHEETS\n \n\n
\n \n*Summarized from audited fiscal year 1998 balance sheet.\n \n See Notes to Condensed Consolidated Financial Statements.\n ------------\n \n \n 4\n\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n CONDENSED CONSOLIDATED BALANCE SHEETS\n \n\n
\n \n*Summarized from audited fiscal year 1998 balance sheet.\n \n See Notes to Condensed Consolidated Financial Statements.\n ------------\n \n \n 5\n\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS\n \n\n
\n \n See Notes to Condensed Consolidated Financial Statements.\n ------------\n \n \n 6\n\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n \n NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS\n (Unaudited)\n \n(1) The Management's Discussion and Analysis of Financial Condition and\n Results of Operations which follows these notes contains additional\n information on the results of operations and the financial position of the\n company. Those comments should be read in conjunction with these notes.\n The company's annual report on Form 10-K for the fiscal year ended April\n 29, 1998 includes additional information about the company, its\n operations, and its financial position, and should be read in conjunction\n with this quarterly report on Form 10-Q.\n \n(2) The results for the interim periods are not necessarily indicative of the\n results to be expected for the full fiscal year due to the seasonal nature\n of the company's business. Certain prior year amounts have been\n reclassified in order to conform with the Fiscal 1999 presentation.\n \n(3) In the opinion of management, all adjustments, which are of a normal and\n recurring nature, necessary for a fair statement of the results of\n operations of these interim periods have been included.\n \n(4) The composition of inventories at the balance sheet dates was as follows:\n \n\n
\n \n(5) The provision for income taxes consists of provisions for federal, state,\n U.S. possessions and foreign income taxes. The company operates in an\n international environment with significant operations in various locations\n outside the United States. Accordingly, the consolidated income tax rate\n is a composite rate reflecting the earnings in the various locations and\n the applicable tax rates.\n \n(6) In the third quarter, as part of the initial phase of Operation Excel (the\n transformative four-year growth and restructuring initiative, announced on\n February 17, 1999) the company recognized restructuring and related costs\n of $141.7 million pretax ($0.27 per diluted share), primarily due to\n combining the company's Ore-Ida Foods and Weight Watchers Gourmet Food\n Company units into the newly formed Heinz Frozen Food Company. These costs\n are classified as costs of products sold ($87.6 million) and as selling,\n general and administrative expenses ($54.1 million) in the Consolidated\n Statement of Income. In its entirety, Operation Excel will require a pre-\n tax restructuring charge of $900 million, which includes the charge taken\n in this third quarter. This $900 million charge will be spread over four\n years, with most of the cost accrued this year. Implementation costs will\n be approximately $200 million over the four years.\n \n As part of this plan to streamline and focus the North American frozen\n food operations, Heinz Frozen Food Company headquarters will be located in\n Pittsburgh. The company's current frozen food manufacturing operations\n will also be realigned to create \"Centers of Manufacturing Excellence.\"\n This manufacturing realignment includes the closure of the West Chester,\n Pennsylvania factory and downsizing of the Pocatello, Idaho facility. In\n addition, the company will discontinue the pocket sandwich business and\n exit certain non-strategic frozen food businesses in order to focus on the\n key frozen brands.\n \n \n 7\n\n \n The major components of this charge and the remaining accrual balance as\n of January 27, 1999 were as follows:\n \n\n
\n \n Employee termination and severance costs do not represent all of the\n amounts to be recorded in connection with the separation of the affected\n employees, as additional costs will be recognized over the next year as\n eligibility requirements are met. The restructuring initiatives will\n result in a net workforce reduction of approximately 400 employees due to\n the termination of approximately 800 employees at closed or downsized\n locations, which will be partially offset by increased employment at other\n locations.\n \n Asset write-downs consist primarily of fixed asset and other long-term\n asset impairments that were recorded as a direct result of the company's\n decision to exit businesses or facilities ($86 million). Of this amount,\n $61.4 million represents write-downs of property, plant and equipment and\n other depreciable assets and $24.6 million represents the write-down of\n goodwill on businesses to be discontinued. Write-downs were also\n recognized for estimated losses from disposals of inventories, packaging\n materials and other assets as a direct result of the company's decision to\n exit businesses or facilities ($3.3 million).\n \n Implementation costs consist primarily of consulting fees and employee\n relocation costs related to Operation Excel and are recognized as\n incurred.\n \n(7) In the second quarter of Fiscal 1999, the company reversed $25.7 million\n of unutilized Project Millennia (the company's reorganization and\n restructuring program announced in March, 1997) accruals for severance and\n exit costs. This reversal reflected efficiencies on a number of\n initiatives where the original estimates were higher than the actual costs\n to complete the projects. This reversal reduced accrued restructuring\n costs on the balance sheet and was recorded in cost of products sold\n ($20.7 million) and selling, general and administrative expenses ($5.0\n million) in the Consolidated Statement of Income. The remaining Project\n Millennia accrual balance of $21.3 million is included in accrued\n restructuring costs on the Condensed Consolidated Balance Sheet.\n \n(8) On October 2, 1998, the company completed the sale of its bakery products\n unit to The Pillsbury Company for $178 million. The transaction resulted\n in a pretax gain of $5.7 million, which was recorded in selling, general\n and administrative expenses. The bakery products unit contributed\n approximately $200 million in sales for Fiscal 1998. Pro forma results of\n the company, assuming this transaction had been made at the beginning of\n each period presented, would not be materially different from the results\n reported.\n \n(9) On June 1, 1998, the company acquired the Vidalia O's frozen onion rings\n brand from Vidalia Frozen Foods, Inc. to complement the company's Ore-Ida\n frozen vegetable lines.\n \n On June 26, 1998, the company acquired the Eta brand of dressings\n (mayonnaise, salad dressings) and peanut butter from Griffins Foods\n Limited of Auckland, New Zealand.\n \n On July 6, 1998, the company acquired the College Inn brand of canned\n broths from Nabisco Inc.\n \n \n 8\n\n \n On January 4, 1999, the company acquired Sonnen Bassermann, Germany's\n leading marketer of ready-to-serve soups and meals, from Danone Group.\n \n During Fiscal 1999, the company also made other acquisitions.\n \n All of the above acquisitions have been accounted for as purchases and,\n accordingly, the respective purchase prices have been allocated on a\n preliminary basis to the respective assets and liabilities based on their\n estimated fair values as of the dates of the acquisitions. Operating\n results of these acquisitions have been included in the Consolidated\n Statement of Income from the dates of the acquisitions.\n \n Pro forma results of the company, assuming all of the acquisitions had\n been made at the beginning of each period presented, would not be\n materially different from the results reported.\n \n(10) The company's $2.30 billion credit agreement, which expires in September\n 2001, supports its domestic commercial paper program. At January 27, 1999,\n the company had $1.55 billion of domestic commercial paper outstanding,\n all of which has been classified as long-term debt due to the long-term\n nature of the credit agreement. As of April 29, 1998, the company had\n $1.34 billion of domestic commercial paper outstanding and classified as\n long-term debt.\n \n On July 15, 1998, the company, under its current shelf registration\n statement, issued $250 million of 6.375% debentures due 2028. The proceeds\n were used to repay domestic commercial paper.\n \n(11) On September 8, 1998, the company's board of directors raised the\n quarterly dividend on the company's common stock to $0.34 1/4 per share\n from $0.31 1/2 per share, for an indicated annual rate of $1.37 per share.\n \n \n 9\n\n \n(12) The following table sets forth the computation of basic and diluted\n earnings per share in accordance with the provisions of SFAS No. 128.\n \n\n
\n \n 10\n\n \n(13) As of April 30, 1998, the company adopted SFAS No. 130, \"Reporting\n Comprehensive Income.\" The adoption of this statement had no impact on\n the company's net income or shareholders' equity. SFAS No. 130\n establishes standards for reporting comprehensive income in financial\n statements. Comprehensive income includes all changes in equity during a\n period except those resulting from investments by or distributions to\n shareholders. For the company, comprehensive income for all periods\n presented consisted of net income, foreign currency translation\n adjustments and the adjustment to the minimum pension liability. Amounts\n in prior year financial statements have been reclassified to conform to\n SFAS No. 130 requirements.\n \n The components of comprehensive income, net of related tax, for the\n periods presented are as follows:\n \n\n
\n \n 11\n\n \nItem 2. Management's Discussion and Analysis of Financial Condition and\n Results of Operations.\n \n THREE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998\n \n On November 10, 1998, the company announced the formation of Heinz Frozen\nFood Company, combining the operations of its Ore-Ida Foods and Weight\nWatchers Gourmet Food Company units. This program is the initial phase of\nOperation Excel and includes consolidating Ore-Ida's headquarters staff in\nBoise with the Weight Watchers Gourmet Food Company in Pittsburgh. The\ncompany's frozen food manufacturing operations will also be realigned to\ncreate \"Centers of Manufacturing Excellence.\" This manufacturing realignment\nincludes the closure of the West Chester, Pennsylvania factory and downsizing\nthe Pocatello, Idaho facility. In addition, the company will discontinue the\npocket sandwich business and exit certain non-strategic frozen food businesses\nin order to focus on the key frozen brands. In connection with this initial\nphase of Operation Excel the company expects to make capital expenditures\ntotaling approximately $17 million, with a significant portion to be spent in\nFiscal 2000. This phase of the restructuring initiatives will result in a net\nworkforce reduction of approximately 400 employees due to the termination of\napproximately 800 employees at closed or downsized locations, which will be\npartially offset by increased employment at other locations.\n \n In the third quarter, the company recorded restructuring and related costs\nof $141.7 million pretax ($0.27 per diluted share) primarily for this initial\nphase of Operation Excel. This charge is classified as cost of products sold\n($87.6 million) and as selling, general and administrative expenses ($54.1\nmillion) in the Consolidated Statement of Income. Components of the third\nquarter Operation Excel costs requiring the utilization of cash total\napproximately $42 million, of which approximately $33 million was spent in the\nthird quarter.\n \nResults of Operations\n \n For the three months ended January 27, 1999, sales increased $46.0 million,\nor 2.1%, to $2,282.1 million from $2,236.0 million last year. The increase is\ndue to improved volume of 2.6%, acquisitions of 2.3% and pricing of 0.5%,\npartially offset by the unfavorable effect of foreign exchange translation\nrates of 1.0% and divestitures of 2.3%. Domestic operations provided 53.1% of\nsales in both the current and prior year periods.\n \n Volume increases were recorded in seafood, single serve condiments, Smart\nOnes frozen entrees, sauces, soups, Heinz ketchup, weight loss classroom\nactivities and infant foods. These increases were partially offset by volume\ndecreases in dog food, coated products, Budget Gourmet frozen entrees, and\nfrozen potatoes. Price increases in infant foods were offset by price\ndecreases in seafood and Heinz ketchup.\n \n Foreign currencies declined against the U.S. dollar, decreasing sales by\n$21.5 million or 1.0%. This decrease came primarily from sales in the\nAsia/Pacific region, Canada and Africa.\n \n Acquisitions impacting the quarter-to-quarter sales dollar comparison\ninclude the College Inn brand of canned broths and other smaller acquisitions,\nprimarily in South Africa. The sales impact of these acquisitions was offset\nby divestitures, primarily the bakery products unit in Fiscal 1999.\n \n Gross profit decreased $4.2 million to $852.6 million from $856.8 million\nand the gross profit margin decreased to 37.4% from 38.3%. Excluding the\nOperation Excel costs in the current quarter and Project Millennia\nimplementation costs ($14.8 million) in the prior year's same quarter, gross\nprofit increased $68.5 million to $940.2 million from $871.7 million, and the\ngross profit margin increased to 41.2% from 39.0%. Cost savings from Project\nMillennia, stronger sales volume, a favorable product mix due to acquisitions\nand divestitures, and gross profit margin improvements in the Weight Watchers\nclassroom business (attributable to the Weight Watchers 1-2-3 Success(TM)\nPlan) increased gross profit and gross profit margin.\n \n 12\n\n \n Operating income decreased $77.7 million to $266.4 million from $344.0\nmillion. Excluding the Operation Excel costs in the current quarter and\nProject Millennia implementation costs ($29.4 million) in last year's third\nquarter, operating income increased $34.7 million, or 9.3% to $408.1 million\nfrom $373.4 million and the operating margin increased to 17.9% from 16.7%.\nThe increase in operating income, excluding these non-recurring items, is\nprimarily attributable to the increase in gross profit; partially offset by\nincreased selling, general and administrative expenses, due primarily to\nincreased marketing expense. Poor results in the pet food business, primarily\ndue to the disappointing performance of the 9-Lives four pack, an unfavorable\nmix shift and inefficient trade spending, were largely offset by the favorable\nresults of the Weight Watchers classroom business. Excluding the results of\nthe pet food and the Weight Watchers classroom businesses, operating income\nincreased more than 12%.\n \n Net interest expense was flat as higher borrowings were offset by lower\naverage interest rates. Other expenses decreased $10.4 million to $7.6 million\nfrom $18.0 million, primarily due to currency losses in the Asia/Pacific\nregion last year.\n \n The effective tax rate for the third quarter of Fiscal 1999 was 40.1%\ncompared to 30.0% for the same period last year. This quarter's higher rate\nincludes the impact of nondeductible expenses related to the restructuring.\nExcluding the impact of the Operation Excel restructuring and related costs,\nthe effective tax rate for this year's third quarter was 36.0%. Last year's\neffective tax rate included a benefit from tax legislation in Italy and a\nreduction in the full-year projected rate.\n \n Net income for the third quarter of Fiscal 1999 was $120.6 million compared\nto $188.2 million for the same period last year, and diluted earnings per\nshare was $0.33 compared to $0.50 a year ago. Excluding the impact of the non-\nrecurring items noted above, net income would have increased 6.2% to $219.5\nmillion from $206.7 million, and diluted earnings per share would have\nincreased 9.1% to $0.60 from $0.55 last year.\n \n NINE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998\n \nResults of Operations\n \n For the nine months ended January 27, 1999, sales increased $99.3 million,\nor 1.5% to $6,832.7 million from $6,733.4 million. The increase is due to\nimproved volume of 3.2%, acquisitions of 2.4% and pricing of 1.0%, partially\noffset by the unfavorable impact of foreign exchange translation rates of 2.9%\nand divestitures of 2.2%. Domestic operations provided 53.2% of sales in both\nthe current and prior year periods.\n \n Volume increases were recorded in weight loss classroom activities, Heinz\nketchup, Smart Ones frozen entrees, single serve condiments, sauces, seafood\nand soups. These increases were partially offset by volume decreases in dog\nfood, coated products and frozen potatoes. Price increases in infant foods and\nsauces were partially offset by price decreases in dog food.\n \n Foreign currencies declined against the U.S. dollar, decreasing sales by\n$192.6 million, or 2.9%. This decrease came primarily from sales in the\nAsia/Pacific region, Africa and Canada.\n \n During the first nine months of Fiscal 1999, the company acquired the\nCollege Inn brand of canned broths, the Eta brand of dressings and peanut\nbutter in New Zealand, the convenience meals business of Sonnen Bassermann in\nGermany, the Vidalia O's frozen onion rings brand and also made some other\nsmall acquisitions. Fiscal 1998 acquisitions impacting the period-to-period\nsales dollar comparison include John West Foods Limited in Europe and other\nacquisitions, primarily in South Africa and Europe. The sales impact of these\nacquisitions was partially offset by divestitures, primarily the Ore-Ida\nfrozen foodservice business in Fiscal 1998 and the bakery products unit in the\nsecond quarter of Fiscal 1999.\n \n During the first nine months of Fiscal 1999, the company reversed $25.7\nmillion of unutilized Project Millennia accruals for severance and exit costs.\nThis reversal reflected efficiencies on a number of initiatives where the\noriginal estimates were higher than the actual costs to complete the projects.\nThis reversal was recorded in cost of products sold ($20.7 million) and\nselling, general and\n \n 13\n\n \nadministrative expenses ($5.0 million) in the Consolidated Statement of\nIncome. Also during Fiscal 1999, the company incurred additional costs of\n$22.3 million related to the implementation of Project Millennia. These costs\nconsisted primarily of start-up, consulting, and training costs. On October 2,\n1998, the company completed the sale of its bakery products unit, resulting in\na pretax gain of $5.7 million, which was recorded in selling, general and\nadministrative expenses in the Consolidated Statement of Income. The net\nimpact, on diluted earnings per share, of these items and the Operation Excel\ncosts described above was a decrease of $0.26.\n \n During the first nine months of Fiscal 1998, the company recognized a pretax\ngain of $96.6 million from the sale of its Ore-Ida frozen foodservice\nbusiness, which was recorded in selling, general and administrative expenses,\nand also incurred additional costs of $60.4 million related to the\nimplementation of Project Millennia. The net impact of these items on diluted\nearnings per share for last year's nine-month period was an increase of $0.04\nper share.\n \n Gross profit increased $120.9 million to $2,657.4 million from $2,536.6\nmillion last year, and the gross profit margin increased to 38.9% from 37.7%.\nExcluding the Operation Excel costs, the reversal of unutilized Project\nMillennia accruals in the current period, and Project Millennia implementation\ncosts in both periods, gross profit increased $176.9 million to $2,739.1\nmillion from $2,562.2 million, and the gross profit margin increased to 40.1%\nfrom 38.1%. Cost savings from Project Millennia, stronger sales volume, a\nfavorable product mix due to acquisitions and divestitures, and gross profit\nmargin improvements in the Weight Watchers classroom business (attributable to\nthe Weight Watchers 1-2-3 Success(TM) Plan) increased gross profit and gross\nprofit margin.\n \n Operating income decreased $55.2 million to $1,111.8 million from $1,167.0\nmillion last year. The current period includes the Operation Excel costs; the\nreversal of unutilized Project Millennia accruals; the gain on the sale of the\nbakery products unit; and Project Millennia implementation costs. Last year's\nfirst nine months included the gain on the sale of the Ore-Ida frozen\nfoodservice business and Project Millennia implementation costs. Excluding\nthese items in both periods, operating income increased $113.6 million, or\n10.0%, to $1,244.5 million from $1,130.8 million and the operating margin\nincreased to 18.2% from 16.8%. The increase in operating income, excluding\nthese items, is primarily attributable to the increase in gross profit;\npartially offset by increased selling, general and administrative expenses,\ndriven by increased marketing expense. Poor results in the pet food business,\nprimarily due to the disappointing performance of the 9-Lives four pack, an\nunfavorable mix shift and inefficient trade spending, were largely offset by\nthe favorable results of the Weight Watchers classroom business. The company\nexpects that continued exceptional performance by several core businesses,\nalong with tight cost controls, will keep it on track to meet expectations for\nthe year despite an anticipated reduction in the fourth quarter operating\nincome for the pet food business.\n \n Net interest expense increased to $174.9 million from $168.0 million last\nyear due to higher borrowings offset by lower average interest rates.\n \n The effective tax rate for the current nine-month period was 37.4% compared\nto 35.9% last year. Excluding the impact of the Operation Excel costs and the\nbakery sale, the effective tax rate for the current nine-month period was\n36.0%. Last year's effective tax rate reflected the benefits of tax\nlegislation in Italy and the United Kingdom, partially offset by a\nsignificantly higher tax rate associated with the sale of Ore-Ida's frozen\nfoodservice business. Excluding these items, last year's effective tax rate\nwas 37.0% for the nine-month period.\n \n Net income for the first nine months of Fiscal 1999 was $565.7 million\ncompared to $620.3 million last year, and diluted earnings per share was $1.54\ncompared to $1.66 a year ago. Excluding the impact of the non-recurring items\nnoted above, net income would have increased 9.5% to $663.0 million from\n$605.2 million last year, and diluted earnings per share would have increased\n11.1% to $1.80 from $1.62 last year.\n \n \n 14\n\n \nLiquidity and Financial Position\n \n Cash provided by operating activities totaled $475.4 million for the nine-\nmonth period ended January 27, 1999 compared to $554.7 million last year.\n \n Cash used for investing activities totaled $209.3 million this year compared\nto providing $148.5 million last year. Acquisitions in the current period\nrequired $196.4 million, due mainly to the purchases of the College Inn brand\nof canned broths, the Eta brand of dressings and peanut butter in New Zealand,\nthe convenience meals business of Sonnen Bassermann in Germany, and the\nVidalia O's frozen onion rings brand. Acquisitions in last year's comparable\nperiod required $136.4 million, due mainly to the purchases of John West Foods\nLimited in Europe, the single-serve foodservice business of CPC (United\nKingdom) and its Frank Cooper's brand, a majority interest in Pudliszki S. A.\nof Poland, and other acquisitions primarily in South Africa and the\nAsia/Pacific region. Capital expenditures required $211.8 million in the\ncurrent period compared to $258.4 million last year. Cash provided by\ndivestitures totaled $179.0 million in the current period, due primarily to\nthe sale of the bakery products unit. Last year, cash provided by divestitures\ntotaled $490.7 million due to the sale of the Ore-Ida frozen foodservice\nbusiness.\n \n In the current period, financing activities required $216.5 million compared\nto $647.5 million last year. Share repurchases totaled $373.6 million (6.7\nmillion shares) versus $480.3 million (10.2 million shares) last year.\nDividend payments totaled $361.7 million compared to $337.7 million last year.\nPayments on long-term debt required $54.4 million compared to $563.1 million a\nyear ago. Proceeds from long-term debt provided $255.9 million versus $3.9\nmillion last year. Net proceeds from commercial paper and short-term\nborrowings provided $214.5 million compared to $481.4 million last year. Stock\noptions exercised provided $70.8 million in the current period versus $170.6\nmillion last year.\n \n The company's $2.30 billion credit agreement, which expires in September\n2001, supports its domestic commercial paper program. At January 27, 1999, the\ncompany had $1.55 billion of domestic commercial paper outstanding, all of\nwhich has been classified as long-term debt due to the long-term nature of the\ncredit agreement. As of April 29, 1998, the company had $1.34 billion of\ndomestic commercial paper outstanding and classified as long-term debt.\n \n On July 15, 1998, the company, under its current shelf registration\nstatement, issued $250 million of 6.375% debentures due 2028. The proceeds\nwere used to repay domestic commercial paper.\n \n On September 8, 1998, the company's board of directors raised the quarterly\ndividend on the company's common stock to $0.34 1/4 per share from $0.31 1/2\nper share, for an indicated annual rate of $1.37 per share. On March 10, 1999,\nthe company's board of directors declared the quarterly dividend on the\ncompany's common stock of $0.34 1/4 per share, payable on April 10, 1999, to\nshareholders of record at the close of business on March 22, 1999.\n \n On October 2, 1998, the company completed the sale of its bakery products\nunit to the Pillsbury Company for $178.0 million. The transaction resulted in\na pretax gain of $5.7 million. The bakery products unit contributed\napproximately $200 million in sales for Fiscal 1998.\n \n The company's financial position remains strong, enabling it to meet cash\nrequirements for operations, capital expansion programs and dividends to\nshareholders.\n \nYear 2000 Issue\n \n The Year 2000 issue arises because many computer hardware and software\nsystems use only two digits rather than four digits to refer to a year.\nTherefore, computers or other equipment with date sensitive programming may\nnot properly recognize a year that begins with \"20.\" If not corrected, this\ncould cause system failures or miscalculations that could significantly\ndisrupt the company's business.\n \n \n \n 15\n\n \n Beginning in 1996, the company initiated a worldwide plan to address the\nYear 2000 issues that could affect its operations. The company's Chief\nInformation Officer is in charge of the Year 2000 project. Each of the\ncompany's business units and corporate headquarters have established Year 2000\nteams. The project is called \"Operation Ready,\" a name that helps focus the\norganization on the overall challenge of being operationally ready to address\nthe expected consequences of the Year 2000 issue, including compliance by\nthird parties who have material relationships with the company, such as\nvendors, customers and suppliers, and the development of contingency plans.\nThe company's progress is monitored by senior management and periodically\nreported to the Audit Committee and Board of Directors.\n \n The first phase of Operation Ready was to conduct a worldwide review to\nidentify and evaluate areas impacted by the Year 2000 issue. The review and\nevaluation focused on both traditional computer information systems (\"IT\nsystems\") and non-information systems such as manufacturing, process and\nlogistical systems which rely on embedded chips or similar devices (\"non-IT\nsystems\"). The assessment of the company's internal IT systems has been\ncompleted, and the assessment of its non-IT systems is continuing on schedule\nand is expected to be complete by June 1999.\n \n The second phase of the company's Year 2000 readiness plan is remediation\nwhich involves replacement, upgrading, modification and testing of affected\nhardware, software and process systems. Management estimates that nearly 60%\nof its core worldwide IT systems are Year 2000 ready. It is expected that the\nremaining IT systems will be operationally ready by July 1999. The remediation\nof non-IT systems is progressing on schedule, and it is estimated that these\nefforts will be substantially complete by August 1999. The testing of\nremediated systems has been ongoing and is progressing on schedule.\n \n The Company's Corporate Audit Department has dedicated efforts to evaluating\nthe company's Year 2000 preparedness. During the first quarter of calendar\nyear 1999, Corporate Audit with the assistance of outside consultants\nperformed on-site preparedness reviews at the company's 11 largest affiliate\nlocations and its Corporate Headquarters. These reviews addressed IT systems\nremediation efforts as well as contingency planning and non-IT issues. Over\nthe course of the remainder of the year, Corporate Audit will be performing\nsimilar reviews of other affiliates in addition to monitoring progress with\nrespect to earlier reviews.\n \n It is currently estimated that the cost to make the company's IT systems and\nnon-IT systems Year 2000 operationally ready will be approximately $65\nmillion, of which over 70% has been incurred to date. All of the costs are\nbeing funded through operating cash flow. These estimated costs have not had\nnor are expected to have a material adverse effect on the company's\nconsolidated financial position, results of operations or liquidity. This\namount does not include any costs for implementation of the company's\ncontingency plans described below.\n \n A critical part of Operation Ready involves the investigation and assessment\nof the Year 2000 preparedness of important suppliers, vendors, customers,\nutilities and other third parties. The company's initial round of assessments\nhas been completed. Generally, these third parties have indicated that they\nare progressing on schedule with their Year 2000 issues. The company has begun\non-site interviews and face-to-face visits with the critical suppliers,\nvendors and customers. These efforts will continue throughout the year in\norder to minimize the risk that any significant adverse consequences will\nresult due to the failure of these third parties to be Year 2000 ready.\n \n While the company has no reason to believe that its exposure to the risks of\nthe failure of it or third parties to be Year 2000 ready is any greater than\nthe exposure to such risks that affect its competitors generally, there can be\nno assurance that the consequences of such failures would not have a material\nadverse impact on the company's operations. Although the company does not\nanticipate any major noncompliance issues, the company believes the most\nlikely worst case scenario would be the temporary disruption of its business\nin certain locations in the event of noncompliance by the company or such\nthird parties, which could include temporary plant closings, delays in the\ndelivery and receipt\n \n 16\n\n \nof products and supplies, invoice and collection errors and inventory\nobsolescence. The company believes that its Operation Ready contingency planning\nshould significantly reduce the adverse effect any such disruptions may have.\n \n The company's headquarters and affiliate Year 2000 readiness teams are\nworking to allow the company to continue critical operations in the event\neither the company or major key suppliers or customers fail to resolve their\nrespective Year 2000 issues in a timely manner. In addition, each major\nfunction involving the company (purchasing, manufacturing, sales, etc.) has a\ncontingency planning team working on Year 2000 issues specific to that\nfunction. The plans developed by the functional teams have been shared with\nthe affiliate teams, so that Year 2000 issues will be addressed from two\nseparate perspectives. Contingency plans include stockpiling raw and packaging\nmaterials, increasing finished goods inventory levels, developing emergency\nback-up and recovery procedures, securing alternate suppliers, replacing\nelectronic applications with manual processes or other appropriate measures.\n \n In early March, the key managers from corporate headquarters and each major\naffiliate participated in a three-day conference to share best practices, with\nparticular emphasis on contingency planning. The company anticipates that this\nconference will help to accelerate its overall plan and readiness efforts.\n \n The company's Year 2000 readiness plan, including the further development\nand refinement of contingency plans, is an ongoing process and will continue\nto evolve and change as new information becomes available.\n \nEuro Conversion\n \n A single currency, the Euro, was introduced in Europe on January 1, 1999. Of\nthe fifteen member countries of the European Union, eleven adopted the Euro as\ntheir legal currency on that date. Fixed conversion rates between the national\ncurrencies of these eleven countries and the Euro were established on that\ndate. The national currencies are scheduled to remain legal tender as\ndenominations of the Euro during the transition period ending December 31,\n2001. During this transition period, parties may settle transactions using\neither the Euro or a participating country's national currency. At the current\ntime, the company does not believe that the conversion to the Euro will have a\nmaterial impact on its business or its financial condition.\n \n The foregoing discussion of the company's Year 2000 issue and Euro\nconversion contains forward- looking statements regarding anticipated costs,\nprojections or risks, descriptions of expected outcomes and results and other\nmatters that are not historical facts. These statements are subject to risks,\nuncertainties and unanticipated events, including among others with respect to\nthe Year 2000 issue, those that could arise from Year 2000 actions and plans\nof entities that do business with the company, the ability to identify,\nassess, remediate and test all affected equipment and systems, including those\nusing embedded technology and the continued availability of qualified\npersonnel. As a consequence, actual results and costs may differ materially\nfrom those expressed above. In addition, actual results may differ as a result\nof other factors not enumerated above as well as changes in current\ncircumstances that are impossible to predict at this time.\n \nOther Matters\n \n On February 11, 1999, the company announced that it has completed a joint\nventure transaction involving Indonesia's leading ketchup and sauce producer,\nABC Central Food Industry of Jakarta. The new joint venture, named PT Heinz\nABC Indonesia, will continue ABC Central Food's business. The company holds a\nmajority interest in the joint venture. The ABC brand is Indonesia's market\nleader in \"kecap\" (a sweet soy sauce consumed with virtually every meal as\neither a tabletop condiment or ingredient). ABC produces Indonesia's top\nbrands of \"sambal\" (a hot chili sauce) and \"kecap asin\" (a salty soy sauce).\nAdditionally, the joint venture will produce ABC tomato ketchup and fruit\ndrink concentrates. ABC products are sold to both the grocery and foodservice\ntrade.\n \n \n 17\n\n \n On February 17, 1999, the company announced a transformative four-year\ngrowth and restructuring initiative, named Operation Excel, that is expected\nto generate $200 million in annual savings upon completion and growth in\nearnings per share of 10 to 12% annually over the next four years.\n \n Financially, Operation Excel is expected to deliver over four years:\n \n . More than $200 million in annual savings to reinvest against Heinz's\n brands;\n \n . $2.5 billion in free cash flow;\n \n . Volume growth of 3 to 4% annually;\n \n . Return on invested capital to almost 40%;\n \n . Increased gross profit margins to 42%;\n \n . A sustained tax rate of between 35 to 36%; and\n \n . An additional $100 million investment in the coming year to support\n marketing and pricing initiatives against key brands (including ketchup,\n tuna and frozen potatoes).\n \n Operationally, the initiative will:\n \n . Focus on six core food categories (ketchup, condiments and sauces;\n frozen foods; tuna; soups, beans and pasta meals; infant foods; and pet\n products) and six key countries (the U. S.; the U. K.; Italy; Canada;\n Australia; and New Zealand) to provide a platform for growth in our\n other new markets worldwide;\n \n . Realign global manufacturing and distribution and create \"Centers of\n Manufacturing Excellence\" through expansion of 13 to 15 factories,\n closure or sale of 15 to 20 factories and the downsizing of at least 10\n more;\n \n . Result in a net reduction of the worldwide workforce by approximately\n 3,000 to 4,000 over four years; and\n \n . Sell the Weight Watchers classroom business (while keeping Weight\n Watchers brand frozen foods), resulting in a reduction in future EPS\n projections by approximately 7 cents per share.\n \n Restructuring initiatives from Operation Excel are expected to generate\nsavings of at least $50 million in Fiscal 2000, $145 million in Fiscal 2001,\nsurpassing $200 million in Fiscal 2002 and beyond. Delivering these savings\nwill require a pre-tax restructuring charge of approximately $900 million,\nwhich includes the charge taken in this third quarter. This $900 million\ncharge will be spread over four years, with most of the cost accrued this\nyear. Implementation costs that cannot be accrued under the accounting rules\nwill be approximately $200 million over the four years.\n \n With the exception of the projects reflected in the third quarter\nrestructuring charge, the remainder of Operation Excel, including the sale of\nthe Weight Watchers classroom business, is subject to the approval of the\ncompany's Board of Directors. Action by the Board of Directors on Operation\nExcel is expected to take place prior to the end of the fiscal year. For\nadditional information regarding Operation Excel, please refer to the\ncompany's Current Report on Form 8-K dated February 22, 1999.\n \nItem 3. Quantitative and Qualitative Disclosures About Market Risk.\n \n There have been no material changes in the company's market risk during the\nnine months ended January 27, 1999. For additional information, refer to pages\n31 through 33 of the company's Annual Report to Shareholders for the fiscal\nyear ended April 29, 1998.\n \n 18\n\n \n PART II--OTHER INFORMATION\n \nITEM 1. LEGAL PROCEEDINGS\n \n Nothing to report under this item.\n \nITEM 2. CHANGES IN SECURITIES\n \n Nothing to report under this item.\n \nITEM 3. DEFAULTS UPON SENIOR SECURITIES\n \n Nothing to report under this item.\n \nITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\n \n Nothing to report under this item.\n \nITEM 5. OTHER INFORMATION\n \n See Notes 6 and 9 to the Condensed Consolidated Financial Statements in Part\nI--Item 1 of this Quarterly Report on Form 10-Q and \"Other Matters\" in Part\nI--Item 2 of this Quarterly Report on Form 10-Q.\n \n This report contains certain forward-looking statements which are based on\nmanagement's current views and assumptions regarding future events and\nfinancial performance. Reference should be made to the section \"Forward-\nLooking Statements\" in Item 1 of the registrant's Annual Report on Form 10-K\nfor the fiscal year ended April 29, 1998 for a description of the important\nfactors that could cause actual results to differ materially from those\ndiscussed herein.\n \nITEM 6. EXHIBITS AND REPORTS ON FORM 8-K\n \n (a) Exhibits required to be furnished by Item 601 of Regulation S-K are\n listed below and are filed as part hereof. The Registrant has omitted\n certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-\n K. The Registrant agrees to furnish such documents to the Commission upon\n request. Documents not designated as being incorporated herein by reference\n are filed herewith. The paragraph numbers correspond to the exhibit numbers\n designated in Item 601 of Regulation S-K.\n \n 12. Computation of Ratios of Earnings to Fixed Charges.\n \n 27. Financial Data Schedule.\n \n (b) Reports on Form 8-K\n \n No reports on Form 8-K were filed during the quarter ended January 27,\n 1999.\n \n 19\n\n \n Pursuant to the requirements of the Securities Exchange Act of 1934, the\nRegistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n \n H. J. HEINZ COMPANY\n (Registrant)\n \nDate: March 15, 1999 /s/ Paul F. Renne\n By...................................\n Paul F. Renne\n Executive Vice President and\n Chief Financial Officer\n (Principal Financial Officer)\n \nDate: March 15, 1999 /s/ Edward J. McMenamin\n By...................................\n Edward J. McMenamin\n Vice President and Corporate\n Controller\n (Principal Accounting Officer)\n \n 20\n \n \n\nEX-12\n2\nCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES\n\n\n\n \n Exhibit 12\n \n H. J. HEINZ COMPANY AND SUBSIDIARIES\n COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES\n \n\n
\n \n*Interest expense includes amortization of debt expense and any discount or\npremium relating to indebtedness.\n \n \n\nEX-27\n3\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":190,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"HP"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/46765/0000950134-99-001083.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n JbcGQ0omXTkJ0z/5XXKfN2HgSCXmv61E4shov0WWlugdoY2n+rpOqGDtjSM2/c3t\n p2ektdaES6gvNhxDup4N1g==\n\n0000950134-99-001083.txt : 19990217\n0000950134-99-001083.hdr.sgml : 19990217\nACCESSION NUMBER:\t\t0000950134-99-001083\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t2\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990216\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tHELMERICH & PAYNE INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000046765\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tDRILLING OIL & GAS WELLS [1381]\n\t\tIRS NUMBER:\t\t\t\t730679879\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0930\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-04221\n\t\tFILM NUMBER:\t\t99540101\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\tUTICA AT 21ST ST\n\t\tCITY:\t\t\tTULSA\n\t\tSTATE:\t\t\tOK\n\t\tZIP:\t\t\t74114\n\t\tBUSINESS PHONE:\t\t9187425531\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\tUTICA AT 21ST ST\n\t\tCITY:\t\t\tTULSA\n\t\tSTATE:\t\t\tOK\n\t\tZIP:\t\t\t74114\n \n\n10-Q\n1\nFORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1998\n\n\n 1\n FORM 10-Q\n\n\n SECURITIES AND EXCHANGE COMMISSION\n Washington, D. C. 30549\n\n [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)\n OF THE SECURITIES EXCHANGE ACT OF 1934\n\n For quarterly period ended: DECEMBER 31, 1998\n\n OR\n\n [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)\n OF THE SECURITIES EXCHANGE ACT OF 1934\n\n For the transition period from _____________ to ______________\n\n\n Commission File Number: 1-4221\n\n\n HELMERICH & PAYNE, INC.\n (Exact name of registrant as specified in its charter)\n\n\n DELAWARE\n (State or other jurisdiction of incorporation or organization)\n\n\n 73-0679879\n (I.R.S. Employer I.D. Number)\n\n\nUTICA AT TWENTY-FIRST STREET, TULSA, OKLAHOMA 74114 \n (Address of principal executive office) (Zip Code)\n\n\nRegistrant's telephone number, including area code: (918) 742-5531\n\n\nFormer name, former address and former fiscal year, if changed since last\nreport:\n NONE\n\n\nIndicate by check mark whether the registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months (or for such shorter period that the registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days. YES X NO \n ----- -----\n\n CLASS OUTSTANDING AT DECEMBER 31, 1998\nCommon Stock, .10 par value 49,416,682\n\n\n\n\n 2\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n\n\n INDEX\n\n\n\nPART I. FINANCIAL INFORMATION\n\n\n Consolidated Condensed Balance Sheets -\n December 31, 1998 and September 30, 1998 . . . . . . . . . 3\n\n\n Consolidated Condensed Statements of Income -\n Three Months Ended December 31, 1998 and 1997. . . . . . . 4\n\n\n Consolidated Condensed Statements of Cash Flows -\n Three Months Ended December 31, 1998 and 1997. . . . . . . 5\n\n Consolidated Condensed Statement of Shareholders' Equity\n Three Months Ended December 31, 1998 . . . . . . . . . . . 6\n\n\n Notes to Consolidated Condensed Financial Statements . . . 7, 8 & 9\n\n\n Revenues and Income by Business Segments . . . . . . . . . 10\n\n\n Management's Discussion and Analysis of Results of\n Operations and Financial Condition . . . . . . . . . . . . 11 - 16\n\n\n\nPART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . 17\n\n\n Signature Page . . . . . . . . . . . . . . . . . . . . . . 17\n\n\n\n\n -2-\n 3\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n CONSOLIDATED CONDENSED BALANCE SHEETS\n (in thousands)\n\n\n\n\n
\n\n\n\nSee accompanying notes to financial statements.\n\n -3-\n 4\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n CONSOLIDATED CONDENSED STATEMENTS OF INCOME\n (Unaudited)\n (in thousands except per share data)\n\n\n\n
\n\n\n\nThe accompanying notes are an integral part of these statements.\n\n -4-\n\n 5\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS\n (Unaudited)\n (in thousands)\n\n\n\n
\n\n\n -5-\n\n 6\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY\n (in thousands - except per share data)\n\n\n\n\n
\n\n\n\n\n -6-\n\n 7\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS\n\n\n 1. In the opinion of the Company, the accompanying unaudited\n condensed financial statements contain all adjustments (consisting\n of only normal recurring accruals) necessary to present fairly the\n results of the periods presented. The results of operations for\n the three months ended December 31, 1998, and December 31, 1997,\n are not necessarily indicative of the results to be expected for\n the full year.\n\n 2. The $.07 cash dividend declared in September, 1998, was paid\n December 1, 1998. On December 2, 1998, a cash dividend of $.07 per\n share was declared for shareholders of record on February 15,\n 1999, payable March 1, 1999.\n\n 3. Inventories consist of materials and supplies.\n\n 4. Income from investments includes $116,000 and $6,015,000 from\n gains on sales of available-for-sale securities during the first\n quarter of fiscal years 1999 and 1998, respectively.\n\n 5. The following is a summary of available-for-sale securities, which\n excludes those accounted for under the equity method of\n accounting. The recorded investment in securities accounted for\n under the equity method is $36,702,000.\n\n\n
\n\n 6. As of October 1, 1998, the Company adopted Statement of \n Financial Accounting Standards (SFAS) No. 130, \"Reporting\n Comprehensive Income\" (SFAS 130). SFAS 130 establishes new rules\n for the reporting and display of comprehensive income and its\n components; however, the adoption of this statement had no impact\n on the Company's net income or shareholders' equity. SFAS 130\n requires the Company's unrealized gains or losses on\n available-for-sale securities to be included in other\n comprehensive income. Prior to adoption this item was reported\n separately in shareholders' equity. Prior year financial\n statements have been reclassified to conform to the requirements\n of SFAS 130.\n\n\n -7-\n\n\n 8\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS\n (Continued)\n\n The components of comprehensive income, net of related tax, for\n the three month periods ended December 31, 1998, and 1997, are as\n follows:\n\n\n
\n\n The only component of accumulated other comprehensive income is\n unrealized gains on available-for-sale securities.\n\n 7. At December 31, 1998, the Company had committed bank lines of\n credit totaling $130 million; $20 million may be borrowed through\n February 1999, $50 million may be borrowed through May 1999, $10\n million may be borrowed through May 2000, and $50 million may be\n borrowed through October 2003. Additionally, the Company had\n uncommitted credit facilities totaling $63 million. Collectively,\n the Company had $123.5 million in outstanding borrowings and\n outstanding letters of credit totaling $8.2 million against these\n lines at December 31, 1998. The average rate on the borrowings at\n December 31, 1998, was 5.6 percent.\n\n Concurrent with a $50 million borrowing under one of its committed\n facilities, the Company has entered into a 5-year, $50 million\n interest rate swap, which closely correlates with the terms and\n maturity of the facility. The swap effectively fixes the interest\n rate on this facility at 5.38% for the entire 5 year term of the\n note.\n\n 8. Earnings per Share - Basic earnings per share is based on the \n weighted-average number of common shares outstanding during the\n period. Diluted earnings per share includes the dilutive effect of\n stock options and restricted stock.\n\n A reconciliation of the weighted-average common shares outstanding\n on a basic and diluted basis is as follows:\n\n\n
\n\n\n -8-\n\n\n \n 9\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS\n (Continued)\n\n Restricted stock of 180,000 shares at a weighted-average price of\n $37.73 and options to purchase 919,000 shares of common stock at a\n weighted-average price of $32.40 were outstanding at December 31, 1998,\n but were not included in the computation of diluted earnings per common\n share. Inclusion of these shares would be antidilutive, as the exercise\n prices of the options exceed the average market price of the common\n shares.\n\n 9. New Accounting Pronouncements -\n The Financial Accounting Standards Board has issued SFAS No. 133,\n \"Accounting for Derivative Instruments and Hedging Activities\" (SFAS\n 133). SFAS 133 is effective for fiscal years beginning after June 15,\n 1999. This standard requires that all derivatives be recognized as\n assets or liabilities in the balance sheet and that those instruments\n be measured at fair value. The Company has not yet determined what the\n effect of SFAS 133 will be on the earnings and the financial position\n of the Company.\n\n In June 1997, the Financial Accounting Standards Board issued SFAS No.\n 131, \"Disclosures About Segments of an Enterprise and Related\n Information\". This statement, which is effective for fiscal years\n beginning after December 15, 1997, expands or modifies disclosures and\n will have no impact on the Company's consolidated financial position,\n results of operations or cash flows.\n\n The American Institute of Certified Public Accountants (AICPA) issued\n Statement of Position (SOP)98-5, \"Reporting on the Costs of Start-Up\n Activities\", effective for fiscal years beginning after December 15,\n 1998. The SOP requires that all start-up costs be expensed and that the\n effect of adopting the SOP be reported as the cumulative effect of a\n change in accounting principle. The effect of this SOP on the Company's\n results of operations and financial position is not expected to be\n material.\n\n 10. Restricted Stock Awards -\n In the first quarter of fiscal year 1999, the Company issued to certain\n employees 17,000 shares of treasury stock as restricted stock awards\n under the 1996 Stock Incentive Plan. The Company recognized unearned\n compensation of $289,000, which was the fair market value of the stock\n at the time of issuance. Treasury stock was reduced by the book value\n of the shares issued ($152,396) with the difference recognized as an\n increase in paid-in-capital. The unearned compensation is being\n amortized over a five-year period as compensation expense.\n\n\n\n\n\n\n\n\n\n\n\n -9-\n\n\n\n\n\n 10\n\n\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n REVENUES AND INCOME BY BUSINESS SEGMENTS\n (UNAUDITED)\n (in thousands)\n\n\n\n\n
\n\n\n\n\n\n\n\n\n\n\n\n\n -10-\n\n 11\n\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n\nRISK FACTORS AND FORWARD-LOOKING STATEMENTS\n\nThe following discussion should be read in conjunction with the consolidated\nfinancial statements and related notes included elsewhere herein. The Company's\nfuture operating results may be affected by various trends and factors, which\nare beyond the Company's control. These include, among other factors,\nfluctuations in natural gas and crude oil prices, expiration or termination of\ndrilling contracts, currency exchange losses, changes in general economic\nconditions, rapid or unexpected changes in technologies and uncertain business\nconditions that affect the Company's businesses. Accordingly, past results and\ntrends should not be used by investors to anticipate future results or trends.\n\nWith the exception of historical information, the matters discussed in\nManagement's Discussion & Analysis of Results of Operations and Financial\nCondition includes forward-looking statements. These forward-looking statements\nare based on various assumptions. The Company cautions that, while it believes\nsuch assumptions to be reasonable and makes them in good faith, assumed facts\nalmost always vary from actual results. The differences between assumed facts\nand actual results can be material. The Company is including this cautionary\nstatement to take advantage of the \"safe harbor\" provisions of the Private\nSecurities Litigation Reform Act of 1995 for any forward-looking statements made\nby, or on behalf of, the Company. The factors identified in this cautionary\nstatement are important factors (but not necessarily all important factors) that\ncould cause actual results to differ materially from those expressed in any\nforward-looking statement made by, or on behalf of, the Company.\n\nRESULTS OF OPERATIONS\n\nThe Company reported net income of $12,811,000 ($0.26 per share on a diluted\nbasis) from revenues of $143,864,000 for the first quarter ended December 31,\n1998, compared with net income of $29,165,000 ($0.57 per share, diluted) from\nrevenues of $151,823,000 for the first quarter of the prior fiscal year. Net\nincome in the first quarter of fiscal 1998 included $3,675,000 ($0.07 per share,\ndiluted) from the sale of investment securities.\n\nThe Company's Exploration and Production Division reported operating profit of\n$4,505,000 for the first quarter ended December 31, 1998, compared with\noperating profit of $14,859,000 for the same period in fiscal 1998. This\nsignificant decrease is the result of lower oil and gas revenues, increased\nexploration costs and increased depreciation and depletion, offset by decreased\ndry hole expense and a gain recorded from the sale of producing properties.\n\nOil and gas revenues decreased approximately 32% from the first quarter of\nfiscal 1998 to $21.6 million in the first quarter of fiscal 1999. Crude oil\nprices for the first quarter of fiscal 1999 averaged $10.95 per bbl, compared\nwith $18.50 per bbl in the same period of 1998. Crude oil volumes were 1,951\nbbls/d and 2,220 bbls/d for the first quarter of 1999 and 1998, respectively.\nNatural gas prices for the first quarter of fiscal 1999 averaged $1.79 per mcf,\ncompared with $2.61 per mcf in the same period of 1998. Natural gas volumes for\nthe first quarter of fiscal 1999 averaged 119.4 mmcf/d, compared with 117.1\nmmcf/d in the same period of 1998. The first quarter of fiscal 1999 also\nincluded gains from the sale of producing properties of approximately $4.6\nmillion.\n\n -11-\n\n 12\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n (Continued)\n\nExploration costs, primarily geophysical charges, increased to $6.8 million in\nthe first quarter of fiscal 1999, compared with $.9 million in the first quarter\nof fiscal 1998. Dry hole expense was $17,000 in first quarter of fiscal 1999,\ncompared with $2,581,000 in the same period of fiscal 1998. Depreciation and\ndepletion increased $1.3 million (21%) in the first quarter of fiscal 1999,\ncompared with first quarter of fiscal 1998. A portion of the increase in\ndepreciation and depletion was the recognition of an impairment charge of\napproximately $.7 million for proved exploration and production properties,\nwhich is included in depreciation, depletion and amortization expense.\n\nOperating profit from the Company's domestic drilling operations for the first\nthree months of fiscal 1999 and 1998 was $7,664,000 and $9,371,000,\nrespectively. Domestic land rig activity averaged 85% for the first quarter of\nfiscal 1999, down from the 100% utilization experienced in the same period of\nfiscal 1998. Revenue days for land rigs were essentially the same as last year,\nwhile average dayrates were down approximately 7% from last year's first\nquarter. Continued softening of land dayrates and rig utilization are expected\nfor the remainder of the fiscal year.\n\nDomestic offshore platform rig activity was at 100% for the first quarter of\nboth fiscal 1999 and 1998. Recent increases in offshore platform rig revenues\nand earnings from the Company's commencement of operations on Shell's Ursa\nTension Leg Platform, together with fees earned from managing the construction\nof a large platform rig, should help offset declines in land rig revenues and\nearnings during the next three quarters.\n\nOperating profit from the Company's international drilling operations for the\nfirst three months of fiscal 1999 and 1998 was $9,941,000 and $14,055,000,\nrespectively. Revenues for the same periods were $54,685,000 and $51,994,000.\nIncluded in revenues and operating profit for the first quarter of fiscal 1999\nwere recently negotiated retroactive billings in Colombia and incentive payments\nin Venezuela, as well as revenues from Rig 91, which did not commence operations\nuntil late in the first quarter of fiscal 1998. During the second quarter, Rig\n91 was moved from offshore Venezuela to the Company's domestic operations and\nwill be working in the Gulf of Mexico for a major oil company.\n\nRig utilization in South America has fallen from 91% in the first quarter of\nfiscal 1998 to 65% in this year's first quarter. As volatility in dayrates and\nutilization continues, revenues and operating profit from international\noperations are expected to be lower in the next three quarters.\n\nIMPACT OF YEAR 2000\n\nReaders are cautioned that forward-looking statements contained in the following\nYear 2000 discussion should be read in conjunction with the Company's\ndisclosures under the heading: \"Risk Factors and Forward-Looking Statements\".\nThis discussion shall constitute the Company's \"Year 2000 Readiness Disclosure\"\nwithin the meaning of the Year 2000 Information and Readiness Act.\n\n\n\n\n\n\n -12-\n\n 13\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n (Continued)\n\nTHE COMPANY'S STATE OF READINESS\n\nThe Company has undertaken various initiatives in an attempt to ensure that its\nhardware, software and equipment will function properly with respect to dates\nbefore and after January 1, 2000. For this purpose, the phrase \"hardware,\nsoftware and equipment\" includes systems that are commonly thought of as\nInformation Technology (\"IT\") systems, as well as those Non-Information\nTechnology (\"Non-IT\") systems and equipment which include imbedded technology.\nIT systems include computer hardware and software, and other related systems.\nNon-IT systems include certain oil and gas drilling and production equipment,\nsecurity systems and other miscellaneous systems. The Non-IT systems present the\ngreatest compliance challenge since identification of embedded technology is\ndifficult and because the Company is, to a great extent, reliant on third\nparties for Non-IT compliance.\n\nThe Company has formed a Year 2000 (\"Y2K\") Project team which is chaired by the\nDirector of IT. The team includes IT staff, corporate staff and representatives\nfrom the Company's business units. The Company has organized its compliance\nefforts into a four-phase approach as follows:\n\nPhase 1: Identification - Identify and inventory mission \n critical components of Company operations and systems which\n may be affected.\n\nPhase 2: Assessment - Determine which hardware, software and\n equipment must be modified, upgraded or replaced.\n\nPhase 3: Remediation - Modify, upgrade or replace non-compliant \n hardware, software and equipment.\n\nPhase 4: Testing - Fully test all IT systems which are material to\n the Company's operations. Selectively test those Non-IT\n systems and equipment which are material to the Company's\n operations.\n\nFor the purposes of the Y2K Project material items are those items the Company\nbelieves to have a risk involving safety of individuals, damage to the\nenvironment, material effect on revenues or material damage to property.\n\nThe following represents the status of the Company's IT and Non-IT Compliance\nProject:\n\n\n
\n\n\n\n -13-\n\n 14\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n (Continued)\n\n\n
\n\nAs reflected in the above table, the Company is in the process of identifying\nembedded technology and determining the extent to which such technology is Y2K\ncompliant. As part of this process, the Company has mailed letters to its\nsignificant vendors and service providers to confirm that the products and\nservices purchased from or by such entities are Y2K compliant. Also, the Company\nis in the process of obtaining information from significant customers regarding\nthe extent to which Y2K issues may affect the amount of business the Company\ncurrently conducts with such customers. As of February 1, 1999, the Company had\nreceived responses from approximately 57% of such vendors and service providers.\nApproximately 86% of such vendors and service providers have provided written\nassurances that they expect to address their significant Y2K issues on a timely\nbasis. A follow-up mailing to significant vendors and services providers that\ndid not initially respond, or whose responses were deemed unsatisfactory, has\nbeen completed. As a result of these activities, the Company expects discussions\nwill be conducted with the vendors or manufacturers of such mission critical\nequipment to determine the most effective solutions to Y2K compliance issues.\n\nTHE COST TO ADDRESS Y2K ISSUES\n\nThe Company believes that the cost of its Y2K Project should not exceed\n$1,000,000, including costs of employees working on the Y2K Project. Costs\nincurred for new software and hardware purchases are being capitalized, and\nother costs are being expensed as incurred. The costs relating to the Company's\nY2K Project are paid from the Company's general funds. To date, the Company has\nincurred Y2K Project costs of approximately $600,000. This expenditure mainly\nrelates to repair, upgrading or replacement of existing software and hardware,\nand solicitation and evaluation of information received from significant\nvendors, service providers, or customers. The $1,000,000 figure does not include\nthe costs of independent Y2K consultants. The Company has not determined whether\nit will engage independent Y2K consultants. The cost of such consultants would\nnot be material to the Company.\n\n -14-\n 15\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n (Continued)\n\nTHE COMPANY'S CONTINGENCY PLAN\n\nThe Company is in the process of developing its contingency plans on a business\nunit and departmental basis. These plans are projected to be complete by May 31,\n1999. These contingency plans will include, but will not be limited to:\ndevelopment of backup and recovery procedures for IT Systems; remediation of\nexisting systems or equipment; installation of new systems or equipment;\nstockpiling of Y2K compliant goods and supplies; stockpiling old equipment which\ndoes not contain embedded technology; replacement of current services with\ntemporary manual processes; finding non-technological alternatives or sources\nfor information; or identification of alternative customers, suppliers or\noutsourcing subcontractors who stand ready to receive or provide critical goods,\nequipment and services. The Company has engaged a computer recovery services\ncontractor as a potential source of alternative computer systems as part of its\ncontingency plan.\n\nTHE RISKS OF THE COMPANY'S Y2K ISSUES\n\nThe Company is in the process of completing an analysis of the operational\nproblems and costs (including loss of revenues) that would be reasonably likely\nto result from the failure by the Company and certain third parties to complete\nefforts necessary to achieve Y2K compliance on a timely basis. The Company\npresently believes that the Y2K issue will not pose significant operational\nproblems for the Company. However, if all significant Y2K issues are not\nproperly identified, or assessment, remediation and testing are not effected\ntimely, there can be no assurance that the Y2K issue will not materially and\nadversely impact the Company's results of operations, liquidity and financial\ncondition or materially and adversely affect the Company's relationships with\ncustomers, vendors, or others. Additionally, there can be no assurance that the\nlack of Y2K compliance by other entities will not have a material and adverse\nimpact on the Company's operations or financial condition.\n\nThe preceding Y2K disclosure is based upon certain forward-looking information\nincluding, but not limited to, the dates on which the Company believes that\nvarious phases of the Y2K Project will be completed. This forward-looking\ninformation is based on Management's good faith estimates. These estimates were\nderived utilizing numerous assumptions of future events, including the continued\navailability of certain resources, third-party plans and other factors. However,\nthere can be no guarantee that these estimates will be achieved, or that there\nwill not be a delay in, or increased costs associated with, the implementation\nof the Y2K Project. Specific factors that might cause differences between the\nestimates and actual results include, but are not limited to, the availability\nand cost of personnel trained in these areas, the ability to locate and correct\nall relevant computer code, timely responses to and corrections by third-parties\nand suppliers, the ability to implement interfaces between the new systems and\nthe systems not being replaced, and similar uncertainties. Due to the general\nuncertainty inherent in Y2K issues, including the uncertainty of third party Y2K\ncompliance, the Company cannot ensure its ability to timely and cost-effectively\nresolve problems associated with Y2K issues that may affect its operations and\nbusiness, or expose it to third party liability.\n\n\n\n\n -15-\n 16\n\n PART I. FINANCIAL INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS\n OF OPERATIONS AND FINANCIAL CONDITION\n DECEMBER 31, 1998\n (Continued)\n\nLIQUIDITY AND CAPITAL RESOURCES\n\nNet cash provided by operating activities was $16,114,000 for the first quarter\nof fiscal 1999, compared with $32,184,000 for the same period in 1998. Capital\nexpenditures were $44,418,000 and $48,633,000 for the first quarter of fiscal\n1999 and 1998, respectively.\n\nIt is anticipated for fiscal 1999 that capital expenditures will approach $135\nmillion, which is close to the Company's projected internally generated cash\nflows. The Company would, if necessary, borrow under its line of credit\nagreement to fund capital expenditures in excess of cash flows. The Company\nborrowed an additional $28,700,000 during the current quarter. The Company's\nindebtedness totaled $123,500,000 as of December 31, 1998, as described in Note\n7 to the Consolidated Condensed Financial Statements.\n\nThere were no other significant changes in the Company's financial position\nsince September 30, 1998.\n\n\n\n\n\n\n\n\n\n\n\n -16-\n 17\n\n PART II. OTHER INFORMATION\n HELMERICH & PAYNE, INC. AND SUBSIDIARIES\n\n\nItem 6(b) Reports on Form 8-K\n\n There were no reports on Form 8-K for the three months ended December\n31, 1998.\n\n\n\n\n\n\n SIGNATURES\n\n\n\n Pursuant to the requirements of the Securities Exchange Act of 1934,\nthe Registrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n\n\n\n\nDate: FEBRUARY 16, 1999 /S/ DOUGLAS E. FEARS \n ----------------------- -----------------------------------------\n Douglas E. Fears, Chief Financial Officer\n\n\n\n\nDate: FEBRUARY 16, 1999 /S/ HANS C. HELMERICH\n ----------------------- -----------------------------------------\n Hans C. Helmerich, President\n \n\n\n\n\n\n\n\n\n\n\n\n\n -17-\n 18\n\n INDEX TO EXHIBITS\n\n\n\n
\n\n\n \n \n\nEX-27\n2\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":191,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"HPQ"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/47217/0000047217-99-000003.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n TzpeB7/KztbKSmMf6JDfxdQ34ULLQNkGLkRWg6jWaq7nmdVrUmjzIw322bu5o4ne\n fphskNKretNF2gsqiHNChQ==\n\n0000047217-99-000003.txt : 19990301\n0000047217-99-000003.hdr.sgml : 19990301\nACCESSION NUMBER:\t\t0000047217-99-000003\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t2\nCONFORMED PERIOD OF REPORT:\t19990131\nFILED AS OF DATE:\t\t19990226\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tHEWLETT PACKARD CO\n\t\tCENTRAL INDEX KEY:\t\t\t0000047217\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tCOMPUTER & OFFICE EQUIPMENT [3570]\n\t\tIRS NUMBER:\t\t\t\t941081436\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t1031\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-04423\n\t\tFILM NUMBER:\t\t99552699\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t3000 HANOVER ST\n\t\tCITY:\t\t\tPALO ALTO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94304\n\t\tBUSINESS PHONE:\t\t4158571501\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t3000 HANOVER ST\n\t\tSTREET 2:\t\tMS 20BQ\n\t\tCITY:\t\t\tPALO ALTO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94304\n \n\n10-Q\n1\n10-Q FILING FOR QUARTER ENDING JANUARY 31, 1999\n\n\n \n \n SECURITIES AND EXCHANGE COMMISSION\n \n Washington, D.C. 20549\n \n FORM 10-Q\n \n (Mark one)\n ___\n | X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)\n ---\n OF THE SECURITIES EXCHANGE ACT OF 1934.\n \n For the quarterly period ended January 31, 1999\n \n OR\n ___\n | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)\n ---\n OF THE SECURITIES EXCHANGE ACT OF 1934.\n \n For the transition period from ___________ to __________\n \n Commission file number: 1-4423\n \n HEWLETT-PACKARD COMPANY \n ----------------------------------------------------\n (Exact name of registrant as specified in its charter)\n \n Delaware 94-1081436 \n ----------------------------- ------------------\n (State or other jurisdiction of (IRS Employer\n incorporation or organization) Identification No.)\n \n 3000 Hanover Street, Palo Alto, California 94304 \n ------------------------------------------ ---------\n (Address of principal executive offices) (Zip Code)\n \n Registrant's telephone number, including area code (650) 857-1501\n -------------\n \n ________________________________________________________________________ \n (Former name, former address and former fiscal year, if changed since\n last report)\n \n Indicate by check mark whether the registrant (1) has filed all reports\n required to be filed by Section 13 or 15(d) of the Securities Exchange\n Act of 1934 during the preceding 12 months (or for such shorter period\n that the registrant was required to file such reports), and (2) has been\n subject to such filing requirements for the past 90 days.\n \n Yes X No \n ----- -----\n \n Indicate the number of shares outstanding of each of the issuer's\n classes of common stock, as of the latest practicable date.\n \n Class Outstanding at January 31, 1999\n ----------------------------- -------------------------------\n Common Stock, $0.01 par value 1.015 billion shares\n\n \n \n\n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n INDEX\n -----\n Page No.\n --------\n \n Part I. Financial Information\n \n Item 1. Financial Statements.\n \n Consolidated Condensed Balance Sheet \n January 31, 1999 (Unaudited) and October 31, 1998 2\n \n Consolidated Condensed Statement of Earnings\n Three months ended January 31, 1999 \n and 1998 (Unaudited) 3 \n \n Consolidated Condensed Statement of Cash Flows \n Three months ended January 31, 1999 and 1998 (Unaudited) 4\n \n Notes to Consolidated Condensed Financial Statements \n (Unaudited) 5-6\n \n Item 2. Management's Discussion and Analysis of Financial \n Condition, Results of Operations and Factors That May \n Affect Future Results (Unaudited) 7-17 \n \n Item 3. Quantitative and Qualitative Disclosures About Market Risk\n \n \n Part II. Other Information\n \n \n Item 6. Exhibits and Reports on Form 8-K. 17\n \n Signature 18\n \n Exhibit Index 19\n \n 1\n \n \n\n Item 1. Financial Statements.\n \n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n CONSOLIDATED CONDENSED BALANCE SHEET\n ------------------------------------\n (Millions except par value and number of shares)\n \n January 31 October 31\n 1999 1998 \n ----------- ---------- \n (Unaudited)\n Assets\n ------\n \n Current assets:\n Cash and cash equivalents $ 3,694 $ 4,046\n Short-term investments 4 21 \n Accounts receivable 5,790 6,232\n Financing receivables 1,780 1,520 \n Inventory 6,302 6,184 \n Other current assets 3,370 3,581 \n ------- ------ \n Total current assets 20,940 21,584\n ------- -------\n \n Property, plant and equipment (less accumulated\n depreciation: January 31, 1999 - $6,383; \n October 31, 1998 - $6,212) 6,139 6,358\n Long-term investments and other assets 5,789 5,731\n ------- -------\n $32,868 $33,673 \n ======= ======= \n \n \n Liabilities and Shareholders' Equity\n ------------------------------------\n \n Current liabilities:\n Notes payable and short-term borrowings $ 1,288 $ 1,245\n Accounts payable 2,835 3,203 \n Employee compensation and benefits 1,740 1,768\n Taxes on earnings 1,903 2,796\n Deferred revenues 1,605 1,453\n Other accrued liabilities 3,088 3,008\n ------- -------\n Total current liabilities 12,459 13,473\n ------- -------\n \n Long-term debt 1,708 2,063\n Other liabilities 1,191 1,218 \n \n \n Shareholders' equity:\n Preferred stock, $1 par value; 300,000,000 \n shares authorized; none issued - -\n Common stock and capital in excess of $0.01 \n par value; 4,800,000,000 shares authorized;\n 1,015,339,000 and 1,015,403,000 shares\n issued and outstanding at January 31, 1999\n and October 31, 1998, respectively 64 10\n Retained earnings 17,446 16,909 \n ------- ------- \n Total shareholders' equity 17,510 16,919 \n ------- ------- \n $32,868 $33,673 \n ======= =======\n \n The accompanying notes are an integral part of these consolidated \n condensed financial statements.\n\n \n \n \n \n\n\n \n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n CONSOLIDATED CONDENSED STATEMENT OF EARNINGS\n --------------------------------------------\n (Unaudited)\n \n (Millions except per share amounts)\n \n \n
\n \n The accompanying notes are an integral part of these consolidated\n condensed financial statements.\n \n \n \n \n \n\n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS\n ----------------------------------------------\n (Unaudited)\n \n (Millions)\n Three month ended\n January 31\n -----------------\n 1999 1998\n ---- ----\n \n Cash flows from operating activities:\n Net earnings $ 960 $ 929\n Adjustments to reconcile net earnings to net \n cash provided by operating activities:\n Depreciation and amortization 420 411\n Deferred taxes on earnings 350 (108)\n Change in assets and liabilities: \n Accounts and financing receivables (23) (64)\n Inventories (119) (326)\n Accounts payable (368) (210)\n Taxes on earnings (890) 495\n Other current assets and liabilities (100) 34\n Other, net 60 (17)\n ------- -------\n Net cash provided by operating activities 290 1,144 \n ------- -------\n \n Cash flows from investing activities:\n Investment in property, plant and equipment (311) (450)\n Disposition of property, plant and equipment 178 152\n Purchase of short-term investments (475) (1,605)\n Maturities of short-term investments 492 925\n Other, net 48 (21)\n ------- -------\n Net cash used in investing activities (68) (999)\n \n Cash flows from financing activities:\n Change in notes payable and short-term borrowings 175 462\n Issuance of long-term debt 28 139\n Payment of long-term debt (529) (446)\n Issuance of common stock under employee stock plans 179 96\n Repurchase of common stock (265) (589)\n Dividends (162) (146)\n ------- -------\n Net cash used in financing activities (574) (484)\n ------ ------\n \n Decrease in cash and cash equivalents (352) (339)\n Cash and cash equivalents at beginning of period 4,046 3,072\n ------ ------\n Cash and cash equivalents at end of period $3,694 $2,733\n ====== ======\n \n The accompanying notes are an integral part of these consolidated\n condensed financial statements.\n\n \n \n \n \n \n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS\n ----------------------------------------------------\n (Unaudited)\n \n 1. In the opinion of the Company's management, the accompanying consolidated\n condensed financial statements contain all adjustments (which comprise\n only normal and recurring accruals) necessary to present fairly the\n financial position as of January 31, 1999 and October 31, 1998, the\n results of operations for the three months ended January 31, 1999 and\n 1998, and the cash flows for the three months ended January 31, 1999 and\n 1998.\n \n The results of operations for the three months ended January 31, 1999 \n are not necessarily indicative of the results to be expected for the \n full year. The information included in this Form 10-Q should be read\n in conjunction with Management's Discussion and Analysis and the\n consolidated financial statements and notes thereto included in the\n Hewlett-Packard Company 1998 Form 10-K.\n \n 2. The Company's basic EPS is calculated based on net earnings available\n to common shareholders and the weighted-average number of shares \n outstanding during the reported period. Diluted EPS includes additional\n dilution from potential common stock, such as stock issuable pursuant \n to the exercise of stock options outstanding and the conversion of debt. \n \n \n Three Months Ended\n January 31 \n ------------------\n 1999 1998\n ---- ----\n \n (in millions except\n per share data)\n Numerator: \n Net earnings $ 960 $ 929\n Adjustment for interest\n expense, net of income \n tax effect 6 6\n ------ ------\n Net earnings, adjusted 966 935\n \n Denominator:\n Weighted-average shares\n outstanding 1,011 1,038\n \n Effect of dilutive \n securities:\n Dilutive options 27 28\n \n Convertible zero-coupon \n notes due 2017 11 10\n ------ ------ \n Dilutive potential \n common shares 38 38 \n \n\n \n\n \n Weighted-average shares \n and dilutive potential\n common shares 1,049 1,076 \n \n Basic earnings per share $0.95 $0.89\n \n Diluted earnings per share $0.92 $0.86\n \n \n 3. Income tax provisions for interim periods are based on estimated\n effective annual income tax rates. The effective income tax rate varies\n from the U.S. federal statutory income tax rate primarily because of\n variations in the tax rates on foreign income. \n \n 4. Inventory\n (In Millions) \n January 31 October 31\n 1999 1998\n ---- ----\n \n Finished Goods $4,327 $4,170\n Purchased parts and fabricated\n assemblies 1,975 2,014\n ------ ------\n $6,302 $6,184\n ====== ======\n \n 5. The Company paid interest of $99 million and $96 million during the three\n months ended January 31, 1999 and 1998, respectively. During the same\n periods, the Company paid income taxes of $871 million and received an\n income tax refund, net of income taxes paid, of $40 million,\n respectively. The effect of foreign currency exchange rate fluctuations\n on cash balances held in foreign currencies was not material.\n \n 6. In June 1998, the Financial Accounting Standards Board (FASB)issued\n Statement of Financial Accounting Standards No. 133 (SFAS No. 133),\n \"Accounting for Derivative Instruments and Hedging Activities.\" This\n statement establishes accounting and reporting standards for derivative\n instruments and requires recognition of all derivatives as assets or\n liabilities in the statement of financial position and measurement of\n those instruments at fair value. The statement is effective for fiscal\n years beginning after June 15, 1999. The Company will adopt the standard\n no later than the first quarter of fiscal 2000 and is in the process of\n determining the impact that adoption will have on its consolidated\n financial statements.\n \n In June 1997, the FASB issued SFAS No. 131 \"Disclosures about Segments\n of an Enterprise and Related Information.\" The statement changes\n standards for the way that public business enterprises identify and\n report operating segments in annual and interim financial statements. \n This statement requires selected information about an enterprise's\n operating segments and related disclosure about products and services,\n geographic areas and major customers. The Company expects to report\n multiple segments when it adopts the standard for fiscal year-end 1999.\n \n \n\n \n \n Item 2. Management's Discussion and Analysis of Financial Condition,\n Results of Operations and Factors That May Affect Future\n Results (Unaudited).\n \n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n RESULTS OF OPERATIONS\n ---------------------\n \n Net Revenue - Net revenue for the first quarter ended January 31, 1999 was\n $11.9 billion, an increase of 1 percent from the same period of fiscal\n 1998. Product sales decreased by less than 1 percent and service revenue\n grew 10 percent over the corresponding period of fiscal 1998. Net revenue\n grew 3 percent to $6.8 billion internationally and declined 2 percent to\n $5.1 billion in the U.S. Currency had no significant impact on the\n Company's reported net revenue growth for the quarter.\n \n The first quarter's net revenue growth was principally due to solid demand\n for the Company's family of DeskJet and LaserJet printers and related\n supplies, strong demand for the Company's HP Pavilion home personal\n computers and strong growth in service and support revenue, primarily\n customer support, outsourcing and financing services. Net revenue growth\n from these products and services was offset by declines in revenue growth\n in the Company's measurement businesses, enterprise server products and\n commercial personal computers. The decline in net revenue in the Company's\n measurement business was primarily attributable to test and measurement\n which experienced a 14% decline in net revenue during the first quarter of\n 1999. Growth in test and measurement net revenue continued to be impacted\n by economic weakness in Asia as well as the worldwide semiconductor\n industry slowdown that began in 1998.\n \n Costs and Expenses - Cost of products sold and services as a percentage of\n net revenue was 66.9 percent for the first quarter of fiscal 1999,\n compared to 66.3 percent for the first quarter of fiscal 1998, a 0.6\n percentage point increase. The slight increase in the cost of sales\n percentage was attributed to a number of factors. The effect of lower\n volumes for the Company's measurement products as well as an overall\n continued shift in the Company's product sales mix to lower-gross-margin\n products resulted in an increase in the cost of sales percentage. This\n increase in the cost of sales ratio was partially offset by operational\n efficiencies in personal computers, increased volume in printers and lower\n component costs in some enterprise servers. The Company expects continued\n variability in the cost of sales trend over time, with an overall upward\n trend over the long-term, as competitive pricing pressures and mix shifts\n continue. \n \n Operating expenses as a percentage of net revenue were 23.1 percent for\n the first quarter of fiscal 1999, compared to 22.7 percent for the first\n quarter of fiscal 1998, a 0.4 percentage point increase. Despite the\n increase in the operating expense percentage, operating expenses grew only\n 3 percent for the first quarter of fiscal 1999, compared to 15 percent\n growth experienced in the first quarter of fiscal 1998. The first quarter\n 1999 increase of 3 percent resulted primarily from higher expenses\n including the effect of stock appreciation rights. Fluctuations in foreign\n currency exchange rates had no significant impact on the year-over-year \n operating expense growth rate.\n\n \n \n The Company continues to focus on the reduction of operating expense\n ratios and optimization of manufacturing processes in order to improve\n profitability.\n \n Provision for Taxes - The provision for taxes as a percentage of earnings\n before taxes was 27 percent for the first quarter of fiscal 1999 compared\n to 30 percent for the corresponding period in the prior year and 28\n percent for the entire fiscal 1998. The annual effective tax rate\n decreased as a result of changes in the expected geographic mix of the\n Company's earnings.\n \n Net Earnings - Net earnings for the first quarter of fiscal 1999 were $960\n million, compared to net earnings of $929 million for the first quarter of\n fiscal 1998. Earnings per share for the first quarter of fiscal 1999 on a\n diluted basis were 92 cents per share on 1.05 billion weighted-average\n shares and equivalents, compared to 86 cents per share on an average of\n 1.08 billion shares for the first quarter of fiscal 1998. Basic earnings\n per share for the first quarter of fiscal 1999 were 95 cents per share on\n an average of 1.01 billion shares, compared to 89 cents per share on an\n average of 1.04 billion shares for the first quarter of fiscal 1998.\n \n FINANCIAL CONDITION\n -------------------\n \n Liquidity and Capital Resources - The Company's financial position\n continues to be strong, with cash and cash equivalents and short-term\n investments of $3.7 billion at January 31, 1999, compared with $4.1\n billion at October 31, 1998. In addition, other long-term investments of\n $1.9 billion, relatively low levels of debt compared to assets, and a\n large equity base continue to contribute to the Company's financial\n flexibility.\n \n Cash flows from operating activities were $290 million during the first\n three months of fiscal 1999, compared to $1.1 billion for the\n corresponding period of fiscal 1998. The decrease in cash flows from\n operating activities in fiscal 1999 was attributable primarily to tax\n payments made in the first quarter of fiscal 1999 and the change in\n accounts payable, partially offset by increased net earnings and slower\n growth in accounts and financing receivables and inventory. Inventory as\n a percentage of net revenue has decreased from 16.0 percent at the end of\n the first quarter of fiscal 1998 to 13.4 percent at January 31, 1999, due\n primarily to ongoing progress in supply-chain management. In addition,\n accounts and financing receivables as a percentage of net revenue \n decreased from 16.5 percent at January 31, 1998 to 16.0 percent as of\n January 31, 1999.\n \n Capital expenditures for the first three months of fiscal 1999 were $311\n million, compared to $450 million for the corresponding period in fiscal \n 1998. The decrease in capital expenditures was due in part to a Company-\n wide emphasis on reducing non-essential expenditures combined with\n increased outsourcing of certain production processes and slowing capacity\n requirements.\n \n Shares of the Company's common stock are repurchased under a systematic\n program to manage the dilution created by shares issued under employee\n stock plans. During July 1998, the Company's Board of Directors\n authorized a new incremental repurchase program under which up to $2\n billion of the Company's common stock can be repurchased in the open\n market or in private transactions. Under both these plans, during the\n first quarter ended January 31, 1999, the Company purchased and retired\n approximately 4.2 million shares for an aggregate price of $265 million. \n Under the systematic program, during the first quarter ended January 31,\n 1998, the Company purchased and retired approximately 9.4 million shares\n for an aggregate price of $589 million.\n \n \n\n FACTORS THAT MAY AFFECT FUTURE RESULTS\n --------------------------------------\n \n Competition. The Company encounters aggressive competition in all areas\n of its business activity. The Company's competitors are numerous, ranging\n from some of the world's largest corporations to many relatively small and\n highly specialized firms. The Company competes primarily on the basis of\n technology, performance, price, quality, reliability, distribution and\n customer service and support. Product life cycles are short, and, to\n remain competitive, the Company will be required to develop new products,\n periodically enhance its existing products and compete effectively on the\n basis of the factors described above. In particular, the Company\n anticipates that it will have to continue to adjust prices of many of its\n products to stay competitive and it will have to effectively manage\n financial returns with reduced gross margins.\n \n New Product Introductions. The Company's future operating results may \n be adversely affected if the Company is unable to continue to develop,\n manufacture and market innovative products and services rapidly that meet\n customer requirements for performance and reliability. The process of\n developing new high technology products and solutions is inherently\n complex and uncertain. It requires accurate anticipation of customers'\n changing needs and emerging technological trends. The Company\n consequently must make long-term investments and commit significant\n resources before knowing whether its predictions will eventually result in\n products that achieve market acceptance. After a product is developed, the\n Company must quickly manufacture sufficient volumes at acceptable costs. \n This is a process that requires accurate forecasting of volumes, mix of\n products and configurations. Moreover, the supply and timing of a new\n product or service must match customers' demand and timing for the\n particular product or service. Given the wide variety of systems,\n products and services the Company offers, the process of planning\n production and managing inventory levels becomes increasingly difficult.\n \n Inventory Management. Inventory management has become increasingly complex\n as the Company continues to sell a greater mix of products, especially\n printers and personal computers, through third-party distribution\n channels. Channel partners constantly adjust their ordering patterns in\n response to the Company's and its competitors' supply into the channel and\n the timing of their new product introductions and relative feature sets,\n as well as seasonal fluctuations in end-user demand such as the\n back-to-school and holiday selling periods. Channel partners may increase\n orders during times of shortages, cancel orders if the channel is filled\n with currently available products, or delay orders in anticipation of new\n products. Any excess supply could result in price reductions and\n inventory writedowns, which in turn could adversely affect the Company's\n gross margins.\n \n Short Product Life Cycles. The short life cycles of many of the Company's\n products pose a challenge for the effective management of the transition\n from existing products to new products and could adversely affect the\n Company's future operating results. Product development or manufacturing\n delays, variations in product costs, and delays in customer purchases of\n\n \n\n existing products in anticipation of new product introductions are among\n the factors that make a smooth transition from current products to new\n products difficult. In addition, the timing of introductions by suppliers\n and competitors of new products and services may negatively affect future\n operating results of the Company, especially when competitive product\n introductions coincide with periods leading up to the Company's own\n introduction of new or enhanced products. Furthermore, some of the\n Company's own new products may replace or compete with certain of the\n Company's current products.\n \n Intellectual Property. The Company generally relies upon patent,\n copyright, trademark and trade secret laws in the United States and in\n selected other countries to establish and maintain its proprietary rights\n in its technology and products. However, there can be no assurance that\n any of the Company's proprietary rights will not be challenged,\n invalidated or circumvented, or that any such rights will provide\n significant competitive advantages. Moreover, because of the rapid pace\n of technological change in the information technology industry, many of\n the Company's products rely on key technologies developed by others. \n There can be no assurance that the Company will be able to continue to\n obtain licenses to such technologies. In addition, from time to time, the\n Company receives notices from third parties regarding patent or copyright\n claims. Any such claims, with or without merit, could be time-consuming\n to defend, result in costly litigation, divert management's attention and\n resources and cause the Company to incur significant expenses. In the\n event of a successful claim of infringement against the Company and\n failure or inability of the Company to license the infringed technology or\n to substitute similar non-infringing technology, the Company's business\n could be adversely affected.\n \n Reliance on Suppliers. Portions of the Company's manufacturing operations\n are dependent on the ability of suppliers to deliver quality components,\n subassemblies and completed products in time to meet critical\n manufacturing and distribution schedules. The Company periodically\n experiences constrained supply of certain component parts in some product\n lines as a result of strong demand in the industry for those parts. Such\n constraints, if persistent, may adversely affect the Company's operating\n results until alternate sourcing can be developed. In order to secure\n components for production and introduction of new products, the Company at\n times makes advance payments to certain suppliers, and often enters into\n noncancelable purchase commitments with vendors for such components. \n Volatility in the prices of these component parts, the possible inability\n of the Company to secure enough components at reasonable prices to build\n new products in a timely manner in the quantities and configurations\n demanded or, conversely, a temporary oversupply of these parts, could\n adversely affect the Company's future operating results.\n \n Reliance on Third-Party Distribution Channels. The Company continues to \n expand into third-party distribution channels to accommodate changing \n customer preferences. As a result, the financial health of wholesale and\n retail distributors of the Company's products, and the Company's\n continuing relationships with such distributors, are becoming more\n important to the Company's success. Some of these companies are thinly\n capitalized and may be unable to withstand changes in business conditions. \n The Company's financial results could be adversely affected if the\n financial condition of certain of these third parties substantially\n weakens or if the Company's relationship with them deteriorates.\n\n \n \n International. Sales outside the United States make up more than half of\n the Company's revenues. In addition, a portion of the Company's product\n and component manufacturing, along with key suppliers, are located outside\n the United States. Accordingly, the Company's future results could be\n adversely affected by a variety of factors, including changes in a\n specific country's or region's political conditions or changes or\n continued weakness in economic conditions, trade protection measures,\n import or export licensing requirements, the overlap of different tax\n structures, unexpected changes in regulatory requirements and natural\n disasters. \n \n Derivative Financial Instruments. The Company is also exposed to foreign\n currency exchange rate risk inherent in its sales commitments, anticipated\n sales and assets and liabilities denominated in currencies other than the\n U.S. dollar, as well as interest rate risk inherent in the Company's debt,\n investment and finance receivable portfolio. As more fully described in\n the notes to the Company's 1998 annual report to shareholders, the\n Company's risk management strategy utilizes derivative financial\n instruments, including forwards, swaps and purchased options to hedge\n certain foreign currency and interest rate exposures, with the intent of\n offsetting gains and losses that occur on the underlying exposures with\n gains and losses on the derivative contracts hedging them. The Company\n does not enter into derivatives for trading purposes.\n \n The Company has performed a sensitivity analysis assuming a hypothetical \n 10% adverse movement in foreign exchange rates and interest rates applied\n to the hedging contracts and underlying exposures described above. As of\n January 31, 1999 and 1998, the analysis indicated that such market\n movements would not have a material effect on the Company's consolidated\n financial position, results of operations or cash flows. Actual gains and\n losses in the future may differ materially from that analysis, however,\n based on changes in the timing and amount of interest rate and foreign\n currency exchange rate movements and the Company's actual exposures and\n hedges.\n \n Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. As a\n matter of course, the Company frequently engages in discussions with a\n variety of parties relating to possible acquisitions, strategic alliances,\n joint ventures and divestitures. Although consummation of any transaction\n is unlikely to have a material effect on the Company's results as a whole,\n the implementation or integration of a transaction may contribute to the\n Company's results differing from the investment community's expectation in\n a given quarter. Divestitures may result in the cancellation of orders\n and charges to earnings. Acquisitions and strategic alliances may\n require, among other things, integration or coordination with a different\n company culture, management team organization and business infrastructure. \n They may also require the development, manufacture and marketing of\n product offerings with the Company's products in a way that enhances the\n performance of the combined business or product line. Depending on the\n size and complexity of the transaction, successful integration depends on\n a variety of factors, including the hiring and retention of key employees,\n management of geographically separate facilities, and the integration or\n coordination of different research and development and product\n manufacturing facilities. All of these efforts require varying levels of\n management resources, which may temporarily adversely impact other\n business operations.\n \n \n\n Earthquake. A portion of the Company's research and development\n activities, its corporate headquarters, other critical business operations\n and certain of its suppliers are located near major earthquake faults. \n The ultimate impact on the Company, its significant suppliers and the\n general infrastructure is unknown, but operating results could be\n materially affected in the event of a major earthquake. The Company is\n predominantly uninsured for losses and interruptions caused by\n earthquakes.\n \n Environmental. Certain of the Company's operations involve the use of\n substances regulated under various federal, state, and international laws\n governing the environment. It is the Company's policy to apply strict\n standards for environmental protection to sites inside and outside the\n U.S., even if not subject to regulations imposed by local governments. \n The liability for environmental remediation and related costs is accrued\n when it is considered probable and the costs can be reasonably estimated.\n Environmental costs are presently not material to the Company's operations\n or financial position.\n \n Profit Margin. The profit margins realized by the Company vary somewhat \n among its products, its customer segments and its geographic markets. \n Consequently, the overall profitability of the Company's operations in any \n given period is partially dependent on the product, customer and geographic\n mix reflected in that period's net sales.\n \n Year 2000. The information provided below constitutes a \"Year 2000 \n Readiness Disclosure\" for purposes of the Year 2000 Information and \n Readiness Disclosure Act.\n \n The Year 2000 (\"Y2K\") problem arises from the use of a two-digit field to\n identify years in computer programs, e.g., 85=1985, and the assumption of\n a single century, the 1900s. Any program so created may read, or attempt\n to read, \"00\" as the year 1900. There are two other related issues which\n could also lead to incorrect calculations or failure, such as (i) some\n systems' programming assigns special meaning to certain dates, such as\n 9/9/99, and (ii) the year 2000 is a leap year. Accordingly, some computer\n hardware and software, including programs embedded within machinery and\n parts, will need to be modified prior to the year 2000 to remain\n functional. The Company's Y2K initiatives are focusing primarily on four\n areas of potential impact: internal information technology (IT) systems;\n internal non-IT systems and processes, including services and embedded\n chips (controllers); the Company's products and services, and the\n readiness of significant third parties with whom the Company has material\n business relationships. The Company established a Y2K Program Office in\n 1997 to coordinate these programs across the enterprise and to provide a\n single point of contact for information about the Company's Y2K programs.\n The Company's Y2K efforts in these areas are led by the Y2K General\n Manager who reports directly to the Company's Senior Management. \n \n The Company expects to implement successfully the systems and programming\n changes necessary to address Y2K internal IT and non-IT readiness issues\n and material third party relationships, and based on current estimates, does\n not believe that the costs associated with such actions will have a\n material effect on the Company's results of operations or financial\n condition. However, the costs of such actions may vary from quarter to\n quarter. There can be no assurance, however, that there will not be a\n delay in, or increased costs associated with the implementation of such\n changes. In addition, failure to achieve Y2K readiness for the Company's\n internal systems could delay its ability to manufacture and ship products\n and deliver services, disrupt its customer service and technical support\n facilities, and interrupt customer access to its online products and\n services. The Company's inability to perform these functions could have an\n adverse effect on future results of operations or financial condition.\n \n \n\n Internal IT Systems. - The Company has established a dedicated Y2K IT\n Internal Readiness Program Organization to oversee the Company's worldwide \n Y2K internal IT application and infrastructure readiness activities. The\n Internal Readiness IT Program Organization provides monthly progress\n reports to the Company's senior management. The Internal Readiness IT\n Program Organization is charged with raising awareness throughout the\n Company, developing tools and methodologies for addressing the Y2K issue,\n monitoring the development and implementation of business and\n infrastructure plans to bring non-compliant applications into compliance\n on a timely basis and identifying and assisting in resolving high-risk\n issues. \n \n The Company is approaching its Y2K IT internal readiness program in the\n following four phases: (1) assessment, (2) planning, (3) preparation and\n (4) implementation. The assessment phase involves taking an inventory of\n the Company's internal IT applications to prioritize risk, identifying\n failure dates, defining a solution strategy, estimating repair costs and\n communicating across and within business units regarding the magnitude of\n the problem and the need to address Y2K issues. The planning phase\n consists of identifying the tasks necessary to ensure readiness,\n scheduling remediation plans for applications and infrastructure, and\n determining resource requirements and allocations. The third phase,\n preparation, involves readying the development and testing environments,\n and piloting the remediation process. Implementation, the last phase,\n consists of executing the Company's plans to fix, test and implement\n critical applications and associated infrastructure, and putting in place\n contingency plans for processes that have a high impact on the Company's\n businesses. \n \n The Company is targeting its efforts to ensure that its IT applications\n will be Y2K compliant by July 31, 1999. The assessment, planning and\n preparation phases have been completed. As of January 31, 1999, the\n implementation phase is approximately 60 percent complete.\n \n Internal Non-IT Systems and Processes. - Non-IT systems include, but are\n not limited to, those systems that are not commonly thought of as IT\n systems, such as telephone/PBX systems; fax machines; facilities systems\n regulating alarms, building access and sprinklers; manufacturing, assembly\n and distribution equipment; and other miscellaneous systems and processes.\n Y2K readiness for these internal non-IT systems is the responsibility of\n the Company's worldwide operating units and their respective functions and\n operations, e.g., facilities, research and development, manufacturing,\n distribution, logistics, sales and customer support.\n \n The Company's Y2K Program Office has developed a comprehensive process to\n assure all Company operations and global business units use a structured\n and standardized methodology to organize, plan and implement their Y2K\n readiness.\n \n \n\n The Company has also established a Year 2000 Council to coordinate its\n overall internal readiness and its business continuity planning efforts. \n It is composed of representatives from the major business units within the\n Company and the critical corporate and infrastructure functions that\n support them. The Council is chaired by the Company's Year 2000 General\n Manager and has initiated a comprehensive program to ensure timely and\n consistent business continuity planning by all of the Company's business\n units. The program objective is to assure that substantially all Y2K\n testing, internal mitigation and remediation activities, and business\n contingency plans are finalized by July 31, 1999. From July 31, 1999,\n until November 30, 1999, the company's Y2K internal readiness solutions,\n contingency plans, crisis management and recovery mechanisms will be\n further stress-tested to ensure full preparation. \n \n Product and Customer Readiness. - The Company's newly introduced products \n are Y2K compliant. However, certain hardware and software products \n currently installed at customer sites will require upgrade or other \n remediation. Some of these products are used in critical applications \n where the impact of non-performance to these customers and other parties \n could be significant. The Company believes that its customers are \n responsible for costs to achieve their Y2K compliance. The Company, \n however, is taking steps to preserve customer satisfaction and brand \n reputation. In 1997, the Company established a dedicated Y2K Product \n Compliance Program Office to coordinate the Company's worldwide Y2K \n product compliance activities. The Product Compliance Program Office is \n charged with developing and overseeing implementation of plans to identify\n all standard products delivered since January 1, 1995; to test those \n products for compliance; to identify an appropriate path to compliance for \n non-compliant standard products; and to communicate the status and \n necessary customer action for non-compliant standard products. \n \n The Company has an internet website dedicated to communicating Y2K issues\n to a broad customer base. This website includes a product compliance\n search page that allows customers to look up the status of the Company's\n products they have installed. In certain areas, the Company is taking\n additional steps to identify affected customers, raise customer awareness\n related to non-compliance of certain Company products and assist the\n customer base to assess their risks. The Company is in the process of\n implementing plans to accommodate increased levels of customer assistance\n in the first quarter of fiscal 2000 and currently anticipates that a\n significant portion of the costs related to such actions would occur in\n the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000.\n \n All of these efforts are coordinated by the HP Year 2000 Products and\n Customers Board of Directors (\"Board\"), which is composed of\n representatives for all of the Company's product and service business\n units, and which works in conjunction with the Product Compliance Program \n Office to develop and implement the Company's Year 2000 policies for \n products and services. The Company's Year 2000 General Manager chairs \n the Board.\n \n The costs of the readiness program for products are primarily costs of\n existing internal resources largely absorbed within existing engineering\n spending levels. These costs were incurred primarily in fiscal 1998 and\n earlier years and were not broken out from other product engineering\n costs. Historical Y2K customer satisfaction costs were not material.\n Future product readiness costs, including those for customer satisfaction,\n are not anticipated to be material. In addition, while the Company is\n aware of the potential for legal claims against it and other companies for\n damages arising from products that are not Y2K compliant, management\n believes that reasonable customer satisfaction steps are under way so that\n any such claims against the Company would be without merit. \n \n \n\n It is unknown how Y2K issues may affect customer spending patterns. As\n customers focus their attention and capital budgets in the near term on\n preparing their own businesses for the Year 2000, they may either delay or\n accelerate purchases of new applications, services and systems from the\n Company. Many of the Company's products run custom software or connect to\n other systems or peripheral products that may be adversely affected by\n operating system or hardware upgrades. Although these factors may\n increase demand for certain of the Company's products and services, it\n could also soften the demand for other offerings. As a result, these\n events may affect the Company's future revenues and revenue patterns. \n \n Material Third-Party Relationships. - The Company has developed a Y2K\n process for dealing with its key suppliers, contract manufacturers,\n distributors, vendors and partners. The process generally involves the\n following steps: (i) initial supplier survey, (ii) risk assessment and\n contingency planning, (iii) follow-up supplier reviews and escalation, if \n necessary, and where relevant, (iv) testing. To date, the Company has\n received formal responses from all of its critical suppliers. Most of them\n have responded that they expect to address all their significant Y2K\n issues on a timely basis. The Company regularly reviews and monitors the\n suppliers' Y2K readiness plans and performance. Based on the Company's\n risk assessment, selective on-site reviews may be performed. Risk analysis\n has been completed with the Company's base of suppliers and contingency\n plans are now being developed and tested. All testing is targeted to be\n complete by June 1, 1999. In some cases, to meet Y2K readiness, the\n Company has replaced suppliers or eliminated suppliers from consideration\n for new business. The Company has also contracted with multiple\n transportation companies to provide product delivery alternatives. The\n Company has also completed substantially all Electronic Data Interchange\n (EDI) migration and testing with its supply base.\n \n The Company is working to identify and analyze the most reasonably likely\n worst-case scenarios for third-party relationships affected by Y2K. These\n scenarios could include possible infrastructure collapse, the failure of\n power and water supplies, major transportation disruptions, unforeseen\n product shortages due to hoarding of products and sub-assemblies and\n failures of communications and financial systems. Any one of these\n scenarios could have a major and material effect on the Company's ability\n to build its products and deliver services to its customers. While the\n Company has contingency plans in place to address most issues under its\n control, an infrastructure problem outside of its control or some\n combination of several of these problems could result in a delay in\n product shipments depending on the nature and severity of the problems.\n The Company would expect that most utilities and service providers would\n be able to restore service within days although more pervasive system\n problems involving multiple providers could last two to four weeks or more\n depending on the complexity of the systems and the effectiveness of their\n contingency plans.\n \n Although the Company is dedicating substantial resources towards attaining\n Y2K readiness, there is no assurance it will be successful in its efforts\n to identify and address all Y2K issues. Even if the Company acts in a\n timely manner to complete all of its assessments; identifies, develops and\n implements remediation plans believed to be adequate; and develops\n contingency plans believed to be adequate some problems may not be\n identified or corrected in time to prevent material adverse consequences\n to the Company. \n \n \n\n The discussion above regarding estimated completion dates, costs, risks\n and other forward-looking statements regarding Y2K is based on the\n Company's best estimates given information that is currently available and\n is subject to change. As the Company continues to progress with its Y2K\n initiatives, it may discover that actual results will differ materially\n from these estimates.\n \n Adoption of the Euro. In 1997, the Company established a dedicated task \n force to address the issues raised by the introduction of a European single\n currency (the Euro) for initial implementation as of January 1, 1999 and \n during the transition period through January 1, 2002. The Company's primary\n focus has been on the changes needed to deal with a mix of Euro and local\n denomination transactions from the first day of changeover - January 1, 1999.\n Since the beginning of the transition period, product prices in local \n currencies are being converted to Euros as required. At an appropriate \n point during the transition period, product prices in participating\n countries will be established and stored in Euros, and converted to local \n denominations. System changes were implemented to give multi-currency \n capability to the few internal applications that did not have it yet, or \n to ensure that external partners facing systems processing euro conversions\n be compliant with the European council regulations.\n \n The Company has developed plans to support display and printing of the\n Euro character by impacted Hewlett-Packard products. Most products are\n currently able to perform these functions while plans are still in process\n for a few remaining products. Current information about the impact of the\n adoption of the Euro on the Company's products and businesses is available\n at the Hewlett-Packard Euro Web site. \n \n The Company does not presently expect that introduction and use of the\n Euro will materially affect the Company's foreign exchange and hedging\n activities or the Company's use of derivative instruments. Management does\n not expect that the introduction of the Euro will result in any material\n increase in costs to the Company and all costs associated with the\n introduction of the Euro will be expensed to operations as incurred. \n While the Company will continue to evaluate the impact of the Euro\n introduction over time, based on currently available information, \n management does not believe that the introduction of the Euro currency\n will have a material adverse impact on the Company's financial condition\n or overall trends in results of operations.\n \n Quarterly Fluctuations and Volatility of Stock Prices. Although the\n Company believes that it has the product offerings and resources needed\n for continuing success, future revenue and margin trends cannot be\n reliably predicted and may cause the Company to adjust its operations,\n which could cause period-to-period fluctuations in operating results.\n \n The Company's stock price, like that of other technology companies, is\n subject to significant volatility. The announcement of new products,\n services or technological innovations by the Company or its competitors,\n quarterly variations in the Company's results of operations, changes in\n revenue or earnings estimates by the investment community and speculation\n in the press or investment community are among the factors affecting the\n Company's stock price. In addition, the stock price may be affected by\n general market conditions and domestic and international macroeconomic\n factors unrelated to the Company's performance. Because of the foregoing\n reasons, recent trends should not be considered reliable indicators of\n future stock prices or financial results.\n\n \n \n Item 3. Quantitative and Qualitative Disclosures About Market Risk.\n \n A discussion of the Company's exposure to, and management of, market risk\n appears in Item 2 of this Form 10-Q under the heading \"Factors That May\n Affect Future Results\".\n \n \n PART II. OTHER INFORMATION\n ---------------------------\n \n \n Item 6. Exhibits and Reports on Form 8-K.\n \n (a) Exhibits:\n \n A list of exhibits is set forth in the Exhibit Index found on \n page 19 of this report. \n \n (b) Reports on Form 8-K:\n \n None\n \n \n \n \n\n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n SIGNATURE\n ---------\n \n Pursuant to the requirements of the Securities Exchange Act of 1934, the\n registrant has duly caused this report to be signed on its behalf by the\n undersigned thereunto duly authorized.\n \n HEWLETT-PACKARD COMPANY\n (Registrant)\n \n \n \n Dated: February 26, 1999 By:/s/Robert P. Wayman \n --------------------------\n Robert P. Wayman\n Executive Vice President,\n Finance and Administration\n (Chief Financial Officer)\n \n \n \n \n \n\n HEWLETT-PACKARD COMPANY AND SUBSIDIARIES\n \n EXHIBIT INDEX\n -------------\n \n Exhibits:\n \n 1. Not applicable.\n \n 2-4 None.\n \n 5-9. Not applicable.\n \n 10. None\n \n 11. See Item 2 in Notes to Consolidated Condensed Financial\n Statement on Page 4.\n \n 12-14. Not applicable.\n \n 15. None.\n \n 16-17. Not applicable.\n \n 18-19. None.\n \n 20-21. Not applicable.\n \n 22-24. None.\n \n 25-26. Not applicable.\n \n 27. Financial Data Schedule.\n \n 28. Not applicable.\n \n 99. None.\n\n \n \n \n\nEX-27\n2\nARTICLE 5 FDS FOR 1ST QUARTER 10-Q\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":192,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"HRB"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/12659/0000950124-99-001828.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n NMqgOBEGp/Dkfe1uQmqzXAdaSxt44Zvt4h6aClczkajQ6xOKHyYFojxbZXy7qwrn\n 7P+I/Rgn8N/qv+8/t6mhYA==\n\n0000950124-99-001828.txt : 19990317\n0000950124-99-001828.hdr.sgml : 19990317\nACCESSION NUMBER:\t\t0000950124-99-001828\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t4\nCONFORMED PERIOD OF REPORT:\t19990131\nFILED AS OF DATE:\t\t19990316\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tH&R BLOCK INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000012659\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tSERVICES-PERSONAL SERVICES [7200]\n\t\tIRS NUMBER:\t\t\t\t440607856\n\t\tSTATE OF INCORPORATION:\t\t\tMO\n\t\tFISCAL YEAR END:\t\t\t0430\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-06089\n\t\tFILM NUMBER:\t\t99566349\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t4410 MAIN ST\n\t\tCITY:\t\t\tKANSAS CITY\n\t\tSTATE:\t\t\tMO\n\t\tZIP:\t\t\t64111\n\t\tBUSINESS PHONE:\t\t8167536900\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t4410 MAIN STREET\n\t\tCITY:\t\t\tKANSAS CITY\n\t\tSTATE:\t\t\tMO\n\t\tZIP:\t\t\t64111\n \n\n10-Q\n1\nQUARTERLY REPORT DATED JANUARY 31, 1999\n\n\n 1\n SECURITIES AND EXCHANGE COMMISSION\n Washington, D.C. 20549\n ______________________\n\n FORM 10-Q\n\n\n (Mark One)\n [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\n SECURITIES EXCHANGE ACT OF 1934\n For the quarterly period ended January 31, 1999\n\n [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\n SECURITIES EXCHANGE ACT OF 1934\n For the transition period from ______________ to ______________\n\n\n Commission file number 1-6089\n\n H&R BLOCK, INC.\n (Exact name of registrant as specified in its charter)\n \n \n MISSOURI 44-0607856\n (State or other jurisdiction of (I.R.S. Employer\n incorporation or organization) Identification No.)\n \n\n 4400 Main Street\n Kansas City, Missouri 64111\n (Address of principal executive offices, including zip code)\n\n (816) 753-6900\n (Registrant's telephone number, including area code)\n\n\n\nIndicate by check mark whether the registrant (1) has filed all reports\nrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of\n1934 during the preceding 12 months (or for such shorter period that the\nregistrant was required to file such reports), and (2) has been subject to such\nfiling requirements for the past 90 days.\n\nYes X No \n --- ---\n\nThe number of shares outstanding of the registrant's Common Stock, without par\nvalue, at March 1, 1999 was 97,188,921 shares.\n\n 2\n\n\n\n TABLE OF CONTENTS\n\n\n\n\n Page\n ----\n PART I Financial Information\n\n Consolidated Balance Sheets\n January 31, 1999 and April 30, 1998........................... 1\n \n Consolidated Statements of Operations\n Three Months Ended January 31, 1999 and 1998.................. 2\n Nine Months Ended January 31, 1999 and 1998................... 3\n \n Consolidated Statements of Cash Flows\n Nine Months Ended January 31, 1999 and 1998................... 4\n \n Notes to Consolidated Financial Statements....................... 5\n \n Management's Discussion and Analysis of Financial\n Condition and Results of Operations........................... 10\n \n Quantitative and Qualitative Disclosures about Market Risk....... 21\n\n PART II Other Information................................................ 22\n\n SIGNATURES................................................................ 23\n\n\n\n\n 3\n\n\n H&R BLOCK, INC.\n CONSOLIDATED BALANCE SHEETS\n Amounts in thousands, except share amounts\n\n\n\n
\n\n See Notes to Consolidated Financial Statements\n\n -1-\n 4\n\n\n\n H&R BLOCK, INC.\n CONSOLIDATED STATEMENTS OF OPERATIONS\n Unaudited, amounts in thousands, except per share amounts\n\n\n\n
\n\n See Notes to Consolidated Financial Statements\n\n -2-\n 5\n\n\n\n H&R BLOCK, INC.\n CONSOLIDATED STATEMENTS OF OPERATIONS\n Unaudited, amounts in thousands, except per share amounts\n\n\n\n
\n\n\n See Notes to Consolidated Financial Statements\n\n -3-\n\n 6\n\n\n\n H&R BLOCK, INC.\n CONSOLIDATED STATEMENTS OF CASH FLOWS\n Unaudited, amounts in thousands\n\n\n\n
\n\n See Notes to Consolidated Financial Statements\n\n -4-\n 7\n\n\n\n H&R BLOCK, INC.\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n Unaudited, dollars in thousands, except share data\n\n\n1. The Consolidated Balance Sheet as of January 31, 1999, the Consolidated\n Statements of Operations for the three and nine months ended January 31, 1999\n and 1998, and the Consolidated Statements of Cash Flows for the nine months\n ended January 31, 1999 and 1998 have been prepared by the Company, without\n audit. In the opinion of management, all adjustments (which include only\n normal recurring adjustments) necessary to present fairly the financial\n position, results of operations and cash flows at January 31, 1999 and for\n all periods presented have been made.\n\n Reclassifications have been made to prior periods to conform with the current\n period presentation.\n\n Principles of consolidation: The consolidated financial statements include\n the accounts of the Company, all majority-owned subsidiaries and companies\n that are directly or indirectly controlled by the Company through majority\n ownership or otherwise.\n\n Certain information and footnote disclosures normally included in financial\n statements prepared in accordance with generally accepted accounting\n principles have been condensed or omitted. These consolidated financial\n statements should be read in conjunction with the financial statements and\n notes thereto included in the Company's April 30, 1998 Annual Report to\n Shareholders.\n\n Operating revenues are seasonal in nature with peak revenues occurring in the\n months of January through April. Thus, the nine-month results are not\n indicative of results to be expected for the year.\n\n2. On January 29, 1999, the Company completed the sale of its WebCard Visa\n portfolio. The Company recorded a $20.0 million loss, net of taxes, on the\n transaction. The $127.6 million receivable for the sale of the portfolio was\n treated as a noncash investing activity in the Consolidated Statement of Cash\n Flows for the nine months ended January 31, 1999. The Consolidated\n Statements of Operations for the three and nine months ended January 31, 1999\n and 1998 have been reclassified to reflect the Company's Credit Card\n operations segment as discontinued operations.\n\n3. On January 31, 1998, the Company completed the sale of all of its interest\n in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc.\n (WorldCom). The Consolidated Statements of Operations for the three and nine\n months ended January 31, 1998 and the Consolidated Statement of Cash Flows\n for the nine months ended January 31, 1998 reflect CompuServe as discontinued\n operations.\n\n -5-\n 8\n\n\n\n 4. Revenues from discontinued operations for the nine months ended January 31,\n 1999 and 1998 were $24.1 million and $657.2 million, respectively. Revenues\n for the three months ended January 31, 1999 and 1998 were $7.8 million and\n $227.2 million, respectively.\n\n 5. Receivables consist of the following:\n\n\n
\n\n 6. The Company files its Federal and state income tax returns on a calendar\n year basis. The Consolidated Statements of Operations reflect the effective\n tax rates expected to be applicable for the respective full fiscal years.\n\n 7. The Company securitized $1.7 billion in mortgage loans during the nine\n months ended January 1999. The retained interests from the securitizations\n of $104.3 million were treated as noncash investing activities in the\n Consolidated Statement of Cash Flows for the nine months ended January 31,\n 1999.\n\n 8. Basic and diluted net earnings (loss) per share is computed using the\n weighted average number of shares outstanding during each period. Diluted\n net loss per share excludes the impact of common stock options outstanding\n of 5,884,733 shares and the conversion of 712 shares of preferred stock to\n common stock, as they are antidilutive. The weighted average shares\n outstanding for the nine months ended decreased to 100,526,000 from\n 104,568,000 last year, due to the purchase of treasury shares by the Company\n during the period from February 1998 to January 1999. The decrease was\n partially offset by stock option exercises during fiscal 1998 and 1999.\n\n 9. During the nine months ended January 31, 1999 and 1998, the Company issued\n 1,996,012 and 1,025,326 shares, respectively, pursuant to provisions for\n exercise of stock options under its stock option plans. During the nine\n months ended January 31, 1999, the Company acquired 11,792,500 shares of its\n common stock at an aggregate cost of $490,868.\n\n10. CompuServe, certain current and former officers and directors of CompuServe\n and the registrant have been named as defendants in six lawsuits pending\n before the state and Federal courts in Columbus, Ohio. All suits allege\n similar violations of the Securities Act of 1933 based on assertions of\n omissions and misstatements of fact in connection with CompuServe's public\n filings related to its initial public offering in April 1996. One state\n lawsuit also alleges certain oral omissions and misstatements in connection\n with such offering. Relief sought in the\n\n -6-\n 9\n\n\n\n lawsuits is unspecified, but includes pleas for rescission and damages. One\n Federal lawsuit names the lead underwriters of CompuServe's initial public\n offering as additional defendants and as representatives of a defendant\n class consisting of all underwriters who participated in such offering. The\n Federal suits were consolidated, the defendants filed a motion to dismiss\n the consolidated suits, the district court stayed all proceedings pending\n the outcome of the state court suits, and the United States Court of Appeals\n for the Sixth Circuit affirmed such stay. The four state court lawsuits\n also allege violations of various state statutes and common law of negligent\n misrepresentation in addition to the 1933 Act claims. The state lawsuits\n were consolidated for discovery purposes and defendants filed a motion for\n summary judgment covering all four state lawsuits. In the state lawsuits,\n the court entered an order in July 1998 that the suits entitled Harvey\n Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.\n CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et\n al. be maintained as a class action on behalf of the following class:\n\n \"All persons and entities who purchased shares of common stock of CompuServe\n Corporation between April 18, 1996 pursuant to the CompuServe's initial\n public offering or on the open market and July 16, 1996, and who were\n damaged thereby. All named defendants to these consolidated actions,\n members of their immediate families, any entity in which they have a\n controlling interest, and their legal representatives, heirs, successors or\n assigns are excluded from the class.\"\n\n Plaintiffs Greenfield, Schnipper and Silverglate were designated as class\n representatives. The Florida State Board of Administration v. CompuServe\n Corporation, et al. case pending in state court was not included in the\n class certification order as the plaintiff in such case did not seek class\n certification of its action. As a part of the sale of its interest in\n CompuServe, the Company agreed to indemnify WorldCom and CompuServe against\n 80.1% of any losses and expenses incurred by them with respect to these\n lawsuits. The defendants are vigorously defending these lawsuits.\n\n11. Summarized financial information for Block Financial Corporation, an\n indirect, wholly owned subsidiary of the Company, is presented below.\n\n \n
\n\n -7-\n 10\n\n \n
\n\n12. The Company sells short treasury securities under an open repurchase\n agreement that can be adjusted at any time by either party. The position on\n certain or all of the fixed rate mortgages is closed when the Company enters\n into a forward commitment to sell those mortgages. The effectiveness of the\n hedge is measured by a historical and probable future high correlation of\n changes in the fair value of the hedging instruments with changes in value\n of the hedged item. If correlation ceases to exist, hedge accounting will\n be terminated and gains or losses are recorded in revenues. During the\n second quarter of fiscal 1999, the Company's short treasury securities no\n longer correlated with the hedged item and, therefore, the hedge was\n terminated. A loss of $2.5 million was recognized upon termination in the\n second quarter. At January 31, 1999, the Company had no hedging instruments\n in place.\n\n13. The Company adopted Statement of Financial Accounting Standards No. 130,\n \"Reporting Comprehensive Income\" (SFAS 130) in the first quarter of fiscal\n 1999. SFAS 130 requires that all changes in equity during the period,\n except those resulting from investments by and distributions to owners, be\n reported as \"comprehensive income\" in the financial statements. The\n Company's comprehensive income is comprised of net earnings (loss), foreign\n currency translation adjustments and the change in the net unrealized gain\n or loss on marketable securities. The adoption of SFAS 130 had no effect on\n the Company's consolidated financial statements. The components of\n comprehensive income (loss) during the three and nine months ended January\n 31, 1999 and 1998 were:\n\n\n \n
\n\n14. In the third quarter of fiscal 1999, the Company elected early adoption of\n Statement of Financial Accounting Standards No. 134, \"Accounting for\n Mortgage-Backed Securities Retained after the Securitization of Mortgage\n Loans Held for Sale by a Mortgage Banking Enterprise\" (SFAS 134). SFAS 134\n requires that mortgage-backed securities or other interests retained after a\n securitization be classified based on the intent to sell or hold the\n\n -8-\n 11\n\n\n investments. The Company has classified its retained interests as\n available-for-sale securities, which are included in Investments in\n marketable securities on the Consolidated Balance Sheet.\n\n15. In the first quarter of fiscal year 1999, the Company acquired operations\n that management determined to be a new reportable operating segment. The\n new segment, Business services, is primarily engaged in providing\n accounting, tax and consulting services to business clients and tax, estate\n planning and financial planning services to individuals. The Business\n services segment currently offers its services through regional accounting\n firms based in Kansas City, Missouri; Chicago, Illinois; Indianapolis,\n Indiana; Buffalo, New York and Dallas, Texas. Revenues of this segment are\n seasonal in nature, with peak revenues occurring during January through\n April.\n\n Information concerning the Company's operations by reportable operating\n segments for the three and nine months ended January 31, 1999 and 1998 is as\n follows:\n\n\n \n
\n \n\n -9-\n\n 12\n\n\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF\n FINANCIAL CONDITION AND RESULTS OF OPERATIONS\n\n\nEXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN\nTHIS DISCUSSION ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND\nUNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH RISKS\nAND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, YEAR 2000 READINESS OF THE\nCOMPANY, ITS FRANCHISEES OR THIRD PARTIES; AND ECONOMIC, COMPETITIVE,\nGOVERNMENTAL AND VARIOUS OTHER FACTORS AFFECTING THE COMPANY'S OPERATIONS,\nMARKETS, PRODUCTS, SERVICES AND PRICES.\n\nFINANCIAL CONDITION\n\nThese comments should be read in conjunction with the Consolidated Balance\nSheets and Consolidated Statements of Cash Flows found on pages 1 and 4,\nrespectively.\n\nWorking capital decreased to $247.5 million at January 31, 1999 from $812.3\nmillion at April 30, 1998. The working capital ratio at January 31, 1999 is 1.2\nto 1, compared to 1.6 to 1 at April 30, 1998. The decrease in working capital\nand the working capital ratio is primarily due to the repurchase of treasury\nshares and, to a lesser extent, the seasonal nature of the Company's U.S. tax\noperations segment. Tax return preparation occurs almost entirely in the fourth\nquarter and has the effect of increasing certain assets and liabilities during\nthis time.\n\nThe Company maintains seasonal lines of credit to support short-term borrowing\nfacilities in the United States and Canada. The credit limits of these lines\nfluctuate according to the amount of short-term borrowings outstanding during\nthe year.\n\nThe Company incurs short-term borrowings throughout the year to fund receivables\nassociated with its nonconforming mortgage loan and other financial services\nprograms. These short-term borrowings in the U.S. are supported by a $1.85\nbillion back-up credit facility through November 1999, subject to renewal.\n\nThe Company's capital expenditures, treasury share purchases and dividend\npayments during the first nine months were funded through internally-generated\nfunds.\n\nAt January 31, 1999, short-term borrowings used to fund mortgage loans and other\nprograms increased to $806.0 million from $643.0 million at April 30, 1998 due\nmainly to the funding of mortgage operations. For the nine months ended January\n31, 1999 and 1998, interest expense was $53.9 million and $26.9 million,\nrespectively. The increase in interest expense is primarily attributable to the\nfunding of mortgage operations with short-term borrowings and the debt incurred\nto fund the acquisition of Option One Mortgage Corporation (Option One) in June\n1997.\n\n -10-\n 13\n\n\nThe Company announced in December 1993 its intention to repurchase from time to\ntime up to 10 million of its shares on the open market. In July 1996, the\nCompany announced its intention to repurchase up to 10 million additional shares\nin the open market over a two-year period following the separation of CompuServe\nCorporation. At January 31, 1999, 17.0 million shares had been repurchased.\nThe Company plans to continue to purchase its shares on the open market in\naccordance with these authorizations, subject to various factors including the\nprice of the stock, availability of excess cash, the ability to maintain\nfinancial flexibility, securities laws restrictions and other investment\nopportunities available.\n\n -11-\n 14\n\n\n\n\nRESULTS OF OPERATIONS\n- ---------------------\nFISCAL 1999 COMPARED TO FISCAL 1998\n\nThe analysis that follows should be read in conjunction with the table below\nand the Consolidated Statements of Operations found on pages 2 and 3.\n\n THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO\n -----------------------------------------------\n THREE MONTHS ENDED JANUARY 31, 1998\n -----------------------------------\n (amounts in thousands)\n\n\n\n
\n\n\nConsolidated revenues for the three months ended January 31, 1999 increased\n46.6% to $291.5 million from $198.8 million reported last year. The increase is\nprimarily due to revenues from Mortgage operations of $79.3 million, a 111.4%\nincrease over last year and U.S. tax operations, a 23.8% increase. The new\nBusiness services segment, acquired in May 1998, also contributed $15.3 million\nto the increase.\n\nThe consolidated pretax loss from continuing operations for the third quarter of\nfiscal 1999 decreased to $4.6 million from $23.9 million in the third quarter of\nlast year. The decrease is attributable to increased earnings from Mortgage\noperations and higher investment income.\n\nThe net loss from continuing operations was $2.8 million, or $.03 per share,\ncompared to $14.8 million, or $.14 per share, for the same period last year.\n\n -12-\n 15\n\n\n\nAn analysis of operations by reportable operating segments follows.\n\nU.S. TAX OPERATIONS\n\nRevenues increased 23.8% to $189.1 million from $152.8 million last year,\nresulting primarily from increased revenues from tax-related services that are\nattributable to an increase in the number of clients served and price increases.\nDuring the first month of the U.S. tax-filing season, the number of clients\nserved in company-owned offices increased 4.8%. Improved software sales and\nrevenues from Refund Anticipation Loan (RAL) participations also contributed to\nthe increase.\n\nThe pretax loss decreased 1.1% to $18.8 million from $19.1 million in the third\nquarter of last year due to the strong increase in revenues. The increase in\nrevenues completely offset the increase in expenses over the prior year. The\nincrease in expenses is attributable to normal increases in compensation and\nbenefits related to tax services, a more conservative loss reserve related to\nRAL participations than in the same period last year and an increase in the\nnumber of tax offices. Due to the nature of this segment's business, the results\nfor the first month of the tax-filing season are not necessarily indicative of\nexpected results for the entire tax season.\n\nINTERNATIONAL TAX OPERATIONS\n\nRevenues decreased 8.1% to $6.8 million compared to $7.4 million in the prior\nyear's third quarter. The decrease is principally attributable to increased\ncompetitive conditions related to discounted returns and a slower start to the\nCanadian tax-filing season. The number of regular and discounted returns\nprepared in company-owned offices in Canada during the month of January\ndecreased 27.5% from the prior year. The decline in Canada was partially offset\nby increased revenues in Australia.\n\nThe pretax loss increased 8.4% to $7.5 million from $6.9 million last year. The\nincrease is due to compensation and other facility-related expenses in Canada\nprimarily attributable to normal operational increases and an increase in the\nnumber of tax offices, as well as decreased revenues. Due to the nature of this\nsegment's business, third quarter operating results are not indicative of\nexpected results for the entire fiscal year.\n\nMORTGAGE OPERATIONS\n\nRevenues increased 111.4% to $79.3 million from $37.5 million in the same period\nlast year. The increase is attributable to a higher volume of loans sold or\nsecuritized and increased interest income over the prior year. Option One\noriginated and sold or securitized $930.2 million and $1.3 billion in loans,\nrespectively, during the third quarter of fiscal 1999, compared to $507.0\nmillion originated and $466.0 million sold in the third quarter last year. Both\nOption One and Companion Mortgage had higher interest income earned related to\nhigher balances of mortgage loans held for sale during the quarter.\n\nMortgage operations pretax earnings of $24.3 million increased 216.4% this year\ncompared to $7.7 million during the third quarter of fiscal 1998, driven\nentirely by the increase in revenues. Increases in compensation and benefits and\nmarketing and advertising expense had a negative impact on pretax earnings due\nprimarily to the continued expansion of Option One's operations.\n\n -13-\n 16\n\n\nBUSINESS SERVICES\n\nBusiness services is a new reportable operating segment for fiscal year 1999.\nBusiness services contributed revenues of $15.3 million and a pretax loss of $8\nthousand for the third quarter of fiscal 1999, including goodwill amortization\nof $1.1 million. Due to the nature of this segment's business, revenues are\nseasonal, while expenses are relatively fixed throughout the year. Results for\nthe third quarter are not indicative of the expected results for the entire\nyear.\n\nINVESTMENT INCOME, NET\n\nNet investment income increased 319.2% to $4.6 million from $1.1 million last\nyear. The increase is due to additional funds available for investment resulting\nfrom the proceeds of the monetization of WorldCom, Inc. stock during fiscal\n1998.\n\nUNALLOCATED CORPORATE AND ADMINISTRATIVE\n\nThe unallocated corporate and administrative pretax loss for the third quarter\nincreased 18.2% to $2.7 million from $2.3 million in the comparable period last\nyear. The increase is a result of higher employee costs.\n\n -14-\n 17\n\n\n\n THREE MONTHS ENDED JANUARY 31, 1999 (THIRD QUARTER) COMPARED TO\n ---------------------------------------------------------------\n THREE MONTHS ENDED OCTOBER 31, 1998 (SECOND QUARTER)\n ----------------------------------------------------\n (amounts in thousands)\n\n\n\n
\n\n\nConsolidated revenues for the three months ended January 31, 1999 increased\n240.5% to $291.5 million from $85.6 million reported in the second quarter of\nfiscal 1999. The increase is primarily due to revenues from U.S. tax operations\nrelated to the beginning of the U.S. tax-filing season, as well as increased\nrevenues from Mortgage operations and Business services.\n\nThe consolidated pretax loss from continuing operations for the third quarter of\nfiscal 1999 decreased to $4.6 million from $50.2 million in the second quarter\nof this year. The decrease is attributable to U.S. tax operations, which\nincurred a pretax loss of $18.8 million this quarter compared to a pretax loss\nof $61.3 million in the second quarter, and improved results from Mortgage\noperations.\n\nThe net loss from continuing operations was $2.8 million, or $.03 per share,\ncompared to $31.2 million, or $.31 per share, for the second quarter.\n\nAn analysis of operations by reportable operating segments follows.\n\n\n -15-\n 18\n\n\n\nU.S. TAX OPERATIONS\n\nRevenues increased 927.6% to $189.1 million from $18.4 million in the second\nquarter. The pretax loss decreased 69.3% to $18.8 million from $61.3 million in\nthe three months ended October 31, 1998. The improved results are due to the\nonset of the U.S. tax-filing season.\n\nINTERNATIONAL TAX OPERATIONS\n\nRevenues decreased 42.7% to $6.8 million compared to the second quarter revenues\nof $11.8 million. The pretax loss increased 231.8% to $7.5 million from $2.3\nmillion in the second quarter. The decreased results are due to the timing of\nthe tax-filing seasons in Australia and Canada. The Australian tax season ends\nin October while the Canada tax season begins in late January.\n\nMORTGAGE OPERATIONS\n\nRevenues increased 50.0% to $79.3 million from $52.9 million in the prior\nquarter. Pretax earnings increased 130.6% to $24.3 million from $10.5 million in\nthe three months ended October 31, 1998. The improved results are due to the\ntiming of loan sales, increased interest income earned on higher loan balances\nand a one-time loss of $2.5 million on the termination of a hedging instrument\nincurred during the second quarter. The increased earnings were partially\nreduced by increases in compensation and benefits expenses. Option One sold or\nsecuritized $1.3 billion in loans in the current quarter compared to $539.6\nmillion in the second quarter.\n\nBUSINESS SERVICES\n\nBusiness services is a new reportable operating segment for fiscal year 1999.\nRevenues increased 895.5% to $15.3 million from $1.5 million in the three months\nended October 31, 1998. The pretax loss decreased 91.8% to $8 thousand from $98\nthousand in the prior quarter. The improved results are due to acquisitions made\nduring the third quarter and the onset of the accounting firms' tax and\naccounting season.\n\nINVESTMENT INCOME, NET\n\nNet investment income decreased 51.9% to $4.6 million from $9.6 million in the\nsecond quarter of fiscal 1999. The decrease resulted from less funds available\nfor investment due to the purchase of treasury shares.\n\nUNALLOCATED CORPORATE AND ADMINISTRATIVE\n\nThe unallocated corporate and administrative pretax loss for the third quarter\nincreased 18.0% to $2.7 million from $2.3 million in the second quarter. The\nincrease is due to higher charitable contributions, employee costs and\nconsultant fees. Improved results at the Company's captive insurance subsidiary\npartially offset the increased loss.\n\n\n -16-\n 19\n\n\n\n NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO\n ----------------------------------------------\n NINE MONTHS ENDED JANUARY 31, 1998\n ----------------------------------\n (amounts in thousands)\n\n\n\n
\n\n\nConsolidated revenues for the nine months ended January 31, 1999 increased 48.0%\nto $447.7 million from $302.4 million reported last year. The increase is\nprimarily due to revenues from Mortgage operations of $184.9 million, a 98.8%\nincrease over last year, a 20.8% increase in revenues from U.S. tax operations\nand revenues from the new Business services segment.\n\nThe consolidated pretax loss from continuing operations for the first nine\nmonths of fiscal 1999 decreased to $97.6 million from $121.5 million last year.\nThe decrease is attributable to higher earnings from Mortgage operations and\nincreased investment income, which were reduced by increased losses from U.S.\ntax operations.\n\nThe net loss from continuing operations was $60.5 million, or $.60 per share,\ncompared to $75.3 million, or $.72 per share, for the same period last year.\n\nAn analysis of operations by reportable operating segments follows.\n\n -17-\n 20\n\n\nU.S. TAX OPERATIONS\n\nRevenues increased 20.8% to $219.7 million from $181.9 million last year,\nresulting primarily from higher revenues from tax related services that are\nattributable to a 3.8% increase in clients served and price increases. Revenues\nfrom software sales and RAL participations also contributed to the increase.\n\nThe pretax loss increased 12.0% to $138.0 million from $123.2 million in the\ncomparable period last year due to normal operational increases in compensation,\nrent and other facility-related expenses. Also contributing to the increases in\nrent and other facility-related expenses is an increase in the amount of tax\noffice space maintained under lease during this year's off-season, as well as an\nadditional 236 tax offices this tax season compared to last year's tax season.\nThe increased loss was partially offset by earnings from software sales. Due to\nthe nature of this segment's business, the nine month operating results are not\nindicative of expected results for the entire fiscal year.\n\nINTERNATIONAL TAX OPERATIONS\n\nRevenues decreased 9.0% to $22.0 million compared to $24.2 million in the prior\nyear. The decrease is due to foreign currency translation of Australia\noperations and a decline in tax preparation and discounted return fees in\nCanada. Discounted returns prepared in company-owned offices declined 19.0% from\nthe prior year. The number of tax returns prepared in company-owned offices\ndeclined 12.6% from last year.\n\nThe pretax loss increased 19.5% to $15.7 million from $13.2 million last year.\nThe increase is due to higher facility-related expenses in Canada, which is\nattributable to the increase in the number of offices and normal operational\nincreases, and increased compensation and benefits in the United Kingdom. Due to\nthe nature of this segment's business, the nine month operating results are not\nindicative of expected results for the entire fiscal year.\n\nMORTGAGE OPERATIONS\n\nRevenues increased 98.8% to $184.9 million from $93.0 million in the same period\nlast year. The increase is essentially attributable to Option One, which was\nacquired on June 17, 1997. Option One contributed revenues of $157.8 million for\nthe nine months, a $76.9 million increase over the seven-and-a-half month period\nlast year. Option One originated and sold or securitized $2.5 billion in loans\nduring the first nine months of fiscal 1999. Companion Mortgage also contributed\nrevenues of $27.1 million, a 123.9% increase over last year, due to interest\nincome earned on higher balances of mortgage loans held for sale.\n\nPretax earnings increased 146.2% to $48.6 million from $19.8 million in the\nprior year. The increase is primarily due to Option One, which contributed\nearnings of $46.7 million compared to earnings of $19.3 million last year and\nincreased earnings from Companion Mortgage. Earnings were reduced by increased\nlosses from an equity investment.\n\n -18-\n 21\n\n\nBUSINESS SERVICES\n\nBusiness services is a new reportable operating segment for fiscal year 1999.\nBusiness services contributed revenues of $18.1 million and a pretax loss of\n$220 thousand for the nine months ended January 31, 1999, including goodwill\namortization of $1.3 million. Due to the nature of this segment's business,\nrevenues are seasonal, while expenses are relatively fixed throughout the year.\nResults for the nine months are not indicative of the expected results for the\nentire year.\n\nINVESTMENT INCOME, NET\n\nNet investment income increased 196.9% to $28.2 million from $9.5 million last\nyear. The increase is due to additional funds available for investment resulting\nfrom the proceeds of the monetization of WorldCom, Inc. stock during fiscal\n1998.\n\nUNALLOCATED CORPORATE AND ADMINISTRATIVE\n\nThe unallocated corporate and administrative pretax loss for the nine months\nincreased 42.4% to $7.2 million from $5.0 million in the comparable period last\nyear. The increase is a result of increased employee costs and the start-up of a\nbusiness that offers financial planning services through the Company's tax\noffices.\n\n\nOTHER ISSUES\n- ------------\nYEAR 2000 READINESS DISCLOSURE\n\nThe Company has established a program to identify, evaluate and mitigate\npotential Year 2000 related issues. As part of its program, the Company has\nidentified three key categories of software and systems, including information\ntechnology (IT) systems, non-IT systems (systems with internal clocks or\nimbedded microprocessors) and systems of third parties with which it interacts,\nfor which the Company has developed detailed plans to address the Year 2000\nissue.\n\nThe Company has identified 9 mission critical business functions (i.e. U.S. tax\npreparation services, wholesale loan services, etc.) and 28 non-mission critical\nbusiness functions (i.e. TaxCut(R) software, Australian tax operations, etc.).\nWithin each of the business functions, key IT and non-IT systems have been\ninventoried and assessed for compliance and detailed plans are in place for\nrequired system modifications or replacements. Currently remediation projects\nare at different phases of completion. One hundred and thirty-five remediation\nprojects, including both IT and non-IT systems, were identified within the 9\nmission critical business functions. Of these projects, 87 are complete and\nsuccessfully tested, 23 are in the testing phase and 25 are still in progress.\nOf the projects currently in the testing phase, 82% are scheduled to be\ncompleted by April 30, 1999. The remaining projects will be completed after the\n1998 tax season due to the nature of the Company's business.\n\nThe Company has initiated communications and surveyed state, Federal and foreign\ngovernments and suppliers with which it interacts to determine their plans for\naddressing Year 2000 issues. The Company is relying on their responses to\ndetermine if key suppliers will be Year 2000 compliant. One of the Company's key\nthird parties is the Internal Revenue Service (IRS). In a report given to the\nHouse Committee on Ways and Means on Year 2000 Conversion Efforts on\n\n -19-\n 22\n\n\nFebruary 24, 1999, the Commissioner of the IRS reported the status of the IRS's\nYear 2000 effort. He stated: \"Nearly all of our (IRS) mission critical systems\nwere made Y2K compliant and were placed back into production for the 1999 Filing\nSeason. Approximately half of these systems have been successfully tested\n\"end-to-end\" with the clocks rolled forward. We (IRS) will continue focusing our\nrepair efforts on mission critical systems from now until the end of March. From\nApril through the end of 1999, most of the effort will be applied to wrapping up\nsome smaller systems and, most importantly, completing the full-scale End-to-End\nTesting.\" The Company is also in the process of completing a survey and\ninventory of tax franchisees. Some readiness issues have been identified and the\nCompany is assisting its franchisees with their remediation programs to help\nmitigate their risk. Assurances from franchisees of Year 2000 readiness are\nscheduled to be obtained after the end of the current tax season. The Company\nwill continue to monitor its third party relationships for Year 2000 issues.\n\nCosts associated with the Year 2000 issue are being expensed as incurred. Total\ncosts are currently estimated at $3.7 million, with approximately $1.8 million\nincurred to date. The costs associated with the replacement of computer systems,\nhardware or equipment (currently estimated to be $12.9 million in total, with\n$10.4 million incurred to date), substantially all of which would be\ncapitalized, are not included in the above estimates. All costs related to the\nYear 2000 issue are being funded through internally-generated funds.\n\nThe Company's most likely, worst case potential risk is that the IRS will not be\nYear 2000 compliant and the Company would not be able to process electronic\nfilings or refund anticipation loans. The Company believes that its competitors\nwill face the same risks.\n\nThe Company is currently identifying and developing contingency plans for Year\n2000 related interruptions in the event that internal and/or external\nremediation projects are not completed on a timely basis or that they fail to\nmeet anticipated needs. The contingency plans are scheduled to be completed by\nJune 1999.\n\nThe Company's Year 2000 program is an ongoing process and the estimates of\ncosts, risks and completion dates are based on currently available information\nand are subject to change.\n\nWhile the Company does not anticipate any major interruptions of its business\nactivities, it can not make any assurances that its systems, the systems of the\nstate, Federal and foreign governments, tax franchisees and suppliers will be\nYear 2000 compliant and will not interrupt business. While the impact can not be\nfully determined, the inability of these systems to be ready could result in\nsignificant difficulties in processing and completing fundamental transactions.\nIn such event, the Company's results of operations and financial position could\nbe adversely affected in a material manner.\n\n -20-\n 23\n\n\n\n QUANTITATIVE AND QUALITATIVE DISCLOSURES\n ABOUT MARKET RISK\n\nAs of January 31, 1999, there has been no change in the Company's market risk\nexposure related to interest rates on investments in fixed-rate mortgage loans\nheld for resale or securitization from what was reported in the Company's Form\n10-Q for the quarter ended October 31, 1998. As previously reported in the\nCompany's Annual Report on Form 10-K for April 30, 1998, the Company hedged its\nfixed-rate mortgage portfolio by selling short treasury securities and utilizing\nforward commitments. This is still the Company's policy, however, due to market\nconditions it became apparent that the performance of selling short treasury\nsecurities was not correlating with the value of fixed-rate mortgages in the\nwhole loan market. Therefore, at January 31, 1999 the Company had no outstanding\nhedges to minimize market risk on the fixed-rate mortgage loan portfolio. The\nCompany is evaluating other alternatives to minimize market risk. At January 31,\n1999, the fixed-rate portfolio represents 20.3% of all mortgage loans held for\nsale and 3.8% of total assets. Mortgage loans held for sale are recorded at the\nlower of cost or market value. If it is determined that the market value drops\nbelow cost, a valuation allowance would be set up and the loss would be\nrecognized in the current period. No valuation allowance has been recorded at\nJanuary 31, 1999.\n\nThe Company estimates that an increase in interest rates on fixed-rate mortgages\nof 50 basis points would result in a decline in value of approximately $3.4\nmillion, which would be recorded as a loss in the consolidated income statement\nto the extent that the market value dropped below cost. Such impact would\nrepresent approximately 6.9% of the pretax earnings from Mortgage operations and\n3.5% of the Company's consolidated pretax loss for the nine months ended January\n31, 1999, assuming the entire decline was recognized as a lower of cost or\nmarket adjustment.\n\n -21-\n 24\n\n\n\nPART II - OTHER INFORMATION\n\nITEM 1. LEGAL PROCEEDINGS.\n\n The lawsuits discussed herein were reported in the Form 10-Q for the first\n and second quarters of fiscal 1999. CompuServe, certain current and former\n officers and directors of CompuServe and the registrant have been named as\n defendants in six lawsuits pending before the state and Federal courts in\n Columbus, Ohio. All suits involve claims based on allegations of omissions\n and misstatements of fact in connection with CompuServe's initial public\n offering in April 1996. Relief sought in the lawsuits is unspecified, but\n includes pleas for rescission and damages. The Federal suits were\n consolidated, the defendants filed a motion to dismiss the consolidated\n suits, the district court stayed all proceedings pending the outcome of the\n state court suits, and the United States Court of Appeals for the Sixth\n Circuit affirmed such stay. The state lawsuits were consolidated for\n discovery purposes and defendants filed a motion for summary judgment\n covering all four state lawsuits. In the state lawsuits, the court entered an\n order in July 1998 that the suits entitled Harvey Greenfield v. CompuServe\n Corporation, et al., Jeffrey Schnipper v. CompuServe Corporation, and Philip\n Silverglate v. CompuServe Corporation, et al. be maintained as a class action\n on behalf of the following class:\n\n \"All persons and entities who purchased shares of common stock of CompuServe\n Corporation between April 18, 1996 pursuant to the CompuServe's initial\n public offering or on the open market and July 16, 1996, and who were damaged\n thereby. All named defendants to these consolidated actions, members of their\n immediate families, any entity in which they have a controlling interest, and\n their legal representatives, heirs, successors or assigns are excluded from\n the class.\"\n\n Plaintiffs Greenfield, Schnipper and Silverglate were designated as class\n representatives. The Florida State Board of Administration v. CompuServe\n Corporation, et al. case pending in state court was not included in the class\n certification order as the plaintiff in such case did not seek class\n certification of its action. The defendants continue to vigorously defend\n these lawsuits.\n\nITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.\n\na) Exhibits\n\n 10.1 H&R Block Deferred Compensation Plan for Executives, as\n Amended and Restated.\n for Executives, as Amended and Restated.\n\n 10.2 Amendment No. 1 to the H&R Block Deferred Compensation Plan for \n Executives, as Amended and Restated.\n\n 27 Financial Data Schedule\n\nb) Reports on Form 8-K\n The registrant did not file any reports on Form 8-K during the third\n quarter of fiscal 1999.\n\n -22-\n 25\n\n\n\n SIGNATURES\n\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n\n H&R BLOCK, INC.\n -------------------------------\n (Registrant)\n\n\n\nDATE 03/16/99 BY /s/ Ozzie Wenich\n --------------- ---------------------------------\n Ozzie Wenich\n Senior Vice President and\n Chief Financial Officer\n\n\n\nDATE 03/16/99 BY /s/ Cheryl L. Givens\n --------------- ---------------------------------\n Cheryl L. Givens\n Vice President and Corporate Controller\n\n\n\n -23-\n \n \n\nEX-10.1\n2\nH&R BLOCK DEFERRED COMPENSATION PLAN\n\n\n 1\n EXHIBIT 10.1\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n H&R BLOCK\n \n DEFERRED COMPENSATION PLAN\n \n FOR EXECUTIVES,\n \n AS AMENDED AND RESTATED\n \n \n \n \n \n JANUARY 1, 1999\n \n\n\n\n\n 2\n\n\n\n\n\n H & R BLOCK\n DEFERRED COMPENSATION PLAN\n FOR EXECUTIVES,\n AS AMENDED AND RESTATED\n\n TABLE OF CONTENTS\n\n
\n\n 1\n 3\n\n
\n\n 2\n 4\n\n\n H&R BLOCK\n DEFERRED COMPENSATION PLAN\n FOR EXECUTIVES,\n AS AMENDED AND RESTATED\n\n H&R Block, Inc. (the \"Company\") established, effective August 1, 1987, a\nnonqualified deferred compensation plan for the benefit of specified Executives\nof the Company, and specified affiliates of the Company. This plan became known\nas the H&R Block Deferred Compensation Plan for Executives (the \"DCP\"). The\nCompany amended the DCP by Amendment No. 1 effective December 15, 1990; by\nAmendment No. 2 effective January 1, 1990; by Amendment No. 3 effective\nSeptember 1, 1991; by Amendment No. 4 effective January 1, 1994; by Amendment\nNo. 5 effective May 1, 1994; by Amendment No. 6 effective August 1, 1995; by\nAmendment No. 7 effective December 11, 1996; by Amendment No. 8 effective\nJanuary 1, 1998; by Amendment No. 9 effective as of January 1, 1997; by\nAmendment No. 10 effective in part March 1, 1998 and in part April 1, 1998; and\nby Amendment No. 11 effective as of May 15, 1998.\n\n The Company adopted the H&R Block Supplemental Deferred Compensation Plan\nfor Executives (the \"Supplemental Plan\") effective as of May 1, 1994. The\nCompany amended said Supplemental Plan by Amendment No. 1 effective September\n7, 1994; by Amendment No. 2 effective August 1, 1995; by Amendment No. 3\neffective December 11, 1996; by Amendment No. 4 effective January 1, 1998; by\nAmendment No. 5 effective May 1, 1997; by Amendment No. 6 effective in part\nMarch 1, 1998 and in part April 1, 1998; and by Amendment No. 7 effective as of\nMay 15, 1998.\n\n The Company continues to retain the right to amend the DCP and the\nSupplemental Plan pursuant to action by the Company's Board of Directors. The\nCompany hereby exercises that right by combining the DCP and the SDCP into one\nplan to be known as the H&R Block Deferred Compensation Plan for Executives, as\nAmended and Restated (the \"Plan\") and by making other amendments to the Plan.\nThe Plan shall be effective as of January 1, 1999. Like its predecessors, the\nPlan is intended to be an unfunded plan maintained primarily for the purpose of\nproviding deferred compensation for a select group of management or highly\ncompensated employees as described in Sections 201(2), 301 (a)(3) and 401(a)(1)\nof the Employee Retirement Income Security Act of 1974 (\"ERISA\").\n\n ARTICLE 1 DEFERRED COMPENSATION ACCOUNT\n\n Section 1.1 Establishment of Account. The Company shall establish an\naccount (\"Account\") for each Participant which shall be utilized solely as a\ndevice to measure and determine the amount of deferred compensation to be paid\nunder the Plan. For each Participant in the DCP or each Participant in both the\nDCP and the Supplemental Plan as of December 31, 1998, the \"Account\" shall\ninclude those accounts that existed under such plans for such Participant as of\nthe close of business on December 31, 1998.\n\n Section 1.2 Property of Company and Participating Affiliates. Any amounts\nso set aside for benefits payable under the Plan are the property of the\nCompany and its participating affiliates (\"Participating Affiliates\"), except,\nand to the extent, of any assignment of such assets to an irrevocable trust.\n\n ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER\n\n Section 2.1 Definitions. Whenever used in the Plan, the following words\nand phrases\n\n 3\n 5\n\n\nshall have the meanings set forth below unless the context plainly requires a\ndifferent meaning, and when a defined meaning is intended, the term is\ncapitalized.\n\n 2.1.1 \"Account\" means the device used to measure and determine\n the amount of deferred compensation to be paid to a Participant or\n Beneficiary under the Plan, and may refer to the separate Accounts that\n represent amounts deferred by a Participant under separate Permissible\n Deferral elections or by the Company pursuant to Section 4.1.\n\n 2.1.2 \"Account Executive\" means a person who has the title of\n Account Executive, is employed on a full-time basis by a Participating\n Affiliate, and is responsible for managing, overseeing, directing or\n handling the accounts of clients of the Participating Affiliate.\n\n 2.1.3 \"Accounting Firm\" means an accounting firm in which the\n Company has no direct or indirect ownership interest but with which an\n Accounting Subsidiary has a contractual relationship in respect of one or\n more employees who are employees of both such accounting firm and such\n Accounting Subsidiary.\n\n 2.1.4 \"Accounting Subsidiary\" means an indirect accounting firm\n subsidiary of the Company that is involved in the provision of non-attest\n accounting services, the management of one or more Accounting Firms,\n and/or the ownership of one or more other accounting firm subsidiaries of\n the Company.\n\n 2.1.5 \"Affiliates\" or \"Affiliate\" means a group of entities,\n including the Company, which constitutes a controlled group of\n corporations (as defined in section 414(b) of the Code), a group of\n trades or businesses (whether or not incorporated) under common control\n (as defined in section 414(c) of the Code), and members of an affiliated\n service group (within the meaning of section 414(m) of the Code.)\n\n 2.1.6 \"Age\" of a Participant means the number of whole calendar\n years that have elapsed since the date of the Participant's birth.\n\n 2.1.7 \"Annual Deferral Amount\" means the amount of Base Salary,\n and/or Bonus that a Participant elects to defer each Plan Year under a\n Permissible Deferral. The amount of Base Salary included in the Annual\n Deferral Amount shall be equal to a percentage of the Participant's Base\n Salary that is not less than three percent (3%) and not greater than\n fifty percent (50%), and the amount of Bonus or Bonuses included in the\n Annual Deferral Amount shall be equal to (i) a flat dollar amount,\n expressed in one thousand dollar ($1,000) increments, or (ii) a\n percentage of the Bonus or Bonuses paid during the Plan Year that is not\n less than five percent (5%) and not greater than fifty percent (50%),\n expressed in five percent (5%) increments. In the case of a Participant\n who is an employee of both an Accounting Subsidiary and an Accounting\n Firm, the calculation of the amount of the Annual Deferral Amount that\n the Participant is permitted to elect shall be made by taking into\n account the amount of salary and bonus paid to such Participant by the\n Accounting Firm, but the actual deferral under the Plan shall only be\n made out of the Base Salary and/or Bonus or Bonuses paid by all\n Affiliates.\n\n 2.1.8 \"Assumed Interest Rate\" has the meaning specified in\n Section 6.4.3.\n\n 2.1.9 \"Base Salary\" of an Executive for any Plan Year means the\n total annual salary and wages paid by all Affiliates to such individual\n during that Plan Year, including any amount which would be included in\n the definition of Base Salary, but for the\n\n 4\n 6\n\n\n individual's election to defer some of his or her salary pursuant to this\n Plan or some other deferred compensation plan established by an\n Affiliate; but excluding any other remuneration paid by Affiliates, such\n as overtime, net commissions, bonuses, stock options, distributions of\n compensation previously deferred, restricted stock, allowances for\n expenses (including moving, travel expenses, and automobile allowances),\n and fringe benefits payable in a form other than cash. The \"Base Salary\"\n of an Account Executive for any Plan Year means the total earnings and\n wages, including any and all commissions, incentives and bonuses, paid by\n all Affiliates to such individual during that Plan Year, including any\n amount which would be included in the definition of Base Salary, but for\n the individual's election to defer some of his or her earnings pursuant\n to this Plan or some other deferred compensation plan established by an\n Affiliate; but excluding any other remuneration paid by Affiliates, such\n as overtime, stock options, distributions of compensation previously\n deferred, restricted stock, allowances for expenses (including moving,\n travel expenses, and automobile allowances), and fringe benefits payable\n in a form other than cash. In the case of an individual who is a\n participant in a plan sponsored by an Affiliate which is described in\n Section 401(k) of the Code, the term Base Salary shall include any amount\n which would be included in the definition of Base Salary, but for the\n individual's election to reduce his salary or earnings and have the\n amount of the reduction contributed to the 401(k) plan on his behalf.\n\n 2.1.10 \"Beneficiary\" or \"Beneficiaries\" means the persons or\n trusts designated by a Participant in writing pursuant to Section 6.6.4\n of the Plan as being entitled to receive any benefit payable under the\n Plan by reason of the death of a Participant, or, in the absence of such\n designation, the persons specified in Section 6.6.5 of the Plan.\n\n 2.1.11 \"Board\" means the Board of Directors of the Company as\n constituted at the relevant time.\n\n 2.1.12 \"Bonus\" or \"Bonuses\" of an Executive for any Plan Year\n means the total remuneration paid under the various annual management\n bonus programs (\"annual bonuses\") by Affiliates to such individual for\n that Plan Year including any amount which would be included in the\n definition of Bonus, but for the individual's election to defer some or\n all of his or her annual bonus pursuant to this Plan or some other\n deferred compensation plan established by an Affiliate; but excluding any\n other remuneration paid by Affiliates, such as Base Salary, overtime, net\n commissions, stock options, distributions of compensation previously\n deferred, restricted stock, allowances for expenses (including moving,\n travel expenses, and automobile allowances), and fringe benefits payable\n in a form other than cash. For purposes of this Plan, the terms Bonus and\n Bonuses specifically exclude any and all types of commissions, incentives\n or bonuses paid by any Affiliate to an Account Executive.\n\n 2.1.13 \"Change in Control\" has the meaning specified in \n Section 10.2\n\n 2.1.14 \"Closing Price\" means the closing price of the Company's\n Common Stock on the New York Stock Exchange as of the applicable date;\n provided, however, that if no closing price is available for such date,\n \"Closing Price\" means the closing price of the Company's Common Stock as\n of the next most recent date for which a price is available.\n\n 2.1.15 \"Code\" means the Internal Revenue Code of 1986, as\n amended from time to time and any successor statute. References to a\n Code section shall be deemed to be to that section or to any successor to\n that section.\n\n\n 5\n 7\n\n\n 2.1.16 \"Committee\" means the Compensation Committee of the\n Company's Board.\n\n 2.1.17 \"Common Stock\" means the common stock of the Company.\n\n 2.1.18 \"Company\" means H&R Block, Inc.\n\n\n 2.1.19 \"Company Contribution\" or \"Company Contributions\" means\n the sum of (i) the Company Matching Contributions described in Section\n 4.1.2, and (ii) the additional Company contributions described in Section\n 4.1.3.\n\n 2.1.20 \"DCP\" means the H&R Block Deferred Compensation Plan for\n Executives initially adopted by the Company effective as of August 1,\n 1987, as subsequently amended prior to the Effective Date of this Plan.\n\n 2.1.21 \"Deferred Compensation Unit\" means a unit equal in value\n to one share of Common Stock and posted to a Participant's Account for\n the purpose of measuring the benefits payable under the Plan.\n\n 2.1.22 \"Disabled\" or \"Disability\" with respect to a Participant\n shall have the same definition as in the Company's then existing long\n term group disability insurance program.\n\n 2.1.23 \"Early Retirement Date\" of a Participant means the first\n day of the first calendar month commencing on or after the date on which\n (i) the Participant has reached Age 55 while in the employ of an\n Affiliate and (ii) the Participant has completed at least ten (10) Years\n of Service.\"\n\n 2.1.24 \"Effective Date\" or \"Effective Date of this Plan\" means\n the date on which the DCP became effective, i.e., August 1, 1987.\n\n 2.1.25 \"Enrollment Period\" for a Plan Year commencing on January\n 1 means the immediately preceding period of October 1 through December\n 15, inclusive. At its sole and absolute discretion, the Committee may\n grant to a person eligible to participate in the Plan an \"Enrollment\n Period\" consisting of the 30-day period immediately following the date on\n which such person is first employed by a Participating Affiliate.\n\n 2.1.26 \"Executive\" means a person other than an Account\n Executive with substantial responsibility in the management of a\n Participating Affiliate employed on a full-time basis by that\n Participating Affiliate.\n\n 2.1.27 \"5-year payout\" has the meaning specified in \n Section 6.3.2.\n\n 2.1.28 \"Fixed 120 Account\" means an Account that represents\n amounts deferred by a Participant under a Permissible Deferral\n election(s) as a part of which the Participant elected the fixed rate\n investment option described in the second paragraph of Section 4.2.1.\n\n 2.1.29 \"Group A Participant\" has the meaning specified in\n Section 3.1.1.\n\n 2.1.30 \"Group B Participant\" has the meaning specified in\n Section 3.1.2.\n\n\n 6\n 8\n\n\n 2.1.31 \"Hours of Service\" means hours of service determined in\n accordance with the provisions of the then existing H&R Block Employee\n Profit Sharing Retirement Plan.\n\n 2.1.32 \"Initial Payment Period\" has the meaning specified in\n Section 6.4.2.\n\n 2.1.33 \"Matching Contributions\" has the meaning specified in\n Section 4.1.2.\n\n 2.1.34 \"Normal Retirement Date\" of a Participant means the last\n day of the calendar month in which the Participant reaches the Age of 65\n while in the employ of an Affiliate.\n\n 2.1.35 \"Overall Payment Period\" has the meaning specified in\n Section 6.4.1.\n\n 2.1.36 \"Participant\" means an Executive or an Account Executive\n who is eligible to participate in the Plan and has elected to participate\n in the Plan.\n\n 2.1.37 \"Participating Affiliate\" or \"Participating Affiliates\"\n means the Company and the following indirect subsidiaries of the Company,\n each of which is an Affiliate: HRB Management, Inc., H&R Block Tax\n Services, Inc., Block Financial Corporation, HRB Business Services, Inc.,\n and the U.S. subsidiaries of such indirect subsidiaries; and such other\n Affiliates as may be designated as such by the Company from time to time.\n\n 2.1.38 \"Permissible Deferral\" means, with respect to a Plan\n Year, a deferral in that Plan Year of an Annual Deferral Amount. For all\n Participants, the aggregate of all deferrals made under the Plan,\n including the DCP and the Supplemental Plan, for all Plan Years may not\n exceed one million dollars ($1,000,000.00).\n\n In the case of a Participant who is an employee of both an\n Accounting Subsidiary and an Accounting Firm, the calculation of the\n amount of the Permissible Deferral shall be made by taking into account\n the amount of salary and bonus paid to such Participant by the Accounting\n Firm, but the actual deferral under the Plan shall only be made out of\n Base Salary and/or Bonus or Bonuses paid by all Affiliates.\n\n Deferrals may be made from Base Salary for a Plan Year and/or\n from a Bonus or Bonuses applicable to the Plan Year. Deferrals from the\n Base Salary or from a Bonus or Bonuses are made in separate elections by\n the Participant during the Enrollment Period prior to the Plan Year\n during which such Base Salary would otherwise be paid to the Participant\n or the Bonus would be earned without further contingency (regardless of\n when such Bonus is paid). Deferral elections must specify (i) the\n percentage (stated as an integer) of the deferral that is intended to be\n deducted from the Base Salary and (ii) the percentage (stated as an\n integer) or the flat dollar amount of the deferral that is intended to be\n deducted from the Bonus or Bonuses. Deferrals made from the Base Salary\n shall be made in installments, as instructed and approved by the\n Committee. Deferrals made from each Bonus shall be made at the time or\n times during the applicable Plan Year that the Bonus would otherwise be\n paid to the Participant (based upon the deferral election in effect for\n the Plan Year when the Bonus was earned without further contingency).\n Each installment of a deferral shall be rounded to the nearest whole\n dollar amount.\n\n A Participant may irrevocably elect at the time of making a\n Permissible Deferral election to have the entire amount of his or her\n Base Salary deferral for a Plan Year deferred from such Participant's\n Bonus or Bonuses earned during such Plan Year without\n\n 7\n 9\n\n\n further contingency. The amount of the Base Salary deferral will be\n determined as of January 1 of such Plan Year based on the annual rate of\n Base Salary in effect for the Participant on that date. Such election may\n be in addition to an election to defer Bonus itself and both the Base\n Salary deferral amount and the Bonus deferral amount are eligible for\n Company Contributions (subject to the limits specified in Article 4). For\n example, Participant A, a 5-year Plan Participant, is paid a Base Salary\n at an annual rate of $100,000 on January 1 of Plan Year X, and earns a\n Bonus of $50,000 without further contingency during Plan Year X. During\n the Enrollment Period prior to Plan Year X, A elected to defer 25% of\n Base Salary and 25% of Bonus in Plan Year X. A also elected to have all\n of the Base Salary deferral deferred from the Bonus. In this example,\n $37,500 would be deferred from A's bonus ($25,000 of salary deferrals\n (25% of $100,000) and $12,500 of bonus deferrals ($25% of $50,000)). The\n entire $37,500 would be subject to Company Contributions under Article 4.\n If, in such example, the actual Bonus amount is $35,000, all of the bonus\n would be deferred and $2,500 of elected Base Salary deferrals would not\n be deferred from Base Salary or Bonus applicable to such Plan Year\n because the Bonus was not sufficiently large to cover both the elected\n Base Salary deferral and the Bonus deferral.\n\n 2.1.39 \"Plan\" means the \"H&R Block Deferred Compensation Plan\n for Executives, as Amended and Restated\" as of January 1, 1999, as set\n forth herein and as further amended and/or restated from time to time.\n\n 2.1.40 \"Plan Year\" means the calendar year for all Permissible\n Deferrals and for all purposes when used in Sections 4.3, 4.4, 6.2, 6.3,\n 6.4, 6.6 and 6.7. Except for Permissible Deferrals elected to commence on\n March 1, 1998, and Permissible Deferrals elected during a discretionary\n Enrollment Period in accordance with Section 2.1.25, \"Plan Year \" means\n the calendar year (a) for all Permissible Deferrals elected by Group B\n Participants, and (b) for Permissible Deferrals of Group A Participants\n elected to commence January 1, 1991 or later. For Permissible Deferrals\n of Group A Participants elected to commence on or before May 1, 1990,\n \"Plan Year\" means the 12-month period ending each April 30, through April\n 30, 1997, the period between May 1, 1997 and December 31, 1997,\n inclusive, and the calendar year thereafter. For Permissible Deferrals of\n Participants elected to commence on March 1, 1998, \"Plan Year\" means the\n 10-month period between March 1, 1998 and December 31, 1998, inclusive,\n and the calendar year thereafter. If the Committee grants to a person\n eligible to participate in the Plan a discretionary Enrollment Period in\n accordance with Section 2.1.25 and such person submits to the Company a\n Permissible Deferral election, such Participant's first \"Plan Year\" shall\n be the period (i) beginning on the first day of his or her first regular\n pay period commencing not less than 30 days after the Company's receipt\n of his or her Permissible Deferral election, and (ii) ending on December\n 31 of the year in which such pay period falls. Plan Years under the DCP\n and Supplemental Plan shall constitute Plan Years under this Plan,\n provided that, for all purposes hereunder, a Participant that\n participated in both the DCP and the Supplemental Plan simultaneously\n shall be considered to have participated in this Plan for only one Plan\n Year for each Plan Year of simultaneous participation in the DCP and\n Supplemental Plan.\n\n 2.1.41 \"Plan Year Payment Period\" has the meaning specified in\n Section 6.4.2.\n\n 2.1.42 \"Remainder Payment Period\" has the meaning specified in\n Section 6.4.2.\n\n 2.1.43 \"Standard Form of Benefit\" as to any Participant means\n semimonthly payments for a fifteen (15) year period.\n\n\n 8\n 10\n\n\n 2.1.44 \"Supplemental Plan\" means the H&R Block Supplemental\n Deferred Compensation Plan for Executives initially adopted by the\n Company effective as of May 1, 1994, as subsequently amended prior to the\n Effective Date of this Plan.\n\n 2.1.45 \"10-year payout\" has the meaning specified in \n Section 6.3.2.\n\n 2.1.46 \"Trust\" means the H&R Block, Inc. Deferred Compensation\n Trust Agreement.\n\n\n\n 2.1.47 \"Years of Service\" means the number of consecutive Plan\n Years (including years prior to the Effective Date of this Plan) for\n which the Participant had at least 1,000 Hours of Service.\n\n Section 2.2 Gender and Number. Except as otherwise indicated by\n context, masculine terminology used herein also includes the feminine and\n neuter, and terms used in the singular may also include the plural.\n\n\n ARTICLE 3 PARTICIPATION\n\n Section 3.1 Who May Participate. Participation in the Plan is\n limited to Group A and Group B Participants, described as follows:\n\n 3.1.1 \"Group A Participant\" is an Executive of the\n Company or of a Participating Affiliate (i) serving as a Vice\n President of the Company or applicable Participating Affiliate,\n or (ii) participating in the DCP as a \"Group A Participant\"\n under the DCP as of December 31, 1998, as such term was defined\n as of such date.\n\n 3.1.2 \"Group B Participant\" is an Executive or Account\n Executive who does not qualify as a Group A Participant, but who\n is designated by the Committee as eligible to participate in the\n Plan.\n\n Section 3.2 Time and Conditions of Participation. An eligible\n Executive or Account Executive shall become a Participant only upon (i)\n the individual's completion of a Permissible Deferral election for the\n succeeding Plan Year or Plan Years during an Enrollment Period, in\n accordance with a form established by the Company from time to time, and\n (ii) compliance with such terms and conditions as the Committee may from\n time to time establish for the implementation of the Plan, including, but\n not limited to, any condition the Committee may deem necessary or\n appropriate for the Company to meet its obligations under the Plan. An\n individual may make a Permissible Deferral election for any succeeding\n Plan Year during an Enrollment Period provided the total Permissible\n Deferral elections do not exceed the limitation set forth in Section\n 2.1.38.\n\n Section 3.3 Termination of Participation. Once an individual\n has become a Participant in the Plan, participation shall continue until\n the first to occur of (i) payment in full of all benefits to which the\n Participant or Beneficiary is entitled under the Plan, or (ii) the\n occurrence of an event specified in Section 3.4 which results in loss of\n benefits, or (iii) for a Group B Participant, having an Annual Deferral\n Amount that causes the Participant's Base Salary and Bonus for the Plan\n Year, after reduction for the Annual Deferral Amount, to be less than\n ninety-nine percent (99%) of the United States Social Security\n Contribution and Benefit Base determined under Section 230 of\n\n 9\n 11\n\nthe Social Security Act for such Plan Year. A Group B Participant whose\nparticipation in the Plan is terminated under clause (iii) of the preceding\nsentence shall be deemed for purposes of all Plan provisions (including Section\n4.4, Section 5.1 and Section 6.3) to have voluntarily terminated employment with\nthe Company as of the date the Participant's Plan participation is terminated.\nSuch a Participant may then reenter the Plan during the following Enrollment\nPeriod, assuming the Participant continues to be eligible to participate in the\nPlan as provided in Section 3.1. Except as otherwise specified in the Plan, the\nCompany may not terminate an individual's participation in the Plan.\n\n Section 3.4 Missing Persons. If the Company is unable to locate the\nParticipant or his Beneficiary for purposes of making a distribution, the amount\nof a Participant's benefits under this Plan that would otherwise be considered\nas non-forfeitable shall be forfeited effective four (4) years after (i) the\nlast date a payment of said benefit was made, if at least one such payment was\nmade, or (ii) the first date a payment of said benefit was directed to be made\nby the Company pursuant to the terms of the Plan, if no payments had been made.\nIf such person is located after the date of such forfeiture, the benefits for\nsuch Participant or Beneficiary shall not be reinstated hereunder.\n\n Section 3.5 Relationship to Other Plans. Participation in the Plan shall\nnot preclude participation of the Participant in any other fringe benefit\nprogram or plan sponsored by an Affiliate for which such Participant would\notherwise be eligible. For persons participating in the DCP and, if applicable,\nthe Supplemental Plan, as of December 31, 1998, who continue as Participants in\nthis Plan as of January 1, 1999, participation in this Plan shall be deemed to\nbe continued participation in the DCP and, if applicable, the Supplemental Plan,\nbut under the terms of this Plan.\n\n Section 3.6 Changes in Employment Status. If a Participant has a change in\nhis or her employment responsibilities, title and/or compensation, such that the\nParticipant would not qualify for initial participation in the Plan as a Group A\nParticipant or Group B Participant, as determined by the Committee, (i) the\nParticipant shall continue to make deferrals in accordance with the\nParticipant's Permissible Deferral election for the Plan Year during which the\nchange in employment responsibilities, title and/or compensation occurs, (ii)\nthe Participant shall not be eligible to make Permissible Deferrals in Plan\nYears following the Plan Year during which the change in employment\nresponsibilities, title and/or compensation occurs unless and until the\nParticipant again qualifies for initial participation as a Group A Participant\nor a Group B Participant, as determined by the Committee, and (iii) the\nParticipant shall otherwise continue to participate in the Plan.\n\n ARTICLE 4 ENTRIES TO THE ACCOUNT\n\n Section 4.1 Contributions\n\n 4.1.1 Deferrals. During each Plan Year, if the Participant\n elects the fixed rate and/or variable crediting rate option for measuring\n the performance of the Account under Section 4.2, the Company shall post\n to the Account of such Participant the dollar amount of Base Salary and\n Bonuses to be deferred as designated by the Participant's Permissible\n Deferral election in effect for that Plan Year. Deferrals from Base\n Salary each calendar month shall be posted as of the first day of such\n month and deferrals from Bonuses shall be posted as of the first day of\n the calendar month in which the Bonus would otherwise have been paid to\n the Participant.\n\n During each Plan Year, if the Participant elects the Common\n Stock crediting rate option for measuring the performance of the Account\n under Section 4.2, the Company\n\n\n 10\n\n 12\n\n\n shall post to the Account of such Participant a number of Deferred\n Compensation Units equivalent to the amount of Base Salary and Bonuses to\n be deferred as designated by the Participant's Permissible Deferral\n election in effect for that Plan Year. Deferrals from Base Salary each\n calendar month (and the corresponding number of Deferred Compensation\n Units) shall be posted as of the first day of such month and deferrals\n from Bonuses shall be posted as of the first day of the calendar month in\n which the Bonus would otherwise have been paid to the Participant. The\n number of Deferred Compensation Units posted for each calendar month\n shall be calculated by dividing: (i) the dollar amount deferred during\n that month; by (ii) the Closing Price on the first business day (i.e., a\n day on which the Common Stock is traded on the New York Stock Exchange)\n of that month.\n\n 4.1.2 Company Matching Contributions. The Company shall post\n \"Matching Contributions\" to the Account of each Participant as follows.\n For each $1.00 of Base Salary or Bonus deferred pursuant to Section\n 4.1.1, the Company shall post an additional $.25 to the Participant's\n Account, provided, however, that the maximum percentage of each of Base\n Salary and Bonus to which a Matching Contribution shall be made with\n respect to a Plan Year shall be dependent upon the number of Plan Years\n in which the Participant has participated in the Plan, as follows:\n\n\n Maximum Percentage\n of Base Salary and Bonus\n Plan Year of Participation Matched by a Company Contribution\n -------------------------- ---------------------------------\n 1st and 2nd Year of Participation 10%\n 3rd and 4th Year of Participation 20%\n 5th Year of Participation and After 25%\n\n\n and, provided further, that the total of all Matching Contributions made\n pursuant to this Plan after December 31, 1998 shall not exceed\n twenty-five percent (25%) of the amount by which $1,000,000.00 exceeds\n the aggregate amount of Permissible Deferrals completed by the\n Participant pursuant to the Plan on or before December 31, 1998.\n\n The combination of the DCP and the Supplemental Plan into this\n Plan shall not result in the posting of any Company Matching\n Contributions to any accounts applicable to the Supplemental Plan (which\n had no Matching Contributions), nor shall such combination affect any\n Company Matching Contributions posted to accounts pursuant to the DCP.\n Deferrals made on and after January 1, 1999, by Participants who were\n participants in the Supplemental Plan shall result in the posting of\n Company Matching Contributions to the extent permitted by the immediately\n preceding paragraph of this Section 4.1.2.\n\n If the Participant elects the Common Stock crediting rate option\n for measuring the performance of the Account under Section 4.2, the\n Company shall post to the Account of such Participant for each calendar\n month a number of Deferred Compensation Units equal to (i) the dollar\n amount of Matching Contributions posted to the Account during such month;\n divided by (ii) the Closing Price on the first business day of that\n month. Deferred Compensation Units attributable to Matching\n Contributions shall be posted as of the same time as the corresponding\n Matching Contributions.\n\n 4.1.3 Additional Company Contributions. The Company shall also\n post to the Account of each Participant once each Plan Year the\n difference, if any, between (a) the amount for that Plan Year which would\n have been contributed on behalf of the Participant to any profit sharing\n plan which is deemed to be a \"qualified plan\" under the Code if the\n\n 11\n 13\n\n\n Participant had not made a Permissible Deferral election under the Plan;\n and (b) the amount for that Plan Year contributed on behalf of the\n Participant to such a plan.\n\n If the Participant elects the Common Stock crediting rate option\n for measuring the performance of the Account under Section 4.2, the\n Company shall post to the Account of such Participant for the calendar\n month in which any Plan Year contribution is made by the Company pursuant\n to the first paragraph of this Section 4.1.3 a number of Deferred\n Compensation Units equal to (i) the dollar amount of any such Plan Year\n contribution made during such month; divided by (ii) the Closing Price on\n the first business day of that month. Deferred Compensation Units\n attributable to any contribution made by the Company pursuant to the\n first paragraph of this Section 4.1.3 shall be posted as of the same time\n as such corresponding contributions.\n\n 4.1.4 Disability. During the first 90-day period in which a\n Participant is Disabled, deferrals and Company Contributions (and, if\n applicable, the corresponding number of Deferred Compensation Units)\n shall continue to be posted as described in Sections 4.1.1, 4.1.2 and\n 4.1.3. If a Participant continues to be Disabled after such 90-day\n period, deferrals will cease but Company Contributions will continue for\n the balance of the Participant's Permissible Deferral period as if the\n Participant's deferrals had continued. A Participant may resume deferrals\n upon his or her return to work.\n\n 4.1.5 Fixed 120 Account Permissible Deferral Elections. A\n Participant making Base Salary and/or Bonus deferrals into a Fixed 120\n Account under the DCP as of December 31, 1997 who did not make the\n special, one-time election provided under the DCP to have all then\n outstanding and incomplete Fixed 120 Account deferral cycles deemed\n completed as of December 31, 1997, shall continue to make such deferrals\n in accordance with the Participant's original Permissible Deferral\n election.\n\n Section 4.2 Crediting Rate. Gains or losses shall be posted to the\nAccount in accordance with the Participant's election of investment options\nwhich will be a reference for measuring the performance of the Account, as\nmodified, if applicable, by Section 4.3 or Section 4.4. The Company intends to\nmeasure the performance of the Account in accordance with the Participant's\nelection but reserves the right to do otherwise. The Participant shall elect\nfrom among the following investment options: (i) a fixed rate as described in\n4.2.1, (ii) a variable rate as described in 4.2.2, or (iii) a Common Stock\ncrediting rate as described in 4.2.3. On a monthly basis, Participants may elect\nto reallocate all or any portion of their Account balances, including the entire\nbalance in a Fixed 120 Account, among the available investment options,\nincluding those funds selected by the Company for the variable rate investment\noption, provided said reallocations are in at least ten percent (10%)\nincrements. If a Participant does elect to reallocate his or her entire Fixed\n120 Account balance to another investment option, said Fixed 120 Account will be\ndeemed closed and terminated. In no event shall a Participant be entitled to\nreallocate an Account balance that is not a Fixed 120 Account balance into a\nFixed 120 Account.\n\n Participants may change their crediting rate elections during an\nEnrollment Period or once each calendar month by giving the Company written\nnotice of such change on a form provided by the Company for that purpose. Upon\nreceipt of such notice submitted with enrollment materials during an Enrollment\nPeriod, the crediting rate change shall be made as of the first day of the Plan\nYear to which the Enrollment Period relates. Upon receipt of such notice other\nthan in connection with enrollment materials, the Company will effect the change\non the first day of the calendar month immediately following the month in which\nsuch notice was received. Any change in crediting rate made in accordance with\nsuch notice procedures will govern the Participant's\n\n 12\n 14\n\n\nAccount balance and future deferrals occurring after the effective date.\n\n 4.2.1 Fixed Rate. If a Participant elects a fixed rate, the\n interest will be compounded on a daily basis and posted to the\n Participant's Account per each pay period at an effective annual yield\n equal to the rate of ten-year United States Treasury notes. The rate will\n be determined once each Plan Year and will be the rate in effect as of\n September 30 of the Plan Year immediately prior to the Plan Year to which\n it applies, as published by Salomon Brothers Inc., or any successor\n thereto, or as determined by the Chief Financial Officer of the Company.\n\n For Permissible Deferrals elected under the DCP and commencing\n prior to January 1, 1995, the effective annual yield for the fixed rate\n crediting option shall be equal to one hundred twenty percent (120%) of\n the ten-year rolling average rate of ten-year United States Treasury\n notes. The ten-year rolling average rate will be the rate in effect as of\n September 30 of the Plan Year immediately prior to the Plan Year to which\n it applies, as published by Salomon Brothers Inc., or any successor\n thereto, or as determined by the Chief Financial Officer of the Company.\n\n 4.2.2 Variable Rate. If a Participant elects a variable rate,\n the Participant's Account will be credited or debited as if the Account\n balance were invested in one or more funds selected by the Company in the\n proportions elected by the Participant. Statements will be provided on a\n quarterly basis. Initially the funds will be from the Pruco Variable\n Appreciable Life Insurance Contracts and include the Equity Portfolio,\n the Flexible Managed Portfolio, the Conservative Balanced Portfolio, the\n Money Market Portfolio, the Diversified Bond Portfolio, the High Yield\n Bond Portfolio and the Real Property Portfolio. Participants may elect to\n have their Accounts treated as if they were invested in one or more of\n the funds selected, provided the election is in at least ten percent\n (10%) increments of the Account.\n\n 4.2.3 Common Stock Crediting Rate. If a Participant elects the\n Common Stock crediting rate, the Participant's Account will be valued as\n if his or her Account were invested in shares of Common Stock equal to\n the number of Deferred Compensation Units posted to his or her Account.\n The value of a Participant's Account will vary with the value of the\n Company's Common Stock. The Participant's Account will be credited, as of\n the applicable dividend payment date, with additional Deferred\n Compensation Units equal in value to any dividends declared on the\n Company's Common Stock based on the number of Deferred Compensation Units\n posted to the Participant's Account as of the record date with respect to\n the declaration of such dividend. As of any date of valuation, the value\n of a Participant's Account will be equal to the value (at the Closing\n Price on such date) of the number of shares of Common Stock represented\n by the Deferred Compensation Units credited to the Account as of that\n date.\n\n Section 4.3 Crediting Rate Upon Retirement, Disability, Continued\nEmployment After Reaching the Age of 75, Death or Termination of Employment with\nall Affiliates as a Result of a Change in Control. If a Participant (i)\nterminates employment at or after Normal Retirement Date or Early Retirement\nDate, (ii) is Disabled, or (iii) continues employment after reaching the Age of\n75 and has completed ten (10) Years of Service, gains and losses shall be\ncredited as described in Section 4.2 to that Participant's Accounts. If a\nParticipant dies prior to termination of employment, gains and losses shall be\ncredited, to date of death, as described in Section 4.2 to that Participant's\nAccounts. If a Participant terminates employment with all Affiliates before\nNormal Retirement Date or Early Retirement Date as a result of a Change in\nControl, gains and losses to all of that Participant's Accounts shall be\ncredited as described in Section 4.2 up to, but not after,\n\n 13\n 15\n\n\nthe date of the Change in Control.\n\n Section 4.4 Crediting Rate Upon Resignation or Discharge.\n\n 4.4.1 For a Participant whose employment with all Affiliates\n terminates on or after August 1, 1995, but before the Normal Retirement\n Date or the Early Retirement Date, for reasons other than death,\n Disability or a Change in Control, gains and losses shall be credited to\n that Participant's Account as described in Section 4.2 up to the date of\n termination of employment, and the crediting shall continue after such\n date for those Participants who elected a 10-year payout or a 5-year\n payout, as such terms are defined in Section 6.3.2. If a Participant\n elected to be paid in a lump sum, there shall be no further crediting to\n the Participant's Account following the date of termination of\n employment.\n\n 4.4.2 For a Participant whose employment with all Affiliates\n terminated prior to August 1, 1995, and before the Normal Retirement Date\n or the Early Retirement Date, for reasons other than death, Disability or\n a Change in Control, gains and losses to that Participant's Accounts that\n represent completed deferral cycles shall be credited as described in\n Section 4.2 up to the date of termination of employment. Gains and losses\n to that Participant's Accounts that do not represent completed deferral\n cycles and gains and losses after the date of termination of employment\n shall be credited at an interest rate equal to the average of (i) the\n interest rate set by the Chief Financial Officer of the Company in his\n discretion for the Plan Year in which the termination of employment\n occurs, which rate shall not be less than the rate then payable on\n Investment Savings Accounts of $1,000 or less at Commerce Bank of Kansas\n City, N.A., Kansas City, Missouri, or any successor thereto, and (ii) the\n respective interest rates so set by the Chief Financial Officer of the\n Company for each of the two Plan Years immediately prior to the Plan Year\n in which the termination of employment occurs.\n\n\n ARTICLE 5 VESTING\n\n Section 5.1 Participant Deferrals and Vesting Schedule for Company\nContributions. Participant deferrals pursuant to Section 4.1.1 are fully vested\nimmediately. The Participant's interest in the Company Matching Contributions\nunder Section 4.1.2 and the Company Contributions described in Section 4.1.3\nshall vest according to the following schedule:\n\n\n Percentage of\n Company Contributions\n Years of Service Vested\n ---------------- ---------------------\n Less than 2 None\n 2 20%\n 3 30%\n 4 40%\n 5 50%\n 6 60%\n 7 70%\n 8 80%\n 9 90%\n 10 100%\n\n\nFor purposes of crediting Years of Service under the foregoing Schedule,\nParticipants will be credited with Years of Service beginning with the year in\nwhich the Participant began participation\n\n 14\n 16\n\n\nin the Plan. A Disabled Participant will be credited with any Hours of Service\nwith which he or she would have been credited but for the Disability.\n\n Section 5.2 Exceptions to Vesting Schedule. Company Contributions are\nfully vested upon a Participant's death prior to termination of employment, and\nupon a Change in Control as defined in Section 10.2. Participants who have\nattained Age 65 prior to the date on which they first became eligible to\nparticipate in the Plan and who have completed ten (10) Years of Service are\nfully vested. Participants who have attained Age 55 (but are less than Age 65)\nprior to the date on which they first became eligible to participate in the Plan\nand who have completed ten (10) Years of Service, vest according to the\nfollowing formula:\n\n Years of Service since initial Plan eligibility date\n ------------------------------------------------------------\n 65 minus Participant's Age on initial Plan eligibility date.\n\n\n\n ARTICLE 6 DISTRIBUTION OF BENEFITS\n\n Section 6.1 Payments After Termination of Employment. Generally, payments\nof benefits to a Participant shall be made by the Company only upon the\ntermination, voluntary or involuntary, of the Participant's employment with all\nAffiliates, except where (i) a Participant is Disabled, (ii) the provisions of\nSection 6.2.2 apply, or (iii) the provisions of Section 6.7 apply.\n\n Section 6.2 Form of Benefits Upon Retirement, Disability or Continued\nEmployment After Reaching the Age of 75.\n\n 6.2.1 Retirement or Disability. Payments from the\n Account shall be made in accordance with the Standard Form of\n Benefit for Participants who terminate employment on or after\n Normal Retirement Date or Early Retirement Date or are\n Disabled. However, no less than 13 months prior to such\n termination of employment, the Participant may petition the\n Committee for, and the Committee may approve at such time, an\n optional form of benefit.\n\n 6.2.2 Continued Employment After Reaching the Age of\n 75. If a Participant reaches the Age of 75 while in the employ\n of an Affiliate, and has completed ten (10) Years of Service,\n payment of benefits shall commence in the first pay period of\n the first calendar quarter that begins at least forty-five (45)\n days after the date on which the Participant reaches the Age of\n 75. Payments from the Account shall be made in accordance with\n the Standard Form of Benefit. However, no less than 13 months\n prior to the date on which the Participant reaches the Age of\n 75, the Participant may petition the Committee for, and the\n Committee may approve at such time, an optional form of\n benefit.\n\n 6.2.3 Lump-Sum Payment. Notwithstanding any other\n provisions of the Plan, a Participant who terminates employment\n on or after Normal Retirement Date or Early Retirement Date,\n and a Participant who reaches the Age of 75 while in the employ\n of an Affiliate may, at any time before or after a Change in\n Control, as defined in Section 10.2, elect to receive an\n immediate lump-sum payment of the\n\n 15\n 17\n\n\n aggregate of the balances of said Participant's Accounts\n reduced by a penalty, which shall be forfeited to the Company,\n in lieu of payments in accordance with the Standard Form of\n Benefit or such optional form of benefit as may have previously\n been approved by the Committee under this Section 6.2.3. The\n penalty shall be equal to ten percent (10%) of the aggregate of\n the balances of such Accounts if the election is made before a\n Change in Control and shall be equal to five percent (5%) of\n the aggregate of the balances of such Accounts if the election\n is made after a Change in Control. However, the penalty shall\n not apply if the Committee determines, based on advice of\n counsel or a final determination or ruling by the Internal\n Revenue Service or any court of competent jurisdiction, that by\n reason of the provisions of this paragraph any Participant has\n recognized or will recognize gross income for federal income\n tax purposes under this Plan in advance of payment to the\n Participant of Plan benefits. The Company shall notify all\n Participants of any such determination by the Committee and\n shall thereafter refund all penalties which were imposed\n hereunder in connection with any lump-sum payments made at any\n time during or after the first year to which the Committee's\n determination applies (i.e., the first year for which, by\n reasons of the provisions of this paragraph, gross income under\n this Plan is recognized for federal income tax purposes in\n advance of payment of benefits). Interest compounded annually\n shall be paid by the Company to the Participant (or the\n Participant's Beneficiary if the Participant is deceased) on\n any such refund from the date of the Company's payment of the\n lump sum at an annual rate equal to the rate of one-year United\n States Treasury notes in effect as of September 30 of the Plan\n Year immediately prior to the Plan Year in which such refund is\n paid, as published by Salomon Brothers, Inc., or any successor\n thereto, or as determined by the Chief Financial Officer of the\n Company. The Committee may also reduce or eliminate the penalty\n if it determines that the right to elect an immediate lump-sum\n payment under this paragraph, with the reduced penalty or with\n no penalty, as the case may be, will not cause any Participant\n to recognize gross income for federal income tax purposes under\n this Plan in advance of payment to the Participant of Plan\n benefits.\n\n Section 6.3 Form of Benefits Upon Resignation or Discharge, or\nTermination of Employment with all Affiliates as a Result of a Change in\nControl.\n\n 6.3.1 Upon a Participant's termination of employment with all\n Affiliates before Normal Retirement Date or Early Retirement Date, but\n following a Change in Control, payments from the Account shall be paid in\n a lump sum within forty-five (45) days after the date of the termination\n of employment.\n\n 6.3.2 If a Change in Control has not occurred, for Participants\n who terminate employment with all Affiliates on or after August 1, 1995,\n but before the Normal Retirement Date or the Early Retirement Date, for\n reasons other than Disability or death, payment(s) from the Account shall\n be in the form of (a) semimonthly payments over a 10-year period (a\n \"10-year payout\"); (b) semimonthly payments over a five-year period (a\n \"5-year payout\"); or (c) a lump sum, as elected by the Participant at the\n time of said Participant's first Permissible Deferral election, or, in\n the case of a Participant who made one or more Permissible Deferral\n elections prior to August 1, 1995, as elected by the Participant in\n writing during a special election period between August 15, 1995 and\n September 15, 1995, inclusive.\n\n 6.3.3 If a Change in Control has not occurred, for Participants\n who terminated employment with all Affiliates prior to August 1, 1995,\n but before the Normal Retirement\n\n 16\n 18\n\n\n Date or the Early Retirement Date, for reasons other than Disability or\n death, payment(s) from the Account shall be in the form of (a)\n semi-monthly payments over a three-year period for all Permissible\n Deferrals that satisfy a completed deferral cycle, or (b) a lump sum for\n all Permissible Deferrals that do not satisfy a completed deferral cycle.\n\n 6.3.4 If no election under Section 6.3.2 is made by the\n Participant eligible to make such an election, payment from the Account\n shall be in the form of a lump sum. An election made in accordance with\n Section 6.3.2 shall apply to all Permissible Deferral elections made by\n the Participant under the Plan and is irrevocable.\n\n 6.3.5 If an eligible Participant has elected a 10-year payout or\n a 5-year payout pursuant to Section 6.3.2, and the amount of each\n semimonthly installment, as initially calculated, is less than $500 (such\n calculation to be accomplished by amortizing the aggregate of the\n Participant's Account balances over the payment period using a crediting\n rate equal to the rate of one-year United States Treasury notes in effect\n as of September 30 of the Plan Year prior to the Plan Year in which the\n termination of employment occurs), the form of payment(s) for such\n Participant shall be a 5-year payout in lieu of an elected 10-year payout\n (unless the amount of each semimonthly installment under a 5-year payout,\n as so calculated, is also less than $500, in which case the form of\n payment will be a single lump sum), or a lump sum in lieu of an elected\n 5-year payout, as the case may be.\n\n 6.3.6 Notwithstanding any other provisions of the Plan, an\n eligible Participant who (1) elects either a 10-year payout or a 5-year\n payout and either such payout is not automatically converted to a lump\n sum pursuant to Section 6.3.5, and (2) terminates employment before the\n Normal Retirement Date or the Early Retirement Date may, at any time\n before or after a Change in Control, as defined in Section 10.2, elect to\n receive an immediate lump-sum payment of the aggregate of the balances of\n said Participant's Accounts reduced by a penalty, which shall be\n forfeited to the Company, in lieu of payments in accordance with the\n 10-year payout or the 5-year payout, whichever is applicable. The penalty\n shall be equal to ten percent (10%) of the aggregate of the balances of\n such Accounts if the election is made before a Change in Control and\n shall be equal to five percent (5%) of the aggregate of the balances of\n such Accounts if the election is made after a Change in Control. However,\n the penalty shall not apply if the Committee determines, based on advice\n of counsel or a final determination or ruling by the Internal Revenue\n Service or any court of competent jurisdiction, that by reason of the\n provisions of this paragraph any Participant has recognized or will\n recognize gross income for federal income tax purposes under this Plan in\n advance of payment to the Participant of Plan benefits. The Company shall\n notify all Participants of any such determination by the Committee and\n shall thereafter refund all penalties which were imposed hereunder in\n connection with any lump-sum payments made at any time during or after\n the first year to which the Committee's determination applies (i.e., the\n first year for which, by reasons of the provisions of this paragraph,\n gross income under this Plan is recognized for federal income tax\n purposes in advance of payment of benefits). Interest compounded\n annually shall be paid by the Company to the Participant (or the\n Participant's Beneficiary if the Participant is deceased) on any such\n refund from the date of the Company's payment of the lump sum at an\n annual rate equal to the rate of one-year United States Treasury notes in\n effect as of September 30 of the Plan Year immediately prior to the Plan\n Year in which such refund is paid, as published by Salomon Brothers,\n Inc., or any successor thereto, or as determined by the Chief Financial\n Officer of the Company. The Committee may also reduce or eliminate the\n penalty if it determines that the right to elect an immediate lump-sum\n payment under this paragraph, with the reduced penalty or with no\n penalty, as the\n\n 17\n 19\n\n\n case may be, will not cause any Participant to recognize gross income for\n federal income tax purposes under this Plan in advance of payment to the\n Participant of Plan benefits.\n\n Section 6.4 Amount of Benefit.\n\n 6.4.1 Except for distributions in the form of a lump sum,\n benefit payments shall be in the form of semimonthly cash installments\n paid during the applicable payment period (the \"Overall Payment Period\").\n\n 6.4.2 Except as provided in Section 6.4.4, the amount of each\n installment payment shall be level during the portion of the Overall\n Payment Period ending on December 31 of the Plan Year in which benefit\n payments commence (the \"Initial Payment Period\"), during each complete\n Plan Year of the Overall Payment Period thereafter (a \"Plan Year Payment\n Period\"), and during any remaining period of the Overall Payment Period\n following the last Plan Year Payment Period (the \"Remainder Payment\n Period\"), but will vary from one such portion of the Overall Payment\n Period to the next. If a Participant was receiving benefits pursuant to\n Section 6.2 as of August 1, 1995, payments due on and after January 1,\n 1996 shall be made in accordance with this Section 6.4.2 and with Section\n 6.4.3.\n\n 6.4.3 The amount of each level payment for the Initial Payment\n Period, if any, shall be calculated using the balance in the Account as\n of the beginning of the Initial Payment Period and amortizing such\n balance over the remaining Overall Payment Period using an assumed\n interest rate equal to the rate of one-year United States Treasury notes,\n said rate to be determined once each Plan Year and to be the rate in\n effect as of the September 30 immediately preceding the payment period to\n which it applies, as published by Solomon Brothers, Inc., or any\n successor thereto, or as determined by the Chief Financial Officer of the\n Company (the \"Assumed Interest Rate\"). The amount of each level payment\n for each Plan Year Payment Period shall be calculated by taking the\n balance in the Account as of November 30 of the Plan Year immediately\n prior to such Plan Year Payment Period, subtracting the benefit payments\n made during the portion of such preceding Plan Year following November\n 30, and amortizing the difference over the remaining Overall Payment\n Period using the Assumed Interest Rate. The amount of each level payment\n for the Remainder Payment Period, if any, shall be calculated by taking\n the balance in the Account as of November 30 of the Plan Year immediately\n prior to the Remainder Payment Period, subtracting the benefit payments\n made during the portion of such preceding Plan Year following November\n 30, and amortizing the difference over the Remainder Payment Period using\n an assumed interest rate of zero percent (0%) per annum. If the actual\n crediting rate for the Remainder Payment Period is more than zero\n percent, the additional gain resulting from the difference in crediting\n rates shall be paid to the Participant in a single payment within six\n months after the last day of the Remainder Payment Period.\n\n 6.4.4 If the Participant terminates employment with all\n Affiliates prior to August 1, 1995, and receives benefits pursuant to\n Section 6.3.3, semimonthly payments for Permissible Deferrals that\n satisfy a completed deferral cycle shall be level during the entire\n Overall Payment Period and shall be calculated using the balance in the\n Account at the commencement of benefit payments, and amortizing such\n balance over three years at the crediting rate determined in accordance\n with Section 4.4.2.\n\n 6.4.5 Generally, the Account shall continue to be credited\n during the Overall Payment Period with gains and losses as provided in\n Section 4.3. However, if a Participant\n\n 18\n 20\n\n\n receives benefits pursuant to Section 6.3 (other than pursuant to Section\n 6.3.1), the Account shall be credited with gains and losses as provided\n in Section 4.4. Except as provided otherwise, if a Participant dies,\n Section 6.6 shall apply.\n\n 6.4.6 Notwithstanding anything in this Plan to the contrary, the\n Committee may, in its sole discretion, (i) increase or reduce any assumed\n interest rate set forth in this Section 6.4 and any such assumed interest\n rate, as so adjusted, shall be effective for calculating level\n semimonthly installments for Participants whose benefit payments commence\n after the date of such adjustment, and (ii) change the date set forth in\n Section 6.4.3 on which the balance in the Participant's Account is to be\n determined for purposes of calculating the amount of each level payment\n for each Plan Year Payment Period and each Remainder Payment Period, and\n any such revised date shall be effective for calculating level\n semimonthly installments for the Plan Year Payment Period or the\n Remainder Payment Period beginning on or after the effective date of such\n revision.\n\n Section 6.5 Time of Payment. Generally, benefit payments to a Participant\nshall commence in the first pay period of the calendar quarter that begins at\nleast forty-five (45) days after the date of termination of employment.\nNotwithstanding the preceding sentence, if a Participant elected to be paid in a\nlump sum, the benefit payment shall be made within forty-five (45) days after\nthe date of termination of employment. In the case of a Disabled Participant,\nbenefits shall commence no later than six (6) months after the Participant's\nEarly Retirement Date.\n\n With respect to Permissible Deferral elections made under the DCP prior\nto January 1, 1997, a Participant was permitted elect at the time of each\nPermissible Deferral election to defer commencement of the payment of benefits\nafter termination of employment with respect to such Permissible Deferral\nelection until the earlier of: (a) five (5) years after termination of\nemployment; or (b) Age 70. If the Participant made such an election and did not\nrevoke such election pursuant to a one-time opportunity during the Enrollment\nPeriod prior to the Plan Year commencing January 1, 1998, the Participant shall\nreceive benefit payments in accordance with said election, provided that the\nCommittee, upon written petition of the Participant, may begin benefit payments\nat an earlier time after termination if it determines that compelling reasons\nexist for such earlier payments. No elections to defer commencement of benefits\nshall be permitted under this Plan with respect to Permissible Deferrals\ncommencing on or after January 1, 1998.\n\n Section 6.6 Death Benefits.\n\n 6.6.1 Death After Benefit Commencement. In the event a\n Participant dies after benefit payments have commenced (other than\n payments made pursuant to Section 6.7), the remaining benefit payments,\n if any, shall be paid to the Participant's Beneficiary in the same manner\n such benefits would have been paid to the Participant had the Participant\n survived. A Beneficiary may petition the Committee for an alternative\n method of payment. If such benefits were payable pursuant to Section 6.3,\n the Account shall continue to be credited during the payout period as\n provided in Section 4.4, except that, if such benefits were payable\n because of the Participant's termination of employment with all\n Affiliates following a Change in Control, the Account shall continue to\n be credited as provided in Section 4.3. If such benefits were payable\n pursuant to Section 6.2, the Account shall be credited from the date of\n the Participant's death at a rate equal to the rate of one-year United\n States Treasury notes, said rate to be determined once each Plan Year and\n to be the rate in effect as of September 30 of the Plan Year immediately\n prior to the Plan Year to which it applies, as published by Salomon\n Brothers, Inc., or any successor thereto, or as determined by the Chief\n Financial Officer of the Company. The Participant's Beneficiary\n\n 19\n 21\n\n\n\n may make the election to receive an immediate lump-sum payment of the\n balance of said Participant's Account in accordance with the provisions\n of Section 6.2.3 or Section 6.3.6, whichever is applicable, and all\n provisions set forth therein relating to penalties shall apply to any\n such election.\n\n In addition, if a Participant dies on or after such\n Participant's Normal Retirement Date or Early Retirement Date after\n having retired, or after benefits have commenced because of the\n Participant's Disability, an annuity shall be paid to the Participant's\n surviving spouse, if any (to whom he has been married at least one (1)\n year prior to the date of death). The annuity shall be for the life of\n the Participant's surviving spouse with each semimonthly payment equal to\n fifty percent (50%) of the average amount which would have been payable\n to the Participant and his or her Beneficiary if, on the date benefits\n commenced, the Participant had received the Standard Form of Benefit\n payment. If the Participant's surviving spouse is more than thirty-six\n (36) months younger than the Participant, the survivor life annuity\n payable to such spouse shall be reduced by one-half of one percent (.5%)\n for each month the spouse is more than thirty-six (36) months younger\n than the Participant. Payment shall commence on the first day of the\n month following the later of (a) the Participant's death, (b) the\n completion of the death benefits under the first paragraph of this\n Section 6.6.1, or (c) fifteen (15) years from the date benefits commenced\n or would have commenced to the Participant.\n\n 6.6.2 Death Prior to Benefit Commencement. In the event a\n Participant dies before benefit payments have commenced, the Company\n shall pay a pre-retirement death benefit to the Participant's\n Beneficiary. The amount of such pre-retirement death benefit is the\n greater of:\n\n (a) the Participant's Account as of the date of\n the Participant's death annuitized over a ten-year\n period at an interest rate equal to the rate of\n one-year United States Treasury notes in effect as of\n September 30 of the Plan Year immediately prior to the\n Plan Year in which payment of the pre-retirement death\n benefit commences, as published by Salomon Brothers,\n Inc., or any successor thereto, or as determined by\n the Chief Financial Officer of the Company; or\n\n (b) An annual benefit of twenty-five percent\n (25%) of the total deferrals and Company Contributions\n made as of the date of the Participant's death.\n\n The pre-retirement death benefit shall be paid semimonthly for a ten-year\n period. The Beneficiary may petition the Committee for an alternative\n method of payment. If the pre-retirement death benefit is computed\n pursuant to 6.6.2(a), the Account shall continue to be credited during\n the payment period at an interest rate equal to the rate of one-year\n United States Treasury notes, said rate to be determined once each Plan\n Year and to be the rate in effect as of September 30 of the Plan Year\n immediately prior to the Plan Year to which it applies, as published by\n Salomon Brothers, Inc., or any successor thereto, or as determined by the\n Chief Financial Officer of the Company. Commencement of benefits under\n this Section 6.6.2 shall begin no later than six (6) months following the\n death of the Participant notwithstanding any election which the\n Participant may have made to defer benefits pursuant to Section 6.5.\n\n 6.6.3 Marital Deduction. Any benefits which become payable\n under this Article 6 to the surviving spouse of a Participant shall be\n paid in a manner which will qualify such\n\n 20\n 22\n\n\n benefits for a marital deduction in the estate of a deceased Participant\n under the terms of Section 2056 of the Code, and unless specifically\n directed by a Participant to the contrary pursuant to an effective\n beneficiary designation, any portion of a Participant's death benefit\n payable to a surviving spouse which remains unpaid at the death of such\n spouse shall be paid to the spouse's estate.\n\n 6.6.4 Designation by Participant. Each Participant has the\n right to designate primary and contingent Beneficiaries for death\n benefits payable under the Plan. Such Beneficiaries may be individuals or\n trusts for the benefit of individuals. A Beneficiary designation by a\n Participant shall be in writing on a form acceptable to the Committee and\n shall only be effective upon delivery to the Company. A Beneficiary\n designation may be revoked by a Participant at any time by delivering to\n the Company either written notice of revocation or a new Beneficiary\n designation form. The Beneficiary designation form last delivered to the\n Company prior to the death of a Participant shall control.\n\n 6.6.5 Failure to Designate Beneficiary. In the event there is\n no Beneficiary designation on file with the Company, or all Beneficiaries\n designated by a Participant have predeceased the Participant, the\n benefits payable by reason of the death of the Participant shall be paid\n to the Participant's spouse, if living; if the Participant does not leave\n a surviving spouse, to the Participant's issue by right of\n representation; or, if there are no such issue then living, to the\n Participant's estate. In the event there are benefits remaining unpaid at\n the death of a sole Beneficiary and no successor Beneficiary has been\n designated, either by the Participant or the Participant's spouse\n pursuant to 6.6.3, the remaining balance of such benefit shall be paid to\n the deceased Beneficiary's estate; or, if the deceased Beneficiary is one\n of multiple concurrent Beneficiaries, such remaining benefits shall be\n paid proportionally to the surviving Beneficiaries.\n\n Section 6.7 Hardships. Upon the application of any Participant, the\nCommittee, in accordance with its uniform, non-discriminatory policy, may permit\nsuch Participant to terminate future deferrals or to withdraw his total Account.\nA Participant must give a written petition of the termination of his or her\nPermissible Deferral election at least thirty (30) days prior to the next\nperiodic (for Base Salary) or single sum (for Bonuses) deferral. A Participant\nmust give a written petition of the intent to withdraw the Account at least\nsixty (60) days (or such shorter time as permitted by the Committee) prior to\nthe date of withdrawal. No termination or withdrawal shall be made under the\nprovisions of this Section except for the purpose of enabling a Participant to\nmeet immediate needs created by a financial hardship for which the Participant\ndoes not have other reasonably available sources of funds, as determined by the\nCommittee in accordance with uniform rules. The term financial hardship shall\ninclude the need for funds to: meet uninsured medical expenses for the\nParticipant or his dependents, meet a significant uninsured casualty loss for\nthe Participant or his dependents, and meet other catastrophes of a \"sudden and\nserious nature.\"\n\n The Committee may permit a withdrawal of any deferrals. If a withdrawal\nis permitted, a Participant's deferrals shall be credited at the lesser of (a)\nthe amount as described in Section 4.2; or (b) an interest rate equal to the\nrate of one-year United States Treasury notes in effect as of September 30 of\nthe Plan Year immediately prior to the Plan Year in which application for such\nwithdrawal is made, as published by Salomon Brothers, Inc., or any successor\nthereto, or as determined by the Chief Financial Officer of the Company.\nWithdrawals shall be distributed in the form of a lump sum as soon as is\nreasonably convenient.\n\n If a termination of deferrals or a withdrawal is made under this Section,\nthe Participant may not enter into a new Permissible Deferral election for two\n(2) complete Plan Years after the date of\n\n 21\n 23\n\n\nthe termination or withdrawal.\n\n Section 6.8 Claims Procedure. The Committee shall notify a Participant in\nwriting within ninety (90) days of the Participant's written application for\nbenefits of his eligibility or non-eligibility for benefits under the Plan. If\nthe Committee determines that a Participant is not eligible for benefits or full\nbenefits, the notice shall set forth (a) the specific reasons for such denial,\n(b) a specific reference to the provision of the Plan on which the denial is\nbased, (c) a description of any additional information or material necessary for\nthe claimant to perfect his claim, and a description of why it is needed, and\n(d) an explanation of the Plan's claims review procedure and other appropriate\ninformation as to the steps to be taken if the Participant wishes to have his\nclaim reviewed. If the Committee determines that there are special circumstances\nrequiring additional time to make a decision, the Committee shall notify the\nParticipant of the special circumstances and the date by which a decision is\nexpected to be made, and may extend the time for up to an additional 90-day\nperiod. If a Participant is determined by the Committee to be not eligible for\nbenefits, or if the Participant believes that he is entitled to greater or\ndifferent benefits, he shall have the opportunity to have his claim reviewed by\nthe Committee by filing a petition for review with the Committee within sixty\n(60) days after receipt by him of the notice issued by the Committee. Said\npetition shall state the specific reasons the Participant believes he is\nentitled to benefits or greater or different benefits. Within sixty (60) days\nafter receipt by the Committee of said petition, the Committee shall afford the\nParticipant (and his counsel, if any) an opportunity to present his position to\nthe Committee orally or in writing, and said Participant (or his counsel) shall\nhave the right to review the pertinent documents, and the Committee shall notify\nthe Participant of its decision in writing within said sixty (60) day period,\nstating specifically the basis of said decision written in a manner calculated\nto be understood by the Participant and the specific provisions of the Plan on\nwhich the decision is based. If, because of the need for a hearing, the sixty\n(60) day period is not sufficient, the decision may be deferred for up to\nanother sixty (60) day period at the election of the Committee, but notice of\nthis deferral shall be given to the Participant.\n\n Section 6.9 Alternate Forms of Benefit Distribution. Participants shall have\nthe right to petition the Committee to request methods of benefit distribution\nother than those provided to Participants pursuant to this Article 6.\n\n Section 6.10 Distributions on Plan Termination. Notwithstanding anything in\nthis Article 6 to the contrary, if the Plan is terminated, distributions shall\nbe made in accordance with Section 9.2.\n\n\n\n ARTICLE 7 FUNDING\n\n Section 7.1 Source of Benefits. All benefits under the Plan shall be paid\nwhen due by the Company out of its assets or from an irrevocable trust\nestablished by the Company for that purpose. The Company may, but shall have no\nobligations to, make such advance provision for the payment of such benefit as\nthe Board may from time to time consider appropriate.\n\n Section 7.2 No Claim on Specific Assets. No Participant shall be deemed to\nhave, by virtue of being a Participant in the Plan, any claim on any specific\nassets of the Company such that the Participant would be subject to income\ntaxation on his benefits under the Plan prior to distribution and the rights of\nParticipants and Beneficiaries to benefits to which they are otherwise entitled\nunder the Plan shall be those of an unsecured general creditor of the Company.\n\n ARTICLE 8 ADMINISTRATION AND FINANCES\n\n\n 22\n 24\n\n\n Section 8.1 Administration. The Plan shall be administered by the Committee.\nThe Company shall bear all administrative costs of the Plan other than those\nspecifically charged to a Participant or Beneficiary.\n\n Section 8.2 Powers of Committee. In addition to the other powers granted\nunder the Plan, the Committee shall have all powers necessary to administer the\nPlan, including, without limitation, powers:\n\n (a) to interpret the provisions of the Plan;\n\n (b) to establish and revise the method of accounting for the \n Plan and to maintain the Accounts; and\n\n (c) to establish rules for the administration of the Plan \n and to prescribe any forms required to administer the Plan.\n\nNot in limitation, but in amplification of the foregoing and of the authority\nconferred upon the Committee in Section 8.1, the Company specifically intends\nthat the Committee have the greatest permissible discretion to construe the\nterms of the Plan and to determine all questions concerning eligibility,\nparticipation and benefits. Any such decision made by the Committee is intended\nto be subject to the most deferential standard of judicial review. Such standard\nof review is not to be effected by any real or alleged conflict of interest on\nthe part of the Company or any member of the Committee.\n\n Section 8.3 Actions of the Committee. Except as modified by the Company, all\ndeterminations, interpretations, rules, and decisions of the Committee shall be\nconclusive and binding upon all persons having or claiming to have any interest\nor right under the Plan.\n\n Section 8.4 Delegation. The Committee, or any officer designated by the\nCommittee, shall have the power to delegate specific duties and responsibilities\nto officers or other employees of the Company or other individuals or entities.\nAny delegation may be rescinded by the Committee at any time. Each person or\nentity to whom a duty or responsibility has been delegated shall be responsible\nfor the exercise of such duty or responsibility and shall not be responsible for\nany act or failure to act of any other person or entity.\n\n Section 8.5 Reports and Records. The Committee and those to whom the\nCommittee has delegated duties under the Plan shall keep records of all their\nproceedings and actions and shall maintain books of account, records, and other\ndata as shall be necessary for the proper administration of the Plan and for\ncompliance with applicable law.\n\n\n ARTICLE 9 AMENDMENTS AND TERMINATION\n\n Section 9.1 Amendments. The Company, by action of the Board, may amend the\nPlan, in whole or in part, at any time and from time to time. Any such amendment\nshall be filed with the Plan documents. No amendment, however, may be effective\nto eliminate or reduce the benefits of any retired Participant or the\nBeneficiary of any deceased Participant then eligible for benefits or the vested\nportion of the benefits, if any, in any active Participant's Account immediately\nbefore the effective date of such amendment, and each such Account will be\ncredited to the date of such amendment in accordance with Section 4.2.\nNotwithstanding anything in this Section 9.1 to the contrary, the Committee may,\nin its discretion, amend the Plan to reduce the rates set forth in Section 4.2\neffective for crediting of Accounts from the date of any such amendment.\n\n 23\n 25\n\n\nNotwithstanding anything in this Section 9.1 to the contrary, the Committee may,\nin its discretion, (i) amend the Plan to reduce or eliminate the penalty\ndescribed in Section 6.2.3 and/or the penalty described in Section 6.3.6, in\naccordance with the provisions of such Section 6.2.3 and/or such Section 6.3.6,\n(ii) amend the Plan to increase or reduce any assumed interest rate set forth in\nSection 6.4, in accordance with the provisions of Section 6.4.6, or (iii) amend\nthe Plan to change the date set forth in Section 6.4.3 on which the balance in\nthe Participant's Account is to be determined for purposes of calculating the\namount of each level payment for each Plan Year Payment Period and each\nRemainder Payment Period, in accordance with the provisions of Section 6.4.6.\n\n Section 9.2 Termination. The Company expects the Plan to be permanent, but\nnecessarily must, and hereby does, reserve the right to terminate the Plan at\nany time by action of the Board. In all events, the Plan will be terminated if\nthe existence of a trust causes a federal court to hold that the Plan is\n\"funded\" for ERISA purposes, as defined in Section 2.02-4 of the Trust and\nappeals from that holding are no longer timely or have been exhausted, and the\ntrust is therefore terminated with respect to the Plan. Upon termination of the\nPlan, all deferrals and Company Contributions will cease and no future deferrals\nor Company Contributions will be made. Termination of the Plan shall not operate\nto eliminate or reduce benefits of any retired Participant or the Beneficiary of\nany deceased Participant then eligible for benefits. Active Participants shall\nbecome vested in their accrued benefits to the extent and in the manner provided\nin Section 9.3 as of the effective date of such termination and each account of\nan active Participant shall be credited, to the date of distribution of all\nbenefits in each such Account, in accordance with Section 4.2., as it may be\namended from time to time pursuant to Section 9.1.\n\n If the Plan is terminated, payments from the Accounts of all Participants\nand Beneficiaries shall be made as soon as administratively convenient in the\nform of monthly payments over a five (5) year period; however, the Committee in\nits sole discretion may pay the benefits in a lump sum. Notwithstanding the\npreceding sentence, if the termination occurs because the Plan is held to be\n\"funded\" as described in the first paragraph of this Section 9.2, the\ndistribution will be paid in a lump sum not later than ninety (90) days after\nsuch termination.\n\n Section 9.3 Accelerated Vesting. Notwithstanding Article 5, upon termination\nof the Plan a Participant shall vest in Company Contributions according to the\nfollowing schedule:\n\n\n Percentage of Company\n Years of Service Contributions Vested\n ---------------- ---------------------\n Less than 1 None\n \n 1 20%\n 2 40%\n 3 60%\n 4 80%\n 5 or more 100%\n\n\nYears of Service shall be credited in accordance with Section 5.1.\n\n\n ARTICLE 10 ACCELERATED VESTING\n\n Section 10.1 Accelerated Vesting. Notwithstanding Article 5, upon a Change\nin Control as defined in Section 10.2, a Participant shall be fully vested in\nCompany Contributions.\n\n Section 10.2 Change in Control. A Change in Control for any Participant\nshall occur if there is a Change in Control of the Company as defined in Section\n1.01-2 of the Trust or there is a\n\n 24\n 26\n\n\n\nChange in Control of a Participating Subsidiary, as defined in Section 1.01-2 of\nthe Trust, of the Participating Affiliate by whom the Participant is employed.\n\n\n ARTICLE 11 MISCELLANEOUS\n\n Section 11.1 No Guarantee of Employment. Neither the adoption and\nmaintenance of the Plan nor the execution by the Company of a Permissible\nDeferral agreement with any Executive shall be deemed to be a contract of\nemployment between the Company and any Participant. Nothing contained herein\nshall give any Participant the right to be retained in the employ of the Company\nor to interfere with the right of the Company to discharge any Participant at\nany time, nor shall it give the Company the right to require any Participant to\nremain in its employ or to interfere with the Participant's right to terminate\nhis employment at any time.\n\n Section 11.2 Individual Account Plan. If it is determined that the Plan is\nnot an unfunded deferred compensation plan maintained primarily for a select\ngroup of management or highly compensated employees as described in Sections\n201(2), 301(a)(3) and 401(a)(1) of ERISA, then the Plan is intended to be an\nindividual account plan (other than a money purchase plan) as described in\nSection 301(a)(8) of ERISA and the vesting schedule set forth in Article 5 shall\nbe replaced by the vesting schedule in the then current H&R Block Profit Sharing\nRetirement Plan.\n\n Section 11.3 Release. Any payment of benefits to or for the benefit of a\nParticipant or a Participant's Beneficiaries that is made in good faith by the\nCompany in accordance with the Company's interpretation of its obligations\nhereunder, shall be in full satisfaction of all claims against the Company for\nbenefits under this Plan to the extent of such payment.\n\n Section 11.4 Notices. Any notice permitted or required under the Plan shall\nbe in writing and shall be hand delivered or sent, postage prepaid, certified or\nregistered mail with return receipt requested, to the principal office of the\nCompany, if to the Company, or to the address last shown on the records of the\nCompany, if to a Participant or Beneficiary. Any such notice shall be effective\nas of the date of hand delivery or mailing.\n\n Section 11.5 Non-Alienation. No benefit payable at any time under this Plan\nshall be subject in any manner to alienation, sale, transfer, assignment,\npledge, levy, attachment, or encumbrance of any kind.\n\n Section 11.6 Tax Liability. The Company may direct the trustee of the Trust\nto withhold from any payment of benefits under the Plan such amounts as the\nCompany determines are reasonably necessary to pay any taxes (and interest\nthereon) required to be withheld or for which the trustee of the Trust may\nbecome liable under applicable law. The Company may also direct the trustee of\nthe Trust to forward to the appropriate taxing authority any amounts required to\nbe paid by the Company or the Trust under the preceding sentence. Any amounts\nwithheld pursuant to this Section 11.6 in excess of the amount of taxes due (and\ninterest thereon) shall be paid to the Participant or Beneficiary upon final\ndetermination, as determined by the Company, of such amount. No interest shall\nbe payable by the Company to any Participant or Beneficiary by reason of any\namounts withheld pursuant to this Section 11.6.\n\n Section 11.7 Captions. Article and section headings and captions are\nprovided for purposes of reference and convenience only and shall not be relied\nupon in any way to construe, define, modify, limit, or extend the scope of any\nprovision of the Plan.\n\n Section 11.8 Applicable Law. The Plan and all rights hereunder shall be\ngoverned by and construed according to the laws of the State of Missouri, except\nto the extent such laws are\n\n 25\n 27\n\n\npreempted by the laws of the United States of America.\n\n\n\n\n\nDated: November 1, 1998 H&R BLOCK, INC.\n\n\n\n By: /s/ Frank L. Salizzoni\n ---------------------------------------\n\n Its: President and Chief Executive Officer\n ---------------------------------------\n\n\n 26\n \n \n\nEX-10.2\n3\nAMENDMENT NO.1 TO THE H&R BLOCK DEFERRED PLAN\n\n\n 1\n EXHIBIT 10.2\n\n AMENDMENT NO. 1\n TO THE\n H&R BLOCK DEFERRED COMPENSATION PLAN\n FOR EXECUTIVES, AS AMENDED AND RESTATED\n\n H&R Block, Inc. (the \"Company\") adopted the H&R Block Deferred Compensation\nPlan for Executives, as Amended and Restated (the \"Plan\"), effective as of\nJanuary 1, 1999. The Company retains the right to amend the Plan pursuant to\naction by the Company's Board of Directors. The Company hereby exercises that\nright. This Amendment No. 1 is effective as of January 1, 1999.\n\n\n AMENDMENT\n\n 1. Section 2.1.25 of the Plan is amended by adding the following sentence\nat the end of such Section:\n\n \"For persons eligible to participate in the Plan who were\n employed prior to January 1, 1999 by a subsidiary of HRB\n Business Services, Inc. that was incorporated after May 15,\n 1998, an 'Enrollment Period' is granted consisting of the period\n between January 4, 1999 and January 31, 1999, inclusive.\"\n\n 2. Section 2.1.40 of the Plan is amended by (a) deleting the second\nsentence thereof and replacing such second sentence with the following new\nsentence:\n\n \"Except for Permissible Deferrals elected to commence on March\n 1, 1998, and Permissible Deferrals elected during an Enrollment\n Period described in Section 2.1.25 other than a period comprised\n of October 1 through December 15, inclusive, 'Plan Year' means\n the calendar year (a) for all Permissible Deferrals elected by\n Group B Participants, and (b) for Permissible Deferrals of Group\n A Participants elected to commence January 1, 1991 or later.\";\n\n(b) deleting the fifth sentence thereof and replacing such fifth sentence with\nthe following new sentence:\n\n \"If the Committee grants to a person eligible to participate in\n the Plan a discretionary Enrollment Period in accordance with\n Section 2.1.25 and such person submits to the Company a\n Permissible Deferrable election during such Enrollment Period,\n such Participant's first 'Plan Year' shall be the period (i)\n beginning on the first day of the first calendar month\n commencing not less than 45 days after the date that such\n Participant is first employed by a Participating Affiliate, and\n (ii) ending on December 31 of the year in which such calendar\n month falls.\"; and\n\n\n\n 2\n\n\n\n(c) adding the following new sentence after the new fifth sentence of such\nSection 2.1.40 and prior to the sixth sentence of said Section:\n\n \"For Permissible Deferrals of Participants elected during the\n Enrollment Period consisting of the period between January 4,\n 1999 and January 31, 1999, inclusive, 'Plan Year' means the\n 10-month period between March 1, 1999 and December 31, 1999,\n inclusive, and the calendar year thereafter.\"\n\n 3. Section 4.1.2 of the Plan is amended by (a) adding the following words\nand punctuation after the words and punctuation \"provided, however, that\" and\nbefore the words \"the maximum percentage\" in the first paragraph of said\nSection:\n\n \"(i) each Participating Affiliate may elect before each\n Enrollment Period to have no Matching Contributions posted\n during the Plan Year (to which the Enrollment Period relates) to\n the Accounts of Participants employed by such Participating\n Affiliate, and (ii)\";\n\nand (b) adding the following new sentence at the end of the first paragraph of\nsaid Section:\n\n \"If a Participating Affiliate elects to have Matching\n Contributions posted to the Accounts of Participants employed by\n such Participating Affiliate during a Plan Year, Matching\n Contributions shall continue to be posted to such Accounts\n during all subsequent Plan Years, provided that, not less than\n four months prior to the beginning of any such subsequent Plan\n Year, the Participating Affiliate may petition the Committee,\n and the Committee may approve at such time, for no Matching\n Contributions to be posted to the Accounts of such Participants\n during such Plan Year.\"\n\n 4. Except as modified in this Amendment No. 1, the Plan shall remain in\nfull force and effect, including the Company's right to amend or terminate the\nPlan as set forth in Article 9 of the Plan.\n\n\n H&R BLOCK, INC.\n\n\n By: /s/ Frank L. Salizzoni\n ---------------------------------------\n\n Its: President and Chief Executive Officer\n --------------------------------------\n\n\n 2\n \n \n\nEX-27\n4\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":193,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"IKN"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/3370/0001010410-99-000029.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n TH3hZGKLcL7CrPqTGN/n8aFno02ksdgFEeC9H7DvuGK+OpmBFurVGAZBld5TSulO\n 3Mn7H0bmxsQN+uUASClNnA==\n\n0001010410-99-000029.txt : 19990215\n0001010410-99-000029.hdr.sgml : 19990215\nACCESSION NUMBER:\t\t0001010410-99-000029\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t2\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990212\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tIKON OFFICE SOLUTIONS INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000003370\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tWHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045]\n\t\tIRS NUMBER:\t\t\t\t230334400\n\t\tSTATE OF INCORPORATION:\t\t\tOH\n\t\tFISCAL YEAR END:\t\t\t0930\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-05964\n\t\tFILM NUMBER:\t\t99537170\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t70 VALLEY STREAM\n\t\tCITY:\t\t\tMALVERN\n\t\tSTATE:\t\t\tPA\n\t\tZIP:\t\t\t19355\n\t\tBUSINESS PHONE:\t\t6102968000\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\tBOX 834\n\t\tCITY:\t\t\tVALLEY FORGE\n\t\tSTATE:\t\t\tPA\n\t\tZIP:\t\t\t19482\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tALCO STANDARD CORP\n\t\tDATE OF NAME CHANGE:\t19920703\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tALCO CHEMICAL CORP\n\t\tDATE OF NAME CHANGE:\t19680218\n \n\n10-Q\n1\n\n\n UNITED STATES\n SECURITIES AND EXCHANGE COMMISSION\n Washington, D. C. 20549\n\n Form 10-Q\n(Mark One)*\n[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange\nAct of 1934 for the quarterly period ended December 31, 1998 or [ ] Transition\nreport pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934\nfor the transition period from to\n\nCommission file number 1-5964 \n\n\n IKON OFFICE SOLUTIONS, INC.\n (Exact name of registrant as specified in its charter)\n\n OHIO 23-0334400 \n(State or other jurisdiction of (I.R.S. Employer\nincorporation or organization) Identification No.)\n\n\n P.O. Box 834, Valley Forge, Pennsylvania 19482\n (Address of principal executive offices)\n (Zip Code)\n\n (610) 296-8000\n (Registrant's telephone number, including area code)\n\n NONE\n (Former name, former address and former fiscal year,\n if changed since last report)\n\nIndicate by check mark whether the registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months (or for such shorter period that the registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days.\n\nYes X No ___ \n\n* Applicable only to issuers involved in bankruptcy proceedings during the\npreceding five years:\n\nIndicate by check mark whether the registrant has filed all documents and\nreports required to be filed by Sections 12, 13 or 15(d) of the Securities\nExchange Act of 1934 subsequent to the distribution of securities under a plan\nconfirmed by a court.\n\nYes ___ No ___ \n\n* Applicable only to corporate issuers:\n\nIndicate the number of shares outstanding of each of the issuer's classes of\ncommon stock, as of January 31, 1999.\n\nCommon Stock, no par value 147,696,695 shares\n\n\n INDEX\n\n IKON OFFICE SOLUTIONS, INC.\n\nPART I. FINANCIAL INFORMATION\n\n\n Item 1. Financial Statements (Unaudited)\n\n Consolidated Balance Sheets--December 31, 1998\n and September 30, 1998\n\n Consolidated Statements of Income--Three months\n ended December 31, 1998 and December 31, 1997\n\n Consolidated Statements of Cash Flows--Three months\n ended December 31, 1998 and December 31, 1997\n\n Notes to Consolidated Financial Statements--\n December 31, 1998\n\n\n Item 2. Management's Discussion and Analysis of Results\n of Operations and Financial Condition and Liquidity\n\n\n\nPART II. OTHER INFORMATION\n\n\n Item 6. Exhibits and Reports on Form 8-K\n\n\n\nSIGNATURES\n\n\n\n\n PART I. FINANCIAL INFORMATION\n\nItem 1: Financial Statements (unaudited)\n\n IKON OFFICE SOLUTIONS, INC.\n CONSOLIDATED BALANCE SHEETS\n ( in thousands )\n\n
\n\n IKON OFFICE SOLUTIONS, INC.\n CONSOLIDATED STATEMENTS OF INCOME\n (in thousands, except per share data)\n\n Three Months Ended\n December 31\n ----------------------------\n 1998 1997\n ---------- ----------\n\nRevenues\nNet sales $ 707,719 $ 728,105\nService and rentals 591,417 575,822\nFinance income 97,281 70,330\n ---------- ----------\n 1,396,417 1,374,257\n ---------- ----------\n\nCosts and Expenses\nCost of goods sold 471,746 468,200\nService and rental costs 341,589 332,155\nFinance interest expense 32,680 30,746\nSelling and administrative 477,255 441,219\nTransformation costs 19,519\n ---------- ----------\n 1,323,270 1,291,839\n ---------- ----------\n\nOperating income 73,147 82,418\nInterest expense 19,547 17,029\n ---------- ----------\nIncome before taxes 53,600 65,389\nIncome taxes 24,924 28,405\n ---------- ----------\nNet Income 28,676 36,984\nLess: Preferred Dividends 4,885\n ---------- ----------\nAvailable to Common Shareholders $ 28,676 $ 32,099\n ========== ==========\n\nBasic and Diluted Earnings Per Share $ 0.19 $ 0.24\n ========== ==========\n\nCash Dividends Per Share of Common Stock $ 0.04 $ 0.04\n ========== ==========\n\n\n\nSee notes to consolidated financial statements.\n\n IKON OFFICE SOLUTIONS, INC.\n CONSOLIDATED STATEMENTS OF CASH FLOWS\n (in thousands)\n\n
\nSee notes to consolidated financial statements.\n\n\n IKON OFFICE SOLUTIONS, INC.\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n DECEMBER 31, 1998\n\n\nNote 1: Basis of Presentation\n\n The accompanying unaudited condensed consolidated financial statements\nhave been prepared in accordance with generally accepted accounting principles\nfor interim financial information and the instructions to Form 10-Q and Rule\n10-01 of Regulation S-X. In the opinion of management, all adjustments\n(consisting of normal recurring accruals) considered necessary for a fair\npresentation have been included. For further information, refer to the\nconsolidated financial statements and footnotes thereto included in the\nCompany's annual report on Form 10-K for the year ended September 30, 1998.\nCertain prior year amounts have been reclassified to conform with the current\nyear presentation.\n\nNote 2: Asset Securitization\n\n In addition to the $275 million of asset securitizations in place at\nthe end of fiscal 1998, in December 1998, the Company's U.S. finance subsidiary\nentered into an asset securitization transaction whereby it sold $366.6 million\nin direct financing lease receivables for $250 million in cash and a retained\ninterest in the remainder. The agreement is for an initial three year term with\ncertain renewal provisions and was structured as a revolving asset\nsecuritization so that as collections reduce previously sold interests in this\nnew pool of leases, additional leases can be sold up to $250 million. The terms\nof the agreement provide that the Company continues to service the lease\nportfolio for the securitization provider. At December 31, 1998, the\ninterest-only strip of $27.9 million related to the sale is included in prepaid\nexpenses and other current assets and the recourse and servicing obligations of\n$8.6 million and $5.5 million, respectively, are included in other accrued\nexpenses. The retained interest is classified in current finance receivables\n($38.5 million) and long-term finance receivables ($71.4 million). The Company\nrecognized a pretax gain of $14.3 million during the first quarter of fiscal\n1999 on this agreement.\n\n\nNote 3: Transformation Costs\n\n In September 1995, the Company announced its transformation program to\nchange its organization into a more cohesive and efficient network by building a\nuniform information technology system and implementing best practices for\ncritically important management functions throughout the IKON companies. The\nCompany substantially completed the transformation program as of September 30,\n1998. The transformation involved a variety of activities that the Company\nbelieves will ultimately lower administrative costs and improve gross margins\nthrough the creation of marketplace-focused field operations with greater\nattention to customer sales and service. These activities included consolidating\npurchasing, inventory control, logistics and other activities into thirteen\ncustomer service centers in the U.S., establishing a single financial processing\ncenter, building a common information technology system, adopting a common name\nand common benefit programs. Transformation costs in the first three months of\nfiscal 1998 of $19.5 million relate principally to severance and other\nemployee-related costs, including temporary labor ($14.3 million), facility\nconsolidation costs, including lease buyouts and write-offs of leasehold\nimprovements ($3.3 million) and technology conversion costs ($1.9 million). Cash\nof $2.7 million was expended during the first quarter of fiscal 1999 reducing\nthe September 30, 1998 severance and lease buyout accruals to $7.2 million and\n$10.2 million, respectively, at December 31, 1998.\n\n\n IKON OFFICE SOLUTIONS, INC.\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)\n DECEMBER 31, 1998\n\nNote 4: Comprehensive Income\n\n As of October 1, 1998, the Company adopted Statement of Financial\nAccounting Standards No. 130, \"Reporting Comprehensive Income\" (SFAS 130). SFAS\n130 establishes rules for the reporting and presentation of comprehensive income\nand its components. SFAS 130 requires foreign currency translation adjustments,\nequity adjustments related to pension liabilities and mark to market adjustments\non retained interests in lease receivables to be included in other comprehensive\nincome. Equity accounts as of September 30, 1998 have been reclassified to\nconform to the requirements of SFAS 130. The adoption of SFAS 130 did not impact\nthe Company's net income or total shareholders' equity.\n\n Total comprehensive income is as follows (in thousands):\n Three Months Ended\n December 31 \n ----------------------\n 1998 1997\n ---- ----\n Net income $28,676 $36,984\n Foreign currency translation adjustments (465) 12\n Mark to market adjustment, net of tax 969 \n ------- -------\n Total comprehensive income $29,180 $36,996\n ======= =======\n\n\nNote 5: Conversion of Series BB Preferred Stock\n\n On October 1, 1998, each of the outstanding depositary shares of the\nSeries BB Preferred Stock automatically converted to 2.4972 shares of common\nstock per depositary share, resulting in the issuance of 9,682,143 common\nshares. The common stock account increased by $290.2 million to reflect the\nconversion. There was no change to total shareholders' equity.\n\nNote 6: Earnings Per Share\n\n The following table sets forth the computation of basic and diluted\nearnings per share (in thousands):\n\n
\n\n Options to purchase 4,945,964 shares of common stock at $8.70 per share\nto $62.45 per share were outstanding during the first quarter of fiscal 1999 and\noptions to purchase 3,034,759 shares of common stock at $28.88 per share to\n$61.08 per share were outstanding during the first quarter of fiscal 1998 but\nwere not included in the computation of diluted earnings per share because the\noptions' exercise prices were greater than the average market price of the\ncommon shares and, therefore, the effect would be antidilutive.\n\n The Company's Series BB conversion preferred stock is excluded from the\ndiluted calculation for the quarter ended December 31, 1997 because the effect\nof adding 9,682,143 shares and deleting the preferred dividends to reflect\nassumed conversion would be antidilutive.\n\n\nNote 7: Shareholder Lawsuit\n\n The Company and certain current and former principal officers and\nemployee directors were named as defendants in a series of purported class\naction complaints which were purportedly filed on behalf of purchasers of the\nCompany's common stock. The complaints were filed in the United States District\nCourt for the Eastern District of Pennsylvania following the issuance of the\nCompany's August 14, 1998 earnings release. By court order dated November 30,\n1998 the Court appointed co-lead counsel. By court order dated December 3, 1998,\nall the complaints were consolidated. The consolidated complaint was filed on\nDecember 18, 1998 and alleges that the defendants publicly disseminated a series\nof false and misleading statements, including filings with the Securities and\nExchange Commission, concerning the Company's revenue, profitability and\nfinancial condition, in violation of the federal securities law. The plaintiffs\nseek to represent a class of persons who purchased or acquired the Company's\ncommon stock between January 24, 1996 and August 14, 1998. The complaint seeks\nunspecified compensatory and punitive damages, prejudgment interest, attorneys'\nfees and costs. The Company has responded to the complaint and believes that\nthe allegations contained therein are without merit and that the outcome of the\nproceedings will not have a material adverse effect on the financial position or\noverall trends in the results of operations of the Company. However, due to the\ninherent uncertainties of litigation, the Company cannot predict the ultimate\noutcome of these proceedings or the probability of any liability or losses\nrelating thereto, and, accordingly, no provision has been made for any liability\nor loss that may result from the adjudication or settlement of these proceedings\nin the financial statements for the first quarter of fiscal 1999. An unfavorable\noutcome of these proceedings could have a material adverse impact on the\nCompany's financial condition and results of operations.\n\nItem 2: Management's Discussion and Analysis of Results of Operations and\nFinancial Condition and Liquidity\n\n The Company sells, rents and leases photocopiers, digital printers and\nother automated office equipment for use in both traditional and integrated\noffice environments. The Company also provides outsourcing and imaging services\nand offers consulting, design, computer networking and technology training for\nthe networked office environment.\n\n Results of Operations\n\n The discussion of the results of operations reviews the operations of\nthe Company as reported in the Consolidated Statements of Income.\n\n Three Months Ended December 31, 1998\n Compared with the Three Months Ended December 31, 1997\n\n Results of operations for the first quarter of fiscal 1999 compared to\nthe first quarter of fiscal 1998 were as follows:\n\n Three Months Ended \n December 31 %\n 1998 1997 Change\n(in millions)\nREVENUES $ 1,396 $ 1,374 1.6%\n ======== ======== \n\nINCOME BEFORE TAXES:\nOperating income, excluding\n transformation costs $ 73.1 $ 101.9 (28.3%)\nTransformation costs (19.5)\n -------- -------- \n Operating income 73.1 82.4\nInterest expense (19.5) (17.0)\n -------- -------- \n $ 53.6 $ 65.4 (18.0%)\n ======== ======== \n\n The Company's first quarter revenues increased $22 million, or 1.6%\nover the first quarter of fiscal 1998. The first quarter of fiscal 1999 included\na $14.3 million gain from an asset securitization. Excluding the gain, overall\nrevenue was essentially flat compared to the first quarter of fiscal 1998. The\nflat revenue reflects the elimination of unprofitable revenue streams and a\ntransition away from low-margin commodity products. Net sales, which includes\nequipment revenue, decreased $20 million or 2.8%. Equipment revenue has been\naffected by the shift from analog to digital, color and high volume copiers and\nthe sales activity has been impacted by the transition to a common sales\nstrategy and a centralized, tighter credit policy. Service and rental revenue\nincreased $15 million or 2.7%. This increase is lower than in prior periods due\nto the closure of several Document Services locations during the first quarter\nof fiscal 1999. Finance income increased $13 million, or 17.9%, excluding the\ngain, due to the growth in the lease portfolio.\n\n Revenues from the Company's operations outside the U.S. were $198\nmillion for the first quarter of fiscal 1999 compared to $177 million for the\nsame period of the prior fiscal year. European operations increased $30 million,\ndue primarily to acquisitions, while Canadian revenues decreased $8 million and\nother foreign operations revenue decreased $1 million in the first quarter of\nfiscal 1999 compared to the first quarter of fiscal 1998. In the first quarter\nof fiscal 1999, the Company completed five acquisitions, all in Europe, as the\nCompany continues to concentrate on its core business in North America.\n\n The Company's operating income decreased by $9.3 million compared to\nthe prior year's quarter. Excluding transformation costs in fiscal 1998 and the\ngain from the asset securitization in fiscal 1999, operating income decreased\n$43.1 million to $58.8 million for the first quarter of fiscal 1999 compared to\n$101.9 million in the prior year. Gross margins in the first quarter of fiscal\n1999, excluding the gain, were 38.8% compared to 39.5% in the prior year.\nHowever, gross margins in the first quarter of fiscal 1999 are higher than the\n34.3% in the fourth quarter of fiscal 1998. The improvement reflects greater\nprofitability in both equipment and service sales, due to the elimination of\ninappropriate discounting, an increased focus on controlling services costs and\nthe turnaround in underperforming units compared to the fourth quarter of fiscal\n1998. Selling and administrative expense as a percent of revenue was 34.5% in\nthe first quarter of fiscal 1999 compared to 32.1% in the first quarter of\nfiscal 1998. Selling and administrative expense as a percent of revenue was\nessentially flat compared to the fourth quarter of fiscal 1998, adjusted for the\nspecial charges in that quarter of $40.4 million. This is due in part to the\nlower revenue levels and to the lag in the benefits of cost cutting programs.\nThe Company has made strides in the first quarter of fiscal 1999 in workforce\nreductions and facility closures and expects to see benefits in future quarters.\n\n Costs associated with the Company's transformation program were $19.5\nmillion in the first quarter of fiscal 1998. Severance and other employee costs\nwere $14.3 million, facility consolidation costs were $3.3 million and\ntechnology conversion costs were $1.9 million. The transformation is essentially\ncomplete and there are no significant transformation expenses in fiscal 1999.\n\n Operating income from foreign operations was $3.6 million for the first\nquarter of fiscal 1999, down $9 million from $12.6 million for the first quarter\nof fiscal 1998. European operations decreased $1.7 million in the first quarter,\nwhile Canadian operating income decreased $6.6 million. Other foreign operations\ndecreased $.7 million in the first quarter of fiscal 1999. There was no material\neffect of foreign currency exchange rate fluctuations on the results of\noperations in the first quarter of fiscal 1999 compared to the first quarter of\nfiscal 1998.\n\n Interest expense increased $2.5 million in the first quarter of fiscal\n1999. The increased expense is due to higher debt levels and slightly higher\ninterest rates than in the first quarter of fiscal 1998.\n\n Income before taxes decreased by $11.8 million in the first quarter as\na result of decreasing gross margins, increasing selling and administrative\nexpenses and increasing interest expense, offset by no transformation expense in\nthe first quarter of fiscal 1999. The effective income tax rate for the first\nquarter of fiscal 1999 is 46.5% compared to 43.4% for the comparable period in\nfiscal 1998. The increase in the effective tax rate is due to the effect of a\nlower pretax income on non-tax-deductible items, primarily goodwill\namortization.\n\n Diluted earnings per common share decreased from $.24 per share for the\nfirst quarter of fiscal 1998 to $.19 per share for the first quarter of fiscal\n1999. Excluding the after-tax gain on the asset securitization that was\ncompleted in December 1998, diluted earnings per common share were $.13 in the\nfirst quarter of fiscal 1999 and, excluding transformation costs, diluted\nearnings per common share were $.33 per share in the first quarter of fiscal\n1998. Diluted weighted average shares increased 14.1 million as a result of the\nconversion of the Series BB preferred stock on October 1, 1998 (9.7 million\nweighted shares) and the full period impact of 1998 common share issuances\nrelated to acquisitions (4.7 million weighted shares).\n\nImpact of Year 2000\n\n State of Readiness. The Year 2000 issue is the result of computer\nprograms being written using two digits rather than four to define the\napplicable year. Any of the Company's computer programs or hardware that have\ndate-sensitive software or embedded technology (non-IT systems) may recognize a\ndate using \"00\" as the year 1900 rather than the year 2000. This could result in\na system failure or miscalculations causing disruptions of operations,\nincluding, among other things, a temporary inability to process transactions,\nsend invoices, or engage in similar normal business activities. The potential\nfor a problem exists with all computer hardware and software, as well as in\nproducts with embedded technology: copiers and fax machines; security and HVAC\nsystems; voice/telephony systems; elevators, etc.\n\n The Company has appointed a Year 2000 Corporate Compliance Team, which\nhas prepared an international compliance program for the Company and is\nresponsible for coordinating and inspecting compliance activities in all\nbusiness units. The compliance program requires all business units and locations\nin every country to inventory potentially affected systems and products, assess\nrisk, take any required corrective actions, test and certify compliance. The\nCompany's Year 2000 Testing and Certification Guidelines delineate the Year 2000\ncompliance process, testing and quality assurance guidelines, certification and\nreporting processes and contingency planning. An independent consulting company\nhas reviewed the compliance program and any appropriate recommendations have\nbeen implemented. All internal IT systems and non-IT systems have been\ninventoried. Risk assessment and testing plans are 23% complete, remediation is\n16% complete, testing and validation are 14% complete and implementation is 12%\ncomplete. The Company anticipates completing all phases of the Year 2000 project\nno later than October 31, 1999, which is prior to any anticipated material\nimpact on its operating systems.\n\n Product warranties and certifications are being sought from vendors and\nsuppliers. The Company has obtained \"Year 2000 Statements\" from national vendors\nincluding Canon, Oce, Ricoh and Sharp.\n\n Costs. The Company will use both internal and external resources to\nreprogram or replace, test and implement its IT and non-IT systems for Year 2000\nmodifications. The Company does not separately track the internal costs incurred\non the Year 2000 project. Such costs are principally payroll and related costs\nfor its internal IT personnel. The total cost of the Year 2000 project,\nexcluding these internal costs, is estimated at $11.4 million and is being\nfunded through operating cash flows. Of the total estimated project cost,\napproximately $2.4 million is attributable to the purchase of new software which\nwill be capitalized. The remaining $9.0 million will be expensed as incurred. To\ndate, the Company has incurred approximately $1.8 million ($1.5 million expensed\nand $291,000 capitalized), related to its Year 2000 project.\n\n Risks. Management believes, based on the information currently available to\nit, that the most reasonably likely worse case scenario that could be caused by\ntechnology failures relating to the Year 2000 could pose a significant threat\nnot only to IKON, its customers and suppliers, but to all businesses. Risks\ninclude: \no Legal risks, including customer, supplier, employee or shareholder lawsuits\n over failure to deliver contracted services, product failure, or health and\n safety issues.\no Loss of sales due to failure to meet customer quality expectations or\n inability to ship products.\no Increased operational costs due to manual processing, data corruption or\n disaster recovery.\no Inability to bill or invoice.\n\n The Company has taken steps to limit the scope of product and service\nwarranties to customers to either the replacement of noncompliant products or to\nreimbursement of the cost of the product or service provided. With respect to\nproducts sold by the Company prior to the inclusion of such limited warranties,\ndiffering interpretations of the warranties included with such products will\nlikely result in litigation against the Company. The Company is not able to\nassess the impact of such potential litigation at this time.\n\n The Company is engaged in the provision of certain Year 2000 services to\ncustomers, whereby the Company evaluates the Year 2000 compliance of customers'\nsoftware and hardware, and works with customers to find solutions to Year 2000\nproblems. The Company has taken steps to limit its warranties with respect to\nthe Company's provision of such services.\n\n The cost of the project and the date on which the Company believes it will\ncomplete the Year 2000 modifications are based in management's best estimates,\nwhich were derived using numerous assumptions of future events, including the\ncontinued availability of certain resources and other factors. However, there\ncan be no guarantee that these estimates will be achieved and actual results\ncould differ materially from those anticipated. Specific factors that might\ncause such material differences include, but are not limited to, the\navailability and cost of personnel trained in this area, the ability to locate\nand correct all relevant computer codes, and similar uncertainties.\n\n Contingency Plans. The Company's Guidelines require that contingency plans\nbe developed and validated in the event that any critical system cannot be\ncorrected and certified before the system's failure date. Contingency plans are\ncurrently being developed and are approximately 29% complete at this time. The\nCompany expects to have its contingency plans in place by October 31, 1999. In\naddition, the Company is forming a rapid response team as part of its IT group\nthat will respond to any operational problems during the Year 2000 date change\nperiod.\n\n\n Financial Condition and Liquidity\n\n Net cash provided by operating activities for the first quarter of\nfiscal 1999 was $22 million. During the same period, the Company generated $144\nmillion in cash from investing activities, which included net finance subsidiary\nactivity of $197 million, less acquisition activity at a cash cost of $16\nmillion, capital expenditures for property and equipment of $18 million and\ncapital expenditures for equipment on operating rental of $13 million. Cash used\nin financing activities includes $88 million net increase in corporate debt,\nexcluding the effects of acquisitions, and $238 million decrease in finance\nsubsidiaries debt. Debt, excluding finance subsidiaries, was $946 million at\nDecember 31, 1998, an increase of $90 million from the debt balance at September\n30, 1998 of $856 million. The debt to capital ratio, excluding finance\nsubsidiaries, was 39.4% at December 31, 1998 compared to 37.5% at September 30,\n1998. The Company continues to focus on goals to reduce working capital and\nrelated debt levels.\n\n As of December 31, 1998, short-term borrowings supported by a $600\nmillion credit agreement totaled $149 million. The Company also has $700 million\navailable for either stock or debt offerings under its shelf registration\nstatement.\n\n Finance subsidiaries debt decreased by $238 million from September 30,\n1998, as a result of payments on medium term notes and bank borrowings. During\nthe three months ended December 31, 1998, the U.S. finance subsidiary repaid\n$135 million of its medium term notes and $100 million of bank debt. No new\nnotes were issued. At December 31, 1998, $1.7 billion of medium term notes were\noutstanding with a weighted interest rate of 6.5%, while $1.1 billion remains\navailable under this program. In December 1998, the U.S. finance subsidiary\nentered into a new asset securitization agreement under which it received cash\nof $250 million. Under its previously existing $275 million asset securitization\nprograms, the U.S. finance subsidiary sold $31 million in direct financing\nleases during the first quarter of fiscal 1999, replacing those leases\nliquidated and leaving the amount of contracts sold unchanged. No additional\nleases were sold under the Canadian CN$175 million asset securitization\nagreement during the first quarter of fiscal 1999.\n\n The Company filed a shelf registration for 10 million shares of common\nstock in April 1997. Shares issued under the registration statement are being\nused for acquisitions. Approximately 2.3 million shares have been issued under\nthis shelf registration through December 31, 1998, leaving 7.7 million shares\navailable for issuance.\n\n On April 17, 1997, the Company announced that it may repurchase from\ntime to time as much as five percent of the outstanding IKON common stock in\nopen market transactions. Through fiscal 1998, the Company repurchased 4.6\nmillion common shares for $113 million under this program.\n\n The Company believes that its operating cash flow together with unused\nbank credit facilities and other financing arrangements will be sufficient to\nfinance current operating requirements including capital expenditures,\nacquisitions, dividends, stock repurchases and the remaining accrued costs\nassociated with the Company's transformation program.\n\n\n Forward-Looking Information\n\n This document includes or incorporates by reference information which\nmay constitute forward-looking statements within the meaning of the federal\nsecurities laws. Although the Company believes the expectations contained in\nsuch forward-looking statements are reasonable, no assurances can be given that\nsuch expectations will prove correct. Such forward-looking information is based\nupon management's current plans or expectations and is subject to a number of\nuncertainties and risks that could significantly affect current plans,\nanticipated actions and the Company's future financial condition and results.\nThese uncertainties and risks include, but are not limited to, those relating to\nsuccessfully managing the integration of acquired companies, including companies\nwith technical services and products that are relatively new to the Company, and\nalso including companies outside the United States, which present additional\nrisks relating to international operations; risks and uncertainties relating to\nconducting operations in a competitive environment; delays, difficulties,\ntechnological changes, management transitions and employment issues associated\nwith consolidation of business operations; risks and uncertainties associated\nwith the implementation of a preferred vendor porgram; risks and uncertainties\nrelating to potential year 2000 deficiencies associated with the operation of\nIKON's internal systems and distributed products; debt service requirements\n(including sensitivity to fluctuations in interest rates); and general economic\nconditions. As a consequence, current plans, anticipated actions and future\nfinancial condition and results may differ materially from those expressed in\nany forward-looking statements made by or on behalf of the Company.\n\n\n PART II. OTHER INFORMATION\n\n\nItem 6. Exhibits and Reports on Form 8-K\n\n (a) The following Exhibits are furnished pursuant to Item 601 of\n Regulation S-K:\n\n Exhibit No. (27) Financial Data Schedule\n\n\n (b) Reports on Form 8-K\n\n On November 5, 1998, the registrant filed a Current Report on Form\n 8-K to file, under Item 5 of the form, information contained in its\n press release dated November 4, 1998 concerning earnings for the\n fiscal quarter and year ended September 30, 1998.\n\n On January 26, 1999, the registrant filed a Current Report on Form\n 8-K to file, under Item 5 of the form, its press release dated\n January 19, 1999, indicating that the Company anticipated first\n quarter earnings to exceed the First Call consensus estimate of\n $.05 per share for the quarter ending December 31, 1998 and that\n based on preliminary results, the Company expects earnings per\n share for the quarter to be in the range of $.12 to $.15, excluding\n a gain from asset securitization of $.04 to $.06 per share and that\n revenues for the quarter are expected to be in the range of $1.36\n billion to $1.39 billion, excluding the gain from the asset\n securitization of $12 million to $16 million. The Company also\n stated that, based on a single quarter of performance and the\n balance of the initiatives being rolled out, it would not adjust\n its full-year earnings expectation at this time and that the\n Company's complete first quarter earnings report will be released\n on January 27, 1999.\n\n On February 5, 1999, the registrant filed a Current Report on Form\n 8-K to file, under Item 5 of the form, information contained in its\n press release dated January 27, 1999 concerning earnings for the\n first quarter ended December 31, 1998.\n\n\n SIGNATURES\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nRegistrant has duly caused this report to be signed on its behalf by the\nundersigned, thereunto duly authorized. This report has also been signed by the\nundersigned in his capacity as the chief accounting officer of the Registrant.\n\n\n IKON OFFICE SOLUTIONS, INC.\n\n\nDate February 12, 1999 /s/ Michael J. Dillon \n -------------------------- ------------------------------------\n Michael J. Dillon\n Vice President and Controller\n (Chief Accounting Officer)\n\n\n INDEX TO EXHIBITS\n\n\n\nExhibit Number\n\n\n(27) Financial Data Schedule\n\n\n\n \n \n\nEX-27\n2\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":194,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"JAVA"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/709519/0000891618-99-000396.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n UF8nm0UB4dmHpNrDlzEhNPXjuSXGpBkG7pn2FrDWwQDrBaEhbShqCG4HJoNuKJAF\n yiloM8PHcIr4D6PxwS9N0w==\n\n0000891618-99-000396.txt : 19990210\n0000891618-99-000396.hdr.sgml : 19990210\nACCESSION NUMBER:\t\t0000891618-99-000396\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t4\nCONFORMED PERIOD OF REPORT:\t19981227\nFILED AS OF DATE:\t\t19990209\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tSUN MICROSYSTEMS INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000709519\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tELECTRONIC COMPUTERS [3571]\n\t\tIRS NUMBER:\t\t\t\t942805249\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0630\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t000-15086\n\t\tFILM NUMBER:\t\t99526522\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t901 SAN ANTONIO RD\n\t\tCITY:\t\t\tPALO ALTO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94303\n\t\tBUSINESS PHONE:\t\t6509601300\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t901 SAN ANTONIO ROAD\n\t\tCITY:\t\t\tPALO ALTO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94303\n \n\n10-Q\n1\nFORM 10-Q\n\n\n 1\n\n SECURITIES AND EXCHANGE COMMISSION\n WASHINGTON, D.C. 20549\n\n FORM 10-Q\n\n(Mark One)\n\n[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange\n Act of 1934 for the quarterly period ended December 27, 1998 or\n\n[ ] Transition report pursuant to Section 13 or 15(d) of the Securities\n Exchange Act of 1934 for the transition period from ______ to _______\n\n Commission file number:0-15086\n\n SUN MICROSYSTEMS, INC.\n (Exact Name of registrant as specified in its charter)\n\n\n
\n\n 901 SAN ANTONIO ROAD PALO ALTO, CA 94303\n (Address of principal executive offices with zip code)\n\nRegistrant's telephone number, including area code: (650) 960-1300\n\n N/A\n (Former name, former address and former fiscal year,\n if changed since last report)\n\n Indicate by check mark whether the registrant (1) has filed all reports\nrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of\n1934 during the preceding 12 months (or for such shorter period that the\nregistrant was required to file such reports), and (2) has been subject to such\nfiling requirements for the past 90 days.\n\n YES [X] NO [ ]\n\n APPLICABLE ONLY TO ISSUERS INVOLVED IN\n BANKRUPTCY PROCEEDINGS DURING\n THE PRECEDING FIVE YEARS:\n\n Indicate by check mark whether the registrant has filed all documents and\nreports required to be filed by Section 12, 13 or 15(d) of the Securities\nExchange Act of 1934 subsequent to the distribution of securities under a plan\nconfirmed by a court.\n\n YES [X] NO [ ]\n\n APPLICABLE ONLY TO CORPORATE ISSUERS:\n\n Indicate the number of shares outstanding of each of the issuer's classes\nof common stock, as of the latest practical date.\n\n\n
\n\n 2\n\n INDEX\n\n\n
\n\n\n 2\n\n 3\n\n PART I - FINANCIAL INFORMATION\n\nITEM 1 - FINANCIAL STATEMENTS\n\n SUN MICROSYSTEMS, INC.\n CONDENSED CONSOLIDATED BALANCE SHEETS\n (in thousands)\n\n\n
\n\n See accompanying notes\n\n\n 3\n\n 4\n\n SUN MICROSYSTEMS, INC.\n CONDENSED CONSOLIDATED STATEMENTS OF INCOME\n (unaudited)\n (in thousands, except per share amounts)\n\n\n\n
\n\n See accompanying notes.\n\n\n 4\n\n 5\n\n SUN MICROSYSTEMS, INC.\n CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS\n (unaudited)\n (in thousands)\n\n\n
\n\n\n 5\n\n 6\n\n SUN MICROSYSTEMS, INC.\n CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)\n (unaudited)\n (in thousands)\n\n\n
\n\n See accompanying notes.\n\n\n 6\n\n 7\n\n\n SUN MICROSYSTEMS, INC.\n NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)\n\n\nBASIS OF PRESENTATION\n\n The consolidated financial statements include the accounts of Sun\n Microsystems, Inc. (\"Sun\" or the \"Company\") and its wholly-owned\n subsidiaries. Intercompany accounts and transactions have been eliminated.\n Certain amounts from prior years have been reclassified to conform to\n current year presentation.\n\n While the interim financial information is unaudited, the financial\n statements included in this report reflect all adjustments (consisting of\n normal recurring accruals) that the Company considers necessary for a fair\n presentation of the results of operations for the interim periods covered\n and of the financial condition of the Company at the date of the interim\n balance sheet. The results for the interim periods are not necessarily\n indicative of the results for the entire year. The information included in\n this report should be read in conjunction with the 1998 Annual Report to\n Stockholders which is incorporated by reference in the Company's 1998 Form\n 10-K .\n\nINVENTORIES (IN THOUSANDS)\n\n\n
\n\n\nINCOME TAXES\n\nThe Company accounts for income taxes under the liability method of Statement of\nFinancial Accounting Standards No. 109. The provision for income taxes during\nthe interim periods considers anticipated annual income before taxes, earnings\nof foreign subsidiaries permanently invested in foreign operations, and other\ndifferences.\n\n\nRECENT PRONOUNCEMENTS\n\nThe Company adopted SOP 98-1 \"Accounting for the Costs of Computer Software\nDeveloped or Obtained for Internal Use\" effective July 1, 1998. The adoption of\nSOP 98-1 did not have a material effect on the Company's consolidated financial\nposition or operating results.\n\nIn June 1998, Financial Accounting Standard No. 133 (\"FAS 133\"), \"Accounting for\nDerivative Instruments and Hedging Activities\" was issued and is effective for\nall fiscal years beginning after June 15, 1999. FAS 133 requires the Company to\nrecognize all derivatives as either assets or liabilities and measure those\ninstruments at\n\n\n 7\n\n 8\n\nfair value. It further provides criteria for derivative instruments to be\ndesignated as fair value, cash flow and foreign currency hedges and establishes\nrespective accounting standards for reporting changes in the fair value of the\nderivative instruments. Upon adoption, the Company will be required to adjust\nhedging instruments to fair value in the balance sheet and recognize the\noffsetting gains or losses as adjustments to be reported in net income or other\ncomprehensive income, as appropriate. The Company is evaluating its expected\nadoption date and currently expects to comply with the requirements of FAS 133\nin fiscal year 2000. The Company does not expect the adoption will be material\nto the Company's financial position or results of operations.\n\nCOMPREHENSIVE NET INCOME\n\nAs of July 1, 1998, the Company adopted Financial Accounting Standards No. 130\n(\"FAS 130\") , \"Reporting Comprehensive Income.\" FAS 130 establishes new rules\nfor the reporting and display of comprehensive net income and its components,\nhowever, it has no impact on the Company's net income or stockholders' equity.\nFAS 130 requires foreign currency translation adjustments and changes in fair\nvalue for available for sale securities, which prior to adoption were reported\nin stockholders' equity, to be included in comprehensive income.\n\nThe components of comprehensive net income, net of tax, are as follows:\n\n\n
\n\n\nACQUISITIONS\n\nOn August 28, 1998 the Company acquired all of the outstanding capital stock of\nNetDynamics, Inc. (\"NetDynamics\") by means of a merger transaction pursuant to\nwhich all the shares of NetDynamics capital stock were converted into the right\nto receive Sun common stock based upon an agreed-upon exchange ratio which was\ncalculated using an agreed-upon average market price for Sun common stock. The\nCompany issued 2,746,785 shares of Sun common stock (with a fair market value of\n$48.26875 per share) as the consideration for the acquisition. The transaction\nwas accounted for as a purchase and the excess purchase price over the estimated\nfair value of net tangible assets has been allocated to various intangible\nassets, primarily consisting of developed technology ($20 million) and goodwill\n($36.2 million), customer base ($10 million) and assembled workforce ($2\nmillion). In addition to the intangible assets acquired, the Company recorded an\n$80 million charge, representing the write-off of in-process research and\ndevelopment (\"IPRD\").\n\nOn September 28, 1998 the Company acquired all of the outstanding capital stock\nof i-Planet, Inc. (\"i-Planet\") by means of a merger transaction pursuant to\nwhich all the shares of i-Planet capital stock were converted into the right to\nreceive cash. The transaction was accounted for as a purchase and the excess\npurchase price over the estimated fair value of net tangible assets has been\nallocated to various intangible assets, primarily consisting of developed\ntechnology ($3.3 million) and goodwill type assets ($18.3 million). In addition\nto the intangible assets acquired, the Company recorded an $8.4 million charge,\nrepresenting the write-off of IPRD.\n\n\n 8\n\n 9\n\nOn October 16, 1998, the Company acquired all of the outstanding capital stock\nof Beduin Communications Incorporated (\"Beduin\") by means of a share purchase\ntransaction pursuant to which all the shares of Beduin capital stock were\nconverted into the right to receive cash. The transaction was accounted for as a\npurchase and the excess purchase price over the estimated fair value of net\ntangible assets has been allocated to various intangible assets, primarily\nconsisting of developed technology ($3.1 million) and goodwill type assets ($1.4\nmillion). In addition to the intangible assets acquired, the Company recorded an\n$3.6 million charge, representing the write-off of IPRD.\n\nFor financial reporting purposes, the Company is required for each acquisition\nto determine the fair value of all identified intangible assets acquired and\nexpense the fair value associated with IPRD for which there is no alternative\nfuture use. The allocation of $80 million, $8.4 million, and $3.6 million of the\npurchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun\nacquisitions, respectively, represents the estimated fair value based on risk\nadjusted cash flows related to each incomplete project. The Company believes\nthat such fair values do not exceed the amount a third party would pay for each\nsuch in-process technology. At the date of each of the acquisitions, the\nprojects associated with the IPRD efforts had not yet reached technological\nfeasibility and the in-progress technology had no alternative future use.\nAccordingly, these costs were expensed.\n\nIn making its purchase price allocations for the NetDynamics, i-Planet, and\nBediun acquisitions, the Company considered present value calculations of\nincome, an analysis of project accomplishments and completion costs, an\nassessment of overall contribution, as well as project risks. The values\nassigned to IPRD related to each acquisition were determined by estimating the\ncosts to develop the purchased in-process technology into commercially viable\nproducts, estimating the resulting net cash flows from each project, excluding\nthe cash flows related to the portion of each project that was incomplete at the\nacquisition date, and discounting the resulting net cash flows to their present\nvalue. Each of these forecasts were based upon future discounted cash flows,\ntaking into account the state of development of each in-process project, the\ncost to complete that project, the expected income stream, the life cycle of the\nproduct ultimately developed, and the associated risks. Projected future net\ncash flows attributable to the in-process technology, assuming successful\ndevelopment of such technologies, were discounted to their present value using a\ndiscount rate which was derived based on the Company's estimated weighted\naverage cost of capital plus a risk premium to account for the inherent\nuncertainty surrounding the successful completion of each project and the\nassociated estimated cash flows.\n\nThe values assigned to developed technologies related to each acquisition were\nbased upon future discounted cash flows related to each of the existing\nproducts' projected income stream. The values of the customer bases were\ndetermined based upon the value of existing relationships and the expected\nrevenue stream. The value of the assembled workforces were based upon the cost\nto replace that workforce. Intangible assets, including goodwill, are being\namortized over their estimated useful lives, generally two to five years.\n\n\n 9\n\n 10\nSUN MICROSYSTEMS, INC. AND AMERICA ONLINE, INC. STRATEGIC DEVELOPMENT AND\nMARKETING AGREEMENT\n\nOn November 23, 1998, Sun and America Online, Inc. (\"AOL\") entered into a\nStrategic Alliance consisting of several agreements between the parties,\nincluding the Strategic Development and Marketing Agreement (\"SDMA\"). A copy of\nthe SDMA has been filed as exhibit 10.93 to this Form 10-Q and is incorporated\nherein by reference. Under terms of the SDMA, AOL and Sun committed to\ncollaboratively develop, market and sell client and server software and\ncollaboratively develop an AOL specific Java environment that will enable AOL\nservices to be accessed through a variety of hardware devices. The SDMA provides\nthat over a three year period, AOL will develop and market, together with Sun,\nclient software and network application and server software based in part on the\nNetscape Communications, Inc. (\"Netscape\") code base, on Sun code and\ntechnology, and on certain AOL services features to business enterprises. In\naddition, AOL and Sun have agreed to coordinate their sales efforts and share\nrevenues with respect to designated collaboratively developed client software\nand network application and server software and associated services.\n\nUnder the terms of the SDMA, Sun has committed that the total revenue earned by\nAOL from certain existing Netscape contracts, the sale or license of certain AOL\nand Netscape software and services, the sale or license of certain\ncollaboratively developed software products and services and the license to Sun\nto distribute commercially existing Netscape software will not be less than $312\nmillion, $330 million and $333 million in the first, second and third years of\nthe SDMA's three year term, respectively; for these purposes a portion of the\ntotal revenue is determined as a percentage of the gross margin or net of sales\ncommissions earned by Sun. In addition, Sun will pay to AOL approximately $275\nmillion in licensing and other fees in connection with licenses granted to Sun\nby AOL. In a separate transaction, AOL signed a definitive agreement to acquire\nNetscape (the \"Merger\"). The SDMA provides that in the event the Merger is not\nconsummated by June 30, 1999, AOL and Sun will negotiate in good faith for a\nperiod of 30 days thereafter in an effort to agree to alternative terms, and\neither party may terminate the SDMA if the parties fail to agree on alternative\nterms during that period.\n\nSUBSEQUENT EVENTS\n\nOn January 21, 1999 the Company announced a two-for-one stock split (to be\neffected in the form of a stock dividend) to stockholders of record as of the\nclose of business on March 18, 1999. This dividend is subject to stockholder\napproval of an increase in the number of authorized shares of the Company's\nCommon Stock to 1.8 billion shares which will be sought\nat the Company's Special Meeting of Stockholders on March 17, 1999.\n\nOn January 22, 1999, the Company acquired all of the outstanding capital stock\nof Maxstrat Corporation (\"Maxstrat\"), by means of a merger transaction pursuant\nto which all of the shares of Maxstrat capital stock were converted into the\nright to receive cash. The transaction will be accounted for as a purchase, and\nthe purchase price will be allocated to tangible and intangible assets and IPRD.\n\n\n 10\n\n 11\n\nITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND\n FINANCIAL CONDITION\n\nThe following table sets forth items from the Condensed Consolidated Statements\nof Income as a percentage of total net revenues:\n\n\n
\n\n\nThe following sections contain forward-looking statements within the meaning of\nthe Private Securities Litigation Reform Act of 1995. These forward-looking\nstatements involve risks and uncertainties, and the cautionary statements set\nforth below, specifically those contained in \"Future Operating Results\" identify\nimportant factors that could cause actual results over the next few quarters to\ndiffer materially from those predicted in any such forward-looking statements.\nSuch factors include, but are not limited to, adverse changes in general\neconomic conditions, including adverse changes in the specific markets for the\nCompany's products, adverse business conditions, decreased or lack of growth in\nthe computing industry, adverse changes in customer order patterns, increased\ncompetition, lack of acceptance of new products, pricing pressures, lack of\nsuccess in technological advancements, risks associated with foreign operations\n(including the downturn of economic trends and unfavorable currency movements in\nthe Asia Pacific and Latin American marketplace), \n\n\n 11\n\n 12\n\nrisks associated with the Company's efforts to comply with Year 2000\nrequirements, risks associated with the Company's new business practices,\nprocesses and information systems, and other factors, including those listed\nbelow. Other facts that may affect such results and financial condition are set\nforth in the Company's 1998 Annual Report to Stockholders which is incorporated\nby reference in the Company's Form 10-K.\n\n\nRESULTS OF OPERATIONS\n\nNET REVENUES\n\nNet revenues were $2,784.4 million for the second quarter of fiscal 1999 and\n$5,275.6 million for the first six months of fiscal 1999, representing increases\nof 13.6% and 16.0%, respectively, over the corresponding periods of fiscal 1998.\n\nSun's products net revenues were $2,384.7 million for the second quarter of\nfiscal 1999, an increase of $222.7 million or 10.3% over the second quarter of\nfiscal 1998. Net product revenues were $4,540.9 million for the six months ended\nDecember 27, 1998, an increase of $531.0 million or 13.2% over the corresponding\nperiod of fiscal 1998. More than 50% of the growth in products revenues for\nthe quarter ended December 27, 1998 resulted from strong demand for low-end\ndesktop products and workgroup servers, and to a lesser extent from increased\nrevenues generated by richly configured enterprise servers. More than 50% of\nthe growth in products revenues for the six month period ended December 27, 1998\nresulted from strong demand for low-end desktop products and workgroup servers\nand to a lesser extent, the Company's storage products. The growth in product\nrevenues in both the quarter and year to date periods was partially offset by a\ndecline in high-end desktop product volumes as the result of a shift in customer\npurchasing patterns towards low-end desktop products and workgroup servers.\n\nSun's services net revenues were $399.7 million for the second quarter of fiscal\n1999, an increase of $111.4 million or 38.6% over the second quarter of fiscal\n1998. Net revenues from services were $734.8 million for the six months ended\nDecember 27, 1998, an increase of $195.8 million or 36.3% over the corresponding\nperiod of fiscal 1998. The increases in services revenues are primarily the\nresult of a larger installed product base due to increased product unit sales,\nas well as increased revenues associated with Sun's professional and educational\nservices.\n\nDomestic net revenues increased by 10.1% and 14.9 % in the second quarter and\nfirst six months of fiscal 1999, respectively. International net revenues\n(including United States exports) grew 17.2% and 17.1% in the second quarter and\nfirst six months of fiscal 1999, respectively, compared with the corresponding\nperiods of fiscal 1998. In US dollars, European net revenues increased 22.7% and\n28.7%, Rest of World (ROW) net revenues increased 7.1% and 10.8%, and Japanese\nnet revenues increased 13.8% and decreased 3.3%, in the second quarter and first\nsix months of fiscal 1999, respectively, when compared with the corresponding\nperiods of fiscal 1998. The increases in Europe and the ROW are due to continued\nmarket acceptance of Sun's network computing products and services primarily in\nthe United Kingdom and Germany. The Company attributes the increase in Japanese\nrevenues in the second quarter to increased demand within the region for Sun's\nproducts, rather than a sign of strengthening in the Asian economies. Sun\nremains cautious with regard to the Japanese market and does not expect the\ncurrent Japanese Macroeconomic trends to change significantly or materially in\nthe near term. The foregoing is a forward-looking statement that is subject to\nrisks and uncertainties, and actual results may differ materially from those set\nforth in such statement as the result of a number of factors. In particular, if\nthe economic trends in Japan significantly worsen in a quarter or decline over\nan extended period of time, the Company's results from operations and cash flows\nwould be adversely affected.\n\nA portion of the Company's operations consists of manufacturing and sales\nactivities in foreign jurisdictions. As a result, the Company's results could be\nsignificantly adversely affected by factors such as changes in foreign currency\nexchange rates or economic conditions in the foreign markets in which the\nCompany distributes its \n\n\n 12\n\n 13\n\nproducts. The Company is primarily exposed to changes in exchange rates on the\nJapanese yen, British pound sterling, French franc and German mark. When the\nU.S. dollar strengthens against these currencies, the U.S. dollar value of\nnon-U.S. dollar-based sales decreases. When the U.S. dollar weakens against\nthese currencies, the U.S. dollar value of non-U.S. dollar-based sales\nincreases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs\nincreases when the U.S. dollar weakens and decreases when the U.S. dollar\nstrengthens. Overall the Company is a net receiver of currencies other than the\nU.S. dollar and, as such, benefits from a weaker dollar, and is adversely\naffected by a stronger dollar relative to major currencies worldwide.\nAccordingly, changes in exchange rates, and in particular a strengthening of the\nU.S. dollar, may adversely affect the Company's consolidated sales and gross\nmargins as expressed in U.S. dollars.\n\nTo mitigate the short-term effect of changes in currency exchange rates on the\nCompany's non-US dollar-based sales, product procurement, and operating\nexpenses, the Company regularly hedges its net non-U.S. dollar-based exposures\nby entering into foreign exchange forward and option contracts to hedge\ntransactions. Currently, hedge contracts do not extend beyond three months.\nGiven the short-term nature of the Company's foreign exchange forward and\noptions contracts, the Company's exposure to risk associated with currency\nmarket movement on these instruments is not material.\n\n\nGROSS MARGIN\n\nTotal gross margin was 51.6% for the second quarter of fiscal 1999 and 51.4% for\nthe first six months of fiscal 1999, compared with 52.2% and 51.7%,\nrespectively, for the corresponding periods of fiscal 1998.\n\nProducts gross margin was 53.0% in the second quarter of fiscal 1999 and 53.5%\nfor the first six months of fiscal 1999, compared with 53.9% and 53.6%,\nrespectively, for the corresponding periods of fiscal 1998. The decrease in the\nproducts gross margin for the second quarter of fiscal 1999 reflects the effects\nof increased volumes of lower margin low-end desktop products, partially offset\nby higher margin servers and reduced component costs across product lines. There\ncould be a further impact upon products gross profit margins as the result of\nany continued shift in customer purchasing patterns towards low-end desktop\nproducts and workgroup servers. The foregoing is a forward-looking statement\nthat is subject to risks and uncertainties, and actual results may differ\nmaterially from those set forth in such statement as the result of a number of\nfactors. Services gross margin was 43.5% for the second quarter of fiscal 1999\nand 38.2% for the first six months of fiscal 1999, compared with 39.5% and\n36.8%, respectively, for the corresponding periods of fiscal 1998. The increases\nin services gross margin reflect increased market penetration in Enterprise\ndatacenter accounts, increased enrollment in datacenter training courses and\nother offerings, and continued growth in professional services offerings. These\nincreases have been partially offset by increased investment by the Company in\nits services business.\n\nThe Company continuously evaluates the competitiveness of its product offerings.\nThese evaluations could result in repricing actions in the near term. Sun's\nfuture operating results would be adversely affected if such repricing actions\nwere to occur and the Company were unable to mitigate the resulting margin\npressure by maintaining a favorable mix of systems, software, service, and other\nproducts and by achieving component cost reductions, operating efficiencies and\nincreasing volumes.\n\nRESEARCH AND DEVELOPMENT\n\nResearch and development (R&D) expenses increased to $303.5 million in the\nsecond quarter of fiscal 1999, compared with $259.2 million for the second\nquarter of fiscal 1998. R&D expenses were $586.8 million for the first six\nmonths of fiscal 1999, compared with $481.8 million for the corresponding period\nof fiscal 1998. As a percentage of total net revenues, R&D expenses increased to\n10.9% and 11.1% for the second quarter and first six months of fiscal 1999,\nrespectively, compared with 10.6% in each of the corresponding periods of fiscal\n1998. Both the dollar and percentage increase in R&D expenses in the second\nquarter and first half of fiscal 1999 over the corresponding periods in fiscal\n1998 primarily reflect increased expenditures focused on the development of\nhardware and software products which utilize the Java (TM) platform and new\nserver and storage products. The remaining increase in R&D expenses is due to \n\n\n 13\n\n 14\nfurther development of products acquired through acquisitions and increased\ncompensation due primarily to higher levels of R&D staffing. The increase in R&D\nexpenses reflects the Company's belief that to maintain its competitive position\nin a market characterized by rapid rates of technological advancement, the\nCompany must continue to invest significant resources in new systems, software\nproducts and microprocessor development, as well as enhancements to existing\nproducts. The Company continues to expect the level of R&D expenses to be in the\nrange of 10 to 11% of revenue for fiscal 1999.\n\nSELLING, GENERAL AND ADMINISTRATIVE\n\nSelling, general and administrative (SG&A) expenses increased to $747.6 million\nin the second quarter of fiscal 1999, compared with $696.5 million for the\nsecond quarter of fiscal 1998. SG&A expenses were $1,459.2 million for the first\nsix months of fiscal 1999, compared with $1,311.9 million for the corresponding\nperiod of fiscal 1998. As a percentage of total net revenues, SG&A expenses\ndecreased to 26.8% and 27.7% in the second quarter and first six months of\nfiscal 1999, respectively, from 28.4% and 28.8%, respectively, in the\ncorresponding periods of fiscal 1998. Overall SG&A spending increased by\napproximately $51.1 million or 7.3% in the second quarter of fiscal 1999 in\ncomparison with the same period of fiscal 1998. For the six month period ended\nDecember 27, 1998, overall SG&A spending increased by approximately $147.2\nmillion or 11.2% in comparison to the corresponding period of fiscal 1998. The\ndollar increases in fiscal 1999 are primarily attributable to increased\ncompensation resulting from higher levels of headcount, principally in the sales\norganization, annual salary adjustments and to a lesser extent marketing costs\nrelated to promotional programs. The dollar increase also reflects investments\naimed at improving Sun's own business processes. The Company expects to continue\nto hire personnel, although at a lower rate than in fiscal 1998 and early 1999,\nto further expand its demand creation programs and support organizations.\n\nPURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT\n\n NETDYNAMICS, INC.\n\nOn August 28, 1998, the Company acquired all of the outstanding capital stock of\nNetDynamics by means of a merger transaction pursuant to which all the shares of\nNetDynamics capital stock were converted into the right to receive shares of Sun\ncommon stock based upon an agreed-upon exchange ratio which was calculated using\nan agreed-upon average market price for Sun common stock. The Company issued\n2,746,785 shares of Sun common stock (with a fair market value of $48.26875 per\nshare) as the consideration for the acquisition. The transaction was accounted\nfor as a purchase and the excess purchase price over the estimated fair value of\nnet tangible assets has been allocated to various intangible assets, primarily\nconsisting of developed technology ($20 million), goodwill ($36.2 million),\ncustomer base ($10 million) and assembled workforce ($2 million). In addition to\nthe intangible assets acquired, the Company recorded an $80 million charge,\nrepresenting the write-off of IPRD.\n\nAt the acquisition date, NetDynamics was conducting development, engineering,\nand testing activities associated with the completion of a new enterprise\napplication platform product scheduled to be released in mid calendar 1999. It\nis anticipated that this new product offering (\"NetDynamics New Product\nOffering\") will employ a new server-side component model, based on the\nEnterprise JavaBeans (TM) (\"EJB\") architecture, which will allow business logic\nto reside in the middle tier of the enterprise computing model independent of\nthe client presentation layer and independent of legacy and database systems.\nThis architecture is significantly different than the business logic\narchitecture in NetDynamics' existing product offering in which the server\ncomponents are tightly integrated with the presentation interface. The EJB\narchitecture will allow for the development of more robust applications with\nimproved reusability, better connectivity to a wide variety of data sources, and\na more-industry standard interface through the use of Java enterprise\napplication \n\n\n 14\n\n 15\n\nprogramming interfaces. Other new features include significant security\nenhancements and performance and scalability improvements and the addition of\nnew platform adaptor components for legacy systems integration.\n\nAt the acquisition date, NetDynamics was in mid-stages of development and\nsubstantial progress had been made in the areas of specifications, design, and\nimplementation. Remaining efforts necessary to complete the NetDynamics New\nProduct Offering relate primarily to coding, testing, and addressing additional\nimplementation issues. The Company anticipates that the NetDynamics New Product\nOffering will be complete by the end of the Company's fiscal year ending June\n30, 1999, after which the Company expects to begin generating economic benefits\nfrom the value of the completed development associated with the IPRD. The\nCompany continues to expect expenditures to complete the NetDynamics New Product\nOffering to total approximately $5.7 million in fiscal 1999 of which $2.4\nmillion has been incurred. The preceding two sentences are forward-looking\nstatements that are subject to risks and uncertainties and actual results may\ndiffer materially from those set forth in such sentences as a result of a number\nof factors. In particular, there can be no assurance that the NetDynamics New\nProduct Offering will be completed by the end of the Company's fiscal year\nending June 30, 1999, that it will meet either technological or commercial\nsuccess or that the Company will receive any economic benefit from the\nNetDynamics New Product Offering. In addition, the expenditures related to\ncompleting the NetDynamics New Product Offering may exceed the Company's current\nestimates as a result of delays in the development of the technology, the\ncomplexity of the technology, changes in customer needs, or for other reasons.\n\n\n I-PLANET, INC.\n\nOn September 28, 1998 the Company acquired all of the outstanding capital stock\nof i-Planet by means of a merger transaction pursuant to which all the shares of\ni-Planet capital stock were converted into the right to receive cash. The\ntransaction was accounted for as a purchase and the excess purchase price over\nthe estimated fair value of net tangible assets has been allocated to various\nintangible assets, primarily consisting of developed technology ($3.3 million)\nand goodwill type assets ($18.3 million). In addition to the intangible assets\nacquired, the Company recorded an $8.4 million charge, representing the\nwrite-off of IPRD.\n\nAt the acquisition date, i-Planet was conducting development, engineering, and\ntesting activities associated with the completion of a new Java technology-based\nremote Internet access product scheduled to be released in early calendar 1999.\nIt is anticipated that this new product offering (\"i-Planet New Product\nOffering\") when combined with a new Sun software product will be designed to\nallow cost-effective, secure, and ubiquitous internet access for applications\nsuch as remote access to corporate intranets, supply chain management and\ncommerce applications.\n\nAt the acquisition date, i-Planet was in mid-stages of development and\nsubstantial progress had been made in the areas of specifications, design, and\nimplementation. Remaining efforts necessary to complete the i-Planet New Product\nOffering relate primarily to coding, testing, and addressing additional\nimplementation issues. The Company anticipates that the i-Planet New Product\nOffering will be complete by the end of the Company's third quarter of fiscal\n1999, after which the Company expects to begin generating economic benefits from\nthe value of the completed development associated with the IPRD. Expenditures to\ncomplete the i-Planet New Product Offering are expected to total approximately\n$6 million in fiscal 1999. The preceding two sentences are forward-looking\nstatements that are subject to risks and uncertainties and actual results may\ndiffer materially from those set forth in such sentences as a result of a number\nof factors. In particular, there can be no assurance that the i-Planet New\nProduct Offering will be completed by the end of the Company's fiscal year\nending June 30, 1999, that it will meet either technological or commercial\nsuccess or that the Company will receive any economic benefit from the i-Planet\nNew Product Offering. In addition, the expenditures related to completing the\ni-Planet New Product Offering may exceed the Company's current estimates as a\nresult of delays in the development of the technology, the complexity of the\ntechnology, changes in customer needs, or for other reasons.\n\n BEDIUN COMMUNICATIONS INCORPORATED\n\nOn October 16, 1998, the Company acquired all of the outstanding capital stock\nof Beduin by means of a share purchase transaction pursuant to which all the\nshares of Beduin capital stock were converted into the right to receive cash.\nThe transaction was accounted for as a purchase and the excess purchase price\nover the estimated fair value of net tangible assets has been allocated to\nvarious intangible assets, primarily consisting of developed technology ($3.1\nmillion) and goodwill type assets ($1.4 million). In addition to the intangible\nassets acquired, the Company recorded an $3.6 million charge, representing the\nwrite-off of IPRD.\n\nAt the acquisition date, Bediun was conducting development, engineering, and\ntesting activities associated with the completion of a suite of products\n(\"Bediun New Product Offerings\") which included: Lifestyle Manager Personal\nInformation Manager (\"PIM\") (a next generation PIM targeted at smart devices\nincorporating Java technology), and email Client (a next generation email client\nspecialized to take advantage of the benefits of \n\n\n 15\n\n 16\n\nthese smart devices). The Lifestyle PIM and the email client were scheduled to\nbe released in the second quarter of calendar year 1999. It is anticipated that\nthese Bediun New Product Offerings will provide the core functionality for smart\ndevices incorporating Java technology and enable more efficient communication,\nregardless of time, location or type of device. These Bediun New Product\nOfferings are designed to integrate and synchronize communications and data\nprocessing systems to enable communications across time and space.\n\nAt the acquisition date, Bediun was in mid-stages of development and substantial\nprogress had been made in the areas of specifications, design, and\nimplementation. Remaining efforts necessary to complete the Bediun New Product\nOfferings relate primarily to coding, testing, and addressing additional\nimplementation issues. The Company anticipates that the Bediun New Product\nOfferings will be complete during the fourth quarter of the Company's fiscal\nyear ending June 30, 1999, after which the Company expects to begin generating\neconomic benefits from the value of the completed development associated with\nthe IPRD. Expenditures to complete the Bediun New Product Offerings are expected\nto total approximately $1 million in fiscal 1999. The preceding two sentences\nare forward-looking statements that are subject to risks and uncertainties and\nactual results may differ materially from those set forth in such sentences as a\nresult of a number of factors. In particular, there can be no assurance that the\nBediun New Product Offerings will be completed by the end of the Company's\nfiscal year ending June 30, 1999, that it will meet either technological or\ncommercial success or that the Company will receive any economic benefit from\nthe Bediun New Product Offerings. In addition, the expenditures related to\ncompleting the Bediun New Product Offerings may exceed the Company's current\nestimates as a result of delays in the development of the technology, the\ncomplexity of the technology, changes in customer needs, or for other reasons.\n\n\n VALUATIONS OF IPRD\n\nFor financial reporting purposes, the Company is required to determine the fair\nvalue of all identified intangible assets and expense the fair value associated\nwith IPRD for which there is no alternative future use for each of its\nacquisitions. The allocation of $80 million, $8.4 million, and $3.6 million of\nthe purchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun\nacquisitions, respectively, represents the estimated fair values based on risk\nadjusted cash flows related to each incomplete project. The Company believes\nthat such fair values do not exceed the amount a third party would pay for each\nsuch in-process technology. At the date of each of the acquisitions, the\nprojects associated with the IPRD efforts had not yet reached technological\nfeasibility and the R&D in progress had no alternative future uses. Accordingly,\nthese costs were expensed.\n\nForecasts of future results that management believes are likely to occur were\nthe basis for assigning value to IPRD. For the NetDynamics, i-Planet, and Bediun\nacquisitions, the values assigned to IPRD were determined by estimating the\ncosts to develop the purchased in-process technology into commercially viable\nproducts, estimating the resulting net cash flows from each project, excluding\nthe cash flows related to the portion of each project that was incomplete at the\nacquisition date, and discounting the resulting net cash flows to their present\nvalue. Each of these forecasts were based upon future discounted cash flows,\ntaking into account the state of development of each in-process project, the\ncost to complete that project, the expected income stream, the life cycle of the\nproduct ultimately developed, and the risks associated with successful\ndevelopment and commercialization of each project. Projected future net cash\nflows attributable to the in-process technology, assuming successful development\nof such technologies, were discounted to their present value using a discount\nrate which was derived based on the Company's estimated weighted average cost of\ncapital (\"WACC\") plus a risk premium to account for the inherent uncertainty\nsurrounding the successful completion of each project and the associated\nestimated cash flows. The discount rates used in valuing the net cash flows from\neach purchased in-process technology were 20% for the NetDynamics acquisition,\n25% for the i-Planet acquisition, and 40% for the Bediun acquisition. These\ndiscount rates are higher than the WACC due to the inherent uncertainties in the\nestimates described above, including the uncertainty surrounding the successful\ndevelopment of the purchased in-process technologies, the useful life of such\ntechnologies, the profitability levels of such technology and the uncertainty of\ntechnological advances that are unknown at this time.\n\nThe estimates utilized in the valuation of the IPRD charges are subject to\nchange, given the uncertainties of the development process, and no assurance can\nbe given that deviations from these estimates will not occur. Management expects\nto continue its development each project and believes that there is a reasonable\nchance of successfully completing such development. However, there is risk\nassociated with the completion of the in-process projects and there can be no\nassurance that any project will meet with either technological or commercial\nsuccess. Failure to successfully develop and commercialize these in-process\nprojects would result \n\n\n 16\n\n 17\n\nin the loss of the expected economic return inherent in the fair value\nallocation. Additionally, the value of other intangible assets acquired may\nbecome impaired. The foregoing statements in this paragraph are forward-looking\nstatements that are subject to risks and uncertainties, and actual results may\ndiffer materially from those set forth in such statements as the result of a\nnumber of factors, including those stated in this paragraph.\n\nPurchased IPRD of $110.1 million and $162.3 million in the second quarter and\nfirst six months of fiscal 1998, respectively, represent the write-off of\npurchased IPRD associated with the Company's acquisitions of Chorus Systems\nS.A., and the storage products business of Encore Computer Corporation in the\nsecond quarter of fiscal 1998 and Diba, Inc. and Integrity Arts, Inc. in the\nfirst quarter of fiscal 1998.\n\nINTEREST INCOME, NET\n\nNet interest income was $20.3 million for the second quarter and $35.7 million\nfor the first six months of fiscal 1999, compared with $10.2 million and $20.8\nmillion, respectively for the corresponding periods in fiscal 1998. The\nincreases in 1999 are primarily the result of higher interest earnings due to a\nlarger average portfolio of cash and short-term investments.\n\nINCOME TAXES\n\nThe Company's effective income tax rate was 33% for the second quarter and first\nsix months of fiscal 1999, before non-recurring tax charges of $3.2 million\nresulting from a write-off of IPRD associated with the acquisition of i-Planet\nin the second quarter of fiscal 1999 and $30.4 million resulting from a\nwrite-off of IPRD associated with the acquisition of NetDynamics in the first\nquarter of fiscal 1999. The effective tax rate including such charges for the\nsecond quarter and six months ended December 27, 1998 was 33.8% and 38.5%,\nrespectively. The Company's effective income tax rate for the second quarter and\nsix months ended December 28, 1997 was 33% before a tax charge of $19.8 million\nresulting from a write-off of IPRD associated with the acquisitions of Diba Inc.\nand Integrity Arts, Inc. in the first quarter of fiscal 1998. The Company\ncurrently expects its effective tax rate to remain at 33% for the balance of\nfiscal 1999, exclusive of any acquisition- related charges.\n\nFUTURE OPERATING RESULTS\n\nCOMPETITION\n\nThe markets for Sun's hardware and software products and services are intensely\ncompetitive and subject to continuous, rapid technological change, short product\nlife cycles and frequent product performance improvements and price reductions.\nDue to the breadth of the Company's product lines and the scalability of its\nproducts and network computing model, Sun competes principally with\nHewlett-Packard Company, International Business Machines Corporation, Compaq\nComputer Corporation, Silicon Graphics, Inc. and EMC Corporation, in many\nsegments of the network computing market across a broad spectrum of customers.\nThe Company expects the markets for its products, technologies, and services, as\nwell as its competitors within such markets, will continue to change as the\nrightsizing trend shifts customer buying patterns to network-based systems which\noften employ solutions from multiple vendors. Competition in these markets will\nalso continue to intensify as Sun and many of its competitors, aggressively\nposition themselves to benefit from this shifting of customer buying patterns\nand demand. The Company is also facing competition from certain systems\nmanufacturers, including Dell Computer Corporation and certain of its\ncompetitors listed above, whose products are based on microprocessors from Intel\nCorporation coupled with Windows NT operating system software from Microsoft\nCorporation. These products demonstrate the viability of certain networked\npersonal computer solutions and have increased the competitive pressure,\nparticularly in the Company's workstation and \n\n\n 17\n\n 18\n\nlower-end server product lines. Finally, the timing of introductions of new\nproducts and services by Sun's competitors may negatively impact the future\noperating results of the Company, particularly when such introductions occur in\nperiods leading up to the Company's introduction of its own new enhanced\nproducts. The Company expects this pressure to continue and intensify throughout\nfiscal 1999. While many other technical, service and support capabilities affect\na customer's buying decision, the Company's future operating results will\ndepend, in part, on its ability to compete with these technologies.\n\nPRODUCT DEVELOPMENT\n\nThe Company's future operating results will depend to a considerable extent on\nits ability to rapidly and continuously develop, introduce, and deliver in\nquantity new systems, software, and service products, as well as new\nmicroprocessor technologies, that offer its customers enhanced performance at\ncompetitive prices. The development of new high-performance computer products,\nsuch as the Company's recent development of the UltraSPARC microprocessor is a\ncomplex and uncertain process requiring high levels of innovation from the\nCompany's designers and suppliers, as well as accurate anticipation of customer\nrequirements and technological trends. Once a hardware product is developed, the\nCompany must rapidly bring such products to volume manufacturing, a process that\nrequires accurate forecasting of volumes, mix of products and configurations,\namong other things, in order to achieve acceptable yields and costs. Future\noperating results will depend to a considerable extent on the Company's ability\nto closely manage product introductions in order to minimize unfavorable\npatterns of customer orders, to reduce levels of older inventory and to ensure\nthat adequate supplies of new products can be delivered to meet customer demand.\nThe ability of the Company to match supply and demand is further complicated by\nthe Company's need to adjust prices to reflect changing competitive market\nconditions as well as the variability and timing of customer orders with respect\nto the Company's older products. As a result, the Company's operating results\ncould be materially adversely affected if the Company is not able to correctly\nanticipate the level of demand for the mix of products. Because the Company is\ncontinuously engaged in this product development, introduction, and transition\nprocess, its operating results may be subject to considerable fluctuation,\nparticularly when measured on a quarterly basis.\n\nMANUFACTURING AND SUPPLY\n\nSun uses many standard parts and components in its products and believes there\nare a number of competent vendors for most parts and components. However, a\nnumber of important components are developed by and purchased from single\nsources due to price, quality, technology or other considerations. In some\ncases, those components are available only from single sources. In particular,\nSun is dependent on Sony Corporation for various monitors and on Texas\nInstruments Incorporated for different implementations of SPARC(TM)\nmicroprocessors. Certain custom silicon parts are designed by and produced on a\ncontractual basis for Sun. The process of substituting a new producer of such\nparts could materially adversely affect Sun's operating results. Some suppliers\nof certain components, including color monitors and custom silicon parts,\nrequire long lead times such that it can be difficult for the Company to plan\ninventory levels of components to consistently meet demand for Sun's products.\nCertain other components, especially memory integrated circuits such as DRAMs,\nSRAMs, and VRAMs, have from time to time been subject to industry wide\nshortages. Future shortages of components could negatively affect the Company's\nability to match supply and demand, and therefore could materially adversely\nimpact the Company's future operating results.\n\nThe Company is increasingly dependent on the ability of its suppliers to design,\nmanufacture, and deliver advanced components required for the timely\nintroduction of new products. The failure of any of these suppliers to deliver\ncomponents on time or in sufficient quantities, or the failure of any of the\nCompany's own designers to develop advanced innovative products on a timely\nbasis, could result in a material adverse impact on the Company's operating\nresults. The inability to secure enough components to build products, including\nnew products, in the quantities and configurations required, or to produce, test\nand deliver sufficient products to meet demand in a timely manner, would\nmaterially adversely affect the Company's net revenues and operating \n\n\n 18\n\n 19\n\nresults. To secure components for development, production, and introduction of\nnew products, the Company frequently makes advanced payments to certain\nsuppliers and often enters into noncancelable purchase commitments with vendors\nearly in the design process. Due to the variability of material requirement\nspecifications during the design process, the Company must closely manage\nmaterial purchase commitments and respective delivery schedules. In the event of\na delay or flaw in the design process, the Company's operating results could be\nmaterially adversely affected due to the Company's obligations to fulfill such\nnoncancelable purchase commitments.\n\nSALES, DISTRIBUTION AND MARKETING\n\nGenerally, the computer systems sold by Sun, such as products based on\nUltraSPARC (TM) processors, are the result of hardware and software development,\nsuch that delays in the software development can delay the ability of the\nCompany to ship new hardware products. In addition, adoption of a new release of\nan operating system may require effort on the part of the customer and porting\nby software vendors providing applications. As a result, the timing of\nconversion to a new release is inherently unpredictable. Moreover, delays by\ncustomers in adopting a new release of an operating system can limit the\nacceptability of hardware products tied to that release. Such delays could\nmaterially adversely affect the future operating results of the Company.\n\nA significant portion of the Company's revenues is derived from international\nsales and is therefore subject to inherent risks related thereto, including the\ngeneral economic and political conditions in each country, currency exchange\nrate fluctuations, the effect of the tax structures of various jurisdictions,\nchanges to and compliance with a variety of foreign laws and regulations, trade\nprotection measures and import and export licensing requirements. There can be\nno assurance that the economic crisis and currency issues currently being\nexperienced in certain parts of Asia will not have an adverse effect on the\nCompany's revenue or revenue growth rates in the future. The impact of any of\nthe foregoing factors could have a material adverse effect on the Company's\nfuture financial condition and operating results.\n\nSeasonality also affects the Company's operating results, particularly in the\nfirst and third quarter of each fiscal year. In addition, the Company's\noperating expenses are increasing as the Company continues to expand its\noperations, and future operating results will be adversely affected if revenues\ndo not increase accordingly. Additionally, the Company plans to continue to\nevaluate and, when appropriate, make acquisitions of complementary technologies,\nproducts or businesses. As part of this process, the Company will continue to\nevaluate the changing value of its assets, and when necessary, make adjustments\nthereto. Acquisitions may involve amortization of acquired intangible assets in\nperiods following such acquisitions. In addition, acquisition transactions are\naccompanied by a number of risks, including, among other things, those\nassociated with integrating operations, personnel, and technologies acquired,\nand the potential for unknown liabilities of the acquired business.\n\nOne customer accounted for more than 10% of revenues in fiscal 1998. Any\ntermination by a significant customer of its relationship with the Company or\nmaterial reduction in the amount of business such a customer does with the\nCompany could materially adversely effect the Company's business, financial\ncondition or operating results.\n\nBUSINESS PRACTICES, PROCESSES AND INFORMATION SYSTEMS\n\nIn order to remain competitive in a rapidly changing industry, the Company is\ncontinually improving and changing its business practices, processes, and\ninformation systems. In this regard, during fiscal 1999 the Company implemented\na number of new business practices and a series of related information systems\nacross the enterprise that affect numerous operational and financial systems and\nprocesses. Although the systems were fully operational by the end of the second\nquarter of fiscal 1999, these systems will be further tested in the second half\nof the Company's fiscal year, and in particular, the fourth quarter to the\nextent that the Company \n\n\n 19\n\n 20\n\nexperiences higher volumes of orders and shipments as it has typically\nexperienced during these periods. In addition, during the balance of fiscal\n1999, the Company expects to continue its efforts to optimize usage of systems\ncapabilities, enhance user skills surrounding system features, and reduce\nruntime errors. However, there can be no assurance that the system will be able\nto support the increased volume of activities expected at the Company's fiscal\nyear end.\n\nThe time period in which the new business practices and related information\nsystems will be fully tested and leveraged are forward-looking statements\nsubject to risks and uncertainties, and actual results may differ materially\nfrom those set forth above as a result of a number of risk factors. In\nparticular, the ability to fully leverage systems capabilities are subject to a\nnumber of risks, including the complexity of the new systems themselves and the\nneed for substantial and comprehensive employee training in connection with the\nadoption of such new business practices and information systems. While the\nCompany has tested these new systems and processes in advance of their\nimplementation and continues to monitor the systems and processes ability to\nsupport increased volumes of transactions, there are inherent limitations in the\nCompany's ability to simulate a full-scale operating environment in advance of\nactual transaction volumes. Any increase in the volume of orders and shipments\nof products during the last half of the fiscal year may have a material adverse\neffect on the Company's business and operating results, if the systems and\nprocesses are unable to support the increased volume of activity. In addition,\nto the extent that the Company encounters problems with these new systems and\npractices that prevent or limit their full utilization, there could be a\nmaterial adverse impact on the Company's operating results.\n\nYEAR 2000 COMPLIANCE\n\nMany currently installed computer systems and software products are coded to\naccept only two digit entries in the date code field. As the Year 2000\napproaches, these code fields will need to be able to distinguish years\nbeginning with \"19\" from those beginning with \"20.\" As a result, in less than a\nyear, computer systems and/or software products used by many companies may need\nto be upgraded to comply with such Year 2000 requirements. The Company is\ncurrently expending resources to review its products and services, as well as\nits internal use software in order to identify and modify those products,\nservices and systems that are not Year 2000 compliant. The Company believes that\nthe vast majority of these costs are not incremental to the Company but\nrepresent a reallocation of existing resources and include regularly scheduled\nsystem upgrades and maintenance. In addition, the Company is working to make\ncustom coding enhancements to its internal systems (described in the above\nparagraphs) so that such systems will be Year 2000 compliant by the end of\nfiscal year 1999.\n\nAlthough the Company believes that the costs associated with the aforementioned\nYear 2000 efforts are not material, the Company currently estimates that such\ncosts will be approximately $35 million, of which approximately $5 million has\nbeen spent to date. The aforementioned costs are estimates due in large part to\nthe fact that the Company does not separately track the internal labor costs\nassociated with Year 2000 compliance, unless such costs are incurred by\nindividuals devoted primarily to Year 2000 compliance efforts. These cost\nestimates do not include any potential costs related to any customer or other\nclaim. In addition, these cost estimates are based on the current assessment of\nthe ongoing activities described above, and are subject to change as the Company\ncontinuously monitors these activities. The Company believes any modifications\ndeemed necessary will be made on a timely basis and does not believe that the\ncost of such modifications will have a material adverse effect on the Company's\noperating results. The Company currently expects the aforementioned evaluation\nof its products, services, and systems and any remediation necessary will be\ncompleted by the end of fiscal year 1999. The Company's expectations as to the\nextent and timeliness of any modifications required in order to achieve Year\n2000 compliance and the costs related thereto are forward-looking statements\nsubject to risks and uncertainties. Actual results may vary materially as a\nresult of a number of factors, including, among others, those described in this\nsection. There can be no assurance however, that the Company will be able to\nsuccessfully \n\n\n 20\n\n 21\n\nmodify on a timely basis such products, services and systems to comply with Year\n2000 requirements, which failure could have a material adverse effect on the\nCompany's operating results.\n\nThe Company has established a program to assess whether certain of its products\nare Year 2000 compliant. Under the program, the Company is in the process of\nperforming tests on its products listed on the Company's price lists. To monitor\nthis program and to help customers evaluate their Year 2000 issues the Company\nhas created a web site at http://sun.com/y2000/cpl.html which identifies the\nfollowing categories: products that were released Year 2000 compliant; products\nthat require modifications to be Year 2000 compliant; products under review;\nproducts that are not Year 2000 compliant and need to be replaced with a Year\n2000 compliant product; source code products that could be modified and\nimplemented without Sun's review; and products that do not process or manipulate\ndate data or have no date-related technology. This list is periodically updated\nas analysis of additional products is completed.\n\nBased on the Company's assessment to date, most newly introduced products and\nservices of the Company are Year 2000 compliant, however, there can be no\nassurance that the Company's current products do not contain undetected errors\nor defects associated with Year 2000 functions that may result in material costs\nto the Company. In addition, some of the Company's customers are running\nproducts that are not Year 2000 compliant and will require an upgrade or other\nremediation to become Year 2000 compliant. The Company provides limited\nwarranties as to Year 2000 compliance on certain of its products and services.\nExcept as specifically provided for in the limited warranties, the Company does\nnot believe it is legally responsible for costs incurred by customers to achieve\nYear 2000 compliance. The Company has been taking steps to identify affected\ncustomers, raise customer awareness related to noncompliance of the Company's\nolder products and encourage such customers to migrate to current products or\nproduct versions. It is possible that the Company may experience increased\nexpenses in addressing migration issues for such customers or customer\ndissatisfaction as a result of Year 2000 issues, which may have a material\nadverse effect on the Company's operating results.\n\nThe Company also faces risks to the extent that suppliers of products, services\nand systems purchased by the Company and others with whom the Company transacts\nbusiness on a worldwide basis do not have business systems or products that\ncomply with Year 2000 requirements. To the extent that Sun is not able to test\ntechnology provided by third party hardware or software vendors, Sun is in the\nprocess of obtaining Year 2000 compliance certifications from each of its major\nvendors that their products and internal systems, as applicable, are Year 2000\ncompliant. In the event any such third parties cannot timely provide the Company\nwith products, services or systems that meet the Year 2000 requirements, the\nCompany's operating results could be materially adversely affected. Furthermore,\na reasonably likely worst case scenario would be if one of the Company's major\nvendors experienced a material disruption in business, which caused the Company\nto experience a material disruption in business, such a disruption would have a\nmaterial adverse effect on the Company's business, financial condition and\noperating results. Should either the Company's internal systems or the internal\nsystems, products or services of one or more of the Company's major vendors fail\nto achieve Year 2000 compliance, the Company's business, financial position or\nresults of operations could be materially adversely affected. The Company is\ncurrently developing contingency plans to deal with potential Year 2000 problems\nrelated to its internal systems and products and services provided by outside\nvendors and expects these plans to be complete by the end of fiscal year 1999.\n\nAlthough the Company believes that the cost of Year 2000 modifications for both\ninternal use software and systems, as well as the Company's products are not\nmaterial, there can be no assurance that various factors relating to the Year\n2000 compliance issues will not have a material adverse effect on the Company's\nbusiness, operating results or financial position. For example, a significant\namount of litigation may arise out of Year 2000 compliance issues and there can\nbe no assurance as to the extent the Company may be affected by any such\nlitigation. Even though the Company does not believe that it is legally\nresponsible for its customer's Year 2000 compliance obligations, it is unclear\nwhether different governments or governmental agencies may decide \n\n\n 21\n\n 22\n\nto allocate liability relating to Year 2000 compliance to the Company without\nregard to specific warranties or warranty disclaimers. Such allocation of\nliability could have a materially adverse effect on the Company's financial\ncondition and results of operations in any given quarter. Furthermore, it is\nunknown how customer spending patterns may be impacted by Year 2000 issues. As\ncustomers focus on preparing their businesses for the Year 2000, capital budgets\nmay be spent on remediation efforts, potentially delaying the purchase and\nimplementation of new systems, thereby creating less demand for the Company's\nproducts and services. These as well as other factors could have a material\nadverse effect on the Company's revenues or operating results.\n\nEURO COMPLIANCE\n\nEleven of the fifteen member countries of the European Union established fixed\nconversion rates between their existing sovereign currencies and the Euro and\nadopted the Euro as their common legal currency effective for the initial\nimplementation date of January 1, 1999. The Euro trades on currency exchanges\nand is available for non-cash transactions, while the legacy currencies will\nremain legal tender in the participating countries for a transition period\nbetween January 1, 1999 and January 1, 2002. During the transition period,\ncash-less payments can be made in the Euro and parties can elect to pay for\ngoods and services and transact business using either the Euro or the legacy\ncurrency. Between January 1, 2002 and July 1, 2002, the participating countries\nwill introduce Euro notes and coins and withdraw all legacy currencies.\n\nThe Company has expended and continues to expend resources to review and modify\nits products to support the Euro's requirements, determine pricing strategies in\nthe new economic environment, analyze the legal and contractual implications for\ncontracts, evaluate system capabilities, and ensure banking vendors can support\nthe Company's operations with respect to Euro transactions for the initial\nimplementation as of January 1, 1999 and during the transition period through to\nJanuary 1, 2002 and thereafter. The Company does not expect that the\nintroduction and use of the Euro will materially affect the Company's foreign\nexchange and hedging activities, expects that modifications will be made to its\nbusiness operations and systems, as necessary, on a timely basis and does not\nbelieve that the cost of such modifications will have a material adverse impact\non the Company's operating results. The Company's expectations as to the extent\nand timeliness of modifications required to accommodate the conversion to Euro\ntransactions is a forward-looking statement subject to risks and uncertainties.\nActual results may vary materially, as a result of a number of factors,\nincluding among others, those described in this paragraph. There can be no\nassurance that the Company will be able to complete such modifications to comply\nwith Euro requirements, which could have a material adverse effect on the\nCompany's operating results. In addition, the Company faces risks to the extent\nthat vendors upon whom the Company relies and their suppliers are unable to make\nappropriate modifications to support Euro transactions. The Company has not yet\ncompleted its evaluation of the impact of the Euro upon its functional currency\ndesignations.\n\nWhile the Company cannot predict what effect these various factors may have on\nits financial results, the aggregate effect of these and other factors could\nresult in significant volatility in the Company's future performance and stock\nprice.\n\n\nLIQUIDITY AND CAPITAL RESOURCES\n\nThe Company's financial condition strengthened as of December 27, 1998 when\ncompared with June 30, 1998. During the first six months of fiscal 1999, cash\nflows from operating activities generated $771.8 million in cash and cash\nequivalents. Non-cash expenses affecting cash provided by operating activities\nin the first six months of fiscal 1999 included depreciation and amortization\nexpense of $313.4 million, tax benefits of options exercised of $96.8 million\nand charges for IPRD of $92 million in connection with the acquisitions of\n\n\n 22\n\n 23\n\nNetDynamics, i-Planet and Bediun. Favorably impacting cash provided by\noperations were increases in accounts payable and other liabilities of $114.7\nmillion and $144.5 million, respectively, which reflect the timing of payments\nfor inventory and other items. Offsetting these items, accounts receivable\nincreased $258.7 million which reflects an increase in days sales outstanding.\nAdditionally, other current assets increased due to the timing of payments for\ninsurance and other taxes. Other long-term assets increased primarily due to an\nincrease in intangible assets in connection with the acquisition of NetDynamics.\n\nThe Company's investing activities used $907.5 million of cash in the first six\nmonths of fiscal 1999, an increase of $353 million from the prior year's\ncomparable period. The increase resulted primary from increased acquisitions of\nshort-term investments during the first six months of fiscal 1999, as compared\nwith the prior year's comparable period. Also included in investing activities\nis capital spending for real estate development, as well as capital additions to\nsupport increased headcount, primarily in the Company's engineering, services\nand marketing organizations.\n\nAt December 27, 1998, the Company's primary sources of liquidity consisted of\ncash, cash equivalents and short-term investments of $1,572.8 million and a\nrevolving credit facility with banks aggregating $500 million, which was\navailable subject to compliance with certain covenants. Additionally, on October\n16, 1997, the Company filed a Registration Statement with the Securities and\nExchange Commission relating to the registration for public offering of senior\nand subordinated debt securities and common stock with an aggregate initial\npublic offering price of up to $1 billion. On October 24, 1997, the Registration\nStatement became effective, so that the Company may now choose to offer, from\ntime to time, the securities pursuant to Rule 415 in one or more separate\nseries, in amounts, at prices and on terms to be set forth in the prospectus\ncontained in the Registration Statement and in one or more supplements to the\nprospectus. The Company believes that the liquidity provided by existing cash\nand short-term investment balances and the borrowing arrangements described\nabove will be sufficient to meet the Company's capital requirements through\nfiscal 1999. However, the Company believes the level of financial resources is a\nsignificant competitive factor in its industry and may choose at any time to\nraise additional capital through debt or equity financing to strengthen its\nfinancial position, facilitate growth and provide the Company with additional\nflexibility to take advantage of business opportunities that may arise.\n\n\n 23\n\n 24\n\n PART II - OTHER INFORMATION\n\nITEM 1 - LEGAL PROCEEDINGS\n\nOn October 7, 1997, the Company filed suit against Microsoft Corporation in the\nUnited States District Court for the Northern District of California alleging\nbreach of contract, trademark infringement, false advertising, unfair\ncompetition, interference with prospective economic advantage and inducing\nbreach of contract. The Company filed an amended complaint on October 14, 1997.\nMicrosoft Corporation filed its answer, affirmative defenses and counterclaims\nto the amended complaint. The counterclaims include breach of contract, breach\nof the covenant of good faith and fair dealing, violation of the California\nBusiness & Professions Code and declaratory judgment. The Company believes that\nthe counterclaims are without merit and/or that the Company has affirmative\ndefenses and intends vigorously to defend itself with respect thereto. On March\n24, 1998 the United States District Court judge ruled in favor of the Company\ngranting a preliminary injunction directing Microsoft Corporation to cease using\nthe Company's Java Compatible Logo(TM) on Microsoft products that failed to pass\nthe applicable test suites from Sun. In addition, on May 12, 1998, the Company\nfiled a second amended complaint alleging copyright infringement by Microsoft\nand motions requesting further preliminary injunctive relief directed against\nthe planned release by Microsoft of additional products that failed to pass the\napplicable test suites from Sun. The Court held hearings and arguments on such\nmotions on September 8, 9, and 10, 1998. On November 17, 1998, the District\nCourt issued an Order granting, in substantial part, Sun's request for\npreliminary injunctions. On December 15, 1998 Microsoft filed notice of its\nintent to appeal the District Court's Order and on December 18, 1998 Microsoft\nfiled Motions with the District Court to extend the time for compliance with the\nOrder and to clarify or modify the Order. On December 29, 1998 the District\nCourt issued a further Order directing the parties to schedule a settlement\nconference with respect to certain issues before a designated Magistrate or\nmutually selected individual. On January 13, 1999, Microsoft filed an appeal to\nthe District Court's Order issued on November 17, 1998. The Company believes\nthat the outcome of this matter will not have a material adverse impact on Sun's\nfinancial condition, results of operations or cash flows in any given fiscal\nyear.\n\nITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\n\n On November 11, 1998 the Annual Meeting of Stockholders of the Company was \nheld in Menlo Park, California. The results of voting of the 313,381,495 shares\nof Common Stock represented at the meeting or by proxy are described below.\n\n An election of directors was held with the following individuals being \nelected to the Board of Directors of the Company:\n\n\n
\n\n\n 24\n\n 25\n\n The seven nominees who received the highest number of votes (all of the \nabove individuals) were elected to the Board of Directors.\n\n The stockholders approved an amendment to the Company's 1990 Long-Term\nEquity Incentive Plan in order to increase the number of shares of Common Stock\nauthorized for issuance thereunder by 18,000,000 shares of Common Stock to an\naggregate of 119,400,000 shares. There were 193,531,834 votes cast for the\namendment, 121,004,835 votes cast against the amendment and 1,558,670\nabstentions.\n\n The stockholders approved an amendment to the Company's 1988 Directors'\nStock Option Plan in order to decrease the number of shares of Common Stock\nsubject to the one-time automatic nonemployee director grant (granted on the\ndate of the initial appointment of a director who is not affiliated with an\nentity having an equity investment in the Company) from 80,000 shares to 30,000\nshares. There were 259,580,690 votes cast for the amendment, 54,345,777 votes\ncast against the amendment and 2,168,872 abstentions.\n\nITEM 5 - OTHER INFORMATION\n\na) SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER\n\n None\n\nb) NON-RULE 14a-8 STOCKHOLDER PROPOSALS\n\nProposals of the Company's stockholders that such stockholders intend to present\nat the Company's 1999 Annual Meeting of Stockholders (the \"Annual Meeting\"), but\nnot included in the Company's Proxy Statement and form of Proxy related to the\nAnnual Meeting (a \"Non-Rule 14a-8 Proposal\"), must be received by the Company's\nSecretary at the Company's offices at 901 San Antonio Road, Palo Alto,\nCalifornia 94303 no later than September 13, 1999 and no earlier than August 12,\n1999. In the event that the Company does not receive timely notice with respect\nto a Non-Rule 14a-8 Proposal, management of the Company would use its\ndiscretionary authority to vote the shares it represents as the Board of\nDirectors may recommend.\n\nITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K\n\n a) EXHIBITS\n\n\n
\n\n + Confidentiality Treatment Requested.\n\n (1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to\n Registrant's Amendment No. 1 to Registration Statement Form S-8/A file\n number 333-67183 filed with the Securities and Exchange Commission on\n January 26, 1999.\n\n b) REPORTS ON FORM 8-K\n\n No reports on Form 8-K were filed during the quarter ended December 27, \n1998.\n\n\nITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK\n\nThe Company's market risk disclosures set forth in the 1998 Form 10-K have not\nchanged significantly through the quarter ended December 27, 1998.\n\n\n 25\n\n 26\n\n SIGNATURES\n\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n\n SUN MICROSYSTEMS, INC.\n\n\n BY\n\n /s/ Michael E. Lehman\n ----------------------------------------\n Michael E. Lehman\n Vice President, Corporate Resources\n and Chief Financial Officer\n\n\n\n /s/ George Reyes\n ----------------------------------------\n George Reyes\n Vice President and Corporate Controller,\n Chief Accounting Officer\n\n\n\nDated: February 8, 1999\n\n\n 26\n\n 27\n\n INDEX TO EXHIBITS\n\n\n
\n\n + Confidentiality Treatment Requested.\n\n (1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to\nRegistrant's Amendment No. 1 to Registration Statement Form S-8/A file number\n333-67183 filed with the Securities and Exchange Commission on January 26, 1999.\n\n\n\n 27\n \n \n\nEX-10.64\n2\n1998 DIRECTORS' STOCK OPTION PLAN AS AMENDED\n\n\n 1\n Exhibit 10.64\n\n SUN MICROSYSTEMS, INC.\n 1988 DIRECTORS' STOCK OPTION PLAN\n (AMENDED AS OF NOVEMBER 11, 1998)\n\n\n 1. Purposes of the Plan. The purposes of this Directors' Stock Option\nPlan are to attract and retain the best available personnel for services as\nDirectors of the Company, to provide additional incentive to the Outside\nDirectors of the Company to serve as Directors, and to encourage their continued\nservice on the Board.\n\n 2. Definitions. As used herein, the following definitions shall apply:\n\n (a) \"Board\" shall mean the Board of Directors of the Company.\n\n (b) \"Common Stock\" shall mean the Common Stock of the Company.\n\n (c) \"Company\" shall mean Sun Microsystems, Inc., a Delaware\ncorporation.\n\n (d) \"Continuous Status as a Director\" shall mean the absence of any\ninterruption or termination of service as a Director.\n\n (e) \"Director\" shall mean a member of the Board.\n\n (f) \"Employee\" shall mean any person, including officers and\nDirectors, employed by the Company or any Parent or Subsidiary of the Company.\nThe payment of a Director's fee by the Company shall not be sufficient in and of\nitself to constitute \"employment\" by the Company.\n\n (g) \"Exchange Act\" shall mean the Securities Exchange Act of 1934, as\namended.\n\n (h) \"Option\" shall mean a stock option granted pursuant to the Plan.\n\n (i) \"Optioned Stock\" shall mean the Common Stock subject to an\nOption.\n\n (j) \"Optionee\" shall mean an Outside Director who receives an Option.\n\n (k) \"Outside Director\" shall mean a Director who is not an Employee.\n\n (l) \"Parent\" shall mean a \"parent corporation\", whether now or\nhereafter existing, as defined in Section 425(e) of the Internal Revenue Code of\n1986.\n\n (m) \"Plan\" shall mean this 1988 Directors' Stock Option Plan.\n\n (n) \"Share\" shall mean a share of the Common Stock, as adjusted in\naccordance with Section 11 of the Plan.\n\n (o) \"Subsidiary\" shall mean a \"subsidiary corporation\", whether now\nor hereafter existing, as defined in Section 425(f) of the Internal Revenue Code\nof 1986.\n \n 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of\nthe Plan, the \n\n 2\n\nmaximum aggregate number of Shares which may be optioned and sold under the Plan\nis 2,200,000 Shares (the \"Pool\") of Common Stock. The Shares may be authorized,\nbut unissued, or required Common Stock.\n\n If an Option should expire or become unexercisable for any reason without\nhaving been exercised in full, the unpurchased Shares which were subject thereto\nshall, unless the Plan shall have been terminated, shall become available for\nfuture grant under the Plan. If Shares which were acquired upon exercise of an\nOption are subsequently repurchased by the Company, such Shares shall not in any\nevent be returned to the Plan and shall not become available for future grant\nunder the Plan.\n\n 4. Administration of and Grants of Options under the Plan.\n\n (a) Administrator. Except as otherwise required herein, the Plan\nshall be administered by the Board. \n\n (b) Procedure for Grants. All grants of Options hereunder shall be\nautomatic and non-discretionary and shall be made strictly in accordance with\nthe following provisions:\n\n (i) No person shall have any discretion to select which Outside\nDirectors shall be granted Options or to determine the number of Shares to be\ncovered by Options granted to Outside Directors.\n\n (ii) Each Outside Director who is a partner, officer or director\nof an entity having an equity investment in the Company (or who was so\naffiliated with such an entity at the time of his or her initial appointment or\nelection to the Board) shall be automatically granted an Option to purchase\n20,000 Shares (the \"First Option\") upon the effective date of the Plan, as\ndetermined in accordance with Section 6 hereof, or the date on which such person\nfirst becomes a Director, whether through election by the shareholders of the\nCompany or appointment by the Board of Directors to fill a vacancy; provided,\nhowever, that no Option shall be issued under the Plan or become exercisable\nuntil shareholder approval of the Plan has been obtained. Each Outside Director\nwho is not, on the date of his or her initial appointment or election to the\nBoard, affiliated with an investment entity as described above, shall\nautomatically be granted a First Option of 30,000 Shares, subject to the above\nprovision.\n\n (iii) After the First Option has been granted to an Outside\nDirector, such Outside Director shall thereafter be automatically granted an\nOption to purchase 20,000 Shares (a \"Subsequent Option\") on the date of and\nimmediately following each Annual Meeting of Shareholders of the Company at\nwhich such non-employee director is re-elected, if on such date,\n \n 2\n\n 3\n\nhe shall have served on the Board for at least six (6) months.\n\n (iv) Notwithstanding the provisions of subsections (ii) and (iii)\nhereof, in the event that a grant would cause the number of Shares subject to\noutstanding Options plus the number of Shares previously purchased upon exercise\nof Options to exceed the Pool, then each such automatic grant shall be for that\nnumber of Shares determined by dividing the total number of Shares remaining\navailable for grant by the number of Directors on the automatic grant date. Any\nfurther grants shall then be deferred until such time, if any, as additional\nShares become available for grant under the Plan of Shares which may be issued\nunder the Plan or through cancellation or expiration of Options previously\ngranted hereunder.\n\n (v) The terms of an Option granted hereunder shall be as\nfollows:\n\n (A) The term of the Option shall be five (5) years.\n\n (B) The Option shall be exercisable only while the Outside\nDirector remains a Director of the Company, except as set forth in Section 9\nhereof.\n\n (C) The exercise price per Share shall be 100% of the fair\nmarket value per Share on the date of grant of the Option.\n\n (D) The Option shall become exercisable in installments\ncumulatively as to twenty-five percent (25%) of the Shares subject to the Option\non each of the first, second, third and fourth anniversaries of the date of\ngrant of the Option.\n\n (c) Powers of the Board. Subject to the provisions and restrictions\nof the Plan, the Board shall have the authority, in its discretion: (i) to\ndetermine, upon review of relevant information and in accordance with Section\n8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine\nthe exercise price per share of Options to be granted, which exercise price\nshall be determined in accordance with Section 8(a) of the Plan; (iii) to\ninterpret the Plan; (iv) to prescribe, amend and rescind rules and regulations\nrelating to the Plan; (v) to authorize any person to exercise on behalf of the\nCompany any instrument required to effectuate the grant of an Option previously\ngranted hereunder; and (vi) to make all other determinations deemed necessary or\nadvisable for the administration of the Plan.\n\n (d) Effect of the Board's Decision. All decisions, determinations and\ninterpretations of the Board shall be final and binding on all Optionees and any\nother holders of any Options granted under the Plan.\n\n (e) Suspension or Termination of Option. If the Chief Executive\nOfficer or his designee reasonably believes that an Optionee has committed an\nact of misconduct, the Chief\n\n 3\n\n 4\n\n\nExecutive Officer may suspend the Optionee's right to exercise any option\npending a determination by the Board of Directors (excluding the Outside\nDirector accused of such misconduct). If the Board of Directors (excluding the\nOutside Director accused of such misconduct) determines an Optionee has\ncommitted an act of embezzlement, fraud, dishonesty, nonpayment of an obligation\nowed to the Company, breach of fiduciary duty or deliberate disregard of the\nCompany rules resulting in loss, damage or injury to the Company, or if an\nOptionee makes an unauthorized disclosure of any Company trade secret or\nconfidential information, engages in any conduct constituting unfair\ncompetition, induces any Company customer to breach a contract with the Company\nor induces any principal for whom the Company acts as agent to terminate such\nagency relationship, neither the Optionee nor his estate shall be entitled to\nexercise any option whatsoever. In making such determination, the Board of\nDirectors (excluding the Outside Director accused of such misconduct) shall act\nfairly and shall give the Optionee an opportunity to appear and present evidence\non Optionee's behalf at a hearing before the Board or committee of the Board.\n\n 5. Eligibility. Options may be granted only to Outside Directors. All\nOptions shall be automatically granted in accordance with the terms set forth in\nSection 4(b) hereof. An Outside Director who has been granted an Option may, if\nhe is otherwise eligible, be granted an additional Option or Options in\naccordance with such provisions.\n\n The Plan shall not confer upon any Optionee any right with respect to\ncontinuation of service as a Director or nomination to serve as a Director, nor\nshall it interfere in any way with any rights which the Director or the Company\nmay have to terminate his directorship at any time.\n\n 6. Term of Plan. The Plan shall become effective upon the earlier to\noccur of its adoption by the Board of Directors or its approval by the\nshareholders of the Company. It shall continue in effect until December 31, 2008\nunless sooner terminated under Section 13 of the Plan.\n\n 7. Term of Option. The term of each Option shall be five (5) years from\nthe date of grant thereof.\n\n 8. Exercise Price and Consideration. \n\n (a) Exercise Price. The per Share exercise price for the Shares to be\nissued pursuant to exercise of an Option shall be 100% of the fair market value\nper Share on the date of grant of the Option. In the case of an Option granted\nto an Optionee who, immediately before the grant of such Option, owns stock\nrepresenting more than ten percent (10%) of the voting power or\n\n 4\n\n 5\n\nvalue of all classes of stock of the Company or its parents or subsidiaries, the\nper Share exercise price for the Shares to be issued pursuant to exercise of\nsuch Option shall be at least 110% of the fair market value per Share on the\ndate of grant of the Option.\n\n (b) Fair Market Value. The fair market value shall be the closing\nprice of the Common Stock on the date of grant, as reported on the National\nAssociation of Securities Dealers Automated Quotation (\"NASDAQ\") System or, in\nthe event the Common Stock is traded on a stock exchange, the fair market value\nper Share shall be the closing price on such exchange on the date of grant of\nthe Option.\n\n (c) Form of Consideration. The consideration to be paid for the\nShares to be issued upon exercise of an Option shall consist entirely of cash,\ncheck, other Shares of Common Stock having a fair market value on the date of\nsurrender equal to the aggregate exercise price of the Shares as to which said\nOption shall be exercised, or any combination of such methods of payment.\n\n 9. Exercise of Option.\n\n (a) Procedure for Exercise; Rights as a Shareholder. Any Option\ngranted hereunder shall be exercisable at such times as are set forth in Section\n4(b) hereof; provided, however, that no Options shall be exercisable until\nshareholder approval of the Plan in accordance with Section 17 hereof has been\nobtained.\n\n An Option may not be exercised for a fraction of a Share.\n\n An Option shall be deemed to be exercised when written notice of\nsuch exercise has been given to the Company in accordance with the terms of the\nOption by the person entitled to exercise the Option and full payment for the\nShares with respect to which the Option is exercised has been received by the\nCompany. Full payment may consist of any consideration and method of payment\nallowable under Section 8(c) of the Plan. Until the issuance (as evidenced by\nthe appropriate entry on the books of the Company or of a duly authorized\ntransfer agent of the Company) of the stock certificate evidencing such Shares,\nno right to vote or receive dividends or any other rights as a shareholder shall\nexist with respect to the Optioned Stock, notwithstanding the exercise of the\nOption. A share certificate for the number of Shares so acquired shall be issued\nto the Optionee as soon as practicable after exercise of the Option. No\nadjustment will be made for a dividend or other right for which the record date\nis prior to the date the stock certificate is issued, except as provided in\nSection 11 of the Plan.\n\n (b) Termination of Status as a Director. If an Outside Director\nceases to serve as\n\n 5\n\n 6\n\na Director, he may, but only within ninety (90) days after the date he ceases to\nbe a Director of the Company, exercise his Option to the extent that he was\nentitled to exercise it at the date of such termination. Notwithstanding the\nforegoing, in no event may the Option be exercised after its five (5) year term\nhas expired. To the extent that he was not entitled to exercise an Option at the\ndate of such termination, or if he does not exercise such Option (which he was\nentitled to exercise) within the time specified herein, the Option shall\nterminate.\n\n (c) Disability of Optionee. Notwithstanding the provisions of Section\n9(b) above, in the event a Director is unable to continue his service as a\nDirector with the Company as a result of his total and permanent disability (as\ndefined in Section 22(e)(3) of the Internal Revenue Code), he may, but only\nwithin six (6) months from the date of termination, exercise his Option to the\nextent he was entitled to exercise it at the date of such termination.\nNotwithstanding the foregoing, in no event may the Option be exercised after its\nfive (5) year term has expired. To the extend that he was not entitled to\nexercise the Option at the date of termination, or if he does not exercise such\nOption (which he was entitled to exercise) within the time specified herein, the\nOption shall terminate.\n\n (d) Death of Optionee. In the event of the death of an Optionee:\n\n (i) During the term of the Option, Optionee who is, at the time\nof his death, a Director of the Company and who shall have been in Continuous\nStatus as a Director since the date of grant of the Option, the Option may be\nexercised, at any time within six (6) months following the date of death, by the\nOptionee's estate or by a person who acquired the right to exercise the Option\nby bequest or inheritance, but only to the extent of the right to exercise that\nwould have accrued had the Optionee continued living and remained in Continuous\nStatus as Director for six (6) months after the date of death. Notwithstanding\nthe foregoing, in no event may the Option be exercised after its five (5) year\nterm has expired.\n\n (ii) Within one (l) month after the termination of Continuous\nStatus as a Director, the Option may be exercised, at any time within six (6)\nmonths following the date of death, by the Optionee's estate or by a person who\nacquired the right to exercise the Option by bequest or inheritance, but only to\nthe extent of the right to exercise that had accrued at the date of termination.\nNotwithstanding the foregoing, in no event may the option be exercised after its\nfive (5) year term has expired.\n\n 10. Non-Transferability of Options. Options may not be sold, pledged,\nassigned, hypothecated, transferred or disposed of in any manner other than by\nwill or by the laws of\n\n 6\n\n 7\n\ndescent and distribution or pursuant to a qualified domestic relations order as\ndefined by the Code or Title l of the Employee Retirement Income Security Act,\nor the rules thereunder. The designation of a beneficiary by an Optionee does\nnot constitute a transfer. An Option may be exercised, during the lifetime of\nthe Optionee, only by the Optionee or a transferee permitted by this Section 10.\n\n 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any\nrequired action by the shareholders of the Company, the number of shares of\nCommon Stock covered by each outstanding Option, and the number of shares of\nCommon Stock which have been authorized for issuance under the Plan but as to\nwhich no Options have yet been granted or which have been returned to the Plan\nupon cancellation or expiration of an Option, as well as the price per share of\nCommon Stock covered by each such outstanding Option, shall be proportionately\nadjusted for any increase or decrease in the number of issued shares of Common\nStock resulting from a stock split, reverse stock split, stock dividend,\ncombination or reclassification of the Common Stock, or any other increase or\ndecrease in the number of issued shares of Common Stock effected without receipt\nof consideration by the Company; provided, however, that conversion of any\nconvertible securities of the Company shall not be deemed to have been \"effected\nwithout receipt of consideration\". Such adjustment shall be made by the Board,\nwhose determination in that respect shall be final, binding and conclusive.\nExcept as expressly provided herein, no issuance by the Company of shares of\nstock of any class, shall affect, and no adjustment by reason thereof shall be\nmade with respect to, the number or price of shares of Common Stock subject to\nan Option.\n\n In the event of the proposed dissolution or liquidation of the\nCompany, the Option will terminate immediately prior to the consummation of such\nproposed action. In the event of a proposed sale of all or substantially all of\nthe assets of the Company or the merger of the Company with or into another\ncorporation, the Option shall be assumed or an equivalent option shall be\nsubstituted by such successor corporation or a parent or subsidiary of such\nsuccessor corporation. In the event that such successor corporation refuses to\nassume the Option or to substitute an equivalent option, the Board shall, in\nlieu of such assumption or substitution, provide for the Optionee to have the\nright to exercise the Option as to all of the Optioned Stock, including Shares\nas to which the Option would not otherwise be exercisable, in which case, the\nBoard shall notify the Optionee that the Option shall be fully exercisable for a\nperiod of thirty (30) days from the date of such notice, and the Option will\nterminate upon the expiration of such period.\n\n 7\n\n 8\n\n\n 12. Time of Granting Options. The date of grant of an Option shall, for\nall purposes, be the date determined in accordance with Section 4(b) hereof.\nNotice of the termination shall be given to each Outside Director to whom an\nOption is so granted within a reasonable time after the date of such grant.\n\n 13. Amendment and Termination of the Plan.\n\n (a) Amendment and Termination. The Board may amend or terminate the\nPlan from time to time in such respects as the Board may deem advisable;\nprovided that, to the extent necessary and desirable to comply with Rule l6b-3\nunder the Exchange Act (or any other applicable law or regulation), the Company\nshall obtain approval of the shareholders of the Company of Plan amendments to\nthe extent and in the manner required by such law or regulation.\n\n Notwithstanding the foregoing, the provisions set forth in\nSections 2(k), 4(b), 5, 7 and 8(a) of this Plan (and any other Sections of this\nPlan that affect the formula award terms required to be specified in this Plan\nby Rule l6b-3) shall not be amended more than once every six months, other than\nto comport with changes in the Internal Revenue Code, the Employee Retirement\nIncome Security Act, or the rules thereunder.\n\n (i) any increase in the number of Shares subject to the Plan,\nother than in connection with an adjustment under Section 11 of the Plan; or\n\n (ii) any change in the designation of the class of persons\neligible to be granted Options; or\n\n (iii) any material increase in the benefits accruing to\nparticipants under the Plan; or\n\n (iv) any change in the number of shares subject to Options to be\ngranted hereunder or in the terms thereof as set forth in Section 4(b) hereof.\n\n (b) Effect of Amendment or Termination. Any such amendment or\ntermination of the Plan shall not affect Options already granted and such\nOptions shall remain in full force and effect as if this Plan had not been\namended or terminated, unless mutually agreed otherwise between the Optionee and\nthe Board, which agreement must be in writing and signed by the Optionee and the\nCompany.\n\n 14. Conditions Upon Issuance of Shares. Shares shall not be issued\npursuant to the exercise of an Option unless the exercise of such Option and the\nissuance and delivery of such \n\n 8\n\n 9\n\nShares pursuant thereto shall comply with all relevant provisions of law,\nincluding, without limitation, the Securities Act of 1933, as amended the\nExchange Act, the rules and regulations promulgated thereunder, state securities\nlaws, and the requirements of any stock exchange upon which the Shares may then\nbe listed, and shall be further subject to the approval of counsel for the\nCompany with respect to such compliance.\n\n As a condition to the exercise of an Option, the Company may require\nthe person exercising such Option to represent and warrant at the time of any\nsuch exercise that the Shares are being purchased only for investment and\nwithout any present intention to sell or distribute such Shares, if, in the\nopinion of counsel for the Company, such a representation is required by any of\nthe aforementioned relevant provisions of law.\n\n Inability of the Company to obtain authority from any regulatory body\nhaving jurisdiction, which authority is deemed by the Company's counsel to be\nnecessary to the lawful issuance and sale of any Shares hereunder, shall relieve\nthe Company of any liability in respect of the failure to issue or sell such\nShares as to which such requisite authority shall not have been obtained.\n\n 15. Reservation of Shares. The Company, during the term of this Plan, will\nat all times reserve and keep available such number of Shares as shall be\nsufficient to satisfy the requirements of the Plan.\n\n 16. Option Agreement. Options shall be evidenced by written option\nagreements in such form as the Board shall approve.\n\n 17. Information to Optionees. The Company shall provide to each Optionee,\nduring the period for which such Optionee has one or more Options outstanding,\ncopies of all annual reports to shareholders, proxy statements and other\ninformation provided to all shareholders of the Company.\n\n 9\n \n \n\nEX-10.93\n3\nSTRATEGIC DEVELOPMENT AND MARKETING AGREEMENT\n\n\n 1\n Exhibit 10.93\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED\n SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION\n PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT\n ASTERISKS (*) DENOTE SUCH OMISSIONS\n\n STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT\n\nThis Strategic Development and Marketing Agreement (this \"Agreement\") is made\nand entered into this 23rd day of November, 1998, by and between America Online,\nInc. (\"AOL\") and Sun Microsystems, Inc. (\"Sun\").\n\nCertain terms used in this Agreement are defined in Section 24 hereof. This\nagreement is confidential between the parties, provided that either party may\ndisclose the terms of this Agreement, and any associated collateral documents,\nin order to comply with applicable laws and regulations, including securities\nlaws and regulations, and further provided that either party may disclose\ninformation regarding portions of the financial provisions of this Agreement\nafter consulting with and obtaining the approval of the other party's Executive\nRepresentative, which consent will not be unreasonably withheld or delayed. AOL\nand Sun hereby agree as follows:\n\n1.0 OBJECTIVES. AOL and Sun intend to cooperate in the development and marketing\nof software and services in the area of electronic commerce and extended\ncommunities and connectivity (\"EC(2)\") to businesses worldwide. The parties\nintend to offer together an integrated, end-to-end solution including consumer\ntraffic, dial-up connectivity, network services, client software, server\nsoftware, computer systems, computer hardware, professional services, help desk\nand service and support, but, subject to the terms and conditions herein, each\nparty would be free to offer its components in conjunction with competitive\ncomponents from third-parties. As described in this Agreement, some components\nof such solution will be collaboratively developed, and some will be developed\nprincipally or entirely by AOL or Sun. The solution offered by the parties is\nexpected to include traffic from AOL's multiple brands and related directory\nservices, configurable Netcenter or AOL.Com services and information, AOL\nnetwork access services, AOL instant messaging functionality, Sun support\nservices, Sun or AOL consulting services and Netscape or AOL outsourcing\nservices. As described in this Agreement, some components of such solution will\nbe marketed and sold by both parties pursuant to collaborative marketing and\nsales plans, and some components would be marketed and sold by AOL or Sun only.\nThe business objectives of the parties include the following:\n\n 1.1 Establish a cooperative relationship between AOL, the world's\n leading internet content provider, and Sun, the world's leading network\n computing platform supplier, to create and deliver the best, integrated,\n end-to-end enterprise commerce solutions using, where appropriate, the\n Java and Jini technology from Sun.\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n 2\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n 1.2 Sustain and grow leadership in the browser marketplace for both\n consumers and the enterprise to deeply penetrate the enterprise desktop\n environment.\n\n 1.3 Accelerate revenues from merchants and build deep relationships with\n top merchants by speeding their adoption of electronic commerce.\n\n 1.4 Create more value from relationships with electronic commerce\n merchants and customers by *** creating new services revenues.\n\n 1.5 Sustain and grow a strong electronic commerce and enterprise\n middleware software and services business, including developing a\n leading commerce software and service platform that enables powerful\n turnkey and customized solutions.\n\n 1.6 Sustain and grow the Sun Solaris, SPARC, Java and Jini business\n technologies, as the choice for enterprises and service providers\n worldwide.\n\n 1.7 *** APPROXIMATELY 3 LINES OMITTED ***\n\n 1.8 Establish and operate productive research and development,\n marketing, sales and services to support this strategy.\n\n2.0 SOFTWARE TO BE DEVELOPED. The parties intend to develop the following\nproducts:\n\n 2.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. The \"AOL Distributed\n Communicator Client\" will be a client application that will include the\n fullest and most robust set of features and functions of any of the\n client applications to be developed pursuant to this Section 2,***\n APPROXIMATELY 2 LINES OMITTED ***. The AOL Distributed Communicator\n Client *** will include the initial Release of the AOL Distributed\n Communicator Client and all subsequent Releases of such application. ***\n APPROXIMATELY 9 LINES OMITTED ***\n\n 2.2 THIRD PARTY COMMUNICATOR CLIENT. The \"Third Party Communicator\n Client\" will be a client application.*** APPROXIMATELY 6 LINES OMITTED\n *** The specification of the features and functions included in the\n Third Party Communicator Client may be modified from time to time by\n AOL, after consultation with Sun. The Third Party Communicator Client\n *** will include the initial Release of the Third Party Communicator\n Client and all subsequent Releases of such application that are\n commercially released during the term of this Agreement.\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n 2\n\n 3\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n\n 2.3 OEM COMMUNICATOR CLIENT. The \"OEM Communicator Client\" will be a\n client application incorporating a browser component, with features and\n functions as set forth in the Collaborative Work Plans. The OEM\n Communicator Client will include the initial Release of such application\n and all subsequent Releases of such application that are commercially\n released during the term of this Agreement.\n\n 2.4 NEW BROWSER. The \"New Browser\" will consist of a basic browser with\n functions for browsing, rendering display of and accessing the Internet,\n including enabling access to a portal, *** APPROXIMATELY 4 LINES OMITTED\n ***. The functions and features to be included in the New Browser will\n be described in more detail in the Collaborative Work Plans. The New\n Browser will include the initial Release of such application and all\n subsequent Releases of such application that are commercially released\n during the term of this Agreement. *** APPROXIMATELY 3 LINES OMITTED ***\n\n 2.5 NETWORK APPLICATION AND SERVER SOFTWARE. The \"Network Application\n and Server Software\" will consist of network applications and server\n software as specified in the Collaborative Development Work Plans, and\n will include, without limitation, an application server, email server,\n commerce server and directory software, as well as other software\n specified in the Collaborative Development Work Plans.\n\n 2.6 COMMENCEMENT OF DEVELOPMENT. No collaborative development work shall\n commence pursuant to this Agreement, and Sun shall not be provided with\n access to any Netscape or AOL code, prior to the Closing Date.\n\n3.0 DEVELOPMENT RESPONSIBILITIES.\n\n 3.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. AOL will develop the AOL\n Distributed Communicator Client, *** APPROXIMATELY 4 LINES OMITTED ***\n\n 3.2 THIRD PARTY COMMUNICATOR CLIENT. AOL will, with assistance from Sun,\n develop the Third Party Communicator Client, *** APPROXIMATELY 6 LINES\n OMITTED ***\n\n 3.3 OEM COMMUNICATOR CLIENT. AOL will, with assistance from Sun, develop\n the OEM Communicator Client,*** APPROXIMATELY 6 LINES OMITTED ***\n\n 3.4 NEW BROWSER. AOL will, with assistance from Sun, develop the New\n Browser, *** APPROXIMATELY 8 LINES OMITTED ***\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n 3\n\n 4\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n 3.5 NETWORK APPLICATION AND SERVER SOFTWARE. AOL and Sun will\n collaboratively develop the Network Application and Server Software, ***\n APPROXIMATELY 3 LINES OMITTED ***. AOL and Sun shall cooperate and\n coordinate their development efforts so that, to the extent commercially\n reasonable, the Client Software shall be compatible with and support the\n interfaces, protocols and APIs of the Network Application and Server\n Software in the Product Suites and vice versa.\n\n 3.6 JAVA TECHNOLOGY. The parties agree to use reasonable efforts to\n modify the existing Netscape browser to develop the New Browser to\n incorporate, for each System Platform, the most current release\n available of the complete Java Runtime Environment (JRE) on all System\n Platforms for which Sun has a JRE available. The parties agree to use\n all reasonable efforts to ensure that Java code executing on the JRE so\n invoked has the same access privileges and capabilities as Java code\n running native on the operating system and can display user interfaces\n within the browser window consistent with the user experience of running\n Java applets today, provided that Sun provides such JRE to AOL, *** in\n binary form in a fully operational and commercially viable form. Without\n limiting the foregoing, AOL shall have no obligation to incorporate into\n any browser any JRE provided by Sun that fails to operate properly on\n the applicable System Platform for such version of such browser due to\n the fault of Sun or any party other than AOL, or *** or which would\n cause a material degradation in the performance characteristics of such\n browser relative to competitive browsers in the marketplace, or which\n cannot ***APPROXIMATELY 8 LINES OMITTED*** Without limiting the\n foregoing, with respect to the *** AOL shall have no obligation to\n ***APPROXIMATELY 3 LINES OMITTED*** Sun agrees to provide error\n corrections and bug fixes for the JREs on all supported System Platforms\n pursuant to its standard terms of support (but without fee to AOL). In\n the event Sun fails to provide such error corrections and bug fixes in a\n timely commercially reasonable manner, Sun shall, pursuant to the TLDA\n entered into between AOL and Sun, provide AOL with the source code, test\n suites and related development tools for such JREs and the right to use\n such source code, test suites and related development tools for the\n purpose of supporting and maintaining such JREs in accordance with the\n TLDA. Sun agrees to use reasonable efforts to *** In order to permit the\n binary JRE to be integrated into such browsers, AOL agrees to use\n reasonable efforts to incorporate and support the Open Java Interface in\n such browsers. AOL and Sun agree to collaborate and consult with one\n another and to cooperate with one another in good faith in an effort to\n define and integrate this interface into such browsers for use by the\n JREs in such browsers. AOL further agrees that if such incorporation of\n the JRE is successfully implemented in a version of such browser for any\n applicable System Platform, AOL will incorporate such version of such\n browser in the versions of the OEM Communicator Client, Third Party\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n 4\n\n 5\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n Client and AOL Distributed Communicator Client for such System Platform\n *** If the JRE is so incorporated in the OEM Communicator Client, Third\n Party Client or AOL Distributed Communicator Client, and AOL elects to\n distribute any version of such product via download, such version shall\n either be the JRE enabled version of such product, or AOL will make the\n JRE enabled version of such product available for download in addition\n to any non-JRE enabled version of such product made available for\n download. If the JRE is so incorporated in the OEM Communicator Client,\n Third Party Client or AOL Distributed Communicator Client, and AOL\n elects to distribute any version of such product via CD-ROM, the version\n of the product distributed by AOL via CD-ROM will be such JRE-enabled\n version, to the extent contractually permissible and subject to size\n limitations, and provided that AOL shall have no obligation to require\n that its OEMs include the JRE-enabled version. AOL shall have the right\n to distribute via download a smaller version of the New Browser without\n the JRE, provided such version has hooks that permit the user optionally\n to download and install the JRE. AOL will consider as part of the\n Collaborative Development Work Plans whether to expose to the JRE all\n public and private developer interfaces within the browser (including,\n without limitation those in NSHTML.DLL), but shall have no obligation to\n do so. AOL's obligations pursuant to this Section 3.6 are conditioned\n upon Sun's granting to AOL *** any rights to Java technology necessary\n to comply with this Section 3.6. In the event of any inconsistency or\n conflict between this Section 3.6 or Section 9.8.1 of this Agreement and\n the TLDA entered into between Sun and AOL, the terms of this Section 3.6\n and the terms of Section 9.8.1 shall control.\n\n 3.7 INTENT TO DEVELOP LEADING PRODUCTS. The parties agree to use their\n reasonable efforts to maintain the existing Netscape browser and the New\n Browser as competitive alternatives to the browser component of Internet\n Explorer from Microsoft, and agree that it is their intention to make\n all products developed and distributed pursuant to this Agreement\n leading and competitive products in their respective product categories.\n\n 3.8 JRE BUNDLING ON CD-ROMS. On any CD-ROMs on which AOL ships the AOL\n classic client and on which AOL provides installation options permitting\n third party software other than AOL classic client software to be a\n separate installable item, ***APPROXIMATELY 3 LINES OMITTED*** AOL\n agrees, subject to any third party contractual limitations, to use\n reasonable efforts to co-package the latest version of the JRE with such\n client and to offer to users an installation option to install such JRE,\n provided that the JRE meets commercially reasonable standards making it\n suitable for inclusion and installation, including without limitation\n reasonable quality assurance and size limitations. AOL shall have no\n obligation to display such installation option until after\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n 5\n\n 6\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n the user has gone through any included registration process for any AOL\n Service Offering. AOL will also consider including*** APPROXIMATELY 6\n LINES OMITTED ***\n\n 3.9 DESIGN OF CLIENTS. *** APPROXIMATELY 7 LINES OMITTED ***.\n\n 3.10 THIRD PARTY COMPONENTS AND PROTOCOLS; DIVERGENCE OF DEVELOPMENT. In\n the event AOL (i) elects to use third party software or technology for\n core functionality and features of the browser component of any of the\n Client Software, (ii) adopts and maintains protocols or interfaces that\n are inconsistent with Sun's reasonable server-dictated requirements; or\n (iii) fails to support protocols or interfaces that are reasonably\n required by Sun's server-dictated requirements, Sun shall have the\n right, but not the obligation, to have AOL provide to Sun the source\n code, test suites, and related development tools reasonably required for\n Sun to pursue independent development of a browser based on the Existing\n Netscape Software and/or Collaborative Software and to create client\n applications incorporating such independently developed Sun browser. Any\n resulting products developed by Sun shall be deemed to constitute\n Designated Collaborative Software for purposes of this Agreement.\n\n4.0 SALES AND MARKETING.\n\n 4.1 CUSTOMERS.\n\n 4.1.1 GENERAL. In accordance with the Marketing and Sales\n Plan, the parties will work together to actively market\n Product Suites, as well as other related products,\n including Sun, Netscape, and AOL products and services,\n to customers.\n\n 4.1.2 AOL COMMITTED SALES FORCE. Sun acknowledges that AOL\n intends to commit an AOL sales force to target sales by\n AOL to AOL EC Service Opportunities. Such sales force\n may consist of (i) AOL interactive marketing sales\n personnel and (ii) the current Netscape Netcenter sales\n personnel. AOL shall bear all costs of such committed\n sales force. Sun shall provide reasonable assistance to\n AOL, as reasonably requested by AOL from time to time,\n in connection with this AOL committed sales effort. Sun\n shall provide such assistance through the sales and\n marketing resources that Sun is required to provide\n pursuant to the provisions of Section 4.1.3 and the\n Marketing and Sales Plan, which may include access to\n and participation of Sun employees who are not part of\n the collaborative \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 6\n\n 7\n\n\n sales team, such as Sun technical personnel. Sun also\n acknowledges that AOL intends to maintain a professional\n services group to support AOL EC Services Opportunities\n independent of any persons providing collaborative\n services pursuant to this Agreement.\n\n 4.1.3 COLLABORATIVE SALES. AOL and Sun shall each form their\n own respective sales forces targeting sales of the\n Product Suites to non AOL EC Service Opportunities. The\n AOL collaborative sales force shall consist of AOL and\n Netscape enterprise sales and marketing, professional\n services and technical support personnel selected by\n AOL. The Sun collaborative sales force shall consist of\n Sun sales personnel selected by Sun. The AOL and the Sun\n collaborative sales forces shall both sell only off a\n common pricelist and on standard terms and conditions,\n with such pricelist and terms and conditions to be\n designated by the Lead Executive for marketing and\n sales. Each of AOL and Sun will, as specified in the\n Marketing and Sales Plan, commit specified target levels\n of sales and marketing resources (personnel and a\n portion of marketing budget) to the staffing and support\n of their respective collaborative sales forces and\n coordinate the efforts of their respective collaborative\n sales forces. In addition, Sun will support the\n collaborative sales activities of the AOL collaborative\n sales force with respect to any Sun products and\n services, which may include access to and participation\n of Sun employees who are not part of the collaborative\n team, such as Sun technical personnel, and AOL will\n support the collaborative sales activities of the Sun\n collaborative sales force with respect to AOL Services\n Offerings, which may include access to and participation\n of AOL employees who are not part of the collaborative\n team, such as AOL technical personnel.\n\n 4.1.4 SHARING OF REVENUES COLLECTED FROM CUSTOMERS. Subject to\n the provisions of Section 4.2, revenues from the sale or\n license of products or services shall be shared as set\n forth below. Each party acknowledges that these\n provisions are intended to reflect how revenues are\n allocated and are not controlling as to which revenues\n are recognized by which parties, which recognition shall\n be at the sole discretion of each party in accordance\n with Generally Accepted Accounting Principles.\n\n 4.1.4.1 AOL AND NETSCAPE SOFTWARE AND ASSOCIATED\n SERVICES. AOL will receive 100% of the revenues\n (and pay all of the associated cost of goods)\n collected from any sale or license of AOL and\n Netscape products and Associated Services,\n including without limitation from sales or\n licenses of the AOL Distributed Communicator\n Client and Associated Services (but excluding\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 7\n\n\n 8\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n Existing Netscape Software and Existing Netscape\n Software Upgrades and Associated Services), less\n a sales commission equal to *** of such revenues\n which shall be payable to Sun if a Sun\n salesperson was primarily responsible for making\n the sale of the AOL products or Associated\n Services.\n\n 4.1.4.2 THIRD PARTY COMMUNICATOR AND EXISTING NETSCAPE\n SOFTWARE AND ASSOCIATED SERVICES. AOL will\n receive 100% of the revenues (and pay all of the\n associated cost of goods) collected from any\n sale or license of the Third Party Communicator\n and Associated Services and Existing Netscape\n Software and Existing Netscape Software Upgrades\n and Associated Services, less a sales commission\n equal to *** of such revenues, which shall be\n payable to Sun if a Sun salesperson not on the\n collaborative marketing and sales force was\n primarily responsible for making the sale of the\n AOL products or Associated Services.\n\n 4.1.4.3 SUN SOFTWARE AND SERVICES. Sun will receive 100%\n of the revenues collected (and pay all of the\n costs of goods) from any sale or license of Sun\n software and professional services, less a sales\n commission equal to *** of such revenues, which\n shall be payable to AOL if an AOL salesperson\n was primarily responsible for making the sale of\n the Sun products or Associated Services. This\n Section 4.1.4.3 shall not apply to \"Sun\n Products\" as defined in the Service Provider\n Agreement between the parties of even date\n herewith.\n\n 4.1.4.4 DESIGNATED COLLABORATIVE SOFTWARE AND SERVICES.\n AOL will receive *** of the Gross Margin\n collected from any sale or license of Designated\n Collaborative Software products and Associated\n Services and Sun will receive *** of the Gross\n Margin collected from such sales or licenses.\n Whichever party to this Agreement enters into\n the sales contract with the customer will\n receive the revenues from such contract and\n remit *** of the Gross Margin to the other party\n as provided in this Section.\n\n 4.1.4.5 SALES BONUS. To the extent the amounts payable\n to AOL in any quarter that are applied to the\n Minimum Commitment exceed one \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 8\n\n\n 9\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n hundred twenty-five percent (125%) of the\n applicable Minimum Commitment for such quarter\n as set forth in Section 4.5, Sun shall, in\n addition to any other amounts payable by Sun to\n AOL, pay to AOL a bonus equal to*** of the\n amount by which such amounts payable to AOL\n exceed one hundred twenty-five percent (125%) of\n the applicable Minimum Commitment for such\n quarter.\n\n 4.1.5 MARKETING CO-OP FEE. During the term of this Agreement,\n as consideration for the marketing and selling of Sun\n products and services and the products and services\n developed under the Collaborative Activity, Sun will pay\n AOL a marketing co-op fee, which shall be applied as\n determined by AOL. The marketing co-op fee shall be Ten\n Million Dollars ($10,000,000) for the first year\n following the Closing Date, Ten Million ($10,000,000)\n for the second year following the Closing Date, and Ten\n Million Dollars ($10,000,000) for the third year\n following the Closing Date, payable each year in\n quarterly payments as provided in Section 8.l.\n\n 4.2 ADDITIONAL REVENUE DETERMINATION AND ALLOCATION PROVISIONS\n\n 4.2.1 REVENUE CALCULATION. For purposes of determining the\n appropriate revenue or Gross Margin allocation under\n Section 4.1.4, in cases where a single product or\n service is sold, the revenues received shall be deemed\n to equal the gross revenues (before sales commission)\n collected from the end user or the OEM customer and the\n Gross Margin shall be calculated in accordance with\n Section 21.20. In cases where multiple products or\n services are sold in a bundled sale, the revenues per\n product or service will be calculated by computing the\n overall discount (or ***, whichever is lower) from list\n price for the bundled sale (or the aggregate sum of the\n list prices for each individual component in the bundled\n sale, if there is no list price for the bundled sale)\n and applying that discount to the list price for the\n product. *** APPROXIMATELY 10 LINES OMITTED ***.\n\n 4.2.2 SPECIAL REVENUE ALLOCATIONS. Notwithstanding anything to\n the contrary herein, including without limitation the\n provisions of Section 4.1.4, AOL shall retain all\n collected revenues from existing Netscape OEM and\n customer contracts (including without limitation\n revenues collected in connection with any existing\n service, development, support, maintenance, reseller,\n VAR, OEM and other contracts) and existing contracts for\n the \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 9\n\n 10\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n sale and distribution of Existing Netscape Software and\n any updates, enhancements and/or new releases thereof.\n As used in this Section 4.2.2, the term \"existing\n contracts\" shall mean any contracts entered into on or\n before the Closing Date for the duration of the\n remaining term of such contracts as well as any\n extensions or renewals of the term of such contracts to\n the extent the customer or OEM elects to exercise any\n unilateral right of extension or renewal contained in\n such existing contracts. AOL and Sun each shall retain\n their existing customer contracts for the Netscape\n client software, with all service, maintenance and\n support provided by AOL, to the extent Netscape is\n obligated to provide such service, maintenance and\n support under existing service, maintenance and support\n agreements, and all service, maintenance and support\n provided by Sun, to the extent Sun is obligated to\n provide such service, maintenance and support under\n existing service, support and maintenance agreements.\n AOL and Sun will each have the right to fulfill its\n respective obligations under existing contracts,\n notwithstanding anything to the contrary contained in\n this Agreement\n\n 4.3 PRIORITY OF MARKETING BY SUN. In conducting its marketing\n activities, Sun shall prioritize the marketing of the following client\n products, where they exist for the customer platform, in the following\n manner:\n\n (a) As part of the standard Product Suites offering and any\n other time Sun is marketing, distributing or selling a browser\n component, Sun will give first priority to the marketing and\n sale of ***.\n\n (b) If a customer indicates that it does not want ***,Sun will\n next attempt to market and sell ***.\n\n (c) If a customer indicates that it does not want ***, Sun will\n next attempt to market and sell ***.\n\n *** APPROXIMATELY 7 LINES OMITTED ***\n\n 4.4 AOL SERVICE COMPONENTS AND SERVICE OFFERINGS. AOL and Sun each\n agrees actively to market, promote and support the Product Suites.\n Without limiting the foregoing, Sun will actively market, promote and\n support the AOL Service Components and AOL Service Offerings that are\n incorporated into products comprising the Product \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 10\n\n 11\n\n\n Suites in connection with its marketing, promotion and sales of the\n Product Suites, provided that Sun customers will not be required to use\n or maintain any AOL Service Components included in the Product Suites.\n Notwithstanding anything to the contrary herein, including without\n limitation the provisions of Section 4.1.4, AOL shall retain all\n collected revenues related to or derived from sales or licenses of AOL\n Service Components and AOL Service Offerings. Neither Sun nor the\n collaborative sales team shall have any right to sell any AOL Service\n Offerings without AOL's prior written consent, and AOL shall have no\n obligation to provide such consent.\n\n 4.5 MINIMUM REVENUE COMMITMENTS BY SUN. Sun will commit that, during the\n term of this Agreement, the total of the net amounts paid per year to\n AOL under Sections, 4.1.4.2, 4.1.4.4, 9.6.2 (including, without\n limitation, net of commissions payable to Sun sales personnel) and under\n 4.2.2 (which includes revenues derived by AOL from the sale of Existing\n Netscape Software and Existing Netscape Software Upgrades and Associated\n Services), will be not less than Three Hundred Twelve Million Dollars\n ($312,000,000) for the first year following the Closing Date, Three\n Hundred Thirty Million Dollars ($330,000,000) for the second year\n following the Closing Date, and Three Hundred Thirty Three Million Two\n Hundred Fifty Thousand Dollars ($333,250,000) for the third year\n following the Closing Date, payable in quarterly minimum payments the\n (\"Minimum Commitment\") as set forth in Section 8.1.\n\n 4.6 PENETRATION RATE FOR BUSINESS DESKTOP. So long as certain specified\n milestone deliverable dates are satisfied as set forth in the\n Collaborative Development Work Plans, Sun shall use all reasonable\n efforts to achieve penetration of enterprise desktops by the Third Party\n Communicator Client and AOL Distributed Communicator Client as set forth\n in the Marketing and Sales Plan as mutually-agreed in writing prior to\n the Closing Date, including without limitation bundling the Third Party\n Communicator with Sun's Solaris operating system, actively promoting the\n Third Party Communicator on Sun's website, and such other actions as Sun\n normally takes to promote and market its products, provided that Sun\n shall be relieved of such obligations to achieve such penetration if Sun\n embarks on a divergent development path with respect to the Third Party\n Communicator Client pursuant to Section 3.10. If the agreed level of\n penetration is not achieved, Sun will take reasonable steps (e.g.,\n increased marketing, promotion and salesforce incentives) to increase\n the penetration rate to the required level within six months; provided\n that, if Sun believes that the failure to achieve the requisite level of\n penetration was due to factors beyond its reasonable control and/or that\n the penetration rate shortfall cannot reasonably be remedied through\n increased marketing and promotion unless additional remedial action is\n also taken during such six month period, Sun will so inform AOL and the\n parties shall discuss Sun's concerns and attempt to agree through good\n faith negotiation on an appropriate plan to increase the penetration\n rate within such six month period. Such plan may include actions by Sun\n and/or AOL, depending on the circumstances. The Executive\n Representatives shall facilitate such negotiation. If either \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 11\n\n\n 12\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n Executive Representative believes that negotiation will not succeed in a\n timely fashion, he or she may refer such dispute to the two chief\n executive officers to resolve. The Incentive Plan referred to in Section\n 13.1 will set forth the method by which Sun will provide incentives to\n its sales force to achieve the requisite penetration rate. The\n escalation procedures set forth in this Section 4.6 shall constitute\n AOL's sole and exclusive remedy for any failure to achieve the specified\n target penetration rate.\n\n 4.7 MARKETING AND SALES PLAN. The Marketing and Sales Plan will set\n forth a detailed description of how the two sales and marketing teams\n (i.e., the sale forces described in Sections 4.1.2 and 4.1.3,\n respectively) will collaborate, including the initial sales force\n compensation and incentive plans (as further described in Section 13.1)\n to be implemented independently by the parties, the goal of which will\n be to provide appropriate incentives for the sales forces to meet and\n exceed the Minimum Commitments.\n\n 4.8 WARRANTIES, INDEMNIFICATION AND SUPPORT. Sun shall have the\n exclusive right to provide and will provide all warranty and support\n services in connection with sales and licenses (other than pursuant to\n existing contracts as set forth in Section 4.2.2) by the collaborative\n sales force and by the dedicated AOL sales force of the Product Suites,\n including warranty and support services for supported Systems Platforms\n other than the Sun Systems Platform, which may include Systems Platforms\n such as Windows NT, HP-UX, Linux and IBM AIX. Sun will fulfill warranty\n and support obligations in connection with all sales and licenses by AOL\n arising from sales by the collaborative sales force and by the dedicated\n AOL sales force of the Product Suites (other than pursuant to existing\n contracts as set forth in Section 4.2.2). In consideration of Sun's\n providing such support services, AOL will pay to Sun the sum of One\n Million Dollars ($1,000,000) per month during the term of this\n Agreement. In addition, Sun will, at the request of AOL, fulfill\n warranty and support obligations for existing contracts as set forth in\n Section 4.2.2 ***. Such support services shall include frontline\n technical support, including call receipt, call screening, installation\n assistance, problem identification and diagnosis, and other standard\n support services customarily provided by Sun's twenty-four hour per day,\n seven day per week support center. Backline escalation support shall be\n provided by the collaborative development team. Sun shall defend,\n indemnify and hold AOL harmless from all third party claims and\n allegations relating to alleged breach or failure to provide support\n services or breach of support service obligations under Sun's standard\n maintenance contracts under which it is obligated to support the Product\n Suites. AOL will promptly notify Sun in writing of any such claim or\n allegation giving Sun the sole right of defense and settlement, and will\n assist Sun, at Sun's expense (except for the value \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 12\n\n\n 13\n\n\n of time of AOL employees), to defend or settle such claim or allegation.\n AOL shall have the right to employ separate counsel and to participate\n in the defense of such claim at its own cost. Sun shall not be liable\n for litigation expenses of or settlements by any third parties unless\n Sun agrees in writing.\n\n5.0 MANAGEMENT PROCESS FOR DEVELOPMENT AND SALES AND MARKETING.\n\n 5.1 EXECUTIVE REPRESENTATIVES. Each party shall designate a senior\n executive reporting to its chief executive officer, president or chief\n operating officer as its Executive Representative to the other for the\n purpose of this Agreement. AOL's initial Executive Representative shall\n be David Colburn, and Sun's initial Executive Representative shall be\n William J. Raduchel. The Executive Representatives shall collaboratively\n report quarterly in writing (which may be electronic) to both chief\n executive officers on the progress of development under this Agreement\n and shall work to facilitate cooperation between the parties to achieve\n the development goals of this Agreement. The chief executive officers\n shall consult prior to changing the Executive Representatives.\n\n 5.2 EXECUTIVE MEETING. In January and July of each year, the chief\n executive officers and the relevant members of their management teams\n including the Executive Representatives shall meet to review the\n development progress and sales and marketing progress under this\n Agreement. The January meetings shall be in California hosted by Sun and\n the July meetings in Virginia, hosted by AOL. The host Executive\n Representative shall be responsible, in consultation with the\n participants and the other Executive Representative, for organizing such\n meeting and establishing its agenda.\n\n 5.3 MANAGEMENT PROCESS FOR CLIENT SOFTWARE DEVELOPMENT AND NETWORK\n APPLICATION AND SERVER SOFTWARE DEVELOPMENT.\n\n 5.3.1 LEAD EXECUTIVES. The initial Lead Executives and Deputy\n Lead Executives for each major component (\"MC\") of the\n collaborative development activity are set forth in\n Sections 5.3.3 and 5.3.4. Future Lead Executives will be\n designated by AOL after consultation with Sun. AOL shall\n have the right, after consultation with Sun, to replace\n the Lead Executive for either MC at any time if in its\n good faith judgement such action is in the best\n interests of the parties. The Lead Executive and Deputy\n Lead Executive must be replaced by a person of similar\n rank and stature unless the parties otherwise agree. The\n Lead Executives and Deputy Lead Executives shall not be\n changed prior to the Closing Date.\n\n 5.3.2 POWERS OF DEVELOPMENT LEAD EXECUTIVES; DEPUTY LEAD\n EXECUTIVES. The Lead Executive shall maintain and revise\n the corresponding \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 13\n\n 14\n\n\n Collaborative Development Work Plan for each MC in\n accordance with its terms and will have the right, after\n consultation with the Deputy Lead Executive, to\n designate the project leader for each major project and\n to establish teams and team leaders for various\n development projects. For each Lead Executive there\n shall be a Deputy Lead Executive. The Deputy Lead\n Executive shall be assigned by the party other than the\n party employing the Lead Executive, after consultation\n with the Lead Executive. Each party shall structure all\n employees and resources for each MC under the Lead\n Executive or Deputy Lead Executive for that MC, and the\n Lead and Deputy Lead Executives and project leaders\n shall direct such resources in accordance with and to\n achieve the objectives of the Collaborative Development\n Work Plan.\n\n 5.3.3 CLIENT SOFTWARE. The initial Lead Executive for the\n Client Software MC shall be Barry Schuler. The Lead\n Executive for the Client Software MC shall have the\n right, after consultation with the Deputy Lead\n Executive, to make all decisions with respect to the\n design and development of the Client Software and the\n New Browser, including without limitation the features\n and functions to be included in each such product design\n and all decisions regarding development priorities and\n resource allocation.\n\n 5.3.4 NETWORK APPLICATION AND SERVER SOFTWARE. The initial\n Lead Executive for the Network Application and Server\n Software MC shall be Ed Zander. As part of the\n Collaborative Development Work Plans, with the consent\n of each party through its Lead Executive or Deputy Lead\n Executive, which consent shall not be unreasonably\n withheld or delayed, the Lead Executive will establish\n mutually agreeable targets for development of the\n Network Application and Server Software. It is AOL's\n present intention not to replace the initial Lead\n Executive for Network Application and Server Software\n unless such development targets are missed in a material\n fashion, but AOL shall have the right, after\n consultation with Sun, to replace the Lead Executive for\n the Network Application and Server Software MC at any\n time after the Closing Date. The Lead Executive for the\n Network Application and Server Software may be an\n employee of either party. In selecting the project\n leader and team leaders for various development projects\n to be undertaken in the development of the Network\n Application and Server Software, the Lead Executive for\n the Network Application and Server Software shall\n appoint a significant number of AOL employees as project\n and/or team leaders.\n\n 5.3.5 COLLABORATIVE DEVELOPMENT WORK PLANS. Prior to the\n Closing Date, the Lead Executive and Deputy Lead\n Executives shall establish and attach \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 14\n\n\n 15\n\n\n hereto as Schedule 5.3 the initial Collaborative\n Development Work Plans for the two MCs of the initial\n Collaborative Development Activity (consisting of an MC\n for Client Software development and an MC for Network\n Application and Server Software development), setting\n forth the objectives, principal deliverables of each\n such MC and providing for priorities in going forward.\n Changes to the principal deliverables or priorities\n sections of the Collaborative Development Work Plan for\n Network Application and Server Software shall require\n the consent of both parties not to be unreasonably\n withheld or delayed, but all other changes to such\n Collaborative Development Work Plans may be made by the\n Lead Executive for the applicable MC after consultation\n with the Deputy Lead Executive for such MC. In making\n such changes, the Lead Executive must act solely in\n accordance with the terms and objectives of this\n Agreement.\n\n 5.3.6 CROSS PLATFORM DEVELOPMENT. Understanding that it is the\n parties' intention to offer cross platform solutions,\n the parties shall, to the extent commercially\n reasonable, develop the Client Software and the Network\n Applications and System Software to operate on a variety\n of System Platforms, including the Sun System Platform\n as well as other Systems Platforms including Windows NT,\n IBM AIX, Linux, HP-UX and other Systems Platforms. Any\n decision to support a platform other than Solaris or\n Windows NT shall require a financial analysis showing a\n reasonably appropriate return on investment, and in all\n cases all Collaboratively Developed Software at the date\n of first customer shipment must ship on Solaris.\n\n 5.3.7 NON-DISCLOSURE; LIMITATIONS ON WORK ON OTHER\n DEVELOPMENT. All individuals engaged in Collaborative\n Development Activities will be prohibited from using or\n disclosing any confidential information or trade secrets\n learned or developed in the course of such Collaborative\n Development Activities other than in the course of their\n work on the Collaborative Development Activities or\n their work for AOL or Sun, respectively. AOL and Sun\n each acknowledges that the parties may have to establish\n procedures and/or enter into supplemental\n confidentiality agreements to address issues that may\n arise in connection with Collaborative Development\n Activities, such as, by way of example, the use of\n confidential information of third parties which one\n party may not have the right to disclose to the other\n party. In addition, AOL and Sun each agrees that after\n it has assigned developers to the Collaborative\n Development Activities, it shall use reasonable efforts\n to keep such individuals assigned to the Collaborative\n Development Activities, and \n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 15\n\n 16\n\n\n AOL and Sun each agrees that it will not reassign\n multiple employees engaged in the Collaborative\n Development Activities to work on similar or competitive\n development activities for other customers, clients, or\n strategic partners. If AOL or Sun reassigns an\n individual employee to work on similar or competitive\n development activities for a customer, client, strategic\n partner or other third party, such party to this\n agreement shall advise the customer, client, strategic\n partner or other third party that such employee was\n involved in similar or competitive development\n activities pursuant to this Agreement and that such\n individual is subject to a confidentiality and\n non-disclosure agreement prohibiting such individual\n from using or disclosing any confidential information or\n trade secrets learned or developed in the course of such\n Collaborative Development Activities.\n\n 5.3.8 PROTECTION OF SOFTWARE. AOL and Sun will agree on\n procedures so that development is conducted in a such a\n manner that AOL Service Components, other AOL and\n Netscape proprietary software, Sun software, and the\n Collaborative Software are not inadvertently placed in\n the public domain or required to be publicly disclosed\n pursuant to the Mozilla Public License or Netscape\n Public License. Both parties shall comply with such\n procedures, and notwithstanding anything to the contrary\n contained in this Agreement, in no event may a Lead\n Executive make any decision to implement development in\n a manner inconsistent with such procedures without the\n written consent of both AOL and Sun, which either party\n may withhold in its sole discretion.\n\n 5.4 MANAGEMENT PROCESS FOR SALES AND MARKETING.\n\n 5.4.1 MARKETING AND SALES PLANS. An initial draft of the\n Marketing and Sales Plan for the Collaborative Marketing\n and Sales Activity will be mutually agreed upon prior to\n the Closing Date by the Lead Executive and Deputy Lead\n Executive for marketing and sales, setting forth the\n objectives and targets, and principal methods for\n marketing and sales of the Product Suites and components\n thereof. Major substantive changes to such initial\n Marketing and Sales Plan shall require the consent of\n both parties, such consent not to be unreasonably\n withheld, but any minor changes may be made by the\n corresponding Lead Executive after consultation with the\n Deputy Lead Executive. In making such changes, the Lead\n Executive must act solely in accordance with the terms\n and objectives of this Agreement. The Lead Executive and\n Deputy Lead Executive shall not be changed prior to the\n Closing Date.\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 16\n\n 17\n\n\n 5.4.2 POWERS OF MARKETING AND SALES LEAD EXECUTIVE. The Lead\n Executive for Marketing and Sales shall maintain and\n revise the Marketing and Sales Plan in accordance with\n its terms. For each Lead Executive there shall be a\n Deputy Lead Executive. The Deputy Lead Executive shall\n be assigned by the party other than the party employing\n the Lead Executive. The Lead Executive for Marketing and\n Sales, after consultation with the Deputy Lead Executive\n for Marketing and Sales, shall have the right to\n establish projects and teams and project and team\n leaders for various major sales efforts (\"SE's\") of the\n Marketing and Sales Plan. Each party shall structure all\n employees and resources of such party's respective\n collaborative sales team under the Lead Executive or\n Deputy Lead Executive, and the Lead Executive and Deputy\n Lead Executives and their subordinates shall direct such\n resources in accordance with and to achieve the\n objectives of the applicable Marketing and Sales Plan.\n\n 5.4.3 LEAD EXECUTIVES. The initial Lead Executive for\n Marketing and Sales shall be Ed Zander. The initial\n Deputy Lead Executive for Marketing and Sales shall be\n Barry Schuler. As part of the Marketing and Sales Plans,\n AOL and Sun will establish mutually agreeable targets\n for marketing and sales of the Product Suites. It is\n AOL's present intention not to replace the initial Lead\n Executive for Marketing and Sales unless such targets\n are not met, but AOL shall have the right, after\n consultation with Sun, to replace the Lead Executive for\n Marketing and Sales at any time after the Closing Date.\n In the event replaced, the Lead Executive and Deputy\n Lead Executive may only be replaced by a person of\n similar rank and stature unless the parties otherwise\n agree. The Lead Executive for Marketing and Sales must\n be an employee of either AOL or Sun.\n\n 5.4.4 COORDINATION. The AOL collaborative sales force and the\n Sun collaborative sales force shall coordinate their\n sales efforts and endeavor to cooperate with one another\n to achieve maximum sales of the Product Suites in\n accordance with the Marketing and Sales Plan.\n\n 5.4.5 CROSS PLATFORM MARKETING AND SALES. The collaborative\n sales forces of AOL and Sun will be trained and\n knowledgeable about and shall, to the extent\n commercially reasonable, actively market and promote the\n sale or license of the Product Suites on the Sun Systems\n Platform, Windows NT and on a variety of other System\n Platforms to which the Product Suites have been ported,\n which may include IBM AIX, Linux, HP-UX and other\n Systems Platforms, which marketing and promotion shall\n include efforts to license the Product Suites on an OEM\n basis.\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 17\n\n\n 18\n\n\n6.0 OTHER DEVELOPMENT AND MARKETING RIGHTS AND LIMITATIONS.\n\n 6.1 AOL. During the term of this Agreement, AOL will market Network\n Application and Server Software only to AOL EC Service Opportunities and\n only to enable such opportunities. In sales to AOL EC Service\n Opportunities made by AOL personnel, AOL may elect to have the sales and\n licensing agreements for the goods and services sold be between the\n customer and AOL or may elect to have such agreements be between Sun and\n the customer. AOL shall have the unrestricted right to market and\n distribute the Client Software and New Browser during and after the term\n of this Agreement in any manner whatsoever, including without limitation\n through OEM licensing arrangements.\n\n 6.2 SUN. During the term of this Agreement, Sun will have the right to\n market, including through reseller and OEM arrangements, the\n Collaborative Software through the Collaborative Marketing and Sales\n Activities as well as its independent sales force, subject to the\n provisions of Section 4.1.4.\n\n 6.3 SUN DEVELOPMENT. Subject to the provisions of Sections 6.6 and 6.7,\n Sun is free to develop at its own expense additional client, server and\n application software, functionality and features for EC(2). Any such\n software developed by Sun independently which is not a derivative work\n of the Existing Netscape Software or the Collaborative Software and was\n not developed pursuant to any Collaborative Development Work Plan shall\n not constitute Collaborative Software or Designated Collaborative\n Software, and Sun shall own such independent developments and all\n proprietary rights therein.\n\n 6.4 AOL DEVELOPMENT. AOL is free to develop at its own expense and to\n collaborate with one or more third parties in developing additional\n client, server and application software, and functionality and features\n for electronic commerce and extended communities and connectivity,\n including without limitation software based on and derived from the\n Existing Netscape Software. Any such software developed by AOL\n independent of any Collaborative Development Work Plan shall not\n constitute Collaborative Software or Designated Collaborative Software,\n and AOL shall own such independent developments and all proprietary\n rights therein.\n\n 6.5 REPLACEMENT OF IE BROWSER. To the extent contractually permissible,\n AOL will periodically evaluate replacing the browser component of\n Microsoft Internet Explorer browser with the New Browser in the AOL\n classic online service offering and to use the New Browser in clients\n for other brands such as ICQ and CompuServe, provided that the parties\n acknowledge that AOL has no present intention to make any such\n replacement or use and shall have no obligation to make any such\n replacement or use, and that it is AOL's present expectation that it\n will not seek to terminate or limit its present agreement \n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 18\n\n 19\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n and may seek to renew and/or extend and expand its present agreement\n with Microsoft Corporation to continue to distribute Microsoft Internet\n Explorer. It is acknowledged that among the critical issues for AOL in\n evaluating the merits of any such possible replacement would be ***\n APPROXIMATELY 8 LINES OMITTED ***\n\n 6.6 NO DEVELOPMENT OR MARKETING OF COMPETITIVE CLIENTS. Except as\n provided in Section 3.10, for any System Platform for which AOL\n implements, in the OEM Communicator Client and Third Party Communicator\n Client, the most recent version of Sun's JRE pursuant to Section 3.6,\n Sun shall not during the term of this Agreement, directly or indirectly\n through any third party, develop, market, advertise, or distribute any\n software product or assist in advertising, marketing, or distributing\n any software product on such System Platform (including without\n limitation any other browser component) including or bundled with\n features and functions which make it competitive with a desktop client\n such as the client for the AOL classic online service, AOL Distributed\n Communicator Client, the Third Party Communicator Client, the OEM\n Communicator Client or Microsoft Internet Explorer (as it continues to\n evolve away from a browser to a fully featured online desktop\n client),*** APPROXIMATELY 11 LINES OMITTED *** This Section 6.6 shall\n not be deemed to limit or prohibit Sun from continuing to develop,\n market, advertise, promote and distribute browsers that are 100% Pure\n Java or are for platforms other than personal computers or workstations,\n subject to the provisions of Section 4.3, nor from continuing to\n develop, market and promote client software other than browsers except\n as provided in this Section.\n\n 6.7 SUPPORT FOR PRODUCT SUITES STANDARDS. It is the intention of the\n parties that all client software will support industry-standard\n protocols and the standards, protocols and defaults in the Product\n Suites, including without limitation the standards, protocols and\n defaults of the AOL Services Components in the Product Suites, and\n except as provided in Section 3.10, Sun agrees not to implement, in the\n Sun Systems Platform or in other software competitive with or offering\n similar functionality to the Product Suites, inconsistent or conflicting\n standards, protocols or defaults, including without limitation\n inconsistent or conflicting with the components, features,\n functionality, interfaces, protocols and APIs of the New Browser.\n\n 6.8 IMPACT OF LICENSE TO COMPETING OEM. If, during the term of this\n Agreement, AOL grants an OEM license to any of the network application\n and server software comprising the Existing Netscape Software or any\n derivative works thereof developed by \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 19\n\n 20\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n AOL to any other Systems Platform suppliers, each such transaction must\n be structured so that the revenues to AOL reflect *** and in such event\n the Minimum Commitment as set forth in Section 4.5 for each quarter\n subsequent to AOL granting such a license shall be reduced by *** of the\n consideration received by AOL during the preceding quarter pursuant to\n such license agreement for the rights granted to such OEM with respect\n to any such software, provided that in the event AOL receives an upfront\n large sum or advance pursuant to such an agreement, the reduction\n arising from such amount shall be applied pro rata across all then\n remaining quarterly Minimum Commitments.\n\n 6.9 LICENSES BY SUN. During the term of this Agreement, Sun shall\n structure its license transactions for the Existing Netscape Software\n and Designated Collaborative Software so that the revenues to Sun ***\n and Sun shall not enter into licenses for such software intending to (a)\n have a material adverse impact on the penetration rate for the business\n desktop as set forth in Section 4.6 or (b) materially reduce the amounts\n payable to AOL hereunder.\n\n 6.10 RESOURCES. AOL and Sun shall each provide a minimum level of\n staffing through their respective collaborative sales forces, as set\n forth in the Marketing and Sales Plan, to achieve the objectives of the\n SE's, and AOL and Sun shall each provide a minimum level of development\n staffing, as set forth in the initial Collaborative Development Work\n Plans, to achieve the objectives of the Network Application and Server\n Software development MC. Sun shall be responsible for using all\n reasonable efforts at its expense to provide whatever remaining\n resources are needed to achieve the goals of each SE as set forth in the\n Marketing and Sales Plan and to achieve the goals set forth in the\n Collaborative Development Work Plan for Network Application and Server\n Software, but in no event will Sun be required to provide more than the\n maximum levels of Sun staffing set forth in the Marketing and Sales Plan\n and the Collaborative Development Work Plan for Network Application and\n Server Software. Sun will provide a level of staffing for Sun's\n collaborative sales force at least as large as that of AOL's\n collaborative sales force, and Sun shall provide a level of staffing for\n the Collaborative Development Activities at least as great as the\n staffing AOL provides for the Collaborative Development Activities.\n Either party may reduce its level of staffing if such party concludes\n that then current and reasonably anticipated business conditions no\n longer justify then current staffing levels. In the event the aggregate\n level of staffing provided by AOL in any quarter for Collaborative\n Development Activities and Collaborative Marketing and Sales Activities\n is less than ***, the otherwise applicable Minimum Sales Commitment for\n the next quarter shall be reduced by *** per person for such shortfall\n (i.e., for each person by which such staffing by AOL is below ***),\n provided that in the event the composition of \n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 20\n\n 21\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n such AOL staffing with respect to mix of salary levels changes\n materially, Sun and AOL will negotiate in good faith adjustments to such\n *** per person shortfall reduction.\n\n7.0 ESCALATION AND DISPUTE RESOLUTION FOR COLLABORATIVE DEVELOPMENT AND\nMARKETING AND SALES.\n\n 7.1 GENERAL. The parties shall attempt to promptly resolve through good\n faith negotiation any dispute or disagreement between them directly\n relating to design and development priorities and decisions and resource\n allocation under the Collaborative Development Work Plan for Network\n Application and Server Software and marketing and sales priorities and\n decisions under the Marketing and Sales Plans. ***APPROXIMATELY 10 LINES\n OMITTED***\n\n 7.2 DEADLOCK ON MAJOR DISPUTES. ***APPROXIMATELY 48 LINES OMITTED***\n\n8.0 PAYMENT TIMING PROVISIONS.\n\n 8.1 TIMING. Fees payable pursuant to Section 4.1.5, 4.5 and 9.8.2 shall\n be paid quarterly in advance not later than the fifth business day of\n the quarter for which due, except that amounts payable pursuant to such\n Sections for the first quarter shall be paid on the Closing Date, and,\n in the event to first quarter is not a complete quarter, amounts payable\n pursuant to such Sections for the first partial quarter and the first\n full quarter shall be payable on the Closing Date. Unless otherwise\n specified, other fees shall be paid no later than 45 calendar days after\n the end of the quarter for which due (including fees in excess of the\n minimum amounts due with respect to any quarter). No fees are payable\n until the quarter in which the Closing Date occurs, and any fees for\n that quarter, including minimum quarterly fees specified in this\n Agreement, including in Sections 4.1.5, 4.5 and 9.8.2, shall be a pro\n rata amount based on the number of days remaining in such quarter. In\n the event the first quarter is not a complete quarter (i.e., the Closing\n Date occurs other than at the beginning of the quarter), any reductions\n in minimum revenues or other fees specified in this Agreement, including\n in Sections 4.1.5, 4.5 and 9.8.2, shall not apply until the second full\n quarter. For partial quarters at the beginning and the end of each year\n of the term of this Agreement, the quarterly amount payable shall be a\n prorated portion of the full quarterly amount specified for such year,\n based on the number of days in such partial quarter period. (For\n example, if the first anniversary of the Closing Date is March 20, 2000,\n the prorated Minimum Commitment payable pursuant to Section 4.5 for the\n partial period running from January 1, 2000 through March 20, 2000 shall\n be the applicable prorated portion of $78,000,000, which amount shall be\n due and payable on January 1, 2000, and the prorated Minimum Commitment\n for the partial period running \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n\n 21\n\n 22\n\n\n from March 21, 2000 through March 30, 2000 shall be the applicable\n prorated portion of $82,500,000, which amount shall also be due and\n payable on January 1, 2000.\n\n 8.2 NO RIGHT TO WITHHOLD OR OFFSET. Sun will have no right whatsoever to\n withhold payment of any minimum fees or revenues provided for in\n Sections 4.1.5, 4.5 or 9.8.1 on the basis of any alleged right of offset\n or any alleged breach by AOL of any of its obligations pursuant to this\n Agreement or for any other reasons except to the extent permitted\n pursuant to a final, non-appealable judgment obtained from a court of\n competent jurisdiction in litigation between AOL and Sun.\n Notwithstanding anything to the contrary set forth in this Agreement, in\n the event Sun believes that AOL has breached any obligations under this\n Agreement, Sun shall have no right to cease paying any such minimum fees\n and revenues, even if Sun has terminated or purported to terminate this\n Agreement, and Sun's sole and exclusive remedy shall be to litigate the\n dispute and to continue making such payments during the pendency of the\n litigation. AOL shall be entitled to injunctive relief to compel Sun to\n continue making such payments during the pendency of such litigation.\n\n 8.3 LATE CHARGES. In the event that either party does not receive any\n amounts from the other party hereunder on or before the day upon which\n such amounts are due and payable, and fails to cure such breach within\n ten (10) business days following written notice from the other party,\n such outstanding amounts shall thereupon be subject to payment of a late\n charge which shall accrue until payment at the rate of one percent (1%)\n per month. Amounts received by shall first be credited against any\n unpaid late charges accrued pursuant to this Section, and accrual of\n such late charges shall be in addition to and without limitation of any\n and all additional rights or remedies under this Agreement or at law or\n in equity.\n\n9.0 INTELLECTUAL PROPERTY RIGHTS.\n\n 9.1 OWNERSHIP. Each party shall own all preexisting software and/or\n technology which it makes available to the Collaborative Development\n Activity or which it developed or develops with its own resources\n without use of any intellectual property of the other party and not as\n part of the Collaborative Development Activities and all proprietary\n rights therein. To the extent such software and/or technology is\n incorporated into the Designated Collaborative Software, it shall, to\n the extent so incorporated, be subject to the provisions of Sections\n 9.2, 9.3 and 9.4.\n\n 9.2 DESIGNATED COLLABORATIVE SOFTWARE. AOL shall own all improvements\n and modifications to any preexisting software or technology of either\n party, any new software and technology created through Collaborative\n Development Activity to create the Client Software and/or New Browser,\n and all newly-created intellectual property rights therein, whether\n completed or work in progress. Sun shall own all improvements and\n modifications to any preexisting software of either party and any new\n software and \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 22\n\n 23\n\n\n technology created through Collaborative Development Activity to create\n the Network Application and Server Software and all newly-created\n intellectual property rights therein.\n\n 9.3 AOL LICENSE TO SUN. AOL hereby grants to Sun and its subsidiary, Sun\n Microsystems International, B.V. (\"Sun International B.V.\") a Software\n License to all Designated Collaborative Software owned by AOL pursuant\n to Sections 9.1 and/or 9.2, subject only to the payment by Sun of the\n amounts provided in this Agreement. Such license shall be unrestricted\n as to field of use, except for those limitations set forth in Section\n 6.6 and 6.7. AOL also hereby grants to Sun a non-exclusive, perpetual,\n non-terminable, fully sublicensable right under any patents issued\n anywhere in the world for which AOL is or becomes the beneficial or\n legal owner which were reduced to practice in the course of the\n Collaborative Development Activity to make, have made, practice, have\n practiced, use, lease, sell and otherwise transfer any and all\n inventions, methods or processes which are the subject of any claim of\n any such patent.\n\n 9.4 SUN LICENSE TO AOL. Sun shall grant to AOL a Software License to all\n Designated Collaborative Software owned by Sun pursuant to Sections 9.1\n and/or 9.2, whether written in Java or any other programming language.\n Such license shall be unrestricted as to field of use. Notwithstanding\n the foregoing grant to AOL, AOL's rights to the Java Platform shall be\n governed solely by the TLDA executed concurrently herewith by the\n parties. Sun also hereby grants to AOL a non-exclusive, perpetual,\n non-terminable, fully sublicensable right under any patents issued\n anywhere in the world for which Sun is or becomes the beneficial or\n legal owner which were reduced to practice in the course of the\n Collaborative Development Activity to make, have made, practice, have\n practiced, use, lease, sell and otherwise transfer any and all\n inventions, methods or processes which are the subject of any claim of\n any such patent.\n\n 9.5 PROCEDURES FOR LITIGATING PROPRIETARY RIGHTS CLAIMS AGAINST THIRD\n PARTIES. AOL and Sun agree to cooperate with one another and to\n negotiate in good faith procedures and terms and conditions permitting\n each party to pursue infringement claims against third parties with\n respect to the Designated Collaborative Software and other rights\n licensed to one another pursuant to this Agreement. The parties will\n consider and discuss whatever arrangements might most efficiently and\n fairly permit such actions to be pursued, which might include, by way of\n example, an assignment of an undivided joint interest in the software at\n issue in order to confer standing to sue on the party seeking to bring\n such action, an agreement by which the other party is joined as a party\n plaintiff in the action with provisions allocating the responsibilities\n and costs of litigating such claims, or some other mechanism.\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 23\n\n 24\n\n\n 9.6 LICENSE TO EXISTING NETSCAPE SOFTWARE.\n\n 9.6.1 LICENSE FOR DEVELOPMENT. As of the Closing Date, as\n between AOL and Sun, AOL shall own all rights in and\n shall grant to Sun a Software License to the Existing\n Netscape Software. AOL may also elect to grant to Sun a\n Software License to any Existing Netscape Software\n Upgrades that AOL makes available for Collaborative\n Development Activities pursuant to this Agreement. Such\n license shall be subject to the limitations set forth in\n this Agreement on Sun's marketing and licensing thereof\n during the term of this Agreement, which shall include\n those limitations set forth in Sections 6.3, 6.6 and 6.7\n of this Agreement as well as limitations during and\n after the term of this Agreement permitting Sun and Sun\n International B.V. to use the Existing Netscape Software\n (and any Existing Netscape Software Upgrades, if any,\n licensed to Sun) solely for purpose of developing the\n New Browser, the OEM Communicator Client, and the\n Designated Collaborative Software as part of the\n Collaborative Development Activity. Such licenses shall\n also be subject to any contractual restrictions with\n third parties for the duration of such contractual\n restrictions. AOL represents that concurrently with the\n execution of this Agreement, AOL is obtaining from\n Netscape contractual commitments requiring that Netscape\n cooperate with AOL between the date of this Agreement\n and the Closing Date to identify any \"Encumbrances\" (as\n defined in this Section) that may adversely affect AOL's\n rights to Netscape Existing Software and/or any\n components thereof as set forth below, including without\n limitation AOL's rights to grant others access to source\n code and sublicense such rights. Such cooperation shall\n include granting AOL full access to Netscape technology\n licenses, agreements by which technology rights were\n acquired by Netscape and information regarding\n intellectual property infringement or misappropriation\n claims, if any, relating to the Netscape Existing\n Software and all components thereof. As used in this\n Section, \"Encumbrances\" means any restriction or limit\n that would prevent or materially limit or restrict AOL\n from granting pursuant to this Agreement the applicable\n source and binary access, use and distribution rights\n under Sections 9.6.1, 9.6.2 and 14.7 of the Agreement\n with respect to the Netscape Existing Software or any\n component thereof (\"Sun License Rights\"), including,\n without limitation, limitations and restrictions on\n source access and sublicensing fights, as well as\n prohibitions or requirements to obtain consents to\n assignment of rights from Netscape to AOL upon the\n Closing Date where to failure to obtain such consent\n would materially limit or restrict AOL's rights,\n including sublicensing rights. AOL further represents\n that it is obtaining from Netscape concurrently with the\n execution of this Agreement contractual commitments\n obligating Netscape to use reasonable efforts to remove,\n limit or diminish such \n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n\n 24\n\n 25\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n Encumbrances, in a priority order to be specified by\n AOL. After the Closing Date, AOL shall continue such\n efforts. *** APPROXIMATELY 4 LINES OMITTED *** Sun and\n AOL will consider the scope and impact of any such\n Encumbrances in determining what work to undertake\n pursuant to the Collaborative Development Plans and the\n products to be included in the Product Suites.\n\n 9.6.2 RESELLER RIGHTS. AOL shall grant to Sun, effective as of\n the Closing Date and continuing for the term of this\n Agreement, (a) the right to distribute the Existing\n Netscape Software in binary form only except as set\n forth below; (b) the right to use the source code for\n the Existing Netscape Software solely for purposes of\n supporting and maintaining the binary copies distributed\n to Sun customers; and (c) the right to license the\n source code for the Existing Netscape Software to OEM\n licensees solely for the purpose of permitting such OEM\n licensees to support and maintain the binary copies\n distributed by such OEMs, provided that Sun may provide\n such source code to OEM licensees only pursuant to the\n terms of a written agreement substantially in\n conformance with a form approved by AOL, which approval\n shall not be unreasonably withheld or delayed,\n containing customary terms and conditions to preserve\n the confidentiality of such source code and containing\n customary limitations and disclaimers of warranties and\n exclusions and limitations of liability. The rights\n granted to Sun pursuant to this Section 9.6.2 with\n respect to the Existing Netscape Software shall\n terminate upon expiration or termination of this\n Agreement, except that Sun shall retain thereafter a\n limited source code license to retain and use such\n software solely for the support of existing customers as\n of such expiration or termination.\n\n 9.6.3 DELIVERY. Promptly following the Closing Date, AOL will\n deliver to Sun a copy of all Existing Netscape Software\n that is subject to the license granted pursuant to\n Section 9.6.1 and 9.6.2.\n\n 9.7 POST TERMINATION RIGHTS. The license rights of the parties following\n expiration or termination of this Agreement are set forth in Sections\n 14.5 and 14.7.\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 25\n\n 26\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n 9.8 LICENSE FEES.\n\n 9.8.1 PAYMENTS FROM AOL TO SUN. AOL shall pay to Sun quarterly\n license fees of $5 million per quarter during the term\n of this Agreement for the Sun-owned components licensed\n to AOL by Sun pursuant to Section 9.4. No license fee\n shall be required after expiration or termination of\n this Agreement for any such license rights that survive\n termination. AOL may allocate up to *** of the fees\n under this section to any payments required under any\n TLDA between Sun and AOL, and any unused balance of such\n amounts not applied to TLDA fees may be carried forward\n and applied to future fees under any TLDA. \n\n 9.8.2 PAYMENTS FROM SUN TO AOL. Sun shall pay to AOL quarterly\n license fees during the term of this Agreement for the\n software and trademark rights granted to Sun by AOL\n pursuant to Sections 9.3, 9.6 and 12, which shall be\n Eighty-Six Million Dollars ($86,000,000) for the first\n year following the Closing Date, Ninety-Five Million\n Five Hundred Thousand Dollars ($95,500,000) for the\n second year following the Closing Date, and Ninety-Seven\n Million Dollars ($97,000,000) for the third year\n following the Closing Date, payable in quarterly\n payments as provided in Section 8.1. No license fee\n shall be required after expiration or termination of the\n definitive agreement for any such license rights that\n survive termination.\n\n10.0 NETCENTER.\n\n 10.1 OBJECTIVES. AOL shall develop the Netcenter to be a portal for a\n variety of customers with a focus on business customers in terms of the\n services, information and customization options offered.\n\n 10.2 OWNERSHIP. AOL owns and controls the Netcenter without restriction\n and shall be responsible for all of its associated costs.\n\n 10.3 PORTAL REVENUES. Notwithstanding anything to the contrary herein,\n AOL shall retain all revenue, and bear all costs, related to or derived\n from the Netcenter.\n\n 10.4 PROMOTION. Sun agrees to cooperate with AOL to make the Netcenter\n the Sun default network portal for the Product Suites and to help gain\n additional traffic for the Netcenter. Without limiting the foregoing,\n the Netcenter will be the default home page in the New Browser, Third\n Party Communicator Client and OEM Communicator Client, any client\n applications developed by Sun pursuant to Section 3.10, the HotJava\n browser\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 26\n\n 27\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n and, to the extent practicable and commercially reasonable, the Bedouin\n browser or any other thin client browser used on platforms other than\n personal computers and workstations, although Sun customers shall not be\n required to maintain such home page against their will. ***\n APPROXIMATELY 5 LINES OMITTED *** Sun shall always position the\n Netcenter in its meetings, promotions and advertising no less favorably\n than any other portal addressed in such meetings, promotions and\n advertising, if any, but the parties recognize and agree that the\n objectives of this Agreement require that Sun market and distribute the\n Product Suites and System Platform to other connectivity and portal\n vendors without restriction, and in such cases such other connectivity\n and portal vendors shall have the right to use and promote their own\n home pages and/or portals in connection with the Products Suites and\n System Platform.\n\n11.0 SYSTEMS PLATFORM.\n\n 11.1 OWNERSHIP. Sun owns and controls the Sun System Platform without\n restriction and shall be responsible for all of its associated costs.\n Sun shall develop the Sun System Platform to be the premiere foundation\n for Product Suites customers in terms of its performance, scalability,\n reliability and cost-effectiveness.\n\n 11.2 PROMOTION. AOL agrees to cooperate with Sun to make the Sun System\n Platform the AOL preferred System Platform for Products Suites for both\n AOL and AOL EC Service Opportunities. AOL shall always position the Sun\n System Platform in its meetings, promotions and advertising no less\n favorably than any other Systems Platform addressed in such meetings,\n promotions and advertising, if any, but the parties recognize and agree\n that the objectives of this Agreement may require that AOL market and\n distribute the Product Suites on other System Platforms to meet customer\n requirements.\n\n12.0 BRANDING.\n\n 12.1 OWNERSHIP. Each party shall retain all rights, title and other\n interest to its brand names, service marks, trademarks and other\n proprietary markings except as expressly provided otherwise in this\n Agreement.\n\n 12.2 BRAND NAMES AND TRADEMARKS. Subsequent to the execution of this\n Agreement and prior to the Closing Date, AOL and Sun shall negotiate in\n good faith and enter into a written trademark license, which shall\n include reasonable and customary terms, including appropriate quality\n control provisions, pursuant to which AOL shall license to Sun on a\n royalty-free, non-sublicensable basis effective as of the Closing Date:\n (a) the right to use the Netscape Communicator trademark in connection\n with the Third-Party Communicator \n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 27\n\n 28\n\n\n Client and related sales and marketing materials, and shall license to\n Sun the right to use successors or replacements of the Netscape\n Communicator trademark in connection with the Third-Party Communicator\n Client and related sales and marketing materials, provided the\n Third-Party Communicator Client meets the requirements for branding with\n such mark(s); (b) the right to use the Netscape trademarks that Netscape\n currently uses as the titles for the Existing Netscape Software in\n connection with the collaborative marketing and sales of the Existing\n Netscape Clients pursuant to this Agreement; and (c) such other\n trademarks, if any, as AOL and Sun may mutually agree. Such trademarks\n shall be licensed to Sun following expiration or termination of this\n Agreement subject to reasonable quality control requirements and a\n reasonable transition period (not to exceed fifteen (15) months) and\n plan which shall be set forth in the definitive trademark license. Such\n trademark license shall also provide for a trademark license from AOL to\n Sun to use the Netscape Communicator trademark, and such other\n trademarks, if any, as AOL and Sun may mutually agree, for any software\n developed by Sun pursuant to Section 3.10, subject to such software\n meeting AOL's reasonable quality control and other transition\n requirements for such branding and subject to a phase-out of Sun's use\n of such trademarks in connection with such products after a reasonable\n transition period (not to exceed fifteen (15) months).\n\n 12.3 BRANDING OF COLLABORATIVE SOFTWARE. The branding for the\n Collaborative Software shall be determined by mutual agreement of the\n Lead Executive and Deputy Lead Executive for marketing and sales, and\n each party shall have the right to use such marks in connection with the\n Product Suites and related sales and marketing materials during the term\n of this Agreement. Following any expiration or termination of this\n Agreement, Sun shall retain ownership of any trademark by which the\n entire Product Suites are identified, subject to transition or phase-out\n terms permitting continued use by AOL for a reasonable transition period\n (not to exceed fifteen (15) months), which terms and conditions shall be\n negotiated in good faith and embodied in a written trademark license\n agreement. Following any expiration or termination of the Agreement, Sun\n and AOL shall each have the non-exclusive right to use any titles by\n which the individual Network Application and Server Products in the\n Product Suites were identified during the term of this Agreement,\n provided that AOL and Sun shall differentiate their uses of such marks\n following any expiration or termination of this Agreement by always\n using any such mark in connection with a name or trademark prominently\n identifying AOL or Sun as the source of such goods or services (for\n example, AOL Commerce Server and Sun Commerce Server).\n\n13.0 EMPLOYEE INCENTIVES.\n\n 13.1 INCENTIVE PLAN. The parties recognize and agree that proper\n motivation and economic incentives for their respective employees\n engaged in the Collaborative Development Activity and collaborative\n marketing and sales is essential to its success and shall create and\n operate an Incentive Plan (\"Incentive Plan\") for all employees \n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 28\n\n 29\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n\n engaged full-time in the Collaborative Development Activity or in\n collaborative marketing and sales. Each party shall bear its own\n expenses in connection with its respective Incentive Plans. Compensation\n for the collaborative marketing and sales force will consist of base\n salary with an additional commission/incentive opportunity, and the\n commission incentive plan will (i) represent a significant part of each\n individual's total annual compensation (base salary plus\n commission/incentive plan) and (ii) support the metrics included in the\n Marketing and Sales Plan. The parties commit to cooperate with one\n another to complete the Incentive Plan as soon as practicable and\n commercially reasonable and prior to the Closing.\n\n 13.2 SENIOR MANAGERS. All senior managers and above shall receive a\n significant portion of their compensation through an annual bonus\n program, tied to performance under the Collaborative Development Work\n Plans and/or Marketing and Sales Plans, and paid annually to those\n employees still employed by either party as of the date of payment of\n the bonus.\n\n 13.3 SALES REPRESENTATIVES. All sales representatives shall receive a\n significant portion of their compensation through an incentive bonus\n program tied to meeting objectives under the Marketing and Sales Plans.\n\n 13.4 POOL FOR ALL PERSONNEL. The Lead Executives and Deputy Lead\n Executive from each party, respectively, may make periodic project and\n spot bonus payments tied to performance under the Collaborative\n Development Work Plans and/or Marketing and Sales Plans, to employees of\n such party from a pool of funds of up to*** of total salaried\n compensation for all personnel employed by such party in such\n activities.\n\n 13.5 LEAD EXECUTIVES AND DEPUTY LEAD EXECUTIVES. At least one-half of\n the total incentive compensation by MC for any Lead Executives or Deputy\n Lead Executives (other than an Executive Officer of Sun or AOL, if a\n Lead Executive or Deputy Lead Executive is an Executive Officer) must be\n provided under the IP.\n\n14.0 TERMINATION.\n\n 14.1 TERM. This Agreement shall terminate at midnight Pacific Daylight\n Time on the date three (3) years following the Closing Date.\n\n 14.2 EARLY TERMINATION. This Agreement assumes the intended merger of\n Netscape and AOL. If the Closing Date does not occur on or before June\n 30, 1999, the parties agree to negotiate in good faith for a period of\n thirty (30) days thereafter in an effort to \n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 29\n\n 30\n\n\n agree on alternative terms to achieve as much as possible the same\n effect as this Agreement using solely Sun technology, provided that if\n the parties fail to agree on such alternative terms within such thirty\n (30) day period, either party may elect to terminate this Agreement by\n giving written notice to the other party.\n\n 14.3 TERMINATION FOR BREACH. Subject to Section 7.2 of this Agreement,\n either party may terminate this Agreement for a material breach of its\n terms by the other party by giving the other party written notice at\n least ninety (90) days in advance of such termination date, and the\n Agreement shall terminate on that date unless the breaching party has\n cured or corrected such breach prior to that time, provided that such\n ninety (90) day period shall be shortened to a ten (10) business day\n cure period following written notice in the event of a failure to pay\n amounts due pursuant to this Agreement. Without limiting the foregoing,\n in the event Sun fails to pay any amounts due to AOL pursuant to this\n Agreement, including without limitation minimum fees or revenues\n provided for in Sections 4.1.5, 4.5 and 9.8.2, and fails to cure such\n breach within the ten (10) business day cure period provided for in this\n Section, AOL shall have the right, exercisable upon written notice to\n Sun, without limiting any of AOL's other rights or remedies, to\n terminate this Agreement and all licenses granted to Sun by AOL,\n including all licenses granted to Sun by AOL pursuant to Sections 9.3,\n 9.6 and 12 (in which event Sun will have no license rights pursuant to\n Section 14.7.1 or 14.7.2). In the event of a termination of this\n Agreement and all licenses granted to Sun by AOL as a result of Sun's\n failure to pay any minimum fees and revenues in a timely manner, Sun's\n obligation to pay all minimum fees and revenues provided for in Sections\n 4.1.5, 4.5 and 9.8.2 shall be accelerated so as to make all such fees\n and revenues be due and payable immediately. Notwithstanding anything to\n the contrary set forth in this Agreement, AOL shall have no right to\n terminate the licenses granted to Sun by AOL pursuant to Sections 9.3,\n 9.6 and 12, except for a failure by Sun to pay any fees and revenues due\n pursuant to this Agreement and a failure to cure such breach in a timely\n manner as provided in this Section 14.3.\n\n 14.4 LIMITATION ON AOL RIGHT TO TERMINATE LICENSES. Except in the event\n Sun fails to pay the fees payable under Sections 4.1.5, 4.5 and 9.8.2 as\n required in Section 8 (the \"Specified Payment Obligations\"), AOL shall\n have no right whatsoever to terminate or reduce Sun's license rights set\n forth in Sections 9.4, 9.6.1, 9.6.2, 12.2, 12.3, 14.7.1 or 14.7.2 (the\n \"Licenses\") on the basis of any alleged breach by Sun of any of its\n obligations pursuant to this Agreement or for any other reasons, except\n to the extent permitted pursuant to a final, non-appealable judgment\n obtained from a court of competent jurisdiction in litigation between\n AOL and Sun. Notwithstanding anything to the contrary set forth in this\n Agreement, in the event AOL believes that Sun has breached any\n obligations under this Agreement, other than the Specified Payment\n Obligations, AOL shall have no right to terminate or reduce such\n licenses, even if AOL has terminated or purported to terminate this\n Agreement, and AOL's sole and exclusive remedy shall be to litigate the\n dispute, provided that nothing contained herein shall be deemed to limit\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 30\n\n 31\n\n\n AOL's right to enforce the limitations set forth in this Agreement on\n the scope or duration of such licenses. Sun shall be entitled to\n injunctive relief to prevent AOL from terminating or limiting such\n licenses in any way other than as expressly allowed in this Section.\n\n 14.5 TERMINATION ON A CHANGE IN CONTROL. During the term of this\n Agreement, if either party is acquired or if any third-party acquires\n effective voting control of either party, such party shall promptly\n notify the other party in writing, and the other party may terminate\n this Agreement effective six (6) months after receipt of such notice;\n provided that if Sun terminates this Agreement pursuant to this Section\n 14.4, it shall be obligated to continue to pay all then remaining\n minimum payments and fees that would have been due if this Agreement had\n expired on the date set forth in Section 14.1, when and as such minimum\n payments and fees would otherwise be payable pursuant to this Agreement.\n\n 14.6 AOL POST TERMINATION LICENSE RIGHTS. Following any expiration or\n termination of this Agreement, AOL shall be free to further develop and\n enhance the Designated Collaborative Software for its own account in all\n respects, shall be entitled to full ownership of any AOL separately\n developed code based on or derived from the Designated Collaborative\n Software, including without limitation any AOL separately developed\n modifications and enhancements to the Designated Collaborative Software\n (such as, by way of example, the Third Party Communicator Client and AOL\n Distributed Communicator Client), shall have no duty to account to or\n pay Sun with respect to any use or exploitation of the Designated\n Collaborative Software, and shall not be subject to any limitations on\n field of use with respect to the Designated Collaborative Software.\n Following any expiration or termination of this Agreement, AOL shall\n have no rights of any kind to any software developed by Sun, which does\n not constitute Collaborative Software or Designated Collaborative\n Software.\n\n 14.7 SUN POST TERMINATION LICENSE RIGHTS.\n\n 14.7.1 DESIGNATED PRODUCTS. As used in this Agreement,\n \"Designated Products\" means (a) any network applications\n and server software included in the Product Suites or\n marketed and sold through Collaborative Marketing and\n Sales Activities pursuant to the Marketing and Sales\n Plan at any time during the term of this Agreement, and\n (b) the Designated Collaborative Software. Except as\n provided in Section 14.3, Sun and Sun International B.V.\n shall be granted effective upon expiration or\n termination of this Agreement a Software License to the\n Designated Products and shall be free following any\n expiration or termination of this Agreement to further\n develop and enhance any Designated Products for their\n own respective accounts in all respects, shall be\n entitled to full ownership of any Sun and Sun\n International B.V. separately developed code based on or\n derived from the Designated Products, including without\n limitation any Sun \n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 31\n\n 32\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n separately developed modifications and enhancements to\n the Designated Products, shall have no duty to account\n to or pay AOL with respect to any use or exploitation of\n the Designated Products, and shall not be subject to any\n limitations on field of use with respect to the\n Designated Products (including without limitation those\n limitations set forth in Sections 6.3, 6.6 and 6.7 of\n this Agreement), provided that (a) AOL may elect to\n require that, within one hundred eighty (180) days\n following any expiration or termination of this\n Agreement, Sun cease to distribute and remove from any\n Designated Products and derivative works thereafter\n marketed or distributed by Sun and Sun International\n B.V. any or all AOL Service Components, as specified by\n AOL, and (b) such license shall be subject to any\n contractual restrictions with third-parties for the\n duration of such contractual restrictions.\n\n 14.7.2 THIRD PARTY COMMUNICATOR CLIENT AND AOL DISTRIBUTED\n COMMUNICATOR CLIENT. Following any expiration or\n termination of this Agreement, Sun shall have no rights\n of any kind to the Third Party Communicator Client or\n the AOL Distributed Communicator Client or any software\n developed by AOL which does not constitute Designated\n Software, other than a limited source code license to\n retain and use such software solely for the support of\n existing customers as of such expiration or termination.\n\n 14.7.3 DELIVERY. Promptly following expiration or termination\n of this Agreement, AOL shall deliver to Sun a copy of\n all source code and binary code comprising the\n Designated Products to the extent Sun does not already\n have such code in its possession.\n\n 14.8 PURCHASE OF SUN PRODUCTS AND SERVICES POST-TERMINATION.\n\n 14.8.1 EC(2) PRODUCTS AND SERVICES. For seven years after the\n expiration or termination of this Agreement for any\n reason other than (a) a termination by Sun arising from\n a material breach by AOL or (b) a termination pursuant\n to Section 14.2 resulting from a failure of the Closing\n Date to occur, AOL will be entitled to purchase Sun ***\n\n 14.8.2 OTHER PRODUCTS AND SERVICES. For seven years after the\n expiration or termination of this Agreement for any\n reason other than (a) a termination \n by Sun arising from a material breach by AOL or (b) a\n termination \n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 32\n\n 33\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n pursuant to Section 14.2 resulting from a failure of the\n Closing Date to occur, AOL will be entitled to purchase\n ***\n\n 14.9 POST TERMINATION LIMITATIONS. For a period of eighteen (18) months\n following any termination or expiration of this Agreement (other than a\n termination arising from a material breach by the other party), each\n party agrees to continue to market and distribute the Network\n Applications and Server Software in a manner generally consistent with\n the manner in which such Network Applications and Server Software were\n marketed and distributed by such party during the term of this\n Agreement, and each party agrees not to sell or dispose of all or\n substantially all of its respective rights in such software during such\n eighteen (18) month period, provided that this Section shall not be\n deemed to limit or prohibit either party from selling or disposing of\n such rights in connection with a merger or sale of assets in which a\n third party acquires or succeeds to all or substantially all of such\n party's assets, including such rights.\n\n15.0 GENERAL REPRESENTATIONS AND WARRANTIES.\n\n 15.1 AOL REPRESENTATIONS AND WARRANTIES. AOL warrants, covenants and\n represents to Sun that:\n\n 15.1.1 AOL has the full corporate right, power and authority to\n enter into this Agreement and to perform the acts\n required of it pursuant to this Agreement;\n\n 15.1.2 the execution of this Agreement and the performance by\n AOL of its obligations and duties under this Agreement\n shall not violate any agreement to which AOL is a party\n or the rights of any other party; and\n\n 15.1.3 AOL is not relying on nor does Sun make any\n representations, warranties or agreements not expressly\n provided for in this Agreement.\n\n 15.2 SUN REPRESENTATIONS AND WARRANTIES. Sun warrants, covenants and\n represents to AOL that:\n\n 15.2.1 Sun has the full corporate right, power and authority to\n enter into this Agreement, to perform the acts required\n of it;\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 33\n\n 34\n\n\n 15.2.2 the execution of this Agreement and the performance by\n Sun of its obligations and duties under this Agreement\n shall not violate any agreement to which Sun is a party\n or the rights of any other party; and\n\n 15.2.3 Sun is not relying on nor does AOL make any\n representations, warranties or agreements not expressly\n provided for in this Agreement; and\n\n16.0 NO PROPRIETARY RIGHTS INDEMNITY. Neither AOL nor Sun makes any warranties\nwith respect to noninfringement and expressly disclaim all implied warranties of\ntitle and against infringement. Neither AOL nor Sun shall have any obligation to\ndefend or indemnify the other against any third party claims of infringement or\nmisappropriation of any proprietary rights in any materials or technology\nprovided by either party to the other or developed pursuant to this Agreement.\n\n17.0 OTHER REMEDIES CUMULATIVE. Except where otherwise specified, the rights and\nremedies granted to a party under this Agreement are cumulative and in addition\nto, and not in lieu of, any other rights or remedies which the party may possess\nat law or in equity, including, without limitation, rights or remedies under\napplicable patent, copyright, trade secret or proprietary rights laws, rules or\nregulations.\n\n18.0 AUDIT RIGHTS. AOL and Sun agree to allow mutually acceptable independent\nCPA auditors, which auditors shall not be compensated on a contingency basis and\nshall be bound to keep all information confidential except as necessary to\ndisclose discrepancies to the other party, to audit and analyze relevant\naccounting records of each other to ensure compliance with all terms of this\nAgreement. Any such audit shall be permitted within thirty (30) days of one\nparty's receipt from the other of a written request to audit, during normal\nbusiness hours, at a time mutually agreed upon. The cost of such an audit shall\nbe borne by the requesting party unless a material discrepancy is found, in\nwhich case the cost of the audit shall be borne by the other party. A\ndiscrepancy shall be deemed material if it involves a payment or adjustment of\nmore than five percent (5%) of the amount actually due from the paying party in\nany given quarter. Audits shall occur no more frequently than once per calendar\nyear and shall not interfere unreasonably with the audited party's business\nactivities and shall be conducted in the audited party's facilities during\nnormal business hours on reasonable notice. An audit may cover any period;\nprovided that: (i) the period has not been previously audited; and (ii) the\nperiod under audit is within a three year period immediately preceding the\ncommencement of the audit. A party shall promptly reimburse the other for the\namount of any discrepancy arising out of such audit which indicates that such\nparty is owed amounts hereunder as well as the costs of the audit, if\napplicable, as provided above.\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 34\n\n 35\n\n\n19.0 LIMITATION OF LIABILITY; EXCLUSION OF DAMAGES; DISCLAIMER OF WARRANTIES.\n\n 19.1 EXCLUSION OF DAMAGES. NEITHER PARTY HERETO SHALL, UNDER ANY\n CIRCUMSTANCES, BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL,\n SPECIAL OR EXEMPLARY DAMAGES, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH\n DAMAGES OCCURRING.\n\n 19.2 LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER\n PARTY'S TOTAL LIABILITY OF ALL KINDS ARISING OUT OF OR RELATED TO THIS\n AGREEMENT REGARDLESS OF THE FORUM AND REGARDLESS OF WHETHER ANY ACTION\n OR CLAIM IS BASED IN CONTRACT, TORT NEGLIGENCE OR OTHERWISE, EXCEED THE\n SUM OF (a) FIFTY MILLION DOLLARS; PLUS (b) ALL AGGREGATE AMOUNTS PAID BY\n SUCH PARTY TO THE OTHER FOLLOWING NOTIFICATION TO THE OTHER PARTY OF AN\n ALLEGED MATERIAL BREACH GIVING RISE TO AN ALLEGED RIGHT OF TERMINATION.\n\n 19.3 EXCEPTIONS. THE EXCLUSIONS OF DAMAGES AND LIMITATIONS OF LIABILITY\n SET FORTH IN SECTIONS 19.1 AND 19.2 SHALL NOT OPERATE TO LIMIT (a)\n AMOUNTS ACTUALLY DUE AND PAYABLE PURSUANT TO THE EXPRESS TERMS OF THIS\n AGREEMENT, OR (b) AMOUNTS OTHERWISE RECOVERABLE BY ONE PARTY FROM THE\n OTHER IN AN ACTION AT LAW OR IN EQUITY ARISING FROM THE OTHER PARTY'S\n INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENTS, COPYRIGHTS, TRADE\n SECRETS OR OTHER PROPRIETARY RIGHTS DURING OR AFTER THE TERM OF THIS\n AGREEMENT, INCLUDING WITHOUT LIMITATION INFRINGEMENT OR MISAPPROPRIATION\n CLAIMS ARISING FROM THE OTHER PARTY'S BREACH OF THIS AGREEMENT.\n\n 19.4 DISCLAIMER OF WARRANTIES. NEITHER SUN NOR AOL MAKES ANY WARRANTIES\n TO THE OTHER WITH RESPECT TO THE OPERATION OR PERFORMANCE OF ANY OF THE\n SOFTWARE DEVELOPED OR LICENSED BY EITHER PARTY TO THE OTHER PURSUANT TO\n THIS AGREEMENT, AND SUN AND AOL EACH HEREBY DISCLAIMS ALL SUCH\n WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED\n WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.\n\n20.0 MISCELLANEOUS PROVISIONS\n\n 20.1 NOTICES. Any notice, consent, approval, request, authorization,\n direction or other communication under this Agreement (\"Notice\") that is\n required to be given in writing will be deemed to have been delivered\n and given for all purposes (i) on the delivery date if delivered by\n confirmed facsimile; (ii) on the delivery date if delivered personally\n to the \n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 35\n\n 36\n\n\n party to whom the same is directed; (iii) one business day after deposit\n with a commercial overnight carrier, with written verification of\n receipt; or (iv) five business days after the mailing date, whether or\n not actually received, if sent by U.S. mail, return receipt requested,\n postage and charges prepaid, or any other means of rapid mail delivery\n for which a receipt is available. In the case of AOL, such notice will\n also be deemed to have been delivered and given for all purposes on the\n delivery date if delivered by electronic mail from an AOL.com email\n address via the U.S. America Online brand service to screenname\n \"AOLNotice@AOL.com.\" Notices shall be addressed as follows:\n\n To Sun:\n\n In the case of Sun, such notice will be provided to\n both:\n\n Chief Strategy Officer\n Sun Microsystems, Inc.\n 901 San Antonio Road\n MS CUP-01\n Palo Alto, California 94033\n Fax no.\n\n And\n\n Vice President and General Counsel\n Sun Software and Technology\n 901 San Antonio Road\n MS CUP-01\n Palo Alto, California 94033\n Fax No. (408) 517-1757\n\n To AOL:\n\n In the case of AOL, such notice will be provided to\n both:\n\n Senior Vice President for Business Affairs\n America Online, Inc.\n 22000 AOL Way\n Dulles, Virginia 20166\n Fax no. 703-265-1206\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 36\n\n 37\n\n\n\n And\n\n Deputy General Counsel\n American Online, Inc.\n 22000 AOL Way\n Dulles, Virginia 20166\n Fax no. 703-265-1105\n\n 20.2 SECTION 365(n) OF BANKRUPTCY CODE. All rights and licenses granted\n under or pursuant to this Agreement by Sun to AOL or by AOL to Sun are,\n and shall otherwise be deemed to be, for purposes of Section 365(n) of\n the United States Bankruptcy Code, 11 U.S.C. Section 101, et seq. (the\n \"Bankruptcy Code\"), licenses of rights to \"intellectual property\" as\n defined under Section 101(56) of the Bankruptcy Code. The parties agree\n that AOL and Sun, as licensees of such rights and licenses, shall retain\n and may fully exercise all of their respective rights and elections\n under the Bankruptcy Code; provided such licensee party abides by the\n terms of this Agreement.\n\n 20.3 DUE DILIGENCE. In connection with the intended merger of AOL and\n Netscape, AOL and Sun has each conducted certain due diligence with\n respect to Netscape and its products, services, business and technology.\n At Sun's request, AOL has made available to Sun certain information and\n analysis learned or developed by AOL in the course of its due diligence.\n Neither Sun nor AOL makes any representations or warranties to the other\n regarding Netscape or any aspect of its business, products, services or\n technology, and Sun and AOL each understands, acknowledges and agrees\n that it is responsible for conducting whatever due diligence it may\n desire to conduct. Neither AOL nor Sun makes any representations or\n warranties to the other regarding the accuracy of any materials provided\n to either party by Netscape or the accuracy of any analysis or\n conclusions which either party may have made based on any such\n information provided by Netscape or the accuracy of any such\n information, materials, analysis or conclusions which AOL and Sun may\n have provided to the other party.\n\n 20.4 EMPLOYEES. Each party shall be responsible for paying all salaries,\n wages, employee benefits and associated expenses for which its own\n employees are eligible under such party's employment policies, any\n legally required benefits or insurance, any taxes or governmental\n charges payable or subject to withholding in connection with the\n employment of such party, and any expenses associated with such\n employees activities under this Agreement. Each party shall have\n exclusive supervision and control with respect to its own respective\n employees and shall have no right to supervise, control, discipline,\n terminate or reassign any employees of the other party. In the event\n that either party makes a reasonable and good faith determination that\n an employee of the other party working on Collaborative Development\n Activities or Collaborative Marketing and Sales Activities lacks\n requisite skills or experience, does not work well with other project\n team members, or is otherwise unsatisfactory, the parties will consult\n with one another in \n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 37\n\n 38\n\n\n good faith regarding whether such employee should be replaced, provided\n that the final determination as to whether to retain, reassign or\n terminate any employee shall be made solely by the party employing such\n individual.\n\n 20.5 NON-EXCLUSIVITY. Sun and AOL agree except for any express\n obligations of AOL and Sun as set forth in this Agreement, nothing in\n this Agreement is intended or shall be construed to prohibit or restrict\n either AOL or Sun from developing or acquiring products or services\n similar to or competitive with products or services of the other party.\n\n 20.6 WAIVER. The waiver by either party of a breach of or a default\n under any provision of this Agreement, shall not be construed as a\n waiver of any subsequent breach of the same or any other provision of\n the Agreement, nor shall any delay or omission on the part of either\n party to exercise or avail itself of any right or remedy that it has or\n may have hereunder operate as a waiver of any right or remedy. Except as\n expressly provided herein to the contrary, no amendment or modification\n of any provision of this Agreement shall be effective unless in writing\n and signed by a duly authorized signatory of Sun and AOL.\n\n 20.7 COSTS AND EXPENSES. Except as expressly provided herein to the\n contrary, each party shall be responsible for its costs and expenses\n incurred in connection with the negotiation and execution of this\n Agreement and its performance hereunder.\n\n 20.8 NO PARTNERSHIP. No agency, partnership, joint venture, or\n employment is created as a result of this Agreement and neither AOL nor\n AOL's agents shall have any authority of any kind to bind Sun in any\n respect whatsoever, nor shall Sun or Sun's agents have any authority of\n any kind to bind AOL.\n\n 20.9 HEADINGS. The captions and section and paragraph headings used in\n this Agreement are inserted for convenience only and shall not affect\n the meaning or interpretation of this Agreement.\n\n 20.10 ATTORNEYS' FEES. If any party to this Agreement brings an action\n against the other party to enforce its rights under this Agreement, the\n prevailing party shall be entitled to recover its costs and expenses,\n including without limitation, attorneys' fees and costs incurred in\n connection with such action, including any appeal of such action.\n\n 20.11 SEVERABILITY. If the application of any provision or provisions of\n this Agreement to any particular facts of circumstances shall be held to\n be invalid or unenforceable by any court of competent jurisdiction,\n then: (i) the validity and enforceability of such provision or\n provisions as applied to any other particular facts or circumstances and\n the validity of other provisions of this Agreement shall not in any way\n be affected or impaired thereby, and (ii) such provision or provisions\n shall be reformed without further \n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 38\n\n 39\n\n\n\n action by the parties hereto and only to the extent necessary to make\n such provision or provisions valid and enforceable when applied to such\n particular facts and circumstances.\n\n 20.12 ENTIRE AGREEMENT. This Agreement, including the attachments\n hereto, constitute the entire agreement between the parties concerning\n the subject matter hereof and supersedes all proposals or prior\n agreements whether oral or written, and all communications between the\n parties relating to the subject matter of this Agreement and all past\n courses of dealing or industry custom.\n\n 20.13 NO PRESUMPTIONS. No presumption shall arise in interpreting the\n provisions of this Agreement by virtue of the role a party or its\n counsel played in drafting this Agreement or any provision hereof.\n\n 20.14 ASSIGNMENT AND SUBLICENSES. This Agreement may not be assigned by\n either party without the prior written consent of the other party,\n except that subject to the provisions of Section 14.4 of this Agreement\n permitting termination of this Agreement by either party in the event of\n an acquisition or change of control of the other party during the term\n of this Agreement: (a) either party shall have the right, without the\n other party's consent, to assign this Agreement and its rights and\n obligations thereunder to any successor of such party by way of merger\n or consolidation or the acquisition of substantially all or a material\n portion of the business and assets of the assigning party relating to\n this Agreement or the licenses granted pursuant to the definitive\n Agreement (a \"Successor\"); and (b) either party shall have the right,\n without the other party's consent, and without limiting any of its other\n rights under the licenses, to sublicense any and all licenses granted\n pursuant to this Agreement to any Successor. These rights shall be\n retained provided that such Successor or sublicensee shall expressly\n assume all of the obligations and liabilities of the assigning or\n sublicensing party to the other party relating to such definitive\n agreement or licenses.\n\n 20.15 APPLICABLE LAW. This Agreement shall be governed by the laws of\n the State of California.\n\n21.0 DEFINITIONS. As used in this Agreement, the following terms have the\nindicated meanings:\n\n 21.1 AOL EC SERVICE OPPORTUNITIES are sales opportunities to sell to a\n specific business opportunity within a commercial customer, including\n both new commerce startup companies and major established companies,\n looking to establish EC(2) relationships with AOL, where the essence of\n the sale and relationship with AOL is the provision of EC2 services\n (including, for example, providing Netcenter services, Netcenter\n offerings and/or consumer traffic) and the sale of the Product Suites is\n secondary to the transaction.\n\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 39\n\n 40\n\n\n CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY\n WITH THE SECURITIES AND EXCHANGE COMMISSION.\n ASTERISKS (*) DENOTE SUCH OMISSIONS.\n\n\n 21.2 AOL DISTRIBUTED COMMUNICATOR CLIENT or AOL DISTRIBUTED COMMUNICATOR\n CLIENT shall have the meaning specified in Section 2.1.\n\n 21.3 AOL SERVICE COMPONENTS are software, services or linkages to AOL\n Service Offerings, such as, without limitation,***, built-in software\n links to AOL default home page, etc.\n\n 21.4 AOL SERVICE OFFERINGS means AOL service offerings providing\n customers with content, electronic commerce, communication and other\n services, such as, without limitation, service portions of AOL services\n such***, default home page,***, remote dial-up access, AOL calendar,\n etc.\n\n 21.5 ASSOCIATED SERVICES means with respect to any software or hardware,\n any support, maintenance, training, installation, and other professional\n services associated with the applicable software or hardware and any\n development and customization services associated with the applicable\n software.\n\n 21.6 CLIENT SOFTWARE means the New Browser, the OEM Communicator Client,\n the Third Party Communicator Client and the AOL Distributed Communicator\n Client.\n\n 21.7 CLOSING DATE means the date on which the intended merger of AOL and\n Odyssey closes in accordance with the Agreement and Plan of Merger\n between AOL and Odyssey.\n\n 21.8 COLLABORATIVE DEVELOPMENT ACTIVITY means all activities\n contemplated under this Agreement to be conducted under Collaborative\n Development Work Plans relating to the development of certain software\n packages comprising those components of the Product Suites that are to\n be developed collaboratively by the parties.\n\n 21.9 COLLABORATIVE DEVELOPMENT WORK PLANS shall have the meaning\n specified in Section 5.3.5.\n\n 21.10 COLLABORATIVE MARKETING AND SALES ACTIVITY means all activities\n contemplated under this Agreement related to collaborative marketing and\n sales of the Product Suites, including all activities under the\n Marketing and Sales Plans\n\n 21.11 COLLABORATIVE SOFTWARE means all software developed through\n Collaborative Development Activity, including without limitation the OEM\n Communicator Client, the Third Party Communicator Client, the New\n Browser and the Network Application and Server Software. Collaborative\n Software does not include the Netcenter, the AOL\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 40\n\n 41\n\n Distributed Communicator Client, the AOL Service Components, the AOL\n Service Offerings, or the Sun Systems Platform. Collaborative Software\n does not include the Existing Netscape Software except to the extent\n that such Existing Netscape Software is modified or enhanced through\n Collaborative Development Activity to create a derivative work based on\n such Existing Netscape Software.\n\n 21.12 DESIGNATED COLLABORATIVE SOFTWARE means the Collaborative Software\n other than the Third Party Communicator Client.\n\n 21.13 DESIGNATED PRODUCTS shall have the meaning specified in Section\n 14.7.1.\n\n 21.14 DEPUTY LEAD EXECUTIVES for collaborative development activity\n shall have the meaning specified in Section 5.3.\n\n 21.15 DEPUTY LEAD EXECUTIVE for collaborative marketing and sales\n activity shall have the meaning specified in Section 5.4.\n\n 21.16 EC(2) shall have the meaning specified in Section 1.0.\n\n 21.17 EXECUTIVE REPRESENTATIVE shall have the meaning specified in\n Section 5.1.\n\n 21.18 EXISTING NETSCAPE SOFTWARE means all Netscape client and server\n software (including without limitation development tools, tests and\n other development components) in existence as of the Closing Date, and\n any maintenance upgrades and new releases of such software, if any,\n which were already in progress at Netscape, provided such upgrades or\n releases are completed and either scheduled to be commercially released\n by AOL or actually released by AOL within a period of three (3) months\n following the Closing Date. Existing Netscape Software does not include\n any software developed pursuant to Collaborative Development Activity\n contemplated under this Agreement and does not include the Third Party\n Communicator Client or AOL Distributed Communicator Client.\n\n 21.19 EXISTING NETSCAPE SOFTWARE UPGRADES means all updates,\n modifications, enhancements and new releases of the Existing Netscape\n Software, if any, which AOL elects to develop based on the Existing\n Netscape Software, which AOL develops outside of Collaborative\n Development Activities and that therefore do not constitute\n Collaborative Software pursuant to this Agreement.\n\n 21.20 GROSS MARGIN means gross revenues booked by a party in connection\n with the sale and or licensing of software and/or Associated Services\n less (a) such party's Cost of Goods associated with such software and/or\n Associated Services and (b) sales commissions paid by such party in\n connection with the sale or licensing of such software and/or Associated\n Services. For purposes of this definition, \"Cost of Goods\" means, with\n\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 41\n\n 42\n\n\n respect to software, costs of goods calculated in accordance with\n Generally Accepted Accounting Principles. For purposes of this\n definition, \"Cost of Goods\" means, with respect to Associated Services,\n all personnel and associated costs of providing such services,\n calculated in accordance with generally accepted accounting principles.\n\n 21.21 JAVA PLATFORM means the Java Virtual Machine and, with respect to\n any particular level or implementation of Java technology, such as, by\n way of example, the Java Development Kit or Personal Java, those Java\n classes required in the Sun specification for such level or\n implementation of the Java Platform technology.\n\n 21.22 JRE shall have the meaning specified in Section 3.6.\n\n 21.23 LEAD EXECUTIVES for collaborative development shall have the\n meaning specified in Section 5.3.\n\n 21.24 LEAD EXECUTIVE for collaborative marketing and sales shall have\n the meaning specified in Section 5.4.\n\n 21.25 MARKETING AND SALES PLAN shall have the meaning specified in\n Section 5.4.1.\n\n 21.26 MC shall have the meaning specified in Section 5.3.1.\n\n 21.27 MINIMUM COMMITMENT shall have the meaning specified in Section\n 4.5.\n\n 21.28 NEW BROWSER shall have the meaning specified in Section 2.4.\n\n 21.29 NETCENTER means the web site(s) operated and branded by Netscape\n as it may change from time to time, but which currently includes web\n site hosting, search engine capabilities, free email, and a variety of\n content channels covering sports, finance, entertainment and other\n topics and service offerings.\n\n 21.30 OEM COMMUNICATOR CLIENT shall have the meaning specified in\n Section 2.3.\n\n 21.31 PRODUCT SUITES means suites of products and services assembled and\n marketed pursuant to the Marketing and Sales Plan, which may include the\n Third Party Communicator Client, the OEM Communicator Client, the New\n Browser, the Network Application and Server Software, and any other\n software assembled and marketed pursuant to the Marketing and Sales\n Plan, as well as communication services, directory services, commerce\n servers, application servers, electronic mail, electronic collaboration\n software, web servers, proxy servers and other related software.\n\n 21.32 RELEASE means, with respect to any software product, the first\n commercially released version of such product and any subsequent\n commercially released versions of \n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 42\n\n 43\n\n\n such product incorporating modifications, updates, enhancements,\n corrections, patches and/or improvements.\n\n 21.33 SDK shall have the meaning specified in Section 2.4.\n\n 21.34 SE shall have the meaning specified in Section 5.4.2.\n\n 21.35 SOFTWARE LICENSE means a non-exclusive, irrevocable, perpetual,\n worldwide, royalty-free license, which (except as otherwise specified in\n this Agreement) survives termination of this Agreement, to use, modify,\n publish, reproduce, distribute, transmit, display and perform, through\n any and all methods and technologies now known or hereafter invented, in\n source or binary form, in whole or in part, alone or with other software\n or technology including the right to sublicense such rights through\n multiple tiers of distribution and being subject only to the provisions\n specifically contained in this Agreement on license fees during the term\n of this Agreement and permitted fields of use during and after the term\n of this Agreement, as applicable.\n\n 21.36 SYSTEMS PLATFORM means those platforms comprising software and\n hardware on which the Product Suites operate, whether Sun's or a third\n party's and shall include, as applicable, Microsoft Windows NT, HP-UX,\n IBM AIX and Linux in addition to Sun's software and hardware.\n\n 21.37 THIRD PARTY COMMUNICATOR CLIENT shall have the meaning specified\n in Section 2.2.\n\n 21.38 TLDA means the Technology License and Distribution Agreement\n entered into between Sun and AOL concurrently herewith.\n\n 21.39 SUN SYSTEMS PLATFORM means the Sun software and Sun hardware on\n which the Product Suites operate.\n\n\n\n\n\n\nAOL CONFIDENTIAL AND PROPRIETARY Final\nSUN CONFIDENTIAL AND PROPRIETARY\n\n\n\n 43\n\n 44\n\n\nIN WITNESS WHEREOF, the parties have executed this Strategic Development and\nMarketing Agreement this 23rd day of November, 1998.\n\n\nAMERICA ONLINE, INC. SUN MICROSYSTEMS, INC.\n\n\nBy: /s/ DAVID M. COLBURN By: /s/ WILLIAM J. RADUCHEL \n -------------------------------- --------------------------------------\n\nDavid M. Colburn William J. Raduchel\nSenior Vice President, Chief Strategy Officer\nBusiness Affairs \n\n\n\n 44\n\n\n\n \n \n\nEX-27.0\n4\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":195,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"JCI"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/833444/0000950135-99-000797.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n GPixNagjY+URInO3MrKRFnm676pnp4nwatD1+XD7GTQefOQluQdQjFmjcgo2H+Ky\n ZS3c2dbXfBZGIycfL5FepQ==\n\n0000950135-99-000797.txt : 19990217\n0000950135-99-000797.hdr.sgml : 19990217\nACCESSION NUMBER:\t\t0000950135-99-000797\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t4\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990216\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tTYCO INTERNATIONAL LTD /BER/\n\t\tCENTRAL INDEX KEY:\t\t\t0000833444\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tGENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569]\n\t\tIRS NUMBER:\t\t\t\t000000000\n\t\tFISCAL YEAR END:\t\t\t0930\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-13836\n\t\tFILM NUMBER:\t\t99541714\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\tTHE GIBBONS BUILDING\n\t\tSTREET 2:\t\t10 QUEENS STREET SUITE 301\n\t\tCITY:\t\t\tHAMILTON HM 12 BERMU\n\t\tSTATE:\t\t\tD0\n\t\tBUSINESS PHONE:\t\t4412928674\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\tC/O TYCO INTERNATIONAL (US) INC\n\t\tSTREET 2:\t\tONE TYCO PARK\n\t\tCITY:\t\t\tEXETER\n\t\tSTATE:\t\t\tNH\n\t\tZIP:\t\t\t03833\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tADT LIMITED\n\t\tDATE OF NAME CHANGE:\t19930601\n \n\n10-Q\n1\nTYCO INTERNATIONAL LTD.\n\n\n 1\n \n- --------------------------------------------------------------------------------\n- --------------------------------------------------------------------------------\n \n SECURITIES AND EXCHANGE COMMISSION\n WASHINGTON, D.C. 20549\n ------------------------\n \n FORM 10-Q\n \n [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)\n OF THE SECURITIES EXCHANGE ACT OF 1934\n \n FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998\n \n OR\n \n [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)\n OF THE SECURITIES EXCHANGE ACT OF 1934\n \n 0-16979\n (COMMISSION FILE NUMBER)\n ------------------------\n \n TYCO INTERNATIONAL LTD.\n (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)\n \n\n
\n \n THE GIBBONS BUILDING, 10 QUEEN STREET, SUITE 301, HAMILTON, HM11, BERMUDA\n (ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)\n \n 441-292-8674*\n (REGISTRANT'S TELEPHONE NUMBER)\n ------------------------\n \n Indicate by check mark whether the registrant (1) has filed all\n reports required to be filed by Section 13 or 15(d) of the Securities\n Exchange Act of 1934 during the preceding 12 months (or for such shorter\n period that the registrant was required to file such reports), and (2) has\n been subject to such filing requirements for the past 90 days. Yes\n [X] No [ ].\n \n The number of shares of common stock outstanding as of February 12,\n 1999 was 652,110,358.\n \n ------------------------\n \n * The Executive Offices of the Registrant's principal United States\n subsidiary, Tyco International (US) Inc., are located at One Tyco Park,\n Exeter, New Hampshire 03833. The telephone number there is (603)\n 778-9700.\n \n- --------------------------------------------------------------------------------\n- --------------------------------------------------------------------------------\n 2\n \n TYCO INTERNATIONAL LTD.\n \n INDEX TO FORM 10-Q\n \n\n
\n 3\n \n PART I -- FINANCIAL INFORMATION\n \nITEM 1 FINANCIAL STATEMENTS\n \n CONSOLIDATED BALANCE SHEETS\n \n\n
\n \n See notes to consolidated financial statements (unaudited).\n \n 1\n 4\n \n CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)\n \n\n
\n \n See notes to consolidated financial statements (unaudited).\n \n 2\n 5\n \n CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)\n \n\n
\n \n See notes to consolidated financial statements (unaudited).\n \n 3\n 6\n \n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)\n \n1. BASIS OF PRESENTATION\n \n The unaudited financial statements presented herein include the\nconsolidated accounts of Tyco International Ltd. (the \"Company\" or \"Tyco\"), a\ncompany incorporated in Bermuda, and its subsidiaries. The financial statements\nhave been prepared in accordance with the instructions to Form 10-Q and do not\ninclude all of the information and note disclosures required by generally\naccepted accounting principles. These statements should be read in conjunction\nwith the Company's Annual Report on Form 10-K for the fiscal year ended\nSeptember 30, 1998 (\"Form 10-K\") and the financial statements and notes thereto\nincluded in the Company's Current Report on Form 8-K filed on December 10, 1998\n(\"Form 8-K\"). As described more fully in Note 2, on October 1, 1998, Tyco merged\nwith United States Surgical Corporation (\"USSC\"). As the merger with USSC was\nconsummated subsequent to Tyco's year end, the Form 8-K was filed to present\nsupplemental consolidated financial statements reflecting the combination of\nTyco and USSC for all periods presented in accordance with the pooling of\ninterests method of accounting. Upon publication of the Company's consolidated\nfinancial statements for a period including October 1, 1998, the supplemental\nconsolidated financial statements included in the Company's Form 8-K became the\nhistorical consolidated financial statements of the Company.\n \n The consolidated financial statements presented herein have also been\nprepared following the pooling of interests method of accounting for the merger\nwith USSC and therefore reflect the combined financial position, operating\nresults and cash flows of Tyco and USSC as if they had been combined for all\nperiods presented.\n \n The accompanying financial statements have not been examined by independent\naccountants in accordance with generally accepted auditing standards, but in the\nopinion of management, such financial statements include all adjustments,\nconsisting only of normal recurring adjustments, necessary to summarize fairly\nthe Company's financial position and results of operations. Certain prior period\namounts have been reclassified to conform with the current period presentation.\n \n2. MERGERS\n \n On October 1, 1998, Tyco consummated a merger with USSC. A total of\napproximately 59.2 million shares were issued to the former shareholders of\nUSSC.\n \n Aggregate fees and expenses related to the merger and to the integration of\nthe combined companies have been expensed in the accompanying consolidated\nstatement of operations for the quarter ended December 31, 1998, as required\nunder the pooling of interests method of accounting. This includes transaction\ncosts of approximately $53.3 million consisting of legal, printing, accounting,\nfinancial advisory services and other direct expenses. It also includes charges\nof approximately $368.5 million to reflect the combination of the companies,\nincluding severance costs, integration costs, the costs associated with the\nelimination of excess facilities and the satisfaction of certain liabilities,\nand $71.5 million for the impairment of long-lived assets. See Notes 7 and 8.\n \n In connection with the merger, the Company assumed an operating lease for\nUSSC's North Haven facilities. In December 1998, the Company assumed the debt\nrelated to the North Haven property of approximately $211 million. The\nassumption of the debt combined with the settlement of certain other obligations\nin the amount of $23 million resulted in the Company acquiring ownership of the\nNorth Haven property. The total cost incurred to acquire the property of $234\nmillion was recorded on the balance sheet at December 31, 1998.\n \n On November 22, 1998, a subsidiary of Tyco entered into a definitive merger\nagreement for the acquisition of AMP Incorporated (\"AMP\"). It is estimated that\nTyco will issue up to approximately 186.0 million common shares for delivery by\nthe subsidiary to the former shareholders of AMP in the merger. The actual\nnumber of shares will be based on Tyco's weighted average stock price for a\nfifteen day trading period ending four trading days prior to AMP's shareholder\nvote on the merger. AMP, with annual revenues of\n \n 4\n 7\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \napproximately $5.5 billion, designs, manufactures and markets electronic,\nelectrical and electro-optic connection devices and associated application tools\nand machines. The acquisition of AMP, which will be accounted for as a pooling\nof interests, is subject to the approval of AMP's shareholders. Issuance of the\nTyco stock to be delivered to AMP shareholders in the merger is subject to\napproval of Tyco shareholders. The transaction is expected to close in April\n1999.\n \n3. ACQUISITIONS\n \n During the first quarter of fiscal 1999, the Company purchased businesses\nin its Healthcare and Specialty Products, Fire and Security Services and Flow\nControl Products segments for an aggregate of $972.2 million, including $831.8\nmillion in cash, net of cash acquired, and the assumption of approximately\n$140.4 million in debt. The acquisitions were made utilizing cash on hand and\nborrowings under the Company's bank credit agreement and uncommitted lines of\ncredit. Each of these acquisitions was accounted for as a purchase and the\nresults of operations of the acquired companies have been included in the\nconsolidated results of the Company from their respective acquisition dates. As\na result of the acquisitions, approximately $827.3 million in goodwill and other\nintangibles was recorded by the Company, which reflects the adjustments\nnecessary to allocate the individual purchase prices to the fair value of assets\nacquired, liabilities assumed and additional purchase liabilities recorded.\n \n The fiscal 1999 first quarter acquisitions include the acquisition of\nGraphic Controls Corporation, which was purchased for approximately $460\nmillion, including the assumption of certain outstanding debt. Graphic Controls,\na leading designer, manufacturer, marketer and distributor of disposal medical\nproducts, will be integrated with Ludlow Technical Products within the Tyco\nHealthcare Group.\n \n Additional purchase liabilities recorded during fiscal 1999 include\napproximately $28.2 million for transaction and other direct costs, $42.8\nmillion for severance and related costs and $25.7 million for costs associated\nwith the shut down and consolidation of certain acquired facilities. The $42.8\nmillion for severance costs and the $25.7 million for the shut down and\nconsolidation of facilities primarily relate to the acquisition of Graphic\nControls discussed above. These costs include employee termination benefits for\napproximately 625 employees located throughout the United States, consisting of\napproximately 370 manufacturing and distribution employees, 140 sales and\nmarketing associates, 65 technical support staff and 50 administrative\npersonnel. The costs associated with the shut down of facilities primarily\nrelate to the closing of three large manufacturing plants and, to a lesser\nextent, the consolidation of corporate facilities, sales offices and other\nlocations. At December 31, 1998, approximately 130 employees had been\nterminated. None of the manufacturing plants was shut down as of December 31,\n1998.\n \n In connection with acquisitions accounted for as purchases consummated\nduring and prior to the quarter ended December 31, 1998, liabilities for\napproximately $45.7 million in transaction and other costs, $162.2 million for\nseverance and related costs and $299.2 million for the shutdown and\nconsolidation of acquired facilities remained on the balance sheet at December\n31, 1998. The Company expects that the termination of employees and\nconsolidation of facilities related to these acquisitions will be substantially\ncomplete within one year of the related dates of acquisition.\n \n The following unaudited pro forma data summarize the results of operations\nfor the periods indicated as if these acquisitions had been completed as of the\nbeginning of the periods presented. The pro forma data give effect to actual\noperating results prior to the acquisitions and adjustments to interest expense,\ngoodwill amortization and income taxes. No effect has been given to cost\nreductions or operating synergies in this presentation. These pro forma amounts\ndo not purport to be indicative of the results that would have actually been\nobtained if the acquisitions had occurred as of the beginning of the periods\npresented or that may be obtained in the future. The pro forma data do not give\neffect to acquisitions completed subsequent to December 31, 1998.\n \n 5\n 8\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \n\n
\n \n4. LONG-TERM DEBT\n \n Long-term debt is as follows:\n \n\n
\n \n In October 1998, Tyco International Group S.A. (\"TIG\"), a wholly-owned\nsubsidiary of the Company, issued $800 million of debt in a private placement\noffering consisting of two series of Notes: $400 million of 5.875% Notes due\nNovember 2004 and $400 million of 6.125% Notes due November 2008. Interest on\neach series of Notes is payable on May 1 and November 1 of each year, beginning\nMay 1, 1999. The Notes are fully and unconditionally guaranteed by Tyco. The net\nproceeds of approximately $791.7 million were used to repay borrowings under\nTIG's $2.25 billion bank credit facility. At the same time, TIG also entered\ninto an interest rate swap agreement with a notional amount of $400 million to\nhedge the fixed rate terms of the 6.125% Notes due 2008. Under this agreement,\nwhich expires in November 2008, TIG will receive payments at a fixed rate of\n6.125% and will make floating rate payments based on LIBOR, as defined therein.\n \n During the quarters ended December 31, 1998 and 1997, respectively, 6,631\nand 124,264 of the Liquid Yield Option Notes (\"LYONs\") with a carrying value of\n$3.1 million and $55.1 million were exchanged for\n \n 6\n 9\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \n180,204 and 3,376,990 common shares of the Company. The extraordinary item of\n$2.4 million in the quarter ended December 31, 1998 relates to the write-off of\nnet unamortized deferred financing costs related to the LYONs and deferred costs\nassociated with USSC's revolver facility fees which the Company refinanced. The\nextraordinary item of $0.9 million in the quarter ended December 31, 1997 was\nthe write-off of net unamortized deferred financing costs related to the LYONs.\n \n Under TIG's bank credit agreement, the Company is required to meet certain\ncovenants, none of which is considered restrictive to the operations of the\nCompany.\n \n5. EARNINGS PER COMMON SHARE\n \n The reconciliations between basic and diluted (loss) earnings per common\nshare are as follows:\n \n\n
\n \n The computation of diluted loss per common share in the quarter ended\nDecember 31, 1998 excludes the effect of the assumed exercise of all outstanding\nstock options and warrants for approximately 42.1 million shares and the assumed\nexchange of outstanding LYONs for approximately 6.5 million shares because the\neffect would be anti-dilutive. The computation of diluted income per common\nshare in the quarter ended December 31, 1997 excludes the effect of the assumed\nexercise of approximately 16.1 million stock options that were outstanding as of\nDecember 31, 1997 because the effect would be anti-dilutive.\n \n6. CASH DIVIDENDS PER COMMON SHARE\n \n Tyco paid a quarterly cash dividend of $0.025 per common share in the\nquarters ended December 31, 1998 and 1997. Prior to its merger with Tyco, USSC\npaid a dividend of $0.04 per share in the quarter ended December 31, 1997.\n \n7. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES\n \n During the first quarter of fiscal 1999, the Company recorded merger,\nrestructuring and other non-recurring charges of $434.9 million primarily\nrelated to the merger with USSC (Notes 1 and 2). Transaction costs of $53.3\nmillion to effect the merger consists of legal, accounting, financial advisory\nservices, and other costs payable at the effective time of the merger, as well\nas other direct expenses. These were expensed as required under the pooling of\ninterests method of accounting. Costs incurred to combine USSC's disposable\nmedical products business with the related business of Tyco include the cost of\nannounced workforce reductions of $124.8 million involving the elimination of\napproximately 800 positions in the United States, 200 positions in Puerto Rico\nand 600 positions in Europe; the combination of certain facilities of $51.8\nmillion involving the closure of 20 manufacturing and distribution facilities in\nEurope and the shut down and consolidation of 30 sales and administrative\noffices located primarily throughout the United States and/or Europe; lease\ntermination costs of $156.8 million; and other costs of $35.1 million relating\nto the consolidation of certain product lines and other non-recurring charges.\nApproximately $183.4 million of accrued merger and restructuring costs are\nincluded in other current liabilities at December 31, 1998. The Company\ncurrently anticipates that the restructuring will be substantially completed by\nDecember 31, 1999.\n \n 7\n 10\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \n During the first quarter of fiscal 1998, the Company recorded restructuring\ncharges of $12.0 million related to employee severance costs, facility disposals\nand asset write-downs as part of USSC's cost cutting objectives, which was\nsubstantially completed as of December 31, 1998.\n \n8. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS\n \n During the first quarter of fiscal 1999, the Company recorded charges of\n$76.0 million for the impairment of long-lived assets in Tyco's Healthcare and\nSpecialty Products segment. This charge primarily relates to the combination of\nproperty, plant and equipment in USSC's operations in the United States and\nEurope with that of Tyco's and was determined following a review of the carrying\nvalue of their assets.\n \n9. COMPREHENSIVE INCOME\n \n During the first quarter of fiscal 1999, the Company adopted Statement of\nFinancial Accounting Standards (\"SFAS\") No.130, \"Reporting Comprehensive\nIncome.\" SFAS No.130 establishes standards for the reporting and display of\ncomprehensive income and its components in financial statements. The purpose of\nreporting comprehensive income is to report a measure of all changes in equity,\nother than transactions with owners. Total comprehensive (loss) income was\n$(5.6) million and $206.6 million for the quarters ended December 31, 1998 and\n1997, respectively. Components of other comprehensive income (loss) include\nforeign currency translation adjustments of $22.8 million and $(46.3) million\nand unrealized loss on marketable securities of $0 and $(2.0) million for the\nquarters ended December 31, 1998 and 1997, respectively. Certain prior year\namounts within shareholders' equity have been reclassified as Accumulated Other\nComprehensive Income to comply with the reporting requirements of SFAS No. 130.\n \n10. CONSOLIDATED SEGMENT DATA\n \n Selected information for the Company's four industry segments is as follows\n(in millions):\n \n\n
\n \n- ---------------\n(1) Includes merger, restructuring and other non-recurring charges of $434.9\n million and charges for the impairment of long-lived assets of $76.0\n million, primarily related to the USSC merger.\n \n(2) Includes restructuring charges of $12.0 million related to USSC's\n operations.\n \n 8\n 11\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \n11. INVENTORIES\n \n Inventories are classified as follows (in millions):\n \n\n
\n \n12. COMMITMENTS AND CONTINGENCIES\n \n In the normal course of business, the Company is liable for contract\ncompletion and product performance. In addition, the Company is involved in\nvarious stages of investigation and cleanup related to environmental remediation\nmatters at a number of sites. In the opinion of management, such obligations\nwill not materially affect the Company's financial position or results of\noperations.\n \n13. TYCO INTERNATIONAL GROUP S.A. (\"TIG\")\n \n During fiscal 1998, TIG issued $2.75 billion of public debt securities,\nwhich are fully and unconditionally guaranteed by Tyco. TIG, a Luxembourg\nholding company, is the parent company of substantially all the operating\nsubsidiaries of the Company. The Company has not included separate financial\nstatements and footnotes for TIG because of the full and unconditional guarantee\nby Tyco of TIG's debt obligations and the Company's belief that such information\nis not material to holders of the debt securities. The following presents\nconsolidated summary financial information for TIG and its subsidiaries, as if\nTIG and its current organizational structure has been in place for all periods\npresented.\n \n\n
\n \n\n
\n \n- ---------------\n(1) Loss before extraordinary item in the quarter ended December 31, 1998\n includes merger, restructuring and other non-recurring charges of $434.9\n million and charges for the impairment of long-lived assets of $76.0 million\n primarily related to the USSC merger. Income before extraordinary item in\n the quarter ended December 31, 1997 includes restructuring charges of $12.0\n million related to USSC's operations.\n \n(2) Extraordinary item was comprised of losses on the write-off of net\n unamortized deferred financing costs relating to the early extinguishment of\n debt.\n \n14. SUBSEQUENT EVENTS\n \n In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and\n$800 million of its 6.875% notes due 2029 in a public offering. Interest is\npayable semi-annually in January and July. Repayment of amounts outstanding\nunder these securities is fully and unconditionally guaranteed by Tyco (Note\n13). The\n \n 9\n 12\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)\n \nnet proceeds of approximately $1.17 billion were used to repay borrowings under\nTIG's $2.25 billion bank credit facility. At the same time, TIG also entered\ninto an interest rate swap agreement to hedge the fixed rate terms of the $400\nmillion notes due 2009. Under the agreement, which expires in January 2009, TIG\nwill receive payments at a fixed rate of 6.125% and will make floating rate\npayments based on an average of three different LIBO rates, as defined, plus a\nspread.\n \n In January 1999, TIG initiated a commercial paper program under which it\ncan issue notes with an aggregate face value of up to $1.75 billion from time to\ntime outstanding. The Company expects to increase the size of the commercial\npaper program to $3.25 billion in connection with the increase of TIG's credit\nagreement discussed below. The notes are unsecured and are fully and\nunconditionally guaranteed by Tyco. Proceeds from the sale of the notes will be\nused for working capital and other corporate purposes. The Company is required\nto maintain an available unused balance under its bank credit agreement\nsufficient to support amounts outstanding under this commercial paper program.\n \n In February 1999, TIG renegotiated its $2.25 billion credit agreement with\na group of commercial banks, giving it the right to borrow up to $3.25 billion\nuntil February 11, 2000, with the option to extend to February 11, 2001, and\nborrow up to an additional $0.5 billion until February 12, 2003. TIG has the\noption to increase the $3.25 billion part of the credit facility up to $4.0\nbillion. Interest payable on borrowings is variable based upon TIG's option to\nselect a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a certificate\nof deposit rate plus margins ranging from 0.535% to 0.555%, or a base rate, as\ndefined. If the outstanding principal amount of loans equals or exceeds 25% of\nthe commitments, the Eurodollar and certificate of deposit margins are increased\nby 0.125%. Repayments of amounts outstanding under this agreement are guaranteed\nby the Company. The Company plans to use the $3.25 billion part of the credit\nfacility principally to fully support its commercial paper program discussed\nabove and therefore expects this part to remain largely undrawn.\n \n On February 5, 1999, USSC completed a tender offer for its 7 1/4% Senior\nNotes due 2008 in which $292 million of the $300 million principal amount of the\nnotes outstanding were tendered. Graphic Controls has made an offer, scheduled\nto expire February 23, 1999, to purchase its 12% Senior Subordinated Notes due\n2005, in which all $75 million principal amount of the notes outstanding have\nbeen tendered. See Note 4.\n \n 10\n 13\n \nITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND\nOPERATING RESULTS\n \n On October 1, 1998, Tyco consummated a merger with United States Surgical\nCorporation (\"USSC\"). The transaction was accounted for as a pooling of\ninterests and, accordingly, the consolidated financial statements reflect the\ncombined financial position, results of operations and cash flows of Tyco and\nUSSC for all periods presented. See Notes 1 and 2 to the Consolidated Financial\nStatements presented herein.\n \nRESULTS OF OPERATIONS\n \n Information for all periods presented below reflects the grouping of the\nCompany's businesses into four business segments consisting of Healthcare and\nSpecialty Products, Fire and Security Services, Flow Control Products, and\nElectrical and Electronic Components.\n \n Overview\n \n (Loss) income before extraordinary item was $(26.0) million, or $(.04) per\nshare on a diluted basis, for the quarter ended December 31, 1998, as compared\nto $255.8 million, or $.41 per diluted share, for the quarter ended December 31,\n1997. During the quarter ended December 31, 1998, the Company incurred an\nafter-tax charge of $427.6 million ($.65 per share) for merger and transaction\ncosts, write-offs and integration costs primarily associated with the USSC\nmerger. During the quarter ended December 31, 1997, the Company incurred an\nafter-tax charge of $9.2 million ($.01 per share) for restructuring charges in\nUSSC's operations. Excluding these non-recurring charges, income before\nextraordinary item rose 51.5% to $401.6 million, or $.61 per diluted share, for\nthe quarter ended December 31, 1998, as compared to $265.0 million, or $.43 per\ndiluted share, for the quarter ended December 31, 1997. The increase was\nattributable to increased sales, margin improvements and results of acquired\ncompanies in each of the Company's business segments.\n \n After each acquisition, acquired companies are immediately integrated, and\nTyco does not separately track post-acquisition financial results. Accordingly,\nthe impact of certain acquired companies in the following analysis is based on\nestimates and assumes that acquisitions were completed as of the beginning of\nthe periods discussed.\n \n Quarter ended December 31, 1998 Compared to Quarter ended December 31, 1997\n \n Sales increased 27.7% during the quarter ended December 31, 1998 to $3.82\nbillion from $2.99 billion in the quarter ended December 31, 1997.\n \n Sales of the Healthcare and Specialty Products group increased $363.7\nmillion to $1.34 billion, or 37.1%, principally due to increased sales of the\nTyco Healthcare Group. This increase was primarily due to the inclusion of\nSherwood-Davis & Geck (\"Sherwood\"), which was acquired in February 1998.\nExcluding the impact of Sherwood, sales increased an estimated $118.4 million,\nor 9.7%.\n \n Sales of the Fire and Security Services group increased $257.7 million to\n$1.38 billion, or 22.9%, principally due to increased sales in the Company's\nelectronic security services business in the United States and, to a lesser\nextent, in the North American fire protection operations and the European fire\nprotection and security operations. This increase was primarily due to the\nhigher volume of recurring service revenues and the inclusion of CIPE S.A.\n(\"CIPE\"), acquired in May 1998 and Wells Fargo Alarm (\"Wells Fargo\"), acquired\nin June 1998. Excluding the impact of CIPE and Wells Fargo, sales increased an\nestimated $130.3 million or 10.4%.\n \n Sales of the Flow Control Products group increased $102.5 million to $652.5\nmillion, or 18.6%, primarily reflecting increased demand for valve products in\nNorth America and Europe and the inclusion of the U.S. Operations of Crosby\nValve, Inc. (\"Crosby\"), acquired in July 1998, and Rust Environmental and\nInfrastructure, Inc. (\"Rust\"), acquired in September 1998. Excluding the impact\nof Crosby and Rust, sales increased an estimated $52.8 million, or 8.8%.\n \n Sales of the Electrical and Electronic Components group increased $105.7\nmillion to $440.0 million, or 31.6%, principally due to increased sales at Tyco\nSubmarine Systems Ltd (\"TSSL\"), the inclusion of Sigma\n \n 11\n 14\n \nCircuits, Inc. (\"Sigma\"), which was acquired in July 1998, and, to a lesser\nextent, increased sales at Tyco Printed Circuit Group. Excluding the impact of\nSigma, sales increased an estimated $82.1 million, or 22.9%\n \n Pre-tax income was $42.2 million for the quarter ended December 31, 1998,\nas compared to $380.2 million for the quarter ended December 31, 1997. Pre-tax\nincome for the quarter ended December 31, 1998 included charges of $434.9\nmillion for merger, restructuring and other non-recurring items and $76.0\nmillion for the impairment of long-lived assets primarily related to the USSC\nmerger. Pre-tax income for the quarter ended December 31, 1997 included charges\nof $12.0 million for restructuring and other non-recurring items related to\nUSSC's operations. See Notes 7 and 8 to the Consolidated Financial Statements.\nExcluding these non-recurring charges, pre-tax income increased $160.9 million,\nor 41.0%, to $553.1 million. Amortization expense for goodwill and other\nintangible assets was $65.1 million for the quarter ended December 31, 1998 and\n$39.6 million for the quarter ended December 31, 1997. The following analysis is\npresented exclusive of these non-recurring charges to better portray\nmanagement's view of the comparability of continuing operations.\n \n Operating profits for the Healthcare and Specialty Products group increased\n$116.5 million to $273.8 million, or 74.1%. Operating profits were 20.4% of\nsales in the quarter ended December 31, 1998 as compared to 16.1% in the quarter\nended December 31, 1997. The increase was principally due to increased volume\nand margins in the Tyco Healthcare Group, including the effect of the\nacquisition of Sherwood, and improved margins at Tyco Plastics and Adhesives.\n \n Operating profits for the Fire and Security Services increased $59.0\nmillion to $205.4 million, or 40.3%. Operating profits were 14.8% of sales in\nthe quarter ended December 31, 1998 as compared to 13.0% in the quarter ended\nDecember 31, 1997. The overall increase was primarily due to higher service\nvolume in the Company's worldwide security and fire protection businesses. The\nincrease in operating profits as a percentage of sales was due to improved\nmargins in the European security and fire protection operations.\n \n Operating profits for the Flow Control Products group increased $21.6\nmillion to $93.5 million, or 30.0%. Operating profits were 14.3% of sales in the\nquarter ended December 31, 1998 as compared to 13.1% in the quarter ended\nDecember 31, 1997. The increase was due to higher volume and margins in the\nCompany's European flow control products operations and improved margins at\nMueller and Allied Tube & Conduit.\n \n Operating profits for the Electrical and Electronic Components group\nincreased $23.4 million to $95.0 million, or 32.7%. Operating profits were 21.6%\nof sales in the quarter ended December 31, 1998 and 21.4% in the quarter ended\nDecember 31, 1997. The overall increase was principally due to increased sales\nat TSSL and higher margins at Allied Electrical Conduit.\n \n The effect of changes in foreign exchange rates during the quarter ended\nDecember 31, 1998 as compared to the quarter ended December 31, 1997 was not\nmaterial to the Company's sales and operating profits.\n \n The effective income tax rate was 27.4% during the quarter ended December\n31, 1998 and 32.4% during the quarter ended December 31, 1997. The decrease was\ndue to higher earnings in domiciles with lower income tax rates.\n \nLIQUIDITY AND CAPITAL RESOURCES\n \n As presented in the Consolidated Statement of Cash Flows, cash used in\noperating activities net of the effect of acquired assets and liabilities was\n$383.8 million during the first quarter of fiscal 1999. The working capital\nacquired as a result of acquisitions during the period is included in the cost\nof acquisitions in the Consolidated Statement of Cash Flows. The significant\noperating changes in working capital were a $367.7 million decrease in accounts\npayable and accrued expenses, which resulted principally from the reduction in\ntrade accounts payable in the ordinary course of business and spending for\nmerger, restructuring and other non-recurring costs, and a $262.0 million\nincrease in accounts receivable and contracts in process. The impact of changes\nin foreign exchange rates did not materially affect net working capital during\nthe quarter.\n \n 12\n 15\n \n During the first quarter of fiscal 1999, the Company used cash of $831.8\nmillion to acquire companies in its Healthcare and Specialty Products, Fire and\nSecurity Services and Flow Control Products segments, $216.3 million to purchase\nproperty, plant and equipment, $234 million to purchase the USSC North Haven\nfacilities discussed below and $16.3 million to pay dividends to shareholders.\nThe Company received proceeds of $96.4 million from the exercise of common share\noptions.\n \n The source of the cash used for acquisitions was primarily from an increase\nin total debt. At December 31, 1998, the Company's total debt was $7.35 billion,\nas compared to $5.61 billion at September 30, 1998. The increase resulted\nprincipally from the issuance of $800 million private placement notes discussed\nbelow and borrowings under the Company's bank credit agreement and uncommitted\nlines of credit. Shareholders' equity was $7.27 billion, or $11.21 per share, at\nDecember 31, 1998, compared to $7.20 billion, or $11.15 per share, at September\n30, 1998. Goodwill and other intangible assets were $7.77 billion at December\n31, 1998, compared to $7.01 billion at September 30, 1998. Total debt as a\npercent of total capitalization (total debt and shareholders' equity) was 50% at\nDecember 31, 1998 and 44% at September 30, 1998.\n \n In October 1998, TIG issued $800 million of debt in a private placement\noffering consisting of two series of Notes: $400 million of 5.875% Notes due\nNovember 2004 and $400 million of 6.125% Notes due November 2008. The Notes are\nfully and unconditionally guaranteed by Tyco. The net proceeds of approximately\n$791.7 million were used to repay borrowings under TIG's $2.25 billion bank\ncredit facility. At the same time, TIG also entered into an interest rate swap\nagreement to hedge the fixed rate terms of the $400 million Notes due 2008.\nUnder this agreement, which expires in November 2008, TIG will receive payments\nat a fixed rate of 6.125% and will make floating rate payments based on LIBOR,\nas defined.\n \n In December 1998, the Company assumed the debt related to USSC's North\nHaven facilities of approximately $211 million. The assumption of the debt\ncombined with the settlement of certain other obligations in the amount of $23\nmillion resulted in the Company acquiring ownership of the North Haven property\nfor a total cost of $234 million.\n \n In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and\n$800 million of its 6.875% notes due 2029 utilizing the capacity under its $3.75\nbillion public shelf registration statement. Interest is payable semi-annually\nin January and July. Repayment of amounts outstanding under these securities is\nfully and unconditionally guaranteed by Tyco (See Note 13 to the Consolidated\nFinancial Statements). The net proceeds of approximately $1.17 billion were used\nto repay borrowings under the $2.25 billion bank credit facility. At the same\ntime, TIG also entered into an interest rate swap agreement to hedge the fixed\nrate terms of the $400 million notes due 2009. Under the agreement, which\nexpires in January 2009, TIG will receive payments at a fixed rate of 6.125% and\nwill make floating rate payments based on an average of three different LIBO\nrates, as defined, plus a spread.\n \n In January 1999, TIG initiated a commercial paper program under which it\ncan issue notes with an aggregate face value of up to $1.75 billion from time to\ntime outstanding. The Company expects to increase the size of the Commercial\npaper program to $3.25 billion in connection with the increase of TIG's credit\nagreement discussed below. The notes are unsecured and are fully and\nunconditionally guaranteed by Tyco. Proceeds from the sale of the notes will be\nused for working capital and other corporate purposes. The Company is required\nto maintain an available unused balance under its bank credit agreement\nsufficient to support amounts outstanding under this commercial paper program.\n \n In February 1999, TIG renegotiated its $2.25 billion credit agreement with\na group of commercial banks, giving it the right to borrow up to $3.25 billion\nuntil February 11, 2000, with the option to extend to February 11, 2001, and\nborrow up to an additional $0.5 billion until February 12, 2003. TIG has the\noption to increase the $3.25 billion part of the credit facility up to $4.0\nbillion. Interest payable on borrowings is variable based upon TIG's option to\nselect a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a certificate\nof deposit rate plus margins ranging from 0.535% to 0.555%, or a base rate, as\ndefined. If the outstanding principal amount of loans equals or exceeds 25% of\nthe commitments, the Eurodollar and certificate of deposit margins are increased\nby 0.125%. Repayments of amounts outstanding under this agreement are guaranteed\nby the Company. The Company plans to use the $3.25 billion part of the credit\nfacility principally to fully\n \n 13\n 16\n \nsupport its commercial paper program discussed above and therefore expects this\npart to remain largely undrawn.\n \n The Company believes that its cash flow from operations together with its\nexisting credit facilities and other credit arrangements, is adequate to fund\nits operations.\n \nBACKLOG\n \n The backlog of unfilled orders was approximately $3.9 billion at December\n31, 1998 as compared to $4.2 billion at September 30, 1998. The net decrease\nprincipally resulted from a decrease in backlog in the Company's submarine\nsystems business, due to the timing of contracts, partially offset by an\nincrease in backlog at Earth Tech and at the Company's worldwide security and\nNorth American fire protection businesses.\n \nYEAR 2000 COMPLIANCE\n \n Year 2000 compliance programs and system modifications were initiated by\nthe Company in fiscal 1997 in an attempt to ensure that these systems and key\nprocesses will remain functional. The Company is continuing its assessment of\nthe potential impact of the Year 2000 on date-sensitive information in computer\nsoftware programs and operating systems in its product development, financial\nbusiness systems and administrative functions, and has begun implementing\nstrategies to avoid adverse implications. This objective is expected to be\nachieved either by modifying present systems using existing internal and\nexternal programming resources or by installing new systems, and by monitoring\nsupplier, customer and other third-party readiness. Review of the systems\naffecting the Company is progressing. The costs of the Company's Year 2000\nprogram to date have not been material, and the Company does not anticipate that\nthe costs of any required modifications to its information technology or\nembedded technology systems will have a material adverse effect on its financial\nposition, results of operations or liquidity.\n \n In the event that the Company or material third parties fail to complete\ntheir Year 2000 compliance programs successfully and on time, the Company's\nability to operate its businesses, service customers, bill or collect its\nrevenues or purchase products in a timely manner could be adversely affected.\nAlthough there can be no assurance that the conversion of the Company's systems\nwill be successful or that the Company's key third-party relationships will have\nsuccessful conversion programs, management does not expect that any such failure\nwould have a material adverse effect on the financial position, results of\noperations or liquidity of the Company. The Company has day-to-day operational\ncontingency plans, and management is in the process of updating these plans for\npossible Year 2000 specific operational requirements.\n \nACCOUNTING PRONOUNCEMENTS\n \n In June 1998, the Financial Accounting Standards Board issued Statement of\nFinancial Accounting Standards (\"SFAS\") No. 133, \"Accounting for Derivative\nInstruments and Hedging Activities,\" which is effective for fiscal years\nbeginning after June 15, 1999. This statement establishes accounting and\nreporting standards requiring that every derivative instrument be recorded in\nthe balance sheet as either an asset or liability measured at its fair value.\nSFAS No. 133 also requires that changes in the derivative's fair value be\nrecognized currently in earnings unless specific hedge accounting criteria are\nmet. Adoption of this standard is not expected to have a material impact on the\nfinancial position or results of operations of the Company.\n \nCONVERSION TO THE EURO\n \n On January 1, 1999, 11 European countries began using the \"euro\" as their\nsingle currency, while still continuing to use their own notes and coins for\ncash transactions. Banknotes and coins denominated in euros are expected to be\nput in circulation during 2002. Uncertainty exists as to the effect the\nintroduction of the euro and the conversion of cash in circulation into euros\nwill have on the marketplace. Tyco conducts a significant amount of business in\nthese countries. The Company has not yet determined the effect, if any, the euro\nwill have on its operations.\n \n 14\n 17\n \n PART II -- OTHER INFORMATION\n \nITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K\n \n (a) Exhibits\n \n 4.1 364-Day Credit Agreement dated as of February 12, 1999 among Tyco\n International Group S.A., the Banks named therein and Morgan\n Guaranty Trust Company of New York, as Agent\n \n 4.2 Parent Guarantee Agreement (as amended) dated as of February 12,\n 1999 between Tyco International Ltd. and Morgan Guaranty Trust\n Company of New York, as Agent\n \n 27 Financial Data Schedule\n \n (b) Reports on Form 8-K\n \n A Current Report on Form 8-K was filed by the registrant on December 10,\n1998 to put on file supplemental consolidated financial statements for the\nfiscal year ended September 30, 1998 reflecting the restatement for the merger\nwith United States Surgical Corporation, which was accounted for as a pooling of\ninterests.\n \n An amended Current Report on Form 8-K/A was filed by the registrant on\nDecember 11, 1998 to amend Exhibit 99.2, Management's Discussion and Analysis of\nFinancial Condition and Results of Operations, included in the registrant's Form\n8-K filed on December 10, 1998.\n \n 15\n 18\n \n SIGNATURES\n \n Pursuant to the requirements of the Securities Exchange Act of 1934, the\nRegistrant has duly caused this report to be signed on its behalf by the\nundersigned hereunto duly authorized.\n \n TYCO INTERNATIONAL LTD.\n \n /s/ MARK H. SWARTZ\n ------------------------------------\n Mark H. Swartz\n EXECUTIVE VICE PRESIDENT AND CHIEF\n FINANCIAL OFFICER\n (PRINCIPAL ACCOUNTING AND FINANCIAL\n OFFICER)\n \nDate: February 16, 1999\n \n 16\n 19\n \n TYCO INTERNATIONAL LTD.\n \n INDEX TO EXHIBITS\n \n\n
\n \n \n\nEX-4.1\n2\nCREDIT AGREEMENT WITH MRGAN GUARANTY TRUST COMPANY\n\n\n 1\n\n EXHIBIT 4.1\n\n\n CONFORMED COPY\n\n\n $3,250,000,000\n\n\n\n 364-DAY CREDIT AGREEMENT\n\n\n dated as of\n\n\n February 12, 1999\n\n\n\n\n\n Tyco International Group S.A.,\n Borrower\n\n\n\n\n Morgan Guaranty Trust Company of New York,\n Administrative Agent\n\n\n\n Bank of America National Trust and Savings Association,\n The Chase Manhattan Bank\n and Commerzbank AG, New York Branch,\n Co-Syndication Agents\n\n\n\n J.P. Morgan Securities Inc.,\n Arranger\n\n\n\n\n 2\n\n\n TABLE OF CONTENTS\n\n ----------------------\n\n\n
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\n\n\n iii\n\n\n\n 5\n\n\n 364-DAY CREDIT AGREEMENT\n\n\n AGREEMENT dated as of February 12, 1999 among TYCO INTERNATIONAL GROUP\nS.A., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST\nCOMPANY OF NEW YORK, as Agent.\n\n The parties hereto agree as follows:\n\n\n\n ARTICLE 1\n DEFINITIONS\n\n SECTION 1.01. Definitions. The following terms, as used herein, have\nthe following meanings:\n\n \"ABSOLUTE RATE AUCTION\" means a solicitation of Money Market Quotes\nsetting forth Money Market Absolute Rates pursuant to Section 2.03.\n\n \"ADJUSTED CD RATE\" has the meaning set forth in Section 2.07(b).\n\n \"ADMINISTRATIVE QUESTIONNAIRE\" means, with respect to each Bank, an\nadministrative questionnaire in the form prepared by the Agent and submitted to\nthe Agent (with a copy to the Borrower) duly completed by such Bank.\n\n \"AFFILIATE\" means (i) any Person that directly, or indirectly through\none or more intermediaries, controls the Borrower (a \"Controlling Person\") or\n(ii) any Person (other than the Borrower or a Subsidiary) which is controlled by\nor is under common control with a Controlling Person. As used herein, the term\n\"control\" means possession, directly or indirectly, of the power to direct or\ncause the direction of the management or policies of a Person, whether through\nthe ownership of voting securities, by contract or otherwise. The fact that an\nAffiliate of a Person is a member of a law firm that renders services to such\nPerson or its Affiliates does not mean that the law firm is an Affiliate of such\nPerson.\n\n \"AGENT\" means Morgan Guaranty Trust Company of New York in its capacity\nas administrative agent for the Banks under the Financing Documents, any\nsuccessor agent that becomes the Agent pursuant to Section 7.08, and the\nrespective corporate successors of the foregoing acting in such capacity.\n\n\n\n\n 6\n\n\n \"APPLICABLE LENDING OFFICE\" means, with respect to any Bank, (i) in the\ncase of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its\nEuro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its\nMoney Market Loans, its Money Market Lending Office.\n\n \"ASSESSMENT RATE\" has the meaning set forth in Section 2.07(b).\n\n \"ASSIGNEE\" has the meaning set forth in Section 9.06(c).\n\n \"BANK\" means each bank listed on the signature pages hereof, each\nfinancial institution which becomes a Bank pursuant to Section 2.17, each\nAssignee which becomes a Bank pursuant to Section 9.06(c), and the respective\ncorporate successors of the foregoing.\n\n \"BANK AFFILIATE\" means, with respect to the Agent or any Bank, any\nPerson controlling, controlled by or under common control with the Agent or such\nBank, as the case may be.\n\n \"BASE RATE\" means, for any day, a rate per annum equal to the higher of\n(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal\nFunds Rate for such day.\n\n \"BASE RATE LOAN\" means a Committed Loan which bears interest at the\nBase Rate pursuant to the applicable Notice of Committed Borrowing or Notice of\nInterest Rate Election or the provisions of Section 2.07(a) or Article 8.\n\n \"BORROWER\" means Tyco International Group S.A., a Luxembourg\ncompany, and its successors.\n\n \"BORROWING\" has the meaning set forth in Section 1.02.\n\n \"CD BASE RATE\" has the meaning set forth in Section 2.07(b).\n\n \"CD LOAN\" means a Committed Loan which bears interest at a CD Rate\npursuant to the applicable Notice of Committed Borrowing or Notice of Interest\nRate Election.\n\n \"CD MARGIN\" means a rate per annum determined daily in accordance with\nthe Pricing Schedule.\n\n \"CD RATE\" means a rate of interest determined pursuant to Section\n2.07(b) on the basis of an Adjusted CD Rate.\n\n\n\n 2\n\n\n\n 7\n\n\n \"CD REFERENCE BANKS\" means The Hongkong and Shanghai Banking\nCorporation Limited, Commerzbank AG and Morgan Guaranty Trust Company of New\nYork.\n\n \"COMMITMENT\" means (i) with respect to each Bank listed on the\nCommitment Schedule, the amount set forth opposite the name of such Bank on the\nCommitment Schedule and (ii) with respect to any financial institution which\nbecomes a Bank pursuant to Section 2.17 or any Assignee, the amount of the\nCommitment assumed by it pursuant to Section 2.17 or 9.06(c), as the case may\nbe, in each case as such amount may be changed from time to time pursuant to\nSection 2.09, 2.17 or 9.06(c).\n\n \"COMMITMENT SCHEDULE\" means the Commitment Schedule attached\nhereto.\n\n \"COMMITTED BORROWING\" has the meaning set forth in Section 1.02.\n\n \"COMMITTED LOAN\" means a loan made by a Bank pursuant to Section 2.01;\nprovided that, if any such loan or loans (or portions thereof) are combined or\nsubdivided pursuant to a Notice of Interest Rate Election, the term Committed\nLoan shall refer to the combined principal amount resulting from such\ncombination or to each of the separate principal amounts resulting from such\nsubdivision, as the case may be.\n\n \"CONDUIT\" means a special purpose corporation which is engaged in\nmaking, purchasing or otherwise investing in commercial loans in the ordinary\ncourse of its business.\n\n \"CONDUIT DESIGNATION\" has the meaning set forth in Section 9.06(f).\n\n \"CONSENTS\" has the meaning set forth in Section 4.01.\n\n \"DEBT RATING\" means a rating of the Borrower's long-term debt which is\nnot secured or supported by a guarantee, letter of credit or other form of\ncredit enhancement. If a Debt Rating by a Rating Agency is required to be at or\nabove a specified level and such Rating Agency shall have changed its system of\nclassifications after the date hereof, the requirement will be met if the Debt\nRating by such Rating Agency is at or above the new rating which most closely\ncorresponds to the specified level under the old rating system.\n\n \"DEFAULT\" means any condition or event which constitutes an Event of\nDefault or which with the giving of notice or lapse of time or both would,\nunless cured or waived, become an Event of Default.\n\n\n\n 3\n\n 8\n\n\n \"DOMESTIC BUSINESS DAY\" means any day except a Saturday, Sunday or\nother day on which commercial banks in New York City are authorized by law to\nclose.\n\n \"DOMESTIC LENDING OFFICE\" means, as to each Bank, its office located at\nits address set forth in its Administrative Questionnaire (or identified in its\nAdministrative Questionnaire as its Domestic Lending Office) or such other\noffice as such Bank may hereafter designate as its Domestic Lending Office by\nnotice to the Borrower and the Agent; provided that any Bank may so designate\nseparate Domestic Lending Offices for its Base Rate Loans, on the one hand, and\nits CD Loans, on the other hand, in which case all references herein to the\nDomestic Lending Office of such Bank shall be deemed to refer to either or both\nof such offices, as the context may require.\n\n \"DOMESTIC LOANS\" means CD Loans or Base Rate Loans or both.\n\n \"DOMESTIC RESERVE PERCENTAGE\" has the meaning set forth in Section\n2.07(b).\n\n \"EFFECTIVE DATE\" means the date this Agreement becomes effective in\naccordance with Section 3.01.\n\n \"ENVIRONMENTAL LAWS\" means any and all federal, state, local and\nforeign statutes, laws, judicial decisions, regulations, ordinances, rules,\njudgments, orders, decrees, plans, injunctions, permits, concessions, grants,\nfranchises, licenses, agreements and other governmental restrictions relating to\nthe environment, the effect of the environment on human health or to emissions,\ndischarges or releases of pollutants, contaminants, hazardous substances or\nwastes into the environment including, without limitation, ambient air, surface\nwater, ground water, or land, or otherwise relating to the manufacture,\nprocessing, distribution, use, treatment, storage, disposal, transport or\nhandling of pollutants, contaminants, hazardous substances or wastes or the\nclean-up or other remediation thereof.\n\n \"EURO-DOLLAR BUSINESS DAY\" means any Domestic Business Day on which\ncommercial banks are open for international business (including dealings in\ndollar deposits) in London.\n\n \"Euro-Dollar Lending Office\" means, as to each Bank, its office, branch\nor affiliate located at its address set forth in its Administrative\nQuestionnaire (or identified in its Administrative Questionnaire as its\nEuro-Dollar Lending Office) or such other office, branch or affiliate of such\nBank as it may hereafter designate as its Euro-Dollar Lending Office by notice\nto the Borrower and the Agent.\n\n\n\n 4\n\n\n 9\n\n\n \"EURO-DOLLAR LOAN\" means a Committed Loan which bears interest at a\nEuro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or\nNotice of Interest Rate Election.\n\n \"EURO-DOLLAR MARGIN\" means a rate per annum determined daily in\naccordance with the Pricing Schedule.\n\n \"EURO-DOLLAR RATE\" means a rate of interest determined pursuant to\nSection 2.07(c) on the basis of a London Interbank Offered Rate.\n\n \"EURO-DOLLAR REFERENCE BANKS\" means the principal London offices of The\nHongkong and Shanghai Banking Corporation Limited, Commerzbank AG and Morgan\nGuaranty Trust Company of New York.\n\n \"EURO-DOLLAR RESERVE PERCENTAGE\" has the meaning set forth in Section\n2.15.\n\n \"EVENT OF DEFAULT\" has the meaning set forth in Section 6.01.\n\n \"EXISTING CREDIT AGREEMENTS\" means the Existing 364-Day Agreement and\nthe Existing Five-Year Agreement.\n\n \"EXISTING FIVE-YEAR AGREEMENT\" means the Extendible 364-Day Credit\nAgreement dated as of February 13, 1998, among the Borrower, the banks listed\ntherein and Morgan Guaranty Trust Company of New York, as agent for such banks,\nas amended to the Effective Date.\n\n \"EXISTING 364-DAY AGREEMENT\" means the 364-Day Credit Agreement dated\nas of February 13, 1998, among the Borrower, the banks listed therein and Morgan\nGuaranty Trust Company of New York, as agent for such banks, as amended to the\nEffective Date.\n\n \"FACILITY FEE RATE\" means a rate per annum determined daily in\naccordance with the Pricing Schedule.\n\n \"FEDERAL FUNDS RATE\" means, for any day, the rate per annum (rounded\nupward, if necessary, to the nearest 1/100th of 1%) equal to the weighted\naverage of the rates on overnight Federal funds transactions with members of the\nFederal Reserve System arranged by Federal funds brokers on such day, as\npublished by the Federal Reserve Bank of New York on the Domestic Business Day\nnext succeeding such day, provided that (i) if such day is not a Domestic\nBusiness Day, the Federal Funds Rate for such day shall be such rate on such\ntransactions on the next preceding Domestic Business Day as so published on the\nnext succeeding\n\n\n\n 5\n\n 10\n\n\nDomestic Business Day, and (ii) if no such rate is so published on such next\nsucceeding Domestic Business Day, the Federal Funds Rate for such day shall be\nthe average rate quoted to Morgan Guaranty Trust Company of New York on such day\non such transactions as determined by the Agent.\n\n \"FINAL MATURITY DATE\" means the first anniversary of the Termination\nDate or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-\nDollar Business Day.\n\n \"FINANCING DOCUMENTS\" means this Agreement, the Subsidiary Guarantees,\nthe Promissory Notes and the Parent Guarantee.\n\n \"FIXED RATE LOANS\" means CD Loans or Euro-Dollar Loans or Money Market\nLoans (excluding Money Market LIBOR Loans bearing interest at the Base Rate\npursuant to Section 8.01(a)) or any combination of the foregoing.\n\n \"GROUP OF LOANS\" means, at any time, a group of Loans consisting of (i)\nall Committed Loans which are Base Rate Loans at such time, (ii) all Euro-Dollar\nLoans having the same Interest Period at such time or (iii) all CD Loans having\nthe same Interest Period at such time, provided that, if a Committed Loan of any\nparticular Bank is converted to or made as a Base Rate Loan pursuant to Article\n8, such Loan shall be included in the same Group or Groups of Loans from time to\ntime as it would have been in if it had not been so converted or made.\n\n \"INDEMNITEE\" has the meaning set forth in Section 9.03(b).\n\n \"INDENTURE\" means the Indenture dated as of April 23, 1998 among the\nBorrower, the Parent Guarantor and The Bank of New York, as Trustee, as amended\nor supplemented from time to time.\n\n \"INTEREST PERIOD\" means: (1) with respect to each Euro-Dollar Loan, the\nperiod commencing on the date of borrowing specified in the applicable Notice of\nBorrowing or on the date specified in an applicable Notice of Interest Rate\nElection and ending one, two, three or six months thereafter (or such other\nperiod of time as may at the time be mutually agreed by the Borrower and the\nBanks), as the Borrower may elect in such notice; provided that:\n\n (a) any Interest Period which would otherwise end on a day\n which is not a Euro-Dollar Business Day shall be extended to the next\n succeeding Euro-Dollar Business Day unless such Euro-Dollar Business\n Day falls in another calendar month, in which case such Interest Period\n shall end on the next preceding Euro-Dollar Business Day; and\n\n\n\n 6\n\n 11\n\n\n (b) any Interest Period which begins on the last Euro-Dollar\n Business Day of a calendar month (or on a day for which there is no\n numerically corresponding day in the calendar month at the end of such\n Interest Period) shall end on the last Euro-Dollar Business Day of a\n calendar month;\n\n (2) with respect to each CD Loan, the period commencing on the date of\nborrowing specified in the applicable Notice of Borrowing or on the date\nspecified in an applicable Notice of Interest Rate Election and ending 30, 60,\n90 or 180 days thereafter (or such other period of time as may at the time be\nmutually agreed by the Borrower and the Banks), as the Borrower may elect in\nsuch notice; provided that any Interest Period which would otherwise end on a\nday which is not a Euro-Dollar Business Day shall be extended to the next\nsucceeding Euro-Dollar Business Day;\n\n (3) with respect to each Money Market LIBOR Loan, the period\ncommencing on the date of borrowing specified in the applicable Notice of\nBorrowing and ending such whole number of months thereafter as the Borrower may\nelect in accordance with Section 2.03; provided that:\n\n (a) any Interest Period which would otherwise end on a day\n which is not a Euro-Dollar Business Day shall be extended to the next\n succeeding Euro-Dollar Business Day unless such Euro-Dollar Business\n Day falls in another calendar month, in which case such Interest Period\n shall end on the next preceding Euro-Dollar Business Day; and\n\n (b) any Interest Period which begins on the last Euro-Dollar\n Business Day of a calendar month (or on a day for which there is no\n numerically corresponding day in the calendar month at the end of such\n Interest Period) shall end on the last Euro-Dollar Business Day of a\n calendar month; and\n\n (4) with respect to each Money Market Absolute Rate Loan, the period\ncommencing on the date of borrowing specified in the applicable Notice of\nBorrowing and ending such number of days thereafter (but not less than 30 days)\nas the Borrower may elect in accordance with Section 2.03; provided that any\nInterest Period which would otherwise end on a day which is not a Euro-Dollar\nBusiness Day shall be extended to the next succeeding Euro-Dollar Business Day;\nand\n\nprovided further that:\n\n\n\n 7\n\n 12\n\n\n (x) any Interest Period applicable to any Loan which begins\n before the Termination Date and would otherwise end after the\n Termination Date shall end on the Termination Date ; and\n\n (y) any Interest Period applicable to any Loan which would\n otherwise end after the Final Maturity Date shall end on the Final\n Maturity Date.\n\n \"LIBOR AUCTION\" means a solicitation of Money Market Quotes setting\nforth Money Market Margins based on the London Interbank Offered Rate pursuant\nto Section 2.03.\n\n \"LIEN\" means, with respect to any asset, any mortgage, lien, pledge,\ncharge, security interest or encumbrance of any kind in respect of such asset.\nFor the purposes of this Agreement, the Borrower or any Subsidiary shall be\ndeemed to own subject to a Lien any asset which it has acquired or holds subject\nto the interest of a vendor or lessor under any conditional sale agreement,\ncapital lease or other title retention agreement (other than an operating lease)\nrelating to such asset.\n\n \"LOAN\" means a Domestic Loan or a Euro-Dollar Loan or a Money Market\nLoan and \"LOANS\" means Domestic Loans or Euro-Dollar Loans or Money Market Loans\nor any combination of the foregoing.\n\n \"LONDON INTERBANK OFFERED RATE\" has the meaning set forth in Section\n2.07(c).\n\n \"MATERIAL ADVERSE EFFECT\" means a material adverse effect on (i) the\nbusiness, consolidated financial position or consolidated results of operations\nof the Parent Guarantor and its Consolidated Subsidiaries, considered as a\nwhole, or (ii) the ability of the Obligors to perform their obligations under\nthe Financing Documents.\n\n \"MONEY MARKET ABSOLUTE RATE\" has the meaning set forth in Section\n2.03(d).\n\n \"MONEY MARKET ABSOLUTE RATE LOAN\" means a loan to be made by a Bank\npursuant to an Absolute Rate Auction.\n\n \"MONEY MARKET BORROWING\" has the meaning set forth in Section 1.02.\n\n \"MONEY MARKET LENDING OFFICE\" means, as to each Bank, its Domestic\nLending Office or such other office, branch or affiliate of such Bank as it may\n\n\n\n 8\n\n 13\n\n\nhereafter designate as its Money Market Lending Office by notice to the Borrower\nand the Agent; provided that any Bank may from time to time by notice to the\nBorrower and the Agent designate separate Money Market Lending Offices for its\nMoney Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate\nLoans, on the other hand, in which case all references herein to the Money\nMarket Lending Office of such Bank shall be deemed to refer to either or both of\nsuch offices, as the context may require.\n\n \"MONEY MARKET LIBOR LOAN\" means a loan to be made by a Bank pursuant to\na LIBOR Auction (including such a loan bearing interest at the Base Rate\npursuant to Section 8.01(a)).\n\n \"MONEY MARKET LOAN\" means a Money Market LIBOR Loan or a Money\nMarket Absolute Rate Loan.\n\n \"MONEY MARKET MARGIN\" has the meaning set forth in Section 2.03(d).\n\n \"MONEY MARKET QUOTE\" means an offer by a Bank to make a Money Market\nLoan in accordance with Section 2.03.\n\n \"MOODY'S\" means Moody's Investors Service, Inc., or any successor to\nsuch corporation's business of rating debt securities.\n\n \"NOTICE OF BORROWING\" means a Notice of Committed Borrowing (as defined\nin Section 2.02 or a Notice of Money Market Borrowing (as defined in Section\n2.03(f)).\n\n \"NOTICE OF INTEREST RATE ELECTION\" has the meaning set forth in Section\n2.16.\n\n \"OBLIGOR\" means, at any time, the Borrower, the Parent Guarantor and\neach Subsidiary Guarantor at such time.\n\n \"PARENT\" means, with respect to any Bank, any Person controlling such\nBank.\n\n \"PARENT GUARANTOR\" means Tyco International Ltd., a Bermuda company,\nand its successors.\n\n \"PARENT GUARANTEE\" means an Amended and Restated Parent Guarantee\nAgreement between the Parent Guarantor and the Agent for the benefit of the\nBanks, substantially in the form of Exhibit J, as amended from time to time.\n\n\n\n 9\n\n\n 14\n\n\n \"PARTICIPANT\" has the meaning set forth in Section 9.06(b).\n\n \"PERSON\" means an individual, a corporation, a partnership, an\nassociation, a trust or any other entity or organization, including a government\nor political subdivision or an agency or instrumentality thereof.\n\n \"PRICING SCHEDULE\" means the Pricing Schedule attached hereto.\n\n \"PRIME RATE\" means the rate of interest publicly announced by Morgan\nGuaranty Trust Company of New York in New York City from time to time as its\nPrime Rate.\n\n \"PROMISSORY NOTES\" means promissory notes of the Borrower,\nsubstantially in the form of Exhibit A hereto, evidencing the obligation of the\nBorrower to repay the Loans, and \"PROMISSORY NOTE\" means any one of such\npromissory notes issued hereunder.\n\n \"PROPERTY\" means any interest of any kind in any property or assets,\nwhether real, mixed or personal and whether tangible or intangible.\n\n \"QUARTERLY PAYMENT DATES\" means each March 31, June 30, September 30\nand December 31.\n\n \"RATING AGENCY\" means S&P or Moody's.\n\n \"REFERENCE BANKS\" means the CD Reference Banks or the Euro-Dollar\nReference Banks, as the context may require, and \"REFERENCE BANK\" means any one\nof such Reference Banks.\n\n \"REGULATION U\" means Regulation U of the Board of Governors of the\nFederal Reserve System, as in effect from time to time.\n\n \"REQUIRED BANKS\" means at any time Banks having more than 60% of the\naggregate amount of the Commitments or, if the Commitments shall have been\nterminated, holding Promissory Notes evidencing more than 60% of the aggregate\nunpaid principal amount of the Loans.\n\n \"RESPONSIBLE OFFICER\" means any of the following: the Chairman,\nPresident, Vice President and Chief Financial Officer, Treasurer or Secretary of\nthe Borrower or a Managing Director of the Borrower.\n\n \"REVOLVING CREDIT LOAN\" means a loan made or to be made by a Bank\npursuant to Section 2.01(a).\n\n\n 10\n\n 15\n\n\n \"S&P\" means Standard & Poor's Ratings Services, a division of The\nMcGraw-Hill Companies, Inc., or any successor to its business of rating debt\nsecurities.\n\n \"SIGNIFICANT SUBSIDIARY\" means, at any date, any Subsidiary of the\nBorrower which is a \"Significant Subsidiary\" as defined in the Parent Guarantee\nat such date.\n\n \"SUBSIDIARY\" means, with respect to any Person, any corporation or\nother entity of which securities or other ownership interests having ordinary\nvoting power to elect a majority of the board of directors or other persons\nperforming similar functions are at the time directly or indirectly owned by\nsuch Person; unless otherwise specified, Subsidiary means a Subsidiary of the\nBorrower.\n\n \"SUBSIDIARY GUARANTOR\" has the meaning set forth in the Parent\nGuarantee.\n\n \"TERMINATION DATE\" means February 11, 2000, or, if such day is not a\nEuro-Dollar Business Day, the next preceding Euro-Dollar Business Day.\n\n \"TERM LOAN\" means a loan made or to be made by a Bank pursuant to\nSection 2.01(b).\n\n \"TYCOLUX DEBT SECURITIES\" means any unsecured debt securities issued by\nthe Borrower pursuant to the Indenture.\n\n \"UNITED STATES\" means the United States of America, including the\nStates and the District of Columbia, but excluding its territories and\npossessions.\n\n \"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY\" has the meaning set forth in\nthe Parent Guarantee.\n\n SECTION 1.02. Types of Borrowings. The term \"Borrowing\" denotes the\naggregation of Loans of one or more Banks to be made to the Borrower pursuant to\nArticle 2 on a single date and for a single Interest Period. Borrowings are\nclassified for purposes of this Agreement either by reference to the pricing of\nLoans comprising such Borrowing (e.g., a \"Euro-Dollar Borrowing\" is a Borrowing\ncomprised of Euro-Dollar Loans) or by reference to the provisions of Article 2\nunder which participation therein is determined (i.e., a \"Committed Borrowing\"\nis a Borrowing under Section 2.01 in which all Banks participate in proportion\nto their Commitments, while a \"Money Market Borrowing\" is a Borrowing under\nSection 2.03 in which the Bank participants are determined on the basis of their\nbids in accordance therewith) or by reference to the maturity of\n\n\n\n 11\n\n\n 16\n\n\nLoans comprising such Borrowing (e.g., a \"TERM BORROWING\" is a Borrowing\ncomprised of Term Loans).\n\n\n\n ARTICLE 2\n THE CREDITS\n\n SECTION 2.01. Commitments to Lend. (a) Revolving Credit Loans. Each\nBank severally agrees, on the terms and conditions set forth in this Agreement,\nto make loans to the Borrower pursuant to this Section 2.01 from time to time\nprior to the Termination Date in amounts such that the aggregate principal\namount of Committed Loans by such Bank at any one time outstanding shall not\nexceed the amount of its Commitment. Each Borrowing under this Section shall be\nin an aggregate principal amount of $10,000,000 or any larger multiple of\n$1,000,000 (except that any such Borrowing may be in the aggregate amount\navailable in accordance with Section 3.03(b)) and shall be made from the several\nBanks ratably in proportion to their respective Commitments. Within the\nforegoing limits, the Borrower may borrow under this Section, repay or, to the\nextent permitted by Section 2.11, prepay Loans and reborrow at any time prior to\nthe Termination Date under this Section 2.01.\n\n (b) Term Loans. Each Bank severally agrees, on the terms and conditions\nset forth in this Agreement, to make a loan to the Borrower on the Termination\nDate in an aggregate amount up to but not exceeding the amount of its\nCommitment.\n\n SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give\nthe Agent notice (a \"NOTICE OF COMMITTED BORROWING\") not later than 11:00 A.M.\n(New York City time) on (x) the date of each Base Rate Borrowing, (y) the second\nDomestic Business Day before each CD Borrowing and (z) the third Euro-Dollar\nBusiness Day before each Euro-Dollar Borrowing, specifying:\n\n (a) the date of such Borrowing, which shall be a Domestic Business Day\nin the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of\na Euro-Dollar Borrowing,\n\n (b) the aggregate amount of such Borrowing,\n\n (c) whether the Loans comprising such Borrowing are to bear interest\ninitially at the Base Rate, a CD Rate or a Euro-Dollar Rate, and\n\n\n\n\n 12\n\n 17\n\n\n (d) in the case of a Fixed Rate Borrowing, the duration of the initial\nInterest Period applicable thereto, subject to the provisions of the definition\nof Interest Period.\n\n SECTION 2.03. The Money Market Borrowings.\n\n (a) The Money Market Option. In addition to Committed Borrowings\npursuant to Section 2.01, the Borrower may, as set forth in this Section,\nrequest the Banks, at any time prior to the Termination Date, to make offers to\nmake Money Market Loans to the Borrower. The Banks may, but shall have no\nobligation to, make such offers and the Borrower may, but shall have no\nobligation to, accept any such offers in the manner set forth in this Section.\n\n (b) Money Market Quote Request. When the Borrower wishes to request\noffers to make Money Market Loans under this Section, it shall transmit to the\nAgent by telex or facsimile transmission a Money Market Quote Request\nsubstantially in the form of Exhibit B hereto so as to be received no later than\n10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior\nto the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y)\nthe Domestic Business Day next preceding the date of Borrowing proposed therein,\nin the case of an Absolute Rate Auction (or, in either case, such other time or\ndate as the Borrower and the Agent shall have mutually agreed and shall have\nnotified to the Banks not later than the date of the Money Market Quote Request\nfor the first LIBOR Auction or Absolute Rate Auction for which such change is to\nbe effective), specifying:\n\n (i) the proposed date of Borrowing, which shall be a\n Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic\n Business Day in the case of an Absolute Rate Auction,\n\n (ii) the aggregate amount of such Borrowing, which shall be\n $10,000,000 or a larger multiple of $1,000,000,\n\n (iii) the duration of the Interest Period applicable thereto,\n subject to the provisions of the definition of Interest Period, and\n\n (iv) whether the Money Market Quotes requested are to set\n forth a Money Market Margin or a Money Market Absolute Rate.\n\nThe Borrower may request offers to make Money Market Loans for more than one\nInterest Period in a single Money Market Quote Request. No Money Market Quote\nRequest shall be given within five Euro-Dollar Business Days (or such\n\n\n\n 13\n\n 18\n\n\nother number of days as the Borrower and the Agent may agree) of any other Money\nMarket Quote Request.\n\n (c) Invitation for Money Market Quotes. Promptly upon receipt of a\nMoney Market Quote Request, the Agent shall send to the Banks by telex or\nfacsimile transmission an Invitation for Money Market Quotes substantially in\nthe form of Exhibit C hereto, which shall constitute an invitation by the\nBorrower to each Bank to submit Money Market Quotes offering to make the Money\nMarket Loans to which such Money Market Quote Request relates in accordance with\nthis Section.\n\n (d) Submission and Contents of Money Market Quotes. (i) Each Bank may,\nin its sole discretion, submit a Money Market Quote containing an offer or\noffers to make Money Market Loans in response to any Invitation for Money Market\nQuotes. Each Money Market Quote must comply with the requirements of this\nsubsection 2.03(d) and must be submitted to the Agent by telex or facsimile\ntransmission at its offices specified in or pursuant to Section 9.01 not later\nthan (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day\nprior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y)\n9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of\nan Absolute Rate Auction (or, in either case, such other time or date as the\nBorrower and the Agent shall have mutually agreed and shall have notified to the\nBanks not later than the date of the Money Market Quote Request for the first\nLIBOR Auction or Absolute Rate Auction for which such change is to be\neffective); provided that Money Market Quotes submitted by the Agent (or any\naffiliate of the Agent) in the capacity of a Bank may be submitted, and may only\nbe submitted, if the Agent or such affiliate notifies the Borrower of the terms\nof the offer or offers contained therein not later than (x) one hour prior to\nthe deadline for the other Banks, in the case of a LIBOR Auction or (y) 15\nminutes prior to the deadline for the other Banks, in the case of an Absolute\nRate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall\nbe irrevocable except with the written consent of the Agent given on the\ninstructions of the Borrower.\n\n (ii) Each Money Market Quote shall be in substantially the\n form of Exhibit D hereto and shall in any case specify:\n\n (A) the proposed date of Borrowing and the Interest\n Period therefor,\n\n (B) the principal amount of the Money Market Loan for\n which each such offer is being made, which principal amount\n (w) may be greater than or less than the Commitment of the\n quoting Bank, (x) must be $5,000,000 or a larger multiple of\n $1,000,000,\n\n\n\n 14\n\n 19\n\n\n (y) may not exceed the principal amount of Money Market Loans\n for which offers were requested and (z) may be subject to an\n aggregate limitation as to the principal amount of Money\n Market Loans for which offers being made by such quoting Bank\n may be accepted,\n\n (C) in the case of a LIBOR Auction, the margin above\n or below the applicable London Interbank Offered Rate (the\n \"Money Market Margin\") offered for each such Money Market\n Loan, expressed as a percentage (specified to the nearest\n 1/10,000th of 1%) to be added to or subtracted from the\n applicable London Interbank Offered Rate,\n\n (D) in the case of an Absolute Rate Auction, the rate\n of interest per annum (specified to the nearest 1/10,000th of\n 1%) (the \"Money Market Absolute Rate\") offered for each such\n Money Market Loan, and\n\n (E) the identity of the quoting Bank.\n\nA Money Market Quote may set forth up to five separate offers by the quoting\nBank with respect to each Interest Period specified in the related Invitation\nfor Money Market Quotes.\n\n (iii) Any Money Market Quote shall be disregarded if it:\n\n (A) is not substantially in conformity with Exhibit D\n hereto or does not specify all of the information required by\n subsection 2.03(d)(ii);\n\n (B) contains qualifying, conditional or similar\n language;\n\n (C) proposes terms other than or in addition to those\n set forth in the applicable Invitation for Money Market\n Quotes; or\n\n (D) arrives after the time set forth in subsection\n 2.03(d)(i).\n\n (e) Notice to Borrower. The Agent shall promptly notify the Borrower of\nthe terms (x) of any Money Market Quote submitted by a Bank that is in\naccordance with subsection 2.03(d) and (y) of any Money Market Quote that\namends, modifies or is otherwise inconsistent with a previous Money Market Quote\nsubmitted by such Bank with respect to the same Money Market Quote Request. Any\nsuch subsequent Money Market Quote shall be disregarded by the\n\n\n\n 15\n\n 20\n\n\nAgent unless such subsequent Money Market Quote is submitted solely to correct a\nmanifest error in such former Money Market Quote. The Agent's notice to the\nBorrower shall specify (A) the aggregate principal amount of Money Market Loans\nfor which offers have been received for each Interest Period specified in the\nrelated Money Market Quote Request, (B) the respective principal amounts and\nMoney Market Margins or Money Market Absolute Rates, as the case may be, so\noffered and (C) if applicable, limitations on the aggregate principal amount of\nMoney Market Loans for which offers in any single Money Market Quote may be\naccepted.\n\n (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New\nYork City time) on (x) the third Euro-Dollar Business Day prior to the proposed\ndate of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of\nBorrowing, in the case of an Absolute Rate Auction (or, in either case, such\nother time or date as the Borrower and the Agent shall have mutually agreed and\nshall have notified to the Banks not later than the date of the Money Market\nQuote Request for the first LIBOR Auction or Absolute Rate Auction for which\nsuch change is to be effective), the Borrower shall notify the Agent of its\nacceptance or non-acceptance of the offers so notified to it pursuant to\nsubsection 2.03(e) (and the failure of the Borrower to give such notice by such\ntime shall constitute non-acceptance) and the Agent shall promptly notify each\naffected Bank. In the case of acceptance, such notice (a \"Notice of Money Market\nBorrowing\") shall specify the aggregate principal amount of offers for each\nInterest Period that are accepted. The Borrower may, but shall not be obligated\nto, accept any Money Market Quote in whole or in part; provided that:\n\n (i) the aggregate principal amount of each Money Market\n Borrowing may not exceed the applicable amount set forth in the related\n Money Market Quote Request,\n\n (ii) the principal amount of each Money Market Borrowing must\n be $10,000,000 or a larger multiple of $1,000,000,\n\n (iii) acceptance of offers may only be made on the basis of\n ascending order of Money Market Margins or Money Market Absolute Rates,\n as the case may be, in each case beginning with the lowest rate so\n offered, and\n\n (iv) the Borrower may not accept any offer where the Agent has\n advised the Borrower that such offer is described in subsection\n 2.03(d)(iii) or that otherwise fails to comply with the requirements of\n this Agreement.\n\n\n\n\n 16\n\n\n 21\n\n\n (g) Allocation by Agent. If offers are made by two or more Banks with\nthe same Money Market Margins or Money Market Absolute Rates, as the case may\nbe, for a greater aggregate principal amount than the amount in respect of which\nsuch offers are accepted for the related Interest Period, the principal amount\nof Money Market Loans in respect of which such offers are accepted shall be\nallocated by the Agent among such Banks as nearly as possible (in multiples of\n$1,000,000, as the Agent may deem appropriate) in proportion to the aggregate\nprincipal amounts of such offers. Determinations by the Agent of the amounts of\nMoney Market Loans shall be conclusive in the absence of manifest error.\n\n SECTION 2.04. Notice to Banks; Funding of Loans.\n\n (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly\nnotify each Bank of the contents thereof and of such Bank's share (if any) of\nsuch Borrowing and such Notice of Borrowing shall not thereafter be revocable by\nthe Borrower.\n\n (b) Not later than 2:00 P.M. (New York City time) on the date of each\nBorrowing, each Bank participating therein shall make available its share of\nsuch Borrowing, in Federal or other funds immediately available in New York\nCity, to the Agent at its address referred to in Section 9.01. Unless the Agent\ndetermines that any applicable condition specified in Article 3 has not been\nsatisfied or waived in accordance with Section 9.05, the Agent will make the\nfunds so received from the Banks available to the Borrower no later than 3:00\nP.M. (New York City time) on such date, in Federal or other funds immediately\navailable in New York City, as directed by the Borrower.\n\n (c) If any Bank makes a new Loan hereunder on any day on which the\nBorrower is to repay all or any part of an outstanding Loan from such Bank, such\nBank shall apply the proceeds of its new Loan to make such repayment and only an\namount equal to the difference (if any) between the amount being borrowed and\nthe amount being repaid shall be made available by such Bank to the Agent as\nprovided in subsection 2.04(b), or remitted by the Borrower to the Agent as\nprovided in Section 2.12, as the case may be.\n\n (d) Unless the Agent shall have received notice from a Bank prior to\nthe date of any Borrowing that such Bank will not make available to the Agent\nsuch Bank's share of such Borrowing, the Agent may assume that such Bank has\nmade such share available to the Agent on the date of such Borrowing in\naccordance with subsections (b) and (c) of this Section 2.04 and the Agent may,\nin reliance upon such assumption, make available to the Borrower on such date a\ncorresponding amount. If and to the extent that such Bank shall not have so made\nsuch share available to the Agent, such Bank and, if such Bank shall not have\npaid\n\n\n\n 17\n\n\n 22\n\nsuch amount to the Agent within two Domestic Business Days of the Agent's demand\ntherefor, the Borrower severally agree to repay to the Agent forthwith on demand\nsuch corresponding amount together with interest thereon, for each day from the\ndate such amount is made available to the Borrower until the date such amount is\nrepaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the\nAgent such corresponding amount, such amount so repaid shall constitute such\nBank's Loan included in such Borrowing for purposes of this Agreement.\n\n (e) The failure of any Bank to make any Loan to be made by it on the\ndate specified therefor shall not relieve any other Bank of any obligation to\nmake a Loan on such date.\n\n SECTION 2.05. Promissory Notes. (a) The Loans of each Bank shall be\nevidenced by a single Promissory Note payable to the order of such Bank for the\naccount of its Applicable Lending Office in an amount equal to the aggregate\nunpaid principal amount of such Bank's Loans.\n\n (b) Each Bank may, by notice to the Borrower and the Agent, request\nthat its Loans of a particular type be evidenced by a separate Promissory Note\nin an amount equal to the aggregate unpaid principal amount of such Loans. Each\nsuch Promissory Note shall be in substantially the form of Exhibit A hereto with\nappropriate modifications to reflect the fact that it evidences solely Loans of\nthe relevant type. Each reference in this Agreement to the \"Promissory Note\" of\nsuch Bank shall be deemed to refer to and include any or all of such Promissory\nNotes, as the context may require.\n\n (c) Upon receipt of each Bank's Promissory Note pursuant to Section\n3.01(b), the Agent shall forward such Promissory Note to such Bank. Each Bank\nshall record the date, amount, type and maturity of each Loan made by it and the\ndate and amount of each payment of principal made by the Borrower with respect\nthereto, and may, if such Bank so elects in connection with any transfer or\nenforcement of its Promissory Note, endorse on the schedule forming a part\nthereof appropriate notations to evidence the foregoing information with respect\nto each such Loan then outstanding; provided that the failure of any Bank to\nmake any such recordation or endorsement shall not affect the obligations of the\nBorrower hereunder or under the Promissory Notes. Each Bank is hereby\nirrevocably authorized by the Borrower so to endorse its Promissory Note and to\nattach to and make a part of its Promissory Note a continuation of any such\nschedule as and when required.\n\n SECTION 2.06. Maturity of Loans. (a) Each Revolving Credit Loan shall\nmature, and the principal amount thereof shall be due and payable (together with\ninterest accrued thereon), on the Termination Date.\n\n\n\n 18\n\n 23\n\n\n (b) Each Term Loan shall mature, and the principal amount thereof shall\nbe due and payable, together with accrued interest thereon, on the Final\nMaturity Date.\n\n (c) Each Money Market Loan included in any Money Market Borrowing shall\nmature, and the principal amount thereof shall be due and payable (together with\ninterest accrued thereon), on the last day of the Interest Period applicable to\nsuch Borrowing.\n\n SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear\ninterest on the outstanding principal amount thereof, for each day from the date\nsuch Loan is made until it becomes due, at a rate per annum equal to the Base\nRate for each such day. Such interest shall be payable at maturity, quarterly in\narrears on each Quarterly Payment Date prior to maturity and, with respect to\nthe principal amount of any Base Rate Loan converted to a CD Loan or a\nEuro-Dollar Loan, on the date such amount is so converted. Any overdue principal\nof or interest on any Base Rate Loan shall bear interest, payable on demand, for\neach day from and including the date payment thereof was due to but excluding\nthe date of actual payment, at a rate per annum equal to the sum of 2% plus the\nrate otherwise applicable to Base Rate Loans for each such day.\n\n (b) Each CD Loan shall bear interest on the outstanding principal\namount thereof, for each day during each Interest Period applicable thereto, at\na rate per annum equal to the sum of the CD Margin for each such day plus the\napplicable Adjusted CD Rate for such Interest Period; provided that if any CD\nLoan shall, as a result of the further proviso to the definition of Interest\nPeriod, have an Interest Period of less than 30 days, such CD Loan shall bear\ninterest during such Interest Period at the rate applicable to Base Rate Loans\nduring such period. Such interest shall be payable for each Interest Period on\nthe last day thereof and, if such Interest Period is longer than 90 days, at\nintervals of 90 days after the first day thereof. Any overdue principal of or\ninterest on any CD Loan shall bear interest, payable on demand, for each day\nfrom and including the date payment thereof was due to but excluding the date of\nactual payment, at a rate per annum equal to the sum of 2% plus the higher of\n(i) the sum of the CD Margin for each such day plus the Adjusted CD Rate\napplicable to such Loan on the day before such payment was due and (ii) the rate\napplicable to Base Rate Loans for each such day.\n\n The \"Adjusted CD Rate\" applicable to any Interest Period means a rate\nper annum determined pursuant to the following formula:\n\n\n\n 19\n\n 24\n\n\n [ CDBR ]*\n ACDR = [ ---------- ] + AR\n [ 1.00 - DRP ]\n\n ACDR = Adjusted CD Rate\n CDBR = CD Base Rate\n DRP = Domestic Reserve Percentage\n AR = Assessment Rate\n\n- ----------\n* The amount in brackets being rounded upward, if\nnecessary, to the next higher 1/100 of 1%\n\n The \"CD BASE RATE\" applicable to any Interest Period is the rate of\ninterest determined by the Agent to be the average (rounded upward, if\nnecessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid\nat 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the\nfirst day of such Interest Period by two or more New York certificate of deposit\ndealers of recognized standing for the purchase at face value from each CD\nReference Bank of its certificates of deposit in an amount comparable to the\nprincipal amount of the CD Loan of such CD Reference Bank to which such Interest\nPeriod applies and having a maturity comparable to such Interest Period.\n\n \"DOMESTIC RESERVE PERCENTAGE\" means for any day that percentage\n(expressed as a decimal) which is in effect on such day, as prescribed by the\nBoard of Governors of the Federal Reserve System (or any successor) for\ndetermining the maximum reserve requirement (including without limitation any\nbasic, supplemental or emergency reserves) for a member bank of the Federal\nReserve System in New York City with deposits exceeding five billion dollars in\nrespect of new non-personal time deposits in dollars in New York City having a\nmaturity comparable to the related Interest Period and in an amount of $100,000\nor more. The Adjusted CD Rate shall be adjusted automatically on and as of the\neffective date of any change in the Domestic Reserve Percentage.\n\n \"ASSESSMENT RATE\" means for any day the annual assessment rate in\neffect on such day which is payable by a member of the Bank Insurance Fund\nclassified as adequately capitalized and within supervisory subgroup \"A\" (or a\ncomparable successor assessment risk classification) within the meaning of 12\nC.F.R. ss. 327.4(a) or any successor provision (a \"BIF Member\") to the Federal\nDeposit Insurance Corporation (or any successor) for the Federal Deposit\nInsurance Corporation's (or such successor's) insuring time deposits at offices\nof such BIF Member in the United States. The Adjusted CD Rate shall be adjusted\nautomatically on and as of the effective date of any change in the Assessment\nRate.\n\n\n 20\n\n 25\n\n\n (c) Each Euro-Dollar Loan shall bear interest on the outstanding\nprincipal amount thereof, for each day during each Interest Period applicable\nthereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for each\nsuch day plus the applicable London Interbank Offered Rate for such Interest\nPeriod. Such interest shall be payable for each Interest Period on the last day\nthereof and, if such Interest Period is longer than three months, at intervals\nof three months after the first day thereof.\n\n The \"LONDON INTERBANK OFFERED RATE\" applicable to any Interest Period\nmeans the average (rounded upward, if necessary, to the next higher 1/16 of 1%)\nof the respective rates per annum at which deposits in dollars are offered to\neach of the Euro-Dollar Reference Banks in the London interbank market at\napproximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the\nfirst day of such Interest Period in an amount approximately equal to the\nprincipal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to\nwhich such Interest Period is to apply and for a period of time comparable to\nsuch Interest Period.\n\n (d) Any overdue principal of or interest on any Euro-Dollar Loan shall\nbear interest, payable on demand, for each day from and including the date\npayment thereof was due to but excluding the date of actual payment, at a rate\nper annum equal to the sum of 2% plus the higher of (i) the sum of the\nEuro-Dollar Margin for such day plus the London Interbank Offered Rate\napplicable to such Loan on the day before such payment was due and (ii) the\nEuro-Dollar Margin for such day plus the quotient obtained (rounded upward, if\nnecessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded\nupward, if necessary, to the next higher 1/16 of 1%) of the respective rates per\nannum at which one day (or, if such amount due remains unpaid more than three\nEuro-Dollar Business Days, then for such other period of time not longer than\nsix months as the Agent may select) deposits in dollars in an amount\napproximately equal to such overdue payment due to each of the Euro-Dollar\nReference Banks are offered to such Euro-Dollar Reference Bank in the London\ninterbank market for the applicable period determined as provided above by (y)\n1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances\ndescribed in subsection (a) or (b) of Section 8.01 shall exist, at a rate per\nannum equal to the sum of 2% plus the rate applicable to Base Rate Loans for\nsuch day).\n\n (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear\ninterest on the outstanding principal amount thereof, for each day during the\nInterest Period applicable thereto, at a rate per annum equal to the sum of the\nLondon Interbank Offered Rate for such Interest Period (determined in accordance\nwith Section 2.07(c) as if the related Money Market LIBOR Borrowing were a\nEuro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the \n\n\n\n 21\n\n 26\n\n\nBank making such Loan in accordance with Section 2.03. Each Money Market\nAbsolute Rate Loan shall bear interest on the outstanding principal amount\nthereof, for each day during the Interest Period applicable thereto, at a rate\nper annum equal to the Money Market Absolute Rate quoted by the Bank making such\nLoan in accordance with Section 2.03. Such interest shall be payable for each\nInterest Period on the last day thereof and, if such Interest Period is longer\nthan three months, at intervals of three months after the first day thereof. Any\noverdue principal of or interest on any Money Market Loan shall bear interest,\npayable on demand, for each day from and including the date payment thereof was\ndue to but excluding the date of actual payment, at a rate per annum equal to\nthe sum of 2% plus the Base Rate for each such day.\n\n (f) The Agent shall determine each interest rate applicable to the\nLoans hereunder. The Agent shall give prompt notice to the Borrower and the\nparticipating Banks of each rate of interest so determined, and its\ndetermination thereof shall be conclusive in the absence of manifest error.\n\n (g) Each Reference Bank agrees to use its best efforts to furnish\nquotations to the Agent as contemplated by this Section. If any Reference Bank\ndoes not furnish a timely quotation, the Agent shall determine the relevant\ninterest rate on the basis of the quotation or quotations furnished by the\nremaining Reference Bank or Banks or, if none of such quotations is available on\na timely basis, the provisions of Section 8.01 shall apply.\n\n SECTION 2.08. Facility Fee. (a) The Borrower shall pay to the Agent for\nthe account of the Banks ratably a facility fee at the Facility Fee Rate. Such\nfacility fee shall accrue (i) from and including the date hereof to but\nexcluding the Termination Date (or earlier date of termination of the\nCommitments in their entirety), on the daily aggregate amount of the Commitments\n(whether used or unused) and (ii) from and including the Termination Date (or\nearlier date of termination of the Commitments in their entirety) to but\nexcluding the date the Loans shall be repaid in their entirety, on the daily\naggregate outstanding principal amount of the Loans.\n\n (b) Accrued fees under this Section shall be payable quarterly in\narrears on each Quarterly Payment Date and upon the date of termination of the\nCommitments in their entirety (and, if later, the date the Loans shall be repaid\nin their entirety).\n\n SECTION 2.09. Optional Termination or Reduction of Commitments. The\nBorrower may, upon at least three Domestic Business Days' notice to the Agent,\n(i) terminate the Commitments at any time, if no Loans are outstanding at such\ntime or (ii) ratably reduce from time to time by an aggregate amount of\n\n\n\n 22\n\n 27\n\n\n$10,000,000 or any larger multiple thereof, the aggregate amount of the\nCommitments in excess of the aggregate outstanding principal amount of the\nLoans. Promptly after receiving a notice pursuant to this Section, the Agent\nshall notify each Bank of the contents thereof.\n\n SECTION 2.10. Mandatory Termination of Commitments. The Commitments\nshall terminate on the Termination Date, and any Revolving Credit Loans then\noutstanding (together with accrued interest thereon) shall be due and payable on\nsuch date.\n\n SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at\nleast one Domestic Business Day's notice to the Agent, prepay any Group of Base\nRate Loans (or any Money Market Borrowing bearing interest at the Base Rate\npursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days'\nnotice to the Agent, subject to Section 2.13, prepay any Group of CD Loans and\n(iii) upon at least three Euro-Dollar Business Days' notice to the Agent,\nsubject to Section 2.13, prepay any Group of Euro-Dollar Loans, in whole at any\ntime, or from time to time in part in amounts aggregating $10,000,000 or any\nlarger multiple of $1,000,000, by paying the principal amount to be prepaid\ntogether with accrued interest thereon to but not including the date of\nprepayment. Each such optional prepayment shall be applied to prepay ratably the\nLoans of the several Banks included in such Group of Loans (or such Money Market\nBorrowing).\n\n (b) Except as provided in Section 2.11(a)(i), the Borrower may not\nprepay all or any portion of the principal amount of any Money Market Loan prior\nto the maturity thereof.\n\n (c) Upon receipt of a notice of prepayment pursuant to this Section,\nthe Agent shall promptly notify each Bank of the contents thereof and of such\nBank's ratable share (if any) of such prepayment and once notice is so given to\nthe Banks, the Borrower's notice of prepayment shall not thereafter be revocable\nby the Borrower.\n\n SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall\nmake each payment of principal of, and interest on, the Loans and of fees\nhereunder, not later than 2:00 P.M. (New York City time) on the date when due,\nin Federal or other funds immediately available in New York City, to the Agent\nat its address referred to in Section 9.01. The Agent will promptly distribute\nto each Bank its ratable share of each such payment received by the Agent for\nthe respective accounts of the Banks. Whenever any payment of principal of, or\ninterest on, the Domestic Loans or of fees shall be due on a day which is not a\nDomestic Business Day, the date for payment thereof shall be extended to the\nnext\n\n\n\n 23\n\n 28\n\n\nsucceeding Domestic Business Day. Whenever any payment of principal of, or\ninterest on, the Euro-Dollar Loans shall be due on a day which is not a\nEuro-Dollar Business Day, the date for payment thereof shall be extended to the\nnext succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day\nfalls in another calendar month, in which case the date for payment thereof\nshall be the next preceding Euro-Dollar Business Day. Whenever any payment of\nprincipal of, or interest on, the Money Market Loans shall be due on a day which\nis not a Euro-Dollar Business Day, the date for payment thereof shall be\nextended to the next succeeding Euro-Dollar Business Day. If the date for any\npayment of principal is extended by operation of law or otherwise, interest\nthereon shall be payable for such extended time.\n\n (b) Unless the Agent shall have received notice from the Borrower prior\nto the date on which any payment is due to the Banks hereunder that the Borrower\nwill not make such payment in full, the Agent may assume that the Borrower has\nmade such payment in full to the Agent on such date and the Agent may, in\nreliance upon such assumption, cause to be distributed to each Bank on such due\ndate an amount equal to the amount then due such Bank. If and to the extent that\nthe Borrower shall not have so made such payment, each Bank shall repay to the\nAgent forthwith on demand such amount distributed to such Bank together with\ninterest thereon, for each day from the date such amount is distributed to such\nBank until the date such Bank repays such amount to the Agent, at the Federal\nFunds Rate.\n\n SECTION 2.13. Funding Losses. If the Borrower makes any payment of\nprincipal with respect to any Fixed Rate Loan or any Fixed Rate Loan is\nconverted to a different type of Loan (pursuant to Article 2, 6 or 8 (other than\nSection 8.02)) on any day other than the last day of an Interest Period\napplicable thereto, or the last day of an applicable period fixed pursuant to\nSection 2.07(d), or if the Borrower fails to borrow, prepay, convert or continue\nany Fixed Rate Loans after notice has been given to any Bank in accordance with\nSection 2.04(a), 2.11(c) or 2.16 (other than as a result of default by such\nBank), the Borrower shall reimburse each Bank within 15 days after written\ndemand for any resulting loss or expense reasonably incurred by it (or by an\nexisting or prospective Participant in the related Loan) in obtaining,\nliquidating or employing deposits from third parties, but excluding loss of\nmargin for the period after any such payment or conversion or failure to borrow,\nprepay, convert or continue; provided that such Bank shall have delivered to the\nBorrower a certificate specifying in reasonable detail the calculation of, and\nthe reasons for, the amount of such loss or expense, which certificate shall be\nconclusive in the absence of manifest error.\n\n SECTION 2.14. Computation of Interest and Fees. Interest based on the\nPrime Rate hereunder shall be computed on the basis of a year of 365 days (or\n366\n\n\n\n\n 24\n\n\n\n 29\n\n\ndays in a leap year) and paid for the actual number of days elapsed (including\nthe first day but excluding the last day). All other interest and fees shall be\ncomputed on the basis of a year of 360 days and paid for the actual number of\ndays elapsed (including the first day but excluding the last day).\n\n SECTION 2.15. Regulation D Compensation. Each Bank may require the\nBorrower to pay, contemporaneously with each payment of interest on the Euro-\nDollar Loans, additional interest on the related Euro-Dollar Loan of such Bank\nat a rate per annum determined by such Bank up to but not exceeding the excess\nof (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus\nthe Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank\nOffered Rate. Any Bank wishing to require payment of such additional interest\n(x) shall so notify the Borrower and the Agent, in which case such additional\ninterest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at\nthe place indicated in such notice with respect to each Interest Period\ncommencing at least three Euro-Dollar Business Days after the giving of such\nnotice, and (y) shall notify the Borrower at least five Euro-Dollar Business\nDays prior to each date on which interest is payable on the Euro-Dollar Loans of\nthe amount then due it under this Section.\n\n \"EURO-DOLLAR RESERVE PERCENTAGE\" means for any day that percentage\n(expressed as a decimal) which is in effect on such day, as prescribed by the\nBoard of Governors of the Federal Reserve System (or any successor) for\ndetermining the maximum reserve requirement for a member bank of the Federal\nReserve System in New York City with deposits exceeding five billion dollars in\nrespect of \"Eurocurrency liabilities\" (or in respect of any other category of\nliabilities which includes deposits by reference to which the interest rate on\nEuro-Dollar Loans is determined or any category of extensions of credit or other\nassets which includes loans by a non-United States office of any Bank to United\nStates residents).\n\n SECTION 2.16. Method of Electing Interest Rates. (a) The Loans included\nin each Committed Borrowing shall bear interest initially at the type of rate\nspecified by the Borrower in the applicable Notice of Committed Borrowing.\nThereafter, the Borrower may from time to time elect to change or continue the\ntype of interest rate borne by each Group of Loans (subject to subsection\n2.16(d) of this Section and the provisions of Article 8), as follows:\n\n (i) if such Loans are Base Rate Loans, the Borrower may elect\n to convert such Loans to CD Loans as of any Domestic Business Day or to\n Euro-Dollar Loans as of any Euro-Dollar Business Day;\n\n\n\n\n 25\n\n 30\n\n\n (ii) if such Loans are CD Loans, the Borrower may elect to\n convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to\n continue such Loans as CD Loans for an additional Interest Period,\n subject to Section 2.13 if any such conversion is effective on any day\n other than the last day of an Interest Period applicable to such Loans;\n and\n\n (iii) if such Loans are Euro-Dollar Loans, the Borrower may\n elect to convert such Loans to Base Rate Loans or CD Loans or elect to\n continue such Loans as Euro-Dollar Loans for an additional Interest\n Period, subject to Section 2.13 if any such conversion is effective on\n any day other than the last day of an Interest Period applicable to\n such Loans.\n\nEach such election shall be made by delivering a notice (a \"Notice of Interest\nRate Election\") to the Agent not later than 10:30 A.M. (New York City time) on\nthe third Euro-Dollar Business Day before the conversion or continuation\nselected in such notice is to be effective (unless the relevant Loans are to be\nconverted from Domestic Loans of one type to Domestic Loans of the other type or\nare CD Loans to be continued as CD Loans for an additional Interest Period, in\nwhich case such notice shall be delivered to the Agent not later than 10:30 A.M.\n(New York City time) on the second Domestic Business Day before such conversion\nor continuation is to be effective). A Notice of Interest Rate Election may, if\nit so specifies, apply to only a portion of the aggregate principal amount of\nthe relevant Group of Loans; provided that (i) such portion is allocated ratably\namong the Loans comprising such Group and (ii) the portion to which such Notice\napplies, and the remaining portion to which it does not apply, are each at least\n$10,000,000 (unless such portion is comprised of Base Rate Loans). If no such\nnotice is timely received before the end of an Interest Period for any Group of\nCD Loans or Euro-Dollar Loans, the Borrower shall be deemed to have elected that\nsuch Group of Loans be converted to Base Rate Loans at the end of such Interest\nPeriod.\n\n (b) Each Notice of Interest Rate Election shall specify:\n\n (i) the Group of Loans (or portion thereof) to which such\n notice applies;\n\n (ii) the date on which the conversion or continuation selected\n in such notice is to be effective, which shall comply with the\n applicable clause of subsection 2.16(a) above;\n\n (iii) if the Loans comprising such Group are to be converted,\n the new type of Loans and, if the Loans resulting from such conversion\n are to be CD Loans or Euro-Dollar Loans, the duration of the next\n succeeding Interest Period applicable thereto; and\n\n\n\n 26\n\n 31\n\n\n\n (iv) if such Loans are to be continued as CD Loans or\n Euro-Dollar Loans for an additional Interest Period, the duration of\n such additional Interest Period.\n\nEach Interest Period specified in a Notice of Interest Rate Election shall\ncomply with the provisions of the definition of Interest Period.\n\n (c) Promptly after receiving a Notice of Interest Rate Election from\nthe Borrower pursuant to subsection (a) above, the Agent shall notify each Bank\nof the contents thereof and such notice shall not thereafter be revocable by the\nBorrower.\n\n (d) The Borrower shall not be entitled to elect to convert any\nCommitted Loans to, or continue any Committed Loans for an additional Interest\nPeriod as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts\nof any Group of CD Loans or Euro-Dollar Loans created or continued as a result\nof such election would be less than $10,000,000 or (ii) a Default shall have\noccurred and be continuing when the Borrower delivers notice of such election to\nthe Agent.\n\n SECTION 2.17. Optional Increase in Commitments. At any time, if no\nDefault shall have occurred and be continuing, the Borrower may, if it so\nelects, increase the aggregate amount of the Commitments, either by designating\na financial institution not theretofore a Bank to become a Bank (such\ndesignation to be effective only with the prior written consent of the Agent,\nwhich consent will not be unreasonably withheld) or by agreeing with an existing\nBank that such Bank's Commitment shall be increased. Upon execution and delivery\nby the Borrower and such Bank or other financial institution of an instrument in\nform reasonably satisfactory to the Agent, such existing Bank shall have a\nCommitment as therein set forth or such other financial institution shall become\na Bank with a Commitment as therein set forth and all the rights and obligations\nof a Bank with such a Commitment hereunder; provided:\n\n (a) that the Borrower shall provide prompt notice of such increase to\nthe Agent, who shall promptly notify the Banks;\n\n (b) that no Commitment of any Bank exceeds, as a result of such\nincrease, 10% of the aggregate amount of the Commitments; and\n\n (c) that the amount of such increase, together with all other increases\nin the aggregate amount of the Commitments pursuant to this Section 2.17 since\nthe date of this Agreement, does not exceed $750,000,000.\n\n\n\n 27\n\n\n 32\n\n\n\n Upon any increase in the aggregate amount of the Commitments pursuant\nto this Section 2.17, within five Domestic Business Days, in the case of any\nGroup of Base Rate Loans then outstanding, and at the end of the then current\nInterest Period with respect thereto, in the case of any Group of Euro-Dollar\nLoans or CD Loans then outstanding, the Borrower shall prepay such Group in its\nentirety and, to the extent the Borrower elects to do so and subject to the\nconditions specified in Article 3, the Borrower shall reborrow Committed Loans\nfrom the Banks in proportion to their respective Commitments after giving effect\nto such increase, until such time as all outstanding Committed Loans are held by\nthe Banks in such proportion.\n\n\n\n ARTICLE 3\n CONDITIONS\n\n SECTION 3.01. Effectiveness. This Agreement shall become effective on\nthe date that each of the following conditions shall have been satisfied (or\nwaived in accordance with Section 9.05):\n\n (a) receipt by the Agent of counterparts hereof signed by each of the\nparties hereto (or, in the case of any party as to which an executed counterpart\nshall not have been received, receipt by the Agent in form satisfactory to it of\ntelegraphic, telex or other written confirmation from such party of execution of\na counterpart hereof by such party);\n\n (b) receipt by the Agent of a duly executed Promissory Note for the\naccount of each Bank dated on or before the Effective Date complying with the\nprovisions of Section 2.05;\n\n (c) receipt by the Agent of the Parent Guarantee, duly executed by the\nParent Guarantor;\n\n (d) receipt by the Agent of an opinion of each of (i) Mark A. Belnick,\nExecutive Vice President and Chief Corporate Counsel of the Parent Guarantor,\nsubstantially in the form of Exhibit E hereto, (ii) Beghin Nothar Feider Loeff\nClaeys Verbeke, special Luxembourg counsel for the Borrower, substantially in\nthe form of Exhibit F hereto and (iii) Appleby, Spurling & Kempe, special\nBermuda counsel for the Parent Guarantor, substantially in the form of Exhibit G\nhereto;\n\n (e) receipt by the Agent of an opinion of Davis Polk & Wardwell,\nspecial counsel for the Agent, substantially in the form of Exhibit H hereto and\n\n\n\n 28\n\n\n 33\n\n\ncovering such additional matters relating to the transactions contemplated\nhereby as the Required Banks may reasonably request;\n\n (f) receipt by the Agent of all documents the Agent may reasonably\nrequest relating to the existence of the Borrower and the Parent Guarantor, the\ncorporate authority for and the validity of this Agreement, the Parent Guarantee\nand the Promissory Notes, and any other matters reasonably determined by the\nAgent to be relevant hereto, all in form and substance reasonably satisfactory\nto the Agent;\n\n (g) receipt by the Agent of evidence satisfactory to it that all\nprincipal of any loans outstanding under, and all accrued interest and fees\nunder, the Existing 364-Day Agreement shall have been paid in full; and\n\n (h) receipt by the Agent of payment of participation fees for the\naccount of the Banks in the respective amounts heretofore mutually agreed;\n\nprovided that this Agreement shall not become effective or be binding on any\nparty hereto unless all of the foregoing conditions are satisfied not later than\nFebruary 15, 1999. The Agent shall promptly notify the Borrower, each Bank and\neach other party to the Existing Credit Agreements of the Effective Date, and\nsuch notice shall be conclusive and binding on all parties to the Financing\nDocuments.\n\n SECTION 3.02. Existing Agreements. (a) On the Effective Date, the\ncommitments under the Existing 364-Day Agreement shall terminate, without\nfurther action by any party thereto.\n\n (b) On the Effective Date, without further action by any party to the\nExisting Five-Year Agreement, the Existing Five-Year Agreement shall be amended\nas follows:\n\n (i) The following provisions of the Existing Five-Year\n Agreement shall be amended to read exactly as the corresponding\n provisions of this Agreement:\n\n (A) the following definitions: Borrower, Financing\n Documents, Indenture, Material Adverse Effect, Obligor, Parent\n Guarantee, Parent Guarantor, Responsible Officer, Significant\n Subsidiary, Subsidiary Guarantor, TycoLux Debt Securities and\n Wholly-Owned Consolidated Subsidiary;\n\n (B) subsections (b), (c), (d) and (e) of Section\n 2.07;\n\n\n\n 29\n\n 34\n\n\n\n (C) subsection (d) of Section 3.03;\n\n (D) Articles 4, 5 and 6; and\n\n (E) Section 9.08.\n\n (ii) The following new provisions are added to the Existing\n Five- Year Agreement to read exactly as the corresponding provisions of\n this Agreement:\n\n (A) the following definitions: CD Margin, Euro-Dollar\n Margin, Facility Fee Rate and Pricing Schedule; and\n\n (B) Section 9.12.\n\n (iii) The following portions of the Existing Five-Year\n Agreement are deleted:\n\n (A) Exhibits E-1, E-2, F, H, I, L, K and M;\n\n (B) the following definitions: Acquisition,\n Applicable Margin, Consolidated Assets, Consolidated Debt,\n Consolidated EBIT, Consolidated Interest Expense, Consolidated\n Net Income, Consolidated Net Worth, Consolidated Subsidiary,\n Consolidated Tangible Assets, Consolidated Tangible Net Worth,\n Consolidated Total Capitalization, Debt, Domestic Parent,\n ERISA, ERISA Group, Existing Agreements, Existing Five-Year\n Agreement, Existing 364-Day Agreement, Existing Tyco US Debt,\n Guarantee, Guarantor, Hazardous Substances, Intangible Assets,\n Internal Revenue Code, Level I Status, Level II Status, Level\n III Status, Level IV Status, Level V Status, Level VI Status,\n Material Debt, Material Plan, Multiemployer Plan, New Borrower\n Agreement, New Borrower Date, PBGC, Permitted Receivables\n Transaction, Plan, Prospects, Refinancing, Related Agreement,\n Status, Subsidiary Guarantee, Tyco Luxembourg, Tyco US and\n Unfunded Liabilities;\n\n (C) Section 1.02;\n\n (D) subsection (h) of Section 2.07;\n\n (E) the second paragraph of Section 2.08(a) and\n\n (F) Section 3.01, 3.02 and 3.04.\n\n\n\n 30\n\n\n 35\n\n\n\n (iv) The definition of Termination Date is amended to read as\n follows:\n\n \"TERMINATION DATE\" means February 12, 2003; provided that if\n such date is not a Euro-Dollar Business Day, the Termination Date shall\n be the next preceding Euro-Dollar Business Day.\n\n\n (v) The pricing schedule set forth as Exhibit K to this\n Agreement is added to the Existing Five-Year Agreement as the Pricing\n Schedule referred to therein.\n\n (c) The Banks which are parties to the Existing Credit Agreements,\ncomprising the \"Required Banks\" as defined therein, hereby (i) waive any\nrequirement of notice of termination of the commitments pursuant to Section 2.09\nof the Existing 364-Day Agreement and of prepayment of Loans to the extent\nnecessary to give effect to the subsections 3.01(g) and 3.02(a), provided that\nany such prepayment of Loans shall be subject to Section 2.13 of the Existing\n364- Day Agreement and (ii) agree to the amendments specified in subsection\n3.02(b) and the amendment and restatement of the \"Parent Guarantee\" (as defined\nin the Existing Credit Agreements) pursuant to subsection 3.01(c).\n\n SECTION 3.03. Borrowings. The obligation of any Bank to make a Loan on\nthe occasion of any Borrowing is subject to the satisfaction (or waiver in\naccordance with Section 9.05) of the following conditions:\n\n (a) receipt by the Agent of a Notice of Borrowing as required by\nSection 2.02 or 2.03, as the case may be;\n\n (b) the fact that, immediately after such Borrowing, the aggregate\noutstanding principal amount of the Loans will not exceed the aggregate amount\nof the Commitments;\n\n (c) the fact that, immediately before and after such Borrowing, no\nDefault shall have occurred and be continuing; and\n\n (d) the fact that the representations and warranties of each Obligor\ncontained in the Financing Documents (except the representations and warranties\nset forth in Section 3.04(a) and (b) of the Parent Guarantee, which are made\nonly as of the date of the Parent Guarantee) shall be true in all material\nrespects on and as of the date of such Borrowing.\n\n\n 31\n\n\n 36\n\n\n\n Each Borrowing hereunder shall be deemed to be a representation and\nwarranty by the Borrower on the date of such Borrowing as to the facts specified\nin subsections (b), (c) and (d) of this Section.\n\n\n\n ARTICLE 4\n REPRESENTATIONS AND WARRANTIES\n\n The Borrower represents and warrants to the Agent and the Banks that:\n\n SECTION 4.01. Corporate Existence and Power. The Borrower is a company\nduly organized and validly existing under the laws of its jurisdiction of\norganization. The Borrower has all corporate powers and all governmental\nlicenses, authorizations, consents and approvals (collectively, the \"Consents\")\nrequired to carry on its business as now conducted, other than those powers and\nConsents, the failure of which to be possessed or obtained could not, based upon\nthe facts and circumstances in existence at the time this representation and\nwarranty is made or deemed made, reasonably be expected to have a Material\nAdverse Effect.\n\n SECTION 4.02. Corporate and Governmental Authorization; No\nContravention. The execution, delivery and performance by the Borrower of this\nAgreement and the Promissory Notes: (a) are within the Borrower's corporate\npowers; (b) have been duly authorized by all necessary corporate action on the\npart of the Borrower; (c) require no action by or in respect of, or filing with,\nany governmental body, agency or official, in each case, on the part of the\nBorrower; and (d) do not contravene, or constitute a default by the Borrower\nunder, any provision of (i) applicable law or regulation, (ii) the\norganizational documents of the Borrower, or (iii) any agreement or instrument\nevidencing or governing debt of the Borrower or any other material agreement,\njudgment, injunction, order, decree or other instrument binding upon the\nBorrower.\n\n SECTION 4.03. Binding Effect. This Agreement constitutes a valid and\nbinding agreement of the Borrower and the Promissory Notes, when executed and\ndelivered in accordance with this Agreement, will constitute valid and binding\nobligations of the Borrower.\n\n SECTION 4.04. Litigation. There is no action, suit or proceeding\npending against, or to the knowledge of the Borrower threatened against or\naffecting, the Borrower or any of its Subsidiaries before any court or\narbitrator or any governmental body, agency or official in which there is a\nreasonable possibility of an adverse decision which could, based upon the facts\nand circumstances in\n\n\n\n 32\n\n\n 37\n\n\nexistence at the time this representation and warranty is made or deemed made,\nreasonably be expected to have a Material Adverse Effect or which in any manner\ndraws into question the validity of the Financing Documents.\n\n SECTION 4.05. Not an Investment Company. The Borrower is not an\n\"investment company\" within the meaning of the Investment Company Act of 1940,\nas amended.\n\n\n\n ARTICLE 5\n COVENANTS\n\n The Borrower agrees that, so long as any Bank has any Commitment\nhereunder or any amount payable under any Promissory Note remains unpaid:\n\n SECTION 5.01. Information. The Borrower will deliver to each of the\nBanks:\n\n (a) within five Domestic Business Days after any Responsible Officer\nobtains knowledge of any Default, if such Default is then continuing, a\ncertificate on behalf of the Borrower signed by the chief financial officer, the\nchief accounting officer or the treasurer of the Borrower setting forth, in\nreasonable detail, the nature thereof and the action which the Borrower is\ntaking or proposes to take with respect thereto;\n\n (b) promptly upon the filing thereof, copies of all final registration\nstatements (other than the exhibits thereto and any registration statements on\nForm S-8 or its equivalent) and final reports on Forms 10-K, 10-Q and 8-K (or\ntheir equivalents) which the Borrower may file with the Securities and Exchange\nCommission;\n\n (c) promptly following, and in any event within 10 days of, any change\nin a Debt Rating by any Rating Agency, notice thereof; and\n\n (d) from time to time, upon reasonable notice, such additional\ninformation regarding the financial position or business of the Borrower and its\nSubsidiaries as the Agent, at the request of any Bank, may reasonably request.\n\n Information required to be delivered pursuant to subsection (b) above\nshall be deemed to have been delivered on the date on which the Borrower\nprovides (or causes to be provided) notice to the Banks that such information\nhas been posted on the Parent Guarantor's website on the Internet at the website\naddress listed on\n\n\n 33\n\n 38\n\n\n\nthe signature pages hereof, at sec.gov/edaux/searches.htm or at another website\nidentified in such notice and accessible by the Banks without charge; provided\nthat (i) such notice may be included in a certificate delivered pursuant to\nSection 4.01(c) of the Parent Guarantee and (ii) the Borrower shall deliver\npaper copies of the information referred to in subsection (b) to any Bank which\nrequests such delivery.\n\n SECTION 5.02. Payment of Obligations. The Borrower will pay and\ndischarge, and will cause each Subsidiary to pay and discharge, at or before\nmaturity, all their respective material obligations and liabilities, including,\nwithout limitation, tax liabilities, except where (i) any such failure to so pay\nor discharge could not, based upon the facts and circumstances in existence at\nthe time, reasonably be expected to have a Material Adverse Effect or (ii) such\nliabilities or obligations may be contested in good faith by appropriate\nproceedings. The Borrower will maintain, and will cause each Subsidiary to\nmaintain, in accordance with generally accepted accounting principles,\nappropriate reserves for the accrual of any of such liabilities or obligations.\n\n SECTION 5.03. Maintenance of Property; Insurance. (a) Except as\npermitted by Section 5.04 or 5.07, the Borrower will keep, and will cause each\nSubsidiary to keep, all property necessary in its business in good working order\nand condition, ordinary wear and tear excepted, unless the failure to so keep\ncould not, based upon the facts and circumstances existing at the time,\nreasonably be expected to have a Material Adverse Effect.\n\n (b) The Borrower will maintain, and will cause each Subsidiary to\nmaintain, with financially sound and reputable insurers, insurance with respect\nto its assets and business against such casualties and contingencies, of such\ntypes (including, without limitation, loss or damage, product liability,\nbusiness interruption, larceny, embezzlement or other criminal misappropriation)\nand in such amounts as is customary in the case of similarly situated\ncorporations of established reputations engaged in the same or a similar\nbusiness, unless the failure to maintain such insurance could not, based upon\nthe facts and circumstances existing at the time, reasonably be expected to have\na Material Adverse Effect.\n\n SECTION 5.04. Conduct of Business and Maintenance of Existence. The\nBorrower (a) will continue, and will cause each Subsidiary to continue, to\nengage in business of the same general type as now conducted by the Borrower and\nits Subsidiaries and reasonably related extensions thereof, and (b) will\npreserve, renew and keep in full force and effect, and will cause each\nSubsidiary to preserve, renew and keep in full force and effect (x) their\nrespective corporate existence and (y) their respective rights, privileges and\nfranchises necessary or\n\n\n 34\n\n 39\n\n\ndesirable in the normal conduct of business, unless in the case of either the\nfailure of the Borrower to comply with subclause (b) (y) of this Section 5.04 or\nthe failure of a Subsidiary to comply with clauses (a) or (b) of this Section\n5.04, such failure could not, based upon the facts and circumstances existing at\nthe time, reasonably be expected to have a Material Adverse Effect; provided\nthat nothing in this Section 5.04 shall prohibit (i) the merger or consolidation\nof a Subsidiary with or into the Borrower or a Wholly-Owned Consolidated\nSubsidiary, (ii) the sale, lease, transfer, assignment or other disposition by a\nSubsidiary of all or any part of its assets to the Borrower or to a Wholly-Owned\nConsolidated Subsidiary, (iii) the merger or consolidation of a Subsidiary with\nor into a Person other than the Borrower or a Wholly-Owned Consolidated\nSubsidiary, if the Person surviving such consolidation or merger is a Subsidiary\nof the Parent Guarantor and immediately after giving effect thereto, no Default\nshall have occurred and be continuing, (iv) the sale, lease, transfer,\nassignment or other disposition by a Subsidiary of all or any part of its assets\nto a Person other than the Borrower or a Wholly-Owned Consolidated Subsidiary if\nthe Person to which such sale, lease, transfer, assignment or other disposition\nis made is a Subsidiary of the Parent Guarantor and immediately after giving\neffect thereto, no Default shall have occurred and be continuing, (v) any\ntransaction permitted pursuant to Section 5.07, (vi) the termination of the\ncorporate existence of any Subsidiary if the Borrower in good faith determines\nthat such termination is in the best interest of the Borrower and is not\nmaterially disadvantageous to the Banks and (vii) the sale, lease, transfer,\nassignment or other disposition (including any such transaction by way of merger\nor consolidation) by the Borrower of all or any part of its assets to a Person\nother than the Borrower or a Subsidiary if (A) immediately after giving effect\nthereto, no Default shall have occurred and be continuing and (B) the Borrower\nis a Subsidiary of such Person or the Borrower and such Person are Subsidiaries\nof the same Person.\n\n SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause\neach Subsidiary to comply, in all material respects with all applicable laws,\nordinances, rules, regulations, and requirements of governmental authorities\n(including, without limitation, Environmental Laws and ERISA and the rules and\nregulations thereunder) except where (a) noncompliance therewith could not,\nbased upon the facts and circumstances in existence at the time, reasonably be\nexpected to have a Material Adverse Effect or (b) the necessity of compliance\ntherewith is contested in good faith by appropriate proceedings.\n\n SECTION 5.06. Inspection of Property, Books and Records;\nConfidentiality. (a) The Borrower will keep, and will cause each Subsidiary to\nkeep, proper books of record and account in which true and correct entries shall\nbe made of its business transactions and activities so that financial statements\nthat\n\n 35\n\n\n 40\n\nfairly present its business transactions and activities can be properly prepared\nin accordance with generally accepted accounting principles.\n\n (b) The Borrower will permit, and will cause each Subsidiary to permit,\nrepresentatives of any Bank at such Bank's expense to visit and inspect any of\ntheir respective properties, to examine and make abstracts from any of their\nrespective books and records and to discuss their respective affairs, finances\nand accounts with their respective officers, employees and independent public\naccountants, all upon reasonable notice to the Borrower, at such reasonable\ntimes and as often as may reasonably be requested by any Bank.\n\n (c) Each Bank and the Agent shall, by its receipt of Confidential\nInformation (as defined below) pursuant to or in connection with this Agreement\nor its exercise of any of its rights hereunder, be deemed to have agreed (on\nbehalf of itself and each of its affiliates, directors, officers, employees and\nrepresentatives) to (i) keep such information confidential, (ii) (except as\npermitted by clause (iii) of this Section 5.06(c)) not disclose such information\nto any Person other than an officer, director, employee, legal counsel,\nindependent auditor or authorized agent or advisor of the Agent or such Bank\nneeding to know such information (it being understood that any such officer,\ndirector, employee, legal counsel, independent auditor or authorized agent or\nadvisor shall be informed by the Agent or such Bank of the confidential nature\nof such information), (iii) not disclose such information to any Assignee or\nParticipant (or prospective Assignee or Participant), unless such Assignee or\nParticipant (or prospective Assignee or Participant) shall agree in writing to\nbe bound by the provisions of this Section 5.06(c) and (iv) not use any such\ninformation except for purposes relating to this Agreement or the Notes. The\nterm \"Confidential Information\" shall mean non-public information furnished by\nor on behalf of the Borrower or any of its Subsidiaries to the Agent, any Bank\nor other Person exercising rights hereunder or required to be bound hereby\n(collectively \"Recipients\"), but shall not include any such information which\n(1) has become or hereafter becomes available to the public other than as a\nresult of a disclosure by a Recipient, or (2) has become or hereafter becomes\navailable to a Recipient, on a non-confidential basis, from a source other than\nthe Borrower or any of its Subsidiaries (or any of their respective\nrepresentatives or agents) or any Recipient, which source, to the knowledge of\nthe Recipient, is not prohibited from disclosing such information by a\nconfidentiality agreement with, or other legal or fiduciary obligation to, the\nBorrower or its Subsidiaries.\n\n The restrictions set forth in the immediately preceding paragraph shall\nnot prevent the disclosure by a Recipient of any such information:\n\n (A) with the prior written consent of the Borrower,\n\n\n\n\n 36\n\n 41\n\n\n (B) at the request of a bank regulatory agency or in\n connection with an examination by bank examiners, or\n\n (C) upon order of any court or administrative agency\n of competent jurisdiction, to the extent required by such\n order and not effectively stayed on appeal or otherwise, or as\n otherwise required by law; provided that in the case of any\n intended disclosure under this clause (C), the Recipient shall\n (unless otherwise required by applicable law) give the\n Borrower not less than five Domestic Business Days prior\n notice (or such shorter period as may, in the good faith\n discretion of the Recipient, be reasonable under the\n circumstances or may be required by any court or agency under\n the circumstances), specifying the Confidential Information\n involved and stating such Recipient's intention to disclose\n such Confidential Information (including the manner and extent\n of such disclosure) in order to allow the Borrower an\n opportunity to seek an appropriate protective order.\n\n Each Recipient shall agree that, in addition to all other remedies\navailable, the Borrower shall be entitled to specific performance and injunctive\nand other equitable relief as a remedy for any breach of this Section 5.06(c) by\nsuch Recipient.\n\n SECTION 5.07. Consolidations, Mergers and Sales of Assets. The\nBorrower will not (i) consolidate or merge with or into any other Person or (ii)\nsell, lease or otherwise transfer all or substantially all of its assets to any\nother Person, unless\n\n (A) the Borrower or a Subsidiary is the surviving\n corporation;\n\n (B) the Person (if other than the Borrower) formed by\n such consolidation or into which the Borrower is merged, or\n the Person which acquires by sale or other transfer, or which\n leases, all or substantially all of the assets of the Borrower\n (any such Person, the \"Successor\"), shall be organized and\n existing under the laws of Luxembourg, and shall expressly\n assume, in a writing executed and delivered to the Agent for\n delivery to each of the Banks, in form reasonably satisfactory\n to the Agent, the due and punctual payment of the principal of\n and interest on the Promissory Notes and the performance of\n the other obligations under this Agreement and the Promissory\n Notes on the part of the Borrower to be performed or\n\n\n 37\n\n 42\n\n\n observed, as fully as if such Successor were originally named\n as the Borrower in this Agreement;\n\n (C) immediately after giving effect to such\n transaction, no Default shall have occurred and be continuing;\n and\n\n (D) the Borrower has delivered to the Agent a\n certificate on behalf of the Borrower signed by a Responsible\n Officer and an opinion of counsel (which counsel may be an\n employee of the Borrower), each stating that all conditions\n provided in this Section 5.07 relating to such transaction\n have been satisfied.\n\n The foregoing provisions of this Section 5.07 shall not restrict the\nmerger or consolidation of any Subsidiary with and into the Borrower.\n\n Upon the satisfaction (or waiver in accordance with Section 9.05) of\nthe conditions set forth in this Section 5.07, the Successor shall succeed, and\nmay exercise every right and power of, the Borrower under this Agreement and the\nPromissory Notes with the same effect as if the Successor had been originally\nnamed as the Borrower herein and in the Promissory Notes, and the Borrower shall\nbe relieved of its obligations under this Agreement and the Promissory Notes.\n\n SECTION 5.08. Use of Proceeds. The proceeds of the Loans made under\nthis Agreement will be used by the Borrower for its general corporate purposes,\nincluding, without limitation, capital expenditures and (subject to the\nfollowing sentence) acquisitions. None of such proceeds will be used, directly\nor indirectly, for the purpose, whether immediate, incidental or ultimate, of\nbuying or carrying any \"margin stock\" within the meaning of Regulation U.\n\n SECTION 5.09. Transactions with Affiliates. The Borrower will not, and\nwill not permit any Subsidiary to, directly or indirectly, pay any funds to or\nfor the account of, make any investment (whether by acquisition of stock or\nindebtedness, by loan, advance, transfer of property, guarantee or other\nagreement to pay, purchase or service, directly or indirectly, any Debt, or\notherwise) in, lease, sell, transfer or otherwise dispose of any assets,\ntangible or intangible, to, or participate in, or effect any transaction in\nconnection with any joint enterprise or other joint arrangement with, any\nAffiliate (collectively, \"AFFILIATE TRANSACTIONS\"); provided, however, that the\nforegoing provisions of this Section 5.09 shall not prohibit the Borrower or any\nof its Subsidiaries from: (a) making sales to or purchases from any Affiliate\nand, in connection therewith, extending credit or making payments, or from\nmaking payments for services rendered by any Affiliate, if such sales or\npurchases are made or such services are rendered in the\n\n \n\n 38\n\n\n 43\n\n\nordinary course of business and on terms and conditions at least as favorable to\nthe Borrower or such Subsidiary as the terms and conditions which the Borrower\nwould reasonably expect to be obtained in a similar transaction with a Person\nwhich is not an Affiliate at such time, (b) making payments of principal,\ninterest and premium on any debt of the Borrower or such Subsidiary held by an\nAffiliate if the terms of such debt are at least as favorable to the Borrower or\nsuch Subsidiary as the terms which the Borrower would reasonably expect to have\nbeen obtained at the time of the creation of such debt from a lender which was\nnot an Affiliate, (c) participating in, or effecting any transaction in\nconnection with, any joint enterprise or other joint arrangement with any\nAffiliate if the Borrower or such Subsidiary participates in the ordinary course\nof its business and on a basis no less advantageous than the basis on which such\nAffiliate participates, (d) paying or granting reasonable compensation and\nbenefits to any director, officer, employee or agent of the Borrower or any\nSubsidiary, (e) paying reasonable legal fees and expenses to a law firm of which\nan Affiliate is a member or (f) engaging in any Affiliate Transaction not\notherwise addressed in subsections (a) - (e) of this Section 5.09, the\nconsummation of which could not reasonably be expected to have a Material\nAdverse Effect.\n\n SECTION 5.10. Subsidiary Guarantors. If any Subsidiary becomes a\nguarantor of TycoLux Debt Securities under the Indenture, the Borrower will\ncause such Person to become a Subsidiary Guarantor concurrently therewith.\n\n ARTICLE 6\n DEFAULTS\n\n SECTION 6.01. Events of Defaults. If one or more of the following\nevents (\"EVENTS OF DEFAULT\") shall have occurred and be continuing and shall not\nhave been waived in accordance with Section 9.05:\n\n (a) any principal of any Loan shall not be paid when due, or any\ninterest on any Loan or any fees payable hereunder shall not be paid within\nthree Domestic Business Days of the due date thereof;\n\n (b) the Borrower shall fail to observe or perform any covenant\ncontained in Section 5.10;\n\n (c) the Borrower shall fail to observe or perform any covenant\ncontained in Sections 5.07 to 5.09, inclusive, and such failure shall not be\nremedied within five days after any Responsible Officer obtains actual knowledge\nthereof;\n\n (d) the Borrower shall fail to observe or perform any covenant or\nagreement contained in this Agreement (other than those covered by clause (a),\n(b)\n\n 39\n\n\n 44\n\n\n\nor (c) of this Section 6.01) for 10 days after notice thereof has been given to\nthe Borrower by the Agent at the request of any Bank;\n\n (e) any representation, warranty, certification or statement made in\nwriting by the Borrower in the Financing Documents or in any certificate,\nfinancial statement or other document required to be delivered to the Agent or\nany of the Banks pursuant to the Financing Documents shall prove to have been\nincorrect in any material respect when made (or deemed made);\n\n (f) there shall occur any Guarantor Event of Default (as defined in the\nParent Guarantee);\n\n (g) the Borrower shall (i) commence a voluntary case or other\nproceeding seeking liquidation, reorganization or other relief with respect to\nitself or its debts under any bankruptcy, insolvency or other similar law now or\nhereafter in effect or seeking the appointment of a trustee, receiver,\nliquidator, custodian or other similar official of it or substantially all of\nits property, or (ii) consent to any such relief or to the appointment of or\ntaking possession by any such official in an involuntary case or other similar\nproceeding commenced against it, or (iii) make a general assignment for the\nbenefit of creditors, or (iv) fail generally to pay its debts as they become\ndue, or (v) take corporate action authorizing any of the foregoing;\n\n (h) (i) an involuntary case or other proceeding shall be commenced\nagainst the Borrower seeking liquidation, reorganization or other relief with\nrespect to it or its debts under any bankruptcy, insolvency or other similar law\nnow or hereafter in effect or seeking the appointment of a trustee, receiver,\nliquidator, custodian or other similar official of it or substantially all of\nits property, and such involuntary case or other proceeding shall remain in\neffect and undismissed and unstayed for a period of 60 consecutive days or (ii)\nan order for relief shall be entered against the Borrower under the federal\nbankruptcy laws as now or hereafter in effect;\n\n (i) a judgment or order for the payment of money in excess of\n$30,000,000 (after deducting amounts covered by insurance, except to the extent\nthat the insurer providing such insurance has declined such coverage) shall be\nrendered against the Borrower or any Subsidiary and, within 60 days after entry\nthereof, such judgment or order is not discharged or execution thereof stayed\npending appeal, or within 60 days after the expiration of any such stay, such\njudgment or order is not discharged;\n\n (j) the Borrower shall cease to be a Wholly-Owned Consolidated\nSubsidiary of the Parent Guarantor; or\n\n\n\n 40\n\n 45\n\n\n\n (k) any Financing Document shall cease to be valid and enforceable\n(except for the termination of a Subsidiary Guarantee in accordance with its\nterms); or any Obligor shall so assert in writing;\n\nthen, and in every such event, the Agent shall (i) if requested by Banks having\nmore than 60% in aggregate amount of the Commitments, by notice to the Borrower\nterminate the Commitments and they shall thereupon terminate, and (ii) if\nrequested by Banks holding Promissory Notes evidencing more than 60% in\naggregate principal amount of the Loans, by notice to the Borrower declare the\nPromissory Notes (together with accrued interest thereon) to be, and the\nPromissory Notes shall thereupon become, immediately due and payable without\npresentment, demand, protest or other notice of any kind, all of which are\nhereby waived by the Borrower; provided that in the case of any of the Events of\nDefault specified in subsection (g) or (h) above or any Guarantor Event of\nDefault specified in Section 5.01(g) of the Parent Guarantee with respect to any\nObligor, without any notice to the Borrower or any other act by the Agent or the\nBanks, the Commitments shall thereupon terminate and the Promissory Notes\n(together with accrued interest thereon) shall become immediately due and\npayable without presentment, demand, protest or other notice of any kind, all of\nwhich are hereby waived by the Borrower.\n\n SECTION 6.02. Notice of Default. The Agent shall give notice to the\nBorrower under Section 6.01(d) promptly upon being requested to do so by any\nBank and shall thereupon notify all the Banks thereof.\n\n ARTICLE 7\n THE AGENT\n\n SECTION 7.01. Appointment and Authorization. Each Bank irrevocably\nappoints and authorizes the Agent to take such action as agent on its behalf and\nto exercise such powers under the Financing Documents as are delegated to the\nAgent by the terms hereof or thereof, together with all such powers as are\nreasonably incidental thereto.\n\n SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of\nNew York (and any successor acting as Agent) in its capacity as a Bank hereunder\nshall have the same rights and powers under the Financing Documents as any other\nBank and may exercise or refrain from exercising the same as though it were not\nthe Agent, and Morgan Guaranty Trust Company of New York (and any successor\nacting as Agent) and its affiliates may accept deposits from, lend money\n\n\n\n 41\n\n 46\n\nto, and generally engage in any kind of business with the Borrower or any\nSubsidiary or affiliate of the Borrower as if it were not the Agent hereunder.\n\n SECTION 7.03. Action by Agent. The obligations of the Agent under the\nFinancing Documents are only those expressly set forth therein. Without limiting\nthe generality of the foregoing, the Agent shall not be required to take any\naction with respect to any Default, except as expressly provided in Article 6.\n\n SECTION 7.04. Consultation with Experts. The Agent may consult with\nlegal counsel (who may be counsel for the Borrower), independent public\naccountants and other experts selected by it and shall not be liable for any\naction taken or omitted to be taken by it in good faith in accordance with the\nadvice of such counsel, accountants or experts.\n\n SECTION 7.05. Limits of Liability. Neither the Agent nor any of its\naffiliates nor any of their respective directors, officers, agents or employees\nshall be liable for any action taken or not taken by it in connection herewith\n(i) with the consent or at the request of the Required Banks or (ii) in the\nabsence of its own gross negligence or willful misconduct. Neither the Agent nor\nany of its affiliates nor any of their respective directors, officers, agents or\nemployees shall be responsible for or have any duty to ascertain, inquire into\nor verify (i) any statement, warranty or representation made in connection with\nthis Agreement or any borrowing hereunder; (ii) the performance or observance of\nany of the covenants or agreements of the Borrower or any Guarantor; (iii) the\nsatisfaction of any condition specified in Article 3, except receipt of items\nrequired to be delivered to the Agent; or (iv) the validity, effectiveness or\ngenuineness of this Agreement, the Subsidiary Guarantees, the Parent Guarantee,\nthe Promissory Notes or any other instrument or writing furnished in connection\nherewith. The Agent shall not incur any liability by acting in reliance upon any\nnotice, consent, certificate, statement, or other writing (which may be a bank\nwire, telex or similar writing) believed by it in good faith to be genuine or to\nbe signed by or on behalf of the proper party or parties. Without limiting the\ngenerality of the foregoing, the use of the term \"agent\" in this Agreement with\nreference to the Agent is not intended to connote any fiduciary or other implied\n(or express) obligations arising under agency doctrine of any applicable law.\nInstead, such term is used merely as a matter of market custom and is intended\nto create or reflect only an administrative relationship between independent\ncontracting parties.\n\n SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance\nwith its Commitment, indemnify the Agent, its affiliates and their respective\ndirectors, officers, agents and employees (to the extent not reimbursed by the\nBorrower) against any cost, expense (including counsel fees and disbursements),\nclaim, demand, action, loss or liability (except such as result from such\n\n\n\n 42\n\n 47\n\n\nindemnitees' gross negligence or willful misconduct) that such indemnitees may\nsuffer or incur in connection with the Financing Documents or any action taken\nor omitted by such indemnitees thereunder.\n\n SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,\nindependently and without reliance upon the Agent or any other Bank, and based\non such documents and information as it has deemed appropriate, made its own\ncredit analysis of the Borrower and its Subsidiaries and its own decision to\nenter into this Agreement. Each Bank also acknowledges that it will,\nindependently and without reliance upon the Agent or any other Bank, and based\non such documents and information as it shall deem appropriate at the time,\ncontinue to make its own credit decisions in taking or not taking any action\nunder this Agreement.\n\n SECTION 7.08. Successor Agent. The Agent may resign at any time by\ngiving notice thereof to the Banks and the Borrower. Upon any such resignation,\nthe Required Banks shall have the right to appoint a successor Agent, subject to\nthe consent of the Borrower. If no successor Agent shall have been so appointed\nby the Required Banks and consented to by the Borrower and shall have accepted\nsuch appointment within 45 days after the retiring Agent gives notice of\nresignation, then the retiring Agent may, on behalf of the Banks, appoint a\nsuccessor Agent, which shall be a commercial bank organized or licensed under\nthe laws of the United States of America or of any State thereof and having a\ncombined capital and surplus of at least $50,000,000. Upon the acceptance of its\nappointment as Agent hereunder by a successor Agent, such successor Agent shall\nthereupon succeed to and become vested with all the rights, powers, privileges\nand duties of the retiring Agent, and the retiring Agent shall be discharged\nfrom its duties and obligations under the Financing Documents. After any\nretiring Agent's resignation hereunder as Agent, the provisions of this Article\nshall inure to its benefit as to any actions taken or omitted to be taken by it\nwhile it was acting as the Agent.\n\n SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its\nown account fees in the amounts and at the times previously agreed upon in\nwriting between the Borrower and the Agent.\n\n\n\n 43\n\n 48\n\n\n\n ARTICLE 8\n CHANGE IN CIRCUMSTANCES\n\n SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.\nIf on or prior to the first day of any Interest Period for any CD Loan,\nEuro-Dollar Loan or Money Market LIBOR Loan:\n\n (a) the Agent is advised by the Reference Banks that deposits in\ndollars (in the applicable amounts) are not being offered to the Reference Banks\nin the relevant market for such Interest Period, or\n\n (b) in the case of CD Loans or Euro-Dollar Loans, Banks holding 50% or\nmore of the aggregate amount of the affected Loans advise the Agent that the\nAdjusted CD Rate or the London Interbank Offered Rate, as the case may be, as\ndetermined by the Agent will not adequately and fairly reflect the cost to such\nBanks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for\nsuch Interest Period, the Agent shall forthwith give notice thereof to the\nBorrower and the Banks, whereupon, until the Agent notifies the Borrower that\nthe circumstances giving rise to such suspension no longer exist (which the\nAgent agrees to do promptly upon such circumstances ceasing to exist), (i) the\nobligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may\nbe, or to continue or convert outstanding Loans as or into CD Loans or\nEuro-Dollar Loans, as the case may be, shall be suspended and (ii) each\noutstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted\ninto a Base Rate Loan on the last day of the then current Interest Period\napplicable thereto. Unless the Borrower notifies the Agent at least one Domestic\nBusiness Day before the date of any Fixed Rate Borrowing for which a Notice of\nBorrowing has previously been given that it elects not to borrow on such date,\n(i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall\ninstead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing\nis a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such\nBorrowing shall bear interest for each day from and including the first day to\nbut excluding the last day of the Interest Period applicable thereto at the Base\nRate for such day.\n\n SECTION 8.02. Illegality. If, on or after the date of this Agreement,\nany Bank has determined in its reasonable judgment that the adoption of any\napplicable law, rule or regulation, or any change in any applicable law, rule or\nregulation, or any change in the interpretation or administration thereof by any\ngovernmental authority, central bank or comparable agency charged with the\ninterpretation or administration thereof, or compliance by any Bank (or its\nEuro-Dollar Lending Office) with any request or directive (whether or not having\n\n\n\n 44\n\n 49\n\n\n\nthe force of law) of any such authority, central bank or comparable agency,\nshall make it unlawful or impossible for such Bank (or its Euro-Dollar Lending\nOffice) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so\nnotify the Agent, the Agent shall forthwith give notice specifying the\ncircumstances giving rise to such suspension to the other Banks and the\nBorrower, whereupon, until such Bank notifies the Borrower and the Agent that\nthe circumstances giving rise to such suspension no longer exist (which such\nBank agrees to do promptly upon such circumstances ceasing to exist), the\nobligation of such Bank to make Euro-Dollar Loans, or to continue or convert\noutstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before\ngiving any notice to the Agent pursuant to this Section, such Bank shall\ndesignate a different Euro-Dollar Lending Office if such designation will avoid\nthe need for giving such notice and will not, in the judgment of such Bank in\nthe good faith exercise of its discretion, be otherwise disadvantageous to such\nBank. If such notice is given, each Euro-Dollar Loan of such Bank then\noutstanding shall be converted to a Base Rate Loan either (a) on the last day of\nthe then current Interest Period applicable to such Euro-Dollar Loan if such\nBank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan\nto such day or (b) immediately if such Bank shall determine that it may not\nlawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such\nday.\n\n SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x)\nthe date of this Agreement, in the case of any Committed Loan or any obligation\nto make Committed Loans or (y) the date of the related Money Market Quote, in\nthe case of any Money Market Loan, any Bank has determined in its reasonable\njudgment that the adoption of any applicable law, rule or regulation, or any\nchange in any applicable law, rule or regulation, or any change in the\ninterpretation or administration thereof by any governmental authority, central\nbank or comparable agency charged with the interpretation or administration\nthereof, or compliance by any Bank (or its Applicable Lending Office) with any\nrequest or directive (whether or not having the force of law) of any such\nauthority, central bank or comparable agency, shall impose, modify or deem\napplicable any reserve (including, without limitation, any such requirement\nimposed by the Board of Governors of the Federal Reserve System, but excluding\n(i) with respect to any CD Loan any such requirement included in an applicable\nDomestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any\nsuch requirement with respect to which such Bank is entitled to compensation\nduring the relevant Interest Period under Section 2.15), special deposit,\ninsurance assessment (excluding, with respect to any CD Loan, any such\nrequirement reflected in an applicable Assessment Rate) or similar requirement\nagainst assets of, deposits with or for the account of, or credit extended by,\nsuch Bank (or its Applicable Lending Office) or shall impose on any Bank (or its\nApplicable Lending Office) or on the United States market for certificates of\ndeposit or the London interbank\n\n\n\n 45\n\n 50\n\n\nmarket any other condition affecting its Fixed Rate Loans, its Promissory Note\nor its obligation to make Fixed Rate Loans and the result of any of the\nforegoing is to increase the cost to such Bank (or its Applicable Lending\nOffice) of making or maintaining any Fixed Rate Loan, or to reduce the amount of\nany sum received or receivable by such Bank (or its Applicable Lending Office)\nunder this Agreement or under its Promissory Note with respect thereto, by an\namount deemed by such Bank to be material to such Bank, then, within 15 days\nafter written demand by such Bank (with a copy to the Agent), the Borrower shall\npay to such Bank such additional amount or amounts as will compensate such Bank\nfor such increased cost or reduction.\n\n (b) If any Bank shall have determined that, after the date of this\nAgreement, the adoption of any applicable law, rule or regulation regarding\ncapital adequacy, or any change in any such law, rule or regulation, or any\nchange in the interpretation or administration thereof by any governmental\nauthority, central bank or comparable agency charged with the interpretation or\nadministration thereof, or any request or directive regarding capital adequacy\n(whether or not having the force of law) of any such authority, central bank or\ncomparable agency (including any determination by any such authority, central\nbank or comparable agency that, for purposes of capital adequacy requirements,\nthe Commitments hereunder do not constitute commitments with an original\nmaturity of one year or less), has or would have the effect of reducing the rate\nof return on capital of such Bank (or its Parent) as a consequence of such\nBank's obligations hereunder to a level below that which such Bank (or its\nParent) could have achieved but for such adoption, change, request or directive\n(taking into consideration its policies with respect to capital adequacy) by an\namount deemed by such Bank to be material, then from time to time, within 15\ndays after written demand by such Bank (with a copy to the Agent), the Borrower\nshall pay to such Bank such additional amount or amounts as will compensate such\nBank (or its Parent) for such reduction.\n\n (c) Each Bank will promptly notify the Borrower and the Agent of any\nevent of which it has knowledge, occurring after the date of this Agreement,\nwhich will entitle such Bank to compensation pursuant to this Section; provided\nthat (i) if any Bank fails to give such notice within 90 days after it obtains\nactual knowledge of such an event, such Bank shall only be entitled to payment\nunder this Section 8.03 for costs incurred from and after the date 90 days prior\nto the date that such Bank does give such notice and (ii) each such Bank will\ndesignate a different Applicable Lending Office if such designation will avoid\nthe need for, or reduce the amount of, such compensation and will not, in the\njudgment of such Bank in the good faith exercise of its discretion, be otherwise\ndisadvantageous to such Bank. A certificate of any Bank claiming compensation\nunder this Section and setting forth in reasonable detail the additional amount\nor amounts to be paid\n\n\n 46\n\n\n 51\n\nto it hereunder and the basis used to determine such amounts shall be conclusive\nin the absence of manifest error. In determining such amount, such Bank will use\nreasonable averaging and attribution methods and will have a reasonable basis\nfor any assumptions it makes in connection therewith.\n\n SECTION 8.04. Taxes. (a) Any and all payments by the Borrower to or for\nthe account of any Bank or the Agent hereunder or under any Promissory Note\nshall be made free and clear of and without deduction for any and all present or\nfuture taxes, duties, levies, imposts, deductions, charges or withholdings, and\nall liabilities with respect thereto, excluding, in the case of each Bank and\nthe Agent, taxes imposed on or measured by its income, and franchise taxes\nimposed on it, by the jurisdiction under the laws of which such Bank or the\nAgent (as the case may be) is organized or any political subdivision thereof\nand, in the case of each Bank, taxes imposed on or measured by its income, and\nfranchise or similar taxes imposed on it, by the jurisdiction of such Bank's\nApplicable Lending Office or any political subdivision thereof (all such\nnon-excluded taxes, duties, levies, imposts, deductions, charges, withholdings\nand liabilities being hereinafter referred to as its \"TAXES\", and all such\nexcluded taxes being hereinafter referred to as its \"DOMESTIC TAXES\"). If the\nBorrower shall be required by law to deduct any Taxes from or in respect of any\nsum payable hereunder or under any Promissory Note to any Bank or the Agent, (i)\nthe sum payable shall be increased as necessary so that after making all\nrequired deductions (including deductions applicable to additional sums payable\nunder this Section 8.04 such Bank or the Agent (as the case may be) receives an\namount equal to the sum it would have received had no such deductions been made,\n(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the\nfull amount deducted to the relevant taxation authority or other authority in\naccordance with applicable law and (iv) the Borrower shall furnish to the Agent,\nat its address referred to in Section 9.01, the original or a certified copy of\na receipt evidencing payment thereof.\n\n (b) In addition, the Borrower agrees to pay any present or future stamp\nor documentary taxes and any other excise or property taxes, or charges or\nsimilar levies which arise from any payment made hereunder or under any\nPromissory Note or from the execution or delivery of, or otherwise with respect\nto, this Agreement or any other Financing Document (hereinafter referred to as\n\"OTHER TAXES\").\n\n (c) The Borrower agrees to indemnify each Bank and the Agent for the\nfull amount of Taxes or Other Taxes (including, without limitation, any Taxes or\nOther Taxes imposed or asserted by any jurisdiction on amounts payable under\nthis Section 8.04 paid by such Bank or the Agent (as the case may be) and any\nliability (including penalties, interest and expenses) arising therefrom or with\nrespect thereto. In addition, on and after the New Borrower Date, the Borrower\n\n\n 47\n\n 52\n\n\n\nagrees to indemnify the Agent and each Bank for all Domestic Taxes and any\nliability (including penalties, interest and expenses) arising therefrom or with\nrespect thereto, in each case to the extent that such Domestic Taxes result from\nany payment or indemnification pursuant to this Section for (i) Taxes or Other\nTaxes imposed by any jurisdiction other than the United States or (ii) Domestic\nTaxes of the Agent or such Bank, as the case may be. This indemnification shall\nbe made within 15 days from the date such Bank or the Agent (as the case may be)\nmakes demand therefor.\n\n (d) At the times indicated herein, each Bank organized under the laws\nof a jurisdiction outside the United States shall provide the Borrower with\nInternal Revenue Service form 1001 or 4224 (in each case accompanied by any\nstatements which may be required under applicable Treasury regulations), as\nappropriate, or any successor form prescribed by the Internal Revenue Service,\ncertifying that such Bank is entitled to receive payments under this Agreement\n(i) without deduction or withholding of any United States federal income taxes\nor (ii) subject to a reduced rate of United States federal withholding tax,\nunless, in each case of clause (i) and (ii) of this Section 8.04(d), an event\n(including, without limitation, any change in treaty, law or regulation) has\noccurred prior to the date on which any such delivery would otherwise be\nrequired which renders such forms inapplicable or which would prevent the Bank\nfrom duly completing and delivering any such form with respect to it and the\nBank advises the Borrower and the Agent that it is not capable of receiving\npayments without any deduction or withholding of such taxes. Such forms shall be\nprovided (x) on or prior to the date of the Bank's execution and delivery of\nthis Agreement in the case of each Bank listed on the signature pages hereof,\nand on or prior to the date on which it becomes a Bank in the case of each other\nBank, and (y) on or before the date that such form expires or becomes obsolete\nor after the occurrence of any event requiring a change in the most recent form\nso delivered by the Bank. If the form provided by a Bank at the time such Bank\nfirst becomes a party to this Agreement indicates a United States interest\nwithholding tax rate in excess of zero, United States withholding tax at such\nrate shall be considered excluded from \"TAXES\" as defined in Section 8.04(a). In\naddition, to the extent that for reasons other than a change of treaty, law or\nregulation any Bank becomes subject to an increased rate of United States\ninterest withholding tax while it is a party to this Agreement, United States\nwithholding tax at such increased rate shall be considered excluded from \"Taxes\"\nas defined in Section 8.04(a).\n\n (e) For any period with respect to which a Bank has failed to provide\nthe Borrower with the appropriate form in accordance with Section 8.04(d)\n(unless such failure is excused by the terms of Section 8.04(d)), such Bank\nshall not be entitled to indemnification under Section 8.04(a) or 8.04(c) with\nrespect to Taxes imposed by the United States; provided, however, that should a\nBank, which is\n\n\n 48\n\n 53\n\n\notherwise exempt from or subject to a reduced rate of withholding tax, become\nsubject to Taxes because of its failure to deliver a form required hereunder,\nthe Borrower shall take such steps as such Bank shall reasonably request to\nassist such Bank to recover such Taxes.\n\n (f) If the Borrower is required to pay additional amounts to or for the\naccount of any Bank pursuant to this Section 8.04, then such Bank will change\nthe jurisdiction of its Applicable Lending Office so as to eliminate or reduce\nany such additional payment which may thereafter accrue if such change, in the\njudgment of such Bank in the good faith exercise of its discretion, is not\notherwise disadvantageous to such Bank.\n\n SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate\nLoans. If (i) the obligation of any Bank to make, or to continue or convert\noutstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to\nSection 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or\n8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall,\nby at least five Euro-Dollar Business Days' prior notice to such Bank through\nthe Agent, have elected that the provisions of this Section shall apply to such\nBank, then, unless and until such Bank notifies the Borrower that the\ncircumstances giving rise to such suspension or demand for compensation no\nlonger exist (which such Bank agrees to do promptly upon such circumstances\nceasing to exist), all Loans which would otherwise be made by such Bank as (or\ncontinued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,\nshall instead be Base Rate Loans (on which interest and principal shall be\npayable contemporaneously with the related Fixed Rate Loans of the other Banks).\nIf such Bank notifies such Borrower that the circumstances giving rise to such\nsuspension or demand for compensation no longer exist, the principal amount of\neach such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan,\nas the case may be, on the first day of the next succeeding Interest Period\napplicable to the related CD Loans or Euro-Dollar Loans of the other Banks.\n\n SECTION 8.06. Substitution of Bank. If any Bank (i) has demanded\ncompensation for increased costs pursuant to Section 8.03 or 8.04 or is entitled\nto payments under Section 8.04(a) or (ii) has determined that the making or\nmaintaining of any Euro-Dollar Loan has become unlawful or impossible pursuant\nto Section 8.02 and similar additional interest or compensation has not been\ndemanded by, or a similar determination has not been made by, all of the Banks,\nthe Borrower shall have the right (with the assistance of the Agent) to\ndesignate an Assignee which is not an Affiliate of the Borrower to purchase for\ncash, pursuant to an Assignment and Assumption Agreement in substantially the\nform of Exhibit G hereto, the outstanding Loans and Commitment of such Bank and\nto assume all of such Bank's other rights and obligations hereunder without\nrecourse\n\n\n 49\n\n 54\n\nto or warranty by, or expense to, such Bank, for a purchase price equal to the\nprincipal amount of all of such Bank's outstanding Loans plus any accrued but\nunpaid interest thereon and the accrued but unpaid fees in respect of that\nBank's Commitment hereunder plus such amount, if any, as would be payable\npursuant to Section 2.13 if the outstanding Loans of such Bank were prepaid in\ntheir entirety on the date of consummation of such assignment.\n\n\n\n ARTICLE 9\n MISCELLANEOUS\n\n SECTION 9.01. Notices. All notices, requests and other communications\nto any party provided for hereunder shall be in writing (including, without\nlimitation, bank wire, telex, facsimile transmission or similar writing) and\nshall be given to such party: (x) in the case of the Borrower or the Agent, at\nits address or facsimile or telex number set forth on the signature pages\nhereof, (y) in the case of any Bank, at its address or facsimile or telex number\nset forth in its Administrative Questionnaire or (z) in the case of any party,\nsuch other address or facsimile or telex number as such party may hereafter\nspecify for the purpose by notice to the Agent and the Borrower. Each such\nnotice, request or other communication shall be effective (i) if given by telex,\nwhen such telex is transmitted to the telex number specified in this Section and\nthe appropriate answerback is received, (ii) if given by facsimile, when such\nfacsimile is transmitted to the facsimile number specified in this Section 9.01\nand electronic, telephonic or other appropriate confirmation of receipt is\nreceived by the sender, (iii) if given by mail, 72 hours after such\ncommunication is deposited in the mails with first class postage prepaid,\naddressed as aforesaid or (iv) if given by any other means, when delivered at\nthe address specified in this Section; provided that notices to the Agent under\nArticle 2 or Article 8 shall not be effective until received.\n\n SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank\nin exercising any right, power or privilege hereunder or under any other\nFinancing Document shall operate as a waiver thereof nor shall any single or\npartial exercise thereof preclude any other or further exercise thereof or the\nexercise of any other right, power or privilege. The rights and remedies herein\nand therein provided shall be cumulative and not exclusive of any rights or\nremedies provided by law.\n\n SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i)\nall reasonable out-of-pocket expenses of the Agent, including reasonable fees\nand disbursements of special counsel for the Agent, in connection with the\npreparation and administration of the Financing Documents, any waiver or consent\nhereunder\n\n\n 50\n\n\n 55\n\n\nor any amendment thereof or any Default or alleged Default hereunder and (ii) if\nan Event of Default occurs, all reasonable out-of-pocket expenses incurred by\nthe Agent and each Bank, including reasonable fees and disbursements of counsel,\nin connection with such Event of Default and collection, bankruptcy, insolvency\nand other enforcement proceedings resulting therefrom.\n\n (b) The Borrower agrees to indemnify the Agent and each Bank, their\nrespective Bank Affiliates and the respective directors, officers, agents and\nemployees of the foregoing (each an \"Indemnitee\") and hold each Indemnitee\nharmless from and against any and all liabilities, losses, damages, costs and\nexpenses, including, without limitation, the reasonable fees and disbursements\nof counsel, which may be incurred by such Indemnitee (whether or not such\nIndemnitee shall be designated a party thereto) arising out of any\ninvestigative, administrative or judicial proceeding (brought or threatened)\nrelating to or arising out of the Financing Documents, the arrangement,\nadministration, performance or enforcement thereof or any actual or proposed use\nof proceeds of Loans hereunder; provided that no Indemnitee shall have the right\nto be indemnified hereunder for such Indemnitee's own gross negligence or\nwillful misconduct as determined by a court of competent jurisdiction; provided\nfurther that no Indemnitee shall have the right to be indemnified hereunder in\nconnection with any proceedings between it and another Indemnitee which does not\nrelate to the Borrower.\n\n (c) If any proceeding or claim shall be brought or asserted against any\nIndemnitee in respect of which indemnity may be sought pursuant to the preceding\nsubsection, such Indemnitee shall promptly notify the Borrower. The Borrower\nshall not be liable for any costs or expenses in connection with any settlement\nentered into without its consent.\n\n SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,\nby exercising any right of set-off or counterclaim or otherwise, receive payment\nof a proportion of the aggregate amount of principal and interest due with\nrespect to any Promissory Note held by it which is greater than the proportion\nreceived by any other Bank in respect of the aggregate amount of principal and\ninterest due with respect to any Promissory Note held by such other Bank, the\nBank receiving such proportionately greater payment shall purchase such\nparticipations in the Promissory Notes held by the other Banks, and such other\nadjustments shall be made, as may be required, so that all such payments of\nprincipal and interest with respect to the Promissory Notes held by the Banks\nshall be shared by the Banks pro rata; provided that nothing in this Section\nshall impair the right of any Bank to exercise any right of set-off or\ncounterclaim it may have and to apply the amount subject to such exercise to the\npayment of indebtedness of the Borrower other than its indebtedness under the\nPromissory Notes.\n\n\n\n 51\n\n\n 56\n\n\n SECTION 9.05. Amendments and Waivers. Any provision of this Agreement\nor the Promissory Notes may be amended or waived if, but only if, such amendment\nor waiver is in writing and is signed by the Borrower and the Required Banks\n(and, if the rights or duties of the Agent are affected thereby, by the Agent);\nprovided that no such amendment or waiver shall, unless signed by all the Banks,\n(i) increase or decrease the Commitment of any Bank (except for a ratable\ndecrease in the Commitments of all Banks) or subject any Bank to any additional\nobligation, (ii) reduce the principal of or rate of interest on any Loan or any\nfees hereunder, (iii) postpone the date fixed for any payment of principal of or\ninterest on any Loan or any fees hereunder or for termination of any Commitment,\n(iv) change the percentage of the Commitments or of the aggregate unpaid\nprincipal amount of the Promissory Notes, or the number of Banks, which shall be\nrequired for the Banks or any of them to take any action under this Section or\nany other provision of this Agreement or (v) release the Parent Guarantor from\nits obligations under the Parent Guarantee.\n\n SECTION 9.06. Successors and Assigns. (a) The provisions of this\nAgreement shall be binding upon and inure to the benefit of the parties hereto\nand their respective successors and assigns, except that the Borrower may not\nassign or otherwise transfer any of its rights under this Agreement without the\nprior written consent of all Banks.\n\n (b) Any Bank may at any time grant to one or more banks or other\ninstitutions (each a \"Participant\") participating interests in its Commitment or\nany or all of its Loans. In the event of any such grant by a Bank of a\nparticipating interest to a Participant, whether or not upon notice to the\nBorrower and the Agent, such Bank shall remain responsible for the performance\nof its obligations hereunder, and the Borrower and the Agent shall continue to\ndeal solely and directly with such Bank in connection with such Bank's rights\nand obligations under this Agreement. Any agreement pursuant to which any Bank\nmay grant such a participating interest shall provide that such Bank shall\nretain the sole right and responsibility to enforce the obligations of the\nBorrower hereunder including, without limitation, the right to approve any\namendment, modification or waiver of any provision of this Agreement; provided\nthat such participation agreement may provide that such Bank will not agree to\nany modification, amendment or waiver of this Agreement described in clause (i),\n(ii), (iii) or (iv) of Section 9.05 without the consent of the Participant. The\nBorrower agrees that each Participant shall, to the extent provided in its\nparticipation agreement and subject to subsection (e), (f) and (g) below, be\nentitled to the benefits of Article 8 with respect to its participating\ninterest. An assignment or other transfer which is not permitted by subsection\n9.06(c) or 9.06(d) below shall be given effect for purposes of this Agreement\nonly to the extent of a participating interest granted in accordance with this\nsubsection (b).\n\n\n\n 52\n\n\n 57\n\n\n (c) Any Bank may at any time assign to one or more banks or other\ninstitutions (each an \"Assignee\") all, or a proportionate part (in an amount\nequivalent to an original Commitment of not less than $10,000,000) of all, of\nits rights and obligations under this Agreement and the Promissory Notes, and\nsuch Assignee shall assume such rights and obligations, pursuant to an\nAssignment and Assumption Agreement in substantially the form of Exhibit I\nhereto executed by such Assignee and such transferor Bank, with (and subject to)\nthe subscribed consent of the Borrower and the Agent, which shall not be\nunreasonably withheld; provided that if an Assignee is an affiliate of such\ntransferor Bank, no such consent shall be required; and provided further that\nsuch assignment may, but need not, include rights of the transferor Bank in\nrespect of outstanding Money Market Loans. Upon execution and delivery of such\ninstrument and payment by such Assignee to such transferor Bank of an amount\nequal to the purchase price agreed between such transferor Bank and such\nAssignee, such Assignee shall be a Bank party to this Agreement and shall have\nall the rights and obligations of a Bank with a Commitment as set forth in such\ninstrument of assumption, and the transferor Bank shall be released from its\nobligations hereunder to a corresponding extent, and no further consent or\naction by any party shall be required. Upon the consummation of any assignment\npursuant to this subsection (c), the transferor Bank, the Agent and the Borrower\nshall make appropriate arrangements so that, if required, a new Promissory Note\nis issued to the Assignee. In connection with any such assignment, the\ntransferor Bank shall pay to the Agent an administrative fee for processing such\nassignment in the amount of $2,500. If the Assignee is not incorporated under\nthe laws of the United States of America or a state thereof, it shall deliver to\nthe Borrower and the Agent certification as to exemption from deduction or\nwithholding of any United States federal income taxes in accordance with Section\n8.04.\n\n (d) Any Bank may at any time assign all or any portion of its rights\nunder this Agreement and its Promissory Note to a Federal Reserve Bank. No such\nassignment shall release the transferor Bank from its obligations hereunder.\n\n (e) No Assignee, Participant or other transferee of any Bank's rights\nshall be entitled to receive any greater payment under Section 8.03 or 8.04 than\nsuch Bank would have been entitled to receive with respect to the rights\ntransferred, unless such transfer is made with the Borrower's prior written\nconsent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring\nsuch Bank to designate a different Applicable Lending Office under certain\ncircumstances or at a time when the circumstances giving rise to such greater\npayment did not exist.\n\n (f) Notwithstanding anything to the contrary contained in this Section\n9.06 but subject to the terms and conditions set forth in this subsection (f),\nany\n\n\n\n 53\n\n 58\n\n\n\n Bank may from time to time, elect to designate a Conduit to provide all\nor any part of Loans required to be made by such Bank to the Borrower pursuant\nto this Agreement or to acquire a participation interest in any Loans extended\nby such Bank hereunder (a \"CONDUIT DESIGNATION\"), provided the designation of a\nConduit by any Bank for purposes of this Section 9.06(f) shall be subject to the\napproval of the Borrower, which shall not be unreasonably withheld. No\nadditional Note shall be required with regard to a Conduit Designation;\nprovided, however, to the extent any Conduit shall advance funds under a Conduit\nDesignation, the designating Bank shall be deemed to hold the Note in its\npossession as an agent for such Conduit to the extent of the Loan funded by such\nConduit. Notwithstanding any such Conduit Designation, (x) the designating Bank\nshall remain solely responsible to the other parties hereto for its obligations\nunder this Agreement and (y) the Borrower and the Agent may continue to deal\nsolely and directly with the designating Bank as administrative agent for such\ndesignating Bank's Conduit, in connection with all of such Conduit's rights and\nobligations under this Agreement, unless and until the Borrower and the Agent\nare notified that the designating Bank has been replaced as administrative agent\nfor its Conduit; any payments for the benefit of any designating Bank and its\nConduit shall be paid to such designating Bank for itself as administrative\nagent for its Conduit, as applicable; provided neither the Borrower nor the\nAgent shall be responsible for any designating Bank's application of any such\npayments. In addition, any Conduit may (i) with notice to, but without the prior\nwritten consent of the Borrower and the Agent, and without paying any processing\nfee therefor, assign all or portions of its interest in any Loans to the Bank\nthat designated such Conduit or to any financial institutions consented to by\nthe Borrower and the Agent providing liquidity and/or credit facilities to or\nfor the account of such Conduit to support the funding or maintenance of Loans\nand (ii) disclose on a confidential basis any non-public information relating to\nits Loans to any rating agency, commercial paper dealer or provider of any\nguarantee, surety, credit or liquidity enhancement to such Conduit.\n\n (g) Each party to this Agreement hereby agrees that, at any time a\nConduit Designation is in effect, it shall not institute against, or join any\nother person in instituting against, any Conduit any bankruptcy, reorganization,\narrangement, insolvency or liquidation proceeding or other proceedings under any\nfederal or state bankruptcy or similar law, for one year and a day after the\nlatest maturing commercial paper note issued by such Conduit is paid. This\nSection 9.06(g) shall survive the termination of this Agreement.\n\n SECTION 9.07. Collateral. Each of the Banks represents to the Agent and\neach of the other Banks that it in good faith is not relying upon any \"margin\nstock\" (as defined in Regulation U) as collateral in the extension or\nmaintenance of the credit provided for in this Agreement.\n\n\n 54\n\n\\\n 59\n\n\n\n SECTION 9.08. Governing Law. THIS AGREEMENT AND EACH PROMISSORY NOTE\nSHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF\nNEW YORK.\n\n SECTION 9.09. Counterparts; Integration. This Agreement may be signed\nin any number of counterparts, each of which shall be an original, with the same\neffect as if the signatures thereto and hereto were upon the same instrument.\nThis Agreement constitutes the entire agreement and understanding among the\nparties hereto and supersedes any and all prior agreements and understandings,\noral or written, relating to the subject matter hereof.\n\n SECTION 9.10. Waiver of Jury Trial. EACH OF THE BORROWER, THE AGENT AND\nTHE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY\nLEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE\nTRANSACTIONS CONTEMPLATED HEREBY.\n\n SECTION 9.11. Judgment Currency. If, under any applicable law and\nwhether pursuant to a judgment being made or registered against the Borrower or\nfor any other reason, any payment under or in connection with this Agreement, is\nmade or satisfied in a currency (the \"Other Currency\") other than that in which\nthe relevant payment is due (the \"Required Currency\") then, to the extent that\nthe payment (when converted into the Required Currency at the rate of exchange\non the date of payment or, if it is not practicable for the party entitled\nthereto (the \"Payee\") to purchase the Required Currency with the other Currency\non the date of payment, at the rate of exchange as soon thereafter as it is\npracticable for it to do so) actually received by the Payee falls short of the\namount due under the terms of this Agreement, the Borrower shall, to the extent\npermitted by law, as a separate and independent obligation, indemnify and hold\nharmless the Payee against the amount of such short-fall. For the purpose of\nthis Section, \"rate of exchange\" means the rate at which the Payee is able on\nthe relevant date to purchase the Required Currency with the Other Currency and\nshall take into account any premium and other costs of exchange.\n\n SECTION 9.12. Judicial Proceedings. (a) Consent to Jurisdiction. The\nBorrower irrevocably submits to the non-exclusive jurisdiction of any federal or\nNew York State court sitting in New York City over any suit, action or\nproceeding arising out of or relating to the Financing Documents. The Borrower\nirrevocably waives, to the fullest extent permitted by law, any objection which\nit may now or hereafter have to the laying of the venue of any such suit, action\nor proceeding brought in such court and any claim that any suit, action or\nproceeding brought in such court has been brought in an inconvenient forum. The\nBorrower agrees that a final judgment in any such suit, action or proceeding\nbrought in such a court shall\n\n\n 55\n\n 60\n\n\nbe conclusive and binding upon it and will be given effect in Luxembourg to the\nfullest extent permitted by applicable law and may be enforced in any federal or\nNew York State court sitting in New York City (or any other courts to the\njurisdiction of which the Borrower is or may be subject) by a suit upon such\njudgment, provided that service of process is effected upon it in one of the\nmanners specified herein or as otherwise permitted by law.\n\n (b) Appointment of Agent for Service of Process. The Borrower hereby\nirrevocably designates and appoints CT Corporation System having an office on\nthe date hereof at 1633 Broadway, New York, New York 10019 as its authorized\nagent, to accept and acknowledge on its behalf, service of any and all process\nwhich may be served in any suit, action or proceeding of the nature referred to\nin subsection (a) above in any federal or New York State court sitting in New\nYork City. The Borrower represents and warrants that such agent has agreed in\nwriting to accept such appointment and that a true copy of such designation and\nacceptance has been delivered to the Agent. Such designation and appointment\nshall be irrevocable until all principal and interest and all other amounts\npayable under the Financing Documents shall have been paid in full in accordance\nwith the provisions hereof. If such agent shall cease so to act, the Borrower\ncovenants and agrees to designate irrevocably and appoint without delay another\nsuch agent satisfactory to the Agent and to deliver promptly to the Agent\nevidence in writing of such other agent's acceptance of such appointment.\n\n (c) Service of Process. The Borrower hereby consents to process being\nserved in any suit, action, or proceeding of the nature referred to in\nsubsection (a) above in any federal or New York State court sitting in New York\nCity by service of process upon the agent of the Borrower, as the case may be,\nfor service of process in such jurisdiction appointed as provided in subsection\n(b) above; provided that, to the extent lawful and possible, written notice of\nsaid service upon such agent shall be mailed by registered airmail, postage\nprepaid, return receipt requested, to the Borrower at its address specified on\nthe signature pages hereof or to any other address of which the Borrower shall\nhave given written notice to the Agent. The Borrower irrevocably waives, to the\nfullest extent permitted by law, all claim of error by reason of any such\nservice and agrees that such service shall be deemed in every respect effective\nservice of process upon the Borrower in any such suit, action or proceeding and\nshall, to the fullest extent permitted by law, be taken and held to be valid and\npersonal service upon and personal delivery to the Borrower.\n\n (d) No Limitation on Service or Suit. Nothing in this Section shall\naffect the right of the Agent or any Bank to serve process in any other manner\npermitted by law or limit the right of the Agent or any Bank to bring\nproceedings against the Borrower in the courts of any jurisdiction or\njurisdictions.\n\n\n\n 56\n\n\n 61\n\n\n\n\n IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be\nduly executed by their respective authorized officers as of the day and year\nfirst above written.\n\n\n\n TYCO INTERNATIONAL GROUP S.A.\n\n By: /s/ Richard Brann \n ---------------------------------------\n Title: Managing Director\n\n\n By: /s/ Erik D. Lazar \n ---------------------------------------\n Title: Managing Director\n\n Address: 6 Avenue Emile Reuter\n 2nd Floor\n Luxembourg, 2420\n Facsimile number: 352-46-43-50\n\n\n\n MORGAN GUARANTY TRUST COMPANY\n OF NEW YORK\n\n\n By: /s/ SoVonna L. Day \n ---------------------------------------\n Title: Vice President\n\n\n MORGAN GUARANTY TRUST COMPANY\n OF NEW YORK, as Agent\n\n\n By: /s/ SoVonna L. Day \n ---------------------------------------\n Title: Vice President\n\n 60 Wall Street\n New York, New York 10260-0060\n Attention: SoVonna L. Day\n Telex number: 177615\n Facsimile number: 212-648-5018\n\n\n 62\n\n\n\n\n\n Co-Syndication Agents:\n\n BANK OF AMERICA NATIONAL TRUST\n AND SAVINGS ASSOCIATION\n\n\n By: /s/ John W. Pocalyko \n ---------------------------------------\n Title: Managing Director\n\n\n THE CHASE MANHATTAN BANK\n\n\n By: /s/ Michael Lancia \n ---------------------------------------\n Title: Vice President\n\n\n COMMERZBANK AG, NEW YORK BRANCH\n\n\n By: /s/ Robert Donohue \n ---------------------------------------\n Title: Senior Vice President\n\n By: /s/ Peter Doyle \n ---------------------------------------\n Title: Assistant Vice President\n\n Managing Agents:\n\n ABN AMRO BANK N.V.\n\n\n By: /s/ James S. Adelsheim \n ---------------------------------------\n Title: Group Vice President\n\n\n By: /s/ David A. Carroll \n ---------------------------------------\n Title: Officer\n\n\n 63\n\n\n BARCLAYS BANK PLC\n\n\n By: /s/ Paul Kavanagh \n ---------------------------------------\n Title: Director\n\n\n BANKERS TRUST COMPANY\n\n\n By: /s/ Patricia Hogan \n ---------------------------------------\n Title: Principal\n\n\n CITIBANK, N.A.\n\n\n By: /s/ Diane L. Pockaj \n ---------------------------------------\n Title: Vice President\n\n\n CREDIT LYONNAIS NEW YORK BRANCH\n\n\n By: /s/ Vladimir Labun \n ---------------------------------------\n Title: First Vice President - Manager\n\n\n\n\n\n 64\n\n\n\n CREDIT SUISSE FIRST BOSTON\n\n\n By: /s/ David W. Kratovil \n ---------------------------------------\n Title: Director\n\n\n By: /s/ Robert Hetu \n ---------------------------------------\n Title: Vice President\n\n\n DRESDNER BANK AG, NEW YORK AND\n GRAND CAYMAN BRANCHES\n\n\n By: /s/ A. Richard Morris \n ---------------------------------------\n Title: First Vice President\n\n By: /s/ Ken Hamilton \n ---------------------------------------\n Title: Senior Vice President\n\n\n THE FIRST NATIONAL BANK OF CHICAGO\n\n\n By: /s/ Robert McMillan \n ---------------------------------------\n Title: Corporate Banking Officer\n\n\n FIRST UNION NATIONAL BANK\n\n\n By: /s/ Mareen Walker Duvall \n ---------------------------------------\n Title: Senior Vice President\n\n\n\n 65\n\n\n\n\n ISTITUTO BANCARIO SAN PAOLO DI\n TORINO ISTITUTO MOBILIARE\n ITALIANO, SPA\n\n\n By: /s/ Luca Sacchi \n ---------------------------------------\n Title: Vice President\n\n By: /s/ Carlo Persico \n ---------------------------------------\n Title: Deputy General Manager\n\n\n MARINE MIDLAND BANK\n\n\n By: /s/ Mark J. Rakov \n ---------------------------------------\n Title: Vice President\n\n\n MELLON BANK, N.A.\n\n\n By: /s/ Charles H. Staub \n ---------------------------------------\n Title: First Vice President\n\n\n SOCIETE GENERALE\n\n\n By: /s/ Louis P. Laville, III \n ---------------------------------------\n Title: Director\n\n\n\n 66\n\n\n\n THE BANK OF NOVA SCOTIA\n\n\n By: /s/ William E. Zarrett \n ---------------------------------------\n Title: Senior Relationship Manager\n\n\n TORONTO DOMINION (TEXAS), INC.\n\n\n By: /s/ Anne C. Favoriti \n ---------------------------------------\n Title: Vice President\n\n WESTDEUTSCHE LANDESBANK\n GIROZENTRALE\n\n\n By: /s/ Duncan M. Robertson \n ---------------------------------------\n Title: Vice President\n\n\n By: /s/ Alan S. Bookspan \n ---------------------------------------\n Title: Vice President\n\n Co-Agents:\n\n BANKBOSTON, N.A.\n\n\n By: /s/ Roberta F. Keeler \n ---------------------------------------\n Title: Vice President\n\n\n 67\n\n\n\n\n BANQUE NATIONALE DE PARIS\n\n\n By: /s/ Richard L. Sted \n ---------------------------------------\n Title: Senior Vice President\n\n By: /s/ Richard Pace \n ---------------------------------------\n Title: Vice President\n Corporate Banking Division\n\n Lead Managers:\n\n DEN DANSKE BANK AKTIESELSKAB,\n CAYMAN ISLANDS BRANCH\n\n\n By: /s/ Peter L. Hargraves \n ---------------------------------------\n Title: Vice President\n\n By: /s/ Henrik K. Ibsen \n ---------------------------------------\n Title: Vice President\n\n\n FLEET BANK - NH\n\n\n By: /s/ Amy LeBlanc Hackett \n ---------------------------------------\n Title: Vice President\n\n\n KEYBANK NATIONAL ASSOCIATION\n\n\n By: /s/ Frank J. Jancar \n ---------------------------------------\n Title: Vice President\n\n\n\n 68\n\n\n\n\n NATIONAL WESTMINSTER BANK PLC\n NEW YORK BRANCH\n\n\n NATIONAL WESTMINSTER BANK PLC\n NASSAU BRANCH\n\n\n By: /s/ B. T. Sharpe \n ---------------------------------------\n Title: Senior Corporate Manager\n\n\n By: /s/ B. T. Sharpe \n ---------------------------------------\n Title: Senior Corporate Manager\n\n\n STANDARD CHARTERED BANK\n\n\n By: /s/ Jacob H. Yahiayan \n ---------------------------------------\n Title: Vice President\n\n Participants:\n\n AUSTRALIA AND NEW ZEALAND BANKING\n GROUP LIMITED\n\n\n By: /s/ Robert Sloan \n ---------------------------------------\n Title: First Vice President\n\n\n 69\n\n\n\n\n BANCA COMMERCIALE ITALIANA\n NEW YORK BRANCH\n\n\n By: /s/ C. Dougherty \n ---------------------------------------\n Title: Vice President\n\n\n By: /s/ Karen Purelis \n ---------------------------------------\n Title: Vice President\n\n BANCA POPOLARE DI MILANO\n NEW YORK BRANCH\n\n\n By: /s/ Fulvio Montanari \n ---------------------------------------\n Title: First Vice President\n\n\n By: /s/ Patrick F. Dillon \n ---------------------------------------\n Title: Vice President\n Chief Credit Officer\n\n\n BBL INTERNATIONAL, (U.K.) LTD\n\n\n By: /s/ C. F. Wright \n ---------------------------------------\n Title: Authorized Signatory\n\n\n By: /s/ M-C Swinnen \n ---------------------------------------\n Title: Authorized Signatory\n\n\n\n\n 70\n\n\n\n\n BANK OF TOKYO-MITSUBISHI, LTD.\n\n\n By: /s/ Thomas Fennessey \n ---------------------------------------\n Title: Attorney-in-fact\n\n\n BAYERISCHE HYPO-UND VEREINSBANK AG,\n NEW YORK BRANCH\n\n\n By: /s/ Marianne Weinzinger \n ---------------------------------------\n Title: Director\n\n\n By: /s/ Imke Engelmann \n ---------------------------------------\n Title: Associate Director\n\n\n BAYERISCHE LANDESBANK\n GIROZENTRALE CAYMAN ISLANDS\n BRANCH\n\n\n By: /s/ Alexander Kohnert \n ---------------------------------------\n Title: First Vice President\n\n\n By: /s/ James H. Boyle \n ---------------------------------------\n Title: Senior Vice President\n\n\n\n\n 71\n\n\n\n CARIPLO - CASSA DI RISPARMIO DELLE\n PROVINCIE LOMBARDE S.p.A.\n\n\n By: /s/ Anthony F. Giobbi \n ---------------------------------------\n Title: First Vice President\n\n\n By: /s/ Maria Elena Greene \n ---------------------------------------\n Title: Assistant Vice President\n\n\n COMERICA BANK\n\n\n By: /s/ Martin G. Elllis \n ---------------------------------------\n Title: Vice President\n\n CREDIT COMMERCIAL DE FRANCE\n NEW YORK BRANCH\n\n\n By: /s/ J. J. Salomon \n ---------------------------------------\n Title: Senior Vice President\n\n\n By: /s/ Elizabeth A. Fallon \n ---------------------------------------\n Title: Vice President\n\n\n\n\n 72\n\n\n NORDDEUTSCHE LANDESBANK\n GIROZENTRALE NEW YORK BRANCH\n AND/OR CAYMAN ISLANDS BRANCH\n\n\n By: /s/ Irene A. Burczynski \n ---------------------------------------\n Title: Vice President\n\n\n By: /s/ Stephen K. Hunter \n ---------------------------------------\n Title: Senior Vice President\n\n\n PNC BANK, NATIONAL ASSOCIATION\n\n\n By: /s/ Donald V. Davis \n ---------------------------------------\n Title: Vice President\n\n\n THE BANK OF NEW YORK\n\n\n By: /s/ Thomas C. McCrohan \n ---------------------------------------\n Title: Vice President\n\n\n THE NORTHERN TRUST COMPANY\n\n\n By: /s/ Russell R. Rockenbach \n ---------------------------------------\n Title: Second Vice President\n\n\n\n 73\n\n\n\n UNICREDITO ITALIANO S.p.A.\n\n\n By: /s/ Harmon P. Butler \n ---------------------------------------\n Title: First Vice President and \n Deputy Manager\n\n\n By: /s/ Gianfranco Bisagni \n ---------------------------------------\n Title: First Vice President\n\n\n BW CAPITAL MARKETS, INC.\n\n\n By: /s/ Robert B. Herber \n ---------------------------------------\n Title: Managing Director\n\n\n By: /s/ Thomas A. Lowe \n ---------------------------------------\n Title: Vice President\n\n\n THE DAI-ICHI KANGYO BANK, LTD.,\n NEW YORK BRANCH\n\n\n By: /s/ Bob Gallagher, Jr. \n ---------------------------------------\n Title: Vice President\n\n\n WESTPAC BANKING CORPORATION\n\n\n By: /s/ Kate V. Perry \n ---------------------------------------\n Title: Vice President\n\n\n\n 74\n\n\n COMMITMENT SCHEDULE\n\n
\n\n 75\n\n\n
\n\n\n\n\n\n\n\n\n 76\n\n\n PRICING SCHEDULE\n\n The \"EURO-DOLLAR MARGIN\", \"CD MARGIN\" and \"FACILITY FEE RATE\" for any\nday are the respective percentages set forth below in the applicable row and\ncolumn based upon the Utilization and Status that exist on such day (provided\nthat for any day on or after February 11, 2000, the \"Euro-Dollar Margin\" and the\n\"CD Margin\" shall be equal to the respective percentages so determined plus (x)\n1.00% per annum for any day on which Level I Status, Level II Status, Level III\nStatus or Level IV Status exists or (y) 2.00% per annum for any day on which\nLevel V Status or Level VI Status exists):\n\n\n
\n\n For purposes of this Schedule, the following terms have the following\nmeanings, subject to the concluding paragraph of this Schedule:\n\n \"LEVEL I STATUS\" exists at any date if, at such date, the Borrower's\nsenior unsecured long-term debt is rated A or higher by S&P or A2 or higher by\nMoody's.\n\n \"LEVEL II STATUS\" exists at any date if, at such date, (i) the\nBorrower's senior unsecured long-term debt is rated A- or higher by S&P or A3 or\nhigher by Moody's and (ii) Level I Status does not exist.\n\n \"LEVEL III STATUS\" exists at any date if, at such date, (i) the\nBorrower's senior unsecured long-term debt is rated BBB+ or higher by S&P or\nBaa1 or higher by Moody's and (ii) neither Level I Status nor Level II Status\nexists.\n\n \"LEVEL IV STATUS\" exists at any date if, at such date, (i) (x) the\nBorrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2\nor higher by Moody's and (y) the Borrower's commercial paper is rated A2 or\nhigher by S&P and P2 or higher by Moody's and (ii) none of Level I Status, Level\nII Status and Level III Status exists.\n\n\n\n\n\n 77\n\n\n \"LEVEL V STATUS\" exists at any date, if at such date, (i) the\nBorrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2\nor higher by Moody's and (ii) none of Level I Status, Level II Status, Level III\nStatus or Level IV Status exists.\n\n \"LEVEL VI STATUS\" exists at any date if, at such date, no other Status\nexists.\n\n \"STATUS\" refers to the determination of which of Level I Status, Level\nII Status, Level III Status, Level IV Status, Level V Status or Level VI Status\nexists at any date.\n\n \"UTILIZATION\" means, at any date, the percentage equivalent of a\nfraction (i) the numerator of which is the aggregate outstanding principal\namount of the Loans at such date and (ii) the denominator of which is the\naggregate amount of the Commitments at such date. If for any reason any Loans\nremain outstanding following termination of the Commitments, Utilization shall\nbe deemed to be in excess of 25%.\n\n The credit ratings to be utilized for purposes of this Schedule are\nthose assigned to the senior unsecured long-term debt securities and/or\ncommercial paper, as the case may be, of the Borrower without third-party credit\nenhancement, and any rating assigned to any other debt security of the Borrower\nshall be disregarded. The rating in effect at any date is that in effect at the\nclose of business on such date. If the Borrower is split-rated and the ratings\ndifferential is one notch, the higher of the two ratings will apply (e.g., A/A3\nresults in Level I Status). If the Borrower is split-rated and the ratings\ndifferential is more than one notch, the average of the two ratings (or the\nhigher of two intermediate ratings) shall be used (e.g., A/Baa1 results in Level\nII Status, as does A/Baa2).\n\n\n\n\n\n\n 2\n\n\n\n 78\n\n EXHIBIT A\n\n\n\n\n\n PROMISSORY NOTE\n\n\n\n\n\n New York, New York\n\n , 1999\n\n\n\n\n\n For value received, TYCO INTERNATIONAL GROUP S.A., a Luxembourg company\n(the \"Borrower\"), promises to pay to the order of (the \"Bank\"), for the\naccount of its Applicable Lending Office, the unpaid principal amount of each\nLoan made by the Bank to the Borrower pursuant to the Credit Agreement referred\nto below on the maturity date provided for in the Credit Agreement. The Borrower\npromises to pay interest on the unpaid principal amount of each such Loan on the\ndates and at the rate or rates provided for in the Credit Agreement. All such\npayments of principal and interest shall be made in lawful money of the United\nStates in Federal or other immediately available funds at the office of Morgan\nGuaranty Trust Company of New York, 60 Wall Street, New York, New York.\n\n All Loans made by the Bank, the respective types and maturities thereof\nand all repayments of the principal thereof shall be recorded by the Bank and,\nif the Bank so elects in connection with any transfer or enforcement hereof,\nappropriate notations to evidence the foregoing information with respect to each\nsuch Loan then outstanding may be endorsed by the Bank on the schedule attached\nhereto, or on a continuation of such schedule attached to and made a part\nhereof; provided that the failure of the Bank to make any such recordation or\nendorsement shall not affect the obligations of the Borrower hereunder or under\nthe Credit Agreement.\n\n This promissory note is one of the Promissory Notes referred to in the\n364-Day Credit Agreement dated as of February 12, 1999 among the Borrower, the\n\n\n\n\n\n 79\n\n\nbanks listed on the signature pages thereof and Morgan Guaranty Trust Company of\nNew York, as Agent (as the same may be amended from time to time, the \"Credit\nAgreement\"). Terms defined in the Credit Agreement are used herein with the same\nmeanings. Reference is made to the Credit Agreement for provisions for the\nprepayment hereof and the acceleration of the maturity hereof.\n\n Except as permitted by Section 9.06 of the Credit Agreement, this\nPromissory Note may not be assigned by the Bank to any other Person.\n\n This Promissory Note shall be governed by and construed in accordance\nwith the laws of the State of New York.\n\n\n TYCO INTERNATIONAL GROUP S.A.\n\n\n By:\n ---------------------------------------\n Name:\n Title:\n\n By: \n ---------------------------------------\n Name:\n Title:\n\n\n\n\n\n\n\n 2\n\n\n\n\n 80\n\n\n Promissory Note (cont'd)\n\n\n LOANS AND PAYMENTS OF PRINCIPAL\n\n- --------------------------------------------------------------------------------\n Amount Type Amount of Unpaid\n of of Principal Principal Maturity Notation\nDate Loan Loan Repaid Amount Date Made By\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n- --------------------------------------------------------------------------------\n\n\n\n\n\n\n 3\n\n\n\n 81\n\n\n EXHIBIT B\n\n FORM OF MONEY MARKET QUOTE REQUEST\n\n[Date]\n\nTo: Morgan Guaranty Trust Company of New York\n (the \"Agent\")\n\nFrom: Tyco International Group S.A.\n\n Re: 364-Day Credit Agreement (the \"Credit Agreement\") dated\n as of February 12, 1999 among the Borrower, the Banks\n listed on the signature pages thereof and the Agent\n\n We hereby give notice pursuant to Section 2.03 of the Credit Agreement\nthat we request Money Market Quotes for the following proposed Money Market\nBorrowing(s):\n\n Date of Borrowing: __________________\n\n\n
\n\n Such Money Market Quotes should offer a Money Market [Margin] [Absolute\nRate]. [The applicable base rate is the London Interbank Offered Rate.]\n\n Terms used herein have the meanings assigned to them in the Credit\nAgreement.\n\n TYCO INTERNATIONAL GROUP S.A.\n\n By \n -----------------------------------------\n Title:\n\n By \n ----------------------------------------\n Title:\n\n\n\n- ------------------------\n\n *Amount must be $10,000,000 or a larger multiple of $1,000,000.\n\n **Not less than one month (LIBOR Auction) or not less than 30 days\n(Absolute Rate Auction), subject to the provisions of the definition of Interest\nPeriod.\n\n\n 82\n\n EXHIBIT C\n\n FORM OF INVITATION FOR MONEY MARKET QUOTES\n\n\nTo: [Name of Bank]\n\n Re: Invitation for Money Market Quotes to Tyco International\n Group S.A. (the \"Borrower\")\n\n Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of\nFebruary 12, 1999 among the Borrower, the Banks parties thereto and the\nundersigned, as Agent (the \"Credit Agreement\"), we are pleased on behalf of the\nBorrower to invite you to submit Money Market Quotes to the Borrower for the\nfollowing proposed Money Market Borrowing(s):\n\n Date of Borrowing: __________________\n\n\n
\n\n\n Such Money Market Quotes should offer a Money Market [Margin] [Absolute\nRate]. [The applicable base rate is the London Interbank Offered Rate.]\n\n Please respond to this invitation by no later than [2:00 P.M.] [9:30\nA.M.] (New York City time) on [date].\n\n Terms used herein have the meanings assigned to them in the Credit\nAgreement.\n\n MORGAN GUARANTY TRUST COMPANY\n OF NEW YORK\n\n By \n -----------------------------------------\n Authorized Officer\n\n\n\n 83\n\n\n EXHIBIT D\n\n FORM OF MONEY MARKET QUOTE\n\nTo: Morgan Guaranty Trust Company of New York, as Agent\n\nRe: Money Market Quote to Tyco International Group S.A. (the \"Borrower\")\n\n In response to your invitation on behalf of the Borrower dated\n_____________, 19__, we hereby make the following Money Market Quote on the\nfollowing terms:\n\n 1. Quoting Bank: ________________________________\n\n 2. Person to contact at Quoting Bank:\n\n -----------------------------\n\n 3. Date of Borrowing: ____________________*\n\n 4. We hereby offer to make Money Market Loan(s) in the following\n principal amounts, for the following Interest Periods and at\n the following rates:\n\n Principal Interest Money Market\n\n\n
\n\n\n [Provided, that the aggregate principal amount of Money Market Loans\nfor which the above offers may be accepted shall not exceed $____________.]**\n\n ----------\n\n * As specified in the related Invitation.\n\n ** Principal amount bid for each Interest Period may not exceed\nprincipal amount requested. Specify aggregate limitation if the sum of the\nindividual offers exceeds the amount the Bank is willing to lend. Bids must be\nmade for $5,000,000 or a larger multiple of $1,000,000.\n\n (notes continued on following page)\n\n\n\n 84\n\n\n\n We understand and agree that the offer(s) set forth above, subject to\nthe satisfaction of the applicable conditions set forth in the 364-Day Credit\nAgreement dated as of February 12, 1999 (the \"Credit Agreement\") among the\nBorrower, the Banks listed on the signature pages thereof and yourselves, as\nAgent, irrevocably obligates us to make the Money Market Loan(s) for which any\noffer(s) are accepted, in whole or in part, in accordance with Section 2.03(f)\nof the Credit Agreement.\n\n Terms used herein have the meanings assigned to them in the Credit\nAgreement.\n\n Very truly yours,\n\n\n [NAME OF BANK]\n\nDated: By: \n --------------------- ---------------------------------\n Authorized Officer\n\n\n\n\n\n\n- ----------\n*** Not less than one month or not less than 30 days, as specified in the\nrelated Invitation. No more than five bids are permitted for each Interest\nPeriod.\n**** Margin over or under the London Interbank Offered Rate determined\nfor the applicable Interest Period. Specify percentage (to the nearest 1/10,000\nof 1%) and specify whether \"PLUS\" or \"MINUS\". \n***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).\n\n\n\n 2\n\n 85\n\n\n EXHIBIT E\n\n\n\n FORM OF OPINION OF CHIEF CORPORATE COUNSEL\n OF THE PARENT GUARANTOR\n\n\n February 12, 1999\n\n\nTo the Banks and the Agent\nNamed on the Attached Distribution List\nc/o Morgan Guaranty Trust Company\nof New York, as Agent\n60 Wall Street\nNew York, New York 10260\n\nLadies and Gentlemen:\n\n\n I am the Executive Vice President and Chief Corporate Counsel of Tyco\nInternational Ltd., a Bermuda company (the \"PARENT GUARANTOR\"), which owns all\nof the outstanding capital stock of Tyco International Group S.A., a Luxembourg\ncompany (the \"BORROWER\"). I am rendering this opinion in connection with (i)\nthat certain 364-Day Credit Agreement (the \"CREDIT AGREEMENT\"), dated as of\nFebruary 12, 1999, among the Borrower, the banks listed on the signature pages\nthereof (the \"BANKS\") and Morgan Guaranty Trust Company of New York, as Agent\nand (ii) that certain Amended and Restated Parent Guarantee Agreement (the\n\"PARENT GUARANTEE\"), dated as of February 13, 1998 and amended and restated as\nof February 12, 1999, entered into by the Parent Guarantor pursuant to the\nCredit Agreement. This opinion is being delivered to you pursuant to Section\n3.01(d) of the Credit Agreement. Each term defined in the Credit Agreement and\nused herein, but not otherwise defined herein, has the meaning ascribed thereto\nin the Credit Agreement.\n\n In connection with the opinion set forth herein, I have caused\nattorneys employed under my supervision to review the Credit Agreement, the\nPromissory Notes of the Borrower, the Parent Guarantee (collectively, the\n\"FINANCING DOCUMENTS\") and the Extendible 364-Day Credit Agreement dated as of\nFebruary 13, 1998 among the Borrower, the banks listed therein and Morgan\nGuaranty Trust Company of New York, as agent for such banks, as amended to the\nEffective Date (the \"EXISTING FIVE-YEAR AGREEMENT\" and, as further amended by\n\n\n\n\n\n\n 86\n\n\n\nthe Credit Agreement, the \"AMENDED FIVE-YEAR AGREEMENT\" and together with the\nCredit Agreement, the \"AGREEMENTS\") and have caused attorneys employed under my\nsupervision to examine originals or copies, certified or otherwise identified to\nmy satisfaction, of such documents, records, certificates and instruments as I\nhave deemed relevant and necessary as a basis for the opinion hereinafter\nexpressed.\n\n In connection with such examination, I have assumed the genuineness of\nall signatures on original documents, the authenticity of all documents\nsubmitted for review as originals, the conformity to the originals of all copies\nsubmitted for review as certified, conformed or photostatic copies, and the\nauthenticity of the originals of such copies. As to various questions of fact\nmaterial to this opinion, I have relied, without independent investigation or\nverification, upon statements, representations and certificates of officers and\nother representatives of the Borrower, the Parent Guarantor and certificates of\npublic officials. In addition, I have assumed that (i) the Agreements have been\nvalidly authorized, executed and delivered by all parties thereto (other than\nthe Borrower), (ii) each party to the Agreements (other than the Borrower) has\nbeen duly organized and is a corporation or other entity validly existing and in\ngood standing (to the extent applicable) under the laws of its respective\njurisdiction of organization, with the full corporate or other organizational\npower to execute and deliver the Agreements and to perform its respective\nobligations thereunder, (iii) the Agreements constitute the legal, valid and\nbinding obligations of the respective parties thereto (other than the Borrower)\nenforceable against such parties in accordance with their respective terms, (iv)\nthe execution and delivery of the Agreements by each party thereto (other than\nthe Borrower) and the performance by such parties of their respective\nobligations thereunder do not violate such parties' respective articles or\ncertificate of incorporation or by-laws, or other organizational documents, and\n(v) the execution, delivery and performance by each party to the Agreements\n(other than the Borrower) and the performance by such parties of their\nrespective obligations thereunder do not violate any agreement, judgment,\ninjunction, decree, order of any governmental authority, other instrument, law\nor regulation applicable to such party.\n\n Based upon the foregoing, and subject to the qualifications and\nassumptions set forth herein, it is my opinion that:\n\n 1. The execution, delivery and performance by the Borrower of the\nCredit Agreement and the Promissory Notes and the performance by the Borrower of\nthe Amended Five-Year Agreement (a) require no action by or in respect of, or\nfiling with, any governmental body, agency or official, in each case, on the\npart of the Borrower; and (b) do not contravene, or constitute a default by the\nBorrower under, any provision of (i) applicable law or regulation, or (ii) any\nagreement or\n\n\n\n 2\n\n 87\n\n\ninstrument evidencing or governing debt of the Borrower, or any other agreement,\njudgment, injunction, order, decree or other instrument binding upon the\nBorrower.\n\n 2. Each of the Credit Agreement and the Amended Five-Year Agreement\nconstitutes a valid and binding agreement of the Borrower and each Promissory\nNote constitutes a valid and binding obligation of the Borrower.\n\n 3. The execution, delivery and performance by the Parent Guarantor of\nthe Parent Guarantee (a) require no action by or in respect of, or filing with,\nany governmental body, agency or official, in each case, on the part of the\nParent Guarantor; and (b) do not contravene, or constitute a default by the\nParent Guarantor under, any provision of (i) applicable law or regulation or\n(ii) any agreement or instrument evidencing or governing debt of the Parent\nGuarantor, or any other agreement, judgment, injunction, order, decree or other\ninstrument binding upon the Parent Guarantor.\n\n 4. The Parent Guarantee constitutes a valid and binding obligation of\nthe Parent Guarantor.\n\n 5. There is no action, suit or proceeding pending against, or, to the\nbest of my knowledge, threatened against or affecting, the Parent Guarantor or\nany of its Subsidiaries before any court or arbitrator or any governmental body,\nagency or official, in which there is a reasonable possibility of an adverse\ndecision which could, based upon the facts and circumstances in existence on the\ndate hereof, reasonably be expected to have a Material Adverse Effect or which\nin any manner draws into question the validity of the Financing Documents.\n\n 6. Each of the Parent Guarantor's corporate Subsidiaries is a\ncorporation validly existing and in good standing under the laws of its\njurisdiction of incorporation, except where the failure to be so incorporated,\nexisting or in good standing could not, based upon the facts and circumstances\nexisting on the date hereof, reasonably be expected to have a Material Adverse\nEffect, and has all corporate powers and all Consents required to carry on its\nbusiness as now conducted other than those powers and Consents, the failure of\nwhich to be possessed or obtained could not, based upon the facts and\ncircumstances in existence on the date hereof, reasonably be expected to have a\nMaterial Adverse Effect.\n\n The opinion set forth herein is subject to the following qualifications\nand limitations:\n\n\n\n 3\n\n 88\n\n\n (a) The enforceability of the Credit Agreement, the Promissory Notes,\nthe Parent Guarantee and the Amended Five-Year Agreement may be subject to or\nlimited by bankruptcy, insolvency, reorganization, arrangement, moratorium,\nfraudulent conveyance or transfer or other similar laws and court decisions, now\nor hereafter in effect, relating to or affecting the rights of creditors\ngenerally.\n\n (b) The enforceability of the Credit Agreement, the Promissory Notes,\nthe Parent Guarantee and the Amended Five-Year Agreement is or will be subject\nto the application of and may be limited by general principles of equity\nincluding, without limitation, concepts of materiality, reasonableness, good\nfaith and fair dealing (regardless of whether considered in a proceeding in\nequity or at law). Such principles of equity are of general application, and in\napplying such principles a court, among other things, might not allow a creditor\nto accelerate maturity of a debt under certain circumstances including, without\nlimitation, upon the occurrence of a default deemed immaterial, or might decline\nto order the Borrower, the Parent Guarantor or any of the other parties to the\nFinancing Documents to perform covenants. Such principles as applied by a court\nmight include a requirement that a creditor act with reasonableness and in good\nfaith. Thus, I express no opinion as to the validity or enforceability of (i)\nprovisions restricting access to legal or equitable remedies, such as the\nspecific performance of executory covenants, (ii) provisions that purport to\nestablish evidentiary standards, (iii) provisions relating to waivers,\nseverability, set-off, or delay or omission of enforcement of rights or\nremedies, and (iv) provisions purporting to convey rights to persons other than\nparties to the Financing Documents.\n\n (c) The remedy of specific performance and injunctive and other forms\nof equitable relief are subject to equitable defenses and to the discretion of\nthe court before which any proceeding therefor may be brought.\n\n I call your attention to the fact that I am admitted to practice law\nonly in the State of New York and, in rendering the foregoing opinion, I do not\nexpress any opinion as to any laws other than the laws of the State of New York\nand the Federal laws of the United States of America. Insofar as the foregoing\nopinion involves matters governed by the law of Luxembourg or Bermuda, I have\nrelied, without independent investigation or verification, upon the respective\nopinions of Beghin Nothar Feider Loeff Claeys Verbeke, special Luxembourg\ncounsel for the Borrower, and of Appleby Spurling & Kempe, special Bermuda\ncounsel for the Parent Guarantor.\n\n The opinion expressed herein is based upon the laws in effect on the\ndate hereof, and I assume no obligation to revise or supplement this opinion\nshould any such law be changed by legislative action, judicial decision, or\notherwise.\n\n\n\n 4\n\n 89\n\n\n This opinion is being delivered to you solely for your benefit in\nconnection with the Financing Documents, and neither this opinion nor any part\nhereof may be delivered to, or used, referred to or relied upon, by any other\nperson or for any other purpose without my express prior written consent, except\nthat any person who is a permitted successor or assign of a Bank in accordance\nwith the provisions of the Credit Agreement may rely upon this opinion as if it\nwere specifically addressed and delivered to such person on the date hereof.\n\n Very truly yours,\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n 5\n\n\n 90\n\n\n DISTRIBUTION LIST\n\n\nMorgan Guaranty Trust Company of New York\nBank of America National Trust and Savings Association\nThe Chase Manhattan Bank\nCommerzbank AG, New York Branch\nABN AMRO Bank N.V.\nBarclays Bank Plc\nBankers Trust Company\nCitibank, N.A.\nCredit Lyonnais New York Branch\nCredit Suisse First Boston\nDresdner Bank AG, New York and Grand Cayman Branches\nThe First National Bank of Chicago\nFirst Union National Bank\nIstituto Bancario San Paolo di Torino Istituto Mobiliare Italiano, SpA\nMarine Midland Bank\nMellon Bank, N.A.\nSociete Generale\nThe Bank of Nova Scotia\nToronto Dominion (Texas), Inc.\nWestdeutsche Landesbank Girozentrale\nBankBoston, N.A.\nBanque Nationale de Paris\nDen Danske Bank Aktieselskab, Cayman Islands Branch \nFleet Bank - NH\nKeyBank National Association\nNational Westminster Bank Plc New York and Nassau Branches\nStandard Chartered Bank \nAustralia and New Zealand Banking Group Limited\nBanca Commerciale Italiana New York Branch \nBanca Popolare di Milano New York Branch\nBBL International, (U.K.) Ltd \nBank of Tokyo-Mitsubishi, Ltd. \nBayerische Hypo - Und Vereinsbank AG, New York Branch\nBayerische Landesbank Girozentrale Cayman Islands Branch \nCariplo - Cassa Di Risparmio Delle Provincie Lombarde S.p.A.\nComerica Bank\nCredit Commercial de France New York Branch\nNorddeutsche Landesbank Girozentrale New York Branch and/or Cayman\n Islands Branch\nPNC Bank, National Association \nThe Bank of New York \nThe Northern Trust Company \nUnicredito Italiano S.p.A. \nBW Capital Markets, Inc. \nThe Dai-Ichi Kangyo Bank, Ltd., New York Branch\nWestpac Banking Corporation\n\n\n 91\n\n\n\n EXHIBIT F\n\n\n FORM OF OPINION OF SPECIAL COUNSEL\n FOR THE BORROWER\n\n\nTo the banks listed on the signature pages\nof the Credit Agreement (defined below) and \nMorgan Guaranty Trust Company, as Agent\n60 Wall Street\nNew York, New York 10260\n\nLuxembourg, February 12, 1999\n\n\n TYCO INTERNATIONAL GROUP S.A.\n (INCORPORATED WITH LIMITED LIABILITY UNDER THE LAWS OF\n THE GRAND-DUCHY OF LUXEMBOURG)\n\n\nDear Sirs:\n\n We have acted as your legal advisers in the Grand-Duchy of Luxembourg\n(\"LUXEMBOURG\") in connection with the 364-Day Credit Agreement dated as of\nFebruary 12, 1999 (the \"CREDIT AGREEMENT\") among Tyco International Group S.A.,\na Luxembourg company (the \"COMPANY\"), the Banks listed on the signature pages\nthereof and Morgan Guaranty Trust Company of New York, as Agent (the \"AGENT\").\nThis opinion is being delivered to you pursuant to Section 3.01(d) of the Credit\nAgreement.\n\n We give this opinion on the basis of and subject to the assumptions and\nqualifications set out below.\n\n 1. Basis of Opinion\n\n (a) This opinion is confined to Luxembourg law currently in\n force and applied. This opinion is to be construed in accordance with\n the laws of Luxembourg.\n\n (b) For the purpose of giving this opinion, we have examined\n copies of the following documents:\n\n (i) the Credit Agreement;\n\n\n\n\n 92\n\n\n\n (ii) the Extendible 364-Day Agreement dated as of\n February 13, 1998 (the \"FIVE-YEAR AGREEMENT\") among the\n Company, the banks listed therein and Morgan Guaranty Trust\n Company of New York, as agent for such banks (\"MORGAN\"), as\n amended by Amendment No.1 thereto dated as of May 4, 1998 and\n Amendment No. 2 thereto dated as of September 25, 1998 (such\n amendments referred to collectively as the \"AMENDMENTS\") (the\n Five-Year Agreement as amended by the Amendments and as\n further amended by the Credit Agreement, the \"AMENDED FIVE-\n YEAR AGREEMENT\"), together with the New Borrower Agreement\n Relating to the Extendible 364-Day Agreement dated as of June\n 30, 1998 (the \"NEW BORROWER AGREEMENT\") among Tyco\n International (US) Inc., a Massachusetts corporation, the\n Company and Morgan pursuant to which the Company became a\n party to the Five-Year Agreement;\n\n (iii) the Amendments;\n\n (iv) the Amended and Restated Parent Guarantee\n Agreement dated as of February 13, 1998 and amended and\n restated as of February 12, 1999 between Tyco International\n Ltd., a company incorporated under the laws of Bermuda, and\n the Agent (the \"PARENT GUARANTEE\");\n\n (v) the Promissory Notes executed by the Company on\n February 12, 1999;\n\n (vi) a copy of the articles of association of the\n Company in their version of 30th March 1998, filed with the\n Luxembourg Company Register on 22 April 1998 and published in\n the Official Gazette (Memorial) C-N(degree) 474 of 29th June\n 1998, an amendment to the articles of association of the\n Company by way of a notarial deed dated 6 July 1998 and\n published in the Official Gazette (Memorial) C-N(degree) 733\n of 10th October 1998, an amendment to the articles of\n association of the Company by way of a notarial deed dated\n 22nd October 1998, not yet published, and an amendment to the\n articles of association of the Company by way of a notarial\n deed dated December 4, 1998, not yet published;\n\n (vii) a copy of minutes of a meeting of the board of\n directors of the Company held on February 5, 1999 approving\n the execution of the Credit Agreement and the Promissory\n Notes; and\n\n\n\n 2\n\n 93\n\n (viii) such other documents, records, certificates and\n instruments as we have thought necessary or desirable,\n including information gathered at the Luxembourg Company\n Register and at the District Court of Luxembourg.\n\n As used herein, the term \"FINANCING DOCUMENTS\" means the \"Financing\nDocuments\" as defined in the Credit Agreement and the \"Financing Documents\" as\ndefined in the Amended Five-Year Agreement, collectively. Terms defined in the\nCredit Agreement and used herein, but not otherwise defined herein, have the\nmeanings ascribed thereto in the Credit Agreement.\n\n 2. Assumptions\n\n With your consent, we have assumed and we have not verified\nindependently:\n\n (a) that any copies we have examined are complete and accurate\n copies of the originals;\n\n (b) the genuineness and authority of all the signatures,\n stamps and seals on all original or copy documents which we have\n examined;\n\n (c) that all documents have been duly authorized, executed and\n delivered by, and are within the capacity and power of, all the parties\n thereto, other than the Company;\n\n (d) that the documents which are not governed by Luxembourg\n law are legal, valid, binding and enforceable in accordance with their\n terms under their chosen governing law being the laws of the State of\n New York; and\n\n (e) that none of the opinions below would be affected by the\n laws (including the public policy) of any jurisdiction outside\n Luxembourg.\n\n On the above basis and subject to the assumptions and qualifications\nset out above and below, and further subject to any matters, documents, or\nevents not disclosed to us and to undisclosed matters of fact which would affect\nthe conclusions set out below, we are of the opinion that:\n\n 3. Opinion\n\n (a) The Company is a limited liability corporation duly\n organized and validly existing under the laws of Luxembourg pursuant to\n the articles\n\n\n\n\n\n 3\n\n\n 94\n\n\n of association provided in a notarial deed of March 30, 1998, as\n amended, and was formerly incorporated under the laws of Gibraltar\n under the name of Velum Limited.\n\n (b) The Company has all company powers and all material\n governmental licenses, consents and approvals required to carry on its\n business as now conducted (other than such powers or consents the\n failure of which to be obtained could not reasonably be expected to\n have a Material Adverse Effect).\n\n (c) The execution, delivery and performance by the Company of\n the Credit Agreement and the Promissory Notes, and the performance by\n the Company of the Amended Five-Year Agreement (i) are within the\n Company's powers, (ii) have been duly authorized by all necessary\n company action, (iii) require no action by or filing with any\n governmental body, agency or official, (iv) do not contravene or\n constitute a default under (A) applicable law or regulation, (B) the\n Company's articles of association or (C) any agreement or instrument\n governing debt of the Company or any other material agreement,\n judgment, injunction, order, decree or other instrument binding upon\n the Company.\n\n (d) Each of the Credit Agreement and the Amended Five-Year\n Agreement constitutes a valid and binding agreement of the Company, and\n each Promissory Note constitutes a valid and binding obligation of the\n Company.\n\n (e) There is no action, suit or proceeding pending or\n threatened against or affecting the Company or any of its Subsidiaries\n in which there is a reasonable possibility of an adverse decision which\n could reasonably be expected to have a Material Adverse Effect or which\n in any manner draws into question the validity of the Financing\n Documents.\n\n (f) There is no tax, impost, deduction or withholding imposed\n by Luxembourg or any political subdivision thereof on or by virtue of\n the execution, delivery or enforcement of the Financing Documents or\n any other agreement or instrument relating thereto.\n\n (g) Each of the Financing Documents to which the Company is a\n party is in proper legal form under the laws of Luxembourg for the\n enforcement thereof against the Company under the laws of Luxembourg.\n\n (h) To ensure the legality, validity, enforceability or\n admissibility in evidence of the Financing Documents in Luxembourg, it\n is not \n\n\n\n 4\n\n 95\n\n\n\n\n necessary that the Financing Documents or any other document be\n filed or recorded with any court or other authority in Luxembourg.\n\n (i) The choice of the laws of the State of New York to govern\n the Credit Agreement, the Amended Five-Year Agreement and the\n Promissory Notes is a valid and binding choice of law and will be\n recognized and applied by the courts of Luxembourg.\n\n (j) Any judgment obtained in any federal or New York State\n court sitting in New York City, arising out of or in relation to the\n obligations of the Company under the Financing Documents would be\n enforceable in Luxembourg against the Company.\n\n 4. Qualifications\n\n The foregoing opinion is subject to the following qualifications.\n\n (a) Insolvency. This opinion is subject to all insolvency and\n other similar laws affecting the rights of creditors vis-a-vis the\n Company, including inter alia suspension of payments, bankruptcy,\n reorganization or moratorium.\n\n (b) Corporate Benefit. The Company may only validly enter the\n Financing Documents to which it is a party if and to the extent that\n such entry does not threaten its existence or the rights of its\n creditors and that the Company can reasonably hope to draw directly or\n indirectly a corporate benefit, at least in the long term, from the\n Financing Documents. We have no indication and no reason to believe\n that entering the Financing Documents would be other than for the\n corporate benefit of the Company.\n\n (c) Choice of Law. The Luxembourg courts (assuming that\n litigation were brought to the Luxembourg courts and that Luxembourg\n courts had jurisdiction) would not apply a chosen foreign law if:\n\n (i) it were not pleaded and proven; or\n\n (ii) if pleaded and proven, such foreign law would be\n contrary to the mandatory rules of Luxembourg law or\n manifestly incompatible with Luxembourg public policy.\n\n (d) Enforcement of Judgments. The Luxembourg courts would\n enforce a final and conclusive judgment against the Company rendered by\n any federal or New York State court sitting in New York City in any\n suit, \n\n\n\n\n 5\n\n\n 96\n\n\n action or proceedings arising out of or in relation to the \n obligations of the Company under the Financing Documents provided,\n however, that such judgment would comply with the conditions imposed by\n article 678 of the Luxembourg nouveau code de procedure civile (i.e.,\n the exequatur procedure) as currently interpreted by the Luxembourg\n courts and doctrine; namely, the foreign judgment\n\n (i) is final and enforceable in the jurisdiction\n where it has been rendered and complies with the conditions\n posed by any treaty,\n\n (ii) has been rendered in accordance with the legal\n formalities applicable in such jurisdiction,\n\n (iii) emanates from a court having both international\n (according to Luxembourg's conflict of laws rules) and\n national (according to the law of the foreign jurisdiction)\n competence,\n\n (iv) applies the substantive law of the country whose\n law would be applied according to Luxembourg's conflict of\n laws rules; and\n\n (v) is not contrary to Luxembourg public policy or\n mandatory rules of Luxembourg law.\n\n (e) Judgment Currency. Any obligation to pay an amount in a\n currency other than Luxembourg Francs will be enforceable in Luxembourg\n only in terms of Luxembourg Francs, though monetary judgments may be\n expressed in a foreign currency and/or its Luxembourg Francs equivalent\n at the time of payment, and any loss incurred as a result of a currency\n exchange fluctuation can be recovered under Luxembourg law.\n\n (f) Luxembourg Legal Concepts. This opinion shall be construed\n in accordance with Luxembourg law and Luxembourg legal concepts are\n expressed in English terms and not in their original French terms. The\n concepts concerned may not be identical to the concepts described by\n the same English terms as they exist under the laws of other\n jurisdictions. This opinion may, therefore, only be relied upon under\n the express condition that any issues of interpretation arising\n thereunder will be governed by Luxembourg law and be brought before a\n Luxembourg court.\n\n\n\n\n\n 6\n\n\n 97\n\n (g) Registration. If the Financing Documents are or must be\n produced in any court proceedings in Luxembourg or before any official\n authority in Luxembourg, registration thereof may be ordered in which\n case an ad valorem tax at the rate of 0.24 percent of the amount\n mentioned in the registered document or a fixed duty of LUF 500 for\n each of the Financing Documents would then be payable upon\n registration.\n\n (h) Binding Documents. The opinion expressed under (c)(iv)(C)\n is solely based upon a review of documents which have been filed by the\n Company with the Luxembourg Company Register and the certificate of the\n Managing Directors of the Company attached to this opinion as Appendix\n A.\n\n (i) Litigation. The opinion expressed under (e) above is\n solely based on oral information received from the registrar of the\n district court of Luxembourg.\n\n (j) Set-Off. No opinion can be expressed as to whether the\n provisions in the Credit Agreement or the Amended Five-Year Agreement\n on set-off (so far as the Company is concerned) would be effective and\n enforceable against a Luxembourg insolvency official.\n\n (k) Penalty Clause. It is possible that a Luxembourg court (if\n having jurisdiction) would consider Section 2.15 of each of the Credit\n Agreement and the Amended Five-Year Agreement whereby the Borrower may\n be obliged to pay additional interest on the related Euro-Dollar loan\n at a rate per annum determined by the relevant Bank as a penalty clause\n (clause penale).\n\n Penalty clauses as governed by article 1152 and articles 1226\n et seq. of the Luxembourg civil code are allowed to the extent that\n they provide for a reasonable level of damages. The judge has however\n the right to reduce (or increase) the amount thereof if it is\n unreasonably high (or low).\n\n (l) Language Differences. It is noted that there are always\n irreconcilable differences between languages making it impossible to\n guarantee a totally accurate translation or interpretation. In\n particular, there are always some legal concepts which exist in one\n jurisdiction and not in another, and in those cases it is bound to be\n difficult to provide a completely satisfactory translation or\n interpretation because the vocabulary is missing from the language. We\n accept no responsibility for omissions or inaccuracies to the extent\n they are attributable to such factors.\n\n\n\n\n 7\n\n 98\n\n\n This opinion is as of this date and we undertake no obligation to\nupdate this opinion or advise of changes hereafter occurring.\n\n We express no opinion as to any matters other than those expressly set\nforth herein, and no opinion is, or may be, implied or inferred herefrom.\n\n This opinion is given for your benefit as Agent for the Banks and it\nmay be relied upon by you, the Banks as well as your or their assignees,\nsuccessors, and your or their legal advisers. It may also be relied upon by Mark\nA Belnick, Executive Vice President and Chief Corporate Counsel to the Parent\nGuarantor, for the purposes of issuing the opinion required pursuant to Section\n3.01(d)(i) of the Credit Agreement. It may not be relied upon by any other\nperson. It may not be disclosed to third parties, quoted, referred to or\notherwise used (save as required by law) without our prior written consent.\n\n Yours faithfully,\n\n\n\n\n\n\n\n\n\n\n\n\n\n 8\n\n \n 99\n\n\n\n EXHIBIT G\n\n FORM OF OPINION OF SPECIAL COUNSEL\n FOR THE PARENT GUARANTOR\n\n\n\n\nTo the Banks and the Agent\n Named on Schedule 1 to this Opinion\nc/o Morgan Guaranty Trust Company of New York (as Agent)\n60 Wall Street\nNew York, NY 10260 U.S.A.\n\nDear Sirs,\n\n Re: TYCO INTERNATIONAL LTD. (THE \"COMPANY\")\n\n We have been instructed by the Company, a Bermuda corporation, which\nowns all of the issued shares of Tyco International Group S.A., a Luxembourg\ncompany (the \"BORROWER\"), to address this opinion to you in connection with the\nAmended and Restated Parent Guarantee Agreement, dated as of February 13, 1998\nand amended and restated as of February 12, 1999, (the \"GUARANTEE\"), entered\ninto by the Company in connection with all principal of and interest on amounts\nloaned to the Borrower under the Financing Documents.\n\n Unless otherwise defined therein, terms defined in the Guarantee have\nthe same meanings when used in this opinion.\n\n For the purposes of this opinion, we have been supplied with and have\nreviewed, and relied upon the following documents:\n\n (A) a copy of the executed US $3,250,000,000 364-Day Credit\n Agreement dated as of February 12, 1999 among the Borrower, the Banks\n listed on the signature pages thereof and the Agent (the \"CREDIT\n AGREEMENT\");\n\n (B) a copy of the Extendible 364-Day Credit Agreement dated as\n of February 13, 1998 among the Borrower, the Banks listed on the\n signature pages thereof, and Morgan Guaranty Trust Company of New York,\n as agent for such Banks, as amended to the date hereof (the \"EXISTING\n FIVE-YEAR AGREEMENT\");\n\n\n\n 100\n\n\n\n (C) a copy of the executed Promissory Notes (as defined in the\n Credit Agreement and the Existing Five-Year Agreement);\n\n (D) the New Borrower Agreement Relating to the Extendible\n 364-Day Agreement dated as of June 30, 1998 among Tyco International\n (US) Inc., a Massachusetts corporation, the Borrower, and Morgan\n Guaranty Trust Company of New York, as agent, pursuant to which the\n Borrower became a party to the Existing Five-Year Agreement;\n\n The Documents referred to in (A) through (D) inclusive are together\nreferred to as the \"FINANCING DOCUMENTS\".\n\n (E) a copy of the executed Guarantee;\n\n (F) certified copies of the Certificate of Incorporation, the\n Certificate evidencing the change of name of the Company from ADT\n Limited to TYCO International Ltd. and the Memorandum of Association\n and the Bye-laws of the Company;\n\n (G) a certified copy of an extract of the minutes of a meeting\n of the Board of Directors of the Company held on February 9, 1999 (the\n \"RESOLUTIONS\"); and\n\n (H) a certified copy of the Share Certificate evidencing\n ownership by the Company of the Borrower.\n\n We also examined and relied upon:\n\n (A) A Certificate of Compliance issued by the Registrar of\n Companies in Bermuda in respect of the Company on February 10, 1999;\n and\n\n (B) Our searches of the documents of public record in relation\n to the Company maintained by the Registrar of Companies in Bermuda made\n on February 9, 1999 and of the Causes Book maintained by the Registrar\n of the Supreme Court of Bermuda made on the same date (the \"SEARCHES\").\n\n In giving this opinion, we have assumed:\n\n (1) the capacity, power and authority of each of the\n parties other than the Company to execute, deliver and perform\n its obligations under and the due execution and delivery by\n all parties other than the Company of the Financing Documents\n and the Guarantee;\n\n\n 2\n\n\n 101\n\n (2) that each party, other than the Company, has duly\n authorised, executed, delivered and taken such other action as\n may be required by such party to enter into and perform the\n Financing Documents and the Guarantee in the form of the\n execution copies we have reviewed for the purpose of this\n opinion without alteration which is material to this opinion\n and that all such actions were duly authorised when taken;\n\n (3) that no authorisation or approval by, or filing\n with, any governmental or regulatory authority, other than\n such authorisations, approvals and filings as each party other\n than the Company has obtained or made, is necessary for such\n party to duly execute and deliver, or to duly perform all of\n its obligations under the Financing Documents and the\n Guarantee, or for the validity and enforceability of the\n Financing Documents and the Guarantee;\n\n (4) that each of the Financing Documents and the\n Guarantee constitutes the legal, valid and binding obligation\n of each party to it, other than the Company, and is\n enforceable against each such party in accordance with its\n terms;\n\n (5) that the Financing Documents are legal, valid and\n binding under the laws by which they are expressed to be\n governed and that the Guarantee is legal, valid and binding\n under the laws of the State of New York by which it is\n expressed to be governed;\n\n (6) that the records which were the subject of the\n Searches on February 3, 1999 were complete and accurate at the\n time of such searches and disclosed all information which is\n material for the purposes of this opinion and such information\n has not since such date been materially altered;\n\n (7) that there is no provision of the law of any\n jurisdiction, other than Bermuda, which would have any\n implication in relation to the opinions herein expressed;\n\n (8) the genuineness of all signatures on the\n documents which we have examined;\n\n (9) the conformity to original documents of all\n documents produced to us as copies and the authenticity of all\n original documents which, or copies of which, have been\n submitted to us;\n\n\n\n 3\n\n 102\n\n (10) the accuracy and completeness of all factual\n representations made in the Financing Documents, the\n Guarantee, the Resolutions, and any certificates or other\n documents which we have examined and upon which we have\n relied;\n\n (11) that the Resolutions are in full force and\n effect and have not been rescinded or altered in any way\n material to this opinion; and\n\n (12) that the Company is entering into its\n obligations under the Guarantee in good faith and for the\n purpose of carrying on its commercial business in the ordinary\n course thereof and that there are reasonable grounds for\n believing that the transactions contemplated by the Financing\n Documents will benefit the Company.\n\n Based upon and subject to the foregoing, and subject to the\nreservations set out below, to matters not disclosed to us and matters of fact\nwhich would affect the conclusion set out below and having regard to such legal\nconsiderations as we deem relevant, we are of the opinion that:\n\n (i). The Company is a company duly incorporated, duly organised and\nvalidly existing under the laws of Bermuda. The Memorandum of Association of the\nCompany has been duly filed in the office of the Registrar of Companies of\nBermuda and no other filing, recording, publishing or other act is necessary or\nappropriate in Bermuda in connection with the transaction as described in the\nGuarantee except those which have been duly made or performed.\n\n (ii). The Company has the corporate power and authority to enter into\nand perform the Guarantee and has taken all corporate action required on its\npart to authorise the execution, delivery and performance of the Guarantee.\n\n (iii). The execution, delivery and performance of the Guarantee by the\nCompany (i) does not and will not violate the Certificate of Incorporation,\nMemorandum of Association or Bye-laws of the Company; (ii) conflict with The\nCompanies Act 1981 or any other law or governmental rule or regulation published\nby the Bermuda Government which is applicable to the Company; and (iii) as far\nas can be ascertained from the Searches (which are not conclusive) does not and\nwill not violate or conflict with any judgment, order, decree, injunction or\naward of any authority, agency or court in Bermuda to which the Company is\nsubject.\n\n\n 4\n\n 103\n\n\n (iv). The obligations of the Company as set out in the Guarantee\nconstitute, legal, valid and binding obligations of the Company.\n\n (v). The Company having been designated as non-resident for the\npurposes of the Exchange Control Act 1972, it is not necessary for the consent\nof any authority or agency in Bermuda to be obtained to enable the Company to\nenter into and perform its obligations set out in the Guarantee.\n\n (vi). The obligations of the Company under the Guarantee will rank at\nleast pari passu in priority of payment with all other unsecured unsubordinated\nindebtedness of the Company other than indebtedness which is preferred by virtue\nof any provision of Bermuda law of general application.\n\n (vii). As far as can be ascertained from the Searches (which are not\nconclusive), no litigation, arbitration or administrative proceedings of or\nbefore any court, arbitrator or governmental instrumentality of or in Bermuda\nis, to the best of our knowledge, pending with respect to the Company in\nconnection with the Guarantee or the transactions contemplated thereby.\n\n (viii). The Company will be permitted to make all payments under the\nGuarantee free of any deduction or withholding therefrom in Bermuda and such\npayments will not be subject to any tax imposed by the Government of Bermuda or\nany taxing authority thereof or therein.\n\n (ix). The entry into, performance and enforcement of the Guarantee will\nnot give rise to any registration fee or to any stamp, excise or other similar\ntax imposed by the Government of Bermuda or any taxing authority thereof or\ntherein.\n\n (x). Subject to paragraph (xii) and reservation (f) below, it is not\nnecessary or advisable under the laws of Bermuda in order to ensure the\nvalidity, effectiveness or enforceability or admissibility in evidence of the\nGuarantee that the Guarantee be filed, registered or recorded with any Court,\npublic office or other Bermuda regulatory authority.\n\n (xi). The choice of the laws of the State of New York to govern the\nGuarantee is a proper, valid and binding choice of law and will be recognised\nand applied by the courts of Bermuda provided that the point is specifically\npleaded and that such choice of law is a valid and binding choice of law under\nthe laws of the State of New York.\n\n (xii). A final and conclusive judgment obtained in the Courts of the\nState of New York or Federal Courts of the United States of America against the\n\n\n\n\n\n 5\n\n\n 104\n\nCompany based upon the Guarantee under which a sum of money is payable (other\nthan a sum of money payable in respect of taxes or other charges of a like\nnature or in respect of a fine or other penalty or in respect of Multiple\nDamages as defined in the Protection of Trading Interest Act, 1981) may be the\nsubject of enforcement proceedings in the Supreme Court of Bermuda, without\nre-examination of the merits, under the Common Law Doctrine of Obligation. A\nfinal opinion as to the availability of this remedy should be sought when the\nfacts surrounding the foreign judgment are known but, on general principles, we\nwould expect such an application to be successful provided that:\n\n (A) the Court which gave the judgment was competent to hear\n the action in accordance with private international law principles as\n applied in Bermuda;\n\n (B) the judgment has not been obtained by fraud;\n\n (C) the judgment is not and its enforcement would not be\n contrary to public policy of Bermuda;\n\n (D) the judgment has not been obtained in proceedings contrary\n to natural justice; and\n\n (E) the correct procedures under the laws of Bermuda are duly\n complied with.\n\n Neither the Company nor any of its property or assets (or any portion\nthereof) enjoys, under the laws of Bermuda, immunity from suit, execution,\nattachment or other legal process in any proceedings in Bermuda in connection\nwith the Guarantee.\n\n Our reservations are as follows:\n\n (a) We are admitted to practise law in the Islands of Bermuda and we\nexpress no opinion as to any law other than Bermuda law and none of the opinions\nexpressed herein relates to compliance with or matters governed by the laws of\nany jurisdiction except Bermuda.\n\n (b) Where an obligation is to be performed in a jurisdiction other than\nBermuda, the Courts of Bermuda may refuse to enforce it to the extent that such\nperformance would be illegal or contrary to public policy under the laws of such\nother jurisdiction.\n\n\n\n\n 6\n\n\n 105\n\n (c) We express no opinion as to the availability of equitable remedies,\nsuch as specific performance or injunctive relief, or as to matters which are\nwithin the discretion of the Courts of Bermuda such as the award of costs or\nquestions relating to forum non-conveniens. Further, we express no opinion as to\nthe validity or binding effect of any waiver of or obligation to waive any\nprovision of law (whether substantive or procedural) or any right or remedy\narising through circumstances not known at the time of entering into the\nFinancing Documents and the Guarantee.\n\n (d) We express no opinion as to the validity or the binding effect of\nany obligations of the Borrower in the Financing Documents which provide for the\npayment by the Borrower of a higher rate of interest on overdue amounts than on\namounts which are current. A Bermuda Court, even if it were applying the laws of\nthe State of New York might not give effect to such provision as being contrary\nto public policy if it could be established that the amount expressed as being\npayable was such that the provision was in the nature of a penalty; that is to\nsay a requirement for a stipulated sum to be paid irrespective of, or\nnecessarily greater than, the loss likely to be sustained. The Court will\ndetermine and award what it considers to be reasonable damages. Section 9 of The\nInterest and Credit Charges (Regulations) Act 1975 provides that the Bermuda\nCourts have discretion as to the amount of interest if any payable on the amount\nof a judgment after the date of judgment. If the Court does not exercise that\ndiscretion, then interest will accrue at the statutory rate which is currently\n7% per annum.\n\n (e) The obligations of the Company under the Guarantee will be subject\nto any laws from time to time in effect relating to bankruptcy, insolvency or\nliquidation or any other laws or other legal procedures affecting generally the\nenforcement of creditors' rights and may also be the subject of the statutory\nlimitation of the time within which such proceedings may be brought.\n\n (f) To the extent that the Financing Documents, the Guarantee or the\ntransactions contemplated thereunder, create or give rise to the creation of any\ncharge over any assets of the Company, such charge will be registerable under\nPart V of The Companies Act 1981 of Bermuda. The fee payable for registration of\na charge is $425.00. Registration is not compulsory and there is no time limit\nwithin which it must be effected. Any charge which is registerable, and which is\nregistered, under Section 55 of The Companies Act will have priority based on\nthe date that it is registered and not on the date of its creation (to the\nextent that priority of competing charges are to be determined by reference to\nBermuda law) and will have such priority over any unregistered charge.\nAccordingly, it is advisable to register any such charge.\n\n\n\n\n 7\n\n 106\n\n\n (g) Any provision in the Financing Documents or the Guarantee that\ncertain calculations and/or certificates will be conclusive and binding will not\nbe effective if such calculations are fraudulent or erroneous on their face and\nwill not necessarily prevent enquiry into the merits of any claim by an\naggrieved party.\n\n (h) Where a party is vested with a discretion or may determine a matter\nin its opinion, such discretion may have to be exercised reasonably or such an\nopinion may have to be based on reasonable grounds.\n\n (i) Searches in the register of companies at the office of the\nRegistrar of Companies and in the Supreme Court Causes Book at the Registry of\nthe Supreme Court are not conclusive and it should be noted that the register of\ncompanies and the Supreme Court Causes Book do not reveal:\n\n (i) whether an application to the Supreme Court for the\n appointment of a receiver or manager has been presented;\n\n (ii) details of matters which have been lodged for\n registration but have not actually been registered or to the extent\n they have been registered have not been disclosed or appear in the\n public records at the date the search is concluded;\n\n (iii) details of matters which should have been lodged for\n registration but have not been lodged for registration at the date the\n search is concluded; or\n\n (iv) whether a receiver or manager has been appointed\n privately out of the Supreme Court pursuant to the provisions of a\n debenture or other security, unless notice of the fact has been entered\n in the register of charges in accordance with the provisions of the\n Act.\n\n (j) A Bermuda Court may refuse to give effect to any provisions of the\nFinancing Documents or Guarantee in respect of costs of unsuccessful litigation\nbrought before the Court or where that Court has itself made an order for costs.\n\n This opinion is issued on the basis that it will be governed by and\nconstrued in accordance with the provisions of Bermuda law and it is limited to\nand is given on the basis of the current law and practice in Bermuda and will\nnot give rise to action in any other jurisdiction. It is issued solely for your\nbenefit for the purpose of the transactions described in the Guarantee and it is\nnot to be relied upon by any other person (other than permitted assigns and\ntransferees under the Financing Documents), or for any other purpose, without\nour written prior consent. Mr. Mark A Belnick, Executive Vice President and\nChief Corporate\n\n\n\n\n\n 8\n\n 107\n\n\nCounsel of the Company, may rely on our opinion as to matters of Bermuda law for\nthe purpose of issuing his opinion of even date herewith.\n\n Yours faithfully,\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n 9\n\n\n 108\n\n SCHEDULE 1\n\nMorgan Guaranty Trust Company of New York\nBank of America National Trust and Savings Association\nThe Chase Manhattan Bank\nCommerzbank AG, New York Branch\nABN AMRO Bank N.V.\nBarclays Bank Plc\nBankers Trust Company\nCitibank, N.A.\nCredit Lyonnais New York Branch\nCredit Suisse First Boston\nDresdner Bank AG, New York and Grand Cayman Branches\nThe First National Bank of Chicago\nFirst Union National Bank\nIstituto Bancario San Paolo di Torino Istituto Mobiliare Italiano, SpA\nMarine Midland Bank\nMellon Bank, N.A.\nSociete Generale\nThe Bank of Nova Scotia\nToronto Dominion (Texas), Inc.\nWestdeutsche Landesbank Girozentrale\nBankBoston, N.A.\nBanque Nationale de Paris\nDen Danske Bank Aktieselskab, Cayman Islands Branch \nFleet Bank - NH\nKeyBank National Association\nNational Westminster Bank Plc New York and Nassau Branches\nStandard Chartered Bank\nAustralia and New Zealand Banking Group Limited\nBanca Commerciale Italiana New York Branch\nBanca Popolare di Milano New York Branch\nBBL International, (U.K.) Ltd \nBank of Tokyo-Mitsubishi, Ltd. \nBayerische Hypo - Und Vereinsbank AG, New York Branch \nBayerische Landesbank Girozentrale Cayman\nIslands Branch Cariplo - Cassa Di Risparmio Delle Provincie Lombarde S.p.A.\nComerica Bank \nCredit Commercial de France New York Branch\nNorddeutsche Landesbank Girozentrale New York Branch and/or\n Cayman Islands Branch \nPNC Bank, National Association \nThe Bank of New York \nThe Northern Trust Company \nUnicredito Italiano S.p.A. \nBW Capital Markets, Inc. \nThe Dai-Ichi Kangyo Bank, Ltd., New York Branch \nWestpac Banking Corporation\n\n\n\n 109\n\n\n\n\n EXHIBIT H\n\n\n OPINION OF\n DAVIS POLK & WARDWELL, SPECIAL COUNSEL\n FOR THE AGENT\n\n\n\nTo the Banks and the Agent\nReferred to Below\nc/o Morgan Guaranty Trust Company\nof New York, as Agent\n60 Wall Street\nNew York, New York 10260\n\nDear Sirs:\n\n\n We have participated in the preparation of the 364-Day Credit Agreement\ndated as of February 12, 1999 among Tyco International Group S.A., a Luxembourg\ncompany (the \"Borrower\"), the banks listed on the signature pages thereof (the\n\"Banks\") and Morgan Guaranty Trust Company of New York, as Agent (the \"Agent\"),\nand have acted as special counsel for the Agent for the purpose of rendering\nthis opinion pursuant to Section 3.01(e) of the Credit Agreements. Terms defined\nin the Credit Agreement are used herein as therein defined.\n\n We have examined originals or copies, certified or otherwise identified\nto our satisfaction, of such documents, corporate records, certificates of\npublic officials and other instruments and have conducted such other\ninvestigations of fact and law as we have deemed necessary or advisable for\npurposes of this opinion.\n\n Upon the basis of the foregoing, we are of the opinion that the Credit\nAgreement constitutes a valid and binding agreement of the Borrower, that each\nPromissory Note delivered on the date hereof constitutes a valid and binding\nobligation of the Borrower and that the Parent Guarantee constitutes a valid and\nbinding obligation of the Parent Guarantor, in each case enforceable in\naccordance with its terms, except as the same may be limited by bankruptcy,\ninsolvency or similar laws affecting creditors' rights generally and by general\nprinciples of equity.\n\n We are members of the Bar of the State of New York and the foregoing\nopinion is limited to the laws of the State of New York and the federal laws of\nthe United States of America. In giving the foregoing opinion, (i) we express no\nopinion as to the effect (if any) of any law of any jurisdiction (except the\nState of\n\n\n\n\n 110\n\n\nNew York) in which any Bank is located which limits the rate of interest that\nsuch Bank may charge or collect and (ii) insofar as the foregoing opinion\ninvolves matters governed by the laws of Luxembourg or Bermuda, we have relied,\nwithout independent investigation, upon the respective opinions of Beghin Nothar\nFeider Loeff Claeys Verbeke, special Luxembourg counsel for the Borrower, and of\nAppleby, Spurling & Kempe, special Bermuda counsel for the Parent Guarantor,\ncopies of which have been delivered to you.\n\n This opinion is rendered solely to you in connection with the above\nmatter. This opinion may not be relied upon by you for any other purpose or\nrelied upon by any other person without our prior written consent, except that\nany person who is a permitted successor or assign of a Bank in accordance with\nthe provisions of the Credit Agreement may rely upon this opinion as if it were\nspecifically addressed and delivered to such person on the date hereof.\n\n Very truly yours,\n\n\n\n\n\n\n\n\n\n\n\n\n\n 2\n\n\n 111\n EXHIBIT I\n\n\n\n ASSIGNMENT AND ASSUMPTION AGREEMENT\n\n\n\n AGREEMENT dated as of _________, ____ among [ASSIGNOR] (the\n\"Assignor\"), [ASSIGNEE] (the \"Assignee\"), TYCO INTERNATIONAL GROUP S.A. (the\n\"Borrower\") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the\n\"Agent\").\n\n\n\n W I T N E S S E T H\n\n WHEREAS, this Assignment and Assumption Agreement (the \"Agreement\")\nrelates to the 364-Day Credit Agreement dated as of February 12, 1999 among the\nBorrower, the Assignor and the other Banks party thereto, as Banks, and the\nAgent (the \"Credit Agreement\");\n\n WHEREAS, as provided under the Credit Agreement, the Assignor has a\nCommitment to make Loans to the Borrower in an aggregate principal amount at any\ntime outstanding not to exceed $__________;\n\n WHEREAS, Committed Loans made to the Borrower by the Assignor under the\nCredit Agreement in the aggregate principal amount of $__________ are\noutstanding at the date hereof; and\n\n WHEREAS, the Assignor proposes to assign to the Assignee all of the\nrights of the Assignor under the Credit Agreement in respect of a portion of its\nCommitment thereunder in an amount equal to $__________ (the \"Assigned Amount\"),\ntogether with a corresponding portion of its outstanding Committed Loans, and\nthe Assignee proposes to accept assignment of such rights and assume the\ncorresponding obligations from the Assignor on such terms;\n\n NOW, THEREFORE, in consideration of the foregoing and the mutual\nagreements contained herein, the parties hereto agree as follows:\n\n SECTION 1. Definitions. All capitalized terms not otherwise defined\nherein shall have the respective meanings set forth in the Credit Agreement.\n\n\n\n\n 112\n\n\n SECTION 2. Assignment. The Assignor hereby assigns and sells to the\nAssignee all of the rights of the Assignor under the Credit Agreement to the\nextent of the Assigned Amount, and the Assignee hereby accepts such assignment\nfrom the Assignor and assumes all of the obligations of the Assignor under the\nCredit Agreement to the extent of the Assigned Amount, including the purchase\nfrom the Assignor of the corresponding portion of the principal amount of the\nCommitted Loans made by the Assignor outstanding at the date hereof. Upon the\nexecution and delivery hereof by the Assignor, the Assignee, [the Borrower and\nthe Agent] and the payment of the amounts specified in Section 3 required to be\npaid on the date hereof (i) the Assignee shall, as of the date hereof, succeed\nto the rights and be obligated to perform the obligations of a Bank under the\nCredit Agreement with a Commitment in an amount equal to the Assigned Amount,\nand (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced\nby a like amount and the Assignor released from its obligations under the Credit\nAgreement to the extent such obligations have been assumed by the Assignee. The\nassignment provided for herein shall be without recourse to the Assignor.\n\n SECTION 3. Payments. As consideration for the assignment and sale\ncontemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the\ndate hereof in Federal funds the amount heretofore agreed between them.* It is\nunderstood that facility fees in respect of the Assigned Amount accrued to the\ndate hereof are for the account of the Assignor and such fees accruing from and\nincluding the date hereof are for the account of the Assignee. Each of the\nAssignor and the Assignee hereby agrees that if it receives any amount under the\nCredit Agreement which is for the account of the other party hereto, it shall\nreceive the same for the account of such other party to the extent of such other\nparty's interest therein and shall promptly pay the same to such other party.\n\n [SECTION 4. Consent of the Borrower and the Agent. This Agreement is\nconditioned upon the consent of the Borrower and the Agent pursuant to Section\n9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower\nand the Agent is evidence of this consent. Pursuant to Section 9.06(c) the\nBorrower agrees to execute and deliver a Note payable to the order of the\nAssignee to evidence the assignment and assumption provided for herein.]\n\n SECTION 5. Non-Reliance on Assignor. The Assignor makes no\nrepresentation or warranty in connection with, and shall have no responsibility\n\n- -------------------\n *Amount should combine principal together with accrued interest and\nbreakage compensation, if any, to be paid by the Assignee, net of any portion of\nany upfront fee to be paid by the Assignor to the Assignee. It may be preferable\nin an appropriate case to specify these amounts generically or by formula rather\nthan as a fixed sum.\n\n\n\n 2\n\n\n 113\nwith respect to, the solvency, financial condition, or statements of the\nBorrower, or the validity and enforceability of the obligations of the Borrower\nin respect of the Credit Agreement or any Note. The Assignee acknowledges that\nit has, independently and without reliance on the Assignor, and based on such\ndocuments and information as it has deemed appropriate, made its own credit\nanalysis and decision to enter into this Agreement and will continue to be\nresponsible for making its own independent appraisal of the business, affairs\nand financial condition of the Borrower.\n\n SECTION 6. Governing Law. This Agreement shall be governed by and\nconstrued in accordance with the laws of the State of New York.\n\n SECTION 7. Counterparts. This Agreement may be signed in any number of\ncounterparts, each of which shall be an original, with the same effect as if the\nsignatures thereto and hereto were upon the same instrument.\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n 3\n\n\n 114\n\n IN WITNESS WHEREOF, the parties have caused this Agreement to\n be executed and delivered by their duly authorized officers as of the\n date first above written.\n\n [ASSIGNOR]\n\n\n By: \n ----------------------------------------\n Title:\n\n\n [ASSIGNEE]\n\n\n By: \n ----------------------------------------\n Title:\n\n\n TYCO INTERNATIONAL GROUP S.A.\n\n\n By: \n ----------------------------------------\n Title:\n\n\n MORGAN GUARANTY TRUST\n COMPANY OF NEW YORK\n\n\n By: \n ----------------------------------------\n Title: \n\n\n\n\n\n 4\n\n 115\n\n\n\n EXHIBIT K\n\n EXISTING FIVE-YEAR AGREEMENT\n PRICING SCHEDULE\n\n The \"Euro-Dollar Margin\", \"CD Margin\" and \"Facility Fee Rate\" for any\nday are the respective percentages set forth below in the applicable row and\ncolumn based upon the Utilization and Status that exist on such day:\n\n\n\n\n
\n\n For purposes of this Schedule, the following terms have the following\nmeanings, subject to the concluding paragraph of this Schedule:\n\n \"LEVEL I STATUS\" exists at any date if, at such date, the Borrower's\nsenior unsecured long-term debt is rated A or higher by S&P or A2 or higher by\nMoody's.\n\n \"LEVEL II STATUS\" exists at any date if, at such date, (i) the\nBorrower's senior unsecured long-term debt is rated A- or higher by S&P or A3 or\nhigher by Moody's and (ii) Level I Status does not exist.\n\n \"LEVEL III STATUS\" exists at any date if, at such date, (i) the\nBorrower's senior unsecured long-term debt is rated BBB+ or higher by S&P or\nBaa1 or higher by Moody's and (ii) neither Level I Status nor Level II Status\nexists.\n\n \"LEVEL IV STATUS\" exists at any date if, at such date, (i) (x) the\nBorrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2\nor higher by Moody's and (y) the Borrower's commercial paper is rated A2 or\nhigher by S&P and P2 or higher by Moody's and (ii) none of Level I Status, Level\nII Status and Level III Status exists.\n\n \"LEVEL V STATUS\" exists at any date, if at such date, (i) the\nBorrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2\nor higher by\n\n\n\n\n 116\n\n\nMoody's and (ii) none of Level I Status, Level II Status, Level III Status or\nLevel IV Status exists.\n\n \"LEVEL VI STATUS\" exists at any date if, at such date, no other Status\nexists.\n\n \"STATUS\" refers to the determination of which of Level I Status, Level\nII Status, Level III Status, Level IV Status, Level V Status or Level VI Status\nexists at any date.\n\n \"UTILIZATION\" means, at any date, the percentage equivalent of a\nfraction (i) the numerator of which is the aggregate outstanding principal\namount of the Loans at such date and (ii) the denominator of which is the\naggregate amount of the Commitments at such date. If for any reason any Loans\nremain outstanding following termination of the Commitments, Utilization shall\nbe deemed to be in excess of 25%.\n\n The credit ratings to be utilized for purposes of this Schedule are\nthose assigned to the senior unsecured long-term debt securities and/or\ncommercial paper, as the case may be, of the Borrower without third-party credit\nenhancement, and any rating assigned to any other debt security of the Borrower\nshall be disregarded. The rating in effect at any date is that in effect at the\nclose of business on such date. If the Borrower is split-rated and the ratings\ndifferential is one notch, the higher of the two ratings will apply (e.g., A/A3\nresults in Level I Status). If the Borrower is split-rated and the ratings\ndifferential is more than one notch, the average of the two ratings (or the\nhigher of two intermediate ratings) shall be used (e.g., A/Baa1 results in Level\nII Status, as does A/Baa2).\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n 2\n\n\n\n\n\n 117\n\n CROSS-REFERENCE TARGET LIST\n\n NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE\n TARGET PULL-DOWN LIST.\n (This list is for the use of the wordprocessor only, is not a part of this\n document and may be discarded.)\n\nARTICLE/SECTION TARGET NAME\n- --------------- -----------\n\n?.....................................................................eff.terma\n?......................................................................eff.term\n?.................................................................sub.contrib.b\n?................................................................subrog.contrib\n\n1.01.......................................................................defs\n1.01(b).............................................................int.end.ter\n1.02...........................................................types.borrowings\n1.02........................................................types.of.borrowings\n\n2.........................................................................assgn\n2.01................................................................commit.lend\n2.01(a)....................................................revolve.credit.loans\n2.01(b)..............................................................term.loans\n2.02.............................................................not.commit.brw\n2.03........................................................money.market.borrow\n2.03(d).....................................................sub.and.cont.of.mon\n2.03(d)(i)............................................................sub.mon.i\n2.03(d)(ii)..........................................................sub.mon.ii\n2.03(d)(iii)........................................................sub.mon.iii\n2.03(e)............................................................not.borrower\n2.03(f).......................................................Accept.and.notice\n2.04(b)....................................................note.bank.make.avail\n2.07................................................................inter.rates\n2.07(a)......................................................int.rate.base.loan\n2.07(b)....................................................int.rate.adj.cd.rate\n2.07(b)....................................................int.rate.adj.cd.rate\n2.07(b)....................................................int.rate.adj.cd.rate\n2.07(c).................................................int.rate.euro.dollar.ln\n2.08(a)..........................................................facility.fee.a\n2.09.........................................................op.term.red.commit\n2.11.................................................................opt.prepay\n2.11(c)..................................................opt.prepay.notify.bank\n2.13.............................................................funding.losses\n2.15..................................................................reg.d.com\n2.16............................................................Method.of.elect\n2.16(a).......................................................Method.of.elect.a\n2.16(d).......................................................Method.of.elect.d\n2.17..................................................................op.in.com\n\n3........................................................................paymts\n3.01..............................................................effectiveness\n3.01(c)....................................................agt.parent.guarantee\n3.01(g)...................................................agnt.evidence.satisfy\n3.02..............................................................existing.agts\n3.02(a).....................................................exist.agts.eff.date\n3.02(b)..............................................exist.agts.eff.date.1.sent\n3.03.................................................................borrowings\n3.03(a)............................................................borrowings.a\n3.03(b)............................................................agg.out.prin\n3.03(c)............................................................borrowings.c\n3.03(d)............................................................borrowings.d\n\n4..............................................................rep.and.warrants\n4.03.............................................................binding.effect\n\n5.....................................................................covenants\n5.04....................................................conduct.bus.maint.exist\n5.06(c)(iv)(C)...............................................inspect.property.C\n5.07................................................consol.mergers.sales.assets\n5.09.........................................................transact.affiliate\n5.10.......................................................subsidiary.guarntors\n\n6......................................................................defaults\n6.01.............................................................events.default\n6.01(a)..................................................event.default.fail.pay\n6.01(d)........................................................event.def.10days\n6.02.............................................................notice.default\n\n?...............................................................payment.by.Borr\n7.08............................................................successor.agent\n\n8.01...................................................basis.determine.int.rate\n8.01(a)..........................................................dep.in.dollars\n8.02.................................................................illegality\n8.03..............................................increased.cost.reduced.return\n8.04(a)............................................................borr.payment\n8.04(d)...................................................borrower.irsform.1001\n\n9.01....................................................................notices\n9.03.................................................................exp. indem\n9.03(b)...........................................................bor.agr.indem\n9.05.............................................................amend.and.waiv\n9.06.........................................................successors.assigns\n9.06(b)............................................................particip.int\n9.06(c).....................................................bank.assign.to.inst\n9.06(c).....................................................bank.assign.to.inst\n9.06(d)................................................................assign.d\n9.06(e)................................................................assign.e\n9.06(f).......................................................notwithstanding.a\n9.06(g)................................................................assign.g\n9.08..............................................................governing.law\n9.12.......................................................judicial.proceedings\n\n\n\n\n\n \n \n\nEX-4.2\n3\nPARENT GUARANTEE AGREEMENT AS AMENDED\n\n\n 1\n\n EXHIBIT 4.2\n\n CONFORMED COPY\n\n\n\n\n AMENDED AND RESTATED\n PARENT GUARANTEE AGREEMENT\n\n\n dated as of\n\n\n February 13, 1998\n\n\n and amended and restated as of February 12, 1999\n\n\n between\n\n\n Tyco International Ltd.\n\n\n and\n\n\n Morgan Guaranty Trust Company of New York,\n as Administrative Agent\n\n\n\n\n\n\n 2\n TABLE OF CONTENTS\n\n\n ----------\n\n PAGE\n ----\n ARTICLE 1\n DEFINITIONS\n\nSECTION 1.01. Definitions.....................................................1\nSECTION 1.02. Accounting Terms and Determinations............................10\n\n ARTICLE 2\n GUARANTEE\n\nSECTION 2.01. The Guarantee..................................................11\nSECTION 2.02. Guarantee Unconditional........................................11\nSECTION 2.03. Discharge Only upon Payment in Full; Reinstatement \n in Certain Circumstances.......................................12\nSECTION 2.04. Waiver by the Guarantor........................................12\nSECTION 2.05. Subrogation....................................................12\nSECTION 2.06. Stay of Acceleration...........................................12\n\n ARTICLE 3\n REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR\n\nSECTION 3.01. Corporate Existence and Power..................................12\nSECTION 3.02. Corporate and Governmental Authorization; No Contravention.....13\nSECTION 3.03. Binding Effect.................................................13\nSECTION 3.04. Financial Information..........................................13\nSECTION 3.05. Litigation.....................................................14\nSECTION 3.06. Compliance with ERISA..........................................14\nSECTION 3.07. Environmental Matters..........................................14\nSECTION 3.08. Taxes..........................................................15\nSECTION 3.09. Subsidiaries...................................................15\nSECTION 3.10. Not an Investment Company......................................15\nSECTION 3.11. Full Disclosure................................................15\nSECTION 3.12. Obligations to Be Pari Passu...................................15\nSECTION 3.13. Year 2000 Compliance...........................................15\n\n ARTICLE 4\n COVENANTS\n\nSECTION 4.01. Information....................................................16\nSECTION 4.02. Payment of Obligations.........................................17\n\n\n\n\n\n\n 3\n\n PAGE\n ----\n\nSECTION 4.03. Maintenance of Property; Insurance.............................18\nSECTION 4.04. Conduct of Business and Maintenance of Existence...............18\nSECTION 4.05. Compliance with Laws...........................................19\nSECTION 4.06. Inspection of Property, Books and Records; Confidentiality.....19\nSECTION 4.07. Limitation on Restrictions on Subsidiary Dividends and Other\n Distributions..................................................20\nSECTION 4.08. Debt...........................................................22\nSECTION 4.09. Fixed Charge Coverage..........................................22\nSECTION 4.10. Negative Pledge................................................22\nSECTION 4.11. Consolidations, Mergers and Sales of Assets....................24\nSECTION 4.12. Transactions with Affiliates...................................25\nSECTION 4.13. Restricted Payments............................................26\nSECTION 4.14. Subsidiary Guarantors..........................................26\n\n ARTICLE 5\n DEFAULTS\n\nSECTION 5.01. Guarantor Events of Defaults...................................26\nSECTION 5.02. Notice of Default..............................................29\n\n ARTICLE 6\n TAXES\n\nSECTION 6.01. Withholding Taxes..............................................29\nSECTION 6.02. Certain Other Taxes............................................29\nSECTION 6.03. Reimbursement of Taxes Paid by a Bank..........................29\n\n\n ARTICLE 7\n MISCELLANEOUS\n\nSECTION 7.01. Notices........................................................30\nSECTION 7.02. No Waivers.....................................................30\nSECTION 7.03. Expenses; Indemnification......................................30\nSECTION 7.04. Judicial Proceedings...........................................31\nSECTION 7.05. Judgment Currency..............................................32\nSECTION 7.06. Amendments and Waivers.........................................32\nSECTION 7.07. Successors and Assigns.........................................32\nSECTION 7.08. GOVERNING LAW..................................................32\nSECTION 7.09. Counterparts...................................................33\nSECTION 7.10. No Seal........................................................33\nSECTION 7.11. WAIVER OF JURY TRIAL...........................................33\n\n\n\n\n\n\n ii\n 4\n\n PAGE\n ----\n\n\nExhibit A - Form of Subsidiary Guarantee\n\nExhibit B - Form of Subsidiary Counsel Opinion\n\n\n\n\n\n\n iii\n\n\n\n 5\n\n\n AMENDED AND RESTATED\n PARENT GUARANTEE AGREEMENT\n\n\n AGREEMENT dated as of February 13, 1998 and amended and restated as of\nFebruary 12, 1999 between TYCO INTERNATIONAL LTD. and MORGAN GUARANTY TRUST\nCOMPANY OF NEW YORK, as Agent.\n\n\n\n For good and valuable consideration, the receipt and sufficiency of\nwhich are hereby acknowledged, the Guarantor hereby agrees with the Agent for\nthe benefit of the Banks that the Parent Guarantee Agreement between them dated\nas of February 13, 1998 is amended and restated to read in its entirety as\nfollows:\n\n ARTICLE 1\n DEFINITIONS\n\n SECTION 1.01. Definitions. The following terms, as used herein, have\nthe following meanings:\n\n \"ACQUIRED DEBT\" means Debt of a Person (a) existing at the time such\nPerson becomes a Subsidiary or merges into a Subsidiary and (b) not created in\ncontemplation of such event.\n\n \"AFFILIATE\" means (i) any Person that directly, or indirectly through\none or more intermediaries, controls the Guarantor (a \"Controlling Person\") or\n(ii) any Person (other than the Guarantor or a Subsidiary) which is controlled\nby or is under common control with a Controlling Person. As used herein, the\nterm \"control\" means possession, directly or indirectly, of the power to direct\nor cause the direction of the management or policies of a Person, whether\nthrough the ownership of voting securities, by contract or otherwise. The fact\nthat an Affiliate of a Person is a member of a law firm that renders services to\nsuch Person or its Affiliates does not mean that the law firm is an Affiliate of\nsuch Person.\n\n \"AGENT\" means Morgan Guaranty Trust Company of New York in its capacity\nas administrative agent for the Banks under the Financing Documents, and its\nsuccessors in such capacity.\n\n \"BANK\" means each Person from time to time a \"Bank\" party to either of\nthe Credit Agreements.\n\n \"BANK DOMESTIC TAXES\" means, with respect to any Bank, any taxes,\nlevies, imposts, duties, charges or withholding of any nature (and any interest,\npenalties, or similar liabilities with respect thereto) which are not Bank\nForeign Taxes with respect to such Bank.\n\n\n\n 6\n \"BANK FOREIGN TAXES\" means, with respect to any Bank, any taxes,\nlevies, imposts, duties, charges or withholdings of any nature (and any\ninterest, penalties or similar liabilities with respect thereto) now or\nhereafter imposed by any jurisdiction or taxing authority (including any\npossession or territory thereof) other than the jurisdiction of which such Bank\nis a citizen or a resident or under the laws of which such Bank is organized or\nany political subdivision thereof or taxing authority thereof or therein.\n\n \"BERMUDA COMPANIES LAW\" means every Bermuda statute from time to time\nin force concerning companies insofar as the same applies to the Guarantor.\n\n \"BORROWER\" means Tyco International Group S.A., a Luxembourg company,\nand its successors.\n\n \"CONSENTS\" has the meaning set forth in Section 3.01.\n\n \"CONSOLIDATED ASSETS\" means, at any time, the total assets of the\nGuarantor and its Consolidated Subsidiaries, determined on a consolidated basis\nas of such time.\n\n \"CONSOLIDATED DEBT\" means, at any date, the aggregate amount of Debt of\nthe Guarantor and its Consolidated Subsidiaries, determined on a consolidated\nbasis as of such date; provided that (i) if a Permitted Receivables Transaction\nis outstanding at such date and is accounted for as a sale of accounts\nreceivable under generally accepted accounting principles, Consolidated Debt\ndetermined as aforesaid shall be adjusted to include the additional Debt,\ndetermined on a consolidated basis as of such date, which would have been\noutstanding at such date had such Permitted Receivables Transaction been\naccounted for as a borrowing at such date and (ii) Consolidated Debt shall in\nany event include all Debt of any Person other than the Guarantor or a\nConsolidated Subsidiary which is Guaranteed by the Guarantor or a Consolidated\nSubsidiary, except that Consolidated Debt shall not include Debt of a joint\nventure, partnership or similar entity which is Guaranteed by the Guarantor or a\nConsolidated Subsidiary by virtue of the joint venture, partnership or similar\narrangement with respect to such entity or by operation of applicable law (and\nnot otherwise) so long as the aggregate outstanding principal amount of such\nexcluded Debt at any date does not exceed $50,000,000.\n\n \"CONSOLIDATED EBIT\" means, for any fiscal period, Consolidated Net\nIncome for such period plus, to the extent deducted in determining Consolidated\nNet Income for such period, the aggregate amount of (i) Consolidated Interest\nExpense and (ii) federal, state and local income tax expense.\n\n \"CONSOLIDATED INTEREST EXPENSE\" means, for any fiscal period, (without\nduplication) (i) the consolidated interest expense of the Guarantor and its\nConsolidated Subsidiaries for such period minus (ii) the consolidated interest\nincome of the Guarantor and its Consolidated Subsidiaries for such period, if,\nand only if, such consolidated interest income is equal to or less than\n$5,000,000, plus (iii) if a Permitted Receivables Transaction outstanding during\nsuch period \n\n\n\n\n\n\n 2\n\n\n 7\nis accounted for as a sale of accounts receivable under generally accepted\naccounting principles, the additional consolidated interest expense that would\nhave accrued during such period had such Permitted Receivables Transaction been\naccounted for as a borrowing during such period, in each case determined on a\nconsolidated basis.\n\n \"CONSOLIDATED NET INCOME\" means, for any fiscal period, the\nconsolidated net income of the Guarantor and its Consolidated Subsidiaries for\nsuch period, determined on a consolidated basis after eliminating therefrom all\nExtraordinary Gains and Losses. \"EXTRAORDINARY GAINS AND LOSSES\" means and\nincludes, for any fiscal period, all extraordinary gains and losses and all\nother material non-recurring non-cash items of the Guarantor and its\nConsolidated Subsidiaries for such period, determined on a consolidated basis\nand, in addition, includes, without limitation, gains or losses from the\ndiscontinuance of operations and gains or losses of the Guarantor and its\nConsolidated Subsidiaries for such period resulting from the sale, conversion or\nother disposition of material assets of the Guarantor or any Consolidated\nSubsidiary other than in the ordinary course of business.\n\n \"CONSOLIDATED NET WORTH\" means, at any date, the consolidated\nstockholders' equity of the Guarantor and its Consolidated Subsidiaries,\ndetermined on a consolidated basis as of such date and adjusted so as to exclude\nthe effect of the currency translation adjustment as of such date.\n\n \"CONSOLIDATED SUBSIDIARY\" means, at any date, with respect to any\nPerson, any Subsidiary or other entity the accounts of which would be\nconsolidated with those of such Person in its consolidated financial statements\nif such statements were prepared as of such date; unless otherwise specified,\nConsolidated Subsidiary means a Consolidated Subsidiary of the Guarantor.\n\n \"CONSOLIDATED TANGIBLE ASSETS\" means, at any time, the total assets\nless all Intangible Assets appearing on the most recently prepared balance sheet\nof the Guarantor and its Consolidated Subsidiaries as of the end of a fiscal\nquarter of the Guarantor, prepared on a consolidated basis in accordance with\nUnited States generally accepted accounting principles as in effect on the date\nof calculation.\n\n \"CONSOLIDATED TANGIBLE NET WORTH\" means, at any date, (i) Consolidated\nNet Worth as of such date minus (ii) Intangible Assets as of such date.\n\n \"CONSOLIDATED TOTAL CAPITALIZATION\" means, at any date, the sum of\nConsolidated Debt and Consolidated Net Worth, each determined as of such date.\n\n \"CREDIT AGREEMENTS\" means (i) the 364-Day Credit Agreement dated as of\nFebruary 12, 1999 among the Borrower, the Banks listed on the signature pages\nthereof and the Agent and (ii) the Extendible 364-Day Credit Agreement dated as\nof February 13, 1998 among the Borrower, the Banks listed on the signature pages\nthereof and the Agent, in each case as amended from time to time.\n\n\n\n\n\n\n 3\n\n 8\n\n\n \"DEBT\" of any Person means, at any date, without duplication, (i) the\nprincipal amount of all obligations of such Person for borrowed money, (ii) the\nprincipal amount of all obligations of such Person evidenced by bonds,\ndebentures, notes or other similar instruments (it being understood that,\nsubject to the proviso to this definition of \"Debt,\" performance bonds,\nperformance guaranties, letters of credit, bank guaranties and similar\ninstruments shall not constitute Debt of such Person to the extent that the\noutstanding reimbursement obligations of such Person in respect thereof are\ncollateralized by cash or cash equivalents, which cash or cash equivalents would\nnot be reflected as assets on a balance sheet of such Person prepared in\naccordance with generally accepted accounting principles), (iii) all obligations\nof such Person to pay the deferred purchase price of property or services\nrecorded on the books of such Person, except for (a) trade and similar accounts\npayable and accrued expenses arising in the ordinary course of business, and (b)\nemployee compensation and pension obligations, and other obligations arising\nfrom employee benefit programs and agreements or other similar employment\narrangements, (iv) all obligations of such Person as lessee which are\ncapitalized on the books of such Person in accordance with generally accepted\naccounting principles, (v) all Debt secured by a Lien on any asset of such\nPerson, whether or not such Debt is otherwise an obligation of such Person, and\n(vi) all Debt of others Guaranteed by such Person; provided, however, that Debt\nshall not include:\n\n (A) contingent reimbursement obligations in\n respect of performance bonds, performance\n guaranties, bank guaranties or letters of\n credit issued in lieu of performance bonds\n or performance guaranties or similar\n instruments, in each case, incurred by such\n Person in the ordinary course of business;\n\n (B) contingent reimbursement obligations in\n respect of trade letters of credit, or\n similar instruments, in each case, incurred\n by such Person in the ordinary course of\n business; or\n\n (C) contingent reimbursement obligations in\n respect of standby letters of credit or\n similar instruments securing self-insurance\n obligations of such Person;\n\nin each case, so long as the underlying obligation supported thereby does not\nitself constitute Debt.\n\n \"ENVIRONMENTAL LAWS\" means any and all statutes, laws, judicial\ndecisions, regulations, ordinances, rules, judgments, orders, decrees, plans,\ninjunctions, permits, concessions, grants, franchises, licenses, agreements and\nother governmental restrictions relating to the environment, the effect of the\nenvironment on human health or to emissions, discharges or releases of\npollutants, contaminants, Hazardous Substances or wastes into the environment\nincluding, without limitation, ambient air, surface water, ground water, or\nland, or otherwise relating to the manufacture, processing, distribution, use,\ntreatment, storage, disposal, transport or handling of \n\n\n\n\n 4\n\n 9\npollutants, contaminants, Hazardous Substances or wastes or the clean-up or\nother remediation thereof.\n\n \"ERISA\" means the Employee Retirement Income Security Act of 1974, as\namended, or any successor statute.\n\n \"ERISA GROUP\" means any Subsidiary and all members of a controlled\ngroup of corporations and all trades or businesses (whether or not incorporated)\nunder common control which, together with any Subsidiary, are treated as a\nsingle employer under Section 414 of the Internal Revenue Code.\n\n \"EXISTING TYCO US DEBT\" means publicly held and privately placed debt\nsecurities of Tyco US outstanding at December 22, 1997.\n\n \"FINANCING DOCUMENTS\" means this Agreement, the Credit Agreements and\neach Subsidiary Guarantee, Promissory Note and New Borrower Agreement (each as\ndefined in either of the Credit Agreements).\n\n \"GUARANTEE\" by any Person means any obligation, contingent or\notherwise, of such Person directly or indirectly guaranteeing any Debt of any\nother Person and, without limiting the generality of the foregoing, any\nobligation, direct or indirect, contingent or otherwise, of such Person (i) to\npurchase or pay (or advance or supply funds for the purchase or payment of) such\nDebt (whether arising by virtue of partnership arrangements, by agreement to\nkeep-well, to purchase assets, goods, securities or services, to take-or-pay, or\nto maintain financial statement conditions or otherwise) or (ii) entered into\nfor the purpose of assuring in any other manner the holder of such Debt of the\npayment thereof or to protect such holder against loss in respect thereof (in\nwhole or in part), provided that the term Guarantee shall not include\nendorsements for collection or deposit in the ordinary course of business. The\nterm \"Guarantee\" used as a verb has a corresponding meaning.\n\n \"GUARANTOR\" means Tyco International Ltd., a Bermuda company, and its\nsuccessors.\n\n \"GUARANTOR DEFAULT\" means any condition or event which constitutes a\nGuarantor Event of Default or which with the giving of notice or lapse of time\nor both would, unless cured or waived, become a Guarantor Event of Default.\n\n \"GUARANTOR EVENT OF DEFAULT\" has the meaning set forth in Section 5.01.\n\n \"GUARANTOR'S 1998 FORM 10-K\" means the Guarantor's transition report on\nForm 10-K for the twelve months ended September 30, 1998, as filed with the\nSecurities and Exchange Commission pursuant to the Securities Exchange Act of\n1934.\n\n\n\n\n\n 5\n\n 10\n\n\n \"HAZARDOUS SUBSTANCES\" means any toxic, radioactive, caustic or\notherwise hazardous substance, including petroleum, its derivatives, by-products\nand other hydrocarbons, or any substance having any constituent elements\ndisplaying any of the foregoing characteristics.\n\n \"INDEMNITEE\" has the meaning set forth in Section 7.03(b).\n\n \"INDENTURE\" means the Indenture dated as of April 23, 1998 among the\nBorrower, the Guarantor and The Bank of New York, as Trustee, as amended or\nsupplemented from time to time.\n\n \"INTANGIBLE ASSETS\" means, at any date, the amount (if any) which would\nbe stated under the heading \"Costs in Excess of Net Assets of Acquired\nCompanies\" or under any other heading relating to intangible assets separately\nlisted, in each case, on the face of a balance sheet of the Guarantor and its\nConsolidated Subsidiaries prepared on a consolidated basis as of such date.\n\n \"INTERNAL REVENUE CODE\" means the Internal Revenue Code of 1986, as\namended, or any successor statute.\n\n \"LIEN\" means, with respect to any asset, any mortgage, lien, pledge,\ncharge, security interest or encumbrance of any kind in respect of such asset.\nFor the purposes of this Agreement, the Guarantor or any Subsidiary shall be\ndeemed to own subject to a Lien any asset which it has acquired or holds subject\nto the interest of a vendor or lessor under any conditional sale agreement,\ncapital lease or other title retention agreement (other than an operating lease)\nrelating to such asset.\n\n \"MATERIAL ADVERSE EFFECT\" means a material adverse effect on (i) the\nbusiness, consolidated financial position or consolidated results of operations\nof the Guarantor and its Consolidated Subsidiaries, considered as a whole, or\n(ii) the ability of the Guarantor to perform its obligations under this\nAgreement.\n\n \"MATERIAL DEBT\" means Debt (other than (i) any Guarantee by the\nGuarantor of Debt of a Subsidiary, (ii) any Guarantee by a Subsidiary of Debt of\nthe Guarantor or another Subsidiary, (iii) any Debt of the Guarantor owed to a\nWholly-Owned Consolidated Subsidiary or (iv) any Debt of a Subsidiary owed to\nthe Guarantor or a Wholly-Owned Consolidated Subsidiary) of the Guarantor and/or\none or more of its Subsidiaries, arising in one or more related or unrelated\ntransactions, in an aggregate outstanding principal amount exceeding\n$50,000,000.\n\n \"MATERIAL PLAN\" means at any time a Plan or Plans having aggregate\nUnfunded Liabilities in excess of $25,000,000.\n\n \"MULTIEMPLOYER PLAN\" means at any time a multiemployer plan within the\nmeaning of Section 4001(a)(3) of ERISA either (i) to which any member of the\nERISA Group is then making or accruing an obligation to make contributions or\n(ii) has at any time within the preceding five \n\n\n\n\n\n\n 6\n\n 11\nplan years been maintained, or contributed to, by any Person who was at such\ntime a member of the ERISA Group for employees of any Person who was at such\ntime a member of the ERISA Group.\n\n \"OBLIGOR\" means, at any time, the Borrower, the Guarantor and each\nSubsidiary Guarantor at such time.\n\n \"PBGC\" means the Pension Benefit Guaranty Corporation or any entity\nsucceeding to any or all of its functions under ERISA.\n\n \"PERMITTED ACQUIRED DEBT\" means Acquired Debt of a Person which:\n\n (a) remains outstanding no more than 180 days after the date such\nPerson becomes a Subsidiary or merges into a Subsidiary (the \"ACQUISITION\nDATE\"); or\n\n (b) remains outstanding more than 180 days after the Acquisition\nDate, but only if (x) 180 days after the Acquisition Date, the senior unsecured\ndebt of the Borrower is rated at least BBB- by S&P or Baa3 by Moody's, (y) such\nAcquired Debt by its terms is not callable or redeemable prior to its stated\nmaturity within 180 days after the Acquisition Date and (z) such Person in good\nfaith has made or caused to be made an offer to acquire all such Acquired Debt,\nincluding, without limitation, an offer to exchange such Acquired Debt for\nsecurities of the Borrower, on terms which, in the opinion of an independent\ninvestment banking firm of national reputation and standing, are consistent with\nmarket practices in existence at the time for offers of a similar nature,\nprovided that the expiration date of any such offer shall not be later than the\n180 days after the Acquisition Date, and provided further that if Acquired Debt\nwhich becomes Permitted Acquired Debt under this clause (b) thereafter becomes\ncallable or redeemable prior to its stated maturity, such Acquired Debt shall\ncease to be Permitted Acquired Debt under this clause (b) 90 days after it\nbecomes so callable or redeemable; or\n\n (c) remains outstanding more than 180 days after the Acquisition\nDate and is not Permitted Acquired Debt under clause (b), but only if and to the\nextent that the aggregate outstanding principal amount of Permitted Acquired\nDebt under this clause (c) at no time exceeds 5% of the Consolidated Tangible\nAssets of the Guarantor.\n\n \"PERMITTED RECEIVABLES TRANSACTION\" means any sale or sales of,\nrefinancing of and/or financing secured by, any accounts receivable of the\nGuarantor and/or any of its Subsidiaries (the \"RECEIVABLES\") pursuant to which\nthe Guarantor and its Subsidiaries realize aggregate net proceeds of not more\nthan $500,000,000 at any one time outstanding, including, without limitation,\nany revolving purchase(s) of Receivables where the maximum aggregate uncollected\npurchase price (exclusive of any deferred purchase price) for such Receivables\nat any time outstanding does not exceed $500,000,000.\n\n\n\n\n\n 7\n\n 12\n \"PERSON\" means an individual, a corporation, a partnership, an\nassociation, a trust or any other entity or organization, including a government\nor political subdivision or an agency or instrumentality thereof.\n\n \"PLAN\" means at any time an employee pension benefit plan (other than a\nMultiemployer Plan) which is covered by Title IV of ERISA or subject to the\nminimum funding standards under Section 412 of the Internal Revenue Code and\neither (i) is maintained, or contributed to, by any member of the ERISA Group\nfor employees of any member of the ERISA Group or (ii) has at any time within\nthe preceding five years been maintained, or contributed to, by any Person which\nwas at such time a member of the ERISA Group for employees of any Person which\nwas at such time a member of the ERISA Group.\n\n \"PROPERTY\" means any interest of any kind in any property or assets,\nwhether real, mixed or personal and whether tangible or intangible.\n\n \"PROSPECTS\" means, at any time, results of future operations which are\nreasonably foreseeable based upon the facts and circumstances in existence at\nsuch time.\n\n \"REFINANCING\" has the meaning set forth in Section 4.07 (and the term\n\"REFINANCED\" has a correlative meaning).\n\n \"RESPONSIBLE OFFICER\" means any of the following: the Chairman,\nPresident, Vice President and Chief Financial Officer, Treasurer and Secretary\nof the Guarantor.\n\n \"RESTRICTED PAYMENT\" means (i) any dividend or other distribution on\nany shares of the Guarantor's capital stock (except to the extent such dividends\nand distributions are payable in shares of its capital stock or Stock\nEquivalents) or (ii) any payment (except to the extent payable in shares of the\nGuarantor's capital stock or Stock Equivalents) on account of the purchase,\nredemption, retirement or acquisition of (a) any shares of the Guarantor's\ncapital stock or (b) any option, warrant or other right to acquire shares of the\nGuarantor's capital stock.\n\n \"SIGNIFICANT SUBSIDIARY\" means, at any date, (A) any Consolidated\nSubsidiary which, including its consolidated subsidiaries, meets any of the\nfollowing conditions:\n\n (i) the investments in and advances to such\n Consolidated Subsidiary by the Guarantor and its other\n Consolidated Subsidiaries exceed 15% of the total assets of\n the Guarantor and its Consolidated Subsidiaries, determined on\n a consolidated basis as of the end of the most recently\n completed fiscal year; or\n\n (ii) the proportionate share attributable to such\n Consolidated Subsidiary of the total assets of the Guarantor\n and its Consolidated Subsidiaries (after intercompany\n eliminations) exceeds 15% of the total assets of the Guarantor\n and\n\n\n\n\n\n 8\n\n 13\n the Consolidated Subsidiaries, determined on a consolidated\n basis as of the end of the most recently completed fiscal\n year; or\n\n (iii) the Guarantor's and its Consolidated\n Subsidiaries' equity in the income of such Consolidated\n Subsidiary from continuing operations before income taxes,\n extraordinary items and cumulative effect of a change in\n accounting principle exceeds 15% of such income of the\n Guarantor and its Consolidated Subsidiaries, determined on a\n consolidated basis for the most recently completed fiscal\n year; and\n\n (B) any other Subsidiary which is an Obligor.\n\n \"STOCK EQUIVALENTS\" means, with respect to any Person, options,\nwarrants, calls or other rights entered into or issued by such Person to acquire\nany capital stock or equity securities of, or other ownership interests in, or\nsecurities convertible into or exchangeable for, capital stock or equity\nsecurities of, or other ownership interests in, such Person.\n\n \"SUBSIDIARY\" means, with respect to any Person, any corporation or\nother entity of which securities or other ownership interests having ordinary\nvoting power to elect a majority of the board of directors or other persons\nperforming similar functions are at the time directly or indirectly owned by\nsuch Person; unless otherwise specified, Subsidiary means a Subsidiary of the\nGuarantor.\n\n \"SUBSIDIARY GUARANTEE\" means a Guarantee entered into by a Subsidiary\nsubstantially in the form of Exhibit A hereto.\n\n \"SUBSIDIARY GUARANTOR\" means, at any time, a Subsidiary which at or\nprior to such time shall have delivered to the Agent (i) a Subsidiary Guarantee\nduly executed by such Subsidiary, which Subsidiary Guarantee has not terminated\nin accordance with its terms, (ii) an opinion of counsel for such Subsidiary\n(which counsel may be an employee of the Guarantor or such Subsidiary)\nreasonably satisfactory to the Agent with respect to such Subsidiary Guarantee,\nsubstantially in the form of Exhibit B hereto and covering such additional\nmatters relating to such Subsidiary Guarantee as the Agent may reasonably\nrequest and (iii) all documents the Agent may reasonably request relating to the\nexistence of such Subsidiary, the corporate authority for and the validity of\nsuch Subsidiary Guarantee, and any other matters reasonably determined by the\nAgent to be relevant thereto, all in form and substance reasonably satisfactory\nto the Agent.\n\n \"TYCO US\" means Tyco International (US) Inc., a Massachusetts\ncorporation, and its successors.\n\n \"TYCOLUX DEBT SECURITIES\" means any unsecured debt securities issued by\nthe Borrower pursuant to the Indenture.\n\n\n\n\n\n\n 9\n\n 14\n\n\n \"UNFUNDED LIABILITIES\" means, with respect to any Plan at any time, the\namount (if any) by which (i) the value of all benefit liabilities under such\nPlan, determined on a plan termination basis using the assumptions prescribed by\nthe PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market\nvalue of all Plan assets allocable to such liabilities under Title IV of ERISA\n(excluding any accrued but unpaid contributions), all determined as of the then\nmost recent valuation date for such Plan, but only to the extent that such\nexcess represents a potential liability of a member of the ERISA Group to the\nPBGC or to any other Person under Title IV of ERISA\n\n \"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY\" means any Consolidated\nSubsidiary all of the shares of capital stock or other ownership interests of\nwhich (except directors' qualifying shares and investments by foreign nationals\nmandated by applicable law) are at the time beneficially owned, directly or\nindirectly, by the Guarantor.\n\n SECTION 1.02. Accounting Terms and Determinations. Unless otherwise\nspecified herein, all accounting terms used herein shall be interpreted, all\naccounting determinations hereunder shall be made, and all financial statements\nrequired to be delivered hereunder shall be prepared in accordance with United\nStates generally accepted accounting principles as in effect from time to time,\napplied on a basis consistent (except for changes concurred in by the\nGuarantor's independent public accountants) with the then most recent audited\nconsolidated financial statements of the Guarantor and its Consolidated\nSubsidiaries delivered to the Banks; provided that, if either (i) the Guarantor\nnotifies the Agent that the Guarantor wishes to eliminate the effect of any\nchange in generally accepted accounting principles on the operation of any\ncovenant contained in Article 4 or (ii) the Agent notifies the Guarantor that it\nwishes to effect such an elimination, then the Guarantor's compliance with such\ncovenant shall be determined on the basis of generally accepted accounting\nprinciples in effect immediately before the relevant change in generally\naccepted accounting principles became effective, until either (A) such notice is\nwithdrawn by the party giving such notice or (B) such covenant is amended in a\nmanner satisfactory to the Guarantor and the Agent to reflect such change in\ngenerally accepted accounting principles.\n\n\n ARTICLE 2\n GUARANTEE\n\n SECTION 2.01. The Guarantee. The Guarantor hereby guarantees the full\nand punctual payment (whether at stated maturity, upon acceleration or\notherwise) of all principal of and interest on amounts loaned to the Borrower\nunder the Financing Documents and all other amounts payable by the Borrower\nunder the Financing Documents. This is a guarantee of payment and not merely of\ncollection. Upon failure by the Borrower to pay punctually any such amount, the\nGuarantor shall forthwith on demand pay the amount not so paid at the place and\nin the manner specified in the applicable Financing Document.\n\n\n\n\n\n 10\n\n 15\n\n SECTION 2.02. Guarantee Unconditional. The obligations of the Guarantor\nhereunder shall be unconditional and absolute, and, without limiting the\ngenerality of the foregoing, shall not be released, discharged or otherwise\naffected, at any time by:\n\n (i) any extension, renewal, settlement, compromise,\n waiver or release in respect of any obligation of the Borrower under\n any Financing Document, by operation of law or otherwise;\n\n (ii) any modification or amendment of or supplement to any\n Financing Document;\n\n (iii) any release, impairment, non-perfection or invalidity\n of any direct or indirect security for any obligation of the Borrower\n under any Financing Document;\n\n (iv) any change in the corporate existence, structure or\n ownership of the Borrower, or any insolvency, bankruptcy,\n reorganization or other similar proceeding affecting the Borrower or\n its assets or any resulting release or discharge of any obligation of\n the Guarantor or the Borrower contained in any Financing Document;\n\n (v) the existence of any claim, set-off or other rights\n which the Guarantor may have at any time against the Borrower, the\n Agent, any Bank or any other Person, whether in connection herewith or\n any unrelated transactions, provided that nothing herein shall prevent\n the assertion of any such claim by separate suit or compulsory\n counterclaim;\n\n (vi) any invalidity or unenforceability relating to or\n against the Borrower for any reason of any Financing Document, or any\n provision of applicable law or regulation purporting to prohibit the\n payment by the Borrower of any amount payable by it under any Financing\n Document; or\n\n (vii) any other act or omission to act or delay of any kind\n by the Borrower, the Agent, any Bank or any other Person or any other\n circumstance whatsoever which might, but for the provisions of this\n paragraph, constitute a legal or equitable discharge of or defense to\n the Guarantor's obligations hereunder.\n\n SECTION 2.03. Discharge Only upon Payment in Full; Reinstatement in\nCertain Circumstances. This Agreement shall remain in full force and effect\nuntil the commitments of the Banks under the Credit Agreements shall have\nterminated and the principal of and interest on the Promissory Notes (as defined\nin either Credit Agreement) and all other amounts payable by the Borrower under\nthe Financing Documents shall have been paid in full. If at any time any payment\nof principal of or interest on any Promissory Note (as defined in either Credit\nAgreement) or any other amount payable by the Borrower under the Financing\nDocuments is rescinded or must be otherwise restored or returned upon the\ninsolvency, bankruptcy or reorganization of the Borrower or otherwise, the\nGuarantor's obligations hereunder with respect\n\n\n\n\n\n\n 11\n\n 16\nto such payment shall be reinstated at such time as though such payment had been\ndue but not made at such time.\n\n SECTION 2.04. Waiver by the Guarantor. The Guarantor irrevocably waives\nacceptance hereof, presentment, demand, protest and any notice not provided for\nherein, as well as any requirement that at any time any action be taken by any\nPerson against the Borrower or any other Person.\n\n SECTION 2.05. Subrogation. Upon making any payment hereunder with\nrespect to the Borrower, the Guarantor shall be subrogated to the rights of the\npayee against the Borrower with respect to such payment; provided that the\nGuarantor shall not enforce any payment by way of subrogation until all amounts\nof principal of and interest on the Promissory Notes (as defined in either\nCredit Agreement) and all other amounts payable by the Borrower under the\nFinancing Documents have been paid in full.\n\n SECTION 2.06. Stay of Acceleration. In the event that acceleration of\nthe time for payment of any amount payable by the Borrower under any Financing\nDocument is stayed upon insolvency, bankruptcy or reorganization of the\nBorrower, all such amounts otherwise subject to acceleration under the terms of\nthis Agreement shall nonetheless be payable by the Guarantor hereunder forthwith\non demand by the Agent.\n\n ARTICLE 3\n REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR\n\n The Guarantor represents and warrants to the Agent that:\n\n SECTION 3.01. Corporate Existence and Power. The Guarantor is a company\nlimited by shares duly incorporated and validly existing under the laws of\nBermuda. The Guarantor has all corporate powers and all governmental licenses,\nauthorizations, consents and approvals (collectively, the \"Consents\") required\nin order to carry on its business as now conducted, other than those powers and\nConsents, the failure of which to be possessed or obtained could not, based upon\nthe facts and circumstances in existence at the time this representation and\nwarranty is made or deemed made, reasonably be expected to have a Material\nAdverse Effect.\n\n SECTION 3.02. Corporate and Governmental Authorization; No\nContravention. The execution, delivery and performance by the Guarantor of this\nAgreement: (a) are within the Guarantor's corporate powers; (b) have been duly\nauthorized by all necessary corporate action on the part of the Guarantor; (c)\nrequire no action by or in respect of, or filing with, any governmental body,\nagency or official, in each case, on the part of the Guarantor; and (d) do not\ncontravene, or constitute a default by the Guarantor under, any provision of (i)\napplicable law or regulation, (ii) the Memorandum of Association or Bye-Laws of\nthe Guarantor, or (iii) any agreement or instrument evidencing or governing Debt\nof the Guarantor or any other material agreement, judgment, injunction, order,\ndecree or other instrument binding upon the Guarantor.\n\n\n\n\n\n\n 12\n\n 17\n SECTION 3.03. Binding Effect. This Agreement constitutes a valid and\nbinding agreement of the Guarantor.\n\n SECTION 3.04. Financial Information.\n\n (a) The consolidated balance sheet of the Guarantor and its\nConsolidated Subsidiaries as of September 30, 1998 and the related consolidated\nstatements of income, of shareholders' equity and of cash flows for the\nnine-month period then ended, reported on by PriceWaterhouseCoopers LLP and set\nforth in the Guarantor's 1998 Form 10-K, a copy of which has been delivered to\neach of the Banks, fairly present, in conformity with generally accepted\naccounting principles, the consolidated financial position of the Guarantor and\nits Consolidated Subsidiaries as of such date and their consolidated results of\noperations and cash flows for such period.\n\n (b) The supplemental consolidated balance sheet of the Guarantor\nand its Consolidated Subsidiaries as of September 30, 1998 and the related\nsupplemental consolidated statements of operations, shareholders' equity and\ncash flows for the fiscal year then ended, reported on by PriceWaterhouseCoopers\nLLP and set forth in the Guarantor's Form 8-K filed with the Securities and\nExchange Commission pursuant to the Securities Exchange Act of 1934 on December\n10, 1998, a copy of which has been delivered to each of the Banks, fairly\npresent, in conformity with generally accepted accounting principles, the\nconsolidated financial position of the Guarantor and its Consolidated\nSubsidiaries as of such date and their consolidated results of operations and\ncash flows for such period, in each case giving retroactive effect to the merger\nwith United States Surgical Corporation consummated on October 1, 1998 and\naccounted for as a pooling of interests.\n\n (c) Since September 30, 1998 there has been no material adverse\nchange in the business, financial position, results of operations or Prospects\nof the Guarantor and its Consolidated Subsidiaries, considered as a whole.\n\n SECTION 3.05. Litigation. There is no action, suit or proceeding\npending against, or to the knowledge of the Guarantor threatened against or\naffecting, the Guarantor or any of its Subsidiaries before any court or\narbitrator or any governmental body, agency or official in which there is a\nreasonable possibility of an adverse decision which could, based upon the facts\nand circumstances in existence at the time this representation and warranty is\nmade or deemed made, reasonably be expected to have a Material Adverse Effect or\nwhich in any manner draws into question the validity of the Financing Documents.\n\n SECTION 3.06. Compliance with ERISA. Each member of the ERISA Group has\nfulfilled its obligations under the minimum funding standards of ERISA and the\nInternal Revenue Code with respect to each Plan and is in compliance, except\nwhere the failure to so comply could not, based upon the facts and circumstances\nin existence at the time this representation and warranty is made or deemed\nmade, reasonably be expected to have a Material Adverse Effect, with the\n\n\n\n\n 13\n\n\n 18\n\n\npresently applicable provisions of ERISA and the Internal Revenue Code with\nrespect to each Plan. No member of the ERISA Group has (i) sought a waiver of\nthe minimum funding standard under Section 412 of the Internal Revenue Code in\nrespect of any Plan, (ii) failed to make any required contribution or payment to\nany Plan or Multiemployer Plan, or made any amendment to any Plan, which has\nresulted in or could, based upon the facts and circumstances in existence at the\ntime this representation and warranty is made or deemed made, reasonably be\nexpected to result in the imposition of a Lien or the posting of a bond or other\nsecurity under ERISA or the Internal Revenue Code or (iii) incurred any\nliability under Title IV of ERISA (other than a liability to the PBGC for\npremiums under Section 4007 of ERISA), which could, based upon the facts and\ncircumstances existing at the time this representation and warranty is made or\ndeemed made, reasonably be expected to have a Material Adverse Effect.\n\n SECTION 3.07. Environmental Matters. In the ordinary course of its\nbusiness, the Guarantor conducts an ongoing review of the effect of\nEnvironmental Laws on the business, operations and properties of the Guarantor\nand its Subsidiaries, in the course of which it identifies and evaluates\nassociated liabilities and costs (including, without limitation, any capital or\noperating expenditures required for clean-up or closure of properties presently\nor previously owned, any capital or operating expenditures required to achieve\nor maintain compliance with environmental protection standards imposed by law or\nas a condition of any license, permit or contract, any related constraints on\noperating activities, including any periodic or permanent shutdown of any\nfacility or reduction in the level of or change in the nature of operations\nconducted thereat, any costs or liabilities in connection with off-site disposal\nof wastes or Hazardous Substances, and any actual or potential liabilities to\nthird parties, including employees, and any related costs and expenses). On the\nbasis of this review, the Guarantor has reasonably concluded that such\nassociated liabilities and costs, including the costs of compliance with\nEnvironmental Laws, could not, based upon the facts and circumstances existing\nat the time this representation and warranty is made or deemed made, reasonably\nbe expected to have a Material Adverse Effect.\n\n SECTION 3.08. Taxes. The Guarantor and its Significant Subsidiaries\nhave filed all material tax returns which are required to be filed by them and\nhave paid all taxes shown on such returns or pursuant to any assessment received\nby the Guarantor or any Subsidiary, except those assessments which are being\ncontested in good faith by appropriate proceedings. The charges, accruals and\nreserves on the books of the Guarantor and its Subsidiaries in respect of taxes\nor other governmental charges are, in the opinion of the Guarantor, adequate.\n\n SECTION 3.09. Subsidiaries. Each of the Guarantor's corporate\nConsolidated Subsidiaries is a corporation duly incorporated, validly existing\nand in good standing under the laws of its jurisdiction of incorporation, except\nwhere the failure to be so incorporated, existing or in good standing could not,\nbased upon the facts and circumstances existing at the time this representation\nand warranty is made or deemed made, reasonably be expected to have a Material\nAdverse Effect. Each such Subsidiary has all corporate powers and all Consents\nrequired to carry on its business as now conducted, other than those powers and\nConsents, the failure of which to \n\n\n\n\n\n 14\n\n 19\n\nbe possessed or obtained could not, based upon the facts and circumstances in\nexistence at the time this representation and warranty is made or deemed made,\nreasonably be expected to have a Material Adverse Effect.\n\n SECTION 3.10. Not an Investment Company. The Guarantor is not an\n\"investment company\" within the meaning of the Investment Company Act of 1940,\nas amended.\n\n SECTION 3.11. Full Disclosure. All information heretofore furnished by\nor on behalf of the Obligors to the Agent in connection with this Agreement,\ndoes not contain any untrue statement of material fact or omit to state any\nmaterial fact necessary to make the statements contained herein or therein, in\nlight of the circumstances under which they were made, not misleading.\n\n SECTION 3.12. Obligations to Be Pari Passu. The Guarantor's obligations\nunder this Agreement rank PARI PASSU as to priority of payment and in all other\nrespects with all other unsecured and unsubordinated obligations of the\nGuarantor.\n\n SECTION 3.13. Year 2000 Compliance. The Guarantor has (i) initiated a\nreview and assessment of all areas within the business and operations of the\nGuarantor and its Subsidiaries that could be adversely affected by the \"YEAR\n2000 PROBLEM\" (that is, the risk that computer applications used by it or any of\nits Subsidiaries may be unable to recognize and perform properly date-sensitive\nfunctions involving certain dates prior to and any date after December 31,\n1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem\non a timely basis and (iii) to date, implemented such plan in accordance with\nsuch timetable. The Guarantor reasonably believes that all computer applications\nthat are material to the business or operations of the Guarantor or any of its\nSubsidiaries will on a timely basis be able to perform properly date-sensitive\nfunctions for all dates before and from and after January 1, 2000, except to the\nextent that a failure to do so could not reasonably be expected to have a\nMaterial Adverse Effect.\n\n\n ARTICLE 4\n COVENANTS\n\n The Guarantor agrees that:\n\n SECTION 4.01. Information. The Guarantor will deliver to each of the\nBanks:\n\n (a) as soon as available and in any event within 120 days after\nthe end of each fiscal year of the Guarantor, consolidated and consolidating\nbalance sheets of the Guarantor and its Consolidated Subsidiaries as of the end\nof such fiscal year and the related consolidated and consolidating statements of\nincome, of shareholders' equity and of cash flows for such fiscal year, setting\nforth, in each case in comparative form, the figures for the previous fiscal\nyear, such\n\n\n\n\n\n\n 15\n\n 20\n\nconsolidated statements to be reported on by PriceWaterhouseCoopers LLP or other\nindependent public accountants of internationally recognized standing in a\nmanner complying with the applicable rules and regulations promulgated by the\nSecurities and Exchange Commission;\n\n (b) as soon as available and in any event within 60 days after the\nend of each of the first three quarters of each fiscal year of the Guarantor,\nconsolidated and consolidating balance sheets of the Guarantor and its\nConsolidated Subsidiaries as of the end of such quarter, the related\nconsolidated statements of income for such quarter, and the related consolidated\nstatements of income and of cash flows and consolidating statements of income\nfor the portion of the Guarantor's fiscal year ended at the end of such quarter,\nsetting forth in the case of such statements of income and of cash flows in\ncomparative form the figures for the corresponding quarter (in the case of\nconsolidated statements of income) and for the corresponding portion of the\nGuarantor's previous fiscal year, all certified (subject to normal year-end\nadjustments) as to fairness of presentation, generally accepted accounting\nprinciples and consistency on behalf of the Guarantor by the chief financial\nofficer, the chief accounting officer or the treasurer of the Guarantor;\n\n (c) simultaneously with the delivery of each set of financial\nstatements referred to in subsections (a) and (b) above, a certificate on behalf\nof the Guarantor signed by the chief financial officer, the chief accounting\nofficer or the treasurer of the Guarantor (i) setting forth in reasonable detail\nthe calculations required to establish whether the Guarantor was in compliance\nwith the requirements of Sections 4.08, 4.09, 4.10 and 4.13 on the date of such\nfinancial statements and (ii) stating whether any Guarantor Default exists on\nthe date of such certificate and, if any Guarantor Default then exists, setting\nforth, in reasonable detail, the nature thereof and the action which the\nGuarantor is taking or proposes to take with respect thereto;\n\n (d) simultaneously with the delivery of each set of financial\nstatements referred to in subsection (a) above, a statement of the firm of\nindependent public accountants which reported on such financial statements\nstating that, in making the audit necessary for the certification of such\nfinancial statements, such firm of accountants has obtained no knowledge of any\nGuarantor Default, or if it has obtained knowledge of such Guarantor Default,\nspecifying the nature and period of existence thereof; provided such firm of\naccountants shall not be liable to any Person by reason of such firm's failure\nto obtain knowledge of any Guarantor Default which would not be disclosed in the\ncourse of an audit conducted in accordance with generally accepted accounting\nprinciples;\n\n (e) within five business days after any Responsible Officer\nobtains knowledge of any Guarantor Default, if such Guarantor Default is then\ncontinuing, a certificate on behalf of the Guarantor signed by the chief\nfinancial officer, the chief accounting officer or the treasurer of the\nGuarantor setting forth, in reasonable detail, the nature thereof and the action\nwhich the Guarantor is taking or proposes to take with respect thereto;\n\n\n\n\n\n 16\n\n 21\n (f) promptly following the mailing thereof to the shareholders of\nthe Guarantor generally, copies of all financial statements, reports and proxy\nstatements so mailed;\n\n (g) promptly upon the filing thereof, copies of all final\nregistration statements (other than the exhibits thereto and any registration\nstatements on Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q\nand 8-K (or their equivalents) which the Guarantor shall have filed with the\nSecurities and Exchange Commission;\n\n (h) promptly upon any Responsible Officer of the Guarantor\nobtaining knowledge of the commencement of any action, suit or proceeding before\nany court, arbitrator or other governmental body against the Guarantor or any of\nits Subsidiaries that, if adversely determined, could reasonably be expected to\nhave a Material Adverse Effect, a certificate on behalf of the Guarantor\nspecifying the nature of such action, suit or proceeding and what action the\nGuarantor is taking or proposes to take with respect thereto; and\n\n (i) from time to time, upon reasonable notice, such additional\ninformation regarding the financial position or business of the Guarantor and\nits Subsidiaries as the Agent, at the request of any Bank, may reasonably\nrequest.\n\n Information required to be delivered pursuant to subsections (a), (b),\n(f) or (g) above shall be deemed to have been delivered on the date on which the\nGuarantor provides notice to the Banks that such information has been posted on\nthe Guarantor's website on the Internet at the website address listed on the\nsignature pages hereof, at sec.gov/edaux/searches.htm or at another website\nidentified in such notice and accessible by the Banks without charge; provided\nthat (i) such notice may be included in a certificate delivered pursuant to\nsubsection 4.01(c) and (ii) the Guarantor shall deliver paper copies of the\ninformation referred to in subsections (a), (b), (f) or (g) to any Bank which\nrequests such delivery.\n\n SECTION 4.02. Payment of Obligations. The Guarantor will pay and\ndischarge, and will cause each Subsidiary to pay and discharge, at or before\nmaturity, all their respective material obligations and liabilities, including,\nwithout limitation, tax liabilities, except where (i) any such failure to so pay\nor discharge could not, based upon the facts and circumstances in existence at\nthe time, reasonably be expected to have a Material Adverse Effect or (ii) such\nliabilities or obligations may be contested in good faith by appropriate\nproceedings. The Guarantor will maintain, and will cause each Subsidiary to\nmaintain, in accordance with generally accepted accounting principles,\nappropriate reserves for the accrual of any of such liabilities or obligations.\n\n SECTION 4.03. Maintenance of Property; Insurance. (a) Except as\npermitted by Section 4.04 or 4.09, the Guarantor will keep, and will cause each\nSubsidiary to keep, all property necessary in its business in good working order\nand condition, ordinary wear and tear excepted, unless the failure to so keep\ncould not, based upon the facts and circumstances existing at the time,\nreasonably be expected to have a Material Adverse Effect.\n\n\n\n\n\n 17\n\n 22\n (b) The Guarantor will maintain, and will cause each Subsidiary to\nmaintain, with financially sound and reputable insurers, insurance with respect\nto its assets and business against such casualties and contingencies, of such\ntypes (including, without limitation, loss or damage, product liability,\nbusiness interruption, larceny, embezzlement or other criminal misappropriation)\nand in such amounts as is customary in the case of similarly situated\ncorporations of established reputations engaged in the same or a similar\nbusiness, unless the failure to maintain such insurance could not, based upon\nthe facts and circumstances existing at the time, reasonably be expected to have\na Material Adverse Effect.\n\n SECTION 4.04. Conduct of Business and Maintenance of Existence. The\nGuarantor (a) will not engage in any business other than the holding of stock\nand other investments in its Subsidiaries and activities reasonably related\nthereto, (b) will cause each Subsidiary to engage in business of the same\ngeneral type as now conducted by the Guarantor's Subsidiaries and reasonably\nrelated extensions thereof, and (c) will preserve, renew and keep in full force\nand effect, and will cause each Subsidiary to preserve, renew and keep in full\nforce and effect (x) their respective corporate existence and (y) their\nrespective rights, privileges and franchises necessary or desirable in the\nnormal conduct of business, unless in the case of either the failure of the\nGuarantor to comply with subclause (c) (y) of this Section 4.04 or the failure\nof a Subsidiary to comply with clause (b) or (c) of this Section 4.04, such\nfailure could not, based upon the facts and circumstances existing at the time,\nreasonably be expected to have a Material Adverse Effect; provided that nothing\nin this Section 4.04 shall prohibit (i) the merger or consolidation of a\nSubsidiary with or into the Guarantor or a Wholly-Owned Consolidated Subsidiary,\n(ii) the sale, lease, transfer, assignment or other disposition by a Subsidiary\nof all or any part of its assets to the Guarantor or to a Wholly-Owned\nConsolidated Subsidiary, (iii) the merger or consolidation of a Subsidiary with\nor into a Person other than the Guarantor or a Wholly-Owned Consolidated\nSubsidiary, if the Person surviving such consolidation or merger is a Subsidiary\nand immediately after giving effect thereto, no Guarantor Default shall have\noccurred and be continuing, (iv) the sale, lease, transfer, assignment or other\ndisposition by a Subsidiary of all or any part of its assets to a Person other\nthan the Guarantor or a Wholly-Owned Consolidated Subsidiary, if the Person to\nwhich such sale, lease, transfer, assignment or other disposition is made is a\nSubsidiary and immediately after giving effect thereto, no Guarantor Default\nshall have occurred and be continuing, (v) any transaction permitted pursuant to\nSection 4.11 or (vi) the termination of the corporate existence of any\nSubsidiary if the Guarantor in good faith determines that such termination is in\nthe best interest of the Guarantor and is not materially disadvantageous to the\nBanks.\n\n SECTION 4.05. Compliance with Laws. The Guarantor will comply, and\ncause each Subsidiary to comply, in all material respects with all applicable\nlaws, ordinances, rules, regulations, and requirements of governmental\nauthorities (including, without limitation, Environmental Laws and ERISA and the\nrules and regulations thereunder) except where (a) noncompliance therewith could\nnot, based upon the facts and circumstances in existence at the time, reasonably\nbe expected to have a Material Adverse Effect or (b) the necessity of compliance\ntherewith is contested in good faith by appropriate proceedings.\n\n\n\n\n\n 18\n\n 23\n SECTION 4.06. Inspection of Property, Books and Records;\nConfidentiality. (a) The Guarantor will keep, and will cause each Subsidiary to\nkeep, proper books of record and account in which true and correct entries shall\nbe made of its business transactions and activities so that financial statements\nthat fairly present its business transactions and activities can be properly\nprepared in accordance with generally accepted accounting principles.\n\n (b) The Guarantor will permit, and will cause each Subsidiary to\npermit, representatives of any Bank at such Bank's expense to visit and inspect\nany of their respective properties, to examine and make abstracts from any of\ntheir respective books and records and to discuss their respective affairs,\nfinances and accounts with their respective officers, employees and independent\npublic accountants, all upon reasonable notice to the Guarantor, at such\nreasonable times and as often as may reasonably be requested by any Bank.\n\n (c) Each Bank and the Agent shall, by its receipt of Confidential\nInformation (as defined below) pursuant to or in connection with this Agreement\nor its exercise of any of its rights hereunder, be deemed to have agreed (on\nbehalf of itself and each of its affiliates, directors, officers, employees and\nrepresentatives) to (i) keep such information confidential, (ii) (except as\npermitted by clause (iii) of this Section 4.06(c)) not disclose such information\nto any Person other than an officer, director, employee, legal counsel,\nindependent auditor or authorized agent or advisor of the Agent or such Bank\nneeding to know such information (it being understood that any such officer,\ndirector, employee, legal counsel, independent auditor or authorized agent or\nadvisor shall be informed by the Agent or such Bank of the confidential nature\nof such information), (iii) not disclose such information to any Assignee or\nParticipant (or prospective Assignee or Participant), unless such Assignee or\nParticipant (or prospective Assignee or Participant) shall agree in writing to\nbe bound by the provisions of this Section 4.06(c) and (iv) not use any such\ninformation except for purposes relating to this Agreement or the Notes. The\nterm \"Confidential Information\" shall mean non-public information furnished by\nor on behalf of the Guarantor or any of its Subsidiaries to the Agent, any Bank\nor other Person exercising rights hereunder or required to be bound hereby\n(collectively \"Recipients\"), but shall not include any such information which\n(1) has become or hereafter becomes available to the public other than as a\nresult of a disclosure by a Recipient, or (2) has become or hereafter becomes\navailable to a Recipient, on a non-confidential basis, from a source other than\nthe Guarantor or any of its Subsidiaries (or any of their respective\nrepresentatives or agents) or any Recipient, which source, to the knowledge of\nthe Recipient, is not prohibited from disclosing such information by a\nconfidentiality agreement with, or other legal or fiduciary obligation to, the\nGuarantor or its Subsidiaries.\n\n The restrictions set forth in the immediately preceding paragraph shall\nnot prevent the disclosure by a Recipient of any such information:\n\n (A) with the prior written consent of the\n Guarantor,\n\n\n\n\n 19\n\n 24\n (B) at the request of a bank regulatory agency\n or in connection with an examination by bank examiners, or\n\n (C) upon order of any court or administrative\n agency of competent jurisdiction, to the extent required by\n such order and not effectively stayed on appeal or otherwise,\n or as otherwise required by law; provided that in the case of\n any intended disclosure under this clause (C), the Recipient\n shall (unless otherwise required by applicable law) give the\n Guarantor not less than five business days prior notice (or\n such shorter period as may, in the good faith discretion of\n the Recipient, be reasonable under the circumstances or may be\n required by any court or agency under the circumstances),\n specifying the Confidential Information involved and stating\n such Recipient's intention to disclose such Confidential\n Information (including the manner and extent of such\n disclosure) in order to allow the Guarantor an opportunity to\n seek an appropriate protective order.\n\n Each Recipient shall agree that, in addition to all other remedies\navailable, the Guarantor shall be entitled to specific performance and\ninjunctive and other equitable relief as a remedy for any breach of this Section\n4.06(c) by such Recipient.\n\n SECTION 4.07. Limitation on Restrictions on Subsidiary Dividends and\nOther Distributions. The Guarantor will not, and will not permit any Subsidiary\nto, directly or indirectly, create or otherwise cause or suffer to exist or\nbecome effective any encumbrance or restriction on the ability of any Subsidiary\nto (a) pay dividends or make any other distributions on its capital stock or any\nother interest or participation in its profits, owned by the Guarantor or any\nSubsidiary, or pay any Debt owed to the Guarantor or any Subsidiary, (b) make\nloans or advances to the Guarantor or any Subsidiary or (c) transfer any of its\nproperties or assets to the Guarantor or any Subsidiary, except for such\nencumbrances or restrictions existing under or by reason of\n\n (i) applicable law, agreements with foreign governments\n with respect to assets located in their jurisdiction, or condemnation\n or eminent domain proceedings,\n\n (ii) any of the Financing Documents,\n\n (iii) (A) customary provisions restricting subletting or\n assignment of any lease governing a leasehold interest of the Guarantor\n or a Subsidiary, or (B) customary restrictions imposed on the transfer\n of copyrighted or patented materials or provisions in agreements that\n restrict the assignment of such agreements or any rights thereunder,\n\n (iv) provisions contained in the instruments evidencing or\n governing Debt or other obligations or agreements, in each case\n existing on February 12, 1999,\n\n\n\n\n\n 20\n\n 25\n (v) provisions contained in documents evidencing or\n governing any Permitted Receivables Transaction,\n\n (vi) provisions contained in instruments evidencing or\n governing Debt or other obligations or agreements of any Person, in\n each case, at the time such Person (A) shall be merged or consolidated\n with or into the Guarantor or any Subsidiary, (B) shall sell, transfer,\n assign, lease or otherwise dispose of all or substantially all of such\n Person's assets to the Guarantor or a Subsidiary, or (C) otherwise\n becomes a Subsidiary, provided that in the case of clause (A), (B) or\n (C), such Debt, obligation or agreement was not incurred or entered\n into, or any such provisions adopted, in contemplation of such\n transaction,\n\n (vii) provisions contained in instruments amending,\n restating, supplementing, extending, renewing, refunding, refinancing,\n replacing or otherwise modifying, in whole or in part (collectively,\n \"REFINANCING\"), instruments referred to in clauses (ii), (iv) and (vi)\n of this Section 4.07, so long as such provisions are, in the good faith\n determination of the Guarantor's board of directors, not materially\n more restrictive than those contained in the respective instruments so\n Refinanced,\n\n (viii) provisions contained in any instrument evidencing or\n governing Debt or other obligations of a Subsidiary Guarantor,\n\n (ix) any encumbrances and restrictions with respect to a\n Subsidiary imposed in connection with an agreement which has been\n entered into for the sale or disposition of such Subsidiary or its\n assets, provided such sale or disposition otherwise complies with this\n Agreement,\n\n (x) the subordination (pursuant to its terms) in right\n and priority of payment of any Debt owed by any Subsidiary (the\n \"Indebted Subsidiary\") to the Guarantor or any other Subsidiary, to any\n other Debt of such Indebted Subsidiary, provided (A) such Debt is\n permitted under this Agreement and (B) the Guarantor's board of\n directors has determined, in good faith, at the time of the creation of\n such encumbrance or restriction, that such encumbrance or restriction\n could not, based upon the facts and circumstances in existence at the\n time, reasonably be expected to have a Material Adverse Effect,\n\n (xi) provisions governing preferred stock issued by a\n Subsidiary, provided that such preferred stock is permitted under\n Section 4.08, and\n\n (xii) provisions contained in debt instruments, obligations\n or other agreements of any Subsidiary which are not otherwise permitted\n pursuant to clauses (i) through (xi) of this Section 4.07, provided\n that the aggregate investment of the Guarantor in all such Subsidiaries\n (determined in accordance with generally accepted accounting\n principles)\n\n\n\n\n 21\n\n 26\n shall at no time exceed the greater of (a) $300,000,000 or (b) 10% of\n Consolidated Tangible Net Worth.\n\nThe provisions of this Section 4.07 shall not prohibit (x) Liens not prohibited\nby Section 4.10 or (y) restrictions on the sale or other disposition of any\nproperty securing Debt of any Subsidiary, provided such Debt is otherwise\npermitted by this Agreement.\n\n SECTION 4.08. Debt. Consolidated Debt will at no time exceed (x) prior\nto June 30, 1999, 62.5% and (y) on and after June 30, 1999, 52.5% of\nConsolidated Total Capitalization. The total Debt of all Consolidated\nSubsidiaries (excluding (i) Debt of a Consolidated Subsidiary owed to the\nBorrower, to the Guarantor or to a Wholly-Owned Consolidated Subsidiary, (ii)\nDebt of the Borrower or a Subsidiary Guarantor, (iii) Permitted Acquired Debt\nand (iv) Existing Tyco US Debt) will at no time exceed in aggregate outstanding\nprincipal amount 5% of the Consolidated Tangible Assets of the Guarantor. For\npurposes of this Section any preferred stock of a Consolidated Subsidiary held\nby a Person other than the Guarantor or a Wholly-Owned Consolidated Subsidiary\nshall be included, at the higher of its voluntary or involuntary liquidation\nvalue, in \"Consolidated Debt\" and in the \"Debt\" of such Consolidated Subsidiary.\n\n SECTION 4.09. Fixed Charge Coverage. The ratio of Consolidated EBIT to\nConsolidated Interest Expense will not, for any period of four consecutive\nfiscal quarters, be less than 2.5 to 1.\n\n SECTION 4.10. Negative Pledge. The Guarantor will not, and will not\npermit any Subsidiary to, create, assume or suffer to exist any Lien on any\nasset now owned or hereafter acquired by it, except:\n\n (a) any Lien existing on any asset on February 12, 1999 securing\nDebt outstanding on such date;\n\n (b) any Lien existing on any asset of, or capital stock of, or\nother ownership interest in, any Person (such capital stock and other ownership\ninterests are collectively referred to herein as \"Stock\") at the time such\nPerson becomes a Subsidiary, which Lien was not created in contemplation of such\nevent;\n\n (c) any Lien on any asset securing the payment of all or part of\nthe purchase price of such asset upon the acquisition thereof by the Guarantor\nor a Subsidiary or securing Debt (including any obligation as lessee incurred\nunder a capital lease) incurred or assumed by the Guarantor or a Subsidiary\nprior to, at the time of or within one year after such acquisition (or in the\ncase of real property, the completion of construction (including any\nimprovements on an existing property) or the commencement of full operation of\nsuch asset or property, whichever is later), which Debt is incurred or assumed\nfor the purpose of financing all or part of the cost of acquiring such asset or,\nin the case of real property, construction or improvements thereon; provided,\nthat in the case of any such acquisition, construction or improvement, the Lien\nshall\n\n\n\n\n 22\n\n 27\nnot apply to any asset theretofore owned by the Guarantor or a Subsidiary, other\nthan assets so acquired, constructed or improved;\n\n (d) any Lien existing on any asset or Stock of any Person at the\ntime such Person is merged or consolidated with or into the Guarantor or a\nSubsidiary which Lien was not created in contemplation of such event;\n\n (e) any Lien existing on any asset or Stock of any Person at the\ntime of acquisition thereof by the Guarantor or a Subsidiary, which Lien was not\ncreated in contemplation of such acquisition;\n\n (f) any Lien arising out of the refinancing of any Debt secured by\nany Lien permitted by any of the subsections (a) through (e) of this Section\n4.10, provided the principal amount of Debt is not increased and is not secured\nby any additional assets, except as provided in the last sentence of this\nSection 4.10;\n\n (g) any Lien to secure Debt of a Subsidiary to the Guarantor or to\na Wholly-Owned Consolidated Subsidiary;\n\n (h) any Lien created pursuant to a Permitted Receivables\nTransaction;\n\n (i) any Lien in favor of any country (or any department, agency,\ninstrumentality or political subdivision of any country) securing obligations\narising in connection with partial, progress, advance or other payments pursuant\nto any contract, statute, rule or regulation or securing obligations incurred\nfor the purpose of financing all or any part of the purchase price (including\nthe cost of installation thereof or, in the case of real property, the cost of\nconstruction or improvement or installation of personal property thereon) of the\nasset subject to such Lien (including, but not limited to, any Lien incurred in\nconnection with pollution control, industrial revenue or similar financings);\n\n (j) Liens arising in the ordinary course of its business which (i)\ndo not secure Debt, (ii) do not secure any single obligation in an amount\nexceeding $50,000,000 and (iii) do not in the aggregate materially detract from\nthe value of its assets or materially impair the use thereof in the operation of\nits business; and\n\n (k) Liens not otherwise permitted by the foregoing clauses (a)\nthrough (j) of this Section 4.10 securing Debt (without duplication) in an\naggregate principal amount at any time outstanding not to exceed an amount equal\nto the greater of (i) $300,000,000 or (ii) 10% of Consolidated Tangible Net\nWorth.\n\nIt is understood that any Lien permitted to exist on any asset pursuant to the\nforegoing provisions of this Section 4.10 may attach to the proceeds of such\nasset and, with respect to Liens permitted pursuant to subsections (a), (b),\n(d), (e), (f) (but only with respect to the refinancing of a Debt \n\n\n\n\n\n\n 23\n\n 28\nsecured by a Lien permitted pursuant to subsections (a), (b), (d) or (e)) or (g)\nof this Section 4.10, may attach to an asset acquired in the ordinary course of\nbusiness as a replacement of such former asset.\n\n SECTION 4.11. Consolidations, Mergers and Sales of Assets. (a) The\nGuarantor will not (i) consolidate or merge with or into any other Person or\n(ii) sell, lease or otherwise transfer all or substantially all of its assets to\nany other Person, unless\n\n (A) the Guarantor or a Subsidiary is the\n surviving corporation;\n\n (B) the Person (if other than the Guarantor)\n formed by such consolidation or into which the Guarantor is\n merged, or the Person which acquires by sale or other\n transfer, or which leases, all or substantially all of the\n assets of the Guarantor (any such Person, the \"Successor\"),\n shall be organized and existing under the laws of Bermuda or\n of the United States, any state thereof or the District of\n Columbia and shall expressly assume, in a writing executed and\n delivered to the Agent for delivery to each of the Banks, in\n form reasonably satisfactory to the Agent, the due and\n punctual payment of the principal of and interest on the\n Promissory Notes and the performance of the other obligations\n under this Agreement and the Promissory Notes on the part of\n the Guarantor to be performed or observed, as fully as if such\n Successor were originally named as the Guarantor in this\n Agreement;\n\n (C) immediately after giving effect to such\n transaction, no Guarantor Default shall have occurred and be\n continuing; and\n\n (D) the Guarantor has delivered to the Agent a\n certificate on behalf of the Guarantor signed by a Responsible\n Officer and an opinion of counsel, each stating that all\n conditions provided in this Section 4.11 relating to such\n transaction have been satisfied.\n\n The foregoing provisions of this Section 4.11 shall not restrict the\nmerger or consolidation of any Subsidiary with and into the Guarantor.\n\n (b) The Guarantor will not, and will not permit any Subsidiary to,\nsell, lease or otherwise transfer, in any transaction or series of related\ntransactions, to any Person (other than the Guarantor or a Subsidiary) any\nProperty (including, without limitation, the stock of any Subsidiary) having a\nnet book value in excess of 15% of Consolidated Assets determined as of the end\nof the fiscal quarter of the Guarantor most recently ended at the time of such\nsale or other transaction, or Property (including without limitation, stock of a\nSubsidiary) which contributed in excess of 15% of Consolidated EBIT for the\nfiscal year of the Guarantor most recently ended at the time of such sale or\nother transaction.\n\n\n\n\n 24\n\n 29\n SECTION 4.12. Transactions with Affiliates. The Guarantor will not, and\nwill not permit any Subsidiary to, directly or indirectly, pay any funds to or\nfor the account of, make any investment (whether by acquisition of stock or\nindebtedness, by loan, advance, transfer of property, guarantee or other\nagreement to pay, purchase or service, directly or indirectly, any Debt, or\notherwise) in, lease, sell, transfer or otherwise dispose of any assets,\ntangible or intangible, to, or participate in, or effect any transaction in\nconnection with any joint enterprise or other joint arrangement with, any\nAffiliate (collectively, \"AFFILIATE TRANSACTIONS\"); provided, however, that the\nforegoing provisions of this Section 4.12 shall not prohibit the Guarantor or\nany of its Subsidiaries from (a) making Restricted Payments (including, for this\npurpose, transactions expressly excluded from the definition of a Restricted\nPayment) permitted by Section 4.13, (b) making sales to or purchases from any\nAffiliate and, in connection therewith, extending credit or making payments, or\nfrom making payments for services rendered by any Affiliate, if such sales or\npurchases are made or such services are rendered in the ordinary course of\nbusiness and on terms and conditions at least as favorable to the Guarantor or\nsuch Subsidiary as the terms and conditions which the Guarantor would reasonably\nexpect to be obtained in a similar transaction with a Person which is not an\nAffiliate at such time, (c) making payments of principal, interest and premium\non any Debt of the Guarantor or such Subsidiary held by an Affiliate if the\nterms of such Debt are at least as favorable to the Guarantor or such Subsidiary\nas the terms which the Guarantor would reasonably expect to have been obtained\nat the time of the creation of such Debt from a lender which was not an\nAffiliate, (d) participating in, or effecting any transaction in connection\nwith, any joint enterprise or other joint arrangement with any Affiliate if the\nGuarantor or such Subsidiary participates in the ordinary course of its business\nand on a basis no less advantageous than the basis on which such Affiliate\nparticipates, (e) paying or granting reasonable compensation and benefits to any\ndirector, officer, employee or agent of the Guarantor or any Subsidiary, (f)\npaying reasonable legal fees and expenses to a law firm of which an Affiliate is\na member or (g) engaging in any Affiliate Transaction not otherwise addressed in\nsubsections (a) - (f) of this Section 4.12, the terms of which are not less\nfavorable to the Guarantor or such Subsidiary than those that the Guarantor\nwould reasonably expect to be obtained in a comparable transaction at such time\nwith a Person which is not an Affiliate.\n\n SECTION 4.13. Restricted Payments. The Guarantor will not, and will not\npermit any Subsidiary to, declare or make any Restricted Payment unless, after\ngiving effect thereto, the aggregate of all Restricted Payments declared or made\nsubsequent to the date hereof does not exceed an amount equal to the sum of (a)\n$3,100,000,000 plus (b) 50% of Consolidated Net Income (or minus 100% of\nConsolidated Net Income, in the event of a net loss for such period) for the\nperiod from October 1, 1998 through the end of the then most recently ended\nfiscal quarter of the Guarantor (treated for this purpose as a single accounting\nperiod), plus (c) the aggregate cash proceeds (net of underwriting commissions)\nreceived by the Guarantor (other than from a Subsidiary) from the issuance or\nsale after September 30, 1998 of capital stock or Stock Equivalents of the\nGuarantor (other than the proceeds of any capital stock or Stock Equivalent\nwhich by its terms is subject to redemption otherwise than at the sole option of\nthe Guarantor). Nothing in this Section 4.13 shall prohibit the payment of any\ndividend or distribution within 60 days after the declaration thereof if such\ndeclaration was not prohibited by this Section 4.13.\n\n\n\n\n 25\n\n 30\n\n SECTION 4.14. Subsidiary Guarantors. If any Subsidiary becomes a\nguarantor of TycoLux Debt Securities under the Indenture, the Guarantor will\ncause such Person to become a Subsidiary Guarantor concurrently therewith.\n\n ARTICLE 5\n DEFAULTS\n\n SECTION 5.01. Guarantor Events of Defaults. The following events shall\nconstitute \"GUARANTOR EVENTS OF DEFAULT\" for purposes of the Financing\nDocuments:\n\n (a) the Guarantor shall fail to observe or perform any covenant\ncontained in Section 4.08, 4.09, 4.13 or 4.14;\n\n (b) the Guarantor shall fail to observe or perform any covenant\ncontained in Section 4.07 or Sections 4.10 to 4.12, inclusive, and such failure\nshall not be remedied within five days after any Responsible Officer obtains\nactual knowledge thereof;\n\n (c) the Guarantor shall fail to observe or perform any covenant or\nagreement contained in this Agreement (other than those covered by clause (a) or\n(b) of this Section 5.01) for 10 days after notice thereof has been given to the\nGuarantor by the Agent at the request of any Bank;\n\n (d) any representation, warranty, certification or statement made\nin writing by the Guarantor or any Subsidiary Guarantor in the Financing\nDocuments or in any certificate, financial statement or other document required\nto be delivered to the Agent or any of the Banks pursuant to the Financing\nDocuments shall prove to have been incorrect in any material respect when made\n(or deemed made);\n\n (e) the Guarantor or any Subsidiary shall fail to make any payment\nin respect of any Material Debt when due (after giving effect to any applicable\ngrace period);\n\n (f) any event or condition shall occur that results in the\nacceleration of the maturity of any Material Debt or that entitles the holder or\nholders of any Material Debt or any Person acting on behalf of such holder or\nholders to accelerate the maturity thereof;\n\n (g) (i) any corporate action is taken authorizing the winding up,\nliquidation, any arrangement or the taking of any other similar action of or\nwith respect to the Guarantor or authorizing any corporate action to be taken to\nfacilitate any such winding up, liquidation, arrangement, reorganization or\namalgamation or other similar action or any members' voluntary winding up of the\nGuarantor as provided under the Bermuda Companies Law shall be commenced;\n\n\n\n\n\n 26\n\n 31\n (ii) (A) any petition shall be filed seeking the\n liquidation, any arrangement or the taking of any other similar action\n of or with respect to the Guarantor by the Registrar of Companies in\n Bermuda, or by any other Person or Persons, or (B) any petition shall\n be presented for the winding up of the Guarantor to a court of Bermuda\n as provided with the Bermuda Companies Law, or (C) any creditors'\n winding up of the Guarantor as provided under the Bermuda Companies Law\n shall be commenced, or (D) any receiver shall be appointed by a\n creditor of the Guarantor or by a court of Bermuda on the application\n of a creditor of the Guarantor as provided under any instrument giving\n rights for the appointment of a receiver thereto, and in the case of\n any such petition, winding up, appointment, order or other matter, such\n petition, winding up, appointment, order or other matter, shall remain\n undismissed and unstayed for a period of 60 days;\n\n (iii) the Guarantor or any Significant Subsidiary shall (A)\n commence a voluntary case or other proceeding seeking liquidation,\n winding up, reorganization or other relief with respect to itself or\n its debts under any bankruptcy, insolvency or other similar law now or\n hereafter in effect or seeking the appointment of a trustee, receiver,\n liquidator, custodian or other similar official of it or substantially\n all of its property, or (B) consent to any such relief or to the\n appointment of or taking possession by any such official in an\n involuntary case or other similar proceeding commenced against it, or\n (C) make a general assignment for the benefit of creditors, or (D) fail\n generally to pay its debts as they become due, or (E) take any\n corporate action to authorize any of the foregoing; or\n\n (iv) (A) an involuntary case or other proceeding shall be\n commenced against the Guarantor or any Significant Subsidiary seeking\n liquidation, winding up, reorganization or other relief with respect to\n it or its debts under any bankruptcy, insolvency or other similar law\n now or hereafter in effect or seeking the appointment of a trustee,\n receiver, liquidator, custodian or other similar official of it or\n substantially all of its property, and such involuntary case or other\n proceeding shall remain in effect and undismissed and unstayed for a\n period of 60 days; or (B) an order for relief shall be entered against\n the Guarantor or any Significant Subsidiary under the bankruptcy laws\n of any jurisdiction as now or hereafter in effect;\n\n (h) a judgment or order for the payment of money in excess of\n$30,000,000 (after deducting amounts covered by insurance, except to the extent\nthat the insurer providing such insurance has declined such coverage) shall be\nrendered against the Guarantor or any Subsidiary and, within 60 days after entry\nthereof, such judgment or order is not discharged or execution thereof stayed\npending appeal, or within 60 days after the expiration of any such stay, such\njudgment or order is not discharged;\n\n (i) any person or group of persons (within the meaning of Section\n13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired\nbeneficial ownership (within the meaning of Rule 13d-3 promulgated by the\nSecurities and Exchange Commission under said Act) of 40% or more of the\noutstanding shares of common stock of the Guarantor; or, on the last\n\n\n\n\n\n\n 27\n\n 32\nday of any period of twelve consecutive calendar months, a majority of members\nof the board of directors of the Guarantor shall no longer be composed of\nindividuals (i) who were members of said board of directors on the first day of\nsuch twelve consecutive calendar month period or (ii) whose election or\nnomination to said board of directors was approved by individuals referred to in\nclause (i) above constituting at the time of such election or nomination at\nleast a majority of said board of directors;\n\n (j) the Guarantor or any Subsidiary shall fail to make any payment\nowing by it in respect of any performance bond, performance guaranty or bank\nguaranty issued in lieu of a performance bond or performance guaranty (other\nthan a payment which is disputed by the Guarantor or such Subsidiary in good\nfaith), and the aggregate of all such defaulted payments shall exceed\n$50,000,000 at any one time for the Guarantor and its Subsidiaries; or\n\n (k) any member of the ERISA Group shall fail to pay when due an\namount or amounts aggregating in excess of $5,000,000 which it shall have become\nliable to pay under Title IV of ERISA; or notice of intent to terminate a\nMaterial Plan shall be filed under Title IV of ERISA by any member of the ERISA\nGroup, any plan administrator or any combination of the foregoing; or the PBGC\nshall institute proceedings under Title IV of ERISA to terminate, to impose\nliability (other than for premiums under Section 4007 of ERISA) in respect of,\nor to cause a trustee to be appointed to administer any Material Plan; or a\ncondition shall exist by reason of which the PBGC would be entitled to obtain a\ndecree adjudicating that any Material Plan must be terminated; or there shall\noccur a complete or partial withdrawal from, or a default, within the meaning of\nSection 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans\nwhich could cause one or more members of the ERISA Group to incur a current\npayment obligation in excess of $25,000,000.\n\n SECTION 5.02. Notice of Default. The Agent shall give notice to the\nGuarantor under Section 5.01(b) promptly upon being requested to do so by any\nBank and shall thereupon notify all the Banks thereof.\n\n\n\n ARTICLE 6\n TAXES\n\n SECTION 6.01. Withholding Taxes. Each payment by the Guarantor\nhereunder to or for the account of any Bank (a \"Payment\") shall be made without\nany deduction or withholding for any Bank Foreign Taxes with respect to such\nBank; provided that if the Guarantor shall be required by law to make any such\ndeduction or withholding from any Payment, the Guarantor will:\n\n\n\n\n\n 28\n\n 33\n (i) pay such amounts in addition to such Payment as may\n be necessary so that the amount received by the payee, after all such\n withholdings and deductions, will be equal to the full amount provided\n for in this Agreement;\n\n (ii) pay the full amount deducted or withheld to the\n relevant taxation or other authorities within the time allowed under\n applicable law; and\n\n (iii) furnish within 45 days thereafter to the Agent, the\n official receipt or receipts from the relevant taxation or other\n authorities for the full amount so deducted or withheld.\n\n SECTION 6.02. Certain Other Taxes. The Guarantor will pay (i) all Bank\nForeign Taxes imposed (otherwise than by deduction or withholding) on any Bank\nwhich constitute Bank Foreign Taxes with respect to such Bank and (ii) all Bank\nDomestic Taxes imposed on any Bank which constitute Bank Domestic Taxes with\nrespect to such Bank to the extent any such Bank Foreign Taxes or Bank Domestic\nTaxes result from Bank Foreign Taxes or Bank Domestic Taxes paid or reimbursed\nby the Guarantor pursuant to this Article 6.\n\n SECTION 6.03. Reimbursement of Taxes Paid by a Bank. If any Bank\nForeign Taxes or Bank Domestic Taxes to be paid by the Guarantor pursuant to\nthis Article 6 are imposed on and paid by any Bank, the Guarantor shall, upon\nrequest of such Bank and whether or not such Bank Foreign Taxes or Bank Domestic\nTaxes shall have been correctly or legally imposed, reimburse such Bank\ntherefor, together with any interest, penalties and expenses in connection\ntherewith, plus interest thereof at the rate specified in the first sentence of\nSection 2.07(a) of each Credit Agreement. To the extent that any Bank which is\nreimbursed by the Guarantor as provided in this Section thereafter receives any\npayment allocated to Bank Foreign Taxes or Bank Domestic Taxes in respect of\nwhich such Bank was so reimbursed from a governmental taxing authority because\nsuch Bank Foreign Taxes or Bank Domestic Taxes were incorrectly or illegally\nimposed, such Bank shall return to the Guarantor (without interest) any such\npayment.\n\n\n ARTICLE 7\n MISCELLANEOUS\n\n SECTION 7.01. Notices. All notices, requests and other communications\nto any party provided for hereunder shall be in writing (including, without\nlimitation, bank wire, telex, facsimile transmission or similar writing) and\nshall be given to such party at its address or facsimile or telex number set\nforth on the signature pages hereof or such other address or facsimile or telex\nnumber as such party may hereafter specify for the purpose by notice to the\nother party. Each such notice, request or other communication shall be effective\n(i) if given by telex, when such telex is transmitted to the telex number\nspecified in this Section and the appropriate answerback is received, (ii) if\ngiven by facsimile, when such facsimile is transmitted to the facsimile number\nspecified on the signature pages hereof and electronic, telephonic or other\nappropriate confirmation of receipt is received by the sender, (iii) if given by\nmail, 72 hours \n\n\n\n\n\n\n\n 29\n 34\n\nafter such communication is deposited in the mails with first class postage\nprepaid, addressed as aforesaid or (iv) if given by any other means, when\ndelivered at the address specified on the signature pages hereof.\n\n SECTION 7.02. No Waivers. No failure or delay by the Agent or any Bank\nin exercising any right, power or privilege hereunder or under any other\nFinancing Document shall operate as a waiver thereof nor shall any single or\npartial exercise thereof preclude any other or further exercise thereof or the\nexercise of any other right, power or privilege. The rights and remedies herein\nand therein provided shall be cumulative and not exclusive of any rights or\nremedies provided by law.\n\n SECTION 7.03. Expenses; Indemnification. (a) The Guarantor shall pay\n(i) all reasonable out-of-pocket expenses of the Agent, including reasonable\nfees and disbursements of special counsel for the Agent, in connection with the\npreparation and administration of this Agreement, any waiver or consent\nhereunder or any amendment thereof or any default or alleged default hereunder\nand (ii) if an Event of Default (as defined in any Credit Agreement) occurs, all\nreasonable out-of-pocket expenses incurred by the Agent and each Bank, including\nreasonable fees and disbursements of counsel, in connection with such Event of\nDefault and collection, bankruptcy, insolvency and other enforcement proceedings\nin respect of this Agreement resulting therefrom.\n\n (b) The Guarantor agrees to indemnify the Agent and each Bank,\ntheir respective Affiliates and the respective directors, officers, agents and\nemployees of the foregoing (each an \"Indemnitee\") and hold each Indemnitee\nharmless from and against any and all liabilities, losses, damages, costs and\nexpenses, including, without limitation, the reasonable fees and disbursements\nof counsel, which may be incurred by such Indemnitee (whether or not such\nIndemnitee shall be designated a party thereto) arising out of any\ninvestigative, administrative or judicial proceeding (brought or threatened)\nrelating to or arising out of this Agreement, the arrangement, administration,\nperformance or enforcement thereof; provided that no Indemnitee shall have the\nright to be indemnified hereunder for such Indemnitee's own gross negligence or\nwillful misconduct as determined by a court of competent jurisdiction; provided\nfurther that no Indemnitee shall have the right to be indemnified hereunder in\nconnection with any proceedings between it and another Indemnitee which does not\nrelate to the Guarantor.\n\n (c) If any proceeding or claim shall be brought or asserted\nagainst any Indemnitee in respect of which indemnity may be sought pursuant to\nthe preceding subsection, such Indemnitee shall promptly notify the Guarantor.\nThe Guarantor shall not be liable for any costs or expenses in connection with\nany settlement entered into without its consent.\n\n SECTION 7.04. Judicial Proceedings. (a) Consent to Jurisdiction. The\nGuarantor irrevocably submits to the non-exclusive jurisdiction of any federal\nor New York State court sitting in New York City over any suit, action or\nproceeding arising out of or relating to this Agreement. The Guarantor\nirrevocably waives, to the fullest extent permitted by law, any\n\n\n\n\n 30\n\n 35\n\nobjection which it may now or hereafter have to the laying of the venue of any\nsuch suit, action or proceeding brought in such court and any claim that any\nsuit, action or proceeding brought in such court has been brought in an\ninconvenient forum. The Guarantor agrees that a final judgment in any such suit,\naction or proceeding brought in such a court shall be conclusive and binding\nupon it and will be given effect in Bermuda to the fullest extent permitted by\napplicable law and may be enforced in any federal or New York State court\nsitting in New York City (or any other courts to the jurisdiction of which the\nGuarantor is or may be subject) by a suit upon such judgment, provided that\nservice of process is effected upon it in one of the manners specified herein or\nas otherwise permitted by law.\n\n (b) Appointment of Agent for Service of Process. The Guarantor\nhereby irrevocably designates and appoints CT Corporation System having an\noffice on the date hereof at 1633 Broadway, New York, New York 10019 as its\nauthorized agent, to accept and acknowledge on its behalf, service or any and\nall process which may be served in any suit, action or proceeding of the nature\nreferred to in subsection (a) above in any federal or New York State court\nsitting in New York City. The Guarantor represents and warrants that such agent\nhas agreed in writing to accept such appointment and that a true copy of such\ndesignation and acceptance has been delivered to the Agent. Such designation and\nappointment shall be irrevocable until all principal and interest and all other\namounts payable hereunder shall have been paid in full in accordance with the\nprovisions hereof. If such agent shall cease so to act, the Guarantor covenants\nand agrees to designate irrevocably and appoint without delay another such agent\nsatisfactory to the Agent and to deliver promptly to the Agent evidence in\nwriting of such other agent's acceptance of such appointment.\n\n (c) Service of Process. The Guarantor hereby consents to process\nbeing served in any suit, action, or proceeding of the nature referred to in\nsubsection (a) above in any federal or New York State court sitting in New York\nCity by service of process upon the agent of the Guarantor, as the case may be,\nfor service of process in such jurisdiction appointed as provided in subsection\n(b) above; provided that, to the extent lawful and possible, written notice of\nsaid service upon such agent shall be mailed by registered airmail, postage\nprepaid, return receipt requested, to the Guarantor at its address specified on\nthe signature pages hereof or to any other address of which the Guarantor shall\nhave given written notice to the Agent. The Guarantor irrevocably waives, to the\nfullest extent permitted by law, all claim of error by reason of any such\nservice and agrees that such service shall be deemed in every respect effective\nservice of process upon the Guarantor in any such suit, action or proceeding and\nshall, to the fullest extent permitted by law, be taken and held to be valid and\npersonal service upon and personal delivery to the Guarantor.\n\n (d) No Limitation on Service or Suit. Nothing in this Section 7.04\nshall affect the right of the Agent or any Bank to serve process in any other\nmanner permitted by law or limit the right of the Agent or any Bank to bring\nproceeding against the Guarantor in the courts of any jurisdiction or\njurisdictions.\n\n\n\n\n\n 31\n\n 36\n\n\n SECTION 7.05. Judgment Currency. If, under any applicable law and\nwhether pursuant to a judgment being made or registered against the Guarantor or\nfor any other reason, any payment under or in connection with this Agreement, is\nmade or satisfied in a currency (the \"Other Currency\") other than that in which\nthe relevant payment is due (the \"Required Currency\") then, to the extent that\nthe payment (when converted into the Required Currency at the rate of exchange\non the date of payment or, if it is not practicable for the party entitled\nthereto (the \"Payee\") to purchase the Required Currency with the other Currency\non the date of payment, at the rate of exchange as soon thereafter as it is\npracticable for it to do so) actually received by the Payee falls short of the\namount due under the terms of this Agreement, the Guarantor shall, to the extent\npermitted by law, as a separate and independent obligation, indemnify and hold\nharmless the Payee against the amount of such short-fall. For the purpose of\nthis Section, \"rate of exchange\" means the rate at which the Payee is able on\nthe relevant date to purchase the Required Currency with the Other Currency and\nshall take into account any premium and other costs of exchange.\n\n SECTION 7.06. Amendments and Waivers. Any provision of this Agreement\nor the Promissory Notes may be amended or waived if, but only if, such amendment\nor waiver is in writing and is signed by the Guarantor and the Agent with the\nprior written consent of the Required Banks under (and as defined in) each of\nthe Credit Agreements.\n\n SECTION 7.07. Successors and Assigns. The provisions of this Agreement\nshall be binding upon the Guarantor and its successors and shall inure to the\nbenefit of the Agent and the Banks and their respective successors and assigns.\n\n SECTION 7.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND\nCONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.\n\n SECTION 7.09. Counterparts. This Agreement may be signed in any number\nof counterparts, each of which shall be an original, with the same effect as if\nthe signatures thereto and hereto were upon the same instrument.\n\n SECTION 7.10. No Seal. As contemplated by the Bye-Laws of the\nGuarantor, this Agreement shall not be required to be issued under the seal of\nthe Guarantor.\n\n SECTION 7.11. WAIVER OF JURY TRIAL. EACH OF THE GUARANTOR AND THE AGENT\nHEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL\nPROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS\nCONTEMPLATED HEREBY.\n\n\n\n\n\n 32\n\n 37\n\n\n IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be\nduly executed by their respective authorized officers as of the day and year\nfirst above written.\n\n\n\n\n TYCO INTERNATIONAL LTD.\n\n\n\n By: /s/ Mark Swartz\n ---------------------------------------------\n Title: Executive Vice President and Chief\n Financial Officer\n\n Gibbons Building\n 10 Queen Street\n Suite 301\n Hamilton HM11\n Bermuda\n\n\n\n MORGAN GUARANTY TRUST COMPANY OF NEW YORK, \n as Agent\n\n\n By: /s/ Sovonna L. Day\n --------------------------------------------- \n Title: Vice President\n\n\n 60 Wall Street\n New York, New York 10260-0060\n Attention: SoVonna L. Day\n Telex number: 177615\n Facsimile number: 212-648-5018\n\n\n\n\n\n\n\n\n 38\n\n\n EXHIBIT A\n\n SUBSIDIARY GUARANTEE\n\n Dated as of ____________\n\n\n WHEREAS, Tyco International Group S.A., a Luxembourg company, has\nentered into a 364-Day Credit Agreement dated as of February 12, 1999 and an\nExtendible 364-Day Credit Agreement dated as of February 13, 1998 (collectively,\nas the same may be amended from time to time, the \"Credit Agreements\") each\namong the Borrower, the banks listed on the signature pages thereof, and Morgan\nGuaranty Trust Company of New York, as Agent, pursuant to which the Borrower is\nor may be entitled, subject to certain conditions, to borrow up to\n$4,500,000,000;\n\n WHEREAS, in conjunction with the transactions contemplated by the\nCredit Agreements and in consideration of the financial and other support that\nthe Borrower has provided, and such financial and other support as the Borrower\nmay in the future provide, to the undersigned (together with its successors, the\n\"Guarantor\") and in order to induce the Banks and the Agent to enter into the\nCredit Agreements and to make Loans thereunder, the Guarantor is willing to\nguarantee the obligations of the Borrower under the Credit Agreements and the\nPromissory Notes issued thereunder;\n\n NOW, THEREFORE, in consideration of the premises and other good and\nvaluable consideration, the receipt and sufficiency of which are hereby\nacknowledged, the Guarantor hereby agrees as follows:\n\n\n\n ARTICLE 1\n DEFINITIONS\n\n SECTION 1.01. Definitions. Terms defined in the Credit Agreements and\nnot otherwise defined herein are used herein as therein defined (e.g., a \"Loan\"\nis a Loan made pursuant to either Credit Agreement and a \"Promissory Note\" is a\nPromissory Note issued pursuant to either Credit Agreement). In addition the\nfollowing terms, as used herein, have the following meanings:\n\n \"Guaranteed Obligations\" means (i) all obligations of the Borrower in\nrespect of principal of and interest on the Loans and the Promissory Notes, (ii)\nall other amounts payable by the Borrower under either Credit Agreement or any\nPromissory Note and (iii) all renewals or extensions of the foregoing, in each\ncase whether now outstanding or hereafter arising. The Guaranteed Obligations\nshall include, without limitation, any interest, costs, fees and expenses which\naccrue on or with respect to any of the foregoing and are payable by the\nBorrower pursuant\n\n\n\n\n\n Exh. A-1\n\n\n 39\n\nto either Credit Agreement or any Promissory Note, whether before or after the\ncommencement of any case, proceeding or other action relating to the bankruptcy,\ninsolvency or reorganization of any one or more than one of the Obligors, and\nany such interest, costs, fees and expenses that would have accrued thereon or\nwith respect thereto and would have been payable by the Borrower pursuant to\nsuch Credit Agreement or Promissory Note but for the commencement of such case,\nproceeding or other action.\n\n\n\n ARTICLE 2\n GUARANTEE\n\n SECTION 2.01. The Guarantees. Subject to Section 2.03, the Guarantor\nhereby unconditionally and irrevocably guarantees to the Banks and the Agent and\nto each of them, the due and punctual payment of all Guaranteed Obligations as\nand when the same shall become due and payable, whether at maturity, by\ndeclaration or otherwise, according to the terms thereof. This is a guarantee of\npayment and not merely of collection. In case of failure by the Borrower\npunctually to pay the indebtedness guaranteed hereby, the Guarantor, subject to\nSection 2.03, hereby unconditionally agrees to cause such payment to be made\npunctually as and when the same shall become due and payable, whether at\nmaturity or by declaration or otherwise, and as if such payment were made by the\nBorrower.\n\n SECTION 2.02. Guarantee unconditional. The obligations of the Guarantor\nunder this Article 2 shall be unconditional and absolute and, without limiting\nthe generality of the foregoing, shall not be released, discharged or otherwise\naffected by:\n\n (a) any extension, renewal, settlement, compromise, waiver or\nrelease in respect of any obligation of any other Obligor under any Financing\nDocument, by operation of law or otherwise;\n\n (b) any modification or amendment of or supplement to any\nFinancing Document (other than as specified in an amendment or waiver of this\nSubsidiary Guarantee effected in accordance with Section 2.03);\n\n (c) any modification, amendment, waiver, release, non-perfection\nor invalidity of any direct or indirect security, or of any guaranty or other\nliability of any third party, for any obligation of any other Obligor under any\nFinancing Document;\n\n (d) any change in the corporate existence, structure or ownership\nof any other Obligor, or any insolvency, bankruptcy, reorganization or other\nsimilar proceeding affecting any other Obligor or its assets or any resulting\nrelease or discharge of any obligation of any other Obligor contained in any\nFinancing Document;\n\n\n\n\n\n Exh. A-2\n 40\n\n (e) the existence of any claim, set-off or other rights which the\nGuarantor may have at any time against any other Obligor, the Agent, any Bank or\nany other Person, whether or not arising in connection with the Financing\nDocuments; provided that nothing herein shall prevent the assertion of any such\nclaim by separate suit or compulsory counterclaim;\n\n (f) any invalidity or unenforceability relating to or against any\nother Obligor for any reason of any Financing Document, or any provision of\napplicable law or regulation purporting to prohibit the payment by any other\nObligor of the principal of or interest on any Promissory Note or any other\namount payable by any other Obligor under any Financing Document; or\n\n (g) any other act or omission to act or delay of any kind by any\nother Obligor, the Agent, any Bank or any other Person or any other circumstance\nwhatsoever that might, but for the provisions of this paragraph, constitute a\nlegal or equitable discharge of the obligations of the Guarantor under this\nArticle 2.\n\n SECTION 2.03. Limit of Liability. The Guarantor shall be liable under\nthis Subsidiary Guarantee only for amounts aggregating up to the largest amount\nthat would not render its obligations hereunder subject to avoidance under\nSection 548 of the United States Bankruptcy Code or any comparable provisions of\nany other applicable law.\n\n SECTION 2.04. Discharge; Reinstatement in Certain Circumstances.\nSubject to Section 4.06, the Guarantor's obligations under this Article 2 shall\nremain in full force and effect until the Commitments are terminated and the\nprincipal of and interest on the Promissory Notes and all other amounts payable\nby the Borrower under the Financing Documents shall have been paid in full. If\nat any time any payment of the principal of or interest on any Promissory Note\nor any other amount payable by the Borrower under any Financing Document is\nrescinded or must be otherwise restored or returned upon the insolvency,\nbankruptcy or reorganization of any other Obligor or otherwise, the Guarantor's\nobligations under this Article 2 with respect to such payment shall be\nreinstated at such time as though such payment had become due but had not been\nmade at such time.\n\n SECTION 2.05. Waiver. The Guarantor irrevocably waives acceptance\nhereof, presentment, demand, protest and any notice not provided for herein, as\nwell as any requirement that at any time any action be taken by any Person\nagainst any other Obligor or any other Person.\n\n SECTION 2.06. Subrogation and Contribution. (a) The Guarantor\nirrevocably waives any and all rights to which it may be entitled, by operation\nof law or otherwise, upon making any payment hereunder (i) to be subrogated to\nthe rights of the payee against the Borrower with respect to such payment or\notherwise to be reimbursed, indemnified or exonerated by any other Obligor in\nrespect thereof or (ii) to receive any payment, in the nature of contribution or\nfor any other reason, from any other Obligor with respect to such payment\n\n\n\n\n Exh. A-3\n 41\n\n (b) Notwithstanding the provision of subsection (a) of this\nSection 2.06, the Guarantor shall have and be entitled to (i) all rights of\nsubrogation or contribution otherwise provided by law in respect of any payment\nit may make or be obligated to make under this Subsidiary Guarantee and (ii) all\nclaims (as defined under Chapter 11 of Title 11 of the United States Code, as\namended, or any successor statute (the \"Bankruptcy Code\")) it would have against\nthe Borrower or any other Guarantor (each an \"Other Party\") in the absence of\nsubsection (a) of this Section 2.06 and to assert and enforce the same, in each\ncase on and after, but at no time prior to, the date (the \"Subrogation Trigger\nDate\") which is one year and five days after the Termination Date if, but only\nif, (x) no Default or Event of Default of the type described in Section 5.01(g)\nof the Parent Guarantee with respect to the relevant Other Party has existed at\nany time on and after the date of this Subsidiary Guarantee to and including the\nSubrogation Trigger Date and (y) the existence of such Guarantor's rights under\nthis clause (b) would not make such Guarantor a creditor (as defined in the\nBankruptcy Code) of such Other Party in any insolvency, bankruptcy,\nreorganization or similar proceeding commenced on or prior to the Subrogation\nTrigger Date.\n\n SECTION 2.07. Stay of Acceleration. If acceleration of the time for\npayment of any amount payable by the Borrower under the Financing Documents is\nstayed upon the insolvency, bankruptcy or reorganization of the Borrower, all\nsuch amounts otherwise subject to acceleration under the terms of the Financing\nDocuments shall nonetheless be payable by the Guarantor hereunder forthwith on\ndemand by the Agent made at the request of the Required Banks.\n\n\n\n ARTICLE 3\n REPRESENTATIONS AND WARRANTIES\n\n\n The Guarantor represents and warrants to the Agent and the Banks that:\n\n SECTION 3.01. Corporate Existence and Power. The Guarantor is a\ncorporation duly incorporated, validly existing and in good standing under the\nlaws of ___________.\n\n SECTION 3.02. Corporate and Governmental Authorization; No\nContravention. The execution, delivery and performance by the Guarantor of this\nSubsidiary Guarantee:\n\n (a) are within the Guarantor's corporate powers;\n\n (b) have been duly authorized by all necessary corporate action on\nthe part of the Guarantor;\n\n (c) require no action by or in respect of, or filing with, any\ngovernmental body, agency or official, in each case, on the part of the\nGuarantor; and\n\n\n\n\n\n Exh. A-4\n 42\n\n\n (d) do not contravene, or constitute a default by the Guarantor\nunder, any provision of (i) applicable law or regulation, (ii) the certificate\nof incorporation or by-laws of the Guarantor, or (iii) any agreement or\ninstrument evidencing or governing Debt of the Guarantor or any other material\nagreement, judgment, injunction, order, decree or other instrument binding upon\nthe Guarantor.\n\n SECTION 3.03. Binding Effect. This Subsidiary Guarantee constitutes a\nvalid and binding obligation of the Guarantor.\n\n SECTION 3.04. Not an Investment Company. The Guarantor is not an\n\"investment company\" within the meaning of the Investment Company Act of 1940,\nas amended.\n\n\n\n ARTICLE 4\n MISCELLANEOUS\n\n SECTION 4.01. Notices. All notices, requests and other communications\nto be made to or by the Guarantor hereunder shall be in writing (including,\nwithout limitation, bank wire, telex, facsimile transmission or similar writing)\nand shall be given: (a) if to the Guarantor, to it at its address or facsimile\nnumber set forth on the signature pages hereof or such other address or\nfacsimile number as the Guarantor may hereafter specify for the purpose by\nnotice to the Agent and (b) if to any party to either Credit Agreement, to it at\nits address or telex or facsimile number for notices specified in or pursuant to\nsuch Credit Agreement. Each such notice, request or other communication shall be\neffective (i) if given by telex, when such telex is transmitted to the telex\nnumber specified in this Section 4.01 and the appropriate answerback is\nreceived, (ii) if given by facsimile, when such facsimile is transmitted to the\nfacsimile transmission number specified in this Section 4.01 and electronic,\ntelephonic or other appropriate confirmation of receipt thereof is received by\nthe sender, (iii) if given by mail, 72 hours after such communication is\ndeposited in the mails with first class postage prepaid, addressed as aforesaid\nor (iv) if given by any other means, when delivered at the address specified in\nthis Section 4.01.\n\n SECTION 4.02. No Waiver. No failure or delay by the Agent or any Bank\nin exercising any right, power or privilege under this Subsidiary Guarantee or\nany other Financing Document shall operate as a waiver thereof nor shall any\nsingle or partial exercise thereof preclude any other or further exercise\nthereof or the exercise of any other right, power or privilege. The rights and\nremedies herein and therein provided shall be cumulative and not exclusive of\nany rights or remedies provided by law.\n\n SECTION 4.03. Amendments and Waivers. Any provision of this Subsidiary\nGuarantee may be amended or waived if, and only if, such amendment or waiver is\nin writing and is signed by the Guarantor and the Agent with the prior written\nconsent of the Required Banks under the Credit Agreements.\n\n\n\n\n Exh. A-5\n\n 43\n SECTION 4.04. Successors and Assigns. This Subsidiary Guarantee is for\nthe benefit of the Banks and the Agent and their respective successors and\nassigns and in the event of an assignment of the Loans, the Promissory Notes or\nother amounts payable under the Financing Documents, the rights hereunder, to\nthe extent applicable to the indebtedness so assigned, shall be transferred with\nsuch indebtedness. All the provisions of this Subsidiary Guarantee shall be\nbinding upon the Guarantor and its successors and assigns.\n\n SECTION 4.05. Taxes. All payments by the Guarantor hereunder shall be\nmade free and clear of Taxes in accordance with Section 8.04 of the Credit\nAgreements. If the Guarantor is organized under the laws of, or has its\nprincipal place of business in, a jurisdiction outside the United States, this\nSection 4.05 shall be modified in a manner satisfactory to the Agent and the\nGuarantor to indemnify for any foreign taxes which may be applicable.\n\n SECTION 4.06. Effectiveness; Termination. (a) This Subsidiary Guarantee\nshall become effective when the Agent shall have received a counterpart hereof\nsigned by the Guarantor.\n\n (b) The Guarantor may at any time elect to terminate this\nSubsidiary Guarantee and its obligations hereunder, provided that, after giving\neffect thereto, no Default shall have occurred and be continuing; and provided\nfurther that this Subsidiary Guarantee may not be so terminated in respect of\nany Guarantor which is at the time a guarantor of TycoLux Debt Securities under\nthe Indenture. If the Guarantor so elects to terminate this Subsidiary\nGuarantee, it shall give the Agent notice to such effect, which notice shall be\naccompanied by a certificate of a Responsible Officer to the effect that, after\ngiving effect to such termination, no Default shall have occurred and be\ncontinuing. The Agent may if it so elects conclusively rely on such certificate.\nUpon receipt of such notice and such certificate, unless the Agent determines\nthat a Default shall have occurred and be continuing, the Agent shall promptly\ndeliver to the Guarantor the counterpart of this Subsidiary Guarantee delivered\nto the Agent pursuant to Section 4.06(a), and upon such delivery this Subsidiary\nGuarantee shall terminate and the Guarantor shall have no further obligations\nhereunder.\n\n SECTION 4.07. GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS\nSUBSIDIARY GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE\nLAWS OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE\nJURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF\nNEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES\nOF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS SUBSIDIARY GUARANTEE\nOR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO\nTHE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER\nHAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT\nAND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT\nIN AN INCONVENIENT FORUM.\n\n\n\n Exh. A-6\n\n 44\n (b) If the Guarantor is not organized under the laws of the United\nStates of America or a State thereof:\n\n (i) Appointment of Agent for Service of Process. The\n Guarantor hereby irrevocably designates and appoints CT Corporation\n System having an office on the date hereof at 1633 Broadway, New York,\n New York 10019 as its authorized agent, to accept and acknowledge on\n its behalf, service or any and all process which may be served in any\n suit, action or proceeding of the nature referred to in subsection (a)\n above in any federal or New York State court sitting in New York City.\n The Guarantor represents and warrants that such agent has agreed in\n writing to accept such appointment and that a true copy of such\n designation and acceptance has been delivered to the Agent. Such\n designation and appointment shall be irrevocable until all principal\n and interest and all other amounts payable hereunder shall have been\n paid in full in accordance with the provisions hereof. If such agent\n shall cease so to act, the Guarantor covenants and agrees to designate\n irrevocably and appoint without delay another such agent satisfactory\n to the Agent and to deliver promptly to the Agent evidence in writing\n of such other agent's acceptance of such appointment.\n\n (ii) Service of Process. The Guarantor hereby consents to\n process being served in any suit, action, or proceeding of the nature\n referred to in subsection (a) above in any federal or New York State\n court sitting in New York City by service of process upon the agent of\n the Guarantor, as the case may be, for service of process in such\n jurisdiction appointed as provided in subsection (b)(i) above; provided\n that, to the extent lawful and possible, written notice of said service\n upon such agent shall be mailed by registered airmail, postage prepaid,\n return receipt requested, to the Guarantor at its address specified on\n the signature pages hereof or to any other address of which the\n Guarantor shall have given written notice to the Agent. The Guarantor\n irrevocably waives, to the fullest extent permitted by law, all claim\n of error by reason of any such service and agrees that such service\n shall be deemed in every respect effective service of process upon the\n Guarantor in any such suit, action or proceeding and shall, to the\n fullest extent permitted by law, be taken and held to be valid and\n personal service upon and personal delivery to the Guarantor.\n\n (iii) No Limitation on Service or Suit. Nothing in this\n Section 4.07 shall affect the right of the Agent or any Bank to serve\n process in any other manner permitted by law or limit the right of the\n Agent or any Bank to bring proceeding against the Guarantor in the\n courts of any jurisdiction or jurisdictions.\n\n SECTION 4.08. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY\nWAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF\nOR RELATING TO THIS SUBSIDIARY GUARANTEE OR THE TRANSACTIONS CONTEMPLATED\nHEREBY.\n\n\n\n Exh. A-7\n\n 45\n SECTION 4.09. Judgment Currency. If, under any applicable law and\nwhether pursuant to a judgment being made or registered against the Guarantor or\nfor any other reason, any payment under or in connection with this Subsidiary\nGuarantee, is made or satisfied in a currency (the \"Other Currency\") other than\nthat in which the relevant payment is due (the \"Required Currency\") then, to the\nextent that the payment (when converted into the Required Currency at the rate\nof exchange on the date of payment or, if it is not practicable for the party\nentitled thereto (the \"Payee\") to purchase the Required Currency with the other\nCurrency on the date of payment, at the rate of exchange as soon thereafter as\nit is practicable for it to do so) actually received by the Payee falls short of\nthe amount due under the terms of this Subsidiary Guarantee, the Guarantor\nshall, to the extent permitted by law, as a separate and independent obligation,\nindemnify and hold harmless the Payee against the amount of such short-fall. For\nthe purpose of this Section, \"rate of exchange\" means the rate at which the\nPayee is able on the relevant date to purchase the Required Currency with the\nOther Currency and shall take into account any premium and other costs of\nexchange.\n\n\n\n\n\n Exh. A-8\n\n\n 46\n\n\n IN WITNESS WHEREOF, the Guarantor has caused this instrument to be duly\nexecuted by its authorized officer as of the date first above written.\n\n\n\n\n [GUARANTOR]\n\n\n By \n --------------------------------\n Title:\n [Address]\n Facsimile Number:\n\n\n\n\n\n\n Exh. A-9\n\n\n 47\n\n\n\n EXHIBIT B\n\n\n\n\n [Form of Opinion of Counsel for the Subsidiary Guarantor]\n\n\n\n\n\n\nTo the Banks and the Agent\nNamed on the Attached Distribution List\nc/o Morgan Guaranty Trust Company\nof New York, as Agent\n60 Wall Street\nNew York, New York 10260\n\n\n\nLadies and Gentlemen:\n\n I am the [Associate] General Counsel of Tyco International Group S.A.,\na Luxembourg company (the \"Borrower\"), and have acted as counsel for [name of\nSubsidiary Guarantor] (the \"Guarantor\"), and am rendering this opinion in\nconnection with that certain Subsidiary Guarantee (the \"Subsidiary Guarantee\"),\ndated as of __________, entered into by the Guarantor, pursuant to that certain\n364-Day Credit Agreement dated as February 12, 1999 and that certain Extendible\n364-Day Credit Agreement dated as of February 13, 1998 (collectively, the\n\"Credit Agreements\"), each among the Borrower, the banks listed on the signature\npages thereof (the \"Banks\") and Morgan Guaranty Trust Company of New York, as\nAgent. Each term defined in the Subsidiary Guarantee and used herein, but not\notherwise defined herein, has the meaning ascribed thereto in the Subsidiary\nGuarantee. This opinion is being delivered to you pursuant to the Credit\nAgreements.\n\n In connection with the opinion set forth herein, I have reviewed the\nCredit Agreements, the Promissory Notes and the Subsidiary Guarantee and have\nexamined originals or copies, certified or otherwise identified to my\nsatisfaction, of (i) the [Certificate of Incorporation] and By-laws of the\nGuarantor, each as in effect on the date hereof and (ii) such other documents,\nrecords, certificates and instruments as I have deemed relevant and necessary as\na basis for the opinion hereinafter expressed.\n\n In my examination, I have assumed the genuineness of all signatures on\noriginal documents, the authenticity of all documents submitted to me as\noriginals, the conformity to the originals of all copies submitted to be as\ncertified, conformed or photostatic copies, and the authenticity of the\noriginals of such copies. As to various questions of fact material to this\nopinion, I have relied, without independent investigation or verification, upon\nstatements,\n\n\n\n\n\n Exh. B-1\n\n\n 48\n\n\nrepresentations and certificates of officers and other representatives of the\nGuarantor and certificates of public officials.\n\n Based upon the foregoing, and subject to the qualifications and\nassumptions set forth herein, it is my opinion that:\n\n (1) The Guarantor is a corporation duly incorporated, validly\nexisting and in good standing under the laws of _________________.\n\n (2) The execution, delivery and performance by the Guarantor of\nthe Subsidiary Guarantee (a) are within the Guarantor's corporate powers; (b)\nhave been duly authorized by all necessary corporate action on the part of the\nGuarantor; (c) require no action by or in respect of, or filing on the part of\nthe Guarantor with, any governmental body, agency or official, in each case, on\nthe part of the Guarantor; and (d) do not contravene, or constitute a default by\nthe Guarantor under, any provision of (i) applicable law or regulation, (ii) the\ncertificate of incorporation or by-laws of the Guarantor or, (iii) any agreement\nor instrument evidencing or governing Debt of the Guarantor, or any other\nmaterial agreement, judgment, injunction, order, decree or other instrument\nbinding upon the Guarantor.\n\n (3) The Subsidiary Guarantee constitutes a valid and binding\nobligation of the Guarantor.\n\n (4) The Guarantor is not an \"investment company\" within the\nmeaning of the Investment Company Act of 1940, as amended.\n\n The opinion set forth herein is subject to the following qualifications\nand limitations:\n\n (a) The enforceability of the Subsidiary Guarantee may be subject\nto or limited by bankruptcy, insolvency, reorganization, arrangement,\nmoratorium, fraudulent conveyance or transfer or other similar laws and court\ndecisions, now or hereafter in effect, relating to or affecting the rights of\ncreditors generally.\n\n (b) The enforceability of the Subsidiary Guarantee is or will be\nsubject to the application of and may be limited by general principles of equity\nincluding, without limitation, concepts of materiality, reasonableness, good\nfaith and fair dealing (regardless of whether considered in a proceeding in\nequity or at law). Such principles of equity are of general application, and in\napplying such principles a court, among other things, might not allow a creditor\nto accelerate maturity of a debt under certain circumstances including, without\nlimitation, upon the occurrence of a default deemed immaterial, or might decline\nto order the Guarantor to perform covenants. Such principles as applied by a\ncourt might include a requirement that a creditor act with reasonableness and in\ngood faith. Thus, I express no opinion as to the validity or enforceability of\n(i) provisions restricting access to legal or equitable remedies, such as the\nspecific performance of executory covenants, (ii) provisions that purport to\n\n\n\n\n\n\n Exh. B-2\n\n\n 49\n\n\nestablish evidentiary standards, (iii) provisions relating to waivers,\nseverability, set-off, or delay or omission of enforcement of rights or\nremedies, and (iv) provisions purporting to convey rights to persons other than\nparties to the Subsidiary Guarantee.\n\n (c) The remedy of specific performance and injunctive and other\nforms of equitable relief are subject to equitable defenses and to the\ndiscretion of the court before which any proceeding therefor may be brought.\n\n (d) I have not been requested to render, and with your permission\nI do not express, any opinion as to the applicability to any provisions of the\nSubsidiary Guarantee, of Section 548 of the Federal Bankruptcy Code, Article 10\nof the New York Debtor & Creditor Law, or any other fraudulent conveyance,\ninsolvency or transfer laws or any court decisions with respect to any of the\nforegoing.\n\n I call your attention to the fact that I am admitted to practice law\nonly in the State of New York and the Commonwealth of Massachusetts, and, in\nrendering the foregoing opinion, I do not express any opinion as to any laws\nother than the laws of [the jurisdiction of incorporation of the Guarantor], the\nState of New York, the Commonwealth of Massachusetts and the Federal laws of the\nUnited States of America.\n\n The opinion expressed herein is based upon the laws in effect on the\ndate hereof, and I assume no obligation to revise or supplement this opinion\nshould any such law be changed by legislative action, judicial decision, or\notherwise.\n\n This opinion is being delivered to you solely for your benefit in\nconnection with the Subsidiary Guarantee, and neither this opinion nor any part\nhereof may be delivered to, or used, referred to or relied upon, by any other\nperson or for any other purpose without my express prior written consent, except\nthat any person who is a permitted successor or assign of a Bank in accordance\nwith the provisions of the Credit Agreement may rely upon this opinion as if it\nwere specifically addressed and delivered to such person on the date hereof.\n\n\n\n\n\n Very truly yours,\n\n\n\n\n Exh. B-3\n\n\n 50\n\n\n CROSS-REFERENCE TARGET LIST\n\n NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE\n TARGET PULL-DOWN LIST.\n\n (This list is for the use of the wordprocessor only, is not a part of this\n document and may be discarded.)\n\nARTICLE/SECTION TARGET NAME\n- --------------- -----------\n\n1.01........................................................................defs\n1.01.................................................................definitions\n1.02...........................................................acct.terms.determ\n\n2...................................................................art.guaranty\n2.01..................................................................guarantees\n2.02.....................................................guarantee.unconditional\n2.02(a)...............................................................unc.guar.a\n2.02(b)...............................................................unc.guar.b\n2.02(c)...............................................................unc.guar.c\n2.02(d)...............................................................unc.guar.d\n2.02(e)...............................................................unc.guar.e\n2.02(f)...............................................................unc.guar.f\n2.02(g)...............................................................unc.guar.g\n2.03.............................................................limit.liability\n2.06...............................................................stay.of.accel\n2.06..............................................................subrog.contrib\n2.06(b).......................................................subrog.contribut.b\n\n3.01..............................................................corp.existence\n3.02...........................................................corp.gov.authoriz\n3.03..............................................................binding.effect\n3.04.................................................................finan.infor\n3.04(a).............................................................cons.bal.adt\n3.05..................................................................litigation\n3.07..............................................................envirn.matters\n3.08.......................................................................taxes\n3.09................................................................subsidiaries\n3.10................................................................nt.invest.co\n3.11..................................................................full.discl\n\n4.01.................................................................information\n4.01................................................................misc.notices\n4.01(a).................................................................inform.a\n4.01(b).................................................................inform.b\n4.01(c).................................................................inform.c\n4.02...............................................................payment.oblig\n4.03............................................................maint.prop.insur\n4.03(a)............................................maint.prop.insur.wrking.order\n4.03(b)...................................................maint.prop.reput.insur\n4.04.....................................................conduct.bus.maint.exist\n4.04(a)............................................conduct.bus.maint.engage.same\n4.04(c).....................................................conduct.bus.preserve\n4.05...................................................................misc.txes\n4.05.............................................................compliance.laws\n4.05(a)................................................compliance.non.compliance\n4.05(b).....................................................compliance.necessity\n4.06....................................................................eff.term\n4.06............................................................inspect.property\n4.06(a)................................................................eff.terma\n4.06(a)..........................................inspect.prop.keep.proper.record\n4.06(b)...................................................inspect.permit.inspect\n4.06(c)...........................................................inspect.confid\n4.06(c)(iv)(C)................................................inspect.property.C\n4.07................................................limit.restrict.sub.dividends\n4.08........................................................................debt\n4.09.......................................................fixed.charge.coverage\n4.10..................................................................neg.pledge\n4.10(b).........................................................lien.exist.asset\n4.10(e)...................................................lien.exist.time.of.acq\n4.11.................................................consol.mergers.sales.assets\n4.12...........................................................trans.with.affils\n4.13...........................................................restrict.payments\n4.14.............................................................subs.guarantors\n\n5.01..............................................................events.default\n5.01(a)...............................................event.default.fail.observe\n5.01(b)..............................................event.default.fail.remedied\n5.01(c).........................................................event.def.10days\n5.01(d)........................................................event.def.writing\n5.01(e)...................................................event.def.pay.mat.debt\n5.01(f).....................................................event.def.accelerate\n5.01(i)........................................................event.def.ben.own\n5.01(j).......................................................event.def.fail.pay\n5.01(k)..........................................................event.def.erisa\n5.02..............................................................notice.default\n\n6......................................................................art.taxes\n\n7.01.....................................................................notices\n7.02..................................................................no.waivers\n7.03..................................................................exp. indem\n7.03(b)............................................................bor.agr.indem\n7.03(c)...........................................................exp.agent.bank\n7.04................................................................jud.proceeds\n7.06..............................................................amend.and.waiv\n7.09................................................................counterparts\n7.11................................................................waiver.trial\n\n\n\n\n\n\n\n\n Exh. B-1\n\n\n \n \n\nEX-27\n4\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":196,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"KLAC"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/319201/0000891618-99-000414.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n QXlOcIiDR/tFGJwLLnq4kzUqmFLPgWwWpso4mVaoSTqngz0yEmBdAe6TXiT9dLw/\n cu3kaGQCBixPIwi4suWUSg==\n\n0000891618-99-000414.txt : 19990211\n0000891618-99-000414.hdr.sgml : 19990211\nACCESSION NUMBER:\t\t0000891618-99-000414\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t2\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990210\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tKLA TENCOR CORP\n\t\tCENTRAL INDEX KEY:\t\t\t0000319201\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tOPTICAL INSTRUMENTS & LENSES [3827]\n\t\tIRS NUMBER:\t\t\t\t042564110\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0630\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t000-09992\n\t\tFILM NUMBER:\t\t99527543\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t160 RIO ROBLES\n\t\tCITY:\t\t\tSAN JOSE\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t95134\n\t\tBUSINESS PHONE:\t\t4084344200\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t160 RIO ROBLES\n\t\tCITY:\t\t\tSAN JOSE\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t95161-9055\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tKLA INSTRUMENTS CORP\n\t\tDATE OF NAME CHANGE:\t19920703\n \n\n10-Q\n1\nFORM 10-Q FOR PERIOD ENDED 12/31/98\n\n\n 1\n\n\n\n UNITED STATES\n SECURITIES AND EXCHANGE COMMISSION\n WASHINGTON, D.C. 20549\n\n FORM 10-Q\n(Mark One)\n[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE\n ACT OF 1934\n\nFor the quarterly period ended: December 31, 1998\n\n OR\n\n[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES \n EXCHANGE ACT OF 1934\n\nFor the transition period from to \n\nCommission File Number 0-9992\n\n KLA-TENCOR CORPORATION\n (Exact name of registrant as specified in its charter)\n\n DELAWARE 04-2564110\n- ---------------------------------- ----------------------------\n(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER\n CORPORATION OR ORGANIZATION) IDENTIFICATION NO.)\n\n\n 160 Rio Robles\n San Jose, California\n 95134\n (Address of principal executive offices)\n (Zip Code)\n\n (408) 875-3000\n (Registrant's telephone number, including area code)\n\n\n\n Indicate by check mark whether the registrant (1) has filed all reports\nrequired to be filed by Section 13 or 15(d) of the Securities Act of 1934 during\nthe preceding 12 months (or for such shorter period that the registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days.\n\n Yes [X] No [ ]\n\n\n\n As of January 29, 1999 there were 87,813,056 shares of the registrant's\nCommon Stock, $0.001 par value, outstanding.\n\n\n\n 2\n\n INDEX\n\n\n
\n\n\n\n 2\n 3\n\nPART I. FINANCIAL INFORMATION\nITEM 1. FINANCIAL STATEMENTS\n\n KLA-TENCOR CORPORATION\n CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS\n (In thousands)\n\n\n
\n\n\n\nSee accompanying notes to unaudited condensed consolidated interim financial\nstatements.\n\n\n\n 3\n 4\n\n KLA-TENCOR CORPORATION\n CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS\n (In thousands, except per share data)\n\n\n\n\n
\n\n\n\nSee accompanying notes to unaudited condensed consolidated interim financial\nstatements. \n\n\n\n 4\n 5\n\n KLA-TENCOR CORPORATION\n CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOW\n (In thousands)\n\n\n
\n\n\n\nSee accompanying notes to unaudited condensed consolidated interim financial\nstatements.\n\n\n\n 5\n 6\n\n KLA-TENCOR CORPORATION\n NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM\n FINANCIAL STATEMENTS\n\n\nNOTE 1. In the opinion of the management of KLA-Tencor Corporation (the\nCompany), the unaudited condensed consolidated interim financial statements\ninclude only those normal recurring adjustments necessary for a fair statement\nof results. The results for the three month period ended December 31, 1998 are\nnot necessarily indicative of results to be expected for the entire year. This\nfinancial information should be read in conjunction with the Company's Annual\nReport on Form 10-K for the year ended June 30, 1998.\n\nThe preparation of financial statements in conformity with generally accepted\naccounting principles requires management to make estimates and assumptions that\naffect amounts reported in the financial statements and accompanying notes.\nActual amounts could differ materially from those amounts.\n\nNOTE 2. Inventories (in thousands):\n\n
\n\n\nNOTE 3. In August 1997, the Company adopted a plan to repurchase shares of its\nown Common Stock on the open market the purpose of which is to partially offset\ndilution created by employee stock options and stock purchase plans. During the\nsix month period ended December 31, 1998, the Company repurchased 542,000 shares\nof its Common Stock at a cost of $20.6 million.\n\nNOTE 4. As of July 1, 1998, the Company adopted Statement of Financial\nAccounting Standards (\"SFAS\") No. 130, \"Reporting Comprehensive Income\" which\nestablishes the requirements for reporting and presentation of comprehensive\nincome and its components. SFAS No. 130 requires accumulated translation\nadjustments and net unrealized gains/losses on investments to be included in\nother comprehensive income. The adoption of SFAS No. 130 did not impact the\nCompany's net income (loss) or total stockholders' equity. For the three month\nand six month period ended December 31, 1997 and 1998, the components of total\ncomprehensive income (loss) are as follows:\n\n\n
\n\n\n\n 6\n 7\n\nNOTE 5. Basic net income (loss) per share, is calculated using the weighted\naverage number of shares of common stock outstanding during the period. Diluted\nearnings per share is computed in the same manner and additionally gives effect\nto all dilutive potential common shares outstanding during the period. Diluted\nnet loss per share is calculated using the weighted average number of shares of\ncommon stock outstanding during the period; the options outstanding during the\nthree and six month periods ended December 31, 1998 were excluded from the\ncomputation of diluted net loss per share because the effect in periods with a\nnet loss would be antidilutive. The reconciling difference between the\ncomputation of basic and diluted earnings per share for the three and six month\nperiod ended December 31, 1997, is the inclusion of the dilutive effect of stock\noptions issued to employees under employee stock option plans.\n\nNOTE 6. In November 1998, the Company entered into a restructuring plan to\naddress the downturn in the semiconductor industry. The total restructuring\ncharge was $35 million or $0.26 cents per share for the three months ended\nDecember 31, 1998. The plan includes consolidation of facilities, a write-down\nof assets associated with affected programs and reductions in the Company's\nglobal workforce. Restructuring and related charges were as follows for the\nperiod ended December 31, 1998 (in thousands):\n\n\n
\n\nNOTE 7. During the second quarter of fiscal 1999 the Company acquired certain\nassets and intellectual property in separate transactions with Keithley\nInstruments, Inc. and Uniphase Corporation. These acquisitions were accounted\nfor using the purchase method of accounting. The aggregate purchase price of\napproximately $13 million was allocated to the acquired assets, liabilities\nassumed, intangible assets and goodwill and resulted in a pre-tax charge of\napproximately $7.7 million for acquired in-process research and development.\n\nNOTE 8. In June 1997, the Financial Accounting Standards Board issued Statement\nNo. 131, \"Disclosures about Segments of an Enterprise and Related Information.\"\nThis Statement establishes standards for public business enterprises to report\ninformation about operating segments in annual financial statements and requires\nthose enterprises to report selected information about operating segments and\nrelated disclosures about products and services, geographic areas, and major\ncustomers. This Statement is required to be adopted in the Company's annual\nfinancial statements for fiscal year ending June 30, 1999. The effect of SFAS\nNo. 131 is not expected to be material to the Company's financial statement\ndisclosure.\n\nIn June 1998, the Financial Accounting Standards Board issued Statement No. 133,\n\"Accounting for Derivative Instruments and Hedging Activities\" (SFAS 133). It\nestablishes accounting and reporting standards for derivative instruments\nincluding standalone instruments, such as forward currency exchange contracts\nand interest note swaps or embedded derivatives and requires that these\ninstruments be marked-to-market on an ongoing basis. These market value\nadjustments are to be included either in the income statement or stockholders'\nequity, depending on the nature of the transaction. The Company is required to\nadopt SFAS 133 in the first quarter of its fiscal year ending June 30, 2000. The\neffect of SFAS No. 133 is not expected to be material to the Company's financial\nstatements.\n\n\n\n 7\n 8\n\n\nITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS\nOF OPERATIONS.\n\nThe following discussion and analysis may contain forward-looking statements\nthat reflect the Company's current judgment regarding the matters addressed by\nsuch statements. Because such statements apply to future events, they are\nsubject to risks and uncertainties that could cause actual results to differ.\nImportant factors that could cause actual results to differ are described in the\nfollowing discussion and under \"Risk Factors\" below.\n\nRESULTS OF OPERATIONS\nRevenues were $193 million and $399 million for the three and six month periods\nended December 31, 1998, compared to $326 million and $639 million for the same\nperiods of the prior fiscal year, representing a decrease of 41% and 38% for the\nrespective periods. The decrease in revenues is primarily attributable to\nreductions in capital spending by major semiconductor manufacturers worldwide\ndue in part to excess manufacturing capacity resulting from smaller dimensions,\nreduced demand from Asian markets and continued price competition in response to\noversupply in the DRAM market.\n\nIn response to the current market conditions, the Company implemented a\nrestructuring plan during its second fiscal quarter which resulted in a one-time\ncharge of $35 million. The charge consisted primarily of costs associated with\nthe consolidation of facilities, a write-down of assets associated with affected\nprograms and employee severance and related benefits associated with a reduction\nin force completed during the quarter.\n\nGross margins were 46% and 45% of revenues for the three and six month periods\nended December 31, 1998, compared to 54% of revenues for the same periods in the\nprior fiscal year. Gross margins declined year over year primarily due to\nreduced capacity utilization resulting from lower business volume. Additionally,\nmargins were impacted by a shift in product mix away from higher margin product\nsales in the wafer inspection products and an increase in the percentage of\nsales in the lower margin service business.\n\nEngineering, research and development (R&D) expenses were $38 million and $81\nmillion for the three and six month periods ended December 31, 1998 compared to\n$47 million and $92 million for the same periods in the prior fiscal year. As a\npercentage of revenues, R&D expenses increased to 20% for the three and six\nmonth periods ended December 31, 1998 compared to 14% for the same periods in\nthe prior fiscal year. The decrease in absolute dollars is primarily\nattributable to the cost reduction measures and the restructuring actions the\nCompany has executed as result of the current semiconductor industry downturn.\n\nSelling, general and administrative (SG&A) expenses were $50 million and $103\nmillion for the three and six month periods ended December 31, 1998, compared to\n$62 million and $124 million for the same periods in the prior fiscal year. The\ndecrease in dollars during the period is primarily due to cost reduction and\nrestructuring actions implemented by the Company during fiscal 1999, including\nheadcount reduction and the consolidation of facilities.\n\nInterest income and other, net, increased $5 million and $13 million for the\nthree and six month periods ended December 31, 1998, compared to the same\nperiods in the prior fiscal year. The increase is due primarily to gains\nrealized on the sale of equity securities held in a former supplier company as\nwell as increases in interest income on higher average cash equivalents and\ninvestment balances.\n\n\n\n 8\n 9\n\nDuring the three month period ended December 31, 1998, the Company realized an\neffective 38% tax rate for the period which is comprised of a 35% tax benefit\nfrom the effect of non-recurring restructuring and acquisition costs and a 28%\ntax rate on income excluding the one-time charge. The Company anticipates\napproximately a 28% tax rate in the balance of fiscal 1999 which is lower than\nthe 32% tax rate incurred in the prior fiscal year due primarily to a higher\nproportion of income derived from tax-exempt interest in the current year.\n\nLIQUIDITY AND CAPITAL RESOURCES\nDuring the six month period ended December 31, 1998, cash, cash equivalents,\nshort-term investments and marketable securities balances increased\napproximately $10 million to $734 million. Cash provided by operations for the\nsix month period was $63 million, resulting primarily from collections on\naccounts receivable and reduced inventory spending. Capital expenditures of $10\nmillion were primarily for manufacturing equipment necessary for the Company's\noperations. In addition, the Company paid approximately $13 million for the\nacquisition of assets and intellectual property from Keithley Instruments, Inc.\nand from Uniphase Corporation during the second quarter of fiscal 1999.\n\nWorking capital decreased to $516 million as of December 31, 1998 compared to\n$606 million at June 30, 1998 primarily due to a shift of the Company's\ninvestment portfolio to a higher percentage of long-term securities. The Company\nbelieves that existing liquid resources and funds generated from operations\ncombined with its ability, if necessary, to borrow funds will be adequate to\nmeet its operating and capital requirements and obligations through the\nforeseeable future.\n\nYEAR 2000 COMPLIANCE\nMany currently installed computer systems and software products are coded to\naccept only two digit entries in the date code field. These date code fields\nwill need to accept four digit entries to distinguish 21st century dates from\n20th century dates. As a result, many companies' software and computer systems\nmay need to be upgraded or replaced in order to comply with such \"Year 2000\"\nrequirements. The Company believes that the majority of its products and systems\nare Year 2000 ready or will be brought to a state of readiness prior to the year\n2000. Costs to bring its products and systems to a state of compliance with the\nyear 2000 have not been material and the Company does not anticipate future\ncosts will have a material impact on the financial statements; however, complete\ntesting is not feasible and unexpected problems may remain. In addition, the\nCompany utilizes third-party equipment and software that which are also under\nevaluation and planning for Year 2000 readiness. Failure of the Company's\nproducts or third-party equipment or software to operate properly with regard to\nthe Year 2000 and thereafter could require the Company to incur unanticipated\nexpenses to remedy any problems, which could have a material adverse effect on\nthe Company's business and operating results.\n\nThe Company is in the process of contacting its critical suppliers,\nmanufacturers, distributors, and other vendors to determine if their operations\nand the products and services that they provide to the Company are Year 2000\ncompliant. Where practicable, the Company will attempt to mitigate its risks\nwith respect to the failure of third parties to be Year 2000 ready, including\ndeveloping contingency plans. However, such failures, including failures of any\ncontingency plans, remain a possibility and could have a material adverse impact\non the Company's results of operations or financial condition. Furthermore, the\npurchasing patterns of customers or potential customers may be affected by Year\n2000 issues as companies expend significant resources to correct their current\nsystems for Year 2000 compliance. These expenditures may result in reduced funds\navailable to purchase products and services such as those offered by the\nCompany, which could have a material adverse effect on the Company's business\nand operating results.\n\n\n\n 9\n 10\n\nRISK FACTORS\nDuring the calendar year operating results have been adversely affected as the\nCompany experienced declines in orders, revenues and margins due to reduced\ncapital equipment spending by the semiconductor industry. During the second\nquarter of fiscal 1999, the Company implemented a restructuring plan to address\nthe current downturn in the semiconductor industry which resulted in a\nnon-recurring pre-tax charge of $35 million. This restructuring plan includes a\nconsolidation of facilities, a write-down of assets associated with affected\nprograms and employee severance and related benefits costs. There can be no\nassurance that this cost reduction plan will be sufficient to address the\ncurrent market conditions. The current semiconductor industry decline is\nprimarily due to excess semiconductor manufacturing capacity worldwide, coupled\nwith the Asian financial crisis. The Company's operating results are dependent\non many factors, including economic conditions in the semiconductor and related\nindustries, both in the US and abroad, the size and timing of orders from\ncustomers, customer cancellations or delays in shipments, the Company's ability\nto develop, introduce, and market new and enhanced products on a timely basis,\namong others. The Company has experienced reductions in orders, cancellations\nand delays in shipments which may continue to adversely affect sales and margins\nin future periods. The Company's expense levels are based, in part, on\nexpectations of future revenues. Operating results have fluctuated in the past\nand may fluctuate in the future. If revenue levels in a particular period do not\nmeet expectations, operating results may be adversely affected and additional\ncost reduction measures may be necessary for the Company to remain competitive\nin the marketplace.\n\nRapid technological changes in semiconductor manufacturing processes subject the\nsemiconductor manufacturing equipment industry to increased pressure to maintain\ntechnological parity with deep sub-micron process technology. Although the\nCompany is focused on controlling expenses in the current downturn in the\nsemiconductor industry, the Company continues to believe that its future success\nwill depend in part upon its ability to develop, manufacture and successfully\nintroduce new products with improved capabilities (including 300mm wafers and\nsub-quarter micron design rules) and to continue to enhance existing products.\nThe Company must be able to forecast demand for new products while managing the\ntransition from older products. There can be no assurance that the Company will\nsuccessfully or timely develop and manufacture new products or that any such\nproducts will be accepted in the marketplace. If new products have reliability\nor quality problems, reduced orders, higher manufacturing costs, delays in\ncollecting accounts receivable and additional service and warranty expense may\nresult. Additionally, there can be no assurance that future technologies,\nprocesses or product developments will not render the Company's current product\nofferings obsolete. However, if the Company does not continue to successfully\nintroduce new products, its results of operations will be adversely affected.\nThe Company expects to continue to make significant investments in research and\ndevelopment and to sustain its current spending levels for customer support in\nfiscal year 1999 to meet current customer requirements and effectively position\nthe Company for growth when the business cycle turns favorable.\n\nThe semiconductor equipment industry is highly competitive and global in nature\nand the Company has experienced and expects to continue to face substantial\ncompetition. The Company believes that to remain competitive will require\nsignificant financial resources in order to offer a broad range of products, to\nmaintain customer service and support centers worldwide, and to invest in\nproduct and process research and development. The Company's business depends and\nwill continue to depend in the future upon the capital equipment expenditures of\nsemiconductor manufacturers, which in turn depend on the current and anticipated\nmarket demand for integrated circuits and products utilizing integrated\ncircuits. The current industry downturn has had an adverse effect on the\nsemiconductor industry's level of capital expenditures. The Company believes\nthat it is relatively well positioned for this downturn because of its array of\nproducts, its focus on yield improvement and process development rather than\npure wafer fabrication facility capacity, its sales of metrology products to\nnon-semiconductor industries and \n\n\n\n 10\n 11\n\nits strong balance sheet. The Company believes that the semiconductor equipment\nindustry is becoming increasingly dominated by large manufacturers with the\nresources to support customers worldwide. Some of these competitors have\nsubstantially greater financial resources and more extensive engineering,\nmanufacturing, marketing and customer service and support capabilities than the\nCompany. In addition, there are smaller emerging semiconductor equipment\ncompanies which can provide innovative technology. No assurance can be given\nthat the Company will be able to compete successfully worldwide or that the\nCompany will be able to withstand the effects of an industry downturn in the\nshort term or over an extended period if the downturn is prolonged.\n\nThe Company expects that international revenues will continue to represent a\nsignificant percentage of its revenues and international revenues and operations\nmay be adversely affected by economic conditions specific to each country. The\nfuture performance of the Company depends, in part, upon its ability to continue\nto compete successfully worldwide. Asia Pacific is one of the largest regions\nfor the sale of yield management and process monitoring equipment and countries\nin this region, including Japan, Korea and Taiwan, have experienced weaknesses\nin their currency, banking and equity markets in recent periods. The US and\nEurope have shown relative strength during this downturn; however, weaknesses in\nthese regions may also adversely affect demand for the Company's products and\nthe Company's consolidated results of operations. In addition, international\nsales may be adversely affected by fluctuations in foreign currency, imposition\nof governmental controls, restrictions on export technology, political\ninstability, trade restrictions, changes in tariffs and the difficulties\nassociated with staffing and managing international operations. Although the\nCompany attempts to manage near term currency risks through the use of hedging\ninstruments, there can be no assurance that such efforts will be adequate. These\nfactors may have a material adverse effect on the Company's future business and\nfinancial results.\n\n\nITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK\n\nThe Company's market risk exposures as set forth in its Annual Report on Form\n10-K for the year ended June 30, 1998 have not changed significantly.\n\n\n\n 11\n 12\n\nPART II. OTHER INFORMATION\n\nITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS\n\n The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on\n November 19, 1998 at the Company's offices in Milpitas, California. Of\n the 87,321,556 shares outstanding as of September 18, 1988, the record\n date, 75,126,534 shares (86%) were present or represented by proxy at\n the meeting.\n\n 1. The table below presents the results of the election to the Company's\n board of directors.\n\n\n
\n\n 2. The stockholders approved an amendment to the 1997 Employee Stock\n Purchase Plan to increase the number of shares reserved for issuance\n thereunder by 1,000,000 shares of Common Stock. This proposal received\n 57,480,851 votes for, 3,456,114 votes against, with 398,961 votes\n abstaining, and 13,790,608 broker non-votes.\n\n 3. The stockholders approved amendments to the 1997 Employee Stock\n Purchase Plan to increase the number of shares of Common Stock reserved\n for issuance thereunder on the first day of each subsequent fiscal year\n by the lesser of (a) 2,000,000 shares or (b) the number of shares which\n the Company estimates (based on the previous 12 month period) it will be\n required to issue under the 1997 Purchase Plan during the forthcoming\n fiscal year. This proposal received 44,757,829 votes for, 16,174,363\n votes against, with 403,734 votes abstaining, and 13,790,608 broker\n non-votes.\n\n 4. The stockholders approved the 1998 Outside Director Option Plan and\n reserved for issuance thereunder 1,000,000 shares of Common Stock. This\n proposal received 46,643,026 votes for, 15,245,588 votes against, with\n 447,312 votes abstaining, and 13,790,608 broker non-votes.\n\n 5. The stockholders ratified the appointment of PricewaterhouseCoopers\n LLP as the Company's independent accountants for the fiscal year ended\n June 30, 1999. This proposal received 74,728,073 votes for, 172,205\n votes against, with 226,256 votes abstaining.\n\n\nITEM 6. EXHIBITS AND REPORTS ON FORM 8-K\n\n\n (a) Exhibits\n --------\n\n 27.1 Financial Data Schedule.\n\n\n\n 12\n 13\n\n\n SIGNATURES\n\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned, thereunto duly authorized.\n\n\n KLA-TENCOR CORPORATION\n (Registrant)\n\n\n\n\nFebruary 9, 1999 ROBERT J. BOEHLKE \n- ---------------- -------------------------------\n (Date) Robert J. Boehlke\n Executive Vice President\n and Chief Financial Officer\n\n\n\n 13\n 14\n\n Index to Exhibits\n\n\n
\n \n \n\nEX-27.1\n2\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":197,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"LU"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/1006240/0000950116-99-000252.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n OUVCAKtTpC1EyhJP7cDgmgSKnZqmz7QE6KdSkf7RmWi5Z6t4b7poQ2p29wsUC15r\n JgyWaFp+E+U2xb4fqneFuQ==\n\n0000950116-99-000252.txt : 19990217\n0000950116-99-000252.hdr.sgml : 19990217\nACCESSION NUMBER:\t\t0000950116-99-000252\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t4\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990216\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tLUCENT TECHNOLOGIES INC\n\t\tCENTRAL INDEX KEY:\t\t\t0001006240\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tTELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]\n\t\tIRS NUMBER:\t\t\t\t223408857\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0930\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-11639\n\t\tFILM NUMBER:\t\t99542275\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t600 MOUNTAIN AVE\n\t\tCITY:\t\t\tMURRAY HILL\n\t\tSTATE:\t\t\tNJ\n\t\tZIP:\t\t\t07974\n\t\tBUSINESS PHONE:\t\t9085828500\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\t600 MOUNTAIN AVE\n\t\tCITY:\t\t\tMURRAY HILL\n\t\tSTATE:\t\t\tNJ\n\t\tZIP:\t\t\t07974\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tNS MPG INC\n\t\tDATE OF NAME CHANGE:\t19960124\n \n\n10-Q\n1\nFORM 10-Q\n\n\n\n\n\n\n\n UNITED STATES\n\n SECURITIES AND EXCHANGE COMMISSION\n\n Washington, DC 20549\n\n FORM 10-Q\n\n\n\n X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\n --- SECURITIES EXCHANGE ACT OF 1934\n\n For the quarterly period ended December 31, 1998\n\n OR\n\n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF\n --- THE SECURITIES EXCHANGE ACT OF 1934\n\n For the transition period from _____________to _____________\n\n\n Commission file number 001-11639\n\n LUCENT TECHNOLOGIES INC.\n\n A Delaware I.R.S. Employer\n Corporation No. 22-3408857\n\n\n 600 Mountain Avenue, Murray Hill, New Jersey 07974\n\n Telephone - Area Code 908-582-8500\n\n\n\n\nIndicate by check mark whether the registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months (or for such shorter period that the registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days. Yes .X No ....\n\nAt January 31, 1999, 1,321,650,166 common shares were outstanding.\n\n\n\n\n\n\n 2 Form 10-Q - Part I\n\n PART I - FINANCIAL INFORMATION\n\nItem 1. Financial Statements\n\n LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES\n CONSOLIDATED STATEMENTS OF INCOME\n (Dollars in Millions, Except Per Share Amounts)\n (Unaudited)\n\n For the Three\n Months Ended\n December 31,\n 1998 1997 \n\nRevenues............................. $ 9,204 $ 8,724\n \nCosts................................ 4,386 4,519\n \nGross margin......................... 4,818 4,205\n \nOperating Expenses: \nSelling, general and \n administrative expenses............ 1,774 1,555\nResearch and development expenses.... 926 829\nIn-process research \n and development expenses........... 21 427\nTotal operating expenses............. 2,721 2,811\n \nOperating income..................... 2,097 1,394\nOther income - net................... 102 146\nInterest expense..................... 78 62\nIncome before income taxes........... 2,121 1,478\nProvision for income taxes........... 721 686\n \nIncome before cumulative effect of \n accounting change.................. 1,400 792\n \nCumulative effect of accounting change \n (net of income taxes of $842)...... 1,308 -\n \nNet income........................... $ 2,708 $ 792\n \nEarnings per common share - basic: \n Income before cumulative effect of \n accounting change.................. $ 1.06 $ 0.62\n Cumulative effect of accounting \n change ............................ 1.00 -\n Net income.......................... $ 2.06 $ 0.62\n \nEarnings per common share - diluted: \n Income before cumulative effect of \n accounting change.................. $ 1.04 $ 0.61\n Cumulative effect of accounting \n change............................. .96 -\n Net Income.......................... $ 2.00 $ 0.61\n \n \n \nDividends declared per common share.. $ 0.08 $ 0.075\n \n \n \n \nSee Notes to Consolidated Financial Statements. \n\n\n\n\n\n 3 Form 10-Q - Part I\n\n LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES\n CONSOLIDATED BALANCE SHEETS\n (Dollars in Millions, Except Per Share Amounts)\n (Unaudited)\n\n December 31, September 30,\n 1998 1998\nASSETS\n\nCash and cash equivalents.............. $ 940 $ 685\n\nAccounts receivable less allowances\n of $346 at December 31, 1998 and\n $390 at September 30, 1998 ........... 9,185 6,939\n\nInventories............................ 3,778 3,081\n\nContracts in process, net of progress\n billings of $3,995 at December 31, 1998\n and $3,036 at September 30, 1998...... 1,060 1,259\n\nDeferred income taxes - net............ 1,620 1,623\n\nOther current assets................... 768 491\n\nTotal current assets................... 17,351 14,078\n\nProperty, plant and equipment, net\n of accumulated depreciation of\n $6,886 at December 31, 1998 and\n $6,382 at September 30, 1998.......... 5,645 5,403\n\nPrepaid pension costs.................. 6,068 3,754\n\nDeferred income taxes - net............ - 750\n\nCapitalized software development costs. 306 298\n\nOther assets........................... 2,271 2,437\n\nTOTAL ASSETS........................... $31,641 $26,720\n\n\n\n (CONT'D)\n\n\n\n\nSee Notes to Consolidated Financial Statements.\n\n\n\n\n\n\n 4 Form 10-Q - Part I\n\n LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES\n CONSOLIDATED BALANCE SHEETS (CONT'D)\n (Dollars in Millions, Except Per Share Amounts)\n (Unaudited)\n\n December 31, September 30,\n 1998 1998\nLIABILITIES \n \nAccounts payable....................... $ 2,468 $ 2,040 \nPayroll and benefit-related \n liabilities.......................... 1,857 2,511\nPostretirement and postemployment \n benefit liabilities.................. 186 187\nDebt maturing within one year.......... 3,763 2,231\nOther current liabilities.............. 4,167 3,459\n \nTotal current liabilities.............. 12,441 10,428\n \nPostretirement and postemployment \n benefit liabilities.................. 6,413 6,380\nLong-term debt ........................ 2,404 2,409\nOther liabilities...................... 1,946 1,969\n \nTotal liabilities ..................... 23,204 21,186\n \nCommitments and contingencies \n \nSHAREOWNERS' EQUITY \n \nPreferred stock-par value $1.00 per share \n Authorized shares: 250,000,000 \n Issued and outstanding shares: none... - -\nCommon stock-par value $.01 per share \n Authorized shares: 3,000,000,000 \n Issued and outstanding shares: \n 1,320,245,061 at December 31, 1998 \n 1,316,394,169 at September 30, 1998... 13 13\nAdditional paid-in capital............. 4,728 4,488\nGuaranteed ESOP obligation............. (49) (49)\nRetained earnings...................... 3,965 1,364\nAccumulated other comprehensive \n income(loss).......................... (220) (282)\n \nTotal shareowners' equity.............. 8,437 5,534\n \nTOTAL LIABILITIES AND \n SHAREOWNERS' EQUITY................... $31,641 $26,720\n \n \n\n\n\nSee Notes to Consolidated Financial Statements.\n\n\n\n\n\n\n 5 Form 10-Q - Part I\n\n LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES\n CONSOLIDATED STATEMENTS OF CASH FLOWS\n (Dollars in Millions)\n (Unaudited)\n\n For the Three Months\n Ended December 31,\n 1998 1997\nOperating Activities\nNet income............................... $2,708 $ 792\nAdjustments to reconcile net income\n to net cash (used in)provided by\n operating activities:\n Cumulative effect of\n accounting change.................... (1,308) -\n Depreciation and amortization......... 344 343\n Provision for uncollectibles.......... (15) 54\n Deferred income taxes................. 206 (22)\n Purchased in-process research and\n development......................... 21 427\n Increase in accounts receivable - net. (2,235) (1,255)\n (Increase)decrease in inventories\n and contracts in process - net....... (425) 152\n Increase(decrease) in\n accounts payable..................... 352 (387)\n Changes in other operating assets\n and liabilities..................... (501) 512\n Other adjustments for non-cash\n items - net......................... (248) (231)\nNet cash (used in)provided by\n operating activities.................... (1,101) 385\n\nInvesting Activities\nCapital expenditures .................... (343) (261)\nProceeds from the sale or disposal of\n property, plant and equipment.......... 28 27\nPurchases of equity investments.......... (17) (47)\nSales of equity investments.............. 1 25\nAcquisitions of businesses,\n net of cash acquired................... (115) -\nDispositions of businesses............... 57 281\nOther investing activities - net......... 22 (35)\nNet cash used in investing activities.... (367) (10)\n\nFinancing Activities\nRepayments of long-term debt ............ (8) (20)\nIssuance of long-term debt............... 495 3\nProceeds of issuance of common stock..... 239 72\nDividends paid........................... (54) (48)\nIncrease(decrease) in short-term\n borrowings - net....................... 1,041 (485)\nNet cash provided by\n (used in) financing activities.......... 1,713 (478)\n\n\n (CONT'D)\n\n\n\n\n\nSee Notes to Consolidated Financial Statements.\n\n\n\n\n\n 6 Form 10-Q - Part I\n\n LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES\n CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)\n (Dollars in Millions)\n (Unaudited)\n\n For the Three Months\n Ended December 31,\n 1998 1997\n\nEffect of exchange rate\n changes on cash........................ 10 (22)\n\nNet increase(decrease) in cash and\n cash equivalents....................... 255 (125)\n\nCash and cash equivalents\n at beginning of period................. 685 1,350\n\nCash and cash equivalents\n at end of period....................... $ 940 $ 1,225\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\nSee Notes to Consolidated Financial Statements.\n\n\n\n 7 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n\n1. BASIS OF PRESENTATION\n\nThe accompanying unaudited consolidated financial statements have been prepared\nby Lucent Technologies Inc. (\"Lucent\" or the \"Company\") pursuant to the rules\nand regulations of the Securities and Exchange Commission (\"SEC\") and, in the\nopinion of management, include all adjustments necessary for a fair presentation\nof the results of operations, financial position and cash flows for each period\nshown.\n\nThe preparation of financial statements during interim periods requires\nmanagement to make numerous estimates and assumptions that impact the reported\namounts of assets, liabilities, revenues and expenses. Estimates and assumptions\nare reviewed periodically and the effect of revisions is reflected in the\nresults of operations of the interim periods in which changes are determined to\nbe necessary. During the three months ended December 31, 1998, improved\nperformance on multi-year contracts and the resolution of certain contingencies\nhad a positive impact on the reported results of operations.\n\nThe financial statement results for interim periods are not necessarily\nindicative of financial results for the full year. These unaudited consolidated\nfinancial statements should be read in conjunction with the audited consolidated\nfinancial statements and notes thereto included in Lucent's Annual Report on\nForm 10-K for the year ended September 30, 1998.\n\nThe financial statements presented have been restated to reflect the two-for-one\nsplit of Lucent's common stock which became effective on April 1, 1998. Certain\nprior period amounts have been reclassified to conform to the current period\npresentation.\n\n2. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS\n\nEffective October 1, 1998, Lucent changed its method for calculating the\nmarket-related value of plan assets used in determining the expected\nreturn-on-asset component of annual net pension and postretirement benefit\ncosts. Under the previous accounting method, which recognized only interest and\ndividends immediately, all other realized and unrealized gains and losses on\nplan assets were included in the calculated market-related value over a\nfive-year period. The new method changes the manner in which realized and\nunrealized gains and losses are included in market-related value over the\nfive-year period and results in a calculated market-related value of plan assets\nthat is closer to current fair value, while still mitigating the effects of\nannual market value fluctuations. The new method also reduces the substantial\naccumulation of unrecognized gains and losses created under the previous method\ndue to the disparity between fair value and market-related value of plan assets.\n\nThe cumulative effect of this accounting change related to periods prior to\nfiscal year 1999 of $2,150 ($1,308 after-tax, or $1.00 and $0.96 per basic and\ndiluted share, respectively) is a one-time, non-cash credit to fiscal 1999\nearnings. This accounting change also resulted in a reduction in benefit costs\nas a result of the change in Lucent's pension and postretirement accounting in\nthe three months ended December 31, 1998 that increased income by $108 ($65\nafter-tax, or $0.05 per basic and diluted share) as compared to the previous\naccounting method. A comparison of pro forma amounts is presented below showing\nthe effects if the accounting change were applied retroactively:\n\n Three Months Ended December 31,\n 1998 1997 \n ------ ------ \n Net Income $1,400 $ 851\n Earnings per share-basic $ 1.06 $ 0.66\n Earnings per share-diluted $ 1.04 $ 0.65\n \n \n\n\n\n\n 8 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n\n3. COMPREHENSIVE INCOME\n\nLucent has adopted Statement of Financial Accounting Standards No. 130\n\"Reporting Comprehensive Income\" as of October 1, 1998 which requires new\nstandards for reporting and display of comprehensive income and its components\nin the financial statements. However, it does not affect net income or total\nshareowners' equity. The components of comprehensive income are as follows:\n\n Three Months Ended\n December 31,\n 1998 1997\n ----------------------------\nNet income......................... $ 2,708 $ 792\n\nOther comprehensive income(loss):\n Foreign currency translation\n adjustments.................... 51 (82)\n Unrealized holding gains(losses)\n arising during the period...... 11 (21)\nComprehensive income............... $ 2,770 $ 689\n\n\nThe components of accumulated other comprehensive income(loss) are as follows:\n\n
\n \nThe foreign currency translation adjustments are not currently adjusted for\nincome taxes since they relate to indefinite investments in non-United States\nsubsidiaries.\n\n4. ACQUISITION\n\nQuadritek Systems, Inc.\n- -----------------------\nOn October 1, 1998, Lucent completed the purchase of Quadritek Systems, Inc. for\n$50 in cash. Quadritek was a privately-held company involved in the development\nof Internet Protocol (\"IP\") network administration software solutions. The\ntransaction was accounted for under the purchase method of accounting and the\nexcess purchase price over the estimated fair value of net tangible assets was\nallocated to various intangible assets, primarily consisting of developed\ntechnology of $5 and goodwill of $24. These assets are being amortized over six\nand eight years, respectively. In addition to the intangible assets acquired,\nLucent recorded a charge of $21 ($14 after-tax), representing the write-off of\nin-process research and development (\"IPR&D\").\n\nThe allocation of $21 represents the estimated fair value related to incomplete\nprojects based on risk-adjusted cash flows. Lucent believes that such fair value\nis reasonable and does not exceed the amount a third party would pay for these\nprojects. At the date of the acquisition, the projects associated with the IPR&D\nefforts had not yet reached technological feasibility and had no alternative\nfuture uses. Accordingly, these costs were expensed during the period.\n\n\n\n\n\n\n 9 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n\n\nAt the acquisition date, Quadritek was conducting development, engineering, and\ntesting activities associated with the completion of a number of new product\nofferings (\"New Product Offerings\"). The IPR&D projects were in various stages\nof development. Overall, substantial progress had been made. The IPR&D projects\nranged in completion from 20% to 80%. Remaining efforts necessary to complete\nthe New Product Offerings relate primarily to additional coding, testing, and\naddressing performance issues. In total, costs to complete the New Product\nOfferings are expected to total approximately $5.\n\nIn making its purchase price allocation, Lucent relied upon an independent\nthird-party valuation which gave consideration to present value calculations of\nincome, an analysis of project accomplishments and completion costs, an\nassessment of overall contributions, as well as project risks. The values\nassigned to IPR&D were determined by estimating the costs to develop the\npurchased technology into commercially viable products, estimating the resulting\nnet cash flows from each project, excluding the cash flows related to the\nportion of each project that was incomplete at the acquisition date, and\ndiscounting the resulting net cash flows to their present value. Each of the\nproject forecasts was based upon future discounted cash flows, taking into\naccount the stage of development of each in-process project, the cost to\ncomplete that project, the expected income stream, the life cycle of the product\nultimately developed, and the associated risks. Projected future net cash flows\nattributable to the in-process technology, assuming successful development of\nsuch technologies, were discounted to their present values using a discount rate\nof 20%.\n\nThe aforementioned estimates are subject to change, given the uncertainties of\nthe development process, and no assurance can be given that deviations from\nthese estimates will not occur. Management expects to continue development of\nthese efforts and believes there is a reasonable chance of successfully\ncompleting such development. However, there is risk associated with the\ncompletion of the in-process projects and there can be no assurance that any of\nthe projects will meet with either technological or commercial success. Failure\nto successfully develop and commercialize the in-process projects would result\nin the loss of the expected economic return inherent in the fair value\nallocation.\n\n\n\n 10 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n\n\n5. SUPPLEMENTARY BALANCE SHEET INFORMATION\n\nInventories at December 31, 1998 and September 30, 1998 were as follows:\n\n December 31, September 30,\n 1998 1998\n ------------ -------------\n Completed goods ............... $ 1,777 $ 1,578\n Work in process and\n raw materials................ 2,001 1,503\n Total inventories ............. $ 3,778 $ 3,081\n\n6. BUSINESS RESTRUCTURING\n\nFor the three months ended December 31, 1998 and 1997, $13 and $26,\nrespectively, were applied to the 1995 business restructuring reserve. The\nremaining reserve for business restructuring at December 31, 1998 was $238.\n\n7. EARNINGS PER COMMON SHARE\n\nBasic earnings per common share was calculated by dividing net income by the\nweighted average number of common shares outstanding during the period. Diluted\nearnings per share was calculated by dividing net income by the sum of the\nweighted average number of common shares outstanding plus all additional common\nshares that would have been outstanding if potentially dilutive common shares\nhad been issued.\n\nEarnings per share amounts for the periods presented have been restated to\nreflect the two-for-one split of Lucent's common stock which became effective on\nApril 1, 1998. The following table reconciles the number of shares utilized in\nthe earnings per share calculations for the three months ended December 31, 1998\nand 1997:\n\n\n\n\n\n\n\n 11 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n\n Three Months Ended\n December 31,\n 1998 1997\n -------------------------\nNet income $ 2,708 $ 792\n \nEarnings per common share - basic: \n Income before cumulative effect \n of accounting change $ 1.06 $ 0.62\n Cumulative effect of accounting \n change 1.00 -\n Net Income $ 2.06 $ 0.62\n \n \nEarnings per common share - diluted: \n Income before cumulative effect \n of accounting change $ 1.04 $ 0.61\n Cumulative effect of accounting \n change .96 -\n Net Income $ 2.00 $ 0.61\n \nNumber of Shares (in millions) \n- --------------------------------- \nCommon shares - basic 1,317.3 1,287.3\nEffect of dilutive securities: \n Stock options 32.4 18.4\n Other 2.4 0.3\n \nCommon shares - diluted 1,352.1 1,306.0\n \n \nShares excluded from the \ncomputation of earnings \nper common share - diluted since \noption exercise price was greater \nthan the average market price of \nthe common shares for the period 2.8 5.4\n \n \n \n8. PHILIPS CONSUMER COMMUNICATIONS (\"PCC\")\n\nOn October 1, 1997, Lucent contributed its Consumer Products business to a new\nventure formed by Lucent and Philips Electronics N.V. (\"Phillips\") in exchange\nfor 40% ownership of PCC. On October 22, 1998, Lucent and Phillips announced\ntheir intention to end the PCC venture and agreed to regain control of their\noriginal businesses. The results of operations and net assets of the remaining\nbusinesses Lucent previously contributed to PCC have been consolidated as of\nOctober 1, 1998. The revenues are included in Other Systems and Products. In\nDecember 1998, Lucent sold certain assets of the wireless handset portion of the\nremaining businesses to Motorola. Lucent is continuing to look for opportunities\nto sell the remaining consumer products businesses.\n\n\n\n\n\n\n 12 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n9. COMMITMENTS AND CONTINGENCIES\n\nIn the normal course of business, Lucent is subject to proceedings, lawsuits and\nother claims, including proceedings under government laws and regulations\nrelated to environmental and other matters. Such matters are subject to many\nuncertainties, and outcomes are not predictable with assurance. Consequently,\nthe ultimate aggregate amount of monetary liability or financial impact with\nrespect to these matters at December 31, 1998 cannot be ascertained. While these\nmatters could affect the operating results of any one quarter when resolved in\nfuture periods and while there can be no assurance with respect thereto,\nmanagement believes that after final disposition, any monetary liability or\nfinancial impact to Lucent beyond that provided for at December 31, 1998 would\nnot be material to the annual consolidated financial statements.\n\nLucent's current and historical operations are subject to a wide range of\nenvironmental protection laws. In the United States, these laws often require\nparties to fund remedial action regardless of fault. Lucent has remedial and\ninvestigatory activities underway at numerous current and former facilities. In\naddition, Lucent was named a successor to AT&T Corp. (\"AT&T\") as a potentially\nresponsible party (\"PRP\") at numerous \"Superfund\" sites pursuant to the\nComprehensive Environmental Response, Compensation and Liability Act of 1980\n(\"CERCLA\") or comparable state statutes. Under the Separation and Distribution\nAgreement (\"Separation and Distribution Agreement\"), among Lucent, AT&T and NCR\nCorporation (\"NCR\"), dated as of February 1, 1996 as amended and restated,\nLucent is responsible for all liabilities primarily resulting from or relating\nto the operation of Lucent's business as conducted at any time prior to or after\nthe separation from AT&T of the businesses and operations transferred to form\nLucent (the \"Separation\") including related businesses discontinued or disposed\nof prior to the Separation, and Lucent's assets including, without limitation,\nthose associated with these sites. In addition, under the Separation and\nDistribution Agreement, Lucent is required to pay a portion of contingent\nliabilities paid out in excess of certain amounts by AT&T and NCR, including\nenvironmental liabilities.\n\nIt is often difficult to estimate the future impact of environmental matters,\nincluding potential liabilities. Lucent records an environmental reserve when it\nis probable that a liability has been incurred and the amount of the liability\nis reasonably estimable. This practice is followed whether the claims are\nasserted or unasserted. Management expects that the amounts reserved will be\npaid out over the periods of remediation for the applicable sites which range\nfrom 5 to 30 years. Reserves for estimated losses from environmental remediation\nare, depending on the site, based primarily upon internal or third party\nenvironmental studies, and estimates as to the number, participation level and\nfinancial viability of any other PRPs, the extent of the contamination and the\nnature of required remedial actions. Accruals are adjusted as further\ninformation develops or circumstances change. The amounts provided for in\nLucent's consolidated financial statements for environmental reserves are the\ngross undiscounted amount of such reserves, without deductions for insurance or\nthird party indemnity claims. In those cases where insurance carriers or third\nparty indemnitors have agreed to pay any amounts and management believes that\ncollectibility of such amounts is probable, the amounts are reflected as\nreceivables in the financial statements. Although Lucent believes that its\nreserves are adequate, there can be no assurance that the amount of capital\nexpenditures and other expenses which will be required relating to remedial\nactions and compliance with applicable environmental laws will not exceed the\namounts reflected in Lucent's reserves or will not have a material adverse\neffect on Lucent's financial condition, results of operations or cash flows. Any\namounts of environmental costs that may be incurred in excess of those provided\nfor at December 31, 1998 cannot be determined.\n\n\n\n13 Form 10-Q - Part I\n\n NOTES TO CONSOLIDATED FINANCIAL STATEMENTS\n (Dollars in Millions Except Per Share Amounts)\n (Unaudited)\n10. SUBSEQUENT EVENTS\n\nKenan Systems Corporation\n- -------------------------\nOn January 11, 1999, Lucent announced its intention to merge with Kenan Systems\nCorporation, a privately held developer of third-party billing and customer care\nsoftware, in exchange for 12.88 million shares of Lucent common stock. Lucent\nexpects that the acquisition will be completed in Lucent's second fiscal quarter\nending March 31, 1999 and be accounted for as a pooling of interests.\n\nAscend Communications, Inc.\n- ---------------------------\nOn January 13, 1999, Lucent announced that it had entered into a definitive\nagreement to merge with Ascend Communications, Inc. Under the terms of the\nagreement, which was approved by each company's board of directors, each share\nof Ascend common stock will be converted into 0.825 shares of Lucent common\nstock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,\nthe transaction would be valued at approximately $20 billion.\n\nThe transaction, which is subject to customary conditions and regulatory\napprovals, is expected to be completed during Lucent's third fiscal quarter,\nwhich ends June 30, 1999, and is expected to be accounted for as a pooling of\ninterests.\n\nWaveAccess Ltd.\n- ---------------\n\nOn January 22, 1999, Lucent completed the acquisition of the remaining 80\npercent of WaveAccess Ltd. for $45 in cash. In May 1998, Lucent had acquired a\n20 percent stake in the company. WaveAccess is a developer of high-speed systems\nfor wireless data communications. The acquisition will be accounted for using\nthe purchase method of accounting.\n\nThe purchase is expected to result in a one-time, non-tax deductible, non-cash\ncharge to earnings for purchased in-process research and development in the\nquarter ending March 31, 1999. The amount of the charge has not yet been\ndetermined. The remaining purchase price will be allocated to tangible assets\nand intangible assets, including goodwill and existing technology, less\nliabilities assumed.\n\n\n\n\n 14 Form 10-Q - Part I\n\nItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND\n FINANCIAL CONDITION\n\nHIGHLIGHTS\n\nLucent reported net income of $2,708 million, or $2.00 per share (diluted) for\nthe quarter ended December 31, 1998. Included in net income is a $1,308 million\n(or $0.96 per share-diluted) cumulative effect of an accounting change related\nto Lucent's pension and postretirement benefits (see Note 2). The year-ago\nquarterly net income was $792 million, or $0.61 per share (diluted). Excluding\nthe one-time gain from the cumulative effect of the accounting change and the\nin-process research and development charge associated with the acquisition of\nQuadritek, which Lucent completed during the current quarter (see Note 4),\nLucent's net income was $1,414 million, or $1.05 per share (diluted) for the\nthree months ended December 31, 1998. This compares to net income of $1,124\nmillion, or $0.86 per share (diluted) for the three months ended December 31,\n1997, excluding the in-process research and development charge associated with\nthe acquisition of Livingston and the gain on the sale of Advanced Technology\nSystems (\"ATS\").\n\nGross margin increased $613 million for the quarter ended December 31, 1998\ncompared with the year-ago quarter. The increase in gross margin was primarily\ndue to higher sales volume and improved performance on multi-year contracts\ncompared with the same quarter last year.\n\nOperating income of $2,097 million reflects an increase of $703 million in the\nquarter compared with the same quarter in 1997 and was 22.8% of revenues. The\nincrease was primarily due to the increased gross margin described above and a\nnon-cash reduction in benefits costs of $108 million resulting from the change\nin Lucent's pension and postretirement accounting as described in Note 2.\n\nOn October 1, 1998, Lucent completed the purchase of Quadritek for $50 million\nin cash. The acquisition was accounted for using the purchase method of\naccounting and has been included in the balance sheet at December 31, 1998.\n\nOn January 11, 1999, Lucent announced its intention to merge with Kenan Systems\nCorporation, a privately held developer of third-party billing and customer care\nsoftware, in exchange for 12.88 million shares of Lucent common stock. Lucent\nexpects that the acquisition will be completed in Lucent's second fiscal quarter\nending March 31, 1999 and be accounted for as a pooling of interests.\n\nOn January 13, 1999, Lucent announced that it had entered into a definitive\nagreement to merge with Ascend Communications, Inc. Under the terms of the\nagreement, which was approved by each company's board of directors, each share\nof Ascend common stock will be converted into 0.825 shares of Lucent common\nstock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,\nthe transaction would be valued at approximately $20 billion. The transaction,\nwhich is subject to customary conditions and regulatory approvals, is expected\nto be completed during Lucent's third fiscal quarter, which ends June 30, 1999,\nand is expected to be accounted for as a pooling of interests.\n\nOn January 22, 1999, Lucent completed the acquisition of the remaining 80%\ninterest in WaveAccess for $45 million in cash. The acquisition will be\naccounted for using the purchase method of accounting and will be included in\nfinancial statements for the quarter ending March 31, 1999.\n\n\n\n\n\n 15 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nKEY BUSINESS CHALLENGES\n\nLucent continues to face significant competition and expects that the level of\ncompetition on pricing and product offerings will intensify. Lucent expects that\nnew competitors will enter its markets as a result of the trend toward global\nexpansion by foreign and domestic competitors as well as continued changes in\ntechnology and public policy. These competitors may include entrants from the\ntelecommunications, software, data networking and semiconductor industries.\nExisting competitors have, and new competitors may have, strong financial\ncapability, technological expertise, well-recognized brand names and a global\npresence. As a result, Lucent's management periodically assesses market\nconditions and redirects the Company's resources to meet the challenges of\ncompetition. Steps Lucent may take include acquiring or investing in new\nbusinesses and ventures, partnering with existing businesses, delivering new\ntechnologies, closing and consolidating facilities, disposing of assets,\nreducing work force levels or withdrawing from markets.\n\nLucent has taken measures to manage the seasonality of its business by changing\nthe date on which its fiscal year ends and its compensation programs for\nemployees. As a result, Lucent has achieved a more uniform distribution of\nrevenues -- accompanied by a related redistribution of earnings -- throughout\nthe year. Revenues and earnings still remain higher in the first fiscal quarter\nprimarily because many of Lucent's large customers historically delay a\ndisproportionate percentage of their capital expenditures until the fourth\nquarter of the calendar year (Lucent's first fiscal quarter).\n\nThe purchasing behavior of Lucent's largest customers has increasingly been\ncharacterized by the use of fewer, larger contracts. These contracts typically\ninvolve longer negotiating cycles, require the dedication of substantial amounts\nof working capital and other resources, and in general require costs that may\nsubstantially precede recognition of associated revenues. Moreover, in return\nfor larger, longer-term purchase commitments, customers often demand more\nstringent acceptance criteria, which can also cause revenue recognition delays.\nLucent has increasingly provided or arranged long-term financing for customers\nas a condition to obtain or bid on infrastructure projects. Certain multi-year\ncontracts involve new technologies that may not have been previously deployed on\na large-scale commercial basis. On its multi-year contracts, Lucent may incur\nsignificant initial cost overruns and losses that are recognized in the quarter\nin which they become ascertainable. Further, profit estimates on such contracts\nare revised periodically over the lives of the contracts, and such revisions can\nhave a significant impact on reported earnings in any one quarter.\n\nLucent has been successful in diversifying its customer base and seeking out new\ntypes of customers globally. These new types of customers include competitive\naccess providers, competitive local exchange carriers, wireless service\nproviders, cable television network operators and computer manufacturers.\n\nHistorically, a limited number of customers have provided a substantial portion\nof Lucent's total revenues. The loss of any of these customers, or any\nsubstantial reduction in orders by any of these customers, could materially\nadversely affect Lucent's operating results.\n\n\n\n\n\n 16 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\n\n\nREVENUES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED\nDECEMBER 31, 1997\n\nTotal revenues increased 5.5% to $9,204 million in the quarter compared with the\nsame quarter of 1997, due to increases in sales from Systems for Network\nOperators, Business Communications Systems, Microelectronic Products and Other\nSystems and Products. For the quarter, sales within the United States decreased\nby 9.7% compared with the same quarter in 1997 and sales outside the United\nStates increased 49.0% compared with the same quarter last year.\n\nThe following table presents Lucent's revenues by product line, and the\napproximate percentage of total revenues for the three months ended December 31,\n1998 and 1997:\n\n Three Months\n Ended\n December 31,\n Dollars in Millions ------------------------------\n 1998 1997\n ------------- ------------\nSystems for Network Operators........ $6,115 66% $5,943 68%\nBusiness Communications Systems...... 1,975 22 1,930 22\nMicroelectronic Products............. 821 9 775 9\nOther Systems and Products........... 293 3 76 1\nTotal................................ $9,204 100% $8,724 100%\n\nRevenues from SYSTEMS FOR NETWORK OPERATORS increased $172 million, or 2.9% in\n1998 compared with the same quarter in 1997. Revenues were driven by sales of\nswitching systems with associated software, optical networking systems, data\nnetworking systems for service providers, and services. Continued demand for\ndata services and Internet access in businesses and residences contributed to\nthe group's quarterly revenues.\n\nRevenues from Systems for Network Operators in the United States decreased by\n19.2% over the year-ago quarter. The revenue decrease in the United States was\nprimarily due to expected software revenues that were delayed into the second\nand third quarters. Another factor was an exceptionally strong comparative\nquarter in fiscal 1998 when Lucent benefited from revenues associated with\npersonal communications services (\"PCS\") wireless buildouts. Revenues generated\noutside the United States increased 66.7% compared with the same quarter in 1997\ndue to revenue growth in the Europe/Middle East/Africa and Caribbean/Latin\nAmerica regions and China. Revenues generated outside the United States\nrepresented 41.6% of revenues for the quarter compared with 25.7% for the same\nquarter of 1997.\n\nRevenues from BUSINESS COMMUNICATIONS SYSTEMS increased $45 million, or 2.3%\ncompared with the year-ago quarter. Increased sales of DEFINITY(R) enterprise\ncommunication servers, including those with Call Center applications, messaging\nsystems, and enterprise data networking systems contributed to the increased\nrevenue for the quarter. Sales within the United States increased 3.2% for the\nquarter compared with the same quarter of 1997. Revenues generated outside the\nUnited States decreased by 1.7%. Revenues generated outside the United States\nrepresented 17.9% of revenues for the quarter compared with 18.7% in the same\nquarter in 1997.\n\n\n- --------------------------------------\n(R) Registered trademark of Lucent\n\n\n\n\n\n\n 17 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nRevenues from MICROELECTRONIC PRODUCTS increased $46 million, or 5.9% compared\nwith the year-ago quarter driven by sales of chips for high-speed\ncommunications, mass storage, data networking and optoelectronic components.\nThese increases were partially offset by decreased sales of power systems. Sales\nwithin the United States decreased 7.8% compared to the same quarter in 1997.\nRevenues generated outside the United States increased 20.3%. The growth in\nrevenues outside the United States was driven by sales in the Asia/ Pacific and\nEurope/Middle East/Africa regions. Revenues generated outside the United States\nrepresented 55.4% of sales for the quarter compared with 48.8% for the same\nquarter of 1997.\n\nRevenues from OTHER SYSTEMS AND PRODUCTS increased $217 million compared with\nthe year-ago quarter primarily due to the consolidation of the businesses\nregained from the PCC venture (see Note 8).\n\nCOSTS AND GROSS MARGIN - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS \nTHREE MONTHS ENDED DECEMBER 31, 1997\n\nTotal costs decreased by $133 million, or 2.9% in 1998 compared with the same\nquarter in 1997 primarily due to better performance on multi-year contracts and\nimproved cost management partially offset by the costs related to the high sales\nvolume. As a percentage of revenue, gross margin increased to 52.3% from 48.2%\nin the year-ago quarter. The increase this quarter compared with the same\nquarter in 1997 reflects improved performance on multi-year contracts and higher\nprofits on certain products offset by a delayed recognition of software\nrevenues. Based on current planning assumptions, Lucent expects that its full\n1999 fiscal year gross margin will exceed fiscal year 1998, but at a lower level\nthan achieved for the first fiscal quarter.\n\nOPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS\nTHREE MONTHS ENDED DECEMBER 31, 1997\n\nSelling, general and administrative expenses as a percentage of revenues were\n19.3% for the quarter, up 1.5 percentage points compared with 17.8% for the same\nquarter in 1997. Excluding the amortization expense associated with goodwill and\nexisting technology for both years, selling, general and administrative expenses\nas a percentage of revenues was 18.7%, an increase of 1.1 percentage points from\nthe same quarter in 1997.\n\nSelling, general and administrative expenses increased $219 million, or 14.1%\ncompared with the same year-ago quarter. This increase was attributed to\ninvestment in growth initiatives as well as the increase in amortization expense\nassociated with goodwill and existing technology. Amortization expense\nassociated with goodwill and existing technology was $57 million for the\nquarter, an increase of $34 million from the year-ago quarter.\n\nResearch and development expenses represented 10.1% of revenues for the quarter\ncompared with 9.5% of revenues for the same quarter of 1997.\n\nResearch and development expenses increased $97 million during the quarter\ncompared with the same year-ago quarter. This was primarily due to increased\nexpenditures in support of wireless, data networking, optical networking and\nswitching and access systems.\n\nThe purchased in-process research and development expenses for the quarter were\n$21 million associated with the acquisition of Quadritek compared with $427\nmillion related to the acquisition of Livingston for the same quarter of 1997.\n\nOTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE\nMONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31, 1997\n\nOther income - net decreased $44 million to $102 million for the quarter\ncompared with the same quarter in 1997. The decrease was primarily due to the\ngain on ATS recorded in the prior quarter partially offset by lower net equity\nlosses and lower losses on foreign exchange in the current quarter.\n\n\n\n\n\n 18 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\n\nInterest expense for the quarter increased $16 million to $78 million compared\nwith the same quarter in 1997. The increase in interest expense is due to higher\ndebt levels for the quarter ended December 31, 1998 compared with the same\nquarter in 1997.\n\nThe effective income tax rate of 34.0% for the quarter ended December 31, 1998\ndecreased from 46.4% for the prior year quarter. Excluding the purchased\nin-process research and development expenses associated with the Quadritek\nacquisition in 1998 and the Livingston acquisition in 1997, the effective income\ntax rate remained at 34.0% for the quarter ended December 31, 1998 compared with\n36.0% in the prior year quarter. This decrease was primarily due to increased\nresearch and experimentation tax credits and the tax impact of foreign activity.\n\nTOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY\n\nTotal assets increased $4,921 million, or 18.4%, from fiscal year-end 1998. This\nincrease was largely due to increases in accounts receivable and prepaid pension\ncosts of $2,246 million and $2,314 million, respectively. The increase in\naccounts receivable was primarily related to higher sales volume in the last\nmonth of the quarter. Prepaid pension costs increased due to the change in\naccounting for pensions.\n\nTotal liabilities increased $2,018 million, or 9.5% from fiscal year-end 1998.\nThis increase was due primarily to higher commercial paper balances.\n\nWorking capital, defined as current assets less current liabilities, increased\n$1,260 million from September 30, 1998, primarily resulting from the increase in\naccounts receivable and inventories partially offset by higher commercial paper\nbalances.\n\nLucent expects that, from time to time, outstanding commercial paper balances\nmay be replaced with short- or long-term borrowings as market conditions permit.\nAt December 31, 1998, Lucent maintained approximately $5,400 million in credit\nfacilities of which a portion is used to support Lucent's commercial paper\nprogram. At December 31, 1998, approximately $4,900 million was unused. Future\nfinancings will be arranged to meet Lucent's requirements with the timing,\namount and form of issue depending on the prevailing market and general economic\nconditions. Lucent anticipates that borrowings under its bank credit facilities,\nthe issuance of additional commercial paper, cash generated from operations and\nshort- and long-term debt financings will be adequate to satisfy its future cash\nrequirements, although there can be no assurance that this will be the case.\n\nNetwork operators, inside and outside the United States, increasingly have\nrequired their suppliers to arrange or provide long-term financing for them as a\ncondition to obtaining or bidding on infrastructure projects. These projects may\nrequire financing in amounts ranging from modest sums to over a billion dollars.\nLucent has increasingly provided or arranged long-term financing for customers.\nAs market conditions permit, Lucent's intention is to lay off these long-term\nfinancing arrangements, which may include both commitments and drawn down\nborrowings, to financial institutions and investors. This enables Lucent to\nreduce the amount of its commitments and free up additional financing capacity.\n\nAs of December 31, 1998, Lucent had made commitments or entered into an\nagreement to extend credit to certain network operators, including PCS and\nwireless operators, for an aggregate of approximately $3,190 million. As of\nDecember 31, 1998, approximately $440 million had been advanced and was\noutstanding. Included in the $3,190 million is approximately $2,810 million to\ntwelve network operators for possible future sales. As of December 31, 1998,\napproximately $350 million had been advanced and outstanding under seven of\nthese arrangements.\n\n\n\n\n\n 19 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nAs part of the revenue recognition process, Lucent assesses the collectibility\nof its receivables relating to contracts with customers for which Lucent\nprovides financing.\n\nIn addition to the above arrangements, Lucent will continue to provide or commit\nto financing where appropriate for its business. The ability of Lucent to\narrange or provide financing for its customers will depend on a number of\nfactors, including Lucent's capital structure and level of available credit, and\nits continued ability to lay off commitments and drawn down borrowings on\nacceptable terms.\n\nLucent believes that it will be able to access the capital markets on terms and\nin amounts that will be satisfactory to Lucent and that it will be able to\nobtain bid and performance bonds, to arrange or provide customer financing as\nnecessary, and to engage in hedging transactions on commercially acceptable\nterms, although there can be no assurance that this will be the case.\n\nRISK MANAGEMENT\n\nLucent is exposed to market risk from changes in foreign currency exchange rates\nand interest rates, which could impact its results of operations, financial\ncondition and cash flow. Lucent manages its exposure to these market risks\nthrough its regular operating and financing activities and, when deemed\nappropriate, through the use of derivative financial instruments. Derivative\nfinancial instruments are viewed as risk management tools and are not used for\nspeculative or trading purposes. In addition, derivative financial instruments\nare entered into with a diversified group of major financial institutions in\norder to manage Lucent's exposure to nonperformance by the counterparties on\nsuch instruments.\n\nLucent manages its ratio of fixed to floating rate debt with the objective of\nachieving a mix that management believes is appropriate. To manage this mix in a\ncost effective manner, Lucent, from time to time, enters into interest rate swap\nagreements, in which it agrees to exchange various combinations of fixed and/or\nvariable interest rates based on agreed upon notional amounts. Lucent had no\nmaterial interest rate swap agreements in effect as of December 31, 1998 and\nSeptember 30, 1998. Management does not foresee or expect any significant\nchanges in its exposure to interest rate fluctuations or in how such exposure is\nmanaged in the near future.\n\nCASH FLOWS\n\nCash used in operating activities for the three months ended December 31, 1998\nwas $1,101 million compared with cash provided by operating activities of $385\nin the same year-ago quarter. This reduction in cash was primarily due to\nincreases in accounts receivable and inventories, offset by a decrease in\npayroll and benefit related liabilities.\n\nCash payments of $13 million were made for the quarter ended December 31, 1998,\nfor the 1995 business restructuring charge. Of the 23,000 positions that Lucent\nannounced it would eliminate in connection with the restructuring charges,\napproximately 20,100 positions have been eliminated as of December 31, 1998.\n\n\n\n\n\n 20 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\n\n\nComparing the quarters ended December 31, 1998 and 1997, cash used in investing\nactivities increased to $367 million from $10 million primarily due to the cash\nused for acquisitions and a reduction in cash from dispositions.\n\nCapital expenditures were $343 million and $261 million for the quarters ended\nDecember 31, 1998 and 1997, respectively. Capital expenditures relate to\nexpenditures for equipment and facilities used in manufacturing and research and\ndevelopment, including expansion of manufacturing capacity, and expenditures for\ncost reduction efforts and international growth.\n\nCash provided by financing activities for the quarter ended December 31, 1998\nwas $1,713 million compared with $478 million used in financing activities in\nthe same quarter a year-ago. This increase in cash provided by financing\nactivities was primarily due to increased issuances of both short- and long-term\ndebt.\n\nThe ratio of total debt to total capital (debt plus equity) was 42.2% at\nDecember 31, 1998 compared to 45.6% at September 30, 1998.\n\nOTHER\n\nLucent's current and historical operations are subject to a wide range of\nenvironmental protection laws. In the United States, these laws often require\nparties to fund remedial action regardless of fault. Lucent has remedial and\ninvestigatory activities underway at numerous current and former facilities. In\naddition, Lucent was named a successor to AT&T as a potentially responsible\nparty (\"PRP\") at numerous \"Superfund\" sites pursuant to the Comprehensive\nEnvironmental Response, Compensation and Liability Act of 1980 (\"CERCLA\") or\ncomparable state statutes. Under the Separation and Distribution Agreement,\namong AT&T, Lucent and NCR Corporation dated as of February 1, 1996, as amended\nand restated, Lucent is responsible for all liabilities primarily resulting from\nor related to the operation of Lucent's business as conducted at any time prior\nto or after the Separation including related businesses discontinued or disposed\nof prior to the Separation, and Lucent's assets including, without limitation,\nthose associated with these sites. In addition, under the Separation and\nDistribution Agreement, Lucent is required to pay a portion of contingent\nliabilities paid out in excess of certain amounts by AT&T and NCR, including\nenvironmental liabilities.\n\nIt is often difficult to estimate the future impact of environmental matters,\nincluding potential liabilities. Lucent records an environmental reserve when it\nis probable that a liability has been incurred and the amount of the liability\nis reasonably estimable. This practice is followed whether the claims are\nasserted or unasserted. Management expects that the amounts reserved will be\npaid out over the period of remediation for the applicable site which ranges\nfrom 5 to 30 years. Reserves for estimated losses from environmental remediation\nare, depending on the site, based primarily upon internal or third party\nenvironmental studies, and estimates as to the number, participation level and\nfinancial viability of any other PRPs, the extent of the contamination and the\nnature of required remedial actions. Accruals are adjusted as further\ninformation develops or circumstances change. The amounts provided for in\nLucent's consolidated financial statements for environmental reserves are the\ngross undiscounted amount of such reserves, without deductions for insurance or\nthird party indemnity claims. In those cases where insurance carriers or third\nparty indemnitors have agreed to pay any amounts and\n\n\n\n\n\n 21 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\n\nmanagement believes that collectibility of such amounts is probable, the amounts\nare reflected as receivables in the financial statements. Although Lucent\nbelieves that its reserves are adequate, there can be no assurance that the\namount of capital and other expenditures that will be required relating to\nremedial actions and compliance with applicable environmental laws will not\nexceed the amounts reflected in Lucent's reserves or will not have a material\nadverse effect on Lucent's financial condition, results of operations or cash\nflows. Any amounts of environmental costs that may be incurred in excess of\nthose provided for at December 31, 1998 cannot be determined.\n\nFORWARD-LOOKING STATEMENTS\n\nThis Management's Discussion and Analysis of Results of Operations and Financial\nCondition and other sections of this report contain forward-looking statements\nthat are based on current expectations, estimates, forecasts and projections\nabout the industries in which Lucent operates, management's beliefs and\nassumptions made by management. In addition, other written or oral statements\nwhich constitute forward-looking statements may be made by or on behalf of\nLucent. Words such as \"expects,\" \"anticipates,\" \"intends,\" \"plans,\" \"believes,\"\n\"seeks,\" \"estimates,\" variations of such words and similar expressions are\nintended to identify such forward-looking statements. These statements are not\nguarantees of future performance and involve certain risks, uncertainties and\nassumptions (\"Future Factors\") which are difficult to predict. Therefore, actual\noutcomes and results may differ materially from what is expressed or forecasted\nin such forward-looking statements. Lucent undertakes no obligation to update\npublicly any forward-looking statements, whether as a result of new information,\nfuture events or otherwise.\n\nFuture Factors include increasing price and product/services competition by\nforeign and domestic competitors, including new entrants; rapid technological\ndevelopments and changes and Lucent's ability to continue to introduce\ncompetitive new products and services on a timely, cost-effective basis; the mix\nof products/services; the achievement of lower costs and expenses; the ability\nto successfully integrate the operations and business of Ascend, Kenan and other\nacquired companies; the outcome and impact of Year 2000; domestic and foreign\ngovernmental and public policy changes which may affect the level of new\ninvestments and purchases made by customers; changes in environmental and other\ndomestic and foreign governmental regulations; protection and validity of patent\nand other intellectual property rights; reliance on large customers; customer\ndemand for Lucent's products and services; technological, implementation and\ncost/financial risks in the increasing use of large, multi-year contracts; the\ncyclical nature of Lucent business; the outcome of pending and future litigation\nand governmental proceedings and continued availability of financing, financial\ninstruments and financial resources in the amounts, at the times and on the\nterms required to support Lucent's future business. These are representative of\nthe Future Factors that could affect the outcome of the forward-looking\nstatements. In addition, such statements could be affected by general industry\nand market conditions and growth rates, general domestic and international\neconomic conditions including interest rate and currency exchange rate\nfluctuations and other Future Factors.\n\nFor a further description of Future Factors that could cause actual results to\ndiffer materially from such forward-looking statements, see below in this report\nincluding the other sections referred to and also see the discussion in Lucent's\nForm 10-K for the year ended September 30, 1998 in Item 1 in the section\nentitled \"OUTLOOK-Forward Looking Statements\" and the remainder of the OUTLOOK\nsection.\n\n\n\n\n 22 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nCompetition:\nSee discussion above under KEY BUSINESS CHALLENGES.\n\nDependence On New Product Development:\nThe markets for Lucent's principal products are characterized by rapidly\nchanging technology, evolving industry standards, frequent new product\nintroductions and evolving methods of building and operating communications\nsystems for network operators and business customers. Lucent's operating results\nwill depend to a significant extent on its ability to continue to introduce new\nsystems, products, software and services successfully on a timely basis and to\nreduce costs of existing systems, products, software and services. The success\nof these and other new offerings is dependent on several factors, including\nproper identification of customer needs, cost, timely completion and\nintroduction, differentiation from offerings of Lucent's competitors and market\nacceptance. In addition, new technological innovations generally require a\nsubstantial investment before any assurance is available as to their commercial\nviability, including, in some cases, certification by international and domestic\nstandards-setting bodies.\n\nReliance on Major Customers:\nSee discussion above under KEY BUSINESS CHALLENGES.\n\nReadiness for Year 2000:\nLucent is engaged in a major effort to minimize the impact of the Year 2000 date\nchange on Lucent's products, information technology systems, facilities and\nproduction infrastructure. Lucent has targeted June 30, 1999 for completion of\nthese efforts.\n\nThe Year 2000 challenge is a priority within Lucent at every level of Lucent.\nPrimary Year 2000 preparedness responsibility rests with program offices which\nhave been established within each of Lucent's product groups and corporate\ncenters. A corporate-wide Lucent Year 2000 Program Office (\"LYPO\") monitors and\nreports on the progress of these offices. Each program office has a core of\nfull-time individuals augmented by a much larger group who have been assigned\nspecific Year 2000 responsibilities in addition to their regular assignments.\nFurther, Lucent has engaged third parties to assist in its readiness efforts in\ncertain cases. LYPO has established a methodology to measure, track and report\nYear 2000 readiness status consisting of five steps: inventory; assessment;\nremediation; testing and deployment.\n\nLucent is completing programs to make its new commercially available products\nYear 2000 ready and has developed evolution strategies for customers who own\nnon-Year 2000 ready Lucent products. The majority of the upgrades and new\nproducts needed to support customer migration are already generally available.\nBy the end of 1998, all but a few of these products were generally available.\n\nLucent has launched extensive efforts to alert customers who have non-Year 2000\nready products, including direct mailings, phone contacts and participation in\nuser and industry groups. Lucent also has a Year 2000 website www.lucent.com/y2k\nthat provides Year 2000 product information. Lucent continues to cooperate in\nthe Year 2000 information sharing efforts of the Federal Communications\nCommission and other governmental bodies.\n\nLucent believes it has sufficient resources to provide timely support to its\ncustomers that require product migrations or upgrades. However, because this\neffort is heavily dependent on customer cooperation, Lucent continues to monitor\ncustomer response and will take steps to improve customer responsiveness, as\nnecessary. Also, Lucent is continuing contingency planning to address potential\nspikes in demand for customer support resulting from the Year 2000 date change.\nThese plans are targeted for completion by April 30, 1999.\n\n\n\n\n\n 23 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\n\nLucent has largely completed the inventory and assessment phases of the program\nwith respect to its factories, information systems, and facilities.\nApproximately, two-thirds of the production elements included in the factory\ninventory were found to be Year 2000 ready. The factories have commenced the\nremediation phase of their effort through a combination of product upgrades and\nreplacement. Plans have been developed to facilitate the completion of this\nwork, as well as the related testing and deployment, by June 30, 1999.\n\nCurrently, approximately 65% of Lucent's information technology infrastructure\nhas been determined to be Year 2000 ready and is deployed for use.\nApproximately, 65% of our business applications lines of code that are supported\nby Lucent's information technology group are now Year 2000 ready and have been\ndeployed or are awaiting deployment. LYPO is monitoring the progress of\nreadiness efforts across Lucent, with a special emphasis on the early\nidentification of any areas where progress to-date could indicate difficulty in\nmeeting Lucent's June 1999 internal readiness target date. Lucent is developing\nspecific contingency plans, as appropriate.\n\nLucent is also assessing the Year 2000 readiness of the large number of\nfacilities that it owns or leases world-wide. Priority is being placed on\nLucent-owned facilities, leased facilities that Lucent manages and other\ncritical facilities that house large numbers of employees or significant\noperations. Based on the results of these assessment activities, Lucent plans to\ncomplete remediation efforts by March 31, 1999 and complete development of\napplicable contingency plans by May 31, 1999.\n\nTo ensure the continued delivery of third party products and services, Lucent's\nprocurement organization has analyzed Lucent's supplier base and has sent\nsurveys to approximately 5,000 suppliers. Follow-up efforts have commenced to\nobtain feedback from critical suppliers. To supplement this effort, Lucent is\nconducting readiness reviews of the Year 2000 status of the suppliers ranked as\nmost critical based on the nature of their relationship with Lucent, the\nproduct/service provided and/or the content of their survey responses. Almost\nall of Lucent's suppliers are still deeply engaged in executing their Year 2000\nreadiness efforts and, as a result, Lucent cannot, at this time, fully evaluate\nthe Year 2000 risks to its supply chain. Lucent will continue to monitor the\nYear 2000 status of its suppliers to minimize this risk and will develop\nappropriate contingent responses as the risks become clearer.\n\nThe risk to Lucent resulting from the failure of third parties in the public and\nprivate sector to attain Year 2000 readiness is the same as other firms in\nLucent's industry or other business enterprises generally. The following are\nrepresentative of the types of risks that could result in the event of one or\nmore major failures of Lucent's information systems, factories or facilities to\nbe Year 2000 ready, or similar major failures by one or more major third party\nsuppliers to Lucent: (1) information systems--could include interruptions or\ndisruptions of business and transaction processing such as customer billing,\npayroll, accounts payable and other operating and information processes, until\nsystems can be remedied or replaced; (2) factories and facilities--could include\ninterruptions or disruptions of manufacturing processes and facilities with\ndelays in delivery of products, until non-compliant conditions or components can\nbe remedied or replaced; and (3) major suppliers to Lucent--could include\ninterruptions or disruptions of the supply of raw materials, supplies and Year\n2000 ready components which could cause interruptions or disruptions of\nmanufacturing and delays in delivery of products, until the third party supplier\nremedied the problem or contingency measures were implemented. Risks of major\nfailures of Lucent's principal products could include adverse functional impacts\nexperienced by customers, the costs and resources for Lucent to remedy problems\nor replace products where Lucent is obligated or undertakes to take such action,\nand delays in delivery of new products.\n\n\n\n\n\n 24 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nLucent believes it is taking the necessary steps to resolve Year 2000 issues;\nhowever, given the possible consequences of failure to resolve significant Year\n2000 issues, there can be no assurance that any one or more such failures would\nnot have a material adverse effect on Lucent. Lucent estimates that the costs of\nefforts to prepare for Year 2000 from calendar year 1997 through 2000 is about\n$535 million, of which an estimated $280 million has been spent as of December\n31, 1998. Lucent has been able to reprioritize work projects to largely address\nYear 2000 readiness needs within its existing organizations. As a result, most\nof these costs represent costs that would have been incurred in any event. These\namounts cover costs of the Year 2000 readiness work for inventory, assessment,\nremediation, testing and deployment including fees and charges of contractors\nfor outsourced work and consultant fees. Costs for previously contemplated\nupdates and replacements of Lucent's internal systems and information systems\ninfrastructure have been excluded without attempting to establish whether the\ntiming of non-Year 2000 replacement or upgrading was accelerated.\n\nWhile the Year 2000 cost estimates above include additional costs, Lucent\nbelieves, based on available information, that it will be able to manage its\ntotal Year 2000 transition without any material adverse effect on its business\noperations, products or financial prospects.\n\nThe actual outcomes and results could be affected by Future Factors including,\nbut not limited to, the continued availability of skilled personnel, cost\ncontrol, the ability to locate and remediate software code problems, critical\nsuppliers and subcontractors meeting their commitments to be Year 2000 ready and\nprovide Year 2000 ready products, and timely actions by customers.\n\nEuropean Monetary Union - Euro:\nOn January 1, 1999, eleven member countries of the European Union established\nfixed conversion rates between their existing sovereign currencies, and adopted\nthe Euro as their new common legal currency. As of that date, the Euro is\ntrading on currency exchanges, and the legacy currencies will remain legal\ntender in the participating countries for a transition period between January 1,\n1999 and January 1, 2002.\n\nDuring the transition period, cash-less payments can be made in the Euro, and\nparties can elect to pay for goods and services and transact business using\neither the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002,\nthe participating countries will introduce Euro notes and coins and withdraw all\nlegacy currencies so that they will no longer be available.\n\nLucent has begun planning for the Euro's introduction. For this purpose, Lucent\nhas in place a joint European-United States team representing affected functions\nwithin the Company.\n\nThe Euro conversion may affect cross-border competition by creating cross-border\nprice transparency. Lucent is assessing its pricing/marketing strategy in order\nto insure that it remains competitive in a broader European market. Lucent is\nalso assessing its information technology systems to allow for transactions to\ntake place in both the legacy currencies and the Euro and the eventual\nelimination of the legacy currencies, and reviewing whether certain existing\ncontracts will need to be modified. Lucent's currency risk and risk management\nfor operations in participating countries may be reduced as the legacy\ncurrencies are converted to the Euro. Final accounting, tax and governmental\nlegal and regulatory guidance is not available. Lucent will continue to evaluate\nissues involving introduction of the Euro. Based on current information and\nLucent's current assessment, Lucent does not expect that the Euro conversion\nwill have a material adverse effect on its business or financial condition.\n\n\n\n 25 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nEmployee Relations:\nOn December 31, 1998, Lucent employed approximately 143,800 persons, of whom 78%\nwere located in the United States. Of these domestic employees, 40% are\nrepresented by unions, primarily the Communications Workers of America\n(\"CWA\")and the International Brotherhood of Electrical Workers (\"IBEW\"). Lucent\nhas concluded new five year agreements with the CWA and IBEW expiring May 31,\n2003.\n\nMulti-Year Contracts:\nLucent has significant contracts for the sale of infrastructure systems to\nnetwork operators which extend over a multi-year period, and expects to enter\ninto similar contracts in the future, with uncertainties affecting recognition\nof revenues, stringent acceptance criteria, implementation of new technologies\nand possible significant initial cost overruns and losses. See also discussion\nabove under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, and KEY BUSINESS\nCHALLENGES.\n\nSeasonality:\nSee discussion above under KEY BUSINESS CHALLENGES.\n\nFuture Capital Requirements:\nSee discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.\n\nGrowth Outside the U.S., Foreign Exchange and Interest Rates:\nLucent intends to continue to pursue growth opportunities in markets outside the\nU.S. In many markets outside the U.S., long-standing relationships between\npotential customers of Lucent and their local providers, and protective\nregulations, including local content requirements and type approvals, create\nbarriers to entry. In addition, pursuit of such growth opportunities outside the\nU.S. may require significant investments for an extended period before returns\non such investments, if any, are realized. Such projects and investments could\nbe adversely affected by reversals or delays in the opening of foreign markets\nto new competitors, exchange controls, currency fluctuations, investment\npolicies, repatriation of cash, nationalization, social and political risks,\ntaxation, and other factors, depending on the country in which such opportunity\narises. Difficulties in foreign financial markets and economies, and of foreign\nfinancial institutions, could adversely affect demand from customers in the\naffected countries.\n\nSee discussion above under RISK MANAGEMENT with respect to foreign exchange and\ninterest rates. A significant change in the value of the dollar against the\ncurrency of one or more countries where Lucent sells products to local customers\nor makes purchases from local suppliers may materially adversely affect Lucent's\nresults. Lucent attempts to mitigate any such effects through the use of foreign\ncurrency contracts, although there can be no assurances that such attempts will\nbe successful.\n\nWhile Lucent hedges transactions with non-U.S. customers, the decline in value\nof the Asia/Pacific currencies, or declines in currency values in other regions,\nmay, if not reversed, adversely affect future product sales because Lucent's\nproducts may become more expensive to purchase for local customers doing\nbusiness in the countries of the affected currencies.\n\nLegal Proceedings and Environmental:\nSee discussion above in Note 9 - COMMITMENTS AND CONTINGENCIES and OTHER.\n\n\n\n\n\n 26 Form 10-Q - Part I\n\n MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF\n OPERATIONS AND FINANCIAL CONDITION\n\nRECENT PRONOUNCEMENTS\n\nIn December 1998, the American Institute of Certified Public Accountants issued\nStatement of Position 98-9, Modification of SOP 97-2, \"Software Revenue\nRecognition,\" with Respect to Certain Transactions (\"SOP 98-9\"). SOP 98-9 amends\nSOP 97-2 to require recognition for multiple-element arrangements by means of\nthe \"residual method\" in certain circumstances. The provisions of SOP 98-9 that\nextend the deferral of certain passages of SOP 97-2 became effective December\n15, 1998. All other provisions are effective for transactions entered into in\nfiscal years beginning after March 15, 1999. Earlier application for financial\nstatements or information that has not been issued is permitted and retroactive\napplication is prohibited. SOP 98-9 is not expected to have a material impact on\nLucent's consolidated results of operations, financial position or cash flows.\n\n\n\n\n\n 27 Form 10-Q - Part II\n\n Part II - Other Information\n\n\nItem 6. Exhibits and Reports on Form 8-K.\n\n(a) Exhibits:\n\n Exhibit Number\n\n (12) Computation of Ratio of Earnings to Fixed Charges\n\n (18) Preferability Letter on Accounting Change from\n PricewaterhouseCoopers LLP\n\n (27) Financial Data Schedule\n\n\n(b) Reports on Form 8-K:\n\n Current Report on Form 8-K dated October 22, 1998 was filed pursuant to\n Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial\n Information and Exhibits).\n\n\n\n\n\n\n 28 Form 10-Q\n\n\n SIGNATURES\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n\n\n Lucent Technologies Inc.\n\n\n\n\n\n\n\n\n\nDate February 16, 1999\n\n\n\n By James S. Lusk\n Vice President and Controller\n (Principal Accounting Officer)\n\n \n \n\nEX-12\n2\nSTATEMENT RE: COMPUTATION OF RATIOS\n\n\n\n\n\n\n Exhibit 12\n Form 10-Q\n For the Three\n Months Ended\n December 31, 1998\n\n\n Lucent Technologies Inc.\n Computation of Ratio of Earnings to Fixed Charges\n\n (Dollars in Millions)\n (Unaudited)\n\n\n For the Three\n Months Ended\n December 31, 1998\n\nIncome Before Income Taxes............................. $ 2,121\n \nLess Interest Capitalized during \n the Period........................................... 5\nLess Undistributed Earnings of Less than 50% \n Owned Affiliates..................................... 1\n \nAdd Fixed Charges...................................... 117\n \nTotal Earnings ........................................ $ 2,232\n \n \n \nFixed Charges \n \nTotal Interest Expense Including Capitalized Interest.. $ 80\n \nInterest Portion of Rental Expense..................... 37\n \n Total Fixed Charges................................ $ 117\n \nRatio of Earnings to Fixed Charges..................... 19.1\n \n \n \n\nEX-18\n3\nLETTER RE: CHANGE IN ACCOUNTING PRINCIPLES\n\n\n\n\n\n\n\n\n Exhibit 18\n Form 10-Q\n For the Three\n Months Ended\n December 31, 1998\n\n\n\n Preferability Letter on Accounting Change from\n PricewaterhouseCoopers LLP\n\n\n\nLucent Technologies Inc.\n600 Mountain Avenue\nMurray Hill, New Jersey 07974\n\n\nWe are providing this letter to you for inclusion as an exhibit to your Form\n10-Q for the quarterly period ended December 31, 1998 pursuant to Item 601 of\nRegulation S-K.\n\nWe have read management's justification for the change in method for determining\nthe annual expected return on plan assets of the Company's pension and\npostretirement plans contained in the Company's Form 10-Q for the quarterly\nperiod ended December 31, 1998. Based on our reading of the data and discussions\nwith Company officials of business judgment and business planning factors\nrelating to the change, we believe management's justification to be reasonable.\nAccordingly, we concur that the newly adopted accounting principle described\nabove is preferable in the Company's circumstances to the method previously\napplied.\n\nWe have not audited any financial statements of Lucent Technologies Inc. as of\nany date or for any period subsequent to September 30, 1998 nor have we audited\nthe application of the change in accounting principle disclosed in Form 10-Q of\nLucent Technologies Inc. for the quarterly period ended December 31, 1998;\naccordingly, our comments are subject to revision on completion of an audit of\nthe consolidated financial statements that include the accounting change.\n\n\n PricewaterhouseCoopers LLP\n\n\n\n \n \n\nEX-27\n4\nFINANCIAL DATA SCHEDULE\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":198,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"MCK"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/927653/0000927653-99-000004.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n KB0RE+1DxKQupWun1YuG9KgP7fRn1oXtnJ8YFxMsxlkahgisKyangid4TK2Zxkn5\n XMAuWwSsUvcJdr3RnSuVPw==\n\n0000927653-99-000004.txt : 19990215\n0000927653-99-000004.hdr.sgml : 19990215\nACCESSION NUMBER:\t\t0000927653-99-000004\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t2\nCONFORMED PERIOD OF REPORT:\t19981231\nFILED AS OF DATE:\t\t19990212\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tMCKESSON HBOC INC\n\t\tCENTRAL INDEX KEY:\t\t\t0000927653\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tWHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]\n\t\tIRS NUMBER:\t\t\t\t943207296\n\t\tSTATE OF INCORPORATION:\t\t\tDE\n\t\tFISCAL YEAR END:\t\t\t0331\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-13252\n\t\tFILM NUMBER:\t\t99534006\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\tONE POST ST\n\t\tSTREET 2:\t\tMCKESSON PLAZA\n\t\tCITY:\t\t\tSAN FRANCISCO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94104\n\t\tBUSINESS PHONE:\t\t4159838300\n\n\tMAIL ADDRESS:\t\n\t\tSTREET 1:\t\tONE POST ST\n\t\tCITY:\t\t\tSAN FRANCISCO\n\t\tSTATE:\t\t\tCA\n\t\tZIP:\t\t\t94104\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tMCKESSON CORP\n\t\tDATE OF NAME CHANGE:\t19950209\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tSP VENTURES INC\n\t\tDATE OF NAME CHANGE:\t19940728\n \n\n10-Q\n1\nQUARTERLY REPORT\n\n\n\n SECURITIES AND EXCHANGE COMMISSION\n Washington, DC 20549\n\n FORM 10-Q\n\n(Mark One)\n\n[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES\n EXCHANGE ACT OF 1934\n\nFor quarter ended December 31, 1998\n\n[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES \n EXCHANGE ACT OF 1934\n\nFor the transition period from to \n\nCommission file number 1-13252\n\n\n McKESSON HBOC, Inc.\n (Exact name of Registrant as specified in its charter)\n\n DELAWARE\n (State or other jurisdiction of incorporation or organization)\n\n 94-3207296\n (IRS Employer Identification No.)\n\n\n One Post Street, San Francisco, California\n (Address of principal executive offices) \n\n 94104\n (Zip Code)\n\n (415) 983-8300\n (Registrant's telephone number, including area code)\n\n McKESSON CORPORATION\n (Former name, if changed since last report)\n\nIndicate by check mark whether the Registrant (1) has filed all reports required\nto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during\nthe preceding 12 months (or for such shorter period that the Registrant was\nrequired to file such reports), and (2) has been subject to such filing\nrequirements for the past 90 days.\n\n Yes X No\n ---\nIndicate the number of shares outstanding of each of the issuer's classes of\ncommon stock, as of the latest practicable date.\n\n Class\n Common stock, $.01 par value\n\n Outstanding at December 31, 1998\n 99,730,700 shares\n\n\n\n\n\n TABLE OF CONTENTS\n\n PART I. FINANCIAL INFORMATION\n\n\n\n\n\n Item Page\n 1. Financial Statements\n\n Consolidated Balance Sheets\n December 31, 1998 and March 31, 1998 3 - 4\n\n Statements of Consolidated Income\n Three and nine month periods ended December 31, 5\n 1998 and 1997\n\n Statements of Consolidated Cash Flows\n Nine month periods ended December 31, 1998 and 6 - 7\n 1997\n\n Financial Notes 8 - 12\n\n 2. Management's Discussion and Analysis of Financial\n Condition and Results of Operations\n\n Financial Review 13 - 18\n\n 3. Quantitative and Qualitative Disclosures about 18\n Market Risk\n\n\n PART II. OTHER INFORMATION\n\n\n 5. Other Information 19\n\n 6. Exhibits and Reports on Form 8-K 20\n\n Exhibit Index 22\n\n\n\n\n\n PART I. FINANCIAL INFORMATION\n\n\n The information presented in Part I represents historical information for\nMcKesson Corporation (the \"Company\") and does not give effect to the January 12,\n1999 merger with HBO & Company (\"HBOC\") and other acquisitions completed by the\nCompany and HBOC in fiscal 1999 accounted for under the pooling of interests\nmethod. See Financial Note 8.\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n CONSOLIDATED BALANCE SHEETS\n (unaudited)\n\n\n\n December 31, March 31,\n 1998 1998\n --------------- ---------------\n (in millions)\n
\n\n\n\n (Continued)\n\n 3\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n CONSOLIDATED BALANCE SHEETS\n (unaudited)\n\n\n December 31, March 31,\n 1998 1998\n -------------- --------------\n (in millions)\nLIABILITIES AND STOCKHOLDERS' EQUITY\n
\n\nSee Financial Notes.\n\n (Concluded)\n\n 4\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n STATEMENTS OF CONSOLIDATED INCOME\n (unaudited)\n\n\n Three Months Ended Nine Months Ended\n December 31 December 31\n ----------------------- -----------------------\n 1998 1997 1998 1997\n ---------- ---------- ---------- ----------\n (in millions, except per share amounts)\n\n
\n\nSee Financial Notes.\n\n 5\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n STATEMENTS OF CONSOLIDATED CASH FLOWS\n (unaudited)\n\n\n Nine Months Ended\n December 31,\n 1998 1997\n -------- --------\n (in millions)\n
\n\n\n (Continued)\n\n 6\n\n \n McKESSON CORPORATION and SUBSIDIARIES\n STATEMENTS OF CONSOLIDATED CASH FLOWS\n (unaudited)\n\n\n\n Nine Months Ended\n December 31,\n 1998 1997\n --------- ---------\n (in millions)\n\n
\n\nSee Financial Notes.\n\n (Concluded)\n\n 7\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL NOTES\n (unaudited)\n\n1. Interim Financial Statements\n\n In the opinion of the Company, these unaudited consolidated financial\nstatements include all adjustments necessary for a fair presentation of its\nfinancial position as of December 31, 1998, the results of its operations for\nthe three and nine months ended December 31, 1998 and 1997 and its cash flows\nfor the nine months ended December 31, 1998 and 1997. Except for certain items\ndescribed in Note 4, such adjustments were of a normal recurring nature.\n\n The results of operations for the nine months ended December 31, 1998 and\n1997 are not necessarily indicative of the results for the full years.\n\n It is suggested that these interim financial statements be read in\nconjunction with the annual audited financial statements and financial notes\nthereto included in the Company's 1998 Consolidated Financial Statements which\nhave previously been filed with the Securities and Exchange Commission.\n\n\n\n2. Marketable Securities\n\n The December 31, 1998 marketable securities balance includes $22.8\nmillion held in trust as exchange property for the Company's $37.3 million\nprincipal amount of 4.5% exchangeable subordinated debentures which remain\noutstanding.\n\n\n\n3. Convertible Preferred Securities\n\n In February 1997, a wholly owned subsidiary trust of the Company issued 4\nmillion shares of preferred securities to the public and 123,720 common\nsecurities to the Company, which are convertible at the holder's option into\nMcKesson common stock. The proceeds of such issuances were invested by the trust\nin $206,186,000 aggregate principal amount of the Company's 5% Convertible\nJunior Subordinated Debentures due 2027 (the \"Debentures\"). The Debentures\nrepresent the sole assets of the trust. The Debentures mature on June 1, 2027,\nbear interest at the rate of 5%, payable quarterly, and are redeemable by the\nCompany beginning in March 2000 at 103.5% of the principal amount thereof.\n\n Holders of the securities are entitled to cumulative cash distributions at\nan annual rate of 5% of the liquidation amount of $50 per security. Each\npreferred security is convertible at the rate of 1.3418 shares of McKesson\ncommon stock, subject to adjustment in certain circumstances. The preferred\nsecurities will be redeemed upon repayment of the Debentures, and are callable\nby the Company at 103.5% of the liquidation amount beginning in March 2000.\n\n The Company has guaranteed, on a subordinated basis, distributions and\nother payments due to the preferred securities (the \"Guarantee\"). The Guarantee,\nwhen taken together with the Company's obligations under the Debentures and in\nthe indenture pursuant to which the Debentures were issued and the Company's\nobligations under the Amended and Restated Declaration of Trust governing the\nsubsidiary trust, provides a full and unconditional guarantee of amounts due on\nthe preferred securities.\n\n The Debentures and related trust investment in the Debentures have been\neliminated in consolidation and the preferred securities are reflected as\noutstanding in the accompanying consolidated financial statements.\n\n 8\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL NOTES\n (unaudited)\n\n4. Charges in Continuing Operations\n\n The Company continues to pursue its stated objective to become the world\nleader in health care supply and information management across the entire\ncontinuum of health care. In line with this goal, during the third quarter, the\nCompany completed the acquisition of Red Line HealthCare Corporation, which was\naccounted for as a purchase. During the nine months, the Company acquired\nseveral other companies, including Hawk Medical Supply, Inc., Automated\nPrescription Systems, Inc., Med Management, LLC, and J. Knipper and Company,\nInc. (all accounted for as poolings of interests except Med Management, LLC\nwhich was accounted for as a purchase), and also completed the consolidation of\ndistribution centers, technologies and back office operations related to the\nearlier FoxMeyer Corporation and Drug Trading Company, Limited acquisitions. In\nconjunction with the acquisitions and related activities, the Company incurred\ntransaction costs, charges associated with acquired company employee benefit\nchange of control provisions, restructuring costs and integration costs\n(incurred and recorded in the quarter and nine month periods), and wrote down\ncertain assets (primarily costs of duplicate systems that will be eliminated).\n\n Also in the nine months, the Company, by mutual agreement, terminated its\npending merger agreement with AmeriSource Health Corporation and incurred\nrelated charges.\n\n Charges for these items were recorded in selling, distribution, and\nadministrative expenses and are summarized below:\n\n\n Three Months Nine Months\n Ended Ended\n December 31, 1998 December 31, 1998\n ------------------ ------------------\n (in millions)\n\n
\n\n The Company's growth strategy is to pursue strategic acquisitions that\neither expand or complement its business, and the Company routinely reviews such\npotential acquisition opportunities. If additional transactions are entered\ninto, the Company would incur additional acquisition-related costs.\n\n 9\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL NOTES\n (unaudited)\n\n5. Comprehensive Income\n\n The Company adopted Statement of Financial Accounting Standards (\"SFAS\")\nNo. 130 \"Reporting Comprehensive Income,\" in the first quarter of fiscal 1999.\nComprehensive income is defined as all changes in stockholders' equity from\nnonowner sources. As such, it includes net income and amounts arising from\nforeign currency translations, unrecognized pension costs and unrealized gains\nor losses on marketable securities classified as available for sale which are\nrecorded directly to stockholders' equity. Total comprehensive income for the\nthree and nine months ended December 31, 1998 and 1997 is as follows:\n\n Three Months Ended Nine Months Ended\n December 31, December 31,\n ------------------- -------------------\n 1998 1997 1998 1997\n -------- -------- -------- --------\n (in millions)\n\n
\n\n6. Earnings Per Share\n\n The following is a reconciliation of the numerators and denominators of\nthe basic and diluted earnings per common share computations:\n\n Three Months Ended\n December 31, 1998 December 31, 1997\n ----------------------- ---------------------\n (in millions, except per share amounts)\n\n\n Per Per\n Income Shares Share Income Shares Share\n -------- ------ ------- -------- ------ -------\n
\n\n\n 10\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL NOTES\n (unaudited)\n\n\n Nine Months Ended\n December 31, 1998 December 31, 1997\n ----------------------- ---------------------\n (in millions, except per share amounts)\n\n Per Per\n Income Shares Share Income Shares Share\n ------- ------ ------- ------- ------ -------\n
\n\n7. New Accounting Pronouncements\n\n In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.\n131, \"Disclosures about Segments of an Enterprise and Related Information,\"\nwhich establishes annual and interim reporting standards for an enterprise's\noperating segments and related disclosures about its products, services,\ngeographic areas, and major customers; and SFAS No. 132, \"Employers' Disclosures\nabout Pension and Other Postretirement Benefits,\" which standardizes the\ndisclosure requirements for pensions and other postretirement benefits and\nexpands disclosures on changes in benefit obligations and fair values of plan\nassets. The Company will implement these statements in its fiscal 1999 annual\nfinancial statements. Adoption of these statements will not impact the Company's\nconsolidated financial position, results of operations or cash flows, and any\neffect will be limited to the form and content of its disclosures.\n\n In fiscal 1999, the Financial Accounting Standards Board issued SFAS No.\n133, \"Accounting for Derivative Instruments and Hedging Activities,\" which\nstandardizes the accounting for derivatives, requiring recognition as either\nassets or liabilities on the balance sheet and measurement at fair value. The\nCompany plans to adopt this statement in fiscal 2001. The Company has not yet\ndetermined the effect adoption of this statement will have on the Company's\nconsolidated financial position, results of operations or cash flows.\n\n\n\n8. Acquisition of HBO & Company\n\n On January 12, 1999, the Company completed a merger with HBO & Company\n(\"HBOC\"), a leading health care information technology company, by exchanging\n177 million shares of Company common stock for all of the common stock of HBOC.\nEach share of HBOC was exchanged for .37 of a share of Company common stock. In\naddition, outstanding HBOC employee stock options were converted at the same\nexchange factor into options to purchase approximately 10 million shares of\nCompany common stock. The Company was renamed McKesson HBOC, Inc.\n(\"McKessonHBOC\"). The merger constituted a tax-free reorganization and will be\naccounted for as a pooling of interests.\n\n 11\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL NOTES\n (unaudited)\n\n The following table presents pro forma combined revenues, net income and\nearnings per share of McKessonHBOC as if the merger had been consummated at the\nbeginning of the periods presented. The pro forma combined consolidated\nfinancial data also includes all other acquisitions completed by the Company and\nHBOC in fiscal 1999 accounted for under the pooling of interests method.\n\n\n\n Three Months Ended Nine Months Ended\n December 31 December 31\n ------------------ ------------------\n 1998 1997 1998 1997\n -------- -------- -------- -------- \n (in millions, except per share amount)\n\n
\n\n Pro forma net income includes special charges of $64.9 million pre-tax\n($43.7 million after-tax) and $50.3 million pre-tax ($30.1 million after-tax) in\nthe three months ended December 31, 1998 and 1997, respectively, and $158.5\nmillion pre-tax ($104.0 million after-tax) and $98.5 million pre-tax ($56.6\nmillion after-tax) in the nine months ended December 31, 1998 and 1997,\nrespectively, for transaction costs, severance, acquired company employee\nbenefit change of control provisions, asset write-downs, restructuring,\nintegration and system implementation costs (incurred and recorded in the\nquarter and nine month periods) associated primarily with acquisition-related\nactivities.\n\n The pro forma combined consolidated financial data does not reflect any\ncost savings and other synergies anticipated as a result of the merger or any\nmerger-related expenses and is not necessarily indicative of the actual results\nof the combined entities had the merger and other acquisitions been consummated\nat the beginning of the periods presented, nor is it necessarily indicative of\nfuture results of operations.\n\n 12\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\n\nSegment Results\n\n The revenues and operating profits of the Company by business segment are\nas follows:\n\n\n\n\n\n Three Months Ended Nine Months Ended\n December 31 December 31\n ------------------------- -------------------------\n 1998 1997 %chg. 1998 1997 %chg.\n -------- -------- ------ -------- -------- ------ \n (in millions)\n
\n\n\n 13\n\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\nOverview of Results\n\n Net income for the third quarter was $42.2 million, $0.40 per diluted\nshare compared to $42.0 million, $0.43 per share in the prior year. Included in\nthe current year's third quarter results were $27.1 million in pre-tax charges\n($17.2 million after-tax) for transaction costs, asset write-downs (primarily\ncosts of duplicate systems that will be eliminated), restructuring and\nintegration costs associated with acquisitions (see Financial Note 4).\n\n For the nine month period, net income was $93.7 million, $0.92 per diluted\nshare, compared to $119.2 million, $1.23 per share in the prior year. Included\nin the current year's results were the $27.1 million in pre-tax charges noted\nabove, plus $80.1 million in costs incurred in the first and second quarters,\nassociated with the completion of several acquisitions that were accounted for\nas poolings of interests, including Hawk Medical Supply, Inc., J. Knipper and\nCompany, Inc., and Automated Prescription Systems, Inc., and the terminated\nagreement with AmeriSource Health Corporation (\"AmeriSource\"). The charge also\nincluded amounts for an additional facility closure, non-recurring system\nimplementation costs and the completion of operational integration activities\nassociated with earlier acquisitions, which are required to be expensed as\nincurred.\n\n The effective income tax rate for the nine months ended December 31, 1998\ndiffered from the effective tax rate for the comparable prior year period\nprimarily due to certain nondeductible transaction expenses included in the\ncharges noted above.\n\n\nHealth Care Supply Management\n\n The Health Care Supply Management segment includes the operations of the\nCompany's U.S. pharmaceutical distribution and services businesses, its\ninternational pharmaceutical operations (Canada and Mexico), and its\nmedical/surgical distribution and services business. This segment accounted for\n99% of consolidated revenues for the three and the nine month periods ended\nDecember 31, 1998.\n\n Pharmaceutical Distribution & Services revenues increased by 50% in the\nquarter and 36% in the nine months, reflecting internal growth in the U.S.\ndirect delivery business of 22% and 17%, increases in U.S. sales to customers'\nwarehouses of 214% and 139%, and increases in international revenues of 11% and\n23%, respectively. Pharmaceutical Distribution & Services revenues, excluding\nsales to customers' warehouses, increased 22% and 19% in the three and nine\nmonth periods, respectively. U.S. revenue increases reflect growth in the\nexisting customer base and the addition of several new major retail chain\ncustomers. International revenue increases reflect the transition of additional\ncustomers of Drug Trading Company, Limited, to Medis Health and Pharmaceutical\nServices, Inc., the Company's Canadian health care distribution business.\n\n Medical/Surgical Distribution & Services revenues increased 36% to $630.2\nmillion in the quarter (19% to $1,652.2 million in the nine month period),\nincluding $47.6 million in revenues from Red Line HealthCare, acquired for cash\nin a transaction accounted for as a purchase in mid-November. The increase in\nrevenues reflects several new long-term contracts with major customers.\n\n Operating profit for the Health Care Supply Management segment, excluding\nthe impact of $26.5 million of previously discussed acquisition-related charges,\nincreased by 34% in the third quarter (31% for the nine month period, excluding\nacquisition-related charges of $105.1 million). Operating profit as a percent of\nrevenues (calculated excluding acquisition-related charges and sales to\ncustomers' warehouses) increased 18 basis points to 2.29% in the quarter and 21\nbasis points to 2.20% in the nine months, compared to the respective prior year\nperiods. The improvement in operating profit margins reflects growth in\nprocurement profits, operating expense efficiencies and sales of higher-margin\nautomated drug-dispensing products and manufacturer marketing services.\nIncluding acquisition-related charges, operating profit increased by 7% and\ndeclined by 9% in the quarter and nine month period, respectively.\n\n\n 14\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\nWater Products\n\n Segment revenues increased by 22% to $79.1 million, and 18% to $256.0\nmillion in the third quarter and the nine month period, respectively (including\ninternal sales growth of 10% and 11% in the respective periods). Operating\nprofit increased by 13% to $11.3 million in the quarter and 13% to $42.8 million\nin the nine months (before acquisition-related charges of $0.6 million and $2.1\nmillion, respectively), reflecting increased profits in the direct delivery\nbusiness and the favorable impact of several small acquisitions during the\ncurrent fiscal year. Including the impact of acquisition-related charges,\noperating profit increased by 7% and 8% in the quarter and nine month periods,\nrespectively.\n\n\n\nLiquidity and Capital Resources\n\n Cash and marketable securities available for sale were $153.1 million at\nDecember 31, 1998 and $113.6 million at March 31, 1998. The December 31, 1998\nmarketable securities balance included $22.8 million that is currently\nrestricted and held in trust as exchange property in connection with the\nCompany's outstanding exchangeable debentures. Cash and marketable securities\navailable for sale increased by $39.5 million and total debt increased by $801.2\nmillion during the nine months ended December 31, 1998. The net change of $761.7\nmillion primarily reflects both the increased working capital needs to support\nthe significant growth in revenue, (48% in the quarter) and cash utilized for\nacquisitions.\n\n Interest expense, net of interest income, increased to $31.7 million in\nthe third quarter and $86.4 million for the nine month period, compared to $25.0\nmillion and $70.3 million, respectively, in the prior year, due to borrowings to\nsupport the increase in working capital and acquisitions.\n\n Stockholders' equity was $1,680.7 million at December 31, 1998, and the\nnet debt-to-capital ratio was 50% compared with 41% on March 31, 1998. The net\ndebt-to-capital ratio for both periods was computed by reducing the outstanding\ndebt amount by the cash and marketable securities at the end of the period.\n\n For the nine month period, average diluted shares increased to 107.1\nmillion from 101.1 million in the prior year due primarily to the issuance of\n4.3 million common shares in connection with acquisitions, the sale of 1.3\nmillion shares to the Employee Stock Ownership Plan in the first quarter of\nfiscal 1999 and shares issued in connection with other employee benefit plans.\n\n\n\nSubsequent Event\n\n On January 12, 1999, the Company completed a merger with HBO & Company, a\nleading health care information technology company. The Company was renamed\nMcKesson HBOC, Inc. The merger constituted a tax-free reorganization and will be\naccounted for as a pooling of interests (see Financial Note 8). In connection\nwith the merger, the Company expects to record charges in the fourth fiscal\nquarter for merger (including investment, banking, legal, accounting, and other\nrelated costs), and restructuring costs, and affiliation costs expected to be\nincurred in the quarter.\n\n 15\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\nYear 2000\n\nBACKGROUND\n\n The \"Year 2000 problem\" refers to the fact that some computer hardware,\nsoftware and embedded firmware are designed to read and store dates using only\nthe last two digits of the year. The Company relies heavily on computer\ntechnologies to operate its business. In 1996, the Company conducted an initial\nassessment of its information technology to determine which Year 2000 related\nproblems might cause processing errors or computer system failures. Based on the\nresults of that initial analysis, the Company's executive management identified\nthe Year 2000 problem as a top corporate priority and established a central\noffice to provide enterprise-wide management of its Year 2000 project (the\n\"Project\"), which is currently estimated to have a total project cost of less\nthan $45 million (see \"--Costs\").\n\n The following discussion of the implications of the Year 2000 problem for\nthe Company contains numerous forward-looking statements based on inherently\nuncertain information. The cost of the Project and the date on which the Company\nplans to complete its internal Year 2000 modifications are based on the\nCompany's best estimates, which were derived utilizing a number of assumptions\nof future events including the continued availability of internal and external\nresources, third party modifications and other factors. However, there can be no\nguarantee that these estimates will be achieved, and actual results could\ndiffer. Moreover, although the Company believes it will be able to make the\nnecessary modifications in advance, there can be no guarantee that the failure\nto modify the systems would not have a material adverse effect on the Company.\n\n In addition, the Company places a high degree of reliance on computer\nsystems of third parties, such as customers, trade suppliers and computer\nhardware and commercial software suppliers. Although the Company is assessing\nthe readiness of these third parties and preparing contingency plans, there can\nbe no guarantee that the failure of these third parties to modify their systems\nin advance of December 31, 1999 would not have a material adverse effect on the\nCompany.\n\nREADINESS\n\n The Project is intended to ensure that all critical systems, devices and\napplications, as well as data exchanged with customers, trade suppliers, and\nother third parties (\"Trading Partners\") have been evaluated and will be\nsuitable for continued use into and beyond the year 2000. In addition to areas\nnormally associated with information technology (\"IT\"), the project also\nincludes areas normally considered outside of IT, but which may have embedded\nmicroprocessors with potential Year 2000 problems. Examples of such non-IT areas\ninclude the 30,000 hand-held order entry devices the Company has provided its\ncustomers, and recently implemented bar-code scanning devices used in warehouse\noperations.\n\n Responsibility for implementation of the Project has been divided among\nthirteen business units, each with its own IT resources. Each business unit\noperates under published corporate standards and progress is monitored by the\ncorporate Year 2000 central office. Responsibilities have been further\nsubdivided into functional areas. General priorities have been defined,\ndependencies identified, preliminary delivery dates assigned, detailed project\nplans developed, and internal and external technical resources assigned or\nhired. In addition, internal management reporting requirements have been\nestablished. Plans, and progress against those plans, are reviewed by the\nProject's central project office and are reported to the Chief Information\nOfficer, executive steering committee and the Company's Board of Directors.\n\n 16\n \n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\n The Project now consists of hundreds of individual projects, varying in\npriority and resource requirements from large undertakings, such as replacing\ncertain financial and electronic commerce (EDI) systems, to smaller projects,\nsuch as certification of telephony systems. Regardless of its size, each\nindividual project generally progresses through the following seven phases,\nwhich are divided into two stages:\n\nStage One: Stage Two:\n Awareness (Phase 1) Examination and analysis (Phase 3)\n Assessment of risk (Phase 2) Modification and/or renovation (Phase 4)\n Data conversion (Phase 5) \n Acceptance testing (Phase 6) \n Redeployment back into production (Phase 7)\n \n\n The Company has completed Stage One for all identified projects. Because\nof the size of the Project at the Company, and variation in assessed risk, some\nindividual projects have completed all phases while others are at various phases\nwithin Stage Two. Most of the Company's mission critical projects, (i.e., those\nprojects whose failure to be completed would create a significant business\ndisruption) are at Phase 6 or higher, and all of its mission critical projects\nwill be installed by July 31, 1999. A limited number of systems requiring\nextended migration, installation or conversion efforts will require work\nextending past July 31, 1999 but, in any case, the Company expects to complete\nall phases of all identified projects by September 30, 1999. In calendar year\n1999, the Company will be conducting a rigorous final level of review called\nsystems integrated testing under post-Year 2000 conditions.\n\n The Company has conducted and plans to continue to conduct systems testing\nwith Trading Partners during calendar year 1999. In addition, to insure Year\n2000 readiness with trade suppliers, the Company is participating in an industry\neffort organized by the National Wholesale Drug Association with special\nattention to critical suppliers such as manufacturers of branded pharmaceutical\nproducts.\n\n Since early 1997, the Company has required Year 2000 compliance statements\nfrom all suppliers of the Company's computer hardware and commercial software.\nAs of January 1999, approximately 75% of the computer hardware and purchased\nsoftware used in the Company's core distribution business was certified by the\nvendor as compliant. Regardless of the compliance statements, all third party\nhardware and software will also be subjected to testing to reconfirm its Year\n2000 readiness.\n\nCOSTS\n\n The Company incurred costs of approximately $7 million in fiscal 1998 and\n$10 million in the nine months ended December 31, 1998, associated with\nmodifications to the Company's existing systems to make them Year 2000 ready,\nrelated testing and outside consulting. The Company expects to incur costs\nbetween $10 and $15 million in fiscal 1999 and between $10 million and $20\nmillion in fiscal 2000 for a total project cost of less than $45 million. Such\ncosts are being expensed as incurred. Year 2000 Project costs are difficult to\nestimate accurately and the projects cost could change due to unanticipated\ntechnological difficulties, project vendor delays, project vendor cost overruns\nand the degree to which systems of newly acquired businesses are compliant.\n\n\n 17\n\n\n McKESSON CORPORATION and SUBSIDIARIES\n FINANCIAL REVIEW\n\nRISKS\n\n Because of the range of possible issues and the large number of variables\ninvolved (including the Year 2000 readiness of any entities acquired by the\nCompany), it is impossible to quantify the potential cost of problems should the\nCompany's remediation efforts or the efforts of those with whom it does business\nnot be successful. Such costs and any failure of such remediation efforts could\nresult in a loss of business, damage to the Company's reputation, and legal\nliability. Consequently, any such costs or failures could have a material\nadverse effect on the Company. The Company, believes that the most likely risks\nof serious Year 2000 business disruptions are external in nature, such as (i)\ndisruptions in telecommunications, electric, or transportation services, (ii)\nfailure of third party payors or insurers to provide timely reimbursement to the\nCompany's customers and (iii) noncompliance of smaller trading partners. Of all\nthe external risks, the Company believes the most reasonably likely worst case\nscenario would be a business disruption resulting from an extended and/or\nextensive communications failure. With its extensive use of technology, the\nCompany is now dependent on data and voice communications to receive, process,\ntrack and bill customers orders, move funds, replenish product and complete\nother activities critical to the Company's business. Based on the Company's\ninformation regarding the readiness of its major communications carriers and the\nredundancy built into the Company's network architecture, as well as the\nCompany's developing contingency plans, the Company expects that any such\ndisruption would be likely to be localized and of short duration, and would\ntherefore not be likely to have a material adverse effect on the Company.\n\nCONTINGENCY PLANS\n\n Business disruptions in the form of floods, blizzards, hurricanes,\nearthquakes, and power failures are a normal part of the Company's contingency\nplanning. In an effort to reduce the risks associated with the Year 2000\nproblems the Company has established and is currently continuing to develop Year\n2000 contingency plans that build upon existing disaster recovery and\ncontingency plans. Examples of the Company's existing contingency plans include\nalternative electronic and manual means for placing and receiving orders, and\nalternative power supplies and communication lines. Contingency planning for\npossible Year 2000 disruptions will continue to be defined, improved, and\nimplemented.\n\n\n\nItem 3. Quantitative and Qualitative Disclosures about Market Risk\n\n The Company believes there has been no material change in its exposure to\nmarket risk from that discussed in the Company's 1998 Consolidated Financial\nStatements.\n\n\n 18\n\n\n\n PART II. OTHER INFORMATION\n\nItem 5. Other Information\n\n The ratios of earnings to fixed charges and of earnings to combined fixed\ncharges and preferred stock dividends amounted to 2.31x and 3.00x for the nine\nmonths ended December 31, 1998 and 1997, respectively. There were no preferred\nstock dividends in the nine months ended December 31, 1998 and 1997,\nrespectively.\n\n The ratio of earnings to fixed charges was computed by dividing fixed\ncharges (interest expense, the portion of rental expense under operating leases\ndeemed by the Company to be representative of the interest factor and dividends\non preferred securities of a subsidiary grantor trust) into earnings available\nfor fixed charges (net income plus income tax expense and fixed charges).\n\n 19\n\n\nItem 6. Exhibits and Reports on Form 8-K\n- ------------------------------------------\n (a) Exhibits\n\n 2.1 Computation of Ratio of Earnings to Fixed Charges and Earnings to\n Combined Fixed Charges and Preferred Stock Dividends.\n\n 27 Financial Data Schedule\n\n (b) Reports on Form 8-K\n\n The Registrant filed the following reports on Form 8-K during the\n three months ended December 31, 1998:\n\n 1. Form 8-K\n Date of Report: October 19, 1998 Date Filed: October 19, 1998\n\n Item 5. Other Events\n --------------------\n The Registrant announced a definitive merger agreement had been\n signed for McKesson Corporation to acquire HBO & Company\n (\"HBOC\").\n\n 2. Form 8-K/A (Amendment No. 1)\n Date of Report: October 19, 1998 Date Filed: October 30, 1998\n\n\n Item 7. Financial Statements, Pro Forma Financial Information \n ---------------------------------------------------------------\n and Exhibits\n ------------\n\n The Registrant filed financial statements and pro forma financial\n information related to the merger agreement between McKesson\n Corporation and HBOC.\n\n 3. Form 8-K/A (Amendment No. 2)\n Date of Report: October 19, 1998 Date Filed: November 6, 1998\n\n\n\n Item 7. Financial Statements, Pro Forma Financial Information \n ---------------------------------------------------------------\n and Exhibits\n ------------\n\n The Registrant filed amended pro forma financial information\n related to the merger agreement between McKesson Corporation and\n HBOC.\n\n 4. Form 8-K\n Date of Report: December 4, 1998 Date Filed: December 4, 1998\n\n Item 5. Other Events\n --------------------\n The Registrant filed certain information regarding the Company\n and HBOC in connection with the merger agreement between McKesson\n Corporation and HBOC.\n\n 20\n\n\n\n SIGNATURE\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nRegistrant has duly caused this report to be signed on its behalf by the\nundersigned thereunto duly authorized.\n\n\n\n McKESSON HBOC, Inc.\n (Registrant)\n\n\n\n\nDated: February 12, 1999 By /s/ Richard H. Hawkins\n Richard H. Hawkins\n Executive Vice President and\n Chief Financial Officer\n\n\n\n\n By /s/ Heidi E. Yodowitz\n Heidi E. Yodowitz\n Senior Vice President and Controller\n\n 21\n\n\n EXHIBIT INDEX\n\n Exhibit\n Number Description\n- -------------- --------------------------------------------------------\n\n 12.1 Computation of Ratio of Earnings to Fixed Charges and\n Earnings to Combined Fixed Charges and Preferred Stock\n Dividends.\n\n 27 Financial Data Schedule\n\n 22\n\n\n\n EXHIBIT 12.1\n\n\n COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED\n FIXED CHARGES AND PREFERRED STOCK DIVIDENDS\n (dollars in millions)\n\n\n Nine Months Ended\n December 31,\n ----------------------------\n 1998 1997\n ---------- ----------\n\n\n
\n\n\n\n \n \n\nEX-27\n2\nFDS --\n\n\n
\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}},{"rowIdx":199,"cells":{"year":{"kind":"string","value":"1999"},"quarter":{"kind":"class label","value":"0","name":"QTR1"},"symbol":{"kind":"string","value":"MDP"},"report_url":{"kind":"string","value":"https://www.sec.gov/Archives/edgar/data/65011/0000065011-99-000003.txt"},"report":{"kind":"string","value":"-----BEGIN PRIVACY-ENHANCED MESSAGE-----\nProc-Type: 2001,MIC-CLEAR\nOriginator-Name: webmaster@www.sec.gov\nOriginator-Key-Asymmetric:\n MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen\n TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB\nMIC-Info: RSA-MD5,RSA,\n Q3NjTRXx/QsZUVRs+o9Qvb1omJ1IQ/rciEvDxvu0dO9wzcFHl8SYs/cvdIXRewjW\n a7SYAgDS3Q4Q1C+rJrEqIw==\n\n0000065011-99-000003.txt : 19990212\n0000065011-99-000003.hdr.sgml : 19990212\nACCESSION NUMBER:\t\t0000065011-99-000003\nCONFORMED SUBMISSION TYPE:\t10-Q\nPUBLIC DOCUMENT COUNT:\t\t4\nCONFORMED PERIOD OF REPORT:\t19981230\nFILED AS OF DATE:\t\t19990211\n\nFILER:\n\n\tCOMPANY DATA:\t\n\t\tCOMPANY CONFORMED NAME:\t\t\tMEREDITH CORP\n\t\tCENTRAL INDEX KEY:\t\t\t0000065011\n\t\tSTANDARD INDUSTRIAL CLASSIFICATION:\tPERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721]\n\t\tIRS NUMBER:\t\t\t\t420410230\n\t\tSTATE OF INCORPORATION:\t\t\tIA\n\t\tFISCAL YEAR END:\t\t\t0630\n\n\tFILING VALUES:\n\t\tFORM TYPE:\t\t10-Q\n\t\tSEC ACT:\t\t\n\t\tSEC FILE NUMBER:\t001-05128\n\t\tFILM NUMBER:\t\t99531131\n\n\tBUSINESS ADDRESS:\t\n\t\tSTREET 1:\t\t1716 LOCUST ST\n\t\tCITY:\t\t\tDES MOINES\n\t\tSTATE:\t\t\tIA\n\t\tZIP:\t\t\t50309\n\t\tBUSINESS PHONE:\t\t5152843000\n\n\tFORMER COMPANY:\t\n\t\tFORMER CONFORMED NAME:\tMEREDITH PUBLISHING CO\n\t\tDATE OF NAME CHANGE:\t19710317\n \n\n10-Q\n1\n12/30/98 10-Q FILING\n\n\n UNITED STATES\n SECURITIES AND EXCHANGE COMMISSION\n\n Washington, D. C. 20549\n\n FORM 10-Q\n\n\n\n(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE\n ACT OF 1934\n\nFor the quarterly period ended December 31, 1998\n\nCommission file number 1-5128 \n\n\n Meredith Corporation \n (Exact name of registrant as specified in its charter)\n\n Iowa 42-0410230 \n (State or other jurisdiction of (I.R.S. Employer\n incorporation or organization) Identification No.)\n\n 1716 Locust Street, Des Moines, Iowa 50309-3023 \n (Address of principal executive offices) (ZIP Code)\n\n 515 - 284-3000\n (Registrant's telephone number, including area code)\n\n\n\n\nIndicate by check mark whether the registrant (1) has filed all reports\nrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of\n1934 during the preceding 12 months (or for such shorter period that the\nregistrant was required to file such reports), and (2) has been subject to such\nfiling requirements for the past 90 days.\n\n Yes [X] No [ ] \n\n\n\nIndicate the number of shares outstanding of each of the issuer's classes of\ncommon stock, as of the latest practicable date.\n\n\n Class Outstanding at January 31, 1999\nCommon Stock, $1 par value 40,922,609\nClass B Stock, $1 par value 11,177,191\n ----------\n Total Common and Class B Stock 52,099,800\n ==========\n\n\n - 1 -\n\n\n\nPart I - FINANCIAL INFORMATION\nItem 1. Financial Statements\n\n\n\n\n\nMeredith Corporation and Subsidiaries\nConsolidated Balance Sheets\n\n\n\n\n (Unaudited)\n December 31 June 30\nAssets 1998 1998\n- -------------------------------------------------------------------------------\n (in thousands)\nCurrent assets:\nCash and cash equivalents $ 694 $ 4,953\nReceivables, net 133,414 138,036\nInventories 45,097 34,765\nSubscription acquisition costs 44,188 47,070\nProgram rights 27,657 14,809\nOther current assets 11,954 7,168\n ---------- -------\nTotal current assets 263,004 246,801\n ---------- --------\nProperty, plant and equipment 273,388 267,488\n Less accumulated depreciation (124,956) (116,407)\n ---------- --------\nNet property, plant and equipment 148,432 151,081\n ---------- --------\nSubscription acquisition costs 33,771 36,941\nOther assets 49,555 33,808\nGoodwill and other intangibles (at original cost\n less accumulated amortization of $107,569\n on December 31 and $97,716 on June 30) 587,507 597,358\n ---------- ----------\nTotal assets $1,082,269 $1,065,989\n ========== ==========\n\n\nSee accompanying Notes to Interim Consolidated Financial Statements.\n\n\n\n\n\n\n\n\n - 2 -\n\n (Unaudited)\n December 31 June 30\nLiabilities and Stockholders' Equity 1998 1998\n- -------------------------------------------------------------------------------\n (in thousands except share data)\n\nCurrent liabilities:\nShort-term bank debt $ 5,000 $ --\nCurrent portion of long-term debt 40,000 40,000\nCurrent portion of long-term program rights payable 30,575 18,934\nAccounts payable 33,554 63,171\nAccrued taxes and expenses 83,834 82,775\nUnearned subscription revenues 145,411 141,989\n ---------- ----------\nTotal current liabilities 338,374 346,869\n\nLong-term debt 167,000 175,000\nUnearned subscription revenues 91,303 95,603 \nDeferred income taxes 26,370 20,822\nOther deferred items 71,941 49,682\n ---------- ----------\nTotal liabilities 694,988 687,976\n ---------- ----------\nTemporary equity: Put option agreements\nCommon stock, 1,913,018 shares outstanding at\n December 31 and 597,878 shares at June 30 72,456 28,063\n ---------- ---------- \nStockholders' equity:\n Series preferred stock, par value $1 per share\n Authorized 5,000,000 shares; none issued -- --\nCommon stock, par value $1 per share\n Authorized 80,000,000 shares; issued and\n outstanding 39,064,832 at December 31 and\n 40,996,510 at June 30 (net of treasury shares,\n 27,007,056 at December 31 and 26,274,767\n at June 30.) 39,065 40,996\nClass B stock, par value $1 per share,\n convertible to common stock\n Authorized 15,000,000 shares; issued and\n outstanding 11,196,350 at December 31 and\n 11,279,881 at June 30. 11,196 11,280\nRetained earnings 267,484 301,200\nAccumulated other comprehensive income (878) (1,176)\nUnearned compensation (2,042) (2,350)\n ---------- ----------\nTotal stockholders' equity 314,825 349,950\n ---------- ----------\n\nTotal liabilities and stockholders' equity $1,082,269 $1,065,989\n ========== ==========\n\nSee accompanying Notes to Interim Consolidated Financial Statements.\n\n\n - 3 -\n\nMeredith Corporation and Subsidiaries\nConsolidated Statements of Earnings (Unaudited)\n\n Three Months Six Months\n Ended December 31 Ended December 31\n 1998 1997 1998 1997\n- -----------------------------------------------------------------------------\n (in thousands except per share)\nRevenues (less returns and allowances):\n Advertising $150,600 $141,551 $293,538 $273,191\n Circulation 69,066 67,760 136,567 134,932\n All other 35,258 39,573 70,656 71,660\n -------- -------- -------- -------- \nTotal revenues 254,924 248,884 500,761 479,783\n -------- -------- -------- -------- \nOperating costs and expenses:\n Production, distribution and edit 102,267 98,638 209,170 195,030\n Selling, general & administrative 94,836 98,087 189,823 196,073\n Depreciation and amortization 10,018 9,294 20,060 17,386\n -------- -------- -------- -------- \nTotal operating costs and expenses 207,121 206,019 419,053 408,489\n -------- -------- -------- -------- \n\nIncome from operations 47,803 42,865 81,708 71,294\n\n Gain from disposition -- -- 2,375 --\n Interest income 132 298 170 766\n Interest expense (3,875) (4,250) (7,686) (6,717) \n -------- -------- -------- -------- \n\nEarnings before income taxes 44,060 38,913 76,567 65,343\n\n Income taxes 18,637 16,581 32,333 27,920\n -------- -------- -------- -------- \n\nNet earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423\n ======== ======== ======== ======== \n\nBasic earnings per share $ 0.48 $ 0.42 $ 0.84 $ 0.71\n ======== ======== ======== ======== \n \nBasic average shares outstanding 52,304 52,980 52,411 53,048\n ======== ======== ======== ========\n\nDiluted earnings per share $ 0.47 $ 0.40 $ 0.82 $ 0.67\n ======== ======== ======== ======== \n\nDiluted average shares outstanding 53,849 55,639 54,021 55,511\n ======== ======== ======== ======== \n\nDividends paid per share $ 0.070 $ 0.065 $ 0.140 $ 0.130\n ======== ======== ======== ======== \n\nSee accompanying Notes to Interim Consolidated Financial Statements.\n - 4 -\n\nMeredith Corporation and Subsidiaries\nConsolidated Statements of Cash Flows (Unaudited)\n\nSix Months Ended December 31 1998 1997\n- ---------------------------------------------------------------------------\n (in thousands)\nCash flows from operating activities:\n Net earnings $ 44,234 $ 37,423\nAdjustments to reconcile net earnings to\n net cash provided by operating activities:\n Depreciation and amortization 20,060 17,386\n Amortization of program rights 15,651 12,749\n Gain from disposition, net of taxes (1,425) --\n Changes in assets and liabilities:\n Accounts receivable (1,040) (42,515)\n Inventories (10,686) 148\n Supplies and prepayments (1,289) (2,124)\n Subscription acquisition costs 6,052 1,100\n Accounts payable (28,440) 860\n Accruals 4,050 3,404\n Unearned subscription revenues (878) (1,290)\n Deferred income taxes 1,776 10,966\n Other deferred items 2,864 4,064\n -------- -------- \nNet cash provided by operating activities 50,929 42,171\n -------- -------- \nCash flows from investing activities:\n Redemption of marketable securities -- 50,371\n Proceeds from dispositions 9,922 --\n Acquisitions of businesses -- (375,000)\n Additions to property, plant, and equipment (8,311) (23,363) \n Changes in other assets (2,452) (3,689)\n -------- -------- \nNet cash (used) by investing activities (841) (351,681)\n -------- -------- \nCash flows from financing activities:\n Long-term debt incurred -- 270,000\n Repayment of long-term debt (8,000) --\n Short-term debt incurred, net 5,000 --\n Payments for program rights (14,778) (13,199)\n Proceeds from common stock issued 1,628 3,433\n Purchases of company stock (31,054) (18,496)\n Dividends paid (7,335) (6,887)\n Other 192 673\n -------- -------- \nNet cash (used) provided by financing activities (54,347) 235,524\n -------- -------- \nNet (decrease) in cash and cash equivalents (4,259) (73,986)\nCash and cash equivalents at beginning of year 4,953 74,498\n -------- -------- \nCash and cash equivalents at end of period $ 694 $ 512\n ======== ======== \nSee accompanying Notes to Interim Consolidated Financial Statements.\n\n - 5 -\n\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS\n (Unaudited)\n\n\n\n\n1. Accounting Policies\n\na. General\n\nThe information included in the foregoing interim financial statements is\nunaudited. In the opinion of management, all adjustments, which are of a\nnormal recurring nature and necessary for a fair presentation of the results of\noperations for the interim periods presented have been reflected herein. The\nresults of operations for interim periods are not necessarily indicative of the\nresults to be expected for the entire year. Readers are referred to the\ncompany's Form 10-K for the year ended June 30, 1998 for complete financial\nstatements and related notes. Certain prior-year amounts have been restated to\nconform with current-year presentation.\n\n\nb. Use of estimates\n\nThe preparation of financial statements in conformity with generally accepted\naccounting principles requires management to make estimates and assumptions\nthat affect the reported amounts of assets and liabilities and disclosure of\ncontingent assets and liabilities at the date of the financial statements and\nthe reported amounts of revenues and expenses during the reporting period. \nActual results could differ from those estimates.\n\n\n\nc. Goodwill and other intangibles\n\nGoodwill and other intangibles represent the excess of the purchase price over\nthe estimated fair values of tangible assets acquired in the purchases of\nbusinesses. As of December 31, 1998, the unamortized portion of these assets\nprimarily consisted of television Federal Communications Commission (FCC)\nlicenses ($260.4 million), goodwill ($166.9 million) and television network\naffiliation agreements ($141.2 million). Virtually all of these assets were\nacquired subsequent to October 31, 1970, and are being amortized by the\nstraight-line method over the following periods: 40 years for television FCC\nlicenses; 20 to 40 years for goodwill; and 15 to 40 years for network\naffiliation agreements. The company evaluates the recoverability of its\nintangible assets as current events or circumstances warrant to determine\nwhether adjustments are needed to carrying values. Such evaluation may be\nbased on projected income and cash flows on an undiscounted basis from the\nunderlying business or from operations of related businesses. Other economic\nand market variables are also considered in any evaluation.\n\n\n\n - 6 -\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued\n (Unaudited)\n\n2. Comprehensive Income\n\nMeredith adopted Statement of Financial Accounting Standards (SFAS) No. 130,\n\"Reporting Comprehensive Income,\" effective July 1, 1998. SFAS No. 130\nrequires companies to report comprehensive income, which includes net income\nand certain items that are reported as separate components of shareholders'\nequity. The company's comprehensive income includes foreign currency\ntranslation adjustments in addition to net income. Total comprehensive income\n(in thousands) for the six-month periods ended December 31, 1998 and 1997, was\n$44,532 and $37,423, respectively. Total comprehensive income (in thousands)\nfor the three-month periods ended December 31, 1998 and 1997, was $25,515 and\n$22,332, respectively.\n\n3. Acquisitions and disposition\n\nOn August 24, 1998, the company announced that it had agreed to acquire WGNX-\nTV, the CBS affiliate serving Atlanta. The planned acquisition involves the\npurchase of KCPQ-TV, a FOX affiliate in Seattle currently owned by Kelly\nTelevision Co., and the subsequent trade of KCPQ with Tribune Company for WGNX-\nTV in Atlanta. The transactions are subject to regulatory approvals and are\nexpected to be completed early in calendar 1999. The net price to the company\nof this resulting asset purchase is estimated to be $370 million.\n\nEffective July 1, 1998, the company sold the net assets of the Better Homes and\nGardens Real Estate Service to GMAC Home Services, Inc., a subsidiary of GMAC\nFinancial Services. Fiscal 1999 earnings for the six months ended December 31,\n1998, included an after-tax gain of $1.4 million, or 3 cents per diluted share,\nfrom the sale, which closed on July 27, 1998.\n\n4. Inventories\n\nMajor components of inventories are summarized below. Of total inventory\nvalues shown, approximately 45 percent are under the LIFO method at \nDecember 31, 1998 and 58 percent at June 30, 1998.\n\n (unaudited)\n December 31 June 30\n 1998 1998\n ----------- --------\n (in thousands)\n\n Raw materials $28,858 $24,777\n Work in process 20,169 13,286\n Finished goods 5,980 5,446\n ------- ------- \n 55,007 43,509\n Reserve for LIFO cost valuation (9,910) (8,744)\n ------- ------- \n Total $45,097 $34,765\n ======= ======= \n - 7 -\n\n\n\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued\n (Unaudited)\n\n\n\n\n5. Long-term debt and interest rate swap contracts\n\nThe company has an unsecured credit agreement which consists of a $210 million,\n60-month variable rate term loan and a $150 million, 60-month variable rate\nrevolving credit facility. At December 31, 1998, long-term debt outstanding\nunder this agreement consisted of $185 million outstanding under the term loan\nand $22 million outstanding under the revolving credit facility. The credit\nagreement contains certain covenants. As of December 31, 1998, the company was\nin compliance with all debt covenants.\n\nMeredith utilizes interest rate swap contracts to manage interest cost and risk\nassociated with possible increases in variable interest rates. The company\namended its existing swap contracts effective December 31, 1998 and entered\ninto two new swap contracts with effective dates of March 31, 1999. Under the\ncontracts, Meredith pays fixed rates of interest while receiving floating rates\nof interest based on three month LIBOR. These contracts effectively fix the\nbase interest rate on the existing credit agreement and on the new credit\nagreement entered into on December 10, 1998 (see Note 7), although the\napplicable margins vary based upon the company's debt-to-EBITDA ratio. These\ncontracts are held for purposes other than trading. The contracts expire on\nJune 28, 2002. The weighted average interest rate for the six months ended\nDecember 31, 1998 was 6.75 percent.\n\nThe notional amount covered by the contracts was $220 million on December 31,\n1998. The notional amount varies over the term of the contracts. The average\nnotional amount of indebtedness outstanding under these contracts for fiscal\nyears 1999 through 2002 is as follows: $273 million, $305 million, $223\nmillion and $93 million, respectively.\n\nThe company is exposed to credit-related losses in the event of non-performance\nby counterparties to the interest rate swap contracts. Management does not\nexpect any counterparties to fail to meet their obligations given the\ncreditworthiness of the counterparties to the agreements.\n\n\n\n\n\n\n\n\n\n\n\n - 8 -\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued\n (Unaudited)\n\n\n6. Earnings per share\n\n The following table presents the calculations of earnings per share:\n\n (unaudited) (unaudited)\n Three Months Six Months\n Ended December 31 Ended December 31\n 1998 1997 1998 1997\n- -----------------------------------------------------------------------------\n (in thousands except per share) \n\nNet earnings $25,423 $22,332 $44,234 $37,423\n ======= ======= ======= =======\n\nBasic average shares outstanding 52,304 52,980 52,411 53,048\nDilutive effect of stock options 1,545 2,659 1,610 2,463\n ------- ------- ------- -------\nDiluted average shares outstanding 53,849 55,639 54,021 55,511\n ======= ======= ======= =======\n\nBasic earnings per share $ .48 $ .42 $ .84 $ .71\n ======= ======= ======= =======\n\nDiluted earnings per share $ .47 $ .40 $ .82 $ .67\n ======= ======= ======= =======\n\n\nAntidilutive options excluded from the above calculations totaled 550,000\noptions at December 31, 1998 (with a weighted average exercise price of $41.18)\nand 78,000 options at December 31, 1997 (with a weighted average exercise price\nof $34.87).\n\nOptions to purchase 51,000 shares were exercised during the six months ended\nDecember 31, 1998 (145,000 options were exercised in the six months ended\nDecember 31, 1997).\n\n\n7. Commitments and Contingent Liabilities\n\nIn connection with the acquisition of WGNX-TV in Atlanta, Meredith has arranged\nthe following financing. On December 10, 1998, the company entered into a $200\nmillion variable rate unsecured credit agreement with a group of seven banks\nled by Wachovia Bank, N.A., as agent. The credit agreement provides for a $200\nmillion term loan with required principal payments of $100 million in both\nfiscal years 2003 and 2004. One of the conditions to borrowing under the\nagreement is the acquisition of WGNX-TV. The commitments to lend expire on\nApril 30, 1999. No amounts were borrowed under this agreement at December 31,\n1998. Interest rates under the credit agreement are based on applicable\n\n - 9 -\n\n\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued\n (Unaudited)\n\n\n\n\nmargins plus, at the company's option, either adjusted LIBOR or the higher of\nWachovia Bank's prime rate or the overnight federal funds rate plus 0.5\npercent. See Note 5 for information regarding interest rate swap contracts\nthat effectively fix the interest rate on this debt.\n\nThe company is also negotiating a private placement offering with five\ninsurance companies of $200 million in fixed rate unsecured Senior Notes. \nThese notes are expected to mature as follows: $75 million in 6 years, $50\nmillion in 6.5 years and $75 million in 7 years from the date of closing. The\nsale of the Notes is expected to occur on March 1, 1999.\n\nThe credit agreement and Senior Notes include certain financial covenants. The\nmost restrictive covenants require the debt-to-EBITDA ratio to be less than 3.5\nto 1.0 and the fixed-charge-coverage ratio not to be less than 2.0 to 1.0. The\nfixed charge coverage ratio is defined as EBITDA less capital expenditures\ndivided by the sum of interest expense, dividends paid and required debt\npayments. As a result of these financing arrangements, the weighted-average\ninterest rate on the debt that will be used to acquire WGNX-TV is expected to\nbe 6.2 percent.\n\n\n8. Segment information\n\nMeredith adopted SFAS No. 131, \"Disclosures about Segments of an Enterprise and\nRelated Information,\" effective July 1, 1998.\n\nMeredith Corporation is a diversified media company primarily focused on the\nhome and family marketplace. Based on products and services, the company has\ntwo reportable segments: publishing and broadcasting. The publishing segment\nincludes magazine and book publishing, brand licensing, custom marketing and\nother related operations. The broadcasting segment includes the operations of\n11 network-affiliated television stations and syndicated television program\nmarketing and development. In previously reported segment information,\nsyndicated television programming operations were reported as unallocated\ncorporate expenses. Prior-year information has been restated to conform to the\ncurrent-year presentation. Intersegment revenues are not material and\nvirtually all businesses operate in the United States.\n\n\n\n\n\n\n\n\n - 10 -\n\n\n\n MEREDITH CORPORATION\n NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued\n (Unaudited)\n\n\nRevenues, operating profit and depreciation and amortization by industry\nsegment are shown below:\n\n (unaudited) (unaudited)\n Three Months Six Months\n Ended December 31 Ended December 31\n ------------------- -------------------\n 1998 1997 1998 1997\n -------- -------- -------- --------\n (in thousands)\nRevenues\n Publishing $182,858 $182,352 $373,674 $363,102\n Broadcasting 72,066 66,532 127,087 116,681\n -------- -------- -------- --------\n Total revenues $254,924 $248,884 $500,761 $479,783 \n ======== ======== ======== ========\nOperating profit\n Publishing $ 26,762 $ 22,630 $ 51,581 $ 42,079\n Broadcasting 25,915 25,218 38,975 39,739 \n Unallocated corporate expense (4,874) (4,983) (8,848) (10,524)\n -------- -------- -------- --------\n Income from operations 47,803 42,865 81,708 71,294\n\n Gain from disposition -- -- 2,375 --\n Interest income 132 298 170 766\n Interest expense (3,875) (4,250) (7,686) (6,717)\n -------- -------- -------- --------\n\n Earnings before income taxes 44,060 38,913 76,567 65,343\n\n Income taxes 18,637 16,581 32,333 27,920\n -------- -------- -------- --------\n\n Net Earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423\n ======== ======== ======== ========\n\nDepreciation and amortization\n Publishing $ 2,843 $ 2,458 $ 5,694 $ 4,837\n Broadcasting 6,699 6,471 13,379 11,858\n Unallocated corporate 476 365 987 691\n -------- -------- -------- --------\n Total depreciation\n and amortization $ 10,018 $ 9,294 $ 20,060 $ 17,386\n ======== ======== ======== ========\n\n\n\n - 11 -\n\n\n\nItem 2. Management's Discussion and Analysis of Financial\n Condition and Results of Operations\n\n\n\n Results of Operations\n\nThe following discussion presents the key factors that have affected the\ncompany's business in the second quarter and first six months of fiscal 1999\nand fiscal 1998 and compares the results of such periods. This commentary\nshould be read in conjunction with the consolidated financial statements\npresented elsewhere in this report and with the company's Form 10-K for the\nyear ended June 30, 1998. All per-share amounts refer to diluted earnings per\nshare and are computed on a post-tax basis.\n\nThis section contains certain forward-looking statements that are subject to\ncertain risks and uncertainties that could cause actual results to differ\nmaterially from those anticipated. Reader's are referred to the company's Form\n10-K for the year ended June 30, 1998, for a discussion of such factors.\n\n\n\n Significant Events \n\nFiscal 1999\n- -----------\n\nOn August 24, 1998, the company announced that it had reached an agreement to\nacquire the net assets of WGNX-TV, a CBS network-affiliated television station\nserving the Atlanta, Ga., market from Tribune Company. As part of this\ntransaction, Meredith has agreed to purchase Seattle's KCPQ-TV (FOX) from Kelly\nTelevision Co. and trade the station to Tribune for WGNX-TV. The net price to\nthe company of this resulting asset purchase is estimated to be $370 million.\nThe company expects this transaction to close in early calendar year 1999,\nsubject to regulatory approvals. \n\n\nFiscal 1998\n- -----------\n\nOn July 1, 1997, Meredith purchased the net assets of three television stations\naffiliated with the FOX television network from First Media Television, L.P.\n(First Media) for $216 million. Those stations are: KPDX-Portland, Ore.;\nKFXO-Bend, Ore. (a low power station); and WHNS-Greenville, S.C./Spartanburg,\nS.C./Asheville, N.C. On September 4, 1997, Meredith acquired and then\nexchanged the net assets of the fourth First Media station, WCPX-TV in Orlando,\nfor WFSB-TV, a CBS network-affiliated television station serving the\nHartford/New Haven, Conn. market. WFSB-TV was acquired from Post-Newsweek\nStations, Inc. through an exchange of assets plus a $60 million cash payment to\nMeredith. The result was a net cost to the company of $159 million for WFSB.\n\n\n - 12 -\n\n Results of Operations\n\n Three Months Six Months\n Ended December 31 Ended December 31\n 1998 1997 1998 1997\n -------- -------- -------- --------\n (in thousands except per share)\n\n Total revenues $254,924 $248,884 $500,761 $479,783\n ======== ======== ======== ========\n \n Income from operations $ 47,803 $ 42,865 $ 81,708 $ 71,294\n ======== ======== ======== ========\n Earnings before \n nonrecurring items $ 25,423 $ 22,332 $ 42,809 $ 37,423\n ======== ======== ======== ========\n\n Net earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423\n ======== ======== ======== ========\n\n Diluted earnings per share\n before nonrecurring items $ 0.47 $ 0.40 $ 0.79 $ 0.67\n ======== ======== ======== ========\n \n Diluted earnings per share $ 0.47 $ 0.40 $ 0.82 $ 0.67\n ======== ======== ======== ========\n\nNet earnings of $25.4 million, or 47 cents per share, were recorded in the\nquarter ended December 31, 1998, compared to net earnings of $22.3 million, or\n40 cents per share, in the prior-year second quarter. For the six months ended\nDecember 31, 1998, net earnings were $44.2 million, or 82 cents per share,\ncompared to net earnings of $37.4 million, or 67 cents per share, in the prior-\nyear period. Net earnings for the six months ended December 31, 1998, included\na post-tax gain of $1.4 million, or 3 cents per share, from the sale of the\nBetter Homes and Gardens Real Estate Service.\n\nEarnings before nonrecurring items for the comparative six-month periods were\n$42.8 million, or 79 cents per share, in fiscal 1999 and $37.4 million, or 67\ncents per share, in the prior-year period. Fiscal 1999 earnings per share\nbefore nonrecurring items increased 18 percent for both the second quarter and\nsix-month period compared to the prior-year periods. The weighted average\ndiluted number of shares outstanding declined 3 percent in both periods\ncompared to the prior-year periods primarily due to company share repurchases.\n\nSecond quarter revenues increased 2 percent and year-to-date revenues were up 4\npercent from the comparative prior-year periods. Adjusting for the impacts of\nthe real estate sale and the fiscal 1998 first quarter acquisition of WFSB-TV\nin Hartford/New Haven, Conn., comparable revenues increased 5 percent in the\nsecond quarter and 6 percent in the six-month period. Increased advertising,\ncustom publishing, consumer book and circulation revenues were the primary\nfactors in the growth.\n\n\n\n - 13 -\n\n\nSecond quarter operating costs increased slightly to $207.1 million. Higher\npaper and editorial costs and increased television programming and news\nexpenses were nearly offset by the absence of costs from the real estate\noperation and lower magazine production and circulation promotion costs. For\nthe six-month period costs increased 3 percent to $419.1 million due to a full\nsix months of operating expenses and amortization expense at WFSB-Hartford/New\nHaven in the current period, increased television news and programming expenses\nand higher paper and custom publishing costs. As in the quarter, the absence\nof costs from the real estate operation partially offset the increases in other\nareas. The operating profit margin grew from 17 percent in the fiscal 1998\nsecond quarter to 19 percent in the current quarter. For the six months ended\nDecember 31, 1998, the operating profit margin was 16 percent compared to 15\npercent in the prior-year period. \n\nNet interest expense in the second quarter decreased slightly from the level of\nthe prior-year second quarter due to a lower debt level. In the six-month\nperiod ended December 31, 1998, net interest expense increased from the prior-\nyear period due to the timing of debt incurred for the WFSB-Hartford/New Haven\nacquisition.\n\nThe company's effective tax rate was 42.2 percent for the six months ended\nDecember 31, 1998, compared with 42.7 percent in the comparable prior-year\nperiod. The decline reflected the diminished impact of nondeductible items\nbecause of an increase in projected earnings.\n\nPublishing\n- ----------\n Three Months Six Months\n Ended December 31 Ended December 31\n 1998 1997 1998 1997\n -------- -------- -------- --------\n (in thousands)\n Revenues\n ---------\n Advertising $ 80,115 $ 78,507 $170,538 $162,685\n Circulation 69,066 67,760 136,567 134,932\n Other 33,677 36,085 66,569 65,485\n -------- -------- -------- --------\n Total revenues $182,858 $182,352 $373,674 $363,102\n ======== ======== ======== ========\n \n Operating profit $ 26,762 $ 22,630 $ 51,581 $ 42,079\n ======== ======== ======== ========\n\n\nPublishing revenues increased slightly compared to the prior-year quarter and 3\npercent versus the prior-year six month period. Excluding the impact of the\nsale of the Better Homes and Gardens Real Estate Service, publishing revenues\nincreased 3 percent in the second quarter and 6 percent in the six-month\nperiod versus the prior-year periods. Advertising revenues grew 2 percent in\nthe second quarter and 5 percent in the six-month period ended December 31,\n1998. Better Homes and Gardens, the company's largest circulation title,\n\n - 14 -\n\n\n\nreported increased ad revenues in both periods from an increase in ad pages\nsold and higher average revenues per page. Other titles reporting solid\nincreases in ad revenues in both periods included Traditional Home, Country\nHome, Family Money and Country Gardens magazines. These increases in ad\nrevenues were partially offset by lower ad revenues at Ladies' Home Journal\nmagazine primarily due to fewer ad pages sold. Looking forward, management\nexpects advertising pages in the women's service field of the magazine industry\nto be down in the company's fiscal third quarter versus the prior-year quarter. \nWhile both Better Homes and Gardens and Ladies' Home Journal compete in this\nfield, management believes the decline will impact Ladies' Home Journal ad\npaging more than Better Homes and Gardens. In other titles, third quarter ad\npages are generally trending up over last year. At this time, management\nexpects overall ad pages for the third quarter to be flat or up slightly. This\nis based on current information and could change as the quarter progresses. \n\nCirculation revenues increased slightly in both the quarter and the fiscal\nyear-to-date period. The second quarter increase reflected higher subscription\nrevenues due to additional issues of MORE and Country Gardens magazines. The\nincrease in the six-month period reflected these changes and increased\nnewsstand sales of most titles. Other publishing revenues declined in the\nquarter and increased slightly in the six-month period. The changes reflect\nthe sale of the Better Homes and Gardens Real Estate Service and higher\nconsumer book and custom publishing revenues.\n\nPublishing operating profit was up 18 percent in the fiscal 1999 second quarter\nand 23 percent for the fiscal year-to-date versus the comparable prior-year\nperiods. The strong second quarter results were driven primarily by lower\nproduction and circulation costs and increased magazine advertising revenues. \nThe improvement in the fiscal year-to-date period was primarily a result of\nincreased advertising revenues. Increased profit from the custom publishing\noperations also contributed to improved operating profit.\n\nPaper expense increased in both the second quarter and six-month period,\nreflecting increased volumes and higher average prices. The higher average\nprices result from the timing of price changes over the last year. Major\nsuppliers reduced coated groundwood paper prices approximately 4 percent on\nJanuary 1, 1999, following an average price decrease of approximately 3.5\npercent on October 1, 1998. Coated groundwood paper accounts for more than \ntwo-thirds of the company's paper usage. These price decreases are expected to\nhave a favorable impact on paper expense in the second half of fiscal 1999. \nPostage rates increased on January 10, 1999. Management expects the effective\nincrease for the company to be less than the 4.6 percent average for magazine\npublishers taken as a whole due to the company's efficient mailing processes. \nIn addition, the third fiscal quarter impact was lessened by mailing\npromotional campaigns and magazines prior to the date of the increase when\npossible.\n\n\n\n\n\n\n - 15 -\n\nBroadcasting\n- ------------ Three Months Six Months\n Ended December 31 Ended December 31\n 1998 1997 1998 1997\n -------- -------- -------- --------\n Revenues (in thousands)\n ---------\n Advertising $ 70,485 $ 63,044 $123,000 $110,506\n Other 1,581 3,488 4,087 6,175\n -------- -------- -------- --------\n Total revenues $ 72,066 $ 66,532 $127,087 $116,681\n ======== ======== ======== ========\n Operating profit $ 25,915 $ 25,218 $ 38,975 $ 39,739\n ======== ======== ======== ======== \n\nBroadcasting revenues increased 8 percent in the fiscal 1999 second quarter and\n9 percent in the six months ended December 31, 1998 compared to the prior-year\nperiods. Excluding the impact of the timing of the fiscal 1998 first quarter\nacquisition of WFSB-Hartford/New Haven, comparable revenues increased 5 percent\nin the six-month period. Operating profit increased 3 percent in the second\nquarter. All of the company's stations benefited from political advertising in\nthe second quarter. In addition CBS affiliates, especially those in KCTV-\nKansas City and WFSB-Hartford/New Haven, benefited from the addition of\nNational Football League games to network programming. Operating profit\ndeclined 2 percent in the six-month period due primarily to lower ad revenue\nresulting from the General Motors labor dispute during the first quarter and\ninvestment spending primarily in programming, local news and sales, marketing\nand research activities. Among comparable stations, revenue and operating\nprofit performance for both periods was led by KPDX-Portland, KCTV-Kansas City\nand KVVU-Las Vegas. Looking forward to the fiscal third quarter, the stations\nin total are reporting generally flat advertising pacings compared to the prior\nyear quarter. Increases in some areas are being offset by the absence of\nincremental advertising for the Winter Olympics at the company's CBS affiliates\nin the prior year. Advertising pacings are as of a point in time and are\nsubject to change.\n\n Liquidity and Capital Resources\n Percent\n Six months ended December 31 1998 1997 Change\n ---------------------------- -------- -------- -------\n (in thousands)\n Net earnings $ 44,234 $ 37,423 18%\n ========= ========= ====\n Cash flows from operations $ 50,929 $ 42,171 21%\n ========= ========= ====\n Cash flows from investing $ (841) $(351,681) 100%\n ========= ========= ====\n Cash flows from financing $(54,347) $ 235,524 nm\n ========= ========= ====\n Net cash flows $ (4,259) $ (73,986) 94%\n ========= ========= ====\n EBITDA $ 101,768 $ 88,680 15%\n ========= ========= ====\n nm - not meaningful\n - 16 -\n\n\n\nCash and cash equivalents decreased by $4.3 million in the first six months of\nfiscal 1999 compared to a decrease in cash of $74.0 million in the comparable\nprior-year period. The change reflected cash invested for the acquisition of\nfour television stations in the prior-year period, net of long-term debt\nincurred. Cash provided by operating activities increased 21 percent for the\nsix month period due to higher operating cash flows (earnings plus depreciation\nand amortization) and changes in working capital items that resulted primarily\nfrom the prior-year television station acquisitions.\n\nEBITDA is defined as earnings before interest, taxes, depreciation and\namortization. EBITDA is often used to analyze and compare companies on the\nbasis of operating performance and cash flow. EBITDA for the first six months\nof fiscal 1999 increased 15 percent from the prior-year period due to improved\noperating results. EBITDA is not adjusted for all noncash expenses or for\nworking capital changes, capital expenditures or other investment requirements. \nEBITDA should not be considered in isolation or as a substitute for measures of\nperformance prepared in accordance with generally accepted accounting\nprinciples. \n\nThe company has an unsecured credit agreement which consists of a $210 million,\n60-month variable rate term loan and a $150 million, 60-month variable rate\nrevolving credit facility. At December 31, 1998, long-term debt outstanding\nunder this agreement consisted of $185 million outstanding under the term loan\nand $22 million outstanding under the revolving credit facility. The credit\nagreement contains certain covenants. As of December 31, 1998, the company was\nin compliance with all debt covenants.\n\nIn connection with the acquisition of WGNX-TV in Atlanta, the company entered\ninto a $200 million variable rate unsecured credit agreement with a group of\nseven banks led by Wachovia Bank, N.A., as agent, on December 10, 1998. The\ncredit agreement provides for a $200 million term loan with required principal\npayments of $100 million in both fiscal years 2003 and 2004. One of the\nconditions to borrowing under the agreement is the acquisition of WGNX-TV. The\ncommitments to lend expire on April 30, 1999. No amounts were borrowed under\nthis agreement at December 31, 1998. Interest rates under the credit agreement\nare based on applicable margins plus, at the company's option, either adjusted\nLIBOR or the higher of Wachovia Bank's prime rate or the overnight federal\nfunds rate plus 0.5 percent. \n\nTo complete the financing of the acquisition of WGNX-TV, the company is\nnegotiating a private placement offering with five insurance companies of $200\nmillion in fixed rate unsecured Senior Notes. These notes are expected to\nmature as follows: $75 million in 6 years, $50 million in 6.5 years and $75\nmillion in 7 years from the date of closing. The sale of the Notes is expected\nto occur on March 1, 1999. \n\nThe credit agreement and Senior Notes include certain financial covenants. The\nmost restrictive covenants require the debt-to-EBITDA ratio to be less than 3.5\nto 1.0 and the fixed-charge-coverage ratio not to be less than 2.0 to 1.0. The\nfixed-charge-coverage-ratio is defined as EBITDA less capital expenditures\n\n\n - 17 -\n\n\ndivided by the sum of interest expense, dividends paid and required debt\npayments. As a result of these financing arrangements, the weighted-average\ninterest rate on the debt that will be used to acquire WGNX-TV is expected to\nbe 6.2 percent.\n\nMeredith utilizes interest rate swap contracts to manage interest cost and risk\nassociated with possible increases in variable interest rates. The company\namended its existing swap contracts effective December 31, 1998 and entered\ninto two new swap contracts with effective dates of March 31, 1999. Under the\ncontracts, Meredith pays fixed rates of interest while receiving floating rates\nof interest based on three month LIBOR. These contracts effectively fix the\nbase interest rate on the existing credit agreement and on the new credit\nagreement entered into on December 10, 1998, although the applicable margins\nvary based upon the company's debt-to-EBITDA ratio. These contracts are held\nfor purposes other than trading. The contracts expire on June 28, 2002. The\nweighted average interest rate for the six months ended December 31, 1998 was\n6.75 percent.\n\nThe notional amount covered by the contracts was $220 million on December 31,\n1998. The notional amount varies over the term of the contracts. The average\nnotional amount of indebtedness outstanding under these contracts for fiscal\nyears 1999 through 2002 is as follows: $273 million, $305 million, $223\nmillion and $93 million, respectively.\n\nThe company is exposed to credit-related losses in the event of non-performance\nby counterparties to the interest rate swap contracts. Management does not\nexpect any counterparties to fail to meet their obligations given the\ncreditworthiness of the counterparties to the agreements.\n\nAt December 31, 1998, the company also had $5.0 million in short-term variable-\nrate debt outstanding under a bank line of credit agreement. The interest rate\nat December 31, 1998 was approximately 6 percent.\n\nIn the first six months of fiscal 1999, the company spent $31.1 million for the\nrepurchase of 750,000 shares of Meredith Corporation common stock at the then\ncurrent market prices. This compares with spending of $18.5 million for the\nrepurchase of 592,000 shares in the comparable prior-year period. The current\nperiod totals include the repurchase of 297,000 shares under put option\nagreements. As of December 31, 1998, the company had put option agreements to\nrepurchase approximately 1.9 million shares. The market value of these shares\nat December 31, 1998, has been reclassified from stockholders' equity to the\ntemporary equity classification entitled, \"Put option agreements.\" As of\nDecember 31, 1998, approximately 2.3 million shares could be repurchased under\nexisting authorizations by the board of directors. The status of the\nrepurchase program is reviewed at each quarterly board of directors meeting. \nThe company expects to continue to repurchase shares in the foreseeable future,\nsubject to market conditions.\n\nDividends paid in the first six months of fiscal 1999 were $7.3 million, or 14\ncents per share, compared with $6.9 million, or 13 cents per share, in the\nprior-year period. On February 1, 1999, the board of directors increased the\nquarterly dividend by 7 percent (one-half cent per share) to 7.5 cents per\n\n - 18 -\n\n\nshare effective with the dividend payable on March 15, 1999. On an annual\nbasis, the effect of this quarterly dividend increase would be to increase\ndividends paid by approximately $1.0 million at the current number of shares\noutstanding.\n\nSpending for property, plant and equipment decreased to $8.3 million in the\nfirst six months of fiscal 1999 from $23.4 million in the prior-year period. \nThe decrease primarily resulted from prior-year spending for the construction\nof a new office building and related improvements in Des Moines. The project\nwas completed late in fiscal 1998. Total capital expenditures for fiscal 1999\nare expected to be 10 to 20 percent lower than fiscal 1998 expenditures. \nSpending will increase in the second half as several of the broadcasting\nstations begin the conversion to digital technology and two stations prepare\nfor the expansion of local news programming. Funds for capital expenditures\nare expected to be provided by available cash, including cash from operating\nactivities or, if necessary, borrowings under credit agreements. \n\nAt this time, management expects that cash on hand, internally-generated cash\nflow and debt from credit agreements will provide funds for any additional\noperating and recurring cash needs (e.g., working capital, cash dividends) for\nforeseeable periods. \n\n\nYear 2000\n- ---------\n\nThe Year 2000 issue, common to most companies, concerns the inability of\ninformation and noninformation systems to recognize and process date sensitive\ninformation due to the use of only the last two digits to refer to a year. \nThis problem could affect both information systems (software and hardware) and\nother equipment that relies on microprocessors. Management completed a\ncompany-wide evaluation of this impact on its computer systems, applications\nand other date-sensitive equipment. Systems and equipment that are not Year\n2000 compliant have been identified and remediation efforts are in process. \nManagement estimates that nearly 40 percent of remediation efforts were\ncompleted as of December 31, 1998. All remediation efforts and testing of\nsystems/equipment are expected to be completed by June 30, 1999.\n\nThe company is also in the process of monitoring the progress of material third\nparties (vendors and suppliers) in their efforts to become Year 2000 compliant.\nThese third parties include, but are not limited to: magazine and book\nprinters, paper suppliers, magazine fulfillment providers, the U.S. Postal\nService, television networks, other television programming suppliers, mainframe\ncomputer services suppliers, financial institutions and utilities. The company\nhas sought compliance information with respect to vendors and suppliers through\nthe use of surveys, industry groups, peer reviews and vendor websites. \nManagement then followed up to obtain more detailed information regarding the\nYear 2000 efforts of material third parties. Most of these material third\nparties have been cooperative and are supplying Year 2000 project related\ninformation. The company continues to pursue additional information from\nmaterial third parties where needed and from those not responding. \n\n\n - 19 -\n\n\nThrough December 31, 1998, the company has spent approximately $1.3 million to\naddress Year 2000 issues. Total costs to address Year 2000 issues are\ncurrently estimated not to exceed $5 million and consist primarily of costs for\nthe remediation of internal systems and broadcasting equipment. Funds for\nthese costs are expected to be provided by the operating cash flows of the\ncompany. The majority of the internal system remediation efforts relate to \nstaff costs of on-staff systems engineers and therefore, are not incremental\ncosts. \n\nMeredith Corporation could be faced with severe consequences if Year 2000\nissues are not identified and resolved in a timely manner by the company and\nmaterial third parties. A worst case scenario would result in the short-term\ninability of the company to produce/distribute magazines or broadcast\ntelevision programming due to unresolved year 2000 issues. This would result\nin lost revenues; however, the amount would be dependent on the length and\nnature of the disruption, which cannot be predicted or estimated. In light of\nthe possible consequences, the company is devoting the resources needed to\naddress Year 2000 issues in a timely manner. Management has contracted with an\noutside consultant to monitor the progress of Meredith's Year 2000 efforts and\nprovide update reports to the audit committee of the board of directors at each\nquarterly meeting. While management expects a successful resolution of these\nissues, there can be no guarantee that material third parties, on which\nMeredith relies, will address all Year 2000 issues on a timely basis or that\ntheir failure to successfully address all issues would not have an adverse\neffect on the company. \n\nMeredith is in the process of developing contingency plans in case business\ninterruptions do occur. Management expects these plans to be completed by June\n30, 1999.\n\n\nItem 3. Quantitative and Qualitative Disclosures about Market Risk\n\nThe company is subject to certain market risks as a result of the use of\nfinancial instruments. The market risk inherent in the company's financial\ninstruments subject to such risks is the potential market value loss arising\nfrom adverse changes in interest rates and/or the potential effect of changes\nin the market price of company common stock on the company's liquidity. \nReaders are referred to the company's Form 10-K for the year ended June 30,\n1998 for a more complete discussion of these risks.\n\nThe company uses interest rate swap agreements to effectively fix the interest\nrate on its debt. Therefore, there is no earnings or liquidity risk associated\nwith changes in interest rates. The fair market value of the interest rate\nswaps is the estimated amount, based on discounted cash flows, the company\nwould pay or receive to terminate the swap agreements. A 10 percent decrease\nin interest rates would result in a $3.6 million increase in the December 31,\n1998 cost of $4.5 million to terminate the swap agreements.\n\nAt December 31, 1998, the company had put option agreements outstanding to\nrepurchase up to 1.9 million common shares. The risk to the company of an\nincrease in share price is from a liquidity perspective. Based on the \n\n - 20 -\n\n\nDecember 31, 1998 closing price, a 10 percent increase in share price would\ncause the potential repurchase cost for these put options to increase by $9.3\nmillion.\n\nThere has been no material change in the market risk associated with program\nrights payable since June 30, 1998.\n\n\n\nPART II - OTHER INFORMATION\n\nItem 4. Submission of Matters to a Vote of Security Holders.\n\n(a) The Annual Meeting of Stockholders was held on November 9, 1998, at\n the Company's headquarters in Des Moines, Iowa.\n\n(b) The name of each director elected at the Annual Meeting is shown under\n Item 4.(c). The other directors whose terms of office continued after\n the meeting were: Herbert M. Baum, Barbara U. Charlton, Frederick B.\n Henry, William T. Kerr, Robert E. Lee, Nicholas L. Reding, and Jack D.\n Rehm.\n \n(c)(1) Proposal 1: Election of four Class III directors for terms expiring in\n 2001. Each nominee was elected in uncontested elections by the votes\n cast as follows:\n\n Number of shareholder votes*\n -----------------------------\n For Withheld\n ----------- --------\n Class III directors\n Mary Sue Coleman 135,146,210 596,843\n Joel W. Johnson 135,141,925 601,128\n Richard S. Levitt 135,181,126 561,927\n E.T. Meredith III 135,192,172 550,881\n\n(c)(2) Proposal 2: Election of one Class I director for a term expiring in\n 1999. The nominee was elected in an uncontested election by the votes\n cast as follows:\n\n Number of shareholder votes*\n -----------------------------\n For Withheld\n ----------- --------\n Class I director\n Philip A. Marineau 135,013,980 729,073\n \n \n *As specified on the proxy card, if no vote For or Withhold was\n specified, the shares were voted For the election of the named\n director.\n\n\n - 21 -\n\n\nItem 6. Exhibits and Reports on Form 8-K.\n\n(a) Exhibits\n\n 2) $200 million Credit Agreement dated as of December 10, 1998, among\n Meredith Corporation, and certain banks specified therein, for whom\n Wachovia Bank, N.A., is acting as Agent.\n\n 27) Financial Data Schedule\n\n 99) Additional financial information from the Company's second quarter\n press release dated January 19, 1999.\n\n(b) Reports on Form 8-K\n\n No Form 8-K was filed during the quarter ended December 31, 1998.\n\n\n\n\n\n\n\n SIGNATURE\n\n\nPursuant to the requirements of the Securities Exchange Act of 1934, the\nregistrant has duly caused this report to be signed on its behalf by the\nundersigned, thereunto duly authorized.\n\n\n MEREDITH CORPORATION\n Registrant\n\n\n\n\n (Stephen M. Lacy)\n Stephen M. Lacy\n Vice President - Chief Financial Officer\n (Principal Financial and\n Accounting Officer)\n\n\n\n\nDate: February 11, 1999\n\n\n\n\n\n\n - 22 -\n\n\n\n\n\n Index to Exhibits\n\n\n\n\n\n Exhibit\n Number Item\n ------- -----------------------------------------------------------\n\n 2 $200 million Credit Agreement dated as of December 10,\n 1998, among Meredith Corporation, and certain banks specified\n therein, for whom Wachovia Bank, N.A., is acting as Agent*.\n\n 27 Financial Data Schedule\n\n 99 Additional financial information from the Company's second\n quarter press release dated January 19, 1999.\n\n \n\n\n\n\n\n\n* Supplementary Exhibits and Schedules to this Agreement are not included in\n this Form 10-Q filing. Copies of any of the Exhibits and/or Schedules to\n this Agreement will be furnished supplementary to the Commission upon\n request.\n\n\n\n\n\n\n\n\n\n\n \n \n\nEX-2\n2\nEXHIBIT 2 FOR 12/30/98 10-Q\n\n\n\n EXHIBIT 2\n ---------\n\n\n\n\n\n\n\n\n\n $200,000,000\n\n CREDIT AGREEMENT\n\n dated as of\n\n December 10, 1998\n \n among\n\n MEREDITH CORPORATION,\n\n The Banks Listed Herein,\n\n WACHOVIA BANK, N.A.,\n as Agent and a Bank,\n\n THE FIRST NATIONAL BANK OF CHICAGO,\n as Syndication Agent and a Bank,\n\n and\n\n SUNTRUST BANK, CENTRAL FLORIDA,\n NATIONAL ASSOCIATION,\n as Documentation Agent and a Bank.\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 1 -\n\n\n\n CREDIT AGREEMENT\n\n\n AGREEMENT dated as of December 10, 1998 among MEREDITH CORPORATION,\nthe BANKS listed on the signature pages hereof, WACHOVIA BANK, N.A., as Agent\nand as a Bank, THE FIRST NATIONAL BANK OF CHICAGO, as Syndication Agent and a\nBank, and SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as\nDocumentation Agent and a Bank.\n\n The parties hereto agree as follows: \n\n ARTICLE I\n\n DEFINITIONS\n\n SECTION 1.01. Definitions. The terms as defined in this Section1.01\nshall, for all purposes of this Agreement and any amendment hereto (except as\nherein otherwise expressly provided or unless the context otherwise requires),\nhave the meanings set forth herein:\n\n \"Adjusted London Interbank Offered Rate\" has the meaning set forth in\nSection 2.05(c).\n\n \"Affiliate\" of any Person means (i) any other Person which directly,\nor indirectly through one or more intermediaries, controls such Person, (ii)any\nother Person which directly, or indirectly through one or more intermediaries,\nis controlled by or is under common control with such Person, or (iii)any other\nPerson of which such Person owns, directly or indirectly, 20% or more of the\ncommon stock or equivalent equity interests. As used herein, the term\n\"control\" means possession, directly or indirectly, of the power to direct or\ncause the direction of the management or policies of a Person, whether through\nthe ownership of voting securities, by contract or otherwise. \n\n \"Agent\" means Wachovia Bank, N.A., a national banking association\norganized under the laws of the United States of America, in its capacity as\nagent for the Banks hereunder, and its successors and permitted assigns in such\ncapacity.\n\n \"Agent's Letter Agreement\" means that certain letter agreement, dated\nas of October 21, 1998, between the Borrower and the Agent and accepted by the\nBorrower on October 22, 1998, relating to the structure of the Loans, and\ncertain fees from time to time payable by the Borrower to the Agent, together\nwith all amendments and modifications thereto.\n\n \"Agreement\" means this Credit Agreement, together with all amendments\nand supplements hereto.\n\n \"Applicable Margin\" has the meaning set forth in Section 2.05(a).\n\n \"Applicable Unused Fee Rate\" shall mean 0.20%, per annum.\n\n \"Assignee\" has the meaning set forth in Section 9.07(c).\n\n \"Assignment and Acceptance\" means an Assignment and Acceptance\nexecuted in accordance with Section 9.07(c) in the form attached hereto as\nExhibit G.\n\n - 2 -\n\n\n\n \"Authority\" has the meaning set forth in Section 8.02.\n\n \"Bank\" means each bank listed on the signature pages hereof as having\na Commitment, and its successors and assigns. \n\n \"Base Rate\" means for any Base Rate Loan for any day, the rate per\nannum equal to the higher as of such day of (i) the Prime Rate, and (ii) one-\nhalf of one percent above the Federal Funds Rate for such day. For purposes of\ndetermining the Base Rate for any day, changes in the Prime Rate and the\nFederal Funds Rate shall be effective on the date of each such change.\n\n \"Base Rate Borrowing\" means a Borrowing if the advances under such\nborrowing bear or are to bear interest calculated by reference to the Base\nRate.\n\n \"Base Rate Loan\" means Loans which bear or are to bear interest\ncalculated by reference to the Base Rate. \n\n \"Borrower\" means Meredith Corporation, a corporation incorporated\nunder the laws of the State of Iowa, and its successors and permitted assigns. \n\n \"Borrower Officer's Certificate\" has the meaning set forth in Section\n3.01(f).\n\n \"Borrowing\" shall mean a borrowing under the Commitments consisting\nof Loans made to the Borrower at the same time by the Banks pursuant to Article\nII. A Borrowing is a \"Euro-Dollar Borrowing\" if such Loans are made as Euro-\nDollar Loans and a \"Base Rate Borrowing\" if such Loans are made as Base Rate\nLoans.\n\n \"Broadcast Licenses\" means licenses, permits, authorizations or\ncertificates now or hereafter held by the Borrower and its Subsidiaries\n(including, without limitation, the Broadcast Licenses listed on Schedule 4.19\nhereto) to construct, own, operate or promote the Stations granted by the FCC,\nthe administrative law courts or by any state, county, city, town, village or\nother local government authority, and all extensions, additions and renewals\nthereto or thereof.\n\n \"Capital Expenditures\" means for any period the sum of all capital\nexpenditures incurred during such period by the Borrower and its Consolidated\nSubsidiaries, as determined in accordance with GAAP; provided, however, for\npurposes of calculating the \"Fixed Charge Coverage Ratio\" for any Fiscal\nQuarter, Capital Expenditures, in an aggregate amount up to $16,000,000,\nincurred in connection with the construction of a new facility and expanded\nnews programming for WGNX will not be included in \"Capital Expenditures\".\n\n \"Capital Stock\" means any nonredeemable capital stock of the Borrower\nor any Consolidated Subsidiary (to the extent issued to a Person other than the\nBorrower), whether common or preferred.\n\n \"CERCLA\" means the Comprehensive Environmental Response Compensation\nand Liability Act, 42 U.S.C. Section 9601 et seq. and its implementing\nregulations and amendments.\n\n \"CERCLIS\" means the Comprehensive Environmental Response Compensation\nand Liability Information System established pursuant to CERCLA.\n\n - 3 -\n\n\n\n \"Change of Law\" shall have the meaning set forth in Section 8.02.\n\n \"Closing Certificate\" has the meaning set forth in Section 3.01(e).\n\n \"Closing Date\" means December 10, 1998.\n\n \"Code\" means the Internal Revenue Code of 1986, as amended, or any\nsuccessor Federal tax code. Any reference to any provision of the Code shall\nalso be deemed to be a reference to any successor provision or provisions\nthereof.\n\n \"Commitment\" means, with respect to each Bank, (i) the amount\ndesignated as the Commitment set forth opposite the name of such Bank on the\nsignature pages hereof, or (ii) as to any Bank which enters into an Assignment\nand Acceptance (whether as transferor Bank or as Assignee thereunder), the\namount of such Bank's Commitment after giving effect to such Assignment and\nAcceptance, in each case as such amount may be reduced from time to time\npursuant to Section 2.08. \n\n \"Commitment Reduction Date\" means November 1, 2002, May 1, 2003,\nNovember 1, 2003 and May 1, 2004.\n\n \"Compliance Certificate\" has the meaning set forth in Section\n5.01(c).\n\n \"Consolidated Fixed Charges\" for any period means the sum of (i)\nConsolidated Interest Expense for such period; (ii) all payments of principal\nin respect of Debt (excluding principal payments made with respect to any\nrevolving line of credit) of the Borrower or any of its Consolidated\nSubsidiaries for such period; and (iii) all dividends paid by the Borrower and\nits Consolidated Subsidiaries for such period.\n\n \"Consolidated Funded Debt\" means, at any date, the Debt of the\nBorrower and its Consolidated Subsidiaries, determined on a consolidated basis\nas of such date.\n\n \"Consolidated Gross Revenues\" means as applied to any Person for any\nperiod, the aggregate gross revenues of such Person for such period, as\ndetermined in accordance with GAAP.\n\n \"Consolidated Interest Expense\" for any period means interest\nexpensed in respect of Debt of the Borrower or any of its Consolidated\nSubsidiaries outstanding during such period.\n\n \"Consolidated Net Income\" means, for any period, the Net Income of\nthe Borrower and its Consolidated Subsidiaries determined on a consolidated\nbasis, but excluding (i) extraordinary items and (ii) any equity interests of\nthe Borrower or any Subsidiary in the unremitted earnings of any Person that is\nnot a Subsidiary.\n\n \"Consolidated Net Worth\" means, at any time, the shareholders' equity\nof the Borrower and its Consolidated Subsidiaries, as set forth or reflected on\nthe most recent consolidated balance sheet of the Borrower and its Consolidated\nSubsidiaries prepared in accordance with GAAP, but excluding any Redeemable\nPreferred Stock of the Borrower or any of its Consolidated Subsidiaries. \nShareholders' equity generally would include, but not be limited to (i) the par\n\n - 4 -\n\n\n\nor stated value of all outstanding Capital Stock, (ii) capital surplus, (iii)\nretained earnings, and (iv) various deductions such as (A) purchases of\ntreasury stock, (B) valuation allowances, (C) receivables due from an employee\nstock ownership plan, (D) employee stock ownership plan debt guarantees, and\n(E) translation adjustments for foreign currency transactions.\n\n \"Consolidated Operating Profits\" means, for any period, the Operating\nProfits of the Borrower and its Consolidated Subsidiaries.\n\n \"Consolidated Subsidiary\" means at any date any Subsidiary or other\nentity the accounts of which, in accordance with GAAP, would be consolidated\nwith those of the Borrower in its consolidated financial statements as of such\ndate.\n\n \"Consolidated Total Assets\" means, at any time, the total assets of\nthe Borrower and its Consolidated Subsidiaries, determined on a consolidated\nbasis, as set forth or reflected on the most recent consolidated balance sheet\nof the Borrower and its Consolidated Subsidiaries, prepared in accordance with\nGAAP.\n\n \"Controlled Group\" means all members of a controlled group of\ncorporations and all trades or businesses (whether or not incorporated) under\ncommon control which, together with the Borrower, are treated as a single\nemployer under Section 414 of the Code. \n\n \"Debt\" of any Person means at any date, without duplication, (i) all\nobligations of such Person for borrowed money, (ii) all obligations of such\nPerson evidenced by bonds, debentures, notes or other similar instruments,\n(iii) all obligations of such Person to pay the deferred purchase price of\nproperty or services, except trade accounts payable arising in the ordinary\ncourse of business, (iv) all obligations of such Person as lessee under capital\nleases, (v) all obligations of such Person to reimburse any bank or other\nPerson in respect of amounts payable under a bankers' acceptance, (vi) all\nRedeemable Preferred Stock of such Person (in the event such Person is a\ncorporation), (vii) all obligations (absolute or contingent) of such Person to\nreimburse any bank or other Person in respect of amounts paid under a letter of\ncredit or similar instrument, with an expiration date more than one year from\nsuch date, (viii) all Debt of others secured by a Lien on any asset of such\nPerson, whether or not such Debt is assumed by such Person, and (ix) all Debt\nof others Guaranteed by such Person.\n\n \"Default\" means any condition or event which constitutes an Event of\nDefault or which with the giving of notice or lapse of time or both would,\nunless cured or waived in writing, become an Event of Default. \n\n \"Default Rate\" means, with respect to any Loan, on any day, the sum\nof 2% plus the then highest interest rate (including the Applicable Margin)\nwhich may be applicable to any Euro-Dollar Loan or Base Rate Loan hereunder\n(irrespective of whether any such type of loans are actually outstanding\nhereunder).\n\n \"Depreciation and Amortization\" means for any period the sum of all\ndepreciation and amortization expenses of the Borrower and its Consolidated\nSubsidiaries for such period, as determined in accordance with GAAP.\n\n \"Dollars\" or \"$\" means dollars in lawful currency of the United\nStates of America.\n - 5 -\n\n\n\n \"Domestic Business Day\" means any day except a Saturday, Sunday or\nother day on which commercial banks in Georgia are authorized or required by\nlaw to close. \n\n \"EBITDA\" for any period means the sum of: (i) Consolidated Net\nIncome, (ii) taxes on income, (iii) Consolidated Interest Expense, and (iv)\nDepreciation and Amortization, all determined with respect to the Borrower and\nits Consolidated Subsidiaries on a consolidated basis for such period and in\naccordance with GAAP. In computing EBITDA, any of the foregoing items\nrealized or accrued for such period and prior to the date of a Permitted\nAcquisition (solely for purposes of this definition, Permitted Acquisition\nshall be deemed to include the acquisition of any asset) by the Person so\nacquired or attributable to the assets so acquired shall be included in EBITDA,\nbut only to the extent that such items of such Person or attributable to such\nassets would have been available to the Borrower or such Subsidiary had the\nBorrower or such Subsidiary acquired such Person or such assets at the\nbeginning of such period.\n\n \"Environmental Authority\" means any foreign, federal, state, local or\nregional government that exercises any form of jurisdiction or authority under\nany Environmental Requirement.\n\n \"Environmental Authorizations\" means all licenses, permits, orders,\napprovals, notices, registrations or other legal prerequisites for conducting\nthe business of the Borrower or any Subsidiary required by any Environmental\nRequirement.\n\n \"Environmental Judgments and Orders\" means all judgments, decrees or\norders arising from or in any way associated with any Environmental\nRequirements, whether or not entered upon consent or written agreements with an\nEnvironmental Authority or other entity arising from or in any way associated\nwith any Environmental Requirement, whether or not incorporated in a judgment,\ndecree or order.\n\n \"Environmental Laws\" means any and all federal, state, local and\nforeign statutes, laws, regulations, ordinances, rules, judgments, orders,\ndecrees, permits, concessions, grants, franchises, licenses, agreements or\nother governmental restrictions relating to the environment or to emissions,\ndischarges or releases of pollutants, contaminants, petroleum or petroleum\nproducts, chemicals or industrial, toxic or hazardous substances or wastes into\nthe environment, including, without limitation, ambient air, surface water,\ngroundwater or land, or otherwise relating to the manufacture, processing,\ndistribution, use, treatment, storage, disposal, transport or handling of\npollutants, contaminants, petroleum or petroleum products, chemicals or\nindustrial, toxic or hazardous substances or wastes or the clean-up or other\nremediation thereof.\n\n \"Environmental Liabilities\" means any liabilities, whether accrued,\ncontingent or otherwise, arising from and in any way associated with any\nEnvironmental Requirements, which when combined with all other Environmental\nLiabilities of the Borrower is greater than $500,000.\n\n \"Environmental Notices\" means notice from any Environmental Authority\nor by any other person or entity, of possible or alleged noncompliance with or\nliability under any Environmental Requirement, including without limitation any\ncomplaints, citations, demands or requests from any Environmental Authority or\n\n - 6 -\n\n\n\nfrom any other person or entity for correction of any violation of any\nEnvironmental Requirement or any investigations concerning any violation of any\nEnvironmental Requirement.\n\n \"Environmental Proceedings\" means any judicial or administrative\nproceedings arising from or in any way associated with any Environmental\nRequirement.\n\n \"Environmental Releases\" means releases as defined in CERCLA or under\nany applicable state or local environmental law or regulation.\n\n \"Environmental Requirements\" means any legal requirement relating to\nhealth, safety or the environment and applicable to the Borrower, any\nSubsidiary or the Properties, including but not limited to any such requirement\nunder CERCLA or similar state legislation and all federal, state and local\nlaws, ordinances, regulations, orders, writs, decrees and common law.\n\n \"ERISA\" means the Employee Retirement Income Security Act of 1974, as\namended from time to time, or any successor law. Any reference to any\nprovision of ERISA shall also be deemed to be a reference to any successor\nprovision or provisions thereof. \n\n \"E. T. Meredith Family Stockholders\" means (a) the lineal descendants\nby blood or adoption of E.T. Meredith (\"descendants\") and the spouses and\nsurviving spouses of such descendants; (b) any estate, trust, guardianship,\ncustodianship or other fiduciary arrangement for the primary benefit of any one\nor more individuals described in (a) above; and (c) any corporation,\npartnership, limited liability company or other business organization so long\nas (i) one or more individuals or entities described in clauses (a) and (b)\nabove possess, directly or indirectly, the power to direct or cause the\ndirection of, the management and policies of such corporation, partnership,\nlimited liability company or other business organization and (ii) substantially\nall of the ownership, beneficial or other equity interests in such corporation,\npartnership, limited liability company or other business organization are\nowned, directly or indirectly, by one or more individuals or entities described\nin clauses (a) and (b) above.\n\n \"Euro-Dollar Borrowing\" means a Borrowing if the advances under such\nborrowing bear or are to bear interest at a rate based upon the London\nInterbank Offered Rate. \n\n \"Euro-Dollar Business Day\" means any Domestic Business Day on which\ndealings in Dollar deposits are carried out in the London interbank market.\n\n \"Euro-Dollar Loan\" means Loans which bear or are to bear interest at\na rate based upon the London Interbank Offered Rate.\n\n \"Euro-Dollar Reserve Percentage\" has the meaning set forth in Section\n2.05(c).\n\n \"Event of Default\" has the meaning set forth in Section 6.01. \n\n \"FCC\" means the Federal Communications Commission.\n\n \"Federal Funds Rate\" means, for any day, the rate per annum (rounded\nupward, if necessary, to the next higher 1/100th of 1%) equal to the weighted\n\n - 7 -\n\n\n\naverage of the rates on overnight Federal funds transactions with members of\nthe Federal Reserve System arranged by Federal funds brokers on such day, as\npublished by the Federal Reserve Bank of New York on the Domestic Business Day\nnext succeeding such day, provided that (i) if the day for which such rate is\nto be determined is not a Domestic Business Day, the Federal Funds Rate for\nsuch day shall be such rate on such transactions on the next preceding Domestic\nBusiness Day as so published on the next succeeding Domestic Business Day, and\n(ii) if such rate is not so published for any day, the Federal Funds Rate for\nsuch day shall be the average rate charged to Wachovia on such day on such\ntransactions as determined by the Agent.\n\n \"Fiscal Quarter\" means any fiscal quarter of the Borrower.\n\n \"Fiscal Year\" means any fiscal year of the Borrower.\n\n \"Fixed Charge Coverage Ratio\" means the ratio, measured as of the\nlast day of each Fiscal Quarter, of: (A) the amount equal to: (i) EBITDA,\ncalculated for the Fiscal Quarter then ended and the immediately preceding\nthree Fiscal Quarters, less (ii) Capital Expenditures, calculated for the\nFiscal Quarter then ended and the immediately preceding three Fiscal Quarters,\nto (B) Consolidated Fixed Charges for the Fiscal Quarter then ended and the\nimmediately preceding three Fiscal Quarters. \n\n \"Forfeiture Proceeding\" means any action, proceeding or investigation\naffecting the Borrower or any Subsidiary of the Borrower before any court,\narbitrator or Governmental Authority having jurisdiction over the Borrower or\nsuch Subsidiary or the receipt of notice by any such party that any of them is\na suspect in or a target of any governmental inquiry or investigation, which\nmay result in: (a) an indictment of any of them; or (b) the seizure or\nforfeiture of any of their property which, when combined with all other\nproperty of the Borrower of any Subsidiary of the Borrower seized or forfeited\nduring the current Fiscal Quarter and the immediately preceding three Fiscal\nQuarters has an aggregate fair market value in excess of $500,000.\n\n \"Funding Date\" means the earliest of the following dates: (i) April\n30, 1999; (ii) the date on which the Borrower terminates the Commitments; and\n(iii) the Initial Draw Date.\n\n \"GAAP\" means generally accepted accounting principles applied on a\nbasis consistent with those which, in accordance with Section 1.02, are to be\nused in making the calculations for purposes of determining compliance with the\nterms of this Agreement.\n\n \"Governmental Authority\" means any nation or government, any federal,\nstate, local or other political subdivision thereof and any entity exercising\nexecutive, legislative, judicial, regulatory or administrative functions of or\npertaining to government, or any instrumentality of any of the foregoing.\n\n \"Guarantee\" by any Person means any obligation, contingent or\notherwise, of such Person directly or indirectly guaranteeing any Debt or other\nobligation of any other Person and, without limiting the generality of the\nforegoing, any obligation, direct or indirect, contingent or otherwise, of such\nPerson (i) to secure, purchase or pay (or advance or supply funds for the\npurchase or payment of) such Debt or other obligation (whether arising by\nvirtue of partnership arrangements, by agreement to keep-well, to purchase\nassets, goods, securities or services, to provide collateral security, to\n\n - 8 -\n\n\n\ntake-or-pay, or to maintain financial statement conditions or otherwise) or\n(ii) entered into for the purpose of assuring in any other manner the obligee\nof such Debt or other obligation of the payment thereof or to protect such\nobligee against loss in respect thereof (in whole or in part), provided that\nthe term Guarantee shall not include endorsements for collection or deposit in\nthe ordinary course of business. The term \"Guarantee\" used as a verb has a\ncorresponding meaning. \n\n \"Hazardous Materials\" includes, without limitation, (a) solid or\nhazardous waste, as defined in the Resource Conservation and Recovery Act of\n1980, 42 U.S.C. Section 6901 et seq. and its implementing regulations and\namendments, or in any applicable state or local law or regulation, (b) any\n\"hazardous substance\", \"pollutant\" or \"contaminant\", as defined in CERCLA, or\nin any applicable state or local law or regulation, (c) gasoline, or any other\npetroleum product or by-product, including crude oil or any fraction thereof,\n(d) toxic substances, as defined in the Toxic Substances Control Act of 1976,\nor in any applicable state or local law or regulation and (e) insecticides,\nfungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide,\nand Rodenticide Act of 1975, or in any applicable state or local law or\nregulation, as each such Act, statute or regulation may be amended from time to\ntime.\n\n \"Initial Draw Amount\" means the aggregate principal amount of all\nLoans advanced by the Banks on the Initial Draw Date.\n\n \"Initial Draw Date\" means the date on which the first Loan is\nadvanced by the Banks hereunder.\n\n \"Interest Payment Date\" means each April 1, July 1, October 1 and\nJanuary 1.\n\n \"Interest Period\" means: (1) with respect to each Euro-Dollar\nBorrowing, the period commencing on the date of such borrowing and ending on\nthe numerically corresponding day in the first, second, third or sixth month\nthereafter, as the Borrower may elect in the applicable Notice of Borrowing;\nprovided that: \n\n (a) any Interest Period (subject to clause (c) below) which would\n otherwise end on a day which is not a Euro-Dollar Business Day shall be\n extended to the next succeeding Euro-Dollar Business Day unless such \n Euro-Dollar Business Day falls in another calendar month, in which case\n such Interest Period shall end on the next preceding Euro-Dollar Business\n Day;\n\n (b) any Interest Period which begins on the last Euro-Dollar\n Business Day of a calendar month (or on a day for which there is no\n numerically corresponding day in the appropriate subsequent calendar\n month) shall, subject to clause (c) below, end on the last Euro-Dollar\n Business Day of the appropriate subsequent calendar month; and\n\n (c) any Interest Period applicable to the Loans which begins before\n the Maturity Date and would otherwise end after the Maturity Date shall\n end on the Maturity Date. \n\n(2) with respect to each Base Rate Borrowing, the period commencing on the\ndate of such borrowing and ending 30 days thereafter; provided that: \n\n - 9 -\n\n\n\n (a) any Interest Period (subject to clause (b) below) which would\n otherwise end on a day which is not a Domestic Business Day shall be\n extended to the next succeeding Domestic Business Day; and\n\n (b) any Interest Period applicable to the Loans which begins before\n the Maturity Date and would otherwise end after the Maturity Date shall\n end on the Maturity Date.\n\n \"Investment\" means any investment in any Person, whether by means of\npurchase or acquisition of obligations or securities of such Person, capital\ncontribution to such Person, loan or advance to such Person, making of a time\ndeposit with such Person, Guarantee or assumption of any obligation of such\nPerson or otherwise.\n\n \"Lending Office\" means, as to each Bank, its office located at its\naddress set forth on the signature pages hereof (or identified on the signature\npages hereof as its Lending Office) or such other office as such Bank may\nhereafter designate as its Lending Office by notice to the Borrower and the\nAgent.\n\n \"Lien\" means, with respect to any asset, any mortgage, deed to secure\ndebt, deed of trust, lien, pledge, charge, security interest, security title,\npreferential arrangement which has the practical effect of constituting a\nsecurity interest or encumbrance, servitude or encumbrance of any kind in\nrespect of such asset to secure or assure payment of a Debt or a Guarantee,\nwhether by consensual agreement or by operation of statute or other law, or by\nany agreement, contingent or otherwise, to provide any of the foregoing. For\nthe purposes of this Agreement, the Borrower or any Subsidiary shall be deemed\nto own subject to a Lien any asset which it has acquired or holds subject to\nthe interest of a vendor or lessor under any conditional sale agreement,\ncapital lease or other title retention agreement relating to such asset.\n\n \"Loan Documents\" means this Agreement, the Notes, any other document\nevidencing, relating to or securing the Loans, and any other document or\ninstrument delivered from time to time in connection with this Agreement, the\nNotes, or the Loans, as such documents and instruments may be amended or\nsupplemented from time to time.\n\n \"Loans\" means the loans made by the Banks under the Commitments and\n\"Loan\" means any one of such Loans. \n\n \"London Interbank Offered Rate\" has the meaning set forth in Section\n2.05(c). \n\n \"Margin Stock\" means \"margin stock\" as defined in Regulation T, U or\nX of the Board of Governors of the Federal Reserve System, as in effect from\ntime to time, together with all official rulings and interpretations issued\nthereunder.\n\n \"Material Adverse Effect\" means, with respect to any event, act,\ncondition or occurrence of whatever nature (including any adverse determination\nin any litigation, arbitration, or governmental investigation or proceeding),\nwhether singly or in conjunction with any other event or events, act or acts,\ncondition or conditions, occurrence or occurrences, whether or not related, a\nmaterial adverse change in, or a material adverse effect upon, any of (a) the\nfinancial condition, operations, business, properties or prospects of the\n\n - 10 -\n\n\n\nBorrower and its Consolidated Subsidiaries taken as a whole, (b) the rights and\nremedies of the Agent or the Banks under the Loan Documents, or the ability of\nthe Borrower to perform its obligations under the Loan Documents to which it is\na party, as applicable, or (c) the legality, validity or enforceability of any\nLoan Document.\n\n \"Maturity Date\" means May 1, 2004.\n\n \"Multiemployer Plan\" shall have the meaning set forth in Section\n4001(a)(3) of ERISA.\n\n \"Net Income\" means, as applied to any Person for any period, the\naggregate amount of net income of such Person, after taxes, for such period, as\ndetermined in accordance with GAAP.\n\n \"Net Proceeds of Capital Stock\" means any and all proceeds (whether\ncash or non-cash) or other consideration received by the Borrower or a\nConsolidated Subsidiary in respect of the issuance of Capital Stock (including,\nwithout limitation, the aggregate amount of any and all Debt converted into\nCapital Stock), from a Person other than the Borrower or a Consolidated\nSubsidiary, after deducting therefrom all reasonable and customary costs and\nexpenses incurred by the Borrower or such Consolidated Subsidiary directly in\nconnection with the issuance of such Capital Stock.\n\n \"Non-excluded Taxes\" has the meaning set forth in Section 2.11(c).\n\n \"Notes\" means the promissory notes of the Borrower, substantially in\nthe form of Exhibit A hereto, evidencing the obligation of the Borrower to\nrepay the Loans, together with all amendments, consolidations, modifications,\nrenewals and supplements thereto and \"Note\" means any one of such Notes. \n\n \"Notice of Borrowing\" has the meaning set forth in Section 2.02. \n\n \"Operating Profits\" means, as applied to any Person for any period,\nthe operating income of such Person for such period, as determined in\naccordance with GAAP.\n\n \"Participant\" has the meaning set forth in Section 9.07(b).\n\n \"PBGC\" means the Pension Benefit Guaranty Corporation or any entity\nsucceeding to any or all of its functions under ERISA. \n\n \"Permitted Acquisition\" means the acquisition by the Borrower or any\nSubsidiary of the Borrower of shares of capital stock of any Person or assets\nfrom any Person, if: (A) in the case of the acquisition of shares of capital\nstock of any Person, immediately after giving effect to such acquisition (i)\nsuch Person is a Consolidated Subsidiary; (ii) the Borrower controls such\nPerson directly or indirectly through a Subsidiary; (iii) no Default shall have\noccurred and be continuing; (iv) the line or lines of business engaged in by\nsuch Person are substantially the same as the lines of business engaged in by\nthe Borrower and its Subsidiaries on the Closing Date; and (v) such acquisition\nis made on a negotiated basis with the approval of the Board of Directors of\nthe Person to be acquired and, if necessary, the shareholders of the Person to\nbe acquired; and (B) in the case of the acquisition of assets from any Person,\nimmediately after giving effect to such acquisition: (i) the assets acquired\nby the Borrower or such Subsidiary of the Borrower, shall be used by the\n\n - 11-\n\n\n\nBorrower or such Subsidiary in a line of business substantially the same as the\nlines of business engaged in by the Borrower and its Subsidiaries on the\nClosing Date; and (ii) no Default shall have occurred and be continuing.\n\n \"Person\" means an individual, a corporation, a limited liability\ncompany, a partnership (including without limitation, a joint venture), an\nunincorporated association, a trust or any other entity or organization,\nincluding, but not limited to, a government or political subdivision or an\nagency or instrumentality thereof. \n\n \"Plan\" means at any time an employee pension benefit plan which is\ncovered by Title IV of ERISA or subject to the minimum funding standards under\nSection 412 of the Code and is either (i) maintained by a member of the\nControlled Group for employees of any member of the Controlled Group or (ii)\nmaintained pursuant to a collective bargaining agreement or any other\narrangement under which more than one employer makes contributions and to which\na member of the Controlled Group is then making or accruing an obligation to\nmake contributions or has within the preceding 5 plan years made contributions. \n\n \"Prime Rate\" refers to that interest rate so denominated and set by\nWachovia from time to time as an interest rate basis for borrowings. The Prime\nRate is but one of several interest rate bases used by Wachovia. Wachovia\nlends at interest rates above and below the Prime Rate.\n\n \"Properties\" means all real property owned, leased or otherwise used\nor occupied by the Borrower or any Subsidiary, wherever located.\n\n \"Rate Determination Date\" has the meaning set forth in Section\n2.05(a).\n\n \"Redeemable Preferred Stock\" of any Person means any preferred stock\nissued by such Person which is at any time prior to the Maturity Date either\n(i) mandatorily redeemable (by sinking fund or similar payments or otherwise)\nor (ii) redeemable at the option of the holder thereof.\n\n \"Reported Net Income\" means, for any period, the Net Income of the\nBorrower and its Consolidated Subsidiaries determined on a consolidated basis.\n\n \"Required Banks\" means at any time: (1) Banks having at least 51% of\nthe aggregate amount of the Commitments; or, (2) if the Commitments are no\nlonger in effect, Banks holding at least 51% of the aggregate outstanding\nprincipal amount of the Notes.\n\n \"Stations\" means collectively (i) KPHO-TV, a VHF broadcasting station\nlicensed to Phoenix, Arizona, and serving the Phoenix market, (ii) WOFL-TV, a\nUHF broadcasting station licensed to Orlando, Florida, and serving the Orlando-\nDaytona-Melbourne-Cocoa-Claremont market; (iii) KCTV, a VHF broadcasting\nstation licensed to Kansas City, Missouri, and serving the Kansas City market;\n(iv) WSMV-TV, a VHF broadcasting station licensed to Nashville, Tennessee, and\nserving the Nashville market; (v) WNEM-TV, a VHF broadcasting station licensed\nto Bay City, Michigan, and serving the Saginaw-Bay City-Flint market; (vi)\nKVVU-TV, a VHF broadcasting station licensed to Henderson, Nevada, and serving\nthe Las Vegas-Henderson market; (vii) WOGX-TV, a UHF broadcasting station\nlicensed to Ocala, Florida, and serving the Ocala-Gainesville market; (viii)\nWHNS-TV, a UHF broadcasting station licensed to Asheville, North Carolina, and\nserving the Asheville, North Carolina-Greenville, South Carolina, market; \n\n - 12 -\n\n\n\n(ix) KPDX, a UHF broadcasting station licensed to Vancouver, Washington, and\nserving the Portland, Oregon, market; (x) WFSB, a VHF broadcasting station\nlicensed to Hartford, Connecticut, and serving the Hartford-New Haven,\nConnecticut market; (xi) KFXO-LP, a low power broadcasting station licensed to\nBend, Oregon, and serving the Bend, Oregon market; and (xii) any and all\ntelevision, radio or other broadcasting stations, now or hereafter acquired or\ncontrolled, directly or indirectly, by the Borrower.\n\n \"Subsidiary\" means any corporation or other entity of which\nsecurities or other ownership interests having ordinary voting power to elect a\nmajority of the board of directors or other persons performing similar\nfunctions are at the time directly or indirectly owned by the Borrower. \n\n \"Third Parties\" means all lessees, sublessees, licensees and other\nusers of the Properties, excluding those users of the Properties in the\nordinary course of the Borrower's business and on a temporary basis.\n\n \"Total Assets\" of any Person means, at any time, the total assets of\nsuch Person, as set forth or reflected or as should be set forth or reflected\non the most recent balance sheet of such Person, prepared in accordance with\nGAAP.\n\n \"Transferee\" has the meaning set forth in Section 9.07(d).\n\n \"Unencumbered Total Assets\" of any Person means, at any time, Total\nAssets of such Person which are subject to any arrangement specified in 12 CFR\nSection 221.2(g)(1).\n\n \"Unused Fee Payment Date\" means each April 1, July 1, October 1 and\nJanuary 1.\n\n \"Wachovia\" means Wachovia Bank, N.A., a national banking association\nand its successors.\n\n \"WGNX\" means WGNX, a UHF broadcasting station licensed to Atlanta,\nGeorgia and serving the Atlanta, Georgia market.\n\n \"WGNX Acquisition\" means the acquisition by KCPQ Acquisition Corp. (a\nConsolidated Subsidiary of the Borrower) of all or substantially all of the\nassets used in connection with KCPQ-TV (the \"KCPQ Assets\"), a VHF broadcasting\nstation serving the Seattle, Washington market and the subsequent exchange of\nthe KCPQ Assets, for the assets used in connection with the operation of WGNX\nand no less than $5,000,000 in cash; which exchange shall occur simultaneously\nwith the acquisition of the KCPQ Assets.\n\n \"Wholly Owned Subsidiary\" means any Subsidiary all of the shares of\ncapital stock or other ownership interests of which (except directors'\nqualifying shares) are at the time directly or indirectly owned by the\nBorrower. \n\n \"Year 2000 Compliant and Ready\" as used herein means that (A) the\nBorrower's and its Subsidiaries' hardware and software systems with respect to\nthe operation of its business and its general business plan will in all\nmaterial respects: (i) handle date information involving any and all dates\nbefore, during and/or after January 1, 2000, including accepting input,\nproviding output and performing date calculations in whole or in part; \n\n - 13 -\n\n\n\n(ii) operate, accurately without interruption on and in respect of any and all\ndates before, during and/or after January 1, 2000 and without any change in\nperformance; (iii) store and provide date input information without creating\nany ambiguity as to the century and; (B) the Borrower has developed alternative\nplans to ensure business continuity in all material respects in the event of\nthe failure of any or all of items (i) through (iii) above.\n\n SECTION 1.02. Accounting Terms and Determinations. Unless otherwise\nspecified herein, all terms of an accounting character used herein shall be\ninterpreted, all accounting determinations hereunder shall be made, and all\nfinancial statements required to be delivered hereunder shall be prepared in\naccordance with GAAP, applied on a basis consistent (except for changes\nconcurred in by the Borrower's independent public accountants or otherwise\nrequired by a change in GAAP) with the most recent audited consolidated\nfinancial statements of the Borrower and its Consolidated Subsidiaries\ndelivered to the Banks, unless with respect to any such change concurred in by\nthe Borrower's independent public accountants or required by GAAP, in\ndetermining compliance with any of the provisions of this Agreement or any of\nthe other Loan Documents: (i) the Borrower shall have objected to determining\nsuch compliance on such basis at the time of delivery of such financial\nstatements, or (ii) the Required Banks shall so object in writing within 30\ndays after the delivery of such financial statements, in either of which events\nsuch calculations shall be made on a basis consistent with those used in the\npreparation of the latest financial statements as to which such objection shall\nnot have been made (which, if objection is made in respect of the first\nfinancial statements delivered under Section 5.01 hereof, shall mean the\nfinancial statements referred to in Section 4.04).\n\n SECTION 1.03. Use of Defined Terms. All terms defined in this\nAgreement shall have the same meanings when used in any of the other Loan\nDocuments, unless otherwise defined therein or unless the context shall\notherwise require.\n\n SECTION 1.04. Terminology. All personal pronouns used in this\nAgreement, whether used in the masculine, feminine or neuter gender, shall\ninclude all other genders; the singular shall include the plural and the\nplural shall include the singular. Titles of Articles and Sections in this\nAgreement are for convenience only, and neither limit nor amplify the\nprovisions of this Agreement.\n\n SECTION 1.05. References. Unless otherwise indicated, references in\nthis Agreement to \"Articles\", \"Exhibits\", \"Schedules\", and \"Sections\" are\nreferences to articles, exhibits, schedules and sections hereof.\n\n\n ARTICLE II\n\n THE CREDITS\n\n SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on\nthe terms and conditions set forth herein, to make Loans to the Borrower from\ntime to time before the Maturity Date; provided that, (i) each Bank's\nCommitment shall be initially advanced, if at all, in one advance made on the\nFunding Date; and (ii) immediately after each Loan is made, the aggregate\noutstanding principal amount of the Loans by such Bank shall not exceed such\nBank's Commitment, provided further that the aggregate principal amount of all\n\n - 14 -\n\n\n\nLoans at any one time outstanding shall not exceed the aggregate amount of the\nCommitments of all of the Banks at such time. Each Borrowing that is a Euro-\nDollar Borrowing under this Section shall be in an aggregate principal amount\nof $5,000,000 or any larger multiple of $1,000,000 and each Borrowing that is\na Base Rate Borrowing under this Section shall be in an aggregate principal\namount of $1,000,000 or any larger multiple of $500,000 and shall be made from\nthe several Banks ratably in proportion to their respective Commitments. \nWithin the foregoing limits, the Borrower may borrow under this Section 2.01,\nrepay or, to the extent permitted by Section 2.08, repay Loans and reborrow\nunder this Section 2.01 at any time before the Maturity Date; provided,\nhowever, that after the Funding Date: (i) the proceeds of any Borrowing shall\nbe used exclusively for the purpose of repaying Loans maturing on the date of\nsuch Borrowing and for no other purpose; and (ii) the ability to reborrow may\nbe limited by the provisions of Section 2.08 hereof.\n\n SECTION 2.02. Method of Borrowing Loans. (a) The Borrower shall\ngive the Agent notice in the form attached hereto as Exhibit H (a \"Notice of\nBorrowing\") prior to 11:00 A.M. (Atlanta, Georgia time) on the Domestic\nBusiness Day of each Base Rate Borrowing and at least 3 Euro-Dollar Business\nDays before each Euro-Dollar Borrowing, specifying: \n\n (i) the date of such borrowing, which shall be a Domestic Business\n Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in\n the case of a Euro-Dollar Borrowing;\n\n (ii) the aggregate amount of the Borrowing; and\n\n (iii) whether the Loans comprising a Borrowing are to be Base Rate\n Loans or Euro-Dollar Loans, and the duration of the Interest Period\n applicable thereto, subject to the provisions of the definition of\n Interest Period; provided, however, commencing on the Funding Date and\n continuing until October 8, 1999, the Loans comprising a Borrowing shall\n be Euro-Dollar Loans.\n\n (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly\nnotify each Bank of the contents thereof and of such Bank's ratable share of\nsuch Borrowing, and such Notice of Borrowing shall not thereafter be revocable\nby the Borrower. \n\n (c) Not later than 12:00 P.M. (Atlanta, Georgia time) on the date of\neach Borrowing referenced in the Notice of Borrowing, each Bank shall (except\nas provided in subsection (d) of this Section) make available its ratable share\nof such Borrowing in Federal or other funds immediately available in Atlanta,\nGeorgia, to the Agent at its address referred to in or specified pursuant to\nSection 9.01. Unless the Agent determines that any applicable condition\nspecified in Article III has not been satisfied, the Agent will make the funds\nso received from the Banks available to the Borrower at the Agent's aforesaid\naddress. Unless the Agent receives notice from a Bank, at the Agent's address\nreferred to in Section 9.01, no later than 4:00 P.M. (local time at such\naddress) on the Domestic Business Day before the date of the applicable\nBorrowing stating that such Bank will not make the applicable Loan in\nconnection with such Borrowing, the Agent shall be entitled to assume that such\nBank will make the Loan in connection with such Borrowing and, in reliance on\nsuch assumption, the Agent may (but shall not be obligated to) make available\nsuch Bank's ratable share of such Borrowing to the Borrower for the account of\nsuch Bank. If the Agent makes such Bank's ratable share available to the\n\n - 15 -\n\n\n\nBorrower and such Bank does not in fact make its ratable share of such\nBorrowing available on such date, the Agent shall be entitled to recover such\nBank's ratable share from such Bank or the Borrower (and for such purpose shall\nbe entitled to charge such amount to any account of the Borrower with the\nAgent), together with interest thereon for each day during the period from the\ndate of such Borrowing until such sum shall be paid in full at a rate per annum\nequal to the rate at which the Agent determines that it obtained (or could have\nobtained) overnight Federal funds to cover such amount for each such day during\nsuch period, provided that any such payment by the Borrower of such Bank's\nratable share and interest thereon shall be without prejudice to any rights\nthat the Borrower may have against such Bank. If such Bank shall repay to the\nAgent such corresponding amount, such amount so repaid shall constitute such\nBank's Loan included in such borrowing for purposes of this Agreement. \n\n (d) If any Bank makes a new Loan hereunder on a day on which the\nBorrower is to repay all or any part of an outstanding Loan from such Bank,\nsuch Bank shall apply the proceeds of its new Loan to make such repayment and\nonly an amount equal to the difference (if any) between the amount being\nborrowed and the amount being repaid shall be made available by such Bank to\nthe Agent as provided in subsection (c) of this Section, or remitted by the\nBorrower to the Agent as provided in Section 2.11, as the case may be. \n\n (e) Notwithstanding anything to the contrary contained in this\nAgreement, no Euro-Dollar Borrowing may be made if there shall have occurred a\nDefault or an Event of Default, which Default or Event of Default shall not\nhave been cured or waived in writing.\n\n (f) In the event that a Notice of Borrowing fails to specify whether\nthe Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar\nLoans, such Loans shall be made as Base Rate Loans. If the Borrower is\notherwise entitled under this Agreement to repay any Loans maturing at the end\nof an Interest Period applicable thereto with the proceeds of a new Borrowing\nand the Borrower fails to repay such Loans using its own moneys and fails to\ngive a Notice of Borrowing in connection with a new corresponding Borrowing, a\nnew Borrowing shall be deemed to be made on the date such Loans mature in an\namount equal to the principal amount of the Loans so maturing, and the Loans\ncomprising such new Borrowing shall be Base Rate Loans.\n\n (g) Notwithstanding anything to the contrary contained herein, (i)\nthere shall not be more than nine (9) different Interest Periods outstanding at\nthe same time (for which purpose Interest Periods described in different\nnumbered clauses of the definition of the term \"Interest Period\" shall be\ndeemed to be different Interest Periods even if they are coterminous)\napplicable to the Loans; (ii) there shall not be more than eight (8) different\nInterest Periods outstanding at the same time (for which purpose Interest\nPeriods described in different numbered clauses of the definition of the term\n\"Interest Period\" shall be deemed to be different Interest Periods even if they\nare coterminous) applicable to the Loans that are Euro-Dollar Loans; and (iii)\nthe proceeds of any Borrowing that is a Base Rate Borrowing shall be applied\nfirst to repay the unpaid principal amount of all Borrowings that are Base Rate\nLoans (if any) outstanding immediately before such Borrowing.\n\n SECTION 2.03. Notes. (a) The Loans of each Bank shall be evidenced\nby a single Note payable to the order of such Bank for the account of its\nLending Office in an amount equal to the original principal amount of such\nBank's Commitment.\n\n - 16 -\n\n\n\n (b) Upon receipt of each Bank's Note pursuant to Section 3.01, the\nAgent shall deliver such Note to such Bank. Each Bank shall record, and prior\nto any transfer of its Note shall endorse on the schedule forming a part\nthereof appropriate notations to evidence, the date, amount and maturity of,\nand effective interest rate for, each Loan made by it, the date and amount of\neach payment of principal made by the Borrower with respect thereto and\nwhether, in the case of such Bank's Note, such Loan is a Base Rate Loan or\nEuro-Dollar Loan, and such schedule shall constitute rebuttable presumptive\nevidence of the principal amount owing and unpaid on such Bank's Notes;\nprovided that the failure of any Bank to make, or any error in making, any such\nrecordation or endorsement shall not affect the obligation of the Borrower\nhereunder or under the Notes or the ability of any Bank to assign its Notes. \nEach Bank is hereby irrevocably authorized by the Borrower so to endorse its\nNotes and to attach to and make a part of any Note a continuation of any such\nschedule as and when required.\n\n SECTION 2.04. Maturity of Loans. Each Loan included in any\nBorrowing shall mature, and the principal amount thereof shall be due and\npayable, on the first to occur of: (i) the last day of the Interest Period\napplicable to such Borrowing; or (ii) the Maturity Date; provided, however,\nthat the aggregate outstanding principal amount of all Loans at any one time\noutstanding shall not exceed the aggregate amount of the Commitments of all of\nthe Banks at such time.\n\n SECTION 2.05. Interest Rates. (a) Commencing on the Funding Date\nand continuing until October 8, 1999, the Applicable Margin shall be .75% for\nEuro-Dollar Loans. Commencing on October 8, 1999, and continuing at all times\nthereafter, the \"Applicable Margin\" shall be determined quarterly based upon\nthe ratio of Consolidated Funded Debt to EBITDA (calculated as of the last day\nof each Fiscal Quarter for the Fiscal Quarter then ended and the immediately\npreceding three Fiscal Quarters), as follows:\n\nIf the Ratio of Consolidated Base\nFunded Debt to EBITDA is: Rate Loans Euro-Dollar Loans\n- ----------------------------- ---------- -----------------\nGreater than or equal to 3.00 0% .90% \n\nGreater than or equal to 2.50\nbut less than 3.00 0% .75%\n\nGreater than or equal to 2.00\nbut less than 2.50 0% .625%\n\nLess than 2.0 0% .50%\n\n\nThe Applicable Margin shall be determined effective as of the date (herein, the\n\"Rate Determination Date\") which is 50 days after the last day of the Fiscal\nQuarter as of the end of which the foregoing ratios are being determined, based\non the quarterly financial statements for such Fiscal Quarter, and the\nApplicable Margin so determined shall remain effective from such Rate\nDetermination Date until the date which is 50 days after the last day of the\nFiscal Quarter in which such Rate Determination Date falls (which latter date\nshall be a new Rate Determination Date); provided that (i) in the case of any\nApplicable Margin determined for the fourth and final Fiscal Quarter of a\nFiscal Year, the Rate Determination Date shall be the date which is 100 days\n\n - 17 -\n\n\n\nafter the last day of such final Fiscal Quarter and such Applicable Margin\nshall be determined based upon the annual audited financial statements for the\nFiscal Year ended on the last day of such final Fiscal Quarter, and (ii) if on\nany Rate Determination Date the Borrower shall have failed to deliver to the\nBanks the financial statements required to be delivered pursuant to Section\n5.01(a) or Section 5.01(b) with respect to the Fiscal Year or Quarter, as the\ncase maybe, most recently ended prior to such Rate Determination Date, then\nfor the period beginning on such Rate Determination Date and ending on the\nearlier of (A) the date on which the Borrower shall deliver to the Banks the\nfinancial statements to be delivered pursuant to Section 5.01(b) with respect\nto such Fiscal Quarter or any subsequent Fiscal Quarter, or (B) the date on\nwhich the Borrower shall deliver to the Banks annual financial statements\nrequired to be delivered pursuant to Section 5.01(a) with respect to the Fiscal\nYear which includes such Fiscal Quarter or any subsequent Fiscal Year, the\nApplicable Margin shall be determined as if the ratio of Consolidated Funded\nDebt to EBITDA was more than 3.00 at all times during such period. Any change\nin the Applicable Margin on any Rate Determination Date shall result in a\ncorresponding change, effective on and as of such Rate Determination Date, in\nthe interest rate applicable to each Loan outstanding on such Rate\nDetermination Date; provided that: (i) for Euro-Dollar Loans, changes in\nApplicable Margin shall only be effective for Interest Periods commencing on or\nafter the Rate Determination Date; and (ii) no Applicable Margin shall be\ndecreased pursuant to this Section 2.05 if a Default is in existence on the\nRate Determination Date.\n\n (b) Each Loan that is a Base Rate Loan shall bear interest on the\noutstanding principal amount thereof, for each day from the date such Base Rate\nLoan is made until it becomes due, at a rate per annum equal to the Base Rate\nfor such day plus the Applicable Margin. Such interest shall be payable on the\nInterest Payment Date immediately following the last day of such Interest\nPeriod. Any overdue principal of and, to the extent permitted by applicable\nlaw, overdue interest on any Base Rate Loan shall bear interest, payable on\ndemand, for each day until paid at a rate per annum equal to the Default Rate. \n\n (c) Each Loan that is a Euro-Dollar Loan shall bear interest on the\noutstanding principal amount thereof, for the Interest Period applicable\nthereto, at a rate per annum equal to the sum of the Applicable Margin plus the\napplicable Adjusted London Interbank Offered Rate for such Interest Period;\nprovided that if any Euro-Dollar Loan shall, as a result of clause (1)(c) of\nthe definition of Interest Period, have an Interest Period of less than one\nmonth, such Euro-Dollar Loan shall bear interest during such Interest Period at\nthe rate applicable to Base Rate Loans during such period. Such interest shall\nbe payable for each Interest Period on the last day thereof and, if such\nInterest Period is longer than 3 months, on each Interest Payment Date during\nsuch Interest Period. Any overdue principal of and, to the extent permitted by\napplicable law, overdue interest on any Euro-Dollar Loan shall bear interest,\npayable on demand, for each day until paid at a rate per annum equal to the\nDefault Rate. \n\n The \"Adjusted London Interbank Offered Rate\" applicable to any\nInterest Period means a rate per annum equal to the quotient obtained (rounded\nupward, if necessary, to the next higher 1/100th of 1%) by dividing (i) the\napplicable London Interbank Offered Rate for such Interest Period by (ii) 1.00\nminus the Euro-Dollar Reserve Percentage.\n\n The \"London Interbank Offered Rate\" applicable to any Euro-Dollar\nLoan means for the Interest Period of such Euro-Dollar Loan the rate per annum\n - 18 -\n\n\n\ndetermined on the basis of the rate for deposits in Dollars of amounts equal or\ncomparable to the principal amount of such Euro-Dollar Loan offered for a term\ncomparable to such Interest Period, which rate appears on the display\ndesignated as Page \"3750\" of the Telerate Service (or such other page as may\nreplace page 3750 of that service or such other service or services as may be\nnominated by the British Banker's Association for the purpose of displaying\nLondon Interbank Offered Rates for U.S. dollar deposits) determined as of 1:00\np.m. New York City time, 2 Euro-Dollar Business Days prior to the first day of\nsuch Interest Period. \n\n \"Euro-Dollar Reserve Percentage\" means for any day that percentage\n(expressed as a decimal) which is in effect on such day, as prescribed by the\nBoard of Governors of the Federal Reserve System (or any successor) for\ndetermining the maximum reserve requirement for a member bank of the Federal\nReserve System in respect of \"Eurocurrency liabilities\" (or in respect of any\nother category of liabilities which includes deposits by reference to which the\ninterest rate on Euro-Dollar Loans is determined or any category of extensions\nof credit or other assets which includes loans by a non-United States office of\nany Bank to United States residents). The Adjusted London Interbank Offered\nRate shall be adjusted automatically on and as of the effective date of any\nchange in the Euro-Dollar Reserve Percentage.\n\n (d) The Agent shall determine each interest rate applicable to the\nLoans hereunder. The Agent shall give prompt notice to the Borrower and the\nBanks by telecopy of each rate of interest so determined, and its determination\nthereof shall be conclusive in the absence of manifest error. \n\n (e) After the occurrence and during the continuance of a Default,\nthe principal amount of the Loans (and, to the extent permitted by applicable\nlaw, all accrued interest thereon) may, at the election of the Required Banks,\nbear interest at the Default Rate; provided, however, that automatically\nwhether or not the Required Banks elect to do so, any overdue principal of and,\nto the extent permitted by law, overdue interest on any Loan shall bear\ninterest payable on demand, for each day until paid at a rate per annum equal\nto the Default Rate.\n\n (f) Notwithstanding anything herein to the contrary, if one or more\nCommitment Reduction Dates are scheduled to occur during an Interest Period in\nwhich the Loans are Euro-Dollar Loans other than on the last day of such\nInterest Period, then during such Interest Period a portion of the outstanding\nbalance of the Loans which is equal to the aggregate amount of the principal\npayment due on the Loans on such Commitment Reduction Dates shall be Base Rate\nLoans, and only the remaining portion of the outstanding principal of the Loans\nshall constitute Euro-Dollar Loans. \n\n SECTION 2.06. Fees. \n\n (a) The Borrower shall pay to the Agent for the ratable account of\neach Bank an unused fee equal to the product of: (i) the aggregate of the daily\naverage amounts of such Bank's Commitment, times (ii) a per annum percentage\nequal to the Applicable Unused Fee Rate. Such unused fee shall accrue from and\nincluding the Closing Date to and including the Funding Date. Unused fees\nshall be payable quarterly in arrears on each Unused Fee Payment Date and on\nthe Funding Date, provided that should the Commitments be terminated at any\ntime prior to the Funding Date for any reason, the entire accrued and unpaid\nunused fee shall be paid on the date of such termination.\n\n - 19 -\n\n\n (b) (1) On the Closing Date, the Borrower shall pay to the Agent for\nthe account of each Bank a closing up-front fee equal to the amount set forth\non Schedule 2.06A corresponding to such Bank's name.\n\n (2) On the Initial Draw Date, the Borrower shall pay to the Agent\nfor the account of each Bank a funding up-front fee equal to the amount set\nforth on Schedule 2.06B corresponding to such Bank's name; provided that the\nBorrower shall have no obligation to pay any such funding up-front fee in the\nevent Loans are not advanced under this Agreement.\n\n (c) The Borrower shall pay to the Agent, for the account and sole\nbenefit of the Agent, such fees and other amounts at such times as set forth in\nthe Agent's Letter Agreement.\n\n SECTION 2.07. Optional Termination or Reduction of Commitments. At\nany time prior to the Initial Draw Date, the Borrower may, upon at least 3\nDomestic Business Days' notice to the Agent, terminate at any time, or\nproportionately reduce from time to time by an aggregate amount of at least\n$5,000,000 or any larger multiple of $1,000,000, the Commitments. If the\nCommitments are terminated in their entirety, all accrued fees (as provided\nunder Section 2.06(a)) shall be payable on the effective date of such\ntermination. \n\n SECTION 2.08. Mandatory Reduction and Termination of Commitments. \n\n (1) The Commitments shall terminate on the Maturity Date and any\nLoans then outstanding (together with accrued interest thereon) shall be due\nand payable on such date. \n\n (2) The aggregate amount of the Commitments shall be reduced,\ncommencing on the first Commitment Reduction Date and continuing on each\nCommitment Reduction Date thereafter until and including the Commitment\nReduction Date on the Maturity Date in the amounts set forth below\ncorresponding to the respective Commitment Reduction Date:\n\n Commitment Amount of\n Reduction Date Reduction\n -------------- ---------\n\n November 1, 2002 20% of the amount of the Commitment on\n the Funding Date (after giving effect to\n the reduction in the Commitment, if any, \n pursuant to Section 2.08(4)).\n\n May 1, 2003 30% of the amount of the Commitment on\n the Funding Date (after giving effect to the\n reduction in the Commitment, if any, \n pursuant to Section 2.08(4)).\n\n November 1, 2003 20% of the amount of the Commitment on\n the Funding Date (after giving effect to the\n reduction in the Commitment, if any,\n pursuant to Section 2.08(4)).\n\n May 1, 2004 30% of the amount of the Commitment on\n the Funding Date (after giving effect to \n the reduction in the Commitment, if any,\n pursuant to Section 2.08(4)).\n - 20 -\n\n\n\n (3) If the Borrower shall repay or prepay any Loans other than with\nthe proceeds of a new Borrowing under the Commitments then there shall be a\nmandatory reduction of the Commitments to an amount equal to the aggregate\nprincipal amount of all Loans then outstanding (after giving effect to such\nrepayment or prepayment).\n\n (4) If on the Funding Date the Commitments shall not have been\nreduced to a lesser amount pursuant to this Section 2.08, then on the Funding\nDate there shall be a mandatory reduction of the Commitments to an amount equal\nto the aggregate principal amount of all Loans outstanding on the Funding Date.\n\n (5) Each reduction of the Commitments shall be applied to reduce the\nCommitments of the several Banks ratably. Any optional reduction of the\nCommitments shall reduce the amount of any subsequent mandatory reductions\npursuant to this Section 2.08 in their inverse chronological order of maturity. \nNo mandatory reduction of the Commitments pursuant to any paragraph of this\nSection 2.08 shall reduce the amount of any subsequent mandatory reduction of\nthe Commitments pursuant to such paragraph or any other paragraph of this\nSection 2.08.\n\n SECTION 2.09. Optional Prepayments of Loans. (a) The Borrower may,\nupon at least 1 Domestic Business Day's notice to the Agent, prepay any Loan\nthat is a Base Rate Borrowing in whole at any time, or from time to time in\npart in amounts aggregating at least $1,000,000 or any larger multiple of\n$500,000, by paying the principal amount to be prepaid together with accrued\ninterest thereon to the date of prepayment. Each such optional prepayment\nshall be applied to prepay ratably the Loans of the several Banks included in\nsuch Base Rate Borrowing. Any optional or mandatory prepayment of any Loan\npursuant to Section 2.09 or Section 2.10 shall not be reborrowed by Borrower\nunder this Agreement.\n\n (b) Except as provided in Section 8.02, the Borrower may not prepay\nall or any portion of the principal amount of any Euro-Dollar Loan prior to the\nlast day of an Interest Period applicable thereto. \n\n (c) Upon receipt of a notice of prepayment pursuant to this Section,\nthe Agent shall promptly notify each Bank of the contents thereof and of such\nBank's ratable share of such prepayment and such notice shall not thereafter be\nrevocable by the Borrower. \n\n SECTION 2.10. Mandatory Prepayments. On each date on which the\nCommitments are reduced or terminated pursuant to Section 2.07 or Section 2.08,\nthe Borrower shall repay or prepay such principal amount of the outstanding\nLoans, if any (together with interest accrued thereon and any amounts due under\nSection 8.05(a)), as may be necessary so that after such payment the aggregate\nunpaid principal amount of the Loans does not exceed the aggregate amount of\nthe Commitments as then reduced. Each such payment or prepayment shall be\napplied to repay or prepay ratably the Loans of the several Banks; provided\nthat such prepayment shall be applied to Loans outstanding on the date of such\nprepayment (in direct order of maturity).\n\n SECTION 2.11. General Provisions as to Payments. (a) The Borrower\nshall make each payment of principal of, and interest on the Loans and of\nunused fees hereunder, not later than 11:00 A.M. (Atlanta, Georgia time) on the\ndate when due, in Federal or other funds immediately available in Atlanta,\nGeorgia, to the Agent at its address referred to in Section 9.01. The Agent\n\n - 21 -\n\n\n\nwill promptly distribute to each Bank its ratable share of each such payment\nreceived by the Agent for the account of the Banks.\n\n (b) Whenever any payment of principal of, or interest on, the Base\nRate Loans or of fees shall be due on a day which is not a Domestic Business\nDay, the date for payment thereof shall be extended to the next succeeding\nDomestic Business Day. Whenever any payment of principal of, or interest on,\nthe Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business\nDay, the date for payment thereof shall be extended to the next succeeding\nEuro-Dollar Business Day unless such Euro-Dollar Business Day falls in another\ncalendar month, in which case the date for payment thereof shall be the next\npreceding Euro-Dollar Business Day. If the date for any payment of principal\nis extended by operation of law or otherwise, interest thereon shall be payable\nfor such extended time. \n\n (c) All payments of principal, interest and fees and all other\namounts to be made by the Borrower pursuant to this Agreement with respect to\nany Loan or fee relating thereto shall be paid without deduction for, and free\nfrom, any tax, imposts, levies, duties, deductions, or withholdings of any\nnature now or at anytime hereafter imposed by any governmental authority or by\nany taxing authority thereof or therein excluding in the case of each Bank, (i)\ntaxes imposed on or measured by its net income, (ii) franchise taxes imposed on\nit, by the jurisdiction under the laws of which such Bank is organized or any\npolitical subdivision thereof, and (iii) taxes imposed on its income, and\nfranchise taxes imposed on it, by the jurisdiction of such Bank's applicable\nLending Office or any political subdivision thereof (all such non-excluded\ntaxes, imposts, levies, duties, deductions or withholdings of any nature being\n\"Non-excluded Taxes\"). In the event that the Borrower is required by\napplicable law to make any such withholding or deduction of Non-excluded Taxes\nwith respect to any Loan or fee or other amount, promptly after receiving\nnotice thereof, the Borrower shall pay such deduction or withholding to the\napplicable taxing authority, shall promptly furnish to any Bank in respect of\nwhich such deduction or withholding is made all receipts and other documents\nevidencing such payment and shall pay to such Bank additional amounts as may be\nnecessary in order that the amount received by such Bank after the required\nwithholding or other payment shall equal the amount such Bank would have\nreceived had no such withholding or other payment been made. If no withholding\nor deduction of Non-excluded Taxes are payable in respect of any Loan or fee\nrelating thereto, the Borrower shall furnish any Bank, at such Bank's request,\na certificate from each applicable taxing authority or an opinion of counsel\nacceptable to such Bank, in either case stating that such payments are exempt\nfrom or not subject to withholding or deduction of Non-excluded Taxes. If the\nBorrower fails to provide such original or certified copy of a receipt\nevidencing payment of Non-excluded Taxes or certificate(s) or opinion of\ncounsel of exemption, the Borrower hereby agrees to compensate such Bank for,\nand indemnify them with respect to, the tax consequences of the Borrower's\nfailure to provide evidence of tax payments or tax exemption.\n\n In the event any Bank receives a refund of any Non-excluded Taxes\npaid by the Borrower pursuant to this Section 2.11, it will pay to the Borrower\nthe amount of such refund promptly upon receipt thereof; provided, however, if\nat any time thereafter it is required to return such refund, the Borrower shall\npromptly repay to it the amount of such refund.\n\n Without prejudice to the survival of any other agreement of the\nBorrower hereunder, the agreements and obligations of the Borrower contained in\n\n - 22 -\n\n\n\nthis Section 2.11 shall be applicable with respect to any Participant, Assignee\nor other Transferee, and any calculations required by such provisions (i) shall\nbe made based upon the circumstances of such Participant, Assignee or other\nTransferee, and (ii) constitute a continuing agreement and shall survive the\ntermination of this Agreement and the payment in full or cancellation of the\nNotes.\n\n SECTION 2.12. Computation of Interest and Fees. Interest on Base\nRate Loans shall be computed on the basis of a year of 360 days and paid for\nthe actual number of days elapsed (including the first day but excluding the\nlast day). Interest on Euro-Dollar Loans shall be computed on the basis of a\nyear of 360 days and paid for the actual number of days elapsed, calculated as\nto each Interest Period from and including the first day thereof to but\nexcluding the last day thereof. Unused fees and any other fees payable \nhereunder shall be computed on the basis of a year of 360 days and paid for the\nactual number of days elapsed (including the first day but excluding the last\nday).\n\n\n ARTICLE III\n\n CONDITIONS TO BORROWINGS\n\n SECTION 3.01. Conditions to Closing. On the Closing Date, the\nBorrower shall satisfy each of the following conditions:\n\n (a) receipt by the Agent from each of the parties hereto of either\n (i) a duly executed counterpart of this Agreement signed by such party or\n (ii) a facsimile transmission stating that such party has duly executed a\n counterpart of this Agreement and sent such counterpart to the Agent;\n\n (b) receipt by the Agent of a duly executed Note for the account of\n each Bank complying with the provisions of Section 2.03;\n\n (c) receipt by the Agent of an opinion (together with any opinions\n of local counsel relied on therein) of Thomas Slaughter, General Counsel\n of the Borrower, dated as of the Closing Date, substantially in the form\n of Exhibit B hereto and covering such additional matters relating to the\n transactions contemplated hereby as the Agent or any Bank may reasonably\n request;\n\n (d) receipt by the Agent of an opinion of Womble, Carlyle, Sandridge\n & Rice, PLLC, special counsel for the Agent, dated as of the Closing Date,\n substantially in the form of Exhibit C hereto and covering such additional\n matters relating to the transactions contemplated hereby as the Agent may\n reasonably request;\n\n (e) receipt by the Agent of a certificate (the \"Closing\n Certificate\"), dated the Closing Date, substantially in the form of\n Exhibit D hereto, signed by a principal financial officer of the Borrower,\n to the effect that (i) no Default has occurred and is continuing on the\n Closing Date; and (ii) the representations and warranties of the Borrower\n contained in Article IV are true on and as of the Closing Date;\n\n (f) receipt by the Agent of all documents which the Agent or any\n Bank may reasonably request relating to the existence of the Borrower, the\n\n - 23 -\n\n\n\n corporate authority for and the validity of this Agreement, the Notes, and\n any other matters relevant hereto, all in form and substance satisfactory\n to the Agent, including without limitation a certificate of incumbency of\n the Borrower (the \"Borrower Officer's Certificate\"), signed by the\n Secretary or an Assistant Secretary of the Borrower, substantially in the\n form of Exhibit E hereto, certifying as to the names, true signatures and\n incumbency of the officer or officers of the Borrower authorized to\n execute and deliver the Loan Documents to which it is a party, and\n certified copies of the following items: (i) the Borrower's Certificate of\n Incorporation, (ii) the Borrower's Bylaws, (iii) a certificate of the\n Secretary of State of the State of incorporation of the Borrower as to the\n existence of the Borrower as a corporation organized under the laws of\n such state, and (iv) the action taken by the Board of Directors of the\n Borrower authorizing the Borrower's execution, delivery and performance of\n this Agreement, the Notes and the other Loan Documents to which it is a\n party;\n\n (g) receipt and satisfactory review by the Agent of all documents,\n agreements and other matters and information which the Agent may\n reasonably request relating to the WGNX Acquisition;\n\n (h) receipt by the Agent of all fees due and payable under Sections\n 2.06(b)(1) and (c); and\n\n (i) receipt by the Agent of such other documents, certificates and\n other information, as the Agent or any Bank may reasonably request.\n\n SECTION 3.02 Conditions to First Borrowing. The obligation of each\nBank to make a Loan on the occasion of the first Borrowing is subject to the\nsatisfaction of the conditions set forth in Section 3.03 and the following\nadditional conditions:\n\n (a) receipt by the Agent of satisfactory evidence that on or before\n the date of the first Borrowing, the Borrower shall have consummated the\n WGNX Acquisition and acquired WGNX upon terms and conditions substantially\n similar to the terms and conditions disclosed by the Borrower to the Agent\n and the Banks on or before the Closing Date; and\n\n (b) receipt by the Agent of satisfactory evidence that the Borrower\n shall have obtained any and all consents, authorizations and approvals\n from or in respect of, and shall have made all filings, registrations and\n notices with, any and all governmental authorities, agencies or officials\n with respect to the WGNX Acquisition and such WGNX Acquisition shall be in\n compliance with and shall not constitute a default under any provision of\n applicable law or regulation or of any agreement, judgment, injunction,\n order, decree or other instrument binding upon the Borrower; and\n\n (c) receipt by the Agent of all fees due and payable under Sections\n 2.06(b)(2) and (c); and\n\n (d) the fact that, immediately before and after such Borrowing, no\n Default shall have occurred.\n\n SECTION 3.03. Conditions to All Borrowings. The obligation of each\nBank to make a Loan on the occasion of each Borrowing is subject to the\nsatisfaction of the following conditions:\n\n - 24 -\n\n\n\n (a) except as provided in Section 2.02(f), receipt by the Agent of a\n Notice of Borrowing as required by Section 2.02; \n\n (b) the fact that, immediately before and after such Borrowing, no\n Default shall have occurred and be continuing;\n\n (c) the fact that the representations and warranties of the Borrower\n contained in Article IV of this Agreement shall be true on and as of the\n date of such Borrowing; and\n\n (d) the fact that, immediately after such Borrowing, (i) the\n aggregate outstanding principal amount of the Loans of each Bank will not\n exceed the amount of its Commitment and (ii) the aggregate outstanding\n principal amount of the Loans will not exceed the aggregate amount of the\n Commitments of all of the Banks as of such date.\n\nEach Borrowing hereunder shall be deemed to be a representation and warranty by\nthe Borrower on the date of such Borrowing as to the truth and accuracy of the\nfacts specified in clauses (b), (c) and (d) of this Section.\n\n\n ARTICLE IV\n\n REPRESENTATIONS AND WARRANTIES\n\n The Borrower represents and warrants that: \n\n SECTION 4.01. Corporate Existence and Power. The Borrower is a\ncorporation duly organized, validly existing and in good standing under the\nlaws of the jurisdiction of its incorporation, is duly qualified to transact\nbusiness in every jurisdiction where, by the nature of its business, such\nqualification is necessary, and has all corporate powers and all governmental\nlicenses, authorizations, consents and approvals required to carry on its\nbusiness as now conducted. \n\n SECTION 4.02. Corporate and Governmental Authorization; No\nContravention. The execution, delivery and performance by the Borrower of this\nAgreement, the Notes and the other Loan Documents (i) are within the Borrower's\ncorporate powers, (ii) have been duly authorized by all necessary corporate\naction, (iii) require no action by or in respect of, or filing with, any\ngovernmental body, agency or official, (iv) do not contravene, or constitute a\ndefault under, any provision of applicable law or regulation or of the articles\nof incorporation or by-laws of the Borrower or of any agreement, judgment,\ninjunction, order, decree or other instrument binding upon the Borrower or any\nof its Subsidiaries, and (v) do not result in the creation or imposition of any\nLien on any asset of the Borrower or any of its Subsidiaries. \n\n SECTION 4.03. Binding Effect. This Agreement constitutes a valid\nand binding agreement of the Borrower enforceable in accordance with its terms,\nand the Notes and the other Loan Documents, when executed and delivered in\naccordance with this Agreement, will constitute valid and binding obligations\nof the Borrower enforceable in accordance with their respective terms, provided\nthat the enforceability hereof and thereof is subject in each case to general\nprinciples of equity and to bankruptcy, insolvency and similar laws affecting\nthe enforcement of creditors' rights generally.\n\n\n - 25 -\n\n\n\n SECTION 4.04. Financial Information. (a) The consolidated balance\nsheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1998 and\nthe related consolidated statements of income, shareholders' equity and cash\nflows for the Fiscal Year then ended, reported on by KPMG Peat Marwick, copies\nof which have been delivered to each of the Banks, and the unaudited\nconsolidated financial statements of the Borrower for the interim period ended\nSeptember 30, 1998, copies of which have been delivered to each of the Banks,\nfairly present, in conformity with GAAP, the consolidated financial position of\nthe Borrower and its Consolidated Subsidiaries as of such dates and their\nconsolidated results of operations and cash flows for such periods stated.\n\n (b) Since June 30, 1998, there has been no event, act, condition or\noccurrence having a Material Adverse Effect.\n\n SECTION 4.05. Litigation. There is no action, suit or proceeding\npending, or to the knowledge of the Borrower threatened, against or affecting\nthe Borrower or any of its Subsidiaries before any court or arbitrator or any\ngovernmental body, agency or official which could have a Material Adverse\nEffect or which in any manner draws into question the validity or\nenforceability of, or could impair the ability of the Borrower to perform its\nobligations under, this Agreement, the Notes or any of the other Loan\nDocuments.\n\n SECTION 4.06. Compliance with ERISA. (a) The Borrower and each\nmember of the Controlled Group have fulfilled their obligations under the\nminimum funding standards of ERISA and the Code with respect to each Plan and\nare in compliance in all material respects with the presently applicable\nprovisions of ERISA and the Code, and have not incurred any liability to the\nPBGC or a Plan under Title IV of ERISA.\n\n (b) Neither the Borrower nor any member of the Controlled Group has\nincurred any withdrawal liability with respect to any Multiemployer Plan under\nTitle IV of ERISA, and no such liability is expected to be incurred.\n\n SECTION 4.07. Taxes. There have been filed on behalf of the\nBorrower and its Subsidiaries all Federal, state and local income, excise,\nproperty and other tax returns which are required to be filed by them and all\ntaxes due pursuant to such returns or pursuant to any assessment received by or\non behalf of the Borrower or any Subsidiary have been paid. The charges,\naccruals and reserves on the books of the Borrower and its Subsidiaries in\nrespect of taxes or other governmental charges are, in the opinion of the\nBorrower, adequate. United States income tax returns of the Borrower and its\nSubsidiaries have been examined and closed through the Fiscal Year ended June\n30, 1995.\n\n SECTION 4.08. Subsidiaries. Each of the Borrower's Subsidiaries is\na corporation duly organized, validly existing and in good standing under the\nlaws of its jurisdiction of incorporation, is duly qualified to transact\nbusiness in every jurisdiction where, by the nature of its business, such\nqualification is necessary (except where the failure to be qualified shall not\ncause or be reasonably expected to cause a material adverse effect upon such\nSubsidiary's condition (financial, business or other)), and has all corporate\npowers and all governmental licenses, authorizations, consents and approvals\nrequired to carry on its business as now conducted. The Borrower has no\nSubsidiaries except those Subsidiaries listed on Schedule 4.08, which\naccurately sets forth each such Subsidiary's complete name and jurisdiction of\nincorporation. \n - 26 -\n\n\n\n SECTION 4.09. Not an Investment Company. Neither the Borrower nor\nany of its Subsidiaries is an \"investment company\" within the meaning of the\nInvestment Company Act of 1940, as amended. \n\n SECTION 4.10 Public Utility Holding Company Act. Neither the\nBorrower nor any of its Subsidiaries is a \"holding company\", or a \"subsidiary\ncompany\" of a \"holding company\", or an \"affiliate\" of a \"holding company\" or of\na \"subsidiary company\" of a \"holding company\", as such terms are defined in the\nPublic Utility Holding Company Act of 1935, as amended.\n\n SECTION 4.11. Ownership of Property; Liens. Each of the Borrower\nand its Consolidated Subsidiaries has title to its properties sufficient for\nthe conduct of its business, and none of such property is subject to any Lien\nexcept as permitted in Section 5.07.\n\n SECTION 4.12. No Default. Neither the Borrower nor any of its\nConsolidated Subsidiaries is in default under or with respect to any agreement,\ninstrument or undertaking to which it is a party or by which it or any of its\nproperty is bound which could have or cause a Material Adverse Effect. No\nDefault or Event of Default has occurred and is continuing.\n\n SECTION 4.13. Full Disclosure. All information heretofore furnished\nby the Borrower to the Agent or any Bank for purposes of or in connection with\nthis Agreement or any transaction contemplated hereby is, and all such\ninformation hereafter furnished by the Borrower to the Agent or any Bank will\nbe, true, accurate and complete in every material respect or based on\nreasonable estimates on the date as of which such information is stated or\ncertified. The Borrower has disclosed to the Banks in writing any and all\nfacts which could have or cause a Material Adverse Effect.\n\n SECTION 4.14. Environmental Matters. (a) Neither the Borrower nor\nany Subsidiary is subject to any Environmental Liability which could have or\ncause a Material Adverse Effect and neither the Borrower nor any Subsidiary has\nbeen designated as a potentially responsible party under CERCLA or under any\nstate statute similar to CERCLA. None of the Properties has been identified on\nany current or proposed (i) National Priorities List under 40 C.F.R. Section\n300, (ii) CERCLIS list or (iii) any list arising from a state statute similar\nto CERCLA.\n\n (b) No Hazardous Materials have been or are being used, produced,\nmanufactured, processed, treated, recycled, generated, stored, disposed of,\nmanaged or otherwise handled at, or shipped or transported to or from the\nProperties or are otherwise present at, on, in or under the Properties, or, to\nthe best of the knowledge of the Borrower, at or from any adjacent site or\nfacility, except for Hazardous Materials, such as cleaning solvents, pesticides\nand other materials used, produced, manufactured, processed, treated, recycled,\ngenerated, stored, disposed of, and managed or otherwise handled in minimal\namounts in the ordinary course of business in compliance with all applicable\nEnvironmental Requirements.\n\n (c) The Borrower, and each of its Subsidiaries and Affiliates, has\nprocured all Environmental Authorizations necessary for the conduct of its\nbusiness, and is in compliance with all Environmental Requirements in\nconnection with the operation of the Properties and the Borrower's, and each of\nits Subsidiary's and Affiliate's, respective businesses.\n\n\n - 27 -\n\n\n\n SECTION 4.15. Compliance with Laws. The Borrower and each\nSubsidiary is in compliance with all applicable laws, including, without\nlimitation, all Environmental Laws, except where any failure to comply with any\nsuch laws would not, alone or in the aggregate, have a Material Adverse Effect.\n\n SECTION 4.16. Capital Stock. All Capital Stock, debentures, bonds,\nnotes and all other securities of the Borrower and its Subsidiaries presently\nissued and outstanding are validly and properly issued in accordance with all\napplicable laws, including, but not limited to, the \"Blue Sky\" laws of all\napplicable states and the federal securities laws. The issued shares of\nCapital Stock of the Borrower's Wholly Owned Subsidiaries are owned by the\nBorrower free and clear of any Lien or adverse claim. At least a majority of\nthe issued shares of capital stock of each of the Borrower's other Subsidiaries\n(other than Wholly Owned Subsidiaries) is owned by the Borrower free and clear\nof any Lien or adverse claim.\n\n SECTION 4.17. Margin Stock. No part of the proceeds of any Loan\nwill be used for any purpose which violates, or which is inconsistent with, the\nprovisions of Regulations T, U or X. \n\n SECTION 4.18. Insolvency. After giving effect to the execution and\ndelivery of the Loan Documents and the making of the Loans under this\nAgreement, the Borrower will not be \"insolvent,\" within the meaning of such\nterm as used in O.C.G.A. Section 18-2-22 or as defined in Section 101 of Title\n11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer\nAct, or any other applicable state law pertaining to fraudulent transfers, as\neach may be amended from time to time, or be unable to pay its debts generally\nas such debts become due, or have an unreasonably small capital to engage in\nany business or transaction, whether current or contemplated.\n\n SECTION 4.19. Broadcast Licenses. (a) Each of the Borrower and its\nSubsidiaries owns, possesses or has the right to use all of the material\npatents, trademarks, service marks, trade names, copyrights, licenses\n(including, without limitation, Broadcast Licenses) and material rights with\nrespect thereto, necessary for the present and currently planned future conduct\nof its business, without any known conflict with the rights of others.\n\n (b) (i) Schedule 4.19 to this Agreement accurately lists and\ndescribes each material Broadcast License of the Borrower and its Subsidiaries\nwhich is in existence on the date hereof or which will be in existence on the\nClosing Date and the expiration date, if any, of each such material Broadcast\nLicense;\n\n (ii) each such material Broadcast License is, or on the Closing Date\n will be, in full force and effect;\n\n (iii) the Borrower and each Subsidiary has fulfilled and performed\n all of its obligations, if any, with respect to such material Broadcast\n Licenses; and\n\n (iv) no event has occurred which (A) permits, or after notice or\n lapse of time or both would permit, revocation or termination of any such\n material Broadcast License or (B) causes a Material Adverse Effect or in\n the future may (so far as the Borrower can now reasonably foresee) cause a\n Material Adverse Effect in any of the rights of the Borrower or any\n Subsidiary thereunder. Except to the extent required by the\n\n - 28 -\n\n\n\n Communications Act of 1934, as amended, and the rules and regulations of\n the FCC, no Broadcast License or other franchise or license held by the\n Borrower or any Subsidiary requires that any present stockholder,\n director, officer or employee of the Borrower remain as such or that any\n transfer of control of the Borrower or any Subsidiary must be approved by\n any public or governmental body.\n\n (c) The Broadcast Licenses described on Schedule 4.19 to this\nAgreement constitute all of the main station licenses and low power television\nlicenses issued by the FCC or any Governmental Authority, necessary for the\noperation of the business of the Borrower and each Subsidiary in the same\nmanner as it is currently conducted and as proposed to be conducted. The\nBroadcast Licenses described on Schedule 4.19 to this Agreement are, or on the\nClosing Date will be, validly issued and in full force and effect, unimpaired\nby any act or omission by the Borrower or any Subsidiary. Except for\nrulemakings or similar proceedings of general applicability to entities such as\nthe Borrower and its Subsidiaries, no Borrower or Subsidiary is a party to any\ninvestigation (to the best of its knowledge), notice of violation, order, or\ncomplaint issued by or before the FCC or any other Governmental Authority, nor\nare there any other proceedings involving the Borrower or any one or more of\nthe Subsidiaries by or before the FCC or any other Governmental Authority,\nwhich investigation, notice, order, complaint or proceeding could in any manner\nmaterially threaten or adversely affect such Broadcast Licenses. Neither the\nBorrower nor any Subsidiary has any knowledge of a threat of any such\ninvestigation, notice of violation, order, complaint or proceeding with respect\nthereto. Neither the Borrower nor any Subsidiary has any reason to believe\nthat the Broadcast Licenses listed and described on Schedule 4.19 to this\nAgreement will not be renewed in the ordinary course. The Borrower and each\nSubsidiary has filed with the FCC and all other applicable Governmental\nAuthorities all material reports, applications, documents, instruments and\ninformation required to be filed by it pursuant to applicable rules and\nregulations or requests of the FCC or such applicable Governmental Authorities.\n\n SECTION 4.20. Y2K Plan. The Borrower has developed a comprehensive\nplan (the \"Y2K Plan\") for insuring that the Borrower's and its Subsidiaries'\nsoftware and hardware systems which impact or affect in any way the business\noperations of the Borrower and its Subsidiaries will be Year 2000 Compliant and\nReady. The Borrower and its Subsidiaries have met in all material respects the\nY2K Plan milestones such that all hardware and software systems will be Year\n2000 Compliant and Ready in accordance with the Y2K Plan.\n\n\n ARTICLE V\n\n COVENANTS\n\n The Borrower agrees that, so long as any Bank has any Commitment\nhereunder or any amount payable under any Note remains unpaid: \n\n SECTION 5.01. Information. The Borrower will deliver to each of the\nBanks: \n\n (a) as soon as available and in any event within 90 days after the\nend of each Fiscal Year, a consolidated balance sheet of the Borrower and its\nConsolidated Subsidiaries as of the end of such Fiscal Year and the related\nconsolidated statements of income, shareholders' equity and cash flows for such\n\n - 29 -\n\n\n\nFiscal Year, setting forth in each case in comparative form the figures for the\nprevious fiscal year, all certified by KPMG Peat Marwick or other independent\npublic accountants of nationally recognized standing, with such certification\nto be free of exceptions and qualifications not acceptable to the Required\nBanks;\n\n (b) as soon as available and in any event within 45 days after the\nend of each of the first 3 Fiscal Quarters of each Fiscal Year, a consolidated\nbalance sheet of the Borrower and its Consolidated Subsidiaries as of the end\nof such Fiscal Quarter and the related statement of income and statement of\ncash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended\nat the end of such Fiscal Quarter, setting forth in each case in comparative\nform the figures for the corresponding Fiscal Quarter and the corresponding\nportion of the previous Fiscal Year, all certified (subject to normal year-end\nadjustments) as to fairness of presentation, GAAP and consistency by the chief\nfinancial officer or the controller of the Borrower;\n\n (c) simultaneously with the delivery of each set of financial\nstatements referred to in clauses (a) and (b) above, a certificate,\nsubstantially in the form of Exhibit F (a \"Compliance Certificate\"), of the\nchief financial officer or the treasurer of the Borrower (i) setting forth in\nreasonable detail the calculations required to establish whether the Borrower\nwas in compliance with the requirements of Sections 5.03 through 5.07,\ninclusive, and 5.10 and 5.21 on the date of such financial statements, (ii)\nsetting forth the aggregate amount, as of the date of such certificate, of the\nCapital Expenditures incurred in connection with the construction of the new\nfacility and expanded news programming for WGNX, and (iii) stating whether any\nDefault exists on the date of such certificate and, if any Default then exists,\nsetting forth the details thereof and the action which the Borrower is taking\nor proposes to take with respect thereto;\n\n (d) simultaneously with the delivery of each set of annual financial\nstatements referred to in clause (a) above, a statement of the firm of\nindependent public accountants which reported on such statements to the effect\nthat nothing has come to their attention to cause them to believe that any\nDefault existed on the date of such financial statements;\n\n (e) within 5 Domestic Business Days after the Borrower becomes aware\nof the occurrence of any Default, a certificate of the chief financial officer\nor the treasurer of the Borrower setting forth the details thereof and the\naction which the Borrower is taking or proposes to take with respect thereto;\n\n (f) promptly upon the mailing thereof to the shareholders of the\nBorrower generally, copies of all financial statements, reports and proxy\nstatements so mailed;\n\n (g) promptly upon the filing thereof, copies of all registration\nstatements (other than the exhibits thereto and any registration statements on\nForm S-8 or its equivalent) and annual, quarterly or monthly reports which the\nBorrower shall have filed with the Securities and Exchange Commission;\n\n (h) if and when the Borrower or any member of the Controlled Group\n(i) gives or is required to give notice to the PBGC of any \"reportable event\"\n(as defined in Section 4043 of ERISA) with respect to any Plan which might\nconstitute grounds for a termination of such Plan under Title IV of ERISA, or\nknows that the plan administrator of any Plan has given or is required to give\n\n - 30 -\n\n\n\nnotice of any such reportable event, a copy of the notice of such reportable\nevent given or required to be given to the PBGC; (ii) receives notice of\ncomplete or partial withdrawal liability under Title IV of ERISA, a copy of\nsuch notice; or (iii) receives notice from the PBGC under Title IV of ERISA of\nan intent to terminate or appoint a trustee to administer any Plan, a copy of\nsuch notice;\n\n (i) promptly after the Borrower knows of the commencement thereof,\nnotice of any litigation, dispute or proceeding involving a claim against the\nBorrower and/or any Subsidiary for $5,000,000 or more in excess of amounts\ncovered in full by applicable insurance; and\n\n (j) promptly after the commencement thereof or promptly after the\nBorrower knows of the commencement or threat thereof, notice of any Forfeiture\nProceeding; and\n\n (k) as soon as practicable after the receipt thereof, and in any\nevent within ten (10) Domestic Business Days after the issuance thereof:\n\n (i) copies of any order or notice of the FCC, a court of\n competent jurisdiction or any other Governmental Authority which\n designated any Broadcast License of the Borrower or any Subsidiary\n or application therefor for a hearing, or which refuses renewal or\n extension of any such Broadcast License, or revokes or suspends the\n authority of the Borrower or any Subsidiary to operate a broadcast\n station;\n\n (ii) a copy of any competing application filed against any\n Broadcast License of the Borrower or any Subsidiary or application\n therefor;\n\n (iii) copies of any citation, notice of violation or order to\n show cause from the FCC, or any material complaint filed by or with\n the FCC, in each case, in connection with the Borrower or any\n Subsidiary; and\n\n (iv) a copy of any notice or application by the Borrower or any\n Subsidiary requesting authority to cease broadcasting on any\n broadcast station for any period in excess of forty-eight (48) hours;\n and\n\n (l) simultaneously with the delivery of each set of annual and\n quarterly financial statements referred to in paragraphs (a) and (b)\n above, a statement of the Chief Executive Officer, Chief Financial\n Officer, or Chief Technology Officer to the effect that nothing has come\n to their attention to cause them to believe that the Y2K Plan milestones\n have not been met in a manner such that the Borrower's and its\n Subsidiaries hardware and software systems will not be Year 2000 Compliant\n and Ready;\n\n (m) within 5 Domestic Business Days after the Borrower becomes aware\n of any deviations from the Y2K Plan which would cause the Borrower to not\n be Year 2000 Compliant and Ready, a statement of the Chief Executive\n Officer, Chief Financial Officer, or Chief Technology Officer setting\n forth the details thereof and the action which the Borrower is taking or\n proposes to take with respect thereto;\n\n - 31 -\n\n\n\n (n) promptly upon the receipt thereof, a copy of any third party\n assessments of the Borrower's Y2K Plan together with any recommendations\n made by such third party with respect to Year 2000 compliance;\n\n (o) from time to time such additional information regarding the\n financial position or business of the Borrower or any Subsidiary as the\n Agent at the request of any Bank may reasonably request.\n\n SECTION 5.02. Inspection of Property, Books and Records. The\nBorrower will (i) keep, and will cause each Subsidiary to keep, proper books of\nrecord and account in which full, true and correct entries in conformity with\nGAAP shall be made of all dealings and transactions in relation to its business\nand activities; and (ii) permit, and will cause each Subsidiary to permit,\nrepresentatives of any Bank at such Bank's expense prior to the occurrence of\nan Event of Default and at the Borrower's expense after the occurrence of an\nEvent of Default to visit and inspect any of their respective properties, to\nexamine and make abstracts from any of their respective books and records and\nto discuss their respective affairs, finances and accounts with their\nrespective officers, employees and independent public accountants. The\nBorrower agrees to cooperate and assist in such visits and inspections, in each\ncase at such reasonable times and as often as may reasonably be desired.\n\n SECTION 5.03. Ratio of Consolidated Funded Debt to EBITDA. The\nratio of Consolidated Funded Debt to EBITDA (calculated for the Fiscal Quarter\nmost recently ended and the immediately preceding three Fiscal Quarters) shall\nat all times be less than 3.50 to 1.00.\n\n SECTION 5.04. Fixed Charges Coverage. At the end of each Fiscal\nQuarter the Fixed Charge Coverage Ratio shall not be less than 2.00 to 1.00 for\nthe period commencing with the Fiscal Quarter ending September 30, 1998, and\ncontinuing for each Fiscal Quarter thereafter.\n\n SECTION 5.05. Loans or Advances. Neither the Borrower nor any of\nits Subsidiaries shall make loans or advances to any Person except: (i) loans\nor advances to employees not exceeding Five Million and No/100 Dollars\n($5,000,000) in the aggregate outstanding made in the ordinary course of\nbusiness and consistently with practices existing on June 30, 1998; (ii)\ndeposits required by government agencies or public utilities; (iii) loans or\nadvances to Wholly Owned Subsidiaries; and (iv) loans or advances not otherwise\npermitted by the foregoing clauses of this Section, provided that the aggregate\noutstanding loans and advances made under this clause (iv) when aggregated with\nthe Investments made under Section 5.06(vi) shall not at any time exceed\n$40,000,000; provided, further, that after giving effect to the making of any\nloans, advances or deposits permitted by clause (i), (ii), (iii) or (iv) of\nthis Section, no Default shall have occurred and be continuing.\n\n SECTION 5.06. Investments. Neither the Borrower nor any of its\nSubsidiaries shall make Investments in any Person except as permitted by\nSection 5.05 and except Investments in (i) direct obligations of the United\nStates Government maturing within one year, (ii) certificates of deposit issued\nby or money market accounts maintained at a United States bank: (x) whose\nlong-term certificates of deposit are rated at least AA or the equivalent\nthereof by Standard & Poor's Corporation and Aa or the equivalent thereof by\nMoody's Investors Service, Inc.; or (y) if the long-term certificates of\ndeposit of such United States bank are unrated, the long-term debt of the\ncorporation owning such bank must be rated at least AA or the equivalent\n\n - 32 -\n\n\n\nthereof by Standard & Poor's Corporation and Aa or the equivalent thereof by\nMoody's Investors Service, Inc., (iii) commercial paper rated A-1 or the\nequivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent\nthereof by Moody's Investors Service, Inc. and in either case maturing within 9\nmonths after the date of acquisition, (iv) tender bonds the payment of the\nprincipal of and interest on which is fully supported by a letter of credit\nissued by a United States bank whose long-term certificates of deposit are\nrated at least AA or the equivalent thereof by Standard & Poor's Corporation\nand Aa or the equivalent thereof by Moody's Investors Service, Inc., (v)\nPermitted Acquisitions; and/or (vi) debt and investment securities not\notherwise permitted by the foregoing clauses of this Section, provided that the\naggregate amount of Investments made under this clause (vi) when aggregated\nwith the loans and advances made under section 5.05(iv) shall not at any time\nexceed $40,000,000.\n\n SECTION 5.07. Negative Pledge. Neither the Borrower nor any\nConsolidated Subsidiary will create, assume or suffer to exist any Lien on any\nasset now owned or hereafter acquired by it, except:\n \n (a) Liens existing on the date of this Agreement securing Debt\noutstanding on the date of this Agreement in an aggregate principal amount not\nexceeding $5,000,000;\n\n (b) any Lien existing on any asset of any corporation at the time\nsuch corporation becomes a Consolidated Subsidiary and not created in\ncontemplation of such event;\n\n (c) any Lien on any asset securing Debt incurred or assumed for the\npurpose of financing all or any part of the cost of acquiring or constructing\nsuch asset, provided that such Lien attaches to such asset concurrently with or\nwithin 18 months after the acquisition or completion of construction thereof;\n\n (d) any Lien on any asset of any corporation existing at the time\nsuch corporation is merged or consolidated with or into the Borrower or a\nConsolidated Subsidiary and not created in contemplation of such event;\n\n (e) any Lien existing on any asset prior to the acquisition thereof\nby the Borrower or a Consolidated Subsidiary and not created in contemplation\nof such acquisition;\n\n (f) Liens securing Debt owing by any Subsidiary to the Borrower;\n\n (g) any Lien arising out of the refinancing, extension, renewal or\nrefunding of any Debt secured by any Lien permitted by any of the foregoing\nclauses of this Section, provided that (i) such Debt is not secured by any\nadditional assets, and (ii) the amount of such Debt secured by any such Lien is\nnot increased;\n\n (h) Liens incidental to the conduct of its business or the ownership\nof its assets which (i) do not secure Debt and (ii) do not in the aggregate\nmaterially detract from the value of its assets or materially impair the use\nthereof in the operation of its business;\n\n (i) any Lien on Margin Stock; and\n\n\n\n - 33 -\n\n\n\n (j) Liens not otherwise permitted by the foregoing clauses of this\nSection securing Debt (other than indebtedness represented by the Notes) in an\naggregate principal amount at any time outstanding not to exceed 5% of\nConsolidated Net Worth.\n\n SECTION 5.08. Maintenance of Existence. The Borrower shall, and\nshall cause each Subsidiary to, maintain its corporate existence and carry on\nits business in substantially the same manner and in substantially the same\nfields as such business is now carried on and maintained, except through\ncorporate reorganization to the extent permitted by Section 5.10.\n\n SECTION 5.09. Dissolution. Neither the Borrower nor any of its\nSubsidiaries shall suffer or permit dissolution or liquidation either in whole\nor in part or redeem or retire any shares of its own stock or that of any\nSubsidiary, except through corporate reorganization to the extent permitted by\nSection 5.10.\n\n SECTION 5.10. Consolidations, Mergers and Sales of Assets. The\nBorrower will not, nor will it permit any Subsidiary to, consolidate or merge\nwith or into, or sell, lease or otherwise transfer all or any substantial part\nof its assets to, any other Person, or discontinue or eliminate any business\nline or segment, provided that (a) the Borrower may merge with another Person\nif (i) such Person was organized under the laws of the United States of America\nor one of its states, (ii) the Borrower is the corporation surviving such\nmerger and (iii) immediately after giving effect to such merger, no Default\nshall have occurred and be continuing, (b) Subsidiaries of the Borrower may\nmerge with one another, (c) KCPQ Acquisition Corp., a Consolidated Subsidiary\nof the Borrower, may merge with Kelly Television Co. if (i) Kelly Television\nCo. is organized under the laws of the United States of America or one of its\nstates, (ii) KCPQ Acquisition Corp. is the corporation surviving such merger,\nand (iii) immediately after giving effect to such merger, no Default shall have\noccurred and be continuing, and (d) the foregoing limitation on the sale, lease\nor other transfer of assets and on the discontinuation or elimination of a\nbusiness line or segment shall not prohibit, during any Fiscal Quarter, a\ntransfer of assets or the discontinuance or elimination of a business line or\nsegment (in a single transaction or in a series of related transactions) unless\nthe aggregate assets to be so transferred or utilized in a business line or\nsegment to be so discontinued, when combined with all other assets transferred,\nand all other assets utilized in all other business lines or segments\ndiscontinued, during such Fiscal Quarter and the immediately preceding three\nFiscal Quarters, either (x) contributed more than 20% of Consolidated Gross\nRevenues during the 4 Fiscal Quarters immediately preceding such Fiscal\nQuarter, or (y) contributed more than 20% of Consolidated Operating Profits\nduring the 4 consecutive Fiscal Quarters immediately preceding such Fiscal\nQuarter; provided, however, that the exchange of assets in connection with the\nWGNX Acquisition shall be excluded from any computation made pursuant to this\nSection 5.10(c).\n\n SECTION 5.11. Use of Proceeds. No portion of the proceeds of the\nLoans will be used by the Borrower or any Subsidiary (i) in connection with,\neither directly or indirectly, any tender offer for, or other acquisition of,\nstock of any corporation with a view towards obtaining control of such other\ncorporation, except a Permitted Acquisition or (ii) for any purpose in\nviolation of any applicable law or regulation. The proceeds of the initial\nBorrowing under this Agreement shall be used exclusively to finance or\nrefinance the WGNX Acquisition.\n\n - 34 -\n\n\n\n SECTION 5.12. Compliance with Laws; Payment of Taxes. (a) The\nBorrower will, and will cause each of its Subsidiaries and each member of the\nControlled Group to, comply with applicable laws (including but not limited to\nERISA), regulations and similar requirements of governmental authorities\n(including but not limited to PBGC), except where the necessity of such\ncompliance is being contested in good faith through appropriate proceedings\ndiligently pursued. The Borrower will, and will cause each of its Subsidiaries\nto, pay promptly when due all taxes, assessments, governmental charges, claims\nfor labor, supplies, rent and other obligations which: (A) if unpaid, might\nbecome a lien against the property of the Borrower or any Subsidiary, except\nliabilities being contested in good faith by appropriate proceedings diligently\npursued and against which, if requested by the Agent, the Borrower shall have\nset up reserves in accordance with GAAP; or (B) when combined with all other\ntaxes, assessments, governmental charges, claims for labor, supplies, rent and\nother obligations not paid promptly when due during the current Fiscal Quarter\nand the immediately preceding three Fiscal Quarters is greater than $500,000.\n\n (b) The Borrower shall not permit the aggregate complete or partial\nwithdrawal liability under Title IV of ERISA with respect to Multiemployer\nPlans incurred by the Borrower and members of the Controlled Group to exceed\n$5,000,000 at any time. For purposes of this Section 5.12(b), the amount of\nwithdrawal liability of the Borrower and members of the Controlled Group at any\ndate shall be the aggregate present value of the amount claimed to have been\nincurred less any portion thereof which: (1) the Borrower and members of the\nControlled Group have paid; or (2) as to which the Borrower reasonably\nbelieves, after appropriate consideration of possible adjustments arising under\nSections 4219 and 4221 of ERISA, it and members of the Controlled Group will\nhave no liability, provided that the Borrower shall obtain prompt written\nadvice from independent actuarial consultants supporting any such adjustments\nunder Sections 4219 and 4221 of ERISA. The Borrower agrees, from time to time\nbut no more frequently than once each Fiscal Year, upon the request of the\nAgent (i) to request and obtain a current statement of the withdrawal liability\nof the Borrower and members of the Controlled Group from each Multiemployer\nPlan, if any, and (ii) to transmit a copy of such statement to the Agent and\nthe Banks within fifteen (15) days after the Borrower receives the same.\n\n (c) No portion of the proceeds of the Loans will be used by the\nBorrower or any Subsidiary in violation of (or in a manner so as to cause the\nAgent or the Banks to be in violation of) any applicable law or regulation,\nincluding without limitation Regulations G, T, U and X. At no time will the\nvalue of Margin Stock purchased or held by the Borrower (including, without\nlimitation, shares of common stock of the Borrower repurchased by and held by\nthe Borrower but excluding shares of common stock of the Borrower repurchased\nby and immediately retired by the Borrower) exceed 25% of Unencumbered Total\nAssets of the Borrower.\n\n SECTION 5.13. Insurance. The Borrower will maintain, and will cause\neach of its Subsidiaries to maintain (either in the name of the Borrower or in\nsuch Subsidiary's own name), with financially sound and reputable insurance\ncompanies, insurance on all its Property in at least such amounts and against\nat least such risks as are usually insured against in the same general area by\ncompanies of established repute engaged in the same or similar business.\n\n SECTION 5.14. Change in Fiscal Year. The Borrower will not change\nits Fiscal Year without the consent of the Required Banks.\n\n\n - 35 -\n\n\n SECTION 5.15. Maintenance of Property. The Borrower shall, and\nshall cause each Subsidiary to, maintain all of its properties and assets in\ngood condition, repair and working order, ordinary wear and tear excepted.\n\n SECTION 5.16. Environmental Notices. The Borrower shall furnish to\nthe Banks and the Agent prompt written notice of all Environmental Liabilities,\npending, threatened or anticipated Environmental Proceedings, Environmental\nNotices, Environmental Judgments and Orders, and Environmental Releases at, on,\nin, under or in any way affecting the Properties or any adjacent property, and\nall facts, events, or conditions that could lead to any of the foregoing.\n\n SECTION 5.17. Environmental Matters. The Borrower and its\nSubsidiaries will not, and will not permit any Third Party to, use, produce,\nmanufacture, process, treat, recycle, generate, store, dispose of, manage at,\nor otherwise handle or ship or transport to or from the Properties any\nHazardous Materials except for Hazardous Materials such as cleaning solvents,\npesticides and other similar materials used, produced, manufactured, processed,\ntreated, recycled, generated, stored, disposed, managed or otherwise handled in\nminimal amounts in the ordinary course of business in compliance with all\napplicable Environmental Requirements.\n\n SECTION 5.18. Environmental Release. The Borrower agrees that upon\nthe occurrence of an Environmental Release at or on any of the Properties it\nwill act immediately to investigate the extent of, and to take appropriate\nremedial action to eliminate, such Environmental Release, whether or not\nordered or otherwise directed to do so by any Environmental Authority.\n\n SECTION 5.19. Transactions with Affiliates. Neither the Borrower\nnor any of its Subsidiaries shall enter into, or be a party to, any Affiliate\nTransaction, except: (1) as permitted by law; (2) in the ordinary course of\nbusiness; and (3) pursuant to reasonable terms which are no less favorable to\nBorrower or such Subsidiary than would be obtained in a comparable arm's length\ntransaction with a Person which is not an Affiliate. As used herein,\n\"Affiliate Transaction\" means a transaction between the Borrower or any of its\nSubsidiaries with any Affiliate of the Borrower or any such Subsidiary (which\nAffiliate is not the Borrower or a Subsidiary) which transaction when combined\nwith all other transactions between the Borrower or any of its Subsidiaries and\nany Affiliate of the Borrower or a Subsidiary of the Borrower during the\ncurrent Fiscal Quarter and the immediately preceding three Fiscal Quarters is\ngreater than $1,000,000.\n\n SECTION 5.20 Acquisitions. The Borrower will not, nor will it\npermit any Subsidiary to purchase, lease or otherwise acquire (in a single\ntransaction or in a series of transactions), directly or indirectly: (i) all\nor any substantial part of the assets or stock of any other Person; (ii) a\nbusiness line or segment of any other Person; or (iii) control of any other\nPerson; provided that the Borrower and it Subsidiaries may enter into a\nPermitted Acquisition.\n\n SECTION 5.21. Debt. (a) The Borrower shall not at any time incur,\ncreate, assume, or permit to exist any Debt except: (1) the Loans; (2) Debt\nowing to a Subsidiary of the Borrower; (3) Debt outstanding on the date of this\nAgreement described on Schedule 5.21; and (4) Debt, in addition to Debt\npermitted under clauses (1), (2) and (3) of this Section 5.21(a), provided that\nthe Borrower shall not incur, create, assume or permit to exist any Debt under\nthis Section 5.21(a) if the incurrence, creation, assumption or existence of\nany such Debt shall result in a Default or Event of Default.\n\n - 36 -\n\n\n\n\n (b) No Subsidiary of the Borrower shall at any time incur, create,\nassume, or permit to exist any Debt except: (1) Debt owing to the Borrower or\nanother Subsidiary of the Borrower; and (2) Debt, in addition to Debt permitted\nunder clause (1) of this Section 5.21(b), provided that the aggregate\noutstanding principal amount of Debt of all of the Subsidiaries of the Borrower\nincurred under this clause (2) of Section 5.21(b) shall not at any time exceed\n$1,000,000; provided further that no Subsidiary of the Borrower shall incur,\ncreate, assume, or permit to exist any Debt under this Section 5.21(b) if the\nincurrence, creation, assumption or existence of any such Debt shall result in\na Default or Event of Default.\n\n SECTION 5.22. Termination or Loss of Licenses. The Borrower will\nnot, nor will it permit any Subsidiary to, take or fail to take any action\nwhich permits, or after notice or lapse of time or both would permit,\nrevocation or termination of any material Broadcast License; except: (1)\nrevocation or termination of the Broadcast Licenses applicable to the KCPQ\nAssets to the extent such revocation or termination is required in connection\nwith the WGNX Acquisition; and (2) revocation or termination of Broadcast\nLicenses applicable to other assets that are transferred by the Borrower to the\nextent any such transfer is permitted under this Agreement.\n\n SECTION 5.23. No Activities Leading to Forfeiture. The Borrower\nwill not, nor will it permit any Subsidiary to, engage in the conduct of any\nbusiness or activity which could result in a Forfeiture Proceeding.\n\n SECTION 5.24. Y2K Compliant and Ready. The Borrower will meet the\nmilestones contained in the Y2K Plan in all material respects and will have all\nhardware and software systems Year 2000 Compliant and Ready (including all\nmaterial internal and external testing) on or before June 30, 1999.\n\n\n ARTICLE VI\n\n DEFAULTS\n\n SECTION 6.01. Events of Default. If one or more of the following\nevents (\"Events of Default\") shall have occurred and be continuing: \n\n (a) the Borrower shall fail to pay when due any principal of any\n Loan or shall fail to pay any interest on any Loan within five Domestic\n Business Days after such interest shall become due, or shall fail to pay\n any fee or other amount payable hereunder within five Domestic Business\n Days after such fee or other amount becomes due; or\n\n (b) the Borrower shall fail to observe or perform any covenant\n contained in Sections 5.01(e), 5.01(m), 5.02(ii), or 5.03 to 5.11,\n inclusive, or Section 5.13, or Sections 5.20 to 5.23 inclusive; or\n\n (c) the Borrower shall fail to observe or perform any covenant or\n agreement contained or incorporated by reference in this Agreement (other\n than those covered by clause (a) or (b) above) for thirty days after the\n earlier of (i) the first day on which the Borrower has knowledge of such\n failure or (ii) written notice thereof has been given to the Borrower by\n the Agent at the request of any Bank; or\n\n\n - 37 -\n\n\n (d) any representation, warranty, certification or statement made or\n deemed made by the Borrower in Article IV of this Agreement or in any\n certificate, financial statement or other document delivered pursuant to\n this Agreement shall prove to have been incorrect or misleading in any\n material respect when made (or deemed made); or\n\n (e) the Borrower or any Subsidiary shall fail to make any payment in\n respect of Debt outstanding (other than the Notes) in an aggregate\n principal amount in excess of $10,000,000 when due or within any\n applicable grace period; or\n\n (f) any event or condition shall occur which results in the\n acceleration of the maturity of Debt outstanding of the Borrower or any\n Subsidiary in an aggregate principal amount in excess of $10,000,000 or\n the mandatory prepayment or purchase of such Debt by the Borrower (or its\n designee) or such Subsidiary (or its designee) prior to the scheduled\n maturity thereof, or enables (or, with the giving of notice or lapse of\n time or both, would enable) the holders of such Debt or any Person acting\n on such holders' behalf to accelerate the maturity thereof or require the\n mandatory prepayment or purchase thereof prior to the scheduled maturity\n thereof, without regard to whether such holders or other Person shall have\n exercised or waived their right to do so; or\n\n (g) the Borrower or any Subsidiary shall commence a voluntary case\n or other proceeding seeking liquidation, reorganization or other relief\n with respect to itself or its debts under any bankruptcy, insolvency or\n other similar law now or hereafter in effect or seeking the appointment of\n a trustee, receiver, liquidator, custodian or other similar official of it\n or any substantial part of its property, or shall consent to any such\n relief or to the appointment of or taking possession by any such official\n in an involuntary case or other proceeding commenced against it, or shall\n make a general assignment for the benefit of creditors, or shall fail\n generally, or shall admit in writing its inability, to pay its debts as\n they become due, or shall take any corporate action to authorize any of\n the foregoing; or\n\n (h) an involuntary case or other proceeding shall be commenced\n against the Borrower or any Subsidiary seeking liquidation, reorganization\n or other relief with respect to it or its debts under any bankruptcy,\n insolvency or other similar law now or hereafter in effect or seeking the\n appointment of a trustee, receiver, liquidator, custodian or other similar\n official of it or any substantial part of its property, and such\n involuntary case or other proceeding shall remain undismissed and unstayed\n for a period of 60 days; or an order for relief shall be entered against\n the Borrower or any Subsidiary under the federal bankruptcy laws as now or\n hereafter in effect; or\n\n (i) the Borrower or any member of the Controlled Group shall fail to\n pay when due any material amount which it shall have become liable to pay\n to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to\n terminate a Plan or Plans shall be filed under Title IV of ERISA by the\n Borrower, any member of the Controlled Group, any plan administrator or\n any combination of the foregoing; or the PBGC shall institute proceedings\n under Title IV of ERISA to terminate or to cause a trustee to be appointed\n to administer any such Plan or Plans or a proceeding shall be instituted\n by a fiduciary of any such Plan or Plans to enforce Section 515 or\n 4219(c)(5) of ERISA and such proceeding shall not have been dismissed\n\n - 38 -\n\n\n\n within 30 days thereafter; or a condition shall exist by reason of which\n the PBGC would be entitled to obtain a decree adjudicating that any such\n Plan or Plans must be terminated; or\n\n (j) one or more judgments or orders for the payment of money in an\n aggregate amount in excess of $1,000,000 shall be rendered against the\n Borrower or any Subsidiary and such judgment or order shall continue\n unsatisfied and unstayed for a period of 30 days; or\n\n (k) a federal tax lien shall be filed against the Borrower or any\n Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be\n filed against the Borrower or any Subsidiary under Section 4068 of ERISA\n and in either case such lien shall remain undischarged for a period of 25\n days after the date of filing; or\n\n (l) (i) any Person or two or more Persons (other than the E. T.\n Meredith Family Stockholders) acting in concert shall have acquired\n beneficial ownership (within the meaning of Rule 13d-3 of the Securities\n and Exchange Commission under the Securities Exchange Act of 1934) of 20%\n or more of the outstanding shares of the voting stock of the Borrower; or\n (ii) as of any date a majority of the Board of Directors of the Borrower\n consists of individuals who were not either (A) directors of the Borrower\n as of the corresponding date of the previous year, (B) selected or\n nominated to become directors by the Board of Directors of the Borrower of\n which a majority consisted of individuals described in clause (A), or (C)\n selected or nominated to become directors by the Board of Directors of the\n Borrower of which a majority consisted of individuals described in clause\n (A) and individuals described in clause (B); or\n\n (m) except as permitted by Section 5.22, if any of the Broadcast\n Licenses necessary for the operation of the Stations shall be terminated,\n forfeited or revoked or shall fail to be renewed for any reason\n whatsoever, or, for any other reason, the Borrower or any Subsidiary of\n the Borrower shall at any time fail to be a licensee under any of the\n Broadcast Licenses or shall otherwise fail to have all required\n authorizations, licenses and permits to construct, own, operate or promote\n the Stations pursuant to the Broadcast Licenses; or\n\n (n) if (x) any Forfeiture Proceeding shall have been commenced or the\n Borrower shall have given the Bank written notice of the commencement of\n any Forfeiture Proceeding as provided in Section 5.01(j) hereof; or (y)\n the Bank has a good faith basis to believe that a Forfeiture Proceeding\n has been threatened or commenced; or\n\n (o) if, at any time, the FCC or any court of competent jurisdiction\n shall have entered any final order or judgment (which, in either case,\n shall have been outstanding for any period of more than thirty (30) days\n during which enforcement of such order or judgment has not been stayed, by\n reason of a pending appeal or otherwise) requiring the Borrower or any\n Subsidiary of the Borrower to sell, transfer or divest itself of any\n Station, or the assets which comprise any Station, by virtue of any\n failure on the part of the Borrower or any Subsidiary of the Borrower to\n comply with the Federal Communications Act of 1934, as amended, the rules\n and regulations of the FCC promulgated thereunder or any FCC order or any\n judgment, and the Borrower or any Subsidiary of the Borrower shall fail to\n consummate such sale, transfer or divestiture within the time allotted\n therefor;\n - 39 -\n\n\n\n then, and in every such event, the Agent shall (i)if requested by the\nRequired Banks, by notice to the Borrower terminate the Commitments and they\nshall thereupon terminate, and (ii) if requested by the Required Banks, by\nnotice to the Borrower declare the Notes (together with accrued interest\nthereon) and all other amounts payable hereunder and under the other Loan\nDocuments to be, and the Notes (together with all accrued interest thereon) and\nall other amounts payable hereunder and under the other Loan Documents shall\nthereupon become, immediately due and payable without presentment, demand,\nprotest or other notice of any kind, all of which are hereby waived by the\nBorrower; provided that if any Event of Default specified in clause (g) or (h)\nabove occurs with respect to the Borrower, without any notice to the Borrower, \nor any other act by the Agent or the Banks, the Commitments shall thereupon\nautomatically terminate and the Notes (together with accrued interest thereon)\nand all other amounts payable hereunder and under the other Loan Documents\nshall automatically become immediately due and payable without presentment,\ndemand, protest or other notice of any kind, all of which are hereby waived by\nthe Borrower. Notwithstanding the foregoing, the Agent shall have available to\nit all other remedies at law or equity, and shall exercise any one or all of\nthem at the request of the Required Banks. \n\n SECTION 6.02. Notice of Default. The Agent shall give notice to the\nBorrower of any Default under Section 6.01(c) promptly upon being requested to\ndo so by any Bank and shall thereupon notify all the Banks thereof. \n\n\n ARTICLE VII\n\n THE AGENT\n\n SECTION 7.01. Appointment, Powers and Immunities. Each Bank hereby\nirrevocably appoints and authorizes the Agent to act as its agent hereunder and\nunder the other Loan Documents with such powers as are specifically delegated\nto the Agent by the terms hereof and thereof, together with such other powers\nas are reasonably incidental thereto. The Agent: (a) shall have no duties or\nresponsibilities except as expressly set forth in this Agreement and the other\nLoan Documents, and shall not by reason of this Agreement or any other Loan\nDocument be a trustee for any Bank; (b) shall not be responsible to the Banks\nfor any recitals, statements, representations or warranties contained in this\nAgreement or any other Loan Document, or in any certificate or other document\nreferred to or provided for in, or received by any Bank under, this Agreement\nor any other Loan Document, or for the validity, effectiveness, genuineness,\nenforceability or sufficiency of this Agreement or any other Loan Document or\nany other document referred to or provided for herein or therein or for any\nfailure by the Borrower to perform any of its obligations hereunder or\nthereunder; (c) shall not be required to initiate or conduct any litigation or\ncollection proceedings hereunder or under any other Loan Document except to the\nextent requested by the Required Banks, and then only on terms and conditions\nsatisfactory to the Agent, and (d) shall not be responsible for any action\ntaken or omitted to be taken by it hereunder or under any other Loan Document\nor any other document or instrument referred to or provided for herein or\ntherein or in connection herewith or therewith, except for its own gross\nnegligence or willful misconduct. The Agent may employ agents and attorneys-\nin-fact and shall not be responsible for the negligence or misconduct of any\nsuch agents or attorneys-in-fact selected by it with reasonable care. The\nprovisions of this Article VII are solely for the benefit of the Agent and the\nBanks, and the Borrower shall not have any rights as a third party beneficiary\n\n - 40 -\n\n\n\nof any of the provisions hereof. In performing its functions and duties under\nthis Agreement and under the other Loan Documents, the Agent shall act solely\nas agent of the Banks and does not assume and shall not be deemed to have\nassumed any obligation towards or relationship of agency or trust with or for\nthe Borrower. The duties of the Agent shall be ministerial and administrative\nin nature, and the Agent shall not have by reason of this Agreement or any\nother Loan Document a fiduciary relationship in respect of any Bank.\n\n SECTION 7.02. Reliance by Agent. The Agent shall be entitled to\nrely upon any certification, notice or other communication (including any\nthereof by telephone, telefax, telegram or cable) believed by it to be genuine\nand correct and to have been signed or sent by or on behalf of the proper\nPerson or Persons, and upon advice and statements of legal counsel, independent\naccountants or other experts selected by the Agent. As to any matters not\nexpressly provided for by this Agreement or any other Loan Document, the Agent\nshall in all cases be fully protected in acting, or in refraining from acting,\nhereunder and thereunder in accordance with instructions signed by the Required\nBanks, and such instructions of the Required Banks in any action taken or\nfailure to act pursuant thereto shall be binding on all of the Banks.\n\n SECTION 7.03. Defaults. The Agent shall not be deemed to have\nknowledge of the occurrence of a Default or an Event of Default (other than the\nnon-payment of principal of or interest on the Loans) unless the Agent has\nreceived notice from a Bank or the Borrower specifying such Default or Event of\nDefault and stating that such notice is a \"Notice of Default\". In the event\nthat the Agent receives such a notice of the occurrence of a Default or an\nEvent of Default, the Agent shall give prompt notice thereof to the Banks. The\nAgent shall give each Bank prompt notice of each non-payment of principal of or\ninterest on the Loans, whether or not it has received any notice of the\noccurrence of such non-payment. The Agent shall (subject to Section 9.05) take\nsuch action with respect to such Default or Event of Default as shall be\ndirected by the Required Banks; provided that, unless and until the Agent shall\nhave received such directions, the Agent may (but shall not be obligated to)\ntake such action, or refrain from taking such action, with respect to such\nDefault or Event of Default as it shall deem advisable in the best interests of\nthe Banks.\n\n SECTION 7.04. Rights of Agent and its Affiliates as a Bank. With\nrespect to any Loan made by Wachovia or an Affiliate of Wachovia, such\nAffiliate and Wachovia in their capacity as a Bank hereunder shall have the\nsame rights and powers hereunder as any other Bank and may exercise the same as\nthough it were not an Affiliate of Wachovia (or in Wachovia's case, acting as\nthe Agent), and the term \"Bank\" or \"Banks\" shall, unless the context otherwise\nindicates, include such Affiliate of Wachovia or Wachovia in its individual\ncapacity. Such Affiliate and Wachovia may (without having to account therefor\nto any Bank) accept deposits from, lend money to and generally engage in any\nkind of banking, trust or other business with the Borrower (and any of its\nAffiliates) as if they were not an Affiliate of the Agent or the Agent,\nrespectively; and such Affiliate and Wachovia may accept fees and other\nconsideration from the Borrower (in addition to any agency fees and arrangement\nfees heretofore agreed to between the Borrower and Wachovia) for services in\nconnection with this Agreement or any other Loan Document or otherwise without\nhaving to account for the same to the Banks.\n\n SECTION 7.05. Indemnification. Each Bank severally agrees to\nindemnify the Agent, to the extent the Agent shall not have been reimbursed by\n\n - 41 -\n\n\nthe Borrower, ratably in accordance with the aggregate amount of its Commitment\nfor any and all liabilities, obligations, losses, damages, penalties, actions,\njudgments, suits, costs, expenses (including, without limitation, counsel fees\nand disbursements) or disbursements of any kind and nature whatsoever which may\nbe imposed on, incurred by or asserted against the Agent in any way relating to\nor arising out of this Agreement or any other Loan Document or any other\ndocuments contemplated by or referred to herein or therein or the transactions\ncontemplated hereby or thereby (excluding, unless an Event of Default has\noccurred and is continuing, the normal administrative costs and expenses\nincident to the performance of its agency duties hereunder) or the enforcement\nof any of the terms hereof or thereof or any such other documents; provided,\nhowever, that no Bank shall be liable for any of the foregoing to the extent\nthey arise from the gross negligence or willful misconduct of the Agent. If\nany indemnity furnished to the Agent for any purpose shall, in the opinion of\nthe Agent, be insufficient or become impaired, the Agent may call for\nadditional indemnity and cease, or not commence, to do the acts indemnified\nagainst until such additional indemnity is furnished.\n\n SECTION 7.06. CONSEQUENTIAL DAMAGES. THE AGENT SHALL NOT BE\nRESPONSIBLE OR LIABLE TO ANY BANK, THE BORROWER OR ANY OTHER PERSON OR ENTITY\nFOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A\nRESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS\nCONTEMPLATED HEREBY OR THEREBY.\n\n SECTION 7.07. Payee of Note Treated as Owner. The Agent may deem\nand treat the payee of any Note as the owner thereof for all purposes hereof\nunless and until a written notice of the assignment or transfer thereof shall\nhave been filed with the Agent and the provisions of Section 9.07(c) have been\nsatisfied. Any requests, authority or consent of any Person who at the time of\nmaking such request or giving such authority or consent is the holder of any\nNote shall be conclusive and binding on any subsequent holder, transferee or\nassignee of that Note or of any Note or Notes issued in exchange therefor or\nreplacement thereof. \n\n SECTION 7.08. Non-Reliance on Agent and Other Banks. Each Bank\nagrees that it has, independently and without reliance on the Agent or any\nother Bank, and based on such documents and information as it has deemed\nappropriate, made its own credit analysis of the Borrower and decision to enter\ninto this Agreement and that it will, independently and without reliance upon\nthe Agent or any other Bank, and based on such documents and information as it\nshall deem appropriate at the time, continue to make its own analysis and\ndecisions in taking or not taking action under this Agreement or any of the\nother Loan Documents. The Agent shall not be required to keep itself (or any\nBank) informed as to the performance or observance by the Borrower of this\nAgreement or any of the other Loan Documents or any other document referred to\nor provided for herein or therein or to inspect the properties or books of the\nBorrower or any other Person. Except for notices, reports and other documents\nand information expressly required to be furnished to the Banks by the Agent\nhereunder or under the other Loan Documents, the Agent shall not have any duty\nor responsibility to provide any Bank with any credit or other information\nconcerning the affairs, financial condition or business of the Borrower or any\nother Person (or any of their Affiliates) which may come into the possession of\nthe Agent. Each Bank acknowledges that each Bank designated as a \"Syndication\nAgent\" or \"Documentation Agent\" on the signature pages of this Agreement shall\nhave no right, duty or responsibility and shall incur no liability, under this\nAgreement in its capacity as a Syndication Agent or Documentation Agent.\n\n - 42 -\n\n\n SECTION 7.09. Failure to Act. Except for action expressly required\nof the Agent hereunder or under the other Loan Documents, the Agent shall in\nall cases be fully justified in failing or refusing to act hereunder and\nthereunder unless it shall receive further assurances to its satisfaction by\nthe Banks of their indemnification obligations under Section 7.05 against any\nand all liability and expense which may be incurred by the Agent by reason of\ntaking, continuing to take, or failing to take any such action.\n \n SECTION 7.10. Resignation or Removal of Agent. Subject to the\nappointment and acceptance of a successor Agent as provided below, the Agent\nmay resign at any time by giving notice thereof to the Banks and the Borrower\nand the Agent may be removed at any time with or without cause by the Required\nBanks. Upon any such resignation or removal, the Required Banks shall have the\nright to appoint a successor Agent. If no successor Agent that has been duly\nappointed by the Required Banks shall have accepted such appointment within 30\ndays after the retiring Agent's notice of resignation or the Required Banks'\nremoval of the retiring Agent, then the retiring Agent may, on behalf of the\nBanks, appoint a successor Agent. Any successor Agent shall be a bank which\nhas a combined capital and surplus of at least $500,000,000. Upon the\nacceptance of any appointment as Agent hereunder by a successor Agent, such\nsuccessor Agent shall thereupon succeed to and become vested with all the\nrights, powers, privileges and duties of the retiring Agent, and the retiring\nAgent shall be discharged from its duties and obligations hereunder. After any\nretiring Agent's resignation or removal hereunder as Agent, the provisions of\nthis Article VII shall continue in effect for its benefit in respect of any\nactions taken or omitted to be taken by it while it was acting as the Agent \nhereunder.\n\n ARTICLE VIII\n\n CHANGE IN CIRCUMSTANCES; COMPENSATION\n\n SECTION 8.01. Basis for Determining Interest Rate Inadequate or\nUnfair. If on or prior to the first day of any Interest Period: \n\n (a) the Agent determines that deposits in Dollars (in the applicable\n amounts) are not being offered in the relevant market for such Interest\n Period, or\n\n (b) the Required Banks advise the Agent that the London Interbank\n Offered Rate, as determined by the Agent will not adequately and fairly\n reflect the cost to such Banks of funding the relevant type of Euro-Dollar\n Loans for such Interest Period,\n\n the Agent shall forthwith give notice thereof to the Borrower and the\n Banks, whereupon: (i) the obligations of the Banks to make the Euro-Dollar\n Loans specified in such notice shall be suspended; and (ii) the\n obligations of the Banks to make the Euro-Dollar Loans specified in such\n notice shall continue to be suspended until the Agent notifies the\n Borrower that the circumstances giving rise to such suspension no longer\n exist. Unless the Borrower notifies the Agent at least 2 Domestic\n Business Days before the date of any Euro-dollar Borrowing for which a\n Notice of Borrowing has previously been given that it elects not to borrow\n on such date, such borrowing shall instead be made as a Base Rate\n Borrowing. \n\n\n - 43 -\n\n\n SECTION 8.02. Illegality. If, after the date hereof, the adoption of any\napplicable law, rule or regulation, or any change in any existing or future\nlaw, rule or regulation, or any change in the interpretation or administration\nthereof by any governmental authority, central bank or comparable agency\ncharged with the interpretation or administration thereof (any such authority,\nbank or agency being referred to as an \"Authority\" and any such event being\nreferred to as a \"Change of Law\"), or compliance by any Bank (or its Lending\nOffice) with any request or directive (whether or not having the force of law)\nof any Authority shall make it unlawful or impossible for any Bank (or its\nLending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank\nshall so notify the Agent, the Agent shall forthwith give notice thereof to the\nother Banks and the Borrower, whereupon until such Bank notifies the Borrower\nand the Agent that the circumstances giving rise to such suspension no longer\nexist, the obligation of such Bank to make Euro-Dollar Loans shall be\nsuspended. Before giving any notice to the Agent pursuant to this Section,\nsuch Bank shall designate a different Lending Office if such designation will\navoid the need for giving such notice and will not, in the judgment of such\nBank, be otherwise disadvantageous to such Bank. If such Bank shall determine\nthat it may not lawfully continue to maintain and fund any of its outstanding\nEuro-Dollar Loans to maturity and shall so specify in such notice, the Borrower\nshall immediately prepay in full the then outstanding principal amount of each\nEuro-Dollar Loan of such Bank, together with accrued interest thereon and any\namount due such Bank pursuant to Section 8.05(a). Concurrently with prepaying\neach such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an\nequal principal amount from such Bank (on which interest and principal shall be\npayable contemporaneously with the related Euro-Dollar Loans of the other\nBanks), and such Bank shall make such a Base Rate Loan. \n\n SECTION 8.03. Increased Cost and Reduced Return. (a) If after the\ndate hereof, a Change of Law or compliance by any Bank (or its Lending Office)\nwith any request or directive (whether or not having the force of law) of any\nAuthority:\n\n (i) shall subject any Bank (or its Lending Office) to any tax, duty\n or other charge with respect to its Euro-Dollar Loans, its Notes or its\n obligation to make Euro-Dollar Loans, or shall change the basis of\n taxation of payments to any Bank (or its Lending Office) of the principal\n of or interest on its Euro-Dollar Loans or any other amounts due under\n this Agreement in respect of its Euro-Dollar Loans or its obligation to\n make Euro-Dollar Loans (except for changes in the rate of tax on the\n overall net income of such Bank or its Lending Office imposed by the\n jurisdiction in which such Bank's principal executive office or Lending\n Office is located); or\n\n (ii) shall impose, modify or deem applicable any reserve, special\n deposit or similar requirement (including, without limitation, any such\n requirement imposed by the Board of Governors of the Federal Reserve\n System, but excluding with respect to any Euro-Dollar Loan any such\n requirement included in an applicable Euro-Dollar Reserve Percentage)\n against assets of, deposits with or for the account of, or credit extended\n by, any Bank (or its Lending Office); or \n\n (iii) shall impose on any Bank (or its Lending Office) or on the\n London interbank market any other condition affecting its Euro-Dollar\n Loans, its Notes or its obligation to make Euro-Dollar Loans;\n\n\n - 44 -\n\n\nand the result of any of the foregoing is to increase the cost to such Bank (or\nits Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce\nthe amount of any sum received or receivable by such Bank (or its Lending\nOffice) under this Agreement or under its Notes with respect thereto, by an\namount deemed by such Bank to be material, then, within 15 days after demand by\nsuch Bank (with a copy to the Agent), the Borrower shall pay to such Bank such\nadditional amount or amounts as will compensate such Bank for such increased\ncost or reduction. \n\n (b) If any Bank shall have determined that after the date hereof the\nadoption of any applicable law, rule or regulation regarding capital adequacy,\nor any change in any existing or future law, rule or regulation, or any change\nin the interpretation or administration thereof, or compliance by any Bank (or\nits Lending Office) with any request or directive regarding capital adequacy\n(whether or not having the force of law) of any Authority, has or would have\nthe effect of reducing the rate of return on such Bank's capital as a\nconsequence of its obligations hereunder to a level below that which such Bank\ncould have achieved but for such adoption, change or compliance (taking into\nconsideration such Bank's policies with respect to capital adequacy) by an\namount deemed by such Bank to be material, then from time to time, within 15\ndays after demand by such Bank, the Borrower shall pay to such Bank such\nadditional amount or amounts as will compensate such Bank for such reduction.\n\n (c) Each Bank will promptly notify the Borrower and the Agent of any\nevent of which it has knowledge, occurring after the date hereof, which will\nentitle such Bank to compensation pursuant to this Section and will designate a\ndifferent Lending Office if such designation will avoid the need for, or reduce\nthe amount of, such compensation and will not, in the judgment of such Bank, be\notherwise disadvantageous to such Bank. A certificate of any Bank claiming\ncompensation under this Section and setting forth the additional amount or\namounts to be paid to it hereunder shall be conclusive in the absence of\nmanifest error. In determining such amount, such Bank may use any reasonable\naveraging and attribution methods.\n\n (d) The provisions of this Section 8.03 shall be applicable with\nrespect to any Participant, Assignee or other Transferee, and any calculations\nrequired by such provisions shall be made based upon the circumstances of such\nParticipant, Assignee or other Transferee.\n\n SECTION 8.04. Base Rate Loans Substituted for Euro-Dollar Loans. If\n(i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been\nsuspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation\nunder Section 8.03, and the Borrower shall, by at least 5 Euro-Dollar Business\nDays' prior notice to such Bank through the Agent, have elected that the\nprovisions of this Section shall apply to such Bank, then, unless and until\nsuch Bank notifies the Borrower that the circumstances giving rise to such\nsuspension or demand for compensation no longer apply: \n\n (a) all Loans which would otherwise be made by such Bank as \n Euro-Dollar Loans shall be made instead as Base Rate Loans (in all cases\n interest and principal on such Loans shall be payable contemporaneously\n with the related Euro-Dollar Loans of the other Banks), and\n\n (b) after each of its Euro-Dollar Loans has been repaid, all\n payments of principal which would otherwise be applied to repay such \n Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead.\n\n - 45 -\n\nIn the event that the Borrower shall elect that the provisions of this Section\nshall apply to any Bank, the Borrower shall remain liable for, and shall pay to\nsuch Bank as provided herein, all amounts due such Bank under Section 8.03 in\nrespect of the period preceding the date of conversion of such Bank's Loans\nresulting from the Borrower's election.\n\n SECTION 8.05. Compensation. Upon the request of any Bank, delivered\nto the Borrower and the Agent, the Borrower shall pay to such Bank such amount\nor amounts as shall compensate such Bank for any loss, cost or expense incurred\nby such Bank as a result of:\n\n (a) any payment or prepayment (pursuant to Section 2.09, Section\n2.10 or otherwise) of a Euro-Dollar Loan on a date other than the last day of\nan Interest Period for such Euro-Dollar Loan;\n\n (b) any failure by the Borrower to prepay a Euro-Dollar Loan on the\ndate for such prepayment specified in the relevant notice of prepayment\nhereunder; or\n\n (c) any failure by the Borrower to borrow a Euro-Dollar Loan on the\ndate for the Euro-Dollar Borrowing of which such Euro-Dollar Loan is a part\nspecified in the applicable Notice of Borrowing delivered pursuant to Section\n2.02; \n\nsuch compensation to include, without limitation, an amount equal to the\nexcess, if any, of (x) the amount of interest which would have accrued on the\namount so paid or prepaid or not prepaid or borrowed for the period from the\ndate of such payment, prepayment or failure to prepay or borrow to the last day\nof the then current Interest Period for such Euro-Dollar Loan (or, in the case\nof a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan\nwhich would have commenced on the date of such failure to prepay or borrow) at\nthe applicable rate of interest for such Euro-Dollar Loan provided for herein\nover (y) the amount of interest (as reasonably determined by such Bank) such\nBank would have paid on deposits in Dollars of comparable amounts having terms\ncomparable to such period placed with it by leading banks in the London\ninterbank market.\n\n\n ARTICLE IX\n\n MISCELLANEOUS\n\n SECTION 9.01. Notices. All notices, requests and other\ncommunications to any party hereunder shall be in writing (including facsimile\ntransmission or similar writing) and shall be given to such party at its\naddress or telecopy number set forth on the signature pages hereof or such\nother address or telecopy number as such party may hereafter specify for the\npurpose by notice to each other party. Each such notice, request or other\ncommunication shall be effective (i) if given by telecopier, when such telecopy\nis transmitted to the telecopy number specified in this Section and the\ntelecopy machine used by the sender provides a written confirmation that such\ntelecopy has been so transmitted or receipt of such telecopy transmission is\notherwise confirmed, (ii) if given by mail, 72 hours after such communication\nis deposited in the mails with first class postage prepaid, addressed as\naforesaid, and (iii) if given by any other means, when delivered at the address\nspecified in this Section; provided that notices to the Agent under Article II\nor Article VIII shall not be effective until received.\n\n - 46 -\n\n\n SECTION 9.02. No Waivers. No failure or delay by the Agent or any\nBank in exercising any right, power or privilege hereunder or under any Note or\nother Loan Document shall operate as a waiver thereof nor shall any single or\npartial exercise thereof preclude any other or further exercise thereof or the\nexercise of any other right, power or privilege. The rights and remedies\nherein provided shall be cumulative and not exclusive of any rights or remedies\nprovided by law. \n\n SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The\nBorrower shall pay (i) all out-of-pocket expenses of the Agent, including fees\nand disbursements of special counsel for the Banks and the Agent, in connection\nwith the preparation of this Agreement and the other Loan Documents, any waiver\nor consent hereunder or thereunder or any amendment hereof or thereof or any\nDefault or alleged Default hereunder or thereunder and (ii) if a Default\noccurs, all out-of-pocket expenses incurred by the Agent or any Bank, including\nfees and disbursements of counsel to the Agent and each Bank, in connection\nwith such Default and collection and other enforcement proceedings resulting\ntherefrom, including out-of-pocket expenses incurred in enforcing this\nAgreement and the other Loan Documents. \n\n (b) The Borrower shall indemnify the Agent and each Bank against any\ntransfer taxes, documentary taxes, assessments or charges made by any Authority\nby reason of the execution and delivery of this Agreement or the other Loan\nDocuments.\n\n (c) The Borrower shall indemnify the Agent, the Banks and each\nAffiliate thereof and their respective directors, officers, employees and\nagents from, and hold each of them harmless against, any and all losses,\nliabilities, claims or damages to which any of them may become subject, insofar\nas such losses, liabilities, claims or damages arise out of or result from any\nactual or proposed use by the Borrower of the proceeds of any extension of\ncredit by any Bank hereunder or breach by the Borrower of this Agreement or any\nother Loan Document or from any investigation, litigation (including, without\nlimitation, any actions taken by the Agent or any of the Banks to enforce this\nAgreement or any of the other Loan Documents) or other proceeding (including,\nwithout limitation, any threatened investigation or proceeding) relating to the\nforegoing, and the Borrower shall reimburse the Agent and each Bank, and each\nAffiliate thereof and their respective directors, officers, employees and\nagents, upon demand for any expenses (including, without limitation, legal\nfees) incurred in connection with any such investigation or proceeding; but\nexcluding any such losses, liabilities, claims, damages or expenses incurred by\nreason of the gross negligence or willful misconduct of the Person to be\nindemnified.\n\n SECTION 9.04. Set-Offs; Sharing of Set-Offs. (a) The Borrower\nhereby grants to each Bank, as security for the full and punctual payment and\nperformance of the obligations of the Borrower under this Agreement, a\ncontinuing lien on and security interest in all deposits and other sums\ncredited by or due from such Bank to the Borrower or subject to withdrawal by\nthe Borrower; and regardless of the adequacy of any collateral or other means\nof obtaining repayment of such obligations, each Bank may at any time upon or\nafter the occurrence of any Event of Default, and without notice to the\nBorrower, set off the whole or any portion or portions of any or all such\ndeposits and other sums against such obligations, whether or not any other\nPerson or Persons could also withdraw money therefrom. \n\n\n - 47 -\n\n\n (b) Each Bank agrees that if it shall, by exercising any right of\nset-off or counterclaim or otherwise, receive payment of a proportion of the\naggregate amount of principal and interest owing with respect to the Notes held\nby it which is greater than the proportion received by any other Bank in\nrespect of the aggregate amount of all principal and interest owing with\nrespect to the Notes held by such other Bank, the Bank receiving such\nproportionately greater payment shall purchase such participations in the Notes\nheld by the other Banks owing to such other Banks, and/or such other\nadjustments shall be made, as may be required so that all such payments of\nprincipal and interest with respect to the Notes held by the Banks owing to\nsuch other Banks shall be shared by the Banks pro rata; provided that (i)\nnothing in this Section shall impair the right of any Bank to exercise any\nright of set-off or counterclaim it may have and to apply the amount subject to\nsuch exercise to the payment of indebtedness of the Borrower other than its\nindebtedness under the Notes, and (ii) if all or any portion of such payment\nreceived by the purchasing Bank is thereafter recovered from such purchasing\nBank, such purchase from each other Bank shall be rescinded and such other Bank\nshall repay to the purchasing Bank the purchase price of such participation to\nthe extent of such recovery together with an amount equal to such other Bank's\nratable share (according to the proportion of (x) the amount of such other\nBank's required repayment to (y) the total amount so recovered from the\npurchasing Bank) of any interest or other amount paid or payable by the\npurchasing Bank in respect of the total amount so recovered. The Borrower\nagrees, to the fullest extent it may effectively do so under applicable law,\nthat any holder of a participation in a Note, whether or not acquired pursuant\nto the foregoing arrangements, may exercise rights of set-off or counterclaim\nand other rights with respect to such participation as fully as if such holder\nof a participation were a direct creditor of the Borrower in the amount of such\nparticipation. \n\n SECTION 9.05. Amendments and Waivers. (a) Any provision of this\nAgreement, the Notes or any other Loan Documents may be amended or waived if,\nbut only if, such amendment or waiver is in writing and is signed by the\nBorrower and the Required Banks (and, if the rights or duties of the Agent are\naffected thereby, by the Agent); provided that no such amendment or waiver\nshall, unless signed by all of the Banks, (i) change the Commitment of any Bank\nor subject any Bank to any additional obligation, (ii) change the principal of\nor decrease the rate of interest on any Loan or change the amount of any fees\nhereunder, (iii) change the date fixed for any payment of principal of or\ninterest on any Loan or any fees hereunder, (iv) change the amount of\nprincipal, interest or fees due on any date fixed for the payment thereof under\nthis Agreement, the Notes or any other Loan Document, (v) change the percentage\nof the Commitment or of the aggregate unpaid principal amount of the Notes, or\nthe percentage of Banks, which shall be required for the Banks or any of them\nto take any action under this Section or any other provision of this Agreement,\n(vi) change the manner of application of any payments made under this Agreement\nor the Notes, (vii) release or substitute all or any substantial part of the\ncollateral (if any) held as security for the Loans, (viii) waive any of the\nconditions precedent contained in Section 3.01, Section 3.02 or Section 3.03,\n(ix) change the date fixed for any reduction or termination of the Commitments\nof any Bank, or (x) release, discharge or terminate any guaranty given to\nsupport payment of the Loans.\n\n (b) The Borrower will not solicit, request or negotiate for or with\nrespect to any proposed waiver or amendment of any of the provisions of this\nAgreement unless each Bank shall be informed thereof by the Borrower and shall\n\n - 48 -\n\n\nbe afforded an opportunity of considering the same and shall be supplied by the\nBorrower with sufficient information to enable it to make an informed decision\nwith respect thereto. Executed or true and correct copies of any waiver or\nconsent effected pursuant to the provisions of this Agreement shall be\ndelivered by the Borrower to each Bank forthwith following the date on which\nthe same shall have been executed and delivered by the requisite percentage of\nBanks. The Borrower will not, directly or indirectly, pay or cause to be paid\nany remuneration, whether by way of supplemental or additional interest, fee or\notherwise, to any Bank (in its capacity as such) as consideration for or as an\ninducement to the entering into by such Bank of any waiver or amendment of any\nof the terms and provisions of this Agreement unless such remuneration is\nconcurrently paid, on the same terms, ratably to all such Banks.\n\n SECTION 9.06. Margin Stock Collateral. Each of the Banks represents\nto the Agent and each of the other Banks that it in good faith is not, directly\nor indirectly (by negative pledge or otherwise), relying upon any Margin Stock\nas collateral in the extension or maintenance of the credit provided for in\nthis Agreement.\n \n SECTION 9.07. Successors and Assigns. (a) The provisions of this\nAgreement shall be binding upon and inure to the benefit of the parties hereto\nand their respective successors and assigns; provided that the Borrower may not\nassign or otherwise transfer any of its rights under this Agreement, without\nthe written consent of the Banks and Agent.\n\n (b) Any Bank may at any time sell to one or more Persons (each a\n\"Participant\") participating interests in any Loan owing to such Bank, any Note\nheld by such Bank, any Commitment hereunder or any other interest of such Bank\nhereunder. In the event of any such sale by a Bank of a participating interest\nto a Participant, such Bank's obligations under this Agreement shall remain\nunchanged, such Bank shall remain solely responsible for the performance\nthereof, such Bank shall remain the holder of any such Note for all purposes\nunder this Agreement, and the Borrower and the Agent shall continue to deal\nsolely and directly with such Bank in connection with such Bank's rights and\nobligations under this Agreement. In no event shall a Bank that sells a\nparticipation be obligated to the Participant to take or refrain from taking\nany action hereunder except that such Bank may agree that it will not (except\nas provided below), without the consent of the Participant, agree to (i) the\nchange of any date fixed for the payment of principal of or interest on the\nrelated Loan or Loans, (ii) the change of the amount of any principal, interest\nor fees due on any date fixed for the payment thereof with respect to the\nrelated Loan or Loans, (iii) the change of the principal of the related Loan or\nLoans or , (iv) any change in the rate at which either interest is payable\nthereon or (if the Participant is entitled to any part thereof) facility or\nunused fee is payable hereunder from the rate at which the Participant is\nentitled to receive interest or facility or unused fee (as the case may be) in\nrespect of such participation, (v) the release or substitution of all or any\nsubstantial part of the collateral (if any) held as security for the Loans, or\n(vi) the release of any guaranty given to support payment of the Loans. Each\nBank selling a participating interest in any Loan, Note, Commitment or other\ninterest under this Agreement shall, within 10 Domestic Business Days of such\nsale, provide the Borrower and the Agent with written notification stating that\nsuch sale has occurred and identifying the Participant and the interest\npurchased by such Participant. The Borrower agrees that each Participant shall\nbe entitled to the benefits of Article VIII with respect to its participation\nin Loans outstanding from time to time.\n\n - 49 -\n\n\n (c) Any Bank may at any time assign to one or more banks or\nfinancial institutions (each an \"Assignee\") all, or a proportionate part of\nall, of its rights and obligations under this Agreement, the Notes and the\nother Loan Documents, and such Assignee shall assume all such rights and\nobligations, pursuant to an Assignment and Acceptance in the form attached\nhereto as Exhibit G, executed by such Assignee, such transferor Bank and the\nAgent (and, in the case of (i) an Assignee that is not then a Bank or an\nAffiliate of a Bank; and (ii) an assignment not made during the existence of a\nDefault or an Event of Default, by the Borrower); provided that (i) the\naggregate amount of the Commitment of the assigning Bank being assigned\npursuant to such assignment (determined as of the effective date of the\nassignment) shall be equal to $10,000,000 (or any larger multiple of\n$1,000,000), (ii) no interest may be sold by a Bank pursuant to this paragraph\n(c) to any Assignee that is not then a Bank or an Affiliate of a Bank without\nthe consent of the Borrower, which consent shall not be unreasonably withheld,\nprovided that the Borrower's consent shall not be necessary with respect to any\nassignment made during the existence of a Default or an Event of Default; (iii)\na Bank may not, at any one time, have more than two (2)Assignees that either:\n(y) are not then Banks or an Affiliate of such a Bank; or (z) that were not\npreviously Banks; (iv) no interest may be sold by a Bank pursuant to this\nparagraph (c) to any Assignee that is not then a Bank or an Affiliate of a\nBank, without the consent of the Agent, which consent shall not be unreasonably\nwithheld, provided, that, although the Agent's consent may not be necessary\nwith respect to an Assignee that is then a Bank or an Affiliate of a Bank, no\nsuch assignment shall be effective until the conditions set forth in the\nfollowing sentence are satisfied. Upon (A) execution of the Assignment and\nAcceptance by such transferor Bank, such Assignee, the Agent and (if\napplicable) the Borrower, (B) delivery of an executed copy of the Assignment\nand Acceptance to the Borrower and the Agent, (C) payment by such Assignee to\nsuch transferor Bank of an amount equal to the purchase price agreed between\nsuch transferor Bank and such Assignee, and (D) payment by the assigning Bank\nof a processing and recordation fee of $3,500 to the Agent, such Assignee shall\nfor all purposes be a Bank party to this Agreement and shall have all the\nrights and obligations of a Bank under this Agreement to the same extent as if\nit were an original party hereto with a Commitment as set forth in such\ninstrument of assumption, and the transferor Bank shall be released from its\nobligations hereunder to a corresponding extent, and no further consent or\naction by the Borrower, the Banks or the Agent shall be required. Upon the\nconsummation of any transfer to an Assignee pursuant to this paragraph (c), the\ntransferor Bank, the Agent and the Borrower shall make appropriate arrangements\nso that, if required, new Notes are issued to each of such Assignee and such\ntransferor Bank.\n\n (d) Subject to the provisions of Section 9.08, the Borrower\nauthorizes each Bank to disclose to any Participant, Assignee or other\ntransferee (each a \"Transferee\") and any prospective Transferee any and all\nfinancial and other information in such Bank's possession concerning the\nBorrower which has been delivered to such Bank by the Borrower pursuant to this\nAgreement or which has been delivered to such Bank by the Borrower in\nconnection with such Bank's credit evaluation prior to entering into this\nAgreement.\n\n (e) No Transferee shall be entitled to receive any greater payment\nunder Section 8.03 than the transferor Bank would have been entitled to receive\nwith respect to the rights transferred, unless such transfer is made with the\nBorrower's prior written consent or by reason of the provisions of Section 8.02\n\n - 50 -\n\n\nor 8.03 requiring such Bank to designate a different Lending Office under\ncertain circumstances or at a time when the circumstances giving rise to such\ngreater payment did not exist.\n\n (f) Anything in this Section 9.07 to the contrary notwithstanding,\nany Bank may assign and pledge all or any portion of the Loans and/or\nobligations owing to it to any Federal Reserve Bank or the United States\nTreasury as collateral security pursuant to Regulation A of the Board of\nGovernors of the Federal Reserve System and Operating Circular issued by such\nFederal Reserve Bank, provided that any payment in respect of such assigned\nLoans and/or obligations made by the Borrower to the assigning and/or pledging\nBank in accordance with the terms of this Agreement shall satisfy the\nBorrower's obligations hereunder in respect of such assigned Loans and/or\nobligations to the extent of such payment. No such assignment shall release\nthe assigning and/or pledging Bank from its obligations hereunder.\n\n SECTION 9.08. Confidentiality. Each Bank agrees to exercise its\nbest efforts to keep any information delivered or made available by the\nBorrower to it which is clearly indicated to be confidential information,\nconfidential from anyone other than persons employed or retained by such Bank\nwho are or are expected to become engaged in evaluating, approving, structuring\nor administering the Loans; provided, however, that nothing herein shall\nprevent any Bank from disclosing such information (i) to any other Bank, (ii)\nupon the order of any court or administrative agency, (iii) upon the request or\ndemand of any regulatory agency or authority having jurisdiction over such\nBank, (iv) which has been publicly disclosed, (v) to the extent reasonably\nrequired in connection with any litigation to which the Agent, any Bank or\ntheir respective Affiliates may be a party, (vi) to the extent reasonably\nrequired in connection with the exercise of any remedy hereunder, (vii) to such\nBank's legal counsel, Affiliates and independent auditors and (viii) to any\nactual or proposed Participant, Assignee or other Transferee of all or part of\nits rights hereunder which has agreed in writing to be bound by the provisions\nof this Section 9.08.\n\n SECTION 9.09. Representation by Banks. Each Bank hereby represents\nthat it is a commercial lender or financial institution which makes loans in\nthe ordinary course of its business and that it will make its Loans hereunder\nfor its own account in the ordinary course of such business; provided, however,\nthat, subject to Section 9.07, the disposition of the Note or Notes held by\nthat Bank shall at all times be within its exclusive control.\n\n SECTION 9.10. Obligations Several. The obligations of each Bank\nhereunder are several, and no Bank shall be responsible for the obligations or\ncommitment of any other Bank hereunder. Nothing contained in this Agreement\nand no action taken by the Banks pursuant hereto shall be deemed to constitute\nthe Banks to be a partnership, an association, a joint venture or any other\nkind of entity. The amounts payable at any time hereunder to each Bank shall\nbe a separate and independent debt, and each Bank shall be entitled to protect\nand enforce its rights arising out of this Agreement or any other Loan Document\nand it shall not be necessary for any other Bank to be joined as an additional\nparty in any proceeding for such purpose.\n\n SECTION 9.11. Survival of Certain Obligations. Sections 8.03(a),\n8.03(b), 8.05 and 9.03, and the obligations of the Borrower thereunder, shall\nsurvive, and shall continue to be enforceable notwithstanding, the termination\nof this Agreement and the Commitments and the payment in full of the principal\nof and interest on all Loans.\n - 51 -\n\n\n SECTION 9.12. Georgia Law. This Agreement and each Note shall be\nconstrued in accordance with and governed by the law of the State of Georgia.\n\n SECTION 9.13. Severability. In case any one or more of the\nprovisions contained in this Agreement, the Notes or any of the other Loan\nDocuments should be invalid, illegal or unenforceable in any respect, the\nvalidity, legality and enforceability of the remaining provisions contained\nherein and therein shall not in any way be affected or impaired thereby and\nshall be enforced to the greatest extent permitted by law.\n\n SECTION 9.14. Interest. In no event shall the amount of interest\ndue or payable hereunder or under the Notes exceed the maximum rate of interest\nallowed by applicable law, and in the event any such payment is inadvertently\nmade to any Bank by the Borrower or inadvertently received by any Bank, then\nsuch excess sum shall be credited as a payment of principal, unless the\nBorrower shall notify such Bank in writing that it elects to have such excess\nsum returned forthwith. It is the express intent hereof that the Borrower not\npay and the Banks not receive, directly or indirectly in any manner whatsoever,\ninterest in excess of that which may legally be paid by the Borrower under\napplicable law.\n\n SECTION 9.15. Interpretation. No provision of this Agreement or any\nof the other Loan Documents shall be construed against or interpreted to the\ndisadvantage of any party hereto by any court or other governmental or judicial\nauthority by reason of such party having or being deemed to have structured or\ndictated such provision.\n \n SECTION 9.16. Consent to Jurisdiction. The Borrower (a) submits to\npersonal jurisdiction in the State of Georgia, the courts thereof and the\nUnited States District Courts sitting therein, for the enforcement of this\nAgreement, the Notes and the other Loan Documents, (b) waives any and all\npersonal rights under the law of any jurisdiction to object on any basis\n(including, without limitation, inconvenience of forum) to jurisdiction or\nvenue within the State of Georgia for the purpose of litigation to enforce this\nAgreement, the Notes or the other Loan Documents, and (c) agrees that service\nof process may be made upon it in the manner prescribed in Section 9.01 for the\ngiving of notice to the Borrower. Nothing herein contained, however, shall\nprevent the Agent from bringing any action or exercising any rights against any\nsecurity and against the Borrower personally, and against any assets of the\nBorrower, within any other state or jurisdiction.\n\n SECTION 9.17. Counterparts. This Agreement may be signed in any\nnumber of counterparts, each of which shall be an original, with the same\neffect as if the signatures thereto and hereto were upon the same instrument. \n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n - 52 -\n\n\n IN WITNESS WHEREOF, the parties hereto have caused this Agreement to\nbe duly executed, under seal, by their respective authorized officers as of the\nday and year first above written.\n\n MEREDITH CORPORATION\n\n\nATTEST: By: /s/ Michael A. Sell (SEAL)\n -------------------\n Title: Treasurer \n/s/ Thomas L. Slaughter 1716 Locust Street\n- ----------------------- Des Moines, Iowa 50309-3023\nIts: Secretary Attention: Michael A. Sell\n Telecopy number: 515-284-3828\n[CORPORATE SEAL] Telephone number: 515-284-2633\n\n With a copy to:\n Meredith Corporation\n 1716 Locust Street\n Des Moines, Iowa 50309-3023\n Attention: General Counsel\n Telecopy Number: (515) 284-3933\n Telephone Number: (515) 284-3056\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 53 -\n\n\nCOMMITMENTS:\n WACHOVIA BANK, N.A., as Agent and as a Bank\n\nCommitment:\n$47,500,000 By: /s/ Mark L. Thomas (SEAL)\n ------------------\n Title: Vice President\n\n Wachovia Bank, N.A.\n Syndication Services\n 191 Peachtree Street, N.E., Mail Code GA-0423\n Atlanta, Georgia 30303-1757\n Attention: Lynn Smith (27th Floor)\n Telecopy number: (404) 332-4005\n Telephone number: (404) 332-4008\n\n With a copy to:\n Wachovia Bank, N.A.\n 191 Peachtree Street, N.E., Mail Code GA-0370\n Atlanta, Georgia 30303-1757\n Attention: Mark Thomas (28th Floor)\n Telecopy number: (404) 332-6898\n Telephone number: (404) 332-6450\n\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 54 -\n\n\n THE FIRST NATIONAL BANK OF CHICAGO, as \n Syndication Agent and a Bank\n\nCommitment:\n$32,500,000 By: /s/ Laurie W. Blazek (SEAL)\n --------------------\n Title: Vice President\n\n Lending Office\n --------------\n The First National Bank of Chicago\n One First National Plaza\n Suite 0629\n Chicago, IL 60670\n Attention: Laurie Blazek\n Telecopy number: (312) 732-8587\n Telephone number: (312) 732-5475\n\n With a copy to:\n BankOne, Colorado, N.A.\n 1125 17th Street\n 3rd Floor\n MC: CO1-9523\n Denver, CO 80202\n Attention: Mariel Keane Hough, Vice President\n Telecopy number: (303) 244-3351\n Telephone number: (303) 244-3225\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 55 -\n\n\n SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL\n ASSOCIATION, as Documentation Agent and a Bank\n\nCommitment:\n$32,500,000 By: /s/ Ronald K. Rueve (SEAL)\n -------------------\n Title: Vice President\n\n Lending Office\n --------------\n SunTrust Bank, Central Florida, National\n Association\n Mail Code O-1043\n 2000 South Trust Bank\n Orlando, FL 32801\n Attention: Stephen L. Leister, Vice President,\n National Banking\n Telecopy number: (407) 237-6894\n Telephone number: (407) 237-4705\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 56 -\n\n\n FLEET NATIONAL BANK\n\nCommitment:\n$27,500,000 By: /s/ Stephen J. Healey (SEAL)\n ---------------------\n Title: Senior Vice President\n\n Lending Office\n --------------\n Fleet National Bank\n 1 Federal Street\n MC: MAOFD03D\n Boston, MA 02110\n Attention: Stephen Healey\n Telecopy number: (617) 346-4346\n Telephone number: (617) 346-4367\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 57 -\n\n\n BANQUE NATIONALE de PARIS\n\nCommitment:\n$20,000,000 By: /s/ Jo Ellen Bender (SEAL)\n -------------------\n Title: Senior Vice President & Manager\n\n\n By: /s/ Arnaud Collin Du Bocage (SEAL)\n ---------------------------\n Title: Executive Vice President & General Manager\n\n\n Lending Office\n --------------\n Banque Nationale de Paris\n 209 South LaSalle Street\n Chicago, IL 60604\n Attention: Jo Ellen Bender\n Telecopy number: (312) 977-1380\n Telephone number (312) 977-2225\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 58 -\n\n\n\n NORWEST BANK IOWA, N.A.\n\nCommitment:\n$20,000,000 By: /s/ Wm C. Green Jr. (SEAL)\n -------------------\n Title: Vice President\n\n Lending Office\n --------------\n Norwest Bank Iowa, N.A.\n 666 Walnut Street\n Telecopy number: (515)245-3128\n Telephone number: (515)245-3354\n\n\n\n [Remainder of this page intentionally left blank]\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 59 -\n\n\n\n THE BANK OF NEW YORK\nCommitment:\n$20,000,000 By: /s/ B. Todres\n -------------\n Title: Vice President\n\n\n Lending Office\n --------------\n The Bank of New York\n One Wall Street\n New York, NY 10286\n Attention: Benjamin B. Todres\n Telecopy number: (212) 635-8593\n Telephone number (212) 635-8745\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n - 60 -\n \n \n\nEX-27\n3\nFDS FOR 12/30/98 10-Q\n\n\n
\n \n \n\nEX-99\n4\nEXHIBIT 99 FOR 12/30/98 10-Q\n\n\n\n Exhibit 99\n ----------\n\n\n\n\n MEREDITH CORPORATION\n FISCAL 1999 SECOND QUARTER AND YEAR-TO-DATE\n EARNINGS PER SHARE AT-A-GLANCE\n\n\n (Note: All figures are adjusted for stock splits)\n\n\n\n\n\n\n- -- The chart below depicts comparable quarterly and fiscal-year diluted\n earnings per share (EPS) before special items and discontinued operations:\n\n\n\n 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year\n -------- -------- -------- -------- -----------\n\n F1993 .06 .09 .10 .10 .35\n F1994 .08 .13 .16 .13 .50\n F1995 .14 .19 .18 .20 .71\n F1996 .17 .22 .24 .28 .91\n F1997 .22 .31 .33 .36 1.22\n F1998 .27 .40 .37 .42 1.46\n F1999 .32 .47\n\n\n\n\n- -- Fiscal 1999 second quarter net earnings increased 18 percent to a record\n 47 cents per share, compared to 40 cents per share in the prior year.\n\n- -- For the first half of fiscal 1999, earnings per share before non-recurring\n items increased 18 percent to 79 cents, compared to 67 cents in fiscal\n 1998.\n\n- -- Net earnings for the first six months of fiscal 1999 were 82 cents per\n share, including an after-tax gain of 3 cents per share from the sale of\n the Better Homes and Gardens Real Estate Service in the fiscal 1999 first\n quarter.\n\n \n \n \n-----END PRIVACY-ENHANCED MESSAGE-----\n"}}}],"truncated":false,"partial":true},"paginationData":{"pageIndex":1,"numItemsPerPage":100,"numTotalItems":10488,"offset":100,"length":100}},"jwt":"eyJhbGciOiJFZERTQSJ9.eyJyZWFkIjp0cnVlLCJwZXJtaXNzaW9ucyI6eyJyZXBvLmNvbnRlbnQucmVhZCI6dHJ1ZX0sImlhdCI6MTczNTQzMTA0MCwic3ViIjoiL2RhdGFzZXRzL2t1cnJ5L3NwNTAwX2NvbnN0aXR1ZW50c18xMHEiLCJleHAiOjE3MzU0MzQ2NDAsImlzcyI6Imh0dHBzOi8vaHVnZ2luZ2ZhY2UuY28ifQ.U8eYiNAqN0xI_XCgS8L69QYUpOAXetyTIpoXCqW3N8-XOxOnT1U_th2lvWBEu7GwQociPRM3y0s76KYcsqVnAw","displayUrls":true},"discussionsStats":{"closed":1,"open":0,"total":1},"fullWidth":true,"hasGatedAccess":true,"hasFullAccess":true,"isEmbedded":false}">
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1998 | 0QTR1
| ADP | https://www.sec.gov/Archives/edgar/data/8670/0001047469-98-004945.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001047469-98-004945.txt : 19980224
<SEC-HEADER>0001047469-98-004945.hdr.sgml : 19980224
ACCESSION NUMBER: 0001047469-98-004945
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980211
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC
CENTRAL INDEX KEY: 0000008670
STANDARD INDUSTRIAL CLASSIFICATION: 7374
IRS NUMBER: 221467904
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05397
FILM NUMBER: 98532184
BUSINESS ADDRESS:
STREET 1: ONE ADP BOULVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
BUSINESS PHONE: 2019945000
MAIL ADDRESS:
STREET 1: ONE ADP BOULEVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1997 Commission File Number 1-5397
-------------------- --------
Automatic Data Processing, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter )
Delaware 22-1467904
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One ADP Boulevard, Roseland, New Jersey 07068
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (973) 994-5000
-----------------------------
No change
- - --------------------------------------------------------------------------------
Former name, former address & former fiscal year, if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the commission and (2) has
been subject to the filing requirements for at least the past 90 days.
X Yes No
- - ---------------------------------- --------------------------------
As of January 31, 1998 there were 298,927,832 common shares outstanding.
<PAGE>
Form 10Q
<TABLE>
<CAPTION>
Part I. Financial Information
STATEMENTS OF CONSOLIDATED EARNINGS
-----------------------------------
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $1,148,026 $995,575 $2,186,524 $1,906,305
---------- -------- ---------- ----------
Operating expenses 490,202 418,015 933,585 809,535
General, administrative and 286,427 261,531 575,873 522,320
selling expenses
Depreciation and amortization 58,193 55,284 115,623 108,353
Systems development and 91,361 73,065 178,650 139,128
programming costs
Interest expense 7,303 6,970 14,813 14,159
---------- -------- ---------- ----------
933,486 814,865 1,818,544 1,593,495
---------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 214,540 180,710 367,980 312,810
Provision for income taxes 67,150 53,130 115,180 91,950
---------- -------- ---------- ----------
NET EARNINGS $ 147,390 $127,580 $ 252,800 $ 220,860
========== ======== ========== ==========
BASIC EARNINGS PER SHARE $ .50 $ .44 $ .86 $ .76
========== ======== ========== ==========
DILUTED EARNINGS PER SHARE $ .49 $ .43 $ .84 $ .74
========== ======== ========== ==========
Dividends per share $ .1325 $ .115 $ .2475 $ .215
========== ======== ========== ==========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS)
December 31, June 30,
ASSETS 1997 1997
- - ------ ----------- ----------
<S> <C> <C>
Cash and cash equivalents $ 686,049 $ 590,578
Short-term marketable securities 340,215 434,341
Accounts receivable 670,710 605,068
Other current assets 204,088 175,335
---------- ----------
Total current assets 1,901,062 1,805,322
---------- ----------
Long-term marketable securities 573,338 470,164
---------- ----------
Long-term receivables 170,195 176,771
---------- ----------
Land and buildings 367,674 361,594
Data processing equipment 755,660 626,013
Furniture, leaseholds and other 288,616 364,161
---------- ----------
1,411,950 1,351,768
Less accumulated depreciation (884,807) (832,423)
---------- ----------
527,143 519,345
---------- ----------
Other assets 92,220 96,383
---------- ----------
Intangibles 1,431,042 1,314,787
---------- ----------
$4,695,000 $4,382,772
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Notes payable $ 183,262 $ 129,168
Accounts payable 110,532 110,266
Accrued expenses & other current
liabilities 775,284 717,868
Income taxes 74,230 61,479
Current portion of long-term debt 1,395 1,091
---------- ----------
Total current liabilities 1,144,703 1,019,872
---------- ----------
Long-term debt 258,587 401,162
---------- ----------
Other liabilities 110,448 91,685
---------- ----------
Deferred income taxes 48,314 102,751
---------- ----------
Deferred revenue 99,728 106,737
---------- ----------
Shareholders' equity:
Common stock 31,429 31,429
Capital in excess of par value 566,727 480,492
Retained earnings 3,102,398 2,922,317
Treasury stock (576,937) (697,887)
Translation adjustment (90,397) (75,786)
---------- ----------
3,033,220 2,660,565
---------- ----------
$4,695,000 $4,382,772
========== ==========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
-----------------------------------------------
(IN THOUSANDS)
Six Months Ended
December 31,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
- - -------------------------------------
<S> <C> <C>
Net earnings $ 252,800 $ 220,860
Expenses not requiring outlay of cash 133,842 112,720
Changes in operating net assets 39,657 21,714
--------- ---------
Net cash flows from operating activities 426,299 355,294
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- - -------------------------------------
Purchase of marketable securities (239,835) (275,549)
Proceeds from sale of marketable securities 232,612 267,948
Capital expenditures (79,853) (79,093)
Other changes to property, plant and equipment 4,052 (752)
Additions to intangibles (48,676) (32,711)
Acquisitions of businesses (176,606) (64,494)
--------- ---------
Net cash flows from investing activities (308,306) (184,651)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
- - -------------------------------------
Proceeds from issuance of notes payable, net 60,863 41,780
Proceeds from issuance of common stock 30,241 39,257
Repurchases of common stock (40,907) (37,358)
Dividends paid (72,719) (62,447)
Repayments of long-term debt - (3,991)
--------- ---------
Net cash flows from financing activities (22,522) (22,759)
--------- ---------
Net change in cash and cash equivalents 95,471 147,884
Cash and cash equivalents, at beginning of
period 590,578 314,416
--------- ---------
Cash and cash equivalents, at end of
period $ 686,049 $ 462,300
========= =========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods. All adjustments are of a normal recurring nature. These
statements should be read in conjunction with the annual financial statements
and related notes of the Company for the year ended June 30, 1997.
Note A - The results of operations for the six months ended December 31, 1997
may not be indicative of the results to be expected for the year
ending June 30, 1998.
Note B - The Company implemented Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" as of December 31, 1997 which required
the disclosure of basic and diluted earnings per share. A
reconciliation of the income and weighted average shares used in both
calculations follows:
(In thousands, except EPS)
<TABLE>
<CAPTION>
Periods ended December 31, 1997
----------------------------------------------------
Three month period Six month period
-------------------------- -----------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $147,390 293,632 $0.50 $252,800 293,128 $0.86
Effect of zero coupon
subordinated notes 2,464 8,663 5,218 7,140
Effect of stock
options - 6,252 - 6,001
------------------------- ------------------------
Diluted EPS $149,854 308,547 $0.49 $258,018 306,269 $0.84
========================= ========================
<CAPTION>
Periods ended December 31, 1996
----------------------------------------------------
Three month period Six month period
-------------------------- ----------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $127,580 290,502 $ 0.44 $220,860 289,493 $ 0.76
Effect of zero coupon
subordinated notes 2,841 10,341 5,444 10,341
Effect of stock
options - 5,823 - 5,892
------------------------- ------------------------
Diluted EPS $130,421 306,666 $ 0.43 $226,304 305,726 $ 0.74
========================= ========================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OPERATING RESULTS
Revenue and earnings again reached record levels during the quarter ended
December 31, 1997.
Revenue and revenue growth by ADP's major business groups are shown below:
<TABLE>
<CAPTION>
Revenue
----------------------------------
3 Months Ended 6 Months Ended
December 31, December 31,
-------------- -------------
1997 1996 1997 1996
------ ------ ------ -----
($ in millions)
<S> <C> <C> <C> <C>
Employer Services $ 667 $ 551 $1,254 $1,042
Brokerage Services 232 200 455 388
Dealer Services 173 162 339 315
Other 76 83 139 161
------ ----- ------ ------
$1,148 $ 996 $2,187 $1,906
====== ===== ====== ======
<CAPTION>
Revenue Growth
----------------------------------
3 Months Ended 6 Months Ended
December 31, December 31,
-------------- -------------
1997 1996 1997 1996
------ ------ ------ -----
<S> <C> <C> <C> <C>
Employer Services 21% 24% 20% 24%
Brokerage Services 16 18 17 15
Dealer Services 7 23 8 22
Other (8) 12 (14) 26
----- ----- ----- -----
15% 21% 15% 22%
===== ===== ===== =====
</TABLE>
Consolidated revenue for the quarter grew 15% from last year to $1,148 million.
Revenue growth in the Company's three largest businesses, Employer, Brokerage
and Dealer Services, was strong at 21%, 16% and 7% respectively. Each includes
some acquisitions.
The primary components of "Other revenue" are claims services, services for
wholesalers, interest income, foreign exchange differences and miscellaneous
processing services. In addition, "Other revenue" has been reduced to adjust
for the difference between actual interest income earned on invested tax filing
funds and income credited to Employer Services at a standard rate of 6%.
Pretax earnings for the quarter increased 19% from last year. Consolidated
pre-tax margins increased slightly in the quarter, due primarily to the impact
of higher trading volume in Brokerage Services. Systems development and
programming investments increased to accelerate automation, migrate to new
computing technologies, and develop new products.
<PAGE>
Net earnings for the quarter, after a higher effective tax rate, increased 16%
to $147 million. The effective tax rate of 31.3% increased from 29.4% in the
comparable quarter last year, primarily as a result of the greater weighting of
taxable versus non-taxable earnings.
Basic earnings per share grew 14% to $.50 from $.44 last year, on a greater
number of shares outstanding. The Company expects over 15% growth in revenue
and pretax earnings for the full year and basic EPS growth in the area of 13-14%
above fiscal 1997's $1.80 per share (which is prior to non-recurring items in
1997).
FINANCIAL CONDITION
The Company's financial condition and balance sheet remain exceptionally strong,
and operations continue to generate a strong cash flow. At December 31, 1997,
the Company had cash and marketable securities of $1.6 billion. Shareholders'
equity was $3.0 billion and the ratio of long-term debt to equity was 9%.
Capital expenditures for fiscal 1998 are expected to approximate $225 million,
compared to $175 million in fiscal 1997.
During the first half of fiscal 1998, ADP purchased 896,000 shares of common
stock for treasury at an average price of approximately $46. The Company has
remaining Board authorization to purchase up to 8.5 million additional shares to
fund equity related employee benefit plans.
During the first half of fiscal 1998, 315,000 of the Company's zero coupon
convertible subordinated notes were converted to over 4 million shares of common
stock.
The Company's investment portfolio consists primarily of high grade fixed
income investments, such as AA or better rated fixed income municipal
instruments, maturing in less than 7 years and such portfolio does not subject
the Company to material market risk.
PART II. OTHER INFORMATION
Except as noted below, all other items are inapplicable or would result in
negative responses and, therefore, have been omitted.
<PAGE>
PART II. OTHER INFORMATION, CONTINUED
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of the Stockholders was held on November 11, 1997.
The following members were elected to the Company's Board of Directors to hold
office for the ensuing year.
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- -------- --------
<S> <C> <C>
Gary C. Butler 236,374,432 1,434,137
Joseph A. Califano, Jr. 236,240,611 1,567,958
Leon G. Cooperman 236,435,603 1,372,966
George H. Heilmeier 236,409,109 1,399,460
Ann Dibble Jordan 236,371,779 1,436,790
Harvey M. Krueger 236,364,178 1,444,391
Frederic V. Malek 236,342,309 1,466,260
Henry Taub 236,301,977 1,506,592
Laurence A. Tisch 236,016,506 1,792,063
Arthur F. Weinbach 236,439,455 1,369,114
Josh S. Weston 236,379,233 1,429,336
</TABLE>
The result of the voting on the following additional item was as follows:
(a) Ratify the appointment of Deloitte & Touche LLP to serve as the Company's
independent certified public accountants for the fiscal year which began on July
1, 1997.
The votes of the stockholders on this ratification were as follows:
<TABLE>
<CAPTION>
In Favor Opposed Abstained
-------- ------- ---------
<S> <C> <C>
236,442,654 318,300 1,047,615
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Exhibit
------ -------
27.1 Financial Data Schedule
<PAGE>
Form 10Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOMATIC DATA PROCESSING, INC.
-------------------------------
(Registrant)
Date: February 11, 1998 /s/ Richard J. Haviland
----------------------------
Richard J. Haviland
Chief Financial Officer
(Principal Financial Officer)
----------------------------
(Title)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>2
<DESCRIPTION>EXH. 27.1 FDS
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 686,049
<SECURITIES> 340,215
<RECEIVABLES> 710,909
<ALLOWANCES> 40,199
<INVENTORY> 43,184
<CURRENT-ASSETS> 1,901,062
<PP&E> 1,411,950
<DEPRECIATION> 884,807
<TOTAL-ASSETS> 4,695,000
<CURRENT-LIABILITIES> 1,144,703
<BONDS> 258,587
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 31,429
<OTHER-SE> 3,001,791
<TOTAL-LIABILITY-AND-EQUITY> 3,033,220
<SALES> 0
<TOTAL-REVENUES> 2,186,524
<CGS> 0
<TOTAL-COSTS> 1,798,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,916
<INTEREST-EXPENSE> 14,813
<INCOME-PRETAX> 367,980
<INCOME-TAX> 115,180
<INCOME-CONTINUING> 252,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,800
<EPS-PRIMARY> .86
<EPS-DILUTED> .84
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| AIT | https://www.sec.gov/Archives/edgar/data/109563/0000950152-98-001193.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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XDMaigWi8F8+OkyURS35DQ==
<SEC-DOCUMENT>0000950152-98-001193.txt : 19980218
<SEC-HEADER>0000950152-98-001193.hdr.sgml : 19980218
ACCESSION NUMBER: 0000950152-98-001193
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980217
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED INDUSTRIAL TECHNOLOGIES INC
CENTRAL INDEX KEY: 0000109563
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080]
IRS NUMBER: 340117420
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-02299
FILM NUMBER: 98541456
BUSINESS ADDRESS:
STREET 1: 3600 EUCLID AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44115
BUSINESS PHONE: 2168818900
MAIL ADDRESS:
STREET 1: 3600 EUCLID AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44115
FORMER COMPANY:
FORMER CONFORMED NAME: BEARINGS INC /OH/
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: BROWN JIM STORES INC
DATE OF NAME CHANGE: 19600201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>APPLIED INDUSTRIAL TECHNOLOGIES, INC. FORM 10-Q
<TEXT>
<PAGE> 1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1997 .
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
-------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
--------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Shares of common stock outstanding on January 31, 1998 22,047,962
---------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
-------------------------------------
INDEX
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
Part I: FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Six Months
Ended December 31, 1997 and 1996
Consolidated Balance Sheets - 3
December 31, 1997 and June 30, 1997
Statements of Consolidated Cash Flows 4
Six Months Ended December 31, 1997 and 1996
Statements of Consolidated Shareholders' Equity - 5
Six Months Ended December 31, 1997 and
Year Ended June 30, 1997
Notes to Consolidated Financial Statements 6 - 10
Item 2: Management's Discussion and Analysis of 11 - 15
Financial Condition and Results of Operations
Part II: OTHER INFORMATION 16
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Sales $ 368,623 $ 274,992 $ 713,349 $ 557,241
--------- --------- --------- ---------
Cost and Expenses
Cost of sales 273,573 200,025 529,999 408,800
Selling, distribution and
administrative 80,786 63,265 159,278 126,014
--------- --------- --------- ---------
354,359 263,290 689,277 534,814
--------- --------- --------- ---------
Operating Income 14,264 11,702 24,072 22,427
--------- --------- --------- ---------
Interest
Interest expense 2,365 1,595 4,829 3,156
Interest income (200) (253) (478) (571)
--------- --------- --------- ---------
2,165 1,342 4,351 2,585
--------- --------- --------- ---------
Income Before Income Taxes 12,099 10,360 19,721 19,842
--------- --------- --------- ---------
Income Taxes
Federal 3,767 3,704 6,497 6,959
State and local 618 653 1,013 1,475
--------- --------- --------- ---------
4,385 4,357 7,510 8,434
--------- --------- --------- ---------
Net Income $ 7,714 $ 6,003 $ 12,211 $ 11,408
========= ========= ========= =========
Net Income per share - Basic $ 0.36 $ 0.32 $ 0.58 $ 0.62
========= ========= ========= =========
Net Income per share - Diluted $ 0.35 $ 0.32 $ 0.57 $ 0.61
========= ========= ========= =========
Cash dividends per common
share $ 0.12 $ 0.11 $ 0.23 $ 0.20
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
------------ ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and temporary investments $ 14,284 $ 22,405
Accounts receivable, less allowance
of $3,714 and $2,400 174,686 153,080
Inventories (at LIFO) 189,469 103,069
Other current assets 15,269 6,905
--------- ---------
Total current assets 393,708 285,459
--------- ---------
Property - at cost
Land 13,346 12,281
Buildings 73,545 66,157
Equipment 78,909 81,132
--------- ---------
165,800 159,570
Less accumulated depreciation 62,854 68,809
--------- ---------
Property - net 102,946 90,761
--------- ---------
Goodwill 52,170 5,604
Other assets 17,867 12,290
--------- ---------
TOTAL ASSETS $ 566,691 $ 394,114
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 78,712 $ 25,415
Current portion of long-term debt 19,429 11,429
Accounts payable 77,804 49,469
Compensation and related benefits 20,725 19,025
Other accrued liabilities 22,579 15,398
--------- ---------
Total current liabilities 219,249 120,736
Long-term debt 45,714 51,428
Other liabilities 27,321 14,366
--------- ---------
TOTAL LIABILITIES 292,284 186,530
--------- ---------
Shareholders' Equity
Preferred Stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,095 and 20,931 shares issued 10,000 10,000
Additional paid-in capital 79,548 10,311
Income retained for use in the business 223,871 216,642
Less 2,183 and 2,310 treasury shares -
at cost (26,532) (22,983)
Less shares held in trust for
deferred compensation plans (6,552) (5,436)
Less unearned restricted common
stock compensation (5,928) (950)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 274,407 207,584
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 566,691 $ 394,114
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31
------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 12,211 $ 11,408
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation 7,692 6,829
Provision for losses on accounts receivable 989 1,048
Gain on sale of property (250) (143)
Amortization of restricted common stock
compensation and goodwill 2,310 383
Treasury shares contributed to employee
benefit plans 2,597 1,914
Changes in current assets and liabilities, net of
effects from acquisition and disposal of
businesses:
Accounts receivable 18,791 14,995
Inventories (35,475) (11,176)
Other current assets 5,025 (1,929)
Accounts payable and accrued expenses (13,169) (16,021)
Other - net 576 868
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 1,297 8,176
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (11,008) (6,636)
Proceeds from property sales 2,373 1,657
Net cash paid for acquisition of businesses (33,809)
Proceeds from sale of Aircraft Division 9,090
Deposits and other (1,928) 3,745
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (used in) provided by Investing Activities (44,372) 7,856
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (repayments) under
Line-of-credit agreements 53,297 (4,950)
Long-term debt repayments (6,361) (5,714)
Exercise of stock options 791 264
Dividends paid (4,982) (3,724)
Purchase of treasury shares (7,791) (4,269)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities 34,954 (18,393)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and temporary
investments (8,121) (2,361)
Cash and temporary investments
at beginning of period 22,405 9,243
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 14,284 $ 6,882
===========================================================================================================================
Supplemental Cash Flow Information Cash paid during the period for:
Income taxes $ 6,098 $ 9,425
Interest $ 4,607 $ 3,418
Significant noncash investing activity:
Issuance of common stock for the
acquisition of Invetech Company $ 63,374
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1997 (Unaudited)
and Year Ended June 30, 1997
(Thousands, except per share amounts )
<TABLE>
<CAPTION>
Shares of Income Shares Held in
Common Additional Retained Treasury Trust for
Stock Common Paid-in for Use in Shares Deferred
Outstanding Stock Capital the Business - at Cost Compensation Plans
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 18,566 $ 10,000 $ 7,528 $ 197,232 $ (21,260) $ (3,008)
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (249) (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 164 1,809 1,568
Exercise of stock options 78 342 747
Deferred compensation plans 53 532 463 (995)
Restricted common stock awards 9 68 67
Amortization of restricted common
stock compensation 32
Increase in fair value of shares
held in trust (1,433)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 18,621 10,000 10,311 216,642 (22,983) (5,436)
Net income 12,211
Cash dividends - $.23 per share (4,982)
Purchase of common stock
for treasury (276) (7,791)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 88 1,613 984
Exercise of stock options 70 5 786
Deferred compensation plans 22 364 212 (576)
Restricted common stock awards 222 3,881 2,260
Amortization of restricted common
stock compensation
Increase in fair value of shares
held in trust (540)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 21,912 $ 10,000 $ 79,548 $223,871 $ (26,532) $ (6,552)
===========================================================================================================================
<CAPTION>
Unearned
Restricted Total
Common Stock Shareholders'
Compensation Equity
- ------------------------------------------------------------------------
<S> <C> <C>
Balance at July 1, 1996 $ (1,200) $ 189,292
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 3,377
Exercise of stock options 1,089
Deferred compensation plans
Restricted common stock awards (135)
Amortization of restricted common
stock compensation 385 417
Increase in fair value of shares
held in trust (1,433)
- --------------------------------------------------------------------
Balance at June 30, 1997 (950) 207,584
Net income 12,211
Cash dividends - $.23 per share (4,982)
Purchase of common stock
for treasury (7,791)
Issuance of common stock for the
acquisition of Invetech Company 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 2,597
Exercise of stock options 791
Deferred compensation plans
Restricted common stock awards (6,141)
Amortization of restricted common
stock compensation 1,163 1,163
Increase in fair value of shares
held in trust (540)
- --------------------------------------------------------------------
Balance at December 31, 1997 $ (5,928) $ 274,407
====================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of December 31, 1997 and June 30, 1997, and the results of
operations for the three months and six months ended December 31, 1997
and 1996, and cash flows for the six months ended December 31, 1997 and
1996.
The results of operations for the three and six-month periods ended
December 31, 1997 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are
made based on the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. All prior amounts
have been restated to conform to the basic and diluted presentation.
The impact to previously reported earnings per share amounts is not
significant.
All share and per share data have also been restated to reflect a three
for two stock split effective September 15, 1997.
6
<PAGE> 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
The following is a computation of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Net Income
- ----------
Net income as reported in statements of
consolidated income $7,714 $6,003 $12,211 $11,408
===================================================
Average Shares Outstanding
- --------------------------
Weighted average common shares outstanding for basic
computation 21,604 18,496 21,130 18,494
Dilutive effect of:
Stock options 357 209 353 211
Performance Accelerated
Restricted Stock (PARS) 55 47 51 47
---------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 22,016 18,752 21,534 18,752
===================================================
Net Income Per Share
- --------------------
Net income per common share - basic $0.36 $0.32 $0.58 $0.62
===================================================
Net income per common share - diluted $0.35 $0.32 $0.57 $0.61
===================================================
</TABLE>
7
<PAGE> 9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS
Effective August 1, 1997, the Company completed the acquisition of
Invetech Company (Invetech), a distributor of bearings, mechanical and
electrical drive system products, industrial rubber products and
specialty maintenance and repair products. The aggregate purchase price
including the issuance of 2,110 shares of Company common stock, was
$93,900. The cash portion of the purchase price of $23,400 was financed
through available short-term lines of credit.
The Company accounted for the acquisition as a purchase and has
included Invetech's results of operations from the effective date of
the acquisition. The Company incurred a pre-tax nonrecurring charge of
$4,000 in the quarter ending December 31, 1997 for consolidation
expenses and costs associated with disposal of duplicative property and
other assets. The purchase price was allocated based on estimated fair
values at the date of acquisition. Goodwill representing the excess of
the purchase price over assets acquired of $35,840 is being amortized
on a straight-line basis over 30 years.
The following table summarizes the unaudited consolidated pro forma
results of operations, as if the acquisition had occurred at the
beginning of the following periods:
<TABLE>
<CAPTION>
Six Months Ended December 31
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Net sales $738,488 $711,743
Income before income taxes 18,806 22,028
Net income 11,662 13,185
Net income per share-basic .54 .61
Net income per share-diluted .53 .60
</TABLE>
The unaudited pro forma amounts include the pre-tax nonrecurring charge
of $4,000 for the six months ended December 31, 1997.
This pro forma information is not necessarily indicative of the results
that actually would have been obtained if the operations had been
combined during the periods presented and is not intended to be a
projection of future results.
8
<PAGE> 10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
- --------------------------------------------------------------------------------
On August 29, 1997 the Company acquired certain assets of Midwest
Rubber and Supply Company, a rubber fabrication and repair shop for
$2,383 in cash. The Company accounted for the acquisition as a purchase
and has included their results of operations in the accompanying
consolidated financial statements from the acquisition date. Results of
operations are not material for all periods presented. Goodwill
recognized in connection with the acquisition is being amortized over
15 years.
During the quarter ended December 31, 1997 the Company acquired the
stock of Air and Hydraulics Engineering, Inc. and Power Hydraulics,
Inc., distributors of hydraulic, pneumatic and electro-hydraulic
components, systems and related fluid power engineering services, for a
total of $8,486. The acquisitions of these businesses were accounted
for as purchases and their results of operations are included in the
accompanying consolidated financial statements from their respective
acquisition dates. Results of operations for these acquisitions are not
material for all periods presented. Goodwill recognized in connection
with these combinations is being amortized over 15 years.
4. LONG-TERM DEBT
In connection with the Invetech acquisition, the Company assumed an
$8,000 bank term loan, at an interest rate of 5.97%, payable in
December 1998.
9
<PAGE> 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
- --------------------------------------------------------------------------------
5. SUBSEQUENT EVENTS
In January 1998 the Company borrowed $50,000 of long-term debt under a
shelf facility agreement with The Prudential Insurance Company of
America. Proceeds from these 6.6% Senior Unsecured Term Notes were used
to repay short-term debt. Interest is payable quarterly. The principal
amount is to be paid in December 2007.
In January 1998 the Company acquired the stock of Associated Bearings
Company, a distributor of bearings, power transmission products and
industrial supplies, for 123 shares of stock and $1,409 in cash. The
Company will account for the acquisition as a purchase.
On January 15, 1998 the Company's Board of Directors adopted a
Shareholder Rights Plan and declared a dividend distribution of one
preferred share purchase Right for each outstanding share of Company
common stock held of record as of February 2, 1998. The rights become
exercisable only if a person or group acquires beneficial ownership of
20% or more of the Company's common stock or commences a tender or
exchange offer for 20% or more of the Company's common stock, unless
the tender or exchange offer is for all outstanding shares of the
Company upon terms determined by the Company's continuing directors to
be in the best interests of the Company and its shareholders. When
exercisable, the Rights would entitle the holders (other than the
acquirer) to buy shares of the Company's common stock having a market
value equal to two times the Right's exercise price or, in certain
circumstances, to buy shares of the acquiring company having a market
value equal to two times the Right's exercise price.
10
<PAGE> 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For Quarter and Six Months Ended December 31, 1997
- --------------------------------------------------------------------------------
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's: (1) financial condition at December
31, 1997 and June 30, 1997, and (2) results of operations during the periods
included in the accompanying statements of Consolidated Income and Consolidated
Cash Flows.
FINANCIAL CONDITION
Liquidity and Working Capital
- -----------------------------
Cash provided by operating activities was $1.3 million in the six months ended
December 31, 1997. This compares to $8.2 million provided by operating
activities in the same period a year ago.
Cash flow from operations depends primarily upon generating operating income and
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. The Company has continuing programs to monitor
and control these investments. During the six- month period ended December 31,
1997 inventories (excluding inventories purchased in the Invetech transaction
and other acquisitions) increased approximately $35.5 million due to timing of
purchases relating to the calendar year end. Accounts receivable, exclusive of
receivables acquired in the Invetech transaction and other acquisitions,
decreased by $18.8 million due to improved collections and traditionally lower
sales during the first six-month period of our fiscal year as compared to the
last six months of the year.
Investments in property totaled $11.0 million and $6.6 million in the six months
ended December 31, 1997 and 1996 respectively. These capital expenditures were
primarily made for building and upgrading branch and distribution center
facilities, and acquiring data processing equipment and vehicles.
In January 1998 the Company entered into an agreement to build a new
distribution center in the city of Corona, California, in the greater Los
Angeles area. Construction on this 160,000 square foot facility is expected to
begin shortly and be completed by December 1998. This build-to-suit facility
will be leased by the Company under a 10 year lease which is expected to be
accounted for as an operating lease. The Company is planning to move out of its
current Corona Distribution Center and into the new facility upon expiration of
its current lease at the end of November 1998.
Working capital at December 31, 1997 was $174.5 million compared to $164.7
million at June 30, 1997. This increase is primarily due to the acquisition of
Invetech and other companies.
11
<PAGE> 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Capital Resources
- -----------------
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt agreements,
and operating lease arrangements. Average combined short-term and long-term
borrowing was $107.9 million for the six months ended December 31, 1997 and
$89.4 million during the year ended June 30, 1997. The average effective
interest rate on the short-term borrowings for the six months ended December 31,
1997 decreased to 6.0% from an average rate of 6.4% for the six months ended
December 31, 1996 due to lower interest rates on short-term debt. The Company
has $155 million of short-term lines of credit with commercial banks that
provide for payment of interest at various interest rate options, none of which
are in excess of the banks' prime rate. The Company had $78.7 million of
borrowings outstanding under short-term bank lines of credit on December 31,
1997. Unused lines of credit totaling $76.3 million are available for future
short-term financing needs. In January 1998 the Company borrowed $50 million at
a 6.6% interest rate with a ten-year term under a previously unused $50 million
shelf facility agreement in place with The Prudential Insurance Company of
America.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs and stock option
and award programs. These purchases are made in open market and negotiated
transactions, from time to time, depending upon market conditions. The Company
acquired 276,000 shares of its common stock for $7.8 million during the six
months ended December 31, 1997.
Management expects that capital resources provided from operations, available
lines of credit and long-term debt and operating leases will be sufficient to
finance normal working capital needs, business acquisitions, enhancement of
facilities and equipment and the purchase of additional Company common stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
Year 2000 Issue
- ---------------
The Company has constituted a Year 2000 executive task force.
This task force will meet monthly and report directly to the Audit Committee of
the Board of Directors. The executive task force is made up of representatives
from all key management areas of the Company and will review not only activities
relative to its own internal operating systems, but also Year 2000 issues as
they relate to suppliers and customers. A program office has been set up to
monitor the detailed written plans submitted by the management areas relative to
actions, time schedules, resources and costs. Additionally, the Company is in
the process of retaining an outside Year 2000 consultant to provide the
executive task force and the Audit Committee with an independent assessment of
the Company's Year 2000 efforts. The Company expects that the initial draft of
the detailed plan will be prepared by the end of its third quarter ending March
31, 1998. Thereafter, the Company will be in a position to make a reasonable
estimate of the costs and uncertainties associated with Year 2000 issues. The
Company expects that the actions outlined above will significantly reduce the
likelihood that Year 2000 issues would have a material adverse effect on the
Company's business, financial condition or results of operations.
12
<PAGE> 14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Thousands Except per Share Amounts)
Three Months Ended Six Months Ended
December 31 December 31
1997 and 1996 1997 and 1996
Amount Change Amount Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $93,631 34.0% $156,108 28.0%
Cost of sales 73,548 36.8% 121,199 29.6%
Selling,distribution and
administrative expenses 17,521 27.7% 33,264 26.4%
Operating income 2,562 21.9% 1,645 7.3%
Interest expense - net 823 61.3% 1,766 68.3%
Income before income taxes 1,739 16.8% (121) (.6%)
Income taxes 28 .6% (924) (11.0%)
Net income 1,711 28.5% 803 7.0%
Net income per share - diluted .03 9.4% (.04) (6.6%)
</TABLE>
13
<PAGE> 15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended December 31, 1997 and 1996
- ---------------------------------------------
The increase in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. Gross profit as a percentage of sales decreased to 25.8% from
27.3%. These decreases primarily relate to higher freight costs, lower purchase
allowances and changes in the product mix due to the Invetech acquisition.
Selling, distribution and administrative expenses as a percent of sales,
decreased to 21.9% from 23.0% The decrease was primarily from lower compensation
costs and data processing expense and additional gains on the sale of assets
offset by increases in employee benefits and additional outsourcing expenses as
a percent of sales.
Interest expense-net for the quarter increased by 61.3% primarily as a result of
an increase in average borrowings related to the Invetech acquisition.
Income taxes as a percentage of income before taxes were 36.2% in the quarter
ended December 31, 1997 and 42.0% in the quarter ended December 31, 1996. The
decrease is primarily attributed to tax savings from lower effective state and
local income tax rates and adjustment of the tax liability accounts from a
change in estimates. As a result of the above factors, net income increased by
28.5% compared to the same quarter of last year.
Net income per share - diluted increased by 9.4% due to the impact of increased
net income and increases in the number of shares outstanding primarily from the
acquisition of Invetech in August 1997.
Six Months Ended December 31, 1997 and 1996
- -------------------------------------------
The Company acquired Invetech effective August 1, 1997. Invetech's operations
were consolidated with those of the Company as of the acquisition date. The
increase in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. During the period ended December 31, 1997, the Company incurred a
pre-tax nonrecurring charge of $4,000 included in selling, distribution and
administrative expenses for consolidation expenses and costs associated with
disposal of duplicative property and other assets related to the Invetech
acquisition.
Gross profit as a percent of sales was 25.7% compared to 26.6%. These decreases
primarily relate to higher freight costs, lower purchase allowances and changes
in the product mix due to the Invetech acquisition.
14
<PAGE> 16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Selling, distribution and administrative expenses, as a percent of sales,
decreased to 22.3% compared to 22.6%. The decrease was primarily due to lower
compensation costs, data processing expenses and capitalized warehousing costs
offset by the restructuring charge.
Interest expense-net for the period increased by 68.3% primarily as a result of
an increase in average borrowings related to the Invetech acquisition.
Income taxes as a percentage of income before taxes were 38.1% in the six months
ended December 31, 1997 and 42.5% in the six months ended December 31, 1996. The
decrease is primarily attributed to tax savings from lower effective state and
local income tax rates and adjustments to the tax liability accounts from a
change in estimate.
As a result of the above factors, net income increased by 7.0% compared to the
same period last year.
Net income per share - diluted decreased by 6.6% due to the impact of the 7.0%
increase in net income and primarily from the issuance of 3.2 million shares for
the acquisition of Invetech in August 1997.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
Management's discussion and analysis contains statements that are
forward-looking, as that term is defined by the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. All forward-looking
statements are based on current expectations regarding important risk factors.
Accordingly, actual results may differ materially from those expressed in the
forward-looking statements, and the making of such statements should not be
regarded as a representation by the Company or any other person that the results
expressed therein will be achieved.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions; the Company's ability to complete, in
a timely manner and within cost estimates, its Year 2000 project; changes in
accounting policies and practices; the effect of organizational changes within
the Company; adverse results in significant litigation matters; adverse state
and federal regulation and legislation; and the occurrence of extraordinary
events (including prolonged labor disputes, natural events and acts of God,
fires, floods and accidents).
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
(a) The Company incorporates by reference herein the description of the
case captioned KING BEARING, INC. V. CARYL EDMUND ORANGES, ET AL.,
Superior Court of the State of California, County of Orange, Case No.
53-42-31 found in Item 3 "Pending Legal Proceedings" contained in the
Company's Form 10-K for the fiscal year ended June 30, 1997. The
Company believes that this case will have no material adverse effect on
its business or financial condition.
(b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several product-related lawsuits. Based on circumstances
presently known, the Company believes that these cases are not material
to its business or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the Annual Meeting of Shareholders of the Company held on October
21, 1997, the Shareholders (i) elected John C. Dannemiller, J. Michael
Moore, John C. Robinson and Dr. Jerry Sue Thornton as Directors of
Class I for a term expiring in 2000, (ii) adopted an amendment to the
Company's Amended and Restated Articles of Incorporation increasing the
number of authorized shares of Common Stock, without par value, to
50,000,000, (iii) adopted an amendment to the Company's 1990 Long-Term
Performance Plan, and (iv) ratified the appointment of Deloitte &
Touche LLP as independent auditors of the Company for the fiscal year
ending June 30, 1998. Substantially the same information was previously
reported in Part II, Item 5 "Other Information" of the Company's Form
10-Q for the quarter ended September 30, 1997.
ITEM 5. Other Information.
------------------
On February 2, 1998, John C. Robinson, Vice Chairman of the Company,
died of cancer at the age of 55 after over 30 years of service to the
Company.
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
---------
Exhibit No. Description
----------- -----------
4(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on
November 5, 1997.
16
<PAGE> 18
4(b) Code of Regulations of Applied
Industrial Technologies, Inc.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(c) Certificate of Merger of Bearings,
Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio
Secretary of State on October 18,
1988, including an Agreement and
Plan of Reorganization dated
September 6, 1988 (filed as Exhibit
4(a) to the Company's Registration
Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801,
and incorporated here by reference).
4(d) $80,000,000 Maximum Aggregate
Principal Amount Note Purchase and
Private Shelf Facility dated October
31, 1992 between the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company's Registration Statement
on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and
incorporated here by reference).
4(e) Amendment to $80,000,000 Maximum
Aggregate Principal Amount Note
Purchase and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996,
SEC File No. 1-2299, and
incorporated here by reference).
10(a) 1997 Long-Term Performance Plan.
10(b) Description of Life Insurance and
Accidental Death and Dismemberment
Insurance programs for executive
officers.
10(c) Description of Long-Term Disability
Insurance program for executive
officers.
10(d) Schedule pursuant to Instruction 2
of Item 601(a) of Regulation S-K
identifying the directors and
executive officers executing
Director and Officer Indemnification
Agreements.
17
<PAGE> 19
10(e) Schedule pursuant to Instruction 2
of Item 601(a) of Regulation S-K
identifying the executive officers
who have signed an Executive
Severance Agreement and setting
forth the material details in which
the agreements differ from the form
of agreement filed as Exhibit 4(b)
to the Company's Registration
Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801.
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended December 31, 1997.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 16, 1998 By: /s/ John R. Whitten
---------------------------------------
John R. Whitten
Vice President-Chief Financial Officer &
Treasurer
Date: February 16, 1998 By: /s/ Mark O. Eisele
---------------------------------------
Mark O. Eisele
Vice President & Controller
18
<PAGE> 20
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
4(a) Amended and Restated Articles of Incorporation of
Applied Industrial Technologies, Inc., as amended on
November 5, 1997. Attached
4(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6, 1988 (filed
as Exhibit 3(b) to the Company's Registration
Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
4(c) Certificate of Merger of Bearings, Inc. (Ohio) and
Bearings, Inc. (Delaware) filed with the Ohio
Secretary of State on October 18, 1988, including an
Agreement and Plan of Reorganization dated September
6, 1988 (filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801, and incorporated
here by reference).
4(d) $80,000,000 Maximum Aggregate Principal Amount Note
Purchase and Private Shelf Facility dated October 31,
1992 between the Company and The Prudential Insurance
Company of America (filed as Exhibit 4(b) to the
Company's Registration Statement on Form S-4 filed
May 23, 1997, Registration No. 333-27801, and
incorporated here by reference).
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C>
4(e) Amendment to $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf Facility dated
October 31, 1992 between the Company and The
Prudential Insurance Company of America (filed as
Exhibit 4(g) to the Company's Form 10-Q for the
quarter ended March 31, 1996, SEC File No. 1-2299,
and incorporated here by reference).
10(a) 1997 Long-Term Performance Plan. Attached
10(b) Description of Life Insurance and Accidental Death
and Dismemberment Insurance programs for executive
officers. Attached
10(c) Description of Long-Term Disability Insurance
program for executive officers. Attached
10(d) Schedule pursuant to Instruction 2 of Item 601(a) of
Regulation S-K identifying the directors and
executive officers executing director and officer
indemnification agreements. Attached
10(e) Schedule pursuant to Instruction 2 of Item 601(a) of
Regulation S-K identifying the executive officers who
have signed an Executive Severance Agreement and
setting forth the material details in which the
agreements differ from the form of agreement filed as
Exhibit 4(b) to the Company's Registration Statement
on Form S-4 filed May 23, 1997, Registration No.
333-27801. Attached
11 Computation of Net Income Per Share. Attached
27 Financial Data Schedule. Attached
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.A
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 4(A)
<TEXT>
<PAGE> 1
Exhibit 4(a)
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
FIRST: The name of the Corporation shall be Applied Industrial
Technologies, Inc.
SECOND: The place in the State of Ohio where the principal office of
the Corporation will be located is 3600 Euclid Avenue, Cleveland, Ohio 44115, in
Cuyahoga County, or such other location as the Board of Directors shall from
time to time determine.
THIRD: The purpose for which the Corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98, inclusive, of the Revised Code of Ohio, as now in effect or
hereinafter amended.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is Fifty Million (50,000,000) shares of Common Stock,
without par value, and Two Million Five Hundred Thousand (2,500,000) shares of
Preferred Stock, without par value.
No holder of shares of stock of any class of the Corporation shall, as
such holder, have any rights to subscribe for or purchase (a) any shares of
stock of any class, any warrants, options or other instruments that shall confer
upon the holder thereof the right to subscribe for or purchase or receive from
the Corporation any shares of stock of any class which the Corporation may issue
or sell, whether or not such shares shall be exchangeable for any shares of
stock of the Corporation of any class or classes and whether or not such shares
shall be unissued shares, now or hereafter authorized, or shares acquired by the
Corporation after the issue thereof, and whether or not such shares of stock,
warrants, options or other instruments are issued for cash or services or
property or by way of dividend or otherwise, or (b) any other security of the
Corporation which shall be convertible into, or exchangeable for, any shares of
stock of the Corporation or any class or classes, or to which shall be attached
or appurtenant to any warrant, option or other instrument that shall confer upon
the holder of such security the right to subscribe for or purchase or receive
from the Corporation any shares of its stock or any class or classes, whether or
not such shares shall be unissued shares, now or hereafter authorized, or shares
acquired by the Corporation after the issue thereof, and whether or not such
securities are issued for cash or services or property or by way of dividend or
otherwise, other than such right, if any, as the Board of Directors, in its sole
discretion, may from time to time determine. If the Board of Directors shall
offer to the holders of shares of stock of any class of the Corporation, or any
of them, any such shares of stock, options, warrants, instruments or other
securities of the Corporation, such offer shall not, in any way, constitute a
waiver or release of the right of the Board of Directors subsequently to dispose
of other securities of the Corporation without offering the same to said
holders.
<PAGE> 2
The shares of such classes shall have the following express terms:
DIVISION A
EXPRESS TERMS OF THE PREFERRED STOCK
(1) The Preferred Stock may be issued from time to time in one or more
series. All shares of Preferred Stock shall be of equal rank and shall be
identical with all other shares except in respect of the matters that may be
fixed by the Board of Directors as hereinafter provided, and each share of each
series shall be identical with all other shares of such series, except, if
dividends are to be cumulative, as to the date from which dividends are
cumulative. Subject to the provisions of Sections 2 and 3 of this Division,
which provisions shall apply to all Preferred Stock, the Board of Directors
hereby is authorized to cause such shares to be issued in one or more series and
with respect to each such series prior to the issuance thereof to fix:
(a) The number of shares constituting such series, including
the authority to increase or decrease such number, and the distinctive
designation of such series.
(b) The dividend rate of the shares of such series, whether
the dividends shall be cumulative and, if so, the date from which they
shall be cumulative, and the relative rights of priority, if any, of
payment of dividends on shares of such series.
(c) The right, if any, of the Corporation to redeem shares of
such series and the terms and conditions of such redemption including
the redemption price.
(d) The rights of the shares in case of a voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation,
and the relative rights of priority, if any, of payment of shares of
such series.
(e) The obligation, if any, of the Corporation to retire
shares of such series pursuant to a retirement or sinking fund or fund
of a similar nature and the terms and conditions of such obligation.
(f) The terms and conditions, if any, upon which shares of
such series shall be convertible into or exchangeable for shares of
stock of any other class or classes of stock of the Corporation or
other entity or of any other series of Preferred Stock, including the
price or prices or the rate or rates of conversion or exchange and the
terms of adjustment, if any.
(g) Any other rights, preferences or limitations of the shares
of such series as may be permitted by law.
The Board of Directors is authorized to adopt from time to time
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) through (g), inclusive, of this
Section 1.
2
<PAGE> 3
(2) The Preferred Stock shall be senior to the Common Stock in payment
of dividends and payment in respect of liquidation or dissolution.
(3) The holders of Preferred Stock shall be entitled to one vote for
each share of such stock upon all matters presented to the shareholders; and,
except as otherwise required by law, the holders of Preferred Stock and the
holders of Common Stock shall vote together as one class on all matters.
DIVISION B
EXPRESS TERMS OF THE COMMON STOCK
The Common Stock shall be subject to the express terms of the Preferred
Stock and any series thereof and to the terms of Article EIGHTH. Each share of
Common Stock shall be equal to every other share of Common Stock and the holders
thereof shall be entitled to one vote for each share of such stock on all
questions presented to the shareholders.
FIFTH: Except as otherwise provided in these Articles of Incorporation
or in the Regulations, the holders of a majority of the outstanding shares are
authorized to take any action which, but for this provision, would require the
vote or other action of the holders of more than a majority of such shares.
SIXTH: Except as otherwise provided in these Articles of Incorporation,
the Corporation, by its Board of Directors, may purchase issued shares, to the
extent permitted by law.
SEVENTH: The affirmative vote of the holders of not less than eighty
percent (80%) of the voting power of the Corporation in the election of
directors shall be required for the approval or authorization of any Business
Combination; provided, however, that the eighty percent voting requirement shall
not be applicable if the Business Combination is a merger or consolidation and
the cash or fair market value of the property, securities or other consideration
to be received per share by holders of the Common Stock of the Corporation in
the Business Combination (a) is not less than the highest per share price (with
appropriate adjustments for recapitalizations and for stock splits, stock
dividends and like distributions), paid by the Related Person in acquiring any
of its holdings of the Corporation's Common Stock and (b) if the Related Person
has acquired Common Stock with varying forms of consideration, the form of
consideration to be received by the holders of the Common Stock in the Business
Combination is cash or the form used to acquire the largest percentage of the
voting power of the Corporation in the election of directors owned by the
Related Person.
For the purpose of this Article SEVENTH:
(1) The term "Business Combination" shall mean (i) any merger or
consolidation of the Corporation or a subsidiary with or into a Related Person,
(ii) any sale, lease, exchange, transfer
3
<PAGE> 4
or other disposition, including, without limitation, a mortgage or any other
security device, of all or any "Substantial Part" (as hereinafter defined) of
the assets, either of the Corporation (including, without limitation, of any
voting securities of a subsidiary) or of a subsidiary, to a Related Person,
(iii) any merger or consolidation of a Related Person with or into the
Corporation or a subsidiary of the Corporation, (iv) any sale, lease, exchange,
transfer or other disposition of all or any Substantial Part of the assets of a
Related Person to the Corporation or a subsidiary of the Corporation, (v) the
issuance of any securities of the Corporation or a subsidiary of the Corporation
to a Related Person, (vi) any reclassification of securities (including any
reverse stock split) or recapitalization what would have the effect of
increasing the voting power of a Related Person, (vii) the adoption of any plan
or proposal for the liquidation or dissolution of the Corporation proposed by or
on behalf of a Related Person, and (viii) any agreement, contract or other
arrangement providing for any of the transactions described in this definition
of Business Combination.
(2) The term "Related Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
"Affiliates" and "Associates" (as defined on October 18, 1988 in Rule 12b-2
under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined on
October 18, 1988 in Rule 13d-3 under the Securities Exchange Act of 1934) Common
Stock or Preferred Stock of the Corporation consisting in the aggregate of 20
percent or more of the outstanding voting power of the Corporation in the
election of directors, and any Affiliate or Associate of any such individual,
corporation, partnership or other person or entity.
(3) The term "Substantial Part" shall mean more than thirty percent
(30%) of the fair market value of the total assets of the corporation in
question, as of the end of its most recent fiscal year ending prior to the time
the determination is being made.
(4) Without limitation, any Common Stock of the Corporation, or
Preferred Stock of the Corporation that has voting power in the election of
directors, that any Related Person has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise shall be deemed beneficially owned by the Related Person.
(5) For the purposes of this Article SEVENTH, the term "other
consideration to be received" shall include, without limitation, Common Stock of
the Corporation retained by its existing public stockholders in the event of a
Business Combination in which the Corporation is the surviving corporation.
Notwithstanding any other provisions of these Articles of Incorporation
or the Regulations of the Corporation or any provision of law which might
otherwise permit a lesser vote, but in addition to any affirmative vote of the
holders of any particular class or series of stock required by law or these
Articles of Incorporation or the Regulations of the Corporation, the affirmative
vote of the holders of at least eighty percent (80%) of the Corporation's voting
power in the election of directors, voting as a single class, shall be required
to alter, amend or repeal this Article SEVENTH or to adopt any provisions in
these Articles of Incorporation or the Regulations of the Corporation which are
inconsistent with the provisions of this Article SEVENTH.
4
<PAGE> 5
EIGHTH: No person shall make a Control Share Acquisition without first
obtaining the prior authorization of the Corporation's shareholders at a special
meeting of shareholders called by the Board of Directors in accordance with this
Article EIGHTH.
(1) Procedure. Any Person who proposes to make a Control Share
Acquisition shall deliver a notice ("Notice") to the Corporation at its
principal place of business that sets forth all of the following information:
a) The identity of the Person who is giving the Notice;
b) A statement that the Notice is given pursuant to this Article
EIGHTH;
c) The number and class of shares of the Corporation owned,
directly or indirectly, by the Person who gives the Notice;
d) The range of voting power (as specified in Section (6)(b)(1)
of this Article EIGHTH) under which the proposed Control Share
Acquisition would, if consummated, fall;
e) A description in reasonable detail of the terms of the
proposed Control Share Acquisition; and
f) Representations, supported by reasonable information, that the
proposed Control Share Acquisition would be consummated if
shareholder approval is obtained and, if consummated, would
not be contrary to law and that the Person who is giving the
Notice has the financial capacity to make the proposed Control
Share Acquisition.
(2) Call of Special Meeting of Shareholders. The Board of Directors of
the Corporation shall, within ten (10) days after receipt by the Corporation of
a Notice that complies with Section (1), call a special meeting of shareholders
to be held not later than fifty (50) days after receipt of the Notice by the
Corporation, unless the Person who delivered the Notice agrees to a later date,
to consider the proposed Control Share Acquisition; provided that the Board of
Directors shall have no obligation to call such a meeting if they make a
determination within ten (10) days after receipt of the Notice that (i) the
Notice was not given in good faith; (ii) the proposed Control Share Acquisition
would not be in the best interests of the Corporation and its shareholders or
(iii) the proposed Control Share Acquisition could not be consummated for
financial or legal reasons. Notwithstanding anything to the contrary contained
in clause (ii) of the immediately preceding sentence, the Board of Directors
shall call such special meeting of shareholders if the Control Share Acquisition
described in the Notice is for any and all shares of the Corporation, for cash,
at a price higher than the highest price at which shares of Common Stock have
been traded during the ninety (90) day period prior to the date on which the
Corporation receives the Notice.
5
<PAGE> 6
The Board of Directors may adjourn such special meeting of shareholders
if prior to such meeting the Corporation has received a Notice from any other
Person and the Board of Directors has determined that the Control Share
Acquisition proposed by such other Person, or a merger, consolidation or sale of
assets of the Corporation, should be presented to shareholders at an adjourned
meeting or at a special meeting held at a later date.
For purposes of making a determination that a special meeting of
shareholders should not be called pursuant to this Section (2), no such
determination shall be deemed void or voidable with respect to the Corporation
merely because one or more of its directors or officers who participated in
deliberations regarding such determination may be deemed to be other than
disinterested, if in any such case the material facts of the relationship giving
rise to a basis for self-interest are known to the directors and the directors,
in good faith reasonably justified by the facts, make such determination by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors constitute less than a quorum. For purposes of this
paragraph, "disinterested directors" shall mean directors whose material
contacts with the Corporation are limited principally to activities as a
director or shareholder. Persons who have material and recurring business or
professional contacts with the Corporation shall not be deemed to be
"disinterested directors" for purposes of this provision. A director shall not
be deemed to be other than a "disinterested director" merely because he would no
longer be a director if the proposed Control Share Acquisition were approved and
consummated.
(3) Notice of Special Meeting. The Corporation shall, as promptly as
practicable, give notice of the special meeting of shareholders called pursuant
to Section (2) to all shareholders of record as of the record date set for such
meeting. Such notice shall include or be accompanied by a copy of the Notice and
by a statement of the Corporation, authorized by the Board of Directors, of its
position or recommendation, or that it is taking no position or making no
recommendation, with respect to the proposed Control Share Acquisition.
(4) Requirements for Approval. The Person who delivered the Notice may
make the proposed Control Share Acquisition if both of the following occur:
(a) The shareholders of the Corporation authorize such
acquisition at the special meeting of shareholders called pursuant to
Section (2), at which meeting a quorum is present, by the affirmative
vote of a majority of the Voting Stock represented at such meeting in
person or by proxy and by a majority of the portion of such Voting
Stock represented at such meeting in person or by proxy excluding the
votes of Interested Shares. A quorum shall be deemed to be present at
such special meeting if at least a majority of the issued and
outstanding Voting Stock, and a majority of such Voting Stock excluding
Interested Shares, are represented at such meeting in person or by
proxy.
(b) Such acquisition is consummated, in accordance with the
terms so authorized, not later than three hundred sixty (360) days
following shareholder authorization of the Control Share Acquisition.
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<PAGE> 7
(5) Violations of Restriction. Any Voting Stock issued or transferred
to any Person in violation of this Article EIGHTH shall hereinafter be called
"Excess Shares." In the event that any Person acquires Excess Shares, then, in
addition to any other remedies which the Corporation may have at law or in
equity as a result of such acquisition, the Corporation shall have the right to
treat the issuance or transfer of any such Excess Shares as null and void. In
the event the Corporation is not permitted to treat an issuance or transfer of
Excess Shares as null and void, such Excess Shares will be treated as the
equivalent of treasury shares of the Corporation and, as such, holders of Excess
Shares will hold such Excess Shares as agent of the Corporation and shall have
no right to exercise or receive the benefits of shareholder rights appurtenant
to such Excess Shares. In such event, the Corporation may redeem any or all
Excess Shares, arrange a sale to one or more purchasers who could acquire such
Excess Shares without violating this Article EIGHTH, or seek other appropriate
remedies. In addition, any Person who receives dividends, interest or any other
distribution with respect to Excess Shares shall hold the same as agent for the
Corporation and, following a permitted transfer, for the transferee thereof.
Notwithstanding the foregoing, any person who holds Excess Shares may transfer
the same (together with any distributions thereon) to any Person who, following
such transfer, would not own shares in violation of this Article EIGHTH. Upon
such permitted transfer, the Corporation shall pay or distribute to the
transferee any distributions on the Excess Shares not previously paid or
distributed.
(6) Definitions. As used in this Article EIGHTH:
(a) "Person" includes, without limitation, an individual, a
corporation (whether nonprofit or for profit), a partnership, an
unincorporated society or association, and two or more persons having a
joint or common interest.
(b)(1) "Control Share Acquisition" means the acquisition,
directly or indirectly, by any Person, of shares of the Corporation
that, when added to all other shares of the corporation in respect of
which such Person, directly or indirectly, may exercise or direct the
exercise of voting power as provided in this paragraph, would entitle
such Person, immediately after such acquisition, directly or
indirectly, to exercise or direct the exercise of voting power of the
Corporation in the election of directors within any of the following
ranges of such voting power:
(i) One-fifth or more but less than one-third of such
voting power;
(ii) One-third or more but less than a majority of
such voting power; or
(iii) A majority of such voting power.
A bank, broker, nominee, trustee, or other Person who acquires
shares in the ordinary course of business for the benefit of others in
good faith and not for the purpose of circumventing this Article EIGHTH
shall, however, be deemed to have voting power only of shares in
respect of which such Person would be able to exercise or direct the
exercise of votes at a special meeting of shareholders called pursuant
to Section (2) of this
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<PAGE> 8
Article EIGHTH without further instruction from others. For purposes of
this Article EIGHTH, the acquisition of securities immediately
convertible into shares of the Corporation with voting power in the
election of directors shall be treated as an acquisition of such
shares.
(b)(2) The acquisition of any shares of the Corporation does
not constitute a Control Share Acquisition for the purposes of this
Article EIGHTH if the acquisition is consummated in any of the
following circumstances:
(i) By underwriters in good faith and not for the
purpose of circumventing this Article EIGHTH in connection
with any offering to the public of securities of the
Corporation;
(ii) By bequest or inheritance, by operation of law
upon the death of any individual, or by any other transfer
without valuable consideration, including a gift, that is made
in good faith and not for the purpose of circumventing this
Article EIGHTH;
(iii) Pursuant to the satisfaction of a pledge or
other security interest created in good faith and not for the
purpose of circumventing this Article EIGHTH;
(iv) Pursuant to a merger, consolidation, combination
or majority share acquisition adopted or authorized by
shareholder vote in compliance with the provisions of Article
SEVENTH of these Articles of Incorporation and Sections
1701.78, 1701.79 or 1701.83 of the Ohio Revised Code if the
Corporation is a party to the agreement of merger,
consolidation or acquisition, as the case may be;
(v) Under such circumstances that the acquisition
does not result in the Person acquiring shares of the
Corporation being entitled, immediately thereafter and for the
first time, directly or indirectly, to exercise or direct the
exercise of voting power of the Corporation in the election of
directors within the range of one-fifth or more but less than
one-third of such voting power, or within any of the ranges of
voting power specified in Section (6)(b)(1)(i), (ii) or (iii)
which is higher than the range of voting power applicable to
such Person immediately prior to such acquisition;
(vi) Prior to October 18, 1988; or
(vii) Pursuant to a contract existing prior to
October 18, 1988.
The acquisition by any Person of shares of the Corporation in
a manner described under this Section (6)(b)(2) shall be deemed to be a
Control Share Acquisition authorized pursuant to this Article EIGHTH
within the range of voting power specified in Section (6)(b)(1)(i),
(ii) or (iii) that such Person is entitled to exercise after such
acquisition,
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<PAGE> 9
provided that, in the case of an acquisition in a manner described
under Section (6)(b)(1)(i), (ii) or (iii), the transferor of shares to
such Person had previously obtained any authorization of shareholders
required under this Article EIGHTH in connection with such transferor's
acquisition of shares of the Corporation.
(b)(3) The acquisition of shares of the Corporation in good
faith and not for the purpose of circumventing this Article EIGHTH from
any Person whose Control Share Acquisition had previously been
authorized by shareholders in compliance with this Article EIGHTH, or
from any Person whose previous acquisition of shares would have
constituted a Control Share Acquisition but for Section (6)(b)(2), does
not constitute a Control Share Acquisition for the purpose of this
Article EIGHTH unless such acquisition entitles any Person, directly or
indirectly, alone or with others, to exercise or direct the exercise of
voting power of the Corporation in the election of directors in excess
of the range of such voting power authorized pursuant to this Article
EIGHTH, or deemed to be so authorized under Section (6)(b)(2).
(c) "Interested Shares" means Voting Stock with respect to
which any of the following persons may exercise or direct the exercise
of the voting power:
(1) any Person whose Notice prompted the calling of a
special meeting of shareholders pursuant to Section (2);
(2) any officer of the Corporation elected or
appointed by the directors of the Corporation; and
(3) any employee of the Corporation who is also a
director of the corporation.
(d) "Voting Stock" means all securities of the Corporation
entitled to vote generally in the election of directors, and, for
purposes of Sections (5) and (10) of this Article EIGHTH, shall mean
securities of the Corporation immediately convertible into securities
entitled to vote generally in the election of the directors.
(7) Proxies. No proxy appointed for or in connection with the
shareholder authorization of a Control Share Acquisition pursuant to this
Article EIGHTH is valid if it provides that it is irrevocable. No such proxy is
valid unless it is sought, appointed, and received both:
(a) In accordance with all applicable requirements of law; and
(b) Separate and apart from the sale or purchase, contract or
tender for sale or purchase, or request or invitation for tender for
sale or purchase, of shares of the Corporation.
(8) Revocability of Proxies. Proxies appointed for or in connection
with the shareholder authorization of a Control Share Acquisition pursuant to
this Article EIGHTH shall be revocable
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<PAGE> 10
at all times prior to the obtaining of such shareholder authorization, whether
or not coupled with an interest.
(9) Amendments. Notwithstanding any other provisions of these Articles
of Incorporation or the Regulations of the Corporation or any provision of law
that might otherwise permit a lesser vote, but in addition to any affirmative
vote of the holders of any particular class or series of stock required by law,
the Articles of Incorporation or the Regulations of the Corporation, the
affirmative vote of the holders of at least eighty percent (80%) of the Voting
Stock, voting as a single class, shall be required to alter, amend or repeal
this Article EIGHTH or adopt any provisions in these Articles of Incorporation
or the Regulations of the Corporation which are inconsistent with the provisions
of this Article EIGHTH.
(10) Legend on Share Certificates. Each certificate representing Voting
Stock of the Corporation shall contain the following legend:
Transfer of the securities represented by this Certificate is
subject to the provisions of Article EIGHTH of the Corporation's
Articles of Incorporation as the same may be in effect from time to
time. Upon written request delivered to the Secretary of the
Corporation at its principal place of business, the Corporation will
mail to the holder of this Certificate a copy of such provisions
without charge within five (5) days after receipt of written request
therefor. By accepting this Certificate the holder hereof acknowledges
that it is accepting same subject to the provisions of said Article
EIGHTH as the same may be in effect from time to time and covenants
with the Corporation and each holder thereof from time to time to
comply with the provisions of said Article EIGHTH as the same may be in
effect from time to time.
NINTH: The provisions of Section 1701.831 of the Ohio Revised Code, as
amended from time to time, or any successor provision or provisions to said
Section, shall not apply with respect to any particular Control Share
Acquisition, as such is defined in said Section, regarding this Corporation so
long as Article NINTH of these Articles of Incorporation, as such Articles of
Incorporation may be amended from time to time, remains an Article of these
Articles of Incorporation and remains substantially in full force and effect,
disregarding any renumbering of such Article NINTH resulting from any amendment
of these Articles of Incorporation.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation which may be
contained in these articles of incorporation of a corporation organized under
the laws of the State of Ohio, in the manner now or hereafter prescribed by
statute or these Articles of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.A
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10(A)
<TEXT>
<PAGE> 1
EXHIBIT 10(a)
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
1997 LONG-TERM PERFORMANCE PLAN
1. OBJECTIVES
The Applied Industrial Technologies, Inc. 1997 Long-Term Performance
Plan (the "Plan") is designed to foster and promote the long-term growth and
performance of the Company by: (a) strengthening the Company's ability to
develop and retain an outstanding management team, (b) motivating superior
performance by means of long-term performance related incentives and (c)
enabling key management employees and outside directors to participate in the
long-term growth and financial success of the Company. These objectives will be
promoted by awarding to such persons performance-based stock awards, restricted
stock, stock options, stock appreciation rights and/or other performance or
stock-based awards.
2. DEFINITIONS
(a) "Award" -- The grant of stock or any form of stock option, stock
appreciation right, performance share, restricted stock, other stock-based award
or cash whether granted singly, in combination or in tandem, to a Plan
Participant pursuant to such terms, conditions and limitations as the Committee
may establish in order to fulfill the objectives of the Plan.
(b) "Award Agreement" -- An agreement between the Company and a
Participant that sets forth the terms, conditions and limitations applicable to
an Award.
(c) "Board" -- The Board of Directors of the Company.
(d) "Common Shares" or "shares" -- Authorized and issued or unissued
shares of common stock without par value of the Company.
(e) "Code" -- The Internal Revenue Code of 1986, as amended from time
to time.
(f) "Committee" -- The Executive Organization and Compensation
Committee of the Company's Board, or such other committee of the Board that is
designated by the Board to administer the Plan. The Committee shall be
constituted so as to satisfy any applicable legal requirements including the
requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act") or any similar rule which may subsequently be in effect
("Rule 16b-3"). The members shall be appointed by, and serve at the pleasure of,
the Board and any vacancy on the Committee shall be filled by the Board.
<PAGE> 2
(g) "Company" -- Applied Industrial Technologies, Inc., an Ohio
corporation, and its direct and indirect subsidiaries.
(h) "Fair Market Value" -- The average of the high and low prices of
Common Shares as reported on the composite tape for securities listed on the New
York Stock Exchange for the date in question, provided that if no sales of
Common Shares were made on said exchange on that date, the average of the high
and low prices of Common Shares as reported on said composite tape for the
preceding day on which sales of Common Shares were made on said Exchange.
(i) "Participant" -- Any employee of the Company, or other person whose
selection the Committee determines to be in the best interests of the Company,
to whom an Award has been made under the Plan.
(j) "Section 162(m) Employee" -- Any employee with respect to which
compensation paid is subject to the restrictions imposed by Section 162(m) of
the Code, or any similar or successor restrictions.
3. ELIGIBILITY
Persons eligible to be selected as Participants shall include employees
of the Company who hold responsible managerial or professional positions and
outside directors whose performance, in the judgment of the Committee, can
contribute to the continued growth and success of the Company. The selection of
Participants shall be within the sole discretion of the Committee. Grants may be
made to the same Participant on more than one occasion.
4. COMMON SHARES AVAILABLE FOR AWARDS
The aggregate number of Common Shares which may be awarded under the
Plan in each fiscal year of the Company, subject to adjustment as provided in
Section 15 hereof, shall be two percent (2%) of the total outstanding Common
Shares as of the first day of such year for which the Plan is in effect;
provided that such number shall be increased in any year by the number of Common
Shares available for grant hereunder in previous years but not the subject of
Awards granted hereunder in such year; and provided further, that no more than
two hundred thousand (200,000) Common Shares shall be cumulatively available for
the grant of incentive stock options under the Plan and that no more than three
hundred thousand (300,000) Common Shares will be available for the grant of
Stock Options, Stock Appreciation Rights, and Stock Awards to any individual
Participant in any one calendar year. In addition, any Common Shares issued by
the Company through the assumption or substitution of outstanding grants from an
acquired corporation or entity shall not reduce the Common Shares available for
grants under the Plan. Such Shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares.
From time to time, the Board and appropriate officers of the Company
shall take whatever actions are necessary to file required documents with
governmental authorities and stock exchanges to
2
<PAGE> 3
make Common Shares available for issuance pursuant to Awards. Any Common Shares
subject to an Option which for any reason is canceled (excluding shares subject
to an Option canceled upon the exercise of a related stock appreciation right
("SAR") to the extent shares are issued upon exercise of such SAR) or terminated
without having been exercised, or any shares of Restricted Stock or Performance
Shares which are forfeited, shall again be available for Awards under the Plan.
No fractional shares shall be issued, and the Committee shall determine the
manner in which fractional share value shall be treated.
5. ADMINISTRATION
The Plan shall be administered by the Committee which shall have full
and exclusive power and authority to interpret the Plan, to grant waivers of
Plan restrictions and to adopt such rules, regulations and guidelines for
carrying out the Plan as it may deem necessary or proper, all of which powers
shall be executed in the best interests of the Company and in keeping with the
objectives of the Plan. In particular, the Committee shall have the authority
to: (i) select eligible Participants as recipients of Awards; (ii) determine the
number and type of Awards to be granted; (iii) determine the terms and
conditions, not inconsistent with the terms hereof, of any Award granted; (iv)
adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall, from time to time, deem advisable; (v) interpret
the terms and provisions of the Plan and any Award granted; (vi) prescribe the
form of any agreement or instrument executed in connection with any Award; and
(vii) otherwise supervise the administration of the Plan. In addition, the Board
shall have authority, without amending the Plan, to grant Awards hereunder to
Participants who are foreign nationals or employed outside the United States or
both, on terms and conditions different from those specified herein as may in
the sole judgment and discretion of the Board, be necessary or desirable to
further the purpose of the Plan. All decisions made by the Committee pursuant to
the provisions hereof shall be made in the Committee's sole discretion and shall
be final and binding on all persons.
6. DELEGATION OF AUTHORITY
The Committee may to the extent that any such action will not prevent
the Plan from complying with Rule 16b-3, delegate any of its authority hereunder
to such persons as it deems appropriate.
7. AWARDS
The Committee shall determine the type or types of Award(s) to be made
to each Participant and shall set forth in the related Award Agreement the
terms, conditions and limitations applicable to each Award. Awards may include
but are not limited to those listed in this Section 7. Awards may be granted
singly, in combination or in tandem or in exchange for a previously granted
Award; provided that the exercise price for stock options shall not be less than
the Fair Market Value on the date of grant of the new Award. Awards may also be
made in combination or in tandem with, in replacement of, or as alternatives to,
grants or rights under any other employee plan of the Company, including the
plan of any acquired entity.
3
<PAGE> 4
(a) Stock Option -- A grant of a right to purchase a specified number
of Common Shares during a specified period and at a specified price not less
than the Fair Market Value on the date of grant, as determined by the Committee.
A stock option may be in the form of an incentive stock option ("ISO") which, in
addition to being subject to applicable terms, conditions and limitations
established by the Committee, complies with Section 422A of the Code which,
among other limitations, currently provides that the aggregate Fair Market Value
(determined at the time the option is granted) of Common Shares exercisable for
the first time by a Participant during any calendar year shall not exceed
$100,000 (or such other limit as may be required by the Code); that the exercise
price shall be not less than 100% of Fair Market Value on the date of the grant;
that such options shall be exercisable for a period of not more than ten years
and may be granted no later than ten years after the effective date of this
Plan.
(b) Stock Appreciation Right or SAR -- A right to receive a payment, in
cash and/or Common Shares, equal to the excess of the Fair Market Value or other
specified valuation of a specified number of Common Shares on the date the SAR
is exercised over the Fair Market Value or other specified valuation on the date
of grant of the SAR as set forth in the applicable Award Agreement, except that
where the SAR is granted in tandem with a stock option, the grant and exercise
valuations must be no less than Fair Market Value.
(c) Stock Award -- An Award made in Common Shares and other Awards that
are valued in whole or in part by reference to, or are otherwise based on,
Common Shares. All or part of any stock award may be subject to conditions
established by the Committee, and set forth in the Award Agreement.
(d) Cash Award -- An Award denominated in cash with the eventual
payment amount subject to future service and such other restrictions and
conditions as may be established by the Committee, and as set forth in the Award
Agreement. The maximum amount of any Cash Award payable to any Participant in
any one calendar year shall be two million dollars ($2,000,000).
(e)(1) With respect to grants of Awards to any Section 162(m) Employee,
the Stock Awards and Cash Awards made pursuant to paragraphs (c) and (d) shall
be based on the satisfaction of performance goals established by the Committee
at the time an Award is granted, which goals shall include one or more of the
following: sales, costs and expenses, cash flow, pre-tax income, net income,
operating profit and margin, earnings per share, retained earnings, return on
equity, return on assets, return on investment, asset turnover, liquidity,
capitalization, value created, stock price, total shareholder return, price
measures, market share, sales to targeted customers, customer satisfaction,
employee satisfaction, safety measures, quality measures, productivity, process
improvement, educational and technical skills of employees, changes in one or
more of the preceding, development of criteria for and programs related to
hiring and promotion, creation and acquisition of new business units,
development and implementation of business plans and programs relating to
product lines or business units, integration of acquired businesses, development
and implementation of employee training and development programs, implementation
of tax and accounting elections, and development
4
<PAGE> 5
and implementation of communications and investor relations programs; provided
however, that all performance goals shall be objective performance goals
satisfying the requirements for "performance-based compensation" within the
meaning of section 162(m)(4) of the Code. Such performance goals may also be
based on the attainment of levels of performance of the Company and/or any of
its affiliates under one or more of the measures described above relative to the
performance of other businesses.
(2) With respect to grants of Awards to any Participant who is
not a Section 162(m) Employee, the Awards may be based on any of the goals
described in paragraph (1) and on such other conditions as may be established by
the Committee.
8. PAYMENT OF AWARDS
Payment of Awards may be made in the form of cash, Common Shares or
combinations thereof and may include such restrictions as the Committee shall
determine, including in the case of Common Shares, restrictions on transfer and
forfeiture provisions. When transfer of shares is so restricted or subject to
forfeiture provisions, such shares are referred to as "Restricted Stock."
Further, with Committee approval, payments may be deferred, either in the form
of installments or a future lump sum payment. The Committee may permit selected
Participants to elect to defer payments of some or all types of Awards in
accordance with procedures established by the Committee to assure that such
deferrals comply with applicable requirements of the Code including, at the
choice of Participants, the capability to make further deferrals for payment
after retirement. Any deferred payment, whether elected by the Participant or
specified by the Award Agreement or by the Committee, may require the payment to
be forfeited in accordance with the provisions of Section 13 of the Plan.
Dividends or dividend equivalent rights may be extended to and made part of any
Award denominated in shares or units of Shares, subject to such terms,
conditions and restrictions as the Committee may establish. The Committee may
also establish rules and procedures for the crediting of interest on deferred
cash payments and dividend equivalents for deferred payments denominated in
shares or units of shares. At the discretion of the Committee, a Participant may
be offered an election to substitute an Award for another Award or Awards of the
same or different type; provided that Awards may not be made to substitute for
previously granted stock options having higher exercise prices.
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<PAGE> 6
9. STOCK OPTION EXERCISE
The price at which shares may be purchased under a stock option shall
be paid in full at the time of the exercise in cash or, if permitted by the
Committee, by means of tendering Common Shares or surrendering another Award,
including Restricted Stock, valued at Fair Market Value on the date of exercise,
or by any other means which the Committee determines to be consistent with the
Plan's objectives and applicable law and regulations. The Committee shall
determine acceptable methods for tendering Common Shares or other Awards and may
impose such conditions on the use of Common Shares or other Awards to exercise a
stock option as it deems appropriate. In the event shares of Restricted Stock
are tendered as consideration for the exercise of a stock option, a number of
the shares issued upon the exercise of the stock option, equal to the number of
shares of Restricted Stock used as consideration therefor, shall be subject to
the same restrictions as the Restricted Stock so submitted plus any additional
restrictions that may be imposed by the Committee.
10. TAX WITHHOLDING
The Corporation shall have the authority to withhold, or to require a
Participant to remit to the Corporation, prior to issuance or delivery of any
shares or cash hereunder, an amount sufficient to satisfy federal, state and
local tax withholding requirements associated with any Award. In addition, the
Corporation may, in its sole discretion, permit a Participant to satisfy any tax
withholding requirements, in whole or in part, by (i) delivering to the
Corporation shares of common stock held by such Participant having a Fair Market
Value equal to the amount of the tax or (ii) directing the Corporation to retain
Common Shares otherwise issuable to the Participant under the Plan. If Common
Shares are used to satisfy tax withholding, such shares shall be valued based on
the Fair Market Value when the tax withholding is required to be made.
11. AMENDMENT, MODIFICATION, SUSPENSION OR DISCONTINUANCE OF THIS PLAN
The Board may amend, modify, suspend or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law. Subject to changes in law or other legal
requirements which would permit otherwise, the Plan may not be amended without
consent of the holders of the majority of the Common Shares then outstanding, to
(i) increase the aggregate number of Common Shares that may be issued under the
Plan (except for adjustments pursuant to the Plan), (ii) materially modify the
requirements as to eligibility for participation in the Plan, or (iii) withdraw
administration of the Plan from the Committee.
The Board may amend the terms of any Award theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Participant without his consent and no such amendment shall have the effect,
with respect to any Section 162(m) Employee, of increasing the amount of any
Award from the amount that would otherwise be payable pursuant to the formula
and/or goals previously established for such Participant. The Board may also
make Awards hereunder
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<PAGE> 7
in replacement of, or as alternatives to, Awards previously granted to
Participants, except for previously granted options having higher exercise
prices, but including without limitation grants or rights under any other plan
of the Company or of any acquired entity.
12. TERMINATION OF EMPLOYMENT
If the employment of a Participant terminates for any reason, all
unexercised, deferred and unpaid Awards shall be exercisable or paid in
accordance with the applicable Award Agreement, which may provide that the
Committee may authorize, as it deems appropriate, the acceleration and/or
continuation of all or any part of Awards granted prior to such termination.
13. CANCELLATION AND RESCISSION OF AWARDS
Unless the Award Agreement specifies otherwise, the Committee may
cancel any unexpired, unpaid, or deferred Awards at any time if the Participant
is not in compliance with all other applicable provisions of the Award
Agreement, the Plan and with the following conditions:
(a) A Participant shall not render services for any
organization or engage directly or indirectly in any business which, in
the judgment of the Chief Executive Officer of the Company or other
senior officer designated by the Committee, is or becomes competitive
with the Company, or which organization or business, or the rendering
of services to such organization or business, is or becomes otherwise
prejudicial to or in conflict with the interests of the Company. For
Participants whose employment has terminated, the judgment of the Chief
Executive Officer shall be based on the Participant's position and
responsibilities while employed by the Company, the Participant's
post-employment responsibilities and position with the other
organization or business, the extent of past, current and potential
competition or conflict between the Company and the other organization
or business, the effect on the Company's customers, suppliers and
competitors of the Participant's assuming the post-employment position,
and such other considerations as are deemed relevant given the
applicable facts and circumstances. A Participant who has retired shall
be free, however, to purchase as an investment or otherwise, stock or
other securities of such organization or business so long as they are
listed upon a recognized securities exchange or traded
over-the-counter, and such investment does not represent a substantial
investment to the Participant or a greater than one percent (1%) equity
interest in the organization or business.
(b) A Participant shall not, without prior written
authorization from the Company, disclose to anyone outside the Company,
or use in other than the Company's business, any confidential
information or material relating to the business of the Company,
acquired by the Participant either during or after employment with the
Company.
(c) Upon exercise, payment or delivery pursuant to an Award,
the Participant shall certify on a form acceptable to the Committee
that he or she is in compliance with the terms and conditions of the
Plan. Failure to comply with the provisions of paragraph (a), (b) or
(c) of
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<PAGE> 8
this Section 13 prior to, or during the six months after, any exercise,
payment or delivery pursuant to an Award (except in the event of an
intervening Change in Control as defined below) shall cause such
exercise, payment or delivery to be rescinded. The Company shall notify
the Participant in writing of any such rescission within two years
after such exercise, payment or delivery. Within ten days after
receiving such a notice from the Company, the Participant shall pay to
the Company the amount of any gain realized or payment received as a
result of the rescinded exercise, payment or delivery pursuant to an
Award. Such payment shall be made either in cash or by returning to the
Company the number of Common Shares that the Participant received in
connection with the rescinded exercise, payment or delivery.
14. NONASSIGNABILITY
Except as may be otherwise provided in the relevant Award Agreement, no
Award or any benefit under the Plan shall be assignable or transferable, or
payable to or exercisable by, anyone other than the Participant to whom it was
granted.
15. ADJUSTMENTS; WAIVER OF RESTRICTIONS
(a) In the event of any change in capitalization of the Company by
reason of a stock split, stock dividend, combination, reclassification of
shares, recapitalization,merger,consolidation, exchange of shares, spin-off,
spin-out or other distribution of assets to shareholders, or similar event, the
Committee may adjust proportionally (i) the Common Shares (1) reserved under the
Plan, (2) available for ISOs and (3) covered by outstanding Awards denominated
in stock or units of stock; (ii) the stock prices related to outstanding Awards;
and (iii) the appropriate Fair Market Value and other price determinations for
such Awards. In the event of any other change affecting the Common Shares or any
distribution (other than normal cash dividends) to holders of capital stock,
such adjustments as may be deemed equitable by the Committee, shall be made to
give proper effect to such event. In the event of a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation, the Committee shall be authorized to issue or assume stock options,
whether or not in a transaction to which Section 425(a) of the Code applies, by
means of substitution of new options for previously issued options or an
assumption of previously issued options.
(b) The Board may, in its sole discretion, based on such factors as the
Board or the Award Agreement may deem appropriate, waive in whole or in part,
any remaining restrictions or vesting requirements in connection with any Award
hereunder.
8
<PAGE> 9
16. CHANGE IN CONTROL
(a) In the event of a Change in Control (as defined below) of the
Company, and except as the Board may expressly provide otherwise, (i) all Stock
Options or Stock Appreciation Rights then outstanding shall become fully
exercisable as of the date of the Change in Control, whether or not then
exercisable, (ii) all restrictions and conditions of all Stock Awards then
outstanding shall be deemed satisfied as of the date of the Change in Control,
and (iii) all Cash Awards shall be deemed to have been fully earned as of the
date of the Change in Control.
(b) A "Change in Control" of the Company shall have occurred when any
of the following events shall occur:
(i) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and immediately after such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of Voting Stock (as that term is hereafter
defined) of the Company immediately prior to such transaction;
(ii) The Company sells all or substantially all of its assets to any
other corporation or other legal person, less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such sale are held in the
aggregate by the holders of Voting Stock of the Company immediately
prior to such sale;
(iii) There is a report filed or required to be filed on Schedule 13D
on Schedule 14D-1 (or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), disclosing that any person (as the term "person"
is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)
has become the beneficial owner (as the term "beneficial owner, is
defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding securities
entitled to vote generally in the election of directors of the Company
("Voting Stock");
(iv) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) that a change in control of the Company has
or may have occurred or will or may occur in the future pursuant to any
then-existing contract or transaction; or
(v) If during any period of two consecutive years, individuals who at
the beginning of any such period constitute the Directors of the
Company cease for any reason to constitute at least a majority thereof,
provided, however, that for purposes of this clause (v), each Director
who is first elected, or first nominated for election by the Company's
stockholders by a vote of at least two-thirds of the Directors of the
Company (or a committee thereof) then still in office who
9
<PAGE> 10
were Directors of the Company at the beginning of any such period will
be deemed to have been a Director of the Company at the beginning of
such period.
Notwithstanding the foregoing provisions of Section 16(b)(iii) or (iv)
hereof, unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for purposes
of the Plan solely because (i) the Company, (ii) an entity in which the Company
directly or indirectly beneficially owns 50% or more of the voting securities or
interest, or (iii) any Company-sponsored employee stock ownership plan or any
other employee benefit plan of the Company, either files or becomes obligated to
file a report or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) under the Exchange Act, disclosing beneficial ownership
by it of shares of Voting Stock, whether in excess of 20% or otherwise, or
because the Company reports that a change in control of the Company has or may
have occurred or will or may occur in the future by reason of such beneficial
ownership.
17. NOTICE
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Chief Financial Officer or to the Chief
Executive Officer of the Company, and shall become effective when it is received
by the office of the Chief Financial Officer or the Chief Executive Officer.
18. UNFUNDED PLAN
Insofar as it provides for Awards of cash and Common Shares, the Plan
shall be unfunded. Although bookkeeping accounts may be established with respect
to Participants who are entitled to cash, Common Shares or rights thereto under
the Plan, any such accounts shall be used merely as a bookkeeping convenience.
The Company shall not be required to segregate any assets that may at any time
be represented by cash, Common Shares or rights thereto, nor shall the Plan be
construed as providing for such segregation, nor shall the Company nor the Board
nor the Committee be deemed to be a trustee of any cash, Common Shares or rights
thereto to be granted under the Plan. Any liability of the Company to any
Participant with respect to a grant of cash, Common Shares or rights thereto
under the Plan shall be based solely upon any contractual obligations that may
be created by the Plan and any Award Agreement; no such obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by the Plan.
19. GOVERNING LAW
The Plan and all determinations made and actions taken pursuant hereto,
to the extent not otherwise governed by the Code or the securities laws of the
United States, shall be governed by the law of the State of Ohio and construed
accordingly.
10
<PAGE> 11
20. RIGHTS OF EMPLOYEES
Nothing in the Plan shall interfere with or limit in any way the right
of the Company or any subsidiary to terminate any Participant's employment at
any time, nor confer upon any Participant any right to continued employment with
the Company or any subsidiary.
21. STATUS OF AWARDS
Awards hereunder shall not be deemed compensation for purposes of
computing benefits under any retirement plan of the Company and shall not affect
any benefits under any other benefit plan now or hereafter in effect under which
the availability or amount of benefits is related to the level of compensation.
22. EFFECTIVE AND TERMINATION DATES
The Plan shall become effective on the date it is approved by the
holders of a majority of the Common Shares then outstanding. The Plan shall
continue in effect until terminated by the Board pursuant to Section 11.
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.B
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 10(B)
<TEXT>
<PAGE> 1
EXHIBIT 10(b)
LIFE AND ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE
The Company maintains ongoing life insurance for its executive
officers, which coverage was revised effective November 1, 1997. The insurance
provides benefits equal to two and one-half times the officer's total
compensation (base salary plus the average of the most recent three years'
incentive awards) through individual flexible premium variable life insurance
policies, with the officer paying the economic value of the death benefits
provided at alternate term rates under such policies and the Company paying the
remainder of the premiums.
The Company maintains accidental death and dismemberment
insurance for its executive officers, which provides benefits equal to two and
one-half times the officer's annual base salary, but in no event more than
$250,000. The Company also provides its executive officers with travel accident
insurance in the amount of $500,000.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.C
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 10(C)
<TEXT>
<PAGE> 1
EXHIBIT 10(c)
LONG-TERM DISABILITY INSURANCE
The Company's long-term disability insurance plan provides for
long-term disability coverage to all Company employees who become eligible after
a one-year waiting period based on plan requirements. Under the plan, eligible
employees who become totally disabled as defined in the plan receive 60% of
monthly base earnings, subject to a maximum schedule amount of $5,000 per month,
without evidence of insurability. The Company's executive officers are covered
under the plan, subject to a maximum schedule amount of $18,000 per month.
Effective November 1, 1997, executive officers became covered by a supplemental
long-term disability program. Under this program, participants are provided with
additional disability insurance with respect to 60% of their total compensation
(base salary plus average of their most recent three years' incentive awards)
minus the basic benefit (60% of base salary), up to $3,000 per month, and are
charged for the cost of any supplemental insurance relating to incentive awards.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.D
<SEQUENCE>6
<DESCRIPTION>EXHIBIT 10(D)
<TEXT>
<PAGE> 1
EXHIBIT 10(d)
SCHEDULE
The Director and Officer Indemnification Agreements presently in effect for the
Company's directors and executive officers are identical in all material
respects. The Directors having executed such form of Agreement are:
W. G. Bares
R. D. Blackwell
W. E. Butler
J. C. Dannemiller
R. B. Every
R. R. Gifford
L. T. Hiltz
J. J. Kahl
J. M. Moore
J. S. Thornton
The Officers having executed such form of Agreement are (in addition to Mr.
Dannemiller):
M. O. Eisele - Vice President & Controller
J. T. Hopper - Vice President-Information Systems
F. A. Martins - Vice President-Sales & Field Operations
B. L. Purser - Vice President-Marketing & National Accounts
J. A. Ramras - Vice President-Logistics
R. C. Shaw - Vice President-Communications, Organizational
Learning & Quality Standards
R. C. Stinson - Vice President-Chief Administrative Officer,
General Counsel & Secretary
J. R. Whitten - Vice President-Chief Financial Officer & Treasurer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.E
<SEQUENCE>7
<DESCRIPTION>EXHIBIT 10(E)
<TEXT>
<PAGE> 1
EXHIBIT 10(e)
SCHEDULE
The Executive Severance Agreements ("Agreements") in effect
for the executive officers during the quarter ended December 31, 1997 were
substantially identical in all material respects. This revised schedule is
included pursuant to Instruction 2 of Item 601(a) of Regulation S-K for the
purpose of setting forth the material details in which the specific Agreements
differ from the form of Agreement filed as Exhibit 10(a) to Applied's
Registration Statement on Form S-4 dated July 22, 1997:
<TABLE>
<CAPTION>
"Base Compensation"
Multiple Pursuant
Name Title to Paragraph 3(b)
- ---- ----- -----------------
<S> <C> <C>
J. C. Dannemiller Chairman, Chief Executive Officer Three (3)
& President
M. O. Eisele Vice President & Controller Two (2)
J. T. Hopper Vice President-Information Systems Two (2)
F. A. Martins Vice President-Sales & Field Operations Two (2)
B. L. Purser Vice President-Marketing & National Accounts Two (2)
J. A. Ramras Vice President-Logistics Two (2)
R. C. Shaw Vice President-Communications, Two (2)
Organizational Learning &
Quality Standards
R. C. Stinson Vice President-Chief Administrative Officer, Two (2)
General Counsel & Secretary
J. R. Whitten Vice President-Chief Financial Officer & Treasurer Two (2)
</TABLE>
The continuation of employee benefit plans, programs and
arrangements set forth in Paragraph 4 was three (3) years for Mr. Dannemiller
and two (2) years for the other executive officers listed.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>8
<DESCRIPTION>EXHIBIT 11
<TEXT>
<PAGE> 1
EXHIBIT 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
Computation of Net Income Per Share
(Unaudited)
(Thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average Shares Outstanding
--------------------------
1. Average common shares
outstanding 21,604 18,496 21,130 18,494
2. Net additional shares
outstanding assuming stock
options exercised and
proceeds used to purchase
treasury stock 357 209 353 211
3. Net additional shares
outstanding for the effect of
Performance Accelerated Restriced
Stock (PARS) 55 47 51 47
--------- ---------- ---------- ----------
4. Adjusted average common
shares outstanding for
fully diluted computation 22,016 18,752 21,534 18,752
========= ========== ========== ==========
Net Income
----------
5. Net income as reported in
statements of consolidated
income $ 7,714 $ 6,003 $ 12,211 $ 11,408
========= ========== ========== ==========
Net Income Per Share
--------------------
6. Net income per average
common share outstanding -
basic (5/1) $ 0.36 $ 0.32 $ 0.58 $ 0.62
========= ========== ========== ==========
7. Net income per common
share - diluted
(5/3) $ 0.35 $ 0.32 $ 0.57 $ 0.61
========= ========== ========== ==========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>9
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 14,284
<SECURITIES> 0
<RECEIVABLES> 178,400
<ALLOWANCES> 3,714
<INVENTORY> 189,469
<CURRENT-ASSETS> 15,269
<PP&E> 165,800
<DEPRECIATION> 62,854
<TOTAL-ASSETS> 566,691
<CURRENT-LIABILITIES> 219,249
<BONDS> 45,714
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 10,000
<OTHER-SE> 264,407
<TOTAL-LIABILITY-AND-EQUITY> 566,691
<SALES> 713,349
<TOTAL-REVENUES> 713,349
<CGS> 529,999
<TOTAL-COSTS> 529,999
<OTHER-EXPENSES> 159,278
<LOSS-PROVISION> 989
<INTEREST-EXPENSE> 2,165
<INCOME-PRETAX> 12,099
<INCOME-TAX> 4,385
<INCOME-CONTINUING> 7,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,714
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| AMAT | https://www.sec.gov/Archives/edgar/data/6951/0000891618-98-001076.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000891618-98-001076.txt : 19980312
<SEC-HEADER>0000891618-98-001076.hdr.sgml : 19980312
ACCESSION NUMBER: 0000891618-98-001076
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980125
FILED AS OF DATE: 19980311
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED MATERIALS INC /DE
CENTRAL INDEX KEY: 0000006951
STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559]
IRS NUMBER: 941655526
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1026
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-06920
FILM NUMBER: 98563815
BUSINESS ADDRESS:
STREET 1: 3050 BOWERS AVE
CITY: SANTA CLARA
STATE: CA
ZIP: 95054
BUSINESS PHONE: 4087275555
FORMER COMPANY:
FORMER CONFORMED NAME: APPLIED MATERIALS TECHNOLOGY INC
DATE OF NAME CHANGE: 19730319
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED JANUARY 25, 1998
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 25, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-6920
APPLIED MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1655526
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054-3299
Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (408) 727-5555
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Number of shares outstanding of the issuer's common stock as of January
25, 1998: 366,266,123
- --------------------------------------------------------------------------------
<PAGE> 2
PART I. FINANCIAL INFORMATION
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
Jan. 25, Jan. 26,
(In thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,307,685 $ 835,776
Cost of products sold 678,244 464,120
---------- ----------
Gross margin 629,441 371,656
Operating expenses:
Research, development and engineering 182,329 116,492
Marketing and selling 86,389 66,271
General and administrative 65,768 59,608
Acquired in-process research and development 32,227 59,500
---------- ----------
Income from operations 262,728 69,785
Income from litigation settlement 80,000 --
Interest expense 11,864 5,800
Interest income 21,279 13,557
---------- ----------
Income from consolidated companies before taxes 352,143 77,542
Provision for income taxes 123,250 47,965
---------- ----------
Income from consolidated companies 228,893 29,577
Equity in net income/(loss) of joint venture -- --
---------- ----------
Net income $ 228,893 $ 29,577
---------- ----------
Earnings per share: *
Basic $ 0.62 $ 0.08
Diluted $ 0.60 $ 0.08
Weighted average number of shares: *
Basic 366,894 361,408
Diluted 379,101 370,864
- --------------------------------------------------------------------------------------
</TABLE>
* Amounts for the quarter ended January 26, 1997 have been retroactively
restated to reflect a two-for-one stock split in the form of a 100 percent
stock dividend, effective October 13, 1997.
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 3
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Jan. 25, Oct. 26,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 328,313 $ 448,043
Short-term investments 1,070,513 1,094,912
Accounts receivable, net 1,158,629 1,110,885
Inventories 745,426 686,451
Deferred income taxes 324,183 324,568
Other current assets 179,754 105,498
---------- ----------
Total current assets 3,806,818 3,770,357
Property, plant and equipment, net 1,151,327 1,066,053
Other assets 228,429 234,356
---------- ----------
Total assets $5,186,574 $5,070,766
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 52,568 $ 55,943
Current portion of long-term debt 9,267 10,563
Accounts payable and accrued expenses 1,085,261 1,157,808
Income taxes payable 209,142 177,774
---------- ----------
Total current liabilities 1,356,238 1,402,088
Long-term debt 618,343 623,090
Deferred income taxes and other liabilities 107,909 103,417
---------- ----------
Total liabilities 2,082,490 2,128,595
---------- ----------
Stockholders' equity:
Common stock 3,663 3,672
Additional paid-in capital 792,580 850,902
Retained earnings 2,326,931 2,098,038
Cumulative translation adjustments (19,090) (10,441)
---------- ----------
Total stockholders' equity 3,104,084 2,942,171
---------- ----------
Total liabilities and stockholders' equity $5,186,574 $5,070,766
- --------------------------------------------------------------------------------------
</TABLE>
* Amounts as of January 25, 1998 are unaudited. Amounts as of October 26, 1997
are from the October 26, 1997 audited financial statements.
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Three Months Ended
Jan. 25, Jan. 26,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 228,893 $ 29,577
Adjustments required to reconcile
net income to cash provided by operations:
Acquired in-process research and development expense 32,227 59,500
Depreciation and amortization 66,889 48,507
Equity in net income/(loss) of joint venture -- --
Deferred income taxes (383) 4,192
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable (77,545) 69,393
Inventories (65,223) 58,157
Other current assets (74,662) 10,321
Other assets (1,572) (141)
Accounts payable and accrued expenses (47,182) 9,615
Income taxes payable 33,332 90,438
Other liabilities 8,437 6,509
----------- -----------
Cash provided by operations 103,211 386,068
----------- -----------
Cash flows from investing activities:
Capital expenditures, net of retirements (152,636) (30,665)
Cash paid for licensed technology (32,227) --
Cash paid for acquisitions, net of cash acquired -- (246,365)
Proceeds from sales of short-term investments 252,429 83,976
Purchases of short-term investments (228,030) (147,313)
----------- -----------
Cash used for investing (160,464) (340,367)
----------- -----------
Cash flows from financing activities:
Short-term debt activity, net (1,943) (44,508)
Long-term debt activity, net (1,399) (53,819)
Common stock transactions, net (58,331) 18,014
----------- -----------
Cash used for financing (61,673) (80,313)
----------- -----------
Effect of exchange rate changes on cash (804) 82
----------- -----------
Decrease in cash and cash equivalents (119,730) (34,530)
Cash and cash equivalents - beginning of period 448,043 403,888
----------- -----------
Cash and cash equivalents - end of period $ 328,313 $ 369,358
- --------------------------------------------------------------------------------------------------------------
</TABLE>
For the three months ended January 25, 1998, cash payments for interest and
income taxes were $870 and $86,300, respectively. For the three months ended
January 26, 1997, cash payments for interest were $1,841 and net income tax
refunds were $40,734.
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JANUARY 25, 1998
1) Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements of Applied Materials, Inc. (the Company) included
herein have been prepared on a consistent basis with the October 26, 1997
audited consolidated financial statements and include all material
adjustments, consisting of normal recurring adjustments, necessary to
fairly present the information set forth therein. These interim financial
statements should be read in conjunction with the October 26, 1997 audited
consolidated financial statements and notes thereto. The Company's results
of operations for the first fiscal quarter of 1998 are not necessarily
indicative of future operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ materially from those
estimates.
2) Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share," in the first fiscal quarter of 1998.
Under the provisions of SFAS 128, primary earnings per share has been
replaced by basic earnings per share, which does not include the dilutive
effect of stock options in its calculation. In addition, fully diluted
earnings per share has been replaced by diluted earnings per share. All
prior period earnings per share amounts have been restated to reflect the
requirements of SFAS 128. Basic earnings per share has been computed using
the weighted average number of common shares outstanding during the
period. Diluted earnings per share has been computed using the weighted
average number of common shares and equivalents (representing the dilutive
effect of stock options) outstanding during the period. Net income has not
been adjusted for any period presented for purposes of computing basic and
diluted earnings per share.
For purposes of computing diluted earnings per share, weighted average
common share equivalents do not include stock options with an exercise
price that exceeds the average fair market value of the Company's common
stock for the period. For the first fiscal quarter of 1998, options to
purchase approximately 1,999,000 shares of common stock at an average
price of $41.14 were excluded from the computation.
5
<PAGE> 6
3) Inventories
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis. The components of
inventories are as follows (in thousands):
<TABLE>
<CAPTION>
January 25, 1998 October 26, 1997
---------------- ----------------
<S> <C> <C>
Customer service spares $213,488 $207,938
Systems raw materials 135,303 106,406
Work-in-process 282,072 256,737
Finished goods 114,563 115,370
-------- --------
$745,426 $686,451
======== ========
</TABLE>
4) Other Assets
The components of other assets are as follows (in thousands):
<TABLE>
<CAPTION>
January 25, 1998 October 26, 1997
---------------- ----------------
<S> <C> <C>
Purchased technology, net $179,646 $186,127
Goodwill, net 12,969 13,438
Other 35,814 34,791
-------- --------
$228,429 $234,356
======== ========
</TABLE>
Purchased technology and goodwill are presented at cost, net of
accumulated amortization, and are being amortized using the straight-line
method over their estimated useful lives of eight years. The Company
periodically analyzes these assets to determine whether an impairment in
carrying value has occurred.
5) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as follows (in
thousands):
<TABLE>
<CAPTION>
January 25, 1998 October 26, 1997
---------------- ----------------
<S> <C> <C>
Accounts payable $ 321,479 $ 347,584
Compensation and benefits 161,520 219,384
Installation and warranty 232,952 216,962
Other 369,310 373,878
---------- ----------
$1,085,261 $1,157,808
========== ==========
</TABLE>
6) Licensed Technology and Acquisitions
During the first fiscal quarter of 1998, the Company entered into an
agreement with Trikon Technologies, Inc. for a non-exclusive, worldwide,
perpetual license of MORI(TM) plasma source and Forcefill(TM) deposition
technology. The Company recognized pre-tax acquired in-process research
and development expense of approximately $32.2 million, including
transaction costs, in connection with this transaction.
During the first fiscal quarter of 1997, the Company acquired Opal, Inc.
and Orbot Instruments, Ltd. in separate transactions for approximately
$293 million, consisting primarily of cash. In connection with these
acquisitions, the Company recorded a non-tax
6
<PAGE> 7
deductible charge of $59.5 million for acquired in-process research and
development. The Company also recorded approximately $219 million of net
intangible assets and $46 million of deferred tax liabilities. With the
exception of these items, the Company's results of operations and
financial condition for the first fiscal quarter of 1997 were not
materially impacted by these acquisitions.
7) Litigation Settlement
During the first fiscal quarter of 1998, the Company settled all
outstanding litigation with ASM International N.V. (ASM) and recorded $80
million of pre-tax non-operating income. As a result of this settlement,
ASM is also required to pay ongoing royalties for certain system shipments
subsequent to the date of the settlement. The Company does not expect
ongoing royalties to be material.
7
<PAGE> 8
APPLIED MATERIALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
Applied Materials, Inc. (the Company) received new orders of $1,290 million
for the first fiscal quarter of 1998, versus $1,374 million for the fourth
fiscal quarter of 1997. The decrease in new orders is primarily attributable
to softening demand for the Company's equipment from DRAM manufacturers
located in Asia. The continued weakness in DRAM prices, driven by excess
capacity, and recent financing difficulties in Korea and Japan, are causing
many of the Company's DRAM customers to defer their capital spending. New
orders by region were as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
Jan. 25, 1998 Oct. 26, 1997
($) (%) ($) (%)
----- ----- ----- -----
<S> <C> <C> <C> <C>
North America 402 31 403 29
Europe 237 19 217 16
Japan 169 13 242 18
Korea 82 6 101 7
Taiwan 369 29 317 23
Asia-Pacific 31 2 94 7
----- ---- ----- ----
Total 1,290 100 1,374 100
===== ==== ===== ====
</TABLE>
New order levels for Taiwan reflected continued investments by foundry
companies. New orders for North America and Europe remained strong as a
result of logic and microprocessor manufacturers' equipment requirements for
their 0.25 micron applications. The Company's backlog at January 25, 1998 was
$1,636 million, versus $1,722 million at October 26, 1997.
Although the Company's results of operations for the first fiscal quarter of
1998 were not affected by the factors discussed above, there is a high degree
of uncertainty regarding the near-term economic health of Asian countries,
particularly Korea and Japan, and the related effect on the demand for
semiconductor capital equipment. For these and other reasons, the Company's
results of operations for the first fiscal quarter ended January 25, 1998 are
not necessarily indicative of future operating results.
8
<PAGE> 9
The Company achieved record net sales of $1,308 million for the first fiscal
quarter of 1998, an increase of 56.5 percent from $836 million for the
corresponding period of fiscal 1997. During the corresponding period of
fiscal 1997, the Company's results of operations were negatively affected by
a downturn in the semiconductor industry that began in 1996. Industry
conditions improved during the latter half of the Company's fiscal 1997, and
the Company achieved record new orders for the fourth fiscal quarter of 1997,
driven by strengthening demand for leading-edge capability from logic and
microprocessor device manufacturers, foundry capacity investments by
customers located primarily in Taiwan, and selected strategic investments in
0.25 micron technology by DRAM manufacturers. As a result of the strong new
orders level for the second half of fiscal 1997, the Company was able to
achieve record net sales for the first fiscal quarter of 1998. Net sales by
region were as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
Jan. 25, 1998 Jan. 26, 1997
($) (%) ($) (%)
----- ----- ----- -----
<S> <C> <C> <C> <C>
North America 471 36 293 35
Europe 196 15 201 24
Japan 222 17 125 15
Korea 52 4 50 6
Taiwan 288 22 109 13
Asia-Pacific 79 6 58 7
----- ---- ----- ----
Total 1,308 100 836 100
===== ==== ===== ====
</TABLE>
The Company's gross margin for the first fiscal quarter of 1998 was 48.1
percent, compared to 44.5 percent for the corresponding quarter of fiscal
1997. During fiscal 1997, the Company focused on improving manufacturing
efficiencies, reducing cycle times and lowering material costs. These
continuing efforts, combined with increased business volume, resulted in a
higher gross margin for the first fiscal quarter of 1998.
During the first fiscal quarter of 1998, the Company entered into an
agreement with Trikon Technologies, Inc. for a non-exclusive, worldwide,
perpetual license of MORI(TM) plasma source and Forcefill(TM) deposition
technology. In connection with this transaction, the Company recognized
approximately $32.2 million of acquired in-process research and development
expense, including transaction costs, in the first fiscal quarter of 1998.
During the first fiscal quarter of 1997, the Company acquired two companies,
Opal, Inc. and Orbot Instruments, Ltd. (Orbot), in separate transactions and
recognized $59.5 million of acquired in-process research and development
expense. With the exception of this charge, these acquisitions did not have a
9
<PAGE> 10
material effect on the Company's results of operations for the first fiscal
quarter of 1998 or 1997.
Excluding acquired in-process research and development expense, operating
expenses as a percentage of net sales for the three months ended January 25,
1998 and January 26, 1997 were 25.6 percent and 29.0 percent, respectively.
The decrease is primarily attributable to increased business volume.
Research, development and engineering expense as a percentage of net sales
for the first fiscal quarter of 1998 remained unchanged at 14 percent when
compared to the first fiscal quarter of 1997, primarily due to increased
investment in the development of 300mm products and systems for 0.25 micron
and below device production.
Significant operations of the Company are conducted in foreign currencies,
primarily Japanese yen. Forward exchange and currency option contracts are
purchased to hedge certain existing firm commitments and foreign currency
denominated transactions expected to occur during the next year. Gains and
losses on these contracts are recognized in income when the related
transactions being hedged are recognized. Because the impact of movements in
currency exchange rates on forward exchange and currency option contracts
generally offsets the related impact on the underlying items being hedged,
these financial instruments are not expected to subject the Company to risks
that would otherwise result from changes in currency exchange rates. Exchange
gains and losses did not have a significant effect on the Company's results
of operations for the three months ended January 25, 1998 or January 26,
1997.
During the first fiscal quarter of 1998, the Company settled all outstanding
litigation with ASM International N.V. (ASM) and recorded $80 million of
pre-tax non-operating income. As a result of this settlement, ASM is also
required to pay ongoing royalties for certain system shipments subsequent to
the date of the settlement. The Company does not expect ongoing royalties to
be material.
Interest expense for the three months ended January 25, 1998 and January 26,
1997 was $11.9 million and $5.8 million, respectively. This increase is
primarily due to interest expense associated with $400 million of debt issued
by the Company during the fourth fiscal quarter of 1997.
Interest income for the three months ended January 25, 1998 and January 26,
1997 was $21.3 million and $13.6 million, respectively. This increase
resulted from higher average cash and investment balances.
10
<PAGE> 11
The Company's effective income tax rate for the first fiscal quarter of 1998
was 35 percent. The Company's effective income tax rate for the first fiscal
quarter of 1997 was higher than the expected rate of 35 percent, due to the
non-deductible nature of the $59.5 million charge for acquired in-process
research and development. Management anticipates that the Company's effective
income tax rate will be 35 percent for the remainder of fiscal 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at January 25, 1998, with a
ratio of current assets to current liabilities of 2.8:1, compared to 2.7:1 at
October 26, 1997. The Company ended the quarter with cash, cash equivalents
and short-term investments of $1,399 million.
The Company generated approximately $103 million of cash from operations in
the first fiscal quarter of 1998. Sources of cash from operations included
net income, plus non-cash charges for depreciation, amortization and acquired
in-process research and development expense, of $328 million and an increase
in income taxes payable of $33 million. These sources of cash were partially
offset by increases in accounts receivable, inventories and other current
assets of $78 million, $65 million and $75 million, respectively, and a
decrease in accounts payable and accrued expenses of $47 million.
Cash used for investing activities in the first fiscal quarter of 1998 of
approximately $160 million was primarily for purchases of property, plant and
equipment ($153 million, net) and licensed technology ($32 million), which
were partially offset by $24 million of proceeds from net sales of short-term
investments.
Cash used for financing activities in the first fiscal quarter of 1998 of
approximately $62 million consisted primarily of stock repurchases of $80
million, which were partially offset by $21 million of proceeds from the
exercise of stock options.
At January 25, 1998, the Company's principal sources of liquidity consisted
of $1,399 million of cash, cash equivalents and short-term investments and
$302 million of available credit facilities. The Company may from time to
time raise additional cash in the debt and equity markets to better balance
its capital structure or support long-term business growth. The Company's
liquidity is affected by many factors, some of which are based on the normal
on-going operations of the business, and others of which relate to the
uncertainties of the industry and global economies. Although the Company's
cash requirements will fluctuate based on the timing and extent of these
factors, management believes that cash generated from operations, together
with the liquidity provided by existing cash balances and borrowing
capability, will be sufficient to satisfy the Company's liquidity
requirements for the next twelve months.
11
<PAGE> 12
Capital expenditures are estimated to be approximately $650 million in fiscal
1998, consisting primarily of investments in manufacturing and research
laboratory facilities for advanced 300mm technology.
The Company is authorized to repurchase shares of its common stock in the
open market in amounts intended to reduce the dilution resulting from its
stock-based employee benefit and incentive plans. This authorization is
effective until the March 2001 Annual Meeting of Stockholders. The Company
repurchased 2,653,500 shares of its common stock during the first fiscal
quarter of 1998, for a total cash outlay of approximately $80 million.
TRENDS, RISKS AND UNCERTAINTIES
When used in this Management's Discussion and Analysis, the words
"anticipate," "estimate," "expect" and similar expressions are intended to
identify forward-looking statements. These statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected. These risk and uncertainties include, but are not limited
to, those discussed below.
The semiconductor industry has historically been cyclical and subject to
sudden and sharp changes in supply and demand. The timing, length and
severity of these cycles are difficult to predict. During periods of reduced
and declining demand, the Company must be able to quickly align its cost
structure with the expected size of its future operating levels, and to
motivate and retain key employees. During periods of rapid growth, the
Company must be able to acquire and/or develop sufficient manufacturing
capacity to meet customer demand and hire and assimilate an adequate number
of qualified people.
The Company's backlog was approximately $1,636 million as of January 25,
1998, compared to $1,722 million as of October 26, 1997. The Company
schedules production of its systems based upon order backlog and customer
commitments. Backlog includes only orders for which written authorizations
have been accepted and shipment dates within 12 months have been assigned.
Due to possible customer changes in delivery schedules and cancellation of
orders, the Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. A reduction of backlog
during any particular period could adversely affect the Company's future
results of operations.
The Company sells systems and provides services to customers located
throughout the world. Managing global operations and sites located throughout
the world presents challenges associated with cultural diversities and
organizational alignment. Moreover, each region in the
12
<PAGE> 13
global semiconductor equipment market exhibits unique characteristics that
can cause capital equipment investment patterns to vary from period to
period. Although international markets provide the Company with significant
growth opportunities, periodic economic downturns, trade balance issues,
political instability and fluctuations in interest and foreign currency
exchange rates are all risks which could affect global product and service
demand. The Company actively manages its exposure to changes in foreign
currency exchange rates, but there can be no assurance that future changes in
foreign currency exchange rates will not have a material effect on its
results of operations or financial condition.
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. The Company's future success is
therefore dependent on its ability to develop new products (including those
for 300mm technology and 0.25 micron and below production), to qualify these
new products with its customers, to successfully introduce these products to
the marketplace on a timely basis, to commence production to meet customer
demands and to develop new markets in the semiconductor industry for its
products and services. The successful introduction of new technology and
products is increasingly complex. If the Company is unable, for whatever
reason, to develop and introduce new products in a timely manner in response
to changing market conditions or customer requirements, its results of
operations could be adversely impacted.
Many Asian countries are currently experiencing banking and currency
difficulties that could lead to economic recession in those countries.
Specifically, the decline in value of the Korean currency, together with
difficulties in obtaining credit, has resulted in a decline in the purchasing
power of the Company's Korean customers. This has resulted in some
cancellations or delays of orders for the Company's products from Korean
customers and may result in additional cancellations or delays in the future.
In addition, if Japan's economy remains stagnant or weakens further, other
economies could be adversely affected and capital equipment investments by
Japanese customers could decrease. Net sales to customers located in Korea
and Japan for the first fiscal quarter of 1998 were 4 percent and 17 percent,
respectively, of the Company's total net sales.
The DRAM market continues to be characterized by excess capacity and low
device prices. Despite this, the Company's new order levels for the past
several fiscal quarters have included a significant amount of strategic
investments by DRAM manufacturers. If DRAM customers decrease their strategic
investments in manufacturing equipment, the Company's results of operations
could be adversely affected.
The Company completed acquisitions of Opal and Orbot in the first fiscal
quarter of 1997. These acquisitions marked the Company's entrance into the
metrology and inspection
13
<PAGE> 14
semiconductor manufacturing equipment markets. To date, the Company's results
of operations have not been materially affected as a result of the
acquisitions, except for a one-time charge for acquired in-process research
and development. However, the Company expects the acquired companies to
contribute significantly to its results of operations in the future. If the
Company is not able to successfully integrate the operations of these newly
acquired companies or expand their customer bases, the Company's expectations
for its future results of operations may not be met. Also, to the extent that
there is an impairment, for whatever reason, in the value of intangible
assets recorded in connection with the acquisitions, the Company's results of
operations could be adversely affected.
The Company has commenced, for its information systems, a year 2000 date
conversion project to address all necessary changes, testing and
implementation. The "Year 2000 Issue" creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with
whom the Company deals on financial and operational transactions worldwide.
At present, the Company's internal systems, the ability of the Company's
suppliers to address the "Year 2000 Issue", and the impact of the "Year 2000
Issue" on the programs which operate the Company's products have been
identified as the primary areas of risk to the Company from the "Year 2000
Issue". Management continues to assess Year 2000 compliance issues.
Significant difficulties with, or failure of, the Company's and/or third
parties' computer systems could have a material effect on the Company's
ability to conduct its business.
The Company is currently involved in litigation regarding patents and other
intellectual property rights and could become involved in additional
litigation in the future. In the normal course of business, the Company from
time to time receives and makes inquiries with regard to possible patent
infringement. There can be no assurance about the outcome of current or
future litigation or patent infringement inquiries.
14
<PAGE> 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
During the first fiscal quarter of 1998, the Company resolved all outstanding
legal disputes with Advanced Semiconductor Materials International N.V.,
Epsilon Technology Inc. (doing business as ASM Epitaxy) and Advanced
Semiconductor Materials America Inc. (collectively ASM). The settlement
included ASM's payment of $80 million, a cross license of certain patented
technologies held by Applied Materials and ASM, certain covenants not to sue
for potential patent infringement of existing commercially available systems
and processes offered by each company and a dismissal with prejudice of all
pending litigation between the companies. The settlement also included
ongoing royalties payable by ASM on shipments of systems for epitaxial and
plasma TEOS technologies. ASM's payment of $80 million was in the form of a
convertible note, against which the Company received a payment of $15 million
in November 1997.
In April 1997, the Company filed suit against AST Electronik GmbH and AST
Electronik USA, Inc. (collectively AST), and AG Associates, Inc. (AG) in the
United States District Court for the Northern District of California (case
no. C-97-20375RWM), alleging infringement of several of the Company's patents
relating to rapid thermal processing. In October 1997, AST and AG each
brought counterclaims alleging that the Company infringes patents concerning
related technology. Discovery is commencing and trial has been set for March
1999.
As a result of the Company's acquisition of Orbot, the Company is involved in
a lawsuit captioned KLA Instruments Corporation (KLA) v. Orbot (case no.
C93-20886-JW) in the United States District Court for the Northern District
of California. KLA alleges that the Company infringes one patent regarding
equipment for the inspection of masks and reticles, and KLA seeks an
injunction, damages and such other relief as the Court may find appropriate.
There has been discovery, but no trial date has been set.
On June 13, 1997, the Company filed a patent infringement lawsuit against
Varian Associates, Inc. captioned Applied Materials, Inc. v. Varian
Associates, Inc. (Varian) (case no. C-97-20523-RMW), alleging infringement of
several of the Company's patents concerning physical vapor deposition (PVD)
technology. The complaint was later amended on July 7, 1997 to include
Novellus as a defendant as a result of Novellus' acquisition of the Varian
thin film PVD business unit. The Company seeks damages for past infringement,
a permanent injunction, treble damages for willful infringement, pre-judgment
interest and attorneys fees. Varian answered the complaint by denying all
allegations, counterclaiming for declaratory
15
<PAGE> 16
judgment of invalidity and unenforceability and alleging conduct by Applied
Materials in violation of antitrust laws. On June 23, 1997, Novellus filed a
separate patent infringement lawsuit against the Company captioned Novellus
Systems, Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI), alleging
infringement by the Company of three patents concerning PVD technology which
were formerly owned by Varian. On July 8, 1997, Varian filed a separate
lawsuit against the Company captioned Varian Associates, Inc. v. Applied
Materials, Inc. (case no. C-97-20597-PVT), alleging a broad range of conduct
in violation of federal antitrust laws and state unfair competition and
business practice laws. Discovery has commenced in these actions. No trial
dates have been set. Management believes that it has meritorious claims and
defenses and intends to vigorously pursue these matters.
The Company is subject to various other legal proceedings and claims,
asserted and unasserted, which arise in the ordinary course of business. Any
such claims, whether with or without merit, could be time-consuming and
expensive to defend and could divert management's attention and resources.
The outcome of these claims and their effect on the Company's results of
operations cannot be predicted with certainty.
16
<PAGE> 17
Item 5. Other Information
The ratio of earnings to fixed charges for the first fiscal quarter ended
January 25, 1998 and January 26, 1997, and for each of the last five fiscal
years, was as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------ Fiscal Year
Jan. 25, Jan. 26, -----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
20.10x 7.56x 18.96x 20.14x 21.25x 13.37x 7.61x
====== ===== ====== ====== ====== ====== =====
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:
27.0 Financial Data Schedule: filed electronically
b) No report on Form 8-K was filed during the first fiscal
quarter of 1998.
17
<PAGE> 18
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.
APPLIED MATERIALS, INC.
March 11, 1998 By: \s\ Joseph R. Bronson
--------------------------------
Joseph R. Bronson
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
By: \s\ Michael K. O'Farrell
--------------------------------
Michael K. O'Farrell
Vice President and
Corporate Controller
(Principal Accounting Officer)
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JANUARY 25, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-END> JAN-25-1998
<CASH> 328,313
<SECURITIES> 1,070,513
<RECEIVABLES> 1,164,148
<ALLOWANCES> 5,519
<INVENTORY> 745,426
<CURRENT-ASSETS> 3,806,818
<PP&E> 1,712,640
<DEPRECIATION> 561,313
<TOTAL-ASSETS> 5,186,574
<CURRENT-LIABILITIES> 1,356,238
<BONDS> 618,343
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 3,663
<OTHER-SE> 3,100,421
<TOTAL-LIABILITY-AND-EQUITY> 5,186,574
<SALES> 1,307,685
<TOTAL-REVENUES> 1,307,685
<CGS> 678,244
<TOTAL-COSTS> 678,244
<OTHER-EXPENSES> 182,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,864
<INCOME-PRETAX> 352,143
<INCOME-TAX> 123,250
<INCOME-CONTINUING> 228,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 228,893
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.60
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| ANDW | https://www.sec.gov/Archives/edgar/data/317093/0000317093-98-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000317093-98-000003.txt : 19980209
<SEC-HEADER>0000317093-98-000003.hdr.sgml : 19980209
ACCESSION NUMBER: 0000317093-98-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980206
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ANDREW CORP
CENTRAL INDEX KEY: 0000317093
STANDARD INDUSTRIAL CLASSIFICATION: DRAWING AND INSULATING NONFERROUS WIRE [3357]
IRS NUMBER: 362092797
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-09514
FILM NUMBER: 98524446
BUSINESS ADDRESS:
STREET 1: 10500 W 153RD ST
CITY: ORLAND PARK
STATE: IL
ZIP: 60462
BUSINESS PHONE: 7083493300
MAIL ADDRESS:
STREET 1: 10500 WEST 153RD ST
CITY: ORLANDO PARK
STATE: IL
ZIP: 60462
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10Q (12/31/97)
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark-One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 0-9514
ANDREW CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2092797
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
10500 W. 153rd Street, Orland Park, Illinois 60462
(Address of principal executive offices and zip code)
(708) 349-3300
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value--88,484,167 shares as of February 2, 1997
<PAGE>
INDEX
ANDREW CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--December 31, 1997 and September
30, 1997.
Consolidated statements of income--Three months ended December
31, 1997 and 1996.
Consolidated statements of cash flows--Three months ended
December 31, 1997 and 1996.
Notes to consolidated financial statements--December 31, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
10.(A)C(I) Executive Severance Benefit Package with Robert J. Hudzik
10.(A)C(II) Executive Severance Benefit Package with Debra B. Huttenburg
27.1 Financial Data Schedule - December 31, 1997
27.2 Restated Financial Data Schedule - December 31, 1996
SIGNATURES
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
December 31 September 30
1997 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 93,748 $ 93,823
Accounts receivable, less allowances
(Dec. $3,487; Sep. $2,754) 179,685 185,752
Inventories
Finished products 50,109 57,458
Materials and work in process 111,765 109,432
------------- -------------
161,874 166,890
Assets related to discontinued
operations, less allowances 3,968 4,811
Miscellaneous current assets 9,241 8,538
------------- -------------
TOTAL CURRENT ASSETS 448,516 459,814
------------- -------------
OTHER ASSETS
Cost in excess of net assets of
businesses acquired, less
accumulated amortization
(Dec. $9,129; Sep. $8,742) 24,339 24,726
Investments in and advances to affiliates 44,131 55,628
Investments and other assets 14,637 13,396
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 15,160 11,646
Buildings 68,860 72,884
Equipment 279,365 275,015
Allowances for depreciation (224,088) (221,955)
------------- -------------
139,297 137,590
------------- -------------
TOTAL ASSETS $ 670,920 $ 691,154
============= =============
<FN>
The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
<CAPTION>
December 31 September 30
1997 1997
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 10,528 $ 14,319
Accounts payable 30,226 37,237
Accrued expenses and other liabilities 22,699 18,978
Compensation and related expenses 17,389 29,312
Income taxes 19,167 16,430
Restructuring reserve 3,799 2,036
Liabilities related to discontinued operations 3,220 3,637
Current portion of long-term debt 5,065 5,144
------------- -------------
TOTAL CURRENT LIABILITIES 112,093 127,093
------------- -------------
DEFERRED LIABILITIES 10,608 10,239
LONG-TERM DEBT, less current portion 41,881 35,693
MINORITY INTEREST 6,020 9,006
STOCKHOLDERS' EQUITY
Common stock (par value, $.01 a share:
400,000,000 shares authorized; 102,718,210
shares issued, including treasury) 1,027 1,027
Additional paid-in capital 51,849 51,810
Foreign currency translation (9,589) (4,532)
Retained earnings 575,590 547,256
Treasury stock, at cost (14,319,337 shares
in Dec.; 13,060,876 shares in Sep.) (118,559) (86,438)
------------- -------------
500,318 509,123
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 670,920 $ 691,154
============= =============
<FN>
The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended
December 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
SALES $ 231,136 $ 225,715
Cost of products sold 141,539 138,229
------------ ------------
GROSS PROFIT 89,597 87,486
OPERATING EXPENSES
Research and development 7,071 8,953
Sales and administrative 38,437 38,712
------------ ------------
45,508 47,665
------------ ------------
OPERATING INCOME 44,089 39,821
OTHER
Interest expense 1,614 1,259
Interest income (1,073) (694)
Other expense (income) 616 (77)
------------ ------------
1,157 488
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 42,932 39,333
Income taxes 14,598 13,766
------------ ------------
INCOME FROM CONTINUING OPERATIONS 28,334 25,567
DISCONTINUED OPERATIONS
Loss from operations of Network Products
Business, net of applicable tax benefit 0 1,227
------------ ------------
NET INCOME $ 28,334 $ 24,340
============ ============
BASIC AND DILUTED EARNINGS PER SHARE
Continuing Operations $ .32 $ .28
============ ============
Net Income $ .32 $ .27
============ ============
AVERAGE SHARES OUTSTANDING
Basic 89,187 90,723
============ ============
Diluted 89,719 91,570
============ ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars In thousands)
<CAPTION>
Three Months Ended
December 31
-----------------------------
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net Income $ 28,334 $ 24,340
ADJUSTMENTS TO NET INCOME
Restructuring costs (232) 0
Depreciation and amortization 8,642 9,304
Decrease in accounts receivable 4,723 11,692
Decrease (Increase) in inventories 5,194 (820)
Increase in miscellaneous current and
other assets (1,916) (2,501)
Increase in receivables from affiliates 0 (145)
Decrease in accounts payable and
other liabilities (8,888) (1,788)
Other 12 95
------------- ------------
NET CASH FROM OPERATIONS 35,869 40,177
INVESTING ACTIVITIES
Capital expenditures (12,505) (11,519)
Acquisition of businesses, net of cash acquired (3,000) 0
Investment in and advances to affiliates 11,497 (1,434)
Proceeds from sale of property, plant
and equipment 92 118
------------- ------------
NET CASH USED FOR INVESTING ACTIVITIES (3,916) (12,835)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 6,131 0
Short-term borrowings (payments) - net (3,546) 2,807
Purchases of treasury stock (32,463) 0
Stock purchase and option plans 380 2,714
------------- ------------
NET CASH (USED FOR) FROM FINANCING ACTIVITIES (29,498) 5,521
Effect of exchange rate changes on cash (2,530) 623
------------- ------------
TOTAL (DECREASE) INCREASE FOR THE PERIOD (75) 33,486
Cash and Equivalents at Beginning of Period 93,823 31,295
------------- ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 93,748 $ 64,781
============= ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
ANDREW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended December 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
company's annual report on Form 10-K for the year ended September 30, 1997.
NOTE B--EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaces the computation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share, excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The company adopted
Statement 128 in the first quarter of fiscal year 1998. All share and per share
amounts have been presented, and where necessary, restated to conform with the
requirements of Statement 128.
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
December 31
-------- -- --------
1997 1996
-------- --------
<S> <C> <C>
(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE
Numerator:
Numerator for income from continuing operations
per share 28,334 25,567
Numerator for net income per share 28,334 24,340
Denominator:
Weighted average shares outstanding 89,187 90,723
======= =======
Income from continuing operations per share - basic $0.32 $0.28
======= =======
Net income per share - basic $0.32 $0.27
======= =======
DILUTED EARNINGS PER SHARE
Numerator:
Numerator for income from continuing operations
per share 28,334 25,567
Numerator for net income per share 28,334 24,340
Denominator:
Weighted average shares outstanding 89,187 90,723
Effect of dilutive securities:
Stock options 532 847
======= =======
89,719 91,570
======= =======
Income from continuing operations per share - diluted $0.32 $0.28
======= =======
Net income per share - diluted $0.32 $0.27
======= =======
</TABLE>
Options to purchase 706,000 shares of common stock, at prices ranging from
$27.19 - $38.17 per share, were not included in the December 1997 computation of
diluted earnings per share, because the option's exercise price was greater than
the average market price of the common shares. Options to purchase 478,000
shares of common stock at a price of $38.17 per share were not included in the
December 1996 diluted earnings per share calculation since the option's exercise
price was higher than the average market price of the common shares.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the quarter ended December 31, 1997 were $231.1 million, an increase
of 2% over the very strong first quarter of fiscal year 1997. International
wireless infrastructure sales growth, specifically in the Asia-Pacific and Latin
America markets, offset the slight sales decline in the U.S. wireless
infrastructure market. Sales to the common carrier and private microwave market
and land mobile radio market also increased over the same period last fiscal
year. Sales growth in these markets was partially offset by significant declines
in the wireless accessories market and a slight overall decline in the broadcast
and government market. From a product standpoint, increases in coaxial cable
sales helped compensate the overall decline in wireless telephone accessories
compared to the first quarter of fiscal year 1997. An issue that many
international companies are facing is the effect of the volatile Asia-Pacific
economies on operating results. Thus far, we have not been adversely affected by
these economic issues. At this point in time, we do not anticipate that such
volatility will cause any severe impact on our overall fiscal year 1998
expectations.
Cost of products sold, as a percentage of sales, remained stable at 61.2%
compared to the same period last fiscal year. A favorable product mix,
consisting of mainly higher coaxial cable sales and lower wireless accessories
sales, offset increased competitive price pressure keeping cost of goods sold,
as a percentage of sales, unchanged.
As a percentage of sales, operating expenses decreased 1.4% to 19.7%, compared
to the first quarter of fiscal year 1997. Research and development expenses, as
a percentage of sales, for the quarter ended December 31, 1997 decreased to 3.1%
compared to 4.0% for the same period last fiscal year. The decrease is due
primarily to the elimination of the company's fiber optic sensors and global
messaging development activities. Sales and administrative expenses, as a
percentage of sales, decreased to 16.6% compared to 17.2% for the first quarter
of fiscal year 1997.
Net interest expense remained relatively unchanged compared to the first quarter
of fiscal year 1997. Other expense increased slightly during the quarter mainly
due to foreign exchange losses.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal year 1998, the company's cash and cash
equivalents remained relatively stable compared to the end of fiscal year 1997.
The company generated $35.9 million in cash from its operations, principally
from earnings of $28.3 million, which include non-cash charges of $8.4 million.
Accounts receivable collections generated $4.7 million in cash during the first
quarter of fiscal year 1998. Days sales in billed receivables for the quarter
remained steady at 67 days compared to fiscal 1997 year end. Inventory movement
accounted for a $5.2 million inflow of cash for the quarter ended December 31,
1997. During the quarter, the company's inventory turnover ratio increased to
3.5 times compared to 3.3 times at September 30, 1997. These inflows were
partially offset by payments of $8.9 million for accounts payable and other
current liabilities.
<PAGE>
Net cash used in investing activities was $3.9 million for the quarter ended
December 31, 1997. During the first three months of fiscal year 1998, the
company invested $12.5 million in property, plant and equipment, of which $3.6
million was spent on its facility in China. Also, the company's Russian joint
ventures began receiving outside financing under Andrew Corporation's line of
credit with Bank of America. This allowed the ventures to remit $11.5 million in
funds to the company. The company expects to receive an additional $10 to $15
million in funds from the joint ventures over the next three to six months. In
addition, Andrew Corporation increased its ownership interest in its Brazilian
operations to 70% for $3.0 million.
Net cash used in financing activities was $29.5 million for the first three
months of fiscal year 1998. During this period, the company repurchased
1,305,000 shares of its common stock for $32.5 million. Since the May 1997
authorization to buyback up to 5,000,000 shares of its common stock, the
company has repurchased 2,850,000 shares at a total cost of $74.1 million.
During the first quarter of fiscal year 1998, the company's operations in
Brazil borrowed $6.1 million in long-term debt, at a weighted average interest
rate of 12%, to pay off a portion of its outstanding line of credit with
ABN-AMRO. During fiscal year 1997, the ABN-AMRO line of credit, used only for
local currency borrowings in Brazil, had a weighted average interest rate
of 22%.
YEAR 2000
In 1994, the company instituted a program to routinely review and upgrade its
computer hardware and software to both improve operations and comply with the
year 2000 issue. The company is currently in the process of upgrading several of
its business systems, which will be completed by December 1998. In the event
that these systems are not in place by the year 2000, the company does not
expect any significant disruption in operations. The company does not expect the
costs directly associated with year 2000 compliance will be material to its
financial condition or results of operations. The company, also, does not expect
any significant disruption in operations in the event that any of its suppliers
or customers do not successfully achieve year 2000 compliance.
RISK FACTORS
Statements included in this Form 10-Q which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain factors that could
cause the company's results to differ materially from forecasts or expectations
include, but are not limited to: the impact of competitive products and pricing;
regional economic or political conditions that may impact customers' ability to
purchase our products and services; availability of qualified technical
management, principally in emerging markets and end user demand for wireless
communication products.
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
a) EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.(A)C Executive Severance Benefit Plan
(I) Agreement with Robert J. Hudzik
(II) Agreement with Debra B. Huttenburg
27.1 Financial Data Schedule
December 31, 1997
27.2 Restated Financial Data Schedule
December 31, 1996
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date February 6, 1998 \s\ F. L. English
---------------------- ------------------
F. L. English
Chairman, President and Chief
Executive Officer
Date February 6, 1998 \s\ C. R. Nicholas
---------------------- ------------------
C. R. Nicholas
Executive Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.(A)C Executive Severance Benefit Plan
(I) Agreement with Robert J. Hudzik
(II) Agreement with Debra B. Huttenburg
27.1 Financial Data Schedule
December 31, 1997
27.2 Restated Financial Data Schedule
December 31, 1996
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(A)C(I)
<SEQUENCE>2
<DESCRIPTION>EXECUTIVE SEVERANCE BENEFIT PLAN-R. J. HUDZIK
<TEXT>
EXHIBIT 10.(A)C(I)
ANDREW CORPORATION
EXECUTIVE SEVERANCE BENEFIT PLAN AGREEMENT
THIS AGREEMENT made as of 1 December 1997, between Andrew Corporation,
a Delaware corporation (the "Company"), and Robert J. Hudzik (the "Executive").
W I T N E S S E T H:
1. Participation. The Executive has been designated as a participant
in the Andrew Corporation Executive Severance Benefit Plan (the "Plan") by the
Compensation Committee of the Board of Directors of the Company.
2. Plan Benefits. The Executive agrees to be bound by the provisions of
the Plan, including those provisions which relate to his eligibility to receive
benefits and to the conditions affecting the form, manner, time and terms of
benefit payments under the Plan, as applicable. The Executive understands and
acknowledges that his benefit may be reduced pursuant to Section 10 of the Plan
in order to eliminate any "excess parachute payments" as defined under Section
4999 of the Internal Revenue Code of 1954, as amended. The Executive may elect
to receive his Plan benefits in installment payments, as provided under Section
9 of the Plan, by signing the statement included on page three of this
Agreement. The Executive may make an election to receive installment payments,
or may revoke any such election, at any time prior to the date which is ten days
prior to the date on which a Change in Control is deemed to have occurred;
provided that any election subsequent to the execution of this Agreement or any
revocation shall be in writing and shall be subject to the approval of the
Compensation Committee.
3. Federal and State Laws. The Executive shall comply with all federal
and state laws which may be applicable to his participation in this Plan,
including without limitation, his entitlement to, or receipt of, any benefits
under the Plan. If the Executive is subject to the provisions of Section 16(b)
of the Securities Exchange Act of 1934 as amended and in effect at the time of
any Plan benefit payment, he shall comply with the provisions of Section 16(b),
including any applicable exemptions thereto, whether or not such provisions and
exemptions apply to all or any portion of his Plan benefit payments.
<PAGE>
4. Amendment and Termination. The Board of Directors may amend,
modify, suspend or terminate the Plan or this Agreement at any time, subject to
the following:
(a) without the consent of the Executive, no such amendment,
modification, suspension or termination shall reduce or
diminish his right to receive any payment or benefit then
due and payable under the Plan immediately prior to such
amendment, modification, suspension or termination; and
(b) in the event of a Change in Control pursuant to Section 5
of the Plan, no such amendment, modification, suspension
or termination of benefits, and eligibility therefor, will
be effective prior to the expiration of the 48-
consecutive-month period following the date of the Change
in Control.
5. Beneficiary. The Executive hereby designates his primary
beneficiary as Teresa M. Hudzik, who will receive any unpaid benefit payments in
the event of the Executive's death prior to full receipt thereof. In the event
that the primary beneficiary predeceases the Executive, his unpaid benefits
shall be paid to Catherine, Karen and Susan Hudzik as secondary beneficiaries.
If more than one primary or secondary beneficiary has been indicated, each
primary beneficiary or, if none survives, each secondary beneficiary will
receive an equal share of the unpaid benefits unless the Executive indicates
specific percentages next to the beneficiaries' names. Except as required by
applicable law, the Executive's beneficiary or beneficiaries shall not be
entitled to any medical, life or other insurance-type welfare benefits.
6. Arbitration. The Executive agrees to be bound by any determination
rendered by arbitrators pursuant to Section 11 of the Plan.
7. Employment Rights. The Plan and this Agreement shall not be
construed to give the Executive the right to be continued in the employment of
the Company or to give the Executive any benefits not specifically provided by
the Plan.
IN WITNESS WHEREOF, Andrew Corporation has caused this Agreement to
be executed and the Executive has executed this Agreement, both as of the day
and year first above written.
ANDREW CORPORATION
\s\ Robert J. Hudzik By:\s\ F. L. English
- ----------------------------- -------------------------------
Robert J. Hudzik F. L. English
Vice President Chairman, President and
Business Development Chief Executive Officer
<PAGE>
ELECTION OF INSTALLMENTS
I hereby elect to receive my Plan benefits in installment payments
pursuant to the terms of Section 9 of the Plan.
\s\ Robert J. Hudzik
-----------------------------------------
Robert J. Hudzik
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(A)C(II)
<SEQUENCE>3
<DESCRIPTION>EXECUTIVE SEVERANCE BENEFIT PLAN-D. B. HUTTENBURG
<TEXT>
EXHIBIT 10.(A)C(II)
ANDREW CORPORATION
EXECUTIVE SEVERANCE BENEFIT PLAN AGREEMENT
THIS AGREEMENT made as of 1 December 1997, between Andrew Corporation,
a Delaware corporation (the "Company"), and Debra B. Huttenburg (the
"Executive").
W I T N E S S E T H:
1. Participation. The Executive has been designated as a participant
in the Andrew Corporation Executive Severance Benefit Plan (the "Plan") by the
Compensation Committee of the Board of Directors of the Company.
2. Plan Benefits. The Executive agrees to be bound by the provisions of
the Plan, including those provisions which relate to his eligibility to receive
benefits and to the conditions affecting the form, manner, time and terms of
benefit payments under the Plan, as applicable. The Executive understands and
acknowledges that his benefit may be reduced pursuant to Section 10 of the Plan
in order to eliminate any "excess parachute payments" as defined under Section
4999 of the Internal Revenue Code of 1954, as amended. The Executive may elect
to receive his Plan benefits in installment payments, as provided under Section
9 of the Plan, by signing the statement included on page three of this
Agreement. The Executive may make an election to receive installment payments,
or may revoke any such election, at any time prior to the date which is ten days
prior to the date on which a Change in Control is deemed to have occurred;
provided that any election subsequent to the execution of this Agreement or any
revocation shall be in writing and shall be subject to the approval of the
Compensation Committee.
3. Federal and State Laws. The Executive shall comply with all federal
and state laws which may be applicable to his participation in this Plan,
including without limitation, his entitlement to, or receipt of, any benefits
under the Plan. If the Executive is subject to the provisions of Section 16(b)
of the Securities Exchange Act of 1934 as amended and in effect at the time of
any Plan benefit payment, he shall comply with the provisions of Section 16(b),
including any applicable exemptions thereto, whether or not such provisions and
exemptions apply to all or any portion of his Plan benefit payments.
<PAGE>
4. Amendment and Termination. The Board of Directors may amend,
modify, suspend or terminate the Plan or this Agreement at any time, subject to
the following:
(a) without the consent of the Executive, no such amendment,
modification, suspension or termination shall reduce or
diminish his right to receive any payment or benefit then
due and payable under the Plan immediately prior to such
amendment, modification, suspension or termination; and
(b) in the event of a Change in Control pursuant to Section 5
of the Plan, no such amendment, modification, suspension
or termination of benefits, and eligibility therefor, will
be effective prior to the expiration of the 48-
consecutive-month period following the date of the Change
in Control.
5. Beneficiary. The Executive hereby designates his primary
beneficiary as Jerome C. Huttenburg, who will receive any unpaid benefit
payments in the event of the Executive's death prior to full receipt thereof.
In the event that the primary beneficiary predeceases the Executive, his
unpaid benefits shall be paid to Jerome C. Huttenburg as secondary beneficiary.
If more than one primary or secondary beneficiary has been indicated, each
primary beneficiary or, if none survives, each secondary beneficiary will
receive an equal share of the unpaid benefits unless the Executive indicates
specific percentages next to the beneficiaries' names. Except as required by
applicable law, the Executive's beneficiary or beneficiaries shall not be
entitled to any medical, life or other insurance-type welfare benefits.
6. Arbitration. The Executive agrees to be bound by any determination
rendered by arbitrators pursuant to Section 11 of the Plan.
7. Employment Rights. The Plan and this Agreement shall not be
construed to give the Executive the right to be continued in the employment of
the Company or to give the Executive any benefits not specifically provided by
the Plan.
IN WITNESS WHEREOF, Andrew Corporation has caused this Agreement to
be executed and the Executive has executed this Agreement, both as of the day
and year first above written.
ANDREW CORPORATION
\s\ Debra B. Huttenburg By:\s\ F. L. English
- ----------------------------- ------------------------------
Debra B. Huttenburg F. L. English
Group President Chairman, President and
Antenna Systems Chief Executive Officer
<PAGE>
ELECTION OF INSTALLMENTS
I hereby elect to receive my Plan benefits in installment payments
pursuant to the terms of Section 9 of the Plan.
\s\ Debra B. Huttenburg
-----------------------------------------
Debra B. Huttenburg
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>4
<DESCRIPTION>ART. 5 FDS FOR 12-31-97 10Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 93,748
<SECURITIES> 0
<RECEIVABLES> 183,172
<ALLOWANCES> 3,487
<INVENTORY> 161,874
<CURRENT-ASSETS> 448,516
<PP&E> 363,385
<DEPRECIATION> 224,088
<TOTAL-ASSETS> 670,920
<CURRENT-LIABILITIES> 112,093
<BONDS> 41,881
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,027
<OTHER-SE> 499,291
<TOTAL-LIABILITY-AND-EQUITY> 670,920
<SALES> 231,136
<TOTAL-REVENUES> 231,136
<CGS> 141,539
<TOTAL-COSTS> 141,539
<OTHER-EXPENSES> 45,508
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 1,614
<INCOME-PRETAX> 42,932
<INCOME-TAX> 14,598
<INCOME-CONTINUING> 28,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,334
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>5
<DESCRIPTION>ART. 5 FDS FOR 12-31-96 10Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 64,781
<SECURITIES> 0
<RECEIVABLES> 190,123
<ALLOWANCES> 4,008
<INVENTORY> 169,098
<CURRENT-ASSETS> 429,093
<PP&E> 346,650
<DEPRECIATION> 209,808
<TOTAL-ASSETS> 663,018
<CURRENT-LIABILITIES> 119,982
<BONDS> 40,377
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 685
<OTHER-SE> 484,427
<TOTAL-LIABILITY-AND-EQUITY> 663,018
<SALES> 225,715
<TOTAL-REVENUES> 225,715
<CGS> 138,229
<TOTAL-COSTS> 138,229
<OTHER-EXPENSES> 47,665
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 1,259
<INCOME-PRETAX> 39,333
<INCOME-TAX> 13,766
<INCOME-CONTINUING> 25,567
<DISCONTINUED> 1,227
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,340
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<FN>
All amounts in this exhibit have been restated to reflect the disposal of the
company's network products business, as well as a three-for-two stock split for
stockholders of record on February 25, 1997.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| APD | https://www.sec.gov/Archives/edgar/data/2969/0000950123-98-001378.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000950123-98-001378.txt : 19980217
<SEC-HEADER>0000950123-98-001378.hdr.sgml : 19980217
ACCESSION NUMBER: 0000950123-98-001378
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AIR PRODUCTS & CHEMICALS INC /DE/
CENTRAL INDEX KEY: 0000002969
STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810]
IRS NUMBER: 231274455
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04534
FILM NUMBER: 98535097
BUSINESS ADDRESS:
STREET 1: 7201 HAMILTON BLVD
CITY: ALLENTOWN
STATE: PA
ZIP: 18195-1501
BUSINESS PHONE: 2154814911
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>AIR PRODUCTS AND CHEMICALS, INC.
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 31 December 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
- --------------------------------------------------------------------------------
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
Indicate by check x whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at 6 February 1998
- -------------------------- ---------------------------------
Common Stock, $1 par value 117,684,621
<PAGE> 2
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Consolidated Balance Sheets -
31 December 1997 and 30 September 1997 .............................................. 3
Consolidated Income -
Three Months Ended 31 December 1997 and 1996 ........................................ 4
Consolidated Cash Flows -
Three Months Ended 31 December 1997 and 1996 ........................................ 5
Notes to Consolidated Financial Statements ............................................. 6
Management's Discussion and Analysis ................................................... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K .............................................. 14
Signatures ............................................................................. 15
</TABLE>
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "Company" or "Registrant") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
results for the periods indicated herein reflect certain adjustments, such as
the valuation of inventories on the LIFO cost basis, which can only be finally
determined on an annual basis. It is suggested that these consolidated condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's latest annual report on Form 10-K.
Results of operations for any three month period are not necessarily indicative
of the results of operations for a full year.
2
<PAGE> 3
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars, except per share)
<TABLE>
<CAPTION>
31 December 1997 30 September 1997
---------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash items .................................... $ 85.9 $ 52.5
Trade receivables, less allowances for doubtful accounts 860.8 879.6
Inventories ............................................ 406.0 386.5
Contracts in progress, less progress billings .......... 93.9 121.3
Other current assets ................................... 229.1 184.4
-------- --------
TOTAL CURRENT ASSETS ................................... 1,675.7 1,624.3
-------- --------
INVESTMENTS ............................................ 328.6 576.8
-------- --------
PLANT AND EQUIPMENT, at cost ........................... 8,847.7 8,727.3
Less - Accumulated depreciation ...................... 4,372.5 4,286.1
-------- --------
PLANT AND EQUIPMENT, net ............................... 4,475.2 4,441.2
-------- --------
GOODWILL ............................................... 258.7 248.6
-------- --------
OTHER NONCURRENT ASSETS ................................ 336.3 353.2
-------- --------
TOTAL ASSETS ........................................... $7,074.5 $7,244.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payables, trade and other .............................. $ 612.9 $ 616.6
Accrued liabilities .................................... 239.4 315.7
Accrued income taxes ................................... 195.4 15.9
Short-term borrowings .................................. 64.8 100.9
Current portion of long-term debt ...................... 47.8 75.5
-------- --------
TOTAL CURRENT LIABILITIES .............................. 1,160.3 1,124.6
-------- --------
LONG-TERM DEBT ......................................... 2,234.7 2,291.7
-------- --------
DEFERRED INCOME AND OTHER NONCURRENT
LIABILITIES .......................................... 467.8 449.7
-------- --------
DEFERRED INCOME TAXES .................................. 616.3 730.0
-------- --------
TOTAL LIABILITIES ...................................... 4,479.1 4,596.0
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share ................... 124.7 124.7
Capital in excess of par value ......................... 452.1 453.0
Retained earnings ...................................... 3,118.3 2,990.2
Unrealized gain on investments ......................... 4.5 6.9
Cumulative translation adjustments ..................... (218.9) (186.1)
Treasury stock, at cost ................................ (442.0) (297.3)
Shares in trust ........................................ (443.3) (443.3)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ............................. 2,595.4 2,648.1
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............. $7,074.5 $7,244.1
======== ========
</TABLE>
3
<PAGE> 4
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
(Millions of dollars, except per share)
<TABLE>
<CAPTION>
Three Months Ended
31 December
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
SALES AND OTHER INCOME
Sales $ 1,234.8 $ 1,120.9
Other income (expense), net (5.3) 9.4
---------- ----------
1,229.5 1,130.3
---------- ----------
COSTS AND EXPENSES
Cost of sales 720.7 692.7
Selling, distribution and administrative 269.9 241.5
Research and development 26.3 26.7
---------- ----------
OPERATING INCOME 212.6 169.4
Income from equity affiliates, net
of related expenses 5.7 18.7
Gain on Ref-Fuel Sale and Contract
Settlement 75.2 --
Interest expense 40.2 39.9
---------- ----------
INCOME BEFORE TAXES 253.3 148.2
Income taxes 92.8 48.3
---------- ----------
NET INCOME $ 160.5 $ 99.9
========== ==========
BASIC EARNINGS PER COMMON SHARE $ 1.47 $ .91
---------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 1.44 $ .89
---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (in millions) 109.1 110.3
---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES (in millions) 111.4 112.5
---------- ----------
DIVIDENDS DECLARED PER COMMON SHARE - Cash $ .30 $ .275
---------- ----------
</TABLE>
4
<PAGE> 5
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended
31 December
------------------------
1997 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 160.5 $ 99.9
Adjustments to reconcile income to cash provided by operating activities:
Depreciation 117.6 108.1
Deferred income taxes 17.5 15.1
Ref-Fuel divestiture deferred income taxes (80.3) --
Impairment loss -- 9.3
Undistributed (earnings) of unconsolidated affiliates 34.0 (14.5)
Gain on sale of assets and investments (82.9) (10.2)
Other 30.2 29.3
Working capital changes that provided (used) cash, net of effects of
acquisitions:
Trade receivables 53.6 (50.8)
Other receivables (17.4) 50.9
Inventories and contracts in progress 6.0 (54.0)
Payables, trade and other (4.4) 82.1
Accrued liabilities (86.2) (53.1)
Accrued income taxes 151.8 29.3
Other (20.6) (12.3)
Cash provided by (used for) discontinued operations (3.2) --
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 276.2 229.1
------- -------
INVESTING ACTIVITIES
Additions to plant and equipment (154.9) (303.0)
Acquisitions, less cash acquired (16.6) (292.2)
Investment in and advances to unconsolidated affiliates (4.5) (20.1)
Proceeds from sale of assets and investments 248.3 36.4
Other (.9) 4.6
------- -------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 71.4 (574.3)
------- -------
FINANCING ACTIVITIES
Long-term debt proceeds 2.0 325.5
Payments on long-term debt (43.5) (2.9)
Net increase (decrease) in commercial paper (65.5) 193.0
Net increase (decrease) in other short-term borrowings (24.6) 6.1
Dividends paid to shareholders (33.0) (30.2)
Purchase of Treasury Stock (150.0) (75.0)
Other 1.4 9.6
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (313.2) 426.1
------- -------
Effect of Exchange Rate Changes on Cash (1.0) 1.1
------- -------
Increase in Cash and Cash Items 33.4 82.0
Cash and Cash Items - Beginning of Year 52.5 78.7
------- -------
Cash and Cash Items - End of Period $ 85.9 $ 160.7
======= =======
</TABLE>
5
<PAGE> 6
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On 1 October 1997, the Company adopted Statement of Position 96-1,
"Environmental Remediation Liabilities." This statement had minimal impact on
the financial statements.
Effective 31 December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" and SFAS No. 129 "Disclosure of Information about Capital Structure."
SFAS No. 129 does not change the currently reported disclosures, while SFAS No.
128 establishes new accounting and disclosure for earnings per share (EPS). The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(Millions, except per share)
Three months ended 31 December 1997 1996
------------------------
<S> <C> <C>
Numerator for basic EPS
and diluted EPS-net income $ 160.5 $ 99.9
Denominator for basic EPS
- -weighted average shares 109.1 110.3
Effect of diluted securities:
Employee stock options 1.9 1.8
Other award plans 0.4 0.4
------------------------
2.3 2.2
Denominator for diluted EPS
- -weighted average shares and
assumed conversions 111.4 112.5
=========================
Basic EPS $ 1.47 $ .91
=========================
Diluted EPS $ 1.44 $ .89
=========================
</TABLE>
Options on 2.6 million shares of common stock were not included in computing
diluted EPS because their effects were antidilutive. The potential dilutive
effect of these options can not be estimated based on current information.
In December 1997, the Company sold its 50% interest in American Ref-Fuel
Company, its former waste-to-energy joint venture with Browning-Ferris
Industries, Inc.(BFI), to a limited liability company (LCC) formed by Duke
Energy Power Services and United American Energy Corporation. This transaction
provides for the sale of Air Products' interest in American Ref-Fuel's five
waste-to-energy facilities for $237 million, and the assumption of various
parental support agreements by Duke Energy Capital Corporation, the parent
company of Duke Energy Power Services. The income statement for the three months
ended 31 December 1997 includes a gain of $62.6 million from this sale, ($35.1
million after tax or $.32 per share.) Air Products retained a limited
partnership interest in one project which is undergoing a power agreement
restructuring. The restructuring is expected to be completed within the calendar
year. Fiscal 1997 results included equity affiliates' income related to American
Ref-Fuel of $21.4 million before taxes of which $2.3, $.8, $9.6 and $8.7 million
was included in the first through fourth quarters respectively.
6
<PAGE> 7
The results for the three months ended 31 December 1997 also include a gain of
$12.6 million from a cogeneration project contract settlement ($7.6 million
after tax or $.07 per share.)
The Company completed the sale of the landfill gas recovery business, GSF Energy
Inc., during the three months ended 31 December 1996. A gain of $9.5 million
($5.9 million after tax, or $.05 per share) was recorded.
During the three months ended 31 December 1996, an impairment loss of $9.3
million ($6.0 million after tax, or $.05 per share) was recorded in the
chemicals segment. The write-down was related to production assets in the
performance chemicals division and the related goodwill.
On 22 October 1996, the Company obtained control of Carburos Metalicos S.A.
(Carburos). In October 1996, the Company increased its ownership percentage in
Carburos from 47.6% to 96.7% of the outstanding shares in Carburos. The results
for the three months ended 31 December 1996 contained approximately six weeks of
consolidated operating results for Carburos. Previously, the Company accounted
for its investment using the equity method.
7
<PAGE> 8
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER FISCAL 1998 VS. FIRST QUARTER FISCAL 1997
-------------------------------------------------------
RESULTS OF OPERATIONS
CONSOLIDATED
Sales in the first quarter of fiscal 1998 were a record $1,234.8 million, 10%
higher than in the same quarter of the prior year while operating income,
another record, was up $43.2 million, or 26%, to $212.6 million. Profits of
equity affiliates decreased $13.0 million to $5.7 million for the three months
ended 31 December 1997. Net income was $160.5 million, or $1.47 basic earnings
per share, compared to net income of $99.9 million, or $.91 basic earnings per
share, in the year-ago quarter. The current quarter included two special items:
an after-tax gain of $35.1 million, or $.32 per share from the sale of the
Company's 50% interest in American Ref-Fuel Company and a gain of $7.6 million,
or $.07 per share from a cogeneration project contract settlement. Excluding
these special items, net income was $118 million, or $1.08 basic earnings per
share.
These record results were achieved in spite of unfavorable foreign currency
impacts. In this quarter, foreign exchange and currency translation losses
reduced net income growth by $19 million or $.17 per share. Foreign exchange
losses for the quarter resulted in a net income loss of $13 million or $.12 per
share versus a $1 million net income gain or $.01 per share in last year's first
quarter. These foreign exchange losses are principally associated with the
Company's gases segment Asian equity affiliates. A stronger U.S. dollar versus
most of the world's currencies resulted in a reduction of net income of $5
million or $.04 per share when the operating results of the Company's foreign
operations were translated to U.S. dollars using this quarter's rates compared
to the rates of the prior year quarter. This impact was principally in the
Company's European gases and chemicals businesses.
Record consolidated sales were achieved, in spite of a 2% unfavorable currency
related impact. Strong volume growth in the United States and Europe coupled
with a full quarter of Carburos consolidation also produced record sales results
in the gases segment. Broad-based volume gains in the chemicals businesses,
likewise produced record sales. Due to several large equipment bookings in the
first quarter of the prior year, the equipment segment sales declined.
Strong underlying volume growth in gases and chemicals, a favorable product mix
in equipment, overall continuing productivity gains and outstanding chemicals
manufacturing performance produced most of the record operating income growth. A
full quarter of consolidated Carburos results accounted for about a fifth of the
operating income growth.
Equity affiliates' income declined principally due to the impacts of currency
and unfavorable business conditions in the gases Asian affiliate results. About
a third of the decline is due to a full quarter of Carburos consolidation versus
half a quarter in the prior year.
INDUSTRIAL GASES - Sales increased 18% to $727.0 million in the first quarter of
fiscal 1998 while operating income increased 24% to $147.2 million. Strong
volume gains in worldwide merchant and tonnage gases combined with a full
quarter of consolidated Carburos results accounted for record sales. Unfavorable
currency effects, primarily European, decreased
8
<PAGE> 9
year-to-year sales growth by approximately 3%. Excluding the Carburos
consolidation and weaker currency effects, there was strong sales growth
exceeding 15%. There was no discernible price movement for worldwide merchant
gases. Merchant gases volumes grew 11% and 8% in the United States and Europe
respectively, consistent with broad end-use market growth and new business
signings. Tonnage gases volume growth in the United States was 10%. In Europe,
tonnage volumes grew 20% over the prior year as investments continued to load,
as well as the impact of prior year outages. Operating income growth was driven
by the volume impact on both tonnage and merchant systems. Operating margin
increased .9% from the prior year.
Equity affiliates' income for the first quarter of fiscal 1998 decreased to $.4
million compared to $12.0 million in the prior year. This decrease was due
primarily to unfavorable foreign exchange effects in Asia and the movement of
Carburos to consolidated results for the entire quarter of the current year. The
prior period results included approximately seven weeks of Carburos in equity
affiliates' income.
CHEMICALS- Record sales in the first quarter of fiscal 1998 of $380.9 million
increased $34.7 million or 10%. Operating income increased $23.9 million to
$68.4 million. The results of the prior year were reduced $9.3 million due to
the impairment loss in the polyurethane release agents business. Excluding this
prior year loss, fiscal 1998 operating income grew 27%. This substantial growth
resulted from broad-based volume growth, favorable product mix, continued
productivity gains and exceptional manufacturing plant performance. The
broad-based volume gains were led by the growth in both polymers and amines.
Amines grew 23% with good base business growth, a major customer's order pattern
relative to the prior year, and contributions from prior year acquisitions.
Additional international acquisitions and ventures have been announced in the
polymers and amines businesses. The current year operating margin of 18% is
substantially higher than the prior year margin of 15.5%, excluding the
impairment loss. The current year margin is above the normalized trend line. The
Asian currency impact on exports combined with margin pressure created by
potential higher Asian imports is a significant uncertainty.
EQUIPMENT AND SERVICES - Sales decreased to $126.9 million from the unusually
high level in the year-ago quarter as the prior year's results included the
initial sales booking for several large projects. Operating income was up $7.0
million to $12.6 million due to a favorable project mix. Sales backlog for the
equipment product line declined to $277 million at 31 December 1997. This
backlog compares to $310 million at 30 September 1997 and $431 million at 31
December 1996. The backlog's downward trend is reflective of the cyclical nature
of this business.
Equity affiliates' income for the first quarter of fiscal 1998 increased $.9
million to $4.4 million. The improved results reflect improved operating
performance at the power generation facilities.
CORPORATE AND OTHER - Sales declined to zero in the first quarter of 1998 due to
the sale of the landfill gas recovery business in the first quarter of the prior
year. Operating income declined $16.6 million to a loss of $15.6 million. Prior
year results include a gain of $9.5 million related to the sale of the landfill
gas recovery business, GSF Energy Inc. Excluding this gain, operating income
decreased $7.1 million due primarily to unfavorable foreign exchange impacts.
Equity affiliates' income for the first quarter of fiscal 1998 decreased to $.9
million due to the sale of the Company's 50% interest in American Ref-Fuel
Company.
9
<PAGE> 10
INTEREST
Interest expense of $40.2 million is approximately at the level of the prior
fiscal year first quarter. The average debt balance, capitalized interest, and
interest rates are essentially unchanged.
INCOME TAXES
The consolidated effective tax rate on income was 36.6%. Excluding the tax rate
impact on the gain from the sale of the American Ref-Fuel Company and the gain
on the cogeneration power contract settlement, the effective tax rate is 33.9%.
This rate is 1.3% higher than the prior year because of lower gases equity
affiliates' income which is reported on a net of tax basis.
ACCOUNTING CHANGES
On 1 October 1997, the Company adopted Statement of Position 96-1,
"Environmental Remediation Liabilities." This statement had minimal impact on
the financial statements.
Effective 31 December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" and SFAS No. 129 "Disclosure of Information about Capital Structure."
SFAS No. 129 does not change the currently reported disclosures, while SFAS No.
128 establishes new accounting and disclosure for earnings per share.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," in
June of 1997. These standards establish new disclosures for comprehensive income
and segments and will be effective for fiscal 1999. New disclosures will include
a comprehensive income number, operating segments in accordance with internal
management structure, and geographic sales by destination rather than source.
As of 1 January 1998, the Company will cease applying highly inflationary
accounting to operations in Brazil. For operations that used the U.S. dollar for
translation, due to hyper-inflationary conditions, the functional currency will
be the Brazilian Real. No material effects on the financial statements result
from this change.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first three months of fiscal 1998 totaled $186.9
million compared to $617.4 million in the corresponding period of the prior
year. Additions to plant and equipment decreased from $303.0 million during the
first three months of fiscal 1997 to $154.9 million during the current period.
Prior year numbers included the acquisition of an additional 49.1% of the
outstanding shares of Carburos at a cost of $288.4 million. Investments in
unconsolidated affiliates were $4.5 million during the first three months of
fiscal 1998 versus $20.1 million last year. Capital expenditures are expected to
be approximately $1.2 billion in fiscal 1998. It is anticipated that these
expenditures will be funded with cash from operations supplemented with proceeds
from financing activities.
Cash provided by operating activities during the first three months of fiscal
1998 ($276.2 million) combined with proceeds from the sale of assets and
investments ($248.3 million) were used largely for capital expenditures ($186.9
million), purchase of common stock for treasury ($150.0 million), debt
repayments ($133.6 million) and cash dividends ($33.0 million). Cash and cash
items increased $33.4 million from $52.5 million at the beginning of the fiscal
year to $85.9 million at 31 December 1997. The net decrease in commercial paper
was $65.5 million.
10
<PAGE> 11
Total debt at 31 December 1997 and 30 September 1997, expressed as a percentage
of the sum of total debt and shareholders' equity, was 47% and 48%,
respectively. Total debt decreased from $2,468.1 million at 30 September 1997 to
$2,347.3 million at 31 December 1997.
There was $69.5 million of commercial paper outstanding at 31 December 1997. The
Company's revolving credit commitments amounted to $600.0 million at 31 December
1997 with funding available in 13 currencies. No borrowings were outstanding
under these commitments. Additional commitments totaling $86.4 million are
maintained by the Company's foreign subsidiaries, of which $2.8 million was
utilized at 31 December 1997.
At 31 December 1997, the Company had unutilized shelf registrations for $425.0
million of debt securities. Subsequent to 31 December 1997, the Company issued
$50.0 million in notes due in 2010, with a coupon rate of 6.24%.
The Company enters into interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio in order to maintain the
percentage of fixed and variable rate debt within certain parameters set by
management. In accordance with these parameters, the agreements are used to
reduce interest rate risks and costs inherent in the Company's debt portfolio.
Accordingly, the Company enters into agreements to both effectively convert
variable-rate debt to fixed-rate debt and to effectively convert fixed-rate debt
to variable-rate debt, which is principally indexed to LIBOR rates. The Company
has also entered into interest rate swap contracts to effectively convert the
stated variable rates to interest rates based on LIBOR. The fair value gain
(loss) on the variable to variable swaps is equally offset by a fair value loss
(gain) on the related debt agreements.
The notional principal and fair value of interest rate swap agreements at 31
December 1997 and 30 September 1997 were as follows:
(Millions of dollars)
<TABLE>
<CAPTION>
31 December 1997 30 September 1997
------------------------------------- ----------------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Fixed to Variable $511.0 $14.6 $461.0 $9.6
Variable to Variable 60.0 71.9 60.0 68.9
------------------------------------- ----------------------------------
Total $571.0 $86.5 $521.0 $78.5
===================================== ==================================
</TABLE>
A $34.6 million gain has been recognized in the financial statements related to
the above agreements.
The Company is also party to interest rate and currency swap contracts. These
contracts effectively convert the currency denomination of a debt instrument
into another currency in which the Company has a net equity position while
changing the interest rate characteristics of the instrument. The notional
principal of interest rate and currency swap agreements outstanding at 31
December 1997 was $419.3 million. The fair value of the agreements was a gain of
$17.4 million, of which a $40.9 million gain related to the currency component
was recognized in the financial statements. The remaining $23.5 million loss was
related to the interest component and has not been recognized in the financial
statements. This loss reflects that current interest rates are generally lower
than the interest rates paid under the interest rate and currency swap
agreements. As of 30 September 1997 interest rate and currency swap agreements
were outstanding with a notional principal amount and fair value of $354.1
million and a gain of $7.2 million, respectively.
11
<PAGE> 12
The estimated fair value of the Company's long-term debt, including current
portion, as of 31 December 1997 is $2,494.6 million compared to a book value of
$2,282.5 million.
During the first quarter of fiscal 1998, 1.9 million shares of the Company's
outstanding common stock were repurchased at a cost of $150.0 million. Under the
current program, the Company has repurchased 5.6 million shares at a cost of
$385.3 million to date. The remainder of the program will be dependent upon
ongoing capital investment requirements.
FINANCIAL INSTRUMENTS
There has been no material change in the net financial instrument position or
sensitivity to market risk since the disclosure in the annual report.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. Important risk factors and uncertainties
include the impact of worldwide economic growth, pricing, and other factors
resulting from fluctuations in interest rates and foreign currencies, the impact
of competitive products and pricing, continued success of productivity programs,
and the impact of tax and other legislation and other regulations in the
jurisdictions in which the Company and its affiliates operate.
12
<PAGE> 13
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
RESTATED EARNINGS PER SHARE AMOUNTS
Effective 31 December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This standard establishes new accounting and disclosure for EPS. The EPS
amounts for fiscal years 1997 and 1996 have been restated to conform to SFAS No.
128 requirements. The following table summarizes the restatement for each
quarter and the years ended 30 September 1997 and 1996:
<TABLE>
<CAPTION>
(Millions of dollars, except per share) First Second Third Fourth Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
30 SEPTEMBER 1997
Numerator for basic EPS
and diluted EPS-net income $ 99.9 $ 106.0 $ 116.0 $ 107.4 $ 429.3
Denominator for basic EPS
- -weighted average shares 110.3 109.9 109.9 109.9 110.0
Effect of dilutive securities:
Employee stock options 1.8 1.9 1.9 2.1 2.0
Other award plans 0.4 0.5 0.5 0.6 0.5
-----------------------------------------------------------------------
2.2 2.4 2.4 2.7 2.5
Denominator for diluted EPS
- -weighted average shares
and assumed conversions 112.5 112.3 112.3 112.6 112.5
=======================================================================
Basic EPS $ .91 $ .96 $ 1.06 $ .98 $ 3.90
=======================================================================
Diluted EPS $ .89 $ .94 $ 1.03 $ .95 $ 3.82
=======================================================================
30 SEPTEMBER 1996
Numerator for basic EPS
and diluted EPS-net income $ 89.0 $ 135.3 $ 98.0 $ 94.1 $ 416.4
Denominator for basic EPS
- -weighted average shares 111.8 111.9 112.0 111.3 111.7
Effect of dilutive securities:
Employee stock options 1.4 1.4 1.5 1.3 1.4
Other award plans 0.5 0.4 0.4 0.4 0.4
-----------------------------------------------------------------------
1.9 1.8 1.9 1.7 1.8
Denominator for diluted EPS
- -weighted average shares
and assumed conversions 113.7 113.7 113.9 113.0 113.5
=======================================================================
Basic EPS $ .80 $ 1.21 $ .88 $ .85 $ 3.73
=======================================================================
Diluted EPS $ .78 $ 1.19 $ .86 $ .83 $ 3.67
=======================================================================
</TABLE>
Note: Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27)(i) Financial Data Schedule for the three months ended 31
December 1997, which is submitted electronically to
the Securities and Exchange Commission for
information only, and not filed.
(a)(27)(ii)(iii)(iv) Restated Financial Data Schedules pursuant to Item
601(c)(2)(iii) of Regulation S-K, which are submitted
electronically to the Securities and Exchange
Commission for information only, and not filed.
(b) Current Reports on Form 8-K dated 13 October 1997 and
23 October 1997 were filed by the registrant during
the quarter ended 31 December 1997 in which Item 5 of
such form was reported.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Products and Chemicals, Inc.
(Registrant)
Date: February 12, 1998 By: /s/ A. H. Kaplan
----------------------------------
A. H. Kaplan
Senior Vice President - Finance
(Chief Financial Officer)
15
<PAGE> 16
INDEX TO EXHIBITS
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27)(i) Financial Data Schedule for the three months ended 31
December 1997, which is submitted electronically to the
Securities and Exchange Commission for information
only, and not filed.
(a)(27)(ii)(iii)(iv) Restated Financial Data Schedules pursuant to Item
601(c)(2)(iii) of Regulation S-K, which are submitted
electronically to the Securities and Exchange
Commission for information only, and not filed.
(b) Current Reports on Form 8-K dated 13 October 1997 and 23
October 1997 were filed by the registrant during the
quarter ended 31 December 1997 in which Item 5 of such
form was reported.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended 30 September 31
------------------------------------------------------------------- December
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------
EARNINGS: (Millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item and
the cumulative effect of accounting
changes: $ 200.9 $ 233.5 $ 368.2 $ 416.4 $ 429.3 $ 160.5
Add (deduct):
Provision for income taxes 103.0 95.2 186.2 195.5 203.4 93.6
Fixed charges, excluding capitalized
interest 127.3 127.1 148.8 184.0 233.0 57.8
Capitalized interest amortized during
the period 7.7 8.0 9.1 9.4 8.3 2.0
Undistributed earnings of less-than-
fifty-percent-owned affiliates (8.1) (2.8) (25.4) (40.6) (31.1) (2.4)
------- ------- ------- ------- ------- -------
Earnings, as adjusted $ 430.8 $ 461.0 $ 686.9 $ 764.7 $ 842.9 $ 311.5
======= ======= ======= ======= ======= =======
FIXED CHARGES:
Interest on indebtedness, including
capital lease obligations $ 118.6 $ 118.2 $ 139.4 $ 171.7 $ 217.8 $ 54.0
Capitalized interest 6.3 9.7 18.5 20.0 20.9 4.7
Amortization of debt discount premium
and expense 0.7 0.8 0.2 1.5 1.8 0.5
Portion of rents under operating leases
representative of the interest factor 8.0 8.1 9.2 10.8 13.4 3.3
------- ------- ------- ------- ------- -------
Fixed charges $ 133.6 $ 136.8 $ 167.3 $ 204.0 $ 253.9 $ 62.5
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES: 3.2 3.4 4.1 3.7 3.3 5.0
======= ======= ======= ======= ======= =======
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.I
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE 3-MOS ENDED 12/31/97
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 842
<ALLOWANCES> 19
<INVENTORY> 406
<CURRENT-ASSETS> 1,676
<PP&E> 8,848
<DEPRECIATION> 4,372
<TOTAL-ASSETS> 7,074
<CURRENT-LIABILITIES> 1,160
<BONDS> 2,235
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 125
<OTHER-SE> 2,470
<TOTAL-LIABILITY-AND-EQUITY> 7,074
<SALES> 1,235
<TOTAL-REVENUES> 1,235
<CGS> 721
<TOTAL-COSTS> 721
<OTHER-EXPENSES> 26
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 253
<INCOME-TAX> 93
<INCOME-CONTINUING> 160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.44
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.II
<SEQUENCE>4
<DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULES FOR 1997
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF FORMS 10-K AND 10-Q, AS APPLICABLE, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K AND 10-Q, AS APPLICABLE. THIS SCHEDULE IS RESTATED
AND IS TO REPLACE THE PREVIOUSLY PROVIDED SCHEDULES FOR THEIR RESPECTIVE
PERIODS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1996 OCT-01-1996 OCT-1-1996 OCT-01-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1 1 1
<CASH> 53 71 112 161
<SECURITIES> 0 0 0 0
<RECEIVABLES> 895 858 829 833
<ALLOWANCES> 15 16 15 16
<INVENTORY> 386 401 398 405
<CURRENT-ASSETS> 1,624 1,653 1,664 1,720
<PP&E> 8,727 8,628 8,537 8,578
<DEPRECIATION> 4,286 4,243 4,168 4,186
<TOTAL-ASSETS> 4,441 4,385 4,369 7,317
<CURRENT-LIABILITIES> 1,125 1,310 1,386 1,589
<BONDS> 2,292 2,213 2,212 2,102
<PREFERRED-MANDATORY> 0 0 0 0
<PREFERRED> 0 0 0 0
<COMMON> 125 125 125 125
<OTHER-SE> 2,523 2,485 2,433 2,454
<TOTAL-LIABILITY-AND-EQUITY> 7,244 7,226 7,214 7,317
<SALES> 4,638 3,424 2,274 1,121
<TOTAL-REVENUES> 4,638 3,424 2,274 1,121
<CGS> 2,772 2,042 1,379 693
<TOTAL-COSTS> 2,772 2,042 1,379 693
<OTHER-EXPENSES> 114 83 55 27
<LOSS-PROVISION> 6 5 2 1
<INTEREST-EXPENSE> 161 122 82 40
<INCOME-PRETAX> 630 474 303 148
<INCOME-TAX> 201 152 97 48
<INCOME-CONTINUING> 429 322 206 100
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 429 322 206 100
<EPS-PRIMARY> 3.90 2.92 1.87 .91
<EPS-DILUTED> 3.82 2.86 1.83 .89
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.III
<SEQUENCE>5
<DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULES FOR 1996
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF FORMS 10-K AND 10-Q, AS APPLICABLE, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K AND 10-Q, AS APPLICABLE. THIS SCHEDULE IS RESTATED
AND IS TO REPLACE THE PREVIOUSLY PROVIDED SCHEDULES FOR THEIR RESPECTIVE
PERIODS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996 SEP-30-1996 SEP-30-1996
<PERIOD-START> OCT-01-1995 OCT-01-1995 OCT-01-1995 OCT-01-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1 1 1
<CASH> 79 91 82 95
<SECURITIES> 0 0 0 0
<RECEIVABLES> 683 690 664 642
<ALLOWANCES> 13 14 15 14
<INVENTORY> 371 392 383 371
<CURRENT-ASSETS> 1,375 1,433 1,372 1,356
<PP&E> 8,103 7,909 7,691 7,501
<DEPRECIATION> 4,144 4,056 3,982 3,926
<TOTAL-ASSETS> 6,522 6,472 6,224 6,034
<CURRENT-LIABILITIES> 1,263 1,139 1,268 1,333
<BONDS> 1,739 1,850 1,495 1,314
<PREFERRED-MANDATORY> 0 0 0 0
<PREFERRED> 0 0 0 0
<COMMON> 125 125 125 125
<OTHER-SE> 2,449 2,464 2,428 2,320
<TOTAL-LIABILITY-AND-EQUITY> 6,522 6,472 6,224 6,034
<SALES> 4,008 2,957 1,960 947
<TOTAL-REVENUES> 4,008 2,957 1,960 947
<CGS> 2,408 1,763 1,169 560
<TOTAL-COSTS> 2,408 1,763 1,169 560
<OTHER-EXPENSES> 114 84 56 27
<LOSS-PROVISION> 5 4 3 1
<INTEREST-EXPENSE> 129 94 60 29
<INCOME-PRETAX> 609 475 333 131
<INCOME-TAX> 193 153 109 42
<INCOME-CONTINUING> 416 322 224 89
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 416 322 224 89
<EPS-PRIMARY> 3.73 2.88 2.01 .80
<EPS-DILUTED> 3.67 2.83 1.97 .78
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.IV
<SEQUENCE>6
<DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULE FOR 1995
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-K. THIS SCHEDULE IS RESTATED AND IS TO REPLACE THE PREVIOUSLY PROVIDED
SCHEDULE FOR THIS PERIOD.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 639
<ALLOWANCES> 14
<INVENTORY> 335
<CURRENT-ASSETS> 1,332
<PP&E> 7,350
<DEPRECIATION> 3,848
<TOTAL-ASSETS> 5,816
<CURRENT-LIABILITIES> 1,311
<BONDS> 1,194
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 125
<OTHER-SE> 2,273
<TOTAL-LIABILITY-AND-EQUITY> 5,816
<SALES> 3,865
<TOTAL-REVENUES> 3,865
<CGS> 2,317
<TOTAL-COSTS> 2,317
<OTHER-EXPENSES> 103
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 553
<INCOME-TAX> 185
<INCOME-CONTINUING> 368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.24
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| AZO | https://www.sec.gov/Archives/edgar/data/866787/0000866787-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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KXd/2NT4nWUdsXPRppzplw==
<SEC-DOCUMENT>0000866787-98-000002.txt : 19980107
<SEC-HEADER>0000866787-98-000002.hdr.sgml : 19980107
ACCESSION NUMBER: 0000866787-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971122
FILED AS OF DATE: 19980106
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOZONE INC
CENTRAL INDEX KEY: 0000866787
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531]
IRS NUMBER: 621482048
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0828
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10714
FILM NUMBER: 98501426
BUSINESS ADDRESS:
STREET 1: 123 SOUTH FRONT ST
CITY: MEMPHIS
STATE: TN
ZIP: 38103
BUSINESS PHONE: 9014956500
MAIL ADDRESS:
STREET 1: P O BOX 2198
STREET 2: DEPT 8074
CITY: MEMPHIS
STATE: TN
ZIP: 38101-9842
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended November 22, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to ________.
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1482048
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 152,089,797 shares as of January 2, 1998.
<PAGE> AUTOZONE,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Nov. 22, Aug. 30,
1997 1997
------------ -----------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,365 $ 4,668
Accounts receivable 22,384 18,713
Merchandise inventories 724,859 709,446
Prepaid expenses 20,208 20,987
Deferred income taxes 25,107 24,988
------------ -----------
Total current assets 796,923 778,802
Property and equipment:
Property and equipment 1,419,667 1,336,911
Less accumulated depreciation
and amortization (287,646) (255,783)
------------ -----------
1,132,021 1,081,128
Other assets:
Cost in excess of net assets acquired 16,428 16,570
Deferred income taxes 5,114 4,339
Other assets 3,789 3,178
------------ -----------
25,331 24,087
------------ -----------
$ 1,954,275 $ 1,884,017
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 465,274 $ 449,793
Accrued expenses 112,504 122,580
Income taxes payable 25,124 20,079
------------ -----------
Total current liabilities 602,902 592,452
Long-term debt 203,000 198,400
Other liabilities 16,607 17,957
Stockholders' equity 1,131,766 1,075,208
------------ -----------
$ 1,954,275 $ 1,884,017
============ ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE,INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Twelve Weeks Ended
---------------------------------
Nov. 22, Nov. 23,
1997 1996
------------ ------------
(in thousands, except per share amounts)
Net Sales $ 675,274 $ 569,145
Cost of sales, including warehouse
and delivery expenses 394,833 328,847
Operating, selling, general and
administrative expenses 201,793 178,400
----------- ------------
Operating profit 78,648 61,898
Interest expense-net 2,502 1,173
----------- ------------
Income before income taxes 76,146 60,725
Income taxes 28,600 22,750
----------- ------------
Net income $ 47,546 $ 37,975
=========== ============
Net income per share $ .31 $ .25
=========== ============
Average shares outstanding, including
common stock equivalents 153,823 152,394
=========== ============
SEE NOTES TO CONDENSED CONSOLIDATED FIANANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twelve Weeks Ended
---------------------------
Nov. 22, Nov. 23,
1997 1996
---------- ----------
(in thousands)
Cash flows from operating activities:
Net income $ 47,546 $ 37,975
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,630 17,482
Net increase in merchandise inventories (15,413) (54,586)
Net increase in current liabilities 10,450 22,656
Other - net (5,755) (10,874)
---------- ----------
Net cash provided by operating activities 56,458 12,653
Cash flows from investing activities:
Cash outflows for property
and equipment, net (70,373) (54,210)
Cash flows from financing activities:
Net proceeds from debt 4,600 38,600
Proceeds from sale of Common Stock, including
related tax benefit 9,012 2,931
---------- ----------
Net cash provided by financing activities 13,612 41,531
---------- ----------
Net decrease in cash and cash equivalents 303 26
Cash and cash equivalents at beginning of period 4,668 3,904
---------- ----------
Cash and cash equivalents at end of period $ 4,365 $ 3,878
========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the twelve weeks ended November 22, 1997, are not necessarily
indicative of the results that may be expected for the fiscal year ending
August 29, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended August 30, 1997.
NOTE B--INVENTORIES
Inventories are stated at the lower of cost or market using the last-
in, first-out (LIFO) method. An actual valuation of inventory under the
LIFO method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on management's estimates of expected year-end
inventory levels and costs.
NOTE C--DEBT
During December 1996, the Company executed an agreement with a group
of banks for a $275 million five-year unsecured revolving credit facility
to replace the existing revolving credit agreements. The rate of interest
payable under the agreement is a function of the London Interbank Offered
Rate (LIBOR), or the lending bank's base rate (as defined in the
agreement), or a competitive bid rate, at the option of the Company. At
November 22, 1997, the Company's borrowings under this agreement were $203
million and the weighted average interest rate was 5.8%. The unsecured
revolving credit agreement contains a covenant limiting the amount of debt
the Company may incur relative to its total capitalization.
On March 27, 1997, the Company acquired a negotiated rate unsecured
revolving credit agreement totaling $25 million which extends until March
26, 1998. There were no amounts outstanding under this agreement as of
November 22, 1997.
NOTE D--RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." SFAS No. 128 requires dual presentation of basic
earnings per share (EPS) and diluted EPS on the face of all statements of
earnings for periods ending after December 15, 1997. Basic EPS is computed
as net earnings divided by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock-based
compensation including stock options. Assuming the Company had adopted the
provisions of SFAS No. 128, EPS as reported and pro forma for the twelve
weeks ended November 22, 1997, compared to twelve weeks ended November 23,
1996 would be as follows November 22, 1997 - as reported: $0.31, basic:
$0.31; November 23, 1996 - as reported: $0.25, basic: $0.25. The Company's
reported EPS calculations are the same as pro forma diluted EPS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED NOVEMBER 22, 1997, COMPARED TO
TWELVE WEEKS ENDED NOVEMBER 23, 1996
Net sales for the twelve weeks ended November 22, 1997 increased by
$106.1 million, or 18.6%, over net sales for the comparable period of
fiscal 1997. This increase was due to a comparable store sales increase of
7%, (which was primarily due to sales growth in the Company's newer stores
and the added sales of the Company's commercial program), and increases in
net sales for stores opened since the beginning of fiscal 1997. At
November 22, 1997 the Company had 1,772 stores in operation compared with
1,477 stores at November 23, 1996.
Gross profit for the twelve weeks ended November 22, 1997, was $280.4
million, or 41.5% of net sales, compared with $240.3 million, or 42.2% of
net sales, during the comparable period for fiscal 1997. The decrease in
the gross profit percentage was due primarily to lower commodities gross
margins.
Operating, selling, general and administrative expenses for the twelve
weeks ended November 22, 1997 increased by $23.4 million over such expenses
for the comparable period for fiscal 1997, and decreased as a percentage of
net sales from 31.3% to 29.9%. The decrease in the expense ratio was due
primarily to a sales increase in the Company's commercial program,
favorable payroll leverage and efficiencies gained with the call center
closings. The number of stores participating in the commercial program was
1,282 at November 22, 1997.
The Company's effective income tax rate was 37.6% of pre-tax income
for the twelve weeks ended November 22, 1997 and 37.5% for the twelve weeks
ended November 23, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve weeks ended November 22, 1997, net cash of $56.5
million was provided by the Company's operations versus $12.7 million for
the comparable period of fiscal year 1997. The comparative increase in cash
provided by operations was due primarily to favorable inventory require-
ments in comparison to the twelve weeks ended November 23, 1996.
Capital expenditures for the twelve weeks ended November 22, 1997 were
$70.4 million. The Company anticipates that capital expenditures for fiscal
1998 will be approximately $400 million. Year-to-date, the Company opened
44 net new stores and 2 stores that replaced existing stores. The Company
plans to open approximately 350 net new stores during fiscal 1998.
The Company anticipates that it will rely on internally generated funds to
support a majority of its capital expenditures and working capital
requirements; the balance of such requirements will be funded through
borrowings. The Company has revolving credit agreements with several banks
providing for lines of credit in an aggregate maximum amount of $300
million. At November 22, 1997, the Company had borrowings outstanding under
these credit agreements of $203 million.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation of AutoZone, Inc. Incorporated by
reference to Exhibit 3.1 to the Form 10-K for the fiscal year ended August
27, 1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common stock to
200,000,000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for
the fiscal year ended August 27, 1994.
3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit
3.2 to the Registration Statement filed by the Company under the
Securities Act of 1993 (No. 33-45649) (the "February 1992 Form S-1").
4.1 Form of Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992 Form S-1.
4.2 Registration Rights Agreement, dated as of February 18, 1987, by
and among Auto Shack, Inc. and certain stockholders. Incorporated by
reference to Exhibit 4.9 to the Form S-1 Registration Statement filed by
the Company under the Securities Act of 1993 (No.33-9197) (the "April 1991
Form S-1").
4.3 Amendment to the Registration Rights Agreement dated as of August
1, 1993, by and among AutoZone, Inc. and certain stockholders. Incorporated
by reference to Exhibit 4.1 to the Form S-3 Registration Statement filed
by the Company under the Securities Act of 1933. (No. 33-67550).
4.4 Amendment No. 2 to the Registration Rights Agreement dated as of
November 6, 1997, by and among AutoZone, Inc. and certain stockholders.
Incorporated by reference to Exhibit 4.4 to the Form S-3 Registration
Statement filed by the Company under the Securities Act of 1933
(No. 333-39715).
10.1 Amended and Restated Agreement between J. R. Hyde III, and
AutoZone, Inc., dated October 23, 1997.
10.2 AutoZone Inc., Executive Incentive Compensation Plan.
Incorporated by reference to Exhibit A to the definitive Proxy Statement
dated November 14, 1994, filed by the Company pursuant to Regulation 14A of
the Securities Exchange Act of 1934.
10.3 Amended and Restated 1996 Stock Option Plan
11.1 Statement re: Computation of earnings per share.
27.1 Financial Data Schedule. (SEC Use Only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOZONE, INC.
By: /s/ Robert J. Hunt
---------------------------
Robert J. Hunt
Executive Vice President and
Chief Financial Officer-Customer Satisfaction
(Principal Financial Officer)
By: /s/ Michael E. Butterick
----------------------------
Michael E. Butterick
Vice President, Controller-Customer Satisfaction
(Principal Accounting Officer)
Dated: January 6, 1998
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation of AutoZone, Inc. Incorporated by
reference to Exhibit 3.1 to the Form 10-K for the fiscal year ended August
27, 1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common stock to
200,000,000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for
the fiscal year ended August 27, 1994.
3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit
3.2 to the Registration Statement filed by the Company under the
Securities Act of 1993 (No. 33-45649) (the February 1992 Form S-1).
4.1 Form of Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992 Form S-1.
4.2 Registration Rights Agreement, dated as of February 18, 1987, by
and among Auto Shack, Inc. and certain stockholders. Incorporated by
reference to Exhibit 4.9 to the Form S-1 Registration Statement filed by
the Company under the Securities Act of 1993 (No.33-9197), (the "April
1991 Form S-1").
4.3 Amendment to the Registration Rights Agreement dated as of August
1, 1993, by and among AutoZone, Inc. and certain stockholders. Incorporated
by reference to Exhibit 4.1 to the Form S-3 Registration Statement filed
by the Company under the Securities Act of 1933. (No. 33-67550).
4.4 Amendment No. 2 to the Registration Rights Agreement dated as of
November 6, 1997, by and among AutoZone, Inc., and certain stockholders.
Incorporated by reference to Exhibit 4.4 to the Form S-3 Registration
Statement filed by the Company under the Securities Act of 1933
(No. 333-39715).
10.1 Amended and Restated Agreement between J. R. Hyde III, and
AutoZone, Inc., Dated October 23, 1997.
10.2 AutoZone Inc., Executive Incentive Compensation Plan.
Incorporated by reference to Exhibit A to the definitive Proxy Statement
dated November 14, 1994, filed by the Company pursuant to Registration 14A
of the Securities Exchange Act of 1934.
10.3 Amended and Restated 1996 Stock Option Plan
11.1 Statement re: Computation of earnings per share.
27.1 Financial Data Schedule. (SEC Use Only)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<TEXT>
EXHIBIT 10.1
AMENDED AND RESTATED AGREEMENT
KNOW ALL MEN BY THESE PRESENTS, that J. R. Hyde, III ("Hyde") and
AutoZone, Inc., a Nevada corporation, and its subsidiaries (collectively
"AZO") for and in consideration of the promises, undertakings and benefits
first set out in this Agreement as of March 18, 1997, and as herein amended
and restated as of October 23, 1997, agree as follows:
1. EFFECTIVE DATE. Hyde resigns as an employee and Chairman of AZO
as of March 18, 1997 (the "Effective Date"). Notwithstanding such
resignation, Hyde shall remain a member of the Board of Directors of AZO
subject to election, resignation, and replacement in the same manner as
other members of the Board of Directors.
2. RELEASE. Except for the obligations of AZO and Hyde undertaken
pursuant to the terms of this Agreement, Hyde and AZO each release and
forever discharge the other and their respective employees, agents,
subsidiaries, predecessors, successors, affiliates, heirs, and assigns from
all claims of whatsoever nature and the right to receive compensation from
such claims, growing out of or in any way directly or indirectly connected
with the employment relationship between Hyde and AZO, included but not
limited to:
A. Breach of any express or implied term or condition of employment;
B. Any other causes of action under any federal, state or local law,
rule or regulation, including but not limited to claims under any
worker's compensation law, the Age Discrimination in Employment
Act (as amended), the Older Workers' Benefit Protection Act, the
Civil Rights Act of 1991, the Civil Rights Act of 1964 (as
amended), the Civil Rights Act of 1866, the Americans with
Disabilities Act of 1990, the Family and Medical Leave Act of
1993, and/or the Tax Reform Act of 1986 (as amended); and/or
C. Any right to receive any monetary damages or liability payments
from any actions at law or in equity filed on his behalf with
regard to his employment with or arising out of or relating to
his employment with AZO.
3. RECISION. AZO's offer as described in this Agreement will remain
open and effective for twenty-one (21) days from the Effective Date. Hyde
may elect to accept or reject this offer within that time period. If Hyde
does nothing within the twenty-one (21) day period, the offer shall be
deemed withdrawn by AZO. If Hyde does sign the Agreement within the
twenty-one (21) day period, Hyde will have seven (7) days following the
date he signed this Agreement to change his mind and revoke the Agreement
in writing. Therefore, this Agreement will not be in effect until seven
(7) days have passed following the date Hyde signs this Agreement.
4. BENEFITS. In consideration of the release granted by Hyde and
the other obligations undertaken by Hyde pursuant to this Agreement, AZO
agrees to provide, subject only to the limitations contained in this
Agreement, the following benefits in his favor (the "Benefits"):
A. Any vacation pay accrued as of the Effective Date;
B. A prorated bonus for AZO's 1997 fiscal year based on the period
from September 1, 1996, to the Effective Date. Such bonus shall be in
accordance with the bonus plan previously approved by the Compensation
Committee of AZO's Board of Directors and will be paid after the end of
AZO's 1997 fiscal year when the bonuses of all other executive officers of
AZO are paid;
C. AZO shall pay Hyde the following amounts ("Payments"), to be paid
in regular installments as and when AZO pays its regular employees:
1. For the period from March 19, 1997, to March 18, 1998, the sum of
$281,683.
2. For the period from March 19, 1998, to March 18, 1999, the sum of
$298,170.
3. For the period from March 19, 1999, to March 18, 2000, the sum of
$295,070.
4. For the period from March 19, 2000, to March 18, 2001, the sum of
$291,815.
5. For the period from March 19, 2001, to March 18, 2002, the sum of
$288,396.
D. Health and dental insurance during the period of time beginning
on the Effective Date and ending on the date that Hyde ceases to receive
payments pursuant to Section 3(C) of this Agreement as if Hyde were still
employed by AZO, and thereafter the coverage as required by law.
E. Personal security services, consisting of a single person
employed by AutoZone, to provide security services for Hyde in a manner
mutually agreed between the parties. Payments to Hyde are based upon the
assumption of the provision of the single person to Hyde to provide
security services. Should Hyde request that AutoZone provide additional or
different security services, or no security services, AutoZone and Hyde
agree that Payments shall be adjusted appropriately to reflect the change
in security services provided.
HYDE UNDERSTANDS AND AGREES THAT AUTOZONE IS NOT AN INSURER AND THE
SECURITY SERVICES ARE INTENDED TO DETER CRIME, BUT THE SECURITIES SERVICES
WILL NOT ELIMINATE THE POSSIBILITY OF SUCH.
FURTHER, HYDE UNDERSTANDS AND AGREES THAT THE ONLY SALARY OR BENEFITS
(OTHER THAN SUCH COMPENSATION HE MAY RECEIVE AS A NON-EMPLOYEE DIRECTOR OF
AZO) HE WILL RECEIVE FROM AZO ARE SET FORTH HEREIN, AND THAT ALL OTHER
SALARY OR BENEFITS HE IS PRESENTLY RECEIVING FROM AZO, INCLUDING BUT NOT
LIMITED TO LIFE INSURANCE, LONG TERM DISABILITY COVERAGE, SHORT TERM
DISABILITY COVERAGE AND STOCK PURCHASE PLAN, SHALL BE AND ARE TERMINATED AS
OF THE EFFECTIVE DATE. TIME IN SERVICE UNDER THE AUTOZONE, INC., ASSOCIATES
PENSION PLAN SHALL CEASE TO ACCRUE AS OF THE EFFECTIVE DATE.
The parties understand that applicable local, state, and federal tax
and appropriate insurance premium deductions and withholdings will be made
from all of the appropriate payments.
The parties further understand and agree that this Agreement shall not
diminish or adversely affect in any way Hyde's retirement benefits under
the AutoZone, Inc. Associates' Pension Plan, except that payment of
Benefits in no way increases the vesting period for retirement benefits nor
does it have any effect on the computation of retirement benefits which
shall be as provided for pursuant to the AutoZone, Inc. Associates' Pension
Plan.
5. NON-COMPETE. Hyde further agrees that he will not, for the
period commencing on the Effective Date and ending on the date five years
later, be engaged in or concerned with, directly or indirectly, any
business related to or involved in the retail sale of auto parts to "DIY"
customers, or the wholesale or retail sale of auto parts to commercial
installers in any state or area in which AZO operates now or shall operate
during the term of the non-compete agreement (herein called "Competitor"),
as an employee, consultant, beneficial or record owner, partner, joint
venturer, officer or agent of the Competitor. Notwithstanding the
foregoing, an investment by Hyde in an investment partnership or mutual
fund whereby Hyde does not own more than five (5%) percent of such
partnership or fund and does not or have the right to exercise investment
control, shall not be considered a breach of this Section 5.
The parties acknowledge and agree that the time, scope, geographic
area and other provisions of this Non-Compete section have been
specifically negotiated by sophisticated commercial parties and
specifically hereby agree that such time, scope, geographic area and other
provisions are reasonable under the circumstances. The parties further
agree that if, at any time, despite the express agreement of the parties
hereto, Hyde violates the provisions of this Non-Compete section and fails
to cure such violation within thirty days after him receipt of notice of
such violation from AZO, and if AZO attempts to enforce this Agreement and
a court of competent jurisdiction holds that any portion of this Non-
Compete section is unenforceable for any reason, AZO may cease paying any
further Benefits. In the event of breach by Hyde of any provision of this
Non-Compete section Hyde acknowledges that such breach will cause
irreparable damage to AZO, the exact amount of which will be difficult or
impossible to ascertain, and that remedies at law for any such breach will
be inadequate. Accordingly, AZO shall be entitled, in addition to any
other rights or remedies existing in its favor, to obtain, without the
necessity for any bond or other security, specific performance and/or
injunctive relief in order to enforce, or prevent breach of any such
provision and AZO shall be entitled to the remedies set forth in the
section entitled "Remedies." Further, Hyde agrees not to hire, for himself
or any other entity, encourage anyone or entity to hire, or entice away
from AZO any full time employee of AZO during the term of this non-compete
agreement other than current administrative personnel in the Chairman's
office.
6. CONFIDENTIALITY AND AZO PROPERTY. Unless otherwise required by
law, Hyde shall hold in confidence any proprietary or confidential
information obtained by him during his employment with AZO, which shall
include, but not be limited to, information regarding AZO's present and
future business plans, systems, operations and personnel. Confidential
information shall not include information: (a) publicly disclosed by
AutoZone; (b) rightfully received by Hyde from a third party without
restrictions on disclosure or use; (c) approved for release or disclosure
by AutoZone; or (d) produced or disclosed pursuant to applicable laws,
regulation or court order. Hyde acknowledges that all such confidential or
proprietary information is and shall remain the sole property of AZO and
all embodiments of such information shall remain with or be returned to
AZO.
7. AZO PROPERTY. Hyde agrees to return to AZO any and all property
of AZO within a reasonable time after the Effective Date. AZO acknowledges
that it is in possession of certain art belonging to Hyde and agrees to
return such art upon request by Hyde. During such time as such art is in
possession of AZO, AZO agrees to continue to take the same care as it is
currently taking to safeguard such art. AZO agrees to insure such art
while it is in the possession for such amounts as Hyde and AZO shall
mutually agree upon it being agreed that the current insurance is
sufficient until otherwise notified in writing by Hyde. AZO and Hyde agree
that should any damage occur to such art while it is in the possession,
AZO's liability to Hyde shall be limited to the insurance proceeds
recovered by AZO.
8. COMPLETE AGREEMENT. This Agreement contains the entire agreement
between the parties concerning the matters covered herein and integrates
and merges all prior understandings, discussions and negotiations. No
other agreements, oral or written, relating to the subject matter contained
herein shall be binding upon or enforceable against any of the parties.
This Agreement and the documents executed pursuant to it may be amended
only in a writing signed by authorized representatives of the parties. No
provision of this Agreement or any document executed pursuant to it may be
waived except in a writing signed by authorized representatives of the
parties.
This Agreement shall be governed and construed by the laws of the
State of Tennessee, without regard to its choice of law rules. The parties
agree that the only proper venue for any dispute under this Agreement shall
be in the state or federal courts located in Shelby County, Tennessee.
9. SEVERABILITY. The sections of this Agreement are intended to be
severable. If any section or provision of this Agreement shall be held to
be unenforceable by any court of competent jurisdiction, this Agreement
shall be modified to the minimum extent necessary to be enforceable, or if
such modification is not possible, then this Agreement shall be construed
as though such section or provision had not been included. If any section
or provision of this Agreement shall be subject to two constructions, one
of which would render such section or provision invalid, then such section
or provision shall be given that construction that would render it valid.
10. REMEDIES. In the event of breach by Hyde of any provision of this
Agreement, Hyde acknowledges that such breach will cause irreparable damage
to AZO, the exact amount of which will be difficult or impossible to
ascertain, and that remedies at law for any such breach will be inadequate.
Accordingly, AZO shall be entitled, in addition to any other rights or
remedies existing in its favor, to obtain, without the necessity for any
bond or other security, specific performance and/or injunctive relief to
enforce, or prevent breach of any such provision. In the event Hyde
breaches this Agreement in any way and fails to cure such breach within
thirty (30) days of receipt by Hyde of notice of such breach from AZO, any
unpaid Benefits shall immediately terminate. AZO shall have the right, but
not the obligation, to exercise any of its remedies under this Agreement or
any that may be allowed by law in the event of a breach of this Agreement.
Any such remedies available to AZO shall be cumulative, not exclusive. of
this Agreement. Any such remedies available to Hyde shall be cumulative,
not exclusive.
11. FURTHER ASSURANCES. Hyde warrants and represents to AZO that he
has returned to AZO all keys, documents, and other property of AZO. Should
Hyde fail or refuse to return any AZO property, AZO shall be entitled to
exercise its rights under "REMEDIES," in addition to any rights that AZO
may have by law.
The parties agree to execute on or after the date of the execution of
this Agreement any and all reasonable additional documents as requested by
the other or its counsel to effectuate the purposes hereof.
12. NOTICES. All notices shall be deemed received three days after it
is sent by certified mail, return receipt requested, or when actually
received by hand-delivery or overnight courier. All notices shall be sent
to:
To AutoZone: General Counsel
Legal Department
AutoZone, Inc.
123 South Front Street
Memphis, TN 38103-3607
To Hyde: P. O. Box 1152
Memphis, TN 38101-1152
IN WITNESS WHEREOF, the respective parties execute this Agreement.
AUTOZONE, INC.
By: /s/ Timothy D. Vargo /s/ J. R. Hyde, III
----------------------- -----------------------
J. R. Hyde, III
Title: President and COO
By: /s/ Harry L. Goldsmith
-----------------------
Title: Senior Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<TEXT>
EXHIBIT 10.3
AUTOZONE, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
AutoZone, Inc., a corporation organized under the laws of the State of
Nevada, by resolution of the Board of Directors of the Company (the
"Board") on October 21, 1996, and as approved by the stockholders of the
Company on December 12, 1996, adopted this AutoZone, Inc. 1996 Stock Option
Plan (the "Plan").
The Board of Directors of the Company by resolution adopt this Amended
and Restated 1996 Stock Option Plan effective as of October 21, 1997.
The purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to certain of its executive and
other key employees who have been or will be given responsibility for the
management or administration of the Company's business affairs, by
assisting them to become owners of capital stock of the Company and thus to
benefit directly from its growth, development and financial success.
(2) To enable the Company to obtain and retain the services of the type
of professional, technical and managerial employees considered essential to
the long-range success of the Company by providing and offering them an
opportunity to become owners of capital stock of the Company.
ARTICLE I
Definitions
Whenever the following terms are used in this Plan, they shall have
the meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter and
the singular shall include the plural, where the context so indicates.
Section 1.1--Affiliate
"Affiliate" shall mean any Subsidiary and any limited partnership of
which the Company or any Subsidiary is the general partner.
Section 1.2--Award Limit
"Award Limit" shall mean 500,000 shares of Common Stock.
Section 1.3--Board
"Board" shall mean the Board of Directors of the Company.
Section 1.4--Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.5--Committee
"Committee" shall mean the Compensation Committee or another committee
of the Board, appointed as provided in Section 6.1.
Section 1.6--Common Stock
"Common Stock" shall mean the common stock of the Company, par value
$.01 per share, and any equity security of the Company issued or authorized
to be issued in the future, but excluding any preferred stock and any
warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
Section 1.7--Company
"Company" shall mean AutoZone, Inc. In addition, "Company" shall mean
any corporation assuming, or issuing new employee stock options in
substitution for, Incentive Stock Options, outstanding under the Plan, in a
transaction to which Section 424(a) of the Code applies.
Section 1.8--Corporate Transaction
"Corporate Transaction" shall mean any of the following stockholder-
approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Awards are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who held
such securities immediately prior to such merger.
Section 1.9--Director
"Director" shall mean a member of the Board.
Section 1.10--Employee
"Employee" shall mean any employee (as defined in accordance with
Section 3401(c) of the Code) of the Employer, whether such employee is so
employed at the time this Plan is adopted or becomes so employed subsequent
to the adoption of this Plan.
Section 1.11--Employer
"Employer" shall mean the Company or an Affiliate, whichever at the
time employs the Employee.
Section 1.12--Exchange Act
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.13--Fair Market Value
"Fair Market Value" of a share of Common Stock as of a given date
shall be (i) the closing price of a share of Common Stock on the principal
exchange on which shares of Common Stock are then trading, if any (or as
reported on any composite index which includes such principal exchange), on
the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which
a trade occurred; or (ii) if Common Stock is not traded on an exchange but
is quoted on NASDAQ or a successor quotation system, the mean between the
closing representative bid and asked prices for the Common Stock on the
trading day previous to such date as reported by NASDAQ or such successor
quotation system; or (iii) if Common Stock is not publicly traded on an
exchange and not quoted on NASDAQ or a successor quotation system, the Fair
Market Value of a share of Common Stock as established by the Committee
acting in good faith.
Section 1.14--Incentive Stock Option
"Incentive Stock Option" shall mean an Option that qualifies under
Section 422 of the Code and which is designated as an Incentive Stock
Option by the Committee.
Section 1.15--Non-Qualified Option
"Non-Qualified Option" shall mean an Option which is not designated as
an Incentive Stock Option and which is designated as a Non-Qualified Option
by the Committee.
Section 1.16--Officer
"Officer" shall mean an officer of the Company, as defined in Rule
16a-1(f) under the Exchange Act, as such Rule may be amended in the future.
Section 1.17--Option
"Option" shall mean a stock option granted under Article III of this
Plan. An Option granted under this Plan, as determined by the Committee,
shall either be an Incentive Stock Option or a Non-Qualified Option,
provided, however that options granted to Employees of an Affiliate which
is not a Subsidiary shall be Non-Qualified Options.
Section 1.18--Grantee
"Grantee" shall mean an Employee to whom an Option is granted under
this Plan.
Section 1.19--Plan
"Plan" shall mean this 1996 Stock Option Plan of AutoZone, Inc.
Section 1.20--Rule 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended from time to time.
Section 1.21--Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.22--Securities Act
"Securities Act" shall mean the Securities Act of 1933, as amended.
Section 1.23--Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing
50% or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
Section 1.24--Termination of Employment
"Termination of Employment" shall mean the time when the employee-
employer relationship between an Grantee and the Employer is terminated for
any reason, with or without cause, including, but not by way of limitation,
a termination by resignation, discharge, death, or retirement, but
excluding (i) terminations where there is a simultaneous reemployment or
continuing employment of an Grantee by the Employer; (ii) at the discretion
of the Committee, terminations which result in a temporary severance of the
employee-employer relationship; and (iii) at the discretion of the
Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Employer with the former
Employee. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a
Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations
of Employment; provided, however, that, with respect to Incentive Stock
Options, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the
extent that, such leave of absence, change in status or other change
interrupts employment for the purposes of Section 422(a)(2) of the Code and
the then applicable regulations and revenue rulings under said Section.
However, notwithstanding any provision of this Plan, the Employer has an
absolute and unrestricted right to terminate an Employee's employment at
any time for any reason whatsoever, with or without cause, except to the
extent expressly provided otherwise in writing.
ARTICLE II
Shares Subject to Plan
Section 2.1--Shares Subject to Plan
(a) The shares of stock subject to Awards shall be Common Stock,
initially shares of the Company's common stock, $.01 par value. The
aggregate number of such shares which may be issued upon exercise of
Options under the Plan shall not exceed 6,000,000. The shares of Common
Stock issuable under the Plan upon exercise of such Options may be either
previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, the number of shares subject to Options which are canceled continue
to be counted against the Award Limit and if, after grant of an Option, the
price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and
both the Option deemed to be canceled and the Option deemed to be granted
are counted against the Award Limit.
Section 2.2--Add-back of Options
If any Option expires or is canceled without having been fully
exercised or vested, the number of shares subject to such Option, but as to
which such Option was not exercised or vested prior to its expiration or
cancellation, may again be awarded hereunder, subject to the limitations of
Section 2.1. Furthermore, any shares subject to Options which are adjusted
pursuant to Section 7.8 and become exercisable with respect to shares of
stock of another corporation, shall be considered canceled and may again be
awarded hereunder, subject to the limitations of Section 2.1. Shares of
Common Stock which are delivered by the Grantee or withheld by the Company
upon the exercise or vesting of any Option, in payment of the exercise
price thereof, may again be awarded hereunder, subject to the limitations
of Section 2.1. Notwithstanding the provisions of this Section 2.2, no
shares of Common Stock may again be optioned if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option
under Section 422 of the Code.
ARTICLE III
Granting of Options
Section 3.1--Eligibility
Any key Employee selected by the Committee pursuant to Section
3.4(a)(i) shall be eligible to be granted an Option, provided, however,
that an Employee of an Affiliate which is not a Subsidiary shall be
eligible to be granted Non- Qualified Options only.
Section 3.2--Qualification of Incentive Stock Options
No Incentive Stock Option shall be granted to any person who is not an
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company or a Subsidiary.
Section 3.3--Disqualification for Stock Ownership
No person may be granted an Incentive Stock Option under this Plan if
such person, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any then existing Subsidiary or
parent corporation unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
Section 3.4--Granting of Options
(a) The Committee shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(i) Determine which Employees are key employees (including Employees who
have previously received Options under this Plan, or any other plan of the
Company) and in its opinion should be granted Options; and
(ii) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to such selected Employees; and
(iii) Determine whether such Options are to be Incentive Stock Options or
Non-Qualified Options and whether such Options are to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code; and
(iv) Determine the terms and conditions of such Options, consistent with
the Plan; provided, however, that the terms and conditions of such Options
intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall include, but not be limited to, such
terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m)(4)(C) of the Code.
(b) Upon the selection of an Employee to be granted an Option, the
Committee shall instruct the Secretary to issue such Option and may impose
such conditions on the grant of such Option as it deems appropriate.
Without limiting the generality of the preceding sentence, the Committee
may, in its discretion and on such terms as it deems appropriate, require
as a condition of the grant of an Option to an Employee that the Employee
surrender for cancellation some or all of the unexercised Options which
have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
exercise price lower (or higher) than the exercise price of the surrendered
Option, may cover the same (or a lesser or greater) number of shares as the
surrendered Option, may contain such other terms as the Committee deems
appropriate and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, exercise period or any other term or
condition of the surrendered Option. However, in no event may Options to
purchase more than 300,000 shares of common stock be granted at a lower
price on a per share basis than the per share price of any Options required
to be surrendered.
(c) Any Incentive Stock Option granted under this Plan may be modified
by the Committee to disqualify such Option from treatment as an "incentive
stock option" under Section 422 of the Code.
Section 3.5--Consideration
Except as the Committee may otherwise determine, in consideration of
the granting of an Option, the Grantee shall agree, in the written Option
agreement, to remain in the employ of the Company, or any Affiliate, for a
period of at least one year (or such shorter period as may be fixed in the
Option agreement or by action of the Committee following grant of the
Option) after the Option is granted. Nothing in this Plan or in any Option
agreement hereunder shall confer upon any Grantee any right to continue in
the employ of his respective Employer, or shall interfere with or restrict
in any way the rights of each respective Employer, which are hereby
expressly reserved, to discharge any Grantee at any time for any reason
whatsoever, with or without cause.
ARTICLE IV
Terms of Options
Section 4.1--Option Agreement
Each Option shall be evidenced by a written Option agreement which
shall be executed by the Grantee and authorized Officers of the Company and
which shall contain such terms and conditions as the Committee shall
determine, consistent with the Plan. Option agreements evidencing Incentive
Stock Options shall contain such terms and conditions as may be necessary
to meet the applicable provisions of Section 422 of the Code. Stock Option
agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain
such terms and conditions as may be necessary to meet the applicable
provisions of Section 162(m) of the Code.
Section 4.2--Option Price
(a) Subject to subsection 4.2(b), the price per share of the shares
subject to each Option shall be set by the Committee; provided, however,
that such price shall be no less than eighty- five percent (85%) of the
Fair Market Value of the underlying shares on the date of grant; further
provided that (i) such price shall be no less than the par value of a share
of Common Stock, unless otherwise permitted by applicable state law, (ii)
in the case of Incentive Stock Options and Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, such price shall not be less than 100% of the Fair Market Value of a
share of Common Stock on the date the Option is granted; and (iii) in the
case of Incentive Stock Options granted to an individual then owning
(within the meaning of Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422
of the Code) such price shall not be less than 110% of the Fair Market
Value of a share of Common Stock on the date the Option is granted.
(b) Options to purchase no more than 300,000 shares of common stock
may be granted at a price lower than 100% of the Fair Market Value of the
underlying shares on the date of grant.
(c) Except as provided in 3.4(b), the price of an Option, once
established by the Committee as of the grant date, may not be lowered.
Section 4.3--Option Term
The term of an Option shall be set by the Committee in its discretion;
provided, however, that, in the case of Incentive Stock Options, the term
shall not be more than ten (10) years from the date the Incentive Stock
Option is granted, or five (5) years from such date if the Incentive Stock
Option is granted to an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company or any Subsidiary or parent
corporation thereof (within the meaning of Section 422 of the Code). Except
as limited by requirements of Section 422 of the Code and regulations and
rulings thereunder applicable to Incentive Stock Options, the Committee may
extend the term of any outstanding Option in connection with any
Termination of Employment of the Grantee, or amend any other term or
condition of such Option relating to such a termination.
Section 4.4--Option Vesting
(a) Except as the Committee may otherwise provide, no Option may be
exercised in whole or in part during the first year after such Option is
granted unless the Option is being granted in modification or substitution
of a previously granted Option, in which case the one year period shall be
measured from the date of the grant of the previously granted Option.
(b) Subject to the provisions of Sections 4.4(a) and 4.4(d), the
period during which the right to exercise an Option in whole or in part
vests in the Grantee shall be set by the Committee and the Committee may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted. At any time after grant of an Option,
the Committee may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during
which an Option vests.
(c) No portion of an Option which is unexercisable at Termination of
Employment shall thereafter become exercisable, except as may be otherwise
provided by the Committee either in the Option agreement or by action of
the Committee following the grant of the Option.
(d) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by a Grantee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-
Qualified Options to the extent required by Section 422 of the Code. The
rule set forth in the preceding sentence shall be applied by taking Options
into account in the order in which they were granted. For purposes of this
Section 4.4(d), the Fair Market Value of stock shall be determined as of
the time the Option with respect to such stock is granted.
ARTICLE V
Exercise of Options
Section 5.1--Partial Exercise
An exercisable Option may be exercised in whole or in part. However,
an Option shall not be exercisable with respect to fractional shares and
the Committee may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.
Section 5.2--Manner of Exercise
All or a portion of an exercisable Option shall be deemed exercised
upon delivery to the Secretary of the Company or his designee:
(a) A written notice complying with the applicable rules established by
the Committee stating that the Option, or a portion thereof, is exercised.
The notice shall be signed by the Grantee or other person then entitled to
exercise the Option or such portion;
(b) Such representations and documents as the Committee, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act, the Code, and any other
federal or state laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and
registrars;
(c) In the event that the Option or portion thereof shall be by any
person or persons other than the Grantee, appropriate proof of the right of
such person or persons to exercise the Option or portion thereof; and
(d) Full cash payment to the Company of the exercise price and any
applicable taxes for the shares with respect to which the Option, or
portion thereof, is exercised or through the delivery of a notice that the
Grantee has placed a market sell order with a broker approved by the
Company with respect to shares of Common Stock then issuable upon exercise
of the Option, and that the broker has been directed to pay a sufficient
portion of the net proceeds of the sale to the Company in satisfaction of
the Option exercise price and any applicable taxes. However, the Committee
may, in its discretion, allow payment, in whole or in part, through (i) the
delivery of shares of Common Stock owned by the Grantee, duly endorsed for
transfer to the Company with a Fair Market Value on the date of delivery
equal to the aggregate exercise price of the Option or exercised portion
thereof; (ii) allow payment, in whole or in part, through the delivery of a
full recourse promissory note bearing interest (at no less than such rate
as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Committee or the Board;
or (iii) allow payment through any combination of the foregoing. In the
case of a promissory note, the Committee may also prescribe the form of
such note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited
by law.
Section 5.3--Rights as Stockholders
Grantees shall not be, nor have any of the rights or privileges of,
stockholders of the Company in respect of any shares purchasable upon the
exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such Grantees.
Section 5.4--Transfer Restrictions
The Committee, in its absolute discretion, may impose such
restrictions on the transferability of the shares purchasable upon the
exercise of an Option as it deems appropriate. Any such restrictions shall
be set forth in the respective Option agreement and may be referred to on
the certificates evidencing such shares. Without limiting the generality of
the foregoing, the Committee may require the Employee to give the Company
prompt notice of any disposition of shares of stock acquired by exercise of
an Incentive Stock Option within two years from the date of granting such
Option or one year after the transfer of such shares to such Employee. The
Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to give prompt notice of
disposition.
ARTICLE VI
Administration
Section 6.1--Compensation Committee
The Committee shall consist solely of two or more Directors, appointed
by and holding office at the pleasure of the Board, each of whom is both a
"non- employee director" as defined by Rule 16b-3 and an "outside director"
for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee shall be filled by the Board.
Section 6.2--Duties and Powers of the Committee
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the agreements pursuant to
which Options are granted and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent herewith and
to interpret, amend or revoke any such rules. Any such interpretations and
rules in regard to Incentive Stock Options shall be consistent with
provisions of Section 422 of the Code. Any grant under this Plan need not
be the same with respect to each Grantee. In its absolute discretion, the
Board may at any time and from time to time exercise any and all rights and
duties of the Committee under this Plan except with respect to matters
which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or
rules issued thereunder, are required to be determined in the sole
discretion of the Committee.
Section 6.3--Majority Rule; Unanimous Written Consent
The Committee shall act by a majority of its members in attendance at
a meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.
Section 6.4--Professional Assistance; Good Faith Actions
All expenses and liabilities which members of the Committee incur in
connection with the administration of this Plan shall be borne by the
Company. The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its
Officers and Directors shall be entitled to rely upon the advice, opinions
or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee or Board in good
faith shall be final and binding upon all Grantees, the Company and all
other interested persons. No members of the Committee or the Board shall be
personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or the Awards, and all members of the
Committee and the Board shall be fully protected by the Company in respect
to any such action, determination or interpretation.
ARTICLE VII
Other Provisions
Section 7.1--Options Not Transferable
Options may not be sold, pledged, assigned, or transferred in any
manner other than by will or the laws of descent and distribution, unless
and until such Options have been exercised, and the shares underlying such
Options have been issued, and all restrictions applicable to such shares
have lapsed. No Option or interest or right therein or part thereof shall
be liable for the debts, contracts or engagements of the Grantee or his
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by operation
of law by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy), and any attempted disposition
thereof shall be null and void and of no effect except as otherwise
permitted in this Section 7.1.
Section 7.2--Eligibility to Exercise
Only a Grantee may exercise an Option granted under the Plan during
the Grantee's lifetime. After the death of the Grantee, any exercisable
portion of an Option may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Option agreement or other
agreement, be exercised by the Grantee's personal representative, or by any
person empowered to do so under the deceased Grantee's will or under the
then applicable laws of descent and distribution.
Section 7.3--Conditions to Issuance of Stock Certificates
The Company shall not be required to issue or deliver any certificate
or certificates for shares of stock purchased upon the exercise of any
Option prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body, which the Committee shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise of
the Option as the Committee may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares, including
payment of any applicable withholding tax.
Section 7.4--Amendment, Suspension or Termination of the Plan
Except as otherwise provided in this Section 7.4, the Plan may be
wholly or partially amended or otherwise modified, suspended or terminated
at any time or from time to time by the Board or the Committee. However, to
the extent required by Sections 422 or 162(m) of the Code, without approval
of the Company's stockholders given within 12 months before or after the
action by the Committee or Board, no action of the Committee or Board may
increase any limit imposed in Section 2.1 on the maximum number of shares
which may be issued under the Plan, modify the Award Limit, materially
modify the eligibility requirements of Section 3.1, or extend the limit
imposed in this Section 7.4 on the period during which Options may be
granted or amend or modify the Plan in a manner requiring stockholder
approval under Sections 422 or 162(m) of the Code, and no action of the
Committee or Board may be taken that would otherwise require stockholder
approval as a matter of applicable law, regulation or rule. Neither the
amendment, suspension nor termination of the Plan shall, without the
consent of the holder of the Option, alter or impair any rights or
obligations under any Option theretofore granted unless the Option
agreement itself expressly so provides. No Option may be granted during any
period of suspension nor after termination of the Plan, and in no event any
Option be granted under this Plan on or after October 21, 2006. No
amendment, suspension or termination of this Plan shall, without the
consent of the Grantees alter or impair any rights or obligations under any
Option theretofore granted or awarded, unless the Option agreement
otherwise expressly so provides.
Section 7.5--Approval of Plan by Stockholders
The Company shall take such actions with respect to the Plan as may be
necessary to satisfy the requirements of Sections 162(m) and 422 of the
Code. This Plan will be submitted for the approval of the Company's
stockholders within twelve months after the date of the Board's initial
adoption of this Plan. Options may not be granted under the Plan prior to
such stockholder approval.
Section 7.6--Effect of Plan Upon Other Compensation Plans
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Employers. Nothing in this Plan shall be
construed to limit the right of the Employers (a) to establish any other
forms of incentives or compensation for employees of the Employers or (b)
to grant or assume options otherwise than under this Plan in connection
with any proper corporate purpose, including, but not by way of limitation,
the grant or assumption of options in connection with the acquisition by
purchase, lease, merger, consolidation or otherwise, of the business, stock
or assets of any corporation, firm or association.
Section 7.7--Conformity to Securities Laws
The Plan is intended to conform to the extent necessary with all
provisions of the Securities Act, the Exchange Act, the Code, and any and
all regulations and rules promulgated by the Securities and Exchange
Commission and the Internal Revenue Service. Notwithstanding anything
herein to the contrary, the Plan shall be administered, and Options shall
be granted and may be exercised, only in such a manner as to conform to
such laws, rules and regulations. To the extent permitted by applicable
law, the Plan and Options granted hereunder shall be deemed amended to the
extent necessary to conform to such laws, rules and regulations.
Section 7.8--Changes in Common Stock or Assets of the Company, Acquisition
or
Liquidation of the Company and Other Corporate Events
(a) Subject to Section 7.8(d), in event that the Committee determines
that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company (including, but not limited
to, a Corporate Transaction), or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar corporate
transaction or event, in the Committee's sole discretion, affects the
Common Stock such that an adjustment is determined by the Committee to be
appropriate in order to prevent dilution or enlargement of the benefits
intended to be made available under the Plan or with respect to an Option,
then the Committee shall, in such manner as it may deem equitable, adjust
any or all of
(i) the number and kind of shares of Common Stock (or other securities or
property) with respect to which Options may be granted under the Plan,
(including, but not limited to, adjustments of the limitations in Section
2.1 on the maximum number and kind of shares which may be issued and
adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other securities
or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to Section 7.8(d), in the event of any Corporate
Transaction or other transaction or event described in Section 7.8(a) or
any unusual or nonrecurring transactions or events affecting the Company,
any affiliate of the Company, or the financial statements of the Company or
any affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee in its discretion is hereby authorized to take
any one or more of the following actions whenever the Committee determines
that such action is appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under
the Plan or with respect to any Option under this Plan, to facilitate such
transactions or events, or to give effect to such changes in laws,
regulations or principles:
(i) In its sole and absolute discretion, and on such terms and conditions
as it deems appropriate, the Committee may provide, either by the terms of
the Option agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the Grantee's
request, for either the purchase of any such Option for an amount of cash
equal to the amount that could have been attained upon the exercise of such
option, or award or realization of the Grantee's rights had such Option
been currently exercisable or payable or fully vested or the replacement of
such Option with other rights or property selected by the Committee in its
sole discretion;
(ii) In its sole and absolute discretion, the Committee may provide,
either by the terms of such Option or by action taken prior to the
occurrence of such transaction or event that it cannot be exercised after
such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee may provide, either by
the terms of such Option or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event, such option shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such Option;
(iv) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee may provide, either by
the terms of such Option agreement or by action taken prior to the
occurrence of such transaction or event, that upon such event, such Option
be assumed by the successor or survivor corporation, or a parent or
subsidiary thereof, or shall be substituted for by similar options, rights
or awards covering the stock of the successor or survivor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and prices; or
(v) In its sole and absolute discretion, and on such terms and conditions
as it deems appropriate, the Committee may make adjustments in the number
and type of shares of Common Stock (or other securities or property)
subject to outstanding Options and/or in the terms and conditions of
(including the grant or exercise price), and the criteria included in,
outstanding Options that may be granted in the future.
(c) Subject to Section 7.8(d) and 7.12, the Committee may, in its
discretion, include such further provisions and limitations in any Option
agreement or stock certificate, as it may deem equitable and in the best
interests of the Company.
(d) With respect to Options intended to qualify as performance-based
compensation under Section 162(m), no adjustment or action described in
this Section 7.8 or in any other provision of the Plan shall be authorized
to the extent that such adjustment or action would cause the Plan to
violate Section 422(b)(1) of the Code or would cause such Option to fail to
so qualify under Section 162(m), as the case may be, or any successor
provisions thereto. Furthermore, no such adjustment or action shall be
authorized to the extent such adjustment or action would result in short-
swing profits liability under Section 16 of the Exchange Act or violate the
exemptive conditions of Rule 16b-3 unless the Committee determines that the
Option is not to comply with such exemptive conditions.
(e) The number of shares of Common Stock subject to any Option shall
always be rounded to the nearest whole number.
Section 7.9--Tax Withholding
The Company shall be entitled to require payment in cash or deduction
from other compensation payable to each Grantee of any sums required by
federal, state or local tax laws to be withheld with respect to the
issuance, vesting or exercise of any Option. The Committee may in its
discretion and in satisfaction of the foregoing requirement allow such
Grantee to elect to have the Company withhold shares of Common Stock
otherwise issuable under such Option (or allow the return of shares of
Common Stock) having a Fair Market Value equal to the sums required to be
withheld.
Section 7.10--Loans
The Committee may, in its discretion, extend one or more loans to
Employees in connection with the exercise of an Option granted under this
Plan. The terms and conditions of any such loan shall be set by the
Committee.
Section 7.11--Forfeiture Provisions
Pursuant to its general authority to determine the terms and
conditions applicable to awards under the Plan, the Committee shall have
the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3) to provide, in the terms of an Option made under
the Plan, or to require the recipient to agree by separate written
instrument, that (i) any proceeds, gains or other economic benefit actually
or constructively received by the recipient upon any receipt or exercise of
the Option, or upon the receipt or resale of any Common Stock underlying
such Option, must be paid to the Company, and (ii) the Option shall
terminate and any unexercised portion of such Option (whether or not
vested) shall be forfeited, if (a) a Termination of Employment occurs prior
to a specified date, or within a specified time period following receipt or
exercise of the Option, or (b) the recipient at any time, or during a
specified time period, engages in any activity in competition with the
Company, or which is adverse, contrary or harmful to the interests of the
Company, as further defined by the Committee.
Section 7.12--Limitations Applicable to Section 16 Persons and Performance-
Based Compensation
Notwithstanding any other provision of this Plan, this Plan, and any
Option granted to any individual who is then subject to Section 16, shall
be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, the Plan and
Options granted hereunder shall be deemed amended to the extent necessary
to conform to such applicable exemptive rule. Furthermore, notwithstanding
any other provision of this Plan, any Option intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall be subject to any additional limitations set forth in Section
162(m) of the Code (including any amendment to Section 162(m) of the Code)
or any regulations or rulings issued thereunder that are requirements for
qualification as performance-based compensation as described in Section
162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the
extent necessary to conform to such requirements.
Section 7.13--Compliance with Laws
This Plan, the granting and vesting of Options under this Plan and the
issuance and delivery of shares of Common Stock and the payment of money
under this Plan or under Options granted hereunder are subject to
compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law
and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for
the Company, be necessary or advisable in connection therewith. Any
securities delivered under this Plan shall be subject to such restriction,
and the person acquiring such securities shall, if requested by the
Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law,
the Plan, Options granted or awarded hereunder shall be deemed amended to
the extent necessary to conform to such laws, rules or regulations.
Section 7.14--Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Plan.
Section 7.15--Governing Law
This Plan and any agreements hereunder shall be administered,
interpreted and enforced under the internal laws of the State of Nevada
without regard to the conflicts of laws rules thereof.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>4
<TEXT>
EXHIBIT 11.1
STATEMENT RE : COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE WEEKS ENDED
-----------------------------
Nov. 22, Nov. 23,
1997 1996
--------- ---------
PRIMARY:
Average shares outstanding 151,697 150,243
Net effect of dilutive stock options,
based on the treasury stock method,
using average fair market value 2,126 2,151
--------- ---------
Total shares used in computation 153,823 152,394
========= =========
Net Income $ 47,546 $ 37,975
========= =========
Per share amount $ 0.31 $ 0.25
========= =========
FULLY DILUTED:
Average share outstanding 151,697 150,243
Net effect of dilutive stock options,
based on the treasury stock method,
using higher of average or ending
fair market value 2,126 2,151
--------- ---------
Total shares used in computation 153,823 152,394
========= =========
Net Income $ 47,546 $ 37,975
========= =========
Per share amount $ 0.31 $ 0.25
========= =========
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for quarter ended November 22, 1997, and is
qualified in its entirety by reference to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> NOV-22-1997
<CASH> 4365
<SECURITIES> 0
<RECEIVABLES> 22384
<ALLOWANCES> 0
<INVENTORY> 724859
<CURRENT-ASSETS> 796923
<PP&E> 1419667
<DEPRECIATION> 287646
<TOTAL-ASSETS> 1954275
<CURRENT-LIABILITIES> 602902
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1520
<OTHER-SE> 1130246
<TOTAL-LIABILITY-AND-EQUITY> 1954275
<SALES> 675274
<TOTAL-REVENUES> 675274
<CGS> 394833
<TOTAL-COSTS> 394833
<OTHER-EXPENSES> 201793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2502
<INCOME-PRETAX> 76146
<INCOME-TAX> 28600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47546
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| AZO | https://www.sec.gov/Archives/edgar/data/866787/0000866787-98-000006.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000866787-98-000006.txt : 19980401
<SEC-HEADER>0000866787-98-000006.hdr.sgml : 19980401
ACCESSION NUMBER: 0000866787-98-000006
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19980214
FILED AS OF DATE: 19980331
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOZONE INC
CENTRAL INDEX KEY: 0000866787
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531]
IRS NUMBER: 621482048
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0828
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10714
FILM NUMBER: 98583114
BUSINESS ADDRESS:
STREET 1: 123 SOUTH FRONT ST
CITY: MEMPHIS
STATE: TN
ZIP: 38103
BUSINESS PHONE: 9014956500
MAIL ADDRESS:
STREET 1: P O BOX 2198
STREET 2: DEPT 8074
CITY: MEMPHIS
STATE: TN
ZIP: 38101-9842
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 14, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to ________.
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1482048
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 152,560,302 shares as of March 27, 1998.
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Feb. 14, Aug.30,
1998 1997
----------- -----------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,803 $ 4,668
Accounts receivable 19,703 18,713
Merchandise inventories 719,806 709,446
Prepaid expenses 17,609 20,987
Deferred income taxes 25,367 24,988
----------- -----------
Total current assets 787,288 778,802
Property and equipment:
Property and equipment 1,463,404 1,336,911
Less accumulated depreciation
and amortization (296,475) (255,783)
----------- -----------
1,166,929 1,081,128
Other assets:
Cost in excess of net assets
acquired 16,286 16,570
Deferred income taxes 6,559 4,339
Other assets 3,738 3,178
----------- -----------
26,583 24,087
----------- -----------
$ 1,980,800 $ 1,884,017
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 399,179 $ 449,793
Accrued expenses 114,486 122,580
Income taxes payable 19,653 20,079
----------- -----------
Total current liabilities 533,318 592,452
Long-term debt 263,800 198,400
Other liabilities 15,103 17,957
Stockholders' equity 1,168,579 1,075,208
----------- -----------
$ 1,980,800 $ 1,884,017
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------- ------------------------
Feb. 14, Feb. 15, Feb. 14, Feb. 15,
1998 1997 1998 1997
--------- --------- ----------- -----------
(in thousands, except per share amounts)
Net Sales $ 607,097 $ 538,012 $ 1,282,371 $ 1,107,157
Cost of sales, including warehouse
and delivery expenses 353,416 311,056 748,249 639,903
Operating, selling, general and
administrative expenses 195,599 177,739 397,392 356,139
--------- --------- ----------- -----------
Operating profit 58,082 49,217 136,730 111,115
Interest expense 3,028 2,110 5,530 3,283
--------- --------- ----------- -----------
Income before income taxes 55,054 47,107 131,200 107,832
Income taxes 20,700 17,700 49,300 40,450
--------- --------- ----------- -----------
Net income $ 34,354 $ 29,407 $ 81,900 $ 67,382
Weighted average shares
for basic earnings per share 152,061 150,509 151,879 150,385
Effect of dilutive stock options 1,640 1,742 1,883 1,879
--------- --------- ----------- -----------
Adjusted weighted average shares
for diluted earnings per share 153,701 152,251 153,762 152,264
========= ========= =========== ===========
Basic earnings per share $ 0.23 $ 0.20 $ 0.54 $ 0.45
========= ========= =========== ===========
Diluted earnings per share $ 0.22 $ 0.19 $ 0.53 $ 0.44
========= ========= =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-four Weeks Ended
---------------------------
Feb. 14, Feb.15,
1998 1997
----------- -----------
(in thousands)
Cash flows from operating activities:
Net income $ 81,900 $ 67,382
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 40,092 35,482
Net increase in merchandise inventories (10,360) (108,326)
Net decrease in current liabilities (59,134) (9,330)
Other - net (3,639) (9,966)
----------- ----------
Net cash provided by (used in)
operating activities 48,859 (24,758)
Cash flows from investing activities:
Cash outflows for property
and equipment, net (125,595) (103,344)
Cash flows from financing activities:
Net proceeds from debt 65,400 121,500
Proceeds from sale of Common Stock,
including related tax benefit 11,471 7,334
----------- ----------
Net cash provided by financing activities 76,871 128,834
----------- ----------
Net increase in cash and cash equivalents 135 732
Cash and cash equivalents at beginning of period 4,668 3,904
----------- ----------
Cash and cash equivalents at end of period $ 4,803 $ 4,636
=========== ==========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the twenty-four weeks ended February 14, 1998, are not
necessarily indicative of the results that may be expected for the fiscal
year ending August 29, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended August 30, 1997.
NOTE B--INVENTORIES
Inventories are stated at the lower of cost or market using the last-
in, first-out (LIFO) method. An actual valuation of inventory under the
LIFO method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on management's estimates of expected year-end
inventory levels and costs.
NOTE C--DEBT
On February 10, 1998, the Company increased its five-year unsecured
revolving credit facility by $75 million for a total of $350 million which
extends until December 2001. The rate of interest payable under the
agreement is a function of the London Interbank Offered Rate (LIBOR), or
the lending bank's base rate (as defined in the agreement), or a
competitive bid rate, at the option of the Company. At February 14, 1998,
the Company's borrowings under this agreement were $263.8 million and the
weighted average interest rate was 5.9%. The unsecured revolving credit
agreement contains a covenant limiting the amount of debt the Company may
incur relative to its total capitalization.
The Company also has a negotiated rate unsecured revolving credit
agreement totaling $25 million which extends until March 26, 1998. There
were no amounts outstanding under the agreement as of February 14, 1998.
On March 26, 1998 the Company amended this facility to extend the maturity
date to March 26, 1999.
NOTE D--SHAREHOLDERS EQUITY
In January 1998, the Company announced Board approval to purchase up to
$100 million of its common stock in the open market.
NOTE E--SUBSEQUENT EVENTS
On February 17, 1998, the Company acquired 100% of the voting stock of
ADAP, Inc. (Auto Palace) for $55 million in a transaction accounted for as
a purchase. Financial information of Auto Palace will be included in the
results of operations from the date of the acquisition. The Auto Palace
balance sheet and results of operations are not material to the consolidated
results of the Company.
On February 23, 1998, the Company acquired a 364-day credit facility
with a group of banks for $150 million. The rate of interest payable under
the agreement is a function of the London Interbank Offered Rate (LIBOR),
or the lending bank's base rate (as defined in the agreement), or a
competitive bid rate, at the option of the Company. The unsecured
revolving credit agreement contains a covenant limiting the amount of debt
the Company may incur relative to its total capitalization.
On March 2, 1998, the Company announced it had reached a definitive
agreement to acquire assets and liabilities of TruckPro, L.P. (TruckPro).
If consummated, the transaction would not have a material impact on the
fiscal 1998 financial position or consolidated operating results. The
transaction is subject to the satisfactory completion of certain conditions
and regulatory approvals. Financial information of TruckPro will be
included in the results of operations, if consummated, from the date of
acquisition.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED FEBRUARY 14, 1998, COMPARED TO
TWELVE WEEKS ENDED FEBRUARY 15, 1997
Net sales for the twelve weeks ended February 14, 1998 increased by
$69.1 million, or 12.8%, over net sales for the comparable period of fiscal
1997. This increase was due to a comparable store sales increase of 2%,
(which was primarily due to the sales growth of the Company's newer stores
and the added sales of the Company's commercial program), and increases in
net sales for stores opened since the beginning of fiscal 1997. At
February 14, 1998 the Company had 1,824 stores in operation compared with
1,516 stores at February 15, 1997.
Gross profit for the twelve weeks ended February 14, 1998, was $253.7
million, or 41.8% of net sales, compared with $227.0 million, or 42.2% of
net sales, during the comparable period for fiscal 1997. The decrease in
the gross profit percentage was due primarily to lower antifreeze gross
margins.
Operating, selling, general and administrative expenses for the twelve
weeks ended February 14, 1998 increased by $17.9 million over such expenses
for the comparable period for fiscal 1997, and decreased as a percentage of
net sales from 33.0% to 32.2%. The decrease in the expense ratio was due
primarily to a sales increase in the Company's commercial program, which
resulted in favorable commercial payroll leverage, and to efficiencies
gained with the closings of two call centers in fiscal 1997. The number of
stores participating in the commercial program was 1,275 at February 14,
1998.
The Company's effective income tax rate was 37.6% of pre-tax income
for the twelve weeks ended February 14, 1998 and February 15, 1997.
TWENTY-FOUR WEEKS ENDED FEBRUARY 14, 1998, COMPARED TO
TWENTY-FOUR WEEKS ENDED FEBRUARY 15, 1997
Net sales for the twenty-four weeks ended February 14, 1998 increased
by $175.2 million, or 15.8%, over net sales for the comparable period of
fiscal 1997. This increase was due to a comparable store sales increase of
5%, (which was primarily due to the sales growth of the Company's newer
stores and the added sales of the Company's commercial program), and
increases in net sales for stores opened since the beginning of fiscal
1997.
Gross profit for the twenty-four weeks ended February 14, 1998, was
$534.1 million, or 41.7% of net sales, compared with $467.3 million, or
42.2% of net sales, during the comparable period for fiscal 1997. The
decrease in the gross profit percentage was due primarily to lower
commodities gross margins.
Operating, selling, general and administrative expenses for the
twenty-four weeks ended February 14, 1998 increased by $41.3 million over
such expenses for the comparable period for fiscal 1997, and decreased as a
percentage of net sales from 32.2% to 31.0%. The decrease in the expense
ratio was due primarily to a sales increase in the Company's commercial
program, which resulted in favorable commercial payroll leverage, and to
efficiencies gained with the closing of two call centers in fiscal 1997.
The Company's effective income tax rate was 37.6% of pre-tax income
for the twenty-four weeks ended February 14, 1998 and 37.5% for the twenty-
four weeks ended February 15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-four weeks ended February 14, 1998, net cash of $48.9
million was provided by the Company's operations versus $24.8 million used
by operations for the comparable period of fiscal year 1997. The
comparative increase in cash provided by operations is due primarily to
improving inventory turnover.
Capital expenditures for the twenty-four weeks ended February 14, 1998
were $125.6 million. The Company anticipates that capital expenditures for
fiscal 1998 will be approximately $400 million. Year-to-date, the Company
opened 96 net new stores. The Company expects to add approximately 450
new stores including stores acquired through the Auto Palace and TruckPro
acquisitions and approximately 17 to 20 replacement stores during fiscal
1998.
The Company anticipates that it will rely on internally generated funds to
support a majority of its capital expenditures and working capital
requirements; the balance of such requirements, as well as the stock
repuchase and acquisitions, will be funded through borrowings. The Company
has a five-year revolving credit agreement with a group of banks for $350
million. At February 14, 1998 the Company had borrowings outstanding
under this credit agreement of $263.8 million. Additionally, on
February 23, 1998 the Company acquired a 364-day credit facility with a
group of banks for $150 million.
In January 1998, the Company announced Board approval to purchase up
to $100 million of its common stock in the open market.
YEAR 2000 CONVERSION
The Company established a team to coordinate the identification,
evaluation, and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no
effect on customers or disruption to business operations. These actions
are necessary to ensure that the systems and applications will recognize
and process the year 2000 and beyond. Major areas of potential business
impact have been identified and conversion efforts are underway. The
Company also is communicating with suppliers, dealers, financial
institutions and others with which it does business to assess the impact of
their year 2000 conversion plans on the Company. The total cost of
compliance and its effect on the Company's future results of operations
have been estimated as part of the detailed conversion planning. The
Company believes the costs of conversion will not be material. The Company
could be materially affected by the failure of a number of its vendors to
achieve year 2000 date conversion.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, store development and expansion strategy, business
strategies, future revenues and future performance. The forward-looking
statements are subject to risks, uncertainties and assumptions including,
but not limited to competitive pressures, demand for the Company's
products, the market for auto parts, the economy in general, inflation,
consumer debt levels and the weather. Actual results may materially differ
from anticipated results described in these forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Shareholders of the Company was held on
December 18, 1997.
(b) Not applicable.
(c) 1. Election of Directors. All nominees for director were elected
pursuant to the following vote:
VOTES FOR VOTES WITHHELD
------------ ----------------
Johnston C. Adams, Jr. 139,093,584 1,041,128
Andrew M. Clarkson 139,104,265 1,030,447
N. Gerry House 123,114,966 17,019,746
Robert J. Hunt 139,103,108 1,031,604
J. R. Hyde, III 139,108,136 1,026,576
James F. Keegan 139,096,153 1,038,559
Michael W. Michelson 138,961,176 1,173,536
John E. Moll 139,051,369 1,083,343
George R. Roberts 138,957,553 1,177,159
Ronald A. Terry 139,093,249 1,041,463
Timothy D. Vargo 139,108,190 1,026,522
2. Approval of Amended and Restated Employee Stock Purchase Plan:
134,665,744 votes in favor; 2,200,515 votes against;
and 268,453 shares abstained from voting.
3. Ratification of Ernst & Young LLP, as the Company's independent
auditors: 139,868,092 votes in favor; 90,046 votes against;
and 176,574 shares abstained from voting.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation of AutoZone, Inc. incorporated by
reference to Exhibit 3.1 to the Form 10-K for the fiscal year
ended August 27, 1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common
stock to 200,000,000. Incorporated by reference to Exhibit 3.2
to the Form 10-K for the fiscal year ended August 27, 1994.
3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit
3.2 to the Registration Statement filed by the Company under the
Securities Act of 1933 (No. 33-45649) (the February 1992 Form
S-1).
4.1 Form of Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992
Form S-1.
10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several
lenders from time to time party thereto, NationsBank, N.A., as
Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent, dated December
20, 1996. Incorporated herein by reference to the Form 10-Q for the
quarter ended February 15, 1997.
10.2 Amendment No. 1 to Credit Agreement dated as of February 10, 1998
among AutoZone, Inc., as Borrower, the several lenders from time to
time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank,
Nashville, N.A. as Co-Agent.
27.1 Financial Data Schedule. (SEC Use Only)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOZONE, INC.
By: /s/ Robert J. Hunt
---------------------
Robert J. Hunt
Executive Vice President and
Chief Financial Officer-Customer Satisfaction
(Principal Financial Officer)
By: /s/ Michael E. Butterick
-------------------------
Michael E. Butterick
Vice President, Controller-Customer Satisfaction
(Principal Accounting Officer)
Dated: March 31, 1998
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation of AutoZone, Inc. incorporated by
reference to Exhibit 3.1 to the Form 10-K for the fiscal year
ended August 27, 1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common
stock to 200,000,000. Incorporated by reference to Exhibit 3.2
to the Form 10-K for the fiscal year ended August 27, 1994.
3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit
3.2 to the Registration Statement filed by the Company under the
Securities Act of 1933 (No. 33-45649) (the February 1992 Form
S-1).
4.1 Form of Common Stock Certificate. Incorporated by reference to
Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992
Form S-1.
10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several
lenders from time to time party thereto, NationsBank, N.A., as
Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent, dated December
20, 1996. Incorporated herein by reference to the Form 10-Q for the
quarter ended February 15, 1997.
10.2 Amendment No. 1 to Credit Agreement dated as of February 10, 1998
among AutoZone, Inc., as Borrower, the several lenders from time to
time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank,
Nashville, N.A. as Co-Agent.
27.1 Financial Data Schedule. (SEC Use Only)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<TEXT>
EXHIBIT 10.2
AMENDMENT NO. 1 TO CREDIT AGREEMENT
THIS AMENDMENT AGREEMENT (this "AMENDMENT NO. 1"), dated as of
February 10, 1998, among AUTOZONE, INC., a Nevada corporation (the
"BORROWER"), the various lending institutions parties hereto (each a
"Lender" and collectively, the "LENDERS"), and NATIONSBANK, N.A., a
national Lending association, as agent for the Lenders (in such capacity,
the "AGENT");
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, United States National Bank of
Oregon ("USNBO") and the Agent entered into that certain Credit Agreement,
dated as of December 20, 1996 (the "EXISTING CREDIT AGREEMENT"); and
WHEREAS, the Borrower has elected to exercise its rights pursuant to
Section 3.4(b) of the Existing Credit Agreement to increase the Revolving
Committed Amount from $275,000,000 to $350,000,000 and the Lenders have
agreed to participate in such increase; and
WHEREAS, USNBO has declined to participate in such increase and has
requested to have its Loans repaid in full and its Revolving Commitment
terminated; and
WHEREAS, immediately prior to the effectiveness of this Amendment No.
1, the Loans of USNBO have been repaid and its Revolving Commitment
terminated; and
WHEREAS, the Borrower, the Lenders and the Agent have agreed to
execute this Amendment No. 1 for purposes of reflecting the increase in the
Revolving Committed Amount from $275,000,000 to $350,000,000 and the
repayment of the Loans of USNBO and the termination of the Revolving
Commitment of USNBO;
NOW, THEREFORE, in consideration of the agreements herein contained,
the parties hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. CERTAIN DEFINITIONS. Unless otherwise defined herein or
the context otherwise requires, terms used in this Amendment No. 1,
including its preamble and recitals, have the following meanings (such
meanings to be equally applicable to the singular and plural forms
thereof):
"AMENDED CREDIT AGREEMENT" means the Existing Credit Agreement as
amended hereby.
"AMENDMENT NO. 1 EFFECTIVE DATE" is defined in SUBPART 3.1.
SUBPART 1.2. OTHER DEFINITIONS. Unless otherwise defined herein or
the context otherwise requires, terms used in this Amendment No. 1,
including its preamble and recitals, have the meanings provided in the
Amended Credit Agreement.
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 1
Effective Date, the Existing Credit Agreement is hereby amended in
accordance with this PART II. Except as so amended, the Existing Credit
Agreement, the Notes and the other Credit Documents shall continue in full
force and effect.
SUBPART 2.1 AMENDMENTS TO SECTION 1. Section 1 of the Existing
Credit Agreement is hereby amended by inserting, in the alphabetically
appropriate place, the following definitions:
"AMENDMENT NO. 1" means Amendment No. 1 to Credit Agreement,
dated as of February 10, 1998, among the Borrower, the Agent and
the Lenders, amending this Credit Agreement as then in effect.
SUBPART 2.2 AMENDMENTS TO SCHEDULE 2.1(A). SCHEDULE 2.1(A) to the
Existing Credit Agreement is deleted and replaced with SCHEDULE 2.1(A)
attached hereto.
PART III
CONSENTS AND AGREEMENTS
SUBPART 3.1 SECTION 3.4(B). The Borrower acknowledges and agrees
that it shall have no additional rights pursuant to Section 3.4(b) of the
Existing Credit Agreement after the effectiveness of this Amendment No. 1.
The Borrower and the Lenders agree that the execution of this Amendment No.
1 shall satisfy all of the requirements under Section 3.4(b) (including all
notice requirements thereunder).
SUBPART 3.2 USNBO. The Lenders hereby consent to the repayment of
the Loans of USNBO and the termination of the Revolving Commitment of USNBO
and waive any violations of Sections 3.12 and 3.13 of the Existing Loan
Agreement on account of such repayment and termination.
PART IV
CONDITIONS TO EFFECTIVENESS
SUBPART 4.1. AMENDMENT NO. 1 EFFECTIVE DATE. This Amendment shall be
and become effective on such date (the "AMENDMENT NO. 1 EFFECTIVE DATE") on
or prior to February 10, 1998, when all of the conditions set forth in this
SUBPART 4.1 shall have been satisfied, and thereafter, this Amendment No. 1
shall be known, and may be referred to, as "Amendment No. 1."
SUBPART 4.1.1. EXECUTION OF COUNTERPARTS. The Agent shall have
received counterparts of this Amendment No. 1, each of which shall have
been duly executed on behalf of the Borrower, the Agent and the Lenders.
SUBPART 4.1.2. REVOLVING NOTES AND COMPETITIVE NOTES. The Agent
shall have received a replacement Revolving Note and a replacement
Competitive Note for each Lender, each of which shall have been duly
executed on behalf of the Borrower. The Lenders agree to return their
existing Revolving Notes and their existing Competitive Notes promptly
after their receipt of the replacement notes therefor.
SUBPART 4.1.3. LEGAL DETAILS, ETC. All documents executed or
submitted pursuant hereto shall be reasonably satisfactory in form and
substance to the Agent and its counsel. The Agent and its counsel shall
have received all information, and such counterpart originals or such
certified or other copies of such originals, as the Agent or its counsel
may reasonably request, and all legal matters incident to the transactions
contemplated by this Amendment No. 1 shall be reasonably satisfactory to
the Agent and its counsel.
PART V
MISCELLANEOUS
SUBPART 5.1 CROSS-REFERENCES. References in this Amendment No. 1 to
any Part or Subpart are, unless otherwise specified, to such Part or
Subpart of this Amendment No. 1.
SUBPART 5.2 INSTRUMENT PURSUANT TO EXISTING CREDIT AGREEMENT. This
Amendment No. 1 is a document executed pursuant to the Existing Credit
Agreement and shall (unless otherwise expressly indicated therein) be
construed, administered and applied in accordance with the terms and
provisions of the Existing Credit Agreement.
SUBPART 5.3 CREDIT DOCUMENTS. The Borrower hereby confirms and
agrees that the Credit Documents are, and shall continue to be, in full
force and effect, and hereby ratifies and confirms in all respects its
obligations thereunder, except that, upon the effectiveness of, and on and
after the date of, this Amendment No. 1, all references in each Credit
Document to the "Credit Agreement", "thereunder", "thereof" or words of
like import referring to the Existing Credit Agreement shall mean the
Amended Credit Agreement.
SUBPART 5.4 COUNTERPARTS, EFFECTIVENESS, ETC. This Amendment No. 1
may be executed by the parties hereto in several counterparts, each of
which shall be deemed to be an original and all of which shall constitute
together but one and the same agreement.
SUBPART 5.5 GOVERNING LAW; ENTIRE AGREEMENT. THIS AMENDMENT NO. 1
SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF NORTH CAROLINA WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAW PRINCIPLES THEREOF.
SUBPART 5.6 SUCCESSORS AND ASSIGNS. This Amendment No. 1 shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
SUBPART 5.7 REPRESENTATIONS AND WARRANTIES. The Borrower represents
and warrants to the Agent and the Lenders that (i) the representations and
warranties made in Section 5 of the Existing Credit Agreement are true and
correct on and as of the Amendment No. 1 Effective Date as though made on
such date and (ii) no Default or Event of Default has occurred and remains
uncured as of the Amendment No. 1 Effective Date.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
1 to be executed by their respective duly authorized officers as of the day
and year first above written.
AUTOZONE, INC.
By /s/ Robert J. Hunt
-----------------------
Title EVP & CFO
By /s/ Harry L. Goldsmith
------------------------
Title S.V.P.
NATIONSBANK, N.A.,
in its capacity as Agent and
in its individual capacity
as a Lender
By /s/ Mark D. Halmrast
------------------------
Mark D. Halmrast
Title Vice President
SUNTRUST BANK, NASHVILLE, N.A.,
individually in its capacity as a Lender
and in its capacity as Co-Agent
By /s/ Bryan W. Ford
-------------------------
Bryan W. Ford
Title Vice President
Bank of America NT & SA,
successor by merger to
BANK OF AMERICA ILLINOIS
By /s/ Sandra S. Ober
---------------------------
Sandra S. Ober
Title Managing Director
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Catherine A. Muszynski
----------------------------
Catherine A. Muszynski
Title Vice President
FIRST UNION NATIONAL BANK OF
TENNESSEE
By /s/ Robert T. Page
-------------------------------
Title VP
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By /s/ Joseph M. Evangelisti
-------------------------------
Title SVP
UNION PLANTERS BANK, N.A.
By /s/ Leonard McKinnon
--------------------------------
Title Senior Vice President
<PAGE>
SCHEDULE 2.1(A)
LENDERS
<TABLE>
<CAPTION>
Commitment Revolving
LENDER PERCENTAGE COMMITMENT
<S> <C> <C>
NationsBank, N.A. 21.4285714% $75,000,000.00
NationsBank Corporate Center
NC1007-8-7
Charlotte, NC 28255
Attn: Jeb Ball
Tel: (704) 386-9718
Fax: (704) 388-0373
SunTrust Bank, Nashville, N.A. 20.0000000% $70,000,000.00
6410 Poplar Avenue
Suite 320
Memphis, TN 38119
Attn: Bryan W. Ford
Tel: (901) 766-7561
Fax: (901) 766-7565
Bank of America Illinois 18.5714286% $65,000,000.00
231 S. LaSalle
Chicago, IL 60697
Attn: Casey Cosgrove
Tel: (312) 828-3092
Fax: (312) 828-6269
The First National Bank of Chicago 14.2857143% $50,000,000.00
One First National Plaza
Mail Suite 0086
Chicago, IL 60670-0324
Attn: Cathy Muszynski
Tel: (312) 732-7634
Fax: (312) 732-1117
First Union National Bank 12.8571429% $45,000,000.00
150 4th Avenue
2nd Floor
Nashville, TN 37219
Attn: Larry Fuschino
Tel: (615) 251-0857
Fax: (615) 251-0894
Union Planters National Bank 7.1428571% $25,000,000.00
6200 Poplar Avenue
4th Floor
Memphis, TN 38119
Attn: Leonard McKinnon
Tel: (901) 580-5481
Fax: (901) 580-5451
First Tennessee Bank National Association 5.7142857% $20,000,000.00
165 Madison Avenue, 9th Floor
Memphis, TN 38103
Attn: Jim Moore
Tel: (901) 523-4108
Fax: (901) 523-4267
Total: 100% $350,000,000.00
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the quarter ended February 14, 1998, and
is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> FEB-14-1998
<CASH> 4803
<SECURITIES> 0
<RECEIVABLES> 19703
<ALLOWANCES> 0
<INVENTORY> 719806
<CURRENT-ASSETS> 787288
<PP&E> 1463404
<DEPRECIATION> 296475
<TOTAL-ASSETS> 1980800
<CURRENT-LIABILITIES> 533318
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1521
<OTHER-SE> 1167058
<TOTAL-LIABILITY-AND-EQUITY> 1980800
<SALES> 1282371
<TOTAL-REVENUES> 1282371
<CGS> 748249
<TOTAL-COSTS> 748249
<OTHER-EXPENSES> 397392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5530
<INCOME-PRETAX> 131200
<INCOME-TAX> 49300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81900
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| BDX | https://www.sec.gov/Archives/edgar/data/10795/0000950130-98-000699.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950130-98-000699.txt : 19980218
<SEC-HEADER>0000950130-98-000699.hdr.sgml : 19980218
ACCESSION NUMBER: 0000950130-98-000699
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980213
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BECTON DICKINSON & CO
CENTRAL INDEX KEY: 0000010795
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
IRS NUMBER: 220760120
STATE OF INCORPORATION: NJ
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-20669
FILM NUMBER: 98539952
BUSINESS ADDRESS:
STREET 1: ONE BECTON DR
CITY: FRANKLIN LAKES
STATE: NJ
ZIP: 07417-1880
BUSINESS PHONE: 2018476800
MAIL ADDRESS:
STREET 1: ONE BECTON DR
CITY: FRANKLIN LAKE
STATE: NJ
ZIP: 07417
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to________________________
Commission file number 1-4802
------------
Becton, Dickinson and Company
---------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-0760120
- ---------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Becton Drive Franklin Lakes, New Jersey 07417-1880
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201)847-6800
-------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No ____.
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Shares Outstanding as of January 31, 1998
--------------------- -----------------------------------------
Common stock, par value $1.00 122,175,189
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
---------------------
Condensed Consolidated Balance Sheets at December 31, 1997 and
September 30, 1997
Condensed Consolidated Statements of Income for the three months ended
December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1997 1997
- ------ -------------- --------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and equivalents $ 118,477 $ 112,639
Short-term investments 30,511 28,316
Trade receivables, net 532,434 595,685
Inventories (Note 2):
Materials 97,858 92,307
Work in process 77,523 79,519
Finished products 263,151 266,511
-------------- --------------
438,532 438,337
Prepaid expenses, deferred taxes and other 160,506 137,632
-------------- --------------
Total Current Assets 1,280,460 1,312,609
Property, plant and equipment 2,584,236 2,549,828
Less allowances for depreciation and amortization 1,330,512 1,299,123
-------------- --------------
1,253,724 1,250,705
Goodwill, Net 188,036 164,097
Other Intangibles, Net 168,535 167,847
Other 186,426 184,994
-------------- --------------
Total Assets $ 3,077,181 $ 3,080,252
============== ==============
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-term debt $ 99,297 $ 132,440
Payables and accrued expenses 569,134 545,757
-------------- --------------
Total Current Liabilities 668,431 678,197
Long-Term Debt 664,968 665,449
Long-Term Employee Benefit Obligations 314,139 306,514
Deferred Income Taxes and Other 48,202 44,659
Commitments and Contingencies - -
Shareholders' Equity:
Preferred stock 50,556 51,111
Common stock 166,366 167,245
Capital in excess of par value 87,732 83,422
Cumulative currency translation adjustments (102,950) (86,870)
Retained earnings 2,254,984 2,249,463
Unearned ESOP compensation (28,716) (28,620)
Shares in treasury - at cost (1,046,531) (1,050,318)
-------------- --------------
Total Shareholders' Equity 1,381,441 1,385,433
-------------- --------------
Total Liabilities and Shareholders' Equity $ 3,077,181 $ 3,080,252
============== ==============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Thousands of Dollars, Except Per Share Data
(Unaudited)
Three Months Ended
December 31,
-----------------------------------
1997 1996
---------------- -----------------
REVENUES $ 701,640 $ 655,799
Cost of products sold 354,803 343,132
Selling and administrative 199,140 186,530
Research and development 44,630 39,656
-------------- ---------------
TOTAL OPERATING COSTS AND EXPENSES 598,573 569,318
-------------- ---------------
OPERATING INCOME 103,067 86,481
Interest expense, net (10,241) (9,447)
Other (expense) income, net (2,233) 4,808
-------------- ---------------
INCOME BEFORE INCOME TAXES 90,593 81,842
Income tax provision 26,272 23,734
-------------- ---------------
NET INCOME $ 64,321 $ 58,108
============== ===============
Basic Earnings Per Share $ .52 $ .46
============== ===============
Diluted Earnings Per Share $ .50 $ .44
============== ===============
Dividends Per Common Share $ .145 $ .13
============== ===============
See notes to condensed consolidated financial statements
4
<PAGE>
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Dollars
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Operating Activities:
Net income $ 64,321 $ 58,108
Adjustments to net income to derive net cash
provided by operating activities:
Depreciation and amortization 52,977 49,659
Change in working capital 34,043 9,926
Other, net 12,638 21,297
----------- ------------
Net cash provided by operating activities 163,979 138,990
----------- ------------
Investing Activities:
Capital expenditures (43,998) (30,775)
Acquisition of business, net of cash acquired (39,525) -
Proceeds from divestiture of business - 20,860
Change in investments, net 7,133 12,185
Other, net (12,610) (12,849)
----------- ------------
Net cash used for investing activities (89,000) (10,579)
----------- ------------
Financing Activities:
Change in short-term debt (30,207) (64,272)
Proceeds of long-term debt - 97,838
Payments of long-term debt (407) (101,071)
Issuance of common stock 5,987 3,554
Repurchase of common stock (42,745) (44,994)
Dividends paid (687) (858)
----------- ------------
Net cash used for financing activities (68,059) (109,803)
----------- ------------
Effect of exchange rate changes on cash and equivalents (1,082) (1,082)
----------- ------------
Net increase in cash and equivalents 5,838 17,526
Opening Cash and Equivalents 112,639 135,151
----------- ------------
Closing Cash and Equivalents $ 118,477 $ 152,677
=========== ============
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
BECTON, DICKINSON AND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the opinion of
the management of the Company, include all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of financial position and
the results of operations and cash flows for the periods presented. However,
the financial statements do not include all information and footnotes required
for a presentation in accordance with generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included or
incorporated by reference in the Company's 1997 Annual Report on Form 10-K. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
Note 2 - Inventory Valuation
- ----------------------------
An actual valuation of inventory under the LIFO method can be made only at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs.
Note 3 - Earnings per Share
- ---------------------------
In the quarter ended December 31, 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. This Statement simplifies the computation of
earnings per share by replacing the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share,
respectively. Unlike primary earnings per share, basic earnings per share
exclude any dilutive effect of options, warrants and convertible securities.
Diluted earnings per share are very similar to the previously reported fully
diluted earnings per share. All share and per share data for all periods have
been presented and, where necessary, restated to conform to the SFAS No.128
requirements.
6
<PAGE>
The reconciliation between the calculation of basic and diluted earnings per
share follows:
Three Months Ended
December 31,
--------------------
1997 1996
--------- ---------
Numerator:
- ----------
Net income $ 64,321 $ 58,108
Preferred stock dividends (825) (853)
-------- --------
Numerator for basic earnings per
share - income available to
common shareholders 63,496 57,255
Effect of dilutive securities:
Preferred stock dividends - using
"if converted" method 825 853
Additional ESOP contribution -
using "if converted" method (252) (285)
-------- --------
573 568
-------- --------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions $ 64,069 $ 57,823
======== ========
Denominator:
- ------------
Denominator for basic earnings per
share - weighted average common
shares outstanding 121,812 123,183
Effect of dilutive securities:
Dilutive stock equivalents from stock plans 3,733 4,267
Shares issuable upon conversion of
preferred stock 2,742 2,847
-------- --------
Dilutive potential common shares 6,475 7,114
-------- --------
Denominator for diluted earnings per share
- adjusted weighted average common shares
outstanding and assumed conversions 128,287 130,297
======== ========
Basic earnings per share $ 0.52 $ 0.46
======== ========
Diluted earnings per share $ 0.50 $ 0.44
======== ========
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-------------------------------------------
Results of Operations
- ---------------------
First quarter reported revenues of $702 million exceeded prior year revenues by
7%. Reported revenue growth for the quarter was unfavorably impacted by the
effect of a stronger dollar versus the prior year, which reduced revenues by an
estimated $26 million. Excluding the estimated impact of foreign currency
translation, revenue growth would have been approximately 11%. Medical Supplies
and Devices segment ("Medical") revenues of $373 million increased 7%.
Adjusting for the estimated unfavorable impact of foreign currency translation,
Medical revenues would have increased approximately 11%. Diagnostic Systems
segment ("Diagnostic") revenues of $329 million increased 7%, or 11% after
excluding the estimated unfavorable impact of foreign currency translation.
Domestic Medical revenues of $201 million increased 18%. International Medical
revenues of $172 million decreased 3%, but would have increased 4% after
adjusting for the estimated $13 million unfavorable impact of foreign currency
translation. Good growth rates were experienced by the consumer health care and
infusion therapy businesses in both the domestic and international markets.
Domestic Diagnostic revenues of $188 million increased 17%. The infectious
disease diagnostics business experienced improved revenue growth in the first
quarter as a result of a prior year acquisition. International Diagnostic
revenues of $141 million decreased 4%, but would have increased 5% after
excluding the estimated unfavorable effect of foreign currency translation.
Good sales growth was achieved worldwide in the sample collection and flow
cytometry businesses.
The gross profit margin of 49.4% improved almost two percentage points over last
year's first quarter rate of 47.7%. The improvement reflects a more profitable
mix of products sold as well as continuing productivity improvements. Selling
and administrative expense was $199 million, or 28.4% of revenues, which was
unchanged compared to last year's first quarter ratio. Investment of $45
million in research and development increased 13% over last year's first quarter
expenditures, primarily reflecting the continuation of strategic investments in
support of the Company's key businesses.
Operating income of $103 million increased 19% from last year's first quarter
amount of $86 million. The improved operating margin of 14.7% compared to 13.2%
primarily reflects the improved gross profit margin.
Net interest expense of $10 million was about $1 million higher than last year.
Other (expense) income, net was $7 million unfavorable compared with last year,
principally due to higher foreign exchange losses and the absence of a $4
million one-time gain included in the prior year.
8
<PAGE>
The first quarter income tax rate was 29%, consistent with last year's first
quarter rate, reflecting the forecasted mix in income among tax jurisdictions.
Net income was $64 million compared with $58 million last year, an increase of
11%. Earnings per share of $.50 increased 14% over last year's $.44 on a
diluted basis. Diluted earnings per share would have increased 25% after
adjusting for the estimated $.05 unfavorable foreign currency translation
effect. Strong growth in operating income as well as the continuation of the
Company's share repurchase program contributed to this favorable earnings per
share growth.
Financial Condition
- -------------------
During the first quarter of 1998, cash provided by operations was $164 million,
compared with $139 million during the first quarter of last year, principally
due to lower working capital requirements. Capital expenditures during the
quarter were $44 million compared with $31 million during the first quarter of
last year. For the full year, capital expenditures are expected to be slightly
higher than last year's amount of $170 million. The Company also invested $40
million in the first quarter for the acquisition of a manufacturer of ophthalmic
surgical and anesthesia products, with estimated annual revenues of
approximately $22 million.
During the first quarter of 1998, total debt declined $34 million. The
percentage of debt to capitalization (wherein capitalization is defined as the
sum of shareholders' equity, net non-current deferred income tax liabilities,
and debt) was 35.3%, compared with 31.9% a year ago. Because of its strong
credit rating, the Company believes it has the capacity to arrange significant
additional borrowings should the need arise.
During the first quarter of 1998, the Company repurchased 879,000 shares of its
common stock for a total expenditure of $43 million. At December 31, 1997,
authorization from the Board of Directors remained in effect to reacquire up to
an additional 10.7 million shares.
At its November 1997 meeting, the Board of Directors increased the Company's
quarterly dividend from $.13 to $.145 per common share.
In January 1998, the Company signed a definitive agreement to acquire the
Medical Devices Division ("MDD") of Ohmeda, the health care business of The BOC
Group. MDD has estimated annual revenues of $200 million. Subject to receipt
of all requisite government approvals, the Company anticipates completing this
transaction in the third quarter of fiscal 1998.
During the second quarter the Company also acquired IntelliCode Intelligent Bar
Coding Systems, a division of MedPlus, Inc., which provides intelligent bar
coding technology to the health care industry, and Tru-Fit Marketing
Corporation, a Massachusetts-based sports medicine company. Aggregate annual
revenues for these acquisitions were approximately $28 million for their most
recent fiscal years.
9
<PAGE>
As of December 31, 1997, the three year cumulative inflation rate in Brazil was
significantly below 100%. As a result, effective January 1, 1998, the Company
will no longer consider its Brazilian business to be operating in a highly
inflationary economy as defined by SFAS No. 52, "Foreign Currency Translation"
and, accordingly, future translation adjustments will be recorded as a component
of shareholders' equity and will not affect reported earnings or cash flow.
The Brazilian operations represented approximately 3% of the Company's net
revenues in fiscal 1997, and therefore, this change is not expected to have a
material impact on the Company's results of operations or financial condition in
fiscal 1998.
The Company has initiated an enterprise-wide program to prepare its computer
systems for the year 2000. Based on a preliminary assessment, the Company
expects to spend approximately $6 million to $10 million to modify and replace
its existing computer software to ensure proper transaction processing in the
year 2000 and beyond. A portion of these costs will represent the redeployment
of existing internal resources and, therefore, are not expected to be
incremental. The Company will expense the costs of modifying existing systems
and capitalize the replacement of software that is not "Year 2000" compliant.
Accordingly, the cost of the Year 2000 project to be incurred over the next two
years is not expected to have a material effect on the Company's results of
operations or financial position. A comprehensive evaluation of the impact of
the Year 2000 issue on both the Company's infrastructure and its interface with
suppliers and customers is expected to be completed in the latter part of fiscal
year 1998. The Company expects the remediation program to be completed by the
middle of 1999. There can be no guarantee, however, that the systems of other
entities with which the Company's systems interface also will be converted on a
timely basis or that any failure to convert by another entity would not have an
adverse effect on the Company's systems.
This interim report on Form 10-Q may contain certain forward looking statements
(as defined under federal securities laws) regarding the Company's performance,
including future revenues, products and income, which are based upon current
expectations of the Company and involve a number of business risks and
uncertainties. Actual results could vary materially from anticipated results
described in any forward looking statement. Factors that could cause actual
results to vary materially include, but are not limited to, competitive factors,
changes in regional, national or foreign economic conditions, changes in
interest or foreign currency exchange rates, delays in product introductions,
and changes in health care or other governmental regulation, as well as other
factors discussed herein and in the Company's filings with the Securities and
Exchange Commission.
10
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits
27 - Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
December 31, 1997.
11
<PAGE>
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.
Becton, Dickinson and Company
-----------------------------
(Registrant)
Date February 13, 1998
--------------------
/s/ Edward J. Ludwig
------------------------------------
Edward J. Ludwig
Senior Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of
Number Description Filing
- ------- ----------- --------------
27 Financial Data Schedule Filed with
this report
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Consolidated Financial Statements for the three months
ended December 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 118,477
<SECURITIES> 30,511
<RECEIVABLES> 532,434
<ALLOWANCES> 0 <F1>
<INVENTORY> 438,532
<CURRENT-ASSETS> 1,280,460
<PP&E> 2,584,236
<DEPRECIATION> 1,330,512
<TOTAL-ASSETS> 3,077,181
<CURRENT-LIABILITIES> 668,431
<BONDS> 664,968
<COMMON> 166,366
<PREFERRED-MANDATORY> 0
<PREFERRED> 50,556
<OTHER-SE> 1,164,519
<TOTAL-LIABILITY-AND-EQUITY> 3,077,181
<SALES> 701,640
<TOTAL-REVENUES> 701,640
<CGS> 354,803
<TOTAL-COSTS> 354,803
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0 <F1>
<INTEREST-EXPENSE> 13,692
<INCOME-PRETAX> 90,593
<INCOME-TAX> 26,272
<INCOME-CONTINUING> 64,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,321
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.50
<FN>
<F1> These items are consolidated only at year-end.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| BGG | https://www.sec.gov/Archives/edgar/data/14195/0000950124-98-000629.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950124-98-000629.txt : 19980211
<SEC-HEADER>0000950124-98-000629.hdr.sgml : 19980211
ACCESSION NUMBER: 0000950124-98-000629
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971228
FILED AS OF DATE: 19980210
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BRIGGS & STRATTON CORP
CENTRAL INDEX KEY: 0000014195
STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510]
IRS NUMBER: 390182330
STATE OF INCORPORATION: WI
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-01370
FILM NUMBER: 98529507
BUSINESS ADDRESS:
STREET 1: 12301 W WIRTH ST
CITY: WAUWATOSA
STATE: WI
ZIP: 53222
BUSINESS PHONE: 4142595333
MAIL ADDRESS:
STREET 1: P O BOX 702
CITY: MILWAUKEE
STATE: WI
ZIP: 53201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 1-1370
BRIGGS & STRATTON CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0182330
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12301 West Wirth Street, Wauwatosa, Wisconsin 53222
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
414/259-5333
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class December 31, 1997
- --------------------------------------------------------------------------------
COMMON STOCK, par value $0.01 per share 24,751,486 Shares
-1-
<PAGE> 2
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
December 28, 1997 and June 29, 1997 3
Consolidated Condensed Statements of Income -
Three Months and Six Months ended
December 28, 1997 and December 29, 1996 5
Consolidated Condensed Statements of Cash Flow -
Six Months ended December 28, 1997 and
December 29, 1996 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
-2-
<PAGE> 3
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
Dec. 28 June 29
1997 1997
----------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,383 $112,859
Receivables, net 245,271 129,877
Inventories -
Finished products and parts 164,851 83,361
Work in process 44,360 37,922
Raw materials 4,028 4,674
-------- --------
Total inventories 213,239 125,957
Future income tax benefits 32,559 31,602
Prepaid expenses 16,194 18,121
-------- --------
Total current assets 513,646 418,416
-------- --------
OTHER ASSETS:
Deferred income tax assets 16,334 16,975
Capitalized software 11,053 10,532
-------- --------
Total other assets 27,387 27,507
-------- --------
PLANT AND EQUIPMENT -
Cost 811,895 796,714
Less - Accumulated depreciation 413,256 400,448
-------- --------
Total plant and equipment, net 398,639 396,266
-------- --------
$939,672 $842,189
======== ========
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(In thousands)
LIABILITIES & SHAREHOLDERS' INVESTMENT
Dec. 28 June 29
1997 1997
--------- --------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 58,733 $ 82,166
Domestic notes payable 142,660 5,000
Foreign loans 18,604 13,359
Current maturities of long-term debt 15,000 15,000
Accrued liabilities 99,286 87,553
Dividends payable 6,961 -
Federal and state income taxes 12,522 10,916
-------- --------
Total current liabilities 353,766 213,994
-------- --------
OTHER LIABILITIES:
Deferred revenue on sale of plant and equipment 15,932 15,966
Accrued pension cost 30,424 31,891
Accrued employee benefits 12,678 12,324
Accrued postretirement health care obligation 75,197 74,020
Long-term debt 143,000 142,897
-------- --------
Total other liabilities 277,231 277,098
-------- --------
SHAREHOLDERS' INVESTMENT:
Common stock-
Authorized 60,000 shares, $.01 par value,
Issued 28,927 shares 289 289
Additional paid-in capital 37,616 40,533
Retained earnings 484,381 490,682
Cumulative translation adjustments (1,698) (1,033)
Treasury stock at cost, 4,167 and 3,513 shares,
respectively (211,913) (179,374)
-------- --------
Total shareholders' investment 308,675 351,097
-------- --------
$939,672 $842,189
======== ========
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 28 Dec. 29 Dec. 28 Dec. 29
1997 1996 1997 1996
------- -------- ------- ------
<S> <C> <C> <C> <C>
NET SALES $308,481 $299,664 $479,038 $461,395
COST OF GOODS SOLD 257,584 242,807 401,730 386,569
-------- -------- -------- --------
Gross profit on sales $ 50,897 $ 56,857 $ 77,308 $ 74,826
ENGINEERING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 30,065 28,071 59,239 54,132
--------- ------- -------- --------
Income from operations $ 20,832 $ 28,786 $ 18,069 $ 20,694
INTEREST EXPENSE (5,248) (2,408) (9,042) (4,360)
OTHER INCOME, net 1,020 536 3,335 2,098
-------- -------- -------- --------
Income before provision
for income taxes $ 16,604 $ 26,914 $ 12,362 $ 18,432
PROVISION FOR INCOME TAXES 6,310 10,220 4,700 7,000
-------- -------- -------- --------
Net income $ 10,294 $ 16,694 $ 7,662 $ 11,432
======== ======== ======== ========
EARNINGS PER SHARE DATA -
Average shares outstanding 24,903 28,927 25,034 28,927
======== ======== ======== ========
Basic earnings per share $ .41 $ .58 $ .31 $ .40
======== ======== ======== ========
Diluted average shares outstanding 25,054 29,054 25,189 29,054
======== ======== ======== ========
Diluted earnings per share $ .41 $ .57 $ .30 $ .39
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ .28 $ .27 $ .56 $ .54
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: Dec. 28, 1997 Dec. 29, 1996
------------- --------------
<S> <C> <C>
Net income $ 7,662 $ 11,432
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation 22,567 21,578
Amortization of discount on long-term debt 103 -
Loss on disposition of plant and equipment 736 1,537
(Increase)decrease in operating assets -
Accounts receivable (115,394) (115,024)
Inventories (87,282) (93,021)
Other current assets 970 (2,338)
Other assets 120 (10,616)
Increase(decrease) in liabilities -
Accounts payable and accrued
liabilities (3,133) 30,887
Other liabilities 64 1,019
---------- ----------
Net cash used in operating activities (173,587) (154,546)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (26,124) (33,687)
Proceeds received on sale of plant and equipment 336 112
Proceeds received on sale of
Menomonee Falls, Wisconsin facility - 15,996
---------- ----------
Net cash used in investing activities (25,788) (17,579)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on domestic and foreign loans 142,905 40,488
Dividends (13,963) (15,621)
Purchase of common stock for treasury (43,501) (301)
Proceeds from exercise of stock options 8,045 108
---------- ----------
Net cash provided by financing activities 93,486 24,674
---------- ----------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS (587) 66
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (106,476) (147,385)
CASH AND CASH EQUIVALENTS, beginning 112,859 150,639
---------- ----------
CASH AND CASH EQUIVALENTS, ending $ 6,383 $ 3,254
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,807 $ 4,217
========== ==========
Income taxes paid $ 3,713 $ 2,075
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, in the opinion of the Company, adequate disclosures have
been presented to make the information not misleading, and all adjustments
necessary to present fair statements of the results of operations and financial
position have been included. All of these adjustments are of a normal recurring
nature. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
The Company adopted Financial Accounting Standard No. 128, effective
for periods ending after December 15, 1997, during the second quarter of the
current fiscal year. The Company's earnings per share were computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share, for each period presented, were
computed on the assumption that stock options were exercised at the beginning of
the periods reported.
-7-
<PAGE> 8
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is management's discussion and analysis of the Company's
results of operations and financial condition for the periods included in the
accompanying consolidated condensed financial statements.
RESULTS OF OPERATIONS
SALES
Net sales for the second quarter of fiscal 1998 increased 3% or $8.8
million compared to the same period of the previous year. Engine unit shipments
were up 10% for the quarter. However, the sales dollar increase was smaller than
the unit increase because the mix was more heavily weighted toward lower
horsepower, lower selling price engines. Also, the increasing strength of the
dollar reduced revenue between periods by $2.8 million from sales to European
customers, with whom the Company shares currency risk.
Net sales for the six months ended December 1997 increased 4% or $17.6
million compared to the first half of the prior year. Engine unit shipments were
up 10% for the first half. The sales dollar increase was smaller than the unit
increase because the mix was more heavily weighted toward lower horsepower,
lower selling price engines. Also, the increasing strength of the dollar reduced
revenue between periods by $3.7 million from sales to European customers.
GROSS PROFIT
The gross profit percentage declined to 16% from 19% between comparable
quarters because the mix was more heavily weighted to engines with lower gross
profit margins and because of the impact of reduced revenues from European
customers.
The gross profit percentage between six-month periods remained constant
at 16%. The described negative effects of the mix shift and strong dollar on
European revenues were offset by better absorption of fixed expenses amounting
to $1.4 million and higher margins of $4.8 million on service sales.
ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
This category increased 7% or $2.0 million between the second fiscal
quarters of 1998 and 1997 due to increased costs related to the implementation
of a new company-wide information system.
The 9% or $5.1 million increase for the comparative six-month period
was due to the reason described above amounting to $4.3 million and increased
manpower costs of $1.6 million, offset by reduced advertising expenses due to
timing in the fiscal year.
-8-
<PAGE> 9
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense increased $2.8 million in the three-month comparison
and $4.7 million in the six-month comparison. These increases were the result of
the Company's higher level of short-term and long-term borrowings.
OTHER INCOME
This category increased $0.5 million in the three-month period and $1.2
million in the six-month period. In each period, the change is due equally to
reductions in the loss on the disposition of plant and equipment and increases
in the equity income of joint ventures.
PROVISION FOR INCOME TAXES
The effective tax rate used in both years was 38.0%. This rate is
management's estimate of what the rate will be for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the six-month period was $173.6
million in 1997 and $154.5 million in 1996. These funds were used in 1997 and
1996 for seasonal increases in accounts receivable of $115.4 million and $115.0
million, respectively, and inventories of $87.3 million and $93.0 million,
respectively, offset, in part, by earnings before depreciation. The difference
in accounts payable and accrued liabilities is primarily due to timing within
the periods.
Cash used in investing activities totaled $25.8 million in the
six-month period and $17.6 million in the same period of the preceding year.
Additions to plant and equipment totaled $26.1 million and $33.7 million in the
respective years. Partially offsetting additions to plant and equipment in the
prior year was $16.0 million received in the sale of the Company's Menomonee
Falls, Wisconsin facility.
Cash provided by financing activities was $93.5 million in 1997
compared to $24.7 million in 1996. Net borrowings were $142.9 million and $40.5
million, respectively. The significant increase in the amount of borrowings
between years was caused by the Company using available cash in its share
repurchase program. The Company used $43.5 million in the period ended December
1997 for its stock repurchase program which commenced in May 1997. Dividends
totaled $14.0 million and $15.6 million, respectively. The decrease in dividends
paid was caused by the decrease in outstanding shares. Proceeds from the
exercise of stock options amounted to $8.0 million in 1997 compared to $0.1
million in 1996; this increase was caused by more options being exercised in
1997.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
In the previous fiscal year, the Company's Board of Directors
authorized the purchase of up to $300 million of common stock of the Company. As
of December 28, 1997, the Company has made purchases totaling $222.0 million.
Any future purchases will depend on many factors, including the market price of
the shares, the Company's business and financial position, and general economic
and market conditions. The Company intends to fund future purchases of its
common stock through a combination of available cash, cash generated from
operations and additional borrowings.
-9-
<PAGE> 10
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
Management expects capital expenditures for reinvestment in equipment
and new products to total $60 million in fiscal 1998. The Company is also
implementing a new company-wide information system, the future expenditures for
which are expected to total $21.0 million through fiscal 2002. This system,
along with related projects, will address the issues related to the year 2000.
These projects include working with the Company's customers and suppliers
regarding year 2000 issues to ensure continuity of business. Management does not
expect any additional material expenses for the related projects.
Management believes that available cash, the credit facility, cash
generated from operations, existing lines of credit and access to public debt
markets will be adequate to fund the Company's capital requirements for the
foreseeable future.
OUTLOOK
The dollar continues to strengthen and appears likely to remain strong
during the Company's peak shipping months to Europe. Thus the Company believes
that the strong dollar's adverse effects on revenue and gross profit will
continue through the second half of the fiscal year. On the other hand, the
Company expects a more favorable mix of products sold in the second half, as it
believes the mix for the whole year will be similar to that for last year.
Based on customer expectations, orders actually placed, and favorable
econometric forecasts, and assuming normal spring weather, the Company expects
unit shipments for the full fiscal year to be slightly higher than for last
year.
The 1998 fiscal year will not contain the $37.1 million charge related
to the early retirement window which was contained in the final quarter of the
1997 fiscal year. Therefore, the gross profit rate is anticipated to increase
year to year. Interest expense is expected to continue to increase because of
the new long-term debt and less available cash.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis, pages 8
through 10, may contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. The words "anticipate", "believe", "estimate",
"expect", "objective", and "think" or similar expressions are intended to
identify forward-looking statements. The forward-looking statements are based on
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of weather on the purchasing
patterns of the Company's customers and end use purchasers of the Company's
engines; the seasonal nature of the Company's business; actions of competitors;
changes in laws and regulations, including accounting standards; employee
relations; customer demand; prices of purchased raw materials and parts;
domestic economic conditions, including housing starts and changes in consumer
disposable income; and foreign economic conditions, including currency rate
fluctuations. Some or all of the factors may be beyond the Company's control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-10-
<PAGE> 11
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item was previously reported in the
Company's Form 10-Q for the first quarter ended September 28, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
11 Computation of Earnings Per Share of Common Stock
(Filed herewith)
12 Computation of Ratio of Earnings to Fixed Charges
(Filed herewith)
27 Financial Data Schedule
(Filed herewith)
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the second quarter ended December
28, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRIGGS & STRATTON CORPORATION
-----------------------------
(Registrant)
Date: February 2, 1998 /s/ R. H. Eldridge
----------------------------
R. H. Eldridge
Executive Vice President &
Chief Financial Officer,
Secretary-Treasurer
(Prinicpal Financial Officer and duly authorized
to sign on behalf of the registrant)
-11-
<PAGE> 12
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
11 Computation of Earnings Per Share of Common Stock
(Filed herewith)
12 Computation of Ratio of Earnings to Fixed Charges
(Filed herewith)
27 Financial Data Schedule
(Filed herewith)
-12-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 11
<TEXT>
<PAGE> 1
EXHIBIT 11
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(IN THOUSAND EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
---------------------------------------- ------------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
COMPUTATIONS FOR STATEMENTS OF INCOME
<S> <C> <C> <C> <C>
Net income $ 10,294 $ 16,694 $ 7,662 $ 11,432
=============== =============== =============== ===============
Basic earnings per share of common stock:
Average shares of common stock outstanding 24,903 28,927 25,034 28,927
=============== =============== =============== ===============
Basic earnings per share of common stock $ 0.41 $ 0.58 $ 0.31 $ 0.40
=============== =============== =============== ===============
Diluted earnings per share of common stock:
Average shares of common stock outstanding 24,903 28,927 25,034 28,927
Incremental common shares applicable to common
stock options 151 127 155 127
--------------- --------------- --------------- ---------------
Average common shares assuming dilution 25,054 29,054 25,189 29,054
=============== =============== =============== ===============
Diluted earnings per share of common stock $ 0.41 $ 0.57 $ 0.30 $ 0.39
=============== =============== =============== ===============
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 12
<TEXT>
<PAGE> 1
EXHIBIT 12
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Net income $ 7,662 $ 11,432
Add:
Interest 9,042 4,360
Income tax expense and other taxes on income 4,700 7,000
Fixed charges of unconsolidated subsidiaries 271 324
----------------- -----------------
Income as defined $ 21,675 $ 23,116
================= =================
Interest $ 9,042 $ 4,360
Fixed charges of unconsolidated subsidiaries 271 324
----------------- -----------------
Fixed charges as defined $ 9,313 $ 4,684
================= =================
Ratio of earnings to fixed charges 2.33 x 4.94 x
================= =================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF BRIGGS & STRATTON CORPORATION FOR THE SIX MONTHS ENDED DECEMBER
28, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> DEC-28-1997
<CASH> 6,383
<SECURITIES> 0
<RECEIVABLES> 245,271
<ALLOWANCES> 0
<INVENTORY> 213,239
<CURRENT-ASSETS> 513,646
<PP&E> 811,895
<DEPRECIATION> 413,256
<TOTAL-ASSETS> 939,672
<CURRENT-LIABILITIES> 353,766
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 289
<OTHER-SE> 308,386
<TOTAL-LIABILITY-AND-EQUITY> 939,672
<SALES> 479,038
<TOTAL-REVENUES> 479,038
<CGS> 401,730
<TOTAL-COSTS> 401,730
<OTHER-EXPENSES> 55,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,042
<INCOME-PRETAX> 12,362
<INCOME-TAX> 4,700
<INCOME-CONTINUING> 7,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,662
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| BMET | https://www.sec.gov/Archives/edgar/data/351346/0000351346-98-000001.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000351346-98-000001.txt : 19980113
<SEC-HEADER>0000351346-98-000001.hdr.sgml : 19980113
ACCESSION NUMBER: 0000351346-98-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980112
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BIOMET INC
CENTRAL INDEX KEY: 0000351346
STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842]
IRS NUMBER: 351418342
STATE OF INCORPORATION: IN
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-12515
FILM NUMBER: 98505064
BUSINESS ADDRESS:
STREET 1: AIRPORT INDUSTRIAL PARK
STREET 2: P O BOX 587
CITY: WARSAW
STATE: IN
ZIP: 46581-0587
BUSINESS PHONE: 2192676639
MAIL ADDRESS:
STREET 1: AIRPORT INDUSTRIAL PARK
STREET 2: P O BOX 587
CITY: WARSAW
STATE: IN
ZIP: 46581-0587
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file Number 0-12515.
BIOMET, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1418342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587
(Address of principal executive offices)
(219) 267-6639
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of common
stock, as of November 30, 1997:
Common Shares - No Par Value 111,753,388 Shares
(Class) (Number of Shares)
Rights to Purchase Common Shares 111,753,388 Rights
(Class) (Number of Shares)
BIOMET, INC.
CONTENTS
Pages
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II. Other Information 12-13
Signatures 14
Index to Exhibits 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of November 30, 1997 and May 31, 1997
(in thousands)
ASSETS
November 30, May 31,
1997 1997
------------ -------
Current assets:
Cash and cash equivalents $ 94,420 $ 82,034
Investments 45,117 41,237
Accounts and notes receivable, net 174,491 162,135
Inventories 158,941 151,523
Prepaid expenses and other 29,169 27,311
------- -------
Total current assets 502,138 464,240
------- -------
Property, plant and equipment, at cost 176,589 152,839
Less, Accumulated depreciation 73,241 61,927
------- -------
Property, plant and equipment, net 103,348 90,912
------- -------
Investments 50,075 44,527
Intangible assets, net 5,362 5,787
Excess acquisition cost over fair value
of acquired net assets, net 26,986 20,306
Other assets 3,602 2,584
------- -------
Total assets $ 691,511 $ 628,356
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of November 30, 1997 and May 31, 1997
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
November 30, May 31,
1997 1997
------------ -------
Current liabilities:
Short-term borrowings $ 6,324 $ 5,568
Accounts payable 17,603 17,140
Accrued income taxes 16,295 12,181
Accrued wages and commissions 13,116 12,232
Other accrued expenses 30,655 25,793
------- -------
Total current liabilities 83,993 72,914
Long-term liabilities:
Deferred federal income taxes 2,493 2,229
Other liabilities 767 385
------- -------
Total liabilities 87,253 75,528
------- -------
Contingencies (Note 6)
Shareholders' equity:
Common shares 74,440 73,587
Additional paid-in capital 16,001 16,001
Retained earnings 520,217 472,450
Net unrealized appreciation of
available-for-sale securities 1,435 1,040
Cumulative translation adjustment (7,835) (10,250)
------- -------
Total shareholders' equity 604,258 552,828
------- -------
Total liabilities and shareholders' equity $ 691,511 $ 628,356
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the six and three month periods ended November 30, 1997 and 1996
(in thousands, except per share amounts)
Six Months Ended Three Months Ended
November 30, November 30,
---------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $306,111 $281,187 $156,582 $144,009
Cost of sales 95,233 90,833 48,611 46,405
------- ------- ------- -------
Gross profit 210,878 190,354 107,971 97,604
Selling, general and
administrative expenses 107,743 101,990 54,873 52,101
Research and development expense 11,648 12,579 5,762 6,061
------- ------- ------- -------
Operating income 91,487 75,785 47,336 39,442
Other income, net 3,827 4,504 1,501 2,153
------- ------- ------- -------
Income before income taxes 95,314 80,289 48,837 41,595
Provision for income taxes 35,291 30,017 18,075 15,410
------- ------- ------- -------
Net income $ 60,023 $ 50,272 $ 30,762 $ 26,185
======= ======= ======= =======
Earnings per share, based on
the weighted average number
of shares outstanding during
the periods presented $ .54 $ .44 $ .28 $ .23
==== ==== ==== ====
Weighted average number of shares 111,519 115,349 111,519 114,962
======= ======= ======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended November 30, 1997 and 1996
(in thousands)
1997 1996
---- ----
Cash flows from (used in) operating activities:
Net income $ 60,023 $ 50,272
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 7,215 5,892
Amortization 2,779 4,524
Gain on sale of investments (523) (108)
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable (12,527) (1,708)
Inventories (5,019) 3,535
Prepaid expenses and other (1,767) (3,829)
Accounts payable 351 (4,716)
Accrued income taxes 4,357 2,594
Accrued wages and commissions 986 (722)
Other accrued expenses 5,290 872
------- ------
Net cash from operating activities 61,165 56,606
------- ------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 13,083 16,836
Purchases of investments (21,288) (12,121)
Capital expenditures (16,359) (8,715)
Acquisitions, net of cash acquired (13,152) (4,667)
Increase in other assets (1,569) (2,859)
Other (188) (239)
------- ------
Net cash used in investing activities (39,473) (11,765)
------- ------
Cash flows from (used in) financing activities:
Increase in short-term borrowings, net 936 1,200
Issuance of common shares 853 4,436
Cash dividend (12,256) (11,476)
Purchase of common shares -- (33,875)
------- ------
Net cash used in financing activities (10,467) (39,715)
------- ------
Effect of exchange rate changes on cash 1,161 1,275
------- ------
Increase in cash and cash equivalents 12,386 6,401
Cash and cash equivalents, beginning of year 82,034 106,068
------- -------
Cash and cash equivalents, end of period $ 94,420 $112,469
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OPINION OF MANAGEMENT.
The accompanying consolidated financial statements include the
accounts of Biomet, Inc. and its wholly owned subsidiaries
(individual and collectively referred to as the "Company"). The
unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the six month period ended November 30, 1997 are not
necessarily indicative of the results that may be expected for
the fiscal year ending May 31, 1998. For further information,
refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on From 10-K for the
fiscal year ended May 31. 1997.
The accompanying consolidated balance sheet at May 31, 1997, has
been derived from the audited Consolidated Financial Statements
at that date, but does not include all disclosures required by
generally accepted accounting principles.
NOTE 2: INVENTORIES.
Inventories at November 30, 1997 and May 31, 1997 are as follows:
November 30, May 31,
1997 1997
------------ -------
(in thousands)
Raw materials $ 22,305 $ 20,958
Work in process 20,305 16,546
Finished goods 69,374 64,992
Consigned inventory 46,957 49,027
------- -------
$158,941 $151,523
======= =======
NOTE 3: INCOME TAXES.
The difference between the reported provision for income taxes
and a provision computed by applying the federal statutory rate
to pre-tax accounting income is primarily attributable to state
income taxes, tax benefits relating to operations in Puerto
Rico, tax-exempt income and tax credits.
NOTE 4: COMMON SHARES.
During the six months ended November 30, 1997 the Company issued
428,803 Common Shares upon the exercise of outstanding stock
options for proceeds aggregating $853,000.
BIOMET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 5: ACQUISITIONS.
On June 1, 1997, the Company completed the acquisition of one of
its foreign distributors. The purchase price consisted of $13.2
million cash. The excess acquisition cost over fair value of
acquired net assets at the acquisition date approximated $8.5
million. The acquisition has been accounted for using the
purchase method of accounting with the operating results
included in the Company's consolidated financial statements from
the date of acquisition. Pro forma consolidated results of
operations are not presented as the amounts are not materially
different from the Company's historical results.
On November 24, 1997, the Company announced that it had entered
into a definitive agreement providing for the establishment of a
50/50 joint venture for orthopedic products in Europe with Merck
KGaA, of Darmstadt, Germany ("Merck"). Under this agreement,
the Company and Merck will each contribute their existing
European orthopedic operations to the joint venture. Pro forma
sales of the joint venture for the next fiscal year are
anticipated to be approximately $200 million. This venture is
structured to allow the Company to consolidate all of the
venture's revenues and its pro-rata share of the venture's
earnings with its financial results. Merck brings to this
venture an extensive array of chemical, biological,
pharmaceutical and orthopedic technologies and products, while
the Company brings its orthopedic products and technologies
concentrated in total joint replacement. Consummation of the
joint venture transaction is expected to occur in early 1998.
NOTE 6: CONTINGENCIES.
In January 1996, a jury returned a verdict in favor of Raymond
G. Tronzo ("Tronzo") awarding him approximately $55 million on
his patent and state law claims. On October 29, 1996, the United
States District Court for the Southern District of Florida
entered a judgment, which implemented and reduced the jury
verdict, awarding $30.2 million to Tronzo on his state law
claims, including compensatory damages of approximately $7.1
million, punitive damages of $20 million, and prejudgment
interest. The trial court dismissed, with prejudice, Tronzo's
claim based upon unjust enrichment. The trial court denied the
Company's motion challenging the validity of Tronzo's patent.
Tronzo was awarded an additional $6.3 million judgment for
patent infringement, including a fifty percent enhancement based
upon willfulness. The trial court also granted an injunction
prohibiting future manufacture, use, promotion or sale, in the
United States, of the finned version of the Mallory-Head
acetabular cup, the device found to have infringed the Tronzo
patent. The U.S. Court of Appeals for the Federal Circuit (the
"Federal Circuit") denied the Company's motion to stay the
injunction pending the conclusion of the appeal. The
Mallory-Head finned acetabular cup accounted for a relatively
small portion of the Company's annual sales. The Company is
vigorously pursuing its appeal before the Federal Circuit on
both the patent and state law claims. The briefing by both
parties in the appeal was completed in the Federal Circuit in
June 1997 and oral arguments were held in September 1997. It is
anticipated that the Federal Circuit will issue its final
decision on the appeal sometime in early to mid calendar 1998.
In connection with the District Court's final judgment and its
order granting a stay of enforcement and execution
of the judgment, the Company was required to deliver to an
escrow agent investments with a value no less than $36.6 million
to be held in escrow, invested and disbursed for the benefit of
the plaintiff pending the outcomes of all appeals. The $36.6
million of investments, which are restricted under the terms of
the escrow agreement, are included in investments on the
Company's consolidated balance sheet as of November 30 and May
31, 1997.
On June 2, 1997, the Company announced the entry of a jury
verdict against it in the United States District Court of New
Jersey in an action brought by Orthofix SRL ("Orthofix") against
the Company and its wholly-owned subsidiaries, Electro-Biology,
Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the
"Biomet Group") related to the events surrounding the expiration
of a distribution agreement under which EBIMS distributed
Orthofix's external fixation devices in the United States. The
jury found that, notwithstanding Orthofix's refusal to renew the
distribution agreement, EBIMS's commencement of development
activities of a new external fixation system prior to the
expiration of the contract, constituted a breach of the
distribution agreement. The jury awarded compensatory damages
against the Biomet Group for breach of contract and related
claims of approximately $49 million and punitive damages of $100
million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS's
economic relations, but awarded only nominal damages to the
Biomet Group. With respect to certain non-jury issues, the trial
court entered an order denying Orthofix's motions for enhanced
and/or treble damages and attorneys' fees. The trial court also
granted Orthofix's motion for prejudgment interest, but only on
the compensatory portion of the damages commencing from November
29, 1995. On September 2, 1997, the trial court entered an
amended judgment reducing to $50 million, the $100 million in
punitive damages awarded to Orthofix by the jury. The Company
is appealing the final amended judgment entered against the
Biomet Group to the Federal Circuit.
Based on the information currently available and advice from
legal counsel, management believes that the trial court's
judgments in the Tronzo and Orthofix cases will not be upheld
upon appeal. Therefore, no amounts related to these two cases
have been recorded in the Company's financial statements, except
for estimated legal costs associated with the appeal process. If
the Company is unsuccessful in its appeal of either, or both, of
these cases, the ultimate liabilities could be material to the
operating results in the period such losses are recognized. The
Company's cash, cash equivalents and investments are adequate to
address the payment of any losses that could ultimately be
determined with respect to these two cases.
In October 1997, Biomet, Inc. ("Biomet") received a subpoena
from the United States Department of Health and Human Services,
Office of Inspector General ("HHS/OIG"), in connection with the
possible fraudulent submission of claims for Medicare
reimbursement. The subpoena seeks the production of documents
referring or relating to any of Pennsylvania Hospital and Thomas
Jefferson Hospital, two of Biomet's major hospital customers in
Philadelphia; a physician group practicing under the name
Orthopaedic Reconstructive Associates; and The Rothman
Institute. Biomet also is aware that its distributor servicing
the hospitals has received a similar subpoena. Biomet does not
itself submit claims to or receive reimbursements from Medicare,
but the laws with respect to Medicare reimbursement prohibit any
person from paying or offering to pay any direct or indirect
remuneration intended to induce the purchase of products or
services. Those laws are complex and can be broadly construed
to cover a wide range of financial and business activities.
Biomet has not been advised of the precise subject matter of the
HHS/OIG investigation, but it has long-standing research,
product development, physician training, clinical follow-up and
data collection relationships with the physician group. Biomet
is fully cooperating with HHS/OIG in this matter, and is unable
to predict what action, if any, might be taken in the future by
HHS/OIG as a result of its investigation or what impact, if any,
the outcome of this matter might have on its financial position
or business operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF NOVEMBER 30, 1997
The Company's cash and investments have increased $21,814,000
during the last six months to $189,612,000 at November 30, 1997,
despite the $12,256,000 cash dividend paid during the first quarter.
Cash flows provided by operating activities were $61,165,000 for
the first six months of fiscal 1998 compared to $56,606,000 in
1997. Net income plus depreciation and amortization were the
principal sources of cash from operating activities, offset by
increases in accounts receivable and inventories.
Cash flows used in investing activities were $39,473,000 for the
first six months of fiscal 1998 compared to $11,765,000 in 1997.
The primary uses of cash flows for investing activities were
purchases of investments, purchases of capital equipment and a
business acquisition (See Note 5 of the Notes to Consolidated
Financial Statements) offset by sales and maturities of investments .
Cash flows used in financing activities were $10,467,000 for the
first six months of fiscal 1998 compared to $39,715,000 in 1997.
The primary use of cash flows for financing activities was the
cash dividend paid in the first quarter. In June 1997, the
Company's Board of Directors declared a cash dividend of eleven
cents ($.11) per share payable to shareholders of record at the
close of business on July 11, 1997. In January 1997, the
Company's Board of Directors authorized the purchase of up to an
additional $60,000,000 of the outstanding Common Shares of the
Company in open market or privately negotiated transactions
through the close of business on January 28, 1998. During the
first six months of this fiscal year, the Company did not
purchase any additional Common Shares, and has approximately
$38,000,000 under this authorization for future purchases.
Future purchases, if any, will be dependent on market conditions.
Currently available funds, together with anticipated cash flows
generated from future operations, are believed to be adequate to
cover the Company's anticipated cash requirements, including
capital expenditures, research and development costs, purchases
of Common Shares under the repurchase program and litigation
settlements, if any.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1997
AS COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1996
Net sales increased 9% to $306,111,000 for the six-month period
ended November 30, 1997, from $281,187,000 for the same period
last year. The Company's U.S.-based revenue increased 9% to
$227,470,000 during the first six months, while foreign sales
increased 8% to $78,641,000, net of a negative foreign exchange
adjustment of $3,900,000. Biomet's worldwide sales of
reconstructive products during the first six months of fiscal
1998 were $181,684,000, representing an 8% increase compared to
the first six months of last year. This increase was primarily
a result of Biomet's continued penetration of the reconstructive
device market led by the Maxim Total Knee System and the
Alliance Hip System. Sales of fixation products were
$70,504,000 for the first six months of fiscal 1998,
representing a 9% increase as compared to the same period in
1997. Sales of spinal products were $16,161,000 for the first
six months of fiscal 1998, representing a 6% increase as
compared to the same period in 1997. The Company's sales of
other products totaled $37,762,000, representing a 16% increase
over the first six months of fiscal year 1997, primarily as a
result of increased sales of arthroscopic and soft goods
products and the Indiana Tome Carpal Tunnel Release System.
Cost of sales decreased as a percentage of net sales to 31.1%
for the first six months of fiscal 1998 from 32.3% last year
primarily as a result of increased sales of higher margin
products, increased in-house manufacturing efficiencies and
improved margins realized through acquisitions of international
distributors. Selling, general and administrative expenses
decreased as a percentage of net sales to 35.2%, compared to
36.3% for the first six months of last year. This reduction is
principally the result of the consolidation of the operations of
Kirschner into various other subsidiaries and reduced legal
costs. Research and development expenditures decreased during
the first six months to $11,648,000 reflecting the completion or
termination of several research and development projects.
Operating income rose 21% from $75,785,000 for the first six
months of fiscal 1997, to $91,487,000 for the first six months
of fiscal 1998. Other income decreased for the first six months
of fiscal year 1998 compared to the prior year's first six
months as a result of exchange losses realized on foreign
currency transactions. The effective income tax rate decreased
to 37.0% for the current period compared to 37.4% for the same
period in fiscal 1997.
These factors resulted in a 19% increase in net income to
$60,023,000 from $50,272,000 for the first six months of fiscal
1998 as compared to the same period in fiscal 1997 . Earnings
per share increased 23%, from $.44 to $.54 for the periods
presented.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997
AS COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1996
Net sales increased 9% to $156,582,000 for the second quarter of
fiscal year 1998, as compared to $144,009,000 for the same
period last year. Operating income rose 20% from $39,442,000
for the second quarter of fiscal 1997, to $47,336,000 for the
second quarter of fiscal 1998. During the second quarter, net
income increased 17% to $30,762,000 as compared to $26,185,000
for the same period last year. Earnings per share increased 22%
from $.23 per share for the second quarter of fiscal 1997, to
$.28 per share for the same period of fiscal 1998. The business
factors resulting in these changes and relevant trends affecting
the Company's business during the periods in question are
comparable to those described in the preceding discussion for
the six-month period.
OTHER SIGNIFICANT EVENTS.
On November 24, 1997, the Company announced that it had entered
into a definitive agreement providing for the establishment of a
50/50 joint venture for orthopedic products in Europe with Merck
KGaA, of Darmstadt, Germany ("Merck"). Under this agreement,
the Company and Merck will each contribute their existing
European orthopedic operations to the joint venture. Pro forma
sales of the joint venture for the next fiscal year are
anticipated to be approximately $200 million. This venture is
structured to allow the Company to consolidate all of the
venture's revenues and its pro-rata share of the venture's
earnings with its financial results. Merck brings to this
venture an extensive array of chemical, biological,
pharmaceutical and orthopedic technologies and products, while
the Company brings its orthopedic products and technologies
concentrated in total joint replacement. Consummation of the
joint venture transaction is expected to occur in early 1998.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
In January 1996, a jury returned a verdict in favor of Raymond
G. Tronzo ("Tronzo") awarding him approximately $55 million on
his patent and state law claims. On October 29, 1996, the United
States District Court for the Southern District of Florida
entered a judgment, which implemented and reduced the jury
verdict, awarding $30.2 million to Tronzo on his state law
claims, including compensatory damages of approximately $7.1
million, punitive damages of $20 million, and prejudgment
interest. The trial court dismissed, with prejudice, Tronzo's
claim based upon unjust enrichment. The trial court denied the
Company's motion challenging the validity of Tronzo's patent.
Tronzo was awarded an additional $6.3 million judgment for
patent infringement, including a fifty percent enhancement based
upon willfulness. The trial court also granted an injunction
prohibiting future manufacture, use, promotion or sale, in the
United States, of the finned version of the Mallory-Head
acetabular cup, the device found to have infringed the Tronzo
patent. The U.S. Court of Appeals for the Federal Circuit (the
"Federal Circuit") denied the Company's motion to stay the
injunction pending the conclusion of the appeal. The
Mallory-Head finned acetabular cup accounted for a relatively
small portion of the Company's annual sales. The Company is
vigorously pursuing its appeal before the Federal Circuit on
both the patent and state law claims. The briefing by both
parties in the appeal was completed in the Federal Circuit in
June 1997 and oral arguments were held in September 1997. It is
anticipated that the Federal Circuit will issue its final
decision on the appeal sometime in early to mid calendar 1998.
In connection with the District Court's final judgment and its
order granting a stay of enforcement and execution of the
judgment, the Company was required to deliver to an escrow agent
investments with a value no less than $36.6 million to be held
in escrow, invested and disbursed for the benefit of the
plaintiff pending the outcomes of all appeals. The $36.6 million
of investments, which are restricted under the terms of the
escrow agreement, are included in investments on the Company's
consolidated balance sheet as of November 30 and May 31, 1997.
On June 2, 1997, the Company announced the entry of a jury
verdict against it in the United States District Court of New
Jersey in an action brought by Orthofix SRL ("Orthofix") against
the Company and its wholly-owned subsidiaries, Electro-Biology,
Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the
"Biomet Group") related to the events surrounding the expiration
of a distribution agreement under which EBIMS distributed
Orthofix's external fixation devices in the United States. The
jury found that, notwithstanding Orthofix's refusal to renew the
distribution agreement, EBIMS's commencement of development
activities of a new external fixation system prior to the
expiration of the contract, constituted a breach of the
distribution agreement. The jury awarded compensatory damages
against the Biomet Group for breach of contract and related
claims of approximately $49 million and punitive damages of $100
million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS's
economic relations, but awarded only nominal damages to the
Biomet Group. With respect to certain non-jury issues, the trial
court entered an order denying Orthofix's motions for enhanced
and/or treble damages and attorneys' fees. The trial court also
granted Orthofix's motion for prejudgment interest, but only on
the compensatory portion of the damages commencing from November
29, 1995. On September 2, 1997, the trial court entered an
amended judgment reducing to $50 million, the $100 million in
punitive damages awarded to Orthofix by the jury. The Company
is appealing the final amended judgment entered against the
Biomet Group to the Federal Circuit.
Based on the information currently available and advice from
legal counsel, management believes that the trial court's
judgments in the Tronzo and Orthofix cases will not be upheld
upon appeal. Therefore, no amounts related to these two cases
have been recorded in the Company's financial statements, except
for estimated legal costs associated with the appeal process. If
the Company is unsuccessful in its appeal of either, or both, of
these cases, the ultimate liabilities could be material to the
operating results in the period such losses are recognized. The
Company's cash, cash equivalents and investments are adequate to
address the payment of any losses that could ultimately be
determined with respect to these two cases.
In October 1997, Biomet, Inc. ("Biomet") received a subpoena
from the United States Department of Health and Human Services,
Office of Inspector General ("HHS/OIG"), in connection with the
possible fraudulent submission of claims for Medicare
reimbursement. The subpoena seeks the production of documents
referring or relating to any of Pennsylvania Hospital and Thomas
Jefferson Hospital, two of Biomet's major hospital customers in
Philadelphia; a physician group practicing under the name
Orthopaedic Reconstructive Associates; and The Rothman
Institute. Biomet also is aware that its distributor servicing
the hospitals has received a similar subpoena. Biomet does not
itself submit claims to or receive reimbursements from Medicare,
but the laws with respect to Medicare reimbursement prohibit any
person from paying or offering to pay any direct or indirect
remuneration intended to induce the purchase of products or
services. Those laws are complex and can be broadly construed
to cover a wide range of financial and business activities.
Biomet has not been advised of the precise subject matter of the
HHS/OIG investigation, but it has long-standing research,
product development, physician training, clinical follow-up and
data collection relationships with the physician group. Biomet
is fully cooperating with HHS/OIG in this matter, and is unable
to predict what action, if any, might be taken in the future by
HHS/OIG as a result of its investigation or what impact, if any,
the outcome of this matter might have on its financial position
or business operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMET, INC.
- ------------
(Registrant)
DATE: 1/12/98 BY: /s/ GREGORY D. HARTMAN
------- -------------------------
Gregory D. Hartman
Vice President - Finance
(Principal Financial Officer)
(Signing on behalf of the Registrant
and as Principal Financial Officer)
BIOMET, INC.
FORM 10-Q
INDEX TO EXHIBITS
Sequential
Number Assigned Numbering System
in Regulation S-K Page Number
Item 601 Description of Exhibit of Exhibit
- ----------------- -------------------------------- ----------------
(2) No exhibit.
(4) 4.1 Specimen certificate for Common
Shares. (Incorporated by reference
to Exhibit 4.1 to the registrant's
Report on Form 10-K for the fiscal
year ended May 31, 1985).
4.2 Rights Agreement between Biomet,
Inc. and Lake City Bank, as Rights
Agent, dated as of December 2, 1989.
(Incorporated by reference to Exhibit
4 to Biomet, Inc. Form 8-K Current Report
dated December 22, 1989, File No. 0-12515).
(10) No exhibit.
(11) No exhibit.
(15) No exhibit.
(18) No exhibit.
(19) No exhibit.
(22) No exhibit.
(23) No exhibit.
(24) No exhibit.
(27) Financial data schedules.
(99) No exhibit.
</TEXT>
</DOCUMENT>
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<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 94420000
<SECURITIES> 45117000
<RECEIVABLES> 180188000
<ALLOWANCES> 5697000
<INVENTORY> 158941000
<CURRENT-ASSETS> 502138000
<PP&E> 176589000
<DEPRECIATION> 73241000
<TOTAL-ASSETS> 691511000
<CURRENT-LIABILITIES> 83993000
<BONDS> 0
<COMMON> 74440000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 529818000
<TOTAL-LIABILITY-AND-EQUITY> 691511000
<SALES> 306111000
<TOTAL-REVENUES> 306111000
<CGS> 95233000
<TOTAL-COSTS> 214624000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135000
<INCOME-PRETAX> 95314000
<INCOME-TAX> 35291000
<INCOME-CONTINUING> 60023000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60023000
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
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</TEXT>
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|
1998 | 0QTR1
| CAG | https://www.sec.gov/Archives/edgar/data/23217/0001047469-98-000221.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0001047469-98-000221.txt : 19980108
<SEC-HEADER>0001047469-98-000221.hdr.sgml : 19980108
ACCESSION NUMBER: 0001047469-98-000221
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971123
FILED AS OF DATE: 19980107
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CONAGRA INC /DE/
CENTRAL INDEX KEY: 0000023217
STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011]
IRS NUMBER: 470248710
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0525
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 002-21378
FILM NUMBER: 98501750
BUSINESS ADDRESS:
STREET 1: ONE CONAGRA DR
CITY: OMAHA
STATE: NE
ZIP: 68102
BUSINESS PHONE: 4025954000
FORMER COMPANY:
FORMER CONFORMED NAME: NEBRASKA CONSOLIDATED MILLS CO
DATE OF NAME CHANGE: 19721201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q
<TEXT>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 23, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7275
- ------------------------------------------------------------------------------
CONAGRA, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant, as specified in charter)
Delaware 47-0248710
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One ConAgra Drive, Omaha, Nebraska 68102-5001
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(402) 595-4000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NA
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of issuer's common stock, as of December 21,
1997, was 475,529,134.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- --------------------------
NOV. 23, NOV. 24, NOV. 23, NOV. 24,
1997 1996 1997 1996
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 6,433.6 $ 6,590.2 $ 12,574.0 $ 12,747.7
Costs and expenses
Cost of goods sold 5,434.5 5,632.0 10,732.8 10,997.6
Selling, administrative and general expenses 580.0 569.2 1,166.9 1,128.2
Interest expense, net 75.2 72.7 148.3 142.8
---------- ---------- ----------- -----------
6,089.7 6,273.9 12,048.0 12,268.6
---------- ---------- ----------- -----------
Income before income taxes 343.9 316.3 526.0 479.1
Income taxes 133.3 129.0 205.2 195.7
---------- ---------- ----------- -----------
NET INCOME $ 210.6 $ 187.3 $ 320.8 $ 283.4
========== ========== =========== ===========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.460 $ 0.408 $ 0.700 $ 0.618
========== ========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 458.0 459.3 458.5 458.6
========== ========== =========== ===========
Cash dividends declared per common share $ 0.1563 $ 0.1362 $ 0.2925 $ 0.2550
========== ========== =========== ===========
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
NOV. 23, MAY 25, NOV. 24,
1997 1997 1996
------- ------ -------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 62.2 $ 105.8 $ 78.4
Receivables, less allowance for
doubtful accounts of $78.5, $67.2
and $69.8 2,500.7 1,367.6 2,469.1
Inventories 4,095.5 3,342.9 4,080.0
Prepaid expenses 381.7 388.7 433.7
--------- --------- ---------
Total current assets 7,040.1 5,205.0 7,061.2
--------- --------- ---------
Property, plant and equipment
Cost 5,342.5 5,274.3 5,192.6
Less
Accumulated depreciation (2,129.4) (2,031.8) (2,010.5)
Valuation reserve related to restructuring - - (164.8)
--------- --------- ---------
Property, plant and equipment, net 3,213.1 3,242.5 3,017.3
Brands, trademarks and goodwill, at cost
less accumulated amortization 2,402.6 2,434.0 2,460.2
Other assets 404.2 395.6 415.8
--------- --------- ---------
Total assets $13,060.0 $11,277.1 $12,954.5
========= ========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amount)
(unaudited)
<TABLE>
<CAPTION>
NOV. 23, MAY 25, NOV. 24,
1997 1997 1996
------- ------ -------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 3,001.5 $ 529.0 $ 2,864.9
Current installments of long-term debt 78.0 352.9 356.4
Accounts payable 1,879.5 1,894.7 1,977.1
Advances on sales 245.4 766.5 244.0
Other accrued liabilities 1,491.6 1,446.5 1,378.3
--------- --------- ---------
Total current liabilities 6,696.0 4,989.6 6,820.7
Senior long-term debt, excluding
current installments 1,642.6 1,605.7 1,557.2
Other noncurrent liabilities 888.2 935.1 938.4
Subordinated debt 750.0 750.0 750.0
Preferred securities of subsidiary company 525.0 525.0 525.0
Common stockholders' equity
Common stock of $5 par value,
authorized 1,200,000,000 shares,
issued 506,388,739, 506,161,530
and 506,116,426 2,532.0 1,265.4 1,265.3
Additional paid-in capital 543.8 643.3 568.9
Retained earnings 1,235.0 2,061.2 1,851.9
Foreign currency translation adjustment (48.0) (31.5) (11.9)
Less treasury stock, at cost, common
shares 34,328,054, 30,036,626
and 25,656,378 (800.2) (655.1) (526.0)
--------- --------- ---------
3,462.6 3,283.3 3,148.2
Less unearned restricted stock and value
of 23,726,267, 26,202,608
and 28,767,992 common shares held
in Employee Equity Fund (904.4) (811.6) (785.0)
--------- --------- ---------
Total common stockholders' equity 2,558.2 2,471.7 2,363.2
--------- --------- ---------
$13,060.0 $11,277.1 $12,954.5
========= ========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------
NOV. 23, NOV. 24,
1997 1996
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income $ 320.8 $ 283.4
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and other amortization 183.4 170.5
Goodwill amortization 34.7 34.7
Other noncash items (includes nonpension
postretirement benefits) 46.4 (7.9)
Change in assets and liabilities before effects from
business acquisitions (2,525.5) (2,487.2)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES (1,940.2) (2,006.5)
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment (198.0) (289.0)
Payment for business acquisitions - (192.5)
Sale of businesses and property, plant and equipment 139.5 17.9
Notes receivable and other items (53.8) (51.2)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES (112.3) (514.8)
-------- --------
Cash flows from financing activities
Net short-term borrowings 2,472.5 2,433.3
Proceeds from issuance of long-term debt 305.0 397.5
Repayment of long-term debt (544.1) (140.2)
Cash dividends paid (122.4) (107.3)
Treasury stock purchases (140.7) (131.1)
Other items 38.6 33.8
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES 2,008.9 2,486.0
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (43.6) (35.3)
Cash and cash equivalents at beginning of period 105.8 113.7
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62.2 $ 78.4
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
5
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED NOVEMBER 23, 1997 AND
NOVEMBER 24, 1996
(UNAUDITED)
1. ACCOUNTING POLICIES
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the results
of operations, financial position, and cash flows for the periods presented.
Such interim information should be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 annual report to
stockholders, which are incorporated by reference into the Company's annual
report on Form 10-K for the fiscal year ended May 25, 1997.
The results of operations for any interim period are not necessarily indicative
of the results to be expected for other interim periods or the full year.
DERIVATIVE INSTRUMENTS - The SEC is requiring expanded disclosure for derivative
instruments which is fully effective for the Company's annual financial
statements for the fiscal year ended May 31, 1998. As required for this interim
report, specific information on the Company's accounting policies for
derivatives is provided below.
The Company uses derivatives for the purpose of hedging commodity price and
interest rate exposures which exist as a part of its ongoing business
operations.
In general, derivatives used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of
derivative instruments must be highly correlated with changes in market values
of underlying hedged items both at inception of the hedge and over the life of
the hedge contract. Deferred gains or losses related to any instrument 1)
designated but ineffective as a hedge of existing assets, liabilities, or firm
commitments, or 2) designated as a hedge of an anticipated transaction which is
no longer likely to occur, are recognized immediately in the statement of
earnings.
Interest Rate Swap Agreements - The Company utilizes interest rate swap
agreements to alter the impact of changes of interest rates. Interest
differentials to be paid or received on the swap are recognized in income as
incurred, as a component of interest expense.
Commodity Contracts - Commodities are subject to price fluctuations which create
price risk. Generally, the Company intends to hedge commodities to mitigate
this price risk. The Company uses commodity futures, options, forwards and
swaps to manage price fluctuations of the underlying commodity. While this may
tend to limit the Company's ability to participate in gains from commodity price
fluctuations, it also tends to reduce the risk of loss from changes in commodity
prices.
Commodity price risk can be hedged by selling (or buying) the underlying
commodity, or by using an appropriate derivative instrument. The particular
hedging methods employed by the
6
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED NOVEMBER 23, 1997 AND
NOVEMBER 24, 1996
(UNAUDITED)
Company depend on a number of factors, including availability of appropriate
derivative contracts. The Company may, at times, utilize non-exchange traded
derivatives, in which case the Company monitors the amount of associated credit
risk.
ConAgra's board of directors has established policies which limit the amount of
unhedged inventory positions permissible for ConAgra's independent operating
companies. Trading businesses are generally limited to dollar risk exposure
stated in relation to equity capital. Processing company limits are expressed
in terms of weeks of commodity usage.
In the trading businesses, commodity contracts are marked-to-market with net
amounts due to or from brokers recorded in accounts receivable or payable and
the related gains or losses recorded in the statement of earnings. In the
processing companies, commodity contract gains and losses are deferred and
recognized as an adjustment to the basis of the underlying hedged commodity
purchased; gains or losses are recognized in the statement of earnings as a
component of cost of goods sold.
The cash flows related to derivative financial instruments are classified in the
statement of cash flows in a manner consistent with those of the transactions
being hedged.
EARNINGS PER SHARE - Statement of Financial Accounting Standards No. 128 (SFAS
No. 128), EARNINGS PER SHARE, requires presentation of basic and diluted
earnings per share, replacing prior presentation of primary and fully diluted
earnings per share. Basic earnings per share is calculated on the basis of
weighted average outstanding common shares, after giving effect to preferred
stock dividends. Diluted earnings per share is computed on the basis of
weighted average outstanding common shares, outstanding options that are
dilutive, and equivalent shares assuming conversion of outstanding convertible
securities.
Primary earnings per share and pro forma earnings per share (the latter computed
in accordance with SFAS No. 128) for the thirteen and twenty-six week periods
ended November 23, 1997 and November 24, 1996 are as follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
NOV. 23, NOV. 24, NOV. 23, NOV. 24,
1997 1996 1997 1996
--------- -------- ------- -----------
Primary earnings per share -
as reported $ 0.460 $ 0.408 0.700 0.618
Pro forma diluted earnings per share 0.460 0.408 0.700 0.618
Pro forma basic earnings per share 0.470 0.415 0.716 0.628
7
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED NOVEMBER 23, 1997 AND
NOVEMBER 24, 1996
(UNAUDITED)
2. CAPITAL STOCK
On July 11, 1997, the Company's Board of Directors declared a two-for-one split
of the Company's common stock in the form of a stock dividend. This was paid
October 1, 1997, to shareholders of record as of September 5, 1997. All share
and per share data have been restated to reflect the stock split for all periods
presented.
3. INVENTORIES
The composition of inventories is as follows (in millions):
NOV. 23, MAY 25, NOV. 24,
1997 1997 1996
---------- ---------- ----------
Hedged commodities $ 1,454.8 $ 1,169.8 $ 1,338.4
Food products and livestock 1,453.2 1,191.0 1,390.2
Agricultural chemicals,
fertilizer and feed 539.7 381.4 538.3
Retail merchandise 3.9 127.5 118.5
Other, principally
ingredients and supplies 643.9 473.2 694.6
---------- ---------- ----------
$ 4,095.5 $ 3,342.9 $ 4,080.0
========== ========== ==========
4. CONTINGENCIES
In fiscal 1991, ConAgra acquired Beatrice Company ("Beatrice"). As a result
of the acquisition and the significant pre-acquisition tax and other
contingencies of the Beatrice businesses and its former subsidiaries, the
consolidated post-acquisition financial statements of ConAgra reflected
significant liabilities and valuation allowances associated with the
estimated resolution of these contingencies. The material pre-acquisition
tax contingencies were resolved in fiscal 1995.
Beatrice is also engaged in various litigation and environmental proceedings
related to businesses divested by Beatrice prior to its acquisition by ConAgra.
The environmental proceedings include litigation and administrative proceedings
involving Beatrice's status as a potentially responsible party at 41 Superfund,
proposed Superfund or state-equivalent sites. Beatrice has paid or is in the
process of paying its liability share at 35 of these sites. Substantial
reserves for these matters have been established based on the Company's best
estimate of its undiscounted remediation liabilities, which estimates include
evaluation of investigatory studies, extent of required cleanup, the known
volumetric contribution of Beatrice and other potentially responsible parties
and its experience in remediating sites.
8
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED NOVEMBER 23, 1997 AND
NOVEMBER 24, 1996
(UNAUDITED)
ConAgra is a party to a number of other lawsuits and claims arising out of the
operation of its businesses.
After taking into account liabilities recorded for all of the foregoing matters,
management believes the ultimate resolution of such matters should not have a
material adverse effect on ConAgra's financial condition, results of operations
or liquidity.
5. SENIOR LONG-TERM DEBT
On August 1, 1997, the Company issued $300 million of senior notes with an
interest rate of 6.70% due August 1, 2027 and redeemable at the option of the
holders on August 1, 2009. The notes were priced at par.
9
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of certain significant factors
which have affected the Company's financial condition and operating results for
the periods included in the accompanying consolidated condensed financial
statements. Results for the thirteen and twenty-six week periods ended November
23, 1997 are not necessarily indicative of results which may be attained in the
future.
This report contains forward-looking statements. The statements reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and financial results. The statements
are based on many assumptions and factors including availability and prices of
raw materials, product pricing, competitive environment and related market
conditions, operating efficiencies, access to capital and actions of
governments. Any changes in such assumptions or factors could produce
significantly different results.
FINANCIAL CONDITION
The Company's capital investment (working capital plus noncurrent assets)
increased $76.5 million compared to May 25, 1997. Working capital increased
$128.7 million and noncurrent assets decreased $52.2 million. The increase in
working capital was primarily caused by normal seasonal increases in accounts
receivable and inventory offset by a related increase in short term debt. The
decrease in noncurrent assets was primarily caused by the sale of businesses and
normal depreciation and amortization offset by property, plant and equipment
additions.
The Company's objective is that senior long-term debt normally will not exceed
30 percent of total long-term debt plus equity. This objective was met for all
periods presented.
10
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
A summary of the period to period increases (decreases) in the principal
components of operations is shown below (dollars in millions, except per share
amounts).
<TABLE>
<CAPTION>
NOVEMBER 23, 1997 & NOVEMBER 24, 1996
--------------------------------------------
THIRTEEN WEEKS TWENTY-SIX WEEKS
--------------------------------------------
DOLLAR PERCENT DOLLAR PERCENT
CHANGE CHANGE CHANGE CHANGE
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales $(156.6) (2.4) $(173.7) (1.4)
Costs and expenses
Cost of goods sold (197.5) (3.5) (264.8) (2.4)
Selling, administrative and general expenses 10.8 1.9 38.7 3.4
Interest expense, net 2.5 3.4 5.5 3.9
Income before income taxes 27.6 8.7 46.9 9.8
Income taxes 4.3 3.3 9.5 4.9
Net income 23.3 12.4 37.4 13.2
Net income per common and common
equivalent share 0.052 12.7 0.082 13.3
</TABLE>
Two of ConAgra's industry segments, Grocery & Diversified Products and Food
Inputs & Ingredients, increased operating profit in the second quarter and
first half of fiscal 1998 versus the same periods in fiscal 1997. The
increase in those segments was somewhat offset by a decrease in the
Refrigerated Foods segment second quarter and first half operating profit.
For ConAgra in total, fiscal 1998 second quarter sales decreased 2 percent to
$6.43 billion from $6.59 billion. First half sales decreased 1 percent to
$12.57 billion from $12.75 billion. ConAgra's effective tax rates were 38.8
percent in fiscal 1998's second quarter and 39.0 percent in fiscal 1998's
first half versus 40.8 percent in both periods last year and 39.6 percent for
the full fiscal year 1997. In fiscal 1998's second quarter, earnings per
share rose 12.7 percent to 46.0 cents from 40.8 cents in last year's second
quarter, and net income increased 12.4 percent to $210.6 million from $187.3
million. In fiscal 1998's first half, earnings per share rose 13.3 percent
to 70.0 cents from 61.8 cents a year ago, and net income increased 13.2
percent to $320.8 million from $283.4 million.
In ConAgra's Grocery & Diversified Products industry segment, operating
profit was up 9 percent in the second quarter and 6 percent in the first half
of fiscal 1998 versus the same periods
11
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in fiscal 1997. Segment sales increased 1 percent in the second quarter and
2 percent in the first half.
ConAgra Frozen Foods achieved operating profit growth in fiscal 1998's second
quarter and first half. Unit volume growth helped shelf-stable foods - the
Hunt-Wesson companies and Golden Valley - increase second quarter operating
earnings. In the first half, Golden Valley increased earnings, while
Hunt-Wesson's earnings declined due to heavy first quarter spending to
introduce several lines of new products. The Lamb-Weston potato products
business and the seafood business both increased second quarter and first
half earnings.
In ConAgra's Food Inputs & Ingredients industry segment, operating profit
grew 9 percent in the second quarter and 20 percent in the first half of
fiscal 1998 versus the same periods in fiscal 1997. Segment sales decreased
3 percent in the second quarter and were down less than 1 percent in the
first half.
ConAgra's major crop inputs business, United Agri Products, had significant
sales growth and strong operating profit growth in fiscal 1998's second
quarter and first half. Commodity services, flour milling and specialty food
ingredients contributed to segment operating profit growth in both periods.
Earnings declined in grain merchandising and a number of other ingredients
businesses.
In ConAgra's Refrigerated Foods industry segment, operating profit decreased
6 percent in the second quarter and 7 percent in the first half of fiscal
1998 versus the same periods in fiscal 1997. Segment sales decreased
3 percent in both periods.
The branded processed meats businesses improved margins and increased
earnings in the second quarter and first half. Earnings rose in the
Australia beef business in both periods and declined in the U.S. beef
business in both periods. Second quarter and first half earnings were down in
the pork, poultry and cheese businesses.
12
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
ConAgra issued 88,646 shares of its common stock in connection with the
transaction by which Rygmyr Foods, Inc. was merged with a subsidiary of
ConAgra on October 31, 1997. The common stock was issued in this transaction
in reliance on the exemption from registration provided by the Section 4(2)
of the Securities Act of 1933 and Regulation D thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
12 - Statement regarding computation of ratio of earnings to fixed
charges.
(B) Reports on Form 8-K
None
CONAGRA, INC.
By: /s/ James P. O'Donnell
_______________________
James P. O'Donnell
Executive Vice President,
Chief Financial Officer
Corporate Secretary
By: /s/ Kenneth W. DiFonzo
_______________________
Kenneth W. DiFonzo
Senior Vice President and
Controller
Dated this 6th day of January, 1998.
13
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
12 Statement regarding computation of ratio of 15
earnings to fixed charges
14
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>EX-12
<TEXT>
<PAGE>
EXHIBIT 12
CONAGRA, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
TWENTY-SIX WEEKS
ENDED
NOVEMBER 23, 1997
-----------------
Fixed charges
Interest expense $ 180.1
Capitalized interest 6.4
Interest in cost of goods sold 8.5
One third of non-cancellable lease rent 19.0
--------
Total fixed charges (A) $ 214.0
========
Earnings
Pretax income $ 526.0
Add fixed charges 214.0
Less capitalized interest (6.4)
--------
Earnings and fixed charges (B) $ 733.6
========
Ratio of earnings to fixed charges (B/A) 3.4
For the purpose of computing the above ratio of earnings to fixed charges,
earnings consist of income before taxes and fixed charges. Fixed charges,
for the purpose of computing earnings, are adjusted to exclude interest
capitalized. Fixed charges include interest on both long and short-term debt
(whether said interest is expensed or capitalized and including interest
charged to cost of goods sold), and a portion of noncancellable rental
expense representative of the interest factor. The ratio is computed using
the amounts for ConAgra as a whole, including its majority-owned
subsidiaries, whether or not consolidated, and its proportionate share of any
50% owned subsidiaries, whether or not ConAgra guarantees obligations of
these subsidiaries.
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>EX-27
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAY-26-1997
<PERIOD-END> NOV-23-1997
<CASH> 62200
<SECURITIES> 0
<RECEIVABLES> 2579200
<ALLOWANCES> 78500
<INVENTORY> 4095500
<CURRENT-ASSETS> 7040100
<PP&E> 5342500
<DEPRECIATION> 2129400
<TOTAL-ASSETS> 13060000
<CURRENT-LIABILITIES> 6696000
<BONDS> 2392600
<PREFERRED-MANDATORY> 0
<PREFERRED> 525000
<COMMON> 2532000
<OTHER-SE> 26200
<TOTAL-LIABILITY-AND-EQUITY> 13060000
<SALES> 12574000
<TOTAL-REVENUES> 12574000
<CGS> 10732800
<TOTAL-COSTS> 10732800
<OTHER-EXPENSES> 1166900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148300
<INCOME-PRETAX> 526000
<INCOME-TAX> 205200
<INCOME-CONTINUING> 320800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320800
<EPS-PRIMARY> 0.700
<EPS-DILUTED> 0
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| CAH | https://www.sec.gov/Archives/edgar/data/721371/0000950152-98-000952.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000950152-98-000952.txt : 19980212
<SEC-HEADER>0000950152-98-000952.hdr.sgml : 19980212
ACCESSION NUMBER: 0000950152-98-000952
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980211
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CARDINAL HEALTH INC
CENTRAL INDEX KEY: 0000721371
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]
IRS NUMBER: 310958666
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11373
FILM NUMBER: 98532061
BUSINESS ADDRESS:
STREET 1: 5555 GLENDON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
BUSINESS PHONE: 6147618700
MAIL ADDRESS:
STREET 1: 5555 GLEDNON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
FORMER COMPANY:
FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>CARDINAL HEALTH, INC./QUARTERLY REPORT/FORM 10-Q
<TEXT>
<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1997 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
(614) 717-5000
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
The number of Registrant's Common Shares outstanding at the close of
business on January 31, 1998 was as follows:
Common Shares, without par value: 109,663,304
<PAGE> 2
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
----------------------
Item 1. Financial Statements:
Consolidated Statements of Earnings for the Fiscal Quarter and Six
Months Ended December 31, 1997 and 1996............................................ 3
Consolidated Balance Sheets at December 31, 1997 and
June 30, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1997 and 1996......................................................... 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 8
Part II. Other Information:
------------------
Item 1. Legal Proceedings.................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders................................ 12
Item 6. Exhibits and Reports on Form 8-K................................................... 12
* Items deleted are inapplicable.
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Quarter Ended Six Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $3,130,505 $2,816,406 $6,000,476 $5,351,882
Cost of products sold 2,881,607 2,592,548 5,525,713 4,934,196
---------- ---------- ---------- ----------
Gross margin 248,898 223,858 474,763 417,686
Selling, general and administrative expenses 135,211 127,413 270,265 251,569
Merger-related costs (3,189) (18,016) (5,372) (18,174)
---------- ---------- ---------- ----------
Operating earnings 110,498 78,429 199,126 147,943
Other income (expense):
Interest expense (5,160) (7,368) (10,165) (13,974)
Other, net--primarily interest income 3,099 1,684 8,061 4,521
---------- ---------- ---------- ----------
Earnings before income taxes 108,437 72,745 197,022 138,490
Provision for income taxes 42,258 31,419 76,804 57,838
---------- ---------- ---------- ----------
Net earnings $ 66,179 $ 41,326 $ 120,218 $ 80,652
========== ========== ========== ==========
Net earnings per Common Share:
Basic $ 0.60 $ 0.38 $ 1.10 $ 0.76
Diluted $ 0.60 $ 0.38 $ 1.08 $ 0.75
Weighted average number of Common
Shares outstanding:
Basic 109,422 107,543 109,257 105,914
Diluted 111,122 109,339 110,956 107,642
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE> 4
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 111,654 $ 243,061
Trade receivables, net 752,331 672,164
Current portion of net investment in sales-type leases 46,837 40,997
Merchandise inventories 1,938,526 1,436,220
Prepaid expenses and other 105,210 94,668
---------- ----------
Total current assets 2,954,558 2,487,110
---------- ----------
Property and equipment, at cost 514,221 477,420
Accumulated depreciation and amortization (210,075) (199,949)
---------- ----------
Property and equipment, net 304,146 277,471
Other assets:
Net investment in sales-type leases, less current portion 141,174 118,563
Goodwill and other intangibles 121,230 122,104
Other 81,383 86,502
---------- ----------
Total $3,602,491 $3,091,750
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 119,747 $ 22,159
Current portion of long-term obligations 6,333 6,158
Accounts payable 1,433,465 1,135,951
Other accrued liabilities 209,783 225,165
---------- ----------
Total current liabilities 1,769,328 1,389,433
---------- ----------
Long-term obligations, less current portion 275,615 277,766
Deferred income taxes and other liabilities 85,988 89,821
Shareholders' equity:
Common Shares, without par value 667,858 645,051
Retained earnings 816,661 701,896
Common Shares in treasury, at cost (7,356) (6,373)
Other (5,603) (5,844)
---------- ----------
Total shareholders' equity 1,471,560 1,334,730
---------- ----------
Total $3,602,491 $3,091,750
========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE> 5
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 120,218 $ 80,652
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 30,910 25,280
Provision for bad debts 5,856 4,427
Change in operating assets and liabilities:
Increase in trade receivables (86,023) (109,258)
Increase in merchandise inventories (502,306) (450,167)
Increase in net investment in sales-type leases (28,451) (35)
Increase in accounts payable 297,514 241,842
Other operating items, net (26,555) (2,972)
--------- ---------
Net cash used in operating activities (188,837) (210,231)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,365 1,949
Additions to property and equipment (54,012) (34,175)
Purchase of marketable securities available-for-sale -- (3,400)
Proceeds from sale of marketable securities available-for-sale -- 20,550
--------- ---------
Net cash used in investing activities (52,647) (15,076)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 97,588 2,272
Reduction of long-term obligations (4,109) (27,734)
Proceeds from long-term obligations 526 --
Proceeds from issuance of Common Shares 19,270 24,984
Tax benefit of stock options 3,238 6,825
Dividends paid on Common Shares and cash paid in lieu
of fractional shares (5,453) (3,882)
Purchase of treasury shares (983) (1,728)
--------- ---------
Net cash provided by financing activities 110,077 737
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (131,407) (224,570)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 243,061 312,030
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 111,654 $ 87,460
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE> 6
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The consolidated financial statements of Cardinal Health Inc. (the
"Company") include the accounts of all majority-owned subsidiaries and
all significant intercompany amounts have been eliminated. These
consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and include all of the information
and disclosures required by generally accepted accounting principles
for interim reporting. In the opinion of management, all adjustments
necessary for a fair presentation have been included. All such
adjustments are of a normal and recurring nature.
The consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and
related notes contained in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No.1) filed on January 7, 1998.
Note 2. The Company arranges for bulk deliveries to be made to customer
warehouses. Revenues for these deliveries are excluded from net
revenues and totaled $0.8 billion and $0.6 billion for the quarters
ending December 31, 1997 and 1996, respectively, and $1.4 billion and
$1.2 billion during the six months ended December 31, 1997 and 1996,
respectively. The service fees related to bulk deliveries are included
in net revenues and were not significant in any of the periods
presented.
Note 3. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," in the quarter ended December
31, 1997. In accordance with the provisions of the Standard, all prior
periods presented have been restated to comply with SFAS No. 128.
Basic earnings per Common Share ("Basic")is computed by dividing net
earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 4. Costs related to various mergers effected in fiscal 1997 and 1996,
totaling approximately $3.2 million ($1.9 million, net of tax) and
$5.4 million ($3.3 million, net of tax), were recorded during the
three and six months ended December 31, 1997, respectively, related to
integrating the operations of the merged companies. During the three
and six months ended December 31, 1996, merger related costs totaling
$18.0 million ($13.1 million, net of tax) and $18.2 million ($13.1
million, net of tax), respectively, were recorded. These costs include
approximately $13.8 million for transaction and employee related costs
associated with the Company's merger with PCI Services, Inc. ("PCI"),
which was completed on October 11, 1996 (including $7.6 million for
retirement benefits and incentive fees to two executives of PCI, which
vested and became payable upon consummation of the merger), with the
remaining amount in each period related to integrating the operations
of the various merged companies.
The Company estimates that it will incur additional merger related
costs related to various mergers it has completed of approximately
$6.3 million ($3.8 million, net of tax) in future periods (primarily
fiscal 1998) in order to properly integrate operations and implement
efficiencies with regard to, among other things, information systems,
customer systems, marketing programs and administrative functions.
Such amounts will be charged to expense when incurred.
Note 5. On May 27, 1997, the Company announced that it had entered
into a definitive merger agreement with MediQual Systems, Inc.
("MediQual"), pursuant to which MediQual will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be
accounted for as a pooling-of-interests for financial reporting
purposes. In connection with the merger, the Company estimates that it
will issue approximately 0.6 million Common Shares. Upon consummation
of the merger, the Company will record a merger-related charge to
reflect transaction and other costs incurred as a result of the
merger. The amount of this charge is estimated to be approximately $4
million. The merger is expected to be completed in the first quarter
of calendar 1998, subject to the satisfaction of certain conditions,
including approval by
Page 6
<PAGE> 7
shareholders of MediQual. A Special Meeting of MediQual Shareholders
to vote on this transaction is scheduled for February 18, 1998.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of
pharmaceuticals and medical-surgical supplies, pursuant to which
Bergen will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive .775 of a
Company Common Share in exchange for each outstanding common share of
Bergen. The Company will issue approximately 41 million Common Shares
in the transaction and will also assume approximately $646 million in
long-term debt. In connection with the merger, the companies expect to
incur investment banking, legal, accounting, and other related
transaction costs and fees. Additionally, the companies expect to
incur other merger related costs associated with the integration of
the separate companies and institution of efficiencies anticipated as
a result of the merger. Based on information currently available, the
total amount of merger related charges to be recognized in connection
with the merger is estimated to be between $100 and $130 million,
after tax. These merger related expenses will be charged to expense in
the period in which the merger is consummated, or in subsequent
periods, when incurred. Merger related costs incurred prior to
consummation of the merger will be deferred and expensed upon
consummation. Since the merger has not yet been consummated, the
merger expenses can only be estimated at this time, and are subject to
revision as further information becomes available. The merger is
expected to be completed in the first quarter of calendar 1998,
subject to the satisfaction of certain conditions, including approvals
by the stockholders of Bergen and the Company's shareholders, and the
receipt of certain regulatory approvals. Shareholders of both
companies will vote on the transaction at Special Meetings of
Shareholders scheduled for February 20, 1998.
Note 6. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," both of which will require
adoption in fiscal 1999. These new statements will not impact the
Company's financial statements, but may require additional
disclosures. The Company is presently evaluating the applicability of
SFAS No.'s 130 and 131 to its operations.
Page 7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below is concerned with
material changes in financial condition and results of operations for the
Company's consolidated balance sheets as of December 31, 1997 and June 30, 1997,
and for the consolidated statements of earnings for the three and six month
periods ended December 31, 1997 and 1996. This should be read together with
management's discussion and analysis included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997, as amended by the Form 10K/A
(Amendment No. 1) filed on January 7, 1998.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
materially differ from those projected or implied. The most significant of such
risks, uncertainties and other factors are described in Exhibit 99.01 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and
are incorporated herein by reference. The Company disclaims any obligation to
update any forward-looking statement.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the second quarter of fiscal 1998 and for
the six month period ended December 31, 1997 increased 11% and 12%,
respectively, as compared to the prior year. Distribution businesses (those
whose primary operations involve the wholesale distribution of pharmaceuticals,
representing 91% of total revenues) grew at a rate of 12% during the three and
six months ended December 31, 1997, while Service businesses (those that provide
services to the healthcare industry through pharmacy franchising, pharmacy
automation equipment, pharmacy management, and pharmaceutical packaging) grew at
a rate of 17% and 18% during the three and six months ended December 31, 1997,
respectively, primarily on the strength of the Company's pharmacy automation and
pharmacy management businesses. The majority of the revenue increase
(approximately 80% for the three and six month periods ended December 31, 1997)
came from existing customers in the form of increased volume and price
increases. The remainder of the growth came from the addition of new customers.
Gross Margin. For the three months ended December 31, 1997 and 1996, gross
margin as a percentage of net revenues remained stable at 7.95% for both
periods. For the six month periods ended December 31, 1997 and 1996, gross
margin as a percentage of revenue was 7.91% and 7.80%, respectively. The
increase in the gross margin percentage for the six month period is a result of
a higher mix of Services revenues during the six months ended December 31, 1997
compared to the same period of a year ago (9% in fiscal 1998 versus 8% in fiscal
1997). The Service businesses gross margin as a percentage of revenues for the
second quarter of fiscal 1998 and fiscal 1997 was 31.27% and 32.63%,
respectively, and 31.01% and 33.33% for the six months ended December 31, 1997
and 1996, respectively. The decrease is primarily a function of the relatively
higher revenue growth experienced in the pharmacy management operations, which
have lower margins relative to the other Service businesses. The Distribution
businesses gross margin as a percentage of revenues decreased for the second
quarter of the current fiscal year from 5.56% a year ago to 5.40%. During the
six month period ended December 31, 1997, the Distribution businesses gross
margin percentage rate decreased from 5.56% a year ago to 5.47%. These decreases
are primarily due to the impact of lower selling margins, as a result of a
highly competitive market, and a greater mix of high volume customers, where a
lower cost of distribution and better asset management enable the Company to
offer lower selling margins to its customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.32% in the
second quarter of fiscal 1998 compared to 4.52% in the prior year, and 4.50% for
the six month period ended December 31, 1997 compared to 4.70% in the prior
year. The improvements in the second quarter and the six month period reflect
economies associated with the Company's revenue growth, as well as significant
productivity gains resulting from continued cost control efforts and the
consolidation and selective automation of operating facilities. The growth in
the business, combined with a shift towards a greater mix of service business
(Service businesses had a 15.49% and 16.66% ratio of expenses to revenues for
the three and six month periods ending December 31, 1997, respectively, compared
to Distribution businesses with a ratio of 2.95% and 3.00%, during the same
periods) has caused the increase in expense in the current periods. The 6% and
7% growth in selling, general and administrative expenses experienced in the
second quarter of fiscal 1998 and in the six months ended December 31, 1997,
respectively, were due primarily to increases in personnel costs and
depreciation expense.
Page 8
<PAGE> 9
Merger Related Costs. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger costs when incurred. Costs related to various mergers effected in fiscal
1997 and 1996 totaling approximately $3.2 million ($1.9 million, net of tax) and
$5.4 million ($3.3 million, net of tax), were recorded during the three and six
months ended December 31, 1997, respectively, related to integrating the
operations of the merged companies. During the three and six months ended
December 31, 1996, merger related costs totaling $18.0 million ($13.1 million,
net of tax) and $18.2 million ($13.1 million, net of tax), respectively, were
recorded. These costs include approximately $13.8 million for transaction and
employee related costs associated with the Company's merger with PCI, which was
completed on October 11, 1996 (including $7.6 million for retirement benefits
and incentive fees to two executives of PCI, which vested and became payable
upon consummation of the merger), with the remaining amount in each period
related to integrating the operations of the various merged companies.
The effect of the merger related costs recorded during the three months
ended December 31, 1997 and 1996 was to reduce net earnings by $1.9 million to
$66.2 million and $13.1 million to $41.3 million, respectively, and to reduce
reported diluted earnings per common share by $0.01 per share to $0.60 per share
and by $0.12 per share to $0.38 per share, respectively. The effect of the
merger related costs recorded during the six months ended December 31, 1997 and
1996 was to reduce net earnings by $3.3 million to $120.2 million and $13.1
million to $80.7 million, respectively, and to reduce reported diluted earnings
per common share by $0.03 per share to $1.08 per share and by $0.12 per share to
$0.75 per share, respectively.
The Company estimates that it will incur additional merger related costs
related to the various mergers it has completed of approximately $6.3 million
($3.8 million, net of tax) in future periods (primarily fiscal 1998) in order to
properly integrate operations and implement efficiencies with regard to, among
other things, information systems, customer systems, marketing programs and
administrative functions. Such amounts will be charged to expense when incurred.
Other Income (Expense). The decrease in interest expense of $2.2 million in
the second quarter of fiscal 1998 compared to fiscal 1997 and $3.8 million for
the six month period ended December 31, 1997 compared to the prior year is
primarily due to extinguishment of the Company's $100 million 8% Notes on March
1, 1997. The increase in other income is due to higher investment income, in
part due to better asset management in the six month period ended December 31,
1997 when only $131 million of cash was used, compared to a use of $225 million
in the six month period ended December 31, 1996.
Provision for Income Taxes. The Company's provision for income taxes
relative to pretax earnings was 39% and 43% for the second quarter of fiscal
1998 and 1997, respectively and 39% and 42% for the six month periods ended
December 31, 1997 and 1996, respectively. The decrease in the effective tax rate
is primarily due to the impact of certain non-deductible merger related costs
recorded in the second quarter of fiscal 1997, and a reduction in the state
effective tax rate as a result of the change in the Company's business mix.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,185 million at December 31, 1997 from
$1,098 million at June 30, 1997. This increase included additional investments
in merchandise inventories and trade receivables of $502 million and $80
million, respectively. Offsetting the increases in working capital was a
decrease in cash and equivalents of $131 million and an increase in accounts
payable of $298 million. The increase in merchandise inventories reflects normal
seasonal purchases of pharmaceutical inventories and the higher level of current
and anticipated business volume in pharmaceutical distribution activities. The
increase in trade receivables is consistent with the Company's net revenues
growth (see "Net Revenues" above). The change in cash and equivalents and
accounts payable is due primarily to the timing of inventory purchases and
related payments.
Property and equipment, at cost, increased by $36.8 million from June 30,
1997. The property acquired included increased investment in management
information systems and customer support systems.
Shareholders' equity increased to $1,471.6 million at December 31, 1997
from $1,334.7 million at June 30, 1997, primarily due to net earnings of $120.2
million and the investment of $19.3 million by employees of the Company through
various stock incentive plans during the six month period ended December 31,
1997.
Page 9
<PAGE> 10
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to pending business combinations. See "Other" below.
OTHER
On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant
to which MediQual will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. In connection with the merger, the Company
estimates that it will issue approximately 0.6 million Common Shares. Upon
consummation of the merger, the Company will record a merger related charge to
reflect transaction and other costs incurred as a result of the merger. The
amount of this charge is estimated to be approximately $4 million. The merger is
expected to be completed in the first quarter of calendar 1998, subject to the
satisfaction of certain conditions, including approval by shareholders of
MediQual. A Special Meeting of MediQual Shareholders to vote on this transaction
is scheduled for February 18, 1998.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals
and medical-surgical supplies, pursuant to which Bergen will become a wholly
owned subsidiary of the Company in a stock-for-stock merger expected to be
accounted for as a pooling-of-interests for financial reporting purposes. Under
the terms of the proposed merger, shareholders of Bergen will receive .775 of a
Company Common Share in exchange for each outstanding common share of Bergen.
The Company will issue approximately 41 million Common Shares in the transaction
and will also assume approximately $646 million in long-term debt. In connection
with the merger, the companies expect to incur investment banking, legal,
accounting, and other related transaction costs and fees. Additionally, the
companies expect to incur other merger related costs associated with the
integration of the separate companies and institution of efficiencies
anticipated as a result of the merger. Based on information currently available,
the total amount of merger related charges to be recognized in connection with
the merger is estimated to be between $100 and $130 million, after tax. These
merger related expenses will be charged to expense in the period in which the
merger is consummated, or in subsequent periods, when incurred. Merger related
costs incurred prior to consummation of the merger will be deferred and expensed
upon consummation. Since the merger has not yet been consummated, the merger
expenses can only be estimated at this time, and are subject to revision as
further information becomes available. The merger is expected to be completed in
the first quarter of calendar 1998, subject to the satisfaction of certain
conditions, including approvals by Bergen's and the Company's shareholders, and
the receipt of certain regulatory approvals. Shareholders of both companies will
vote on the transaction at Special Meetings of Shareholders scheduled for
February 20, 1998.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the year 2000 approaches. The
Company has completed a preliminary assessment of its year 2000 requirements and
is currently correcting and replacing those systems which are not year 2000
compliant, in order to continue to meet its internal needs and those of its
customers. The Company currently believes it will be able to modify or replace
its affected systems in time to avoid any detrimental impact on its operations,
and expects this process to be substantially completed by the end of calendar
year 1998. The Company estimates that the costs of its year 2000 project will be
approximately $20 million. A significant portion of these costs are not likely
to be incremental costs, but rather will represent the redeployment of existing
resources. The anticipated impact and costs of the project, as well as the date
on which the Company expects to complete the project, are based on management's
best estimates using information currently available and numerous assumptions
about future events. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Based on its current estimates, the Company does not anticipate that the costs
associated with this project will have a material adverse effect on the
Company's consolidated financial statements in future periods.
The Company has initiated formal communications with its significant
suppliers and customers to determine the extent to which the Company may be
vulnerable in the event that those parties fail to properly remediate their own
year 2000 issues. While the Company is not presently aware of any such
significant exposure, there can be no guarantee that the systems of third
parties on which the Company relies will be timely converted, or that a failure
to properly convert by another company would not have a material adverse effect
on the Company.
Page 10
<PAGE> 11
Along with other companies in its industry, the Company has been advised
that bulk deliveries to be made to its customers' warehouses should be reported
as revenues, rather than reporting as revenues only the service fees related to
such bulk deliveries. Such service fees were not significant in any of the
periods presented (see Note 2 of "Notes to Consolidated Financial Statements").
The Company will adopt such presentation beginning with its audited financial
statements for its fiscal year ending June 30, 1998.
Page 11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), as well as other pharmaceutical wholesalers, were named as
defendants in a series of purported class action antitrust lawsuits which were
later consolidated and transferred by the Judicial Panel for Multi-District
Litigation to the United States District Court for the Northern District of
Illinois (the "Brand Name Prescription Drug Litigation"). Subsequent to the
consolidation, a new consolidated complaint was filed which included allegations
that the wholesaler defendants, including the Company and Whitmire (which is now
a subsidiary of the Company), conspired with manufacturers to inflate prices by
using a chargeback pricing system. In addition to the Federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of state court cases alleging similar claims under various state laws
regarding the sale of brand name prescription drugs. These lawsuits are
described in "Item 1 - Legal Proceedings" of Part II of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, which was filed with
the Securities and Exchange Commission and is incorporated herein by reference.
Effective October 26, 1994, the Company entered into a Judgment Sharing
Agreement in the Brand Name Prescription Drug Litigation with other wholesaler
and pharmaceutical manufacturer defendants. Under the Judgment Sharing
Agreement: (a) the manufacturer defendants agreed to reimburse the wholesaler
defendants for litigation costs incurred, up to an aggregate of $9 million; and
(b) if a judgment is entered against both manufacturers and wholesalers, the
total exposure for joint and several liability of the Company is limited to the
lesser of 1% of such judgment or one million dollars. In addition, the Company
has released any claims which it might have had against the manufacturers for
the claims presented by the plaintiffs in the Brand Name Prescription Drug
Litigation. The Judgment Sharing Agreement covers the federal court litigation
as well as the cases which have been filed in various state courts. On December
15, 1994, the plaintiffs filed a motion to declare the Judgment Sharing
Agreement unenforceable. On April 10, 1995, the court denied that motion and
ruled that the Judgment Sharing Agreement is valid and enforceable. The
plaintiffs filed a motion for reconsideration of the court's April 10, 1995
ruling, and the court denied that motion and reaffirmed its earlier decision on
April 24, 1995.
On November 9, 1995, the Company, along with the other wholesaler
defendants, filed a motion for summary judgment in the Brand Name Prescription
Drug Litigation. On April 4, 1996, summary judgment was granted in favor of the
Company and the other wholesaler defendants. The plaintiffs appealed this
decision. On August 15, 1997, the Court of Appeals for the Seventh Circuit,
along with other rulings, reversed the District Court's decision granting
summary judgment to the wholesaler defendants. On September 5, 1997, the
wholesaler defendants filed a motion for this decision to be reconsidered by the
Court of Appeals en banc. On October 8, 1997, the motion to reconsider was
denied by the Court of Appeals. The wholesaler defendants have filed a petition
seeking review of the Court of Appeals decision by the United States Supreme
Court. Trial has been set for the Brand Name Prescription Drug Litigation in
September 1998. Most recently, the wholesaler defendants have also been added as
defendants in a series of related antitrust lawsuits brought by certain
independent pharmacies who have opted out of the class action cases and by
certain chain drug and grocery stores. The Company continues to believe that the
allegations against Cardinal and Whitmire in such litigation are without merit,
and it intends to contest such allegations vigorously.
The Company also becomes involved from time to time in litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced herein cannot be forecast with certainty, the Company does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial statements.
Page 12
<PAGE> 13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Registrant's 1997 Annual Meeting of Shareholders was held on November
5, 1997.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in the
proxy statement; and all director nominees were elected to the class
indicated in the proxy statement pursuant to the vote of the
Registrant's shareholders.
(c) Matters voted upon at the Annual Meeting were as follows:
(1) Election of John F. Finn, John F. Havens, L. Jack Van Fossen, and
Robert D. Walter as directors of the Company. The results of the
shareholder vote were as follows: Mr. Finn- 91,609,872 for, 0
against, 2,309,541 withheld, and 0 broker non-votes; Mr. Havens-
91,582,197 for, 0 against, 2,337,216 withheld, and 0 broker
non-votes; Mr. Van Fossen- 91,604,427 for, 0 against, 2,314,986
withheld, and 0 broker non-votes; Mr. Walter- 91,601,091 for, 0
against, 2,318,322 withheld, and 0 broker non-votes.
(2) Amendment to the Registrant's Equity Incentive Plan to revise
provisions pertaining to outside director options. The results of
the shareholder vote were as follows: 85,414,134 for, 8,222,635
against, 282,644 withheld, and 0 broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
2.01 Amended and Restated Agreement and Plan of Merger dated as of July
7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and
Registrant (1)
2.02 Amendment dated as of November 4, 1997 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant (4)
2.03 Amendment dated as of January 8, 1998 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant (5)
2.04 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (2)
11.01 Computation of Per Share Earnings
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (3)
- ------------------
(1) Included as an annex to the Proxy Statement/Prospectus included in
the Registrant's Registration Statement on Form S-4 (No. 333-30889)
filed with the Commission on July 8, 1997, and incorporated herein
by reference.
(2) Included as an exhibit to the Registrant's Current Report on Form
8-K/A, Amendment No. 1 (No. 0-12591) filed with the Commission on
August 27, 1997, and incorporated herein by reference.
Page 13
<PAGE> 14
(3) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997 (No. 0-12591), and
incorporated herein by reference.
(4) Included as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (No. 0-12591), and
incorporated herein by reference.
(5) Included as an annex to the Proxy Statement/Prospectus included with
the Registrant's Pre-effective Amendment No. 3 to Registration
Statement on Form S-4 (No. 333-30889), filed with the Commission on
January 14, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K:
None.
Page 14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: February 11, 1998 By: /s/ Robert D. Walter
--------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ David Bearman
--------------------
David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.01
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 11.01
<TEXT>
<PAGE> 1
Exhibit 11.01
CARDINAL HEALTH, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Quarter Ended Six Months Ended
---------------------------- --------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC:
Net earnings $ 66,179 $ 41,326 $120,218 $ 80,652
======== ======== ======== ========
Weighted average number of Common
Shares outstanding 109,422 107,543 109,257 105,914
======== ======== ======== ========
Basic earnings per Common Share $ 0.60 $ 0.38 $ 1.10 $ 0.76
======== ======== ======== ========
DILUTED:
Net earnings $ 66,179 $ 41,326 $120,218 $ 80,652
======== ======== ======== ========
Weighted average number of Common
Shares outstanding 109,422 107,543 109,257 105,914
Dilutive effect of stock options 1,700 1,796 1,699 1,728
-------- -------- -------- --------
Weighted average number of
shares outstanding 111,122 109,339 110,956 107,642
======== ======== ======== ========
Diluted earnings per Common Share $ 0.60 $ 0.38 $ 1.08 $ 0.75
======== ======== ======== ========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.01
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 27.01
<FLAWED>
<TEXT>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDLUE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 111,654
<SECURITIES> 0
<RECEIVABLES> 790,748
<ALLOWANCES> (38,417)
<INVENTORY> 1,938,526
<CURRENT-ASSETS> 2,954,558
<PP&E> 514,221
<DEPRECIATION> (210,075)
<TOTAL-ASSETS> 3,602,491
<CURRENT-LIABILITIES> 1,769,328
<BONDS> 275,615
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 667,858
<OTHER-SE> 803,702
<TOTAL-LIABILITY-AND-EQUITY> 3,602,491
<SALES> 6,000,476
<TOTAL-REVENUES> 6,000,476
<CGS> 5,525,713
<TOTAL-COSTS> 5,525,713
<OTHER-EXPENSES> 270,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,165)
<INCOME-PRETAX> 197,022
<INCOME-TAX> 76,804
<INCOME-CONTINUING> 120,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,218
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.08
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.02
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 27.02
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDLUE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL
HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 87,460
<SECURITIES> 37,185
<RECEIVABLES> 775,122
<ALLOWANCES> (38,351)
<INVENTORY> 1,725,725
<CURRENT-ASSETS> 2,706,346
<PP&E> 456,393
<DEPRECIATION> (192,213)
<TOTAL-ASSETS> 3,299,147
<CURRENT-LIABILITIES> 1,666,946
<BONDS> 297,909
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 623,580
<OTHER-SE> 585,490
<TOTAL-LIABILITY-AND-EQUITY> 3,299,147
<SALES> 5,351,882
<TOTAL-REVENUES> 5,351,882
<CGS> 4,934,196
<TOTAL-COSTS> 4,934,196
<OTHER-EXPENSES> 251,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,974)
<INCOME-PRETAX> 138,490
<INCOME-TAX> 57,838
<INCOME-CONTINUING> 80,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,652
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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1998 | 0QTR1
| CB | https://www.sec.gov/Archives/edgar/data/896159/0000902561-98-000044.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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ACCESSION NUMBER: 0000902561-98-000044
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980213
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ACE LTD
CENTRAL INDEX KEY: 0000896159
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 000000000
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11778
FILM NUMBER: 98537243
BUSINESS ADDRESS:
STREET 1: ACE BLDG
STREET 2: P O BOX HM 1015
CITY: HAMILTON HM 08 BERMU
STATE: D0
BUSINESS PHONE: 8092955200
MAIL ADDRESS:
STREET 1: P O BOX HM 1015
CITY: HAMITON BERMUDA
STATE: D0
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________________ to ________________
Commission File No. 1-11778 I.R.S. Employer Identification No. N/A
ACE LIMITED
(Incorporated in the Cayman Islands)
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------------- -----------
The number of registrant's Ordinary Shares ($0.125 par value) outstanding as
of February 6, 1998 was 54,203,651.
1
<PAGE>
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1997 (Unaudited) and September 30, 1997 3
Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 1997 and
December 31, 1996 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended December 31, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 1997 and December 31, 1996 6
Notes to Interim Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Part II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
2
<PAGE>
<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 September 30
1997 1997
------ ----
(unaudited)
(in thousands of U.S. dollars
except share and per share data)
<S> <C> <C>
Assets
Investments and cash
Fixed maturities available for sale,
at fair value (amortized cost - $2,978,403
and $3,226,511) $ 3,056,831 $ 3,290,336
Equity securities, at fair value
(cost - $509,719 and $502,481) 605,329 634,970
Short-term investments, at fair value
(amortized cost - $575,807 and $364,552) 576,071 364,432
Other investments, at cost 83,183 78,691
Cash 123,564 106,336
------- -------
Total investments and cash 4,444,978 4,474,765
Goodwill on Tempest acquisition 195,397 196,667
Premiums and insurance balances receivable 133,779 135,815
Accrued investment income 33,099 40,581
Deferred acquisition costs 24,165 27,018
Prepaid reinsurance premiums 35,814 22,196
Other assets 131,705 104,504
------- -------
Total assets $ 4,998,937 $ 5,001,546
========= =========
Liabilities
Unpaid losses and loss expenses $ 1,858,055 $ 1,869,995
Unearned premiums 369,206 400,689
Premiums received in advance 43,307 24,973
Reinsurance balances payable 23,459 11,245
Accounts payable and accrued liabilities 73,002 63,014
Dividend payable 13,356 12,436
------ ------
Total liabilities 2,380,385 2,382,352
--------- ---------
Commitments and Contingencies
Shareholders' equity
Ordinary Shares ($0.125 par value, 100,000,000
shares authorized;
54,471,452 and 55,293,218 shares issued
and outstanding) 6,809 6,911
Additional paid-in capital 1,086,802 1,102,824
Unearned stock grant compensation (4,250) (1,993)
Net unrealized appreciation on investments 174,302 196,194
Cumulative translation adjustments 709 855
Retained earnings 1,354,180 1,314,403
--------- ---------
Total shareholders' equity 2,618,552 2,619,194
--------- ---------
Total liabilities and shareholders' equity $ 4,998,937 $ 5,001,546
========= =========
See accompanying notes to interim consolidated financial statements
3
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
---- ----
(in thousands of U.S. dollars
except per share data)
<S> <C> <C>
Revenues
Gross premiums written $ 170,245 $ 132,512
Reinsurance premiums ceded (43,268) (21,898)
-------- -------
Net premiums written 126,977 110,614
Change in unearned premiums 40,844 53,786
-------- ------
Net premiums earned 167,821 164,400
Net investment income 58,413 59,738
Net realized gains on investments 27,492 41,723
-------- ------
Total revenues 253,726 265,861
------- -------
Expenses
Losses and loss expenses 109,161 110,150
Acquisition costs 14,201 14,129
Administrative expenses 17,548 15,841
-------- ------
Total expenses 140,910 140,120
------- -------
Net income $ 112,816 $ 125,741
======= =======
Basic earnings per share $ 2.06 $ 2.16
==== ====
Diluted earnings per share $ 2.01 $ 2.14
==== ====
See accompanying notes to interim consolidated financial statements
4
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
---- ----
(in thousands of U.S. dollars)
<S> <C> <C>
Ordinary Shares
Balance -- beginning of period $ 6,911 $ 7,271
Exercise of stock options 2 2
Repurchase of shares (104) (32)
------------ ------
Balance -- end of period 6,809 7,241
------------ -----
Additional paid-in capital
Balance -- beginning of period 1,102,824 1,156,194
Exercise of options for Ordinary Shares 424 393
Repurchase of Ordinary Shares (16,446) (5,015)
---------- ------
Balance -- end of period 1,086,802 1,151,572
--------- ---------
Unearned stock grant compensation
Balance -- beginning of period (1,993) (1,299)
Stock grants awarded (3,123) (2,626)
Amortization 866 401
------------ -------------
Balance -- end of period (4,250) (3,524)
----------- ------------
Net unrealized appreciation
on investments
Balance -- beginning of period 196,194 61,281
Net (depreciation) appreciation during (21,892) 25,719
period ---------- ------
Balance -- end of period 174,302 87,000
---------- -------
Cumulative translation adjustments
Balance -- beginning of period 855 131
Net adjustment for period (146) (449)
------------ -------
Balance -- end of period 709 (318)
------------ --------
Retained earnings
Balance -- beginning of period 1,314,403 1,020,700
Net income 112,816 125,741
Dividends declared (13,085) (10,430)
Repurchase of Ordinary Shares (59,954) (9,613)
---------- ------
Balance -- end of period 1,354,180 1,126,398
--------- ---------
Total shareholders' equity $ 2,618,552 $ 2,368,369
========= =========
See accompanying notes to interim consolidated financial statements
5
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
------ ----
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 112,816 $ 125,741
Adjustments to reconcile net income to
net cash provided by
Operating activities
Unearned premiums (31,483) (43,938)
Unpaid losses and loss expenses (11,940) 34,506
Prepaid reinsurance premiums (13,618) (8,848)
Net realized gains on investments (27,492) (41,723)
Amortization of premium/discounts (867) (1,595)
Deferred acquisition costs 2,853 3,814
Insurance balances receivable 2,036 432
Premiums received in advance 18,334 22,720
Reinsurance balances payable 12,214 11,683
Accounts payable and accrued liabilities 10,973 (16,384)
Other (22,114) 353
----------- ----------
Net cash flows from operating activities 51,712 86,761
----------- ------
Cash flows from investing activities
Purchases of fixed maturities (1,299,104) (1,890,148)
Purchases of equity securities (89,533) (239,903)
Sales of fixed maturities 1,339,664 1,979,112
Sales of equity securities 85,537 141,500
Maturities of fixed maturities 13,000 --
Net realized gains on financial
futures contracts 8,687 17,688
Other investments (4,492) --
Acquisition of subsidiaries, net of cash
acquired -- (30,416)
------------ -------
Net cash from (used in) investing
activities 53,759 (22,167)
----------- -------
Cash flows from financing activities
Repurchase of Ordinary Shares (76,504) (14,658)
Proceeds from exercise of options for
Ordinary Shares 426 393
Dividends paid (12,165) (10,199)
---------- -------
Net cash used for financing activities (88,243) (24,464)
----------- -------
Net increase in cash 17,228 40,130
Cash -- beginning of period 106,336 53,374
---------- ------
Cash -- end of period $ 123,564 $ 93,504
========== ========
</TABLE>
See accompanying notes to interim consolidated financial statements
6
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements, which include the accounts
of the Company and its subsidiaries, have been prepared on the basis of
accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results
for such periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full
year. These financial statements should be read in conjunction with the
consolidated financial statements, and related notes thereto, included in
the Company's 1997 Annual Report on Form 10-K.
On January 2, 1998, the Company completed the acquisition of Westchester
Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding
company, ACE US Holdings, Inc. WSG, through its insurance subsidiaries,
provides specialty commercial property and umbrella liability coverages
in the U.S. Under the terms of the agreement, the Company purchased all
of the outstanding capital stock of WSG for aggregate cash consideration
of $338 million. In connection with the acquisition, National Indemnity,
a subsidiary of Berkshire Hathaway, has provided $750 million (75 percent
quota share of $1 billion) of reinsurance protection to WSG with respect
to their loss reserves for the 1996 and prior accident years. The Company
financed the transaction with $250 million of bank debt (see note 7 -
Credit Facilities) and the remainder with available cash.
The acquisition will be recorded using the purchase method of accounting
and accordingly, the consolidated financial statements will include the
results of ACE US Holdings, Inc. and its subsidiaries from January 2,
1998, the date of acquisition.
At December 31, 1997 approximately 70 percent of the Company's written
premiums came from North America with approximately 18 percent coming
from the United Kingdom and continental Europe and approximately 12
percent from other countries.
2. Significant Accounting Policies
Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported primary earnings per share
which included the dilution effect of outstanding options calculated
using the treasury stock method using an average share price for the
period. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
3. Commitments and Contingencies
A number of the Company's insureds have given notice of claims relating
to breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits including class actions,
involving thousands of implant recipients have been filed in both state
and federal courts throughout the United States. Most of the federal
cases have been consolidated pursuant to the rules for Multidistrict
Litigation to a Federal District Court in Alabama.
On May 15, 1995, the Dow Corning Corporation, a significant defendant,
filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
claims against Dow Corning remain stayed subject to the Bankruptcy Code.
7
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Commitments and Contingencies (cont'd.)
On October 1, 1995, negotiators for three of the major defendants agreed
on the essential elements of a revised individual settlement plan for
U.S. claimants with at least one implant from any of those manufacturers
("the Settlement"). In general, under the Settlement, the amounts payable
to individual participants, and the manufacturers' obligations to make
those payments, would not be affected by the number of claimants electing
to opt out from the new plan. Also, in general, the compensation would be
fixed and not affected by the number of participants, and the
manufacturers would not have a right to walk away because of the amount
of claims payable. Finally, each settling defendant agreed to be
responsible only for cases in which its implant was identified, and not
for a percentage of all claims.
By November 13, 1995, the Settlement was approved by the three major
defendants. In addition, two other defendants became part of the
Settlement, although certain of their settlement terms are different and
more restricted than the plan offered by the original three defendants.
On December 22, 1995, the multidistrict litigation judge approved the
Settlement and the materials for giving notice to claimants although an
appeal concerning the Settlement is pending with the Eleventh Circuit
Court of Appeals. Beginning in mid-January, 1996, the three major
defendants have each made payments to a court-established fund for use in
making payments under the Settlement. The Settlement Claims Office had
reported that as of October 31, 1997, it has sent out Notification of
Status Letters to more than 360,000 non-opt-out domestic implant
recipients who had registered with the Settlement Claims Office. As of
October 31, 1997, approximately $565 million had been distributed under
the Settlement to implant recipients of the three major defendants.
Certain potential payments to claimants relating to other implants remain
suspended because of the pending appeals. The Settlement Claims Office
has also reported that approximately 32,500 domestic registrants
exercised opt-out rights after receiving their status letters.
Previously, approximately 19,000 other domestic implant recipients had
exercised opt-out rights in 1994 and/or before receiving status letters.
At June 30, 1994, the Company increased its then existing reserves
relating to breast implant claims. Although the reserve increase was
partially satisfied by an allocation from existing IBNR, it also required
an increase in the Company's total reserve for unpaid losses and loss
expenses at June 30, 1994 of $200 million. The increase in reserves was
based on information made available in conjunction with the lawsuits and
information made available from the Company's insureds and was predicated
upon an allocation between coverage provided before and after the end of
1985 (when the Company commenced underwriting operations). No additional
reserves relating to breast implant claims have been added since June 30,
1994.
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its
insureds. During fiscal 1997 and the first quarter of fiscal 1998, the
Company made payments of approximately $260 million with respect to
breast implant claims. These payments were included in previous reserves
and are consistent with the Company's belief that its reserves are
adequate. Significant uncertainties continue to exist with regard to the
ultimate outcome and cost of the Settlement and value of the opt-out
claims. While the Company is unable at this time to determine whether
additional reserves, which could have a material adverse effect upon the
financial condition, results of operations and cash flows of the Company,
may be necessary in the future, the Company believes that its reserves
for unpaid losses and loss expenses including those arising from breast
implant claims are adequate as at December 31, 1997.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Shares Issued and Outstanding
The Board of Directors has authorized the repurchase from time to time of
the Company's Ordinary Shares in open market and private purchase
transactions. On May 9, 1997 the Board of Directors terminated the then
existing share repurchase program and authorized a new share program for
up to $300 million of the Company's Ordinary Shares. During the quarter
ended December 31, 1997, the Company repurchased 836,200 Ordinary Shares
under the share repurchase program for an aggregate cost of $76.5
million. As at December 31, 1997, approximately $191.2 million of the
Board authorization had not been utilized.
5. Restricted Stock Awards
Under the terms of the 1995 Long-Term Incentive Plan 34,500 restricted
Ordinary Shares were awarded during the current quarter, to officers of
the Company and its subsidiaries. These shares vest at various dates
through November 2002.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
December 31,
1997 1996
---- ----
(in thousands of U.S. dollars
except share and per share data)
Numerator:
Net Income $ 112,816 $ 125,741
============ ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 54,883,826 58,139,648
Effect of dilutive securities 1,342,994 746,607
----------- ----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 56,226,820 58,886,255
========== ==========
Basic earnings per share $ 2.06 $ 2.16
==== ====
Diluted earnings per share $ 2.01 $ 2.14
==== ====
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Credit Facilities
In December 1997 the Company put in place syndicated credit
facilities which replaced the exisiting facilities. J.P. Morgan
Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit
facilities. The new facilities provide:
. A $200 million 364 day revolving credit facility and a $200
million five year revolving credit facility which together make up
a combined $400 million committed, unsecured revolving credit
facility. This new five year revolving credit facility has a $50
million LOC sublimit.
. A five year LOC of approximately 154 million pounds ($260 million)
which is being used to fulfill the requirements of Lloyd's to
provide funds to support underwriting capacity on Lloyd's
syndicates in which the Company participates. The minimum
consolidated tangible net worth covenant for A.C.E. Insurance
Company, Ltd. under this LOC is $1.0 billion.
. A $250 million seven year Amortized Term Loan Facility which was
used on January 2, 1998 to partially finance the acquisition of
WSG. The interest rate on the term loan is LIBOR plus an
applicable spread.
The revolving credit and term loan facilities require that the Company
maintain a minimum consolidated tangible net worth of $1.4 billion.
8. Reclassification
Certain items in the prior period financial statements have been
reclassified to conform with the current period presentation.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
The following is a discussion of the Company's results of operations,
financial condition, liquidity and capital resources as of and for the
three months ended December 31, 1997. The results of operations and cash
flows for any interim period are not necessarily indicative of results
for the full year. This discussion should be read in conjunction with the
consolidated financial statements, related notes thereto and the
Management's Discussion and Analysis of Results of Operations and
Financial Condition included in the Company's 1997 Annual Report on Form
10-K.
ACE Limited ("ACE") is a holding company which, through its Bermuda-based
operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"),
Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest
Reinsurance Company Limited ("Tempest"), provides insurance and
reinsurance for a diverse group of international clients. In addition,
the Company provides funds at Lloyd's to support underwriting by
syndicates managed by Methuen Underwriting Limited ("MUL"), ACE London
Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"),
each indirect wholly owned subsidiaries of ACE. The term "the Company"
refers to ACE and its subsidiaries, excluding MUL, ALA and ALU.
For the 1996, 1997 and 1998 years of account, the Company, through
corporate subsidiaries, has or will participate in the underwriting of
these syndicates by providing funds at Lloyd's, primarily in the form of
a letter of credit, supporting approximately $37 million, $229 million
and $485 million, respectively, of underwriting capacity. The syndicates
managed by these agencies in which the Company participates underwrite
aviation, marine and non-marine risks. Underwriting capacity is the
amount of gross premiums that a syndicate at Lloyd's can underwrite in a
given year of account. However, a syndicate is not required to fully
utilize all of the capacity and it is not unusual for capacity
utilization to be significantly lower than 100 percent.
On January 2, 1998, the Company completed the acquisition of Westchester
Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding
company, ACE US Holdings, Inc. ("ACE US"). WSG, through its insurance
subsidiaries, provides specialty commercial property and umbrella
liability coverages in the U.S. Under the terms of the agreement, the
Company purchased all of the outstanding capital stock of WSG for
aggregate cash consideration of $338 million. In connection with the
acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, has
provided $750 million (75 percent quota share of $1 billion) of
reinsurance protection to WSG with respect to their loss reserves for the
1996 and prior accident years (see "Liquidity and Capital Resources").
The Company will continue to evaluate potential new product lines and
other opportunities in the insurance and reinsurance markets.
Results of Operations - Three Months ended December 31, 1997
Net Income
Three Months ended % Change
December 31 from
1997 1996 Prior year
----- ------ ----------
(in millions)
Income excluding net realized
gains on investments $ 85.3 $ 84.0 1.6%
Net realized gains on investments 27.5 41.7 N.M.
---- ---- -----
Net income $ 112.8 $125.7 N.M.
===== ===== ====
(N.M. -- Not meaningful)
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Income excluding net realized gains on investments for the first quarter
of fiscal 1998 increased by 1.6 percent, compared with the corresponding
fiscal 1997 quarter. This increase is a result of higher income from
insurance operations and was partially offset by a decrease in investment
income and an increase in general and administrative expenses.
Both net income for the current quarter and the first quarter of fiscal
1997 benefited from positive movements in the investment markets which
produced net realized gains on investments in each of these quarters.
Premiums
Three Months ended % Change
December 31 from
1997 1996 Prior year
----- ------ ---------
(in millions)
Gross premiums written:
ACE Insurance (including CODA) $ 127.5 $ 124.7 2.2%
Lloyd's syndicates 42.7 6.1 N.M.
Property catastrophe (Tempest) __ 1.7 N.M.
----- ------- -------
$ 170.2 $ 132.5 28.5%
===== ===== =======
Net premiums written:
ACE Insurance (including CODA) $ 94.8 $ 105.2 (9.9)%
Lloyd's syndicates 32.2 3.7 N.M.
Property catastrophe (Tempest) __ 1.7 N.M.
----- ------- ------
$ 127.0 $ 110.6 14.8%
===== ===== ======
Net premiums earned:
ACE Insurance (including CODA) $ 119.6 $ 126.0 (5.1)%
Lloyd's syndicates 19.8 2.3 N.M.
Property catastrophe (Tempest) 28.4 36.1 (21.1)
------ ------ ------
$ 167.8 $ 164.4 2.1%
===== ===== ======
(N.M. -- Not meaningful)
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Despite continuing competitive pressures in most insurance and
reinsurance markets, gross premiums written increased by 28.5 percent to
$170.2 million in the quarter ended December 31, 1997 compared with
$132.5 million in the quarter ended December 31, 1996. This increase is
primarily a result of the Company's diversification strategy undertaken
over the past several years. The Company recorded an increase of $36.6
million in gross premiums written with respect to the Company's
participation in the Lloyd's syndicates managed by ACE London at Lloyd's.
This growth, which was achieved despite continuing price competition in
the Lloyd's market, is a result of the Company's increased participation
in the syndicates under management. Gross premiums written in ACE
Insurance increased by 2.2 percent, or $2.8 million, in the quarter
compared with the comparable quarter last year. This increase was
primarily the result of growth in satellite premiums, which experienced
increased activity in both launch and in-orbit programs, offset by
continuing declines in the directors and officers liability and excess
liability lines of business. The decline in excess liability is mainly
the result of non-renewed accounts, premium adjustments and pricing
changes resulting primarily from increases in attachment points and
decreases in limits provided. While this has resulted in decreasing
premiums, it has also led to a reduction in the Company's exposure and an
improved risk profile. As Tempest renewals primarily fall in January and
July of each year premium transactions are minimal during the December
quarter. However, Tempest experienced continuing price pressures on its
January 1998 renewals with price reductions up to 20 percent in many
cases.
Net premiums written increased by $16.4 million to $127.0 million this
quarter from $110.6 million in the quarter ended December 31, 1996, an
increase of 14.8 percent. This increase was the result of increases in
the Company's participation in the Lloyd's syndicates managed by ACE
London at Lloyd's. Net premiums written in ACE Insurance declined by 9.9
percent in the quarter compared to the first quarter of fiscal 1997. The
decline is primarily the result of continuing declines in directors and
officers liability and excess liability premiums, offset somewhat by
growth in premiums from the satellite division. Net premiums written were
also affected by the increased purchase of reinsurance in several
divisions in ACE Insurance.
Net premiums earned were $167.8 million compared to $164.4 million last
year, an increase of 2.1 percent. This increase was a result of a $17.5
million increase in net premiums earned from our Lloyd's syndicate
participation, offset somewhat by declines in earned premiums in ACE
Insurance and in the property catastrophe business in Tempest.
Net Investment Income
Three Months ended % Change
December 31 from
1997 1996 Prior year
---- ---- ----------
(in millions)
Net investment income $ 58.4 $ 59.7 (2.2)%
==== ==== ======
Net investment income decreased to $58.4 million in the quarter compared to
$59.7 million in the quarter ended December 31, 1996. This decrease was
primarily due to the reduction in average yield on the portfolio caused by
downward movements in the yield curve as well as the movement from 15
percent equities to 20 percent equities during December 1996. In addition,
during fiscal 1997 and the first quarter of fiscal 1998, the investable
asset base remained relatively constant as cash flows from operations were
largely offset by share repurchases and dividend payments.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Net Realized Gains on Investment
Three Months ended
December 31,
1997 1996
----- ----
(in millions)
Fixed maturities and short-term investments $ 21.4 $ 21.4
Equity securities 7.3 4.2
Financial futures and option contracts 8.7 17.7
Currency (9.9) (1.6)
----- -----
$ 27.5 $ 41.7
===== ====
The Company's investment strategy takes a long-term view and the
portfolio is actively managed to maximize total return within certain
specific guidelines which minimize risk. The portfolio is reported at
fair value. The effect of market movements on the investment portfolio
will directly impact net realized gains (losses) on investments when
securities are sold. Changes in unrealized gains and losses, which result
from the revaluation of securities held, are reported as a separate
component of shareholders' equity.
The Company uses foreign currency forward and option contracts to
minimize the effect of fluctuating foreign currencies on the value of
non-U.S. dollar holdings. The contracts used are not designated as
specific hedges and therefore, realized and unrealized gains and losses
recognized on these contracts are recorded as a component of net realized
gains (losses) on investments in the period in which the fluctuations
occur, together with net foreign currency gains and losses recognized
when non-U.S. dollar securities are sold.
During the first quarter of fiscal 1998 the fair value of the Company's
investment portfolio was positively impacted by a general increase in
prices in the U.S. bond markets resulting from the decline in interest
rates during the period. The sales proceeds for fixed maturity securities
were generally higher than their amortized cost during most of the
quarter which resulted in net realized gains of $21.4 million being
recognized on fixed maturities and short-term investments.
With strong U.S. equity markets, net realized gains on sales of equity
securities were $7.3 million in the first quarter of fiscal 1998 compared
with gains of $4.2 million in the first quarter of fiscal 1997.
In the first quarter of fiscal 1998 the S&P 500 Stock Index rose
approximately 3 percent and generated net realized gains on the equity
index futures contracts of $4.4 million. The remainder of the net
realized gains on financial futures and option contracts in the first
quarter of fiscal 1998 arose from gains recognized on futures contracts
used by certain of the Company's external managers of fixed income
securities. Net realized gains on financial futures contracts of $17.7
million recorded in the first quarter of fiscal 1997 were primarily
generated by the equity index futures contracts held as a result of an
over 8 percent rise in the S&P 500 Stock Index during that quarter.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Combined Ratio
Three Months ended
December 31
1997 1996
------ ----
(in millions)
Loss and loss expense ratio 65.1% 67.0%
Underwriting and administrative expense ratio 18.9 18.2
------- ----
Combined ratio 84.0% 85.2%
==== ====
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss and loss expense ratio, underwriting
and administrative expense ratio and combined ratio. Each ratio is derived
by dividing the relevant expense amounts by net premiums earned. The
combined ratio is the sum of the loss and loss expense ratio and the
underwriting and the administrative expense ratio. A combined ratio under
100 percent indicates underwriting profits and a combined ratio exceeding
100 percent indicates underwriting losses. Property catastrophe reinsurance
companies generally expect to have overall lower combined ratios as
compared with other reinsurance companies with long-tail exposures.
However, property catastrophe loss experience is generally characterized by
low frequency but high severity short-tail claims which may result in
significant volatility in results.
Several aspects of the Company's operations, including the low frequency
and high severity of losses in the high excess layers in certain lines of
business in which the Company provides insurance and reinsurance,
complicate the actuarial reserving techniques utilized by the Company.
Management believes, however, that the Company's reserves for unpaid losses
and loss expenses, including those arising from breast implant litigation,
are adequate to cover the ultimate cost of losses and loss expenses
incurred through December 31, 1997. Since such provisions are necessarily
based on estimates, future developments may result in ultimate losses and
loss expenses significantly greater or less than such amounts (see "Breast
Implant Litigation").
For the quarter ended December 31, 1997, the loss and loss expense ratio
decreased to 65.1 percent from 67.0 percent for the first quarter of fiscal
1997. This decline is partly due to the fact that Tempest had very little
loss activity in the quarter, posting a loss and loss expense ratio of 1.8
percent compared to 15.0 percent for the 1997 quarter. The change in mix of
earned premiums in ACE Insurance has also contributed to the decrease in
the loss and loss expense ratio during the quarter.
Acquisition costs remained relatively flat during the current quarter
compared to the first quarter of fiscal 1997, despite a continuing change
in the mix of earned premiums. The additional acquisition costs generated
primarily by the increase in earned premiums from the Lloyd's
participation, were offset by a net decrease in acquisition costs
resulting from declines in earned premiums from ACE Insurance and
Tempest. Administrative expenses increased by $1.7 million in the current
quarter compared to the first quarter of fiscal 1997 due primarily to the
costs associated with our increased participation in the Lloyd's market.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, ACE's assets consist primarily of the stock of its
subsidiaries as well as other investments. In addition to investment
income, its cash flows currently depend primarily on dividends or other
statutorily permissible payments from its Bermuda-based operating
subsidiaries (the "Bermuda subsidiaries"). There are currently no legal
restrictions on the payment of dividends from retained earnings by the
Bermuda subsidiaries as the minimum statutory capital and surplus
requirements are satisfied by the share capital and additional paid-in
capital of each of the Bermuda subsidiaries. However, the payment of
dividends or other statutorily permissible distributions by the Bermuda
subsidiaries is subject to the need to maintain shareholder's equity at a
level adequate to support the level of insurance and reinsurance
operations. During December 1997 ACE received a dividend of $115 million
from Tempest.
The Company's consolidated sources of funds consist primarily of net
premiums written, investment income, and proceeds from sales and
maturities of investments. Funds are used primarily to pay claims,
operating expenses and dividends and for the purchase of investments and
for share repurchases.
For the three months ended December 31, 1997, the Company's consolidated
net cash flow from operating activities was $51.7 million, compared with
$86.8 million for the three months ended December 31, 1996. Cash flows
are affected by claims payments, which due to the nature of the insurance
and reinsurance coverage provided by the Company, may comprise large loss
payments on a limited number of claims and can therefore fluctuate
significantly. The irregular timing of these large loss payments, for
which the source of cash can be from operations, available credit
facilities or routine sales of investments, can create significant
variations in cash flow from operations between periods. For the three
month periods ended December 31, 1997 and 1996, loss and loss expense
payments amounted to $120.8 million and $75.1 million respectively. Total
loss and loss expense payments amounted to $402.1 million, $101.4 million
and $73.1 million in fiscal years 1997, 1996 and 1995, respectively.
At December 31, 1997, total investments and cash amounted to
approximately $4.4 billion, compared to $4.5 billion at September 30,
1997.
The Company's investment portfolio is structured to provide a high
level of liquidity to meet insurance related or other obligations. The
consolidated investment portfolio is externally managed by independent
professional investment managers and is invested in high quality
investment grade marketable fixed income and equity securities, the
majority of which trade in active, liquid markets. The Company believes
that its cash balances, cash flow from operations, routine sales of
investments and the liquidity provided by its credit facilities
(discussed below) are adequate to allow the Company to pay claims within
the time periods required under its policies.
During December 1997, the Company put in place syndicated credit
facilities which replaced the existing facilities. J.P. Morgan
Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit facilities. The
new facilities provide:
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
. A $200 million 364 day revolving credit facility and a $200
million five year revolving credit facility which together make up
a combined $400 million committed, unsecured revolving credit
facility. This new five year revolving credit facility has a $50
million LOC sublimit.
. A five year LOC of approximately 154 million pounds ($260 million)
which is being used to fulfill the requirements of Lloyd's to
provide funds to support underwriting capacity on Lloyd's
syndicates in which the Company participates. The minimum
consolidated tangible net worth covenant for ACE Insurance under
this LOC is $1.0 billion.
. A $250 million seven year Amortized Term Loan Facility which was
used on January 2, 1998 to partially finance the acquisition of
WSG. The interest rate on the term loan is LIBOR plus an
applicable spread.
The revolving credit and term loan facilities require that the Company
maintain a minimum consolidated tangible net worth of $1.4 billion.
On November 13, 1997, the Board of Directors approved a special resolution
to split each outstanding Ordinary Share of the Company into three Ordinary
Shares. The stock split was voted on and approved by the shareholders of the
Company on February 6, 1998. The record date for determining those
shareholders entitled to receive certificates representing additional
Ordinary Shares pursuant to the stock split shall be as of the close of
business on February 17, 1998. Certificates representing the additional
shares of stock will be mailed on March 2, 1998. (see Part II, Item 4
"Submission of Matters to a Vote of Security Holders").
The Board of Directors has authorized the repurchase from time to time of
the Company's Ordinary Shares in open market and private purchase
transactions. On May 9, 1997, the Board of Directors terminated the then
existing share repurchase program and authorized a new program for up to
$300.0 million of the Company's Ordinary Shares. During the quarter ended
December 31, 1997, the Company repurchased 836,200 Ordinary Shares under
the share repurchase program for an aggregate cost of $76.5 million.
During the period January 1, 1998 through February 6, 1998, the Company
repurchased an additional 337,500 Ordinary Shares under the share
repurchase program for an aggregate cost of $31.1 million, leaving
approximately $160.1 million of the Board authorization not utilized.
On October 18, 1997 and January 16, 1998, the Company paid quarterly
dividends of 22 cents and 24 cents per share, respectively to
shareholders of record on September 30, 1997 and December 13, 1997. On
February 6, 1998, following approval by the shareholders of the
three-for-one stock split, the Board of Directors declared a quarterly
dividend of 8 cents per share payable on April 18, 1998 to shareholders
of record on March 31, 1998. The declaration and payment of future
dividends is at the discretion of the Board of Directors and will be
dependent upon the profits and financial requirements of the Company and
other factors, including legal restrictions on the payment of dividends
and such other factors as the Board of Directors deems relevant.
As previously discussed, on January 2, 1998, the Company completed the
acquisition of WSG, through its newly-created U.S. holding company, ACE
US, for an aggregate cash consideration of $338 million. ACE US was
capitalized by ACE Limited with $75 million and received $35 million from
an inter-company loan. ACE US financed the acquisition of WSG with $250
million of bank debt (see discussion of syndicated credit facilities
above) and the remaining $88 million came from available funds.
Fully diluted net asset value per share was $48.30 at December 31, 1997,
compared with $47.14 at September 30, 1997.
The Company maintains loss reserves for the estimated unpaid ultimate
liability for losses and loss expenses under the terms of its policies
and agreements. The reserve for unpaid losses and loss expenses of $1.8
billion at December 31, 1997, includes $839 million of case and loss
expense reserves. While the Company believes that its reserve for unpaid
losses and loss expenses at December 31, 1997 is adequate, future
developments may result in ultimate losses and loss expenses
significantly greater or less than the reserve provided. A number of the
Company's insureds have given notice of claims relating to breast
implants or components or raw material thereof that had been produced
and/or sold by such insureds. During fiscal 1997 and 1998, the Company
made certain payments to policyholders with respect to these claims.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
However, the Company does not have adequate data upon which to anticipate
the timing of future payments relating to these liabilities, and it
expects that the amount of time required to determine the ultimate
financial impact of the options selected by claimants may extend well
into 1998 and beyond (see "Breast Implant Litigation").
The Company's financial condition, results of operations and cash flow
are influenced by both internal and external forces. Claims settlements,
premium levels and investment returns may be impacted by changing rates
of inflation and other economic conditions. In many cases, significant
periods of time, ranging up to several years or more, may elapse between
the occurrence of an insured loss, the reporting of the loss to the
Company and the settlement of the Company's liability for that loss. The
liquidity of its investment portfolio, cash flows and the credit
facilities are, in management's opinion, adequate to meet the Company's
expected cash requirements.
Breast Implant Litigation
A number of the Company's insureds have given notice of claims relating
to breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits, including class actions,
involving thousands of implant recipients have been filed in both state
and federal courts throughout the United States. Most of the federal
cases have been consolidated pursuant to the rules for Multidistrict
Litigation to a Federal District Court in Alabama, although cases are in
the process of being transferred back to federal courts or remanded to
state courts.
On May 15, 1995, the Dow Corning Corporation, one of the major
defendants, filed for protection under Chapter 11 of the U.S. Bankruptcy
Code and claims against Dow Corning remain stayed subject to the
Bankruptcy Code.
On October 1, 1995, negotiators for three of the major defendants agreed
on the essential elements of an individual settlement plan for U.S.
claimants with at least one implant from any of those manufacturers ("
the Settlement"). In general, under the Settlement, the amounts payable
to individual participants, and the manufacturers' obligations to make
those payments, would not be affected by the number of participants
electing to opt out from the new plan. Also, in general, the compensation
would be fixed and not affected by the number of participants, and the
manufacturers would not have a right to walk away because of the amount
of claims payable. Finally, each settling defendant agreed to be
responsible only for cases in which its implant was identified, and not
for a percentage of all cases. By November 13, 1995, the Settlement was
approved by the three major defendants. In addition, two other defendants
became part of the Settlement, although certain of their settlement terms
are different and more restricted than the plan offered by the original
three defendants. On December 22, 1995, the multidistrict litigation
judge approved the Settlement and the materials for giving notice to
claimants although an appeal concerning the Settlement is pending with
the Eleventh Circuit Court of Appeals.
Beginning in mid-January, 1996, the three major defendants have each made
payments to a court-established fund for use in making payments under the
Settlement. The Settlement Claims Office had reported that as of October
31, 1997, it has sent out Notification of Status Letters to more than
360,000 non-opt-out domestic implant recipients who had registered with
the Settlement Claims Office. As of October 31, 1997, approximately $565
million had been distributed under the Settlement to implant recipients
of the three major defendants. Certain potential payments to claimants
relating to other implants remain suspended because of the pending
appeals. The Settlement Claims Office has also reported that
approximately 32,500 domestic registrants exercised opt-out rights after
receiving their status letters. Previously, approximately 19,000 other
domestic implant recipients had exercised opt-out rights in 1994 and/or
before receiving status letters.
Although the Company has underwritten the coverage for a number of the
defendant companies including four of the companies involved in the
Settlement, the Company anticipates that insurance coverage issued prior
to the time the Company issued policies will be available for a portion
of the defendants' liability. In addition, the Company's policies only
apply when the underlying liability insurance policies or per occurrence
retentions are exhausted.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Breast Implant Litigation (continued)
Declaratory judgment lawsuits, involving four of the Company's insureds,
have been filed seeking guidance on the appropriate trigger for their
insurance coverage. None of the insureds have named the Company in such
lawsuits, although other insurers and third parties have sought to
involve the Company in those lawsuits. To date, one court has stayed a
lawsuit against the Company by other insurers; two courts have dismissed
actions by other insurers against the Company. Another court in Texas has
ruled against the Company's arguments that the court should dismiss the
claims by other insurers and certain doctors attempting to bring the
Company into coverage litigation there. On appeal in the Texas lawsuit,
the appellate court affirmed the lower court's order refusing to dismiss
the claims against the Company; further appellate review in the Texas
Supreme Court is pending. In addition, further efforts are contemplated
to stay or dismiss the doctor's claims against the Company in the Texas
lawsuit.
At June 30, 1994, the Company increased its then existing reserves
relating to breast implant claims. Although the reserve increase was
partially satisfied by an allocation from existing IBNR, it also required
an increase in the Company's total reserve for unpaid losses and loss
expenses at June 30, 1994 of $200 million. The increase in reserves was
based on information made available in the pending lawsuits and
information from the Company's insureds and was predicated upon an
allocation between coverage provided before and after the end of 1985
(when the Company commenced underwriting operations). No additional
reserves relating to breast implant claims have been added since June 30,
1994.
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its
insureds. During fiscal 1997 and the first quarter of fiscal 1998 the
Company made payments of approximately $260 million with respect to
breast implant claims. These payments were included in previous reserves
and are consistent with the Company's belief that its reserves are
adequate. Significant uncertainties continue to exist with regard to the
ultimate outcome and cost of the Settlement and value of the opt-out
claims. While the Company is unable at this time to determine whether
additional reserves, which could have a material adverse effect upon the
financial condition, results of operations and cash flows of the Company,
may be necessary in the future, the Company believes that its reserves
for unpaid losses and loss expenses including those arising from breast
implant claims are adequate as at December 31, 1997.
IMPACT OF THE YEAR 2000 ISSUE
Management has initiated a Company wide program to prepare the Company's
various computer systems and selected applications for the Year 2000. The
Company has appointed individuals in each business segment to review all
systems to assess their ability to process transactions in the Year 2000.
Based on these assessments, the Company has determined that certain
business segments, particularly ACE USA and ACE London, need to modify or
replace significant portions of their computer systems so these systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with these modifications and replacements the Year 2000 Issue
can be adequately addressed. The Company will utilize both internal and
external resources to reprogram or replace, and test these systems for Year
2000 modifications. The Company has initiated communications with its
significant business partners, including its business partners in the
Lloyd's markets, to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue. The
Company is also assessing its exposure to contingencies related to the Year
2000 Issue for the policies it issues. The total cost of this effort is
still being evaluated and the Company has not yet determined if the total
cost will be material.
19
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1) The Annual General Meeting was held on February 6, 1998.
2) The following matters were voted on at the Annual General Meeting:
a) The following directors were elected.
Term Expiring Votes In Favour Votes Withheld
------------- --------------- --------------
Thomas J. Neff 2000 37,816,864 233,441
Brian Duperreault 2001 37,818,446 231,859
Robert M. Hernandez 2001 37,817,443 232,862
Peter Menikoff 2001 37,819,231 261,074
Glen M. Renfrew 2001 37,812,471 237,834
Robert Ripp 2001 37,819,549 230,756
Dermot F. Smurfit 2001 37,816,974 233,331
b) A resolution was voted on amending the Company's Memorandum of
Association and Articles of Association to split each outstanding
Ordinary Share of the Company into three Ordinary Shares.
The record date for determining those shareholders entitled to
receive certificates representing additional Ordinary Shares pursuant
pursuant to the stock split shall be as of the close of business on
February 17, 1998. Certificates representing the additional shares
of stock will be mailed on March 2, 1998.
The holders of 37,796,245 shares voted in favour, 21,530 shares
voted against and 232,530 shares abstained.
c) A special resolution was voted upon to amend Article 33 of the
Company's Articles to clarify the setting of record dates in respect
of shareholder meetings and payments of dividends.
The holders of 37,794,080 shares voted in favour, 13,754 shares
voted against and 242,471 shares abstained.
d) The appointment of Coopers & Lybrand L.L.P. as independent public
accountants for the Company for the year ended September 30, 1998
was ratified and approved.
The holders of 37,794,080 shares voted in favour, 13,754 shares
voted against and 242,471 shares abstained.
ITEM 5. OTHER INFORMATION
1) On February 6, 1998, following approval by the shareholders of the
three-for-one stock split, the Company declared a dividend of $0.08 per
Ordinary Share payable on April 18, 1998 to shareholders of record on
March 31, 1998.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Exhibits
--------
10.1 ACE Limited Elective Deferred Compensation Plan
10.2 ACE Limited Rules of the Approved UK Stock Option Program
27 Financial Data Schedule
2) Reports on Form 8-K
The Company filed a Form-8K current report dated January 23, 1998
pertaining to the completion of the acquisition of Westchester Specialty
Group, Inc.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE LIMITED
---------------------------------
February 13, 1998 /s/ Brian Duperreault
----------------------------
Brian Duperreault
Chairman, President and Chief
Executive Officer
February 13, 1998 /s/ Christopher Z. Marshall
----------------------------
Christopher Z. Marshall
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Numbered Page
- ------- ------------ --------------
10.1 ACE Limited Elective Deferred
Compensation Plan
10.2 ACE Limited Rules of the Approved
UK Stock Option Programme
27 Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>ELECTIVE DEFERRED COMPENSATION PLAN
<TEXT>
ACE LIMITED
ELECTIVE DEFERRED COMPENSATION PLAN
-1-
<PAGE>
TABLE OF CONTENTS
SECTION 1.................................................................... 1
General ............................................................1
1.1. Purpose ..............................................1
1.2. Effective Date........................................1
1.3. Related Companies and Employers.......................1
1.4. Operation and Administration..........................1
1.5. Plan Year.............................................1
1.6. Gender and Number.....................................1
1.7. Notices ..............................................2
1.8. Form and Time of Elections............................2
1.9. Other Costs and Benefits..............................2
1.10. Evidence.............................................2
1.11. Action by Employers..................................2
SECTION 2.....................................................................2
Participation..........................................................2
2.1. Participant...........................................2
2.2. Deferral Election.....................................3
2.3. Eligible Compensation.................................3
2.4. Plan Not Contract of Employment.......................3
SECTION 3.....................................................................3
Plan Accounting......................................................3
3.1. Accounts..............................................3
3.2. Adjustment of Accounts................................3
3.3. Crediting Under Deferral Election.....................4
3.4. Investment Return Dates...............................4
3.5. Participant Selection of Investment Return Rate.......4
3.6. Statement of Accounts.................................4
SECTION 4.....................................................................5
Distributions........................................................5
4.1. General ..............................................5
4.2. Distribution Election.................................5
4.3. Beneficiary...........................................5
4.4. Distributions to Disabled Persons.....................5
4.5. Benefits May Not be Assigned..........................5
4.6. Offset ..............................................6
4.7. Unforeseeable Emergency...............................6
-i-
<PAGE>
SECTION 5....................................................................6
Source of Benefit Payments..........................................6
5.1. Liability for Benefit Payments.......................6
5.2. No Guarantee.........................................7
SECTION 6....................................................................7
Committee...........................................................7
6.1. Powers of Committee..................................7
6.2. Delegation by Committee..............................7
6.3. Information to be Furnished to Committee.............8
6.4. Liability and Indemnification of Committee...........8
SECTION 7....................................................................8
Amendment and Termination...........................................8
-ii-
<PAGE>
ACE LIMITED
ELECTIVE DEFERRED COMPENSATION PLAN
SECTION 1
General
1.1. Purpose. The ACE Limited Elective Deferred Compensation Plan
(the "Plan") has been established by ACE Limited (the "Company") so that
it, and each of the Related Companies which, with the consent of the
Company, adopts the Plan may provide its eligible employees with an
opportunity to build additional financial security, thereby aiding such
companies in attracting and retaining employees of exceptional ability.
1.2. Effective Date. The "Effective Date" of the Plan is January 1, 1998.
1.3. Related Companies and Employers. For purposes of the Plan, the
term "Related Company" means any company during any period in which it is a
"subsidiary corporation,"as that term in defined in section 424(f) of the
United States Internal Revenue Code of 1986, as amended (the "Code") with
respect to the Company. The Company and each Related Company which adopts
the Plan for the benefit of its eligible employees are referred to below
collectively as the "Employers" and individually as an "Employer." A
Related Company may adopt the Plan by action of its Board of Directors;
provided that a Related Company will be considered to have adopted the Plan
for its Eligible Employees (without the need for action by its Board of
Directors) if an executive officer of the Related Company announces such
adoption to the Eligible Employees.
1.4. Operation and Administration. The authority to control and
manage the operation and administration of the Plan shall be vested in the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"). In controlling and managing the operation and
administration of the Plan, the Committee shall have the rights, powers and
duties set forth in Section 6. Capitalized terms in the Plan shall be
defined as set forth in the Plan.
1.5. Plan Year. The term "Plan Year" means the fiscal year of the
Company.
1.6. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the
plural and the plural shall include the singular.
-1-
<PAGE>
1.7. Notices. Any notice or document required to be filed with the
Plan Administrator or the Committee under the Plan will be properly filed
if delivered or mailed to the Plan Administrator, in care of the Company,
at its principal executive offices. The Plan Administrator may, by advance
written notice to affected persons, revise such notice procedure from time
to time. Any notice required under the Plan may be waived by the person
entitled to notice.
1.8. Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted modification
or revocation thereof, shall be in writing filed at such times, in such
form, and subject to such restrictions and limitations as the Plan
Administrator shall require. In addition to any other deferral elections
made under this Plan, an election to defer the receipt of an award under
the ACE Limited Annual Performance Incentive Plan will be made under this
Plan.
1.9. Other Costs and Benefits. The Plan is intended to defer, but not
to eliminate, payment of compensation to a Participant. Accordingly, if any
compensation or benefits that would otherwise be provided to a Participant
in the absence of the Plan are reduced or eliminated by reason of deferral
under the Plan, the Company shall equitably compensate the Participant for
such reduction or elimination. However, no reimbursement will be made for
increased taxes resulting from benefits under the Plan (whether resulting
from a change in individual income tax rates or otherwise).
1.10. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person
acting on it considers pertinent and reliable, and signed, made or
presented by the proper party or parties.
1.11. Action by Employers. Any action required or permitted to be
taken by any Employer shall be by resolution of its board of directors, or
by a duly authorized officer of the Employer.
SECTION 2
Participation
2.1. Participant. Subject to the terms of the Plan, an individual
shall be eligible to make deferrals under the Plan during any period he or
she is an Eligible Employee. For purposes of the Plan, the term "Eligible
Employee" for any period shall mean any individual during any period he or
she is a Bermuda-based employee of an Employer;
-2-
<PAGE>
provided that the Committee may designate any other employee of an Employer
or member of a group of employees of an Employer as an Eligible Employee.
2.2. Deferral Election. An Eligible Employee shall participate in the
Plan by electing to defer payment of all or a portion of his or her
Eligible Compensation pursuant to the terms of a "Deferral Election." An
individual's Deferral Election shall be filed with the Plan Administrator
prior to the period to which it relates. Except as otherwise provided by
the Committee, a Participant may not revoke any Deferral Elections. The
Committee may revoke a Participant's Deferral Election as of the date on
which the Participant ceases to be an Eligible Employee (provided that this
sentence shall not be construed to permit the Committee to revoke a
Distribution Election by reason of the Participant ceasing to be an
Eligible Employee).
2.3. Eligible Compensation. For purposes of the Plan, a Participant's
"Eligible Compensation" from any Employer for any Plan Year means (i)
salary otherwise payable to him by the Employer, (ii) amounts payable under
the ACE Limited Annual Performance Incentive Plan and (iii) amounts which
are designated by the Committee as compensation eligible for deferral in
accordance with the Plan.
2.4. Plan Not Contract of Employment. The Plan does not constitute a
contract of employment, and participation in the Plan will not give any
employee the right to be retained in the employ of any Employer nor any
right or claim to any benefit under the Plan, unless such right or claim
has specifically accrued under the terms of the Plan.
SECTION 3
Plan Accounting
3.1. Accounts. The Plan Administrator shall establish an Account for
each Participant who has filed a Deferral Election. If a Participant's
Eligible Compensation subject to a Deferral Election would otherwise be
payable from more than one Employer, a separate Account shall be
established for the Participant with respect to the Eligible Compensation
from each such Employer. The amount held in an Account established on
behalf of a Participant will be expressed in United States dollars.
3.2. Adjustment of Accounts. Each Account shall be adjusted in
accordance with this Section 3 in a uniform manner as of such periodic
"Accounting Dates" as may be determined by the Committee from time to time.
As of each Accounting Date, the balance of each Account shall be adjusted
as follows:
-3-
<PAGE>
(a) first, charge to the Account balance the amount of any distributions
under the Plan with respect to that Account that have not previously
been charged;
(b) then, adjust the Account balance for the applicable Investment Return
Rate(s); and
(c) then, credit to the Account balance the amount to be credited to that
Account in accordance with subsection 3.3 that have not previously
been credited.
3.3. Crediting Under Deferral Election. The balance of a
Participant's Account for any period shall be credited, in accordance with
the provisions of paragraph 3.2(c), with the amount by which his or her
Eligible Compensation for that period is reduced pursuant to a Deferral
Election. Such crediting shall occur as of the date on which such Eligible
Compensation would otherwise have been paid to the Participant by the
Employer were it not for the reduction made pursuant to the Deferral
Election or, if such date is not an Accounting Date, as of the first
Accounting Date occurring thereafter.
3.4. Investment Return Rates. The "Investment Return Rate(s)" with
respect to the Account(s), or portions of the Account(s), of any
Participant for any period shall be the Investment Return Rate(s) elected
by the individual in accordance with subsection 3.5 from among such
investment alternatives (if any) for that period which, in the discretion
of the Committee, are offered from time to time under this paragraph 3.4.
3.5. Participant Selection of Investment Return Rate. The Investment
Return Rate alternatives under the Plan, and a Participant's ability to
choose among Investment Return Rate alternatives, shall be determined in
accordance with rules established by the Committee from time; provided,
however, that the Company may not modify the Investment Return Rate with
respect to periods prior to the adoption of such modification.
3.6. Statement of Accounts. As soon as practicable after the end of
each Plan Year, and at such other times as determined by the Committee or
the Chief Executive Officer of the Company, the Company shall provide each
Participant having one or more Accounts under the Plan with a statement of
the transactions in his or her Accounts during that year and his or her
Account balances as of the end of the year.
-4-
<PAGE>
SECTION 4
Distributions
4.1. General. Subject to this Section 4, the balance of a
Participant's Account(s) with respect to any year shall be distributed in
accordance with the Participant's Distribution Election. In no event shall
the amount distributed with respect to any Participant's Account as of any
date exceed the amount of the Account balance as of that date.
4.2. Distribution Election. A Participant's Distribution Election
shall specify the manner (including the time and form of distribution) in
which the Participant's Account(s) shall be distributed, subject to such
restrictions and limitations as may be imposed by the Committee.
4.3. Beneficiary. Subject to the terms of the Plan, any benefits
payable to a Participant under the Plan that have not been paid at the time
of the Participant's death shall be paid at the time and in the form
determined in accordance with the foregoing provisions of the Plan, to the
beneficiary designated by the Participant in writing filed with the Plan
Administrator in such form and at such time as the Plan Administrator shall
require. A beneficiary designation form will be effective only when the
signed form is filed with the Plan Administrator while the Participant is
alive and will cancel all beneficiary designation forms filed earlier. If a
deceased Participant failed to designate a beneficiary, or if the
designated beneficiary of a deceased Participant dies before him or before
complete payment of the Participant's benefits, the amounts shall be paid
to the legal representative or representatives of the estate of the last to
die of the Participant and his or her designated beneficiary.
4.4. Distributions to Disabled Persons. Notwithstanding the
provisions of this Section 4, if, in the Plan Administrator's opinion, a
Participant or beneficiary is under a legal disability or is in any way
incapacitated so as to be unable to manage his or her financial affairs,
the Plan Administrator may direct that payment be made to a relative or
friend of such person for his or her benefit until claim is made by a
conservator or other person legally charged with the care of his or her
person or his or her estate, and such payment shall be in lieu of any such
payment to such Participant or beneficiary. Thereafter, any benefits under
the Plan to which such Participant or beneficiary is entitled shall be paid
to such conservator or other person legally charged with the care of his or
her person or his or her estate.
4.5. Benefits May Not be Assigned. Neither the Participant nor any
other person shall have any voluntary or involuntary right to commute, sell,
assign, pledge,
-5-
<PAGE>
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey
in advance of actual receipt of the amounts, if any, payable hereunder, or
any part hereof, which are expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall be, prior to actual
payment, subject to seizure or sequestration for payment of any debts,
judgements, alimony or separate maintenance owed by the Participant or any
other person, or be transferred by operation of law in the event of the
Participant's or any other person's bankruptcy or insolvency.
4.6. Offset. Notwithstanding the provisions of subsection 4.5, if, at
the time payments are to be made under the Plan, the Participant or
beneficiary or both are indebted or obligated to any Employer or Related
Company, then the payments remaining to be made to the Participant or the
beneficiary or both may, at the discretion of the Plan Administrator, be
reduced by the amount of such indebtedness, or obligation, provided,
however, that an election by the Plan Administrator not to reduce any such
payment shall not constitute a waiver of the claim for such indebtedness or
obligation.
4.7. Unforeseeable Emergency. Prior to the date otherwise scheduled
for distribution of his or her benefits under the Plan, upon a showing of
an unforeseeable emergency, a Participant may elect to accelerate payment
of an amount not exceeding the lesser of (a) the amount necessary to meet
the emergency or (b) the sum of his or her Account balance(s) under the
Plan. For purposes of the Plan, the term "unforeseeable emergency" shall
mean an unanticipated emergency that is caused by an event beyond the
control of the Participant (or the control of the beneficiary, if the
amount is payable to a beneficiary) and that would result in severe
financial hardship to the individual if early withdrawal were not
permitted. The determination of "unforeseeable emergency" shall be made by
the Plan Administrator, based on such information as the Plan Administrator
shall deem to be necessary.
SECTION 5
Source of Benefit Payments
5.1. Liability for Benefit Payments. Subject to the provisions of
this Section 5, an Employer shall be liable for payment of benefits under
the Plan with respect to any Participant to the extent that such benefits
are attributable to the deferral of compensation otherwise payable by that
Employer to the Participant. Any disputes relating to liability of
Employers for benefit payments shall be resolved by the Committee.
-6-
<PAGE>
5.2. No Guarantee. Neither a Participant nor any other person shall,
by reason of the Plan, acquire any right in or title to any assets, funds
or property of the Employers whatsoever, including, without limitation, any
specific funds, assets, or other property which the Employers, in their
sole discretion, may set aside in anticipation of a liability under the
Plan. A Participant shall have only a contractual right to the amounts, if
any, payable under the Plan, unsecured by any assets of the Employers.
Nothing contained in the Plan shall constitute a guarantee by any of the
Employers that the assets of the Employers shall be sufficient to pay any
benefits to any person.
SECTION 6
Committee
6.1. Powers of Committee. Responsibility for the day-to-day
administration of the Plan shall be vested in the Plan Administrator, which
shall be the Committee. The authority to control and manage all other
aspects of the operation and administration of the Plan shall also be
vested in the Committee. The Committee is authorized to interpret the Plan,
to establish, amend, and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant
to the Plan, and to make all other determinations that may be necessary or
advisable for the administration of the Plan. Except as otherwise
specifically provided by the Plan, any determinations to be made by the
Committee under the Plan shall be decided by the Committee in its sole
discretion. Any interpretation of the Plan by the Committee and any
decision made by it under the Plan is final and binding on all persons.
6.2. Delegation by Committee. The Committee may allocate all or any
portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers
to any person or persons selected by it. Any such allocation or delegation
may be revoked by the Committee at any time.
Until the Committee takes action to the contrary:
(a) The Chief Executive Officer of the Company shall be delegated the
power and responsibility to take all actions assigned to or permitted
to be taken by the Committee under Section 2, Section 3, and Section
4 (other than the powers and responsibility of the Plan
Administrator).
(b) The powers and responsibilities of the Plan Administrator shall be
delegated to the Chief Administration Officer (or his or her
delegate) of the Company, subject to such direction as may be
provided to the Chief Administration Officer or his or
-7-
<PAGE>
her delegate from time to time by the Committee and the Chief
Executive Officer of the Company.
6.3. Information to be Furnished to Committee. The Employers and
Related Companies shall furnish the Committee with such data and
information as may be required for it to discharge its duties. The records
of the Employers and Related Companies as to an employee's or Participant's
employment, termination of employment, leave of absence, reemployment and
Eligible Compensation shall be conclusive on all persons unless determined
to be incorrect. Participants and other persons entitled to benefits under
the Plan must furnish the Committee such evidence, data or information as
the Committee considers desirable to carry out the Plan.
6.4. Liability and Indemnification of Committee. No member or
authorized delegate of the Committee shall be liable to any person for any
action taken or omitted in connection with the administration of the Plan
unless attributable to his or her own fraud or willful misconduct; nor
shall the Employers be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director or
employee of the Employers. The Committee, the individual members thereof,
and persons acting as the authorized delegates of the Committee under the
Plan, shall be indemnified by the Employers against any and all
liabilities, losses, costs and expenses (including legal fees and expenses)
of whatsoever kind and nature which may be imposed on, incurred by or
asserted against the Committee or its members or authorized delegates by
reason of the performance of a Committee function if the Committee or its
members or authorized delegates did not act dishonestly or in willful
violation of the law or regulation under which such liability, loss, cost
or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 7
Amendment and Termination
The Committee may, at any time, amend or terminate the Plan
(including the rules for administration of the Plan), subject to the
following:
(a) Subject to the following provisions of this Section 7, no amendment
or termination may materially adversely affect the rights of any
Participant or beneficiary under the Plan.
(b) The Committee may revoke the right to defer Eligible Compensation
under the Plan.
-8-
<PAGE>
(c) The Plan may not be amended to delay the date on which benefits are
otherwise payable under the Plan without the consent of each affected
Participant. The Committee may amend the Plan to accelerate the date
on which Plan benefits are otherwise payable under the Plan and
eliminate all future deferrals under the Plan, thereby terminating
the Plan.
(d) The Committee may amend the Plan to modify or eliminate any
Investment Return Rate alternative, except that any such amendment
may not modify the Investment Return Rate with respect to periods
prior to the adoption of the amendment.
(e) Notwithstanding any other provision of the Plan to the contrary,
neither the Committee nor the Board may delegate its rights and
responsibilities under this Section 7; provided, however, that, the
Board of Directors may, from time to time, substitute itself, or
another committee of the Board, for the Compensation Committee under
this Section 7.
IN WITNESS WHEREOF, ACE Limited has caused this Plan to be executed by its
duly authorized officer this ______, day of _________, 1997.
ACE Limited
By:___________________
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<DESCRIPTION>APPROVED UK STOCK OPTION PROGRAMME
<TEXT>
ACE Limited
Rules of the
Approved UK Stock Option Programme
Approved by the Inland Revenue on 24 November 1997
(Reference No: X19095/RC)
Lovell White Durrant
65 Holborn Viaduct
London EC1A 2DY
Ref: A4/JCMcM/LLW
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Clause
Page No.
<S> <C> <C>
1. Establishment and purpose of the Programme 1
2. Definitions 1
3. Grant of Options 5
4. Limitations on Grant of Options 5
5. Exercise of Options 6
6. Time for Exercise of Options 6
7. Replacement of Options on a takeover or other change in Control of
the Company 7
8. Variations in the Share Capital of the Company 8
9. Administration of the Programme 8
10. Amendment of the Programme 8
11. Additional Provisions 8
12. Termination 9
</TABLE>
<PAGE>
- 1 -
ACE Limited
Approved UK Stock Incentive Programme
(An approved Company share option plan
pursuant to the provisions of Schedule 9
to the Income and Corporation Taxes Act 1988)
1. Establishment and Purpose of the Programme
1.1 On 12 November 1997 the Committee adopted, subject to the approval
of the Inland Revenue, the Programme as an addendum to the ACE
Limited 1995 Long-Term Incentive Plan (the "Plan") to enable
Eligible Employees of the Company and its Subsidiaries to
participate in the Plan and obtain the benefit of approval by the
Board of Inland Revenue pursuant to Schedule 9 to the Income and
Corporation Taxes Act 1988 ("Schedule 9").
1.2 On 24 November 1997 the Inland Revenue gave formal approval to the
Programme. The rules of the Programme (the "Programme Rules")
comply with the requirements of Schedule 9.
1.3 The rules of the Plan (the "Plan Rules") shall apply to the
Programme unless the Programme Rules expressly or by implication
provide to the contrary, but so that nothing in either the Plan or
the Programme Rules shall operate to prejudice the approval by the
Board of Inland Revenue of the Programme PROVIDED ALWAYS THAT in
the event of a conflict between the Plan Rules and the Programme
Rules whereby the status of the Plan is or will be prejudiced the
Plan Rules shall prevail.
1.4 For the avoidance of doubt rule 2.5 of the Plan shall not apply to
the Programme and the Company may only grant options pursuant the
Programme. Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock or a Stock Purchase Program may not be
granted pursuant the Programme Rules.
1.5 The Committee may designate whether or not an Option is to be
considered an incentive stock option as defined in Section 422(b)
of the US Internal Code 1986, as amended ("Incentive Stock
Option").
1.6 The Programme shall be governed and construed in accordance with the
laws of England.
2. Definitions
2.1 In the Programme the following words and expressions have the meanings
set opposite them:
"ACE Group" the Company and all of the
Subsidiaries and, in relation to
a New Option granted pursuant to
clause 7 the Acquiring Company
and the Controlling Company and
their Subsidiaries as defined in
Section 736 of the Companies Act
1985, and "member of the ACE
Group" shall be construed
accordingly;
"Act" the Securities Exchange Act 1934,
as amended;
<PAGE>
- 2 -
"Acquiring a company which for the purposes of
Company" clause 7 comes within the
definition of "the acquiring
company" in paragraph 15(1) of
Schedule 9;
"Affiliate" a person or entity that directly or
indirectly controls, is controlled
by or is under common control with
another person or entity;
"Any Other any scheme other than the Programme
Approved Scheme" established by the Company
or by any Associated Company and
approved in accordance with
Schedule 9 but excluding for the
purposes of this definition any
savings-related share option
scheme or profit sharing scheme
so established;
"Approval Date" the date on which the
Company receives written
notification from the Board of
Inland Revenue that the Programme
has received Revenue Approval;
"Associated any company which is an associated
Company" company of the Company
within the meaning of section
416(1) of the Taxes Act;
"Board" the board of directors for the
time being of the Company;
"Change in Control" shall for the purposes of clause
6.7 mean the occurrence of one of
the following events:
(i) the acquisition by any
Person of beneficial
ownership (within the
meaning of Rule 13d-3
promulgated under the
Act) of fifty percent
(50%) or more of the
Voting Stock;
(ii) the majority of the
Board consists of
individuals other than
Incumbent Directors;
(iii) the Company adopts any
plan of liquidation
providing for the
distribution of all or
substantially all of
its assets;
<PAGE>
- 3 -
(iv) all or substantially
all the assets or
business of the
Company is disposed of
pursuant to a merger,
consolidation or other
transaction (unless
the shareholders of
the Company
immediately prior to
such merger,
consolidation or other
transaction
beneficially own,
directly or
indirectly, in
substantially the same
proportion as they
owned Voting Stock of
the Company, all of
the Voting Stock or
other ownership
interests of the
entity or entities, if
any, that succeed to
the business of the
Company);
(v) the Company combines
with another company
and is the surviving
corporation but,
immediately after the
combination, the
shareholders of the
Company immediately
prior to the
combination hold,
directly or
indirectly, 50% or
less of the Voting
Stock of the combined
company (there being
excluded from the
number of shares held
by such shareholders,
but not from the
Voting Stock of the
combined company, any
shares received by
Affiliates of such
other company in
exchange for stock of
such other company);
"Committee" the Compensation Committee of the
Board or such other committee
as the Board shall designate to
administer the Plan;
"Company" ACE Limited, a Corporation
incorporated in the Cayman Islands;
"Control" for the purposes of clause 7, the
control of a company within the
meaning given to that expression by
section 840 of the Taxes Act;
"Controlling a company, other than the Company
Company" and an Acquiring Company,
which falls within sub-paragraphs
10(b) or 10(c) of Schedule 9;
<PAGE>
- 4 -
"Disability" a Participant shall be considered
to have a "Disability" during the
period in which he is unable by
reason of a medically
determinable physical or mental
impairment to engage in any
substantial gainful activity,
which condition, in the opinion
of a physician selected by the
Committee, is expected to have a
duration of not less than 120
days;
"Eligible Employee" any person whose terms
of employment require him to
devote substantially the whole of
his time to working for any
member or members of the ACE
Group, except for;
(i) any director of a
member or members of
the ACE Group who is
contracted to work for
less than 25 hours a
week (excluding meal
breaks) in that
capacity; and
(ii) any person who is
prohibited from partici-
pating in the Programme
by the provisions of
paragraph 8 of Schedule 9;
"Exercise Price" the price per Share
payable on the exercise of an
Option as determined by the
Committee but in no event less
than the greater of:
(i) the nominal value of a
Share (if the Shares are
to be subscribed); and
(ii) the Fair Market Value of a
Share on the day on which
the Option is granted;
"Fair Market Value" the value of a Share on any day being:
(i) if and for so long as
the Company's Shares
are admitted to the
official list of the
New York Stock
Exchange, the closing
market composite price
for Shares as reported
on the New York Stock
Exchange - Composite
Transactions on that
date or if the New
York Stock Exchange is
closed on that date,
the last preceding
date on which the New
York Stock Exchange
was open for trading
and on which the
Shares were traded
PROVIDED THAT such
date shall not be a
date which is more
than 30 days before
the date of grant of
an Option; or
<PAGE>
- 5 -
(ii) in all other cases, the
market value determined
in accordance with Part
VIII of the taxation of
Chargeable Gains Act
1992 and if and for so
long as the Programme
has Revenue Approval
agreed in advance with
the Shares Valuation
Division of the Inland
Revenue;
"Incumbent Directors" the individuals
constituting the Board as of the
date the Plan was adopted and any
subsequent directors whose
election or nomination for
election by the Company's
stockholders was approved by a
vote of three quarters (3/4) of
the individuals who are then
Incumbent Directors;
"Normal Retirement the voluntary termination of
Age" employment at a time when the
Participant has attained normal
retirement age under the ACE
Limited Employee Retirement Plan
or any other retirement benefits
scheme maintained by a company in
the ACE Group or such other age
as shall be determined by the
Committee in its sole discretion;
"Option" subject to clause 7, a right to
acquire Shares pursuant to the
provisions of the Programme;
"Option Period" subject to clause 6, the period
ending no later than ten years
from the date of an Option
during which an Option shall be
exercisable in accordance with
the provisions of the Programme
as determined by the Committee
at the date of grant of the
Option provided that the Option
may not be exercisable before
the Participant has completed
one year's service with the
Group;
"Participant" an Eligible Employee who has been
granted an Option or where
applicable, the personal represent-
ative(s) of any such person;
"Person" person for the purposes of the
definition of "Change in Control"
has the same meaning as set forth
in Sections 3(a)(9) and 13(d) of
the Act;
"Plan" the ACE Limited 1995 Long-Term
Incentive Plan approved by the
stockholders of the Company in
general meeting on 9 February
1996 and as subsequently amended;
<PAGE>
- 6 -
"Programme" the Programme adopted on 12 November
1997 as from time to
time amended in accordance with the
provisions hereof;
"Related Company" any company which is a subsidiary
corporation as defined in
Section 424(f) of the Internal
Revenue Code of 1986;
"Revenue Approval" approval of the Programme by the
Board of Inland Revenue under
Schedule 9;
"Schedule 9" Schedule 9 to the Taxes Act;
"Shares" subject to clause 7.3(a), Stock
which satisfies the requirements of
paragraphs 10 to 14 inclusive of
Schedule 9;
"Stock" shares of the common stock of the
Company;
Subsidiaries" those companies over which for
the time being the Company has
Control and which are
subsidiaries of the Company
within the meaning of Section 736
of the Companies Act 1985;
"Taxes Act" the Income and Corporation Taxes Act
1988;
"Voting Stock" capital stock if any class
or classes having general voting
power under ordinary
circumstances in the absence of
contingencies to elect the
directors of a company.
<PAGE>
- 7 -
2.2 Any reference herein to a statutory provision shall include a
reference to that provision as amended or re-enacted from time to
time. Where the context permits the singular shall include the
plural and vice versa and the masculine gender shall include the
feminine.
3. Grant of Options
3.1 Subject to the limits contained in clause 4, at any time after the
Approval Date, the Committee may, in its absolute discretion grant
an Option to an Eligible Employee in accordance with the
Programme. The Committee shall give notice in writing to the
Eligible Employee to specify:
(a) the number of Shares in respect of which the Option is
granted,
(b) the date on which it is granted,
(c) the Exercise Price,
(d) the objective performance target(s), if any, imposed by
the Committee, the terms of which must, at any time when
the Programme has Revenue Approval, be approved by the
Board of Inland Revenue; and
(e) the Option Period.
3.2 The grant of an Option shall be made on the basis that
participation in the Programme shall be deemed to constitute an
agreement to be bound by the Programme Rules and shall be
evidenced by an instrument in such form as the Committee may from
time to time prescribe. The instrument shall be issued as soon as
practicable after the date of grant.
3.3 An Option shall be personal to the Participant and may not be
transferred except as designated by the Participant by will or by
the laws of descent, or, subject to the provisions of clause 6.2,
exercised by any other person. In no event shall an Incentive
Stock Option be transferable to the extent that such
transferability would violate the requirements of the Inland
Revenue Code 1986 Section 422. Any attempt to so transfer or sell
an Option shall cause the Option to lapse forthwith.
4. Limitations on Grant of Options
4.1 No Option shall be granted pursuant to clause 3 if such grant
would exceed the limits imposed on the grant of rights under the
Plan pursuant to section 6 of the Plan with respect to the number
of Shares which may be made the subject of Options and other
rights under the Plan.
4.2 No Option shall be granted to an Eligible Employee pursuant to the
Programme if as a result the total Option Price of the Shares
issuable on the exercise of such Option when aggregated with the
total market price at the relevant date of grant of shares still
capable of being issued on the exercise of options previously
granted to him under the Programme and Any Other Approved Scheme
would exceed (pound)30,000 (or its equivalent in any other
currency, taking as the rate of exchange the spot rate for the
currency in question on the date of grant of the Option as quoted
by any of the Company's bankers from time to time).
<PAGE>
- 8 -
5. Exercise of Options
5.1 Subject to clause 6, an Option shall only be exercised by a
Participant within the Option Period by his giving to the
Secretary of the Company at its corporate headquarters, written
notice, which shall be in such form as may be prescribed by the
Committee and shall be signed by the Participant. An Option may be
exercised in whole or in part. Such notice shall specify the
number of Shares in respect of which the Option is being exercised
and shall be accompanied by payment in full of the total Exercise
Price for the said Shares and the instrument evidencing the grant
of the relevant Option for cancellation or amendment.
5.2 Payment for the Option exercised shall be in cash, or cheque, bank
draft or money order to the order of the Company, for an amount in
United States dollars equal to the total Exercise Price for the
number of Shares in respect of which an Option is exercised.
5.3 The Committee shall transfer the appropriate number of Shares to
the Participant at their Exercise Price as soon as possible but in
any event not later than one month after the date of exercise of
the Option and shall deliver where appropriate to the Participant
a definitive share certificate in respect thereof. Any Shares
issued pursuant to this clause 5.3 shall rank pari passu in all
respects and form a uniform class with Shares already in issue.
While an Option is unexercised, a Participant shall have no voting
rights or any other rights of stockholders with respect to the
Shares which are subject to his Option. Furthermore, no cash
dividends shall accrue or be payable with respect to any such
Shares. Shares subject to unexercised Options shall have no
subscription rights.
6. Time for Exercise of Options
6.1 Subject to clauses 6.2 to 6.4 inclusive, an Option may only be
exercised during its Option Period. An Option which is not so
exercised shall lapse PROVIDED THAT, at the time of exercise of
his Option a Participant is not prohibited from doing so by the
provisions of paragraph 8 of Schedule 9.
6.2 If a Participant dies his Option may be exercised in full by his
personal representative(s) at any time before the expiry of its
Option Period and within but not later than 12 months of his
death.
Any such Option which is not so exercised shall lapse.
6.3 If a Participant ceases to be employed by the Company or a Related
Company by reason of Disability, he may exercise his Option in
full at any time before the expiry of its Option Period and within
12 months after the date of cessation of his employment. Any such
Option which is not so exercised shall lapse.
6.4 If a Participant ceases to be employed by the Company or a Related
Company by reason of retirement on or after Normal Retirement Age
or earlier retirement with consent of his employer, he may
exercise his option to the extent exercisable by him at the time
of such cessation at any time before the expiry of its Option
Period or his death if earlier.
6.5 If a Participant ceases to be employed by the Company or a Related
Company otherwise than by reason of the events specified in
clauses 6.2 to 6.4, he may exercise his option to the extent
exercisable by him at the time of such cessation at any time
before the expiry of its Option Period and within three months
after the date of cessation of his employment. Any such Option
which is not so exercised shall lapse.
6.6 For the purposes of this paragraph where a Participant's
employment is terminated without notice or on terms in lieu of
notice it shall be deemed to cease on the date on which the
termination takes effect and where the said employment is
terminated with notice it shall cease on the date when the notice
period expires.
<PAGE>
- 9 -
6.7 If a Change in Control of the Company shall occur a Participant
may exercise his Option in full at any time before the expiry of
its Option Period PROVIDED THAT this clause 6.7 shall not apply
where a Participant by agreement with an Acquiring Company,
releases his Option in consideration of the grant to him of a New
Option pursuant to clause 7 before the expiry of the appropriate
period referred to in clause 7.4.
7. Replacement of Options on a takeover or other change in Control of
the Company
7.1 Clause 7.2 below shall apply where an Acquiring Company obtains
Control of the Company as a result of making:
(a) a general offer to acquire the whole of the issued share
capital of the Company (other than that which is already
owned by it and/or by any of its subsidiaries) made on a
condition such that if it is satisfied the Acquiring
Company will have Control of the Company; or
(b) a general offer to acquire all the Shares (or such Shares
as are not already owned by the Acquiring Company and/or
by any of its subsidiaries).
7.2 A Participant may at any time within the appropriate period as
defined in clause 7.4, by agreement with the Acquiring Company,
release any of his Options (the "Old Option" for the purposes of
this clause) in consideration of the grant to him of a new option
(the "New Option" for the purposes of this clause) PROVIDED THAT
any New Option satisfies the conditions set out in clause 7.3.
7.3 The New Option must:
(a) be over shares in the Acquiring Company or a Controlling
Company which shares satisfy the conditions specified in
paragraphs 10 to 14 inclusive of Schedule 9 (references
to the term "Shares" in this Programme shall thereafter
be construed accordingly);
(b) be a right to acquire such number of shares which on
acquisition of the New Option have an aggregate market
value (determined in accordance with Part VIII of the
Taxation of Chargeable Gains Act 1992) equal to the
aggregate market value of the Shares the subject of the
Old Option immediately before its release;
(c) have an exercise price per share such that the aggregate
price payable on complete exercise of the New Option
equals the aggregate price which would have been payable
on complete exercise of the Old Option at the time of its
release.
7.4 The appropriate period referred to in clause 7.2 is the period of
six months commencing on the date when the Acquiring Company
making the offer has obtained Control of the Company and any
condition subject to which the offer is made is satisfied.
7.5 The New Option shall be exercisable in the same manner as the Old
Option and in accordance with the provisions of the Programme as
it had effect in relation to the Old Option immediately before its
release (references to the term "Option" in the Programme
thereafter being construed accordingly), and the New Option shall,
for all purposes of the Programme other than clause 7.6, be
treated as having been granted on the date when the corresponding
Old Option was granted.
7.6 With effect from the grant of a New Option hereunder clause 5,
this clause 7, and clauses 8, 9 and 11 shall, in relation to the
New Option, be construed as if references to the Company were
references to the Acquiring Company, or as the case may be, the
Controlling Company.
<PAGE>
- 10 -
8. Variations in the Share Capital of the Company
8.1 If at any time after the date of grant of an Option and before it
ceases to be exercisable, there is a variation or reorganisation
of Stock or other capital of the Company, including, without
limitation, any subdivision or consolidation of shares or stock or
other capital readjustment, stock split, payment of stock
dividend, combination of shares or recapitalisation or other
increase or reduction of the number of shares or stock
outstanding, without receiving compensation therefor in money,
services or property or otherwise with respect to its common
stock, the number of Shares available under the Programme shall be
adjusted and the number then subject to Options and the Exercise
Price therefor shall be proportionately and appropriately adjusted
all as the Committee shall deem appropriate PROVIDED THAT:
(a) the aggregate Exercise Price payable on the exercise of an
Option previously granted hereunder shall not be increased;
(b) the Option Price shall not be reduced below the nominal value
of a Share thereby;
(c) all such adjustments shall be subject to prior approval by
the Board of Inland Revenue.
8.2 All Participants shall be notified in writing of any such
adjustments as soon as practicable thereafter and the Committee
shall be entitled to call in the instruments evidencing the grant
of the Options affected by such adjustments for endorsement or
replacement, as may appear appropriate.
9. Administration of the Programme
9.1 The Programme shall be administered by the Committee.
9.2 Subject as herein otherwise expressly provided the Committee's
decision on any matter concerning the Programme shall be final and
binding.
10. Amendment of the Programme
10.1 Subject to clause 10.2, the Board or the Committee shall at any
time be entitled to amend by resolution all or any of the
provisions of the Programme provided that no amendment may
adversely affect the rights of any participant already acquire by
him under the Programme.
10.2 No amendment to the Programme shall be effective unless and until
approved by the Board of Inland Revenue and subject to clause 1.3
nothing shall be done to the Programme which would prejudice the
obtaining of Revenue Approval or cause it to be withdrawn.
11. Additional Provisions
11.1 Every Option shall be subject to the condition that no Shares
shall be issued to a Participant following the exercise of an
Option if such issuance would be contrary to any enactment or
regulation for the time being in force of the United States or of
any other country having jurisdiction in relation thereto. The
Company shall not be bound to take any action to obtain the
consent of any governmental authority to such issue or to take any
action to ensure that any such issuance shall be in accordance
with any such enactment or regulation if such action could in the
opinion of the Committee be unduly onerous.
11.2 Every Option shall be subject to the requirement that if at any
time the Board shall determine, in its discretion, that the
listing, registration or qualification of the Shares subject to an
Option upon any securities exchange or under any state or federal
law, or that the consent or approval
<PAGE>
- 11 -
of any governmental authority, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of
shares under an Option such Option may not be exercised in whole
or in part, unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board. Any Option may be
exercised only in accordance with the provisions of all applicable
law.
11.3 The rights and obligations of a Participant under his terms of
employment with any member of the ACE Group shall not be affected
by his participation in the Programme and the Programme shall not
afford to a Participant any right to continued employment or any
additional right to compensation in consequence of the termination
of his employment for any reason whatsoever.
12. Termination
the Committee may at any time resolve to cease making further
grants of Options under the Programme but in such event the
subsisting rights of Participants shall not thereby be affected.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 3,056,831
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 605,329
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,321,414
<CASH> 123,564
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,165
<TOTAL-ASSETS> 4,998,937
<POLICY-LOSSES> 1,858,055
<UNEARNED-PREMIUMS> 369,206
<POLICY-OTHER> 66,766
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 6,809
<OTHER-SE> 2,611,743
<TOTAL-LIABILITY-AND-EQUITY> 4,998,937
<PREMIUMS> 167,821
<INVESTMENT-INCOME> 58,413
<INVESTMENT-GAINS> 27,492
<OTHER-INCOME> 0
<BENEFITS> 109,161
<UNDERWRITING-AMORTIZATION> 14,201
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 112,816
<INCOME-TAX> 0
<INCOME-CONTINUING> 112,816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,816
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| CFC | https://www.sec.gov/Archives/edgar/data/25191/0000025191-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000025191-98-000002.txt : 19980116
<SEC-HEADER>0000025191-98-000002.hdr.sgml : 19980116
ACCESSION NUMBER: 0000025191-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980115
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC
CENTRAL INDEX KEY: 0000025191
STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162]
IRS NUMBER: 132641992
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-12331-01
FILM NUMBER: 98507105
BUSINESS ADDRESS:
STREET 1: 4500 PARK GRANADA BLVD
CITY: CALABASAS
STATE: CA
ZIP: 91302
BUSINESS PHONE: 8182253000
MAIL ADDRESS:
STREET 1: 4500 PARK GRANADA BLVD
CITY: CALABASAS
STATE: CA
ZIP: 91302
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>THIRD QUARTER FORM 10-Q
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to _________________
Commission File Number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2641992
- -------------------------------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4500 Park Granada, Calabasas, California 91302
- ------------------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(818) 225-3000
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 13, 1998
----- -------------------------------
Common Stock $.05 par value 108,543,439
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, February 28,
1997 1997
---------------- -----------------
(Dollar amounts in thousands)
ASSETS
<S> <C> <C>
Cash $ 17,438 $ 18,269
Mortgage loans and mortgage-backed securities held for sale 4,493,420 2,579,972
Other receivables 1,745,250 1,051,777
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 216,779 190,104
Mortgage servicing rights 3,433,816 3,023,826
Other assets 1,407,712 825,142
---------------- ------------------
Total assets $11,314,415 $ 7,689,090
================ ==================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $2,788,964 $1,695,523
================ ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $7,594,448 $4,713,324
Drafts payable issued in connection with mortgage loan closings 26,974 221,757
Accounts payable and accrued liabilities 447,949 206,835
Deferred income taxes 817,152 635,643
---------------- ------------------
Total liabilities 8,886,523 5,777,559
Commitments and contingencies
- -
Company-obligated mandatorily redeemable securities of subsidiary
trusts holding company guaranteed related subordinated debt 500,000 300,000
Common stock - authorized, 240,000,000 shares of $.05 par value; issued and
outstanding, 107,993,561 shares at November 30, 1997
and 106,095,558 shares at February 28, 1997 5,397 5,305
Additional paid-in capital 975,953 917,942
Unrealized loss on available-for-sale securities (6,462) (30,545)
Retained earnings 953,004 718,829
---------------- ------------------
Total shareholders' equity 1,927,892 1,611,531
---------------- ------------------
Total liabilities and shareholders' equity $11,314,415 $7,689,090
================ ==================
Borrower and investor custodial accounts $2,788,964 $1,695,523
================ ==================
The accompanying notes are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended November 30, Ended November 30,
1997 1996 1997 1996
------------------------------------ ------------------------------------
(Dollar amounts in thousands, except per share data)
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $ 78,907 $ 43,922 $ 197,561 $ 145,468
Gain on sale of loans 103,323 65,562 288,954 171,053
------------------------------------ ------------------------------------
Loan production revenue 182,230 109,484 486,515 316,521
Interest earned 119,743 85,371 305,605 260,257
Interest charges (110,113) (77,238) (291,935) (230,547)
------------------------------------ ------------------------------------
Net interest income 9,630 8,133 13,670 29,710
Loan servicing income 234,499 199,169 670,582 567,583
Amortization and impairment of
mortgage servicing rights (243,726) (198,735) (375,067) (185,073)
Servicing hedge benefit 161,506 140,152 150,225 22,001
------------------------------------ ------------------------------------
Net loan administration income 152,279 140,586 445,740 404,511
Commissions, fees and other income 31,002 23,327 95,636 64,885
Gain on sale of subsidiary - - 57,381 -
------------------------------------ ------------------------------------
Total revenues 375,141 281,530 1,098,942 815,627
------------------------------------ ------------------------------------
Expenses
Salaries and related expenses 110,458 71,548 299,043 208,537
Occupancy and other office expenses 49,179 33,036 128,667 94,349
Guarantee fees 43,467 40,607 128,855 117,471
Marketing expenses 9,711 7,743 30,353 25,665
Other operating expenses 30,878 20,506 85,989 59,677
------------------------------------ ------------------------------------
Total expenses 243,693 173,440 672,907 505,699
------------------------------------ ------------------------------------
Earnings before income taxes 131,448 108,090 426,035 309,928
Provision for income taxes 51,265 42,155 166,154 120,872
------------------------------------ ------------------------------------
NET EARNINGS $ 80,183 $ 65,935 $ 259,881 $ 189,056
==================================== ====================================
Earnings per share
Primary $0.71 $0.62 $2.34 $1.80
Fully diluted $0.71 $0.62 $2.31 $1.78
Weighted Average Shares Outstanding
Primary 112,490,000 106,342,000 111,173,000 104,953,000
Fully Dilluted 113,201,000 106,844,000 112,719,000 106,066,000
The accompanying notes are an integral part of these
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended November 30,
1997 1996
---------------- -----------------
(Dollar amounts in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 259,881 $ 189,056
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Gain on sale of subsidiary (57,381) -
Amortization and impairment/recovery of mortgage servicing rights 375,065 185,073
Depreciation and other amortization 32,559 29,561
Deferred income taxes 181,509 120,872
Origination and purchase of loans held for sale (32,654,304) (28,491,353)
Principal repayments and sale of loans 30,740,856 29,291,032
---------------- ----------------
(1,913,448) 799,679
Increase in other receivables and other assets (1,191,679) (899,086)
Increase in accounts payable and accrued liabilities 231,705 278,705
---------------- ----------------
Net cash (used) provided by operating activities (2,081,789) 703,860
---------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (785,057) (646,700)
Purchase of property, equipment and leasehold
improvements - net (52,922) (69,765)
---------------- ----------------
Net cash used by investing activities (837,979) (716,465)
---------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in warehouse debt and other
short-term borrowings 1,962,505 (427,525)
Issuance of long-term debt 1,192,513 537,624
Repayment of long-term debt (468,677) (113,507)
Issuance of Company-obligated mandatorily redeemable securities
of subsidiary trusts holding company guaranteed related
subordinated debt 200,000
Issuance of common stock 58,302 39,032
Cash dividends paid (25,706) (24,628)
---------------- ----------------
Net cash provided by financing activities 2,918,937 10,996
---------------- ----------------
Net decrease in cash (831) (1,609)
Cash at beginning of period 18,269 16,444
================ ================
Cash at end of period $ 17,438 $ 14,835
================ ================
Supplemental cash flow information:
Cash used to pay interest $ 286,310 $ 212,653
Cash used to pay income taxes $ 50 $ 15
Non-cash transactions:
Unrealized gain (loss) on available-for-sale-securities, net of taxes $ 24,083 $ -
Notes receivable issued for options exercised $ 199 $ -
</TABLE>
The accompanying notes are an integral part of
these statements.
<PAGE>
Page 18
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page 10
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended November 30, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K for the fiscal year ended February 28, 1997 of Countrywide
Credit Industries, Inc. (the "Company").
Certain amounts reflected in the consolidated financial statements for the
periods ended November 30, 1996 have been reclassified to conform to the
presentation for the periods ended November 30, 1997.
<TABLE>
<CAPTION>
NOTE B - NOTES PAYABLE
Notes payable consisted of the following.
------------------------------------------------------------------ ---- --------------- --- -------------- --
(Dollar amounts in thousands) November 30, February 28,
1997 1997
------------------------------------------------------------------ ---- --------------- --- -------------- --
<S> <C> <C>
Commercial paper $3,139,741 $1,943,368
Medium-term notes, Series A, B, C, D, E and F 3,451,500 2,346,800
Repurchase agreements 254,607 220,637
Subordinated notes 200,000 200,000
Unsecured notes payable 545,000 -
Other notes payable 3,600 2,519
=============== ==============
$7,594,448 $4,713,324
=============== ==============
------------------------------------------------------------------ ---- --------------- --- -------------- --
</TABLE>
Revolving Credit Facility and Commercial Paper
As of November 30, 1997, Countrywide Home Loans, Inc. ("CHL"), the Company's
mortgage banking subsidiary, had an unsecured credit agreement (revolving credit
facility) with forty-five commercial banks permitting CHL to borrow an aggregate
maximum amount of $4.0 billion. The facility contains various financial
covenants and restrictions, certain of which limit the amount of dividends that
can be paid by the Company or CHL. The interest rate on direct borrowings is
based on a variety of sources, including the prime rate and the London Interbank
Offered Rates ("LIBOR") for U.S. dollar deposits. This interest rate varies,
depending on CHL's credit ratings. No amount was outstanding on the revolving
credit facility at November 30, 1997. The five year facility of $3.0 billion
expires on September 24, 2002 and the one year facility of $1.0 billion expires
on September 24, 1998. The weighted average borrowing rate on commercial paper
borrowings for the nine months ended November 30, 1997 was 5.61%. The weighted
average borrowing rate on commercial paper outstanding as of November 30, 1997
was 5.63%.
<TABLE>
<CAPTION>
Medium-Term Notes
As of November 30, 1997, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission
were as follows.
- -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------------------- ----------- ---------- ------------- -------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A $ - $ 230,500 $ 230,500 6.53% 8.79% Mar. 1998 Mar. 2002
Series B - 396,000 396,000 6.02% 6.98% Mar. 1998 Aug. 2005
Series C 303,000 197,000 500,000 5.65% 8.43% Dec. 1997 Mar. 2004
Series D 115,000 385,000 500,000 6.05% 6.88% Aug. 1998 Sept. 2005
Series E 310,000 690,000 1,000,000 5.96% 7.45% Feb. 2000 Oct. 2008
Series F 100,000 725,000 825,000 5.59% 6.84% Oct. 1999 Sept. 2002
-------------------------------------------
Total $828,000 $2,623,500 $3,451,500
===========================================
---------------------------------------------------------------------------------------------------------------
</TABLE>
As of November 30, 1997, all of the outstanding fixed-rate notes had been
effectively converted by interest rate swap agreements to floating-rate notes.
The weighted average borrowing rate on medium-term note borrowings for the nine
months ended November 30, 1997, including the effect of the interest rate swap
agreements, was 6.23%.
On July 29, 1997, the Company filed a $2.0 billion shelf registration with
the Securities and Exchange Commission ("SEC") covering Series F Medium-Term
Notes. The Company intends to use the proceeds from the sale of the medium-term
notes for general corporate purposes, which may include retirement of
indebtedness of the Company and investment in servicing rights through the
current production of loans and the bulk acquisition of contracts to service
loans.
Repurchase Agreements
As of November 30, 1997, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities ("MBS") under agreements to
repurchase. The weighted average borrowing rate for the nine months ended
November 30, 1997 was 5.58%. The weighted average borrowing rate on repurchase
agreements outstanding as of November 30, 1997 was 5.81%. The repurchase
agreements were collateralized by MBS. All MBS underlying repurchase agreements
are held in safekeeping by broker-dealers and all agreements are to repurchase
the same or substantially identical MBS.
Subordinated Notes
The 8.25% subordinated notes are due July 15, 2002. Interest is payable
semi-annually on each January 15 and July 15. The subordinated notes are not
redeemable prior to maturity and are not subject to any sinking fund
requirements.
Pre-Sale Funding Facilities
As of November 30, 1997, CHL had uncommitted revolving credit facilities
with two government-sponsored entities. The credit facilities are secured by
conforming mortgage loans which are in the process of being pooled into MBS.
Interest rates are based on LIBOR, federal funds and/or the prevailing rates for
MBS repurchase agreements. The weighted average borrowing rate for both
facilities for the nine months ended November 30, 1997 was 5.70%. As of November
30, 1997, the Company had no outstanding borrowings under either of these
facilities. NOTE C - COMPANY-OBLIGATED CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
On December 11, 1996, Countrywide Capital I (the "Subsidiary Trust I"), a
subsidiary of the Company, issued $300 million of 8% Capital Trust Pass-through
Securities (the "8% Capital Securities"). In connection with the Subsidiary
Trust I issuance of the 8% Capital Securities, CHL issued to the Subsidiary
Trust I, $309 million of its 8% Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debt Securities I"). The Subordinated Debt
Securities I are due on December 15, 2026 with interest payable semi-annually on
June 15 and December 15 of each year. The Company has the right to redeem at
par, plus accrued interest the 8% Capital Securities any time on or after
December 15, 2006. The sole assets of the Subsidiary Trust I are and will be the
Subordinated Debt Securities I. CHL's obligations under the Subordinated Debt
Securities I, a related guarantee and other agreements, taken together,
constitute a full and unconditional guarantee by the Company of the Subsidiary
Trust I obligations under the 8% Capital Securities.
On June 4, 1997, Countrywide Capital III (the "Subsidiary Trust III"), a
subsidiary of the Company, issued $200 million of 8.05% Subordinated Capital
Income Securities, Series A (the "8.05% Capital Securities"). In connection with
the Subsidiary Trust III issuance of 8.05% Capital Securities, CHL issued to the
Subsidiary Trust III, $206 million of its 8.05% Junior Subordinated Deferrable
Interest Debentures (the "Subordinated Debt Securities III"). The Subordinated
Debt Securities III are due on June 15, 2027 with interest payable semi-annually
on June 15 and December 15 of each year. The sole assets of the Subsidiary Trust
III are and will be the Subordinated Debt Securities III. CHL's obligations
under the Subordinated Debt Securities III, a related guarantee and other
agreements, taken together, constitute a full and unconditional guarantee by the
Company of the Subsidiary Trust III obligations under the 8.05 % Capital
Securities. (See Note G)
In relation to Subsidiary Trusts I and III, CHL has the right to defer
payment of interest by extending the interest payment period, from time to time,
for up to 10 consecutive semi-annual periods. If interest payments on the
Debentures are so deferred, the Company and CHL shall not declare or pay
dividends on, or make a distribution with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital
stock.
<TABLE>
<CAPTION>
NOTE D - SERVICING HEDGE
The following summarizes the notional amounts of servicing hedge derivative
contracts.
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
(Dollar amounts in millions)
Balance, Dispositions/ Balance,
February 28, 1997 Additions Expirations November 30, 1997
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Floors $26,250 10,500 ( 4,500) $32,250
Long Call Options on
Interest Rate Futures $ 4,200 34,800 ( 11,900) $27,100
Swap Caps $ 1,000 - - $ 1,000
Swaps - 3,900 - $ 3,900
Principal - Only Swaps $ 268 - - $ 268
Interest Rate Caps $ 1,000 4,000 ( 500) $ 4,500
Swaptions $ 1,750 1,000 ( 900) $ 1,850
Callable Pass-through Certificate - 186 - $ 186
- ------------------------------------- ------------------- -------------------- ------------------- ---------------------
</TABLE>
NOTE E - RESERVE FOR IMPAIRMENT OF MORTGAGE SERVICING RIGHTS
The following summarizes the aggregate activity in the reserve for
impairment of mortgage servicing rights.
- ------------------------------------- ------- ------------------------
(Dollar amounts in thousands) Aggregate Balances
------------------------
Balance, February 28, 1997 $ 2,668
(Reductions) additions 11,641
------------------------
Balance, November 30, 1997 $14,309
------------------------
- ------------------------------------- ------- ------------------------
NOTE F- LEGAL PROCEEDINGS
On September 29, 1997, the United States District Court adopted the
recommendation of a magistrate denying class certification in a lawsuit which
was filed against CHL and a mortgage broker by Jeff and Kathy Briggs as a
purported class action. The effect of the ruling is that the lawsuit will not
proceed as a class action and will be limited to the Briggs' own claims. The
Briggs have not sought appellate review of the Court's ruling. The suit alleges
that in connection with residential mortgage loan closings, CHL made certain
payments to mortgage brokers in violation of the Real Estate Settlement
Procedures Act. The plaintiffs seek unspecified compensatory and punitive
damages plus, as to certain claims, treble damages. CHL's management believes
that its compensation programs to mortgage brokers comply with applicable laws
and long standing industry practice, and that it has meritorious defenses to the
action. CHL intends to defend vigorously against the action and believes that
the ultimate resolution of such claims will not have a material adverse effect
on the Company's financial position or results of operations.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
NOTE G - SUBSEQUENT EVENTS
On December 17, 1997, the Company declared a cash dividend of $0.08 per common
share payable February 2, 1998 to shareholders of record on January 15, 1998.
On December 24, 1997, Subsidiary Trust III completed an exchange offer
pursuant to which newly issued capital securities (the "New 8.05% Capital
Securities") were exchanged for all of the outstanding 8.05% Capital Securities.
The New 8.05% Capital Securities are identical in all material respects to the
8.05% Capital Securities, except that the New 8.05% Capital Securities have been
registered under the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Financial information for Countrywide Home Loans, Inc. is summarized in the following tables.
-- ----------------------------------------- ---- --------------------------------------------------- -------
(Dollar amounts in thousands) November 30, February 28,
1997 1997
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
Balance Sheets:
Mortgage loans and mortgage-backed
<S> <C> <C>
securities held for sale $ 4,493,420 $2,579,972
Other assets 6,267,980 4,835,078
============== ==============
Total assets $10,761,400 $7,415,050
============== ==============
Short- and long-term debt $ 8,110,622 $5,220,277
Other liabilities 984,646 742,435
Equity 1,666,132 1,452,338
============== ==============
Total liabilities and equity $10,761,400 $7,415,050
============== ==============
-- ---------------------------------------------- -------- -------------- ---------- -------------- ---------
</TABLE>
<TABLE>
<CAPTION>
--- ----------------------------------------- --- -------------------------------------------------- --------
(Dollar amounts in thousands) Nine Months Ended November 30,
--------------- ---------- ---------------
1997 1996
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
Statements of Earnings:
<S> <C> <C>
Revenues $914,084 $740,193
Expenses 603,599 468,165
Provision for income taxes 120,774 106,091
=============== ===============
Net earnings $189,711 $165,937
=============== ===============
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
</TABLE>
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which
supersedes APB Opinion No. 15, of the same name. SFAS No. 128 simplifies the
standards for computing earnings per share ("EPS") and makes them comparable to
international standards. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, with earlier application not
permitted. Upon adoption, all prior EPS data will be restated.
<TABLE>
<CAPTION>
The following table presents basic and diluted EPS for the three months and nine
months ended November 30, 1997 and 1996, computed under the provisions of SFAS
No. 128.
- ------------------------ -- -- ----- ------------------------------------- -- ---- -------
Three Months Ended November 30,
-- -- ----- ------------------------------------- -- ---- -------
1997 1996
--------- --------- --------- ---------- --------- -----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- --------------------- ------------ -------- --------- ----------- --------- -----------
Net earnings $80,183 $65,935
========= ==========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $80,183 107,572 $0.75 $65,935 103,135 $0.64
Effect of dilutive
stock options - 4,918 - 3,207
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $80,183 112,490 $0.71 $65,935 106,342 $0.62
========= ========= ========= ========== ========= -----------
- ------------------------ --------- --------- --------- -- ---------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------ -- -- ----- ------------------------------------- -- ----- ------
Nine Months Ended November 30,
-- -- ----- ------------------------------------- -- ----- ------
1997 1996
--------- --------- --------- ----------- --------- ----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- --------- ----------
Net earnings $259,881 $189,056
========= ===========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $259,881 107,111 $2.43 $189,056 102,666 $1.84
Effect of dilutive
stock options - 4,062 - 2,287
--------- --------- ----------- ---------
Diluted EPS
Net earnings available
to common shareholders $259,881 111,173 $2.34 $189,056 104,953 $1.80
========= ========= ========= =========== ========= ----------
- ------------------------ --------- --------- --------- -- ----------- --------- ----------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q may contain forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy and demographics of the Company's lending
markets; (2) the direction of interest rates; (3) the relationship between
mortgage interest rates and the cost of funds; (4) federal and state regulation
of the Company's mortgage banking operations and (5) competition within the
mortgage banking industry.
RESULTS OF OPERATIONS
Quarter Ended November 30, 1997 Compared to Quarter Ended November 30, 1996
Revenues for the quarter ended November 30, 1997 increased 33% to
$375.1 million from $281.5 million for the quarter ended November 30, 1996. Net
earnings increased 22% to $80.2 million for the quarter ended November 30, 1997
from $65.9 million for the quarter ended November 30, 1996. The increase in
revenues and net earnings for the quarter ended November 30, 1997 compared to
the quarter ended November 30, 1996 was primarily attributable to an increase in
the size of the Company's servicing portfolio, a 53% increase in production with
improved pricing margins on prime credit quality first mortgages and an increase
in the income of the non-mortgage banking subsidiaries. These positive factors
during the quarter ended November 30, 1997 were partially offset by an increase
in amortization of the servicing asset and an increase in expenses.
The total volume of loans produced increased 53% to $12.7 billion for
the quarter ended November 30, 1997 from $8.3 billion for the quarter ended
November 30, 1996. The increase in loan production was primarily due to
generally lower interest rates that prevailed during the quarter ended November
30, 1997 compared to the quarter ended November 30, 1996, as well as to the
continuing expansion of the Company's Consumer Markets and Wholesale divisions.
Refinancings totaled $5.1 billion, or 40% of total fundings, for the quarter
ended November 30, 1997, as compared to $2.2 billion, or 26% of total fundings,
for the quarter ended November 30, 1996. Fixed-rate mortgage loan production
totaled $9.9 billion, or 77% of total fundings, for the quarter ended November
30, 1997, as compared to $5.9 billion, or 71% of total fundings, for the quarter
ended November 30, 1996.
<TABLE>
<CAPTION>
Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- ---------------------------------------- -----
(Dollar amounts in millions) Three Months Ended November 30,
- -------------------------------------------- ---------------------------------------- -----
1997 1996
--------------- ----------------
<S> <C> <C>
Consumer Markets Division $ 3,498 $ 1,787
Wholesale Lending Division 4,194 2,096
Correspondent Lending Division 5,041 4,436
=============== ================
Total Loan Volume $12,733 $ 8,319
=============== ================
- -------------------------------------------- --------------- ------- ---------------- -----
</TABLE>
The factors which affect the relative volume of production among the
Company's three divisions include the price competitiveness of each division's
product offerings, the level of mortgage lending activity in each division's
market and the success of each division's sales and marketing efforts.
Included in the Company's total volume of loans produced are $372
million of home equity loans funded in the quarter ended November 30, 1997 and
$172 million funded in the quarter ended November 30, 1996. Sub-prime credit
quality loan production, which is also included in the Company's total
production volume, was $427 million for the quarter ended November 30, 1997 and
$255 million for the quarter ended November 30, 1996.
At November 30, 1997 and 1996, the Company's pipeline of loans in
process was $7.9 billion and $4.7 billion, respectively. Historically,
approximately 43% to 77% of the pipeline of loans in process has funded. In
addition, at November 30, 1997, the Company had committed to make loans in the
amount of $1.1 billion, subject to property identification and approval of the
loans (the "LOCK `N SHOP(R) Pipeline"). At November 30, 1996, the LOCK `N
SHOP(R) Pipeline was $1.7 billion. For the quarters ended November 30, 1997 and
1996, the Company received 180,702 and 117,821 new loan applications,
respectively, at an average daily rate of $315 million and $195 million,
respectively. The factors that affect the percentage of applications received
and funded during a given time period include the movement and direction of
interest rates, the average length of loan commitments issued, the
creditworthiness of applicants, the production divisions' loan processing
efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended November 30,
1997 as compared to the quarter ended November 30, 1996 due to higher loan
production. The percentage increase in loan origination fees was more than the
percentage increase in total production. This is primarily because production by
the Consumer Markets and Wholesale Lending Divisions (which, due to their cost
structures, charge higher origination fees per dollar loaned than the
Correspondent Division) comprised 60% of the total fundings during the quarter
ended November 30, 1997 compared to 47% during the quarter ended November 30,
1996. Gain on sale of loans improved during the quarter ended November 30, 1997,
as compared to the quarter ended November 30, 1996 due in part to improved
pricing margins on prime credit quality first mortgages. The sales of home
equity loans contributed $17.8 million to the gain on sale of loans during the
quarter ended November 30, 1997 and $12.0 during the quarter ended November 30,
1996. Sub-prime loans contributed $13.0 million and $23.1 million to the gain on
sale of loans for the quarters ended November 30, 1997 and 1996, respectively.
In general, loan origination fees and gain (loss) on sale of loans are affected
by numerous factors including the volume and mix of loans produced and sold,
loan pricing decisions, interest rate volatility and the general direction of
interest rates.
Net interest income (interest earned net of interest charges) increased
to $9.6 million for the quarter ended November 30, 1997 from $8.1 million for
the quarter ended November 30, 1996. Net interest income is principally a
function of: (i) net interest income earned from the Company's mortgage loan
warehouse ($21.4 million and $16.2 million for the quarters ended November 30,
1997 and 1996, respectively); (ii) interest expense related to the Company's
investment in servicing rights ($56.2 million and $37.3 million for the quarters
ended November 30, 1997 and 1996, respectively) and (iii) interest income earned
from the custodial balances associated with the Company's servicing portfolio
($41.9 million and $28.5 million for the quarters ended November 30, 1997 and
1996, respectively). The Company earns interest on, and incurs interest expense
to carry, mortgage loans held in its warehouse. The increase in net interest
income from the mortgage loan warehouse was primarily attributed to an increase
in the average amount of mortgage loan warehouse due to higher production. The
increase in interest expense related to the investment in servicing rights
resulted primarily from a larger servicing portfolio and an increase in interest
costs incurred on payoffs. The increase in net interest income earned from the
custodial balances was related to an increase in the average custodial balances
from the quarter ended November 30, 1996 to the quarter ended November 30, 1997.
During the quarter ended November 30, 1997, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. At
November 30, 1997, the Company serviced $175.2 billion of loans (including $6.2
billion of loans subserviced for others) compared to $152.9 billion (including
$3.1 billion of loans subserviced for others) at November 30, 1996, a 15%
increase. The growth in the Company's servicing portfolio during the quarter
ended November 30, 1997 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments and scheduled repayments of mortgage loans. The weighted average
interest rate of the mortgage loans in the Company's servicing portfolio was
7.8% at both November 30, 1997 and 1996. It is the Company's strategy to build
and retain its servicing portfolio because of the returns the Company can earn
from such investment and because the Company believes that servicing income is
countercyclical to loan production income.
During the quarter ended November 30, 1997, the prepayment rate of the
Company's servicing portfolio was 16%, as compared to 9% for the quarter ended
November 30, 1996. In general, the prepayment rate is affected by the overall
level of refinance activity, which in turn is driven primarily by the relative
level of mortgage interest rates.
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. In addition, to mitigate the effect on
earnings of higher amortization and impairment that may result from increased
current and projected future prepayment activity, the Company acquires financial
instruments, including derivative contracts, that increase in aggregate value
when interest rates decline (the "Servicing Hedge"). These financial instruments
include call options on interest rate futures and MBS, interest rate floors,
interest rate swaps (with the Company's maximum payment capped) ("Swap Caps"),
interest rate swaps ("Swaps"), options on interest rate swaps ("Swaptions"),
interest rate caps, principal-only ("P/O") swaps, certain tranches of
collateralized mortgage obligations ("CMOs") and Callable Pass-through
Certificates ("CPC").
With the Swap Caps, the Company receives and pays interest on a
specified notional amount. The rate received is fixed; the rate paid is
adjustable, is indexed to the London Interbank Offered Rates for U.S. dollar
deposits ("LIBOR") and has a specified maximum or "cap."
With Swaps, the Company receives and pays interest on a specified
notional amount. The rate received is fixed; the rate paid is adjustable and is
indexed to the London Interbank Offered Rates for U.S. dollar deposits
("LIBOR").
With Swaptions, the Company has the option to enter into a
receive-fixed, pay-floating interest rate swap at a future date or to settle the
transaction for cash.
The P/O swaps are derivative contracts, the value of which is
determined by changes in the value of the referenced P/O security. The payments
received by the Company under the P/O swaps relate to the cash flows of the
referenced P/O security. The payments made by the Company are based upon a
notional amount tied to the remaining balance of the referenced P/O security
multiplied by a floating rate indexed to LIBOR.
The CMOs, which consist primarily of P/O securities, have been
purchased at deep discounts to their par values. As interest rates decrease,
prepayments on the collateral underlying the CMOs should increase. This should
result in a decline in the average lives of the P/O securities and a
corresponding increase in the present values of their cash flows. Conversely, as
interest rates increase, prepayments on the collateral underlying the CMOs
should decrease. This should result in an increase in the average lives of the
P/O securities and a decrease in the present values of their cash flows.
The CPC is an option with a mortgage-backed security as the underlying
collateral. The option gives the holder the right to call the mortgage-backed
security at par and receive the remaining cashflows from the particular pool.
This option has a one year lockout, meaning it cannot be exercised until the end
of the first year. After the lockout period, the option can be exercised at
anytime. This option expires in 2025.
The Servicing Hedge is designed to protect the value of the investment
in mortgage servicing rights ("MSRs") from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, the value of the MSRs increases while the value of
the hedge instruments declines. With respect to the options, Swaptions, floors,
caps, CMOs and CPC, the Company is not exposed to loss beyond its initial outlay
to acquire the hedge instruments. With respect to the Swap Caps contracts
entered into by the Company as of November 30, 1997, the Company estimates that
its maximum exposure to loss over the contractual term is $19.8 million. With
respect to the Swap contracts entered into by the Company as of November 30,
1997, the Company estimates that its maximum exposure to loss over the
contractual term is $169.0 million. The Company's exposure to loss in the P/O
swaps is related to changes in the market value of the referenced P/O security
over the life of the contract. In the quarter ended November 30, 1997, the
Company recognized a net benefit of $161.5 million from its Servicing Hedge. The
net benefit included unrealized net gains of $148.0 million and realized gains
of $13.5 million from the premium amortization and sale of various financial
instruments that comprise the Servicing Hedge. In the quarter ended November 30,
1996, the Company recognized a net benefit of $140.2 million from its Servicing
Hedge. The net benefit included unrealized gains of $164.2 million and net
realized losses of $24.0 million from the premium amortization and sale of
various financial instruments that comprise the Servicing Hedge. There can be no
assurance that the Servicing Hedge will generate gains in the future, or if
gains are generated, that they will fully offset impairment of the MSRs.
The Company recorded amortization and net impairment of its MSRs in the
quarter ended November 30, 1997 totaling $243.7 million (consisting of normal
amortization amounting to $76.8 million and impairment of $166.9 million),
compared to $198.7 million of amortization and a net impairment (consisting of
normal amortization amounting to $55.0 million and net impairment of $143.7
million) in the quarter ended November 30, 1996. The factors affecting the
amount of amortization and impairment or recovery of the MSRs recorded in an
accounting period include the level of prepayments during the period, the change
in estimated future prepayments and the amount of Servicing Hedge gains or
losses.
During the quarter ended November 30, 1997, the Company acquired bulk
servicing rights for loans with principal balances aggregating $215 million at a
price of 1.17% of the aggregate outstanding principal balances of the servicing
portfolios acquired. During the quarter ended November 30, 1996, the Company
acquired bulk servicing rights for loans with principal balances aggregating $60
million at a price of 1.08% of the aggregate outstanding principal balances of
the servicing portfolios acquired.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below for the quarters
ended November 30, 1997 and 1996.
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Quarter Ended November 30, 1997
thousands)
-- --------- ------------------------------------------------- -- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $35,462 $11,262 $17,853 $6,514 $71,091
Incentive Bonus 20,826 316 4,096 2,606 27,844
Payroll Taxes and Benefits 5,373 2,138 3,440 572 11,523
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $61,661 $13,716 $25,389 $9,692 $110,458
============ ============= ============= ============= -------------
Average Number of 3,452 1,669 1,431 488 7,040
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-- --------------------------- -- --- -------- ------------------------------------------------- ---- --- -- ----
(Dollar amounts in Quarter Ended November 30, 1996
thousands)
--- -------- ------------------------------------------------- ---- --- -- ----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $23,050 $10,716 $13,994 $3,281 $51,041
Incentive Bonus 7,870 203 3,733 1,892 13,698
Payroll Taxes and Benefits 3,220 1,833 1,302 454 6,809
------------ -------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $34,140 $12,752 $19,029 $5,627 $71,548
============ ============== ============= ============= -------------
Average Number of 2,325 1,593 1,155 250 5,323
Employees
-- --------------------------- -- ------------ - -------------- - ------------- -- ------------- -- -------------
</TABLE>
The amount of salaries increased during the quarter ended November 30,
1997 from the quarter ended November 30, 1996 reflecting the Company's strategy
of expanding and enhancing its Consumer Markets and Wholesale branch networks,
including new retail sub-prime branches. In addition, a larger servicing
portfolio and growth in the Company's non-mortgage banking subsidiaries also
contributed to the increase. Incentive bonuses earned during the quarter ended
November 30, 1997 increased primarily due to higher production and a change in
production mix.
Occupancy and other office expenses for the quarter ended November 30,
1997 increased to $49.2 million from $33.0 million for the quarter ended
November 30, 1996, reflecting the Company's goal of expanding its Consumer
Markets and Wholesale branch networks, including the new retail sub-prime
branches. In addition, a larger servicing portfolio and growth in the Company's
non-mortgage banking activities contributed to the increase.
Guarantee fees represent fees paid to guarantee timely and full payment
of principal and interest on MBS and whole loans sold to permanent investors and
to transfer the credit risk of the loans in the servicing portfolio. For the
quarter ended November 30, 1997, guarantee fees increased 7% to $43.5 million
from $40.6 million for the quarter ended November 30, 1996. The factors which
affect the amount of guarantee fees in a period include the size of the
servicing portfolio, the mix of permanent investors and the terms negotiated at
the time of loan sales.
Marketing expenses for the quarter ended November 30, 1997 increased
26% to $9.7 million from $7.7 million for the quarter ended November 30, 1996,
reflecting the Company's continued implementation of a marketing plan to
increase brand awareness of the Company in the residential mortgage market.
Other operating expenses for the quarter ended November 30, 1997
increased from the quarter ended November 30, 1996 by $10.4 million, or 51%.
This increase was due primarily to higher loan production, a larger servicing
portfolio, increased reserves for bad debts, increased systems development and
growth in the Company's non-mortgage banking subsidiaries.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1997, the Company's pre-tax income from
its loan production activities (which include loan origination and purchases,
warehousing and sales) was $62.9 million. In the quarter ended November 30,
1996, the Company's comparable pre-tax income was $36.7 million. The increase of
$26.2 million was primarily attributable to increased loan production, positive
trends in the production mix and in the pricing margins on prime credit quality
first mortgages. These positive results were partially offset by higher
production and overhead costs. In the quarter ended November 30, 1997, the
Company's pre-tax income from its loan servicing activities (which include
administering the loans in the servicing portfolio, selling homeowners and other
insurance, acting as tax payment agent, marketing foreclosed properties and
acting as a reinsurer) was $58.4 million as compared to $64.3 million in the
quarter ended November 30, 1996. The decrease of $5.9 million from November 30,
1996 to November 30, 1997 was due primarily to increased amortization and
increased interest expense resulting from a higher cost basis in the MSRs and an
increase in interest expense incurred on payoffs. This was partially offset by
an increase in servicing fees and miscellaneous revenue.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title insurance and escrow services, home appraisals, credit
cards, securities brokerage and servicing rights brokerage. For the quarter
ended November 30, 1997, these activities contributed $10.2 million to the
Company's pre-tax income compared to $7.1 million for the quarter ended November
30, 1996.
RESULTS OF OPERATIONS
Nine Months Ended November 30, 1997 Compared to Nine Months Ended
November 30, 1996
Revenues from ongoing operations for the nine months ended November 30,
1997 increased 35% to $1.1 billion from $815.6 million for the nine months ended
November 30, 1996. Net earnings from ongoing operations increased 19% to $224.9
million for the nine months ended November 30, 1997 from $189.1 million for the
nine months ended November 30, 1996. Both revenues and net earnings from ongoing
operations for the nine months ended November 30, 1997 exclude a nonrecurring
pre-tax gain of $57.4 million on the sale of a subsidiary. The increase in
revenues and net earnings from ongoing operations for the nine months ended
November 30, 1997 compared to the nine months ended November 30, 1996 was
primarily attributable to an increase in the size of the Company's servicing
portfolio, a 53% increase in production with improved pricing margins on prime
credit quality first mortgages and greater sales of higher-margin home equity
loans. These positive factors were partially offset by an increase in
amortization of the servicing asset and increased expenses in the nine months
ended November 30, 1997 from the nine months ended November 30, 1996 which is
mainly attributable to the ongoing branch expansion effort, which has resulted
in 55 Consumer Markets, 18 Wholesale and 20 sub-prime retail branches being
opened over the last twelve months.
The total volume of loans produced increased 15% to $32.7 billion for
the nine months ended November 30, 1997 from $28.5 billion for the nine months
ended November 30, 1996. Refinancings totaled $10.9 billion, or 33% of total
fundings, for the nine months ended November 30, 1997, as compared to $8.9
billion, or 31% of total fundings, for the nine months ended November 30, 1996.
Fixed-rate loan production totaled $23.6 billion, or 72% of total fundings, for
the nine months ended November 30, 1997, as compared to $21.4 billion, or 75% of
total fundings, for the nine months ended November 30, 1996.
Included in the Company's total volume of loans produced are $1.0
billion of home equity loans funded in the nine months ended November 30, 1997
and $405 million funded in the nine months ended November 30, 1996. Sub-prime
credit quality loan production, which is also included in the Company's total
production volume, was $1.1 billion for the nine months ended November 30, 1997
and $634 million for the nine months ended November 30, 1996.
For the nine months ended November 30, 1997 and 1996, the Company
received 474,664 and 378,383 new loan applications, respectively, at an average
daily rate of $263 million and $208 million, respectively. The factors that
affect the percentage of applications received and funded during a given time
period include the movement and direction of interest rates, the average length
of loan commitments issued, the creditworthiness of applicants, the production
divisions' loan processing efficiency and loan pricing decisions.
<TABLE>
<CAPTION>
Total loan volume in the Company's production divisions is summarized below.
- -------------------------------------------- --------------------------------------- --------
(Dollar amounts in millions) Nine Months Ended November 30,
- -------------------------------------------- ---------------------------------------
1997 1996
------------- ----------------
<S> <C> <C>
Consumer Markets Division $ 8,870 $ 6,017
Wholesale Lending Division 10,024 6,020
Correspondent Lending Division 13,760 16,454
============= ================
Total Loan Volume $32,654 $28,491
============= ================
- -------------------------------------------- ------------- -------- ---------------- --------
</TABLE>
Loan origination fees increased during the nine months ended November
30, 1997 as compared to the nine months ended November 30, 1996 due to higher
production. The percentage increase in loan origination fees was more than the
increase in production. This was primarily because production by the Consumer
Markets Division and the Wholesale Lending Division (which, due to their cost
structures, charge higher origination fees per dollar loaned than the
Correspondent Division) comprised a greater percentage of total production in
the nine months ended November 30, 1997 than in the nine months ended November
30, 1996 as a result of the continuing expansion of these divisions coupled with
an initiation to improve margins in the Correspondent Lending Division. Gain on
sale of loans improved during the nine months ended November 30, 1997 as
compared to the nine months ended November 30, 1996 primarily due to greater
sales of higher margin home equity loans and improved pricing margins on prime
credit quality first mortgages.
Net interest income (interest earned net of interest charges) decreased
to $13.7 million for the nine months ended November 30, 1997 from $29.7 million
for the nine months ended November 30, 1996. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($53.4 million and $47.8 million for the nine months
ended November 30, 1997 and 1996, respectively); (ii) interest expense related
to the Company's investment in servicing rights ($152.4 million and $108.0
million for the nine months ended November 30, 1997 and 1996, respectively) and
(iii) interest income earned from the custodial balances associated with the
Company's servicing portfolio ($106.0 million and $87.8 million for the nine
months ended November 30, 1997 and 1996, respectively). The Company earns
interest on, and incurs interest expense to carry, mortgage loans held in its
warehouse. The increase in interest expense on the investment in servicing
rights resulted primarily from a larger servicing portfolio and an increase in
interest costs incurred on payoffs. The increase in net interest income earned
from the custodial balances was related to an increase in the average custodial
balances (caused by growth of the servicing portfolio) combined with an increase
in the earnings rate from the nine months ended November 30, 1996 to the nine
months ended November 30, 1997.
During the nine months ended November 30, 1997, loan servicing income
was positively affected by the continued growth of the loan servicing portfolio.
The growth in the Company's servicing portfolio during the nine months ended
November 30, 1997 was the result of loan production volume and the acquisition
of bulk servicing rights, partially offset by prepayments, partial prepayments,
and scheduled amortization of mortgage loans.
The prepayment rate of the Company's servicing portfolio was 13% and 11%
for the nine month periods ended November 30, 1997 and November 30, 1996,
respectively.
During the nine months ended November 30, 1997, the Company recognized
a net benefit of $150.2 million from its Servicing Hedge. The net benefit
included an unrealized gain of $139.2 million and a net realized gain of $11.0
million from the amortization and sale of various financial instruments that
comprise the Servicing Hedge. During the nine months ended November 30, 1996,
the Company recognized a net benefit of $22.0 million from its Servicing Hedge.
The net benefit included an unrealized gain of $75.8 million and a net realized
loss of $53.8 million from the amortization and sale of various financial
instruments that comprise the Servicing Hedge.
The Company recorded amortization and net impairment of its MSRs in the
nine months ended November 30, 1997 totaling $375.1 million (consisting of
normal amortization amounting to $213.8 million and net impairment of $161.3
million), compared to amortization and net impairment of its MSRs of $185.1
million (consisting of normal amortization amounting to $158.8 million and net
impairment of $26.3 million) in the nine months ended November 30, 1996.
During the nine months ended November 30, 1997, the Company acquired
bulk servicing rights for loans with principal balances aggregating $574 million
at a price of approximately 1.16% of the aggregate outstanding principal balance
of the servicing portfolios acquired. During the nine months ended November 30,
1996, the Company acquired bulk servicing rights for loans with principal
balances aggregating $1.2 billion at a price of approximately 1.69% of the
aggregate outstanding principal balance of the servicing portfolios acquired.
<TABLE>
<CAPTION>
Salaries and related expenses are summarized below for the nine months ended
November 30, 1997 and 1996.
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Nine Months Ended November 30, 1997
thousands)
-- --------- ------------------------------------------------- -- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $95,626 $32,936 $51,079 $17,417 $197,058
Incentive Bonus 51,199 901 12,541 7,576 72,217
Payroll Taxes and Benefits 15,279 6,220 6,645 1,624 29,768
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $162,104 $40,057 $70,265 $26,617 $299,043
============ ============= ============= ============= -------------
Average Number of 3,132 1,637 1,364 434 6,567
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
<TABLE>
<CAPTION>
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Nine Months Ended November 30, 1996
thousands)
-- --------- ------------------------------------------------- -- --- --- -----
-- --------------------------- --
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 66,202 $30,617 $39,436 $ 9,437 $145,692
Incentive Bonus 24,884 545 10,994 4,681 41,104
Payroll Taxes and Benefits 10,436 5,455 4,602 1,248 21,741
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $101,522 $36,617 $55,032 $15,366 $208,537
============ ============= ============= ============= -------------
Average Number of 2,225 1,524 1,083 247 5,079
Employees
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
</TABLE>
The amount of salaries increased during the nine months ended November
30, 1997 from the nine months ended November 30, 1996 primarily due to an
increased number of employees resulting from expansion of the Consumer Markets
and Wholesale division branch networks, a larger servicing portfolio and growth
in the Company's non-mortgage banking activities. The increase in incentive
bonuses was due primarily to the increased Consumer Markets and Wholesale
divisions' production.
Occupancy and other office expenses for the nine months ended November
30, 1997 increased to $128.7 million from $94.3 million for the nine months
ended November 30, 1996, reflecting the Company's goal of expanding its Consumer
Markets and Wholesale branch networks. In addition, higher loan production, a
larger servicing portfolio and growth in the Company's non-mortgage banking
activities also contributed to the increase.
Guarantee fees for the nine months ended November 30, 1997 increased
10% to $128.9 million from $117.5 million for the nine months ended November 30,
1996. This increase resulted from an increase in the servicing portfolio,
changes in the mix of permanent investors and terms negotiated at the time of
loan sales.
Marketing expenses for the nine months ended November 30, 1997
increased 18% to $30.4 million from $25.7 million for the nine months ended
November 30, 1996, reflecting the Company's continued implementation of a
marketing plan to increase brand awareness of the Company in the residential
mortgage market.
Other operating expenses for the nine months ended November 30, 1997
increased from the nine months ended November 30, 1996 by $26.3 million, or 44%.
This increase was due primarily to higher loan production, a larger servicing
portfolio, increased reserves for bad debts and increased systems development in
the nine months ended November 30, 1997 as compared to the nine months ended
November 30, 1996.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1997, the Company's pre-tax
income from its loan production activities (which include loan origination and
purchases, warehousing and sales) was $158.1 million. In the nine months ended
November 30, 1996, the Company's comparable pre-tax income was $101.4 million.
The increase of $56.7 million was primarily attributable to a larger gain on
sale of loans resulting from the sale of higher margin home equity loans and
improved pricing margins on prime credit quality first mortgages. These positive
results were partially offset by higher production costs. In the nine months
ended November 30, 1997, the Company's pre-tax income from its loan servicing
activities (which include administering the loans in the servicing portfolio,
selling homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as a reinsurer) was $178.7 million as compared
to $190.7 million in the nine months ended November 30, 1996. The decrease of
$12.0 million was principally due to increased amortization resulting from a
higher cost basis in the MSRs and an increase in interest expense incurred on
payoffs. This was partially offset by an increase in servicing fees and
miscellaneous revenues.
Profitability of Other Activities
Other ancillary products and services, excluding the sale of a
subsidiary, contributed $31.8 million to the Company's pre-tax income in the
nine months ended November 30, 1997, compared to $17.8 million during the nine
months ended November 30, 1996. This increase to pre-tax income primarily
resulted from improved performance of the title insurance, escrow and Capital
Markets businesses.
During the nine months ended November 30, 1997, Countrywide Asset Management
Corporation, a subsidiary of the Company, was sold to INMC Mortgage Holdings,
Inc., (INMC) a publicly traded real estate investment trust for 3.44 million
shares of INMC stock. The impact of this sale on earnings was a $57.4 million
pre-tax gain.
INFLATION
Inflation affects the Company in the areas of loan production and
servicing. Interest rates normally increase during periods of high inflation and
decrease during periods of low inflation. Historically, as interest rates
increase, loan production, particularly from loan refinancings, decreases,
although in an environment of gradual interest rate increases, purchase activity
may actually be stimulated by an improving economy or the anticipation of
increasing real estate values. In such periods of reduced loan production,
production margins may decline due to increased competition resulting from over
capacity in the market. In a higher interest rate environment, servicing-related
earnings are enhanced because prepayment rates tend to slow down thereby
extending the average life of the Company's servicing portfolio and reducing
both amortization and impairment of the MSRs and interest costs incurred on
payoffs, and because the rate of interest earned from the custodial balances
tends to increase. Conversely, as interest rates decline, loan production,
particularly from loan refinancings, increases. However, during such periods,
prepayment rates tend to accelerate (principally on the portion of the portfolio
having a note rate higher than the then-current interest rates), thereby
decreasing the average life of the Company's servicing portfolio and adversely
impacting its servicing-related earnings primarily due to increased amortization
and impairment of the MSRs, a decreased rate of interest earned from the
custodial balances and increased interest costs incurred on payoffs. The effects
of changing interest rates on servicing-related earnings are reduced by
performance of the Servicing Hedge, which is designed to mitigate the impact on
earnings of higher amortization and impairment that may result from declining
interest rates.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to partially offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
funding activities and the investment in servicing rights. To meet these needs,
the Company currently utilizes commercial paper supported by the revolving
credit facility, medium-term notes, MBS repurchase agreements, unsecured
subordinated notes payable, an optional cash purchase feature in the dividend
reinvestment plan, redeemable capital securities of subsidiary trust and cash
flow from operations. In the past, the Company has utilized whole loan
repurchase agreements, pre-sale funding facilities, servicing-secured bank
facilities, private placements of unsecured notes and other financings, direct
borrowings from the revolving credit facility and public offerings of preferred
stock.
Certain of the debt obligations of the Company and Countrywide Home
Loans Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth, and other financial
covenants. These provisions have not had, and are not expected to have, an
adverse impact on the ability of the Company and CHL to pay dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its growing operations through the public and
private capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows. In June
1997, Countrywide Capital III, a statutory business trust and a subsidiary of
the Company, issued $200 million of 8.05% Company-obligated subordinated capital
income securities, the proceeds of which were used to purchase subordinated debt
securities from the Company. The Company used the net proceeds from the sale of
the subordinated debt securities for general corporate purposes, principally for
investment in mortgage servicing rights.
In connection with its derivative contracts, the Company may be
required to deposit cash or certain government securities or obtain letters of
credit to meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In the nine months ended November 30, 1997, the
Company's operating activities used cash of approximately $2.1 billion primarily
to increase its mortgage loans and MBS held for sale. These are generally
financed with short-term borrowings as discussed under "Financing Activities."
Investing Activities The primary investing activity for which cash was
used during the nine months ended November 30, 1997 was the investment in
servicing. Net cash used by investing activities was $0.8 billion and $0.7
billion for the nine months ended November 30, 1997 and November 30, 1996,
respectively.
Financing Activities Net cash provided by financing activities amounted
to $2.9 billion and $11.0 million for the nine months ended November 30, 1997
and November 30, 1996, respectively. The increase in cash flow from financing
activities was primarily the result of an increase in net short-term borrowings
used to finance the increase in mortgage loans and MBS held for sale as
discussed under "Operating Activities".
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000 compliant.
The financial impact to the Company has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
For the month ended December 31, 1997, the Company received new loan
applications at an average daily rate of $303 million compared to a daily
application rate for the month ended December 31, 1996 of $229 million. The
Company's pipeline of loans in process was $7.6 billion and $4.5 billion at
December 31, 1997 and 1996, respectively. The size of the pipeline is generally
an indication of the level of future fundings, as historically 43% to 77% of the
pipeline of loans in process has funded. In addition, the Company's Lock `N Shop
Pipeline(R) at December 31, 1997 was $769.1 million and at December 31, 1996 was
$1.1 billion. Future application levels and loan fundings are dependent on
numerous factors, including the level of demand for mortgage credit, the extent
of price competition in the market, the direction of interest rates, seasonal
factors and general economic conditions.
Market Factors
Mortgage interest rates were generally lower during the quarter ended
November 30, 1997 compared to the quarter ended November 30, 1996. Loan
production increased 53% from the quarter ended November 30, 1996 to the quarter
ended November 30, 1997. The Company benefited from a relatively strong home
purchase market during the quarter ended November 30, 1997. In addition,
sub-prime and home equity loan fundings, which are generally less sensitive to
interest rate fluctuations than prime credit quality first mortgages, also
increased from the quarter ended November 30, 1996.
The Company's primary competitors are commercial banks, savings and
loans and mortgage banking subsidiaries of diversified companies, as well as
other mortgage bankers. Certain commercial banks have expanded their mortgage
banking operations through acquisition of formerly independent mortgage banking
companies, the integration of which has not, in all cases, been completed, or
through internal growth. The Company believes that these transactions and
activities have not had a material impact on the Company or on the degree of
competitive pricing in the market.
Some regions in which the Company operates, particularly some regions
of California, had been experiencing slower economic growth, and real estate
financing activity in these regions had been negatively impacted. The Company's
California mortgage loan production (measured by principal balance) constituted
26% of its total production during the nine months ended November 30, 1997, up
slightly from 25% for the nine months ended November 30, 1996. The Company is
continuing its efforts to expand its production capacity outside of California.
To the extent that any geographic region's mortgage loan production constitutes
a significant portion of the Company's production, there can be no assurance
that the Company's operations will not be adversely affected if that region
experiences slow or negative economic growth resulting in decreased residential
real estate lending activity or market factors further impact the Company's
competitive position in the state.
The delinquency rate in the Company-owned servicing portfolio increased
to 4.29% at November 30, 1997 from 3.23% at November 30, 1996. The Company
believes that this increase was primarily the result of portfolio mix changes
and aging. The proportion of government and high loan-to-value conventional
loans, which tend to experience higher delinquency rates than low loan-to-value
conventional loans, has increased from 48% of the portfolio at November 30, 1996
to 49% at November 30, 1997. In addition, the weighted average age of the
portfolio was 30 months at November 30, 1997, up from 27 months at November 30,
1996. Delinquency rates tend to increase as loans age, reaching a peak at three
to five years of age. However, related late charge income has historically been
sufficient to offset incremental servicing expenses resulting from an increased
delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that
are in foreclosure is 0.62% at November 30, 1997 and 1996. Generally, the
Company is not exposed to credit risk. Because the Company services
substantially all prime credit quality loans on a non-recourse basis,
foreclosure losses are generally the responsibility of the investor or insurer
and not the Company. The Company retains credit risk on the home equity and
sub-prime loans it sells in the form of pools backing securities. As such,
through retention of a subordinated interest in the trust, the Company bears
primary responsibility for credit losses on the loans. At November 30, 1997, the
Company had investments in such subordinated interests amounting to $181
million, which represents the maximum exposure to credit losses on the
securitized home equity and sub-prime loans. While the Company generally does
not retain credit risk with respect to the prime credit quality mortgage loans
it sells, it does have potential liability under representations and warranties
made to purchasers and insurers of the loans. In the event of a breach of the
representations and warranties, the Company may be required to repurchase a
mortgage loan and any subsequent loss on the mortgage loan may be borne by the
Company. Similarly, government loans serviced by the Company (29% of the
Company's servicing portfolio at November 30, 1997) are insured by the Federal
Housing Administration or partially guaranteed against loss by the Department of
Veterans Administration. The Company is exposed to credit losses to the extent
that the partial guarantee provided by the Department of Veterans Administration
is inadequate to cover the total credit losses incurred.
The Company's bad debt expense is primarily driven by the exposures
associated with foreclosure activity. Bad debt expense is included with other
operating expenses and amounted to $24.9 million for the nine months ended
November 30, 1997 and $17.2 million for the nine months ended November 30, 1996.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in mortgage servicing rights from the
effects of increased prepayment activity that generally results from declining
interest rates. In periods of increasing interest rates, the value of the
Servicing Hedge generally declines and the value of MSRs generally increases.
There can be no assurance that, in periods of increasing interest rates, the
increase in value of the MSRs will offset the amount of Servicing Hedge expense;
or in periods of declining interest rates, that the Company's Servicing Hedge
will generate gains or if gains are generated, that they will fully offset
impairment of the MSRs.
Implementation of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which
supersedes APB Opinion No. 15, of the same name. SFAS No. 128 simplifies the
standards for computing earnings per share ("EPS") and makes them comparable to
international standards. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, with earlier application not
permitted. Upon adoption, all prior EPS data will be restated.
<TABLE>
<CAPTION>
The following table presents basic and diluted EPS for the three months and nine
months ended November 30, 1997 and 1996, computed under the provisions of SFAS
No. 128.
- ------------------------ -- -- ----- ------------------------------------ -- ----- ----
Three Months Ended November 30,
-- -- ----- ------------------------------------ -- ----- ----
1997 1996
--------- --------- --------- ---------- --------- ---------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- --------- ---------
Net earnings $80,183 $65,935
========= ==========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $80,183 107,052 $0.75 $65,935 103,135 $0.64
Effect of dilutive
stock options - 4,918 - 3,207
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $80,183 112,490 $0.71 $65,935 106,342 $0.62
========= ========= ========= ========== ========= ---------
- ------------------------ --------- --------- --------- - ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------ -- -- ----- ------------------------------------ -- ----- ----
Nine Months Ended November 30,
-- -- ----- ------------------------------------ -- ----- ----
1997 1996
--------- --------- --------- ---------- --------- ---------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- ------------------------ --------- --------- --------- --------- --------- ---------
Net earnings $259,881 $189,056
========= ==========
Basic EPS
Net earnings available
<S> <C> <C> <C> <C> <C> <C>
to common shareholders $259,881 107,111 $2.43 $189,056 102,666 $1.84
Effect of dilutive
stock options - 4,062 - 2,287
--------- --------- ---------- ---------
Diluted EPS
Net earnings available
to common shareholders $259,881 111,173 $2.34 $189,056 104,953 $1.80
========= ========= ========= ========== ========= ---------
- ------------------------ --------- --------- --------- - ---------- --------- ---------
</TABLE>
<PAGE>
Page 28
Page 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.11.1 First Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.11.2 Second Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.11.3 Third Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.20.6 Sixth Amendment to the 1991 Stock Option Plan.
10.20.7 Seventh Amendment to the 1991 Stock Option Plan.
10.21.1 First Amendment to the 1992 Stock Option Plan.
10.21.2 Second Amendment to the 1992 Stock Option Plan.
10.22.2 Second Amendment to the Amended and Restated 1993 Stock Option Plan.
11.1 Statement Regarding Computation of Per Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
27 Financial Data Schedules (included only with the electronic filing with
the SEC).
(b) Reports on Form 8-K. None
<PAGE>
Page 25
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.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: January 14, 1998
--------------------------------------
Stanford L. Kurland
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1998
--------------------------------------
Carlos M. Garcia
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
Page 26
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.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: January 14, 1997 /s/ Stanford L. Kurland
-------------------------------------
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1997 /s/ Carlos M. Garcia
-------------------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Document Description
10.11.1 First Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.11.2 Second Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.11.3 Third Amendment to the 1987 Stock Option Plan as Amended and Restated.
10.20.6 Sixth Amendment to the 1991 Stock Option Plan.
10.20.7 Seventh Amendment to the 1991 Stock Option Plan.
10.21.1 First Amendment to the 1992 Stock Option Plan.
10.21.2 Second Amendment to the 1992 Stock Option Plan.
10.22.2 Second Amendment to the Amended and Restated 1993 Stock Option Plan.
11.1 Statement Regarding Computation of Per Share Earnings.
12.1 Computation of the Ratio of Earnings to Fixed Charges.
27 Financial Data Schedules (included only with the electronic filing
with the SEC).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<DESCRIPTION>FIRST AMENDMENT TO THE 1987 STOCK OPTION PLAN
<TEXT>
<PAGE>
FIRST AMENDMENT
TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1987 STOCK OPTION PLAN AS AMENDED AND RESTATED
WHEREAS, Countrywide Credit Industries, Inc. (the "Company")previously
adopted the Countrywide Credit Industries, Inc. 1987 Stock Option Plan (the
"1987 Plan"); and
WHEREAS, the terms of the 1987 Plan were intended to
comply with Rule 16b-3 under the Securities Exchange Act of
1934; and
WHEREAS, Rule 16b-3 has been amended by the
Securities and Exchange Commission since the date of the last
amendment to the 1987 Plan; and
WHEREAS, the Board of Directors of the Company
desires to amend the 1987 Plan to comply with the new
provisions of Rule l6b-3.
NOW, THEREFORE, BE IT RESOLVED, That the 1987 Plan
be, and hereby is, amended effective this 22nd day of January,
1992 as follows:
A. Section 2(a) is amended to read in its entirety as follows:
2. ADMINISTRATION
(a) The Plan shall be administered by a committee
(the "Committee") to be appointed from time to time by the
Board of Directors of the Company (the "Board"), and the
Committee shall consist of at least two disinterested
directors within the meaning of Rule l6b-3 under the
Securities Exchange Act of 1934.
B. Section 4 is amended to read in its entirety as follows:
4. ELIGIBILITY
Options may be granted only to persons who are (i)
both directors and employees or (ii) key employees of the
Company or any subsidiary thereof; provided, however, that no
director or key employee shall be entitled to receive an
incentive stock option under the Plan unless he is an employee
of the Company or any subsidiary thereof at the time the
incentive stock option is granted; provided further, that no
individual who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the
Company, or any subsidiary of the Company, shall be eligible.
to receive an incentive stock option.
RESOLVED FURTHER, That Jack L. Bruckner, Ben M. Enis, Harley W. Snyder and
Victor R. Witt be, and hereby are, appointed to serve as the Committee to
administer the 1987 Plan.
DATED: January 22, 1992
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>SECOND AMENDMENT TO THE 1987 STOCK OPTION PLAN
<TEXT>
SECOND AMENDMENT TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1987 STOCK OPTION PLAN AS AMENDED AND RESTATED
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1987 Stock Option Plan as Amended and Restated (the "Plan") to revise
the definition of "Change of Control."
NOW, THEREFORE, Paragraph (b)(i) of Section 18 of the Plan is hereby deleted in
its entirety and the following is inserted in its place:
(i) "Change in Control" shall mean the occurrence during the term of
the Plan of any one of the following events:
(1) An acquisition (other than directly from Company)
of any common stock or other "Voting Securities"
(as hereinafter defined) of Company by any "Person"
(as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), immediately
after which such person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of twenty five percent (25%) or
more of the then outstanding shares of Company's
common stock or the combined voting power of
Company's then outstanding Voting Securities;
provided, however, in determining whether a Change
in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control.
For purposes of this Agreement, (A) "Voting
Securities" shall mean Company's outstanding voting
securities entitled to vote generally in the
election of directors and (B) a "Non-Control
Acquisition" shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part
thereof) maintained by (x) Company or (y) any
corporation or other Person of which a majority of
its voting power or its voting equity securities or
equity interest is owned, directly or indirectly,
by Company (for purposes of this definition, a
"Subsidiary"), (ii) Company or any of its
Subsidiaries, or (iii) any Person in connection
with a "Non-Control Transaction" (as hereinafter
defined);
(2) The individuals who as of September 13, 1996 are
members of the Board (the "Incumbent Board") cease
for any reason to constitute at least two-thirds of
the members of the Board; provided, however, that
if the election, or nomination for election by
Company's common stockholders, of any new director
was approved by a vote of at least two-thirds of
the Incumbent Board, such new director shall, for
purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further,
however, that no individual shall be considered a
member of the Incumbent Board if such individual
initially assumed office as a result of either an
actual or threatened "Election Contest" as
described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest; or
(3) The consummation of:
(A) A merger, consolidation or reorganization
involving Company, unless such merger,
consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control
Transaction" shall mean a merger,
consolidation or reorganization of
Company where:
(i) the stockholders of Company, immediately before such merger,
consolidation or reorganization, own directly or indirectly immediately
following such merger, consolidation or reorganization, at least seventy
percent (70%) of the combined voting power of the outstanding Voting
Securities of the corporation resulting from such merger, consolidation or
reorganization (the "Surviving Corporation") in substantially the same
proportion as their ownership of the Voting Securities immediately before
such merger, consolidation or reorganization;
(ii) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving Corporation, or in the
event that, immediately following the consummation of such transaction, a
corporation beneficially owns, directly or indirectly, a majority of the
Voting Securities of the Surviving Corporation, the board of directors of
such corporation; and
(iii) no Person other than (w) Company, (x) any Subsidiary, (y) any
employee benefit plan (or any trust forming a part thereof) maintained by
Company, the Surviving Corporation, or any Subsidiary, or (z) any Person
who, immediately prior to such merger, consolidation or reorganization had
Beneficial Ownership of twenty five percent (25%) or more of the then
outstanding Voting Securities or common stock of Company, has Beneficial
Ownership of twenty five percent (25%) or more of the combined voting power
of the Surviving Corporation's then outstanding Voting Securities or its
common stock;
(B) A complete liquidation or dissolution of Company; or
(C) The sale or other disposition of all or substantially all of the assets
of Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the
acquisition of common stock or Voting Securities by Company which, by
reducing the number of shares of common stock or Voting Securities then
outstanding, increases the proportional number of shares Beneficially
Owned by the Subject Persons; provided, however, that if a Change in
Control would occur (but for the operation of this sentence) as a
result of the acquisition of common stock or Voting Securities by
Company, and after such share acquisition by Company, the Subject
Person becomes the Beneficial Owner of any additional common stock or
Voting Securities which increases the percentage of the then
outstanding common stock or Voting Securities Beneficially Owned by the
Subject Person, then a Change in Control shall occur.
IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed
this 13th day of September, 1996.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By:_________________________
Sandor E. Samuels
Managing Director
Attest: _____________________
Gwen J. Eells
Assistant Secretary
s:\gje\1987opamend2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<DESCRIPTION>THIRD AMENDMENT TO THE 1987 STOCK OPTION PLAN
<TEXT>
AMENDMENT NUMBER THREE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1987 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF JULY 12, 1989)
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1987 Stock Option Plan, amended and restated as of July 12, 1989, and
as further amended (the "Plan"), to allow for the naming of death beneficiaries
to exercise options upon the death of an option holder so as to avoid the
inclusion of options in the option holder's probate estate and certain
jurisdictions;
NOW, THEREFORE, the Plan shall be amended as follows effective September
22, 1997. 1. Section 8(c) shall be amended in its entirety to read as
follows: (c) If an Optionee dies while a director or an employee of the
Company or any Subsidiary or within three (3) months after termination as
described in clause (a) of this Section 8 or within one (1) year after
termination as a result of Disability as described in clause (b) of this
Section 8, the Option may be exercised at any time within one (1) year
after the Optionee's death by the person or persons to whom the Optionee's
rights pass by designation pursuant to Section 21, or, absent such a
designation, by the person or persons to whom such rights under the Option
shall pass by will or by the laws of descent and distribution; provided,
however, that an Option may be ----------------- exercised to the extent,
and only to the extent, that the Option or portion thereof was exercisable
on the date of death or earlier termination.
2. Section 9 shall be amended in its entirety to read as follows: 9.
Options not Transferable. Options granted under the Plan shall, by their
terms, be nontransferable except pursuant to a beneficiary designation made
under Section 21 hereof or by will or by the laws of descent and
distribution and, during the lifetime of the person to whom an option is
granted, only the grantee or the duly appointed guardian or personal
representative of the grantee may exercise it.
3. The first sentence of Section 10 shall be amended by inserting ",
beneficiary," after "legatee" in the second line thereof.
4. A new section 21 shall be added to read as follows: 21. Designation of
Beneficiaries. The person granted an option hereunder
---------------------------- may file with the Company a written
designation of a beneficiary or beneficiaries under this Plan on a form and
in such manner as the Committee prescribes and may from time to time revoke
or change any such designation of beneficiary. Any designation of
beneficiary under the Plan shall be controlling over any other disposition,
testamentary or otherwise; provided, however, that if the Committee is in
doubt as to the entitlement of any such beneficiary to any option, the
Committee may determine to recognize only the legal representative of the
option grantee in which case the Company, the Committee and the members
thereof shall not be under any further liability to anyone.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this amendment number three
to be executed by its duly authorized officer this _______ day of September,
1997.
Countrywide Credit Industries, Inc.
By:____________________________
Sandor E. Samuels
Managing Director
Attest:
- -------------------------------
Gwen J. Eells
Assistant Secretary
LT972590.086/1+
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<DESCRIPTION>SIXTH AMENDMENT TO THE 1991 STOCK OPTION PLAN
<TEXT>
SIXTH AMENDMENT TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1991 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to amend
its 1991 Stock Option Plan (the "Plan") to revise the definition of "Change
of Control."
NOW, THEREFORE, Paragraph (f) of Section 2 of the Plan is hereby deleted in its
entirety and the following is inserted in its place:
(f) "Change in Control" shall mean the occurrence during the term
of the Plan of any one of the following events:
(1) An acquisition (other than directly from Company)
of any common stock or other "Voting Securities"
(as hereinafter defined) of Company by any "Person"
(as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), immediately
after which such person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of twenty five percent (25%) or
more of the then outstanding shares of Company's
common stock or the combined voting power of
Company's then outstanding Voting Securities;
provided, however, in determining whether a Change
in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control.
For purposes of this Agreement, (A) "Voting
Securities" shall mean Company's outstanding voting
securities entitled to vote generally in the
election of directors and (B) a "Non-Control
Acquisition" shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part
thereof) maintained by (x) Company or (y) any
corporation or other Person of which a majority of
its voting power or its voting equity securities or
equity interest is owned, directly or indirectly,
by Company (for purposes of this definition, a
"Subsidiary"), (ii) Company or any of its
Subsidiaries, or (iii) any Person in connection
with a "Non-Control Transaction" (as hereinafter
defined);
(2) The individuals who as of September 13, 1996 are
members of the Board (the "Incumbent Board") cease
for any reason to constitute at least two-thirds of
the members of the Board; provided, however, that
if the election, or nomination for election by
Company's common stockholders, of any new director
was approved by a vote of at least two-thirds of
the Incumbent Board, such new director shall, for
purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further,
however, that no individual shall be considered a
member of the Incumbent Board if such individual
initially assumed office as a result of either an
actual or threatened "Election Contest" as
described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest; or
(3) The consummation of:
(A) A merger, consolidation or reorganization
involving Company, unless such merger,
consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control
Transaction" shall mean a merger,
consolidation or reorganization of
Company where:
(i) the stockholders of Company, immediately before such merger, consolidation
or reorganization, own directly or indirectly immediately following such
merger, consolidation or reorganization, at least seventy percent (70%) of
the combined voting power of the outstanding Voting Securities of the
corporation resulting from such merger, consolidation or reorganization
(the "Surviving Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger,
consolidation or reorganization;
(ii) the individuals who were members of the Incumbent Board immediately prior
to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the
board of directors of the Surviving Corporation, or in the event that,
immediately following the consummation of such transaction, a corporation
beneficially owns, directly or indirectly, a majority of the Voting
Securities of the Surviving Corporation, the board of directors of such
corporation; and
(iii)no Person other than (w) Company, (x) any Subsidiary, (y) any employee
benefit plan (or any trust forming a part thereof) maintained by Company,
the Surviving Corporation, or any Subsidiary, or (z) any Person who,
immediately prior to such merger, consolidation or reorganization had
Beneficial Ownership of twenty five percent (25%) or more of the then
outstanding Voting Securities or common stock of Company, has Beneficial
Ownership of twenty five percent (25%) or more of the combined voting power
of the Surviving Corporation's then outstanding Voting Securities or its
common stock;
(B) A complete liquidation or dissolution of Company; or
(C) The sale or other disposition of all or substantially all of the assets of
Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the
acquisition of common stock or Voting Securities by Company which, by
reducing the number of shares of common stock or Voting Securities then
outstanding, increases the proportional number of shares Beneficially
Owned by the Subject Persons; provided, however, that if a Change in
Control would occur (but for the operation of this sentence) as a
result of the acquisition of common stock or Voting Securities by
Company, and after such share acquisition by Company, the Subject
Person becomes the Beneficial Owner of any additional common stock or
Voting Securities which increases the percentage of the then
outstanding common stock or Voting Securities Beneficially Owned by the
Subject Person, then a Change in Control shall occur.
IN WITNESS WHEREOF, the Company has caused this Sixth Amendment to be executed
this 13th day of September, 1996.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By:_________________________
Sandor E. Samuels
Managing Director
Attest: _____________________
Gwen J. Eells
Assistant Secretary
s:\gje\1991opamend6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<DESCRIPTION>SEVENTH AMENDMENT TO THE 1991 STOCK OPTION PLAN
<TEXT>
AMENDMENT NUMBER SEVEN
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1991 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1991 Stock Option Plan, as amended (the "Plan"), to allow for the
naming of death beneficiaries to exercise options upon the death of an option
holder so as to avoid the inclusion of options in an option holder's probate
estate in certain jurisdictions;
NOW, THEREFORE, the Plan shall be amended as follows, effective September
22, 1997:
1. The first sentence of Section 7(a) shall be amended to read as follows: (a)
Non-transferability. No Option granted hereunder shall be transferable by
the Optionee to whom granted otherwise than pursuant to a beneficiary
designation made under Section 14(d) hereof or by will or the laws of
descent and distribution, and an Option may be exercised during the
lifetime of such Optionee only by the Optionee or his or her guardian or
legal representative.
2. Section 7(d)(4) shall be amended in its entirety to read as follows: (4) If
an Optionee dies while a director or an employee of the Company or any
Subsidiary or within three (3) months after termination as described in
clause (1) of this Section 7(d) or within one (1) year after termination as
a result of Disability as described in clause (2) of this Section 7(d), the
Option may be exercised at any time within one (1) year after the
Optionee's death by the person or persons to whom the Optionee's rights
pass by designation pursuant to Section 14(d), or, absent such a
designation, by the person or persons to whom such rights under the Option
shall pass by will or by the laws of descent and distribution; provided,
however, that an Option may be exercised to the extent, and only to the
extent, that the Option or portion thereof was exercisable on the date of
death or earlier termination.
3. New Sections 14(c) and (d) shall be added
to read as follows:
(c) Effect of Death. In the event of the death of any Optionee hereunder, the
term "Optionee" as used hereunder shall thereafter be deemed to refer to
the beneficiary or beneficiaries designated pursuant to Section 14(d)
hereof or if no such designation is in effect, the person to whom the
Optionee's rights pass by will or applicable law, or, if no such person has
such right, the executor or administrator of the estate of such Optionee.
(d) Designation of Beneficiaries. An Optionee hereunder may file with
---------------------------- the Company a written designation of a
beneficiary or beneficiaries under this Plan on a form and in such manner
as the Committee prescribes and may from time to time revoke or amend any
such designation. Any designation of beneficiary under the Plan shall be
controlling over any other disposition, testamentary or otherwise;
provided, however that if the Committee is in doubt as to the entitlement
of any such beneficiary to any Option, the Committee may determine to
recognize only the legal representative of the Optionee in which case the
Company, the Committee and the members thereof shall not be under any
further liability to anyone.
IN WITNESS WHEREOF, the Company has caused this amendment
number seven to be executed by its duly authorized officer this _______ day of
September, 1997.
Countrywide Credit Industries, Inc.
By:____________________________
Sandor E. Samuels
Managing Director
Attest:
- -------------------------------
Gwen J. Eells
Assistant Secretary
LT972590.088/1+
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<DESCRIPTION>FIRST AMENDMENT TO THE 1992 STOCK OPTION PLAN
<TEXT>
FIRST AMENDMENT TO THE
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1992 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1992 Stock Option Plan (the "Plan") to revise the definition
of "Change of Control."
NOW, THEREFORE, Paragraph (f) of Section 2 of the Plan is hereby deleted in its
entirety and the following is inserted in its place:
(f) "Change in Control" shall mean the occurrence during the term of
the Plan of any one of the following events:
(1) An acquisition (other than directly from Company)
of any common stock or other "Voting Securities"
(as hereinafter defined) of Company by any "Person"
(as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), immediately
after which such person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of twenty five percent (25%) or
more of the then outstanding shares of Company's
common stock or the combined voting power of
Company's then outstanding Voting Securities;
provided, however, in determining whether a Change
in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control.
For purposes of this Agreement, (A) "Voting
Securities" shall mean Company's outstanding voting
securities entitled to vote generally in the
election of directors and (B) a "Non-Control
Acquisition" shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part
thereof) maintained by (x) Company or (y) any
corporation or other Person of which a majority of
its voting power or its voting equity securities or
equity interest is owned, directly or indirectly,
by Company (for purposes of this definition, a
"Subsidiary"), (ii) Company or any of its
Subsidiaries, or (iii) any Person in connection
with a "Non-Control Transaction" (as hereinafter
defined);
(2) The individuals who as of September 13, 1996 are
members of the Board (the "Incumbent Board") cease
for any reason to constitute at least two-thirds of
the members of the Board; provided, however, that
if the election, or nomination for election by
Company's common stockholders, of any new director
was approved by a vote of at least two-thirds of
the Incumbent Board, such new director shall, for
purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further,
however, that no individual shall be considered a
member of the Incumbent Board if such individual
initially assumed office as a result of either an
actual or threatened "Election Contest" as
described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest; or
(3) The consummation of:
(A) A merger, consolidation or reorganization
involving Company, unless such merger,
consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control
Transaction" shall mean a merger,
consolidation or reorganization of
Company where:
(i) the stockholders of Company, immediately before such merger,
consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or reorganization, at
least seventy percent (70%) of the combined voting power of the
outstanding Voting Securities of the corporation resulting from such
merger, consolidation or reorganization (the "Surviving Corporation")
in substantially the same proportion as their ownership of the Voting
Securities immediately before such merger, consolidation or
reorganization;
(ii) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving Corporation, or in
the event that, immediately following the consummation of such
transaction, a corporation beneficially owns, directly or indirectly,
a majority of the Voting Securities of the Surviving Corporation, the
board of directors of such corporation; and
(iii)no Person other than (w) Company, (x) any Subsidiary, (y) any
employee benefit plan (or any trust forming a part thereof) maintained
by Company, the Surviving Corporation, or any Subsidiary, or (z) any
Person who, immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of twenty five percent (25%)
or more of the then outstanding Voting Securities or common stock of
Company, has Beneficial Ownership of twenty five percent (25%) or more
of the combined voting power of the Surviving Corporation's then
outstanding Voting Securities or its common stock;
(B) A complete liquidation or dissolution of Company; or
(C) The sale or other disposition of all or substantially all of the
assets of Company to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the
acquisition of common stock or Voting Securities by Company which, by
reducing the number of shares of common stock or Voting Securities
then outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Persons; provided, however, that if
a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of common stock or Voting
Securities by Company, and after such share acquisition by Company,
the Subject Person becomes the Beneficial Owner of any additional
common stock or Voting Securities which increases the percentage of
the then outstanding common stock or Voting Securities Beneficially
Owned by the Subject Person, then a Change in Control shall occur.
IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed
this 13th day of September, 1996.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
By:_________________________
Sandor E. Samuels
Managing Director
Attest: _____________________
Gwen J. Eells
Assistant Secretary
s:\gje\1992opamend1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<DESCRIPTION>SECOND AMENDMENT TO THE 1992 STOCK OPTION PLAN
<TEXT>
AMENDMENT NUMBER TWO
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1992 STOCK OPTION PLAN
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1992 Stock Option Plan, as amended (the "Plan"), to add further
provisions to clarify the procedure in the Plan allowing for the naming of death
beneficiaries to exercise options upon the death of an option holder so as to
avoid the inclusion of options in an option holder's probate estate in certain
jurisdiction.
NOW, THEREFORE, the Plan shall be amended as follows effective September
22, 1997:
1. The first sentence of Section 5(f) shall be amended in its entirety to
read as follows:
No Option granted hereunder shall be transferable by the Optionee to whom
granted otherwise then pursuant to a beneficiary designation made
under Section 12(c) hereof or by will or the laws of descent and
distribution, and an Option may be exercised during the lifetime of
such Optionee only by the Optionee or his or her guardian or legal
representative.
2. Section 5(i)(4) shall be amended in its entirety to read as follows:
(4) If an Optionee dies while an employee of the Company or any
Subsidiary or within three (3) months after termination as described
in clause (1) of this Section 5(i) or within one (1) year after
termination as a result of Disability as described in clause (2) of
this Section 5(i), the Option may be exercised at any time within one
(1) year after the Optionee's death by the person or persons to whom
the Optionee's rights pass by designation pursuant to Section 12(c),
or, absent such a designation, by the person or persons to whom such
rights under the Option shall pass by will or by the laws of descent
and distribution; provided, however, that an Option may be exercised
to the extent, and only to the extent, that the Option or portion
thereof was exercisable on the date of death or earlier termination.
3. A new Section 12(d) shall be added to read as follows: (d) Effect of
Death. In the event of the death of any Optionee hereunder, the term
"Optionee" as used hereunder shall thereafter be deemed to refer to
the beneficiary of beneficiaries designated pursuant to Section 12(c)
hereof, or if no such designation is in effect, the person to whom the
Optionee's rights pass by will or applicable law, or, if no such
person has such right, the executor or administrator of the estate of
such Optionee.
IN WITNESS WHEREOF, the Company has caused this first amendment to be
executed by its duly authorized officer this ____ day of September, 1997.
Countrywide Credit Industries, Inc.
By:____________________________
Sandor E. Samuels
Managing Director
Attest:
- -------------------------------
Gwen J. Eells
Assistant Secretary
LT972590.090/1+
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<DESCRIPTION>SECOND AMENDMENT TO THE 1993 STOCK OPTION PLAN
<TEXT>
AMENDMENT NUMBER TWO
COUNTRYWIDE CREDIT INDUSTRIES, INC.
1993 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF MARCH 27, 1996)
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend its 1993 Stock Option Plan, amended and restated as of March 27, 1996 (the
"Plan"), to allow for the naming of death beneficiaries to exercise options upon
the death of an Optionee so as to avoid the inclusion of options in an
optionee's probate estate in certain jurisdictions;
NOW, THEREFORE, the Plan shall be amended as follows effective September
10, 1997:
1. The first sentence of Section 7(a) shall be amended to read as
follows:
(a) Non-transferability. No option granted hereunder shall be transferred
by the Optionee to whom granted otherwise then pursuant to a
beneficiary designation made under Section 14(d) hereof or by will or
the laws of descent and distribution, and an Option may be exercised
during the lifetime of such Optionee only by the Optionee or his or
her guardian or legal representative.
2. Section 7(d)(4) shall be amended in its entirety to read as follows:
(4) If an Optionee dies while a director or an employee of the Company
or any Subsidiary or within three (3) months after termination as
described in clause (1) of this Section 7(d) or within one (1) year
after termination as a result of Disability as described in clause (2)
of this Section 7(d), the Option may be exercised at any time within
one (1) year after the Optionee's death by the person or persons to
whom the Optionee's rights pass by designation pursuant to Section
14(d), or, absent such a designation, by the person or persons to whom
such rights under the Option shall pass by will or by the laws of
descent and distribution; provided, however, that an Option may be
exercised to the extent, and only to the extent, that the Option or
portion thereof was exercisable on the date of death or earlier
termination.
3. New Sections 14(c) and (d) shall be added to read as follows:
(c) Effect of Death. In the event of the death of any Optionee hereunder,
the term "Optionee" as used hereunder shall thereafter be deemed to
refer to the beneficiary or beneficiaries designated pursuant to
Section 14(d) hereof or if no such designation is in effect, the
person to whom the Optionee's rights pass by will or applicable law,
or, if no such person has such right, the executor or administrator of
the estate of such Optionee.
(d) Designation of Beneficiaries. An Optionee hereunder may file with the
Company a written designation of a beneficiary or beneficiaries under
this Plan and may from time to time revoke or amend any such
designation. Any designation of beneficiary under the Plan shall be
controlling over any other disposition, testamentary or otherwise;
provided, however that if the Committee is in doubt as to the
entitlement of any such beneficiary to any
<PAGE>
Option, the Committee may determine to recognize only the legal
representative of the Optionee in which case the Company, the
Committee and the members thereof shall not be under any further
liability to anyone.
IN WITNESS WHEREOF, the Company has caused this second amendment to be
executed by its duly authorized officer this ____ day of September, 1997.
Countrywide Credit Industries, Inc.
By:____________________________
Sandor E. Samuels
Managing Director
Attest:
- -------------------------------
Gwen J. Eells
Assistant Secretary
LT972510.092/2+
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>10
<DESCRIPTION>STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TEXT>
<TABLE>
<CAPTION>
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Nine Months
Ended November 30,
1997 1996
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Primary
<S> <C> <C>
Net earnings applicable to common stock $259,881 $189,056
================ =================
Average shares outstanding 107,111 102,666
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 4,062 2,287
---------------- -----------------
Total average shares 111,173 104,953
================ =================
Per share amount $2.34 $1.80
================ =================
Fully diluted
Net earnings applicable to common stock $259,881 $189,056
================ =================
Average shares outstanding 107,111 102,665
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 5,608 3,401
---------------- -----------------
Total average shares 112,719 106,066
================ =================
Per share amount $2.31 $1.78
================ =================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>11
<DESCRIPTION>COMP. OF THE RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<TABLE>
<CAPTION>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the nine months ended November 30, 1997 and 1996 and for the five
fiscal years ended February 29(28), 1997 computed by dividing net fixed charges
(interest expense on all debt plus the interest element (one-third) of operating
leases) into earnings (income before income taxes and fixed charges).
Nine Months Ended
November 30, Fiscal Years Ended February 29(28),
------------------------- ------------------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $259,881 $189,056 $257,358 $195,720 $ 88,407 $179,460 $140,073
Income tax expense 166,154 120,872 164,540 130,480 58,938 119,640 93,382
Interest charges 291,935 230,547 316,705 281,573 205,464 219,898 128,612
Interest portion of rental
expense 2,703 5,486 7,420 6,803 7,379 6,372 4,350
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $720,676 $545,961 $746,023 $614,576 $360,188 $525,370 $366,417
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $291,935 $230,547 $316,705 $281,573 $205,464 $219,898 $128,612
Interest portion of rental
expense 2,703 5,486 7,420 6,803 7,379 6,372 4,350
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $294,638 $236,033 $324,125 $288,376 $212,843 $226,270 $132,962
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 2.45 2.31 2.30 2.13 1.69 2.32 2.76
============ ============ ============= ============ ============= ============ ============
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>12
<DESCRIPTION>ART.5 FDS FOR 3RD QUARTER 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> Nov-30-1997
<CASH> 17,438
<SECURITIES> 0
<RECEIVABLES> 1,745,250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 341,709
<DEPRECIATION> 124,930
<TOTAL-ASSETS> 11,314,415
<CURRENT-LIABILITIES> 0
<BONDS> 3,651,500
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 5,397
<OTHER-SE> 1,922,495
<TOTAL-LIABILITY-AND-EQUITY> 11,314,415
<SALES> 0
<TOTAL-REVENUES> 1,098,942
<CGS> 0
<TOTAL-COSTS> 672,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 426,035
<INCOME-TAX> 166,154
<INCOME-CONTINUING> 259,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,881
<EPS-PRIMARY> 2.34
<EPS-DILUTED> 2.31
<FN> Total revenues includes $291,935 of interest expense
related to mortgage loan activities.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| CLX | https://www.sec.gov/Archives/edgar/data/21076/0000021076-98-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
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MIC-Info: RSA-MD5,RSA,
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FQVKzNXCoeOcdnZXTUVlVg==
<SEC-DOCUMENT>0000021076-98-000003.txt : 19980217
<SEC-HEADER>0000021076-98-000003.hdr.sgml : 19980217
ACCESSION NUMBER: 0000021076-98-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CLOROX CO /DE/
CENTRAL INDEX KEY: 0000021076
STANDARD INDUSTRIAL CLASSIFICATION: SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS [2842]
IRS NUMBER: 310595760
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-07151
FILM NUMBER: 98534604
BUSINESS ADDRESS:
STREET 1: THE CLOROX COMPANY
STREET 2: 1221 BROADWAY
CITY: OAKLAND
STATE: CA
ZIP: 94612-1888
BUSINESS PHONE: 510-271-7000
MAIL ADDRESS:
STREET 1: P.O. BOX 24305
CITY: OAKLAND
STATE: CA
ZIP: 94612-1305
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q TEXT
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-07151
-------
THE CLOROX COMPANY
- ---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-0595760
- ---------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1221 Broadway - Oakland, California 94612 - 1888
- ---------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, (510)-271-7000
(including area code)
- ---------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
(Former name, former address and former fiscal year, if changed
since last report) Indicate by check mark whether the registrant
(1) has filed all report required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of December 31, 1997 there were 103,402,995 shares outstanding of
the registrant's common stock (par-value - $1.00), the registrant's
only outstanding class of stock.
Total pages 9 1
THE CLOROX COMPANY
PART 1. Financial Information Page No.
Item 1. Financial Statements
Condensed Statements of Consolidated Earnings
Six Months Ended December 31, 1997 and 1996 3
Condensed Consolidated Balance Sheets
December 31, 1997 and June 30, 1997 4
Condensed Statements of Consolidated Cash Flows
Six Months Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-10
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Earnings
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
12/31/97 12/31/96 12/31/97 12/31/96
----------- ----------- ------------ ------------
<C> <S> <S> <S> <S>
Net Sales $ 591,795 $ 530,215 $ 1,241,079 $ 1,120,988
Costs and Expenses
Cost of products sold 258,189 235,626 537,883 492,987
Selling, delivery and
administration 139,789 120,439 270,188 237,033
Advertising 83,408 80,910 174,952 169,884
Research and
development 13,007 11,532 24,613 22,030
Interest expense 19,414 11,745 34,908 22,242
Other income, net (3,131) (2,986) (4,490) (4,959)
----------- ----------- ------------ ------------
Total costs and
expenses 510,676 457,266 1,038,054 939,217
----------- ----------- ------------ ------------
Earnings before
Income Taxes 81,119 72,949 203,025 181,771
Income Taxes 31,636 29,034 79,179 72,346
----------- ----------- ------------ ------------
Net Earnings $ 49,483 $ 43,915 $ 123,846 $ 109,425
=========== =========== ============ ============
Earnings per Common
Share
Basic $ 0.48 $ 0.42 $ 1.20 $ 1.06
Diluted 0.47 0.42 1.17 1.04
Weighted Average Shares
Outstanding
Basic 103,393 103,369 103,305 103,231
Diluted 105,429 105,051 105,427 104,979
Dividends per Share $ 0.32 $ 0.29 $ 0.64 $ 0.58
See Notes to Condensed Consolidated Financial Statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
12/31/97 6/30/97
------------- -----------
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and short-term investments $ 50,898 $ 101,046
Accounts receivable, less allowance 345,459 356,996
Inventories 219,711 170,340
Prepaid expenses 42,936 22,534
Deferred income taxes 21,107 22,581
------------- -----------
Total current assets 680,111 673,497
Property, Plant and Equipment - Net 570,811 570,645
Brands, Trademarks, Patents and Other Intangibles 1,204,187 1,186,951
Investments in Affiliates 95,678 93,004
Other Assets 280,957 253,855
------------- -----------
Total $ 2,831,744 $ 2,777,952
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 116,842 $ 143,360
Accrued liabilities 249,390 358,785
Short-term debt 410,551 369,973
Income taxes payable 24,108 17,049
Current maturities of long-term debt 45 3,551
------------- -----------
Total current liabilities 800,936 892,718
Long-term Debt 702,185 565,926
Other Obligations 122,025 112,539
Deferred Income Taxes 155,352 170,723
Share Repurchase Obligations 54,848 -
Stockholders' Equity
Common stock 110,845 110,844
Additional paid-in capital 71,746 66,803
Retained earnings 1,267,787 1,207,524
Treasury shares, at cost (365,893) (289,075)
Cumulative translation adjustments and other (88,087) (60,050)
------------- -----------
Stockholders' Equity 996,398 1,036,046
Total $ 2,831,744 $ 2,777,952
============= ===========
See Notes to Condensed Consolidated Financial Statements. 4
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
12/31/97 12/31/96
---------- ----------
<S> <C> <C>
Operations:
Net earnings $ 123,846 109,425
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 65,005 59,783
Deferred income taxes 2,855 2,146
Other (2,669) 5,303
Effects of changes in:
Accounts receivable 13,523 43,710
Inventories (48,726) (41,838)
Prepaid expenses 4,597 (7,285)
Accounts payable (26,909) (52,574)
Accrued liabilities (82,589) 19,194
Income taxes payable 1,221 817
---------- ----------
Net cash provided by operations 50,154 138,681
Investing Activities:
Property, plant and equipment (39,681) (37,403)
Disposal of property, plant and equipment 1,686 1,921
Businesses purchased (80,120) (452,788)
Other (48,468) (23,386)
---------- ----------
Net cash used for investment (166,583) (511,656)
---------- ----------
Financing Activities:
Short-term borrowing 13,407 7,671
Short-term debt repayments (161,719) -
Long-term borrowings 193,736 438,196
Long-term debt and other obligations repayments (61,525) (4,637)
Commercial paper, net 186,451 (16,548)
Cash dividends (65,999) (59,868)
Treasury stock purchased (33,815) (11,752)
Employee stock plans and other (4,255) 9,996
---------- ----------
Net cash provided by financing 66,281 363,058
---------- ----------
Net Decrease in Cash and Short-Term Investments (50,148) (9,917)
Cash and Short-Term Investments:
Beginning of period 101,046 90,828
---------- ----------
End of period $ 50,898 $ 80,911
========== ==========
See Notes to Condensed Financial Statements 5
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(1) The summarized financial information for the three and six
months ended December 31, 1997 and 1996 has not been audited,
but in the opinion of management, includes all adjustments
(consisting only of normal recurring accruals) necessary for a
fair presentation of the results of operations, financial
position, and cash flows of The Clorox Company and subsidiaries
(the Company). The results of the three and six months ended
December 31, 1997 and 1996 should not be considered as
necessarily indicative of the results for the entire year.
(2) Inventories at December 31, 1997 and at June 30, 1997
consisted of (in thousands):
12/31/97 6/30/97
-------- -------
Finished goods and work in process $143,587 $109,189
Raw materials and supplies 76,124 61,151
-------- --------
Total $219,711 $170,340
(3) International businesses purchased for the six months ended
December 31, 1997 totaling $80,120,000 were funded using a
combination of cash and long-term borrowings and were accounted
for as purchases.
Acquisitions for the six months ended December 31, 1996 totaled
$452,788,000 and included the Armor All Products Corporation for
$360,144,000. The acquisition occurred on December 31, 1996.
Other businesses purchased included the Shell Group's non-core line
of household products in Chile, the Pinoluz brand of pine cleaner
in Argentina, and the Limpido brand of liquid bleach and an
increase in ownership in Tecnoclor, S.A. both in Colombia.
These acquisitions were accounted for as purchases and were funded
from cash provided by operations, long-term borrowings and
commercial paper.
(4) The Company entered into two share repurchase transactions
during the second quarter of fiscal 1998 whereby Clorox contracted
for the future delivery of 400,000 shares of Clorox stock on
October 27, 2000 and 400,000 shares of Clorox stock on October 23,
2002. The specified strike prices are $68.50 and $68.62 per share.
The aggregate redemption cost of $54,848,000 has been classified
as share repurchase obligations with a corresponding increase in
treasury stock at December 31, 1997. The Company paid a premium
of $13,193,000 on this transaction which has been recorded as
treasury stock and at maturity will become part of the basis in
the repurchased shares.
6
(5) Impact of New Accounting Standard
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
("SFAS 128"), Earnings per Share. SFAS 128 requires dual
presentation of basic EPS and diluted EPS on the face of all
earnings statements issued after December 15, 1997 for all
entities with complex capital structures. Basic earnings per
share is computed by dividing net earnings by the weighted
average number of common shares outstanding each period. Diluted
earnings per share are computed by dividing net earnings by the
diluted weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options,
restricted stock, warrants and other convertible securities.
The weighted average number of shares outstanding (denominator)
used to calculate basic earnings per share is reconciled to those
used in calculating diluted earnings per share as follows:
<TABLE>
<CAPTION>
Weighted Average Number
of Shares Outstanding
----------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------- --------------------------
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic 103,393 103,369 103,305 103,231
Stock options 1,987 1,661 2,073 1,727
Other 49 21 49 21
-------- -------- -------- --------
Diluted 105,429 105,051 105,427 104,979
======== ======== ======== ========
</TABLE>
(6) Stock Split
On July 15, 1997, the Company's Board of Directors authorized
a 2-for-1 split of its common stock effective September 2, 1997,
in the form of a stock dividend for stockholders of record at the
close of business on July 28, 1997. All share and per share amounts
in the accompanying consolidated financial statements have been
restated to give effect to the stock split.
7
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
Comparison of the Three Months Ended December 31, 1997
with the Three Months Ended December 31, 1996
Basic earnings per share increased 13 percent to 48 cents from 42
cents a year ago and net earnings increased 13 percent to
$49,483,000 from $43,915,000. Earnings per share reflect a
2-for-1 stock split on September 2, 1997. Growth in earnings
and net sales were driven by a 13 percent volume increase.
Net sales increased 12 percent to $591,795,000 and lagged
slightly compared to the volume increase due to price
reductions on certain products as well as a change in the
overall product mix. Armor All and other acquisitions
contributed 6 percent to volume growth with the remainder due
to growth in base businesses. Domestic brands having record
shipments and contributing to quarterly growth include
Clorox 2, bottled Hidden Valley Ranch, KC Masterpiece barbecue
sauces, Brita water filtration systems and Match Light instant
lighting charcoal briquets. Clorox liquid bleach shipments
decreased slightly following a record first quarter reflecting
a price increase effective early in October. The insecticides
businesses experienced a quarter and a year-to-date volume
decline due to weather conditions and overall category
softness. Shipments in our international business increased
22 percent of which approximately half was from base
businesses and the remainder from acquisitions. The effect
of negative currency issues in Korea and Southeast Asia were
not material and we anticipate that further declines will not
materially effect our full year international results.
Cost of goods sold as a percentage of net sales was 43.6 and
44.4 percent in the current and year ago quarters,
respectively. The improvement reflects the impact of various
cost savings efforts across business units and improvement in
our Latin America businesses where economies of scale are
being achieved through acquisitions, and consolidation of
production activities.
Selling, delivery, and administration expense increased 16
percent over the year ago period due to continued investment
in international infrastructure, increased investment in
information technology and expenses related to integrating
Armor All. Advertising expense increased slightly over the
year ago period when spending was extremely high due to heavy
new product introduction late in the second quarter. We
anticipate that for the full year advertising expense will
increase in line with or slightly ahead of sales.
Interest expense increased $7,669,000 versus the year ago
period principally due to the prior year's acquisition activity.
8
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Results of Operations
Comparison of the Six Months Ended December 31, 1997
with the Six Months Ended December 31, 1996
Basic earnings per share increased 13 percent to $1.20 from $1.06
and net earnings increased 13 percent to $123,846,000 from
$109,425,000 a year ago principally due to an 11 percent increase
in net sales driven by a 12 percent increase in volume. Record
shipments were recorded by Match Light instant lighting charcoal
briquets and KC masterpiece barbecue sauces. Clorox liquid
bleach was up for the six months despite a slight decrease in
the second quarter. Shipments in our international businesses
increased 24 percent of which approximately half was from base
businesses and the remainder from acquisitions.
Cost of goods sold as a percentage of sales was 43.3 and 44.0 in
the current and year ago periods respectively. We anticipate
gross margins for the full year to be slightly favorable compared
to the prior fiscal year.
Selling, delivery and administration expense increased 14
percent due to continued investment in international infrastructure,
increased investment in information technology and expenses
related to integrating Armor All. Advertising expense increased
over the year ago period. For the full year we anticipate
advertising expense will increase in line with or slightly ahead
of sales.
Interest increased $12,666,000 versus the year ago period
principally due to the prior year's acquisition activity.
Income tax expense as a percent of pretax earnings declined from
39.8 percent to 39 percent principally due to an increasing share
of earnings from International operations located in countries
with lower statutory tax rates.
9
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources
The Company's financial position and liquidity remain strong. The
increase in inventories reflect normal seasonal variations,
principally due to the charcoal and insecticides business. The
reduction in accounts payable and accrued liabilities from June 30,
1997 is due in part to seasonality and higher levels of
advertising and sales promotion activities in our domestic
household products businesses recorded at June 30, 1997.
Increases in commercial paper borrowings and additional
long-term debt were used to supplement cash provided by
operations to fund acquisitions, the increase in other assets
and the share repurchase program.
Acquisitions since June 30, 1997 totaled $80,120,000 and were
financed using a combination of cash provided by operations
and long-term borrowings. These acquisitions included an
additional investment in Mexico, the Clorosul bleach business
in Brazil and two smaller acquisitions in Southeast Asia and
Australia.
In September 1996, the Board of Directors authorized a share
repurchase program to offset the dilutive effect of employee
stock option exercises. The Company expects to issue between
400,000 and 500,000 shares of stock each year pursuant to its
stock based compensation plan and intends to repurchase
approximately the number of shares issued over time subject to
market conditions and business opportunities which may arise.
During the six month period ended December 31, 1997, 280,000
shares at a cost of $20,622,000 were reacquired. As part of
the repurchase program the Company entered into two transactions
for the future delivery of 400,000 shares of Clorox stock on
October 27, 2000 and 400,000 shares of Clorox stock on October 23,
2002. The aggregate redemption cost is $54,848,000 and the Company
paid a premium of $13,193,000 on the transaction.
The Company has approved the use of interest rate derivative
instruments such as interest rate swaps in order to manage the
impact of interest rate movements on interest expense. These
instruments have the effect of converting fixed rate interest to
floating, or floating to fixed. The conditions under which
derivatives can be used are set forth in a Company Policy Statement
and include a restriction on the amount of such activity to a
designated portion of existing debt, a limit on the term of any
derivative transaction, and a specific prohibition on the use of
any leveraged derivatives. In September 1997, the Company
refinanced $192 million in commercial paper by entering into a
Sterling denominated financing arrangement with Abbey National
Bank. The Arrangement has a final maturity of April 2002. The
Company entered into a series of swaps with notional amounts
totaling $192 million to eliminate foreign currency exposure risk
generated by this Sterling denominated obligation. The swaps
effectively convert the Company's 5.7% fixed rate sterling
obligation to a floating U.S. dollar rate of Libor less 147
basis points or 4.25% at December 31, 1997.
Management believes the Company has access to additional capital
through existing lines of credit and from public and private
sources should the need arise.
The foregoing Management's Discussion and Analysis contains
"forward-looking" statements under applicable securities laws.
The Company cautions readers that actual results might differ
materially from those projected depending on a number of economic
and competitive risk factors. For a discussion of such risk
factors, the Company refers readers to the Company's Form 10-K
Current Report which was filed on September 25, 1997.
10
S I G N A T U R E
-----------------
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.
THE CLOROX COMPANY
------------------
(Registrant)
DATE February 12, 1998 BY /s/HENRY J. SALVO, JR.
----------------- ----------------------
Henry J. Salvo, Jr.
Vice-President - Controller
</TEXT>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997,
AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FOR SUCH PERIOD, AND IS QUALIFED
IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
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|
1998 | 0QTR1
| COMS | https://www.sec.gov/Archives/edgar/data/738076/0000738076-98-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000738076-98-000003.txt : 19980114
<SEC-HEADER>0000738076-98-000003.hdr.sgml : 19980114
ACCESSION NUMBER: 0000738076-98-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980113
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: 3COM CORP
CENTRAL INDEX KEY: 0000738076
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 942605794
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-12867
FILM NUMBER: 98505403
BUSINESS ADDRESS:
STREET 1: 5400 BAYFRONT PLZ
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8145
BUSINESS PHONE: 4087645000
MAIL ADDRESS:
STREET 1: 5400 BAYFRONT PLAZA
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8145
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
______________________________________________________________
United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
Quarterly report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the Quarterly Period Ended November 30, 1997 Commission File No. 0-12867
or
Transition report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the transition period from to
____________
3Com Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Bayfront Plaza 95052
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (408) 764-5000
Former name, former address and former fiscal year, if changed
since last report: N/A
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ....XX.... No ..........
As of November 30, 1997, 354,562,107 shares of the Registrant's
Common Stock were outstanding.
This report contains a total of 27 pages of which this page is
number 1.
______________________________________________________________
3Com Corporation
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Three and Six Months Ended November 30, 1997 and 1996
Consolidated Balance Sheets
November 30, 1997 and May 31, 1997
Consolidated Statements of Cash Flows
Six Months Ended November 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
3Com, AccessBuilder and U.S. Robotics are registered
trademarks of 3Com Corporation or its subsidiaries.
CoreBuilder, HiPer, Total Control, and x2 are trademarks of
3Com Corporation or its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3Com Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Sales $1,220,253 $1,421,660 $2,821,115 $2,671,720
Cost of sales 651,094 738,252 1,483,902 1,395,649
--------- --------- --------- ---------
Gross margin 569,159 683,408 1,337,213 1,276,071
--------- --------- --------- ---------
Operating expenses:
Sales and marketing 337,594 243,893 638,901 449,350
Research and development 145,491 107,388 287,608 205,504
General and administrative 70,507 55,256 133,096 102,565
Purchased research and
development - 54,000 - 54,000
Merger-related charges and other - 6,600 426,000 6,600
--------- --------- --------- ---------
Total operating expenses 553,592 467,137 1,485,605 818,019
--------- --------- --------- ---------
Operating income (loss) 15,567 216,271 (148,392) 458,052
Interest and other income, net 7,637 4,133 10,598 7,106
--------- --------- --------- ---------
Income (loss) before income taxes 23,204 220,404 (137,794) 465,158
Income tax provision (benefit) 8,121 101,363 (6,057) 191,247
--------- --------- --------- ---------
Net income (loss) $ 15,083 $ 119,041 $ (131,737) $ 273,911
========= ========= ========= =========
Net income (loss) per common
and equivalent share:
Primary $ 0.04 $ 0.34 $ (0.37) $ 0.78
Fully diluted $ 0.04 $ 0.34 $ (0.37) $ 0.77
========= ========= ========= =========
Shares used in computing per share
amounts:
Primary 365,085 353,657 353,529 352,814
Fully diluted 365,105 355,158 353,539 353,772
========= ========= ========= =========
See notes to consolidated financial statements.
3Com Corporation
Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
November 30, May 31,
1997 1997
---- ----
Current assets:
Cash and equivalents $ 539,748 $ 401,125
Short-term investments 596,062 538,706
Accounts receivable, net 927,504 1,234,227
Inventories, net 628,974 402,356
Deferred income taxes 296,337 165,731
Other 111,289 94,419
--------- ---------
Total current assets 3,099,914 2,836,564
Property and equipment, net 743,195 723,962
Deposits and other assets 80,093 112,644
--------- ---------
Total assets $3,923,202 $3,673,170
========= =========
Current liabilities:
Short-term debt $ 110,000 $ 60,700
Accounts payable 327,862 345,304
Other accrued liabilities 878,944 477,393
Income taxes payable 22,533 212,416
--------- ---------
Total current liabilities 1,339,339 1,095,813
Long-term obligations 46,717 170,457
Deferred income taxes 60,685 25,858
Stockholders' equity:
Preferred stock, no par value, 10,000 shares
authorized; none outstanding - -
Common stock, $.01 par value, 990,000 shares
authorized; shares outstanding: November 30, 1997:
354,562; May 31, 1997: 334,558 1,564,586 1,178,359
Retained earnings 917,755 1,209,861
Unrealized gain on investments, net 536 2,320
Unamortized restricted stock grants (4,912) (5,165)
Accumulated translation adjustments (1,504) (4,333)
--------- ---------
Total stockholders' equity 2,476,461 2,381,042
--------- ---------
Total liabilities and stockholders' equity $3,923,202 $3,673,170
========= =========
See notes to consolidated financial statements.
3Com Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
November 30,
----------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (131,737) $ 273,911
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 107,009 90,266
Deferred income taxes (113,642) (1,552)
Pooling of interests: OnStream - 4,850
U.S. Robotics (139,685) 71,632
Purchased research and development - 54,000
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 306,723 (325,432)
Inventories (265,218) 12,682
Other current assets (20,630) (24,056)
Accounts payable (17,442) 50,246
Other accrued liabilities 142,794 66,294
Income taxes payable (39,524) 133,747
Merger-related reserves 426,000 -
--------- ---------
Net cash provided by operating activities 254,648 406,588
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (269,631) (225,283)
Proceeds from short-term investments 209,603 191,458
Purchase of property and equipment (193,041) (219,389)
Business acquired in purchase transaction - (66,547)
Other, net (25,418) (32,866)
--------- ---------
Net cash used for investing activities (278,487) (352,627)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 234,110 48,237
Repayments of long-term obligations (71,704) (1,272)
Proceeds from long-term obligations - 32,500
Other, net 56 (44)
--------- ---------
Net cash provided by financing activities 162,462 79,421
--------- ---------
Increase in cash and equivalents 138,623 133,382
Cash and equivalents, beginning of period 401,125 233,573
--------- ---------
Cash and equivalents, end of period $ 539,748 $ 366,955
========= =========
Non-cash financing and investing activities:
Tax benefit on stock option transactions $ 131,351 $ 73,554
========= =========
Unrealized gain (loss) on investments, net $ (1,784) $ 1,923
========= =========
See notes to consolidated financial statements.
3Com Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation
On June 12, 1997, 3Com Corporation (the Company)
completed the merger with U.S. Robotics Corporation (U.S.
Robotics), which was accounted for as a pooling-of-
interests. All financial data of the Company, including
the Company's previously issued financial statements for
the periods presented in this Form 10-Q, have been
restated to include the historical financial information
of U.S. Robotics in accordance with generally accepted
accounting principles and pursuant to Regulation S-X.
The unaudited consolidated financial statements have
been prepared by the Company and include the accounts of
the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have
been eliminated. In the opinion of management, these
unaudited consolidated financial statements include all
adjustments necessary for a fair presentation of the
Company's financial position as of November 30, 1997, and
the results of operations and cash flows for the three
and six months ended November 30, 1997 and 1996.
On June 1, 1997, the Company adopted a 52-53 week
fiscal year ending on the Sunday nearest to May 31, which
for fiscal 1998 will be May 31, 1998. The Company does
not expect this change to have a material impact on the
Company's financial statements. The results of
operations for the three and six months ended November
30, 1997 may not necessarily be indicative of the results
to be expected for the fiscal year ending May 31, 1998.
These financial statements should be read in conjunction
with the consolidated financial statements and related
notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997.
2. Inventories, net consisted of (in thousands):
November 30, May 31,
1997 1997
---- ----
Finished goods $ 459,692 $ 262,023
Work-in-process 53,620 35,462
Raw materials 115,662 104,871
--------- ---------
Total $ 628,974 $ 402,356
========= =========
3. Net Income (Loss) Per Common and Equivalent Share
Net income (loss) per common and equivalent share is
computed based on the weighted average number of common
shares and the dilutive effects of stock options
outstanding during the period using the treasury stock
method. Common equivalent shares were not included in
the calculation of earnings per share as they were
antidilutive for the six months ended November 30, 1997.
The effect of the assumed conversion of the 10.25 percent
convertible subordinated notes was antidilutive for all
periods presented.
4. Business Combination
On June 12, 1997 the Company merged with U.S. Robotics, a
leading supplier of products and systems for accessing
information across the wide area network, including
modems and remote access products. The Company issued
approximately 158 million shares of its common stock in
exchange for the outstanding common stock of U.S.
Robotics. The Company also assumed and exchanged all
options to purchase U.S. Robotics' stock for options to
purchase approximately 31 million shares of the Company's
common stock. The transaction was accounted for as a
pooling-of-interests. Fiscal 1998 will include the
results of the combined operations for the 12 months
commencing on June 1, 1997.
All financial data of the Company presented herein have
been restated to include the historical financial
information of U.S. Robotics. The combined balance sheet
as of May 31, 1997 includes the U.S. Robotics balance
sheet as of March 30, 1997. Results of operations of U.S.
Robotics for the two months ended May 25, 1997,
comprising the first eight weeks of what would otherwise
have been a 13-week quarter, reflected sales of $15.3
million and a net loss of $160.3 million. Sales for this
period principally reflected the following factors: the
historical non-linear sales pattern of U.S. Robotics, in
which sales were relatively low in the first two months
and significantly higher in the third month of a quarter;
efforts to reduce levels of channel inventory; a
provision for estimated returns, resulting from higher
returns, relative to both historical and anticipated
levels; and, to a lesser extent, a provision for price
protection. The net loss for the period, primarily
reflecting the factors affecting sales discussed above
and the relative linearity of operating expenses, was
recorded as a decrease to the Company's retained earnings
balance as of June 1, 1997.
The consolidated statements of operations and cash flows
for the three and six months ended November 30, 1996
include the U.S. Robotics statements of earnings and cash
flows for the three and six months ended September 29,
1996. The following information has been prepared for
comparative purposes only and does not purport to be
indicative of what would have occurred had this
transaction not been effected on the date indicated above
or of results which may occur in the future. Per share
data are presented after adjustment for the exchange of
1.75 shares of 3Com Common Stock for each share of U.S.
Robotics common stock.
Three Months Ended Six Months Ended
November 30, November 30,
1996 1996
------------------ ----------------
(Unaudited. In thousands, except per share amounts)
Sales:
3Com $ 820,296 $1,530,436
U.S. Robotics 611,410 1,158,195
Reclassifications to conform
financial statement presentation (10,046) (16,911)
Combined $1,421,660 $2,671,720
Net income:
3Com $ 105,569 $ 197,141
U.S. Robotics 13,472 76,770
Combined $ 119,041 $ 273,911
Net income per common and equivalent share
(on a fully diluted basis):
3Com $ 0.56 $ 1.06
U.S. Robotics 0.08 0.45
Combined $ 0.34 $ 0.77
The accompanying historical financial information as of
May 31, 1997 and for the three and six months ended
November 30, 1996 excludes the effect of conforming the
two companies' fixed asset capitalization policies, which
had reduced retained earnings by $41.4 million at May 31,
1997, as previously described in the Company's Form 10-Q
for the quarter ended August 31, 1997. In preparing the
Form 10-Q for the quarter ended November 30, 1997, the
Company determined that this change was not appropriate.
Eliminating this change did not have a material impact on
the Company's consolidated financial statements.
As a result of the merger, the Company recorded charges
of $426 million during the first quarter of fiscal 1998.
These charges include approximately $364 million of
integration expenses, $42 million of direct transaction
costs (consisting primarily of investment banking and
other professional fees) and $20 million of other merger
charges. Integration expenses included:
- - $105 million primarily associated with the
elimination and phase-out of duplicate wide area
networking and PC Card products (i.e., 3Com's
AccessBuilder (Registered Trademark) 2000, 4000, 5000 and 8000
products and U.S. Robotics'(Registered Trademark) TOTALswitch,
ATM switch, LANLinker switch and related small office home
office products,and Combo and LAN PC Cards), and the
discontinuance of U.S. Robotics' telephony products. The
provision includes an estimate for replacement of installed
AccessBuilder 5000 and 8000 products, inventory write-
offs associated with the discontinued products listed
above, and estimated returns of discontinued products
from the distribution channel;
- - $92 million associated with certain long-term
assets, primarily including duplicate finance,
manufacturing, human resource and other management
information systems, capitalized purchased research and
development costs in connection with a discontinued
product, and goodwill related to certain duplicate
international distribution operations;
- - $81 million related to the closure and elimination
of duplicate owned and leased facilities, primarily
corporate headquarters and domestic and European sales
offices;
- - $70 million for severance and outplacement costs
related to the merger. Employee groups impacted by the
merger include personnel involved in duplicate
corporate services, manufacturing and logistics,
product organizations and sales; and
- - $16 million related to an obligation under a
noncancelable research and development funding
contract, elimination of certain duplicate Asian
distribution operations, and repayment of a government
research grant associated with the discontinuance of
duplicate products.
The remaining merger-related accrual at November 30,
1997 was approximately $324 million. Total expected cash
expenditures relating to the merger charge are estimated to
be approximately $193 million, of which approximately $64 million
was disbursed prior to November 30, 1997. Termination
benefits paid to 561 employees terminated through
November 30, 1997 (approximately 56 percent of the total
planned severances) were approximately $29 million. The
remaining severance and outplacement amounts are expected
to be paid within the next nine months.
5. Litigation
The Company is a party to lawsuits in the normal course
of its business. The Company notes that (i) litigation
in general and patent litigation in particular can be
expensive and disruptive to normal business operations
and (ii) the results of complex legal proceedings can be
very difficult to predict with any certainty.
Securities Litigation
In December 1997 and January 1998, several putative
shareholder class action lawsuits were filed against the
Company and certain of its officers and directors in the
United States District Court for the Northern District of
Illinois and in the United States District Court for the
Northern District of California. The complaints allege
violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange
Act of 1934. The complaints allege class periods between
May 19, 1997 and November 14, 1997 and do not specify the
damages sought. The Company believes it has meritorious
defenses to the claims and intends to contest the
lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
U.S. Robotics, certain of its directors, and the Company
were named as defendants in shareholder class actions
relating to the merger between the Company and U.S.
Robotics. (In re: U.S. Robotics Corporation Shareholders
Litigation, Delaware Chancery Court Consolidated Civil
Action No. 15580). On October 7, 1997, all claims
related to such suits were settled pursuant to a
settlement approved by the Delaware Chancery Court.
Results of the settlement did not have a material effect
on the Company's results of operations or financial
condition.
On March 24, and May 5, 1997, putative shareholder class
action lawsuits, entitled Hirsch v. 3Com Corporation, et
al., Civil Action No. CV764977, and Kravitz v. 3Com
Corporation, et al., Civil Action No. CV765962,
respectively, were filed against the Company and certain
of its officers and directors in the California Superior
Court, Santa Clara County (the Superior Court).
Following resolution of a demurrer filed by the Company,
the remaining causes of action in the complaints allege
violations of the state securities laws, specifically
sections 25400 and 25500 of the California Corporations
Code. The complaints, which cover a putative period of
September 24, 1996 through February 10, 1997, do not
specify the damages sought. The Company believes it has
meritorious defenses to the claims and intends to contest
the lawsuits vigorously. An unfavorable resolution of
the actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
Intellectual Property Litigation
In September 1997, Livingston Enterprises, Inc.
(Livingston) filed suit against U.S. Robotics in the
United States District Court for the Northern District of
California (Livingston Enterprises, Inc. v. U.S. Robotics
Access Corporation, Case No. C-97-3551(CRB)), claiming
copyright infringement, misappropriation of trade
secrets, breach of contract and unfair competition with
respect to certain software code previously licensed to
U.S. Robotics for incorporation in certain of its remote
access server and concentrator products. Livingston
seeks injunctive relief and damages that are not
specified as to amount. The Company believes it has
meritorious defenses to Livingston's claims and intends
to contest the lawsuit vigorously. In September 1997,
Livingston filed a separate action in the same federal
court (Livingston Enterprises, Inc. v. U.S. Robotics
Access Corporation, Case No. C-97-3487 (CRB)) seeking a
declaratory judgment to the effect that one of U.S.
Robotics' U.S. patent is invalid and not infringed by
Livingston's products, as well as unspecified damages.
U.S. Robotics has answered this complaint and filed
counterclaims alleging infringement of such patent by
Livingston. An unfavorable resolution of the action could
have a material adverse effect on the business, results
of operations or financial condition of the Company.
On April 26, 1997, Xerox Corporation filed suit against
U.S. Robotics in the United States District Court for the
Western District of New York (Xerox Corporation v. U.S.
Robotics Corporation and U.S. Robotics Access
Corporation, No. 97-CV-6182T), claiming infringement of
one United States Patent related to handwriting
recognition. The complaint alleges willful infringement
and prays for unspecified damages and injunctive relief.
The Company believes it has meritorious defenses to the
claims and intends to contest the lawsuit vigorously. An
unfavorable resolution of the action could have a
material adverse effect on the business, results of
operations or financial condition of the Company.
On February 13, 1997, Motorola, Inc. filed suit against
U.S. Robotics in the United States District Court for the
District of Massachusetts (Motorola, Inc. v. U.S.
Robotics Corporation, et al., Civil Action No. 97-
10339RCL), claiming infringement of eight United States
patents. The complaint alleges willful infringement and
prays for unspecified damages and injunctive relief.
U.S. Robotics has filed an answer to Motorola's claims
setting forth its defenses and asserting counterclaims
which allege infringement of a U.S. Robotics patent,
violation of antitrust laws, promissory estoppel and
unfair competition. The Company believes it has
meritorious defenses to the claims and intends to contest
the lawsuit vigorously. An unfavorable resolution of the
action could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
Consumer Litigation
During 1997, three putative class action lawsuits
were filed against the Company or its subsidiary, U.S.
Robotics in the state courts of California and Illinois.
Each of the actions seeks damages as a result of alleged
misrepresentations by the Company or U.S. Robotics in
connection with the sale of its new x2TM products and
products upgradeable to x2 under various California and
Illinois consumer fraud statutes and under common law
theories including fraud and negligent misrepresentation.
Plaintiffs in Bendall, et al. v. U.S. Robotics
Corporation, et al., (No. 170441, Superior Court of Marin
County, California), Lippman, et al v. 3Com, (No. 97 CH
09773, Circuit Court of Cook County, Illinois), and
Michaels, et al. v. U.S. Robotics Access Corporation et
al., (No. 94 CH 14417, Circuit Court of Cook County,
Illinois) seek certification respectively of nationwide
classes of purchasers of x2 technology during the
approximate period November 1996 through at least May
1997. U.S. Robotics' motion to dismiss the Bendall
action is presently pending; the Lippman action presently
is stayed, and a responsive pleading is not yet due in
the Michaels action. The complaints seek injunctive
relief and an unspecified amount of damages. Two other
actions purporting to be brought in the public interest
have also been filed against U.S. Robotics in state court
in California under California statutes arising out of
U.S. Robotics alleged misrepresentation in connection
with the sale of the x2 products. Levy v. U.S. Robotics
Corporation, (No. 170968, Superior Court of Marin County,
California) and Intervention Inc. v. U.S. Robotics
Corporation, (No. 984352, Superior Court of San
Francisco, California) seek injunctive and unspecified
monetary relief. The Company believes it has meritorious
defenses to these lawsuits and intends to contest the
lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the
business, results of operations or financial condition of
the Company.
6. Effects of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share." This
Statement establishes and simplifies standards for
computing and presenting earnings per share. SFAS 128
will be effective for the Company's third quarter of
fiscal 1998, and requires restatement of all previously
reported earnings per share data that are presented.
Early adoption of this Statement is not permitted. SFAS
128 replaces primary and fully diluted earnings per share
with basic and diluted earnings per share. The Company
expects that basic earnings per share amounts will be
accretive compared to the Company's primary earnings per
share amounts, and diluted earnings per share amounts
will not be materially different from the Company's fully
diluted earnings per share amounts.
In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive
income and its components. SFAS 130 will be effective
for the Company's fiscal year 1999 and requires
reclassification of financial statements for earlier
periods for comparative purposes.
In June 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information."
This statement requires that financial information be
reported on the basis used internally for evaluating
segment performance and deciding how to allocate
resources to segments. SFAS 131 is effective for the
Company's fiscal year 1999 and requires restatement of
all previously reported information for comparative
purposes.
7. Subsequent Events
On December 17, 1997, the Company's Board of Directors
approved the repricing of certain employee stock options
with an exercise price in excess of the fair market value
of the Company's common stock on January 12, 1998. The
exercise price of such employee stock options was reset
to the closing market price on January 12, 1998. All
such options retain their original vesting schedules but
are subject to a nine-month period in which exercises are
prohibited. Stock options held by executive officers and
directors were not eligible for such repricing.
On December 23, 1997, the Company redeemed its
convertible subordinated notes totaling $110 million.
Under the terms of the note agreement, cash payments
related to principal, accrued interest and prepayment
penalties totaled approximately $115 million.
3Com Corporation
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total sales represented by the line items
reflected in the Company's consolidated statements of
operations:
Three months ended Six months ended
November 30, November 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.4 51.9 52.6 52.2
----- ----- ----- -----
Gross margin 46.6 48.1 47.4 47.8
Operating expenses:
Sales and marketing 27.7 17.2 22.6 16.8
Research and development 11.9 7.6 10.2 7.7
General and administrative 5.8 3.9 4.7 3.8
Purchased research
and development - 3.8 - 2.0
Merger-related charges - 0.4 15.2 0.3
and other ----- ----- ----- -----
Total operating expenses 45.4 32.9 52.7 30.6
----- ----- ----- -----
Operating income (loss) 1.2 15.2 (5.3) 17.2
Interest and other income, net 0.6 0.3 0.4 0.2
----- ----- ----- -----
Income (loss) before income taxes 1.8 15.5 (4.9) 17.4
Income tax provision (benefit) 0.6 7.1 (0.2) 7.1
----- ----- ----- -----
Net income (loss) 1.2% 8.4% (4.7)% 10.3%
===== ===== ===== =====
Excluding merger-related charges:
Total operating expenses 45.4% 28.6% 37.6% 28.3%
Operating income 1.2 19.5 9.8 19.4
Net income 1.2 12.6 6.6 12.5
Sales in the second quarter of fiscal 1998 totaled $1.2
billion, a decrease of $201.4 million or 14 percent from the
corresponding quarter a year ago. Sales of network systems
products (e.g., switches, routers, hubs, and remote access
concentrators) in the second quarter of fiscal 1998 decreased
two percent from the same quarter one year ago and decreased
13 percent compared to the first quarter of fiscal 1998.
Sales of network systems products represented 51 percent of
total sales in the second quarter of fiscal 1998, compared to
44 percent in the year ago quarter. Sales of client access
products (e.g., modems and network interface cards [NICs]) in
the second quarter of fiscal 1998 decreased 24 percent from
the same quarter one year ago and 32 percent from the first
quarter of fiscal 1998. Sales of client access products in
the second quarter of fiscal 1998 represented 49 percent of
total sales compared to 56 percent in the second quarter of
fiscal 1997. Domestic sales represented 58 percent of total
sales for the second quarter of fiscal 1998. Domestic and
international sales decreased 16 percent and 11 percent,
respectively when compared to the second quarter of fiscal
1997. The Company also experienced a sequential decline from
the first quarter of fiscal 1998 in domestic and international
sales of 21 percent and 28 percent, respectively.
Sales in the first six months of fiscal 1998 totaled $2.8
billion, an increase of $149.4 million or six percent from the
corresponding period a year ago. Sales of network systems
products in the first six months of fiscal 1998 increased 15
percent from the same period one year ago, and represented 47
percent of total sales, compared to 44 percent in the year ago
period. Sales of client access products in the first six
months of fiscal 1998 decreased 2 percent from the same period
one year ago, and represented 53 percent of total sales,
compared to 56 percent in the first six months of fiscal 1997.
Domestic sales for the first six months of fiscal 1998
comprised 56 percent of total sales compared to 60 percent in
the same period a year ago. Domestic sales decreased one
percent while international sales increased 16 percent when
compared to the first six months of fiscal 1997. During the
quarter, the Company began transitioning to next generation
platforms across several major product categories. For
example, the Company introduced and began shipping new
CoreBuilderTM High-Function Switches and began shipping the
Total ControlTM HiPerTM Access System. In addition, the
pricing environment continued to be very competitive, and
although the Company experienced significant year-over-year
unit growth in key products such as Fast Ethernet NICs and
workgroup switches, these gains were partially offset by
declines in average selling prices.
The Company believes that the year-over-year decrease in
second quarter sales and the sequential decrease in sales from
the first quarter of fiscal 1998 is due to a variety of
factors, including those discussed below.
In light of information received late in the second
quarter, the Company adopted a new inventory business model.
The new model generally calls for fewer weeks supply of
inventory in the channel. In order to begin implementing the
new model, the Company constrained sales into its distribution
channels. The Company made progress during the second quarter
in implementing the new model.
The Company believes another factor affecting sales, in
particular modem and remote access concentrator sales, was the
failure of the International Telecommunications Union (ITU) to
determine a standard for 56 Kbps technology. The Company
believes that the delay in finalizing such standards resulted
in customers postponing buying decisions.
During the second quarter of fiscal 1998, sales in the
Asia Pacific region compared to the second quarter of fiscal
1997 and the first quarter of fiscal 1998 decreased five
percent and 32 percent, respectively. Historically, the Asia
Pacific region had been a high growth region for the
networking industry and the Company. During the second
quarter of fiscal 1998, however, several Asian countries
experienced a weakening of their local currencies and turmoil
in their financial markets and institutions, which the Company
believes adversely affected financial results for the second
quarter of fiscal 1998.
An additional factor affecting second quarter results was
an apparent slowdown in the growth of the networking industry.
Recent reports by industry sources indicated that the
networking industry worldwide grew by less than 20 percent
during 1997, well below historical growth rates.
Gross margin as a percentage of sales was 46.6 percent in
the second quarter of fiscal 1998, compared to 48.1 percent in
the second quarter of fiscal 1997 and 48.0 percent in the
first quarter of fiscal 1998. The decline in margins during
the second quarter of fiscal 1998 resulted, in part, from
period costs being a higher percentage of sales. Margins also
reflected a higher mix of certain NICs and workgroup switching
products which have lower margins than other NICs and
workgroup switching products. These factors were partially
offset by an increased mix of higher margin modem products,
such as the U.S. Robotics brand 56 Kbps modem with x2
technology. Gross margin as a percentage of sales was 47.4
percent in the first six months of fiscal 1998, compared to
47.8 percent for the first six months of fiscal 1997.
Operating expenses in the second quarter of fiscal 1998
were $553.6 million or 45.4 percent of sales, compared to
$467.1 million or 32.9 percent of sales in second quarter of
fiscal 1997 and $932.0 million or 58.2 percent of sales in the
first quarter of fiscal 1998. Operating expenses in the first
six months of fiscal 1998 were $1,485.6 million or 52.7
percent of sales, compared to $818.0 million or 30.6 percent
of sales in first six months of fiscal 1997. Operating
expenses as a percentage of sales were higher than historical
levels primarily due to the reduced level of sales for the
second quarter of fiscal 1998, as discussed above. Excluding
charges of $54.0 million for purchased research and
development associated with U.S. Robotics' acquisition of
Scorpio Communications, Ltd. (Scorpio) and a charge of $6.6
million associated with 3Com's acquisition of OnStream
Networks, Inc. (OnStream), operating expenses would have
increased 36 percent from $406.5 million or 28.6 percent of
sales in the second quarter of fiscal 1997 and would have
increased 40 percent from $757.4 million or 28.3 percent of
sales in the first six months of fiscal 1997. Excluding the
pre-tax merger-related charge of $426.0 million related to the
merger with U.S. Robotics, operating expenses for the first
quarter of fiscal 1998 were $506.0 million, or 31.6 percent of
sales and $1,059.6 million, or 37.6 percent of sales for the
first six months of fiscal 1998.
Sales and marketing expenses in the second quarter of
fiscal 1998 increased $93.7 million or 38 percent from the
second quarter of fiscal 1997 and $36.3 million or 12 percent
from the first quarter of fiscal 1998. Sales and marketing
expenses as a percentage of sales increased to 27.7 percent of
sales in the second quarter of fiscal 1998, from 17.2 percent
in the corresponding fiscal 1997 period and 18.8 percent in
the first quarter of fiscal 1998. Sales and marketing
expenses in the first six months of fiscal 1998 increased
$189.6 million or 42 percent from the first six months of
fiscal 1997. The increase in absolute dollars primarily
reflected an increase in field sales, marketing and customer
support.
Research and development expenses in the second quarter
of fiscal 1998 increased $38.1 million or 35 percent from the
year-ago period, and $3.4 million or 2 percent from the first
quarter of fiscal 1998. Research and development expenses
increased to 11.9 percent of total sales in the second quarter
of fiscal 1998, compared to 7.6 percent in second quarter of
fiscal 1997 and 8.9 percent in the first quarter of fiscal
1998. Research and development expenses in the first six
months of fiscal 1998 increased $82.1 million or 40 percent
from the year-ago six-month period. The increase in research
and development expenses in absolute dollars was primarily
attributable to the cost of developing the Company's new
products, primarily client access, switching, and network
management, and its expansion into new technologies and
markets. The Company believes the timely introduction of new
technologies and products is crucial to its success, and plans
to continue to make acquisitions or strategic investments to
accelerate time to market where appropriate.
General and administrative expenses in the second quarter
of fiscal 1998 increased $15.3 million or 28 percent from the
same period a year ago, and $7.9 million or 13 percent from
the first quarter of fiscal 1998. General and administrative
expenses increased to 5.8 percent of total sales in the second
quarter of fiscal 1998, compared to 3.9 percent in the second
quarter of fiscal 1997 and the first quarter of fiscal 1998.
General and administrative expenses in the first six months of
fiscal 1998 increased $30.5 million or 30 percent from the
same period a year ago. The increase in general and
administrative expenses in absolute dollars primarily
reflected an expansion of the Company's infrastructure.
Interest and other income, net increased $3.5 million or
85 percent compared to the second quarter of fiscal 1997 and
$4.7 million compared to the first quarter of fiscal 1998.
Interest and other income, net increased approximately $3.5
million in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997. Such increases were due to
higher interest income in the second quarter of fiscal 1998
and lower foreign currency losses. The majority of the
Company's sales are denominated in U.S. Dollars. Where
available, the Company enters into foreign exchange forward
contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign
exchange rates.
The Company's effective income tax rate was approximately
35.0 percent in the second quarter of fiscal 1998 compared to
46.0 percent in the second quarter of fiscal 1997. Excluding
the purchased research and development and merger-related
charges associated with Scorpio and OnStream, the pro forma
income tax rate was 36.1 percent for the second quarter of
fiscal 1997. The Company's effective income tax rate on the
pre-tax loss of $137.8 million was a benefit of 4.4 percent in
the first six months of fiscal 1998 compared to an effective
rate of approximately 41.1 percent in the first six months of
fiscal 1997. Excluding the pre-tax merger-related charge
associated with U.S. Robotics, which was not fully deductible,
the pro forma income tax rate was 35.0 percent for the first
six months of fiscal 1998. Excluding the purchased research
and development and merger-related charges associated with
Scorpio and OnStream, the pro forma income tax rate was 36.4
percent for the first six months of fiscal 1997.
Net income for the second quarter of fiscal 1998 was
$15.1 million, or $0.04 per share, compared to net income of
$119.0 million, or $0.34 per share, for the second quarter of
fiscal 1997. Excluding the purchased research and development
and merger-related charges associated with Scorpio and
OnStream, net income was $179.6 million, or $0.51 per share
for the second quarter of fiscal 1997. Net loss for the first
six months of fiscal 1998 was $131.7 million, or $0.37 per
share, compared to net income of $273.9 million, or $0.77 per
share, for the first six months of fiscal 1997. Excluding the
merger-related charge associated with U.S. Robotics, net
income was $187.3 million, or $0.52 per share for the first
six months of fiscal 1998. Excluding the purchased research
and development and merger-related charges associated with
Scorpio and OnStream, net income was $334.5 million, or $0.95
per share for the first six months of fiscal 1997.
Business Environment and Risk Factors
This report contains certain forward looking statements,
including statements regarding future trends in market growth,
sales, gross margins, and inventory levels. Actual results
could vary materially based on a number of factors, including
but not limited to those set forth below.
The Company participates in a highly volatile industry
which is characterized by vigorous competition for market
share, rapid technological development, consolidations, and
uncertainty over adoption of industry standards. This has in
the past resulted and could in the future result in aggressive
pricing practices and increased competition, both from start-
up companies and from well-capitalized computer systems,
communications and other major technology companies. For
example, in the third quarter of fiscal 1997, a major
competitor reduced its average selling prices on Fast Ethernet
NIC products by approximately 40 percent. The Company
immediately responded with similar price cuts. As a result,
the Company experienced a significant downward pressure on
this product's gross margin and an accelerated transition from
10 Mbps Ethernet to Fast Ethernet NICs. In addition, as new
competitors enter the market and offer competing products,
pricing may be affected. The Company believes there is a risk
of downward pricing pressure on the Company's products,
including products incorporating 56 Kbps modem technology.
Pricing pressure intensified across a variety of the Company's
products during the second quarter of fiscal 1998, and may
intensify in coming quarters.
Recently, market researchers have reported slower
industry growth worldwide in calendar 1997 than in the past.
Although market researchers generally forecast a small
increase in networking growth rates in calendar 1998 from 1997
levels, there can be no assurance that this will occur.
Similarly, there can be no assurances that the Company's
results in any particular quarter will fall within market
researchers' forecasted ranges.
The Company sells a significant portion of its products
to distributors and resellers. In turn, such distributors and
resellers maintain significant levels of the Company's
products in their inventories. The Company attempts to ensure
appropriate levels of inventory are available to end users by
working closely with these resellers and distributors. In
light of information received late in the second quarter, the
Company adopted a new inventory business model. The new model
generally calls for fewer weeks supply of inventory in the
channel. In order to begin implementing the new model, the
Company constrained sales into its distribution channels. The
Company made progress during the second quarter in
implementing the new model. However, the Company anticipates
that the full implementation of the new inventory business
model will require additional reductions in channel inventory
during the third quarter and possibly beyond. Such reductions
could adversely affect the Company's sales and results of
operations.
The Company distributes a significant portion of its
products through third party distributors and resellers. Due
to consolidation in the distribution and reseller channels and
the Company's increased volume of sales into these channels,
the Company has experienced an increased concentration of
credit risk. While the Company continually monitors and
manages this risk, financial difficulties on the part of one
or more of the Company's resellers may have a material adverse
effect on the Company's results of operations.
The Company's operations in certain markets, which are
characterized by economic and political instability and
currency fluctuations, may subject the Company's resellers to
financial difficulties which may have an adverse impact on the
Company. For example, the recent instability in the Asian
financial markets appears to have negatively impacted sales,
and may continue to negatively impact sales in those markets
in a number of ways, including: increasing competition from
local competitors that offer sales terms in local currencies,
reducing access to sources of capital needed by customers to
make purchases, and slowing end user purchases. Should the
Asian economic environment fail to improve, the Company would
consider continuing to expand its exposure to foreign
currencies to preserve long-term customer relationships. A
significant fluctuation in foreign currency could have an
adverse impact on the Company. Finally, the aforementioned
instability may increase credit risks as the recent weakening
of certain Asian currencies may result in insolvencies or
otherwise impair customers' ability to repay existing
obligations. Depending on the situation in Asia in coming
quarters, any or all of these factors could adversely impact
the Company's financial results in future quarters.
Typically, quarterly sales and results of operations
depend on the volume and timing of orders, and the ability to
fulfill them within the quarter. The Company's customers
historically request fulfillment of orders in a short period
of time, resulting in a minimal backlog and limited visibility
to future sales trends. Should incoming order rates decline,
if ordered products are not readily available, or if the
Company does not immediately fill orders in an attempt to
further reduce channel inventory levels, the Company's results
of operations could be adversely affected.
The Company historically has sold a large percentage of
its products in the third month of each quarter. This
subjects the Company to additional business risks due to
unexpected disruptions in functions, including but not limited
to manufacturing, order management, information systems and
shipping, which could have an adverse affect on the Company's
results of operations.
The Company's success depends, in substantial part, on
the timely and successful introduction of new products. An
unexpected change in one or more of the technologies affecting
network communications, or in market demand for products based
on a particular technology, or entry by new competitors, could
lead to a slowdown in sales of certain products, and could
have a material adverse effect on the Company's operating
results if the Company does not respond timely and effectively
to such changes. The Company is engaged in research and
development activities in certain emerging LAN and WAN high-
speed standards and high-speed technologies, such as: Fast
Ethernet, Gigabit Ethernet, ATM, 56 Kbps, ISDN, xDSL and data-
over-cable. As the industry standardizes on high-speed
technologies, there can be no assurance that the Company will
be able to respond promptly and cost-effectively to compete in
the marketplace.
The Company's success depends, in substantial part, on
the adoption of industry standards, the timely and successful
introduction of products that are compliant with new industry
standards, and the Company's ability to address competing
technological and product developments. Delays in adoption of
industry standards or adoption of standards incorporating
competing technologies or competitors' intellectual property
could adversely affect the Company's sales or operating
margins. In December, a technical compromise was reached
among ITU members that may result in the determination of a
standard for 56 Kbps technology in January 1998 with official
adoption in September. While the Company believes that it will
be able to comply quickly with this proposed standard and
offer its customers software upgrades to the new standard,
there can be no assurances that the development of this
standard and the Company's compliance with it will proceed as
rapidly or smoothly as expected or that these events will
result in increased demand for the Company's 56 Kbps products.
Any benefits which the Company may derive from the expected
adoption of this proposed standard will continue to be
dependent upon the timing and extent to which the standard 56
Kbps technology is deployed by Internet Service Providers and
accepted by Internet users. Moreover, consumer confusion
regarding 56 Kbps technology, which has negatively impacted
sales to date, may persist notwithstanding final determination
of the ITU standard.
The Company operates in an industry in which the ability
to compete is dependent on the development or acquisition and
protection of proprietary technology, which must be protected
both to secure the benefits of the Company's innovations in
its own products and to better enable the Company to license
proprietary technology from others on acceptable terms. The
Company attempts to perfect and preserve intellectual property
rights in the technologies it develops through a combination
of trade secrets, patents, copyrights and trademarks. There
can be no assurance that the steps taken by the Company will
be sufficient to prevent misappropriation or infringement of
its intellectual property or that competitors will not
independently develop technologies or procure intellectual
property rights that are equivalent or superior to those of
the Company.
The Company, from time to time, must negotiate licenses
with third parties in order to obtain rights to incorporate
proprietary technologies, including de facto and official
standard networking and communications protocols and
specifications, into its products. In most instances, the
owners of intellectual property rights covering technologies
required to implement official standards have undertaken to
license such rights on reasonable and non-discriminatory
terms, and as a general rule the Company has no reason to
believe that these parties will fail to honor their
undertakings and the Company anticipates that it will be able
to enter into licenses with such parties on reasonable terms
that will be comparable to those available to its competitors.
There can be no assurances in this regard, however, and there
is always the potential for disputes and litigation, even
where a third party owner of intellectual property rights has
undertaken to make licenses generally available or has
actually entered into licenses upon which the Company has
relied in designing and making its products. By way of
example, the Company is currently involved in disputes with
Motorola, Inc. over patents related to certain modem standards
and with Livingston Enterprises, Inc. over certain software
previously licensed by U.S. Robotics. See Part II. Item 1.
Legal Proceedings. The Company's failure to obtain and
maintain licenses for all of the third party intellectual
property rights required for the manufacture, sale and use of
its products, particularly those which must comply with industry
standard protocols and specifications in order to be commercially
viabe, could have a material adverse effect on the Company's
business, results of operation, and financial condition.
The Company derives a portion of its sales from original
equipment manufacture (OEM) partners including PC companies
who bundle 3Com network interface cards and modems, and
incorporate chip-sets into their products. The Company
believes that future sales growth of these products is
dependent, in part, on the Company's ability to strengthen
relationships and increase business with OEM partners. OEM
sales are characterized as having lower average selling prices
and gross margins. Consequently, the Company's overall gross
margin percentage may be adversely impacted if OEM sales
become a larger percentage of the Company's business. Certain
OEMs in the PC industry are integrating communication
subsystems on the PC motherboard. If such integration becomes
a trend, the Company's future sales growth may be adversely impacted.
Acquisitions of complementary businesses and
technologies, including technologies and products under
development, are an active part of the Company's overall
business strategy. Certain of the Company's major competitors
have also been engaged in merger and acquisition transactions.
Such consolidations by competitors are creating entities with
increased market share, customer base, technology and
marketing expertise, sales force size, or proprietary
technology in segments in which the Company competes. These
developments may adversely affect the Company's ability to
compete in such segments.
In June 1997, the Company merged with U.S. Robotics, the
largest acquisition in the history of the networking industry.
Large acquisitions are challenging, in general, and there can
be no assurance that products, technologies, distribution
channels, customer support operations, management information
systems, key personnel and businesses of U.S. Robotics or
other acquired companies will be effectively assimilated into
the Company's business or product offerings, or that such
integration will not adversely affect the Company's business,
financial condition or results of operations. The inability
of management to successfully integrate the operations of the
two companies in a timely manner could have a material adverse
effect on the business, results of operations, and financial
condition of the Company.
The high-growth nature of the computer networking
industry, coupled with critical time-to-market factors, has
caused increased competition and consolidation. As a result,
there has been a significant increase in the cost of acquiring
computer networking companies. There can be no assurance that
the Company will continue to be able to identify and
consummate suitable acquisition transactions in the future.
However, should the Company consummate acquisitions in the
future, the impact may result in increased dilution of the
Company's future earnings.
The Company's products are covered by warranties and the
Company is subject to contractual commitments. If unexpected
circumstances arise such that the product does not perform as
intended and the Company is not successful in resolving
product quality or performance issues, there could be an
adverse impact on the financial results of the Company.
Some key components of the Company's products are
currently available only from single sources. There can be no
assurance that in the future the Company's suppliers will be
able to meet the Company's demand for components in a timely
and cost-effective manner. The Company's operating results
and customer relationships could be adversely affected by
either an increase in prices for, or an interruption or
reduction in supply of, any key components.
Recruiting and retaining skilled personnel, especially in
certain locations in which the Company operates, is highly
competitive. Recently, for example, recruiting of qualified
engineers has been extremely competitive. If the Company
cannot successfully recruit and retain such skilled personnel,
the Company's financial results may be adversely affected.
The Company is in the process of transitioning its
manufacturing requirements planning, accounts payable,
purchasing and intercompany accounting systems to a new set of
applications which operate on a client server based platform.
The third quarter of fiscal 1998 will be the first quarter in
which some of the Company's major manufacturing sites utilize
the new system. As a result of the planned transition to the
new client server platform, the Company may experience
production, development, sales processing, financial system,
or other disruptions, which may have an adverse financial
effect on the Company.
Many computer systems were not designed with the year
2000 issues in mind, and may require significant hardware and
software modifications. During the next few years, companies
owning and operating such systems may plan to devote a
substantial portion of their information spending to make such
modifications and divert spending away from networking
solutions. This could have an adverse impact on the Company's
sales and results of operations. The Company believes the
majority of its major systems are currently Year 2000
compliant, and costs to transition the Company's remaining
systems to Year 2000 compliance are not anticipated to be
material.
The market price of the Company's common stock has been,
and may continue to be, extremely volatile. Factors such as
new product, pricing or acquisition announcements by the
Company or its competitors, quarterly fluctuations in the
Company's operating results, challenges associated with
integration of businesses and general conditions in the data
networking market, such as a decline in industry growth rates,
may have a significant impact on the market price of the
Company's common stock. These conditions, as well as factors
which generally affect the market for stocks of high
technology companies, could cause the price of the Company's
stock to fluctuate substantially over short periods.
Because of the foregoing factors, as well as other
factors affecting the Company's operating results, past trends
and performance should not be presumed by investors to be an
accurate indicator of future results or trends.
Liquidity and Capital Resources
Cash, equivalents and short-term investments at November
30, 1997 were $1.1 billion, increasing $196.0 million from May
31, 1997.
For the six months ended November 30, 1997, net cash
generated from operating activities was $254.6 million.
Accounts receivable at November 30, 1997 decreased $306.7
million from May 31, 1997 to $927.5 million. Days sales
outstanding in receivables decreased to 68 days at November
30, 1997, compared to 74 days at May 31, 1997 due to a lower
concentration of sales in the third month of the quarter.
Inventory levels at November 30, 1997 increased $226.6
million, of which $197.7 million was finished goods, from the
prior fiscal year-end to $628.9 million. Inventory turnover
was 5.0 turns at November 30, 1997, compared to 7.5 turns at
May 31, 1997 primarily as a result of the increase in the
Company's inventory due to reduced sales levels, as previously
discussed.
During the six months ended November 30, 1997, the
Company made $193.0 million in capital expenditures. Major
capital expenditures included upgrades and expansion of the
Company's facilities in the U.K., Santa Clara, California and
Illinois and the continuing development of the Company's
worldwide information systems. As of November 30, 1997, the
Company had approximately $170 million in capital expenditure
commitments outstanding primarily associated with the
construction and expansion of office and manufacturing space
in Santa Clara, Illinois, the U.K., and Singapore.
During the first six months of fiscal 1998, the Company
received cash of $234.1 million from the sale of its common
stock to employees through its employee stock purchase and
option plans.
During the first quarter of fiscal 1998, the Company
signed a lease, which replaces a previous land lease, for
300,000 square feet of office and research and development
space and a data center to be built on land adjacent to the
Company's headquarters site. The lease expires in August
2002, with an option to extend the lease term for two
successive periods of five years each. The Company has an
option to purchase the property for $83.6 million, or at the
end of the lease arrange for the sale of the property to a
third party with the Company retaining an obligation to the
owner for the difference between the sale price and $83.6
million, subject to certain provisions of the lease.
Construction of the buildings began in July 1997, and the
Company anticipates that it will occupy and begin lease
payments in the second quarter of fiscal 1999.
During the first quarter of fiscal 1998, the Company
signed a lease, which replaces a previous land lease, for
525,000 square feet of office, research and development and
manufacturing space to be built on land in Marlborough,
Massachusetts. The lease expires in August 2002, with an
option to extend the lease term for two successive periods of
five years each. The Company has an option to purchase the
property for $86.0 million, or at the end of the lease arrange
for the sale of the property to a third party with the Company
retaining an obligation to the owner for the difference
between the sale price and $86.0 million, subject to certain
provisions of the lease. Construction of the buildings began
in the first quarter of fiscal 1998, and the Company
anticipates that it will occupy and begin lease payments in
the third quarter of fiscal 1999.
During the first quarter of fiscal 1998, the Company
signed a lease for an existing 400,000 square foot building
and for 100,000 square feet to be built on adjacent land in
Rolling Meadows, Illinois. The new and renovated facility
will be used for research and development and office space.
The lease expires in September 2002, with an option to extend
the lease term for two successive periods of five years each.
The Company has an option to purchase the property for $95.0
million, or at the end of the lease arrange for the sale of
the property to a third party with the Company retaining an
obligation to the owner for the difference between the sale
price and $95.0 million, subject to certain provisions of the
lease. The lessor began construction of the buildings in the
second quarter of fiscal 1998, and the Company anticipates it
will occupy and begin lease payments in the first quarter of
fiscal 1999.
The three aforementioned leases require the Company to
maintain specified financial covenants, all of which the
Company was in compliance with as of November 30, 1997.
The Company has a $100 million revolving bank credit
agreement which expires December 20, 1999. Payment of cash
dividends are permitted under the credit agreement, subject to
certain limitations based on net income levels of the Company.
The Company has not paid and does not anticipate it will pay
cash dividends on its common stock. The credit agreement
requires the Company to maintain specified financial
covenants. As of November 30, 1997, there were no outstanding
borrowings under the credit agreement and the Company was in
compliance with all required covenants. During the quarter
ended August 31, 1997, the Company retired certain debt owed
by the heritage U.S. Robotics organization, which included
approximately $170 million of borrowings that occurred during
the April and May time period, which was not reflected in the
restated May 31, 1997 balance sheet.
On December 23, 1997, the Company redeemed convertible
subordinated notes totaling $110 million. Under the terms of
the agreement, the Company paid cash of approximately $115
million for principal, accrued interest and early payment
penalties.
During the quarter ended August 31, 1997, the Company
completed the merger transaction with U.S. Robotics. As a
result, the Company recorded merger-related charges of $426
million. Total expected cash expenditures relating to the
merger-related charges are approximately $193 million, of
which approximately $64 million was disbursed prior to
November 30, 1997.
Based on current plans and business conditions, the
Company believes that its existing cash and equivalents,
temporary cash investments, cash generated from operations and
the available revolving credit agreement will be sufficient to
satisfy anticipated operating cash requirements for at least
the next twelve months.
Effects of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share." This
Statement establishes and simplifies standards for computing
and presenting earnings per share. SFAS 128 will be effective
for the Company's third quarter of fiscal 1998, and requires
restatement of all previously reported earnings per share data
that are presented. Early adoption of this Statement is not
permitted. SFAS 128 replaces primary and fully diluted
earnings per share with basic and diluted earnings per share.
The Company expects that basic earnings per share amounts will
be accretive compared to the Company's primary earnings per
share amounts, and diluted earnings per share amounts will not
be materially different from the Company's fully diluted
earnings per share amounts.
In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income and its
components. SFAS 130 will be effective for the Company's
fiscal year 1999 and requires reclassification of financial
statements for earlier periods for comparative purposes.
In June 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information." This
statement requires that financial information be reported on
the basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. SFAS 131
is effective for the Company's fiscal year 1999 and requires
restatement of all previously reported information for
comparative purposes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course
of its business. The Company notes that (i) litigation in
general and patent litigation in particular can be expensive
and disruptive to normal business operations and (ii) the
results of complex legal proceedings can be very difficult to
predict with any certainty.
Securities Litigation
In December 1997 and January 1998, several putative
shareholder class action lawsuits were filed against the
Company and certain of its officers and directors in the
United States District Court for the Northern District of
Illinois and in the United States District Court for the
Northern District of California. The complaints allege
violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934. The complaints allege class periods between May 19,
1997 and November 14, 1997 and do not specify the damages
sought. The Company believes it has meritorious defenses to
the claims and intends to contest the lawsuits vigorously. An
unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or
financial condition of the Company.
U.S. Robotics, certain of its directors, and the Company
were named as defendants in shareholder class actions relating
to the merger between the Company and U.S. Robotics. (In re:
U.S. Robotics Corporation Shareholders Litigation, Delaware
Chancery Court Consolidated Civil Action No. 15580). On
October 7, 1997, all claims related to such suits were settled
pursuant to a settlement approved by the Delaware Chancery
Court. Results of the settlement did not have a material
effect on the Company's results of operations or financial
condition.
On March 24, and May 5, 1997, putative shareholder class
action lawsuits, entitled Hirsch v. 3Com Corporation, et al.,
Civil Action No. CV764977, and Kravitz v. 3Com Corporation, et
al., Civil Action No. CV765962, respectively, were filed
against the Company and certain of its officers and directors
in the California Superior Court, Santa Clara County (the
Superior Court). Following resolution of a demurrer filed by
the Company, the remaining causes of action in the complaints
allege violations of the state securities laws, specifically
sections 25400 and 25500 of the California Corporations Code.
The complaints, which cover a putative period of September 24,
1996 through February 10, 1997, do not specify the damages
sought. The Company believes it has meritorious defenses to
the claims and intends to contest the lawsuits vigorously. An
unfavorable resolution of the actions could have a material
adverse effect on the business, results of operations or
financial condition of the Company.
Intellectual Property Litigation
In September 1997, Livingston Enterprises, Inc.
(Livingston) filed suit against U.S. Robotics in the United
States District Court for the Northern District of California
(Livingston Enterprises, Inc. v. U.S. Robotics Access
Corporation, Case No. C-97-3551(CRB)), claiming copyright
infringement, misappropriation of trade secrets, breach of
contract and unfair competition with respect to certain
software code previously licensed to U.S. Robotics for
incorporation in certain of its remote access server and
concentrator products. Livingston seeks injunctive relief and
damages that are not specified as to amount. The Company
believes it has meritorious defenses to Livingston's claims
and intends to contest the lawsuit vigorously. In September
1997, Livingston filed a separate action in the same federal
court (Livingston Enterprises, Inc. v. U.S. Robotics Access
Corporation, Case No. C-97-3487 (CRB)) seeking a declaratory
judgment to the effect that one of U.S. Robotics' U.S. patent
is invalid and not infringed by Livingston's products, as well
as unspecified damages. U.S. Robotics has answered this
complaint and filed counterclaims alleging infringement of
such patent by Livingston. An unfavorable resolution of the
action could have a material adverse effect on the business,
results of operations or financial condition of the Company.
On April 26, 1997, Xerox Corporation filed suit against
U.S. Robotics in the United States District Court for the
Western District of New York (Xerox Corporation v. U.S.
Robotics Corporation and U.S. Robotics Access Corporation, No.
97-CV-6182T), claiming infringement of one United States
Patent related to handwriting recognition. The complaint
alleges willful infringement and prays for unspecified damages
and injunctive relief. The Company believes it has
meritorious defenses to the claims and intends to contest the
lawsuit vigorously. An unfavorable resolution of the action
could have a material adverse effect on the business, results
of operations or financial condition of the Company.
On February 13, 1997, Motorola, Inc. filed suit against
U.S. Robotics in the United States District Court for the
District of Massachusetts (Motorola, Inc. v. U.S. Robotics
Corporation, et al., Civil Action No. 97-10339RCL), claiming
infringement of eight United States patents. The complaint
alleges willful infringement and prays for unspecified damages
and injunctive relief. U.S. Robotics has filed an answer to
Motorola's claims setting forth its defenses and asserting
counterclaims which allege infringement of a U.S. Robotics
patent, violation of antitrust laws, promissory estoppel and
unfair competition. The Company believes it has meritorious
defenses to the claims and intends to contest the lawsuit
vigorously. An unfavorable resolution of the action could
have a material adverse effect on the business, results of
operations or financial condition of the Company.
Consumer Litigation
During 1997, three putative class action lawsuits
were filed against the Company or its subsidiary, U.S.
Robotics in the state courts of California and Illinois. Each
of the actions seeks damages as a result of alleged
misrepresentations by the Company or U.S. Robotics in
connection with the sale of its new x2TM products and products
upgradeable to x2 under various California and Illinois
consumer fraud statutes and under common law theories
including fraud and negligent misrepresentation. Plaintiffs
in Bendall, et al. v. U.S. Robotics Corporation, et al., (No.
170441, Superior Court of Marin County, California), Lippman,
et al v. 3Com, (No. 97 CH 09773, Circuit Court of Cook County,
Illinois), and Michaels, et al. v. U.S. Robotics Access
Corporation et al., (No. 94 CH 14417, Circuit Court of Cook
County, Illinois) seek certification respectively of
nationwide classes of purchasers of x2 technology during the
approximate period November 1996 through at least May 1997.
U.S. Robotics' motion to dismiss the Bendall action is
presently pending; the Lippman action presently is stayed, and
a responsive pleading is not yet due in the Michaels action.
The complaints seek injunctive relief and an unspecified
amount of damages. Two other actions purporting to be brought
in the public interest have also been filed against U.S.
Robotics in state court in California under California
statutes arising out of U.S. Robotics alleged
misrepresentation in connection with the sale of the x2
products. Levy v. U.S. Robotics Corporation, (No. 170968,
Superior Court of Marin County, California) and Intervention
Inc. v. U.S. Robotics Corporation, (No. 984352, Superior Court
of San Francisco, California) seek injunctive and unspecified
monetary relief. The Company believes it has meritorious
defenses to these lawsuits and intends to contest the lawsuits
vigorously. An unfavorable resolution of the actions could
have a material adverse effect on the business, results of
operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on
October 7, 1997.
(b) Each of the persons named in the Proxy Statement as
a nominee for director was elected and the proposals listed
below were approved. The following are the voting results
of the proposals:
Proposal I In Favor Instructed Withheld
Election of Directors 294,476,345 57,881 1,516,491
Proposal II In Favor Opposed Abstain
To approve an increase in the 255,933,552 38,672,866 1,444,299
share reserve under the Company's
1983 Stock Option Plan by
7,000,000 shares.
Proposal III In Favor Opposed Abstain
To ratify the appointment of 294,752,931 510,203 787,583
Deloitte & Touche LLP as the
Company's independent public
accountants for the fiscal year
ending May 31, 1998.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation (13)
3.2 Certificate of Correction Filed
to Correct a Certain Error in the Certificate of Incorporation (13)
3.3 Certificate of Merger (13)
3.4 Bylaws of 3Com Corporation, As Amended (13)
4.1 Indenture Agreement between 3Com Corporation and The First
National Bank of Boston for the private placement of convertible subordinated
notes dated as of November 1, 1994 (Exhibit 5.2 to Form 8-K) (6)
4.2 Placement Agreement for the private placement of convertible
subordinated notes dated November 8, 1994 (Exhibit 5.1 to Form 8-K) (6)
4.3 Amended and Restated Rights Agreement dated December 31, 1994
(Exhibit 10.27 to Form 10-Q) (7)
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to Form 10-K)
(3)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 First Amended and Restated 1984 Employee Stock Purchase Plan,
as amended (Exhibit 19.1 to Form 10-Q) (4)*
10.5 Second Amended and Restated 1984 Employee Stock Purchase Plan
(Exhibit 10.5 to Form 10-Q)(8)*
10.6 3Com Corporation Director Stock Option Plan, as amended
(Exhibit 19.3 to Form 10-Q) (4)*
10.7 Amended 3Com Corporation Director Stock Option Plan
(Exhibit 10.8 to Form 10-Q)(8)*
Item 6. Exhibits and Reports on Form 8-K (Continued)
10.8 3Com Corporation Restricted
Stock Plan, as Amended (Exhibit 10.17 to
Form 10-Q)(8)*
10.9 1994 Stock Option Plan (Exhibit
10.22 to Form 10-K) (5)*
10.10 Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of
November 20, 1996 (Exhibit 10.37 to Form
10-Q) (10)
10.11 Purchase Agreement between
BNP Leasing Corporation and 3Com
Corporation, effective as of November 20,
1996 (Exhibit 10.38 to Form 10-Q) (10)
10.12 Agreement and Plan of
Reorganization among 3Com Corporation,
OnStream Acquisition Corporation and
OnStream Networks, Inc. dated as of
October 5, 1996 (Exhibit 2.1 to Form S-4)
(9)
10.13 Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of
February 3, 1997 for the Combined Great
America Headquarters site (Exhibit 10.19
to Form 10-Q) (12)
10.14 Purchase Agreement between
BNP Leasing Corporation and 3Com
Corporation, effective as of February 3,
1997 for the Combined Great America
Headquarters site (Exhibit 10.20 to Form
10-Q) (12)
10.15 Credit Agreement dated as
of December 20, 1996 among 3Com
Corporation, Bank of America National
Trust and Savings Association, as Agent,
and the Other Financial Institutions Party
Hereto Arranged by BA Securities, Inc.
(Exhibit 10.21 to Form 10-Q) (12)
10.16 Amended and Restated
Agreement and Plan of Merger by and among
3Com Corporation, TR Acquisitions
Corporation, 3Com (Delaware) Corporation,
and U.S. Robotics Corporation, dated as of
February 26, 1997 and amended as of March
14, 1997(11)
10.17 Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of
July 25, 1997 for the Great America Phase
III (PAL) site (13)
10.18 Purchase Agreement between
BNP Leasing Corporation and 3Com
Corporation, effective as of July 25, 1997
for the Great America Phase III (PAL) site
(13)
10.19 Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of
July 29, 1997 for the Marlborough site
(13)
10.20 Purchase Agreement between
BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997
for the Marlborough site (13)
10.21 Lease Agreement between BNP
Leasing Corporation, as Landlord, and 3Com
Corporation, as Tenant, effective as of
August 11, 1997 for the Rolling Meadows
site (13)
10.22 Purchase Agreement between
BNP Leasing Corporation and 3Com
Corporation, effective as of August 11,
1997 for the Rolling Meadows site
10.23 First Amendment to Credit
Agreement (13)
* Indicates a management contract
or compensatory plan.
(1) Incorporated by reference to the
corresponding Exhibit previously filed as
an Exhibit to Registrant's Registration
Statement on Form S-1 filed January 25,
1984 (File No. 2-89045)
(2) Incorporated by reference to
Exhibit 10.2 to Registrant's Registration
Statement on Form S-4 filed on August 31,
1987 (File No. 33-16850)
(3) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-K filed on August 27,
1991 (File No. 0-12867)
(4) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q filed January 10,
1992 (File No. 0-12867)
(5) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-K filed on August 31,
1994 (File No. 0-12867)
(6) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 8-K filed on November
16, 1994 (File No. 0-12867)
(7) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q filed on January
13, 1995 (File No. 0-12867)
(8) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q, filed on January
15, 1996 (File No. 0-12867)
(9) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Registration Statement on
Form S-4, originally filed on October 11,
1996 (File No. 333-13993)
(10) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q filed on January
13, 1997 (File No. 0-12867)
(11) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Registration Statement on
Form S-4, filed on March 17, 1997 (File
No. 333-23465)
(12) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q, filed on April 11,
1997 (File No. 0-12867)
(13) Incorporated by reference to the
Exhibit identified in parentheses
previously filed as an Exhibit to
Registrant's Form 10-Q, filed on October
14, 1997 (File No. 0-12867)
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
3Com Corporation
(Registrant)
Dated: January 12, 1998 By: /s/ Christopher B. Paisley
-------------------- ---------------------------
Christopher B. Paisley
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TEXT>
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<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000738076
<NAME> JULIE SIMPSON
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 539,748
<SECURITIES> 596,062
<RECEIVABLES> 927,504
<ALLOWANCES> (70,930)
<INVENTORY> 628,974
<CURRENT-ASSETS> 3,099,914
<PP&E> 1,221,125
<DEPRECIATION> (477,931)
<TOTAL-ASSETS> 3,923,202
<CURRENT-LIABILITIES> 1,339,339
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,564,586
<OTHER-SE> 911,875
<TOTAL-LIABILITY-AND-EQUITY> 3,923,202
<SALES> 2,821,115
<TOTAL-REVENUES> 2,821,115
<CGS> 1,483,902
<TOTAL-COSTS> 2,122,803
<OTHER-EXPENSES> 812,390
<LOSS-PROVISION> 14,986
<INTEREST-EXPENSE> 8,730
<INCOME-PRETAX> (137,794)
<INCOME-TAX> (6,057)
<INCOME-CONTINUING> (131,737)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (131,737)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
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</TEXT>
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|
1998 | 0QTR1
| COST | https://www.sec.gov/Archives/edgar/data/909832/0001047469-98-010755.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001047469-98-010755.txt : 19980323
<SEC-HEADER>0001047469-98-010755.hdr.sgml : 19980323
ACCESSION NUMBER: 0001047469-98-010755
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19980215
FILED AS OF DATE: 19980320
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COSTCO COMPANIES INC
CENTRAL INDEX KEY: 0000909832
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331]
IRS NUMBER: 330572969
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0830
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 333-04355
FILM NUMBER: 98569914
BUSINESS ADDRESS:
STREET 1: 999 LAKE DRIVE
CITY: ISSAQUAH
STATE: WA
ZIP: 98027-
BUSINESS PHONE: (206)-313-8100
MAIL ADDRESS:
STREET 1: 999 LAKE DRIVE
CITY: ISSAQUAD
STATE: WA
ZIP: 98027
FORMER COMPANY:
FORMER CONFORMED NAME: PRICE/COSTCO INC
DATE OF NAME CHANGE: 19930728
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 15, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20355
COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0572969
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(425) 313-8100
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The registrant had 215,651,544 common shares, par value $.01, outstanding at
March 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1--FINANCIAL STATEMENTS.............................................. 3
Condensed Consolidated Balance Sheets................................... 11
Condensed Consolidated Statements of Income............................. 12
Condensed Consolidated Statements of Cash Flows......................... 13
Notes to Condensed Consolidated Financial Statements.................... 14
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS................................................. 8
ITEM 2--CHANGES IN SECURITIES............................................. 8
ITEM 3--DEFAULTS UPON SENIOR SECURITIES................................... 8
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 8
ITEM 5--OTHER INFORMATION................................................. 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................................. 9
Exhibit (28) Report of Independent Public Accountants................... 17
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of February 15, 1998, the condensed consolidated
balance sheet as of August 31, 1997, and the unaudited condensed consolidated
statements of income and cash flows for the 12- and 24-week periods ended
February 15, 1998 and February 16, 1997 are included elsewhere herein. Also,
included elsewhere herein are notes to the unaudited condensed consolidated
financial statements and the results of the limited review performed by Arthur
Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1998 is a
52-week year with period 13 ending on August 30, 1998. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 16
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1997 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 15, 1998 AND FEBRUARY 16, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 1998 increased 29% to $125,993,
or $0.56 per share (diluted), from $97,449, or $0.46 per share (diluted), during
the second quarter of fiscal 1997.
Net sales increased 11% to $5,697,098 during the second quarter of fiscal
1998 from $5,147,425 during the second quarter of fiscal 1997. This increase was
due to opening a net of 11 new warehouses (15 opened, 4 closed) since the end of
the second quarter of fiscal 1997 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 9 percent during the second quarter of fiscal 1998, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods and
various ancillary businesses to certain existing locations. Changes in prices of
merchandise did not contribute to sales increases.
Membership fees and other revenue increased 7% to $97,908 or 1.72% of net
sales in the second quarter of fiscal 1998 from $91,468 or 1.78% of net sales in
the second quarter of fiscal 1997. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the second quarter of
fiscal 1997.
Gross margin (defined as net sales minus merchandise costs) increased 13% to
$598,106 or 10.50% of net sales in the second quarter of fiscal 1998 from
$528,217 or 10.26% of net sales in the second quarter of fiscal 1997. The 24
basis point increase in gross margin as a percentage of net sales reflects the
Company's greater purchasing power, expanded use of its depot facilities,
improved fresh foods margins, and increased sales penetration of certain higher
gross margin ancillary businesses. The gross margin figures reflect accounting
for merchandise costs on the last-in, first-out (LIFO) method. The second
quarters of fiscal 1998 and 1997 each included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.40% during the second quarter of fiscal 1998 from 8.47% during
the second quarter of fiscal 1997. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher
3
<PAGE>
expenses associated with international expansion and continued expansion and
rollout of certain ancillary businesses.
Preopening expenses totaled $4,071 or 0.07% of net sales during the second
quarter of fiscal 1998 compared to $6,087 or 0.12% of net sales during the
second quarter of fiscal 1997. One warehouse was opened in the second quarter of
fiscal 1998, compared to two new locations opened during the last year's second
quarter (including a relocated warehouse). Preopening expenses also included
costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses, as well as costs associated with expanding
international operations.
Interest expense totaled $10,965 in the second quarter of fiscal 1998
compared to $17,243 in the second quarter of fiscal 1997. The decrease in
interest expense is primarily related to the call for redemption of both the
Company's 6 3/4% ($285,079 principal amount) and 5 1/2% ($179,338 principal
amount) Convertible Subordinated Debentures during the second quarter of fiscal
1997, and the call for redemption of the Company's 5 3/4% ($300,000 principal
amount) Convertible Subordinated Debentures during the fourth quarter of fiscal
1997. In the aggregate, approximately $302,000 of these three convertible
debentures were converted into common stock (13.1 million shares) and
approximately $462,000 were redeemed for cash. This reduction in debt was offset
by the raising of approximately $450,000 through the issuance of 3 1/2%
($900,000 principal amount at maturity) Zero Coupon Convertible Subordinated
Notes during the fourth quarter of fiscal 1997. (See "Note 2--Debt").
Interest income and other totaled $7,743 in the second quarter of fiscal
1998 compared to $3,461 in the second quarter of fiscal 1997. The increase
primarily reflects interest earned on higher balances of cash and cash
equivalents during the second quarter of fiscal 1998.
The effective income tax rate on earnings in the second quarter of fiscal
1998 was 40.00% compared to 40.50% effective tax rate in the second quarter of
fiscal 1997. The decrease in the effective tax rate was related primarily to
decreases in foreign taxes.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 15, 1998 AND FEBRUARY 16, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first half of fiscal 1998 reflect net income
of $223,919, or $0.99 per share (diluted), compared to net income of $129,259,
or $0.62 per share (diluted), during the first half of fiscal 1997. Net income
in the first half of fiscal 1997 included a non-cash, pretax charge of $65,000
($38,675 after-tax) reflecting a provision for the impairment of long-lived
assets as required by the Company's adoption of Statement of Financial
Accounting Standard No. 121. Excluding the $65,000 asset impairment charge, net
income for the first half of fiscal 1997 would have been $167,934, or $0.79 per
share (diluted).
Net sales increased 11% to $11,018,354 during the first half of fiscal 1998
from $9,933,061 during the first half of fiscal 1997. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
11 warehouses (15 opened, 4 closed) since the end of the second quarter of
fiscal 1997. Comparable sales, that is sales in warehouses open for at least a
year, increased 8 percent during the first half of fiscal 1998, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods and
various ancillary businesses to certain existing locations. Changes in prices of
merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $206,415 or 1.87% of net
sales in the first half of fiscal 1998 from $189,240 or 1.91% of net sales in
the first half of fiscal 1997. Membership fees include new membership sign-ups
at the new warehouses opened since the end of the second quarter of fiscal 1997.
Gross margin (defined as net sales minus merchandise costs) increased 13% to
$1,140,066 or 10.35% of net sales in the first half of fiscal 1998 from
$1,005,483 or 10.12% of net sales in the first half of fiscal 1997. The 23 basis
point increase in gross margin as a percentage of net sales reflects the
Company's greater purchasing power, expanded use of its depot facilities,
improved fresh foods and softlines margins,
4
<PAGE>
and increased sales penetration of certain higher gross margin ancillary
businesses. The gross margin figures reflect accounting for merchandise costs on
the last-in, first-out (LIFO) method. The first half of fiscal 1998 and 1997
each included a $5,000 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.62% during the first half of fiscal 1998 from 8.68% during the
first half of fiscal 1997. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher expenses associated
with international expansion and continued expansion and rollout of certain
ancillary businesses.
Preopening expenses totaled $11,414 or 0.10% of net sales during the first
half of fiscal 1998 compared to $16,284 or 0.16% of net sales during the first
half of fiscal 1997. Nine warehouses were opened in the first half of fiscal
1998 (including one relocated warehouse), compared to eleven new locations
during the last year's first half (including four relocated warehouses).
Preopening expenses also included costs related to remodels, including expanded
fresh foods and ancillary operations at existing warehouses, as well as costs
associated with expanding international operations.
In the first half of fiscal 1998 the Company recorded a pre-tax provision
for warehouse closing costs of $2,000, or $.01 per share on an after-tax basis
(diluted), compared to a pre-tax provision for warehouse closing costs of $5,000
or $.01 per share on an after-tax basis (diluted) recorded in the first half of
fiscal 1997. The provisions included estimated closing costs for warehouses
closed in each respective fiscal year, including closing costs associated with
warehouses which were relocated to new facilities. There was one warehouse
relocated in the first half of fiscal 1998 compared to four relocations and one
outright closing in the first half of fiscal 1997.
Interest expense totaled $21,888 in the first half of fiscal 1998 compared
to $36,176 in the first half of fiscal 1997. The decrease in interest expense is
primarily related to the call for redemption of the Company's 6 3/4% ($285,079
principal amount) and 5 1/2% ($179,338 principal amount) Convertible
Subordinated Debentures during the second quarter of fiscal 1997, and the call
for redemption of the Company's 5 3/4% ($300,000 principal amount) Convertible
Subordinated Debentures during the fourth quarter of fiscal 1997. In the
aggregate, approximately $302,000 of these three convertible debentures were
converted into common stock (13.1 million shares) and approximately $462,000
were redeemed for cash. This reduction in debt was offset by the raising of
approximately $450,000 through the issuance of 3 1/2% ($900,000 principal amount
at maturity) Zero Coupon Convertible Subordinated Notes during the fourth
quarter of fiscal 1997. (See "Note 2--Debt").
Interest income and other totaled $11,463 in the first half of fiscal 1998
compared to $7,119 in the first half of fiscal 1997. The increase primarily
reflects interest earned on higher balances of cash and cash equivalents during
the first half of fiscal 1998.
The effective income tax rate on earnings in the first half of fiscal 1998
was 40.00% compared to a 40.50% effective tax rate in the first half of fiscal
1997. The decrease in the effective tax rate was related primarily to decreases
in foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the Company's reports
filed previously with the Securities and Exchange Commission. Actual results may
differ materially.
5
<PAGE>
EXPANSION PLANS
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $400,000 to $450,000 during
fiscal 1998 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $60,000 to $80,000 for international expansion, including the
United Kingdom, Asia and other potential ventures. These expenditures will be
financed with a combination of cash provided from operations, the use of cash
and cash equivalents (which totaled $340,689 at February 15, 1998), short-term
borrowings under revolving credit facilities, and/or commercial paper facilities
and other financing sources as required. A total of approximately $281,000 has
been spent on capital expenditures during the first half of fiscal 1998, which
includes the acquisition costs of seven sites in Michigan from the Hechinger
Company, a home improvement warehouse operation. The Company concluded a
purchase agreement with Hechinger Company in the first quarter of fiscal 1998,
and intends to invest approximately $70,000 in these facilities, including
initial warehouse purchase and remodeling costs and working capital
requirements.
Expansion plans for the United States and Canada during fiscal 1998 are to
open approximately 16 to 17 new warehouse clubs, including five locations
acquired from the Hechinger Company (noted above), as well as one or two
relocations of existing warehouses to larger and better-located warehouses.
Through the end of the first half of fiscal 1998, the Company has opened 6
warehouses in the United States (including the relocation of its Pomona,
California warehouse to Chino Hills, California), 2 warehouses in Canada, and 1
warehouse in the United Kingdom. The Company also consolidated several of its
Southern California distribution (depot) facilities into a larger,
state-of-the-art facility in Mira Loma, California in the second quarter of
fiscal 1998. The Company also expects to continue expansion of its international
operations and plans to open one or two additional units in the United Kingdom
through its 60%-owned subsidiary during calendar 1998. Other international
markets are being assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of February 15, 1998,
Price Club Mexico operated 14 Price Club warehouses in Mexico.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 25, 1999, and $250,000 expires on January 30, 2001. At
February 15, 1998, no amount was outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, which expires in March 1999. At February 15, 1998, no amount was
outstanding under the bank credit facility or the Canadian commercial paper
program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
6
<PAGE>
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $258,000. The outstanding
commitments under these facilities at February 15, 1998 totaled approximately
$122,000, including approximately $42,000 in standby letters of credit for
workers' compensation requirements.
DERIVATIVES
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at quarter-end or in place
during the first half of fiscal 1998 was immaterial to the Company's results of
operations or its financial position.
YEAR 2000
Like most corporations, the Company is reliant upon computer information
systems to run its business. Many computer systems process dates using two
digits to identify the year, and some of these systems are unable to properly
process dates beginning with the year 2000. The Company has developed plans to
address this Year 2000 issue and is modifying and updating its computer systems
so that they will be Year 2000 compliant. The Company believes that the costs
connected with such preparations will not be material to the Company's financial
results.
FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables in relation to inventory than generally
encountered in other forms of retailing. When combined with other current
liabilities, the resulting amount typically approaches or exceeds the current
assets needed to operate the business (e.g., merchandise inventories, accounts
receivable and other current assets). Working capital totaled approximately
$240,000 at February 15, 1998 compared to $146,000 at August 31, 1997.
Net cash provided by operating activities totaled $433,865 in the first half
of fiscal 1998 compared to $247,746 in the first half of fiscal 1997. The
increase in net cash from operating activities is primarily a result of
increased net income and decreased owned inventory (inventory less trade
payables) during the first half of fiscal 1998 compared to the first half of
fiscal 1997.
Net cash used in investing activities totaled $268,587 in the first half of
fiscal 1998 compared to $285,539 in the first half of fiscal 1997. The investing
activities primarily relate to additions to property and equipment for new and
remodeled warehouses of $281,079 and $285,113 in the first half of fiscal 1998
and 1997, respectively. The Company opened 9 warehouses (including one
relocation) in the first half of fiscal 1998 compared to 11 warehouses
(including four relocations) opened in the first half of fiscal 1997. The first
half of fiscal 1998 also includes a payment to the Hechinger Company for the
acquisition of seven locations in Michigan (including five in the Detroit
market, which the Company plans to operate).
Net cash provided by financing activities totaled $1,705 in the first half
of fiscal 1998 compared to $23,155 in the first half of fiscal 1997. This
decrease reflects the utilization of operating cash flows from the first half of
fiscal 1998 operating activities, as well as the use of cash balances generated
from the fourth quarter 1997 issuance of 3 1/2% Zero Coupon Subordinated Notes,
to finance expansion plans.
The Company's balance sheet as of February 15, 1998 reflects a $397,391 or
7% increase in total assets since August 31, 1997. The increase is primarily due
to higher cash balances and a net increase in property and equipment primarily
related to the Company's expansion program.
7
<PAGE>
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1992, The Price Company was served with a Complaint in an action
entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United
States District Court, Southern District of California (the "Court").
Subsequently, on April 22, 1992, The Price Company was served with a First
Amended Complaint in the action. The case was dismissed without prejudice by the
Court on September 21, 1992, on the grounds the plaintiffs had failed to state a
sufficient claim against defendants. Subsequently, plaintiffs filed a Second
Amended Complaint which, in the opinion of The Price Company's counsel, alleged
substantially the same facts as the prior complaint. The Complaint alleged
violation of certain state and federal laws during the time period prior to The
Price Company's earnings release for the second quarter of fiscal year 1992. The
case was dismissed with prejudice by the Court on March 9, 1993, on grounds the
plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs
filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated
November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. In
February 1997, the Court granted the plaintiffs' motion for certification of a
class consisting of all purchasers of the common stock of The Price Company from
April 3, 1991 through April 2, 1992. The Company believes that this lawsuit is
without merit and is vigorously defending the lawsuit. The Company does not
believe that the ultimate outcome of such litigation will have a material
adverse effect on the Company's financial position or results of operations.
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on January 21, 1998 at
the Meydenbauer Center Hall in Bellevue, Washington. Stockholders of record at
the close of business on December 5, 1997 were entitled to notice of and to vote
in person or by proxy at the annual meeting. At the date of record, there were
214,384,241 shares outstanding. Certain matters presented for vote received the
required majority approval and had the following total, for, against and
abstained votes as noted below.
(1) To elect three Class II directors to hold office until the 2001 Annual
Meeting of Stockholders and until their successors are elected and qualified.
<TABLE>
<CAPTION>
W/H AUTHORITY AND
TOTAL SHARES AGAINST ABSTAINED VOTES/
VOTED/(%) FOR VOTES/(%) VOTES/(%) (%)
------------- ------------- ------------ ------------------
<S> <C> <C> <C> <C>
Hamilton E. James................................ 178,111,255 174,476,895 -- 3,634,360
(Class II) 83.08% 97.96% -- 2.04%
Frederick O. Paulsell............................ 178,111,255 175,476,624 -- 2,634,631
(Class II) 83.08% 98.52% -- 1.48%
Jill A. Ruckelshaus.............................. 178,111,255 175,505,574 -- 2,605,681
(Class II) 83.08% 98.54% -- 1.46%
</TABLE>
8
<PAGE>
(2) To amend The Costco Companies, Inc. 1993 Combined Stock Grant and Stock
Option Plan to clarify the eligibility requirements and to conform to changes
under Section 16 of the Securities Exchange Act.
<TABLE>
<CAPTION>
W/H AUTHORITY AND
TOTAL SHARES FOR AGAINST ABSTAINED VOTES/
VOTED/(%) VOTES/(%) VOTES/(%) (%)
------------ ------------ ---------- ------------------
<S> <C> <C> <C> <C>
178,111,255 141,040,667 34,585,387 2,485,201
83.08% 79.19% 19.42% 1.39%
</TABLE>
(3) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
<TABLE>
<CAPTION>
W/H AUTHORITY AND
TOTAL SHARES FOR AGAINST ABSTAINED VOTES/
VOTED/(%) VOTES/(%) VOTES/(%) (%)
------------ ------------ ---------- ------------------
<S> <C> <C> <C> <C>
Arthur Andersen LLP..................... 178,111,255 177,705,460 78,799 326,996
83.08% 99.77% .05% .18%
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule--Fiscal year ends 1995, 1996
and Quarters 1, 2, 3 of 1996
(27.3) Restated Financial Data Schedule--Fiscal year end 1997, Quarters
1, 2, 3 of 1997 and Quarter 1 of 1998
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended February 15,
1998.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
COSTCO COMPANIES, INC.
REGISTRANT
--------------------------------------
Date: March 19, 1998 James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
--------------------------------------
Richard A. Galanti
Date: March 19, 1998 EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
10
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 15, AUGUST 31,
1998 1997
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $ 340,689 $ 175,508
Receivables, net...................................... 173,304 147,133
Merchandise inventories, net.......................... 1,758,236 1,686,525
Other current assets.................................. 76,169 100,784
------------ ----------
Total current assets................................ 2,348,398 2,109,950
------------ ----------
PROPERTY AND EQUIPMENT
Land and land rights.................................. 1,157,450 1,094,607
Buildings and leasehold and land improvements......... 2,085,622 1,933,740
Equipment and fixtures................................ 897,380 840,578
Construction in progress.............................. 44,857 81,417
------------ ----------
4,185,309 3,950,342
Less-accumulated depreciation and amortization........ (865,951) (795,708)
------------ ----------
Net property and equipment.......................... 3,319,358 3,154,634
------------ ----------
OTHER ASSETS.......................................... 205,949 211,730
------------ ----------
$ 5,873,705 $5,476,314
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding............................... $ 6,734 $ 14,930
Short-term borrowings................................. -- 25,460
Accounts payable...................................... 1,486,367 1,379,379
Accrued salaries and benefits......................... 350,393 302,681
Accrued sales and other taxes......................... 94,939 90,774
Other current liabilities............................. 169,474 150,823
------------ ----------
Total current liabilities........................... 2,107,907 1,964,047
LONG-TERM DEBT........................................ 922,159 917,001
DEFERRED INCOME TAXES AND OTHER LIABILITIES........... 44,480 38,967
------------ ----------
Total liabilities................................... 3,074,546 2,920,015
------------ ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST..................................... 99,645 88,183
------------ ----------
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding........ -- --
Common stock $.01 par value; 900,000,000 shares
authorized; 215,103,000 and 213,593,000 shares
issued and outstanding.............................. 2,151 2,136
Additional paid-in capital............................ 741,501 706,324
Accumulated foreign currency translation.............. (106,139) (78,426)
Retained earnings..................................... 2,062,001 1,838,082
------------ ----------
Total stockholders' equity.......................... 2,699,514 2,468,116
------------ ----------
$ 5,873,705 $5,476,314
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- ----------------------------
FEBRUARY 15, FEBRUARY 16, FEBRUARY 15, FEBRUARY 16,
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Net sales.............................................. $ 5,697,098 $ 5,147,425 $ 11,018,354 $ 9,933,061
Membership fees and other.............................. 97,908 91,468 206,415 189,240
------------ ------------ ------------- -------------
Total revenue........................................ 5,795,006 5,238,893 11,224,769 10,122,301
OPERATING EXPENSES
Merchandise costs...................................... 5,098,992 4,619,208 9,878,288 8,927,578
Selling, general and administrative.................... 478,732 436,036 949,443 862,140
Preopening expenses.................................... 4,071 6,087 11,414 16,284
Provision for impaired assets and warehouse closing
costs................................................ -- -- 2,000 70,000
------------ ------------ ------------- -------------
Operating income..................................... 213,211 177,562 383,624 246,299
OTHER INCOME (EXPENSE)
Interest expense....................................... (10,965) (17,243) (21,888) (36,176)
Interest income and other.............................. 7,743 3,461 11,463 7,119
------------ ------------ ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES............... 209,989 163,780 373,199 217,242
Provision for income taxes............................. 83,996 66,331 149,280 87,983
------------ ------------ ------------- -------------
NET INCOME............................................. $ 125,993 $ 97,449 $ 223,919 $ 129,259(a)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Basic................................................ $ 0.59 $ 0.47 $ 1.05 $ 0.64
Diluted.............................................. $ 0.56 $ 0.46 $ 0.99 $ 0.62(a)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Shares used in calculation (000's)
Basic................................................ 214,590 206,540 214,211 201,573
Diluted.............................................. 230,482 222,894 229,962 217,565
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
- ------------------------
(a) Net income and net income per common and common equivalent share would have
been $167,934 and $0.79, respectively, without the effect of adopting FAS
No. 121, using 224,838 diluted shares.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS ENDED
--------------------------
FEBRUARY 15, FEBRUARY 16,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................ $ 223,919 $ 129,259
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 94,046 79,909
Provision for asset impairments..................................................... -- 65,000
Increase in merchandise inventories................................................. (80,768) (155,362)
Increase in accounts payable........................................................ 113,865 96,502
Other............................................................................... 82,803 32,438
------------ ------------
Total adjustments................................................................. 209,946 118,487
------------ ------------
Net cash provided by operating activities........................................... 433,865 247,746
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment................................................... (281,079) (285,113)
Proceeds from the sale of property and equipment...................................... 15,385 7,603
Other................................................................................. (2,893) (8,029)
------------ ------------
Net cash used in investing activities............................................... (268,587) (285,539)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings................................. (24,979) 159,477
Decrease in bank checks outstanding................................................... (7,958) (9,618)
Net proceeds from long-term borrowings................................................ 2,338 2,589
Payments on long-term debt and notes payable.......................................... (3,660) (164,624)
Proceeds from minority interests, net................................................. 10,222 16,669
Exercise of stock options............................................................. 25,742 18,662
------------ ------------
Net cash provided by financing activities........................................... 1,705 23,155
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,802) 231
------------ ------------
Net increase/(decrease) in cash and cash equivalents................................ 165,181 (14,407)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 175,508 101,955
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 340,689 $ 87,548
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)(a)............................................ $ 16,367 $ 45,763
Income taxes........................................................................ 102,463 65,400
</TABLE>
- ------------------------
(a) Interest on the 3 1/2% ($900 million principal amount at maturity) Zero
Coupon Subordinated Notes requires no cash payments; rather the principal
accretes to full value at maturity. Semi-annual interest payments on the
5 1/2% and 6 3/4% convertible debentures were paid on September 3, 1996,
subsequent to the beginning of the first quarter of fiscal 1997, which began
September 2, 1996. These debentures were redeemed during fiscal 1997.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco"
or the "Company"). Costco is a holding company which operates primarily through
its major subsidiaries, The Price Company and subsidiaries, and Costco Wholesale
Corporation and subsidiaries. All intercompany transactions between the Company
and its subsidiaries have been eliminated in consolidation. Costco primarily
operates membership warehouses under the "Costco Wholesale" name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally-branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. As of February 15, 1998, Costco operated 269 warehouses clubs: 205
in the United States (23 states); 56 in Canada (in nine Canadian provinces);
seven in the United Kingdom; and one warehouse in Taiwan. As of February 15,
1998, the Company also operated (through a 50%-owned joint venture) 14
warehouses in Mexico, and had a license agreement for the operation of two
membership warehouses in Korea.
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended August 31, 1997.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1998 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 30, 1998, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are recorded at the lower of cost or market as
determined by the retail inventory method, and are stated using the last-in,
first-out (LIFO) method for U.S. merchandise inventories, and the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used, merchandise inventory would have been $21,150 higher at both
February 15, 1998 and February 16, 1997.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
14
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In the second quarter of fiscal 1998, the Company adopted the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" (SFAS No.
128). SFAS No. 128 established new standards for computing and presenting
earnings per share (EPS) for entities with publicly-held common stock.
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- --------------------------
FEBRUARY 15, FEBRUARY 16, FEBRUARY 15, FEBRUARY 16,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders used in basic
EPS..................................................... $ 125,993 $ 97,449 $ 223,919 $ 129,259
Interest on convertible bonds............................. 2,198 4,228 4,396 5,855
------------ ------------ ------------ ------------
Net income available to common stockholders after assumed
conversions of dilutive securities...................... $ 128,191 $ 101,677 $ 228,315 $ 135,114
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares used in basic
EPS..................................................... 214,590 206,540 214,211 201,573
Stock options............................................. 5,673 3,713 5,532 3,211
Conversion of convertible bonds........................... 10,219 12,641 10,219 12,781
------------ ------------ ------------ ------------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS........................ 230,482 222,894 229,962 217,565
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The 5 3/4% debentures convertible into 7,273 common shares were not included
in computing diluted EPS for the 24 weeks ended in fiscal 1997 because their
effect was antidilutive.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In
accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of
$65,000 reflecting its estimate of impairment relating principally to excess
property and closed warehouses. The charge reflects the difference between
carrying value and fair-market value, which was based on market valuations for
those assets whose carrying value was not recoverable through future cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
15
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(UNAUDITED)
NOTE (2)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 25, 1999, and $250,000 expires on January 30, 2001. At
February 15, 1998, no amount was outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, which expires in March 1999. At February 15, 1998, no amount was
outstanding under the bank credit facility or the Canadian commercial paper
program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $258,000. The outstanding
commitments under these facilities at February 15, 1998 totaled approximately
$122,000, including approximately $42,000 in standby letters of credit for
workers' compensation requirements.
NOTE (3)--INCOME TAXES
The following is a reconciliation of the federal statutory income tax rate
to the effective income tax rate for income before income taxes:
<TABLE>
<CAPTION>
24 WEEKS ENDED 24 WEEKS ENDED
FEBRUARY 15, 1998 FEBRUARY 16, 1997
----------------------- ----------------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate.................................. $ 130,620 35.00% $ 76,035 35.00%
State, foreign and other income taxes, net......................... 18,660 5.00% 11,948 5.50%
---------- ----------- --------- -----------
$ 149,280 40.00% $ 87,983 40.50%
---------- ----------- --------- -----------
---------- ----------- --------- -----------
</TABLE>
NOTE (4)--COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations. See Item 1. Legal Proceedings on page 8.
16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-28
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 28
<TEXT>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of February
15, 1998, and the related condensed consolidated statements of income for the
twelve-week and twenty-four-week periods ended February 15, 1998 and February
16, 1997, and the condensed consolidated statements of cash flows for the
twenty-four-week periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
March 10, 1998
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 27.1 (FDS)
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-30-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-15-1998
<CASH> 340,689
<SECURITIES> 0
<RECEIVABLES> 178,171
<ALLOWANCES> 4,867
<INVENTORY> 1,758,236
<CURRENT-ASSETS> 2,348,398
<PP&E> 4,185,309
<DEPRECIATION> 865,951
<TOTAL-ASSETS> 5,873,705
<CURRENT-LIABILITIES> 2,107,907
<BONDS> 922,159
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 743,652
<OTHER-SE> 1,955,862
<TOTAL-LIABILITY-AND-EQUITY> 5,873,705
<SALES> 11,018,354
<TOTAL-REVENUES> 11,224,769
<CGS> 9,878,288
<TOTAL-COSTS> 10,841,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,888
<INCOME-PRETAX> 373,199
<INCOME-TAX> 149,280
<INCOME-CONTINUING> 223,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,919
<EPS-PRIMARY> 1.05
<EPS-DILUTED> .99
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>4
<DESCRIPTION>FDS EXH.27.2
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS
12-MOS
<FISCAL-YEAR-END> SEP-03-1995 SEP-01-1996 SEP-01-1996 SEP-01-1996
SEP-01-1996
<PERIOD-START> AUG-29-1994 SEP-04-1995 SEP-04-1995 SEP-04-1995
SEP-04-1995
<PERIOD-END> SEP-03-1995 NOV-26-1995 FEB-18-1996 MAY-12-1996
SEP-01-1996
<CASH> 45,688 12,876 40,496 80,531
101,955
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 151,293 182,190 180,298 140,004
140,965
<ALLOWANCES> 4,628 5,026 4,102 3,314
3,498
<INVENTORY> 1,422,272 1,818,165 1,393,803 1,497,564
1,500,842
<CURRENT-ASSETS> 1,702,319 2,090,737 1,699,327 1,798,319
1,828,304
<PP&E> 3,062,035 3,177,637 3,283,733 3,378,872
3,543,536
<DEPRECIATION> 526,442 551,836 579,823 610,389
655,226
<TOTAL-ASSETS> 4,437,419 4,925,472 4,600,691 4,760,593
4,911,861
<CURRENT-LIABILITIES> 1,692,938 2,135,671 1,749,646 1,721,076
1,771,594
<BONDS> 1,099,815 1,098,681 1,092,842 1,232,457
1,229,221
<PREFERRED-MANDATORY> 0 0 0 0
0
<PREFERRED> 0 0 0 0
0
<COMMON> 305,941 306,848 308,166 313,902
323,796
<OTHER-SE> 1,224,803 1,271,815 1,320,508 1,364,480
1,454,002
<TOTAL-LIABILITY-AND-EQUITY> 4,437,419 4,925,472 4,600,691 4,760,593
4,911,861
<SALES> 17,905,926 4,295,862 8,901,932 13,138,139
19,213,866
<TOTAL-REVENUES> 18,247,286 4,383,564 9,072,259 13,383,747
19,566,456
<CGS> 16,225,848 3,887,116 8,041,108 11,871,031
17,345,315
<TOTAL-COSTS> 17,813,954 4,282,539 8,834,444 13,058,492
19,075,733
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 67,911 17,771 35,272 54,466
78,078
<INCOME-PRETAX> 368,204 84,345 205,921 276,174
423,477
<INCOME-TAX> 150,963 34,792 84,942 113,921
174,684
<INCOME-CONTINUING> 217,241 49,553 120,979 162,253
248,793
<DISCONTINUED> (83,363) 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 133,878 49,553 120,979 162,253
248,793
<EPS-PRIMARY> .66 .25 .62 .83
1.27
<EPS-DILUTED> .66 .25 .59 .80
1.22
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.3
<SEQUENCE>5
<DESCRIPTION>FDS EXH. 27.3
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
3-MOS
<FISCAL-YEAR-END> AUG-31-1997 AUG-31-1997 AUG-31-1997 AUG-31-1997
AUG-30-1998
<PERIOD-START> SEP-02-1996 SEP-02-1996 SEP-02-1996 SEP-02-1996
SEP-01-1997
<PERIOD-END> NOV-24-1996 FEB-16-1997 MAY-11-1997 AUG-31-1997
NOV-23-1997
<CASH> 111,011 87,548 136,660 175,508
205,693
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 174,234 171,705 134,933 151,493
208,355
<ALLOWANCES> 4,412 3,840 3,895 4,360
4,563
<INVENTORY> 1,992,675 1,660,210 1,647,216 1,686,525
2,099,981
<CURRENT-ASSETS> 2,348,256 1,993,961 1,993,550 2,109,950
2,587,410
<PP&E> 3,677,903 3,761,759 3,829,771 3,950,342
4,123,191
<DEPRECIATION> 693,279 720,382 749,793 795,708
832,514
<TOTAL-ASSETS> 5,520,599 5,225,373 5,258,964 5,476,314
6,085,166
<CURRENT-LIABILITIES> 2,336,199 2,094,635 2,059,677 1,964,047
2,454,451
<BONDS> 1,231,174 765,421 760,010 917,001
920,368
<PREFERRED-MANDATORY> 0 0 0 0
0
<PREFERRED> 0 0 0 0
0
<COMMON> 326,502 648,732 668,636 708,460
722,175
<OTHER-SE> 1,503,078 1,590,284 1,644,702 1,759,656
1,847,444
<TOTAL-LIABILITY-AND-EQUITY> 5,520,599 5,225,373 5,258,964 5,476,314
6,085,166
<SALES> 4,785,636 9,933,061 14,685,506 21,484,118
5,321,256
<TOTAL-REVENUES> 4,883,408 10,122,301 14,958,530 21,874,404
5,429,763
<CGS> 4,308,369 8,927,578 13,210,736 19,314,485
4,779,296
<TOTAL-COSTS> 4,814,670 9,876,002 14,592,098 21,293,692
5,259,350
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 18,933 36,176 50,839 76,281
10,923
<INCOME-PRETAX> 53,462 217,242 326,770 520,329
163,210
<INCOME-TAX> 21,652 87,983 131,246 208,132
65,284
<INCOME-CONTINUING> 31,810 129,259 195,524 312,197
97,926
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 31,810 129,259 195,524 312,197
97,926
<EPS-PRIMARY> .16 .64 .95 1.51
.46
<EPS-DILUTED> .16 .62 .93 1.47
.44
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| CPB | https://www.sec.gov/Archives/edgar/data/16732/0000893220-98-000443.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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InmqEUp9NVDFzX45K0SYKA==
<SEC-DOCUMENT>0000893220-98-000443.txt : 19980226
<SEC-HEADER>0000893220-98-000443.hdr.sgml : 19980226
ACCESSION NUMBER: 0000893220-98-000443
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980201
FILED AS OF DATE: 19980225
SROS: NYSE
SROS: PHLX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CAMPBELL SOUP CO
CENTRAL INDEX KEY: 0000016732
STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000]
IRS NUMBER: 210419870
STATE OF INCORPORATION: NJ
FISCAL YEAR END: 0729
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-03822
FILM NUMBER: 98549348
BUSINESS ADDRESS:
STREET 1: CAMPBELL PL
CITY: CAMDEN
STATE: NJ
ZIP: 08103
BUSINESS PHONE: 6093424800
MAIL ADDRESS:
STREET 1: CAMPBELL PL
CITY: CAMDEN
STATE: NJ
ZIP: 08103
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR CAMPBELL SOUP COMPANY 2/1/1998
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
FEBRUARY 1, 1998 1-3822
[Campbell Soup Company Logo]
NEW JERSEY 21-0419870
STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO.
CAMPBELL PLACE
CAMDEN, NEW JERSEY 08103-1799
PRINCIPAL EXECUTIVE OFFICES
TELEPHONE NUMBER: (609) 342-4800
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO .
THERE WERE 454,133,575 SHARES OF CAPITAL STOCK OUTSTANDING
AS OF FEBRUARY 9, 1998.
-1-
<PAGE> 2
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF EARNINGS
(unaudited)
(millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
FEBRUARY January FEBRUARY January
1, 1998 26, 1997 1, 1998 26, 1997
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,342 $ 2,317 $ 4,462 $ 4,369
- --------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of products sold 1,177 1,227 2,281 2,339
Marketing and selling expenses 518 486 944 882
Administrative expenses 93 93 188 176
Research and development expenses 18 19 38 37
Other expense 18 29 42 67
Restructuring charge - - - 216
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,824 1,854 3,493 3,717
- -------------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes 518 463 969 652
Interest, net 44 45 87 74
- -------------------------------------------------------------------------------------------------------------------
Earnings before taxes 474 418 882 578
Taxes on earnings 163 142 304 214
- -------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of change
in accounting principle 311 276 578 364
Cumulative effect of change in accounting principle 11 - 11 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 300 $ 276 $ 567 $ 364
===================================================================================================================
Per share - basic
Earnings before cumulative effect of change
in accounting principle $ .68 $ .59 $ 1.26 $ .76
Cumulative effect of change in accounting principle .02 - .02 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ .66 $ .59 $ 1.24 $ .76
===================================================================================================================
Dividends $ .210 $ .193 $ .403 $ .365
===================================================================================================================
Weighted average shares outstanding - basic 457 467 457 482
===================================================================================================================
Per share - assuming dilution
Earnings before cumulative effect of change
in accounting principle $ .67 $ .58 $ 1.25 $ .75
Cumulative effect of change in accounting principle .02 - .02 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ .65 $ .58 $ 1.23 $ .75
===================================================================================================================
Weighted average shares outstanding - assuming dilution 462 473 463 487
===================================================================================================================
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 3
CAMPBELL SOUP COMPANY CONSOLIDATED
BALANCE SHEETS
(millions)
<TABLE>
<CAPTION>
FEBRUARY August
1, 1998 3, 1997
--------- ---------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 99 $ 26
Accounts receivable 910 633
Inventories 722 762
Other current assets 174 162
- --------------------------------------------------------------------------------
Total current assets 1,905 1,583
- --------------------------------------------------------------------------------
Plant assets, net of depreciation 2,449 2,560
Intangible assets, net of amortization 2,124 1,793
Other assets 529 523
- --------------------------------------------------------------------------------
Total assets $ 7,007 $ 6,459
================================================================================
Current liabilities
Notes payable $ 2,112 $ 1,506
Payable to suppliers and others 522 608
Accrued liabilities 607 642
Dividend payable -- 88
Accrued income taxes 197 137
- --------------------------------------------------------------------------------
Total current liabilities 3,438 2,981
- --------------------------------------------------------------------------------
Long-term debt 1,263 1,153
Nonpension postretirement benefits 441 442
Other liabilities, including deferred
income taxes of $254 and $251 381 463
- --------------------------------------------------------------------------------
Total liabilities 5,523 5,039
- --------------------------------------------------------------------------------
Shareowners' equity
Preferred stock; authorized 40 shares;
none issued -- --
Capital stock, $.0375 par value; authorized
560 shares; issued 542 shares 20 20
Capital surplus 370 338
Earnings retained in the business 3,955 3,571
Capital stock in treasury, at cost (2,749) (2,459)
Cumulative translation adjustments (112) (50)
- --------------------------------------------------------------------------------
Total shareowners' equity 1,484 1,420
- --------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 7,007 $ 6,459
================================================================================
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 4
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
(millions)
<TABLE>
<CAPTION>
Six Months Ended
----------------
FEBRUARY January
1, 1998 26, 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 567 $ 364
Non-cash charges to net earnings
Cumulative effect of accounting change 11 --
Restructuring charge -- 216
Depreciation and amortization 156 160
Deferred taxes 8 (64)
Other, net 21 65
Changes in working capital
Accounts receivable (273) (289)
Inventories 39 74
Other current assets and liabilities (61) 51
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 468 577
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant assets (113) (133)
Sales of plant assets 14 21
Businesses acquired (478) (238)
Sales of businesses 21 73
Other, net (5) (19)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (561) (296)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term borrowings 370 300
Repayments of long-term borrowings (16) (4)
Short-term borrowings 1,066 1,019
Repayments of short-term borrowings (716) (196)
Dividends paid (272) (175)
Treasury stock purchased (304) (1,235)
Treasury stock issued 49 20
- ---------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 177 (271)
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (11) (13)
- ---------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 73 (3)
Cash and cash equivalents - beginning of period 26 34
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 99 $ 31
=============================================================================================
</TABLE>
See Notes to Financial Statements
-4-
<PAGE> 5
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF SHAREOWNERS' EQUITY
(unaudited)
(millions, except per share amounts)
<TABLE>
<CAPTION>
Capital Stock
---------------------------------------- Earnings
Issued In Treasury retained Cumulative Total
----------------- ------------------ Capital in the translation shareowners'
Shares Amount Shares Amount surplus business adjustments equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 28, 1996 542 $20 (48) $(779) $228 $3,211 $62 $2,742
Net earnings 364 364
Dividends ($.365 per share) (175) (175)
Treasury stock purchased (31) (1,235) (1,235)
Treasury stock issued under
Management incentive and
Stock option plans 1 (7) 39 32
Translation adjustments (40) (40)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 26, 1997 542 $20 (78) $(2,021) $267 $3,400 $22 $1,688
===================================================================================================================================
BALANCE AT AUGUST 3, 1997 542 $20 (84) $(2,459) $338 $3,571 $(50) $1,420
NET EARNINGS 567 567
DIVIDENDS ($.403 PER SHARE) (183) (183)
TREASURY STOCK PURCHASED (6) (304) (304)
TREASURY STOCK ISSUED UNDER
MANAGEMENT INCENTIVE AND
STOCK OPTION PLANS 2 14 32 46
TRANSLATION ADJUSTMENTS (62) (62)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 1998 542 $20 (88) $(2,749) $370 $3,955 $(112) $1,484
===================================================================================================================================
</TABLE>
See Notes to Financial Statements
-5-
<PAGE> 6
CAMPBELL SOUP COMPANY CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(millions)
(a) The financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results
for the indicated periods. All such adjustments are of a normal
recurring nature.
(b) Cumulative Effect of Change In Accounting Principle
In the second quarter of fiscal 1998, the company adopted the
provisions of the Emerging Issues Task Force (EITF) consensus ruling on
Issue 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Reengineering and
Information Technology Transformation." The EITF, a sub-committee of
the Financial Accounting Standards Board, reached a consensus that
costs of business process reengineering activities that are part of a
systems development project are to be expensed as incurred.
Furthermore, the consensus ruling stipulates that the unamortized
balance of such previously capitalized business process reengineering
costs are to be written off as a cumulative effect of accounting change
as of the beginning of the quarter which includes November 20, 1997.
The company previously capitalized certain consulting costs related to
the purchase and implementation of software for internal use. The
cumulative effect of this change in accounting principle is $11 million
or $.02 per share, net of an income tax benefit of approximately $7
million.
(c) Earnings Per Share
The company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("FAS 128") as of the second
quarter fiscal 1998. FAS 128 revised the standards for computation and
presentation of earnings per share ("EPS"), requiring the presentation
of both basic EPS and EPS assuming dilution. Basic EPS is based on the
weighted average shares outstanding during the applicable period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Prior periods have been restated to
conform with the provisions of FAS 128.
For the periods presented in the Statements of Earnings, the
calculations of basic EPS and EPS assuming dilution vary in that the
weighted average shares outstanding assuming dilution includes the
incremental effect of stock options.
-6-
<PAGE> 7
(d) Acquisitions
In December 1997, the company acquired the Liebig soup business in
France for approximately $180 million. Aggregate annual sales are
approximately $75 million. Also in December, Arnotts Limited purchased
the remaining outstanding ordinary shares held by its minority
shareholders for an aggregate purchase price of approximately $290
million. Prior to the transaction, the company owned approximately 70%
of Arnotts Limited. The acquisitions have been recorded using the
purchase method of accounting, and accordingly, results of their
operations have been included in the company's consolidated financial
statements since the effective dates of the respective acquisitions.
The aggregate excess of the purchase price over the fair value of the
net identifiable assets of $360 million has been recorded as goodwill
and will be amortized over 40 years. The allocations of the purchase
price of the acquisitions is preliminary and may be modified as
additional financial information is available.
(e) Segment Information
The company operates in four business segments: Soup and Sauces,
Biscuits and Confectionery, Foodservice, and Specialty Foods. The
segments are managed as strategic units due to their distinct
manufacturing processes, marketing strategies and distribution
channels. The Soup and Sauces segment includes the worldwide soup
businesses, Prego spaghetti sauces, Pace Mexican sauces,
Franco-American pasta, Swanson broths, and V8 beverages. The Biscuits
and Confectionery segment includes the Godiva Chocolatier, Pepperidge
Farm, Arnotts Limited and Delacre businesses. Foodservice represents
the distribution of products, including Campbell's Soups and Campbell's
Specialty Kitchen entrees to the food service and meal replacement
markets. The Specialty Foods segment is comprised of Swanson frozen
foods, Vlasic pickles and certain European and Argentine specialty
foods businesses. On September 9, 1997, the company announced its
intention to spin off the Specialty Foods segment.
Accounting policies for measuring segment assets and earnings before
interest and taxes are substantially consistent with those described in
the summary of significant accounting policies included in the fiscal
1997 Annual Report. The company evaluates segment performance based on
earnings before interest and taxes, excluding certain non-recurring
charges. Foodservice products are principally produced by the tangible
assets of the company's other segments. Accordingly, tangible assets
have not been allocated to the Foodservice segment. Depreciation and
amortization is allocated to Foodservice based on budgeted production
hours. Transfers between segments are recorded at cost plus mark-up or
at market.
-7-
<PAGE> 8
FEBRUARY 1, 1998
<TABLE>
<CAPTION>
Corporate
Soup and Biscuits and Food- Specialty and
Sauces Confectionery service Foods Other(1) Eliminations(2) Total
-------- ------------- ------- ----- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
Net sales $1,386 428 119 344 98 (33) $2,342
Earnings before Interest
and Taxes $ 396 76 16 34 4 (8) $ 518
Depreciation and
Amortization $ 30 22 2 12 5 5 $ 76
Capital Expenditures $ 25 14 -- 12 3 4 $ 58
SIX MONTHS ENDED
Net sales $2,601 837 225 665 201 (67) $4,462
Earnings before Interest
and Taxes $ 766 135 31 60 6 (29) $ 969
Depreciation and
Amortization $ 66 44 4 23 9 10 $ 156
Capital Expenditures $ 45 30 -- 23 8 7 $ 113
Segment Assets $3,294 1,725 100 930 382 576 $7,007
</TABLE>
- ----------
(1)Represents financial information of certain prepared convenience food
businesses not categorized as reportable segments.
(2)Represents elimination of intersegment sales, unallocated corporate expenses
and unallocated assets, including corporate offices, deferred taxes and pension
accounts.
-8-
<PAGE> 9
JANUARY 26, 1997
<TABLE>
<CAPTION>
Corporate
Soup and Biscuits and Food- Specialty and
Sauces Confectionery service Foods Other(1) Eliminations(2) Total
-------- -------------- ------- --------- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
Net sales $1,301 425 118 353 143 (23) $2,317
Earnings before Interest
and Taxes $ 359 69 18 32 2 (17) $ 463
Depreciation and
Amortization $ 33 23 2 10 8 5 $ 81
Capital Expenditures $ 16 20 -- 19 4 5 $ 64
SIX MONTHS ENDED
Net sales $2,407 826 223 684 279 (50) $4,369
Earnings before Interest
and Taxes(3) $ 557 68 32 46 (12) (39) $ 652
Depreciation and
Amortization $ 65 45 4 20 16 10 $ 160
Capital Expenditures $ 33 45 -- 35 7 13 $ 133
Segment Assets(4) $2,966 1,523 78 888 439 565 $6,459
</TABLE>
- ----------
(1)Represents financial information of certain prepared convenience food
businesses not categorized as reportable segments.
(2)Represents elimination of intersegment sales, unallocated corporate expenses
and unallocated assets, including corporate offices, deferred taxes and pension
accounts.
(3)Contributions to earnings before interest and taxes by segment include the
effects of a first quarter fiscal 1997 restructuring charge of $216 as follows:
Soup and Sauces - $134, Biscuits and Confectionery - $53, Specialty Foods - $13
and Other - $16.
(4)Segment assets reported as of the fiscal year ended August 3, 1997.
-9-
<PAGE> 10
(f) Inventories
<TABLE>
<CAPTION>
FEBRUARY August
1, 1998 3, 1997
------- -------
<S> <C> <C>
Raw materials, containers and supplies $273 $300
Finished products 455 471
- --------------------------------------------------------------------------------
728 771
Less - Adjustment of certain inventories
To LIFO basis 6 9
- --------------------------------------------------------------------------------
$722 $762
================================================================================
</TABLE>
(g) Notes Payable and Long-Term Debt
In December 1997, the company partially financed the purchase of the
remaining outstanding minority shares in Arnotts Limited with a
one-year $260 million bank borrowing bearing interest at 5.1%.
In December 1997, the company issued $300 million of notes due December
1, 2002 bearing interest at 6.15%. The issuance was the second draw
down on the company's $1 billion Shelf Registration filed with the
Securities and Exchange Commission in fiscal 1997. Four hundred million
dollars remain available for issuance under the Shelf Registration.
Also in December 1997, a wholly owned subsidiary of the company entered
into a three-year borrowing arrangement with an investor group for
approximately $100 million. Principal payments are made monthly under
the terms of the arrangement.
(h) Subsequent Events
On February 18, 1998, the company announced that it received a
favorable ruling from the Internal Revenue Service that the previously
announced plan to spin off the Specialty Foods segment qualifies as a
tax-free transaction to U.S. shareowners. Subject to approval of the
company's Board of Directors and various regulatory agencies, the
spinoff is expected to be completed in the third quarter of fiscal
1998. The new company, which includes Swanson frozen foods, Vlasic
pickles, and certain European and Argentine specialty foods businesses,
will be named Vlasic Foods International Inc.
-10-
<PAGE> 11
In February 1998, the company entered into a revolving credit facility
which provides for aggregate funding of $750 million. The company
expects to draw down $500 million under the terms of the facility in
March 1998. In connection with the spinoff of the Specialty Foods
segment, the revolving credit facility and the outstanding debt
obligation will be assigned to the new company, Vlasic Foods
International Inc.
In February 1998, the company reached an agreement in principle to sell
the assets of its can-making operations at four of its North American
thermal manufacturing plants for approximately $125 million and enter
into a long-term supply agreement with the buyer. The transaction is
expected to be completed in fiscal 1998.
On February 18, 1998, the company announced that it expects to record a
special charge in the third quarter of fiscal 1998 to cover the costs
associated with its strategic growth plan. The special charge is
expected to include one-time costs related to the spinoff of Vlasic
Foods International Inc. and other cost and productivity initiatives
that are currently under review.
-11-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CAMPBELL SOUP COMPANY
RESULTS OF OPERATIONS
OVERVIEW
Campbell achieved record sales and earnings for the second quarter ended
February 1, 1998. Comparability in net earnings and earnings per share with the
second quarter last year were impacted by the adoption of a one-time accounting
change. On November 20, 1997, the Emerging Issues Task Force (EITF) released
Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting
Contract that Combines Business Process Reengineering and Information Technology
Transformation." The impact of this required accounting change was $11 million
after-tax or $.02 per share. In addition, the company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which requires the
computation and presentation of basic and diluted earnings per share. Excluding
the accounting change, net earnings increased 12% and basic and diluted earnings
per share increased 15% and 16%, respectively, versus last year.
Also in the quarter, the following transactions were completed:
- The company acquired the Liebig soup business in France from
Danone S.A. for approximately $180 million;
- Arnotts Limited repurchased the outstanding ordinary shares
held by minority shareholders for approximately $290 million.
As a result of the repurchase, Campbell's ownership of Arnotts
increased to 100%; and
- The company issued $300 million 6.15% notes due December 1,
2002.
Comparability of net earnings and earnings per share for the six months ended
February 1, 1998 were impacted by the cumulative effect of adopting EITF 97-13
in the second quarter of fiscal 1998 and the first quarter fiscal 1997 special
charge of $216 million ($160 million after-tax or $.32 per share) to cover the
costs of a restructuring program. Excluding these charges, net earnings
increased 10% and basic and diluted earnings per share increased 16% versus the
prior year.
-12-
<PAGE> 13
SECOND QUARTER
SALES
Sales in the quarter increased 1% to $2.34 billion from $2.32 billion last year.
The growth was due to a 2% increase from volume and product mix, 2% from higher
selling prices, 1% from acquisitions, offset by a 4% decline due to currency and
divestitures.
An analysis of net sales by segment follows:
<TABLE>
<CAPTION>
(millions) 1998 1997 % CHANGE
- ---------- -------- -------- --------
<S> <C> <C> <C>
Soup and Sauces $ 1,386 $ 1,301 7%
Biscuits and Confectionery 428 425 1
Foodservice 119 118 1
- ----------------------------------------------------------------------------
Subtotal 1,933 1,844 5
Specialty Foods 344 353 (3)
Other 98 143 (31)
Interdivision (33) (23) --
- ----------------------------------------------------------------------------
$ 2,342 $ 2,317 1%
============================================================================
</TABLE>
Soup and Sauces sales were up significantly due to worldwide wet soup volume
growth of 7%. Strong volume gains were achieved in Canada, Germany and Japan.
France, due to the acquisition of Liebig, also contributed to the volume gains.
U.S. soup unit volume increase was led by Campbell's ready-to-serve soups,
including Home Cookin', Joseph A. Campbell premium soups in glass jars and
Chunky soups. In beverages, V8 Splash continues to deliver outstanding results.
Biscuits and Confectionery posted a moderate increase in sales compared to
second quarter fiscal 1997. This performance was adversely impacted by currency
movement, particularly the weakness of the Australian dollar against the U.S.
dollar. Excluding the impact of currency, sales increased 8%. The increase was
led by Pepperidge Farm Goldfish crackers, Milano and Chocolate Chunk cookies and
Swirl breads. Godiva Chocolatier, boosted by excellent holiday season and
Valentine's Day sales, delivered double-digit sales growth.
-13-
<PAGE> 14
The increase in Foodservice sales was principally driven by wet soup volume
gains offset by volume declines in the club store channel.
Specialty Foods reported increases in sales of Swanson frozen foods which were
more than offset by declines in Vlasic pickle sales and competitive difficulties
in the German specialty foods distribution business.
GROSS MARGIN
Gross margin, defined as net sales less cost of products sold, increased $75
million in the quarter. As a percent of sales, gross margin was 49.7% compared
to 47.1% last year. The improvement was primarily due to continued productivity
gains in manufacturing facilities.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses as a percent of sales increased to 22% from 21%
last year. The increase is attributable to a 7% increase in worldwide
advertising spending including double-digit increases in U.S. wet soup, Pace
Mexican Sauces, Erasco and Arnotts Limited.
ADMINISTRATIVE EXPENSES
Administrative expenses as a percent of sales remained flat with the prior year
at 4%.
Research and development expenses as a percent of sales were consistent with
last year at 1%.
Other expenses declined as compared to last year due primarily to reduced
minority interest expense and lower expenses associated with the company's
long-term incentive plan obligations.
OPERATING EARNINGS
Segment operating earnings increased 10% for the second quarter versus the prior
year. Excluding the impact of currency, operating earnings in core segments
increased 10% compared to last year.
An analysis of operating earnings by segment follows:
-14-
<PAGE> 15
<TABLE>
<CAPTION>
(millions) 1998 1997 % CHANGE
-------------------------- ----- ----- --------
<S> <C> <C> <C>
Soup and Sauces $ 396 $ 359 10%
Biscuits and Confectionery 76 69 10
Foodservice 16 18 (11)
- ----------------------------------------------------------------------------
Subtotal 488 446 9
Specialty Foods 34 32 6
Other 4 2 100
- ----------------------------------------------------------------------------
$ 526 $ 480 10
Corporate (8) (17)
- ----------------------------------------------------------------------------
$ 518 $ 463
============================================================================
</TABLE>
Soup and Sauces earnings increased due to sales and volume growth in Campbell's
ready-to-serve soups including Home Cookin', Joseph A. Campbell and Chunky
soups. In addition, strong earnings were delivered by our core business in
Mexico and newly acquired business in France. In addition, V8 Splash and
Franco-American pastas posted strong earnings results.
Biscuits and Confectionery earnings increase was primarily led by Godiva
Chocolatier's outstanding holiday season and Valentine's Day sales growth and
cost productivity gains in the Delacre biscuit business in Europe.
Foodservice earnings decline was attributable to volume declines in non-soup
products.
Specialty Foods earnings increase was due to increased sales of Swanson frozen
foods and manufacturing productivity gains in the U.S. plants offset by cattle
supply issues in Argentina.
NON-OPERATING ITEMS
Interest expense was flat versus prior year.
The effective tax rate was 34.5% compared to 33.9% in fiscal 1997.
SIX MONTHS
-15-
<PAGE> 16
SALES
Sales for the six months increased 2% to $4.46 billion from $4.37 billion last
year. The growth was due to a 3% increase in volume and product mix, 2% from
higher selling prices, 1% from acquisitions offset by a 4% decline due to
currency and divestitures.
An analysis of net sales by segment follows:
<TABLE>
<CAPTION>
(millions) 1998 1997 % CHANGE
---------------- ------- ------- --------
<S> <C> <C> <C>
Soup and Sauces $ 2,601 $ 2,407 8%
Biscuits and Confectionery 837 826 1
Foodservice 225 223 1
----------------------------------------------------------------------------
Subtotal 3,663 3,456 6
Specialty Foods 665 684 (3)
Other 201 279 (28)
Interdivision (67) (50) --
----------------------------------------------------------------------------
$ 4,462 $ 4,369 2%
============================================================================
</TABLE>
Soup and Sauces sales were led by worldwide wet soup volume growth of 7%. Volume
gains were achieved in Canada, Germany, Mexico, Japan and France. U.S. soup
volume gains were led by Campbell's ready-to-serve soups including Home Cookin',
Joseph A. Campbell and Chunky soups. In addition, Swanson broths and V8 Splash
continued their momentum.
Biscuits and Confectionery reported a moderate sales increase compared to the
prior year. The performance was adversely impacted by currency movement,
particularly the weakness of the Australian dollar against the U.S. dollar.
Excluding the impact of currency, sales increased 7% year-to-date. The increase
was driven by Pepperidge Farm Goldfish crackers, Milano cookies and Swirl
breads. In addition, Godiva reported double-digit growth due to their excellent
holiday season and Valentine's Day sales.
Foodservice sales were relatively flat due to the volume increases in wet soup
offset by declines in the club store channel.
-16-
<PAGE> 17
Specialty Foods reported increases in Swanson frozen foods' sales which were
more than offset by declines in Vlasic pickle sales and competitive difficulties
in the German specialty foods distribution business.
GROSS MARGIN
Gross margin increased $151 million year-to-date. As a percent of sales, gross
margin was 48.9% compared to 46.5% last year. The improvement was primarily due
to continued productivity gains in manufacturing facilities.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses as a percent of sales increased to 21% from 20%
last year. The increase is attributable to a 12% increase in worldwide
advertising spending including double-digit increases in U.S. wet soup, Prego
spaghetti sauces, V8 beverages, Pepperidge Farm Goldfish crackers and Milano
cookies and Erasco.
ADMINISTRATIVE EXPENSES
Administrative expenses as a percent of sales remained flat with the prior year
at 4%.
Research and development expenses as a percent of sales were consistent with the
prior year at 1%.
Other expenses declined compared to last year primarily due to reduced minority
interest expense and lower expenses associated with the company's long-term
incentive plans.
OPERATING EARNINGS
The increase in segment operating earnings from the prior year is due in part to
the first quarter fiscal 1997 special charge of $216 million. Excluding the
special charge, operating earnings increased 10% versus the prior year.
An analysis of operating earnings by segment follows:
-17-
<PAGE> 18
<TABLE>
<CAPTION>
(millions) 1998 1997
-------------- ----- -----
<S> <C> <C>
Soup and Sauces $ 766 $ 557
Biscuits and Confectionery 135 68
Foodservice 31 32
- -----------------------------------------------------------------
Subtotal 932 657
Specialty Foods 60 46
Other 6 (12)
- -----------------------------------------------------------------
998 691
Corporate (29) (39)
- -----------------------------------------------------------------
$ 969 $ 652
=================================================================
</TABLE>
Contributions to earnings by segment included the effect of a first quarter
fiscal 1997 restructuring charge as follows: Soup and Sauces $134 million,
Biscuits and Confectionery $53 million, Specialty Foods $13 million and Other
$16 million.
Soup and Sauces earnings, excluding the special charge, were up 11% due to sales
growth in Campbell's ready-to-serve soups including Home Cookin', Joseph A.
Campbell and Chunky soups. In addition, Swanson broths and our core businesses
in the United Kingdom, Germany and Mexico reported strong earnings.
Franco-American pastas and gravies also delivered strong financial performance.
Biscuits and Confectionery earnings, excluding the special charge, increased 12%
led by excellent earnings growth at Pepperidge Farm and Godiva. Pepperidge
Farm's Swirl and frozen breads delivered strong earnings performance and Godiva
posted record earnings as a result of outstanding holiday season and Valentine's
Day sales volume growth.
Foodservice earnings, excluding the special charge, were down 4% due to lower
sales of non-soup products.
Specialty Foods earnings, excluding the special charge, were up 2% due to
increased sales of Swanson frozen foods and manufacturing efficiencies in the
U.S. plants offset by cattle supply issues in Argentina and the competitive
difficulties in the German specialty foods distribution business.
-18-
<PAGE> 19
NON-OPERATING ITEMS
Comparability in interest expense is primarily impacted by the financing costs
associated with the company's $2.5 billion share repurchase program that
commenced in October 1996 with the "Dutch Auction" tender offer.
The effective tax rate was 34.5% compared to 37% last year. Excluding the
special charge, the effective tax rate was 34% for the six months ended January
26, 1997.
SPECIAL CHARGE
A special charge of $216 million ($160 million after-tax or $.32 per share) was
recorded in the first quarter of fiscal 1997 to cover the costs of a
restructuring program. The restructuring program was designed to improve
operational efficiency by reconfiguring or closing various plants, reducing
administrative and operational staff functions and divesting non-strategic,
under-performing businesses. The program was substantially completed in the
first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The company generated cash from operations of $468 million compared to $577
million last year. This decrease is principally due to changes in working
capital, including spending on the restructuring program and a reduction in
accrued liabilities due to timing of trade marketing and consumer promotions
versus the prior year.
Capital expenditures were $113 million, a decline from $133 million last year.
The company continues to aggressively manage its capital outlays and expects
total expenditures to approximate $375 million in fiscal 1998.
During the year, the company acquired the Liebig soup business in France for
approximately $180 million and the outstanding ordinary shares held by Arnotts
Limited's minority shareholders for approximately $290 million.
In the first six months, the company repurchased approximately 5.7 million
shares versus 30.9 million shares last year.
In December 1997, the company issued $300 million 6.15% notes due December 1,
2002. This issuance was the second draw down on the company's $1 billion shelf
registration. Four hundred million dollars remain available under the Shelf
Registration. In addition, the company entered into a three-year debt borrowing
arrangement for approximately $100 million. Principal payments are remitted
monthly in accordance with the terms of the arrangement.
-19-
<PAGE> 20
In February 1998, the company entered into a revolving credit facility which
provides for aggregate funding of $750 million. The company expects to draw down
$500 million under the terms of the facility in March 1998. In connection with
the spinoff of the Specialty Foods segment, as discussed in Footnote (h) to the
consolidated financial statements, the revolving credit facility and the
outstanding debt obligation will be assigned to the new company, Vlasic Foods
International Inc. The company intends to use the net proceeds to repay
short-term debt.
OTHER MATTERS
Historically, certain computer programs were written using two digits rather
than four to define the applicable year. Accordingly, the company's software may
recognize a date using "00" as 1900 rather than the year 2000, which could
result in major systems failures or miscalculations, commonly referred to as the
Year 2000 issue.
The company has performed an assessment of major information technology systems
and expects that all necessary modifications and/or replacements will be
completed in a timely manner to ensure that systems are Year 2000 compliant.
Based on current estimates, the costs of addressing this issue are not expected
to have a material adverse effect on the company's financial position, results
of operations or cash flows. The potential impact of the Year 2000 issue on
significant customers, vendors and suppliers cannot be reasonably estimated at
this time.
RECENT DEVELOPMENTS
On February 18, 1998, the company announced that it received a favorable ruling
from the Internal Revenue Service that the previously announced plan to spin off
the Specialty Foods segment qualifies as a tax-free transaction to U.S.
shareowners. Subject to approvals of the company's Board of Directors and
various regulatory agencies, the spinoff is expected to be completed in the
third quarter of fiscal 1998. The new company, which includes Swanson frozen
foods, Vlasic pickles, and certain European and Argentine specialty foods
businesses, will be named Vlasic Foods International Inc.
In February 1998, the company reached an agreement in principle to sell the
assets of its can-making operations at four of its North American thermal
manufacturing plants for approximately $125 million and enter into a long-term
supply agreement with the buyer. The transaction is expected to be completed in
fiscal 1998.
On February 18, 1998, the company announced that it expects to record a special
charge in the third quarter of fiscal 1998 to cover the costs associated with
its strategic growth plan. The special charge is expected to include one-time
costs related to the spinoff of Vlasic Foods International Inc. and other cost
and productivity initiatives that are currently under review.
-20-
<PAGE> 21
In June 1997, the FASB issued Statement of Financial Accounting Standards
No.130, "Reporting Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income. The provisions of the
statement are effective for fiscal years beginning after December 15, 1997.
FORWARD LOOKING INFORMATION
From time to time, in written reports, including the fiscal 1997 Annual Report,
and oral statements, we discuss our expectations regarding future performance of
the company. These "forward-looking statements" are based on currently available
competitive, financial and economic data and our operating plans. They are
inherently uncertain, and investors must recognize that actual results could
differ materially from those expressed or implied in the forward-looking
statements. In addition, as discussed in the Management's Discussion and
Analysis:
- The completion of the company's divestiture program in fiscal
1998 depends on our ability to find buyers to purchase these
businesses at prices we consider appropriate.
- The agreement in principle to sell the can-making assets is
contingent upon negotiation and completion of definitive
agreements.
- The recording of a special charge in the third quarter of
fiscal 1998 is subject to approval by the company's Board
of Directors.
-21-
<PAGE> 22
PART II
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings as reported in
Campbell's Form 10-Q for the quarter ended November 2, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Campbell's Annual Meeting of Shareowners was held on November
20, 1997.
c. The matters voted upon and the results of the vote are as
follows:
Election of Directors
<TABLE>
<CAPTION>
Number of Shares
----------------
Name For Withheld
<S> <C> <C>
Alva A. App 412,414,173 1,065,716
Edmund M. Carpenter 412,456,950 1,022,939
Bennett Dorrance 412,447,459 1,032,430
Thomas W. Field, Jr. 412,455,731 1,024,158
Kent B. Foster 412,379,052 1,100,837
Harvey Golub 412,427,620 1,052,269
David W. Johnson 412,406,340 1,073,549
David K. P. Li 412,421,894 1,057,995
Philip E. Lippincott 412,418,854 1,061,035
Mary Alice Malone 412,427,168 1,052,721
Dale F. Morrison 412,453,660 1,026,229
Charles H. Mott 412,438,855 1,041,034
George M. Sherman 412,445,066 1,034,823
Donald M. Stewart 409,735,732 3,744,157
George Strawbridge, Jr. 412,435,942 1,043,947
Charlotte C. Weber 412,425,852 1,054,037
</TABLE>
-22-
<PAGE> 23
Ratification of Appointment of Accountants
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-Votes
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Ratification of Appointment
of Accountants 411,899,171 346,954 1,233,764 -0-
</TABLE>
Shareowner Proposal Concerning Proxy Format
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-Votes
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Shareowner Proposal Concerning
Proxy Format 22,707,464 356,449,245 11,392,994 22,930,186
</TABLE>
ITEM 5. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements which are based
on management's current views and assumptions regarding future events
and financial performance. These statements are qualified by reference
to the section "Cautionary Statement on Forward-Looking Statements" in
Item 1 of the registrant's Annual Report on Form 10-K for the fiscal
year ended August 3, 1997. See Item 1 for a description of important
factors that could impact the company's strategic growth plan goals and
cause actual results to differ materially from those expressed or
implied in the forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
No.
4 There is no instrument with respect to long-term debt of
the company that involves indebtedness or securities
authorized thereunder exceeding 10 percent of the total
assets of the company and its subsidiaries on a
consolidated basis. The company agrees to file a copy of
any instrument or agreement defining the rights of
holders of long-term debt of the company upon request of
the Securities and Exchange Commission.
27 Financial Data Schedule.
-23-
<PAGE> 24
b. Reports on Form 8-K
There were no reports on Form 8-K filed by Campbell during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMPBELL SOUP COMPANY
Date: February 25, 1998 By: /s/ BASIL ANDERSON
-------------------------------
Basil Anderson
Executive Vice President and
Chief Financial Officer
-24-
<PAGE> 25
INDEX TO EXHIBITS
Exhibit Number
27 Financial Data Schedule.
-25-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-02-1998
<PERIOD-START> AUG-04-1997
<PERIOD-END> FEB-01-1998
<CASH> 99
<SECURITIES> 0
<RECEIVABLES> 970
<ALLOWANCES> 60
<INVENTORY> 722
<CURRENT-ASSETS> 1,905
<PP&E> 4,411
<DEPRECIATION> 1,962
<TOTAL-ASSETS> 7,007
<CURRENT-LIABILITIES> 3,438
<BONDS> 1,263
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 20
<OTHER-SE> 1,464
<TOTAL-LIABILITY-AND-EQUITY> 7,007
<SALES> 4,462
<TOTAL-REVENUES> 4,462
<CGS> 2,281
<TOTAL-COSTS> 2,281
<OTHER-EXPENSES> 986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 882
<INCOME-TAX> 304
<INCOME-CONTINUING> 578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 11
<NET-INCOME> 567
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.23
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| CSCO | https://www.sec.gov/Archives/edgar/data/858877/0000891618-98-001021.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000891618-98-001021.txt : 19980310
<SEC-HEADER>0000891618-98-001021.hdr.sgml : 19980310
ACCESSION NUMBER: 0000891618-98-001021
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980124
FILED AS OF DATE: 19980309
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CISCO SYSTEMS INC
CENTRAL INDEX KEY: 0000858877
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 770059951
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0731
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-18225
FILM NUMBER: 98559708
BUSINESS ADDRESS:
STREET 1: 170 WEST TASMAN DRIVE
CITY: SAN JOSE
STATE: CA
ZIP: 95134-1706
BUSINESS PHONE: 4085264000
MAIL ADDRESS:
STREET 1: 225 WEST TASMAN DRIVE
CITY: SAN JOSE
STATE: CA
ZIP: 95134-1706
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDED JANUARY 24, 1998
<TEXT>
<PAGE> 1
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 24, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction (I.R.S. Employer
of Identification Number)
incorporation or
organization)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days.
YES X NO
------- -------
As of March 2, 1998, 1,022,987,214 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 24, 1998
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. Financial statements and supplementary data
a) Consolidated statements of operations for the three and six
months ended January 24, 1998 and January 25, 1997 3
b) Consolidated balance sheets at January 24, 1998 and July 26, 4
1997
c) Consolidated statements of cash flows for the six months
ended January 24, 1998 and January 25, 1997 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 9
Part II. Other information 16
Signature 17
Exhibit 18
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
Jan. 24, Jan. 25, Jan. 24, Jan. 25,
1998 1997 1998 1997
-------------------------- --------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $2,016,315 $1,592,377 $3,885,032 $3,027,203
Cost of sales 696,774 552,519 1,348,955 1,053,999
---------- ---------- ---------- ----------
Gross margin 1,319,541 1,039,858 2,536,077 1,973,204
Operating expenses:
Research and development 238,772 167,652 463,007 312,363
Sales and marketing 363,408 288,341 696,825 547,451
General and administrative 57,668 52,111 114,082 93,887
Purchased research and development 43,203 127,191 217,792
---------- ---------- ---------- ----------
Total operating expenses 659,848 551,307 1,401,105 1,171,493
---------- ---------- ---------- ----------
Operating income 659,693 488,551 1,134,972 801,711
Realized gain on sale of investment 47,299 5,411 102,407
Interest and other income, net 43,818 27,064 80,874 48,542
---------- ---------- ---------- ----------
Income before provision for income taxes 703,511 562,914 1,221,257 952,660
Provision for income taxes 246,229 224,455 427,440 433,258
---------- ---------- ---------- ----------
Net income $ 457,282 $ 338,459 $ 793,817 $ 519,402
========== ========== ========== ==========
Net income per share--Basic $ .45 $ .34 $ .78 $ .53
========== ========== ========== ==========
Net income per share--Diluted $ .43 $ .33 $ .75 $ .50
========== ========== ========== ==========
Shares used in per-share
calculation--Basic 1,015,347 988,109 1,012,257 983,287
========== ========== ========== ==========
Shares used in per-share
calculation--Diluted 1,062,505 1,035,456 1,059,533 1,030,236
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
January 24, July 26,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 476,927 $ 269,608
Short-term investments 1,136,720 1,005,977
Accounts receivable, net of allowance for doubtful
accounts of $29,106 at January 24, 1998 and
$22,340 at July 26, 1997 1,255,996 1,170,401
Inventories, net 267,866 254,677
Deferred income taxes 360,452 312,132
Prepaid expenses and other current assets 58,331 88,471
----------- -----------
Total current assets 3,556,292 3,101,266
Investments 1,982,797 1,267,174
Restricted investments 442,956 363,216
Property and equipment, net 478,592 466,352
Other assets 361,992 253,976
----------- -----------
Total assets $ 6,822,629 $ 5,451,984
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 238,720 $ 207,178
Income taxes payable 319,239 256,224
Accrued payroll and related expenses 290,248 263,269
Other accrued liabilities 501,720 393,438
----------- -----------
Total current liabilities 1,349,927 1,120,109
Minority interest 42,301 42,253
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized:
none issued or outstanding at January 24, 1998
and July 26, 1997
Common stock and additional paid-in capital,
$.001 par value(no par value - July 26, 1997),
1,800,000 shares authorized: 1,018,407 shares
issued and outstanding at January 24, 1998
and 1,006,168 at July 26, 1997 2,121,996 1,763,200
Retained earnings 3,280,875 2,487,058
Unrealized gain on investments 42,131 49,628
Cumulative translation adjustments (14,601) (10,264)
----------- -----------
Total shareholders' equity 5,430,401 4,289,622
----------- -----------
Total liabilities and shareholders' equity $ 6,822,629 $ 5,451,984
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------- -----------
January 24, January 25,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 793,817 $ 519,402
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 138,069 98,541
Deferred income taxes (82,580) (61,461)
Tax benefits from employee stock plans 141,668 101,546
Adjustment to conform StrataCom fiscal year -- (11,020)
Purchased research and development from
acquisitions 19,009 43,203
Change in operating assets and liabilities:
Accounts receivable (85,595) (399,887)
Inventories (13,189) 100,013
Prepaid expenses and other current assets 30,140 4,150
Income taxes payable 63,015 2,750
Accounts payable 31,502 99,272
Accrued payroll and related expenses 26,979 56,447
Other accrued liabilities 104,482 4,315
----------- -----------
Net cash provided by operating activities 1,167,317 557,271
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (855,332) (697,891)
Proceeds from sales and maturities of short-term
investments 913,774 706,535
Purchases of investments (1,429,564) (1,007,291)
Proceeds from sales of investments 507,033 618,377
Purchases of restricted investments (190,455) (133,744)
Proceeds from sales and maturities of restricted
investments 115,780 114,071
Acquisition of property and equipment (140,430) (169,372)
Acquisition of Telebit Corporation, net of
purchased research and development (25,189)
Other (75,791) (8,000)
----------- -----------
Net cash used in investing activities (1,154,985) (602,504)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 199,324 102,940
Other (4,337) (4,595)
----------- -----------
Net cash provided by financing activities 194,987 98,345
----------- -----------
Net increase in cash and equivalents 207,319 53,112
Cash and equivalents, beginning of period 269,608 279,695
----------- -----------
Cash and equivalents, end of period $ 476,927 $ 332,807
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. (the "Company") provides networking solutions that connect
computing devices and computer networks, allowing people to access or transfer
information without regard to differences in time, place or type of computer
system. The Company sells its products in approximately 105 countries through a
combination of direct sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52 or 53 weeks ending on the last Saturday in
July. Fiscal years 1998 and 1997 are both 52 week years.
Basis of Presentation
The accompanying financial data as of January 24, 1998 and July 26, 1997, and
for the three and six month periods ended January 24, 1998 and January 25, 1997,
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The July 26, 1997 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended July 26, 1997.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of January 24, 1998 and for the three
and six month periods ended January 24, 1998 and January 25, 1997, have been
made. The results of operations for the period ended January 24, 1998 are not
necessarily indicative of the operating results for the full year.
Computation of Net Income Per Share
The Company has adopted Statement of Financial Accounting Standards(SFAS) No.
128. This Statement requires the presentation of basic and diluted net income
per share. Basic net income per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options (see Note 7). The Company has
restated all prior period per share data presented as required by SFAS No. 128.
No adjustments were required as a result of
6
<PAGE> 7
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the revised computations. Restated numbers as computed using the diluted method
under SFAS No. 128 are the same as those computed using the primary method as
defined in Accounting Principals Board Opinion No. 15.
Share and per share data presented reflect a three-for-two split, which was
effective on December 16, 1997.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." Readers are referred to the "Recent
Accounting Pronouncements" section of the Company's 1997 Annual Report to
Shareholders for further discussion.
3. BUSINESS COMBINATIONS
In August 1997, the Company completed its purchase of Dagaz Technologies,
Inc.("Dagaz"), a wholly owned subsidiary of Integrated Network Corporation, and
its xDSL technology. Under the terms of the agreement the Company paid cash of
$108 million, exchanged stock worth $18 million and assumed net liabilities of
$1 million in exchange for all of the outstanding common stock of Dagaz. The
Company recorded purchased research and development related to this transaction
of $127 million. A pro forma summary is not presented as the historical
operations of Dagaz are not material to the Company's consolidated operations
and financial position. The amount allocated to purchased research and
development was determined through established valuation techniques in the
high-technology communications industry and were expensed upon acquisition,
because technological feasibility had not been established and no alternative
uses existed. Research and development costs to bring the xDSL products to
technological feasibility are not expected to have a material impact on the
Company's future results of operations, cash flows, or liquidity.
Business Combinations Completed Subsequent to Quarter-End
Subsequent to the end of the quarter, the Company completed its purchase of
LightSpeed International, Inc. ("LightSpeed") a privately-held innovator in
voice signaling translation technology. Under the terms of the agreement, the
Company exchanged 2.5 million shares of its common stock for all outstanding
shares of LightSpeed. The Company also assumed remaining outstanding LightSpeed
stock options which were converted to options to purchase approximately .5
million shares of the Company's common stock.
In February 1998, the Company announced a definitive agreement to purchase
WheelGroup Corporation ("WheelGroup"), a privately-held innovator of network
security software products. Under the terms of the agreement between 1.8 and
2.0 million shares of the Company's common stock will be exchanged for all the
outstanding shares and options of WheelGroup. The acquisition is expected to be
completed during the third quarter.
7
<PAGE> 8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BALANCE SHEET DETAIL
(In thousands)
<TABLE>
<CAPTION>
Inventories: January 24, July 26,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $ 55,327 $ 89,226
Work in process 107,872 114,724
Finished goods 79,736 21,733
Demonstration systems 24,931 28,994
----------- -----------
$ 267,866 $ 254,677
=========== ===========
</TABLE>
5. INCOME TAXES
The Company paid income taxes of $307 million in the six months ended January
24, 1998 and $390 million in the six months ended January 25, 1997. The
Company's income taxes currently payable for both federal and state purposes
have been reduced by the tax benefit of disqualifying dispositions of stock
options. This benefit totaled $142 million in the first six months of fiscal
1998, and was credited directly to shareholders' equity.
6. SHAREHOLDERS' EQUITY AND STOCK SPLIT
(In thousands, except per-share amounts)
At the Annual Meeting of Shareholders held on November 13, 1997, the
shareholders approved an amendment to the Articles of Incorporation changing the
par value of the Company's Common Stock from zero to $.001 per share. As a
result, the Company has transferred the additional paid-in capital to a separate
account, however, for financial statement purposes, the additional paid-in
capital account has been combined with the common stock account and reflected on
the balance sheet as "Common stock and additional paid-in capital."
In November 1997, the Company announced that its Board of Directors approved a
three-for-two split of the Company's common stock that was applicable to
shareholders of record on November 18, 1997 and effective on December 16, 1997.
Share and per-share data for all periods presented have been adjusted to give
effect to this three-for-two stock split.
8
<PAGE> 9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per
share as required under SFAS 128:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
Jan. 24, Jan. 25, Jan. 24, Jan. 25,
1998 1997 1998 1997
------------------------- -------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 457,282 $ 338,459 $ 793,817 $ 519,402
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per
share-- weighted-average shares 1,015,347 988,109 1,012,257 983,287
Effect of dilutive securities:
Employee stock options 47,158 47,347 47,276 46,949
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share 1,062,505 1,035,456 1,059,533 1,030,236
========== ========== ========== ==========
Net income per share--Basic $ .45 $ .34 $ .78 $ .53
========== ========== ========== ==========
Net income per share--Diluted $ .43 $ .33 $ .75 $ .50
========== ========== ========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import, constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Readers are referred to the "Acquisitions, Investments and Alliances",
"Competition", "Research and Development", "Manufacturing", "Patents,
Intellectual Property and Licensing" and "Other Risk Factors" sections contained
in the Company's 1997 Form 10-K filed on October 22, 1997, and to the "Financial
Risk Management" and "Future Growth Subject to Risks" sections contained herein
which identify important risk factors that could cause actual results to differ
from those contained in the forward looking statements.
Net sales grew to $2,016 million in the second quarter of 1998 from $1,592
million in the second quarter of 1997. Net sales for the first half of 1998 were
$3,885 million, compared to $3,027 million in the first half of 1997. The 26.6%
increase in net sales between the two three month periods and the 28.3% increase
in net sales between the two six month periods was primarily a result of
increasing unit sales of LAN switching products such as the Catalyst(R) 5000
family, access servers such as the Cisco 3600 family, WAN switching products
including the AXIS and BPX product lines, and growth in the sales of add-on
boards that provide increased functionality, as well as increased service
contract sales. The sales growth rate for lower-priced access
9
<PAGE> 10
and switching products targeted toward small and medium-sized businesses has
increased faster than that of the Company's high-end core router products. These
products typically carry lower average selling prices, and thus have slowed the
Company's growth rate versus the second quarter of last year. Additionally, some
of the Company's more established product lines, such as the Cisco 2500 product
family, have experienced decelerating growth rates. Sales to international
customers declined to 41.7% in the second quarter of 1998, from 43.6% for the
second quarter of 1997. International sales in the first six months of 1998 were
40.4% of net sales compared with 45.1% of net sales for the same period in 1997.
The decrease reflects slower sales growth in international markets, particularly
certain countries in Asia. The Company anticipates that sales in Asia will
remain weak in the near future. Sales growth in these markets has been impacted
by certain factors including weaker economic conditions, delayed government
spending, a stronger dollar versus the local currencies, and slower adoption of
networking technologies.
Gross margins increased slightly to 65.4% in the second quarter of 1998 from
65.3% in the second quarter of 1997. Gross margins for the first six months of
1998 were 65.3% compared with 65.2% for the same period in 1997. The increase is
due principally to the Company's value engineering efforts, as well as stronger
service provider sales, which traditionally have resulted in higher margins. The
prices of component parts have fluctuated in the recent past, and the Company
expects that this trend may continue. An increase in the price of component
parts may have a material adverse impact on gross margins. The Company expects
that gross margins will decrease in the future, because it believes that the
market for lower-margin remote access and switching products for small to
medium-sized businesses will continue to increase at a faster rate than the
market for the Company's higher-margin router and high-performance switching
products. The Company is attempting to mitigate this trend through various
means, such as increasing the functionality of its products, continued value
engineering efforts, controlling royalty costs, and improving manufacturing
efficiencies. There can be no assurance that any efforts made by the Company in
these and other areas will successfully offset decreasing margins.
Research and development expenses increased by $71 million in the second quarter
of 1998 over the second quarter of 1997, and increased $151 million in the first
six months of 1998 versus the first six months of 1997. This represents an
increase from 10.5% to 11.8% of net sales in the quarter to quarter period and
from 10.3% to 11.9% of net sales for the first six months of each fiscal year.
The increase reflects the Company's ongoing research and development efforts in
a wide variety of areas such as voice, video, and data integration, Digital
Subscriber Line (DSL) technologies, dial access, enterprise switching, security,
network management, and high-end routing technologies, among others. A
significant portion of the increase was due to the addition of new personnel, as
well as higher expenditures on prototypes and depreciation on new equipment. For
the near future, research and development expenses are expected to increase at a
greater rate than the sales growth rate, as the Company invests in technology to
address potential market opportunities. The Company also continues to purchase
technology in order to bring a broad range of products to the market in a timely
fashion. If the Company believes it is unable to enter a particular market in a
timely manner, it may acquire other businesses or license technology from other
businesses as an alternative to internal research and development. All of the
Company's research and development costs are expensed as incurred.
10
<PAGE> 11
Sales and marketing expenses increased by $75 million between the second quarter
of 1998 over the second quarter of 1997, and increased $149 million from the
first six months of 1997 to the first six months of 1998. This represents a
slight decrease from 18.1% of net sales to 18.0% for the quarter to quarter
period and from 18.1% to 17.9% for the first six months of each fiscal year. The
dollar increase in these expenses resulted mainly from an increase in the size
of the Company's direct sales force and its commissions, additional marketing
programs to support the launch of new products and expanding distribution
channels. Sales and marketing expenses are expected to grow at a greater rate
than the sales growth rate in the near future, as the Company invests in certain
key areas such as expansion of its end-to-end strategy and service provider
coverage in order to take advantage of future market opportunities.
General and administrative expenses rose $6 million between the second quarters
of 1998 and 1997, and decreased to 2.9% from 3.3% of net sales in the second
quarter of 1998 and 1997, respectively. These expenses increased $20 million
from the first half of 1997 to the first half of 1998, representing a decrease
to 2.9% from 3.1% of net sales for the comparable six month periods. The dollar
increase reflects increased personnel costs necessary to support the Company's
business infrastructure, including those associated with its new European
Logistics Center, as well as further development of its information systems. It
is management's intent to keep general and administrative costs relatively
constant as a percentage of net sales; however, this goal is dependent upon the
level of acquisition activity, among other factors.
The amount expensed to purchased research and development in the first six
months of fiscal 1998 related to the acquisition of Dagaz (See Note 3).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." Readers are referred to the "Recent Accounting Pronouncements"
section of the Company's 1997 Annual Report to Shareholders for further
discussion.
FINANCIAL RISK MANAGEMENT
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Historically, the Company's primary exposures related to
nondollar-denominated sales in Japan, Canada, and Australia and
nondollar-denominated operating expenses in Europe, Latin America, and Asia
where the Company sells primarily in U.S. dollars. The Company has recently
expanded its business activities in Europe. As a result, the Company expects to
see an increase in exposures related to nondollar-denominated sales in several
European currencies. At the present time, the Company hedges only those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and does not generally hedge anticipated foreign
currency cash flows. The hedging activity undertaken by the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities.
11
<PAGE> 12
The success of this activity depends upon forecasts of transaction activity
denominated in various currencies, primarily the Japanese yen, Canadian dollar,
Australian dollar, and certain European currencies. To the extent that these
forecasts are over- or understated during periods of currency volatility, the
Company could experience unanticipated currency gains or losses.
The Company has experienced increased activity with partners in its two-tier
distributor channel, as well as an increase in leasing activity. The Company is
also closely monitoring credit risk with its customers in Asia. Although to
date, the Company has not experienced significant losses due to customers
failing to meet their obligations, such losses, if incurred, could have a
material adverse impact on the Company's business, operating results, and
financial position.
The Company maintains investment portfolio holdings of various issuers, types,
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of shareholders'
equity, net of tax. Part of this portfolio includes minority equity investments
in several publicly-traded companies, the value of which are subject to market
price volatility. The Company also has certain real estate lease commitments
with payments tied to short-term interest rates. At any time, a sharp rise in
interest rates could have a material adverse impact on the fair value of the
Company's investment portfolio while increasing the costs associated with its
lease commitments. Conversely, declines in interest rates could have a material
impact on interest earnings for the Company's investment portfolio. The Company
does not currently hedge these interest rate exposures. Readers are referred to
pages 26-27 of the Company's 1997 Annual Report to Shareholders for further
discussion of the Company's interest rate exposures.
FUTURE GROWTH SUBJECT TO RISKS
The networking business is highly competitive, and as such, the Company's growth
is dependent upon market growth and its ability to enhance its existing products
and introduce new products on a timely basis. One of the ways the Company has
addressed and will continue to address the need to develop new products is
through acquisitions of other companies. Acquisitions involve numerous risks,
including difficulties in integration of the operations, technologies, and
products of the acquired companies; the risk of diverting management's attention
from normal daily operations of the business; risks of entering markets in which
the Company has no or limited direct prior experience and where competitors in
such markets have stronger market positions; and the potential loss of key
employees of the acquired company. The Company must also maintain its ability to
manage any such growth effectively. Failure to manage growth effectively and
successfully integrate acquisitions made by the Company could adversely affect
the Company's business and operating results.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions, and
evolving methods of building and operating networks. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely manner, or that products
and technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive.
12
<PAGE> 13
As the Company focuses on new market opportunities, such as transporting voice,
video, and data traffic across the same networks, it will increasingly compete
with large telecommunications equipment suppliers, and well funded start-up
companies. Additionally, as customers in these markets complete infrastructure
deployments, they may require greater levels of service, support and financing
than the Company has experienced in the past. There can be no assurance that the
Company can provide products, service, support and financing to effectively
compete for these market opportunities. Readers are referred to the
"Competition" section of the Company's Form 10-K filed on October 22, 1997 for
further discussion.
The Company expects that in the future, its net sales may grow at a slower rate
than was experienced in previous periods, and that on a quarter-to-quarter
basis, the Company's growth in net sales may be significantly lower than its
historical quarterly growth rate. In recent quarters, the sequential sales
growth has slowed from prior levels, and a disproportionate share of the sales
has occurred in the last month of the quarter. As a consequence, operating
results for a particular quarter are extremely difficult to predict. The
Company's ability to meet financial expectations could be hampered if the
nonlinear sales pattern continues in future periods. The Company generally has
had one quarter of a fiscal year when backlog has been reduced. Traditionally,
it has been the third quarter, when the purchasing volumes of large
telecommunications service providers tend to be seasonally low. Although such
reductions have not occurred consistently in recent years, they are difficult to
predict and may occur in the future. In addition, in response to customer
demand, the Company continues to attempt to reduce its product manufacturing
lead times, which may result in corresponding reductions in order backlog. A
decline in backlog levels could result in more variability and less
predictability in the Company's quarter-to-quarter net sales and operating
results going forward. On the other hand, for certain products, lead times are
longer than the Company's goal. If the Company cannot reduce manufacturing lead
times for such products, the Company's customers may cancel orders or not place
further orders if shorter lead times are available from other manufacturers,
thus creating additional variability.
The Company has not been significantly impacted by the recent unfavorable
economic conditions in certain Asian and Pacific Rim countries. If the economic
conditions in these markets worsen, or if these unfavorable conditions result in
a wider regional or global economic slowdown, this may have a material adverse
impact on the Company's business, operations and financial condition. The
Company continues to monitor activity in the region closely.
Many computer systems were not designed to handle any dates beyond the year
1999, and therefore computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is concerned
that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
may result in spending being diverted from networking solutions over the next
two years. The Company is still assessing the impact the year 2000 issue will
have on its products and internal information systems and has begun corrective
efforts in these areas. The Company does not anticipate that addressing the year
2000 problem for its internal information systems and current and future
products will have a material impact on its operations or financial results.
However, there can be no assurance that these costs
13
<PAGE> 14
will not be greater than anticipated, or that corrective actions undertaken will
be completed before any year 2000 problems could occur. The year 2000 issue
could lower demand for the Company's products while increasing the Company's
costs. These combining factors, while not quantified, could have a material
adverse impact on the Company's financial results.
The Company has certain key relationships with suppliers. If these suppliers
fail to adequately address the year 2000 issue for the products they provide the
Company, this could have a material adverse impact on the Company's operations
and financial results. The Company is still assessing the effect the year 2000
issue will have on its suppliers and, at this time, cannot determine the impact
it will have.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. For example, the
Company believes that gross margins may continue to decline over time, because
the markets for lower-margin access products targeted toward small to
medium-sized customers have continued to grow at a faster rate than the markets
for the Company's higher-margin router and high-performance switching products
targeted toward enterprise and service provider customers. The Company has
recently introduced new products with several new products scheduled to be
released in the near future. If warranty costs associated with these new
products are greater than the Company has experienced historically, gross
margins may be adversely affected. The Company's gross margins may also be
impacted by geographic mix, as well as the mix of configurations within each
product group. The Company continues to expand into third-party or indirect
distribution channels, which generally results in lower gross margins. In
addition, increasing third-party and indirect distribution channels generally
results in greater difficulty in forecasting the mix of the Company's products,
and to a certain degree, the timing of its orders.
The Company's growth and ability to meet customer demands also depend in part on
its ability to obtain timely deliveries of parts from its suppliers. The Company
has experienced component shortages in the past that have adversely affected its
operations. Although the Company works closely with its suppliers to avoid these
types of shortages, there can be no assurance that the Company will not
encounter these problems in the future.
The Company also expects that its operating margins may decrease as it continues
to hire additional personnel and increases other operating expenses to support
its business. The Company plans its operating expense levels based primarily on
forecasted revenue levels. Because these expenses are relatively fixed in the
short term, a shortfall in revenue could lead to operating results being below
expectations. The results of operations for the quarter ended January 24, 1998
are not necessarily indicative of results to be expected in future periods, and
the Company's operating results may be subject to quarterly fluctuations as a
result of a number of factors. These factors include the integration of people,
operations, and products from acquired businesses and technologies; increased
competition in the networking industry; the overall trend toward industry
consolidation; the introduction and market acceptance of new technologies and
standards, including Gigabit Ethernet Switching, Tag Switching, currently also
known as multiprotocol label switching (MPLS) and voice, video and data
products; variations in sales channels, product costs, or mix of
14
<PAGE> 15
products sold; the timing of orders and manufacturing lead times; and changes in
general economic conditions, any of which could have a material adverse impact
on operations and financial results.
The Company's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in the
Silicon Valley area of Northern California, a region known for seismic activity.
Additionally, one of the Company's manufacturing facilities is located near a
river that has experienced flooding in the past. A significant natural disaster,
such as an earthquake or a flood, could have a material adverse impact on the
Company's business, financial condition and operating results.
Liquidity and Capital Resources
Cash and equivalents, short-term investments, and investments were $3.6 billion
at January, 24, 1998, an increase of $1.1 billion from July 26, 1997. The
increase is primarily a result of cash generated by operations; and to a lesser
extent, through financing activities, primarily the exercise of employee stock
options. These cash flows were partially offset by cash outflows from operating
activities including tax payments of approximately $307 million, cash outflows
from investing activities including capital expenditures of approximately $140
million, and a cash payment of $108 million related to the acquisition of Dagaz.
Accounts receivable increased 7.3% from July 26, 1997 to January 24, 1998. Days
sales outstanding in receivables improved to 57 days at January 24, 1998 from 60
days at July 26, 1997. Inventories increased 5.2% between July 26, 1997 and
January 24, 1998. The increase in inventories was due primarily to the shift
toward a two-tier distribution system, and the need to maintain shorter lead
times on certain products. Inventory management remains an area of focus as the
Company balances the need to maintain strategic inventory levels to ensure
competitive lead times versus the risk of inventory obsolescence because of
rapidly changing technology and customer requirements.
Accounts payable increased by 15.2% at January 24, 1998 over July 26, 1997.
Other accrued liabilities increased by 27.5% primarily due to higher deferred
revenue on service contracts.
At January 24, 1998, the Company had a line of credit totaling $500 million,
which expires July 2002. There have been no borrowings under this facility.
The Company has entered into certain lease arrangements in San Jose, California,
and Research Triangle Park, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities. In connection with these transactions, the Company pledged
$443 million of its investments as collateral for certain obligations of the
leases. The Company anticipates that it will occupy more leased property in the
future that will require similar pledged securities; however, the Company does
not expect the impact of this activity to be material to liquidity.
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, borrowing capacity, and cash generated
from operations will satisfy its expected working capital and capital
expenditure requirements through fiscal 1998.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
At the Annual Meeting of Shareholders held on November 13, 1997, the
shareholders approved an amendment to the Articles of Incorporation changing
the par value of the Company's common stock from zero to $.001 per share.
A three-for-two stock split of the Company's common stock was approved by the
Board of Directors in November 1997, applicable to shareholders of record on
November 18, 1997 and was effective on December 16, 1997. Share and per-share
data for all periods presented have been adjusted to give effect to this
three-for-two stock split.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
----- ----- -------- ---------
a. Election of Directors
Carol A. Bartz 839,840,845 - 4,676,932 -
John T. Chambers 838,779,079 - 5,738,698 -
James F. Gibbons 840,124,681 - 4,393,096 -
Edward R. Kozel 838,785,403 - 5,732,374 -
John P. Morgridge 840,117,001 - 4,400,776 -
Robert L. Puette 838,440,658 - 6,077,119 -
Masayoshi Son 820,037,053 - 24,480,724 -
Donald T. Valentine 838,721,443 - 5,796,334 -
Steven M. West 840,202,311 - 4,315,467 -
b. Approval of Amendment
to the Employee Stock
Purchase Plan 821,426,532 19,166,581 3,893,464 31,200
c. Increase in the
Par Value of the
Common Stock 836,931,453 4,521,892 3,064,432 -
d. Ratification of
Coopers & Lybrand
L.L.P. as the
Company's
independent
accountants 841,476,093 785,788 2,255,896 -
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a)Exhibit
27 Financial data schedule
(b)Reports on Form 8-K
None
16
<PAGE> 17
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.
Cisco Systems, Inc.
Date: March 5, 1998 By /s/ Larry R. Carter
-----------------------------
Larry R. Carter,
Senior Vice President Finance, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT 27 FINANCIAL DATA SCHEDULE
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN
THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JANUARY 24, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-27-1997
<PERIOD-END> JAN-24-1998
<CASH> 476,927
<SECURITIES> 3,562,473
<RECEIVABLES> 1,285,102
<ALLOWANCES> 29,106
<INVENTORY> 267,866
<CURRENT-ASSETS> 3,556,292
<PP&E> 1,017,456
<DEPRECIATION> 538,864
<TOTAL-ASSETS> 6,822,629
<CURRENT-LIABILITIES> 1,349,927
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 2,121,996
<OTHER-SE> 3,308,405
<TOTAL-LIABILITY-AND-EQUITY> 6,822,629
<SALES> 3,885,032
<TOTAL-REVENUES> 3,885,032
<CGS> 1,348,955
<TOTAL-COSTS> 2,750,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,221,257
<INCOME-TAX> 427,440
<INCOME-CONTINUING> 793,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 793,817
<EPS-PRIMARY> 0.78<F1>
<EPS-DILUTED> 0.75
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| CTX | https://www.sec.gov/Archives/edgar/data/18532/0000950134-98-001097.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950134-98-001097.txt : 19980217
<SEC-HEADER>0000950134-98-001097.hdr.sgml : 19980217
ACCESSION NUMBER: 0000950134-98-001097
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CENTEX CORP
CENTRAL INDEX KEY: 0000018532
STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531]
IRS NUMBER: 750778259
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-06776
FILM NUMBER: 98535756
BUSINESS ADDRESS:
STREET 1: P O BOX 199000
STREET 2: 2728 N HARWOOD
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596500
MAIL ADDRESS:
STREET 1: PO BOX 199000
STREET 2: 2728 N HARWOOD
CITY: DALLAS
STATE: TX
ZIP: 75219
FORMER COMPANY:
FORMER CONFORMED NAME: CENTEX CONSTRUCTION CO INC
DATE OF NAME CHANGE: 19681211
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: 3333 HOLDING CORP
CENTRAL INDEX KEY: 0000818762
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500]
IRS NUMBER: 752178860
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09624
FILM NUMBER: 98535757
BUSINESS ADDRESS:
STREET 1: 3333 LEE PKWY
STREET 2: SUITE 500
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596700
MAIL ADDRESS:
STREET 1: PO BOX 19000
STREET 2: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CENTEX DEVELOPMENT CO LP
CENTRAL INDEX KEY: 0000818764
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500]
IRS NUMBER: 752168471
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09625
FILM NUMBER: 98535758
BUSINESS ADDRESS:
STREET 1: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596700
MAIL ADDRESS:
STREET 1: PO BOX 19000
STREET 2: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1997
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
JOINT QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended
DECEMBER 31, 1997
Commission File No. 1-6776
CENTEX CORPORATION
A Nevada Corporation
IRS Employer Identification No. 75-0778259
2728 N. Harwood
Dallas, Texas 75201
(214) 981-5000
Commission File Nos. 1-9624 and 1-9625, respectively
3333 HOLDING CORPORATION
A Nevada Corporation
CENTEX DEVELOPMENT COMPANY, L.P.
A Delaware Limited Partnership
IRS Employer Identification Nos. 75-2178860 and 75-2168471, respectively
2728 N. Harwood
Dallas, Texas 75201
(214) 981-6700
The registrants have 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
have been subject to such filing requirements for the past 90 days.
- -------------------------------------------------------------------------------
As of the close of business on February 9, 1998, 29,736,039 shares of Centex
Corporation common stock were outstanding, 1,000 shares of common stock of 3333
Holding Corporation were outstanding, and 900 class B units of limited
partnership interest of Centex Development Company, L.P. were outstanding.
- -------------------------------------------------------------------------------
<PAGE> 2
CENTEX CORPORATION
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
FORM 10-Q TABLE OF CONTENTS
DECEMBER 31, 1997
CENTEX CORPORATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements 1
Condensed Consolidated Statement of Earnings
for the Three Months Ended December 31, 1997 2
Condensed Consolidated Statement of Earnings
for the Nine Months Ended December 31, 1997 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended December 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
-i-
<PAGE> 3
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Combining Financial Statements 19
Condensed Combining Statement of Operations
for the Three Months Ended December 31, 1997 20
Condensed Consolidated Statement of Operations
for the Nine Months Ended December 31, 1997 21
Condensed Combining Balance Sheets 22
Condensed Combining Statement of Cash Flows
for the Nine Months Ended December 31, 1997 23
Notes to Condensed Combining Financial Statements 24
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 25
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27-28
</TABLE>
-ii-
<PAGE> 4
CENTEX CORPORATION
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1.
The condensed consolidated financial statements include the
accounts of Centex Corporation and subsidiaries ("Centex" or the "Company"),
and have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's latest annual report on Form
10-K. In the opinion of the Company, all adjustments necessary to present
fairly the information in the following condensed consolidated financial
statements of the Company have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the full
year.
-1-
<PAGE> 5
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Home Building
Conventional Housing $ 557,484 $ 566,691
Manufactured Housing 38,239 --
Investment Real Estate 6,088 4,771
Financial Services 64,604 38,190
Construction Products 70,510 59,117
Contracting and Construction Services 246,158 270,338
------------ ------------
983,083 939,107
------------ ------------
COSTS AND EXPENSES
Home Building
Conventional Housing 515,194 529,834
Manufactured Housing 34,768 --
Investment Real Estate (986) (787)
Financial Services 56,097 30,990
Construction Products 49,811 41,826
Contracting and Construction Services 243,652 273,387
Other, net 2,025 654
Corporate General and Administrative 5,014 4,285
Interest Expense 8,293 7,969
Minority Interest 10,292 8,455
------------ ------------
924,160 896,613
------------ ------------
EARNINGS BEFORE INCOME TAXES 58,923 42,494
Income Taxes 21,543 15,031
------------ ------------
NET EARNINGS $ 37,380 $ 27,463
============ ============
EARNINGS PER SHARE
Basic $ 1.26 $ 0.96
============ ============
Diluted $ 1.21 $ 0.93
============ ============
AVERAGE SHARES OUTSTANDING
Basic 29,683,411 28,670,420
============ ============
Diluted 30,879,736 29,670,683
============ ============
CASH DIVIDENDS PER SHARE $ 0.07 $ 0.05
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE> 6
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Home Building
Conventional Housing $ 1,605,169 $ 1,704,181
Manufactured Housing 103,727 --
Investment Real Estate 18,199 6,781
Financial Services 169,141 117,113
Construction Products 231,876 185,713
Contracting and Construction Services 708,092 819,333
------------ ------------
2,836,204 2,833,121
------------ ------------
COSTS AND EXPENSES
Home Building
Conventional Housing 1,493,910 1,600,161
Manufactured Housing 95,200 --
Investment Real Estate (3,643) (6,007)
Financial Services 147,866 97,676
Construction Products 160,066 133,172
Contracting and Construction Services 703,384 822,019
Other, net 4,945 1,516
Corporate General and Administrative 14,278 12,760
Interest Expense 24,818 26,760
Minority Interest 35,343 25,900
------------ ------------
2,676,167 2,713,957
------------ ------------
EARNINGS BEFORE INCOME TAXES 160,037 119,164
Income Taxes 59,256 41,642
------------ ------------
NET EARNINGS $ 100,781 $ 77,522
============ ============
EARNINGS PER SHARE
Basic $ 3.42 $ 2.72
============ ============
Diluted $ 3.30 $ 2.63
============ ============
AVERAGE SHARES OUTSTANDING
Basic 29,427,192 28,549,797
============ ============
Diluted 30,524,196 29,518,786
============ ============
CASH DIVIDENDS PER SHARE $ 0.19 $ 0.15
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE> 7
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
Centex Corporation and
Subsidiaries Centex Corporation
------------------------------- -------------------------------
December 31, March 31, December 31, March 31,
1997* 1997** 1997* 1997**
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 89,499 $ 31,320 $ 74,709 $ 21,679
Receivables -
Residential Mortgage Loans 825,200 632,657 -- --
Other 347,203 354,728 311,685 331,091
Affiliates -- -- -- --
Inventories 1,152,879 1,001,759 1,152,879 1,001,759
Investments -
Centex Development Company, L.P. 28,596 32,664 28,596 32,664
Joint Ventures 5,743 5,277 5,743 5,277
Unconsolidated Subsidiaries -- -- 54,584 68,171
Property and Equipment, net 302,161 293,143 282,603 276,627
Other Assets -
Deferred Income Taxes 166,279 197,413 166,471 195,983
Goodwill, net 107,272 103,622 96,863 91,442
Deferred Charges and Other 34,327 26,246 22,968 18,233
------------ ------------ ------------ ------------
$ 3,059,159 $ 2,678,829 $ 2,197,101 $ 2,042,926
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Liabilities $ 703,092 $ 737,698 $ 644,064 $ 685,050
Short-term Debt 936,757 627,518 137,500 47,000
Long-term Debt 240,183 236,769 240,183 236,769
Minority Stockholders' Interest 144,889 142,230 141,116 139,493
Negative Goodwill 86,837 98,837 86,837 98,837
Stockholders' Equity -
Preferred Stock, Authorized 5,000,000
Shares, None Issued -- -- -- --
Common Stock $.25 Par Value; Authorized
50,000,000 Shares; Issued and Outstanding
29,692,312 and 29,016,089 respectively 7,423 7,254 7,423 7,254
Capital in Excess of Par Value 35,075 18,789 35,075 18,789
Retained Earnings 904,903 809,734 904,903 809,734
------------ ------------ ------------ ------------
Total Stockholders' Equity 947,401 835,777 947,401 835,777
------------ ------------ ------------ ------------
$ 3,059,159 $ 2,678,829 $ 2,197,101 $ 2,042,926
============ ============ ============ ============
<CAPTION>
Financial Services
--------------------------------
December 31, March 31,
1997* 1997**
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 14,790 $ 9,641
Receivables -
Residential Mortgage Loans 825,200 632,657
Other 35,518 23,637
Affiliates (894) (19,985)
Inventories -- --
Investments -
Centex Development Company, L.P. -- --
Joint Ventures -- --
Unconsolidated Subsidiaries -- --
Property and Equipment, net 19,558 16,516
Other Assets -
Deferred Income Taxes (192) 1,430
Goodwill, net 10,409 12,180
Deferred Charges and Other 11,359 8,013
------------ ------------
$ 915,748 $ 684,089
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Liabilities $ 59,028 $ 52,648
Short-term Debt 799,257 580,518
Long-term Debt -- --
Minority Stockholders' Interest 3,773 2,737
Negative Goodwill -- --
Stockholders' Equity -
Preferred Stock, Authorized 5,000,000
Shares, None Issued -- --
Common Stock $.25 Par Value; Authorized
50,000,000 Shares; Issued and Outstanding
29,692,312 and 29,016,089 respectively 1 1
Capital in Excess of Par Value 46,444 44,075
Retained Earnings 7,245 4,110
------------ ------------
Total Stockholders' Equity 53,690 48,186
------------ ------------
$ 915,748 $ 684,089
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
* Unaudited
** Condensed from audited financial statements.
In the supplemental data presented above, "Centex Corporation" represents the
adding together of all subsidiaries other than those included in Financial
Services. Transactions between Centex Corporation and Financial Services have
been eliminated from the Centex Corporation and Subsidiaries balance sheets.
-4-
<PAGE> 8
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Earnings $ 100,781 $ 77,522
Adjustments -
Depreciation and Amortization 18,265 9,851
Deferred Income Taxes 38,986 27,807
Equity in Earnings of CDC and Joint Ventures (3,742) (1,671)
Minority Interest in Earnings of Subsidiaries 35,343 25,900
Decrease (Increase) in Receivables 7,525 (9,458)
(Increase) Decrease in Residential Mortgage Loans (192,543) 3,667
(Increase) Decrease in Inventories (151,120) 29,024
(Decrease) Increase in Payables and Accruals (34,606) 16,924
Increase in Other Assets (25,272) (31,328)
Other, net (32,684) 1,225
--------- ---------
(239,067) 149,463
--------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Decrease in Advances to CDC and Joint Ventures 7,344 2,291
Increase in Property and Equipment, net (33,594) (4,099)
--------- ---------
(26,250) (1,808)
--------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Increase (Decrease) in Debt 312,653 (90,522)
Proceeds from Stock Option Exercises 16,455 7,099
Dividends Paid (5,612) (4,293)
--------- ---------
323,496 (87,716)
--------- ---------
NET INCREASE IN CASH 58,179 59,939
CASH AT BEGINNING OF PERIOD 31,320 14,042
--------- ---------
CASH AT END OF PERIOD $ 89,499 $ 73,981
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(unaudited)
(A) A summary of changes in stockholders' equity is presented below:
<TABLE>
<CAPTION>
Capital in
Preferred Common Excess of Retained
Stock Stock Par Value Earnings Total
--------- --------- --------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 $ -- $ 7,254 $ 18,789 $ 809,734 $ 835,777
Net Earnings -- -- -- 100,781 100,781
Exercise of Stock Options -- 169 16,286 -- 16,455
Cash Dividends -- -- -- (5,612) (5,612)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 $ -- $ 7,423 $ 35,075 $ 904,903 $ 947,401
========= ========= ========= ========= =========
</TABLE>
(B) On November 30, 1987 the Company distributed to a nominee, all of the
issued and outstanding shares of common stock of 3333 Holding Corporation
and warrants to purchase approximately 80% of the Class B units of limited
partnership interest in Centex Development Company, L. P. (CDC). A
wholly-owned subsidiary of 3333 Holding Corporation serves as general
partner of Centex Development Company, L. P. These securities are held by
the nominee on behalf of Centex stockholders, and will trade in tandem
with the common stock of Centex, until such time as they are detached.
Supplementary condensed combined financial statements for Centex, 3333
Holding Corporation and Subsidiary and Centex Development Company, L. P.
are as follows:
-6-
<PAGE> 10
NOTES - continued
CENTEX CORPORATION, 3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L. P.
SUPPLEMENTARY CONDENSED COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997*
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 90,091 $ 31,950
Receivables 1,180,781 989,886
Inventories 1,189,596 1,041,855
Investments in Joint Ventures 5,812 5,479
Property and Equipment, net 302,161 293,143
Other Assets 307,978 327,281
------------ ------------
$ 3,076,419 $ 2,689,594
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Liabilities $ 707,308 $ 740,230
Short-term Debt 948,563 634,573
Long-term Debt 240,183 236,769
Minority Stockholders' Interest 144,889 142,230
Negative Goodwill 86,837 98,837
Stockholders' Equity 948,639 836,955
------------ ------------
$ 3,076,419 $ 2,689,594
============ ============
</TABLE>
*Condensed from audited financial statements
SUPPLEMENTARY CONDENSED COMBINED STATEMENT OF EARNINGS
(dollars in thousands)
For the Nine Months Ended
December 31,
-----------------------------
1997 1996
------------ ------------
Revenues $ 2,847,726 $ 2,840,658
Costs and Expenses 2,687,629 2,721,279
------------ ------------
Earnings Before Income Taxes 160,097 119,379
Income Taxes 59,256 41,642
------------ ------------
NET EARNINGS $ 100,841 $ 77,737
============ ============
-7-
<PAGE> 11
Notes - continued
(C) In order to assure the future availability of land for its Home Building
operation, the Company has made deposits totaling $22 million as of
December 31, 1997 for options to purchase undeveloped land and developed
lots having a total purchase price of approximately $573 million. These
options and commitments expire at various dates to the year 2003. The
Company has also committed to purchase land and developed lots totaling
approximately $8 million. In addition, the Company has executed lot
purchase contracts with CDC which aggregate approximately $7 million.
(D) Interest expense relating to the Financial Services operations is
included in its costs and expenses. Interest related to non-financial
services is included as interest expense.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
12/31/97 12/31/96
-------- --------
<S> <C> <C>
Total Interest Incurred $ 56,491 $ 50,946
Less - Financial Services (31,673) (24,186)
-------- --------
Interest Expense $ 24,818 $ 26,760
======== ========
</TABLE>
(E) During April, 1994, Centex Construction Products, Inc. (CXP) completed
an initial public offering of its stock which began trading on the New
York Stock Exchange under the symbol "CXP". Centex's ownership interest
in CXP was 54.6% as of December 31, 1997.
(F) During the quarter ended June 30, 1996, Centex's Home Building
subsidiary completed a business combination transaction and
reorganization with Vista Properties, Inc. As a result of the
combination, Centex's Investment Real Estate portfolio, valued in excess
of $125 million, was reduced to a nominal "book basis" after recording
certain Vista-related tax benefits. As these properties are developed or
sold, the net sales proceeds will be reflected as operating margin.
"Negative Goodwill" recorded as a result of the business combination is
being amortized to earnings over approximately seven years which
represents the estimated period over which the land will be developed
and/or sold.
All investment property operations are being reported through Centex's
"Investment Real Estate" business segment.
(G) During March, 1997, Centex Real Estate Corporation acquired 78% of Cavco
Industries, Inc.'s (Cavco) outstanding common stock for a total of $74.3
million. Goodwill of $68.7 million was recorded in connection with the
acquisition (approximately $53.6 million relates to the 78% acquired by
Centex) and is being amortized to earnings over 30 years.
Cavco's operations are being reported through the "Manufactured Housing"
segment within the Home Building line of business.
(H) In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). This Statement establishes new standards for computing and
presenting earnings per share (EPS). SFAS No. 128 replaces the
presentation of primary EPS previously prescribed by Accounting
Principles Board Opinion No. 15 (APB No. 15) with a presentation of
basic EPS which is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period.
-8-
<PAGE> 12
Notes - continued
SFAS No. 128 also requires dual presentation of basic and diluted EPS.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
No. 15. This Statement is effective for financial statements issued for
periods ending after December 15, 1997, and requires restatement of all
prior- period EPS data presented. The following tables reconcile the
computation of basic EPS and diluted EPS for the quarter and nine months
ended December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
For the Three Months Ended
December 31, 1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS - Net earnings available
to common stockholders $37,380,000 29,683,411 $1.26
=====
EFFECT OF DILUTIVE SECURITIES
Options -- 996,325
Convertible debenture 25,360 200,000
----------- -----------
DILUTED EPS - Net earnings available to common
stockholders + assumed conversions $37,405,360 30,879,736 $1.21
=========== =========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS - Net earnings available
to common stockholders $100,781,000 29,427,192 $3.42
=====
EFFECT OF DILUTIVE SECURITIES
Options -- 897,004
Convertible debenture 75,834 200,000
------------ ------------
DILUTED EPS - Net earnings available to common
stockholders + assumed conversions $100,856,834 30,524,196 $3.30
============ ============ =====
</TABLE>
Note: Options to purchase 10,000 shares of common stock at
approximately $65 per share (expiring in November, 2007) were
outstanding during the quarter ended and as of December 31, 1997 but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
shares.
-9-
<PAGE> 13
Notes - continued
<TABLE>
<CAPTION>
For the Three Months Ended
December 31, 1996
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS - Net earnings available
to common stockholders $27,463,000 28,670,420 $.96
====
EFFECT OF DILUTIVE SECURITIES
Options -- 800,263
Convertible debenture 24,872 200,000
----------- -----------
DILUTED EPS - Net earnings available to common
stockholders + assumed conversions $27,487,872 29,670,683 $.93
=========== =========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31, 1996
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS - Net earnings available
to common stockholders $77,522,000 28,549,797 $2.72
=====
EFFECT OF DILUTIVE SECURITIES
Options -- 768,989
Convertible debenture 73,689 200,000
----------- -----------
DILUTED EPS - Net earnings available to common
stockholders + assumed conversions $77,595,689 29,518,786 $2.63
=========== =========== =====
</TABLE>
(I) In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in
a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company does not expect adoption
of the Statement to have a material effect on the presentation of its
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information", (SFAS No. 131) which changes
the way public companies report information about segments. SFAS No.
131, which is based on the management approach to segment reporting,
requires companies to report selected quarterly segment information and
entity-wide disclosures about products and services, major customers,
and the material countries in which the entity holds assets and reports
revenues. This Statement is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company does not
expect adoption of the Statement to have a material effect on the
presentation of its financial statements.
-10-
<PAGE> 14
CENTEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Centex's consolidated revenues for the quarter were $983.1 million, a 5%
increase over $939.1 million for the same quarter last year. Earnings before
income taxes were $58.9 million, 39% higher than $42.5 million last year. Net
earnings were $37.4 million and diluted earnings per share were $1.21 for this
quarter compared to $27.5 million and $.93, respectively, for the same quarter
last year.
For the nine months ended December 31, 1997, corporate revenues totaled
$2.8 billion, about equal to revenues for the same period last year. Earnings
before income taxes were $160.0 million, 34% higher than $119.2 million for the
same period last year. Net earnings were a record $100.8 million and diluted
earnings per share were $3.30 for the current nine months compared to $77.5
million and $2.63 last year.
HOME BUILDING
Conventional Housing
The following summarizes Conventional Housing results for the quarter
and fiscal year-to-date ended December 31, 1997 compared to the quarter and
fiscal year-to-date ended December 31, 1996 (dollars in millions, except per
unit data):
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
12/31/97 12/31/96
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Conventional Housing Revenues $ 557.5 100.0% $ 566.7 100.0%
Cost of Sales (441.9) (79.3%) (464.3) (81.9%)
Selling, General & Administrative (73.3) (13.1%) (65.6) (11.6%)
---------- ---------- ---------- ----------
Operating Earnings $ 42.3 7.6% $ 36.8 6.5%
========== ========== ========== ==========
Units Closed 3,025 3,226
% Change (6.2%) 9.4%
Unit Sales Price $ 181,266 $ 172,536
% Change 5.1% 4.4%
Operating Earnings per Unit $ 13,980 $ 11,425
% Change 22.4% 17.8%
</TABLE>
<TABLE>
<CAPTION>
Fiscal Fiscal
Year-to-Date Year-to-Date
12/31/97 12/31/96
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Conventional Housing Revenues $ 1,605.2 100.0% $ 1,704.2 100.0%
Cost of Sales (1,278.6) (79.7%) (1,394.1) (81.8%)
Selling, General & Administrative (215.3) (13.4%) (206.1) (12.1%)
---------- ---------- ---------- ----------
Operating Earnings $ 111.3 6.9% $ 104.0 6.1%
========== ========== ========== ==========
Units Closed 8,709 9,835
% Change (11.4%) 15.4%
Unit Sales Price $ 181,716 $ 169,845
% Change 7.0% 4.2%
Operating Earnings per Unit $ 12,775 $ 10,577
% Change 20.8% 25.9%
</TABLE>
-11-
<PAGE> 15
Home closings for the quarter were 3,025 units, 6% less than 3,226 for
the same quarter last year. Home sales (orders) were 2,591 for the quarter this
year, compared to 2,567 units for the same quarter a year ago. Home closings
for the nine months this year totaled 8,709 units, 11% less than closings of
9,835 units for the same period a year ago. Unit orders for the current nine
months were 8,824, 6% higher than 8,319 units for the same period last year.
The backlog of homes sold but not closed at December 31, 1997 was 4,423 units,
10% higher than 4,017 units at December 31, 1996. Centex is currently operating
slightly fewer neighborhoods than it did a year ago.
The operating earnings for the quarter and nine months ended December
31, 1997 increased as a percentage of revenue and on a per unit basis compared
to the same periods last year primarily as a result of Centex Homes' continuing
focus on improved efficiency throughout its operations.
Manufactured Housing
The following summarizes Manufactured Housing's results for the quarter
and fiscal year-to-date ended December 31, 1997 (dollars in millions):
<TABLE>
<CAPTION>
Fiscal
Quarter Ended Year-to-Date
12/31/97 12/31/97
-------------------- --------------------
<S> <C> <C> <C> <C>
Manufactured Housing Revenues $ 38,239 100.0% $ 103,727 100.0%
Cost of Sales (30,967) (81.0%) (83,387) (80.4%)
Selling, General & Administrative (3,228) (8.4%) (10,094) (9.7%)
--------- ----- --------- -----
Earnings Before Goodwill and
Minority Interest 4,044 10.6% 10,246 9.9%
===== =====
Goodwill Amortization (573) (1,719)
Minority Interest (742) (2,042)
--------- ---------
Operating Earnings $ 2,729 $ 6,485
========= =========
Units Produced 1,601 4,219
========= =========
</TABLE>
The Manufactured Housing operation was acquired in late March 1997.
Accordingly, there is no comparative data for the quarter and fiscal
year-to-date ended December 31, 1996.
INVESTMENT REAL ESTATE
For the quarter ended December 31, 1997, Centex's Investment Real Estate
operation, through which all investment property transactions are reported, had
operating earnings of $7.1 million, 27% higher than $5.6 million last year.
For the current nine months, operating earnings from Investment Real
Estate were $21.8 million, a 71% improvement over operating earnings of $12.8
million for the same period in the prior year.
-12-
<PAGE> 16
FINANCIAL SERVICES
The following summarizes Financial Services' results for the quarter and
fiscal year-to-date ended December 31, 1997 compared to the quarter and fiscal
year-to-date ended December 31, 1996 (dollars in millions):
<TABLE>
<CAPTION>
Fiscal Fiscal
Quarter Ended Quarter Ended Year-to-date Year-to-date
12/31/97 12/31/96 12/31/97 12/31/96
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 64.6 $ 38.2 $ 169.1 $ 117.1
------------- ------------- ------------- -------------
Operating Earnings $ 8.5 $ 7.2 $ 21.3 $ 19.4
------------- ------------- ------------- -------------
Origination Volume $ 1,744 $ 1,316 $ 4,836 $ 4,100
------------- ------------- ------------- -------------
Number of Loans Originated
CTX Mortgage -
Centex-built Homes ("Builder") 2,127 2,275 6,085 7,220
Non-Centex-built Homes ("Retail") 10,426 7,931 30,258 26,155
------------- ------------- ------------- -------------
12,553 10,206 36,343 33,375
Centex Home Equity 2,341 1,507 5,161 2,434
------------- ------------- ------------- -------------
14,894 11,713 41,504 35,809
============= ============= ============= =============
</TABLE>
CTX Mortgage Company's (CTX) builder applications for the quarter of
2,000 increased 26% over last year while Retail applications rose 45% to
10,025. Builder applications of 6,544 for the nine month period were 10% higher
than a year ago. Retail applications increased 24% from 24,771 a year ago to
30,626 for the nine months. CTX's profit per loan of $841 for this year's
quarter was a 36% improvement over the per loan profit of $620 for last year's
quarter as a result of increased originations and the centralization of certain
back-office functions.
Centex Home Equity Corporation (CHEC) generated 7,645 "B & C" loan
applications for the quarter, an increase of 32% compared to the same quarter a
year ago. CHEC applications for the nine months rose 47% to 16,283. Operating
earnings for the quarter reflect continuing start-up costs of approximately $2
million for CHEC and the recently formed Centex Finance Company.
CONSTRUCTION PRODUCTS
Revenues from CXP were $70.5 million for the quarter this year, 19%
higher than last year. CXP's operating earnings, net of minority interest, were
$11.2 million for the quarter this year, 27% higher than last year's earnings.
CXP's revenues for the current nine months were $231.9 million, 25% higher than
last year. CXP's operating earnings, net of minority interest, were a record
$38.6 million, a 45% improvement over results for the same period a year ago.
CXP's record results were due to higher product sales volumes,
particularly the increased gypsum wallboard sales related to the acquisition of
the Eagle Gypsum plant in late fiscal 1997. CXP's earnings also were favorably
impacted by continued strong product demand and higher average cement and
gypsum wallboard pricing.
-13-
<PAGE> 17
CONTRACTING AND CONSTRUCTION SERVICES
The following summarizes Contracting and Construction Services' results
for the quarter and fiscal year-to-date ended December 31, 1997 compared to the
quarter and fiscal year-to-date ended December 31, 1996 (dollars in millions):
<TABLE>
<CAPTION>
Fiscal Fiscal
Quarter Ended Quarter Ended Year-to-Date Year-to-Date
12/31/97 12/31/96 12/31/97 12/31/96
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 246.2 $ 270.3 $ 708.1 $ 819.3
------------- ------------- ------------- -------------
Operating Earnings (Loss) $ 2.5 $ (3.0) $ 4.7 $ (2.7)
------------- ------------- ------------- -------------
New Contracts Received $ 122 $ 334 $ 613 $ 831
------------- ------------- ------------- -------------
Backlog of Uncompleted Contracts $ 1,019 $ 1,213 $ 1,019 $ 1,213
------------- ------------- ------------- -------------
</TABLE>
Although Contracting and Construction Services continues to operate in
an intensely competitive environment, nonresidential construction is improving
as the economy strengthens and profit margins on contracts recently acquired by
the group continue to improve. During the current and prior fiscal years, the
Contracting and Construction Services operation has provided a positive average
net cash flow in excess of Centex's investment in the group of approximately
$55-60 million.
In October 1992 Martin County sued one of the Company's general
contracting subsidiaries, Centex-Rooney Construction Co., Inc. ("Rooney"),
alleging defects in the design and construction of the Martin County Courthouse
in Stuart, Florida. Rooney was construction manager of the project. In July
1996 a judgment of $14.2 million was returned against Rooney, and in April 1997
Martin County also obtained a judgment of $3.2 million in attorney's fees and
costs. Both judgments, together with interest, currently approach $20 million.
Recently, the 4th District Court of Appeals affirmed the $14.2 million judgment
and Rooney is now preparing a motion for re-hearing and an appeal to the
Supreme Court of Florida. Rooney's appeal of the $3.2 million award is still
pending. At this time, Rooney is prosecuting claims and lawsuits against
sub-contractors, their insurance carriers and Rooney's own insurance carriers
for recovery of the judgments. One of Rooney's carriers has agreed to pay
approximately $3.5 million. While there is no assurance that Rooney's appeal
will be successful or that it will recover from such sub-contractors or other
insurance carriers, management believes that Rooney will be able to recover
substantially all of both judgments. In any case, these judgments would not
have a material impact on the financial condition of the Company.
FINANCIAL CONDITION AND LIQUIDITY
Centex fulfills its short-term financing requirements with cash
generated from its operations and funds available under its credit facilities.
These credit facilities also serve as back-up lines for overnight borrowings
under its uncommitted bank facilities and commercial paper program. In
addition, CTX Mortgage Company has its own $700 million of committed credit
facilities and approximately $600 million of uncommitted facilities to finance
mortgages which are held during the period they are being securitized and
readied for delivery against forward sale commitments.
The $312.7 million increase in debt was primarily used to fund the
increase in both residential mortgage loans and inventories. The increase in
residential mortgage loans is primarily due to an increase in mortgage
refinancing activity which is attributed to continuing favorable mortgage
interest rates.
The Company believes it has adequate resources and sufficient credit
facilities to satisfy its current needs and provide for future growth.
-14-
<PAGE> 18
OTHER DEVELOPMENTS AND OUTLOOK
During the quarter, Centex's Board of Directors authorized a two-for-one
split of its common stock subject to certain conditions, including stockholder
approval of an amendment to Centex Corporation's Restated Articles of
Incorporation that will double the number of authorized shares from 50 to 100
million. Stockholders approved the amendment at a special meeting of the Centex
stockholders on February 4, 1998. The split will be effected by the issuance of
one additional share of stock for each share outstanding on the record date,
which will be February 13, 1998. Distribution of the additional shares will
occur on February 27, 1998. Following the stock split, the Company's current
quarterly dividend of 7 cents per share will be increased to 4 cents on each of
the new shares, resulting in a 14% gain in the post split quarterly dividend.
Also during the quarter, Centex Financial Services formed Centex Finance
Company, a Phoenix, Arizona-based operation providing lending services to
customers of manufactured housing dealers. The new entity initiated operations
in Arizona in order to take advantage of the dealer network serving Cavco
Industries, Centex's manufactured housing company. Centex Finance Company will
also target additional dealerships in Arizona and is adding representatives in
other states.
Favorable interest rates and the strong national economy in recent
months have positively affected the Company's businesses. If interest rates and
general economic conditions remain at or near current levels, Centex's Home
Building results will exceed fiscal 1997's record performance. Centex's other
businesses also should continue to report improved results, including CXP which
is on track to have its fourth consecutive year of record earnings.
As a result, Centex's fiscal 1998 financial results should surpass
fiscal 1997's all-time-high earnings.
----------------------------------------
The information contained in this report includes forward looking
statements involving a number of risks and uncertainties. In addition to the
factors discussed, other determinants that could cause actual results to differ
include: increases in interest rates; business conditions; growth in the home
building, investment real estate, financial services, contracting and
construction services, and construction products industries and the economy in
general; competitive factors; and the cost of building materials. These and
other factors are described in the Joint Annual Report on Form 10-K of Centex
Corporation and 3333 Holding Corporation and Centex Development Company, L.P.,
and in the Annual Report on Form 10-K for Centex Construction Products, Inc.,
for the fiscal year ended March 31, 1997. Both reports are filed with the
Securities and Exchange Commission.
-15-
<PAGE> 19
CENTEX CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter
ended December 31, 1997.
All other items required under Part II are omitted because they are not
applicable.
-16-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CENTEX CORPORATION
------------------------------
Registrant
February 12, 1998 /s/ David W. Quinn
------------------------------
David W. Quinn
Vice Chairman and
Chief Financial Officer
(principal financial officer)
February 12, 1998 /s/ Barry G. Wilson
------------------------------
Barry G. Wilson
Controller
(chief accounting officer)
-17-
<PAGE> 21
This page intentionally left blank
-18-
<PAGE> 22
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
PART I. FINANCIAL INFORMATION
CONDENSED COMBINING FINANCIAL STATEMENTS
ITEM 1.
The condensed combining financial statements include the accounts
of 3333 Holding Corporation and subsidiary and Centex Development Company, L.P.
(collectively the "Companies"), and have been prepared by the Companies,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Companies believe that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
condensed combining financial statements be read in conjunction with the
financial statements and the notes thereto included in the Companies' latest
annual report on Form 10-K. In the opinion of the Companies, all adjustments
necessary to present fairly the information in the following condensed
financial statements of the Companies have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
-19-
<PAGE> 23
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF OPERATIONS
(dollars in thousands, except per share/unit data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
----------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 9,228 $ 9,123 $ 310 $ 4,026 $ 3,932 $ 307
Costs and Expenses 6,194 6,069 330 3,382 3,224 371
------------ ------------ ------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes 3,034 3,054 (20) 644 708 (64)
Income Taxes -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 3,034 $ 3,054 $ (20) $ 644 $ 708 $ (64)
============ ============ ============ ============ ============ ============
EARNINGS (LOSS) PER SHARE/UNIT
(Average Outstanding Shares,
1,000; Units, 1,000) $ 3,054 $ (20) $ 708 $ (64)
============ ============ ============ ============
</TABLE>
See notes to condensed combining financial statements.
-20-
<PAGE> 24
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF OPERATIONS
(dollars in thousands, except per share/unit data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
----------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 16,063 $ 15,748 $ 1,059 $ 8,323 $ 7,945 $ 1,331
Costs and Expenses 11,890 11,635 999 7,414 7,251 1,116
------------ ------------- ------------ ------------ ------------- ------------
Earnings Before Income Taxes 4,173 4,113 60 909 694 215
Income Taxes -- -- -- -- -- --
------------ ------------- ------------ ------------ ------------- ------------
NET EARNINGS $ 4,173 $ 4,113 $ 60 $ 909 $ 694 $ 215
============ ============= ============ ============ ============= ============
EARNINGS PER SHARE/UNIT
(Average Outstanding Shares,
1,000; Units, 1,000) $ 4,113 $ 60 $ 694 $ 215
============= ============ ============= ============
</TABLE>
See notes to condensed combining financial statements.
-21-
<PAGE> 25
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1997* March 31, 1997**
------------------------------------------ ------------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 592 $ 585 $ 7 $ 630 $ 625 $ 5
Accounts Receivable 321 4,560 184 312 868 176
Notes Receivable -
Centex Corporation and Subsidiaries 7,700 -- 7,700 7,700 -- 7,700
Other 8,241 8,241 -- 2,365 2,365 --
Investment in Affiliate -- -- 767 -- -- 767
Investment in Real Estate Joint Venture 69 69 -- 202 202 --
Projects Held for Development & Sale 35,479 35,479 -- 38,918 38,918 --
Other Assets 100 100 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
$ 52,502 $ 49,034 $ 8,658 $ 50,127 $ 42,978 $ 8,648
============ ============ ============ ============ ============ ============
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Accounts Payable and Accrued
Liabilities $ 4,311 $ 4,102 $ 4,632 $ 2,648 $ 2,410 $ 970
Notes Payable -
Centex Corporation and Subsidiaries 3,288 -- 3,288 7,000 -- 7,000
Other 11,806 11,806 -- 7,055 7,055 --
Land Sale Deposits 10 10 -- 10 10 --
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities 19,415 15,918 7,920 16,713 9,475 7,970
Stockholders' Equity and
Partners' Capital 33,087 33,116 738 33,414 33,503 678
------------ ------------ ------------ ------------ ------------ ------------
$ 52,502 $ 49,034 $ 8,658 $ 50,127 $ 42,978 $ 8,648
============ ============ ============ ============ ============ ============
</TABLE>
* Unaudited
** Condensed from audited financial statements.
See notes to condensed combining financial statements.
-22-
<PAGE> 26
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
----------------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
----------- ------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Earnings $ 4,173 $ 4,113 $ 60 $ 909 $ 694 $ 215
Net Change in Payables, Accruals,
Deposits and Receivables 1,655 (1,999) 3,654 (309) (95) (214)
(Increase) Decrease in Notes Receivable (5,877) (5,877) -- 1,439 1,439 --
Decrease (Increase) in Advances to
Joint Venture 133 133 -- (101) (101) --
Decrease in Projects Held for
Development and Sale 3,439 3,439 -- 4,891 4,891 --
Increase in Other Assets (100) (100) -- (3,000) (3,000) --
----------- ----------- ----------- ----------- ----------- -----------
3,423 (291) 3,714 3,829 3,828 1
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS - FINANCING ACTIVITIES
(Decrease) Increase in Notes Payable -
Centex Corporation and Subsidiaries (3,712) -- (3,712) -- -- --
Other 4,751 4,751 -- (1,373) (1,373) --
Capital Distributions (4,500) (4,500) -- (2,000) (2,000) --
----------- ----------- ----------- ----------- ----------- -----------
(3,461) 251 (3,712) (3,373) (3,373) --
----------- ----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (38) (40) 2 456 455 1
CASH AT BEGINNING OF YEAR 630 625 5 231 225 6
----------- ----------- ----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 592 $ 585 $ 7 $ 687 $ 680 $ 7
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to condensed combining financial statements.
-23-
<PAGE> 27
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
NOTES TO CONDENSED COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 1997
(unaudited)
(A) On November 30, 1987 Centex Corporation ("Centex") distributed to a
nominee all of the issued and outstanding shares of common stock of
3333 Holding Corporation ("Holding") and warrants to purchase
approximately 80% of the Class B units of limited partnership interest
in Centex Development Company, L.P. (the "Partnership"). 3333
Development Corporation ("Development"), a wholly-owned subsidiary of
Holding, serves as general partner of the Partnership. These
securities are held by the nominee on behalf of Centex stockholders
and will trade in tandem with the common stock of Centex until such
time as they are detached.
(B) See Note B to the condensed consolidated financial statements of
Centex Corporation and subsidiaries included elsewhere in this Form
10-Q for supplementary condensed combined financial statements for
Centex Corporation and Subsidiaries, Holding and subsidiary and the
Partnership.
(C) The Partnership sells lots to Centex Homes pursuant to certain
purchase and sale agreements. Revenues from these sales totaled
$220,000 and $855,000 for the quarter and nine months ended December
31, 1997 and $113,000 and $3,090,000 for the quarter and nine months
ended December 31, 1996, respectively. Additionally, during the nine
months ended December 31, 1997, the Partnership sold property located
in Carrollton, Texas to Centex Homes for $2,866,000.
(D) A summary of changes in stockholders' equity and partners' capital is
presented below (dollars in thousands).
<TABLE>
<CAPTION>
For the Nine Months Ended December 31, 1997
-------------------------------------------------------------------------------------------------
3333 Holding Corporation
Centex Development Company, L.P. and Subsidiary
---------------------------------------- ----------------------------------------
CLASS B GENERAL LIMITED CAPITAL IN
UNITS PARTNERS' PARTNERS' STOCK EXCESS OF RETAINED
COMBINED WARRANTS CAPITAL CAPITAL WARRANTS PAR VALUE EARNINGS
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ 33,414 $ 500 $ 767 $ 32,236 $ 1 $ 800 $ (123)
Preference Payments (4,500) -- -- (4,500) -- -- --
Net Earnings 4,173 -- -- 4,113 -- -- 60
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 $ 33,087 $ 500 $ 767 $ 31,849 $ 1 $ 800 $ (63)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The Partnership agreement provides that Class A limited partners are
entitled to a cumulative preferred return of 9% per annum on their
unrecovered capital. Unrecovered capital represents initial capital
contributions as reduced by repayments and is the basis for preference
accruals.
During the nine months ended December 31, 1997, the Partnership made
preference payments to its limited partner, which is a Centex
affiliate, totaling $4.5 million. No preference payments were made
during the quarter. Preference in arrears at December 31, 1997 amounted
to $3.4 million and unrecovered capital totaled $32.8 million.
-24-
<PAGE> 28
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
On a combined basis, revenues for the quarter and nine months ended
December 31, 1997 of $9.2 million and $16.1 million, respectively, included the
sale of commercial property in Texas, and residential property in Texas and
Florida. Revenues of $4.0 million and $8.3 million for the quarter and nine
months ended December 31, 1996, respectively, included the sale of commercial
property in Texas and residential property in Illinois and New Jersey. The
quarter ended December 31, 1997 resulted in combined net earnings of $3.0
million compared to net earnings of $644,000 for the same quarter last year.
The nine months ended December 31, 1997 resulted in combined net earnings of
$4.2 million compared to $909,000 for the same period last year. The increase
in earnings during the current year period reflects the continued improvement
in the north Texas real estate market. This improvement has been evidenced by
both higher margins on land sales and increased sales activity.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from sales and the principal collection on notes
receivable during the nine months ended December 31, 1997 was sufficient to
allow for the Partnership to make preference payments to its limited partner
totaling $4.5 million.
Holding, Development and the Partnership believe that they will be
able to provide or obtain the necessary funding for their current operations
and future expansion needs. The revenues, earnings and liquidity of these
companies are largely dependent on future land sales, the timing of which is
uncertain. The ability to obtain external debt or equity capital is subject to
the provisions of Holding's loan agreement with Centex and the Partnership
Agreement governing the Partnership.
-25-
<PAGE> 29
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
Exhibit 27.2 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter
ended December 31, 1997.
All other items required under Part II are omitted because they are not
applicable.
-26-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3333 HOLDING CORPORATION
---------------------------------
Registrant
February 12, 1998 /s/ J. Stephen Bilheimer
---------------------------------
J. Stephen Bilheimer
President
February 12, 1998 /s/ Kimberly Pinson
---------------------------------
Kimberly Pinson
Vice President and Treasurer
(chief accounting officer)
-27-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTEX DEVELOPMENT COMPANY, L.P.
-------------------------------------
Registrant
By: 3333 Development Corporation,
General Partner
February 12, 1998 /s/ J. Stephen Bilheimer
-------------------------------------
J. Stephen Bilheimer
President
February 12, 1998 /s/ Kimberly Pinson
-------------------------------------
Kimberly Pinson
Vice President and Treasurer
(chief accounting officer)
-28-
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX
CORPORATION'S DECEMBER 31, 1997, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<CIK> 0000018532
<NAME> CENTEX CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 89,499
<SECURITIES> 0
<RECEIVABLES> 1,172,403
<ALLOWANCES> 0
<INVENTORY> 1,152,879
<CURRENT-ASSETS> 0
<PP&E> 517,632
<DEPRECIATION> 215,471
<TOTAL-ASSETS> 3,059,159
<CURRENT-LIABILITIES> 0
<BONDS> 240,183
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 7,423
<OTHER-SE> 939,978
<TOTAL-LIABILITY-AND-EQUITY> 3,059,159
<SALES> 2,836,204
<TOTAL-REVENUES> 2,836,204
<CGS> 2,601,728
<TOTAL-COSTS> 2,601,728
<OTHER-EXPENSES> 49,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,818
<INCOME-PRETAX> 160,037
<INCOME-TAX> 59,256
<INCOME-CONTINUING> 100,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,781
<EPS-PRIMARY> 3.42
<EPS-DILUTED> 3.30
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3333 HOLDING
CORPORATION'S DECEMBER 31, 1997, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000818762
<NAME> 3333 HOLDING CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 7,884
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,658
<CURRENT-LIABILITIES> 0
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1
<OTHER-SE> 737
<TOTAL-LIABILITY-AND-EQUITY> 8,658
<SALES> 1,059
<TOTAL-REVENUES> 1,059
<CGS> 999
<TOTAL-COSTS> 999
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 60
<INCOME-TAX> 0
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX
DEVELOPMENT COMPANY, L.P.'S DECEMBER 31, 1997, FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000818764
<NAME> CENTEX DEVELOPMENT COMPANY, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 585
<SECURITIES> 0
<RECEIVABLES> 12,801
<ALLOWANCES> 0
<INVENTORY> 35,479
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,034
<CURRENT-LIABILITIES> 0
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 500
<OTHER-SE> 32,616
<TOTAL-LIABILITY-AND-EQUITY> 49,034
<SALES> 15,748
<TOTAL-REVENUES> 15,748
<CGS> 11,635
<TOTAL-COSTS> 11,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,113
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| DE | https://www.sec.gov/Archives/edgar/data/315189/0000315189-98-000005.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000315189-98-000005.txt : 19980309
<SEC-HEADER>0000315189-98-000005.hdr.sgml : 19980309
ACCESSION NUMBER: 0000315189-98-000005
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980306
SROS: CSX
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: DEERE & CO
CENTRAL INDEX KEY: 0000315189
STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523]
IRS NUMBER: 362382580
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04121
FILM NUMBER: 98559511
BUSINESS ADDRESS:
STREET 1: JOHN DEERE RD
CITY: MOLINE
STATE: IL
ZIP: 61265
BUSINESS PHONE: 3097658000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-Q
------------------------
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1998
--------------------------
Commission file no: 1-4121
--------------------------
DEERE & COMPANY
Delaware 36-2382580
(State of incorporation) (IRS employer identification no.)
One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No
At January 31, 1998, 248,061,138 shares of common stock, $1 par
value, of the registrant were outstanding.
- -----------------------------------------------------------------
Page 1 of 28 Pages.
Index to Exhibits: Page 24
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY CONSOLIDATED
STATEMENT OF CONSOLIDATED INCOME (Deere & Company and
Consolidated Subsidiaries)
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment $2,404.7 $2,002.6
Finance and interest income 233.2 192.5
Insurance and health care premiums 169.0 162.0
Investment income 17.1 15.0
Other income 22.1 23.9
Total 2,846.1 2,396.0
Costs and Expenses
Cost of goods sold 1,866.5 1,529.6
Research and development expenses 94.7 86.5
Selling, administrative and general
expenses 283.1 261.8
Interest expense 114.7 94.9
Insurance and health care claims
and benefits 138.6 123.8
Other operating expenses 27.6 14.1
Total 2,525.2 2,110.7
Income of Consolidated Group
Before Income Taxes 320.9 285.3
Provision for income taxes 117.8 106.1
Income of Consolidated Group 203.1 179.2
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (.2) (.5)
Insurance
Health care
Other .4 (2.0)
Total .2 (2.5)
Net Income $ 203.3 $ 176.7
Per Share:
Net income $ .81 $ .69
Net income - diluted $ .81 $ .68
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY EQUIPMENT OPERATIONS
STATEMENT OF CONSOLIDATED INCOME (Deere & Company with
Financial Services on the
Equity Basis)
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment $2,404.7 $2,002.6
Finance and interest income 32.1 29.4
Insurance and health care premiums
Investment income
Other income 10.9 11.9
Total 2,447.7 2,043.9
Costs and Expenses
Cost of goods sold 1,871.0 1,535.7
Research and development expenses 94.7 86.5
Selling, administrative and general
expenses 194.6 183.4
Interest expense 21.7 20.5
Insurance and health care claims
and benefits
Other operating expenses 1.6 .5
Total 2,183.6 1,826.6
Income of Consolidated Group
Before Income Taxes 264.1 217.3
Provision for income taxes 97.2 81.9
Income of Consolidated Group 166.9 135.4
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit 32.9 32.9
Insurance 5.5 9.0
Health care (2.4) 1.4
Other .4 (2.0)
Total 36.4 41.3
Net Income $ 203.3 $ 176.7
Page 3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY FINANCIAL SERVICES
STATEMENT OF CONSOLIDATED INCOME
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment
Finance and interest income $203.2 $164.4
Insurance and health care premiums 175.4 173.0
Investment income 17.1 15.0
Other income 12.5 13.2
Total 408.2 365.6
Costs and Expenses
Cost of goods sold
Research and development expenses
Selling, administrative and general
expenses 90.9 83.1
Interest expense 95.1 75.6
Insurance and health care claims
and benefits 139.4 125.3
Other operating expenses 25.9 13.6
Total 351.3 297.6
Income of Consolidated Group
Before Income Taxes 56.9 68.0
Provision for income taxes 20.7 24.2
Income of Consolidated Group 36.2 43.8
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (.2) (.5)
Insurance
Health care
Other
Total (.2) (.5)
Net Income $ 36.0 $ 43.3
Page 4
<PAGE>
DEERE & COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company and
Consolidated Subsidiaries)
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 319.2 $ 330.0 $ 366.1
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 319.2 330.0 366.1
Marketable securities 867.6 819.6 878.1
Receivables from unconsolidated
subsidiaries and affiliates 14.9 14.6 19.6
Trade accounts and notes
receivable - net 3,526.4 3,333.8 3,016.8
Financing receivables - net 6,613.6 6,404.7 6,132.9
Other receivables 395.3 412.7 467.2
Equipment on operating
leases - net 820.8 774.6 481.1
Inventories 1,464.3 1,072.7 1,193.7
Property and equipment - net 1,534.8 1,524.1 1,331.8
Investments in unconsolidated
subsidiaries and affiliates 148.2 149.9 132.4
Intangible assets - net 183.8 157.8 282.5
Prepaid pension costs 574.7 592.9 31.4
Deferred income taxes 528.9 543.6 646.4
Other assets and
deferred charges 194.8 188.8 161.0
Total $17,187.3 $16,319.8 $15,141.0
Liabilities and Stockholders' Equity
Short-term borrowings $4,934.0 $ 3,774.6 $ 3,834.1
Payables to unconsolidated
subsidiaries and affiliates 43.2 48.7 40.2
Accounts payable and
accrued expenses 2,458.1 2,839.7 2,295.6
Insurance and health care
claims and reserves 405.1 414.7 428.1
Accrued taxes 178.3 117.5 201.5
Deferred income taxes 21.3 21.4 9.9
Long-term borrowings 2,642.3 2,622.8 2,478.4
Retirement benefit accruals
and other liabilities 2,359.0 2,333.2 2,279.2
Total liabilities 13,041.3 12,172.6 11,567.0
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 1,778.5 1,778.5 1,766.9
Retained earnings 3,194.3 3,048.4 2,425.2
Minimum pension liability
adjustment (14.0) (14.0) (235.4)
Cumulative translation adjustment (87.5) (57.4) (29.2)
Unrealized gain on
marketable securities 26.6 22.2 15.3
Unamortized restricted
stock compensation (16.1) (17.4) (20.7)
Common stock in treasury,
at cost (735.8) (613.1) (348.1)
Total stockholders' equity 4,146.0 4,147.2 3,574.0
Total $17,187.3 $16,319.8 $15,141.0
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
Page 5
<PAGE>
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company with
Financial Services on
the Equity Basis)
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 73.5 $ 61.2 $ 135.4
Cash deposited with unconsolidated
subsidiaries 180.5 350.0 168.5
Cash and cash equivalents 254.0 411.2 303.9
Marketable securities
Receivables from unconsolidated
subsidiaries and affiliates 107.7 57.3 44.1
Trade accounts and notes
receivable - net 3,526.4 3,333.8 3,016.8
Financing receivables - net 82.7 83.5 82.4
Other receivables 2.1
Equipment on operating
leases - net 186.6 193.9 156.0
Inventories 1,464.3 1,072.7 1,193.7
Property and equipment - net 1,491.0 1,479.1 1,281.5
Investments in unconsolidated
subsidiaries and affiliates 1,510.5 1,494.7 1,475.2
Intangible assets - net 174.4 148.4 273.2
Prepaid pension costs 574.7 592.9 31.4
Deferred income taxes 485.6 490.8 595.8
Other assets and deferred charges 125.9 123.8 93.6
Total $9,983.8 $9,484.2 $8,547.6
Liabilities and Stockholders' Equity
Short-term borrowings $1,036.6 $ 171.1 $ 272.1
Payables to unconsolidated
subsidiaries and affiliates 43.2 54.8 41.5
Accounts payable and accrued
expenses 1,693.1 2,134.1 1,573.1
Insurance and health care
claims and reserves
Accrued taxes 165.9 114.2 197.2
Deferred income taxes 20.8 21.4 9.5
Long-term borrowings 551.9 539.9 625.4
Retirement benefit accruals
and other liabilities 2,326.3 2,301.5 2,254.8
Total liabilities 5,837.8 5,337.0 4,973.6
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 1,778.5 1,778.5 1,766.9
Retained earnings 3,194.3 3,048.4 2,425.2
Minimum pension liability
adjustment (14.0) (14.0) (235.4)
Cumulative translation adjustment (87.5) (57.4) (29.2)
Unrealized gain on marketable
securities 26.6 22.2 15.3
Unamortized restricted stock
compensation (16.1) (17.4) (20.7)
Common stock in treasury, at cost (735.8) (613.1) (348.1)
Total stockholders' equity 4,146.0 4,147.2 3,574.0
Total $9,983.8 $9,484.2 $8,547.6
Page 6
<PAGE>
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEET
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 245.7 $ 268.8 $ 230.8
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 245.7 268.8 230.8
Marketable securities 867.6 819.6 878.1
Receivables from unconsolidated
subsidiaries and affiliates 6.1 1.7
Trade accounts and notes
receivable - net
Financing receivables - net 6,530.9 6,321.2 6,050.5
Other receivables 395.3 410.6 467.2
Equipment on operating leases - net 634.2 580.7 325.1
Inventories
Property and equipment - net 43.8 45.0 50.3
Investments in unconsolidated
subsidiaries and affiliates 12.7 13.0 5.7
Intangible assets - net 9.4 9.4 9.3
Prepaid pension costs
Deferred income taxes 43.4 52.8 50.5
Other assets and deferred charges 68.9 65.0 67.4
Total $8,851.9 $8,592.2 $8,136.6
Liabilities and Stockholders' Equity
Short-term borrowings $3,897.4 $3,603.5 $3,562.0
Payables to unconsolidated
subsidiaries and affiliates 273.3 392.7 193.4
Accounts payable and accrued
expenses 765.0 705.6 722.6
Insurance and health care
claims and reserves 405.1 414.7 428.1
Accrued taxes 12.4 3.2 4.4
Deferred income taxes .5 .3
Long-term borrowings 2,090.4 2,082.9 1,853.0
Retirement benefit accruals
and other liabilities 32.7 31.8 24.3
Total liabilities 7,476.8 7,234.4 6,788.1
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 237.1 238.4 209.4
Retained earnings 1,121.5 1,104.5 1,126.5
Minimum pension liability
adjustment
Cumulative translation
adjustment (10.1) (7.3) (2.7)
Unrealized gain on marketable
securities 26.6 22.2 15.3
Unamortized restricted stock
compensation
Common stock in treasury, at cost
Total stockholders' equity 1,375.1 1,357.8 1,348.5
Total $8,851.9 $8,592.2 $8,136.6
Page 7
<PAGE>
DEERE & COMPANY CONSOLIDATED
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Deere & Company
and
Consolidated Subsidiaries
Three Months Ended
January 31
Millions of dollars (Unaudited) 1998 1997
Cash Flows from Operating Activities
Net income $ 203.3 $ 176.7
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities (809.0) (374.7)
Net cash provided by (used for)
operating activities (605.7) (198.0)
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,492.7 1,459.5
Proceeds from maturities and
sales of marketable securities 36.9 25.1
Cost of financing receivables acquired (1,725.7) (1,686.5)
Purchases of marketable securities (76.8) (32.3)
Purchases of property and equipment (73.0) (68.1)
Cost of operating leases acquired (117.9) (89.4)
Acquisitions of businesses (38.5) (6.8)
Other 82.6 72.5
Net cash used for investing activities (419.7) (326.0)
Cash Flows from Financing Activities
Increase in short-term borrowings 979.5 616.7
Change in intercompany receivables/payables
Proceeds from long-term borrowings 306.0 145.0
Principal payments on long-term borrowings (92.6) (10.3)
Proceeds from issuance of common stock 6.6 3.2
Repurchases of common stock (132.8) (100.2)
Dividends paid (50.2) (51.6)
Other (.1)
Net cash provided by (used for)
financing activities 1,016.5 602.7
Effect of Exchange Rate Changes on Cash (1.9) (4.1)
Net Increase (Decrease) in Cash and
Cash Equivalents (10.8) 74.6
Cash and Cash Equivalents at
Beginning of Period 330.0 291.5
Cash and Cash Equivalents at End of Period $ 319.2 $ 366.1
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the Consolidated" data.
Page 8
<PAGE>
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Deere & Company
Three Months Ended January 31 with Financial
Services on
Millions of dollars (Unaudited) the Equity Basis)
Three Months Ended
January 31
1998 1997
Cash Flows from Operating Activities
Net income $ 203.3 $ 176.7
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities (879.8) (420.5)
Net cash provided by (used for)
operating activities (676.5) (243.8)
Cash Flows from Investing Activities
Collections and sales of financing receivables 10.1 28.1
Proceeds from maturities and sales of
marketable securities
Cost of financing receivables acquired (10.3) (7.4)
Purchases of marketable securities
Purchases of property and equipment (71.2) (65.8)
Cost of operating leases acquired (16.1) (18.4)
Acquisitions of businesses (38.5) (6.8)
Other 10.9 21.7
Net cash used for investing activities (115.1) (48.6)
Cash Flows from Financing Activities
Increase in short-term borrowings 869.9 65.6
Change in intercompany receivables/payables (56.1) 69.0
Proceeds from long-term borrowings
Principal payments on long-term borrowings (1.1) (10.3)
Proceeds from issuance of common stock 6.6 3.2
Repurchases of common stock (132.8) (100.2)
Dividends paid (50.2) (51.6)
Other (.1)
Net cash provided by (used for)
financing activities 636.3 (24.4)
Effect of Exchange Rate Changes on Cash (1.9) (4.1)
Net Increase (Decrease) in Cash and
Cash Equivalents (157.2) (320.9)
Cash and Cash Equivalents at
Beginning of Period 411.2 624.8
Cash and Cash Equivalents at End of Period $ 254.0 $ 303.9
Page 9
<PAGE>
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months Ended January 31
Three Months Ended
Millions of dollars (Unaudited January 31
1998 1997
Cash Flows from Operating Activities
Net income $ 36.0 $ 43.3
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities 54.1 22.5
Net cash provided by (used for)
operating activities 90.1 65.8
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,482.6 1,431.4
Proceeds from maturities and
sales of marketable securities 36.9 25.1
Cost of financing receivables acquired (1,715.4) (1,679.1)
Purchases of marketable securities (76.8) (32.3)
Purchases of property and equipment (1.8) (2.3)
Cost of operating leases acquired (101.8) (71.0)
Acquisitions of businesses
Other 72.9 50.8
Net cash used for investing activities (303.4) (277.4)
Cash Flows from Financing Activities
Increase in short-term borrowings 109.6 551.1
Change in intercompany receivables/payables (113.3) (445.3)
Proceeds from long-term borrowings 306.0 145.0
Principal payments on long-term borrowings (91.5)
Proceeds from issuance of common stock
Repurchases of common stock
Dividends paid (19.3) (20.0)
Other (1.3)
Net cash provided by (used for)
financing activities 190.2 230.8
Effect of Exchange Rate Changes on Cash
Net Increase (Decrease) in Cash and
Cash Equivalents (23.1) 19.2
Cash and Cash Equivalents at
Beginning of Period 268.8 211.6
Cash and Cash Equivalents at End of Period $ 245.7 $ 230.8
Page 10
<PAGE>
Notes to Interim Financial Statements
1. The consolidated financial statements of Deere & Company and
consolidated subsidiaries have been prepared by the Company,
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted
by such rules and regulations. All adjustments, consisting of
normal recurring adjustments, have been included. Management
believes that the disclosures are adequate to present fairly the
financial position, results of operations and cash flows at the
dates and for the periods presented. It is suggested that these
interim financial statements be read in conjunction with the
financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K. Results for interim
periods are not necessarily indicative of those to be expected for
the fiscal year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
and related disclosures. Actual results could differ from those
estimates.
2. The Company's consolidated financial statements and some
information in the notes and related commentary are presented in a
format which includes data grouped as follows:
Equipment Operations - These data include the Company's
agricultural equipment, construction equipment and commercial and
consumer equipment operations with Financial Services reflected on
the equity basis. Data relating to the above equipment
operations, including the consolidated group data in the income
statement, are also referred to as "Equipment Operations" in this
report.
Financial Services - These data include the Company's credit,
insurance and health care subsidiaries.
Consolidated - These data represent the consolidation of the
Equipment Operations and Financial Services in conformity with
Financial Accounting Standards Board (FASB) Statement No. 94.
References to "Deere & Company" or "the Company" refer to the
entire enterprise.
3. An analysis of the Company's retained earnings follows in
millions of dollars:
Three Months Ended
January 31
1998 1997
Balance, beginning of period $3,048.4 $2,299.5
Net income 203.3 176.7
Dividend declared (54.8) (51.0)
Other (2.6)
Balance, end of period $3,194.3 $2,425.2
Page 11
<PAGE>
4. An analysis of the cumulative translation adjustment follows
in millions of dollars:
Three Months Ended
January 31
1998 1997
Balance, beginning of period $(57.4) $(14.0)
Translation adjustment (29.9) (12.4)
Income taxes applicable to translation
adjustments (.2) (2.8)
Balance, end of period $(87.5) $(29.2)
5. Substantially all inventories owned by Deere & Company and its
United States equipment subsidiaries are valued at cost on the
last-in, first-out (LIFO) basis. If all of the Company's
inventories had been valued on an approximate first-in, first-out
(FIFO) basis, estimated inventories by major classification in
millions of dollars would have been as follows:
January 31 October 31 January 31
1998 1997 1997
Raw materials and supplies $ 259 $ 228 $ 238
Work-in-process 532 427 459
Finished machines and parts 1,686 1,430 1,527
Total FIFO value 2,477 2,085 2,224
Adjustment to LIFO basis 1,013 1,012 1,030
Inventories $1,464 $1,073 $1,194
6. During the first three months of 1998, the Financial Services
subsidiaries received proceeds from the sale of retail notes of
$12 million. At January 31, 1998, the net unpaid balance of all
retail notes previously sold by the Financial Services
subsidiaries was $1,182 million and the Company's maximum exposure
under all related recourse provisions was $171 million.
At January 31, 1998, the Company had commitments of approximately
$112 million for construction and acquisition of property and
equipment.
7. Dividends declared and paid on a per share basis were as
follows:
Three Months Ended
January 31
1998 1997
Dividends declared $.22 $.20
Dividends paid $.20 $.20
Page 12
<PAGE>
8. Worldwide net sales and revenues and operating profit in
millions of dollars follow:
Three Months Ended
January 31
%
Change
Net Sales:
Agricultural Equipment $1,451 $1,273 + 14
Construction equipment 578 461 + 25
Commercial and consumer equipment 376 269 + 40
Total net sales 2,405 2,003 + 20
Financial Services revenues 401 354 + 13
Other revenues 40 39 + 3
Total net sales and revenues $2,846 $2,396 + 19
United States and Canada:
Equipment net sales $1,815 $1,415 + 28
Financial Services revenues 401 354 + 13
Total 2,216 1,769 + 25
Overseas Net sales 590 588
Other revenues 40 39 + 3
Total net sales and revenues $2,846 $2,396 + 19
Operating profit**:
Agricultural equipment $ 206 $ 195 + 6
Construction equipment 64 38 + 68
Commercial and consumer equipment 18 4 +350
Equipment Operations* 288 237 + 22
Financial Services 57 68 - 16
Total operating profit 345 305 + 13
Interest and corporate expenses-net (24) (22) + 9
Income taxes (118) (106) + 11
Net income $ 203 $ 177 + 15
* Includes overseas operating profit
as follows: $ 57 $ 69 - 17
** Operating profit is income before interest expense, foreign
exchange gains and losses, income taxes and certain corporate
expenses. However, operating profit of Financial Services
includes the effect of interest expense.
Page 13
<PAGE>
9. In the first quarter of 1998, the Company adopted FASB
Statement No. 128, Earnings per Share. This Statement requires
the presentation of basic and diluted net income per share, and a
reconciliation between these two amounts. Diluted net income per
share was restated for the prior period.
A reconciliation of basic and diluted net income per share in
millions, except per share amounts, follows:
Three Months Ended
January 31
1998 1997
Net income $203.3 $176.7
Average shares outstanding 249.5 256.1
Basic net income per share $ .81 $ .69
Average shares outstanding 249.5 256.1
Effect of dilutive securities:
Stock options 2.6 2.4
Other .3 .2
Total potential shares outstanding 252.4 258.7
Diluted net income per share $ .81 $ .68
Stock options to purchase 2.2 million shares during the first
quarter of 1998 and 1.6 million shares during the first quarter of
1997 were outstanding, but not included in the above diluted per
share computation because the options' exercise prices were
greater than the average market price of the Company's common
stock during the related periods.
10. In December 1997, the Company granted options to employees
for the purchase of 1.7 million shares of common stock at an
exercise price of $56.50 per share and .5 million shares at an
exercise price of $82.19 per share. At January 31, 1998, options
for 8.1 million shares were outstanding at option prices in a
range of $15.60 to $82.19 per share and a weighted-average
exercise price of $39.21 per share. A total of 12.6 million
shares remained available for the granting of future options.
11. The Company is subject to various unresolved legal actions
which arise in the normal course of its business, the most
prevalent of which relate to product liability, retail credit
matters and patent and trademark matters. Although it is not
possible to predict with certainty the outcome of these unresolved
legal actions or the range of possible loss, the Company believes
these unresolved legal actions will not have a material effect on
its financial position or results of operations.
Page 14
<PAGE>
12. In December 1997, the Company announced the extension of its
stock repurchase program and authorized an additional $1 billion
of such repurchases. At the Company's discretion, repurchases of
common stock are being made from time to time in the open market
and through privately negotiated transactions. During the first
quarter of 1998, the Company repurchased $95 million of common
stock related to the extended program and $38 million for ongoing
stock option and restricted stock plans.
13. In December 1997, the Company invested $39 million for a 49
percent interest in Cameco Industries, Inc., primarily a
manufacturer of sugarcane harvesters and forestry equipment
located in Thibodaux, Louisiana. The initial goodwill acquired
was $27 million, which will be amortized to expense over 10 years.
The Company has also agreed to purchase the remaining 51 percent
interest for $40 million within 12 months of the first investment.
Cameco has been consolidated beginning in the first quarter of
1998 and the purchase did not have a material effect on the
Company's operating results.
Page 15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Deere & Company achieved record first quarter worldwide net income
of $203.3 million, or $.81 per share, for the period ended January
31, an increase of 15 percent compared with $176.7 million, or
$.69 per share, in the first quarter of 1997. Net income per
share rose by 17 percent due to ongoing share repurchases.
Significant revenue growth and continued favorable margins were
the primary reasons for the strong results. Strong customer
response to new products and continuing progress from the
Company's quality improvement initiatives is driving the earnings
performance, even as spending has increased for growth initiatives
and as some global markets have become more challenging.
Worldwide net sales and revenues rose 19 percent to $2,846 million
for the first quarter, compared with $2,396 million last year.
Net sales to dealers of agricultural, construction, and commercial
and consumer equipment were $2,405 million for the quarter,
compared to $2,003 million last year. Export sales from the U.S.
remained robust, totaling $444 million for the quarter, compared
with $392 million last year. Overseas sales were approximately
equal to last year's first quarter total. Overall, the Company's
worldwide physical volume of sales increased 22 percent for the
first quarter of 1998 compared to the same period last year.
The Company's worldwide Equipment Operations, which exclude the
Financial Services subsidiaries and unconsolidated affiliates, had
record income of $166.9 million for the first quarter, compared
with $135.4 million last year. Worldwide equipment operating
profit increased to $288 million in the first quarter, compared
with $237 million a year ago.
- - Worldwide agricultural equipment operating profit was $206
million for the quarter, compared with $195 million last year,
reflecting higher sales and production volumes, partially offset
by higher expenses related to the development of new products and
markets, higher sales incentive costs and a less favorable sales
mix.
- - Worldwide construction equipment operating profit totaled $64
million for the quarter, in comparison with $38 million last year.
The increase reflected higher sales and production volumes and
improved operating efficiencies, partially offset by growth
expenditures and start-up expenses primarily at the new engine
facility in Torreon, Mexico.
- - Worldwide commercial and consumer equipment operating profit was
$18 million for the quarter compared with $4 million last year.
Results benefited from higher sales and production volumes and a
more favorable yen exchange rate, partially offset by start-up
costs at new facilities and growth expenditures.
The ratio of cost of goods sold to net sales of the Equipment
Operations was 77.8 percent in the first quarter of 1998 compared
to 76.7 percent in the same period last year. Additional
information on business segments is presented in Note 8 to the
interim financial statements.
Net income of the Company's credit operations was $32.9 million
for both the first quarter of 1998 and 1997. The higher income
from a larger average receivable and lease portfolio financed was
offset by higher operating expenses, lower securitization and
servicing fee income and narrower financing spreads. Total
revenues of the credit operations increased 21 percent from $178
million in the first quarter of 1997 to $216 million in the first
quarter of 1998.
Page 16
<PAGE>
The average balance of receivables and leases financed was 12
percent higher in the first three months of 1998 compared to the
same period last year. Interest expense increased 25 percent
compared with the first quarter of 1997 as a result of an increase
in average borrowings and higher borrowing rates this year. The
credit subsidiaries' consolidated ratio of earnings to fixed
charges was 1.54 to 1 during the first three months this year
compared with 1.69 to 1 in the comparable period of 1997.
Net income from insurance operations was $5.5 million in the first
quarter of 1998 compared with $9.0 million last year, primarily
due to less favorable underwriting results. For the three-month
period, insurance premiums decreased 13 percent in 1998 compared
with the same period last year, while total claims, benefits, and
selling, administrative and general expenses decreased 8 percent
this year.
The health care operations incurred a net loss of $2.4 million in
the first quarter of 1998 compared with net income of $1.4 million
last year. The loss primarily reflected reduced margins caused by
very competitive industry conditions. Health care premiums and
administrative services revenues increased 14 percent in the first
three months of 1998 compared with the same period last year,
while total claims, benefits, and selling, administrative and
general expenses increased 22 percent this year.
Market Conditions and Outlook
Worldwide demand for John Deere agricultural equipment remained
strong for the quarter as a result of favorable fundamentals in
the farm economy and excellent customer response to new products.
With regard to the future, worldwide commodity carryover stocks
should remain relatively low, while grain and soybean prices,
although trending down, are expected to continue at profitable
levels. Near term commodity price volatility could increase until
the full effects of El Nino are known. At the same time, U.S.
farm cash receipts are expected to remain near, or slightly below,
the high levels of the previous two years. U.S. farmers' balance
sheets should remain strong as a result of rising farmland prices
and low interest rates. With regard to the Asian economic
situation, the Company does not have significant sales to the
region, and, according to the U.S. Department of Agriculture, farm
exports to Asia are expected to show only a modest decline for the
year. However, the Asian financial crisis is contributing to
global uncertainty, currency realignments and pricing challenges
in some parts of the world. Concurrently, worldwide commodity
consumption is expected to increase again this year, and overall
fundamentals are expected to remain generally favorable for farm
equipment sales in 1998.
Construction equipment demand is expected to remain strong in
1998, sustained by low interest rates, moderate economic growth
and low inflation. Housing starts are expected to approximate
last year's level, while expenditures on highways and streets are
anticipated to grow in connection with the approval of pending
federal highway legislation.
Sales for commercial and consumer equipment are expected to
benefit from growing incomes, low interest rates, moderate
economic growth, a strong housing market and new product
introductions.
The credit operations' performance is expected to improve this
year as a result of strong demand for John Deere products and
favorable economic conditions. The insurance operations will
continue to face competitive market conditions, with results
expected to fall below last year's levels. Although health care
operations continue to experience margin pressures and a very
competitive environment, significant improvement is expected for
1998 over the previous year.
Page 17
<PAGE>
Based on these conditions, the Company's worldwide physical volume
of sales is currently projected to increase by approximately 8
percent in 1998 compared with 1997. Second quarter physical
volumes are projected to be 13 percent higher than comparable
levels for the second quarter of 1997.
Overall, the general fundamentals of the Company's business remain
favorable. With the commitment of the Company's employees and
enthusiastic support of its dealers, the Company is confident the
strong operating performance will continue for the remainder of
1998.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Market Conditions and
Outlook" heading, which relate to future operating periods, are
subject to important risks and uncertainties that could cause
actual results to differ materially. The Company's businesses
include Equipment Operations (agricultural, construction and
commercial and consumer) and Financial Services (credit, insurance
and health care). Forward-looking statements relating to these
businesses involve certain factors that are subject to change,
including: the many interrelated factors that affect farmers'
confidence, including worldwide demand for agricultural products,
world grain stocks, commodities prices, weather conditions such as
El Nino, animal diseases, crop pests, harvest yields, real estate
values and government farm programs; general economic conditions
and housing starts; legislation, primarily legislation relating to
agriculture, the environment, commerce and government spending on
infrastructure; actions of competitors in the various industries
in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor
relations; interest and currency exchange rates; accounting
standards; and other risks and uncertainties. Economic
difficulties in Asia could affect North American grain and meat
export prospects and could trigger instability in the world's
financial markets. The Company's outlook is based upon
assumptions relating to the factors described above. Further
information concerning the Company and its businesses, including
factors that potentially could materially affect the Company's
financial results, is included in the Company's most recent annual
report on Form 10-K as filed with the Securities and Exchange
Commission.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been
organized to review separately, where appropriate, the Company's
Equipment Operations, Financial Services operations and the
consolidated totals.
Equipment Operations
The Company's equipment businesses are capital intensive and are
subject to large seasonal variations in financing requirements for
trade receivables from dealers and inventories. Accordingly,
to the extent necessary, funds provided from operations are
supplemented from external borrowing sources.
In the first quarter of 1998, negative cash flows from operating
activities of $677 million resulted primarily from an increase in
trade receivables and Company-owned inventories, and a decrease in
accounts payable and accrued expenses. Partially offsetting these
operating cash outflows were positive cash flows from net income.
The resulting net cash requirement for operating activities, along
with repurchases of common stock, purchases of property and
equipment, an increase in receivables from Financial Services and
payment of dividends, were provided primarily from an increase in
borrowings and a decrease in cash and cash equivalents.
Page 18
<PAGE>
Negative cash flows from operating activities of $244 million in
the first quarter of 1997 resulted primarily from an increase in
Company-owned inventories and a decrease in accounts payable and
accrued expenses. Partially offsetting these operating cash
outflows were positive cash flows from net income and a reduction
in trade and other receivables. The resulting net cash
requirement for operating activities, along with repurchases of
common stock, purchases of property and equipment and payment of
dividends, were provided primarily from a decrease in cash and
cash equivalents and an increase in borrowings.
Equipment Operations' assets at January 31, 1998 were 72.6 percent
of the last 12 months net sales, compared with 72.2 percent a year
ago.
Net trade accounts and notes receivable result mainly from sales
to dealers of equipment that is being carried in their
inventories. Although trade receivables increased $193 million
during the first quarter and $510 million compared to one year
ago, the ratios of worldwide net trade accounts and notes
receivable to the last 12 months' net sales were 31 percent at
January 31, 1998, 30 percent at October 31, 1997 and 31 percent at
January 31, 1997. North American agricultural, construction, and
commercial and consumer equipment trade receivables increased
approximately $250 million, $50 million and $150 million,
respectively, compared with the levels 12 months earlier. Total
overseas trade receivables were approximately $60 million higher
than a year ago. The percentage of total worldwide trade
receivables outstanding for periods exceeding 12 months was 5
percent at January 31, 1998, 5 percent at October 31, 1997 and 8
percent at January 31, 1997.
Company-owned inventories at January 31, 1998 have increased by
$392 million compared with the end of the previous fiscal year and
$271 million compared to one year ago, primarily reflecting a
seasonal increase in the first quarter and increased production
and sales volumes from a year ago. Most of the Company's
inventories are valued on the last-in, first-out (LIFO) basis.
Inventories valued on an approximate current cost basis increased
by only 11 percent from a year ago, compared to an increase in net
sales of 20 percent during the same periods.
Total interest-bearing debt of the Equipment Operations was $1,588
million at January 31, 1998 compared with $711 million at the end
of fiscal year 1997 and $898 million at January 31, 1997. The
ratio of total debt to total capital (total interest-bearing debt
and stockholders' equity) was 28 percent, 15 percent and 20
percent at January 31, 1998, October 31, 1997 and January 31,
1997, respectively.
Financial Services
The Financial Services' credit subsidiaries rely on their ability
to raise substantial amounts of funds to finance their receivable
and lease portfolios. Their primary sources of funds for this
purpose are a combination of borrowings and equity capital.
Additionally, the credit subsidiaries periodically sell
substantial amounts of retail notes. The insurance and health
care operations generate their funds through internal operations
and intercompany loans.
During the first quarter of 1998, the aggregate cash provided from
operating and financing activities was used primarily to increase
financing receivables. Cash provided from Financial Services
operating activities was $90 million in the current quarter. Cash
provided by financing activities totaled $190 million in 1998,
primarily resulting from a $211 million increase in total
borrowings, which was partially offset by payment of a $19 million
dividend to the Equipment Operations. Cash used for investing
activities totaled $303 million in the current quarter, primarily
due to the cost of financing receivables and leases acquired
exceeding collections. Cash and cash equivalents decreased $23
million during the first quarter.
Page 19
<PAGE>
In the first quarter of 1997, the aggregate cash provided from
operating and financing activities was used primarily to increase
financing receivables. Cash provided from Financial Services
operating activities was $66 million in the first quarter of 1997.
Cash provided by financing activities totaled $231 million in
1997, resulting from a $251 million increase in total borrowings,
which was partially offset by payment of a $20 million dividend to
the Equipment Operations. Cash used for investing activities
totaled $277 million in 1997, primarily due to the cost of
financing receivables and leases acquired exceeding collections.
Cash and cash equivalents increased $19 million during the first
quarter of last year.
Marketable securities consist primarily of debt securities held by
the insurance and health care operations in support of their
obligations to policyholders. During the first quarter and last
12 months, marketable securities have increased $48 million and
decreased $10 million, respectively. The increase in the first
quarter was primarily due to the investment of the insurance
operation's cash and cash equivalents held at the beginning of the
year.
Financing receivables and leases increased by $263 million in the
first quarter of 1998 and $789 million during the past 12 months.
These receivables and leases consist of retail notes originating
in connection with retail sales of new and used equipment by
dealers of John Deere products, retail notes from non-Deere-
related customers, revolving charge accounts, wholesale notes
receivable, and financing and operating leases.
The credit subsidiaries' receivables and leases increased during
the last 12 months due to the cost of financing receivables and
leases acquired exceeding collections, which was partially offset
by the sale of retail notes during the same period. Total
acquisitions of financing receivables and leases were 4 percent
higher in the first quarter of 1998 compared with the same period
last year. At January 31, 1998, the levels of retail notes,
wholesale receivables, leases and revolving charge accounts were
all higher than one year ago. Financing receivables and leases
administered by the credit subsidiaries, which include receivables
previously sold, amounted to $8,347 million at January 31, 1998
compared with $8,416 million at October 31, 1997 and $7,512
million at January 31, 1997. At January 31, 1998, the unpaid
balance of all retail notes previously sold was $1,182 million
compared with $1,515 million at October 31, 1997 and $1,137
million at January 31, 1997.
Total outside interest-bearing debt of the credit subsidiaries was
$5,988 million at January 31, 1998 compared with $5,686 million at
the end of fiscal year 1997 and $5,415 million at January 31,
1997. Total outside borrowings increased during the first quarter
of 1998 and the past 12 months, generally corresponding with the
level of the financing receivable and lease portfolio, the level
of cash and cash equivalents and the change in payables owed to
the Equipment Operations. The credit subsidiaries' ratio of total
interest-bearing debt to stockholder's equity was 6.7 to 1 at
January 31, 1998 compared with 6.6 to 1 at October 31, 1997 and
6.5 to 1 at January 31, 1997.
During the first three months of 1998, John Deere Capital
Corporation issued $200 million of 5.85% notes due in 2001. The
Capital Corporation also issued $106 million and retired $92
million of medium-term notes during the first quarter of 1998.
Consolidated
The Company maintains unsecured lines of credit with various banks
in North America and overseas. Some of the lines are available to
both the Equipment Operations and certain credit subsidiaries.
Worldwide lines of credit totaled $4,368 million at January 31,
1998, $705 million of which were unused. For the purpose of
Page 20
<PAGE>
computing unused credit lines, total short-term borrowings,
excluding the current portion of long-term borrowings, were
considered to constitute utilization. Included in the total
credit lines is a long-term credit agreement commitment totaling
$3,500 million.
Stockholders' equity was $4,146 million at January 31, 1998
compared with $4,147 million at October 31, 1997 and $3,574
million at January 31, 1997. The increase in equity due to net
income of $203 million for the first three months of 1998 was
primarily offset by an increase in common stock in treasury of
$123 million related to the Company's stock repurchase and
employee benefit programs, dividends declared of $55 million and a
$30 million change in the cumulative translation adjustment.
The Board of Directors at its meeting on February 25, 1998
declared a quarterly dividend of 22 cents per share payable May 1,
1998 to stockholders of record on March 31, 1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See the Company's most recent annual report filed on Form 10-K
(Item 7A). There has been no material change in this information.
Page 21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note (11) to the Interim Financial Statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the index to exhibits immediately preceding the exhibits filed
with this report.
Certain instruments relating to long-term debt constituting less
than 10% of the registrant's total assets are not filed as
exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation
S-K. The registrant will file copies of such instruments upon
request of the Commission.
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 25, 1997 (Item 7).
Current Report on Form 8-K dated December 3, 1997 (Items 5 and 7).
Page 22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DEERE & COMPANY
Date: March 6, 1998 By: s/ Nathan J. Jones
------------- ------------------
Nathan J. Jones
Senior Vice President,
Principal Financial Officer
and Principal Accounting
Officer
Page 23
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
Number
2 Not applicable -
3 Not applicable -
4 Not applicable -
10 Not applicable -
11 Not applicable -
12 Computation of ratio of earnings to
fixed charges 25
15 Not applicable -
18 Not applicable -
19 Not applicable -
22 Not applicable -
23 Not applicable -
24 Not applicable -
27 Financial data schedule 28
99 Not applicable -
Page 24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<TEXT>
<PAGE>
EXHIBIT 12
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Year
Ended Ended
January 31 October 31
1998 1997 1997
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $320,896 $285,254 $1,507,070
Dividends received from less-
than-fifty percent owned
affiliates 329 1,228 3,591
Fixed charges excluding
capitalized interest 117,912 97,004 433,673
Total earnings $439,137 $383,486 $1,944,334
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $115,372 $ 94,855 $ 422,588
Portion of rental charges
deemed to be interest 3,184 2,149 11,497
Total fixed charges $118,556 $ 97,004 $ 434,085
Ratio of earnings to
fixed charges* 3.70 3.95 4.48
The computation of the ratio of earnings to fixed charges is based
on applicable amounts of the Company and its consolidated
subsidiaries plus dividends received from less-than-fifty percent
owned affiliates. "Earnings" consist of income before income
taxes, the cumulative effect of changes in accounting and fixed
charges excluding capitalized interest. "Fixed charges" consist of
interest on indebtedness, amortization of debt discount and
expense, an estimated amount of rental expense which is deemed to
be representative of the interest factor, and capitalized interest.
* The Company has not issued preferred stock. Therefore, the
ratios of earnings to combined fixed charges and preferred stock
dividends are the same as the ratios presented above.
Page 25
<PAGE>
EXHIBIT 12
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year
Ended
October 31
1996 1995
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $1,286,634 $1,092,751
Dividends received from less-
than-fifty percent owned
affiliates 7,937 2,023
Fixed charges excluding
capitalized interest 410,764 399,056
Total earnings $1,705,335 $1,493,830
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $ 402,168 $ 392,408
Portion of rental charges
deemed to be interest 8,596 6,661
Total fixed charges $ 410,764 $ 399,069
Ratio of earnings to
fixed charges* 4.15 3.74
Page 26
<PAGE>
EXHIBIT 12
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year
Ended
October 31
1994 1993
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $ 920,920 $272,345
Dividends received from less-
than-fifty percent owned
affiliates 2,329 1,706
Fixed charges excluding
capitalized interest 310,047 375,238
Total earnings $1,233,296 $649,289
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $ 303,080 $369,325
Portion of rental charges
deemed to be interest 7,008 6,127
Total fixed charges $ 310,088 $375,452
Ratio of earnings to
fixed charges* 3.98 1.73
Page 27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000315189
<NAME> DEERE&CO
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 319
<SECURITIES> 868
<RECEIVABLES> 10,669
<ALLOWANCES> 119
<INVENTORY> 1,464
<CURRENT-ASSETS> 0
<PP&E> 4,422
<DEPRECIATION> 2,888
<TOTAL-ASSETS> 17,187
<CURRENT-LIABILITIES> 0
<BONDS> 2,642
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,779
<OTHER-SE> 2,367
<TOTAL-LIABILITY-AND-EQUITY> 17,187
<SALES> 2,405
<TOTAL-REVENUES> 2,846
<CGS> 1,867
<TOTAL-COSTS> 2,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> 321
<INCOME-TAX> 118
<INCOME-CONTINUING> 203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| DRI | https://www.sec.gov/Archives/edgar/data/940944/0000940944-98-000018.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000940944-98-000018.txt : 19980330
<SEC-HEADER>0000940944-98-000018.hdr.sgml : 19980330
ACCESSION NUMBER: 0000940944-98-000018
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19980222
FILED AS OF DATE: 19980327
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: DARDEN RESTAURANTS INC
CENTRAL INDEX KEY: 0000940944
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812]
IRS NUMBER: 593305930
STATE OF INCORPORATION: FL
FISCAL YEAR END: 0526
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13666
FILM NUMBER: 98576197
BUSINESS ADDRESS:
STREET 1: 5900 LAKE ELLENOR DR
CITY: ORLANDO
STATE: FL
ZIP: 32809
BUSINESS PHONE: 4072454000
MAIL ADDRESS:
STREET 1: 5900 LAKE ELLENOR DRIVE
CITY: ORLANDO
STATE: FL
ZIP: 32809
FORMER COMPANY:
FORMER CONFORMED NAME: GENERAL MILLS RESTAURANTS INC
DATE OF NAME CHANGE: 19950313
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
----------------------------------
(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 22, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
----------------------------------
1-13666
Commission File Number
----------------------------------
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3305930
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5900 LAKE ELLENOR DRIVE,
ORLANDO, FLORIDA 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
----- -----
-----------------------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of March 20, 1998:
142,749,933 (excluding 18,185,103 shares held in treasury).
================================================================================
<PAGE>
DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 2
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Index to Exhibits 13
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirteen Weeks Ended
- --------------------------------------------------------------------------------
February 22, 1998 February 23, 1997
- --------------------------------------------------------------------------------
Sales...................................... $ 811,261 $ 800,846
Costs and Expenses:
Cost of sales:
Food and beverages..................... 269,164 277,824
Restaurant labor....................... 263,382 258,555
Restaurant expenses.................... 113,065 116,908
---------- ----------
Total Cost of Sales.................. $ 645,611 $ 653,287
Selling, general and administrative...... 83,269 85,245
Depreciation and amortization............ 32,074 35,067
Interest, net............................ 5,079 5,634
---------- ----------
Total Costs and Expenses........... $ 766,033 $ 779,233
---------- ----------
Earnings before Income Taxes............... 45,228 21,613
Income Taxes............................... (15,470) (5,890)
---------- ----------
Net Earnings............................... $ 29,758 $ 15,723
========== ==========
Net Earnings per Share, Basic and Diluted.. $ 0.20 $ 0.10
========== ==========
Average Number of Common Shares Outstanding:
Basic.................................... 148,100 154,200
========== ==========
Diluted.................................. 151,300 154,900
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirty-Nine Weeks Ended
- --------------------------------------------------------------------------------
February 22, 1998 February 23, 1997
- --------------------------------------------------------------------------------
Sales...................................... $ 2,365,855 $ 2,355,158
Costs and Expenses:
Cost of sales:
Food and beverages..................... 776,973 803,621
Restaurant labor....................... 775,328 757,763
Restaurant expenses.................... 353,750 360,090
----------- -----------
Total Cost of Sales.................. $ 1,906,051 $ 1,921,474
Selling, general and administrative.... 256,886 277,636
Depreciation and amortization.......... 95,159 105,170
Interest, net.......................... 14,495 16,191
----------- -----------
Total Costs and Expenses........... $ 2,272,591 $ 2,320,471
----------- -----------
Earnings before Income Taxes............... 93,264 34,687
Income Taxes............................... (31,568) (9,660)
----------- -----------
Net Earnings............................... $ 61,696 $ 25,027
=========== ===========
Net Earnings per Share, Basic and Diluted.. $ 0.41 $ 0.16
=========== ===========
Average Number of Common Shares Outstanding:
Basic.................................... 150,300 156,500
=========== ===========
Diluted.................................. 152,200 157,400
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)
- --------------------------------------------------------------------------------
February 22, 1998 May 25, 1997
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 35,679 $ 25,490
Receivables................................... 27,363 16,333
Refundable income taxes, net.................. 4,550 16,968
Inventories................................... 176,276 132,241
Net assets held for disposal.................. 50,618 47,471
Prepaid expenses and other current assets..... 13,048 14,709
Deferred income taxes......................... 79,963 84,157
----------- -----------
Total Current Assets........................ $ 387,497 $ 337,369
Land, Buildings and Equipment................... 1,500,552 1,533,272
Other Assets.................................... 95,105 93,081
----------- -----------
Total Assets............................ $ 1,983,154 $ 1,963,722
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $ 138,989 $ 113,087
Short-term debt............................... 33,500 43,400
Current portion of long-term debt............. 5 5
Accrued payroll............................... 68,535 58,312
Other accrued taxes........................... 21,907 22,180
Other current liabilities..................... 256,910 243,596
----------- -----------
Total Current Liabilities................... $ 519,846 $ 480,580
Long-term Debt.................................. 310,871 313,187
Deferred Income Taxes........................... 73,731 70,118
Other Liabilities............................... 19,007 18,624
----------- -----------
Total Liabilities......................... $ 923,455 $ 882,509
----------- -----------
Stockholders' Equity:
Common stock and surplus...................... $ 1,277,633 $ 1,268,656
Retained earnings (deficit)................... 13,985 (41,706)
Treasury stock................................ (156,102) (69,184)
Cumulative foreign currency adjustment........ (11,129) (10,037)
Unearned compensation......................... (64,688) (66,516)
----------- -----------
Total Stockholders' Equity................ $ 1,059,699 $ 1,081,213
----------- -----------
Total Liabilities and Stockholders'
Equity................................ $ 1,983,154 $ 1,963,722
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirteen Weeks Ended
- --------------------------------------------------------------------------------
February 22, February 23,
1998 1997
- --------------------------------------------------------------------------------
Cash Flows--Operating Activities:
Net earnings...................................... $ 29,758 $ 15,723
Adjustments to reconcile net earnings to cash
flow:
Depreciation and amortization................. 32,074 35,067
Amortization of unearned compensation and
loan costs.................................. 882 960
Change in current assets and liabilities...... 34,770 28,461
Change in other liabilities .................. 117 91
Loss on disposal of land, buildings and
equipment................................... 149 1,593
Deferred income taxes......................... 766 4,581
Other, net.................................... 232 (71)
---------- ----------
Net Cash Provided by Operating Activities. $ 98,748 $ 86,405
---------- ----------
Cash Flows--Investment Activities:
Purchases of land, buildings and equipment....... (31,068) (42,548)
Purchases of intangibles......................... (393) (88)
Decrease in other assets......................... 22 247
Proceeds from disposal of land, buildings and
equipment (including net assets held for
disposal)...................................... 11,067 9,569
---------- ----------
Net Cash Used by Investment Activities... $ (20,372) $ (32,820)
---------- ----------
Cash Flows--Financing Activities:
Proceeds from issuance of common stock........... 2,994 337
Income tax benefit credited to equity............ 577 71
Purchases of treasury stock...................... (40,253) (34,813)
ESOP note receivable repayment................... 600 1,000
Decrease in short-term debt...................... (28,800) (11,000)
Repayment of long-term debt...................... (600) (1,000)
Proceeds from issuance of equity puts............ 716
---------- ----------
Net Cash Used by Financing Activities.... $ (64,766) $ (45,405)
---------- ----------
Increase in Cash and Cash Equivalents.............. 13,610 8,180
Cash and Cash Equivalents - Beginning of Period.... 22,069 20,607
---------- ----------
Cash and Cash Equivalents - End of Period.......... $ 35,679 $ 28,787
========== ==========
Cash Flow from Changes in Current Assets and
Liabilities:
Receivables.................................... $ (7,863) $ (1,805)
Refundable income taxes, net.................... 7,403 1,670
Inventories..................................... 6,558 (7,524)
Prepaid expenses and other current assets....... (601) 3,170
Accounts payable................................ 6,745 22,805
Accrued payroll................................. 9,071 3,246
Other accrued taxes............................. (1,435) (2,106)
Other current liabilities....................... 14,892 9,005
---------- ----------
Change in Current Assets and Liabilities...... $ 34,770 $ 28,461
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirty-Nine Weeks Ended
- --------------------------------------------------------------------------------
February 22, February 23,
1998 1997
- --------------------------------------------------------------------------------
Cash Flows--Operating Activities:
Net earnings...................................... $ 61,696 $ 25,027
Adjustments to reconcile net earnings to cash
flow:
Depreciation and amortization................. 95,159 105,170
Amortization of unearned compensation and
loan costs.................................. 2,599 2,781
Change in current assets and liabilities...... 7,024 (20,806)
Change in other liabilities .................. 383 272
Loss on disposal of land, buildings and
equipment................................... 1,700 4,461
Deferred income taxes......................... 7,807 12,611
Other, net.................................... 338 10
---------- ----------
Net Cash Provided by Operating Activities. $ 176,706 $ 129,526
---------- ----------
Cash Flows--Investment Activities:
Purchases of land, buildings and equipment........ (87,181) (125,948)
Purchases of intangibles.......................... (1,264) (617)
(Increase) decrease in other assets............... (3,045) 1,265
Proceeds from disposal of land, buildings and
equipment (including net assets held for
disposal)....................................... 20,128 22,303
---------- ----------
Net Cash Used by Investment Activities.... $ (71,362) $ (102,997)
---------- ----------
Cash Flows--Financing Activities:
Proceeds from issuance of common stock............ 5,490 1,275
Income tax benefit credited to equity............. 1,156 360
Dividends paid.................................... (6,005) (6,284)
Purchases of treasury stock....................... (86,918) (44,005)
ESOP note receivable repayments................... 2,400 1,600
Increase (decrease) in short-term debt............ (9,900) 6,700
Proceeds from issuance of long-term debt.......... 16,900
Repayment of long-term debt....................... (2,405) (4,454)
Proceeds from issuance of equity puts............. 1,027
Payment of loan costs............................. (177)
---------- ----------
Net Cash Used by Financing Activities..... $ (95,155) $ (28,085)
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents.... 10,189 (1,556)
Cash and Cash Equivalents - Beginning of Period..... 25,490 30,343
---------- ----------
Cash and Cash Equivalents - End of Period........... $ 35,679 $ 28,787
========== ==========
Cash Flow from Changes in Current Assets and
Liabilities:
Receivables..................................... $ (11,030) $ (5,932)
Refundable income taxes, net.................... 12,418 (9,555)
Inventories..................................... (44,035) (26,701)
Prepaid expenses and other current assets....... 1,661 2,528
Accounts payable................................ 25,902 24,267
Accrued payroll................................. 10,223 2,848
Accrued income taxes............................ (12,522)
Other accrued taxes............................. (273) 923
Other current liabilities....................... 12,158 3,338
---------- ----------
Change in Current Assets and Liabilities...... $ 7,024 $ (20,806)
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
<PAGE>
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. BACKGROUND
----------
These consolidated financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature. Operating results for the thirteen and
thirty-nine weeks ended February 22, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending May 31, 1998.
These statements should be read in conjunction with the consolidated
financial statements and footnotes included in the annual report on Form 10-K of
Darden Restaurants, Inc. (hereinafter called the "Company" or "Darden") for the
year ended May 25, 1997. The accounting policies used in preparing these
consolidated financial statements are the same as those described in Darden's
annual report on Form 10-K.
NOTE 2. CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
During the thirteen and thirty-nine weeks ended February 22, 1998,
Darden paid $8,483 and $16,665, respectively, for interest (net of amount
capitalized) and $6,678 and $10,749, respectively, for income taxes.
NOTE 3. NET EARNINGS PER SHARE
----------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share", which requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As required, the Company adopted the
provisions of SFAS 128 in the quarter ended February 22, 1998. All prior year
weighted average and per share information has been restated in accordance with
SFAS 128. Outstanding stock options issued by the Company represent the only
dilutive effect reflected in diluted weighted average shares.
Options to purchase 375,000 and 14.0 million shares of common stock
were excluded from the calculation of diluted EPS for the thirteen weeks ended
February 22, 1998 and February 23, 1997, respectively, because their exercise
prices exceeded the average market price of common shares for the period.
Options to purchase 8.9 million and 14.1 million shares of common stock were
excluded from the calculation of diluted EPS for the thirty-nine weeks ended
February 22, 1998 and February 23, 1997, respectively, for the same reason.
NOTE 4. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS
----------------------------------------------
On January 31, 1997, the Securities and Exchange Commission (SEC)
issued amended disclosure rules for derivatives and exposures to market risk
from derivative and other financial and certain commodity instruments. Enhanced
accounting policy disclosures in accordance with this SEC release follow.
The Company may, from time to time, use financial and commodities
derivatives in the management of interest rate and commodities pricing risks
that are inherent in its business operations. Such instruments are not held or
issued for trading or speculative purposes.
7
<PAGE>
The Company uses commodities hedging instruments, including forwards,
futures and options, to reduce the risk of price fluctuations related to future
raw materials requirements for commodities such as coffee, soybean oil, and
shrimp. The terms of such instruments generally do not exceed twelve months, and
depend on the commodity and other market factors. Deferred gains and losses are
subsequently recorded as cost of products sold in the statement of earnings when
the inventory is sold. If the inventory is not acquired and the hedge is
disposed of, the deferred gain or loss is recognized immediately in cost of
products sold.
The Company may, from time to time, use interest rate swap and cap
agreements in the management of interest rate exposure. The interest rate
differential to be paid or received is normally accrued as interest rates
change, and is recognized as a component of interest expense over the life of
the agreements. If an agreement is terminated prior to the maturity date and is
characterized as a hedge, any accrued rate differential would be deferred and
recognized as interest expense over the life of the hedged item.
The Company does not have any material risk from any of the above
financial instruments, and the Company does not anticipate any material losses
from the use of such instruments.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth selected restaurant operating data as a
percentage of sales for the periods indicated. All information is derived from
the consolidated statements of earnings for the thirteen and thirty-nine weeks
ended February 22, 1998 and February 23, 1997.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
- ----------------------------------------------------------------------------------------------------
February 22, February 23, February 22, February 23,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales...................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverages................... 33.2 34.7 32.8 34.1
Restaurant labor..................... 32.5 32.3 32.8 32.2
Restaurant expenses.................. 13.9 14.6 15.0 15.3
------ ------ ------ ------
Total Cost of Sales................ 79.6% 81.6% 80.6% 81.6%
Selling, general and administrative.... 10.3 10.6 10.9 11.8
Depreciation and amortization.......... 3.9 4.4 4.0 4.4
Interest, net.......................... 0.6 0.7 0.6 0.7
------ ------ ------ ------
Total Costs and Expenses......... 94.4% 97.3% 96.1% 98.5%
------ ------ ------ ------
Earnings before Income Taxes............... 5.6 2.7 3.9 1.5
Income Taxes............................... (1.9) (0.7) (1.3) (0.4)
------ ------ ------ ------
Net Earnings .............................. 3.7% 2.0% 2.6% 1.1%
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
For the fiscal 1998 third quarter ended February 22, 1998, earnings
after tax were $29.8 million or twenty cents per diluted share, compared to
earnings after tax of $15.7 million or ten cents per diluted share in the third
quarter of fiscal 1997. The increase in third quarter earnings was primarily
attributable to strong same store sales at The Olive Garden and improved margins
at Red Lobster. Sales of $811.3 million for the quarter, with 65 fewer
restaurants at the end of the quarter, were slightly ahead of last year's second
quarter.
For the first nine months of fiscal 1998, net earnings were $61.7
million or 41 cents per diluted share, compared to $25.0 million or 16 cents per
diluted share in the same fiscal 1997 period. Sales approximating $2.4 billion
for the nine months of fiscal 1998 were comparable to last year.
Food and beverage costs for the quarter were 33.2% of sales, compared
to 34.7% of sales last year primarily attributable to reduced costs, pricing and
sales mix. Restaurant labor increased to 32.5% of sales compared to last year's
32.3% due to wage rate inflation and higher manager bonuses, net of productivity
gains realized during the quarter. Restaurant expenses decreased to 13.9% of
sales compared to 14.6% last year. Restaurant level profit margin increased to
20.4% of sales in the third quarter compared to 18.4% last year. The decrease in
third quarter selling, general and administrative expense to 10.3% of sales
compared to 10.6% of sales last year was mainly attributable to reduced
marketing expenses. Depreciation and amortization expense declined to 3.9% of
sales compared to 4.4% in the prior year. This decline resulted from restaurant
closings and asset impairment write-downs subsequent to fiscal 1997's third
quarter.
The effective tax rate for the third quarter of fiscal 1998 was 34.2%
compared to 27.3% last year. The estimated effective tax rate for fiscal 1998 is
approximately 33.9% which is up from last year's effective tax rate before
unusual items of 27.9% due to a higher level of expected pre-tax income for the
year.
9
<PAGE>
Food and beverage costs for the first nine months of fiscal 1998 were
32.8% of sales, down from last year's 34.1% and also attributable to reduced
costs, pricing and sales mix. Restaurant labor increased to 32.8% of sales
compared to last year's 32.2%, also due to wage rate inflation and higher
manager bonuses, net of productivity gains. Restaurant expenses were 15.0% of
sales, compared to 15.3% in the prior year. Selling, general and administrative
expenses decreased to 10.9% of sales compared to 11.8% in the prior year, again
primarily attributable to reduced marketing expenses. Depreciation and
amortization expense declined to 4.0% of sales compared to 4.4% in the prior
year. This decline also resulted from restaurant closings and asset impairment
write-downs subsequent to fiscal 1997's third quarter.
DIVISION RESULTS
- ----------------
Red Lobster sales of $467.3 million, with 42 fewer restaurants at the
end of the quarter, was 1.7% below last year's third quarter. Same-store sales
in the U.S. were up 2.8% for the quarter which compares favorably to last year's
strong sales and traffic due to heavy marketing associated with the
repositioning of Red Lobster. Third quarter margins and operating profits
substantially improved over the prior year because of lower restaurant level
costs as a percentage of sales and reduced marketing and depreciation expense.
Through the first nine months of fiscal 1998, Red Lobster's sales declined 2.4%
to $1.35 billion and same-store sales in the U.S. increased by 1.6%. The overall
reduction in sales was attributable to units closed subsequent to fiscal 1997's
third quarter.
The Olive Garden continued its positive momentum in the third quarter
of fiscal 1998 with a 5.3% increase in sales to $341.0 million. Same-store sales
in the U.S. increased 9.1%, marking the fourteenth consecutive quarter of
same-store sales increases. Third quarter operating profits were significantly
ahead of last year. Through the first nine months of fiscal 1998, The Olive
Garden sales increased 4.0% to $1.0 billion and same-store sales in the U.S.
increased by 7.4%.
Darden's newest concept Bahama Breeze continues to report strong sales
at both restaurants. Three more restaurants are currently under development.
The table below details the number of restaurants open at the end of
the third quarter fiscal year 1998, compared with the number open at the end of
May 1997 and the end of last fiscal year's third quarter.
NUMBER OF RESTAURANTS
- --------------------------------------------------------------------------------
FEBRUARY 22, 1998 MAY 25, 1997 FEBRUARY 23, 1997
- --------------------------------------------------------------------------------
Red Lobster - USA......... 649 652 674
Red Lobster - Canada...... 35 51 52
------- ------- -------
Total................ 684 703 726
------- ------- -------
Olive Garden - USA........ 460 461 473
Olive Garden - Canada..... 5 16 16
------- ------- -------
Total................ 465 477 489
------- ------- -------
Bahama Breeze............. 2 2 1
------- ------- -------
Grand Total...... 1,151 1,182 1,216
======= ======= =======
- --------------------------------------------------------------------------------
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On March 26, 1998, the Company's Board of Directors (the "Board") elected
Odie C. Donald a Director. Mr. Donald is Group President - Customer Operations
for BellSouth Communications in Atlanta. Previously, Mr. Donald was President of
BellSouth Mobility, Inc.
In other action on March 26, 1998, the Board approved a semi-annual
dividend of four cents per share to be paid on May 1, 1998, to shareholders of
record on April 10, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Consolidated Earnings to
Fixed Charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the fiscal quarter covered
by this Form 10-Q.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: March 27, 1998 By: /s/ C.L. Whitehill
------------------------------------
C.L. Whitehill
Senior Vice President,
General Counsel and Secretary
Dated: March 27, 1998 By: /s/ James D. Smith
------------------------------------
James D. Smith
Senior Vice President - Finance
(Principal financial and accounting
officer)
12
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title Page
12 Computation of Ratio of Consolidated Earnings
to Fixed Charges 14
27 Financial Data Schedule 15
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<TEXT>
<PAGE>
Exhibit 12
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
- ----------------------------------------------------------------------------------------------------
February 22, February 23, February 22, February 23,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Earnings from Operations
before Income Taxes..................... $ 45,228 $ 21,613 $ 93,264 $ 34,687
Plus Fixed Charges......................... 9,726 9,979 28,037 29,593
Less Capitalized Interest.................. (175) (162) (756) (866)
--------- --------- --------- ---------
Consolidated Earnings from Operations
Before Income Taxes Available to
Cover Fixed Charges..................... $ 54,779 $ 31,430 $ 120,545 $ 63,414
========= ========= ========= =========
Ratio of Consolidated Earnings to Fixed
Charges................................. 5.63 3.15 4.30 2.14
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------
</TABLE>
14
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Darden Restaurants, Inc. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000940944
<NAME> Darden Restaurants, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-24-1998
<PERIOD-START> MAY-26-1997
<PERIOD-END> FEB-22-1998
<CASH> 35,679
<SECURITIES> 0
<RECEIVABLES> 27,363
<ALLOWANCES> (236)
<INVENTORY> 176,276
<CURRENT-ASSETS> 387,497
<PP&E> 2,370,233
<DEPRECIATION> (869,681)
<TOTAL-ASSETS> 1,983,154
<CURRENT-LIABILITIES> 519,846
<BONDS> 310,876
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,277,633
<OTHER-SE> (217,934)
<TOTAL-LIABILITY-AND-EQUITY> 1,983,154
<SALES> 2,365,855
<TOTAL-REVENUES> 2,365,855
<CGS> 776,973
<TOTAL-COSTS> 1,906,051
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,495
<INCOME-PRETAX> 93,264
<INCOME-TAX> 31,568
<INCOME-CONTINUING> 61,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,696
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| EMR | https://www.sec.gov/Archives/edgar/data/32604/0000032604-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000032604-98-000002.txt : 19980218
<SEC-HEADER>0000032604-98-000002.hdr.sgml : 19980218
ACCESSION NUMBER: 0000032604-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980217
SROS: CSX
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EMERSON ELECTRIC CO
CENTRAL INDEX KEY: 0000032604
STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823]
IRS NUMBER: 430259330
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-00278
FILM NUMBER: 98540264
BUSINESS ADDRESS:
STREET 1: 8000 W FLORISSANT AVE
STREET 2: P O BOX 4100
CITY: ST LOUIS
STATE: MO
ZIP: 63136
BUSINESS PHONE: 3145532000
MAIL ADDRESS:
STREET 1: 8000 W. FLORISSANT
STREET 2: P.O. BOX 4100
CITY: ST LOUIS
STATE: MO
ZIP: 63136
FORMER COMPANY:
FORMER CONFORMED NAME: EMERSON ELECTRIC MANUFACTUING CO
DATE OF NAME CHANGE: 19730710
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-278
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri 43-0259330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri 63136
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 553-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Common stock outstanding at December 31, 1997: 443,392,829 shares.
1
<PAGE>
PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial Statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in millions except per share amounts; unaudited)
Three Months Ended
December 31,
---------------------
1997 1996
-------- --------
Net sales $3,171.5 2,830.6
-------- --------
Costs and expenses:
Cost of sales 2,029.8 1,805.4
Selling, general and administrative expenses 646.4 583.3
Interest expense 35.8 27.5
Other deductions, net 18.4 9.1
-------- --------
Total costs and expenses 2,730.4 2,425.3
-------- --------
Income before income taxes 441.1 405.3
Income taxes 158.8 150.4
-------- --------
Net earnings $ 282.3 254.9
======== ========
Basic earnings per common share $ .64 .57
======== ========
Diluted earnings per common share $ .64 .57
======== ========
Cash dividends per common share $ .295 .27
======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amounts; unaudited)
December 31, September 30,
ASSETS 1997 1997
------ --------- --------
CURRENT ASSETS
Cash and equivalents $ 464.2 221.1
Receivables, less allowances of $56.6 and $54.0 2,226.5 2,200.2
Inventories 1,874.6 1,881.6
Other current assets 391.7 413.9
--------- --------
Total current assets 4,957.0 4,716.8
--------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 2,774.0 2,735.4
--------- --------
OTHER ASSETS
Excess of cost over net assets of purchased
businesses 3,283.7 3,116.0
Other 902.8 895.1
--------- --------
Total other assets 4,186.5 4,011.1
--------- --------
$11,917.5 11,463.3
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current maturities
of long-term debt $ 1,845.9 1,445.1
Accounts payable 746.8 942.1
Accrued expenses 1,128.5 1,241.9
Income taxes 280.9 213.3
--------- --------
Total current liabilities 4,002.1 3,842.4
--------- --------
LONG-TERM DEBT 574.3 570.7
--------- --------
OTHER LIABILITIES 1,691.5 1,629.5
--------- --------
STOCKHOLDERS' EQUITY
Preferred stock of $2.50 par value per share.
Authorized 5,400,000 shares; issued - none -- --
Common stock of $.50 par value per share.
Authorized 1,200,000,000 shares; issued
476,677,006 shares 238.3 238.3
Additional paid in capital 38.2 3.3
Retained earnings 6,501.0 6,348.9
Cumulative translation adjustments (190.9) (205.9)
Cost of common stock in treasury, 33,284,177
shares and 35,873,321 shares (937.0) (963.9)
--------- --------
Total stockholders' equity 5,649.6 5,420.7
--------- --------
$11,917.5 11,463.3
========= ========
See accompanying notes to consolidated financial statements.
3
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Dollars in millions; unaudited)
1997 1996
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 246.0 184.1
INVESTING ACTIVITIES
Capital expenditures (112.5) (113.7)
Purchases of businesses, net of cash and
equivalents acquired -- (14.6)
Other, net 6.1 (65.9)
-------- --------
Net cash used in investing activities (106.4) (194.2)
-------- --------
FINANCING ACTIVITIES
Net increase in short-term borrowings 403.5 221.8
Proceeds from long-term debt 1.4 5.5
Principal payments on long-term debt (6.1) (5.7)
Dividends paid (130.2) (120.9)
Net purchases of treasury stock (152.4) (59.5)
-------- --------
Net cash provided by financing activities 116.2 41.2
-------- --------
Effect of exchange rate changes on cash and equivalents (12.7) 1.8
-------- --------
INCREASE IN CASH AND EQUIVALENTS 243.1 32.9
Beginning cash and equivalents 221.1 149.0
-------- --------
ENDING CASH AND EQUIVALENTS $ 464.2 181.9
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
Notes to Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements, in
the opinion of management, include all adjustments necessary for
a fair presentation of the results for the interim periods
presented. These adjustments consist of normal recurring
accruals. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do
not include all the disclosures required by generally accepted
accounting principles. For further information refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended
September 30, 1997.
2. Other Financial Information
(Dollars in millions; unaudited)
December 31, September 30,
Inventories 1997 1997
----------- -------- --------
Finished products $ 794.8 789.6
Raw materials and work in process 1,079.8 1,092.0
-------- --------
$1,874.6 1,881.6
======== ========
December 31, September 30,
Property, plant and equipment, net 1997 1997
---------------------------------- -------- --------
Property, plant and equipment, at cost $5,558.3 5,433.7
Less accumulated depreciation 2,784.3 2,698.3
-------- --------
$2,774.0 2,735.4
======== ========
3. In December 1997, the Company purchased Computational Systems, Inc.
(CSI) for approximately $160 million, primarily in common stock. CSI
is a supplier of condition monitoring and diagnostic products and
services for motors and other rotational equipment.
5
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
4. In the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share," (SFAS
128) which establishes standards for computing and presenting earnings
per share. Basic earnings per common share considers only the weighted
average of common shares outstanding while diluted earnings per common
share considers the dilutive effects of stock options, incentive shares
and convertible securities. Previously reported earnings per share
amounts have been restated to conform to SFAS 128 requirements. A
reconciliation of basic earnings per common share and diluted earnings
per common share follows (dollars and shares in millions except per share
amounts):
Three Months Ended December 31,
1997 1996
---------------------------- ----------------------------
Weighted- Earnings Weighted- Earnings
Average Per Average Per
Earnings Shares Share Earnings Shares Share
-------- -------- -------- -------- -------- --------
Basic $ 282.3 439.2 $ .64 $ 254.9 447.4 $ .57
======== ========
Convertible debt .2 1.0 .3 1.5
Stock plans 3.7 2.7
-------- -------- -------- --------
Diluted $ 282.5 443.9 $ .64 $ 255.2 451.6 $ .57
======== ======== ======== ======== ======== ========
For the quarters ended March 31, June 30, and September 30, 1997, respectively,
basic earnings per common share were $0.63, $0.67 and $0.65; and diluted
earnings per common share were $0.62, $0.66 and $0.65. Basic and diluted
earnings per common share for fiscal 1997 were $2.52 and $2.50, respectively.
6
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
Items 2 and 3. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Results of Operations
Sales, net earnings and earnings per share for the first quarter of
fiscal 1998 were the highest for any first quarter in the Company's
history.
Net sales for the quarter ended December 31, 1997, were $3,171.5 million,
an increase of 12.0 percent over net sales of $2,830.6 million for the
quarter ended December 31, 1996. The first quarter results reflect good
domestic demand and the contribution of 1997 acquisitions, including
consolidations. Excluding the negative impact of currency, underlying
international subsidiary sales showed solid improvement as a result of
continuing strength in Latin America and improving conditions in Europe.
Export sales were limited by weakness in the Asia-Pacific region,
particularly for heating, ventilating and air-conditioning products.
In the Commercial and Industrial segment, the electronics business achieved
very strong underlying sales growth, reflecting contributions from all
product lines and service offerings. The industrial components and equipment
business achieved modest underlying sales growth as very strong international
demand was limited by the impact of the strengthening dollar. Moderate
international demand reduced by unfavorable currency translation limited
sales of the process business. The industrial motors and drives business
experienced a modest increase in demand, which was more than offset by the
impact of currency on international results and reflects weakness in the
Asia-Pacific region.
In the Appliance and Construction-Related segment, sales of the underlying
tools business were strong due to the success of new products and good demand
during the holiday season. The fractional motors and appliance components
business achieved strong domestic sales growth, while international results
were reduced by currency translation. The heating, ventilating and air
conditioning business reported a modest decrease in sales as the impact of
last year's cool weather continued to dampen domestic market demand, and the
weakening Asian environment severely limited export sales.
Cost of sales for the first quarter was $2,029.8 million or 64.0
percent of sales, compared with $1,805.4 million, or 63.8 percent of
sales, for the first quarter of 1997. Selling, general and
administrative expenses for the three months ended December 31, 1997,
were $646.4 million, or 20.4 percent of sales, compared to $583.3
million, or 20.6 percent of sales for the same period a year ago.
Operating profit margins remained at high levels as a result of continuing
cost reduction efforts and productivity improvement programs.
7
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
Financial Condition
A comparison of key elements of the Company's financial condition at
the end of the first quarter as compared to the end of the prior
fiscal year follows:
December 31, September 30,
1997 1997
-------- --------
Working capital (in millions) $ 954.9 $ 874.4
Current ratio 1.2 to 1 1.2 to 1
Total debt to total capital 30.0% 27.1%
Net debt to net capital 25.7% 24.9%
The Company's interest coverage ratio (earnings before income taxes and
interest expense, divided by interest expense) was 13.3 times for the
quarter ended December 31, 1997, compared to 15.8 times for the same
period one year earlier. The decrease in the interest coverage ratio
reflects higher average borrowings resulting from share repurchases and
1997 acquisitions, partially offset by earnings growth. In the first quarter
of fiscal 1998, the Company entered into an interest rate agreement which
caps the rate on $250 million of commercial paper at 6.0 percent through
September 1999.
Cash and equivalents increased by $243.1 million during the three months
ended December 31, 1997. Cash flow provided by operating activities of
$246.0 million and an increase in borrowings of $398.8 million were used
primarily to fund capital expenditures of $112.5 million, pay
dividends of $130.2 million, and fund net treasury stock purchases of $152.4
million.
The Company is in a strong financial position, continues to generate
strong operating cash flow, and has the resources available for
reinvestment in existing businesses, strategic acquisitions and managing
the capital structure on a short- and long-term basis.
Statements in this report that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties.
These include economic and currency conditions, market demand, pricing,
and competitive and technological factors, among others, which are set
forth in the Company's Annual Report on Form 10-K for the year ended
September 30, 1997.
8
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table
of Item 601 in Regulation S-K).
3(a) Restated Articles of Incorporation of Emerson Electric Co.,
incorporated by reference to Emerson Electric Co. Form 10-Q
for the quarter ended March 31, 1997, Exhibit 3(a).
3(b) Bylaws of Emerson Electric Co., as amended through October 7,
1997, incorporated by reference to Emerson Electric Co. 1997
Form 10-K, Exhibit 3(b).
27 Financial Data Schedules
(b) Reports on Form 8-K. Pursuant to Item 5, the Company filed a Report on
Form 8-K dated October 7, 1997, related to technical changes in the
Rights Agreement dated November 1, 1988. Also pursuant to Item 5, the
Company filed a Report on Form 8-K dated December 29, 1997, adding an
exhibit to the Registration Statement on Form S-4 for the CSI
acquisition.
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.
EMERSON ELECTRIC CO.
Date: February 12, 1998 By /s/ Walter J. Galvin
-----------------------
Walter J. Galvin
Senior Vice President - Finance
and Chief Financial Officer
(on behalf of the registrant and
as Chief Financial Officer)
9
</TEXT>
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<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5 EXHIBIT 27(a)
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMERSON
ELECTRIC CO. CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1997, FILED WITH THE COMPANY'S
1998 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 464,200
<SECURITIES> 0
<RECEIVABLES> 2,283,100
<ALLOWANCES> 56,600
<INVENTORY> 1,874,600
<CURRENT-ASSETS> 4,957,000
<PP&E> 5,558,300
<DEPRECIATION> 2,784,300
<TOTAL-ASSETS> 11,917,500
<CURRENT-LIABILITIES> 4,002,100
<BONDS> 574,300
<COMMON> 238,300
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 5,411,300
<TOTAL-LIABILITY-AND-EQUITY> 11,917,500
<SALES> 3,171,500
<TOTAL-REVENUES> 3,171,500
<CGS> 2,029,800
<TOTAL-COSTS> 2,029,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,800
<INCOME-PRETAX> 441,100
<INCOME-TAX> 158,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,300
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>RESTATED FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5 EXHIBIT 27(b)
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMERSON
ELECTRIC CO. CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996, FILED WITH THE COMPANY'S
1997 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 181,900
<SECURITIES> 0
<RECEIVABLES> 2,068,100
<ALLOWANCES> 51,700
<INVENTORY> 1,816,900
<CURRENT-ASSETS> 4,329,400
<PP&E> 5,001,700
<DEPRECIATION> 2,511,100
<TOTAL-ASSETS> 10,696,400
<CURRENT-LIABILITIES> 3,116,500
<BONDS> 773,200
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 238,300
<OTHER-SE> 5,256,600
<TOTAL-LIABILITY-AND-EQUITY> 10,696,400
<SALES> 2,830,600
<TOTAL-REVENUES> 2,830,600
<CGS> 1,805,400
<TOTAL-COSTS> 1,805,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,500
<INCOME-PRETAX> 405,300
<INCOME-TAX> 150,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254,900
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
</TEXT>
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1998 | 0QTR1
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ACCESSION NUMBER: 0000846909-98-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980114
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CABLETRON SYSTEMS INC
CENTRAL INDEX KEY: 0000846909
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 042797263
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10228
FILM NUMBER: 98506923
BUSINESS ADDRESS:
STREET 1: 35 INDUSTRIAL WAY
CITY: ROCHESTER
STATE: NH
ZIP: 03867
BUSINESS PHONE: 6033329400
MAIL ADDRESS:
STREET 1: 35 INDUSTRIAL WAY
CITY: ROCHESTER
STATE: NH
ZIP: 03867
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FOR THE PERIOD ENDING NOVEMBER 30, 1997
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263 (State or other
jurisdiction of (I.R.S. Employer incorporation or organization)
identification no.)
35 Industrial Way, Rochester, New Hampshire 03867
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (603) 332-9400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES - X NO -
As of December 31, 1997 there were 158,207,514 shares of the Registrant's common
stock outstanding.
This document contains 136 pages
Exhibit index on page 11
<PAGE>
INDEX
CABLETRON SYSTEMS, INC.
Page
Facing Page 1
Index 2-3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - November 30, 1997 (unaudited)
and February 28, 1997 4
Consolidated Statements of Income - Three and nine months
ended November 30, 1997, and 1996 (unaudited) 5
Consolidated Statements of Cash Flows - Nine months ended
November 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements - November 30, 1997 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index to the Exhibits 15
Exhibit 11.1 Statement re: Computation of Per Share Earnings 137
* Confidential Treatment request as to certain portions. The term "Confidential
Treatment" and the mark "*" as used throughout the indicated exhibit means that
material has been omitted and separately filed with the Commission.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(unaudited)
November 30, February 28,
1997 1997
Assets
Current Assets:
Cash and cash equivalents ................... $ 206,926 $ 214,828
Short-term investments ...................... 214,680 165,396
Accounts receivable, net .................... 298,672 219,896
Inventories ................................. 280,021 197,438
Deferred income taxes ....................... 57,691 57,107
Prepaid expenses and other assets ........... 37,521 35,925
---------- ----------
Total current assets ................... 1,095,511 890,590
Long-term investments ............................ 148,554 188,081
Property, plant and equipment, net ............... 212,023 198,557
Long-term deferred income taxes .................. 30,756 29,627
---------- ----------
Total assets ..................................... $1,486,844 $1,306,855
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................ $ 69,003 $ 68,604
Accrued expenses ............................ 169,333 135,208
Income taxes payable ........................ 5,282 10,442
---------- ----------
Total current liabilities .............. 243,618 214,254
---------- ----------
Deferred income taxes ............................ 4,577 11,103
---------- ----------
Total liabilities ................................ 248,195 225,357
---------- ----------
Stockholders' equity:
Preferred stock, $1.00 par value
Authorized 2,000 shares; none issued ...... -- --
Common stock $0.01 par value
Authorized 240,000 shares; issued and
outstanding 158,208 and 156,305
respectively .............................. 1,582 1,563
Additional paid-in capital .................. 287,218 266,829
Retained earnings ........................... 949,194 812,885
---------- ----------
1,237,993 1,081,277
Cumulative translation adjustment ........... 656 221
---------- ----------
Total stockholders' equity ....................... 1,238,649 1,081,498
---------- ----------
Total liabilities and stockholders' equity ....... $1,486,844 $1,306,855
========== ==========
<PAGE>
<TABLE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
<CAPTION>
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .......................... $331,827 $361,558 $1,065,808 $1,025,997
Cost of sales ...................... 164,254 147,598 476,847 419,307
-------- -------- ---------- ----------
Gross profit .................. 167,573 213,960 588,961 606,690
-------- -------- ---------- ----------
Operating expenses:
Research and development ...... 46,552 41,139 134,583 119,444
Selling, general and
administrative ............... 95,521 73,792 261,848 209,380
Nonrecurring items ............ -- -- -- 43,024
-------- -------- ---------- ----------
Total operating expenses .. 142,073 114,931 396,431 371,848
-------- -------- ---------- ----------
Income from operations ... 25,500 99,029 192,530 234,842
Interest income, net ............... 4,648 4,932 14,269 14,254
-------- -------- ---------- ----------
Income before income taxes 30,148 103,961 206,799 249,096
Income taxes ....................... 10,250 36,219 70,490 87,307
-------- -------- ---------- ----------
Net income ......................... $ 19,898 $ 67,742 $ 136,309 $ 161,789
======== ======== ========== ==========
Net income per common share ........ $ 0.13 $ 0.44 $ 0.87 $ 1.04
======== ======== ========== ==========
Weighted average number of shares
outstanding ........................ 157,986 155,299 157,527 154,968
======== ======== ========= ==========
</TABLE>
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Nine Months Ended
November 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income ................................. $136,309 $161,789
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......... 50,205 37,332
Provision for losses on accounts
receivable ............................ 1,098 7,276
Deferred income taxes .................. (8,239) (19,376)
(Gain)/loss on disposal of property .... (446) 83
Changes in assets and liabilities:
Accounts receivable ................. (82,031) (72,431)
Inventories ......................... (84,233) (18,086)
Prepaid expenses and other assets ... (1,755) (2,499)
Accounts payable and accrued expenses 39,244 38,337
Income taxes payable ................ (4,892) (1,148)
-------- --------
Net cash provided by operating activities 45,260 131,277
-------- --------
Cash flows from investing activities:
Capital expenditures ....................... (64,037) (69,419)
Purchase of available-for-sale securities .. (86,478) (169,349)
Purchase of held-to-maturity securities .... (37,228) (170,595)
Maturities of marketable securities ........ 113,943 326,729
-------- --------
Net cash used in investing activities ... (73,800) (82,634)
-------- --------
Cash flows from financing activities:
Common stock issued to employee stock
purchase plan ............................. 3,311 3,019
Net proceeds from sale of stock ............ -- 8,580
Repayment of notes from stockholders ....... -- (2,155)
Proceeds from stock option exercise ........ 17,097 13,110
Repurchase of common stock ................. -- 544
-------- --------
Net cash provided by financing activities 20,408 23,098
-------- --------
Effect of exchange rate changes on cash ....... 230 49
-------- --------
Net (decrease) increase in cash and cash
equivalents .................................. (7,902) 71,790
Cash and cash equivalents, beginning of period 214,828 106,101
-------- --------
Cash and cash equivalents, end of period ...... $206,926 $177,891
======== ========
Cash paid during the year for:
Income taxes ............................... $ 46,109 $101,318
======== ========
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and Article 2 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
entire year. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 28, 1997.
2. Inventories
Inventories consist of:
11/30/97 2/28/97
-------- -------
Raw materials $ 93,215 $ 64,685
Work in process 26,035 57,070
Finished goods 160,771 75,683
-------- --------
Total inventories $280,021 $197,438
======== ========
3. Proposed Acquisition
On November 24, 1997, the Company executed a definitive asset purchase agreement
(the "Asset Purchase Agreement") by and among the Company, Ctron Acquisition
Co., Inc., a wholly-owned subsidiary of the Company, and Digital Equipment
Corporation ("Digital") pursuant to which the Company will acquire certain
assets of the network products business unit (the "NPB") of Digital. The NPB
develops and supplies a wide range of data networking hardware and software. The
purchase price for the acquisition is $435.5 million, before closing
adjustments, consisting of approximately $91.8 million in cash, approximately
$293.5 million in product credits and approximately $50 million in shares of the
Company's common stock. The closing of the acquisition is subject to certain
conditions, including the lack of any material adverse change in the NPB or the
Company.
The Company and Digital have also entered into a Reseller and Services Agreement
dated November 24, 1997 pursuant to which Digital designated the Company as its
Strategic Network Products Partner and was appointed by the Company as a
reseller of certain of the Company's products (including the products previously
sold by the NPB), the Company designated Digital as its Strategic Network
Services Partner, and the Company agreed to sell and Digital agreed to purchase,
for internal use and resale, certain minimum volumes of products during the term
of the Reseller Agreement, which extends through June 30, 2001. The minimum
volumes are subject to downward or upward adjustment in certain instances.
<PAGE>
During the term of the Reseller Agreement, the Company will operate the NPB
under the name Digital Network Products Group, a Cabletron Systems, Inc.
Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cabletron Systems' worldwide net sales in the third quarter of fiscal 1998 (the
three month period ended November 30, 1997) were $331.8 million, an 8 percent
decrease from net sales of $361.6 million for the third quarter of fiscal 1997.
The decrease was primarily the result of lower than expected sales in North
America, changes in the order pattern for some U.S. Federal Government Business
and lower international sales in the Latin American and Asian markets. For the
nine months ended November 30, 1997 worldwide sales slightly increased by 4
percent to $1,065.8 million in fiscal 1998 from $1,026.0 million in fiscal 1997.
Gross profit as a percentage of net sales in the third quarter of fiscal 1998
decreased to 50.5% from 59.2% for the third quarter of fiscal 1997. Gross
margins for the first nine months of fiscal 1998 were 55.3% compared with 59.1%
for the same period in fiscal 1997. The decrease reflects the impact of pricing
on margins, some impact from foreign exchange on margins and inventory changes
for the period. The Company anticipates that industry competitiveness will
remain active in the future and as such could create future pressures on margin
levels.
Research and development ("R&D") expenses in the third quarter of fiscal 1998
increased 11.8% to $46.6 million from $41.1 million in the third quarter of
fiscal 1997. In the first nine months of fiscal 1998 R&D expenses increased
$15.2 million to $134.6 million compared to $119.4 for the first nine months of
fiscal 1997. The increase reflects the Company's ongoing research and
development efforts, including the further development of the SMARTSwitch family
of products, SPECTRUM management software as well as the increase in the hiring
of additional software and hardware engineers and associated cost related to
development of new products. Research and development spending as a percentage
of net sales increased to 14.0% from 11.4% in the third quarter of fiscal 1997.
R&D expenses increased as a percentage of net sales primarily as a result of
lower than expected sales.
Selling, general and administrative ("SG&A") expenses in the third quarter of
fiscal 1998 increased 29.4% to $95.5 million from $73.8 million in the third
quarter of fiscal 1997 and increased $52.4 million to $261.8 million for the
first nine months of fiscal 1998 compared to $209.4 million for the first nine
months of fiscal 1997. The increase in SG&A expenses was due predominately to
the increase in sales and technical personnel, and the opening of additional
office locations. SG&A expenses as a percentage of net sales increased to 28.8%
from 20.4% in the third quarter of fiscal 1997. SG&A increased as a percentage
of net sales primarily as a result of lower than expected sales.
Net interest income in the third quarter of fiscal 1998 decreased slightly to
$4.6 million, as compared to $4.9 million in the same quarter of fiscal 1997.
For the first nine months in both periods, net interest income remained
consistent at $14.3 million. Interest income in both periods reflects returns on
invested cash, marketable securities and long-term investments.
<PAGE>
Income before income taxes in the third quarter of fiscal 1998 decreased 71.1%
to $30.1 million from $104.0 million in the third quarter of fiscal 1997. Income
before income taxes for the first nine months of fiscal 1998 was $206.8 million
as compared with $249.1 million for the same period in fiscal 1997. The decrease
in income before income taxes, as a percentage of net sales for the quarter, was
due primarily to lower than expected sales and higher expenses.
Net income in the third quarter of fiscal 1998 was $19.9 million compared to
$67.7 million in the third quarter of fiscal 1997 and for the first nine months
was $136.3 million for fiscal 1998 compare with $161.8 million for the same
period in fiscal 1997. The decrease was due to lower sales and higher expenses.
Liquidity and Capital Resources
Cash and cash equivalents, marketable securities and long-term investments
slightly increased to $570.2 million at November 30, 1997 from $568.3 million at
February 28, 1997.
Net accounts receivable increased $78.8 million to $298.7 million at November
30, 1997 from $219.9 million at February 28, 1997. Average days sales
outstanding were 81 days at November 30, 1997 compared to 52 days at February
28, 1997. The increase was a result of shipment of products shifting towards the
latter part of the quarter and lower than expected sales.
The Company has historically maintained higher levels of inventory than its
competitors in the networking industry in order to implement its policy of
shipping most orders requiring immediate delivery within 24 to 48 hours.
Worldwide inventories at November 30, 1997 were $280.0 million, or 155 days of
inventory, compared to $197.4 million, or 111 days of inventory at the end of
the prior fiscal year. Inventory turnover was 2.4 turns at November 30, 1997,
compared to 3.4 turns at February 28, 1997. The lower inventory turns were due
to lower sales in the quarter.
Capital expenditures for the first nine months of fiscal 1998 were $64.0 million
compared to $69.4 million for the same period of the preceding year. Capital
expenditures included approximately $34.5 million for equipment costs, of which
$22.2 million was for computer and computer related equipment, and $12.3 million
represented systems development costs.
Current liabilities at November 30, 1997 were $243.6 million compared to $214.3
million at the end of the prior fiscal year. This increase was mainly due to the
growth in operations and the timing of disbursements.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will prove adequate
to support the Company's working capital and capital expenditure requirements
for at least the next twelve months.
<PAGE>
Realignment
The Company announced on December 16, 1997 a global initiative to better align
the Company's business strategy with its focus in the enterprise and service
provider markets. The realignment is intended to better position the Company to
provide more solutions-oriented products and service; to increase its
distribution of products through third-party distributors and resellers; to
improve its position internationally, and to aggressively develop partnership
and acquisition opportunities. The Company expects to incur a pre-tax charge in
the fourth quarter of fiscal 1998 of between $25 and $30 million related to the
realignment. The realignment will include general expense reduction through the
elimination of duplicate facilities, consolidation of related operations,
reallocation of resources, including the elimination of certain existing
projects, and personnel reduction. The Company plans to complete most of these
reductions over the next few months. The expense reductions associated with the
realignment are intended to yield approximately $50 to $60 million in total
annualized savings, beginning in the fourth quarter of fiscal 1998.
The statements concerning the Company's realignment plans and the intended
expense reductions constitute forward looking information and actual results
could differ materially. Those factors which could cause the Company not to
achieve its intended expense reductions include, among others, additional costs
associated with relocations and employee severance, the need to maintain certain
essential, but underutilized, facilities, and delays in implementing planned
reductions. Difficulties in achieving the expense reductions may result in the
Company's failure to realize the full amount of the projected annualized cost
savings or may cause the Company to incur additional costs in future quarters as
it takes additional actions to achieve the projected annualized cost savings.
The Company's realignment will require the dedication of management and other
resources, which may result in a temporary disruption of the Company's business
activities. Any such disruption could have a material adverse effect on the
Company's business, operating results or financial condition. Over time, the
loss of the personnel, facilities and other resources eliminated through the
expense reductions may adversely impact Cabletron's ability to generate expected
revenue levels.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be results of operations of the
period. SFAS 130, which becomes effective for the Company in its fiscal year
ending February 28, 1999, is not expected to have a material impact on the
consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
<PAGE>
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement,
which becomes effective for the Company in its fiscal year ending February 28,
1999, is currently not expected to have a material impact on the Company's
consolidated financial statements and disclosures footnote.
ITEM 3. QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on the Company's financial results. The
Company uses derivative financial instruments, principally forward exchange
contracts and options, in its management of foreign currency exposure. These
contracts primarily require the Company to exchange or sell certain foreign
currencies either with or for US dollars at contractual rates. The Company's
foreign currency hedging activities are used to minimize adverse foreign
exchange movements on the eventual dollar net cash inflows of its foreign
denominated net assets. The success of the Company's foreign currency hedging
activities depends upon forecasts of transaction activity denominated in various
currencies. To the extent that these forecasts are over- or understated during
periods of currency volatility, the Company could experience unanticipated
currency gains or losses. The Company does not hold or issue derivative
financial instruments for speculative or trading purposes.
Realized and unrealized foreign exchange gains and losses are recognized in
operating income and offset foreign exchange gains and losses on the underlying
exposures. Premiums paid on forward exchange contracts are amortized over the
life of the contract. Premiums paid on options are expensed immediately. The
Company's derivative financial instruments are marked to market at the balance
sheet date and the carrying amount approximates the fair value of the
instruments. The Company maintains investment portfolio holdings of various
issuers, types, and maturities. These securities are generally classified as
available for sale, and consequently, are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of
stockholders' equity.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Since October 24, 1997, the following six shareholder class action lawsuits have
been filed against the Company and certain officers and directors of the Company
in the United States District Court for the District of New Hampshire: Charles
Mesko, et al. V. Cabletron Systems, Inc., et al. (District of New Hampshire
10/24/07); Karen Borick, et al. V. Cabletron Systems, Inc., et al. (District of
New Hampshire 11/24/97); Richard Durr, et al. V. Cabletron Systems, Inc., et al.
(District of New Hampshire 12/11/97); Albert Shapiro, et al. V. Cabletron
Systems, Inc., et al. (District of New Hampshire 12/9/97); James Pettus, et al.
v. Cabletron Systems, Inc., et al. (District of New Hampshire 12/16/97); and
Kenneth M. Williams, et al. v. Cabletron Systems, Inc., et al. (District of New
Hampshire 12/18/97). The Company expects that these lawsuits, which are similar
in material respects, will be consolidated and will proceed as one class action
against the Company and certain officers and directors. The complaints allege
that the Company and several of its officers and directors disseminated
materially false and misleading information about the Company's operations and
acted in violation of Section 10(b) and Rule 10b-5 of the exchange Act during
the period between March 3, 1997 and December 2, 1997. The complaints further
allege that certain officers and directors profited from the dissemination of
such misleading information by selling shares of the Company's common stock
during this period. The complaints do not specify the amount of damages sought
on behalf of the class.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
[a] There were no reports on Form 8-K filed during the quarter ended November
30, 1997.
[b]
Exhibit 2.1 Asset Purchase Agreement dated as of November 24, 1997 (the "Asset
Purchase Agreement") by and among Cabletron Systems, Inc., a Delaware
corporation ("Cabletron"), Ctron Acquisition, Inc., a Delaware corporation and a
wholly-owned subsidiary of Cabletron, and Digital Equipment Corporation, a
Massachusetts corporation ("Digital"). The Exhibits and Disclosure Schedules to
the Asset Purchase Agreement are not included with the Asset Purchase Agreement.
A list briefly identifying the contents of such omitted Exhibits and Disclosure
Schedules is included herein. Cabletron agrees to furnish supplementally to the
Commission, upon request, a copy of such Exhibits and Disclosure Schedules.*
(page 15 of this report)
Exhibit 10.1 Reseller and Services Agreement dated as of November 24, 1997
between Cabletron and Digital (the "Reseller Agreement"). The Exhibits and
Disclosure Schedules to the Reseller Agreement are not included with the
Reseller Agreement. A list briefly identifying the contents of such omitted
Exhibits and Disclosure is included herein. Cabletron agrees to furnish
supplementally to the Commission, upon request, a copy of such Exhibits and
Disclosures Schedules.* (page 86 of this report)
Exhibit 11 - Statement re: Computation of Per Share Earnings (page 137 of
this report)
<PAGE>
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.
CABLETRON SYSTEMS, INC.
(Registrant)
January 14, 1998 /s/ Donald B. Reed
Date Donald B. Reed
President and
Chief Executive Officer
January 14, 1998 /s/ David J. Kirkpatrick
Date David J. Kirkpatrick
Director of Finance and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
2.1 Asset Purchase Agreement dated as of November 24, 1997 (the
"Asset Purchase Agreement") by and among Cabletron Systems,
Inc., a Delaware corporation ("Cabletron"), Ctron Acquisition,
Inc., a Delaware corporation and a wholly-owned subsidiary of
Cabletron, and Digital Equipment Corporation, a
Massachusetts corporation ("Digital"). The Exhibits and
Disclosure Schedules to the Asset Purchase Agreement are not
included with the Asset Purchase Agreement. A list briefly
identifying the contents of such omitted Exhibits and Disclosure
Schedules is included herein. Cabletron agrees to furnish
supplementally to the Commission, upon request, a copy of such
Exhibits and Disclosure Schedules.* 16
10.1 Reseller and Services Agreement dated as of November 24, 1997
between Cabletron and Digital (the "Reseller Agreement"). The
Exhibits and Disclosure Schedules to the Reseller Agreement are
not included with the Reseller Agreement. A list briefly
identifying the contents of such omitted Exhibits and Disclosure
is included herein. Cabletron agrees to furnish supplementally to
the Commission, upon request, a copy of such Exhibits and
Disclosures Schedules.* 86
11.1 Statement re: Computation of Per Share Earnings 137
* Confidential Treatment request as to certain portions. The term "Confidential
Treatment" and the mark "*" as used throughout the indicated exhibit means that
material has been omitted and separately filed with the Commission.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.1
<SEQUENCE>2
<DESCRIPTION>ASSET PURCHASE AGREEMENT
<TEXT>
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
AMONG
CABLETRON SYSTEMS, INC.,
CTRON ACQUISITION, INC.
AND
DIGITAL EQUIPMENT CORPORATION(1)
NOVEMBER 24, 1997
(1) Confidential Treatment has been requested as to certain portions of this
agreement. The term "Confidential Treatment" and the mark (*) is used throughout
this agreement in order to indicate that material has been omitted and
separatley filed with the Securities and Exchange Commission.
<PAGE>
Exhibits
A - Initial Statement of Assets
B - Form of Reseller Agreement
C - Assignment and Assumption Agreement
D - Bill of Sale
E - Statements of Operations
F - List of NPB Employees
G - Assignment of Patents and Patent Applications
H - Assignment of Trademarks, Trademark Applications and Goodwill
Schedules
Schedule 1.1 (a) - Accounting Convention
Schedule 1.1 (b) - Agreed-Upon Procedures
Schedule 1.2 - Assigned Licenses
Schedule 1.3 - Assigned Patents
Schedule 1.4 - Assigned Trademarks
Schedule 1.5 - Products
Schedule 1.6 - Retained Patents
Schedule 1.7 - Licensing Programs
Schedule 2.1(a) - Encumbrances on Acquired Assets
Schedule 2.1(h) - Contracts
Schedule 2.1(i) - Permits
<PAGE>
Schedule 2.1(x) - International Assets
Disclosure Schedule -- Exceptions to Representations and Warranties
Schedule 4.8 - Exceptions to Representation 4.8
Schedule 5.10(a) - Disability Schedule
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is entered into on
November 24, 1997, by and among Cabletron Systems, Inc., a Delaware corporation,
Ctron Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of
Cabletron and Digital Equipment Corporation, a Massachusetts corporation. The
Buyer and the Seller are collectively referred to herein as the "Parties."
Whereas, Seller desires to sell certain assets of its network products
business to Buyer;
Whereas, Buyer desires to purchase certain assets of Seller's network
products business;
Whereas, as a condition to entering into the purchase and sale, the
parties have agreed to enter into a Reseller Agreement, pursuant to which Seller
will be appointed as a reseller of Buyer's products, including the products of
the network products business, and Seller has agreed to purchase certain minimum
amounts of such products;
Whereas, the parties wish to describe their respective rights and
obligations.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. Definitions.
"Accounting Convention" means the accounting convention attached
hereto as Schedule 1.1(a).
"Acquisition" has the meaning set forth in the preamble above.
"Acquired Assets" has the meaning set forth in ss. 2.1.
"Acton Facilities" mean the parcels of real property designated as 50
and 100 Nagog Park, Acton, Massachusetts, and all improvements, fixtures and
fittings thereon, easements, rights-of-way, and other appurtenant rights
thereto.
"Agreed-Upon Procedures" means the agreed-upon procedures attached
hereto as Schedule 1.1(b).
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
<PAGE>
"Agreement" has the meaning set forth in the preamble above.
"Asset Value" means the net value of the assets on the applicable
Statement of Assets established in accordance with the Accounting Convention.
"Assigned Copyrights" mean the copyright interests, registered or
unregistered, used primarily in the NPB or the Products or the Products Under
Development, or used solely in any other Acquired Assets.
"Assigned Intellectual Property" means the entire right, title and
interest in and to (i) the Assigned Patents, the Assigned Copyrights, the
Assigned Trademarks, and all applications for any of the foregoing, and the
Assigned Licenses, and (ii) trade secrets, know-how and other proprietary
information that is used primarily in the NPB or the Products or the Products
Under Development, excluding in all cases the Retained Patents, the Digital
Marks, and the Retained Software.
"Assigned Licenses" mean the license agreements set forth in Schedule
1.2 and licenses licensed specifically for a Product or a Product Under
Development and used primarily in the NPB.
"Assigned Patents" mean the Patents listed under the heading "Assigned
Patents" set forth in Schedule 1.3 and all foreign counterparts thereto, subject
to all encumbrances set forth in Schedule 2.1(a).
"Assigned Trademarks" mean the Trademarks set forth in Schedule 1.4.
"Assumed Liabilities" has the meaning set forth in ss. 2.3.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could reasonably form the
basis for any specified consequence.
"Buyer" means Cabletron Systems, Inc., Ctron Acquisition, Inc. and
Cabletron Systems, Inc.'s Subsidiaries, as and to the extent that the context
requires.
"Buyer 401(k) Plan" means the Cabletron Systems, Inc. 401(k) Plan.
"Cabletron" means Cabletron Systems, Inc.
"Cabletron Common Stock" means the common stock, $0.01 par value per
share, of Cabletron.
<PAGE>
"Cabletron Marks" means the trademark "Cabletron" and the other
trademarks, logos and designs used by Buyer from time-to-time to signify Buyer's
products and services.
"Cabletron Shares" has the meaning set forth in ss. 2.5(b).
"Cabletron Stock Price" means the average, rounded to the nearest
one-thousandth of a dollar ($0.001), of the midpoints of the high and low sales
prices of Cabletron Common Stock as reported on the New York Stock Exchange
Composite Tape (as reported by the eastern edition of The Wall Street Journal
or, if not reported thereby, as reported by another authoritative source as
mutually agreed by the Buyer and the Seller) for the 10 consecutive trading days
during the period ending on and including the date hereof.
"Cause" has the meaning set forth in ss.5.10.
"Closing" has the meaning set forth in ss. 2.7.
"Closing Date" has the meaning set forth in ss. 2.7.
"Closing Date Statement of Assets" has the meaning set forth in ss.
2.6(a)(i).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Confidential Information" means any and all information concerning the
businesses and affairs of the Buyer (including, following the Closing,
information of the Seller related to the NPB) or Seller, as the case may be,
other than that information which is independently developed in the future,
already generally or readily obtainable by the public or is publicly known or
becomes publicly known through no breach of ss. 7 by the Seller or Buyer, as the
case may be.
"Contracts" has the meaning set forth in ss. 2.1(h).
"Data Networking Product" means a data networking or telecommunication
hardware product (and the software incorporated therein) specifically designed
for transporting data between two or more computing devices, such as hubs,
routers, switches, bridges, structured wiring, adapters, remote access devices
(e.g., access concentrators) and terminal servers, and logical extensions
thereof.
"Demand Plan" means Seller's twelve month product plan previously
delivered to Buyer based on the consolidated input of Seller's sales
organizations as of the ninth week of Seller's first quarter of fiscal year
1998.
<PAGE>
"Digital Brand" has the meaning set forth in the Reseller Agreement.
"Digital Marks" has the meaning set forth in the Reseller Agreement.
"Disclosure Schedule" has the meaning set forth in ss. 3.
"Employee Plan" has the meaning set forth in ss. 3.24(a).
"Environment" means soil, land surface or subsurface strata, surface
waters (including navigable waters, ocean waters, streams, ponds, drainage
basins and wetlands), groundwater, water body sediments, drinking water supply,
stream sediments, ambient air (including indoor air), plant and animal life and
any other environmental medium or natural resource.
"Environmental Laws" mean the Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation and Recovery Act, the
Clean Air Act, the Clean Water Act, and M.G.L. Chapter 21E, each as amended or
hereinafter in effect and any other federal, state, local or foreign law,
regulation or legal requirement, as now or hereinafter in effect, relating to:
(a) the Release, containment, removal, remediation, response, cleanup or
abatement of any sort of any Hazardous Materials; (b) the manufacture,
generation, formulation, processing, labeling, distribution, introduction into
commerce, use, treatment, handling, storage, recycling, disposal or
transportation of any Hazardous Materials; (c) exposure of persons, including
employees, to any Hazardous Materials; (d) the pollution, protection or clean up
of the Environment; or (e) noise.
"Environmental Permit" means any Permit or authorization from any
governmental authority required under, issued pursuant to, or authorized by any
Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excluded Assets" has the meaning set forth in ss. 2.2.
"First Year" has the meaning set forth in ss. 2.5 below.
"First Year Product Credits" has the meaning set forth in ss. 2.5
below.
"FMLA" has the meaning set forth in ss. 5.10.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
<PAGE>
"Hazardous Materials" means all substances defined as Hazardous
Substances, Hazardous Materials, Oils, Pollutants or Contaminants in the
National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. ss.
200.5, or defined as such by, or regulated as such under, any Environmental Law.
"Hired Employees" has the meaning set forth in ss. 5.10.
"Indemnified Party" has the meaning set forth in ss. 9.5(a).
"Initial Employment Period" has the meaning set forth in ss. 5.10.
"Indemnifying Party" has the meaning set forth in ss. 9.5(a).
"Initial Statement of Assets" means the Statement of Assets as of June
28, 1997 attached hereto as Exhibit A.
"Knowledge" of an organization means actual knowledge of the Persons
within such organization having principal responsibility for the relevant
matters after reasonable investigation.
"Laws" means all laws, rules, regulations, codes, injunctions,
judgments, orders, decrees, rulings, interpretations, constitution, ordinance,
common law, or treaty, of any federal, state, local municipal and foreign,
international, or multinational government or administration and related
agencies.
"Leave Expiration Date" has the meaning set forth in ss. 5.10.
"Liability" means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, whether incurred, and
whether due or to become due).
"Licensing Programs" mean the licenses on Schedule 1.7.
"Lien" means any mortgage, pledge, lien, security interest, claim,
equitable interest, encumbrance, restriction on transfer, conditional sale or
other title retention device or arrangement (including, without limitation, a
capital lease), or contractual restriction on the creation of any of the
foregoing, whether relating to any property or right or the income or profits
therefrom; provided, however, that the term "Lien" shall not include (i)
statutory liens for Taxes to the extent that the payment thereof is not in
arrears or otherwise due, (ii) encumbrances in the nature of zoning
restrictions, easements, rights or restrictions of record on the uses of real
property if the same do not materially detract from the value of the property
encumbered thereby or materially impair the use of such property in the business
<PAGE>
of the NPB as currently conducted, (iii) deposits or pledges made in connection
with, or to secure payment of, worker's compensation, unemployment insurance,
old age pension programs mandated under applicable laws or other social security
regulations, (iv) rights of MCI and Bell Atlantic with respect to the Acton
Facilities, and (iv) mechanics', carriers', workmen's, repairmen's and similar
liens, that do not materially interfere with the ability to conduct business or
use the property as presently used.
"Load" means, with respect to the NPB, its backlog, quarter-to-date
revenues and orders booked and scheduled to ship in the relevant quarter. Load
is used by Seller in the Ordinary Course of Business as a leading indicator for
revenue.
"Local Transfer Impediment" has the meaning set forth in ss. 2.1.
"Losses" has the meaning set forth in ss. 9.2.
"Material Adverse Effect" means a material adverse effect in the
business, assets, financial condition and results of operations of the NPB or
the Acquired Assets, as the case may be, taken as a whole; provided, however,
none of the following items in and of themselves individually shall constitute a
Material Adverse Effect: (i) the differential between the current Load and the
historical Load requirements necessary to achieve Seller's planned second fiscal
quarter revenue, all as reflected in the Load report dated November 18, 1997
previously provided to Buyer, (ii) that a sufficient number of NPB Employees
have failed to become Hired Employees, such that Buyer is entitled to a [*] to
the Purchase Price, or (iii) any decrease in assets resulting in an Asset Value
determined with respect to the Closing Date Statement of Assets of less than $75
million.
"Multiemployer Plan" has the meaning set forth in ss. 3.26(c).
"NPB" means the business, operations and assets of the Seller with
respect to the design, having manufactured, sale, marketing, distribution,
maintenance and support (but not service) of the Products and the design of
Products Under Development.
"NPB Employees" has the meaning set forth in ss. 5.10.
"Offerees" has the meaning set forth in ss. 5.10.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Overseas Employees" means NPB Employees whose principal work location
is outside of the United States.
* Confidential Treatment
<PAGE>
"Patent" means: (i) any United States or foreign patent, patent
application, patent disclosure or other patent right; (ii) any division,
continuation, continuation-in-part or similar extension of an application that
is a Patent; and (iii) any patent or other patent right that issues or is based
upon an application that is a Patent.
"Party" and "Parties" have the meanings set forth in the preamble
above.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"Plan Eligibility Date" has the meaning provided in Section 5.10(b).
"Product Credits" means credits to be used by Seller on a first in,
first out basis and net of credits against the full value of the invoice for the
purchase of products on the Product Road Map from Buyer in a specified dollar
amount during a specified period of time pursuant to the Reseller Agreement.
"Product Road Map" has the meaning set forth in the Reseller Agreement.
"Products" mean the products listed in Schedule 1.5 "Products."
"Products Under Development" mean products developed or products under
development (but not including the Products) by Seller employees (including
contract employees) during the period when such employees were employed by
Seller's Network Products Business Unit and were engaged in the business of the
design, having manufactured, sale, marketing, distribution, maintenance, or
support of Data Networking Products.
"Purchase Price" has the meaning set forth in ss. 2.5.
"Purchase Price Adjustment" shall mean the aggregate adjustments to the
Purchase Price which occur pursuant to ss. 2.6.
"Registration Statement" has the meaning set forth in ss. 4.6.
"Related Entity" means any corporation, trust, partnership or other
entity that would be considered as a single employer with Seller under Section
4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code.
"Release" means any actual spilling, leaking, pumping, pouring,
emitting, dispersing, emptying, discharging, injecting, escaping, leaching,
dumping, or disposing of any Hazardous Materials into the Environment.
<PAGE>
"Remaining Accrued Vacation Dollars" has the meaning set forth in
ss. 2.6.
"Remediation Standard" means a numerical standard that defines the
concentrations of Hazardous Materials that may be permitted to remain in the
Environment after an investigation, remediation or containment of a release of
Hazardous Materials.
"Reports" has the meaning set forth in ss. 3.28.
"Reseller Agreement" means the Reseller Agreement entered into by the
Parties in the form of Exhibit B attached hereto.
"Restoration Pension Plan" means the Digital Equipment Corporation Cash
Account Pension Restoration Plan.
"Retained NPB Employees" has the meaning set forth in ss. 5.10.
"Retained Patents" means the Patents listed under the heading "Retained
Patents" in Schedule 1.6.
"Retained Software" means all right, title and interest in (i) any
software, including fragments or modules thereof, that is used by Seller
primarily outside the NPB, and (ii) general purpose standalone software
components (e.g., not data networking) that are used by Seller both within and
outside the NPB (e.g., compilers, run-time systems and libraries).
"SAVE Plan" means the Digital Equipment Corporation Savings and
Investment Plan.
"Second Year" has the meaning set forth in ss. 2.5.
"Second Year Product Credits" has the meaning set forth in ss. 2.5.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Seller" means Digital Equipment Corporation and its Subsidiaries, as
and to the extent the context requires.
"Seller Pension Plan" means the Digital Equipment Corporation Cash
Account Pension Plan.
"Statement of Assets" means a statement of assets sold prepared in
accordance with the Accounting Convention.
<PAGE>
"Subsidiary" means with respect to any Person, (i) any corporation at
least a majority of whose outstanding voting stock is owned, directly or
indirectly, by such Person or by one or more of its Subsidiaries, or by such
Person and one or more of its Subsidiaries; (ii) any general partnership, joint
venture or similar entity, at least a majority of whose outstanding partnership
or similar interests shall at the time be owned by such Person, or by one or
more of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
and (iii) any limited partnership of which such Person or any of its
Subsidiaries is a general partner. For the purposes of this definition, "voting
stock" means shares, interests, participations or other equivalents in the
equity interest (however designated) in such Person having ordinary voting power
for the election of a majority of the directors (or the equivalent) of such
Person other than shares, interests, participations or other equivalents having
such power only by reason of the occurrence of a contingency.
"Tax" or "Taxes" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under Code
ss. 59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar, including FICA), unemployment, disability, real property,
personal property, sales, use, transfer, registration, value added, alternative
or add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto and including any amendment thereof.
"Third Party Claim" has the meaning set forth in ss. 9.5(a).
"Trademarks" means any trademarks, service marks, trade dress, and
logos, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith.
"Welfare Plan" has the meaning set forth in ss. 3.26(a) below.
2. Acquisition of Assets by Buyer
2.1. Purchase and Sale of Assets. The Seller agrees to sell and
transfer to the Buyer, and the Buyer agrees to purchase from the Seller at the
Closing, subject to and upon the terms and conditions contained herein, free
and clear of any material Lien, except those encumbrances listed on
Schedule 2.1(a), all right, title, and interest in and to the following
properties and assets (the "Acquired Assets"):
<PAGE>
(a) all assets reflected on the Initial Statement of Assets
other than those disposed of since June 28, 1997 and those acquired in
the Ordinary Course of Business since June 28, 1997 which appear on the
Closing Date Statement of Assets.
(b) all the inventory of the NPB, including raw materials,
work-in-process, and finished goods, as reflected on the Closing Date
Statement of Assets;
(c) all tangible personal property used primarily in the
NPB (including, without limitation, all machinery, equipment, test
equipment, supplies, manufactured and purchased parts, tools, jigs and
dies, computer software stored on a tangible medium, workstations and
personal computers, electronic, electrical and mechanical equipment and
other computer hardware used primarily in the NPB) owned by Seller
whether in the Seller's possession or in the possession of another
party such as a manufacturer or vendor of the Seller, including
fully-depreciated or fully-expensed tangible property used primarily in
the NPB; not including, however, furniture, file cabinets, and similar
office equipment and office supplies located in the Littleton facility
that are not transferred to the Acton Facilities but including
furniture, file cabinets, and similar office equipment and office
supplies located in Acton intended to compensate for the non-transfer
of Littleton equipment;
(d) the securities of Ipsilon Networks, Inc. owned by the
Seller;
(e) prepaid expenses and deposits;
(f) the Acton Facilities and the furniture and equipment
located therein or comparable substitutes;
(g) the Assigned Intellectual Property, remedies against
infringement thereof and rights to protection of interests therein;
(h) all rights under any contracts, indentures, mortgages,
instruments, Liens, guaranties, or other agreements of Seller, in each
case to the extent they relate to the NPB or the Acquired Assets, and
including, without limitation, those agreements set forth in Schedule
2.1(h) (the "Contracts"), provided, however, that no rights are granted
pursuant to this clause (h) with respect to intellectual property;
(i) all rights under all permits, authorizations, orders,
registrations, certificates, variances, approvals, consents and
franchises or any pending applications all to the extent related to the
NPB or the Acquired Assets, including without limitation all
governmental permits, licenses, authorizations, approvals and consents
described in Schedule 2.1(i) ("Permits");
<PAGE>
(j) all technical data, designs, drawings, specifications,
documentation and manuals (or portions thereof) to the extent that they
are related to the NPB;
(k) the Licensing Programs, remedies against infringement
thereof and rights to protection of interests therein;
(l) all customer, distributor, supplier and mailing lists,
pricing and cost information, and business and marketing plans of
Seller (or portions thereof), all to the extent related to the NPB;
(m) all manufacturing MAC addresses used exclusively in
the operation of the NPB;
(n) all business records and financial management reports,
books, files, plans, appraisals, environmental audits and reports,
documents, correspondence, lists, plats, architectural plans, drawings,
notebooks, specifications, creative materials, advertising and
promotional materials, marketing materials, studies, reports, equipment
repair, maintenance or service records whether written or
electronically stored or otherwise recorded, in each case, that is used
exclusively in the NPB;
(o) all rights and interests of Seller as plan sponsor in
and with respect to the assets associated with the accounts of Hired
Employees under the SAVE Plan transferred to the Buyer 401(k) Plan as
contemplated in ss. 5.10;
(p) the goodwill associated with the NPB and the Acquired
Assets.
On the Closing Date, Seller shall transfer to Buyer all of the Acquired Assets
located outside of the United States, including those listed by country on
Schedule 2.1(x). If it is not possible to do so without adversely affecting the
ability of Seller to transfer, and Buyer to hire, the NPB Employees employed
outside of the United States, or if the Parties mutually agree that it is not
desirable to transfer to Buyer Acquired Assets located in a country other than
the United States on the Closing Date because of any law or regulation, the need
for the approval of any governmental entity, or the need for the review or
approval by any union, works council or similar body ("Local Transfer
Impediment"), Seller and Buyer shall take all actions reasonably necessary to
eliminate the Local Transfer Impediment and Seller shall take all actions
reasonably necessary to transfer the Acquired Assets and Buyer shall take all
actions reasonably necessary to hire the affected non-U.S. NPB Employees as soon
as possible. To this end, the parties agree to prepare and execute, to the
extent necessary, one or more international implementation agreements as soon as
possible after the date hereof to facilitate the transfer of non-U.S. assets and
employees.
<PAGE>
2.2. Excluded Assets. There shall be excluded from the Acquired Assets
to be sold, assigned, transferred, conveyed and delivered to Buyer hereunder,
and to the extent in existence on the Closing Date, there shall be retained by
the Seller, assets, properties and rights including, but not limited to,
(collectively, the "Excluded Assets"):
(a) the Digital Marks;
(b) the Retained Patents;
(c) the Retained Software;
(d) cash, cash equivalents, accounts receivables and
short-term investments; and
(e) any of the rights of the Seller under this Agreement
(or under any other agreement between the Seller on the one hand and
the Buyer on the other hand.
2.3. Assumption of Liabilities. On the terms and subject to the conditions
set forth herein, from and after
the Closing, the Buyer will assume and satisfy or perform when due only the
following Liabilities (the "Assumed Liabilities"):
(a) all liabilities under the Contracts or Permits arising
after the Closing Date (including commitments by the Seller to purchase
goods in the Ordinary Course of Business which are unfulfilled as of
the Closing Date), except to the extent arising from any breach or
default occurring prior to the Closing Date;
(b) all liabilities under the Licensing Programs and under
the licenses granted pursuant to ss. 8.2 arising after the Closing
Date, except to the extent arising from any breach or default occurring
prior to the Closing Date;
(c) all other liabilities and obligations set forth in
Schedule 2.3(c) under an express statement (that the Buyer has
initialed) to the effect that the definition of Assumed Liabilities
will include the Liabilities and obligations so disclosed;
(d) all liabilities related to the Acquired Assets to the
extent arising from or related to any facts or circumstances occurring
after the Closing Date, including, without limitation, all Taxes with
respect to real property allocable to any period after the Closing
Date; and
(e) all liabilities related to the Hired Employees
arising from or related to any facts or circumstances occurring
after the Closing Date, except as otherwise expressly provided herein.
<PAGE>
2.4. Liabilities Not Assumed. Except as expressly set forth in this
Agreement or any other written agreements between the Parties executed
contemporaneously herewith, the Buyer will not assume or perform any
Liabilities not specifically contemplated by ss. 2.3 hereof.
2.5. Purchase Price. The Buyer agrees to assume the Assumed Liabilities
at the Closing and pay to the Seller aggregate consideration consisting of the
following (the "Purchase Price"), subject to adjustment pursuant to ss. 2.6:
(a) Cash. At the Closing, $91,800,000 in cash (subject to
adjustment pursuant to ss.2.6) payable by wire transfer to the Seller
in accordance with written instructions of the Seller given to the
Buyer at least two business days prior to the Closing.
(b) Cabletron Stock. At the Closing, Buyer shall deliver to
the Seller certificates representing the number of whole shares of
Cabletron Common Stock equal to $50,000,000 divided by the Cabletron
Stock Price (the "Cabletron Shares").
(c) Product Credits. The following Product Credits:
(i) First Year Product Credits. Subject to
adjustment pursuant to ss. 2.6, $168,500,000 in First Year
Product Credits.
"First Year Product Credits" means Product
Credits which may be used by Seller to purchase from
Buyer, at prices set forth in the Reseller Agreement,
products that are ordered under the Reseller
Agreement during the period beginning on the Closing
Date and ending on the first anniversary of the
Closing Date (the "First Year") requesting delivery
at any time until thirty days after the end of the
First Year. Any First Year Product Credits not
expended in accordance with the preceding sentence
shall automatically expire and be of no further force
or effect immediately following the end of the First
Year; provided, however, Seller shall be permitted to
carryover to the Second Year unused First Year
Product Credits equal to the amount, if any, that
Seller's minimum purchase commitment (as described in
the Reseller Agreement) is reduced in the First Year
as contemplated by the Reseller Agreement.
(ii) Second Year Product Credits. Subject to
adjustment pursuant to ss. 2.6, $125,000,000 in Second Year
Product Credits.
<PAGE>
"Second Year Product Credits" means Product
Credits which may be used by Seller to purchase from
Buyer, at prices set forth in the Reseller Agreement,
products that are ordered under the Reseller
Agreement during the period beginning on the first
anniversary of the Closing Date and ending on the
second anniversary of the Closing Date (the "Second
Year") requesting delivery at any time until thirty
days after the end of the Second Year. Any Second
Year Product Credits not expended in accordance with
the preceding sentence shall automatically expire and
be of no further force or effect immediately
following the end of the Second Year; provided,
however, Seller shall be permitted to use in the
twelve month period immediately following the Second
Year unused Second Year Product Credits equal to the
amount, if any, that Seller's minimum purchase
commitment (as described in the Reseller Agreement)
is reduced in the Second Year as contemplated
pursuant to the Reseller Agreement.
2.6. Ajustments to Purchase Price. The acceptance by the Buyer and Seller
of any adjustments to the Purchase Price pursuant to this ss. 2.6 shall be the
exclusive remedy of either Party in connection with an increase or decrease in
the Asset Value of the assets set forth on the Initial Statement of Assets,
notwithstanding any provisions of ss.9.
(a) Post-Closing Adjustment to Purchase Price
(i) Preparation of Closing Date Statement of
Assets
(A) Within 60 days after the Closing
Date, the Seller will cause Coopers & Lybrand to
perform the Agreed-Upon Procedures and assist in the
preparation of a Statement of Assets (the "Closing
Date Statement of Assets") for the NPB as of the
Closing. The Closing Date Statement of Assets shall
be prepared based upon the Accounting Convention. The
Closing Date Statement of Assets will not reflect any
Liabilities. In addition, the Seller will permit the
Buyer (or its accountants) to participate in the
substantially complete physical count of inventory
and other tangible personal property and property,
plant and equipment. Buyer and Seller will share
equally the fees and expenses of Coopers & Lybrand to
assist in the preparation of the Closing Date
Statement of Assets and the performance of the
Agreed-Upon Procedures.
(B) If the Buyer has any objections
to the Closing Date Statement of Assets, it will
deliver a written statement setting forth such
objections to the Seller within 45 days after
<PAGE>
receiving the Closing Date Statement of Assets. The
Buyer and the Seller will use reasonable efforts to
resolve any such objections themselves. If the
Parties do not obtain a final resolution within 30
days after the Seller has received the statement of
objections, however, the Parties shall appoint
Deloitte & Touche, certified public accountants, to
resolve any remaining objections. If Deloitte &
Touche is unavailable, the Parties will select a
nationally-recognized accounting firm by lot (after
excluding their respective regular outside accounting
firms). The determination of any accounting firm so
selected will be set forth in writing and will be
conclusive and binding upon the Parties. The Seller
will revise the Closing Date Statement of Assets as
appropriate to reflect the resolution of any
objections thereto pursuant to this ss. 2.6(a)(i)(B).
The Closing Date Statement of Assets shall be deemed
final if Buyer fails to object within 45 days after
receipt or after any revisions are completed pursuant
to this ss. 2.6(a)(i)(B).
(C) In the event the Parties submit
any unresolved objections to an accounting firm for
resolution as provided in ss. 2.6(a)(i)(B) above, the
Buyer and the Seller will share equally the fees and
expenses of the accounting firm.
(D) As part of Buyer's review of the
Closing Date Statement of Assets or during the
resolution of any dispute, including by the
nationally-recognized accounting firm appointed to
resolve disputes of the Parties pursuant to ss.
2.6(a)(i)(B), Buyer and its accountants and other
representatives will be entitled to review the
methodology and back-up materials used in preparing
the Closing Date Statement of Assets in the presence
of appropriate financial staff of Seller at
reasonable times and upon reasonable notice.
(ii) Adjustment to Purchase Price. The Purchase
Price will be adjusted (in First Year Product Credits) as
follows:
(A) If the Asset Value as determined
in the Closing Date Statement of Assets, net of any
resolved disputes, exceeds the Asset Value as
determined in the Initial Statement of Assets by
$1,000,000 or more, the First Year Product Credits
will be increased by the amount by which the Asset
Value exceeds the Asset Value as determined with
respect to the Initial Statement of Assets.
(B) If the Asset Value as determined
in the Closing Date Statement of Assets, net of any
resolved disputes, is less than the Asset Value as
<PAGE>
determined with respect to the Initial Statement of
Assets by $1,000,000 or more, the First Year Product
Credits will be decreased by the amount by which the
Asset Value is less than the Asset Value as
determined with respect to the Initial Statement of
Assets.
(b) Vacation Adjustment. The Purchase Price shall be
adjusted for accrued vacation benefits as follows:
(i) "Remaining Accrued Vacation Dollars" shall
mean the sum for all Hired Employees, of an amount for each
Hired Employee equal to (i) the total number of accrued
vacation hours not paid out to such employee pursuant to
ss.5.10(b)(v), multiplied by (ii) the hourly wage rate for
such employee.
Within 25 business days following the Closing Date, Seller
shall prepare and deliver to the Buyer a statement showing the
Remaining Accrued Vacation Dollars prepared in accordance with
Seller's standard accounting policies prepared on a consistent
basis with prior vacation accrual calculations. Within 20 days
following the delivery of such statement by Seller to Buyer,
Buyer may object to the calculation of the Remaining Accrued
Vacation Dollars in writing. If Buyer so objects to the
Remaining Accrued Vacation Dollars, the Parties shall attempt
to resolve such dispute by negotiation. If the parties are
unable to resolve such dispute within twenty days of any
objection by Buyer, the parties shall appoint Deloitte &
Touche, certified public accountants, to resolve any remaining
objections. If Deloitte & Touche is unavailable, the Parties
will select a nationally-recognized accounting firm by lot
(after excluding their respective regular outside accounting
firms). The determination of any accounting firm so selected
will be set forth in writing and will be conclusive and
binding upon the Parties.
If Buyer does not object to the calculation of Remaining
Accrued Vacation Dollars within the time period set forth
above or upon the final resolution of any dispute concerning
the Remaining Accrued Vacation Dollars (i) Seller shall pay to
Buyer the amount, if any, by which the Remaining Accrued
Vacation Dollars exceeds $1,500,000, or (ii) Buyer shall pay
to Seller the amount, if any, by which $1,500,000 exceeds the
Remaining Accrued Vacation Dollars, in each case as soon as
possible, but in any event within 10 business days.
2.7. The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing"), such Closing to be deemed to have occurred at
12:01 a.m. on the Closing Date, shall take place at the offices of Ropes & Gray
in Boston, Massachusetts, commencing at 10:00 a.m. eastern time on the business
day after all conditions in Sections 6.1 and 6.2 are satisfied (provided that
<PAGE>
such date is reasonably acceptable to both Parties) or such other date as the
Parties may mutually determine (the "Closing Date").
2.8. Deliveries at the Closing. At the Closing, the Seller will deliver
to the Buyer properly executed and acknowledged, if appropriate (i) the various
certificates, instruments, and documents referred to in ss. 6.1 below; (ii) a
quitclaim deed relating to the Acton Facilities, (iii) assignments of the
Assigned Patents, Assigned Trademarks, Contracts and Permits, (iv) such other
instruments of sale, transfer, conveyance, and assignment as the Buyer and its
counsel may reasonably request in respect of the Acquired Assets, (v) the
Reseller Agreement, and (vii) the Bill of Sale in the form attached hereto as
Exhibit D. The Buyer will execute, acknowledge (if appropriate), and deliver the
Assignment and Assumption Agreement in the form attached hereto as Exhibit E and
will deliver the consideration specified in ss. 2.5(a) and 2.5(b) above.
Simultaneously with such delivery, the Buyer and Seller will use all
reasonable efforts and take all reasonable action as may be necessary to put
Buyer in possession and operating control of the Acquired Assets.
At any time and from time to time after the Closing, at the request of
Buyer and without further consideration, except as stated below, the Seller will
execute and deliver such other instruments of sale, transfer, conveyance,
assignment and confirmation and take such action as Buyer may reasonably
determine is necessary to transfer, convey and assign to Buyer, and to confirm
Buyer's title to or interest in the Acquired Assets, to put Buyer in actual
possession and operating control thereof and to assist Buyer in exercising all
rights with respect thereto.
2.9. Preliminary Allocation of Purchase Price The Parties agree that the
preliminary allocation of the Purchase Price for the Acquired Assets shall be as
determined by the allocation formula to be agreed by the parties; as may be
adjusted to reflect any Purchase Price Adjustments. The Seller and Buyer agree
that the allocation may be amended or modified by mutual agreement to establish
a final allocation prior to the filing of the applicable Tax Returns of Buyer
and Seller. The Seller and Buyer shall use such final allocation in all Tax
Returns.
3. Representations and Waranties of the Sellers. The Seller represents and
warrants to the Buyer that the statements contained in this ss. 3 are correct
and complete as of the date of this Agreement and, unless a date is specified in
such representation and warranty, will be correct and complete as of the Closing
Date as though made then, except as set forth in the disclosure schedule
accompanying this Agreement (the "Disclosure Schedule"). The Disclosure Schedule
will be arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this ss. 3. Disclosure in one paragraph is not deemed
disclosure for any other paragraph.
<PAGE>
3.1. The Seller is a corporation duly organized, validly existing,
and in good standing under the laws of the state of its incorporation.
3.2. [Intentionally Omitted]
3.3. Authorization of Transaction. The Seller has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. All corporate actions or proceedings to be taken by or on the part of
the Seller to authorize and permit the execution and delivery by Seller of this
Agreement and the instruments required to be executed and delivered by Seller
pursuant hereto, the performance by Seller of its obligations hereunder, and the
consummation by Seller of the transactions contemplated herein, have been duly
and properly taken. This Agreement has been duly executed and delivered by the
Seller and constitutes the legal, valid and binding obligation of the Seller,
enforceable in accordance with its terms and conditions.
3.4. Noncontravention. Except as set forth in ss. 3.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby (including the assignments
and assumptions referred to in ss. 2 above), will (i) violate any constitution,
statute, regulation, rule, injunction, judgment, order or decree of any
government, governmental agency, or court to which the Seller is subject or any
provision of the charter or by-laws of the Seller or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license, instrument, or
other arrangement to which the Seller is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Lien upon
any of its assets), except in the case of (i) and (ii), for violations,
conflicts, breaches or defaults that would not have a Material Adverse Effect.
Except as set forth in ss. 3.4 of the Disclosure Schedule, the Seller does not
need to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order for the
Parties to consummate the transactions contemplated by this Agreement (including
the assignments and assumptions referred to in ss. 2 above) except for the
required filings under the Hart-Scott-Rodino and foreign pre-merger notification
requirements.
3.5. Brokers' Fees. The Seller has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Buyer could become
liable or obligated.
3.6. Title of Assets. Except for Real Property and Intellectual Property
which are subject to ss.ss. 3.15 and 3.16 and except as set forth in ss.3.6 of
the Disclosure Schedule, the Seller owns or has a valid leasehold interest in
the Acquired Assets, free and clear of all Liens, except for Liens that would
not have a Material Adverse Effect.
<PAGE>
3.7. All Assets Necessary to Conduct Business. The Acquired Assets and the
licenses granted in Section 8.2 comprise all of the assets, properties and
rights of every type and description, real, personal, tangible and intangible
necessary to the conduct of the NPB.
3.8. Financial Statements. The Initial Statement of Assets, attached hereto
as Exhibit D, was prepared in accordance with the Accounting Convention. Exhibit
E are unaudited summary statements of operations for the NPB for the fiscal
years ended July 1, 1995, June 29, 1996 and June 28, 1997 (together with the
Initial Statement of Assets, the "Financial Information"). The Initial Statement
of Assets was prepared in good faith and in accordance with the Accounting
Convention. The summary statements of operations were prepared in good faith and
derived from Seller's management reporting systems as maintained by Seller in
the ordinary course of business. No representation is made that the Financial
Information has been prepared in a manner consistent with GAAP or that the
Financial Information is indicative of the financial condition and the results
of operations that would have been achieved had the NPB been operated as a
stand-alone, non-affiliated entity.
3.9. Absence of Changes. Since the date of the Initial Statement of Assets
and except as disclosed in ss. 3.9 of the Disclosure Schedule, the Seller has
operated and conducted the business of the NPB only in the Ordinary Course of
Business and, with respect to, by and on behalf of the NPB, there has not been:
(a) any sale, lease, transfer, or assignment of assets,
tangible or intangible, other than sales of inventory in the Ordinary
Course of Business and other than in an amount not in excess of
$250,000;
(b) any acceleration, termination, modification, or
cancellation of any Contract listed in Schedule 2.1(h) involving
payments of more than $250,000;
(c) as of the date hereof the responsible managers of
the NPB have not received any notice that any major resellers or
distributors do not intend to continue with Buyer a business
relationship on terms at least as favorable as the relationship such
resellers or distributors, as the case may be, currently have with the
Seller with respect to NPB; and
(d) any damage, destruction, or loss (whether or not
covered by insurance) to the Acquired Assets in excess of $250,000.
3.10. Absence of Undisclosed Liabilities. The Seller has no Liability that
will be assumed by Buyer except as expressly set forth herein and in the
schedules and attachments hereto or in other written agreements between the
Parties.
<PAGE>
3.11. Legal and Other Compliance. Except for Intellectual Property and
Environmental matters, which are addressed in ss.ss.3.16 and 3.25:
(a) the Seller is in compliance with all applicable Laws
the violation of which, either singularly or in the aggregate, would
have a Material Adverse Effect on the NPB or the Acquired Assets and,
to Seller's Knowledge, no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any failure so to
comply; and
(b) neither the ownership nor use of properties of the
NPB nor the conduct of the business of the NPB conflicts with the
rights of any other Person or violates, or with the giving of notice or
the passage of time or both will violate, conflict with or result in a
default, right to accelerate or loss of rights under, any terms or
provisions of any of their charter or by-laws or any Lien, law,
ordinance, rule or regulation, any order, judgment or decree to which
the NPB is a party or by which the NPB may be bound or affected, except
for such conflicts, violations and defaults which would not have a
Material Adverse Effect.
3.12. No Material Adverse Change. Since the date of the Initial Statement
of Assets, there has not been any change which has resulted in a Material
Adverse Effect and no event has occurred or circumstance exists that would
reasonably be likely to result in such a Material Adverse Effect.
3.13. Demand Plan. Seller has previously provided a Demand Plan for
the NPB to Buyer, which plan was prepared in good faith and in a manner
consistent with past practice by Seller. The Demand Plan is based upon a number
of assumptions and estimates that, while presented with numerical specificity
and considered reasonable by the Seller, are (i) inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the control of the NPB, and (ii) based upon assumptions
with respect to future business decisions that are subject to change.
Accordingly, actual results may vary from the Demand Plan, and these variations
may be material. Consequently, the Demand Plan is not a representation by Seller
that the results therein will be achieved.
3.14. Taxes. All Taxes required to have been withheld and paid with
respect to the NPB in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third party have been
withheld and paid, and there are no Liens or other encumbrances on any of the
Acquired Assets that arose in connection with any failure (or alleged failure)
to pay any Tax.
<PAGE>
3.15. Real Property
(a) The Acton Facilities are all of the real property
that are part of the Acquired Assets. Except as set forth in ss.
3.15(a) of the Disclosure Schedule, with respect to the Acton Facility:
(i) the Seller has good and clear record and
marketable title to the parcel of real property, free and
clear of any Lien, except for installments of special
assessments not yet delinquent and recorded easements,
covenants, and other restrictions which do not materially
impair the current use, occupancy, or value, of the property
subject thereto;
(ii) there are no pending or, to the Knowledge
of Seller, threatened condemnation proceedings, lawsuits, or
administrative actions relating to the property or other
matters which would materiality adversely affect the use,
occupancy, or value thereof;
(iii) the buildings and improvements of the Acton
Facilities are located within the boundary lines of the real
property being sold by Seller to Buyer, are not in violation
of applicable setback requirements, zoning laws and ordinances
which violations would materially impair the current use,
occupancy or value of the property subject thereto, do not
encroach on any easement which encroachment would materially
impair the current use, occupancy or value of the property
subject thereto, and the land does not serve any adjoining
property for any purpose which would materially impair the
current use, occupancy, or value of the property subject
thereto;
(iv) to the Knowledge of Seller each facility
located on such parcel has received all approvals of
governmental authorities (including licenses and permits)
required in connection with the ownership or operation thereof
and have been operated and maintained in accordance with
applicable laws, rules, and regulations;
(v) there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to
any party or parties the right of use or occupancy of the
parcel or any portion thereof except for licensees or
concessions serving the premises;
(vi) there are no outstanding options or rights
of first refusal to purchase such parcel, or any portion
thereof or interest therein;
<PAGE>
(vii) there are no parties (other than the NPB or
other employees of the Seller or MCI or Bell Atlantic) in
possession of such parcel;
(viii) each facility located on such parcel is
supplied with utilities and other services necessary for the
operation of such facility, as presently operated; and
(ix) each parcel has direct access to a public
road or has access to a public road via a permanent,
irrevocable, appurtenant easement benefitting such parcel
adequate for the current use.
<PAGE>
3.16. Intellectual Property
(a) The Seller owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Assigned Intellectual
Property. Subject to obtaining all necessary consents as disclosed in
ss. 3.27 of the Disclosure Schedule, each item of Assigned Intellectual
Property owned or used by the Seller in connection with the business of
the NPB immediately prior to the Closing hereunder will be owned or
available for use by the Buyer on identical terms and conditions
immediately subsequent to the Closing hereunder except for facts and
circumstances specific to Buyer. Except as disclosed in ss. 3.16(a) of
the Disclosure Schedule, to the knowledge of the Seller, the Seller has
taken all necessary action to protect each item of Assigned
Intellectual Property, except for Assigned Licenses.
(b) Except as disclosed in ss. 3.16(b) of the Disclosure
Schedule, to the Knowledge of the Seller, the Seller in connection with
the NPB has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any intellectual property rights of
third parties (excluding patents pending but not yet issued as of the
Closing Date), and there has never been any written charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that the Seller
must license or refrain from using any intellectual property rights of
any third party). Except as disclosed in ss. 3.16(b) of the Disclosure
Schedule, to the Knowledge of the Seller, Seller has provided to Buyer
all documents concerning claims that a third party has interfered with,
infringed upon, misappropriated, or otherwise come into conflict with
any Assigned Intellectual Property rights of the Seller, except with
respect to Assigned Licenses.
(c) Section 3.16(c) of the Disclosure Schedule
identifies each patent or registration which has been issued with
respect to the Assigned Intellectual Property, except for Assigned
Licenses, and identifies each pending patent application or application
for registration which has been made with respect to the Assigned
Intellectual Property, except for Assigned Licenses. With respect to
<PAGE>
each item of Assigned Intellectual Property required to be identified
in section 3.16(c) of the Disclosure Schedule to the Knowledge of
Seller, no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the Knowledge of the
Seller, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item other than in the course
of any proceedings in the U.S. Patent and Trademark Office (or any
international equivalent) relating to any pending patent or trademark
application.
(d) The Seller has delivered to the Buyer correct and
complete copies of all Assigned Licenses listed on Schedule 1.2. With
respect to each Assigned License, except as set forth in Section
3.16(d) of the Disclosure Schedule:
(i) to the Knowledge of Seller, the license,
sublicense, agreement, or permission covering the Assigned
License is legal, valid, binding, enforceable, and in full
force and effect and will continue to be legal, valid,
binding, enforceable, and in full force and effect on
identical terms following the consummation of the transactions
contemplated hereby;
(ii) to the Knowledge of Seller, it is not in
breach or default of any Assigned License;
(iii) to the Knowledge of Seller, no event has
occurred which with notice or lapse of time would constitute a
breach or default or permit termination, modification, or
acceleration thereunder; and, Seller has not provided written
notice of breach or default to any Licensor of an Assigned
License;
(iv) to the Knowledge of the Seller, it has not
repudiated any provision of an Assigned License, and it has
not received written notice from any Licensor of an Assigned
License that it has done so;
(v) to the Knowledge of Seller, each underlying
item of intellectual property is not subject to any
outstanding injunction, judgment, order, decree, ruling, or
charge;
(e) Except as set forth in Section 3.16(e) of the
Disclosure Schedule, no action, suit, proceeding, hearing,
investigation, charge, complaint, written claim, or written demand is
pending or, to the Knowledge of the Seller, has been threatened in
writing, which challenges the legality, validity, or enforceability of
the underlying item of Assigned Intellectual Property, other than in
the course of any proceedings in the U.S. Patent and Trademark Office
(or any international equivalent) relating to any pending patent or
trademark application.
<PAGE>
(f) Other than in connection with the sale, manufacture
or license of Products in the ordinary course, the Seller has not
granted any sublicense or similar right with respect to the Assigned
Licenses.
(g) To the Knowledge of Seller, the Assigned
Intellectual Property, together with the licenses granted pursuant to
ss. 8.2, constitutes all of the intellectual property necessary for the
design, sale, marketing, distribution, maintenance and support (but not
service) of the Products and having the Products manufactured;
(h) The Seller has granted no licenses with respect to
the Assigned Patents except for those set forth in ss. 3.16(h) of the
Disclosure Schedule.
3.17. Inventories. The inventory of the Seller in connection with the
business of the NPB consists of raw materials and supplies, manufactured and
purchased parts, goods in process, and finished goods, all of which is saleable,
suitable and usable for the production or completion of saleable products for
sale in the Ordinary Course of Business, except as reflected in the Initial
Statement of Assets and the Closing Date Statement of Assets. The inventory,
taken as a whole, reflected in the Initial Statement of Assets, is valued in
accordance with the Accounting Convention. Since June 28, 1997, no inventory has
been sold or disposed of except in the Ordinary Course of Business of the NPB.
3.18. Contracts. The Seller has delivered to the Buyer a correct and
complete copy of each material Contract (as amended to date) listed on Schedule
2.1(h). Except as disclosed in ss. 3.18 of the Disclosure Schedule, with respect
to each Contract: (i) the agreement is legal, valid, binding, enforceable, and
in full force and effect in all material respects; (ii) to the Seller's
Knowledge no party is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default, or permit
termination, modification, or acceleration, under the Contract; and (iii) to the
Seller's Knowledge no party has repudiated any provision of the Contract.
3.19. There are no outstanding powers of attorney executed on behalf of any
of the Seller in respect of the NPB.
3.20. Insurance and Risk Management. The NPB has been covered during the
past 2 years by insurance in scope and amount customary and reasonable for the
businesses in which it has engaged during the aforementioned period.
3.21. Litigation. Except as disclosed in ss. 3.21 of the Disclosure
Schedule, there are no judicial or administrative actions, claims, suits,
proceedings or investigations pending or, to the Knowledge of the Seller,
threatened, that would be reasonably likely to result in a Material Adverse
Effect and the Seller has no notice of any action seeking to enjoin the
<PAGE>
consummation of the transactions contemplated hereby and to the Knowledge of the
Seller, there is no Basis for any such action, claim, suit, proceeding or
investigation. There are no judgments, orders, decrees, citations, fines or
penalties heretofore assessed against the Seller which have had a Material
Adverse Effect.
3.22. Product Warranties; Defects; Liability. To the Knowledge of the
Seller, each product manufactured, sold, leased, or delivered by the NPB has
been in conformity in all material respects with all applicable federal, state,
local or foreign laws and regulations, contractual commitments and all express
and implied warranties. Section 3.22 of the Disclosure Schedule includes copies
of the standard terms and conditions of sale or lease for the NPB (containing
applicable guaranty, warranty, and indemnity provisions).
3.23. Employees.
(a) As of the date hereof, to the Knowledge of Robert
Rennick or Chris Sullivan no employee on the key employee list
previously provided by Seller to Buyer has any plans to terminate
employment with the Seller or not accept employment with Buyer. The
Seller has not experienced any material labor disputes or work stoppage
in the United States due to labor disagreements with regard to the
business of the NPB. With respect to the operations of the NPB in the
United States, the Seller is not nor has it ever been a party to any
collective bargaining agreements and the NPB has not been the subject
of any organizational activity.
(b) With respect to Overseas Employees, there is no
existing material labor dispute or work stoppage due to labor
disagreements specifically with regard to the business of the NPB.
3.24. Employee Benefits.
(a) Seller Plans. Seller has provided to Buyer a
description of the material terms of each material Employee Plan which
is maintained by Seller or any Related Entity which benefits any NPB
employee of the Seller (a "Seller Plan"). For purposes of this
Agreement, the term "Employee Plan" means any U.S. plan, program,
agreement, policy or arrangement (a "plan"), whether or not reduced to
writing, that is: (i) a welfare benefit plan within the meaning of
Section 3(1) of ERISA (a "Welfare Plan"); (ii) a pension benefit plan
within the meaning of Section 3(2) of ERISA; (iii) a stock bonus, stock
purchase, stock option, restricted stock, stock appreciation right or
similar equity-based plan; or (iv) any other deferred-compensation,
retirement, welfare-benefit, bonus, incentive or fringe benefit plan or
arrangement.
(b) The SAVE Plan. The SAVE Plan is qualified under
Section 401(a) of the Code and its associated trust is exempt from tax
<PAGE>
under section 501(a) of the Code and each has been administered in all
material respects in accordance with its terms and with applicable law.
Seller has received a favorable determination letter from the IRS with
respect to the SAVE Plan. There has been no non-exempt "prohibited
transaction" within the meaning of Code Section 4975(c) involving the
assets of the SAVE Plan. All required contributions on account of the
SAVE Plan have been made or accrued by the Seller in accordance with
GAAP. Section 3.24 of the Disclosure Schedule sets forth each and every
pending or, to the knowledge of Seller, threatened lawsuit, claim or
other controversy relating to the SAVE Plan, other than claims for
benefits in the normal course. Seller has delivered to Buyer the SAVE
Plan document and delivered or made available to Buyer all related SAVE
Plan documents.
(c) No Liability. No circumstance exists and no event
(including any action or the failure to do any act) has occurred with
respect to any Employee Plan (including, for purposes of this ss. 3.24
only, any non-U.S. employee plan) maintained or formerly maintained by
Seller or any Related Entity, or to which Seller or any Related Entity
is or has been required to contribute, that could subject Buyer to
Liability, or the assets of the NPB to any lien, under ERISA or the
Code, nor will the transactions contemplated by this Agreement give
rise to any such Liability or lien.
(d) Multiemployer Plans. With respect to Hired
Employees, neither Seller nor any Related Entity has or had any
liability to make payments or contributions to a multiemployer plan as
that term is defined in ERISA section 3(37), and has no actual or
potential liability under ERISA section 4201 for any complete or
partial withdrawal from a multiemployer plan.
3.25. Environment.
(a) Except as disclosed in ss. 3.25 of the Disclosure
Schedule:
(i) the Seller in connection with the business
of the NPB and the Acton Facilities has complied and is in
compliance with all applicable Environmental Laws the
violation of which could have a Material Adverse Effect;
(ii) the Seller in connection with the business
of the NPB and the Acton Facilities has obtained, and is and
has been in material compliance with the conditions of, all
Environmental Permits required for the continued conduct of
<PAGE>
the business of the NPB in the manner now conducted;
(iii) the Seller in connection with the business
of the NPB and the Acton Facilities has filed all required
applications, notices and other documents necessary to effect
the timely renewal or issuance of all Environmental Permits
for the continued conduct of the business of the NPB and the
Acton Facilities in the manner now conducted;
(iv) the Seller in connection with the present
or past assets, properties, businesses, leaseholds or
operations of the business of the NPB or the Acton Facilities
has not received nor is subject to, nor within the past three
years has been subject to, any outstanding order, decree,
judgment, complaint, agreement, claim, citation, or notice or
is subject to any ongoing judicial or administrative
proceeding indicating that the Seller or the past and present
assets of the NPB or the Acton Facilities are or may be: (A)
in violation of any Environmental Law; or (B) responsible for
the on-site or off-site storage or Release of any Hazardous
Materials;
(v) to the Knowledge of Seller, no proceeding
related to the matters covered by subsection (iv) have been
threatened within three years prior to the Closing Date;
(vi) Section 3.25 of the Disclosure Schedule
lists all property presently or previously leased, owned or
operated by the Seller in connection with the business of the
NPB that has been used in the business of the NPB or by any
other Person (including a prior owner or operator) for the
intentional disposal of Hazardous Materials;
(vii) Section 3.25 of the Disclosure Schedule
sets forth a list of all underground storage tanks owned or
operated at any time at the Acton Facilities or currently
owned and operated by the Seller in connection with the
business of the NPB; and
(viii) There have been no Releases of Hazardous
Materials on or underneath the Acton Facilities or any of the
real property owned or leased by the business of the NPB that
would be reasonably likely to have a Material Adverse Effect.
(b) For purposes of this ss. 3.25 only, all references
to the "Seller" are intended to include any and all other entities to
which the Seller is considered a successor under applicable
Environmental Laws. The representations and warranties in this section
are the only representations and warranties with respect to
Environmental Laws or environmental matters notwithstanding any other
language in this Agreement of general applicability.
3.26. Government Contracts. The Contracts listed on Schedule 2.1(h) do not
include any governmental contracts.
<PAGE>
3.27. Consents. Section 3.27 of the Disclosure Schedule sets forth a
true, correct and complete list of the identities of any Person whose consent or
approval is required with respect to any matter, agreement or contract (other
than immaterial matters, agreements or contracts) and the matter, agreement or
contract to which such consent relates in connection with the transfer,
assignment or conveyance by the Seller of any of the Acquired Assets.
3.28. Investment Intent. Seller is acquiring the Cabletron Shares
for its own account and not with a view to, or for resale in connection with,
any unregistered distribution thereof, and Seller has no present intention to
sell, convey, dispose of or otherwise distribute any interest in or risk related
to the Cabletron Shares except pursuant to an effective Registration Statement
or in a manner consistent with the requirements of the Securities Act. Seller
understands that the Cabletron Shares have not been registered under the
Securities by reason of a specific exemption from the registration provisions of
the Securities Act. Seller has had the opportunity to review the information set
forth in all of Cabletron's reports filed with the Securities and Exchange
Commission since December 31, 1995 (the "Reports"). In making its decision to
acquire the Cabletron Shares, Seller has relied solely upon the Reports and
other publicly available information, has not been provided with or relied upon
any material nonpublic information concerning Cabletron and has carefully
considered the risks regarding Cabletron set forth in detail in the Reports. The
Seller is a sophisticated investor with knowledge and experience in business and
financial matters and is able to bear the economic risk and lack of liquidity
inherent in holding the Cabletron Shares.
4. Representations and Warranties of the Byer. The Buyer represents and
warrants to the Seller that the statements contained in this ss. 4
are true, correct and complete as of the date of this Agreement
and, unless a date is specified in such representation and
warranty, will be true, correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted
for the date of this Agreement throughout ss. 4).
4.1. Organization of the Buyer. Each of Cabletron and Acquisition is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of its incorporation.
4.2. Authority for Agreement. Each of Cabletron and Acquisition has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. All corporate actions or proceedings to be
taken by or on the part of Cabletron and Acquisition to authorize and permit the
execution and delivery by Cabletron and Acquisition of this Agreement and the
instruments required to be executed and delivered by Cabletron and Acquisition
pursuant hereto, the performance by Cabletron and Acquisition of their
respective obligations hereunder, and the consummation by Cabletron and
Acquisition of the transactions contemplated herein, have been duly and properly
taken. This Agreement has been duly executed and delivered by Cabletron and
<PAGE>
Acquisition and constitutes the legal, valid and binding obligation of Cabletron
and Acquisition, enforceable against each in accordance with its terms and
conditions.
4.3. Litigation. Buyer has no notice of any action seeking to
enjoin the consummation of the transactions contemplated hereby and to the
Knowledge of the Buyer, there is no Basis for any such action, claim, suit,
proceeding or investigation.
4.4. Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in ss. 2 above), will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Cabletron and Acquisition is subject or
any provision of their respective charter or bylaws or (ii) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which either Cabletron or Acquisition is a party or by
which either is bound or to which any of either Cabletron's or Acquisition's
assets is subject (or result in the imposition of any lien upon its assets),
except for violations, breaches or defects that would not make a material
adverse effect on Cabletron or Acquisition. Cabletron and Acquisition do not
need to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order for the
Parties to consummate the transactions contemplated by this Agreement (including
the assignments and assumptions referred to in ss. 2 above), except for required
filings under the Hart-Scott-Rodino Act and foreign pre-merger notification
requirements, which filings have been made.
4.5. Brokers' Fees. Neither Cabletron nor Acquisition has any Liability
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which the
Seller could become liable or obligated.
4.6. Registration Statement. The Form S-3 registration statement (the
"Registration Statement") pursuant to which the Cabletron Shares to be issued
pursuant to this Agreement will be registered with the Commission shall not, at
the time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the Commission, contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements included therein, in light of the circumstances under which they
were made, not misleading. The Registration Statement shall comply in all
material respects as to form with the requirements of the Securities Act and the
rules and regulations thereunder. Notwithstanding the foregoing, Buyer makes no
representation or warranty with respect to any information supplied by the
Seller or the officers and directors of the Seller and its Subsidiaries which is
<PAGE>
contained in, or furnished in connection with the preparation of, the
Registration Statement.
4.7. SEC Reports and Financial Statements. Cabletron has timely
filed with the Commission all forms, reports and other documents which it
believes were required to be filed by it since December 31, 1995 under the
Securities Exchange Act and the Securities Act (as such documents have been
amended since the time of their filing, collectively, the "Buyer SEC
Documents"). The Buyer SEC Documents, including, without limitation, any
financial statements or schedules included therein, at the time filed, complied
in all material respects with the applicable requirements of the Securities
Exchange Act or the Securities Act, as the case may be. The consolidated
financial statements of Buyer included in the Buyer SEC Documents comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto, have
been prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the Commission)
and fairly present in all material respects (subject, in the case of the
unaudited statements, to normal, recurring audit adjustments which are not
material in amount) the consolidated financial position of Buyer and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
4.8. No Material Adverse Change. Except as disclosed in Schedule
4.8, since the date of the most recent Form 10-Q filed by Buyer with the
Commission, Buyer has conducted its operations only in the Ordinary Course of
Business. There has not been any change which has resulted in a material adverse
effect on the business, assets, financial condition, and results of operations
of Buyer and no circumstances exists that would be reasonably likely to result
in such a material adverse effect.
4.9. Employee Benefits. The Buyer 401(k) Plan is qualified under Section
401(a) of the Code and its associated trust is exempt from Tax under section
501(a) of the Code and each has been administered in accordance with its terms
and with applicable law. All required contributions on account of the Buyer
401(k) Plan have been made or accrued by the Buyer in accordance in accordance
with GAAP. Section 4.8 of the Disclosure Schedule sets forth each and every
pending or, to the knowledge of Buyer, threatened lawsuit, claim or other
controversy relating to the Buyer 401(k) Plan, other than claims for benefits in
the ordinary course. Buyer has made the Buyer 401(k) Plan and related documents
available to Seller. The Company has received a favorable determination letter
from the IRS with respect to the Buyer 401(k) Plan.
5. Covenants. The Parties agree as follows:
<PAGE>
5.1. General. Each of the Parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
ss. 6 below and including the diligent defense in good faith of any action or
proceeding which may threaten the consummation of the transactions contemplated
hereby).
5.2. Notices and Consents. The Seller will give any notices to third
parties, and Buyer and Seller will use reasonable efforts to obtain any third
party consents, that are required to transfer the Acquired Assets to Buyer, and
any other consent that the Buyer may reasonably request. Each of the Parties
promptly will file Notification and Report Forms and related material that may
be required to be filed with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice under the Hart-Scott-Rodino
Act, and will make any further filings pursuant thereto that may be necessary or
requested in connection therewith. Notwithstanding any other provision of this
Agreement to the contrary, until any third party consent is obtained, or if an
attempted assignment thereunder would be ineffective or would affect the rights
of the Seller thereunder so that Buyer would not in receive all such rights,
Seller and Buyer will cooperate with each other to provide for the benefits of,
and to permit Buyer to assume all liabilities under, any such right, claim,
Permit or Contract any and all rights of Seller against a third party thereto
arising out of the breach or cancellation thereof by such third party; and any
transfer or assignment to Buyer by Seller of any property or property rights or
any contract or agreement which shall require the consent or approval of any
third party shall be made subject to such consent or approval being obtained.
5.3. Operation of Business. The Seller will not engage in any practice,
take any action, or enter into any transaction outside the Ordinary Course of
Business in respect of the NPB prior to Closing. Without limiting the generality
of the foregoing, prior to Closing, Buyer and Seller will use all reasonable
efforts to (A) keep available to Buyer the services of the NPB's present
employees, agents and independent contractors, and (B) preserve for the benefit
of Buyer the goodwill of the NPB's customers, suppliers and others having
business relations with it and (C) cooperate in establishing the terms of the
SCI Systems, Inc. contract.
5.4. Preservation of Business. The Seller will use all reasonable efforts
to keep the business and properties of the NPB substantially intact, including
its present operations, physical facilities, working conditions, and
relationships with lessors, licensors, suppliers, customers, and employees,
other than the substitution of the Acton Facilities for the Littleton facility
and as otherwise contemplated hereby or by other written agreements between the
parties.
5.5. Access. The Seller will permit representatives of the Buyer to
have access at all reasonable times, and in a manner so as not to interfere with
<PAGE>
the normal business operations of the NPB, to all premises, properties,
personnel, business, financial management records, contracts and documents of or
pertaining to the NPB.
5.6. Notice of Developments. Each Party will give prompt written notice
to the other Party of any specific events occurring subsequent to the execution
of this Agreement and prior to the Closing Date causing a breach of any of its
own representations and warranties in ss. 3 and ss. 4 above. Disclosure by any
Party pursuant to this ss. 5.6, however, shall be deemed to amend or supplement
the Disclosure Schedule for the purpose of determining whether the
representations and warranties of the Seller are true and correct as of the
Closing Date for all purposes, including for purposes of Section 9.2 and 9.3,
but excluding for purposes of satisfying the conditions set forth in Section
6.1(a).
5.7. Exclusivity. So long as Buyer (upon Seller's request)
re-affirms its intention to consummate the transactions contemplated hereby, the
Seller will not (and the Seller will not cause or permit any of its
Subsidiaries, officers, directors, agents or Affiliates to) (i) solicit,
initiate, or encourage the submission of any proposal or offer from any Person,
or enter into or consummate any transaction, relating to the acquisition of any
portion of the Acquired Assets (other than sales in the Ordinary Course of
Business) or (ii) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any Person to do or seek any of the
foregoing. The Seller will notify the Buyer immediately if any Person makes any
proposal, offer, inquiry, or contract with respect to any of the foregoing.
5.8. Insurance. The Seller shall assist (including by providing existing
title and/or title insurance information in Seller's possession or control to
Buyer) Buyer in obtaining title insurance policies at Buyer's expense.
5.9. Surveys. With respect to the Acton Facilities, the Seller shall
assist the Buyer in procuring a current survey at Buyer's expense, of the Acton
Facilities, prepared by a licensed surveyor and conforming to current ALTA
Minimum Detail Requirements for Land Title Surveys.
5.10. Employee Matters.
(a) Continued Employment.
(i) Buyer agrees to offer within five business
days of receiving Seller's final list of [*] Retained NPB
Employees employment to all of the NPB Employees (determined
as of a date two weeks prior to the Closing Date), up to a
maximum of [*] NPB Employees less the Retained NPB Employees.
"NPB Employees" means all of those individuals who, two weeks
prior to the proposed Closing Date, are actively employed by
Seller, any Affiliate of Seller or its Subsidiaries, as
* Confidential Treatment
<PAGE>
regular (not temporary) employees and who are among those
persons listed on Exhibit H on the date hereof. Seller shall
provide Buyer with a proposed list of [*] NPB Employees to be
retained by Seller (the "Retained NPB Employees") at least
three weeks prior to the proposed Closing Date. No persons
listed on the key employee list previously agreed to by the
Parties shall become Retained NPB Employees without the
consent of Buyer which shall not be unreasonably withheld,
conditioned or delayed. A final list of [*] Retained NPB
Employees shall be completed two weeks prior to the proposed
Closing Date. A certain number of the Retained NPB Employees
are to be included in the Digital Personnel Team pursuant to
the Reseller Agreement. For the purposes of this Section
5.10(a), any person who would otherwise be an NPB Employee,
but is, on the Closing Date: (i) on a leave of absence
approved by Seller or on disability, provided such leave of
absence is expected in good faith not to exceed thirteen weeks
in total, (ii) on a leave of absence pursuant to the Family
and Medical Leave of 1993 (the "FMLA") or similar applicable
non-U.S. law, (iii) on a leave of absence for military service
or (iv) as otherwise set forth in Schedule 5.10(a)
(collectively, "Permissible Leave of Absence") shall be
considered an NPB Employee. Notwithstanding anything to the
contrary contained herein, Buyer shall not otherwise be
required to offer employment to any individual who is not on
the active payroll on the Closing Date, excluding any person
on a Permissible Leave of Absence, including without
limitation any person whose leave has exceeded his/her
authorization or entitlement under the FMLA or similar
applicable non-U.S. law or who is otherwise on leave of
absence from which reinstatement is not guaranteed by law or
who is on unauthorized leave of absence or whose employment
has terminated or who has retired under the Seller Pension
Plan, before the Closing Date. Those to whom Buyer is
obligated to offer employment hereunder are hereafter referred
to as the "Offerees."
(ii) Seller shall provide Buyer with a list of
all NPB Employees with current work telephone numbers and home
addresses as soon as possible after the date of execution of
this Agreement. Within five business days of receiving
Seller's final list of [*] Retained NPB Employees, Buyer shall
offer employment in writing to all Offerees, such employment
to commence as of the Closing Date, except that, in the case
of any Offeree on a Permissible Leave of Absence, such
employment will commence following the Leave Expiration Date,
as hereafter defined. Buyer shall be required to hire only
those Offerees who on or before the Closing Date have not
explicitly refused the terms of employment offered by Buyer.
Offerees who actually commence employment with the Buyer are
hereafter referred to as the "Hired Employees" and,
individually, as a "Hired Employee". If Buyer hires an NPB
Employee after the Closing Date, except as provided in
paragraph (c) below, or any other individual previously
* Confidential Treatment
<PAGE>
employed by Seller or any Affiliate of Seller, such person
shall not constitute a Hired Employee. The terms and
conditions of Buyer's offer to hire Offerees shall be made in
writing and shall include pertinent conditions as determined
in the sole discretion of Buyer, subject to the following:
(A) Buyer will employ the Hired
Employees at will, except in those cases in which
Buyer and a Hired Employee enter into a written
contract of employment on or before the Closing Date;
provided, however, that Buyer agrees not to terminate
any Hired Employee other than for Cause during the
six month period immediately following the Closing
Date (the "Initial Employment Period"). For these
purposes, "Cause" shall mean materially deficient job
performance, material violation of any published
employment policy or practice of the Buyer or other
misconduct that could be harmful to the business,
interests or reputation of the Buyer or any
Subsidiary of Buyer for whom the Hired Employee is
providing services, each as determined by the Buyer
in its reasonable judgment.
(B) Each of the Hired Employees
shall initially be assigned to such position as shall
be determined by Buyer, but with responsibilities and
duties reasonably comparable to those of the Hired
Employee immediately prior to the Closing Date,
except as otherwise mutually agreed by Buyer and the
Hired Employee.
(C) Commencing on the date each
Hired Employee commences active employment with the
Buyer and except as otherwise expressly provided
herein, Hired Employees in the United States shall be
eligible to participate in all Employee Plans offered
to comparably situated employees of Buyer in the
United States to the extent such participation is
permitted by applicable plan terms and generally
applicable Buyer policies. For purposes of seniority
and vacation, personal and sick time accrual, each
Hired Employee shall receive credit with Buyer for
service while employed by Seller. With respect to
Overseas Employees, comparable provisions will be
made, in all cases in accordance with local law.
(iii) Buyer shall have no duty to hire any
Offeree who has not met, as of the date such Offeree's
employment was to begin pursuant to this Section 5.9(a), the
conditions set forth in Buyer's written offer of employment or
who has explicitly rejected Buyer's offer of employment or
resigned on or before the Closing Date. Such terms and
conditions may include the requirement that the Offeree report
<PAGE>
to work on such date, following the Closing Date, as is
specified in Buyer's written offer of employment, unless the
Offeree is on a Permissible Leave of Absence or, on the
Closing Date, is absent due to vacation or personal illness or
injury as hereinafter provided. An Offeree who has not
explicitly rejected Buyer's offer of employment or resigned,
but is on a Permissible Leave of Absence on the Closing Date
shall be treated as a Hired Employee for purposes of this
Agreement as of 12:01 a.m. of the day following the date the
leave expires (which date of expiration is elsewhere referred
to as the "Leave Expiration Date"), provided, however, that
(i) the Offeree had not explicitly rejected the Buyer's offer
of employment or resigned on or before the Closing Date; (ii)
the Offeree applies for instatement to employment with the
Buyer in a timely manner, in accordance with the terms of
his/her leave, applicable law and this ss.5.10; (iii) the
Offeree has met, as of the Leave Expiration Date, all other
applicable conditions precedent to employment; (iv) the
Offeree, in the case of leave due to the Offeree's personal
illness or injury, has been medically cleared to return to
active employment without restrictions or with restrictions
which constitute a reasonable accommodation under applicable
law, (iv) the termination of the leave is not the result of
the misconduct of or a failure to act by such Offeree, and (v)
for Offerees on disability or personal leave, that such
Offeree returns to work within 13 weeks of the onset of such
disability or leave (or as set forth in Schedule 5.10(a)). An
Offeree who has not explicitly rejected Buyer's written offer
of employment or resigned prior to Closing shall not be deemed
to have failed to report to work on the date specified in such
offer if the Offeree is absent due to vacation approved by
Seller in advance of the Closing Date and in accordance with
Seller's generally applicable policies or as a result of a
personal illness or injury which results in the Offeree being
absent from work for five (5) or fewer consecutive work days
on or after the Closing Date, but such Offeree shall not
become a Hired Employee until the date on which he/she
actually commences employment with the Buyer.
(iv) Seller shall terminate the employment of
or accept the retirement of each NPB Employee (other than
Retained NPB Employees) effective as of the date immediately
preceding the date such NPB Employee is to commence employment
with the Buyer as set forth herein.
(b) Employee Benefits.
(i) Defined Benefit Pension Plan. Each Hired
Employee will cease accruing benefits in the Seller Pension
Plan and the Restoration Pension Plan as of the Closing Date,
or such Hired Employee's Leave Expiration Date, if later,
(such applicable date hereinafter referred to as the "Plan
Eligibility Date"),and Seller shall take all necessary action
to ensure that each Hired Employee is fully vested in his or
<PAGE>
her accrued benefit as of the Plan Eligibility Date under the
Seller Pension Plan and the Restoration Pension Plan.
(ii) Defined Contribution Plan. As of the Plan
Eligibility Date of a Hired Employee, such Hired Employee will
cease contributing to the SAVE Plan, and the Seller shall take
all necessary action to ensure that such Hired Employee is
fully vested in his or her account balance under the SAVE Plan
and the Restoration SAVE Plan. Each Hired Employee shall be
eligible to participate in the Buyer 401(k) Plan upon
commencement of employment with Buyer in accordance with the
terms of the Buyer 401(k) Plan (including any term of general
application excluding a class of employees from eligibility
for such plan). The Buyer 401(k) Plan shall recognize as
service credit for purposes of eligibility for participation
and vesting all service credited under the SAVE Plan for a
Hired Employee as of the Hired Employee's Plan Eligibility
Date.
(iii) Transfer of Assets of the Save Plan. As
soon as practicable after the Closing Date, Seller will amend
its SAVE Plan to spin off and transfer an amount equal to the
account balances of the Hired Employees in the SAVE Plan
valued as of the most recent valuation date preceding the date
the transfer is made to the Buyer 401(k) Plan. Notwithstanding
anything in this subparagraph to the contrary, if Buyer is
unable in good faith to arrange for the transfer to the Buyer
401(k) Plan, such transfer shall not be executed until
appropriate arrangements are made. The transfer will be
accomplished in full compliance with the applicable provisions
of ERISA, the Code, and regulations and rulings promulgated
thereunder. Seller and Buyer agree to cooperate fully and to
file in a timely manner whatever reports, forms, and notices
as are necessary under applicable law as a result of, and to
effect, the transfer. The transfer will be accomplished by way
of a single transfer of plan assets constituting cash and
liabilities, except that any outstanding participant loans
from the SAVE Plan to Hired Employees that are not in default
may be transferred in kind to the extent not repaid prior to
the transfer. Seller agrees to provide to Buyer in a timely
manner all information for each Hired Employee, including
without limitation, accrued benefits under the SAVE Plan as of
the date of transfer, vesting service, and any other employee
information required by Buyer to determine benefits payable
from the Buyer 401(k) Plan.
(iv) Welfare Plans.
(A) Each Hired Employees shall
cease participating in all Welfare Plans, programs,
payroll practices or arrangements maintained by
Seller as of 12:01 a.m. on such Hired Employee's Plan
Eligibility Date, unless a different date is required
<PAGE>
by law. Under all of such plans, programs or
arrangements, a Hired Employee's service as
recognized under the comparable Seller plans,
programs, payroll practices and arrangements will be
credited as service with Buyer for purposes of
determining participation and benefit levels
thereunder to the same extent as credited by Seller,
unless otherwise prohibited by law or the terms of
any of Buyer's plans and programs that cannot
reasonably be amended.
(B) Buyer will offer coverage for
medical and dental benefits, group life insurance,
and short-term and long-term disability insurance
coverage as of 12:01 a.m. on the day following the
Plan Eligibility Date to each Hired Employee and his
or her dependents (as that term is defined by the
respective Buyer plans) in accordance with the terms
of the relevant Buyer benefit plans (including any
term excluding a class of employees from eligibility
for such plan), except to the extent provided for
herein or, with respect to Overseas Employees, as
required by law. Buyer will waive any applicable
waiting periods for participation under such plans
and will impose no limitation on coverage or
participation with respect to a pre-existing
condition of a Hired Employee or his or her
dependents, provided that such Hired Employee or
dependent of a Hired Employee has satisfied any
pre-existing condition limitation under the
comparable Seller Plan, and that such Hired Employee
or his or her dependent enroll in the relevant Buyer
benefit plan upon initial eligibility as specified in
such plans. Buyer and Seller shall coordinate (or
cause insurance carriers or third party
administrators to coordinate) medical benefits claims
for Hired Employees under their respective plans so
as to carry out the provisions above with respect to
Buyer's medical benefits and carry out the other
applicable provisions of this Agreement.
(v) Vacation. Except as otherwise required by
law, within 35 days after Closing, Seller shall pay each Hired
Employee, by lump sum payment, for the amount of their accrued
but unused vacation as of such Hired Employee's Plan
Eligibility Date to the extent such accrued vacation exceeds
ten days. Any remaining accrued vacation not paid for in this
manner shall be retained by such Hired Employees under Buyer's
vacation policy and shall be available for use by them
immediately. Each Hired Employee shall begin to accrue
vacation, in addition to such Hired Employee's retained
vacation accrual, under, and subject to, the Buyer vacation
policy as of the date such Hired Employee commences employment
with Buyer. Each Hired Employee with 20 or more years of
service with Seller as of such Hired Employee's Plan
Eligibility Date shall receive a beginning accrual, upon
commencement of employment with Buyer, of 5 days personal/sick
time and shall thereafter, along with all other Hired
<PAGE>
Employees, accrue sick/personal time under, and subject to,
the Buyer personal/sick time policy.
(vi) One-time Pension Replacement Payment.
Buyer shall make a cash payment to each Hired Employee upon
such Hired Employee's commencement of employment with Buyer in
an amount equal to the grossed-up value (assuming an effective
average tax rate of 35% for all Hired Employees) of the
product of 4% multiplied by such Hired Employee's
"compensation" (as determined under the Seller Pension Plan
and subject to the annual limit on compensation under Code
section 401(a)(17)) for the 1997 calendar year, provided that
such Hired Employee shall as a condition of employment with
Buyer agree to repay such amount in full to Buyer in the event
such Hired Employee's employment with Buyer terminates during
the six-month period immediately following the Closing Date.
(vii) Matching Contribution. As soon as
practicable following the close of the 1998 calendar year,
Buyer shall make a cash payment to each Hired Employee who is
employed by Buyer as of the last day of the 1998 calendar year
in an amount equal to the grossed-up value (assuming an
effective average tax rate of 35% for all Hired Employees) of
a 30% match on the first 6% of the Hired Employee's
compensation (as determined under the Buyer 401(k) Plan and
subject to the annual limit on compensation under Code section
401(a)(17)) deferred by the Hired Employee under the Buyer
401(k) Plan for the 1998 calendar year, provided, however,
that Buyer shall have no obligation to make any such cash
payment in the event that Buyer provides an equivalent level
of matching contribution (without regard to any gross-up) for
the benefit of Hired Employees under the Buyer 401(k) Plan.
(c) Termination at Law. In the event that any Hired
Employees outside the United States are entitled by law to severance
payments, Seller and Buyer shall share the costs of these severance
payments equally.
(d) Overseas Employees. On the Closing Date, Seller
shall transfer the employment of the Overseas Employees identified by
country on Exhibit F. To the extent that, by operation of law or any
agreement binding Seller, the transfer of employment of any Overseas
Employee requires the Buyer to assume any pension or similar obligation
related to an employee's tenure as an employee of Seller, Seller will
transfer to Buyer or its designated Subsidiary on the Closing Date the
monies necessary to fund the obligation or will otherwise make
available to the relevant Overseas Employees all of their accrued
benefits in their pension plans. If the Parties mutually agree that is
not desirable or it is not possible for Seller to transfer to Buyer the
employment of any Overseas Employee on the Closing Date because of a
Local Transfer Impediment, Seller and Buyer shall take all actions
reasonably necessary to eliminate the Local Transfer Impediment and
<PAGE>
Seller shall take all actions reasonably necessary to transfer the
employment of all Overseas Employees located in the affected country as
soon as possible.
(e) Prior to Closing, Seller shall disclose full and
accurate details of any employee benefit plans including pension and
insurance benefits payable to the Overseas Employees.
5.11. Access to Records.
(a) General. For a period of seven years after the
Closing Date, the Seller and its representatives shall have reasonable
access to any books and records of the NPB in the possession of Buyer
to the extent that such access may reasonably be required by the Seller
in connection with matters relating to or affected by the operations of
the NPB prior to the Closing Date. For a period of seven years after
the Closing Date, the Buyer and its representatives shall have
reasonable access to any books and records related to the NPB in the
possession of Seller to the extent that such access may reasonably be
required by the Buyer in connection with matters relating to or
affected by the operations of the NPB after the Closing Date. Such
access shall be afforded upon receipt of reasonable advance notice and
during normal business hours. If either Party desires to dispose of any
of such books and records prior to the expiration of such seven-year
period, such Party shall, prior to such disposition, give the other
Party a reasonable opportunity, at such other Party's expense, to
segregate and remove such books and records as such other Party may
select.
(b) Product-Related Claims. Seller agrees to use
reasonable efforts to provide Buyer prior to Closing with any written
materials in Seller's possession or control that are relevant to any
intellectual property infringement, epidemic field failure, product
liability or other material related claims previously made by third
parties concerning any Product. In the event that, in the future, any
of the Products becomes the subject of any intellectual property
infringement, epidemic field failure, product liability or other
material related claim, Seller agrees to use reasonable efforts to (i)
provide to Buyer any written materials or other information in Seller's
possession or control which are relevant to such claim, and (ii)
provide such other assistance as may be reasonably requested by Buyer.
Buyer shall reimburse Seller for all out-of-pocket expenses incurred by
Seller, subject to prior approval of major expenses and excluding any
expenses for which Seller is required to provide indemnification
pursuant to Section 9. Notwithstanding the foregoing, Seller shall have
no obligation to provide any materials or disclose any information
which it is prohibited by law or by contract from providing or
disclosing to Buyer.
<PAGE>
(c) Contracts. Seller agrees to use reasonable efforts
to deliver to Buyer prior to Closing a correct and complete copy of
each Contract not previously delivered to Buyer.
(d) Licensing Programs; Assigned Patents and
Trademarks. Seller agrees to use reasonable efforts to provide Buyer
prior to Closing with any written materials in Seller's possession or
control that are relevant to the Licensing Programs. Seller agrees to
use reasonable efforts to provide Buyer prior to Closing with any
written materials in Seller's possession or control that are relevant
to any infringement or alleged infringement of any Assigned Patent or
Assigned Trademark.
(e) Environmental Reports. The Seller shall deliver or
otherwise make available for inspection the Buyer true, complete and
correct copies as result of any reports, studies, analyses, test or
monitoring in Seller's possession, prepared since November 1, 1989 for
the Acton Facilities pertaining to Hazardous Materials in, on, beneath
or adjacent to said facilities or regarding the compliance with
applicable Environmental Laws as said facilities.
5.12. Transfer of Acquired Assets Located Outside the United
States. Buyer and Seller understand and agree that Acquired Assets located
outside the United States are the property of and Overseas Employees are
employed by Seller operating in the countries listed in Schedule 2.1(x) and
Exhibit F, and that transfers of such assets and of the employment of such
persons, as provided for in this Agreement, shall be made to Buyer operating in
each of the respective countries, the identity and address of which shall be
designated to Seller prior to the Closing Date. Buyer agrees that it will cause
its Subsidiaries to take all actions and execute and deliver any documents or
instruments necessary to complete the transfer of Acquired Assets located
outside of the United States and the employment of Overseas Employees on the
Closing Date.
5.13. Assistance in Effecting Transfer of Overseas Assets and
Employees. Buyer shall cooperate with Seller in their efforts to eliminate any
Local Transfer Impediment affecting the transfer of Acquired Assets or the
employment of any Overseas Employee. In the event of an occurrence of a
continuing Local Transfer Impediment, prior to the transfer of any Acquired
Assets or Overseas Employees, Seller and Buyer shall take all action reasonably
necessary to allow Buyer to enjoy the benefit of the Acquired Assets and the
Overseas Employees.
5.14. Bulk Sales Compliance. Buyer hereby waives compliance by Seller with
the provisions of the Bulk Sales Law of any state.
<PAGE>
5.15. Transfer Taxes. Seller and Buyer agree to share equally all Taxes
in connection with the transfer of the Acquired Assets hereunder other than
Taxes measured by or based upon either Party's income.
5.16. Manufacture of NPB Products. After the Closing, Seller agrees to
manufacture the Products at Seller's manufacturing facilities in Taiwan and Ayr,
Scotland [*] following Closing and at arm's length negotiated prices for up to
an additional twelve months. Seller shall provide a 12 months manufacturer's
warranty for products delivered from such facilities. Buyer agrees to assume a
certain manufacturing agreement currently being renegotiated between the Seller
and SCI Systems, Inc. provided the final agreement is acceptable to Buyer and
the term is not more than one year. Buyer agrees to advise Seller promptly after
the provision of the final agreement whether such agreement is acceptable to
Buyer.
5.17. Transitional Services. Seller will provide transitional payroll,
business systems, accounting and facilities services and leased facilities at
the pro rata fully loaded costs currently allocated for such services plus any
incremental costs incurred by Seller to offer such services to Buyer for up to
one year following the Closing or any closing in any foreign country.
5.18. Littleton Occupancy. Seller agrees that, if necessary, it
will enter into a building occupancy agreement with respect to the portion of
Littleton facility currently used in connection with the NPB to Buyer for up to
5 months following Closing, while the Acton Facilities are being re-fitted, at a
rate consistent with current fully loaded occupancy costs.
5.19. Acton Occupancy. Buyer agrees that, if necessary, it will
enter into a building occupancy agreement with respect to the Acton Facilities
for up to 5 months following Closing at a rate consistent with Seller's former
fully loaded occupancy costs.
5.20. Space for Telecommunications. Buyer agrees to arrange for
Seller to occupy at a nominal cost the portion of the larger of the Acton
Facilities which houses the MCI and Bell Atlantic telecommunications
infrastructures for as long as it houses such infrastructures.
5.21. Refit of Acton Facilities. Buyer has paid Seller as part of
the cash portion of the Purchase Price $2,000,000 towards the cost of refitting
the Acton Facilities for the anticipated use thereof by Buyer. Buyer and Seller
will agree on a general understanding regarding the nature and scope of the
refit work and Seller hereby agrees that it shall be responsible to cause such
refitting of the Acton Facilities to be undertaken and completed using
appropriate and responsible designers and contractors to complete such refit as
soon as reasonably possible. Throughout such refitting Seller shall communicate
with Buyer regarding details of the refitting and in cooperation with Buyer make
such changes to the refit work as is needed from time to time for Buyer's
anticipated use of the Acton Facilities. Buyer shall be responsible to pay for
* Confidential Treatment
<PAGE>
any cost of the refitting which exceeds $2,000,000. However, Seller agrees to
promptly advise Buyer as soon as Seller first anticipates that there is likely
to be any cost overrun or should a cost overrun occur. Thereafter Seller shall
proceed as directed by Buyer to suspend, alter or complete the refitting. Seller
shall provide a written accounting of funds expended on the refit and shall not
be entitled to any fee for its services with respect to assisting Buyer with or
overseeing the refitting.
5.22. Distributors and Resellers. Seller agrees to use reasonable efforts
to assist Buyer in negotiating prior to Closing satisfactory agreements with the
NPB's major third party distributors and resellers.
5.23. Retention Program. Seller shall grant the right to receive
bonuses of up to [*] to NPB Employees before the Closing Date as an incentive
for such employees to remain in the employment of Seller between the date hereof
and the Closing Date, to become Hired Employees and to remain in the employment
of Buyer (the "New Bonuses"). Seller has previously granted the right to receive
so-called "stay-put" bonuses to certain NPB Employees the payment of which are
presently expected to extend beyond the Closing Date (the "Existing Bonuses";
together with the New Bonuses, the "Bonuses"). Seller shall remain responsible
for the total amount of the Existing Bonuses and the New Bonuses paid to the NPB
Employees, regardless of whether such amounts are paid before or after such NPB
Employees become Hired Employees.
5.24. Licences. Prior to Closing, Seller shall disclose to Buyer the
existence of any grant of any license or sublicense of any rights or
modification of any rights under or with respect to, or entered into any
settlement regarding any infringements of its rights to, any Assigned
Intellectual Property all arising after the date hereof other than in connection
with the sale, manufacture or license of Products in the ordinary course.
5.25. Employment Contracts. Prior to Closing, Seller shall disclose to
Buyer the existence of any material employment contract or collective bargaining
agreement entered into, written or oral, or modification of the terms of any
existing such contract or agreement all arising after the date hereof.
5.26. Litigation. Prior to Closing, each Party shall disclose to the other
the existence of any of the following matters which arise after the date hereof:
any judicial or administrative actions, claims, suits, proceedings or
investigations pending or, to the Knowledge of the such Party, threatened, that
would be reasonably likely to result in a Material Adverse Effect or a material
adverse effect to the Buyer, as the case may be. Prior to the Closing, each
Party shall disclose to the other any notice to such party of any action seeking
to enjoin the consummation of the transactions contemplated hereby and to the
Knowledge of such Party, the existence of any Basis for any such action, claim,
suit, proceeding or investigation. Each Party agrees to use its reasonable
efforts to defend against any action, suit, or proceeding before any court or
* Confidential Treatment
<PAGE>
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would (i) prevent consummation of any of the transactions contemplated
by this Agreement or (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation.
5.27. Form 8-K Financial Statements. Seller agrees to engage its
outside accountants to assist, at the Buyer's expense, in the preparation and
audit of the financial statements required by Buyer for its 8-K. Buyer agrees to
notify Seller of the financial statements required within 5 days of the date
hereof. Provided that Buyer complies with the foregoing, Seller agrees to
deliver such financial statements within 60 days after the Closing Date. Such
financial statements shall be prepared in accordance with GAAP.
5.28. Registration Statement. Prior to Closing Buyer shall prepare
and file with the Commission the Registration Statement with respect to the
Cabletron Shares to be issued pursuant to this Agreement and shall use its
reasonable efforts to cause the Registration Statement to become effective upon
or promptly following Closing and remain effective for a period of at least 90
days (or such shorter period during which the Seller shall have sold all
Cabletron Shares), provided that the Buyer shall have the right to delay or
suspend such Registration Statement two times for an aggregate period of 60 days
under the following circumstances: (i) in the event of any event or circumstance
which necessitates the making of any changes in the Registration Statement, or
any document incorporated or deemed to be incorporated therein by reference, so
that, in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or any omission to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
or (ii) the Buyer is in possession of material information that it deems
advisable not to disclose in a Registration Statement. Buyer agrees not to issue
any securities of Cabletron pursuant to an effective registration statement
under the Securities Act for the first thirty days for which the Registration
Statement is effective. Seller shall have the right to assign the rights under
this ss. 5.28 to any purchaser of not less than one-third of the Cabletron
Shares from Seller in a private placement. For purposes of ss.5.28, the period
during which the Registration Statement is suspended or delayed shall be deemed
a period during which the Registration Statement is not effective.
5.29. Listing of Cabletron Shares. Buyer shall use all reasonable efforts
to cause the Cabletron Shares to be issued pursuant to this Agreement to be
approved for listing on The New York Stock Exchange (or the principal exchange
on which Cabletron's Common Shares are then trading).
5.30. Cabletron Shares. The Cabletron Shares will be imprinted with a
legend substantially in the following form:
<PAGE>
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended.
Such legend shall be removed from the certificates representing the Cabletron
Shares upon Seller's request in order to deliver any shares sold pursuant to the
Registration Statement or whenever the legend is not required by applicable law.
Prior to effectiveness of the Registration Statement, Seller must furnish the
Buyer before any transfer of Cabletron Shares with (i) a written opinion
reasonably satisfactory to the Buyer in form and substance from counsel
reasonably satisfactory to the Buyer by reason of experience to the effect that
the holder may transfer Cabletron Shares as desired without registration under
the Securities Act and (ii) a written undertaking executed by the desired
transferee reasonably satisfactory to the Buyer in form and substance agreeing
to be bound by the restrictions on transfer contained herein.
5.31. Future Assurances. From time to time after the Closing Date, at
the request of either Party hereto and at the expense of such Party, the Parties
hereto shall execute and deliver such other instruments of sale, transfer,
conveyance, assignment and confirmation and take such action as Buyer may
reasonably determine is necessary to transfer, convey and assign to Buyer, and
to confirm Buyer's title to or interest in the Acquired Assets, to put Buyer in
actual possession and operating control thereof and to assist Buyer in
exercising all rights with respect thereto. The Seller hereby constitutes and
appoints Buyer and its successors and assigns as its true and lawful attorney in
fact in connection with the transactions contemplated by this instrument, with
full power of substitution, in the name and stead of the Seller but on behalf of
and for the benefit of the Buyer and its successors and assigns, to demand and
receive any and all of the assets, properties, rights and business hereby
conveyed, assigned, and transferred or intended so to be, and to give receipt
and releases for and in respect of the same and any part thereof, and from time
to time to institute and prosecute, in the name of the Seller or otherwise, for
the benefit of the Buyer or its successors and assigns, proceedings at law, in
equity, or otherwise, which the Buyer or its successors or assigns reasonably
deem proper in order to collect or reduce to possession or endorse any of the
Acquired Assets and to do all acts and things in relation to the assets which
the Buyer or its successors or assigns reasonably deem desirable.
6. Conditions to Obligation to Close
6.1. Conditions to Obligation of the Buyer. The obligation of the Buyer to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) Representations and Warranties. The representations
and warranties set forth in ss. 3 above shall be true, correct and
<PAGE>
complete when made and shall be deemed to have been made again at and
as of the Closing Date and shall then be true, correct and complete,
except where such failure to be true, correct and complete would not,
in the aggregate, have a Material Adverse Effect. In addition, the
written disclosure pursuant to ss.5.6 by Seller shall be taken into
account in determining whether the representations and warranties of
the Seller are true and correct as of the Closing Date for all
purposes, including for purposes of Section 9.2 and 9.3, but excluding
for purposes of satisfying the condition set forth in this Section
6.1(a);
(b) Performance by Sellers. The Seller shall have
performed and complied with all of its covenants, agreements and
obligations hereunder in all material respects through the Closing;
(c) Consents. [Intentionally omitted];
(d) Absence of Litigation. No action, suit, or
proceeding shall be pending before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction which would in Buyer's good faith judgment be reasonably
likely to result in an unfavorable injunction, judgment, order, decree,
ruling, or charge (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect) that would (i) prevent
consummation of the transactions contemplated by this Agreement or (ii)
cause the transactions contemplated by this Agreement to be rescinded
following consummation;
(e) Anti-trust Matters. All applicable waiting periods
(and any extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated and any other material consents,
approvals or filings under any national, supranational or international
merger control law the absence of which would prohibit the consummation
of a material portion of the transactions contemplated under this
Agreement shall have been obtained or made;
(f) Certificates. The Seller shall have delivered to the
Buyer a certificate signed by an authorized officer to the effect that
each of the conditions specified above in ss. 6.1 are satisfied
in all respects;
(g) Additional Agreements. The Seller shall have
entered into agreements in form and substance set forth in Exhibits B,
C, D, G and H attached hereto and the same shall be in full force and
effect; and
(h) No Material Adverse Change. There shall not have
been any change which has resulted in a Material Adverse Effect and no
event has occurred or circumstance exists that would reasonably be
expected to result in such a Material Adverse Effect.
<PAGE>
The Buyer may waive any condition specified in this ss. 6.1 if it executes a
writing so stating at or prior to the Closing and such waiver shall not be
considered a waiver of any other provision in this Agreement unless the writing
specifically so states.
6.2. Conditions to Obligations of the Sellers. The obligation of the Seller
to consummate the transactions to be performed by them in connection with the
Closing is subject to satisfaction of the following conditions:
(a) Representations and Warranties. The representations
and warranties set forth in ss. 4 above shall be true, correct and
complete (in all material respects in the case of those representations
and warranties which are not by their express terms qualified by
reference to materiality) when made and shall be deemed to have been
made again at and as of the Closing Date and shall then be true,
correct and complete (in all material respects, in the case of those
representations and warranties which are not by their express terms
qualified by reference to materiality). In addition, the written
disclosure pursuant to ss.5.6 by Buyer shall be taken into account in
determining whether the representations and warranties of Buyer are
true and correct as of the Closing Date for all purposes, including for
purposes of Section 9.4, but excluding for purposes of satisfying the
condition set forth in this Section 6.2(a);
(b) Performance by Buyer. The Buyer shall have performed
and complied with all of its covenants, agreements and obligations
hereunder in all material respects through the Closing;
(c) Absence of Litigation. No action, suit, or
proceeding shall be pending before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction which would in Seller's good faith judgment be reasonably
likely to result in an unfavorable injunction, judgment, order, decree,
ruling, or charge (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect) that would (i) prevent
consummation of any of the transactions contemplated by this Agreement
or (ii) cause any of the transactions contemplated by this Agreement to
be rescinded following consummation;
(d) Consents. [Intentionally omitted.];
(e) Certificates. The Buyer shall have delivered to the
Seller a certificate signed by the Chief Financial Officer of Buyer to
the effect that each of the conditions specified above in ss.
6.2(a)-(c) is satisfied in all respects;
(f) Anti-trust Matters. All applicable waiting periods
(and any extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated and any other consents, approvals
or filings under any national, supranational or international merger
<PAGE>
control law the absence of which would prohibit the consummation of a
material portion of the transactions contemplated under this Agreement
shall have been obtained or made; and
(g) Additional Agreements. The Buyer shall have entered
into agreements in form and substance set forth in Exhibits B, C, D, G
and H attached hereto and the same shall be in full force and effect.
7. Confidentiality. Each Party will treat and hold as such all of the
Confidential Information and refrain from using any of the Confidential
Information except in connection with the transactions contemplated by
this Agreement or the Reseller Agreement. In the event that either
Party is requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose
any Confidential Information, such Party will notify the other Party
promptly of the request or requirement so that the other Party may seek
an appropriate protective order or waive compliance with the provisions
of this ss. 7. If, in the absence of a protective order or the receipt
of a waiver hereunder, such Party is, on the advice of counsel,
required to disclose any Confidential Information, such Party may
disclose the Confidential Information; provided, however, that such
Party shall use reasonable efforts to obtain, at the request of the
other Party, an assurance that confidential treatment will be accorded
to such portion of the Confidential Information required to be
disclosed as the other Party shall designate.
8. Other Post-Closing Agreements
8.1 Noncompetition.
(a) Seller agrees that, except as set forth below (1)
[*], it and its affiliates will not design or manufacture (or have
designed or manufactured for it) and (2) [*] it and its affiliates
will not private label with any Digital Brand any products which are
substantially similar in function and performance to:
(i) The NPB hardware products (and the
software incorporated therein) being transferred to Buyer,
including without limitation, those hubs, routers, switches,
bridges, structured wiring (DECconnect), adapters, remote
access devices (e.g., access concentrators) and terminal
servers being transferred, and logical extensions thereof (one
example of the "logical extension" of a product is a fast
ethernet switch to a gigabit ethernet switch);
* Confidential Treatment
<PAGE>
(ii) Buyer data networking and
telecommunication hardware products (and the software
incorporated therein) identified in the initial Product
Roadmap (as defined in the Reseller Agreement), and logical
extensions thereof;
(iii) Data networking or telecommunication
hardware products (and the software incorporated therein)
specifically designed for transporting data between two or
more computing devices, such as hubs, routers, switches,
bridges, structured wiring, adapters, remote access devices
(e.g., access concentrators) and terminal servers, and logical
extensions thereof.
(iv) NPB network management software being
transferred to Buyer (clearVISN), and logical extensions
thereof (other than embedded "client" modules that have no
standalone function); and
(v) Those portions of Buyer's SPECTRUM
software identified in the initial Product Roadmap which are
substantially similar to NPB software products and simple
extensions thereof,(including without limitation, clearVISN
and planned extensions of clearVISN) and logical extensions
thereof.
(b) Notwithstanding Section 8.1(a) above: (i) Seller
shall be permitted to embed networking capabilities of its own
development or from third parties in products which are not and are not
marketed primarily as data networking or telecommunication hardware
products. The parties acknowledge that products contemplated within
this exclusion include, but are not limited to, firewall and tunnel
products, proxy servers and extensions and follow-ons thereto, (ii)
Seller also shall be permitted to private label with any Digital Brand
and resell client and server products (which are not and are not
marketed primarily as data networking or telecommunication hardware
products) developed and manufactured by a third party OEM which contain
third party networking component products independently selected by the
OEM to meet Digital or customer specified form, fit, function,
performance and cost, so long as Digital specifications do not (1)
specify a required supplier or (2) result in effectively limiting the
OEM's choices to a single supplier (unless in either case the customer
specifically requested a specific supplier) of any networking
components to be incorporated into such OEM manufactured client or
server products.
(c) The covenants set forth in Section 8.1(a): (i) are
subject to pre-existing contractual obligations existing as of the
Closing Date and not transferred to Buyer under this Agreement
involving annual sales by Seller of not greater than $5 million for any
individual product and $15 million in the aggregate and (ii) do not
apply to any products in Seller's current portfolio being retained by
Seller (and logical extensions thereof) provided such products are not
substantially similar in function and performance to the products
described in Sections 8.1(a)(i) and (ii) above.
<PAGE>
(d) Seller further agrees that during the initial term
of the Reseller Agreement it will not directly or indirectly without
the prior written consent of Buyer, recruit, offer employment, employ,
engage as a consultant, lure or entice away or in any other manner
persuade or attempt to persuade any person to leave the employ of Buyer
who is a Hired Employee; provided, however, this provision shall not
apply to (i) any Hired Employee terminated by Buyer; (ii) any Hired
Employee whose employment with Buyer voluntarily terminates within two
years of the Closing Date after the later of twelve months from the
Closing Date or six months after cessation of such person's employment
with Buyer; and (iii) any Hired Employee whose employment with Buyer
voluntarily terminates more than two years after the Closing Date four
months after cessation of such person's employment with Buyer. Buyer
agrees to consider in good faith requests for exceptions to this
provision. Seller agrees that it will not directly or indirectly
without the prior written consent of Buyer, employ or engage as a
consultant any NPB Employee who is both not a Retained NPB Employee and
not a Hired Employee for one year following the later of separation or
the Closing Date.
8.2. Intellectual Property Licenses.
(a) Buyer hereby grants to Seller a non-exclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, use
and sell products and services using the Assigned Intellectual
Property, but excluding (i) the Assigned Trademarks except as permitted
under the Reseller Agreement, and (ii) the Software Source Code License
Agreement between Seller and Proteon Inc. dated June 30, 1995 and any
other Assigned License to the extent not sublicensable. The foregoing
license to Seller does not include the right of Seller to grant
sublicenses except (i) to a directly or indirectly wholly-owned
subsidiary of Seller for use consistent with this section, (ii) to a
third party solely for the purpose of manufacturing products or
performing services on behalf of Seller or a directly or indirectly
wholly-owned subsidiary of Seller bearing the Digital Marks, or (iii)
to Intel Corporation pursuant to the form of agreement referenced in
the Settlement Agreement between Seller and Intel Corporation dated
October 27, 1997.
(b) Seller hereby grants to Buyer a non-exclusive,
royalty-free, perpetual, irrevocable, worldwide license to make, use
and sell products and services using the Retained Patents. The
foregoing license to Buyer does not include the right of Buyer to grant
sublicenses, except (i) to a directly or indirectly wholly-owned
subsidiary of Buyer for use consistent with this section, or (ii) to a
third party solely for the purpose of manufacturing products or
performing services on behalf of Buyer or a directly or indirectly
wholly-owned Subsidiary of Buyer bearing the Digital Marks or Cabletron
Marks.
<PAGE>
(c) Seller hereby grants Buyer a limited,
non-exclusive, royalty-free, perpetual, worldwide license to Seller's
remaining Patents, trade secrets, know-how and other proprietary
information to the extent necessary to make, use or sell the Products
or the Products Under Development. The foregoing license to Buyer does
not include the right of Buyer to grant sublicenses, except (i) to a
directly or indirectly wholly-owned subsidiary of Buyer for use
consistent with this section, or (ii) to a third party solely for the
purpose of manufacturing Products or Products Under Development on
behalf of Buyer or a directly or indirectly wholly-owned Subsidiary of
Buyer.
(d) Each Party covenants that it shall not commence
litigation against the other for infringement of any Patent committed
prior to the Closing Date. The foregoing covenant does not prevent
either Party from initiating a compulsory counterclaim arising from an
infringement claim brought by the other.
(e) Each Party covenants that it shall not commence
litigation against the other for infringement of any product existing
as of the Closing Date of any Patent committed after the Closing Date.
The foregoing covenant does not prevent either Party from initiating a
compulsory counterclaim arising from an infringement claim brought by
the other.
(f) Seller hereby grants Buyer a non-exclusive,
royalty-free, worldwide license to copy, have copied, make derivative
works with respect to, use, distribute and sublicense the Retained
Software solely as part of the Products, the Products Under Development
and logical extensions thereof.
(g) In the event Seller ceases to manufacture or
otherwise supply to Buyer any integrated circuits or other components
used in the Products that cannot be obtained at a reasonable price from
another source, Buyer shall automatically have a license under Seller's
applicable intellectual property in order to produce such integrated
circuits or components solely for use in data and telecommunications
network hardware products sold by Buyer.
(h) The licenses granted in this section 8.4 may not be
transferred or assigned by either party without the consent of the
licensor except to a successor in connection with any sale of all or
substantially all of the assets of the licensee or the relevant
division or unit of the licensee, or in connection with any merger or
business combination where the licensee is not the surviving entity.
8.3. Chargeback Provisions.
(a) Buyer agrees to promptly forward any request by a
third party for payment of a Chargeback Item to Seller for payment by
Seller directly unless Buyer believes it is in its best interests to
<PAGE>
pay the Chargeback Item itself. Seller agrees to reimburse Buyer in
accordance with this Section 8.3 for any Chargeback Item that Buyer
pays up to $5,000 per item and up to an aggregate of $50,000 per month
for a period not to exceed six months after Closing. To the extent of
any reimbursement paid to Buyer for a Chargeback Item pursuant to this
ss. 8.3, Buyer shall not be entitled to any recovery under ss. 9.2.
The Chargeback Items shall mean any of the following liabilities of the
NPB existing at Closing: (i) market development fund commitments to
resellers, stock rotations commitments, pricing errors to customers,
warranty (including spares) on Products sold prior to the Closing Date,
sales returns on Products, and other similar commitments to customers
or resellers of the NPB; and (ii) miscellaneous reimbursement expenses
of Hired Employees. On no more than a monthly basis, Buyer shall submit
to Seller an itemized written list identifying in reasonable detail any
Chargeback Items for which Buyer seeks reimbursement by Seller. Seller
shall have 20 calendar days to dispute any item on such list. At the
end of such twenty day period, Seller agrees to pay Buyer within 10
business days for all undisputed Chargeback Items set forth on such
list. For any items on such list that remain in dispute, Buyer and
Seller shall attempt for five calendar days to mutually resolve such
disputes. At the end of such five day period, either Party may appoint
Deloitte & Touche, certified public accountants, to resolve the
remaining disputes related to the Chargeback Items. If Deloitte &
Touche is unavailable, the Parties will select a nationally-recognized
accounting firm by lot (after excluding their respective regular
outside accounting firms). The determination of any accounting firm so
selected will be set forth in writing and will be conclusive and
binding upon the Parties. In the event the Parties submit any disputes
to an accounting firm for resolution as provided in this section, the
Buyer and the Seller will share equally the fees and expenses of the
accounting firm. Within 10 business days after the determination of any
accounting firm so selected, Seller shall pay Buyer for any disputed
Chargeback Items which such accounting firm determined Seller was
liable to Buyer.
(b) Buyer and Seller agree to effect the payment of the
Bonuses to Hired Employees pursuant to this ss. 8.3(b). One week prior
to the date upon which each Bonus payment is to be made to Hired
Employees, Buyer shall deliver an invoice to Seller setting forth the
amount of such Bonuses to be paid on such date. Seller shall pay Buyer
the amount of such invoice by wire transfer at least two days before
the payment date. Assuming that Buyer has received the payment due from
Seller, Buyer shall pay the Bonuses to the applicable Hired Employees
on the payment date. Buyer shall not be entitled to indemnification
under ss. 9.2 for amounts received by Seller under this ss. 8.3(b).
Buyer shall promptly forward to Seller reasonably satisfactory evidence
of each Bonus payment.
8.4. Unique ASICs.
<PAGE>
(a) Seller presently produces certain ASICs
(Application Specific Integrated Circuits) at its Hudson, Massachusetts
facility that are used solely in the Products (the "Unique ASICs"). As
part of its agreement with Intel Corporation ("Intel"), Seller
presently anticipates that it will transfer the facilities and rights
to make the Unique ASICs to Intel. Seller will retain the right to
purchase the Unique ASICs from Intel.
(b) Seller agrees to supply such Unique ASICs to Buyer
pursuant to the Reseller Agreement. Seller agrees that neither it nor
its Affiliates will sell any of the Unique ASICs to any Person other
than Buyer.
(c) As promptly as possible following the closing of
Seller's transaction with Intel, Seller agrees to provide Buyer with a
written description of the procedure pursuant to which Seller can make
an end-of-life final purchase of such Unique ASICs, including the
amount of notice, if any Intel is required to provide to Seller and the
other parameters concerning the procedure. Seller agrees to notify
Buyer immediately in the event that Intel informs Seller that it
intends to cease production of a Unique ASIC in order that Buyer may
make a "last buy" purchase of such Unique ASIC. In connection with such
notice, Seller shall provide Buyer with a forecast for its purchases of
the Product incorporating such Unique ASIC for the remaining term of
the Reseller Agreement. In the event that Buyer purchases a sufficient
quantity of the Unique ASIC to satisfy the forecast (in addition to the
quantity that Buyer has purchased for its other needs), Seller agrees
to repurchase any such Unique ASICs purchased to satisfy Seller's
forecasted need that remain unused at the end of the term of the
Reseller Agreement at Buyer's cost.
8.5. Open Patents.
(a) With respect to the Assigned Patents identified in
Schedule 1.3 with an "*" (the "Open Patents"), Buyer acknowledges that
these patents relate to certain emerging network standards and that
Seller has made certain commitments to standards organizations
regarding the availability of nonexclusive licenses under the Open
Patents at reasonable royalty rates. Seller has provided Buyer with all
written materials related to Seller's interactions with standard
organizations regarding the Open Patents. Buyer agrees to honor
Seller's commitments to the standards organizations and to make
licenses to the Open Patents available in accordance with the policies
of the relevant standards organizations, provided that Buyer reserves
the right to use the Open Patents "defensively" against any Person
asserting that Buyer's products infringe patents held by such Person.
9. Indemnification
<PAGE>
9.1. Survival of Representations and Warranties. All of the representations
and warranties of the Buyer and the Seller (except for those contained in
ss.ss.3.3 (Authorization of Transaction) 3.6 (Title to Assets) and 3.14 (Taxes))
contained herein or in any document, certificate or other instrument required to
be delivered hereunder shall survive the Closing (even if the other Party knew
or had reason to know of any misrepresentation or breach of warranty at the time
of Closing) and continue in full force and effect until 15 months after the
Closing Date. The representations and warranties of Seller contained in
ss.ss.3.3 and 3.6 shall survive the Closing and shall continue in full force and
effect for 5 years after the Closing Date and in ss.3.14 shall survive the
Closing and shall continue in full force and effect for the applicable statute
of limitations. The termination of any representation and warranty shall not
affect any claim for breaches of representations or warranties (or any
allegation by a third party that, if established, would constitute a breach of a
representation or warranty) if written notice thereof is given to the breaching
party or parties prior to such termination date. All covenants and indemnities
of any Party in this Agreement or in any document or certificate delivered
hereunder shall, unless otherwise specifically provided therein, remain in full
force and effect forever. This Section 9 is subject to Section 5.6.
9.2. Indemnification Provisions for Benefit of the Buyer. Seller agrees to
indemnify, defend and hold harmless Buyer and its directors, officers and
Affiliates against and in respect of all Liabilities, obligations, judgments,
Liens, injunctions, charges, orders, decrees, rulings, damages, dues,
assessments, Taxes, losses, fines, penalties, expenses, fees, costs, amounts
paid in settlement (including reasonable attorneys' and expert witness fees and
disbursements in connection with investigating, defending or settling any action
or threatened action), arising out of any claim, damages, complaint, demand,
cause of action, audit, investigation, hearing, action, suit or other proceeding
asserted or initiated or otherwise existing in respect of any matter
(collectively, the "Losses") that results from:
(a) the breach of any representation or warranty made
by Seller herein, or resulting from any misrepresentation or breach of
warranty, all determined as if all materiality and knowledge provisions
were not contained therein (for this purpose only those qualifiers
containing the defined term "Knowledge" shall constitute knowledge
qualifiers), or nonfulfillment of any agreement or covenant of Seller
contained herein or in any agreement or instrument required to be
entered into in connection herewith or from any misrepresentation in or
omission from any schedule, document, certificate or other instrument
required to be furnished by Seller hereunder; provided, however, that
the Seller shall be liable under this ss.9.2(a) in respect of Losses if
the aggregate of such Losses exceeds $10,000,000 in which case the
Seller will be liable for all Losses relating back to the first dollar;
provided, that for Losses pursuant to this ss.9.2(a), individual claims
that are less than $200,000 shall be excluded for all purposes and,
provided, further, that the maximum liability of Seller for aggregate
Losses arising from the breach of any representations or warranties
shall not exceed $50,000,000;
<PAGE>
(b) any Liability of the Seller (including any
liability of the Seller existing prior to or resulting from actions
taken or events occurring prior to Closing), other than an Assumed
Liability (including any Liability that becomes a Liability of the
Buyer under any bulk transfer law of any jurisdiction, under any common
law doctrine of de facto merger or successor liability, or otherwise by
operation of law).
In the event that Seller may be obliged to indemnify Buyer under both subsection
(a) and subsection (b) of this ss. 9.2, their obligations under subsection (b)
shall be controlling and the limitations provided in ss.ss. 9.1 and 9.2(a)
hereof relating to their obligations in respect of Losses resulting from the
inaccuracy of any representation and warranty, or any misrepresentation, breach
of warranty or non-fulfillment of an agreement or covenant as described in ss.
9.2(a), shall not apply. Buyer shall provide Seller written notice for any claim
made in respect of the indemnification provided in this ss. 9.2, whether or not
arising out of a claim by a third party. Notwithstanding the foregoing, Assumed
Liabilities shall in no event be considered a Loss under this ss. 9.2.
9.3. Seller's Environmental Indemnification.
(a) Notwithstanding any other provision of this
Agreement to the contrary (other than ss. 5.6, ss. 9.7 and the proviso
of ss. 9.2 relating to a cap on total Losses), this ss. 9.3 shall
control and limit Seller's obligation to indemnify Buyer for
environmental matters. Seller shall defend, indemnify, and hold
harmless Buyer from and against any and all Losses to the extent it
relates to the NPB or the Acquired Assets resulting from: (i) cleanup
of Hazardous Materials Released, disposed of or discharged on or prior
to the Closing Date on or beneath the Acton Facilities on or prior to
the Closing Date; (ii) the failure of the Seller prior to the Closing
Date to be in compliance with any Environmental Laws in effect as of
and enforceable as of the Closing Date; (iii) the disposal, treatment,
storage or recycling of Hazardous Materials, on or prior to the Closing
Date, at any real property other than the real property being
transferred to Buyer as part of the Acquired Assets; and (iv) any
breach of the representations made in ss. 3.25 (claims for such breach
to be subject to the time and monetary limitations of ss.ss. 9.2 and
9.2(a) except to the extent that such claims are also subject to ss.
9.2(b).
(b) Notwithstanding subsection (a) above, Seller shall
only be required to defend, indemnify, and hold harmless Buyer to the
extent that: (i) cleanup of the Hazardous Materials is required by a
Governmental Entity or recommended by a Massachusetts Licensed Site
Professional ("LSP") as required under an applicable Environmental Law
that is in effect as of and is enforceable as of the Closing Date;
(iii) the Remediation Standards that must be met in order to satisfy
the requirements of the applicable Environmental Law or Governmental
Entity (A) are no more stringent than the Remediation Standards that
were in effect as of and were enforceable as of the Closing Date under
the applicable Environmental Law that is the source of the obligation
<PAGE>
to conduct a cleanup, or, where no such Remediation Standards had been
promulgated and were enforceable as of the Closing Date, Remediation
Standards that were applied, within one year prior to the Closing Date,
on a case-by-case basis, to properties that are most similar to the
property that is subject to a cleanup and (B) are also those
Remediation Standards that would be the least stringent permanent
solution (provided that this does not preclude a Class C Response
Action Outcome pursuant to the Massachusetts Contingency Plan, 310 CMR
40.000, where a permanent solution is not technically feasible) set
forth in the Remediation Standards that would be applicable given the
use of the property as of the date before the Closing Date; (iv) such
cleanup is for substances that were designated as Hazardous Materials
and would have been subject to cleanup under an applicable
Environmental Law had such cleanup been initiated on or before the
Closing Date; and (v) such cleanup is conducted using the most cost
effective methods for investigation, remediation and/or containment
consistent with applicable Environmental Law or the Requirements of a
Governmental Entity. To the extent that the Losses incurred in
connection with a cleanup covered by subsection (a) are in excess of
the Losses that would be incurred for a cleanup meeting the conditions
set forth in this subsection (b), Seller shall have no obligation to
indemnify Buyer for such excess Losses.
(c) Notwithstanding anything to the contrary herein,
Seller and Buyer covenant to each other that the Seller indemnity in
this ss. 9.3 shall be subject to the following limitations: (i) if the
cost of cleanup or correcting a non-compliance with law subject to
indemnify by Seller are increased after the Closing Date due to an or
omission by a person other than Seller or Seller's agents, Seller shall
not be responsible for any such increase in costs incurred; (ii) Seller
shall not be responsible for any capital improvements and repairs and
modifications to capital improvements associated with the property or
the facilities of the Company made after the Closing Date; (iii) if
Seller is undertaking performance of its obligations pursuant to this
ss. 9.3, Seller shall not be responsible for the costs associated with
Buyer's oversight of Seller's performance, including the cost of
Buyer's oversight of Seller's legal counsel, consultants, or employees;
and (iv) Seller shall not be responsible for any costs that are
incurred by Seller in performing it indemnity obligations under this
ss. 9.3 due to any change related to the property or the Company
resulting or arising from the closure or sale of a facility or
business, the construction of new structures or equipment, a
modification to existing structures or equipment, the excavation or
movement of soil, or a change in use of the facilities from
manufacturing to any other use.
(d) To the extent that Buyer makes a claim for breach
of the representation set forth in ss. 3.25, or for a non-compliance
with applicable Environmental Law, and such matter relates to a cleanup
of Hazardous Materials at the Acton Facilities, the provisions of this
ss. 9.3 shall govern the rights and obligations of the parties.
<PAGE>
(e) Indemnification shall be available under this ss.
9.3 only with respect to those specific claims for which Buyer has
provided written notice to Seller by the fifth anniversary of the
Closing Date. Such notice must include, based on reasonably available
evidence, the following: (i) location; (ii) the extent of contamination
and the impacted media, if known; and (iii) a copy of any notices filed
with or received from any Governmental Entity, LSP or other Person, or,
if no such notice has been filed or received, the basis upon which the
claimant seeks indemnification. Claims brought pursuant to this ss. 9.3
shall be subject to the procedures for indemnification set forth in ss.
9.5 if such claims are third party claims. Buyer shall be responsible
for managing any cleanup of the Acton Facilities or any matters
relating thereto, notwithstanding Seller's indemnification obligations
pursuant to this Section 9.3. Buyer agrees that: (i) it shall promptly
provide copies to Seller of all notices, correspondence, draft reports,
final reports, intended submissions and final submissions, proposed and
final workplans, governmental responses thereto, and other documents or
information of similar import; (ii) it shall afford Seller a reasonable
opportunity to comment and consult on any such intended submissions,
draft reports, proposed workplans and similar documents; (iii) it shall
provide Seller notice of any meetings with the governing regulatory
authority concerning any matter subject to the indemnity hereunder,
including, but not limited, any meetings related to the establishment
of applicable Remediation Standards; (iv) it shall provide Seller
reasonable notice of any intended field work to be conducted at the
Acton Facilities, shall allow Seller and its agents, employees,
consultants, attorneys and other representatives to observe and monitor
such field work and to obtain split samples at Seller's request; and
(v) it shall promptly provide Seller with the results of any such field
work. Seller shall be responsible for its own costs and expenses with
respect to its participation in any matters covered hereunder.
9.4. Inbdemnification Provisions for Benefit of the Seller. Buyer hereby
agrees to indemnify, defend and hold harmless Seller and its directors, officers
and Affiliates against and in respect of all Liabilities, obligations,
judgments, Liens, injunctions, charges, orders, decrees, rulings, damages, dues,
assessments, Taxes, losses, fines, penalties, damages, expenses, fees, costs,
amounts paid in settlement (including reasonable attorneys' and expert witness
fees and disbursements in connection with investigating, defending or settling
any action or threatened action) arising out of any claim, complaint, demand,
cause of action, audit, investigation, hearing, action, suit or other proceeding
asserted or initiated in respect of any matter that results from (i) the
inaccuracy of any representation or warranty made by Buyer herein, or resulting
from any misrepresentation, breach of warranty, all determined as if all
materiality and knowledge qualifiers were not contained therein (for this
purpose, only those qualifiers containing the defined term "Knowledge" shall
constitute knowledge qualifiers) or nonfulfillment of any agreement or covenant
of Buyer, contained herein or in any agreement or instrument required to be
entered into in connection herewith or from any misrepresentation in or omission
from any schedule, document, certificate or other instrument required to be
furnished by Buyer hereunder; provided, however, that the Buyer shall be liable
<PAGE>
under this ss.9.4(i) in respect of Losses if the aggregate of such Losses
exceeds $2,500,000 in which case the Buyer will be liable for all Losses
relating back to the first dollar; provided, that individual claims that are
less than $200,000 shall be excluded from the calculation of Losses from this
ss.9.4(i), and, provided, further, that the maximum liability of Buyer for
aggregate Losses arising from breach of representations or warranties shall not
exceed $50,000,000; and (ii) any Liability of the Buyer, including without
limitation, any Assumed Liability.
In the event that Buyer may be obliged to indemnify Seller under both subsection
(i) and subsection (ii) of this ss. 9.4, their obligations under subsection (ii)
shall be controlling and the limitations provided in ss.ss. 9.1 and 9.4(i)
hereof relating to their obligations in respect of Losses resulting from the
inaccuracy of any representation and warranty, or any misrepresentation, breach
of warranty or non-fulfillment of an agreement or covenant as described in ss.
9.4(i), shall not apply. Seller shall provide Buyer written notice for any claim
made in respect of the indemnification provided in this ss. 9.4, whether or not
arising out of a claim by a third party.
9.5. Matters Involving Third Parties.
(a) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim")
which may give rise to a claim for indemnification against any other
Party (the "Indemnifying Party") under this ss. 9, then the Indemnified
Party shall promptly notify each Indemnifying Party thereof in writing;
provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying
Party from any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party forfeits any rights or defenses.
(b) Any Indemnifying Party will have the right to
defend the Indemnified Party against the Third Party Claim with counsel
of its choice reasonably satisfactory to the Indemnified Party so long
as (i) the Indemnifying Party notifies the Indemnified Party in writing
within 15 days after the Indemnified Party has given notice of the
Third Party Claim that the Indemnifying Party will indemnify the
Indemnified Party from and against the entirety of any Losses the
Indemnified Party may suffer resulting from, arising out of, relating
to, in the nature of, or caused by the Third Party Claim to the extent
it is required to do so, (ii) the Indemnifying Party provides the
Indemnified Party with evidence acceptable to the Indemnified Party
that the Indemnifying Party will have the financial resources to defend
against the Third Party Claim and fulfill its indemnification
obligations hereunder, and (iii) the Indemnifying Party conducts the
defense of the Third Party Claim actively and diligently and the
representation of both parties by the same counsel is not inappropriate
due to actual or potential conflicts of interest between them. The
Indemnified Party agrees to cooperate fully with the Indemnifying Party
<PAGE>
and its counsel in the defense against any Third Party Claim, and to
the extent that any Party assumes the defense of any Third Party Claim
as provided herein, such Party agrees to conduct the defense of such
Claim actively and diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with ss. 9.5(b) above,
(i) the Indemnified Party may retain separate co-counsel at its sole
cost and expense and participate in the defense of the Third Party
Claim, (ii) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnifying Party
(which consent shall not unreasonably be withheld), (iii) the
Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim unless
written agreement is obtained releasing the Indemnified Party from all
liability thereunder, and (iv) the Indemnifying Party will not consent
to the entry of any judgement or enter into any settlement with respect
to a Third Party Claim seeking an injunction or other equitable relief
on the sale of a product of the Indemnified Party that generated
$10,000,000 or more of revenue for the Indemnified Party in the twelve
months from the date of such proposed consent, without the prior
written consent of the Indemnified Party (which consent shall not
unreasonably be withheld, conditioned or delayed).
(d) In the event any of the conditions in ss. 9.5(b)
above is or becomes unsatisfied, however, (i) the Indemnified Party may
defend against any Third Party Claim, and will not consent to the entry
of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of the Indemnifying
Party, which shall not be unreasonably withheld; (ii) the Indemnifying
Parties will reimburse the Indemnified Party promptly and periodically
for the costs of one counsel in defending against the Third Party Claim
(including attorneys' fees and expenses), and (iii) the Indemnifying
Parties will remain responsible for any Losses the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature
of, or caused by the Third Party Claim to the fullest extent provided
in this ss. 9.
9.6. Exslusive Remedy. Except for remedies of specific performance,
the foregoing indemnification provisions shall be the exclusive remedy of the
Buyer and the Seller with respect to the transactions contemplated by this
Agreement; provided, however, the limitation on remedies provided in this ss.
9.6 shall in no way limit either Parties remedies under the Reseller Agreement.
9.7. Tax Effect. The amount of Losses payable by the Seller
pursuant to this ss. 9 as a result of a claim by the Buyer shall be (i) reduced
by the amount of any Tax benefit actually realized by the Buyer (for itself or
on behalf of the Indemnified Party) and (ii) increased by the amount of any
increased Taxes (including by reason of reduced amortization deductions)
actually incurred by the Buyer (for itself or on behalf of the Indemnified
Party) as a result of Seller's indemnification payment of Losses for such
<PAGE>
claims. The parties agree that to the extent allowed by applicable law, the
Seller's indemnification payment of Losses shall be reported as an adjustment to
the Purchase Price.
10. Termination
10.1. Termination of Agreement. Certain of the Parties may terminate this
Agreement as provided below:
(a) the Parties may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(b) either Party may terminate this Agreement if the
Closing shall not have occurred prior to February 28, 1998; provided,
however, that this date shall be automatically extended to March 31,
1998 in the event that the FTC or DOJ issues a second request with
respect to filing under the Hart-Scott-Rodino Act;
(c) either Party may terminate this Agreement if
consummation of the transactions contemplated hereby would violate any
nonappealable final order, decree or judgment of any court or
governmental body having competent jurisdiction; or
(d) either Party may terminate this Agreement if the
other Party shall have materially breached any representation, warranty
or covenant contained in this Agreement and such breach would
reasonably be expected to have a Material Adverse Effect, in the case
of Seller, or a material adverse effect on the aggregate benefits
Seller would receive hereunder as contemplated hereby in the case of
Buyer and such breach shall not be amenable to cure.
10.2. Effect of Termination. If any Party terminates this Agreement
pursuant to ss. 10.1 above, all rights and obligations of the Parties hereunder
shall terminate without any Liability of any Party to any other Party except for
any Liability of any Party then in breach and except as set forth in ss. 10.3.
10.3. Termination Fee. If either Party shall terminate this
Agreement for any reason whatsoever, Buyer shall pay a fee of $7,500,000 in cash
to Seller within one business day after such termination. Such fee shall not be
subject to set-off or any other claim and is in addition to all other remedies
available and is payable regardless of fault.
<PAGE>
11. Miscellaneous.
11.1. Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior approval of the other
Party; provided, however, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will provide the other Party with the opportunity to review in
advance the disclosure).
11.2. No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
11.3. Entire Agreement. This Agreement (including the documents
referred to herein), between the Parties and any other written agreements
entered into between the Parties contemporaneously herewith constitute the
entire agreement between the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties, written or oral, to
the extent they related in any way to the subject matter hereof.
11.4.Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party; provided, however, that the Buyer may (i) assign any or all
of its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one or more of its Affiliates to perform its obligations hereunder;
provided that Buyer shall continue to be liable hereunder.
11.5. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.6. Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.7. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given (i) upon
confirmation of facsimile, (ii) one business day following the date sent when
sent by overnight delivery and (iii) five business days following the date
mailed when mailed by registered or certified mail return receipt requested and
postage prepaid at the following address:
<PAGE>
If to the Seller:
Chris Sullivan
Vice President
Digital Equipment Corporation
111 Powdermill Road
Maynard, Massachusetts 01754-1418
Copy to:
Gail Mann
Vice President, Asst. General Counsel
111 Powdermill Road
Maynard, Massachusetts 01754-1418
If to the Buyer:
Cabletron Systems, Inc.
35 Industrial Way
Rochester, New Hampshire 03867
Attention: Donald B. Reed
Copy to:
David A. Fine
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Tel: 617-951-7000
Fax: 617-951-7050
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
<PAGE>
11.8. Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the Commonwealth of Massachusetts
without giving effect to any choice or conflict of law provision or rule
(whether of the Commonwealth of Massachusetts or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
Commonwealth of Massachusetts.
11.9. Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Seller. The consummation of the transactions contemplated by this
Agreement at Closing shall not be deemed to have resulted in a waiver of any
breach of a representation or warranty (whether or not such party knew or had
reason to know of such misrepresentation or breach of warranty) unless such
waiver was expressly set forth in a writing signed by Buyer and Seller. No
waiver by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
11.10. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.11. Expenses. Except as otherwise provided herein, each of the
Buyer and the Seller will bear his or its own costs and expenses (including
legal and accounting fees and expenses) and the Seller will bear all of the
costs and expenses (including legal and accounting fees and expenses) of the NPB
incurred in connection with this Agreement and the transactions contemplated
hereby.
11.12. Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. Nothing in the
Disclosure Schedule shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the Disclosure Schedule identifies
the exception with particularity and describes the relevant facts in detail.
Without limiting the generality of the foregoing, the mere listing (or inclusion
of a copy) of a document or other item shall not be deemed adequate to disclose
an exception to a representation or warranty made herein (unless the
representation or warranty has to do with the existence of the document or other
item itself). The Parties intend that each representation, warranty, and
<PAGE>
covenant contained herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant contained herein in any
respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty, or covenant.
11.13. Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
11.14. Specific Performance. Each of the Parties acknowledges and agrees
that the other Party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter in addition to any other remedy to which it may be
entitled, at law or in equity.
11.15. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW WHICH CANNOT BE WAIVED, THE SELLER HEREBY WAIVES, AND COVENANTS
THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY
RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT TO ANY ISSUE, CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION ARISING OUT OF OR PASSED UPON THIS AGREEMENT OR THE
SUBJECT MATTER HEREOF, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER
SOUNDING IN TORT OR CONTRACT OR OTHERWISE.
<PAGE>
*****
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
CABLETRON SYSTEMS, INC.
By: /s/ Donald B. Reed
Name: Donald B. Reed
Title: President
CTRON ACQUISITION, INC.
By: /s/ Donald B. Reed
Name: Donald B. Reed
Title: President
DIGITAL EQUIPMENT CORPORATION
By: /s/ Harold D. Copperman
Name: Harold D. Copperman
Title: Senior Vice President and
General Manager
Products Division
<PAGE>
EXHIBIT 2.1
CABLETRON SYSTEMS, INC.
DISCLOSURE SCHEDULE
INDEX
Exhibits
Exhibit A - Initial Statement of Assets
Exhibit B - Form of Reseller Agreement
Exhibit C - Assignment and Assumption Agreement
Exhibit D - Bill of Sale
Exhibit E - Statements of Operations
Exhibit F - List of NPB Employees
Exhibit G - Assignment of Patents and Patent Applications
Exhibit H - Assignment of Trademarks, Trademark Applications and
Goodwill
Schedules
Schedule 1.1 (a) - Accounting Convention
Schedule 1.1 (b) - Agreed-Upon Procedures
Schedule 1.2 - Assigned Licenses
Schedule 1.3 - Assigned Patents
Schedule 1.4 - Assigned Trademarks
Schedule 1.5 - Products
Schedule 1.6 - Retained Patents
<PAGE>
Schedule 1.7 - Licensing Programs
Schedule 2.1(a) - Encumbrances on Acquired Assets
Schedule 2.1(h) - Contracts
Schedule 2.1(i) - Permits
Schedule 2.1(x) - International Assets
Schedule 4.8 - Exceptions to Representation 4.8
Schedule 5.10(a) - Disability Schedule
Disclosure Schedule of Cabletron Systems, Inc.
Disclosure Schedule of Digital Equipment Corporation
<PAGE>
8 December 1997
Mr. Donald B. Reed, President
Mr. David Kirkpatrick, Chief Financial Officer
Cabletron Systems, Inc.
36 Industrial Way
Rochester, NH 03866-5005
Dear Don and David:
This letter agreement is being furnished to Cabletron Systems, Inc. and Ctron
Acquisition, Inc. (collectively, the "Buyer") by Digital Equipment Corporation
("Seller") to amend the Asset Purchase Agreement ("Agreement") between the Buyer
and Seller dated November 24, 1997. All terms used herein shall have the
meanings ascribed to them in the Agreement.
The Agreement is herby amended as follows:
1. Section 1 of the Agreement is amended by adding the following definition
"Adjusted Cabletron Stock Price" means the average, rounded to th nearest
one-thousandth of a dollar ($0.001), of the midpoints of the high and low
sales prices of Cabletron Common Stock as reported on the New York Stock
Exchange Composite Tape (as reported by the eastern edition of The Wall
Street Journal or, if not reported thereby, as reported by another
authoritative source as mutually agreed by the Buyer and the Seller) for
the ten (10) consecutive trading days during the period ending on the
trading day immediately preceding the Closing Date.
2. Section 2.5(a) of the Agreement is amended in its entirey to read as
follows: Cash At the Closing, (x) $91,800,000 in cash (subject to
adjustment pursuant to Section 2.6) and (y) in the event of the Cabletron
Stock Price is greater than the Adjusted Cabletron Stock Price, an
additional amount of cash consideration equal to the amount by which the
difference, if any, between the aggregate value of the Cabletron Shares
determined with reference to the Cabletron Stock Price and the value of
the Cabletron Shares determined with refernce to the Adjusted Cabletron
Stock Price exceeds $7,500,000, all of such cash payable by wire transfer
to the Seller in accordance with instructions of the Seller given to the
Buyer prior to the Closing.
3. The first paragraph of Section 2.5(c)(ii) of the Agreement is amended
in its entirety to read as follows: Second Year Product Credits. Subject
to adjustment pursuant to Section 2.6, (x) $125,000,000 is Second Year
Product Credits and (y) in the event the Cabletron Stock Price is greater
than the Adjusted Cabletron Stock Price, a dollar amount of additional
Second Year Product Credits, equal to the differnce, if any, between the
aggregrate value of the Cabletron Shares detemined with reference to the
Cabletron Stock price and the value of the Cabletron Shares determined
with reference to the Adjusted Cabletron Stock Price, up to $7,500,000.
4. Section 2.5 of the Agreement is amended by adding thereto the following
Section 2.5(d): At Buyer's option, in lieu of delivering to Seller at
Closing the Cabletron Shares, Buyer may elect to furnish Seller, so long as
Buyer so notifies Seller at least two business days prior to Closing, with
additional cash consideration, payable in accordance with the provisions
of Section 2.5(a), equal to the value of the Cabletron Shares detemined
with reference to the Adjusted Cabletron Stock Price.
Except as expressly modified herein, the Agreement shall remain in full force
and effect in accordance with its terms.
Pleeas indicate your agreement with the terms hereof by dating and signing the
duplicate copy of this letter enclosed and returning it by facsimile, followed
originally executed copy, to Gail S. Mann, Vice President, Assistant General
Counsel, Secretary and Clerk at Digital Equipment Corporation, 111 Powdermill
Road (MSO2-3/F13), Maynard, MA 01754. facsimile number 978-493-7310.
Sincerely,
Digital Equipment Corporation
By: /s/ Harold D. Copperman
Harold D. Copperman
Senior Vice President and General Manager
Products Division
Acknoweledged and agreed to:
Cabletron Systems, Inc.
CTRON Acquisition, Inc.
By: /s/ Donald B. Reed
Donald B. Reed
President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>RESELLER AND SERVICES AGREEMENT
<TEXT>
EXHIBIT 10.1
RESELLER
AND
SERVICES AGREEMENT
between
SELLER
and
DIGITAL
EQUIPMENT
CORPORATION(1)
(1) Confidential Treatment has been requested as to certain portions of this
agreement. The term "Confidential Treatment" and the mark (*) is used throughout
this agreement in order to indicate that material has been omitted and
separatley filed with the Securities and Exchange Commission.
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS 2
2. TERM AND TERMINATION 7
3. PRODUCT PURCHASING REQUIREMENTS AND PROCEDURES 8
4. PRICING AND PRICE CHANGES 13
5. DELIVERY OF PRODUCTS 15
6. QUALITY, INSPECTION, AND ACCEPTANCE 18
7. PAYMENT 19
8. PRODUCT SERVICES 19
9. DIGITAL PRODUCT BRANDING 22
10. SELLER'S SALE RESTRICTIONS/PARTIES'
SALES COMPENSATION 26
11. DOCUMENTATION 27
12. PROPRIETARY RIGHTS AND LICENSES 27
13. PRODUCT LOANS, BETA SITES, MODELING 29
14. TECHNICAL SUPPORT BY SELLER 29
15. PERSONNEL 30
16. TRAINING 32
17. END OF LIFE 33
<PAGE>
18. ENGINEERING AND FIELD CHANGE ORDERS 33
19. SALES AND RELATIONSHIP PLANNING AND ENGAGEMENT 34
20. MARKETING 35
21. WARRANTY 35
22. STOCK ROTATION 37
23. ESCROW DEPOSIT 37
24. SUPPLY BY DIGITAL 38
25. LIMITATION OF LIABILITY AND REMEDIES 38
26. CONFIDENTIAL INFORMATION AND AUDITS 39
27. COMPLIANCE WITH LAWS 41
28. INDEMNIFICATION AND INSURANCE 41
29. NOTICES 43
30. FORCE MAJEURE 44
31. GENERAL 44
<PAGE>
RESELLER AND SERVICES AGREEMENT
This Agreement ("Agreement") made and effective as of November
24, 1997 ("Effective Date") between Cabletron Systems, Inc., having a principal
place of business at 35 Industrial Way, Rochester, New Hampshire 03867 (together
with all Subsidiaries collectively referred to as "Seller") and DIGITAL
EQUIPMENT CORPORATION, having a principal place of business at 111 Powdermill
Road, Maynard, Massachusetts 01754 (together with all Subsidiaries collectively
referred to as "Digital").
W I T N E S S E T H:
WHEREAS, Seller is in the business of, among other things,
providing networking technology products to its customers and Digital is in the
business of, among other things, providing systems integration, network
management, technology deployment, and outsourcing services to its clients;
WHEREAS, Seller and Digital are entering into an asset
purchase agreement ("Asset Purchase Agreement") which (i) involves the transfer
of assets associated with its networking product business; and (ii) defines the
roles and responsibilities of the parties hereto, and the requirements of each
in developing, marketing, selling and supporting a set of defined products;
WHEREAS, a condition of the Asset Purchase Agreement is the
execution of certain ancillary agreements including this Agreement;
WHEREAS, Seller wishes to appoint Digital as a reseller of
certain products on certain terms;
WHEREAS, Seller wishes to market and support Digital as its
Strategic Network Services Partner and Digital wishes to market and support
Seller as its Strategic Network Product Partner;
WHEREAS, Seller shall provide certain products and services to
Digital and third parties; and
WHEREAS, the parties wish to describe their respective rights
and obligations herein.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants, promises, and undertakings hereinafter set forth, Digital and
Seller hereby agree as follows:
<PAGE>
1.. DEFINITIONS
Capitalized terms contained herein but not defined shall
have the meaning set forth in the Asset Purchase Agreement.
1.1. "Authorized Warranty Service Provider" shall mean any Person to which
either party subcontracts some or all of its service obligations.
1.2. "Baseline ESF Percentage" shall mean the percentage of sales of NPB
Products to Shared Resellers during the four (4) quarters prior to the
Closing Date which represents sales by Digital Enterprise Sales Force
(as compared to sales by NPB channel sales personnel to such Shared
Resellers), as mutually agreed between the parties prior to Closing.
1.3. "Business Day" shall mean Monday through Friday, excluding local
holidays.
1.4. "Closing Date" shall mean the closing date as defined in the Asset
Purchase Agreement.
1.5. "Contract Services" shall mean all hardware/Software services that
Digital provides to Customers that are not Warranty Services.
1.6. "Control" and the correlative terms "Controlling," "Controlled By" and
"Under Common Control With" for purposes of this definition means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through
ownership of voting securities or by contract, or otherwise, but only
during the period of such ownership or control.
1.7. "Customers" shall mean purchasers of Products and/or Services.
1.8. "DEC Formative Marks" shall mean the marks set forth on Appendix
2 to Schedule 9.1.1.
1.9. "Demand Forecast" shall mean a written demand forecast produced by
Digital and delivered to Seller that specifies the amount of Products
Digital expects to purchase over at least the succeeding twelve months,
with dollar volumes specified on a monthly basis.
1.10. "Digital-Branded Products" shall mean all NPB Products, all products
set forth on Schedule 9.6, and all other Products to which the parties
agree, to be sold under the Digital Marks.
<PAGE>
1.11. "Digital Marks" shall mean the Digital Brand, the DEC Formative Marks,
and the Relationship Logo set forth on Schedule 9.1.1 and all
Appendices thereto, as the same may be amended by Digital from time to
time.
1.12. "Digital Brand" shall mean the Digital logo that is set forth on
Schedule 9.1.1, and any logo that Digital uses to replace that logo.
1.13. "Digital Partner" shall mean any Person selling and/or servicing
Digital-Branded Products, including external Product resellers,
Digital's internal services organization, and Authorized Warranty
Service Providers, in each case to the extent that such person
purchases such Products through Digital or provides such services on
behalf of Digital.
1.14. "Digital Price Book" shall mean Digital's published price list for (i)
Digital-Branded Products and (ii) certain Seller Products to be
included by mutual agreement of the parties.
1.15. "Digital Service Agreement" shall mean agreements between Digital and
Customers for Services.
1.16. "Digital Services Division" shall mean MCS, NSIS, and OMS, or any other
organization(s) within Digital that perform(s) the functions performed
by these divisions as of the Closing Date.
1.17. "Dead on arrival" or "DOA" shall mean that the product does not
function upon initial receipt by a Customer.
1.18. "End of Life" or "EOL" shall have the meaning set forth in Section
17.1.
1.19. "Engineering Change Order" or "ECO" shall mean a manufacturing change
to a Product necessitated by problems or defects in form fit or
function or by product safety concerns.
1.20. "Enterprise Sales Force" shall mean all Digital field sales personnel
that are not NPB channel sales personnel immediately prior to the
Closing Date.
1.21. "Escrow Deposit" shall mean (i) all Software source code for Products
on the Product Road Map or otherwise provided by Seller hereunder
(including from time to time each upgrade, enhancement or other
modification), together with, to the extent in existence, (A) any
pertinent commentary or explanation that may be necessary to render
such source code understandable and usable by a trained
computer-programming expert, (B) such system documentation, statements
of principles of operation and schematics as are necessary or
useful for the effective understanding of such source code, and (C) all
devices, programming or documentation (including compilers,
workbenches, tools and higher-level or proprietary languages) employed
<PAGE>
by Seller for the development, maintenance and implementation of such
source code; (ii) all technical specifications for the Products on
the Product Road Map or otherwise provided by Seller hereunder and all
documentation related thereto; and (iii) manufacturing technical
specifications and processes, and all documentation related thereto.
1.22. "First Revenue Ship" or "FRS" shall mean the initial shipment of a New
Product by Seller.
1.23. "First Volume Ship" shall mean the initial shipment of New Products by
Seller in volumes to satisfy Digital's forecasted needs, as set forth
in the Product Road Map.
1.24. "Field Replacement Unit" or "FRU" shall mean a field replaceable unit,
or those parts, options, and/or components that can be used to effect a
fix on a Product.
1.25. "First Year Product Credits" means first year Product Credits as that
term is defined in the Asset Purchase Agreement which may be used by
Digital to purchase from Seller, at prices set forth herein,
Digital-Branded Products that are ordered under this Agreement during
the period beginning on the Closing Date and ending on the first
anniversary of the Closing Date (the "First Year") for requesting
delivery at any time until thirty days
after the end of the First Year.
1.26. "Full Revenue Quota Credit" shall mean the lesser of (i) a one hundred
percent (100%) sales quota credit or (ii) the best equivalent sales
quota credit generally provided by Digital for other Digital products.
1.27. "Gold Key Program" shall have the meaning set forth in Section 8.3.
1.28. "including" shall mean including but not limited to.
1.29. "Intellectual Property Rights" shall mean all copyrights, trademarks,
servicemarks, trade secrets, patents and other intellectual property
rights wherever in the world enjoyable.
1.30. "MDF" shall mean marketing development funds.
1.31. "Minimum Product Volumes" shall have the meaning set forth in Section
3.2.
1.32. "Multivendor Customer Services" or "MCS" shall mean Warranty Services
and Contract Services.
<PAGE>
1.33. "New Products" shall mean future Products to be included in the terms
of this Agreement by the mutual agreement of Digital and Seller,
pursuant to the Product Road Map. New Products shall be classified as
Digital-Branded Products or Seller Products.
1.34. "NSIS" shall mean Digital's Network Systems Integration Services.
1.35. "NPB Products" shall mean the products that are part of Digital's
Network Product Business that have achieved FRS as of the Closing Date
and will be transferred by Digital to Seller under the Asset Purchase
Agreement.
1.36. "OEM" shall mean original equipment manufacturer.
1.37. "OMS" shall mean Operations Management Services
1.38. "One Tier Reseller" means a reseller that buys Product directly from a
manufacturer for resale directly to an end user.
1.39. "Person" for these purposes means any individual, partnership, firm,
association, trust, estate, corporation or any other legal or business
entity.
1.40. "Product Information" shall mean descriptions of documentation,
technical tips, Software support tools, publications, technical
newsletters, training materials and all other information in any media
which Digital may reasonably require in order to sell, support and
maintain the Products and/or deliver Services to Customers.
1.41. "Product Road Map" shall mean the standards, specifications and other
terms regarding the Products set forth on Schedule 3.1, as amended from
time to time pursuant to the procedures expressly set forth in this
Agreement.
1.42 "Product Credits" shall mean Product Credits to be used by Digital for
the purchase of Digital-Branded Products, as further set forth in the
Asset Purchase Agreement.
1.43. "Products" shall mean, collectively, NPB Products, Digital-Branded
Products, Seller Products, and all Spare Parts and Field Replacement
Units related to the foregoing.
1.44. "Relationship Logo" shall mean the Digital logo set forth on Appendix 1
to Schedule 9.1.1, encircled by a relationship designation, as set
forth in Appendix 7 to Schedule 9.1.1.
1.45. "Required Lead Time" shall mean the Seller's published lead times.
1.46 "Resale Products" shall mean Products purchased by Digital for resale
or redistribution to third parties.
<PAGE>
1.47 "RFP" shall mean a Request for Proposal.
1.48. "Rotate" shall mean to return a Product to Seller for either (i)
replacement of a more current revision level of the same Product; or
(ii) replacement with a different Product.
1.49. "SCI" shall mean SCI Technology, Inc.
1.50. "Second Year Product Credits" means second year Product Credits as that
term is defined in the Asset Purchase Agreement which may be used by
Seller to purchase from Buyer, at prices set forth in this Agreement,
Digital-Branded Products that are ordered during the period beginning
on the first anniversary of the Closing Date and ending on the second
anniversary of the Closing Date (the "Second Year") requesting delivery
at any time until thirty days after the Second Year.
1.51. "Seller Marks" shall mean the trademarks, service marks, logos and
designs of Seller.
1.52. "Seller Products" shall mean all non-Digital-Branded Products offered
by Seller under the Seller Marks.
1.53. "Seller Selling Partner" shall mean any Person selling Digital-Branded
Products, at any level, under a contract with, or authorization from,
Seller.
1.54. "Seller Tradename" shall have the meaning set forth in Section 9.9.
1.55. "Services" shall mean all services and support provided by Digital or
Digital Partners to its Customers.
1.56 "Shared Resellers" shall mean those resellers listed on Schedule 1.56.
1.57. "Software" shall mean all computer program, databases and firmware, (i)
embedded in the Products or (ii) sold on a stand-alone basis as
Products, and all user documentation and technical specifications
associated therewith.
1.58. "Spare Parts" shall mean all new or like-new spares or spare parts used
to effect a fix on a Product.
1.59. "Subsidiary" as used with reference to any Person means any Person
controlling, controlled by, or under common Control with such Person.
1.60. "Term" shall have the meaning set forth in Section 2.1.
1.61. "Two Tier Reseller" means a reseller that buys Product directly from a
manufacturer for resale directly to a reseller, who in turn will resell
directly to an end user.
<PAGE>
1.62. "Unique Materials" shall mean all materials or components ordered by
Seller for use in Digital-Branded Products, and for which Seller has no
alternate use.
1.63. "Warranty" shall mean a standard Product warranty provided to a
Customer in accordance with the specifications for such Product.
1.64 "Warranty Services" shall mean those services provided by Digital or
Digital Partners to a Customer in connection with a Warranty.
1.65. "Year 2000 Compliant" shall mean that all computer hardware, software,
and microcode has user interfaces, date data fields, processing logic,
and output that correctly recognize, process, reflect and otherwise
support date data for all dates, including dates occurring after
December 31, 1999.
2.. TERM AND TERMINATION
2.1. This Agreement shall extend for an initial term beginning on the
Closing Date and ending on June 30, 2001, unless terminated sooner
pursuant to judicial or similar order (the "Term").
2.2. Upon termination of this Agreement, (A) subject to Section 17.1,
Seller's obligation to manufacture Product necessary for Digital to (i)
purchase Spare Parts; (ii) meet any outstanding contractual obligations
to its Customers, including with respect to Warranty Services and
Contract Services, and/or (iii) to conclude any Digital or Digital
Partners' sales opportunities, shall survive termination for six months
and (B) Digital will continue to receive the technical support and
related services set forth in Section 14.
2.3. In addition to those Sections that survive termination pursuant to
Section 2.2, the following Sections of this Agreement shall also
survive termination: Definitions, Section 10.6, Technical Support by
Seller, Section 17.1, Limitation of Liability; Audits and Confidential
Information; Compliance With Laws; Indemnification and Insurance;
General and all related schedules.
2.4. Upon termination of the Agreement, other than pursuant to judicial or
similar order because of breach of this Agreement by Seller, if Seller
has finished inventory of Digital-Branded Products, Seller shall offer
Digital a right of first offer which offer shall remain open for thirty
(30) days to purchase all such Digital-Branded Products at the prices
Digital was paying immediately prior to termination. In the event
Digital does not exercise this right, Seller may sell-off such Products
for an additional sixty (60) days after Digital notifies Seller it will
not exercise this right. At the conclusion of such sixty (60) day
<PAGE>
period, Seller must either remove the Digital Marks from all such
Products or destroy such Products and provide Digital with written
certification of such removal or destruction. The license to Digital
Marks granted hereunder shall survive for such sell-off period solely
to the extent necessary for Seller to exercise its rights under this
Section 2.4.
3.. PRODUCT PURCHASING REQUIREMENTS AND PROCEDURES
3.1. Attached hereto as Schedule 3.1 is the Product Road Map for the first
twelve (12) months of this Agreement. Schedule 3.1 also sets forth (i)
the procedures for creating a new Product Road Map quarterly, or more
frequently, if agreed between the parties, and (ii) escalation
procedures in the event of a disagreement between the parties.
3.1.1. Seller is contractually committed to comply with the Product
Road Map [*] covered by the then current Product Road Map,
subject to changes approved by both parties.
3.1.2. If Seller notifies Digital through the Product Road Map
process that it proposes to cease production of any Product
that has achieved First Volume Ship, and Digital has
delivered or delivers to Seller within one month of receipt
of such notice a Demand Forecast that contains a forecast of
sales by Digital for such Product in excess of ten ($10)
million for the twelve (12) months following such notice
(and the forecast amount is reasonably consistent with prior
Demand Forecasts given then current marketplace conditions),
then Seller shall produce at least the Demand Forecast
amount of such Product and Digital shall be bound, under the
terms of this Agreement, to purchase such amount.
3.1.3. If Digital has proposed adding a New Product to the Product
Road Map for introduction at least nine months following the
date of such proposal and: (i) production by Seller of the
Product is technologically feasible; and (ii) Digital has
presented Seller with a forecast that shows sales of such
New Product comprising thirty-five ($35) million or more of
Digital's total forecast sales for the twelve (12) months
following the proposed introduction of such New Product,
then, at Seller's option: (x) Seller may agree to make
the New Product and Digital shall have a contractual
commitment to purchase at least the amount forecast at
agreed upon OEM pricing, or (y) if Seller declines
to produce the New Product, Digital's corresponding Minimum
Product Volumes shall be reduced by fifty cents ($.50) for
each forecast dollar. If the parties disagree on whether
the introduction of a New Product is technologically
feasible, such disagreement shall be submitted for
escalation treatment as set forth in the Product Road Map.
A proposal under this provision must identify the form, fit,
*Confidential Treatment
<PAGE>
functionality and performance of the New Product with
sufficient specificity to allow Seller to assess the
technological feasibility and manufacturability of the New
Product. OEM pricing means, except as otherwise agreed, an
industry standard OEM discount accounting for relevant
volumes purchased.
3.2. Subject to Seller's compliance with its contractual obligations under
this Agreement respecting the then current Product Road Map, and the
terms and conditions of this Agreement including Section 3.4, Digital
shall purchase the following minimum volumes of Products ("Minimum
Product Volumes") during the following Term years:
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------- ------------------------------------- -------------------------------------
YEAR PURCHASES PURCHASES FOR
FOR RESALE SPARE PARTS AND
AND INTERNAL USE
- ---------------------------------------- ------------------------------------- -------------------------------------
Digital Fiscal Year 98 [*] [*]
- ---------------------------------------- ------------------------------------- -------------------------------------
Digital Fiscal Year 99 [*] [*]
- ---------------------------------------- ------------------------------------- -------------------------------------
Digital Fiscal Year 00 [*] [*]
- ---------------------------------------- ------------------------------------- -------------------------------------
Digital Fiscal Year 01 [*] [*]
- ---------------------------------------- ------------------------------------- -------------------------------------
</TABLE>
3.2.1. For purposes of calculating the Minimum Product Volumes,
Digital Fiscal Year 98 shall commence on January 1, 1998 and
end on June 30, 1998. Digital Fiscal Year 99 shall commence
on July 1, 1998, and terminate on June 30, 1999. Digital
Fiscal Year 00 shall commence on July 1, 1999 and terminate
on June 30, 2000. Digital Fiscal Year 01 shall commence on
July 1, 2000 and terminate on June 30, 2001.
Notwithstanding the foregoing, if Digital Fiscal Year 98 is
decreased by one or two months, then Digital's Minimum
Product Volume for Fiscal Year 98 shall be decreased and
Digital's Minimum Product Volume for Fiscal Year 01 shall be
increased by [*] for decreases of one month, and
[*] for decreases of two months. If Digital's
Fiscal year 98 is decreased by more than two months, the
parties shall meet to determine the allocation of Digital's
Minimum Product Volumes.
3.2.2. The volume of dollar purchases by Digital shall be
determined based on the purchase price after any discounts
are applied. Purchases for Spare Parts and internal use in
excess of the amounts set forth above shall be applied
against the Minimum Product Volume purchases for resale
requirements.
3.2.3. Purchases by Digital from Seller of Products and any other
products and/or services shall be applied towards the
Minimum Product Volumes.
*Confidential Treatment
<PAGE>
3.3. As set forth in, and subject to, the Asset Purchase Agreement, Digital
has First Year Product Credits in an amount set forth in the Asset
Purchase Agreement, and Second Year Product Credits of $125 million.
3.3.1 Digital may apply its Product Credits to Digital-Branded
Product purchases in its sole discretion, provided that:
(i) in the event that Digital fails to meet its Minimum
Product Volume commitment in Fiscal Year 98: (x) Second Year
Product Credits shall be reduced by sixty percent (60%) of
the amount of the Fiscal Year 98 shortfall; (y) Digital may
not apply any First Year Product Credits in Fiscal Year 99
until a volume of Digital-Branded Products equal to the
Fiscal Year 98 shortfall is purchased other than in Product
Credits, at those prices set forth in Section 4; and (z)
Digital may not apply any Second Year Product Credits to
purchases in Fiscal Year 99 until a volume of
Digital-Branded Products equal to sixty percent (60%) of the
Fiscal Year 98 shortfall is purchased in Year Two (as
defined in the Asset Purchase Agreement) other than in
Product Credits, at those prices set forth in Section 4; and
(ii) in the event that Digital fails to meet its Minimum
Product Volume commitment in Fiscal Year 99: (x) any
remaining Second Year Product Credits shall be reduced by
sixty percent (60%) of the amount of the Fiscal Year 99
shortfall; and (y) Digital may not apply any remaining
Second Year Product Credits to purchases in Fiscal Year 00
until a volume of Digital-Branded Products equal to the
shortfall is purchased other than in Product Credits, at
those prices set forth in Section 4.
3.3.2. In the event that Minimum Product Volumes for the aggregate
of Fiscal Year 98 and Fiscal Year 99 (pro-rated to a six (6)
month period) are reduced to a level below the amount of
First Year Product Credits pursuant to Section 3.4, then
Digital shall receive a dollar-for-dollar carryover of
unused First Year Product Credits to Second Year Product
Credits.
3.4.4 The Minimum Product Volumes will be subject to the following:
3.4.1. Other than for delays caused directly by Digital, or by SCI
for one hundred and twenty (120) days following the Closing
Date, if Digital issues a valid Purchase Order for a Product
on the Product Road Map that is accepted by Seller and [ * ]
after the scheduled delivery date, the parties shall
escalate the problem to the parties' respective Relationship
Managers, or their respective designee, who will either (i)
create a recovery plan for expeditious shipment of the
Product; or (ii) agree on an alternative Product to be
offered by Seller, provided that the final determination as
to whether
*Confidential Treatment
<PAGE>
Digital shall accept such alternative Product shall be in the sole discretion of
Digital. In the event that Seller fails to provide an adequate shipment remedy
or a substitute that is acceptable to Digital [ * ].
3.5. Digital shall authorize purchase of Products by issuing written (which
includes electronic data interchange and facsimile) or telephonic
orders on its then current purchase order form and any documents
incorporated therein by reference ("Purchase Order"). The terms of
this Agreement shall supersede the pre-printed terms and conditions of
any Purchase Order. All terms and conditions not specifically set
forth in this Agreement but appearing on the face of the Purchase Order
shall apply to such transactions as if set forth in this Agreement.
In the event of a conflict between this Agreement and any term or
condition in any Purchase Order, this Agreement shall govern. No terms
appearing on the face of a Purchase Order, other than with respect to
time of delivery, mode of transportation, special discounts, and
similar commercial terms acknowledged in writing by the Seller, shall
be deemed to amend, modify or limit the application of any express term
of this Agreement. Digital shall use its reasonable commercial efforts
to send confirming written Purchase Orders within two (2) weeks after
issuing any telephonic Purchase Orders.
3.6. Seller may not unreasonably reject a Purchase Order that is consistent
with the terms of this Agreement. Seller shall promptly acknowledge all
Purchase Orders, but in no event may Seller reject a Purchase Order
later than seven (7) days after receipt of a Purchase Order. Acceptance
by Seller is limited to Digital's offer as contained in this Agreement
and the Purchase Order. Unless otherwise agreed between the parties, no
additional or different provisions proposed by either party shall
apply. In addition, the parties agree that this Agreement and any
issued Purchase Orders constitute a Contract for the Sale of Goods and
satisfy all statutory and legal formalities of a contract.
3.7. Commencing twelve (12) months after the Effective Date, Seller shall be
required to meet the Required Lead Time with respect to [ * ]
*Confidential Treatment
<PAGE>
[ * ] during each quarter throughout the term of this Agreement.
3.7.1 In the event that Seller fails to meet the foregoing
requirement, and does not meet that requirement during the
following quarter, [ * ].
3.8. Commencing twelve (12) months after the Effective Date, Seller shall
use all reasonable efforts to deliver Products by the originally
scheduled ship date specified by Seller with respect to [ * ].
3.8.1. In the event that Seller fails to deliver Products by the
originally scheduled ship date specified by Seller with
respect to [ * ].
3.9. The provisions of Sections 3.7 and 3.8 shall not apply to (i) Products
on allocation, and (ii) New Products for the first ninety (90) days
after introduction.
3.10. Promptly after the first anniversary of the Closing Date, the parties
shall calculate the percentage of sales of Digital-Branded Products by
Digital (as compared to Seller) to Shared Resellers (based on invoice
net of return totals) during the first year after the Closing Date (the
"Future ESF Percentage"). The parties shall adjust Digital's Minimum
Product Volume purchase commitments for Fiscal Year '99 by the
following formula:
(Baseline ESF Percentage minus Future ESF Percentage)
multiplied by (the combined sales by Digital Enterprise
Sales Force and Seller of Digital-Branded Products to Shared
Resellers in Fiscal Year 99), provided that in no event
shall the adjustment to Digital's Minimum Product Volumes
(up or down) pursuant to Section 3.10 exceed $7.5 million.
*Confidential Treatment
<PAGE>
4.. PRICING AND PRICE CHANGES
4.1. The price to Digital of all NPB Products that are Resale Products shall
be the lesser of (i) Digital's List Price less Digital's current
discounts; and (ii) Seller's best comparable reseller channel pricing.
4.2. The price for all Resale Products other than NPB Products shall be
Seller's Platinum Plus pricing (which is currently Seller's best
comparable reseller channel pricing program). If the Platinum Plus
program is changed, eliminated or superseded, Digital will receive
Seller's best comparable reseller channel pricing program.
4.3. The price of Products used for demonstrations and as lab equipment,
Products purchased for internal use and not for Spare Parts by Digital,
and Customer loan equipment [ * ]. Unless otherwise agreed between the
parties, no MDF or incentive programs shall apply to such purchases.
4.4. The price of Spare Parts used for the provision of Contract Services of
NPB Products shall be [ * ] from the pricing set forth in Sections 4.1
and 4.2. Refurbished Spare Parts may be substituted when Digital is
providing maintenance service but not in connection with any warranty.
Unless otherwise agreed between the parties, no MDF or incentive
programs shall apply to such purchases. The price for repair services
for NPB Product Spare Parts provided in connection with Digital's
provision of Contract Services of NPB Products shall be [ * ].
4.5. In the event that Digital purchases Products in excess of the Minimum
Product Volumes in any given Fiscal Year, it shall be [ * ].
4.6. Seller shall provide Digital written notice of any change in Seller's
pricing that applies to Digital [ * ]. If Seller fails to give Digital
such prior notice:
*Confidential Treatment
<PAGE>
4.6.1. [ * ]
4.6.2. [ * ]
4.7. Seller's prices shall include all charges such as packaging, packing,
customs duties imposed before passage of title, and all taxes except
sales, use and other such taxes imposed upon the sale or transfer of
Product for which Digital is solely responsible under applicable law
and for which Digital is properly invoiced by Seller. If Product or
Spare Parts is supplied without normal packaging or packing, Seller
will pass on to Digital its resultant cost savings in connection
therewith.
4.8. Notwithstanding anything else in this Agreement, Seller shall provide
reasonable consideration, on an opportunity basis, to any special
pricing and/or discount terms and conditions which may be requested by
Digital for a specific contract opportunity. Such requests shall be
made by Digital to the local Seller sales and/or channels manager for
review. Seller shall respond to Digital's request within forty-eight
(48) hours from the date of the request, unless otherwise agreed to by
the parties.
4.9. Digital shall accrue [ * ] in applicable categories per quarter which
can be utilized for a variety of Seller product related business and
marketing activities, as specified and approved by Seller, such as
training, advertising, trade shows, presentation materials, seminars,
special events and promotional materials. MDF funds may not be used for
travel or lodging costs, provided that the use of MDF Funds in
connection with training need not be approved by Seller.
4.10. Unless approved by Seller, MDF funds: (i) may not be applied against
future Product purchases; and (ii) may not be used to satisfy any
outstanding balance owed to Seller.
4.11. Digital shall submit invoices and proof of items purchased to Seller
prior to the disbursement of MDF. Seller shall reimburse Digital within
sixty (60) days from date of Seller approval of the invoice, or in the
case of Seller charges, deduct directly from the MDF account.
4.12. With the prior approval of Seller, MDF may be utilized in advance based
on projected purchase levels in subsequent quarters.
4.13. In the event this Agreement terminates, other than pursuant to judicial
or similar order because of breach of the Agreement by Seller, only MDF
requests submitted and approved prior to termination shall be
reconciled. MDF requests submitted subsequent to
*Confidential Treatment
<PAGE>
such termination will not be accepted, and all remaining MDF will be forfeited.
All advanced MDF owed to Seller are payable at final settlement.
5.. DELIVERY OF PRODUCTS
5.1. All Products shall be deemed to have been purchased on their originally
scheduled ship date (i) for purposes of the application of such
purchases towards the satisfaction of the Minimum Product Volumes and
application of the Product Credits and (ii) to determine Seller's
compliance with Sections 3.6 and 3.7.
5.2. Digital Purchase Orders upon acceptance by Seller shall state Seller's
committed delivery dates for each Product. The minimum period between
Digital's issuance of a Purchase Order and the committed delivery date
shall be the Required Leadtime. At the request of Digital, Seller shall
use reasonable efforts to expedite a shipping date.
5.3. Except as otherwise provided in this Agreement, all deliveries shall be
FOB Origin. Digital shall select the carrier and shall pay
transportation charges on a "freight collect" basis. Digital may
require that Products be shipped by Seller to various destinations
including directly to a Customer. The Purchase Order will clearly
specify the "Ship To" location for each order placed with Seller.
5.4. If Seller has more than one geographic location which could supply
Resale Product, Seller shall use reasonable efforts to make such
Product available to Digital from Seller's closest location to
Digital's "Ship To" location.
5.5. If Seller delivers a Product more than [*] of the schedule delivery
date, Digital may (i) return such Product, at Seller's expense, for
subsequent delivery on the scheduled delivery date (provided, that
in the case of Products shipped outstide the United States, this
clause shall apply only for Products delivered [*] of the scheduled
delivery date); or (ii) retain such Product and postpone payment until
it would have been due if Seller had delivered such Product on
schedule. Without limiting any of Digital's rights and remedies in
equity or at law, if Seller has failed to deliver any Product by the
scheduled delivery date, such Product shall be considered "late" and
Digital may require that Seller ship that Product via premium means
(e.g., guaranteed overnight delivery) at Seller's expense, or may
cancel the order for such Product, without cost or liability to
Digital.
5.6. In the event of a Product or a Product component shortage, Seller shall
fill orders placed by Digital to satisfy Digital end user Customer
requirements on a pro rata basis with other
*Confidential Treatment
<PAGE>
purchasers (based upon the average purchased volumes subject to such shortage
for the prior three months).
5.7. Seller shall deliver the exact quantity of Product scheduled for
delivery pursuant to Purchase Orders. If Seller delivers less than the
scheduled volume, Seller shall correct the shortage within two (2)
Business Days. If Seller fails to corrct such shortage within this
period, without limiting any of Digital's rights and remedies under
this Agreement. Digital may cancel the pertinent portion of the
Purchase Order without cost or liability.
5.8. If Digital's Purchase Order specifies export after passage of title,
Seller shall furnish Digital with all necessary export/import
documentation at Seller's expense. Export/import documentation shall be
in accordance with the INCOTERMS then in force.
5.9. Digital may cancel and/or reschedule delivery of individual Purchase
Orders, or portions thereof, in accordance with the Schedules described
below. Oral directions to reschedule deliveries shall be permitted and
shall be confirmed in writing by Digital within two (2) weeks following
such oral directions. Digital shall be assessed a cancellation fee as
follows:
The following cancellation terms shall apply to (i) all NPB Products together
with upgrades and revisions thereto which conform to such Products in form, fit
and function, and (2) all Products on the Product Road Map that are unique to
Digital's requirements in form, fit and function, and have no Seller-branded
equivalent:
- ---------------------------------------- ---------------------------------------
DAYS BEFORE RESULT OF
SCHEDULED DELIVERY CANCELLATION
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
*Confidential Treatment
<PAGE>
Seller shall provide reasonable consideration, on an opportunity basis, to any
special cancellation terms which may be requested by Digital Services Division
for specific contract opportunities. Such requests shall be made by Digital to
Seller's local sales and/or channels manager for review. Seller shall respond to
Digital's request within 48 hours from the date of the request, unless otherwise
agreed to by the parties.
The following cancellation terms shall apply to all other Products:
- ---------------------------------------- ---------------------------------------
DAYS BEFORE RESULT OF
SCHEDULED DELIVERY CANCELLATION
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
[ * ] [ * ]
- ---------------------------------------- ---------------------------------------
5.10. Digital may reschedule any Purchase Order(s), or portions of any
Purchase Order(s) pursuant to the following guidelines:
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------ ---------------------------- --------------------------- ----------------------------
Days in advance of Seller Amount of order that can Number of times Number of days
committed delivery date: be rescheduled: order can be that order can be
rescheduled: rescheduled for:
- ------------------------------ ---------------------------- --------------------------- ----------------------------
[ * ] [ * ] [ * ] [ * ]
- ------------------------------ ---------------------------- --------------------------- ----------------------------
[ * ] [ * ] [ * ] [ * ]
- ------------------------------ ---------------------------- --------------------------- ----------------------------
[ * ] [ * ] [ * ] [ * ]
- ------------------------------ ---------------------------- --------------------------- ----------------------------
[ * ] [ * ] [ * ] [ * ]
- ------------------------------ ---------------------------- --------------------------- ----------------------------
[ * ] [ * ] [ * ] [ * ]
- ------------------------------ ---------------------------- --------------------------- ----------------------------
</TABLE>
5.11 Digital shall provide rolling twelve (12) month Demand Forecasts of its
intended purchases from Seller for Resale Products. Seller shall
provide quarterly forecasts of its Product availability to Digital, and
shall cooperate with Digital in dealing with any forecasted shortfall
on a timely basis. The parties acknowledge that all forecasts shall be
non-binding, provided that the forecast for the [*] immediately
following the date of submission of the forecast for NPB Products
shall constitute a binding commitment ("Binding Forecast") by
Digital to purchase the forecasted amounts, subject to Sections 5.10
and 5.11.
*Confidential Treatment
<PAGE>
5.11.1 Digital's Binding Forecast shall be binding both with
respect to the total dollar volume and Product mix contained
in such Binding Forecast, provided that Digital may change
the Product mix with respect to twenty five percent (25%) of
the total dollar value of the Binding Forecast.
5.11.2 In the event that Seller accepts a Purchase Order for
Products that are included in the Binding Forecast and fails
to deliver such Product(s) within thirty (30) days from the
scheduled delivery date, Digital shall be released from the
Binding Forecast for the forecasted value of the late or
non-delivered Product, and Digital shall have no obligation
to replace such Products with other Products.
5.12. Digital's Demand Forecast is expected to be at least eighty-five
percent (85%) of its Minimum Product Volume commitment for the same
corresponding period. In the event that Digital's Demand Forecast is
ever less than eighty-five percent (85%), the parties shall meet
promptly to establish a remedial plan.
5.13. A copy of Seller's packing list shall accompany all Product shipments
and shall indicate Digital's Purchase Order Number, Part Number, and
Serial Number.
6.. QUALITY, INSPECTION, AND ACCEPTANCE
6.1. Prior to delivery, Seller shall insure that all Products conform to the
guidelines set forth on Schedule 6.1.
6.2. Digital may perform source inspection and quality assurance reviews in
accordance with the Quality Assurance Guidelines contained in Schedule
6.1, but this shall in no way relieve Seller of its obligation to
deliver conforming Product, nor does said right of inspection waive (i)
any of Seller's obligations hereunder; (ii) the rights of Digital to
inspect the Products upon delivery; or (iii) the specific Product
Warranty provisions. Seller shall assist Digital, at Digital's request,
in performing such inspection and reviews.
6.3. Seller shall have fourteen (14) days from the date of notification by
Digital of a deviation from the Quality Assurance Guidelines to cure
such deviation. In the event such deviation is not cured within
fourteen (14) days, Digital, at its option, may:
6.3.1 require that Seller cease all further sales and shipment of the
non-conforming Products until such non-conformance is cured; or
<PAGE>
6.3.2 immediately terminate Seller's right to continue to use the
Digital Marks on said Products.
6.4. All Products repaired by Seller pursuant to the Warranty Services or
otherwise at the request of Digital, shall be subject to the Product
standards, including the Quality Assurance Guidelines and acceptance
standards, set forth in Schedule 6.1 and in the Product Road Map.
7.. PAYMENT
7.1. Digital shall issue payment to Seller for conforming Products that have
been received thirty (30) calendar days after the date of receipt of a
valid invoice. Digital shall be offered all early payment programs
offered by Seller.
7.2. Digital may apply Product Credits to invoiced payments as set forth in
Section 3.
7.3. Amounts owed to Digital due to rejections of Products, or discrepancies
on paid invoices will be, at Digital's option, fully credited against
current or future invoices payable by Digital. Such netting should be
fully reconciled with the Seller on a monthly basis.
7.4. Seller shall pay Digital [ * ]. The foregoing takes into account the
fact that Digital will provide as part of the Warranty Services (i)
call handling, (ii) purchasing, stocking and storage of Spare Parts and
replacement whole units, and (iii) logistics and revision management,
and will not be providing repair services.
7.5. Digital shall invoice Seller for its provision of Warranty Services
every thirty (30) days. All invoiced payments shall be due fifteen days
after the date of receipt of an undisputed invoice.
8.. PRODUCT SERVICES
8.1. NPB Products and Digital-Branded Products shall be serviced as follows:
8.1.1. Warranty Services. [*] for all NPB Products and
Digital-Branded Products
*Confidential Treatment
<PAGE>
worldwide, except in the territories set forth on Schedule 8.1.1. Digital may
provide such Warranty Services directly to Customers or through its Authorized
Warranty Service Providers.
8.1.2 Contract Services. Seller shall promote Digital as Seller's
Strategic Network Services Partner for Contract Services.
This shall include, at a minimum, informing any Customer
seeking such Services that Digital is Seller's Strategic
Network Services Partner; providing such Customer with any
contact information provided by Digital to Seller for such
purposes; and complying with the requirements of Sections 19
and 20 herein. At Digital's option, it may offer such
Contract Services directly to Customers or through its
Authorized Warranty Service Providers.
8.2. Seller Products shall be serviced as follows:
8.2.1. Warranty Services. Seller hereby appoints Digital as the
exclusive Warranty Services provider for all Seller Products
in the territories set forth in Schedule 8.2.1, as the same
may be amended from time to time by the parties. Digital may
provide such Warranty Services directly to Customers or
through its Authorized Warranty Service Providers.
8.2.2 Contract Service. Seller shall promote Digital as Seller's
Strategic Network Services Partner for Contract Services in
the territories set forth in Schedule 8.2.1, as the same may
be amended from time to time by the parties. This shall
include, at a minimum, informing any Customer seeking such
Services that Digital is Seller's Strategic Network Services
Partner; providing such Customer with any contact
information provided by Digital to Seller for such purposes;
and complying with the requirements of Sections 19 and 20
herein. At Digital's option, Digital may offer such
Contract Services directly to customers or through its
Authorized Warranty Service Providers.
8.3. Pursuant to authorization from Digital, Seller and Seller Selling
Partners may offer for sale Contract Services during the term of the
Agreement in accordance with the terms and conditions of the Digital
Gold Key Program attached hereto as Schedule 8.3 ("Gold Key Program").
Seller and Seller Selling Partners must be granted authorization by
Digital prior to offering such Contract Services. Pricing, discounts
and compensation shall be determined based on the Gold Key Program
arrangement with the respective selling party. Except as provided in
the Gold Key Program terms and conditions, Digital will provide no
other form of fee or compensation for service sales during the term of
the Agreement. Seller Selling Partners that have been granted
authorization by Digital prior to execution of the Agreement
shall not require additional authorization by Digital, provided that
such Seller Selling Partners maintain conformance to the Gold Key
Program requirements as set forth in the attached Schedule.
<PAGE>
8.4. Nothing contained herein shall prevent Digital from marketing or
promoting its Services directly or indirectly to Customers, or offering
Customers a Services Agreement independent of Seller.
8.5. Digital may freely subcontract all of its Services obligations.
8.6. In the event that, at any point during the term of this Agreement,
Digital is engaged to provide Contract Services to a Seller customer
for whom Seller itself, (not through a subcontractor) is providing
service on the Closing Date, then [ * ].
8.7. In the event that, at any time following the Closing Date, Seller
decides to subcontract its obligations under any contract for the
servicing of Seller Products (either in connection with a new service
agreement entered into by Seller or in connection with the renewal of
an existing service subcontracting agreement between Seller and a third
party), Seller shall [ * ].
8.8. Seller acknowledges that Digital's worldwide implementation of the
Services contemplated by this Agreement will likely be accomplished in
a phased approach. Seller also acknowledges that Digital's ability
and commitment to perform such Services is greatly dependent on
Seller's delivery to Digital of all necessary training, tools,
diagnostics, information and support ("Readiness Requirements") in a
timely and efficient manner. As such, Seller will work with Digital to
establish a Service Readiness Plan, (the "Plan"). The Plan shall be
incorporated by reference into this Agreement, and shall establish
detailed operational instructions concerning how to invoke the service
relationship created by this Agreement. The parties agree to assign
the necessary resources to begin the development of the Plan
immediately upon execution of this Agreement. Specifics to be
included in the Plan shall be: (i) Seller's deliverables respecting
Digital's implementation of Warranty Services and Contract Services;
(ii) logistics planning and disposition requirements; (iii) training
and information/documentation deliverables for all NPB Products,
Digital-Branded Products and Seller Products; (iv) Digital staffing
and training requirements to satisfy mutually acceptable certification
levels; (v) field deployment (persons/equipment); (vi) communications
and infrastructure requirements; (vii) problem tracking and
reporting requirements; and (viii) sales forecasting details
(types/frequency) by region/territory. Readiness Requirements for New
Products shall be added to the Plan by amendment.
*Confidential Treatment
<PAGE>
8.9. Digital shall provide Warranty Services during its normal business
hours, Monday through Friday, 8 a.m. to 5 p.m. local time, excluding
locally observed holidays.
8.10. Seller will provide the warranty registration cards with the
Digital-Branded Products. All warranty registration cards shall contain
the warranty information described on Schedule 8.10.
8.11. Seller will provide Digital with whole units, [ * ], for Digital's use
in planning and determining backup support when New Products are
introduced. Such units will be shipped to Digital at least two (2)
weeks prior to the commencement of any New Product sales to Customers.
The units shall be limited to internal support use and training and may
not be resold by Digital to Customers. Digital may disassemble such
whole units for support when New Products are introduced. Upon FRS,
Digital shall either return any New Products provided hereunder or
purchase the New Products at Digital's Spare Parts price.
8.12. Seller will establish a Priority/Urgent Order support process to
support Digital Warranty Services and Contract Services on an on-going
basis.
8.13. Seller will package Spare Parts consistent with MCS' current packaging
requirements, a copy of which is attached hereto as Schedule 6.1.
8.14. If material shortages arise due to Seller parts sourcing or Digital
support parts consumption which impact Seller's ability to manufacture
Products or Digital's ability to provide Services under the terms of
this Agreement, then Seller and Digital shall meet within two (2)
Business Days to develop parts shortage resolutions which will ensure
the uninterrupted flow of Products and Services.
9.. DIGITAL PRODUCT BRANDING
9.1. Digital hereby grants to Seller, during the Term, a limited,
non-exclusive, worldwide nontransferrable license, without the right to
grant sublicenses, to use the Digital Marks solely in accordance with
this Agreement and the Product Road Map. The license granted to Seller
shall terminate upon termination of this Agreement, and upon
termination, Seller shall immediately cease all use of the Digital
Marks subject to the provisions of Section 2.4 hereof. Seller may not
assign the license granted in this Section 9.1 without the prior
written consent of Digital.
9.1.1. Digital may terminate this license with respect to an
individual Product if Seller neglects or fails to perform or
observe any of the obligations set forth on
*Confidential Treatment
<PAGE>
Schedule 9.1.1 with respect to such individual Product that Digital determines,
in its sole discretion, causes a material adverse effect on Digital's trademark
rights, and such condition is not remedied within thirty (30) days after written
notice of such neglect or failure; or if Seller enters bankruptcy proceedings,
becomes insolvent, makes an assignment for the benefit of its creditors,
discontinues its business or is placed in receivership. Notwithstanding the
foregoing, if Seller is using reasonable and prompt efforts to cure such neglect
or failure, Digital shall not exercise its right of termination hereunder until
the earlier of (i) ten (10) days after the end of such thirty (30) day cure
period, and (ii) Seller ceases using reasonable efforts to cure such neglect or
failure, as determined in Digital's sole discretion.
9.2. Seller shall brand all products and related materials with the Digital
Marks in accordance with this Agreement, including this Section and
Schedules 9.1.1 and 9.8.
9.3. Seller shall submit all uses of the Digital Marks and the Digital Brand
to Digital for its prior approval, which shall not be unreasonably
withheld. Digital's approval of any standard layouts and designs shall
be limited to ensuring that such layouts and designs comply with the
standards set forth in Schedule 9.1.1, as the same may be amended from
time to time. After a layout or design has been approved. Seller may
use the approved layouts or designs and substantially identical layouts
and designs upon products, packaging and marketing collateral without
further approval of Digital, except in the event that the standards set
forth on Schedule 9.1.1 have been modified by Digital, in which case
all such layouts and designs must be resubmitted to Digital for
reapproval. The parties shall meet once per year for Digital to review
all uses of the Digital Marks and the Digital Brand and confirm such
uses are in accordance with this Agreement.
9.4. During the Term, Seller shall sell all NPB Products sold to Digital
under the Digital Marks. Seller shall affix all New Products that are
Digital-Branded Products with the Digital Marks prior to First Revenue
Ship.
9.5. In the event that Seller sells NPB Products other than under the
Digital Marks, the parties shall establish an engagement plan to define
the roles and responsibilities of each party in the engagement, sale
and delivery of such Products.
9.6. After the Closing Date, the Seller Products listed on Schedule 9.6
shall be sold under the Digital Marks in accordance with the Product
Road Map. Before the First Revenue Ship of such Products under the
Digital Marks, Seller must have met all of Digital's requirements with
respect to the items listed in Section 8.8 to insure that Digital is
prepared to be the exclusive Warranty Service and Contract Service
provider for all such Products. Digital shall use reasonable
efforts to expedite the approval of the branding of all such Seller
Products with the Digital Marks, it being understood that the average
<PAGE>
time required is expected to be no less than eight (8) weeks but in no
event shall exceed twelve (12) weeks after the Closing Date.
9.7 All Products set forth on or anticipated by the Product Road Map are
eligible to be branded with the Digital Marks, subject to Digital's
consent, such consent not to be unreasonably withheld, and provided
such Products meet the criteria set forth on Schedule 9.1.1, which may
reasonably be amended from time to time by Digital. Seller shall
propose Products to Digital to determine if such Products meet these
criteria. Digital shall have the sole right to determine whether a
Product meets the criteria. If Seller disputes a determination by
Digital that a Product should not be branded with the Digital Marks,
then the dispute will be subject to the Escalation Process set forth in
the Product Road Map Schedule. if such Escalation Process does not
resolve the issue, Digital shall not be obligated to brand the Products
with the Digital Marks. Notwithstanding the foregoing, Seller may seek,
through litigation, a determination that the Product met the criteria,
and, as relief, that the Product should be branded with the Digital
Marks. Any Products for which Seller obtains such relief shall be
treated as Digital-Branded Products for purposes of this Agreement.
9.8. Seller shall adhere to all Digital standards regarding the use of the
Digital Marks, as applicable to Digital's own products. The current
Digital standards are set forth in Schedule 9.8. Digital shall
provide Seller with sixty (60) days prior written notice of any
material changes to Digital's trademark standards. In the event that
Digital provides less than sixty (60) days notice: (i) any direct costs
incurred by Seller for materials that conformed to the previous
trademark guidelines during the Shortfall Period shall be reimbursed by
Digital; and (ii) Seller shall not be responsible for failures
to meet shipping dates arising from the fact that Digital provided less
than sixty (60) days notice. For purposes of this Section 9.8,
"Shortfall Period" shall mean the period prior to the date that
Digital provided notice of the change in its trademark standards
equivalent to (60 days minus the number of days notice actually
provided by Digital).
9.9. Seller shall be entitled to refer to an organization within Seller that
sells only Digital-Branded Products as the "Digital Network Products
Group, a Cabletron Systems, Inc. Company" (the "Seller Tradename").
9.9.1 Seller shall not use Seller Tradename in any way that
suggests that the Seller is Digital or is authorized to act
on behalf of Digital.
9.9.2 Seller may not use the word mark "DIGITAL" other than as
part of the Seller Tradename.
9.9.3 Seller shall be entitled to use the Seller Tradename on all
marketing, business and product collateral, including
without limitation business cards, stationary, facsimile
<PAGE>
sheets, price lists, trade show displays and material,
training materials, product documentation and similar
materials.
9.9.4 The Seller Tradename and the Relationship Logo may only be
used to identify the group or division within Seller which
is manufacturing, selling, marketing, and servicing
Digital-Branded Products and doing business under the Seller
Tradename and the Relationship Logo. It may not be used for
product branding.
9.9.5 Seller shall not co-join the Seller Tradename with the
Digital Brand.
9.9.6 Subject to the limitations set forth herein, Buyer shall be
entitled to use the Relationship Logo on the same material
upon which the Seller Tradename appears.
9.9.7 The example set forth on Schedule 9.9.5 illustrates
permitted uses of the Digital Brand, subject to Digital's
approval, with respect to color, size and appearance of the
Digital Brand.
9.9.8 Seller acknowledges that all use of the word "DIGITAL" by
Seller in the Seller Tradename shall be pursuant to a
license from Digital, and that all such use shall inure to
the benefit of Digital.
9.9.9. Upon request by Digital, Seller shall assist Digital in the
preparation, execution and filing of any registered user or
other agreements deemed necessary by Digital in order to
protect the Digital Marks, and Digital shall reimburse
Seller for all of Seller's reasonable out-of-pocket costs
incurred in connection therewith.
9.10. Seller shall abide by the Digital Trademark License and Quality
Requirements terms set forth on Schedule 9.6.
9.11 Seller is not granted any rights to use the Digital Marks on products
or services other than pursuant to this Agreement.
9.12. Digital agrees that it shall not use the mark "Digital Network Products
Group" after the Term.
<PAGE>
10.. SELLER'S SALE RESTRICTIONS/PARTIES' SALES COMPENSATION
10.1. All NPB Products and Digital-Branded Products, and any components
thereof, shall be included in the Digital Price Book. In the future,
Digital, in its sole discretion, may include Seller Products in the
Digital Price Book. All packaging for NPB Products and Digital-Branded
Products, and any components thereof, shall bear the Digital Marks.
10.2 Unless otherwise agreed between the parties, consistent with Digital's
current policy, Digital's internal sales force shall earn Full Revenue
Quota Credit in connection with (i) its sale of all Digital-Branded
Products and Services, and (ii) Approved Seller Products and Services
that have been sold and fulfilled by Digital.
10.3 In the event that Seller's direct sales force takes an order for
Digital-Branded Products directly from end users, Seller must fulfill
such orders through a Seller Selling Partner. Notwithstanding the
foregoing, unless otherwise agreed between the parties, Seller's sales
force shall receive comparable sales quota credit for the sale of
Digital-Branded Products as it receives for Seller Products.
10.4. Seller shall be responsible for accrediting all Seller Selling
Partners, pursuant to Seller's guidelines set forth on Schedule 10.4,
as they may be amended from time to time.
10.5. Seller agrees to use reasonable efforts to comply with Digital's
currently existing point-of-sale ("POS") process, which requires, among
other things, the monthly provision by Seller of sales out information
for all Digital-Branded Products sold by Seller Selling Partners,
provided that the foregoing shall be a required obligation for Tier-1
resellers. Digital agrees to use its reasonable efforts to provide
Seller with sales out information for all Digital-Branded Products sold
by Digital Partners, provided that the foregoing shall be a required
obligation for Tier-1 resellers. The specific information provided by
each party shall include (i) sales activity per the preceding calendar
month; (ii) Digital-Branded Product name and number; (iii)
end-Customer's name; (iv) vertical market; (v) ship to and bill to
locations (including country, state, and zip/postal code); (vi) total
invoice cost; and (viii) quantity per unit and extended cost.
10.6 Each party shall have the right to audit at its own expense, the other
party's documents and records to the extent they relate to any
obligation under this Section 10. Each party shall notify the other not
less than thirty (30) days prior to its intent to conduct such audit.
All audits shall be conducted during normal working hours. Audits shall
be conducted no more than once during each six (6) month period.
<PAGE>
10.7 Digital may not provide sales quota credit on sales of third party
network equipment, other than Seller Products, to any Digital sales
group except for sales through the Digital Services Division sales
force.
11.. DOCUMENTATION
11.1. Seller shall supply Digital with copies of originals and/or electronic
versions of all Product Information, including the documents listed in
the documentation plan, attached hereto as Schedule 11.1.
11.2. Seller hereby grants to Digital and its Authorized Warranty Service
Providers a royalty-free, non-exclusive, worldwide license to reproduce
and distribute, in whole or in part, all Product Information and any
other service related materials or documentation provided by Seller to
Digital or Digital Partners hereunder.
11.3. Seller shall provide Digital with sufficient copies, in Digital media
(e.g., CD format), of the then current generally available technical
documentation for the Products for supporting sales and services of the
Products. Digital shall have the right at no charge, to copy such
documentation for its own internal use, including posting such
documentation on Digital's internal electronic bulletin board.
12.. PROPRIETARY RIGHTS AND LICENSES
12.1. Digital owns all right, title and interest, including all Intellectual
Property Rights in all materials (including diagnostic Software,
hardware and Software tools and associated documentation) developed by
Digital for its own use or use of its Authorized Warranty Service
Providers in the performance of Services.
12.2 Seller hereby grants to Digital and its Digital Partners a
non-exclusive, worldwide license, until the expiration of the last
Digital Services Agreement, to duplicate, use, and distribute, directly
and indirectly, all Seller Software, including revisions and updates.
All Software, including revisions and updates, shall be available for
duplication and distribution internally by Digital, and to Customers
and/or third parties via down-loading from Seller's on-line
database(s). Digital will pay Seller a royalty on any Software that is
duplicated and distributed by Digital, at rates to be negotiated by the
parties. Royalty payments shall be reduced by the amount of any tax
required to be withheld against Seller income from royalties by a
government or governmental agency; provided that the parties shall
<PAGE>
cooperate in good faith to reduce such withholding to the extent
legally possible. Where reduced or nil rates of withholding tax apply
under the provisions of double taxation treaties, Seller shall provide
Digital with the authorizations necessary to apply for such rates, and
Digital shall make such filings as may be necessary to claim the
benefit of the reduced or nil rate. Digital shall provide Seller any
certification of the amounts withheld and copies of any certificates
furnished by a withholding jurisdiction. In the event that Digital
makes any payment without deduction of withholding tax, Seller shall
indemnify Digital against any subsequent liability arising from the
failure to make such a deduction. Prior to First Revenue Ship of a
Software Product or revision or upgrade thereto, Seller will provide
Digital with a distribution master for such Product, revision or
upgrade.
12.2.1 Notwithstanding the foregoing, Digital may issue no charge
Purchase Orders for all Software that is provided by Seller
generally to Customers at no cost. Such Software shall be
provided to Digital in such quantities as requested by
Digital, on a royalty-free basis.
12.2.2 Notwithstanding the foregoing, the provisions of Section
12.2 shall not apply to Seller's "Spectrum" software
Product. With respect to Seller's Spectrum Product, Seller
grants to Digital the right to provide support, including
upgrades and revisions, for such Product subject to mutually
agreed upon pricing and other provisions for the service and
support of such Product.
12.3 Seller hereby grants to Digital and its Authorized Warranty Service
Providers a royalty free, non-exclusive, worldwide license, until the
expiration of the last Digital Services Agreement, to use and
distribute, and to provide Customers, both directly and indirectly,
electronic access to all data and information contained in Seller's
Product information database (excluding company confidential
information) for the purpose of providing support to Customers.
12.4. Seller hereby grants to Digital and Digital Partners, during the Term
and for the time period set forth in Section 2.2 hereof, a
royalty-free, non-exclusive, worldwide license to use the Seller's
Marks in connection with the marketing, promotion and sale of Products
or Services. Under no circumstances shall Seller's branding, labeling
or Product identification be modified or otherwise mutilated.
12.5. Except as may be otherwise expressly stated herein, and except as
required by a party to exercise its express rights and obligations
hereunder, neither the terms of this Agreement, nor the acts of either
party under this Agreement, shall be considered in any way as a grant
of any license whatsoever under any of Digital's or Seller's present or
future Intellectual Property Rights, nor is any such license granted by
implication, estoppel, or otherwise.
<PAGE>
13.. PRODUCT LOANS, BETA SITES, MODELING
13.1. Digital may be given the opportunity to act as a beta site for all
Products. To the extent normally required by Seller, Digital will
execute Seller's standard beta site Agreement, subject to any mutually
agreeable modifications thereto.
13.2. Seller shall make available to Digital, at no charge to Digital, and
for use by appropriately-trained Digital personnel, all available
application Software which is produced by Seller and normally
distributed to Seller's Selling Partner to assist field sales and
engineering personnel in the modeling, configuration and testing of
Products.
13.3. Seller shall make available for use by Digital and Digital's Authorized
Warranty Service Providers service tools (including diagnostic Software
and hardware, hardware tools and associated documentation) to assist
Digital and Digital's Authorized Warranty Service in performing
Services hereunder. The types, quantities and deployment of such
service tools will be mutually determined by the parties. The
proprietary service tools shall remain the exclusive property of
Seller, and shall be returned to Seller upon expiration or termination
of this Agreement.
14.. TECHNICAL SUPPORT BY SELLER
14.1 During the Term and until the expiration of all Digital Service
Agreements, not to exceed five (5) years, Seller will assist Digital
personnel in resolving Customer or Product problems, including by
escalating to Seller's engineering and manufacturing organization as
set forth in the Escalation and Prioritization Guidelines attached
hereto as Schedule 14.1, until the Customer problem has been completely
resolved and closed in accordance with the parties' call closure
procedures.
14.2. During the Term and until the expiration of all Digital Service
Agreements, not to exceed five (5) years, Seller will provide MCS with
level 3 technical support to allow MCS to provide Warranty Services
and Contract Services to Customers and for Products used internally.
Such Seller support shall be provided from Seller's Support Center via
telephone, facsimile or e-mail messages, as appropriate, twenty-four
(24) hours per day, seven (7) days per week, for Priority 1 and 2
Problem Escalations, and eight (8) hours per day (during Digital's
standard working hours), Monday through Friday, for Priority 3
and 4 Problem Escalations, as defined, and in accordance with, the
Escalation and Prioritization Guidelines.
<PAGE>
14.3. During the Term and until the expiration of all Digital Service
Agreements, not to exceed five (5) years, Seller shall provide level 3
Software support in accordance with the service delivery model set
forth on Schedule 14.3.
14.4. Seller shall provide Digital and Digital Partners with pre- and
post-Product sales technical support, as set forth in a Technical
Support Plan to be mutually agreed upon by the parties within thirty
(30) days of execution of this Agreement and incorporated herein by
reference, and any other sales and technical support reasonably
requested by Digital.
14.5. [*]
14.6. All support provided by Seller pursuant to this Section 14 shall be [ *
]. Seller shall utilize a Product serial numbering system that ensures
that Digital has full capabilities to validate a Customer's Product
Warranty when a Customer is contacting Digital for Warranty Services.
14.7. Seller shall utilize a Product serial numbering system that ensures
that Digital has full capabilities to validate a Customer's Product
Warranty when a Customer is contacting Digital for Warranty Services.
14.8. Seller shall not be in breach of its support obligations under this
Agreement in the event that it ceases to provide support due to the
fact that Seller no longer has access to, or any inventory of, ASICs as
that term is defined in the Asset Purchase Agreement.
15.. PERSONNEL
15.1. Each party shall appoint a Relationship Director to manage all aspects
of the relationship including: (i) agreement amendments,
interpretations, and negotiations; (ii) field and sales engagement
planning information management; (iii) partner business reviews; (iv)
escalations; (v) partner sales and marketing programs; (vi) strategic
business planning including the Product strategy and the Product Road
Map; and (vii) such additional matters that the parties may agree upon.
*Confidential Treatment
<PAGE>
15.2. The parties agree that during the Term, they shall both maintain
appropriate personnel teams ("Program Office") that shall meet
periodically to effect the terms of this Agreement, including
individuals with the following areas of expertise:
15.2.1 forecasts and Spare Parts management, including acquisition;
15.2.2 product and service planning and management;
15.2.3. pre- and post-sales technical support, including
configuration and server interface support;
15.2.4. marketing development program management;
15.2.5. contract performance;
15.2.6. third party relationship management;
15.2.7. agreement amendments, interpretations, and negotiations;
15.2.8. field and sales engagement planning information management;
15.2.9. partner business reviews;
15.2.10. partner sales and marketing programs;
15.2.11. strategic business planning;
15.2.12. supporting global Customers and global partners; and
15.2.13. training development.
15.3. The initial organization structure for the parties' relationship is
attached as Schedule 15.3. Seller shall have the right to approve
Digital's initial Program Office, such approval not to be unreasonably
withheld.
15.4. The Digital Program Office shall consist of at least thirty dedicated
individuals and will include people within both Digital's Enterprise
Sales Force and Digital Services groups (or such groups' equivalents),
reasonably acceptable to Seller as related to employees identified on
the Seller's Key Employee Team, as that team is defined in the Asset
Purchase Agreement. Seller's Program Office shall consist of
individuals with complimentary skills and knowledge.
<PAGE>
15.5. For any period during which Seller is providing support under Sections
14.1, 14.2, 14.3 or 17.1 after the term hereof the parties' pre- and
post-sales technical support team shall continue for such period.
16.. TRAINING
16.1. Seller shall provide to Digital and Digital Partners all training
services necessary to meet the varying needs and requirements of
Digital's sales support organizations, including training: (i) sales
and sales support personnel; (ii) design architects and consultants;
and (iii) on-site and off-site maintenance and technical service,
support personnel and engineering services personnel. The training may
be provided using the following methods: (i) computer based training
(CBT); (ii) train the trainer programs; (iii) web-based offerings; (iv)
test-outs for certification; and/or (v) additional training
requirements set forth in a Training Plan to be determined by the
parties and incorporated by reference within thirty (30) days of this
Agreement. Training will be held at locations to be determined by
mutual agreement.
16.2. Seller will provide Digital and Digital Partners with sales and
technical training as follows: [ * ]. Seller agrees that all such
training may be paid for with MDF funds described in Section 4.9.
16.3. Seller shall provide to Digital and Digital Partners all materials
generally made available to its Seller Selling Partners including
Seller's self-study material on the Products, if any, and sets of all
present and future maintenance, diagnostic, and training documentation,
including video tapes and student workbooks, applicable to each
Product.
16.4. Upon Digital's request, Seller shall provide Digital and Digital
Partners with software, videotapes, presentation scripts and other
Product marketing materials offered by Seller to demonstrate the
features and functions of the Products for use by Digital and Digital
Partners in training or in the sales and marketing of its Services.
Seller agrees to make available to Digital and Digital Partners all
necessary training and training documentation
* Confidential Treatment
<PAGE>
in advance of FRS of New Products to enable Digital and Digital Partners to
adequately prepare for New Products sales and support.
17.. END OF LIFE
17.1. Upon termination of this Agreement, or in the event Seller discontinues
the manufacture and/or distribution of a Product(s) and/or removes such
Product(s) from its Price List, (collectively "End of Life"), [ * ].
17.2 Seller may not designate a Product as End of Life other than in
accordance with the Product Road Map.
18.. ENGINEERING AND FIELD CHANGE ORDERS
18.1. Seller will provide to Digital all safety related ECOs, including all
required Spare Parts, and technical service bulletins, [ * ] by
Seller or the applicable manufacturer. All other ECO
materials and technical service bulletins are to be provided to Digital
[ * ] by Seller or the applicable manufacturer.
18.2. Seller will bear all Spare Parts costs and will work with Digital to
determine the labor costs for all safety related ECO's and mandatory
ECO's required to bring the Product into functional conformity with its
design specifications. In addition, ECO's that affect purchased stock
and/or consigned units, purchased field Spare Parts, and Products under
Digital Services Agreements will be implemented in accordance with a
mutually agreed upon update schedule at no charge to Digital.
18.3. If Seller notifies Digital of a safety-related Product recall, Seller
shall be fully responsible for all costs associated with the purge and
return of Products from Digital's inventory.
*Confidential Treatment
<PAGE>
For non-safety Product recalls, the parties shall mutually determine at the time
of notification by Seller how payment of inventory purges and Product returns
shall be handled. Digital will advise Seller of the need for an ECO('s) due to
problems or defects in form, fit or function of the Products or Product safety
concerns. To the extent Seller determines a change is necessary, Seller shall
work with Digital to determine the means by which implementation of such changes
shall be accomplished.
19.. SALES AND RELATIONSHIP PLANNING AND ENGAGEMENT
19.1. Digital and Seller will inform the sales and support personnel of each
as to the availability, pricing and positioning of the Products and
Services by including appropriate information regarding Digital's
preferred services and systems provider role and Seller's network
products partnering role in Seller's and Digital's sales and marketing
literature, trade shows, customer seminars, sales training, and other
appropriate marketing/business development materials.
19.2. The parties' regional and country management shall compile a list of
countries where it is advantageous to develop formal business plans.
These jointly developed business plans will guide the engagement
between Digital and Seller in such country(ies), subject to this
Agreement. The plans will include, but not be limited to: (i) Digital's
targeted Product needs; (ii) opportunities for joint sales and
marketing activities; and (iii) appropriate business review processes
between Digital and Seller.
19.3. Each party shall develop standard descriptions of itself, its products
and its services for inclusion in the other party's sales material as
deemed appropriate by the other party. Notwithstanding the foregoing,
each party shall have the right to approve, upon reasonable advance
notice, any sales material that describes itself, its products, or its
services. Such approval shall be provided promptly, and shall not be
unreasonably withheld.
19.4. Subject to client ownership and/or confidentiality requirements,
Digital will use reasonable efforts to keep Seller generally informed
as to (i) problems encountered and resolutions developed with respect
to any Product, and (ii) all material modifications, design changes or
improvements to the Products suggested by any Customer, or any employee
or agent of Digital. Digital shall have no obligation to provide
Seller with the actual modifications, design changes, or improvements.
The provision of the foregoing information shall not confer on Seller
any Intellectual Property Rights in such information. Seller may use
all such information without obligation of any nature to Digital.
Seller's use of such information shall be at its own risk and neither
Digital nor the party making the applicable suggestion shall be liable
for any damages arising from such use.
<PAGE>
19.5. Digital shall receive invitations to attend Seller's annual partners'
conference, and Seller shall waive any registration or other fee
normally charged by Seller as a condition of attendance at such
conference.
20.. MARKETING
20.1. Seller shall promote Digital as its Strategic Network Services Partner,
and Digital shall promote the Seller as its Strategic Network Products
Partner. This designation does not preclude any partnerships,
relationships and programs between Digital and other vendors or service
providers, or between Seller and other vendors or service providers,
that do not conflict with this Section 20, provided that neither party
shall designate any other party in a manner that may imply a more
significant relationship.
20.2. Seller and Digital will mutually agree on a joint marketing and public
relations plan to support sales and services through Digital Partners
and Seller Selling Partners ("Marketing Plan"). The Marketing Plan will
be updated minimally twice a year to ensure that it remains relevant
and current.
20.2.1. Digital will implement the activities set forth in Schedule
20.2.1 to transition Digital's relationship with Digital's
resellers to Seller.
20.3. Except as set forth in this Agreement, both parties shall have the
exclusive right to determine the nature and extent of their own
advertising and marketing efforts.
20.4. Seller shall be designated at a corporate level as Digital's sole
preferred supplier for its internal network equipment needs. Digital
shall not designate a competitor of Seller as a major internal network
equipment supplier.
21.. WARRANTY
21.1. The manufacturer of a Product shall bear all costs associated with the
one-year manufacturers warranty.
21.2. Seller warrants to Digital that any services performed by Seller in
connection with this Agreement shall be performed in a workmanlike
manner.
<PAGE>
21.3. Seller warrants that all Products sold by Seller to Digital under the
terms of this Agreement will be free from defects in workmanship and
materials under normal unse and service for (i) one year for hardware
and Software and (ii) ninety (90) days for floppy dics and magnetic
media. All Warranty claims must comply with the terms of the Warranty
set forth on Schedule 8.10. The manufacturer of the Product, whether
Digital or Seller, as the case may be, shall be responsible for all
Product repairs during the one (1) year Warranty period.
21.4. Seller warrants that (i) the Software provided hereunder will perform
in substantial conformance to the program specifications therefor
during its one-year warranty period; (ii) that all defects in the
Software identified during the one-year warranty period will be
corrected; (iii) that the Software is Year 2000 Compliant; and (iv)
the magnetic media containing Software will not fail during the first
ninety (90) days.
21.5. The Warranty for Digital-Branded Products shall be as set forth on the
Warranty Schedule attached hereto, Schedule 8.10. The parties shall
mutually agree on all additions to, deletions from or changes to the
Schedule. Prior to shipment of any Digital-Branded Products, Seller
shall incorporate the Warranty set forth on Schedule 8.10 into its
Products literature, documentation and corresponding Warranty
registration cards or forms.
21.6. In the case of a breach of the forgoing warranties, Seller shall use
commericially reasonable efforts to remedy the breach.
21.7. Any replaced or repaired Spare Parts carry an additional ninety (90)
day warranty or the remainder of the initial Warranty period, whichever
is longer. All expenses associated with the transportation of Products
(to and from Seller's facilities) shall be borne by Seller, except in
the event that Products shall not require repair due to a no problem
found ("NPF") diagnosis by Seller. In cases of NPF, Digital shall be
responsible fo delivery expenses to Seller's facilities, and Seller
shall pay for delivery expenses back to Digital provided that.
21.7.1 In the event that Digital determines that a product is DOA,
Seller shall ship a replacement Product at Seller's cost within
twenty-four (24) hours of notification by Digital. Digital
shall return the DOA Product to Seller at Seller's cost.
21.7.2 In the event that Seller evaluates and determines that there is
NPF in greater than ten (10%) percent of the Products or parts
returned in a six (6) month period, Seller reserves the right to
charge Digital for each returned unit determined to be NPF
thereafter the lesser of (i) $150 or (ii) twenty-five percent
(25%) of the purchase price.
<PAGE>
21.8. The above warranties shall survive any delivery, acceptance, payment,
termination or expiration of a Purchase Order or this Agreement, and
shall run to Digital, its successors, assigns and Customers.
21.9. THE FOREGOING WARRANTIES OF SELLER ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
22.. STOCK ROTATION
22.1. Digital may Rotate up to [ * ]. In accordance with this Section,
Digital may Rotate Digital-Branded Products for Seller Products and
Seller Products for Digital-Branded Products, in its sole discretion.
22.2. Digital shall bear all transportation charges to Seller's designated
site for Products to be Rotated.
22.3. In no event shall Seller discontinue or remove a Product from its price
list other than in accordance with the Product Road Map process.
23.. ESCROW DEPOSIT
23.1 Upon request by Digital, Seller will place the Escrow Deposit into
escrow with a nationally recognized escrow agent in the United States
reasonably acceptable to both parties (the "Escrow Agent") pursuant to
a mutually agreed escrow agreement between the parties. Digital will be
responsible for the expenses of the Escrow Agent, and any of Seller's
direct and reasonable costs in excess of $5,000 per quarter. Seller
shall not be obligated to escrow any third party component utilized in
connection with its Spectrum Products.
23.2. The escrow agreement will provide, among other things, the terms under
which Digital will have access to the Escrow Deposit.
*Confidential Treatment
<PAGE>
24.. SUPPLY BY DIGITAL
24.1. Digital shall supply Seller with all Unique Materials that are used in
NPB Products and Seller Products. In the event of component shortages
by Digital, Digital will allocate among Seller and other purchasers pro
rata based on Digital's Demand Forecast for the past three (3) months.
Pricing for unique components will be the most favored nation pricing
for similar volumes but no more than existing transfer pricing,
adjusted for cost increases.
24.2. Seller will have the right to purchase NPB Products from Digital's
Taiwan and Scotland facilities for up to an eighteen (18) month period
commencing on the Closing Date. The price to Seller for such NPB
Products shall be (i) Digital's current intercompany transfer pricing
during the six (6) month period after the Closing Date and (ii) at an
arm's length negotiated price thereafter.
24.2.1 Digital shall provide Seller with Digital's standard
manufacturing warranty for NPB Products purchased by Seller
under this Section 24.
24.3. The parties shall negotiate the pricing, terms, and conditions of a
separate supply agreement prior to the Closing Date.
25.. LIMITATION OF LIABILITY AND REMEDIES
25.1. Except for damages awarded to a third party for indemnification claims
covered by this Agreement, neither party shall be liable to the other
for any damages arising from lost data, incidental, consequential,
special or indirect damages of the other of any kind (whether in
contract, tort, or under statute), even if the party has been advised
of the possibility of such damages.
25.2. Notwithstanding any provision contained herein to the contrary, except
with respect to the Product Credits and Minimum Product Volume
commitments, in no event will the aggregate liability of either party
or its respective officers, directors, employees and subsidiaries to
either party or to any third person for damages, direct or otherwise,
arising out of or in connection with this Agreement exceed twenty (20)
million dollars ($20,000,000) regardless of the cause or form of
action.
<PAGE>
25.3. The parties acknowledge that, in addition to any remedy they may have
at law or equity, nothing in this Agreement shall prevent (i) either
party from seeking termination of the Agreement; (ii) Digital from
recovering its remaining Product Credits as damages; and/or (iii)
Seller from recovering Digital's remaining Minimum Product Volumes as
damages.
25.4. Nothing in this Agreement shall preclude either party from seeking
relief through law or equity for any breach by the other party of this
Agreement.
26.. CONFIDENTIAL INFORMATION AND AUDITS
26.1. For purposes of this Agreement, "Confidential Information" means (i)
any information regarding the terms of this Agreement; (ii) any
information, in whatever form, designated by the disclosing party (the
"Disclosing Party") in writing as confidential, proprietary or marked
with words of like import when provided to the receiving party (the
"Receiving Party"); and (iii) information orally conveyed if the
Disclosing Party states at the time of the oral conveyance or promptly
thereafter that such information is Confidential, and provides specific
written confirmation thereof within 30 days of the oral conveyance.
26.2. Confidential Information will not include information which:
26.2.1. at or prior to the time of disclosure by the Disclosing Party
was known to the Receiving Party through lawful means;
26.2.2. at or after the time of disclosure by the Disclosing Party
becomes generally available to the public through no act or
omission on the Receiving Party's part;
26.2.3. is developed by the Receiving Party independent of any
Confidential Information it receives from the Disclosing
Party; or
26.2.4. the Receiving Party receives from a third Person free to make
such disclosure without breach of any legal obligation.
26.3. The Receiving Party may disclose Confidential Information pursuant to
any statute, regulation, order, subpoena or document discovery request,
provided that prior written notice of such disclosure is furnished to
the Disclosing Party as soon as practicable in order to afford the
Disclosing Party an opportunity to seek a protective order (it being
agreed that if the Disclosing Party is unable to obtain or does not
seek a protective order and the Receiving Party is legally compelled to
disclose such information, disclosure of such information may be made
without liability).
<PAGE>
26.4. The Receiving Party acknowledges the confidential and proprietary
nature of the Disclosing Party's Confidential Information and agrees
that it shall not discuss, reveal, or disclose the Disclosing Party's
Confidential Information to any other Person (other than Affiliates),
or use any Confidential Information for any purpose other than as
contemplated hereby, in each case, without the prior written consent of
the Disclosing Party. The Receiving Party agrees to take reasonable
precautions (no less rigorous than the Receiving Party takes with
respect to its own comparable Confidential Information) to prevent
unauthorized or inadvertent disclosure of the Confidential Information
of the Disclosing Party. In the event that a Receiving Party wished to
disclose Confidential Information to one of its professional advisors,
it may do so only if that professional advisor agrees to abide by the
terms of this Section.
26.5. The Receiving Party will, at the request of the Disclosing Party,
during the Term or thereafter (i) promptly return all Confidential
Information held or used by the Receiving Party in whatever form, or
(ii) at the discretion of the Disclosing Party, promptly destroy all
such Confidential Information, including all copies thereof, and those
portions of all documents that incorporate such Confidential
Information.
26.6. In view of the difficulties of placing a monetary value on the
Confidential Information, the Disclosing Party may be entitled to a
preliminary and final injunction without the necessity of posting any
bond or undertaking in connection therewith to prevent any further
breach of this Section or further unauthorized use of its Confidential
Information. This remedy is separate from any other remedy the
Disclosing Party may have.
26.7. The provisions of this Section will survive for three years after the
end of the Term.
26.8. Seller shall have the right to audit consigned parts or units as
received, stored and consumed by Digital. Seller shall notify Digital
not less than thirty (30) days prior to its intent to conduct such
audits. All audits shall be conducted during normal working hours.
Audits shall be conducted no more than once during each six (6) month
period. Physical inventory and cycle counts are the responsibility of
Digital. Such physical inventory and cycle counts shall be performed in
accordance with Digital standard business policies and practices.
26.9. Each party agrees to retain appropriate documentation regarding its
obligations hereunder, for at least three years following the
termination of this Agreement. Each party shall have the right at its
own expense, not more than once each year on reasonable advance notice
and during normal business hours, to have its independent auditor
inspect such documentation for the purpose of verifying the accuracy of
the figures reported and amounts owed pursuant to this Agreement. Any
discrepancies that are identified as a result of such an audit and are
not disputed will be promptly corrected by the parties. Any information
disclosed as a result of such an audit will be Confidential
Information.
<PAGE>
27.. COMPLIANCE WITH LAWS
27.1. All Products supplied and work performed by Digital and Seller under
this Agreement shall comply with all material applicable (United States
and other) laws and regulations, including customs and trade
regulations regarding restraints on the use of convict labor,
government procurement, export controls, environmental, health and
safety, and labor laws and regulations. Either party's failure to
comply with any of the requirements of this Section shall be considered
a material breach of this Agreement.
27.2. Upon request, the parties agree to provide the other with information
and certifications required to demonstrate compliance with Section
27.1. Schedule 27.2 describes some, but not all of the applicable
United States regulatory requirements with which Seller agrees to
comply and/or provide information and certifications.
28.. INDEMNIFICATION AND INSURANCE
28.1. Seller shall defend, indemnify, and hold Digital, its Subsidiaries, and
Digital Partners and their representatives, its officers, directors,
agents, subsidiaries, affiliates, and employees harmless from and
against any and all claims, losses, expenses (including reasonable
attorney's fees and expenses), demands, settlements, or judgments
("Damages") which result from or arise out of:
28.1.1. Seller's breach of any obligation, representation, covenant or
warranty provided or required hereunder.
28.1.2. Any claim against Digital alleging that Products, or any
component thereof, infringes any Intellectual Property rights
in any country. If an injunction against Digital's, a
Customer's or Digital Partners' use, sale, lease, license, or
other distribution of the Products, or any component thereof,
results from such a claim (or if Digital reasonably believes
such an injunction is likely), Seller shall, at its expense
(and in addition to the Seller's other obligations,
hereunder), and as Digital requests: obtain for Digital
and/or Customers or Digital Partners the right to continue
using, selling, leasing, licensing, or otherwise istributing
the Products, or replace or modify such Products so they
become noninfringing but functionally equivalent.
<PAGE>
28.1.3. Seller making greater service commitments to its Customers
then are set forth in the Gold Key Program.
28.1.4. The acts, errors, omissions, or negligence of Seller while on
the property of Digital or its Customers or Digital Partners,
regardless of whether the loss, damage, or injury resulting
for sale occurs after the Seller has left such property.
28.1.5. The presence of any equipment or tools used by Seller in the
performance of this Agreement, on the property of Digital or
its Customers or Digital Partners.
28.1.6. The use by Seller of Digital's equipment, tools, or facilities
whether or not any claims are based upon the condition of the
foregoing or Digital's, its agent's or employee's alleged
negligence in permitting its use.
28.1.7. Seller's obligations to any third Person.
28.1.8. Any product liability claims related to the Products
including, but not limited to, personal injury as well as
damage to real or personal property arising out of the use or
sale of the Products, and regardless of the theory upon which
the claim is based including, but not limited to, negligence,
strict liability, and breach of warranty.
28.2. Digital acknowledges that Seller's indemnification obligations under
Sections 28.1.2 and 28.1.8, solely as each relates to the NPB Products,
shall apply to NPB Products sold following the first anniversary of the
Closing Date, provided that Seller's indemnification obligations for
NPB Products shall commence immediately for any claim that arises
because of any upgrade or modification to the NPB Products made by, or
at the direction of, Seller, that would not have arisen in the absence
of such upgrade or modification.
28.3. Digital shall defend, indemnify, and hold Seller, its officers,
directors, agents, and employees harmless from and against any and all
Damages which result from or arise out of:
28.3.1. Digital's breach of any obligation, representation, covenant
or warranty provided or required hereunder.
28.3.2. The acts, errors, omissions, or negligence of Digital while on
the property of the Seller or its Customers, regardless of
whether the loss, damage, or injury resulting for sale occurs
after Digital has left such property; or
28.3.3. The presence of any equipment or tools used by Digital in the
performance of this Agreement, on the property of the Seller
or its Customers.
<PAGE>
28.3.4. Digital making greater Warranty commitments to its Customers
than are authorized under this Agreement.
28.3.5. The use by Digital of Seller's equipment, tools, or facilities
whether or not any claims are based upon the condition of the
foregoing or Seller's, its agent's or employee's alleged
negligence in permitting its use.
28.3.6. Digital's obligations to any third Person.
29.. NOTICES
Any notice given under this Agreement shall be written or sent
by telex or facsimile. Written notice shall be sent by registered mail or
certified mail, postage prepaid, return receipt requested, or by any other
overnight delivery service which delivers to the noticed destination, and
provides proof of delivery to the sender. All notices shall be effective when
first received at the following addresses:
If to Seller: If to Digital:
Cabletron Systems, Inc. Digital Equipment Corporation
36 Industrial Way 111 Powdermill Road
Rochester, NH 03866 Maynard, MA 01754
Attn: David Kirkpatrick Attn: Relationship Manager
Telecopy: (613) 332-4004 Telecopy: (508) 841-3522
with a copy to: with copies to:
Ropes & Gray Digital Equipment Corporation
One International Place 111 Powdermill Road
Boston, Massachusetts 02110-2624 Maynard, MA 01754
Attn: David A. Fine, Esq. Attn: Gail Mann, Esq.
Telecopy: (617) 951-7050 Telecopy: (508) 493-6049
<PAGE>
30.. FORCE MAJEURE
30.1. Neither party shall be liable for failure to perform any of its
obligations under this Agreement during any period in which such party
cannot perform due to fire, flood, or other natural disaster or act of
God, war, embargo, riot, or the intervention of any government
authority, provided that the party so delayed immediately notifies the
other party of such delay, and provided further that the party claiming
the benefit of this Section shall use reasonable effort to resume
performance. In the event a party cannot perform substantially all of
its obligations under this Agreement because of such an event, the
other party may terminate this Agreement.
31.. GENERAL
31.1. The rights and remedies of the parties provided in this Agreement shall
not be exclusive and are in addition to any other rights and remedies
provided at law or in equity.
31.2. This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto. Neither party
may assign or otherwise transfer this Agreement without the written
consent of the other party, and such consent shall not be unreasonably
withheld; however either party may assign this Agreement without the
consent of the other party in connection with the sale of all or
substantially all of its assets, whether by asset purchase, merger, or
otherwise.
31.3. Subject to the non-compete provisions set forth in the Asset Purchase
Agreement, nothing will be deemed to limit or restrict Digital from
entering into agreements with any other person covering services or
products similar to the Products or Services, or from offering similar
product or services itself.
31.4. The parties are independent contractors, and nothing in this Agreement
shall be construed as making either party the agent, joint venturer,
partner or employee of the other. Neither party shall make any
representation or warranty on behalf of the other, including but not
limited to any representation or warranty concerning the quality,
performance or other characteristics of the Products or Services other
than those which are consistent in all respects with, and do not expand
the scope of, the warranties set forth in this Agreement or the Gold
Key Program.
<PAGE>
31.5. If any provision of this Agreement is held illegal or unenforceable by
any court of competent jurisdiction, the parties shall meet and use
reasonable efforts to amend this Agreement with a provision that meets
the intent of the parties.
31.6. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts, without regard for its
principles of conflicts of law. The parties hereby consent to the
jurisdiction of the courts of the Commonwealth of Massachusetts or the
United States Federal District Court for the District of Massachusetts
for the purpose of any action or proceeding brought by them in
connection with this Agreement.
31.7. Digital and Seller agree to comply with U.S. laws and regulations
governing the export of technology and products, including the Export
Administration Act of 1979, as amended, any successor legislation, and
the Export Administration Regulations issued by the Department of
Commerce, Bureau of Export Administration. Digital and Seller agree to
cooperate with each other, including, without limitation, providing
required documentation and information, in order to obtain the
necessary government authorizations prior to any export of technology
or Products under this Agreement.
31.8. The failure of either party to enforce, in any one or more instances,
any of the terms or conditions of this Agreement shall not be construed
as a waiver of the future performance of any such term or condition.
31.9. This Agreement and all Schedules and any addenda hereto, together with
the Asset Purchase Agreement, (i) represent the entire agreement of the
parties regarding the subject matter hereof; (ii) supersedes all prior
oral and written understandings and agreements between the parties
concerning the subject matter hereof; and (iii) may not be modified or
amended except in a writing signed by the executive officers of the
parties.
<PAGE>
DIGITAL EQUIPMENT CORPORATION SELLER
/s/ Harold D. Copperman /s/ Donald B. Reed
Authorized Signature Authorized Signature
Harold D. Copperman Donald B. Reed
Senior Vice President and General Manager President
Products Division
Name and Title Name and Title
November 24, 1997 November 24, 1997
Date Date
<PAGE>
EXHIBIT 10.1
CABLETRON SYSTEMS, INC.
DISCLOSURE SCHEDULE
INDEX
Schedule 1.56 - Shared Resellers
Schedule 3.1 - Product Road Map Outline
Schedule 6.1 - Quality Assurance Guidelines
Schedule 8.1.1 - Territories in Which Digital Will Not Perform Warranty
Services
Schedule 8.2.1 - Seller Warranty Services Territories to be Provided by
Digital
Schedule 8.3 - Gold Key Program
Schedule 8.10 - Warranty Services and Descriptions
Schedule 9.1.1 - Trademark License and Quality Requirements
Appendix 1 - The Digital Brand
Appendix 2 - DEC Formative Marks
Appendix 3 - Digital Logo Reproduction Requirements
Appendix 4 - Eligibility for Digital Branding Criteria
Appendix 5 - Digital Brand Relationship Logo Usage Requirements
Appendix 6 - Usage Criteria for the DEC Formative Marks
Appendix 7 - Relationship Logo
Schedule 9.6 - Current Cabletron Products to be Branded with the
Digital Marks
Schedule 9.8 - Digital's Requirements for Current Use of the Digital
Marks
Schedule 9.9.5 - Business Card Drawing
<PAGE>
Schedule 10.4 - Europe and U.S. Accreditation Guidelines
Schedule 11.1 - Documentation Plan
Schedule 14.1 - Escalation and Prioritization Guidelines
Schedule 14.3 - Contract Services Delivery Model
Schedule 15.3 - Relationship Director Responsibilities
Appendix 1 - Digital Networks Program Office
Schedule 20.2.1 - Preferred Service Provider Marketing Plan
Schedule 27.2 - Legal Compliance Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>4
<DESCRIPTION>STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TEXT>
<TABLE>
<CAPTION>
EXHIBIT 11.1
CABLETRON SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For periods ended November 30, 1997 and 1996
(in thousands of dollars, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Income Per Common Share - (non-dilutive)
<S> <C> <C> <C> <C>
Net income .................................. $ 19,898 $ 67,742 $136,309 $161,789
======== ======== ======== ========
Weighted average common shares outstanding .. 157,986 155,299 157,527 154,968
======== ======== ======== ========
Reported net income per common share ........ $ 0.13 $ 0.44 $ 0.87 $ 1.04
======== ======== ======== ========
Net Income Per Common Share - (full dilution)
Net income .................................. $ 19,898 $ 67,742 $136,309 $161,789
======== ======== ======== ========
Weighted average common shares outstanding .. 157,986 155,299 157,527 154,968
Add net additional common shares upon
exercise of common stock options ............ 1,889 3,414 2,379 4,921
-------- -------- -------- --------
Adjusted average common shares outstanding .. 159,875 158,713 159,906 159,889
======== ======== ======== ========
Net income per common share - (full
dilution) .................................. $ 0.12 $ 0.43 $ 0.85 $ 1.01
======== ======== ======== ========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>FDS -- FOR THE 3RD QUARTER
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extrated from the
Consolidated Balance Bheet, Consolidated Statement of Operations and
Consolidated statement of Cash Flows included in the Company's Form 10-Q for
the period ending November 30, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000846909
<NAME> Cabletron Systems, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 206,926
<SECURITIES> 214,680
<RECEIVABLES> 298,672
<ALLOWANCES> 16,530
<INVENTORY> 280,021
<CURRENT-ASSETS> 1,095,512
<PP&E> 410,148
<DEPRECIATION> 198,125
<TOTAL-ASSETS> 1,486,844
<CURRENT-LIABILITIES> 243,615
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,581
<OTHER-SE> 1,238,649
<TOTAL-LIABILITY-AND-EQUITY> 1,486,844
<SALES> 1,065,808
<TOTAL-REVENUES> 1,065,808
<CGS> 476,867
<TOTAL-COSTS> 476,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 206,799
<INCOME-TAX> 70,490
<INCOME-CONTINUING> 136,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,309
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.85
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| GAS | https://www.sec.gov/Archives/edgar/data/1004155/0001004155-98-000006.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0001004155-98-000006.txt : 19980218
<SEC-HEADER>0001004155-98-000006.hdr.sgml : 19980218
ACCESSION NUMBER: 0001004155-98-000006
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980217
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AGL RESOURCES INC
CENTRAL INDEX KEY: 0001004155
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]
IRS NUMBER: 582210952
STATE OF INCORPORATION: GA
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-14174
FILM NUMBER: 98540823
BUSINESS ADDRESS:
STREET 1: 303 PEACHTREE ST NE
CITY: ATLANTA
STATE: GA
ZIP: 30308
BUSINESS PHONE: 4045844000
MAIL ADDRESS:
STREET 1: 303 PEACHTREE ST
STREET 2: STE 400
CITY: ATLANTA
STATE: GA
ZIP: 30308
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>AGL RESOURCES INC. FORM 10-Q
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification Number
1-14174 AGL RESOURCES INC. 58-2210952
(A Georgia Corporation)
303 PEACHTREE STREET, NE
ATLANTA, GEORGIA 30308
404-584-9470
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1997.
Common Stock, $5.00 Par Value
Shares Outstanding at December 31, 1997 ..............................56,799,765
<PAGE>
AGL RESOURCES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 1997
Table of Contents
Item Page
Number Number
PART I -- FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Income Statements 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 13
PART II -- OTHER INFORMATION
1 Legal Proceedings 21
5 Other Information 21
6 Exhibits and Reports on Form 8-K 26
SIGNATURES 27
<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS AND TWELVE MONTHS ENDED
DECEMBER 31, 1997 AND 1996
(MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
Three Months Twelve Months
------------------------------- -----------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 402.3 $ 379.6 $1,310.3 $1,271.0
Cost of Gas 257.1 231.1 792.5 762.6
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Margin 145.2 148.5 517.8 508.4
- -----------------------------------------------------------------------------------------------------------------------------------
Other Operating Expenses 92.8 88.3 354.1 345.1
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Income 52.4 60.2 163.7 163.3
- -----------------------------------------------------------------------------------------------------------------------------------
Other Income 5.2 2.4 13.2 15.1
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Interest and Income Taxes 57.6 62.6 176.9 178.4
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense and Preferred Stock Dividends
Interest expense 14.1 13.6 52.7 49.9
Dividends on preferred stock of subsidiaries 2.4 1.1 7.5 4.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense and preferred stock
dividends 16.5 14.7 60.2 54.3
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 41.1 47.9 116.7 124.1
- -----------------------------------------------------------------------------------------------------------------------------------
Income Taxes 15.4 18.3 43.9 48.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 25.7 $ 29.6 $ 72.8 $ 76.1
===================================================================================================================================
Basic and Diluted Earnings Per Share
of Common Stock (See Note 7) $ 0.45 $ 0.53 $ 1.29 $ 1.37
Cash Dividends Paid Per Share of Common Stock $ 0.27 $ 0.27 $ 1.08 $ 1.065
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS)
<CAPTION>
(Unaudited)
December 31, September 30,
---------------------- -------------
ASSETS 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents $ 7.9 $ 1.1 $ 4.8
Receivables (less allowance for uncollectible accounts
of $5.0 at December 31, 1997, $3.9 at December 31,
1996, and $2.6 at September 30, 1997) 225.8 222.9 93.9
Inventories
Natural gas stored underground 109.3 113.1 151.8
Liquefied natural gas 17.7 17.4 17.5
Materials and supplies 6.7 6.5 8.2
Other 6.3 2.8 6.0
Deferred purchased gas adjustment 33.1 31.4 8.5
Other 1.9 10.0 2.0
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 408.7 405.2 292.7
- ------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Utility plant 2,091.3 1,982.7 2,069.1
Less accumulated depreciation 661.4 615.8 648.8
- ------------------------------------------------------------------------------------------------------------------------
Utility plant - net 1,429.9 1,366.9 1,420.3
- ------------------------------------------------------------------------------------------------------------------------
Nonutility property 108.2 88.0 105.8
Less accumulated depreciation 30.9 27.0 29.5
- ------------------------------------------------------------------------------------------------------------------------
Nonutility property - net 77.3 61.0 76.3
- ------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment - net 1,507.2 1,427.9 1,496.6
- ------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Unrecovered environmental response costs 53.3 40.7 55.0
Investment in joint ventures 37.2 33.2 32.7
Unrecovered Integrated Resource Plan costs 1.3 9.6 2.0
Other 42.5 37.2 46.0
- ------------------------------------------------------------------------------------------------------------------------
Total deferred debits and other assets 134.3 120.7 135.7
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,050.2 $ 1,953.8 $ 1,925.0
========================================================================================================================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS)
<CAPTION>
(Unaudited)
December 31, September 30,
---------------------- -------------
LIABILITIES AND CAPITALIZATION 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts payable-trade $ 96.6 $ 107.5 $ 65.1
Short-term debt 150.5 188.8 29.5
Redemption requirements on preferred stock 0.3 44.5
Customer deposits 31.6 29.9 29.2
Interest 19.2 18.4 29.6
Taxes 30.3 24.0 19.1
Other 29.4 32.7 26.4
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 357.6 401.6 243.4
- ------------------------------------------------------------------------------------------------------------------
Accumulated Deferred Income Taxes 188.6 170.0 191.7
- ------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Accrued environmental response costs 37.3 31.3 37.3
Accrued pension costs 6.6
Accrued postretirement benefits costs 36.9 34.5 34.3
Deferred credits 59.7 60.5 61.9
- ------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 133.9 132.9 133.5
- ------------------------------------------------------------------------------------------------------------------
Capitalization
Long-term debt 660.0 584.5 660.0
Subsidiary obligated mandatorily redeemable
preferred securities 74.3 74.3
Preferred stock of subsidiary, cumulative $100 par or
stated value, shares issued and outstanding of
0.6 at December 31, 1996 58.5
Common stock, $5 par value, shares issued and
outstanding of 56.8 at December 31, 1997, 55.9 at 635.8 606.3 622.1
December 31, 1996, and 56.6 at September 30, 1997
- ------------------------------------------------------------------------------------------------------------------
Total capitalization 1,370.1 1,249.3 1,356.4
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Capitalization $ 2,050.2 $ 1,953.8 $ 1,925.0
==================================================================================================================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(MILLIONS)
(UNAUDITED)
<CAPTION>
Three Months Twelve Months
---------------------------- -------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 25.7 $ 29.6 $ 72.8 $ 76.1
Adjustments to reconcile net income to
net cash flow from operating activities
Depreciation and amortization 18.4 17.4 71.2 68.3
Deferred income taxes (1.3) 2.6 16.3 26.3
Non-cash compensation expense 0.3 0.3 2.2 0.1
Other (0.6) (0.2) (2.4) (0.8)
Changes in certain assets and liabilities (72.4) (84.0) (4.3) (57.8)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flow from operating
activities (29.9) (34.3) 155.8 112.2
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Sale of common stock, net of expenses 0.7 0.3 2.2 1.8
Sale of preferred securities, net of expenses 74.3
Sale of long-term debt 30.0 75.5 30.0
Short-term borrowings, net 121.0 36.8 (39.8) 32.5
Redemptions and purchase fund requirements
of preferred securities (44.5) (59.2)
Dividends paid on common stock (13.0) (12.6) (51.2) (49.5)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flow from financing
activities 64.2 54.5 1.8 14.8
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Utility plant expenditures (25.2) (29.0) (119.7) (134.0)
Non-utility plant expenditures (2.5) (0.3) (25.5) (1.2)
Cash received from joint ventures 0.3 0.1 2.2 2.9
Investment in joint ventures (3.0) 0.5 (4.5) 0.9
Cost of removal, net of salvage (0.8) 0.9 (3.3) (0.3)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flow used in investing
activities (31.2) (27.8) (150.8) (131.7)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 3.1 (7.6) 6.8 (4.7)
Cash and cash equivalents
at beginning of period 4.8 8.7 1.1 5.8
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 7.9 $ 1.1 $ 7.9 $ 1.1
==========================================================================================================================
Cash Paid During the Year for
Interest $ 23.6 $ 21.0 $ 51.3 $ 46.4
Income taxes $ 1.4 $ 0.2 $ 29.5 $ 19.5
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Principles of Consolidation
AGL Resources Inc. (AGL Resources), a Georgia corporation, became the
holding company for Atlanta Gas Light Company (AGL), AGL's wholly owned
natural gas utility subsidiary, Chattanooga Gas Company (Chattanooga), and
AGL's nonregulated subsidiaries upon receipt of shareholder and regulatory
approval on March 6, 1996. At that time each share of AGL common stock was
converted into one share of AGL Resources common stock, and AGL became the
primary subsidiary of AGL Resources. AGL comprises substantially all of AGL
Resources' assets, revenues, and earnings. The consolidated financial
statements of AGL Resources include the financial statements of AGL,
Chattanooga, and the nonregulated subsidiaries as though AGL Resources had
existed in all periods shown and had owned all of AGL's outstanding common
stock prior to March 6, 1996. Intercompany balances and transactions have
been eliminated.
2. Subsidiaries
Unless noted specifically or otherwise required by the context,
references to AGL Resources include AGL, AGL Interstate Pipeline Company
(AGL Interstate Pipeline), AGL Peaking Services, Inc. (AGL Peaking
Services), and AGL Resources' nonregulated subsidiaries. AGL Resources
engages in natural gas distribution through AGL and AGL's wholly owned
subsidiary, Chattanooga. AGL is a public utility that distributes and
transports natural gas in Georgia and Tennessee and is subject to
regulation by the Georgia Public Service Commission (Georgia Commission)
and the Tennessee Regulatory Authority (TRA), with respect to its rates for
service, maintenance of its accounting records, and various other matters.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which give appropriate
recognition to the rate-making and accounting practices and policies of the
Georgia Commission and the TRA.
AGL Resources engages in nonregulated business activities through its
wholly owned subsidiaries, AGL Energy Services, Inc. (AGL Energy Services),
a gas supply services company; AGL Investments, Inc. (AGL Investments), a
subsidiary established to develop and manage certain nonregulated
businesses; The Energy Spring, Inc., a retail energy marketing company; and
AGL Resources Service Company. AGL Energy Services has one nonregulated
subsidiary, Georgia Gas Company. AGL Investments has six nonregulated
subsidiaries: AGL Propane, Inc. (formerly known as Georgia Gas Service
Company) (AGL Propane); AGL Consumer Services, Inc.; AGL Gas Marketing,
Inc.; AGL Power Services, Inc.; AGL Energy Wise Services, Inc. and Trustees
Investments, Inc.
3. Interim Financial Statements
In the opinion of management, the unaudited condensed consolidated
financial statements included herein reflect all normal recurring accruals
necessary for a fair statement of the results of the interim periods
reflected. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted from these condensed consolidated
financial statements pursuant to applicable rules and regulations of the
Securities and Exchange Commission. These financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the annual reports on Form 10-K of AGL Resources for the fiscal
years ended September 30, 1997, and September 30, 1996. Certain 1996
amounts have been reclassified for comparability with 1997 amounts.
<PAGE>
4. Earnings
AGL Resources' principal business is the distribution of natural gas
to customers in central, northwest, northeast and southeast Georgia and the
Chattanooga, Tennessee area through its natural gas distribution
subsidiary, AGL. Since consumption of natural gas is dependent to a large
extent on weather, the majority of AGL Resources' income is realized during
the winter months. Earnings for a three-month period are not indicative of
the earnings for a twelve-month period.
5. Environmental Matters - AGL
AGL has identified nine sites in Georgia where it currently owns all
or part of a manufactured gas plant (MGP) site. In addition, AGL has
identified three other sites in Georgia which AGL does not own, but that
may have been associated with the operation of MGPs by AGL or its
predecessors.
Those sites are potentially subject to a variety of regulatory
programs. AGL's response to MGP sites in Georgia is proceeding under two
state regulatory programs: the Georgia Hazardous Waste Management Act
(HWMA) and the Hazardous Site Response Act (HSRA). AGL is planning to
undertake some degree of response action, under one or both of those
programs, at most of the Georgia sites.
AGL also has identified three sites in Florida which may have been
associated with AGL or its predecessors. AGL does not own any of the former
MGP sites in Florida. However, AGL has been contacted by the current owners
of two of those sites. In addition, AGL has received a "Special Notice
Letter" from the U.S. Environmental Protection Agency (EPA) with respect to
one of the two sites and a "General Notice Letter" with respect to the
other. AGL expects to undertake some degree of response action at those two
sites. AGL currently is negotiating with both regulatory authorities and
other potentially responsible parties to determine the extent of its
responsibility for the two sites.
AGL has estimated the investigation and remediation expenses likely
to be associated with the former MGP sites. First, AGL has identified
several sites where it has concluded that no significant response actions
are reasonably likely in the foreseeable future and therefore has not made
any cost projections for these sites. Second, since response cost
liabilities are often spread among potentially responsible parties, AGL's
ultimate liability will, in some cases, be limited to AGL's equitable share
of such expenses under the circumstances. Therefore, where reasonably
possible, AGL has attempted to estimate the range of AGL's equitable share,
given current cost sharing arrangements, combined with AGL's current
knowledge of relevant facts, including the current methods of equitable
apportionment and the solvency of potential contributors. Where such an
estimation was not reasonably possible, AGL has estimated a range of
expenses without adjustment for AGL's equitable share. Finally, AGL has,
with the assistance of outside consultants, prepared estimates of the range
of future investigation and remediation costs for those sites where further
action appears likely.
Applying these concepts to those sites where some future action
presently appears reasonably possible, AGL currently estimates that the
future cost to AGL of investigating and remediating the former MGP sites
could be as low as $37.3 million or as high as $76.5 million. That range
does not include other expenses, such as unasserted property damage claims,
for which AGL may be held liable, but for which neither the existence nor
the amount of such liabilities can be reasonably forecast. Within the
stated range of $37.3 million to $76.5 million, no amount within the range
can be identified reliably as a better estimate than any other estimate.
Therefore, a liability at the low end of that range has been recorded in
the financial statements.
<PAGE>
AGL has two means of recovering the expenses associated with the
former MGP sites. First, the Georgia Commission has approved the recovery
by AGL of Environmental Response Costs, as defined, pursuant to an
Environmental Response Cost Recovery Rider (ERCRR). For purposes of the
ERCRR, Environmental Response Costs include investigation, testing,
remediation and litigation costs and expenses or other liabilities relating
to or arising from MGP sites. A regulatory asset in the amount of $53.3
million has been recorded in the financial statements to reflect the
recovery of those costs through the ERCRR.
In connection with the ERCRR, the staff of the Georgia Commission has
undertaken a financial and management process audit related to the MGP
sites, cleanup activities at the sites, and environmental response costs
that have been incurred for purposes of the ERCRR. The Georgia Commission
has scheduled a hearing for March 16, 1998 to consider three issues
relating to the ERCRR. Specifically, the Georgia Commission is to consider
whether the term "Environmental Response Costs" should include punitive
damages, whether AGL should be required to provide an annual accounting for
revenue recovered from customers through the ERCRR, and whether a schedule
should be established for site remediation.
Second, AGL intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. During the twelve month
period ended December 31, 1997, AGL recovered $4.6 million from its
insurance carriers and other potentially responsible parties. In accordance
with provisions of the ERCRR, AGL recognized other income of $1.1 million
and established regulatory liabilities for the remainder of the recoveries.
On February 10, 1995, a class action lawsuit captioned Trinity
Christian Methodist Episcopal Church, et al. v. Atlanta Gas Light Company,
No. 95-RCCV-93, was filed in the Superior Court of Richmond County,
Georgia, seeking to recover for damage to property owned by persons
adjacent to and nearby the former MGP site in Augusta, Georgia. On December
13, 1996, the parties reached a preliminary settlement, which was approved
by the Court on April 15, 1997. Pursuant to the settlement, there is a
claims process before an umpire to determine either the full fair market
value of properties tendered to AGL or the diminution in fair market value
of properties not tendered to AGL. Settlements have been paid to 188
property owners in the class totaling approximately $2.9 million, including
legal fees and expenses of the plaintiffs. There are seven settlements yet
to be paid. One settlement of approximately $64,000, including attorney's
fees, is pending reconsideration, and AGL has filed motions to vacate six
settlements totaling approximately $4.3 million. Orders were entered
denying the motions to vacate. AGL has filed notices of appeal with the
Georgia Court of Appeals seeking to reverse the denial of the motions to
vacate.
6. Competition - AGL
Alternative Fuels and Competitive Pricing. AGL competes to supply
natural gas to interruptible customers who are capable of switching to
alternative fuels, including propane, fuel and waste oils, electricity and,
in some cases, combustible wood by-products. AGL also competes to supply
gas to interruptible customers who might seek to bypass its distribution
system.
AGL can price distribution services to interruptible customers four
ways. First, multiple rates are established under the rate schedules of
AGL's tariff approved by the Georgia Commission. If an existing tariff rate
does not produce a price competitive with a customer's relevant competitive
alternative, three alternate pricing mechanisms exist: Negotiated
Contracts, Interruptible Transportation and Sales Maintenance (ITSM)
discounts and Special Contracts.
<PAGE>
On February 17, 1995, the Georgia Commission approved a settlement
that permits AGL to negotiate contracts with customers who have the option
of bypassing AGL's facilities (Bypass Customers) to receive natural gas
from other suppliers. The bypass avoidance contracts (Negotiated Contracts)
can be renewable, provided the initial term does not exceed five years,
unless a longer term specifically is authorized by the Georgia Commission.
The rate provided by the Negotiated Contract may be lower than AGL's filed
rate, but not less than AGL's marginal cost of service to the potential
Bypass Customer. Service pursuant to a Negotiated Contract may commence
without Georgia Commission action, after a copy of the contract is filed
with the Georgia Commission. Negotiated Contracts may be rejected by the
Georgia Commission within 90 days of filing; absent such action, however,
the Negotiated Contracts remain in effect. All of the Negotiated Contracts
filed to date with the Georgia Commission are in effect.
The settlement also provides for a bypass loss recovery mechanism to
operate until the earlier of September 30, 1998, or the effective date of
new rates for AGL resulting from a general rate case. Under the recovery
mechanism, AGL is allowed to recover from other customers 75% of the
difference between (a) the nongas cost revenue that was received from the
potential Bypass Customer during the most recent twelve-month period and
(b) the nongas cost revenue that is calculated to be received from the
lower Negotiated Contract rate applied to the same volumetric level.
Concerning the remaining 25% of the difference, AGL is allowed to retain
44% of firm customers' share of capacity release revenues in excess of $5
million until AGL is made whole for discounts from Negotiated Contracts.
In addition to Negotiated Contracts, which are designed to serve
existing and potential Bypass Customers, AGL's ITSM Rider continues to
permit discounts for short-term transactions to compete with alternative
fuels. Revenue shortfalls, if any, from interruptible customers as measured
by the test-year interruptible revenues determined by the Georgia
Commission in AGL's 1993 rate case, will continue to be recovered under the
ITSM Rider.
The settlement approved by the Georgia Commission also provides that
AGL may file contracts (Special Contracts) for Georgia Commission approval
if the service cannot be provided through the ITSM Rider, existing rate
schedules, or Negotiated Contract procedures. A Special Contract, for
example, could involve AGL providing a long-term service contract to
compete with alternative fuels where physical bypass is not the relevant
competition.
Pursuant to the approved settlement, AGL has filed and is providing
service pursuant to 55 Negotiated Contracts. Additionally, AGL is providing
service pursuant to six Special Contracts.
On November 27, 1996, the TRA approved an experimental rule allowing
Chattanooga to negotiate contracts with large commercial and industrial
customers who have long-term competitive options, including bypass. The
experimental rule provides that before any such customer is allowed a
discounted rate, both the large customer and Chattanooga must petition the
TRA for approval of the rates set forth in the contract. On October
7, 1997, the TRA denied petitions filed by Chattanooga and four large
customers for discounted rates pursuant to the experimental rule upon a
finding that customer bypass was not imminent. On January 14, 1998,
however, the FERC issued an order authorizing the bypass of Chattanooga by
Southern Natural Gas Company (Southern) to serve an interruptible customer.
AGL is continuing to negotiate with the customer to determine whether a
compromise can be reached to retain the customer, and Southern has not yet
constructed the facilities necessary to complete the bypass. Management
does not expect the order issued by the FERC to have a material adverse
effect on the consolidated financial statements of AGL Resources.
<PAGE>
Atlanta Gas Light Company - Unbundling and Rate Filing. The Natural
Gas Competition and Deregulation Act (Georgia Gas Act) was signed into law
on April 14, 1997. The act provides a legal framework for comprehensive
deregulation of many aspects of the natural gas business in Georgia.
On November 26, 1997, AGL filed with the Georgia Commission notice of
its election to be subject to this new law and to establish separate rates
for unbundled services. AGL filed contemporaneously an application with the
Georgia Commission to have its distribution rates, charges, classifications
and services regulated pursuant to performance-based regulation. The filing
requests an increase in revenues of $18.6 million annually. The requested
increase includes the costs to support changes in AGL's business systems to
ensure reliable service to customers and that the systems are in place to
serve new gas suppliers in the competitive marketplace.
Within seven months from the date of such filing, the Georgia
Commission must issue an order approving the plan as filed or with
modification. Retail marketing companies, including AGL affiliates, may now
file with the Georgia Commission separate certificate of authority
applications to sell natural gas to firm customers connected to AGL's
delivery system. It is currently anticipated that marketers who become
certificated by the Georgia Commission may begin offering natural gas sales
services to customers of AGL by November 1998.
The Georgia Gas Act provides a transition period leading to a
condition of effective competition in all natural gas markets. AGL, as an
electing distribution company, will unbundle all services to its natural
gas customers, allocate firm delivery capacity to certificated marketers
selling the gas commodity and create a secondary market for interruptible
transportation capacity. Certificated marketers, including nonregulated
affiliates of AGL, will compete to sell natural gas to all customers at
market-based prices. AGL will continue to provide intrastate delivery of
gas to end users through its existing system, subject to continued rate
regulation by the Georgia Commission. As a result of the election to be
subject to the Georgia Gas Act, it is expected that the purchased gas
adjustment provisions included in AGL's rate schedules will be discontinued
during fiscal 1999. The November 26, 1997 filing contains a provision to
true-up any over-recovery or under-recovery that may exist at the time such
purchased gas adjustment provisions are discontinued. Accordingly, AGL will
no longer defer any over-recoveries or under-recoveries of gas costs when
the purchased gas adjustment provisions are discontinued. In addition, the
Georgia Commission will continue to regulate safety, access and quality of
service pursuant to an alternative form of regulation.
The Georgia Gas Act provides marketing standards and rules of
business practice to ensure the benefits of a competitive natural gas
market are available to all customers on AGL's system. The act imposes on
marketers an obligation to serve with a corresponding universal service
fund that provides a funding mechanism for uncollectible accounts and
enables AGL to expand its facilities and serve the public interest.
Hearings in this proceeding are scheduled for the weeks of March 9,
1998, April 28, 1998 and May 18, 1998, and a decision by the Georgia
Commission is expected in June 1998.
Pursuant to the Georgia Gas Act, the Georgia Commission issued rules
and regulations on December 30, 1997, for certification of marketers and
assignment of firm customers to marketers for customers who ultimately do
not select a marketer after competition is fully developed. Additionally,
the Georgia Commission issued a Notice of Inquiry to address certain
aspects of random assignment of customers and marketer certification not
fully resolved in the rulemakings.
<PAGE>
7. Earnings Per Share
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128), which establishes standards for computing and presenting
earnings per share. AGL Resources adopted SFAS 128 in October 1997.
Earnings per share are based on the weighted average number of common
and common stock equivalent shares outstanding. The average number of
common shares used in the calculation of basic earnings per share and the
weighted average number of shares and common stock equivalent shares used
in the calculation of diluted earnings per share for the three-month and
twelve-month periods ended December 31, 1997 and 1996, were as follows:
(In millions)
Basic Diluted
Three-months ended
December 31, 1997 56.7 56.8
December 31, 1996 55.8 55.9
Twelve-months ended
December 31, 1997 56.3 56.4
December 31, 1996 55.5 55.6
The only common stock equivalent shares are those related to stock
options outstanding during the respective years whose exercise price was
less than the average market price of the common shares for the respective
periods. Additional options to purchase common stock were outstanding, but
were not included in the computation of diluted earnings per share because
the exercise price of those options was greater than the average market
price of the common shares for the respective periods.
8. Accounting Developments
During its July 1997 meeting, the Financial Accounting Standards
Board's Emerging Issues Task Force (EITF) concluded that once legislation
is passed to deregulate a segment of a utility and that legislation
includes sufficient detail for the enterprise to determine how the
transition plan will affect that segment, Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), should be discontinued for that segment. The state
of Georgia has enacted legislation, the Georgia Gas Act, that allows for
the deregulation of the merchant function and unbundling of certain
ancillary services of local gas distribution companies. AGL has filed its
election to become an electing distribution company. The rates to transport
natural gas through the intrastate pipe system of the local gas
distribution company will be regulated by the Georgia Commission. Since
AGL's regulatory assets and liabilities associated with its gas
distribution activities continue to be regulated, AGL has determined that
the continued application of SFAS 71 related to those distribution
activities remains appropriate. See Part II, Item 5 - "Other Information,
State Regulatory Matters" in this Form 10-Q.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS 130) and Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). AGL Resources will adopt SFAS 130 and SFAS 131 in
fiscal year 1999. SFAS 130 establishes standards for the reporting and
displaying of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
SFAS 131 establishes standards for the way that
<PAGE>
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders.
Management does not expect these new pronouncements to have a
significant impact on the presentation of AGL Resources' consolidated
financial statements.
During November 1997, the EITF published Issue No. 97-13 "Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project That Combines Business Process Reengineering and Information
Technology Transformation." Issue No. 97-13 addresses costs which have been
incurred by organizations related to advances in computer technologies.
Some of the costs which have been incurred include consulting fees paid for
business process reengineering and information technology transformation.
The EITF concluded that these costs should be expensed as incurred rather
than capitalized. The EITF requires items previously capitalized to be
written off during the quarter which includes November 20, 1997. The
impacts of applying the effects of this consensus were not significant to
the financial results for the quarter ended December 31, 1997.
9. Year 2000
AGL Resources uses several computer application programs written over
many years using two-digit year fields to define the applicable year,
rather than four-digit year fields. Programs that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000.
That misinterpretation of the year could result in incorrect computation or
computer shutdown.
With the assistance of an independent consultant, AGL Resources has
identified the systems that could be affected by the year 2000 issue and
has developed a plan to resolve the issue. The plan provides for, among
other things, the replacement or modification of existing data processing
systems as necessary. Implementation of the plan has begun, and the cost
estimates associated with the implementation are not expected to
significantly impact AGL Resources' consolidated financial statements.
Management believes that with the appropriate modification, AGL
Resources will be able to operate its time-sensitive business systems
through the turn of the century.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides for the
use of cautionary statements accompanying forward-looking statements.
Disclosures provided contain forward-looking statements concerning, among
other things, deregulation, restructuring and environmental remediation.
Important factors that could cause actual results to differ
materially from those in the forward-looking statements include, but are
not limited to, the following: changes in price and demand for natural gas
and related products; uncertainty as to state and federal legislative and
regulatory issues; the effects of competition, particularly in markets
where prices and providers historically have been regulated; changes in
accounting policies and practices; uncertainty with regard to environmental
issues and competitive issues in general.
<PAGE>
Results of Operations
Three-Month Periods Ended December 31, 1997 and 1996
Explained below are the major factors that had a significant effect
on results of operations for the three-month period ended December 31,
1997, compared with the same period in 1996.
Operating revenues increased 6.0% for the three-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) an increase in the cost of gas supply recovered from customers under
the purchased gas provisions of AGL's rate schedules, as explained in the
following paragraph, as a result of increased volumes of gas sold due to
weather that was 36.5% colder than during the same period in 1996, (2)
increased operating revenues attributable to a nonregulated retail
marketing company formed in July 1996 and the acquisition of propane
operations during February and June, 1997 and (3) growth in the number of
customers served.
AGL balances the cost of gas with revenues collected from customers
under the purchased gas provisions of its rate schedules. Under-recoveries
or over-recoveries of gas costs are deferred and recorded as current assets
or liabilities, thereby eliminating the effect that recovery of gas costs
would otherwise have on net income. Cost of gas increased 11.3% for the
three-month period ended December 31, 1997, compared with the same period
in 1996 primarily due to (1) increased volumes of gas sold as a result of
weather that was 36.5% colder than during the same period in 1996 and (2)
increased cost of gas attributable to a nonregulated retail marketing
company formed in July 1996 and the acquisition of propane operations
during February and June, 1997. The increase in the cost of gas was offset
partly by a shift by certain interruptible customers from interruptible
sales to transportation service.
Operating margin decreased 2.2% for the three-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) decreased consumption patterns not related to weather conditions
attributable to AGL's firm-service customers and (2) decreased expenses
pursuant to an Integrated Resource Plan (IRP) which are recovered through
an IRP Cost Recovery Rider approved by the Georgia Commission. The decrease
in operating margin was offset partly by margins resulting from the
acquisition of propane operations during February and June, 1997. Weather
normalization adjustment riders (WNARs), approved by the Georgia Commission
and the TRA, stabilized operating margin at the level which would occur
with normal weather for the three-month periods ended December 31, 1997 and
1996. As a result of the WNARs, weather conditions experienced do not have
a significant impact on the comparability of operating margin.
Operating expenses increased 5.1% for the three-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) operating expenses of propane operations acquired during February and
June, 1997, (2) increased distribution maintenance expenses and (3)
increased depreciation expense recorded as a result of increased
depreciable property. The increase in operating expenses was offset partly
by decreased expenses recovered pursuant to an IRP Cost Recovery Rider. AGL
balances IRP expenses which are included in operating expenses with
revenues collected under the rider, thereby eliminating the effect that
recovery of IRP expenses would otherwise have on net income.
Other income increased $2.8 million primarily due to increased income
from a gas marketing joint venture.
<PAGE>
Interest expense increased $0.5 million for the three-month period
ended December 31, 1997, compared with the same period in 1996 primarily
due to increased amounts of long-term debt outstanding during the period.
The increase in interest expense was offset partly by decreased amounts of
short-term debt outstanding.
Dividends on preferred stock of subsidiaries increased $1.3 million
for the three-month period ended December 31, 1997, compared with the same
period in 1996 primarily due to dividend requirements related to the
issuance of $75 million principal amount of Capital Securities in June
1997, as more fully described below within the caption "Financial
Condition."
Income taxes decreased $2.9 million for the three-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
decreased taxable income.
Net income for the three-month period ended December 31, 1997, was
$25.7 million, compared with net income of $29.6 million for the same
period in 1996. Basic and diluted earnings per share of common stock were
$0.45 for the three-month period ended December 31, 1997, compared with
basic and diluted earnings per share of $0.53 for the same period in 1996.
The decreases in net income and earnings per share were primarily due to
(1) decreased operating margin, (2) increased operating expenses and (3)
increased preferred dividend requirements. The decreases in net income and
earnings per share were offset partly by increased other income.
Twelve-Month Periods Ended December 31, 1997 and 1996
Explained below are the major factors that had a significant effect
on results of operations for the twelve-month period ended December 31,
1997, compared with the same period in 1996.
Operating revenues increased 3.1% for the twelve-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) increased operating revenues attributable to a nonregulated retail
marketing company formed in July 1996 and the acquisition of propane
operations during February and June, 1997, (2) increased operating revenues
from a nonregulated gas supply services company formed in July 1996 and (3)
growth in the number of customers served. The increase in operating
revenues was offset substantially by a shift by certain interruptible
customers from interruptible sales to transportation service. Operating
revenues are less when gas is transported for a customer than when it is
sold to that customer. The utility's transportation rate generates the same
operating margin as the applicable sales rate schedule for interruptible
sales of gas; therefore, earnings are not affected.
Cost of gas increased 3.9% for the twelve-month period ended December
31, 1997, compared with the same period in 1996 primarily due to (1)
increased cost of gas attributable to a nonregulated retail marketing
company formed in July 1996 and the acquisition of propane operations
during February and June, 1997 and (2) increased cost of gas from a
nonregulated gas supply services company formed in July 1996. The increase
in cost of gas was offset substantially by a shift by certain interruptible
customers from interruptible sales to transportation service.
Operating margin increased 1.8% for the twelve-month period ended
December 30, 1997, compared with the same period in 1996 primarily due to
(1) an increase in operating margin attributable to a nonregulated gas
supply services company formed in July 1996 and the acquisition of propane
operations during February and June, 1997 and (2) growth in the number of
customers served. The increase in operating margin was offset partly by
decreased expenses pursuant to an IRP which are recovered through an IRP
Cost Recovery Rider approved by the Georgia Commission. WNARs, approved by
the Georgia Commission and
<PAGE>
the TRA, stabilized operating margin at the level which would occur with
normal weather for the twelve-month periods ended December 31, 1997
and 1996. As a result of the WNARs, weather conditions experienced
do not have a significant impact on the comparability of operating margin.
Operating expenses increased 2.6% for the twelve-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
increased (1) depreciation expense recorded as a result of increased
depreciable property, (2) uncollectible accounts expense and (3)
maintenance of general plant. The increase in operating expenses was offset
partly by decreased expenses recovered pursuant to an IRP Cost Recovery
Rider. AGL balances IRP expenses which are included in operating expenses
with revenues collected under the rider, thereby eliminating the effect
that recovery of IRP expenses would otherwise have on net income.
Other income decreased $1.9 million for the twelve-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) increased carrying costs on recoveries from insurance carriers and
third parties related to environmental response costs and (2) decreased
income from a power marketing joint venture. The decrease in other income
was offset partly by the recovery from utility customers of increased
carrying costs not included in base rates related to storage gas
inventories.
Interest expense increased 5.6% for the twelve-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
increased amounts of long-term debt outstanding during the period. The
increase in interest expense was offset partly by decreased amounts of
short-term debt outstanding.
Dividends on preferred stock of subsidiaries increased $3.1 million
for the twelve-month period ended December 31, 1997, compared with the same
period in 1996 primarily due to dividend requirements related to the
issuance of $75 million principal amount of Capital Securities in June 1997
as more fully described below within the caption "Financial Condition."
Income taxes decreased $4.1 million for the twelve-month period ended
December 31, 1997, compared with the same period in 1996 primarily due to
(1) decreased taxable income and (2) a decrease in the effective tax
accrual rate as a result of payment of tax deductible interest on
subordinated debt to fund dividends on Capital Securities issued in June
1997.
Net income for the twelve-month period ended December 31, 1997, was
$72.8 million, compared with net income of $76.1 million for the same
period in 1996. Basic and diluted earnings per share of common stock was
$1.29 for the twelve-month period ended December 31, 1997, compared with
basic and diluted earnings per share of $1.37 for the same period in 1996.
The decreases in net income and earnings per share were primarily due to
(1) increased operating expenses, (2) increased interest expense and
preferred dividend requirements and (3) decreased other income. The
decreases in net income and earnings per share were offset partly by
increased operating margin.
Financial Condition
AGL Resources' primary gas utility business is highly seasonal in
nature and typically shows a substantial increase in accounts receivable
from customers from September 30 to December 31 as a result of colder
weather. The utility also uses gas stored underground to serve its
customers during periods of colder weather. As a result, accounts
receivable increased $131.9 million and inventory of gas stored underground
decreased $42.5 million during the quarter ended December 31, 1997.
Accounts payable increased $31.5 million during the quarter ended December
31, 1997, primarily due to an increase in accounts payable to gas
<PAGE>
suppliers. Accounts payable decreased $10.9 million from December 31, 1996
to December 31, 1997, primarily due to a $8.5 million decrease in accounts
payable to gas suppliers.
The gas purchasing practices of AGL are subject to review by the
Georgia Commission under legislation enacted by the Georgia General
Assembly (Gas Supply Plan Legislation). The Gas Supply Plan Legislation
establishes procedures for review and approval, in advance, of gas supply
plans for gas utilities and gas cost adjustment factors applicable to firm
service customers of gas utilities. Pursuant to AGL's approved Gas Supply
Plan for fiscal year 1998, gas supply purchases are being recovered under
the purchased gas provisions of AGL's rate schedules. The plan also allows
recovery from the customers of AGL of Federal Energy Regulatory
Commission's (FERC) Order No. 636 transition costs that are currently being
charged by AGL's pipeline suppliers.
Based on filings with the FERC by its pipeline suppliers, AGL
currently estimates that its total portion of transition costs associated
with the FERC's Order No. 636 from all of its pipeline suppliers will be
approximately $104.8 million. Approximately $94.4 million of such costs has
been incurred by AGL as of December 31, 1997, and is being recovered from
its customers under the purchased gas provisions of AGL's rate schedules.
AGL's Gas Supply Plan for fiscal year 1998 includes limited gas
supply hedging activities. AGL is authorized to enter into an expanded
program to hedge up to one half of its estimated monthly winter wellhead
purchases and establish a price for those purchases at an amount other than
the beginning of the month index price to create an additional element of
diversification and price stability. The financial results of all hedging
activities are passed through to firm service customers under the purchased
gas provisions of AGL's rate schedules. Accordingly, there is no earnings
impact as a result of the hedging program.
Additionally, the approved plan contains a gas supply incentive
mechanism for off-system and capacity release sales that is consistent with
the incentive mechanism in the Georgia Gas Act signed into law on April 14,
1997, whereby AGL and the firm customers share in any benefits produced
from incremental use of gas supply assets.
As noted above, AGL recovers the cost of gas under the purchased gas
provisions of its rate schedules. AGL was in an under-recovery position of
$8.5 million as of September 30, 1997, an under-recovery position of $31.4
million as of December 31, 1996, and an under-recovery position of $33.1
million as of December 31, 1997. Under the provisions of the utility's rate
schedules, any under-recoveries or over-recoveries of purchased gas costs
are included in current assets or liabilities and have no effect on net
income.
The expenditures for plant and other property totaled $27.7 million
for the three-month and $145.2 million for the twelve-month periods ended
December 31, 1997, respectively. Effective February 1, 1997, AGL Propane, a
subsidiary of AGL Investments, acquired eight related companies engaged in
the retail sale and delivery of propane gas. Effective June 12, 1997, AGL
Propane acquired a retail propane distribution company headquartered in
Blairsville, Georgia through the issuance of common stock. Those
acquisitions were accounted for using the purchase method of accounting.
AGL has accrued liabilities of $37.3 million as of December 31, 1997,
$31.3 million as of December 31, 1996, and $37.3 million as of September
30, 1997, for estimated future expenditures covering investigation and
remediation of MGP sites which are expected to be made over a period of
several years. The Georgia Commission has approved the recovery by AGL of
Environmental Response Costs pursuant to the ERCRR. In connection with the
ERCRR, the staff of the Georgia Commission has undertaken a financial
<PAGE>
and management process audit related to the MGP sites, cleanup activities
at the sites and environmental response costs that have been incurred for
purposes of the ERCRR.
The Georgia Commission has scheduled a hearing for March 16, 1998 to
consider three issues relating to the ERCRR. Specifically, the Georgia
Commission is to consider whether the term "Environmental Response Costs"
should include punitive damages, whether AGL should be required to provide
an annual accounting for revenue recovered from customers through the
ERCRR, and whether a schedule should be established for site remediation.
See Note 5 to Notes to Condensed Consolidated Financial Statements in this
Form 10-Q.
In June 1997, AGL Capital Trust, a Delaware business trust (the
Trust), of which AGL Resources owns all of the common voting securities,
issued and sold to certain initial investors $75 million in principal
amount of 8.17% Capital Securities (liquidation amount $1,000 per Capital
Security), the proceeds of which were used to purchase from AGL Resources
8.17% Junior Subordinated Deferrable Interest Debentures due June 1, 2037.
The Capital Securities are subject to mandatory redemption upon repayment
of the Junior Subordinated Debentures on the stated maturity date of June
1, 2037, upon the earlier occurrence of certain events or upon the optional
prepayment by AGL Resources on or after June 1, 2007. AGL Resources has
fully and unconditionally guaranteed all of the Trust's obligations with
respect to the Capital Securities. Net proceeds to AGL Resources from the
sale of the Junior Subordinated Debentures of $74.3 million was used to
repay short-term debt, to redeem certain of AGL's outstanding issues of
preferred stock and for other corporate purposes.
On August 15, 1997, AGL redeemed its 4.5% Cumulative Preferred Stock,
4.72% Cumulative Preferred Stock, 5% Cumulative Preferred Stock, 7.84%
Cumulative Preferred Stock, and 8.32% Cumulative Preferred Stock at the
call price in effect for each issue for an aggregate principal amount of
$14.7 million. Those issues of preferred stock have been retired in full.
On December 1, 1997, AGL redeemed its 7.70% depositary preferred shares at
the redemption price of $100 per share for an aggregate principal amount of
$44.5 million.
Long-term debt outstanding increased $75.5 million during the
twelve-month period ended December 31, 1997, as a result of the issuance in
July 1997 by AGL of the remaining $75.5 million of $300 million aggregate
principal amount of Medium-Term Notes Series C. Net proceeds from the
issuance of Medium-Term Notes were used to fund capital expenditures, to
repay short-term debt and for other corporate purposes.
Short-term debt increased $121.0 million for the three-month period
ended December 31, 1997 primarily to meet increased working capital
requirements and redemption requirements related to the 7.70% depositary
preferred shares described above. Short-term debt decreased $38.3 million
for the twelve-month period ended December 31, 1997 primarily due to the
issuance of Capital Securities and long-term debt.
On February 17, 1995, the Georgia Commission approved a settlement
that permits AGL to negotiate contracts with customers who have the option
of bypassing AGL's facilities (Bypass Customers) to receive natural gas
from other suppliers. The bypass avoidance contracts (Negotiated Contracts)
can be renewable, provided the initial term does not exceed five years,
unless a longer term specifically is authorized by the Georgia Commission.
The rate provided by the Negotiated Contract may be lower than AGL's filed
rate, but not less than AGL's marginal cost of service to the potential
Bypass Customer. Service pursuant to a Negotiated Contract may commence
without Georgia Commission action, after a copy of the contract is filed
with the Georgia Commission. Negotiated Contracts may be rejected by the
Georgia Commission within 90
<PAGE>
days of filing; absent such action, however, the Negotiated Contracts
remain in effect. All of the Negotiated Contracts filed to date with the
Georgia Commission are in effect.
The settlement also provides for a bypass loss recovery mechanism to
operate until the earlier of September 30, 1998, or the effective date of
new rates for AGL resulting from a general rate case. See Note 6 to Notes
to Condensed Consolidated Financial Statements in this Form 10-Q.
On November 27, 1996, the TRA approved an experimental rule allowing
Chattanooga to negotiate contracts with large commercial or industrial
customers who have long-term competitive options, including bypass. The
experimental rule provides that before any such customer is allowed a
discounted rate, both the large customer and Chattanooga must petition the
TRA for approval of the rates set forth in the contract. On October
7, 1997, the TRA denied petitions filed by Chattanooga and four large
customers for discounted rates pursuant to the experimental rule upon a
finding that customer bypass was not imminent. On January 14, 1998,
however, the FERC issued an order authorizing the bypass of Chattanooga by
Southern to serve an interruptible customer. AGL is continuing to
negotiate with the customer to determine whether a compromise can be
reached to retain the customer, and Southern has not yet constructed the
facilities necessary to complete the bypass. Management does not expect
the order issued by the FERC to have a material adverse effect on the
consolidated financial statements of AGL Resources.
The Georgia Gas Act was signed into law on April 14, 1997. The act
provides a legal framework for comprehensive deregulation of many aspects
of the natural gas business in Georgia. On November 26, 1997, AGL filed
with the Georgia Commission notice of its election to be subject to this
new law and to establish separate rates for unbundled services. AGL filed
contemporaneously an application with the Georgia Commission to have its
distribution rates, charges, classifications and services regulated
pursuant to performance-based regulation. The filing requests an increase
in revenues of $18.6 million annually. The requested increase includes the
costs to support changes in AGL's business systems to ensure reliable
service to customers and that the systems are in place to serve new gas
suppliers in the competitive marketplace. The Georgia Gas Act provides a
transition period leading to a condition of effective competition in all
natural gas markets. See Note 6 to Notes to Condensed Consolidated
Financial Statements in this Form 10-Q.
On May 1, 1997, Chattanooga filed a rate proceeding with the TRA
seeking an increase in revenues of $4.4 million annually. Revenues from the
rate increase will be used to improve and expand Chattanooga's natural gas
distribution system; to recover increased operation, maintenance and tax
expenses; and to provide a reasonable return to investors. Under the TRA's
rules and regulations, the effective date of the requested new rates was
suspended until November 1, 1997. Hearings in the rate proceeding were
scheduled to begin on October 13, 1997. On October 3, 1997, all parties to
the proceeding filed a motion with the TRA requesting that the hearings be
continued and that the suspended effective date for new rates be extended
to afford an opportunity to pursue settlement discussions. The hearings in
this proceeding began on February 9, 1998.
Year 2000
AGL Resources uses several computer application programs written over
many years using two-digit year fields to define the applicable year,
rather than four-digit year fields. Programs that are time-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000.
That misinterpretation of the year could result in incorrect computation or
computer shutdown.
<PAGE>
With the assistance of an independent consultant, AGL Resources has
identified the systems that could be affected by the year 2000 issue and
has developed a plan to resolve the issue. The plan provides for, among
other things, the replacement or modification of existing data processing
systems as necessary. Implementation of the plan has begun and the cost
estimates associated with the implementation of the plan are not expected
to significantly impact AGL Resources' consolidated financial statements.
Management believes that with the appropriate modification, AGL
Resources will be able to operate its time-sensitive business systems
through the turn of the century.
Accounting Developments
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share,"
(SFAS 128), which establishes standards for computing and presenting
earnings per share. AGL Resources adopted SFAS 128 in October 1997. See
Note 7 in Notes to Condensed Consolidated Financial Statements in this Form
10-Q.
During its July 1997 meeting, the Financial Accounting Standard
Board's Emerging Issues Task Force (EITF) concluded that once legislation
is passed to deregulate a segment of a utility and that legislation
includes sufficient detail for the enterprise to determine how the
transition plan will affect that segment, Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), should be discontinued for that segment. The state
of Georgia has enacted legislation, the Georgia Gas Act, that allows for
the deregulation of the merchant function and unbundling of certain
ancillary services of local gas distribution companies. AGL has filed its
election to become an electing distribution company. The rates to transport
natural gas through the intrastate pipe system of the local gas
distribution company will be regulated by the Georgia Commission. Since
AGL's regulatory assets and liabilities associated with its gas
distribution activities continue to be regulated, AGL has determined that
the continued application of SFAS 71 related to those distribution
activities remains appropriate.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (SFAS 130) and Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). AGL Resources will adopt SFAS 130 and SFAS 131 in
fiscal year 1999. SFAS 130 establishes standards for the reporting and
displaying of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Management does not expect these new pronouncements to have a
significant impact on the presentation of AGL Resources' consolidated
financial statements.
During November 1997, the EITF published Issue No. 97-13 "Accounting
for Costs Incurred in Connection with a Consulting Contract or an Internal
Project That Combines Business Process Reengineering and Information
Technology Transformation." Issue No. 97-13 addresses costs which have been
incurred by organizations related to advances in computer technologies.
Some of the costs which have been incurred include consulting fees paid for
business process reengineering and information technology transformation.
The EITF concluded that these costs should be expensed as incurred rather
than capitalized. The EITF requires items previously capitalized to be
written off during the quarter which includes November
<PAGE>
20, 1997. The impacts of applying the effects of this consensus were not
significant to the financial results for the quarter ended December 31,
1997.
PART II -- OTHER INFORMATION
"Part II -- Other Information" is intended to supplement information
contained in the Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, and should be read in conjunction therewith.
ITEM 1. LEGAL PROCEEDINGS
See Item 5.
ITEM 5. OTHER INFORMATION
Federal Regulatory Matters
FERC Order 636 Transition Costs Settlement Agreements. Based on
filings with the FERC by its pipeline suppliers, AGL currently estimates
that its total portion of transition costs associated with the FERC's Order
No. 636 from all of its pipeline suppliers will be approximately $104.8
million. Approximately $94.4 million of such costs has been incurred by AGL
as of December 31, 1997, and is being recovered from its customers under
the purchased gas provisions of AGL's rate schedules.
FERC Rate Proceedings. AGL also is participating in various rate
proceedings before the FERC involving applications for rate changes filed
by its pipeline suppliers. These proceedings typically involve numerous
issues concerning the pipeline's cost of service, allocation of costs to
different services, and rate design. A variety of cost allocation and rate
design proposals typically are advanced by the pipeline's customers, making
it impossible to forecast the precise effect of any given rate change
filing on AGL's operations. AGL is authorized to recover the costs paid to
its pipeline suppliers from its customers through the purchased gas
provisions of its rate schedules. To the extent that these cases have not
been settled, as described below, the rates filed in these proceedings have
been accepted, and made effective subject to refund and the outcome of the
FERC proceedings.
Southern. As noted above, the FERC's orders approving Southern's
restructuring settlement, which resolves all issues between AGL and
Southern for Southern's outstanding rate proceedings, are final and no
longer subject to judicial review.
ANR Pipeline. On October 17, 1997, ANR filed a proposed settlement of
its current rate case which, if approved, will provide AGL with reductions
of approximately $3 million in rates, prospectively, as well as rate
refunds.
Other FERC Proceedings. Tennessee has filed for authority to replace
an existing no-fee transportation service performed on behalf of Southern's
injections and withdrawals at the Bear Creek storage facility, which is
jointly owned by Southern and Tennessee, with service under Tennessee's
generally applicable firm transportation rate schedule at Tennessee's
generally applicable firm transportation rate. AGL has filed comments
opposing Tennessee's proposal, due to the likely effect of the proposal on
Southern's rates to AGL and due to the possible effect of the change in the
terms and conditions of the service on Southern's no-notice firm
transportation service to AGL, which relies in part upon the Bear Creek
storage facility.
<PAGE>
AGL cannot predict the outcome of those federal proceedings nor
determine the ultimate effect, if any, such proceedings may have on AGL.
State Regulatory Matters
Atlanta Gas Light Company - Unbundling and Rate Filing. The Georgia
Gas Act was signed into law on April 14, 1997. The act provides a legal
framework for comprehensive deregulation of many aspects of the natural gas
business in Georgia.
On November 26, 1997, AGL filed with the Georgia Commission notice of
its election to be subject to this new law and to establish separate rates
for unbundled services. AGL filed contemporaneously an application with the
Georgia Commission to have its distribution rates, charges, classifications
and services regulated pursuant to performance-based regulation. The filing
requests an increase in revenues of $18.6 million annually. The requested
increase includes the costs to support changes in AGL's business systems to
ensure reliable service to customers and that the systems are in place to
serve new gas suppliers in the competitive marketplace.
Within seven months from the date of such filing, the Georgia
Commission must issue an order approving the plan as filed or with
modification. Retail marketing companies, including AGL affiliates, may now
file with the Georgia Commission separate certificate of authority
applications to sell natural gas to firm customers connected to AGL's
delivery system. It is currently anticipated that marketers who become
certificated by the Georgia Commission may begin offering natural gas sales
services to customers of AGL by November 1998.
The Georgia Gas Act provides a transition period leading to a
condition of effective competition in all natural gas markets. AGL, as an
electing distribution company, will unbundle all services to its natural
gas customers, allocate firm delivery capacity to certificated marketers
selling the gas commodity and create a secondary market for interruptible
transportation capacity. Certificated marketers, including nonregulated
affiliates of AGL, will compete to sell natural gas to all customers at
market-based prices. AGL will continue to provide intrastate delivery of
gas to end users through its existing system, subject to continued rate
regulation by the Georgia Commission. As a result of the election to be
subject to the Georgia Gas Act, it is expected that the purchased gas
adjustment provisions included in AGL's rate schedules will be discontinued
during fiscal 1999. The November 26, 1997, filing contains a provision to
true-up any over-recovery or under-recovery that may exist at the time such
purchased gas adjustment provisions are discontinued. Accordingly, AGL will
no longer defer any over-recoveries or under-recoveries of gas costs when
the purchased gas adjustment provisions are discontinued. In addition, the
Georgia Commission will continue to regulate safety, access and quality of
service pursuant to an alternative form of regulation.
The Georgia Gas Act provides marketing standards and rules of
business practice designed to ensure the benefits of a competitive natural
gas market are available to all customers on AGL's system. The act imposes
on marketers an obligation to serve with a corresponding universal service
fund that provides a funding mechanism for uncollectible accounts and
enables AGL to expand its facilities and serve the public interest.
Hearings in this proceeding are scheduled for the weeks of March 3,
1998, April 28, 1998 and May 18, 1998, and a decision by the Georgia
Commission is expected in June 1998.
Pursuant to the Georgia Gas Act, the Georgia Commission issued rules
and regulations on December 30, 1997, for certification of marketers and
assignment of firm customers to marketers for customers who
<PAGE>
ultimately do not select a marketer after competition is fully developed.
Additionally, the Georgia Commission issued a Notice of Inquiry to
address certain aspects of random assignment of customers and marketer
certification not fully resolved in the rulemakings.
AGL supported the regulatory initiatives provided for by the Georgia
Gas Act for several reasons. AGL currently makes no profit on the purchase
and sale of gas because actual gas procurement costs are passed through to
customers under the purchased gas provisions of AGL's rate schedules.
Earnings are provided through revenues received for intrastate
transportation of the commodity. Consequently, allowing AGL to cease its
sales service function and the associated sales obligation would not affect
AGL's ability to earn a return on its distribution system investment.
Allowing gas to be sold to all customers by numerous retail marketing
companies, including nonregulated subsidiaries of AGL Resources, would
provide new business opportunities.
On May 21, 1996, the Georgia Commission adopted a Policy Statement
concerning changes in state regulatory guidelines to respond to trends
toward increased competition in natural gas markets. Consistent with the
specific goals expressed in the Policy Statement, AGL filed on June 10,
1996, the Natural Gas Service Provider Selection Plan (the Plan), a
comprehensive plan for serving interruptible markets. The Plan proposed
further unbundling of services to provide large customers more service
options and the ability to purchase only those services they required. As a
result of various procedural delays, a decision on the proposed Plan had
not been reached by the Georgia Commission prior to AGL's election to be
subject to the Georgia Gas Act. Since implementation of the Plan would be
unlikely to occur significantly in advance of implementation of AGL's
election under the Georgia Gas Act, the Plan could not serve as a
meaningful opportunity for AGL, marketers and end-use customers to gain
experience with pooling and aggregation of loads. Consequently,
simultaneous with the filings of the notice of election under the Georgia
Gas Act on November 26, 1997, AGL filed with the Georgia Commission a
notice of withdrawal of the Plan.
Atlanta Gas Light Company - Other. On January 8, 1998, the Georgia
Commission issued a Procedural and Scheduling Order to establish a schedule
for certain hearings and pre-hearings in connection with alleged pipeline
safety violations. Hearings in this proceeding have been scheduled for
March 31 and April 1, 1998. On January 16, 1998, AGL filed with the Georgia
Commission a petition for reconsideration of the order citing the Georgia
Commission's violation of its rules by denying AGL the opportunity to
respond to the alleged safety violations in the manner prescribed by such
rules. The petition for reconsideration is still pending.
Chattanooga Gas Company - Rate Filing. On May 1, 1997, Chattanooga
filed a rate proceeding with the TRA seeking an increase in revenues of
$4.4 million annually. Revenues from the rate increase would be used to
improve and expand Chattanooga's natural gas distribution system; to
recover increased operation, maintenance and tax expenses; and, to provide
a reasonable return to investors. Under the TRA's rules and regulations,
the effective date of the requested new rates was suspended until November
1, 1997. Hearings in the rate proceeding were scheduled to begin on October
13, 1997. On October 3, 1997, all parties to the proceeding filed a motion
with the TRA requesting that the hearings be continued and that the
suspended effective date for new rates be extended to afford an opportunity
to pursue settlement discussions. On October 7, 1997, the TRA granted the
motion. The hearings in this proceeding began on February 9, 1998.
AGL cannot predict the outcome of those state regulatory proceedings
nor determine the ultimate effect, if any, such proceeding may have on AGL.
<PAGE>
Environmental Matters
AGL has identified nine sites in Georgia where it currently owns all
or part of an MGP site. In addition, AGL has identified three other sites
in Georgia which AGL does not own, but that may have been associated with
the operation of MGPs by AGL or its predecessors.
Those sites are potentially subject to a variety of regulatory
programs. AGL's response to MGP sites in Georgia is proceeding under two
state regulatory programs, HWMA and HSRA, as previously defined in Note 5
to Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
AGL is planning to undertake some degree of response action, under one or
both of those programs, at most of the Georgia sites.
AGL also has identified three sites in Florida which may have been
associated with AGL or its predecessors. AGL does not own any of the former
MGP sites in Florida. However, AGL has been contacted by the current owners
of two of those sites. In addition, AGL has received a "Special Notice
Letter" from the U.S. EPA with respect to one of the two sites and a
"General Notice Letter" with respect to the other. AGL expects to undertake
some degree of response action at those two sites. AGL currently is
negotiating with both regulatory authorities and other potentially
responsible parties to determine the extent of its responsibility for the
two sites.
AGL has estimated the investigation and remediation expenses likely
to be associated with the former MGP sites. First, AGL has identified
several sites where it has concluded that no significant response actions
are reasonably likely in the foreseeable future and therefore has not made
any cost projections for these sites. Second, since response cost
liabilities are often spread among potentially responsible parties, AGL's
ultimate liability will, in some cases, be limited to AGL's equitable share
of such expenses under the circumstances. Therefore, where reasonably
possible, AGL has attempted to estimate the range of AGL's equitable share,
given current cost sharing arrangements, combined with AGL's current
knowledge of relevant facts, including the current methods of equitable
apportionment and the solvency of potential contributors. Where such an
estimation was not reasonably possible, AGL has estimated a range of
expenses without adjustment for AGL's equitable share. Finally, AGL has,
with the assistance of outside consultants, prepared estimates of the range
of future investigation and remediation costs for those sites where further
action appears likely.
Applying these concepts to those sites where some future action
presently appears reasonably possible, AGL currently estimates that the
future cost to AGL of investigating and remediating the former MGP sites
could be as low as $37.3 million or as high as $76.5 million. That range
does not include other expenses, such as unasserted property damage claims,
for which AGL may be held liable, but for which neither the existence nor
the amount of such liabilities can be reasonably forecast. Within the
stated range of $37.3 million to $76.5 million, no amount within the range
can be identified reliably as a better estimate than any other estimate.
Therefore, a liability at the low end of that range has been recorded in
the financial statements.
AGL has two means of recovering the expenses associated with the
former MGP sites. First, the Georgia Commission has approved the recovery
by AGL of Environmental Response Costs, as defined, pursuant to an ERCRR.
For purposes of the ERCRR, Environmental Response Costs include
investigation, testing, remediation and litigation costs and expenses or
other liabilities relating to or arising from MGP sites. A regulatory asset
in the amount of $53.3 million has been recorded in the financial
statements to reflect the recovery of those costs through the ERCRR.
In connection with the ERCRR, the staff of the Georgia Commission has
undertaken a financial and management process audit related to the MGP
sites, cleanup activities at the sites, and environmental
<PAGE>
response costs
that have been incurred for purposes of the ERCRR. The Georgia Commission
has scheduled a hearing for March 16, 1998 to consider three issues
relating to the ERCRR. Specifically, the Georgia Commission is to consider
whether the term "Environmental Response Costs" should include punitive
damages, whether AGL should be required to provide an annual accounting for
revenue recovered from customers through the ERCRR, and whether a schedule
should be established for site remediation.
Second, AGL intends to seek recovery of appropriate costs from its
insurers and other potentially responsible parties. During the twelve month
period ended December 31, 1997, AGL recovered $4.6 million from its
insurance carriers and other potentially responsible parties. In accordance
with provisions of the ERCRR, AGL recognized other income of $1.1 million
and established regulatory liabilities for the remainder of the recoveries.
On February 10, 1995, a class action lawsuit captioned Trinity
Christian Methodist Episcopal Church, et al. v. Atlanta Gas Light Company,
No. 95-RCCV-93, was filed in the Superior Court of Richmond County,
Georgia, seeking to recover for damage to property owned by persons
adjacent to and nearby the former manufactured gas plant site in Augusta,
Georgia. On December 13, 1996, the parties reached a preliminary
settlement, which was approved by the Court on April 15, 1997. Pursuant to
the settlement, there is a claims process before an umpire to determine
either the full fair market value of properties tendered to AGL or the
diminution in fair market value of properties not tendered to AGL.
Settlements have been paid to 188 property owners in the class totaling
approximately $2.9 million, including legal fees and expenses of the
plaintiffs. There are seven settlements yet to be paid. One settlement of
approximately $64,000, including attorney's fees, is pending
reconsideration, and AGL has filed motions to vacate six settlements
totaling approximately $4.3 million. Orders were entered denying the
motions to vacate. AGL has filed notices of appeal with the Georgia Court
of Appeals seeking to reverse the denial of the motions to vacate.
Other Legal Proceedings
With regard to other legal proceedings, AGL Resources is a party, as
both plaintiff and defendant, to a number of other suits, claims and
counterclaims on an ongoing basis. Management believes that the outcome of
all litigation in which it is involved will not have a material adverse
effect on the consolidated financial statements of AGL Resources.
Joint Ventures
On December 1, 1997, AGL Resources, through its subsidiary AGL
Interstate Pipeline, entered into a joint venture with Transcontinental Gas
Pipe Line Corporation (Transco) known as Cumberland Pipeline Company
(Cumberland), to provide interstate pipeline services to customers in
Georgia and Tennessee. The transaction is subject to various regulatory
approvals. Initially, the 135-mile Cumberland pipeline will include
existing pipeline infrastructure owned by the two companies extending from
Walton County, Georgia, to Catoosa County, Georgia. Projected to enter
service by November 1, 2000, Cumberland will be positioned to serve AGL,
Chattanooga and other markets throughout the eastern Tennessee Valley,
northwest Georgia and northeast Alabama. Affiliates of Transco and AGL
Resources each will own 50% of Cumberland, and an affiliate of Transco will
serve as operator. It currently is anticipated that an open season for
subscriptions for capacity on Cumberland will be announced during the first
quarter of calendar year 1998, and the project will be submitted to the
FERC for approval during fiscal year 1998.
On December 15, 1997, AGL Resources, through its subsidiary AGL
Peaking Services, and Southern, a subsidiary of Sonat Inc., entered into an
agreement to jointly construct, own and operate a new liquefied natural gas
peaking facility, Etowah LNG (Etowah), in Polk County, Georgia. The
transaction is subject to
<PAGE>
regulatory approvals. AGL Peaking Service and
Southern each will own 50 percent of Etowah, the operations of which will
be subject to jurisdiction of the FERC.
The proposed plant will connect directly into AGL's and Southern's
pipelines. Etowah will provide natural gas storage and peaking services to
AGL and other southeastern customers. The new facility will cost
approximately $90 million, with 2.5 billion-cubic-feet of natural gas
storage capacity and 300 million-cubic-feet per day of vaporization
capacity. Affiliates of AGL Resources will manage the construction of the
facility and operate it. Southern will provide administrative services.
The companies held an open season from December 1, 1997 to January
30, 1998 for Etowah subscriptions for peaking services and expect to file a
certificate application with the FERC in March 1998. Subject to receiving
timely FERC approval, construction will begin in early 1999 in order to
provide peaking services during the 2001-2002 winter heating season.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Executive Compensation Plans and Arrangements.
10.1.a - Third Amendment to the AGL Resources Inc.
Nonqualified Savings Plan (Exhibit 10.1.h, AGL
Resources Inc. Form 10-K for the fiscal year ended
September 30,1997).
10.1.b - AGL Resources Inc. 1998 Common Stock Equivalent Plan
for Non-Employee Directors.
10.2 - Extension of Service Agreements #904480 under Rate
Schedule FT; #904481 under Rate Schedule FT-NN; and
#S20140 under Rate Schedule CSS, all dated November 1,
1994, between Atlanta Gas Light Company and Southern
Natural Gas Company (Exhibits 10.30; 10.32 and 10.33,
respectively, AGL Resources Inc. Form 10-K for the
fiscal year ended September 30, 1997).
27 - Financial Data Schedule.
(b)Reports on Form 8-K.
On January 22, 1998, AGL Resources filed a Current Report on Form 8-K dated
January 21, 1998, containing: "Item 5 Other Events"; Exhibits 99 - Form of
Press Release, dated January 15, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGL Resources Inc.
(Registrant)
Date February 17, 1998 /s/ J. Michael Riley
----------------- --------------------------------------------
J. Michael Riley
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10.1.A
<TEXT>
THIRD AMENDMENT TO THE
AGL RESOURCES INC.
NONQUALIFIED SAVINGS PLAN
THIS THIRD AMENDMENT to the AGL Resources Inc. Nonqualified Savings
Plan (the "Plan") hereby is made by AGL Resources Inc. (the "Controlling
Company") as of the 7th day of November, 1997.
W I T N E S S E T H :
WHEREAS, the Controlling Company desires to amend the Plan to provide
that a Covered Employee who has met the eligibility requirements of the Plan
will continue as an Active Participant in the Plan even upon a change in Covered
Employee status;
WHEREAS, the Board of Directors of the Controlling Company has
authorized the officers to take this action and Section 10.1 of the Plan permits
the Company to amend the Plan at any time;
NOW, THEREFORE, the Controlling Company hereby amends the Plan as
follows:
1.
Effective as of January 1, 1998, Section 2.3(c) of the Plan is hereby
amended by deleting that section in its entirety and by substituting in lieu
thereof the following:
"(c) Change by Participant. If an Active Participant changes
his status of employment (but remains employed) so that he is
no longer a Covered Employee, he shall continue his active
participation in the Plan until he separates from service with
a Participating Company (and all other Participating
Companies), and he shall continue to be a Participant until he
no longer has an Account under the Plan."
2.
Except as specifically set forth above, the terms of the Plan shall
remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Third Amendment to be
executed by its duly authorized officer as of the date first above written.
AGL RESOURCES INC.
By: /s/ Robert L. Goocher
Robert L. Goocher
Executive Vice President
b409604
I:\CORP_SEC\FORMS\NSP\3AMDT.
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.1.B
<TEXT>
AGL RESOURCES INC.
1998 COMMON STOCK EQUIVALENT PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Establishment and Purpose. AGL Resources Inc., a Georgia corporation
(the "Company"), hereby establishes the AGL Resources Inc. 1998 Common
Stock Equivalent Plan for Non-Employee Directors (the "Plan"), to be
effective as of January 1, 1998. The purpose of the Plan is to (i)
provide Directors participating in the Plan with an opportunity to
obtain a proprietary interest in the Company, (ii) provide such
Directors with an added incentive to continue in the service of the
Company, and (iii) stimulate such Directors' efforts in promoting the
growth, efficiency and profitability of the Company.
2. Definitions.
(a) "Account" shall mean the bookkeeping account to which a
Participant has Deferred Amounts credited under this Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Beneficiary" shall mean the person or persons (including,
without limitation, the trustees of any testamentary or inter
vivos trust) designated from time to time in writing by a
Participant on an election form provided for said purpose to
receive payments under the Plan after the death of such
Participant, or, in the absence of any such designation or in
the event that such designated persons or person shall
predecease such Participant or shall not be in existence or
shall otherwise be unable to receive such payments, the
person or persons designated under such Participant's last
will and testament or, in the absence of such designation, to
the Participant's estate.
(d) "Change in Control" shall mean the occurrence of any one of
the following events (the terms used in this Section 2(c) with
an initial capital letter shall have the meanings set forth in
this Section 2(c) unless otherwise defined in the Plan):
i. the acquisition by a Person, together with Affiliates
and Associates of such Person, whether by purchase,
tender offer, exchange, reclassification,
recapitalization, merger or otherwise, of a
sufficient number of shares of Common Stock or
Equivalents to constitute the Person an Acquiring
Person; or
ii. during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to
constitute at least a majority thereof, unless the
election of each director who was not a director at
the beginning of such period has been approved in
advance by a majority of the Continuing Directors
then in office; or
corpsec\forms\dircse\plandoc
1
<PAGE>
iii. any merger or consolidation the result of which is
that less than 90 percent of the common stock, Voting
Securities or other equity interests of the surviving
or resulting corporation or other Person shall be
owned in the aggregate by the former shareholders of
the Company, other than Affiliates or Associates of
any party to such merger or consolidation, as the
same shall have existed immediately prior to such
merger or consolidation; or
iv. the sale by the Company, in one transaction or a
series of related transactions, whether in
liquidation, dissolution or otherwise, of assets or
earning power aggregating more than 50 percent of the
assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person
or Persons.
The following definitions shall apply in determining when a
Change in Control has occurred:
(1) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person,
shall become the Beneficial Owner of 10 percent or more of the
shares of Common Stock then outstanding, but shall not include
the Company, any Subsidiary of the Company, or any Person who
or which, together with all Affiliates and Associates of such
Person, is the Beneficial Owner of 10 percent or more of the
shares of Common Stock as of the effective date of the Plan,
any employee benefit plan of the Company or of any Subsidiary
of the Company [if approved by a majority of the Continuing
Directors], or any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any
such plan.
(2) "Affiliate" shall have the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended and in effect on
the effective date of the Plan (the "Exchange Act").
(3) "Associate" shall mean:
(a) any corporation or organization, or parent or
subsidiary of such corporation or organization, of
which a Person is an officer, director or partner or
is, directly or indirectly, the Beneficial Owner of
10 percent or more of any class of equity securities;
(b) any trust or other estate in which a Person has a
beneficial interest of 10 percent or more or as to
which such Person serves as trustee or in a similar
fiduciary capacity; and
(c) any brother or sister (whether by whole or half
blood), ancestor, lineal descendant or spouse of a
Person, or any such relative of such spouse.
(4) "Beneficial Owner" shall mean, with respect to any
securities, any Person who, together with such Person's
Affiliates and Associates, directly or indirectly:
corpsec\forms\dircse\plandoc
2
<PAGE>
(a) has the right to acquire such securities (whether
such right is exercisable immediately or only after
the passage of time) pursuant to any agreement,
arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights,
exchange rights, rights, warrants or options, or
otherwise; provided, a Person shall not be deemed the
Beneficial Owner of, or to Beneficially Own:
(i) Securities acquired by participation in
good faith in a firm commitment underwriting
by a Person engaged in business as an
underwriter of securities until the
expiration of 40 days after the date of such
acquisition; or
(ii) Securities tendered pursuant to a
tender or exchange offer made by such Person
or any of such Person's Affiliates or
Associates until such tendered securities
are accepted for purchase or exchange; or
(iii) Securities issuable upon exercise of
rights issued to all shareholders generally,
which rights are only exercisable upon
separation from the Common Stock, or
securities issuable upon exercise of rights
that have separated from the Common Stock
upon the occurrence of events specified in a
rights agreement between the Company and a
rights agent.
(b) has the right to vote or dispose of or has
Beneficial Ownership (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the
Exchange Act) of such securities, including pursuant
to any agreement, arrangement or understanding,
whether or not in writing; provided, a Person shall
not be deemed the Beneficial Owner of, or to
Beneficially Own, any security under this
subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if
such agreement, arrangement or understanding:
(i) arises solely from a revocable proxy
given in response to a public proxy or
consent solicitation made pursuant to, and
in accordance with, the applicable
provisions of the General Rules and
Regulations under the Exchange Act; and
(ii) is not also then reportable by such
Person on Schedule 13D under the Exchange
Act (or any comparable or successor report);
or
(iii) with respect to any securities which
are Beneficially Owned, directly or
indirectly, by any other Person (or any
Affiliate or Associate thereof), has any
agreement, arrangement or understanding
(whether or not in writing), for the purpose
of acquiring, holding, voting (except
pursuant to a revocable proxy as described
herein or disposing of any voting securities
of the Company.
corpsec\forms\dircse\plandoc
3
<PAGE>
(5) "Continuing Director" shall mean:
(a) any member of the Board who is not an Acquiring
Person, or an Affiliate or Associate of an Acquiring
Person, or a representative of an Acquiring Person or
of any such Affiliate or Associate, and was a member
of the Board prior to the effective date of the Plan;
or
(b) any Person who subsequently becomes a member of
the Board who is not an Acquiring Person, or an
Affiliate or Associate of an Acquiring Person, or a
representative of an Acquiring Person or of any such
Affiliate or Associate, if such Person's nomination
for election or election to the Board is recommended
or approved by a majority of the Continuing
Directors.
(5) "Equivalents" shall mean preferred stock or other entity
securities of the Company having the right to be converted by
the holders thereof into shares of Common Stock, or having the
right to vote generally for the election of directors and on
other matters. For purposes of determining the total amount of
Common Stock and Equivalents owned by any Person, such
Equivalents shall be equal to the number of shares into which
they may be converted by the holders thereof, or in the case
of securities that are not convertible having the right to
vote, shall be equal to the number of votes they are entitled
to cast in elections for directors.
(7) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(8) "Subsidiary" shall mean any corporation, partnership,
joint venture, trust or other entity more than 50 percent of
the Voting Securities of which are Beneficially Owned,
directly or indirectly, by a Person.
(9) "Voting Securities" shall mean any class of then
outstanding shares of stock or other beneficial interests
entitled to vote in election of directors or other Persons
charged with management of a Person.
(e) "Common Stock" shall mean the common stock of the Company, par
value $5.00 per share.
(f) "Common Stock Equivalents" or "CSEs" shall mean the units that
are credited to a Director's Account under this Plan.
(g) "Company" shall mean AGL Resources Inc., a Georgia
corporation, and any successor of the Company.
(h) "Compensation" shall mean the meeting fees received by the Director.
(i) "Deferred Amount" shall mean an amount of Compensation
deferred at the election of the Participant under this Plan.
corpsec\forms\dircse\plandoc
4
<PAGE>
(j) "Director" shall mean any member of the Board of Directors of
the Company who is not an employee of the Company.
(k) "Fair Market Value" shall mean the closing sale price per
share of the Common Stock as published in the Eastern Edition
of The Wall Street Journal report on the New York Stock
Exchange Composite Transactions (or other established exchange
on which the Common Stock is listed) on a particular date. If,
for any reason, the Fair Market Value of the Common Stock
cannot be ascertained or is unavailable for a particular date,
the Fair Market Value of the Common Stock shall be determined
as of the nearest preceding date on which such Fair Market
Value can be ascertained pursuant to the terms hereof.
(l) "Participant" shall mean any Director who elects to defer
Compensation under this Plan.
(m) "Plan" shall mean the AGL Resources Inc. 1998 Common Stock
Equivalent Plan for Non-Employee Directors, as from time to
time amended and in effect.
(n) "Termination of Service" shall mean the termination (by death,
retirement or otherwise) of a Participant's service as a
Director of the Company.
3. Deferral of Compensation. Each Director may elect to defer his or her
Compensation for any calendar year under this Plan. Such election shall
be made on a form prescribed by the Company and filed with the Corporate
Secretary of the Company prior to the beginning of the calendar year
during which such Compensation is to be earned. The election shall be
irrevocable for the first calendar year to which it relates, and it
shall continue in effect for subsequent calendar years until changed
prospectively by the Participant, in writing to the Corporate Secretary
of the Company, before the beginning of the calendar year for which the
change is effective. If an election is made by a person who has been
elected to serve as a Director, but whose term has not yet commenced,
that Director's election shall be effective as of the commencement of
said term.
4. Treatment of Deferred Amounts. The Company shall establish on its books
an Account for each Participant who defers Compensation under this Plan.
Such Account will accurately reflect the Company's liability to such
Participant. The standing balance in each account is hereafter referred
to as the "Account Balance." Despite the maintenance of such Account,
the Company's obligation to make payments under the Plan to a
Participant shall be made from the Company's general assets and
property. The Company may, in its sole discretion, establish a
separate fund or account to make payment of benefits to a Participant or
Beneficiary hereunder. Whether or not the Company, in its sole
discretion, does establish such a fund or account, no Participant,
Beneficiary or any person shall have, under any circumstances, any
interest whatever in any particular property or assets of the Company by
virtue of this Plan.
5. Common Stock Equivalents. Deferred Amounts credited to a Participant's
Account shall be converted into CSEs. The CSEs shall be equal to the
number of shares of Common Stock, to three decimal places, that could be
purchased on the day that the Participant's Deferred Amount would
otherwise be paid, at a per share price equal to the Fair Market Value
of the Common Stock on such date.
corpsec\forms\dircse\plandoc
5
<PAGE>
6. Dividends and Stock Splits. On each date on which a dividend, in cash,
property or stock, is distributed on shares of issued and outstanding
Common Stock, the Participant's Account shall be credited with a number
of CSEs based upon the amount of cash or the fair market value of any
property or stock (the "base amount") distributed with respect to a
number of shares issued and outstanding of the Common Stock equal to
the number of CSEs (including fractions) standing to the Participant's
credit in his or her Account on the record date for such distribution
(assuming that fractional shares could be held of record and that
distributions were made with respect thereto). The number of CSEs to be
so credited shall be equal to the number of shares of Common Stock, to
three decimal places, that could be purchased on such dividend
distribution date with the base amount at a per share price equal to the
Fair Market Value of the Common Stock on such date.
7. Payment of Deferred Amounts. Upon a Participant's Termination of
Service, or upon a Change in Control of the Company, a Participant's
Account Balance shall be paid to him or her (or, in the event of the
Participant's death, to the Participant's Beneficiary). The
Participant's Account Balance will, at the irrevocable election of the
Participant on a form prescribed by the Company, be paid to the
Participant in either (i) five annual cash installments; or (ii) one
cash lump sum payment. Payment of such amounts shall commence within
thirty (30) days of such Termination of Service or Change in Control.
In converting a Participant's CSEs in his or her Account into cash for
payment purposes, such conversion shall be made on each payment date to
the Participant based on the then current Fair Market Value of the
shares of Common Stock reflected in the Participant's Account.
8. Amendment or Termination. The Board of Directors may amend or terminate
this Plan at any time; provided, however, that no amendment or
termination shall adversely affect any then existing Deferred Amounts or
rights under this Plan, and provided further that no amendment may be
made to the last sentence of Section 12 hereof.
9. Expenses. The expenses of administering the Plan shall be borne by the
Company, and shall not be charged against any Participant's Account.
10. Applicable Law. The provisions of the Plan shall be construed,
administered and enforced according to the laws of the State of Georgia.
11. No Trust. No action by the Company or its Board of Directors under this
Plan shall be construed as creating a trust, escrow or other secured or
segregated fund or other fiduciary relationship of any kind in favor of
any Participant, Beneficiary, or any other persons. The status of a
Participant or Beneficiary with respect to any liabilities assumed by
the Company hereunder shall be solely those of unsecured creditors of
the Company. Any asset acquired or held by the Company in connection
with liabilities assumed by it hereunder shall not be deemed to be held
under any trust, escrow or other secured or segregated fund or other
fiduciary relationship of any kind for the benefit of a Participant or
Beneficiary, or to be security for the performance of the obligations of
the Company, but shall be, and remain, a general, unpledged,
unrestricted asset of the Company at all times subject to the claims of
general creditors of the Company.
corpsec\forms\dircse\plandoc
6
<PAGE>
12. Assignment; Successors. Neither the Participant nor any other person
shall have the power, voluntarily or involuntarily, to transfer, assign,
anticipate, pledge, mortgage or otherwise encumber, alienate or transfer
any rights hereunder in advance of any of the payments to be made
pursuant to this Plan or any portion thereof. The obligations of the
Company hereunder shall be binding upon any and all successors and
assigns to the Company.
13. Withholding. The Company shall comply with all federal and state laws
and regulations respecting the withholding, deposit and payment of any
income or employment taxes relating to the payment of Deferred Amounts
under this Plan.
14. No Impact on Directorship. This Plan shall not be construed to confer
any right on the part of a Participant to be or remain a Director or to
receive any, or any particular rate of, Compensation.
15. Interpretations. Interpretations of, and determinations related to, this
Plan made by the Company in good faith, including any determinations or
calculations of Deferred Amounts or Account Balances, shall be
conclusive and binding upon all parties; and the Company shall not incur
any liability to a Participant for any such interpretation or
determination so made or for any other action taken by it in connection
with this Plan.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer as of January 1, 1998.
AGL RESOURCES INC.
By: /s/ Robert L. Goocher
Robert L. Goocher
Executive Vice President
S2-396657.1
corpsec\forms\dircse\plandoc
7
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 10-2
<TEXT>
Southern Natural Gas Company
Post Office Box 2563
Birmingham AL 35202 2563
205 325 7410
SOUTHERN NATURAL GAS
December 16, 1997
Mr. Stephen J. Gunther
Atlanta Gas Light Company
Post Office Box 4569
Atlanta, Georgia 30302-4569
Dear Mr. Gunther:
Atlanta Gas Light Company ("Atlanta") and Southern Natural Gas Company
("Southern") are parties to a firm transportation agreement dated November 1,
1994 (#904480) for 5,173 Mcf/day ("FT Agreement"), a firm transportation
no-notice agreement dated November 1, 1994 (#904481) for 6,764 Mcf/day ("FT-NN
Agreement"), and a contract storage service agreement dated November 1, 1994
(#S20140) for 334,997 Mcf ("CSS Agreement"), as amended by Amendatory Agreement
dated March 1, 1995 (collectively, the "Agreements"). Pursuant to Section 4.1 of
each agreement, the agreement is effective through February 28, 1998, and may be
extended for successive terms of one year each year thereafter if the parties
mutually agree in writing to each yearly extension at least 60 days prior to the
end of the primary term or any subsequent yearly extension. Southern herewith
states its election to extend the Agreements for an additional term of one year,
commencing on March 1, 1998, and terminating on February 28, 1999. If Atlanta is
in agreement, please so indicate by signing both originals and returning one
original to Southern.
Very truly yours,
Larry E. Powell
Senior Vice President-Pipeline Customer Services
Accepted and agreed to this 23rd Accepted and agreed to this 16th
day of December, 1997. day of December, 1997.
ATLANTA GAS LIGHT COMPANY SOUTHERN NATURAL GAS COMPANY
By: /s/ Stephen J. Gunther By: /s/ Larry E. Powell .
--------------------------- ----------------------------
Its: As Agent for Atlanta Gas Light Co. Its: Sr. Vice President .
----------------------------------- ---------------------------------
A SONAT COMPANY
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<TEXT>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0001004155
<NAME> AGL RESOURCES INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,430
<OTHER-PROPERTY-AND-INVEST> 77
<TOTAL-CURRENT-ASSETS> 409
<TOTAL-DEFERRED-CHARGES> 122
<OTHER-ASSETS> 12
<TOTAL-ASSETS> 2,050
<COMMON> 284
<CAPITAL-SURPLUS-PAID-IN> 186
<RETAINED-EARNINGS> 166
<TOTAL-COMMON-STOCKHOLDERS-EQ> 636
<PREFERRED-MANDATORY> 75
<PREFERRED> 0
<LONG-TERM-DEBT-NET> 660
<SHORT-TERM-NOTES> 151
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
<PREFERRED-STOCK-CURRENT> 0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 528
<TOT-CAPITALIZATION-AND-LIAB> 2,050
<GROSS-OPERATING-REVENUE> 402
<INCOME-TAX-EXPENSE> 15
<OTHER-OPERATING-EXPENSES> 93
<TOTAL-OPERATING-EXPENSES> 350
<OPERATING-INCOME-LOSS> 52
<OTHER-INCOME-NET> 5
<INCOME-BEFORE-INTEREST-EXPEN> 42
<TOTAL-INTEREST-EXPENSE> 14
<NET-INCOME> 28
<PREFERRED-STOCK-DIVIDENDS> 2
<EARNINGS-AVAILABLE-FOR-COMM> 26
<COMMON-STOCK-DIVIDENDS> 15
<TOTAL-INTEREST-ON-BONDS> 12
<CASH-FLOW-OPERATIONS> (30)
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| GIS | https://www.sec.gov/Archives/edgar/data/40704/0000040704-98-000005.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000040704-98-000005.txt : 19980202
<SEC-HEADER>0000040704-98-000005.hdr.sgml : 19980202
ACCESSION NUMBER: 0000040704-98-000005
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971123
FILED AS OF DATE: 19980107
SROS: CSX
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GENERAL MILLS INC
CENTRAL INDEX KEY: 0000040704
STANDARD INDUSTRIAL CLASSIFICATION: 2040
IRS NUMBER: 410274440
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0525
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-01185
FILM NUMBER: 98502147
BUSINESS ADDRESS:
STREET 1: NUMBER ONE GENERAL MILLS BLVD
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55426
BUSINESS PHONE: 6125402311
MAIL ADDRESS:
STREET 1: P O BOX 1113
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55440
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>SECOND QUARTER 10-Q, FISCAL 1998
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 23, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-1185
GENERAL MILLS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-0274440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Number One General Mills Boulevard
Minneapolis, MN 55426
(Mail: P.O. Box 1113) (Mail: 55440)
(Address of principal executive offices) (Zip Code)
(612) 540-2311
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of December 12, 1997, General Mills had 158,429,896 shares of its $.10 par
value common stock outstanding (excluding 45,723,436 shares held in treasury).
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GENERAL MILLS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In Millions, Except per Share Data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
November 23, November 24, November 23, November 24,
1997 1996 1997 1996
----------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Sales $ 1,638.3 $1,560.1 $ 3,054.8 $2,875.7
Costs and Expenses:
Cost of sales 653.7 659.4 1,197.6 1,195.2
Selling, general and administrative 645.4 587.5 1,223.0 1,098.2
Depreciation and amortization 48.5 43.0 97.4 85.9
Interest, net 27.3 24.5 58.5 47.3
Unusual items 166.8 - 166.4 48.4
--------- --------- --------- --------
Total Costs and Expenses 1,541.7 1,314.4 2,742.9 2,475.0
--------- -------- --------- --------
Earnings before Taxes and Earnings
(Losses) of Joint Ventures 96.6 245.7 311.9 400.7
Income Taxes 31.6 90.5 113.1 147.0
Earnings (Losses) from Joint Ventures (.4) 1.5 .1 .7
--------- -------- --------- --------
Net Earnings $ 64.6 $ 156.7 $ 198.9 $ 254.4
========= ======== ========= ========
Earnings per Share $ .41 $ 1.00 $ 1.25 $ 1.62
========= ========= ========= =========
Dividends per Share $ .53 $ .50 $ 1.06 $ 1.00
========= ========= ========= =========
Average Number of Common Shares 158.2 156.5 158.9 157.2
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited) (Unaudited)
November 23, November 24, May 25,
1997 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 29.9 $ 28.3 $ 12.8
Receivables 442.8 428.4 419.1
Inventories:
Valued primarily at FIFO 219.7 154.2 155.9
Valued at LIFO (FIFO value exceeds LIFO by
$48.2, $58.4 and $47.5, respectively) 251.9 242.1 208.5
Prepaid expenses and other current assets 111.5 128.3 107.3
Deferred income taxes 103.8 101.2 107.7
--------- -------- ---------
Total Current Assets 1,159.6 1,082.5 1,011.3
--------- -------- ---------
Land, Buildings and Equipment, at Cost 2,416.8 2,474.7 2,571.6
Less accumulated depreciation (1,243.9) (1,218.3) (1,292.2)
--------- -------- ---------
Net Land, Buildings and Equipment 1,172.9 1,256.4 1,279.4
Intangibles 641.0 107.8 655.2
Other Assets 975.6 959.0 956.5
--------- -------- ---------
Total Assets $ 3,949.1 $3,405.7 $ 3,902.4
========= ======== =========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $ 689.2 $ 617.1 $ 599.7
Current portion of long-term debt 93.8 107.5 139.0
Notes payable 183.8 421.6 204.3
Accrued taxes 114.0 141.7 97.0
Other current liabilities 304.1 232.4 252.5
--------- -------- ---------
Total Current Liabilities 1,384.9 1,520.3 1,292.5
Long-term Debt 1,596.9 1,078.8 1,530.4
Deferred Income Taxes 271.3 243.1 272.1
Deferred Income Taxes - Tax Leases 136.4 154.5 143.7
Other Liabilities 170.4 168.4 169.1
--------- -------- ---------
Total Liabilities 3,559.9 3,165.1 3,407.8
--------- -------- ---------
Stockholders' Equity:
Cumulative preference stock, none issued - - -
Common stock, 204.2 shares issued 596.8 389.6 578.0
Retained earnings 1,566.6 1,506.7 1,535.4
Less common stock in treasury, at cost,
shares of 46.0, 48.3 and 44.3, respectively (1,660.8) (1,553.6) (1,501.9)
Unearned compensation and other (50.9) (52.8) (58.0)
Cumulative foreign currency adjustment (62.5) (49.3) (58.9)
--------- -------- ---------
Total Stockholders' Equity 389.2 240.6 494.6
--------- -------- ---------
Total Liabilities and Equity $ 3,949.1 $3,405.7 $ 3,902.4
========= ======== =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) (In Millions)
Twenty-Six Weeks Ended
November 23, November 24,
1997 1996
----------- ---------
Cash Flows - Operating Activities:
Earnings from continuing operations $198.9 $254.4
Adjustments to reconcile earnings to cash flow:
Depreciation and amortization 97.4 85.9
Deferred income taxes (2.4) (3.8)
Change in current assets and liabilities (19.1) (67.6)
Unusual items 166.4 48.4
Other, net (11.5) (5.4)
------ ------
Cash provided by continuing operations 429.7 311.9
Cash used by discontinued operations (3.8) (3.9)
------ ------
Net Cash Provided by Operating Activities 425.9 308.0
------ ------
Cash Flows - Investment Activities:
Purchases of land, buildings and equipment (80.5) (78.4)
Investments in businesses, intangibles and
affiliates, net of investment returns and
dividends 8.7 (23.6)
Purchases of marketable investments (5.5) (3.9)
Proceeds from sale of marketable investments 31.2 21.3
Other, net (39.1) (40.6)
------ ------
Net Cash Used by Investment Activities (85.2) (125.2)
------ ------
Cash Flows - Financing Activities:
Change in notes payable (18.3) 277.7
Issuance of long-term debt 103.8 3.9
Payment of long-term debt (77.8) (109.9)
Common stock issued 53.4 23.4
Purchases of common stock for treasury (215.2) (209.9)
Dividends paid (168.8) (157.5)
Other, net (.7) (2.8)
------ ------
Net Cash Used by Financing Activities (323.6) (175.1)
------ ------
Increase in Cash and Cash Equivalents $ 17.1 $ 7.7
====== ======
See accompanying notes to consolidated condensed financial statements.
<PAGE>
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Background
These financial statements do not include certain information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal
recurring nature. Operating results for the twenty-six weeks ended November 23,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending May 31, 1998.
These statements should be read in conjunction with the financial statements and
footnotes included in our annual report for the year ended May 25, 1997. The
accounting policies used in preparing these financial statements are the same as
those described in our annual report.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
(2) Unusual Items
In the first quarter of fiscal 1998 we recorded several unusual items resulting
in a net after-tax charge of $.1 million. We received an insurance settlement
from one of our carriers related to costs incurred in fiscal 1995 and 1996
(charged against fiscal 1994) from the improper use of a pesticide by an
independent contractor in treating some of the company's oat supplies. Snack
Ventures Europe (SVE), our joint venture with PepsiCo, Inc., recorded
restructuring charges for productivity initiatives primarily related to
production consolidation. We also recorded charges associated with restructuring
our sales regions and our trade and promotion organization.
In the second quarter of fiscal 1998, we recorded restructuring charges of
$166.8 million pretax, $100.1 million after tax ($.63 per share) primarily
related to improving the cost structure of our North American cereal operations.
We shut down one cereal system at our Lodi, California facility and closed our
two smallest plants, located in South Chicago, Illinois and Etobicoke, Ontario.
The charges included approximately $137 million in non-cash charges primarily
related to asset write-offs, and approximately $30 million of cash charges,
primarily related to costs to dispose of assets and pay severance. Most of this
cash will be paid by fiscal year end. An additional smaller restructuring charge
is expected to be recorded in the third quarter. It is expected that these
restructuring activities will be substantially completed by the end of fiscal
1998. Annualized cost savings from these actions are estimated at $22 million
after-tax (14 cents per share).
In the first quarter of fiscal 1997 we adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The non-cash charge upon adoption
of SFAS No. 121 was $48.4 million pretax, $29.2 million after tax ($.18 per
share). The charge represented a reduction in the carrying amounts of certain
impaired assets to their estimated fair value.
<PAGE>
(3) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Adoption of
SFAS No. 128 is required in our third quarter of fiscal 1998; all prior periods
will be restated when SFAS No. 128 is adopted. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share (EPS) on the statement of
earnings. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period (such as related to
outstanding stock options). The EPS as reported and the pro forma basic and
diluted EPS of the company are as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
1997 1996 1997 1996
---- ---- ---- ----
EPS as reported $.41 $1.00 $1.25 $1.62
Basic EPS $.41 $1.00 $1.25 $1.62
Diluted EPS $.40 $ .98 $1.22 $1.59
The thirteen and twenty-six weeks ended November 23, 1997 included restructuring
charges related to North American cereal operations (see "Unusual Items" note).
Excluding the unusual charge, EPS as reported, basic EPS, and diluted EPS for
the thirteen and twenty-six weeks were $1.04, $1.04 and $1.01; and $1.88, $1.88,
and $1.83, respectively.
The twenty-six weeks ended November 24, 1996 included an unusual charge related
to the adoption of SFAS No. 121 (see "Unusual Items" note). Excluding the
unusual charge, EPS as reported, basic EPS, and diluted EPS were $1.80, $1.80
and $1.77, respectively.
(4) Statements of Cash Flows
During the first six months, we paid $59.3 million for interest (net of amount
capitalized) and $84.3 million for income taxes.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Operations generated $117.8 million more cash in the first half of fiscal 1998
than in the same prior-year period. The increase in cash provided by operations
as compared to last year was caused by a $48.5 million decrease in the working
capital change and by a $69.3 million increase in cash from operations, after
adjustment for non-cash charges.
Fiscal 1998 capital expenditures are estimated to be approximately $175 million.
During the first six months, capital expenditures totaled $80.5 million.
Our short-term outside financing is obtained through private placement of
commercial paper and bank notes. Our level of notes payable fluctuates based on
cash flow needs.
Our long-term outside financing is obtained primarily through our medium-term
note program. First half activity under this program consisted of issuance of
$100.0 million in notes and debt payments of $75.2 million.
RESULTS OF OPERATIONS
Second quarter sales of $1,638.3 million grew 5 percent from the prior year.
First half sales of $3,054.8 million grew 6 percent. Second quarter earnings
from operations of $164.7 million ($1.04 per share) before restructuring charges
of $100.1 million ($.63 per share) (See Note (2)), increased by 5 percent from
$156.7 million ($1.00 per share) reported last year. Including restructuring
charges, second quarter earnings this year were $64.6 million ($.41 per share).
Cumulative earnings from operations of $299.1 million ($1.88 per share) before
unusual items of $100.2 million, ($.63 per share), were up 5 percent from $283.6
million ($1.80 per share), before the non-cash charge associated with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of"last year. Adoption of SFAS No. 121 resulted in a non-cash,
after-tax charge of $29.2 million, or 18 cents per share. Including unusual
items, first half earnings this year were $198.9 million ($1.25 per share).
Including the non-cash charge, last year first half earnings were $254.4 million
($1.62 per share).
The second-quarter earnings gain was driven by 6 percent growth in worldwide
unit volume on top of the 9 percent volume increase reported in the same period
a year earlier.
In the United States, General Mills' total retail unit volume grew 5 percent in
the second quarter and was up 7 percent through the first six months. Excluding
the acquired Ralcorp brands, domestic retail unit volume was down 2 percent in
the quarter and even with last year through the first half, as second-quarter
Big G cereal shipments fell below the prior year's record levels, offsetting
volume gains across the remaining U.S. businesses.
Total Big G cereal volume including the acquired Chex and Cookie Crisp brands
was up 1 percent in the second quarter and up 5 percent through six months. Chex
cereal shipments in November exceeded expectations, and represented good
momentum going into the holiday season, when the popularity of Chex Party Mix
drives strong consumer volume for the franchise. Excluding acquired brands, Big
G volume was 11 percent below last year's, when second-quarter volume grew more
than 10 percent reflecting the launch of three new cereals and strong
performance from a sample-size merchandising program.
Cereal category volume in all Nielsen measured outlets grew 2.6 percent in the
quarter, reflecting continued acceleration from the 1 percent growth rate
achieved in fiscal 1997. Big G cereals' total share of market through six months
was 25.6 percent. Market share excluding acquired brands is 23.3 percent,
virtually even with Big G's 23.4 percent share for fiscal 1997.
Combined unit volume for the company's remaining domestic retail businesses grew
9 percent in the quarter. Snack food volume was up more than 20 percent for both
the quarter and first half including the Chex Mix line. Excluding Chex Mix,
snacks volume was up 5 percent in the first half and 2 percent above last year's
second quarter, when volume grew 12 percent. This performance was broad based,
with fruit snacks, Pop Secret microwave popcorn and grain snacks all posting
first-half market share gains. Yogurt volume grew 18 percent in the quarter on
continued good performance by core Yoplait product lines and the successful
expansion of Colombo yogurt distribution to the western United States. Betty
Crocker main meal and side dish volume was up 1 percent. Combined volume for
dessert, flour and baking mix businesses was up 4 percent in the quarter despite
heightened competitive promotional levels in the dessert category.
Second-quarter volume for foodservice operations grew 5 percent.
International unit volume grew 11 percent in both the second quarter and first
six months, led by the Cereal Partners Worldwide (CPW) joint venture with
Nestle. CPW unit volume grew 12 percent in the quarter, reflecting continued
broad-based volume and share strength across major European and Latin American
markets. Snack Ventures Europe (SVE), the company's joint venture with PepsiCo,
recorded 7 percent volume growth in the quarter. Volume for the International
Dessert Partners venture with CPC International in Latin America was up 17
percent through six months and 1 percent above last year's second quarter, which
included initial shipments to expansion markets. In Canada, quarterly unit
volume was up 2 percent.
During the second quarter, General Mills repurchased 1.3 million shares of
common stock at an average price of $65 per share. Through six months, share
repurchases totaled 3.1 million shares. Average shares outstanding totaled 158.2
million for the second quarter compared to 156.5 million in the prior year,
reflecting shares issued in the February 1997 Ralcorp acquisition. Interest
expense in the second quarter totaled $27.3 million, up from $24.5 million last
year due to the Ralcorp acquisition and share repurchase activities.
Our tax rates (excluding unusual items) for the second quarter and first half of
fiscal 1998 were 37.3 percent and 37.5 percent, respectively, compared to 36.8
percent and 37.0 percent in last year's second quarter and first half. Our
reported tax rates for the first six months of fiscal 1998 and 1997 were 36.3
percent and 36.7 percent, respectively.
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on September 22, 1997.
(b) All directors nominated were elected at the Annual Meeting.
(c) For the election of directors, the results were as follows:
Richard M. Bressler For 137,140,009
Withheld 978,259
Livio D. DeSimone For 137,335,605
Withheld 782,663
William T. Esrey For 137,356,180
Withheld 762,088
Charles W. Gaillard For 137,411,151
Withheld 707,117
Judith R. Hope For 137,303,126
Withheld 815,142
Kenneth A. Macke For 137,162,022
Withheld 956,246
Michael D. Rose For 137,369,103
Withheld 749,165
Stephen W. Sanger For 137,405,337
Withheld 712,931
A. Michael Spence For 137,383,106
Withheld 735,162
Dorothy A. Terrell For 137,380,191
Withheld 738,077
Raymond G. Viault For 137,424,026
Withheld 694,242
C. Angus Wurtele For 137,381,639
Withheld 736,629
On the ratification of the appointment of KPMG Peat Marwick LLP as
auditors for fiscal 1998 the results were as follows:
For: 137,402,167
Against: 213,944
Abstain: 502,157
On the proposal to adopt an amendment to the Company's Restated
Certificate of Incorporation, the results were as follows:
For: 125,551,716
Against: 1,865,121
Abstain: 743,931
Broker Non-Vote: 9,957,500
<PAGE>
The stockholders' proposal requesting that the directors take action
to adopt cumulative voting was rejected:
For: 32,984,566
Against: 88,292,079
Abstain: 5,034,414
Broker Non-Vote: 11,807,209
Item 5. Other Information.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and financial
performance. These statements are qualified by reference to the section
"Cautionary Statement Relevant to Forward-Looking Information" in Item 1 of our
Annual Report on Form 10-K for the fiscal year ended May 25, 1997, which lists
important factors that could cause actual results to differ materially from
those discussed in this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Statement of Computation of Earnings per Share.
Exhibit 12 Statement of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second
quarter of fiscal 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL MILLS, INC.
(Registrant)
Date January 5, 1998 /s/ S. S. Marshall
--------------- -------------------------------------
S. S. Marshall
Senior Vice President,
General Counsel
Date January 5, 1998 /s/ K. L. Thome
--------------- -------------------------------------
K. L. Thome
Senior Vice President,
Financial Operations
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 11 TO 2ND QTR. 10-Q, FISCAL 1998
<TEXT>
Exhibit 11
GENERAL MILLS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In Millions, Except per Share Data)
Twenty-Six Weeks Ended
November 23, November 24,
1997 1996
--------- --------
Net Earnings $ 198.9 $254.4
======= ======
Computation of Shares:
Weighted average number of shares outstanding,
excluding shares held in treasury (a) 158.9 157.2
Net shares resulting from the assumed exercise of
certain stock options (b) 4.0* 3.0*
Shares potentially issuable under compensation plans .1* -*
------- ------
Total common shares and common share equivalents 163.0 160.2
======= ======
Earnings per Share $ 1.25 $ 1.62
======= ======
Notes to Exhibit 11:
(a) Computed as the weighted average of net shares outstanding on
stock-exchange trading days.
(b) Common share equivalents are computed by the "treasury stock" method. This
method first determines the number of shares issuable under stock options
that had an option price below the average market price for the period, and
then deducts the number of shares that could have been repurchased with the
proceeds of options exercised.
* Common share equivalents are not material. As a result, earnings per share
have been computed using the weighted average number of shares outstanding
of 158.9 million and 157.2 million for the first six months of fiscal 1998
and 1997, respectively.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 12 TO 2 QTR. 10-Q, FISCAL 1998
<TEXT>
<TABLE>
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Twenty-Six Weeks Ended Fiscal Year Ended
November 23, November 24, May 25, May 26, May 28, May 29,May 30,
1997 1996 1997 1996 1995 1994 1993
------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings
to Fixed Charges 5.22 7.68 6.54 6.94 4.10 6.18 8.62
For purposes of computing the ratio of earnings to fixed charges, earnings
represent pretax income from continuing operations, plus pretax earnings or
losses of joint ventures plus fixed charges (net of capitalized interest). Fixed
charges represent interest (whether expensed or capitalized) and one-third (the
proportion deemed representative of the interest factor) of rents of continuing
operations.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FDS, 2ND QTR. 10-Q, FISCAL 1998
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from our
Form 10-Q for the twenty-six week period ended November 23, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAY-26-1997
<PERIOD-END> NOV-23-1997
<CASH> 29,900,000
<SECURITIES> 0
<RECEIVABLES> 442,800,000
<ALLOWANCES> 0
<INVENTORY> 471,600,000
<CURRENT-ASSETS> 1,159,600,000
<PP&E> 2,416,800,000
<DEPRECIATION> (1,243,900,000)
<TOTAL-ASSETS> 3,949,100,000
<CURRENT-LIABILITIES> 1,384,900,000
<BONDS> 1,596,900,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 596,800,000
<OTHER-SE> (207,600,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,949,100,000
<SALES> 3,054,800,000
<TOTAL-REVENUES> 3,054,800,000
<CGS> 1,197,600,000
<TOTAL-COSTS> 1,197,600,000
<OTHER-EXPENSES> 97,400,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,500,000
<INCOME-PRETAX> 311,900,000
<INCOME-TAX> 113,100,000
<INCOME-CONTINUING> 198,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,900,000
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| HNZ | https://www.sec.gov/Archives/edgar/data/46640/0000950132-98-000205.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950132-98-000205.txt : 19980317
<SEC-HEADER>0000950132-98-000205.hdr.sgml : 19980317
ACCESSION NUMBER: 0000950132-98-000205
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19980128
FILED AS OF DATE: 19980313
SROS: NYSE
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEINZ H J CO
CENTRAL INDEX KEY: 0000046640
STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030]
IRS NUMBER: 250542520
STATE OF INCORPORATION: PA
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-03385
FILM NUMBER: 98565690
BUSINESS ADDRESS:
STREET 1: 600 GRANT ST
CITY: PITTSBURGH
STATE: PA
ZIP: 15219
BUSINESS PHONE: 4124565700
MAIL ADDRESS:
STREET 2: P O BOX 57
CITY: PITTSBURGH
STATE: PA
ZIP: 15230
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 28, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- ----------------
FOR THE NINE MONTHS ENDED JANUARY 28, 1998 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 412-456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of February 28, 1998, was 365,679,947 shares.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales........................................ $6,733,386 $6,910,356
Cost of products sold........................ 4,196,835 4,418,924
---------- ----------
Gross profit................................. 2,536,551 2,491,432
Selling, general and administrative expenses. 1,369,517 1,445,107
---------- ----------
Operating income............................. 1,167,034 1,046,325
Interest income.............................. 23,004 28,701
Interest expense............................. 190,956 204,481
Other expense, net........................... 31,829 27,117
---------- ----------
Income before income taxes................... 967,253 843,428
Provision for income taxes................... 346,930 311,991
---------- ----------
Net income................................... $ 620,323 $ 531,437
========== ==========
Net income per share--diluted................ $ 1.66 $ 1.42
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ 1.69 $ 1.45
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .92 $ .84 1/2
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
2
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales........................................ $2,236,034 $2,307,538
Cost of products sold........................ 1,379,218 1,459,249
---------- ----------
Gross profit................................. 856,816 848,289
Selling, general and administrative expenses. 512,776 502,998
---------- ----------
Operating income............................. 344,040 345,291
Interest income.............................. 7,462 8,324
Interest expense............................. 64,848 70,496
Other expense, net........................... 18,041 6,436
---------- ----------
Income before income taxes................... 268,613 276,683
Provision for income taxes................... 80,457 102,296
---------- ----------
Net income................................... $ 188,156 $ 174,387
========== ==========
Net income per share--diluted................ $ .50 $ .47
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ .51 $ .47
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .31 1/2 $ .29
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
3
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................... $ 195,979 $ 156,986
Short-term investments, at cost which
approximates market......................... 12,435 31,451
Receivables, net.............................. 1,037,415 1,118,874
Inventories................................... 1,446,611 1,432,511
Prepaid expenses and other current assets..... 207,606 273,284
---------- ----------
Total current assets........................ 2,900,046 3,013,106
---------- ----------
Property, plant and equipment................. 4,060,852 4,380,598
Less accumulated depreciation................. 1,728,564 1,901,378
---------- ----------
Total property, plant and equipment, net.... 2,332,288 2,479,220
---------- ----------
Goodwill, net................................. 1,764,200 1,803,552
Other intangibles, net........................ 617,068 627,096
Other non-current assets...................... 514,188 514,813
---------- ----------
Total other non-current assets.............. 2,895,456 2,945,461
---------- ----------
Total assets................................ $8,127,790 $8,437,787
========== ==========
</TABLE>
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
4
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 402,361 $ 589,893
Portion of long-term debt due within one year. 13,382 573,549
Accounts payable.............................. 791,274 865,154
Salaries and wages............................ 74,007 64,836
Accrued marketing............................. 185,721 164,354
Accrued restructuring costs................... 127,259 210,804
Other accrued liabilities..................... 302,566 315,662
Income taxes.................................. 153,861 96,163
---------- ----------
Total current liabilities................... 2,050,431 2,880,415
---------- ----------
Long-term debt................................ 2,925,537 2,283,993
Deferred income taxes......................... 247,462 265,409
Non-pension postretirement benefits........... 208,005 211,500
Other......................................... 364,342 356,049
---------- ----------
Total long-term debt and other liabilities.. 3,745,346 3,116,951
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,988 108,015
Additional capital............................ 245,917 175,811
Retained earnings............................. 4,323,938 4,041,285
Cumulative translation adjustments............ (364,110) (210,864)
---------- ----------
4,313,733 4,114,247
Less:
Treasury shares at cost (65,612,637 shares at
January 28, 1998 and 63,912,463 shares
at April 30, 1997).......................... 1,940,798 1,629,501
Unfunded pension obligation.................. 25,376 26,962
Unearned compensation relating to the ESOP... 15,546 17,363
---------- ----------
Total shareholders' equity.................. 2,332,013 2,440,421
---------- ----------
Total liabilities and shareholders' equity.. $8,127,790 $8,437,787
========== ==========
</TABLE>
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
5
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash Provided by Operating Activities........ $ 554,715 $ 434,858
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (258,421) (277,681)
Acquisitions, net of cash acquired......... (136,351) (179,627)
Proceeds from sale of Ore-Ida frozen
foodservice foods business................ 490,739 --
Purchases of short-term investments........ (857,067) (951,912)
Sales and maturities of short-term
investments............................... 880,710 962,226
Other items, net........................... 28,864 25,741
--------- ---------
Cash provided by (used for) investing
activities.............................. 148,474 (421,253)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............... 3,934 45,185
Payments on long-term debt................. (563,065) (100,049)
Proceeds from commercial paper and short-
term borrowings, net...................... 481,438 468,693
Dividends.................................. (337,670) (310,239)
Purchases of treasury stock................ (480,306) (208,281)
Exercise of stock options.................. 170,598 105,589
Other items, net........................... 77,549 27,384
--------- ---------
Cash (used for) provided by financing
activities.............................. (647,522) 28,282
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ (16,674) (7,068)
--------- ---------
Net increase in cash and cash equivalents.... 38,993 34,819
Cash and cash equivalents at beginning of
year........................................ 156,986 90,064
--------- ---------
Cash and cash equivalents at end of period... $ 195,979 $ 124,883
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
6
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's annual report on Form 10-K for the fiscal year ended April
30, 1997 includes additional information about the company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the fiscal 1998 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Finished goods and work-in-process........ $1,090,218 $1,040,104
Packaging material and ingredients........ 356,393 392,407
---------- ----------
$1,446,611 $1,432,511
========== ==========
</TABLE>
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice foods business to McCain Foods Limited of New Brunswick,
Canada. The transaction resulted in a pretax gain of approximately $96.6
million ($0.14 per diluted share), and was recorded as an offset to
selling, general and administrative expenses. The transaction included the
sale of the company's Ore-Ida appetizer, pasta and potato foodservice
business and five of the Ore-Ida plants that manufacture the products. The
Ore-Ida frozen foodservice foods business contributed approximately $525
million in net sales for fiscal 1997. This sale was an essential part of
Project Millennia as it will allow the company to focus its efforts on the
Ore-Ida retail frozen potato and pasta business, and on the frozen retail
snacks business. The sale is not expected to have an adverse impact on the
company's results of operations.
(7) On June 30, 1997, the company acquired John West Foods Limited from
Unilever. John West Foods Limited, with annual sales of more than $250
million, is the leading brand of canned tuna and fish in the United
Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish
products throughout Continental Europe and in a number of other
international markets. (John West operations in Australia, New Zealand and
South Africa were not included in the transaction.)
On July 21, 1997, the company announced that it had acquired a majority
interest in a joint venture with Tiger Oats Limited of Johannesburg, South
Africa. The new company is known as Pet Products (Pty) Limited with its
headquarters in Cape Town. Pet Products manufactures and markets pet food
brands formerly owned exclusively by Tiger Oats. These brands include
Dogmor, Husky, Pamper and Catmor.
7
<PAGE>
On August 28, 1997, the company acquired a majority interest in one of
Poland's leading food processors, Pudliszki S.A. Pudliszki is the largest
ketchup producer in Poland and also markets tomato concentrate, canned
vegetables and cooking sauces.
On November 7, 1997, the company acquired the single-serve foodservice
business of CPC (United Kingdom) Ltd. and its Frank Cooper's brand. Along
with its flagship brand, Frank Cooper's, this business offers single-
serve sauces, dressings, and jams and jellies under the names Oxford,
Vintage, Adpac and Berry Hill.
During the current year the company also made other acquisitions,
primarily in the Asia/Pacific region.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
Pro forma results of the company, assuming all of the above transactions
had been made at the beginning of each period presented, would not be
materially different from the results reported.
(8) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 28,
1998, the company had $2.01 billion of domestic commercial paper
outstanding, all of which has been classified as long-term debt due to
the long-term nature of the credit agreement. As of April 30, 1997, the
company had $1.35 billion of domestic commercial paper outstanding and
classified as long-term debt.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on
February 3, 1998 and the proceeds were used to repay domestic commercial
paper.
(9) On September 10, 1997, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.31 1/2 per share
from $0.29 per share, for an indicated annual rate of $1.26 per share.
(10) On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998, there is authorization to repurchase up to
11.6 million shares.
(11) In the third quarter, the company adopted SFAS No. 128, "Earnings per
Share" which requires the disclosure of both diluted and basic earnings
per share. Basic earnings per share is calculated by dividing earnings
attributable to common shares by average common shares outstanding, while
diluted earnings per share include all dilutive securities or other
contracts that may entitle its holder to obtain common stock, in the
divisor.
8
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of Statement 128.
Previously reported earnings per share amounts have been restated, as
necessary, to conform to Statement 128 requirements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
January 28, January 29, January 28, January 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
FY 1998 FY 1997 FY 1998 FY 1997
(In Thousands, Except per Share Amounts)
<S> <C> <C> <C> <C>
Net income per share--basic:
Net income................ $188,156 $174,387 $620,323 $531,437
Preferred dividends....... 9 10 28 32
-------- -------- -------- --------
Net income applicable to
common stock............. $188,147 $174,377 $620,295 $531,405
======== ======== ======== ========
Average common shares
outstanding--basic....... 366,403 367,465 366,403 367,465
======== ======== ======== ========
Net income per share--
basic.................... $ 0.51 $ 0.47 $ 1.69 $ 1.45
======== ======== ======== ========
Net income per share--
diluted:
Net income................ $188,156 $174,387 $620,323 $531,437
======== ======== ======== ========
Average common shares
outstanding.............. 366,403 367,465 366,403 367,465
Effect of dilutive
securities:
Convertible preferred
stock.................. 304 345 304 345
Stock options........... 6,802 6,469 6,802 6,469
-------- -------- -------- --------
Average common shares
outstanding--diluted..... 373,509 374,279 373,509 374,279
======== ======== ======== ========
Net income per share--
diluted................ $ 0.50 $ 0.47 $ 1.66 $ 1.42
======== ======== ======== ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NINE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
H. J. Heinz Company announced its largest-ever reorganization plan in the
fourth quarter of Fiscal 1997. This reorganization and restructuring program
("Project Millennia") is designed to strengthen the company's core businesses
and improve the company's profitability and global growth.
On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice business to McCain Foods Limited. The transaction resulted in a
pretax gain of approximately $96.6 million ($0.14 per diluted share), and was
recorded as an offset to selling, general and administrative expenses. This
sale was an essential part of Project Millennia as it will allow the company
to focus its efforts on the Ore-Ida retail frozen potato and pasta business,
and on the frozen retail snacks business. In addition, the company has
announced the closure or sale of 23 plants worldwide, with another 2 to be
announced.
During the first nine months of Fiscal 1998, the company incurred non-
recurring costs related to the ongoing implementation of Project Millennia of
$60.4 million pretax ($0.10 per diluted share). These non-recurring costs
consist primarily of relocation, training, consulting and start-up costs. In
the fourth quarter of the fiscal year, the company expects additional non-
recurring costs associated with the implementation of Project Millennia of
between $0.04 and $0.05 per share.
RESULTS OF OPERATIONS
For the nine months ended January 28, 1998, sales decreased $177.0 million,
or 2.6%, to $6,733.4 million from $6,910.4 million recorded in the same period
a year ago. The sales decrease resulted from divestitures of 6.3% and the
unfavorable effect of foreign exchange translation rates of 3.0%; partially
offset by acquisitions of 3.4%, volume gains of 1.7% and favorable price of
1.6%. Domestic operations provided 53.2% of the current period's sales
compared to 55.4% in the same period last year.
During the first nine months of Fiscal 1998, the company acquired John West
Foods Limited in Europe, a majority interest in Pudliszki S.A., one of
Poland's top food processors, and other small acquisitions. Fiscal 1997
acquisitions impacting the period-to-period sales dollar comparison include
substantially all of the pet food businesses of Martin Feed Mills Limited in
Canada, the canned beans and pasta business of Nestle Canada, Inc. and other
small acquisitions, primarily in the Asia/Pacific region. The sales impact of
these acquisitions was more than offset by divestitures, primarily the Ore-Ida
frozen foodservice business and the New Zealand ice cream business.
Volume increases recorded in seafood, sauces and pastes, weight loss
classroom activities, bakery products and retail frozen potatoes were
partially offset by a volume decline in pet food.
Price increases recorded in retail ketchup, infant food, pet food and
seafood were partially offset by a price decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
3.0%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
Gross profit increased $45.1 million to $2,536.6 million from $2,491.4
million a year ago. The ratio of gross profit to sales increased to 37.7% from
36.1%. In the current period, gross profit was unfavorably impacted by non-
recurring costs related to the ongoing implementation of Project Millennia.
Gross profit in the prior period was favorably impacted by a gain on the sale
of real estate, partially offset by restructuring and related costs. Excluding
these non-recurring items in both periods, gross profit would have increased
$79.5 million and the gross profit ratio would have increased to 38.1% from
35.9%. The current year's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
10
<PAGE>
Operating income increased $120.7 million, or 11.5%, to $1,167.0 million
from $1,046.3 million for the same period last year. In the current period,
operating income was favorably impacted by the gain on the sale of the Ore-Ida
frozen foodservice business, partially offset by non-recurring costs related
to the ongoing implementation of Project Millennia. Operating income in the
prior period was unfavorably impacted by restructuring and related costs,
partially offset by a gain on the sale of real estate. Excluding these non-
recurring items in both periods, operating income would have increased $76.0
million, or 7.2%, to $1,130.8 million from $1,054.8 million. The increase in
operating income, excluding the effects of these non-recurring items in both
periods, is primarily due to the increase in gross profit as SG&A expenses
were relatively flat period-to-period. Unfavorable foreign exchange
translation rates reduced operating income by $32.0 million or 3.1%.
Interest expense decreased $13.5 million to $191.0 million from $204.5
million in the comparable period a year ago primarily due to lower average
borrowings.
Other expenses increased $4.7 million to $31.8 million from $27.1 million in
the prior period, primarily due to currency losses in the Asia/Pacific region.
The effective tax rate for the current nine-month period was 35.9% compared
to 37.0% for the same period last year. The current period's effective rate
reflected the benefits of recent tax legislation in Italy and the United
Kingdom, partially offset by a significantly higher tax rate associated with
the sale of Ore-Ida's frozen foodservice business. Excluding these items, the
effective tax rate for the nine-month period would be 37.0%, the same as the
prior year's comparable period. The current rate reflects a reduction in the
effective rate for the year as a result of foreign tax planning.
Net income for the first nine months was $620.3 million compared to $531.4
million for the same period last year. Diluted earnings per share was $1.66
compared to $1.42 a year ago and basic earnings per share was $1.69 compared
to $1.45 a year ago. Excluding the non-recurring items noted above, net income
would have increased 12.8% to $605.2 million from $536.5 million a year ago;
diluted earnings per share would have increased 13.3% to $1.62 from $1.43 a
year ago; and basic earnings per share would have increased 13.0% to $1.65
from $1.46 a year ago.
THREE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
RESULTS OF OPERATIONS
For the three months ended January 28, 1998, sales decreased $71.5 million,
or 3.1%, to $2,236.0 million from $2,307.5 million recorded in the same period
a year ago. The sales decrease resulted from the impact of divestitures of
7.2% and the unfavorable effect of foreign exchange translation rates of 4.8%;
partially offset by volume gains of 4.3%, acquisitions of 3.3% and favorable
price of 1.3%. Domestic operations provided 53.1% of the current period's
sales compared to 53.6% in the same period last year.
Volume increases occurred in seafood, retail ketchup, retail frozen
potatoes, sauces and pastes, infant food, frozen entrees and weight loss
classroom activities; partially offset by decreases in pet food and soups.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
included John West Foods Limited in Europe, a majority interest in Pudliszki
S.A., one of Poland's top food processors and other small acquisitions. The
sales impact of these acquisitions was more than offset by divestitures,
primarily the Ore-Ida frozen foodservice business and the New Zealand ice
cream business.
Price increases recorded in retail ketchup and infant food were partially
offset by a decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
4.8%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
11
<PAGE>
Gross profit increased $8.5 million to $856.8 million from $848.3 million a
year ago. The ratio of gross profit to sales increased to 38.3% from 36.8%. In
the current period, gross profit was unfavorably impacted by non-recurring
costs related to the ongoing implementation of Project Millennia. Gross profit
in the prior period was favorably impacted by a gain on the sale of real
estate, partially offset by restructuring and related costs. Excluding the
non-recurring items in both periods, gross profit would have increased $32.3
million and the gross profit ratio would have increased to 39.0% from 36.4%.
The current quarter's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
Operating income decreased $1.3 million to $344.0 million from $345.3
million for the same quarter last year. In the current quarter, operating
income was unfavorably impacted by non-recurring costs related to the ongoing
implementation of Project Millennia of $29.4 million pretax ($0.05 per diluted
share). Operating income in the same quarter last year was unfavorably
impacted by a pretax charge of $18.1 million ($0.03 per diluted share) for
restructuring and related costs, partially offset by a pretax gain of $13.2
million ($0.02 per diluted share) on the sale of real estate. Excluding the
non-recurring items in both periods, operating income increased $23.2 million,
or 6.6%, to $373.4 million from $350.2 million. The increase in operating
income, excluding the effects of these non-recurring items in both periods, is
primarily due to the increase in gross profit as SG&A expenses were relatively
flat quarter-to-quarter. Unfavorable foreign exchange translation rates
reduced operating income by $16.0 million or 4.6%.
Interest expense decreased $5.6 million to $64.8 million from $70.5 million
in the third quarter a year ago primarily due to lower average borrowings.
Other expenses increased $11.6 million to $18.0 million from $6.4 million in
the same quarter last year, primarily due to currency losses in the
Asia/Pacific region.
The effective tax rate for the third quarter was 30.0%, which included a
benefit from recent tax legislation in Italy and a reduction in the full-year
projected tax rate as noted in the nine-month discussion above.
Net income for the current quarter was $188.2 million compared to $174.4
million for the same quarter last year. Diluted earnings per share was $0.50
compared to $0.47 a year ago and basic earnings per share was $0.51 compared
to $0.47 a year ago. Excluding the non-recurring items noted above, net income
would have increased 16.6% to $206.7 million from $177.2 million a year ago;
diluted earnings per share would have increased 14.6% to $0.55 from $0.48 a
year ago; and basic earnings per share would have increased 16.7% to $0.56
from $0.48 a year ago.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities totaled $554.7 million for the nine
month period ended January 28, 1998 compared to $434.9 million last year.
Cash provided by investing activities totaled $148.5 million compared to
requiring $421.3 million last year. Cash provided by divestitures in the
current period totaled $490.7 million, due to the sale of the Ore-Ida frozen
foodservice business. Acquisitions in the current period required $136.4
million, due mainly to the purchases of John West Foods Limited in Europe, the
single-serve foodservice business of CPC (United Kingdom) and its Frank
Cooper's brand, a majority interest in Pudliszki S.A. of Poland, a majority
interest in a pet food joint venture with Tiger Oats Limited of Johannesburg,
South Africa and other acquisitions, primarily in the Asia/Pacific region.
Acquisitions in the prior year's comparable period totaled $179.6 million, due
mainly to the purchases of substantially all of the pet food businesses of
Martin Feed Mills Limited in Canada, the assets of the canned beans and pasta
business of Nestle Canada Inc., Shortland Cannery Limited in New Zealand, and
Southern Country Foods Ltd. in Australia. Purchases of property, plant and
equipment totaled $258.4 million in the current period compared to $277.7
million a year ago.
12
<PAGE>
In the current period, $647.5 million was applied to financing activities
while financing activities provided $28.3 million a year ago. Treasury stock
purchases totaled $480.3 million (10.2 million shares) versus $208.3 million
(6.2 million shares) in the prior year's first nine months. Payments on long-
term debt totaled $563.1 million for the current period compared to $100.0
million last year. Dividend payments totaled $337.7 million compared to $310.2
million a year ago. Proceeds from long-term debt provided $3.9 million
compared to $45.2 million in the prior period. Stock options exercised
provided $170.6 million in the current period versus $105.6 million in the
prior year's comparable period. Net proceeds from commercial paper and short-
term borrowings provided $481.4 million compared to $468.7 million in the
prior period.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. As of January 28, 1998,
the company had $2.01 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 30, 1997, the company had $1.35 billion of
domestic commercial paper outstanding and classified as long-term debt. The
company continues to evaluate long-term financing vehicles in order to reduce
short-term variable interest rate debt.
On September 10, 1997, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.31 1/2 per share from $0.29 per
share, for an indicated annual rate of $1.26 per share. On March 11, 1998, the
company's board of directors declared the quarterly dividend on the company's
common stock of $0.31 1/2 per share payable on April 10, 1998 to shareholders
of record at the close of business on March 23, 1998.
On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998 there is authorization to repurchase 11.6
million shares.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on February
3, 1998 and the proceeds were used to repay domestic commercial paper.
In the third quarter, the company adopted SFAS No. 128, "Earnings per Share"
which requires the disclosure of both diluted and basic earnings per share.
Basic earnings per share is calculated by dividing earnings attributable to
common shares by average common shares outstanding, while diluted earnings per
share include all dilutive securities or other contracts that may entitle its
holder to obtain common stock, in the divisor.
The company's financial position continues to remain strong, enabling it to
meet cash requirements for operations, capital expansion programs and
dividends to shareholders.
OTHER MATTERS
On December 2, 1997, following the recommendation of the Chairman and Chief
Executive Officer Anthony J. F. O'Reilly, to the Management Development and
Compensation Committee of outside directors, the board of directors of the
company announced the appointment of William R. Johnson as president and chief
executive officer, effective April 30, 1998, the beginning of the company's
financial year. Dr. O'Reilly has agreed to remain as non-executive chairman of
the company through the annual meeting of shareholders in September 2000.
13
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings set forth under this caption in the
company's Quarterly Report on Form 10-Q for the three months ended July 30,
1997.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Note 7 to the Condensed Consolidated Financial Statements in Part I--
Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--
Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
10. Service Agreement between H. J. Heinz Company and
Anthony J. F. O'Reilly.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 28, 1998.
14
<PAGE>
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.
H. J. HEINZ COMPANY
(Registrant)
Date: March 13, 1998 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 1998 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<DESCRIPTION>SERVICE AGREEMENT
<TEXT>
<PAGE>
Exhibit 10
SERVICE AGREEMENT
AGREEMENT made as of December 2, 1997 between H.J. Heinz Company, a
Pennsylvania corporation (the "Company"), and Anthony J.F. O'Reilly
(the "Chairman").
WHEREAS, the Chairman has been serving as Chairman of the Board
of Directors of the Company (the "Board") and Chief Executive Officer of the
Company;
WHEREAS, the Chairman desires to resign his position as Chief
Executive Officer of the Company as of the "Effective Date" (as defined below);
WHEREAS, the Company desires the Chairman to continue to serve as
Chairman of the Board and to retain the services and skills of the Chairman who
has been President and Chief Operating Officer of the Company since 1973, Chief
Executive Officer of the Company since 1979 and Chairman of the Board of the
Company since 1987, and who has been, and continues to be, critical to the
continued growth and success of the Company;
WHEREAS, the Company believes that it is particularly important
during the transition period in which the term of a new chief executive officer
will commence for the Company to avail itself of the skill and experience of the
Chairman as well as his relationships with the business and international
community;
WHEREAS, in order to induce the Chairman to continue to serve as
Chairman of the Board and to provide the services described herein, the Company
desires to provide the Chairman with compensation and other benefits on the
terms and conditions set forth in this Agreement; and
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WHEREAS, the Chairman is willing to continue to serve as Chairman
of the Board and to perform services for the Company, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Service. The Chairman's term of service under this
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Agreement (the "Term"), shall be for the period beginning April 30, 1998, the
commencement date of the Company's next fiscal year (the "Effective Date"),
and ending on the date of the Company's annual meeting of shareholders in
September, 2000 (the "Termination Date"), subject however, to earlier
termination as expressly provided herein.
2. Service.
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2.1 Duties. During the Term, the Chairman shall continue to serve as
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Chairman of the Board. In addition, the Chairman will be available to consult
with the executives and the other directors of the Company. The Chairman will
provide such other services to the Company as may be mutually agreed between the
Chairman and the Board (but will not be responsible for any of the day to day
operations of the Company, which shall be the responsibility of the Chief
Executive Officer). The Chairman shall be expected to attend meetings of the
Board of Directors and the Annual Meeting of Stockholders, and will attend such
other functions as may be reasonably requested by the Chief Executive Officer,
subject to the Chairman's other personal and professional commitments. The
Chairman shall be
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3
entitled, but shall not be required, to attend other Company sponsored meetings.
During the Term, the Company's annual financial results will be announced and
published jointly by the Chairman, as Chairman of the Board, and the Chief
Executive Officer in a manner consistent with the announcements and publications
in prior years. During the Term, the Chairman shall remain as Chairman of the
H.J. Heinz Company Foundation. The Chairman shall continue to be authorized to
make or approve expenditures on behalf of the Company consistent with the
expenditures that heretofore have been or currently are provided in the Chairman
budgets. The Chairman shall perform his duties in a manner consistent with the
objectives and prospects of the Company and its multinational operations,
subject to the general powers and responsibilities of the Board.
2.2 Corporate Action. The Company will take all necessary action,
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including effecting any necessary amendments to the Company's by-laws, to enable
the (Chairman to serve in the capacity described herein and will cause the
Chairman to be nominated for election as a director of the Company during the
Term.
2.3 Location. The Chairman may perform his duties from locations of
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his choosing as may be appropriate, taking into account the reduced scope of the
Chairman's authority and responsibilities contemplated hereby.
2.4 Employment Status. From and after the Effective Date, the
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Chairman shall cease to be an employee of the Company and its affiliates and
shall be deemed to have retired from the Company and its affiliates for purposes
of the qualified and nonqualified retirement plans, programs and arrangements of
the Company and its affiliates.
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4
3. Compensation.
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3.1 Annual Fee. The Company shall pay or cause to be paid to the
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Chairman during the Term an annual fee that shall not be less than $500,000 (the
"Annual Fee"). The Annual Fee shall be payable in accordance with current
practices for the Chairman. The Company, by action of the Management Development
and Compensation Committee of its Board of Directors (the "Compensation
Committee"), taken in its discretion, may increase the Annual Fee at any time
and from time to time during the Term.
3.2 Bonus Compensation. During the Term, the Chairman shall be
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eligible to receive an annual bonus in such amounts, if any, and at such times,
as may be determined by the Compensation Committee in its sole discretion.
4. Stock Options.
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4.1 Existing Options. As of the date of this Agreement, the Chairman
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holds stock options to acquire 1,875,000 shares of the Company common stock (the
"Existing Options"). There are 1,125,000 Existing Options that are currently
scheduled to vest on December 31, 1997 which shall, if not then vested, vest
upon the execution of this Agreement. The remaining 750,000 Existing Options
held by the Chairman will continue to vest and remain exercisable in accordance
with their terms during the Term as though the Chairman continued to be a full
time employee of the Company and shall, to the extent not then vested, become
fully vested on the date the Chairman shall cease to serve as Chairman of the
Board for any reason. The Company agrees to take all necessary action to effect
the foregoing, and the committee administering each stock option plan pursuant
to which the
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5
Existing Options were granted shall pass such resolutions and take any other
action that may be necessary to waive any conditions to vesting and the exercise
of the Existing Options that are inconsistent herewith.
4.2 Confirmation. The parties confirm that they have no current
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understanding or agreement regarding the grant of any additional stock options
to the Chairman during the Term.
5. Authorization. The Company represents and warrants that the
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execution, delivery and performance of this Agreement have been duly authorized
by all necessary corporate action on the part of the Company and the Board, and
do not require any further approval or consent, or amendment or modification
of any plan or agreement.
6. Benefits.
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6.1 Expenses. The Chairman shall be reimbursed by the Company for
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all reasonable expenses incurred by the Chairman as a result of the termination
of his services as the Chief Executive Officer of the Company and his retirement
from the Company.
6.2 Support Services. The Chairman shall continue to be provided
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such benefits and support services (including but not limited to executive
office facilities and secretarial, financial, communications, security and
transportation services and other allowances) as heretofore have been and
currently are being provided to the Chairman. The Chairman shall be provided
with an office, commensurate with his position with the Company, on the 60th
floor of the Company's corporate headquarters in Pittsburgh. The Company shall
continue to
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6
provide the Chairman with the exclusive services of the Chairman's personal
assistant, Clyde Fearer, or any other personal assistant of his choosing and
shall provide such assistant with an office on the 60th floor of the Company's
corporate headquarters in Pittsburgh.
6.3 Other Benefits.
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(a) During the Term, the Chairman shall continue to participate
in all employee benefit plans and programs of the Company and its affiliates
(other than as provided for in Section 2.4), including, without limitation, any
medical, life insurance and disability plans or programs, on a basis consistent
with the general provisions of such plans.
(b) The Chairman shall continue to be reimbursed for expenses
incurred in connection with Company business in a manner consistent with past
practice. Any issues as to consistency with past practice shall be resolved by
the Chairman of the Audit Committee.
(c) The Chairman shall have complete and full access to the
Company's aircraft for any travel that might facilitate the Chairman in
performing his duties hereunder as the Chairman shall determine in a manner
consistent with past practice; provided that the Chairman will inform the
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Company of any such use. To the extent any such use is determined by the
Chairman or the Chairman of the Company's Audit Committee to be unrelated to the
business activities of the Company, the Chairman will reimburse the Company for
the use of the aircraft in a manner consistent with past practice.
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7
7. Termination.
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7.1 Termination for Cause. The Company may terminate the Term prior
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to the Termination Date for "cause." Such termination shall be effected by
notice thereof delivered by the Company to the Chairman.
For purposes of this Agreement, termination by the Company for
"cause" shall mean termination by action of a majority of the entire Board
because of (i) the Chairman's conviction of a felony relating to the business or
assets of the Company (which through the lapse of time or otherwise is not
subject to appeal) in which case such termination shall be effective as of the
date of such notice or (ii) the Chairman's willful continuing and repeated
refusal without proper cause to perform the duties described herein to the
Company; provided, that no termination for the events described in clause (ii)
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hereof shall be made unless the Chairman shall have failed to cure such event
within thirty days after written notice thereof shall have been given to the
Chairman by the Company.
In the event of termination by the Company for cause in accordance
with the foregoing procedures, the following provisions shall apply:
7.1.1 The Company shall have no further obligation to pay the
Annual Fee or bonuses to the Chairman hereunder except for any portion of the
Annual Fee accrued and unpaid through the effective date of termination and any
unpaid bonus with respect to any previously completed fiscal year.
7.1.2 Such termination shall not affect any rights the Chairman
has under any insurance or other benefit plans or arrangements of the
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8
Company that are vested as of the termination date or that vest as a result of
such termination.
7.1.3 The Chairman shall have the right to contest such
termination by appropriate legal action before any court of competent
jurisdiction and to obtain appropriate damages from the Company if and to the
extent that such termination is determined by such court to have been wrongful.
7.2 Termination by the Company Without Cause or Termination by the
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Chairman for Good Reason. In the event that the term of employment is
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terminated prior to the Termination Date by the Company without "cause" (as
defined in Section 7.1 hereof) or by the Chairman for "Good Reason" (as defined
in Section 7.2.3 hereof), the following provisions shall apply:
7.2.1 The Chairman shall be entitled to the following:
(a) A lump-sum payment in cash equal to the aggregate
Annual Fee and bonus (which shall be deemed to be an amount equal to the highest
bonus paid to the Chairman, whether under this Agreement or otherwise, by the
Company and its affiliates in any of the last three full fiscal years proceeding
the date of termination) that the Chairman would have received for the greater
of (x) the period ending on the Termination Date and (y) one year after the date
of termination (the "Severance Period"), it being understood that to the extent
the Severance Period includes any partial fiscal year, the bonus otherwise
payable with respect to such fiscal year will be pro-rated; and
(b) The Chairman shall continue, during the Severance
Period (i) to be entitled to use of the office facilities (as described in
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9
Section 6.2 above), his personal assistant and the Company's corporate aircraft
on the same terms as were made available to him during the Term and (ii) to be
covered by the employee benefit plans of the Company and its affiliates to the
same extent he was covered during the Term (or, if continued coverage is not
permitted under the terms of such employee benefit plans, the Company will
provide the Chairman with a cash payment representing the economic equivalent of
such coverage (on an after-tax basis)).
7.2.2 Termination by the Chairman for Good Reason shall be
effected by notice thereof delivered by the Chairman to the Company and shall be
effective as of the date of such notice. The Company shall have the right to
contest such termination by appropriate legal action before any court of
competent jurisdiction and to obtain appropriate damages from the Chairman if
and to the extent such termination is determined by such court to have been
wrongful.
7.2.3 For purposes of this Agreement, "Good Reason" shall mean
the occurrence of any of the following events during the Term; provided, in the
case of clauses (a), (b) and (c) below, that if such breach is reasonably
capable of being cured by the Company, no termination for Good Reason shall be
made unless the Company shall have failed to cure such breach within thirty days
after written notice thereof shall have been given to the Company by the
Chairman:
(a) A material breach by the Company of its obligations
under this Agreement;
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(b) A material reduction by the Company in the Chairman's
authority or responsibilities from those described herein and customarily
associated with the position of Chairman of the Board;
(c) The failure of the Chairman (being willing and able to
serve) to be nominated, recommended and elected as a director at every
shareholders' meeting at which his term as a director would otherwise expire or
the failure of the Chairman to remain as Chairman of the Board; or
(d) a "Change in Control."
The term "Change in Control" shall mean:
(1) A transaction or series of transactions in which
any person or group within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 (the "1934 Act") shall have become the beneficial owner,
directly or indirectly (with beneficial ownership determined as provided in Rule
13d-3, or any successor rule, under the 1934 Act), of securities of the Company
entitling the person or group to 20% or more of all votes (without consideration
of the rights of any class of stock to elect directors by a separate class vote)
to which all shareholders of the Company would be entitled in the election of
directors were an election held on such date; provided that any shares held by
any employee stock ownership plan sponsored by the Company shall be excluded
from the shares held by any person or group for purposes of determining whether
the foregoing 20% threshold for securities ownership has been reached by such
person or group;
(2) The failure of individuals who were members of the
Board of Directors as of the Effective Date to constitute at least a
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11
majority of the Board of Directors, unless the election (or the nomination for
election by the shareholders) of each new director was approved by a vote of at
least two-thirds of the total of such individuals then still in office and such
other directors as may previously have been elected or nominated pursuant to
such a two-thirds vote; or
(3) (i) The merger or consolidation of the Company with
another corporation in which the Company is not the surviving corporation, or
pursuant to which its common stock is converted, other than any transaction
where the shareholders of the Company immediately prior to the merger or
consolidation beneficially own, immediately after the merger or consolidation,
shares of the corporation issuing cash or securities in the merger or
consolidation entitling such shareholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect directors by a
separate class vote) to which all shareholders of such corporation would be
entitled in the election of directors or where the members of the Board of
Directors of the Company immediately prior to the merger or consolidation
constitute, immediately after the merger or consolidation, a majority of the
Board of Directors of the corporation issuing cash or securities in the merger
or consolidation, or (ii) the sale or other disposition or liquidation of all or
substantially all the assets of the Company; provided, however, that
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notwithstanding anything to the contrary in this Agreement, no transaction or
series of transactions shall be deemed to constitute a "Change in Control" if
such transaction or series of transactions required the Chairman to be
identified in any United States securities law filing as a person or a member of
any
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group acquiring, holding or disposing of beneficial ownership of the Company
securities and effecting a "Change in Control," as defined herein.
7.2.4 Notwithstanding any other provision of this Agreement, if
all or any portion of the payments or benefits provided to the Chairman pursuant
to this Agreement, either alone or together with other payments or benefits
which the Chairman receives, or is entitled to receive, from the Company, would
constitute a "parachute payment" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), then, except as set
forth in the following sentence, the amount of such payments or benefits
provided hereunder or otherwise shall be reduced to the extent necessary so that
no portion thereof shall be subject to the excise tax imposed by Section 4999 of
the Code. Notwithstanding the preceding sentence, if the Chairman would receive
a larger amount, on an after-tax basis, if the payments hereunder were not
reduced pursuant to the preceding sentence, then the payments hereunder to the
Chairman shall not be so reduced. The determination of whether or not the
Chairman would receive a larger amount, on after-tax basis, shall be made in
good faith by the Chairman and shall be submitted to the Company in writing at
least five business days prior to the time of the first payment and, if
reasonable, such determination shall be binding on the parties hereto.
7.2.5 In the event of termination by the Company without cause or
by the Chairman for Good Reason, (a) the Chairman shall have no further
obligations or liabilities to the Company under this Agreement, (b) the Chairman
shall retain the right to all options as modified hereunder, and all unvested
options shall immediately vest and become exercisable, and (c) such termination
shall
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not affect any vested rights which the Chairman may have had at the effective
date of such termination pursuant to any insurance or other death benefit plans
or arrangements of the Company, or any stock option or other plan of the Company
maintained for its senior executives, all of which rights shall remain in full
force and effect, nor shall such termination affect the obligation of the
Company to continue to provide the Chairman with the other benefits and support
services required to be provided to the Chairman under this Agreement.
7.3 No Mitigation. The Chairman shall not be required to mitigate
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damages or the amount of any payments provided for under this Agreement by
seeking other employment or otherwise and no such employment, if obtained, or
compensation or benefits payable in connection therewith, shall reduce any
amounts or benefits to which the Chairman is entitled hereunder. Any payments
that may become due to the Chairman under Section 7.2.1 hereof shall not be
subject to offset for any claims the Company may have against the Chairman.
7.4 Legal Costs. If either party institutes any legal action to
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enforce his or its rights under, or to recover damages for breach of, this
Agreement, the prevailing party in such an action shall be entitled to recover
from the other party any actual expenses for attorney's fees and disbursements
incurred by him or it.
8. Disability. If during the Term the Chairman shall become
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permanently disabled, as defined in the Company's long-term disability plan as
in effect on the date hereof, the Chairman shall continue to receive for the
balance of the Term an annual disability benefit equal to 60% of the then Annual
Fee and the Chairman shall retain the right to all of his options and all
unvested options shall
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14
immediately vest and become exercisable. If during the Term, the Chairman shall
fully recover from a disability, the Company, by action of a majority of the
members of the Compensation Committee, shall have the right (exercisable within
sixty days after notice from the Chairman of such recovery) but not the
obligation to restore the Chairman to full time service at full compensation. If
the Company elects not to restore the Chairman to the same position, functions,
duties and responsibilities as he exercised prior to his disability, he shall be
entitled to receive the full compensation and benefits provided for in this
Agreement. The Term shall not be extended or be deemed suspended by reason of
any period of disability and, unless otherwise provided in this Section 8,
the Chairman shall be entitled to receive all compensation and benefits provided
for in this Agreement.
9. Death. Upon the death of the Chairman, this Agreement and all
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benefits hereunder shall terminate except that the Chairman's estate (or a
designated beneficiary) shall be entitled to receive in a lump sum payment an
amount equal to: the Annual Fee accrued and unpaid to the last day of the month
in which his death occurs and the Chairman's estate or designated beneficiary
shall retain the right to all options and all unvested options shall immediately
vest and become exercisable. In addition to the foregoing payments, the
Chairman's estate or designated beneficiary shall have the right to receive any
death benefits or insurance payments provided for under any plan, program or
policy maintained by the Company hereunder or for the benefit of its senior
executive and to which the Chairman may be entitled.
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10. Covenant Not to Compete.
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10.1 Noncompetition Period. The period of time beginning with the
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Effective Date and continuing to and including the earlier of (a) September 15,
2001 and (b) the first anniversary of the last day of the term of the Chairman's
engagement hereunder, is referred to herein as the "Noncompetition Period";
provided that the Noncompetition Period shall terminate immediately upon the
termination of the Chairman by the Company without cause or by the Chairman for
Good Reason.
10.2 Limitation on Activities.
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(a) During the Noncompetition Period, the Chairman shall not
serve as a chief executive officer, president or other senior executive officer
of, chairman of a board of, or serve in any similar capacities on behalf of, any
firm, corporation, partnership, business organization or other entity
(collectively, "Entities" ) that is significantly engaged (x) in the business of
manufacturing, processing, distributing, or marketing of food products or (y) in
other businesses in which the Company (which for purposes of this Article 10
shall include its subsidiaries) currently, or as of the last day of the
Chairman's engagement by the Company, is engaged, and that produce annual
revenues in excess of $100 million, and, with respect to clauses (x) and (y), is
in direct competition with the Company.
(b) The Chairman shall not divert, solicit or hire away, or
attempt to divert, solicit or hire away, any person who was employed by the
Company in an executive, managerial or exclusive consulting capacity at any time
within twelve months prior to the last day of the Chairman's engagement by the
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Company; provided that nothing in this Agreement shall prohibit the Chairman,
with the prior written consent of the Company (which consent shall not be
unreasonably withheld), from hiring any person who shall theretofore have
retired from the Company in the ordinary course and who served under the
Chairman as an executive officer of the Company.
10.3 Limitations. The parties intend and acknowledge that the
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limitations on the Chairman's activity set forth in Section 10.2 above are
specifically limited in terms of temporal, geographic and activity-related scope
to such activities which, if they took place, would likely threaten the
Company's proprietary technology, trade secrets, marketing plans and other
confidential business information or its long-term business relationships with
certain customers and suppliers, such relationships having been developed and
maintained by the Company under the direction or supervision of the Chairman
with substantial effort and investment of the Company's time, money and other
resources.
10.4 Permitted Activities. The Company acknowledges that the
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Chairman has engaged in outside business activities and has made outside
investments prior to the date hereof and the Company agrees that it is the
intent of the parties that such activities and investments and additional
activities and investments in Entities that may or may not be engaged in the
food business or in other business which may directly compete with the Company
("Permitted Activities"), shall be outside the scope of this Section 10.
Accordingly, the provisions of this Section 10 shall not apply to the
involvement of, or restrain or prohibit the participation by the Chairman in,
any Permitted Activities during the Noncompetition Period or otherwise,
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so long as the Chairman does not assume the active responsibilities or duties
with respect to such Permitted Activities that would otherwise be prohibited by
Section 10.2.
11. Covenant Not to Disclose.
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11.1 The Chairman hereby covenants and agrees that he shall not at
any time or in any manner knowingly use or disclose any proprietary trade secret
or other confidential business information belonging to the Company (including,
for purposes of this Section 11, its subsidiaries and affiliates), including but
not limited to information relating to (a) the Company's strategic or marketing
plans, including any discussions or negotiations with respect to the
introduction of new products or the purchase or acquisition of any interest in
any operation relating to the Company's business; (b) the Company's business or
financing plans, whether long-term or short-term, as discussed, presented,
considered, or otherwise reviewed during meetings with other employees or agents
of the Company or the Board; (c) the profitability or cost of operations for the
Company or any of its subsidiaries, divisions, affiliates or business segments;
and (d) the Company's evaluation and compensation of, or future plans for, the
senior management and technical personnel employed by the Company or its
subsidiaries or affiliates. The provisions of this Section 10.1 shall not
prohibit the disclosure of (i) information that has entered the public domain
other than through any breach of this Agreement, (ii) information which the
Chairman is required to disclose under subpoena or similar process of law
(provided, that the Chairman shall give the Company such notice as may be
practicable of any such process in order that the Company may seek appropriate
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relief) or (iii) information, the disclosure of which is reasonably necessary
for the Chairman to defend himself or assert his rights under this Agreement in
connection with any proceeding to which the Company or its affiliates is a
party.
11.2 Upon the Chairman's termination of service with the Company
for any reason, the Chairman agrees (at the expense of the Company) to return
immediately and not to take any and all tangible or intangible property,
records, files, documents, software, data and other information irrespective of
form, belonging to the Company (or any of its subsidiaries, divisions, and
affiliated entities), with the exception of such materials or information as may
relate specifically to this Agreement or the Chairman's compensation and
benefits and except as may otherwise be approved by the Company in writing.
12. Special Remedies Upon Disclosure. A material breach of this
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Agreement will occur if the Chairman breaches or threatens to breach the
provisions of Sections 10 or 11 of this Agreement. The Chairman acknowledges
and agrees that such a breach would irreparably injure the Company and that the
occurrence of such a breach or threatened breach shall accordingly entitle the
Company to seek and obtain any legal, equitable or other relief which the
Company determines to be appropriate or necessary under the circumstances,
including specific performance of the provisions of this Agreement and/or the
issuance of an injunction or injunctions, without the posting of a bond or other
security, in addition to any other remedy which the Company may be entitled to
at law or in equity.
13. Rights Unfunded and Unsecured. All rights of the Chairman
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under this Agreement shall at all times be entirely unfunded and no provision
shall at
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any time be made with respect to segregating any assets of the Company for
payment of any amounts due hereunder. The Chairman shall not have or be given
any interest in or rights against any specific assets of the Company and shall
have only the rights of a general unsecured creditor of the Company.
14. Withholding. To the extent, but only to the extent, required by
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law (including, without limitation, Sections 3402, 3102 and 3301 of the Code),
the Company shall withhold employment taxes from all payments and benefits
provided to the Chairman pursuant to this Agreement. In the case of the exercise
of any stock option, such withholding may be effected by retention of an
appropriate number of shares of common stock.
15. Notices. All notices, requests, consents and other communications,
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required or permitted to be given hereunder, shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by prepaid
telegram, or mailed first-class, postage prepaid, by registered mail, as follows
(or to such other or additional addresses as either party shall designate by
notice in writing to the other in accordance herewith):
15.1 If to the Company:
H.J. Heinz Company
World Headquarters
P.O. Box 57
Pittsburgh, Pennsylvania 15230
Attention: Board of Directors
Attn: Chairman of the Management
Development and Compensation
Committee
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(with a copy, similarly addressed but Attention:
General Counsel)
15.2 If to the Chairman:
Dr. Anthony J.F. O'Reilly
H.J. Heinz Company
World Headquarters
P.O. Box 57
Pittsburgh, Pennsylvania 15230
16. General.
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16.1 Governing Law. Jurisdiction. Source of Process, Venue. This
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Agreement shall be governed by and construed and enforced in accordance with the
internal laws (and not the law of conflicts) of the State of Pennsylvania
applicable to agreements made and to be performed entirely in Pennsylvania. Each
party (a) hereby irrevocably submits itself to and acknowledges and recognizes
the jurisdiction of the courts of the State of Pennsylvania located in the
County of Allegheny or in the United States District Court for the Western
District of Pennsylvania (which courts, together with all applicable appellant
courts, for purposes of this Agreement, are the only "courts of competent
jurisdiction"), for the purpose of any suit, action or other proceeding arising
out of, under, or in connection with, relating to, or based upon this Agreement
or the subject matter hereof or the transactions contemplated hereby, (b) agrees
that any service of process in connection with any such suit, action or other
proceeding may be made upon it by means of the United States mail or such other
service as may be authorized by any such court, (c) agrees that the courts of
competent jurisdiction shall be the sole and exclusive courts and forums for the
purpose of any such suit, action or proceeding and agrees
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21
not to commence any suit, action or other proceeding arising out of, under, or
in connection with, or relating to or based upon this Agreement or the subject
matter hereof or the transactions contemplated hereby in any other forum and (d)
hereby waives and agrees not to assert, by way of motion, as a defense, or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject to the jurisdiction of courts of competent jurisdiction, that such suit,
action or proceeding is brought in an inconvenient forum, that the venue of the
suit, action or proceeding is improper or that this Agreement or the subject
matter hereof may not be enforced in or by such court. Each party agrees that
its submission to jurisdiction and its consent to service of process by mail is
made for the express benefit of the other party.
16.2 Severability. The invalidity or unenforceability of any
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term or provision of Sections 10, 11 or 12 of this Agreement shall not affect
the validity or enforceability of any other term or provision of such Sections,
which shall remain in full force and effect. If a final judgment of a court of
competent jurisdiction declares any such term or provision to be invalid or
unenforceable, the parties agree that the court making such determination shall
have the power to reduce the scope, duration, or area of such term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes as close as legally possible to expressing the intention of the
invalid or unenforceable term or provision, and that the failure to exercise
such power would be inconsistent with the specific and mutual intent of the
parties hereto.
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16.3 Captions. The section headings contained herein are for
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reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
16.4 Entire Agreement. This Agreement sets forth the entire
----------------
agreement and understanding of the parties relating to the subject matter
hereof, and supersedes all prior agreements, arrangements and understandings,
written or oral, between the parties.
16.5 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or liable for any alleged representation,
promise or inducement not so set forth.
16.6 Assignability. This Agreement and the Chairman's rights and
-------------
obligations hereunder may not be assigned by the Chairman. The Company may
assign its rights, together with its obligations, hereunder in connection with
any sale, transfer or other disposition of all or substantially all of its
business or assets; and such rights and obligations shall inure to, and be
binding upon, any successor to the business or substantially all of the assets
of the Company whether by merger, purchase of stock or assets or otherwise.
16.7 Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived, only by a written instrument executed by both of the parties hereto,
or in the case of a waiver, by the party waiving compliance. The failure of
either party at any time or times to require performance of any provision
<PAGE>
23
hereof shall in no manner affect the right at a later time to enforce the same.
No waiver by either party of the breach of any term or covenant contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such breach, or a waiver of the breach of any other term or covenant contained
in this Agreement.
16.8 Legal Fees. The Company shall pay all reasonable legal fees
----------
and expenses incurred by the parties in connection with the negotiation and
execution of this Agreement.
16.9 Beneficiaries. Whenever this Agreement provides for any
-------------
payment to the Chairman's estate, such payment may be made instead to such
beneficiary or beneficiaries as the Chairman may have designated in writing
filed with the Company. The Chairman shall have the right to revoke any such
designation and to redesignate a beneficiary or beneficiaries by written notice
to the Company (and to any applicable insurance company) to such effect.
16.10 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same instrument.
<PAGE>
24
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
H.J. HEINZ COMPANY
By: /s/ HERMAN J. SCHMIDT
----------------------------
HERMAN J. SCHMIDT
Chairman
Management Development and
Compensation Committee
/s/ ANTHONY J.F. O'REILLY
----------------------------
Anthony J.F. O'Reilly
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JANUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-29-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-28-1998
<EXCHANGE-RATE> 1
<CASH> 195,979
<SECURITIES> 12,435
<RECEIVABLES> 1,037,415
<ALLOWANCES> 0
<INVENTORY> 1,446,611
<CURRENT-ASSETS> 2,900,046
<PP&E> 4,060,852
<DEPRECIATION> 1,728,564
<TOTAL-ASSETS> 8,127,790
<CURRENT-LIABILITIES> 2,050,431
<BONDS> 2,925,537
<PREFERRED-MANDATORY> 0
<PREFERRED> 214
<COMMON> 107,774
<OTHER-SE> 2,224,025
<TOTAL-LIABILITY-AND-EQUITY> 8,127,790
<SALES> 6,733,386
<TOTAL-REVENUES> 6,733,386
<CGS> 4,196,835
<TOTAL-COSTS> 4,196,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,956
<INCOME-PRETAX> 967,253
<INCOME-TAX> 346,930
<INCOME-CONTINUING> 620,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 620,323
<EPS-PRIMARY> 1.69<F1>
<EPS-DILUTED> 1.66
<FN>
<F1>Represents basic earnings per share in accordance with SFAS No. 128.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| HP | https://www.sec.gov/Archives/edgar/data/46765/0000950134-98-001140.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950134-98-001140.txt : 19980218
<SEC-HEADER>0000950134-98-001140.hdr.sgml : 19980218
ACCESSION NUMBER: 0000950134-98-001140
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980213
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HELMERICH & PAYNE INC
CENTRAL INDEX KEY: 0000046765
STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381]
IRS NUMBER: 730679879
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04221
FILM NUMBER: 98537203
BUSINESS ADDRESS:
STREET 1: UTICA AT 21ST ST
CITY: TULSA
STATE: OK
ZIP: 74114
BUSINESS PHONE: 9187425531
MAIL ADDRESS:
STREET 1: UTICA AT 21ST ST
CITY: TULSA
STATE: OK
ZIP: 74114
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q FOR QUARTER ENDED DECEMBER 31, 1997
<TEXT>
<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 30549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 1-4221
HELMERICH & PAYNE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
73-0679879
(I.R.S. Employer I.D. Number)
UTICA AT TWENTY-FIRST STREET, TULSA, OKLAHOMA 74114
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (918) 742-5531
Former name, former address and former fiscal year, if changed since last
report: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- ------
CLASS OUTSTANDING AT DECEMBER 31, 1997
Common Stock, .10 par value 50,267,218
AUTHORIZED AT DECEMBER 31, 1997
53,528,952
Total Number of Pages 15
--
<PAGE> 2
HELMERICH & PAYNE, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
December 31, 1997 and September 30, 1997 3
Consolidated Condensed Statements of Income -
Three Months Ended December 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended December 31, 1997 and 1996 5
Consolidated Condensed Statement of Shareholders' Equity -
Three Months Ended December 31, 1997 6
Notes to Consolidated Condensed Financial Statements 7,8 & 9
Revenues and Income by Business Segments 10
Management's Discussion and Analysis of Financial 11 thru 14
Condition and Results of Operations
PART II. OTHER INFORMATION 14
Signature Page 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 50,414 $ 27,963
Short-term investments 1,286 1,318
Accounts receivable, net 112,479 98,697
Inventories 20,955 19,639
Prepaid expenses and other 16,412 10,387
----------- -----------
Total Current Assets 201,546 158,004
----------- -----------
Investments 300,590 323,510
Property, Plant and Equipment, Net 554,047 539,025
Other Assets 13,670 13,056
----------- -----------
Total Assets $ 1,069,853 $ 1,033,595
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 42,013 $ 42,642
Accrued liabilities 55,033 47,525
Notes payable 15,000 5,000
----------- -----------
Total Current Liabilities 112,046 95,167
----------- -----------
Noncurrent Liabilities
Deferred income taxes 138,636 141,331
Other 17,933 16,517
----------- -----------
Total Noncurrent Liabilities 156,569 157,848
----------- -----------
Shareholders' Equity
Common stock, par value
$.10 per share 5,353 5,353
Preferred stock, no shares issued -- --
Additional paid-in capital 57,654 51,316
Retained earnings 655,244 629,562
Unearned compensation (6,623) --
Net unrealized holding gains 108,390 114,454
----------- -----------
820,018 800,685
Less treasury stock, at cost 18,780 20,105
----------- -----------
Total Shareholders' Equity 801,238 780,580
----------- -----------
$ 1,069,853 $ 1,033,595
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1997 1996
-------- ---------
<S> <C> <C>
REVENUES:
Sales and other operating revenues $144,112 $116,726
Income from investments 7,711 1,536
-------- --------
151,823 118,262
-------- --------
COST AND EXPENSES:
Operating costs 76,490 63,900
Depreciation, depletion and amortization 18,651 15,472
Dry holes and abandonments 4,137 560
Taxes, other than income taxes 5,194 4,687
General and administrative 2,556 2,259
Interest 25 3
-------- --------
107,053 86,881
-------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN INCOME OF AFFILIATE 44,770 31,381
INCOME TAX EXPENSE 16,822 11,756
EQUITY IN INCOME OF AFFILIATE,
net of income taxes 1,217 500
-------- --------
NET INCOME $ 29,165 $ 20,125
======== ========
EARNINGS PER COMMON SHARE:
Basic $ 0.58 $ 0.41
======== ========
Diluted $ 0.57 $ 0.40
======== ========
CASH DIVIDENDS (Note 2) $ 0.07 $ 0.065
Average common shares outstanding:
Basic 50,006 49,651
Diluted 51,066 50,484
</TABLE>
Certain amounts have been restated to reflect the effect of the two-for-one
common stock split and distribution as discussed in Note 7. The accompanying
notes are an integral part of these statements.
-4-
<PAGE> 5
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 29,165 $ 20,125
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation, depletion, and amortization 18,651 15,472
Dry holes and abandonments 4,137 560
Equity in income of affiliate before
income taxes (1,963) (806)
Amortization of deferred compensation 209 368
Gain on sale of investments (6,015) --
Gain on sale of fixed assets (526) (485)
Other 348 47
Change in assets and liabilities--
Accounts receivable (13,782) (10,159)
Inventories (1,316) 76
Prepaid expenses and other (6,639) (3,384)
Accounts payable (32) 6,119
Accrued liabilities 7,508 7,353
Deferred income taxes 1,023 238
Other noncurrent liabilities 1,416 2,837
-------- --------
Total adjustments 3,019 18,236
-------- --------
Net cash provided by operating activities 32,184 38,361
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including dry hole costs (48,633) (36,319)
Proceeds from sales of property, plant, and
equipment 10,756 1,283
Purchase of investments (103) --
Proceeds from sale of investments 21,070 --
Purchase of short-term investments -- (276)
Proceeds from sale of short-term investments 32 --
-------- --------
Net cash used in investing activities (16,878) (35,312)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 33,000 15,000
Payments made on notes payable (23,000) (5,000)
Dividends paid (3,524) (3,243)
Proceeds from exercise of stock options 669 796
-------- --------
Net cash provided by financing activities 7,145 7,553
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 22,451 10,602
CASH AND CASH EQUIVALENTS, beginning of period 27,963 16,892
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 50,414 $ 27,494
======== ========
</TABLE>
-5-
<PAGE> 6
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands - except per share data)
<TABLE>
<CAPTION>
Net
Common Stock Unrealized
----------------------- Paid-In Holding Unearned
Shares Amount Capital Gains Compensation
------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 53,529 $ 5,353 $ 51,316 $ 114,454 $ --
Change in net unrealized
holding gains, net of
income taxes of ($3,718) -- -- -- (6,064) --
Cash dividends
($0.07 per share) -- -- -- -- --
Exercise of stock options -- -- 581 -- --
Stock, issued under
Restricted Stock Award Plan -- -- 5,757 -- (6,791)
Amortization of deferred
compensation -- -- -- -- 168
Net income -- -- -- -- --
---------------------------------------------------------------------------
Balance, December 31, 1997 53,529 $ 5,353 $ 57,654 $ 108,390 $ (6,623)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Retained -----------------------
Earnings Shares Amount
--------- ------ --------
<S> <C> <C> <C>
Balance, September 30, 1997 $ 629,562 3,501 $ (20,105)
Change in net unrealized
holding gains, net of
income taxes of ($3,718) -- -- --
Cash dividends
($0.07 per share) (3,524) -- --
Exercise of stock options -- (59) 291
Stock, issued under
Restricted Stock Award Plan -- (180) 1,034
Amortization of deferred
compensation 41 -- --
Net income 29,165 -- --
---------------------------------------------
Balance, December 31, 1997 $ 655,244 3,262 $ (18,780)
==============================================
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE> 7
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the results of
the periods presented. The results of operations for the three months
ended December 31, 1997, and December 31, 1996, are not necessarily
indicative of the results to be expected for the full year.
2. The $.065 cash dividend declared in September was paid December 1,
1997. On December 3, 1997, a cash dividend of $0.07 per share was
declared for shareholders of record on February 13, 1998, payable
March 2, 1998.
3. Inventories consist of materials and supplies.
4. Income from investments includes a $6,015,000 gain from sales of
available-for-sale securities during the first quarter of fiscal year
1998. The gain was $3,675,000 net of tax ($0.07 per share). There
were no sales of securities in the first quarter of fiscal year 1997.
5. The following is a summary of available-for-sale securities, which
excludes those accounted for under the equity method of accounting.
The recorded investment in securities accounted for under the equity
method is $30,857,998.
<TABLE>
<CAPTION>
Gross Gross Est.
Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
------------------------------------------
<S> <C> <C> <C> <C>
Equity Securities 12/31/97 $ 94,909 $175,388 $565 $269,732
Equity Securities 09/30/97 $110,011 $184,708 $104 $294,615
</TABLE>
6. The Company maintains a line of credit agreement with certain banks
which provides for maximum borrowing of $40,000,000 at adjustable
interest rates. Under the agreement, $40,000,000 may be borrowed
through May 1998, and $10,000,000 may be borrowed through May 1999.
As of December 31, 1997, the Company had borrowed $15,000,000 at a
rate of 6.32% and had letters of credit outstanding in the amount of
$8,l7l,000, leaving $16,829,000 available. Under the line of credit
agreement the Company must meet certain requirements regarding levels
of debt, net worth and earnings.
The Company has an additional $14.5 million line of credit with a bank
to be used primarily for letters of credit. As of December 31, 1997,
the Company had letters of credit outstanding in the amount of
$1,347,222 leaving $13,152,778 available.
-7-
<PAGE> 8
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
7. Stock Split and Earnings per Share -
On December 3, 1997, the Board of Directors of the Company declared a
two-for-one stock split and distribution; approximately 26.8 million
shares were issued on December 31, 1997 to stockholders of record on
December 15, 1997. All references in the financial statements and
notes to the number of common shares outstanding and per share amounts
reflect the impact of the split.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share",
effective for financial statement reporting periods ending after
December 15, 1997. This statement establishes standards for computing
and presenting earnings per share (EPS). It replaces the presentation
of primary and fully diluted EPS with a presentation of basic and
diluted EPS. The Company's primary EPS, as reported in prior periods,
will not change when applying the method required in computing the new
basic EPS.
Basic net income (or earnings) per common share is calculated based on
the weighted average shares outstanding during the period. Diluted
net income (or earnings) per common share includes in average common
shares outstanding employee stock options which are dilutive (984,188
shares and 762,296 shares for the first quarter of fiscal 1998 and
1997, respectively) and non-vested restricted stock (75,517 shares and
70,526 shares for the first quarter of fiscal 1998 and 1997,
respectively).
8. New Accounting Pronouncements -
The Financial Accounting Standards Board has issued two new accounting
standards, SFAS NO. 130, "Reporting Comprehensive Income", (SFAS 130)
and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", (SFAS 131), both effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for
the reporting and display of comprehensive income. While the Company
does have certain comprehensive income items, management does not
believe that adopting SFAS 130 will materially change the Company's
financial reporting and disclosures. SFAS 131 establishes standards
for reporting financial and descriptive information about a company's
operating segments. Management is currently analyzing the impact of
SFAS 131, but does not expect the standard to materially change its
current segment reporting disclosures.
-8-
<PAGE> 9
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
9. Restricted Stock Awards -
In the first quarter of fiscal year 1998, the Company has issued
180,000 shares of treasury stock as restricted stock awards under the
1996 Stock Incentive Plan. The Company recognized unearned
compensation of $6,791,000, which was the fair market value of the
stock at the time of issuance. Treasury stock was reduced by the book
value of the shares issued ($1,034,000) with the difference recognized
as an increase in paid-in-capital. The unearned compensation is being
amortized over a five-year period as compensation expense.
-9-
<PAGE> 10
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
REVENUES AND INCOME BY BUSINESS SEGMENTS
(in thousands)
<TABLE>
<CAPTION>
FY 1998 FY 1997
1ST QUARTER 1ST QUARTER
----------- -----------
<S> <C> <C>
SALES AND OTHER REVENUES:
Contract Drilling-Domestic $ 41,736 $ 29,596
Contract Drilling-International 51,994 35,630
--------- ---------
Total Contract Drilling Division 93,730 65,226
--------- ---------
Exploration and Production 32,171 30,014
Natural Gas Marketing 16,056 18,991
--------- ---------
Total Oil & Gas Division 48,227 49,005
--------- ---------
Real Estate Division 2,091 2,412
Investment and Other 7,775 1,619
--------- ---------
Total Revenues $ 151,823 $ 118,262
========= =========
OPERATING PROFIT (LOSS):
Contract Drilling-Domestic $ 9,371 $ 4,210
Contract Drilling-International 14,055 6,907
--------- ---------
Total Contract Drilling Division 23,426 11,117
--------- ---------
Exploration and Production 14,859 18,274
Natural Gas Marketing 587 1,381
--------- ---------
Total Oil & Gas Division 15,446 19,655
--------- ---------
Real Estate Division 1,308 1,779
--------- ---------
Total Operating Profit 40,180 32,551
--------- ---------
OTHER 4,590 (1,170)
INCOME BEFORE INCOME TAXES AND
--------- ---------
EQUITY IN INCOME OF AFFILIATE $ 44,770 $ 31,381
========= =========
</TABLE>
See accompanying notes to financial statements.
-10-
<PAGE> 11
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1997
Business Environment and Risk Factor
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include, among other
factors, fluctuations in natural gas and crude oil prices, expiration or
termination of drilling contracts, changes in general economic conditions,
rapid or unexpected changes in technologies and uncertain business conditions
that affect the Company's businesses. Accordingly, past results and trends
should not be used by investors to anticipate future results or trends.
With the exception of historical information, the matters discussed
below under the headings "Results of Operations" and "Liquidity and Capital
Resources" may include forward-looking statements that involve risks and
uncertainties. The Company wishes to caution readers that a number of
important factors discussed in this report and in the Company's other reports
filed with the Securities and Exchange Commission, could affect the Company's
actual results and cause actual results to differ materially from those in the
forward-looking statements.
Results of Operations
The Company reported net income of $29,165,000 ($0.58 per share) from
revenues of $151,823,000 for the first quarter of fiscal year 1998, compared
with $20,125,000 ($0.41 per share) net income from revenues of $118,262,000
during the first quarter of 1997. Net income for the first quarter of 1998
included $3,675,000 ($0.07 per share) from the sale of securities. There were
no sales of securities in the first quarter of fiscal year 1997.
The Company's Exploration and Production Division reported an
operating profit of $14,859,000 for the first quarter of fiscal 1998, compared
with an operating profit of $18,274,000 for the same period last year. The
Division's lower operating profit was the result of increased dry hole and
lease amortization expenses. Dry hole and abandonment expenses for the quarter
were $4.0 million, compared with $0.5 million in the first quarter of 1997.
Two significant dry holes were drilled during the current quarter as the
Company stepped up its exploratory effort. In addition, lease amortization
increased appreciably over last year as the result of significant acreage
purchases during the last quarter of fiscal 1997.
-11-
<PAGE> 12
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1997
(Continued)
Two additional exploratory wells should be completed in the second
quarter of fiscal 1998. One of the wells is in a Pinnacle Reef prospect in
east Texas that has encountered significant gas shows and pressure, but has
experienced some mechanical difficulties. It is uncertain at this time whether
the well will be completed. The other well is in southern Louisiana and is
expected to be drilled to 18,000' by late February.
Oil and gas revenues for the first quarter of 1998 increased to
$32,171,000 from $30,014,000, in the first quarter of 1997. Average natural
gas prices improved to $2.61 per mcf over last year's first quarter average of
$2.46 per mcf, but oil prices were down to an average of $18.50 per barrel this
year from $23.37 per barrel last year. First quarter natural gas production
rose to 117.1 mmcf a day, compared with 108.2 mmcf a day during last year's
first quarter. Oil production dropped to an average of 2,220 barrels per day,
from 2,853 barrels per day during the first quarter of last year. Both oil and
gas prices have softened going into the second quarter, especially compared to
the same period of 1997.
After participating in the Louisiana Austin Chalk play since the early
1990's, the Company sold its production and acreage in that play during the
first quarter of this fiscal year. Although the Company did experience some
successes in its exploration and development efforts there, the profitability
of the play was hampered by high finding costs that resulted in high
depreciation and depletion costs. The $10.6 million in sale proceeds, which
was slightly higher than book value, will be redeployed in other exploratory
regions.
The Contract Drilling Division reported an operating profit of
$23,426,000 in the first quarter of fiscal year 1998, more than double the
$11,117,000 for the same period of 1997. Operating profit from the domestic
drilling operations increased to $9,371,000 for the quarter, compared with
$4,210,000 for the first quarter of fiscal 1997. Rig utilization remained at
100% for land rigs (revenue days increased 11% from the first quarter of 1997)
and dayrates increased approximately 20% over last year. In the second
quarter, the Company plans to place into service a newly built 3,000 horsepower
land rig and also plans to construct six additional 1,500 horsepower land rigs
and place into service at various times over the next three quarters. The six
new rigs will be marketed to both domestic and international customers.
Domestic earnings were also helped by the addition of two platform
rigs which commenced operations in May, 1997 for Shell Offshore Inc. in the
Gulf of Mexico. A third platform rig is scheduled to be placed in service by
the fourth quarter of this fiscal year.
-12-
<PAGE> 13
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1997
(Continued)
Operating profit from international drilling operations increased to
$14,055,000 in the first quarter of fiscal 1998 from $6,907,000 in the first
quarter of 1997. Results from operations in Venezuela, Colombia and Ecuador
improved significantly over the first quarter of 1997 due to increased
revenues, improved margins and slightly higher rig utilization (91% versus
86%). In the second quarter, offshore platform Rig 91 commenced operations in
Venezuela. Rig 91, upgraded in the fourth quarter of 1997, will be working for
B.P. Exploration de Venezuela, S.A. and is expected to have a positive impact
on future earnings.
Impact of Year 2000 -
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the Year 2000 and thereafter. To date, the
Year 2000 Project cost has been less than $400,000 and the Company estimates
that the total cost associated with the Year 2000 Project will be less than
$500,000.
The project is estimated to be completed not later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue
could have an impact on the operations of the Company.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
-13-
<PAGE> 14
I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1997
(Continued)
Liquidity and Capital Resources
Net cash provided by continuing operations was $32,184,000 for the
first quarter of fiscal 1998, compared with $38,361,000 for the same period in
1997. Capital expenditures were $48,633,000 and $36,319,000 for the first
quarter of fiscal 1998 and 1997, respectively.
It is anticipated for fiscal 1998 that capital expenditures will
approach $240 million, exceeding internally generated cash flows, and that the
Company will borrow under its line of credit agreement or sell a portion of its
investment portfolio to fund capital expenditures.
There were no significant changes in the Company's financial position
since September 30, 1997.
PART II. OTHER INFORMATION
HELMERICH & PAYNE, INC.
Item 1. Legal Proceedings
NONE
Item 6(b) Reports on Form 8-K
Registrant filed with the Securities and Exchange Commission a report
on Form 8-K on December 5, 1997.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
HELMERICH & PAYNE, INC.
(Continued)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: FEBRUARY 13 1998 /S/ DOUGLAS E. FEARS
---------------------- -----------------------------------------
Douglas E. Fears, Chief Financial Officer
Date: FEBRUARY 13 1998 /S/ HANS C. HELMERICH
---------------------- -----------------------------------------
Hans C. Helmerich, President
-15-
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 50,414
<SECURITIES> 300,590
<RECEIVABLES> 113,787
<ALLOWANCES> 1,308
<INVENTORY> 20,955
<CURRENT-ASSETS> 201,546
<PP&E> 1,188,921
<DEPRECIATION> 634,874
<TOTAL-ASSETS> 1,069,853
<CURRENT-LIABILITIES> 112,046
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 5,353
<OTHER-SE> 795,885
<TOTAL-LIABILITY-AND-EQUITY> 1,069,853
<SALES> 144,112
<TOTAL-REVENUES> 151,823
<CGS> 103,578
<TOTAL-COSTS> 103,578
<OTHER-EXPENSES> 894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 44,770
<INCOME-TAX> 16,822
<INCOME-CONTINUING> 29,165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,165
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| HPQ | https://www.sec.gov/Archives/edgar/data/47217/0001012870-98-000677.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001012870-98-000677.txt : 19980318
<SEC-HEADER>0001012870-98-000677.hdr.sgml : 19980318
ACCESSION NUMBER: 0001012870-98-000677
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980317
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEWLETT PACKARD CO
CENTRAL INDEX KEY: 0000047217
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570]
IRS NUMBER: 941081436
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04423
FILM NUMBER: 98566813
BUSINESS ADDRESS:
STREET 1: 3000 HANOVER ST
CITY: PALO ALTO
STATE: CA
ZIP: 94304
BUSINESS PHONE: 4158571501
MAIL ADDRESS:
STREET 1: 3000 HANOVER ST
STREET 2: MS 20BQ
CITY: PALO ALTO
STATE: CA
ZIP: 94304
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR 01/31/1998
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________ to __________
Commission file number: 1-4423
HEWLETT-PACKARD COMPANY
----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-1081436
----------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3000 Hanover Street, Palo Alto, California 94304
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 857-1501
-------------
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
- -------------------------- -------------------------------
Common Stock, $1 par value 1.03 billion shares
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
-----
Page No.
---------
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Balance Sheet
January 31, 1998 (Unaudited) and October 31, 1997 2
Consolidated Condensed Statement of Earnings (Unaudited)
Three months ended January 31, 1998 and 1997 3
Consolidated Condensed Statement of Cash Flows (Unaudited)
Three months ended January 31, 1998 and 1997 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations and Factors That May
Affect Future Results (Unaudited). 6-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders. 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signature 12
Exhibit Index 13
<PAGE>
Item 1. Financial Statements.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(Millions except par value and number of shares)
<TABLE>
<CAPTION>
January 31 October 31
1998 1997
----------- ----------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,733 $ 3,072
Short-term investments 2,177 1,497
Accounts and notes receivable 8,401 8,173
Inventories:
Finished goods 4,501 4,136
Purchased parts and fabricated assemblies 2,592 2,627
Other current assets 1,448 1,442
------- -------
Total current assets 21,852 20,947
------- -------
Property, plant and equipment (less accumulated
depreciation: January 31, 1998 - $5,529;
October 31, 1997 - $5,464) 6,275 6,312
Long-term investments and other assets 4,580 4,490
------- -------
$32,707 $31,749
======= =======
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable and short-term borrowings $ 1,959 $ 1,226
Accounts payable 2,992 3,185
Employee compensation and benefits 1,679 1,723
Taxes on earnings 1,990 1,515
Deferred revenues 1,273 1,152
Other accrued liabilities 2,612 2,418
------- -------
Total current liabilities 12,505 11,219
------- -------
Long-term debt 2,581 3,158
Other liabilities 1,237 1,217
Shareholders' equity:
Preferred stock, $1 par value; 300,000,000
shares authorized; none issued
Common stock and capital in excess of $1 par
value; 2,400,000,000 shares authorized;
1,033,799,000 and 1,041,042,000 shares
issued and outstanding at January 31, 1998
and October 31, 1997, respectively 1,034 1,187
Retained earnings 15,350 14,968
------- -------
Total shareholders' equity 16,384 16,155
------- -------
$32,707 $31,749
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
--------------------------------------------
(Unaudited)
(Millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended
January 31
------------------
1998 1997
---- ----
<S> <C> <C>
Net revenue:
Products $10,158 $ 8,825
Services 1,658 1,470
------- -------
11,816 10,295
Costs and expenses:
Cost of products sold and
services 7,837 6,694
Research and development 803 699
Selling, general and
administrative 1,872 1,621
------- -------
10,512 9,014
------- -------
Earnings from operations 1,304 1,281
Interest income and other, net 90 76
Interest expense 67 54
------- -------
Earnings before taxes 1,327 1,303
Provision for taxes 398 391
------- -------
Net earnings $ 929 $ 912
======= =======
Net earnings per share:
Basic $ .89 $ .90
======= =======
Diluted $ .86 $ .87
======= =======
Cash dividends declared per share $ .28 $ .24
======= =======
Average shares used in computing
basic net earnings per share 1,038 1,017
======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,076 1,047
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Millions)
<TABLE>
<CAPTION>
Three months ended
January 31
------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 929 $ 912
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 411 335
Deferred taxes on earnings (108) (195)
Change in current assets and liabilities:
Accounts and notes receivable (198) 314
Inventories (326) 169
Accounts payable (210) (152)
Taxes on earnings 495 509
Other current assets and liabilities 168 (102)
Other, net (17) 20
------ ------
Net cash provided by operating activities 1,144 1,810
------ ------
Cash flows from investing activities:
Investment in property, plant and equipment (450) (513)
Disposition of property, plant and equipment 152 146
Purchase of short-term investments (1,605) (412)
Maturities of short-term investments 925 784
Other, net (21) 18
------ ------
Net cash (used in) provided by (999) 23
investing activities ------ ------
Cash flows from financing activities:
Change in notes payable and short-term borrowings 462 (1,760)
Issuance of long-term debt 139 34
Payment of long-term debt (446) (14)
Issuance of common stock under employee stock plans 96 106
Repurchase of common stock (589) (172)
Dividends (146) (122)
Other, net - (1)
------ ------
Net cash (used in) financing activities (484) (1,929)
------ ------
Decrease in cash and cash equivalents (339) (96)
Cash and cash equivalents at beginning of period 3,072 2,885
------ ------
Cash and cash equivalents at end of period $2,733 $2,789
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. In the opinion of the Company's management, the accompanying consolidated
condensed financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the
financial position as of January 31, 1998 and October 31, 1997, the
results of operations for the three months ended January 31, 1998 and
1997, and the cash flows for the three months ended January 31, 1998 and
1997.
The results of operations for the three months ended January 31, 1998
are not necessarily indicative of the results to be expected for the
full year. The information included in this Form 10-Q should be read
in conjunction with Management's Discussion and Analysis and the
financial statements and notes thereto included in the Hewlett-Packard
Company 1997 Form 10-K.
2. The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share," in the first quarter of fiscal 1998.
Under SFAS 128, the Company presents two earnings per share (EPS) amounts.
Basic EPS is calculated based on net earnings available to common
shareholders and the weighted-average number of shares outstanding
during the reported period. Diluted EPS includes additional dilution
from potential common stock, such as stock issuable pursuant to the
exercise of stock options outstanding and the conversion of debt. All
prior period EPS amounts have been presented to conform to the provisions
of the statement.
<TABLE>
<CAPTION>
Three months ended
January 31
(in millions except
per share data)
------------------
1998 1997
----- -----
<S> <C> <C>
Numerator:
Net earnings $929 $912
Adjustment for interest expense,
net of income tax effect 6 -
----- -----
Net earnings, adjusted 935 912
Denominator:
Weighted-average shares outstanding 1,038 1,017
Effect of dilutive securities:
Dilutive options outstanding 28 30
Convertible zero-coupon notes due 2017 10 -
----- -----
Dilutive potential common shares 38 30
Weighted-average shares and dilutive
potential common shares 1,076 1,047
Basic earnings per share $0.89 $0.90
Diluted earnings per share $0.86 $0.87
</TABLE>
3. Income tax provisions for interim periods are based on estimated
effective annual income tax rates. The effective income tax rate
varies from the U.S. federal statutory income tax rate primarily
because of variations in the tax rates on foreign income.
4. The Company paid interest of $96 million and $107 million during the
three months ended January 31, 1998 and 1997, respectively. The Company
received an income tax refund, net of income taxes paid, in the amount
of $40 million during the three months ended January 31, 1998 and paid
income taxes of $47 million during the three months ended January 31,
1997. The effect of foreign currency exchange rate fluctuations on
cash balances held in foreign currencies was not material.
5. On February 24, 1998, the Company's shareholders approved the
proposed reincorporation of the Company under the laws of the
state of Delaware. The Company expects to effect the reincorporation
as soon as practicable. Upon reincorporation, the par value of the
Company's stock will be decreased from $1.00 per share to $0.01 per
share. The shareholders also approved an increase in the number of
shares of Common Stock authorized to 4.8 billion shares. These
shareholder actions are not expected to have a material impact on
the Company's financial condition or results of operations.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Factors That May Affect Future Results
(Unaudited).
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
- ---------------------
Net Revenue - Net revenue for the first quarter ended January 31, 1998 was
$11.8 billion, an increase of 15 percent from the same period of fiscal 1997.
Product sales increased 15 percent and service revenue grew 13 percent over
the corresponding period of fiscal 1997. Net revenue grew 10 percent to
$6.6 billion internationally and 21 percent to $5.2 billion in the U.S.
The first quarter growth in net revenue was principally due to strong
demand for the Company's personal computer products driven by HP Pavilion
multimedia home PCs, HP Vectra corporate PCs, and HP Omnibook mobile PCs,
the continued strength of UNIX(R) system servers and HP Kayak PC workstation
products. In the service and support business, net revenue growth was
driven by customer financing and consulting. Net revenue from the Company's
family of Deskjet and LaserJet printers grew moderately, with supplies leading
growth. Without the unfavorable impact of currency, the Company's net revenue
growth would have been approximately 22 percent. Declining average selling
prices and intensified competitive pricing pressures for many of the Company's
products negatively impacted revenue.
Costs and Expenses - Cost of products sold and services as a percentage
of net revenue was 66.3 percent for the first quarter of fiscal 1998,
compared to 65.0 percent for the first quarter of fiscal 1997, a 1.3
percentage point increase. The increase reflects stronger competitive
pricing pressures, leading to declines in the average selling prices of
many PC and printer products, and the continued shift in the Company's
product sales mix to lower-gross-margin products. These were somewhat
offset by improved supply-chain management and lower component pricing
in some businesses. Cost of sales is expected to continue its upward
trend over time, with some variability around that trend, as competitive
pricing pressures and mix shifts continue.
Operating Expenses - Operating expenses as a percentage of net revenue
were 22.7 percent for the first quarter of fiscal 1998, compared to
22.6 percent for the first quarter of fiscal 1997, a .1 percentage point
increase. Despite remaining virtually flat as a percentage of net revenue,
operating expenses increased 15 percent for the first quarter of fiscal
1998 over the corresponding year-ago period. Year-over-year growth
resulted primarily from higher marketing expenses as a result of increased
advertising and higher administrative expenses driven by continued hiring
to support the Company's growth. Acquisitions contributed an additional
4 percentage points to overall operating expense growth which was mostly
offset by the positive impact of changes in foreign currency exchange rates.
The reduction of operating expense ratios and optimization of manufacturing
processes in order to improve profitability remain major focuses of the
Company.
To improve it's overall cost and expense structure, the Company will
consolidate and restructure some North American production activities in
the inkjet business. The Company believes this will result in a future
cost savings of more than $100 million per year. The consolidation and
other actions will require one-time charges that will reduce earnings per
share by about 7 cents during the remainder of fiscal 1998. The charges
6
<PAGE>
will cover costs associated with both people and assets.
Provision for Taxes - The provision for taxes as a percentage of earnings
before taxes was 30 percent for the first quarter of fiscal 1998 and 1997.
Net Earnings - Net earnings for the first quarter of fiscal 1998 were $929
million, compared to net earnings of $912 million for the first quarter of
fiscal 1997. Earnings per share for the first quarter of fiscal 1998 on a
diluted basis were 86 cents per share on 1.08 billion weighted-average shares
and equivalents, compared to 87 cents per share on an average of 1.05 billion
shares for the first quarter of fiscal 1997. Basic earnings per share for the
first quarter of fiscal 1998 were 89 cents per share on an average of 1.04
billion shares, compared to 90 cents per share on an average of 1.02 billion
shares for the first quarter of fiscal 1997.
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources - The Company's financial position remains
strong, with cash and cash equivalents and short-term investments of $4.9
billion at January 31, 1998, compared with $4.6 billion at October 31, 1997.
In addition, other long-term investments, relatively low levels of debt
compared to assets, and a large equity base contribute to the Company's
financial flexibility.
Cash flows from operating activities were $1.1 billion during the first three
months of fiscal 1998, compared to $1.8 billion for the corresponding period of
fiscal 1997. The decrease in cash flows from operating activities in fiscal 1998
was attributable primarily to changes in inventory and accounts and notes
receivable levels during fiscal 1998 and 1997. Inventory increased 14 percent
from the same period last year on 15 percent revenue growth during the first
three months of fiscal 1998. This compares to an inventory decline of 8
percent on revenue growth of 11 percent during the comparable period of fiscal
1997. The increase during fiscal 1998, as well as the resulting increase in
inventory as a percentage of net revenue, from 15.8 percent in fiscal 1997 to
16.0 percent in fiscal 1998, is attributable primarily to increased production
of inkjet supplies to support new product families as well as growth of new
inkjet printer products. Accounts and notes receivable at January 31, 1998
increased 23 percent from January 31, 1997 compared to an increase of 6
percent in the same period of fiscal 1997. This resulted in an increase in
accounts and notes receivable as a percentage of net revenue, from 17.4
percent in fiscal 1997 to 18.9 percent in fiscal 1998.
Capital expenditures for the first three months of fiscal 1998 were $450
million, compared to $513 million for the corresponding period in fiscal
1997. The decrease in capital expenditures was concentrated in the inkjet
printer business and also resulted from continued outsourcing to third-
party contractors in the components business.
The changes in short-term investment and borrowing activities during the first
three months of fiscal 1998 compared to the same period in fiscal 1997 resulted
from a program of repatriation of short-term investments from Puerto Rico in
1997 due to changes in tax laws. Cash from the liquidation of those investments
was used to pay down notes payable and short-term borrowings.
Shares of the Company's common stock are repurchased under a systematic program
to manage the dilution created by shares issued under employee stock plans.
During the three months ended January 31, 1998, the Company purchased and
retired approximately 9.4 million shares for an aggregate price of $589 million.
During the three months ended January 31, 1997 the Company purchased and retired
approximately 3.3 million shares for an aggregate price of $172 million.
7
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
Competition. The Company encounters aggressive competition in all areas
of its business activity. The Company's competitors are numerous, ranging
from some of the world's largest corporations to many relatively small and
highly specialized firms. The Company competes primarily on the basis of
technology, performance, price, quality, reliability, distribution and
customer service and support. Product life cycles are short, and, to
remain competitive, the Company will be required to develop new products,
periodically enhance its existing products and compete effectively on
the basis of the factors described above. In particular, the Company
anticipates that it will have to continue to adjust prices of many of its
products to stay competitive and it will have to effectively manage
financial returns with reduced gross margins.
New Product Introductions. The Company's future operating results may
be adversely affected if the Company is unable to continue to develop,
manufacture and market innovative products and services rapidly that meet
customer requirements for performance and reliability. The process of
developing new high technology products and solutions is inherently complex
and uncertain. It requires accurate anticipation of customers' changing
needs and emerging technological trends. The Company consequently must
make long-term investments and commit significant resources before knowing
whether its predictions will eventually result in products that achieve
market acceptance. After a product is developed, the Company must quickly
manufacture sufficient volumes at acceptable costs. This is a process
that requires accurate forecasting of volumes, mix of products and
configurations. Moreover, the supply and timing of a new product or
service must match customers' demand and timing for the particular product
or service. Given the wide variety of systems, products and services the
Company offers, the process of planning production and managing inventory
levels becomes increasingly difficult.
Inventory Management. Inventory management has become increasingly complex
as the Company continues to sell a greater mix of products, especially
printers and personal computers, through third-party distribution channels.
Resellers constantly adjust their ordering patterns in response to the
Company's and its competitors' supply into the channel and the timing
of their new product introductions and relative feature sets, as well as
seasonal fluctuations in end-user demand such as the back-to-school and
holiday selling periods. Resellers may increase orders during times of
shortages, cancel orders if the channel is filled with currently available
products, or delay orders in anticipation of new products. Any excess
supply could result in price reductions and inventory writedowns, which
in turn would adversely affect the Company's gross margins.
Short Product Life Cycles. The short life cycles of many of the Company's
products pose a challenge for the effective management of the transition
from existing products to new products and could adversely affect the
Company's future operating results. Product development or manufacturing
delays, variations in product costs, and delays in customer purchases of
existing products in anticipation of new product introductions are among
the factors that make a smooth transition from current products to new
products difficult. In addition, the timing of competitors' introductions
of new products and services may negatively affect future operating results
of the Company, especially when these introductions coincide with periods
leading up to the Company's own introduction of new or enhanced products.
Furthermore, some of the Company's own new products may replace or compete
with certain of the Company's current products.
Intellectual Property. The Company generally relies upon patent, copyright,
trademark and trade secret laws in the United States and in selected other
countries to establish and maintain its proprietary rights in its technology
and products. However, there can be no assurance that any of the Company's
proprietary rights will not be challenged, invalidated or circumvented,
or that any such rights will provide significant competitive advantages.
Moreover, because of the rapid pace of technological change in the information
technology industry, many of the Company's products rely on key technologies
developed by others. There can be no assurance that the Company will be
able to continue to obtain licenses to such technologies. In addition, from
time to time, the Company receives notices from third parties regarding
patent or copyright claims. Any such claims, with or without merit, could
be time-consuming to defend, result in costly litigation, divert management's
attention and resources and cause the Company to incur significant expenses.
In the event of a successful claim of infringement against the Company and
failure or inability of the Company to license the infringed technology or
to substitute similar non-infringing technology, the Company's business could
be adversely affected.
8
<PAGE>
Reliance on Suppliers. Portions of the Company's manufacturing operations
are dependent on the ability of suppliers to deliver quality components,
subassemblies and completed products in time to meet critical manufacturing
and distribution schedules. The Company periodically experiences constrained
supply of certain component parts in some product lines as a result of strong
demand in the industry for those parts. Such constraints, if persistent, may
adversely affect the Company's operating results until alternate sourcing can
be developed. In order to secure components for production and introduction
of new products, the Company at times makes advance payments to certain
suppliers, and often enters into noncancelable purchase commitments with
vendors for such components. Volatility in the prices of these component
parts, the possible inability of the Company to secure enough components at
reasonable prices to build new products in a timely manner in the quantities
and configurations demanded or, conversely, a temporary oversupply of these
parts, could adversely affect the Company's future operating results.
Reliance on Third-Party Distribution Channels. The Company continues to
expand into third-party distribution channels to accommodate changing
customer preferences. As a result, the financial health of resellers of
the Company's products, and the Company's continuing relationships with
such resellers, are becoming more important to the Company's success. Some
of these companies are thinly capitalized and may be unable to withstand
changes in business conditions. The Company's financial results could be
adversely affected if the financial condition of certain of these resellers
substantially weakens or if the Company's relationship with such resellers
deteriorates.
International. Sales outside the United States make up more than half of the
Company's revenues. In addition, a portion of the Company's product and
component manufacturing, along with key suppliers, are located outside the
United States. Accordingly, the Company's future results could be adversely
affected by a variety of factors, including changes in a specific country's
or region's political or economic conditions, trade protection measures,
import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements and natural
disasters.
Derivative Financial Instruments. The Company is also exposed to foreign
currency exchange rate risk inherent in its sales commitments, anticipated sales
and assets and liabilities denominated in currencies other than the U.S. dollar,
as well as interest rate risk inherent in the Company's debt, investment and
finance receivable portfolio. As more fully described in the notes to the
Company's 1997 annual report to shareholders, the Company's risk management
strategy utilizes derivative financial instruments, including forwards, swaps
and purchased options to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting gains and losses that occur on the
underlying exposures with gains and losses on the derivative contracts hedging
them. The Company does not enter into derivatives for trading purposes.
The Company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign exchange rates and interest rates applied
to the hedging contracts and underlying exposures described above. As of
January 31, 1998, the analysis indicated that such market movements would
not have a material effect on the Company's consolidated financial position,
results of operations or cash flows. Actual gains and losses in the future
may differ materially from that analysis, however, based on changes in the
timing and amount of interest rate and foreign currency exchange rate
movements and the Company's actual exposures and hedges.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. As a matter
of course, the Company frequently engages in discussions with a variety of
parties relating to possible acquisitions, strategic alliances, joint ventures
and divestitures. Although consummation of most transactions is unlikely to have
a material effect on the Company's results as a whole, the implementation or
integration of a transaction may contribute to the Company's results differing
from the investment community's expectation in a given quarter. Divestitures may
result in the cancellation of orders and charges to earnings. Acquisitions and
strategic alliances may require, among other things, integration or coordination
with a different company culture, management team organization and business
infrastructure. They may also require the development, manufacture and marketing
of product offerings with the Company's products in a way that enhances the
performance of the combined business or product line. Depending on the size and
complexity of the transaction, successful integration depends on a variety of
factors, including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination of
different research and development and product manufacturing facilities. All of
these efforts require varying levels of management resources, which may
temporarily adversely impact other business operations.
Earthquake. A portion of the Company's research and development activities,
its corporate headquarters, other critical business operations and certain of
its suppliers are located near major earthquake faults. The ultimate impact
on the Company, its significant suppliers and the general infrastructure is
unknown, but operating results could be materially affected in the event of
a major earthquake. The Company is predominantly self-insured for losses
and interruptions caused by earthquakes.
9
<PAGE>
Environmental. Certain of the Company's operations involve the use of
substances regulated under various federal, state, and international laws
governing the environment. It is the Company's policy to apply strict
standards for environmental protection to sites inside and outside the
U.S., even if not subject to regulations imposed by local governments.
The liability for environmental remediation and related costs is accrued
when it is considered probable and the costs can be reasonably estimated.
Environmental costs are presently not material to the Company's operations
or financial position.
Year 2000. Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing both the readiness of its internal computer systems and the compliance
of its computer products and software sold to customers for handling the year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations or
financial condition.
Certain hardware and software products currently installed at customer sites
will require upgrade or other remediation to become year 2000 compliant. The
Company believes that it is not legally responsible for costs incurred by its
customers to achieve their year 2000 compliance. However, the Company is taking
steps to identify affected customers, raise customer awareness related to non-
compliance of the Company's older products, and assist the customer base to
assess their risks. The Company may see increasing customer satisfaction costs
related to these actions over the next few years. Since customer satisfaction
programs are on-going, year 2000 complications are not fully known, and
potential liability issues in certain countries are unclear, the potential
impact on the Company's financial condition and results of operations is not
known at this time.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors.
The Company's reliance on suppliers and subcontractors, and, therefore, on
the proper functioning of their information systems and software, means that
failure to address year 2000 issues could have a material impact on the
Company's operations and financial results; however, the potential impact
and related costs are not known at this time.
Quarterly Fluctuations and Volatility of Stock Price. Although the Company
believes that it has the product offerings and resources needed for
continuing success, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its operations, which could
cause period-to-period fluctuations in operating results. The Company's
stock price, like that of other technology companies, is subject to
significant volatility. The announcement of new products, services or
technological innovations by the Company or its competitors, quarterly
variations in the Company's results of operations, changes in revenue or
earnings estimates by the investment community and speculation in the press
or investment community are among the factors affecting the Company's stock
price. In addition, the stock price may be affected by general market
conditions and domestic and international macroeconomic factors unrelated
to the Company's performance. Because of the foregoing reasons, recent
trends should not be considered reliable indicators of future stock prices
or financial results.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
A discussion of the Company's exposure to, and management of, market
risk appears in Item 2 of this Form 10-Q under the heading "Factors
That May Affect Future Results".
PART II. OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on
February 24, 1998.
(b) At the Annual Meeting, the following proposals were voted upon
by the shareholders as indicated below:
1. To elect a board of 13 directors to serve until the next annual meeting
and until their successors have been elected and qualified.
Directors Voted For Withheld
Philip M. Condit 876,603,385 4,284,933
Thomas E. Everhart 876,721,851 4,166,467
John B. Fery 876,576,790 4,311,528
Jean-Paul G. Gimon 876,480,769 4,407,549
Sam Ginn 876,717,619 4,170,699
Richard A. Hackborn 876,726,584 4,161,734
Walter B. Hewlett 876,494,391 4,393,927
George A. Keyworth II 876,716,357 4,171,961
David M. Lawrence, M.D. 876,677,361 4,210,957
Susan P. Orr 876,513,162 4,375,156
David W. Packard 876,383,388 4,504,930
Lewis E. Platt 876,447,305 4,441,013
Robert P. Wayman 876,537,815 4,350,503
2. To ratify the appointment of Price Waterhouse LLP as the Company's
independent accountants for the 1998 fiscal year.
Voted
Voted For Against Abstained Non-Vote
876,528,934 1,009,457 3,349,924 3
3. To change the Company's state of incorporation from California to Delaware.
Voted
Voted For Against Abstained Non-Vote
596,219,234 157,405,509 5,968,587 121,294,988
4. To increase the number of authorized shares of Common Stock from
2,400,000,000 to 4,800,000,000 subject to the change in the Company's
state of incorporation from California to Delaware.
Voted
Voted For Against Abstained Non-Vote
700,204,516 53,666,782 5,722,024 121,294,996
5. To approve the Company's Variable Pay Plan for the purpose of qualifying
compensation paid pursuant to the plan as deductible for U.S. federal
income tax purposes.
Voted
Voted For Against Abstained Non-Vote
862,323,548 8,464,965 6,528,481 3,571,324
6. To reserve an additional 285,000 shares of the Company's Common Stock for
issuance under the VeriFone, Inc. Amended and Restated Employee Stock
Purchase Plan.
Voted
Voted For Against Abstained Non-Vote
865,555,297 9,345,819 5,986,997 205
7. To approve the Company's 1998 Subsidiary Employee Stock Purchase Plan.
Voted
Voted For Against Abstained Non-Vote
782,517,875 92,928,780 5,441,455 208
8. Shareholder proposal concerning confidential voting.
Voted
Voted For Against Abstained Non-Vote
278,687,492 468,574,301 12,327,490 121,299,035
9. Shareholder proposal regarding international environmental standards for
electronics industry subcontractor/suppliers.
Voted
Voted For Against Abstained Non-Vote
55,459,485 669,183,163 34,945,057 121,300,613
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on
page 13 of this report.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended January 31, 1998.
11
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
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.
HEWLETT-PACKARD COMPANY
(Registrant)
Dated: March 16, 1998 By: /s/ Robert P. Wayman
--------------------
Robert P. Wayman
Executive Vice President,
Finance and Administration
(Chief Financial Officer)
12
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
-------------
Exhibits:
1. Not applicable.
2. None.
3. None.
4. None.
5-9. Not applicable.
10. None.
11. Statement re computation of per share earnings.
12-14. Not applicable.
15. None.
16-17. Not applicable.
18-19. None.
20-21. Not applicable.
22-24. None.
25-26. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
99. None.
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>COMPUTATION OF PER SHARE EARNING
<TEXT>
<PAGE>
Statement Regarding Computation of Per Share Earnings
Registrant's Basic and Diluted Earnings Per Share (in millions except
per share amounts)
EXHIBIT 11
----------
<TABLE>
<CAPTION>
Three months ended,
January 31
-------------------
1998 1997
<S> <C> <C>
Basic earnings per share
Net earnings $929 $912
Number of shares on which basic earnings
per share is based:
Weighted-average common shares outstanding
during the period 1,038 1,017
Basic earnings per share $.89 $.90
===== =====
Diluted earnings per share
Net earnings $929 $912
Adjustment for interest expense, net of tax 6 -
----- -----
Net earnings, adjusted 935 912
Number of shares on which diluted earnings
per share is based:
Weighted-average common shares outstanding
during the period 1,038 1,017
Weighted-average dilutive potential common shares:
Stock options 28 30
Convertible zero-coupon notes due 2017 10 -
Number of shares and equivalents on which
diluted earnings per share is based 1,076 1,047
Diluted earnings per share $.86 $.87
===== =====
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
CONSOLIDATED CONDENSEDBALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT OF
ERNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> DEC-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,733
<SECURITIES> 2,177
<RECEIVABLES> 8,401
<ALLOWANCES> 0
<INVENTORY> 7,093
<CURRENT-ASSETS> 21,852
<PP&E> 11,804
<DEPRECIATION> 5,529
<TOTAL-ASSETS> 32,707
<CURRENT-LIABILITIES> 12,505
<BONDS> 2,581
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,034
<OTHER-SE> 15,350
<TOTAL-LIABILITY-AND-EQUITY> 32,707
<SALES> 10,158
<TOTAL-REVENUES> 11,816
<CGS> 0
<TOTAL-COSTS> 7,837
<OTHER-EXPENSES> 2,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 1,327
<INCOME-TAX> 398
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> .89
<EPS-DILUTED> .86
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| HRB | https://www.sec.gov/Archives/edgar/data/12659/0000950124-98-001364.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950124-98-001364.txt : 19980317
<SEC-HEADER>0000950124-98-001364.hdr.sgml : 19980317
ACCESSION NUMBER: 0000950124-98-001364
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980316
SROS: NYSE
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: H&R BLOCK INC
CENTRAL INDEX KEY: 0000012659
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200]
IRS NUMBER: 440607856
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-06089
FILM NUMBER: 98566224
BUSINESS ADDRESS:
STREET 1: 4410 MAIN ST
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
BUSINESS PHONE: 8167536900
MAIL ADDRESS:
STREET 1: 4410 MAIN STREET
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-6089
H&R BLOCK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 44-0607856
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4400 MAIN STREET
KANSAS CITY, MISSOURI 64111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(816) 753-6900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares of the registrant's Common Stock, without par value,
outstanding at March 2, 1998 was 104,809,372 shares.
<PAGE> 2
TABLE OF CONTENTS
PART I Page
Financial Information ----
Consolidated Balance Sheets
January 31, 1998 and April 30, 1997 ......................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 1998 and 1997 ................ 2
Nine Months Ended January 31, 1998 and 1997 ................. 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1998 and 1997 ................. 4
Notes to Consolidated Financial Statements .................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 11
PART II Other Information.............................................. 21
SIGNATURES ............................................................. 23
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
---------- ----------
1998 1997
---------- ----------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 107,557 $ 457,079
Marketable securities 1,031,699 61,755
Receivables, less allowance for doubtful accounts of $18,149
and $30,144 779,169 407,441
Prepaid expenses and other current assets 111,154 31,671
Net assets of discontinued operations - 522,144
---------- ----------
TOTAL CURRENT ASSETS 2,029,579 1,480,090
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 13,566 20,273
Excess of cost over fair value of net tangible assets acquired,
net of amortization 266,161 74,794
Other 80,804 66,836
---------- ----------
360,531 161,903
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 76,409 65,065
---------- ----------
$2,466,519 $1,707,058
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 631,840 $ 269,619
Accounts payable, accrued expenses and deposits 132,959 164,872
Accrued salaries, wages and payroll taxes 41,337 105,326
Accrued taxes on earnings 272,200 129,192
---------- ----------
TOTAL CURRENT LIABILITIES 1,078,336 669,009
LONG-TERM DEBT 249,663 -
OTHER NONCURRENT LIABILITIES 41,432 38,952
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Convertible preferred stock, no par, stated value $.01 per share 4 4
Additional paid-in capital 495,350 502,308
Retained earnings 749,646 684,071
---------- ----------
1,246,089 1,187,472
Less cost of 3,880,095 and 4,905,421 shares of common stock
in treasury 149,001 188,375
---------- ----------
1,097,088 999,097
---------- ----------
$2,466,519 $1,707,058
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE> 4
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JANUARY 31,
-----------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 161,981 $ 127,524
Product sales 35,625 14,841
Royalties 10,562 11,931
Other income 515 841
------------- -------------
208,683 155,137
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 94,184 74,693
Occupancy and equipment 49,024 41,286
Interest expense 15,681 3,618
Marketing and advertising 16,730 10,820
Supplies, freight and postage 16,081 15,738
Other 46,228 32,057
------------- -------------
237,928 178,212
------------- -------------
Operating loss (29,245) (23,075)
OTHER INCOME
Investment income, net 1,107 657
Other, net (17) -
------------- -------------
1,090 657
------------- -------------
Loss from continuing operations before income tax benefit (28,155) (22,418)
Income tax benefit (10,699) (8,496)
------------- -------------
Net loss from continuing operations (17,456) (13,922)
Net earnings (loss) from discontinued operations (less applicable
income taxes (benefit) of $941 and ($5,957)) 167 (11,404)
Net gain on sale of discontinued operations (less applicable
income taxes of $251,701) 231,867 -
------------- -------------
Net earnings (loss) $ 214,578 $ (25,326)
============= =============
Weighted average number of common shares outstanding 105,050 104,041
============= =============
Basic and diluted net loss per share from continuing operations $ (.17) $ (.13)
============= =============
Basic and diluted net earnings (loss) per share $ 2.04 $ (.24)
============= =============
Dividends per share $ .20 $ .20
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE> 5
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 250,243 $ 182,479
Product sales 62,417 16,253
Royalties 14,980 16,486
Other income 3,245 1,641
------------- -------------
330,885 216,859
------------- -------------
OPERATING EXPENSES
Employee compensation and benefits 166,226 122,496
Occupancy and equipment 122,735 102,768
Interest expense 37,223 6,948
Marketing and advertising 28,459 19,802
Supplies, freight and postage 23,815 22,048
Other 95,405 62,449
------------- -------------
473,863 336,511
------------- -------------
Operating loss (142,978) (119,652)
OTHER INCOME
Investment income, net 9,490 6,863
Other, net (5) -
------------- -------------
9,485 6,863
------------- -------------
Loss from continuing operations before income tax benefit (133,493) (112,789)
Income tax benefit (50,727) (42,747)
------------- -------------
Net loss from continuing operations (82,766) (70,042)
Net loss from discontinued operations (less applicable
tax benefit of ($7,277) and ($48,053)) (13,889) (81,638)
Net gain on sale of discontinued operations (less applicable
income taxes of $251,701) 231,867 -
------------- -------------
Net earnings (loss) $ 135,212 $ (151,680)
============= =============
Weighted average number of common shares outstanding 104,568 103,960
============= =============
Basic and diluted net loss per share from continuing operations $ (.79) $ (.67)
============= =============
Basic and diluted net earnings (loss) per share $ 1.29 $ (1.46)
============= =============
Dividends per share $ .60 $ .84
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 6
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED, AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
JANUARY 31,
-----------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 135,212 $ (151,680)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 34,637 22,085
Net gain on sale of discontinued operations (231,867) -
Other noncurrent liabilities 2,480 4,080
Changes in:
Receivables 82,717 (363,411)
Prepaid expenses and other current assets (44,304) (52,441)
Net assets of discontinued operations 13,665 80,867
Accounts payable, accrued expenses and deposits (64,385) 40,829
Accrued salaries, wages and payroll taxes (65,796) (55,633)
Accrued taxes on earnings (123,339) (77,603)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (260,980) (552,907)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (133,774) (28,089)
Maturities of marketable securities 202,473 17,488
Purchases of property and equipment (30,633) (33,231)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (237,786) (19,294)
Other, net (14,283) (9,163)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (214,003) (72,289)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (8,499,105) (3,147,413)
Proceeds from issuance of notes payable 8,405,163 3,535,782
Proceeds from issuance of long-term debt 249,663 -
Dividends paid (62,676) (87,180)
Proceeds from stock options exercised 32,416 2,821
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 125,461 304,010
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (349,522) (321,186)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 457,079 405,019
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 107,557 $ 83,833
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 58,746 $ 18,695
Interest paid 35,492 6,989
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 7
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 1998, the Consolidated
Statements of Operations for the three and nine months ended January 31,
1998 and 1997, and the Consolidated Statements of Cash Flows for the nine
months ended January 31, 1998 and 1997 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 31,
1998 and for all periods presented have been made.
Reclassifications have been made to prior period amounts to conform with
current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K/A,
Amendment Number 2, for the fiscal year ended April 30, 1997.
Operating revenues are seasonal in nature with peak revenues occurring in
the months of January through April. Thus, the nine month results are not
indicative of results to be expected for the year.
2. On January 31, 1998, the Company completed the sale of its 80.1%
interest in CompuServe Corporation (CompuServe) to a subsidiary of
WorldCom, Inc. (WorldCom). The Company recorded a $231.9 million gain, net
of taxes, on the transaction. The sale was structured as a stock-for-stock
transaction in which the Company received 30.1 million shares of WorldCom
stock in exchange for its 80.1% ownership interest (74.2 million shares) in
CompuServe stock. The Company completed the transaction through its receipt
of $1.03 billion in net proceeds from the monetization of 100% of its
WorldCom stock in a block trade on February 2, 1998. As a part of the
CompuServe transaction, the Company has agreed to indemnify WorldCom and
CompuServe against 80.1% of any losses and expenses incurred by them with
respect to litigation and claims brought against CompuServe, any of its
current or former officers, directors, employees, agents or underwriters
relating to CompuServe's initial public offering in April 1996, as
discussed below. The 30.1 million shares of WorldCom stock valued at $1.03
billion that the Company received in the stock-for-stock transaction was
treated as a noncash investing activity in the Consolidated Statement of
Cash Flows for the nine months ended January 31, 1998.
The consolidated financial statements have been reclassified to reflect the
Company's Computer Services segment as discontinued operations. Revenues
from Computer Services for the nine months ended January 31, 1998 and 1997
were $628.2 million and $634.0 million, respectively, and were $217.1
million and $211.0 million, respectively, for the three months ended
January 31, 1998 and 1997.
-5-
<PAGE> 8
3. On June 17, 1997, the Company completed the purchase of Option One
Mortgage Corporation (Option One). The cash purchase price was $218.1
million, consisting of $28.1 million in adjusted stockholder's equity and a
premium of $190 million. In addition, the Company made cash payments of
$456 million to Option One's former parent to eliminate intercompany loans
made to Option One to finance its mortgage loan operations. The $456
million payment was recorded as an intercompany loan and was repaid to the
Company by the end of June 1997 after Option One sold the loans to a third
party in the ordinary course of business. The acquisition was accounted for
as a purchase and, accordingly, Option One's results are included since the
date of acquisition. The fair value of tangible assets acquired, including
cash, and liabilities assumed was $683.8 million and $463.9 million,
respectively. Liabilities assumed were treated as a noncash investing
activity in the Consolidated Statement of Cash Flows for the nine months
ended January 31, 1998. The excess of cost over fair value of net tangible
assets acquired was $183.1 million and is being amortized on a
straight-line basis over 15 years. The acquisition was financed with the
issuance of $250 million in Senior Notes during the second quarter of
fiscal 1998, discussed below.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Option One as if the acquisition had
occurred on May 1, 1997 and 1996, after giving effect to certain
adjustments, including amortization of intangible assets, increased
interest expense on the acquisition debt and the related income tax
effects. The pro forma information is presented for information purposes
only and is not necessarily indicative of what would have occurred if the
acquisition had been made as of those dates. In addition, the pro forma
information is not intended to be a projection of future results.
<TABLE>
<CAPTION>
Nine months ended
-----------------
January 31,
-----------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 338,171 $ 282,879
Net earnings (loss) 131,195 (152,822)
Basic and diluted net earnings (loss) per share 1.25 (1.47)
</TABLE>
4. Receivables consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
1998 1997
---- ----
(Audited)
<S> <C> <C>
Credit card loans $ 217,858 $ 247,889
Mortgage loans held for sale 324,664 107,115
Participations in refund anticipation loans 116,860 26,308
Other 137,936 56,273
----------- -----------
797,318 437,585
Allowance for doubtful accounts 18,149 30,144
----------- -----------
$ 779,169 $ 407,441
=========== ===========
</TABLE>
5. During the nine months ended January 31, 1998, the net unrealized holding
gain on available-for-sale securities increased $121 to $1,447.
-6-
<PAGE> 9
6. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
7. During the nine months ended January 31, 1998 and 1997, the Company issued
1,025,326 and 69,511 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans.
8. Product sales consist primarily of gains on sales of mortgage loans and
software sales. Gains on loan sales are recognized utilizing the specific
identification method at the time of sale. Software sales are recorded at
the time of shipment.
9. CompuServe, certain current and former officers and directors of
CompuServe and the registrant have been named as defendants in six lawsuits
pending before the state and Federal courts in Columbus, Ohio. All suits
allege similar violations of the Securities Act of 1933 based on assertions
of omissions and misstatements of fact in connection with CompuServe's
public filings related to its initial public offering in April 1996. One
state lawsuit also alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is
unspecified, but includes pleas for rescission and damages. One Federal
lawsuit names the lead underwriters of CompuServe's initial public offering
as additional defendants and as representatives of a defendant class
consisting of all underwriters who participated in such offering. The
Federal suits are both subject to pending motions to dismiss filed on
behalf of the defendants, and they have been consolidated. The four state
court lawsuits also allege violations of various state statutes and common
law of negligent misrepresentation in addition to the 1933 Act claims. The
state lawsuits have been consolidated for discovery. As a part of the sale
of its interest in CompuServe, the Company has agreed to indemnify WorldCom
and CompuServe against 80.1% of any losses and expenses incurred by them
with respect to these lawsuits. The defendants are vigorously defending
these lawsuits.
10. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
1998 1997
---- ----
<S> <C> <C>
Condensed balance sheets: (Audited)
Cash and cash equivalents $ 25,741 $ 3,425
Finance receivables, net 700,735 380,206
Other assets 317,316 34,657
-------------- ---------------
Total assets $ 1,043,792 $ 418,288
============== ===============
Commercial paper $ 627,729 $ 269,619
Other liabilities 44,904 26,867
Long-term debt 249,663 -
Stockholder's equity 121,496 121,802
-------------- ---------------
Total liabilities and stockholder's equity $ 1,043,792 $ 418,288
============== ===============
</TABLE>
-7-
<PAGE> 10
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed statements
of operations:
Revenues $ 69,700 $ 32,732 $ 144,060 $ 50,940
Earnings (loss) from operations 3,737 7,795 (467) 4,683
Net earnings (loss) 2,291 4,711 (297) 2,826
</TABLE>
11. On October 21, 1997, the Company, through a subsidiary, issued $250,000 of
6 3/4% Senior Notes due 2004. The Senior Notes are not redeemable prior
to maturity. The net proceeds of this transaction were used to repay
short-term borrowings which initially funded the acquisition of Option
One, as discussed above.
12. As a part of its interest rate risk management strategy, the Company
hedged its interest rate risk related to its fixed rate mortgage portfolio
during the nine months ended January 31, 1998 by selling short treasury
securities and utilizing forward commitments. With its agreement, the
Company sells short treasury securities under an open repurchase agreement
that can be adjusted at any time by either party. The position on certain
or all of the fixed rate mortgages is closed when the Company enters into a
forward commitment to sell those mortgages. Deferred losses on the treasury
securities hedging instrument amounted to $73 at January 31, 1998. The
contract value and the market value of this hedging instrument at January
31, 1998 was $20,865 and $20,897, respectively. The contract value and
market value of the forward commitment at January 31, 1998 was $95,000 and
$94,145, respectively.
13. The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128) issued by the Financial Accounting
Standards Board in February 1997, which is effective for periods ending
after December 15, 1997. SFAS 128, which simplifies the standards for
computing and presenting earnings per share, replaces the previously
reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Accordingly, earnings
per share as previously reported have been restated, as necessary, to
conform to the new standard. As presented herein, both basic earnings per
share and diluted earnings per share are computed using the weighted
average number of shares outstanding. Diluted earnings per share excludes
the impact of common stock options and convertible preferred stock options
outstanding of 6,052,434 shares, and the conversion of all shares of
preferred stock to common stock of 1,657,332 shares, as they are
antidilutive. The weighted average shares outstanding for the nine months
ended January 31, 1998 increased to 104,568,000 from 103,960,000 last year,
mainly due to stock option exercises.
-8-
<PAGE> 11
14. In the third quarter of fiscal 1998, the Company elected the early adoption
of Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
requires that a company report financial and descriptive information about
its reportable operating segments, defined as those components of an
enterprise about which separate financial information is available and is
evaluated regularly by management in deciding how to allocate resources
and in assessing performance. Management analyzes its business according to
differences in types of services and geographic locations and the
reportable operating segments have been determined accordingly. The
reportable operating segments are discussed below.
15. The principal business activity of the Company is providing financial
services to the general public and business community. Management has
determined the reportable segments identified below according to
differences in types of services, geographic locations and how operational
decisions are made. Geographical information is presented within the
segment data below. All foreign countries in which the Company operates,
which are individually immaterial, are included in International Tax
Services. Included below are the revenues, operating earnings (loss) and
identifiable assets of each segment that are used by management to evaluate
the segment's results. The Company operates in the following reportable
segments:
Tax Services: This segment is primarily engaged in providing tax return
preparation, filing, and related services to the general public in the
United States. Tax-related service revenue includes fees from company-owned
tax offices and royalties from franchised offices. This segment also
purchases participation interests in refund anticipation loans made by a
third party lending institution which are offered to tax clients, and
provides tax preparation software to the general public. Revenues of this
segment are seasonal in nature.
International Tax Services: This segment is primarily engaged in providing
tax return preparation, filing, and related services to the general public
in Canada, Australia and the United Kingdom. In addition, International Tax
Services has franchise offices in eight countries. Tax-related service
revenue includes fees from company-owned tax offices and royalties from
franchised offices. Revenues of this segment are seasonal in nature.
Mortgage Operations: This segment is engaged in the origination, purchase,
servicing, securitization and sale of nonconforming mortgage loans in the
United States. Mortgage origination services are offered through a network
of mortgage brokers in 46 states and through H&R Block tax offices in 19
states.
Credit Card Operations: This segment operates in the United States and
sponsors credit card loans under a co-branded agreement and, through an
Internet site and an online service provider, allows cardholders access to
account transactions and payment detail through an online lookup feature.
-9-
<PAGE> 12
Identifiable Assets: Identifiable assets are those assets, including the
excess of cost over fair value of net tangible assets acquired, associated
with each reportable segment. The remaining assets are classified as
corporate assets and consist primarily of cash, marketable securities and
corporate equipment.
Information concerning the Company's operations by reportable operating
segments for the nine months ended January 31, 1998 and 1997, and the
three months ended January 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
January 31, January 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
U.S. tax services $ 184,894 $ 163,461 $ 154,637 $ 135,135
International tax services 24,221 24,891 7,371 8,359
Mortgage operations 93,039 6,746 37,522 4,845
Credit card operations 28,956 22,929 10,053 8,200
Unallocated corporate 944 331 251 97
Inter-segment sales (1,169) (1,499) (1,151) (1,499)
--------------- -------------- -------------- --------------
$ 330,885 $ 216,859 $ 208,683 $ 155,137
=============== ============== ============== ==============
OPERATING EARNINGS:
U.S. tax services $ (122,291) $ (101,645) $ (18,703) $ (16,071)
International tax services (13,174) (10,237) (6,925) (5,767)
Mortgage operations 19,756 2,737 7,681 2,480
Credit card operations (11,964) (3,650) (4,223) (1,295)
Unallocated corporate (15,310) (6,857) (7,092) (2,422)
Investment income, net 9,490 6,863 1,107 657
--------------- -------------- -------------- --------------
Earnings from continuing
operations before
income taxes $ (133,493) $ (112,789) $ (28,155) $ (22,418)
=============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
1998 1997
---- ----
<S> <C> <C>
IDENTIFIABLE ASSETS:
U.S. tax services $ 401,172 $ 209,047
International tax services 43,825 39,145
Mortgage operations 642,311 125,734
Credit card operations 220,150 253,052
-------------- --------------
Total assets from reportable segments 1,307,458 626,978
Unallocated corporate 1,159,061 557,936
Net assets of discontinued operations - 522,144
-------------- --------------
$ 2,466,519 $ 1,707,058
============== ==============
</TABLE>
-10-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital increased to $951.2 million at January 31, 1998 from $811.1
million at April 30, 1997. The working capital ratio at January 31, 1998 is 1.9
to 1, compared to 2.2 to 1 at April 30, 1997. The increase in working capital
and the decrease in the working capital ratio is primarily due to the following:
(1) working capital was increased by approximately $231.9 million due to the
sale of CompuServe Corporation (CompuServe); and (2) the seasonal nature of the
Company's U.S. Tax Services segment. Tax return preparation occurs almost
entirely in the fourth quarter and has the effect of increasing certain assets
and liabilities during this time.
The Company maintains seasonal lines of credit to support short-term borrowing
facilities in the United States and Canada. During the months of January through
April, the Company's Canadian Tax Services regularly incurs short-term
borrowings to purchase refunds due its clients from Revenue Canada.
The Company, through a subsidiary, incurs short-term borrowings throughout the
year to fund receivables associated with its credit card, nonconforming mortgage
loan and other financial service programs. During January through April,
short-term borrowings will be used to purchase a 40 percent participating
interest in certain Refund Anticipation Loans through a ten-year agreement with
Beneficial National Bank. There is a $1.8 billion back-up credit facility to
support various financial activities through November 1998, subject to renewal.
On October 21, 1997, the Company, through a subsidiary, issued $250 million of 6
3/4% Senior Notes due 2004. The Senior Notes are not redeemable prior to
maturity. The net proceeds of this transaction were used to repay short-term
borrowings which initially funded the acquisition of Option One Mortgage
Corporation (Option One), described below.
The Company's capital expenditures, excluding the acquisition of Option One, and
dividend payments during the first nine months were funded primarily through
internally-generated funds and, to a lesser extent, short-term borrowings.
Using internally-generated funds, the Company paid CompuServe $67.1 million in
September for the tax benefits derived by the Company from CompuServe's
operating losses in the 1996 calendar year. Such payment was made in accordance
with the Tax Sharing Agreement between the Company and CompuServe.
At January 31, 1998, short-term borrowings used to fund credit cards, mortgage
loans, other programs and operations increased to $631.8 million compared to
$269.6 million at April 30, 1997, due mainly to the funding of mortgage
operations. For the nine months ended January 31, 1998 and 1997, interest
expense was $37.3 million and $6.9 million, respectively. The increase
-11-
<PAGE> 14
in interest expense is primarily attributable to the funding of mortgage
operations with short-term borrowings and the long-term debt used to acquire
Option One.
On January 31, 1998, the Company finalized the sale of CompuServe and received
30.1 million shares of WorldCom, Inc. (WorldCom) stock. The transaction was
completed with the receipt of $1.03 billion in net proceeds from the
monetization of the WorldCom stock in a block trade on February 2, 1998. The
proceeds will be used to assist the Company in growing its core tax and
financial services businesses and to fund the Company's stock repurchase plan
discussed below.
The Company announced in December 1993 its intention to repurchase from time to
time up to 10 million of its shares on the open market. In July 1996, the
Company announced its intention to repurchase up to 10 million additional shares
in the open market over a two-year period following the separation of
CompuServe. Such authorization is in addition to the 1993 authorization. At
January 31, 1998, 4.8 million shares had been repurchased. No shares have been
purchased pursuant to these authorizations since December 1995. With the
completion of the CompuServe transaction in January 1998, the Company will begin
to purchase its shares in accordance with these authorizations, subject to
various factors including the price of the stock, availability of excess cash,
the ability to maintain financial flexibility, and other investment
opportunities available.
RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On June 17, 1997, the Company completed the purchase of Option One. Option One
engages in the origination, purchase, servicing, securitization and sale of
nonconforming mortgage loans. Based in Santa Ana, California, Option One has a
network of more than 5,000 mortgage brokers in 46 states. The cash purchase
price was $218.1 million. In addition, the Company made a cash payment of $456
million to Option One's former parent to eliminate intercompany loans made to
Option One to finance its mortgage loan operations. The $456 million payment was
recorded as an intercompany loan and was repaid to the Company by the end of
June 1997 after Option One sold the mortgage loans to a third party in the
ordinary course of business. The acquisition was accounted for as a purchase
and, accordingly, Option One's results are included since the date of
acquisition.
On January 31, 1998, the Company completed the sale of CompuServe to a
subsidiary of WorldCom. The Company recorded a $231.9 million gain, net of
taxes, on the transaction. The sale was structured as a stock-for-stock
transaction in which the Company received 30.1 million shares of WorldCom stock
in exchange for their 80.1% ownership (74.2 million shares) of CompuServe stock.
The Company received $1.03 billion in net proceeds from the monetization of
WorldCom stock in a block trade on February 2, 1998. The financial summary below
has been reclassified to reflect CompuServe as discontinued operations through
the date of the sale. CompuServe was previously reported in the Computer
Services segment.
-12-
<PAGE> 15
FISCAL 1998 COMPARED TO FISCAL 1997
The analysis that follows should be read in conjunction with the table below and
the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax services $ 154,637 $ 135,135 $ (18,703) $ (16,071)
International tax services 7,371 8,359 (6,925) (5,767)
Mortgage operations 37,522 4,845 7,681 2,480
Credit card operations 10,053 8,200 (4,223) (1,295)
Unallocated corporate 251 97 (7,092) (2,422)
Investment income, net - - 1,107 657
Inter-segment sales (1,151) (1,499) - -
--------------- -------------- -------------- -------------
$ 208,683 $ 155,137 (28,155) (22,418)
=============== ==============
Income tax benefit (10,699) (8,496)
-------------- -------------
Net loss from continuing operations (17,456) (13,922)
Net earnings (loss) from discontinued operations 167 (11,404)
Net gain on sale of discontinued operations 231,867 -
-------------- -------------
Net earnings (loss) $ 214,578 $ (25,326)
============== =============
</TABLE>
Consolidated revenues for the three months ended January 31, 1998 increased
34.5% to $208.7 million from $155.1 million reported last year. The increase is
primarily due to the revenues from Option One, acquired on June 17, 1997, which
are included in the Mortgage Operations segment, and increased revenues from the
U.S. Tax Services segment.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1998 increased 25.6% to $28.2 million from $22.4 million in the third
quarter of last year. The increase is primarily attributable to the Credit Card
Operations segment, which reported a pretax loss of $4.2 million compared to
$1.3 million in the third quarter of last year, and the U.S. Tax Services
segment which increased its loss by 16.4%.
The net loss from continuing operations was $17.5 million, or $.17 per share,
compared to $13.9 million, or $.13 per share, for the same period last year.
An analysis of operations by segment follows.
-13-
<PAGE> 16
U.S. TAX SERVICES
Revenues increased 14.4% to $154.6 million from $135.1 million last year,
resulting primarily from higher tax-related service fees that are attributable
to an increase in the number of clients served and price increases. During the
first month of the U.S. tax filing season, the total number of clients served
increased 6.9%. Software sales also contributed $4.8 million to the increase due
to an increase in the number of units shipped over the prior year.
The pretax loss increased 16.4% to $18.7 million from $16.1 million in the third
quarter of last year. The increase is due to a decrease in the number of Refund
Anticipation Loan (RAL) participations that is partially attributable to the
delayed start of the electronic filing season. Additionally, inflationary
increases and the number of new tax offices opened this year contributed to the
increased loss. Due to the nature of this segment's business, the results for
the first month of the tax filing season are not indicative of the expected
results for the entire tax season.
INTERNATIONAL TAX SERVICES
Revenues decreased 11.8% to $7.4 million from $8.4 million in the prior year.
The decrease is mainly due to lower levels of discounted tax returns in Canada,
resulting from the provinces' continued elimination of tax credits, and a slower
start of the tax season due to the later distribution of wage slips which enable
tax payers to file their forms.
The pretax loss increased 20.1% to $6.9 million from $5.8 million in the same
period last year. The increase is attributable to investments made to open 27
new offices in the United Kingdom and 33 new offices in Australia. Due to the
nature of this segment's business, the results for the quarter are not
indicative of the expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 674.4% to $37.5 million from $4.8 million in the same period
last year. Pretax earnings increased 209.7% to $7.7 million from $2.5 million in
the prior year. The increase is primarily related to Option One which
contributed revenues of $33.1 million, including gains totaling $19.0 million on
whole-loan sales of $466.0 million during the quarter, and earnings of $8.7
million. These increases were partially off-set by the $3.0 million gain on the
mortgage loan securitization that was recorded in January 1997.
CREDIT CARD OPERATIONS
Revenues increased 22.6% to $10.1 million from $8.2 million in the third quarter
last year due to growth in average revolving credit card balances of 7.4% over
the third quarter of fiscal 1997.
The pretax loss increased 226.1% to $4.2 million from $1.3 million last year.
The increase is attributable to the write-off of $2.2 million in deferred
subscriber acquisition costs and a $1.6 million increase in bad debt expense due
to a deterioration in the quality of the credit card portfolio.
-14-
<PAGE> 17
INVESTMENT INCOME, NET
Net investment income increased 68.5% to $1.1 million from $657 thousand last
year. The increase resulted from more funds available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 192.8% to $7.1 million from $2.4 million in the comparable period last
year. The increase resulted mainly from interest expense of $4.4 million
associated with the acquisition of Option One incurred during the quarter and
higher consultant fees.
-15-
<PAGE> 18
THREE MONTHS ENDED JANUARY 31, 1998 (THIRD QUARTER) COMPARED TO
THREE MONTHS ENDED OCTOBER 31, 1997 (SECOND QUARTER)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- --------------------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. tax services $ 154,637 $ 18,306 $ (18,703) $ (54,075)
International tax services 7,371 13,470 (6,925) (1,125)
Mortgage operations 37,522 41,309 7,681 10,984
Credit card operations 10,053 9,597 (4,223) (4,684)
Unallocated corporate 251 310 (7,092) (4,122)
Investment income, net - - 1,107 3,193
Inter-segment sales (1,151) - - -
--------------- -------------- -------------- -------------
$ 208,683 $ 82,992 (28,155) (49,829)
=============== ==============
Income tax benefit (10,699) (19,380)
-------------- -------------
Net loss from continuing operations (17,456) (30,449)
Net earnings (loss) from discontinued operations 167 (10,782)
Net gain from sale of discontinued operations 231,867 -
-------------- -------------
Net earnings (loss) $ 214,578 $ (41,231)
============== =============
</TABLE>
Consolidated revenues for the three months ended January 31, 1998 increased
151.4% to $208.7 million from $83.0 million in the second quarter of fiscal
1998. The increase is primarily due to revenues from the U.S. Tax Services
segment related to the beginning of the U.S. tax filing season.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1998 decreased 43.5% to $28.2 million from $49.8 million in the second
quarter of this year. The decrease is attributable to the U.S. Tax Services
segment, which incurred a pretax loss of $18.7 million compared to a pretax loss
of $54.1 million in the second quarter of fiscal 1998.
The net loss from continuing operations was $17.5 million, or $.17 per share,
compared to $30.4 million, or $.29 per share, for the second quarter.
An analysis of operations by segment follows.
U.S. TAX SERVICES
Revenues increased 744.7% to $154.6 million from $18.3 million in the second
quarter. The pretax loss decreased 65.4% to $18.7 million from $54.1 million in
the three months ended October 31, 1997. The improved results are due to the
onset of the tax filing season in the U.S.
-16-
<PAGE> 19
INTERNATIONAL TAX SERVICES
Revenues decreased 45.3% to $7.4 million from $13.5 million in the second
quarter. The pretax loss increased 515.6% to $6.9 million from $1.1 million in
the second quarter. The decreased results are due to the timing of the tax
filing seasons in Australia and Canada. The Australian tax season ends in
October while the Canadian tax season begins in late January.
MORTGAGE OPERATIONS
Revenues decreased 9.2% to $37.5 million from $41.3 million in the second
quarter. Pretax earnings decreased 30.1% to $7.7 million from $11.0 million in
the second quarter. These decreases resulted from the timing of loan sales and
prices received for loans sold during the third quarter as compared to the
second quarter.
CREDIT CARD OPERATIONS
Revenues increased 4.8% to $10.1 million from $9.6 million due to larger
revolving credit card balances.
The pretax loss decreased 9.8% to $4.2 million from $4.7 million in the three
months ended October 31, 1997. The decrease is primarily attributable to reduced
losses related to online services due to the downsizing of these operations and
the write-off of capitalized software costs related to software which was being
developed to provide a variety of online services to these and similar customers
during the second quarter. These decreases were partially offset by the
write-off of deferred subscriber acquisition costs related to the credit card
portfolio in the third quarter.
INVESTMENT INCOME, NET
Net investment income decreased 65.3% to $1.1 million from $3.2 million in the
three months ended October 31, 1997. The decrease resulted from less funds
available for investment.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 72.1% to $7.1 million from $4.1 million in the second quarter. The
increase resulted mainly from increased interest expense from the acquisition of
Option One and increased charitable contributions and consultant fees.
-17-
<PAGE> 20
NINE MONTHS ENDED JANUARY 31, 1998 (FYTD) COMPARED TO
NINE MONTHS ENDED JANUARY 31, 1997 (FYTD)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
-------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax services $ 184,894 $ 163,461 $ (122,291) $ (101,645)
International tax services 24,221 24,891 (13,174) (10,237)
Mortgage operations 93,039 6,746 19,756 2,737
Credit card operations 28,956 22,929 (11,964) (3,650)
Unallocated corporate 944 331 (15,310) (6,857)
Investment income, net - - 9,490 6,863
Intersegment sales (1,169) (1,499) - -
--------------- -------------- -------------- -------------
$ 330,885 $ 216,859 (133,493) (112,789)
=============== ==============
Income tax benefit (50,727) (42,747)
-------------- -------------
Net loss from continuing operations (82,766) (70,042)
Net loss from discontinued operations (13,889) (81,638)
Net gain on sale of discontinued operations 231,867 -
-------------- -------------
Net earnings (loss) $ 135,212 $ (151,680)
============== =============
</TABLE>
Consolidated revenues for the nine months ended January 31, 1998 increased 52.6%
to $330.9 million from $216.9 million reported last year. The increase is
primarily due to the revenues of the Company's Mortgage Operations segment this
year of $93.0 million, which include revenues of Option One, acquired on June
17, 1997, and increased revenues from the U.S. Tax Services segment.
The consolidated pretax loss from continuing operations increased 18.4% to
$133.5 million from $112.8 million in the comparable period last year. The
increase is primarily attributable to the U.S. Tax Services segment which
increased its loss to $122.3 million from $101.6 million in the prior year.
The net loss from continuing operations was $82.8 million, or $.79 per share,
compared to $70.0 million, or $.67 per share, for the same period last year.
An analysis of operations by segment follows.
-18-
<PAGE> 21
U.S. TAX SERVICES
Revenues increased 13.1% to $184.9 million from $163.5 million last year,
resulting primarily from higher tax-related service fees that are attributable
to a 6.9% increase in clients served and price increases. Software sales also
contributed $3.8 million to the increase. These increases were somewhat reduced
by lower revenues related to RAL participations.
The pretax loss increased 20.3% to $122.3 million from $101.6 million last year
due to inflationary increases and the number of new tax offices opened this
year. In addition, costs increased due to improvements made to the client
services and technology systems and an increase in the return allowance for
retail software sales. Due to the seasonality of this segment's business, the
first nine months operating results are not indicative of expected results for
the entire fiscal year.
INTERNATIONAL TAX SERVICES
Revenues decreased 2.7% to $24.2 million from $24.9 million reported last year,
primarily attributable to a weakening of Canadian and Australian dollars
relative to the U.S. dollar.
The pretax loss increased 28.7% to $13.2 million from $10.2 million in the
comparable period last year. The increased loss is mainly due to fewer
discounted returns in Canada during January and investments made to open new
offices in the United Kingdom and Australia. Due to the seasonality of this
segment's business, the first nine months operating results are not indicative
of expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased $86.3 million to $93.0 million from $6.7 million in the same
period last year. Mortgage Operations reported earnings of $19.8 million, a
621.8% increase from earnings of $2.7 million in the prior year. These increases
are primarily related to Option One which contributed revenues of $79.9 million
this year, including gains totaling $44.1 million on whole-loan sales and
earnings of $21.6 million.
CREDIT CARD OPERATIONS
Revenues increased 26.3% to $29.0 million from $22.9 million in the prior year.
The increase is a result of higher average revolving credit card balances over
the prior nine-month period.
The pretax loss increased 227.8% to $12.0 million from $3.7 million in the
comparable period last year. The greater loss is attributable to increased bad
debt, the write-off of deferred subscriber acquisition costs of $2.2 million and
capitalized software costs of $1.6 million related to software which was being
developed to provide a variety of online services to these and similar
customers.
INVESTMENT INCOME, NET
Net investment income increased 38.3% to $9.5 million from $6.9 million last
year. The increase resulted from more funds available for investment.
-19-
<PAGE> 22
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the first nine
months increased 123.3% to $15.3 million from $6.9 million in the comparable
period last year. The increase resulted mainly from interest expense of $9.3
million related to the acquisition of Option One. These expenses were partially
offset by a decrease in expenses related to the planned spin-off of the
Company's remaining investment in CompuServe.
-20-
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Form 10-Q for each of the
first and second quarters of fiscal 1998. CompuServe, certain current and former
officers and directors of CompuServe and the registrant have been named as
defendants in six lawsuits pending before the state and Federal courts in
Columbus, Ohio. All suits allege similar violations of the Securities Act of
1933 based on assertions of omissions and misstatements of fact in connection
with CompuServe's public filings related to its initial public offering in April
1996. One state lawsuit also alleges certain oral omissions and misstatements in
connection with such offering. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. One Federal lawsuit names the lead
underwriters of CompuServe's initial public offering as additional defendants
and as representatives of a defendant class consisting of all underwriters who
participated in such offering. The Federal suits are both subject to pending
motions to dismiss filed on behalf of the defendants, and they have been
consolidated. The four state court lawsuits also allege violations of various
state statutes and common law of negligent misrepresentation in addition to the
1933 Act claims. The state lawsuits have been consolidated for discovery. As a
part of the sale of its interest in CompuServe, the Company has agreed to
indemnify WorldCom and CompuServe against 80.1% of any losses and expenses
incurred by them with respect to these lawsuits. The defendants are vigorously
defending these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10(a) Amendment No. 10 to the H&R Block Deferred Compensation
Plan for Executives.
10(b) Amendment No. 6 to the H&R Block Supplemental Deferred
Compensation Plan for Executives.
10(c) Amendment No. 5 to the H&R Block Deferred Compensation
Plan for Directors.
(27) Financial Data Schedule.
-21-
<PAGE> 24
b) Reports on Form 8-K
A Form 8-K, Current Report, dated November 10, 1997, was filed by the
registrant reporting as an "Other Event" the decision by the U.S. Department of
Justice to permit the statutory waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 to expire in connection with the merger of
CompuServe Corporation with and into WAC Acquisition Company, L.L.C., a wholly
owned subsidiary of WorldCom, Inc. The press release related to the decision was
included as an exhibit to the Form 8-K. No financial statements were filed as a
part of the Form 8-K.
Except for the aforementioned Form 8-K, the registrant did not file
any reports on Form 8-K during the third quarter of fiscal year 1998.
-22-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
-----------------------------------
(Registrant)
DATE 3/16/98 BY /s/ Ozzie Wenich
------- -----------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 3/16/98 BY /s/ Patrick D. Petrie
------- -----------------------------------
Patrick D. Petrie
Vice President and Corporate Controller
-23-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.A
<SEQUENCE>2
<DESCRIPTION>EX-10.A
<TEXT>
<PAGE> 1
EXHIBIT 10(A)
AMENDMENT NO. 10
TO THE
H&R BLOCK DEFERRED COMPENSATION PLAN
FOR EXECUTIVES
H&R BLOCK, INC. (the "Company") adopted the H&R Block Deferred
Compensation Plan for Executives (the "Plan"), effective as of August 1, 1987.
The Company amended said Plan by Amendment No. 1, effective December 15, 1990;
by Amendment No. 2, effective January 1, 1990; by Amendment No. 3, effective
September 1, 1991; by Amendment No. 4, effective January 1, 1994; by Amendment
No. 5, effective May 1, 1994; by Amendment No. 6, effective August 1, 1995; by
Amendment No. 7, effective December 11, 1996; by Amendment No. 8, effective
January 1, 1998; and by Amendment No. 9 effective as of January 1, 1997. The
Company continues to retain the right to amend the Plan, pursuant to action by
the Company's Board of Directors. The Company hereby exercises that right.
This Amendment No. 10 is effective as of March 1, 1998, except for those
provisions in Paragraphs 16, 17(ii) and 18, which are effective as of April 1,
1998.
AMENDMENT
1. The first sentence of the introductory paragraph of the Plan is
replaced with the following new sentence:
"H&R Block, Inc. (the "Company") hereby establishes,
effective August 1, 1987, a nonqualified deferred
compensation plan for the benefit of specified Executives of
the Company and such other entities as may be designated by
the Company from time to time."
2. The following new Section 2.1.1a is added to the Plan immediately
after Section 2.1.1 and before Section 2.1.2:
"2.1.1a 'Account Executive' means a person who has the
title of Account Executive, is employed on a full-time basis
by a Participating Affiliate, and is responsible for
managing, overseeing, directing or handling the accounts of
clients of the Participating Affiliate."
3. Section 2.1.4 of the Plan, as previously amended, is further
amended by replacing said Section 2.1.4 with the following new Section 2.1.4:
"2.1.4 'Annual Deferral Amount' means the amount of
Base Salary, and/or Bonus that a Participant elects to defer
each Plan Year under a Permissible Deferral. For those
individuals first eligible to participate in the Plan prior
to March 1, 1998, the amount of Base Salary included in the
Annual Deferral Amount shall be equal to a percentage of the
Participant's Base Salary that is not less than three
percent (3%) and not greater than thirty-five percent (35%),
and the amount of Bonus or Bonuses included in the Annual
Deferral Amount shall be equal to (i) a flat dollar amount,
expressed in one thousand dollar ($1,000) increments, or
(ii) a percentage of the Bonus or Bonuses paid during the
Plan Year that is not less than five percent (5%) and not
greater than one hundred percent (100%), expressed in
1
<PAGE> 2
five percent (5%) increments. For those individuals eligible to
participate in the Plan on or after March 1, 1998, the
amount of Base Salary included in the Annual Deferral Amount
shall be equal to a percentage within such parameters as are
established by the Committee in its sole and absolute
discretion, and the amount of Bonus or Bonuses included in
the Annual Deferral Amount shall be equal to a percentage or
flat dollar amount within such parameters as are established
by the Committee.
4. Section 2.1.5 of the Plan, as previously amended, is further
amended (i) by replacing the words "a Participant" in the first sentence with
the words "an Executive"; (ii) by inserting the following sentence after the
first sentence thereof:
"The 'Base Salary' of an Account Executive for any Plan Year
means the total earnings and wages, including any and all
commissions, incentives and bonuses, paid by all Affiliates
to such individual during that Plan Year, including any
amount which would be included in the definition of Base
Salary, but for the individual's election to defer some of
his or her earnings pursuant to this Plan or some other
deferred compensation plan established by an Affiliate; but
excluding any other remuneration paid by Affiliates, such as
overtime, stock options, distributions of compensation
previously deferred, restricted stock, allowances for
expenses (including moving, travel expenses, and automobile
allowances), and fringe benefits payable in a form other
than cash.";
and (iii) by inserting the phrase "or earnings" after the phrase "reduce his
salary" in the last sentence of such Section.
5. Section 2.1.8 of the Plan is amended (i) by replacing the words "a
Participant" in the first sentence with the words "an Executive"; and (ii) by
adding the following new sentence to the end of this Section:
"For the purposes of this Plan, the terms Bonus and Bonuses
specifically exclude any and all types of commissions,
incentives or bonuses paid by any Affiliate to an Account
Executive."
6. Section 2.1.17 of the Plan is replaced by the following new Section
2.1.17:
"2.1.17 'Enrollment Period for a Plan Year commencing
on January 1 means the immediate preceding period of October
1 through December 15. For the Plan Year for Group A
Participants and Group B Participants first participating in
the Plan on March 1, 1998, 'Enrollment Period' means the
immediately preceding period of January 1 through February
20, 1998. At its sole and absolute discretion, the
Committee may grant to a person eligible to participate in
the Plan as a Group A Participant or a Group B Participant
an 'Enrollment Period' consisting of the 30-day period
immediately following the date on which such person is
employed by an Affiliate."
7. Section 2.1.21 of the Plan is replaced with the following new
Section 2.1.21:
2
<PAGE> 3
"2.1.21 'Participant' means an Executive or an Account
Executive who is eligible to participate in the Plan and has
elected to participate in the Plan."
8. Section 2.1.22 of the Plan is replaced with the following new
Section 2.1.22:
"2.1.22 'Participating Affiliate' or 'Participating
Affiliates' means the Company and the following indirect
subsidiaries of the Company: HRB Management, Inc., H&R
Block Tax Services, Inc., Block Financial Corporation,
Option One Mortgage Corporation, and the U.S. subsidiaries
of such indirect subsidiaries; and such other entities as
may be designated as such by the Company from time to time."
9. Section 2.1.23 of the Plan, as previously amended, is further
amended by replacing the second and third sentences of the first paragraph
thereof with the following new sentences:
"For Executives, the aggregate of all deferrals may not
exceed two hundred eighty percent (280%) of the Executive's
total annual salary and wages paid by all Affiliates to such
individual, as determined as of the later of July 1, 1987 or
the date on which the Executive first became eligible to
participate in the Plan. For Account Executives, the
aggregate of all deferrals may not exceed two hundred eighty
percent (280%) of the Account Executive's aggregate earnings
and wages paid by all Affiliates to such individual during
the twelve-month period ending on September 30 of the
calendar year immediately preceding the Plan Year in which
the Account Executive first becomes eligible to participate
in the Plan. For purposes of the two immediately preceding
sentences, such annual salary and wages and such annual
earnings and wages shall include and exclude the same items
of remuneration as are included or excluded from annual
salary and wages and annual earnings and wages in the
definition of Base Salary."
10. Section 2.1.25 of the Plan is replaced with the following new
Section 2.1.25:
"2.1.25 'Plan Year' means the calendar year (i) for
all Permissible Deferrals elected by Group B Participants,
except for those Permissible Deferrals elected to commence
on March 1, 1998, (ii) for Permissible Deferrals of Group A
Participants elected to commence January 1, 1991 or later,
except for those Permissible Deferrals elected to commence
on March 1, 1998, and (iii) for all Permissible Deferrals
and for all purposes when used in Sections 4.3, 4.4, 6.2,
6.3, 6.4, 6.6 and 6.7. For Permissible Deferrals of Group A
Participants elected to commence on or before May 1, 1990,
'Plan Year' means the twelve month period ending each April
30, through April 30, 1997, the period between May 1, 1997
and December 31, 1997, inclusive, and the calendar year
thereafter. For Permissible Deferrals of Group A
Participants and Group B Participants elected to commence on
March 1, 1998, 'Plan Year' means the ten-month period
between March 1, 1998 and December 31, 1998, inclusive, and
the calendar year thereafter. If the Committee grants to a
person eligible to participate in the Plan as a Group A
Participant or a Group B Participant a discretionary
Enrollment Period in accordance with Section 2.1.17 and such
person submits to the
3
<PAGE> 4
Company a Permissible Deferral election, such Participant's
first 'Plan Year' shall be the period (i) beginning on the first
day of his or her first regular pay period commencing not less than
30 days after the Company's receipt of his or her Permissible
Deferral election, and (ii) ending on December 31 of the year in
which such pay period falls."
11. Section 3.1.2 of the Plan is amended by inserting the words "or
Account Executives" after the word "Executives" therein.
12. Section 3.2 of the Plan, as previously amended, is further amended
(i) by inserting the words "or Account Executive" after the word "Executive";
and (ii) by deleting the comma and phrase ", and subject to the provisions of
Sections 3.6 and 3.7" from the last sentence of said Section.
13. Section 3.3 of the Plan, as previously amended, is further amended
(i) by inserting the word "or" in between subsections (b) and (c) thereof; (ii)
by replacing the comma at the end of subsection (c) with a period; (iii) by
deleting the word "or" in between subsections (c) and (d) thereof; and (iv) by
deleting subsection (d) thereof.
14. Section 3.6 of the Plan is amended by replacing it with the
following new Section 3.6:
"Section 3.6 Changes in Employment Status. If a
Participant has a change in his or her employment
responsibilities, title and/or compensation, such that the
Participant would not qualify for initial participation in
the Plan as a Group A Participant or Group B Participant, as
determined by the Committee, (i) the Participant shall
continue to make deferrals in accordance with the
Participant's Permissible Deferral election for the Plan
Year during which the change in employment responsibilities,
title and/or compensation occurs, (ii) the Participant shall
not be eligible to make Permissible Deferrals in Plan Years
following the Plan Year during which the change in
employment responsibilities, title and/or compensation
occurs unless and until the Participant again qualifies for
initial participation as a Group A Participant or a Group B
Participant, as determined by the Committee, and (iii) the
Participant shall otherwise continue to participate in the
Plan.
15. Section 3.7 of the Plan is deleted therefrom in its entirety.
16. Section 4.1.1 of the Plan, as previously amended, is further amended
by replacing the phrase "of the following calendar month" in the last sentence
of the second paragraph thereof with the phrase "that month".
17. Section 4.1.2 of the Plan, as previously amended, is further amended
(i) by replacing the second and third sentences of the first paragraph thereof
with the following new sentences:
"For each $1.00 of Base Salary or Bonus deferred pursuant to
Section 4.1.1, the Company shall post an additional .50 to
the Participant's Account,
4
<PAGE> 5
provided, however, that for Executives, the total of all
Matching Contributions made pursuant to this Section 4.1.2 shall
not exceed one hundred forty percent (140%) of the Executive's
total annual salary and wages paid by all Affiliates to such
individual, as determined as of the later of July 1, 1998 or the
date on which the Executive first became eligible to participate in
the Plan, and for Account Executives, the total of all Matching
Contributions shall not exceed one hundred forty percent (140%) of
the Account Executive's aggregate earnings and wages paid by all
Affiliates to such individual during the twelve-month period ending
on September 30 of the calendar year immediately preceding the Plan
Year in which the Account Executive first becomes eligible to
participate in the Plan. For purposes of the two immediately
preceding sentences, such annual salary and wages and such annual
earnings and wages shall include and exclude the same items of
remuneration as are included or excluded from annual salary and
wages and annual earnings and wages in the definition of Base
Salary.";
and (ii) by replacing the phrase "of the following calendar month" in the first
sentence of the second paragraph thereof with the phrase "that month".
18. Section 4.1.3 of the Plan, as previously amended, is further amended
by replacing the phrase "of the following calendar month" in the first sentence
of the second paragraph thereof with the phrase "that month".
19. Section 6.4.2 of the Plan is amended (i) by replacing the phrase
"Section 6.4.5" in the first sentence thereof with the phrase "Section 6.4.4";
and (ii) by replacing the phrase "either Section 6.4.3 or Section 6.4.4" in the
last sentence thereof with the phrase "Section 6.4.3".
20. Section 6.4.3 of the Plan is amended by replacing it with the
following new Section 6.4.3:
"6.4.3 The amount of each level payment for the Initial
Payment Period, if any, shall be calculated using the balance
in the Account as of the beginning of the Initial Payment Period
and amortizing such balance over the remaining Overall Payment
Period using an assumed interest rate equal to the rate of one-year
United States Treasury notes, said rate to be determined once each
Plan Year and to be the rate in effect as of the September 30
immediately preceding the payment period to which it applies, as
published by Solomon Brothers, Inc., or any successor thereto, or
as determined by the Chief Financial Officer of the Company (the
"Assumed Interest Rate"). The amount of each level payment for
each Calendar Year Payment Period shall be calculated by taking the
balance in the Account as of November 30 of the calendar year
immediately prior to such Calendar Year Payment Period, subtracting
the benefit payments made during the portion of such calendar year
following November 30, and amortizing the difference over the
remaining Overall Payment Period using the Assumed Interest Rate.
The amount of each level payment for the Remainder Payment Period,
if any, shall be calculated by taking the balance in the Account as
of November 30 of the calendar year immediately prior to the
Remainder Payment Period, subtracting the benefit payments made
during the portion of such calendar year following November 30, and
5
<PAGE> 6
amortizing the difference over the Remainder Payment Period
using an assumed interest rate of zero percent (0%) per annum. If
the actual crediting rate for the Remainder Payment Period is more
than zero percent, the additional gain resulting from the
difference shall be paid to the Participant in a single payment
within six months after the last day of the Remainder Payment
Period."
21. Section 6.4.4 of the Plan is deleted, and Sections 6.4.5, 6.4.6 and
6.4.7 are redesignated as Sections 6.4.4, 6.4.5 and 6.4.6, respectively.
22. Section 6.4.6 (previously Section 6.4.7) of the Plan is amended by
replacing the reference to "Section 6.4.4" therein with the phrase "Section
6.4.3".
23. Section 9.1 of the Plan, as previously amended, is further amended
by replacing the references to "Section 6.4.4" and "Section 6.4.7" therein with
the phrases "Section 6.4.3" and "Section 6.4.6", respectively.
24. Except as modified in this Amendment No. 10, the Plan, as previously
amended, shall remain in full force and effect, including the Company's right
to amend or terminate the Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
------------------------------------
Its: President and Chief Executive Officer
------------------------------------
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.B
<SEQUENCE>3
<DESCRIPTION>EX-10.B
<TEXT>
<PAGE> 1
EXHIBIT 10(B)
AMENDMENT NO. 6
TO THE
H&R BLOCK SUPPLEMENTAL
DEFERRED COMPENSATION PLAN FOR EXECUTIVES
H&R BLOCK, INC. (the "Company") adopted the H&R Block Supplemental
Deferred Compensation Plan for Executives (the "Plan") effective as of May 1,
1994. The Company amended said Plan by Amendment No. 1 effective September 7,
1994; by Amendment No. 2 effective August 1, 1995; by Amendment No. 3 effective
December 11, 1996; by Amendment No. 4, effective January 1, 1998; and by
Amendment No. 5, effective January 1, 1997. The Company continues to retain
the right to amend the Plan, pursuant to action by the Company's Board of
Directors. The Company hereby exercises that right. This Amendment No. 6 is
effective as of March 1, 1998, except for the provisions of Paragraphs 16, 17 ,
which are effective as of April 1, 1998.
AMENDMENT
1. The first sentence of the introductory paragraph of the Plan is
replaced with the following new sentence:
"H&R Block, Inc. (the "Company") hereby establishes,
effective May 1, 1994, a nonqualified deferred compensation
plan for the benefit of specified Executives of the Company,
and the following indirect subsidiaries of the Company: HRB
Management, Inc., H&R Block Tax Services, Inc., Block
Financial Corporation, Option One Mortgage Corporation, and
the U.S. subsidiaries of such indirect subsidiaries; and
such other entities as may be designated by the Company from
time to time."
2. The following new Section 2.1.1a is added to the Plan immediately
after Section 2.1.1 and before Section 2.1.2:
"2.1.1a 'Account Executive' means a person who has the
title of Account Executive, is employed on a full-time basis
by a Participating Affiliate, and is responsible for
managing, overseeing, directing or handling the accounts of
clients of the Participating Affiliate."
3. Section 2.1.4 of the Plan, as previously amended, is further
amended by replacing said Section 2.1.4 with the following new Section 2.1.4:
"2.1.4 'Annual Deferral Amount' means the amount of
Base Salary, and/or Bonus that a Participant elects to defer
each Plan Year under a Permissible Deferral. For those
individuals first eligible to participate in the Plan prior
to March 1, 1998, the amount of Base Salary included in the
Annual Deferral Amount shall be equal to a percentage of the
Participant's Base Salary that is not less than three
percent (3%) and not greater than thirty-five percent (35%),
and the amount of Bonus or Bonuses included in the Annual
Deferral Amount shall be equal to (i) a flat dollar amount,
expressed in one thousand dollar ($1,000) increments, or
(ii) a percentage of the Bonus or Bonuses paid during the
Plan Year that is not less than five
1
<PAGE> 2
percent (5%) and not greater than one hundred percent (100%),
expressed in five percent (5%) increments. For those individuals
first eligible to participate in the Plan on or after March 1,
1998, the amount of Base Salary included in the Annual Deferral
Amount shall be equal to a percentage within such parameters as are
established by the Committee in its sole and absolute discretion,
and the amount of Bonus or Bonuses included in the Annual Deferral
Amount shall be equal to a percentage or flat dollar amount within
such parameters as are established by the Committee.
4. Section 2.1.5 of the Plan, as previously amended, is further amended
(i) by replacing the words "a Participant" in the first sentence with the words
"an Executive"; (ii) by inserting the following sentence after the first
sentence thereof:
"The 'Base Salary' of an Account Executive for any Plan Year
means the total earnings and wages, including any and all
commissions, incentives and bonuses, paid by all Affiliates
to such individual during that Plan Year, including any
amount which would be included in the definition of Base
Salary, but for the individual's election to defer some of
his or her earnings pursuant to this Plan or some other
deferred compensation plan established by an Affiliate; but
excluding any other remuneration paid by Affiliates, such as
overtime, stock options, distributions of compensation
previously deferred, restricted stock, allowances for
expenses (including moving, travel expenses, and automobile
allowances), and fringe benefits payable in a form other
than cash.";
and (iii) by inserting the phrase "or earnings" after the phrase "reduce his or
her salary" in the last sentence of said Section.
5. Section 2.1.8 of the Plan is amended (i) by replacing the words "a
Participant" in the first sentence with the words "an Executive"; and (ii) by
adding the following new sentence to the end of this Section:
"For the purposes of this Plan, the terms Bonus and Bonuses
specifically exclude any and all types of commissions,
incentives or bonuses paid by any Affiliate to an Account
Executive."
6. Section 2.1.19 of the Plan is amended by adding the following new
sentence to the end of said Section:
"For the Plan Year commencing on March 1, 1998, 'Enrollment
Period' means the immediately preceding period of January 1
through February 20, 1998."
7. Section 2.1.23 of the Plan is replaced with the following new
Section 2.1.23:
"2.1.23 'Participant' means an Executive or an Account
Executive who is eligible to participate in the Plan and has
elected to participate in the Plan."
2
<PAGE> 3
8. Section 2.1.24 of the Plan is replaced with the following new Section
2.1.24:
"2.1.24 'Participating Affiliate' or 'Participating
Affiliates' means the Company and the following indirect
subsidiaries of the Company: HRB Management, Inc., H&R
Block Tax Services, Inc., Block Financial Corporation,
Option One Mortgage Corporation, and the U.S. subsidiaries
of such indirect subsidiaries; and such other entities as
may be designated as such by the Company from time to time."
9. Section 2.1.25 of the Plan, as previously amended, is further amended
by replacing the second and third sentences of the first paragraph thereof with
the following new sentences:
"For Executives, the aggregate of all deferrals may not
exceed two hundred eighty percent (280%) of the Executive's
total annual salary and wages paid by all Affiliates to such
individual, as determined as of the later of July 1, 1987 or
the date on which the Executive first became eligible to
participate in the Plan. For Account Executives, the
aggregate of all deferrals may not exceed two hundred eighty
percent (280%) of the Account Executive's aggregate earnings
and wages paid by all Affiliates to such individual during
the twelve-month period ending on September 30 of the
calendar year immediately preceding the Plan Year in which
the Account Executive first becomes eligible to participate
in the Plan. For purposes of the two immediately preceding
sentences, such annual salary and wages and such annual
earnings and wages shall include and exclude the same items
of remuneration as are included or excluded from annual
salary and wages and annual earnings and wages in the
definition of Base Salary.";
10. Section 2.1.27 of the Plan is amended by inserting the following
sentence after the second sentence thereof:
"For Permissible Deferrals elected to commence on March 1,
1998, 'Plan Year' means the ten-month period between March
1, 1998 and December 31, 1998, inclusive, and the calendar year
thereafter."
11. Section 3.1 of the Plan is amended by inserting the words "or
Account Executives" after the word "Executives" therein.
12. Section 3.2 of the Plan, as previously amended, is further amended
(i) by inserting the words "or Account Executive" after the word "Executive";
and (ii) by deleting the comma and phrase ", and subject to the provisions of
Sections 3.6 and 3.7" from the last sentence of said Section.
13. Section 3.3 of the Plan, as previously amended, is further amended
(i) by inserting the word "or" in between subsections (a) and (b) thereof;
(ii) by replacing the comma at the end of subsection (b) with a period; (iii) by
deleting the word "or" in between subsections (b) and (c) hereof; and (iv) by
deleting subsection (c) thereof.
3
<PAGE> 4
14. Section 3.6 of the Plan is amended by replacing it with the
following new Section 3.6:
"Section 3.6 Changes in Employment Status. If a
Participant has a change in his or her employment
responsibilities, title and/or compensation, such that the
Participant would not qualify for initial participation in
the Plan, (i) the Participant shall continue to make
deferrals in accordance with the Participant's Permissible
Deferral election for the Plan Year during which the change
in employment responsibilities, title or compensation
occurs, (ii) the Participant shall not be eligible to make
Permissible Deferrals in Plan Years following the Plan Year
during which the change in employment responsibilities,
title and/or compensation occurs unless and until the
Participant again qualifies for initial participation in the
Plan, and (iii) the Participant shall otherwise continue to
participate in the Plan."
15. Section 3.7 of the Plan is deleted therefrom in its entirety.
16. Section 4.1.1 of the Plan, as previously amended, is further amended
by replacing the phrase "of the following calendar month" in the last sentence
thereof with the phrase "that month".
17. Section 4.1.2 of the Plan, as previously amended, is further amended
by replacing the phrase "of the following calendar month" in the first sentence
of the second paragraph thereof with the phrase "that month".
18. Section 4.3.1 of the Plan, as previously amended, is further amended
(i) by deleting the phrase "which immediately follows the calendar month" in
the first sentence thereof; (ii) by deleting the phrase "the first calendar
month that immediately follows" in the second sentence thereof; and (iii) by
replacing the last sentence thereof with the following new sentence:
"Except for distributions in the form of a lump sum and
distributions pursuant to Section 6.6.2, a Participant's
Account shall be valued for each payment period specified in
Section 6.4 that follows the Plan Year in which benefit
payments commence as of November 30 of the calendar year
immediately preceding each such payment period, as described
in Section 6.4.2."
19. Section 4.3.2 of the Plan is amended by deleting the phrase "which
immediately follows the calendar month" from the first sentence thereof and by
adding the following new sentence at the end thereof:
"Except for distributions in the form of a lump sum, a
Participant's Account shall be valued for each payment
period specified in Section 6.4 that follows the Plan Year
in which benefit payments commence as of November 30 of the
calendar year immediately preceding each such payment
period, as described in Section 6.4.2."
20. Section 6.4.2 of the Plan is amended by replacing it with the
following new Section 6.4.2:
4
<PAGE> 5
"6.4.2 The amount of each level payment for the Initial
Payment Period, if any, shall be calculated using the
balance in the Account as of the beginning of the Initial
Payment Period and amortizing such balance over the
remaining Overall Payment Period using an assumed interest
rate equal to the rate of one-year United States Treasury
notes, said rate to be determined once each Plan Year and to
be the rate in effect as of the September 30 immediately
preceding the payment period to which it applies, as
published by Solomon Brothers, Inc., or any successor
thereto, or as determined by the Chief Financial Officer of
the Company (the "Assumed Interest Rate"). The amount of
each level payment for each Plan Year Payment Period shall
be calculated by taking the balance in the Account as of
November 30 of the calendar year immediately prior to such
Plan Year Payment Period, subtracting the benefit payments
made during the portion of such calendar year following
November 30, and amortizing the difference over the
remaining Overall Payment Period using the Assumed Interest
Rate. The amount of each level payment for the Remainder
Payment Period, if any, shall be calculated by taking the
balance in the Account as of November 30 of the calendar
year immediately prior to the Remainder Payment Period,
subtracting the benefit payments made during the portion of
such calendar year following November 30, and amortizing the
difference over the Remainder Payment Period using an assumed
interest rate of zero percent (0%) per annum. If the actual
crediting rate for the Remainder Payment Period is more than
zero percent, the additional gain resulting from the
difference shall be paid to the Participant in a single
payment within six months after the last day of the
Remainder Payment Period."
21. Section 6.4.3 of the Plan is deleted therefrom in its entirety and
Section 6.4.4 is redesignated as Section 6.4.3.
22. Except as modified in this Amendment No. 6, the Plan, as previously
amended, shall remain in full force and effect, including the Company's right
to amend or terminate the Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
------------------------------------------
Its: President and Chief Executive Officer
------------------------------------------
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.C
<SEQUENCE>4
<DESCRIPTION>EX-10.C
<TEXT>
<PAGE> 1
EXHIBIT 10(C)
AMENDMENT NO. 5
TO THE
H&R BLOCK
DEFERRED COMPENSATION PLAN FOR DIRECTORS
H&R BLOCK, INC. (the "Company") adopted the H&R Block Deferred
Compensation Plan for Directors (the "Plan") effective as of August 1, 1987.
The Company amended said Plan by Amendment No. 1 effective May 1, 1995; by
Amendment No. 2 effective December 11, 1996; by Amendment No. 3 effective May
1, 1997; and by Amendment No. 4 effective January 1, 1998. The Company
continues to retain the right to amend the Plan pursuant to action by the
Company's Board of Directors. The Company hereby exercises that right. This
Amendment No. 5 is effective as of March 1, 1998, except for the provisions in
Paragraph 3, which are effective as of April 1, 1998.
AMENDMENT
1. The first sentence of the introductory paragraph of the Plan is
replaced with the following new sentence:
"H&R Block, Inc. (the "Company") hereby establishes, effective
September 1, 1987, a nonqualified deferred compensation plan
for the benefit of specified Directors of the Company and such
other entities as may be designated by the Company from time
to time."
2. Section 2.1.15 of the Plan, as previously amended, is further amended
by inserting the phrase "Option One Mortgage Corporation," immediately after
the phrase "Block Financial Corporation," therein.
3. Section 4.1 of the Plan, as previously amended, is further amended by
replacing the phrase "the following calendar month" in subsection (c)(ii)
thereof with the phrase "that month".
4. Section 6.2.3 of the Plan, as previously amended, is further amended
by replacing it with the following new Section 6.2.3:
"6.2.3 The amount of each level payment for the Initial
Payment Period, if any, shall be calculated using the balance
in the Account as of the beginning of the Initial Payment Period and
amortizing such balance over the remaining Overall Payment Period
using an assumed interest rate equal to the rate of one-year United
States Treasury notes, said rate to be determined once each Plan
Year and to be the rate in effect as of the September 30 immediately
preceding the payment period to which it applies, as published by
Solomon Brothers, Inc., or any successor thereto, or as determined
by the Chief Financial Officer of the Company (the "Assumed Interest
Rate"). The amount of each level payment for each Calendar Year
Payment Period shall be calculated by taking the balance in the
Account as of November 30 of the calendar year immediately prior to
such Calendar Year Payment Period, subtracting the benefit payments
made during the portion of such calendar year following November 30,
and amortizing the difference over the remaining Overall Payment
Period using the Assumed Interest Rate. The amount of each level
1
<PAGE> 2
payment for the Remainder Payment Period, if any, shall be
calculated by taking the balance in the Account as of November 30 of
the calendar year immediately prior to the Remainder Payment Period,
subtracting the benefit payments made during the portion of such
calendar year following November 30, and amortizing the difference
over the Remainder Payment Period using an assumed interest rate of
zero percent (0%) per annum. If the actual crediting rate for the
Remainder Payment Period is more than zero percent, the additional
gain resulting from the difference shall be paid to the Participant
in a single payment within six months after the last day of the
Remainder Payment Period."
5. Section 6.2.6 of the Plan, as previously amended, is furtheramended
by replacing the phrase "Section 6.2.4" with the phrase "Section 6.2.3".
6. Section 6.2.4 of the Plan is deleted and Sections 6.2.5 and 6.2.6 are
redesignated as Sections 6.2.4 and 6.2.5, respectively.
7. Section 9.1 of the Plan, as previously amended, is further amended
(i) by replacing the phrases "Section 6.2.6" with the phrase "Section 6.2.5";
and (ii) by replacing the phrase "Section 6.2.4" with the phrase "Section
6.2.3".
8. Except as modified in this Amendment No. 5, the Plan, as previously
amended, shall remain in full force and effect, including the Company's right
to amend or terminate the Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
----------------------------------------
Its: President and Chief Executive Officer
----------------------------------------
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>EX-27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 107557
<SECURITIES> 1031699
<RECEIVABLES> 797318
<ALLOWANCES> 18149
<INVENTORY> 0
<CURRENT-ASSETS> 2029579
<PP&E> 76409<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2466519
<CURRENT-LIABILITIES> 1078336
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 4
<COMMON> 1089
<OTHER-SE> 1095995
<TOTAL-LIABILITY-AND-EQUITY> 2466519
<SALES> 0
<TOTAL-REVENUES> 330885
<CGS> 0
<TOTAL-COSTS> 473863
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (133493)
<INCOME-TAX> (50727)
<INCOME-CONTINUING> (82766)
<DISCONTINUED> 217978<F2>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135212
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 0
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
<F2>NET OF TAXES OF $244,424.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| IKN | https://www.sec.gov/Archives/edgar/data/3370/0000950159-98-000033.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950159-98-000033.txt : 19980217
<SEC-HEADER>0000950159-98-000033.hdr.sgml : 19980217
ACCESSION NUMBER: 0000950159-98-000033
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: IKON OFFICE SOLUTIONS INC
CENTRAL INDEX KEY: 0000003370
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045]
IRS NUMBER: 230334400
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05964
FILM NUMBER: 98533411
BUSINESS ADDRESS:
STREET 1: P O BOX 834
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
BUSINESS PHONE: 2152968000
MAIL ADDRESS:
STREET 1: BOX 834
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
FORMER COMPANY:
FORMER CONFORMED NAME: ALCO STANDARD CORP
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: ALCO CHEMICAL CORP
DATE OF NAME CHANGE: 19680218
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1997 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission file number 1-5964
IKON OFFICE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
OHIO 23-0334400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 834, Valley Forge, Pennsylvania 19482
(Address of principal executive offices)
(Zip Code)
(610) 296-8000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 1998.
Common Stock, no par value 134,617,971 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--December 31, 1997
and September 30, 1997
Consolidated Statements of Income--Three months
ended December 31, 1997 and December 31, 1996
Consolidated Statements of Cash Flows--Three months
ended December 31, 1997 and December 31, 1996
Notes to Consolidated Financial Statements--
December 31, 1997
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
December 31 September 30
ASSETS 1997 1997
Current Assets
Cash $20,636 $21,341
Accounts receivable, net 810,662 765,660
Finance receivables, net 713,969 670,784
Inventories 539,202 442,207
Prepaid expenses 114,744 101,294
Deferred taxes 122,023 124,520
---------- ----------
Total current assets 2,321,236 2,125,806
---------- ----------
Investments and Long-Term Receivables 14,718 17,508
Long-Term Finance Receivables, net 1,422,689 1,331,372
Equipment on Operating Leases, net 109,153 101,900
Property and Equipment, at cost 493,443 462,360
Less accumulated depreciation 240,530 222,815
---------- ----------
252,913 239,545
---------- ----------
Other Assets
Goodwill 1,375,020 1,348,133
Miscellaneous 171,233 159,622
---------- ----------
1,546,253 1,507,755
---------- ----------
$5,666,962 $5,323,886
========== ==========
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
December 31 September 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1997
<S> <C> <C>
Current Liabilities
Current portion of long-term debt $59,688 $60,794
Current portion of long-term debt, finance subsidiaries 358,752 251,711
Notes payable 146,417 266,979
Trade accounts payable 206,884 206,547
Accrued salaries, wages and commissions 79,448 110,628
Deferred revenues 200,133 208,612
Other accrued expenses 270,460 268,511
----------- -----------
Total current liabilities 1,321,782 1,373,782
----------- -----------
Long-Term Debt 740,433 490,235
Long-Term Debt, Finance Subsidiaries 1,577,330 1,494,043
Deferred Taxes 339,325 330,996
Other Long-Term Liabilities 157,016 153,182
Shareholders' Equity
Series BB conversion preferred stock, no par value:
3,877 depositary shares issued and outstanding 290,170 290,170
Common stock, no par value:
Authorized 300,000 shares
Issued 135,705 shares 677,681 677,681
Retained earnings 602,751 574,646
Foreign currency translation adjustment (716) (728)
Cost of common shares in treasury: 12/97 - 1,519 shares;
9/97 - 2,401 shares (38,810) (60,121)
----------- -----------
1,531,076 1,481,648
----------- -----------
$5,666,962 $5,323,886
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share)
Three Months Ended
December 31
1997 1996
Revenues
Net sales $728,105 $629,427
Service and rentals 575,822 463,261
Finance income 70,330 47,746
----------- -----------
1,374,257 1,140,434
----------- -----------
Costs and Expenses
Cost of goods sold 468,200 402,046
Service and rental costs 285,283 219,046
Finance interest expense 30,746 20,011
Selling and administrative 488,091 403,576
Transformation costs 19,519 14,343
----------- -----------
1,291,839 1,059,022
----------- -----------
Operating income 82,418 81,412
Interest expense 17,029 8,201
----------- -----------
Income from continuing operations before taxes
and extraordinary loss 65,389 73,211
Taxes on income 28,405 28,552
----------- -----------
Income from continuing operations before
extraordinary loss 36,984 44,659
Discontinued operations 20,151
----------- -----------
Income before extraordinary loss 36,984 64,810
Extraordinary loss from early extinguishment
of debt, net of tax benefit (12,156)
----------- -----------
Net Income 36,984 52,654
Less: Preferred Dividends 4,885 4,885
----------- -----------
Available to Common Shareholders $32,099 $47,769
=========== ===========
Basic and Diluted Earnings Per Share
Continuing Operations $0.24 $0.30
Discontinued Operations $0.15
Extraordinary loss $(0.09)
----------- -----------
$0.24 $0.36
=========== ===========
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1997 1996
<S> <C> <C>
Operating Activities
Income from continuing operations before extraordinary loss $36,984 $44,659
Additions (deductions) to reconcile income from continuing
operations before extraordinary loss to net cash
used in operating activities of continuing operations
Depreciation 31,617 28,616
Amortization 15,052 11,211
Provisions for losses on accounts receivable 13,188 7,430
Provision for deferred taxes 15,000 18,800
Writeoff of fixed assets related to transformation 1,251
Changes in operating assets and liabilities, net of effects from
acquisitions and divestitures:
Increase in accounts receivable (53,763) (63,384)
Increase in inventories (95,246) (79,134)
Increase in prepaid expenses (15,755) (54,245)
(Decrease) increase in accounts payable, deferred
revenues and accrued expenses (42,126) 17,446
Miscellaneous 3,070 7,186
--------- ---------
Net cash used in operating activities of continuing operations (90,728) (61,415)
Net cash provided by operating activities of
discontinued operations 24,176
--------- ---------
Net cash used in operating activities (90,728) (37,239)
Investing activities
Proceeds from the sale of property and equipment 7,851 10,679
Cost of companies acquired, net of cash acquired (26,149) (41,224)
Expenditures for property and equipment (58,769) (38,912)
Purchase of miscellaneous assets (9,969) (9,249)
Finance subsidiaries receivables - additions (344,812) (317,869)
Finance subsidiaries receivables - collections 182,808 142,615
--------- ---------
Net cash used in investing activities of continuing operations (249,040) (253,960)
Net cash used in investing activities of discontinued operations (38,058)
--------- ---------
Net cash used in investing activities (249,040) (292,018)
Financing activities
Payments of short-term borrowings, net (120,958) (180,351)
Proceeds from issuance of long-term debt 253,654 14,591
Proceeds from option exercises and sale of treasury shares 5,600 27,874
Proceeds from sale of finance subsidiaries lease receivables 25,760 25,433
Proceeds from discontinued operations 553,479
Long-term debt repayments (5,071) (258,969)
Finance subsidiaries debt - additions 275,328 200,008
Finance subsidiaries debt - repayments (85,000) (26,000)
Dividends paid (10,240) (23,537)
Purchase of treasury shares (10) (1,786)
--------- ---------
Net cash provided by financing activities of continuing operations 339,063 330,742
Net cash provided by financing activities of discontinued operations 13,882
--------- ---------
Net cash provided by financing activities 339,063 344,624
--------- ---------
Net (decrease) increase in cash (705) 15,367
Cash at beginning of year 21,341 46,056
--------- ---------
Cash at end of period $20,636 $61,423
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1997.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Debt
On January 16, 1998, the Company's credit agreement with several
banks was amended to increase the amount available from $400 million to $600
million. There were no other significant changes to the terms of the agreement.
On October 27, 1997, the Company completed a $250 million
underwritten public debt offering consisting of $125 million 6.75% notes due
November 1, 2004 and $125 million 7.3% notes due November 1, 2027. The 6.75%
notes were sold at a discount to yield 6.794% and carry a make-whole call
provision with a five basis-points premium. The 7.3% notes were also sold at a
discount to yield 7.344% and carry a make-whole call provision with a 15
basis-points premium. The proceeds of the offering were used to repay short-term
borrowings.
Note 3: Discontinued Operations
Discontinued operations of the Company represent the operations of
Unisource Worldwide, Inc. ("Unisource"), which was spun off as a separate public
company on December 31, 1996. The results of discontinued operations, included
in the Company's results of operations through December 31, 1996, are as follows
(in thousands):
Three Months Ended
December 31, 1996
Revenues $1,728,533
Income before taxes $34,743
Tax expense 14,592
----------
Net income $20,151
==========
In December 1996, Unisource repaid $553.5 million of intercompany debt
outstanding with the Company and the Unisource stock was distributed to IKON
shareholders. Equity of the Company was reduced by $952.3 million, which was the
equity of Unisource at December 31, 1996.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
Note 4: Extraordinary Loss on Early Extinguishment of Debt
On December 2, 1996, Unisource borrowed under its new credit facility
to repay $553.5 million of intercompany debt with the Company. The Company
prepaid debt in the amount of $514 million from these funds. Early repayment of
this debt resulted in certain prepayment penalties. Total prepayment penalties
of $18.7 million and related tax benefits of $6.5 million are reflected as an
extraordinary loss on early extinguishment of debt on the Statement of Income
for the three months ended December 31, 1996.
Note 5: Transformation Costs
At the end of fiscal 1995, the Company announced its transformation
program to change its organization into a more cohesive and efficient network by
building a uniform information technology system and implementing best practices
for critically important management functions throughout the IKON companies. In
March 1997, the Company announced that it was accelerating the transformation
program. As a result, the Company began to separately disclose these costs as a
component of operating expenses on the Statement of Income. The Company expects
to substantially complete the transformation program by the end of fiscal 1998.
The transformation involves a variety of activities which the Company believes
will significantly lower administrative costs and improve margins. These
activities include consolidating purchasing, inventory control, logistics and
other activities into thirteen customer service centers in the U.S.,
establishing a single financial processing center, building a common information
technology system, adopting a common name and creating marketplace-focused field
operations with greater attention to customer sales and services. Costs charged
to transformation expense in the first quarter of fiscal 1998 of $19.5 million
relate principally to severance and other employee-related costs, including
temporary labor ($14.3 million), facility consolidation costs, including lease
buyouts and write-offs of leasehold improvements ($3.3 million) and technology
conversion costs ($1.9 million). Transformation costs of $14.3 million for the
first quarter of fiscal 1997 consist primarily of severance and other
employee-related costs, including temporary labor and costs related to
consultants assisting in the transformation ($8.3 million), facility
consolidation costs, including lease buyouts and write-offs of leasehold
improvements ($1.3 million), technology conversion costs ($4.0 million) and
costs incurred to adopt the IKON name ($.7 million).
Note 6: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations (in thousands):
<TABLE>
<CAPTION>
12/31/97 12/31/96
<S> <C> <C>
Numerator:
Income from continuing operations $ 36,984 $ 44,659
Preferred stock dividends 4,885 4,885
------------- ------------
Numerator for continuing operations
basic earnings per share - income
available to common shareholders 32,099 39,774
Effect of dilutive securities:
Convertible loan notes 77 85
------------- ------------
Numerator for continuing operations
diluted earnings per share - income
available to common shareholders
after assumed conversions $ 32,176 $ 39,859
============= ============
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1997
Note 6: Earnings Per Share (continued)
Denominator:
Denominator for basic earnings per
share - weighted average shares 133,729 132,801
Effect of dilutive securities:
Employee stock options 780 1,546
Convertible loan notes 258 230
------------- ------------
Dilutive potential common shares 1,038 1,776
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 134,767 134,577
============= ============
Basic earnings per share from
continuing operations $0.24 $0.30
===== =====
Diluted earnings per share from
continuing operations $0.24 $0.30
===== =====
</TABLE>
Options to purchase 3,034,759 shares of common stock at $28.88 per
share to $61.08 per share were outstanding during the first quarter of fiscal
1998 but were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
The Company's Series BB conversion preferred stock is excluded from the
diluted calculation because the effect of adding 9,682,144 shares and deleting
the preferred dividends to reflect assumed conversion would be antidilutive.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations
and Financial Condition and Liquidity
Continuing operations of the Company consist of IKON, which sells,
rents and leases photocopiers, digital printers and other automated office
equipment for use in both traditional and integrated office environments. IKON
also provides outsourcing and imaging services and offers consulting, design,
computer networking and technology training for the networked office
environment.
Results of Operations
The discussion of the results of operations reviews the continuing
operations of the Company as contained in the Consolidated Statements of Income.
Three Months Ended December 31, 1997
Compared with the Three Months Ended December 31, 1996
Revenues and income before taxes for the first quarter of fiscal 1998
compared to the first quarter of fiscal 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31 %
1997 1996 Change
(in millions)
<S> <C> <C> <C>
REVENUES $1,374 $1,140 20.5%
====== ======
INCOME BEFORE TAXES:
Operating income, excluding transformation costs $101.9 $95.8 6.4%
Transformation costs (19.5) (14.3)
------ ------
Operating income 82.4 81.4
Interest expense (17.0) (8.2)
------ ------
$65.4 $73.2 (10.7%)
====== ======
</TABLE>
The Company's first quarter revenues increased $234 million, or 20.5%
over the first quarter of fiscal 1997, of which $129 million relates to current
and prior year acquisitions and $105 million to base companies' internal growth.
The Company's worldwide internal revenue growth was 9% in the first quarter of
fiscal 1998 compared to 10% in the fourth quarter of fiscal 1997. The internal
revenue growth rate was 10% in North America for the first quarter of fiscal
1998, the decrease to 9% worldwide was the result of the remaining impact of
transformation in the U.K. Revenues from the Company's operations outside the
U.S. were $177 million for the first quarter of fiscal 1998 compared to $147
million for the same period of the prior fiscal year. The Company's European
operations accounted for $14 million of the increase, primarily from
acquisitions, while Canadian revenues increased $14 million as a result of
acquisitions and internal growth in base companies. Other foreign operations
revenue increased $2 million in the first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997.
The Company's operating income increased by $1 million compared to the
prior year's quarter. Operating income for the first quarter of fiscal 1998
continues to be impacted by the effects of transformation. Excluding
transformation costs, operating income increased 6.4% to $101.9 million for the
first quarter of fiscal 1998 compared to $95.8 million in the prior year.
Finance subsidiaries contributed 20.6% of the Company's operating income before
transformation costs in the first quarter of fiscal 1998 compared to 17.7% in
the first quarter of fiscal 1997. The Company's operating margins were 6.0% in
the first quarter of fiscal 1998, compared to 7.1% in fiscal 1997. Excluding
transformation costs, the Company's operating margins were 7.4% in the first
quarter of fiscal 1998, compared to 8.4% in the first quarter of fiscal 1997,
however, the first quarter of fiscal 1998 is showing an improvement in operating
margins, excluding transformation costs, from the 7.3% operating margin reported
in the fourth quarter of fiscal 1997.
<PAGE>
Costs associated with the Company's transformation program increased
$5.2 million in the first quarter of fiscal 1998 compared to the first quarter
of fiscal 1997, primarily relating to employee severance agreements.
Operating income from foreign operations was $12.6 million for the
three months ended December 31, 1997, up $2.6 million from the prior year's
quarter. European operations increased by $1.4 million in the first quarter,
while Canadian operating income increased $.5 million and other foreign
operations increased $.7 million in the first quarter of fiscal 1998. There was
no material effect of foreign currency exchange rate fluctuations on the results
of operations in the first quarter of fiscal 1998 compared to the first quarter
of fiscal 1997.
Acquisitions
In the first quarter of fiscal 1998, the Company completed 17
acquisitions with trailing revenues of $86 million. Of the 17 companies
acquired, five were outsourcing and imaging companies, five were systems
integration companies and seven were traditional copier companies. The focus of
acquisition activity for fiscal 1998 will be to continue to build a presence in
Europe and expand capability in technology services and outsourcing/imaging.
Other
Interest expense increased $8.8 million in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997 as a result of increased debt
levels from investment in working capital, acquisitions and the share repurchase
program which began in the third quarter of fiscal 1997.
Income before taxes decreased by $7.8 million in the first quarter over
the prior year, primarily reflecting the combined result of internal growth from
base companies, along with earnings contributed by acquisitions, net of
increased transformation and interest costs. The effective income tax rate for
the first quarter of fiscal 1998 is 43.4% compared with 39.0% for the
comparative period in fiscal 1997. The effective tax rate for the full year of
fiscal 1997 was 42.6%.
The Company used the proceeds of a December 2, 1996 $553.5 million
intercompany debt repayment from its discontinued operation, Unisource, to
prepay $514 million of corporate debt. The Company recorded an extraordinary
charge of $12.2 million after tax ($18.7 million pretax) in the first quarter of
fiscal 1997 primarily for prepayment penalties relating to its early
extinguishment of certain corporate debt.
Earnings per share from continuing operations, assuming dilution,
decreased from $.30 per share for the first quarter of fiscal 1997 to $.24 per
share for the first quarter of fiscal 1998. Excluding transformation costs,
earnings per share from continuing operations, assuming dilution, decreased 8.3%
from $.36 per share for the first quarter of fiscal 1997 to $.33 per share in
the first quarter of fiscal 1998. Including income from discontinued operations
and the extraordinary loss on the extinguishment of debt, earnings per share,
assuming dilution, of the Company were $.36 for the first quarter of fiscal
1997.
<PAGE>
Financial Condition and Liquidity
Net cash used by operating activities for the first three months of
fiscal 1998 was $91 million, primarily the result of increases in working
capital. During the same period, the Company used $249 million in cash for
investing activities, which included finance subsidiary activity of $162
million, acquisition activity at a cash cost of $26 million and capital
expenditures of $59 million. Investing activities were funded by financing
activities. Cash provided by financing activities includes $133 million net
increase in corporate debt and $190 million increase in finance subsidiaries
debt. Debt, excluding finance subsidiaries, was $946.5 million at December 31,
1997, an increase of $128.5 million from the debt balance at September 30, 1997
of $818 million. The debt to capital ratio, excluding finance subsidiaries, was
38.2% at December 31, 1997 compared to 35.6% at September 30, 1997. The Company
has placed increased emphasis on working capital reduction as short-term goal.
On January 16, 1998, the Company amended its December 16, 1996 credit
agreement to increase the borrowing limit from $400 million to $600 million. As
of December 31, 1997, short-term borrowings supported by the agreement totaled
$130 million. In October 1997, the Company completed a $250 million two tranche
underwritten public offering consisting of $125 million 6.75% notes due November
1, 2004 and $125 million 7.3% notes due November 1, 2027. The 6.75% notes were
sold at a discount to yield 6.794% and carry a make-whole call provision with a
five basis-points premium. The 7.3% notes were also sold at a discount to yield
7.344% and carry a make-whole call provision with a 15 basis-points premium. The
proceeds of the offering were used to repay short-term borrowings. The Company
also has $200 million available for either stock or debt offerings under its
shelf registration statement filed in November 1995. In January 1998, the Board
of Directors approved the filing of an additional $500 million shelf
registration statement for either stock or debt offerings.
Finance subsidiaries debt grew by $190.3 million from September 30,
1997, a result of increased leasing activity. During the three months ended
December 31, 1997, the U.S. finance subsidiary issued an additional $248.5
million under its medium term notes program. At December 31, 1997, $1.7 billion
of medium term notes were outstanding with a weighted interest rate of 6.6%,
while $1.4 billion remains available under this program. Under its $275 million
asset securitization programs, the U.S. finance subsidiary sold $25.8 million in
direct financing leases during the first three months of fiscal 1998, replacing
those leases liquidated and leaving the amount of contracts sold unchanged.
The Company filed shelf registrations for 10 million shares of common
stock in April 1997 and 5 million shares of common stock in March 1996. Shares
issued under these registration statements are being used for acquisitions.
Approximately 4.7 million shares have been issued under these shelf
registrations through December 31, 1997, leaving 10.3 million shares available
for issuance.
On April 17, 1997, the Company announced that it may repurchase from
time to time as much as five percent of the outstanding IKON common stock in
open market transactions. Through fiscal 1997, the Company repurchased 4.4
million common shares for $109.7 million. There were no shares repurchased under
this program during the first quarter of fiscal 1998.
The Company believes that its operating cash flow together with unused
bank credit facilities and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures,
acquisitions, dividends, stock repurchases and costs associated with the
Company's transformation program. The Company estimates the total remaining
costs of its transformation program to be from $35 million to $50 million,
excluding capital costs. Transformation costs are expected to be in the range of
$5 million to $20 million for each of the next three quarters.
<PAGE>
Forward-Looking Information
This document contains, and other materials filed or to be filed by the
Company with the Commission which are incorporated by reference herein, as well
as information included in oral statements or other written statements made or
to be made by the Company, contain or will contain or include, disclosures which
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the 1934 Exchange Act.
Such forward-looking statements address, among other things, strategic
initiatives (including plans for enhancing the Company's business through new
acquisitions, information technology systems, sales strategies, market growth
plans, margin enhancement initiatives, capital expenditures and financing
sources). Such forward-looking information is based upon management's current
plans or expectations and is subject to a number of uncertainties and risks that
could significantly affect current plans, anticipated actions and the Company's
future financial condition and results. These uncertainties and risks include,
but are not limited to, those relating to successfully managing an aggressive
program to acquire and integrate new companies, including companies with
technical services and products that are relatively new to the Company, and also
including companies outside the U.S., which present additional risks relating to
international operations; risks and uncertainties relating to conducting
operations in a competitive environment; delays, difficulties, technological
changes, management transitions and employment issues associated with a
large-scale transformation project; debt service requirements (including
sensitivity to fluctuations in interest rates); and general economic conditions.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by or on behalf of the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
On October 2, 1997, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, the press release dated
September 26, 1997, indicating that it planned to release fourth
quarter and fiscal 1997 earnings on October 15, 1997 and
indicating that the registrant expects earnings per share from
continuing operations, excluding transformation charges, to be
within the range of $.33 - $.36 for the quarter.
On October 22, 1997, the registrant filed a Current Report on
Form 8-K to file, under Item 5 of the form, as an exhibit to the
report, its Ratio of Earnings to Fixed Charges for each of the
years in the five-year period ended September 30, 1997, and its
results for the fiscal year ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date February 12, 1998 /s/ Michael J. Dillon
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
(27) Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of IKON Office Solutions, Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 20,636,000
<SECURITIES> 0
<RECEIVABLES> 873,863,000
<ALLOWANCES> 63,201,000
<INVENTORY> 539,202,000
<CURRENT-ASSETS> 2,321,236,000
<PP&E> 767,395,000<F1>
<DEPRECIATION> 405,329,000<F2>
<TOTAL-ASSETS> 5,666,962,000
<CURRENT-LIABILITIES> 1,321,782,000
<BONDS> 2,317,763,000
<COMMON> 677,681,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 290,170,000
<OTHER-SE> 563,225,000
<TOTAL-LIABILITY-AND-EQUITY> 5,666,962,000
<SALES> 728,105,000
<TOTAL-REVENUES> 1,374,257,000
<CGS> 468,200,000
<TOTAL-COSTS> 784,229,000<F3>
<OTHER-EXPENSES> 507,610,000<F4>
<LOSS-PROVISION> 13,188,000
<INTEREST-EXPENSE> 17,029,000
<INCOME-PRETAX> 65,389,000
<INCOME-TAX> 28,405,000
<INCOME-CONTINUING> 36,984,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,984,000
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
<FN>
<F1>Includes equipment on operating leases, at cost, of $273,952,000
<F2>Includes accumulated depreciations for equipment on operating leases of
$164,799,000
<F3>Includes Finance Subsidiaries interest of $30,746,000
<F4>Represents selling, general and administrative expenses and transformation
costs.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| JAVA | https://www.sec.gov/Archives/edgar/data/709519/0000891618-98-000491.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000891618-98-000491.txt : 19980210
<SEC-HEADER>0000891618-98-000491.hdr.sgml : 19980210
ACCESSION NUMBER: 0000891618-98-000491
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971228
FILED AS OF DATE: 19980209
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC
CENTRAL INDEX KEY: 0000709519
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571]
IRS NUMBER: 942805249
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-15086
FILM NUMBER: 98525881
BUSINESS ADDRESS:
STREET 1: 901 SAN ANTONIO RD
CITY: PALO ALTO
STATE: CA
ZIP: 94303
BUSINESS PHONE: 6509601300
MAIL ADDRESS:
STREET 1: 901 SAN ANTONIO ROAD
CITY: PALO ALTO
STATE: CA
ZIP: 94303
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 28, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number:0-15086
SUN MICROSYSTEMS, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 94-2805249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 SAN ANTONIO ROAD, PALO ALTO, CA 94303
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (650) 960-1300
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
CLASS OUTSTANDING AT DECEMBER 28, 1997
Common stock - $0.00067 par value 377,366,835
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 18
Item 7a - Quantitative and Qualitative Disclosures About
Market Risk 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 28, June 30,
1997 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 573,268 $ 660,170
Short-term investments 329,476 452,590
Accounts receivable, net 1,652,871 1,666,523
Inventories 459,579 437,978
Deferred tax assets 305,291 286,720
Other current assets 275,156 224,469
----------- -----------
Total current assets 3,595,641 3,728,450
Property, plant and equipment, at cost 1,933,511 1,658,341
Accumulated depreciation and amortization (862,278) (858,448)
----------- -----------
1,071,233 799,893
Other assets, net 269,730 168,931
----------- -----------
$ 4,936,604 $ 4,697,274
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 482 $ 100,930
Accounts payable 520,999 468,912
Accrued liabilities 938,846 963,012
Other current liabilities 311,287 316,184
----------- -----------
Total current liabilities 1,771,614 1,849,038
Long-term debt and other obligations 137,782 106,299
Stockholders' equity 3,027,208 2,741,937
----------- -----------
$ 4,936,604 $ 4,697,274
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $2,450,243 $2,081,588 $4,548,847 $3,940,607
Cost and expenses:
Cost of sales 1,171,630 1,033,402 2,199,064 2,005,503
Research and development 259,228 201,010 481,846 387,278
Selling, general and administrative 696,450 591,331 1,311,943 1,115,997
Purchased in-process research and
development 110,100 -- 162,284 --
---------- ---------- ---------- ----------
Total costs and expenses 2,237,408 1,825,743 4,155,137 3,508,778
Operating income 212,835 255,845 393,710 431,829
Interest income, net 10,197 6,421 20,768 11,893
---------- ---------- ---------- ----------
Income before income taxes 223,032 262,266 414,478 443,722
Provision for income taxes 73,600 83,925 156,613 141,991
---------- ---------- ---------- ----------
Net income $ 149,432 $ 178,341 $ 257,865 $ 301,731
========== ========== ========== ==========
Net income per common
share - basic $ 0.40 $ 0.48 $ 0.69 $ 0.82
========== ========== ========== ==========
Net income per common
share - diluted $ 0.38 $ 0.46 $ 0.65 $ 0.77
========== ========== ========== ==========
Shares used in the calculation of
net income per share - basic 373,875 368,381 372,968 367,748
========== ========== ========== ==========
Shares used in the calculation of
net income per share - diluted 393,231 388,738 394,165 389,428
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 257,865 $ 301,731
Adjustments to reconcile net income
to net cash provided from
operating activities:
Depreciation, amortization and
other non-cash items 183,472 180,820
Tax benefit of options exercised 74,466 17,968
Purchased in-process research
and development 162,284 --
Decrease (increase) in accounts receivable 16,004 (186,261)
(Increase) decrease in inventories (15,765) 65,995
Increase in accounts payable 14,414 58,914
Net increase in other current
and non-current assets (97,594) (37,045)
Net increase in other current
and non-current liabilities 19,301 12,517
--------- ---------
Net cash provided from operating activities 614,447 414,639
--------- ---------
Cash flow from investing activities:
Acquisition of property, plant and equipment (410,453) (301,582)
Acquisition of other assets (49,080) (22,241)
Payment for acquisitions, net of cash acquired (227,655) --
Acquisition of short-term investments (305,738) (221,081)
Maturities of short-term investments 438,431 371,676
--------- ---------
Net cash (used by) investing activities (554,495) (173,228)
--------- ---------
Cash flow from financing activities:
Issuance of common stock 37,189 18,101
Acquisition of treasury stock (140,537) (329,531)
Proceeds from employee stock purchase plans 50,649 37,303
Reduction of short-term borrowings, net (100,448) (22,260)
Increase (reduction) of long-term borrowings 6,293 (35,795)
--------- ---------
Net cash used by financing activities (146,854) (332,182)
--------- ---------
Net decrease in cash and cash equivalents $ (86,902) $ (90,771)
========= =========
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 388 $ 8,198
Income taxes $ 55,503 $ 122,888
Supplemental schedule of non-cash investing and
financing activities:
The Company purchased Diba, Inc., Integrity
Arts, Inc. and certain assets of Chorus Systems,
S.A. and Encore Computer Corporation. In conjunction
with these acquisitions, liabilities were assumed as
follows:
Fair value of assets acquired $ 284,294
Cash paid for assets (233,111)
---------
Liabilities assumed $ 51,183
=========
</TABLE>
See accompanying notes.
6
<PAGE> 7
SUN MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sun
Microsystems, Inc. ("Sun" or "the Company") and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been
eliminated. Certain amounts from prior years have been reclassified to
conform to current year presentation.
While the quarterly financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting
only of normal recurring accruals) that the Company considers necessary
for a fair presentation of the results of operations for the interim
periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for the interim periods
are not necessarily indicative of the results for the entire year. The
information included in this report should be read in conjunction with
the 1997 Annual Report to Stockholders which is incorporated by
reference in the Company's 1997 Form 10-K (as amended on Form 10-K/A).
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 28, June 30,
1997 1997
------------ --------
<S> <C> <C>
Raw materials $158,450 $236,900
Work in process 74,977 50,577
Finished goods 226,152 150,501
-------- --------
$459,579 $437,978
======== ========
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the liability method of Statement of
Financial Accounting Standards No. 109. The provision for income taxes during
the interim periods considers anticipated annual income before taxes, earnings
of foreign subsidiaries permanently invested in foreign operations, and other
differences.
STOCK DIVIDEND
The Company declared a two-for-one stock split (effected in the form of a stock
dividend) to stockholders of record as of the close of business on November 18,
1996. Share and per share amounts presented have been adjusted to reflect the
stock dividend.
7
<PAGE> 8
EARNINGS PER SHARE
The Company adopted Financial Accounting Standards No. 128 (FAS 128), "Earnings
Per Share" in the second quarter of fiscal 1998. Share and per share amounts for
all periods presented have been restated to comply with FAS 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 28, 1997 December 29, 1996
------------------------------- ---------------------------------
Net income Shares EPS Net income Shares EPS
---------- ------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic $149,432 373,875 $ 0.40 $178,341 368,381 $ 0.48
Effect of dilutive
securities - options
and warrants 19,356 20,357
------- -------
Diluted $149,432 393,231 $ 0.38 $178,341 388,738 $ 0.46
======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
December 28, 1997 December 29, 1996
------------------------------- ---------------------------------
Net income Shares EPS Net income Shares EPS
---------- ------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic $257,865 372,968 $ 0.69 $301,731 367,748 $ 0.82
Effect of dilutive
securities - options
and warrants 21,197 21,680
------- -------
Diluted $257,865 394,165 $ 0.65 $301,731 389,428 $ 0.77
======= =======
</TABLE>
ACQUISITIONS
On August 22, 1997, the Company acquired all of the outstanding stock of Diba,
Inc. for $25,000,000 in cash. The transaction was accounted for as a purchase
and, on this basis, the excess purchase price over the estimated fair value of
net tangible assets has been allocated, based upon an independent third-party
valuation, to various intangible assets, primarily consisting of purchased
in-process research and development and goodwill. In connection with this
acquisition, purchased in-process research and development of $22,300,000,
associated with products which had not achieved technological feasibility and
for which no alternative uses have been established by the Company, was written
off. Intangible assets, including goodwill, are being amortized over three
years. The results of operations of Diba, Inc. from the date of acquisition
through December 28, 1997 are included in the Company's consolidated statements
of income and are not material to the Company.
On September 22, 1997, the Company acquired all of the outstanding stock of
Integrity Arts, Inc. for $30,200,000 in cash. The transaction was accounted for
as a purchase and, on this basis, the excess purchase price over the estimated
fair value of net tangible assets has been allocated, based upon an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
this acquisition, purchased in-process research and development of approximately
$29,900,000, associated with products which had not achieved technological
feasibility and for which no alternative uses have been established by the
Company, was written off. Intangible assets, including goodwill, are being
amortized over three years. The results of operations of Integrity Arts, Inc.
from the date of acquisition through December 28, 1997 are included in the
Company's consolidated statements of income and are not material to the Company.
On October 21, 1997, the Company acquired substantially all of the assets and
certain liabilities of Chorus Systems, S.A. and its wholly-owned subsidiaries
for approximately $26,500,000 in cash. The transaction was accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of net tangible assets has been allocated, based upon an independent
third-party valuation, to various intangible assets, primarily consisting of
purchased in-process research and development and goodwill. In connection with
this
8
<PAGE> 9
acquisition, purchased in-process research and development of $13,100,000,
associated with products which had not achieved technological feasibility and
for which no alternative uses have been established by the Company, was written
off. Intangible assets, including goodwill, are being amortized over three
years. The results of operations of Chorus Systems, S.A. from the date of
acquisition through December 28, 1997 are included in the Company's consolidated
statements of income and are not material to the Company.
On November 24, 1997, the Company acquired substantially all of the assets and
certain liabilities of Encore Computer Corporation's storage products business
for approximately $186,000,000 in cash, $35,000,000 of which is due in July
1998. The transaction was accounted for as a purchase and, on this basis, the
excess purchase price over the estimated fair value of net tangible assets has
been allocated, based upon an independent third-party valuation, to various
intangible assets, primarily consisting of purchased in-process research and
development and goodwill. In connection with this acquisition, purchased
in-process research and development of $97,000,000, associated with products
which had not achieved technological feasibility and for which no alternative
uses have been established by the Company, was written off. Intangible assets,
including goodwill, are being amortized over three years. The results of
operations of the storage products business of Encore Computer Corporation from
the date of acquisition through December 28, 1997 are included in the Company's
consolidated statements of income and are not material to the Company.
REGISTRATION STATEMENT
On October 16, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission relating to the registration for public
offering of senior and subordinated debt securities and common stock with an
aggregate initial public offering price of up to $1,000,000,000. On October 24,
1997, the Registration Statement became effective, so that the Company may now
choose to offer, from time to time, the debt securities and common stock
pursuant to Rule 415 in one or more separate series, in amounts, at prices and
on terms to be set forth in the prospectus contained in the Registration
Statement and in one or more supplements to the prospectus.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth items from the Condensed Consolidated Statements
of Income as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.8 49.6 48.3 50.9
----- ----- ----- -----
Gross margin 52.2 50.4 51.7 49.1
Research and development 10.6 9.7 10.6 9.8
Selling, general and administrative 28.4 28.4 28.8 28.3
Purchased in-process research
and development 4.5 -- 3.6 --
----- ----- ----- -----
Operating income 8.7 12.3 8.7 11.0
Interest income, net 0.4 0.3 0.4 0.3
----- ----- ----- -----
Income before income taxes 9.1 12.6 9.1 11.3
Provision for income taxes 3.0 4.0 3.4 3.6
----- ----- ----- -----
Net income 6.1% 8.6% 5.7% 7.7%
===== ===== ===== =====
</TABLE>
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risk and uncertainties such that actual results may vary
materially. Certain factors that may affect the Company's results and financial
condition over the next few quarters are discussed under the caption "Future
Operating Results" below. Other factors that may affect such results and
financial condition are set forth in the Company's 1997 Annual Report to
Stockholders which is incorporated by reference in the Company's Form 10-K (as
amended on Form 10-K/A), and the Company's Form 10-K, as amended.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $2.450 billion for the second quarter and $4.549 billion for
the first six months of fiscal 1998, representing increases of 17.7% and 15.4%,
respectively, over the comparable periods of fiscal 1997. The growth in revenue
resulted primarily from strong demand for work group, enterprise and
departmental servers, and from high-end storage, memory and related products.
The remaining increase reflects growth in revenues from other Sun businesses,
primarily service.
10
<PAGE> 11
Domestic net revenues increased by 19.4% and 18% while international net
revenues (including United States exports) grew 16.1% and 12.8% in the second
quarter and first six months of fiscal 1998, respectively, compared with the
corresponding periods of fiscal 1997. In US dollars, European net revenues
increased 22.3% and 14.8%, Japanese net revenues decreased 3.8% and increased
2.8%, and net revenues in Rest of World increased 23% and 19.2% in the second
quarter and first six months of fiscal 1998, respectively, when compared with
the same periods of fiscal 1997. These increases are due primarily to continued
strengthening of the markets in Europe and many of the markets in Asia, and are
partially offset by the strengthening of the U.S. dollar. Japan experienced a
modest increase in local currency revenue, but, when translated into US dollars,
showed a decline for the second quarter of fiscal 1998 as compared with the same
period of fiscal 1997.
The Company generally manages currency exposure through the use of simple,
short-term forward foreign exchange and currency option contracts, the objective
of which is to minimize the impact of currency fluctuations on the results of
operations. As the Company utilizes projected data to establish its forward
foreign exchange and currency option contracts, variances which result from
forecasting differences and the extent of currency movement during the quarter
could have a material adverse effect on the results of operations and cash
flows.
GROSS MARGIN
Gross margin was 52.2% for the second quarter and 51.7% for the first six months
of fiscal 1998, compared with 50.4% and 49.1%, respectively, for the
corresponding periods in fiscal 1997. The increase in the gross margin for the
periods compared primarily reflects the effects of increased revenues generated
from higher margin servers and storage products, as well as continued decreases
in costs of key components, including chips, memory and storage.
The factors described above resulted in a favorable impact on gross margin for
the second quarter and first six months of fiscal 1998. The Company continuously
evaluates the competitiveness of its product offerings. These evaluations could
result in repricing actions in the near term. Sun's future operating results
would be adversely affected if such repricing actions were to occur and the
Company were unable to mitigate the resulting margin pressure by maintaining a
favorable mix of systems, storage, software, service, and other products and by
achieving component cost reductions, operating efficiencies and by increasing
volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses were $259.2 million in the second
quarter and $481.8 million for the first six months of fiscal 1998, compared
with $201.0 and $387.3 million for the same periods of fiscal 1997. As a
percentage of net revenues, R&D expenses increased to 10.6% for both the second
quarter and the first six months of fiscal 1998 from 9.7% and 9.8%,
respectively, in the corresponding periods of fiscal 1997. These increases
reflect the increased expenditures focused on the development of hardware and
software products which utilize the Java architecture, as well as the continued
development of ULTRASparc systems, low-end desktop systems, storage products,
products acquired through acquisitions, and increased compensation due primarily
to an increase in personnel.
11
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses were $696.5 million in the
second quarter and $1,311.9 million in the first six months of fiscal 1998,
compared with $591.3 and $1,116.0 million for the same periods of fiscal 1997.
As a percentage of net revenues, SG&A expenses were 28.4% and 28.8% in the
second quarter and first six months of fiscal 1998, respectively, and 28.4% and
28.3%, respectively in the corresponding periods of fiscal 1997. The dollar
increases are primarily attributable to increased compensation resulting from
higher levels of headcount (principally in the sales organization) in addition
to marketing costs related to demand creation programs. The increase is also due
to costs incurred in connection with the Company's ongoing efforts to improve
business processes and cycle times. The Company expects to continue to hire
personnel to further expand its demand creation programs and support
organizations.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development represents the write-off of
purchased in-process research and development associated with the Company's
acquisitions of Diba, Inc., Integrity Arts, Inc., Chorus Systems, S.A. and the
storage products business of Encore Computer Corporation. Such write-offs were
$110.1 million and $162.3 million, respectively, for the second quarter and
first six months of fiscal 1998. There were no such charges in the corresponding
periods of fiscal 1997.
INTEREST INCOME, NET
Net interest income was $10.2 million for the second quarter and $20.8 million
for the first six months of fiscal 1998, compared with $6.4 million and $11.9
million, respectively, for the corresponding periods in fiscal 1997. The
increases are primarily the result of higher interest earnings due to a larger
average portfolio of cash and short-term investments.
INCOME TAXES
The Company's effective income tax rate was 33% for the second quarter and first
six months of fiscal 1998 before a $19.8 million tax charge resulting from a
non-recurring write-off of in-process research and development associated with
the acquisitions of Diba, Inc. and Integrity Arts, Inc. during the first quarter
of fiscal 1998. The effective income tax rate for the first six months of fiscal
1998 including such tax charge was 38%. The effective income tax rate for the
second quarter and first six months of fiscal 1997 was 32%. The increase in the
overall effective tax rate to 33% for fiscal 1998 is attributable to an increase
in anticipated worldwide earnings without offsetting tax credits or other tax
savings.
FUTURE OPERATING RESULTS
The market for Sun's products and services is intensely competitive and subject
to continuous, rapid technological change, short product life cycles and
frequent product performance improvements and price reductions. Due to the
breadth of the Company's product lines and the scalability of its products and
network computing model, Sun competes in many segments of the network computing
market across a broad spectrum of customers. The Company expects the markets for
its products and technologies, as well as its competitors within such markets,
will continue to change as the rightsizing trend shifts customer buying patterns
to network based systems which often employ solutions from multiple vendors.
Competition in these markets will also continue to intensify as Sun and its
competitors, principally Hewlett-Packard Corporation, International Business
Machines Corporation, Digital Equipment Corporation, and Silicon Graphics, Inc.,
aggressively position themselves to benefit from this shifting of customer
buying patterns and demand. The Company is also facing competition from these
competitors, as well as other systems manufacturers, such as Compaq Computer
Corporation and Dell Computer Corporation, with respect to products based on
microprocessors from Intel Corporation coupled with Windows NT operating system
software from Microsoft Corporation. These products demonstrate the viability of
certain networked personal computer solutions and have increased the competitive
pressure, particularly in the Company's workstation and lower-end server product
lines. Finally, the timing of introductions of new products and services by
Sun's competitors may negatively impact the future operating results of the
Company, particularly when such introductions occur in periods leading up to the
Company's introduction of its own new enhanced products. The Company expects
this pressure to continue and intensify throughout fiscal 1998 and beyond. While
many other technical, service and support capabilities affect a customer's
buying decision, the Company's future operating results will depend, in part, on
its ability to compete with these technologies.
12
<PAGE> 13
The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, storage, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high-performance computer products,
such as the Company's development of the UltraSPARC microprocessor is a complex
and uncertain process requiring high levels of innovation from the Company's
designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be adversely affected if the Company is not able to correctly anticipate
the level of demand for the mix of products. Because the Company is continuously
engaged in this product development, introduction, and transition process, its
operating results may be subject to considerable fluctuation, particularly when
measured on a quarterly basis.
The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a significant adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
adversely affect the Company's net revenues and operating results. To secure
components for development, production, and introduction of new products, the
Company frequently makes advanced payments to certain suppliers and often enters
into noncancelable purchase commitments with vendors early in the design
process. Due to the variability of material requirement specifications during
the design process, the Company must closely manage material purchase
commitments and respective delivery schedules. In the event of a delay or flaw
in the design process, the Company's operating results could be adversely
affected due to the Company's obligations to fulfill such noncancelable purchase
commitments.
Generally, the computer systems sold by Sun, such as the UltraSPARC-based
products, are the result of hardware and software development, such that delays
in the software development can delay the ability of the Company to ship new
hardware products. In addition, adoption of a new release of an operating system
may require effort on the part of the customer and porting by software vendors
providing applications. As a result, the timing of conversion to a new release
is inherently unpredictable. Moreover, delays by customers in adopting a new
release of an operating system can limit the acceptability of hardware products
tied to that release. Such delays could adversely affect the future operating
results of the Company.
A significant portion of the Company's revenues is derived from international
sales and is therefore subject to inherent risks related thereto, including the
general economic and political conditions in each country, currency exchange
rate fluctuations, the effect of the tax structures of various jurisdictions,
changes to and compliance with a variety of foreign laws and regulations, trade
protection measures and import and export licensing requirements. There can be
no assurance that the economic crisis and currency issues currently being
experienced in Asia will not have an adverse effect on the Company's revenue or
revenue growth rates in the future. The impact of any of the foregoing factors
could have an adverse effect on the Company's financial condition and operating
results.
13
<PAGE> 14
Seasonality also affects the Company's operating results, particularly in the
first quarter of each fiscal year. In addition, the Company's operating expenses
are increasing as the Company continues to expand its operations, and future
operating results will be adversely affected if revenues do not increase
accordingly. Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complementary technologies, products or
businesses. As part of this process, the Company will continue to evaluate the
changing value of its assets, and when necessary, make adjustments thereto.
In order to remain competitive in a rapidly changing industry, the Company is
continually improving and changing its business practices, processes, and
information systems. In this regard, the Company has begun to implement a number
of new business practices and a series of related information systems; such
activities are currently planned to be fully operational in the first half of
fiscal year 1999. Implementing a number of new business practices and
information systems is a complex process, affecting numerous operational and
financial systems and processes as well as requiring comprehensive employee
training. While the Company tests these new systems and processes in advance of
implementation, there are inherent limitations in the Company's ability to
simulate a full-scale operating environment in advance of the system cutover. To
the extent that the Company encounters problems after introduction of these new
systems and practices that prevent or limit their full utilization, there could
be a material, adverse impact on the Company's operating results.
Many installed computer systems and software products are coded to accept only
two digit entries in the date code field. As the year 2000 approaches, these
code fields will need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20" dates. As a result, in less
than two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The Company
is currently expending significant resources to review its products and
services, as well as its internal management information systems in order to
identify and modify those products, services and systems that are not year 2000
compliant. The Company expects such modifications will be made on a timely basis
and does not believe that the cost of such modifications will have a material
effect on the Company's operating results. There can be no assurance, however,
that the Company will be able to modify timely and successfully such products,
services and systems to comply with year 2000 requirements, which could have a
material adverse effect on the Company's operating results. Based on the
Company's assessment to date, most newly introduced products and services of the
Company are year 2000 compliant, however some of the Company's customers are
running product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current product versions. In addition,
the Company faces risks to the extent that suppliers of products, services and
systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not have business systems or products that
comply with the year 2000 requirements. In the event any such third parties
cannot timely provide the Company with products, services or systems that meet
the year 2000 requirements, the Company's operating results could be materially
adversely affected. Furthermore, there can be no assurance that these or other
factors relating to the year 2000 compliance issues, including litigation, will
not have a material adverse effect on the Company's business, operating results
or financial condition.
While the Company can not predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 28, 1997 increased by approximately $239.3 million from
June 30, 1997, due principally to increases in inventory of $21.6 million,
property, plant and equipment-net of $271.3 million, other current assets and
deferred tax assets of $69.3 million and other assets of $100.8 million, offset
by decreases in cash, cash equivalents and short-term investments of $210
million and accounts receivable of $13.7 million. The decrease in accounts
receivable reflects slightly lower revenue in the second quarter of fiscal 1998
relative to the fourth quarter of fiscal 1997. The increase in inventory is the
result of inventory acquired through acquisitions and is also due to the
slightly lower revenue in the second quarter of fiscal 1998 as compared to the
fourth quarter of fiscal 1997. The increase in property, plant and equipment
reflects capital spending for real estate development of the Company's
facilities, assets acquired through acquisitions and capital additions to
support increased headcount, primarily in the Company's engineering, service and
marketing organizations. Other current assets increased due to the timing of
payments for insurance and other taxes and other assets increased due to the
recording of goodwill and other intangible assets related to the Company's
acquisitions.
Total current liabilities decreased $77.4 million from June 30, 1997, due
principally to decreases in short-term borrowings of $100.4 million, accrued
liabilities of $24.2 million and other current liabilities of $4.9 million,
offset by an increase in accounts payable of $52.1 million. The decrease in
short-term borrowings reflects payments related to debt of subsidiaries. The
decrease in accrued liabilities reflects the payment of performance-based
compensation and commissions, offset by increases in warranty and the employee
stock participation program liability. The decrease in other current liabilities
is the offset of a decrease in deferred revenue and an increase in income taxes
payable. The increase in accounts payable reflects increased inventory balances
and a payment due on one of the Company's acquisitions.
At December 28, 1997, the Company's primary sources of liquidity consisted of
cash, cash equivalents and short-term investments of $902.7 million and a
revolving credit facility with banks aggregating $500 million, which was
available subject to compliance with certain covenants. On October 16, 1997, the
Company filed a Registration Statement with the Securities and Exchange
Commission relating to the registration for public offering of senior and
subordinated debt securities and common stock with an aggregate initial public
offering price of up to $1,000,000,000. On October 24, 1997, the Registration
Statement became effective, so that the Company may now choose to offer, from
time to time, the debt securities and common stock pursuant to Rule 415 in one
or more separate series, in amounts, at prices and on terms to be set forth in
the prospectus contained in the Registration Statement and in one or more
supplements to the prospectus. The Company believes that the liquidity provided
by existing cash and short-term investment balances and the offering and
borrowing arrangements described above will be sufficient to meet the Company's
capital requirements through fiscal 1998. However, the Company believes the
level of financial resources is a significant competitive factor in its industry
and may choose at any time to raise additional capital through debt or equity
financing to strengthen its financial position, facilitate growth and provide
the Company with additional flexibility to take advantage of business
opportunities that may arise.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 7, 1997, the Company filed suit against Microsoft Corporation in the
United States District Court for the Northern District of California alleging
breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. The
Company believes that the outcome of this matter will not have a material
adverse impact on Sun's financial condition, results of operations or cash flows
in any given fiscal year.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 1997, the Annual Meeting of Stockholders of the Company was held
in Menlo Park, California. The results of voting of the 308,000,440 shares of
common stock represented at the meeting are as described below.
An election of directors was held with the following individuals being elected
to the Board of Directors of the Company:
<TABLE>
<CAPTION>
Shares Voted For Votes Withheld
---------------- --------------
<S> <C> <C>
Scott G. McNealy 306,596,583 1,403,857
L. John Doerr 306,572,798 1,427,642
Judith L. Estrin 306,568,115 1,432,325
Robert J. Fisher 306,545,429 1,455,011
Robert L. Long 306,581,242 1,419,198
M. Kenneth Oshman 306,609,507 1,390,933
A. Michael Spence 306,561,299 1,439,141
</TABLE>
The seven nominees who received the highest number of votes (all of the above
individuals) were elected to the Board of Directors.
The stockholders approved an amendment to the Company's 1990 Employee Stock
Purchase Plan in order to increase the number of shares of common stock reserved
for issuance thereunder by 10,000,000 shares of common stock to an aggregate of
55,800,000 shares. There were 250,085,154 votes cast for the amendment,
52,803,996 votes against the amendment, 1,437,287 abstentions and 3,674,003
broker non-votes.
The stockholders approved an amendment to the 1988 Directors' Stock Option Plan
(1988 DSOP) in order to (i) extend the duration of the 1988 DSOP by
approximately ten (10) additional years and (ii) increase the number of shares
of common stock reserved for issuance thereunder by 600,000 shares of common
stock to an aggregate of 2,200,000 shares. There were 214,860,004 votes cast for
the amendment, 91,365,940 votes cast against the amendment and 1,774,496
abstentions.
The stockholders approved the adoption of the 1997 French Stock Option Plan
(1997 FSOP) and the reservation for issuance thereunder of 3,000,000 shares of
common stock. There were 228,328,042 votes cast for the 1997 FSOP, 77,566,926
shares against the 1997 FSOP and 2,105,472 abstentions.
16
<PAGE> 17
ITEM 5 - OTHER INFORMATION
SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER
The following is a summary of all sales of the Company's Common Stock by the
Company's executive officers and directors who are subject to Section 16 of the
Securities Exchange Act of 1934, as amended, during the fiscal quarter ended
December 28, 1997:
<TABLE>
<CAPTION>
OFFICER/ NUMBER OF
DIRECTOR DATE PRICE SHARES SOLD
=================================================================
<S> <C> <C> <C>
L. John Doerr 11/3/97 $35.75 10,000
11/3/97 $36.00 5,000
11/3/97 $36.25 5,000
Scott G. McNealy 11/13/97 $31.3958 150,000
11/18/97 $35.6310 150,000
John Shoemaker 10/24/97 $37.3675 1,000
10/24/97 $37.305 4,000
A. Michael Spence 11/18/97 $35.50 9,500
Edward J. Zander 10/29/97 $36.8958 15,000
</TABLE>
17
<PAGE> 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
10.64(1) 1988 Directors' Stock Option Plan, as amended on
August 13, 1997
10.65(1) 1990 Employee Stock Purchase Plan, as amended on
August 13, 1997
10.94(2) 1997 French Stock Option Plan
27.0 Financial data for the period ended December 28, 1997
(1) Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed
as exhibits to the Registrant's Registration Statement on Form S-8, file
no. 333-40677, filed with the Securities and Exchange Commission on
November 20, 1997.
(2) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8, file no. 333-40675,
filed with the Securities and Exchange Commission on November 20, 1997.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 28,
1997.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1997 Annual
Report to Stockholders have not changed significantly.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN MICROSYSTEMS, INC.
BY
/s/ Michael E. Lehman
-----------------------------------------
Michael E. Lehman
Vice President, Corporate Resources and
Chief Financial Officer
/s/ George Reyes
-----------------------------------------
George Reyes
Vice President and Corporate Controller,
Chief Accounting Officer
Dated: February 9, 1998
19
<PAGE> 20
EXHIBIT INDEX
SUN MICROSYSTEMS, INC.
EXHIBIT
NUMBER EXHIBIT TITLE
10.64(1) 1988 Directors' Stock Option Plan, as amended on August 13, 1997
10.65(1) 1990 Employee Stock Purchase Plan, as amended on August 13, 1997
10.94(2) 1997 French Stock Option Plan
27.0 Financial data for the period ended December 28, 1997
(1) Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed
as exhibits to the Registrant's Registration Statement on Form S-8, file
no. 333-40677, filed with the Securities and Exchange Commission on
November 20, 1997.
(2) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8, file no. 333-40675,
filed with the Securities and Exchange Commission on November 20, 1997.
20
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-29-1996
<CASH> 438,083
<SECURITIES> 312,657
<RECEIVABLES> 1,392,873
<ALLOWANCES> 154,086
<INVENTORY> 394,919
<CURRENT-ASSETS> 2,968,890
<PP&E> 1,549,677
<DEPRECIATION> 848,739
<TOTAL-ASSETS> 3,866,620
<CURRENT-LIABILITIES> 1,481,451
<BONDS> 40,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 73
<OTHER-SE> 2,304,094
<TOTAL-LIABILITY-AND-EQUITY> 3,866,620
<SALES> 2,081,588
<TOTAL-REVENUES> 2,081,588
<CGS> 1,033,402
<TOTAL-COSTS> 1,825,743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,160
<INTEREST-EXPENSE> 2,132
<INCOME-PRETAX> 262,266
<INCOME-TAX> 83,925
<INCOME-CONTINUING> 178,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,341
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| JCI | https://www.sec.gov/Archives/edgar/data/833444/0000950135-98-001092.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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cBtcYs/zEJTz9+FibQlS3w==
<SEC-DOCUMENT>0000950135-98-001092.txt : 19980218
<SEC-HEADER>0000950135-98-001092.hdr.sgml : 19980218
ACCESSION NUMBER: 0000950135-98-001092
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980217
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TYCO INTERNATIONAL LTD /BER/
CENTRAL INDEX KEY: 0000833444
STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569]
IRS NUMBER: 000000000
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13836
FILM NUMBER: 98543862
BUSINESS ADDRESS:
STREET 1: THE GIBBONS BUILDING
STREET 2: 10 QUEENS STREET SUITE 301
CITY: HAMILTON HM 12 BERMU
STATE: D0
BUSINESS PHONE: 4412928374
MAIL ADDRESS:
STREET 1: C/O TYCO INTERNATIONAL (US) INC
STREET 2: ONE TYCO PARK
CITY: EXETER
STATE: NH
ZIP: 03833
FORMER COMPANY:
FORMER CONFORMED NAME: ADT LIMITED
DATE OF NAME CHANGE: 19930601
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>TYCO INTERNATIONAL
<TEXT>
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
0-16979
(COMMISSION FILE NUMBER)
------------------------
TYCO INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
(Jurisdiction of Incorporation) (I.R.S. Employer
Identification Number)
THE GIBBONS BUILDING
10 QUEEN STREET, SUITE 301,
HAMILTON, HM11, BERMUDA
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
(441)-292-8674*
(REGISTRANT'S TELEPHONE NUMBER)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of common stock outstanding as of January 16, 1998 was
550,182,802.
------------------------
* The Executive Offices of the Registrant's principal United States
subsidiary, Tyco International (US) Inc., are located at One Tyco Park, Exeter,
New Hampshire 03833. The telephone number there is (603) 778-9700.
================================================================================
<PAGE> 2
TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION:
Item 1 - Financial Statements -
Consolidated Balance Sheets - December 31, 1997 and September 30, 1997... 1-2
Consolidated Statements of Operations for the Quarters ended December 31,
1997 and 1996.......................................................... 3
Consolidated Statements of Cash Flows for the Quarters ended December 31,
1997 and 1996.......................................................... 4
Notes to Consolidated Financial Statements............................... 5-9
Item 2 - Management's Discussion and Analysis of Financial Condition and
Operating Results....................................................... 10-12
PART II -- OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K........................................ 13
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(UNAUDITED)
(IN MILLIONS) DECEMBER 31, 1997 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 364.8 $ 369.8
Receivables, less allowance for doubtful accounts of $111.1
in fiscal 1998 and $107.7 in fiscal 1997................... 1,983.8 1,912.3
Contracts in process......................................... 141.8 138.3
Inventories.................................................. 1,121.4 1,124.8
Deferred income taxes........................................ 368.0 389.4
Prepaid expenses and other current assets.................... 201.6 174.2
--------- ---------
4,181.4 4,108.8
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land......................................................... 155.9 160.3
Buildings.................................................... 681.0 679.7
Subscriber systems........................................... 1,801.0 1,737.6
Machinery and equipment...................................... 1,828.3 1,860.3
Leasehold improvements....................................... 74.3 74.8
Construction in progress..................................... 238.8 211.6
Accumulated depreciation..................................... (1,851.4) (1,800.3)
--------- ---------
2,927.9 2,924.0
--------- ---------
GOODWILL AND OTHER INTANGIBLE ASSETS......................... 2,952.3 2,933.2
DEFERRED INCOME TAXES........................................ 119.3 144.0
OTHER ASSETS................................................. 333.1 337.0
--------- ---------
TOTAL ASSETS................................................. $10,514.0 $10,447.0
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA) DECEMBER 31, 1997 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt....... $ 259.0 $ 250.0
Accounts payable............................................. 876.2 1,012.0
Accrued expenses and other current liabilities............... 1,691.3 1,853.4
Contracts in process - billings in excess of costs........... 372.6 293.7
Deferred revenue............................................. 145.8 152.3
Income taxes................................................. 397.6 403.5
Deferred income taxes........................................ 26.9 26.9
--------- ---------
3,769.4 3,991.8
--------- ---------
LONG-TERM DEBT............................................... 2,382.2 2,480.6
OTHER LONG-TERM LIABILITIES.................................. 460.8 497.5
DEFERRED INCOME TAXES........................................ 58.8 47.7
COMMITMENTS AND CONTINGENCIES................................
CONVERTIBLE REDEEMABLE PREFERENCE SHARES..................... -- --
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 750,000,000 shares authorized;
issued 549,940,006 shares in fiscal 1998 and 536,357,498
shares
in fiscal 1997, net of 100,000 shares owned by a subsidiary
in
fiscal 1998 (at cost)...................................... 110.0 107.3
Capital in excess:
Share premium.............................................. 2,188.8 2,041.3
Contributed surplus, net of deferred compensation of $2.1
in fiscal 1998 and $2.2 in fiscal 1997.................. 2,392.5 2,305.7
Currency translation adjustment.............................. (211.4) (161.6)
Accumulated deficit.......................................... (637.1) (863.3)
--------- ---------
3,842.8 3,429.4
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $10,514.0 $ 10,447.0
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED DECEMBER 31,
(IN MILLIONS EXCEPT PER SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES................................................................. $2,687.5 $2,232.1
Cost of sales............................................................. 1,791.7 1,528.8
Selling, general and administrative expenses.............................. 500.9 444.8
Restructuring and other non-recurring charges............................. -- 237.3
-------- --------
OPERATING INCOME.......................................................... 394.9 21.2
Interest income........................................................... 6.8 10.3
Interest expense.......................................................... (49.8) (51.3)
Other income less expenses................................................ 7.5 118.4
-------- --------
Income before income taxes and extraordinary items........................ 359.4 98.6
Income taxes.............................................................. (118.6) (30.5)
-------- --------
Income before extraordinary items......................................... 240.8 68.1
Extraordinary items, net of taxes......................................... (0.9) (2.6)
-------- --------
NET INCOME................................................................ 239.9 65.5
Dividends on preference shares............................................ -- (0.1)
-------- --------
Net income available to common shareholders............................... $ 239.9 $ 65.4
======== ========
BASIC EARNINGS PER SHARE:
Income before extraordinary items......................................... $ .44 $ .14
Extraordinary items, net of taxes......................................... -- --
-------- --------
Net Income................................................................ $ .44 $ .14
======== ========
DILUTED EARNINGS PER SHARE:
Income before extraordinary items......................................... $ .43 $ .14
Extraordinary items, net of taxes......................................... -- (.01)
-------- --------
Net Income................................................................ $ .43 $ .13
======== ========
CASH DIVIDENDS PER COMMON SHARE (SEE NOTE 5).............................. $ 0 .025
========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................................... 545.1 479.6
======== ========
Diluted................................................................... 568.3 487.1
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $239.9 $ 65.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring and other non-recurring charges................... -- 217.4
Depreciation.................................................... 102.6 91.6
Goodwill and other intangible amortization...................... 26.9 23.5
Deferred income taxes........................................... 54.1 (39.7)
Gain arising from the ownership of investments.................. -- (53.2)
Settlement gain................................................. -- (69.7)
Other non-cash items............................................ 2.1 (0.6)
Changes in assets and liabilities net of the effects of
acquisitions:
Accounts receivable and contracts in process............... 10.1 42.4
Inventory.................................................. 4.9 (22.5)
Accounts payable and accrued expenses...................... (237.1) (65.3)
Income taxes payable....................................... (7.7) (6.7)
Deferred revenue........................................... (6.5) (8.8)
Other...................................................... (46.7) 15.3
------ ------
Net cash provided by operating activities....................... 142.6 189.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............................ (148.5) (164.4)
Acquisition of businesses, net of cash acquired...................... (93.1) (96.2)
Disposal of other investments, net................................... -- 63.5
------ ------
Net cash used in investing activities........................... (241.6) (197.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from long-term debt and lines of credit........ (37.8) 108.2
Dividends paid....................................................... (13.2) (14.1)
Exercise of options.................................................. 149.5 --
Other................................................................ (4.5) 1.0
------ ------
Net cash provided by financing activities....................... 94.0 95.1
------ ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (5.0) 87.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER.................... 369.8 237.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER.......................... $364.8 $324.2
====== ======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Transition Report on Form
10-K for the nine months ended September 30, 1997. The accompanying financial
statements have not been examined by independent accountants in accordance with
generally accepted auditing standards, but in the opinion of management such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the Company's financial
position and results of operations. Certain prior year amounts have been
reclassified to conform with current year presentation.
On July 2, 1997 a wholly-owned subsidiary of what was formerly called ADT
Limited ("ADT") merged with Tyco International Ltd. ("Former Tyco"). Upon
consummation of the merger, ADT (the surviving corporation) changed its name to
Tyco International Ltd. (the "Company" or "Tyco"). Former Tyco became a
wholly-owned subsidiary of the Company and changed its name to Tyco
International (US) Inc. ("Tyco US"). In addition, subsidiaries of Tyco merged
with INBRAND Corporation ("INBRAND") and Keystone International, Inc.
("Keystone") on August 27, 1997 and August 29, 1997, respectively. These
consolidated financial statements include the consolidated accounts of Tyco, a
company incorporated in Bermuda, and its subsidiaries. They have been prepared
using the pooling of interests method of accounting for the mergers and
therefore reflect the combined financial position, operating results and cash
flows of ADT, Former Tyco and Keystone as if they had been combined for all
periods presented. The restated combined financial statements do not include the
financial position, operating results and cash flows of INBRAND prior to January
1, 1997, due to immateriality.
2. ACQUISITIONS AND DIVESTITURES
During the first quarter of fiscal 1998, the Company purchased businesses
with cash payments of $93.1 million. The cash portion of the acquisitions were
made utilizing cash on hand. Each of these acquisitions was accounted for as a
purchase and, as a result of the acquisitions, approximately $30.7 million in
goodwill was recorded by the Company. Additional purchase liabilities were
recorded totaling $3.0 million for severance, relocation, facilities related and
direct transaction costs.
In addition, during the first quarter, the Company entered into an
agreement to purchase the Sherwood-Davis & Geck division ("Sherwood") of
American Home Products Corporation ("AHP") for cash of $1.77 billion. Sherwood
is a manufacturer of medical and surgical devices, such as catheters, needles
and syringes, sutures, thermometers and other specialized disposable medical
products with annual revenues of approximately $1.0 billion. The Sherwood
acquisition is subject to approval of various regulatory agencies and certain
other conditions. The transaction is expected to close in the second quarter of
fiscal 1998. On February 3, 1998, the Company completed its acquisition of
Holmes Protection Group, Inc. ("Holmes") for $104.0 million in cash. Holmes
provides electronic security systems to commercial and residential customers
throughout the United States and will be integrated with Tyco's Fire and
Security Services Division. The Company intends to account for these
acquisitions as purchases.
In connection with purchase acquisitions consummated during and prior to
the quarter ended December 31, 1997, liabilities for approximately $22.9 million
for severance and related costs and $23.0 million for the shutdown and
consolidation of acquired facilities remained on the balance sheet at December
31, 1997. The Company expects that the termination of employees and
consolidation of facilities related to these acquisitions will be substantially
complete by the end of fiscal 1998.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
(IN MILLIONS) 1997 1997
-------------------------------------------------- ------------ -------------
<S> <C> <C>
Bank and acceptance facilities.................... $ 55.0 $ 56.4
Bank credit agreement............................. 900.0 1,400.0
Private placement notes........................... 475.0 --
Uncommitted lines of credit....................... 185.2 38.5
Variable rate term loan due 1998.................. -- 97.1
8.125% public notes due 1999...................... 10.5 10.5
8.25% senior notes due 2000....................... 9.5 9.5
6.34% senior notes due 2000 - Keystone............ -- 45.0
6.5% public note due 2001......................... 298.8 298.7
Sterling denominated bank facility due 2002....... 140.3 137.5
9.25% senior subordinated notes due 2003.......... 14.1 14.1
6.375% public notes due 2004...................... 104.5 104.5
Zero coupon Liquid Yield Option Notes due 2010.... 208.0 259.6
9.5% public debentures due 2022................... 49.0 49.0
8.0% public debentures due 2023................... 50.0 50.0
Other............................................. 141.3 160.2
-------- --------
Total debt........................................ 2,641.2 2,730.6
Less current portion.............................. 259.0 250.0
-------- --------
Long-term debt.................................... $2,382.2 $2,480.6
======== ========
</TABLE>
In December 1997, Tyco US terminated a $500 million portion of its existing
credit agreement and thereafter had the right to borrow (a) up to $750 million
until June 1998 and (b) up to $500 million until June 2002. Balances outstanding
at the time of termination were repaid through the issuance of private placement
notes, $225 million due in March 1998 and $250 million due in June 1998, all of
which bear interest at LIBOR plus 0.25%. The $475 million of private placement
notes and the $400 million drawn under the portion of the existing credit
agreement due in June 1998 have been classified as long term liabilities, based
on the Company's ability and intent to refinance these obligations on a long
term basis.
On February 13, 1998, Tyco US entered into a new $2.25 billion credit
agreement with a group of commercial banks, giving it the right to borrow (a) up
to $1.75 billion until February 12, 1999, with the ability to extend, at the
option of Tyco US, to February 12, 2000, and (b) up to $0.5 billion until
February 12, 2003, such term converting from a 364-day term to a five year term
upon termination of the existing credit agreement. Interest payable on
borrowings is variable based upon the borrower's option of selecting a
Eurodollar rate plus margins ranging from 0.17% to 0.19%, a certificate of
deposit rate plus margins ranging from 0.295% to 0.315%, or a base rate, as
defined. If the outstanding principal amount of loans equals or exceeds
one-third of the commitments, the Eurodollar and certificate of deposit margins
are increased by 0.10%. Repayment of amounts outstanding under this agreement is
guaranteed by the Company.
Simultaneous with the closing of the new credit agreement, Tyco US reduced
aggregate commitments available under its existing credit agreement to $950
million by reducing the $750 million portion to $450 million due in June 1998
and amended the terms and conditions, including interest rates, of the existing
credit agreement to conform to the new credit agreement.
Uncommitted lines of credit are borrowings by Tyco US from commercial banks
on an "as offered" basis. Borrowings and repayments occur daily and contain no
significant terms other than due dates and interest rates. The due dates
generally range from overnight to 90 days and interest rates approximate those
available under the Tyco US credit agreement.
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Under its various loan agreements, the Company is required to meet certain
covenants, none of which is considered restrictive to the operations of the
Company.
During the quarters ended December 31, 1997 and 1996, respectively, 124,264
and 100 of the Liquid Yield Option Notes ("LYONs") with a carrying value of
$55.1 and $0.3 million were exchanged for 3,376,990 and 2,717 common shares of
the Company. Extraordinary items in the quarter ended December 31, 1997 include
the write-off of net unamortized deferred refinance costs and other related fees
of $0.9, which were recorded upon the early extinguishment of the related LYONs.
The extraordinary items in 1996 includes $2.6 million for the write-off of
deferred financing costs upon the early extinguishment of debt agreements by
ADT.
4. EARNINGS PER SHARE
During the first quarter of fiscal 1998, the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is substantially similar to the
standards recently issued by the International Accounting Standards Committee
entitled "International Accounting Standards Earnings Per Share". Prior period
earnings per share data has been restated in accordance with the provisions of
this statement.
The reconciliations between basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31, 1997
-------------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Basic Income Per Share --
Net income available to common shareholders.................. $239.9 545.1 $.44
Restricted stock, options and warrants....................... -- 10.1
Exchange of LYONs............................................ 2.2 13.1
------ -----
Diluted Income Per Share --
Net income available to common shareholders plus assumed
conversions................................................ $242.1 568.3 $.43
====== =====
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31, 1996
-------------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Basic Income Per Share --
Net income available to common shareholders.................. $ 65.4 479.6 $.14
Restricted stock, options and warrants....................... -- 7.5
------ -----
Diluted Income Per Share --
Net income available to common shareholders plus assumed
conversions................................................ $ 65.4 487.1 $.13
====== =====
</TABLE>
The effects on diluted earnings per common share resulting from the assumed
exchange of LYONs and from the assumed conversion of convertible redeemable
preference shares, which were redeemed during fiscal 1997, are anti-dilutive in
the quarter ended December 31, 1996. Income before extraordinary items in the
quarter ended December 31, 1996 was adjusted for the dividends on preference
shares in the calculation of earnings per share.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
5. CASH DIVIDENDS PER COMMON SHARE
Tyco declared a dividend of $0.025 per share in the first quarter of fiscal
1998. Prior to the merger with Former Tyco, ADT had not declared any dividends
on its common shares since 1991. Former Tyco and Keystone declared dividends of
$0.025 and $0.19 per Former Tyco and Keystone common share, respectively, in the
quarter ended December 31, 1996.
6. MERGER RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the quarter ended December 31, 1996, ADT recorded a charge of $237.3
million related to restructuring and other non-recurring charges in its
electronic security services and corporate operations. During fiscal 1997 the
Company also recorded merger, restructuring and other non-recurring charges
related to the mergers between ADT, Former Tyco, Keystone and INBRAND.
Approximately $329.7 million of accrued merger and restructuring costs
remain in other current liabilities and $106.9 million in other non-current
liabilities as of December 31, 1997. The Company currently anticipates that the
restructurings will be substantially completed by September 30, 1998, except for
certain long-term obligations.
7. CONSOLIDATED SEGMENT DATA
Selected information for the Company's four industry segments is as follows
(in millions):
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
SALES:
Disposable and Specialty Products..................... $ 676.6 $ 581.0
Fire and Security Services............................ 1,126.6 1,019.0
Flow Control Products................................. 550.0 511.5
Electrical and Electronic Components.................. 334.3 120.6
-------- --------
$2,687.5 $2,232.1
======== ========
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS:
Disposable and Specialty Products..................... $ 123.6 $ 96.4
Fire and Security Services............................ 146.4 (19.2)(1)
Flow Control Products................................. 71.9 51.9
Electrical and Electronic Components.................. 71.6 22.5
-------- --------
Total operations................................. 413.5 151.6
Interest expense, net................................. (43.0) (41.0)(2)
Corporate and other amounts........................... (11.1) (12.0)
-------- --------
$ 359.4 $ 98.6
======== ========
</TABLE>
(1) Includes net charges of $119.9 million for non-recurring items in ADT's
electronic security services operations, principally comprised of a $237.3
million charge related to restructuring and other non-recurring items, a
$65.0 million net gain on litigation settlement and a net gain of $53.4
million arising from the sale of ADT's investment in Limelight Group plc.
(2) Includes non-recurring interest income of $4.8 million associated with the
non-recurring items for ADT.
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
8. INVENTORIES
Inventories are classified as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Purchased materials and manufactured
parts.................................. $ 298.4 $ 262.7
Work in process.......................... 274.2 294.4
Finished goods........................... 548.8 567.7
-------- --------
$ 1,121.4 $1,124.8
======== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract
completion and product performance. In addition, the Company is in receipt of
notifications from various environmental agencies that conditions at a number of
sites where hazardous wastes were disposed of by the Company and other persons
may require cleanup and other possible remedial action. In the opinion of
management, these obligations will not materially affect the Company's financial
position or results of operations.
9
<PAGE> 12
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS
On July 2, 1997, a wholly-owned subsidiary of what was formerly called ADT
Limited ("ADT") merged with Tyco International Ltd. ("Former Tyco"). Upon
consummation of the merger, ADT (the surviving corporation) changed its name to
Tyco International Ltd. (the "Company" or "Tyco"). In August 1997, the Company
acquired Keystone International, Inc. and INBRAND Corporation. All three of
these transactions were accounted for as a pooling of interests and,
accordingly, the consolidated financial statements reflect the combined
financial position and results of operations and cash flows of ADT, Former Tyco,
Keystone and INBRAND for all periods presented except that the consolidated
financial statements for periods prior to January 1, 1997 do not include INBRAND
due to immateriality. See Note 1 to the consolidated financial statements
presented herein. These transactions are more fully discussed in the Company's
Consolidated Financial Statements and notes thereto as of September 30, 1997
previously filed on Form 10-K.
RESULTS OF OPERATIONS.
Information for all periods presented below reflects the grouping of the
Company's businesses into four business segments consisting of Disposable and
Specialty Products, Fire and Security Services, Flow Control Products, and
Electrical and Electronic Components.
In September 1997, the Company changed its fiscal year end from December 31
to September 30. In the discussions below, the results of operations for fiscal
1998 compare the first quarter ended December 31, 1997 with the corresponding
quarter ended December 31, 1996.
Overview
Net income before extraordinary item was $240.8 million, or $0.43 per share
on a diluted basis for the quarter ended December 31, 1997 as compared to $68.1
million, or $0.14 per share, for the quarter ended December 31, 1996. Excluding
the $80.3 million ($0.16 per share) after-tax net charge for restructuring and
other non-recurring items recorded in the quarter ended December 31, 1996,
income before extraordinary item rose 62.3% from $148.4 million, or $0.30 per
share. The increase was attributable to increased income from operations
primarily in the Electrical and Electronic Components and Fire and Security
Services segments and, to a lesser extent, the Disposable and Specialty Products
and Flow Control Products segments.
Quarter ended December 31, 1997 Compared to Quarter ended December 31, 1996:
Sales increased 20.4% during the quarter ended December 31, 1997 to $2.69
billion from $2.23 billion in the quarter ended December 31, 1996.
Sales of the Electrical and Electronic Components group increased $213.7
million to $334.3 million, or 177.2%, principally due to increased sales of
$189.3 million at Tyco Submarine Systems Limited (TSSL), as well as increased
sales at Tyco Printed Circuit Group (TPCG), offset slightly by decreased sales
at Allied Electrical Conduit. The increased sales at TSSL resulted principally
from the acquisition of AT&T's submarine systems business in July 1997.
Sales of the Fire and Security Services Group increased $107.6 million to
$1.13 billion, or 10.6%, principally due to increased sales of $75.5 million in
the North America, Australia and Europe geographic regions for the Company's
fire protection operations, and increased worldwide sales of $46.8 million in
the Company's electronic security services business. Net sales increased in the
fire protection and security businesses primarily due to an increase in the
volume of the service business.
Sales of the Disposable and Specialty Products Group increased $95.6
million to $676.6 million, or 16.4%, principally due to increased sales of $65.5
million at Kendall, $20.4 million at Tyco Plastics and $10.7 million at ADT
Automotive. At Kendall the increase in sales resulted principally from the
inclusion of INBRAND in 1997, as well as internal growth at the Ludlow Technical
Products division.
Sales of the Flow Control Products Group increased $38.5 million to $550.0
million, or 7.5%, primarily reflecting increased volume at existing businesses
at Allied Tube & Conduit, including businesses acquired during the first quarter
of fiscal 1997.
10
<PAGE> 13
Pre-tax income before extraordinary item was $359.4 million for the quarter
ended December 31, 1997, as compared to $98.6 million for the quarter ended
December 31, 1996. Pretax income for the quarter ended December 31, 1996
includes net charges of $115.1 million for non-recurring items in ADT's
electronic security services operations. Excluding these non-recurring charges,
pre-tax income increased $145.7 million, or 68.2%, from $213.7 million.
Amortization expense for goodwill and other intangible assets was $26.9 million
for the quarter ended December 31, 1997 and $23.5 million for the quarter ended
December 31, 1996. The following analysis is exclusive of the non-recurring
amounts to present the comparability of recurring operations.
For the quarter ended December 31, 1997 as compared to the quarter ended
December 31, 1996, operating profits of the Electrical and Electronic Components
group increased $49.1 million to $71.6 million, or 218.2%. Operating profits
were 21.4% of sales in the quarter ended December 31, 1997 and 18.7% in the
quarter ended December 31, 1996. The increase was principally due to the
acquisition of AT&T's submarine systems business in July 1997, as well as
increased sales and better margins at TPCG, offset slightly by decreased sales
at Allied Electrical Conduit.
Fire and Security Services profits increased $45.7 million to $146.4
million, or 45.4%. Operating profits were 13.0% of sales in the quarter ended
December 31, 1997 and 9.9% in the quarter ended December 31, 1996. The increase
was principally due to increases in the service volume of the fire protection
and security businesses mentioned above, higher volume and improved margins in
the Company's fire protection contracting businesses in North America, Australia
and New Zealand, as well as, improved volume and margins in the security service
businesses in North America and the United Kingdom.
Operating profits for the Disposable and Specialty Products Group increased
$27.2 million to $123.6 million, or 28.2%. Operating profits were 18.3% of sales
in the quarter ended December 31, 1997 and 16.6% in the quarter ended December
31, 1996. The increase was principally due to higher sales and increased margins
in Kendall's North American healthcare business, including INBRAND, higher sales
and margins at Tyco Plastics and higher profit at ADT Automotive, where the
volume of automobiles placed in auctions increased.
Operating profits for the Flow Control Group increased $20.0 million to
$71.9 million, or 38.5%. Operating profits were 13.1% of sales in the quarter
ended December 31, 1997 and 10.1% in the quarter ended December 31, 1996. The
increase was principally due increased margins in the Company's North American
and European flow control products operations, including Keystone's valve
products, which have been integrated into the operations of Grinnell and Europe
Flow Control.
The effect of average foreign exchange rates during the quarter ended
December 31, 1997 as compared to the quarter ended December 31, 1996 was not
material to the Company's total sales or operating profits.
The effective income tax rate was 33% during the quarter ended December 31,
1997 and 31% during the quarter ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As presented in the Consolidated Statement of Cash Flows, net cash provided
by operating activities was $142.6 million during the first quarter of fiscal
1998. Accounts payable and accrued expenses decreased $237.1 million which
resulted principally from spending for merger, restructuring and other
non-recurring costs during the quarter. Net changes in other working capital
accounts were not significant during the period. The impact of changes in
foreign exchange rates did not materially affect net working capital during the
quarter.
During the first quarter of fiscal 1998, the Company used cash to (i)
acquire companies for an aggregate of $93.1 million in cash, (ii) purchase
$148.5 million of property, plant and equipment; and (iii) pay dividends of
$13.2 million and received $149.5 million upon the exercise of common share
options.
At December 31, 1997 the Company's total debt was $2.64 billion, a slight
decrease as compared to $2.73 billion at September 30, 1997. The decrease
resulted principally from the exchange of LYON's debt with a $55.1 million
principal balance for common shares and the net repayment of various borrowings.
Shareholders' equity was $3.84 billion, or $6.99 per share, at December 31,
1997, compared to $3.43 billion, or
11
<PAGE> 14
$6.39 per share, at September 30, 1997. Goodwill and other intangible assets was
$2.95 billion at December 31, 1997 compared to $2.93 billion at September 30,
1997. The increase in shareholders' equity was due primarily to net income of
$239.9 million and proceeds from the exercise of options. Total debt as a
percent of total capitalization (total debt and shareholders' equity) was 41% at
December 31, 1997 and 44% at September 30, 1997.
In December 1997, Tyco US terminated a $500 million portion of its existing
credit agreement and thereafter had the right to borrow (a) up to $750 million
until June 1998 and (b) up to $500 million until June 2002. Balances outstanding
at the time of termination were repaid through the issuance of private placement
notes, $225 million due in March 1998 and $250 million due in June 1998, all of
which bear interest at LIBOR plus 0.25%. The $475 million of private placement
notes and the $400 million drawn under the portion of the existing credit
agreement due in June 1998 have been classified as long term liabilities, based
on the Company's ability and intent to refinance these obligations on a long
term basis.
On February 13, 1998, Tyco US entered into a new $2.25 billion credit
agreement with a group of commercial banks, giving it the right to borrow (a) up
to $1.75 billion until February 12, 1999, with the ability to extend, at the
option of Tyco US, to February 12, 2000, and (b) up to $0.5 billion until
February 12, 2003, such term converting from a 364-day term to a five year term
upon termination of the existing credit agreement. Repayment of amounts
outstanding under this agreement is guaranteed by the Company.
Simultaneous with the closing of the new credit agreement, Tyco US reduced
aggregate commitments available under its existing credit agreement to $950
million by reducing the $750 million portion to $450 million due in June 1998
and amended the terms and conditions, including interest rates, of the existing
credit agreement to conform to the new credit agreement.
Working capital requirements for the remainder of fiscal 1998 are not
expected to significantly increase as compared to fiscal 1997. The level of
capital expenditures is not expected to increase materially in fiscal 1998 as
compared to annualized fiscal 1997. The Company believes that its funding
sources are adequate for its anticipated requirements, including the acquisition
of Sherwood for approximately $1.77 billion in the second quarter of fiscal
1998, through expected cash flow from operations, established financial
arrangements and accessing equity and debt capital markets. In December 1997 the
Company filed a shelf registration statement for the issuance of debt and equity
up to $2.0 billion.
BACKLOG
The backlog of unfilled orders was approximately $2.7 billion at December
31, 1997 as compared to $2.3 billion at September 30, 1997. Backlog increased in
the Company's Electrical and Electronic Components, Fire and Security Services
and Flow Control Group segments. Within Electrical and Electronic Components,
backlog increased principally due to the acquired backlog of AT&T's submarine
systems business, as well as new projects issued to TSSL. Within Fire and
Security Services, backlog increased principally due to an increase in backlog
at the Company's U.S. security business and the Europe fire business.
12
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
$1.75 billion 364-day Credit Agreement dated February 13, 1998 held by Tyco
4.1 US.
$500 million Extendible Credit Agreement dated February 13, 1998 held by Tyco
4.2 US.
Parent Guarantee Agreement dated as of February 13, 1998.
4.3
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TYCO INTERNATIONAL LTD.
/s/ MARK H. SWARTZ
---------------------------------------------------
MARK H. SWARTZ
Executive Vice President -- Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: February 17, 1998
14
<PAGE> 17
TYCO INTERNATIONAL LTD.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
4.1 $1.75 billion 364-day Credit Agreement dated February 13, 1998 held by Tyco US.
4.2 $500 million Extendible Credit Agreement dated February 13, 1998 held by Tyco US.
4.3 Parent Guarantee Agreement dated as of February 13, 1998.
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1
<SEQUENCE>2
<DESCRIPTION>$ 1.75 BILLION 364-DAY CREDIT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 4.1
CONFORMED COPY
$1,750,000,000
364-DAY CREDIT AGREEMENT
dated as of
February 13, 1998
among
Tyco International (US) Inc.,
The Banks Listed Herein
and
Morgan Guaranty Trust Company of New York,
as Agent
<PAGE> 2
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 1
DEFINITIONS
<S> <C> <C>
SECTION 1.01. Definitions........................................................ 1
SECTION 1.02. Accounting Terms and Determinations................................ 16
SECTION 1.03. Types of Borrowings................................................ 16
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend................................................ 17
SECTION 2.02. Notice of Committed Borrowing...................................... 17
SECTION 2.03. The Money Market Borrowings........................................ 17
SECTION 2.04. Notice to Banks; Funding of Loans.................................. 21
SECTION 2.05. Promissory Notes................................................... 22
SECTION 2.06. Maturity of Loans.................................................. 23
SECTION 2.07. Interest Rates..................................................... 23
SECTION 2.08. Facility Fee....................................................... 26
SECTION 2.09. Optional Termination or Reduction of Commitments................... 27
SECTION 2.10. Mandatory Termination of Commitments............................... 27
SECTION 2.11. Optional Prepayments............................................... 27
SECTION 2.12. General Provisions as to Payments.................................. 27
SECTION 2.13. Funding Losses..................................................... 28
SECTION 2.14. Computation of Interest and Fees................................... 28
SECTION 2.15. Regulation D Compensation.......................................... 28
SECTION 2.16. Method of Electing Interest Rates.................................. 29
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness...................................................... 31
SECTION 3.02. Existing Agreements................................................ 32
SECTION 3.03. Borrowings......................................................... 34
SECTION 3.04. New Borrower....................................................... 34
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power...................................... 36
SECTION 4.02. Corporate and Governmental Authorization; No Contravention......... 37
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 4.03. Binding Effect..................................................... 37
SECTION 4.04. Financial Information.............................................. 37
SECTION 4.05. Litigation......................................................... 37
SECTION 4.06. Compliance with ERISA.............................................. 37
SECTION 4.07. Environmental Matters.............................................. 38
SECTION 4.08. Taxes.............................................................. 38
SECTION 4.09. Subsidiaries....................................................... 38
SECTION 4.10. Not an Investment Company.......................................... 39
SECTION 4.11. Full Disclosure.................................................... 39
ARTICLE 5
COVENANTS
SECTION 5.01. Information........................................................ 39
SECTION 5.02. Payment of Obligations............................................. 41
SECTION 5.03. Maintenance of Property; Insurance................................. 41
SECTION 5.04. Conduct of Business and Maintenance of Existence................... 42
SECTION 5.05. Compliance with Laws............................................... 42
SECTION 5.06. Inspection of Property, Books and Records; Confidentiality......... 43
SECTION 5.07. Limitation on Restrictions on Subsidiary Dividends and Other
Distributions...................................................... 44
SECTION 5.08. Debt............................................................... 46
SECTION 5.09. Fixed Charge Coverage.............................................. 46
SECTION 5.10. Negative Pledge.................................................... 46
SECTION 5.11. Consolidations, Mergers and Sales of Assets........................ 48
SECTION 5.12. Use of Proceeds.................................................... 49
SECTION 5.13. Transactions with Affiliates....................................... 49
SECTION 5.14. Additional Subsidiary Guarantors................................... 49
ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults................................................. 50
SECTION 6.02. Notice of Default.................................................. 52
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization...................................... 52
SECTION 7.02. Agent and Affiliates............................................... 52
SECTION 7.03. Action by Agent.................................................... 52
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 7.04. Consultation with Experts.......................................... 53
SECTION 7.05. Liability of Agent................................................. 53
SECTION 7.06. Indemnification.................................................... 53
SECTION 7.07. Credit Decision.................................................... 53
SECTION 7.08. Successor Agent.................................................... 53
SECTION 7.09. Agent's Fee........................................................ 54
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair........... 54
SECTION 8.02. Illegality......................................................... 55
SECTION 8.03. Increased Cost and Reduced Return.................................. 55
SECTION 8.04. Taxes.............................................................. 57
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.......... 58
SECTION 8.06. Substitution of Bank............................................... 59
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices............................................................ 59
SECTION 9.02. No Waivers......................................................... 60
SECTION 9.03. Expenses; Indemnification.......................................... 60
SECTION 9.04. Sharing of Set-Offs................................................ 60
SECTION 9.05. Amendments and Waivers............................................. 61
SECTION 9.06. Successors and Assigns............................................. 61
SECTION 9.07. Collateral......................................................... 63
SECTION 9.08. Governing Law; Submission to Jurisdiction.......................... 63
SECTION 9.09. Counterparts; Integration.......................................... 64
SECTION 9.10. Waiver of Jury Trial............................................... 64
SECTION 9.11. Judgment Currency.................................................. 64
</TABLE>
Commitment Schedule
Exhibit A - Promissory Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E-1 - Opinion of General Counsel of the Borrower
Exhibit E-2 - Opinion of General Counsel on Behalf of the Parent Guarantor
Exhibit F - Opinion of Special Counsel for the Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Form of Subsidiary Guarantee
Exhibit I - Form of Subsidiary Counsel Opinion
iii
<PAGE> 5
Exhibit J - Form of Parent Guarantee
Exhibit K - Form of Parent Counsel Opinion
Exhibit L - Form of New Borrower Agreement
Exhibit M - Form of Tyco Luxembourg Counsel Opinion
iv
<PAGE> 6
EXTENDIBLE 364-DAY CREDIT AGREEMENT
AGREEMENT dated as of February 13, 1998 among TYCO INTERNATIONAL (US)
INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"ACQUISITION" means the acquisition by the Borrower and certain of its
Affiliates of the Sherwood-Davis & Geck Division of American Home Products
Corporation on substantially the terms and conditions heretofore disclosed to
the Banks.
"ADJUSTED CD RATE" has the meaning set forth in Section 2.07(b).
"ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Borrower (a "Controlling Person") or
(ii) any Person (other than the Borrower or a Subsidiary) which is controlled by
or is under common control with a Controlling Person. As used herein, the term
"control" means possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise. The fact that an
Affiliate of a Person is a member of a law firm that renders services to such
Person or its Affiliates does not mean that the law firm is an Affiliate of such
Person.
"AGENT" means Morgan Guaranty Trust Company of New York in its capacity
as agent for the Banks under the Financing Documents, any successor agent that
becomes the Agent pursuant to Section 7.08, and the respective corporate
successors of the foregoing acting in such capacity.
<PAGE> 7
"APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its
Money Market Loans, its Money Market Lending Office.
"APPLICABLE MARGIN" has the meaning set forth in Section 2.07(h).
"ASSESSMENT RATE" has the meaning set forth in Section 2.07(b).
"ASSIGNEE" has the meaning set forth in Section 9.06(c).
"BANK" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 9.06(c), and the respective
corporate successors of the foregoing.
"BANK AFFILIATE" means, with respect to the Agent or any Bank, any
Person controlling, controlled by or under common control with the Agent or such
Bank, as the case may be.
"BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"BASE RATE LOAN" means a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Section 2.07(a) or Article 8.
"BORROWER" means (i) until the New Borrower Date, Tyco US and (ii) on
and after the New Borrower Date, Tyco Luxembourg.
"BORROWING" has the meaning set forth in Section 1.03.
"CD BASE RATE" has the meaning set forth in Section 2.07(b).
"CD LOAN" means a Committed Loan which bears interest at a CD Rate
pursuant to the applicable Notice of Committed Borrowing or Notice of Interest
Rate Election.
"CD RATE" means a rate of interest determined pursuant to Section
2.07(b) on the basis of an Adjusted CD Rate.
"CD REFERENCE BANKS" means The Hongkong and Shanghai Banking
Corporation Limited, Commerzbank AG and Morgan Guaranty Trust Company of New
York.
"COMMITMENT" means (i) with respect to each Bank listed on the
Commitment Schedule, the amount set forth opposite the name of such Bank on the
Commitment Schedule and (ii) with respect to any Assignee, the amount of the
transferor Bank's Commitment assigned to it pursuant
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<PAGE> 8
to Section 9.06(c), in each case as such amount may be changed from time to time
pursuant to Section 2.09 or 9.06(c).
"COMMITMENT SCHEDULE" means the Commitment Schedule attached hereto.
"COMMITTED BORROWING" has the meaning set forth in Section 1.03.
"COMMITTED LOAN" means a loan made by a Bank pursuant to Section 2.01;
provided that, if any such loan or loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term Committed
Loan shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"CONDUIT" means a special purpose corporation which is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business.
"CONDUIT DESIGNATION" has the meaning set forth in Section 9.06(f).
"CONSENTS" has the meaning set forth in Section 4.01.
"CONSOLIDATED ASSETS" means, at any time, the total assets of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis
as of such time.
"CONSOLIDATED DEBT" means, at any date, the aggregate amount of Debt of
the Borrower and its Consolidated Subsidiaries, determined on a consolidated
basis as of such date; provided that (i) if a Permitted Receivables Transaction
is outstanding at such date and is accounted for as a sale of accounts
receivable under generally accepted accounting principles, Consolidated Debt
determined as aforesaid shall be adjusted to include the additional Debt,
determined on a consolidated basis as of such date, which would have been
outstanding at such date had such Permitted Receivables Transaction been
accounted for as a borrowing at such date and (ii) Consolidated Debt shall in
any event include all Debt of any Person other than the Borrower or a
Consolidated Subsidiary which is Guaranteed by the Borrower or a Consolidated
Subsidiary, except that Consolidated Debt shall not include Debt of a joint
venture, partnership or similar entity which is Guaranteed by the Borrower or a
Consolidated Subsidiary by virtue of the joint venture, partnership or similar
arrangement with respect to such entity or by operation of applicable law (and
not otherwise) so long as the aggregate outstanding principal amount of all such
excluded Debt at any date does not exceed $50,000,000.
"CONSOLIDATED EBIT" means, for any fiscal period, Consolidated Net
Income for such period plus, to the extent deducted in determining Consolidated
Net Income for such period, the aggregate amount of (i) Consolidated Interest
Expense and (ii) federal, state and local income tax expense.
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<PAGE> 9
"CONSOLIDATED INTEREST EXPENSE" means, for any fiscal period, (without
duplication) (i) the consolidated interest expense of the Borrower and its
Consolidated Subsidiaries for such period minus (ii) the consolidated interest
income of the Borrower and its Consolidated Subsidiaries for such period, if,
and only if, such consolidated interest income is equal to or less than
$5,000,000, plus (iii) if a Permitted Receivables Transaction outstanding during
such period is accounted for as a sale of accounts receivable under generally
accepted accounting principles, the additional consolidated interest expense
that would have accrued during such period had such Permitted Receivables
Transaction been accounted for as a borrowing during such period, in each case
determined on a consolidated basis.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the
consolidated net income of the Borrower and its Consolidated Subsidiaries for
such period, determined on a consolidated basis after eliminating therefrom all
Extraordinary Gains and Losses. "EXTRAORDINARY GAINS AND LOSSES" means and
includes, for any fiscal period, all extraordinary gains and losses and all
other material non-recurring non-cash items of the Borrower and its Consolidated
Subsidiaries for such period, determined on a consolidated basis and, in
addition, includes, without limitation, gains or losses from the discontinuance
of operations and gains or losses of the Borrower and its Consolidated
Subsidiaries for such period resulting from the sale, conversion or other
disposition of material assets of the Borrower or any Consolidated Subsidiary
other than in the ordinary course of business.
"CONSOLIDATED NET WORTH" means, at any date, the consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries,
determined on a consolidated basis as of such date and adjusted so as to exclude
the effect of the currency translation adjustment as of such date.
"CONSOLIDATED SUBSIDIARY" means, at any date, with respect to any
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in such Person's consolidated financial
statements if such statements were prepared as of such date; unless otherwise
specified, Consolidated Subsidiary means a Consolidated Subsidiary of the
Borrower.
"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, (i) Consolidated
Net Worth as of such date minus (ii) Intangible Assets as of such date.
"CONSOLIDATED TOTAL CAPITALIZATION" means, at any date, the sum of
Consolidated Debt and Consolidated Net Worth, each determined as of such date.
"DEBT" of any Person means, at any date, without duplication, (i) the
principal amount of all obligations of such Person for borrowed money, (ii) the
principal amount of all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (it being understood that,
subject to the proviso to this definition of "Debt," performance bonds,
performance guaranties, letters of credit, bank guaranties and similar
instruments shall not constitute Debt of such Person to the extent that the
outstanding reimbursement obligations of
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<PAGE> 10
such Person in respect thereof are collateralized by cash or cash equivalents,
which cash or cash equivalents would not be reflected as assets on a balance
sheet of such Person prepared in accordance with generally accepted accounting
principles), (iii) all obligations of such Person to pay the deferred purchase
price of property or services recorded on the books of such Person, except for
(a) trade and similar accounts payable and accrued expenses arising in the
ordinary course of business, and (b) employee compensation and pension
obligations, and other obligations arising from employee benefit programs and
agreements or other similar employment arrangements, (iv) all obligations of
such Person as lessee which are capitalized on the books of such Person in
accordance with generally accepted accounting principles, (v) all Debt secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person, and (vi) all Debt of others Guaranteed by such
Person; provided, however, that Debt shall not include:
(A) contingent reimbursement obligations in respect of
performance bonds, performance guaranties, bank
guaranties or letters of credit issued in lieu of
performance bonds or performance guaranties or
similar instruments, in each case, incurred by such
Person in the ordinary course of business;
(B) contingent reimbursement obligations in respect of
trade letters of credit, or similar instruments, in
each case, incurred by such Person in the ordinary
course of business; or
(C) contingent reimbursement obligations in respect of
standby letters of credit or similar instruments
securing self-insurance obligations of such Person;
in each case, so long as the underlying obligation supported thereby does not
itself constitute Debt.
"DEBT RATING" means a rating of the Borrower's long-term debt which is
not secured or supported by a guarantee, letter of credit or other form of
credit enhancement. If a Debt Rating by a Rating Agency is required to be at or
above a specified level and such Rating Agency shall have changed its system of
classifications after the date hereof, the requirement will be met if the Debt
Rating by such Rating Agency is at or above the new rating which most closely
corresponds to the specified level under the old rating system.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
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<PAGE> 11
"DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent; provided that any Bank may so designate
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
of such offices, as the context may require.
"DOMESTIC LOANS" means CD Loans or Base Rate Loans or both.
"DOMESTIC PARENT" means any Affiliate incorporated under the laws of
the United States, any State thereof or the District of Columbia of which Tyco
US is a Subsidiary.
"DOMESTIC RESERVE PERCENTAGE" has the meaning set forth in Section
2.07(b).
"EFFECTIVE DATE" means the date this Agreement becomes effective in
accordance with Section 3.01.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means the Borrower, any Subsidiary Guarantor and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower or any Subsidiary Guarantor, are treated as a single employer under
Section 414 of the Internal Revenue Code.
"EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or
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<PAGE> 12
affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending
Office by notice to the Borrower and the Agent.
"EURO-DOLLAR LOAN" means a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election.
"EURO-DOLLAR RATE" means a rate of interest determined pursuant to
Section 2.07(c) on the basis of a London Interbank Offered Rate.
"EURO-DOLLAR REFERENCE BANKS" means the principal London offices of The
Hongkong and Shanghai Banking Corporation Limited, Commerzbank AG and Morgan
Guaranty Trust Company of New York.
"EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section
2.15.
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01.
"EXISTING AGREEMENTS" means the Existing 364-Day Agreement and the
Existing Five-Year Agreement.
"EXISTING FIVE-YEAR AGREEMENT" means the Five-Year Credit Agreement,
dated as of June 27, 1997, among the Borrower, the banks listed therein and
Morgan Guaranty Trust Company of New York, as agent for such banks, as amended
to the Effective Date.
"EXISTING 364-DAY AGREEMENT" means the 364-Day Credit Agreement, dated
as of June 27, 1997, among the Borrower, the banks listed therein and Morgan
Guaranty Trust Company of New York, as agent for such banks, as amended to the
Effective Date.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Agent.
"FINAL MATURITY DATE" means the first anniversary of the Termination
Date or, if such day is not a Euro-Dollar Business Day, the next preceding
Euro-Dollar Business Day.
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<PAGE> 13
"FINANCING DOCUMENTS" means this Agreement, the Subsidiary Guarantees,
the Promissory Notes, the New Borrower Agreement and the Parent Guarantee.
"FIXED RATE LOANS" means CD Loans or Euro-Dollar Loans or Money Market
Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate
pursuant to Section 8.01(a)) or any combination of the foregoing.
"GROUP OF LOANS" means, at any time, a group of Loans consisting of (i)
all Committed Loans which are Base Rate Loans at such time, (ii) all Euro-Dollar
Loans having the same Interest Period at such time or (iii) all CD Loans having
the same Interest Period at such time, provided that, if a Committed Loan of any
particular Bank is converted to or made as a Base Rate Loan pursuant to Article
8, such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such holder against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"GUARANTOR" means the Parent Guarantor and any Subsidiary Guarantor.
"HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"INDEMNITEE" has the meaning set forth in Section 9.03(b).
"INTANGIBLE ASSETS" means, at any date, the amount (if any) which would
be stated under the heading "Costs in Excess of Net Assets of Acquired
Companies" or under any other heading relating to intangible assets separately
listed, in each case, on the face of a balance sheet of the Borrower and its
Consolidated Subsidiaries prepared on a consolidated basis as of such date.
"INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, the
period commencing on the date of borrowing specified in the applicable Notice of
Borrowing or on the date specified in an applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter (or such other
period of time as may at the time be mutually agreed by the Borrower and the
Banks), as the Borrower may elect in such notice; provided that:
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<PAGE> 14
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on
the next preceding Euro-Dollar Business Day; and
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Euro-Dollar Business Day of a calendar
month;
(2) with respect to each CD Loan, the period commencing on the date of
borrowing specified in the applicable Notice of Borrowing or on the date
specified in an applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter (or such other period of time as may at the time be
mutually agreed by the Borrower and the Banks), as the Borrower may elect in
such notice; provided that any Interest Period which would otherwise end on a
day which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on
the next preceding Euro-Dollar Business Day; and
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Euro-Dollar Business Day of a calendar
month; and
(4) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 30 days)
as the Borrower may elect in accordance with Section 2.03; provided that any
Interest Period which would otherwise end on a day which is not a Euro-Dollar
Business Day shall be extended to the next succeeding Euro-Dollar Business Day;
and
provided further that:
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<PAGE> 15
(x) any Interest Period applicable to any Loan which begins before the
Termination Date and would otherwise end after the Termination Date
shall end on the Termination Date; and
(y) any Interest Period applicable to any Loan which would otherwise
end after the Final Maturity Date shall end on the Final Maturity Date.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"LEVEL I STATUS" exists at any date if, at such date, the Borrower has
Debt Ratings at or above the level of A by S&P or A2 by Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the Borrower
has Debt Ratings at or above the level of A- by S&P or A3 by Moody's and (ii)
Level I Status does not exist at such date.
"LEVEL III STATUS" exists at any date if, at such date, (i) the
Borrower has Debt Ratings at the level of BBB+ by S&P or Baa1 by Moody's and
(ii) Level I Status and Level II Status do not exist at such date.
"LEVEL IV STATUS" exists at any date if, at such date, (i) the Borrower
has Debt Ratings at the level of BBB by S&P or Baa2 by Moody's and (ii) Level I
Status, Level II Status and Level III Status do not exist at such date.
"LEVEL V STATUS" exists at any date if, at such date, the Borrower has
Debt Ratings at the level of BBB- by S&P and Baa3 by Moody's.
"LEVEL VI STATUS" exists at any date if, at such date, (i) the Borrower
has a Debt Rating from neither Rating Agency or (ii) Level I Status, Level II
Status, Level III Status, Level IV Status and Level V Status do not exist at
such date.
"LIBOR AUCTION" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate pursuant
to Section 2.03.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Borrower or any Subsidiary shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement (other than an operating lease)
relating to such asset.
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<PAGE> 16
"LOAN" means a Domestic Loan or a Euro-Dollar Loan or a Money Market
Loan and "LOANS" means Domestic Loans or Euro-Dollar Loans or Money Market Loans
or any combination of the foregoing.
"LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section
2.07(c).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, consolidated financial position or consolidated results of operations
of the Borrower and its Consolidated Subsidiaries, considered as a whole, or
(ii) the ability of the Borrower and the Guarantors to perform their obligations
under the Financing Documents.
"MATERIAL DEBT" means Debt (other than (i) the Promissory Notes, (ii)
the Subsidiary Guarantees, (iii) any Guarantee by the Borrower of Debt of a
Subsidiary, (iv) any Guarantee by a Subsidiary of Debt of the Borrower or
another Subsidiary, (v) any Debt of the Borrower owed to a Wholly-Owned
Consolidated Subsidiary or (vi) any Debt of a Subsidiary owed to the Borrower or
a Wholly-Owned Consolidated Subsidiary) of the Borrower and/or one or more of
its Subsidiaries, arising in one or more related or unrelated transactions, in
an aggregate outstanding principal amount exceeding $50,000,000.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section
2.03(d).
"MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"MONEY MARKET BORROWING" has the meaning set forth in Section 1.03.
"MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided that any Bank may from time to time by notice to the
Borrower and the Agent designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to
a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.01(a)).
"MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
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"MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d).
"MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.03.
"MOODY'S" means Moody's Investors Service, Inc., or any successor to
such corporation's business of rating debt securities.
"MULTIEMPLOYER PLAN" means at any time a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA either (i) to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
(ii) has at any time within the preceding five plan years been maintained, or
contributed to, by any Person who was at such time a member of the ERISA Group
for employees of any Person who was at such time a member of the ERISA Group.
"NEW BORROWER AGREEMENT" means an agreement among Tyco US, Tyco
Luxembourg and the Agent for the benefit of the Banks, substantially in the form
of Exhibit L.
"NEW BORROWER DATE" has the meaning set forth in Section 3.04.
"NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined
in Section 2.02 or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section
2.16.
"OBLIGOR" means, at any time, the Borrower and each Guarantor at such
time.
"PARENT" means, with respect to any Bank, any Person controlling such
Bank.
"PARENT GUARANTOR" means Tyco International Ltd., a Bermuda
corporation, and its successors.
"PARENT GUARANTEE" means a Parent Guarantee Agreement between the
Parent Guarantor and the Agent for the benefit of the Banks, substantially in
the form of Exhibit J, as amended from time to time.
"PARTICIPANT" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED RECEIVABLES TRANSACTION" means any sale or sales of,
refinancing of and/or financing secured by, any accounts receivable of the
Borrower and/or any of its Subsidiaries (the "RECEIVABLES") pursuant to which
the Borrower and its Subsidiaries realize aggregate net
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<PAGE> 18
proceeds of not more than $500,000,000 at any one time outstanding, including,
without limitation, any revolving purchase(s) of Receivables where the maximum
aggregate uncollected purchase price (exclusive of any deferred purchase price)
for such Receivables at any time outstanding does not exceed $500,000,000.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PLAN" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"PRIME RATE" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"PROMISSORY NOTES" means promissory notes of the Borrower,
substantially in the form of Exhibit A hereto, evidencing the obligation of the
Borrower to repay the Loans, and "PROMISSORY NOTE" means any one of such
promissory notes issued hereunder.
"PROPERTY" means any interest of any kind in any property or assets,
whether real, mixed or personal and whether tangible or intangible.
"PROSPECTS" means, at any time, results of future operations which are
reasonably foreseeable based upon the facts and circumstances in existence at
such time.
"QUARTERLY PAYMENT DATES" means each March 31, June 30, September 30
and December 31.
"RATING AGENCY" means S&P or Moody's.
"REFERENCE BANKS" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "REFERENCE BANK" means any one
of such Reference Banks.
"REFINANCING" has the meaning set forth in Section 5.07 (and the term
"REFINANCED" has a correlative meaning).
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
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"RELATED AGREEMENT" means the Extendible 364-Day Credit Agreement dated
as of the date hereof among the Borrower, the banks from time to time parties
thereto and Morgan Guaranty Trust Company of New York, as agent for such banks,
as amended from time to time.
"REQUIRED BANKS" means at any time Banks having more than 60% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Promissory Notes evidencing more than 60% of the aggregate
unpaid principal amount of the Loans.
"REQUIRED SIGNIFICANT SUBSIDIARY" means any Significant Subsidiary as
defined in clause (A) of the definition of Significant Subsidiary; provided that
any Person which is a Significant Subsidiary as so defined shall nonetheless not
be a Required Significant Subsidiary if and for so long as (i) one or more
Required Significant Subsidiaries which are Subsidiary Guarantors are
Subsidiaries of such Person and (ii) such Person would not be a Significant
Subsidiary but for its ownership of such Subsidiary Guarantors.
"RESPONSIBLE OFFICER" means any of the following: the Chairman,
President, Vice President and Chief Financial Officer, Treasurer and Secretary
of the Borrower and, on and after the New Borrower Date, a Managing Director of
the Borrower.
"REVOLVING CREDIT LOAN" means a loan made or to be made by a Bank
pursuant to Section 2.01(a).
"SIGNIFICANT SUBSIDIARY" means, at any date, (A) any Consolidated
Subsidiary which, including its consolidated subsidiaries, meets any of the
following conditions:
(i) the investments in and advances to such
Consolidated Subsidiary by the Borrower and its other
Consolidated Subsidiaries exceed 15% of the total assets of
the Borrower and its Consolidated Subsidiaries, determined on
a consolidated basis as of the end of the most recently
completed fiscal year; or
(ii) the proportionate share attributable to such
Consolidated Subsidiary of the total assets of the Borrower
and its Consolidated Subsidiaries (after intercompany
eliminations) exceeds 15% of the total assets of the Borrower
and the Consolidated Subsidiaries, determined on a
consolidated basis as of the end of the most recently
completed fiscal year; or
(iii) the Borrower's and its Consolidated Subsidiaries'
equity in the income of such Consolidated Subsidiary from
continuing operations before income taxes, extraordinary items
and cumulative effect of a change in accounting principle
exceeds 15% of such income of the Borrower and its
Consolidated Subsidiaries, determined on a consolidated basis
for the most recently completed fiscal year; and
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<PAGE> 20
(B) any other Subsidiary which is a Subsidiary Guarantor.
"STATUS" means, at any date, whichever of Level I Status, Level II
Status, Level III Status, Level IV Status, Level V Status or Level VI Status
exists at such date.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor to its business of rating debt
securities.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; unless otherwise specified, Subsidiary means a Subsidiary of the
Borrower.
"SUBSIDIARY GUARANTEE" means a Guarantee entered into by a Subsidiary
substantially in the form of Exhibit H hereto.
"SUBSIDIARY GUARANTOR" means, at any time, a Subsidiary which at or
prior to such time shall have delivered to the Agent (i) a Subsidiary Guarantee
in substantially the form of Exhibit H, duly executed by such Subsidiary, which
Subsidiary Guarantee has not terminated in accordance with its terms, (ii) an
opinion of counsel for such Subsidiary (which counsel may be an employee of the
Borrower or such Subsidiary) reasonably satisfactory to the Agent with respect
to such Subsidiary Guarantee, substantially in the form of Exhibit I hereto and
covering such additional matters relating to such Subsidiary Guarantee as the
Required Banks may reasonably request and (iii) all documents the Agent may
reasonably request relating to the existence of such Subsidiary, the corporate
authority for and the validity of such Subsidiary Guarantee, and any other
matters reasonably determined by the Agent to be relevant thereto, all in form
and substance reasonably satisfactory to the Agent.
"TERMINATION DATE" means February 12, 1999, or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
"TERM LOAN" means a loan made or to be made by a Bank pursuant to
Section 2.01(b).
"TYCO LUXEMBOURG" means Tyco Group S.a.r.l., a Luxembourg company, and
its successors.
"TYCO US" means Tyco International (US) Inc., a Massachusetts
corporation, and its successors.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of
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<PAGE> 21
ERISA (excluding any accrued but unpaid contributions), all determined as of the
then most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or to any other Person under Title IV of ERISA.
"UNITED STATES" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means, with respect to any
Person, any Consolidated Subsidiary all of the shares of capital stock or other
ownership interests of which (except directors' qualifying shares and
investments by foreign nationals mandated by applicable law) are at the time
beneficially owned, directly or indirectly, by such Person; unless otherwise
specified, Wholly-Owned Consolidated Subsidiary means a Wholly-Owned
Consolidated Subsidiary of the Borrower.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the then most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if either (i) the Borrower notifies the Agent that
the Borrower wishes to eliminate the effect of any change in generally accepted
accounting principles on the operation of any covenant contained in Article 5 or
(ii) the Agent notifies the Borrower that the Required Banks wish to effect such
an elimination, then the Borrower's compliance with such covenant shall be
determined on the basis of generally accepted accounting principles in effect
immediately before the relevant change in generally accepted accounting
principles became effective, until either (A) such notice is withdrawn by the
party giving such notice or (B) such covenant is amended in a manner
satisfactory to the Borrower and the Required Banks to reflect such change in
generally accepted accounting principles.
SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article 2 on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2
under which participation therein is determined (i.e., a "Committed Borrowing"
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "Money Market Borrowing" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids in accordance therewith) or by reference to the maturity of Loans
comprising such Borrowing (e.g., a "TERM BORROWING" is a Borrowing comprised of
Term Loans).
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ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend. (a) Revolving Credit Loans. Each
Bank severally agrees, on the terms and conditions set forth in this Agreement,
to make loans to the Borrower pursuant to this Section 2.01 from time to time
prior to the Termination Date in amounts such that the aggregate principal
amount of Committed Loans by such Bank at any one time outstanding shall not
exceed the amount of its Commitment. Each Borrowing under this Section shall be
in an aggregate principal amount of $10,000,000 or any larger multiple of
$1,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 3.03(b)) and shall be made from the several
Banks ratably in proportion to their respective Commitments. Within the
foregoing limits, the Borrower may borrow under this Section, repay or, to the
extent permitted by Section 2.11, prepay Loans and reborrow at any time prior to
the Termination Date under this Section 2.01.
(b) Term Loans. Each Bank severally agrees, on the terms and conditions
set forth in this Agreement, to make a loan to the Borrower on the Termination
Date in an aggregate amount up to but not exceeding the amount of its
Commitment.
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give
the Agent notice (a "Notice of Committed Borrowing") not later than 11:00 A.M.
(New York City time) on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to bear interest
initially at the Base Rate, a CD Rate or a Euro-Dollar Rate, and
(d) in the case of a Fixed Rate Borrowing, the duration of the initial
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period.
SECTION 2.03. The Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Borrowings
pursuant to Section 2.01, the Borrower may, as set forth in this Section,
request the Banks, at any time prior to the Termination Date, to make offers to
make Money Market Loans to the Borrower. The Banks may, but shall have no
obligation to, make such offers and the Borrower may, but shall have no
obligation to, accept any such offers in the manner set forth in this Section.
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(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to the
Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later than
10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior
to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y)
the Domestic Business Day next preceding the date of Borrowing proposed therein,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Agent shall have mutually agreed and shall have
notified to the Banks not later than the date of the Money Market Quote Request
for the first LIBOR Auction or Absolute Rate Auction for which such change is to
be effective), specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day
in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may,
in its sole discretion, submit a Money Market Quote containing an offer or
offers to make Money Market Loans in response to any Invitation for Money Market
Quotes. Each Money Market Quote must comply with the requirements of this
subsection 2.03(d) and must be submitted to the Agent by telex or facsimile
transmission at its offices specified in or pursuant to Section 9.01 not later
than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day
prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y)
9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of
an Absolute Rate Auction (or, in either
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case, such other time or date as the Borrower and the Agent shall have mutually
agreed and shall have notified to the Banks not later than the date of the Money
Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for
which such change is to be effective); provided that Money Market Quotes
submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank
may be submitted, and may only be submitted, if the Agent or such affiliate
notifies the Borrower of the terms of the offer or offers contained therein not
later than (x) one hour prior to the deadline for the other Banks, in the case
of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks,
in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money
Market Quote so made shall be irrevocable except with the written consent of the
Agent given on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing and the Interest Period
therefor,
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be
greater than or less than the Commitment of the quoting Bank, (x)
must be $5,000,000 or a larger multiple of $1,000,000, (y) may not
exceed the principal amount of Money Market Loans for which offers
were requested and (z) may be subject to an aggregate limitation
as to the principal amount of Money Market Loans for which offers
being made by such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market
Margin") offered for each such Money Market Loan, expressed as a
percentage (specified to the nearest 1/10,000th of 1%) to be added
to or subtracted from the applicable London Interbank Offered
Rate,
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000th of 1%)
(the "Money Market Absolute Rate") offered for each such Money
Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection
2.03(d)(ii);
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(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection
2.03(d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the Borrower
of the terms (x) of any Money Market Quote submitted by a Bank that is in
accordance with subsection 2.03(d) and (y) of any Money Market Quote that
amends, modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the Agent unless such
subsequent Money Market Quote is submitted solely to correct a manifest error in
such former Money Market Quote. The Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins or
Money Market Absolute Rates, as the case may be, so offered and (C) if
applicable, limitations on the aggregate principal amount of Money Market Loans
for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction (or, in either case, such
other time or date as the Borrower and the Agent shall have mutually agreed and
shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection 2.03(e) (and the failure of the Borrower to give such notice by such
time shall constitute non-acceptance) and the Agent shall promptly notify each
affected Bank. In the case of acceptance, such notice (a "Notice of Money Market
Borrowing") shall specify the aggregate principal amount of offers for each
Interest Period that are accepted. The Borrower may, but shall not be obligated
to, accept any Money Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $10,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the basis of
ascending order of Money Market Margins or Money Market Absolute Rates,
as the case may be, in each case beginning with the lowest rate so
offered, and
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(iv) the Borrower may not accept any offer where the Agent has
advised the Borrower that such offer is described in subsection
2.03(d)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as possible (in multiples of
$1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determinations by the Agent of the amounts of
Money Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly
notify each Bank of the contents thereof and of such Bank's share (if any) of
such Borrowing and such Notice of Borrowing shall not thereafter be revocable by
the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall make available its share of
such Borrowing, in Federal or other funds immediately available in New York
City, to the Agent at its address referred to in Section 9.01. Unless the Agent
determines that any applicable condition specified in Article 3 has not been
satisfied or waived in accordance with Section 9.05, the Agent will make the
funds so received from the Banks available to the Borrower no later than 3:00
P.M. (New York City time) on such date, in Federal or other funds immediately
available in New York City, as directed by the Borrower.
(c) If any Bank makes a new Loan hereunder on any day on which the
Borrower is to repay all or any part of an outstanding Loan from such Bank, such
Bank shall apply the proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount being borrowed and
the amount being repaid shall be made available by such Bank to the Agent as
provided in subsection 2.04(b), 2.04(c), or remitted by the Borrower to the
Agent as provided in Section 2.12, as the case may be.
(d) If any Bank makes a Term Loan to the Borrower hereunder on a day on
which the Borrower is to repay all or any part of an outstanding Revolving
Credit Loan from such Bank, such Bank shall apply the proceeds of its Term Loan
to make such repayment and only an amount equal to the difference (if any)
between the amount being borrowed and the amount being repaid shall be made
available by such Bank to the Agent as provided in subsection 2.04(b), 2.04(c),
or remitted by the Borrower to the Agent as provided in Section 2.12, as the
case may be.
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(e) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing that such Bank will not make available to the Agent
such Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) and (c) of this Section 2.04 and the Agent may,
in reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and, if such Bank shall not have
paid such amount to the Agent within two Domestic Business Days of the Agent's
demand therefor, the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall
repay to the Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for purposes of this
Agreement.
(f) The failure of any Bank to make any Loan to be made by it on the
date specified therefor shall not relieve any other Bank of any obligation to
make a Loan on such date.
SECTION 2.05. Promissory Notes. (a) The Loans of each Bank shall be
evidenced by a single Promissory Note payable to the order of such Bank for the
account of its Applicable Lending Office in an amount equal to the aggregate
unpaid principal amount of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type be evidenced by a separate Promissory Note
in an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Promissory Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Promissory Note" of
such Bank shall be deemed to refer to and include any or all of such Promissory
Notes, as the context may require.
(c) Upon receipt of each Bank's Promissory Note pursuant to Section
3.01(b), the Agent shall forward such Promissory Note to such Bank. Each Bank
shall record the date, amount, type and maturity of each Loan made by it and the
date and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Promissory Note, endorse on the schedule forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of any Bank to
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Promissory Notes. Each Bank is hereby
irrevocably authorized by the Borrower so to endorse its Promissory Note and to
attach to and make a part of its Promissory Note a continuation of any such
schedule as and when required.
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SECTION 2.06. Maturity of Loans. (a) Each Revolving Credit Loan
shall mature, and the principal amount thereof shall be due and payable
(together with interest accrued thereon), on the Termination Date.
(b) Each Term Loan shall mature, and the principal amount thereof
shall be due and payable, together with accrued interest thereon, on the Final
Maturity Date.
(c) Each Money Market Loan included in any Money Market Borrowing
shall mature, and the principal amount thereof shall be due and payable
(together with interest accrued thereon), on the last day of the Interest Period
applicable to such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the Base
Rate for each such day. Such interest shall be payable at maturity, quarterly in
arrears on each Quarterly Payment Date prior to maturity and, with respect to
the principal amount of any Base Rate Loan converted to a CD Loan or a
Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal
of or interest on any Base Rate Loan shall bear interest, payable on demand, for
each day from and including the date payment thereof was due to but excluding
the date of actual payment, at a rate per annum equal to the sum of 2% plus the
rate otherwise applicable to Base Rate Loans for each such day.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the Applicable Margin for each such day
plus the applicable Adjusted CD Rate for such Interest Period; provided that if
any CD Loan shall, as a result of the further proviso to the definition of
Interest Period, have an Interest Period of less than 30 days, such CD Loan
shall bear interest during such Interest Period at the rate applicable to Base
Rate Loans during such period. Such interest shall be payable for each Interest
Period on the last day thereof and, if such Interest Period is longer than 90
days, at intervals of 90 days after the first day thereof. Any overdue principal
of or interest on any CD Loan shall bear interest, payable on demand, for each
day from and including the date payment thereof was due to but excluding the
date of actual payment, at a rate per annum equal to the sum of 2% plus the
higher of (i) the sum of the Applicable Margin for each such day plus the
Adjusted CD Rate applicable to such Loan on the day before such payment was due
and (ii) the rate applicable to Base Rate Loans for each such day.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
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DRP = Domestic Reserve Percentage
AR = Assessment Rate
- ----------
* The amount in brackets being rounded upward, if necessary, to the next higher
1/100 of 1%
The "CD BASE RATE" applicable to any Interest Period is the rate of
interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"DOMESTIC RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"ASSESSMENT RATE" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. Section 327.4(a) or any successor provision (a "BIF Member") to the
Federal Deposit Insurance Corporation (or any successor) for the Federal Deposit
Insurance Corporation's (or such successor's) insuring time deposits at offices
of such BIF Member in the United States. The Adjusted CD Rate shall be adjusted
automatically on and as of the effective date of any change in the Assessment
Rate.
(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin for each
such day plus the applicable London Interbank Offered Rate for such Interest
Period. Such interest shall be payable for each Interest Period on the last day
thereof and, if such Interest Period is longer than three months, at intervals
of three months after the first day thereof.
The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the
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<PAGE> 30
London interbank market at approximately 11:00 A.M. (London time) two
Euro-Dollar Business Days before the first day of such Interest Period in an
amount approximately equal to the principal amount of the Euro-Dollar Loan of
such Euro-Dollar Reference Bank to which such Interest Period is to apply and
for a period of time comparable to such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a rate
per annum equal to the sum of 2% plus the higher of (i) the sum of the
Applicable Margin for such day plus the London Interbank Offered Rate applicable
to such Loan on the day before such payment was due and (ii) the Applicable
Margin for such day plus the quotient obtained (rounded upward, if necessary, to
the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if
necessary, to the next higher 1/16 of 1%) of the respective rates per annum at
which one day (or, if such amount due remains unpaid more than three Euro-Dollar
Business Days, then for such other period of time not longer than six months as
the Agent may select) deposits in dollars in an amount approximately equal to
such overdue payment due to each of the Euro-Dollar Reference Banks are offered
to such Euro-Dollar Reference Bank in the London interbank market for the
applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar
Reserve Percentage (or, if the circumstances described in subsection (a) or (b)
of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the
rate applicable to Base Rate Loans for such day).
(e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall
bear interest on the outstanding principal amount thereof, for each day during
the Interest Period applicable thereto, at a rate per annum equal to the sum of
the London Interbank Offered Rate for such Interest Period (determined in
accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing
were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin
quoted by the Bank making such Loan in accordance with Section 2.03. Each Money
Market Absolute Rate Loan shall bear interest on the outstanding principal
amount thereof, for each day during the Interest Period applicable thereto, at a
rate per annum equal to the Money Market Absolute Rate quoted by the Bank making
such Loan in accordance with Section 2.03. Such interest shall be payable for
each Interest Period on the last day thereof and, if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof. Any overdue principal of or interest on any Money Market Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a rate
per annum equal to the sum of 2% plus the Base Rate for each such day.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the
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<PAGE> 31
Agent shall determine the relevant interest rate on the basis of the quotation
or quotations furnished by the remaining Reference Bank or Banks or, if none of
such quotations is available on a timely basis, the provisions of Section 8.01
shall apply.
(h) The "APPLICABLE MARGIN" with respect to any Euro-Dollar Loan or CD
Loan at any date is the applicable percentage amount set forth in the table
below based on the Status on such date:
<TABLE>
<CAPTION>
LEVEL
LEVEL I LEVEL II III LEVEL IV LEVEL V LEVEL VI
STATUS STATUS STATUS STATUS STATUS STATUS
------- -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Euro-Dollar Loans 0.145% 0.190% 0.225% 0.250% 0.325% 0.4375%
CD Loans 0.270% 0.315% 0.350% 0.375% 0.450% 0.5625%
</TABLE>
(i) For each day on which (i) the aggregate outstanding principal
amount of the Loans equals or exceeds one-third of the aggregate amount of the
Commitments or (ii) any Loans are outstanding after termination of the
Commitments (including, without limitation, pursuant to Section 2.01(b), the
Borrower shall pay additional interest on the aggregate principal amount of
Euro-Dollar Loans and CD Loans outstanding to it on such day at the applicable
rate per annum set forth in the table below based upon the Status on such day:
<TABLE>
<CAPTION>
LEVEL I STATUS LEVEL II STATUS LEVEL III STATUS LEVEL IV STATUS LEVEL V STATUS LEVEL VI STATUS
- -------------- --------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
0.05% 0.10% 0.10% 0.125% 0.125% 0.125%
</TABLE>
Accrued interest under this subsection (i) shall be payable quarterly in arrears
on each Quarterly Payment Date and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.08. Facility Fee. (a) The Borrower shall pay to the Agent for
the account of the Banks ratably a facility fee at the Facility Fee Rate. Such
facility fee shall accrue (i) from and including the date hereof to but
excluding the Termination Date (or earlier date of termination of the
Commitments in their entirety), on the daily aggregate amount of the Commitments
(whether used or unused) and (ii) from and including the Termination Date (or
earlier date of termination of the Commitments in their entirety) to but
excluding the date the Loans shall be repaid in their entirety, on the daily
aggregate outstanding principal amount of the Loans.
The "FACILITY FEE RATE" at any date is: (i) 0.055% if Level I Status
exists at such date, (ii) 0.060% if Level II Status exists at such date, (iii)
0.075% if Level III Status exists at such date, (iv) 0.100% if Level IV Status
exists at such date, (v) 0.125% if Level V Status exists at such date or (vi)
0.1875% if Level VI Status exists at such date.
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<PAGE> 32
(b) Accrued fees under this Section shall be payable quarterly in
arrears on each Quarterly Payment Date and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.09. Optional Termination or Reduction of Commitments. The
Borrower may, upon at least three Domestic Business Days' notice to the Agent,
(i) terminate the Commitments at any time, if no Loans are outstanding at such
time or (ii) ratably reduce from time to time by an aggregate amount of
$10,000,000 or any larger multiple thereof, the aggregate amount of the
Commitments in excess of the aggregate outstanding principal amount of the
Loans. Promptly after receiving a notice pursuant to this Section, the Agent
shall notify each Bank of the contents thereof.
SECTION 2.10. Mandatory Termination of Commitments. The Commitments
shall terminate on the Termination Date, and any Revolving Credit Loans then
outstanding (together with accrued interest thereon) shall be due and payable on
such date.
SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at
least one Domestic Business Day's notice to the Agent, prepay any Group of Base
Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days'
notice to the Agent, subject to Section 2.13, prepay any Group of CD Loans and
(iii) upon at least three Euro-Dollar Business Days' notice to the Agent,
subject to Section 2.13, prepay any Group of Euro-Dollar Loans, in whole at any
time, or from time to time in part in amounts aggregating $10,000,000 or any
larger multiple of $1,000,000, by paying the principal amount to be prepaid
together with accrued interest thereon to but not including the date of
prepayment. Each such optional prepayment shall be applied to prepay ratably the
Loans of the several Banks included in such Group of Loans (or such Money Market
Borrowing).
(b) Except as provided in Section 2.11(a)(i), the Borrower may not
prepay all or any portion of the principal amount of any Money Market Loan prior
to the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and once notice is so given to
the Banks, the Borrower's notice of prepayment shall not thereafter be revocable
by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and of fees
hereunder, not later than 2:00 P.M. (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in Section 9.01. The Agent will promptly distribute
to each Bank its ratable share of each such payment received by the Agent for
the respective accounts of the Banks. Whenever any payment of principal of, or
interest on, the Domestic Loans or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic
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<PAGE> 33
Business Day. Whenever any payment of principal of, or interest on, the
Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day,
the date for payment thereof shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case the date for payment thereof shall be the next
preceding Euro-Dollar Business Day. Whenever any payment of principal of, or
interest on, the Money Market Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Banks hereunder that the
Borrower will not make such payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrower shall not have so made such payment, each Bank shall
repay to the Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a different type of Loan (pursuant to Article 2, 6 or 8 (other than
Section 8.02)) on any day other than the last day of an Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.07(d), or if the Borrower fails to borrow, prepay, convert or continue
any Fixed Rate Loans after notice has been given to any Bank in accordance with
Section 2.04(a), 2.11(c) or 2.16 (other than as a result of default by such
Bank), the Borrower shall reimburse each Bank within 15 days after written
demand for any resulting loss or expense reasonably incurred by it (or by an
existing or prospective Participant in the related Loan) in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after any such payment or conversion or failure to borrow,
prepay, convert or continue; provided that such Bank shall have delivered to the
Borrower a certificate specifying in reasonable detail the calculation of, and
the reasons for, the amount of such loss or expense, which certificate shall be
conclusive in the absence of manifest error.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.15. Regulation D Compensation. Each Bank may require the
Borrower to pay, contemporaneously with each payment of interest on the
Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such
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<PAGE> 34
Bank up to but not exceeding the excess of (i) (A) the applicable London
Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve
Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank
wishing to require payment of such additional interest (x) shall so notify the
Borrower and the Agent, in which case such additional interest on the
Euro-Dollar Loans of such Bank shall be payable to such Bank at the place
indicated in such notice with respect to each Interest Period commencing at
least three Euro-Dollar Business Days after the giving of such notice, and (y)
shall notify the Borrower at least five Euro-Dollar Business Days prior to each
date on which interest is payable on the Euro-Dollar Loans of the amount then
due it under this Section.
"EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents).
SECTION 2.16. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue the
type of interest rate borne by each Group of Loans (subject to subsection
2.16(d) of this Section and the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may
elect to convert such Loans to CD Loans as of any Domestic Business Day
or to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period,
subject to Section 2.13 if any such conversion is effective on any day
other than the last day of an Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, subject to Section 2.13 if any such conversion is effective on
any day other than the last day of an Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on
the third Euro-Dollar Business Day before the conversion or continuation
selected in such notice is to be effective (unless the
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<PAGE> 35
relevant Loans are to be converted from Domestic Loans of one type to Domestic
Loans of the other type or are CD Loans to be continued as CD Loans for an
additional Interest Period, in which case such notice shall be delivered to the
Agent not later than 10:30 A.M. (New York City time) on the second Domestic
Business Day before such conversion or continuation is to be effective). A
Notice of Interest Rate Election may, if it so specifies, apply to only a
portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group and (ii) the portion to which such Notice applies, and the remaining
portion to which it does not apply, are each at least $10,000,000 (unless such
portion is comprised of Base Rate Loans). If no such notice is timely received
before the end of an Interest Period for any Group of CD Loans or Euro-Dollar
Loans, the Borrower shall be deemed to have elected that such Group of Loans be
converted to Base Rate Loans at the end of such Interest Period.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation
selected in such notice is to be effective, which shall comply with the
applicable clause of subsection 2.16(a) above;
(iii) if the Loans comprising such Group are to be converted,
the new type of Loans and, if the Loans resulting from such conversion
are to be CD Loans or Euro-Dollar Loans, the duration of the next
succeeding Interest Period applicable thereto; and
(iv) if such Loans are to be continued as CD Loans or
Euro-Dollar Loans for an additional Interest Period, the duration of
such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Promptly after receiving a Notice of Interest Rate Election from
the Borrower pursuant to subsection (a) above, the Agent shall notify each Bank
of the contents thereof and such notice shall not thereafter be revocable by the
Borrower.
(d) The Borrower shall not be entitled to elect to convert any
Committed Loans to, or continue any Committed Loans for an additional Interest
Period as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts
of any Group of CD Loans or Euro-Dollar Loans created or continued as a result
of such election would be less than $10,000,000 or (ii) a Default shall have
occurred and be continuing when the Borrower delivers notice of such election to
the Agent.
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<PAGE> 36
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness. This Agreement shall become effective on
the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section 9.05):
(a) receipt by the Agent of counterparts hereof signed by each of the
parties hereto (or, in the case of any party as to which an executed counterpart
shall not have been received, receipt by the Agent in form satisfactory to it of
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party);
(b) receipt by the Agent of a duly executed Promissory Note of Tyco US
for the account of each Bank dated on or before the Effective Date complying
with the provisions of Section 2.05;
(c) receipt by the Agent of the Parent Guarantee, duly executed by the
Parent Guarantor;
(d) receipt by the Agent from each Subsidiary Guarantor under the
Existing Agreements of (i) a Subsidiary Guarantee in substantially the form of
Exhibit H hereto, duly executed by such Subsidiary Guarantor, (ii) an opinion of
counsel for such Subsidiary Guarantor, reasonably satisfactory to the Agent,
with respect to such Subsidiary Guarantee, substantially in the form of Exhibit
I hereto and covering such additional matters relating to such Subsidiary
Guarantee as the Required Banks may reasonably request and (iii) all documents
the Agent may reasonably request relating to the existence of such Subsidiary
Guarantee, the corporate authority for and the validity of such Subsidiary
Guarantee, and any other matters reasonably determined by the Agent to be
relevant thereto, all in form and substance reasonably satisfactory to the
Agent;
(e) receipt by the Agent of an opinion of each of (i) the General
Counsel of the Borrower, substantially in the form of Exhibit E-1 hereto, (ii)
the General Counsel of the Borrower on behalf of the Parent Guarantor,
substantially in the form of Exhibit E-2 hereto and (iii) Appleby, Spurling &
Kempe, special Bermuda counsel for the Parent Guarantor, substantially in the
form of Exhibit K hereto;
(f) receipt by the Agent of an opinion of Davis Polk & Wardwell,
special counsel for the Agent, substantially in the form of Exhibit F hereto and
covering such additional matters relating to the transactions contemplated
hereby as the Required Banks may reasonably request;
(g) receipt by the Agent of all documents the Agent may reasonably
request relating to the existence of the Borrower and the Parent Guarantor, the
corporate authority for and the validity of this Agreement, the Parent Guarantee
and the Promissory Notes, and any other
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<PAGE> 37
matters reasonably determined by the Agent to be relevant hereto, all in form
and substance reasonably satisfactory to the Agent; and
(h) receipt by the Agent of evidence satisfactory to it that the
Acquisition shall be consummated in compliance with all applicable laws
substantially simultaneously with the effectiveness of this Agreement;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later than
March 28, 1998.
SECTION 3.02. Existing Agreements. (a) On the Effective Date, the
commitments under the Existing Agreements shall be reduced to an aggregate
amount of $950,000,000 by ratably reducing the commitments under the Existing
364-Day Agreement to an aggregate amount of $450,000,000, without further action
by any party thereto. The Agent will promptly notify each of the other parties
hereto and to the Existing Agreements of the effectiveness of this Agreement.
(b) If after giving effect to the reduction of the commitments under
the Existing 364-Day Agreement pursuant to subsection 3.02(a), the aggregate
principal amount of loans outstanding under the Existing 364-Day Agreement would
exceed the aggregate amount of the commitments thereunder, Tyco US shall on the
Effective Date prepay loans thereunder in accordance with the terms of such
Existing 364-Day Agreement to the extent necessary to eliminate such excess.
(c) On the Effective Date, without further action by any party to the
Existing Agreements,
(i) the definition of "Level V Status" in Section 1.01 of
each of the Existing Agreements shall be amended to read as set forth
in the definition of "Level V Status" in Section 1.01 of this
Agreement;
(ii) a new definition of "Level VI Status" shall be added to
Section 1.01 of each of the Existing Agreements to read as set forth in
the definition of "Level VI Status" in Section 1.01 of this Agreement;
(iii) Section 1.01 of each of the Existing Agreements shall be
amended by deleting the defined terms "Restricted Payment" and "Stock
Equivalents" in their entirety;
(iv) the table in Section 2.07(h) of the Existing 364-Day
Agreement shall be amended to read as set forth in the table in Section
2.07(h) of this Agreement;
(v) the table in Section 2.07(h) of the Existing Five-Year
Agreement shall be amended to read as set forth in the table in Section
2.07(h) of the Related Agreement;
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<PAGE> 38
(vi) Section 2.07(i) of each of the Existing Agreements
shall be amended to read as set forth in Section 2.07(i) of this
Agreement;
(vii) the second paragraph of Section 2.08(a) of the Existing
364-Day Agreement shall be amended to read as set forth in the second
paragraph of Section 2.08(a) of this Agreement;
(viii) the second paragraph of Section 2.08(a) of the Existing
Five-Year Agreement shall be amended to read as set forth in the second
paragraph of Section 2.08(a) of the Related Agreement;
(ix) clause (xii) of Section 5.07 of each of the Existing
Agreements shall be amended to read as set forth in clause (xii) of
Section 5.07 of this Agreement;
(x) Section 5.08 of each of the Existing Agreements shall
be amended to read as set forth in Section 5.08 of this Agreement;
(xi) Section 5.10 of each of the Existing Agreements shall
be amended by deleting the text of Section 5.10 in its entirety and
substituting therefor the words "Intentionally Omitted";
(xii) clause (i) of Section 5.11(k) of each of the Existing
Agreements shall be amended to read as set forth in clause (i) of
Section 5.10(k) of this Agreement;
(xiii) Section 1.01 of the Parent Guarantee (as defined in the
Existing Agreements) shall be amended by adding, in appropriate
alphabetical order, (A) a definition of "Consolidated Net Income" to
read as set forth in the definition of "Consolidated Net Income" in
Section 1.01 of the Parent Guarantee, (B) a definition of "Restricted
Payment" to read as set forth in the definition of "Restricted Payment"
in Section 1.01 of the Parent Guarantee and (C) a definition of "Stock
Equivalents" to read as set forth in the definition of "Stock
Equivalents" in Section 1.01 of the Parent Guarantee;
(xiv) subsections (a), (b) and (c) of Section 4.01 of the
Parent Guarantee (as defined in the Existing Agreements) shall be
amended to read, respectively, as set forth in subsections (a), (b) and
(c) of Section 4.01 of the Parent Guarantee;
(xv) the first sentence of Section 4.07 of the Parent
Guarantee (as defined in the Existing Agreements) shall be amended to
read as set forth in the first sentence of Section 4.07 of the Parent
Guarantee;
(xvi) clause (i) of Section 4.08(k) of the Parent Guarantee
(as defined in the Existing Agreements) shall be amended to read as set
forth in clause (i) of Section 4.08(k) of the Parent Guarantee;
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<PAGE> 39
(xvii) the proviso of Section 4.10 of the Parent Guarantee
(as defined in the Existing Agreements) shall be amended to read as set
forth in the proviso of Section 4.10 of the Parent Guarantee;
(xviii) a new Section 4.11 shall be added to Article 4 of the
Parent Guarantee (as defined in the Existing Agreements) to read as set
forth in Section 4.11 of the Parent Guarantee; and
(xix) Section 5.01(b) of the Parent Guarantee (as defined in
the Existing Agreements) shall be amended by replacing the reference to
"Section 4.07" with a reference to "Section 4.07 or 4.11."
(d) The Banks which are parties to the Existing Agreements, comprising
the "Required Banks" as defined therein, hereby (i) waive any requirement of
notice of reduction of the Commitments pursuant to Section 2.09 of the Existing
Agreements and of prepayment of Loans to the extent necessary to give effect to
the subsections (a) and (b) above, provided that any such prepayment of Loans
shall be subject to Section 2.13 of the Existing Agreements and (ii) agree to
the amendments specified in subsection 3.02(c).
SECTION 3.03. Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing is subject to the satisfaction (or waiver in
accordance with Section 9.05) of the following conditions:
(a) receipt by the Agent of a Notice of Borrowing as required by
Section 2.02 or 2.03, as the case may be;
(b) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the aggregate amount
of the Commitments;
(c) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the Borrower
and each Guarantor contained in the Financing Documents (except the
representations and warranties set forth in Sections 4.04(a) and 4.11, which are
made only as of the date of this Agreement) shall be true in all material
respects on and as of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in
subsections (b), (c) and (d) of this Section.
SECTION 3.04. New Borrower. Tyco US and Tyco Luxembourg may, upon not
less than three Domestic Business Days' notice to the Agent, elect that Tyco
Luxembourg shall become
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<PAGE> 40
the Borrower hereunder and that Tyco US shall cease to be the Borrower (the
effective date of such election being herein called the "NEW BORROWER DATE"),
provided that the effectiveness of such election shall be subject to
satisfaction of each of the following conditions:
(a) receipt by the Agent of evidence satisfactory to it that not less
than 75% of the publicly held and privately placed debt securities of Tyco US
outstanding at December 22, 1997 (exclusive of Debt under the Existing
Agreements) shall have been refinanced with the proceeds of debt securities
issued by Tyco Luxembourg;
(b) the fact that, both immediately before and after giving effect to
such election, the conditions to borrowing specified in Sections 3.03(c) and
3.03(d) shall have been met, and the Agent shall have received a certificate of
a Responsible Officer to such effect;
(c) the fact that, prior to or simultaneously with the effectiveness
of such election, all Loans to Tyco US hereunder and all loans to Tyco US under
the Existing Agreements shall have been repaid, together with accrued interest
thereon and all other amounts payable hereunder and under the Existing Credit
Agreements;
(d) receipt by the Agent of counterparts of the New Borrower Agreement
duly executed by each of the parties thereto (or, in the case of any party as to
which an executed counterpart shall not have been received, receipt by the Agent
in form satisfactory to it of telegraphic, telex or other written confirmation
from such party of execution of a counterpart hereof by such party);
(e) receipt by the Agent of a duly executed Promissory Note of Tyco
Luxembourg for the account of each Bank dated on or before the New Borrower Date
complying with the provisions of Section 2.05;
(f) receipt by the Agent from each Required Significant Subsidiary of
Tyco Luxembourg which is not then a Subsidiary Guarantor of (i) a Subsidiary
Guarantee in substantially the form of Exhibit H hereto, duly executed by such
Subsidiary Guarantor, (ii) an opinion of counsel for such Subsidiary Guarantor,
reasonably satisfactory to the Agent, with respect to such Subsidiary Guarantee,
substantially in the form of Exhibit I hereto and covering such additional
matters relating to such Subsidiary Guarantee as the Required Banks may
reasonably request and (iii) all documents the Agent may reasonably request
relating to the existence of such Subsidiary Guarantee, the corporate authority
for and the validity of such Subsidiary Guarantee, and any other matters
reasonably determined by the Agent to be relevant thereto, all in form and
substance reasonably satisfactory to the Agent;
(g) receipt by the Agent of an opinion of counsel for Tyco Luxembourg,
which counsel and which opinion shall be reasonably satisfactory to the Agent,
substantially to the effect of Exhibit M hereto and covering such additional
matters relating to the transactions contemplated hereby as the Required Banks
may reasonably request;
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(h) receipt by the Agent of all documents the Agent may reasonably
request relating to the existence of Tyco Luxembourg, the corporate authority
for and the validity of this Agreement and the Promissory Notes, and any other
matters reasonably determined by the Agent to be relevant hereto, all in form
and substance reasonably satisfactory to the Agent; and
(i) the fact that, if the Related Agreement is still in effect, Tyco
Luxembourg shall simultaneously become the "Borrower" thereunder.
On the New Borrower Date, subject to satisfaction of the conditions
specified in Section 3.03 and this Section 3.04, each of the Banks shall make a
Loan to Tyco Luxembourg in an amount equal to the aggregate principal amount of
Loans of such Bank then outstanding hereunder (or such other amount as Tyco
Luxembourg may specify in the applicable Notice of Borrowing), the proceeds of
which Loan will be substantially simultaneously applied, first, by Tyco
Luxembourg to fund the inter-company loan to Tyco US contemplated by the New
Borrower Agreement and, second, by Tyco US to repay all Loans outstanding to it
hereunder and, to the extent such Loan proceeds may be required to fund the
same, payment of accrued interest and other amounts then due hereunder and under
the Existing Agreements.
On the New Borrower Date, the commitments under the Existing Agreements
shall terminate without any further action by any party thereto. The Agent will
promptly notify each of the other parties hereto and to the Existing Agreements
of the New Borrower Date, and such notice shall be conclusive. The Banks which
are parties to the Existing Agreements, comprising the "Required Banks" as
defined therein, hereby waive any requirement of notice of termination of the
Commitments pursuant to Section 2.09 of the Existing Agreements and any
restriction on prepayment of loans thereunder to the extent necessary to give
effect to the subsection (c) above, provided that any such prepayment of Loans
shall be subject to Section 2.13 of the Existing Agreements. Promptly after the
New Borrower Date, each Bank shall return to Tyco US for cancellation the Note
of Tyco US previously delivered to such Bank hereunder.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the
Banks that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
corporation (in the case of Tyco US) or a company (in the case of Tyco
Luxembourg) duly incorporated and validly existing and (in the case of Tyco US)
in good standing under the laws of its jurisdiction of incorporation. The
Borrower has all corporate powers and all governmental licenses, authorizations,
consents and approvals (collectively, the "Consents") required to carry on its
business as now conducted, other than those powers and Consents, the failure of
which to be
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possessed or obtained could not, based upon the facts and circumstances in
existence at the time this representation and warranty is made or deemed made,
reasonably be expected to have a Material Adverse Effect.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement and the Promissory Notes: (a) are within the Borrower's corporate
powers; (b) have been duly authorized by all necessary corporate action on the
part of the Borrower; (c) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Borrower; and (d) do not contravene, or constitute a default by the Borrower
under, any provision of (i) applicable law or regulation, (ii) the
organizational documents of the Borrower, or (iii) any agreement or instrument
evidencing or governing Debt of the Borrower or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Borrower.
SECTION 4.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower and the Promissory Notes, when executed and
delivered in accordance with this Agreement, will constitute valid and binding
obligations of the Borrower.
SECTION 4.04. Financial Information.
(a) The consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as of June 30, 1997 and the related consolidated statements of
income, of shareholders' equity and of cash flows for the fiscal year then
ended, reported on by Coopers & Lybrand L.L.P., copies of which have been
delivered to each of the Banks, fairly present, in conformity with generally
accepted accounting principles, the consolidated financial position of the
Borrower and its Consolidated Subsidiaries as of such date and their
consolidated results of operations and cash flows for such fiscal year.
(b) Since June 30, 1997 there has been no material adverse change in
the business, financial position, results of operations or Prospects of the
Borrower and its Consolidated Subsidiaries, considered as a whole.
SECTION 4.05. Litigation. There is no action, suit or proceeding
pending against, or to the knowledge of the Borrower threatened against or
affecting, the Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could, based upon the facts
and circumstances in existence at the time this representation and warranty is
made or deemed made, reasonably be expected to have a Material Adverse Effect or
which in any manner draws into question the validity of the Financing Documents.
SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance, except
where the failure to so comply could not,
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based upon the facts and circumstances in existence at the time this
representation and warranty is made or deemed made, reasonably be expected to
have a Material Adverse Effect, with the presently applicable provisions of
ERISA and the Internal Revenue Code with respect to each Plan. No member of the
ERISA Group has (i) sought a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to
make any required contribution or payment to any Plan or Multiemployer Plan, or
made any amendment to any Plan, which has resulted in or could, based upon the
facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to result in the
imposition of a Lien or the posting of a bond or other security under ERISA or
the Internal Revenue Code or (iii) incurred any liability under Title IV of
ERISA (other than a liability to the PBGC for premiums under Section 4007 of
ERISA), which could, based upon the facts and circumstances existing at the time
this representation and warranty is made or deemed made, reasonably be expected
to have a Material Adverse Effect.
SECTION 4.07. Environmental Matters. In the ordinary course of its
business, the Borrower conducts an ongoing review of the effect of Environmental
Laws on the business, operations and properties of the Borrower and its
Subsidiaries, in the course of which it identifies and evaluates associated
liabilities and costs (including, without limitation, any capital or operating
expenditures required for clean-up or closure of properties presently or
previously owned, any capital or operating expenditures required to achieve or
maintain compliance with environmental protection standards imposed by law or as
a condition of any license, permit or contract, any related constraints on
operating activities, including any periodic or permanent shutdown of any
facility or reduction in the level of or change in the nature of operations
conducted thereat, any costs or liabilities in connection with off-site disposal
of wastes or Hazardous Substances, and any actual or potential liabilities to
third parties, including employees, and any related costs and expenses). On the
basis of this review, the Borrower has reasonably concluded that such associated
liabilities and costs, including the costs of compliance with Environmental
Laws, could not, based upon the facts and circumstances existing at the time
this representation and warranty is made or deemed made, reasonably be expected
to have a Material Adverse Effect.
SECTION 4.08. Taxes. The Borrower and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes shown on such
returns or pursuant to any assessment received by the Borrower or any
Subsidiary, except those assessments which are being contested in good faith by
appropriate proceedings. The charges, accruals and reserves on the books of the
Borrower and its Subsidiaries in respect of taxes or other governmental charges
are, in the opinion of the Borrower, adequate.
SECTION 4.09. Subsidiaries. Each of the Borrower's corporate
Consolidated Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, except
where the failure to be so incorporated, existing or in good standing could not,
based upon the facts and circumstances existing at the time this representation
and warranty is made or deemed made, reasonably be expected to have a Material
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Adverse Effect. Each such Subsidiary has all corporate powers and all Consents
required to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 4.10. Not an Investment Company. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 4.11. Full Disclosure. The factual information, reports,
financial statements, exhibits and schedules concerning the Borrower and its
Subsidiaries furnished by or on behalf of the Borrower and contained in the
Confidential Information Memorandum dated January 1998 furnished by J.P. Morgan
Securities Inc. to a limited number of banks which were being invited to
participate in this Agreement, do not contain any untrue statement of material
fact or omit to state any material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
ARTICLE 5
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Promissory Note remains unpaid:
SECTION 5.01. Information. The Borrower will deliver to each of the
Banks:
(a) as soon as available and in any event within 120 days after the end
of each fiscal year of the Borrower, for so long as Tyco US is the Borrower,
consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as
of the end of such fiscal year and the related consolidated statements of
income, of shareholders' equity and of cash flows for such fiscal year, setting
forth, in each case in comparative form, the figures for the previous fiscal
year, all reported on by Coopers & Lybrand L.L.P. or other independent public
accountants of nationally recognized standing in a manner complying with the
applicable rules and regulations promulgated by the Securities and Exchange
Commission;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each fiscal year of the Borrower, for so
long as Tyco US is the Borrower, consolidated balance sheets of the Borrower and
its Consolidated Subsidiaries as of the end of such quarter and the related
consolidated statements of income for such quarter and the related consolidated
statements of income and consolidated statements of cash flows for the portion
of the Borrower's fiscal year ended at the end of such quarter, setting forth in
the case of such statements of income and of cash flows in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Borrower's previous fiscal year, all certified (subject
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to normal year-end adjustments) as to fairness of presentation, generally
accepted accounting principles and consistency on behalf of the Borrower by the
chief financial officer, the chief accounting officer or the treasurer of the
Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) above, for so long as Tyco US
is the Borrower, and simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) of Section 4.01 of the Parent
Guarantee, for so long as Tyco Luxembourg is the Borrower, a certificate on
behalf of the Borrower signed by the chief financial officer, the chief
accounting officer or the treasurer of the Borrower (i) setting forth in
reasonable detail the calculations required to establish whether the Borrower
was in compliance with the requirements of Sections 5.08 to 5.10, inclusive, on
the date of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any Default then exists, setting
forth, in reasonable detail, the nature thereof and the action which the
Borrower is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial
statements referred to in subsection (a) above, a statement of the firm of
independent public accountants which reported on such financial statements
stating that, in making the audit necessary for the certification of such
financial statements, such firm of accountants has obtained no knowledge of any
Default, or if it has obtained knowledge of such Default, specifying the nature
and period of existence thereof; provided such firm of accountants shall not be
liable to any Person by reason of such firm's failure to obtain knowledge of any
Default which would not be disclosed in the course of an audit conducted in
accordance with generally accepted accounting principles;
(e) within five Domestic Business Days after any Responsible Officer
obtains knowledge of any Default, if such Default is then continuing, a
certificate on behalf of the Borrower signed by the chief financial officer, the
chief accounting officer or the treasurer of the Borrower setting forth, in
reasonable detail, the nature thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
(f) promptly following the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all final registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q and 8-K (or
their equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(h) within 30 days after any Responsible Officer of the Borrower
obtains knowledge that any member of the ERISA Group (i) gave or was required to
give notice to the PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds for a termination
of such Plan under Title IV of ERISA, or knew that the plan administrator of any
Plan has given or is required to give notice of any such reportable event, a
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copy of the notice of such reportable event given or required to be given to the
PBGC; (ii) received notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such notice; (iii) received notice
from the PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than under Sections 4007, 4071 and 4302 of ERISA) in respect
of, or appoint a trustee to administer any Plan, a copy of such notice; (iv)
applied for a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code, a copy of such application; (v) gave notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
other information filed with the PBGC; (vi) gave notice of withdrawal from any
Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) failed
to make any required payment or contribution to any Plan or Multiemployer Plan
or made any amendment to any Plan which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security, a certificate
on behalf of the Borrower, signed by the chief financial officer, the chief
accounting officer or the treasurer of the Borrower setting forth, to the best
of its knowledge, in reasonable detail, the nature of such occurrence and
action, if any, which the Borrower or applicable member of the ERISA Group is
required or proposes to take;
(i) promptly following, and in any event within 10 days of, any change
in a Debt Rating by any Rating Agency, notice thereof;
(j) promptly upon any Responsible Officer of the Borrower obtaining
knowledge of the commencement of any action, suit or proceeding before any
court, arbitrator or other governmental body against the Borrower or any of its
Subsidiaries that, if adversely determined, could reasonably be expected to have
a Material Adverse Effect, a certificate on behalf of the Borrower specifying
the nature of such action, suit or proceeding and what action the Borrower is
taking or proposes to take with respect thereto; and
(k) from time to time, upon reasonable notice, such additional
information regarding the financial position or business of the Borrower and its
Subsidiaries as the Agent, at the request of any Bank, may reasonably request.
SECTION 5.02. Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where (i) any such failure to so pay
or discharge could not, based upon the facts and circumstances in existence at
the time, reasonably be expected to have a Material Adverse Effect or (ii) such
liabilities or obligations may be contested in good faith by appropriate
proceedings. The Borrower will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of such liabilities or obligations.
SECTION 5.03. Maintenance of Property; Insurance. (a) Except as
permitted by Section 5.04 or 5.11, the Borrower will keep, and will cause each
Subsidiary to keep, all property necessary in its business in good working order
and condition, ordinary wear and tear excepted,
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unless the failure to so keep could not, based upon the facts and circumstances
existing at the time, reasonably be expected to have a Material Adverse Effect.
(b) The Borrower will maintain, and will cause each Subsidiary to
maintain, with financially sound and reputable insurers, insurance with respect
to its assets and business against such casualties and contingencies, of such
types (including, without limitation, loss or damage, product liability,
business interruption, larceny, embezzlement or other criminal misappropriation)
and in such amounts as is customary in the case of similarly situated
corporations of established reputations engaged in the same or a similar
business, unless the failure to maintain such insurance could not, based upon
the facts and circumstances existing at the time, reasonably be expected to have
a Material Adverse Effect.
SECTION 5.04. Conduct of Business and Maintenance of Existence. The
Borrower (a) will continue, and will cause each Subsidiary to continue, to
engage in business of the same general type as now conducted by the Borrower and
its Subsidiaries and reasonably related extensions thereof, and (b) will
preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect (x) their
respective corporate existence and (y) their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business, unless in
the case of either the failure of the Borrower to comply with subclause (b) (y)
of this Section 5.04 or the failure of a Subsidiary to comply with clauses (a)
or (b) of this Section 5.04, such failure could not, based upon the facts and
circumstances existing at the time, reasonably be expected to have a Material
Adverse Effect; provided that nothing in this Section 5.04 shall prohibit (i)
the merger or consolidation of a Subsidiary with or into the Borrower or a
Wholly-Owned Consolidated Subsidiary, (ii) the sale, lease, transfer, assignment
or other disposition by a Subsidiary of all or any part of its assets to the
Borrower or to a Wholly-Owned Consolidated Subsidiary, (iii) the merger or
consolidation of a Subsidiary with or into a Person other than the Borrower or a
Wholly-Owned Consolidated Subsidiary, if the Person surviving such consolidation
or merger is a Subsidiary and immediately after giving effect thereto, no
Default shall have occurred and be continuing, (iv) the sale, lease, transfer,
assignment or other disposition by a Subsidiary of all or any part of its assets
to a Person other than the Borrower or a Wholly-Owned Consolidated Subsidiary if
the Person to which such sale, lease, transfer, assignment or other disposition
is made is a Subsidiary and immediately after giving effect thereto, no Default
shall have occurred and be continuing, (v) any transaction permitted pursuant to
Section 5.11, (vi) the termination of the corporate existence of any Subsidiary
if the Borrower in good faith determines that such termination is in the best
interest of the Borrower and is not materially disadvantageous to the Banks and
(vii) the sale, lease, transfer, assignment or other disposition (including any
such transaction by way of merger or consolidation) by the Borrower of all or
any part of its assets to a Person other than the Borrower or a Subsidiary if
(A) immediately after giving effect thereto, no Default shall have occurred and
be continuing and (B) the Borrower is a Subsidiary of such Person or the
Borrower and such Person are Subsidiaries of the same Person.
SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules,
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regulations, and requirements of governmental authorities (including, without
limitation, Environmental Laws and ERISA and the rules and regulations
thereunder) except where (a) noncompliance therewith could not, based upon the
facts and circumstances in existence at the time, reasonably be expected to have
a Material Adverse Effect or (b) the necessity of compliance therewith is
contested in good faith by appropriate proceedings.
SECTION 5.06. Inspection of Property, Books and Records;
Confidentiality. (a) The Borrower will keep, and will cause each Subsidiary to
keep, proper books of record and account in which true and correct entries shall
be made of its business transactions and activities so that financial statements
that fairly present its business transactions and activities can be properly
prepared in accordance with generally accepted accounting principles.
(b) The Borrower will permit, and will cause each Subsidiary to permit,
representatives of any Bank at such Bank's expense to visit and inspect any of
their respective properties, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs, finances
and accounts with their respective officers, employees and independent public
accountants, all upon reasonable notice to the Borrower, at such reasonable
times and as often as may reasonably be requested by any Bank.
(c) Each Bank and the Agent shall, by its receipt of Confidential
Information (as defined below) pursuant to or in connection with this Agreement
or its exercise of any of its rights hereunder, be deemed to have agreed (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to (i) keep such information confidential, (ii) (except as
permitted by clause (iii) of this Section 5.06(c)) not disclose such information
to any Person other than an officer, director, employee, legal counsel,
independent auditor or authorized agent or advisor of the Agent or such Bank
needing to know such information (it being understood that any such officer,
director, employee, legal counsel, independent auditor or authorized agent or
advisor shall be informed by the Agent or such Bank of the confidential nature
of such information), (iii) not disclose such information to any Assignee or
Participant (or prospective Assignee or Participant), unless such Assignee or
Participant (or prospective Assignee or Participant) shall agree in writing to
be bound by the provisions of this Section 5.06(c) and (iv) not use any such
information except for purposes relating to this Agreement or the Notes. The
term "Confidential Information" shall mean non-public information furnished by
or on behalf of the Borrower or any of its Subsidiaries to the Agent, any Bank
or other Person exercising rights hereunder or required to be bound hereby
(collectively "Recipients"), but shall not include any such information which
(1) has become or hereafter becomes available to the public other than as a
result of a disclosure by a Recipient, or (2) has become or hereafter becomes
available to a Recipient, on a non-confidential basis, from a source other than
the Borrower or any of its Subsidiaries (or any of their respective
representatives or agents) or any Recipient, which source, to the knowledge of
the Recipient, is not prohibited from disclosing such information by a
confidentiality agreement with, or other legal or fiduciary obligation to, the
Borrower or its Subsidiaries.
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The restrictions set forth in the immediately preceding paragraph shall
not prevent the disclosure by a Recipient of any such information:
(A) with the prior written consent of the
Borrower,
(B) at the request of a bank regulatory agency
or in connection with an examination by bank examiners, or
(C) upon order of any court or administrative
agency of competent jurisdiction, to the extent required by
such order and not effectively stayed on appeal or otherwise,
or as otherwise required by law; provided that in the case of
any intended disclosure under this clause (C), the Recipient
shall (unless otherwise required by applicable law) give the
Borrower not less than five Domestic Business Days prior
notice (or such shorter period as may, in the good faith
discretion of the Recipient, be reasonable under the
circumstances or may be required by any court or agency under
the circumstances), specifying the Confidential Information
involved and stating such Recipient's intention to disclose
such Confidential Information (including the manner and extent
of such disclosure) in order to allow the Borrower an
opportunity to seek an appropriate protective order.
Each Recipient shall agree that, in addition to all other remedies
available, the Borrower shall be entitled to specific performance and injunctive
and other equitable relief as a remedy for any breach of this Section 5.06(c) by
such Recipient.
SECTION 5.07. Limitation on Restrictions on Subsidiary Dividends and
Other Distributions. The Borrower will not, and will not permit any Subsidiary
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Subsidiary
to (a) pay dividends or make any other distributions on its capital stock or any
other interest or participation in its profits, owned by the Borrower or any
Subsidiary, or pay any Debt owed to the Borrower or any Subsidiary, (b) make
loans or advances to the Borrower or any Subsidiary or (c) transfer any of its
properties or assets to the Borrower or any Subsidiary, except for such
encumbrances or restrictions existing under or by reason of
(i) applicable law, agreements with foreign governments
with respect to assets located in their jurisdiction, or condemnation
or eminent domain proceedings,
(ii) any of the Financing Documents,
(iii) (A) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Borrower
or a Subsidiary, or (B) customary restrictions imposed on the transfer
of copyrighted or patented materials or provisions in agreements that
restrict the assignment of such agreements or any rights thereunder,
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(iv) provisions contained in the instruments evidencing or
governing Debt or other obligations or agreements, in each case
existing on the Effective Date,
(v) provisions contained in documents evidencing or
governing any Permitted Receivables Transaction,
(vi) provisions contained in instruments evidencing or
governing Debt or other obligations or agreements of any Person, in
each case, at the time such Person (A) shall be merged or consolidated
with or into the Borrower or any Subsidiary, (B) shall sell, transfer,
assign, lease or otherwise dispose of all or substantially all of such
Person's assets to the Borrower or a Subsidiary, or (C) otherwise
becomes a Subsidiary, provided that in the case of clause (A), (B) or
(C), such Debt, obligation or agreement was not incurred or entered
into, or any such provisions adopted, in contemplation of such
transaction,
(vii) provisions contained in instruments amending,
restating, supplementing, extending, renewing, refunding, refinancing,
replacing or otherwise modifying, in whole or in part (collectively,
"Refinancing"), instruments referred to in clauses (ii), (iv) and (vi)
of this Section 5.07, so long as such provisions are, in the good faith
determination of the Borrower's board of directors, not materially more
restrictive than those contained in the respective instruments so
Refinanced,
(viii) provisions contained in any instrument evidencing or
governing Debt or other obligations of a Subsidiary Guarantor,
(ix) any encumbrances and restrictions with respect to a
Subsidiary imposed in connection with an agreement which has been
entered into for the sale or disposition of such Subsidiary or its
assets, provided such sale or disposition otherwise complies with this
Agreement,
(x) the subordination (pursuant to its terms) in right
and priority of payment of any Debt owed by any Subsidiary (the
"Indebted Subsidiary") to the Borrower or any other Subsidiary, to any
other Debt of such Indebted Subsidiary, provided (A) such Debt is
permitted under this Agreement and (B) the Borrower's board of
directors has determined, in good faith, at the time of the creation of
such encumbrance or restriction, that such encumbrance or restriction
could not, based upon the facts and circumstances in existence at the
time, reasonably be expected to have a Material Adverse Effect,
(xi) provisions governing preferred stock issued by a
Subsidiary, provided that such preferred stock is permitted under
Section 5.08, and
(xii) provisions contained in debt instruments obligations
or other agreements of any Subsidiary which are not otherwise permitted
pursuant to clauses (i) through (xi) of
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this Section 5.07, provided that the aggregate investment of the
Borrower in all such Subsidiaries (determined in accordance with
generally accepted accounting principles) shall at no time exceed the
greater of (a) $300,000,000 or (b) 10% of Consolidated Tangible Net
Worth.
The provisions of this Section 5.07 shall not prohibit (x) Liens not prohibited
by Section 5.10 or (y) restrictions on the sale or other disposition of any
property securing Debt of any Subsidiary, provided such Debt is otherwise
permitted by this Agreement.
SECTION 5.08. Debt. Consolidated Debt will at no time exceed (x) prior
to March 31, 1999, 65% and (y) on and after March 31, 1999, 52.5% of
Consolidated Total Capitalization. The total Debt of all Consolidated
Subsidiaries (excluding (i) Debt of a Consolidated Subsidiary to the Borrower or
to a Wholly-Owned Consolidated Subsidiary, (ii) Debt of a Subsidiary Guarantor
and (iii) Debt of any Person (a) existing at the time such Person becomes a
Subsidiary or merges into a Subsidiary and (b) not created in contemplation of
such event, but only for a period ending 180 days after the date of such event)
will at no time exceed $400,000,000 in aggregate outstanding principal amount.
For purposes of this Section any preferred stock of a Consolidated Subsidiary
held by a Person other than the Borrower or a Wholly-Owned Consolidated
Subsidiary shall be included, at the higher of its voluntary or involuntary
liquidation value, in "Consolidated Debt" and in the "Debt" of such Consolidated
Subsidiary.
SECTION 5.09. Fixed Charge Coverage. The ratio of Consolidated EBIT to
Consolidated Interest Expense will not, for any period of four consecutive
fiscal quarters, be less than 2.5 to 1.
SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary
will create, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it, except:
(a) any Lien existing on any asset on the Effective Date securing
Debt outstanding on the Effective Date;
(b) any Lien existing on any asset of, or capital stock of, or
other ownership interest in, any Person (such capital stock and other ownership
interests are collectively referred to herein as "Stock") at the time such
Person becomes a Subsidiary, which Lien was not created in contemplation of such
event;
(c) any Lien on any asset securing the payment of all or part of
the purchase price of such asset upon the acquisition thereof by the Borrower or
a Subsidiary or securing Debt (including any obligation as lessee incurred under
a capital lease) incurred or assumed by the Borrower or a Subsidiary prior to,
at the time of or within one year after such acquisition (or in the case of real
property, the completion of construction (including any improvements on an
existing property) or the commencement of full operation of such asset or
property, whichever is later), which Debt is incurred or assumed for the purpose
of financing all or part of the cost of acquiring such asset or, in the case of
real property, construction or improvements thereon; provided, that in the case
of any such acquisition, construction or improvement, the Lien shall
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not apply to any asset theretofore owned by the Borrower or a Subsidiary, other
than assets so acquired, constructed or improved;
(d) any Lien existing on any asset or Stock of any Person at the
time such Person is merged or consolidated with or into the Borrower or a
Subsidiary which Lien was not created in contemplation of such event;
(e) any Lien existing on any asset or Stock of any Person at the
time of acquisition thereof by the Borrower or a Subsidiary, which Lien was not
created in contemplation of such acquisition;
(f) any Lien arising out of the Refinancing of any Debt secured by
any Lien permitted by any of the subsections (a) through (e) of this Section
5.10, provided the principal amount of Debt is not increased and is not secured
by any additional assets, except as provided in the last sentence of this
Section 5.10;
(g) any Lien to secure Debt of a Subsidiary to the Borrower or to
a Wholly-Owned Consolidated Subsidiary;
(h) any Lien created pursuant to a Permitted Receivables
Transaction;
(i) any Lien in favor of the United States or any other country
(or any department, agency, instrumentality or political subdivision of the
United States or any other country) securing obligations arising in connection
with partial, progress, advance or other payments pursuant to any contract,
statute, rule or regulation or securing obligations incurred for the purpose of
financing all or any part of the purchase price (including the cost of
installation thereof or, in the case of real property, the cost of construction
or improvement or installation of personal property thereon) of the asset
subject to such Lien (including, but not limited to, any Lien incurred in
connection with pollution control, industrial revenue or similar financings);
(j) Liens arising in the ordinary course of its business which (i)
do not secure Debt, (ii) do not secure any single obligation in an amount
exceeding $50,000,000 and (iii) do not in the aggregate materially detract from
the value of its assets or materially impair the use thereof in the operation of
its business; and
(k) Liens not otherwise permitted by the foregoing clauses (a)
through (j) of this Section 5.10 securing Debt (without duplication) in an
aggregate principal amount at any time outstanding not to exceed an amount equal
to the greater of (i) $300,000,000 or (ii) 10% of Consolidated Tangible Net
Worth.
It is understood that any Lien permitted to exist on any asset pursuant to the
foregoing provisions of this Section 5.10 may attach to the proceeds of such
asset and, with respect to Liens permitted pursuant to subsections (a), (b),
(d), (e), (f) (but only with respect to the Refinancing of a Debt secured by a
Lien permitted pursuant to subsections (a), (b), (d) or (e)) or (g) of this
Section 5.10,
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may attach to an asset acquired in the ordinary course of business as a
replacement of such former asset.
SECTION 5.11. Consolidations, Mergers and Sales of Assets. (a) The
Borrower will not (i) consolidate or merge with or into any other Person or (ii)
sell, lease or otherwise transfer all or substantially all of its assets to any
other Person, unless
(A) the Borrower or a Subsidiary or (in the case
of Tyco US) a Domestic Parent is the surviving corporation;
(B) the Person (if other than the Borrower)
formed by such consolidation or into which the Borrower is
merged, or the Person which acquires by sale or other
transfer, or which leases, all or substantially all of the
assets of the Borrower (any such Person, the "Successor"),
shall be organized and existing under the laws of (x) in the
case of Tyco US, the United States, any state thereof or the
District of Columbia and (y) in the case of Tyco Luxembourg,
Luxembourg, and shall expressly assume, in a writing executed
and delivered to the Agent for delivery to each of the Banks,
in form reasonably satisfactory to the Agent, the due and
punctual payment of the principal of and interest on the
Promissory Notes and the performance of the other obligations
under this Agreement and the Promissory Notes on the part of
the Borrower to be performed or observed, as fully as if such
Successor were originally named as the Borrower in this
Agreement;
(C) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing;
and
(D) the Borrower has delivered to the Agent a
certificate on behalf of the Borrower signed by a Responsible
Officer and an opinion of counsel (which counsel may be an
employee of the Borrower), each stating that all conditions
provided in this Section 5.11 relating to such transaction
have been satisfied.
The foregoing provisions of this Section 5.11 shall not restrict the
merger or consolidation of any Subsidiary with and into the Borrower.
Upon the satisfaction (or waiver in accordance with Section 9.05) of
the conditions set forth in this Section 5.11, the Successor shall succeed, and
may exercise every right and power of, the Borrower under this Agreement and the
Promissory Notes with the same effect as if the Successor had been originally
named as the Borrower herein and in the Promissory Notes, and the Borrower shall
be relieved of its obligations under this Agreement and the Promissory Notes.
(b) The Borrower will not, and will not permit any Subsidiary to,
sell, lease or otherwise transfer, in any transaction or series of related
transactions, to any Person (other than the Borrower, a Subsidiary, a Person of
which the Borrower is a Subsidiary or a Subsidiary of such a Person) any
Property (including, without limitation, the stock of any Subsidiary) having a
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net book value in excess of 15% of Consolidated Assets determined as of the end
of the fiscal quarter of the Borrower most recently ended at the time of such
sale or other transaction, or Property (including without limitation, stock of a
Subsidiary) which contributed in excess of 15% of Consolidated EBIT for the
fiscal year of the Borrower most recently ended at the time of such sale or
other transaction.
SECTION 5.12. Use of Proceeds. The proceeds of the Loans made under
this Agreement will be used by the Borrower for its general corporate purposes,
including, without limitation, capital expenditures and (subject to the
following sentence) acquisitions. None of such proceeds will be used, directly
or indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying any "margin stock" within the meaning of Regulation U.
SECTION 5.13. Transactions with Affiliates. The Borrower will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate (collectively, "AFFILIATE TRANSACTIONS"); provided, however, that the
foregoing provisions of this Section 5.13 shall not prohibit the Borrower or any
of its Subsidiaries from: (a) making sales to or purchases from any Affiliate
and, in connection therewith, extending credit or making payments, or from
making payments for services rendered by any Affiliate, if such sales or
purchases are made or such services are rendered in the ordinary course of
business and on terms and conditions at least as favorable to the Borrower or
such Subsidiary as the terms and conditions which the Borrower would reasonably
expect to be obtained in a similar transaction with a Person which is not an
Affiliate at such time, (b) making payments of principal, interest and premium
on any Debt of the Borrower or such Subsidiary held by an Affiliate if the terms
of such Debt are at least as favorable to the Borrower or such Subsidiary as the
terms which the Borrower would reasonably expect to have been obtained at the
time of the creation of such Debt from a lender which was not an Affiliate, (c)
participating in, or effecting any transaction in connection with, any joint
enterprise or other joint arrangement with any Affiliate if the Borrower or such
Subsidiary participates in the ordinary course of its business and on a basis no
less advantageous than the basis on which such Affiliate participates, (d)
paying or granting reasonable compensation and benefits to any director,
officer, employee or agent of the Borrower or any Subsidiary, (e) paying
reasonable legal fees and expenses to a law firm of which an Affiliate is a
member or (f) engaging in any Affiliate Transaction not otherwise addressed in
subsections (a) - (e) of this Section 5.13, the consummation of which could not
reasonably be expected to have a Material Adverse Effect.
SECTION 5.14. Additional Subsidiary Guarantors. If, subsequent to the
New Borrower Date, any Person shall become a Required Significant Subsidiary of
the Borrower, the Borrower shall cause such Person to become a Subsidiary
Guarantor within 30 days after such Person became a Significant Subsidiary of
the Borrower.
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ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults. If one or more of the following
events ("EVENTS OF DEFAULT") shall have occurred and be continuing and shall not
have been waived in accordance with Section 9.05:
(a) the Borrower shall fail to pay when due any principal of any
Loan, or shall fail to pay within three Domestic Business Days of the due date
thereof any interest on any Loan or any fees payable hereunder;
(b) the Borrower shall fail to observe or perform any covenant
contained in Section 5.08, 5.09 or 5.14;
(c) the Borrower shall fail to observe or perform any covenant
contained in Section 5.07 or Sections 5.10 to 5.13, inclusive, and such failure
shall not be remedied within five days after any Responsible Officer obtains
actual knowledge thereof;
(d) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a),
(b) or (c) of this Section 6.01) for 10 days after notice thereof has been given
to the Borrower by the Agent at the request of any Bank;
(e) any representation, warranty, certification or statement made
in writing by the Borrower or any Guarantor in the Financing Documents or in any
certificate, financial statement or other document required to be delivered to
the Agent or any of the Banks pursuant to the Financing Documents shall prove to
have been incorrect in any material respect when made (or deemed made);
(f) there shall occur any Guarantor Event of Default (as defined
in the Parent Guarantee);
(g) the Borrower or any Subsidiary shall fail to make any payment
in respect of any Material Debt when due (after giving effect to any applicable
grace period);
(h) any event or condition shall occur that results in the
acceleration of the maturity of any Material Debt or that entitles the holder or
holders of any Material Debt or any Person acting on behalf of such holder or
holders to accelerate the maturity thereof;
(i) the Borrower or any Significant Subsidiary shall (i) commence
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or substantially all of its property, or (ii) consent to any such
relief or to the appointment of or taking possession by any such official in an
involuntary case or other similar proceeding
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commenced against it, or (iii) make a general assignment for the benefit of
creditors, or (iv) fail generally to pay its debts as they become due, or (v)
take corporate action authorizing any of the foregoing;
(j) (i) an involuntary case or other proceeding shall be commenced
against the Borrower or any Significant Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or substantially all of its property, and such
involuntary case or other proceeding shall remain in effect and undismissed and
unstayed for a period of 60 consecutive days or (ii) an order for relief shall
be entered against the Borrower or any Significant Subsidiary under the federal
bankruptcy laws as now or hereafter in effect;
(k) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $5,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the ERISA
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or there shall
occur a complete or partial withdrawal from, or a default, within the meaning of
Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
which could cause one or more members of the ERISA Group to incur a current
payment obligation in excess of $25,000,000;
(l) a judgment or order for the payment of money in excess of
$30,000,000 (after deducting amounts covered by insurance, except to the extent
that the insurer providing such insurance has declined such coverage) shall be
rendered against the Borrower or any Subsidiary and, within 60 days after entry
thereof, such judgment or order is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay, such
judgment or order is not discharged;
(m) the Borrower shall cease to be a Wholly-Owned Consolidated
Subsidiary of the Parent Guarantor;
(n) the Borrower or any Subsidiary shall fail to make any payment
owing by it in respect of any performance bond, performance guaranty or bank
guaranty issued in lieu of a performance bond or performance guaranty (other
than a payment which is disputed by the Borrower or such Subsidiary in good
faith), and the aggregate of all such defaulted payments shall exceed
$50,000,000 at any one time for the Borrower and its Subsidiaries; or
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(o) any Financing Document shall cease to be valid and enforceable
(except for the termination of a Subsidiary Guarantee in accordance with its
terms); or any Obligor shall so assert in writing;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 60% in aggregate amount of the Commitments, by notice to the Borrower
terminate the Commitments and they shall thereupon terminate, and (ii) if
requested by Banks holding Promissory Notes evidencing more than 60% in
aggregate principal amount of the Loans, by notice to the Borrower declare the
Promissory Notes (together with accrued interest thereon) to be, and the
Promissory Notes shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower; provided that in the case of any of the Events of
Default specified in subsection (i) or (j) above with respect to the Borrower,
without any notice to the Borrower or any other act by the Agent or the Banks,
the Commitments shall thereupon terminate and the Promissory Notes (together
with accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.01(d) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under the Financing Documents as are delegated to the
Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
New York (and any successor acting as Agent) in its capacity as a Bank hereunder
shall have the same rights and powers under the Financing Documents as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York (and any successor
acting as Agent) and its affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower or any Subsidiary or
affiliate of the Borrower as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent under the
Financing Documents are only those expressly set forth therein. Without limiting
the generality of the foregoing, the Agent shall not be required to take any
action with respect to any Default, except as expressly provided in Article 6.
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SECTION 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Agent nor
any of its affiliates nor any of their respective directors, officers, agents or
employees shall be responsible for or have any duty to ascertain, inquire into
or verify (i) any statement, warranty or representation made in connection with
this Agreement or any borrowing hereunder; (ii) the performance or observance of
any of the covenants or agreements of the Borrower or any Guarantor; (iii) the
satisfaction of any condition specified in Article 3, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Subsidiary Guarantees, the Parent Guarantee,
the Promissory Notes or any other instrument or writing furnished in connection
herewith. The Agent shall not incur any liability by acting in reliance upon any
notice, consent, certificate, statement, or other writing (which may be a bank
wire, telex or similar writing) believed by it in good faith to be genuine or to
be signed by or on behalf of the proper party or parties. Without limiting the
generality of the foregoing, the use of the term "agent" in this Agreement with
reference to the Agent is not intended to connote any fiduciary or other implied
(or express) obligations arising under agency doctrine of any applicable law.
Instead, such term is used merely as a matter of market custom and is intended
to create or reflect only an administrative relationship between independent
contracting parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by the
Borrower) against any cost, expense (including counsel fees and disbursements),
claim, demand, action, loss or liability (except such as result from such
indemnitees' gross negligence or willful misconduct) that such indemnitees may
suffer or incur in connection with the Financing Documents or any action taken
or omitted by such indemnitees thereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of the Borrower and its Subsidiaries and its own decision to
enter into this Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking any action
under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time by
giving notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent, subject to
the consent of the Borrower. If no
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successor Agent shall have been so appointed by the Required Banks and consented
to by the Borrower and shall have accepted such appointment within 45 days after
the retiring Agent gives notice of resignation, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent, which shall be a commercial bank
organized or licensed under the laws of the United States of America or of any
State thereof and having a combined capital and surplus of at least $50,000,000.
Upon the acceptance of its appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under the Financing
Documents. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was acting as the Agent.
SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its
own account fees in the amounts and at the times previously agreed upon in
writing between the Borrower and the Agent.
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Banks
in the relevant market for such Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks holding
50% or more of the aggregate amount of the affected Loans advise the Agent that
the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be,
as determined by the Agent will not adequately and fairly reflect the cost to
such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be,
for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon, until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist (which the Agent agrees to do promptly
upon such circumstances ceasing to exist), (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to continue or
convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case
may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar
Loan, as the case may be, shall be converted into a Base Rate Loan on the last
day of the then current Interest Period applicable thereto. Unless the Borrower
notifies the Agent at least one Domestic Business Day before the date of any
Fixed Rate Borrowing for which a Notice of Borrowing has
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previously been given that it elects not to borrow on such date, (i) if such
Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be
made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money
Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing
shall bear interest for each day from and including the first day to but
excluding the last day of the Interest Period applicable thereto at the Base
Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this Agreement,
any Bank has determined in its reasonable judgment that the adoption of any
applicable law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency,
shall make it unlawful or impossible for such Bank (or its Euro-Dollar Lending
Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so
notify the Agent, the Agent shall forthwith give notice specifying the
circumstances giving rise to such suspension to the other Banks and the
Borrower, whereupon, until such Bank notifies the Borrower and the Agent that
the circumstances giving rise to such suspension no longer exist (which such
Bank agrees to do promptly upon such circumstances ceasing to exist), the
obligation of such Bank to make Euro-Dollar Loans, or to continue or convert
outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before
giving any notice to the Agent pursuant to this Section, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will avoid
the need for giving such notice and will not, in the judgment of such Bank in
the good faith exercise of its discretion, be otherwise disadvantageous to such
Bank. If such notice is given, each Euro-Dollar Loan of such Bank then
outstanding shall be converted to a Base Rate Loan either (a) on the last day of
the then current Interest Period applicable to such Euro-Dollar Loan if such
Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan
to such day or (b) immediately if such Bank shall determine that it may not
lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such
day.
SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date of this Agreement, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, any Bank has determined in its reasonable
judgment that the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but excluding
(i) with respect to any CD Loan any such requirement included in an applicable
Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any
such requirement with respect to which such Bank is
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entitled to compensation during the relevant Interest Period under Section
2.15), special deposit, insurance assessment (excluding, with respect to any CD
Loan, any such requirement reflected in an applicable Assessment Rate) or
similar requirement against assets of, deposits with or for the account of, or
credit extended by, such Bank (or its Applicable Lending Office) or shall impose
on any Bank (or its Applicable Lending Office) or on the United States market
for certificates of deposit or the London interbank market any other condition
affecting its Fixed Rate Loans, its Promissory Note or its obligation to make
Fixed Rate Loans and the result of any of the foregoing is to increase the cost
to such Bank (or its Applicable Lending Office) of making or maintaining any
Fixed Rate Loan, or to reduce the amount of any sum received or receivable by
such Bank (or its Applicable Lending Office) under this Agreement or under its
Promissory Note with respect thereto, by an amount deemed by such Bank to be
material to such Bank, then, within 15 days after written demand by such Bank
(with a copy to the Agent), the Borrower shall pay to such Bank such additional
amount or amounts as will compensate such Bank for such increased cost or
reduction.
(b) If any Bank shall have determined that, after the date of this
Agreement, the adoption of any applicable law, rule or regulation regarding
capital adequacy, or any change in any such law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency (including any determination by any such authority, central
bank or comparable agency that, for purposes of capital adequacy requirements,
the Commitments hereunder do not constitute commitments with an original
maturity of one year or less), has or would have the effect of reducing the rate
of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after written demand by such Bank (with a copy to the Agent), the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date of this Agreement,
which will entitle such Bank to compensation pursuant to this Section; provided
that (i) if any Bank fails to give such notice within 90 days after it obtains
actual knowledge of such an event, such Bank shall only be entitled to payment
under this Section 8.03 for costs incurred from and after the date 90 days prior
to the date that such Bank does give such notice and (ii) each such Bank will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank in the good faith exercise of its discretion, be otherwise
disadvantageous to such Bank. A certificate of any Bank claiming compensation
under this Section and setting forth in reasonable detail the additional amount
or amounts to be paid to it hereunder and the basis used to determine such
amounts shall be conclusive in the absence of manifest error. In determining
such amount, such Bank will use
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reasonable averaging and attribution methods and will have a reasonable basis
for any assumptions it makes in connection therewith.
SECTION 8.04. Taxes. (a) Any and all payments by the Borrower to or for
the account of any Bank or the Agent hereunder or under any Promissory Note
shall be made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding, in the case of each Bank and
the Agent, taxes imposed on or measured by its income, and franchise taxes
imposed on it, by the jurisdiction under the laws of which such Bank or the
Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Bank, taxes imposed on or measured by its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as its "TAXES", and all such
excluded taxes being hereinafter referred to as its "DOMESTIC TAXES"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under any Promissory Note to any Bank or the Agent, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 8.04 such Bank or the Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 9.01, the original or a certified copy of
a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any
Promissory Note or from the execution or delivery of, or otherwise with respect
to, this Agreement or any other Financing Document (hereinafter referred to as
"OTHER TAXES").
(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04 paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto. In addition, on and after the New Borrower Date, the Borrower
agrees to indemnify the Agent and each Bank for all Domestic Taxes and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, in each case to the extent that such Domestic Taxes result from
any payment or indemnification pursuant to this Section for (i) Taxes or Other
Taxes imposed by any jurisdiction other than the United States or (ii) Domestic
Taxes of the Agent or such Bank, as the case may be. This indemnification shall
be made within 15 days from the date such Bank or the Agent (as the case may be)
makes demand therefor.
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(d) At the times indicated herein, each Bank organized under the laws
of a jurisdiction outside the United States shall provide the Borrower with
Internal Revenue Service form 1001 or 4224 (in each case accompanied by any
statements which may be required under applicable Treasury regulations), as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to receive payments under this Agreement
(i) without deduction or withholding of any United States federal income taxes
or (ii) subject to a reduced rate of United States federal withholding tax,
unless, in each case of clause (i) and (ii) of this Section 8.04(d), an event
(including, without limitation, any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders such forms inapplicable or which would prevent the Bank
from duly completing and delivering any such form with respect to it and the
Bank advises the Borrower and the Agent that it is not capable of receiving
payments without any deduction or withholding of such taxes. Such forms shall be
provided (x) on or prior to the date of the Bank's execution and delivery of
this Agreement in the case of each Bank listed on the signature pages hereof,
and on or prior to the date on which it becomes a Bank in the case of each other
Bank, and (y) on or before the date that such form expires or becomes obsolete
or after the occurrence of any event requiring a change in the most recent form
so delivered by the Bank. If the form provided by a Bank at the time such Bank
first becomes a party to this Agreement indicates a United States interest
withholding tax rate in excess of zero, United States withholding tax at such
rate shall be considered excluded from "TAXES" as defined in Section 8.04(a). In
addition, to the extent that for reasons other than a change of treaty, law or
regulation any Bank becomes subject to an increased rate of United States
interest withholding tax while it is a party to this Agreement, United States
withholding tax at such increased rate shall be considered excluded from "Taxes"
as defined in Section 8.04(a).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form in accordance with Section 8.04(d)
(unless such failure is excused by the terms of Section 8.04(d)), such Bank
shall not be entitled to indemnification under Section 8.04(a) or 8.04(c) with
respect to Taxes imposed by the United States; provided, however, that should a
Bank, which is otherwise exempt from or subject to a reduced rate of withholding
tax, become subject to Taxes because of its failure to deliver a form required
hereunder, the Borrower shall take such steps as such Bank shall reasonably
request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for
the account of any Bank pursuant to this Section 8.04, then such Bank will
change the jurisdiction of its Applicable Lending Office so as to eliminate or
reduce any such additional payment which may thereafter accrue if such change,
in the judgment of such Bank in the good faith exercise of its discretion, is
not otherwise disadvantageous to such Bank.
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate
Loans. If (i) the obligation of any Bank to make, or to continue or convert
outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to
Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or
8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower
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shall, by at least five Euro-Dollar Business Days' prior notice to such Bank
through the Agent, have elected that the provisions of this Section shall apply
to such Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist), all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,
shall instead be Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related Fixed Rate Loans of the other Banks).
If such Bank notifies such Borrower that the circumstances giving rise to such
suspension or demand for compensation no longer exist, the principal amount of
each such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan,
as the case may be, on the first day of the next succeeding Interest Period
applicable to the related CD Loans or Euro-Dollar Loans of the other Banks.
SECTION 8.06. Substitution of Bank. If any Bank (i) has demanded
compensation for increased costs pursuant to Section 8.03 or 8.04 or is entitled
to payments under Section 8.04(a) or (ii) has determined that the making or
maintaining of any Euro-Dollar Loan has become unlawful or impossible pursuant
to Section 8.02 and similar additional interest or compensation has not been
demanded by, or a similar determination has not been made by, all of the Banks,
the Borrower shall have the right (with the assistance of the Agent) to
designate an Assignee which is not an Affiliate of the Borrower to purchase for
cash, pursuant to an Assignment and Assumption Agreement in substantially the
form of Exhibit G hereto, the outstanding Loans and Commitment of such Bank and
to assume all of such Bank's other rights and obligations hereunder without
recourse to or warranty by, or expense to, such Bank, for a purchase price equal
to the principal amount of all of such Bank's outstanding Loans plus any accrued
but unpaid interest thereon and the accrued but unpaid fees in respect of that
Bank's Commitment hereunder plus such amount, if any, as would be payable
pursuant to Section 2.13 if the outstanding Loans of such Bank were prepaid in
their entirety on the date of consummation of such assignment.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other communications
to any party provided for hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given to such party: (x) in the case of the Borrower or the Agent, at
its address or facsimile or telex number set forth on the signature pages
hereof, (y) in the case of any Bank, at its address or facsimile or telex number
set forth in its Administrative Questionnaire or (z) in the case of any party,
such other address or facsimile or telex number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by telex,
when such telex is transmitted to the telex number specified in this Section and
the appropriate answerback is received, (ii) if given by facsimile, when such
facsimile is transmitted
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to the facsimile number specified in this Section 9.01 and electronic,
telephonic or other appropriate confirmation of receipt is received by the
sender, (iii) if given by mail, 72 hours after such communication is deposited
in the mails with first class postage prepaid, addressed as aforesaid or (iv) if
given by any other means, when delivered at the address specified in this
Section; provided that notices to the Agent under Article 2 or Article 8 shall
not be effective until received.
SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any other
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
and therein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i)
all reasonable out-of-pocket expenses of the Agent, including reasonable fees
and disbursements of special counsel for the Agent, in connection with the
preparation and administration of the Financing Documents, any waiver or consent
hereunder or any amendment thereof or any Default or alleged Default hereunder
and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses
incurred by the Agent and each Bank, including reasonable fees and disbursements
of counsel, in connection with such Event of Default and collection, bankruptcy,
insolvency and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank, their
respective Bank Affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses, including, without limitation, the reasonable fees and disbursements
of counsel, which may be incurred by such Indemnitee (whether or not such
Indemnitee shall be designated a party thereto) arising out of any
investigative, administrative or judicial proceeding (brought or threatened)
relating to or arising out of the Financing Documents, the arrangement,
administration, performance or enforcement thereof or any actual or proposed use
of proceeds of Loans hereunder; provided that no Indemnitee shall have the right
to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction; provided
further that no Indemnitee shall have the right to be indemnified hereunder in
connection with any proceedings between it and another Indemnitee which does not
relate to the Borrower.
(c) If any proceeding or claim shall be brought or asserted against any
Indemnitee in respect of which indemnity may be sought pursuant to the preceding
subsection, such Indemnitee shall promptly notify the Borrower. The Borrower
shall not be liable for any costs or expenses in connection with any settlement
entered into without its consent.
SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate
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amount of principal and interest due with respect to any Promissory Note held by
it which is greater than the proportion received by any other Bank in respect of
the aggregate amount of principal and interest due with respect to any
Promissory Note held by such other Bank, the Bank receiving such proportionately
greater payment shall purchase such participations in the Promissory Notes held
by the other Banks, and such other adjustments shall be made, as may be
required, so that all such payments of principal and interest with respect to
the Promissory Notes held by the Banks shall be shared by the Banks pro rata;
provided that nothing in this Section shall impair the right of any Bank to
exercise any right of set-off or counterclaim it may have and to apply the
amount subject to such exercise to the payment of indebtedness of the Borrower
other than its indebtedness under the Promissory Notes.
SECTION 9.05. Amendments and Waivers. Any provision of this Agreement
or the Promissory Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks,
(i) increase or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for termination of any Commitment,
(iv) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Promissory Notes, or the number of Banks, which shall be
required for the Banks or any of them to take any action under this Section or
any other provision of this Agreement or (v) release the Parent Guarantor from
its obligations under the Parent Guarantee.
SECTION 9.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without the
prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii) or (iv) of Section 9.05 without the consent of the Participant. The
Borrower agrees that each Participant shall, to the extent provided in its
participation agreement and subject to subsection (e), (f) and (g) below, be
entitled to the benefits
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of Article 8 with respect to its participating interest. An assignment or other
transfer which is not permitted by subsection 9.06(c) or 9.06(d) below shall be
given effect for purposes of this Agreement only to the extent of a
participating interest granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part (in an amount
equivalent to an original Commitment of not less than $10,000,000) of all, of
its rights and obligations under this Agreement and the Promissory Notes, and
such Assignee shall assume such rights and obligations, pursuant to an
Assignment and Assumption Agreement in substantially the form of Exhibit G
hereto executed by such Assignee and such transferor Bank, with (and subject to)
the subscribed consent of the Borrower and the Agent, which shall not be
unreasonably withheld; provided that if an Assignee is an affiliate of such
transferor Bank, no such consent shall be required; and provided further that
such assignment may, but need not, include rights of the transferor Bank in
respect of outstanding Money Market Loans. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an amount
equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower
shall make appropriate arrangements so that, if required, a new Promissory Note
is issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Agent an administrative fee for processing such
assignment in the amount of $2,500. If the Assignee is not incorporated under
the laws of the United States of America or a state thereof, it shall deliver to
the Borrower and the Agent certification as to exemption from deduction or
withholding of any United States federal income taxes in accordance with Section
8.04.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Promissory Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.03 or 8.04 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring
such Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
(f) Notwithstanding anything to the contrary contained in this Section
9.06 but subject to the terms and conditions set forth in this subsection (f),
any Bank may from time to time, elect to designate a Conduit to provide all or
any part of Loans required to be made by such Bank to the Borrower pursuant to
this Agreement or to acquire a participation interest in any Loans
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extended by such Bank hereunder (a "CONDUIT DESIGNATION"), provided the
designation of a Conduit by any Bank for purposes of this Section 9.06(f) shall
be subject to the approval of the Borrower. No additional Note shall be required
with regard to a Conduit Designation; provided, however, to the extent any
Conduit shall advance funds under a Conduit Designation, the designating Bank
shall be deemed to hold the Note in its possession as an agent for such Conduit
to the extent of the Loan funded by such Conduit. Notwithstanding any such
Conduit Designation, (x) the designating Bank shall remain solely responsible to
the other parties hereto for its obligations under this Agreement and (y) the
Borrower and the Agent may continue to deal solely and directly with the
designating Bank as administrative agent for such designating Bank's Conduit, in
connection with all of such Conduit's rights and obligations under this
Agreement, unless and until the Borrower and the Agent are notified that the
designating Bank has been replaced as administrative agent for its Conduit; any
payments for the benefit of any designating Bank and its Conduit shall be paid
to such designating Bank for itself as administrative agent for its Conduit, as
applicable; provided neither the Borrower nor the Agent shall be responsible for
any designating Bank's application of any such payments. In addition, any
Conduit may (i) with notice to, but without the prior written consent of the
Borrower and the Agent, and without paying any processing fee therefor, assign
all or portions of its interest in any Loans to the Bank that designated such
Conduit or to any financial institutions consented to by the Borrower and the
Agent providing liquidity and/or credit facilities to or for the account of such
Conduit to support the funding or maintenance of Loans and (ii) disclose on a
confidential basis any non-public information relating to its Loans to any
rating agency, commercial paper dealer or provider of any guarantee, surety,
credit or liquidity enhancement to such Conduit.
(g) Each party to this Agreement hereby agrees that, at any time a
Conduit Designation is in effect, it shall not institute against, or join any
other person in instituting against, any Conduit any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceeding or other proceedings under any
federal or state bankruptcy or similar law, for one year and a day after the
latest maturing commercial paper note issued by such Conduit is paid. This
Section 9.06(g) shall survive the termination of this Agreement.
SECTION 9.07. Collateral. Each of the Banks represents to the Agent and
each of the other Banks that it in good faith is not relying upon any "margin
stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to Jurisdiction. THIS AGREEMENT
AND EACH PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY
FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE BORROWER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
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IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SECTION 9.09. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 9.10. Waiver of Jury Trial. EACH OF THE BORROWER, THE AGENT AND
THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Borrower or
for any other reason, any payment under or in connection with this Agreement, is
made or satisfied in a currency (the "Other Currency") other than that in which
the relevant payment is due (the "Required Currency") then, to the extent that
the payment (when converted into the Required Currency at the rate of exchange
on the date of payment or, if it is not practicable for the party entitled
thereto (the "Payee") to purchase the Required Currency with the other Currency
on the date of payment, at the rate of exchange as soon thereafter as it is
practicable for it to do so) actually received by the Payee falls short of the
amount due under the terms of this Agreement, the Borrower shall, to the extent
permitted by law, as a separate and independent obligation, indemnify and hold
harmless the Payee against the amount of such short-fall. For the purpose of
this Section, "rate of exchange" means the rate at which the Payee is able on
the relevant date to purchase the Required Currency with the Other Currency and
shall take into account any premium and other costs of exchange.
<PAGE> 70
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TYCO INTERNATIONAL (US) INC.
By:/s/
----------------------------
Name:
Title: Vice President - Chief Financial Officer
By: /s/
---------------------------
Name:
Title: Vice President - Treasurer
1 Tyco Park
Exeter, New Hampshire 03833
Facsimile number: 603-778-0108
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/
---------------------------
Title: Vice President
THE BANK OF NOVA SCOTIA
By: /s/
-----------------------------
Name:
Title:
BANKERS TRUST COMPANY
By: /s/
------------------------------
Name:
Title:
<PAGE> 71
COMMERZBANK AG, NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
CREDIT SUISSE FIRST BOSTON
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
MARINE MIDLAND BANK
By: /s/
----------------------------
Name:
Title:
MELLON BANK, N.A.
By: /s/
----------------------------
Name:
Title:
<PAGE> 72
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
NATIONSBANK, N.A.
By: /s/
----------------------------
Name:
Title:
TORONTO DOMINION (TEXAS), INC.
By: /s/
----------------------------
Name:
Title:
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
<PAGE> 73
BANK BRUSSELS LAMBERT
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
BANQUE NATIONALE DE PARIS
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
NATIONAL WESTMINSTER BANK PLC NEW
YORK BRANCH
By: /s/
----------------------------
Name:
Title:
NATIONAL WESTMINSTER BANK PLC
NASSAU BRANCH
By: /s/
----------------------------
Name:
Title:
<PAGE> 74
THE BANK OF NEW YORK
By: /s/
----------------------------
Name:
Title:
ABN AMRO BANK N.V.
By: /s/
----------------------------
Name:
Title:
BANCA COMMERCIALE ITALIANA -
NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
BANCA NAZIONALE DEL LAVORO S.p.A. -
NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
<PAGE> 75
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/
----------------------------
Name:
Title:
BANK OF MONTREAL, CHICAGO BRANCH
By: /s/
----------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY, NEW YORK BRANCH
By: /s/
----------------------------
Name:
Title:
BANKBOSTON, N.A.
By: /s/
----------------------------
Name:
Title:
CITIBANK, N.A.
By: /s/
----------------------------
Name:
Title:
<PAGE> 76
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/
----------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By: /s/
----------------------------
Name:
Title:
FLEET BANK - NH
By: /s/
----------------------------
Name:
Title:
ISTITUTO BANCARIO SAN PAOLO
DI TORINO SPA
By: /s/
----------------------------
Name:
Title:
By: /s/
----------------------------
Name:
Title:
KEYBANK NATIONAL ASSOCIATION
By: /s/
----------------------------
<PAGE> 77
Name:
Title:
STANDARD CHARTERED BANK
By: /s/
----------------------------
Name:
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By:/s/
----------------------------
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention:
Telex number: 177615
Facsimile number: 212-648-5018
<PAGE> 78
APPENDIX
COMMITMENT SCHEDULE
<TABLE>
<S> <C>
Morgan Guaranty Trust Company of New York $ 108,888,888.89
The Bank of Nova Scotia 97,222,222.22
Bankers Trust Company 97,222,222.22
Commerzbank AG, New York Branch 97,222,222.22
Credit Suisse First Boston 97,222,222.22
Marine Midland Bank 97,222,222.22
Mellon Bank, N.A. 97,222,222.22
Credit Lyonnais New York Branch 77,777,777.78
NationsBank, N.A. 77,777,777.78
Toronto Dominion (Texas), Inc. 77,777,777.78
Union Bank of Switzerland, New York Branch 77,777,777.78
Bank Brussels Lambert 50,555,555.56
Banque Nationale de Paris 50,555,555.56
National Westminster Bank PLC 50,555,555.56
The Bank of New York 50,555,555.56
ABN AMRO Bank N.V. 38,888,888.89
Banca Commerciale Italiana - New York Branch 38,888,888.89
Banca Nazionale del Lavoro S.p.A. - New York Branch 38,888,888.89
Bank of America NT & SA 38,888,888.89
Bank of Montreal, Chicago Branch 38,888,888.89
Bank of Tokyo-Mitsubishi Trust Company 38,888,888.89
BankBoston, N.A. 38,888,888.89
Citibank, N.A. 38,888,888.89
The First National Bank of Chicago 38,888,888.89
First Union National Bank 38,888,888.89
Fleet Bank - NH 38,888,888.89
Istituto Bancario San Paolo Di Torino SpA 38,888,888.89
KeyBank National Association 38,888,888.89
Standard Chartered Bank 38,888,888.89
------------------
Total Commitments $ 1,750,000,000.00
</TABLE>
<PAGE> 79
EXHIBIT A
PROMISSORY NOTE
New York, New York
, 1998
For value received, [NAME OF BORROWER], a ___________ corporation (the
"Borrower"), promises to pay to the order of (the "Bank"), for the account of
its Applicable Lending Office, the unpaid principal amount of each Loan made by
the Bank to the Borrower pursuant to the Credit Agreement referred to below on
the maturity date provided for in the Credit Agreement. The Borrower promises to
pay interest on the unpaid principal amount of each such Loan on the dates and
at the rate or rates provided for in the Credit Agreement. All such payments of
principal and interest shall be made in lawful money of the United States in
Federal or other immediately available funds at the office of Morgan Guaranty
Trust Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank and,
if the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This promissory note is one of the Promissory Notes referred to in the
364-Day Credit Agreement dated as of February 13, 1998 among the Borrower, the
banks listed on the signature pages thereof and Morgan Guaranty Trust Company of
New York, as Agent (as the same may be amended from time to time, the "Credit
Agreement"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
Except as permitted by Section 9.06 of the Credit Agreement, this
Promissory Note may not be assigned by the Bank to any other Person.
<PAGE> 80
This Promissory Note shall be governed by and construed in accordance
with the laws of the State of New York.
[NAME OF BORROWER]
By________________________
Title:
By________________________
Title:
<PAGE> 81
Promissory Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Amount Type Amount of Unpaid
of of Principal Principal Maturity Notation
Date Loan Loan Repaid Amount Date Made By
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 82
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: [Name of Borrower]
Re: 364-Day Credit Agreement (the "Credit Agreement") dated as of
February 13, 1998 among the Borrower, the Banks listed on the
signature pages thereof and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
Principal Amount* Interest Period**
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Terms used herein have the meanings assigned to them in the Credit
Agreement.
[NAME OF BORROWER]
By -----------------------------------------
Title:
By -----------------------------------------
Title:
*Amount must be $10,000,000 or a larger multiple of $1,000,000.
**Not less than one month (LIBOR Auction) or not less than 30 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE> 83
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to [Name of Borrower] (the
"Borrower")
Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of
February 13, 1998 among the Borrower, the Banks parties thereto and the
undersigned, as Agent (the "Credit Agreement"), we are pleased on behalf of the
Borrower to invite you to submit Money Market Quotes to the Borrower for the
following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
<TABLE>
<CAPTION>
Principal Amount Interest Period
---------------- ---------------
<S> <C>
$
</TABLE>
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.] [9:30
A.M.] (New York City time) on [date].
Terms used herein have the meanings assigned to them in the Credit
Agreement.
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By ----------------------------------------
Authorized Officer
<PAGE> 84
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Agent
Re: Money Market Quote to [Name of Borrower]. (the "Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
_______________________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at
the following rates:
Principal Interest Money Market
<TABLE>
<CAPTION>
Amount** Period*** [Margin****] [Absolute Rate*****]
<S> <C> <C> <C>
$
$
</TABLE>
[Provided, that the aggregate principal amount of Money Market Loans
for which the above offers may be accepted shall not exceed $____________.]**
___________
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed
principal amount requested. Specify aggregate limitation if the sum of the
individual offers exceeds the amount the Bank is willing to lend. Bids must be
made for $5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
<PAGE> 85
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the 364-Day Credit
Agreement dated as of February 13, 1998 (the "Credit Agreement") among the
Borrower, the Banks listed on the signature pages thereof and yourselves, as
Agent, irrevocably obligates us to make the Money Market Loan(s) for which any
offer(s) are accepted, in whole or in part, in accordance with Section 2.03(f)
of the Credit Agreement.
Terms used herein have the meanings assigned to them in the Credit
Agreement.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
__________
*** Not less than one month or not less than 30 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined
for the applicable Interest Period. Specify percentage (to the nearest 1/10,000
of 1%) and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per
annum (to the nearest 1/10,000th of 1%).
<PAGE> 86
EXHIBIT E-1
Form of Opinion of General Counsel
of the Borrower
[Effective Date]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, As Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the General Counsel of Tyco International (US) Inc., a
Massachusetts corporation (the "Borrower") and am rendering this opinion in
connection with that certain 364-Day Credit Agreement and that certain
Extendible 364-Day Credit Agreement (collectively, the "Credit Agreements"),
each dated as of February 13, 1998, among the Borrower, the banks listed on the
signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New
York, as Agent. This opinion is being delivered to you pursuant to Section
3.01(e) of each Credit Agreement. Each term defined in the Credit Agreements and
used herein, but not otherwise defined herein, has the meaning ascribed thereto
in the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes of the Borrower and the Parent Guarantee
and have examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the Restated Articles of Organization and By-laws of the
Borrower, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to me as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Borrower and certificates of public officials. In
addition, I have assumed that (i) the Credit Agreements have been validly
authorized, executed and delivered by all parties thereto (other than the
Borrower), (ii) each party to the Credit Agreements (other than the Borrower)
has been duly organized and is a corporation or other entity validly existing
and in good standing (to the extent applicable) under the laws of its respective
jurisdiction of organization, with the full corporate or other
<PAGE> 87
organizational power to execute and deliver the Credit Agreements and to perform
its respective obligations thereunder, (iii) the Credit Agreements constitute
the legal, valid and binding obligations of the respective parties thereto
(other than the Borrower) enforceable against such parties in accordance with
their respective terms, (iv) the execution and delivery of the Credit Agreements
by each party thereto (other than the Borrower) and the performance by such
parties of their respective obligations thereunder do not violate such parties'
respective articles or certificate of incorporation or by-laws, or other
organizational documents, and (v) the execution, delivery and performance by
each party to the Credit Agreements (other than the Borrower) and the
performance by such parties of their respective obligations thereunder do not
violate any agreement, judgment, injunction, decree, order of any governmental
authority, other instrument, law or regulation applicable to such party.
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
1. The Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts, and
has all corporate powers and all material governmental licenses, authorizations,
consents and approvals (collectively, the "Consents") required to carry on its
business as now conducted, other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence on the date hereof, reasonably be expected to have a
Material Adverse Effect.
2. The execution, delivery and performance by the Borrower of the
Credit Agreements and the Promissory Notes (a) are within the Borrower's
corporate powers; (b) have been duly authorized by all necessary corporate
action on the part of the Borrower; (c) require no action by or in respect of,
or filing with, any governmental body, agency or official, in each case, on the
part of the Borrower; and (d) do not contravene, or constitute a default by the
Borrower under, any provision of (i) applicable law or regulation, (ii) the
certificate of incorporation or by-laws of the Borrower or, (iii) any agreement
or instrument evidencing or governing Debt of the Borrower, or any other
agreement, judgment, injunction, order, decree or other instrument binding upon
the Borrower.
3. Each Credit Agreement constitutes a valid and binding agreement of
the Borrower and each Promissory Note constitutes a valid and binding obligation
of the Borrower.
4. There is no action, suit or proceeding pending against, or, to the
best of my knowledge, threatened against or affecting, the Borrower or any of
its Subsidiaries before any court or arbitrator or any governmental body, agency
or official, in which there is a reasonable possibility of an adverse decision
which could, based upon the facts and circumstances in existence on the date
hereof, reasonably be expected to have a Material Adverse Effect or which in any
manner draws into question the validity of the Financing Documents.
2
<PAGE> 88
5. Each of the Borrower's corporate Subsidiaries is a corporation
validly existing and in good standing under the laws of its jurisdiction of
incorporation, except where the failure to be so incorporated, existing or in
good standing could not, based upon the facts and circumstances existing on the
date hereof, reasonably be expected to have a Material Adverse Effect, and has
all corporate powers and all Consents required to carry on its business as now
conducted other than those powers and Consents, the failure of which to be
possessed or obtained could not, based upon the facts and circumstances in
existence on the date hereof, reasonably be expected to have a Material Adverse
Effect.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Credit Agreements and the Promissory
Notes may be subject to or limited by bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance or transfer or other similar laws
and court decisions, now or hereafter in effect, relating to or affecting the
rights of creditors generally.
(b) The enforceability of the Credit Agreements and the Promissory
Notes is or will be subject to the application of and may be limited by general
principles of equity including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether considered in
a proceeding in equity or at law). Such principles of equity are of general
application, and in applying such principles a court, among other things, might
not allow a creditor to accelerate maturity of a debt under certain
circumstances including, without limitation, upon the occurrence of a default
deemed immaterial, or might decline to order the Borrower or any of the other
parties to the Financing Documents to perform covenants. Such principles as
applied by a court might include a requirement that a creditor act with
reasonableness and in good faith. Thus, I express no opinion as to the validity
or enforceability of (i) provisions restricting access to legal or equitable
remedies, such as the specific performance of executory covenants, (ii)
provisions that purport to establish evidentiary standards, (iii) provisions
relating to waivers, severability, set-off, or delay or omission of enforcement
of rights or remedies, and (iv) provisions purporting to convey rights to
persons other than parties to the Financing Documents.
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission I do
not express, any opinion as to the applicability to any provision of the
Financing Documents, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
3
<PAGE> 89
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of the State of New York, the Commonwealth of Massachusetts
and the Federal laws of the United States of America.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Financing Documents, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
4
<PAGE> 90
EXHIBIT E-2
Form of Opinion of General Counsel
of the Borrower on Behalf of the Parent Guarantor
[Effective Date]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, As Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the General Counsel of Tyco International (US) Inc., a
Massachusetts corporation and a wholly owned indirect subsidiary of Tyco
International Ltd., a Bermuda corporation (the "Parent Guarantor") and am
rendering this opinion in connection with that certain Parent Guarantee (the
"Parent Guarantee"), dated as of February 13, 1998, entered into by the Parent
Guarantor pursuant to that certain 364-Day Credit Agreement and that certain
Extendible 364- Day Credit Agreement (collectively, the "Credit Agreements"),
each dated as of February 13, 1998, among Tyco International (US) Inc. (the
"Borrower"), the banks listed on the signature pages thereof (the "Banks") and
Morgan Guaranty Trust Company of New York, as Agent. This opinion is being
delivered to you pursuant to Section 3.01(e) of each Credit Agreement. Each term
defined in the Credit Agreements and used herein, but not otherwise defined
herein, has the meaning ascribed thereto in the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes of the Borrower and the Parent Guarantee
and have examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the [Memorandum of Association and By-laws] of the Parent
Guarantor, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to me as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Parent Guarantor and certificates of public officials.
<PAGE> 91
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
1. The execution, delivery and performance by the Parent Guarantor of
the Parent Guarantee (a) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Parent Guarantor; and (b) do not contravene, or constitute a default by the
Parent Guarantor under, any provision of (i) applicable law or regulation or
(ii) any agreement or instrument evidencing or governing Debt of the Parent
Guarantor, or any other agreement, judgment, injunction, order, decree or other
instrument binding upon the Parent Guarantor.
2. The Parent Guarantee constitutes a valid and binding obligation of
the Parent Guarantor.
3. There is no action, suit or proceeding pending against, or, to the
best of my knowledge, threatened against or affecting, the Parent Guarantor or
any of its Subsidiaries before any court or arbitrator or any governmental body,
agency or official, in which there is a reasonable possibility of an adverse
decision which could, based upon the facts and circumstances in existence on the
date hereof, reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of the Financing Documents.
4. Each of the Parent Guarantor's corporate Subsidiaries is a
corporation validly existing and in good standing under the laws of its
jurisdiction of incorporation, except where the failure to be so incorporated,
existing or in good standing could not, based upon the facts and circumstances
existing on the date hereof, reasonably be expected to have a Material Adverse
Effect, and has all corporate powers and all Consents required to carry on its
business as now conducted other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence on the date hereof, reasonably be expected to have a
Material Adverse Effect.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Parent Guarantee may be subject to or
limited by bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or transfer or other similar laws and court decisions, now
or hereafter in effect, relating to or affecting the rights of creditors
generally.
(b) The enforceability of the Parent Guarantee is or will be subject to
the application of and may be limited by general principles of equity including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing (regardless of whether considered in a proceeding in equity or at law).
Such principles of equity are of general application, and in applying such
principles a court, among other things, might not allow a creditor to accelerate
maturity of a debt under certain circumstances including, without limitation,
upon the occurrence
2
<PAGE> 92
of a default deemed immaterial, or might decline to order the Parent Guarantor
or any of the other parties to the Financing Documents to perform covenants.
Such principles as applied by a court might include a requirement that a
creditor act with reasonableness and in good faith. Thus, I express no opinion
as to the validity or enforceability of (i) provisions restricting access to
legal or equitable remedies, such as the specific performance of executory
covenants, (ii) provisions that purport to establish evidentiary standards,
(iii) provisions relating to waivers, severability, set-off, or delay or
omission of enforcement of rights or remedies, and (iv) provisions purporting to
convey rights to persons other than parties to the Financing Documents.
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission I do
not express, any opinion as to the applicability to any provision of the
Financing Documents, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of the State of New York, the Commonwealth of Massachusetts
and the Federal laws of the United States of America. Insofar as the foregoing
opinion involves matters governed by the laws of Bermuda, I have relied, without
independent investigation, upon the opinion of ____________, a copy of which has
been delivered to you.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Financing Documents, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
3
<PAGE> 93
EXHIBIT F
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE AGENT
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the 364-Day Credit Agreement
and the Extendible 364-Day Credit Agreement (collectively, the "Credit
Agreements"), each dated as of February 13, 1998, among Tyco International (US)
Inc., a Massachusetts corporation (the "Borrower"), the banks listed on the
signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New
York, as Agent (the "Agent"), and have acted as special counsel for the Agent
for the purpose of rendering this opinion pursuant to Section 3.01(f) of the
Credit Agreements. Terms defined in the Credit Agreements are used herein as
therein defined.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that each Credit
Agreement constitutes a valid and binding agreement of the Borrower, that each
Promissory Note delivered on the date hereof constitutes a valid and binding
obligation of the Borrower and that the Parent Guarantee constitutes a valid and
binding obligation of the Parent Guarantor, in each case enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and by general
principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York and the federal laws of
the United States of America. In giving the foregoing opinion, (i) we express no
opinion as to the effect (if any) of any law of any jurisdiction (except the
State of New York) in which any Bank is located which limits the rate of
<PAGE> 94
interest that such Bank may charge or collect and (ii) insofar as the foregoing
opinion involves matters governed by the laws of Massachusetts or Bermuda, we
have relied, without independent investigation, upon the respective opinions of
the General Counsel of the Borrower [and the Parent Guarantor] and of Appleby,
Spurling & Kempe, special Bermuda counsel for the Parent Guarantor, copies of
which have been delivered to you.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without our prior written consent, except that
any person who is a permitted successor or assign of a Bank in accordance with
the provisions of the Credit Agreement may rely upon this opinion as if it were
specifically addressed and delivered to such person on the date hereof.
Very truly yours,
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<PAGE> 95
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, ____ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), [NAME OF BORROWER] (the "Borrower")
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the 364-Day Credit Agreement dated as of February 13, 1998 among the
Borrower, the Assignor and the other Banks party thereto, as Banks, and the
Agent (the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans to the Borrower in an aggregate principal amount at any
time outstanding not to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"),
together with a corresponding portion of its outstanding Committed Loans, and
the Assignee proposes to accept assignment of such rights and assume the
corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of
<PAGE> 96
the Assignor under the Credit Agreement to the extent of the Assigned Amount,
including the purchase from the Assignor of the corresponding portion of the
principal amount of the Committed Loans made by the Assignor outstanding at the
date hereof. Upon the execution and delivery hereof by the Assignor, the
Assignee, [the Borrower and the Agent] and the payment of the amounts specified
in Section 3 required to be paid on the date hereof (i) the Assignee shall, as
of the date hereof, succeed to the rights and be obligated to perform the
obligations of a Bank under the Credit Agreement with a Commitment in an amount
equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as
of the date hereof, be reduced by a like amount and the Assignor released from
its obligations under the Credit Agreement to the extent such obligations have
been assumed by the Assignee. The assignment provided for herein shall be
without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.* It is
understood that facility fees in respect of the Assigned Amount accrued to the
date hereof are for the account of the Assignor and such fees accruing from and
including the date hereof are for the account of the Assignee. Each of the
Assignor and the Assignee hereby agrees that if it receives any amount under the
Credit Agreement which is for the account of the other party hereto, it shall
receive the same for the account of such other party to the extent of such other
party's interest therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent. This Agreement is
conditioned upon the consent of the Borrower and the Agent pursuant to Section
9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower
and the Agent is evidence of this consent. Pursuant to Section 9.06(c) the
Borrower agrees to execute and deliver a Note payable to the order of the
Assignee to evidence the assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition, or statements of the
Borrower, or the validity and enforceability of the obligations of the Borrower
in respect of the Credit Agreement or any Note. The Assignee acknowledges that
it has, independently and without reliance on the Assignor, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the business, affairs
and financial condition of the Borrower.
- --------
*Amount should combine principal together with accrued interest
and breakage compensation, if any, to be paid by the Assignee, net of any
portion of any upfront fee to be paid by the Assignor to the Assignee. It may be
preferable in an appropriate case to specify these amounts generically or by
formula rather than as a fixed sum.
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<PAGE> 97
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[ASSIGNOR]
By
------------------------------------
Title:
[ASSIGNEE]
By
-------------------------------------
Title:
[NAME OF BORROWER]
By
------------------------------------
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By
-----------------------------------
Title:
3
<PAGE> 98
EXHIBIT H
SUBSIDIARY GUARANTEE
Dated as of ____________
WHEREAS, [Name of Borrower], a ___________ corporation, has entered
into a 364-Day Credit Agreement and an Extendible 364-Day Credit Agreement
(collectively, as the same may be amended from time to time, the "Credit
Agreements") each dated as of February 13, 1998 among the Borrower, the banks
listed on the signature pages thereof, and Morgan Guaranty Trust Company of New
York, as Agent, pursuant to which the Borrower is entitled, subject to certain
conditions, to borrow up to $2,250,000,000;
WHEREAS, in conjunction with the transactions contemplated by the
Credit Agreements and in consideration of the financial and other support that
the Borrower has provided, and such financial and other support as the Borrower
may in the future provide, to the undersigned (together with its successors, the
"Guarantor") and in order to induce the Banks and the Agent to enter into the
Credit Agreements and to make Loans thereunder, the Guarantor is willing to
guarantee the obligations of the Borrower under the Credit Agreements and the
Promissory Notes issued thereunder;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby agrees as follows:
ARTICLE
DEFINITIONS
SECTION 1. Definitions. Terms defined in the Credit Agreements and not
otherwise defined herein are used herein as therein defined (e.g., a "Loan" is a
Loan made pursuant to either Credit Agreement and a "Promissory Note" is a
Promissory Note issued pursuant to either Credit Agreement). In addition the
following terms, as used herein, have the following meanings:
"Guaranteed Obligations" means (i) all obligations of the Borrower in
respect of principal of and interest on the Loans and the Promissory Notes, (ii)
all other amounts payable by the Borrower under either Credit Agreement or any
Promissory Note and (iii) all renewals or extensions of the foregoing, in each
case whether now outstanding or hereafter arising. The Guaranteed Obligations
shall include, without limitation, any interest, costs, fees and expenses which
accrue on or with respect to any of the foregoing and are payable by the
Borrower pursuant to either Credit Agreement or any Promissory Note, whether
before or after the
<PAGE> 99
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of any one or more than one of the Obligors, and
any such interest, costs, fees and expenses that would have accrued thereon or
with respect thereto and would have been payable by the Borrower pursuant to
such Credit Agreement or Promissory Note but for the commencement of such case,
proceeding or other action.
ARTICLE
GUARANTEE
SECTION 1. The Guarantees. Subject to Section 3, the Guarantor hereby
unconditionally and irrevocably guarantees to the Banks and the Agent and to
each of them, the due and punctual payment of all Guaranteed Obligations as and
when the same shall become due and payable, whether at maturity, by declaration
or otherwise, according to the terms thereof. In case of failure by the Borrower
punctually to pay the indebtedness guaranteed hereby, the Guarantor, subject to
Section 3, hereby unconditionally agrees to cause such payment to be made
punctually as and when the same shall become due and payable, whether at
maturity or by declaration or otherwise, and as if such payment were made by the
Borrower.
SECTION 2. Guarantee unconditional. The obligations of the Guarantor
under this Article 2 shall be unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by:
(a) any extension, renewal, settlement, compromise, waiver or release
in respect of any obligation of any other Obligor under any Financing Document,
by operation of law or otherwise;
(b) any modification or amendment of or supplement to any Financing
Document (other than as specified in an amendment or waiver of this Subsidiary
Guarantee effected in accordance with Section 3);
(c) any modification, amendment, waiver, release, non-perfection or
invalidity of any direct or indirect security, or of any guaranty or other
liability of any third party, for any obligation of any other Obligor under any
Financing Document;
(d) any change in the corporate existence, structure or ownership of
any other Obligor, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting any other Obligor or its assets or any resulting
release or discharge of any obligation of any other Obligor contained in any
Financing Document [(including, without limitation, any change in the identity
of the Borrower from Tyco US to Tyco Luxembourg as contemplated by Section 3.04
of the Credit Agreements)] [to be included in Subsidiary Guarantees issued while
Tyco US is the Borrower];
2
<PAGE> 100
(e) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against any other Obligor, the Agent, any Bank or
any other Person, whether or not arising in connection with the Financing
Documents; provided that nothing herein shall prevent the assertion of any such
claim by separate suit or compulsory counterclaim;
(f) any invalidity or unenforceability relating to or against any other
Obligor for any reason of any Financing Document, or any provision of applicable
law or regulation purporting to prohibit the payment by any other Obligor of the
principal of or interest on any Promissory Note or any other amount payable by
any other Obligor under any Financing Document; or
(g) any other act or omission to act or delay of any kind by any other
Obligor, the Agent, any Bank or any other Person or any other circumstance
whatsoever that might, but for the provisions of this paragraph, constitute a
legal or equitable discharge of the obligations of the Guarantor under this
Article 2.
SECTION 3. Limit of Liability. The Guarantor shall be liable under this
Subsidiary Guarantee only for amounts aggregating up to the largest amount that
would not render its obligations hereunder subject to avoidance under Section
548 of the United States Bankruptcy Code or any comparable provisions of any
other applicable law.
SECTION 4. Discharge; Reinstatement in Certain Circumstances. Subject
to Section 6, the Guarantor's obligations under this Article 2 shall remain in
full force and effect until the Commitments are terminated and the principal of
and interest on the Promissory Notes and all other amounts payable by the
Borrower under the Financing Documents shall have been paid in full. If at any
time any payment of the principal of or interest on any Promissory Note or any
other amount payable by the Borrower under any Financing Document is rescinded
or must be otherwise restored or returned upon the insolvency, bankruptcy or
reorganization of any other Obligor or otherwise, the Guarantor's obligations
under this Article 2 with respect to such payment shall be reinstated at such
time as though such payment had become due but had not been made at such time.
SECTION 5. Waiver. The Guarantor irrevocably waives acceptance hereof,
presentment, demand, protest and any notice not provided for herein, as well as
any requirement that at any time any action be taken by any Person against any
other Obligor or any other Person.
SECTION 6. Subrogation and Contribution. (a) The Guarantor irrevocably
waives any and all rights to which it may be entitled, by operation of law or
otherwise, upon making any payment hereunder (i) to be subrogated to the rights
of the payee against the Borrower with respect to such payment or otherwise to
be reimbursed, indemnified or exonerated by any other Obligor in respect thereof
or (ii) to receive any payment, in the nature of contribution or for any other
reason, from any other Obligor with respect to such payment
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<PAGE> 101
(b) Notwithstanding the provision of subsection (a) of this Section 6,
the Guarantor shall have and be entitled to (i) all rights of subrogation or
contribution otherwise provided by law in respect of any payment it may make or
be obligated to make under this Subsidiary Guarantee and (ii) all claims (as
defined under Chapter 11 of Title 11 of the United States Code, as amended, or
any successor statute (the "Bankruptcy Code")) it would have against the
Borrower or any other Guarantor (each an "Other Party") in the absence of
subsection (a) of this Section 6 and to assert and enforce the same, in each
case on and after, but at no time prior to, the date (the "Subrogation Trigger
Date") which is one year and five days after the Termination Date if, but only
if, (x) no Default or Event of Default of the type described in Section 6.01(i)
or 6.01(j) of the Credit Agreements with respect to the relevant Other Party has
existed at any time on and after the date of this Subsidiary Guarantee to and
including the Subrogation Trigger Date and (y) the existence of such Guarantor's
rights under this clause (b) would not make such Guarantor a creditor (as
defined in the Bankruptcy Code) of such Other Party in any insolvency,
bankruptcy, reorganization or similar proceeding commenced on or prior to the
Subrogation Trigger Date.
SECTION 7. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under the Financing Documents is
stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all
such amounts otherwise subject to acceleration under the terms of the Financing
Documents shall nonetheless be payable by the Guarantor hereunder forthwith on
demand by the Agent made at the request of the Required Banks.
ARTICLE
REPRESENTATIONS AND WARRANTIES
The Guarantor represents and warrants to the Agent and the Banks that:
SECTION 1. Corporate Existence and Power. The Guarantor is a
corporation duly incorporated, validly existing and in good standing under the
laws of ___________.
SECTION 2. Corporate and Governmental Authorization; No Contravention.
The execution, delivery and performance by the Guarantor of this Subsidiary
Guarantee:
(a) are within the Guarantor's corporate powers;
(b) have been duly authorized by all necessary corporate action on the
part of the Guarantor;
(c) require no action by or in respect of, or filing with, any
governmental body, agency or official, in each case, on the part of the
Guarantor; and
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<PAGE> 102
(d) do not contravene, or constitute a default by the Guarantor under,
any provision of (i) applicable law or regulation, (ii) the certificate of
incorporation or by-laws of the Guarantor, or (iii) any agreement or instrument
evidencing or governing Debt of the Guarantor or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Guarantor.
SECTION 3. Binding Effect. This Subsidiary Guarantee constitutes a
valid and binding obligation of the Guarantor.
SECTION 4. Not an Investment Company. The Guarantor is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
ARTICLE
MISCELLANEOUS
SECTION 1. Notices. All notices, requests and other communications to
be made to or by the Guarantor hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given: (a) if to the Guarantor, to it at its address or facsimile
number set forth on the signature pages hereof or such other address or
facsimile number as the Guarantor may hereafter specify for the purpose by
notice to the Agent and (b) if to any party to either Credit Agreement, to it at
its address or telex or facsimile number for notices specified in or pursuant to
such Credit Agreement. Each such notice, request or other communication shall be
effective (i) if given by telex, when such telex is transmitted to the telex
number specified in this Section 1 and the appropriate answerback is received,
(ii) if given by facsimile, when such facsimile is transmitted to the facsimile
transmission number specified in this Section 1 and electronic, telephonic or
other appropriate confirmation of receipt thereof is received by the sender,
(iii) if given by mail, 72 hours after such communication is deposited in the
mails with first class postage prepaid, addressed as aforesaid or (iv) if given
by any other means, when delivered at the address specified in this Section 1.
SECTION 2. No Waiver. No failure or delay by the Agent or any Bank in
exercising any right, power or privilege under this Subsidiary Guarantee or any
other Financing Document shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein and therein provided shall be cumulative and not exclusive of any rights
or remedies provided by law.
SECTION 3. Amendments and Waivers. Any provision of this Subsidiary
Guarantee may be amended or waived if, and only if, such amendment or waiver is
in writing and is signed by the Guarantor and the Agent with the prior written
consent of the Required Banks under the Credit Agreements.
5
<PAGE> 103
SECTION 4. Successors and Assigns. This Subsidiary Guarantee is for the
benefit of the Banks and the Agent and their respective successors and assigns
and in the event of an assignment of the Loans, the Promissory Notes or other
amounts payable under the Financing Documents, the rights hereunder, to the
extent applicable to the indebtedness so assigned, shall be transferred with
such indebtedness. All the provisions of this Subsidiary Guarantee shall be
binding upon the Guarantor and its successors and assigns.
SECTION 5. Taxes. All payments by the Guarantor hereunder shall be made
free and clear of Taxes in accordance with Section 8.04 of the Credit
Agreements. If the Guarantor is organized under the laws of, or has its
principal place of business in, a jurisdiction outside the United States, this
Section 5 shall be modified in a manner satisfactory to the Agent and the
Guarantor to indemnify for any foreign taxes which may be applicable.
SECTION 6. Effectiveness; Termination. (a) This Agreement shall become
effective when the Agent shall have received a counterpart hereof signed by the
Guarantor.
(b) The Guarantor may at any time elect to terminate this Subsidiary
Guarantee and its obligations hereunder, provided that, after giving effect
thereto, no Default shall have occurred and be continuing; and provided further
that subsequent to the New Borrower Date, this Subsidiary Guarantee may not be
so terminated in respect of any Guarantor which is a Required Significant
Subsidiary. If the Guarantor so elects to terminate this Subsidiary Guarantee,
it shall give the Agent notice to such effect, which notice shall be accompanied
by a certificate of a Responsible Officer to the effect that, after giving
effect to such termination, no Default shall have occurred and be continuing.
The Agent may if it so elects conclusively rely on such certificate. Upon
receipt of such notice and such certificate, unless the Agent determines that a
Default shall have occurred and be continuing, the Agent shall promptly deliver
to the Guarantor the counterpart of this Subsidiary Guarantee delivered to the
Agent pursuant to Section 6(a), and upon such delivery this Subsidiary Guarantee
shall terminate and the Guarantor shall have no further obligations hereunder.
SECTION 7. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS SUBSIDIARY
GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION
OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF
ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS SUBSIDIARY GUARANTEE OR THE
TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT
AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
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<PAGE> 104
SECTION 8. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY
WAIVES AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS SUBSIDIARY GUARANTEE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
7
<PAGE> 105
IN WITNESS WHEREOF, the Guarantor has caused this instrument to be duly
executed by its authorized officer as of the date first above written.
[GUARANTOR]
By ____________________________
Title:
[Address]
Facsimile Number:
8
<PAGE> 106
EXHIBIT I
[Form of Opinion of Counsel for the Subsidiary Guarantor]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the [Associate] General Counsel of [Name of Borrower], a
__________ corporation (the "Borrower"), and have acted as counsel for [name of
Subsidiary Guarantor] (the "Guarantor"), and am rendering this opinion in
connection with that certain Subsidiary Guarantee (the "Subsidiary Guarantee"),
dated as of __________, entered into by the Guarantor, pursuant to that certain
364-Day Credit Agreement and that certain Extendible 364-Day Credit Agreement
(collectively, the "Credit Agreements"), each dated as of February 13, 1998,
among the Borrower, the banks listed on the signature pages thereof (the
"Banks") and Morgan Guaranty Trust Company of New York, as Agent. Each term
defined in the Subsidiary Guarantee and used herein, but not otherwise defined
herein, has the meaning ascribed thereto in the Subsidiary Guarantee. This
opinion is being delivered to you pursuant to the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes and the Subsidiary Guarantee and have
examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the [Certificate of Incorporation] and By-laws of the
Guarantor, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to be as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Guarantor and certificates of public officials.
<PAGE> 107
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
(1) The Guarantor is a corporation duly incorporated, validly
existing and in good standing under the laws of _________________.
(2) The execution, delivery and performance by the Guarantor of
the Subsidiary Guarantee (a) are within the Guarantor's corporate powers; (b)
have been duly authorized by all necessary corporate action on the part of the
Guarantor; (c) require no action by or in respect of, or filing on the part of
the Guarantor with, any governmental body, agency or official, in each case, on
the part of the Guarantor; and (d) do not contravene, or constitute a default by
the Guarantor under, any provision of (i) applicable law or regulation, (ii) the
certificate of incorporation or by-laws of the Guarantor or, (iii) any agreement
or instrument evidencing or governing Debt of the Guarantor, or any other
material agreement, judgment, injunction, order, decree or other instrument
binding upon the Guarantor.
(3) The Subsidiary Guarantee constitutes a valid and binding
obligation of the Guarantor.
(4) The Guarantor is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Subsidiary Guarantee may be subject
to or limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance or transfer or other similar laws and court
decisions, now or hereafter in effect, relating to or affecting the rights of
creditors generally.
(b) The enforceability of the Subsidiary Guarantee is or will be
subject to the application of and may be limited by general principles of equity
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether considered in a proceeding in
equity or at law). Such principles of equity are of general application, and in
applying such principles a court, among other things, might not allow a creditor
to accelerate maturity of a debt under certain circumstances including, without
limitation, upon the occurrence of a default deemed immaterial, or might decline
to order the Guarantor to perform covenants. Such principles as applied by a
court might include a requirement that a creditor act with reasonableness and in
good faith. Thus, I express no opinion as to the validity or enforceability of
(i) provisions restricting access to legal or equitable remedies, such as the
specific performance of executory covenants, (ii) provisions that purport to
establish evidentiary standards, (iii) provisions relating to waivers,
severability, set-off, or delay or omission of enforcement of rights or
remedies, and (iv) provisions purporting to convey rights to persons other than
parties to the Subsidiary Guarantee.
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<PAGE> 108
(c) The remedy of specific performance and injunctive and other
forms of equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission
I do not express, any opinion as to the applicability to any provisions of the
Subsidiary Guarantee, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of [the jurisdiction of incorporation of the Guarantor], the
State of New York, the Commonwealth of Massachusetts and the Federal laws of the
United States of America.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Subsidiary Guarantee, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
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<PAGE> 109
EXHIBIT K
Form of Opinion of Counsel
for the Parent Guarantor
To the Banks and the Agent
named on Schedule 1 to this Opinion
c/o Morgan Guaranty Trust Company of New York (as Agent)
60 Wall Street
New York, NY 10260
Dear Sirs,
Re: TYCO INTERNATIONAL LTD. (THE "COMPANY")
We have been instructed by the Company to address this opinion to you
in connection with the Parent Guarantee, dated as of February 13, 1998 (the
"Guarantee"), entered into by the Company in connection with all principal of
and interest on amounts loaned to the Borrower under the Financing Documents.
Unless otherwise defined therein, terms defined in the Guarantee have
the same meanings when used in this opinion.
For the purpose of this opinion, we have been supplied with and have
reviewed, and relied upon the following documents:
(A) a copy of the executed US $500,000,000 Extendible
364-Day Credit Agreement dated as of February 13, 1998 among the
Borrower, the Banks listed on the signature pages thereof and the
Agent;
(B) a copy of the executed US $1,750,000,000 364-Day
Credit Agreement dated as of February 13, 1998 among the Borrower, the
Banks listed on the signature pages thereof and the Agent;
(C) a copy of the executed Subsidiary Guarantees;
(D) a copy of the executed Promissory Notes;
The Documents referred to in (a), (b) and (d) inclusive are together referred to
as the "Financing Documents".
<PAGE> 110
(E) a copy of the executed Guarantee;
(F) certified copies of the Certificate of Incorporation,
the Certificate evidencing the change of name of the Company from ADT
Limited to TYCO International Ltd. and the Memorandum of Association
and the Bye-laws of the Company;
(G) a certified copy of the minutes of a meeting of the
Board of Directors of the Company held on [ ], 199_ (the
"Resolutions"); and
(H) a certified copy of the Share Certificate evidencing
ownership by the Company of [the Borrower].
We also examined and relied upon:
(A) A Certificate of Compliance issued by the Registrar
of Companies on Bermuda in respect of the Company on [ ] February,
1998; and
(B) Our searches of the documents of public record in
relation to the Company maintained by the Registrar of Companies in
Bermuda made on [ ] February, 1998 and of the Causes Book maintained by
the Registrar of the Supreme Court of Bermuda made on the same date
(the "Searches").
In giving this opinion, we have assumed:
(1) the capacity, power and authority of each of
the parties other than the company to execute, deliver and
perform its obligations under and the due execution and
delivery by all parties other than the Company of the
Financing Documents and the Guarantee;
(2) that each party, other than the Company, has
duly authorised, executed, delivered and taken such other
action as may be required by such party to enter into and
perform the Financing Documents and the Guarantee in the form
of the execution copies we have reviewed for the purpose of
this opinion without alteration which is material to this
opinion and that all such actions were duly authorised when
taken;
(3) that no authorisation or approval by, or
filing with, any governmental or regulatory authority, other
than such authorisations, approvals and filings as each party
other than the Company has obtained or made, is necessary for
such party to duly execute and deliver, or to duly perform all
of its obligations under the Financing Documents and the
Guarantee, or for the validity and enforceability of the
Financing Documents and the Guarantee;
2
<PAGE> 111
(4) that each of the Financing Documents and the
Guarantee constitutes the legal, valid and binding obligation
of each party to it, other than the Company, and is
enforceable against each such party in accordance with its
terms;
(5) that the Financing Documents are legal,
valid and binding under the laws by which they are expressed
to be governed and that the Guarantee is legal, valid and
binding under the laws of the State of New York by which it is
expressed to be governed;
(6) that the information disclosed by the
Searches has not been materially altered and the Searches did
not fail to disclose any material information which has been
delivered for filing or registration, but was not disclosed or
did not appear on the public file at the time of the Searches;
(7) that there is no provision of the law of any
jurisdiction, other than Bermuda, which would have any
implication in relation to the opinions herein expressed;
(8) the genuineness of all signatures on the
documents which we have examined;
(9) the conformity to original documents of all
documents produced to us as copies and the authenticity of all
original documents which, or copies of which, have been
submitted to us;
(10) the accuracy and completeness of all factual
representations made in the Financing Documents, the
Guarantee, the Resolutions and any certificates or other
documents which we have examined and upon which we have
relied;
(11) that the Resolutions are in full force and
effect and have not been rescinded or altered in any way
material to this opinion; and
(12) that the Company is entering into its
obligations under the Guarantee in good faith and for the
purpose of carrying on its commercial business in the ordinary
course thereof and that there are reasonable grounds for
believing that the transactions contemplated by the Financing
Documents will benefit the Company.
Based upon and subject to the foregoing, and subject to the
reservations set out below, to matters not disclosed to us and matters of fact
which would affect the conclusion set out below and having regard to such legal
considerations as we deem relevant, we are of the opinion that:
3
<PAGE> 112
(i). The Company is a company duly incorporated, duly organised and
validly existing under the laws of Bermuda. The Memorandum of Association of the
Company has been duly filed in the office of the Registrar of Companies of
Bermuda and no other filing, recording, publishing or other act is necessary or
appropriate in Bermuda in connection with the transaction as described in the
Guarantee except those which have been duly made or performed.
(ii). The Company has the corporate power and authority to enter
into and perform the Guarantee and has taken all corporate action required on
its part to authorise the execution, delivery and performance of the guarantee.
(iii). The execution, delivery and performance of the Guarantee by
the Company (i) does not and will not violate the Certificate of Incorporation,
Memorandum of Association or Bye-laws of the Company; (ii) conflict with the
Companies Act 1981 or any other law or governmental rule or regulation published
by the Bermuda Government which is applicable to the Company; and (iii) as far
as can be ascertained from the Searches (which are not conclusive) does not and
will not violate or conflict with any judgment, order, decree, injunction or
award of any authority, agency or court in Bermuda to which the Company is
subject.
(iv). The obligations of the Company as set out in the Guarantee
constitute, legal, valid and binding obligations of the Company.
(v). The Company having been designated as non-resident for the
purposes of the Exchange Control Act 1972, it is not necessary for the consent
of any authority or agency in Bermuda to be obtained to enable the Company to
enter into and perform its obligations set out in the Guarantee.
(vi). The obligations of the Company under the Guarantee will rank
at least pari passu in priority of payment with all other unsecured
unsubordinated indebtedness of the Company other than indebtedness which is
preferred by virtue of any provision of Bermuda law of general application.
(vii). As far as can be ascertained from the Searches (which are not
conclusive), no litigation, arbitration or administrative proceedings of or
before any court, arbitrator or governmental instrumentality of or in Bermuda
is, to the best of our knowledge, pending with respect to the Company in
connection with the Guarantee or the transactions contemplated thereby.
(viii). The Company will be permitted to make all payments under the
Guarantee free of any deduction or withholding therefrom in Bermuda and such
payments will not be subject to any tax imposed by the Government of Bermuda or
any taxing authority thereof or therein.
4
<PAGE> 113
(ix). The entry into, performance and enforcement of the Guarantee
will not give rise to any registration fee or to any stamp, excise or other
similar tax imposed by the Government of Bermuda or any taxing authority thereof
or therein.
(x). Subject to paragraph (12) and reservation (f) below, it is not
necessary or advisable under the laws of Bermuda in order to ensure the
validity, effectiveness or enforceability or admissibility in evidence of the
Guarantee that the Guarantee be filed, registered or recorded with any Court,
public office or other Bermuda regulatory authority.
(xi). The choice of the laws of the State of New York to govern the
Guarantee is a proper, valid and binding choice of law and will be recognised
and applied by the courts of Bermuda provided that the point is specifically
pleaded and that such choice of law is a valid and binding choice of law under
the laws of the State of New York.
(xii). A final and conclusive judgement obtained in the Courts of the
State of New York or Federal Courts of the United States of America against the
Company based upon the Guarantee under which a sum of money is payable (other
than a sum of money payable in respect of taxes or other charges of a like
nature or in respect of a fine or other penalty or in respect of Multiple
Damages as defined in the Protection of Trading Interest Act, 1981) may be the
subject of enforcement proceedings in the Supreme Court of Bermuda, without
re-examination of the merits, under the Common Law Doctrine of Obligation. A
final opinion as to the availability of this remedy should be sought when the
facts surrounding the foreign judgment are known but, on general principles, we
would expect such an application to be successful provided that:
(A) the Court which gave the judgment was competent to
hear the action in accordance with private international law principles
as applied in Bermuda;
(B) the judgment has not been obtained by fraud;
(C) the judgment is not and its enforcement would not be
contrary to public policy of Bermuda;
(D) the judgment has not been obtained in proceedings
contrary to natural justice; and
(E) the correct procedures under the laws of Bermuda are
duly complied with.
Neither the Company nor any of its property or assets (or any portion
thereof) enjoys, under the laws of Bermuda, immunity from suit, execution,
attachment or other legal process in any proceedings in Bermuda in connection
with the Guarantee.
Our reservations are as follows:
5
<PAGE> 114
(a) We are admitted to practise law in the Islands of Bermuda and
we express no opinion as to any law other than Bermuda law and none of the
opinions expressed herein relates to compliance with or matters governed by the
laws of any jurisdiction except Bermuda.
(b) Where an obligation is to be performed in a jurisdiction other
than Bermuda, the Courts of Bermuda may refuse to enforce it to the extent that
such performance would be illegal or contrary to public policy under the laws of
such other jurisdiction.
(c) We express no opinion as to the availability of equitable
remedies, such as specific performance or injunctive relief, or as to matters
which are within the discretion of the Courts of Bermuda such as the award of
costs or questions relating to forum non-conveniens. Further, we express no
opinion as to the validity or binding effect of any waiver of or obligation to
waive any provision of law (whether substantive or procedural) or any right or
remedy arising through circumstances not known at the time of entering into the
Financing Documents and the Guarantee.
(d) We express no opinion as to the validity or the binding effect
of any obligations of the Borrower in the Financing Documents which provide for
the payment by the Borrower of a higher rate of interest on overdue amounts than
on amounts which are current. A Bermuda Court, even if it were applying the laws
of the State of New York might not give effect to such provision as being
contrary to public policy if it could be established that the amount expressed
as being payable was such that the provision was in the nature of a penalty;
that is to say a requirement for a stipulated sum to be paid irrespective of, or
necessarily greater than, the loss likely to be sustained. The Court will
determine and award what it considers to be reasonable damages. Section 9 of The
Interest and Credit Charges (Regulations) Act 1975 provides that the Bermuda
Courts have discretion as to the amount of interest if any payable on the amount
of a judgment after the date of judgment. If the Court does not exercise that
discretion, then interest will accrue at the statutory rate which is currently
7% per annum.
(e) The obligations of the Company under the Guarantee will be
subject to any laws from time to time in effect relating to bankruptcy,
insolvency or liquidation or any other laws or other legal procedures affecting
generally the enforcement of creditors' rights and may also be the subject of
the statutory limitation of the time within which such proceedings may be
brought.
(f) To the extent that the Financing Documents, the Guarantee or
the transactions contemplated thereunder, create or give rise to the creation of
any charge over any assets of the Company, such charge will be registerable
under Part V of The Companies Act 1981 of Bermuda. The fee payable for
registration of a charge is $425.00. Registration is not compulsory and there is
no time limit within which it must be effected. Under Section 55 of the
Companies Act, any charge registered will have priority based on the date that
it is registered and not on the date of its creation and will have such priority
over any unregistered charge. Accordingly, it is advisable to register any such
charge.
6
<PAGE> 115
(g) Any provision in the Financing Documents or the Guarantee that
certain calculations and/or certificates will be conclusive and binding will not
be effective if such calculations are fraudulent or erroneous on their face and
will not necessarily prevent enquiry into the merits of any claim by an
aggrieved party.
(h) Where a party is vested with a discretion or may determine a
matter in its opinion, such discretion may have to be exercised reasonably or
such an opinion may have to be based on reasonable grounds.
(i) Searches in the register of companies at the office of the
Registrar of Companies and in the Supreme Court Causes Book at the Registry of
the Supreme Court are not conclusive and it should be noted that the register of
companies and the Supreme Court Causes Book do not reveal:
(i) whether an application to the Supreme Court for the
appointment of a receiver or manager has been presented;
(ii) details of matters which have been lodged for
registration but have not actually been registered or to the extent
they have been registered have not been disclosed or appear in the
public records at the date the search is concluded;
(iii) details of matters which should have been lodged for
registration but have not been lodged for registration at the date the
search is concluded; or
(iv) whether a receiver or manager has been appointed
privately out of the Supreme Court pursuant to the provisions of a
debenture or other security, unless notice of the fact has been entered
in the register of charges in accordance with the provisions of the
Act.
(j) A Bermuda Court may refuse to give effect to any provisions of
the Financing Documents or Guarantee in respect of costs of unsuccessful
litigation brought before the Court or where that Court has itself made an order
for costs.
This opinion is issued on the basis that it will be governed by and
construed in accordance with the provisions of Bermuda law and it is limited to
and is given on the basis of the current law and practice in Bermuda and will
not give rise to action in any other jurisdiction. It is issued solely for your
benefit for the purpose of the transactions described in the Guarantee and it is
not to be relied upon by any other person (other than permitted assigns and
transferees under the Financing Documents), or for any other purpose, without
our prior written consent.
Yours faithfully,
7
<PAGE> 116
EXHIBIT L
NEW BORROWER AGREEMENT
AGREEMENT dated as of ___________ among TYCO INTERNATIONAL (US) INC., a
Massachusetts corporation ("Tyco US"), TYCO GROUP S.a.r.l., a Luxembourg company
("Tyco Luxembourg"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(the "Agent").
R E C I T A L S:
WHEREAS, Tyco US is a party to a 364-Day Credit Agreement dated as of
February 13, 1998 (as the same has been or may hereafter be amended from time to
time, the "Credit Agreement") with the Banks listed therein and the Agent; and
WHEREAS, any Loans made to Tyco US by the Banks under the Credit
Agreement will be prepaid in full not later than the date of effectiveness
hereof; and
WHEREAS, Tyco US and Tyco Luxembourg have elected that Tyco Luxembourg
shall become the Borrower under the Credit Agreement and that Tyco US shall
cease to be the Borrower thereunder;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings set forth in the Credit Agreement.
SECTION 2. New Borrower. Upon the satisfaction of the conditions
referred to in Section 3.04 of the Credit Agreement, (i) each of the Banks shall
make a Loan to Tyco Luxembourg on the terms and conditions set forth in the
Credit Agreement, (ii) the proceeds of such Loans shall fund to the extent
necessary an inter-company loan by Tyco Luxembourg to Tyco US, which
inter-company loan shall fund in whole or in part the repayment of all loans to
Tyco US under the Credit Agreement and the Existing Agreements, (iii) Tyco US
shall execute a promissory note in favor of Tyco Luxembourg, in form reasonably
satisfactory to Tyco Luxembourg, to evidence such inter-company loans, (iv) Tyco
Luxembourg shall become a party to the Credit Agreement and shall be the
Borrower thereunder with all the rights of the Borrower thereunder and all
liabilities and obligations under the Credit Agreement and the Notes arising
from and after the effectiveness of this Agreement and (v) Tyco US shall be
released from all
<PAGE> 117
liabilities and obligations under the Credit Agreement and the Notes to the
extent such liabilities and obligations arise from and after the effectiveness
of this Agreement and shall cease to be a party to the Credit Agreement. Nothing
in this Section shall affect the obligations of Tyco US as a Subsidiary
Guarantor.
SECTION 3. Judicial Proceedings. (a) Consent to Jurisdiction. Tyco
Luxembourg irrevocably submits to the non-exclusive jurisdiction of any federal
or New York State court sitting in New York City over any suit, action or
proceeding arising out of or relating to the Financing Documents. Tyco
Luxembourg irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding brought in such court and any claim that any
suit, action or proceeding brought in such court has been brought in an
inconvenient forum. Tyco Luxembourg agrees that a final judgment in any such
suit, action or proceeding brought in such a court shall be conclusive and
binding upon it and will be given effect in Luxembourg to the fullest extent
permitted by applicable law and may be enforced in any federal or New York State
court sitting in New York City (or any other courts to the jurisdiction of which
Tyco Luxembourg is or may be subject) by a suit upon such judgment, provided
that service of process is effected upon it in one of the manners specified
herein or as otherwise permitted by law.
(b) Appointment of Agent for Service of Process. Tyco Luxembourg
hereby irrevocably designates and appoints CT Corporation System having an
office on the date hereof at 1633 Broadway, New York, New York 10019 as its
authorized agent, to accept and acknowledge on its behalf, service or any and
all process which may be served in any suit, action or proceeding of the nature
referred to in subsection (a) above in any federal or New York State court
sitting in New York City. Tyco Luxembourg represents and warrants that such
agent has agreed in writing to accept such appointment and that a true copy of
such designation and acceptance has been delivered to the Agent. Such
designation and appointment shall be irrevocable until all principal and
interest and all other amounts payable under the Financing Documents shall have
been paid in full in accordance with the provisions hereof. If such agent shall
cease so to act, Tyco Luxembourg covenants and agrees to designate irrevocably
and appoint without delay another such agent satisfactory to the Agent and to
deliver promptly to the Agent evidence in writing of such other agent's
acceptance of such appointment.
(c) Service of Process. Tyco Luxembourg hereby consents to process
being served in any suit, action, or proceeding of the nature referred to in
subsection (a) above in any federal or New York State court sitting in New York
City by service of process upon the agent of Tyco Luxembourg, as the case may
be, for service of process in such jurisdiction appointed as provided in
subsection (b) above; provided that, to the extent lawful and possible, written
notice of said service upon such agent shall be mailed by registered airmail,
postage prepaid, return receipt requested, to Tyco Luxembourg at its address
specified on the signature pages hereof or to any other address of which Tyco
Luxembourg shall have given written notice to the Agent. Tyco Luxembourg
irrevocably waives, to the fullest extent permitted by law, all claim of error
by reason of any such service and agrees that such service shall be deemed in
every respect effective
2
<PAGE> 118
service of process upon Tyco Luxembourg in any such suit, action or proceeding
and shall, to the fullest extent permitted by law, be taken and held to be valid
and personal service upon and personal delivery to Tyco Luxembourg.
(d) No Limitation on Service or Suit. Nothing in this Section
shall affect the right of the Agent or any Bank to serve process in any other
manner permitted by law or limit the right of the Agent or any Bank to bring
proceedings against Tyco Luxembourg in the courts of any jurisdiction or
jurisdictions.
SECTION 4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 5. Counterparts; This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
TYCO INTERNATIONAL (US) INC.
By
--------------------------------------
Title:
By
--------------------------------------
Title:
TYCO GROUP S.a.r.l.
By
--------------------------------------
Title:
By
--------------------------------------
Title:
3
<PAGE> 119
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By
--------------------------------------
Title:
4
<PAGE> 120
EXHIBIT M
Opinion of Counsel of Tyco Luxembourg
Matters to be covered include*:
(a) Counsel has reviewed (i) the 364-Day Credit Agreement and the
Extendible 364- Day Credit Agreement (the "Credit Agreements"), (ii) the Parent
Guarantee, (iii) the New Borrower Agreement, (iv) the Promissory Notes executed
by Tyco Luxembourg, (v) the [Articles of Organization and By-laws] of Tyco
Luxembourg and (vi) such other documents, records, certificates and instruments
as are relevant and necessary as the basis for its opinion.
(b) Tyco Luxembourg is a company duly organized and validly
existing under the laws of Luxembourg
(c) Tyco Luxembourg has all company powers and all material
governmental licenses, consents and approvals required to carry on its business
as now conducted (other than such powers or consents the failure of which to be
obtained could not reasonably be expected to have a Material Adverse Effect).
(d) The execution, delivery and performance by Tyco Luxembourg of
the New Borrower Agreement and the Promissory Notes, and the performance by Tyco
Luxembourg of the Credit Agreements (i) are within Tyco Luxembourg's company
powers, (ii) have been duly authorized by all necessary company action, (iii)
require no action by or filing with any governmental body, agency or official,
(iv) do not contravene or constitute a default under (A) applicable law or
regulation, (B) Tyco Luxembourg's charter or by-laws or (C) any agreement or
instrument governing Debt of Tyco Luxembourg or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon Tyco
Luxembourg.
(e) Each of the Credit Agreements and the New Borrower Agreement
constitutes a valid and binding agreement of Tyco Luxembourg, and each
Promissory Note constitutes a valid and binding obligation of Tyco Luxembourg.
(f) There is no action, suit or proceeding pending or threatened
against or affecting Tyco Luxembourg or any of its Subsidiaries in which there
is a reasonable possibility of an adverse decision which could reasonably be
expected to have a Material Adverse Effect or which in any manner draws into
question the validity of the Financing Documents.
- --------
* Terms defined in the Credit Agreements and used herein, but not
otherwise defined herein, have the meanings ascribed thereto in the Credit
Agreements.
<PAGE> 121
(g) There is no tax, impost, deduction or withholding imposed by
Luxembourg or any political subdivision thereof on or by virtue of the
execution, delivery or enforcement of the Financing Documents or any other
agreement or instrument relating thereto.
(h) Each of the Financing Documents is in proper legal form under
the laws of Luxembourg for the enforcement thereof against Tyco Luxembourg under
the laws of Luxembourg.
(i) To ensure the legality, validity, enforceability or
admissibility in evidence of the Financing Documents in Luxembourg, it is not
necessary that the Financing Documents or any other document be filed or
recorded with any court or other authority in Luxembourg.
(j) The choice of the laws of the State of New York to govern the
Credit Agreements, the New Borrower Agreement and the Promissory Notes is a
valid and binding choice of law an will be recognized and applied by the courts
of Luxembourg.
(k) Any judgment obtained in a state or Federal court sitting in
the Borough of Manhattan, City of New York, State of New York, arising out of or
in relation to the obligations of Tyco Luxembourg under the Financing Documents
would be enforceable in Luxembourg against Tyco Luxembourg.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>3
<DESCRIPTION>$ 500 MILLION EXTENDABLE 364-DAY CREDIT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 4.2
CONFORMED COPY
$500,000,000
EXTENDIBLE 364-DAY CREDIT AGREEMENT
dated as of
February 13, 1998
among
Tyco International (US) Inc.,
The Banks Listed Herein
and
Morgan Guaranty Trust Company of New York,
as Agent
<PAGE> 2
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 1
DEFINITIONS
<S> <C> <C>
SECTION 1.01. Definitions.................................................. 1
SECTION 1.02. Accounting Terms and Determinations.......................... 16
SECTION 1.03. Types of Borrowings.......................................... 16
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend.......................................... 16
SECTION 2.02. Notice of Committed Borrowing................................ 17
SECTION 2.03. The Money Market Borrowings.................................. 17
SECTION 2.04. Notice to Banks; Funding of Loans............................ 21
SECTION 2.05. Promissory Notes............................................. 21
SECTION 2.06. Maturity of Loans............................................ 22
SECTION 2.07. Interest Rates............................................... 22
SECTION 2.08. Facility Fee................................................. 26
SECTION 2.09. Optional Termination or Reduction of Commitments............. 26
SECTION 2.10. Mandatory Termination of Commitments......................... 26
SECTION 2.11. Optional Prepayments......................................... 26
SECTION 2.12. General Provisions as to Payments............................ 27
SECTION 2.13. Funding Losses............................................... 27
SECTION 2.14. Computation of Interest and Fees............................. 28
SECTION 2.15. Regulation D Compensation.................................... 28
SECTION 2.16. Method of Electing Interest Rates............................ 28
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness................................................ 30
SECTION 3.02. Existing Agreements.......................................... 31
SECTION 3.03. Borrowings................................................... 33
SECTION 3.04. New Borrower................................................. 34
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power................................ 36
SECTION 4.02. Corporate and Governmental Authorization; No Contravention... 36
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 4.03. Binding Effect............................................... 36
SECTION 4.04. Financial Information........................................ 36
SECTION 4.05. Litigation................................................... 37
SECTION 4.06. Compliance with ERISA........................................ 37
SECTION 4.07. Environmental Matters........................................ 37
SECTION 4.08. Taxes........................................................ 38
SECTION 4.09. Subsidiaries................................................. 38
SECTION 4.10. Not an Investment Company.................................... 38
SECTION 4.11. Full Disclosure.............................................. 38
ARTICLE 5
COVENANTS
SECTION 5.01. Information.................................................. 38
SECTION 5.02. Payment of Obligations....................................... 41
SECTION 5.03. Maintenance of Property; Insurance........................... 41
SECTION 5.04. Conduct of Business and Maintenance of Existence............. 41
SECTION 5.05. Compliance with Laws......................................... 42
SECTION 5.06. Inspection of Property, Books and Records; Confidentiality... 42
SECTION 5.07. Limitation on Restrictions on Subsidiary Dividends and Other
Distributions................................................ 43
SECTION 5.08. Debt......................................................... 45
SECTION 5.09. Fixed Charge Coverage........................................ 45
SECTION 5.10. Negative Pledge.............................................. 45
SECTION 5.11. Consolidations, Mergers and Sales of Assets.................. 47
SECTION 5.12. Use of Proceeds.............................................. 48
SECTION 5.13. Transactions with Affiliates................................. 48
SECTION 5.14. Additional Subsidiary Guarantors............................. 49
ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults........................................... 49
SECTION 6.02. Notice of Default............................................ 51
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization................................ 52
SECTION 7.02. Agent and Affiliates......................................... 52
SECTION 7.03. Action by Agent.............................................. 52
SECTION 7.04. Consultation with Experts.................................... 52
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
SECTION 7.05. Liability of Agent........................................... 52
SECTION 7.06. Indemnification.............................................. 53
SECTION 7.07. Credit Decision.............................................. 53
SECTION 7.08. Successor Agent.............................................. 53
SECTION 7.09. Agent's Fee.................................................. 53
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair..... 54
SECTION 8.02. Illegality................................................... 54
SECTION 8.03. Increased Cost and Reduced Return............................ 55
SECTION 8.04. Taxes........................................................ 56
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.... 58
SECTION 8.06. Substitution of Bank......................................... 58
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices...................................................... 59
SECTION 9.02. No Waivers................................................... 59
SECTION 9.03. Expenses; Indemnification.................................... 59
SECTION 9.04. Sharing of Set-Offs.......................................... 60
SECTION 9.05. Amendments and Waivers....................................... 60
SECTION 9.06. Successors and Assigns....................................... 61
SECTION 9.07. Collateral................................................... 63
SECTION 9.08. Governing Law; Submission to Jurisdiction.................... 63
SECTION 9.09. Counterparts; Integration.................................... 63
SECTION 9.10. Waiver of Jury Trial......................................... 63
SECTION 9.11. Judgment Currency............................................ 64
</TABLE>
Commitment Schedule
Exhibit A - Promissory Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E-1 - Opinion of General Counsel of the Borrower
Exhibit E-2 - Opinion of General Counsel on Behalf of the Parent Guarantor
Exhibit F - Opinion of Special Counsel for the Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Form of Subsidiary Guarantee
Exhibit I - Form of Subsidiary Counsel Opinion
Exhibit J - Form of Parent Guarantee
iii
<PAGE> 5
Exhibit K - Form of Parent Counsel Opinion
Exhibit L - Form of New Borrower Agreement
Exhibit M - Form of Tyco Luxembourg Counsel Opinion
iv
<PAGE> 6
EXTENDIBLE 364-DAY CREDIT AGREEMENT
AGREEMENT dated as of February 13, 1998 among TYCO INTERNATIONAL (US)
INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"ACQUISITION" means the acquisition by the Borrower and certain of its
Affiliates of the Sherwood-Davis & Geck Division of American Home Products
Corporation on substantially the terms and conditions heretofore disclosed to
the Banks.
"ADJUSTED CD RATE" has the meaning set forth in Section 2.07(b).
"ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Borrower (a "Controlling Person") or
(ii) any Person (other than the Borrower or a Subsidiary) which is controlled by
or is under common control with a Controlling Person. As used herein, the term
"control" means possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise. The fact that an
Affiliate of a Person is a member of a law firm that renders services to such
Person or its Affiliates does not mean that the law firm is an Affiliate of such
Person.
"AGENT" means Morgan Guaranty Trust Company of New York in its capacity
as agent for the Banks under the Financing Documents, any successor agent that
becomes the Agent pursuant to Section 7.08, and the respective corporate
successors of the foregoing acting in such capacity.
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"APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its
Money Market Loans, its Money Market Lending Office.
"APPLICABLE MARGIN" has the meaning set forth in Section 2.07(h).
"ASSESSMENT RATE" has the meaning set forth in Section 2.07(b).
"ASSIGNEE" has the meaning set forth in Section 9.06(c).
"BANK" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 9.06(c), and the respective
corporate successors of the foregoing.
"BANK AFFILIATE" means, with respect to the Agent or any Bank, any
Person controlling, controlled by or under common control with the Agent or such
Bank, as the case may be.
"BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"BASE RATE LOAN" means a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Section 2.07(a) or Article 8.
"BORROWER" means (i) until the New Borrower Date, Tyco US and (ii) on
and after the New Borrower Date, Tyco Luxembourg.
"BORROWING" has the meaning set forth in Section 1.03.
"CD BASE RATE" has the meaning set forth in Section 2.07(b).
"CD LOAN" means a Committed Loan which bears interest at a CD Rate
pursuant to the applicable Notice of Committed Borrowing or Notice of Interest
Rate Election.
"CD RATE" means a rate of interest determined pursuant to Section
2.07(b) on the basis of an Adjusted CD Rate.
"CD REFERENCE BANKS" means The Hongkong and Shanghai Banking
Corporation Limited, Commerzbank AG and Morgan Guaranty Trust Company of New
York.
"COMMITMENT" means (i) with respect to each Bank listed on the
Commitment Schedule, the amount set forth opposite the name of such Bank on the
Commitment Schedule and (ii) with respect to any Assignee, the amount of the
transferor Bank's Commitment assigned to it pursuant
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to Section 9.06(c), in each case as such amount may be changed from time to time
pursuant to Section 2.09 or 9.06(c).
"COMMITMENT SCHEDULE" means the Commitment Schedule attached hereto.
"COMMITTED BORROWING" has the meaning set forth in Section 1.03.
"COMMITTED LOAN" means a loan made by a Bank pursuant to Section 2.01;
provided that, if any such loan or loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term Committed
Loan shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"CONDUIT" means a special purpose corporation which is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business.
"CONDUIT DESIGNATION" has the meaning set forth in Section 9.06(f).
"CONSENTS" has the meaning set forth in Section 4.01.
"CONSOLIDATED ASSETS" means, at any time, the total assets of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis
as of such time.
"CONSOLIDATED DEBT" means, at any date, the aggregate amount of Debt of
the Borrower and its Consolidated Subsidiaries, determined on a consolidated
basis as of such date; provided that (i) if a Permitted Receivables Transaction
is outstanding at such date and is accounted for as a sale of accounts
receivable under generally accepted accounting principles, Consolidated Debt
determined as aforesaid shall be adjusted to include the additional Debt,
determined on a consolidated basis as of such date, which would have been
outstanding at such date had such Permitted Receivables Transaction been
accounted for as a borrowing at such date and (ii) Consolidated Debt shall in
any event include all Debt of any Person other than the Borrower or a
Consolidated Subsidiary which is Guaranteed by the Borrower or a Consolidated
Subsidiary, except that Consolidated Debt shall not include Debt of a joint
venture, partnership or similar entity which is Guaranteed by the Borrower or a
Consolidated Subsidiary by virtue of the joint venture, partnership or similar
arrangement with respect to such entity or by operation of applicable law (and
not otherwise) so long as the aggregate outstanding principal amount of all such
excluded Debt at any date does not exceed $50,000,000.
"CONSOLIDATED EBIT" means, for any fiscal period, Consolidated Net
Income for such period plus, to the extent deducted in determining Consolidated
Net Income for such period, the aggregate amount of (i) Consolidated Interest
Expense and (ii) federal, state and local income tax expense.
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"CONSOLIDATED INTEREST EXPENSE" means, for any fiscal period, (without
duplication) (i) the consolidated interest expense of the Borrower and its
Consolidated Subsidiaries for such period minus (ii) the consolidated interest
income of the Borrower and its Consolidated Subsidiaries for such period, if,
and only if, such consolidated interest income is equal to or less than
$5,000,000, plus (iii) if a Permitted Receivables Transaction outstanding during
such period is accounted for as a sale of accounts receivable under generally
accepted accounting principles, the additional consolidated interest expense
that would have accrued during such period had such Permitted Receivables
Transaction been accounted for as a borrowing during such period, in each case
determined on a consolidated basis.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the
consolidated net income of the Borrower and its Consolidated Subsidiaries for
such period, determined on a consolidated basis after eliminating therefrom all
Extraordinary Gains and Losses. "EXTRAORDINARY GAINS AND LOSSES" means and
includes, for any fiscal period, all extraordinary gains and losses and all
other material non-recurring non-cash items of the Borrower and its Consolidated
Subsidiaries for such period, determined on a consolidated basis and, in
addition, includes, without limitation, gains or losses from the discontinuance
of operations and gains or losses of the Borrower and its Consolidated
Subsidiaries for such period resulting from the sale, conversion or other
disposition of material assets of the Borrower or any Consolidated Subsidiary
other than in the ordinary course of business.
"CONSOLIDATED NET WORTH" means, at any date, the consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries,
determined on a consolidated basis as of such date and adjusted so as to exclude
the effect of the currency translation adjustment as of such date.
"CONSOLIDATED SUBSIDIARY" means, at any date, with respect to any
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in such Person's consolidated financial
statements if such statements were prepared as of such date; unless otherwise
specified, Consolidated Subsidiary means a Consolidated Subsidiary of the
Borrower.
"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, (i) Consolidated
Net Worth as of such date minus (ii) Intangible Assets as of such date.
"CONSOLIDATED TOTAL CAPITALIZATION" means, at any date, the sum of
Consolidated Debt and Consolidated Net Worth, each determined as of such date.
"DEBT" of any Person means, at any date, without duplication, (i) the
principal amount of all obligations of such Person for borrowed money, (ii) the
principal amount of all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (it being understood that,
subject to the proviso to this definition of "Debt," performance bonds,
performance guaranties, letters of credit, bank guaranties and similar
instruments shall not constitute Debt of such Person to the extent that the
outstanding reimbursement obligations of
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such Person in respect thereof are collateralized by cash or cash equivalents,
which cash or cash equivalents would not be reflected as assets on a balance
sheet of such Person prepared in accordance with generally accepted accounting
principles), (iii) all obligations of such Person to pay the deferred purchase
price of property or services recorded on the books of such Person, except for
(a) trade and similar accounts payable and accrued expenses arising in the
ordinary course of business, and (b) employee compensation and pension
obligations, and other obligations arising from employee benefit programs and
agreements or other similar employment arrangements, (iv) all obligations of
such Person as lessee which are capitalized on the books of such Person in
accordance with generally accepted accounting principles, (v) all Debt secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person, and (vi) all Debt of others Guaranteed by such
Person; provided, however, that Debt shall not include:
(A) contingent reimbursement obligations in
respect of performance bonds, performance
guaranties, bank guaranties or letters of
credit issued in lieu of performance bonds
or performance guaranties or similar
instruments, in each case, incurred by such
Person in the ordinary course of business;
(B) contingent reimbursement obligations in
respect of trade letters of credit, or
similar instruments, in each case, incurred
by such Person in the ordinary course of
business; or
(C) contingent reimbursement obligations in
respect of standby letters of credit or
similar instruments securing self-insurance
obligations of such Person;
in each case, so long as the underlying obligation supported thereby does not
itself constitute Debt.
"DEBT RATING" means a rating of the Borrower's long-term debt which is
not secured or supported by a guarantee, letter of credit or other form of
credit enhancement. If a Debt Rating by a Rating Agency is required to be at or
above a specified level and such Rating Agency shall have changed its system of
classifications after the date hereof, the requirement will be met if the Debt
Rating by such Rating Agency is at or above the new rating which most closely
corresponds to the specified level under the old rating system.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
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"DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent; provided that any Bank may so designate
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
of such offices, as the context may require.
"DOMESTIC LOANS" means CD Loans or Base Rate Loans or both.
"DOMESTIC PARENT" means any Affiliate incorporated under the laws of
the United States, any State thereof or the District of Columbia of which Tyco
US is a Subsidiary.
"DOMESTIC RESERVE PERCENTAGE" has the meaning set forth in Section
2.07(b).
"EFFECTIVE DATE" means the date this Agreement becomes effective in
accordance with Section 3.01.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or wastes or the
clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means the Borrower, any Subsidiary Guarantor and all
members of a controlled group of corporations and all trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower or any Subsidiary Guarantor, are treated as a single employer under
Section 414 of the Internal Revenue Code.
"EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or
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affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending
Office by notice to the Borrower and the Agent.
"EURO-DOLLAR LOAN" means a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election.
"EURO-DOLLAR RATE" means a rate of interest determined pursuant to
Section 2.07(c) on the basis of a London Interbank Offered Rate.
"EURO-DOLLAR REFERENCE BANKS" means the principal London offices of The
Hongkong and Shanghai Banking Corporation Limited, Commerzbank AG and Morgan
Guaranty Trust Company of New York.
"EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section
2.15.
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01.
"EXISTING AGREEMENTS" means the Existing 364-Day Agreement and the
Existing Five- Year Agreement.
"EXISTING FIVE-YEAR AGREEMENT" means the Five-Year Credit Agreement,
dated as of June 27, 1997, among the Borrower, the banks listed therein and
Morgan Guaranty Trust Company of New York, as agent for such banks, as amended
to the Effective Date.
"EXISTING 364-DAY AGREEMENT" means the 364-Day Credit Agreement, dated
as of June 27, 1997, among the Borrower, the banks listed therein and Morgan
Guaranty Trust Company of New York, as agent for such banks, as amended to the
Effective Date.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Agent.
"FINANCING DOCUMENTS" means this Agreement, the Subsidiary Guarantees,
the Promissory Notes, the New Borrower Agreement and the Parent Guarantee.
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"FIXED RATE LOANS" means CD Loans or Euro-Dollar Loans or Money Market
Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate
pursuant to Section 8.01(a)) or any combination of the foregoing.
"GROUP OF LOANS" means, at any time, a group of Loans consisting of (i)
all Committed Loans which are Base Rate Loans at such time, (ii) all Euro-Dollar
Loans having the same Interest Period at such time or (iii) all CD Loans having
the same Interest Period at such time, provided that, if a Committed Loan of any
particular Bank is converted to or made as a Base Rate Loan pursuant to Article
8, such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such holder against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"GUARANTOR" means the Parent Guarantor and any Subsidiary Guarantor.
"HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"INDEMNITEE" has the meaning set forth in Section 9.03(b).
"INTANGIBLE ASSETS" means, at any date, the amount (if any) which would
be stated under the heading "Costs in Excess of Net Assets of Acquired
Companies" or under any other heading relating to intangible assets separately
listed, in each case, on the face of a balance sheet of the Borrower and its
Consolidated Subsidiaries prepared on a consolidated basis as of such date.
"INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, the
period commencing on the date of borrowing specified in the applicable Notice of
Borrowing or on the date specified in an applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter (or such other
period of time as may at the time be mutually agreed by the Borrower and the
Banks), as the Borrower may elect in such notice; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business
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Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next
preceding Euro-Dollar Business Day; and
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Euro-Dollar Business Day of a calendar
month;
(2) with respect to each CD Loan, the period commencing on the date of
borrowing specified in the applicable Notice of Borrowing or on the date
specified in an applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter (or such other period of time as may at the time be
mutually agreed by the Borrower and the Banks), as the Borrower may elect in
such notice; provided that any Interest Period which would otherwise end on a
day which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on
the next preceding Euro-Dollar Business Day; and
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Euro-Dollar Business Day of a calendar
month; and
(4) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 30 days)
as the Borrower may elect in accordance with Section 2.03; provided that any
Interest Period which would otherwise end on a day which is not a Euro-Dollar
Business Day shall be extended to the next succeeding Euro-Dollar Business Day;
and
provided further that any Interest Period applicable to any Loan which begins
before the Termination Date and would otherwise end after the Termination Date
shall end on the Termination Date.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
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"LEVEL I STATUS" exists at any date if, at such date, the Borrower has
Debt Ratings at or above the level of A by S&P or A2 by Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the Borrower
has Debt Ratings at or above the level of A- by S&P or A3 by Moody's and (ii)
Level I Status does not exist at such date.
"LEVEL III STATUS" exists at any date if, at such date, (i) the
Borrower has Debt Ratings at the level of BBB+ by S&P or Baa1 by Moody's and
(ii) Level I Status and Level II Status do not exist at such date.
"LEVEL IV STATUS" exists at any date if, at such date, (i) the Borrower
has Debt Ratings at the level of BBB by S&P or Baa2 by Moody's and (ii) Level I
Status, Level II Status and Level III Status do not exist at such date.
"LEVEL V STATUS" exists at any date if, at such date, the Borrower has
Debt Ratings at the level of BBB- by S&P and Baa3 by Moody's.
"LEVEL VI STATUS" exists at any date if, at such date, (i) the Borrower
has a Debt Rating from neither Rating Agency or (ii) Level I Status, Level II
Status, Level III Status, Level IV Status and Level V Status do not exist at
such date.
"LIBOR AUCTION" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate pursuant
to Section 2.03.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Borrower or any Subsidiary shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement (other than an operating lease)
relating to such asset.
"LOAN" means a Domestic Loan or a Euro-Dollar Loan or a Money Market
Loan and "LOANS" means Domestic Loans or Euro-Dollar Loans or Money Market Loans
or any combination of the foregoing.
"LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section
2.07(c).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, consolidated financial position or consolidated results of operations
of the Borrower and its Consolidated Subsidiaries, considered as a whole, or
(ii) the ability of the Borrower and the Guarantors to perform their obligations
under the Financing Documents.
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"MATERIAL DEBT" means Debt (other than (i) the Promissory Notes, (ii)
the Subsidiary Guarantees, (iii) any Guarantee by the Borrower of Debt of a
Subsidiary, (iv) any Guarantee by a Subsidiary of Debt of the Borrower or
another Subsidiary, (v) any Debt of the Borrower owed to a Wholly-Owned
Consolidated Subsidiary or (vi) any Debt of a Subsidiary owed to the Borrower or
a Wholly-Owned Consolidated Subsidiary) of the Borrower and/or one or more of
its Subsidiaries, arising in one or more related or unrelated transactions, in
an aggregate outstanding principal amount exceeding $50,000,000.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section
2.03(d).
"MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"MONEY MARKET BORROWING" has the meaning set forth in Section 1.03.
"MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided that any Bank may from time to time by notice to the
Borrower and the Agent designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to
a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.01(a)).
"MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d).
"MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.03.
"MOODY'S" means Moody's Investors Service, Inc., or any successor to
such corporation's business of rating debt securities.
"MULTIEMPLOYER PLAN" means at any time a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA either (i) to which any member of the
ERISA Group is then making
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or accruing an obligation to make contributions or (ii) has at any time within
the preceding five plan years been maintained, or contributed to, by any Person
who was at such time a member of the ERISA Group for employees of any Person who
was at such time a member of the ERISA Group.
"NEW BORROWER AGREEMENT" means an agreement among Tyco US, Tyco
Luxembourg and the Agent for the benefit of the Banks, substantially in the form
of Exhibit L.
"NEW BORROWER DATE" has the meaning set forth in Section 3.04.
"NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined
in Section 2.02 or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section
2.16.
"OBLIGOR" means, at any time, the Borrower and each Guarantor at such
time.
"PARENT" means, with respect to any Bank, any Person controlling such
Bank.
"PARENT GUARANTOR" means Tyco International Ltd., a Bermuda
corporation, and its successors.
"PARENT GUARANTEE" means a Parent Guarantee Agreement between the
Parent Guarantor and the Agent for the benefit of the Banks, substantially in
the form of Exhibit J, as amended from time to time.
"PARTICIPANT" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED RECEIVABLES TRANSACTION" means any sale or sales of,
refinancing of and/or financing secured by, any accounts receivable of the
Borrower and/or any of its Subsidiaries (the "RECEIVABLES") pursuant to which
the Borrower and its Subsidiaries realize aggregate net proceeds of not more
than $500,000,000 at any one time outstanding, including, without limitation,
any revolving purchase(s) of Receivables where the maximum aggregate uncollected
purchase price (exclusive of any deferred purchase price) for such Receivables
at any time outstanding does not exceed $500,000,000.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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"PLAN" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"PRIME RATE" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"PROMISSORY NOTES" means promissory notes of the Borrower,
substantially in the form of Exhibit A hereto, evidencing the obligation of the
Borrower to repay the Loans, and "PROMISSORY NOTE" means any one of such
promissory notes issued hereunder.
"PROPERTY" means any interest of any kind in any property or assets,
whether real, mixed or personal and whether tangible or intangible.
"PROSPECTS" means, at any time, results of future operations which are
reasonably foreseeable based upon the facts and circumstances in existence at
such time.
"QUARTERLY PAYMENT DATES" means each March 31, June 30, September 30
and December 31.
"RATING AGENCY" means S&P or Moody's.
"REFERENCE BANKS" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "REFERENCE BANK" means any one
of such Reference Banks.
"REFINANCING" has the meaning set forth in Section 5.07 (and the term
"REFINANCED" has a correlative meaning).
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"RELATED AGREEMENT" means the 364-Day Credit Agreement dated as of the
date hereof among the Borrower, the banks from time to time parties thereto and
Morgan Guaranty Trust Company of New York, as agent for such banks, as amended
from time to time.
"REQUIRED BANKS" means at any time Banks having more than 60% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Promissory Notes evidencing more than 60% of the aggregate
unpaid principal amount of the Loans.
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"REQUIRED SIGNIFICANT SUBSIDIARY" means any Significant Subsidiary as
defined in clause (A) of the definition of Significant Subsidiary; provided that
any Person which is a Significant Subsidiary as so defined shall nonetheless not
be a Required Significant Subsidiary if and for so long as (i) one or more
Required Significant Subsidiaries which are Subsidiary Guarantors are
Subsidiaries of such Person and (ii) such Person would not be a Significant
Subsidiary but for its ownership of such Subsidiary Guarantors.
"RESPONSIBLE OFFICER" means any of the following: the Chairman,
President, Vice President and Chief Financial Officer, Treasurer and Secretary
of the Borrower and, on and after the New Borrower Date, a Managing Director of
the Borrower.
"SIGNIFICANT SUBSIDIARY" means, at any date, (A) any Consolidated
Subsidiary which, including its consolidated subsidiaries, meets any of the
following conditions:
(i) the investments in and advances to such Consolidated
Subsidiary by the Borrower and its other Consolidated
Subsidiaries exceed 15% of the total assets of the Borrower
and its Consolidated Subsidiaries, determined on a
consolidated basis as of the end of the most recently
completed fiscal year; or
(ii) the proportionate share attributable to such
Consolidated Subsidiary of the total assets of the Borrower
and its Consolidated Subsidiaries (after intercompany
eliminations) exceeds 15% of the total assets of the Borrower
and the Consolidated Subsidiaries, determined on a
consolidated basis as of the end of the most recently
completed fiscal year; or
(iii) the Borrower's and its Consolidated Subsidiaries'
equity in the income of such Consolidated Subsidiary from
continuing operations before income taxes, extraordinary items
and cumulative effect of a change in accounting principle
exceeds 15% of such income of the Borrower and its
Consolidated Subsidiaries, determined on a consolidated basis
for the most recently completed fiscal year; and
(B) any other Subsidiary which is a Subsidiary Guarantor.
"STATUS" means, at any date, whichever of Level I Status, Level II
Status, Level III Status, Level IV Status, Level V Status or Level VI Status
exists at such date.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor to its business of rating debt
securities.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or
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<PAGE> 20
indirectly owned by such Person; unless otherwise specified, Subsidiary means a
Subsidiary of the Borrower.
"SUBSIDIARY GUARANTEE" means a Guarantee entered into by a Subsidiary
substantially in the form of Exhibit H hereto.
"SUBSIDIARY GUARANTOR" means, at any time, a Subsidiary which at or
prior to such time shall have delivered to the Agent (i) a Subsidiary Guarantee
in substantially the form of Exhibit H, duly executed by such Subsidiary, which
Subsidiary Guarantee has not terminated in accordance with its terms, (ii) an
opinion of counsel for such Subsidiary (which counsel may be an employee of the
Borrower or such Subsidiary) reasonably satisfactory to the Agent with respect
to such Subsidiary Guarantee, substantially in the form of Exhibit I hereto and
covering such additional matters relating to such Subsidiary Guarantee as the
Required Banks may reasonably request and (iii) all documents the Agent may
reasonably request relating to the existence of such Subsidiary, the corporate
authority for and the validity of such Subsidiary Guarantee, and any other
matters reasonably determined by the Agent to be relevant thereto, all in form
and substance reasonably satisfactory to the Agent.
"TERMINATION DATE" means February 12, 1999; provided that if on or
prior to such date the commitments under the Existing Agreements shall have
terminated and all principal of and interest on the loans outstanding thereunder
and all other amounts payable thereunder shall have been paid, the Borrower may
elect upon at least five days' notice to the Agent to extend the Termination
Date to February 12, 2003; and provided further that if the date otherwise
specified as the Termination Date is not a Euro-Dollar Business Day, the
Termination Date shall be the next preceding Euro-Dollar Business Day. The
notice referred to in the preceding sentence shall be effective upon receipt by
the Agent, which shall thereupon promptly notify all Banks thereof.
"TYCO LUXEMBOURG" means Tyco Group S.a.r.l., a Luxembourg company, and
its successors.
"TYCO US" means Tyco International (US) Inc., a Massachusetts
corporation, and its successors.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or to any other Person under Title IV of ERISA.
"UNITED STATES" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
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<PAGE> 21
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means, with respect to any
Person, any Consolidated Subsidiary all of the shares of capital stock or other
ownership interests of which (except directors' qualifying shares and
investments by foreign nationals mandated by applicable law) are at the time
beneficially owned, directly or indirectly, by such Person; unless otherwise
specified, Wholly-Owned Consolidated Subsidiary means a Wholly-Owned
Consolidated Subsidiary of the Borrower.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the Borrower's
independent public accountants) with the then most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries delivered
to the Banks; provided that, if either (i) the Borrower notifies the Agent that
the Borrower wishes to eliminate the effect of any change in generally accepted
accounting principles on the operation of any covenant contained in Article 5 or
(ii) the Agent notifies the Borrower that the Required Banks wish to effect such
an elimination, then the Borrower's compliance with such covenant shall be
determined on the basis of generally accepted accounting principles in effect
immediately before the relevant change in generally accepted accounting
principles became effective, until either (A) such notice is withdrawn by the
party giving such notice or (B) such covenant is amended in a manner
satisfactory to the Borrower and the Required Banks to reflect such change in
generally accepted accounting principles.
SECTION 1.03. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article 2 on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2
under which participation therein is determined (i.e., a "Committed Borrowing"
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "Money Market Borrowing" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids in accordance therewith).
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on the
terms and conditions set forth in this Agreement, to make loans to the Borrower
pursuant to this Section 2.01 from time to time prior to the Termination Date in
amounts such that the aggregate principal amount of Committed Loans by such Bank
at any one time outstanding shall not exceed the amount of its Commitment. Each
Borrowing under this Section shall be in an aggregate principal
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<PAGE> 22
amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such
Borrowing may be in the aggregate amount available in accordance with Section
3.03(b)) and shall be made from the several Banks ratably in proportion to their
respective Commitments. Within the foregoing limits, the Borrower may borrow
under this Section, repay or, to the extent permitted by Section 2.11, prepay
Loans and reborrow at any time prior to the Termination Date under this Section
2.01.
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give
the Agent notice (a "Notice of Committed Borrowing") not later than 11:00 A.M.
(New York City time) on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to bear interest
initially at the Base Rate, a CD Rate or a Euro-Dollar Rate, and
(d) in the case of a Fixed Rate Borrowing, the duration of the initial
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period.
SECTION 2.03. The Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Borrowings
pursuant to Section 2.01, the Borrower may, as set forth in this Section,
request the Banks, at any time prior to the Termination Date, to make offers to
make Money Market Loans to the Borrower. The Banks may, but shall have no
obligation to, make such offers and the Borrower may, but shall have no
obligation to, accept any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to the
Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later than
10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior
to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y)
the Domestic Business Day next preceding the date of Borrowing proposed therein,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Agent shall have mutually agreed and shall have
notified to the Banks not later than the date of the Money Market Quote Request
for the first LIBOR Auction or Absolute Rate Auction for which such change is to
be effective), specifying:
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<PAGE> 23
(i) the proposed date of Borrowing, which shall be a
Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such other
number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may,
in its sole discretion, submit a Money Market Quote containing an offer or
offers to make Money Market Loans in response to any Invitation for Money Market
Quotes. Each Money Market Quote must comply with the requirements of this
subsection 2.03(d) and must be submitted to the Agent by telex or facsimile
transmission at its offices specified in or pursuant to Section 9.01 not later
than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day
prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y)
9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of
an Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money Market Quote Request for the first
LIBOR Auction or Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by the Agent (or any
affiliate of the Agent) in the capacity of a Bank may be submitted, and may only
be submitted, if the Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x) one hour prior to
the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15
minutes prior to the deadline for the other Banks, in the case of an Absolute
Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall
be irrevocable except with the written consent of the Agent given on the
instructions of the Borrower.
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<PAGE> 24
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing and the Interest
Period therefor,
(B) the principal amount of the Money Market Loan for
which each such offer is being made, which principal amount
(w) may be greater than or less than the Commitment of the
quoting Bank, (x) must be $5,000,000 or a larger multiple of
$1,000,000, (y) may not exceed the principal amount of Money
Market Loans for which offers were requested and (z) may be
subject to an aggregate limitation as to the principal amount
of Money Market Loans for which offers being made by such
quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above
or below the applicable London Interbank Offered Rate (the
"Money Market Margin") offered for each such Money Market
Loan, expressed as a percentage (specified to the nearest
1/10,000th of 1%) to be added to or subtracted from the
applicable London Interbank Offered Rate,
(D) in the case of an Absolute Rate Auction, the rate
of interest per annum (specified to the nearest 1/10,000th of
1%) (the "Money Market Absolute Rate") offered for each such
Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D
hereto or does not specify all of the information required by
subsection 2.03(d)(ii);
(B) contains qualifying, conditional or similar
language;
(C) proposes terms other than or in addition to those
set forth in the applicable Invitation for Money Market
Quotes; or
(D) arrives after the time set forth in subsection
2.03(d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the Borrower
of the terms (x) of any Money Market Quote submitted by a Bank that is in
accordance with subsection 2.03(d) and (y) of any Money Market Quote that
amends, modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market
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Quote Request. Any such subsequent Money Market Quote shall be disregarded by
the Agent unless such subsequent Money Market Quote is submitted solely to
correct a manifest error in such former Money Market Quote. The Agent's notice
to the Borrower shall specify (A) the aggregate principal amount of Money Market
Loans for which offers have been received for each Interest Period specified in
the related Money Market Quote Request, (B) the respective principal amounts and
Money Market Margins or Money Market Absolute Rates, as the case may be, so
offered and (C) if applicable, limitations on the aggregate principal amount of
Money Market Loans for which offers in any single Money Market Quote may be
accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction (or, in either case, such
other time or date as the Borrower and the Agent shall have mutually agreed and
shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection 2.03(e) (and the failure of the Borrower to give such notice by such
time shall constitute non-acceptance) and the Agent shall promptly notify each
affected Bank. In the case of acceptance, such notice (a "Notice of Money Market
Borrowing") shall specify the aggregate principal amount of offers for each
Interest Period that are accepted. The Borrower may, but shall not be obligated
to, accept any Money Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $10,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the basis of
ascending order of Money Market Margins or Money Market Absolute Rates,
as the case may be, in each case beginning with the lowest rate so
offered, and
(iv) the Borrower may not accept any offer where the Agent has
advised the Borrower that such offer is described in subsection
2.03(d)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as possible (in multiples of
$1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal
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amounts of such offers. Determinations by the Agent of the amounts of Money
Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly
notify each Bank of the contents thereof and of such Bank's share (if any) of
such Borrowing and such Notice of Borrowing shall not thereafter be revocable by
the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall make available its share of
such Borrowing, in Federal or other funds immediately available in New York
City, to the Agent at its address referred to in Section 9.01. Unless the Agent
determines that any applicable condition specified in Article 3 has not been
satisfied or waived in accordance with Section 9.05, the Agent will make the
funds so received from the Banks available to the Borrower no later than 3:00
P.M. (New York City time) on such date, in Federal or other funds immediately
available in New York City, as directed by the Borrower.
(c) If any Bank makes a new Loan hereunder on any day on which the
Borrower is to repay all or any part of an outstanding Loan from such Bank, such
Bank shall apply the proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount being borrowed and
the amount being repaid shall be made available by such Bank to the Agent as
provided in subsection 2.04(b), 2.04(c), or remitted by the Borrower to the
Agent as provided in Section 2.12, as the case may be.
(d) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing that such Bank will not make available to the Agent
such Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) and (c) of this Section 2.04 and the Agent may,
in reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and, if such Bank shall not have
paid such amount to the Agent within two Domestic Business Days of the Agent's
demand therefor, the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall
repay to the Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for purposes of this
Agreement.
(e) The failure of any Bank to make any Loan to be made by it on the
date specified therefor shall not relieve any other Bank of any obligation to
make a Loan on such date.
SECTION 2.05. Promissory Notes. (a) The Loans of each Bank shall be
evidenced by a single Promissory Note payable to the order of such Bank for the
account of its Applicable
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Lending Office in an amount equal to the aggregate unpaid principal amount of
such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type be evidenced by a separate Promissory Note
in an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Promissory Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Promissory Note" of
such Bank shall be deemed to refer to and include any or all of such Promissory
Notes, as the context may require.
(c) Upon receipt of each Bank's Promissory Note pursuant to Section
3.01(b), the Agent shall forward such Promissory Note to such Bank. Each Bank
shall record the date, amount, type and maturity of each Loan made by it and the
date and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Promissory Note, endorse on the schedule forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of any Bank to
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Promissory Notes. Each Bank is hereby
irrevocably authorized by the Borrower so to endorse its Promissory Note and to
attach to and make a part of its Promissory Note a continuation of any such
schedule as and when required.
SECTION 2.06. Maturity of Loans. (a) Each Committed Loan shall mature,
and the principal amount thereof shall be due and payable (together with
interest accrued thereon), on the Termination Date.
(b) Each Money Market Loan included in any Money Market Borrowing shall
mature, and the principal amount thereof shall be due and payable (together with
interest accrued thereon), on the last day of the Interest Period applicable to
such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the Base
Rate for each such day. Such interest shall be payable at maturity, quarterly in
arrears on each Quarterly Payment Date prior to maturity and, with respect to
the principal amount of any Base Rate Loan converted to a CD Loan or a Euro-
Dollar Loan, on the date such amount is so converted. Any overdue principal of
or interest on any Base Rate Loan shall bear interest, payable on demand, for
each day from and including the date payment thereof was due to but excluding
the date of actual payment, at a rate per annum equal to the sum of 2% plus the
rate otherwise applicable to Base Rate Loans for each such day.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the Applicable Margin for each such day
plus the applicable Adjusted CD Rate for such Interest
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Period; provided that if any CD Loan shall, as a result of the further proviso
to the definition of Interest Period, have an Interest Period of less than 30
days, such CD Loan shall bear interest during such Interest Period at the rate
applicable to Base Rate Loans during such period. Such interest shall be payable
for each Interest Period on the last day thereof and, if such Interest Period is
longer than 90 days, at intervals of 90 days after the first day thereof. Any
overdue principal of or interest on any CD Loan shall bear interest, payable on
demand, for each day from and including the date payment thereof was due to but
excluding the date of actual payment, at a rate per annum equal to the sum of 2%
plus the higher of (i) the sum of the Applicable Margin for each such day plus
the Adjusted CD Rate applicable to such Loan on the day before such payment was
due and (ii) the rate applicable to Base Rate Loans for each such day.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ ---------- ]+ AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
- ----------
* The amount in brackets being rounded upward, if
necessary, to the next higher 1/100 of 1%
The "CD BASE RATE" applicable to any Interest Period is the rate of
interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"DOMESTIC RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
23
<PAGE> 29
"ASSESSMENT RATE" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. Section 327.4(a) or any successor provision (a "BIF Member") to the
Federal Deposit Insurance Corporation (or any successor) for the Federal Deposit
Insurance Corporation's (or such successor's) insuring time deposits at offices
of such BIF Member in the United States. The Adjusted CD Rate shall be adjusted
automatically on and as of the effective date of any change in the Assessment
Rate.
(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin for each
such day plus the applicable London Interbank Offered Rate for such Interest
Period. Such interest shall be payable for each Interest Period on the last day
thereof and, if such Interest Period is longer than three months, at intervals
of three months after the first day thereof.
The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the
first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a rate
per annum equal to the sum of 2% plus the higher of (i) the sum of the
Applicable Margin for such day plus the London Interbank Offered Rate applicable
to such Loan on the day before such payment was due and (ii) the Applicable
Margin for such day plus the quotient obtained (rounded upward, if necessary, to
the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if
necessary, to the next higher 1/16 of 1%) of the respective rates per annum at
which one day (or, if such amount due remains unpaid more than three Euro-Dollar
Business Days, then for such other period of time not longer than six months as
the Agent may select) deposits in dollars in an amount approximately equal to
such overdue payment due to each of the Euro-Dollar Reference Banks are offered
to such Euro-Dollar Reference Bank in the London interbank market for the
applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar
Reserve Percentage (or, if the circumstances described in subsection (a) or (b)
of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the
rate applicable to Base Rate Loans for such day).
(e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall
bear interest on the outstanding principal amount thereof, for each day during
the Interest Period applicable thereto, at a rate per annum equal to the sum of
the London Interbank Offered Rate for such Interest Period (determined in
accordance with Section 2.07(c) as if the related Money Market
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<PAGE> 30
LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the
Money Market Margin quoted by the Bank making such Loan in accordance with
Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the
outstanding principal amount thereof, for each day during the Interest Period
applicable thereto, at a rate per annum equal to the Money Market Absolute Rate
quoted by the Bank making such Loan in accordance with Section 2.03. Such
interest shall be payable for each Interest Period on the last day thereof and,
if such Interest Period is longer than three months, at intervals of three
months after the first day thereof. Any overdue principal of or interest on any
Money Market Loan shall bear interest, payable on demand, for each day from and
including the date payment thereof was due to but excluding the date of actual
payment, at a rate per annum equal to the sum of 2% plus the Base Rate for each
such day.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations furnished by the
remaining Reference Bank or Banks or, if none of such quotations is available on
a timely basis, the provisions of Section 8.01 shall apply.
(h) The "APPLICABLE MARGIN" with respect to any Euro-Dollar Loan or CD
Loan at any date is the applicable percentage amount set forth in the table
below based on the Status on such date:
<TABLE>
<CAPTION>
LEVEL
LEVEL I LEVEL II III LEVEL IV LEVEL V LEVEL VI
STATUS STATUS STATUS STATUS STATUS STATUS
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Euro-Dollar Loans 0.125% 0.170% 0.205% 0.225% 0.300% 0.400%
CD Loans 0.250% 0.295% 0.330% 0.350% 0.425% 0.525%
</TABLE>
(i) For each day on which (i) the aggregate outstanding principal
amount of the Loans equals or exceeds one-third of the aggregate amount of the
Commitments or (ii) any Loans are outstanding after termination of the
Commitments, the Borrower shall pay additional interest on the aggregate
principal amount of Euro-Dollar Loans and CD Loans outstanding to it on such day
at the applicable rate per annum set forth in the table below based upon the
Status on such day:
<TABLE>
<CAPTION>
LEVEL I STATUS LEVEL II STATUS LEVEL III STATUS LEVEL IV STATUS LEVEL V STATUS LEVEL VI STATUS
- -------------- --------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
0.05% 0.10% 0.10% 0.125% 0.125% 0.125%
</TABLE>
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<PAGE> 31
Accrued interest under this subsection (i) shall be payable quarterly in arrears
on each Quarterly Payment Date and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.08. Facility Fee. (a) The Borrower shall pay to the Agent for
the account of the Banks ratably a facility fee at the Facility Fee Rate. Such
facility fee shall accrue (i) from and including the date hereof to but
excluding the Termination Date (or earlier date of termination of the
Commitments in their entirety), on the daily aggregate amount of the Commitments
(whether used or unused) and (ii) from and including the Termination Date (or
earlier date of termination of the Commitments in their entirety) to but
excluding the date the Loans shall be repaid in their entirety, on the daily
aggregate outstanding principal amount of the Loans.
The "FACILITY FEE RATE" at any date is: (i) 0.075% if Level I Status
exists at such date, (ii) 0.080% if Level II Status exists at such date, (iii)
0.095% if Level III Status exists at such date, (iv) 0.125% if Level IV Status
exists at such date, (v) 0.150% if Level V Status exists at such date or (vi)
0.225% if Level VI Status exists at such date.
(b) Accrued fees under this Section shall be payable quarterly in
arrears on each Quarterly Payment Date and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.09. Optional Termination or Reduction of Commitments. The
Borrower may, upon at least three Domestic Business Days' notice to the Agent,
(i) terminate the Commitments at any time, if no Loans are outstanding at such
time or (ii) ratably reduce from time to time by an aggregate amount of
$10,000,000 or any larger multiple thereof, the aggregate amount of the
Commitments in excess of the aggregate outstanding principal amount of the
Loans. Promptly after receiving a notice pursuant to this Section, the Agent
shall notify each Bank of the contents thereof.
SECTION 2.10. Mandatory Termination of Commitments. The Commitments
shall terminate on the Termination Date, and any Loans then outstanding
(together with accrued interest thereon) shall be due and payable on such date.
SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at
least one Domestic Business Day's notice to the Agent, prepay any Group of Base
Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days'
notice to the Agent, subject to Section 2.13, prepay any Group of CD Loans and
(iii) upon at least three Euro-Dollar Business Days' notice to the Agent,
subject to Section 2.13, prepay any Group of Euro-Dollar Loans, in whole at any
time, or from time to time in part in amounts aggregating $10,000,000 or any
larger multiple of $1,000,000, by paying the principal amount to be prepaid
together with accrued interest thereon to but not including the date of
prepayment. Each such optional prepayment shall be applied to prepay ratably the
Loans of the several Banks included in such Group of Loans (or such Money Market
Borrowing).
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<PAGE> 32
(b) Except as provided in Section 2.11(a)(i), the Borrower may not
prepay all or any portion of the principal amount of any Money Market Loan prior
to the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and once notice is so given to
the Banks, the Borrower's notice of prepayment shall not thereafter be revocable
by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and of fees
hereunder, not later than 2:00 P.M. (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in Section 9.01. The Agent will promptly distribute
to each Bank its ratable share of each such payment received by the Agent for
the respective accounts of the Banks. Whenever any payment of principal of, or
interest on, the Domestic Loans or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior
to the date on which any payment is due to the Banks hereunder that the Borrower
will not make such payment in full, the Agent may assume that the Borrower has
made such payment in full to the Agent on such date and the Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank shall repay to the
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Agent, at the Federal
Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a different type of Loan (pursuant to Article 2, 6 or 8 (other than
Section 8.02)) on any day other than the last day of an Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.07(d), or if the Borrower fails to borrow, prepay, convert or continue
any Fixed Rate Loans after notice has been given to any Bank in accordance with
Section 2.04(a), 2.11(c) or 2.16 (other than as a result of default by such
Bank), the Borrower shall reimburse each Bank within 15 days after written
demand for any resulting loss or expense reasonably incurred by it
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<PAGE> 33
(or by an existing or prospective Participant in the related Loan) in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after any such payment or conversion or failure to borrow,
prepay, convert or continue; provided that such Bank shall have delivered to the
Borrower a certificate specifying in reasonable detail the calculation of, and
the reasons for, the amount of such loss or expense, which certificate shall be
conclusive in the absence of manifest error.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
SECTION 2.15. Regulation D Compensation. Each Bank may require the
Borrower to pay, contemporaneously with each payment of interest on the
Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such
Bank at a rate per annum determined by such Bank up to but not exceeding the
excess of (i) (A) the applicable London Interbank Offered Rate divided by (B)
one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London
Interbank Offered Rate. Any Bank wishing to require payment of such additional
interest (x) shall so notify the Borrower and the Agent, in which case such
additional interest on the Euro-Dollar Loans of such Bank shall be payable to
such Bank at the place indicated in such notice with respect to each Interest
Period commencing at least three Euro-Dollar Business Days after the giving of
such notice, and (y) shall notify the Borrower at least five Euro-Dollar
Business Days prior to each date on which interest is payable on the Euro-Dollar
Loans of the amount then due it under this Section.
"EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents).
SECTION 2.16. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue the
type of interest rate borne by each Group of Loans (subject to subsection
2.16(d) of this Section and the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to CD Loans as of any Domestic Business Day or to
Euro-Dollar Loans as of any Euro-Dollar Business Day;
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<PAGE> 34
(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period,
subject to Section 2.13 if any such conversion is effective on any day
other than the last day of an Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, subject to Section 2.13 if any such conversion is effective on
any day other than the last day of an Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on
the third Euro-Dollar Business Day before the conversion or continuation
selected in such notice is to be effective (unless the relevant Loans are to be
converted from Domestic Loans of one type to Domestic Loans of the other type or
are CD Loans to be continued as CD Loans for an additional Interest Period, in
which case such notice shall be delivered to the Agent not later than 10:30 A.M.
(New York City time) on the second Domestic Business Day before such conversion
or continuation is to be effective). A Notice of Interest Rate Election may, if
it so specifies, apply to only a portion of the aggregate principal amount of
the relevant Group of Loans; provided that (i) such portion is allocated ratably
among the Loans comprising such Group and (ii) the portion to which such Notice
applies, and the remaining portion to which it does not apply, are each at least
$10,000,000 (unless such portion is comprised of Base Rate Loans). If no such
notice is timely received before the end of an Interest Period for any Group of
CD Loans or Euro-Dollar Loans, the Borrower shall be deemed to have elected that
such Group of Loans be converted to Base Rate Loans at the end of such Interest
Period.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the
applicable clause of subsection 2.16(a) above;
(iii) if the Loans comprising such Group are to be converted,
the new type of Loans and, if the Loans resulting from such conversion
are to be CD Loans or Euro- Dollar Loans, the duration of the next
succeeding Interest Period applicable thereto; and
(iv) if such Loans are to be continued as CD Loans or
Euro-Dollar Loans for an additional Interest Period, the duration of
such additional Interest Period.
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<PAGE> 35
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Promptly after receiving a Notice of Interest Rate Election from
the Borrower pursuant to subsection (a) above, the Agent shall notify each Bank
of the contents thereof and such notice shall not thereafter be revocable by the
Borrower.
(d) The Borrower shall not be entitled to elect to convert any
Committed Loans to, or continue any Committed Loans for an additional Interest
Period as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts
of any Group of CD Loans or Euro-Dollar Loans created or continued as a result
of such election would be less than $10,000,000 or (ii) a Default shall have
occurred and be continuing when the Borrower delivers notice of such election to
the Agent.
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness. This Agreement shall become effective on
the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section 9.05):
(a) receipt by the Agent of counterparts hereof signed by each of the
parties hereto (or, in the case of any party as to which an executed counterpart
shall not have been received, receipt by the Agent in form satisfactory to it of
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party);
(b) receipt by the Agent of a duly executed Promissory Note of Tyco US
for the account of each Bank dated on or before the Effective Date complying
with the provisions of Section 2.05;
(c) receipt by the Agent of the Parent Guarantee, duly executed by the
Parent Guarantor;
(d) receipt by the Agent from each Subsidiary Guarantor under the
Existing Agreements of (i) a Subsidiary Guarantee in substantially the form of
Exhibit H hereto, duly executed by such Subsidiary Guarantor, (ii) an opinion of
counsel for such Subsidiary Guarantor, reasonably satisfactory to the Agent,
with respect to such Subsidiary Guarantee, substantially in the form of Exhibit
I hereto and covering such additional matters relating to such Subsidiary
Guarantee as the Required Banks may reasonably request and (iii) all documents
the Agent may reasonably request relating to the existence of such Subsidiary
Guarantee, the corporate authority for and the validity of such Subsidiary
Guarantee, and any other matters reasonably determined
30
<PAGE> 36
by the Agent to be relevant thereto, all in form and substance reasonably
satisfactory to the Agent;
(e) receipt by the Agent of an opinion of each of (i) the General
Counsel of the Borrower, substantially in the form of Exhibit E-1 hereto, (ii)
the General Counsel of the Borrower on behalf of the Parent Guarantor,
substantially in the form of Exhibit E-2 hereto and (iii) Appleby, Spurling &
Kempe, special Bermuda counsel for the Parent Guarantor, substantially in the
form of Exhibit K hereto;
(f) receipt by the Agent of an opinion of Davis Polk & Wardwell,
special counsel for the Agent, substantially in the form of Exhibit F hereto and
covering such additional matters relating to the transactions contemplated
hereby as the Required Banks may reasonably request;
(g) receipt by the Agent of all documents the Agent may reasonably
request relating to the existence of the Borrower and the Parent Guarantor, the
corporate authority for and the validity of this Agreement, the Parent Guarantee
and the Promissory Notes, and any other matters reasonably determined by the
Agent to be relevant hereto, all in form and substance reasonably satisfactory
to the Agent; and
(h) receipt by the Agent of evidence satisfactory to it that the
Acquisition shall be consummated in compliance with all applicable laws
substantially simultaneously with the effectiveness of this Agreement;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later than
March 28, 1998.
SECTION 3.02. Existing Agreements. (a) On the Effective Date, the
commitments under the Existing Agreements shall be reduced to an aggregate
amount of $950,000,000 by ratably reducing the commitments under the Existing
364-Day Agreement to an aggregate amount of $450,000,000, without further action
by any party thereto. The Agent will promptly notify each of the other parties
hereto and to the Existing Agreements of the effectiveness of this Agreement.
(b) If after giving effect to the reduction of the commitments under
the Existing 364- Day Agreement pursuant to subsection 3.02(a), the aggregate
principal amount of loans outstanding under the Existing 364-Day Agreement would
exceed the aggregate amount of the commitments thereunder, Tyco US shall on the
Effective Date prepay loans thereunder in accordance with the terms of such
Existing 364-Day Agreement to the extent necessary to eliminate such excess.
(c) On the Effective Date, without further action by any party to the
Existing Agreements,
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<PAGE> 37
(i) the definition of "Level V Status" in Section 1.01 of each
of the Existing Agreements shall be amended to read as set forth in the
definition of "Level V Status" in Section 1.01 of this Agreement;
(ii) a new definition of "Level VI Status" shall be added to
Section 1.01 of each of the Existing Agreements to read as set forth in
the definition of "Level VI Status" in Section 1.01 of this Agreement;
(iii) Section 1.01 of each of the Existing Agreements shall be
amended by deleting the defined terms "Restricted Payment" and "Stock
Equivalents" in their entirety;
(iv) the table in Section 2.07(h) of the Existing 364-Day
Agreement shall be amended to read as set forth in the table in Section
2.07(h) of the Related Agreement;
(v) the table in Section 2.07(h) of the Existing Five-Year
Agreement shall be amended to read as set forth in the table in Section
2.07(h) of this Agreement;
(vi) Section 2.07(i) of each of the Existing Agreements shall
be amended to read as set forth in Section 2.07(i) of this Agreement;
(vii) the second paragraph of Section 2.08(a) of the Existing
364-Day Agreement shall be amended to read as set forth in the second
paragraph of Section 2.08(a) of the Related Agreement;
(viii) the second paragraph of Section 2.08(a) of the Existing
Five-Year Agreement shall be amended to read as set forth in the second
paragraph of Section 2.08(a) of this Agreement;
(ix) clause (xii) of Section 5.07 of each of the Existing
Agreements shall be amended to read as set forth in clause (xii) of
Section 5.07 of this Agreement;
(x) Section 5.08 of each of the Existing Agreements shall be
amended to read as set forth in Section 5.08 of this Agreement;
(xi) Section 5.10 of each of the Existing Agreements shall be
amended by deleting the text of Section 5.10 in its entirety and
substituting therefor the words "Intentionally Omitted";
(xii) clause (i) of Section 5.11(k) of each of the Existing
Agreements shall be amended to read as set forth in clause (i) of
Section 5.10(k) of this Agreement;
(xiii) Section 1.01 of the Parent Guarantee (as defined in the
Existing Agreements) shall be amended by adding, in appropriate
alphabetical order, (A) a
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<PAGE> 38
definition of "Consolidated Net Income" to read as set forth in the
definition of "Consolidated Net Income" in Section 1.01 of the Parent
Guarantee, (B) a definition of "Restricted Payment" to read as set
forth in the definition of "Restricted Payment" in Section 1.01 of the
Parent Guarantee and (C) a definition of "Stock Equivalents" to read as
set forth in the definition of "Stock Equivalents" in Section 1.01 of
the Parent Guarantee;
(xiv) subsections (a), (b) and (c) of Section 4.01 of the
Parent Guarantee (as defined in the Existing Agreements) shall be
amended to read, respectively, as set forth in subsections (a), (b) and
(c) of Section 4.01 of the Parent Guarantee;
(xv) the first sentence of Section 4.07 of the Parent
Guarantee (as defined in the Existing Agreements) shall be amended to
read as set forth in the first sentence of Section 4.07 of the Parent
Guarantee;
(xvi) clause (i) of Section 4.08(k) of the Parent Guarantee
(as defined in the Existing Agreements) shall be amended to read as set
forth in clause (i) of Section 4.08(k) of the Parent Guarantee;
(xvii) the proviso of Section 4.10 of the Parent Guarantee (as
defined in the Existing Agreements) shall be amended to read as set
forth in the proviso of Section 4.10 of the Parent Guarantee;
(xviii) a new Section 4.11 shall be added to Article 4 of the
Parent Guarantee (as defined in the Existing Agreements) to read as set
forth in Section 4.11 of the Parent Guarantee; and
(xix) Section 5.01(b) of the Parent Guarantee (as defined in
the Existing Agreements) shall be amended by replacing the reference to
"Section 4.07" with a reference to "Section 4.07 or 4.11."
(d) The Banks which are parties to the Existing Agreements, comprising
the "Required Banks" as defined therein, hereby (i) waive any requirement of
notice of reduction of the Commitments pursuant to Section 2.09 of the Existing
Agreements and of prepayment of Loans to the extent necessary to give effect to
the subsections (a) and (b) above, provided that any such prepayment of Loans
shall be subject to Section 2.13 of the Existing Agreements and (ii) agree to
the amendments specified in subsection 3.02(c).
SECTION 3.03. Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing is subject to the satisfaction (or waiver in
accordance with Section 9.05) of the following conditions:
(a) receipt by the Agent of a Notice of Borrowing as required by
Section 2.02 or 2.03, as the case may be;
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<PAGE> 39
(b) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the aggregate amount
of the Commitments;
(c) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the Borrower
and each Guarantor contained in the Financing Documents (except the
representations and warranties set forth in Sections 4.04(a) and 4.11, which are
made only as of the date of this Agreement) shall be true in all material
respects on and as of the date of such Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in
subsections (b), (c) and (d) of this Section.
SECTION 3.04. New Borrower. Tyco US and Tyco Luxembourg may, upon not
less than three Domestic Business Days' notice to the Agent, elect that Tyco
Luxembourg shall become the Borrower hereunder and that Tyco US shall cease to
be the Borrower (the effective date of such election being herein called the
"NEW BORROWER DATE"), provided that the effectiveness of such election shall be
subject to satisfaction of each of the following conditions:
(a) receipt by the Agent of evidence satisfactory to it that not less
than 75% of the publicly held and privately placed debt securities of Tyco US
outstanding at December 22, 1997 (exclusive of Debt under the Existing
Agreements) shall have been refinanced with the proceeds of debt securities
issued by Tyco Luxembourg;
(b) the fact that, both immediately before and after giving effect to
such election, the conditions to borrowing specified in Sections 3.03(c) and
3.03(d) shall have been met, and the Agent shall have received a certificate of
a Responsible Officer to such effect;
(c) the fact that, prior to or simultaneously with the effectiveness
of such election, all Loans to Tyco US hereunder and all loans to Tyco US under
the Existing Agreements shall have been repaid, together with accrued interest
thereon and all other amounts payable hereunder and under the Existing Credit
Agreements;
(d) receipt by the Agent of counterparts of the New Borrower Agreement
duly executed by each of the parties thereto (or, in the case of any party as to
which an executed counterpart shall not have been received, receipt by the Agent
in form satisfactory to it of telegraphic, telex or other written confirmation
from such party of execution of a counterpart hereof by such party);
(e) receipt by the Agent of a duly executed Promissory Note of Tyco
Luxembourg for the account of each Bank dated on or before the New Borrower Date
complying with the provisions of Section 2.05;
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(f) receipt by the Agent from each Required Significant Subsidiary of
Tyco Luxembourg which is not then a Subsidiary Guarantor of (i) a Subsidiary
Guarantee in substantially the form of Exhibit H hereto, duly executed by such
Subsidiary Guarantor, (ii) an opinion of counsel for such Subsidiary Guarantor,
reasonably satisfactory to the Agent, with respect to such Subsidiary Guarantee,
substantially in the form of Exhibit I hereto and covering such additional
matters relating to such Subsidiary Guarantee as the Required Banks may
reasonably request and (iii) all documents the Agent may reasonably request
relating to the existence of such Subsidiary Guarantee, the corporate authority
for and the validity of such Subsidiary Guarantee, and any other matters
reasonably determined by the Agent to be relevant thereto, all in form and
substance reasonably satisfactory to the Agent;
(g) receipt by the Agent of an opinion of counsel for Tyco Luxembourg,
which counsel and which opinion shall be reasonably satisfactory to the Agent,
substantially to the effect of Exhibit M hereto and covering such additional
matters relating to the transactions contemplated hereby as the Required Banks
may reasonably request;
(h) receipt by the Agent of all documents the Agent may reasonably
request relating to the existence of Tyco Luxembourg, the corporate authority
for and the validity of this Agreement and the Promissory Notes, and any other
matters reasonably determined by the Agent to be relevant hereto, all in form
and substance reasonably satisfactory to the Agent; and
(i) the fact that, if the Related Agreement is still in effect, Tyco
Luxembourg shall simultaneously become the "Borrower" thereunder.
On the New Borrower Date, subject to satisfaction of the conditions
specified in Section 3.03 and this Section 3.04, each of the Banks shall make a
Loan to Tyco Luxembourg in an amount equal to the aggregate principal amount of
Loans of such Bank then outstanding hereunder (or such other amount as Tyco
Luxembourg may specify in the applicable Notice of Borrowing), the proceeds of
which Loan will be substantially simultaneously applied, first, by Tyco
Luxembourg to fund the inter-company loan to Tyco US contemplated by the New
Borrower Agreement and, second, by Tyco US to repay all Loans outstanding to it
hereunder and, to the extent such Loan proceeds may be required to fund the
same, payment of accrued interest and other amounts then due hereunder and under
the Existing Agreements.
On the New Borrower Date, the commitments under the Existing Agreements
shall terminate without any further action by any party thereto. The Agent will
promptly notify each of the other parties hereto and to the Existing Agreements
of the New Borrower Date, and such notice shall be conclusive. The Banks which
are parties to the Existing Agreements, comprising the "Required Banks" as
defined therein, hereby waive any requirement of notice of termination of the
Commitments pursuant to Section 2.09 of the Existing Agreements and any
restriction on prepayment of loans thereunder to the extent necessary to give
effect to the subsection (c) above, provided that any such prepayment of Loans
shall be subject to Section 2.13 of the Existing
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Agreements. Promptly after the New Borrower Date, each Bank shall return to Tyco
US for cancellation the Note of Tyco US previously delivered to such Bank
hereunder.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the
Banks that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
corporation (in the case of Tyco US) or a company (in the case of Tyco
Luxembourg) duly incorporated and validly existing and (in the case of Tyco US)
in good standing under the laws of its jurisdiction of incorporation. The
Borrower has all corporate powers and all governmental licenses, authorizations,
consents and approvals (collectively, the "Consents") required to carry on its
business as now conducted, other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence at the time this representation and warranty is made
or deemed made, reasonably be expected to have a Material Adverse Effect.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement and the Promissory Notes: (a) are within the Borrower's corporate
powers; (b) have been duly authorized by all necessary corporate action on the
part of the Borrower; (c) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Borrower; and (d) do not contravene, or constitute a default by the Borrower
under, any provision of (i) applicable law or regulation, (ii) the
organizational documents of the Borrower, or (iii) any agreement or instrument
evidencing or governing Debt of the Borrower or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Borrower.
SECTION 4.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower and the Promissory Notes, when executed and
delivered in accordance with this Agreement, will constitute valid and binding
obligations of the Borrower.
SECTION 4.04. Financial Information.
(a) The consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of June 30, 1997 and the related consolidated
statements of income, of shareholders' equity and of cash flows for the fiscal
year then ended, reported on by Coopers & Lybrand L.L.P., copies of which have
been delivered to each of the Banks, fairly present, in conformity with
generally accepted accounting principles, the consolidated financial position of
the Borrower and
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<PAGE> 42
its Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such fiscal year.
(b) Since June 30, 1997 there has been no material adverse change in
the business, financial position, results of operations or Prospects of the
Borrower and its Consolidated Subsidiaries, considered as a whole.
SECTION 4.05. Litigation. There is no action, suit or proceeding
pending against, or to the knowledge of the Borrower threatened against or
affecting, the Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could, based upon the facts
and circumstances in existence at the time this representation and warranty is
made or deemed made, reasonably be expected to have a Material Adverse Effect or
which in any manner draws into question the validity of the Financing Documents.
SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance, except
where the failure to so comply could not, based upon the facts and circumstances
in existence at the time this representation and warranty is made or deemed
made, reasonably be expected to have a Material Adverse Effect, with the
presently applicable provisions of ERISA and the Internal Revenue Code with
respect to each Plan. No member of the ERISA Group has (i) sought a waiver of
the minimum funding standard under Section 412 of the Internal Revenue Code in
respect of any Plan, (ii) failed to make any required contribution or payment to
any Plan or Multiemployer Plan, or made any amendment to any Plan, which has
resulted in or could, based upon the facts and circumstances in existence at the
time this representation and warranty is made or deemed made, reasonably be
expected to result in the imposition of a Lien or the posting of a bond or other
security under ERISA or the Internal Revenue Code or (iii) incurred any
liability under Title IV of ERISA (other than a liability to the PBGC for
premiums under Section 4007 of ERISA), which could, based upon the facts and
circumstances existing at the time this representation and warranty is made or
deemed made, reasonably be expected to have a Material Adverse Effect.
SECTION 4.07. Environmental Matters. In the ordinary course of its
business, the Borrower conducts an ongoing review of the effect of Environmental
Laws on the business, operations and properties of the Borrower and its
Subsidiaries, in the course of which it identifies and evaluates associated
liabilities and costs (including, without limitation, any capital or operating
expenditures required for clean-up or closure of properties presently or
previously owned, any capital or operating expenditures required to achieve or
maintain compliance with environmental protection standards imposed by law or as
a condition of any license, permit or contract, any related constraints on
operating activities, including any periodic or permanent shutdown of any
facility or reduction in the level of or change in the nature of operations
conducted thereat, any costs or liabilities in connection with off-site disposal
of wastes or Hazardous Substances, and any actual or potential liabilities to
third parties, including employees, and any related costs and expenses). On the
basis of this review, the Borrower has
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reasonably concluded that such associated liabilities and costs, including the
costs of compliance with Environmental Laws, could not, based upon the facts and
circumstances existing at the time this representation and warranty is made or
deemed made, reasonably be expected to have a Material Adverse Effect.
SECTION 4.08. Taxes. The Borrower and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes shown on such
returns or pursuant to any assessment received by the Borrower or any
Subsidiary, except those assessments which are being contested in good faith by
appropriate proceedings. The charges, accruals and reserves on the books of the
Borrower and its Subsidiaries in respect of taxes or other governmental charges
are, in the opinion of the Borrower, adequate.
SECTION 4.09. Subsidiaries. Each of the Borrower's corporate
Consolidated Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, except
where the failure to be so incorporated, existing or in good standing could not,
based upon the facts and circumstances existing at the time this representation
and warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has all corporate powers and all Consents
required to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 4.10. Not an Investment Company. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 4.11. Full Disclosure. The factual information, reports,
financial statements, exhibits and schedules concerning the Borrower and its
Subsidiaries furnished by or on behalf of the Borrower and contained in the
Confidential Information Memorandum dated January 1998 furnished by J.P. Morgan
Securities Inc. to a limited number of banks which were being invited to
participate in this Agreement, do not contain any untrue statement of material
fact or omit to state any material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
ARTICLE 5
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Promissory Note remains unpaid:
SECTION 5.01. Information. The Borrower will deliver to each of the
Banks:
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(a) as soon as available and in any event within 120 days after the
end of each fiscal year of the Borrower, for so long as Tyco US is the Borrower,
consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as
of the end of such fiscal year and the related consolidated statements of
income, of shareholders' equity and of cash flows for such fiscal year, setting
forth, in each case in comparative form, the figures for the previous fiscal
year, all reported on by Coopers & Lybrand L.L.P. or other independent public
accountants of nationally recognized standing in a manner complying with the
applicable rules and regulations promulgated by the Securities and Exchange
Commission;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each fiscal year of the Borrower, for so
long as Tyco US is the Borrower, consolidated balance sheets of the Borrower and
its Consolidated Subsidiaries as of the end of such quarter and the related
consolidated statements of income for such quarter and the related consolidated
statements of income and consolidated statements of cash flows for the portion
of the Borrower's fiscal year ended at the end of such quarter, setting forth in
the case of such statements of income and of cash flows in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Borrower's previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency on behalf of the Borrower by the chief financial
officer, the chief accounting officer or the treasurer of the Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) above, for so long as Tyco US
is the Borrower, and simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) of Section 4.01 of the Parent
Guarantee, for so long as Tyco Luxembourg is the Borrower, a certificate on
behalf of the Borrower signed by the chief financial officer, the chief
accounting officer or the treasurer of the Borrower (i) setting forth in
reasonable detail the calculations required to establish whether the Borrower
was in compliance with the requirements of Sections 5.08 to 5.10, inclusive, on
the date of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any Default then exists, setting
forth, in reasonable detail, the nature thereof and the action which the
Borrower is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial
statements referred to in subsection (a) above, a statement of the firm of
independent public accountants which reported on such financial statements
stating that, in making the audit necessary for the certification of such
financial statements, such firm of accountants has obtained no knowledge of any
Default, or if it has obtained knowledge of such Default, specifying the nature
and period of existence thereof; provided such firm of accountants shall not be
liable to any Person by reason of such firm's failure to obtain knowledge of any
Default which would not be disclosed in the course of an audit conducted in
accordance with generally accepted accounting principles;
(e) within five Domestic Business Days after any Responsible Officer
obtains knowledge of any Default, if such Default is then continuing, a
certificate on behalf of the
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Borrower signed by the chief financial officer, the chief accounting officer or
the treasurer of the Borrower setting forth, in reasonable detail, the nature
thereof and the action which the Borrower is taking or proposes to take with
respect thereto;
(f) promptly following the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all final registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q and 8-K (or
their equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(h) within 30 days after any Responsible Officer of the Borrower
obtains knowledge that any member of the ERISA Group (i) gave or was required to
give notice to the PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds for a termination
of such Plan under Title IV of ERISA, or knew that the plan administrator of any
Plan has given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be given to the
PBGC; (ii) received notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated, a copy of such notice; (iii) received notice
from the PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than under Sections 4007, 4071 and 4302 of ERISA) in respect
of, or appoint a trustee to administer any Plan, a copy of such notice; (iv)
applied for a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code, a copy of such application; (v) gave notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
other information filed with the PBGC; (vi) gave notice of withdrawal from any
Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) failed
to make any required payment or contribution to any Plan or Multiemployer Plan
or made any amendment to any Plan which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security, a certificate
on behalf of the Borrower, signed by the chief financial officer, the chief
accounting officer or the treasurer of the Borrower setting forth, to the best
of its knowledge, in reasonable detail, the nature of such occurrence and
action, if any, which the Borrower or applicable member of the ERISA Group is
required or proposes to take;
(i) promptly following, and in any event within 10 days of, any change
in a Debt Rating by any Rating Agency, notice thereof;
(j) promptly upon any Responsible Officer of the Borrower obtaining
knowledge of the commencement of any action, suit or proceeding before any
court, arbitrator or other governmental body against the Borrower or any of its
Subsidiaries that, if adversely determined, could reasonably be expected to have
a Material Adverse Effect, a certificate on behalf of the Borrower specifying
the nature of such action, suit or proceeding and what action the Borrower is
taking or proposes to take with respect thereto; and
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(k) from time to time, upon reasonable notice, such additional
information regarding the financial position or business of the Borrower and its
Subsidiaries as the Agent, at the request of any Bank, may reasonably request.
SECTION 5.02. Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where (i) any such failure to so pay
or discharge could not, based upon the facts and circumstances in existence at
the time, reasonably be expected to have a Material Adverse Effect or (ii) such
liabilities or obligations may be contested in good faith by appropriate
proceedings. The Borrower will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of such liabilities or obligations.
SECTION 5.03. Maintenance of Property; Insurance. (a) Except as
permitted by Section 5.04 or 5.11, the Borrower will keep, and will cause each
Subsidiary to keep, all property necessary in its business in good working order
and condition, ordinary wear and tear excepted, unless the failure to so keep
could not, based upon the facts and circumstances existing at the time,
reasonably be expected to have a Material Adverse Effect.
(b) The Borrower will maintain, and will cause each Subsidiary to
maintain, with financially sound and reputable insurers, insurance with respect
to its assets and business against such casualties and contingencies, of such
types (including, without limitation, loss or damage, product liability,
business interruption, larceny, embezzlement or other criminal misappropriation)
and in such amounts as is customary in the case of similarly situated
corporations of established reputations engaged in the same or a similar
business, unless the failure to maintain such insurance could not, based upon
the facts and circumstances existing at the time, reasonably be expected to have
a Material Adverse Effect.
SECTION 5.04. Conduct of Business and Maintenance of Existence. The
Borrower (a) will continue, and will cause each Subsidiary to continue, to
engage in business of the same general type as now conducted by the Borrower and
its Subsidiaries and reasonably related extensions thereof, and (b) will
preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect (x) their
respective corporate existence and (y) their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business, unless in
the case of either the failure of the Borrower to comply with subclause (b) (y)
of this Section 5.04 or the failure of a Subsidiary to comply with clauses (a)
or (b) of this Section 5.04, such failure could not, based upon the facts and
circumstances existing at the time, reasonably be expected to have a Material
Adverse Effect; provided that nothing in this Section 5.04 shall prohibit (i)
the merger or consolidation of a Subsidiary with or into the Borrower or a
Wholly-Owned Consolidated Subsidiary, (ii) the sale, lease, transfer, assignment
or other disposition by a Subsidiary of all or any part of its assets to the
Borrower or to a Wholly-Owned Consolidated Subsidiary, (iii) the merger or
consolidation of a Subsidiary with or into a Person other than the Borrower or a
Wholly-Owned Consolidated Subsidiary, if
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the Person surviving such consolidation or merger is a Subsidiary and
immediately after giving effect thereto, no Default shall have occurred and be
continuing, (iv) the sale, lease, transfer, assignment or other disposition by a
Subsidiary of all or any part of its assets to a Person other than the Borrower
or a Wholly-Owned Consolidated Subsidiary if the Person to which such sale,
lease, transfer, assignment or other disposition is made is a Subsidiary and
immediately after giving effect thereto, no Default shall have occurred and be
continuing, (v) any transaction permitted pursuant to Section 5.11, (vi) the
termination of the corporate existence of any Subsidiary if the Borrower in good
faith determines that such termination is in the best interest of the Borrower
and is not materially disadvantageous to the Banks and (vii) the sale, lease,
transfer, assignment or other disposition (including any such transaction by way
of merger or consolidation) by the Borrower of all or any part of its assets to
a Person other than the Borrower or a Subsidiary if (A) immediately after giving
effect thereto, no Default shall have occurred and be continuing and (B) the
Borrower is a Subsidiary of such Person or the Borrower and such Person are
Subsidiaries of the same Person.
SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where (a) noncompliance therewith could not,
based upon the facts and circumstances in existence at the time, reasonably be
expected to have a Material Adverse Effect or (b) the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
SECTION 5.06. Inspection of Property, Books and Records;
Confidentiality. (a) The Borrower will keep, and will cause each Subsidiary to
keep, proper books of record and account in which true and correct entries shall
be made of its business transactions and activities so that financial statements
that fairly present its business transactions and activities can be properly
prepared in accordance with generally accepted accounting principles.
(b) The Borrower will permit, and will cause each Subsidiary to permit,
representatives of any Bank at such Bank's expense to visit and inspect any of
their respective properties, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs, finances
and accounts with their respective officers, employees and independent public
accountants, all upon reasonable notice to the Borrower, at such reasonable
times and as often as may reasonably be requested by any Bank.
(c) Each Bank and the Agent shall, by its receipt of Confidential
Information (as defined below) pursuant to or in connection with this Agreement
or its exercise of any of its rights hereunder, be deemed to have agreed (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to (i) keep such information confidential, (ii) (except as
permitted by clause (iii) of this Section 5.06(c)) not disclose such information
to any Person other than an officer, director, employee, legal counsel,
independent auditor or authorized agent or advisor of the Agent or such Bank
needing to know such information (it being understood that any such officer,
director, employee, legal counsel, independent auditor or
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authorized agent or advisor shall be informed by the Agent or such Bank of the
confidential nature of such information), (iii) not disclose such information to
any Assignee or Participant (or prospective Assignee or Participant), unless
such Assignee or Participant (or prospective Assignee or Participant) shall
agree in writing to be bound by the provisions of this Section 5.06(c) and (iv)
not use any such information except for purposes relating to this Agreement or
the Notes. The term "Confidential Information" shall mean non-public information
furnished by or on behalf of the Borrower or any of its Subsidiaries to the
Agent, any Bank or other Person exercising rights hereunder or required to be
bound hereby (collectively "Recipients"), but shall not include any such
information which (1) has become or hereafter becomes available to the public
other than as a result of a disclosure by a Recipient, or (2) has become or
hereafter becomes available to a Recipient, on a non-confidential basis, from a
source other than the Borrower or any of its Subsidiaries (or any of their
respective representatives or agents) or any Recipient, which source, to the
knowledge of the Recipient, is not prohibited from disclosing such information
by a confidentiality agreement with, or other legal or fiduciary obligation to,
the Borrower or its Subsidiaries.
The restrictions set forth in the immediately preceding paragraph shall
not prevent the disclosure by a Recipient of any such information:
(A) with the prior written consent of the Borrower,
(B) at the request of a bank regulatory agency or in
connection with an examination by bank examiners, or
(C) upon order of any court or administrative agency
of competent jurisdiction, to the extent required by such
order and not effectively stayed on appeal or otherwise, or as
otherwise required by law; provided that in the case of any
intended disclosure under this clause (C), the Recipient shall
(unless otherwise required by applicable law) give the
Borrower not less than five Domestic Business Days prior
notice (or such shorter period as may, in the good faith
discretion of the Recipient, be reasonable under the
circumstances or may be required by any court or agency under
the circumstances), specifying the Confidential Information
involved and stating such Recipient's intention to disclose
such Confidential Information (including the manner and extent
of such disclosure) in order to allow the Borrower an
opportunity to seek an appropriate protective order.
Each Recipient shall agree that, in addition to all other remedies
available, the Borrower shall be entitled to specific performance and injunctive
and other equitable relief as a remedy for any breach of this Section 5.06(c) by
such Recipient.
SECTION 5.07. Limitation on Restrictions on Subsidiary Dividends and
Other Distributions. The Borrower will not, and will not permit any Subsidiary
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or
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restriction on the ability of any Subsidiary to (a) pay dividends or make any
other distributions on its capital stock or any other interest or participation
in its profits, owned by the Borrower or any Subsidiary, or pay any Debt owed to
the Borrower or any Subsidiary, (b) make loans or advances to the Borrower or
any Subsidiary or (c) transfer any of its properties or assets to the Borrower
or any Subsidiary, except for such encumbrances or restrictions existing under
or by reason of
(i) applicable law, agreements with foreign governments with
respect to assets located in their jurisdiction, or condemnation or
eminent domain proceedings,
(ii) any of the Financing Documents,
(iii) (A) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Borrower
or a Subsidiary, or (B) customary restrictions imposed on the transfer
of copyrighted or patented materials or provisions in agreements that
restrict the assignment of such agreements or any rights thereunder,
(iv) provisions contained in the instruments evidencing or
governing Debt or other obligations or agreements, in each case
existing on the Effective Date,
(v) provisions contained in documents evidencing or governing
any Permitted Receivables Transaction,
(vi) provisions contained in instruments evidencing or
governing Debt or other obligations or agreements of any Person, in
each case, at the time such Person (A) shall be merged or consolidated
with or into the Borrower or any Subsidiary, (B) shall sell, transfer,
assign, lease or otherwise dispose of all or substantially all of such
Person's assets to the Borrower or a Subsidiary, or (C) otherwise
becomes a Subsidiary, provided that in the case of clause (A), (B) or
(C), such Debt, obligation or agreement was not incurred or entered
into, or any such provisions adopted, in contemplation of such
transaction,
(vii) provisions contained in instruments amending, restating,
supplementing, extending, renewing, refunding, refinancing, replacing
or otherwise modifying, in whole or in part (collectively,
"Refinancing"), instruments referred to in clauses (ii), (iv) and (vi)
of this Section 5.07, so long as such provisions are, in the good faith
determination of the Borrower's board of directors, not materially more
restrictive than those contained in the respective instruments so
Refinanced,
(viii) provisions contained in any instrument evidencing or
governing Debt or other obligations of a Subsidiary Guarantor,
(ix) any encumbrances and restrictions with respect to a
Subsidiary imposed in connection with an agreement which has been
entered into for the sale or disposition of
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such Subsidiary or its assets, provided such sale or disposition
otherwise complies with this Agreement,
(x) the subordination (pursuant to its terms) in right and
priority of payment of any Debt owed by any Subsidiary (the "Indebted
Subsidiary") to the Borrower or any other Subsidiary, to any other Debt
of such Indebted Subsidiary, provided (A) such Debt is permitted under
this Agreement and (B) the Borrower's board of directors has
determined, in good faith, at the time of the creation of such
encumbrance or restriction, that such encumbrance or restriction could
not, based upon the facts and circumstances in existence at the time,
reasonably be expected to have a Material Adverse Effect,
(xi) provisions governing preferred stock issued by a
Subsidiary, provided that such preferred stock is permitted under
Section 5.08, and
(xii) provisions contained in debt instruments obligations or
other agreements of any Subsidiary which are not otherwise permitted
pursuant to clauses (i) through (xi) of this Section 5.07, provided
that the aggregate investment of the Borrower in all such Subsidiaries
(determined in accordance with generally accepted accounting
principles) shall at no time exceed the greater of (a) $300,000,000 or
(b) 10% of Consolidated Tangible Net Worth.
The provisions of this Section 5.07 shall not prohibit (x) Liens not prohibited
by Section 5.10 or (y) restrictions on the sale or other disposition of any
property securing Debt of any Subsidiary, provided such Debt is otherwise
permitted by this Agreement.
SECTION 5.08. Debt. Consolidated Debt will at no time exceed (x) prior
to March 31, 1999, 65% and (y) on and after March 31, 1999, 52.5% of
Consolidated Total Capitalization. The total Debt of all Consolidated
Subsidiaries (excluding (i) Debt of a Consolidated Subsidiary to the Borrower or
to a Wholly-Owned Consolidated Subsidiary, (ii) Debt of a Subsidiary Guarantor
and (iii) Debt of any Person (a) existing at the time such Person becomes a
Subsidiary or merges into a Subsidiary and (b) not created in contemplation of
such event, but only for a period ending 180 days after the date of such event)
will at no time exceed $400,000,000 in aggregate outstanding principal amount.
For purposes of this Section any preferred stock of a Consolidated Subsidiary
held by a Person other than the Borrower or a Wholly-Owned Consolidated
Subsidiary shall be included, at the higher of its voluntary or involuntary
liquidation value, in "Consolidated Debt" and in the "Debt" of such Consolidated
Subsidiary.
SECTION 5.09. Fixed Charge Coverage. The ratio of Consolidated EBIT to
Consolidated Interest Expense will not, for any period of four consecutive
fiscal quarters, be less than 2.5 to 1.
SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary
will create, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it, except:
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(a) any Lien existing on any asset on the Effective Date securing Debt
outstanding on the Effective Date;
(b) any Lien existing on any asset of, or capital stock of, or other
ownership interest in, any Person (such capital stock and other ownership
interests are collectively referred to herein as "Stock") at the time such
Person becomes a Subsidiary, which Lien was not created in contemplation of such
event;
(c) any Lien on any asset securing the payment of all or part of the
purchase price of such asset upon the acquisition thereof by the Borrower or a
Subsidiary or securing Debt (including any obligation as lessee incurred under a
capital lease) incurred or assumed by the Borrower or a Subsidiary prior to, at
the time of or within one year after such acquisition (or in the case of real
property, the completion of construction (including any improvements on an
existing property) or the commencement of full operation of such asset or
property, whichever is later), which Debt is incurred or assumed for the purpose
of financing all or part of the cost of acquiring such asset or, in the case of
real property, construction or improvements thereon; provided, that in the case
of any such acquisition, construction or improvement, the Lien shall not apply
to any asset theretofore owned by the Borrower or a Subsidiary, other than
assets so acquired, constructed or improved;
(d) any Lien existing on any asset or Stock of any Person at the time
such Person is merged or consolidated with or into the Borrower or a Subsidiary
which Lien was not created in contemplation of such event;
(e) any Lien existing on any asset or Stock of any Person at the time
of acquisition thereof by the Borrower or a Subsidiary, which Lien was not
created in contemplation of such acquisition;
(f) any Lien arising out of the Refinancing of any Debt secured by any
Lien permitted by any of the subsections (a) through (e) of this Section 5.10,
provided the principal amount of Debt is not increased and is not secured by any
additional assets, except as provided in the last sentence of this Section 5.10;
(g) any Lien to secure Debt of a Subsidiary to the Borrower or to a
Wholly-Owned Consolidated Subsidiary;
(h) any Lien created pursuant to a Permitted Receivables Transaction;
(i) any Lien in favor of the United States or any other country (or any
department, agency, instrumentality or political subdivision of the United
States or any other country) securing obligations arising in connection with
partial, progress, advance or other payments pursuant to any contract, statute,
rule or regulation or securing obligations incurred for the purpose of financing
all or any part of the purchase price (including the cost of installation
thereof or, in the case of real property, the cost of construction or
improvement or installation of
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personal property thereon) of the asset subject to such Lien (including, but not
limited to, any Lien incurred in connection with pollution control, industrial
revenue or similar financings);
(j) Liens arising in the ordinary course of its business which (i) do
not secure Debt, (ii) do not secure any single obligation in an amount exceeding
$50,000,000 and (iii) do not in the aggregate materially detract from the value
of its assets or materially impair the use thereof in the operation of its
business; and
(k) Liens not otherwise permitted by the foregoing clauses (a) through
(j) of this Section 5.10 securing Debt (without duplication) in an aggregate
principal amount at any time outstanding not to exceed an amount equal to the
greater of (i) $300,000,000 or (ii) 10% of Consolidated Tangible Net Worth.
It is understood that any Lien permitted to exist on any asset pursuant to the
foregoing provisions of this Section 5.10 may attach to the proceeds of such
asset and, with respect to Liens permitted pursuant to subsections (a), (b),
(d), (e), (f) (but only with respect to the Refinancing of a Debt secured by a
Lien permitted pursuant to subsections (a), (b), (d) or (e)) or (g) of this
Section 5.10, may attach to an asset acquired in the ordinary course of business
as a replacement of such former asset.
SECTION 5.11. Consolidations, Mergers and Sales of Assets. (a) The
Borrower will not (i) consolidate or merge with or into any other Person or (ii)
sell, lease or otherwise transfer all or substantially all of its assets to any
other Person, unless
(A) the Borrower or a Subsidiary or (in the case of
Tyco US) a Domestic Parent is the surviving corporation;
(B) the Person (if other than the Borrower) formed by
such consolidation or into which the Borrower is merged, or
the Person which acquires by sale or other transfer, or which
leases, all or substantially all of the assets of the Borrower
(any such Person, the "Successor"), shall be organized and
existing under the laws of (x) in the case of Tyco US, the
United States, any state thereof or the District of Columbia
and (y) in the case of Tyco Luxembourg, Luxembourg, and shall
expressly assume, in a writing executed and delivered to the
Agent for delivery to each of the Banks, in form reasonably
satisfactory to the Agent, the due and punctual payment of the
principal of and interest on the Promissory Notes and the
performance of the other obligations under this Agreement and
the Promissory Notes on the part of the Borrower to be
performed or observed, as fully as if such Successor were
originally named as the Borrower in this Agreement;
(C) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing;
and
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(D) the Borrower has delivered to the Agent a
certificate on behalf of the Borrower signed by a Responsible
Officer and an opinion of counsel (which counsel may be an
employee of the Borrower), each stating that all conditions
provided in this Section 5.11 relating to such transaction
have been satisfied.
The foregoing provisions of this Section 5.11 shall not restrict the
merger or consolidation of any Subsidiary with and into the Borrower.
Upon the satisfaction (or waiver in accordance with Section 9.05) of
the conditions set forth in this Section 5.11, the Successor shall succeed, and
may exercise every right and power of, the Borrower under this Agreement and the
Promissory Notes with the same effect as if the Successor had been originally
named as the Borrower herein and in the Promissory Notes, and the Borrower shall
be relieved of its obligations under this Agreement and the Promissory Notes.
(b) The Borrower will not, and will not permit any Subsidiary to, sell,
lease or otherwise transfer, in any transaction or series of related
transactions, to any Person (other than the Borrower, a Subsidiary, a Person of
which the Borrower is a Subsidiary or a Subsidiary of such a Person) any
Property (including, without limitation, the stock of any Subsidiary) having a
net book value in excess of 15% of Consolidated Assets determined as of the end
of the fiscal quarter of the Borrower most recently ended at the time of such
sale or other transaction, or Property (including without limitation, stock of a
Subsidiary) which contributed in excess of 15% of Consolidated EBIT for the
fiscal year of the Borrower most recently ended at the time of such sale or
other transaction.
SECTION 5.12. Use of Proceeds. The proceeds of the Loans made under
this Agreement will be used by the Borrower for its general corporate purposes,
including, without limitation, capital expenditures and (subject to the
following sentence) acquisitions. None of such proceeds will be used, directly
or indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying any "margin stock" within the meaning of Regulation U.
SECTION 5.13. Transactions with Affiliates. The Borrower will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate (collectively, "AFFILIATE TRANSACTIONS"); provided, however, that the
foregoing provisions of this Section 5.13 shall not prohibit the Borrower or any
of its Subsidiaries from: (a) making sales to or purchases from any Affiliate
and, in connection therewith, extending credit or making payments, or from
making payments for services rendered by any Affiliate, if such sales or
purchases are made or such services are rendered in the ordinary course of
business and on terms and conditions at least as favorable to the Borrower or
such Subsidiary as the terms and conditions which the Borrower would reasonably
expect to be obtained in a similar transaction with a Person which is not an
Affiliate at such time, (b) making
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payments of principal, interest and premium on any Debt of the Borrower or such
Subsidiary held by an Affiliate if the terms of such Debt are at least as
favorable to the Borrower or such Subsidiary as the terms which the Borrower
would reasonably expect to have been obtained at the time of the creation of
such Debt from a lender which was not an Affiliate, (c) participating in, or
effecting any transaction in connection with, any joint enterprise or other
joint arrangement with any Affiliate if the Borrower or such Subsidiary
participates in the ordinary course of its business and on a basis no less
advantageous than the basis on which such Affiliate participates, (d) paying or
granting reasonable compensation and benefits to any director, officer, employee
or agent of the Borrower or any Subsidiary, (e) paying reasonable legal fees and
expenses to a law firm of which an Affiliate is a member or (f) engaging in any
Affiliate Transaction not otherwise addressed in subsections (a) - (e) of this
Section 5.13, the consummation of which could not reasonably be expected to have
a Material Adverse Effect.
SECTION 5.14. Additional Subsidiary Guarantors. If, subsequent to the
New Borrower Date, any Person shall become a Required Significant Subsidiary of
the Borrower, the Borrower shall cause such Person to become a Subsidiary
Guarantor within 30 days after such Person became a Significant Subsidiary of
the Borrower.
ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults. If one or more of the following
events ("EVENTS OF DEFAULT") shall have occurred and be continuing and shall not
have been waived in accordance with Section 9.05:
(a) the Borrower shall fail to pay when due any principal of any Loan,
or shall fail to pay within three Domestic Business Days of the due date thereof
any interest on any Loan or any fees payable hereunder;
(b) the Borrower shall fail to observe or perform any covenant
contained in Section 5.08, 5.09 or 5.14;
(c) the Borrower shall fail to observe or perform any covenant
contained in Section 5.07 or Sections 5.10 to 5.13, inclusive, and such failure
shall not be remedied within five days after any Responsible Officer obtains
actual knowledge thereof;
(d) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a),
(b) or (c) of this Section 6.01) for 10 days after notice thereof has been given
to the Borrower by the Agent at the request of any Bank;
(e) any representation, warranty, certification or statement made in
writing by the Borrower or any Guarantor in the Financing Documents or in any
certificate, financial statement
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or other document required to be delivered to the Agent or any of the Banks
pursuant to the Financing Documents shall prove to have been incorrect in any
material respect when made (or deemed made);
(f) there shall occur any Guarantor Event of Default (as defined in the
Parent Guarantee);
(g) the Borrower or any Subsidiary shall fail to make any payment in
respect of any Material Debt when due (after giving effect to any applicable
grace period);
(h) any event or condition shall occur that results in the acceleration
of the maturity of any Material Debt or that entitles the holder or holders of
any Material Debt or any Person acting on behalf of such holder or holders to
accelerate the maturity thereof;
(i) the Borrower or any Significant Subsidiary shall (i) commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
substantially all of its property, or (ii) consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other similar proceeding commenced against it, or (iii) make a general
assignment for the benefit of creditors, or (iv) fail generally to pay its debts
as they become due, or (v) take corporate action authorizing any of the
foregoing;
(j) (i) an involuntary case or other proceeding shall be commenced
against the Borrower or any Significant Subsidiary seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or substantially all of its property, and such
involuntary case or other proceeding shall remain in effect and undismissed and
unstayed for a period of 60 consecutive days or (ii) an order for relief shall
be entered against the Borrower or any Significant Subsidiary under the federal
bankruptcy laws as now or hereafter in effect;
(k) any member of the ERISA Group shall fail to pay when due an amount
or amounts aggregating in excess of $5,000,000 which it shall have become liable
to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan
shall be filed under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing; or the PBGC shall
institute proceedings under Title IV of ERISA to terminate, to impose liability
(other than for premiums under Section 4007 of ERISA) in respect of, or to cause
a trustee to be appointed to administer any Material Plan; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or there shall occur a
complete or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
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which could cause one or more members of the ERISA Group to incur a current
payment obligation in excess of $25,000,000;
(l) a judgment or order for the payment of money in excess of
$30,000,000 (after deducting amounts covered by insurance, except to the extent
that the insurer providing such insurance has declined such coverage) shall be
rendered against the Borrower or any Subsidiary and, within 60 days after entry
thereof, such judgment or order is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay, such
judgment or order is not discharged;
(m) the Borrower shall cease to be a Wholly-Owned Consolidated
Subsidiary of the Parent Guarantor;
(n) the Borrower or any Subsidiary shall fail to make any payment owing
by it in respect of any performance bond, performance guaranty or bank guaranty
issued in lieu of a performance bond or performance guaranty (other than a
payment which is disputed by the Borrower or such Subsidiary in good faith), and
the aggregate of all such defaulted payments shall exceed $50,000,000 at any one
time for the Borrower and its Subsidiaries; or
(o) any Financing Document shall cease to be valid and enforceable
(except for the termination of a Subsidiary Guarantee in accordance with its
terms); or any Obligor shall so assert in writing;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 60% in aggregate amount of the Commitments, by notice to the Borrower
terminate the Commitments and they shall thereupon terminate, and (ii) if
requested by Banks holding Promissory Notes evidencing more than 60% in
aggregate principal amount of the Loans, by notice to the Borrower declare the
Promissory Notes (together with accrued interest thereon) to be, and the
Promissory Notes shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower; provided that in the case of any of the Events of
Default specified in subsection (i) or (j) above with respect to the Borrower,
without any notice to the Borrower or any other act by the Agent or the Banks,
the Commitments shall thereupon terminate and the Promissory Notes (together
with accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.01(d) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
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ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under the Financing Documents as are delegated to the
Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
New York (and any successor acting as Agent) in its capacity as a Bank hereunder
shall have the same rights and powers under the Financing Documents as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York (and any successor
acting as Agent) and its affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower or any Subsidiary or
affiliate of the Borrower as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent under the
Financing Documents are only those expressly set forth therein. Without limiting
the generality of the foregoing, the Agent shall not be required to take any
action with respect to any Default, except as expressly provided in Article 6.
SECTION 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.05. Liability of Agent. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Agent nor
any of its affiliates nor any of their respective directors, officers, agents or
employees shall be responsible for or have any duty to ascertain, inquire into
or verify (i) any statement, warranty or representation made in connection with
this Agreement or any borrowing hereunder; (ii) the performance or observance of
any of the covenants or agreements of the Borrower or any Guarantor; (iii) the
satisfaction of any condition specified in Article 3, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Subsidiary Guarantees, the Parent Guarantee,
the Promissory Notes or any other instrument or writing furnished in connection
herewith. The Agent shall not incur any liability by acting in reliance upon any
notice, consent, certificate, statement, or other writing (which may be a bank
wire, telex or similar writing) believed by it in good faith to be genuine or to
be signed by or on behalf of the proper party or parties. Without limiting the
generality of the foregoing, the use of the term "agent" in this Agreement with
reference to the Agent is not intended to connote any fiduciary or other implied
(or express) obligations arising under agency doctrine of any
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applicable law. Instead, such term is used merely as a matter of market custom
and is intended to create or reflect only an administrative relationship between
independent contracting parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by the
Borrower) against any cost, expense (including counsel fees and disbursements),
claim, demand, action, loss or liability (except such as result from such
indemnitees' gross negligence or willful misconduct) that such indemnitees may
suffer or incur in connection with the Financing Documents or any action taken
or omitted by such indemnitees thereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of the Borrower and its Subsidiaries and its own decision to
enter into this Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking any action
under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time by
giving notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent, subject to
the consent of the Borrower. If no successor Agent shall have been so appointed
by the Required Banks and consented to by the Borrower and shall have accepted
such appointment within 45 days after the retiring Agent gives notice of
resignation, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a commercial bank organized or licensed under
the laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $50,000,000. Upon the acceptance of its
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under the Financing Documents. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was acting as the Agent.
SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its
own account fees in the amounts and at the times previously agreed upon in
writing between the Borrower and the Agent.
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ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Banks
in the relevant market for such Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks holding 50% or
more of the aggregate amount of the affected Loans advise the Agent that the
Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as
determined by the Agent will not adequately and fairly reflect the cost to such
Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for
such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon, until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist (which the Agent agrees to do promptly
upon such circumstances ceasing to exist), (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to continue or
convert outstanding Loans as or into CD Loans or Euro-Dollar Loans, as the case
may be, shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar
Loan, as the case may be, shall be converted into a Base Rate Loan on the last
day of the then current Interest Period applicable thereto. Unless the Borrower
notifies the Agent at least one Domestic Business Day before the date of any
Fixed Rate Borrowing for which a Notice of Borrowing has previously been given
that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a
Committed Borrowing, such Borrowing shall instead be made as a Base Rate
Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR
Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear
interest for each day from and including the first day to but excluding the last
day of the Interest Period applicable thereto at the Base Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this Agreement,
any Bank has determined in its reasonable judgment that the adoption of any
applicable law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not having
the force of law) of any such authority, central bank or comparable agency,
shall make it unlawful or impossible for such Bank (or its Euro-Dollar Lending
Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so
notify the Agent, the Agent shall forthwith give notice specifying the
circumstances giving rise to such suspension to the other Banks and the
Borrower, whereupon, until such Bank notifies the Borrower and the Agent that
the circumstances giving
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rise to such suspension no longer exist (which such Bank agrees to do promptly
upon such circumstances ceasing to exist), the obligation of such Bank to make
Euro-Dollar Loans, or to continue or convert outstanding Loans as or into
Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent
pursuant to this Section, such Bank shall designate a different Euro-Dollar
Lending Office if such designation will avoid the need for giving such notice
and will not, in the judgment of such Bank in the good faith exercise of its
discretion, be otherwise disadvantageous to such Bank. If such notice is given,
each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base
Rate Loan either (a) on the last day of the then current Interest Period
applicable to such Euro-Dollar Loan if such Bank may lawfully continue to
maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately
if such Bank shall determine that it may not lawfully continue to maintain and
fund such Loan as a Euro-Dollar Loan to such day.
SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date of this Agreement, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, any Bank has determined in its reasonable
judgment that the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but excluding
(i) with respect to any CD Loan any such requirement included in an applicable
Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any
such requirement with respect to which such Bank is entitled to compensation
during the relevant Interest Period under Section 2.15), special deposit,
insurance assessment (excluding, with respect to any CD Loan, any such
requirement reflected in an applicable Assessment Rate) or similar requirement
against assets of, deposits with or for the account of, or credit extended by,
such Bank (or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the United States market for certificates of
deposit or the London interbank market any other condition affecting its Fixed
Rate Loans, its Promissory Note or its obligation to make Fixed Rate Loans and
the result of any of the foregoing is to increase the cost to such Bank (or its
Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to
reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Promissory Note
with respect thereto, by an amount deemed by such Bank to be material to such
Bank, then, within 15 days after written demand by such Bank (with a copy to the
Agent), the Borrower shall pay to such Bank such additional amount or amounts as
will compensate such Bank for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date of this
Agreement, the adoption of any applicable law, rule or regulation regarding
capital adequacy, or any change in any such law, rule or regulation, or any
change in the interpretation or administration thereof by
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any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after written demand by such Bank (with a copy to the Agent), the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date of this Agreement,
which will entitle such Bank to compensation pursuant to this Section; provided
that (i) if any Bank fails to give such notice within 90 days after it obtains
actual knowledge of such an event, such Bank shall only be entitled to payment
under this Section 8.03 for costs incurred from and after the date 90 days prior
to the date that such Bank does give such notice and (ii) each such Bank will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank in the good faith exercise of its discretion, be otherwise
disadvantageous to such Bank. A certificate of any Bank claiming compensation
under this Section and setting forth in reasonable detail the additional amount
or amounts to be paid to it hereunder and the basis used to determine such
amounts shall be conclusive in the absence of manifest error. In determining
such amount, such Bank will use reasonable averaging and attribution methods and
will have a reasonable basis for any assumptions it makes in connection
therewith.
SECTION 8.04. Taxes. (a) Any and all payments by the Borrower to or for
the account of any Bank or the Agent hereunder or under any Promissory Note
shall be made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding, in the case of each Bank and
the Agent, taxes imposed on or measured by its income, and franchise taxes
imposed on it, by the jurisdiction under the laws of which such Bank or the
Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Bank, taxes imposed on or measured by its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as its "TAXES", and all such
excluded taxes being hereinafter referred to as its "DOMESTIC TAXES"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under any Promissory Note to any Bank or the Agent, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 8.04 such Bank or the Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or other authority in
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accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 9.01, the original or a certified copy of
a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future stamp
or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any
Promissory Note or from the execution or delivery of, or otherwise with respect
to, this Agreement or any other Financing Document (hereinafter referred to as
"OTHER TAXES").
(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04 paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto. In addition, on and after the New Borrower Date, the Borrower
agrees to indemnify the Agent and each Bank for all Domestic Taxes and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, in each case to the extent that such Domestic Taxes result from
any payment or indemnification pursuant to this Section for (i) Taxes or Other
Taxes imposed by any jurisdiction other than the United States or (ii) Domestic
Taxes of the Agent or such Bank, as the case may be. This indemnification shall
be made within 15 days from the date such Bank or the Agent (as the case may be)
makes demand therefor.
(d) At the times indicated herein, each Bank organized under the laws
of a jurisdiction outside the United States shall provide the Borrower with
Internal Revenue Service form 1001 or 4224 (in each case accompanied by any
statements which may be required under applicable Treasury regulations), as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to receive payments under this Agreement
(i) without deduction or withholding of any United States federal income taxes
or (ii) subject to a reduced rate of United States federal withholding tax,
unless, in each case of clause (i) and (ii) of this Section 8.04(d), an event
(including, without limitation, any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders such forms inapplicable or which would prevent the Bank
from duly completing and delivering any such form with respect to it and the
Bank advises the Borrower and the Agent that it is not capable of receiving
payments without any deduction or withholding of such taxes. Such forms shall be
provided (x) on or prior to the date of the Bank's execution and delivery of
this Agreement in the case of each Bank listed on the signature pages hereof,
and on or prior to the date on which it becomes a Bank in the case of each other
Bank, and (y) on or before the date that such form expires or becomes obsolete
or after the occurrence of any event requiring a change in the most recent form
so delivered by the Bank. If the form provided by a Bank at the time such Bank
first becomes a party to this Agreement indicates a United States interest
withholding tax rate in excess of zero, United States withholding tax at such
rate shall be considered excluded from "TAXES" as defined in Section 8.04(a). In
addition, to the extent that for reasons other than a change of treaty, law or
regulation any Bank becomes subject to an
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increased rate of United States interest withholding tax while it is a party to
this Agreement, United States withholding tax at such increased rate shall be
considered excluded from "Taxes" as defined in Section 8.04(a).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form in accordance with Section 8.04(d)
(unless such failure is excused by the terms of Section 8.04(d)), such Bank
shall not be entitled to indemnification under Section 8.04(a) or 8.04(c) with
respect to Taxes imposed by the United States; provided, however, that should a
Bank, which is otherwise exempt from or subject to a reduced rate of withholding
tax, become subject to Taxes because of its failure to deliver a form required
hereunder, the Borrower shall take such steps as such Bank shall reasonably
request to assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section 8.04, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to eliminate or reduce
any such additional payment which may thereafter accrue if such change, in the
judgment of such Bank in the good faith exercise of its discretion, is not
otherwise disadvantageous to such Bank.
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate
Loans. If (i) the obligation of any Bank to make, or to continue or convert
outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to
Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or
8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall,
by at least five Euro-Dollar Business Days' prior notice to such Bank through
the Agent, have elected that the provisions of this Section shall apply to such
Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist), all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,
shall instead be Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related Fixed Rate Loans of the other Banks).
If such Bank notifies such Borrower that the circumstances giving rise to such
suspension or demand for compensation no longer exist, the principal amount of
each such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan,
as the case may be, on the first day of the next succeeding Interest Period
applicable to the related CD Loans or Euro-Dollar Loans of the other Banks.
SECTION 8.06. Substitution of Bank. If any Bank (i) has demanded
compensation for increased costs pursuant to Section 8.03 or 8.04 or is entitled
to payments under Section 8.04(a) or (ii) has determined that the making or
maintaining of any Euro-Dollar Loan has become unlawful or impossible pursuant
to Section 8.02 and similar additional interest or compensation has not been
demanded by, or a similar determination has not been made by, all of the Banks,
the Borrower shall have the right (with the assistance of the Agent) to
designate an Assignee which is not an Affiliate of the Borrower to purchase for
cash, pursuant to an Assignment and Assumption Agreement in substantially the
form of Exhibit G hereto, the outstanding Loans and
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Commitment of such Bank and to assume all of such Bank's other rights and
obligations hereunder without recourse to or warranty by, or expense to, such
Bank, for a purchase price equal to the principal amount of all of such Bank's
outstanding Loans plus any accrued but unpaid interest thereon and the accrued
but unpaid fees in respect of that Bank's Commitment hereunder plus such amount,
if any, as would be payable pursuant to Section 2.13 if the outstanding Loans of
such Bank were prepaid in their entirety on the date of consummation of such
assignment.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other communications
to any party provided for hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given to such party: (x) in the case of the Borrower or the Agent, at
its address or facsimile or telex number set forth on the signature pages
hereof, (y) in the case of any Bank, at its address or facsimile or telex number
set forth in its Administrative Questionnaire or (z) in the case of any party,
such other address or facsimile or telex number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by telex,
when such telex is transmitted to the telex number specified in this Section and
the appropriate answerback is received, (ii) if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this Section 9.01
and electronic, telephonic or other appropriate confirmation of receipt is
received by the sender, (iii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iv) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Agent under
Article 2 or Article 8 shall not be effective until received.
SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any other
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
and therein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i)
all reasonable out-of-pocket expenses of the Agent, including reasonable fees
and disbursements of special counsel for the Agent, in connection with the
preparation and administration of the Financing Documents, any waiver or consent
hereunder or any amendment thereof or any Default or alleged Default hereunder
and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses
incurred by the Agent and each Bank, including reasonable fees and disbursements
of
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counsel, in connection with such Event of Default and collection, bankruptcy,
insolvency and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank, their
respective Bank Affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses, including, without limitation, the reasonable fees and disbursements
of counsel, which may be incurred by such Indemnitee (whether or not such
Indemnitee shall be designated a party thereto) arising out of any
investigative, administrative or judicial proceeding (brought or threatened)
relating to or arising out of the Financing Documents, the arrangement,
administration, performance or enforcement thereof or any actual or proposed use
of proceeds of Loans hereunder; provided that no Indemnitee shall have the right
to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction; provided
further that no Indemnitee shall have the right to be indemnified hereunder in
connection with any proceedings between it and another Indemnitee which does not
relate to the Borrower.
(c) If any proceeding or claim shall be brought or asserted against any
Indemnitee in respect of which indemnity may be sought pursuant to the preceding
subsection, such Indemnitee shall promptly notify the Borrower. The Borrower
shall not be liable for any costs or expenses in connection with any settlement
entered into without its consent.
SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate amount of principal and interest due with
respect to any Promissory Note held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest due with respect to any Promissory Note held by such other Bank, the
Bank receiving such proportionately greater payment shall purchase such
participations in the Promissory Notes held by the other Banks, and such other
adjustments shall be made, as may be required, so that all such payments of
principal and interest with respect to the Promissory Notes held by the Banks
shall be shared by the Banks pro rata; provided that nothing in this Section
shall impair the right of any Bank to exercise any right of set-off or
counterclaim it may have and to apply the amount subject to such exercise to the
payment of indebtedness of the Borrower other than its indebtedness under the
Promissory Notes.
SECTION 9.05. Amendments and Waivers. Any provision of this Agreement
or the Promissory Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks,
(i) increase or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for termination of any Commitment,
(iv) change the percentage of the
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Commitments or of the aggregate unpaid principal amount of the Promissory Notes,
or the number of Banks, which shall be required for the Banks or any of them to
take any action under this Section or any other provision of this Agreement or
(v) release the Parent Guarantor from its obligations under the Parent
Guarantee.
SECTION 9.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without the
prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii) or (iv) of Section 9.05 without the consent of the Participant. The
Borrower agrees that each Participant shall, to the extent provided in its
participation agreement and subject to subsection (e), (f) and (g) below, be
entitled to the benefits of Article 8 with respect to its participating
interest. An assignment or other transfer which is not permitted by subsection
9.06(c) or 9.06(d) below shall be given effect for purposes of this Agreement
only to the extent of a participating interest granted in accordance with this
subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part (in an amount
equivalent to an original Commitment of not less than $10,000,000) of all, of
its rights and obligations under this Agreement and the Promissory Notes, and
such Assignee shall assume such rights and obligations, pursuant to an
Assignment and Assumption Agreement in substantially the form of Exhibit G
hereto executed by such Assignee and such transferor Bank, with (and subject to)
the subscribed consent of the Borrower and the Agent, which shall not be
unreasonably withheld; provided that if an Assignee is an affiliate of such
transferor Bank, no such consent shall be required; and provided further that
such assignment may, but need not, include rights of the transferor Bank in
respect of outstanding Money Market Loans. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an amount
equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party
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shall be required. Upon the consummation of any assignment pursuant to this
subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Promissory Note is issued
to the Assignee. In connection with any such assignment, the transferor Bank
shall pay to the Agent an administrative fee for processing such assignment in
the amount of $2,500. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall deliver to the Borrower
and the Agent certification as to exemption from deduction or withholding of any
United States federal income taxes in accordance with Section 8.04.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Promissory Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.03 or 8.04 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring
such Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
(f) Notwithstanding anything to the contrary contained in this Section
9.06 but subject to the terms and conditions set forth in this subsection (f),
any Bank may from time to time, elect to designate a Conduit to provide all or
any part of Loans required to be made by such Bank to the Borrower pursuant to
this Agreement or to acquire a participation interest in any Loans extended by
such Bank hereunder (a "CONDUIT DESIGNATION"), provided the designation of a
Conduit by any Bank for purposes of this Section 9.06(f) shall be subject to the
approval of the Borrower. No additional Note shall be required with regard to a
Conduit Designation; provided, however, to the extent any Conduit shall advance
funds under a Conduit Designation, the designating Bank shall be deemed to hold
the Note in its possession as an agent for such Conduit to the extent of the
Loan funded by such Conduit. Notwithstanding any such Conduit Designation, (x)
the designating Bank shall remain solely responsible to the other parties hereto
for its obligations under this Agreement and (y) the Borrower and the Agent may
continue to deal solely and directly with the designating Bank as administrative
agent for such designating Bank's Conduit, in connection with all of such
Conduit's rights and obligations under this Agreement, unless and until the
Borrower and the Agent are notified that the designating Bank has been replaced
as administrative agent for its Conduit; any payments for the benefit of any
designating Bank and its Conduit shall be paid to such designating Bank for
itself as administrative agent for its Conduit, as applicable; provided neither
the Borrower nor the Agent shall be responsible for any designating Bank's
application of any such payments. In addition, any Conduit may (i) with notice
to, but without the prior written consent of the Borrower and the Agent, and
without paying any processing fee therefor, assign all or portions of its
interest in any Loans to the Bank that designated such Conduit or to any
financial institutions consented to by the Borrower and the Agent providing
liquidity and/or credit facilities to or for the account of such Conduit to
support the funding or maintenance of Loans and (ii) disclose on a confidential
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basis any non-public information relating to its Loans to any rating agency,
commercial paper dealer or provider of any guarantee, surety, credit or
liquidity enhancement to such Conduit.
(g) Each party to this Agreement hereby agrees that, at any time a
Conduit Designation is in effect, it shall not institute against, or join any
other person in instituting against, any Conduit any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceeding or other proceedings under any
federal or state bankruptcy or similar law, for one year and a day after the
latest maturing commercial paper note issued by such Conduit is paid. This
Section 9.06(g) shall survive the termination of this Agreement.
SECTION 9.07. Collateral. Each of the Banks represents to the Agent and
each of the other Banks that it in good faith is not relying upon any "margin
stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
SECTION 9.08. Governing Law; Submission to Jurisdiction. THIS AGREEMENT
AND EACH PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY
FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE BORROWER IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
SECTION 9.09. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 9.10. Waiver of Jury Trial. EACH OF THE BORROWER, THE AGENT AND
THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
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SECTION 9.11. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Borrower or
for any other reason, any payment under or in connection with this Agreement, is
made or satisfied in a currency (the "Other Currency") other than that in which
the relevant payment is due (the "Required Currency") then, to the extent that
the payment (when converted into the Required Currency at the rate of exchange
on the date of payment or, if it is not practicable for the party entitled
thereto (the "Payee") to purchase the Required Currency with the other Currency
on the date of payment, at the rate of exchange as soon thereafter as it is
practicable for it to do so) actually received by the Payee falls short of the
amount due under the terms of this Agreement, the Borrower shall, to the extent
permitted by law, as a separate and independent obligation, indemnify and hold
harmless the Payee against the amount of such short-fall. For the purpose of
this Section, "rate of exchange" means the rate at which the Payee is able on
the relevant date to purchase the Required Currency with the Other Currency and
shall take into account any premium and other costs of exchange.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
TYCO INTERNATIONAL (US) INC.
By: /s/
--------------------------------------------
Name:
Title: Vice President - Chief Financial Officer
By: /s/
--------------------------------------------
Name:
Title: Vice President - Treasurer
1 Tyco Park
Exeter, New Hampshire 03833
Facsimile number: 603-778-0108
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/
--------------------------------------------
Title: Vice President
THE BANK OF NOVA SCOTIA
By: /s/
--------------------------------------------
Name:
Title:
BANKERS TRUST COMPANY
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 71
COMMERZBANK AG, NEW YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
CREDIT SUISSE FIRST BOSTON
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
MARINE MIDLAND BANK
By: /s/
--------------------------------------------
Name:
Title:
MELLON BANK, N.A.
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 72
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
NATIONSBANK, N.A.
By: /s/
--------------------------------------------
Name:
Title:
TORONTO DOMINION (TEXAS), INC.
By: /s/
--------------------------------------------
Name:
Title:
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 73
BANK BRUSSELS LAMBERT
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
BANQUE NATIONALE DE PARIS
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
NATIONAL WESTMINSTER BANK PLC NEW
YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
NATIONAL WESTMINSTER BANK PLC
NASSAU BRANCH
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 74
THE BANK OF NEW YORK
By: /s/
--------------------------------------------
Name:
Title:
ABN AMRO BANK N.V.
By: /s/
--------------------------------------------
Name:
Title:
BANCA COMMERCIALE ITALIANA -
NEW YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
BANCA NAZIONALE DEL LAVORO S.p.A. -
NEW YORK BRANCH
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 75
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/
--------------------------------------------
Name:
Title:
BANK OF MONTREAL, CHICAGO BRANCH
By: /s/
--------------------------------------------
Name:
Title:
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/
--------------------------------------------
Name:
Title:
BANKBOSTON, N.A.
By: /s/
--------------------------------------------
Name:
Title:
CITIBANK, N.A.
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 76
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/
--------------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By: /s/
--------------------------------------------
Name:
Title:
FLEET BANK - NH
By: /s/
--------------------------------------------
Name:
Title:
ISTITUTO BANCARIO SAN PAOLO
DI TORINO SPA
By: /s/
--------------------------------------------
Name:
Title:
By: /s/
--------------------------------------------
Name:
Title:
KEYBANK NATIONAL ASSOCIATION
By: /s/
--------------------------------------------
Name:
Title:
<PAGE> 77
STANDARD CHARTERED BANK
By: /s/
--------------------------------------------
Name:
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By:/s/
--------------------------------------------
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention:
Telex number: 177615
Facsimile number: 212-648-5018
<PAGE> 78
APPENDIX
COMMITMENT SCHEDULE
<TABLE>
<S> <C>
Morgan Guaranty Trust Company of New York $ 31,111,111.11
The Bank of Nova Scotia 27,777,777.78
Bankers Trust Company 27,777,777.78
Commerzbank AG, New York Branch 27,777,777.78
Credit Suisse First Boston 27,777,777.78
Marine Midland Bank 27,777,777.78
Mellon Bank, N.A. 27,777,777.78
Credit Lyonnais New York Branch 22,222,222.22
NationsBank, N.A. 22,222,222.22
Toronto Dominion (Texas), Inc. 22,222,222.22
Union Bank of Switzerland, New York Branch 22,222,222.22
Bank Brussels Lambert 14,444,444.44
Banque Nationale de Paris 14,444,444.44
National Westminster Bank PLC 14,444,444.44
The Bank of New York 14,444,444.14
ABN AMRO Bank N.V. 11,111,111.11
Banca Commerciale Italiana - New York Branch 11,111,111.11
Banca Nazionale del Lavoro S.p.A. - New York Branch 11,111,111.11
Bank of America National Trust and Savings Association 11,111,111.11
Bank of Montreal, Chicago Branch 11,111,111.11
Bank of Tokyo-Mitsubishi Trust Company 11,111,111.11
BankBoston, N.A. 11,111,111.11
Citibank, N.A. 11,111,111.11
The First National Bank of Chicago 11,111,111.11
First Union National Bank 11,111,111.11
Fleet Bank - NH 11,111,111.11
Istituto Bancario San Paolo Di Torino SpA 11,111,111.11
KeyBank National Association 11,111,111.11
Standard Chartered Bank 11,111,111.11
----------------
Total Commitments $ 500,000,000.00
</TABLE>
<PAGE> 79
EXHIBIT A
PROMISSORY NOTE
New York, New York
, 1998
For value received, [NAME OF BORROWER], a corporation (the
"Borrower"), promises to pay to the order of
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the maturity date provided for in the
Credit Agreement. The Borrower promises to pay interest on the unpaid principal
amount of each such Loan on the dates and at the rate or rates provided for in
the Credit Agreement. All such payments of principal and interest shall be made
in lawful money of the United States in Federal or other immediately available
funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall
Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank and,
if the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This promissory note is one of the Promissory Notes referred to in the
Extendible 364-Day Credit Agreement dated as of February 13, 1998 among the
Borrower, the banks listed on the signature pages thereof and Morgan Guaranty
Trust Company of New York, as Agent (as the same may be amended from time to
time, the "Credit Agreement"). Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the Credit Agreement for
provisions for the prepayment hereof and the acceleration of the maturity
hereof.
Except as permitted by Section 9.06 of the Credit Agreement, this
Promissory Note may not be assigned by the Bank to any other Person.
<PAGE> 80
This Promissory Note shall be governed by and construed in accordance
with the laws of the State of New York.
[NAME OF BORROWER]
By
-----------------------------------
Title:
By
-----------------------------------
Title:
<PAGE> 81
Promissory Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Amount Type Amount of Unpaid
of of Principal Principal Maturity Notation
Date Loan Loan Repaid Amount Date Made By
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
<PAGE> 82
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: [Name of Borrower]
Re: Extendible 364-Day Credit Agreement (the "Credit
Agreement") dated as of February 13, 1998 among the
Borrower, the Banks listed on the signature pages
thereof and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing:
<TABLE>
<CAPTION>
Principal Amount* Interest Period**
<S> <C>
$
</TABLE>
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Terms used herein have the meanings assigned to them in the Credit
Agreement.
[NAME OF BORROWER]
By
-------------------------------------
Title:
By
-------------------------------------
Title:
- -------------------------------
*Amount must be $10,000,000 or a larger multiple of $1,000,000.
**Not less than one month (LIBOR Auction) or not less than 30
days (Absolute Rate Auction), subject to the provisions of the definition of
Interest Period.
<PAGE> 83
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to [Name of Borrower] (the
"Borrower")
Pursuant to Section 2.03 of the Extendible 364-Day Credit Agreement
dated as of February 13, 1998 among the Borrower, the Banks parties thereto and
the undersigned, as Agent (the "Credit Agreement"), we are pleased on behalf of
the Borrower to invite you to submit Money Market Quotes to the Borrower for the
following proposed Money Market Borrowing(s):
Date of Borrowing:
<TABLE>
<CAPTION>
Principal Amount Interest Period
<S> <C>
$
</TABLE>
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.] [9:30
A.M.] (New York City time) on [date].
Terms used herein have the meanings assigned to them in the Credit
Agreement.
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
------------------------------------
Authorized Officer
<PAGE> 84
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Agent
Re: Money Market Quote to [Name of Borrower]. (the "Borrower")
In response to your invitation on behalf of the Borrower dated
, 19 , we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank:
2. Person to contact at Quoting Bank:
3. Date of Borrowing: *
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at
the following rates:
Principal Interest Money Market
<TABLE>
<CAPTION>
Amount** Period*** [Margin****] [Absolute Rate*****]
<S> <C> <C> <C>
$
$
</TABLE>
[Provided, that the aggregate principal amount of Money Market Loans
for which the above offers may be accepted shall not exceed $ .]**
----------
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed
principal amount requested. Specify aggregate limitation if the sum of the
individual offers exceeds the amount the Bank is willing to lend. Bids must be
made for $5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
<PAGE> 85
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the Extendible
364-Day Credit Agreement dated as of February 13, 1998 (the "Credit Agreement")
among the Borrower, the Banks listed on the signature pages thereof and
yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s)
for which any offer(s) are accepted, in whole or in part, in accordance with
Section 2.03(f) of the Credit Agreement.
Terms used herein have the meanings assigned to them in the Credit
Agreement.
Very truly yours,
[NAME OF BANK]
Dated: By:
--------------------------------
Authorized Officer
- ----------
*** Not less than one month or not less than 30 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined for the
applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%)
and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).
<PAGE> 86
EXHIBIT E-1
Form of Opinion of General Counsel
of the Borrower
[Effective Date]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, As Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the General Counsel of Tyco International (US) Inc., a
Massachusetts corporation (the "Borrower") and am rendering this opinion in
connection with that certain 364-Day Credit Agreement and that certain
Extendible 364-Day Credit Agreement (collectively, the "Credit Agreements"),
each dated as of February 13, 1998, among the Borrower, the banks listed on the
signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New
York, as Agent. This opinion is being delivered to you pursuant to Section
3.01(e) of each Credit Agreement. Each term defined in the Credit Agreements and
used herein, but not otherwise defined herein, has the meaning ascribed thereto
in the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes of the Borrower and the Parent Guarantee
and have examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the Restated Articles of Organization and By-laws of the
Borrower, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to me as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Borrower and certificates of public officials. In
addition, I have assumed that (i) the Credit Agreements have been validly
authorized, executed and delivered by all parties thereto (other than the
Borrower), (ii) each party to the Credit Agreements (other than the Borrower)
has been duly organized and is a corporation or other entity validly existing
and in good standing (to the extent applicable) under the laws of its respective
jurisdiction of organization, with the full corporate or other
<PAGE> 87
organizational power to execute and deliver the Credit Agreements and to perform
its respective obligations thereunder, (iii) the Credit Agreements constitute
the legal, valid and binding obligations of the respective parties thereto
(other than the Borrower) enforceable against such parties in accordance with
their respective terms, (iv) the execution and delivery of the Credit Agreements
by each party thereto (other than the Borrower) and the performance by such
parties of their respective obligations thereunder do not violate such parties'
respective articles or certificate of incorporation or by-laws, or other
organizational documents, and (v) the execution, delivery and performance by
each party to the Credit Agreements (other than the Borrower) and the
performance by such parties of their respective obligations thereunder do not
violate any agreement, judgment, injunction, decree, order of any governmental
authority, other instrument, law or regulation applicable to such party.
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
1. The Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of the Commonwealth of Massachusetts, and
has all corporate powers and all material governmental licenses, authorizations,
consents and approvals (collectively, the "Consents") required to carry on its
business as now conducted, other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence on the date hereof, reasonably be expected to have a
Material Adverse Effect.
2. The execution, delivery and performance by the Borrower of the
Credit Agreements and the Promissory Notes (a) are within the Borrower's
corporate powers; (b) have been duly authorized by all necessary corporate
action on the part of the Borrower; (c) require no action by or in respect of,
or filing with, any governmental body, agency or official, in each case, on the
part of the Borrower; and (d) do not contravene, or constitute a default by the
Borrower under, any provision of (i) applicable law or regulation, (ii) the
certificate of incorporation or by-laws of the Borrower or, (iii) any agreement
or instrument evidencing or governing Debt of the Borrower, or any other
agreement, judgment, injunction, order, decree or other instrument binding upon
the Borrower.
3. Each Credit Agreement constitutes a valid and binding agreement of
the Borrower and each Promissory Note constitutes a valid and binding obligation
of the Borrower.
4. There is no action, suit or proceeding pending against, or, to the
best of my knowledge, threatened against or affecting, the Borrower or any of
its Subsidiaries before any court or arbitrator or any governmental body, agency
or official, in which there is a reasonable possibility of an adverse decision
which could, based upon the facts and circumstances in existence on the date
hereof, reasonably be expected to have a Material Adverse Effect or which in any
manner draws into question the validity of the Financing Documents.
2
<PAGE> 88
5. Each of the Borrower's corporate Subsidiaries is a corporation
validly existing and in good standing under the laws of its jurisdiction of
incorporation, except where the failure to be so incorporated, existing or in
good standing could not, based upon the facts and circumstances existing on the
date hereof, reasonably be expected to have a Material Adverse Effect, and has
all corporate powers and all Consents required to carry on its business as now
conducted other than those powers and Consents, the failure of which to be
possessed or obtained could not, based upon the facts and circumstances in
existence on the date hereof, reasonably be expected to have a Material Adverse
Effect.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Credit Agreements and the Promissory
Notes may be subject to or limited by bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance or transfer or other similar laws
and court decisions, now or hereafter in effect, relating to or affecting the
rights of creditors generally.
(b) The enforceability of the Credit Agreements and the Promissory
Notes is or will be subject to the application of and may be limited by general
principles of equity including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether considered in
a proceeding in equity or at law). Such principles of equity are of general
application, and in applying such principles a court, among other things, might
not allow a creditor to accelerate maturity of a debt under certain
circumstances including, without limitation, upon the occurrence of a default
deemed immaterial, or might decline to order the Borrower or any of the other
parties to the Financing Documents to perform covenants. Such principles as
applied by a court might include a requirement that a creditor act with
reasonableness and in good faith. Thus, I express no opinion as to the validity
or enforceability of (i) provisions restricting access to legal or equitable
remedies, such as the specific performance of executory covenants, (ii)
provisions that purport to establish evidentiary standards, (iii) provisions
relating to waivers, severability, set-off, or delay or omission of enforcement
of rights or remedies, and (iv) provisions purporting to convey rights to
persons other than parties to the Financing Documents.
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission I do
not express, any opinion as to the applicability to any provision of the
Financing Documents, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
3
<PAGE> 89
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of the State of New York, the Commonwealth of Massachusetts
and the Federal laws of the United States of America.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Financing Documents, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
4
<PAGE> 90
EXHIBIT E-2
Form of Opinion of General Counsel
of the Borrower on Behalf of the Parent Guarantor
[Effective Date]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, As Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the General Counsel of Tyco International (US) Inc., a
Massachusetts corporation and a wholly owned indirect subsidiary of Tyco
International Ltd., a Bermuda corporation (the "Parent Guarantor") and am
rendering this opinion in connection with that certain Parent Guarantee (the
"Parent Guarantee"), dated as of February 13, 1998, entered into by the Parent
Guarantor pursuant to that certain 364-Day Credit Agreement and that certain
Extendible 364- Day Credit Agreement (collectively, the "Credit Agreements"),
each dated as of February 13, 1998, among Tyco International (US) Inc. (the
"Borrower"), the banks listed on the signature pages thereof (the "Banks") and
Morgan Guaranty Trust Company of New York, as Agent. This opinion is being
delivered to you pursuant to Section 3.01(e) of each Credit Agreement. Each term
defined in the Credit Agreements and used herein, but not otherwise defined
herein, has the meaning ascribed thereto in the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes of the Borrower and the Parent Guarantee
and have examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the [Memorandum of Association and By-laws] of the Parent
Guarantor, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to me as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Parent Guarantor and certificates of public officials.
<PAGE> 91
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
1. The execution, delivery and performance by the Parent Guarantor of
the Parent Guarantee (a) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Parent Guarantor; and (b) do not contravene, or constitute a default by the
Parent Guarantor under, any provision of (i) applicable law or regulation or
(ii) any agreement or instrument evidencing or governing Debt of the Parent
Guarantor, or any other agreement, judgment, injunction, order, decree or other
instrument binding upon the Parent Guarantor.
2. The Parent Guarantee constitutes a valid and binding obligation of
the Parent Guarantor.
3. There is no action, suit or proceeding pending against, or, to the
best of my knowledge, threatened against or affecting, the Parent Guarantor or
any of its Subsidiaries before any court or arbitrator or any governmental body,
agency or official, in which there is a reasonable possibility of an adverse
decision which could, based upon the facts and circumstances in existence on the
date hereof, reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of the Financing Documents.
4. Each of the Parent Guarantor's corporate Subsidiaries is a
corporation validly existing and in good standing under the laws of its
jurisdiction of incorporation, except where the failure to be so incorporated,
existing or in good standing could not, based upon the facts and circumstances
existing on the date hereof, reasonably be expected to have a Material Adverse
Effect, and has all corporate powers and all Consents required to carry on its
business as now conducted other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence on the date hereof, reasonably be expected to have a
Material Adverse Effect.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Parent Guarantee may be subject to or
limited by bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or transfer or other similar laws and court decisions, now
or hereafter in effect, relating to or affecting the rights of creditors
generally.
(b) The enforceability of the Parent Guarantee is or will be subject to
the application of and may be limited by general principles of equity including,
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing (regardless of whether considered in a proceeding in equity or at law).
Such principles of equity are of general application, and in applying such
principles a court, among other things, might not allow a creditor to accelerate
maturity of a debt under certain circumstances including, without limitation,
upon the occurrence
2
<PAGE> 92
of a default deemed immaterial, or might decline to order the Parent Guarantor
or any of the other parties to the Financing Documents to perform covenants.
Such principles as applied by a court might include a requirement that a
creditor act with reasonableness and in good faith. Thus, I express no opinion
as to the validity or enforceability of (i) provisions restricting access to
legal or equitable remedies, such as the specific performance of executory
covenants, (ii) provisions that purport to establish evidentiary standards,
(iii) provisions relating to waivers, severability, set-off, or delay or
omission of enforcement of rights or remedies, and (iv) provisions purporting to
convey rights to persons other than parties to the Financing Documents.
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission I do
not express, any opinion as to the applicability to any provision of the
Financing Documents, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of the State of New York, the Commonwealth of Massachusetts
and the Federal laws of the United States of America. Insofar as the foregoing
opinion involves matters governed by the laws of Bermuda, I have relied, without
independent investigation, upon the opinion of , a copy of which has
been delivered to you.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Financing Documents, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
3
<PAGE> 93
EXHIBIT F
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE AGENT
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the 364-Day Credit Agreement
and the Extendible 364-Day Credit Agreement (collectively, the "Credit
Agreements"), each dated as of February 13, 1998, among Tyco International (US)
Inc., a Massachusetts corporation (the "Borrower"), the banks listed on the
signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New
York, as Agent (the "Agent"), and have acted as special counsel for the Agent
for the purpose of rendering this opinion pursuant to Section 3.01(f) of the
Credit Agreements. Terms defined in the Credit Agreements are used herein as
therein defined.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that each Credit
Agreement constitutes a valid and binding agreement of the Borrower, that each
Promissory Note delivered on the date hereof constitutes a valid and binding
obligation of the Borrower and that the Parent Guarantee constitutes a valid and
binding obligation of the Parent Guarantor, in each case enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and by general
principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York and the federal laws of
the United States of America. In giving the foregoing opinion, (i) we express no
opinion as to the effect (if any) of any law of any jurisdiction (except the
State of New York) in which any Bank is located which limits the rate of
<PAGE> 94
interest that such Bank may charge or collect and (ii) insofar as the foregoing
opinion involves matters governed by the laws of Massachusetts or Bermuda, we
have relied, without independent investigation, upon the respective opinions of
the General Counsel of the Borrower [and the Parent Guarantor] and of Appleby,
Spurling & Kempe, special Bermuda counsel for the Parent Guarantor, copies of
which have been delivered to you.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without our prior written consent, except that
any person who is a permitted successor or assign of a Bank in accordance with
the provisions of the Credit Agreement may rely upon this opinion as if it were
specifically addressed and delivered to such person on the date hereof.
Very truly yours,
2
<PAGE> 95
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, ____ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), [NAME OF BORROWER] (the "Borrower")
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the Extendible 364-Day Credit Agreement dated as of February 13, 1998
among the Borrower, the Assignor and the other Banks party thereto, as Banks,
and the Agent (the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans to the Borrower in an aggregate principal amount at any
time outstanding not to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"),
together with a corresponding portion of its outstanding Committed Loans, and
the Assignee proposes to accept assignment of such rights and assume the
corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the
<PAGE> 96
Assignee hereby accepts such assignment from the Assignor and assumes all of the
obligations of the Assignor under the Credit Agreement to the extent of the
Assigned Amount, including the purchase from the Assignor of the corresponding
portion of the principal amount of the Committed Loans made by the Assignor
outstanding at the date hereof. Upon the execution and delivery hereof by the
Assignor, the Assignee, [the Borrower and the Agent] and the payment of the
amounts specified in Section 3 required to be paid on the date hereof (i) the
Assignee shall, as of the date hereof, succeed to the rights and be obligated to
perform the obligations of a Bank under the Credit Agreement with a Commitment
in an amount equal to the Assigned Amount, and (ii) the Commitment of the
Assignor shall, as of the date hereof, be reduced by a like amount and the
Assignor released from its obligations under the Credit Agreement to the extent
such obligations have been assumed by the Assignee. The assignment provided for
herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.* It is
understood that facility fees in respect of the Assigned Amount accrued to the
date hereof are for the account of the Assignor and such fees accruing from and
including the date hereof are for the account of the Assignee. Each of the
Assignor and the Assignee hereby agrees that if it receives any amount under the
Credit Agreement which is for the account of the other party hereto, it shall
receive the same for the account of such other party to the extent of such other
party's interest therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent. This Agreement is
conditioned upon the consent of the Borrower and the Agent pursuant to Section
9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower
and the Agent is evidence of this consent. Pursuant to Section 9.06(c) the
Borrower agrees to execute and deliver a Note payable to the order of the
Assignee to evidence the assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no responsibility
with respect to, the solvency, financial condition, or statements of the
Borrower, or the validity and enforceability of the obligations of the Borrower
in respect of the Credit Agreement or any Note. The Assignee acknowledges that
it has, independently and without reliance on the Assignor, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the business, affairs
and financial condition of the Borrower.
- --------
*Amount should combine principal together with accrued interest
and breakage compensation, if any, to be paid by the Assignee, net of any
portion of any upfront fee to be paid by the Assignor to the Assignee. It may be
preferable in an appropriate case to specify these amounts generically or by
formula rather than as a fixed sum.
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<PAGE> 97
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[ASSIGNOR]
By
----------------------------------
Title:
[ASSIGNEE]
By
----------------------------------
Title:
[NAME OF BORROWER]
By
----------------------------------
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By
----------------------------------
Title:
3
<PAGE> 98
EXHIBIT H
SUBSIDIARY GUARANTEE
Dated as of ____________
WHEREAS, [Name of Borrower], a ___________ corporation, has entered
into a 364- Day Credit Agreement and an Extendible 364-Day Credit Agreement
(collectively, as the same may be amended from time to time, the "Credit
Agreements") each dated as of February 13, 1998 among the Borrower, the banks
listed on the signature pages thereof, and Morgan Guaranty Trust Company of New
York, as Agent, pursuant to which the Borrower is entitled, subject to certain
conditions, to borrow up to $2,250,000,000;
WHEREAS, in conjunction with the transactions contemplated by the
Credit Agreements and in consideration of the financial and other support that
the Borrower has provided, and such financial and other support as the Borrower
may in the future provide, to the undersigned (together with its successors, the
"Guarantor") and in order to induce the Banks and the Agent to enter into the
Credit Agreements and to make Loans thereunder, the Guarantor is willing to
guarantee the obligations of the Borrower under the Credit Agreements and the
Promissory Notes issued thereunder;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby agrees as follows:
ARTICLE
DEFINITIONS
SECTION 1. Definitions. Terms defined in the Credit Agreements and not
otherwise defined herein are used herein as therein defined (e.g., a "Loan" is a
Loan made pursuant to either Credit Agreement and a "Promissory Note" is a
Promissory Note issued pursuant to either Credit Agreement). In addition the
following terms, as used herein, have the following meanings:
"Guaranteed Obligations" means (i) all obligations of the Borrower in
respect of principal of and interest on the Loans and the Promissory Notes, (ii)
all other amounts payable by the Borrower under either Credit Agreement or any
Promissory Note and (iii) all renewals or extensions of the foregoing, in each
case whether now outstanding or hereafter arising. The Guaranteed Obligations
shall include, without limitation, any interest, costs, fees and expenses which
accrue on or with respect to any of the foregoing and are payable by the
Borrower pursuant to either Credit Agreement or any Promissory Note, whether
before or after the
<PAGE> 99
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of any one or more than one of the Obligors, and
any such interest, costs, fees and expenses that would have accrued thereon or
with respect thereto and would have been payable by the Borrower pursuant to
such Credit Agreement or Promissory Note but for the commencement of such case,
proceeding or other action.
ARTICLE
GUARANTEE
SECTION 1. The Guarantees. Subject to Section 3, the Guarantor hereby
unconditionally and irrevocably guarantees to the Banks and the Agent and to
each of them, the due and punctual payment of all Guaranteed Obligations as and
when the same shall become due and payable, whether at maturity, by declaration
or otherwise, according to the terms thereof. In case of failure by the Borrower
punctually to pay the indebtedness guaranteed hereby, the Guarantor, subject to
Section 3, hereby unconditionally agrees to cause such payment to be made
punctually as and when the same shall become due and payable, whether at
maturity or by declaration or otherwise, and as if such payment were made by the
Borrower.
SECTION 2. Guarantee unconditional. The obligations of the Guarantor
under this Article 2 shall be unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by:
(a) any extension, renewal, settlement, compromise, waiver or release
in respect of any obligation of any other Obligor under any Financing Document,
by operation of law or otherwise;
(b) any modification or amendment of or supplement to any Financing
Document (other than as specified in an amendment or waiver of this Subsidiary
Guarantee effected in accordance with Section 3);
(c) any modification, amendment, waiver, release, non-perfection or
invalidity of any direct or indirect security, or of any guaranty or other
liability of any third party, for any obligation of any other Obligor under any
Financing Document;
(d) any change in the corporate existence, structure or ownership of
any other Obligor, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting any other Obligor or its assets or any resulting
release or discharge of any obligation of any other Obligor contained in any
Financing Document [(including, without limitation, any change in the identity
of the Borrower from Tyco US to Tyco Luxembourg as contemplated by Section 3.04
of the Credit Agreements)] [to be included in Subsidiary Guarantees issued while
Tyco US is the Borrower];
2
<PAGE> 100
(e) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against any other Obligor, the Agent, any Bank or
any other Person, whether or not arising in connection with the Financing
Documents; provided that nothing herein shall prevent the assertion of any such
claim by separate suit or compulsory counterclaim;
(f) any invalidity or unenforceability relating to or against any other
Obligor for any reason of any Financing Document, or any provision of applicable
law or regulation purporting to prohibit the payment by any other Obligor of the
principal of or interest on any Promissory Note or any other amount payable by
any other Obligor under any Financing Document; or
(g) any other act or omission to act or delay of any kind by any other
Obligor, the Agent, any Bank or any other Person or any other circumstance
whatsoever that might, but for the provisions of this paragraph, constitute a
legal or equitable discharge of the obligations of the Guarantor under this
Article 2.
SECTION 3. Limit of Liability. The Guarantor shall be liable under this
Subsidiary Guarantee only for amounts aggregating up to the largest amount that
would not render its obligations hereunder subject to avoidance under Section
548 of the United States Bankruptcy Code or any comparable provisions of any
other applicable law.
SECTION 4. Discharge; Reinstatement in Certain Circumstances. Subject
to Section 6, the Guarantor's obligations under this Article 2 shall remain in
full force and effect until the Commitments are terminated and the principal of
and interest on the Promissory Notes and all other amounts payable by the
Borrower under the Financing Documents shall have been paid in full. If at any
time any payment of the principal of or interest on any Promissory Note or any
other amount payable by the Borrower under any Financing Document is rescinded
or must be otherwise restored or returned upon the insolvency, bankruptcy or
reorganization of any other Obligor or otherwise, the Guarantor's obligations
under this Article 2 with respect to such payment shall be reinstated at such
time as though such payment had become due but had not been made at such time.
SECTION 5. Waiver. The Guarantor irrevocably waives acceptance hereof,
presentment, demand, protest and any notice not provided for herein, as well as
any requirement that at any time any action be taken by any Person against any
other Obligor or any other Person.
SECTION 6. Subrogation and Contribution. (a) The Guarantor irrevocably
waives any and all rights to which it may be entitled, by operation of law or
otherwise, upon making any payment hereunder (i) to be subrogated to the rights
of the payee against the Borrower with respect to such payment or otherwise to
be reimbursed, indemnified or exonerated by any other Obligor in respect thereof
or (ii) to receive any payment, in the nature of contribution or for any other
reason, from any other Obligor with respect to such payment
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<PAGE> 101
(b) Notwithstanding the provision of subsection (a) of this Section 6,
the Guarantor shall have and be entitled to (i) all rights of subrogation or
contribution otherwise provided by law in respect of any payment it may make or
be obligated to make under this Subsidiary Guarantee and (ii) all claims (as
defined under Chapter 11 of Title 11 of the United States Code, as amended, or
any successor statute (the "Bankruptcy Code")) it would have against the
Borrower or any other Guarantor (each an "Other Party") in the absence of
subsection (a) of this Section 6 and to assert and enforce the same, in each
case on and after, but at no time prior to, the date (the "Subrogation Trigger
Date") which is one year and five days after the Termination Date if, but only
if, (x) no Default or Event of Default of the type described in Section 6.01(i)
or 6.01(j) of the Credit Agreements with respect to the relevant Other Party has
existed at any time on and after the date of this Subsidiary Guarantee to and
including the Subrogation Trigger Date and (y) the existence of such Guarantor's
rights under this clause (b) would not make such Guarantor a creditor (as
defined in the Bankruptcy Code) of such Other Party in any insolvency,
bankruptcy, reorganization or similar proceeding commenced on or prior to the
Subrogation Trigger Date.
SECTION 7. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under the Financing Documents is
stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all
such amounts otherwise subject to acceleration under the terms of the Financing
Documents shall nonetheless be payable by the Guarantor hereunder forthwith on
demand by the Agent made at the request of the Required Banks.
ARTICLE
REPRESENTATIONS AND WARRANTIES
The Guarantor represents and warrants to the Agent and the Banks that:
SECTION 1. Corporate Existence and Power. The Guarantor is a
corporation duly incorporated, validly existing and in good standing under the
laws of ___________.
SECTION 2. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Guarantor of this
Subsidiary Guarantee:
(a) are within the Guarantor's corporate powers;
(b) have been duly authorized by all necessary corporate action on
the part of the Guarantor;
(c) require no action by or in respect of, or filing with, any
governmental body, agency or official, in each case, on the part of the
Guarantor; and
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<PAGE> 102
(d) do not contravene, or constitute a default by the Guarantor under,
any provision of (i) applicable law or regulation, (ii) the certificate of
incorporation or by-laws of the Guarantor, or (iii) any agreement or instrument
evidencing or governing Debt of the Guarantor or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Guarantor.
SECTION 3. Binding Effect. This Subsidiary Guarantee constitutes a
valid and binding obligation of the Guarantor.
SECTION 4. Not an Investment Company. The Guarantor is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
ARTICLE
MISCELLANEOUS
SECTION 1. Notices. All notices, requests and other communications to
be made to or by the Guarantor hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given: (a) if to the Guarantor, to it at its address or facsimile
number set forth on the signature pages hereof or such other address or
facsimile number as the Guarantor may hereafter specify for the purpose by
notice to the Agent and (b) if to any party to either Credit Agreement, to it at
its address or telex or facsimile number for notices specified in or pursuant to
such Credit Agreement. Each such notice, request or other communication shall be
effective (i) if given by telex, when such telex is transmitted to the telex
number specified in this Section 1 and the appropriate answerback is received,
(ii) if given by facsimile, when such facsimile is transmitted to the facsimile
transmission number specified in this Section 1 and electronic, telephonic or
other appropriate confirmation of receipt thereof is received by the sender,
(iii) if given by mail, 72 hours after such communication is deposited in the
mails with first class postage prepaid, addressed as aforesaid or (iv) if given
by any other means, when delivered at the address specified in this Section 1.
SECTION 2. No Waiver. No failure or delay by the Agent or any Bank in
exercising any right, power or privilege under this Subsidiary Guarantee or any
other Financing Document shall operate as a waiver thereof nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies
herein and therein provided shall be cumulative and not exclusive of any rights
or remedies provided by law.
SECTION 3. Amendments and Waivers. Any provision of this Subsidiary
Guarantee may be amended or waived if, and only if, such amendment or waiver is
in writing and is signed by the Guarantor and the Agent with the prior written
consent of the Required Banks under the Credit Agreements.
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<PAGE> 103
SECTION 4. Successors and Assigns. This Subsidiary Guarantee is for the
benefit of the Banks and the Agent and their respective successors and assigns
and in the event of an assignment of the Loans, the Promissory Notes or other
amounts payable under the Financing Documents, the rights hereunder, to the
extent applicable to the indebtedness so assigned, shall be transferred with
such indebtedness. All the provisions of this Subsidiary Guarantee shall be
binding upon the Guarantor and its successors and assigns.
SECTION 5. Taxes. All payments by the Guarantor hereunder shall be made
free and clear of Taxes in accordance with Section 8.04 of the Credit
Agreements. If the Guarantor is organized under the laws of, or has its
principal place of business in, a jurisdiction outside the United States, this
Section 5 shall be modified in a manner satisfactory to the Agent and the
Guarantor to indemnify for any foreign taxes which may be applicable.
SECTION 6. Effectiveness; Termination. (a) This Agreement shall become
effective when the Agent shall have received a counterpart hereof signed by the
Guarantor.
(b) The Guarantor may at any time elect to terminate this Subsidiary
Guarantee and its obligations hereunder, provided that, after giving effect
thereto, no Default shall have occurred and be continuing; and provided further
that subsequent to the New Borrower Date, this Subsidiary Guarantee may not be
so terminated in respect of any Guarantor which is a Required Significant
Subsidiary. If the Guarantor so elects to terminate this Subsidiary Guarantee,
it shall give the Agent notice to such effect, which notice shall be accompanied
by a certificate of a Responsible Officer to the effect that, after giving
effect to such termination, no Default shall have occurred and be continuing.
The Agent may if it so elects conclusively rely on such certificate. Upon
receipt of such notice and such certificate, unless the Agent determines that a
Default shall have occurred and be continuing, the Agent shall promptly deliver
to the Guarantor the counterpart of this Subsidiary Guarantee delivered to the
Agent pursuant to Section 6(a), and upon such delivery this Subsidiary Guarantee
shall terminate and the Guarantor shall have no further obligations hereunder.
SECTION 7. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS SUBSIDIARY
GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION
OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF
ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS SUBSIDIARY GUARANTEE OR THE
TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT
AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
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<PAGE> 104
SECTION 8. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY
WAIVES AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS SUBSIDIARY GUARANTEE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
7
<PAGE> 105
IN WITNESS WHEREOF, the Guarantor has caused this instrument to be duly
executed by its authorized officer as of the date first above written.
[GUARANTOR]
By
--------------------------------
Title:
[Address]
Facsimile Number:
8
<PAGE> 106
EXHIBIT I
[Form of Opinion of Counsel for the Subsidiary Guarantor]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the [Associate] General Counsel of [Name of Borrower], a
__________ corporation (the "Borrower"), and have acted as counsel for [name of
Subsidiary Guarantor] (the "Guarantor"), and am rendering this opinion in
connection with that certain Subsidiary Guarantee (the "Subsidiary Guarantee"),
dated as of __________, entered into by the Guarantor, pursuant to that certain
364-Day Credit Agreement and that certain Extendible 364-Day Credit Agreement
(collectively, the "Credit Agreements"), each dated as of February 13, 1998,
among the Borrower, the banks listed on the signature pages thereof (the
"Banks") and Morgan Guaranty Trust Company of New York, as Agent. Each term
defined in the Subsidiary Guarantee and used herein, but not otherwise defined
herein, has the meaning ascribed thereto in the Subsidiary Guarantee. This
opinion is being delivered to you pursuant to the Credit Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes and the Subsidiary Guarantee and have
examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the [Certificate of Incorporation] and By-laws of the
Guarantor, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to be as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements, representations and certificates of officers and other
representatives of the Guarantor and certificates of public officials.
<PAGE> 107
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
(1) The Guarantor is a corporation duly incorporated, validly existing
and in good standing under the laws of _________________.
(2) The execution, delivery and performance by the Guarantor of the
Subsidiary Guarantee (a) are within the Guarantor's corporate powers; (b) have
been duly authorized by all necessary corporate action on the part of the
Guarantor; (c) require no action by or in respect of, or filing on the part of
the Guarantor with, any governmental body, agency or official, in each case, on
the part of the Guarantor; and (d) do not contravene, or constitute a default by
the Guarantor under, any provision of (i) applicable law or regulation, (ii) the
certificate of incorporation or by-laws of the Guarantor or, (iii) any agreement
or instrument evidencing or governing Debt of the Guarantor, or any other
material agreement, judgment, injunction, order, decree or other instrument
binding upon the Guarantor.
(3) The Subsidiary Guarantee constitutes a valid and binding
obligation of the Guarantor.
(4) The Guarantor is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Subsidiary Guarantee may be subject to
or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or transfer or other similar laws and court decisions, now
or hereafter in effect, relating to or affecting the rights of creditors
generally.
(b) The enforceability of the Subsidiary Guarantee is or will be
subject to the application of and may be limited by general principles of equity
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether considered in a proceeding in
equity or at law). Such principles of equity are of general application, and in
applying such principles a court, among other things, might not allow a creditor
to accelerate maturity of a debt under certain circumstances including, without
limitation, upon the occurrence of a default deemed immaterial, or might decline
to order the Guarantor to perform covenants. Such principles as applied by a
court might include a requirement that a creditor act with reasonableness and in
good faith. Thus, I express no opinion as to the validity or enforceability of
(i) provisions restricting access to legal or equitable remedies, such as the
specific performance of executory covenants, (ii) provisions that purport to
establish evidentiary standards, (iii) provisions relating to waivers,
severability, set-off, or delay or omission of enforcement of rights or
remedies, and (iv) provisions purporting to convey rights to persons other than
parties to the Subsidiary Guarantee.
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<PAGE> 108
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission I
do not express, any opinion as to the applicability to any provisions of the
Subsidiary Guarantee, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of [the jurisdiction of incorporation of the Guarantor], the
State of New York, the Commonwealth of Massachusetts and the Federal laws of the
United States of America.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Subsidiary Guarantee, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
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EXHIBIT K
Form of Opinion of Counsel
for the Parent Guarantor
To the Banks and the Agent
named on Schedule 1 to this Opinion
c/o Morgan Guaranty Trust Company of New York (as Agent)
60 Wall Street
New York, NY 10260
Dear Sirs,
Re: TYCO INTERNATIONAL LTD. (THE "COMPANY")
We have been instructed by the Company to address this opinion to you
in connection with the Parent Guarantee, dated as of February 13, 1998 (the
"Guarantee"), entered into by the Company in connection with all principal of
and interest on amounts loaned to the Borrower under the Financing Documents.
Unless otherwise defined therein, terms defined in the Guarantee have
the same meanings when used in this opinion.
For the purpose of this opinion, we have been supplied with and have
reviewed, and relied upon the following documents:
(A) a copy of the executed US $500,000,000 Extendible 364-Day Credit
Agreement dated as of February 13, 1998 among the Borrower, the Banks
listed on the signature pages thereof and the Agent;
(B) a copy of the executed US $1,750,000,000 364-Day Credit Agreement
dated as of February 13, 1998 among the Borrower, the Banks listed on
the signature pages thereof and the Agent;
(C) a copy of the executed Subsidiary Guarantees;
(D) a copy of the executed Promissory Notes;
The Documents referred to in (a), (b) and (d) inclusive are together referred to
as the "Financing Documents".
<PAGE> 110
(E) a copy of the executed Guarantee;
(F) certified copies of the Certificate of Incorporation, the
Certificate evidencing the change of name of the Company from ADT Limited to
TYCO International Ltd. and the Memorandum of Association and the Bye-laws of
the Company;
(G) a certified copy of the minutes of a meeting of the Board of
Directors of the Company held on [ ], 199_ (the "Resolutions"); and
(H) a certified copy of the Share Certificate evidencing ownership by
the Company of [the Borrower].
We also examined and relied upon:
(A) A Certificate of Compliance issued by the Registrar of
Companies on Bermuda in respect of the Company on [ ] February, 1998; and
(B) Our searches of the documents of public record in relation
to the Company maintained by the Registrar of Companies in Bermuda made on [ ]
February, 1998 and of the Causes Book maintained by the Registrar of the Supreme
Court of Bermuda made on the same date (the "Searches").
In giving this opinion, we have assumed:
(1) the capacity, power and authority of each of the
parties other than the company to execute, deliver and perform
its obligations under and the due execution and delivery by
all parties other than the Company of the Financing Documents
and the Guarantee;
(2) that each party, other than the Company, has duly
authorised, executed, delivered and taken such other action as
may be required by such party to enter into and perform the
Financing Documents and the Guarantee in the form of the
execution copies we have reviewed for the purpose of this
opinion without alteration which is material to this opinion
and that all such actions were duly authorised when taken;
(3) that no authorisation or approval by, or filing with,
any governmental or regulatory authority, other than such
authorisations, approvals and filings as each party other than
the Company has obtained or made, is necessary for such party
to duly execute and deliver, or to duly perform all of its
obligations under the Financing Documents and the Guarantee,
or for the validity and enforceability of the Financing
Documents and the Guarantee;
2
<PAGE> 111
(4) that each of the Financing Documents and the
Guarantee constitutes the legal, valid and binding obligation
of each party to it, other than the Company, and is
enforceable against each such party in accordance with its
terms;
(5) that the Financing Documents are legal, valid and
binding under the laws by which they are expressed to be
governed and that the Guarantee is legal, valid and binding
under the laws of the State of New York by which it is
expressed to be governed;
(6) that the information disclosed by the Searches has
not been materially altered and the Searches did not fail to
disclose any material information which has been delivered for
filing or registration, but was not disclosed or did not
appear on the public file at the time of the Searches;
(7) that there is no provision of the law of any
jurisdiction, other than Bermuda, which would have any
implication in relation to the opinions herein expressed;
(8) the genuineness of all signatures on the documents
which we have examined;
(9) the conformity to original documents of all
documents produced to us as copies and the authenticity of all
original documents which, or copies of which, have been
submitted to us;
(10) the accuracy and completeness of all factual
representations made in the Financing Documents, the
Guarantee, the Resolutions and any certificates or other
documents which we have examined and upon which we have
relied;
(11) that the Resolutions are in full force and effect
and have not been rescinded or altered in any way material to
this opinion; and
(12) that the Company is entering into its obligations
under the Guarantee in good faith and for the purpose of
carrying on its commercial business in the ordinary course
thereof and that there are reasonable grounds for believing
that the transactions contemplated by the Financing Documents
will benefit the Company.
Based upon and subject to the foregoing, and subject to the
reservations set out below, to matters not disclosed to us and matters of fact
which would affect the conclusion set out below and having regard to such legal
considerations as we deem relevant, we are of the opinion that:
3
<PAGE> 112
(i). The Company is a company duly incorporated, duly organised and
validly existing under the laws of Bermuda. The Memorandum of Association of the
Company has been duly filed in the office of the Registrar of Companies of
Bermuda and no other filing, recording, publishing or other act is necessary or
appropriate in Bermuda in connection with the transaction as described in the
Guarantee except those which have been duly made or performed.
(ii). The Company has the corporate power and authority to enter into
and perform the Guarantee and has taken all corporate action required on its
part to authorise the execution, delivery and performance of the guarantee.
(iii). The execution, delivery and performance of the Guarantee by the
Company (i) does not and will not violate the Certificate of Incorporation,
Memorandum of Association or Bye-laws of the Company; (ii) conflict with the
Companies Act 1981 or any other law or governmental rule or regulation published
by the Bermuda Government which is applicable to the Company; and (iii) as far
as can be ascertained from the Searches (which are not conclusive) does not and
will not violate or conflict with any judgment, order, decree, injunction or
award of any authority, agency or court in Bermuda to which the Company is
subject.
(iv). The obligations of the Company as set out in the Guarantee
constitute, legal, valid and binding obligations of the Company.
(v). The Company having been designated as non-resident for the
purposes of the Exchange Control Act 1972, it is not necessary for the consent
of any authority or agency in Bermuda to be obtained to enable the Company to
enter into and perform its obligations set out in the Guarantee.
(vi). The obligations of the Company under the Guarantee will rank at
least pari passu in priority of payment with all other unsecured unsubordinated
indebtedness of the Company other than indebtedness which is preferred by virtue
of any provision of Bermuda law of general application.
(vii). As far as can be ascertained from the Searches (which are not
conclusive), no litigation, arbitration or administrative proceedings of or
before any court, arbitrator or governmental instrumentality of or in Bermuda
is, to the best of our knowledge, pending with respect to the Company in
connection with the Guarantee or the transactions contemplated thereby.
(viii). The Company will be permitted to make all payments under the
Guarantee free of any deduction or withholding therefrom in Bermuda and such
payments will not be subject to any tax imposed by the Government of Bermuda or
any taxing authority thereof or therein.
4
<PAGE> 113
(ix). The entry into, performance and enforcement of the Guarantee will
not give rise to any registration fee or to any stamp, excise or other similar
tax imposed by the Government of Bermuda or any taxing authority thereof or
therein.
(x). Subject to paragraph (12) and reservation (f) below, it is not
necessary or advisable under the laws of Bermuda in order to ensure the
validity, effectiveness or enforceability or admissibility in evidence of the
Guarantee that the Guarantee be filed, registered or recorded with any Court,
public office or other Bermuda regulatory authority.
(xi). The choice of the laws of the State of New York to govern the
Guarantee is a proper, valid and binding choice of law and will be recognised
and applied by the courts of Bermuda provided that the point is specifically
pleaded and that such choice of law is a valid and binding choice of law under
the laws of the State of New York.
(xii). A final and conclusive judgement obtained in the Courts of the
State of New York or Federal Courts of the United States of America against the
Company based upon the Guarantee under which a sum of money is payable (other
than a sum of money payable in respect of taxes or other charges of a like
nature or in respect of a fine or other penalty or in respect of Multiple
Damages as defined in the Protection of Trading Interest Act, 1981) may be the
subject of enforcement proceedings in the Supreme Court of Bermuda, without
re-examination of the merits, under the Common Law Doctrine of Obligation. A
final opinion as to the availability of this remedy should be sought when the
facts surrounding the foreign judgment are known but, on general principles, we
would expect such an application to be successful provided that:
(A) the Court which gave the judgment was competent to hear the action
in accordance with private international law principles as applied in
Bermuda;
(B) the judgment has not been obtained by fraud;
(C) the judgment is not and its enforcement would not be contrary
to public policy of Bermuda;
(D) the judgment has not been obtained in proceedings contrary
to natural justice; and
(E) the correct procedures under the laws of Bermuda are duly complied
with.
Neither the Company nor any of its property or assets (or any portion
thereof) enjoys, under the laws of Bermuda, immunity from suit, execution,
attachment or other legal process in any proceedings in Bermuda in connection
with the Guarantee.
Our reservations are as follows:
5
<PAGE> 114
(a) We are admitted to practise law in the Islands of Bermuda and we
express no opinion as to any law other than Bermuda law and none of the opinions
expressed herein relates to compliance with or matters governed by the laws of
any jurisdiction except Bermuda.
(b) Where an obligation is to be performed in a jurisdiction other than
Bermuda, the Courts of Bermuda may refuse to enforce it to the extent that such
performance would be illegal or contrary to public policy under the laws of such
other jurisdiction.
(c) We express no opinion as to the availability of equitable remedies,
such as specific performance or injunctive relief, or as to matters which are
within the discretion of the Courts of Bermuda such as the award of costs or
questions relating to forum non-conveniens. Further, we express no opinion as to
the validity or binding effect of any waiver of or obligation to waive any
provision of law (whether substantive or procedural) or any right or remedy
arising through circumstances not known at the time of entering into the
Financing Documents and the Guarantee.
(d) We express no opinion as to the validity or the binding effect of
any obligations of the Borrower in the Financing Documents which provide for the
payment by the Borrower of a higher rate of interest on overdue amounts than on
amounts which are current. A Bermuda Court, even if it were applying the laws of
the State of New York might not give effect to such provision as being contrary
to public policy if it could be established that the amount expressed as being
payable was such that the provision was in the nature of a penalty; that is to
say a requirement for a stipulated sum to be paid irrespective of, or
necessarily greater than, the loss likely to be sustained. The Court will
determine and award what it considers to be reasonable damages. Section 9 of The
Interest and Credit Charges (Regulations) Act 1975 provides that the Bermuda
Courts have discretion as to the amount of interest if any payable on the amount
of a judgment after the date of judgment. If the Court does not exercise that
discretion, then interest will accrue at the statutory rate which is currently
7% per annum.
(e) The obligations of the Company under the Guarantee will be subject
to any laws from time to time in effect relating to bankruptcy, insolvency or
liquidation or any other laws or other legal procedures affecting generally the
enforcement of creditors' rights and may also be the subject of the statutory
limitation of the time within which such proceedings may be brought.
(f) To the extent that the Financing Documents, the Guarantee or the
transactions contemplated thereunder, create or give rise to the creation of any
charge over any assets of the Company, such charge will be registerable under
Part V of The Companies Act 1981 of Bermuda. The fee payable for registration of
a charge is $425.00. Registration is not compulsory and there is no time limit
within which it must be effected. Under Section 55 of the Companies Act, any
charge registered will have priority based on the date that it is registered and
not on the date of its creation and will have such priority over any
unregistered charge. Accordingly, it is advisable to register any such charge.
6
<PAGE> 115
(g) Any provision in the Financing Documents or the Guarantee that
certain calculations and/or certificates will be conclusive and binding will not
be effective if such calculations are fraudulent or erroneous on their face and
will not necessarily prevent enquiry into the merits of any claim by an
aggrieved party.
(h) Where a party is vested with a discretion or may determine a matter
in its opinion, such discretion may have to be exercised reasonably or such an
opinion may have to be based on reasonable grounds.
(i) Searches in the register of companies at the office of the
Registrar of Companies and in the Supreme Court Causes Book at the Registry of
the Supreme Court are not conclusive and it should be noted that the register of
companies and the Supreme Court Causes Book do not reveal:
(i) whether an application to the Supreme Court for the
appointment of a receiver or manager has been presented;
(ii) details of matters which have been lodged for registration
but have not actually been registered or to the extent they have been
registered have not been disclosed or appear in the public records at
the date the search is concluded;
(iii) details of matters which should have been lodged for
registration but have not been lodged for registration at the date the
search is concluded; or
(iv) whether a receiver or manager has been appointed privately
out of the Supreme Court pursuant to the provisions of a debenture or
other security, unless notice of the fact has been entered in the
register of charges in accordance with the provisions of the Act.
(j) A Bermuda Court may refuse to give effect to any provisions of the
Financing Documents or Guarantee in respect of costs of unsuccessful litigation
brought before the Court or where that Court has itself made an order for costs.
This opinion is issued on the basis that it will be governed by and
construed in accordance with the provisions of Bermuda law and it is limited to
and is given on the basis of the current law and practice in Bermuda and will
not give rise to action in any other jurisdiction. It is issued solely for your
benefit for the purpose of the transactions described in the Guarantee and it is
not to be relied upon by any other person (other than permitted assigns and
transferees under the Financing Documents), or for any other purpose, without
our prior written consent.
Yours faithfully,
7
<PAGE> 116
EXHIBIT L
NEW BORROWER AGREEMENT
AGREEMENT dated as of ___________ among TYCO INTERNATIONAL (US) INC., a
Massachusetts corporation ("Tyco US"), TYCO GROUP S.a.r.l., a Luxembourg company
("Tyco Luxembourg"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(the "Agent").
R E C I T A L S:
WHEREAS, Tyco US is a party to an Extendible 364-Day Credit Agreement
dated as of February 13, 1998 (as the same has been or may hereafter be amended
from time to time, the "Credit Agreement") with the Banks listed therein and the
Agent; and
WHEREAS, any Loans made to Tyco US by the Banks under the Credit
Agreement will be prepaid in full not later than the date of effectiveness
hereof; and
WHEREAS, Tyco US and Tyco Luxembourg have elected that Tyco Luxembourg
shall become the Borrower under the Credit Agreement and that Tyco US shall
cease to be the Borrower thereunder;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings set forth in the Credit Agreement.
SECTION 2. New Borrower. Upon the satisfaction of the conditions
referred to in Section 3.04 of the Credit Agreement, (i) each of the Banks shall
make a Loan to Tyco Luxembourg on the terms and conditions set forth in the
Credit Agreement, (ii) the proceeds of such Loans shall fund to the extent
necessary an inter-company loan by Tyco Luxembourg to Tyco US, which
inter-company loan shall fund in whole or in part the repayment of all loans to
Tyco US under the Credit Agreement and the Existing Agreements, (iii) Tyco US
shall execute a promissory note in favor of Tyco Luxembourg, in form reasonably
satisfactory to Tyco Luxembourg, to evidence such inter-company loans, (iv) Tyco
Luxembourg shall become a party to the Credit Agreement and shall be the
Borrower thereunder with all the rights of the Borrower thereunder and all
liabilities and obligations under the Credit Agreement and the Notes arising
from and after the effectiveness of this Agreement and (v) Tyco US shall be
released from all
<PAGE> 117
liabilities and obligations under the Credit Agreement and the Notes to the
extent such liabilities and obligations arise from and after the effectiveness
of this Agreement and shall cease to be a party to the Credit Agreement. Nothing
in this Section shall affect the obligations of Tyco US as a Subsidiary
Guarantor.
SECTION 3. Judicial Proceedings. (a) Consent to Jurisdiction. Tyco
Luxembourg irrevocably submits to the non-exclusive jurisdiction of any federal
or New York State court sitting in New York City over any suit, action or
proceeding arising out of or relating to the Financing Documents. Tyco
Luxembourg irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding brought in such court and any claim that any
suit, action or proceeding brought in such court has been brought in an
inconvenient forum. Tyco Luxembourg agrees that a final judgment in any such
suit, action or proceeding brought in such a court shall be conclusive and
binding upon it and will be given effect in Luxembourg to the fullest extent
permitted by applicable law and may be enforced in any federal or New York State
court sitting in New York City (or any other courts to the jurisdiction of which
Tyco Luxembourg is or may be subject) by a suit upon such judgment, provided
that service of process is effected upon it in one of the manners specified
herein or as otherwise permitted by law.
(b) Appointment of Agent for Service of Process. Tyco Luxembourg hereby
irrevocably designates and appoints CT Corporation System having an office on
the date hereof at 1633 Broadway, New York, New York 10019 as its authorized
agent, to accept and acknowledge on its behalf, service or any and all process
which may be served in any suit, action or proceeding of the nature referred to
in subsection (a) above in any federal or New York State court sitting in New
York City. Tyco Luxembourg represents and warrants that such agent has agreed in
writing to accept such appointment and that a true copy of such designation and
acceptance has been delivered to the Agent. Such designation and appointment
shall be irrevocable until all principal and interest and all other amounts
payable under the Financing Documents shall have been paid in full in accordance
with the provisions hereof. If such agent shall cease so to act, Tyco Luxembourg
covenants and agrees to designate irrevocably and appoint without delay another
such agent satisfactory to the Agent and to deliver promptly to the Agent
evidence in writing of such other agent's acceptance of such appointment.
(c) Service of Process. Tyco Luxembourg hereby consents to process
being served in any suit, action, or proceeding of the nature referred to in
subsection (a) above in any federal or New York State court sitting in New York
City by service of process upon the agent of Tyco Luxembourg, as the case may
be, for service of process in such jurisdiction appointed as provided in
subsection (b) above; provided that, to the extent lawful and possible, written
notice of said service upon such agent shall be mailed by registered airmail,
postage prepaid, return receipt requested, to Tyco Luxembourg at its address
specified on the signature pages hereof or to any other address of which Tyco
Luxembourg shall have given written notice to the Agent. Tyco Luxembourg
irrevocably waives, to the fullest extent permitted by law, all claim of error
by reason of any such service and agrees that such service shall be deemed in
every respect effective
2
<PAGE> 118
service of process upon Tyco Luxembourg in any such suit, action or proceeding
and shall, to the fullest extent permitted by law, be taken and held to be valid
and personal service upon and personal delivery to Tyco Luxembourg.
(d) No Limitation on Service or Suit. Nothing in this Section shall
affect the right of the Agent or any Bank to serve process in any other manner
permitted by law or limit the right of the Agent or any Bank to bring
proceedings against Tyco Luxembourg in the courts of any jurisdiction or
jurisdictions.
SECTION 4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 5. Counterparts; This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
TYCO INTERNATIONAL (US) INC.
By
-------------------------------
Title:
By
-------------------------------
Title:
TYCO GROUP S.a.r.l.
By
-------------------------------
Title:
By
-------------------------------
Title:
3
<PAGE> 119
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By
-------------------------------
Title:
4
<PAGE> 120
EXHIBIT M
Opinion of Counsel of Tyco Luxembourg
Matters to be covered include*:
(a) Counsel has reviewed (i) the 364-Day Credit Agreement and the
Extendible 364-Day Credit Agreement (the "Credit Agreements"), (ii) the Parent
Guarantee, (iii) the New Borrower Agreement, (iv) the Promissory Notes executed
by Tyco Luxembourg, (v) the [Articles of Organization and By-laws] of Tyco
Luxembourg and (vi) such other documents, records, certificates and instruments
as are relevant and necessary as the basis for its opinion.
(b) Tyco Luxembourg is a company duly organized and validly existing
under the laws of Luxembourg.
(c) Tyco Luxembourg has all company powers and all material
governmental licenses, consents and approvals required to carry on its business
as now conducted (other than such powers or consents the failure of which to be
obtained could not reasonably be expected to have a Material Adverse Effect).
(d) The execution, delivery and performance by Tyco Luxembourg of the
New Borrower Agreement and the Promissory Notes, and the performance by Tyco
Luxembourg of the Credit Agreements (i) are within Tyco Luxembourg's company
powers, (ii) have been duly authorized by all necessary company action, (iii)
require no action by or filing with any governmental body, agency or official,
(iv) do not contravene or constitute a default under (A) applicable law or
regulation, (B) Tyco Luxembourg's charter or by-laws or (C) any agreement or
instrument governing Debt of Tyco Luxembourg or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon Tyco
Luxembourg.
(e) Each of the Credit Agreements and the New Borrower Agreement
constitutes a valid and binding agreement of Tyco Luxembourg, and each
Promissory Note constitutes a valid and binding obligation of Tyco Luxembourg.
(f) There is no action, suit or proceeding pending or threatened
against or affecting Tyco Luxembourg or any of its Subsidiaries in which there
is a reasonable possibility of an adverse decision which could reasonably be
expected to have a Material Adverse Effect or which in any manner draws into
question the validity of the Financing Documents.
- --------
* Terms defined in the Credit Agreements and used herein, but not
otherwise defined herein, have the meanings ascribed thereto in the Credit
Agreements.
<PAGE> 121
(g) There is no tax, impost, deduction or withholding imposed by
Luxembourg or any political subdivision thereof on or by virtue of the
execution, delivery or enforcement of the Financing Documents or any other
agreement or instrument relating thereto.
(h) Each of the Financing Documents is in proper legal form under the
laws of Luxembourg for the enforcement thereof against Tyco Luxembourg under the
laws of Luxembourg.
(i) To ensure the legality, validity, enforceability or admissibility
in evidence of the Financing Documents in Luxembourg, it is not necessary that
the Financing Documents or any other document be filed or recorded with any
court or other authority in Luxembourg.
(j) The choice of the laws of the State of New York to govern the
Credit Agreements, the New Borrower Agreement and the Promissory Notes is a
valid and binding choice of law an will be recognized and applied by the courts
of Luxembourg.
(k) Any judgment obtained in a state or Federal court sitting in the
Borough of Manhattan, City of New York, State of New York, arising out of or in
relation to the obligations of Tyco Luxembourg under the Financing Documents
would be enforceable in Luxembourg against Tyco Luxembourg.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.3
<SEQUENCE>4
<DESCRIPTION>PARENT GUARANTEE AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 4.3
CONFORMED COPY
PARENT GUARANTEE AGREEMENT
dated as of
February 13, 1998
between
Tyco International Ltd.
and
Morgan Guaranty Trust Company of New York,
as Agent
<PAGE> 2
TABLE OF CONTENTS
-------------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.................................................. 1
SECTION 1.02. Accounting Terms and Determinations.......................... 7
ARTICLE 2
GUARANTEE
SECTION 2.01. The Guarantee................................................ 7
SECTION 2.02. Guarantee Unconditional...................................... 7
SECTION 2.03. Discharge Only upon Payment in Full; Reinstatement in Certain
Circumstances................................................ 8
SECTION 2.04. Waiver by the Guarantor...................................... 9
SECTION 2.05. Subrogation.................................................. 9
SECTION 2.06. Stay of Acceleration......................................... 9
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR
SECTION 3.01. Corporate Existence and Power................................ 9
SECTION 3.02. Corporate and Governmental Authorization; No Contravention... 9
SECTION 3.03. Binding Effect............................................... 10
SECTION 3.04. Financial Information........................................ 10
SECTION 3.05. Litigation................................................... 10
SECTION 3.06. Environmental Matters........................................ 10
SECTION 3.07. Taxes........................................................ 11
SECTION 3.08. Subsidiaries................................................. 11
SECTION 3.09. Not an Investment Company.................................... 11
SECTION 3.10. Full Disclosure.............................................. 11
SECTION 3.11. Obligations to be Pari Passu................................. 11
ARTICLE 4
COVENANTS
SECTION 4.01. Information.................................................. 11
SECTION 4.02. Payment of Obligations....................................... 13
SECTION 4.03. Maintenance of Property; Insurance........................... 13
<PAGE> 3
PAGE
----
SECTION 4.04. Conduct of Business and Maintenance of Existence............. 13
SECTION 4.05. Compliance with Laws......................................... 14
SECTION 4.06. Inspection of Property, Books and Records; Confidentiality... 14
SECTION 4.07. Debt......................................................... 16
SECTION 4.08. Negative Pledge.............................................. 16
SECTION 4.09. Consolidations, Mergers and Sales of Assets.................. 17
SECTION 4.10. Transactions with Affiliates................................. 18
SECTION 4.11. Restricted Payments.......................................... 19
SECTION 4.12. Prepayment of Existing Agreements............................ 19
ARTICLE 5
DEFAULTS
SECTION 5.01. Guarantor Events of Defaults................................. 20
SECTION 5.02. Notice of Default............................................ 22
ARTICLE 6
TAXES
SECTION 6.01. Withholding Taxes............................................ 22
SECTION 6.02. Certain Other Taxes.......................................... 23
SECTION 6.03. Reimbursement of Taxes Paid by a Bank........................ 23
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Notices...................................................... 23
SECTION 7.02. No Waivers................................................... 23
SECTION 7.03. Expenses; Indemnification.................................... 24
SECTION 7.04. Judicial Proceedings......................................... 24
SECTION 7.05. Judgment Currency............................................ 25
SECTION 7.06. Amendments and Waivers....................................... 26
SECTION 7.07. Successors and Assigns....................................... 26
SECTION 7.08. GOVERNING LAW................................................ 26
SECTION 7.09. Counterparts................................................. 26
SECTION 7.10. No Seal...................................................... 26
SECTION 7.11. WAIVER OF JURY TRIAL......................................... 26
SECTION 7.12. Amendment of Existing Parent Guarantee Agreement............. 26
ii
<PAGE> 4
PARENT GUARANTEE AGREEMENT
AGREEMENT dated as of February 13, 1998 between TYCO INTERNATIONAL LTD.
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent.
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Guarantor hereby agrees with the Agent for
the benefit of the Banks as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Guarantor (a "Controlling Person") or
(ii) any Person (other than the Guarantor or a Subsidiary) which is controlled
by or is under common control with a Controlling Person. As used herein, the
term "control" means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise. The fact
that an Affiliate of a Person is a member of a law firm that renders services to
such Person or its Affiliates does not mean that the law firm is an Affiliate of
such Person.
"AGENT" means Morgan Guaranty Trust Company of New York in its capacity
as agent for the Banks under the Financing Documents, and its successors in such
capacity.
"BANK" means each Person from time to time a "Bank" party to either of
the Credit Agreements.
"BANK DOMESTIC TAXES" means, with respect to any Bank, any taxes,
levies, imposts, duties, charges or withholding of any nature (and any interest,
penalties, or similar liabilities with respect thereto) which are not Bank
Foreign Taxes with respect to such Bank.
"BANK FOREIGN TAXES" means, with respect to any Bank, any taxes,
levies, imposts, duties, charges or withholdings of any nature (and any
interest, penalties or similar liabilities with respect thereto) now or
hereafter imposed by any jurisdiction or taxing authority (including any
possession or territory thereof) other than the jurisdiction of which such Bank
is a citizen or a resident or under the laws of which such Bank is organized or
any political subdivision thereof or taxing authority thereof or therein.
<PAGE> 5
"BERMUDA COMPANIES LAW" means every Bermuda statute from time to time
in force concerning companies insofar as the same applies to the Guarantor.
"BORROWER" means, at any time, the Person who at such time is the
Borrower under the Credit Agreements.
"CONSENTS" has the meaning set forth in Section 3.01.
"CONSOLIDATED ASSETS" means, at any time, the total assets of the
Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis
as of such time.
"CONSOLIDATED DEBT" means, at any date, the aggregate amount of Debt of
the Guarantor and its Consolidated Subsidiaries, determined on a consolidated
basis as of such date; provided that (i) if a Permitted Receivables Transaction
is outstanding at such date and is accounted for as a sale of accounts
receivable under generally accepted accounting principles, Consolidated Debt
determined as aforesaid shall be adjusted to include the additional Debt,
determined on a consolidated basis as of such date, which would have been
outstanding at such date had such Permitted Receivables Transaction been
accounted for as a borrowing at such date and (ii) Consolidated Debt shall in
any event include all Debt of any Person other than the Guarantor or a
Consolidated Subsidiary which is Guaranteed by the Guarantor or a Consolidated
Subsidiary, except that Consolidated Debt shall not include Debt of a joint
venture, partnership or similar entity which is Guaranteed by the Guarantor or a
Consolidated Subsidiary by virtue of the joint venture, partnership or similar
arrangement with respect to such entity or by operation of applicable law (and
not otherwise) so long as the aggregate outstanding principal amount of such
excluded Debt at any date does not exceed $50,000,000.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the
consolidated net income of the Guarantor and its Consolidated Subsidiaries for
such period, determined on a consolidated basis after eliminating therefrom all
Extraordinary Gains and Losses. "EXTRAORDINARY GAINS AND LOSSES" means and
includes, for any fiscal period, all extraordinary gains and losses and all
other material non-recurring non-cash items of the Guarantor and its
Consolidated Subsidiaries for such period, determined on a consolidated basis
and, in addition, includes, without limitation, gains or losses from the
discontinuance of operations and gains or losses of the Guarantor and its
Consolidated Subsidiaries for such period resulting from the sale, conversion or
other disposition of material assets of the Guarantor or any Consolidated
Subsidiary other than in the ordinary course of business.
"CONSOLIDATED NET WORTH" means, at any date, the consolidated
stockholders' equity of the Guarantor and its Consolidated Subsidiaries,
determined on a consolidated basis as of such date and adjusted so as to exclude
the effect of the currency translation adjustment as of such date.
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"CONSOLIDATED SUBSIDIARY" means, at any date, with respect to any
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in its consolidated financial statements
if such statements were prepared as of such date; unless otherwise specified,
Consolidated Subsidiary means a Consolidated Subsidiary of the Guarantor.
"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, (i) Consolidated
Net Worth as of such date minus (ii) Intangible Assets as of such date.
"CONSOLIDATED TOTAL CAPITALIZATION" means, at any date, the sum of
Consolidated Debt and Consolidated Net Worth, each determined as of such date.
"CREDIT AGREEMENTS" means (i) the 364-Day Credit Agreement dated as of
February 13, 1998 among the Borrower, the Banks listed on the signature pages
thereof and the Agent and (ii) the Extendible 364-Day Credit Agreement dated as
of February 13, 1998 among the Borrower, the Banks listed on the signature pages
thereof and the Agent, in each case as amended from time to time.
"DEBT" of any Person means, at any date, without duplication, (i) the
principal amount of all obligations of such Person for borrowed money, (ii) the
principal amount of all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (it being understood that,
subject to the proviso to this definition of "Debt," performance bonds,
performance guaranties, letters of credit, bank guaranties and similar
instruments shall not constitute Debt of such Person to the extent that the
outstanding reimbursement obligations of such Person in respect thereof are
collateralized by cash or cash equivalents, which cash or cash equivalents would
not be reflected as assets on a balance sheet of such Person prepared in
accordance with generally accepted accounting principles), (iii) all obligations
of such Person to pay the deferred purchase price of property or services
recorded on the books of such Person, except for (a) trade and similar accounts
payable and accrued expenses arising in the ordinary course of business, and (b)
employee compensation and pension obligations, and other obligations arising
from employee benefit programs and agreements or other similar employment
arrangements, (iv) all obligations of such Person as lessee which are
capitalized on the books of such Person in accordance with generally accepted
accounting principles, (v) all Debt secured by a Lien on any asset of such
Person, whether or not such Debt is otherwise an obligation of such Person, and
(vi) all Debt of others Guaranteed by such Person; provided, however, that Debt
shall not include:
(A) contingent reimbursement obligations in respect of
performance bonds, performance guaranties, bank
guaranties or letters of credit issued in lieu of
performance bonds or performance guaranties or similar
instruments, in each case, incurred by such Person in
the ordinary course of business;
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(B) contingent reimbursement obligations in respect of
trade letters of credit, or similar instruments, in
each case, incurred by such Person in the ordinary
course of business; or
(C) contingent reimbursement obligations in respect of
standby letters of credit or similar instruments
securing self-insurance obligations of such Person;
in each case, so long as the underlying obligation supported thereby does not
itself constitute Debt.
"ENVIRONMENTAL LAWS" means any and all statutes, laws, judicial
decisions, regulations, ordinances, rules, judgments, orders, decrees, plans,
injunctions, permits, concessions, grants, franchises, licenses, agreements and
other governmental restrictions relating to the environment, the effect of the
environment on human health or to emissions, discharges or releases of
pollutants, contaminants, hazardous substances or wastes into the environment
including, without limitation, ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
hazardous substances or wastes or the clean-up or other remediation thereof.
"FINANCING DOCUMENTS" means this Agreement, the Credit Agreements and
each Subsidiary Guarantee, Promissory Note and New Borrower Agreement (each as
defined in either of the Credit Agreements).
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such holder against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"GUARANTOR" means Tyco International Ltd., a Bermuda company, and its
successors.
"GUARANTOR DEFAULT" means any condition or event which constitutes a
Guarantor Event of Default or which with the giving of notice or lapse of time
or both would, unless cured or waived, become a Guarantor Event of Default.
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"GUARANTOR EVENT OF DEFAULT" has the meaning set forth in Section 5.01.
"GUARANTOR'S 1997 FORM 10-K" means the Guarantor's transition report on
Form 10-K for the nine months ended September 30, 1997, as filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
"INDEMNITEE" has the meaning set forth in Section 7.03(b).
"INTANGIBLE ASSETS" means, at any date, the amount (if any) which would
be stated under the heading "Costs in Excess of Net Assets of Acquired
Companies" or under any other heading relating to intangible assets separately
listed, in each case, on the face of a balance sheet of the Guarantor and its
Consolidated Subsidiaries prepared on a consolidated basis as of such date.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Guarantor or any Subsidiary shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement (other than an operating lease)
relating to such asset.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, consolidated financial position or consolidated results of operations
of the Guarantor and its Consolidated Subsidiaries, considered as a whole, or
(ii) the ability of the Guarantor to perform its obligations under this
Agreement.
"MATERIAL DEBT" means Debt (other than (i) any Guarantee by the
Guarantor of Debt of a Subsidiary, (ii) any Guarantee by a Subsidiary of Debt of
the Guarantor or another Subsidiary, (iii) any Debt of the Guarantor owed to a
Wholly-Owned Consolidated Subsidiary or (iv) any Debt of a Subsidiary owed to
the Guarantor or a Wholly-Owned Consolidated Subsidiary) of the Guarantor and/or
one or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate outstanding principal amount exceeding
$50,000,000.
"PERMITTED RECEIVABLES TRANSACTION" means any sale or sales of,
refinancing of and/or financing secured by, any accounts receivable of the
Guarantor and/or any of its Subsidiaries (the "RECEIVABLES") pursuant to which
the Guarantor and its Subsidiaries realize aggregate net proceeds of not more
than $500,000,000 at any one time outstanding, including, without limitation,
any revolving purchase(s) of Receivables where the maximum aggregate uncollected
purchase price (exclusive of any deferred purchase price) for such Receivables
at any time outstanding does not exceed $500,000,000.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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"PROPERTY" means any interest of any kind in any property or assets,
whether real, mixed or personal and whether tangible or intangible.
"PROSPECTS" means, at any time, results of future operations which are
reasonably foreseeable based upon the facts and circumstances in existence at
such time.
"RESPONSIBLE OFFICER" means any of the following: the Chairman,
President, Vice President and Chief Financial Officer, Treasurer and Secretary
of the Guarantor.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution on
any shares of the Guarantor's capital stock (except to the extent such dividends
and distributions are payable in shares of its capital stock or Stock
Equivalents) or (ii) any payment (except to the extent payable in shares of the
Guarantor's capital stock or Stock Equivalents) on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the Guarantor's
capital stock or (b) any option, warrant or other right to acquire shares of the
Guarantor's capital stock.
"SIGNIFICANT SUBSIDIARY" means, at any date, each Consolidated
Subsidiary which, including its consolidated subsidiaries, meets any of the
following conditions:
(i) the investments in and advances to such
Consolidated Subsidiary by the Guarantor and its other
Consolidated Subsidiaries exceed 15% of the total assets of
the Guarantor and its Consolidated Subsidiaries, determined on
a consolidated basis as of the end of the most recently
completed fiscal year; or
(ii) the proportionate share attributable to such
Consolidated Subsidiary of the total assets of the Guarantor
and its Consolidated Subsidiaries (after intercompany
eliminations) exceeds 15% of the total assets of the Guarantor
and the Consolidated Subsidiaries, determined on a
consolidated basis as of the end of the most recently
completed fiscal year; or
(iii) the Guarantor's and its Consolidated
Subsidiaries' equity in the income of such Consolidated
Subsidiary from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in
accounting principle exceeds 15% of such income of the
Guarantor and its Consolidated Subsidiaries, determined on a
consolidated basis for the most recently completed fiscal
year.
"STOCK EQUIVALENTS" means, with respect to any Person, options,
warrants, calls or other rights entered into or issued by such Person to acquire
any capital stock or equity securities of, or other ownership interests in, or
securities convertible into or exchangeable for, capital stock or equity
securities of, or other ownership interests in, such Person.
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"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; unless otherwise specified, Subsidiary means a Subsidiary of the
Guarantor.
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means any Consolidated
Subsidiary all of the shares of capital stock or other ownership interests of
which (except directors' qualifying shares and investments by foreign nationals
mandated by applicable law) are at the time beneficially owned, directly or
indirectly, by the Guarantor.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the
Guarantor's independent public accountants) with the then most recent audited
consolidated financial statements of the Guarantor and its Consolidated
Subsidiaries delivered to the Banks; provided that, if either (i) the Guarantor
notifies the Agent that the Guarantor wishes to eliminate the effect of any
change in generally accepted accounting principles on the operation of any
covenant contained in Article 2 or (ii) the Agent notifies the Guarantor that it
wishes to effect such an elimination, then the Guarantor's compliance with such
covenant shall be determined on the basis of generally accepted accounting
principles in effect immediately before the relevant change in generally
accepted accounting principles became effective, until either (A) such notice is
withdrawn by the party giving such notice or (B) such covenant is amended in a
manner satisfactory to the Guarantor and the Agent to reflect such change in
generally accepted accounting principles.
ARTICLE 2
GUARANTEE
SECTION 2.01. The Guarantee. The Guarantor hereby guarantees the full
and punctual payment (whether at stated maturity, upon acceleration or
otherwise) of all principal of and interest on amounts loaned to the Borrower
under the Financing Documents and all other amounts payable by the Borrower
under the Financing Documents. Upon failure by the Borrower to pay punctually
any such amount, the Guarantor shall forthwith on demand pay the amount not so
paid at the place and in the manner specified in the applicable Financing
Document.
SECTION 2.02. Guarantee Unconditional. The obligations of the Guarantor
hereunder shall be unconditional and absolute, shall survive the New Borrowing
Date (as defined in either Credit Agreement), shall be applicable to Tyco
Luxembourg (as defined in either Credit
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Agreement) as the Borrower under the Credit Agreements and, without limiting the
generality of the foregoing, shall not be released, discharged or otherwise
affected, at any time by:
(i) any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of the Borrower under any
Financing Document, by operation of law or otherwise;
(ii) any modification or amendment of or supplement to any
Financing Document;
(iii) any release, impairment, non-perfection or invalidity of
any direct or indirect security for any obligation of the Borrower
under any Financing Document;
(iv) any change in the corporate existence, structure or
ownership of the Borrower, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting the Borrower or
its assets or any resulting release or discharge of any obligation of
the Guarantor or the Borrower contained in any Financing Document;
(v) the existence of any claim, set-off or other rights which
the Guarantor may have at any time against the Borrower, the Agent, any
Bank or any other Person, whether in connection herewith or any
unrelated transactions, provided that nothing herein shall prevent the
assertion of any such claim by separate suit or compulsory
counterclaim;
(vi) any invalidity or unenforceability relating to or against
the Borrower for any reason of any Financing Document, or any provision
of applicable law or regulation purporting to prohibit the payment by
the Borrower of any amount payable by it under any Financing Document;
or
(vii) any other act or omission to act or delay of any kind by
the Borrower, the Agent, any Bank or any other Person or any other
circumstance whatsoever which might, but for the provisions of this
paragraph, constitute a legal or equitable discharge of or defense to
the Guarantor's obligations hereunder.
SECTION 2.03. Discharge Only upon Payment in Full; Reinstatement in
Certain Circumstances. This Agreement shall remain in full force and effect
until the commitments of the Banks under the Credit Agreements shall have
terminated and the principal of and interest on the Promissory Notes (as defined
in either Credit Agreement) and all other amounts payable by the Borrower under
the Financing Documents shall have been paid in full. If at any time any payment
of principal of or interest on any Promissory Note (as defined in either Credit
Agreement) or any other amount payable by the Borrower under the Financing
Documents is rescinded or must be otherwise restored or returned upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise, the
Guarantor's obligations hereunder with respect
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to such payment shall be reinstated at such time as though such payment had been
due but not made at such time.
SECTION 2.04. Waiver by the Guarantor. The Guarantor irrevocably waives
acceptance hereof, presentment, demand, protest and any notice not provided for
herein, as well as any requirement that at any time any action be taken by any
Person against the Borrower or any other Person.
SECTION 2.05. Subrogation. Upon making any payment hereunder with
respect to the Borrower, the Guarantor shall be subrogated to the rights of the
payee against the Borrower with respect to such payment; provided that the
Guarantor shall not enforce any payment by way of subrogation until all amounts
of principal of and interest on the Promissory Notes (as defined in either
Credit Agreement) and all other amounts payable by the Borrower under the
Financing Documents have been paid in full.
SECTION 2.06. Stay of Acceleration. In the event that acceleration of
the time for payment of any amount payable by the Borrower under any Financing
Document is stayed upon insolvency, bankruptcy or reorganization of the
Borrower, all such amounts otherwise subject to acceleration under the terms of
this Agreement shall nonetheless be payable by the Guarantor hereunder forthwith
on demand by the Agent.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR
The Guarantor represents and warrants to the Agent that:
SECTION 3.01. Corporate Existence and Power. The Guarantor is a company
limited by shares duly incorporated and validly existing under the laws of
Bermuda. The Guarantor has all corporate powers and all governmental licenses,
authorizations, consents and approvals (collectively, the "Consents") required
in order to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 3.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Guarantor of this
Agreement: (a) are within the Guarantor's corporate powers; (b) have been duly
authorized by all necessary corporate action on the part of the Guarantor; (c)
require no action by or in respect of, or filing with, any governmental body,
agency or official, in each case, on the part of the Guarantor; and (d) do not
contravene, or constitute a default by the Guarantor under, any provision of (i)
applicable law or regulation, (ii) the Memorandum of Association or Bye-Laws of
the Guarantor, or (iii) any agreement or instrument evidencing or governing Debt
of the Guarantor or any other material agreement, judgment, injunction, order,
decree or other instrument binding upon the Guarantor.
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SECTION 3.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Guarantor.
SECTION 3.04. Financial Information.
(a) The consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as of September 30, 1997 and the related consolidated
statements of income, of shareholders' equity and of cash flows for the
nine-month period then ended, reported on by Coopers & Lybrand and set forth in
the Guarantor's 1997 Form 10-K, a copy of which has been delivered to each of
the Banks, fairly present, in conformity with generally accepted accounting
principles, the consolidated financial position of the Guarantor and its
Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such period.
(b) Since September 30, 1997 there has been no material adverse change
in the business, financial position, results of operations or Prospects of the
Guarantor and its Consolidated Subsidiaries, considered as a whole.
SECTION 3.05. Litigation. There is no action, suit or proceeding
pending against, or to the knowledge of the Guarantor threatened against or
affecting, the Guarantor or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could, based upon the facts
and circumstances in existence at the time this representation and warranty is
made or deemed made, reasonably be expected to have a Material Adverse Effect or
which in any manner draws into question the validity of the Financing Documents.
SECTION 3.06. Environmental Matters. In the ordinary course of its
business, the Guarantor conducts an ongoing review of the effect of
Environmental Laws on the business, operations and properties of the Guarantor
and its Subsidiaries, in the course of which it identifies and evaluates
associated liabilities and costs (including, without limitation, any capital or
operating expenditures required for clean-up or closure of properties presently
or previously owned, any capital or operating expenditures required to achieve
or maintain compliance with environmental protection standards imposed by law or
as a condition of any license, permit or contract, any related constraints on
operating activities, including any periodic or permanent shutdown of any
facility or reduction in the level of or change in the nature of operations
conducted thereat, any costs or liabilities in connection with off-site disposal
of wastes or hazardous substances, and any actual or potential liabilities to
third parties, including employees, and any related costs and expenses). On the
basis of this review, the Guarantor has reasonably concluded that such
associated liabilities and costs, including the costs of compliance with
Environmental Laws, could not, based upon the facts and circumstances existing
at the time this representation and warranty is made or deemed made, reasonably
be expected to have a Material Adverse Effect.
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SECTION 3.07. Taxes. The Guarantor and its Significant Subsidiaries
have filed all material tax returns which are required to be filed by them and
have paid all taxes shown on such returns or pursuant to any assessment received
by the Guarantor or any Subsidiary, except those assessments which are being
contested in good faith by appropriate proceedings. The charges, accruals and
reserves on the books of the Guarantor and its Subsidiaries in respect of taxes
or other governmental charges are, in the opinion of the Guarantor, adequate.
SECTION 3.08. Subsidiaries. Each of the Guarantor's corporate
Consolidated Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, except
where the failure to be so incorporated, existing or in good standing could not,
based upon the facts and circumstances existing at the time this representation
and warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has all corporate powers and all Consents
required to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 3.09. Not an Investment Company. The Guarantor is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 3.10. Full Disclosure. All information heretofore furnished by
or on behalf of the Guarantor to the Agent in connection with this Agreement,
does not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
SECTION 3.11. Obligations to be Pari Passu. The Guarantor's obligations
under this Agreement rank pari passu as to priority of payment and in all other
respects with all other unsecured and unsubordinated obligations of the
Guarantor.
ARTICLE 4
COVENANTS
The Guarantor agrees that:
SECTION 4.01. Information. The Guarantor will deliver to each of the
Banks:
(a) as soon as available and in any event within 120 days after the end
of each fiscal year of the Guarantor, consolidated and consolidating balance
sheets of the Guarantor and its Consolidated Subsidiaries as of the end of such
fiscal year and the related consolidated and
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consolidating statements of income, of shareholders' equity and of cash flows
for such fiscal year, setting forth, in each case in comparative form, the
figures for the previous fiscal year, such consolidated statements to be
reported on by Coopers & Lybrand or other independent public accountants of
internationally recognized standing in a manner complying with the applicable
rules and regulations promulgated by the Securities and Exchange Commission;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each fiscal year of the Guarantor,
consolidated and consolidating balance sheets of the Guarantor and its
Consolidated Subsidiaries as of the end of such quarter, the related
consolidated statements of income for such quarter, and the related consolidated
statements of income and of cash flow and consolidating statements of income for
the portion of the Guarantor's fiscal year ended at the end of such quarter,
setting forth in the case of such statements of income and of cash flows in
comparative form the figures for the corresponding quarter (in the case of
consolidated statements of income) and for the corresponding portion of the
Guarantor's previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency on behalf of the Guarantor by the chief financial
officer, the chief accounting officer or the treasurer of the Guarantor;
(c) simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) above, a certificate on behalf
of the Guarantor signed by the chief financial officer, the chief accounting
officer or the treasurer of the Guarantor (i) setting forth in reasonable detail
the calculations required to establish whether the Guarantor was in compliance
with the requirements of Sections 4.07, 4.08 and 4.11 on the date of such
financial statements and (ii) stating whether any Guarantor Default exists on
the date of such certificate and, if any Guarantor Default then exists, setting
forth, in reasonable detail, the nature thereof and the action which the
Guarantor is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial
statements referred to in clause 4.01(a) above, a statement of the firm of
independent public accountants which reported on such financial statements
stating that, in making the audit necessary for the certification of such
financial statements, such firm of accountants has obtained no knowledge of any
Guarantor Default, or if it has obtained knowledge of such Guarantor Default,
specifying the nature and period of existence thereof; provided such firm of
accountants shall not be liable to any Person by reason of such firm's failure
to obtain knowledge of any Guarantor Default which would not be disclosed in the
course of an audit conducted in accordance with generally accepted accounting
principles;
(e) within five business days after any Responsible Officer obtains
knowledge of any Guarantor Default, if such Guarantor Default is then
continuing, a certificate on behalf of the Guarantor signed by the chief
financial officer, the chief accounting officer or the treasurer of the
Guarantor setting forth, in reasonable detail, the nature thereof and the action
which the Guarantor is taking or proposes to take with respect thereto;
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(f) promptly following the mailing thereof to the shareholders of the
Guarantor generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all final registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q and 8-K (or
their equivalents) which the Guarantor shall have filed with the Securities and
Exchange Commission;
(h) promptly following, and in any event within 10 days of, any change
in a Debt Rating (as defined in either Credit Agreement) by any Rating Agency
(as defined in either Credit Agreement), notice thereof; and
(i) from time to time, upon reasonable notice, such additional
information regarding the financial position or business of the Guarantor and
its Subsidiaries as the Agent, at the request of any Bank, may reasonably
request.
SECTION 4.02. Payment of Obligations. The Guarantor will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where (i) any such failure to so pay
or discharge could not, based upon the facts and circumstances in existence at
the time, reasonably be expected to have a Material Adverse Effect or (ii) such
liabilities or obligations may be contested in good faith by appropriate
proceedings. The Guarantor will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of such liabilities or obligations
SECTION 4.03. Maintenance of Property; Insurance. (a) Except as
permitted by Section 4.04 or 4.09, the Guarantor will keep, and will cause each
Subsidiary to keep, all property necessary in its business in good working order
and condition, ordinary wear and tear excepted, unless the failure to so keep
could not, based upon the facts and circumstances existing at the time,
reasonably be expected to have a Material Adverse Effect.
(b) The Guarantor will maintain, and will cause each Subsidiary to
maintain, with financially sound and reputable insurers, insurance with respect
to its assets and business against such casualties and contingencies, of such
types (including, without limitation, loss or damage, product liability,
business interruption, larceny, embezzlement or other criminal misappropriation)
and in such amounts as is customary in the case of similarly situated
corporations of established reputations engaged in the same or a similar
business, unless the failure to maintain such insurance could not, based upon
the facts and circumstances existing at the time, reasonably be expected to have
a Material Adverse Effect.
SECTION 4.04. Conduct of Business and Maintenance of Existence. The
Guarantor (a) will not engage in any business other than the holding of stock
and other investments in its
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Subsidiaries and activities reasonably related thereto, (b) will cause each
Subsidiary to engage in business of the same general type as now conducted by
the Guarantor's Subsidiaries and reasonably related extensions thereof, and (c)
will preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect (x) their
respective corporate existence and (y) their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business, unless in
the case of either the failure of the Guarantor to comply with subclause (b) (y)
of this Section 4.04 or the failure of a Subsidiary to comply with clauses (a)
or (b) of this Section 4.04, such failure could not, based upon the facts and
circumstances existing at the time, reasonably be expected to have a Material
Adverse Effect; provided that nothing in this Section 4.04 shall prohibit (i)
the merger or consolidation of a Subsidiary with or into the Guarantor or a
Wholly-Owned Consolidated Subsidiary, (ii) the sale, lease, transfer, assignment
or other disposition by a Subsidiary of all or any part of its assets to the
Guarantor or to a Wholly-Owned Consolidated Subsidiary, (iii) the merger or
consolidation of a Subsidiary with or into a Person other than the Guarantor or
a Wholly-Owned Consolidated Subsidiary, if the Person surviving such
consolidation or merger is a Subsidiary and immediately after giving effect
thereto, no Guarantor Default shall have occurred and be continuing, (iv) the
sale, lease, transfer, assignment or other disposition by a Subsidiary of all or
any part of its assets to a Person other than the Guarantor or a Wholly-Owned
Consolidated Subsidiary, if the Person to which such sale, lease, transfer,
assignment or other disposition is made is a Subsidiary and immediately after
giving effect thereto, no Guarantor Default shall have occurred and be
continuing, (v) any transaction permitted pursuant to Section 4.09 or (vi) the
termination of the corporate existence of any Subsidiary if the Guarantor in
good faith determines that such termination is in the best interest of the
Guarantor and is not materially disadvantageous to the Banks.
SECTION 4.05. Compliance with Laws. The Guarantor will comply, and
cause each Subsidiary to comply, in all material respects with all applicable
laws, ordinances, rules, regulations, and requirements of governmental
authorities (including, without limitation, Environmental Laws and ERISA and the
rules and regulations thereunder) except where (a) noncompliance therewith could
not, based upon the facts and circumstances in existence at the time, reasonably
be expected to have a Material Adverse Effect or (b) the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
SECTION 4.06. Inspection of Property, Books and Records;
Confidentiality. (a) The Guarantor will keep, and will cause each Subsidiary to
keep, proper books of record and account in which true and correct entries shall
be made of its business transactions and activities so that financial statements
that fairly present its business transactions and activities can be properly
prepared in accordance with generally accepted accounting principles.
(b) The Guarantor will permit, and will cause each Subsidiary to
permit, representatives of any Bank at such Bank's expense to visit and inspect
any of their respective properties, to examine and make abstracts from any of
their respective books and records and to discuss their respective affairs,
finances and accounts with their respective officers, employees and
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independent public accountants, all upon reasonable notice to the Guarantor, at
such reasonable times and as often as may reasonably be requested by any Bank.
(c) Each Bank and the Agent shall, by its receipt of Confidential
Information (as defined below) pursuant to or in connection with this Agreement
or its exercise of any of its rights hereunder, be deemed to have agreed (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to (i) keep such information confidential, (ii) (except as
permitted by clause (iii) of this Section 4.06(c)) not disclose such information
to any Person other than an officer, director, employee, legal counsel,
independent auditor or authorized agent or advisor of the Agent or such Bank
needing to know such information (it being understood that any such officer,
director, employee, legal counsel, independent auditor or authorized agent or
advisor shall be informed by the Agent or such Bank of the confidential nature
of such information), (iii) not disclose such information to any Assignee or
Participant (or prospective Assignee or Participant), unless such Assignee or
Participant (or prospective Assignee or Participant) shall agree in writing to
be bound by the provisions of this Section 4.06(c) and (iv) not use any such
information except for purposes relating to this Agreement or the Notes. The
term "Confidential Information" shall mean non-public information furnished by
or on behalf of the Guarantor or any of its Subsidiaries to the Agent, any Bank
or other Person exercising rights hereunder or required to be bound hereby
(collectively "Recipients"), but shall not include any such information which
(1) has become or hereafter becomes available to the public other than as a
result of a disclosure by a Recipient, or (2) has become or hereafter becomes
available to a Recipient, on a non-confidential basis, from a source other than
the Guarantor or any of its Subsidiaries (or any of their respective
representatives or agents) or any Recipient, which source, to the knowledge of
the Recipient, is not prohibited from disclosing such information by a
confidentiality agreement with, or other legal or fiduciary obligation to, the
Guarantor or its Subsidiaries.
The restrictions set forth in the immediately preceding paragraph shall
not prevent the disclosure by a Recipient of any such information:
(A) with the prior written consent of the Guarantor,
(B) at the request of a bank regulatory agency or in
connection with an examination by bank examiners, or
(C) upon order of any court or administrative agency of
competent jurisdiction, to the extent required by such order and
not effectively stayed on appeal or otherwise, or as otherwise
required by law; provided that in the case of any intended
disclosure under this clause (C), the Recipient shall (unless
otherwise required by applicable law) give the Guarantor not less
than five business days prior notice (or such shorter period as
may, in the good faith discretion of the Recipient, be reasonable
under the circumstances or may be required by any court or agency
under the circumstances), specifying the
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Confidential Information involved and stating such Recipient's
intention to disclose such Confidential Information (including the
manner and extent of such disclosure) in order to allow the
Guarantor an opportunity to seek an appropriate protective order.
Each Recipient shall agree that, in addition to all other remedies
available, the Guarantor shall be entitled to specific performance and
injunctive and other equitable relief as a remedy for any breach of this Section
4.06(c) by such Recipient.
SECTION 4.07. Debt. Consolidated Debt will at no time exceed (x) prior
to March 31, 1999, 62% and (y) on and after March 31, 1999, 52.5% of
Consolidated Total Capitalization. For purposes of this Section any preferred
stock of a Consolidated Subsidiary held by a Person other than the Guarantor or
a Wholly-Owned Consolidated Subsidiary shall be included, at the higher of its
voluntary or involuntary liquidation value, in "Consolidated Debt" and in the
"Debt" of such Consolidated Subsidiary.
SECTION 4.08. Negative Pledge. Neither the Guarantor nor any Subsidiary
will create, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by it, except:
(a) any Lien existing on any asset on the Effective Date (as defined in
either Credit Agreement) securing Debt outstanding on the Effective Date;
(b) any Lien existing on any asset of, or capital stock of, or other
ownership interest in, any Person (such capital stock and other ownership
interests are collectively referred to herein as "Stock") at the time such
Person becomes a Subsidiary, which Lien was not created in contemplation of such
event;
(c) any Lien on any asset securing the payment of all or part of the
purchase price of such asset upon the acquisition thereof by the Guarantor or a
Subsidiary or securing Debt (including any obligation as lessee incurred under a
capital lease) incurred or assumed by the Guarantor or a Subsidiary prior to, at
the time of or within one year after such acquisition (or in the case of real
property, the completion of construction (including any improvements on an
existing property) or the commencement of full operation of such asset or
property, whichever is later), which Debt is incurred or assumed for the purpose
of financing all or part of the cost of acquiring such asset or, in the case of
real property, construction or improvements thereon; provided, that in the case
of any such acquisition, construction or improvement, the Lien shall not apply
to any asset theretofore owned by the Guarantor or a Subsidiary, other than
assets so acquired, constructed or improved;
(d) any Lien existing on any asset or Stock of any Person at the time
such Person is merged or consolidated with or into the Guarantor or a Subsidiary
which Lien was not created in contemplation of such event;
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(e) any Lien existing on any asset or Stock of any Person at the time
of acquisition thereof by the Guarantor or a Subsidiary, which Lien was not
created in contemplation of such acquisition;
(f) any Lien arising out of the refinancing of any Debt secured by any
Lien permitted by any of the subsections (a) through (e) of this Section 4.08,
provided the principal amount of Debt is not increased and is not secured by any
additional assets, except as provided in the last sentence of this Section 4.08;
(g) any Lien to secure Debt of a Subsidiary to the Guarantor or to a
Wholly-Owned Consolidated Subsidiary;
(h) any Lien created pursuant to a Permitted Receivables Transaction;
(i) any Lien in favor of any country (or any department, agency,
instrumentality or political subdivision of any country) securing obligations
arising in connection with partial, progress, advance or other payments pursuant
to any contract, statute, rule or regulation or securing obligations incurred
for the purpose of financing all or any part of the purchase price (including
the cost of installation thereof or, in the case of real property, the cost of
construction or improvement or installation of personal property thereon) of the
asset subject to such Lien (including, but not limited to, any Lien incurred in
connection with pollution control, industrial revenue or similar financings);
(j) Liens arising in the ordinary course of its business which (i) do
not secure Debt, (ii) do not secure any single obligation in an amount exceeding
$50,000,000 and (iii) do not in the aggregate materially detract from the value
of its assets or materially impair the use thereof in the operation of its
business; and
(k) Liens not otherwise permitted by the foregoing clauses (a) through
(j) of this Section 4.08 securing Debt (without duplication) in an aggregate
principal amount at any time outstanding not to exceed an amount equal to the
greater of (i) $300,000,000 or (ii) 10% of Consolidated Tangible Net Worth.
It is understood that any Lien permitted to exist on any asset pursuant to the
foregoing provisions of this Section 4.08 may attach to the proceeds of such
asset and, with respect to Liens permitted pursuant to subsections (a), (b),
(d), (e), (f) (but only with respect to the refinancing of a Debt secured by a
Lien permitted pursuant to subsections (a), (b), (d) or (e)) or (g) of this
Section 4.08, may attach to an asset acquired in the ordinary course of business
as a replacement of such former asset.
SECTION 4.09. Consolidations, Mergers and Sales of Assets. (a) The
Guarantor will not (i) consolidate or merge with or into any other Person or
(ii) sell, lease or otherwise transfer all or substantially all of its assets to
any other Person, unless
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(A) the Guarantor or a Subsidiary is the surviving
corporation;
(B) the Person (if other than the Guarantor) formed by such
consolidation or into which the Guarantor is merged, or the Person
which acquires by sale or other transfer, or which leases, all or
substantially all of the assets of the Guarantor (any such Person,
the "Successor"), shall be organized and existing under the laws
of Bermuda or of the United States, any state thereof or the
District of Columbia and shall expressly assume, in a writing
executed and delivered to the Agent for delivery to each of the
Banks, in form reasonably satisfactory to the Agent, the due and
punctual payment of the principal of and interest on the
Promissory Notes and the performance of the other obligations
under this Agreement and the Promissory Notes on the part of the
Guarantor to be performed or observed, as fully as if such
Successor were originally named as the Guarantor in this
Agreement;
(C) immediately after giving effect to such transaction, no
Guarantor Default shall have occurred and be continuing; and
(D) the Guarantor has delivered to the Agent a certificate on
behalf of the Guarantor signed by a Responsible Officer and an
opinion of counsel, each stating that all conditions provided in
this Section 4.09 relating to such transaction have been
satisfied.
The foregoing provisions of this Section 4.09 shall not restrict the
merger or consolidation of any Subsidiary with and into the Guarantor.
SECTION 4.10. Transactions with Affiliates. The Guarantor will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate (collectively, "AFFILIATE TRANSACTIONS"); provided, however, that the
foregoing provisions of this Section 4.10 shall not prohibit the Guarantor or
any of its Subsidiaries from (a) making Restricted Payments (including, for this
purpose, transactions expressly excluded from the definition of a Restricted
Payment) permitted by Section 4.11, (b) making sales to or purchases from any
Affiliate and, in connection therewith, extending credit or making payments, or
from making payments for services rendered by any Affiliate, if such sales or
purchases are made or such services are rendered in the ordinary course of
business and on terms and conditions at least as favorable to the Guarantor or
such Subsidiary as the terms and conditions which the Guarantor would reasonably
expect to be obtained in a similar transaction with a Person which is not an
Affiliate at such time, (c) making payments of principal, interest and premium
on any Debt of the Guarantor or such Subsidiary held by an
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Affiliate if the terms of such Debt are at least as favorable to the Guarantor
or such Subsidiary as the terms which the Guarantor would reasonably expect to
have been obtained at the time of the creation of such Debt from a lender which
was not an Affiliate, (d) participating in, or effecting any transaction in
connection with, any joint enterprise or other joint arrangement with any
Affiliate if the Guarantor or such Subsidiary participates in the ordinary
course of its business and on a basis no less advantageous than the basis on
which such Affiliate participates, (e) paying or granting reasonable
compensation and benefits to any director, officer, employee or agent of the
Guarantor or any Subsidiary, (f) paying reasonable legal fees and expenses to a
law firm of which an Affiliate is a member or (g) engaging in any Affiliate
Transaction not otherwise addressed in subsections (a) - (f) of this Section
4.10, the terms of which are not less favorable to the Guarantor or such
Subsidiary than those that the Guarantor would reasonably expect to be obtained
in a comparable transaction at such time with a Person which is not an
Affiliate.
SECTION 4.11. Restricted Payments. Neither the Guarantor nor any
Subsidiary will declare or make any Restricted Payment unless, after giving
effect thereto, the aggregate of all Restricted Payments declared or made
subsequent to the date hereof does not exceed an amount equal to the sum of (a)
$1,250,000,000 plus (b) 50% of Consolidated Net Income (or minus 100% of
Consolidated Net Income, in the event of a net loss for such period) for the
period from October 1, 1997 through the end of the then most recently ended
fiscal quarter of the Guarantor (treated for this purpose as a single accounting
period), plus (c) the aggregate cash proceeds (net of underwriting commissions)
received by the Guarantor (other than from a Subsidiary) from the issuance or
sale after September 30, 1997 of capital stock or Stock Equivalents of the
Guarantor (other than the proceeds of any capital stock or Stock Equivalent
which by its terms is subject to redemption otherwise than at the sole option of
the Guarantor). Nothing in this Section 4.11 shall prohibit the payment of any
dividend or distribution within 60 days after the declaration thereof if such
declaration was not prohibited by this Section 4.11.
SECTION 4.12. Prepayment of Existing Agreements. Promptly and in any
event within five Euro-Dollar Business Days (as defined in either Credit
Agreement) of the receipt by the Guarantor or any of its Consolidated
Subsidiaries of net cash proceeds from the issuance of long-term debt securities
or equity securities in the capital markets, the Guarantor will cause Tyco US
(as defined in either Credit Agreement) to prepay loans outstanding under the
Existing Agreements (as defined in either Credit Agreement) in an aggregate
amount equal to the largest multiple of $1,000,000 which does not exceed the
amount of such net cash proceeds, and simultaneously with such prepayment to
reduce the commitments under the Existing Agreements by an equal amount.
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ARTICLE 5
DEFAULTS
SECTION 5.01. Guarantor Events of Defaults. The following events shall
constitute "GUARANTOR EVENTS OF DEFAULT" for purposes of the Financing
Documents:
(a) the Guarantor shall fail to pay when due any principal of any Loan
(as defined in the Credit Agreements), or shall fail to pay within three
Domestic Business Days (as defined in the Credit Agreements) of the due date
thereof any interest on any Loan (as defined in the Credit Agreements) or any
fees payable hereunder;
(b) the Guarantor shall fail to observe or perform any covenant
contained in Section 4.07, 4.11 or 4.12;
(c) the Guarantor shall fail to observe or perform any covenant
contained in Section 4.08 or 4.09 and such failure shall not be remedied within
five days after any Responsible Officer obtains actual knowledge thereof;
(d) the Guarantor shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a),
(b) or (c) of this Section 5.01) for 10 days after notice thereof has been given
to the Guarantor by the Agent at the request of any Bank;
(e) any representation, warranty, certification or statement made in
writing by the Guarantor in the Financing Documents or in any certificate,
financial statement or other document required to be delivered to the Agent or
any of the Banks pursuant to the Financing Documents shall prove to have been
incorrect in any material respect when made (or deemed made);
(f) the Guarantor or any Subsidiary shall fail to make any payment in
respect of any Material Debt when due (after giving effect to any applicable
grace period);
(g) any event or condition shall occur that results in the acceleration
of the maturity of any Material Debt or that entitles the holder or holders of
any Material Debt or any Person acting on behalf of such holder or holders to
accelerate the maturity thereof;
(h) (i) any corporate action is taken authorizing the winding up,
liquidation, any arrangement or the taking of any other similar action of or
with respect to the Guarantor or authorizing any corporate action to be taken to
facilitate any such winding up, liquidation, arrangement, reorganization or
amalgamation or other similar action or any members' voluntary winding up of the
Guarantor as provided under the Bermuda Companies Law shall be commenced;
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(ii) (A) any petition shall be filed seeking the liquidation,
any arrangement or the taking of any other similar action of or with
respect to the Guarantor by the Registrar of Companies in Bermuda, or
by any other Person or Persons, or (B) any petition shall be presented
for the winding up of the Guarantor to a court of Bermuda as provided
with the Bermuda Companies Law, or (C) any creditors' winding up of the
Guarantor as provided under the Bermuda Companies Law shall be
commenced, or (D) any receiver shall be appointed by a creditor of the
Guarantor or by a court of Bermuda on the application of a creditor of
the Guarantor as provided under any instrument giving rights for the
appointment of a receiver thereto, and in the case of any such
petition, winding up, appointment, order or other matter, such
petition, winding up, appointment, order or other matter, shall remain
undismissed and unstayed for a period of 60 days;
(iii) the Guarantor or any Significant Subsidiary shall (A)
commence a voluntary case or other proceeding seeking liquidation,
winding up, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or substantially
all of its property, or (B) consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other similar proceeding commenced against it, or
(C) make a general assignment for the benefit of creditors, or (D) fail
generally to pay its debts as they become due, or (E) take any
corporate action to authorize any of the foregoing; or
(iv) (A) an involuntary case or other proceeding shall be
commenced against the Guarantor or any Significant Subsidiary seeking
liquidation, winding up, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or
substantially all of its property, and such involuntary case or other
proceeding shall remain in effect and undismissed and unstayed for a
period of 60 days; or (B) an order for relief shall be entered against
the Guarantor or any Significant Subsidiary under the bankruptcy laws
of any jurisdiction as now or hereafter in effect;
(i) a judgment or order for the payment of money in excess of
$30,000,000 (after deducting amounts covered by insurance, except to the extent
that the insurer providing such insurance has declined such coverage) shall be
rendered against the Guarantor or any Subsidiary and, within 60 days after entry
thereof, such judgment or order is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay, such
judgment or order is not discharged;
(j) any person or group of persons (within the meaning of Section 13 or
14 of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 40% or more of the
outstanding shares of common stock of the Guarantor; or, on the last
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day of any period of twelve consecutive calendar months, a majority of members
of the board of directors of the Guarantor shall no longer be composed of
individuals (i) who were members of said board of directors on the first day of
such twelve consecutive calendar month period or (ii) whose election or
nomination to said board of directors was approved by individuals referred to in
clause (i) above constituting at the time of such election or nomination at
least a majority of said board of directors;
(k) the Guarantor or any Subsidiary shall fail to make any payment
owing by it in respect of any performance bond, performance guaranty or bank
Guaranty issued in lieu of a performance bond or performance guaranty (other
than a payment which is disputed by the Guarantor or such Subsidiary in good
faith), and the aggregate of all such defaulted payments shall exceed
$50,000,000 at any one time for the Guarantor and its Subsidiaries; or
(l) the Guarantor shall have any Significant Subsidiary other than (i)
Tyco Luxembourg, (ii) a Subsidiary of Tyco Luxembourg or (iii) for a period not
to exceed six months from the date of the initial acquisition thereof, any other
Significant Subsidiary.
SECTION 5.02. Notice of Default. The Agent shall give notice to the
Guarantor under Section 5.01(c) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 6
TAXES
SECTION 6.01. Withholding Taxes. Each payment by the Guarantor
hereunder to or for the account of any Bank (a "Payment") shall be made without
any deduction or withholding for any Bank Foreign Taxes with respect to such
Bank; provided that if the Guarantor shall be required by law to make any such
deduction or withholding from any Payment, the Guarantor will:
(i) pay such amounts in addition to such Payment as may be
necessary so that the amount received by the payee, after all such
withholdings and deductions, will be equal to the full amount provided
for in this Agreement;
(ii) pay the full amount deducted or withheld to the relevant
taxation or other authorities within the time allowed under applicable
law; and
(iii) furnish within 45 days thereafter to the Agent, the
official receipt or receipts from the relevant taxation or other
authorities for the full amount so deducted or withheld.
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SECTION 6.02. Certain Other Taxes. The Guarantor will pay (i) all Bank
Foreign Taxes imposed (otherwise than by deduction or withholding) on any Bank
which constitute Bank Foreign Taxes with respect to such Bank and (ii) all Bank
Domestic Taxes imposed on any Bank which constitute Bank Domestic Taxes with
respect to such Bank to the extent any such Bank Foreign Taxes or Bank Domestic
Taxes result from Bank Foreign Taxes or Bank Domestic Taxes paid or reimbursed
by the Guarantor pursuant to this Article 6.
SECTION 6.03. Reimbursement of Taxes Paid by a Bank. If any Bank
Foreign Taxes or Bank Domestic Taxes to be paid by the Guarantor pursuant to
this Article 6 are imposed on and paid by any Bank, the Guarantor shall, upon
request of such Bank and whether or not such Bank Foreign Taxes or Bank Domestic
Taxes shall have been correctly or legally imposed, reimburse such Bank
therefor, together with any interest, penalties and expenses in connection
therewith, plus interest thereof at the rate specified in the first sentence of
Section 2.07(a) of each Credit Agreement. To the extent that any Bank which is
reimbursed by the Guarantor as provided in this Section thereafter receives any
payment allocated to Bank Foreign Taxes or Bank Domestic Taxes in respect of
which such Bank was so reimbursed from a governmental taxing authority because
such Bank Foreign Taxes or Bank Domestic Taxes were incorrectly or illegally
imposed, such Bank shall return to the Guarantor (without interest) any such
payment.
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Notices. All notices, requests and other communications
to any party provided for hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given to such party at its address or facsimile or telex number set
forth on the signature pages hereof or such other address or facsimile or telex
number as such party may hereafter specify for the purpose by notice to the
other party. Each such notice, request or other communication shall be effective
(i) if given by telex, when such telex is transmitted to the telex number
specified in this Section and the appropriate answerback is received, (ii) if
given by facsimile, when such facsimile is transmitted to the facsimile number
specified on the signature pages hereof and electronic, telephonic or other
appropriate confirmation of receipt is received by the sender, (iii) if given by
mail, 72 hours after such communication is deposited in the mails with first
class postage prepaid, addressed as aforesaid or (iv) if given by any other
means, when delivered at the address specified on the signature pages hereof.
SECTION 7.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any other
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
and therein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
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SECTION 7.03. Expenses; Indemnification. (a) The Guarantor shall pay
(i) all reasonable out-of-pocket expenses of the Agent, including reasonable
fees and disbursements of special counsel for the Agent, in connection with the
preparation and administration of this Agreement, any waiver or consent
hereunder or any amendment thereof or any default or alleged default hereunder
and (ii) if an Event of Default (as defined in any Credit Agreement) occurs, all
reasonable out-of-pocket expenses incurred by the Agent and each Bank, including
reasonable fees and disbursements of counsel, in connection with such Event of
Default and collection, bankruptcy, insolvency and other enforcement proceedings
in respect of this Agreement resulting therefrom.
(b) The Guarantor agrees to indemnify the Agent and each Bank, their
respective Affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses, including, without limitation, the reasonable fees and disbursements
of counsel, which may be incurred by such Indemnitee (whether or not such
Indemnitee shall be designated a party thereto) arising out of any
investigative, administrative or judicial proceeding (brought or threatened)
relating to or arising out of this Agreement, the arrangement, administration,
performance or enforcement thereof; provided that no Indemnitee shall have the
right to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction; provided
further that no Indemnitee shall have the right to be indemnified hereunder in
connection with any proceedings between it and another Indemnitee which does not
relate to the Guarantor.
(c) If any proceeding or claim shall be brought or asserted against any
Indemnitee in respect of which indemnity may be sought pursuant to the preceding
subsection, such Indemnitee shall promptly notify the Guarantor. The Guarantor
shall not be liable for any costs or expenses in connection with any settlement
entered into without its consent.
SECTION 7.04. Judicial Proceedings. (a) Consent to Jurisdiction. The
Guarantor irrevocably submits to the non-exclusive jurisdiction of any federal
or New York State court sitting in New York City over any suit, action or
proceeding arising out of or relating to this Agreement. The Guarantor
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding brought in such court and any claim that any suit, action or
proceeding brought in such court has been brought in an inconvenient forum. The
Guarantor agrees that a final judgment in any such suit, action or proceeding
brought in such a court shall be conclusive and binding upon it and will be
given effect in Bermuda to the fullest extent permitted by applicable law and
may be enforced in any federal or New York State court sitting in New York City
(or any other courts to the jurisdiction of which the Guarantor is or may be
subject) by a suit upon such judgment, provided that service of process is
effected upon it in one of the manners specified herein or as otherwise
permitted by law.
24
<PAGE> 28
(b) Appointment of Agent for Service of Process. The Guarantor hereby
irrevocably designates and appoints CT Corporation System having an office on
the date hereof at 1633 Broadway, New York, New York 10019 as its authorized
agent, to accept and acknowledge on its behalf, service or any and all process
which may be served in any suit, action or proceeding of the nature referred to
in subsection (a) above in any federal or New York State court sitting in New
York City. The Guarantor represents and warrants that such agent has agreed in
writing to accept such appointment and that a true copy of such designation and
acceptance has been delivered to the Agent. Such designation and appointment
shall be irrevocable until all principal and interest and all other amounts
payable hereunder shall have been paid in full in accordance with the provisions
hereof. If such agent shall cease so to act, the Guarantor covenants and agrees
to designate irrevocably and appoint without delay another such agent
satisfactory to the Agent and to deliver promptly to the Agent evidence in
writing of such other agent's acceptance of such appointment.
(c) Service of Process. The Guarantor hereby consents to process being
served in any suit, action, or proceeding of the nature referred to in
subsection (a) above in any federal or New York State court sitting in New York
City by service of process upon the agent of the Guarantor, as the case may be,
for service of process in such jurisdiction appointed as provided in subsection
(b) above; provided that, to the extent lawful and possible, written notice of
said service upon such agent shall be mailed by registered airmail, postage
prepaid, return receipt requested, to the Guarantor at its address specified on
the signature pages hereof or to any other address of which the Guarantor shall
have given written notice to the Agent. The Guarantor irrevocably waives, to the
fullest extent permitted by law, all claim of error by reason of any such
service and agrees that such service shall be deemed in every respect effective
service of process upon the Guarantor in any such suit, action or proceeding and
shall, to the fullest extent permitted by law, be taken and held to be valid and
personal service upon and personal delivery to the Guarantor.
(d) No Limitation on Service or Suit. Nothing in this Section 7.04
shall affect the right of the Agent or any Bank to serve process in any other
manner permitted by law or limit the right of the Agent or any Bank to bring
proceeding against the Guarantor in the courts of any jurisdiction or
jurisdictions.
SECTION 7.05. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Guarantor or
for any other reason, any payment under or in connection with this Agreement, is
made or satisfied in a currency (the "Other Currency") other than that in which
the relevant payment is due (the "Required Currency") then, to the extent that
the payment (when converted into the Required Currency at the rate of exchange
on the date of payment or, if it is not practicable for the party entitled
thereto (the "Payee") to purchase the Required Currency with the other Currency
on the date of payment, at the rate of exchange as soon thereafter as it is
practicable for it to do so) actually received by the Payee falls short of the
amount due under the terms of this Agreement, the Guarantor shall, to the extent
permitted by law, as a separate and independent obligation, indemnify and hold
harmless the Payee against the amount of such short-fall. For the purpose of
this Section, "rate of
25
<PAGE> 29
exchange" means the rate at which the Payee is able on the relevant date to
purchase the Required Currency with the Other Currency and shall take into
account any premium and other costs of exchange.
SECTION 7.06. Amendments and Waivers. Any provision of this Agreement
or the Promissory Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Guarantor and the Agent with the
prior written consent of the Required Banks under (and as defined in) each of
the Credit Agreements.
SECTION 7.07. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon the Guarantor and its successors and shall inure
to the benefit of the Agent and the Banks and their respective successors and
assigns.
SECTION 7.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7.09. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 7.10. No Seal. As contemplated by the Bye-Laws of the
Guarantor, this Agreement shall not be required to be issued under the seal of
the Guarantor.
SECTION 7.11. WAIVER OF JURY TRIAL. EACH OF THE GUARANTOR AND THE AGENT
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
SECTION 7.12. Amendment of Existing Parent Guarantee Agreement. The
Guarantor hereby agrees to the amendments specified in Section 3.02(c) of each
of the Credit Agreements.
26
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TYCO INTERNATIONAL LTD.
By: /s/
--------------------------------
Name:
Title: Executive Vice President
Gibbons Building
10 Queen Street
Suite 301
Hamilton HM11
Bermuda
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/
--------------------------------
Name:
Title:
60 Wall Street
New York, New York 10260-0060
Attention:
Telex number: 177615
Facsimile number: 212-648-5018
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF TYCO INTERNATIONAL LTD. AS OF AND FOR THE QUARTER
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 1,779
<ALLOWANCES> 111
<INVENTORY> 1,121
<CURRENT-ASSETS> 4,181
<PP&E> 4,779
<DEPRECIATION> 1,851
<TOTAL-ASSETS> 10,514
<CURRENT-LIABILITIES> 3,769
<BONDS> 2,382
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 110
<OTHER-SE> 3,733
<TOTAL-LIABILITY-AND-EQUITY> 10,514
<SALES> 2,688
<TOTAL-REVENUES> 2,688
<CGS> 1,792
<TOTAL-COSTS> 1,792
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 359
<INCOME-TAX> 118
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> (1)
<CHANGES> 0
<NET-INCOME> 240
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| KLAC | https://www.sec.gov/Archives/edgar/data/319201/0000891618-98-000616.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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s+4b7H/CeSY2iVOz93Qr8Q==
<SEC-DOCUMENT>0000891618-98-000616.txt : 19980217
<SEC-HEADER>0000891618-98-000616.hdr.sgml : 19980217
ACCESSION NUMBER: 0000891618-98-000616
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: KLA TENCOR CORP
CENTRAL INDEX KEY: 0000319201
STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827]
IRS NUMBER: 042564110
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-09992
FILM NUMBER: 98533754
BUSINESS ADDRESS:
STREET 1: 160 RIO ROBLES
CITY: SAN JOSE
STATE: CA
ZIP: 95134
BUSINESS PHONE: 4084344200
MAIL ADDRESS:
STREET 1: 160 RIO ROBLES
CITY: SAN JOSE
STATE: CA
ZIP: 95161-9055
FORMER COMPANY:
FORMER CONFORMED NAME: KLA INSTRUMENTS CORP
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1997
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to_________________
Commission File Number 0-9992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 434-4200
(Registrant's telephone number, including area code)
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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of January 30, 1997 there were 84,030,319 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
June 30, 1997 and December 31, 1997 .................................... 3
Condensed Consolidated Interim Statements of Operations for
the Three and Six Month Periods Ended December 31, 1996
and 1997 ............................................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the Six Months Ended December 31, 1996 and 1997 .................... 5
Notes to Condensed Consolidated Interim Financial Statements............ 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings........................................................... 12
Item 2 Changes in Securities....................................................... 12
Item 3 Defaults Upon Senior Securities............................................. 12
Item 4 Submission of Matters to a Vote of Security Holders......................... 12
Item 5 Other Events................................................................ 12
Item 6 Exhibits and Reports on Form 8-K............................................ 13
SIGNATURES 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 279,225 $ 191,133
Short-term investments 69,606 89,837
Accounts receivable, net 269,291 376,345
Inventories 174,634 195,045
Deferred income taxes 54,799 53,557
Other current assets 12,452 13,744
----------- -----------
Total current assets 860,007 919,661
Land, property and equipment, net 117,595 131,045
Marketable securities 338,418 403,596
Other assets 27,287 30,357
----------- -----------
Total assets $ 1,343,307 $ 1,484,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 25,113 $ 22,495
Accounts payable 41,155 54,034
Other current liabilities 258,483 266,130
----------- -----------
Total current liabilities 324,751 342,659
----------- -----------
Deferred income taxes and other 3,943 3,179
----------- -----------
Stockholders' equity:
Common stock and capital in excess of par value 458,308 476,112
Retained earnings 542,706 644,486
Net unrealized gain on investments 17,591 27,269
Cumulative translation adjustment (3,992) (9,046)
----------- -----------
Total stockholders' equity 1,014,613 1,138,821
----------- -----------
Total liabilities and stockholders' equity $ 1,343,307 $ 1,484,659
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed
consolidated interim financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
----------------------- -----------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $242,155 $326,361 $503,295 $638,781
Costs and operating expenses:
Costs of goods sold 114,874 150,235 230,238 290,999
Research and development 29,308 47,280 61,804 92,457
Selling, general and administrative 50,223 61,622 108,838 123,760
Merger, restructure and other charges -- -- 8,500 --
-------- -------- -------- --------
Total costs and operating expenses 194,405 259,137 409,380 507,216
-------- -------- -------- --------
Income from operations 47,750 67,224 93,915 131,565
Other income and other, net 5,353 9,331 11,010 18,116
-------- -------- -------- --------
Income before income taxes 53,103 76,555 104,925 149,681
Provision for income taxes 18,884 24,497 37,126 47,901
-------- -------- -------- --------
Net income $ 34,219 $ 52,058 $ 67,799 $101,780
======== ======== ======== ========
Earnings per share:
Basic $ 0.42 $ 0.61 $ 0.83 $ 1.20
======== ======== ======== ========
Diluted $ 0.40 $ 0.59 $ 0.80 $ 1.15
======== ======== ======== ========
Weighted average number of shares:
Basic 82,114 84,657 81,961 84,470
======== ======== ======== ========
Diluted 84,907 88,105 84,230 88,343
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed
consolidated interim financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 67,799 $ 101,780
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 22,881 18,228
Changes in assets and liabilities:
Accounts receivable, net 92,873 (122,067)
Inventories 19,069 (26,791)
Other assets (12,584) (7,217)
Accounts payable (12,442) 14,007
Other current liabilities 4,616 16,300
--------- ---------
Net cash provided by (used in)
operating activities 182,212 (5,760)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (31,915) (33,701)
Net purchases of available for sale securities (54,304) (75,738)
--------- ---------
Net cash used in investing activities (86,219) (109,439)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 8,902 25,350
Stock repurchases -- (7,546)
Net payments under debt obligations (3,596) (1,222)
--------- ---------
Net cash provided by financing activities 5,306 16,582
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (415) 10,525
--------- ---------
Net increase (decrease) in cash and cash equivalents 100,884 (88,092)
Cash and cash equivalents at beginning of period 201,704 279,225
--------- ---------
Cash and cash equivalents at end of period $ 302,588 $ 191,133
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid $ 42,480 $ 45,292
Interest paid $ 796 $ 1,307
</TABLE>
See accompanying notes to unaudited condensed
consolidated interim financial statements.
5
<PAGE> 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
NOTE 1. In the opinion of the management of KLA-Tencor Corporation (the
Company), the unaudited condensed consolidated interim financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results. The results for the quarter ended
December 31, 1997 are not necessarily indicative of results to be expected for
the entire year. This financial information should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended June 30, 1997.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1997
-------- --------
<S> <C> <C>
Customer service parts $ 31,387 $ 30,680
Raw materials 36,829 30,984
Work-in-process 71,998 75,433
Demonstration equipment 20,580 40,258
Finished goods 13,840 17,690
-------- --------
$174,634 $195,045
======== ========
</TABLE>
NOTE 3. During the six months ended December 31, 1997, the Company authorized
the repurchase, at its discretion, of up to 350,000 shares of Common Stock on
the open market for issuance under its employee stock purchase plans. During the
six month period ended December 31, 1997, the Company repurchased 136,500 shares
of its Common Stock at a cost of $7.5 million.
NOTE 4. During the quarter ended December 31, 1997, Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share." SFAS 128 requires
presentation of both Basic and Diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS, which replaces primary EPS, is computed
by dividing net income available to common stockholders by the weighted average
number of common share outstanding during the period. Diluted EPS replaces fully
diluted EPS and gives effect to all dilutive potential common shares outstanding
during a period. In computing Diluted EPS, the average stock price as reported
on the Nasdaq National Market System for the period is used in determining the
number of shares assumed to be purchased from the exercise of stock options
rather than the higher of the average or ending stock price as used in the
computation of fully diluted EPS.
The difference between the computation of Basic EPS and Diluted EPS, for all
periods presented, is the inclusion of the dilutive effect of stock options
issued to employees under employee stock option plans. During the three month
and six month periods ended December 31, 1997, options to purchase approximately
900,000 and 779,000 shares, respectively, at prices ranging from $48.06 to
$69.88 were outstanding but not included in the computation of Diluted EPS
because the exercise price was greater than the average market price of common
shares.
6
<PAGE> 7
NOTE 5. The Company recorded charges totaling $60.6 million for merger,
restructuring and other non-recurring events which occurred during forth quarter
of fiscal 1997. Of this amount approximately $46 million was the result of the
merger between KLA Instruments and Tencor Instruments on April 30, 1997, $6.1
million was a result of the write-off of a bad debt for shipments made to a
Thailand company in fiscal 1997 and additional restructuring charges of $8.5
million primarily related to lease exit costs incurred by Tencor Instruments in
fiscal 1997. As of December 31, 1997, approximately $10.6 million of the accrued
balance remains relating primarily to lease exit costs, and is expected to be
utilized ratably during the remainder of fiscal 1998.
NOTE 6. The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates and interest rates. The
Company utilizes various hedge instruments, primarily forward exchange
contracts, to manage its exposure associated with firm intercompany and
third-party transactions denominated in local currencies. At December 31, 1997,
the Company had foreign exchange forward contracts maturing throughout fiscal
1998 and early fiscal 1999 to sell and purchase approximately $282 million and
$16 million, respectively, in foreign currency, primarily Japanese yen. Net
gains on these contracts were approximately $11 million at December 31, 1997.
The Company's foreign exchange forward contracts do not subject the Company to
risk due to exchange rate movements because net gains and losses on these
contracts as previously noted, are offset by net losses on the assets,
liabilities and transactions being hedged.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ.
Important factors that could cause actual results to differ are described in the
following discussion and under "Risk Factors" below.
RESULTS OF OPERATIONS
Revenues were $326.4 million and $638.8 million for the three and six month
periods ended December 31, 1997, compared to $242.2 million and $503.3 million
for the same periods of the prior fiscal year, representing an increase of 34.8%
and 26.9% for the respective periods. The increase in revenues is primarily
attributable to increased demand for the Company's products when compared to the
same periods in the prior fiscal year in which the semiconductor industry was
experiencing a slowdown resulting from lower memory device prices caused by
excess production capacity. Higher revenue levels were driven by increases in
wafer inspection, metrology and reticle inspection system sales. E-Beam
Metrology divisional sales continue to grow the Company's overall market share
of this technology.
Gross margins were 54.0% and 54.4% of revenues for the three and six month
periods ended December 31, 1997, compared to 52.6% and 54.3% of revenues for the
same periods of the prior fiscal year. Gross margins for system products
increased during the current quarter when compared to the prior year quarter
primarily as a result of a shift in product mix toward Wisard and Surfscan which
have relatively higher gross margins than other product lines as well as
improved margins in the Company's E-Beam Metrology division which realized some
manufacturing efficiencies as it ramped production during the period. These
increases were offset in part by increased costs in the Company's field support
organization. Gross margins for the six months ended December 31, 1997 remained
relatively consistent with the same period of the prior fiscal year.
Engineering, research and development (R&D) expenses were $47.3 million and
$92.5 million for the three and six month periods ended December 31, 1997
compared to $29.3 million and $61.8 million for the same periods of the prior
fiscal year. As a percentage of revenues, R&D expenses increased to 14.5% for
the three and six month periods ended December 31, 1997, compared to 12.1% and
12.3% for the same periods of the prior fiscal year. The increase is primarily
attributable to increases in headcount and project material costs associated
with the Company's ongoing efforts for product development in new market
segments and enhancements to existing products including next generation 300mm
products and inspection enhancements for 0.25-micron technology and below.
Selling, general and administrative (SG&A) expenses were $61.6 million and
$123.8 million for the three and six month periods ended December 31, 1997,
compared to $50.2 million and $108.8 million for the same periods of the prior
fiscal year. As a percentage of revenues, SG&A decreased to18.9% and 19.4% for
the three and six month period ended December 31, 1997, compared to 20.7% and
21.6% for the same periods of the prior fiscal year. The dollar increase during
the periods is due primarily to additions to headcount, investment in the
Company's worldwide information systems and customer group sales applications
resources worldwide.
In the first quarter of fiscal 1997, the Company incurred restructuring charges
of $8.5 million for costs related to downsizing its operations as well as
exiting certain leased facilities.
8
<PAGE> 9
Interest income and other, net, increased $4.0 million and $7.1 million for the
three and six month periods ended December 31, 1997, compared to the same
periods of the prior fiscal year. The increase is due primarily to higher
average investment balances when compared to the same periods a year ago.
The Company's effective tax rate decreased to 32% for the three and six month
periods ended December 31, 1997, compared to 35.6% and 35.4% for the same
periods of the prior fiscal year. This decrease is due primarily to the
realization of tax attributes related to a prior acquisition and benefits from
R&D tax credits.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 through 1992. The Company has received a notice of proposed
tax deficiency for such years and filed a tax protest letter with the IRS on
June 10, 1996, in response to that IRS notice. Management believes sufficient
taxes have been provided in prior years and that the ultimate outcome of the IRS
audit will not have a material adverse impact on the Company's financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended December 31, 1997, cash, cash equivalents,
short-term investments and marketable securities balances declined $2.7 million
to $684.6 million. Cash used in operations for the six month period was $5.8
million, resulting primarily from increases in accounts receivable and inventory
and offset in part by net income, which includes non-cash charges for
depreciation. During the six months ended December 31, 1997, approximately $81.0
million of the Company's accounts receivable were sold.
Capital expenditures of $33.7 million during the first six months of fiscal 1998
were primarily for computer equipment and facilities improvements to support the
Company's growth.
Cash and cash equivalents provided by financing activities during the first six
months of fiscal 1998 were $16.6 million compared to $5.3 million provided in
the same period of the prior year. The increase is primarily attributed to
issuance of the Company's stock in connection with employee benefit plans offset
by stock repurchases .
Working capital was $577.0 million at December 31, 1997 compared to $535.3
million at the end of fiscal 1997. A major component of working capital
continues to be cash and short-term investments. The Company believes that
existing liquid resources and funds generated from operations combined with its
ability to borrow funds will be adequate to meet its operating and capital
requirements and obligations through the foreseeable future. The Company
believes that success in its industry requires substantial capital in order to
maintain the flexibility to take advantage of opportunities as they may arise.
Accordingly, the Company may, from time to time, as market and business
conditions warrant, invest in or acquire businesses, products, or technologies
which it believes complement its overall business strategy. Borrowings under the
Company's credit facilities, or public offerings of equity or debt securities,
are available if the need arises. The sale of additional equity securities could
result in additional dilution to the Company's stockholders.
9
<PAGE> 10
RISK FACTORS
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. The Company's operating results are dependent on many
factors, including the economic conditions in the semiconductor and related
industries, both in the US and abroad, the size and timing of the receipt of
orders from customers, customer cancellations or delays of shipments, the
Company's ability to develop, introduce, and market new and enhanced products on
a timely basis (which includes its ability to attract, hire and assimilate an
adequate number of qualified people), among others. There can be no assurance
that one or more of these factors will not adversely impact the Company's
quarterly operating results.
The Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns. Even during periods
of reduced revenues, in order to remain competitive the Company will be required
to continue to invest in research and development and to maintain extensive
ongoing worldwide customer service and support capability which could adversely
affect its financial results.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. The Company
believes that its future success will depend in part upon its ability to
develop, manufacture and successfully introduce new products with improved
capabilities including those for 300mm wafers and devices with critical
dimensions at 0.25-micron and below and to continue to enhance existing
products. Due to the risks inherent in transitioning to new products, the
Company will be required to accurately forecast demand for new products while
managing the transition from older products. If new products have reliability or
quality problems, reduced orders, higher manufacturing costs, delays in
acceptance of and payment for new products and additional service and warranty
expense may result. In the past, the Company has experienced some delays as well
as reliability and quality problems in connection with product introductions,
resulting in some of these consequences. There can be no assurance that the
Company will successfully develop and manufacture new products, or that new
products introduced by the Company will be accepted in the marketplace. If the
Company does not successfully introduce new products, the Company's results of
operations will be materially adversely affected.
The Company expects to continue to make significant investments in research and
development. There can be no assurance that future technologies, processes or
product developments will not render the Company's current product offerings
obsolete or that the Company will be able to develop and introduce new products
or enhancements to its existing products which satisfy customer needs in a
timely manner or achieve market acceptance. The failure to do so could adversely
affect the Company's business.
10
<PAGE> 11
The semiconductor equipment industry is highly competitive. The Company has
experienced and expects to continue to face substantial competition throughout
the world. The Company believes that to remain competitive, it will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide, and to invest in
product and process research and development. The Company believes that the
semiconductor equipment industry is becoming increasingly dominated by large
manufacturers, who have the resources to support customers on a worldwide basis.
Many of these competitors have substantially greater financial resources and
more extensive engineering, manufacturing, marketing and customer service and
support capabilities than the Company. In addition, there are smaller emerging
semiconductor equipment companies which provide innovative technology. No
assurance can be given that the Company will be able to compete successfully
worldwide.
International revenues accounted for 65%, 66% and 65% of the Company's net
revenues for fiscal years 1995, 1996 and 1997, respectively. International sales
were 63% for the three and six month periods ended December 31, 1997. The
Company expects that international revenues will continue to represent a
significant percentage of its net revenues. International revenues and
operations may be adversely affected by imposition of governmental controls,
restrictions on export technology, political instability, trade restrictions,
changes in tariffs and the difficulties associated with staffing and managing
international operations. In addition, international sales may be adversely
affected by economic conditions in each country. The future performance of the
Company will be dependent, in part, upon its ability to continue to compete
successfully in Asia, one of the largest areas for the sale of yield management
and process monitoring equipment. Countries in the Asia Pacific region,
including Japan, Korea and Taiwan, have recently experienced weaknesses in their
currency, banking and equity markets. These weaknesses could adversely affect
consumer demand for the Company's products, the U.S. dollar value of the
Company's foreign currency denominated sales, the availability and supply of
resources, and the Company's consolidated results of operations. Although the
Company attempts to manage near term currency risks through "hedging," there can
be no assurance that such efforts will be adequate. These factors could have a
material adverse effect on the Company's future business and financial results.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held
on November 18, 1997 at the Company's offices in Milpitas, California.
Of the 84,408,077 shares outstanding as of the record date, 73,423,716
shares (87%) were present or represented by proxy at the meeting.
1. The table below presents the results of the election to the
Company's board of directors.
<TABLE>
<CAPTION>
Votes
Votes For Withheld
---------- -------
<S> <C> <C>
Leo J. Chamberlain 73,273,387 150,329
Richard J. Elkus, Jr 73,254,489 169,227
Dag Tellefsen 73,272,733 150,983
</TABLE>
2. The stockholders approved an amendment to the 1981 Employee Stock
Purchase Plan to increase the number of shares reserved thereunder by
800,000 shares of Common Stock. This proposal was approved by the
stockholders and received 54,252,652 votes for, 18,327,997 votes
against, with 117,748 votes abstaining, and 725,319 broker non-votes.
3. The stockholders approved the new 1997 Employee Stock Purchase Plan
and reserved for issuance thereunder 200,000 shares of Common Stock.
This proposal was approved by the stockholders and received 53,675,977
votes for, 18,268,699 votes against, with 115,921 votes abstaining, and
1,363,119 broker non-votes.
4. The stockholders ratified the appointment of Price Waterhouse LLP as
the Company's independent accountants for the fiscal year ended June
30, 1998. This proposal received 73,321,250 votes for, 19,566 votes
against, with 82,900 votes abstaining.
ITEM 5. OTHER INFORMATION
Not Applicable.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.12 Participation Agreement dated as of November 12,
1997, including exhibits, schedules and related
agreements thereto, by and between KLA-Tencor
Corporation, Lease Plan U.S.A., Inc., certain
financial institutions, ABN AMRO Bank N.V. and Banque
Nationale De Paris.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period
ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLA-TENCOR CORPORATION
(Registrant)
February 11, 1998 Fredrick A. Ball
- -------------------------- -------------------------------
(Date) Fredrick A. Ball
Vice President Finance and Accounting
13
<PAGE> 14
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.12 Participation Agreement dated as of November 12, 1997
including exhibits, schedules and related agreements
thereto, by and between KLA-Tencor Corporation, Lease
Plan U.S.A., Inc., certain financial institutions, ABN
AMRO Bank N.V. and Banque Nationale De Paris.
27.1 Financial Data Schedule.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>2
<DESCRIPTION>PARTICIPATION AGREEMENT DATED NOVEMBER 12, 1997
<TEXT>
<PAGE> 1
Exhibit 10.12
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT (this "Agreement" herein), dated as of
November 12, 1997, is entered into by and among:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee");
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor");
(3) Each of the financial institutions from time to time listed in
Schedule I hereto, as amended from time to time (such financial
institutions to be referred to collectively as the "Participants");
(4) ABN AMRO BANK N.V., acting through its San Francisco
International Branch, as agent for the Participants (in such capacity,
"Agent"); and
(5) BANQUE NATIONALE DE PARIS, as co-agent for the Participants
(in such capacity, "Co-Agent").
RECITALS
A. Pursuant to a Phase IIA Participation Agreement dated as of December
29, 1995 (the "Phase IIA Participation Agreement") among Lessee, Lessor, certain
participants thereunder (the "Phase IIA Participants") and ABN AMRO Bank N.V.,
as agent for the Phase IIA Participants, and a Phase IIA Lease Agreement dated
as of December 29, 1995 (the "Phase IIA Lease Agreement") between Lessor and
Lessee, (1) Lessor purchased the land described in Part 1 of Exhibit A (as more
fully defined in Schedule 1.01, the "Tract 1 Land") and certain related
property; (2) Lessor leased such property to Lessee; and (3) the Phase IIA
Participants participated in the Phase IIA Lease Agreement by funding the
purchase price and other advances made on account of such property.
B. Pursuant to a Phase IIB Participation Agreement dated as of December
29, 1995 (the "Phase IIB Participation Agreement") among Lessee, Lessor, certain
participants thereunder (the "Phase IIB Participants") and ABN AMRO Bank N.V.,
as agent for the Phase IIB Participants, and a Phase IIB Lease Agreement dated
as of December 29, 1995 (the "Phase IIB Lease Agreement") between Lessor and
Lessee, (1) Lessor purchased the land described in Part 5 of Exhibit A (as more
fully defined in Schedule 1.01, the "Tract 5 Land") and certain related
property; (2) Lessor leased such property to Lessee; and (3) the Phase IIB
Participants participated in the Phase IIB Lease Agreement by funding the
purchase price and other advances made on account of such property.
C. In order to refinance the Phase IIA Lease Agreement, the Phase IIB
Lease Agreement and certain other lease agreements and to finance the
acquisition of certain additional property, Lessee has requested Lessor and the
Participants to provide to Lessee a certain lease facility. Pursuant to such
facility:
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<PAGE> 2
(1) Lessor would:
(a) purchase the land described in Part 2 of Exhibit A (as
more fully defined in Schedule 1.01, the "Tract 2 Land"), the
improvements thereto and certain related property designated by
Lessee;
(b) acquire a leasehold interest in the land described in
Part 3 of Exhibit A (as more fully defined in Schedule 1.01, the
"Tract 3 Land") and purchase the improvements to such land and
certain related property designated by Lessee;
(c) purchase the land described in Part 4 of Exhibit A (as
more fully defined in Schedule 1.01, the "Tract 4 Land" and,
collectively with the Tract 1 Land, Tract 2 Land, Tract 3 Land and
Tract 5 Land, the "Land")) , the improvements thereto and certain
related property designated by Lessee;
(d) lease to Lessee all of Lessor's rights in the Land, the
improvements thereto and certain related property designated by
Lessee;
(e) appoint Lessee as Lessor's agent to make certain
improvements to the Tract 1 Land, Tract 3 Land, Tract 4 Land and
Tract 5 Land;
(f) make advances to finance such improvements and to pay
certain related expenses; and
(e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the termination payments to be made to the Phase IIA
Participants and Phase IIB Participants (collectively, the "Phase II
Participants") to terminate the Phase IIA Lease Agreement and Phase IIB
Lease Agreement (collectively, the "Phase II Lease Agreements"); (b)
funding the purchase prices to be paid by Lessor for the new property to
be acquired by Lessor; (c) funding other advances to be made by Lessor;
and (d) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
C. Lessor and the Participants are willing to provide such lease
facility upon the terms and subject to the conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
2
<PAGE> 3
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01, when used in
this Agreement or any other Operative Document, shall have the respective
meaning given to that term in Schedule 1.01 or in the provision of this
Agreement or other document, instrument or agreement referenced in Schedule
1.01.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 shall apply to this Agreement and the other Operative Documents.
SECTION 2. LEASE FACILITIES.
2.01. Acquisition, Lease, Amount Limitations, Etc.
(a) Acquisition, Lease, Etc. Subject to the terms and conditions
of this Agreement (including the limitations set forth in Subparagraph
2.01(b)):
(i) On a date specified by Lessee pursuant to Subparagraph
2.03(a) for the acquisition of the Tract 2 Property and Tract 3
Property (the "Closing Date"):
(A) Lessor shall (1) purchase (with funds provided by
the Participants) the Tract 2 Land, together with any
Appurtenant Rights thereto, all Improvements thereto and other
related property; and (2) acquire a leasehold interest in the
Tract 3 Land, together with any Appurtenant Rights thereto,
and purchase (with funds provided by the Participants) all
Improvements thereto and other related property;
(B) Lessor shall pay (with funds provided by the
Participants) (1) to the Phase IIA Participants the amount
necessary to terminate the Phase IIA Lease Agreement (the
"Phase IIA Termination Payment") and (2) to the Phase IIB
Participants the amount necessary to terminate the Phase IIB
Lease Agreement (the "Phase IIB Termination Payment"); and
(C) Immediately upon the purchase and acquisition by
Lessor of such property and the termination of the Phase IIA
Lease Agreement and Phase IIB Lease Agreement, Lessor and
Lessee shall execute (1) a Lease Agreement in the form of
Exhibit B (the "Lease Agreement"), pursuant to which Lessor
will lease to Lessee the Tract 1 Land, Tract 2 Land, Tract 3
Land and Tract 5 Land; (2) a Purchase Agreement in the form of
Exhibit C (the "Purchase Agreement"), pursuant to which Lessor
grants to Lessee the right to purchase such property under the
circumstances described therein and (3) a Construction Agency
Agreement in the form of Exhibit D (the "Construction Agency
Agreement"), pursuant to which Lessee agrees to the manner in
which it
3
<PAGE> 4
will construct certain improvements to the Tract 1 Land, Tract
3 Land and Tract 5 Land;
(ii) On a date specified by Lessee pursuant to Subparagraph
2.03(a) for the acquisition of the Tract 4 Property under (the
"Tract 4 Acquisition Date"):
(A) Lessor shall purchase (with funds provided by the
Participants) the Tract 4 Land, together with any Appurtenant
Rights thereto, all Improvements thereto and other related
property; and
(B) Immediately upon the purchase and acquisition by
Lessor of such property, Lessor and Lessee shall execute
amendments to the Lease Agreement, the Purchase Agreement and
the Construction Agency Agreement to the extent necessary to
add such property to the property covered thereby; and
(iii) During the period (the "Commitment Period") beginning on
the Closing Date and ending on November 1, 1998 (the "Outside
Completion Date") or, if earlier, on the first Business Day of the
first full calendar month immediately succeeding the earlier of (A)
the Completion Date and (B) the date on which the Unused Total
Commitment is $0 (the earlier of the Outside Completion Date and
such first Business Day to be referred to as the "Commitment
Termination Date"), Lessor shall, at the request of Lessee, make
additional advances to pay Permitted Improvement Costs and Permitted
Transaction Expenses ("Improvement/Expense Advances").
(b) Amount Limitations. The advances made by Lessor to purchase
property and to terminate the Phase II Lease Agreements (collectively, the
"Acquisition Advances") and the Improvement/Expense Advances made by
Lessor (the Acquisition Advances and the Improvement/Expense Advances to
be referred to collectively as the "Advances") shall be subject to the
following limitations:
(i) The aggregate amount of the Acquisition Advance and any
Improvement/Expense Advance made by Lessor for each Tract of
Property on the Acquisition Date for such Tract shall not exceed the
sum of (A) the Closing Date Appraisal for such Tract of Property,
plus (B) an additional amount allocated by Lessee to pay Permitted
Transaction Expenses and Permitted Improvement Costs related or
allocable to such Tract of Property, provided that the sum of all
such additional amounts allocated by Lessee to pay Permitted
Transaction Expenses and Permitted Improvement Costs for all of the
Property does not exceed $500,000;
(ii) Until Lessee delivers to Lessor the Plans and
Specifications for any New Improvements to be constructed on any
Tract of Property and an Expiration Date Appraisal for such Tract of
Property pursuant to the following clause (iii), the aggregate
amount of all Advances made by Lessor for such Tract of Property
(including the Acquisition Advance and all Improvement/Expense
Advances for
6
<PAGE> 5
such Tract of Property) shall not exceed the sum of (A) the Closing
Date Appraisal for such Tract of Property plus (B) an additional
amount allocated by Lessee to pay Permitted Transaction Expenses and
Permitted Improvement Costs related or allocable to such Tract of
Property, provided that the sum of all such additional amounts
allocated by Lessee to pay Permitted Transaction Expenses and
Permitted Improvement Costs for all of the Property does not exceed
$2,000,000;
(iii) After Lessee delivers to Lessor the Plans and
Specifications for any New Improvements to be constructed on any
Tract of Property, together with a certificate of the architect for
such New Improvements certifying that such Plans and Specifications
are complete (which certification may indicate that such Plans and
Specifications are complete as to a building shell or interior
improvements only), and an Expiration Date Appraisal for such Tract
of Property dated as of a recent date, each in form and substance
satisfactory to Lessor and Agent, the aggregate amount of all
Advances made by Lessor for such Tract of Property (including the
Acquisition Advance and all Improvement/Expense Advances for such
Tract of Property) shall not exceed the most recent Expiration Date
Appraisal for such Tract of Property; and
(iv) The aggregate amount of all Advances made by Lessor
(including all Acquisition Advances and all Improvement/Expense
Advances for all Tracts of Property) shall not exceed One Hundred
Seventy-Five Million Dollars ($175,000,000) (the "Total
Commitment").
(c) Additional Expiration Date Appraisals. If, after Lessee
delivers to Lessor the Plans and Specifications for any New Improvements
to be constructed on any Tract of Property and an Expiration Date
Appraisal for such Tract of Property pursuant to clause (iii) of
Subparagraph 2.01(b), Lessee revises, amends, supplements or otherwise
modifies such Plans and Specifications for such Tract of Property
(including the delivery of Plans and Specifications for interior
improvements only) as permitted by the Construction Agency Agreement,
Lessee may deliver to Lessor a subsequent Expiration Date Appraisal for
such Tract of Property, dated as of a recent date prior to the date of
delivery; provided, however, that Lessee may deliver only two (2)
subsequent Expiration Date Appraisals for each Tract of Property. If a
subsequent Expiration Date Appraisal is in form and substance satisfactory
to Lessor and Agent, the amount limitation for such Tract of Property set
forth in clause (iii) of Subparagraph 2.01(b) thereafter shall be set
based upon such subsequent Expiration Date Appraisal.
(d) Tranches. Each Advance shall consist of a Tranche A Portion, a
Tranche B Portion and a Tranche C Portion. For accounting purposes, the
Tranche A Portion and Tranche B Portion of each Advance shall constitute
debt and the Tranche C Portion shall constitute equity. If, at the time
Lessee delivers any Expiration Date Appraisal for any Tract of Property
pursuant to Subparagraph 2.01(b) or Subparagraph 2.01(c), the maximum
amount of the Tranche A Proportionate Share permitted under FASB 13 is
changed due to any change in the appraised value of the applicable Land
and Improvements as set forth in such appraisal, the parties hereto shall
enter into an
5
<PAGE> 6
amendment to this Agreement amending Part A of Schedule I and the
definitions of "Tranche A Proportionate Share" and "Tranche B
Proportionate Share" to the extent necessary to satisfy the requirements
of FASB 13, provided that no such amendment shall (i) increase the
Proportionate Share of any Participant; (ii) change the ratio of any
Participant's Tranche A Percentage to the Tranche A Proportionate Share or
the ratio of any Participant's Tranche B Percentage to the Tranche B
Proportionate Share; (iii) change any Participant's Tranche C Percentage
or the Tranche C Proportionate Share; or (iv) decrease the Tranche A
Portion to less than eighty percent (80%).
2.02. Participation Agreement.
(a) Advances. Subject to the terms and conditions of this
Agreement, each Participant severally, unconditionally and irrevocably
agrees with Lessor to participate in each Advance made by Lessor in an
amount equal to such Participant's Proportionate Share of such Advance;
provided, however, that the aggregate amount of each Participant's
Proportionate Share of all Advances shall not exceed such Participant's
Commitment. Each Participant shall fund its Proportionate Share of each
Advance as provided in Subparagraph 2.05(a). Each Participant's
Proportionate Share of each Advance shall consist of such Participant's
Tranche A Portion, Tranche B Portion and Tranche C Portion of such
Advance.
(b) Payments. In consideration of each Participant's participation
in each Advance made by Lessor, such Participant shall participate in the
payments made by Lessee under this Agreement and the other Operative
Documents as provided in Paragraph 2.06.
(c) Other Rights of Participants and Agent.
(i) Until all amounts payable to Agent and Participants
under this Agreement and the other Operative Documents are paid in
full, Lessee shall deliver all notices for Lessor under this
Agreement and the other Operative Documents to Agent at the office
or facsimile number and during the hours specified in Paragraph
7.01. Agent shall promptly furnish to Lessor and each Participant
copies of each such notice and, in the case of each request for an
Advance, shall notify each Participant of the amount of such
Participant's Proportionate Share of the Advance requested thereby.
(ii) Lessor is not an agent for Participants or Agent and may
exercise or refrain from exercising its rights under this Agreement
and the other Operative Documents in its discretion; provided,
however that, until all amounts payable to Agent and Participants
under this Agreement and the other Operative Documents are paid in
full, (A) Lessor shall, subject to the limitations set forth in
Section VI, be required to act or to refrain from acting upon
instructions of the Required Participants as provided in Paragraph
6.03 and (B) Agent may exercise any or all of the rights and
remedies of Lessor, and shall be entitled to the other benefits
afforded Lessor, under this Agreement and the other Operative
Documents.
6
<PAGE> 7
(iii) Neither Agent nor any Participant shall have any right,
title or interest in the Property except for the Lien therein
granted to Agent, for the benefit of the Participants, under the
Lessor Deed of Trust, the Lessor Security Agreement and the
Assignment of Lease.
2.03. Advance Requests.
(a) Acquisition Requests. Lessee shall request Lessor to make each
Acquisition Advance under this Agreement by delivering to Agent an
irrevocable written request in the form of Exhibit E, appropriately
completed (an "Acquisition Request"), which specifies, among other things:
(i) The Tract(s) of Property to be purchased or Phase II
Lease Agreement(s) to be terminated;
(ii) The amount of such requested Acquisition Advance,
including the amount of the Acquisition Price(s) or of the Phase IIA
Termination Payment or Phase IIB Termination Payment (individually,
a "Phase II Termination Payment") and the Permitted Transaction
Expenses included in such Acquisition Advance;
(iii) The date selected by Lessor as the Acquisition Date for
such purchase or termination, which shall be, (A) in the case of the
Acquisition Advances to purchase the Tract 2 Property and the Tract
3 Property and to pay the Phase II Termination Payments (the
"Initial Acquisition Advances"), on the same date that is a Business
Day on or prior to December 31, 1997 and (B) in the case of the
Acquisition Advance to purchase the Tract 4 Property (the "Tract 4
Acquisition Advance"), on a date that is a Business Day on or prior
to June 1, 1998; and
(iv) The Portions into which such Advance(s) is (are) to be
divided and the Rental Period for each Portion.
(b) Improvement/Expense Advance Requests. Lessee shall request
Lessor to make each Improvement/Expense Advance by delivering to Lessor:
(i) An irrevocable written request in the form of Exhibit F,
appropriately completed (an "Improvement/Expense Advance Request"),
which specifies, among other things:
(A) The amount of such Advance, which shall be in the
amount of $1,000,000 or an integral multiple of $100,000 in
excess thereof;
(B) The date of such Advance, which shall be the first
Business Day of a month; and
(C) The Permitted Improvement Costs and Permitted
Transaction Expenses to be paid by such Advance and the
Tract(s) of Property for which payable; and
7
<PAGE> 8
(ii) If the proceeds of such Advance are to be used to
purchase Related Goods:
(A) A Supplement to Exhibit B to the Lease Agreement
in the form of Exhibit B(1) to the Lease Agreement (an
"Exhibit B Supplement"), which contains a detailed description
of such Related Goods; and
(B) Bills of sale for all such Related Goods showing
Lessor as the purchaser.
Lessee shall not request more than one (1) Improvement/Expense Advance in any
calendar month.
(c) Delivery of Advance Requests. Etc. Lessee shall deliver to
Lessor the Acquisition Requests for the Initial Acquisition Advances at
least one (1) Business Day before the Closing Date and the Acquisition
Request for the Tract 4 Acquisition Advance at least one (1) Business Day
before the Tract 4 Acquisition Date. Lessee shall deliver each
Improvement/Expense Advance Request to Lessor at least three (3) Business
Days before the date of such Advance. The Acquisition Requests and
Improvement/Expense Advance Requests (collectively, "Advance Requests")
shall be delivered by first-class mail or facsimile as required by
Subparagraph 2.02(c) and Paragraph 7.01; provided, however, that Lessee
shall promptly deliver to Lessor the original of any Advance Request
initially delivered by facsimile.
(d) Capitalization of Base Rent During Commitment Period. On each
Scheduled Rent Payment Date occurring under the Lease Agreement during the
Commitment Period, the portion of the Base Rent due on such Scheduled Rent
Payment Date and attributable to the New Improvements shall be capitalized
by automatically treating the amount of such Base Rent as an
Improvement/Expense Advance made on such Scheduled Rent Payment Date.
Agent shall notify Lessor and each Participant of the amount of the Base
Rent due on each such Scheduled Rent Payment Date and so treated as an
Improvement/Expense Advance.
2.04. Fees.
(a) Agent's Fees. Lessee shall pay to Agent, for its own account,
agent's fees in the amounts and at the times set forth in the Agent's Fee
Letter (the "Agent's Fees").
(b) Commitment Fees. Lessee shall pay to Agent, for the ratable
benefit of the Participants as provided in clause (ii) of Subparagraph
2.06(c), commitment fees (the "Commitment Fees") of fifteen hundredths of
one percent (0.15%) per annum on the daily average Unused Total Commitment
for the period beginning on the date of this Agreement and ending on the
Commitment Termination Date. Lessee shall pay the Commitment Fees in
arrears on the first Business Day in each January, April, July and October
(commencing January 1, 1998) and on the Commitment Termination Date (or if
the Total Commitment is cancelled on a date prior to such day, on such
prior date).
8
<PAGE> 9
(c) Commitment Extension Fee. If Lessor and the Participants
consent to any extension of the Commitment Termination Date requested by
Lessee pursuant to Subparagraph 2.09(a), Lessee shall pay to Agent, for
the ratable benefit of the Participants as provided in clause (iii) of
Subparagraph 2.06(c), an extension fee (the "Commitment Extension Fee") of
Ten Thousand Dollars ($10,000). Lessee shall pay the Commitment Extension
Fee on or prior to the Business Day immediately preceding the original
Commitment Termination Date.
2.05. Funding of Advances.
(a) Participant Funding and Disbursement. Subject to the terms and
conditions of this Agreement, each Participant shall, before 12:00 p.m. on
the date of each Advance, make available to Agent at its office specified
in Paragraph 7.01, in same day or immediately available funds, such
Participant's Proportionate Share of such Advance. After Agent's receipt
of such funds and upon fulfillment of the applicable conditions set forth
in Section III, Agent will promptly disburse such funds on behalf of
Lessor, in same day or immediately available funds, as follows:
(i) Agent shall disburse each Acquisition Advance to
purchase property on the Closing Date or the Tract 4 Acquisition
Date to an escrow or other account established for payment of the
applicable Acquisition Price and any related Permitted Transaction
Expenses pursuant to the applicable Acquisition Agreements or
otherwise as directed by Lessee in the Advance Request for such
Acquisition Advance to pay such amounts.
(ii) Agent shall disburse each Acquisition Advance to pay a
Phase II Termination Payment on the Closing Date to ABN AMRO, as
agent for the Phase IIA Participants or the Phase IIB Participants,
as the case may be, and any related Permitted Transaction Expenses
as directed by Lessee in the Advance Request for such Acquisition
Advance to pay such amounts.
(iii) Agent shall disburse each Improvement/Expense Advance as
directed by Lessee in the Advance Request for such
Improvement/Expense Advance.
(b) Participant Failure to Fund. Unless Agent shall have received
notice from a Participant prior to the date of any Advance that such
Participant will not make available to Agent such Participant's
Proportionate Share of such Advance, Agent may assume that such
Participant has made such portion available to Agent on the date of such
Advance in accordance with Subparagraph 2.05(a), and Agent may, in
reliance upon such assumption, disburse the full amount of such Advance on
such date; provided, however, that neither Agent nor Lessor shall have any
obligation to make an Advance requested hereunder in an amount which
exceeds the aggregate amount of funds actually received by Agent from the
Participants on account of their respective Proportionate Shares of such
Advance. If any Participant does not make the amount of its Proportionate
Share of any Advance available to Agent on or prior to the date such
Advance is made, such Participant shall pay to Agent, on demand, interest
which shall accrue on such amount
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until made available to Agent at rates equal to (i) the daily Federal
Funds Rate during the period from the date of such Advance through the
third Business Day thereafter and (ii) the Base Rate plus two percent
(2.0%) thereafter. A certificate of Agent submitted to any Participant
with respect to any amounts owing under this Subparagraph 2.05(b) shall be
conclusive absent manifest error. If any Participant's Proportionate Share
of any Advance is not in fact made available to Agent by such Participant
within three (3) Business Days after the date of such Advance, Lessee
shall pay to Agent, on demand, an amount equal to such Proportionate Share
together with interest thereon, for each day from the date such amount was
made available to Lessee until the date such amount is repaid to Agent, at
a per annum rate equal to the Base Rate.
(c) Participants' Obligations Several. The failure of any
Participant to fund its Proportionate Share of any Advance shall not
relieve any other Participant of its obligation hereunder to fund its
Proportionate Share of such Advance, and no Participant shall be
responsible for the failure of any other Participant to fund its
Proportionate Share of any Advance on the date of such Advance.
2.06. Sharing of Payments.
(a) Outstanding Lease Amount. Lessor shall share payments applied
to reduce the Outstanding Lease Amount as follows:
(i) Each payment of the Outstanding Lease Amount derived
from the purchase price paid by Lessee (or an Assignee Purchaser) to
purchase the Property pursuant to the Purchase Agreement shall be
shared by the Participants pro rata according to their respective
Outstanding Participation Amounts at the time of such payment.
(ii) Each payment of the Outstanding Lease Amount derived
from the Residual Value Guaranty Amount paid by Lessee pursuant to
the Purchase Agreement shall be shared first by the Tranche A
Participants pro rata according to their respective Outstanding
Tranche A Participation Amounts at the time of such payment; second,
if any amounts remain after all Outstanding Tranche A Participation
Amounts are paid in full, by the Tranche B Participants pro rata
according to their respective Outstanding Tranche B Participation
Amounts at the time of such payment; and third, if any amounts
remain after all Outstanding Tranche A Participation Amounts and all
Outstanding Tranche B Participation Amounts are paid in full, by the
Tranche C Participants pro rata according to their respective
Outstanding Tranche C Participation Amounts at the time of such
payment.
(iii) Each payment of the Outstanding Lease Amount derived
from:
(A) the purchase price paid by a Designated Purchaser
to purchase the Property pursuant to the Purchase Agreement;
(B) the Indemnity Amount paid by Lessee pursuant to
the Purchase Agreement; or
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(C) Casualty Proceeds or Condemnation Proceeds related
to any of the Property;
Shall be shared first by the Tranche B Participants pro rata
according to their respective Outstanding Tranche B Participation
Amounts at the time of such payment; second, if any amounts remain
after all Outstanding Tranche B Participation Amounts are paid in
full, by the Tranche A Participants pro rata according to their
respective Outstanding Tranche A Participation Amounts at the time
of such payment; and third, if any amounts remain after all
Outstanding Tranche B Participation Amounts and all Outstanding
Tranche A Participation Amounts are paid in full, by the Tranche C
Participants pro rata according to their respective Outstanding
Tranche C Participation Amounts at the time of such payment.
(iv) Each payment of the Outstanding Lease Amount derived
from the purchase price paid by any other Person to purchase the
Property (whether after the retention of such Property by Lessor
following the Expiration Date of the Lease Agreement, upon
foreclosure or otherwise) shall be shared first by the Tranche B
Participants pro rata according to their respective Outstanding
Tranche B Participation Amounts at the time of such payment; second,
if any amounts remain after all Outstanding Tranche B Participation
Amounts are paid in full, by the Tranche A Participants pro rata
according to their respective Outstanding Tranche A Participation
Amounts at the time of such payment; and third, if any amounts
remain after all Outstanding Tranche B Participation Amounts and all
Outstanding Tranche A Participation Amounts are paid in full, by the
Tranche C Participants pro rata according to their respective
Outstanding Tranche C Participation Amounts at the time of such
payment.
(b) Base Rent. Lessor shall share each payment applied to Base
Rent among the Participants which funded the Outstanding Lease Amount pro
rata according to (i) the respective Outstanding Participation Amounts so
funded by such Participants and (ii) the dates on which such Participants
so funded such amounts.
(c) Supplemental Rent. Lessor shall share each payment applied to
Supplemental Rent among the Lessor Parties as follows:
(i) Each payment applied to Agent's Fees shall be solely for
the account of Agent.
(ii) Each payment applied to Commitment Fees shall be shared
by the Participants pro rata according to (A) their respective
Proportionate Shares and (B) in the case of each Participant which
becomes a Participant hereunder after the date hereof, the date upon
which such Participant so became a Participant.
(iii) Each payment applied to the Commitment Extension Fee
shall be shared by the Participants pro rata according to their
respective Proportionate Shares on the date of such payment.
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(iv) Each payment applied to reimburse any Lessor Party for
any fees, costs and expenses incurred by such Lessor Party shall be
solely for the account of such Lessor Party.
(v) Each payment of interest (other than Base Rent) shall be
shared among the Lessor Parties owed the amount upon which such
interest accrues pro rata according to (A) the respective amounts so
owed such Lessor Parties and (B) the dates on which such amounts
became owing to such Lessor Parties.
(vi) All other payments under this Agreement and the other
Operative Documents shall be for the benefit of the Person or
Persons specified.
(d) Disproportionate Payments, Etc. If any Lessor Party shall
obtain any payment (whether voluntary, involuntary, through the exercise
of any right of setoff, or otherwise) on account of amounts owed to it in
excess of its ratable share of payments on account of such amounts
obtained by all Lessor Parties entitled to such payments, such Lessor
Party shall forthwith purchase from the other Lessor Parties such
participations in the payments to be made under the Operative Documents as
shall be necessary to cause such purchasing Lessor Party to share the
excess payment ratably with each of them; provided, however, that if all
or any portion of such excess payment is thereafter recovered from such
purchasing Lessor Party, such purchase shall be rescinded and each other
Lessor Party shall repay to the purchasing Lessor Party the purchase price
to the extent of such recovery together with an amount equal to such other
Lessor Party's ratable share (according to the proportion of (i) the
amount of such other Lessor Party's required repayment to (ii) the total
amount so recovered from the purchasing Lessor Party) of any interest or
other amount paid or payable by the purchasing Lessor Party in respect of
the total amount so recovered. Lessee agrees that any Lessor Party so
purchasing a participation from another Lessor Party pursuant to this
Subparagraph 2.06(d) may, to the fullest extent permitted by law, exercise
all its rights of payment (including the right of setoff) with respect to
such participation as fully as if such Lessor Party were the direct
creditor of Lessee in the amount of such participation.
2.07. Other Payment Terms.
(a) Place and Manner of Payments by Lessee. Lessee shall make all
payments due to any Lessor Party under this Agreement and the other
Operative Documents by payments to Agent, for the account of such Person,
at Agent's office, located at the address specified in Paragraph 7.01,
with each payment due to a Participant to be for the account of such
Participant's Applicable Participating Office. Lessee shall make all
payments in lawful money of the United States and in same day or
immediately available funds not later than 11:00 a.m. on the date due.
Agent shall promptly disburse to the appropriate Person each such payment
received by Agent for such Person.
(b) Date. Whenever any payment due under this Agreement or any
other Operative Document shall fall due on a day other than a Business
Day, such payment shall be made on the next succeeding Business Day, and
such extension of time shall be included in the computation of Rent,
interest or fees, as the case may be.
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(c) Late Payments. If any amounts required to be paid by Lessee
under this Agreement or any other Operative Document (including Rent,
interest, fees or other amounts) remain unpaid after such amounts are due,
Lessee shall pay interest on the aggregate, outstanding balance of such
amounts from the date due until those amounts are paid in full at a per
annum rate equal to the Base Rate plus two percent (2.0%), such rate to
change from time to time as the Base Rate shall change.
(d) Application of Payments. All payments under this Agreement and
the other Operative Documents shall be applied first to unpaid fees, costs
and expenses and other Supplemental Rent then due and payable under this
Agreement or any other Operative Document, second to the accrued Base Rent
then due and payable under this Agreement or any other Operative Document
and finally to reduce the Outstanding Lease Amount.
(e) Failure to Pay Agent. Unless Agent shall have received notice
from Lessee at least one (1) Business Day prior to the date on which any
payment is due to Lessor or the Participants under this Agreement or the
other Operative Documents that Lessee will not make such payment in full,
Agent may assume that Lessee has made such payment in full to Agent on
such date and Agent may, in reliance upon such assumption, cause to be
distributed to the appropriate Persons on such due date an amount equal to
the amount then due such Persons. If and to the extent Lessee shall not
have so made such payment in full to Agent, each such Person shall repay
to Agent forthwith on demand such amount distributed to such Person
together with interest thereon, for each day from the date such amount is
distributed to such Person until the date such Person repays such amount
to Agent, at (i) the Federal Funds Rate for the first three (3) days and
(ii) the Base Rate plus two percent (2.0%) thereafter, such rate to change
from time to time as the Base Rate shall change. A certificate of Agent
submitted to any Person with respect to any amounts owing by such Person
under this Subparagraph 2.07(e) shall be conclusive absent manifest error.
2.08. Commitment Reductions.
(a) Reduction or Cancellation of Commitments. Lessee may, at any
time prior to the Commitment Termination Date, upon five (5) Business Days
written notice to Lessor, permanently reduce the Total Commitment by the
amount of Five Million Dollars ($5,000,000) or an integral multiple of One
Million Dollars ($1,000,000) in excess thereof or cancel the Total
Commitment in its entirety.
(b) Effect of Commitment Reductions. From the effective date of
any reduction of the Total Commitment, the Commitment Fees shall be
computed on the basis of the Total Commitment as so reduced. Once reduced
or cancelled, the Total Commitment may not be increased or reinstated
without the prior written consent of Lessor and all Participants. Any
reduction of the Total Commitment pursuant to this Paragraph 2.08 shall be
applied ratably to reduce each Participant's Commitment pro rata in
accordance with its Proportionate Share.
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2.09. Extensions.
(a) Commitment Extension. Lessee may request Lessor to extend the
Commitment Termination Date for an additional period of six (6) months by
appropriately completing, executing and delivering to Agent a written
request in the form of Exhibit G(1) (a "Commitment Extension Request").
Lessee shall deliver the Commitment Extension Request to Agent not more
than three (3) months and not less than two (2) months before the original
Commitment Termination Date. Agent shall promptly deliver to Lessor and
each Participant three (3) copies of each Commitment Extension Request
received by Agent. If Lessor or a Participant, in its sole and absolute
discretion, consents to the Commitment Extension Request, such Person
shall evidence such consent by executing and returning two (2) copies of
the Commitment Extension Request to Agent not later than the last Business
Day which is not less than fifteen (15) Business Days prior to the
original Commitment Termination Date. Any failure by Lessor or any
Participant so to execute and return a Commitment Extension Request shall
be deemed a denial thereof. If Lessee shall deliver a Commitment Extension
Request to Lessor pursuant to the first sentence of this Subparagraph
2.09(a), then not later than ten (10) Business Days prior to the original
Commitment Termination Date, Agent shall notify Lessee, Lessor and the
Participants in writing whether (i) Agent has received a copy of the
Commitment Extension Request executed by Lessor and each Participant, in
which case the definition of "Commitment Termination Date" set forth in
Subparagraph 2.01(a) shall be deemed extended to the date which is six (6)
months after the original Commitment Termination Date (subject to receipt
by Agent of the Commitment Extension Fee), or (ii) Agent has not received
a copy of the Commitment Extension Request executed by Lessor and each
Participant, in which case such Commitment Extension Request shall be
deemed denied. Lessee acknowledges that neither Lessor nor any Participant
has promised (either expressly or implicitly), or has any obligation or
commitment, to extend or consent to the extension of the Commitment
Termination Date at any time.
(b) Lease Extension. Lessee may request Lessor to extend the
original Scheduled Expiration Date of the Lease Agreement for an
additional period of two (2) years by appropriately completing, executing
and delivering to Agent a written request in the form of Exhibit G(2),
together with an attachment thereto setting forth the terms upon which
Lessee would propose for the requested extension (a "Lease Extension
Request"). Lessee shall deliver the Lease Extension Request to Agent not
more than three (3) months and not less than two (2) months before the
first anniversary of the Closing Date. Agent shall promptly deliver to
Lessor and each Participant three (3) copies of the Lease Extension
Request received by Agent. If Lessor or a Participant, in its sole and
absolute discretion, consents to a Lease Extension Request, such Person
shall evidence such consent by executing and returning two (2) copies of
such Lease Extension Request to Agent not later than the last Business Day
which is not less than one (1) month prior to the first anniversary of the
Closing Date. Any failure by Lessor or any Participant so to execute and
return a Lease Extension Request shall be deemed a denial thereof. If
Lessee shall deliver a Lease Extension Request to Lessor pursuant to the
first sentence of this Subparagraph 2.09(b), then not later than the last
Business Day which is not less than fifteen (15) Business Days prior to
the first anniversary of the Closing Date, Agent shall
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<PAGE> 15
notify Lessee, Lessor and the Participants in writing whether (i) Agent
has received a copy of the Lease Extension Request executed by Lessor and
each Participant, in which case the definition of "Scheduled Expiration
Date" set forth in Subparagraph 2.02(a) of the Lease Agreement shall be
deemed extended to the date which is two (2) years after the original
Scheduled Expiration Date (subject to the receipt by Agent of any amounts
payable by Lessee in connection with such extension), or (ii) Agent has
not received a copy of the Lease Extension Request executed by Lessor and
each Participant, in which case such Lease Extension Request shall be
deemed denied. Lessee acknowledges that neither Lessor nor any Participant
has promised (either expressly or implicitly), or has any obligation or
commitment, to extend or consent to the extension of the Scheduled
Expiration Date at any time.
2.10. Nature of the Transactions. Lessee and the Lessor Parties intend
that the transactions evidenced by this Agreement and the other Operative
Documents constitute operating leases pursuant to FASB 13 for accounting
purposes and loans secured by the Property for all other purposes, including
federal, state and local income tax purposes and commercial, real estate and
bankruptcy law purposes. To the extent that this Agreement and the other
Operative Documents reflect the lease form alone, they do so for convenience
only. Lessee and the Lessor Parties intend that the Operative Documents have the
dual form referred to in the first sentence of this paragraph, notwithstanding
the use of the lease form alone.
(a) Tax Treatment. For purposes of all income, franchise and other
taxes imposed upon or measured by income, Lessee and Lessor Parties intend
that the transactions evidenced by the Operative Documents shall be
treated as loans by the Participants (through Lessor) to Lessee secured by
the Property, with Lessee as owner of the Property. Lessee and the Lessor
Parties may only take deductions, credits, allowances and other reporting
positions on their respective returns, reports and statements which are
consistent with such treatment, unless required to do otherwise by an
appropriate taxing authority after the completion of judicial proceedings
at which Lessee has had a full and complete opportunity to present its
position or after a clearly applicable change in applicable Governmental
Rules; provided, however, that if an appropriate taxing authority or a
clearly applicable change in applicable Governmental Rules requires any
Lessor Party to take such an inconsistent position, such Lessor Party
shall promptly notify Lessee.
(b) Other Legal Treatment. For purposes of commercial law, real
property law, bankruptcy law and other applicable laws, Lessee and Lessor
Parties also intend that the transactions evidenced by the Operative
Documents shall be treated as loans by the Participants (through Lessor)
to Lessee secured by the Property, with Lessee as owner of the Property.
Consistent with such treatment, Lessee and the Lessor Parties intend that,
among other things for such purposes, (i) the Advances be treated as loans
to Lessee by the Participants (through Lessor); (ii) the Advances be
secured by the Property and the Lessor Parties have the rights and
remedies of secured lenders; (iii) Base Rent be treated as interest on the
Advances; (iv) Lessee be required to pay on the Expiration Date only the
Residual Value Guaranty Amount, the Indemnity Amount and the other amounts
required by clause (ii) of Subparagraph 4.06(a) of the Purchase Agreement
(or clause (iii) of Subparagraph 4.06(a) if Lessor is retaining the
Property) if Lessee exercises the
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Marketing Option in accordance with the Purchase Agreement; and (v) Lessee
be required to pay on the Expiration Date the Outstanding Lease Amount and
all other amounts outstanding under this Agreement and the other Operative
Documents (including amounts required by clause (i) of Subparagraph
4.06(a) of the Purchase Agreement) if the Lease Agreement is terminated
prior to its Scheduled Expiration Date after an Event of Default occurs
under the Lease Agreement or if Lessee fails to or is otherwise not
entitled to exercise the Marketing Option in accordance with the Purchase
Agreement.
(c) No Reliance by Lessee. Lessee acknowledges and agrees that no
Lessor Party has made any representations or warranties to Lessee
concerning the tax, accounting or legal characteristics of the Operative
Documents and that Lessee has obtained and relied upon such tax,
accounting and legal advice concerning the Operative Documents as it deems
appropriate.
2.11. Security.
(a) Lessee Obligations.
(i) To the extent that the transaction evidenced by the
Lease Agreement, Purchase Agreement and other Operative Documents is
treated as a loan by the Participants (through Lessor) to Lessee
secured by the Property, with Lessee as owner of the Property
pursuant to Paragraph 2.10, the Lessee Obligations shall be secured
by the Real Property Collateral and the Personal Property Collateral
(collectively, the "Property Collateral") as provided in
Subparagraphs 2.07(a) and 2.07(b) of the Lease Agreement and in an
Assignment of Construction Agreements in the form of Exhibit H, duly
executed by Lessee (the "Assignment of Construction Agreements"),
and the other Lessee Security Documents.
(ii) In addition to the Property Collateral, the Lessee
Obligations shall be secured, as provided in the Purchase Agreement,
by a Cash Collateral Agreement in a form acceptable to Lessor and
Agent, duly executed by Lessee (the "Cash Collateral Agreement"),
and Cash Collateral delivered to Agent or Participants pursuant to
the Cash Collateral Agreement if Lessee elects to exercise the
Marketing Option after Lessor notifies Lessee that Lessor is
terminating the Lease Agreement on a Termination Date that is prior
to the Scheduled Expiration Date and the only basis for such early
termination is the occurrence of a Non-Marketing Option Event of
Default.
(iii) Lessee shall deliver to Lessor and Agent such additional
mortgages, deeds of trust, security agreements, pledge agreements,
lessor consents and estoppels (containing appropriate mortgagee and
lender protection language) and other instruments, agreements,
certificates, opinions and documents (including Uniform Commercial
Code financing statements and fixture filings and landlord waivers)
as Lessor or Agent may reasonably request to (A) grant, perfect,
maintain, protect and evidence security interests in favor of
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<PAGE> 17
Lessor or Agent in the Property Collateral and Cash Collateral prior
to the Liens or other interests of any Person, except in the case of
the Property Collateral for Permitted Property Liens; and (B)
otherwise establish, maintain, protect and evidence the rights
provided to Lessor and Agent in the Property Collateral and Cash
Collateral. Lessee shall fully cooperate with Lessor and Agent and
perform all additional acts reasonably requested by Lessor or Agent
to effect the purposes of this Subparagraph 2.11(a).
(b) Lessor Obligations.
(i) The Lessor Obligations shall be secured by the
following:
(A) An Assignment of Lease Agreement and Purchase
Agreement in the form of Exhibit I, duly executed by Lessor
(the "Assignment of Lease");
(B) A Construction Deed of Trust with Assignment of
Rents, Security Agreement and Fixture Filing in the form of
Exhibit J, duly executed by Lessor (the "Lessor Deed of
Trust"); and
(C) A Security Agreement in the form of Exhibit K,
duly executed by Lessor (the "Lessor Security Agreement").
(ii) Lessor shall deliver to Agent such additional mortgages,
deeds of trust, security agreements, pledge agreements, lessor
consents and estoppels (containing appropriate mortgagee and lender
protection language) and other instruments, agreements,
certificates, opinions and documents (including Uniform Commercial
Code financing statements and fixture filings and landlord waivers)
as Agent may reasonably request to (A) grant, perfect, maintain,
protect and evidence security interests in favor of Agent in
Lessor's rights in the Property Collateral and Cash Collateral; and
(B) otherwise establish, maintain, protect and evidence the rights
provided to Agent in the Property Collateral and Cash Collateral.
Lessor shall fully cooperate with Agent and perform all additional
acts reasonably requested by Agent to effect the purposes of this
Subparagraph 2.11(b).
(iii) Lessee hereby consents to the Assignment of Lease, the
Lessor Deed of Trust and the Lessor Security Agreement; the Liens
granted to Agent therein; and all other Liens granted to Agent in
any of the Operative Documents and the Property to secure the Lessor
Obligations.
2.12. Change of Circumstances.
(a) Inability to Determine Rates. If, on or before the first day
of any Rental Period for any Portion, (i) any Participant shall advise
Agent that the LIBOR Rental Rate for such Rental Period and Portion cannot
be adequately and reasonably determined due to the unavailability of funds
in or other circumstances affecting the London interbank market or (ii)
Majority Participants shall advise Agent that the LIBOR Rental Rate for
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<PAGE> 18
such Rental Period and Portion does not adequately and fairly reflect the
cost to such Participants of funding their shares of such Portion, Agent
shall immediately give notice of such condition to Lessee, Lessor and the
other Participants. After the giving of any such notice (and until Agent
shall otherwise notify Lessee and Lessor that the circumstances giving
rise to such condition no longer exist), the LIBOR Rental Rate shall be
unavailable and the Rental Rate for each new Rental Period shall be the
Alternate Rental Rate.
(b) Illegality. If, after the date of this Agreement, the adoption
of any Governmental Rule, any change in any Governmental Rule or the
application or requirements thereof (whether such change occurs in
accordance with the terms of such Governmental Rule as enacted, as a
result of amendment or otherwise), any change in the interpretation or
administration of any Governmental Rule by any Governmental Authority, or
compliance by Lessor or any Participant with any request or directive
(whether or not having the force of law) of any Governmental Authority,
except for any such adoption or change publicly announced prior to the
date of this Agreement (a "Change of Law") shall make it unlawful or
impossible for any Participant to fund or maintain its portion of the
Outstanding Lease Amount at the LIBOR Rental Rate, such Participant shall
immediately notify Agent and Agent shall immediately notify Lessee, Lessor
and the other Participants of such Change of Law. After the giving of any
such notice (and until Agent shall otherwise notify Lessee and Lessor that
such Change of Law is no longer in effect), the LIBOR Rental Rate shall be
unavailable and the Rental Rate for each Rental Period shall be the
Alternate Rental Rate.
(c) Increased Costs. If, after the date of this Agreement, any
Change of Law:
(i) Shall subject Lessor or any Participant to any tax, duty
or other charge with respect to the Outstanding Lease Amount, or
shall change the basis of taxation of Base Rent payments by Lessee
to Lessor or any Participant under this Agreement or any other
Operative Document (except for changes in the rate of taxation on
the overall net income of Lessor or any Participant imposed by its
jurisdiction of incorporation, the jurisdiction in which its
principal executive office is located or, in the case of any
Participant, the jurisdiction in which its Applicable Participating
Office is located); or
(ii) Shall impose, modify or hold applicable any reserve
(excluding any Reserve Requirement or other reserve to the extent
included in the calculation of the LIBOR Rental Rate), special
deposit or similar requirement against assets held by, deposits or
other liabilities in or for the account of, advances or loans by, or
any other acquisition of funds by Lessor or any Participant for its
portion of the Outstanding Lease Amount; or
(iii) Shall impose on Lessor or any Participant any other
condition related to the Outstanding Lease Amount, Base Rent or
Lessor's or such Participant's commitments hereunder;
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And the effect of any of the foregoing is to increase the cost to Lessor
or such Participant of funding or maintaining its portion of the
Outstanding Lease Amount or commitments or to reduce any amount receivable
by Lessor or such Participant hereunder; then Lessee shall from time to
time within fifteen (15) Business Days after demand by Lessor or such
Participant, pay to Lessor or such Participant additional amounts
sufficient to reimburse Lessor or such Participant for such increased
costs or to compensate Lessor or such Participant for such reduced
amounts; provided, however, that Lessee shall have no obligation to make
any payment to any demanding party under this Subparagraph 2.12(c) on
account of any such increased costs or reduced amounts relating to any
Rental Period that ended more than six (6) months prior to such demanding
party's first demand for payment (or, if any increased costs or reduced
amounts do not relate to a particular Rental Period,. on account of any
such increased costs or reduced amounts about which the demanding party
first knew or should have known more than six (6) months prior to its
first demand for payment). A certificate setting forth in reasonable
detail the amount of such increased costs or reduced amounts, submitted by
Lessor or such Participant to Lessee shall, in the absence of manifest
error, be conclusive and binding on Lessee for all purposes. The
obligations of Lessee under this Subparagraph 2.12(c) shall survive the
payment and performance of the Lessee Obligations and the termination of
this Agreement.
(d) Capital Requirements. If, after the date of this Agreement,
Lessor or any Participant determines that (i) any Change of Law affects
the amount of capital required to be maintained by such Person or any
other Person controlling such Person (a "Capital Adequacy Requirement")
and (ii) the amount of capital maintained by such Person or such other
Person which is attributable to or based upon the Advances, the
commitments or this Agreement must be increased as a result of such
Capital Adequacy Requirement (taking into account such Person's or such
other Person's policies with respect to capital adequacy), Lessee shall
pay to such Person or such other Person, within fifteen (15) Business Days
after demand of such Person, such amounts as such Person or such other
Person reasonably shall determine are necessary to compensate such Person
or such other Person for the increased costs to such Person or such other
Person of such increased capital; provided, however, that Lessee shall
have no obligation to make any payment to any demanding party under this
Subparagraph 2.12(d) on account of any such increased costs relating to
any Rental Period that ended more than six (6) months prior to such
demanding party's first demand for payment (or, if any increased costs or
reduced amounts do not relate to a particular Rental Period,. on account
of any such increased costs or reduced amounts about which the demanding
party first knew or should have known more than six (6) months prior to
its first demand for payment). A certificate of Lessor or any Participant
setting forth in reasonable detail the computation of any such increased
costs, delivered by such Person to Lessee shall, in the absence of
manifest error, be conclusive and binding on Lessee for all purposes. The
obligations of Lessee under this Subparagraph 2.12(d) shall survive the
payment and performance of the Lessee Obligations and the termination of
this Agreement.
(e) Mitigation. If Lessor or any Participant becomes aware of (i)
any Change of Law which will make it unlawful or impossible for such
Person to fund or maintain its portion of the Outstanding Lease Amount at
the LIBOR Rental Rate or (ii) any Change of
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Law or other event or condition which will obligate Lessee to pay any
amount pursuant to Subparagraph 2.12(c) or Subparagraph 2.12(d), such
Person shall notify Lessee and Agent thereof as promptly as practical. If
any Person has given notice of any such Change of Law or other event or
condition and thereafter becomes aware that such Change of Law or other
event or condition has ceased to exist, such Person shall notify Lessee
and Agent thereof as promptly as practical. Each Person affected by any
Change of Law which makes it unlawful or impossible for such Person to
fund or maintain its portion of the Outstanding Lease Amount at the LIBOR
Rental Rate or to which Lessee is obligated to pay any amount pursuant to
Subparagraph 2.12(c) or Subparagraph 2.12(d) shall use reasonable
commercial efforts (including changing the jurisdiction of its Applicable
Participating Office) to avoid the effect of such Change of Law or to
avoid or materially reduce any amounts which Lessee is obligated to pay
pursuant to Subparagraph 2.12(c) or Subparagraph 2.12(d) if, in the
reasonable opinion of such Person, such efforts would not be
disadvantageous to such Person or contrary to such Person's normal banking
practices.
2.13. Taxes on Payments.
(a) Payments Free of Taxes. All payments made by Lessee under this
Agreement and the other Operative Documents shall be made free and clear
of, and without deduction or withholding for or on account of, any present
or future Indemnified Taxes, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority. If any Indemnified
Taxes are required to be withheld from any amounts payable to any Lessor
Party hereunder or under the other Operative Documents, the amounts so
payable to such Lessor Party shall be increased to the extent necessary to
yield to such Lessor Party (after payment of all Indemnified Taxes) the
Base Rent or any such other amounts payable hereunder at the rates or in
the amounts specified in this Agreement and the other Operative Documents.
Whenever any Indemnified Taxes are payable by Lessee, as promptly as
possible thereafter, Lessee shall send to Agent for its own account or for
the account of Lessor or such Participant, as the case may be, a certified
copy of an original official receipt received by Lessee showing payment
thereof. If Lessee fails to pay any Indemnified Taxes when due to the
appropriate taxing authority or fails to remit to Agent the required
receipts or other required documentary evidence, Lessee shall indemnify
the Lessor Parties for any incremental taxes, interest or penalties that
may become payable by the Lessor Parties as a result of any such failure.
The obligations of Lessee under this Subparagraph 2.13(a) shall survive
the payment and performance of the Lessee Obligations and the termination
of this Agreement.
(b) Withholding Exemption Certificates. On or prior to the Closing
Date or, if such date does not occur within thirty (30) days after the
date of this Agreement, by the end of such 30- day period, Lessor, if it
is not organized under the laws of the United States of America or a state
thereof, and each Participant which is not incorporated under the laws of
the United States of America or a state thereof, shall deliver to Lessee
and Agent two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 (or successor applicable form), as the case may
be, certifying in each case that Lessor or such Participant, as the case
may be, is entitled to receive payments under this Agreement and the other
Operative Documents without deduction or withholding of any
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United States federal income taxes. Each Person which delivers to Lessee
and Agent a Form 1001 or 4224 pursuant to the immediately preceding
sentence further undertakes to deliver to Lessee and Agent two further
copies of Form 1001 or 4224 (or successor applicable forms), or other
manner of certification or procedure, as the case may be, on or before the
date that any such form expires or becomes obsolete or after the
occurrence of any event requiring a change in the most recent form
previously delivered by it to Lessee and Agent, and such extensions or
renewals thereof as may reasonably be requested by Lessee or Agent,
certifying in the case of a Form 1001 or 4224 that such Person is entitled
to receive payments under this Agreement and the other Operative Documents
without deduction or withholding of any United States federal income
taxes, unless in any such cases an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on
which any such delivery would otherwise be required which renders all such
forms inapplicable or which would prevent Lessor or a Participant from
duly completing and delivering any such form with respect to it and Lessor
or such Participant advises Lessee and Agent that it is not capable of
receiving payments without any deduction or withholding of United States
federal income tax.
(c) Mitigation. If any Lessor Party claims any additional amounts
to be payable to it pursuant to this Paragraph 2.13, such Lessor Party
shall use reasonable commercial efforts to file any certificate or
document requested in writing by Lessee (including copies of Internal
Revenue Service Form 1001 (or successor forms) reflecting a reduced rate
of withholding) or to change the jurisdiction of its Applicable
Participating Office if the making of such a filing or such change in the
jurisdiction of its Applicable Participating Office would avoid the need
for or materially reduce the amount of any such additional amounts which
may thereafter accrue and if, in the reasonable opinion of a Participant,
in the case of a change in the jurisdiction of its Applicable
Participating Office, such change would not be disadvantageous to such
Person or contrary to such Person's normal banking practices.
(d) Tax Returns. Nothing contained in this Paragraph 2.13 shall
require any Lessor Party to make available any of its tax returns (or any
other information relating to its taxes which it deems to be
confidential).
(e) Tax Savings. In the event an Indemnitee receives a refund (or
similar tax savings) in respect of any Indemnified Tax paid or reimbursed
by Lessee, such Indemnitee shall, within thirty (30) days thereafter,
remit the amount of such refund (or tax savings) to Lessee, provided that
the amount so remitted shall not exceed the lesser of: (i) the amount
received by such Indemnitee as a refund (or tax savings) net of all
reasonable costs and expenses incurred by such Indemnitee in connection
with obtaining and paying such amount; and (ii) the remainder of (A) the
amount of all prior payments by Lessee to such Indemnitee with respect to
Indemnified Taxes, plus any refunded interest, less (B) the amount of all
prior payments by such Indemnitee to Lessee under this Subparagraph
2.13(e); provided that (1) any disallowance or other loss of such refund
(or tax savings) shall be treated as an "Indemnified Tax" without regard
to all exclusions and (2) no such remittance shall be made if any Default
or Event of Default has occurred and is continuing.
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2.14. Funding Loss Indemnification. If Lessee shall (a) pay all or any
Portion of the Outstanding Lease Amount on any day other than the last day of a
Rental Period therefor (whether an optional payment, a mandatory payment or
otherwise) or (b) cancel or otherwise fail to consummate any Advance Request
which has been delivered to Agent (whether as a result of the failure to satisfy
any applicable conditions or otherwise), Lessee shall, upon demand by Lessor or
any Participant, reimburse such Person for and hold such Person harmless from
all costs and losses incurred by such Person as a result of such payment,
cancellation or failure. Lessee understands that such costs and losses may
include, without limitation, losses incurred by Lessor or a Participant as a
result of funding and other contracts entered into by such Person to fund its
portion of the Outstanding Lease Amount. Each Person demanding payment under
this Paragraph 2.14 shall deliver to Lessee, with a copy to Agent, a certificate
setting forth the amount of costs and losses for which demand is made, which
certificate shall set forth in reasonable detail the calculation of the amount
demanded. Such a certificate so delivered to Lessee shall constitute prima facie
evidence of such costs and losses. The obligations of Lessee under this
Paragraph 2.14 shall survive the payment and performance of the Lessee
Obligations and the termination of this Agreement.
2.15. Replacement of Participants. If any Participant shall (a) become a
Defaulting Participant more than two (2) times in a period of twelve (12)
consecutive months, (b) continue as a Defaulting Participant for more than five
(5) Business Days at any time, (c) deliver, pursuant to Subparagraph 2.12(a), a
notice that any LIBOR Rental Rate cannot be adequately and reasonably determined
or that any LIBOR Rental Rate does not adequately and fairly reflect the cost to
such Participant of funding its shares of any Portion and such a notice is not
delivered by all Participants, (d) deliver, pursuant to Subparagraph 2.12(b), a
notice of a Change of Law which does not affect all Participants, or (e) demand
any payment under Subparagraph 2.12(c), 2.12(d) or 2.13(a) for a reason which is
not applicable to all Participants, then Agent may (or upon the written request
of Lessee if no Event of Default has occurred and is continuing, shall) replace
such Participant (the "affected Participant"), or cause such affected
Participant to be replaced, with another financial institution (the "replacement
Participant") satisfying the requirements of an Eligible Assignee under
Subparagraph 7.05(b), by having the affected Participant sell and assign all of
its rights and obligations under this Agreement and the other Operative
Documents to the replacement Participant pursuant to Subparagraph 7.05(b);
provided, however, that if Lessee seeks to exercise such right, it must do so
within sixty (60) days after it first receives notice of the event, condition or
demand giving rise to such right, and no Lessor Party shall have any obligation
to identify or locate a replacement Participant for Lessee. Upon receipt by any
affected Participant of a written notice from Agent stating that Agent is
exercising the replacement right set forth in this Paragraph 2.15, such affected
Participant shall sell and assign all of its rights and obligations under this
Agreement and the other Operative Documents to the replacement Participant
pursuant to an Assignment Agreement and Subparagraph 7.05(b) for a purchase
price equal to the sum of its portion of the Outstanding Lease Amount, the
accrued and unpaid portion of the Base Rent relating to such portion, all
amounts payable under Paragraph 2.14, and its ratable share of all fees to which
it is entitled.
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SECTION 3. CONDITIONS PRECEDENT.
3.01. Initial Acquisition Advances. The obligation of Lessor to make the
Initial Acquisition Advances (and the obligations of the Participants to fund
their respective Proportionate Shares of the Initial Acquisition Advances) is
(are) subject to receipt by Agent, on or prior to the Closing Date, of each item
listed in Schedule 3.01, each in form and substance satisfactory to Lessor,
Agent and each Participant, and with sufficient copies for, Lessor, Agent and
each Participant.
3.02. Tract 4 Acquisition Advance. The obligation of Lessor to make the
Tract 4 Acquisition Advance (and the obligations of the Participants to fund
their respective Proportionate Shares of the Tract 4 Acquisition Advance) is
(are) subject to receipt by Agent, on or prior to the Tract 4 Acquisition Date,
of each item listed in Schedule 3.02, each in form and substance satisfactory to
Lessor, Agent and each Participant, and with sufficient copies for, Lessor,
Agent and each Participant.
3.03. Improvement/Expense Advances. The obligation of Lessor to make each
Improvement/Expense Advance for each Tract of Property (including the first
Improvement/Expense Advance for such Tract of Property) (and the obligations of
the Participants to fund their respective Proportionate Shares of such Advance)
is (are) subject to (i) satisfaction of the conditions set forth in Paragraph
3.01, (ii) receipt by Agent pursuant to Paragraph 2.03 of the Advance Request
for such Advance, appropriately completed and duly executed by Lessee, and (iii)
receipt by Agent of date-down endorsements to Agent's and Lessor's title
insurance policies covering such Tract or binders acceptable to Agent and
Lessor.
3.04. Other Conditions Precedent. The occurrence of each Credit Event
(including the making of each Advance by Lessor and the funding of each Advance
by the Participants) is subject to the further conditions that, on the date such
Credit Event is to occur and after giving effect to such Credit Event, the
following shall be true and correct:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 and in the other Operative Documents are true and correct
in all material respects as if made on such date (except for
representations and warranties expressly made as of a specified date,
which shall be true as of such date);
(b) No Default has occurred and is continuing or will result from
such Credit Event; and
(c) All of the Operative Documents are in full force and effect.
The submission by Lessee to Lessor and Agent of each Advance Request and a
Notice of Marketing Option Exercise shall be deemed to be a representation and
warranty by Lessee that each of the statements set forth above in this Paragraph
3.04 is true and correct as of the date of such request and notice.
3.05. Covenant to Deliver. Lessee agrees (not as a condition but as a
covenant) to deliver to Lessor and Agent each item required to be delivered to
Lessor and Agent as a condition to each Advance if such Advance is made. Lessee
expressly agrees that the making of
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any Advance prior to the receipt by Lessor and Agent of any such item shall not
constitute a waiver by Lessor, Agent or any Participant of Lessee's obligation
to deliver such item, unless expressly waived in writing.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
4.01. Lessee's Representations and Warranties. In order to induce the
Lessor Parties to enter into this Agreement and the other Operative Documents to
which they are parties, Lessee hereby represents and warranties to the Lessor
Parties as follows:
(a) Due Incorporation, Qualification, etc. Each of Lessee and
Lessee's Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of its state of
incorporation; (ii) has the power and authority to own, lease and operate
its properties and carry on its business as now conducted; and (iii) is
duly qualified, licensed to do business and in good standing as a foreign
corporation in each jurisdiction where the failure to be so qualified or
licensed is reasonably likely to have a Material Adverse Effect.
(b) Authority. The execution, delivery and performance by Lessee
of each Operative Document executed, or to be executed, by Lessee and the
consummation of the transactions contemplated thereby (i) are within the
power of Lessee and (ii) have been duly authorized by all necessary
actions on the part of Lessee.
(c) Enforceability. Each Operative Document executed, or to be
executed, by Lessee has been, or will be, duly executed and delivered by
Lessee and constitutes, or will constitute, a legal, valid and binding
obligation of Lessee, enforceable against Lessee in accordance with its
terms, except as limited by bankruptcy, insolvency or other laws of
general application relating to or affecting the enforcement of creditors'
rights generally and general principles of equity.
(d) Non-Contravention. The execution and delivery by Lessee of the
Operative Documents executed by Lessee and the performance and
consummation of the transactions contemplated thereby do not (i) violate
any Requirement of Law applicable to Lessee; (ii) violate any provision
of, or result in the breach or the acceleration of, or entitle any other
Person to accelerate (whether after the giving of notice or lapse of time
or both), any Contractual Obligation of Lessee, where such violation,
breach or acceleration is reasonable likely to have a Material Adverse
Effect; or (iii) result in the creation or imposition of any Lien (or the
obligation to create or impose any Lien) upon any property, asset or
revenue of Lessee (except such Liens as may be created in favor of Lessor
or Agent pursuant to this Agreement or the other Operative Documents).
(e) Approvals. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority or
other Person (including, without limitation, the shareholders of any
Person) is required in connection with the execution and delivery of the
Operative Documents executed by Lessee and the performance and
consummation by Lessee of the transactions contemplated thereby,
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except (i) those that have been made or obtained and are in full force and
effect and (ii) those which, if not made or obtained, are not reasonably
likely to have a Material Adverse Effect.
(f) No Violation or Default. Neither Lessee nor any of its
Subsidiaries is in violation of or in default with respect to (i) any
Requirement of Law applicable to such Person; (ii) any Contractual
Obligation of such Person (nor is there any waiver in effect which, if not
in effect, would result in such a violation or default), where, in each
case, such violation or default is reasonably likely to have a Material
Adverse Effect. Without limiting the generality of the foregoing, neither
Lessee nor any of its Subsidiaries (A) has violated any Environmental
Laws, (B) has any liability under any Environmental Laws or (C) has
received notice or other communication of an investigation or is under
investigation by any Governmental Authority having authority to enforce
Environmental Laws, where such violation, liability or investigation is
reasonably likely to have a Material Adverse Effect. No Default has
occurred and is continuing.
(g) Litigation. No actions (including, without limitation,
derivative actions), suits, proceedings or investigations are pending or,
to the knowledge of Lessee, threatened against Lessee or any of its
Subsidiaries at law or in equity in any court or before any other
Governmental Authority which (i) is reasonably likely (alone or in the
aggregate) to have a Material Adverse Effect or (ii) seeks to enjoin,
either directly or indirectly, the execution, delivery or performance by
Lessee of the Operative Documents or the transactions contemplated
thereby.
(h) Title; Possession Under Leases. Lessee and its Material
Subsidiaries own and have good and marketable title, or a valid leasehold
interest in, all their respective properties and assets as reflected in
the most recent Financial Statements delivered to Agent (except those
assets and properties disposed of in the ordinary course of business or
otherwise in compliance with this Agreement since the date of such
Financial Statements) and all respective assets and properties acquired by
Lessee and its Material Subsidiaries since such date (except those
disposed of in the ordinary course of business or otherwise in compliance
with this Agreement), except in any case where the failure so to own or to
have such title is not reasonably likely to have a Material Adverse
Effect. Such assets and properties are subject to no Lien, except for
Permitted Liens. Each of Lessee and its Material Subsidiaries has complied
with all material obligations under all material leases to which it is a
party, all such leases are in full force and each of Lessee and its
Material Subsidiaries enjoys peaceful and undisturbed possession under
such leases, except in any case where the failure so to comply, the
failure of such leases to be in full force and effect or the failure to be
in such possession is not reasonably likely to have a Material Adverse
Effect.
(i) Financial Statements. The consolidated Financial Statements of
Lessee which have been delivered to Agent, (i) are in accordance with the
books and records of Lessee and its Subsidiaries, which have been
maintained in accordance with good business practice; (ii) have been
prepared in conformity with GAAP; and (iii) fairly present the financial
conditions and results of operations of Lessee and its Subsidiaries as of
the date thereof and for the period covered thereby. Lessee does not have
any
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Contingent Obligations, liability for taxes or other outstanding
obligations which are material in the aggregate, except as disclosed in
the audited Financial Statements dated June 30, 1997 furnished by Lessee
to Agent prior to the date hereof, or in the Financial Statements
delivered to Agent pursuant to clause (i) or (ii) of Subparagraph 5.01(a)
to the extent the same are required under GAAP to be disclosed therein.
(j) Equity Securities. All outstanding Equity Securities of Lessee
are duly authorized, validly issued, fully paid and non-assessable. All
Equity Securities of Lessee have been offered and sold in compliance with
all federal and state securities laws (excluding any foreign securities
and tax laws related to stock options and ownership to the extent that
non-compliance therewith is not reasonably likely to have a Material
Adverse Effect).
(k) No Agreements to Sell Assets; Etc. As of the Closing Date,
neither Lessee nor any of its Subsidiaries has any legal obligation,
absolute or contingent, to any Person to sell the assets of Lessee or any
of its Subsidiaries (other than sales in the ordinary course of business),
or to effect any merger, consolidation or other reorganization of Lessee
or any of its Subsidiaries or to enter into any agreement with respect
thereto, except for sales or mergers permitted by Subparagraph 5.02(b) or
Subparagraph 5.02(c).
(l) Employee Benefit Plans.
(i) Based on the latest valuation of each Employee Benefit
Plan that either Lessee or any ERISA Affiliate maintains or
contributes to, or has any obligation under (which occurred within
twelve months of the date of this representation), the aggregate
benefit liabilities of such plan within the meaning of ss. 4001 of
ERISA did not exceed the aggregate value of the assets of such plan.
Neither Lessee nor any ERISA Affiliate has any liability with
respect to any post-retirement benefit under any Employee Benefit
Plan which is a welfare plan (as defined in section 3(1) of ERISA),
other than liability for health plan continuation coverage described
in Part 6 of Title I(B) of ERISA, which liability for health plan
contribution coverage is not reasonably likely to have a Material
Adverse Effect.
(ii) Each Employee Benefit Plan complies, in both form and
operation, in all material respects, with its terms, ERISA and the
IRC, and no condition exists or event has occurred with respect to
any such plan which would result in the incurrence by either Lessee
or any ERISA Affiliate of any material liability, fine or penalty.
Each Employee Benefit Plan, related trust agreement, arrangement and
commitment of Lessee or any ERISA Affiliate is legally valid and
binding and in full force and effect. No Employee Benefit Plan is
being audited or investigated by any government agency or is subject
to any pending or threatened claim or suit. Neither Lessee nor any
ERISA Affiliate nor any fiduciary of any Employee Benefit Plan has
engaged in a prohibited transaction under section 406 of ERISA or
section 4975 of the IRC.
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(iii) Neither Lessee nor any ERISA Affiliate contributes to or
has any material contingent obligations to any Multiemployer Plan.
Neither Lessee nor any ERISA Affiliate has incurred any material
liability (including secondary liability) to any Multiemployer Plan
as a result of a complete or partial withdrawal from such
Multiemployer Plan under Section 4201 of ERISA or as a result of a
sale of assets described in Section 4204 of ERISA. Neither Lessee
nor any ERISA Affiliate has been notified that any Multiemployer
Plan is in reorganization or insolvent under and within the meaning
of Section 4241 or Section 4245 of ERISA or that any Multiemployer
Plan intends to terminate or has been terminated under Section 4041A
of ERISA.
(m) Other Regulations. Lessee is not subject to regulation under
the Investment Company Act of 1940, the Public Utility Holding Company Act
of 1935, the Federal Power Act, the Interstate Commerce Act, any state
public utilities code or to any other Governmental Rule limiting its
ability to incur indebtedness.
(n) Patent and Other Rights. Except as set forth in Lessee's 10-Q
report and 10-K report delivered to Agent as items C(3) and C(4) of
Schedule 3.01, Lessee and its Subsidiaries own, license or otherwise have
the right to use under validly existing agreements (or can obtain under
agreements not reasonably likely to have a Material Adverse Effect), all
patents, licenses, trademarks, trade names, trade secrets, service marks,
copyrights and all rights with respect thereto, which are required to
conduct their businesses as now conducted, to the extent the failure to
own, license or otherwise have the right to use such rights is not
reasonably likely to have a Material Adverse Effect.
(o) Governmental Charges. Lessee and its Subsidiaries have filed
or caused to be filed all tax returns which are required to be filed by
them, except for any returns the non-filing of which are not reasonably
likely to have a Material Adverse Effect. Lessee and its Subsidiaries have
paid, or made provision for the payment of, all taxes and other
Governmental Charges which have or may have become due pursuant to said
returns or otherwise and all other indebtedness, except such Governmental
Charges or indebtedness, if any, which are being (or promptly will be)
contested in good faith and as to which adequate reserves (determined in
accordance with GAAP) have been provided or which are not reasonably
likely to have a Material Adverse Effect if unpaid.
(p) Margin Stock. Lessee owns no Margin Stock which, in the
aggregate, would constitute a substantial part of the assets of Lessee,
and no proceeds of any Advance will be used to purchase or carry, directly
or indirectly, any Margin Stock or to extend credit, directly or
indirectly, to any Person for the purpose of purchasing or carrying any
Margin Stock.
(q) Subsidiaries, etc. Set forth in Schedule 4.01(q) (as
supplemented by Lessee from time to time in a written notice to Agent) is
a complete list of all of Lessee's Subsidiaries, the jurisdiction of
incorporation of each and the percentage of voting shares owned directly
or indirectly by Lessee.
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(r) Catastrophic Events. Neither Lessee nor any of its
Subsidiaries and none of their properties is or has been affected by any
fire, explosion, accident, strike, lockout or other labor dispute,
drought, storm, hail, earthquake, embargo, act of God or other casualty
that is reasonably likely to have a Material Adverse Effect. There are no
disputes presently subject to grievance procedure, arbitration or
litigation under any of the collective bargaining agreements, employment
contracts or employee welfare or incentive plans to which Lessee or any of
its Subsidiaries is a party, and there are no strikes, lockouts, work
stoppages or slowdowns, or, to the best knowledge of Lessee,
jurisdictional disputes or organizing activities occurring or threatened
which alone or in the aggregate are reasonably likely to have a Material
Adverse Effect.
(s) The Property. The representations and warranties relating to
each Tract set forth in Parts 1 - 5 of Schedule 4.01(s) are true and
correct. The following representations and warranties apply to all Tracts
of the Property on the Acquisition Date thereof:
(i) All of the Property complies and will comply at all
times (whether before commencement of any construction, during any
construction or after completion of construction of any New
Improvements) with all applicable Governmental Rules (including
Title III of the Americans with Disabilities Act; Environmental
Laws; and zoning, land use, building, planning and fire laws, rules,
regulations and codes) and Insurance Requirements, except for
violations which are not reasonably likely to have a Material
Adverse Effect. No Hazardous Materials have been used, generated,
manufactured, stored, treated, disposed of, transported or present
on or released or discharged from the Property in any manner that is
reasonably likely to have a Material Adverse Effect. There are no
claims or actions which are reasonably likely to have a Material
Adverse Effect pending or, to Lessee's knowledge, threatened against
any of the Property by any Governmental Authority or any other
Person relating to Hazardous Materials or pursuant to any
Environmental Laws.
(ii) None of the Improvements (whether before commencement of
any construction, during any construction or after completion of
construction of any New Improvements) encroach or will at any time
encroach in any manner onto any adjoining land, except as permitted
by express written and recorded encroachment agreements approved by
Agent or as affirmatively insured against by appropriate title
insurance.
(iii) All licenses, approvals, authorizations, consents,
permits, easements and rights-of-way required for the use of any of
the Property have been obtained or, if not yet required, will be
obtained before required.
(iv) After the purchase of each Tract of Property on the
Acquisition Date therefor or, in the case of Property subject to the
Phase II Lease Agreements after the termination thereof, Lessor will
have good and valid fee simple title to such Property (or, in the
case of the Tract 3 Land, a good and valid leasehold interest in
such Land), subject to no Liens except for Permitted Property Liens.
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(t) Chief Executive Office. Lessee's chief executive office is
located at 160 Rio Robles Drive, San Jose, California 95134.
(u) Accuracy of Information Furnished. None of the Operative
Documents and none of the other certificates, statements or information
furnished to Lessor, Agent or any Participant by Lessee or any of its
Subsidiaries in connection with the Operative Documents or the
transactions contemplated thereby, when taken together with all
registration statements and reports filed by Lessee with any securities
exchange or the Securities and Exchange Commission and furnished to Agent
pursuant to the Operative Documents, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Lessee shall be deemed to have reaffirmed, for the benefit of the Lessor
Parties, each representation and warranty contained in this Paragraph 4.01 on
and as of the date of each Credit Event (except for representations and
warranties expressly made as of a specified date, which shall be true as of such
date).
4.02. Lessor's Representations and Warranties. In order to induce Lessee,
Agent and the Participants to enter into this Agreement and the other Operative
Documents to which they are parties, Lessor hereby represents and warranties to
Lessee, Agent and the Participants as follows:
(a) Due Incorporation, Qualification, etc. Lessor (i) is a
corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation and (ii) has the power and
authority to own, lease and operate its properties and carry on its
business as now conducted. Lessor is a Wholly-Owned Subsidiary of ABN
AMRO.
(b) Authority. The execution, delivery and performance by Lessor
of each Operative Document executed, or to be executed, by Lessor and the
consummation of the transactions contemplated thereby (i) are within the
power of Lessor and (ii) have been duly authorized by all necessary
actions on the part of Lessor.
(c) Enforceability. Each Operative Document executed, or to be
executed, by Lessor has been, or will be, duly executed and delivered by
Lessor and constitutes, or will constitute, a legal, valid and binding
obligation of Lessor, enforceable against Lessor in accordance with its
terms, except as limited by bankruptcy, insolvency or other laws of
general application relating to or affecting the enforcement of creditors'
rights generally and general principles of equity.
(d) Non-Contravention. The execution and delivery by Lessor of the
Operative Documents executed by Lessor and the performance and
consummation of the transactions contemplated thereby do not (i) violate
any Requirement of Law applicable to Lessor; (ii) violate any provision
of, or result in the breach or the acceleration of, or entitle any other
Person to accelerate (whether after the giving of notice or lapse of time
or both), any Contractual Obligation of Lessor; or (iii) result in the
creation or imposition
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of any Lien (or the obligation to create or impose any Lien) upon any
property, asset or revenue of Lessor (except such Liens as may be created
in favor of Agent pursuant to this Agreement or the other Operative
Documents).
(e) Approvals. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority or
other Person (including, without limitation, the shareholders of any
Person) is required in connection with the execution and delivery of the
Operative Documents executed by Lessor and the performance and
consummation of the transactions contemplated thereby, except such as have
been made or obtained and are in full force and effect.
(f) Litigation. No actions (including, without limitation,
derivative actions), suits, proceedings or investigations are pending or,
to the knowledge of Lessor, threatened against Lessor at law or in equity
in any court or before any other Governmental Authority which (i) is
reasonably likely (alone or in the aggregate) to materially and adversely
affect the ability of Lessor to perform its obligations under the
Operative Documents to which it is a party or (ii) seeks to enjoin, either
directly or indirectly, the execution, delivery or performance by Lessor
of the Operative Documents or the transactions contemplated thereby.
(g) Other Regulations. Lessor is not subject to regulation under
the Investment Company Act of 1940, the Public Utility Holding Company Act
of 1935, the Federal Power Act, the Interstate Commerce Act, any state
public utilities code or to any other Governmental Rule limiting its
ability to incur indebtedness.
(h) Chief Executive Office. Lessor's chief executive office is
located at 180 Interstate Parkway North, Atlanta, Georgia 30339.
4.03. Participants' Representations and Warranties. In order to induce
Lessee, Lessor and Agent to enter into this Agreement and the other Operative
Documents to which they are parties, each Participant hereby represents and
warranties to Lessee, Lessor and Agent as follows:
(a) Due Organization, Qualification, etc. Such Participant (i) is
a legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization and (ii) has the power and
authority to own, lease and operate its properties and carry on its
business as now conducted.
(b) Authority. The execution, delivery and performance by such
Participant of each Operative Document executed, or to be executed, by
such Participant and the consummation of the transactions contemplated
thereby (i) are within the power of such Participant and (ii) have been
duly authorized by all necessary actions on the part of such Participant.
(c) Enforceability. Each Operative Document executed, or to be
executed, by such Participant has been, or will be, duly executed and
delivered by such Participant and constitutes, or will constitute, a
legal, valid and binding obligation of such Participant, enforceable
against such Participant in accordance with its terms, except as limited
by
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bankruptcy, insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and general
principles of equity.
(d) Non-Contravention. The execution and delivery by such
Participant of the Operative Documents executed by such Participant and
the performance and consummation of the transactions contemplated thereby
do not (i) violate any Requirement of Law applicable to such Participant;
(ii) violate any provision of, or result in the breach or the acceleration
of, or entitle any other Person to accelerate (whether after the giving of
notice or lapse of time or both), any Contractual Obligation of such
Participant; or (iii) result in the creation or imposition of any Lien (or
the obligation to create or impose any Lien) upon any property, asset or
revenue of such Participant (except such Liens as may be created in favor
of Lessor or Agent pursuant to this Agreement or the other Operative
Documents).
(e) Approvals. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority or
other Person (including, without limitation, the shareholders of any
Person) is required in connection with the execution and delivery of the
Operative Documents executed by such Participant and the performance and
consummation of the transactions contemplated thereby, except such as have
been made or obtained and are in full force and effect.
(f) Litigation. No actions (including, without limitation,
derivative actions), suits, proceedings or investigations are pending or,
to the knowledge of such Participant, threatened against such Participant
at law or in equity in any court or before any other Governmental
Authority which (i) is reasonably likely (alone or in the aggregate) to
materially and adversely affect the ability of such Participant to perform
its obligations under the Operative Documents to which it is a party or
(ii) seeks to enjoin, either directly or indirectly, the execution,
delivery or performance by such Participant of the Operative Documents or
the transactions contemplated thereby.
(g) Own Account. Such Participant is acquiring its participation
interest hereunder for its own account for investment and not with a view
to any distribution (as such term is used in Section 2(11) of the
Securities Act of 1933) thereof, and, if in the future it should decide to
dispose of its participation interest, it understands that it may do so
only in compliance with the Securities Act of 1933 and the rules and
regulations of the Securities and Exchange Commission thereunder and any
applicable state securities laws.
(h) Capital, Etc. Such Participant is a financial institution with
combined capital and surplus of not less than $500,000,000.
SECTION 5. COVENANTS.
5.01. Lessee's Affirmative Covenants. Until the termination of this
Agreement and the satisfaction in full by Lessee of all Lessee Obligations
(other than inchoate indemnity obligations), Lessee will comply, and will cause
compliance, with the following affirmative covenants, unless Lessor and Required
Participants shall otherwise consent in writing:
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(a) Financial Statements, Reports, etc. Lessee shall furnish to
Agent, with sufficient copies for Lessor and each Participant (and Agent
shall promptly furnish to Lessor and each Participant), the following,
each in such form and such detail as Agent, Lessor or the Required
Participants shall reasonably request:
(i) As soon as available and in no event later than sixty
(60) days after the last day of each fiscal quarter of Lessee (other
than the last quarter in any fiscal year), a copy of the Financial
Statements of Lessee and its Subsidiaries (prepared on a
consolidated basis) for such quarter and for the fiscal year to
date, certified by the president or chief financial officer of
Lessee to present fairly the financial condition, results of
operations and other information reflected therein and to have been
prepared in accordance with GAAP (subject to normal year-end audit
adjustments);
(ii) As soon as available and in no event later than one
hundred and ten (110) days after the close of each fiscal year of
Lessee, (A) copies of the audited Financial Statements of Lessee and
its Subsidiaries (prepared on a consolidated basis) for such year,
audited by Price Waterhouse LLP or by other independent certified
public accountants of recognized national standing acceptable to
Agent, and (B) copies of the opinions delivered by such accountants
in connection with all such Financial Statements;
(iii) Contemporaneously with the quarterly and year-end
Financial Statements required by the foregoing clauses (i) and (ii),
a compliance certificate of the President, Chief Financial Officer,
Chief Executive Officer or the Vice-President of Finance of Lessee
which (A) states that no Default has occurred and is continuing, or,
if any such Default has occurred and is continuing, a statement as
to the nature thereof and what action Lessee proposes to take with
respect thereto and (B) sets forth, for the quarter or year covered
by such Financial Statements or as of the last day of such quarter
or year (as the case may be), the calculation of the financial
ratios and tests provided in Paragraph 5.03;
(iv) As soon as available and in no event later than sixty
(60) days after the last day of each fiscal quarter of Lessee, a
certificate of the President, Chief Financial Officer, Chief
Executive Officer or the Vice-President of Finance of Lessee which
sets forth the calculation of the Senior Funded Indebtedness/Capital
Ratio for the consecutive four-quarter period ending on such day;
(v) As soon as possible and in no event later than ten (10)
Business Days after any Executive Officer of Lessee knows of the
occurrence or existence of (A) any Reportable Event under any
Employee Benefit Plan or Multiemployer Plan; (B) any actual or
threatened litigation, suits, claims or disputes against Lessee or
any of its Subsidiaries involving potential monetary damages payable
by Lessee or its Subsidiaries of $25,000,000 or more; (C) any other
event or condition which is reasonably likely to have a Material
Adverse Effect; or (D) any Default; the statement of the President,
Chief Financial Officer, Chief Executive Officer or the
Vice-President of Finance of Lessee setting forth details of such
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<PAGE> 33
event, condition or Default and the action which Lessee proposes to
take with respect thereto;
(vi) As soon as available and in no event later than ten (10)
Business Days after they are sent, made available or filed, either
(A) copies of all registration statements and reports filed by
Lessee or any of its Subsidiaries with any securities exchange or
the Securities and Exchange Commission (including, without
limitation, all 10-Q, 10-K and 8-K reports, but without exhibits and
excluding filings on Form S-8) or (B) e-mail notice (with a copy to
Lessor and each Participant) of the website from which copies of
such registration statements and reports may be downloaded; and
(vii) Such other information relating to the operations or
condition (financial or otherwise) of Lessee or its Subsidiaries,
and compliance by Lessee with the terms of this Agreement and the
other Operative Documents as Lessor or Agent or any Participant may
from time to time reasonably request.
For the purposes of this Subparagraph 5.01(a), (1) the timely delivery by
Lessee to Agent pursuant to clause (vi) of a copy of the Form 10-Q report
filed by Lessee with the Securities and Exchange Commission for any
quarter shall satisfy the requirements of clause (i) for such quarter and
(2) the timely delivery by Lessee to Agent pursuant to clause (vi) of a
copy of the Form 10-K report filed by Lessee with the Securities and
Exchange Commission for any year shall satisfy the requirements of clause
(ii)(A) for such year, provided that such reports contain the same
information as required by clause (i) and clause (ii)(A), respectively.
(b) Books and Records. Lessee shall at all times keep proper books
of record and account in which full, true and correct entries will be made
of their transactions in accordance with GAAP.
(c) Inspections. Lessee and its Subsidiaries shall permit any
Person designated by any Participant, upon reasonable notice and during
normal business hours, to visit and inspect any of the properties and
offices of Lessee and its Subsidiaries, to examine the books and records
of Lessee and its Subsidiaries and make copies thereof and to discuss the
affairs, finances and business of Lessee and its Subsidiaries with, and to
be advised as to the same by, Lessee's Chief Financial Officer or
Vice-President of Finance, all at such times and intervals as any
Participant may reasonably request.
(d) Insurance. In addition to the insurance requirements set forth
in the Lease Agreement with respect to the Property, Lessee and its
Material Subsidiaries shall:
(i) Carry and maintain insurance of the types and in the
amounts customarily carried from time to time during the term of
this Agreement by others engaged in substantially the same business
as such Person and operating in the same geographic area as such
Person, including, but not limited to, fire, public liability,
property damage and worker's compensation;
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(ii) Carry and maintain each policy for such insurance with
financially sound insurers; provided, however, that Lessee may, if
no Event of Default has occurred and is continuing, self-insure; and
(iii) Deliver to Agent from time to time (but not more than
once per year if no Event of Default has occurred and is
continuing), as Agent may request, schedules setting forth all
insurance then in effect.
(e) Governmental Charges and Other Indebtedness. Lessee and its
Subsidiaries shall promptly pay and discharge when due all taxes and other
Governmental Charges prior to the date upon which penalties accrue
thereon, except (i) such taxes and Governmental Charges as may in good
faith be contested or disputed, or for which arrangements for deferred
payment have been made, provided that in each such case appropriate
reserves as required by GAAP are maintained, and (ii) where the failure to
so pay or discharge is not reasonably likely to have a Material Adverse
Effect.
(f) Use of Proceeds. Lessee shall not use any part of the proceeds
of any Advance, directly or indirectly, for the purpose of purchasing or
carrying any Margin Stock or for the purpose of purchasing or carrying or
trading in any securities under such circumstances as to involve Lessee or
any Lessor Party in a violation of Regulations G, T, U or X issued by the
Federal Reserve Board.
(g) General Business Operations. Each of Lessee and its Material
Subsidiaries shall, except as otherwise permitted by Subparagraph 5.02(c),
preserve and maintain its corporate existence and all of its rights,
privileges and franchises reasonably necessary to the conduct of its
business, where the failure so to preserve and maintain is reasonably
likely to have a Material Adverse Effect. Each of Lessee and its
Subsidiaries shall (i) conduct its business activities in compliance with
all Requirements of Law and Contractual Obligations applicable to such
Person, the violation of which is reasonably likely to have a Material
Adverse Effect and (ii) keep all property useful and necessary in its
business in good working order and condition, ordinary wear and tear
excepted, where the failure so to keep is reasonably likely to have a
Material Adverse Effect. Lessee shall maintain its chief executive office
in the United States and shall not relocate its chief executive office
outside of California without prior written notice to Agent.
5.02. Lessee's Negative Covenants. Until the termination of this Agreement
and the satisfaction in full by Lessee of all Lessee Obligations (other than
inchoate indemnity obligations), Lessee will comply, and will cause compliance,
with the following negative covenants, unless Lessor and Required Participants
shall otherwise consent in writing:
(a) Liens. Neither Lessee nor any of its Material Subsidiaries
shall create, incur, assume or permit to exist any Lien on or with respect
to any of its assets or property of any character, whether now owned or
hereafter acquired, except for the following ("Permitted Liens"):
(i) Liens in favor of Lessor, Agent or any Participant
securing the Lessee Obligations;
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(ii) Liens existing on the date of this Agreement;
(iii) Liens for taxes or other Governmental Charges not at the
time delinquent or thereafter payable without penalty or being
contested in good faith, provided that adequate reserves for the
payment thereof as required by GAAP have been established;
(iv) Liens of carriers, warehousemen, mechanics, materialmen,
vendors, and landlords and other similar Liens imposed by law
incurred in the ordinary course of business for sums not overdue for
more than ninety (90) days or being contested in good faith,
provided that adequate reserves for the payment thereof as required
by GAAP have been established;
(v) Deposits under workers' compensation, unemployment
insurance and social security laws or to secure the performance of
bids, tenders, contracts (other than for the repayment of borrowed
money) or leases, or to secure statutory obligations of surety or
appeal bonds or to secure indemnity, performance or other similar
bonds in the ordinary course of business;
(vi) Zoning restrictions, easements, rights-of-way, title
irregularities and other similar encumbrances, which alone or in the
aggregate are not substantial in amount and do not materially
detract from the value of the property subject thereto or interfere
with the ordinary conduct of the business of Lessee and its
Subsidiaries, taken as a whole;
(vii) Banker's Liens and similar Liens (including set-off
rights) in respect of bank deposits or securities accounts
maintained in the ordinary course of business;
(viii) Liens securing purchase money Indebtedness and rights
of vendors or lessors under conditional sale agreements, Capital
Leases or other title retention agreements, provided that, in each
case, (A) such Lien or right covers only the property, the
acquisition of which was financed by such Indebtedness, together
with all accessions thereto, substitutions and replacements therefor
and the proceeds (including insurance) thereof (B) such Indebtedness
was incurred at the time of or within one hundred and eighty (180)
days after the acquisition by Lessee or one of its Subsidiaries of
such property, (C) such Indebtedness does not exceed the purchase
price of such property, together with reasonable installation costs,
taxes and other similar expenses related to such property, and (D)
such Lien or right extends only to such Indebtedness;
(ix) Liens on the property or assets of any Subsidiary of
Lessee in favor of Lessee or any other Subsidiary of Lessee;
(x) Liens on accounts receivable sold pursuant to clause
(vii) of Subparagraph 5.02(b);
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(xi) Liens incurred in connection with the extension, renewal
or refinancing of the Indebtedness secured by the Liens described in
clause (ii) or clause (viii) above, provided that any extension,
renewal or replacement Lien (A) is limited to the property covered
by the existing Lien, together with all accessions thereto,
substitutions and replacements therefor and the proceeds (including
insurance), and (B) secures Indebtedness which is no greater in
amount and has material terms no less favorable to Lessor and the
Participants than the Indebtedness secured by the existing Lien;
(xii) Permitted Property Liens in the Property;
(xiii) Liens on property of a Person existing at the time such
Person or such Person's parent corporation becomes a Subsidiary of
Lessee or any subsidiary of Lessee; provided that such Liens were in
existence prior to the contemplation of such transaction and do not
extend to any assets other than those of such Person:
(xiv) Liens on property existing at the time of acquisition
thereof by Lessee or any Subsidiary of the Lessee, provided that
such Liens were in existence prior to the contemplation of such
acquisition and extend only to the property so acquired;
(xv) Liens in favor of customs and revenue authorities to
secure payment of customs duties in connection with the importation
of goods in the ordinary course of business and other similar Liens
arising in the ordinary course of business;
(xvi) Leases or subleases granted to third Persons not
interfering with the ordinary course of business of Lessee or its
Subsidiaries;
(xvii) Any attachment or judgement Lien not constituting an
Event of Default under Subparagraph 5.01(h) of the Lease Agreement;
(xviii) Liens in favor of a trustee under any indenture
securing amounts due to the trustee in connection with its services
under such indenture;
(xix) Liens on proceeds of insurance in favor of insurance
companies securing the payment of financed premiums;
(xx) Liens under licensing agreements for use of intellectual
property entered into the ordinary course of business; and
(xxi) Liens on leases and other chattel paper transferred
pursuant to clause (viii) of Subparagraph 5.02(b);
(xxii) Other Liens on the property of Lessee and its
Subsidiaries, provided that the aggregate principal amount of all
Indebtedness secured by such
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other Liens does not exceed at any time twenty percent (20%) of the
consolidated net worth of Lessee and its Subsidiaries at such time;
Provided, however, that the foregoing exceptions shall not be construed to
permit any Liens, except for Permitted Property Liens, on any of the
Property
(b) Asset Dispositions. Neither Lessee nor any of its Material
Subsidiaries shall sell, lease, transfer or otherwise dispose of (each a
"transfer") any of its assets or property, whether now owned or hereafter
acquired, except for the following:
(i) Transfers of inventory by Lessee and its Subsidiaries in
the ordinary course of their businesses;
(ii) Transfers of surplus, damaged, worn or obsolete
equipment or inventory;
(iii) Transfers, in whole or in part, of Investments permitted
by Subparagraph 5.02(d), provided that (A) such transfers are for
not less than fair market value (except for transfers of assets
acquired in an acquisition transaction) and (B) no Default has
occurred and is continuing at the time of such transfer or will
occur after giving effect to such transfer;
(iv) Transfers of defaulted receivables to a collection
agency in the ordinary course of business;
(v) Licenses by Lessee or its Subsidiaries of its patents,
copyrights, trademarks, trade names and service marks in the
ordinary course of its business provided that, in each case (except
in the case of licenses between Lessee and a Subsidiary or between
one Subsidiary and another Subsidiary), the terms of the transaction
are terms which then would prevail in the market for similar
transactions between unaffiliated parties dealing at arm's length;
(vi) Transfers of assets and property by Lessee to any of
Lessee's Subsidiaries or by any of Lessee's Subsidiaries to Lessee
or any of its other Subsidiaries;
(vii) Sales of accounts receivable to financial institutions
in financing transactions, provided that (A) each such sale is (1)
for not less than the fair market value of the receivables sold less
a discount not exceeding twenty-five percent (25%) and (2) directly
or indirectly for cash and (B) the aggregate amount of all such
accounts receivable so sold and outstanding at any time shall not
exceed fifteen percent (15%) of the consolidated net worth of Lessee
and its Subsidiaries at such time;
(viii) Transfers of leases or other chattel paper to financial
institutions in financing transactions or in connection with the
securitization thereof, provided that no Default has occurred and is
continuing at the time of such transfer or will occur after giving
effect to such transfer; and
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(ix) Other transfers of assets and property for not less than
fair market value, provided that the aggregate book value of all
such assets and property so sold, leased, transferred or otherwise
disposed of in any consecutive four-quarter period does not exceed
twenty percent (20%) of the consolidated total assets of Lessee and
its Subsidiaries on the last day immediately preceding such
four-quarter period.
Provided, however, that the foregoing transfers shall not be construed to
permit any transfers of the Property, except for transfers permitted by
the Lease Agreement.
(c) Mergers, Acquisitions, Etc. Neither Lessee nor any of its
Material Subsidiaries shall consolidate with or merge into any other
Person or permit any other Person to merge into it, acquire any Person as
a new Subsidiary or acquire all or substantially all of the assets of any
other Person, except for the following:
(i) Any Wholly-Owned Subsidiary of Lessee may merge or
consolidate with any other Wholly-Owned Subsidiary of Lessee or with
Lessee, provided that, in the case of any merger or consolidation
involving Lessee, Lessee is the surviving corporation; and
(ii) Lessee or any Wholly-Owned Subsidiary of Lessee may (A)
acquire as a direct Wholly-Owned Subsidiary any indirect
Wholly-Owned Subsidiary or (B) acquire all or substantially all of
the assets of any Wholly-Owned Subsidiary of Lessee; and
(iii) Lessee or any of its Subsidiaries may merge or
consolidate with any other corporation, acquire any Person as a new
Subsidiary or acquire all or substantially all of the assets of any
other Person, provided that:
(A) In the case of any merger or consolidation
involving Lessee, Lessee is the surviving corporation; and
(B) No Default has occurred and is continuing at the
time of such merger, consolidation or acquisition or will
occur after giving effect to such merger, consolidation or
acquisition.
(d) Investments. Neither Lessee nor any of its Material
Subsidiaries shall make any Investment except for the following:
(i) Investments of Lessee and its Subsidiaries permitted by
the investment policy of Lessee approved by its Board of Directors
or in Cash Equivalents
(ii) Investments arising in connection with transactions
permitted by Subparagraph 5.02(c);
(iii) Investments of Lessee and its Subsidiaries in
Subsidiaries;
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(iv) Investments existing on the date of this Agreement;
(v) Investments consisting of the endorsement of negotiable
instruments for deposit or collection;
(vi) Investments in or to Lessee and Investments in or to
Subsidiaries and guarantees or other credit support of the
obligations of Lessee or of its Subsidiaries;
(vii) Investments consisting of loans to employees (including
relocation loans) in the ordinary course of business;
(viii) Investments accepted in connection with transfers
permitted under Subparagraph 5.02(b);
(ix) Investments received in connection with the bankruptcy
or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;
(x) Investments pursuant to or arising under currency,
commodity or interest rate hedging arrangements entered into in the
ordinary course of business for the purpose of directly mitigating
risks associated with currency or interest rate changes or commodity
prices;
(xi) Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions (including equipment
leases) to, customers and suppliers in the ordinary course of
business;
(xii) Investments permitted under Subparagraph 5.02(c);
(xiii) Investments of Lessee and its Subsidiaries in joint
ventures, partnerships and the securities of companies in related
businesses on commercially reasonable terms; and
(xiv) Other Investments, provided that the aggregate book
value of such other Investments does not exceed at any time
twenty-five percent (25%) of the consolidated total assets of Lessee
and its Subsidiaries at such time.
(e) Change in Business. Neither Lessee nor any of its Material
Subsidiaries shall engage, either directly or indirectly through
Affiliates, in any material line of business other than the semiconductor
capital equipment business, the inspection and yield management business
and other businesses incidental or reasonably related thereto.
(f) ERISA. Neither Lessee nor any ERISA Affiliate shall (i) adopt
or institute any Employee Benefit Plan that is an employee pension benefit
plan within the meaning of Section 3(2) of ERISA, (ii) take any action
which will result in the partial or complete withdrawal, within the
meanings of sections 4203 and 4205 of ERISA, from a
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Multiemployer Plan, (iii) engage or permit any Person to engage in any
transaction prohibited by section 406 of ERISA or section 4975 of the IRC
involving any Employee Benefit Plan or Multiemployer Plan which would
subject either Lessee or any ERISA Affiliate to any tax, penalty or other
liability including a liability to indemnify, (iv) incur or allow to exist
any accumulated funding deficiency (within the meaning of section 412 of
the IRC or section 302 of ERISA), (v) fail to make full payment when due
of all amounts due as contributions to any Employee Benefit Plan or
Multiemployer Plan, (vi) fail to comply with the requirements of section
4980B of the IRC or Part 6 of Title I(B) of ERISA, or (vii) adopt any
amendment to any Employee Benefit Plan which would require the posting of
security pursuant to section 401(a)(29) of the IRC, where singly or
cumulatively, the above would have a Material Adverse Effect.
(g) Accounting Changes. Lessee shall not change (i) its fiscal
year (currently July 1 through June 30) or (ii) its accounting practices
except as permitted by GAAP.
5.03. Lessee's Financial Covenants. Until the termination of this
Agreement and the satisfaction in full by Lessee of all Lessee Obligations
(other than inchoate indemnity obligations), Lessee will comply, and will cause
compliance, with the following financial covenants, unless Lessor and Required
Participants shall otherwise consent in writing:
(a) Quick Ratio. Lessee shall not permit its Quick Ratio to be
less than 1.15 to 1.00 on the last day of any fiscal quarter.
(b) Liabilities/Tangible Net Worth Ratio. Lessee shall not permit
its Liabilities/Tangible Net Worth Ratio to be greater than 0.85 to 1.00
on the last day of any fiscal quarter.
(c) Debt Service Coverage Ratio. Lessee shall not permit its Debt
Service Coverage Ratio for any consecutive four fiscal quarter period to
be less than 3.50 to 1.00.
(d) Tangible Net Worth. Lessee shall not permit its Tangible Net
Worth on the last day of any fiscal quarter (such date to be referred to
herein as a "determination date") which occurs after June 30, 1997 (such
date to be referred to herein as the "base date") to be less than the sum
on such determination date of the following:
(i) Eighty-five percent (85%) of the Tangible Net Worth of
Lessee and its Subsidiaries on the base date;
plus
(ii) Fifty percent (50%) of the sum of Lessee's consolidated
quarterly net income (ignoring any quarterly losses) for each fiscal
quarter after the base date through and including the fiscal quarter
ending on the determination date;
plus
(iii) One hundred percent (100%) of the Net Proceeds of all
Equity Securities issued by Lessee and its Subsidiaries (to Persons
other than Lessee or
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its Subsidiaries and net of repurchases of Equity Securities related
solely to Lessee's stock option and incentive plans) during the
period commencing on the base date and ending on the determination
date;
plus
(iv) One hundred percent (100%) of the principal amount of
all debt securities of Lessee and its Subsidiaries converted into
Equity Securities of Lessee and its Subsidiaries during the period
commencing on the base date and ending on the determination date;
minus
(v) One hundred percent (100%) of all non-recurring charges
taken by Lessee and its Subsidiaries in connection with the
acquisition of in-process technology during the period commencing on
the base date and ending on the determination date.
5.04. Lessor's Covenants. Until the termination of this Agreement and the
satisfaction in full by Lessor of all Lessor Obligations (other than inchoate
indemnity obligations), Lessor will comply, and will cause compliance, with the
following covenants, unless Lessee and Required Participants shall otherwise
consent in writing:
(a) Use of Proceeds. Lessor shall use the proceeds of all amounts
delivered to Lessor by Participants pursuant to Subparagraph 2.05(a)
solely to fund Advances.
(b) Lessor Liens. Lessor shall not create, incur, assume or permit
to exist any Lessor Lien (other than any Lien granted to Agent or any
Participant pursuant to the Operative Documents to secure the Lessor
Obligations) and shall promptly discharge, at its sole cost and expense,
any Lessor Lien on the Property (other than any Liens granted to Agent or
any Participant pursuant to the Operative Documents to secure the Lessor
Obligations); provided, however, that Lessor shall not be required so to
discharge any such Lessor Lien if (i) the same is being (or promptly will
be) contested in good faith by appropriate proceedings diligently
prosecuted and there is no immediate risk of foreclosure upon any of the
Property, and (ii) any such contest is completed and all Lessor Liens are
discharged on or prior to the Expiration Date.
(c) Property Disposition. Lessor shall not sell, lease, transfer
or otherwise dispose of its right, title and interest in the Property and
the Operative Documents except as provided in Subparagraph 2.11(b) or
Subparagraph 7.05(d), as provided in the Purchase Agreement, or after
retaining the Property following the Expiration Date.
(d) Chief Executive Office. Lessor shall not change its chief
executive office without giving Agent prompt written notice.
5.05. Participants' Covenants. Each Participant covenants that it will not
fund its portion of any Advance with the assets of any "employee benefit plan"
(as defined in Section
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3(3) of ERISA) which is subject to Title I of ERISA or any "plan" (as defined in
Section 4975(e)(1) of the IRC.
SECTION 6. LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS.
6.01. Appointment of Agent. Each Participant hereby appoints and
authorizes Agent to act as its agent hereunder and under the other Operative
Documents with such powers as are expressly delegated to Agent by the terms of
this Agreement and the other Operative Documents, together with such other
powers as are reasonably incidental thereto. Lessor is not an agent for the
Participants or Agent, and neither this Agreement nor any other Operative
Document shall be construed to constitute or evidence a partnership among the
Lessor Parties or otherwise to impose upon Lessor or Agent any fiduciary duty.
6.02. Powers and Immunities. Neither Lessor nor Agent shall have any
duties or responsibilities except those expressly set forth in this Agreement or
in any other Operative Document, be a trustee for any Participant or have any
fiduciary duty to any Participant. Notwithstanding anything to the contrary
contained herein, neither Lessor nor Agent shall be required to take any action
which is contrary to this Agreement or any other Operative Document or any
applicable Governmental Rule. Neither Lessor nor Agent nor any Participant shall
be responsible to any Participant for any recitals, statements, representations
or warranties made by Lessee or any of its Subsidiaries contained in this
Agreement or in any other Operative Document, for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Operative Document or for any failure by Lessee or any of its
Subsidiaries to perform their respective obligations hereunder or thereunder.
Lessor and Agent may employ agents and attorneys-in-fact and shall not be
responsible to any Participant for the negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care. Neither Lessor
nor Agent nor any of their respective directors, officers, employees, agents or
advisors shall be responsible to any Participant for any action taken or omitted
to be taken by it or them hereunder or under any other Operative Document or in
connection herewith or therewith, except for its or their own gross negligence
or willful misconduct. Except as otherwise provided under this Agreement, Lessor
and Agent shall take such action with respect to the Operative Documents as
shall be directed by the Required Participants.
6.03. Reliance. Lessor or Agent shall be entitled to rely upon any
certificate, notice or other document (including any cable, telegram, facsimile
or telex) believed by it in good faith to be genuine and correct and to have
been signed or sent by or on behalf of the proper Person or Persons, and upon
advice and statements of legal counsel, independent accountants and other
experts selected by Lessor or Agent with reasonable care. As to any other
matters not expressly provided for by this Agreement, neither Lessor nor Agent
shall be required to take any action or exercise any discretion, but shall be
required to act or to refrain from acting upon instructions of the Required
Participants and shall in all cases be fully protected by the Participants in
acting, or in refraining from acting, hereunder or under any other Operative
Document in accordance with the instructions of the Required Participants, and
such instructions of the Required Participants and any action taken or failure
to act pursuant thereto shall be binding on all of the Participants.
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6.04. Defaults. Neither Lessor nor Agent shall be deemed to have knowledge
or notice of the occurrence of any Default unless Lessor or Agent has received a
written notice from a Participant or Lessee, referring to this Agreement,
describing such Default and stating that such notice is a "Notice of Default".
If Lessor and Agent receive such a notice of the occurrence of a Default, Agent
shall give prompt notice thereof to the Participants. Lessor and Agent shall
take such action with respect to such Default as shall be reasonably directed by
the Required Participants; provided, however, that until Lessor and Agent shall
have received such directions, Lessor or Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Default as it shall deem advisable in the best interest of the Participants.
6.05. Indemnification. Without limiting the Obligations of Lessee
hereunder, each Participant agrees to indemnify Lessor and Agent (to the extent
not previously reimbursed by Lessee), ratably in accordance with such
Participant's Proportionate Share, for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may at any time be imposed
on, incurred by or asserted against Lessor or Agent in any way relating to or
arising out of this Agreement or any documents contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or the
enforcement of any of the terms hereof or thereof; provided, however, that no
Participant shall be liable for any of the foregoing to the extent they arise
from Lessor's or Agent's gross negligence or willful misconduct, provided,
further however, that to the extent indemnification payments made by the
Participants pursuant to this Paragraph 6.05 are subsequently recovered from or
for the account of Lessee, such previously paid indemnification payments shall
be promptly refunded to the Participants by Lessor and Agent. Lessor or Agent
shall be fully justified in refusing to take or in continuing to take any action
hereunder unless it shall first be indemnified to its satisfaction by the
Participants against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action. The obligations of
each Participant under this Paragraph 6.05 shall survive the payment and
performance of the Lessee Obligations, the termination of this Agreement and any
Participant ceasing to be a party to this Agreement (with respect to events
which occurred prior to the time such Participant ceased to be a Participant
hereunder).
6.06. Non-Reliance. Each Participant represents that it has, independently
and without reliance on Lessor, Agent, or any other Participant, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of the business, prospects, management, financial condition and
affairs of Lessee and the Subsidiaries and its own decision to enter into this
Agreement and agrees that it will, independently and without reliance upon
Lessor, Agent or any other Participant, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
appraisals and decisions in taking or not taking action under this Agreement or
any other Operative Document. Neither Lessor nor Agent nor any of their
respective affiliates nor any of their respective directors, officers,
employees, agents or advisors shall (a) be required to keep any Participant
informed as to the performance or observance by Lessee or any of its
Subsidiaries of the obligations under this Agreement or any other document
referred to or provided for herein or to make inquiry of, or to inspect the
properties or books of Lessee or any of its Subsidiaries; (b) have any duty or
responsibility to provide any Participant with any credit or other information
concerning Lessee or any of its Subsidiaries which may come into the possession
of Lessor or Agent, except for notices, reports
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and other documents and information expressly required to be furnished to the
Participants by Lessor or Agent hereunder; or (c) be responsible to any
Participant for (i) any recital, statement, representation or warranty made by
Lessee or any officer, employee or agent of Lessee in this Agreement or in any
of the other Operative Documents, (ii) the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any Operative
Document, (iii) the value or sufficiency of the Property or the validity or
perfection of any of the liens or security interests intended to be created by
the Operative Documents, or (iv) any failure by Lessee to perform its
obligations under this Agreement or any other Operative Document.
6.07. Resignation or Removal of Agent. Agent may resign at any time by
giving thirty (30) days prior written notice thereof to Lessee and the
Participants, and Agent may be removed at any time with or without cause by the
Required Participants. Upon any such resignation or removal, the Required
Participants shall have the right to appoint a successor Agent, which Agent, if
not a Participant, shall be reasonably acceptable to Lessee; provided, however,
that Lessee shall have no right to approve a successor Agent if a Default has
occurred and is continuing. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from the duties and
obligations thereafter arising hereunder. After any retiring Agent's resignation
or removal hereunder as Agent, the provisions of this Section VI and any other
provision of this Agreement or any other Operative Document which by its terms
survives the termination of this Agreement shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as Agent.
6.08. Authorization. Agent is hereby authorized by the Participants to
execute, deliver and perform, each of the Operative Documents to which Agent is
or is intended to be a party and each Participant agrees to be bound by all of
the agreements of Agent contained in the Operative Documents.
6.09. Lessor and Agent in their Individual Capacities. Lessor, Agent and
their respective affiliates may make loans to, accept deposits from and
generally engage in any kind of banking or other business with Lessee and its
Subsidiaries and affiliates as though Lessor were not Lessor hereunder and Agent
were not Agent hereunder. With respect to Advances, if any, made by Agent in its
capacity as a Participant, Agent in its capacity as a Participant shall have the
same rights and powers under this Agreement and the other Operative Documents as
any other Participant and may exercise the same as though it were not Agent, and
the terms "Participant" or "Participants" shall include Agent in its capacity as
a Participant.
SECTION 7. MISCELLANEOUS
7.01. Notices. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon Lessor,
Lessee, any Participant or Agent under this Agreement or the other Operative
Documents shall be in writing and faxed, mailed or delivered, if to Lessor,
Lessee or Agent, at its respective facsimile number or address set forth below
or, if to any Participant, at the address or facsimile number specified beneath
the
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<PAGE> 45
heading "Address for Notices" under the name of such Participant in Part B
of Schedule I (or to such other facsimile number or address for any party as
indicated in any notice given by that party to the other parties). All such
notices and communications shall be effective (a) when sent by Federal Express
or other overnight service of recognized standing, on the Business Day following
the deposit with such service; (b) when mailed, first class postage prepaid and
addressed as aforesaid through the United States Postal Service, upon receipt;
(c) when delivered by hand, upon delivery; and (d) when faxed, upon confirmation
of receipt; provided, however, that any Advance Request, Notice of Rental Period
Selection, Extension Request, Notice of Term Purchase Option Exercise, Notice of
Marketing Option Exercise or Notice of Expiration Date Purchase Option Exercise
delivered to Lessor or Agent shall not be effective until received by Lessor or
Agent.
Lessee: KLA-Tencor Corporation
160 Rio Robles Drive
San Jose, California 95134
Attn: Treasurer
Tel: (408) 875-2143
Fax: (408) 434-4268
and
KLA-Tencor Corporation
160 Rio Robles Drive
San Jose, California 95134
Attn: General Counsel
Tel: (408) 875-2423
Fax: (408) 875-2002
Lessor: Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 South LaSalle Street, Suite 711
Chicago, IL 60603
Attn: David M. Shipley
Tel: (312) 904-2183
Fax: (312) 904-6217
Agent: ABN AMRO Bank N.V.
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
Tel: (212) 314-1724
Fax: (212) 314-1709
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With a copy to:
ABN AMRO Bank N.V.
101 California Street, Suite 4550
San Francisco, CA 94111-5812
Attn: Bruce Swords
Tel: (415) 984-3721
Fax: (415) 362-3524
Each Advance Request, Notice of Rental Period Selection, Extension Request,
Notice of Term Purchase Option Exercise, Notice of Marketing Option Exercise and
Notice of Expiration Date Purchase Option Exercise shall be given by Lessee to
Agent's office located at its address referred to above during its normal
business hours; provided, however, that any such notice received by Agent after
10:00 a.m. on any Business Day shall be deemed received by Agent on the next
Business Day. In any case where this Agreement authorizes notices, requests,
demands or other communications by Lessee to any Lessor Party to be made by
telephone or facsimile, any Lessor Party may conclusively presume that anyone
purporting to be a person designated in any incumbency certificate or other
similar document received by such Lessor Party is such a person.
7.02. Expenses. Lessee shall pay on demand, whether or not any Advance is
made hereunder, (a) all reasonable fees and expenses, including reasonable
attorneys' fees and expenses, incurred by Lessor and Agent in connection with
the preparation, negotiation, execution and delivery of, the consummation of the
transactions contemplated by and the exercise of their duties under, this
Agreement and the other Operative Documents, and the preparation, negotiation,
execution and delivery of amendments and waivers hereunder and thereunder and
(b) all reasonable fees and expenses, including reasonable attorneys' fees and
expenses, incurred by the Lessor Parties in the enforcement or attempted
enforcement of any of the Lessee Obligations or in preserving any of the Lessor
Parties' rights and remedies (including all such fees and expenses incurred in
connection with any "workout" or restructuring affecting the Operative Documents
or the Lessee Obligations or any bankruptcy or similar proceeding involving
Lessee or any of its Subsidiaries). As used herein, the term "reasonable
attorneys' fees and expenses" shall include, without limitation, allocable costs
and expenses of Agent's and Participants' in-house legal counsel and staff. The
obligations of Lessee under this Paragraph 7.02 shall survive the payment and
performance of the Lessee Obligations and the termination of this Agreement.
7.03. Indemnification. To the fullest extent permitted by law, Lessee
agrees to protect, indemnify, defend and hold harmless, on an after-tax basis,
the Lessor Parties and the other Indemnitees from and against any and all
liabilities, losses, damages or expenses of any kind or nature (including
Indemnified Taxes but not other taxes) and from any suits, claims or demands
(including in respect of or for reasonable attorney's fees and other expenses)
arising on account of or in connection with any matter or thing or action or
failure to act by Indemnitees, or any of them, arising out of or relating to the
Operative Documents, any transaction contemplated thereby or the Property,
including any use by Lessee of the Property or the Advances, except to the
extent such liability arises from (a) the willful misconduct or gross negligence
of such Indemnitee, (b) any act or occurrence which first occurs after the Lease
Agreement has
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<PAGE> 47
terminated and Lessee is no longer in possession of the Property, (c) the breach
by any Lessor Party of its obligations under the Operative Documents or (d)
except as otherwise specifically provided in the Operative Documents, the
performance by any Lessor Party of its obligations thereunder. Upon receiving
knowledge of any suit, claim or demand asserted by a third party that any Lessor
Party believes is covered by this indemnity, such Lessor Party shall give Lessee
notice of the matter and an opportunity to defend it, at Lessee's sole cost and
expense, with legal counsel reasonably satisfactory to such Lessor Party. Such
Lessor Parties may also require Lessee to defend the matter. Any failure or
delay of any Lessor Party to notify Lessee of any such suit, claim or demand
shall not relieve Lessee of its obligations under this Paragraph 7.03. The
obligations of Lessee under this Paragraph 7.03 shall survive the payment and
performance of the Lessee Obligations and the termination of this Agreement.
7.04. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement or any other Operative Document may be amended or waived if such
amendment or waiver is in writing and is signed by Lessor, Lessee and the
Required Participants; provided, however that:
(a) Any amendment, waiver or consent which (i) increases the Total
Commitment, (ii) extends the Commitment Termination Date or the Scheduled
Expiration Date, (iii) reduces the Rental Rate or any fees or other
amounts payable for the account of the Participants hereunder, (iv)
postpones any date scheduled for any payment of Base Rent or any fees or
other amounts payable for the account of the Participants hereunder or
thereunder, (v) amends Paragraph 2.06 or this Paragraph 7.04, (vi) amends
the definition of Required Participants or (vii) releases Lessor's or
Agent's interest in any substantial part of the Property, must be in
writing and signed or approved in writing by all Participants;
(b) Any amendment, waiver or consent which increases or decreases
the Proportionate Share or Commitment of any Participant must be in
writing and signed by such Participant; and
(c) Any amendment, waiver or consent which affects the rights or
obligations of Agent must be in writing and signed by Agent.
No failure or delay by any Lessor Party in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right. Unless otherwise specified in such waiver or consent, a
waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.
7.05. Successors and Assigns.
(a) Binding Effect. This Agreement and the other Operative
Documents shall be binding upon and inure to the benefit of Lessee,
Lessor, the Participants, Agent and their respective permitted successors
and assigns. All references in this Agreement to any Person shall be
deemed to include all successors and assigns of such Person.
(b) Participant Assignments.
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(i) Any Participant may, at any time, sell and assign to any
other Participant or any Eligible Assignee (individually, an
"Assignee Participant") all or a portion of its rights and
obligations under this Agreement and the other Operative Documents
(such a sale and assignment to be referred to herein as an
"Assignment") pursuant to an assignment agreement in the form of
Exhibit L (an "Assignment Agreement"), executed by each Assignee
Participant and such assignor Participant (an "Assignor
Participant") and delivered to Agent for its acceptance and
recording in the Register; provided, however, that:
(A) Without the written consent of Lessor, Agent and,
if no Default has occurred and is continuing, Lessee (which
consent of Lessor, Agent and Lessee shall not be unreasonably
withheld), no Participant may make any Assignment to any
Assignee Participant which is not, immediately prior to such
Assignment, a Participant hereunder or an Affiliate thereof;
or
(B) Without the written consent of Lessor, Agent and,
if no Default has occurred and is continuing, Lessee (which
consent of Lessor, Agent and Lessee shall not be unreasonably
withheld), no Participant may make any Assignment to any
Assignee Participant if, after giving effect to such
Assignment, the Commitment of such Participant or such
Assignee Participant would be less than Five Million Dollars
($5,000,000) (except that a Participant may make an Assignment
which reduces its Commitment to zero without the written
consent of Lessor, Agent or Lessee); or
(C) Without the written consent of Lessor, Agent and,
if no Default has occurred and is continuing, Lessee (which
consent of Lessor, Agent and Lessee shall not be unreasonably
withheld), no Participant may make any Assignment of its
Outstanding Tranche A Participation Amount or its Outstanding
Tranche B Participation Amount which does not assign and
delegate an equal pro rata interest in (1) such Participant's
Outstanding Tranche A Participation Amount and its Outstanding
Tranche B Participation Amount, (2) such Participant's Tranche
A Percentage and its Tranche B Percentage, and (3) such
Participant's other rights, duties and obligations relating to
the Tranche A Portion and the Tranche B Portion under this
Agreement and the other Operative Documents.
(D) Without the written consent of Lessor, Agent and,
if no Default has occurred and is continuing, Lessee (which
consent of Lessor, Agent and Lessee shall not be unreasonably
withheld), no Tranche C Participant may make any Assignment of
its Outstanding Tranche C Participation Amount which does not
assign and delegate an equal pro rata interest in (1) such
Participant's Outstanding Tranche C Participation Amount, (2)
such Participant's Tranche C Percentage, and (3) such
Participant's other rights, duties and obligations relating to
the Tranche C Portion under this Agreement and the other
Operative Documents.
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Upon such execution, delivery, acceptance and recording of each
Assignment Agreement, from and after the Assignment Effective Date
determined pursuant to such Assignment Agreement, (y) each Assignee
Participant thereunder shall be a Participant hereunder with a
Tranche A Percentage, Tranche B Percentage, Tranche C Percentage and
Proportionate Share as set forth on Attachment 1 to such Assignment
Agreement (under the caption "Tranche Percentages and Proportionate
Shares After Assignment") and shall have the rights, duties and
obligations of such a Participant under this Agreement and the other
Operative Documents, and (z) the Assignor Participant thereunder
shall be a Participant with a Tranche A Percentage, Tranche B
Percentage, Tranche C Percentage and Proportionate Share as set
forth on Attachment 1 to such Assignment Agreement (under the
caption "Tranche Percentages and Proportionate Shares After
Assignment") , or, if the Proportionate Share of the Assignor
Participant has been reduced to 0%, the Assignor Participant shall
cease to be a Participant and to have any obligation to fund any
portion of any Advance; provided, however, that any such Assignor
Participant which ceases to be a Participant shall continue to be
entitled to the benefits of any provision of this Agreement which by
its terms survives the termination of this Agreement. Each
Assignment Agreement shall be deemed to amend Schedule I to the
extent, and only to the extent, necessary to reflect the addition of
each Assignee Participant, the deletion of each Assignor Participant
which reduces its Proportionate Share to 0% and the resulting
adjustment of Tranche A Percentages, Tranche B Percentages, Tranche
C Percentages and Proportionate Shares arising from the purchase by
each Assignee Participant of all or a portion of the rights and
obligations of an Assignor Participant under this Agreement and the
other Operative Documents. Each Assignee Participant which was not
previously a Participant hereunder and which is not incorporated
under the laws of the United States of America or a state thereof
shall, within three (3) Business Days of becoming a Participant,
deliver to Lessee and Agent two duly completed copies of United
States Internal Revenue Service Form 1001 or 4224 (or successor
applicable form), as the case may be, certifying in each case that
such Participant is entitled to receive payments under this
Agreement without deduction or withholding of any United States
federal income taxes.
(ii) Agent shall maintain at its address referred to in
Paragraph 7.01 a copy of each Assignment Agreement delivered to it
and a register (the "Register") for the recordation of the names and
addresses of the Participants and the Tranche A Percentage, Tranche
B Percentage, Tranche C Percentage and Proportionate Share of each
Participant from time to time. The entries in the Register shall be
conclusive in the absence of manifest error, and Lessee, Agent and
the Participants may treat each Person whose name is recorded in the
Register as the owner of the interests recorded therein for all
purposes of this Agreement. The Register shall be available for
inspection by Lessee or any Participant at any reasonable time and
from time to time upon reasonable prior notice.
(iii) Upon its receipt of an Assignment Agreement executed by
an Assignor Participant and an Assignee Participant (and, to the
extent required by
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<PAGE> 50
clause (i) of this Subparagraph 7.05(b), by Lessor, Agent and
Lessee), together with payment to Agent by Assignor Participant of a
registration and processing fee of $2,500, Agent shall (A) promptly
accept such Assignment Agreement and (B) on the Assignment Effective
Date determined pursuant thereto record the information contained
therein in the Register and give notice of such acceptance and
recordation to Lessor, the Participants and Lessee. Agent may, from
time to time at its election, prepare and deliver to Lessor, the
Participants and Lessee a revised Schedule I reflecting the names,
addresses and respective Proportionate Shares of all Participants
then parties hereto.
(iv) Subject to Subparagraph 7.13(g), the Lessor Parties may
disclose the Operative Documents and any financial or other
information relating to Lessee or any Subsidiary to each other or to
any potential Assignee Participant.
(c) Participant Subparticipations. Any Participant may at any time
sell to one or more banks or other financial institutions
("Subparticipants") subparticipation interests in the rights and interests
of such Participant under this Agreement and the other Operative
Documents. In the event of any such sale by a Participant of
subparticipation interests, such Participant's obligations under this
Agreement and the other Operative Documents shall remain unchanged, such
Participant shall remain solely responsible for the performance thereof
and Lessee and the other Lessor Parties shall continue to deal solely and
directly with such Participant in connection with such Participant's
rights and obligations under this Agreement. Any agreement pursuant to
which any such sale is effected may require the selling Participant to
obtain the consent of the Subparticipant in order for such Participant to
agree in writing to any amendment, waiver or consent of a type specified
in clause (i), (ii), (iii) or (iv) of Subparagraph 7.04(a) but may not
otherwise require the selling Participant to obtain the consent of such
Subparticipant to any other amendment, waiver or consent hereunder. Lessee
agrees that any Participant which has transferred any subparticipation
interest shall, notwithstanding any such transfer, be entitled to the full
benefits accorded such Participant under Paragraph 2.12, Paragraph 2.13,
and Paragraph 2.14, as if such Participant had not made such transfer.
(d) Lessor Assignments. Lessor may, upon one (1) month's prior
written notice to Lessee and Agent, sell and assign all of its right,
title and interest in the Property and its rights, powers, privileges,
duties and obligations under this Agreement and the other Operative
Documents, provided that:
(i) If such sale and assignment is effected after either (A)
the occurrence of a Change of Law which makes it unlawful or
unreasonably burdensome for Lessor to hold legal or beneficial title
to the Property or to perform its obligations and duties under this
Agreement and the other Operative Documents or (B) the resignation
or removal of the Agent which was the Agent at the time Lessor
became the Lessor, the purchaser/assignee (the "successor Lessor")
shall be either (1) a Participant or an Eligible Assignee that is a
multi-asset Person having substantial assets beyond its interest in
the Property and the Operative Documents or (2) a Person approved as
provided in clause (ii) below; or
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(ii) If such sale and assignment is effected in any other
circumstance, the successor Lessor shall be approved in writing by
Agent, Required Participants and, if no Default has occurred and is
continuing, Lessee (which consents of Agent, Required Participants
and Lessee shall not be unreasonably withheld); and
(iii) The successor Lessor executes such documents,
instruments and agreements as may reasonably be necessary to
evidence its agreement to assume all of the obligations and duties
of the Lessor under this Agreement and the other Operative
Documents.
Upon the consummation of any such sale and assignment, (A) the successor
Lessor shall become the "Lessor" and shall succeed to and become vested
with all the rights, powers, privileges, duties and obligations of the
Lessor under this Agreement and the other Operative Documents and (B) the
retiring Lessor shall be discharged from the duties and obligations of the
Lessor thereafter arising under this Agreement and the other Operative
Documents. After any retiring Lessor's discharge as the Lessor, the
provisions of Section VI and any other provision of this Agreement or any
other Operative Document which by its terms survives the termination of
this Agreement shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the
Lessor.
7.06. Setoff. In addition to any rights and remedies of the Participants
provided by law, each Participant shall have the right, with the prior written
consent of Agent, but without prior notice to or consent of Lessee, any such
notice and consent being expressly waived by Lessee to the extent permitted by
applicable law, upon the occurrence and during the continuance of an Event of
Default, to set-off and apply against the Lessee Obligations, whether matured or
unmatured, any amount owing from such Participant to Lessee, at or at any time
after, the occurrence of such Event of Default. The aforesaid right of set-off
may be exercised by such Participant against Lessee or against any trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
receiver or execution, judgment or attachment creditor of Lessee or against
anyone else claiming through or against Lessee or such trustee in bankruptcy,
debtor in possession, assignee for the benefit of creditors, receiver, or
execution, judgment or attachment creditor, notwithstanding the fact that such
right of set-off shall not have been exercised by such Participant prior to the
occurrence of an Event of Default. Each Participant agrees promptly to notify
Lessee after any such set-off and application made by such Participant, provided
that the failure to give such notice shall not affect the validity of such
set-off and application.
7.07. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the parties hereto and their permitted successors and assigns
hereunder, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
7.08. Partial Invalidity. If at any time any provision of this Agreement
or any other Operative Document is or becomes illegal, invalid or unenforceable
in any respect under the law or any jurisdiction, neither the legality, validity
or enforceability of the remaining provisions of this Agreement or the other
Operative Documents nor the legality, validity or enforceability of
51
<PAGE> 52
such provision under the law of any other jurisdiction shall in any way be
affected or impaired thereby.
7.09. JURY TRIAL. EACH OF LESSEE AND THE LESSOR PARTIES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL
BY JURY AS TO ANY ISSUE RELATING TO THE OPERATIVE DOCUMENTS IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OPERATIVE
DOCUMENT.
7.10. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
7.11. No Joint Venture, Etc. Neither this Agreement nor any other
Operative Document nor any transaction contemplated hereby or thereby shall be
construed to (a) constitute a partnership or joint venture between Lessee and
any Lessor Party or (b) impose upon any Lessor Party any agency relationship
with or fiduciary duty to Lessee.
7.12. Usury Savings Clause. Nothing contained in this Agreement or any
other Operative Documents shall be deemed to require the payment of interest or
other charges by Lessee in excess of the amount the applicable Lessor Parties
may lawfully charge under applicable usury laws. In the event any Lessor Party
shall collect monies which are deemed to constitute interest which would
increase the effective interest rate to a rate in excess of that permitted to be
charged by applicable law, all such sums deemed to constitute excess interest
shall, upon such determination, at the option of Lessor, be returned to Lessee
or credited against other Lessee Obligations.
7.13. Confidentiality. No Lessor Party shall disclose to any Person any
information with respect to Lessee or any of its Subsidiaries which is furnished
pursuant to this Agreement or under the other Operative Documents, except that
any Lessor Party may disclose any such information (a) to its own directors,
officers, employees, auditors, counsel and other advisors and to its Affiliates;
(b) to any other Lessor Party; (c) which is otherwise available to the public;
(d) if required or appropriate in any report, statement or testimony submitted
to any Governmental Authority having or claiming to have jurisdiction over such
Lessor Party; (e) if required or appropriate in response to any summons or
subpoena or in connection with any litigation; (f) to comply with any
Requirement of Law applicable to such Lessor Party; (g) to any Assignee
Participant or Subparticipant or any prospective Assignee Participant or
Subparticipant, provided that such Assignee Participant or Subparticipant or
prospective Assignee Participant or Subparticipant agrees to be bound by this
Paragraph 7.13; or (h) otherwise with the prior consent of Lessee; provided,
however, that any disclosure made in violation of this Agreement shall not
affect the obligations of Lessee and its Subsidiaries under this Agreement and
the other Operative Documents.
[The first signature page follows.]
52
<PAGE> 53
IN WITNESS WHEREOF, Lessee, Lessor, the Participants and Agent have caused
this Agreement to be executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:______________________________________
Name:_________________________________
Title:________________________________
LESSOR: LEASE PLAN U.S.A., INC.
By:______________________________________
Name:_________________________________
Title:________________________________
AGENT: ABN AMRO BANK N.V.
By:______________________________________
Name:_________________________________
Title:________________________________
By:______________________________________
Name:_________________________________
Title:________________________________
CO-AGENT: BANQUE NATIONALE DE PARIS
By:______________________________________
Name:_________________________________
Title:________________________________
PARTICIPANTS: ABN AMRO BANK N.V.
By:______________________________________
Name:_________________________________
Title:________________________________
By:______________________________________
Name:_________________________________
Title:________________________________
53
<PAGE> 54
BANQUE NATIONALE DE PARIS
By:______________________________________
Name:_________________________________
Title:________________________________
KEY BANK NATIONAL ASSOCIATION
By:______________________________________
Name:_________________________________
Title:________________________________
BANK BOSTON N.A.
By:______________________________________
Name:_________________________________
Title:________________________________
THE BANK OF NEW YORK
By:______________________________________
Name:_________________________________
Title:________________________________
THE INDUSTRIAL BANK OF JAPAN,
LIMITED SAN FRANCISCO AGENCY
By:______________________________________
Name:_________________________________
Title:________________________________
THE SANWA BANK, LIMITED
SAN FRANCISCO BRANCH
By:______________________________________
Name:_________________________________
Title:________________________________
54
<PAGE> 55
THE BANK OF NOVA SCOTIA
By:______________________________________
Name:_________________________________
Title:________________________________
THE SUMITOMO TRUST & BANKING CO.,
LTD., LOS ANGELES AGENCY
By:______________________________________
Name:_________________________________
Title:________________________________
UNION BANK OF CALIFORNIA, N.A.
By:______________________________________
Name:_________________________________
Title:________________________________
55
<PAGE> 56
SCHEDULE I
PARTICIPANTS
PART A - TRANCHE PERCENTAGES AND PROPORTIONATE SHARES
<TABLE>
<CAPTION>
Tranche A Tranche B Tranche C Proportionate
Participant Percentage Percentage Percentage Share
----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
ABN AMRO
Bank N.V 7.29896907% 1.12960236% 03.00000000% 11.42857143%
Banque Nationale
de Paris 9.15463918% 1.41678940% 00.00000000% 10.57142857%
Key Bank National
Association 8.65979381% 1.34020619% 00.00000000% 10.00000000%
Bank Boston N.A 8.41237113% 1.30191458% 00.00000000% 9.71428571%
The Bank of
New York 8.41237113% 1.30191458% 00.00000000% 9.71428571%
The Industrial
Bank of Japan, Ltd.,
San Francisco Agency 8.41237113% 1.30191458% 00.00000000% 9.71428571%
The Sanwa Bank, Ltd.,
San Francisco Branch 8.41237113% 1.30191458% 00.00000000% 9.71428571%
The Bank of
Nova Scotia 8.41237113% 1.30191458% 00.00000000% 9.71428571%
The Sumitomo Trust &
Banking Co., Ltd.,
Los Angeles Agency 8.41237113% 1.30191458% 00.00000000% 9.71428571%
Union Bank
of California, N.A 8.41237113% 1.30191458% 00.00000000% 9.71428571%
TOTAL 84.00000000% 13.00000000% 03.00000000% 100.00000000%
</TABLE>
I-1
<PAGE> 57
PART B - ADDRESSES, ETC.
ABN AMRO BANK N.V.
Applicable Participating Office:
ABN AMRO Bank N.V.
San Francisco International Branch
101 California Street, Suite 4550
San Francisco, CA 94111
Address for Notices:
ABN AMRO Bank N.V.
San Francisco International Branch
101 California Street, Suite 4550
San Francisco, CA 94111
Attention: Bruce Swords
Telephone: (415) 984-3721
Fax: (415) 362-3524
ABN AMRO North America, Inc.
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attention: Linda Boardman
Telephone: (212) 314-1724
Fax: (212) 314-1709
Wiring Instructions:
ABN AMRO Bank N.V.
New York, New York
RT/ABA No.: 026009580
Account Name: ABN AMRO Bank N.V. - Chicago CPU
Account No.: 650-001-1789-41
Reference: KLA-Tencor
I-2
<PAGE> 58
BANQUE NATIONALE DE PARIS
Applicable Participating Office:
Banque Nationale de Paris
180 Montgomery Street
San Francisco, CA 94104
Address for Notices:
Banque Nationale de Paris
180 Montgomery Street
San Francisco, CA 94104
Attention: Rafael Lumanian, Vice President
Telephone: (415) 956-0707
Fax No: (415) 296-8954
Wiring Instructions:
Federal Reserve Bank of San Francisco
Banque Nationale de Paris, San Francisco Branch
ABA Number: 121027234
Reference: KLA-TENCOR LEASE
I-3
<PAGE> 59
KEY BANK NATIONAL ASSOCIATION
Applicable Participating Office:
Key Bank National Association
700 Fifth Avenue
Seattle, WA 98104
Address for Notices:
Key Bank National Association
700 Fifth Avenue, 46th Floor
Seattle, WA 98104
Attention: Kevin McBride
Telephone: (206) 684-6079
Fax No: (206) 684-6035
Wiring Instructions:
Key Bank National Association
Seattle, Washington
ABA No: 125-000-578
For Further Credit to: NW Region Specialty Services
Account No: 01500163
Reference: KLA-Tencor
I-4
<PAGE> 60
BANK BOSTON N.A.
Applicable Participating Office:
Bank Boston N.A.
435 Tasso Street
Palo Alto, CA 94301
Address for Notices:
Bank Boston N.A.
435 Tasso Street, Suite 250
Palo Alto, CA 94301
Attention: Maia D. Heymann, Vice President
Telephone: (650) 853-0770
Fax No: (650) 853-1425
Wiring Instructions:
Bank Boston N.A.
Boston, MA
ABA No: 011-000-390
Account No: 540-99647
Reference: KLA-Tencor
I-5
<PAGE> 61
THE BANK OF NEW YORK
Participating Office:
The Bank of New York
10990 Wilshire Boulevard, Suite 1125
Los Angeles, CA 90024
Address for Notices:
The Bank of New York
10990 Wilshire Boulevard, Suite 1125
Los Angeles, CA 90024
Attention: Elizabeth T. Ying
Telephone: (310) 996-8661
Fax No: (310) 996-8667
The Bank of New York
One Wall Street, 15th Floor
New York, NY 10286
Attention: Susan Seibel
Telephone: (212) 635-7944
Fax No: (212) 635-1698
Wiring Instructions:
The Bank of New York
One Wall Street, 22nd Floor
New York, NY 10286
Attention: Sandra Morgan
ABA No: 021-000-018
Account No: GLA111556
Reference: KLA-Tencor
I-6
<PAGE> 62
THE INDUSTRIAL BANK OF JAPAN, LIMITED
Participating Office:
The Industrial Bank of Japan, Limited
San Francisco Agency
555 California Street
San Francisco, CA 94104
Address for Notices:
The Industrial Bank of Japan, Limited
San Francisco Agency
555 California Street, Suite 3110
San Francisco, CA 94104
Attention: Debbie Rajkumar
Telephone: (415) 693-1830
Fax No: (415) 982-1917
Wiring Instructions:
Bank of America NT & SA
International Deposit Services 6561
1850 Gateway Boulevard
Concord, CA 94520
ABA No: 121-000-358
Account: The Industrial Bank of Japan, Limited
Los Angeles Agency
Account No: 62906-14014
For Credit to IBJ SFA, A/C 2601-22011
I-7
<PAGE> 63
THE SANWA BANK, LIMITED
Participating Office:
The Sanwa Bank, Limited
San Francisco Branch
444 Market Street
San Francisco, CA 94111
Address for Notices:
The Sanwa Bank, Limited
San Francisco Branch
444 Market Street, 18th Floor
San Francisco, CA 94111
Attention: Terrence J. Mech
Telephone No: (415) 597-5222
Fax No: (415) 788-5459
Wiring Instructions:
Bank of America
San Francisco, CA
ABA No: 1210-00358
Account No: 6290112268
I-8
<PAGE> 64
THE BANK OF NOVA SCOTIA
Participating Office:
The Bank of Nova Scotia
580 California Street
San Francisco, CA 94104
Address for Notices:
The Bank of Nova Scotia
580 California Street, Suite 2100
San Francisco, CA 94104
Attention: Christopher Osborn
Telephone: (415) 986-1100
Fax No: (415) 397-0791
Wiring Instructions:
The Bank of Nova Scotia
New York Agency
ABA No: 026 002 532
For Credit A/C # 06101-35-BNS
San Francisco Loan Service
Reference: KLA-Tencor
I-9
<PAGE> 65
THE SUMITOMO TRUST & BANKING CO., LIMITED
Participating Office:
The Sumitomo Trust & Banking Co., Ltd.
Los Angeles Agency
333 South Grand Avenue, Suite 5300
Los Angeles, CA 90071
Address for Notices:
The Sumitomo Trust & Banking Co., Ltd.
Los Angeles Agency
333 South Grand Avenue, Suite 5300
Los Angeles, CA 90071
Attention: Ninoos Benjamin
Telephone: (213) 229-2104
Fax No: (213) 613-1083
Copy to:
Credit Administration Department
Telephone: (213) 629-3191
Fax No: (213) 628-2719
Wiring Instructions:
Bank of America
San Francisco, California
ABA No: 121 000 358
Account No: 62907-31117
I-10
<PAGE> 66
UNION BANK OF CALIFORNIA, N.A.
Participating Office:
Union Bank of California, N.A.
350 California Street, 6th Floor
San Francisco, CA 94104
Address for Notices:
Union Bank of California, N.A.
350 California Street, 6th Floor
San Francisco, CA 94104
Attention: Glenn Leyrer
Telephone: (415) 705-7578
Fax No: (415) 705-5093
Wiring Instructions:
Union Bank of California, N.A.
Monterey Park, CA
ABA No: 122-000-496
Account No: 070196431
Attention: 192 Note Center
Reference: KLA-Tencor
I-11
<PAGE> 67
SCHEDULE II
PRICING GRID
(For LIBOR Rental Rate)
<TABLE>
<CAPTION>
SENIOR
FUNDED
INDEBTEDNESS/ PRICING APPLICABLE MARGIN
CAPITAL PERIOD FOR
RATIO LEVEL LIBOR RENTAL RATE
------------- ------- -----------------
<S> <C> <C>
less than or equal to 0.225 1 0.4200%
greater than 0.225
less than 0.300 2 0.5000%
greater than or equal to 0.300 3 0.7250%
</TABLE>
EXPLANATION
1. The Applicable Margin with respect to the LIBOR Rental Rate will be set
for each Pricing Period and will vary depending upon whether such period
is a Level 1 Period, a Level 2 Period, or a Level 3 Period.
2. The first Pricing Period, which commences on the date of this Agreement
and ends on December 31, 1997, will be a Level 1 Period.
3. The second pricing period, which commences on January 1, 1998 and ends on
March 31, 1998, will be a Level 1 Period, a Level 2 Period, or a Level 3
Period depending upon Lessee's Senior Funded Indebtedness/Capital Ratio on
September 30, 1997.
3. Each Pricing Period thereafter will be a Level 1 Period, a Level 2 Period,
or a Level 3 Period depending upon Lessee's Senior Funded
Indebtedness/Capital Ratio on the last day of the most recent fiscal
quarter ending prior to the first day of such Pricing Period.
4. Examples:
(a) Lessee's Senior Funded Indebtedness/Capital Ratio is 0.12 on
September 30, 1997. The Pricing Period of January 1, 1998 through March
31, 1998 will be a Level 1 Period.
(b) Lessee's Senior Funded Indebtedness/Capital Ratio is 0.32 on
December 31, 1997. The Pricing Period of April 1, 1998 through June 30,
1998 will be a Level 3 Period.
II-1
<PAGE> 68
SCHEDULE 1.O1
DEFINITIONS
"ABN AMRO" shall mean ABN AMRO Bank N.V.
"Acquisition Advances" shall have the meaning given to that term in
Subparagraph 2.01(b) of the Participation Agreement.
"Acquisition Agreement" shall mean:
(a) With respect to the Tract 2 Land and Improvements, the
Purchase Agreement dated as of August 10, 1995 between Lessee and BNP
Leasing Corporation;
(b) With respect to the Tract 3 Improvements, the Purchase
Agreement dated as of June 5, 1995 between Lessee and BNP Leasing
Corporation; and
(c) With respect to the Tract 4 Land and Improvements, the Option
Agreement dated as of July 26, 1995 between Lessee and Amdahl Corporation.
"Acquisition Date" shall mean the date on which Lessor acquires any Tract
of Property or pays any Phase II Termination Payment pursuant to the
Participation Agreement.
"Acquisition Price" shall mean, with respect to each Tract of Property,
the total purchase price payable by Lessor for such property on the Acquisition
Date therefor.
"Acquisition Request" shall have the meaning given to that term in
Subparagraph 2.03(a) of the Participation Agreement.
"Adjusted Net Income" shall mean, with respect to Lessee for any period,
the sum, determined on a consolidated basis in accordance with GAAP, of the
following:
(a) The net income or net loss of Lessee and its Subsidiaries for
such period before provision for income taxes;
plus
(b) The sum (to the extent deducted in calculating net income or
loss in clause (a) above) of (i) all interest expenses of Lessee and its
Subsidiaries accruing during such period, and (ii) all depreciation and
amortization expenses of Lessee and its Subsidiaries accruing during such
period;
plus
(c) The sum (to the extent deducted in calculating net income or
loss in clause (a) above) of all non-recurring charges taken by Lessee and
its Subsidiaries during such period in connection with the acquisition of
in-process technology;
1.01-1
<PAGE> 69
minus
(d) All Capital Expenditures of Lessee and its Subsidiaries
accruing during such period;
Provided, however, that, in calculating the Adjusted Net Income of Lessee for
any period, all extraordinary and unusual gains and losses having no cash impact
shall be ignored (subject to any necessary adjustments for any tax impact).
"Advances" shall have the meaning given to that term in Subparagraph
2.01(b) of the Participation Agreement.
"Advance Requests" shall have the meaning given to that term in
Subparagraph 2.03(c) of the Participation Agreement.
"Affiliate" shall mean, with respect to any Person, (a) each Person that,
directly or indirectly, owns or controls, whether beneficially or as a trustee,
guardian or other fiduciary, five percent (5%) or more of any class of Equity
Securities of such Person, (b) each Person that controls, is controlled by or is
under common control with such Person or any Affiliate of such Person or (c)
each of such Person's officers, directors, joint venturers and partners;
provided, however, that in no case shall Lessor, Agent or any Participant be
deemed to be an Affiliate of Lessee or any of its Subsidiaries for purposes of
the Operative Documents. For the purpose of this definition, "control" of a
Person shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of its management or policies, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" shall mean ABN AMRO, acting in its capacity as Agent for the
Participants under the Operative Documents.
"Agent's Fee Letter" shall mean the letter agreement dated as of November
6, 1997 between Lessee and Agent.
"Agent's Fees" shall have the meaning given to that term in Subparagraph
2.04(a) of the Participation Agreement.
"Alternate Rental Rate" shall mean, for any Rental Period (or portion
thereof), the per annum rate equal to the Base Rate in effect from time to time
during such period plus the Applicable Margin, such rate to change from time
during such period as the Base Rate or Applicable Margin shall change.
"Applicable Margin" shall mean:
(a) With respect to the LIBOR Rental Rate, the per annum margin
determined pursuant to the Pricing Grid and added to the LIBO Rate; or
(b) With respect to the Alternate Rental Rate, Zero percent (0%)
per annum;
1.01-2
<PAGE> 70
Provided, however, that each Applicable Margin set forth in subparagraphs (a)
and (b) of this definition shall be increased by two percent (2.0%) per annum on
the date an Event of Default occurs and shall continue at such increased rate
while any Event of Default continues.
"Applicable Participating Office" shall mean, with respect to any
Participant, (a) initially, its office designated as such in Part B of Schedule
I (or, in the case of any Participant which becomes a Participant by an
assignment pursuant to Subparagraph 7.05(b) of the Participation Agreement, its
office designated as such in the applicable Assignment Agreement) and (b)
subsequently, such other office or offices as such Participant may designate to
Agent as the office at which such Participant's interest in the Lease Agreement
will thereafter be maintained and for the account of which all payments of Rent
and other amounts payable to such Participant under the Operative Documents will
thereafter be made.
"Appraisal" shall mean an appraisal of any Tract of the Property or a
portion thereof in a form satisfactory to Lessor, Agent and the Required
Participants, prepared by an independent MAI appraiser that (a) complies with
the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all
other applicable Governmental Rules and (b) is approved by Lessor, Agent and the
Required Participants (at the time such appraiser is selected).
"Appurtenant Rights" shall mean all easements and rights-of-way, strips
and gores of land, streets, ways, alleys, passages, sewer rights, water, water
courses, water rights and powers, air rights and development rights, liberties,
tenements, hereditaments and appurtenances of any nature whatsoever, in any way
belonging, relating or pertaining to any Land or the Improvements thereto and
the reversions, remainders, and all the estates, rights, titles, interests,
property, possession, claim and demand whatsoever, both in law and in equity,
of, in and to such Land and Improvements and every part and parcel thereof, with
the appurtenances thereto.
"Assignee Participant" shall have the meaning given to that term in
Subparagraph 7.05(b) of the Participation Agreement.
"Assignee Purchaser" shall have the meaning given to that term in
Subparagraph 5.03(b)of the Purchase Agreement.
"Assignment" shall have the meaning given to that term in Subparagraph
7.05(b) of the Participation Agreement.
"Assignment Agreement" shall have the meaning given to that term in
Subparagraph 7.05(b) of the Participation Agreement.
"Assignment Effective Date" shall have, with respect to each Assignment
Agreement, the meaning set forth therein.
"Assignment of Construction Agreements" shall have the meaning given to
that term in Subparagraph 2.11(a) of the Participation Agreement.
"Assignment of Lease" shall have the meaning given to that term in
Subparagraph 2.11(b) of the Participation Agreement.
1.01-3
<PAGE> 71
"Assignor Participant" shall have the meaning given to that term in
Subparagraph 7.05(b) of the Participation Agreement.
"Assumed Appraisal" shall have the meaning given to that term in
Subparagraph 3.02(h) of the Purchase Agreement.
"Base Rate" shall mean, on any day, the greater of (a) the Prime Rate in
effect on such date and (b) the Federal Funds Rate for such day plus one-half
percent (0.50%).
"Base Rent" shall have the meaning given to that term in Subparagraph
2.03(a) of the Lease Agreement.
"Business Day" shall mean any day on which (a) commercial banks are not
authorized or required to close in San Francisco, California or New York, New
York and (b) if such Business Day is related to a LIBOR Rental Rate, dealings in
Dollar deposits are carried out in the London interbank market.
"Capital Adequacy Requirement" shall have the meaning given to that term
in Subparagraph 2.12(d) of the Participation Agreement.
"Capital Asset" shall mean, with respect to any Person, any tangible fixed
or capital asset owned or leased (in the case of a Capital Lease) by such
Person, or any expense incurred by such Person that is required by GAAP to be
reported as a non-current asset on such Person's balance sheet.
"Capital Expenditures" shall mean, with respect to any Person and any
period, all expenses accrued by such Person during such period for the
acquisition of Capital Assets (including all indebtedness incurred or assumed in
connection with Capital Leases).
"Capital Leases" shall mean any and all lease obligations that, in
accordance with GAAP, are required to be capitalized on the books of a lessee.
"Cash Collateral" shall mean cash held or maintained by Agent in a deposit
account to the extent such cash and account are held and maintained in
accordance with the Cash Collateral Agreement and Lessor has a first priority
perfected security interest therein securing the Lessee Obligations.
"Cash Collateral Agreement" shall have the meaning given to that term in
Subparagraph 2.11(a) of the Participation Agreement.
"Cash Equivalents" shall mean:
(a) Direct obligations of, or obligations the principal and
interest on which are unconditionally guaranteed by, the United States of
America or obligations of any agency of the United States of America to
the extent such obligations are backed by the full faith and credit of the
United States of America, in each case maturing within one year from the
date of acquisition thereof;
1.01-4
<PAGE> 72
(b) Certificates of deposit maturing within one year from the date
of acquisition thereof issued by a commercial bank or trust company
organized under the laws of the United States of America or a state
thereof or that is a Participant, provided that (A) such deposits are
denominated in Dollars, (B) such bank or trust company has capital,
surplus and undivided profits of not less than $100,000,000 and (C) such
bank or trust company has certificates of deposit or other debt
obligations rated at least A-1 (or its equivalent) by Standard and Poor's
Ratings Group or P-1 (or its equivalent) by Moody's Investors Service,
Inc.;
(c) Open market commercial paper maturing within 270 days from the
date of acquisition thereof issued by a corporation organized under the
laws of the United States of America or a state thereof, provided such
commercial paper is rated at least A-1 (or its equivalent) by Standard and
Poor's Ratings Group or P-1 (or its equivalent) by Moody's Investors
Service, Inc.; and
(d) Any repurchase agreement entered into with a commercial bank
or trust company organized under the laws of the United States of America
or a state thereof or that is a Participant, provided that (A) such bank
or trust company has capital, surplus and undivided profits of not less
than $100,000,000, (B) such bank or trust company has certificates of
deposit or other debt obligations rated at least A-1 (or its equivalent)
by Standard and Poor's Ratings Group or P-1 (or its equivalent) by Moody's
Investors Service, Inc., (C) the repurchase obligations of such bank or
trust company under such repurchase agreement are fully secured by a
perfected security interest in a security or instrument of the type
described in clause (a), (b) or (c) above and (D) such security or
instrument so securing the repurchase obligations has a fair market value
at the time such repurchase agreement is entered into of not less than
100% of such repurchase obligations.
"Casualty" shall mean any damage to, destruction of or decrease in the
value of all or any portion of any of the Property as a result of fire, flood,
earthquake or other natural cause; the actions or inactions of any Person or
Persons (whether willful or unintentional and whether or not constituting
negligence); or any other cause.
"Casualty and Condemnation Proceeds" shall mean all awards, damages,
compensation, reimbursement and other payments made or to be made to Lessee,
Lessor or Agent from any insurer, Governmental Authority or other Person (other
than Lessee or any Lessor Party) on account of any Casualty or Condemnation.
"Change of Control" shall mean, with respect to Lessee, (a) the
acquisition by any person or group of persons (within the meaning of Section 13
or 14 of the Securities Exchange Act of 1934 (as amended, the "Exchange Act"))
of (i) beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under the Exchange Act) of thirty-five
percent (35%) or more of the outstanding Equity Securities of Lessee entitled to
vote for members of the board of directors, or (ii) all or substantially all of
the assets of Lessee and its Subsidiaries taken as a whole; or (b) during any
period of twelve (12) consecutive calendar months, individuals who are directors
of Lessee on the first day of such period ("Initial Directors") and any
directors of Lessee who are specifically approved by two-thirds of the Initial
1.01-5
<PAGE> 73
Directors and previously-approved Directors shall cease to constitute a majority
of the Board of Directors of Lessee before the end of such period.
"Change of Law" shall have the meaning given to that term in Subparagraph
2.12(b) of the Participation Agreement.
"Closing Date" shall have the meaning given to that term in Subparagraph
2.01(a) of the Participation Agreement.
"Closing Date Appraisal" shall mean, with respect to any Tract of Property
(or any portion thereof) on or as of a recent date prior to the Closing Date, an
Appraisal that assesses at such time the Fair Market Value of such Tract of
Property (or such portion) on such date, as improved with any Existing
Improvements.
"Co-Agent" shall mean Banque Nationale de Paris.
"Collateral" shall mean the Property Collateral, the Cash Collateral and
all other property in which any Lessor Party has a Lien to secure any of the
Lessee Obligations.
"Commencement Date" shall have the meaning given to that term in
Subparagraph 2.02(a) of the Lease Agreement.
"Commitment" shall mean, with respect to any Participant at any time, such
Participant's Proportionate Share of the Total Commitment at such time.
"Commitment Extension Fee" shall have the meaning given to that term in
Subparagraph 2.04(c) of the Participation Agreement.
"Commitment Extension Request" shall have the meaning given to that term
in Subparagraph 2.09(a) of the Participation Agreement.
"Commitment Fees" shall have the meaning given to that term in
Subparagraph 2.04(b) of the Participation Agreement.
"Commitment Period" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Commitment Termination Date" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Completion" shall have the meaning given to that term in Subparagraph
3.05(b) of the Construction Agency Agreement. "Completed" and "Completion" shall
have comparable meanings.
"Completion Date" shall mean the first date on which all of the conditions
set forth in Subparagraph 3.05(c) of the Construction Agency Agreement are
satisfied.
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"Compliance Certificate" shall have the meaning given to that term in
Subparagraph 5.01(a) of the Participation Agreement.
"Condemnation" shall mean any condemnation, requisition, confiscation,
seizure or other taking or sale of the use, access, occupancy or other right in
or to all or any portion of any of the Property (whether wholly or partially,
temporarily or permanently), by or on account of any actual or threatened
eminent domain proceeding or other taking of action by any Governmental
Authority or other Person having the power of eminent domain, including an
action by any such Governmental Authority or Person to change the grade of, or
widen the streets adjacent to, such Property or alter the pedestrian or
vehicular traffic flow to such Property so as to result in change in access to
such Property, or by or on account of an eviction by paramount title or any
transfer made in lieu of any such proceeding or action. A "Condemnation" shall
be deemed to have occurred on the earliest of the dates that use, access,
occupancy or other right is taken.
"Conforming Bid" shall have the meaning given to that term in Subparagraph
3.02(c) of the Purchase Agreement.
"Construction Agency Agreement" shall have the meaning given to that term
in Subparagraph 2.01(a) of the Participation Agreement.
"Construction Agreements" shall have the meaning given to that term in
Paragraph 3.02 of the Construction Agency Agreements.
"Contingent Obligation" shall mean, with respect to any Person, (a) any
Guaranty Obligation of that Person; and (b) any direct or indirect obligation or
liability, contingent or otherwise, of that Person (i) in respect of any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments, (ii) as a partner or
joint venturer in any partnership or joint venture, (iii) to purchase any
materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such services, shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered, or (iv) in respect to any Rate Contract that is not
entered into in connection with a bona fide hedging operation that provides
offsetting benefits to such Person. The amount of any Contingent Obligation
shall (subject, in the case of Guaranty Obligations, to the last sentence of the
definition of "Guaranty Obligation") be deemed equal to the maximum reasonably
anticipated liability in respect thereof, and shall with respect to item (b)(iv)
of this definition be marked to market on a current basis.
"Contractual Obligation" of any Person shall mean, any indenture, note,
lease, loan agreement, security, deed of trust, mortgage, security agreement,
guaranty, instrument; contract, agreement or other form of contractual
obligation or undertaking to which such Person is a party or by which such
Person or any of its property is bound.
"Credit Event" shall mean the making of each Advance or the exercise of
the Partial Purchase Option or Marketing Option under the Purchase Agreement.
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"Current Appraisal" shall have the meaning given to that term in
Subparagraph 3.02(h) of the Purchase Agreement.
"Debt Service Coverage Ratio" shall mean, with respect to Lessee for any
period, the ratio, determined on a consolidated basis in accordance with GAAP,
of:
(a) The Adjusted Net Income of Lessee for such period;
to
(b) The sum of (i) all interest expenses of Lessee and its
Subsidiaries accruing during such period and (ii) the current maturities
of all long-term debt (or, in the case of Capital Leases, amounts
attributable to principal).
"Default" shall mean any Event of Default under the Lease Agreement or any
event or circumstance not yet constituting an Event of Default under the Lease
Agreement which, with the giving of any notice or the lapse of any period of
time or both, would become an Event of Default under the Lease Agreement.
"Defaulting Participant" shall mean a Participant which has failed to fund
its portion of any Advance which it is required to fund under the Participation
Agreement and has continued in such failure for three (3) Business Days after
written notice from Agent.
"Designated Purchaser" shall have the meaning given to that term in
Subparagraph 3.02(e) of the Purchase Agreement.
"Dollars" and "$" shall mean the lawful currency of the United States of
America and, in relation to any payment under the Operative Documents, same day
or immediately available funds.
"Eligible Assignee" shall mean (a) a commercial bank organized under the
laws of the United States, or any state thereof, and having a combined capital
and surplus of at least $500,000,000; (b) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least $500,000,000,
provided that such bank is acting through a branch or agency located in the
United States; or (c) a Person that is primarily engaged in the business of
commercial banking and that is (i) a Subsidiary of a Participant, (ii) a
Subsidiary of a Person of which a Participant is a Subsidiary, or (iii) a Person
of which a Participant is a Subsidiary.
"Employee Benefit Plan" shall mean any employee benefit plan within the
meaning of section 3(3) of ERISA maintained or contributed to by Lessee or any
ERISA Affiliate, other than a Multiemployer Plan.
"Environmental Laws" shall mean the Clean Air Act, 42 U.S.C. Section 7401
et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et
seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901
et seq.; the Comprehensive Environment Response, Compensation and Liability Act
of 1980 (including the Superfund Amendments and
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Reauthorization Act of 1986, "CERCLA"), 42 U.S.C. Section 9601 et seq.; the
Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Occupational
Safety and Health Act, 29 U.S.C. Section 651; the Emergency Planning and
Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine
Safety and Health Act of 1977, 30 U.S.C. Section 801 et seq.; the Safe Drinking
Water Act, 42 U.S.C. Section 300f et seq.; and all other Governmental Rules
relating to the protection of human health and the environment, including all
Governmental Rules pertaining to reporting, licensing, permitting,
transportation, storage, disposal, investigation, and remediation of emissions,
discharges, releases, or threatened releases of Hazardous Materials into the
air, surface water, groundwater, or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of Hazardous Materials.
"Equity Securities" of any Person shall mean (a) all common stock,
preferred stock, participations, shares, partnership interests or other equity
interests in and of such Person (regardless of how designated and whether or not
voting or non-voting) and (b) all warrants, options and other rights to acquire
any of the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may from time to time be amended or supplemented, including any rules
or regulations issued in connection therewith.
"ERISA Affiliate" shall mean any Person which is treated as a single
employer with Lessee under Section 414 of the IRC.
"Event of Default" shall have the meaning given to that term in Paragraph
5.01 of the Lease Agreement.
"Executive Officer" shall mean any officer of Lessee designated by
Lessee's Board of Directors as a "reporting officer" under Section 16 of the
Securities Exchange Act of 1934.
"Exhibit B Supplement" shall have the meaning given to that term in
Subparagraph 2.03(b) of the Participation Agreement.
"Existing Improvements" shall mean (a) with respect to a particular Tract
of Land, all Improvements existing on such Land on the Acquisition Date therefor
and (b) with respect to all the Land, all such Improvements. Each reference to
"Existing Improvements" shall refer collectively to Existing Improvements with
respect to all the Land unless such reference specifically indicates that it
applies to a particular Tract.
"Expiration Date" shall mean the earlier of (a) the Scheduled Expiration
Date under the Lease Agreement, as such date may be extended pursuant to this
Agreement, and (b) the Termination Date for the Lease Agreement, if the Lease
Agreement is terminated prior to its Scheduled Expiration Date in accordance
with its terms.
"Expiration Date Appraisal" shall mean, with respect to any Tract of
Property (or any portion thereof) at any time, an Appraisal that assesses at
such time the Fair Market Value of such Tract of Property (or such portion) on
the Scheduled Expiration Date and as improved in
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accordance with the Plans and Specifications for all New Improvements, if any,
to be made to such Tract of Property (or such Portion).
"Expiration Date Purchase Option" shall have the meaning given to that
term in Subparagraph 3.01(b) of the Purchase Agreement.
"Fair Market Value" shall mean, with respect to any of the Property or any
portion thereof, the maximum reasonable amount (not less than zero) that would
be paid in cash in an arm's-length transaction between an informed and willing
purchaser and an informed and willing seller, neither of whom is under any
compulsion to purchase or sell, for the ownership of the Property or such
portion.
"FASB 13" shall mean Financial Accounting Standards Board Statement No.
13.
"Federal Funds Rate" shall mean, for any day, the rate per annum set forth
in the weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor publication, "H.15 (519)") for such day opposite the caption "Federal
Funds (Effective)". If on any relevant day, such rate is not yet published in
H.15 (519), the rate for such day shall be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor publication, the
"Composite 3:30 p.m. Quotations") for such day under the caption "Federal Funds
Effective Rate". If on any relevant day, such rate is not yet published in
either H.15 (519) or the Composite 3:30 p.m. Quotations, the rate for such day
shall be the arithmetic means, as determined by Agent, of the rates quoted to
Agent for such day by three (3) Federal funds brokers of recognized standing
selected by Agent.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"Financial Statements" shall mean, with respect to any accounting period
for any Person, statements of income, shareholders' equity and cash flows of
such Person for such period, and a balance sheet of such Person as of the end of
such period, setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year if such period is less than a
full fiscal year or, if such period is a full fiscal year, corresponding figures
from the preceding annual audit, all prepared in reasonable detail and in
accordance with GAAP.
"Funded Indebtedness" of any Person shall mean, without duplication:
(a) All obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments and all other obligations of such
Person for borrowed money (including the then outstanding face amount of
"pre-acceptance" accounts receivable sold by KLA-Tencor Japan, Ltd. with
recourse);
(b) All obligations of such Person for the deferred purchase price
of property or services (including obligations under letters of credit and
other credit facilities which secure or finance such purchase price and
obligations under "synthetic" leases), other
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than trade payables incurred by such Person in the ordinary course of its
business on ordinary terms and not overdue;
(c) All obligations of such Person under conditional sale or other
title retention agreements with respect to property acquired by such
Person (to the extent of the value of such property if the rights and
remedies of the seller or lender under such agreement in the event of
default are limited solely to repossession or sale of such property); and
(d) All obligations of such Person as lessee under or with respect
to Capital Leases.
"GAAP" shall mean generally accepted accounting principles and practices
as in effect in the United States of America from time to time, consistently
applied.
"Governmental Authority" shall mean any domestic or foreign national,
state or local government, any political subdivision thereof, any department,
agency, authority or bureau of any of the foregoing, or any other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, including, without limitation, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, the
Comptroller of the Currency, any central bank or any comparable authority.
"Governmental Charges" shall mean taxes, levies, assessments, fees,
imposts, duties, licenses, recording charges, claims or other charges imposed by
any Governmental Authority.
"Governmental Rule" shall mean any law, rule, regulation, ordinance,
order, code, interpretation, judgment, decree, directive, guidelines, policy or
similar form of decision of any Governmental Authority.
"Guaranty Obligation" shall mean, with respect to any Person, any direct
or indirect liability of that Person with respect to any indebtedness, lease,
dividend, letter of credit or other obligation (the "primary obligations") of
another Person (the "primary obligor"), including any obligation of that Person,
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the holder of any such
primary obligation against loss in respect thereof. The amount of any Guaranty
Obligation shall be deemed equal to the stated or determinable amount of the
primary obligation in respect of which such Guaranty Obligation is made or, if
not stated or if indeterminable, the maximum reasonably anticipated liability in
respect thereof.
"Hazardous Materials" shall mean all chemical substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes, whether
solid, liquid, or gaseous in nature, and all other materials, substances and
wastes which are classified or regulated as "hazardous,"
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"toxic" or similar descriptions under any Environmental Law or which are
hazardous, toxic, harmful or dangerous to the environment or human health.
"Improvement/Expense Advance Request" shall have the meaning given to that
term in Subparagraph 2.03(b) of the Participation Agreement.
"Improvement/Expense Advances" shall have the meaning given to that term
in Subparagraph 2.01(a) of the Participation Agreement.
"Improvements" shall mean all buildings, structures, facilities, fixtures
and other improvements of every kind and description now or hereafter located on
any of the Land, including (a) all parking areas, roads, driveways, walks,
fences, walls, drainage facilities and other site improvements; (b) all water,
sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other
utility equipment and facilities, all plumbing, lighting, heating, ventilating,
air-conditioning, refrigerating, incinerating, compacting, fire protection and
sprinkler, surveillance and security, public address and communications
equipment and systems, partitions, elevators, escalators, motors, machinery,
pipes, fittings and other items of equipment of every kind and description now
or hereafter located on such Land or attached to the Improvements thereto which
by the nature of their location thereon or attachment thereto are real property
under applicable law; and (c) all Modifications to such Land or its
Improvements, except for any Modifications removed by Lessee from the Property
pursuant to Subparagraph 3.10 of the Lease Agreement.
"Indebtedness" of any Person shall mean, without duplication:
(a) All obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments and all other obligations of such
Person for borrowed money (including obligations to repurchase receivables
and other assets sold with recourse);
(b) All obligations of such Person for the deferred purchase price
of property or services (including obligations under letters of credit and
other credit facilities which secure or finance such purchase price and
obligations under "synthetic" leases);
(c) All obligations of such Person under conditional sale or other
title retention agreements with respect to property acquired by such
Person (to the extent of the value of such property if the rights and
remedies of the seller or lender under such agreement in the event of
default are limited solely to repossession or sale of such property);
(d) All obligations of such Person as lessee under or with respect
to Capital Leases;
(e) All non-contingent payment or reimbursement obligations of
such Person under or with respect to Surety Instruments;
(f) All net obligations of such Person, contingent or otherwise,
under or with respect to Rate Contracts;
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(g) All Guaranty Obligations of such Person with respect to the
obligations of other Persons of the types described in clauses (a) - (f)
above; and
(h) All obligations of other Persons of the types described in
clauses (a) - (f) above to the extent secured by (or for which any holder
of such obligations has an existing right, contingent or otherwise, to be
secured by) any Lien in any property (including accounts and contract
rights) of such Person, even though such Person has not assumed or become
liable for the payment of such obligations.
"Indemnified Taxes" shall mean all income taxes, stamp taxes, sales taxes,
use taxes, rental taxes, gross receipts taxes, property (tangible and
intangible) taxes, franchise taxes, excise taxes, value added taxes, turnover
taxes, withholding taxes and other taxes and Governmental Charges, together with
any and all assessments, penalties, fines, additions and interest thereon,
except:
(a) Net income taxes and franchise taxes in lieu of net income
taxes imposed on any Lessor Party by:
(i) Its jurisdiction of organization;
(ii) A jurisdiction in which it maintains a lending office;
or
(iii) Any other jurisdiction in which such Lessor Party is
subject to such taxes by reason of an office or other property or
the employees, agents or independent contractors of such Lessor
Party in such jurisdiction the presence of which is not contemplated
by the Operative Documents (except to the extent such taxes are
imposed as a result of (A) the location, operation or use of any
portion or component of the Property in such jurisdiction, (B) the
location, presence, activities or place of business of Lessee, its
Affiliates or any Person claiming by, through or under Lessee (a
"Lessee Person") in such jurisdiction or (C) the making of any
payments from such jurisdiction by or on behalf of a Lessee Person);
Except, in each case, to the extent that such taxes exceed the amount of
such taxes that would have been imposed had the transactions contemplated
by the Participation Agreement been characterized as a loan (provided,
however, that this exclusion shall not be construed to prevent a payment
from being made on an after tax basis);
(b) Any tax or other Governmental Charge that has not become a
Lien on any of the Property and that Lessee is contesting pursuant to
Paragraph 3.12 of the Lease Agreement (but only while Lessee is so
contesting such tax or Governmental Charge);
(c) Any tax or other Governmental Charge that is imposed upon an
Indemnitee primarily as a result of the gross negligence or willful
misconduct of such Indemnitee itself (as opposed to gross negligence or
willful misconduct imputed to such Indemnitee), but not taxes or other
Governmental Charges imposed as a result of ordinary negligence of such
Indemnitee;
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(d) Any tax or other Governmental Charge to the extent it relates
to any act, event or omission that occurs with respect to the Property
after the termination of the Lease Agreement, redelivery or sale of the
Property in accordance with the terms of the Operative Documents and
payment by Lessee of all amounts due under the Operative Documents, unless
and to the extent such tax or Governmental Charge is attributable to
actions, omissions or events occurring in connection with the exercise of
remedies following an Event of Default; provided, that this exclusion
shall not apply to taxes or Governmental Charges that are related to or
arising from payments made under the Operative Documents, or events, acts
or omissions occurring or matters arising prior to or simultaneous with
the time set forth above; or
(e) Any tax which is a withholding tax if such tax is imposed in
respect of payments to a Lessor Party that is required to deliver a United
States Internal Revenue Service Form 1001 or 4224 if such form is not
effective to entitle such Lessor Party to receive payment under the
Operative Documents without deduction or withholding of United States
federal income tax as a result of an act or omission of such Lessor Party.
"Indemnitees" shall mean the Lessor Parties and their Affiliates and their
respective directors, officers, employees, agents, attorneys and advisors.
"Indemnity Amount" shall have the meaning given to that term in
Subparagraph 3.02(g) of the Purchase Agreement.
"Initial Acquisition Advances" shall have the meaning given to that term
in Subparagraph 2.03(a) of the Participation Agreement.
"Initial Bid" shall have the meaning given to that term in Subparagraph
3.02(b) of the Purchase Agreement.
"Initial Marketing Period" shall have the meaning given to that term in
Subparagraph 3.02(b) of the Purchase Agreement.
"Initial Property" shall mean the Tract 1 Property, the Tract 2 Property,
the Tract 3 Property and the Tract 5 Property.
"Insurance Requirements" shall mean all terms, conditions and requirements
imposed by the policies of insurance which Lessee is required to maintain by the
Operative Documents.
"Investment" of any Person shall mean any loan or advance of funds by such
Person to any other Person (other than advances to employees of such Person for
moving and travel expenses, drawing accounts and similar expenditures in the
ordinary course of business), any purchase or other acquisition of any Equity
Securities or Indebtedness of any other Person, any capital contribution by such
Person to or any other investment by such Person in any other Person (including
any Guaranty Obligations of such Person and any Indebtedness of such Person of
the type described in clause (h) of the definition of "Indebtedness" on behalf
of any other Person); provided, however, that Investments shall not include (a)
accounts receivable or other indebtedness owed by customers of such Person which
are current assets and arose from sales of
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inventory in the ordinary course of such Person's business or (b) prepaid
expenses of such Person incurred and prepaid in the ordinary course of business.
"IRC" shall mean the Internal Revenue Code of 1986.
"Issues and Profits" shall mean all present and future rents, royalties,
issues, profits, receipts, revenues, income, earnings and other benefits
accruing from any of the Land, Improvements or Appurtenant Rights (whether in
the form of accounts, chattel paper, instruments, documents, investment
property, general intangibles or otherwise) including all rents and other
amounts payable pursuant to any Subleases.
"Land" shall mean all lots, pieces, tracts or parcels of land described in
Exhibit A to the Lease Agreement and leased by Lessee pursuant to the Lease
Agreement.
"Lease Agreement" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Lease Extension Request" shall have the meaning given to that term in
Subparagraph 2.09(b) of the Participation Agreement.
"Lease Reduction Payments" shall mean each of the following to the extent
applied to reduce the Outstanding Lease Amount pursuant to the Operative
Documents:
(a) Casualty and Condemnation Proceeds;
(b) The purchase price paid for the Property (or any portion
thereof) by Lessee, an Assignee Purchaser or a Designated Purchaser
pursuant to the Purchase Agreement;
(c) The Residual Value Guaranty and Indemnity Amount paid by
Lessee pursuant to the Purchase Agreement;
(d) Any proceeds received by Lessee from any sale of the Property
after the Expiration Date if such Property is retained by Lessor after
such Expiration Date pursuant to the applicable Purchase Agreement; and
(e) Any proceeds received by any Lessor Party from the exercise of
any of its remedies under the Operative Documents after the occurrence of
an Event of Default under the Lease Agreement.
"Lessee" shall mean KLA-Tencor Corporation, acting in its capacity as
Lessee under the Operative Documents.
"Lessee Obligations" shall mean and include all liabilities and
obligations owed by Lessee to any Lessor Party under any of the Operative
Documents of every kind and description and however arising (whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising), including the obligation of Lessee to pay Rent, to pay the
Residual Value Guaranty Amount, Indemnity Amount and/or Outstanding Lease Amount
and to
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pay all interest, fees, charges, expenses, attorneys' fees and accountants' fees
chargeable to Lessee or payable by Lessee under the Operative Documents.
"Lessee Security Documents" shall mean and include the Lease Agreement,
the Cash Collateral Agreement, the Assignment of Construction Agreements and all
other instruments, agreements, certificates, opinions and documents (including
Uniform Commercial Code financing statements and fixture filings and landlord
waivers) delivered to any Lessor Party in connection with any Collateral or to
secure the Lessee Obligations.
"Lessor" shall mean Lease Plan U.S.A., Inc., acting in its capacity as
Lessor under the Operative Documents.
"Lessor Deed of Trust" shall have the meaning given to that term in
Subparagraph 2.11(b) of the Participation Agreement.
"Lessor Liens" shall mean any Liens or other interests in any of the
Property of any Person other than Lessee or a Lessor Party arising as a result
of (a) any transfer or assignment by Lessor to such Person of any of Lessor's
interests in such Property in violation of any of the Operative Documents or (b)
any claim against Lessor by any such Person unrelated to any of the Operative
Documents or the transactions contemplated thereby. (Lessor Liens shall include
Liens granted by Lessor to Agent or any Participant to secure the Lessor
Obligations.)
"Lessor Obligations" shall mean and include all liabilities and
obligations owed by Lessor to Agent or any Participant under any of the
Operative Documents of every kind and description and however arising (whether
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising), including the obligation of Lessor to share payments made
by Lessee to Lessor under the Operative Documents as provided in Paragraph 2.06
of the Participation Agreement.
"Lessor Parties" shall mean Lessor, the Participants and Agent.
"Lessor Security Agreement" shall have the meaning given to that term in
Subparagraph 2.11(b) of the Participation Agreement.
"Liabilities" shall mean, with respect to Lessee at any time, the sum at
such time, determined on a consolidated basis in accordance with GAAP, of (a)
all liabilities of Lessee and its Subsidiaries that, in accordance with GAAP,
are reflected in the consolidated balance sheet of Lessee and its Subsidiaries
at such time, plus (b) the aggregate amount attributable to principal under all
"synthetic leases" of Lessee and its Subsidiaries, plus (c) the then outstanding
face amount of "pre-acceptance" accounts receivable sold by KLA- Tencor Japan,
Ltd. with recourse, plus (d) the face amount of all outstanding standby letters
of credit issued for the account of Lessor and its Subsidiaries, plus (e) any
direct or indirect obligation or liability of Lessor and its Subsidiaries as a
partner or joint venturer in any partnership or joint venture to the extent of
any pass-through liability, plus (f) any direct or indirect obligation or
liability of Lessor and its Subsidiaries in respect to any Rate Contract that is
not entered into in connection with a bona fide hedging operation that provides
offsetting benefits to Lessee and its Subsidiaries.
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"Liabilities/Tangible Net Worth Ratio" shall mean, with respect to Lessee
at any time, the ratio, determined on a consolidated basis in accordance with
GAAP, of:
(a) The Liabilities of Lessee and its Subsidiaries at such time;
to
(b) The Tangible Net Worth of Lessee and its Subsidiaries at such
time.
"LIBO Rate" shall mean, with respect to any Rental Period for a Portion, a
rate per annum equal to the quotient (rounded upward if necessary to the nearest
1/100 of one percent) of (a) the arithmetic mean (rounded upward if necessary to
the nearest 1/16 of one percent) of the rates per annum appearing on the
Telerate Page 3750 (or any successor publication) on the second Business Day
prior to the first day of such Rental Period at or about 11:00 A.M. (London
time) (for delivery on the first day of such Rental Period) for a term
comparable to such Rental Period (or for a term of one (1) month for any Rental
Period that is less than one (1) month but is at least seven (7) days), divided
by (b) one minus the Reserve Requirement in effect from time to time. If for any
reason rates are not available as provided in clause (a) of the preceding
sentence, the rate to be used in clause (a) shall be, the rate per annum at
which Dollar deposits are offered by ABN AMRO to prime banks in the London
interbank market on the second Business Day prior to the first day of such
Rental Period at or about 11:00 A.M. (London time) (for delivery on the first
day of such Rental Period) in an amount substantially equal to ABN AMRO's
Proportionate Share of the applicable Portion and for a term comparable to such
Rental Period (or for a term of one (1) month for any Rental Period that is less
than one (1) month but is at least seven (7) days). The LIBO Rate shall be
adjusted automatically as of the effective date of any change in the Reserve
Requirement.
"LIBOR Rental Rate" shall mean, for any Rental Period and Portion, the per
annum rate equal to the LIBO Rate for such Rental Period and Portion, plus the
Applicable Margin, such rate to change from time to time during such period as
the Applicable Margin shall change.
"Lien" shall mean, with respect to any property, any security interest,
mortgage, pledge, lien, charge or other encumbrance in, of, or on such property
or the income therefrom, including the interest of a vendor or lessor under a
conditional sale agreement, Capital Lease, "synthetic" lease or other title
retention agreement, or any agreement to provide any of the foregoing, and the
filing of any financing statement or similar instrument under the Uniform
Commercial Code or comparable law of any jurisdiction.
"Major Casualty" shall mean, with respect to the Property, any Casualty
affecting such Property where (a) the damage to such Property is treated by any
insurer of such Property as a total loss; (b) such Property cannot reasonably be
repaired and restored to the condition in which it existed immediately prior to
such Casualty; or (c) the reasonably anticipated cost to repair and restore such
Property to the condition in which it existed immediately prior to such Casualty
would exceed twenty-five percent (25%) of the Outstanding Lease Amount.
"Major Condemnation" shall mean, with respect to the Property, any
Condemnation affecting such Property where (a) all or substantially all of such
Property is taken by such Condemnation; (b) such Property cannot reasonably be
repaired and restored to the condition in
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which it existed immediately prior to such Condemnation; or (c) the reasonably
anticipated cost to repair and restore such Property to the condition in which
it existed immediately prior to such Condemnation would exceed twenty-five
percent (25%) of the Outstanding Lease Amount.
"Majority Participants" shall mean (a) at any time the aggregate
Outstanding Lease Amount is greater than $0, Participants whose aggregate
Outstanding Participation Amounts equal or exceed fifty percent (50%) of the
aggregate Outstanding Lease Amount at such time and (b) at any time the
aggregate Outstanding Lease Amount is $0, Participants whose Proportionate
Shares equal or exceed fifty percent (50%).
"Margin Stock" shall have the meaning given to that term in Regulation U
issued by the Federal Reserve Board, as amended from time to time, and any
successor regulation thereto.
"Marketing Option" shall have the meaning given to that term in
Subparagraph 3.01(a) of the Purchase Agreement.
"Marketing Option Event of Default" shall mean any Event of Default other
than a Non-Marketing Option Event of Default.
"Material Adverse Effect" shall mean a material adverse effect on (a) the
business, assets, operations or financial or other condition of Lessee and its
Subsidiaries, taken as a whole; (b) the ability of Lessee to pay or perform the
Lessee Obligations in accordance with the terms of the Operative Documents; (c)
the rights and remedies of any Lessor Party under the Operative Documents or any
related document, instrument or agreement; or (d) the value of the Property and
the Collateral, any Lessor Party's security interests, Liens or other rights in
the Property and the Collateral or the perfection or priority of such security
interests, Liens or rights.
"Material Subsidiary" shall mean, as of any date, each Subsidiary of
Lessee whose assets on the last day of the immediately preceding fiscal year
equaled or exceeded five percent (5%) of the consolidated total assets of Lessee
and all of its Subsidiaries on such day. As used herein, "assets" shall mean the
net book value of assets calculated in accordance with GAAP.
"maturity" shall mean, with respect to any Rent, interest, fee or other
amount payable by Lessee under the Operative Documents, the date such Rent,
interest, fee or other amount becomes due, whether upon the stated maturity or
due date, upon acceleration or otherwise.
"Modifications" shall have the meaning given to that term in Subparagraph
3.01(c) of the Lease Agreement.
"Multiemployer Plan" shall mean any multiemployer plan within the meaning
of section 3(37) of ERISA maintained or contributed to by Lessee or any ERISA
Affiliate.
"Net Proceeds" shall mean, with respect to any sale or issuance of any
Equity Security or any other security by any Person, the aggregate consideration
received by such Person from such sale or issuance less the sum of the actual
amount of the customary fees and commissions payable to Persons other than such
Person or any Affiliate of such Person, the reasonable legal expenses and the
other customary costs and expenses directly related to such sale or issuance
that are to be paid by such Person.
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"New Improvements" shall mean (a) with respect to a particular Tract of
Land, all new Improvements to such Tract and its Existing Improvements
contemplated by the Plans and Specifications for such Tract delivered by Lessee
to Lessor and (b) with respect to all the Land, all such new Improvements. Each
reference to "New Improvements" shall refer collectively to New Improvements
with respect to all the Land unless such reference specifically indicates that
it applies to a particular Tract.
"Non-Marketing Option Event of Default" shall mean an Event of Default
arising only under Subparagraph 5.01(b) of the Lease Agreement and only as a
result of Lessee's failure to observe or perform a covenant, obligation,
condition or agreement set forth in Paragraph 5.03 of the Participation
Agreement.
"Notice of Expiration Date Purchase Option Exercise" shall have the
meaning given to that term in Paragraph 3.01 of the Purchase Agreement.
"Notice of Marketing Option Exercise" shall have the meaning given to that
term in Paragraph 3.01 of the Purchase Agreement.
"Notice of Partial Purchase Option Exercise" shall have the meaning given
to that term in Subparagraph 2.02(a) of the Purchase Agreement.
"Notice of Rental Period Selection" shall have the meaning given to that
term in Subparagraph 2.03(a) of the Lease Agreement.
"Notice of Term Purchase Option Exercise" shall have the meaning given to
that term in Subparagraph 2.01(a) of the Purchase Agreement.
"Operative Documents" shall mean and include the Participation Agreement,
the Lease Agreement, the Construction Agency Agreement, the Purchase Agreement,
the Lessee Security Documents, the Lessor Deed of Trust, the Lessor Security
Agreement, the Assignment of Lease and the Agent's Fee Letter; all other
notices, requests, certificates, documents, instruments and agreements delivered
to any Lessor Party pursuant to Paragraph 3.01 or 3.02 of the Participation
Agreement; and all notices, requests, certificates, documents, instruments and
agreements delivered to any Lessor Party in connection with any of the foregoing
on or after the date of the Participation Agreement. (Without limiting the
generality of the preceding definition, the term "Operative Documents" shall
include all written waivers, amendments and modifications to any of the notices,
requests, certificates, documents, instruments and agreements referred to
therein.)
"Outside Completion Date" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Outstanding Lease Amount" shall mean, on any date, the remainder of (a)
the sum of all Advances made by Lessor on or prior to such date, minus (b) the
sum of all Lease Reduction Payments applied by Lessor on or prior to such date.
"Outstanding Participation Amount" shall mean, with respect to any
Participant on any date, the remainder of (a) the sum of the portions of all
Advances funded by such Participant on
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or prior to such date, minus (b) the sum of such Participant's share of all
Lease Reduction Payments applied to the Outstanding Lease Amount on or prior to
such date.
"Outstanding Tranche A Participation Amount" shall mean, with respect to
any Tranche A Participant on any date, the remainder of (a) such Participant's
Tranche A Portion of all Advances made by Lessor on or prior to such date, minus
(b) such Participant's share of all Lease Reduction Payments applied to the
Tranche A Portion of the Advances on or prior to such date.
"Outstanding Tranche B Participation Amount" shall mean, with respect to
any Tranche B Participant on any date, the remainder of (a) such Participant's
Tranche B Portion of all Advances made by Lessor on or prior to such date, minus
(b) such Participant's share of all Lease Reduction Payments applied to the
Tranche B Portion of the Advances on or prior to such date.
"Outstanding Tranche C Participation Amount" shall mean, with respect to
any Tranche C Participant on any date, the remainder of (a) such Participant's
Tranche C Portion of all Advances made by Lessor on or prior to such date, minus
(b) such Participant's share of all Lease Reduction Payments applied to the
Tranche C Portion of the Advances on or prior to such date.
"Partial Purchase Date" shall have the meaning given to that term in
Subparagraph 2.02(a) of the Purchase Agreement.
"Partial Purchase Option" shall have the meaning given to that term in
Paragraph 2.02 of the Purchase Agreement.
"Participants" shall mean the financial institutions from time to time
listed in Schedule I to the Participation Agreement (as amended from time to
time pursuant to Subparagraph 7.05(b) of the Participation Agreement or
otherwise), acting in their capacities as Participants under the Operative
Documents.
"Participation Agreement" shall mean the Participation Agreement, dated as
of November 12, 1997 among Lessee and the Lessor Parties.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Improvement Costs" shall mean all reasonable costs and expenses
necessary for the construction of the New Improvements to the Tract 1 Land,
Tract 3 Land, Tract 4 Land and Tract 5 Land (not including the costs of the
Land, the Existing Improvements and the other Property to be acquired for the
Acquisition Prices paid by Lessor for the Tract 1 Property, Tract 3 Property,
Tract 4 Property and Tract 5 Property on the Acquisition Dates therefor),
including:
(a) All reasonable costs and expenses of building supplies and
materials necessary for the construction of the New Improvements;
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(b) All reasonable costs and expenses of architects, engineers,
contractors and other Persons providing labor and services necessary for
the construction of the New Improvements; and
(c) All reasonable costs and expenses of performance and other
bonds and other insurance necessary for the construction of the New
Improvements.
"Permitted Liens" shall have the meaning given to that term in
Subparagraph 5.02(a) of the Participation Agreement.
"Permitted Property Liens" shall have the meaning given to that term in
Subparagraph 3.07(a) of such Lease Agreement.
"Permitted Transaction Expenses" shall mean the following costs and
expenses to the extent payable by Lessee in connection with and directly related
to the preparation, execution and delivery of the Operative Documents and the
transactions contemplated thereby:
(a) The reasonable fees and expenses of counsel for Lessee
incurred in connection with the preparation, negotiation, execution and
delivery of the Operative Documents;
(b) The reasonable fees and expenses of counsel for each of Lessor
and Agent incurred in connection with the preparation, negotiation,
execution and delivery of the Operative Documents;
(c) The reasonable fees and expenses incurred in recording,
registering or filing any of the Operative Documents;
(d) The title fees, premiums and escrow costs and other expenses
relating to title insurance and the closing of the transactions
contemplated by the Operative Documents;
(e) The reasonable fees and expenses of required environmental
audits and appraisals;
(f) The reasonable fees and expenses of consultants and
accountants for Lessee;
(g) The reasonable fees and expenses for surveys; and
(h) Other related reasonable fees and expenses.
"Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, an
unincorporated association, a limited liability company, a joint venture, a
trust or other entity or a Governmental Authority.
"Personal Property Collateral" shall have the meaning given to that term
in Subparagraph 2.07(b) of the Lease Agreement.
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"Phase IIA Participants" shall have the meaning given to that term in
Recital A to the Participation Agreement.
"Phase IIA Participation Agreement" shall have the meaning given to that
term in Recital A to the Participation Agreement.
"Phase IIA Lease Agreement" shall have the meaning given to that term in
Recital A to the Participation Agreement.
"Phase IIA Termination Payment" shall have the meaning given to that term
in Subparagraph 2.01(a) of the Participation Agreement.
"Phase IIB Participants" shall have the meaning given to that term in
Recital B to the Participation Agreement.
"Phase IIB Participation Agreement" shall have the meaning given to that
term in Recital B to the Participation Agreement.
"Phase IIB Lease Agreement" shall have the meaning given to that term in
Recital B to the Participation Agreement.
"Phase IIB Termination Payment" shall have the meaning given to that term
in Subparagraph 2.01(a) of the Participation Agreement.
"Phase II Lease Agreements" shall have the meaning given to that term in
Recital C to the Participation Agreement.
"Phase II Participants" shall have the meaning given to that term in
Recital C to the Participation Agreement.
"Phase II Termination Payments" shall have the meaning given to that term
in Subparagraph 2.03(a) of the Participation Agreement.
"Plans and Specifications" shall mean, with respect to the Tract 1 Land,
Tract 3 Land, Tract 4 Land or Tract 5 Land, the architectural, engineering and
construction plans, specifications and drawings for the new improvements (which
improvements may consist of a building shell or interior improvements only), if
any, to be constructed on such Tract pursuant to the Operative Documents, as
delivered to Lessor pursuant to clause (iii) of Subparagraph 2.01(b) and
Paragraph 3.03 of the Participation Agreement, as such plans, specifications and
drawings may thereafter be revised, amended, supplemented or modified pursuant
to Paragraph 3.01 of the Construction Agency Agreement. Each reference to "Plans
and Specifications" shall refer collectively to the Plans and Specifications
with respect to all the Land unless such reference specifically indicates that
it applies to a particular Tract.
"Portion" shall mean a portion of the Outstanding Lease Amount. If, at any
time, Lessee has not elected to divide the Outstanding Lease Amount into two or
more portions, any reference to a Portion shall mean the total Outstanding Lease
Amount at such time.
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"Pricing Grid" shall mean Schedule II to the Participation Agreement.
"Pricing Period" shall mean (a) the period commencing on the date of this
Agreement and ending on December 31, 1997, (b) the three-calendar month period
commencing January 1, 1998 and ending March 31, 1998 and (c) each consecutive
three-calendar month period thereafter which commences on the day following the
last day of the immediately preceding three-calendar month period and ends on
the last day of that time period.
"Prime Rate" shall mean the per annum rate publicly announced by ABN AMRO
from time to time at its Chicago Office. The Prime Rate is determined by ABN
AMRO from time to time as a means of pricing credit extensions to some customers
and is neither directly tied to any external rate of interest or index nor
necessarily the lowest rate of interest charged by ABN AMRO at any given time
for any particular class of customers or credit extensions. Any change in the
Base Rate resulting from a change in the Prime Rate shall become effective on
the Business Day on which each change in the Prime Rate occurs.
"Property" shall have the meaning given to that term in Paragraph 2.01 of
the Lease Agreement.
"Property Collateral" shall have the meaning given to that term in
Subparagraph 2.11(a) of the Participation Agreement.
"Proportionate Share" shall mean, with respect to each Participant, the
percentage set forth under the caption "Proportionate Share" opposite such
Participant's name on Part A of Schedule I, or, if changed, such percentage as
may be set forth for such Participant in the Register. The Proportionate Share
of each Participant shall equal the sum of such Participant's Tranche A
Proportionate Share, Tranche B Proportionate Share and Tranche C Proportionate
Share.
"Purchase Agreement" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Purchase Documents" shall have the meaning given to that term in
Subparagraph 4.01(a) of the Purchase Agreement.
"Purchaser" shall have the meaning given to that term in Subparagraph
4.01(b) of the Purchase Agreement.
"Quick Assets" shall mean, with respect to any Person at any time, the sum
at such time (without duplication) of such Person's cash, cash equivalents, net
accounts receivable, short-term investments and marketable securities.
"Quick Ratio" shall mean, with respect to Lessee at any time, the ratio,
determined on a consolidated basis in accordance with GAAP, of:
(a) The Quick Assets of Lessee and its Subsidiaries at such time;
to
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(b) The current liabilities of Lessee and its Subsidiaries at such
time.
"Rate Contracts" shall mean swap agreements (as that term is defined in
Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended) and any
other agreements or arrangements designed to provide protection against
fluctuations in interest or currency exchange rates.
"Real Property Collateral" shall have the meaning given to that term in
Subparagraph 2.07(a) of the Lease Agreement.
"Register" shall have the meaning given to that term in Subparagraph
7.05(b) of the Participation Agreement.
"Related Agreements" shall mean all chattel paper, accounts, instruments,
documents, investment property and general intangibles relating to any of the
Land, Improvements or Appurtenant Rights or to the present or future
development, construction, operation or use of any of the Land, Improvements or
Appurtenant Rights, including (a) all plans, specifications, construction
agreements, maps, surveys, studies, books of account, records, files, insurance
policies, guarantees and warranties relating to such Land or Improvements or to
the present or future development, construction, operation or use of such Land,
Improvements or Appurtenant Rights (including the Construction Agreements and
the Plans and Specifications); (b) all architectural, engineering, construction
and management contracts, all supply and service contracts for water, sanitary
and storm sewer, drainage, electricity, steam, gas, telephone and other
utilities relating to such Land, Improvements or Appurtenant Rights or to the
present or future development, construction, operation or use of such Land,
Improvements or Appurtenant Rights; and (c) all computer software and
intellectual property, guaranties and warranties, letters of credit, and
documents relating to such Land, Improvements or Appurtenant Rights or to the
present or future development, construction, operation or use of such Land,
Improvements or Appurtenant Rights.
"Related Goods" shall mean:
(a) All machinery, furniture, equipment, fixtures and other goods
and tangible personal property (including construction materials and
supplies) financed by any Advance, including all such property described
in Exhibit B to the Lease Agreement and in each Exhibit B Supplement
delivered by Lessee; and
(b) All machinery, equipment, fixtures and other goods and
tangible personal property (including construction materials and supplies)
now or hereafter made part of or used in connection with the construction,
reconstruction, repair, replacement, alteration, addition, or improvement
of or to any of the Improvements to the Property or any of the Related
Goods described in the preceding clause (a), except for any such property
which may be removed by Lessee from the Property pursuant to Paragraph
3.10 of the Lease Agreement.
"Related Permits" shall mean all licenses, authorizations, certificates,
variances, consents, approvals and other permits, now or hereafter pertaining to
any of the Land,
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Improvements or Appurtenant Rights and all tradenames or business names relating
to any of the Land, Improvements or Appurtenant Rights or the present or future
development, construction, operation or use of any of the Land, Improvements or
Appurtenant Rights.
"Rent" shall mean collectively Base Rent and Supplemental Rent.
"Rental Periods" shall mean, with respect to any Portion, the time period
selected by Lessee pursuant to Subparagraph 2.03(a) or Subparagraph 2.03(b) of
the Participation Agreement or Subparagraph 2.03(a ) of the Lease Agreement
which commences on the first day of such Portion and ends on the last day of
such time period, and thereafter, each subsequent time period selected by Lessee
pursuant to Subparagraph 2.03(a) of the Lease Agreement which commences on the
last day of the immediately preceding time period and ends on the last day of
that time period.
"Rental Rate" shall have the meaning given to that term in Subparagraph
2.03(a) of the Lease Agreement.
"Repair and Restoration Account" shall have the meaning given to that term
in Subparagraph 3.04(c) of the Lease Agreement.
"Reportable Event" shall have the meaning given to that term in ERISA and
applicable regulations thereunder.
"Required Participants" shall mean (a) at any time the aggregate
Outstanding Lease Amount is greater than $0, Participants whose aggregate
Outstanding Participation Amounts equal or exceed sixty-six and two-thirds
percent (66-2/3%) or more of the aggregate Outstanding Lease Amount at such time
and (b) at any time the aggregate Outstanding Lease Amount is $0, Participants
whose Proportionate Shares equal or exceed sixty-six and two-thirds percent
(66-2/3%).
"Requirement of Law" applicable to any Person shall mean (a) the Articles
or Certificate of Incorporation and By-laws, Partnership Agreement or other
organizational or governing documents of such Person, (b) any Governmental Rule
applicable to such Person, (c) any license, permit, approval or other
authorization granted by any Governmental Authority to or for the benefit of
such Person or (d) any judgment, decision or determination of any Governmental
Authority or arbitrator, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject.
"Reserve Requirement" shall mean, with respect to any day in any Rental
Period, the aggregate of the reserve requirement rates (expressed as a decimal)
in effect on such day for eurocurrency funding (currently referred to as
"Eurocurrency liabilities" in Regulation D of the Federal Reserve Board)
maintained by a member bank of the Federal Reserve System. As used herein, the
term "reserve requirement" shall include, without limitation, any basic,
supplemental or emergency reserve requirements imposed on any Participant by any
Governmental Authority.
"Residual Value Guaranty Amount" shall have the meaning given to that term
in Subparagraph 3.02(g) of the Purchase Agreement.
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"Scheduled Expiration Date" shall have the meaning given to that term in
Subparagraph 2.02(a) of the Lease Agreement.
"Scheduled Rent Payment Date" shall have the meaning given to that term in
Subparagraph 2.03(a) of the Lease Agreement.
"Secondary Marketing Period" shall have the meaning given to that term in
Subparagraph 3.02(b) of the Purchase Agreement.
"Seller" shall mean:
(a) With respect to the Tract 2 Land and Improvements, BNP Leasing
Corporation;
(b) With respect to the Tract 3 Improvements, BNP Leasing
Corporation; and
(c) With respect to the Tract 4 Land and Improvements, Amdahl
Corporation.
"Senior Funded Indebtedness/Capital Ratio" shall mean, with respect to
Lessee at any time, the ratio, determined on a consolidated basis in accordance
with GAAP, of:
(a) The remainder of (i) all Funded Indebtedness of Lessee and its
Subsidiaries at such time minus (ii) all such Funded Indebtedness that is
subordinated to the Lessee Obligations on terms acceptable to Lessor and
the Required Participants;
to
(b) The sum of (i) the net worth of Lessee and its Subsidiaries at
such time plus (ii) all Funded Indebtedness of Lessee and its Subsidiaries
at such time.
"Solvent" shall mean, with respect to any Person on any date, that on such
date (a) the fair value of the property of such Person is greater than the fair
value of the liabilities (including, without limitation, contingent liabilities)
of such Person, (b) the present fair saleable value of the assets of such Person
is not less than the amount that will be required to pay the probable liability
of such Person on its debts as they become absolute and matured, (c) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (d) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute an unreasonably small capital.
"Subleases" shall mean all leases and subleases of any of the Land,
Improvements and/or Appurtenant Rights by Lessee as lessor or sublessor, now or
hereafter in effect, whether or not of record, including all guaranties and
security therefor and the right to bring actions and proceedings thereunder or
for the enforcement thereof and to do anything which Lessee is or may become
entitled to do thereunder.
"Subparticipants" shall have the meaning given to that term in
Subparagraph 7.05(c) of the Participation Agreement.
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"Subsidiary" of any Person shall mean (a) any corporation of which more
than 50% of the issued and outstanding Equity Securities having ordinary voting
power to elect a majority of the Board of Directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned or controlled by such
Person, by such Person and one or more of its other Subsidiaries or by one or
more of such Person's other Subsidiaries and (b) any partnership, joint venture,
or other association of which more than 50% of the equity interest having the
power to vote, direct or control the management of such partnership, joint
venture or other association is at the time owned and controlled by such Person,
by such Person and one or more of the other Subsidiaries or by one or more of
such Person's other Subsidiaries.
"Supplemental Rent" shall have the meaning given to such term in
Subparagraph 2.03(b) of the Lease Agreement.
"Surety Instruments" shall mean all letters of credit (including standby
and commercial), banker's acceptances, bank guaranties, shipside bonds, surety
bonds and similar instruments.
"Tangible Net Worth" shall mean, with respect to Lessee at any time, the
remainder at such time, determined on a consolidated basis in accordance with
GAAP, of (a) the total assets of Lessee and its Subsidiaries, minus (b) the sum
(without limitation and without duplication of deductions) of (i) the total
liabilities of Lessee and its Subsidiaries, (ii) all reserves established by
Lessee and its Subsidiaries for anticipated losses and expenses (to the extent
not deducted in calculating total assets in clause (a) above) and (iii) all
intangible assets of Lessee and its Subsidiaries (to the extent included in
calculating total assets in clause (a) above), including, without limitation,
goodwill (including any amounts, however designated on the balance sheet,
representing the cost of acquisition of businesses and investments in excess of
underlying tangible assets), trademarks, trademark rights, trade name rights,
copyrights, patents, patent rights, licenses, unamortized debt discount,
marketing expenses, organizational expenses, non-compete agreements and deferred
research and development.
"Term" shall mean the period beginning on the Commencement Date of the
Lease Agreement and ending on the Expiration Date of the Lease Agreement.
"Termination Date" shall mean (a) the date set forth in a Notice of Term
Purchase Option as the Scheduled Rent Payment Date on which the Lease Agreement
will be terminated by Lessee pursuant to Paragraph 4.01 of the Lease Agreement
and the Property will be purchased by Lessee pursuant to Section II of the
Purchase Agreement or (b) the date set forth in a written notice delivered by
Lessor to Lessee pursuant to Subparagraph 5.03(a) or 5.04(a) of the Lease
Agreement after the occurrence of an Event of Default thereunder as the date on
which the Lease Agreement will be terminated.
"Term Purchase Option" shall have the meaning given to that term in
Paragraph 2.01 of the Purchase Agreement.
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"Total Commitment" shall mean the amount set forth as such in Subparagraph
2.01(b) of the Participation Agreement or, if such amount is reduced pursuant to
Subparagraph 2.08(a) of the Participation Agreement, the amount to which so
reduced.
"Tract" shall mean:
(a) With respect to any land, the lots, pieces, parcels and tracts
of land described in each Part of Exhibit A to each Lease Agreement or
Exhibit A to the Participation Agreement, as the case may be; and
(b) With respect to any Property, a Tract of land, together with
all Property related to such Tract of land.
"Tract 1 Land," "Tract 2 Land," "Tract 3 Land," "Tract 4 Land" and "Tract 5 Land
shall mean the lots, pieces, parcels and tracts of land described in Part 1,
Part 2, Part 3, Part 4 and Part 5, respectively, of Exhibit A to the
Participation Agreement. Any reference to the Tract 3 Property shall mean the
leasehold interest in the Tract 3 Land and all other Property related to the
Tract 3 Land.
"Tract 3 Ground Lease Agreement" shall have the meaning given to that term
in Schedule 3.01 to the Participation Agreement.
"Tract 4 Acquisition Advance" shall have the meaning given to that term in
Subparagraph 2.03(a) of the Participation Agreement.
"Tract 4 Acquisition Date" shall have the meaning given to that term in
Subparagraph 2.01(a) of the Participation Agreement.
"Tranche A Participant" shall mean, at any time, any Participant having an
Outstanding Tranche A Participation Amount at such time.
"Tranche A Percentage" shall mean, with respect to each Participant, the
percentage set forth under the caption "Tranche A Percentage" opposite such
Participant's name on Part A of Schedule I, or, if changed, such percentage as
may be set forth for such Participant in the Register.
"Tranche A Portion" shall mean, (a) with respect to any Advance without
reference to any Participant, the portion of such Advance equal to the Tranche A
Proportionate Share of such Advance and (b) with respect to any Advance with
reference to any Participant, the portion of such Advance equal to such
Participant's Tranche A Percentage of such Advance.
"Tranche A Proportionate Share" shall mean eighty-four percent (84%).
"Tranche B Participant" shall mean, at any time, any Participant having an
Outstanding Tranche B Participation Amount at such time.
"Tranche B Percentage" shall mean, with respect to each Participant, the
percentage set forth under the caption "Tranche B Percentage" opposite such
Participant's name on Part A of
1.01-28
<PAGE> 96
Schedule I, or, if changed, such percentage as may be set forth for such
Participant in the Register.
"Tranche B Portion" shall mean, (a) with respect to any Advance without
reference to any Participant, the portion of such Advance equal to the Tranche B
Proportionate Share of such Advance and (b) with respect to any Advance with
reference to any Participant, the portion of such Advance equal to such
Participant's Tranche B Percentage of such Advance.
"Tranche B Proportionate Share" shall mean thirteen percent (13%).
"Tranche C Participant" shall mean, at any time, any Participant having an
Outstanding Tranche C Participation Amount at such time.
"Tranche C Percentage" shall mean, with respect to each Participant, the
percentage set forth under the caption "Tranche C Percentage" opposite such
Participant's name on Part A of Schedule I, or, if changed, such percentage as
may be set forth for such Participant in the Register.
"Tranche C Portion" shall mean, (a) with respect to any Advance without
reference to any Participant, the portion of such Advance equal to the Tranche C
Proportionate Share of such Advance and (b) with respect to any Advance with
reference to any Participant, the portion of such Advance equal to such
Participant's Tranche C Percentage of such Advance.
"Tranche C Proportionate Share" shall mean three percent (3%).
"Unused" shall mean with respect to the Total Commitment at any time, the
remainder of (a) the Total Commitment at such time minus (b) the aggregate
amount of all Advances made prior to such time.
"Wholly-Owned Subsidiary" shall mean a Subsidiary of Lessee in which
Lessee owns, directly or indirectly, all of the issued and outstanding stock,
except for (a) directors' qualifying shares and (b) any shares issued to comply
with local ownership legal requirements.
1.01-29
<PAGE> 97
SCHEDULE 1.02
RULES OF CONSTRUCTION
(a) GAAP. Unless otherwise indicated in any Operative Document, all
accounting terms used in the Operative Documents shall be construed, and all
accounting and financial computations thereunder shall be computed, in
accordance with GAAP. If GAAP changes after the date of the Participation
Agreement such that any covenants contained in the Operative Documents would
then be calculated in a different manner or with different components, Lessee
and the Lessor Parties agree to negotiate in good faith to amend the applicable
Operative Documents in such respects as are necessary to conform those covenants
as criteria for evaluating Lessee's financial condition to substantially the
same criteria as were effective prior to such change in GAAP; provided, however,
that, until Lessee and the Lessor Parities so amend the Operative Documents, all
such covenants shall be calculated in accordance with GAAP as in effect
immediately prior to such change.
(b) Headings. Headings in each of the Operative Documents are for
convenience of reference only and are not part of the substance thereof.
(c) Plural Terms. All terms defined in any Operative Document in the
singular form shall have comparable meanings when used in the plural form and
vice versa.
(d) Time. All references in each of the Operative Documents to a time of
day shall mean San Francisco, California time, unless otherwise indicated. All
references in each of the Operative Documents to a date (the "action date")
which is one month prior to or after another date (the "reference date") shall
mean the date in the immediately preceding or succeeding calendar month (as the
case may be) which numerically corresponds to the reference date; provided,
however, that (i) if such corresponding date in the immediately preceding or
succeeding calendar month (as the case may be) is not a Business Day, the action
date shall be the next succeeding Business Day after such corresponding date
(unless, in the case of a Rental Period, such next Business Day falls in another
calendar month, in which case the action date shall be the immediately preceding
Business Day) and (ii) if the reference date is the last Business Day of a
calendar month (or a day for which there is no numerically corresponding day in
the immediately preceding calendar month) the action date shall be the last
Business Day of the immediately preceding or succeeding calendar month (as the
case may be). All references in each of the Operative Documents to an earlier
date which is two or more months prior to a reference date or to a later date
which is two or more months after a reference date shall be determined in a
comparable manner.
(e) Governing Law. Unless otherwise provided in any Operative Document,
each of the Operative Documents shall be governed by and construed in accordance
with the laws of the State of California without reference to conflicts of law
rules.
(f) Construction. The Operative Documents are the result of negotiations
among, and have been reviewed by Lessee and each Lessor Party and their
respective counsel.
1.02-1
<PAGE> 98
Accordingly, the Operative Documents shall be deemed to be the product of all
parties hereto, and no ambiguity shall be construed in favor of or against
Lessee or any Lessor Party.
(g) Entire Agreement. The Operative Documents, taken together,
constitute and contain the entire agreement of Lessee and the Lessor Parties and
supersede any and all prior agreements, negotiations, correspondence,
understandings and communications among the parties, whether written or oral,
respecting the subject matter thereof (including the commitment letter dated as
of May 9, 1997 between Lessee and Agent.
(h) Calculation of Base Rent, Interest and Fees. All calculations of
Base Rent, interest and fees under the Operative Documents for any period (i)
shall include the first day of such period and exclude the last day of such
period and (ii) shall be calculated on the basis of a year of 360 days for
actual days elapsed, except that during any period that Base Rent or any
interest is to be calculated based upon the Base Rate, such Base Rent or
interest shall be calculated on the basis of a year of 365 or 366 days, as
appropriate, for actual days elapsed.
(i) References.
(i) References in any Operative Document to "Recitals,"
"Sections," "Paragraphs," "Subparagraphs," "Articles," "Exhibits" and
"Schedules" are to recitals, sections, paragraphs, subparagraphs,
articles, exhibits and schedules therein and thereto unless otherwise
indicated.
(ii) References in any Operative Document to any document,
instrument or agreement (A) shall include all exhibits, schedules and
other attachments thereto, (B) shall include all documents, instruments or
agreements issued or executed in replacement thereof, and (C) shall mean
such document, instrument or agreement, or replacement or predecessor
thereto, as amended, modified and supplemented from time to time and in
effect at any given time.
(iii) References in any Operative Document to any Governmental Rule
(A) shall include any successor Governmental Rule, (B) shall include all
rules and regulations promulgated under such Governmental Rule (or any
successor Governmental Rule), and (C) shall mean such Governmental Rule
(or successor Governmental Rule) and such rules and regulations, as
amended, modified, codified or reenacted from time to time and in effect
at any given time.
(iv) References in any Operative Document to any Person in a
particular capacity (A) shall include any permitted successors to and
assigns of such Person in that capacity and (B) shall exclude such Person
individually or in any other capacity.
(j) Other Interpretive Provisions. The words "hereof," "herein" and
"hereunder" and words of similar import when used in any Operative Document
shall refer to such Operative Document as a whole and not to any particular
provision of such Operative Document. The words "include" and "including" and
words of similar import when used in any Operative Document shall not be
construed to be limiting or exclusive. In the event of any inconsistency between
the terms of the Participation Agreement and the terms of any other Operative
Document, the terms of the Participation Agreement shall govern.
1.02-2
<PAGE> 99
SCHEDULE 3.01
CONDITIONS PRECEDENT TO INITIAL ACQUISITION ADVANCES
A. PRINCIPAL OPERATIVE DOCUMENTS.
(1) The Participation Agreement, duly executed by Lessee, Lessor,
each Participant and Agent;
(2) The Lease Agreement (covering the Initial Property), duly
executed by Lessee and Lessor and appropriately notarized;
(3) The Purchase Agreement (covering the Initial Property), duly
executed by Lessee and Lessor;
(4) The Construction Agency Agreement (covering the Tract 1
Property, the Tract 3 Property and the Tract 5 Property), duly executed by
Lessee and Lessor;
(5) The Assignment of Lease (covering the Initial Property), duly
executed by Lessor and appropriately notarized;
(6) The Lessor Deed of Trust (covering the Initial Property), duly
executed by Lessor and appropriately notarized;
(7) The Lessor Security Agreement, duly executed by Lessor; and
(8) The Assignment of Construction Agreements, duly executed by
Lessee.
B. LESSEE CORPORATE DOCUMENTS.
(1) The Certificate or Articles of Incorporation of Lessee,
certified as of a recent date prior to the Closing Date by the Secretary
of State (or comparable official) of its jurisdiction of incorporation;
(2) A Certificate of Good Standing (or comparable certificate) for
Lessee, certified as of a recent date prior to the Closing Date by the
Secretary of State (or comparable official) of its jurisdiction of
incorporation;
(3) A certificate of the Secretary or an Assistant Secretary of
Lessee, dated the Closing Date, certifying (a) that attached thereto is a
true and correct copy of the Bylaws of Lessee as in effect on the Closing
Date; (b) that attached thereto are true and correct copies of resolutions
duly adopted by the Board of Directors of Lessee and continuing in effect,
which authorize the execution, delivery and performance by Lessee of the
Operative Documents executed or to be executed by Lessee and the
consummation of the
3.01-1
<PAGE> 100
transactions contemplated thereby; and (c) that there are no proceedings
for the dissolution or liquidation of Lessee;
(4) A certificate of the Secretary or an Assistant Secretary of
Lessee, dated the Closing Date, certifying the incumbency, signatures and
authority of the officers of Lessee authorized to execute, deliver and
perform the Operative Documents and all other documents, instruments or
agreements related thereto executed or to be executed by Lessee; and
(5) A Certificate of Good Standing for Lessee, certified as of a
recent date prior to the Closing Date by the Secretary of State (or
comparable official) of California.
C. FINANCIAL STATEMENTS, FINANCIAL CONDITION, ETC.
(1) A copy of the unaudited Financial Statements of Lessee and its
Subsidiaries for the fiscal quarter ended September 30, 1997 and for the
fiscal year to such date (prepared on a consolidated and consolidating
basis), certified by the chief financial officer of Lessee to present
fairly the financial condition, results of operations and other
information reflected therein and to have been prepared in accordance with
GAAP (subject to normal year-end audit adjustments);
(2) A copy of the audited consolidated Financial Statements of
Lessee for the fiscal year ended June 30, 1997 prepared by Price
Waterhouse LLP and a copy of the unqualified opinion delivered by such
accountants in connection with such Financial Statements;
(3) A copy of the 10-K report filed by Lessee with the Securities
and Exchange Commission for the fiscal year ended June 30, 1997;
(4) Such other financial, business and other information regarding
Lessee, or any of its Subsidiaries as Agent or any Participant may
reasonably request, including information as to possible contingent
liabilities, tax matters, environmental matters and obligations for
employee benefits and compensation.
D. COLLATERAL DOCUMENTS.
(1) A grant deed transferring fee title in the Tract 2 Property to
Lessor, duly executed by the Seller thereof and appropriately notarized;
(2) A Ground Lease Agreement in the form of Exhibit M, duly
executed by Lessor and Lessee and appropriately notarized (the "Tract 3
Ground Lease Agreement");
3.01-2
<PAGE> 101
(3) A Memorandum of Purchase Agreement (covering the Initial
Property), appropriately completed and duly executed by Lessee and Lessor
and appropriately notarized for recording;
(4) Evidence that the Lease Agreement, the Assignment of Lease,
the Lessor Deed of Trust, the grant deeds, the Tract 3 Ground Lease
Agreement and the Memoranda of Purchase Agreement delivered pursuant to
items A(2), A(4), A(5), D(1), D(2) and D(3) have been properly recorded in
the Official Records of the County of County of Santa Clara, California;
(5) An extended coverage owner's policy or binder of title
insurance (or a commitment therefor) for the Initial Property insuring
Lessor's fee simple title or leasehold estate, as appropriate, to such
Property (subject to such exceptions as Agent may approve), in such
amounts and with such endorsements as Agent may reasonably require, issued
by a title insurer acceptable to Agent, together with such policies of
co-insurance or re-insurance (or commitments therefor) as Agent may
require;
(6) An extended coverage lender's policy of title insurance (or a
commitment therefor) for the Initial Property insuring the validity and
priority of the Lease Agreement (subject to such exceptions as Agent may
approve), in such amounts and with such endorsements as Agent may
reasonably require, issued by a title insurer acceptable to Agent,
together with such policies of co-insurance or re-insurance (or
commitments therefor) as Agent may require;
(7) An extended coverage lender's policy of title insurance (or a
commitment therefor) for the Initial Property insuring the validity and
priority of the Lessor Deed of Trust (subject to such exceptions as Agent
may approve), in such amounts and with such endorsements as Agent may
reasonably require, issued by a title insurer acceptable to Agent,
together with such policies of co-insurance or re-insurance (or
commitments therefor) as Agent may require;
(8) Copies of all leases for the Initial Property and all other
documents, instruments and agreements recorded against or otherwise
affecting such Property, including all amendments, extensions and other
modifications thereof;
(9) Subordination, non-disturbance and attornment agreements from
the lessee under each of the leases for the Initial Property;
(10) Such consents and estoppels, with appropriate mortgagee
protection language, as are requested by Agent, each duly executed by the
appropriate Person;
(11) Such Uniform Commercial Code financing statements and fixture
filings (appropriately completed and executed) for filing in such
jurisdictions as Agent may request to perfect the Liens granted to Lessor
and Agent in the Lessee Security Documents, the Lessor Security Agreement
and the other Operative Documents;
(12) Such Uniform Commercial Code termination statements
(appropriately completed and executed) for filing in such jurisdictions as
Agent may request to
3.01-3
<PAGE> 102
terminate any financing statement evidencing Liens of other Persons in the
Collateral which are prior to the Liens granted to Lessor and Agent in the
Lessee Security Documents, the Lessor Security Agreement and the other
Operative Documents, except for any such prior Liens which are expressly
permitted by the Operative Documents to be prior;
(13) Uniform Commercial Code search certificates from the
jurisdictions in which Uniform Commercial Code financing statements are to
be filed pursuant to item B(11) above reflecting no other financing
statements or filings which evidence Liens of other Persons in the
Collateral which are prior to the Liens granted to Lessor and Agent in the
Lessee Security Documents, the Lessor Security Agreement and the other
Operative Documents, except for any such prior Liens (a) which are
expressly permitted by the Operative Documents to be prior or (b) for
which Agent has received a termination statement pursuant to item B(12)
above;
(14) Such other documents, instruments and agreements as Agents may
reasonably request to establish and perfect the Liens granted to any
Lessor Party in the Lessee Security Documents, the Lessor Deed of Trust,
the Lessor Security Agreement and the other Operative Documents; and
(15) Such other evidence as Agent may request to establish that the
Liens granted to Agent or any Participant in the Lessee Security
Documents, the Lessor Deed of Trust, the Lessor Security Agreement and the
other Operative Documents are perfected and prior to the Liens of other
Persons in the Collateral, except for any such Liens which are expressly
permitted by the Operative Documents to be prior.
E. OPINIONS.
(1) A favorable written opinion of Wilson, Sonsini, Goodrich &
Rosati, counsel to Lessee, dated the Closing Date, addressed to Lessor and
Agent, for the benefit of Agent and the Participants, and covering such
legal matters as Agent may reasonably request and otherwise in form and
substance satisfactory to Agent; and
(2) A favorable written opinion of the General Counsel of Lessee,
dated the Closing Date, addressed to Lessor and Agent, for the benefit of
Agent and the Participants, and covering such legal matters as Agent may
reasonably request and otherwise in form and substance satisfactory to
Agent.
F. OTHER ITEMS.
(1) A duly completed and timely delivered Acquisition Request for
the Initial Acquisition Advances, duly executed by Lessee;
3.01-4
<PAGE> 103
(2) A Closing Date Appraisal for each Tract in the Initial
Property, each dated as of a recent date prior to the Closing Date;
(3) Bills of sale for all Related Goods to be acquired with the
Acquisition Advances to be made on the Closing Date, each reflecting
Lessor as the purchaser of such Related Goods;
(4) An as-built survey of each Tract of the Initial Property (a)
prepared and dated not more than two (2) months prior to the Closing Date
by a registered surveyor reasonably satisfactory to Agent, (b) certified
as correct and as (i) having been made in accordance with the most recent
standards for "Minimum Standard Detail Requirements for ALTA/ACSM Land
Title Surveys," jointly established and adopted by ALTA and ACSM, and (ii)
meeting the accuracy requirements of a Class A survey (as defined therein)
and including items 1-5, 7-13 and 15 of Table 3 thereof, and (c)
disclosing, among other things, (i) the location of the perimeter of the
Property by courses and distances, (ii) all easements and rights-of-way,
whether above or underground, (iii) the lines of the street abutting the
Property and the width thereof, (iv) encroachments, if any, and the extent
thereof in feet and inches upon the Property, and (v) all boundary and lot
lines, and all other matters that would be disclosed by inspection of the
Property and the public records;
(5) Environmental reports and assessments satisfactory to Agent
issued by environmental consultants acceptable to Agent with respect to
the Initial Property;
(6) Certificates of insurance evidencing the insurance Lessee is
required to maintain pursuant to Paragraph 3.03 of the Lease Agreements;
(7) The Acquisition Agreements for the Tract 2 Property and the
Tract 3 Property and assignments of such Acquisition Agreements by Lessee
to Lessor;
(8) A certificate of the Chief Financial Officer of Lessee,
addressed to Lessor and Agent and dated the Closing Date, certifying that:
(a) The representations and warranties set forth in
Paragraph 4.01 of the Participation Agreement and in the other
Operative Documents are true and correct in all material respects as
of such date (except for such representations and warranties made as
of a specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing as of such
date;
(c) All of the Operative Documents are in full force and
effect on such date.
(9) All fees and expenses payable to the Lessor Parties on or
prior to the Closing Date (including all Agent's Fees);
(10) All fees and expenses of Lessor's and Agent's counsels through
the Closing Date; and
3.01-5
<PAGE> 104
(11) Such other evidence as Agent may reasonably request to
establish the accuracy and completeness of the representations and
warranties and the compliance with the terms and conditions contained in
the Operative Documents.
3.01-6
<PAGE> 105
SCHEDULE 3.02
CONDITIONS PRECEDENT TO TRACT 4 ACQUISITION ADVANCE
A. PRINCIPAL OPERATIVE DOCUMENTS.
(1) An amendment to the Lease Agreement adding the Tract 4
Property to the Property covered thereby, duly executed by Lessee and
Lessor and appropriately notarized;
(2) An amendment to the Purchase Agreement adding the Tract 4
Property to the Property covered thereby, duly executed by Lessee and
Lessor;
(3) An amendment to the Construction Agency Agreement adding the
Tract 4 Property to the Property covered thereby, duly executed by Lessee
and Lessor;
(4) An amendment to the Assignment of Lease adding the Tract 4
Property to the Property covered thereby, duly executed by Lessee and
Lessor and appropriately notarized; and
(5) An amendment to the Lessor Deed of Trust adding the Tract 4
Property to the Property covered thereby, duly executed by Lessee and
Lessor and, appropriately notarized.
B. COLLATERAL DOCUMENTS.
(1) An amendment to the Memorandum of Purchase Agreement adding
the Tract 4 Property to the Property covered thereby, duly executed by
Lessee and Lessor and appropriately notarized for recording, and evidence
that such amendment has been properly recorded in the Official Records of
the County of Santa Clara, California;
(2) Evidence that the Lease Agreement, the Assignment of Lease and
the Lessor Deed of Trust, or amendments thereto, have been properly
recorded in the Official Records of the County of Santa Clara, California;
(3) An extended coverage owner's policy or binder of title
insurance (or a commitment therefor) for the Tract 4 Property insuring
Lessor's fee simple title to such Property (subject to such exceptions as
Agent may approve), in such amounts and with such endorsements as Agent
may reasonably require, issued by a title insurer acceptable to Agent,
together with such policies of co-insurance or re-insurance (or
commitments therefor) as Agent may require;
(4) An extended coverage lender's policy of title insurance (or a
commitment therefor) for the Tract 4 Property insuring the validity and
priority of the Lease
3.02-1
<PAGE> 106
Agreement (subject to such exceptions as Agent may approve), in such
amounts and with such endorsements as Agent may reasonably require, issued
by a title insurer acceptable to Agent, together with such policies of
co-insurance or re-insurance (or commitments therefor) as Agent may
require;
(5) An extended coverage lender's policy of title insurance (or a
commitment therefor) for the Tract 4 Property insuring the validity and
priority of the Lessor Deed of Trust (subject to such exceptions as Agent
may approve), in such amounts and with such endorsements as Agent may
reasonably require, issued by a title insurer acceptable to Agent,
together with such policies of co-insurance or re-insurance (or
commitments therefor) as Agent may require;
(6) Copies of all leases for the Tract 4 Property and all other
documents, instruments and agreements recorded against or otherwise
affecting such Property, including all amendments, extensions and other
modifications thereof;
(7) Subordination, non-disturbance and attornment agreements from
the lessee under each of the leases for the Tract 4 Property;
(8) Such consents and estoppels, with appropriate mortgagee
protection language, as are requested by Agent, each duly executed by the
appropriate Person;
(9) Such Uniform Commercial Code financing statements and fixture
filings (appropriately completed and executed) for filing in such
jurisdictions as Agent may request to perfect the Liens granted to Lessor
and Agent in the Lessee Security Documents, the Lessor Security Agreement
and the other Operative Documents;
(10) Such Uniform Commercial Code termination statements
(appropriately completed and executed) for filing in such jurisdictions as
Agent may request to terminate any financing statement evidencing Liens of
other Persons in the Collateral which are prior to the Liens granted to
Lessor and Agent in the Lessee Security Documents, the Lessor Security
Agreement and the other Operative Documents, except for any such prior
Liens which are expressly permitted by the Operative Documents to be
prior;
(11) Uniform Commercial Code search certificates from the
jurisdictions in which Uniform Commercial Code financing statements are to
be filed pursuant to item B.(9) above reflecting no other financing
statements or filings which evidence Liens of other Persons in the
Collateral which are prior to the Liens granted to Lessor and Agent in the
Lessee Security Documents, the Lessor Security Agreement and the other
Operative Documents, except for any such prior Liens (a) which are
expressly permitted by the Operative Documents to be prior or (b) for
which Agent has received a termination statement pursuant to item B.(10)
above;
(12) Such other documents, instruments and agreements as Agents may
reasonably request to establish and perfect the Liens granted to any
Lessor Party in the Lessee Security Documents, the Lessor Deed of Trust,
the Lessor Security Agreement and the other Operative Documents; and
3.02-2
<PAGE> 107
(13) Such other evidence as Agent may request to establish that the
Liens granted to Agent or any Participant in the Lessee Security
Documents, the Lessor Deed of Trust, the Lessor Security Agreement and the
other Operative Documents are perfected and prior to the Liens of other
Persons in the Collateral, except for any such Liens which are expressly
permitted by the Operative Documents to be prior.
C. OPINIONS.
(1) A favorable written opinion of Wilson, Sonsini, Goodrich &
Rosati, counsel to Lessee, dated the Closing Date, addressed to Lessor and
Agent, for the benefit of Agent and the Participants, and covering such
legal matters as Agent may reasonably request and otherwise in form and
substance satisfactory to Agent; and
(2) A favorable written opinion of the General Counsel of Lessee,
dated the Closing Date, addressed to Lessor and Agent, for the benefit of
Agent and the Participants, and covering such legal matters as Agent may
reasonably request and otherwise in form and substance satisfactory to
Agent.
D. OTHER ITEMS.
(1) A duly completed and timely delivered Acquisition Request for
the Tract 4 Advance, duly executed by Lessee;
(2) A Closing Date Appraisal of the Tract 4 Property;
(3) Bills of sale for all Related Goods to be acquired for the
Acquisition Advance to be made on the Tract 4 Acquisition Date, each
reflecting Lessor as the purchaser of such Related Goods;
(4) An as-built survey of the Tract 4 Property (a) prepared and
dated not more than two (2) months prior to the Tract 4 Acquisition Date
by a registered surveyor reasonably satisfactory to Agent, (b) certified
as correct and as (i) having been made in accordance with the most recent
standards for "Minimum Standard Detail Requirements for ALTA/ACSM Land
Title Surveys," jointly established and adopted by ALTA and ACSM, and (ii)
meeting the accuracy requirements of a Class A survey (as defined therein)
and including items 1-5, 7-13 and 15 of Table 3 thereof, and (c)
disclosing, among other things, (i) the location of the perimeter of the
Tract 4 Property by courses and distances, (ii) all easements and
rights-of-way, whether above or underground, (iii) the lines of the street
abutting the Tract 4 Property and the width thereof, (iv) encroachments,
if any, and the extent thereof in feet and inches upon the Tract 4
Property, and (v) all boundary and lot lines, and all other matters that
would be disclosed by inspection of the Tract 4 Property and the public
records;
3.02-3
<PAGE> 108
(5) If requested by Lessor, Agent or any Participant, a list of
and copies of all Construction Agreements;
(6) Environmental reports and assessments satisfactory to Agent
issued by environmental consultants acceptable to Agent with respect to
the Tract 4 Property;
(7) Certificates of insurance evidencing the insurance Lessee is
required to maintain pursuant to Paragraph 3.03 of the Lease Agreement;
(8) The Acquisition Agreement for the Tract 4 Property and an
assignment of such Acquisition Agreement by Lessee to Lessor;
(9) All fees and expenses payable to the Lessor Parties on or
prior to the Acquisition Date for the Tract 4 Property (including all
Agent's Fees);
(10) All fees and expenses of Lessor's and Agent's counsels through
the Acquisition Date for the Tract 4 Property; and
(11) Such other evidence as Agent, Lessor or any Participant may
reasonably request to establish the accuracy and completeness of the
representations and warranties and the compliance with the terms and
conditions contained in the Operative Documents.
3.02-4
<PAGE> 109
SCHEDULE 4.01(Q)
SUBSIDIARIES
Wholly-Owned and Consolidated Subsidiaries
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OWNERSHIP BY
NAME INCORPORATION KLA-TENCOR
- ---- --------------- ------------
<S> <C> <C>
UNITED STATES SUBSIDIARIES
Tencor Instruments........................................ California wholly-owned
International Sales & Business, Inc....................... California wholly-owned
KLA-Tencor Building Corporation........................... California wholly-owned
KLA-Tencor Disc Corporation............................... California wholly-owned
KLA-Tencor International Corporation...................... California wholly-owned
KLA-Tencor Instruments Klinnik Corporation................ California wholly-owned
KLA-Tencor Management Corporation......................... California wholly-owned
KLA-Tencor (Thailand Branch) Corporation.................. California wholly-owned
VLSI Standards, Inc....................................... California wholly-owned
INTERNATIONAL SUBSIDIARIES
KLA-Tencor (Cayman) Limited I............................. Cayman Islands wholly-owned
KLA-Tencor (Cayman) Limited II............................ Cayman Islands wholly-owned
KLA-Tencor (Cayman) Limited III........................... Cayman Islands wholly-owned
KLA-Tencor (Israel) Corporation Israel consolidated
KLA-Tencor Holding Corporation 1987 Limited............... Israel consolidated
KLA-Tencor Corporation 1992 Limited....................... Israel consolidated
KLA-Tencor Italy S.R.L.................................... Italy consolidated
KLA-Tencor Japan, Ltd..................................... Japan wholly-owned
KLA-Tencor Instruments Sales Corporation U.S. Virgin Islands wholly-owned
Tencor Foreign Sales Corporation Barbados wholly-owned
KLA-Tencor GmbH Germany wholly-owned
Tencor Instruments GmbH................................... Germany wholly-owned
KLA-Tencor France SARL France wholly-owned
KLA-Tencor Instruments France S.A......................... France wholly-owned
KLA-Tencor Korea, Inc..................................... Korea wholly-owned
KLA-Tencor Limited........................................ United Kingdom wholly-owned
KLA-Tencor (Malaysia) Snd Bhd............................. Malaysia wholly-owned
KLA-Tencor (Singapore) PTE, Ltd........................... Singapore wholly-owned
Tencor Instruments (Service) Limited...................... United Kingdom wholly-owned
VLSI Standards, KK........................................ Japan wholly-owned
</TABLE>
In addition, KLA-Tencor Corporation holds equity interest in certain other
entities which such interest does not require consolidation for accounting
purposes.
4.01(q)-1
<PAGE> 110
SCHEDULE 4.01(S)
INDIVIDUAL PROPERTY REPRESENTATIONS
4.01(s)-1
<PAGE> 111
SCHEDULE 4.01(S)
TRACT 1 PROPERTY
(i) The Tract 1 Land consists of 31.068 acres located at One Technology
Drive, Milpitas, California, more particularly described in Part 1 to Exhibit A.
(ii) On the date of this Agreement, the Existing Improvements on the
Tract 1 Land consist of three (3) one-story and two (2) two-story buildings.
(iii) No property, other than the Tract 1 Land and Existing Improvements
thereto will be acquired for the Acquisition Price therefor or will be acquired
after the applicable Acquisition Date therefor.
(iv) All utilities required to adequately service the Existing
Improvements for their intended use are available and "tapped on" and hooked up
pursuant to adequate permits (including any that may be required under
applicable Environmental Laws). Access to the Existing Improvements for
pedestrians and motor vehicles from publicly dedicated streets and public
highways are available.
(v) No portion of the Tract 1 Property is located in an area identified
as a special flood hazard area by the Federal Emergency Management Agency or
other applicable Governmental Authority, or if any portion of the Property is
located in such an area, flood insurance has been obtained for the Property or
such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement
and the National Flood Insurance Act of 1968.
4.01(s)-2
<PAGE> 112
SCHEDULE 4.01(S)
TRACT 2 PROPERTY
(i) The Tract 2 Land consists of 8.124 acres located at 51 and 77 Rio
Robles, San Jose, California, more particularly described in Part 2 to Exhibit
A.
(ii) On the date of this Agreement, the Existing Improvements on the
Tract 2 Land consist of two (2) one-story buildings consisting of 64,895 square
feet and 55,750 square feet respectively.
(iii) In addition to the Tract 2 Land and Existing Improvements thereto,
the other Tract 2 Property to be acquired for the Acquisition Price therefor on
the Acquisition Date therefor will include the personal property described on
that certain Bill of Sale, Assignment of Contract Rights and Intangible Assets
executed by Seller and Lessor and the other Related Goods more particularly
described in Exhibit B to the Lease Agreement or the applicable Exhibit B
Supplement.
(iv) All utilities required to adequately service the Existing
Improvements for their intended use are available and "tapped on" and hooked up
pursuant to adequate permits (including any that may be required under
applicable Environmental Laws). Access to the Existing Improvements for
pedestrians and motor vehicles from publicly dedicated streets and public
highways are available.
(v) No portion of the Tract 2 Property is located in an area identified
as a special flood hazard area by the Federal Emergency Management Agency or
other applicable Governmental Authority, or if any portion of the Property is
located in such an area, flood insurance has been obtained for the Property or
such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement
and the National Flood Insurance Act of 1968.
4.01(s)-3
<PAGE> 113
SCHEDULE 4.01(S)
TRACT 3 PROPERTY
(i) The Tract 3 Land consists of 9.2268 acres located at 160 Rio Robles,
San Jose, California, more particularly described in Part 3 to Exhibit A.
(ii) On the date of this Agreement, the Existing Improvements on the
Tract 3 Land consist of one (1) building.
(iii) In addition to the Tract 3 Land and Existing Improvements thereto,
the other Tract 3 Property to be acquired for the Acquisition Price therefor on
the Acquisition Date therefor will include the personal property described on
that certain Bill of Sale, Assignment of Contract Rights and Intangible Assets
executed by Seller and Lessor and the other Related Goods more particularly
described in Exhibit B to the Lease Agreement or the applicable Exhibit B
Supplement.
(iv) All utilities required to adequately service the Existing
Improvements for their intended use are available and "tapped on" and hooked up
pursuant to adequate permits (including any that may be required under
applicable Environmental Laws). Access to the Existing Improvements for
pedestrians and motor vehicles from publicly dedicated streets and public
highways are available.
(v) No portion of the Tract 3 Property is located in an area identified
as a special flood hazard area by the Federal Emergency Management Agency or
other applicable Governmental Authority, or if any portion of the Property is
located in such an area, flood insurance has been obtained for the Property or
such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement
and the National Flood Insurance Act of 1968.
4.01(s)-4
<PAGE> 114
SCHEDULE 4.01(S)
TRACT 4 PROPERTY
(i) The Tract 4 Land consists of 3.55 acres located at 145 Rio Robles,
San Jose, California, more particularly described in Part 4 to Exhibit A.
(ii) On the date of this Agreement, the Existing Improvements on the
Tract 4 Land consist of one (1) one-story building consisting of approximately
52,536 square feet.
(iii) No property, other than the Tract 4 Land and Existing Improvements
thereto will be acquired for the Acquisition Price therefor or will be acquired
after the applicable Acquisition Date therefor.
(iv) All utilities required to adequately service the Existing
Improvements for their intended use are available and "tapped on" and hooked up
pursuant to adequate permits (including any that may be required under
applicable Environmental Laws). Access to the Existing Improvements for
pedestrians and motor vehicles from publicly dedicated streets and public
highways are available.
(v) No portion of the Tract 4 Property is located in an area identified
as a special flood hazard area by the Federal Emergency Management Agency or
other applicable Governmental Authority, or if any portion of the Property is
located in such an area, flood insurance has been obtained for the Property or
such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement
and the National Flood Insurance Act of 1968.
4.01(s)-5
<PAGE> 115
SCHEDULE 4.01(S)
TRACT 5 PROPERTY
(i) The Tract 5 Land consists of 8.273 acres located at One Technology
Drive, Milpitas, California, more particularly described in Part 1 to Exhibit A.
(ii) There are no Improvements on the Tract 5 Land.
(iii) No property, other than the Tract 5 Land will be acquired for the
Acquisition Price therefor or will be acquired after the applicable Acquisition
Date therefor.
(iv) No portion of the Tract 5 Property is located in an area identified
as a special flood hazard area by the Federal Emergency Management Agency or
other applicable Governmental Authority, or if any portion of the Property is
located in such an area, flood insurance has been obtained for the Property or
such portion thereof in accordance with Paragraph 3.03 of the Lease Agreement
and the National Flood Insurance Act of 1968.
4.01(s)-6
<PAGE> 116
EXHIBIT A
LAND
A-1
<PAGE> 117
EXHIBIT A
PART 1
TRACT 1 LAND
A-2
<PAGE> 118
EXHIBIT A
PART 2
TRACT 2 LAND
A-3
<PAGE> 119
EXHIBIT A
PART 3
TRACT 3 LAND
THE FEE OWNER OF THE REAL PROPERTY DESCRIBED BELOW IS: KLA-TENCOR CORPORATION, A
DELAWARE CORPORATION
A-4
<PAGE> 120
EXHIBIT A
PART 3 (CONT.)
TRACT 3 LAND (CONT.)
A-5
<PAGE> 121
EXHIBIT A
PART 3 (CONT.)
TRACT 3 LAND (CONT.)
A-6
<PAGE> 122
EXHIBIT A
PART 3 (CONT.)
TRACT 3 LAND (CONT.)
A-7
<PAGE> 123
EXHIBIT A
PART 4
TRACT 4 LAND
A-8
<PAGE> 124
EXHIBIT A
PART 5
TRACT 5 LAND
A-9
<PAGE> 125
EXHIBIT B
LEASE AGREEMENT
LEASE AGREEMENT,
CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
THIS LEASE AGREEMENT, CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF
RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Agreement" herein), dated as
of November 12, 1997 is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation, as lessor
under this Agreement and as trustee under the deed of trust contained
herein ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions
which are "Participants" under the Participation Agreement referred to in
Recital B below (such financial institutions to be referred to collectively as
the "Participants") to provide to Lessee a certain lease facility. Pursuant to
such facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date
herewith (the "Participation Agreement") among Lessee, Lessor, the Participants
and ABN AMRO Bank N.V., as agent for the Participants (in such capacity,
"Agent"), Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including
without limitation the execution and delivery of this Agreement setting forth
the terms of the lease by Lessor to Lessee of the property.
B-1
<PAGE> 126
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Agreement and the other
Operative Documents.
SECTION 2. BASIC PROVISIONS.
2.01. Lease of the Property. Subject to the acquisition thereof by Lessor
pursuant to the Participation Agreement and applicable Acquisition Agreements
either as of the date hereof or during the term hereof, Lessor agrees to lease
to Lessee and Lessee agrees to lease from Lessor the following property (the
"Property") to the extent of Lessor's estate, right, title and interest therein,
thereto or thereunder:
(a) All lots, pieces, tracts and parcels of land described in
Exhibit A together with such additional parcels of real property as may be
added to Exhibit A from time to time during the term hereof (the "Land");
(b) All Improvements located on the Land;
(c) All Appurtenant Rights belonging, relating or pertaining to
any of the Land or Improvements;
(d) All Related Goods (including those described in Exhibit B and
in each Exhibit B Supplement), Related Permits and Related Agreements
related to any of the foregoing Land, Improvements or Appurtenant Rights;
and
(e) All accessions and accretions to and replacements and
substitutions for the foregoing.
(Lessee understands that Lessor's only interest in the Tract 3 Land is through
the Tract 3 Ground Lease Agreement and is a leasehold interest only.)
B-2
<PAGE> 127
2.02. Term.
(a) Original Term. The original term of this Agreement shall
commence on the Closing Date (the "Commencement Date") and shall end on
the first Business Day of November, 2002 (such date as it may be extended
pursuant to Subparagraph 2.02(b) to be referred to as the "Scheduled
Expiration Date").
(b) Extensions. Lessee may request Lessor to extend the Scheduled
Expiration Date in effect for an additional period of two (2) years, as
provided in Subparagraph 2.09(b) of the Participation Agreement. If Lessor
and each Participant consents to such a request in accordance with such
provision, the definition of "Scheduled Expiration Date" set forth in
Subparagraph 2.02(a) shall be deemed extended to the date which is the
first business day of November, 2004. Lessee acknowledges that neither
Lessor nor any Participant has any obligation or commitment (either
express or implied) to extend, or consent to the extension of, the
Scheduled Expiration Date at any time.
2.03. Rent.
(a) Base Rent.
(i) Lessee shall pay to Lessor as base rent hereunder ("Base
Rent") for each Rental Period for each Portion of the Outstanding
Lease Amount an amount equal to the product of (A) the Rental Rate
for such Rental Period and Portion, times (B) the amount of such
Portion on the first day of such Rental Period, times (C) a
fraction, the numerator of which is the number of days in such
Rental Period and the denominator of which is 360. If the Rental
Rate shall change during any Rental Period, the Rental Rate for such
Rental Period shall be the weighted average of the Rental Rates in
effect from time to time during such Rental Period.
(ii) Lessee may select the number and amounts of the Portions
into which the Outstanding Lease Amount is to be divided and the
Rental Period for each such Portion by (y) setting forth in each
Acquisition Advance Request delivered by Lessee pursuant to
Subparagraph 2.03(a) of the Participation Agreement the Portions
into which Advances initially are to be divided and the initial
Rental Periods therefor and (z) delivering to Lessor at least three
(3) Business Days prior to the last day of each Rental Period for a
Portion an irrevocable written notice in the form of Exhibit C,
appropriately completed (a "Notice of Rental Period Selection"),
subject to the following:
(A) Each Portion shall be in the amount of $5,000,000
or an integral multiple of $100,000 in excess thereof;
provided, however, that (1) during the Commitment Period, all
Improvement/Expense Advances made after the Closing Date shall
be combined as a single Portion (which may be less than
$5,000,000), (2) the total number of Portions outstanding at
any time shall not exceed four (4), and (3) the Outstanding
Lease Amount shall consist of a single Portion in the amount
of the Outstanding Lease Amount if the Outstanding Lease
Amount is less than $5,000,000).
B-3
<PAGE> 128
(B) The initial and each subsequent Rental Period
selected by Lessee for each Portion shall be one (1), two (2),
three (3), six (6) or twelve (12) months; provided, however,
that (1) the initial Rental Period for any Portion that is
originated on an Acquisition Date that is not the first
Business Day of a calendar month shall begin on such
Acquisition Date and shall end on the first Business Day of
the first calendar month immediately following the month in
which such origination occurs, (2) every other Rental Period
shall begin and end on the first Business Day of a calendar
month, (3) during the Commitment Period, the Rental Period for
the Portion consisting of all Improvement/Expense Advances
made after the Closing Date shall be one (1) month, (4) no
Rental Period shall end after the Scheduled Expiration Date,
(5) no Rental Period shall be longer than one (1) month if a
Default has occurred and is continuing on the date three (3)
Business Days prior to the first day of such Rental Period and
(6) each Rental Period after the initial Rental Period for any
Portion for which Lessee fails to make a selection by
delivering a Notice of Rental Period Selection in accordance
with this clause (ii) shall be one (1) month.
Lessee shall deliver each Notice of Rental Period Selection by
first-class mail or facsimile as required by Subparagraph
2.02(a) and Paragraph 7.01 of the Participation Agreement;
provided, however, that Lessee shall promptly deliver the
original of any Notice of Rental Period Selection initially
delivered by facsimile.
(iii) The rental rate for each Rental Period for a Portion
("Rental Rate") shall be the LIBOR Rental Rate for such Rental
Period and Portion, except as follows:
(A) The Rental Rates for the Rental Periods that begin
on the Closing Date and on the Tract 4 Acquisition Date and
end on December 1, 1997 shall be a rate agreed upon by Lessee
and Lessor; or
(B) If any other Rental Period is less than seven (7)
days, the Rental Rate for such Rental Period shall be the
Alternate Rental Rate; or
(C) If the LIBOR Rental Rate is unavailable for any
Rental Period pursuant to Subparagraph 2.12(a) or Subparagraph
2.12(b) of the Participation Agreement, the Rental Rate for
such Rental Period shall be the Alternate Rental Rate.
(iv) Lessee shall pay Base Rent in arrears (A) for each
Portion, on the last day of each Rental Period therefor and, in the
case of any Rental Period which exceeds three (3) months, each day
occurring every three (3) months after the first day of such Rental
Period (individually, a "Scheduled Rent Payment Date") and (B) for
all Portions, on the Expiration Date.
B-4
<PAGE> 129
(b) Supplemental Rent. Lessee shall pay as supplemental rent
hereunder ("Supplemental Rent") all amounts (other than Base Rent, the
purchase price payable by Lessee for any purchase of the Property by
Lessee pursuant to the Purchase Agreement and the Residual Value Guaranty
Amount payable under the Purchase Agreement) payable by Lessee under this
Agreement and the other Operative Documents. Lessee shall pay all
Supplemental Rent amounts on the dates specified in this Agreement and the
other Operative Documents for the payment of such amounts or, if no date
is specified for the payment of any such amount, upon the demand of Lessor
or any other Person to whom such amount is payable.
2.04. Use. Lessee may use the Property for office, research and
development, warehouse and manufacturing purposes, and for any other purpose
which is in compliance with applicable zoning laws and ordinances for the
Property.
2.05. "As Is" Lease. Lessee has conducted, or will conduct from time to
time with regard to property that may be added hereto after the date hereof, all
due diligence which it deems appropriate regarding the Property and agrees that
no Lessor Party has any obligation to conduct any such due diligence. Lessee is
leasing the Property "as is, with all faults" without any representation,
warranty, indemnity or undertaking by any Lessor Party regarding any aspect of
the Property, including (a) the condition of the Property (including any
Improvements to the Property made prior to the Commencement Date or during the
Term); (b) title to the Property (including possession of the Property by any
Person or the existence of any Lien or any other right, title or interest in or
to any of the Property in favor of any Person); (c) the value, habitability,
usability, design, operation or fitness for use of the Property; (d) the
availability or adequacy of utilities and other services to the Property; (e)
any latent, hidden or patent defect in the Property; (f) the zoning or status of
the Property or any other restrictions on the use of the Property; (g) the
economics of the Property; (h) any Casualty or Condemnation; or (i) the
compliance of the Property with any applicable Governmental Rule or Insurance
Requirement; provided, however, that Lessor shall be obligated to remove Lessor
Liens to the extent required in Subparagraph 5.04(b) of the Participation
Agreement. Without limiting the generality of the foregoing, Lessee specifically
waives any covenant of quiet enjoyment except as otherwise provided in
Subparagraph 5.04(b) of the Participation Agreement.
2.06. Nature of Transaction. As more fully provided in Paragraph 2.10 of
the Participation Agreement, Lessee and the Lessor Parties intend that the
transaction evidenced by this Agreement and the other Operative Documents
constitute an operating lease in accordance with FASB 13 for accounting purposes
and a loan secured by the Property for all other purposes, including federal,
state and local income tax purposes and commercial, real estate and bankruptcy
law purposes.
2.07. Security, Etc. In order to secure the Lessee Obligations and
otherwise to assure the Lessor Parties the benefits hereof in the event that the
transaction evidenced by this Agreement and the other Operative Documents is,
pursuant to the intent of Lessee and the Lessor Parties, treated as a loan for
certain purposes, Lessee hereby makes the following grants and agrees as
follows:
B-5
<PAGE> 130
(a) Real Property Security. As security for the Lessee
Obligations, Lessee hereby irrevocably and unconditionally grants,
conveys, transfers and assigns to Lessor, in trust for the benefit of the
Lessor Parties, with power of sale and right of entry and possession, all
estate, right, title and interest of Lessee in the following property,
whether now owned or leased or hereafter acquired, (collectively, the
"Real Property Collateral"):
(i) The Land;
(ii) All Improvements located on the Land;
(iii) All Appurtenant Rights belonging, relating or pertaining
to any of the foregoing Land or Improvements;
(iv) All Subleases of and all Issues and Profits accruing
from any of the foregoing Land, Improvements or Appurtenant Rights
to the extent that such Subleases and Issues and Profits constitute
real property;
(v) All Related Goods, Related Permits and Related
Agreements related to any of the foregoing Land, Improvements or
Appurtenant Rights to the extent that such Related Goods, Related
Agreements and Related Permits constitute real property;
(vi) All other Property to the extent that such property
constitutes real property; and
(vii) All proceeds of the foregoing, including Casualty and
Condemnation Proceeds.
(b) Personal Property Security. As security for the Lessee
Obligations, Lessee hereby irrevocably and unconditionally assigns and
grants to Lessor, for the benefit of the Lessor Parties, a security
interest in all estate, right, title and interest of Lessee in the
following property, whether now owned or leased or hereafter acquired,
(collectively, the "Personal Property Collateral"):
(i) All Subleases of and all Issues and Profits accruing
from any of the Land, Improvements or Appurtenant Rights to the
extent that such Subleases and Issues and Profits constitute
personal property;
(ii) All Related Goods, Related Permits and Related
Agreements related to any of the Land, Improvements or Appurtenant
Rights to the extent that such Related Goods, Related Agreements and
Related Permits constitute personal property;
(iii) All Cash Collateral and all other deposit accounts,
instruments, investment property and monies held by any Lessor Party
in connection with this Agreement or any other Operative Document
(including any Repair and Restoration Account);
B-6
<PAGE> 131
(iv) All other Property to the extent such Property
constitutes personal property; and
(v) All proceeds of the foregoing, including Casualty and
Condemnation Proceeds.
This Agreement constitutes a fixture filing for purposes of the California
Commercial Code with respect to the Related Goods which are or are to
become fixtures on the Land or Improvements.
(c) Absolute Assignment of Subleases, Issues, and Profits. Lessee
hereby irrevocably assigns to Lessor, for the benefit of the Lessor
Parties, all of Lessee's estate, right, title and interest in, to and
under the Subleases and the Issues and Profits, whether now owned or
hereafter acquired. This is a present and absolute assignment, not an
assignment for security purposes only, and Lessor's right to the Subleases
and Issues and Profits is not contingent upon, and may be exercised
without possession of, the Property.
(i) If no Event of Default has occurred and is continuing,
Lessee shall have a revocable license to collect and retain the
Issues and Profits as they become due. Upon the occurrence and
during the continuance of an Event of Default, such license shall
automatically terminate, and Lessor may collect and apply the Issues
and Profits pursuant to Subparagraph 5.02(d) without further notice
to Lessee or any other party and without taking possession of the
Property. All Issues and Profits thereafter collected by Lessee
shall be held by lessee as trustee in a constructive trust for the
benefit of Lessor. Lessee hereby irrevocably authorizes and directs
the sublessees under the Subleases, without any need on their part
to inquire as to whether an Event of Default has actually occurred
or is then existing, to rely upon and comply with any notice or
demand by Lessor for the payment to Lessor of any rental or other
sums which may become due under the Subleases or for the performance
of any of the sublessees' undertakings under the Subleases.
Collection of any Issues and Profits by Lessor shall not cure or
waive any default or notice of default hereunder or invalidate any
acts done pursuant to such notice.
(ii) The foregoing irrevocable assignment shall not cause any
Lessor Party to be (A) a mortgagee in possession; (B) responsible or
liable for (1) the control, care, management or repair of the
Property or for performing any of Lessee's obligations or duties
under the Subleases, (2) any waste committed on the Property by the
sublessees under any of the Subleases or by any other Persons, (3)
any dangerous or defective condition of the Property, or (4) any
negligence in the management, upkeep, repair or control of the
Property resulting in loss or injury or death to any sublessee,
licensee, employee, invitee or other Person; or (C) responsible for
or impose upon any Lessor Party any duty to produce rents or
profits. No Lessor Party, in the absence of gross negligence or
willful disregard on its part, shall be liable to Lessee as a
consequence of (y) the exercise or failure to exercise any of the
rights, remedies or powers granted to Lessor hereunder or
B-7
<PAGE> 132
(z) the failure or refusal of Lessor to perform or discharge any
obligation, duty or liability of Lessee arising under the Subleases.
SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS.
3.01. Maintenance, Repair, Etc.
(a) General. Lessee shall not permit any waste of the Property,
except for ordinary wear and tear, and shall, at its sole cost and
expense, maintain the Property in good working order, mechanical condition
and repair and make all necessary repairs thereto, of every kind and
nature whatsoever, whether interior or exterior, ordinary or
extraordinary, structural or nonstructural or foreseen or unforeseen, in
each case as required by all applicable Governmental Rules and Insurance
Requirements and on a basis consistent with the operation and maintenance
of commercial properties comparable in type and location to the Property
and in compliance with prudent industry practice.
(b) New Improvements. Lessee shall make or cause to be made all of
the New Improvements authorized and required by the Construction Agency
Agreement in accordance with the Construction Agency Agreement.
(c) Other Modifications. Lessee, at its sole cost and expense, may
from time to time make alterations, renovations, improvements and
additions to the Property and substitutions and replacements therefor
(collectively, "Modifications") in addition to the New Improvements;
provided that:
(i) No Modification impairs the value, utility or useful
life of the Property or any part thereof from that which existed
immediately prior to such Modification;
(ii) All Modifications are made expeditiously and, in all
cases unless Lessee currently is exercising either the Term Purchase
Option or the Expiration Date Purchase Option, completed not later
than six (6) months prior to the Scheduled Expiration Date;
(iii) All Modifications are made in a good and workmanlike
manner and in compliance with all applicable Governmental Rules and
Insurance Requirements;
(iv) Subject to Paragraph 3.12 relating to permitted
contests, Lessee pays all costs and expenses and discharges (or
cause to be insured or bonded over) any Liens arising in connection
with any Modification not later than the earlier of (A) sixty (60)
days after the same shall be filed (or otherwise becomes effective)
and (B) unless Lessee currently is exercising either the Term
Purchase Option or the Expiration Date Purchase Option, six (6)
months prior to the Scheduled Expiration Date;
(v) At least one (1) month prior to the commencement of (A)
any Modifications which are anticipated to cost $2,500,000 or more
in the aggregate,
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<PAGE> 133
or (B) any Modifications which cause the total of all Modifications
undertaken during the previous twelve-month period to exceed an
aggregate cost of $5,000,000, Lessee shall deliver to Lessor, with
sufficient copies for Agent and each Participant, a brief written
description of such Modifications; and
(vi) All Modifications otherwise comply with this Agreement
and the other Operative Documents.
(d) Abandonment. Lessee shall not abandon the Property or any
material portion thereof for any period in excess of thirty (30)
consecutive days during the term hereof, except as a part of any New
Improvements or Modifications as permitted herein or in the other
Operative Documents.
3.02. Risk of Loss. Lessee assumes all risks of loss arising from any
Casualty or Condemnation which arises or occurs prior to the Expiration Date or
while Lessee is in possession of the Property and all liability for all personal
injuries and deaths and damages to property suffered by any Person or property
on or in connection with the Property which arises or occurs prior to the
Expiration Date or while Lessee is in possession of the Property, except in each
case to the extent any such loss or liability is primarily caused by the gross
negligence or willful misconduct of a Lessor Party. Lessee hereby waives the
provisions of California Civil Code Sections 1932(1), 1932(2) and 1933(4), and
any and all other applicable existing or future Governmental Rules permitting
the termination of this Agreement as a result of any Casualty or Condemnation,
and Lessor shall in no event be answerable or accountable for any risk of loss
of or decrease in the enjoyment and beneficial use of the Property as a result
of any such event.
3.03. Insurance.
(a) Coverage. Lessee, at its sole cost and expense, shall carry
and maintain the following insurance coverage:
(i) At all times during the Term, commercial liability
insurance covering claims for injuries or death sustained by persons
or damage to property while on the Property, and workers'
compensation insurance;
(ii) At all times during the Term, property insurance
covering loss or damage by fire, flood and other risks in an amount
not less than the then current replacement cost of the Improvements
on the Property;
(iii) During the construction of any Improvements, builders'
risk insurance covering fire, flood and other normal insured risks;
and
(iv) At all times during the Term as appropriate, such other
insurance of the types customarily carried by a reasonably prudent
Person owning or operating properties similar to the Property in the
same geographic area as the Property;
Provided, however, that this Subparagraph 3.03(a) (A) shall not be
construed to require Lessee to carry
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or maintain earthquake insurance and (B) shall not require Lessee to carry
or maintain flood insurance in an amount in excess of the amount required
by any Governmental Rule applicable to Lessee or any Lessor Party. Except
as otherwise specifically required above, such insurance shall be in
amounts, in a form and with deductibles customarily carried by a
reasonably prudent Person owning or operating properties similar to the
Property in the same geographic area as the Property.
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(b) Carriers. Any insurance carried and maintained by Lessee
pursuant to this Paragraph 3.03 shall be underwritten by an insurance
company which (i) has, at the time such insurance is placed and at the
time of each renewal thereof, a general policyholder rating of "A" and a
financial rating of at least 9 from A.M. Best and Company or any successor
thereto (or if there is none, an organization having a similar national
reputation) or (ii) is otherwise approved by Lessor and Required
Participants; provided, however, that Lessee may, if no Event of Default
has occurred and is continuing, self-insure.
(c) Terms. Each insurance policy maintained by Lessee pursuant to
this Paragraph 3.03 shall provide as follows, whether through endorsements
or otherwise:
(i) Lessor and Agent shall be named as additional insureds,
in the case of each policy of liability and property insurance, and
additional loss payees, in the case of each policy of property
insurance.
(ii) In respect of the interests of Lessor in the policy, the
insurance shall not be invalidated by any action or by inaction of
Lessee or by any Person having temporary possession of the Property
while under contract with Lessee to perform maintenance, repair,
alteration or similar work on the Property, and shall insure the
interests of Lessor regardless of any breach or violation of any
warranty, declaration or condition contained in the insurance policy
by Lessee, Lessor or any other additional insured (other than by
such additional insured, as to such additional insured); provided,
however, that the foregoing shall not be deemed to (A) cause such
insurance policies to cover matters otherwise excluded from coverage
by the terms of such policies or (B) require any insurance to remain
in force notwithstanding non-payment of premiums except as provided
in clause (iii) below.
(iii) If the insurance policy is cancelled for any reason
whatsoever, or substantial change is made in the coverage that
affects the interests of Lessor, or if the insurance coverage is
allowed to lapse for non-payment of premium, such cancellation,
change or lapse shall not be effective as to Lessor for thirty (30)
days after receipt by Lessor of written notice from the insurers of
such cancellation, change or lapse.
(iv) No Lessor Party shall have any obligation or liability
for premiums, commissions, assessments, or calls in connection with
the insurance.
(v) The insurer shall waive any rights of set-off or
counterclaim or any other deduction, whether by attachment or
otherwise, that it may have against any Lessor Party.
(vi) The insurance shall be primary without right of
contribution from any other insurance that may be carried by any
Lessor Party with respect to its interest in the Property.
(vii) The insurer shall waive any right of subrogation against
any Lessor Party.
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(viii) All provisions of the insurance, except the limits of
liability, shall operate in the same manner as if there were a
separate policy covering each insured party.
(ix) The insurance shall not be invalidated should Lessee or
any Lessor Party waive, in writing, prior to a loss, any or all
rights of recovery against any Person for losses covered by such
policy, nor shall the insurance in favor of any Lessor Party or
Lessee, as the case may be, or their respective rights under and
interests in said policies be invalidated or reduced by any act or
omission or negligence of any Lessee Party or Lessor, as the case
may be, or any other Person having any interest in the Property.
(x) If the insurer has not received written notice from
Lessor that an Event of Default has occurred and is continuing, (A)
all insurance proceeds in respect of any loss or occurrence with a
value of less than fifteen million Dollars ($15,000,000) shall be
paid to and adjusted solely by Lessee and (B) all other insurance
proceeds shall be paid to Lessor and adjusted jointly by Lessor and
Lessee. From and after the date on which the insurer receives
written notice from Lessor that an Event of Default has occurred and
is continuing (and unless and until such insurer receives written
notice from Lessor that all Events of Default have been cured), all
losses shall be adjusted solely by, and all insurance proceeds shall
be paid solely to, Lessor.
(xi) Each policy shall contain a standard form mortgage
endorsement in favor of Lessor.
(d) Evidence of Insurance. Lessee, at its sole cost and expense,
shall furnish to Lessor from time to time upon the request of Lessor such
certificates or other documents as Lessor may reasonably request to
evidence Lessee's compliance with the insurance requirements set forth in
this Paragraph 3.03.
(e) Release of Lessor Parties. Lessee hereby waives, releases and
discharges each Lessor Party and its directors, officers, employees,
agents and advisors from all claims whatsoever arising out of any loss,
claim, expense or damage to or destruction covered or coverable by
insurance required under this Paragraph 3.03 to the extent the policies
for such insurance permit such waiver, notwithstanding that such loss,
claim, expense or damage may have been caused by any such Person, and, as
among Lessee and such Persons, Lessee agrees to look to the insurance
coverage only in the event of such loss.
3.04. Casualty and Condemnation.
(a) Notice. Lessee shall give Lessor prompt written notice of the
occurrence of any Casualty affecting, or the institution of any
proceedings for the Condemnation of, the Property or any portion thereof.
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(b) Repair or Purchase Option. After the occurrence of any
Casualty or Condemnation affecting the Property or any portion thereof,
Lessee shall either (i) repair and restore the Property as required by
Subparagraph 3.04(c) or (ii) exercise the Term Purchase Option and
purchase the Property pursuant to the Purchase Agreement; provided,
however, that Lessee may not elect to repair and restore the Property if
such casualty or condemnation is a Major Casualty or Major Condemnation or
if an Event of Default has occurred and is continuing, unless Lessor and
the Required Participants shall consent in writing. Not later than one (1)
month after the occurrence of any Casualty or Condemnation, Lessee shall
deliver to Lessor a written notice indicating whether it elects to repair
and restore or purchase the Property
(c) Repair and Restoration. If Lessee elects to repair and restore
the Property following any Casualty or Condemnation, Lessee shall
diligently proceed to repair and restore the Property to the condition in
which it existed immediately prior to such Casualty or Condemnation and
shall use reasonable efforts to complete all such repairs and restoration
as soon as reasonably practicable, but not later than six (6) months prior
to the Scheduled Expiration Date unless Lessee currently is exercising
either the Term Purchase Option or the Expiration Date Purchase Option,.
Lessee shall use its own funds to make such repairs and restoration,
except to the extent any Casualty and Condemnation Proceeds are available
and are released to Lessee for such purpose pursuant to Subparagraph
3.04(f). Lessee's exercise of the repair and restoration option shall, if
Lessor or Required Participants direct, be subject to satisfaction of the
following conditions within one (1) month after the occurrence of the
Casualty or Condemnation:
(i) Deposit in a deposit account acceptable to and
controlled by Lessor (a "Repair and Restoration Account") of funds
(including any Casualty and Condemnation Proceeds which are
available and are released to Lessee pursuant to Subparagraph
3.04(f)) in the amount which Lessor determines is needed to complete
and fully pay all costs of the repair or restoration (including
taxes, financing charges, insurance and rent during the repair
period);
(ii) The establishment of an arrangement for lien releases
and disbursement of funds acceptable to Lessor and in a manner and
upon such terms and conditions as would be required by a prudent
interim construction lender; and
(iii) The delivery to Lessor of the following, each in form
and substance acceptable to Lessor;
(A) Evidence that the Property can, in Lessor's
reasonable judgment, with diligent restoration or repair, be
returned to a condition at least equal to the condition
thereof that existed prior to the Casualty or partial
Condemnation causing the loss or damage within the earlier to
occur of (A) six (6) months after the occurrence of the
Casualty or Condemnation and (B) unless Lessee currently is
exercising either the Term Purchase Option or the Expiration
Date Purchase Option, six (6) months prior to the Scheduled
Expiration Date;
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(B) Evidence that all necessary governmental approvals
can be timely obtained to allow the rebuilding and reoccupancy
of the Property;
(C) Copies of all plans and specifications for the
work;
(D) Copies of all contracts for the work, signed by a
contractor reasonably acceptable to Lessor;
(E) A cost breakdown for the work;
(F) A payment and performance bond for the work or
other security satisfactory to Lender;
(G) Evidence that, upon completion of the work, the
size, capacity and total value of the Property will be at
least as great as it was before the Casualty or Condemnation
occurred; and
(H) Evidence of satisfaction of any additional
conditions that Lessor or Required Participants may reasonably
establish to protect their rights under this Agreement and the
other Operative Documents.
All plans and specifications for the work must be reasonably
acceptable to Lessor, except that Lessor's approval shall not be
required if the restoration work is based on the same plans and
specifications as were originally used to construct the Property. To
the extent that the funds in a Repair and Restoration Account
include both Casualty and Condemnation Proceeds and other funds
deposited by Lessee, the other funds deposited by Lessee shall be
used first. Lessee acknowledges that the specific conditions
described above are reasonable.
(d) Prosecution of Claims for Casualty and Condemnation Proceeds.
Lessee shall proceed promptly and diligently to prosecute in good faith
the settlement or compromise of any and all claims for Casualty and
Condemnation Proceeds; provided, however, that any settlement or
compromise of any such claim shall, except as otherwise provided in clause
(x) of Subparagraph 3.03(c), be subject to the written consent of Lessor
and Required Participants, which consents shall not be unreasonably
withheld. Lessor may participate in any proceedings relating to such
claims, and, after the occurrence and during the continuance of any Event
of Default, Lessor is hereby authorized, in its own name or in Lessee's
name, to adjust any loss covered by insurance or any Casualty or
Condemnation claim or cause of action, and to settle or compromise any
claim or cause of action in connection therewith, and Lessee shall from
time to time deliver to Lessor any and all further assignments and other
instruments required to permit such participation.
(e) Assignment of Casualty and Condemnation Proceeds. Lessee
hereby absolutely and irrevocably assigns to Lessor all Casualty and
Condemnation Proceeds and all claims relating thereto. Except as otherwise
provided in clause (x) of Subparagraph 3.03(c), Lessee agrees that all
Casualty and Condemnation Proceeds are to be paid to Lessor and Lessee
hereby authorizes and directs any insurer, Governmental
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Authority or other Person responsible for paying any Casualty and
Condemnation Proceeds to make payment thereof directly to Lessor alone,
and not to Lessor and Lessee jointly. If Lessee receives any Casualty and
Condemnation Proceeds payable to Lessor hereunder, Lessee shall promptly
pay over such Casualty and Condemnation Proceeds to Lessor. Lessee hereby
covenants that until such Casualty and Condemnation Proceeds are so paid
over to Lessor, Lessee shall hold such Casualty and Condemnation Proceeds
in trust for the benefit of Lessor and shall not commingle such Casualty
and Condemnation Proceeds with any other funds or assets of Lessee or any
other Person. Except as otherwise provided in clause (x) of Subparagraph
3.03(c), Lessor may commence, appear in, defend or prosecute any assigned
right, claim or action, and may adjust, compromise, settle and collect all
rights, claims and actions assigned to Lessor, but shall not be
responsible for any failure to collect any such right, claim or action,
regardless of the cause of the failure.
(f) Use of Casualty and Condemnation Proceeds.
(i) If (A) no Event of Default has occurred and is
continuing, (B) Lessee exercises the repair and restoration option
pursuant to Subparagraphs 3.04(b) and 3.04(c) and (C) Lessee
complies with any conditions imposed pursuant to Subparagraph
3.04(c); then Lessor shall release any Casualty and Condemnation
Proceeds to Lessee for repair or restoration of the Property, but
may condition such release and use of the Casualty and Condemnation
Proceeds upon deposit of the Casualty and Condemnation Proceeds in a
Repair and Restoration Account. Lessor shall have the option, upon
the completion of such restoration of the Property, to apply any
surplus Casualty and Condemnation Proceeds remaining after the
completion of such restoration to the payment of Rent and/or the
reduction of the Outstanding Lease Amount, notwithstanding that such
amounts are not then due and payable or that such amounts are
otherwise adequately secured.
(ii) If (A) an Event of Default has occurred and is
continuing, (B) Lessee fails to or is unable to comply with any
conditions imposed pursuant to Subparagraph 3.04(c) or (C) Lessee
elects to exercise the Term Purchase Option and purchase the
Property pursuant to the Purchase Agreement; then, at the absolute
discretion of Lessor and the Required Participants, regardless of
any impairment of security or lack of impairment of security, but
subject to applicable Governmental Rules governing use of Casualty
and Condemnation Proceeds, if any, Lessor may (1) apply all or any
of the Casualty and Condemnation Proceeds it receives to the
expenses of Lessor Parties in obtaining such proceeds; (2) apply the
balance to the payment of Rent and/or the reduction of the
Outstanding Lease Amount, notwithstanding that such amounts are not
then due and payable or that such amounts are otherwise adequately
secured and/or (3) release all or any part of such proceeds to
Lessee upon any conditions Lessor and the Required Participants may
elect.
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(iii) Lessor shall apply any Casualty and Condemnation
Proceeds which are to be used to reduce the Outstanding Lease Amount
only on the last day of a Rental Period unless a Default has
occurred and is continuing.
(iv) Application of all or any portion of the Casualty and
Condemnation Proceeds, or the release thereof to Lessee, shall not
cure or waive any Default or notice of default or invalidate any
acts done pursuant to such notice.
3.05. Taxes. Subject to Paragraph 3.12 relating to permitted contests,
Lessee shall promptly pay when due all Indemnified Taxes imposed on or payable
by Lessee or any Lessor Party in connection with the Property, this Agreement or
any of the other Operative Documents, or any of the transactions contemplated
hereby or thereby. As promptly as possible after any Indemnified Taxes are
payable by Lessee, Lessee shall send to Lessor for the account of the applicable
Lessor Party a certified copy of an original official receipt received by Lessee
showing payment thereof. If Lessee fails to pay any such Indemnified Taxes when
due to the appropriate taxing authority or fails to remit to Lessor the required
receipts or other required documentary evidence, Lessee shall indemnify the
Lessor Parties for any incremental taxes, interest or penalties that may become
payable by the Lessor Parties as a result of any such failure. The obligations
of Lessee under this Paragraph 3.05 shall survive the payment and performance of
the Lessee Obligations and the termination of this Agreement.
3.06. Environmental Matters.
(a) Lessee's Covenants. Lessee shall not cause or permit Hazardous
Materials to be used, generated, manufactured, stored, treated, disposed
of, transported or present on or released or discharged from the Property
in any manner that is reasonably likely to have a Material Adverse Effect.
Lessee may use Hazardous Materials in connection with the operation of its
business (or the business of permitted subtenants) so long as such use is
consistent with the preceding sentence. Lessee shall immediately notify
Lessor in writing of (i) the discovery of any Hazardous Materials on,
under or about the Property; (ii) any knowledge by Lessee that the
Property does not comply with any Environmental Laws; (iii) any claims
against Lessee or the Property relating to Hazardous Materials or pursuant
to Environmental Laws; and (iv) the discovery of any occurrence or
condition on any real property adjoining or in the vicinity of the
Property that could cause the Property or any part thereof to be
designated as "border zone property" under the provisions of California
Health and Safety Code Sections 25220 et seq. or any regulation adopted in
accordance therewith. In response to the presence of any Hazardous
Materials on, under or about the Property, Lessee shall immediately take,
at Lessee's sole expense, all remedial action required by any
Environmental Laws or any judgment, consent decree, settlement or
compromise in respect to any claim based thereon.
(b) Inspection By Lessor. Upon reasonable prior notice to Lessee,
Lessor, its employees and agents, may from time to time (whether before or
after the commencement of a nonjudicial or judicial foreclosure
proceeding), enter and inspect the Property for the purpose of determining
the existence, location, nature and magnitude of
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any past or present release or threatened release of any Hazardous
Materials into, onto, beneath or from the Property.
(c) Indemnity. Without in any way limiting any other indemnity
contained in this Agreement or any other Operative Document, Lessee agrees
to defend, indemnify and hold harmless the Lessor Parties and the other
Indemnitees from and against any claim, loss, damage, cost, expense or
liability directly or indirectly arising out of (i) the use, generation,
manufacture, storage, treatment, release, threatened release, discharge,
disposal, transportation or presence of any Hazardous Materials which are
found in, on, under or about the Property or (ii) the breach of any
covenant, representation or warranty of Lessee relating to Hazardous
Materials or Environmental Laws contained in this Agreement or any
Operative Document. This indemnity shall include (A) the costs, whether
foreseeable or unforeseeable, of any investigation, repair, cleanup or
detoxification of the Property which is required by any Governmental
Authority or is otherwise necessary to render the Property in compliance
with all Environmental Laws; (B) all other direct or indirect
consequential damages (including any third party claims, claims by any
Governmental Authority, or any fines or penalties against the Indemnitees;
and (C) all court costs and attorneys' fees (including expert witness fees
and the cost of any consultants) paid or incurred by the Indemnitees.
Lessee shall pay immediately upon Lessor's demand any amounts owing under
this indemnity. Lessee shall use legal counsel reasonably acceptable to
Lessor in any action or proceeding arising under this indemnity. The
obligations of Lessee under this Subparagraph 3.06(c) shall survive the
payment and performance of the Lessee Obligations and the termination of
this Agreement.
(d) Legal Effect of Section. Lessee and Lessor agree that (i) this
Paragraph 3.06 and clause (i) of Subparagraph 4.01(s) of the Participation
Agreement are intended as Lessor's written request for information (and
Lessee's response) concerning the environmental condition of the real
property security as required by California Code of Civil Procedure
Section 726.5 and (ii) each representation and warranty and covenant
herein and therein (together with any indemnity applicable to a breach of
any such representation and warranty) with respect to the environmental
condition of the Property is intended by Lessor and Lessee to be an
"environmental provision" for purposes of California Code of Civil
Procedure Section 736.
3.07. Liens, Easements, Etc.
(a) Lessee's Covenants. Subject to Paragraph 3.12 relating to
permitted contests, Lessee shall not create, incur, assume or permit to
exist any Lien or easement on or with respect to any of the Property of
any character, whether now owned or hereafter acquired, except for the
following ("Permitted Property Liens"):
(i) Liens in favor of a Lessor Party securing the Lessee
Obligations;
(ii) Liens and easements in existence on the Commencement
Date to the extent reflected in the title insurance policies
delivered to Agent pursuant to
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Paragraphs 3.01 and 3.02 of and Schedules 3.01 and 3.02 to the
Participation Agreement and approved by Lessor;
(iii) Liens and easements approved by Lessor and reflected in
the title insurance policy or policies or binders to be delivered in
connection with any Land added hereto after the date hereof;
(iv) Liens for taxes or other Governmental Charges not at the
time delinquent or thereafter payable without penalty;
(v) Liens of carriers, warehousemen, mechanics, materialmen
and vendors and other similar Liens imposed by law incurred in the
ordinary course of business for sums not overdue; and
(vi) Lessor Liens.
Subject to Paragraph 3.12 relating to permitted contests, Lessee shall
promptly (A) pay all Indebtedness of Lessee and other obligations prior to
the time the non-payment thereof would give rise to a Lien on the Property
and (B) discharge, at its sole cost and expense, any Lien on the Property
which is not a Permitted Property Lien.
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(b) No Consents. Nothing contained in this Agreement shall be
construed as constituting the consent or request of any Lessor Party,
express or implied, to or for the performance by any contractor, mechanic,
laborer, materialman, supplier or vendor of any labor or services or for
the furnishing of any materials for any construction, alteration,
addition, repair or demolition of or to the Property or any part thereof.
NOTICE IS HEREBY GIVEN THAT NO LESSOR PARTY IS OR SHALL BE LIABLE FOR ANY
LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO
ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE,
AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF ANY LESSOR PARTY IN
AND TO THE PROPERTY.
3.08. Subletting. Lessee may, in the ordinary course of business, sublease
the Property or any portion thereof to any Person, provided, that (a) Lessee
remains directly and primarily liable for performing its obligations under this
Agreement and all other Lessee Obligations; (b) each sublease is subject to and
subordinated to this Agreement; (c) each sublease has a term which expires on or
prior to the Scheduled Expiration Date (or, if longer, includes a provision that
the sublease terminates on the Expiration Date if such Expiration Date occurs
prior to the Scheduled Expiration Date unless Lessee purchases the Property on
the Expiration Date pursuant to the Purchase Agreement); (d) each sublease
prohibits the sublessee from engaging in any activities on the Property other
than those permitted by Paragraph 2.04; and (e) no sublease has a Material
Adverse Effect. Any sublease which does not satisfy each of the requirements of
the immediately preceding sentence shall be null and void as to the Lessor
Parties and their successor and assigns. Except for such permitted subleases,
Lessee shall not assign any of its rights or interests under this Agreement to
any other Person.
3.09. Utility Charges. Lessee shall pay all charges for electricity,
power, gas, oil, water, telephone, sanitary sewer service and all other
utilities and services to, on or in connection with the Property during the
Term.
3.10. Removal of Property. Lessee shall not remove any Improvements from
the Land or any other Property from the Land or Improvements, except that,
during the Term, Lessee may remove any Modification or any trade fixture,
machinery, equipment, inventory or other personal property if such Modification
or property (a) was not financed by an Advance, (b) is not required by any
applicable Governmental Rule or Insurance Requirement and (c) is readily
removable without impairing the value, utility or remaining useful life of the
Property.
3.11. Compliance with Governmental Rules and Insurance Requirements.
Lessee, at its sole cost and expense, shall, unless its failure is not
reasonably likely to have a Material Adverse Effect, (a) comply, and cause its
agents, sublessees, assignees, employees, invitees, licensees, contractors and
tenants, and the Property to comply, with all Governmental Rules and Insurance
Requirements relating to the Property (including the construction, use,
operation, maintenance, repair and restoration thereof, whether or not
compliance therewith shall require structural or extraordinary changes in the
Improvements or interfere with the use and enjoyment of the Property), and (b)
procure, maintain and comply with all licenses, permits, orders, approvals,
consents and other authorizations required for the construction, use,
maintenance and
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operation of the Property and for the use, operation, maintenance, repair and
restoration of the Improvements.
3.12. Permitted Contests. Lessee, at its sole cost and expense, may
contest any alleged Lien or easement on any of the Property or any alleged
Governmental Charge, Indebtedness or other obligation which is payable by Lessee
hereunder to Persons other than the Lessor Parties or which, if unpaid, would
give rise to a Lien on any of the Property, provided that (a) each such contest
is diligently pursued in good faith by appropriate proceedings; (b) the
commencement and continuation of such proceedings suspends the enforcement of
such Lien or easement or the collection of such Governmental Charge,
Indebtedness or obligation; (c) Lessee has established adequate reserves for the
discharge of such Lien or easement or the payment of such Governmental Charge,
Indebtedness or obligation in accordance with GAAP and, if the failure to
discharge such Lien or easement or the failure to pay such Governmental Charge,
Indebtedness or obligation might result in any civil liability for any Lessor
Party, Lessee has provided to such Lessor Party a bond or other security
satisfactory to such Lessor Party; (d) the failure to discharge such Lien or
easement or the failure to pay such Governmental Charge, Indebtedness or
obligation could not result in any criminal liability for any Lessor Party; (e)
the failure to discharge such Lien or easement or the failure to pay such
Governmental Charge, Indebtedness or obligation is not otherwise reasonably
likely to have a Material Adverse Effect; and (f) unless Lessee currently is
exercising either the Term Purchase Option or the Expiration Date Purchase
Option, any such contest is completed and such Lien or easement is discharged
(either pursuant to such proceedings or otherwise) or such Governmental Charge,
Indebtedness or obligation is declared invalid, paid or otherwise satisfied not
later than six (6) months prior to the Scheduled Expiration Date.
3.13. Lessor Obligations; Right to Perform Lessee Obligations. No Lessor
Party shall have any obligation to (a) maintain, repair or make any improvements
to the Property, (b) maintain any insurance on the Property, (c) perform any
other obligation of Lessee under this Agreement or any other Lessee Obligation,
(d) make any expenditure on account of the Property (except to make Advances as
required by the Participation Agreement) or (e) take any other action in
connection with the Property, this Agreement or any other Operative Document,
except as expressly provided herein or in another Operative Document; provided
however, that Lessor may, in its sole discretion and without any obligation to
do so, perform any Lessee Obligation not performed by Lessee when required.
Lessor may enter the Property or exercise any other right of Lessee under this
Agreement or any other Operative Document to the extent Lessor determines in
good faith that such entry or exercise is reasonably necessary for Lessor to
perform any such Lessee Obligation not performed by Lessee when required. Lessee
shall reimburse Lessor and the other Lessor Parties, within five (5) Business
Days after demand, for all fees, costs and expenses incurred by them in
performing any such obligation or curing any Default.
3.14. Inspection Rights. During the Term, Lessee shall permit any Person
designated by Lessor, upon reasonable notice and during normal business hours,
to visit and inspect any of the Property.
SECTION 4. EXPIRATION DATE.
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4.01. Termination by Lessee Prior to Scheduled Expiration Date. Subject to
the terms and conditions of the Purchase Agreement, Lessee may, at any time
prior to the Scheduled Expiration Date, terminate this Agreement and purchase
the Property pursuant to Section 2 of the Purchase Agreement. Lessee shall
notify Lessor of Lessee's election so to terminate this Agreement and purchase
the Property by delivering to Agent a Notice of Term Purchase Option Exercise
pursuant to and in accordance with the provisions of Paragraph 2.01 of the
Purchase Agreement.
4.02. Surrender of Property. Unless Lessee purchases the Property on the
Expiration Date pursuant to the Purchase Agreement, Lessee shall vacate and
surrender the Property to Lessor on the Expiration Date in its then-current
condition, subject to compliance by Lessee on or prior to such date of its
obligations under this Agreement and the other Operative Documents (including
the completion of the New Improvements and all Modifications, the completion of
all permitted contests and the removal of all Liens which are not Permitted
Property Liens of the types described in clauses (i), (ii), (iii), (iv) and (vi)
of Subparagraph 3.07(a)).
4.03. Holding Over. If Lessee does not purchase the Property on the
Expiration Date pursuant to the Purchase Agreement but continues in possession
of any portion of the Property after the Expiration Date, Lessee shall pay rent
for each day it so continues in possession, payable upon demand of Lessor, at a
per annum rate equal to the Alternate Rental Rate plus two percent (2.0%) and
shall pay and perform all of its other Lessee Obligations under this Agreement
and the other Operative Documents in the same manner as though the Term had not
ended; provided, however, that this Paragraph 4.03 shall not be interpreted to
permit such holding over or to limit any right or remedy of Lessor for such
holding over.
SECTION 5. DEFAULT.
5.01. Events of Default. The occurrence or existence of any one or more of
the following shall constitute an "Event of Default" hereunder:
(a) Non-Payment. Lessee shall (i) fail to pay on the Expiration
Date any amount payable by Lessee under this Agreement or any other
Operative Document on or prior to such date, (ii) fail to pay within five
(5) business days after any Scheduled Rent Payment Date any Base Rent
payable on such Scheduled Rent Payment Date (other than the Base Rent
payable on the Expiration Date) or (iii) fail to pay within thirty (30)
days after the same becomes due, any Supplemental Rent or other amount
required under the terms of this Agreement or any other Operative Document
(other than any such amount payable on the Expiration Date or Base Rent);
or
(b) Specific Defaults. Lessee or any of its Subsidiaries shall
fail to observe or perform any covenant, obligation, condition or
agreement set forth in Subparagraph 3.01(d) hereof or in Paragraph 5.02 or
Paragraph 5.03 of the Participation Agreement; or
(c) Other Defaults. Lessee or any of its Subsidiaries shall fail
to observe or perform any other covenant, obligation, condition or
agreement contained in this Agreement or any other Operative Document and
such failure shall continue for a period
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of thirty (30) days after written notice thereof from Lessor; provided,
however, that, if such failure cannot reasonably be cured within such
thirty (30) day period, such failure shall not constitute an Event of
Default hereunder if Lessee (i) promptly commences to cure such failure
within such thirty (30) day period, (ii) thereafter diligently pursues
such cure to completion, and (iii) completes such cure not later than the
earlier of (A) the Expiration Date, if Lessee is exercising the Marketing
Option, and (B) one hundred and twenty days (120) days after Lessor's
notice of such failure; or
(d) Representations and Warranties. Any representation, warranty,
certificate, information or other statement (financial or otherwise) made
or furnished by or on behalf of Lessee or any of its Subsidiaries to any
Lessor Party in or in connection with this Agreement or any other
Operative Document, or as an inducement to any Lessor Party to enter into
this Agreement or any other Operative Document, shall be false, incorrect,
incomplete or misleading in any material respect when made or furnished;
or
(e) Cross-Default. (i) Lessee or any of its Subsidiaries shall
fail to make any payment when due on account of any Indebtedness of such
Person (other than the Lessee Obligations and trade payables) and such
failure shall continue beyond any period of grace provided with respect
thereto, if the amount of such Indebtedness exceeds $40,000,000 or the
effect of such failure is to cause, or permit the holder or holders
thereof to cause, Indebtedness of Lessee and its Subsidiaries (other than
the Lessee Obligations) in an aggregate amount exceeding $40,000,000 to
become due or (ii) Lessee or any of its Subsidiaries shall otherwise fail
to observe or perform any agreement, term or condition contained in any
agreement or instrument relating to any Indebtedness of such Person (other
than the Lessee Obligations and trade payables), or any other event shall
occur or condition shall exist, if the effect of such failure, event or
condition is to cause, or permit the holder or holders thereof to cause,
Indebtedness of Lessee and its Subsidiaries (other than the Lessee
Obligations) in an aggregate amount exceeding $40,000,000 to become due
(and/or to be secured by cash collateral); or
(f) Insolvency, Voluntary Proceedings. Lessee or any of its
Material Subsidiaries shall (i) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) be unable, or admit in writing its
inability, to pay its debts generally as they mature, (iii) make a general
assignment for the benefit of its or any of its creditors, (iv) be
dissolved or liquidated in full or in part, (v) become insolvent (as such
term may be defined or interpreted under any applicable statute), (vi)
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking
possession of its property by any official in an involuntary case or other
proceeding commenced against it, or (vi) take any action for the purpose
of effecting any of the foregoing; or
(g) Involuntary Proceedings. Proceedings for the appointment of a
receiver, trustee, liquidator or custodian of Lessee or any of its
Material Subsidiaries or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking liquidation,
reorganization or other relief with respect to Lessee or any of its
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Material Subsidiaries or the debts thereof under any bankruptcy,
insolvency or other similar law now or hereafter in effect shall be
commenced and an order for relief entered or such proceeding shall not be
dismissed or discharged within thirty (30) days of commencement; or
(h) Judgments. (i) One or more judgments, orders, decrees or
arbitration awards requiring Lessee and/or its Subsidiaries to pay an
aggregate amount of $40,000,000 or more (exclusive of amounts covered by
insurance issued by an insurer not an Affiliate of Lessee and otherwise
satisfying the requirements set forth in Subparagraph 3.03(b)) shall be
rendered against Lessee and/or any of its Subsidiaries in connection with
any single or related series of transactions, incidents or circumstances
and the same shall not be satisfied, vacated or stayed for a period of
thirty (30) consecutive days after issue or levy; (ii) any judgment, writ,
assessment, warrant of attachment, tax lien or execution or similar
process shall be issued or levied against a substantial part of the
property of Lessee or any of its Subsidiaries and the same shall not be
released, stayed, vacated or otherwise dismissed within thirty (30) days
after issue or levy; or (iii) any other judgments, orders, decrees,
arbitration awards, writs, assessments, warrants of attachment, tax liens
or executions or similar processes which, alone or in the aggregate, are
reasonably likely to have a Material Adverse Effect are rendered, issued
or levied; or
(i) Operative Documents. Any Operative Document or any material
term thereof shall cease to be, or be asserted by Lessee or any of its
Subsidiaries not to be, a legal, valid and binding obligation of Lessee or
any of its Subsidiaries enforceable in accordance with its terms; or
(j) ERISA. Any Reportable Event which constitutes grounds for the
termination of any Employee Benefit Plan by the PBGC or for the
appointment of a trustee by the PBGC to administer any Employee Benefit
Plan shall occur, or any Employee Benefit Plan shall be terminated within
the meaning of Title IV of ERISA or a trustee shall be appointed by the
PBGC to administer any Employee Benefit Plan; or
(k) Major Casualty or Condemnation. Any Major Casualty or Major
Condemnation affecting the Property shall occur; or
(l) Change of Control. Any Change of Control shall occur;
Provided, however, that any such Event of Default (except any Event of Default
under Subparagraph 5.01(f) or Subparagraph 5.01(g)) shall be deemed cured and
shall cease to be an Event of Default hereunder if, prior to the time any Lessor
Party begins to exercise any of its rights and remedies for an Event of Default
under the Operative Documents, Lessee delivers to Lessor:
(A) In the case of any Event of Default occurring
under Subparagraph 5.01(e), written evidence that the Persons
owing the applicable Indebtedness have made the required
payment in the case of a failure to pay and, in all cases
(including failure to pay), all holders of such Indebtedness
have waived (without the payment by the Persons owing such
Indebtedness of any waiver fee, penalty or other similar
payment or the provision by
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such Persons of additional collateral) such holders' rights to
cause such Indebtedness to become due (and/or to be secured by
cash collateral); and
(B) In the case of all other Events of Default (except
Events of Default under Subparagraph 5.01(f) or Subparagraph
5.01(g)), written evidence that such Events of Default have
been cured.
5.02. General Remedies. In all cases, upon the occurrence or existence of
any Event of Default and at any time thereafter unless such Event of Default is
waived, Lessor may, with the consent of the Required Participants, or shall,
upon instructions from the Required Participants, exercise any one or more of
the following rights and remedies (except that the remedy set forth in the first
sentence of Subparagraph 5.02(a) shall be automatic):
(a) Termination of Commitments. If such Event of Default is an
Event of Default of the type described in Subparagraph 5.01(f) or
Subparagraph 5.01(g) affecting Lessee, immediately and without notice the
obligation of Lessor to make Advances and the obligations of the
Participants to fund Advances shall automatically terminate. If such Event
of Default is any other Event of Default, Lessor may by written notice to
Lessee, terminate the obligation of Lessor to make Advances and the
obligations of the Participants to fund Advances.
(b) Appointment of a Receiver. Lessor may apply to any court of
competent jurisdiction for, and obtain appointment of, a receiver for the
Property.
(c) Specific Performance. Lessor may bring an action in any court
of competent jurisdiction to obtain specific enforcement of any of the
covenants or agreements of Lessee in this Agreement or any of the other
Operative Documents.
(d) Collection of Issues and Profits. Lessor may collect Issues
and Profits as provided in Subparagraph 2.07(c) and apply the proceeds to
pay Lessee Obligations.
(e) Protection of Property. Lessor may enter, take possession of,
manage and operate all or any part of the Property or take any other
actions which it reasonably determines are necessary to protect the
Property and the rights and remedies of the Lessor Parties under this
Agreement and the other Operative Documents, including (i) taking and
possessing all of Lessee's books and records relating to the Property;
(ii) entering into, enforcing, modifying, or canceling subleases on such
terms and conditions as Lessor may consider proper; (iii) obtaining and
evicting tenants; (iv) fixing or modifying sublease rents; (v) collecting
and receiving any payment of money owing to Lessee; (vi) completing any
unfinished Improvements; and/or (vii) contracting for and making repairs
and alterations.
(f) Other Rights and Remedies. In addition to the specific rights
and remedies set forth above in this Paragraph 5.02 and in Paragraph 5.03
and Paragraph 5.04, Lessor may exercise any other right, power or remedy
permitted to it by any applicable Governmental Rule, either by suit in
equity or by action at law, or both.
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5.03. Lease Remedies. If the transaction evidenced by this Agreement and
the other Operative Documents is treated as a lease, upon the occurrence or
existence of any Event of Default and at any time thereafter unless such Event
of Default is waived, Lessor may, with the consent of the Required Participants,
or shall, upon instructions from the Required Participants, exercise any one or
more of the following rights and remedies in addition to those rights and
remedies set forth in Paragraph 5.02:
(a) Termination of Lease. Lessor may, by written notice to Lessee,
terminate this Agreement on a Termination Date which is prior to the
Scheduled Expiration Date, subject to Subparagraph 3.02(1) of the Purchase
Agreement. Such Termination Date shall be the last day of a Rental Period
unless Required Participants shall otherwise direct. On such Termination
Date (which shall then be the Expiration Date), Lessee shall pay all
unpaid Base Rent accrued through such date, all Supplemental Rent due and
payable on or prior to such date and all other amounts payable by Lessee
on the Expiration Date pursuant to this Agreement and the other Operative
Documents. Lessee also shall pay to Lessor, in addition to all accrued
Base Rent, the worth at the time of such payment of the amount by which
the unpaid Base Rent through the Scheduled Expiration Date exceeds the
amount of such rental loss for the same period that Lessee proves could
reasonably be avoided.
(b) Continuation of Lease. Lessor may exercise the rights and
remedies provided by California Civil Code Section 1951.4, including the
right to continue this Agreement in effect after Lessee's breach and
abandonment and recover Rent as it becomes due. Acts of maintenance or
preservation, efforts to relet the Property, the appointment of a receiver
upon Lessor's initiative to protect its interest under this Agreement or
withholding consent to or terminating a sublease shall not of themselves
constitute a termination of Lessee's right to possession.
(c) Removal and Storage of Property. Lessor may enter the Property
and remove therefrom all Persons and property, store such property in a
public warehouse or elsewhere at the cost of and for the account of Lessee
and sell such property and apply the proceeds therefrom pursuant to
applicable California law.
5.04. Loan Remedies. If the transaction evidenced by this Agreement and
the other Operative Documents is treated as a loan, upon the occurrence or
existence of any Event of Default and at any time thereafter unless such Event
of Default is waived, Lessor may, with the consent of the Required Participants,
or shall, upon instructions from the Required Participants, exercise any one or
more of the following rights and remedies in addition to those rights and
remedies set forth in Paragraph 5.02:
(a) Acceleration of Lessee Obligations. Lessor may, by written
notice to Lessee, terminate this Agreement on a Termination Date which is
prior to the Scheduled Expiration Date, subject to Subparagraph 3.02(1) of
the Purchase Agreement, and declare all unpaid Lessee Obligations due and
payable on such Termination Date. Such Termination Date shall be the last
day of a Rental Period unless Required Participants shall otherwise
direct. On such Termination Date (which shall then be the Expiration
Date), Lessee shall pay all unpaid Base Rent accrued through such date,
all Supplemental
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Rent due and payable on or prior to such date and all other amounts
payable by Lessee on the Expiration Date pursuant to this Agreement and
the other Operative Documents.
(b) Uniform Commercial Code Remedies. Lessor may exercise any or
all of the remedies granted to a secured party under the California
Uniform Commercial Code.
(c) Judicial Foreclosure. Lessor may bring an action in any court
of competent jurisdiction to foreclose the security interest in the
Property granted to Lessor by this Agreement or any of the other Operative
Documents.
(d) Power of Sale. Lessor may cause some or all of the Property,
including any Personal Property Collateral, to be sold under a power of
sale or otherwise disposed of in any combination and in any manner
permitted by applicable Governmental Rules.
(i) Sales of Personal Property. Lessor may dispose of any
Personal Property Collateral separately from the sale of Real
Property Collateral, in any manner permitted by Division 9 of the
California Uniform Commercial Code, including any public or private
sale, or in any manner permitted by any other applicable
Governmental Rule. Any proceeds of any such disposition shall not
cure any Event of Default or reinstate any Lessee Obligation for
purposes of Section 2924c of the California Civil Code. In
connection with any such sale or other disposition, Lessee agrees
that the following procedures constitute a commercially reasonable
sale:
(A) Lessor shall mail written notice of the sale to
Lessee not later than thirty (30) days prior to such sale.
(B) Once per week during the three (3) weeks
immediately preceding such sale, Lessor will publish notice of
the sale in a local daily newspaper of general circulation.
(C) Upon receipt of any written request, Lessor will
make the Property available to any bona fide prospective
purchaser for inspection during reasonable business hours.
(D) Notwithstanding, Lessor shall be under no
obligation to consummate a sale if, in its judgment, none of
the offers received by it equals the fair value of the
Property offered for sale.
(E) If Lessor so requests, Lessee shall assemble all
of the Personal Property Collateral and make it available to
Lessor at the site of the Land. Regardless of any provision of
this Agreement or any other Operative Document, Lessor shall
not be considered to have accepted any property other than
cash or immediately available funds in satisfaction of any
Lessee Obligation, unless Lessor has given express written
notice of its election of that remedy in accordance with
California Uniform Commercial Code Section 9505.
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The foregoing procedures do not constitute the only procedures
that may be commercially reasonable.
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<PAGE> 152
(ii) Lessor's Sales of Real Property or Mixed Collateral.
Lessor may choose to dispose of some or all of the Property which
consists solely of Real Property Collateral in any manner then
permitted by applicable Governmental Rules, including without
limitation a nonjudicial trustee's sale pursuant to California Civil
Code ss.ss. 2924 et seq. In its discretion, Lessor may also or
alternatively choose to dispose of some or all of the Property, in
any combination consisting of both Real Property Collateral and
Personal Property Collateral, together in one sale to be held in
accordance with the law and procedures applicable to real property,
as permitted by Section 9501(4) of the California Uniform Commercial
Code. Lessee agrees that such a sale of Personal Property Collateral
together with Real Property Collateral constitutes a commercially
reasonable sale of the Personal Property Collateral. (For purposes
of this power of sale, either a sale of Real Property Collateral
alone, or a sale of both Real Property Collateral and Personal
Property Collateral together in accordance with California Uniform
Commercial Code Section 9501(4), will sometimes be referred to as a
"Lessor's Sale.")
(A) Before any Lessor's Sale, Lessor shall give such
notice of default and election to sell as may then be required
by applicable Governmental Rules.
(B) When all time periods then legally mandated have
expired, and after such notice of sale as may then be legally
required has been given, Lessor shall sell the property being
sold at a public auction to be held at the time and place
specified in the notice of sale.
(C) Neither Lessor nor Agent shall have any obligation
to make demand on Lessee before any Lessor's Sale.
(D) From time to time in accordance with then
applicable law, Lessor may postpone any Lessor's Sale by
public announcement at the time and place noticed for that
sale.
(E) At any Lessor's Sale, Lessor shall sell to the
highest bidder at public auction for cash in lawful money of
the United States.
(F) Lessor shall execute and deliver to the
purchaser(s) a deed or deeds conveying the Property being sold
without any covenant or warranty whatsoever, express or
implied. The recitals in any such deed of any matters or
facts, including any facts bearing upon the regularity or
validity of any Lessor's Sale, shall be conclusive proof of
their truthfulness. Any such deed shall be conclusive against
all Persons as to the facts recited in it.
(e) Foreclosure Sales.
(i) Single or Multiple. If the Property consists of more
than one lot, parcel or item of property, Lessor may:
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<PAGE> 153
(A) Designate the order in which the lots, parcels
and/or items shall be sold or disposed of or offered for sale
or disposition; and
(B) Elect to dispose of the lots, parcels and/or items
through a single consolidated sale or disposition to be held
or made under the power of sale granted in Subparagraph
5.04(d), or in connection with judicial proceedings, or by
virtue of a judgment and decree of foreclosure and sale; or
through two or more such sales or dispositions; or in any
other manner Lessor may deem to be in its best interests (any
such sale or disposition, a "Foreclosure Sale;" any two or
more, "Foreclosure Sales").
If Lessor chooses to have more than one Foreclosure Sale, Lessor at
its option may cause the Foreclosure Sales to be held simultaneously
or successively, on the same day, or on such different days and at
such different times and in such order as it may deem to be in its
best interests. No Foreclosure Sale shall terminate or affect the
security interests granted to Lessor in the Property by this
Agreement on any part of the Property which has not been sold, until
all of the Lessee Obligations have been paid in full.
(ii) Credit Bids. At any Foreclosure Sale, any Person,
including any Lessor Party, may bid for and acquire the Property or
any part of it to the extent permitted by then applicable
Governmental Rules. Instead of paying cash for that property, Lessor
may settle for the purchase price by crediting the sales price of
the Property against the Lessee Obligations in any order and
proportions as Lessor in its sole discretion may choose.
5.05. Remedies Cumulative. The rights and remedies of Lessor under this
Agreement and the other Operative Documents are cumulative and may be exercised
singularly, successively, or together.
5.06. No Cure or Waiver. Neither the performance by Lessor of any of
Lessee's obligations pursuant to Paragraph 3.13 nor the exercise by Lessor of
any of its other rights and remedies under this Agreement or any other Operative
Document (including the collection of Issues and Profits and the application
thereof to the Lessee Obligations) shall constitute a cure or waiver of any
Default or nullify the effect of any notice of default or sale, unless and until
all Lessee Obligations are paid in full.
5.07. Exercise of Rights and Remedies. The rights and remedies provided to
Lessor under this Agreement may be exercised by Lessor itself, by Agent pursuant
to Subparagraph 2.02(c) of the Participation Agreement, by a court-appointed
receiver or by any other Person appointed by any of the foregoing to act on its
behalf. All of the benefits afforded to Lessor under this Agreement and the
other Operative Documents shall accrue to the benefit of Agent to the extent
provided in Subparagraph 2.02(c) of the Participation Agreement.
SECTION 6. MISCELLANEOUS.
6.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this
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<PAGE> 154
Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01
of the Participation Agreement.
6.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
6.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
6.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
6.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
6.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
6.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
6.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to pay the
amounts payable by Lessee under this Agreement and the other Operative
Documents and to perform the other Lessee Obligation are absolute,
unconditional and irrevocable obligations which are separate and
independent of the obligations of the Lessor Parties under this Agreement
and the other Operative Documents and all other events and circumstances,
including the events and circumstances set forth in Subparagraph 6.08(c).
(b) No Termination or Abatement. This Agreement and the other
Operative Documents and Lessee's obligation to pay Rent and to pay and
perform all other Lessee Obligations shall continue in full force and
effect without abatement notwithstanding the
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<PAGE> 155
occurrence or existence of any event or circumstance, including any event
or circumstance set forth in Subparagraph 6.08(c).
(c) Full Payment and Performance. Lessee shall make all payments
under this Agreement and the other Operative Documents in the full amounts
and at the times required by the terms of this Agreement and the other
Operative Documents without setoff, deduction or reduction of any kind and
shall perform all other Lessee Obligations as and when required, without
regard to any event or circumstances whatsoever, including (i) the
condition of the Property (including any Improvements to the Property made
prior to the Commencement Date or during the Term); (ii) title to the
Property (including possession of the Property by any Person or the
existence of any Lien or any other right, title or interest in or to any
of the Property in favor of any Person); (iii) the value, habitability,
usability, design, operation or fitness for use of the Property; (iv) the
availability or adequacy of utilities and other services to the Property;
(v) any latent, hidden or patent defect in the Property; (vi) the zoning
or status of the Property or any other restrictions on the use of the
Property; (g) the economics of the Property; (vii) any Casualty or
Condemnation; (viii) the compliance of the Property with any applicable
Governmental Rule or Insurance Requirement; (ix) any failure by any Lessor
Party to perform any of its obligations under this Agreement or any other
Operative Document; or (x) the exercise by any Lessor Party of any of its
remedies under this Agreement or any other Operative Document; provided,
however, that this Paragraph 6.08 shall not abrogate any right which
Lessee may have to recover damages from any Lessor Party for any material
breach by such Lessor Party of its obligations under this Agreement or any
other Operative Document to the extent permitted hereunder or thereunder.
[The signature page follows.]
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<PAGE> 156
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:______________________________________
Name:_________________________________
Title:________________________________
LESSOR: LEASE PLAN U.S.A., INC.
By:______________________________________
Name:_________________________________
Title:________________________________
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<PAGE> 157
STATE OF CALIFORNIA )
) ss
COUNTY OF __________________)
On _____________, 1997, before me, ___________________ a Notary Public in
and for the State of California, personally appeared , personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person(s)
whose name(s) is/are subscribed to the within instrument and acknowledged to me
that he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s) or the
entity on behalf of which the person(s) acted, executed the instrument.
Witness my hand and official seal.
[SEAL]
____________________________________________
B-33
<PAGE> 158
STATE OF CALIFORNIA )
) ss
COUNTY OF __________________)
On _____________, 1997, before me, ___________________ a Notary Public in
and for the State of California, personally appeared , personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person(s)
whose name(s) is/are subscribed to the within instrument and acknowledged to me
that he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s) or the
entity on behalf of which the person(s) acted, executed the instrument.
Witness my hand and official seal.
[SEAL]
____________________________________________
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<PAGE> 159
EXHIBIT A
LAND
B-35
<PAGE> 160
EXHIBIT B
RELATED GOODS
The personal property, among other goods, conveyed by BNP Leasing
Corporation to Lease Plan U.S.A., Inc. by Bill of Sale, Assignment of Contract
Rights and Intangible Assets dated as of November 12, 1997 with respect to Tract
2 and Tract 3.
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<PAGE> 161
EXHIBIT B(1)
SUPPLEMENT TO EXHIBIT B TO LEASE AGREEMENT
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndication Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Lease Agreement, dated as of
November 12, 1997 (the "Lease Agreement"), between KLA-Tencor Corporation
("Lessee") and Lease Plan U.S.A., Inc. ("Lessor").
2. Lessee hereby agrees that the description of "Related Goods" set
forth in Exhibit B to the Lease Agreement shall be supplemented by adding
thereto the Related Goods described in Attachment 1 hereto. Lessee hereby
accepts all such Related Goods and agrees that such Related Goods constitute
part of the Property subject to the Lease Agreement.
IN WITNESS WHEREOF, Lessee has executed this Supplement to Exhibit B on
the date set forth above.
LESSEE: KLA-TENCOR CORPORATION
By:_____________________________________
Name:________________________________
Title:_______________________________
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<PAGE> 162
ATTACHMENT 1
TO
SUPPLEMENT TO EXHIBIT B
B-38
<PAGE> 163
EXHIBIT C
NOTICE OF RENTAL PERIOD SELECTION
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12,1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
2. [Insert one of the following as appropriate]
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably selects a new Rental Period for a Portion of the Outstanding
Lease Amount as follows:
(a) The Portion for which a new Rental Period is to be selected is
the Portion in the amount of $__________ with a current Rental Period
which began on ________, ____ and ends on __________, ____; and
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(b) The next Rental Period for such Portion shall be __________
month[s].]
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably elects to divide a Portion of the Outstanding Lease Amount
into further Portions as follows:
(a) The Portion which is to be divided is the Portion in the
amount of $__________ with a current Rental Period which began on
________, ____ and ends on __________, ____; and
(b) On the last day of the current Rental Period for such Portion,
such Portion is to be divided into the following Portions with the
following initial Rental Periods:
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Portion Rental Period
------- -------------
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]]
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably elects to combine into a single Portion certain Portions of
the Outstanding Lease Amount as follows:
(a) The Portions which are to be combined are the Portions in the
amounts of $__________, $_________ and $_______, each with a current
Rental Period which ends on __________, ____; and
(b) The initial Rental Period for such newly created Portion shall
be __________ month[s].]
3. Lessee hereby certifies to the Lessor Parties that, on the date of
this Acquisition Request and after giving effect to the use of the requested
Acquisition Advance[s] as described above:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
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IN WITNESS WHEREOF, Lessee has executed this Acquisition Request on
the date set forth above.
KLA-TENCOR CORPORATION
By: _______________________________
Name: _________________________
Title: ________________________
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<PAGE> 167
Recording requested by and EXECUTION COPY
when recorded return to:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
================================================================================
LEASE AGREEMENT,
CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
THIS LEASE IS NOT INTENDED TO CONSTITUTE
A TRUE LEASE FOR INCOME TAX PURPOSES
(SEE PARAGRAPH 2.06)
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<TABLE>
<S> <C> <C>
SECTION 1. INTERPRETATION.................................................................................2
1.01. Definitions....................................................................................2
1.02. Rules of Construction..........................................................................2
SECTION 2. BASIC PROVISIONS...............................................................................2
2.01. Lease of the Property..........................................................................2
2.02. Term...........................................................................................2
2.03. Rent...........................................................................................3
2.04. Use............................................................................................5
2.05. "As Is" Lease..................................................................................5
2.06. Nature of Transaction..........................................................................5
2.07. Security, Etc..................................................................................5
SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS.................................................8
3.01. Maintenance, Repair, Etc.......................................................................8
3.02. Risk of Loss...................................................................................9
3.03. Insurance......................................................................................9
3.04. Casualty and Condemnation.....................................................................12
3.05. Taxes.........................................................................................15
3.06. Environmental Matters.........................................................................15
3.07. Liens, Easements, Etc.........................................................................16
3.08. Subletting....................................................................................17
3.09. Utility Charges...............................................................................18
3.10. Removal of Property...........................................................................18
3.11. Compliance with Governmental Rules and Insurance Requirements.................................18
3.12. Permitted Contests............................................................................18
3.13. Lessor Obligations; Right to Perform Lessee Obligations.......................................19
3.14. Inspection Rights.............................................................................19
SECTION 4. EXPIRATION DATE...............................................................................19
4.01. Termination by Lessee Prior to Scheduled Expiration Date......................................19
4.02. Surrender of Property.........................................................................19
4.03. Holding Over..................................................................................19
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 5. DEFAULT.......................................................................................20
5.01. Events of Default.............................................................................20
5.02. General Remedies..............................................................................22
5.03. Lease Remedies................................................................................23
5.04. Loan Remedies.................................................................................24
5.05. Remedies Cumulative...........................................................................27
5.06. No Cure or Waiver.............................................................................27
5.07. Exercise of Rights and Remedies...............................................................27
SECTION 6. MISCELLANEOUS.................................................................................27
6.01. Notices.......................................................................................27
6.02. Waivers; Amendments...........................................................................27
6.03. Successors and Assigns........................................................................27
6.04. No Third Party Rights.........................................................................28
6.05. Partial Invalidity............................................................................28
6.06. Governing Law.................................................................................28
6.07. Counterparts..................................................................................28
6.08. Nature of Lessee's Obligations................................................................28
EXHIBITS
A Land (2.01(a))
B Related Goods (2.01(d))
C Notice of Rental Period Selection (2.03(a))
</TABLE>
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EXHIBIT C
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement" herein), dated as of November
12, 1997, is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including without
limitation the execution and delivery of this Agreement setting forth the terms
for the purchase of the Property by Lessee from Lessor.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
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SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Agreement and the other
Operative Documents.
SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM.
2.01. Term Purchase Option. Subject to the terms and conditions of this
Agreement and the other Operative Documents (including those set forth below in
this Paragraph 2.01), Lessee may, at its option on any Business Day prior to the
Scheduled Expiration Date of the Lease Agreement, terminate the Lease Agreement
and purchase all of the Property (the "Term Purchase Option").
(a) Notice of Term Purchase Option Exercise. Lessee shall notify
Lessor of Lessee's exercise of the Term Purchase Option by delivering to
Lessor an irrevocable written notice in the form of Exhibit A(1),
appropriately completed (the "Notice of Term Purchase Option Exercise"),
which states that Lessee is exercising its right to terminate the Lease
Agreement prior to the Scheduled Expiration Date thereof pursuant to
Paragraph 4.01 of the Lease Agreement and purchase all of the Property
pursuant to this Paragraph 2.01 and specifies the Business Day on which
such termination and purchase are to occur (which date, after the delivery
of such notice, shall be the Expiration Date). Lessee shall give the
Notice of Term Purchase Option Exercise to Lessor at least one (1) month
prior to the Business Day on which such termination and purchase are to
occur. The Notice of Term Purchase Option Exercise shall be delivered as
required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation
Agreement; provided, however, that Lessee shall promptly deliver the
original of any Notice of Term Purchase Option Exercise initially
delivered by facsimile.
(b) Term Purchase Option Purchase Price. Lessee shall pay to
Lessor on the Expiration Date, as the purchase price for the Property, an
amount equal to the Outstanding Lease Amount on such date.
(c) Effect of Certain Events. Lessee may exercise the Term
Purchase Option as provided in this Paragraph 2.01, notwithstanding (i)
the prior election by Lessee to exercise the Partial Purchase Option
pursuant to Paragraph 2.02, the Marketing Option pursuant to Paragraph
3.01 and Paragraph 3.02 or the Expiration Date Purchase Option pursuant to
Paragraph 3.01 and Paragraph 3.03, provided that Lessor completes the
purchase of the Property pursuant to the Term Purchase Option and this
Agreement prior
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to the Scheduled Expiration Date and Lessor has not previously entered
into an agreement with a Designated Purchaser or an Assignee Purchaser to
sell the Property or (ii) the occurrence of any Event of Default or the
exercise by the Lessor Parties of any of their rights or remedies under
the Operative Documents following the occurrence of such Event of Default,
provided that such exercise by Lessee of the Term Purchase Option after
the occurrence of any Event of Default shall not require the Lessor
Parties to cease exercising such rights and remedies unless and until
Lessee completes the purchase of the Property pursuant to the Term
Purchase Option and this Agreement.
2.02. Partial Purchase Option. Subject to the terms and conditions of this
Agreement and the other Operative Documents (including those set forth below in
this Paragraph 2.02), Lessee may, at its option on any Business Day prior to the
Scheduled Expiration Date of the Lease Agreement, without terminating the Lease
Agreement, purchase one or more Tracts (but less than all) of the Property (the
"Partial Purchase Option").
(a) Notice of Partial Purchase Option Exercise. Lessee shall
notify Lessor of Lessee's exercise of the Partial Purchase Option by
delivering to Lessor an irrevocable written notice in the form of Exhibit
A(2), appropriately completed (the "Notice of Partial Purchase Option
Exercise"), which states that Lessee is exercising its right to purchase
one or more (but less than all) Tracts of the Property prior to the
Scheduled Expiration Date pursuant to this Paragraph 2.02 and specifies
(i) the Tract(s) so to be purchased and (ii) the Business Day on which
such purchase is to occur (a "Partial Purchase Date"). Lessee shall give
each Notice of Partial Purchase Option Exercise to Lessor at least one (1)
month prior to the Partial Purchase Date on which a purchase is to occur.
Each Notice of Partial Purchase Option Exercise shall be delivered as
required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation
Agreement; provided, however, that Lessee shall promptly deliver the
original of any Notice of Partial Purchase Option Exercise initially
delivered by facsimile.
(b) Partial Purchase Option Purchase Price. Lessee shall pay to
Lessor on each Partial Purchase Date, as the purchase price for each Tract
of Property to be purchased on such date, an amount equal to the portion
of the Outstanding Lease Amount on such date attributable to such Tract of
Property.
(c) Conditions to Exercise of Partial Purchase Option. The
purchase by Lessee on any Partial Purchase Date of any Tract of Property
pursuant to this Paragraph 2.02 is subject to receipt by Lessor, on or
prior to such Partial Purchase Date, of new Expiration Date Appraisals for
all Tracts of Property that are to remain subject to the Lease Agreement
after such Partial Purchase Date, which appraisals (i) each shall be dated
a recent date prior to such Partial Purchase Date and (ii) together shall
assess the aggregate Fair Market Value of all such remaining Tracts of
Property at not less than the Outstanding Lease Amount that will remain
after application of all amounts to be applied thereto on such Partial
Purchase Date.
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SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE.
3.01. Alternative. Unless Lessee has exercised the Term Purchase Option,
on the Expiration Date of the Lease Agreement, Lessee shall either:
(a) Marketing Option. Cause another Person to complete the
purchase of the Property pursuant to Paragraph 3.02 (the "Marketing
Option"); or
(b) Expiration Date Purchase Option. Purchase the Property itself
pursuant to Paragraph 3.03 (the "Expiration Date Purchase Option").
Lessee shall elect either the Marketing Option or the Expiration Date Purchase
Option by delivering to Lessor, not more than nine (9) months nor less than six
(6) months prior to the Scheduled Expiration Date for the Lease Agreement,
either (i) a written notice in the form of Exhibit B, appropriately completed
(the "Notice of Marketing Option Exercise"), or (ii) a written notice in the
form of Exhibit C, appropriately completed (the "Notice of Expiration Date
Purchase Option Exercise"); provided, however, that (A) Lessee shall be deemed
to have elected the Expiration Date Purchase Option if it fails to deliver
either notice as required by this sentence; (B) Lessee's election of the
Expiration Date Purchase Option (whether expressly by a notice so delivered or
implicitly by the failure to deliver any notice) shall be irrevocable; and (C)
Lessee may not elect the Marketing Option if (1) the Expiration Date has been
accelerated to an earlier Termination Date following a Marketing Option Event of
Default under the Lease Agreement or (2) the conditions set forth in Paragraph
3.04 of the Participation Agreement are not satisfied on the date Lessee
delivers its election notice or on the Expiration Date of the Lease Agreement
(unless, in each case, the only event or condition causing such conditions not
to be so satisfied is the occurrence of a Non-Marketing Option Event of Default
under the Lease Agreement). The Notice of Marketing Option Exercise or the
Notice of Expiration Date Purchase Option Exercise shall be delivered as
required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation
Agreement; provided, however, that Lessee shall promptly deliver to Lessor the
original of any such notice initially delivered by facsimile.
3.02. Marketing Option.
(a) General. If Lessee elects to exercise the Marketing Option by
delivering to Lessor a Notice of Marketing Option Exercise pursuant to
Paragraph 3.01, Lessee shall (i) locate a purchaser which satisfies the
requirements set forth in this Paragraph 3.02, (ii) arrange for such
purchaser to purchase the Property on the Expiration Date for a purchase
price which is not less than the lesser of (A) the sum of the total
Tranche B Proportionate Share and the total Tranche C Proportionate Share
of the Outstanding Lease Amount and (B) the Fair Market Value of the
Property and (iii) otherwise comply, or cause compliance with, the
requirements of this Paragraph 3.02 and the other applicable provisions of
this Agreement.
(b) Lessee's Marketing Obligations.
(i) Initial Marketing Period. During the period beginning on
the date Lessee delivers the Notice of Marketing Option Exercise and
ending on the date which is four (4) months prior to the Expiration
Date of the Lease Agreement (the
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"Initial Marketing Period"), Lessee shall use reasonable efforts to
solicit Conforming Bids from potential purchasers of the Property.
On or prior to the last day of the Initial Marketing Period, Lessee
shall deliver to Lessor any Conforming Bid selected by Lessee (the
"Initial Bid"). If the purchase price specified in the Initial Bid
is equal to or greater than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share of
the Outstanding Lease Amount, Lessor shall accept such bid and
Lessee shall have no further obligations to solicit additional bids.
(ii) Secondary Marketing Period. If Lessee does not submit an
Initial Bid or if the purchase price specified in the Initial Bid is
less than the sum of the total Tranche B Proportionate Share and the
total Tranche C Proportionate Share of the Outstanding Lease Amount,
Lessor may reject such bid and Lessee shall, during the period which
begins on the day following the Initial Marketing Period and ends on
the date two (2) months prior to the Expiration Date of the Lease
Agreement (the "Secondary Marketing Period"):
(A) Use its best efforts to solicit additional
Conforming Bids, including the engagement of experienced and
knowledgeable brokers;
(B) Furnish to each Lessor Party copies of all bids
and otherwise provide each Lessor Party with such information
relating to the marketing of the Property as such Person may
reasonably request in writing;
(C) Agree to provide to all potential purchasers all
customary seller's indemnities (including environmental
indemnities), representations and warranties regarding the
Property (including the title to, except for Lessor Liens, and
condition of the Property);
(D) Furnish to each Lessor Party copies of
environmental reports, architect's certificates, licenses,
permits and other evidence reasonably requested by such Person
to establish that no Default has occurred and is continuing
under the Lease Agreement;
(E) Permit any Lessor Party or potential purchaser to
inspect the Property and the maintenance records for the
Property upon reasonable prior written notice and during
normal business hours and provide to each such Person all
information regarding the Property reasonably requested by
such Person in writing;
(F) Take all other commercially reasonable steps to
secure the best price for the Property; and
(G) Submit to Lessor on or prior to the last day of
the Secondary Marketing Period any Conforming Bid selected by
Lessee with a purchase price which is equal to or greater than
the sum of the total Tranche B Proportionate Share and the
total Tranche C Proportionate
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Share of the Outstanding Lease Amount or, if no such
Conforming Bid was received by Lessee, the highest Conforming
Bid received by Lessee during the Secondary Marketing Period.
During the Secondary Marketing Period, any Lessor Party shall have
the right to submit one or more bids or solicit bids from other
Persons.
(c) Conforming Bids. Each bid must meet each of the following
requirements (each such bid to be referred to herein as a "Conforming
Bid"):
(i) The bid may be submitted by any Person other than (A) a
Person which is an Affiliate of Lessee or (B) a Person which has an
agreement (whether express or implied) with Lessee or any of its
Affiliates to sell, lease or otherwise make available to Lessee or
any of its Affiliates any portion of the Property;
(ii) The bidder must agree in writing to purchase the
Property on the Expiration Date of the Lease Agreement for a
purchase price to be paid in cash which is not less than the lesser
of (A) the sum of the total Tranche B Proportionate Share and the
total Tranche C Proportionate Share of the Outstanding Lease Amount
on such date and (B) the Fair Market Value of the Property on such
date;
(iii) The bidder must agree to purchase the Property "as is"
without any representations, warranties or indemnities, except for
(A) any representations, warranties or indemnities provided by
Lessor and Lessee pursuant to Subparagraph 4.01(b) and (B) any
representations, warranties or indemnities provided by Lessee
pursuant to clause (ii)(C) of Subparagraph 3.02(b); and
(iv) The bidder must agree to be bound by the other terms and
conditions of this Agreement applicable to bidders.
(d) Lessor's Obligation to Accept Bids. If, at any time on or
prior to the last day of the Secondary Marketing Period, Lessee submits to
Lessor a Conforming Bid under this Paragraph 3.02 with a purchase price
which is equal to or greater than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share of the
Outstanding Lease Amount, Lessor shall accept such bid. If Lessee submits
to Lessor a Conforming Bid under this Paragraph 3.02 with a purchase price
which is less than the sum of the total Tranche B Proportionate Share and
the total Tranche C Proportionate Share of the Outstanding Lease Amount,
Lessor shall not accept such bid unless so directed by Required
Participants. If Lessee fails to submit a bid to Lessor on or prior to the
last day of the Secondary Marketing Period which Lessor is so required to
accept, Lessor shall retain the Property after the Expiration Date of the
Lease Agreement; provided, however, that Lessee's payment obligations on
such Expiration Date shall be limited to the amounts payable pursuant to
clause (iii) of Subparagraph 4.06(a) if (i) Lessor retains the Property
after Lessee submits a Conforming Bid on or prior to the last day of the
Secondary Marketing Period in accordance with clause (ii) of Subparagraph
3.02(b) and (ii) the Marketing Option has not terminated prior to such
Expiration Date
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pursuant to Subparagraph 3.02(f). Lessor shall notify Lessee of Lessor's
election to retain the Property by delivering to Lessee, at least ten (10)
days prior to the Expiration Date of the Lease Agreement, a written notice
of such election.
(e) Purchase Price. If Lessor accepts any bid by any Person, such
Person (the "Designated Purchaser") shall pay to Lessor on the Expiration
Date of the Lease Agreement, as the purchase price for the Property, the
amount set forth in such bid as the purchase price.
(f) Termination of the Marketing Option. Lessee's right to
exercise the Marketing Option shall immediately terminate and Lessee shall
purchase the Property on the Expiration Date of the Lease Agreement
pursuant to Paragraph 3.03 if (i) Lessee fails to comply with any of its
obligations under this Paragraph 3.02; (ii) a Marketing Option Event of
Default under the Lease Agreement occurs after Lessee delivers the Notice
of Marketing Option Exercise; (iii) the conditions precedent set forth in
Paragraph 3.04 of the Participation Agreement are not satisfied on the
Expiration Date of the Lease Agreement (unless the only event or condition
causing such conditions not to be so satisfied is the occurrence of a
Non-Marketing Option Event of Default under the Lease Agreement); or (iv)
the Designated Purchaser fails to consummate the purchase of the Property
on the Expiration Date of the Lease Agreement in accordance with its
accepted bid and this Agreement, without regard to the reason for such
failure (except as otherwise provided in the following proviso); provided,
however, that, if the Designated Purchaser fails to consummate the
purchase of the Property on the Expiration Date solely due to Lessor's
failure to remove Lessor Liens or deliver the required deed and bill of
sale or other documents required to be delivered by Lessor hereunder,
Lessee's right to exercise the Marketing Option shall not terminate,
Lessee shall not be required to purchase the Property on the Expiration
Date and Lessee's payment obligations on the Expiration Date shall be
limited to the amounts set forth in clause (ii) of Subparagraph 4.06(a).
(g) Residual Value Guaranty Amount and Indemnity Amount. Unless
Lessee's right to exercise the Marketing Option has terminated and Lessee
is required to purchase the Property on the Expiration Date of the Lease
Agreement pursuant to Paragraph 3.03, Lessee shall pay to Lessor on such
Expiration Date the following:
(i) An amount equal to the total Tranche A Proportionate
Share of the Outstanding Lease Amount under on such date (the
"Residual Value Guaranty Amount"); and
(ii) An amount equal to the decrease, if any, between the
Commencement Date and the Expiration Date of the Lease Agreement in
the Fair Market Value of the Property caused by (A) any
representation or warranty of Lessee or any of its Affiliates
regarding the Property set forth in any of the Operative Documents
proving to be false or inaccurate when made, (B) the existence of,
or the failure of Lessee to pay any Governmental Charge,
Indebtedness or other obligation which might give rise to, any Liens
in the Property (other than Permitted Property Liens), (C) the
failure of Lessee to complete any New Improvements or any
Modifications or (D) any other failure of
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Lessee to comply with any of its obligations regarding the Property
set forth in any of the Operative Documents (the "Indemnity
Amount");
Provided, however, that (A) Lessee shall not be obligated to pay any
Residual Value Guaranty Amount or Indemnity Amount if the purchase price
paid to Lessor equals or exceeds the Outstanding Lease Amount on such date
and (B) the sum of any Residual Value Guaranty Amount and Indemnity Amount
payable to Lessor on the Expiration Date of the Lease Agreement shall not
exceed the deficiency, if any, between such Outstanding Lease Amount and
such purchase price.
(h) Determination of Fair Market Value and Indemnity Amount. If
the purchase price specified in the Initial Bid is less than the sum of
the total Tranche B Proportionate Share and the total Tranche C
Proportionate Share of the Outstanding Lease Amount, Lessor may, on or
prior to the last day of the Secondary Marketing Period (if Lessee has not
previously delivered to Lessor a Conforming Bid with a purchase price
equal to or greater than the sum of the total Tranche B Proportionate
Share and the total Tranche C Proportionate Share of the Outstanding Lease
Amount), deliver to Lessee a written notice of Lessor's determination of
the current Fair Market Value of the Property and the Indemnity Amount. To
determine such amounts, Lessor shall obtain Appraisals of the Property
which set forth:
(i) A current Appraisal of the Fair Market Value of the
Property in its then existing condition (the "Current Appraisal");
and
(ii) An Appraisal of the Fair Market Value of the Property
which assumes that (A) all representations and warranties regarding
the Property made by Lessee or any of its Affiliates in any of the
Operative Documents were true and correct when made; (B) Lessee has
maintained the Property in compliance with all applicable
Governmental Rules, Insurance Requirements and the Operative
Documents; (C) Lessee has completed all Modifications and any other
New Improvements in a good and workmanlike manner and otherwise as
required by the Operative Documents; (D) Lessee has repaired the
Property as required by the Operative Documents following any
Casualty; (E) Lessee has restored the Property as required by the
Operative Documents following any Condemnation; (F) Lessee has paid
all Governmental Charges, Indebtedness and other obligations which,
if unpaid, might give rise to a Lien (other than a Lessor Lien) on
the Property; (G) Lessee has removed all Liens on the Property
except for Permitted Property Liens and Lessor Liens; and (H) Lessee
has performed all of its other obligations as required by the
Operative Documents (the "Assumed Appraisal").
In the absence of manifest error, (A) the Current Appraisal shall
constitute the current Fair Market Value of the Property and (B) the
difference between the Current Appraisal and the Assumed Appraisal shall
constitute the Indemnity Amount if the Current Appraisal is less than the
Assumed Appraisal.
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(i) Lessee not an Agent. Lessee shall not be an agent for any of
the Lessor Parties in arranging for a purchaser of the Property. No Lessor
Party shall be bound by any acts of Lessee.
(j) Excess Proceeds. If, on the Expiration Date of the Lease
Agreement, after the application by Lessor of all amounts received by
Lessor on such date to the Outstanding Lease Amount, all unpaid Rent
accrued through or due and payable on or prior to such date and all other
amounts, if any, due and payable by Lessee under the Operative Documents
on or prior to such date, any excess amount remains, Lessor shall pay such
excess amount to Lessee.
(k) Creditworthiness of Designated Purchaser. Lessee assumes all
responsibility for determining the creditworthiness of any potential
purchaser on any bid submitted by Lessee to Lessor hereunder. If, after
any purchase by a Designated Purchaser hereunder, the purchase price paid
by such Designated Purchaser is recovered from any Lessor Party, Lessee
shall reimburse such Lessor Party for such recovery unless such recovery
is due solely to a material misrepresentation or covenant breach by such
Lessor Party.
(l) Exercise of Marketing Option After Non-Marketing Option Event
of Default. If Lessor notifies Lessee pursuant to Subparagraph 5.03(a) or
Subparagraph 5.04(a) of the Lease Agreement that Lessor is terminating the
Lease Agreement on a Termination Date which is prior to the Scheduled
Expiration Date of the Lease Agreement and the only basis for such early
termination is the occurrence of a Non-Marketing Option Event of Default,
Lessee may, subject to Paragraph 3.01, elect to exercise the Marketing
Option if, not later than ten (10) Business Days after it receives from
Lessor such notice of early termination, it (i) delivers to Lessor a
Notice of Marketing Option Exercise, (ii) delivers to Agent (A) a Cash
Collateral Agreement in form and substance reasonably satisfactory to
Lessor and Agent and (B) Cash Collateral in an amount not less than 105%
of the total Tranche A Proportionate Share of the Outstanding Lease
Amount, and (iii) delivers to Lessor an opinion in form and substance
reasonably satisfactory to Lessor regarding the Cash Collateral Agreement
and Lessor's security interest in such Cash Collateral and (iv) takes such
other actions as may be necessary to grant to Agent first priority
perfected security interests in such Cash Collateral in accordance with
the Cash Collateral Agreement. Upon the delivery by Lessee to Lessor of a
Notice of Marketing Option Exercise and satisfaction of the Cash
Collateral requirements set forth in the preceding sentence of this
Subparagraph 3.02(l), the Expiration Date of the Lease Agreement shall, if
the conditions to the exercise of the Marketing Option set forth in
Paragraph 3.01 are satisfied, be extended to the first Business Day that
is six (6) months after the date of receipt by Lessor of such Notice of
Marketing Option Exercise, provided, however, that in no event shall the
Expiration Date of the Lease Agreement be extended beyond the Scheduled
Expiration Date. Any exercise by Lessee of the Marketing Option pursuant
to this Subparagraph 3.02(l) shall be subject to the terms and conditions
otherwise set forth in this Agreement.
(m) Lessor's Obligation to Sell. If Lessor retains the Property
after the Expiration Date for any reason under the Operative Documents
without a judicial or non-
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judicial foreclosure sale or a deed-in-lieu of foreclosure from Lessee,
Lessor thereafter shall use commercially reasonable efforts to sell the
Property in a reasonable time to one or more unrelated third parties for
the Fair Market Value of the Property; provided, however that Lessor shall
have no obligation to sell the Property at a time, or in a manner, that
would adversely affect the Lessor Parties' ability to be paid in full the
Outstanding Lease Amount, all other amounts payable to the Lessor Parties
under the Operative Documents (including reasonable costs of maintaining,
managing and selling the Property) and carrying costs for the Outstanding
Lease Amount and such other amounts accruing at the Base Rate. Following
such sale, Lessor shall pay to Lessee any amounts received by Lessor in
excess of the amounts referred to in the proviso to the preceding
sentence.
3.03. Expiration Date Purchase Option.
(a) General. If (i) Lessee elects to exercise the Expiration Date
Purchase Option by delivering to Lessor a Notice of Expiration Date
Purchase Option Exercise pursuant to Paragraph 3.01; (ii) Lessee elects to
exercise the Marketing Option by delivering to Lessor a Notice of
Marketing Option Exercise pursuant to Paragraph 3.01 but the Marketing
Option terminates pursuant to Subparagraph 3.02(f); or (iii) Lessee fails
to deliver to Lessor either notice as required by Paragraph 3.01; Lessee
shall purchase the Property on the Expiration Date of the Lease Agreement
and otherwise comply, or cause compliance with, the requirements of this
Paragraph 3.03 and the other applicable provisions of this Agreement.
(b) Purchase Price. Lessee shall pay to Lessor on the Expiration
Date of the Lease Agreement, as the purchase price for the Property, an
amount equal to the Outstanding Lease Amount under on such date.
SECTION 4. TERMS OF ALL PURCHASES.
4.01. Representations and Warranties of Parties.
(a) Representations and Warranties of Certain Purchasers. Each
Designated Purchaser shall represent and warrant to Lessor on the
Expiration Date of the Lease Agreement (or, in the case of a purchase of a
portion of the Property pursuant to the Partial Purchase Option, on the
applicable Partial Purchase Date) as follows:
(i) Such Person is a legal entity duly organized, validly
existing and in good standing under the laws of its state of
organization or an individual with legal capacity to purchase the
Property (or, in the case of a purchase of a portion of the Property
pursuant to the Partial Purchase Option, the portion to be
purchased).
(ii) The execution, delivery and performance by such Person
of each document, instrument and agreement executed, or to be
executed, by such Person in connection with its purchase of the
Property (or, in the case of a purchase of a
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portion of the Property pursuant to the Partial Purchase Option, the
portion to be purchased) (the "Purchase Documents") and the
consummation of the transactions contemplated thereby (A) are within
the power of such Person and (B) have been duly authorized by all
necessary actions on the part of such Person.
(iii) Each Purchase Document executed, or to be executed, by
such Person has been, or will be, duly executed and delivered by
such Person and constitutes, or will constitute, a legal, valid and
binding obligation of such Person, enforceable against such Person
in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and general
principles of equity.
(iv) Such Person has not (A) made a general assignment for
the benefit of creditors, (B) filed any voluntary petition in
bankruptcy or suffered the filing of any involuntary petition by
such Person's creditors, (C) suffered the appointment of a receiver
to take possession of all, or substantially all, of such Person 's
assets, (D) suffered the attachment or other judicial seizure of
all, or substantially all, of such Person 's assets, (E) admitted in
writing its inability to pay its debts as they come due, or (F) made
an offer of settlement, extension or composition to its creditors
generally.
(v) Such Person is not a "party in interest" within the
meaning of Section 3(14) of the ERISA, with respect to any investor
in or beneficiary of Lessor.
(b) Representations and Warranties of Lessor and Lessee. Each of
Lessor and Lessee shall represent and warrant to each purchaser of the
Property, whether Lessee, an Assignee Purchaser or a Designated Purchaser
(a "Purchaser"), on the Expiration Date of the Lease Agreement as follows:
(i) Such Person is a corporation duly organized, validly
existing and in good standing under the laws of its state of
incorporation.
(ii) The execution, delivery and performance by such Person
of each Purchase Document executed, or to be executed, by such
Person and the consummation of the transactions contemplated thereby
(A) are within the power of such Person and (B) have been duly
authorized by all necessary actions on the part of such Person.
(iii) Each Purchase Document executed, or to be executed, by
such Person has been, or will be, duly executed and delivered by
such Person and constitutes, or will constitute, a legal, valid and
binding obligation of such Person, enforceable against such Person
in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and general
principles of equity.
(iv) Such Person has not (A) made a general assignment for
the benefit of creditors, (B) filed any voluntary petition in
bankruptcy or suffered the filing of
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any involuntary petition by such Person's creditors, (C) suffered
the appointment of a receiver to take possession of all, or
substantially all, of such Person's assets, (D) suffered the
attachment or other judicial seizure of all, or substantially all,
of such Person's assets, (E) admitted in writing its inability to
pay its debts as they come due, or (F) made an offer of settlement,
extension or composition to its creditors generally.
In addition to the foregoing, (A) Lessee shall represent and warrant to
the Designated Purchaser (or Lessor if Lessor is to retain the Property)
on the Expiration Date of the Lease Agreement that no Liens are attached
to the Property, except for Permitted Property Liens, and (B) Lessor shall
represent and warrant to Purchaser on the Expiration Date of the Lease
Agreement (or, in the case of a purchase of a portion of the Property
pursuant to the Partial Purchase Option, on the applicable Partial
Purchase Date) that no Lessor Liens are attached to the Property (or, in
the case of a purchase of a portion of the Property pursuant to the
Partial Purchase Option, the portion to be purchased). Except for the
foregoing representations and warranties to be made by Lessor on the
Expiration Date of the Lease Agreement (or, in the case of a purchase of a
portion of the Property pursuant to the Partial Purchase Option, on the
applicable Partial Purchase Date), no Lessor Party shall make any
representation or warranty regarding the Property or the sale of the
Property. Lessee shall make such additional representations and warranties
as it may be required to make pursuant to clause (ii) of Subparagraph
3.02(b).
(c) Survival of Representations and Warranties. The
representations and warranties of Purchaser, Lessor and Lessee shall
survive for a period of twelve (12) months after the Expiration Date of
the Lease Agreement (or, in the case of a purchase of a portion of the
Property pursuant to the Partial Purchase Option, after the applicable
Partial Purchase Date). Any claim which any such party may have at any
time against any other such party for a breach of any such representation
or warranty, whether known or unknown, which is not asserted by written
notice within such twelve (12) month period shall not be valid or
effective, and the party shall have no liability with respect thereto.
4.02. "As Is" Purchase. All purchases of the Property hereunder shall be
"as is, with all faults" and without any representations, warranties or
indemnities except for any representations, warranties or indemnities provided
by Lessee pursuant to clause (ii)(C) of Subparagraph 3.02(b) or by Lessor or
Lessee pursuant to Subparagraph 4.01(b). Each Purchaser shall specifically
acknowledge and agree that Lessor is selling and such Purchaser is purchasing
the Property on an "as is, with all faults" basis and that such Purchaser is not
relying on any representations or warranties of any kind whatsoever, express or
implied, from any Lessor Party, its agents, or brokers as to any matters
concerning the Property (except for any representations and warranties provided
by Lessor pursuant to Subparagraph 4.01(b)), including (a) the condition of the
Property (including any Improvements to the Property made prior to the
Commencement Date or during the Term of the Lease Agreement); (b) title to the
Property (including possession of the Property by any Person or the existence of
any Lien or any other right, title or interest in or to any of the Property in
favor of any Person); (c) the value, habitability, usability, design, operation
or fitness for use of the Property; (d) the availability or adequacy of
utilities and other services to the Property; (e) any latent, hidden or patent
defect in the Property; (f) the zoning or
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status of the Property or any other restrictions on the use of the Property; (g)
the economics of the Property; (h) any Casualty or Condemnation; or (i) the
compliance of the Property with any applicable Governmental Rule or Insurance
Requirement.
4.03. Release. Without limiting the foregoing, each Purchaser shall, on
behalf of itself and its successors and assigns, waive its right to recover
from, and forever release and discharge, Lessor and the other Indemnitees from
any and all demands, claims, legal or administrative proceedings, losses,
liabilities, damages, penalties, fines, liens, judgments, costs or expenses
whatsoever (including attorneys' fees and costs), whether direct or indirect,
known or unknown, foreseen or unforeseen, that may arise on account of or in any
way be connected with the physical condition of the Property or any Governmental
Rule applicable thereto, including any Environment Law. Each Purchaser shall
expressly waive the benefits of Section 1542 of the California Civil Code, which
provides that, "a general release does not extend to claims which the creditor
does not know or expect to exist in his favor at the time of executing the
release, which if known to him must have materially affected the settlement with
the debtor."
4.04. Permits, Approvals, Etc. Lessee shall obtain all permits, licenses
and approvals from and make all filings with Governmental Authorities and other
Persons, comply and cause compliance with all applicable Governmental Rules and
take all other actions required for the marketing, purchase and sale of the
Property.
4.05. Costs. Lessee shall pay directly, without deduction from the
purchase price or any other amount payable to Lessor hereunder, all costs and
expenses of Lessee and Lessor associated with the marketing and sale of the
Property, including brokers' fees and commissions; title insurance premiums;
survey charges; utility, tax and other prorations; fees and expenses of
environmental consultants and attorneys; appraisal costs; escrow fees; recording
fees; documentary, transfer and other taxes; and all other fees, costs and
expenses which might otherwise be deducted from the purchase price or any other
amount payable to the Lessor Parties hereunder.
4.06. Lessee's Expiration Date and Partial Purchase Date Payment
Obligations.
(a) Expiration Date. On the Expiration Date of the Lease
Agreement, Lessee shall pay to Lessor the following:
(i) Purchase by Lessee. If the Property is to be purchased
by Lessee or an Assignee Purchaser on such date, (i) the purchase
price payable by Lessee, (ii) all unpaid Rent accrued through or due
and payable on or prior to such date and (iii) all other amounts, if
any, due and payable by Lessee under the Operative Documents on or
prior to such date;
(ii) Purchase by a Designated Purchaser. If the Property is
to be purchased by a Designated Purchaser on such date, (i) the
Residual Value Guaranty Amount (subject to the provisos set forth at
the end of Subparagraph 3.02(g)), (ii) the Indemnity Amount (subject
to the provisos set forth at the end of Subparagraph 3.02(g)), (iii)
all unpaid Rent accrued through or due and payable
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on or prior to such date and (iv) all other amounts, if any, due and
payable by Lessee under the Operative Documents on or prior to such
date; or
(iii) Retention by Lessor. If the Property is to be retained
by Lessor on such date pursuant to Subparagraph 3.02(d), (i) the
Residual Value Guaranty Amount, (ii) the Indemnity Amount, (iii) all
unpaid Rent accrued through or due and payable on or prior to such
date and (iv) all other amounts, if any, due and payable by Lessee
under the Operative Documents on or prior to such date.
(b) Partial Purchase Date. On any Partial Purchase Date, Lessee
shall pay to Lessor (i) the purchase price for the Tracts of Property to
be purchased on such date, (ii) all unpaid Rent attributable to such
Tracts of Property accrued through or due and payable on or prior to such
date and (iii) all other amounts attributable to such Tracts of Property ,
if any, due and payable by Lessee under the Operative Documents on or
prior to such date.
4.07. Lessor Liens. Lessor shall remove all Lessor Liens from the Property
before the Expiration Date of the Lease Agreement (or, in the case of a purchase
of a portion of the Property pursuant to the Partial Purchase Option, from the
portion to be purchased before the applicable Partial Purchase Date).
4.08. Transfer Documents.
(a) Expiration Date.
(i) Lessor. Subject to receipt by Lessor on the Expiration
Date of the Lease Agreement of the full amount of the following,
without any setoff, deduction or reduction of any kind:
(A) In the case of a transfer to Lessee or an Assignee
Purchaser, all amounts payable by Lessee pursuant to clause
(i) of Subparagraph 4.06(a); or
(B) In the case of a transfer to a Designated
Purchaser, (1) the purchase price payable by the Designated
Purchaser and (2) all amounts payable by Lessee pursuant to
clause (ii) of Subparagraph 4.06(a);
Lessor shall transfer its interest in the Property to Purchaser on
the Expiration Date of the Lease Agreement (unless Lessor is to
retain the Property) by executing and delivering to Purchaser a Deed
in substantially the form of Exhibit D-1, an Acknowledgment of
Disclaimer of Representations and Warranties in substantially the
form of Exhibit D-2, a Bill of Sale in substantially the form of
Exhibit E and such other documents, instruments and agreements as
such Person may reasonably request.
(ii) Lessee. On the Expiration Date of the Lease Agreement,
unless Lessee is to purchase the Property, Lessee shall transfer its
interest in the Property to the Designated Purchaser or the Assignee
Purchaser (or Lessor if Lessor is to
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retain the Property pursuant to Paragraph 3.02(d)) by executing and
delivering to such Person a Deed in substantially the form of
Exhibit F, a Bill of Sale in substantially the form of Exhibit G and
such other documents, instruments and agreements as such Person may
reasonably request.
(b) Partial Purchase Date. Subject to receipt by Lessor on any
Partial Purchase Date of all amounts payable by Lessee pursuant to
Subparagraph 4.06(b), without any setoff, deduction or reduction of any
kind, Lessor shall transfer its interest in the Tracts of Property to be
purchased on such date to Lessee by executing and delivering to Lessee a
Deed in substantially the form of Exhibit D, a Bill of Sale in
substantially the form of Exhibit E and such other documents, instruments
and agreements as Lessee may reasonably request
4.09. Casualty and Condemnation Proceeds. If, on the Expiration Date of
the Lease Agreement, any Casualty and Condemnation Proceeds are held by Lessor
in a Repair and Restoration Account or otherwise, Lessor shall (a) if Lessee is
to purchase the Property on the Expiration Date of the Lease Agreement and
Lessee shall so direct, apply such proceeds to the purchase price to be paid by
Lessee or (b) in all other cases, release such proceeds to Lessee; provided,
however, that Lessor shall not have any obligation so to apply or release such
proceeds unless Lessee and/or any Designated Purchaser has complied with all of
the terms and conditions of this Agreement.
4.10. Payments. Purchaser and Lessee shall make all payments in lawful
money of the United States and in same day or immediately available funds not
later than 11:00 a.m. on the date due.
4.11. Environmental Reports. Lessee shall obtain and deliver to Lessor,
not later than twenty (20) days prior to the Expiration Date of the Lease
Agreement (or, in the case of a purchase of a portion of the Property pursuant
to the Partial Purchase Option, prior to the applicable Partial Purchase Date),
environmental reports with respect to the Property (or, in the case of a
purchase of a portion of the Property pursuant to the Partial Purchase Option,
with respect to the applicable portion thereof) prepared by environmental
consultants acceptable to Lessor.
4.12. Further Assurances. Lessee shall, and shall cause any Designated
Purchaser to, execute and deliver such documents, instruments and agreements and
take such other actions as Lessor may reasonably request to effect the purposes
of this Agreement and comply with the terms hereof. Similarly, Lessor shall
execute and deliver such documents, instruments and agreements and take such
other actions as Lessee or a Designated Purchaser may reasonably request to
effect the purposes of this Agreement and comply with the terms hereof.
SECTION 5. MISCELLANEOUS.
5.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this
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Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01
of the Participation Agreement.
5.02. Waivers, Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
5.03. Successors and Assigns.
(a) General. This Agreement shall be binding upon and inure to the
benefit of the Lessor Parties and Lessee and their permitted successors
and assigns; provided, however, that the Lessor Parties and Lessee shall
not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement and in
Subparagraph 5.03(b).
(b) Assignment by Lessee of Purchase Rights. Lessee may assign to
a third party (an "Assignee Purchaser") its right to purchase the Property
pursuant to the Partial Purchase Option, the Term Purchase Option or the
Expiration Date Purchase Option; provided, however, that (i) such an
assignment shall not relieve Lessee of its obligations to consummate or
cause the consummation of any such purchase in accordance with the terms
of this Agreement and (ii) Lessee assumes all responsibility for
determining the creditworthiness of any such Assignee Purchaser. If, after
any purchase by an Assignee Purchaser hereunder, the purchase price paid
by such Assignee Purchaser is recovered from any Lessor Party, Lessee
shall reimburse such Lessor Party for such recovery unless such recovery
is due solely to a material misrepresentation or covenant breach by such
Lessor Party.
5.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
5.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
5.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
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5.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
5.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to pay the
amounts payable by Lessee under this Agreement and the other Operative
Documents and to perform the other Lessee Obligation are absolute,
unconditional and irrevocable obligations which are separate and
independent of the obligations of the Lessor Parties under this Agreement
and the other Operative Documents and all other events and circumstances,
including the events and circumstances set forth in Subparagraph 5.08(c).
(b) No Termination or Abatement. This Agreement and the other
Operative Documents and Lessee's obligation to pay all amounts hereunder
and to pay and perform all other Lessee Obligations shall continue in full
force and effect without abatement notwithstanding the occurrence or
existence of any event or circumstance, including any event or
circumstance set forth in Subparagraph 5.08(c).
(c) Full Payment and Performance. Lessee shall make all payments
under this Agreement and the other Operative Documents in the full amounts
and at the times required by the terms of this Agreement and the other
Operative Documents without setoff, deduction or reduction of any kind and
shall perform all other Lessee Obligations as and when required, without
regard to any event or circumstances whatsoever, including (i) the
condition of the Property (including any Improvements to the Property made
prior to the Commencement Date or during the Term of the Lease Agreement);
(ii) title to the Property (including possession of the Property by any
Person or the existence of any Lien or any other right, title or interest
in or to any of the Property in favor of any Person); (iii) the value,
habitability, usability, design, operation or fitness for use of the
Property; (iv) the availability or adequacy of utilities and other
services to the Property; (v) any latent, hidden or patent defect in the
Property; (vi) the zoning or status of the Property or any other
restrictions on the use of the Property; (g) the economics of the
Property; (vii) any Casualty or Condemnation; (viii) the compliance of the
Property with any applicable Governmental Rule or Insurance Requirement;
(ix) any failure by any Lessor Party to perform any of its obligations
under this Agreement or any other Operative Document; or (x) the exercise
by any Lessor Party of any of its remedies under this Agreement or any
other Operative Document; provided, however, that (A) Lessee shall have no
obligation to purchase the Property on the Expiration Date if Lessor fails
to remove Lessor Liens or deliver the required deed and bill of sale or
other documents required to be delivered by Lessor hereunder and (B) this
Paragraph 5.08 shall not abrogate any right which Lessee may have to
recover damages from any Lessor Party for any material breach by such
Lessor Party of its obligations under this Agreement or any other
Operative Document to the extent permitted hereunder or thereunder.
[The signature page follows.]
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IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:___________________________
Name:______________________
Title:_____________________
LESSOR: LEASE PLAN U.S.A., INC.
By:___________________________
Name:______________________
Title:_____________________
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EXHIBIT A(1)
NOTICE OF TERM PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the "Lease
Agreement"), between Lessee and Lessor; and
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Subparagraph 4.01(a) of the Lease Agreement and
Paragraph 2.01 of the Purchase Agreement, Lessee hereby irrevocably notifies
Lessor that Lessee is exercising its right to terminate the Lease Agreement
prior to the Scheduled Expiration Date of the Lease Agreement and purchase the
Property on [_________, ____] (which date is a Business Day and which date,
after the delivery of this notice, shall be the Expiration Date of the Lease
Agreement).
IN WITNESS WHEREOF, Lessee has executed this Notice of Term Purchase
Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:___________________________
Name:______________________
Title:_____________________
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EXHIBIT A(2)
NOTICE OF PARTIAL PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 2.02 of the Purchase Agreement, Lessee hereby
irrevocably notifies Lessor that Lessee is exercising its right to purchase a
portion of the Property as follows:
(a) The Tract[s] of Property to be purchased is [are]
________________; and
(b) The date on which such purchase is to occur is [_________,
____] (which date is a Business Day).
3. Lessee hereby certifies to Lessor, Agent and the Participants that,
on the date of this notice:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
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IN WITNESS WHEREOF, Lessee has executed this Notice of Partial Purchase
Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:___________________________
Name:______________________
Title:_____________________
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<PAGE> 191
EXHIBIT B
NOTICE OF MARKETING OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 3.01 of the Purchase Agreement, Lessee hereby
notifies Lessor that Lessee is electing to exercise the Marketing Option on the
Scheduled Expiration Date of the Lease Agreement of [_____, ____].
3. Lessee hereby certifies to Lessor, Agent and the Participants that,
on the date of this notice:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default (other than a Non-Marketing Option Event of Default
under the Lease Agreement) has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
C-22
<PAGE> 192
IN WITNESS WHEREOF, Lessee has executed this Notice of Marketing Option
Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:___________________________
Name:______________________
Title:_____________________
C-23
<PAGE> 193
EXHIBIT C
NOTICE OF EXPIRATION DATE PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 3.01 of the Purchase Agreement, Lessee hereby
notifies Lessor that Lessee is electing to exercise the Expiration Date Purchase
Option on the Scheduled Expiration Date of the Lease Agreement of [_____, ____].
IN WITNESS WHEREOF, Lessee has executed this Notice of Expiration Date
Purchase Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:___________________________
Name:______________________
Title:_____________________
C-24
<PAGE> 194
EXHIBIT D(1)
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO
AND MAIL TAX STATEMENTS TO:
[Purchaser]
- ------------------
- ------------------
- ------------------
Documentary Transfer Tax is not of public record and is shown on a separate
sheet attached to this deed.
- --------------------------------------------------------------------------------
QUITCLAIM DEED
FOR VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged,
LEASE PLAN U.S.A., INC., a Georgia corporation ("Grantor"), hereby releases,
remises and forever quitclaims to [PURCHASER], a _____________ ("Grantee"), the
real property located in the City of San Jose, County of Santa Clara, State of
California, described on EXHIBIT A attached hereto and made a part hereof (the
"Property").
Executed as of _____, 19__.
LEASE PLAN U.S.A., INC.,
a Georgia corporation
By: _________________________
Its: _________________________
C-25
<PAGE> 195
EXHIBIT A
LEGAL DESCRIPTION
Assessor's Parcel No.: _______________
C-26
<PAGE> 196
State of _____________
County of _____________________
On ___________________ before me, _________________________,
Date Name, Title of Officer
personally appeared ___________________________________________________________,
Name(s) of signer(s)
(personally known to me -OR- ( proved to me on the basis of satisfactory
evidence to be the person(s) whose
name(s) is/are subscribed to the within
instrument and acknowledged to me that
he/she/they executed the same in
his/her/their authorized capacity(ies),
and that by his/her/their signature(s)
on the instrument the person(s) or the
entity upon behalf of which the
person(s) acted, executed the
instrument.
WITNESS my hand and official seal.
________________________________________
C-27
<PAGE> 197
, 19__
Santa Clara County Recorder
Re: Request That Statement of Documentary Transfer Tax Not be Recorded
Dear Sir:
Request is hereby made in accordance with Section 11932 of the Revenue and
Taxation Code that this statement of tax due not be recorded with the attached
deed but be affixed to the deed after recordation and before return as directed
on the deed.
The attached deed names LEASE PLAN U.S.A., an Georgia corporation, as
grantor, and [PURCHASER], a _________________, as grantee.
The property being transferred and described in the attached deed is
located in the City of San Jose and County of Santa Clara, State of California.
The amount of Documentary Transfer Tax due on the attached deed is
$__________, computed on full value of the property conveyed.
LEASE PLAN U.S.A.,
a Georgia corporation
By: ___________________________
Its: ___________________________
C-28
<PAGE> 198
EXHIBIT D(2)
ACKNOWLEDGMENT AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES (this
"Certificate") is made as of ___________, 1997 by [PURCHASER], a _____________
("Grantee").
Contemporaneously with execution of this Certificate, LEASE PLAN U.S.A.,
INC., a Georgia corporation ("Lease Plan U.S.A."), is executing and delivering
to Grantee a Quitclaim Deed and a Bill of Sale (the foregoing documents and any
other documents to be executed and delivered to Grantee in connection therewith
are herein called the "Conveyancing Documents" and any of the properties, rights
or other matters assigned, transferred or conveyed pursuant thereto are herein
collectively called the "Property") pursuant to the terms of a Purchase
Agreement dated as of November 12, 1997 by and between Lease Plan U.S.A. and
KLA-Tencor Corporation, a Delaware corporation("KLA-Tencor").
Notwithstanding any provision contained in the Conveyancing Documents to
the contrary, Grantee acknowledges that Lease Plan U.S.A. is selling and Grantee
is purchasing the Property on an "as is, with all faults" basis and that Grantee
is not relying on any representations or warranties of any kind whatsoever,
express or implied, from Lease Plan U.S.A., its agents, or brokers as to any
matters concerning the Property including (a) the condition of the Property
(including any improvements to the Property); (b) title to the Property
(including possession of the Property by any individual or entity or the
existence of any lien or any other right, title or interest in or to any of the
Property in favor of any person, but excluding any Lessor Liens as defined in
that certain Participation Agreement dated as of November 12, 1997 among KLA-
Tencor, Lease Plan U.S.A., the Participants and ABN AMRO Bank N.V., as agent for
the Participants (in such capacity, "Agent")); (c) the value, habitability,
usability, design, operation or fitness for use of the Property; (d) the
availability or adequacy of utilities and other services to the Property; (e)
any latent, hidden or patent defect in the Property; (f) the zoning or status of
the Property or any other restrictions on the use of the Property; (g) the
economics of the Property; (h) any damage to, destruction or, or decrease in the
value of all or any portion of the Property or any condemnation or other taking
or sale of all or any portion of the Property, by or on account of any actual or
threatened eminent domain proceeding or other taking of action by any
governmental authority or other person have the power of eminent domain; or (i)
the compliance of the Property with any applicable law, rule, regulation,
ordinance, order, code, judgment or similar form of decision of any governmental
authority or any terms, conditions or requirements imposed by any policies of
insurance relating to the Property.
[See next page]
C-29
<PAGE> 199
The provisions of this Certificate shall be binding on Grantee, its
successors and assigns and any other party claiming through Grantee. Grantee
hereby acknowledges that Lease Plan U.S.A. is entitled to rely and is relying on
this Certificate.
EXECUTED as of ____________, 1997.
[PURCHASER],
a _____________
___________________
___________________
C-30
<PAGE> 200
EXHIBIT E
BILL OF SALE
FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby
acknowledged, LEASE PLAN U.S.A., Inc., a Georgia corporation ("Seller") does
hereby sell, transfer and convey to [PURCHASER], a _________________________
("Purchaser"): 1) the Related Goods (as defined in that certain Participation
Agreement dated as of November 12, 1997 (the "Participation Agreement") among
KLA-Tencor Corporation ("KLA- Tencor"), Seller, the Participants and ABN AMRO
Bank N.V., as agent for the Participants (in such capacity, "Agent")) in
connection with that certain real property commonly known as _______________,
San Jose, California, including, without limitation, the personal property
itemized on SCHEDULE 1 attached hereto and incorporated herein by this reference
(the "Property"), and 2) all Appurtenant Rights, Related Permits and Related
Agreements as those terms are defined in the Participation Agreement.
Seller is selling and Purchaser is purchasing the Property on an "as is,
with all faults" basis and Purchaser is not relying on any representations or
warranties of any kind whatsoever, express or implied, from Seller, its agents,
or brokers as to any matters concerning the Property including (a) the condition
of the Property; (b) title to the Property (including possession of the Property
by any individual or entity or the existence of any lien or any other right,
title or interest in or to any of the Property in favor of any person but
excluding any Lessor Liens as defined in the Participation Agreement); (c) the
value, habitability, usability, design, operation or fitness for use of the
Property; or (d) any latent, hidden or patent defect in the Property.
Dated: ________, 19__ SELLER:
LEASE PLAN U.S.A., INC.
a Georgia corporation
By: ___________________________
Its: ___________________________
PURCHASER:
[PURCHASER]
a __________________________
By: ___________________________
Its: ___________________________
C-31
<PAGE> 201
SCHEDULE 1
PROPERTY
C-32
<PAGE> 202
EXHIBIT F
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO
AND MAIL TAX STATEMENTS TO:
_____________________
_____________________
Attention: _____________
Documentary Transfer Tax is not of public record and is shown on a separate
sheet attached to this deed.
- --------------------------------------------------------------------------------
QUITCLAIM DEED
FOR VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged,
KLA-TENCOR CORPORATION, a Delaware corporation ("Grantor"), hereby releases,
remises and forever quitclaims to [PURCHASER] ("Grantee"), the real property
located in the City of San Jose, County of Santa Clara, State of California,
described on EXHIBIT A attached hereto and made a part hereof (the "Property").
Executed as of __________, 19__.
KLA-TENCOR CORPORATION,
a Delaware corporation
By: ___________________________________
Its: ___________________________________
C-33
<PAGE> 203
EXHIBIT A
LEGAL DESCRIPTION
Assessor's Parcel No.: ____________________
C-34
<PAGE> 204
State of _________________
County of _____________________
On ___________________ before me, _________________________,
Date Name, Title of Officer
personally appeared ___________________________________________________________,
Name(s) of signer(s)
(personally known to me -OR- ( proved to me on the basis of satisfactory
evidence to be the person(s) whose
name(s) is/are subscribed to the within
instrument and acknowledged to me that
he/she/they executed the same in
his/her/their authorized capacity(ies),
and that by his/her/their signature(s)
on the instrument the person(s) or the
entity upon behalf of which the
person(s) acted, executed the
instrument.
WITNESS my hand and official seal.
________________________________________
C-35
<PAGE> 205
_________ , 1997
Santa Clara County Recorder
Re: Request That Statement of Documentary
Transfer Tax Not be Recorded
Dear Sir:
Request is hereby made in accordance with Section 11932 of the Revenue and
Taxation Code that this statement of tax due not be recorded with the attached
deed but be affixed to the deed after recordation and before return as directed
on the deed.
The attached deed names KLA-TENCOR CORPORATION, a Delaware corporation, as
grantor, and [PURCHASER], as grantee.
The property being transferred and described in the attached deed is
located in the City of San Jose and County of Santa Clara, State of California.
The amount of Documentary Transfer Tax due on the attached deed is
$__________, computed on full value of the property conveyed.
KLA-TENCOR CORPORATION,
a Delaware corporation
By: __________________________
Its: __________________________
C-36
<PAGE> 206
EXHIBIT G
BILL OF SALE
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, KLA-Tencor Corporation, a Delaware corporation
("Seller"), does hereby sell, transfer, and convey unto [PURCHASER] ("Buyer"):
1) without warranty, the Related Goods (as defined in that certain Participation
Agreement dated as of November 12, 1997 (the "Participation Agreement") among
Lease Plan U.S.A., Inc., Seller, the Participants and ABN AMRO Bank N.V., as
agent for the Participants (in such capacity, "Agent")) in connection with that
certain real property commonly known as _______________, San Jose, California,
including, without limitation, the personal property itemized on SCHEDULE 1
attached hereto and incorporated herein by this reference (the "Property"), and
2) all Appurtenant Rights, Related Permits and Related Agreements as those terms
are defined in the Participation Agreement.
DATED this ____ day of __________, 19__.
SELLER: KLA-Tencor Corporation,
a Delaware corporation
By: _____________________________________
Its: ____________________________________
C-37
<PAGE> 207
SCHEDULE 1
PROPERTY
C-38
<PAGE> 208
EXECUTION COPY
================================================================================
PURCHASE AGREEMENT
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
C-39
<PAGE> 209
<TABLE>
<S> <C> <C>
SECTION 1. INTERPRETATION.................................................................................2
1.01. Definitions....................................................................................2
1.02. Rules of Construction..........................................................................2
SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM....................................................2
2.01. Term Purchase Option...........................................................................2
2.02. Partial Purchase Option........................................................................3
SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE...................................................4
3.01. Alternative....................................................................................4
3.02. Marketing Option...............................................................................4
3.03. Expiration Date Purchase Option...............................................................10
SECTION 4. TERMS OF ALL PURCHASES........................................................................10
4.01. Representations and Warranties of Parties.....................................................10
4.02. As Is Purchase................................................................................12
4.03. Release.......................................................................................13
4.04. Permits, Approvals, Etc.......................................................................13
4.05. Costs.........................................................................................13
4.06. Lessee's Expiration Date and Partial Purchase Date Payment Obligations........................13
4.07. Lessor Liens..................................................................................14
4.08. Transfer Documents............................................................................14
4.09. Casualty and Condemnation Proceeds............................................................15
4.10. Payments......................................................................................15
4.11. Environmental Reports.........................................................................15
4.12. Further Assurances............................................................................15
SECTION 5. MISCELLANEOUS.................................................................................15
5.01. Notices.......................................................................................16
5.02. Waivers, Amendments...........................................................................16
5.03. Successors and Assigns........................................................................16
5.04. No Third Party Rights.........................................................................16
5.05. Partial Invalidity............................................................................16
5.06. Governing Law.................................................................................16
5.07. Counterparts..................................................................................17
5.08. Nature of Lessee's Obligations................................................................17
</TABLE>
C-40
<PAGE> 210
EXHIBITS
A(1) Notice of Term Purchase Option Exercise (2.02)
A(2) Notice of Partial Purchase Option Exercise (2.02)
B Notice of Marketing Option Exercise (3.01)
C Notice of Expiration Date Purchase Option Exercise (2.02)
D(1) Deed (Lessor) (4.08(a))
D(2) Acknowledgment of Disclaimer of Representations and Warranties (4.08(a))
E Bill of Sale (Lessor) (4.08(a))
F Deed (Lessee) ((4.08(b))
G Bill of Sale (Lessee) 4.08(b))
C-41
<PAGE> 211
EXHIBIT D
CONSTRUCTION AGENCY AGREEMENT
THIS CONSTRUCTION AGENCY AGREEMENT (this "Agreement" herein), dated as of
November 12, 1997 is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including without
limitation the execution and delivery of this Agreement setting forth the terms
of Lessee's construction obligations.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
D-1
<PAGE> 212
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Agreement and the other
Operative Documents.
SECTION 2. APPOINTMENT; AUTHORITY.
2.01. Appointment. Lessor hereby appoints Lessee and Lessee hereby agrees
to act as Lessor's agent for the construction of the New Improvements to the
Tract 1 Property, the Tract 3 Property, the Tract 4 Property and the Tract 5
Property.
2.02. Scope of Authority. Lessee shall have the authority to perform all
acts expressly delegated to or undertaken by Lessee under this Agreement and all
other acts reasonably necessary to complete the construction of the New
Improvements in accordance with the Plans and Specifications, this Agreement,
the other Operative Documents, all applicable Governmental Rules and all
applicable Insurance Requirements; provided, however, that no Lessor Party shall
have any obligation to pay any fees, costs or expenses related to such
construction (except to the extent of Lessor's obligation to make, and the
Participants' obligations to fund, Advances pursuant to the Participation
Agreement) and Lessee shall have no authority to, and shall not, enter into any
agreement which would, directly or indirectly, require any Lessor Party to pay
any such fees, costs or expenses or otherwise impose upon any Lessor Party any
liability or obligation. Subject to the terms and conditions of this Agreement
and the other Operative Documents, Lessee shall have sole management and control
over the construction means, methods, sequences and procedures with respect to
the construction of the New Improvements.
2.03. Delegation of Duties. Lessee may employ such architects, engineers,
contractors, consultants, agents, employees and other Persons as Lessee
determines are necessary or appropriate to construct the New Improvements and
perform its other obligations and duties hereunder and may delegate to such
Persons any or all of such obligations and duties; provided, however, that no
such employment or delegation shall limit or reduce in any way Lessee's
obligations and duties under this Agreement.
SECTION 3. LESSEE'S OBLIGATIONS AND DUTIES.
3.01. Plans and Specifications. Lessee shall deliver to Lessor, for
approval by Lessor and Agent, the Plans and Specifications for all new
improvements it elects to make to each Tract of Property. Once any Plans and
Specifications for any Tract of Property are so delivered and
D-2
<PAGE> 213
approved by Lessor and Agent, Lessee shall not agree to or permit any revision,
amendment, supplementation or other modification to such Plans and
Specifications without the written consent of Lessor if such revision,
amendment, supplementation or modification (either alone or together with all
prior revisions, amendments, supplementations and modifications to all Plans and
Specifications for all of the Tracts of Property) is reasonably likely to:
(a) Cause the Acquisition Prices plus all other costs and expenses
of acquiring all of the Tracts of Property and constructing all of the New
Improvements to all the Tracts of Property in accordance with this
Agreement (including all Permitted Improvement Costs and Permitted
Transaction Expenses paid or to be paid with Advances) to exceed the
lesser of (i) the Total Commitment and (ii) the sum of the most recent
Expiration Date Appraisals for all of the Tracts of Property (or, in the
case of any Tract of Property for which Lessee does not deliver an
Expiration Date Appraisal, the Closing Date Appraisal therefor);
(b) Make it difficult or impossible to Complete the construction
of all the New Improvements to such Tract of Property in accordance with
this Agreement on or prior to the Outside Completion Date; or
(c) Cause the Fair Market Value of such Tract of Property to be
less than the most recent Expiration Date Appraisal for such Tract of
Property (or, in the case of any Tract of Property for which Lessee does
not deliver an Expiration Date Appraisal, the Closing Date Appraisal
therefor) or otherwise decrease in any material amount.
Lessee shall notify Lessor promptly in writing of any revision, amendment,
supplementation or other modification to the Plans and Specifications.
3.02. Construction Agreements. Lessee has entered or shall, on a timely
basis, enter into such agreements with architects, engineers, contractors,
consultants, materialmen, suppliers, agents, employees and other Persons as are
necessary or appropriate to construct the New Improvements and perform Lessee's
other obligations and duties hereunder in connection therewith (together with
the Plans and Specifications, the "Construction Agreements"). Each Construction
Agreement shall expressly permit the assignment of Lessee's rights thereunder to
Lessor without the consent of the other party(ies) to such agreement. Upon
Lessor's request, Lessee shall deliver to Lessor copies of any or all
Construction Agreements.
3.03. Permits, Approvals, Etc. Prior to the time they are required, Lessee
shall obtain from Governmental Authorities and other Persons all licenses,
approvals, authorizations, consents, permits, easements and rights-of-way that
are necessary for the construction of any New Improvements in accordance with
this Agreement. Upon Lessor's request, Lessee shall deliver to Lessor copies of
any or all such licenses, approvals, authorizations, consents, permits,
easements and rights-of-way.
3.04. Material and Supplies. Lessee shall obtain all materials and
supplies necessary to construct the New Improvements. Lessee shall cause all
such materials and supplies (a) to be purchased in a manner that will result in
the ownership thereof vesting unconditionally in Lessor,
D-3
<PAGE> 214
free from all Liens (other than Liens that attach in favor of the materialmen or
subcontractors that supply and/or install such materials and supplies); (b) to
be stored at the applicable Tract of Land under adequate safeguards to minimize
the possibility of loss, theft, damage or commingling with other materials or
projects; and (c) to be covered by the insurance policies required under this
Agreement and the other Operative Documents. Upon Lessor's request, Lessee shall
deliver to Lessor copies of any contracts, bills of sale, statements, receipts,
vouchers or agreements for the materials and supplies used or to be used in the
construction of the New Improvements.
3.05 Construction.
(a) Manner. Lessee shall construct the New Improvements (including
all foundations and structural portions thereof; all plumbing, heating,
air conditioning and electrical systems; and all water, sewer, electric,
gas, telephone and drainage facilities) in a good and workmanlike manner,
free from any material defect in design or construction, in accordance
with the Plans and Specifications, this Agreement, the other Operative
Documents, all applicable Governmental Rules and all applicable Insurance
Requirements.
(b) Completion. Lessee shall Complete the construction of the New
Improvements to all Tracts of Property on which New Improvements are to be
constructed on or prior to the Outside Completion Date. "Completion" shall
occur for the New Improvements to a Tract of Property when each of the
following conditions has been satisfied:
(i) The New Improvements to such Tract of Property have been
completed in accordance with this Agreement, are in first class
working condition and are ready for occupancy and use as a facility
as described in clause (ii) under the heading for the applicable
Tract of Property in Schedule 4.01(s) to the Participation
Agreement. This shall include, without limiting the generality of
the preceding sentence, evidence that (A) all utilities required to
adequately service such New Improvements for their intended use are
available and "tapped on" and hooked up pursuant to adequate permits
(including any that may be required under applicable Environmental
Laws) and (B) access to such New Improvements for pedestrians and
motor vehicles from publicly dedicated streets and public highways
are available.
(ii) Lessee shall have furnished to Lessor each of the
following:
(A) A certificate of Lessee in the form of Exhibit A,
duly executed by Lessee;
(B) A certificate of an architect acceptable to Lessor
in the form of Exhibit B, duly executed by such architect,
together with copies of each of the documents referred to
therein;
D-4
<PAGE> 215
(C) A date-down endorsement to or reissued title
insurance policies or binders delivered by Lessee pursuant to
Paragraph 3.02 and Schedule 3.02 of the Participation
Agreement;
(D) Copies of all mechanic's or materialman's lien
waivers and releases as required by Lessor; and
(E) Certificate of final occupancy issued by the
appropriate Governmental Authority.
3.06. Insurance. Lessee (and its general contractor) shall maintain
policies of casualty and liability insurance as provided in Paragraph 3.03 of
the Lease Agreement.
3.07. Fees, Costs and Expenses.
(a) Lessee's Responsibility. Except to the extent such fees, costs
and expense are paid by Advances, Lessee shall pay all fees, costs and
expenses of constructing the New Improvements from its own funds.
(b) Prompt Payment. Lessee shall pay promptly all fees, costs and
expenses of architects, engineers, contractors, materialmen, suppliers,
consultants, agents, employees and other Persons which provide services,
materials or supplies in connection with the construction of the New
Improvements and all other fees, costs and expenses related to such
construction.
(c) No Lessee Fee. Lessee shall not be entitled to any fee for the
performance of its obligations and duties hereunder or any other
compensation in connection with this Agreement.
3.08. Books and Records. Lessee shall maintain accurate books and records,
in reasonable detail, relating to the construction of the New Improvements and
shall permit Lessor to inspect the same and make copies thereof, at Lessee's
expense, upon reasonable notice to Lessee.
3.09. Additional Obligations and Duties. In addition to the obligations
and duties set forth above in this Section 3, Lessee shall perform all other
acts reasonably necessary to achieve Completion of the construction of the New
Improvements in accordance with the Plans and Specifications, this Agreement,
the other Operative Documents, all applicable Governmental Rules and all
applicable Insurance Requirements.
SECTION 4. MISCELLANEOUS.
4.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this
D-5
<PAGE> 216
Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01
of the Participation Agreement.
4.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
4.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
4.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
4.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
4.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
4.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
4.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to construct
the New Improvements pursuant to this Agreement and the other Operative
Documents and to perform the other Lessee Obligations are absolute,
unconditional and irrevocable obligations which are separate and
independent of the obligations of the Lessor Parties under this Agreement
and the other Operative Documents and all other events and circumstances,
including the events and circumstances set forth in Subparagraph 4.08(c).
(b) No Termination or Abatement. This Agreement and the other
Operative Documents and Lessee's obligation to construct the New
Improvements and to pay and
D-6
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perform all other Lessee Obligations shall continue in full force and
effect without abatement notwithstanding the occurrence or existence of
any event or circumstance, including any event or circumstance set forth
in Subparagraph 4.08(c).
(c) Full Payment and Performance. Lessee shall perform all of its
obligations under this Agreement and the other Operative Documents in the
manner and at the times required by the terms of this Agreement and the
other Operative Documents without setoff, deduction or reduction of any
kind and shall perform all other Lessee Obligations as and when required,
without regard to any event or circumstances whatsoever, including (i) the
condition of the Property (including any Improvements to the Property made
prior to the Commencement Date or during the Term); (ii) title to the
Property (including possession of the Property by any Person or the
existence of any Lien or any other right, title or interest in or to any
of the Property in favor of any Person); (iii) the value, habitability,
useability, design, operation or fitness for use of the Property; (iv) the
availability or adequacy of utilities and other services to the Property;
(v) any latent, hidden or patent defect in the Property; (vi) the zoning
or status of the Property or any other restrictions on the use of the
Property; (g) the economics of the Property; (vii) any Casualty or
Condemnation; (viii) the compliance of the Property with any applicable
Governmental Rule or Insurance Requirement; (ix) any failure by any Lessor
Party to perform any of its obligations under this Agreement or any other
Operative Document; or (x) the exercise by any Lessor Party of any of its
remedies under this Agreement or any other Operative Document; provided,
however, that (A) Lessor shall have no obligation to continue constructing
the New Improvements at any time the Lessor Parties are refusing to make
any Advance in violation of the Participation Agreement and (B) this
Paragraph 4.08 shall not abrogate any right which Lessee may have to
recover damages from any Lessor Party for any material breach by such
Lessor Party of its obligations under this Agreement or any other
Operative Document to the extent permitted hereunder or thereunder.
[The signature page follows.]
D-7
<PAGE> 218
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By: _____________________________________
Name: _______________________________
Title: ______________________________
LESSOR: LEASE PLAN U.S.A., INC.
By: _____________________________________
Name: _______________________________
Title: ______________________________
D-8
<PAGE> 219
EXHIBIT A
LESSEE'S COMPLETION CERTIFICATE
________________, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
and
(b) The Construction Agency Agreement, dated as of November 12,
1997 (the "Construction Agency Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Lessee hereby certifies to Lessor, for the benefit of all of the
Lessor Parties, as follows:
(a) Lessee has completed all of the New Improvements to the Tract
[__] Property in accordance with the Plans and Specifications, the
Construction Agency Agreement, the other Operative Documents, all
applicable Governmental Rules and all applicable Insurance Requirements
and the New Improvements now are ready for use and occupancy as a facility
described in clause (ii) under the heading "Tract [__] Property" in
Schedule 4.01(s) to the Participation Agreement.
(b) All amounts payable to third parties for the construction of
such New Improvements have been paid in full (other than amounts which
Lessee is contesting in accordance with the Lease Agreement).
(c) No changes or modifications that have had an adverse effect on
the value, use or useful life of the Tract [__] Property were made to the
Plans and Specifications for the New Improvements to such Property after
the date the Plans and Specifications for such Property were approved by
Lessor, Agent and the Participants pursuant to Subparagraph 2.01(c) of the
Participation Agreement.
D-9
<PAGE> 220
(d) The representations and warranties relating to the Tract [__]
Property set forth in Subparagraph 4.01(s) of the Participation Agreement
and Schedule 4.01(s) to the Participation Agreement and the other
representations and warranties of Lessee set forth in the Operative
Documents are true and correct in all material respects on the date hereof
(except for representations and warranties expressly made as of a
specified date, which shall be true as of such date).
(e) No Default has occurred and is continuing.
(f) All of the Operative Documents are in full force and effect.
IN WITNESS WHEREOF, Lessee has executed this Lessee's Completion
Certificate on the date set forth above.
KLA-TENCOR CORPORATION
By: _____________________________________
Name: _______________________________
Title: ______________________________
D-10
<PAGE> 221
EXHIBIT B
ARCHITECT'S COMPLETION CERTIFICATE
________________, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The [____________] Agreement, dated as of [____] (the
"Architect's Agreement"), between KLA-Tencor Corporation ("Lessee") and
[__________] ("Architect"); and
(b) The plans and specifications dated as of [_______] prepared by
Architect for certain improvements to the property located at
[_______________] (the "Plans and Specifications").
2. The undersigned hereby certifies to you as follows:
(a) The improvements contemplated by the Plans and Specifications
(the "Improvements") have been completed substantially in accordance with
such Plans and Specifications, a final certificate of occupancy has been
issued by the appropriate governmental agency, and the Improvements are
ready for use and occupancy.
(b) To the best of [my][our] knowledge, the Improvements as so
completed comply with all applicable laws, rule, regulations and
ordinances pertaining to the construction and occupancy thereof, including
applicable building and zoning laws, rule, regulations and ordinances, and
the Americans with Disabilities Act of 1990, 42 U.S.C. Section 1210 et
seq.
(c) No changes or modifications were made to the Plans and
Specifications after the date thereof that have had an adverse effect on
the value, use or useful life of the Property.
(d) Attached hereto are true and complete copies of an "as built"
or "record" set of the plans and specifications for the Improvements, and
an ALTA survey of the property "as built" showing all paving, driveways,
fences and exterior improvements.
D-11
<PAGE> 222
IN WITNESS WHEREOF, the undersigned has executed this Architect's
Completion Certificate on the date set forth above.
[Name of Architectural Firm]
By: _____________________________________
Name: _______________________________
Title: ______________________________
D-12
<PAGE> 223
EXECUTION COPY
================================================================================
CONSTRUCTION AGENCY AGREEMENT
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
D-13
<PAGE> 224
<TABLE>
<S> <C> <C>
SECTION 1. INTERPRETATION.................................................................................2
1.01. Definitions....................................................................................2
1.02. Rules of Construction..........................................................................2
SECTION 2. APPOINTMENT; AUTHORITY.........................................................................2
2.01. Appointment....................................................................................2
2.02. Scope of Authority.............................................................................2
2.03. Delegation of Duties...........................................................................2
SECTION 3. LESSEE'S OBLIGATIONS AND DUTIES................................................................2
3.01. Plans and Specifications.......................................................................2
3.02. Construction Agreements........................................................................3
3.03. Permits, Approvals, Etc........................................................................3
3.04. Material and Supplies..........................................................................3
3.05 Construction...................................................................................4
3.06. Insurance......................................................................................5
3.07. Fees, Costs and Expenses.......................................................................5
3.08. Books and Records..............................................................................5
3.09. Additional Obligations and Duties..............................................................5
SECTION 4. MISCELLANEOUS..................................................................................5
4.01. Notices........................................................................................5
4.02. Waivers; Amendments............................................................................6
4.03. Successors and Assigns.........................................................................6
4.04. No Third Party Rights..........................................................................6
4.05. Partial Invalidity.............................................................................6
4.06. Governing Law..................................................................................6
4.07. Counterparts...................................................................................6
4.08. Nature of Lessee's Obligations.................................................................6
</TABLE>
D-14
<PAGE> 225
EXHIBITS
- --------
A Lessee's Completion Certificate (3.05(c))
B Architect's Completion Certificate (3.05(c)
D-15
<PAGE> 226
EXHIBIT E
ACQUISITION REQUEST
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12, 1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
[Insert the following for the Initial Acquisition Advances]
[2. Pursuant to Subparagraph 2.03(a) of the Participation Agreement,
Lessee hereby irrevocably requests Lessor to make the Initial Acquisition
Advances as follows:
(a) The Initial Acquisition Advances shall consist of the
following:
(i) An Acquisition Advance in the amount of $____________
which shall be used to pay (A) $___________ on account of the Phase
IIA Termination Payment and (B) $___________ on account of Permitted
Transaction Expenses related or allocable to the Tract 1 Property;
(ii) An Acquisition Advance in the amount of $____________
which shall be used to pay (A) $___________ on account of the
purchase price for the Tract 2 Land and the Improvements and
Appurtenant Rights thereto [and the Related Goods described under
the heading "Tract 2 Related Goods" in Attachment 1 hereto]; and (B)
$___________ on account of Permitted Transaction Expenses related or
allocable to the Tract 2 Property;
(iii) An Acquisition Advance in the amount of $____________
which shall be used to pay (A) $___________ on account of the
purchase price for the Existing Improvements to the Tract 3 Land
[and the Related Goods described under the heading "Tract 3 Related
Goods" in Attachment 1 hereto]; and (B) $___________ on account of
Permitted Transaction Expenses related or allocable to the Tract 3
Property; and
E-1
<PAGE> 227
(iv) An Acquisition Advance in the amount of $____________
which shall be used to pay (A) $___________ on account of the Phase
IIB Termination Payment and (B) $___________ on account of Permitted
Transaction Expenses related or allocable to the Tract 5 Property;
(b) The Initial Acquisition Advances shall be made on ___________,
1997 (the "Closing Date"); and
(c) [Insert one of the following as appropriate]
[The Initial Acquisition Advances shall consist of the
following Portion[s] [with the following initial Rental Period[s]]:
Portion Rental Period
------- -------------
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]]
[The Initial Acquisition Advances shall consist of a single
Portion with an initial Rental Period that ends on [December 1, 1997].]]
[Insert the following for the Tract 4 Acquisition Advance]
[2. Pursuant to Subparagraph 2.03(a) of the Participation Agreement,
Lessee hereby irrevocably requests Lessor to make the Tract 4 Acquisition
Advance as follows:
(a) The Tract 4 Acquisition Advance shall be in the amount of
$____________ which shall be used to pay (A) $___________ on account of
the purchase price for the Tract 4 Land and the Improvements and
Appurtenant Rights thereto [and the Related Goods described under the
heading "Tract 4 Related Goods" in Attachment 1 hereto];and (B)
$___________ on account of Permitted Transaction Expenses related or
allocable to the Tract 4 Property;
(b) The Tract 4 Acquisition Advance shall be made on ___________,
1997; and
(c) [Insert one of the following as appropriate]
[The Tract 4 Acquisition Advance shall consist of the
following Portion[s] [with the following initial Rental Period[s]]:
Portion Rental Period
------- -------------
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]]
E-2
<PAGE> 228
[The Tract 4 Acquisition Advance shall consist of a single
Portion with an initial Rental Period that ends on [_________ 1, 199_].]]
3. Lessee hereby certifies to the Lessor Parties that, on the date of
this Acquisition Request and after giving effect to the use of the requested
Acquisition Advance[s] as described above:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing;
(c) All of the Operative Documents are in full force and effect;
(d) No action, suit or other proceeding affecting the title to, or
the use, operation or value of, the applicable Property (including any
proceeding for Condemnation or under any Environmental Law) is pending or,
to the best of Lessee's knowledge, threatened; and
(e) No Casualty affecting the applicable Property has occurred.
4. Please disburse the proceeds of the Acquisition Advance to
IN WITNESS WHEREOF, Lessee has executed this Acquisition Request on the
date set forth above.
KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ______________________
E-3
<PAGE> 229
EXHIBIT F
IMPROVEMENT/EXPENSE ADVANCE REQUEST
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12, 1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
2. Pursuant to Subparagraph 2.03(b) of the Participation Agreement,
Lessee hereby irrevocably requests Lessor to make Improvement/Expense Advances
as follows:
(a) [Insert one of the following as appropriate]
[Such Improvement/Expense Advances shall be in the aggregate
amount of $________ and shall consist of (1) an Improvement/Expense
Advance in the amount of $________ related or allocable to the Tract __
Property, (2) an Improvement/Expense Advance in the amount of $________
related or allocable to the Tract __ Property and (3) an
Improvement/Expense Advance in the amount of $________ related or
allocable to the Tract __ Property;]
[Such Improvement/Expense Advance shall be in the amount of
$________ and is related or allocable to the Tract __ Property;] and
(b) The date of such Improvement/Expense Advance[s] shall be
____________, ____ (the "Advance Date").
3. [Lessee will use $________ of the proceeds of the requested
Improvement/Expense Advance to pay the costs for the Related Goods described in
the Supplement to Exhibit B to the Lease Agreement which is attached hereto. Of
such amount, [(1) $________ will be used to purchase Related Goods related or
allocable to the Tract __ Property,
F-1
<PAGE> 230
(2) $________ will be used to purchase Related Goods related or allocable to the
Tract __ Property and (3) $________ will be used to purchase Related Goods
related or allocable to the Tract __ Property]. Bills of sale for all such
Related Goods, each showing Lessor as the purchaser, also are attached
hereto.][Whenever the requested Improvement/Expense Advance is to be used to pay
for Related Goods, include the preceding three sentences, complete and attach an
Exhibit B Supplement describing the Related Goods and attach the applicable
bills of sale.] Lessee will use the [remaining] proceeds of such
Improvement/Expense Advance to pay the costs and expenses set forth in
Attachment 1 hereto. All such costs and expenses are Permitted Improvement Costs
and/or Permitted Transaction Expenses which are now due and payable. No prior
Advance has been requested to pay any such costs and expenses.
4. Lessee hereby certifies to the Lessor Parties that, on the date of
this Improvement/Expense Advance Request and after giving effect to the
requested Improvement/Expense Advance:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
5. Please disburse the proceeds of the Improvement/Expense Advance to
___________________________________________________.
F-2
<PAGE> 231
IN WITNESS WHEREOF, Lessee has executed this Improvement/Expense Advance
Request on the date set forth above.
KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ______________________
F-3
<PAGE> 232
ATTACHMENT 1
TO
IMPROVEMENT/EXPENSE ADVANCE REQUEST
F-4
<PAGE> 233
EXHIBIT G(1)
COMMITMENT EXTENSION REQUEST
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12, 1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
2. Pursuant to Subparagraph 2.09(a) of the Participation Agreement,
Lessee hereby irrevocably requests Lessor to extend (and the Participants to
consent to such extension) the Unused Total Commitment ($___________) for an
additional six (6) months by extending the current Commitment Termination Date
from [__________] to [__________].
3. Lessee hereby certifies to the Lessor Parties that, on the date of
this Commitment Extension Request and after giving effect to the extension
requested hereby:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
G(1)-1
<PAGE> 234
IN WITNESS WHEREOF, Lessee has executed this Commitment Extension Request
on the date set forth above.
KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ______________________
CONSENT
The undersigned hereby consents to the extension of the Commitment
Termination Date requested above.
_________________________________
By: _____________________________
Name: _______________________
Title: ______________________
Date: ___________________________
G(1)-2
<PAGE> 235
EXHIBIT G(2)
LEASE EXTENSION REQUEST
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12, 1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
2. Pursuant to Subparagraph 2.09(b) of the Participation Agreement,
Lessee hereby irrevocably requests Lessor to extend (and the Participants to
consent to such extension) the Term of the Lease Agreement for an additional two
(2) years by extending the current Scheduled Expiration Date from [__________]
to [__________].
3. Lessee hereby certifies to the Lessor Parties that, on the date of
this Lease Extension Request and after giving effect to the extension requested
hereby:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on such
date (except for representations and warranties expressly made as of a
specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
G(2)-1
<PAGE> 236
IN WITNESS WHEREOF, Lessee has executed this Lease Extension Request on
the date set forth above.
KLA-Tencor Corporation
By: _____________________________
Name: _______________________
Title: ______________________
CONSENT
The undersigned hereby consents to the extension of the Scheduled
Expiration Date requested above upon the terms set forth in the attachment
hereto.
_________________________________
By: _____________________________
Name: _______________________
Title: ______________________
Date: ___________________________
G(2)-2
<PAGE> 237
EXHIBIT H
ASSIGNMENT OF CONSTRUCTION AGREEMENTS
THIS ASSIGNMENT OF CONSTRUCTION AGREEMENTS (this "Agreement" herein),
dated as of November 12, 1997, is executed by
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"),
in favor of
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase price and other advances to be made by Lessor and
(b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including, without
limitation, the execution and delivery of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in
H-1
<PAGE> 238
this Agreement or any other Operative Document, shall have the respective
meaning given to that term in such Schedule 1.01 or in the provision of this
Agreement or other document, instrument or agreement referenced in such Schedule
1.01.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Agreement and the other
Operative Documents.
SECTION 2. ASSIGNMENT.
2.01. Assignment. Lessee hereby assigns to Lessor all of Lessee's right,
title and interest in, to and under all existing and future agreements and
contracts between Lessee and any other Person (collectively, the "Construction
Agreements") relating to the construction of any and all New Improvements on any
portion of the Land described in Exhibit A to the Lease Agreement, including,
without limitation, the agreements and contracts described in Exhibit A and all
future Construction Agreements which may be entered into by Lessee. Upon
execution of any new Construction Agreement, Lessee shall promptly notify Lessor
of such Construction Agreement. Upon Lessor's request, Lessee shall provide
Lessor with copies of the Construction Agreements.
2.02. Absolute Assignment. This Agreement constitutes a present and
absolute assignment to Lessor; provided, however, that Lessor may not enforce
the terms of the Construction Agreements except during continuance of an Event
of Default. Upon the occurrence of any Event of Default, Lessor may, in its sole
discretion, give notice to any of the contractors referred to in the
Construction Agreements or any other party to the Construction Agreements
(collectively, the "Contractors") of its intent to enforce the rights of Lessee
under the Construction Agreements and may initiate or participate in any legal
proceedings respecting the enforcement of said rights. Lessee acknowledges that,
by accepting this assignment, Lessor does not assume any of Lessee's obligations
under the Construction Agreements.
2.03. Contractor's Consent. In connection with the execution and delivery
to Lessor of this Agreement, Lessee shall obtain and deliver to Lessor consents
from each Contractor under each Construction Agreement in the form attached
hereto as Exhibit B (a "Contractor's Consent to Assignment"). Lessee shall
obtain and provide to Lessor a Contractor's Consent to Assignment for any new
Construction Agreements entered into by Lessee after the date hereof.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.
3.01. Representations and Warranties. Lessee represents and warrants to
Lessor that (a) all Construction Agreements entered into by Lessee are in full
force and effect and are enforceable and no default, or event which would
constitute a default after notice or the passage of time, or both, exists with
respect to said Construction Agreements; (b) all copies of the Construction
Agreements delivered to Lessor are complete and correct; and (c) Lessee has not
assigned any of its rights under the Construction Agreements.
3.02. Covenants. Lessee agrees (a) to pay and perform all obligations of
Lessee under the Construction Agreements; (b) to enforce the payment and
performance of all obligations of
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any other Person under the Construction Agreements; (c) not to revise, amend or
modify the existing Construction Agreements if such revision, amendment or
modification (either alone or together with all prior revisions, amendments or
modifications to such Construction Agreements) would result in Lessee's failure
to comply with the provisions of Section 3.01 of the Construction Agency
Agreement nor to enter into any future Construction Agreements without Lessor's
prior written approval which shall not be unreasonably withheld, except as
otherwise may be permitted by the Operative Documents; and (d) not to further
assign, for security or any other purposes, its rights under the Construction
Agreements without Lessor's prior written approval.
SECTION 4. MISCELLANEOUS.
4.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this Agreement shall be given as provided in Subparagraph
2.02(c) and Paragraph 7.01 of the Participation Agreement.
4.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
4.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
4.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
4.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
4.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
[The signature page follows.]
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IN WITNESS WHEREOF, Lessee has caused this Agreement to be executed as of
the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ______________________
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EXHIBIT A
CONSTRUCTION AGREEMENTS
NONE
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EXHIBIT B
CONTRACTOR'S CONSENT TO ASSIGNMENT
1. Reference is made to (a) the property located at [___________] (the
"Property") and (b) the agreement[s] described in Attachment 1 hereto between
KLA-Tencor Corporation ("Lessee") and the undersigned ("Contractor").
2. Lessee has notified Contractor that, pursuant to an Assignment of
Construction Agreements dated as of November 12, 1997 between Lessee and Lease
Plan U.S.A., Inc. ("Lessor") (the "Assignment"), Lessee has assigned to Lessor
the agreement[s] described in Attachment 1 hereto and all future agreements and
contracts between Lessee and Contractor relating to the construction,
maintenance or repair of any improvements to the Property (collectively, the
"Construction Agreements").
3. Contractor hereby consents to the Assignment and agrees as follows
for the benefit of Lessor:
(a) Except with the prior written approval of Lessor, Contractor
shall not perform any construction work pursuant to any change in the
plans and specifications as set forth or attached to the Construction
Agreements where such change would affect the structural integrity,
quality of building material or equipment or overall efficiency of
operating systems or utility systems of the improvements. The liens of
Lessor's security interests shall have priority over any claim of lien of
Contractor arising out of or in any way connected with any construction
work performed by Contractor on the Property.
(b) If requested by Lessor in the exercise of Lessor's rights
under the Assignment, Contractor shall continue to perform its obligations
under the Construction Agreements in accordance with the terms thereof.
Contractor acknowledges that Lessor may have no means of discovering when
or if Contractor claims a default under the Construction Agreements and
agrees that it will give Lessor prior written notice of any default
claimed by Contractor under the Construction Agreements. Said notice shall
set forth a description of the default and a request to Lessor to cure the
same within thirty (30) days. Said notice shall be deemed served upon
delivery or, if mailed, upon the first to occur of receipt or the
expiration of seventy-two (72) hours after deposit in United States Postal
Service certified mail, postage prepaid and addressed to the address of
Lessor appearing below. No termination of the Construction Agreements by
Contractor shall be binding upon Lessor unless Lessor has received such
notice and has failed to cure the described default within said thirty
(30) days. Contractor further acknowledges that, unless and until Lessor
elects to exercise its rights under the Assignment and requests
Contractor's performance under the Construction Agreements in writing,
Lessor neither undertakes nor assumes any obligations or liability under
the Construction Agreements.
(c) Contractor shall hold in trust all money disbursed to or
otherwise received by Contractor from or on account of Lessee in
connection with the construction of the
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improvements and shall use such money solely for the payment of costs
incurred in the construction of the improvements, including Contractor's
fees, and for no other purpose, until all bills, claims and demands for
such costs have been paid in full.
IN WITNESS WHEREOF, Contractor has executed this Consent on this
___________ day of __________, ____.
[________________________________]
By: _____________________________
Name: _______________________
Title: ________________________
Contractor's Address:
[________________________________]
[________________________________]
[________________________________]
[________________________________]
Lessor's Address:
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street
Suite 711
Chicago, IL 60603
Attn: David M. Shipley
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EXECUTION COPY
================================================================================
ASSIGNMENT OF CONSTRUCTION AGREEMENTS
BY
KLA-TENCOR CORPORATION
IN FAVOR OF
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
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EXHIBIT I
ASSIGNMENT OF LEASE
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
THIS ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT (this
"Assignment" herein), dated as of November 12, 1997, is executed by:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor")
in favor of
(2) ABN AMRO BANK N.V., as agent for the Participants under the
Participation Agreement referred to in Recital B below (in such capacity,
"Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), has
requested Lessor and the financial institutions which are "Participants" under
the Participation Agreement referred to in Recital B below (such financial
institutions to be referred to collectively as the "Participants") to provide to
Lessee a certain lease facility. Pursuant to such facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and
Agent, Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including,
without limitation, the execution and delivery of (1) the Lease Agreement dated
as of November 12, 1997 between Lessee and Lessor (the "Lease Agreement"),
pursuant to which Lessee has leased from Lessor the lots, pieces, tracts and
parcels of land described in Exhibit A (the "Land") and the other property
described in the Lease Agreement (the "Property"), (2) the Purchase Agreement
dated as of November 12, 1997 between Lessee and Lessor (the "Purchase
Agreement"), pursuant to which Lessee may purchase the Property from Lessor
under certain circumstances, and (3) this Assignment.
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AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 7. INTERPRETATION.
7.01. Definitions. Unless otherwise indicated in this Assignment or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Assignment or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Assignment or other document, instrument or
agreement referenced in such Schedule 1.01.
7.02. Rules of Construction. Unless otherwise indicated in this Assignment
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Assignment and the other
Operative Documents.
SECTION 8. ASSIGNMENT.
8.01. Assignment. As security for the Lessor Obligations, Lessor hereby
irrevocably and unconditionally grants, conveys, transfers and assigns to Agent,
for the benefit of the Participants and Agent, all estate, right, title and
interest of Lessor, whether now owned or hereafter acquired, in the Lease
Agreement and the Purchase Agreement, including all claims and rights to the
payment of money at any time arising in connection with any repudiation,
rejection or breach of either agreement by Lessee or a trustee or receiver of
Lessee in any bankruptcy, insolvency or similar proceeding.
8.02. Receipt of Rents, Etc. Lessor hereby irrevocably designates Agent
(or its designee) to receive all Rents and other payments to be made by Lessee
under the Lease Agreement and the Purchase Agreement. Lessor shall direct (and
hereby directs) Lessee to deliver to Agent (or its designee), at its address set
forth in the Participation Agreement or at such other address or to such other
Person as Agent shall designate, all such payments, and no delivery thereof by
Lessee shall be of any force or effect unless made to Agent (or its designee),
as herein provided. Lessor and Agent agree that Lessee, in making such payments
to Agent pursuant to the directions contained in this Assignment and in reliance
on such directions shall be deemed to have satisfied its obligation for such
payments under the Lease Agreement.
8.03. Irrevocability; Supplemental Instruments. Lessor agrees that (a)
this Assignment is irrevocable, (b) Lessor will not take any action under the
Lease Agreement or the Purchase Agreement or otherwise which is inconsistent
with this Assignment, (c) any action, assignment, designation or direction
inconsistent herewith shall be void and (d) Lessor will from time to time
execute and deliver all instruments of further assurance and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Assignment.
8.04. Validity. Lessor represents, warrants, covenants and agrees that (a)
Lessor has not assigned or executed any assignment of, and will not assign or
execute any assignment of, Lessor's estate, right, title or interest in the
Lease Agreement or the Purchase Agreement to
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anyone other than Agent, (b) any such assignment is void, and (c) Lessor has not
taken any action that impairs the rights of Agent hereunder.
8.05. Lessor Remains Liable. The assignment made hereby is made for the
purpose of securing the Lessor Obligations only and does not (a) impair or
diminish in any way the obligations of Lessor under the Lease Agreement or the
Purchase Agreement or (b) obligate Agent (or its designee) or any Participant to
perform any of the obligations of Lessor under the Lease Agreement or the
Purchase Agreement. This Assignment shall not operate to cause Agent (or its
designee) to be regarded as a mortgagee in possession.
8.06. Effect of Amendments. If the Lease Agreement or the Purchase
Agreement shall be amended, it shall continue to be subject to the provisions
hereof without the necessity of any further act by any of the parties hereto.
8.07. Absolute Assignment. Lessor has, subject to and in accordance with
the terms and conditions of this Assignment, assigned and transferred unto Agent
all of Lessor's right, title and interest in and to all Rents and other amounts
now or hereafter payable by Lessee under the Lease Agreement and the Purchase
Agreement, it being intended to establish an absolute transfer and assignment,
subject to and in accordance with the terms and conditions of this Assignment,
of all such Rents and other amounts to Agent and not merely to grant a security
interest therein. Subject to the Lease Agreement, Agent (or its designee) may,
in Lessor's name and stead, operate the Property and rent, lease or let all or
any portion of the Property to any party or parties at such rental and upon such
terms as Agent (or its designee) shall, in its discretion, determine.
8.08. Receivers. If, notwithstanding the terms of this Assignment, a
petition or order for sequestration of rents, or the appointment of a receiver
or some similar judicial action or order is deemed required under applicable
California law to allow Agent to continue to collect the Rents and other amounts
payable by Lessee under the Lease Agreement or the Purchase Agreement, then it
is agreed by Lessor that any proof of claim or similar document filed by Agent
in connection with the breach or rejection of the Lease Agreement or the
Purchase Agreement by Lessee thereunder or the trustee of any lessee under any
federal or state bankruptcy, insolvency or other similar law shall, for the
purpose of perfecting Agent's rights, be deemed to constitute action required
under such California law. Upon the occurrence and during the continuance of an
Event of Default, Lessor hereby consents to the appointment of a receiver for
Lessor's interest in the Property without regard to the solvency of Lessor or to
the collateral that may be available for the satisfaction of the Lessor
Obligations.
SECTION 9. MISCELLANEOUS.
9.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Assignment shall be given as provided in Paragraph
7.01 of the Participation Agreement.
9.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Assignment may be amended or waived only as provided in the Participation
Agreement. No failure or delay by Agent in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other
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further exercise thereof or of any other right. Unless otherwise specified
in any such waiver or consent, a waiver or consent given hereunder shall be
effective only in the specific instance and for the specific purpose for which
given.
9.03. Successors and Assigns. This Assignment shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
9.04. No Third Party Rights. Nothing expressed in or to be implied from
this Assignment is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and their permitted successors and assigns, any
benefit or legal or equitable right, remedy or claim under or by virtue of this
Assignment or under or by virtue of any provision herein.
9.05. Partial Invalidity. If at any time any provision of this Assignment
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Assignment nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
9.06. Governing Law. This Assignment shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
9.07. Counterparts. This Assignment may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
[The signature page follows.]
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IN WITNESS WHEREOF, Lessor has caused this Assignment to be executed as of
the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By: _____________________________
Name: _______________________
Title: ______________________
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<PAGE> 250
STATE OF CALIFORNIA )
) ss
COUNTY OF __________________ )
On _____________, 1997, before me, ___________________ a Notary Public in
and for the State of California, personally appeared , personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person(s)
whose name(s) is/are subscribed to the within instrument and acknowledged to me
that he/she/they executed the same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the instrument the person(s) or the
entity on behalf of which the person(s) acted, executed the instrument.
Witness my hand and official seal.
[SEAL]
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EXHIBIT A
LAND
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<PAGE> 252
EXHIBIT B
LESSEE'S CONSENT TO
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
November 12, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street, Suite 711
Chicago, IL 60603
ABN AMRO Bank N.V.,
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"),
Lease Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in
Schedule I to the Participation Agreement (the "Participants") and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the "Lease
Agreement"), between Lessee and Lessor;
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor; and
(d) The Assignment of Lease Agreement and Purchase Agreement,
dated as of November 12, 1997 (the "Assignment of Lease"), executed by
Lessor in favor of Agent.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Consent. Lessee hereby consents to the Assignment of Lease.
3. Payments. Lessee agrees to pay and deliver to Agent (or its
designee) all Rents and other amounts payable by Lessee under the Lease
Agreement and the Purchase Agreement in accordance with the terms thereof.
Lessee will not, for any reason whatsoever, seek to recover from Agent (or its
designee) any moneys paid to Agent (or its designee) by virtue of the Assignment
of Lease.
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<PAGE> 253
4. Lessee's Other Agreements. Lessee hereby further agrees with Lessor
and Agent as follows:
(a) Lessee agrees (i) to deliver to Agent (or its designee) and
Lessor, at their addresses set forth in the Participation Agreement or at
such other addresses as Agent or Lessor, as the case may be, may
designate, duplicate originals or copies of all notices, undertakings,
demands, statements, documents and other communications which Lessee is
required or permitted to deliver pursuant to the Lease Agreement, the
Purchase Agreement or the Assignment of Lease; (ii) that any notice
delivered or declaration made to Lessee by Agent (or its designee)
pursuant to the Lease Agreement or the Purchase Agreement shall be
effective as a notice given or declaration made to Lessee by Lessor; (iii)
that Agent (or its designee) shall not by reason of the Assignment of
Lease be subject to any liability or obligation under the Lease Agreement
or the Purchase Agreement except as set forth in the Assignment of Lease;
and (iv) that any waiver, consent or approval by Lessor under the Lease
Agreement or the Purchase Agreement shall not be valid unless approved in
writing by Agent (or its designee).
(b) Lessee agrees to remain obligated under the Lease Agreement
and the Purchase Agreement in accordance with their respective terms, and
to take no action to terminate (other than in accordance with the terms
thereof), annul, rescind or avoid the Lease Agreement, the Purchase
Agreement or this Consent or to abate, reduce, offset, suspend or defer or
make any counterclaim or raise any defense (other than the defense of
payment to Agent (or its designee)) with respect to the Rents or other
amounts payable thereunder or to cease paying such amounts to Agent (or
its designee) as provided herein.
(c) Lessee hereby agrees that upon the occurrence of any Event of
Default, Agent (or its designee) shall have the right to deliver a notice
of default under the Lease Agreement, which shall be effective for all
purposes under the Lease Agreement as if sent by Lessor.
(d) Lessee shall notify Agent (or its designee) at its address
specified in the Participation Agreement, or such other address as Agent
may designate, of any default by Lessor under the Lease Agreement and
agrees that no such default shall entitle Lessee to terminate (other than
in accordance with the terms of the Lease Agreement), annul, rescind or
avoid the Lease Agreement or reduce or abate the Rents or other amounts
payable thereunder.
5. Amendment or Termination; Agent's Designation. Lessee agrees that it
will not, unilaterally or by agreement, subordinate, amend, supplement, modify,
extend (except in accordance with the express terms thereof), discharge, waive
or terminate (other than in accordance with the terms thereof) the Lease
Agreement, the Purchase Agreement or this Consent without Agent's prior written
consent, and that any attempted subordination, amendment, supplement,
modification, extension, discharge, waiver or termination in violation of this
Section 5 without such consent shall be null and void. In the event that the
Lease Agreement or the Purchase Agreement shall be amended or supplemented as
herein permitted, the Lease Agreement or the Purchase Agreement, as so amended
or supplemented, shall continue to be subject to the provisions of the
Assignment of
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Lease and this Consent without the necessity of any further act by any of the
parties thereto or hereto.
6. Continuing Obligations of Lessor and Lessee. Neither the execution
and delivery of the Assignment of Lease, nor any action or inaction on the part
of Agent shall impair or diminish any obligations of Lessor or Lessee under the
Lease Agreement or the Purchase Agreement, and shall not impose on Agent (or its
designee) any such obligations, nor shall it impose on Agent (or its designee) a
duty to produce Rents or cause Agent to be a mortgagee or pledgee in possession
for any purpose. Except as specifically set forth in this Consent, none of the
terms of the Assignment of Lease shall impose upon Lessee any greater
obligations than those set forth in the Lease Agreement, the Purchase Agreement
and the other Operative Documents.
7. Partial Invalidity. If at any time any provision of this Consent is
or becomes illegal, invalid or unenforceable in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the remaining
provisions of this Consent nor the legality, validity or enforceability of such
provision under the law of any other jurisdiction shall in any way be affected
or impaired thereby.
8. Governing Law. This Consent shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Lessee has executed this Consent on the date set forth
above.
LESSEE: KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ______________________
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RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
================================================================================
ASSIGNMENT OF LEASE AGREEMENT
AND PURCHASE AGREEMENT
BY
LEASE PLAN U.S.A., INC.
IN FAVOR OF
ABN AMRO BANK N.V.,
AS AGENT FOR THE PARTICIPANTS
NOVEMBER 12, 1997
================================================================================
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EXHIBIT J
LESSOR DEED OF TRUST
CONSTRUCTION DEED OF TRUST
THIS CONSTRUCTION DEED OF TRUST dated as of November 12, 1997 (this "Deed
of Trust"), is made by LEASE PLAN U.S.A., INC., a Georgia corporation, as
trustor ("Lessor"), with an address at 135 South LaSalle Street, Chicago, IL
60603, to SANTA CLARA LAND TITLE COMPANY, as trustee ("Trustee"), in favor of
ABN AMRO BANK N.V., with an address at 1325 Avenue of the Americas, 9th Floor,
New York, NY 10019, in its capacity as Agent, as beneficiary (in such capacity,
"Agent"), under the Participation Agreement, dated of even date herewith (as
amended, supplemented or otherwise modified from time to time, the
"Participation Agreement"), among KLA-Tencor Corporation, a Delaware corporation
("Lessee"), Lessor, Agent, and the financial institutions from time to time
parties to the Participation Agreement (the "Participants").
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Deed of Trust or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Deed of Trust or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Deed of Trust or other document, instrument or
agreement referenced in such Schedule 1.01. All terms defined in the UCC shall
have the respective meanings given to those terms in the UCC.
1.02. Rules of Construction. Unless otherwise indicated in this Deed of
Trust or any other Operative Document, the rules of construction set forth in
Schedule 1.02 to the Participation Agreement shall apply to this Deed of Trust
and the other Operative Documents.
SECTION 2. GRANT IN TRUST
2.01. Property. To secure payment of the Secured Obligations (as defined
below), Lessor does hereby GRANT, CONVEY, SELL, TRANSFER, ASSIGN AND SET OVER
UNTO TRUSTEE, IN TRUST FOR THE BENEFIT OF AGENT, WITH POWER OF SALE AND RIGHT OF
ENTRY AND POSSESSION, all of Lessor's right, title and interest, whether now
owned or hereafter acquired, in or to the following property and rights listed
below (such right, title and interest in such property and rights hereinafter
collectively referred to as the "Property") to the extent of Lessor's estate,
right, title and interest therein, thereto or thereunder:
(a) All lots, pieces, tracts and parcels of land described in
Exhibit A together with such additional parcels of real property as may be
added to Exhibit A from time to time during the term hereof (the "Land");
(b) All Improvements and Appurtenant Rights;
(c) All Related Goods (including those described in Exhibit B and
in each Exhibit B Supplement), Related Permits and Related Agreements; and
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(d) All accessions and accretions to and replacements and
substitutions for the foregoing.
SECTION 3. OBLIGATIONS SECURED
3.01. Obligations Secured. Lessor makes this grant and assignment for the
purpose of securing the following obligations (hereinafter "Secured
Obligations"):
(a) Full and punctual payment, performance and observance by
Lessor of the Lessor Obligations; and
(b) All modifications, extensions and renewals of any of the
obligations secured hereby, however evidenced, including, without
limitation: (i) modifications of the required payment, deferring or
accelerating payment dates wholly or partly; or (ii) amendments,
modifications, extensions or renewals of this Deed of Trust, the
Participation Agreement or any of the other Operative Documents.
SECTION 4. REPRESENTATIONS, WARRANTIES, COVENANTS AND DUTIES OF THE PARTIES.
4.01. Representations and Warranties. Lessor represents and warrants to
Agent as follows:
(a) Lessor is the legal and beneficial owner of the Property (or,
in the case of after-acquired Property, at the time Lessor acquires rights
in the Property, will be the legal and beneficial owner thereof).
(b) Lessor has not transferred to any other Person any of its
right, title or interest in the Property, whether by way of Lien or
otherwise.
(c) Lessor's chief executive office is located at 180 Interstate
Parkway North, Atlanta, Georgia 30339.
4.02. Covenants. Lessor hereby covenants to Agent as follows:
(a) Lessor shall promptly procure, execute and deliver to Agent
all documents, instruments and agreements and perform all acts which are
necessary or desirable, or which Agent may request, to establish,
maintain, preserve, protect and perfect the Property, the Lien granted to
Agent therein and the first priority of such Lien or to enable Agent to
exercise and enforce its rights and remedies hereunder with respect to any
Property.
(b) Lessor shall not sell, transfer or assign any of its right,
title or interest in the Property to any Person (other than Agent),
whether by way of Lien or otherwise.
(c) Without prompt written notice to Agent, Lessor shall not
change Lessor's name or chief executive office.
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4.03. Damages; Insurance and Condemnation Proceeds.
(a) Lessor shall give Agent prompt written notice of the
occurrence of any casualty affecting, or the institution of any
proceedings for eminent domain or for the condemnation of, the Property or
any portion thereof. Agent may participate in any such claims or
proceedings, and Agent is hereby authorized, in its own name or in
Lessor's name, to adjust any loss covered by insurance or any condemnation
claim or cause of action, and to settle or compromise any claim or cause
of action in connection therewith, and Lessor shall from time to time
deliver to Agent any and all further assignments and other instruments
required to permit such participation. The provisions regarding the
adjustment of any loss covered by insurance or any condemnation claim or
cause of action, and to settlement or compromise of any claim or cause of
action in connection therewith provided in this Section 4.03(a) are
subject to the adjustment, settlement and compromise provisions set forth
in the Lease Agreement. In the event of any conflict, the adjustment,
settlement and compromise provisions as provided in the Lease Agreement
shall govern.
(b) The following rights, claims and amounts are hereby absolutely
and irrevocably assigned to and shall be paid to Agent: (i) all awards of
damages and all other compensation payable directly or indirectly by
reason of a condemnation or proposed condemnation for public or private
use affecting all or any part of, or any interest in, the Property; (ii)
all other claims and awards for damages to or decrease in value of all or
any part of, or any interest in, the Property; (iii) all proceeds of any
insurance policies payable by reason of loss sustained to all or any part
of the Property; and (iv) all interest which may accrue on any of the
foregoing (collectively, "Loss Proceeds"). The provisions regarding Loss
Proceeds provided in this Section 4.03(b) are subject to the insurance and
condemnation provisions set forth in the Lease Agreement. In the event of
any conflict, the insurance and condemnation provisions as provided in the
Lease Agreement shall govern.
4.04. Acceptance of Trust; Powers and Duties of Trustee. Trustee accepts
this trust when this Deed of Trust is recorded. From time to time upon written
request of Agent and presentation of this Deed of Trust, or a certified copy
thereof, for endorsement, and without affecting the personal liability of any
person for payment of any indebtedness or performance of any Secured Obligation,
Trustee may, without liability therefor and without notice: (a) reconvey all or
any part of the Property; (b) consent to the making of any map or plat thereof;
(c) join in granting any easement thereon; (d) join in any declaration of
covenants and restrictions; or (e) join in any extension agreement or any
agreement subordinating the lien or charge hereof. Except as may otherwise be
required by applicable law, Trustee or Agent may from time to time apply to any
court of competent jurisdiction for aid and direction in the execution of the
trusts hereunder and the enforcement of the rights and remedies available
hereunder, and Trustee or Agent may obtain orders or decrees directing or
confirming or approving acts in the execution of said trusts and the enforcement
of said remedies. Trustee has no obligation to notify any party of any pending
sale or any action or proceeding (including, without limitation, actions in
which Lessor, Agent or Trustee shall be a party) unless held or commenced and
maintained by Trustee under this Deed of Trust. Trustee shall not be obligated
to perform any act required of it
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hereunder unless the performance of the act is requested in writing and Trustee
is reasonably indemnified and held harmless against loss, cost, liability and
expense.
4.05. Substitution of Trustee. From time to time, by a writing signed and
acknowledged by Agent and recorded in the Office of the Recorder of the County
in which the Property is situated, Agent may appoint another trustee to act in
the place and stead of Trustee or any successor. Such writing shall set forth
any information required by law. The recordation of such instrument of
substitution shall discharge Trustee herein named and shall appoint the new
trustee as the trustee hereunder with the same effect as if originally named
trustee herein. A writing recorded pursuant to the provisions of this paragraph
shall be conclusive proof of the proper substitution of such new trustee.
4.06. Partial and Full Reconveyance. Agent may release, for such
consideration or none, as it may require, any portion of the Property without,
as to the remainder of the Property, in any way impairing or affecting the lien,
security interest and priority herein provided to the Agent as to any other lien
holder or secured party. Further, upon satisfaction in full of the Secured
Obligations, or upon Agent's written request, and upon surrender of this Deed of
Trust or certified copy thereof and any note, instrument or instruments setting
forth all obligations secured hereby to Trustee for cancellation, Trustee shall
reconvey, without warranty, the Property or that portion thereof then held
hereunder. The recitals of any matters or facts in any reconveyance executed
hereunder shall be conclusive proof of the truthfulness thereof. To the extent
permitted by law, the reconveyance may describe the grantee as "the person or
persons legally entitled thereto." Neither Agent nor Trustee shall have any duty
to determine the rights of persons claiming to be rightful grantees of any
reconveyance.
4.07. Releases, Extensions, Modifications and Additional Security. Agent
may, from time to time, release any person or entity from liability for the
payment or performance of any Secured Obligation, take any action or make any
agreement extending the maturity or otherwise altering the terms or increasing
the amount of any Secured Obligation, or accept additional security or release
all or a portion of the Property and other security for the Secured Obligations.
None of the foregoing actions shall release or impair the priority of the lien
of this Deed of Trust upon the Property.
SECTION 5. DEFAULT; REMEDIES.
5.01. Event of Default. The occurrence of any of the following events
shall be deemed an event of default ("Event of Default") hereunder:
(a) The occurrence of an Event of Default as defined in the Lease
Agreement; or
(b) Lessor shall fail to observe, perform or discharge any of
Lessor's Obligations, and (i) such failure shall remain uncured for thirty
(30) days after written notice thereof shall have been given to Lessor by
Agent, or (ii) if such failure is of such a nature that it cannot be cured
within such thirty (30) day period, Lessor shall fail to commence to cure
such failure within such thirty (30) day period or shall fail to
diligently prosecute such curative action thereafter.
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5.02. Rights and Remedies. At any time after the occurrence and during the
continuance of an Event of Default, Agent and Trustee shall each have all of the
following rights and remedies:
(a) Appointment of a Receiver. To apply to any court of competent
jurisdiction for, and obtain appointment of, a receiver for the Property.
(b) Specific Performance. To bring an action in any court of
competent jurisdiction to obtain specific enforcement of any of the
covenants or agreements of Lessor in this Deed of Trust or any of the
other Operative Documents.
(c) Collection of Issues and Profits. To collect Issues and
Profits.
(d) Protection of Property. To enter, take possession of, manage
and operate all or any part of the Property or take any other actions
which it reasonably determines are necessary to protect the Property and
the rights and remedies of Agent under this Deed of Trust and the other
Operative Documents, including (i) taking and possessing all of Lessor's
books and records; (ii) entering into, enforcing, modifying, or canceling
subleases on such terms and conditions as Agent may consider proper; (iii)
obtaining and evicting tenants; (iv) fixing or modifying sublease rents;
(v) collecting and receiving any payment of money owing to Lessee; (vi)
completing any unfinished Improvements; and/or (vii) contracting for and
making repairs and alterations.
(e) Uniform Commercial Code Remedies. To exercise any or all of
the remedies granted to a secured party under the California Uniform
Commercial Code.
(f) Judicial Foreclosure. To bring an action in any court of
competent jurisdiction to foreclose the security interest in the Property
granted to Agent by this Deed of Trust or any of the other Operative
Documents.
(g) Power of Sale. To cause some or all of the Property, including
any Personal Property Collateral, to be sold under a power of sale or
otherwise disposed of in any combination and in any manner permitted by
applicable Governmental Rules.
(i) Sales of Personal Property. Agent may dispose of any
Personal Property Collateral separately from the sale of Real
Property Collateral, in any manner permitted by Division 9 of the
California Uniform Commercial Code, including any public or private
sale, or in any manner permitted by any other applicable
Governmental Rule. Any proceeds of any such disposition shall not
cure any Event of Default or reinstate any Lessor Obligation for
purposes of Section 2924c of the California Civil Code. In
connection with any such sale or other disposition, Lessor agrees
that the following procedures constitute a commercially reasonable
sale:
(A) Agent shall mail written notice of the sale to
Lessor not later than thirty (30) days prior to such sale.
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(B) Once per week during the three weeks immediately
preceding such sale, Agent will publish notice of the sale in
a local daily newspaper of general circulation.
(C) Upon receipt of any written request, Agent will
make the Property available to any bona fide prospective
purchaser for inspection during reasonable business hours.
(D) Notwithstanding anything to the contrary herein,
Agent shall be under no obligation to consummate a sale if, in
its judgment, none of the offers received by it equals the
fair value of the Property offered for sale.
(E) If Agent so requests, Lessor shall assemble all of
the Personal Property Collateral and make it available to
Agent at the site of the Land. Regardless of any provision of
this Deed of Trust or any other Operative Document, Agent
shall not be considered to have accepted any property other
than cash or immediately available funds in satisfaction of
any Lessor Obligation, unless Agent has given express written
notice of its election of that remedy in accordance with
California Uniform Commercial Code Section 9505.
The foregoing procedures do not constitute the only procedures that
may be commercially reasonable.
(ii) Agent's Sales of Real Property or Mixed Collateral.
Agent may choose to dispose of some or all of the Property which
consists solely of Real Property Collateral in any manner then
permitted by applicable Governmental Rules, including without
limitation a nonjudicial trustee's sale pursuant to California Civil
Code ss.ss. 2924 et seq. In its discretion, Agent may also or
alternatively choose to dispose of some or all of the Property, in
any combination consisting of both Real Property Collateral and
Personal Property Collateral, together in one sale to be held in
accordance with the law and procedures applicable to real property,
as permitted by Section 9501(4) of the California Uniform Commercial
Code. Lessor agrees that such a sale of Personal Property Collateral
together with Real Property Collateral constitutes a commercially
reasonable sale of the Personal Property Collateral. (For purposes
of this power of sale, either a sale of Real Property Collateral
alone, or a sale of both Real Property Collateral and Personal
Property Collateral together in accordance with California Uniform
Commercial Code Section 9501(4), will sometimes be referred to as an
"Agent's Sale.")
(A) Before any Agent's Sale, Agent shall give such
notice of default and election to sell as may then be required
by applicable Governmental Rules.
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(B) When all time periods then legally mandated have
expired, and after such notice of sale as may then be legally
required has been given, Agent shall sell the property being
sold at a public auction to be held at the time and place
specified in the notice of sale.
(C) Agent shall have no obligation to make demand on
Lessor before any Agent's Sale.
(D) From time to time in accordance with then
applicable law, Agent may postpone any Agent's Sale by public
announcement at the time and place noticed for that sale.
(E) At any Agent's Sale, Agent shall sell to the
highest bidder at public auction for cash in lawful money of
the United States.
(F) Agent shall execute and deliver to the
purchaser(s) a deed or deeds conveying the Property being sold
without any covenant or warranty whatsoever, express or
implied. The recitals in any such deed of any matters or
facts, including any facts bearing upon the regularity or
validity of any Agent's Sale, shall be conclusive proof of
their truthfulness. Any such deed shall be conclusive against
all Persons as to the facts recited in it.
(h) Foreclosure Sales.
(i) Single or Multiple. If the Property consists of more
than one lot, parcel or item of property, Agent may:
(A) Designate the order in which the lots, parcels
and/or items shall be sold or disposed of or offered for sale
or disposition; and
(B) Elect to dispose of the lots, parcels and/or items
through a single consolidated sale or disposition to be held
or made under the power of sale granted under this Deed of
Trust, or in connection with judicial proceedings, or by
virtue of a judgment and decree of foreclosure and sale; or
through two or more such sales or dispositions; or in any
other manner Agent may deem to be in its best interests (any
such sale or disposition, a "Foreclosure Sale;" any two or
more, "Foreclosure Sales").
If Agent chooses to have more than one Foreclosure Sale, Agent at
its option may cause the Foreclosure Sales to be held simultaneously
or successively, on the same day, or on such different days and at
such different times and in such order as it may deem to be in its
best interests. No Foreclosure Sale shall terminate or affect the
security interests granted to Agent in the Property by this Deed of
Trust on any part of the Property which has not been sold, until all
of the Lessor Obligations have been performed in full.
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(ii) Credit Bids. At any Foreclosure Sale, any Person,
Participant or Agent may bid for and acquire the Property or any
part of it to the extent permitted by then applicable Governmental
Rules. Instead of paying cash for that property, Agent may settle
for the purchase price by crediting the sales price of the Property
against the Lessor Obligations in any order and proportions as Agent
in its sole discretion may choose.
(i) Other Rights and Remedies. To exercise any other right, power
or remedy permitted to it by any applicable Governmental Rule, either by
suit in equity or by action at law, or both.
5.03. Remedies Cumulative. The rights and remedies of Agent under this
Deed of Trust and the other Operative Documents are cumulative and may be
exercised singularly, successively, or together.
5.04. No Cure or Waiver. The exercise by Agent of any of its other rights
and remedies under this Deed of Trust or any other Operative Document (including
the collection of Issues and Profits) shall not constitute a cure or waiver of
any Event of Default or nullify the effect of any notice of default or sale,
unless and until all Lessor Obligations are performed in full.
5.05. Exercise of Rights and Remedies. The rights and remedies provided to
Agent under this Deed of Trust may be exercised by Agent itself, by a
court-appointed receiver or by any other Person appointed by any of the
foregoing to act on its behalf. All of the benefits afforded to Agent under this
Deed of Trust and the other Operative Documents shall accrue to the benefit of
the Participants to the extent provided in Subparagraph 2.02(c) of the
Participation Agreement.
SECTION 6. MISCELLANEOUS PROVISIONS
6.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Deed of Trust shall be given as provided in Paragraph
7.01 of the Participation Agreement.
6.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Deed of Trust may be amended or waived only as provided in the
Participation Agreement. No failure or delay by Agent in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
6.03. Successors and Assigns. This Deed of Trust shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
6.04. No Third Party Rights. Nothing expressed in or to be implied from
this Deed of Trust is intended to give, or shall be construed to give, any
Person, other than the Lessor Parties
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and their permitted successors and assigns, any benefit or legal or equitable
right, remedy or claim under or by virtue of this Deed of Trust or under or by
virtue of any provision herein.
6.05. Partial Invalidity. If at any time any provision of this Deed of
Trust is or becomes illegal, invalid or unenforceable in any respect under the
law or any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Deed of Trust nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
6.06. Governing Law. This Deed of Trust shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
6.07. Counterparts. This Deed of Trust may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
6.08. Further Assurances. Lessor shall, upon demand by Agent or Trustee,
execute, acknowledge (if appropriate) and deliver any and all documents and
instruments and do or cause to be done all further acts reasonably necessary or
appropriate to effectuate the provisions hereof.
6.09. Merger. No merger shall occur as a result of Agent's acquiring any
other estate in, or any other lien on, the Property unless Agent consents to a
merger in writing.
6.10. Waiver of Marshalling Rights. Lessor, for itself and for all parties
claiming through or under Lessor, and for all parties who may acquire a lien on
or interest in the Property, hereby waives all rights to have the Property
and/or any other property which is now or later may be security for any Secured
Obligation marshalled upon any foreclosure of this Deed of Trust or on a
foreclosure of any other security for any of the Secured Obligations.
6.11. Exhibits. Exhibit A is incorporated into this Deed of Trust by this
reference.
6.12 Subordinate Deed of Trust. This Deed of Trust is junior and
subordinate to the Lease Agreement and the Purchase Agreement.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, Lessor has caused this Deed of Trust to be executed as
of the day and year first above written.
LEASE PLAN U.S.A., INC.,
a Georgia corporation
By: _____________________________
Name: _______________________
Title: ______________________
(ALL SIGNATURES MUST BE ACKNOWLEDGED)
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STATE OF CALIFORNIA )
)
COUNTY OF________________ )
On ___________ ___, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
____________________________________
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EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
ALL THAT CERTAIN REAL PROPERTY LOCATED IN THE COUNTY OF SANTA CLARA, CALIFORNIA,
DESCRIBED AS FOLLOWS:
APN: __________
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RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
- --------------------------------------------------------------------------------
CONSTRUCTION DEED OF TRUST
DATED AS OF NOVEMBER 12, 1997
BY
LEASE PLAN U.S.A., INC.,
AS TRUSTOR ("LESSOR")
TO
SANTA CLARA LAND TITLE COMPANY,
AS TRUSTEE
FOR THE BENEFIT OF
ABN AMRO BANK N.V., AS AGENT,
AS BENEFICIARY ("AGENT")
RELATING TO PROPERTY SITUATED IN:
SANTA CLARA COUNTY, CALIFORNIA
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EXHIBIT K
LESSOR SECURITY AGREEMENT
THIS LESSOR SECURITY AGREEMENT (this "Agreement" herein), dated as of
November 12, 1997, is executed by:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor"),
in favor of
(2) ABN AMRO BANK N.V., as agent for the Participants under the
Participation Agreement referred to in Recital B below (in such capacity,
"Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), has
requested Lessor and the financial institutions which are "Participants" under
the Participation Agreement referred to in Recital B below (such financial
institutions to be referred to collectively as the "Participants") to provide to
Lessee a certain lease facility. Pursuant to such facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as
Lessor's agent to make certain improvements to a portion of such property,
(d) make advances to finance such improvements and to pay certain related
expenses, and (e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain other
payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and
Agent, Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including,
without limitation, the execution and delivery of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to
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that term in such Schedule 1.01 or in the provision of this Agreement or other
document, instrument or agreement referenced in such Schedule 1.01. All terms
defined in the UCC shall have the respective meanings given to those terms in
the UCC.
1.02. Rules of Construction. Unless otherwise indicated in this Agreement
or any other Operative Document, the rules of construction set forth in Schedule
1.02 to the Participation Agreement shall apply to this Agreement and the other
Operative Documents.
SECTION 2. GRANT OF SECURITY INTEREST.
2.01. Grant. As security for the Lessor Obligations, Lessor hereby
irrevocably and unconditionally pledges and assigns to Agent, for the benefit of
the Participants and Agent, and grants to Agent, for the benefit of the
Participants and Agent, a security interest in all estate, right, title and
interest of Lessor, whether now owned or hereafter acquired, in and to the
following property (such estate, right, title and interest in such property
herein, collectively and severally, the "Lessor Collateral"):
(a) Operative Documents. The Participation Agreement, the
Construction Agency Agreement, the Purchase Agreement, the Lessee Security
Documents and all other Operative Documents (other than the Lease
Agreement); all exhibits, schedules and other attachments thereto; and all
documents, instruments or agreements issued or executed in replacement
thereof; each as amended, modified and supplemented from time to time and
in effect at any given time;
(b) Collateral. All Collateral for the Lessee Obligations under
the Operative Documents; and
(c) Proceeds. All proceeds of the foregoing (including, without
limitation, whatever is receivable or received when Lessor Collateral or
proceeds is sold, collected, exchanged, returned, substituted or otherwise
disposed of, whether such disposition is voluntary or involuntary,
including rights to payment and return premiums and insurance proceeds
under insurance with respect to any Lessor Collateral, and all rights to
payment with respect to any cause of action affecting or relating to the
Lessor Collateral).
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR.
3.01. Representations and Warranties. Lessor represents and warrants to
Agent and the Participants as follows:
(a) Lessor is the legal and beneficial owner of the Lessor
Collateral (or, in the case of after-acquired Lessor Collateral, at the
time Lessor acquires rights in the Lessor Collateral, will be the legal
and beneficial owner thereof).
(b) Lessor has not transferred to any other Person any of its
right, title or interest in the Lessor Collateral, whether by way of Lien
or otherwise.
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(c) Lessor's chief executive office is located at 180 Interstate
Parkway North, Atlanta, Georgia 30339.
3.02. Covenants. Lessor hereby covenants to Agent and the Participants as
follows:
(a) Lessor shall promptly procure, execute and deliver to Agent
all documents, instruments and agreements and perform all acts which are
necessary or desirable, or which Agent may request, to establish,
maintain, preserve, protect and perfect the Lessor Collateral, the Lien
granted to Agent therein and the first priority of such Lien or to enable
Agent to exercise and enforce its rights and remedies hereunder with
respect to any Lessor Collateral.
(b) Lessor shall not sell, transfer or assign any of its right,
title or interest in the Lessor Collateral to any Person (other than
Agent), whether by way of Lien or otherwise.
(c) Without prompt written notice to Agent, Lessor shall not
change Lessor's name or chief executive office.
SECTION 4. RIGHTS AND REMEDIES OF AGENT.
4.01. Authorized Action by Agent. Lessor hereby irrevocably appoints Agent
as its attorney-in-fact and agrees that Agent may perform (but Agent shall not
be obligated to and shall incur no liability to Lessor or any third party for
failure so to do) any act which Lessor is obligated by this Agreement to
perform, and to exercise such rights and powers as Lessor might exercise with
respect to the Lessor Collateral, including, without limitation, the right to
(a) collect by legal proceedings or otherwise and endorse, receive and receipt
for all dividends, interest, payments, proceeds and other sums and property now
or hereafter payable on or on account of the Lessor Collateral; (b) enter into
any extension, reorganization, deposit, merger, consolidation or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Lessor Collateral; (c) insure, process, preserve and enforce
the Lessor Collateral; (d) make any compromise or settlement, and take any
action it deems advisable, with respect to the Lessor Collateral; (e) pay any
Indebtedness of Lessor relating to the Lessor Collateral; and (f) execute UCC
financing statements. Lessor agrees that such care as Agent gives to the
safekeeping of its own property of like kind shall constitute reasonable care of
the Lessor Collateral when in Agent's possession; provided, however, that Agent
shall not be required to make any presentment, demand or protest, or give any
notice and need not take any action to preserve any rights against any prior
party or any other Person in connection with the Lessor Obligations or with
respect to the Lessor Collateral.
4.02. Other Rights and Remedies Upon Default. In addition to all other
rights and remedies granted to Agent by this Agreement and the other Operative
Documents, the UCC and other applicable Governmental Rules, Agent may, if Lessor
fails to perform any of the Lessor Obligations, exercise any one or more of the
following rights and remedies: (a) collect, receive, appropriate or realize upon
the Lessor Collateral or otherwise foreclose or enforce Agent's security
interests in any or all Lessor Collateral in any manner permitted by applicable
Governmental Rules or in this Security Agreement; (b) notify Lessee to make any
or all
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payments to be made by Lessee under the Operative Documents to Agent; (c) sell
or otherwise dispose of any or all Lessor Collateral at one or more public or
private sales, whether or not such Lessor Collateral is present at the place of
sale, for cash or credit or future delivery, on such terms and in such manner as
Agent may determine; (d) require Lessor to assemble the Lessor Collateral and
make it available to Agent at a place to be designated by Agent; and (e) prior
to the disposition of the Lessor Collateral, store, process, repair or
recondition any Lessor Collateral consisting of goods, perform any obligations
and enforce any rights of Lessor under any Operative Documents or otherwise
prepare and preserve Lessor Collateral for disposition in any manner and to the
extent Agent deems appropriate. In any case where notice of any sale or
disposition of any Lessor Collateral is required, Lessor hereby agrees that
thirty (30) days notice of such sale or disposition is reasonable.
SECTION 5. MISCELLANEOUS.
5.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Agreement shall be given as provided in Paragraph
7.01 of the Participation Agreement.
5.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by Agent in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right. Unless otherwise specified in any such waiver or consent,
a waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.
5.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
5.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and their permitted successors and assigns, any
benefit or legal or equitable right, remedy or claim under or by virtue of this
Agreement or under or by virtue of any provision herein.
5.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
5.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
5.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
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IN WITNESS WHEREOF, Lessor has caused this Agreement to be executed as of
the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By: _____________________________
Name: _______________________
Title: ______________________
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EXECUTION COPY
================================================================================
LESSOR SECURITY AGREEMENT
BY
LEASE PLAN U.S.A., INC.
IN FAVOR OF
ABN AMRO BANK N.V.,
AS AGENT
NOVEMBER 12, 1997
================================================================================
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EXHIBIT L
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT, dated as of the date set forth at the top of
Attachment 1 hereto, by and among:
(1) The party designated under item A of Attachment I hereto
as the Assignor Participant ("Assignor Participant"); and
(2) Each party designated under item B of Attachment I hereto
as an Assignee Participant (individually, an "Assignee Participant").
RECITALS
A. Assignor Participant is one of the "Participants" in a Participation
Agreement dated as of November 12, 1997, among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), Assignor Participant and the
other institutions parties thereto as "Participants" (collectively, the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). (Such Participation Agreement, as amended, supplemented or
otherwise modified in accordance with its terms from time to time to be referred
to herein as the "Participation Agreement").
B. Assignor Participant wishes to sell, and each Assignee Participant
wishes to purchase, all or a portion of Assignor Participant's rights under the
Participation Agreement pursuant to Subparagraph 7.05(b) of the Participation
Agreement.
AGREEMENT
Now, therefore, the parties hereto hereby agree as follows:
1. Definitions. Except as otherwise defined in this Assignment
Agreement, all capitalized terms used herein and defined in the Participation
Agreement have the respective meanings given to those terms in the Participation
Agreement.
2. Sale and Assignment. Subject to the terms and conditions of this
Assignment Agreement, Assignor Participant hereby agrees to sell, assign and
delegate to each Assignee Participant and each Assignee Participant hereby
agrees to purchase, accept and assume the rights, obligations and duties of a
Participant under the Participation Agreement and the other Operative Documents
equal to the Tranche A Percentage, Tranche B Percentage, Tranche C Percentage
and Proportionate Share set forth under the captions "Tranche Percentages and
Proportionate Shares Assigned" opposite such Assignee Participant's name on Part
A of Attachment I hereto. Such sale, assignment and delegation shall become
effective on the date
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designated in Part C of Attachment I hereto (the "Assignment Effective Date"),
which date shall be, unless Agent shall otherwise consent, at least five (5)
Business Days after the date following the date counterparts of this Assignment
Agreement are delivered to Agent in accordance with Paragraph 3 hereof.
3. Assignment Effective Notice. Upon (a) receipt by Agent of five (5)
counterparts of this Assignment Agreement (to each of which is attached a fully
completed Attachment 1), each of which has been executed by Assignor Participant
and each Assignee Participant (and, to the extent required by clause (i) of
Subparagraph 7.05(b) of the Participation Agreement, by Lessor, Lessee and
Agent) and (b) payment to Agent of the registration and processing fee specified
in clause (iii) of Subparagraph 7.05(b) of the Participation Agreement, Agent
will transmit to Lessor, Lessee, Assignor Participant and each Assignee
Participant an Assignment Effective Notice substantially in the form of
Attachment 2 hereto, fully completed (an "Assignment Effective Notice").
4. Assignment Effective Date. At or before 12:00 noon (local time of
Assignor Participant) on the Assignment Effective Date, each Assignee
Participant shall pay to Assignor Participant, in immediately available or same
day funds, an amount equal to the purchase price, as agreed between Assignor
Participant and such Assignee Participant (the "Assignment Purchase Price"), for
the respective Tranche A Percentage, Tranche B Percentage, Tranche C Percentage
and Proportionate Share purchased by such Assignee Participant hereunder.
Effective upon receipt by Assignor Participant of the Assignment Purchase Price
payable by each Assignee Participant, the sale, assignment and delegation to
such Assignee Participant of such Proportionate Share as described in Paragraph
2 hereof shall become effective.
5. Payments After the Assignment Effective Date. Assignor Participant
and each Assignee Participant hereby agree that Agent shall, and hereby
authorize and direct Agent to, allocate amounts payable under the Participation
Agreement and the other Operative Documents as follows:
(a) All payments applied to reduce the Outstanding Lease Amount
after the Assignment Effective Date with respect to each Tranche A
Percentage, Tranche B Percentage, Tranche C Percentage and Proportionate
Share assigned to an Assignee Participant pursuant to this Assignment
Agreement shall be payable to such Assignee Participant.
(b) All Base Rent, interest, fees and other amounts accrued after
the Assignment Effective Date with respect to each Tranche A Percentage,
Tranche B Percentage, Tranche C Percentage and Proportionate Share
assigned to an Assignee Participant pursuant to this Assignment Agreement
shall be payable to such Assignee Participant.
Assignor Participant and each Assignee Participant shall make any separate
arrangements between themselves which they deem appropriate with respect to
payments between them of amounts paid under the Operative Documents on account
of the Tranche A Percentage, Tranche B Percentage, Tranche C Percentage and
Proportionate Share assigned to such Assignee Participant, and neither Agent nor
Lessee shall have any responsibility to effect or carry out such separate
arrangements.
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6. Delivery of Copies of Operative Documents. Concurrently with the
execution and delivery hereof, Assignor Participant will provide to each
Assignee Participant (if it is not already a party to the Participation
Agreement) conformed copies of all documents delivered to Assignor Participant
on or prior to the Closing Date in satisfaction of the conditions precedent set
forth in the Participation Agreement.
7. Further Assurances. Each of the parties to this Assignment Agreement
agrees that at any time and from time to time upon the written request of any
other party, it will execute and deliver such further documents and do such
further acts and things as such other party may reasonably request in order to
effect the purposes of this Assignment Agreement.
8. Further Representations, Warranties and Covenants. Assignor
Participant and each Assignee Participant further represent and warrant to and
covenant with each other, Lessor, Agent and the other Participants as follows:
(a) Other than the representation and warranty that it is the
legal and beneficial owner of the interest being assigned hereby free and
clear of any adverse claim, Assignor Participant makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the
Participation Agreement or the other Operative Documents or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of
the Participation Agreement or the other Operative Documents furnished or
the Collateral or any security interest therein.
(b) Assignor Participant makes no representation or warranty and
assumes no responsibility with respect to the financial condition of
Lessee or any of its obligations under the Participation Agreement or any
other Operative Documents.
(c) Each Assignee Participant confirms that it has received a copy
of the Participation Agreement and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to
enter into this Assignment Agreement.
(d) Each Assignee Participant will, independently and without
reliance upon Lessor, Agent, Assignor Participant or any other Participant
and based upon such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not
taking action under the Participation Agreement and the other Operative
Documents.
(e) Each Assignee Participant appoints and authorizes Agent to
take such action as Agent on its behalf and to exercise such powers under
the Participation Agreement and the other Operative Documents as Agent is
authorized to exercise by the terms thereof, together with such powers as
are reasonably incidental thereto, all in accordance with Section VI of
the Participation Agreement.
(f) Each Assignee Participant (i) affirms that each of the
representations and warranties set forth in Paragraph 4.03 of the
Participation Agreement is true and correct with respect to such
Participant and (ii) agrees that it will perform in accordance with
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their terms all of the obligations which by the terms of the Participation
Agreement and the other Operative Documents are required to be performed
by it as a Participant.
(g) Each Assignee Participant represents and warrants that, as of
the date hereof, it would not have any basis for demanding any payment
under Subparagraph 2.12(c) or Subparagraph 2.12(d) of the Participation
Agreement or, to its knowledge, under Subparagraph 2.13(a) of the
Participation Agreement.
(h) Part B of Attachment 1 hereto sets forth administrative
information with respect to each Assignee Participant.
9. Effect of this Assignment Agreement. On and after the Assignment
Effective Date, (a) each Assignee Participant shall be a Participant with a
Tranche A Percentage, Tranche B Percentage, Tranche C Percentage and
Proportionate Share as set forth under the caption "Tranche Percentages and
Proportionate Share After Assignment" opposite such Assignee Participant's name
in Part A of Attachment 1 hereto and shall have the rights, duties and
obligations of such a Participant under the Participation Agreement and the
other Operative Documents and (b) Assignor Participant shall be a Participant
with a Tranche A Percentage, Tranche B Percentage, Tranche C Percentage and
Proportionate Share as set forth under the caption "Tranche Percentages and
Proportionate Share After Assignment" opposite Assignor Participant's name in
Part A of Attachment 1 hereto and shall have the rights, duties and obligations
of such a Participant under the Participation Agreement and the other Operative
Documents, or, if the Proportionate Share of Assignor Participant has been
reduced to zero, Assignor Participant shall cease to be a Participant and shall
have no further obligation to fund any portion of any Advance.
10. Miscellaneous. This Assignment Agreement shall be governed by, and
construed in accordance with, the laws of the State of California. Paragraph
headings in this Assignment Agreement are for convenience of reference only and
are not part of the substance hereof.
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<PAGE> 280
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed by their respective duly authorized officers as of the
date set forth in Attachment 1 hereto.
______________________________, as
Assignor Participant
By: ________________________________
Name: __________________________
Title: _________________________
____________________________, as an
Assignee Participant
By: ________________________________
Name: __________________________
Title: _________________________
____________________________, as an
Assignee Participant
By: ________________________________
Name: __________________________
Title: _________________________
____________________________, as an
Assignee Participant
By: ________________________________
Name: __________________________
Title: _________________________
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CONSENTED TO AND ACKNOWLEDGED BY:
______________________________
as Lessee
By: ________________________________
Name: __________________________
Title: _________________________
______________________________,
as Agent
By: ________________________________
Name: __________________________
Title: _________________________
______________________________,
As Lessor
By: ________________________________
Name: __________________________
Title: _________________________
ACCEPTED FOR RECORDATION IN REGISTER:
______________________________,
As Agent
By: ________________________________
Name: __________________________
Title: _________________________
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ATTACHMENT 1
TO ASSIGNMENT AGREEMENT
PART A
<TABLE>
<CAPTION>
Tranche Percentages and
Proportionate Shares Assigned
------------------------------------------------------------------------
Tranche A Tranche B Tranche C Proportionate
Percentage Percentage Percentage Share
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Assignor Participant:
_________ __. _______% __. _______% __. _______% __. _______%
_________ __. _______% __. _______% __. _______% __. _______%
_________ __. _______% __. _______% __. _______% __. _______%
Assignee Participants:
_________ __. _______% __. _______% __. _______% __. _______%
_________ __. _______% __. _______% __. _______% __. _______%
_________ __. _______% __. _______% __. _______% __. _______%
_________ __. _______% __. _______% __. _______% __. _______%
</TABLE>
<TABLE>
<CAPTION>
Tranche Percentages and
Proportionate Shares After Assignment
-------------------------------------------------------------------------------
Tranche A Tranche B Tranche C Proportionate
Percentage Percentage Percentage Share
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Assignor Participant:
_________ __. _______% __. _______% __. ________% __. ________%
_________ __. _______% __. _______% __. ________% __. ________%
_________ __. _______% __. _______% __. ________% __. ________%
Assignee Participants:
_________ __. _______% __. _______% __. ________% __. ________%
_________ __. _______% __. _______% __. ________% __. ________%
_________ __. _______% __. _______% __. ________% __. ________%
_________ __. _______% __. _______% __. ________% __. ________%
</TABLE>
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<PAGE> 283
PART B
[Assignee Participant]
- --------------------------------
Applicable Participating Office:
___________________________
Address for notices:
Telephone No: __________________
Telecopier No: _________________
Wiring Instructions:
[Assignee Participant]
- --------------------------------
Applicable Participating Office:
___________________________
Address for notices:
Telephone No: __________________
Telecopier No: _________________
Wiring Instructions:
L(1)-2
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PART C
ASSIGNMENT EFFECTIVE DATE ________, ____
L(1)-3
<PAGE> 285
ATTACHMENT 2
TO ASSIGNMENT AGREEMENT
FORM OF
ASSIGNMENT EFFECTIVE NOTICE
Reference is made to the Participation Agreement, dated as of November 12,
1997, among KLA-Tencor Corporation ("Lessee"), Lease Plan U.S.A., Inc.
("Lessor"), the financial institutions parties thereto as "Participants" (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Agent hereby acknowledges receipt of five executed
counterparts of a completed Assignment Agreement, a copy of which is attached
hereto. [Note: Attach copy of Assignment Agreement.] Terms defined in such
Assignment Agreement are used herein as therein defined.
1. Pursuant to such Assignment Agreement, you are advised that the
Assignment Effective Date will be __________.
2. Pursuant to such Assignment Agreement, each Assignee Participant is
required to pay its Purchase Price to Assignor Participant at or before 12:00
Noon on the Assignment Effective Date in immediately available funds.
Very truly yours,
ABN AMRO Bank N.V.,
as Agent
By: _____________________________
Name: _______________________
Title: ______________________
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<PAGE> 286
EXHIBIT M
TRACT 3 GROUND LEASE AGREEMENT
FIRST AMENDED AND RESTATED
GROUND LEASE AGREEMENT
THIS FIRST AMENDED AND RESTATED GROUND LEASE AGREEMENT (this "Ground
Lease" herein), dated as of November 12, 1997, is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Ground
Lessor"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Ground
Lessee").
RECITALS
A. Ground Lessor has requested Ground Lessee and the financial
institutions which are "Participants" under the Participation Agreement referred
to in Recital B below (such financial institutions to be referred to
collectively as the "Participants") to provide to Ground Lessor a certain lease
facility. Pursuant to such facility:
(1) Ground Lessee would (a) acquire certain property designated by
Ground Lessor (either through purchase or lease), (b) lease to Ground
Lessor such property and certain other property currently held by Ground
Lessee, (c) appoint Ground Lessor as Ground Lessee's agent to make certain
improvements to a portion of such property, (d) make advances to finance
such improvements and to pay certain related expenses, and (e) grant to
Ground Lessor the right to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Ground
Lessee and (b) acquiring participation interests in the rental and certain
other payments to be made by Ground Lessor.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Ground Lessor, Ground Lessee, the
Participants and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"), Ground Lessee and the Participants have agreed to provide
such lease facility upon the terms and subject to the conditions set forth
therein, including without limitation the execution and delivery of this Ground
Lease.
C. Ground Lessor is the owner of certain real property located in the
City of San Jose, County of Santa Clara, State of California, commonly know as
160 Rio Robles, San Jose, California, which real property (the "Land") is more
fully described in Exhibit A.
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D. Ground Lessor, formerly known as KLA Instruments Corporation, a
Delaware corporation, and BNP Leasing Corporation, a Delaware corporation,
previously entered into that certain Ground Lease Agreement effective as of June
5, 1995, with respect to the Land (the "Original Lease").
E. BNP Leasing Corporation, a Delaware corporation, has assigned its
interest under the Original Lease to Ground Lessee by that certain Assignment of
Ground Lease, dated as of the date hereof.
F. Ground Lessor and Ground Lessee now desire to amend and restate the
Original Lease in its entirety, as more fully set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the
mutual covenants herein contained, the parties hereto hereby agree as follows:
SECTION 10. INTERPRETATION.
10.01. Definitions. Unless otherwise indicated in this Ground Lease, each
term set forth in Schedule 1.01 to the Participation Agreement, when used in
this Ground Lease, shall have the respective meaning given to that term in such
Schedule 1.01 or in the provision of this Ground Lease or other document,
instrument or agreement referenced in such Schedule 1.01.
10.02. Rules of Construction. Unless otherwise indicated in this Ground
Lease, the rules of construction set forth in Schedule 1.02 to the Participation
Agreement shall apply to this Ground Lease.
SECTION 11. BASIC PROVISIONS.
11.01. Lease of the Property. Ground Lessor agrees to lease to Ground
Lessee and Ground Lessee agrees to lease from Ground Lessor the following
property, if any (the "Leased Property"), to the extent of Ground Lessor's
estate, right, title and interest therein, thereto or thereunder:
(a) All lots, pieces, tracts and parcels of the Land together with
such additional parcels of real property as may be added to the Land from
time to time during the term hereof;
(b) All Improvements now or hereafter located on the Land;
(c) All Appurtenant Rights belonging, relating or pertaining to
any of the Land or Improvements;
(d) All Related Goods, Related Permits and Related Agreements
related to any of the foregoing Land, Improvements or Appurtenant Rights;
and
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(e) All accessions and accretions to and replacements and
substitutions for the foregoing.
11.02. Term. The term of this Ground Lease (herein called the "Term")
shall commence on and include the effective date hereof and end on November 1,
2031. However, subject to the prior approval of any lender or other beneficiary
of a Leasehold Mortgage (defined below) (a "Leasehold Mortgagee"), Ground Lessee
shall have the right to terminate this Ground Lease by giving notice to Ground
Lessor stating that Ground Lessee unequivocally elects to terminate effective as
of a date specified in such notice which may be any date more than thirty days
after the notice and after the expiration or termination of the Lease Agreement
pursuant to its terms. Further, Ground Lessor shall have an option (the "Ground
Lessor's Termination Option") to terminate this Ground Lease on and subject to
the following terms and conditions:
(a) To exercise the Ground Lessor's Termination Option, Ground
Lessor must provide Ground Lessee with an unconditional notice thereof
(the "Ground Lessor's Termination Notice") which specifies a date (the
"Qualifying Termination Date"), which date shall coincide with Ground
Lessor or an Assignee Purchaser's purchase of the Leased Property pursuant
to Section 2 of the Purchase Agreement, as the effective date of the
termination of this Ground Lease and which sets forth Ground Lessor's
calculation of the Outstanding Lease Amount as of such date. Any notice
specifying or purporting to establish an effective date of termination
which is not a Qualifying Termination Date shall not be effective as a
Ground Lessor's Termination Notice hereunder. Any Ground Lessor's
Termination Notice will be irrevocable.
(b) After giving any Ground Lessor's Termination Notice, Ground
Lessor must on or before the effective date of the termination specified
therein, pay to Ground Lessee in good funds the Outstanding Lease Amount.
Ground Lessor's payment of the Outstanding Lease Amount shall be a
condition precedent to the effectiveness of any early termination of this
Ground Lease by Ground Lessor. Time is of the essence as to such payment.
(c) At any time after the Expiration Date of the Lease Agreement,
Ground Lessee may provide a notice to Ground Lessor (a "FOCB Notice")
explaining that, unless Ground Lessor provides a Ground Lessor's
Termination Notice within thirty days after the FOCB Notice is sent in
accordance with the notice provisions hereof, the Ground Lessor's
Termination Option will expire. Unless Ground Lessor does in fact provide
an effective Ground Lessor's Termination Notice within thirty days after
any such FOCB Notice is sent to Ground Lessor by Ground Lessee in
accordance with the notice provisions hereof, the Ground Lessor's
Termination Option will expire. Time is of the essence as to the giving of
any Ground Lessor's Termination Notice required to prevent an expiration
of the Ground Lessor's Termination Option; however, if during the thirty
day period specified above in this subparagraph Ground Lessor is delayed
in providing any Ground Lessor's Termination Notice because of any
automatic stay or similar restraint imposed in any bankruptcy or
insolvency proceedings wherein Ground Lessee is the debtor, then such
thirty day period will be extended by a time equal to such delay.
(d) Notwithstanding the foregoing, if Ground Lessor loses its
rights to acquire Ground Lessee's interest in the Leased Property under the
Purchase Agreement before the effective date of any termination of this
Ground Lease, and if Ground Lessor would not have lost such right but for
Ground Lessor's failure to cure a breach by Ground Lessor of the Purchase
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Agreement within any applicable grace period provided therein, then Ground
Lessor shall no longer have any right whatsoever to terminate this Ground
Lease pursuant to this Paragraph 2.02, and any prior Ground Lessor's
Termination Notice given by Ground Lessor shall become ineffective for
purposes of this Ground Lease.
11.03. Rent. Ground Lessee has paid to Ground Lessor the sum of Ten and
no/100 dollars ($10.00) as prepaid rent for the period beginning on the
effective date and ending on October 31, 2002. The receipt and sufficiency of
such prepaid rent is hereby acknowledged by Ground Lessor. On each anniversary
of the first Business Day of November, 2002 (the "Rent Commencement Date"),
Ground Lessee shall pay Ground Lessor an annual installment of rent in arrears
(herein called "Rent"), in currency that at the time of payment is legal tender
for public and private debts in the United States of America. Each such
installment of Rent shall equal the annual fair rental value of unimproved land
of equivalent size and location to the Land, without considering any value added
by the Improvements, as determined in accordance with Exhibit B (the "Fair
Rental Value").
11.04. Receipt and Application of Insurance and Condemnation Proceeds. All
insurance and condemnation proceeds payable with respect to any damage to or
taking of the Leased Property shall be payable to and become the property of the
Ground Lessee; provided, however, Ground Lessor shall be entitled to receive
condemnation proceeds awarded for the value of Ground Lessor's remainder
interest in the Land exclusive of the Improvements. Ground Lessee is authorized
to take all action necessary on behalf of both Ground Lessee and Ground Lessor
to collect insurance and condemnation proceeds.
11.05. No Lease Termination. Except as expressly provided herein, this
Ground Lease shall not terminate, nor shall Ground Lessor have any right to
terminate this Ground Lease nor shall the obligations of Ground Lessor under
this Ground Lease be excused, for any reason whatsoever, including without
limitation any of the following: (i) any damage to or the destruction of all or
any part of the Leased Property from whatever cause, (ii) the taking of the
Leased Property or any portion thereof by eminent domain or otherwise for any
reason, (iii) any default on the part of the Ground Lessee under this Ground
Lease or under any other agreement to which Ground Lessor and Ground Lessee are
parties, (iv) any other cause whether similar or dissimilar to the foregoing,
any existing or future law to the contrary notwithstanding. It is the intention
of the parties hereto that the obligations of Ground Lessor hereunder shall be
separate and independent of the covenants and agreements of Ground Lessee.
However, nothing in this Paragraph 2.05 shall be construed as a waiver by Ground
Lessor of any right Ground Lessor may have at law or in equity to recover
monetary damages for any default under this Ground Lease.
11.06. Purchase Agreement and Lease Agreement. Nothing contained in this
Ground Lease shall limit, modify or otherwise affect any of Ground Lessor's or
Ground Lessee's respective rights and obligations under the Purchase Agreement
or Lease Agreement, which rights and obligations are intended to be separate,
independent and in addition to, and not in lieu of, the obligations established
by this Ground Lease; provided, however, that if Ground Lessor exercises the
Ground Lessor's Termination Option, Ground Lessee shall have no further
obligations under the Purchase Agreement or the Lease Agreement. In the event of
any inconsistency between the terms and provisions of the Purchase Agreement or
Lease Agreement and the terms and provisions of this Ground Lease, the terms and
provisions of the Purchase Agreement or Lease Agreement (as the case may be)
shall control.
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11.07. Use of Leased Property. Subject to the encumbrances and other
matters affecting the Leased Property that are set forth in Exhibit C attached
hereto and made a part hereof (the "Permitted Encumbrances") and the terms
hereof, Ground Lessee may use and occupy the Leased Property for any lawful
purpose. If a use of the Leased Property by Ground Lessee for any lawful purpose
or any new Improvements or removal or modifications of Improvements proposed by
Ground Lessee would violate any Permitted Encumbrance unless Ground Lessor, as
an owner of adjacent property or otherwise, gave its consent or approval thereto
or agreed to join in a modification of such Permitted Encumbrance, then Ground
Lessor shall give such consent or approval or join in such modification.
Further, Ground Lessor's obligation under the preceding sentence shall be
binding upon any successor or assign of Ground Lessor with respect to the
Permitted Encumbrances. In any event, Ground Lessee may at any time during the
Term remove the Improvements from the Leased Property without the consent of
Ground Lessor and without obligation to compensate Ground Lessor or construct
other Improvements on the Land.
11.08. Assignment and Subletting. Ground Lessor's consent shall not be
required for any assignment or subletting by Ground Lessee.
11.09. Estoppel Certificate. Ground Lessor shall from time to time, within
ten days after receipt of written request by Ground Lessee, deliver a statement
in writing certifying:
(a) that this Ground Lease is unmodified and in full force and
effect (or if modified that this Ground Lease as so modified is in full
force and effect);
(b) that to the knowledge of Ground Lessor, Ground Lessee has not
previously assigned or hypothecated its rights or interests under this
Ground Lease, except as is described in such statement with as much
specificity as Ground Lessor is able to provide;
(c) the term of this Ground Lease and the Rent and any additional
charges;
(d) that Ground Lessee is not in default under any provision of
this Ground Lease (or if in default, the nature thereof in detail) and a
statement as to any outstanding obligations on the part of Ground Lessor
or Ground Lessee; and
(e) such other matters as are requested by Ground Lessee.
GROUND LESSOR'S FAILURE TO DELIVER SUCH STATEMENT WITHIN SUCH TIME SHALL BE
CONCLUSIVE UPON GROUND LESSEE (i) THAT THIS GROUND LEASE IS IN FULL FORCE AND
EFFECT, WITHOUT MODIFICATION EXCEPT AS MAY BE REPRESENTED BY GROUND LESSEE, (ii)
THAT THERE ARE NO UNCURED DEFAULTS IN GROUND LESSEE'S PERFORMANCE HEREUNDER.
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11.10. Leasehold Mortgages.
(a) By any mortgage, deed of trust, security agreement or
assignment executed by Ground Lessee to secure an obligation to repay
borrowed money or other voluntary obligations, which covers Ground
Lessee's leasehold estate hereunder or any part thereof or any rents or
other charges to be paid to Ground Lessee pursuant to any sublease (a
"Leasehold Mortgage"), Ground Lessee may encumber Ground Lessee's
leasehold estate in the Leased Property created by this Ground Lease, as
well as Ground Lessee's rights and interests in buildings, fixtures,
equipment and improvements situated thereon and rents, issues, profits,
revenues and other income to be derived by Ground Lessee therefrom.
However, so long as the Lease Agreement remains in effect, any Leasehold
Mortgage will be permitted hereunder only if permitted pursuant to the
Lease Agreement.
(b) Any Leasehold Mortgagee or other party, including any
corporation formed by a Leasehold Mortgagee, may become the legal owner
and holder of the leasehold estate created by this Ground Lease, and of
the improvements, equipment, fixtures and other property assigned as
additional security pursuant to a Leasehold Mortgage, by foreclosure of a
Leasehold Mortgage or as a result of the assignment or conveyance in lieu
of foreclosure. Further, any such Leasehold Mortgagee or other party may
itself, after becoming the legal owner and holder of the leasehold estate
created by this Ground Lease, or of any improvements, equipment, fixtures
and other property assigned as additional security pursuant to a Leasehold
Mortgage, convey or pledge the same without the consent of Ground Lessor.
(c) Ground Lessor shall serve notice of any default by Ground
Lessee hereunder upon any Leasehold Mortgagee. No notice of a default by
Ground Lessee shall be deemed effective until it is so served. Any
Leasehold Mortgagee shall have the right to correct or cure any such
default within the same period of time after receipt of such notice as is
given to Ground Lessee under this Ground Lease to correct or cure
defaults, plus an additional period of thirty days thereafter. Ground
Lessor will accept performance by any Leasehold Mortgagee of any covenant,
condition or agreement on Ground Lessee's part to be performed hereunder
with the same force and effect as though performed by Ground Lessee.
(d) If this Ground Lease should terminate by reason of a
disaffirmance or rejection of this Ground Lease by Ground Lessee or any
receiver, liquidator or trustee for the property of Ground Lessee, or by
any department of the city, state or federal government which had taken
possession of the business or property of Ground Lessee by reason of the
insolvency or alleged insolvency of Ground Lessee, then:
(i) Ground Lessor shall give notice thereof to each
Leasehold Mortgagee; and upon request of any Leasehold Mortgagee
made within sixty days after Ground Lessor has given such notice,
Ground Lessor shall enter into a new ground lease of the Leased
Property with such Leasehold Mortgagee for the remainder of the
Term, at the same Rent and on the same terms and conditions as
contained in this Ground Lease.
(ii) In connection with any such new ground lease, Ground
Lessor shall also convey to the Leasehold Mortgagee by quitclaim
deed any interest of Ground Lessor in and to the Improvements
included in the Leased Property.
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(iii) The estate of the Leasehold Mortgagee, as lessee under
the new lease, shall have priority equal to the estate of Ground
Lessee hereunder. That is, there shall be no charge, lien or burden
upon the Leased Property prior to or superior to the estate granted
by such new lease which was not prior to or superior to the estate
of Ground Lessee under this Ground Lease as of the date immediately
preceding the termination of this Ground Lease. To the extent that
the Lease Agreement and or the Purchase Agreement are in effect at
the time of execution of such new ground lease, such new ground
lease shall be made subject to the Lease Agreement and the Purchase
Agreement.
(iv) Notwithstanding the foregoing, if Ground Lessor shall
receive requests to enter into a new ground lease from more than one
Leasehold Mortgagee, Ground Lessor shall be required to enter into
only one new ground lease, and the new ground lease shall be to the
requesting Leasehold Mortgagee who holds the highest priority lien
or interest in the Ground Lessee's leasehold estate in the Land. If
the liens or security interests of two or more such requesting
Leasehold Mortgagees which shared the highest priority just prior to
the termination of this Ground Lease, the new ground lease shall
name all such Leasehold Mortgagees as co-tenants thereunder.
(e) If the Ground Lessee has agreed with any Leasehold Mortgagee
that such Leasehold Mortgagee's consent will be required to any
modification or early termination of this Ground Lease by Ground Lessee,
and if Ground Lessor has been notified of such agreement, such consent
will be required.
(f) No Leasehold Mortgagee will assume any liability under this
Ground Lease either by virtue of its Leasehold Mortgage or by any
subsequent receipt or collection of rents or profits generated from the
Leased Property, unless and until the Leasehold Mortgagee acquires Ground
Lessee's leasehold estate in the Leased Property at foreclosure or by deed
in lieu of foreclosure.
(g) Although the foregoing provisions concerning Leasehold
Mortgages and Leasehold Mortgagees will be self operative, Ground Lessor
agrees to include, in addition to the items specified in Paragraph 2.09,
confirmation of the foregoing in any statement provided to a Leasehold
Mortgagee or prospective Leasehold Mortgagee pursuant to Paragraph 2.09.
SECTION 12. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR. Ground
Lessor represents, warrants and covenants as follows:
12.01. Title. Ground Lessor holds good and marketable title to the Land,
free and clear of all liens and encumbrances, other than the Permitted
Encumbrances.
12.02. No Default or Violation. The execution, delivery and performance by
Ground Lessor of this Ground Lease does not and will not constitute a breach or
default under any other material agreement or contract to which Ground Lessor is
a party or by which Ground Lessor is bound or which affects the Leased Property,
and does not violate or contravene any law, order, decree, rule or regulation to
which Ground Lessor is subject, and such execution, delivery and performance by
Ground Lessor will not result in the creation or imposition of (or the
obligation to create or impose) any lien, charge or encumbrance on, or security
interest in, Ground Lessor's property pursuant to the provisions of any of the
foregoing.
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12.03. No Suits. There are no judicial or administrative actions, suits,
proceedings or investigations pending or, to Ground Lessor's knowledge,
threatened that will adversely affect the Leased Property or the validity,
enforceability or priority of this Ground Lease, and Ground Lessor is not in
default with respect to any order, writ, injunction, decree or demand of any
court or other governmental or regulatory authority that could materially and
adversely affect the use, occupancy or operation of the Leased Property. No
condemnation or other like proceedings are pending or, to Ground Lessor's
knowledge, threatened against the Leased Property.
12.04. Enforceability. The execution, delivery and performance of this
Ground Lease are duly authorized and do not require the consent or approval of
any governmental body or other regulatory authority that has not heretofore been
obtained and are not in contravention of or in conflict with any applicable laws
or any term or provision of Ground Lessor's articles of incorporation or bylaws.
This Ground Lease is a valid, binding and legally enforceable obligation of
Ground Lessor in accordance with its terms, except as such enforcement is
affected by bankruptcy, insolvency and similar laws affecting the rights of
creditors, generally, and equitable principles of general application.
12.05. Insurance and Casualty. In the event any of the Leased Property is
destroyed or damaged by fire, explosion, windstorm, hail or by any other
casualty against which insurance shall have been required hereunder, (i) Ground
Lessee may make proof of loss, (ii) each insurance company concerned is hereby
authorized and directed to make payment for such loss directly to Ground Lessee
for application as required by Paragraph 2.04, and (iii) Ground Lessee's consent
must be obtained for any settlement, adjustment or compromise of any claims for
loss, damage or destruction under any policy or policies of insurance.
12.06. Condemnation. All proceeds of condemnation awards or proceeds of
sale in lieu of condemnation with respect to the Leased Property and all
judgments, decrees and awards for injury or damage to the Leased Property shall
be paid to Ground Lessee and applied as provided in Paragraph 2.04 above. Ground
Lessee is hereby authorized, in the name of the Ground Lessor, to execute and
deliver valid acquittances for, and to appeal from, any such judgment, decree or
award concerning condemnation of any of the Leased Property. Ground Lessee shall
not be, in any event or circumstances, liable or responsible for failure to
collect, or to exercise diligence in the collection of, any such proceeds,
judgments, decrees or awards.
12.07. Further Assurances. Ground Lessor shall, on request of Ground
Lessee, (i) promptly correct any defect, error or omission which may be
discovered in the contents of this Ground Lease or in any other instrument
executed in connection herewith or in the execution or acknowledgment thereof;
(ii) execute, acknowledge, deliver and record or file such further instruments
and do such further acts as may be necessary, desirable or proper to carry out
more effectively the purposes of this Ground Lease and to subject to this Ground
Lease any property intended by the terms hereof to be covered hereby including
specifically, but without limitation, any renewals, additions, substitutions,
replacements or appurtenances to the Leased Property; (iii) execute,
acknowledge, deliver, procure and record or file any document or instrument
deemed advisable by Ground Lessee to protect its rights in and to the Leased
Property against the rights or interests of third persons; and (iv) provide such
certificates, documents, reports, information, affidavits and other instruments
and do such further acts as may be necessary, desirable or proper in the
reasonable determination of Ground Lessee to enable Ground Lessee or
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any Leasehold Mortgagee to comply with the requirements or requests of any
agency or authority having jurisdiction over them.
SECTION 13. EVENTS OF DEFAULT.
13.01. Definition of Event of Default. Each of the following events shall
be deemed to be an "Event of Default" by Ground Lessee under this Ground Lease:
(a) Ground Lessee shall fail to pay when due any installment of
Rent due hereunder and such failure shall continue for sixty days after
Ground Lessee receives written notice thereof.
(b) Ground Lessee shall fail to comply with any term, provision or
covenant of this Ground Lease (other than as described in the other
clauses of this Paragraph 4.01), and shall not cure such failure prior to
sixty days after written notice thereof is sent to Ground Lessee if such
failure is susceptible of cure within sixty (60) days, but if such failure
cannot with reasonable diligence be cured within such sixty day period,
and if Ground Lessee shall promptly have commenced to cure the same and
shall thereafter prosecute the curing thereof with reasonable diligence,
the period within which such failure may be cured shall be extended for
such further period as shall be necessary for the curing thereof with
reasonable diligence.
13.02. Remedy. Upon occurrence of an Event of Default which is not cured
within any applicable period expressly permitted by Paragraph 4.01, Ground
Lessor's sole and exclusive remedy shall be to sue Ground Lessee for the
collection of any amount due under this Ground Lease and to enjoin the
continuation of the Event of Default. Ground Lessor may not terminate this
Ground Lease or Ground Lessee's right to possession under this Ground Lease
except as expressly provided herein. Any judgment which Ground Lessor may obtain
against Ground Lessee for amounts due under this Ground Lease may be collected
only through resort of a judgment lien against Ground Lessee's interest in the
Leased Property. Ground Lessee shall have no personal liability for the payment
amounts due under this or for the performance of any obligations of Ground
Lessee under this Ground Lease.
SECTION 14. QUIET ENJOYMENT. Neither Ground Lessor nor any third party lawfully
claiming any right or interest in the Leased Property shall during the Term
disturb Ground Lessee's peaceable and quiet enjoyment of the Leased Property;
however, such enjoyment shall be subject to the terms, provisions, covenants,
agreements and conditions of this Ground Lease and the Permitted Encumbrances,
to which this Ground Lease is subject and subordinate as hereinabove set forth.
SECTION 15. OPTION TO PURCHASE. Subject to the terms and conditions set forth in
Exhibit D, including the condition specified therein that Ground Lessor shall
have breached the Purchase Agreement and failed to cure such breach within any
time for cure expressly provided in the Purchase Agreement, Ground Lessee (and
any assignee of Ground Lessee's entire interest in the Leased Property, but not
any subtenant or assignee of a lesser interest) shall have the option to
purchase the Ground Lessor's interest in the Leased Property.
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SECTION 16. MISCELLANEOUS.
16.01. Notices. Each provision of this Ground Lease, or of any applicable
laws with reference to the sending, mailing or delivery of any notice or with
reference to the making of any payment by Ground Lessee to Ground Lessor, shall
be deemed to be complied with when and if the following steps are taken:
(a) All Rent required to be paid by Ground Lessee to Ground Lessor
hereunder shall be paid to Ground Lessor in accordance with any reasonable
written instruction provided from time to time by Ground Lessor to Ground
Lessee, which may include payment by wire transfer.
(b) Except as otherwise specified herein, all notices, requests,
demands, consents, instructions or other communications to or upon Ground
Lessee or Ground Lessor under this Ground Lease shall be given to Ground
Lessor and Ground Lessee as provided in Subparagraph 2.02(c) and Paragraph
7.01 of the Participation Agreement.
16.02. Severability. If any term or provision of this Ground Lease or the
application thereof shall to any extent be held by a court of competent
jurisdiction to be invalid and unenforceable, the remainder of this Ground
Lease, or the application of such term or provision other than to the extent to
which it is invalid or unenforceable, shall not be affected thereby.
16.03. No Merger. There shall be no merger of this Ground Lease or of the
leasehold estate hereby created with the fee or any other estate in the Leased
Property or any part thereof by reason of the fact that the same person may
acquire or hold, directly or indirectly, this Ground Lease or the leasehold
estate hereby created or any interest in this Ground Lease or in such leasehold
estate as well as the fee or any other estate in the Leased Property or any
interest in such fee or other estate, unless all parties with an interest in the
Leased Property that would be adversely affected by any such merger specifically
agree in writing that such a merger shall occur.
16.04. Entire Agreement. This Ground Lease, the agreements referred to
herein, and the instruments referred to therein supersede any prior negotiations
and agreements between the parties concerning the Leased Property and no
amendment or modification of this Ground Lease shall be binding or valid unless
expressed in a writing executed by both parties hereto.
16.05. Binding Effect. All of the covenants, agreements, terms and
conditions to be observed and performed by the parties hereto shall be
applicable to and binding upon their respective successors and assigns.
16.06. Governing Law. This Ground Lease shall be governed by and construed
in accordance with the laws of the State of California.
16.07. Waiver of a Jury Trail. LESSOR AND LESSEE EACH HEREBY WAIVES ITS
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS GROUND LEASE OR ANY OTHER DOCUMENT OR DEALINGS BETWEEN THEM
RELATING TO THIS GROUND LEASE OR THE LEASED PROPERTY. The scope of this waiver
is intended to be all-encompassing of
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any and all disputes that may be filed in any court and that relate to the
subject matter of this transaction, including, without limitation, contract
claims, tort claims, breach of duty claims, and all other common law and
statutory claims. Ground Lessor and Ground Lessee each acknowledge that this
waiver is a material inducement to enter into a business relationship, that each
has already relied on the waiver in entering into this Ground Lease and the
other documents referred to herein and that each will continue to rely on the
waiver in their related future dealings. Ground Lessee and Ground Lessor each
further warrants and represents that it has reviewed this waiver with its legal
counsel, and that it knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING
THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS GROUND LEASE OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
GROUND LEASE OR THE LEASED PROPERTY. In the event of litigation, this Ground
Lease may be filed as a written consent to a trial by the court.
16.08. Memorandum of Lease. Ground Lessor and Ground Lessee shall execute
a memorandum of this Ground Lease in recordable form which shall be filed in the
real property records of Santa Clara County, California.
16.09. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
[The signature page follows.]
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IN WITNESS WHEREOF, Ground Lessee and Ground Lessor have caused this
Ground Lease to be executed as of the day and year first above written.
GROUND LESSOR: KLA-TENCOR CORPORATION
By:______________________________________
Name:_________________________________
Title:________________________________
GROUND LESSEE: LEASE PLAN U.S.A., INC.
By:______________________________________
Name:_________________________________
Title:________________________________
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EXHIBIT A
LAND
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EXHIBIT B
DETERMINATION OF FAIR RENTAL VALUE
Each annual installment of Rent will equal the Fair Rental Value as of the
Rent Commencement Date, unless reduced to a lesser amount equal to the Fair
Rental Value on a subsequent date selected by Ground Lessee. By notice to Ground
Lessor, Ground Lessee may from time to time (but no more often than once in any
12 month period), designate a new date within sixty days of the date of such
notice as an alternative to the Rent Commencement Date for purposes of
determining Fair Rental Value, in which case installments of Rent due after such
alternative date shall equal the Fair Rental Value on such alternative date
unless and until another alternative date is later designated. However, in no
event will Rent ever be increased above the Fair Rental Value on the Rent
Commencement Date.
If Ground Lessor and Ground Lessee have not agreed upon Fair Rental Value
as of the Rent Commencement Date within 180 days after the Rent Commencement
Date, or if they do not agree upon Fair Rental Value as of an alternative date
within thirty days from the date of a notice from Ground Lessee designating such
alternative date as described above, then Fair Rental Value will be determined
as follows (but, again, in no event shall Rent be adjusted above the Fair Rental
Value on the Rent Commencement Date):
(a) Ground Lessor and Ground Lessee shall each appoint a real
estate appraiser who is familiar with rental values for properties in the
vicinity of the Land. Each party will make the appointment no later than
10 days after receipt of notice from the other party that the appraisal
process described in this paragraph has been invoked. The agreement of the
two appraisers as to Fair Rental Value will be binding upon Ground Lessor
and Ground Lessee. If the two appraisers cannot agree upon the Fair Rental
Value within 10 days following their appointment, they shall within
another 10 days agree upon a third real estate appraiser. Immediately
thereafter, each of the first two appraisers will submit his best estimate
of the appropriate Fair Rental Value (together with a written report
supporting such estimate) to the third appraiser and the third appraiser
will choose between the two estimates. The estimate of Fair Rental Value
chosen by the third appraiser as the closest to the prevailing monthly
fair rental value will be binding upon Ground Lessor and Ground Lessee.
Notification in writing of this estimate shall be made to Ground Lessor
and Ground Lessee within 15 days following the selection of the third
appraiser.
(b) If appraisers must be selected under the procedure set out
above and either Ground Lessee or Ground Lessor fails to appoint an
appraiser or fails to notify the other party of such appointment within 7
days after receipt of notice that the prescribed time for appointing the
appraisers has passed, then the other party's appraiser will determine the
Fair Rental Value. All appraisers selected for the appraisal process set
out in this paragraph will be disinterested, reputable, qualified real
estate appraisers with the designation of MAI or equivalent and with at
least 5 years experience in appraising properties comparable to the Land.
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(c) If a third appraiser must be chosen under the procedure set
out above, he or she will be chosen on the basis of objectivity and
competence, not on the basis of his relationship with the other appraisers
or the parties to this Ground Lease, and the first two appraisers will be
so advised. Although the first two appraisers will be instructed to
attempt in good faith to agree upon the third appraiser, if for any reason
they cannot agree within the prescribed time, either Ground Lessor and
Ground Lessee may require the first two appraisers to immediately submit
its top choice for the third appraiser to the then highest ranking officer
of the San Francisco Bar Association who will agree to help and who has no
attorney/client or other significant relationship to either Ground Lessor
or Ground Lessee. Such officer will have complete discretion to select the
most objective and competent third appraiser from between the choice of
each of the first two appraisers, and will do so within 20 days after such
choices are submitted to him.
(d) Either Ground Lessor or Ground Lessee may notify the appraiser
selected by the other party to demand the submission of an estimate of
Fair Rental Value or a choice of a third appraiser as required under the
procedure described above; and if the submission of such an estimate or
choice is required but the other party's appraiser fails to comply with
the demand within 15 days after receipt of such notice, then the Fair
Rental Value or choice of the third appraiser, as the case may be,
selected by the other appraiser (i.e., the notifying party's appraiser)
will be binding upon Ground Lessor and Ground Lessee.
(e) Ground Lessor and Ground Lessee shall each bear the expense of
the appraiser appointed by it, and the expense of the third appraiser and
of any officer of the San Francisco Bar Association who participates in
the appraisal process described above will be shared equally by Ground
Lessor and Ground Lessee.
Once determined in accordance with this Exhibit, the annual Rent shall
remain the same until Ground Lessee elects to change Rent to the Fair Rental
Value as of the date other than the Rent Commencement Date as provided above.
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EXHIBIT C
PERMITTED ENCUMBRANCES
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EXHIBIT D
CONTINGENT PURCHASE OPTION
Subject to the terms of this Exhibit D, Ground Lessee shall have an option
(the "Option") to buy the Ground Lessor's interest in the Leased Property at any
time during the term of this Ground Lease after (but only after) any breach by
Ground Lessor under the Purchase Agreement, provided Ground Lessor does not cure
the breach within any time permitted for cure by the express provisions of the
Purchase Agreement, for a purchase price (the "Option Price") to Ground Lessor
equal to fair market value.
For the purposes of this Exhibit, "fair market value" means (and all
appraisers and other persons involved in the determination of the Option Price
will be so advised) the price that would be agreed upon between a willing buyer,
but under no compulsion to buy, and a willing seller, but under no compulsion to
sell, for unimproved land comparable in size and location to the Land, exclusive
of any Improvements, at the time of Ground Lessee's exercise of the Option and
taking into consideration the condition of the Land and the encumbrances
affecting the title to the Land at the time of the exercise of the Option.
If Ground Lessee exercises the Option, which Ground Lessee may do by
notifying Ground Lessor that Ground Lessee has elected to buy Ground Lessor's
interest in the Leased Property as provided herein, then:
(a) Upon Ground Lessee's tender of the Option Price to Ground
Lessor, Ground Lessor will convey good and marketable title to the fee
estate in the Leased Property to Ground Lessee by general warranty deed
subject only to the Permitted Encumbrances and, to the extent still in
force, the Lease Agreement and the Purchase Agreement.
(b) Ground Lessee's obligation to close the purchase shall be
subject to the following terms and conditions, all of which are for the
benefit of Ground Lessee: (1) Ground Lessee shall have been furnished with
evidence satisfactory to Ground Lessee that Ground Lessor can convey title
as required by the preceding subparagraph; (2) nothing shall have occurred
or been discovered after Ground Lessee exercised the Option that could
significantly and adversely affect title to the Leased Property or the
Ground Lessee's use thereof, (3) all of the representations of Ground
Lessor in this Ground Lease shall continue to be true as if made effective
on the date of the closing, and with respect to any such representations
which may be limited to the knowledge of Ground Lessor or any of Ground
Lessor's representatives, would continue to be true on the date of the
closing if all relevant facts and circumstances were known to Ground
Lessor and such representatives, and (4) Ground Lessee shall have been
tendered the deed and other documents which are described in this Exhibit
D as documents to be delivered to Ground Lessee at the closing of Ground
Lessee's purchase.
(c) Closing of the purchase will be scheduled on the first
Business Day following thirty days after the Option Price is established
in accordance with the terms and conditions of this Exhibit D, and prior
to closing Ground Lessee's occupancy of the Leased Property shall continue
to be subject to the terms and conditions of this Ground Lease, including
the terms setting forth Ground Lessee's obligation to pay Rent. Closing
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shall take place at the offices of any title insurance company reasonably
selected by Ground Lessee to insure title under the title insurance policy
described below.
(d) Any transfer taxes or notices or registrations required by law
in connection with the sale contemplated by this Exhibit D will be the
responsibility of Ground Lessor.
(e) Ground Lessor will deliver a certificate of nonforeign status
to Ground Lessee at closing as needed to comply with the provisions of the
Foreign Investors Real Property Tax Act (FIRPTA) or any comparable
federal, state or local law in effect at the time.
(f) Ground Lessor will also pay for and deliver to Ground Lessee
at the closing an owner's title insurance policy in the full amount of the
Option Price, issued by a title insurance company designated by Ground
Lessee (or written confirmation from the title company that it is then
prepared to issue such a policy), and subject only to standard printed
exceptions which the title insurance company refuses to delete or modify
in a manner acceptable to Ground Lessee and to Permitted Encumbrances.
(g) Ground Lessor shall also deliver at the closing all other
documents or things reasonably required to be delivered to Ground Lessee
or by the title insurance company to evidence Ground Lessor's ability to
transfer the Leased Property to Ground Lessee.
If Ground Lessor and Ground Lessee do not otherwise agree upon the amount
of the Option Price within 20 days after Ground Lessee exercises the Option, the
Option Price shall be determined in accordance with the following procedure:
(i) Ground Lessor and Ground Lessee shall each appoint a
real estate appraiser who is familiar with properties in the
vicinity of the Land. Each party will make the appointment no later
than 10 days after receipt of notice from the other party that the
appraisal process described in this paragraph has been invoked. The
agreement of the two appraisers as to the Option Price will be
binding upon Ground Lessor and Ground Lessee. If the two appraisers
cannot agree upon the Option Price within 10 days following their
appointment, they shall within another 10 days agree upon a third
real estate appraiser. Immediately thereafter, each of the first two
appraisers will submit his best estimate of the appropriate Option
Price (together with a written report supporting such estimate) to
the third appraiser and the third appraiser will choose between the
two estimates. The estimate of Option Price chosen by the third
appraiser as the closest to the prevailing monthly fair market value
will be binding upon Ground Lessor and Ground Lessee. Notification
in writing of the Option Price shall be made to Ground Lessor and
Ground Lessee within 15 days following the selection of the third
appraiser.
(ii) If appraisers must be selected under the procedure set
out above and either Ground Lessee or Ground Lessor fails to appoint
an appraiser or fails to notify the other party of such appointment
within 7 days after receipt of notice that the prescribed time for
appointing the appraisers has passed, then the other
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party's appraiser will determine the Option Price. All of the
appraisers selected for the appraisal process set out in this
paragraph will be disinterested, reputable, qualified real estate
appraisers with the designation of MAI or equivalent and with at
least 5 years experience in appraising properties comparable to the
Land.
(iii) If a third appraiser must be chosen under the procedure
set out above, he will be chosen on the basis of objectivity and
competence, not on the basis of his relationship with the other
appraisers or the parties to this Ground Lease, and the first two
appraisers will be so advised. Although the first two appraisers
will be instructed to attempt in good faith to agree upon the third
appraiser, if for any reason they cannot agree within the prescribed
time, either Ground Lessor and Ground Lessee may require the first
two appraisers to immediately submit its top choice for the third
appraiser to the then highest ranking officer of the San Francisco
Bar Association who will agree to help and who has no
attorney/client or other significant relationship to either Ground
Lessor or Ground Lessee. Such officer will have complete discretion
to select the most objective and competent third appraiser from
between the choice of each of the first two appraisers, and will do
so within 10 days after such choices are submitted to him.
(iv) Either Ground Lessor or Ground Lessee may notify the
appraiser selected by the other party to demand the submission of an
estimate of Option Price or a choice of third appraiser as required
under the procedure described above; and if the submission of such
an estimate or choice is required but the other party's appraiser
fails to comply with the demand within 15 days after receipt of such
notice, then the Option Price or choice of third appraiser, as the
case may be, selected by the other appraiser (i.e., the notifying
party's appraiser) will be binding upon Ground Lessor and Ground
Lessee.
(v) Ground Lessor and Ground Lessee shall each bear the
expense of the appraiser appointed by it, and the expense of the
third appraiser and of any officer of the San Francisco Bar
Association who participates in the appraisal process described
above will be shared equally by Ground Lessor and Ground Lessee.
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<TABLE>
<S> <C> <C>
SECTION 1 INTERPRETATION.................................................................................2
1.01. Definitions....................................................................................2
1.02. Rules of Construction..........................................................................2
SECTION 2. BASIC PROVISIONS...............................................................................2
2.01. Lease of the Property..........................................................................2
2.02. Term...........................................................................................3
2.03. Rent...........................................................................................4
2.04. Receipt and Application of Insurance and Condemnation Proceeds.................................4
2.05. No Lease Termination...........................................................................4
2.06. Purchase Agreement and Lease Agreement.........................................................4
2.07. Use of Leased Property.........................................................................5
2.08. Assignment and Subletting......................................................................5
2.09. Estoppel Certificate...........................................................................5
2.10. Leasehold Mortgages............................................................................6
SECTION 3. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR......................................7
3.01. Title..........................................................................................7
3.02. No Default or Violation........................................................................7
3.03. No Suits.......................................................................................8
3.04. Enforceability.................................................................................8
3.05. Insurance and Casualty.........................................................................8
3.06. Condemnation...................................................................................8
3.07. Further Assurances.............................................................................8
SECTION 4. EVENTS OF DEFAULT..............................................................................9
4.01. Definition of Event of Default.................................................................9
4.02. Remedy.........................................................................................9
4.03. Quiet Enjoyment................................................................................9
4.04. Option to Purchase............................................................................10
SECTION 5. MISCELLANEOUS.................................................................................10
5.01. Notices.......................................................................................10
5.02. Severability..................................................................................10
5.03. No Merger.....................................................................................10
5.04. Entire Agreement..............................................................................10
</TABLE>
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<TABLE>
<S> <C> <C>
5.05. Binding Effect................................................................................11
5.06. Governing Law.................................................................................11
5.07. Waiver of a Jury Trail........................................................................11
5.08. Memorandum of Lease...........................................................................11
5.09. Counterparts..................................................................................11
</TABLE>
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
M-21
<PAGE> 307
EXECUTION COPY
================================================================================
FIRST AMENDED AND RESTATED
GROUND LEASE AGREEMENT
BY
KLA-TENCOR, CORPORATION,
AS GROUND LESSEE
AND
LEASE PLAN U.S.A., INC.,
AS GROUND LESSOR
EFFECTIVE AS OF NOVEMBER 12, 1997
================================================================================
M-22
<PAGE> 308
EXECUTION COPY
================================================================================
PARTICIPATION AGREEMENT
AMONG
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
AND
THE PARTICIPANTS NAMED HEREIN
AND
ABN AMRO BANK N.V.,
AS AGENT FOR THE PARTICIPANTS
AND
BANQUE NATIONALE DE PARIS,
AS CO-AGENT
NOVEMBER 12, 1997
================================================================================
<PAGE> 309
SCHEDULES
I Participants
II Pricing Grid
1.01 Definitions
1.02 Rules of Construction
3.01 Conditions Precedent to Initial Acquisition Advances
3.02 Conditions Precedent to the Tract 4 Acquisition Advance
4.01(g) Litigation
4.01(q) Subsidiaries
4.01(s) Individual Property Representations
EXHIBITS
A Land
B Lease Agreement
C Purchase Agreement
D Construction Agency Agreement
E Acquisition Request
F Improvement/Expense Advance Request
G(1) Commitment Extension Request
G(2) Lease Extension Request
H Assignment of Construction Agreements
I Assignment of Lease
J Lessor Deed of Trust
K Lessor Security Agreement
L Assignment Agreement
M Tract 3 Ground Lease Agreement
-xxiv-
<PAGE> 310
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1. INTERPRETATION.................................................................................3
1.01. Definitions....................................................................................3
1.02. Rules of Construction..........................................................................3
SECTION 2. LEASE FACILITIES...............................................................................3
2.01. Acquisition, Lease, Amount Limitations, Etc....................................................3
2.02. Participation Agreement........................................................................6
2.03. Advance Requests...............................................................................7
2.04. Fees...........................................................................................8
2.05. Funding of Advances............................................................................9
2.06. Sharing of Payments...........................................................................10
2.07. Other Payment Terms...........................................................................12
2.08. Commitment Reductions.........................................................................13
2.09. Extensions....................................................................................14
2.10. Nature of the Transactions....................................................................15
2.11. Security......................................................................................16
2.12. Change of Circumstances.......................................................................17
2.13. Taxes on Payments.............................................................................20
2.14. Funding Loss Indemnification..................................................................22
2.15. Replacement of Participants...................................................................22
SECTION 3. CONDITIONS PRECEDENT..........................................................................23
3.01. Initial Acquisition Advances..................................................................23
3.02. Tract 4 Acquisition Advance...................................................................23
3.03. Improvement/Expense Advances..................................................................23
3.04. Other Conditions Precedent....................................................................23
3.05. Covenant to Deliver...........................................................................23
SECTION 4. REPRESENTATIONS AND WARRANTIES................................................................24
4.01. Lessee's Representations and Warranties.......................................................24
4.02. Lessor's Representations and Warranties.......................................................29
4.03. Participants' Representations and Warranties..................................................30
SECTION 5. COVENANTS.....................................................................................31
</TABLE>
-i-
<PAGE> 311
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
5.01. Lessee's Affirmative Covenants................................................................31
5.02. Lessee's Negative Covenants...................................................................34
5.03. Lessee's Financial Covenants..................................................................40
5.04. Lessor's Covenants............................................................................41
5.05. Participants' Covenants.......................................................................41
SECTION 6. LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS...........................................42
6.01. Appointment of Agent..........................................................................42
6.02. Powers and Immunities.........................................................................42
6.03. Reliance......................................................................................42
6.04. Defaults......................................................................................43
6.05. Indemnification...............................................................................43
6.06. Non-Reliance..................................................................................43
6.07. Resignation or Removal of Agent...............................................................44
6.08. Authorization.................................................................................44
6.09. Lessor and Agent in their Individual Capacities...............................................44
SECTION 7. MISCELLANEOUS.................................................................................44
7.01. Notices.......................................................................................44
7.02. Expenses......................................................................................46
7.03. Indemnification...............................................................................46
7.04. Waivers; Amendments...........................................................................47
7.05. Successors and Assigns........................................................................47
7.06. Setoff........................................................................................51
7.07. No Third Party Rights.........................................................................51
7.08. Partial Invalidity............................................................................51
7.09. JURY TRIAL....................................................................................52
7.10. Counterparts..................................................................................52
7.11. No Joint Venture, Etc.........................................................................52
7.12. Usury Savings Clause..........................................................................52
7.13. Confidentiality...............................................................................52
</TABLE>
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<PAGE> 312
CONSTRUCTION AGENCY AGREEMENT
THIS CONSTRUCTION AGENCY AGREEMENT (this "Agreement" herein), dated
as of November 12, 1997 is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation
("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation
("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which
are "Participants" under the Participation Agreement referred to in Recital B
below (such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by
Lessee (either through purchase or lease), (b) lease to Lessee such
property and certain other property currently held by Lessor, (c)
appoint Lessee as Lessor's agent to make certain improvements to a
portion of such property, (d) make advances to finance such
improvements and to pay certain related expenses, and (e) grant to
Lessee the right to purchase such property; and
(2) The Participants would participate in such lease
facility by (a) funding the purchase prices and other advances to be
made by Lessor and (b) acquiring participation interests in the
rental and certain other payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including without
limitation the execution and delivery of this Agreement setting forth the terms
of Lessee's construction obligations.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
<PAGE> 313
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or
any other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this
Agreement or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Agreement
and the other Operative Documents.
SECTION 2. APPOINTMENT; AUTHORITY.
2.01. Appointment. Lessor hereby appoints Lessee and Lessee hereby
agrees to act as Lessor's agent for the construction of the New Improvements to
the Tract 1 Property, the Tract 3 Property, the Tract 4 Property and the Tract 5
Property.
2.02. Scope of Authority. Lessee shall have the authority to perform
all acts expressly delegated to or undertaken by Lessee under this Agreement and
all other acts reasonably necessary to complete the construction of the New
Improvements in accordance with the Plans and Specifications, this Agreement,
the other Operative Documents, all applicable Governmental Rules and all
applicable Insurance Requirements; provided, however, that no Lessor Party shall
have any obligation to pay any fees, costs or expenses related to such
construction (except to the extent of Lessor's obligation to make, and the
Participants' obligations to fund, Advances pursuant to the Participation
Agreement) and Lessee shall have no authority to, and shall not, enter into any
agreement which would, directly or indirectly, require any Lessor Party to pay
any such fees, costs or expenses or otherwise impose upon any Lessor Party any
liability or obligation. Subject to the terms and conditions of this Agreement
and the other Operative Documents, Lessee shall have sole management and control
over the construction means, methods, sequences and procedures with respect to
the construction of the New Improvements.
2.03. Delegation of Duties. Lessee may employ such architects,
engineers, contractors, consultants, agents, employees and other Persons as
Lessee determines are necessary or appropriate to construct the New Improvements
and perform its other obligations and duties hereunder and may delegate to such
Persons any or all of such obligations and duties; provided, however, that no
such employment or delegation shall limit or reduce in any way Lessee's
obligations and duties under this Agreement.
SECTION 3. LESSEE'S OBLIGATIONS AND DUTIES.
3.01. Plans and Specifications. Lessee shall deliver to Lessor, for
approval by Lessor and Agent, the Plans and Specifications for all new
improvements it elects to make to each Tract of Property. Once any Plans and
Specifications for any Tract of Property are so delivered and
2
<PAGE> 314
approved by Lessor and Agent, Lessee shall not agree to or permit any revision,
amendment, supplementation or other modification to such Plans and
Specifications without the written consent of Lessor if such revision,
amendment, supplementation or modification (either alone or together with all
prior revisions, amendments, supplementations and modifications to all Plans and
Specifications for all of the Tracts of Property) is reasonably likely to:
(a) Cause the Acquisition Prices plus all other costs and
expenses of acquiring all of the Tracts of Property and constructing
all of the New Improvements to all the Tracts of Property in
accordance with this Agreement (including all Permitted Improvement
Costs and Permitted Transaction Expenses paid or to be paid with
Advances) to exceed the lesser of (i) the Total Commitment and (ii)
the sum of the most recent Expiration Date Appraisals for all of the
Tracts of Property (or, in the case of any Tract of Property for
which Lessee does not deliver an Expiration Date Appraisal, the
Closing Date Appraisal therefor) ;
(b) Make it difficult or impossible to Complete the
construction of all the New Improvements to such Tract of Property in
accordance with this Agreement on or prior to the Outside Completion
Date; or
(c) Cause the Fair Market Value of such Tract of Property
to be less than the most recent Expiration Date Appraisal for such
Tract of Property (or, in the case of any Tract of Property for which
Lessee does not deliver an Expiration Date Appraisal, the Closing
Date Appraisal therefor) or otherwise decrease in any material
amount.
Lessee shall notify Lessor promptly in writing of any revision, amendment,
supplementation or other modification to the Plans and Specifications.
3.02. Construction Agreements. Lessee has entered or shall, on a
timely basis, enter into such agreements with architects, engineers,
contractors, consultants, materialmen, suppliers, agents, employees and other
Persons as are necessary or appropriate to construct the New Improvements and
perform Lessee's other obligations and duties hereunder in connection therewith
(together with the Plans and Specifications, the "Construction Agreements").
Each Construction Agreement shall expressly permit the assignment of Lessee's
rights thereunder to Lessor without the consent of the other party(ies) to such
agreement. Upon Lessor's request, Lessee shall deliver to Lessor copies of any
or all Construction Agreements.
3.03. Permits, Approvals, Etc. Prior to the time they are required,
Lessee shall obtain from Governmental Authorities and other Persons all
licenses, approvals, authorizations, consents, permits, easements and
rights-of-way that are necessary for the construction of any New Improvements in
accordance with this Agreement. Upon Lessor's request, Lessee shall deliver to
Lessor copies of any or all such licenses, approvals, authorizations, consents,
permits, easements and rights-of-way.
3.04. Material and Supplies. Lessee shall obtain all materials and
supplies necessary to construct the New Improvements. Lessee shall cause all
such materials and supplies (a) to be purchased in a manner that will result in
the ownership thereof vesting unconditionally in Lessor,
3
<PAGE> 315
free from all Liens (other than Liens that attach in favor of the materialmen or
subcontractors that supply and/or install such materials and supplies); (b) to
be stored at the applicable Tract of Land under adequate safeguards to minimize
the possibility of loss, theft, damage or commingling with other materials or
projects; and (c) to be covered by the insurance policies required under this
Agreement and the other Operative Documents. Upon Lessor's request, Lessee shall
deliver to Lessor copies of any contracts, bills of sale, statements, receipts,
vouchers or agreements for the materials and supplies used or to be used in the
construction of the New Improvements.
3.05 Construction.
(a) Manner. Lessee shall construct the New Improvements
(including all foundations and structural portions thereof; all
plumbing, heating, air conditioning and electrical systems; and all
water, sewer, electric, gas, telephone and drainage facilities) in a
good and workmanlike manner, free from any material defect in design
or construction, in accordance with the Plans and Specifications,
this Agreement, the other Operative Documents, all applicable
Governmental Rules and all applicable Insurance Requirements.
(b) Completion. Lessee shall Complete the construction of
the New Improvements to all Tracts of Property on which New
Improvements are to be constructed on or prior to the Outside
Completion Date. "Completion" shall occur for the New Improvements to
a Tract of Property when each of the following conditions has been
satisfied:
(i) The New Improvements to such Tract of
Property have been completed in accordance with this
Agreement, are in first class working condition and are
ready for occupancy and use as a facility as described in
clause (ii) under the heading for the applicable Tract of
Property in Schedule 4.01(s) to the Participation
Agreement. This shall include, without limiting the
generality of the preceding sentence, evidence that (A) all
utilities required to adequately service such New
Improvements for their intended use are available and
"tapped on" and hooked up pursuant to adequate permits
(including any that may be required under applicable
Environmental Laws) and (B) access to such New Improvements
for pedestrians and motor vehicles from publicly dedicated
streets and public highways are available.
(ii) Lessee shall have furnished to Lessor each
of the following:
(A) A certificate of Lessee in the form
of Exhibit A, duly executed by Lessee;
(B) A certificate of an architect
acceptable to Lessor in the form of Exhibit B,
duly executed by such architect, together with
copies of each of the documents referred to
therein;
4
<PAGE> 316
(C) A date-down endorsement to or
reissued title insurance policies or binders
delivered by Lessee pursuant to Paragraph 3.02
and Schedule 3.02 of the Participation Agreement;
(D) Copies of all mechanic's or
materialman's lien waivers and releases as
required by Lessor; and
(E) Certificate of final occupancy
issued by the appropriate Governmental Authority.
3.06. Insurance. Lessee (and its general contractor) shall maintain
policies of casualty and liability insurance as provided in Paragraph 3.03 of
the Lease Agreement.
3.07. Fees, Costs and Expenses.
(a) Lessee's Responsibility. Except to the extent such
fees, costs and expense are paid by Advances, Lessee shall pay all
fees, costs and expenses of constructing the New Improvements from
its own funds.
(b) Prompt Payment. Lessee shall pay promptly all fees,
costs and expenses of architects, engineers, contractors,
materialmen, suppliers, consultants, agents, employees and other
Persons which provide services, materials or supplies in connection
with the construction of the New Improvements and all other fees,
costs and expenses related to such construction.
(c) No Lessee Fee. Lessee shall not be entitled to any fee
for the performance of its obligations and duties hereunder or any
other compensation in connection with this Agreement.
3.08. Books and Records. Lessee shall maintain accurate books and
records, in reasonable detail, relating to the construction of the New
Improvements and shall permit Lessor to inspect the same and make copies
thereof, at Lessee's expense, upon reasonable notice to Lessee.
3.09. Additional Obligations and Duties. In addition to the
obligations and duties set forth above in this Section 3, Lessee shall perform
all other acts reasonably necessary to achieve Completion of the construction of
the New Improvements in accordance with the Plans and Specifications, this
Agreement, the other Operative Documents, all applicable Governmental Rules and
all applicable Insurance Requirements.
SECTION 4. MISCELLANEOUS.
4.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this
5
<PAGE> 317
Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01
of the Participation Agreement.
4.02. Waivers; Amendments. Any term, covenant, agreement or condition
of this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
4.03. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
4.04. No Third Party Rights. Nothing expressed in or to be implied
from this Agreement is intended to give, or shall be construed to give, any
Person, other than the Lessor Parties and Lessee and their permitted successors
and assigns, any benefit or legal or equitable right, remedy or claim under or
by virtue of this Agreement or under or by virtue of any provision herein.
4.05. Partial Invalidity. If at any time any provision of this
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
4.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
4.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
4.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to
construct the New Improvements pursuant to this Agreement and the
other Operative Documents and to perform the other Lessee Obligations
are absolute, unconditional and irrevocable obligations which are
separate and independent of the obligations of the Lessor Parties
under this Agreement and the other Operative Documents and all other
events and circumstances, including the events and circumstances set
forth in Subparagraph 4.08(c).
(b) No Termination or Abatement. This Agreement and the
other Operative Documents and Lessee's obligation to construct the
New Improvements and to pay and
6
<PAGE> 318
perform all other Lessee Obligations shall continue in full
force and effect without abatement notwithstanding the
occurrence or existence of any event or circumstance, including
any event or circumstance set forth in Subparagraph 4.08(c).
(c) Full Payment and Performance. Lessee shall perform all
of its obligations under this Agreement and the other Operative
Documents in the manner and at the times required by the terms of
this Agreement and the other Operative Documents without setoff,
deduction or reduction of any kind and shall perform all other Lessee
Obligations as and when required, without regard to any event or
circumstances whatsoever, including (i) the condition of the Property
(including any Improvements to the Property made prior to the
Commencement Date or during the Term); (ii) title to the Property
(including possession of the Property by any Person or the existence
of any Lien or any other right, title or interest in or to any of the
Property in favor of any Person); (iii) the value, habitability,
useability, design, operation or fitness for use of the Property;
(iv) the availability or adequacy of utilities and other services to
the Property; (v) any latent, hidden or patent defect in the
Property; (vi) the zoning or status of the Property or any other
restrictions on the use of the Property; (g) the economics of the
Property; (vii) any Casualty or Condemnation; (viii) the compliance
of the Property with any applicable Governmental Rule or Insurance
Requirement; (ix) any failure by any Lessor Party to perform any of
its obligations under this Agreement or any other Operative Document;
or (x) the exercise by any Lessor Party of any of its remedies under
this Agreement or any other Operative Document; provided, however,
that (A) Lessor shall have no obligation to continue constructing the
New Improvements at any time the Lessor Parties are refusing to make
any Advance in violation of the Participation Agreement and (B) this
Paragraph 4.08 shall not abrogate any right which Lessee may have to
recover damages from any Lessor Party for any material breach by such
Lessor Party of its obligations under this Agreement or any other
Operative Document to the extent permitted hereunder or thereunder.
[The signature page follows.]
7
<PAGE> 319
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to
be executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By: _________________________________
Name:_________________________
Title:________________________
LESSOR: LEASE PLAN U.S.A., INC.
By: _________________________________
Name:_________________________
Title:________________________
8
<PAGE> 320
EXHIBIT A
LESSEE'S COMPLETION CERTIFICATE
________________, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12,
1997 (the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent"); and
(b) The Construction Agency Agreement, dated as of November
12, 1997 (the "Construction Agency Agreement"), between Lessee and
Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Lessee hereby certifies to Lessor, for the benefit of all of the
Lessor Parties, as follows:
(a) Lessee has completed all of the New Improvements to the
Tract [__] Property in accordance with the Plans and Specifications,
the Construction Agency Agreement, the other Operative Documents, all
applicable Governmental Rules and all applicable Insurance
Requirements and the New Improvements now are ready for use and
occupancy as a facility described in clause (ii) under the heading
"Tract [__] Property" in Schedule 4.01(s) to the Participation
Agreement.
(b) All amounts payable to third parties for the
construction of such New Improvements have been paid in full (other
than amounts which Lessee is contesting in accordance with the Lease
Agreement).
(c) No changes or modifications that have had an adverse
effect on the value, use or useful life of the Tract [__] Property
were made to the Plans and Specifications for the New Improvements to
such Property after the date the Plans and Specifications for such
Property were approved by Lessor, Agent and the Participants pursuant
to Subparagraph 2.01(c) of the Participation Agreement.
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<PAGE> 321
(d) The representations and warranties relating to the
Tract [__] Property set forth in Subparagraph 4.01(s) of the
Participation Agreement and Schedule 4.01(s) to the Participation
Agreement and the other representations and warranties of Lessee set
forth in the Operative Documents are true and correct in all material
respects on the date hereof (except for representations and
warranties expressly made as of a specified date, which shall be true
as of such date).
(e) No Default has occurred and is continuing.
(f) All of the Operative Documents are in full force and
effect.
IN WITNESS WHEREOF, Lessee has executed this Lessee's Completion
Certificate on the date set forth above.
KLA-TENCOR CORPORATION
By:_________________________________
Name:________________________
Title:_______________________
A-2
<PAGE> 322
EXHIBIT B
ARCHITECT'S COMPLETION CERTIFICATE
________________, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The [____________] Agreement, dated as of [____] (the
"Architect's Agreement"), between KLA-Tencor Corporation ("Lessee")
and [__________] ("Architect"); and
(b) The plans and specifications dated as of [_______]
prepared by Architect for certain improvements to the property
located at [_______________] (the "Plans and Specifications").
2. The undersigned hereby certifies to you as follows:
(a) The improvements contemplated by the Plans and
Specifications (the "Improvements") have been completed substantially
in accordance with such Plans and Specifications, a final certificate
of occupancy has been issued by the appropriate governmental agency,
and the Improvements are ready for use and occupancy.
(b) To the best of [my][our] knowledge, the Improvements as
so completed comply with all applicable laws, rule, regulations and
ordinances pertaining to the construction and occupancy thereof,
including applicable building and zoning laws, rule, regulations and
ordinances, and the Americans with Disabilities Act of 1990, 42
U.S.C. Section 1210 et seq.
(c) No changes or modifications were made to the Plans and
Specifications after the date thereof that have had an adverse effect
on the value, use or useful life of the Property.
(d) Attached hereto are true and complete copies of an "as
built" or "record" set of the plans and specifications for the
Improvements, and an ALTA survey of the property "as built" showing
all paving, driveways, fences and exterior improvements.
B-1
<PAGE> 323
IN WITNESS WHEREOF, the undersigned has executed this Architect's
Completion Certificate on the date set forth above.
[Name of Architectural Firm]
By:______________________________
Name:_____________________
Title:____________________
B-2
<PAGE> 324
EXECUTION COPY
================================================================================
CONSTRUCTION AGENCY AGREEMENT
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
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TABLE OF CONTENTS
PAGE
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SECTION 1. INTERPRETATION................................................2
1.01. Definitions......................................................2
1.02. Rules of Construction............................................2
SECTION 2. APPOINTMENT; AUTHORITY........................................2
2.01. Appointment......................................................2
2.02. Scope of Authority...............................................2
2.03. Delegation of Duties.............................................2
SECTION 3. LESSEE'S OBLIGATIONS AND DUTIES...............................2
3.01. Plans and Specifications.........................................2
3.02. Construction Agreements..........................................3
3.03. Permits, Approvals, Etc..........................................3
3.04. Material and Supplies............................................3
3.05 Construction.....................................................4
3.06. Insurance........................................................5
3.07. Fees, Costs and Expenses.........................................5
3.08. Books and Records................................................5
3.09. Additional Obligations and Duties................................5
SECTION 4. MISCELLANEOUS.................................................5
4.01. Notices..........................................................5
4.02. Waivers; Amendments..............................................6
4.03. Successors and Assigns...........................................6
4.04. No Third Party Rights............................................6
4.05. Partial Invalidity...............................................6
4.06. Governing Law....................................................6
4.07. Counterparts.....................................................6
4.08. Nature of Lessee's Obligations...................................6
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TABLE OF CONTENTS
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EXHIBITS
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A Lessee's Completion Certificate (3.05(c))
B Architect's Completion Certificate (3.05(c)
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CONSTRUCTION DEED OF TRUST
THIS CONSTRUCTION DEED OF TRUST dated as of November 12, 1997 (this
"Deed of Trust"), is made by LEASE PLAN U.S.A., INC., a Georgia corporation, as
trustor ("Lessor"), with an address at 135 South LaSalle Street, Chicago, IL
60603, to SANTA CLARA LAND TITLE COMPANY, as trustee ("Trustee"), in favor of
ABN AMRO BANK N.V., with an address at 1325 Avenue of the Americas, 9th Floor,
New York, NY 10019, in its capacity as Agent, as beneficiary (in such capacity,
"Agent"), under the Participation Agreement, dated of even date herewith (as
amended, supplemented or otherwise modified from time to time, the
"Participation Agreement"), among KLA-Tencor Corporation, a Delaware corporation
("Lessee"), Lessor, Agent, and the financial institutions from time to time
parties to the Participation Agreement (the "Participants").
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Deed of Trust or
any other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Deed of Trust or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Deed of Trust or other document, instrument or
agreement referenced in such Schedule 1.01. All terms defined in the UCC shall
have the respective meanings given to those terms in the UCC.
1.02. Rules of Construction. Unless otherwise indicated in this Deed of
Trust or any other Operative Document, the rules of construction set forth in
Schedule 1.02 to the Participation Agreement shall apply to this Deed of Trust
and the other Operative Documents.
SECTION 2. GRANT IN TRUST
2.01. Property. To secure payment of the Secured Obligations (as defined
below), Lessor does hereby GRANT, CONVEY, SELL, TRANSFER, ASSIGN AND SET OVER
UNTO TRUSTEE, IN TRUST FOR THE BENEFIT OF AGENT, WITH POWER OF SALE AND RIGHT OF
ENTRY AND POSSESSION, all of Lessor's right, title and interest, whether now
owned or hereafter acquired, in or to the following property and rights listed
below (such right, title and interest in such property and rights hereinafter
collectively referred to as the "Property") to the extent of Lessor's estate,
right, title and interest therein, thereto or thereunder:
(a) All lots, pieces, tracts and parcels of land described in
Exhibit A together with such additional parcels of real property as may
be added to Exhibit A from time to time during the term hereof (the
"Land");
(b) All Improvements and Appurtenant Rights;
(c) All Related Goods (including those described in Exhibit B and
in each Exhibit B Supplement), Related Permits and Related Agreements;
and
(d) All accessions and accretions to and replacements and
substitutions for the foregoing.
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SECTION 3. OBLIGATIONS SECURED
3.01. Obligations Secured. Lessor makes this grant and assignment for
the purpose of securing the following obligations (hereinafter "Secured
Obligations"):
(a) Full and punctual payment, performance and observance by
Lessor of the Lessor Obligations; and
(b) All modifications, extensions and renewals of any of the
obligations secured hereby, however evidenced, including, without
limitation: (i) modifications of the required payment, deferring or
accelerating payment dates wholly or partly; or (ii) amendments,
modifications, extensions or renewals of this Deed of Trust, the
Participation Agreement or any of the other Operative Documents.
SECTION 4. REPRESENTATIONS, WARRANTIES, COVENANTS AND DUTIES OF THE PARTIES.
4.01. Representations and Warranties. Lessor represents and warrants to
Agent as follows:
(a) Lessor is the legal and beneficial owner of the Property (or,
in the case of after-acquired Property, at the time Lessor acquires
rights in the Property, will be the legal and beneficial owner thereof).
(b) Lessor has not transferred to any other Person any of its
right, title or interest in the Property, whether by way of Lien or
otherwise.
(c) Lessor's chief executive office is located at 180 Interstate
Parkway North, Atlanta, Georgia 30339.
4.02. Covenants. Lessor hereby covenants to Agent as follows:
(a) Lessor shall promptly procure, execute and deliver to Agent
all documents, instruments and agreements and perform all acts which are
necessary or desirable, or which Agent may request, to establish,
maintain, preserve, protect and perfect the Property, the Lien granted
to Agent therein and the first priority of such Lien or to enable Agent
to exercise and enforce its rights and remedies hereunder with respect
to any Property.
(b) Lessor shall not sell, transfer or assign any of its right,
title or interest in the Property to any Person (other than Agent),
whether by way of Lien or otherwise.
(c) Without prompt written notice to Agent, Lessor shall not
change Lessor's name or chief executive office.
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4.03. Damages; Insurance and Condemnation Proceeds.
(a) Lessor shall give Agent prompt written notice of the
occurrence of any casualty affecting, or the institution of any
proceedings for eminent domain or for the condemnation of, the Property
or any portion thereof. Agent may participate in any such claims or
proceedings, and Agent is hereby authorized, in its own name or in
Lessor's name, to adjust any loss covered by insurance or any
condemnation claim or cause of action, and to settle or compromise any
claim or cause of action in connection therewith, and Lessor shall from
time to time deliver to Agent any and all further assignments and other
instruments required to permit such participation. The provisions
regarding the adjustment of any loss covered by insurance or any
condemnation claim or cause of action, and to settlement or compromise
of any claim or cause of action in connection therewith provided in this
Section 4.03(a) are subject to the adjustment, settlement and compromise
provisions set forth in the Lease Agreement. In the event of any
conflict, the adjustment, settlement and compromise provisions as
provided in the Lease Agreement shall govern.
(b) The following rights, claims and amounts are hereby
absolutely and irrevocably assigned to and shall be paid to Agent: (i)
all awards of damages and all other compensation payable directly or
indirectly by reason of a condemnation or proposed condemnation for
public or private use affecting all or any part of, or any interest in,
the Property; (ii) all other claims and awards for damages to or
decrease in value of all or any part of, or any interest in, the
Property; (iii) all proceeds of any insurance policies payable by reason
of loss sustained to all or any part of the Property; and (iv) all
interest which may accrue on any of the foregoing (collectively, "Loss
Proceeds"). The provisions regarding Loss Proceeds provided in this
Section 4.03(b) are subject to the insurance and condemnation provisions
set forth in the Lease Agreement. In the event of any conflict, the
insurance and condemnation provisions as provided in the Lease Agreement
shall govern.
4.04. Acceptance of Trust; Powers and Duties of Trustee. Trustee accepts
this trust when this Deed of Trust is recorded. From time to time upon written
request of Agent and presentation of this Deed of Trust, or a certified copy
thereof, for endorsement, and without affecting the personal liability of any
person for payment of any indebtedness or performance of any Secured Obligation,
Trustee may, without liability therefor and without notice: (a) reconvey all or
any part of the Property; (b) consent to the making of any map or plat thereof;
(c) join in granting any easement thereon; (d) join in any declaration of
covenants and restrictions; or (e) join in any extension agreement or any
agreement subordinating the lien or charge hereof. Except as may otherwise be
required by applicable law, Trustee or Agent may from time to time apply to any
court of competent jurisdiction for aid and direction in the execution of the
trusts hereunder and the enforcement of the rights and remedies available
hereunder, and Trustee or Agent may obtain orders or decrees directing or
confirming or approving acts in the execution of said trusts and the enforcement
of said remedies. Trustee has no obligation to notify any party of any pending
sale or any action or proceeding (including, without limitation, actions in
which Lessor, Agent or Trustee shall be a party) unless held or commenced and
maintained by Trustee under this Deed of Trust. Trustee shall not be obligated
to perform any act required of it
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hereunder unless the performance of the act is requested in writing and Trustee
is reasonably indemnified and held harmless against loss, cost, liability and
expense.
4.05. Substitution of Trustee. From time to time, by a writing signed
and acknowledged by Agent and recorded in the Office of the Recorder of the
County in which the Property is situated, Agent may appoint another trustee to
act in the place and stead of Trustee or any successor. Such writing shall set
forth any information required by law. The recordation of such instrument of
substitution shall discharge Trustee herein named and shall appoint the new
trustee as the trustee hereunder with the same effect as if originally named
trustee herein. A writing recorded pursuant to the provisions of this paragraph
shall be conclusive proof of the proper substitution of such new trustee.
4.06. Partial and Full Reconveyance. Agent may release, for such
consideration or none, as it may require, any portion of the Property without,
as to the remainder of the Property, in any way impairing or affecting the lien,
security interest and priority herein provided to the Agent as to any other lien
holder or secured party. Further, upon satisfaction in full of the Secured
Obligations, or upon Agent's written request, and upon surrender of this Deed of
Trust or certified copy thereof and any note, instrument or instruments setting
forth all obligations secured hereby to Trustee for cancellation, Trustee shall
reconvey, without warranty, the Property or that portion thereof then held
hereunder. The recitals of any matters or facts in any reconveyance executed
hereunder shall be conclusive proof of the truthfulness thereof. To the extent
permitted by law, the reconveyance may describe the grantee as "the person or
persons legally entitled thereto." Neither Agent nor Trustee shall have any duty
to determine the rights of persons claiming to be rightful grantees of any
reconveyance.
4.07. Releases, Extensions, Modifications and Additional Security. Agent
may, from time to time, release any person or entity from liability for the
payment or performance of any Secured Obligation, take any action or make any
agreement extending the maturity or otherwise altering the terms or increasing
the amount of any Secured Obligation, or accept additional security or release
all or a portion of the Property and other security for the Secured Obligations.
None of the foregoing actions shall release or impair the priority of the lien
of this Deed of Trust upon the Property.
SECTION 5. DEFAULT; REMEDIES.
5.01. Event of Default. The occurrence of any of the following events
shall be deemed an event of default ("Event of Default") hereunder:
(a) The occurrence of an Event of Default as defined in the
Lease Agreement; or
(b) Lessor shall fail to observe, perform or discharge any of
Lessor's Obligations, and (i) such failure shall remain uncured for
thirty (30) days after written notice thereof shall have been given to
Lessor by Agent, or (ii) if such failure is of such a nature that it
cannot be cured within such thirty (30) day period, Lessor shall fail to
commence to cure such failure within such thirty (30) day period or
shall fail to diligently prosecute such curative action thereafter.
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5.02. Rights and Remedies. At any time after the occurrence and during
the continuance of an Event of Default, Agent and Trustee shall each have all of
the following rights and remedies:
(a) Appointment of a Receiver. To apply to any court of competent
jurisdiction for, and obtain appointment of, a receiver for the
Property.
(b) Specific Performance. To bring an action in any court of
competent jurisdiction to obtain specific enforcement of any of the
covenants or agreements of Lessor in this Deed of Trust or any of the
other Operative Documents.
(c) Collection of Issues and Profits. To collect Issues and
Profits.
(d) Protection of Property. To enter, take possession of, manage
and operate all or any part of the Property or take any other actions
which it reasonably determines are necessary to protect the Property and
the rights and remedies of Agent under this Deed of Trust and the other
Operative Documents, including (i) taking and possessing all of Lessor's
books and records; (ii) entering into, enforcing, modifying, or
canceling subleases on such terms and conditions as Agent may consider
proper; (iii) obtaining and evicting tenants; (iv) fixing or modifying
sublease rents; (v) collecting and receiving any payment of money owing
to Lessee; (vi) completing any unfinished Improvements; and/or (vii)
contracting for and making repairs and alterations.
(e) Uniform Commercial Code Remedies. To exercise any or all of
the remedies granted to a secured party under the California Uniform
Commercial Code.
(f) Judicial Foreclosure. To bring an action in any court of
competent jurisdiction to foreclose the security interest in the
Property granted to Agent by this Deed of Trust or any of the other
Operative Documents.
(g) Power of Sale. To cause some or all of the Property,
including any Personal Property Collateral, to be sold under a power of
sale or otherwise disposed of in any combination and in any manner
permitted by applicable Governmental Rules.
(i) Sales of Personal Property. Agent may dispose of any
Personal Property Collateral separately from the sale of Real
Property Collateral, in any manner permitted by Division 9 of the
California Uniform Commercial Code, including any public or
private sale, or in any manner permitted by any other applicable
Governmental Rule. Any proceeds of any such disposition shall not
cure any Event of Default or reinstate any Lessor Obligation for
purposes of Section 2924c of the California Civil Code. In
connection with any such sale or other disposition, Lessor agrees
that the following procedures constitute a commercially
reasonable sale:
(A) Agent shall mail written notice of the sale to
Lessor not later than thirty (30) days prior to such sale.
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(B) Once per week during the three weeks
immediately preceding such sale, Agent will publish notice
of the sale in a local daily newspaper of general
circulation.
(C) Upon receipt of any written request, Agent will
make the Property available to any bona fide prospective
purchaser for inspection during reasonable business hours.
(D) Notwithstanding anything to the contrary
herein, Agent shall be under no obligation to consummate a
sale if, in its judgment, none of the offers received by
it equals the fair value of the Property offered for sale.
(E) If Agent so requests, Lessor shall assemble all
of the Personal Property Collateral and make it available
to Agent at the site of the Land. Regardless of any
provision of this Deed of Trust or any other Operative
Document, Agent shall not be considered to have accepted
any property other than cash or immediately available
funds in satisfaction of any Lessor Obligation, unless
Agent has given express written notice of its election of
that remedy in accordance with California Uniform
Commercial Code Section 9505.
The foregoing procedures do not constitute the only procedures
that may be commercially reasonable.
(ii) Agent's Sales of Real Property or Mixed Collateral.
Agent may choose to dispose of some or all of the Property which
consists solely of Real Property Collateral in any manner then
permitted by applicable Governmental Rules, including without
limitation a nonjudicial trustee's sale pursuant to California
Civil Code ss.ss. 2924 et seq. In its discretion, Agent may also
or alternatively choose to dispose of some or all of the
Property, in any combination consisting of both Real Property
Collateral and Personal Property Collateral, together in one sale
to be held in accordance with the law and procedures applicable
to real property, as permitted by Section 9501(4) of the
California Uniform Commercial Code. Lessor agrees that such a
sale of Personal Property Collateral together with Real Property
Collateral constitutes a commercially reasonable sale of the
Personal Property Collateral. (For purposes of this power of
sale, either a sale of Real Property Collateral alone, or a sale
of both Real Property Collateral and Personal Property Collateral
together in accordance with California Uniform Commercial Code
Section 9501(4), will sometimes be referred to as an "Agent's
Sale.")
(A) Before any Agent's Sale, Agent shall give such
notice of default and election to sell as may then be
required by applicable Governmental Rules.
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(B) When all time periods then legally mandated
have expired, and after such notice of sale as may then be
legally required has been given, Agent shall sell the
property being sold at a public auction to be held at the
time and place specified in the notice of sale.
(C) Agent shall have no obligation to make demand
on Lessor before any Agent's Sale.
(D) From time to time in accordance with then
applicable law, Agent may postpone any Agent's Sale by
public announcement at the time and place noticed for that
sale.
(E) At any Agent's Sale, Agent shall sell to the
highest bidder at public auction for cash in lawful money
of the United States.
(F) Agent shall execute and deliver to the
purchaser(s) a deed or deeds conveying the Property being
sold without any covenant or warranty whatsoever, express
or implied. The recitals in any such deed of any matters
or facts, including any facts bearing upon the regularity
or validity of any Agent's Sale, shall be conclusive proof
of their truthfulness. Any such deed shall be conclusive
against all Persons as to the facts recited in it.
(h) Foreclosure Sales.
(i) Single or Multiple. If the Property consists of more
than one lot, parcel or item of property, Agent may:
(A) Designate the order in which the lots, parcels
and/or items shall be sold or disposed of or offered for
sale or disposition; and
(B) Elect to dispose of the lots, parcels and/or
items through a single consolidated sale or disposition to
be held or made under the power of sale granted under this
Deed of Trust, or in connection with judicial proceedings,
or by virtue of a judgment and decree of foreclosure and
sale; or through two or more such sales or dispositions;
or in any other manner Agent may deem to be in its best
interests (any such sale or disposition, a "Foreclosure
Sale;" any two or more, "Foreclosure Sales").
If Agent chooses to have more than one Foreclosure Sale, Agent at
its option may cause the Foreclosure Sales to be held
simultaneously or successively, on the same day, or on such
different days and at such different times and in such order as
it may deem to be in its best interests. No Foreclosure Sale
shall terminate or affect the security interests granted to Agent
in the Property by this Deed of Trust on any part of the Property
which has not been sold, until all of the Lessor Obligations have
been performed in full.
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(ii) Credit Bids. At any Foreclosure Sale, any Person,
Participant or Agent may bid for and acquire the Property or any
part of it to the extent permitted by then applicable
Governmental Rules. Instead of paying cash for that property,
Agent may settle for the purchase price by crediting the sales
price of the Property against the Lessor Obligations in any order
and proportions as Agent in its sole discretion may choose.
(i) Other Rights and Remedies. To exercise any other right, power
or remedy permitted to it by any applicable Governmental Rule, either by
suit in equity or by action at law, or both.
5.03. Remedies Cumulative. The rights and remedies of Agent under this
Deed of Trust and the other Operative Documents are cumulative and may be
exercised singularly, successively, or together.
5.04. No Cure or Waiver. The exercise by Agent of any of its other
rights and remedies under this Deed of Trust or any other Operative Document
(including the collection of Issues and Profits) shall not constitute a cure or
waiver of any Event of Default or nullify the effect of any notice of default or
sale, unless and until all Lessor Obligations are performed in full.
5.05. Exercise of Rights and Remedies. The rights and remedies provided
to Agent under this Deed of Trust may be exercised by Agent itself, by a
court-appointed receiver or by any other Person appointed by any of the
foregoing to act on its behalf. All of the benefits afforded to Agent under this
Deed of Trust and the other Operative Documents shall accrue to the benefit of
the Participants to the extent provided in Subparagraph 2.02(c) of the
Participation Agreement.
SECTION 6. MISCELLANEOUS PROVISIONS
6.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Deed of Trust shall be given as provided in Paragraph
7.01 of the Participation Agreement.
6.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Deed of Trust may be amended or waived only as provided in the
Participation Agreement. No failure or delay by Agent in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
6.03. Successors and Assigns. This Deed of Trust shall be binding upon
and inure to the benefit of the Lessor Parties and their permitted successors
and assigns; provided, however, that the Lessor Parties shall not sell, assign
or delegate their respective rights and obligations hereunder except as provided
in the Participation Agreement.
6.04. No Third Party Rights. Nothing expressed in or to be implied from
this Deed of Trust is intended to give, or shall be construed to give, any
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Person, other than the Lessor Parties and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Deed of Trust or under or by virtue of any provision herein.
6.05. Partial Invalidity. If at any time any provision of this Deed of
Trust is or becomes illegal, invalid or unenforceable in any respect under the
law or any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Deed of Trust nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
6.06. Governing Law. This Deed of Trust shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
6.07. Counterparts. This Deed of Trust may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
6.08. Further Assurances. Lessor shall, upon demand by Agent or Trustee,
execute, acknowledge (if appropriate) and deliver any and all documents and
instruments and do or cause to be done all further acts reasonably necessary or
appropriate to effectuate the provisions hereof.
6.09. Merger. No merger shall occur as a result of Agent's acquiring any
other estate in, or any other lien on, the Property unless Agent consents to a
merger in writing.
6.10. Waiver of Marshalling Rights. Lessor, for itself and for all
parties claiming through or under Lessor, and for all parties who may acquire a
lien on or interest in the Property, hereby waives all rights to have the
Property and/or any other property which is now or later may be security for any
Secured Obligation marshalled upon any foreclosure of this Deed of Trust or on a
foreclosure of any other security for any of the Secured Obligations.
6.11. Exhibits. Exhibit A is incorporated into this Deed of Trust by
this reference.
6.12 Subordinate Deed of Trust. This Deed of Trust is junior and
subordinate to the Lease Agreement and the Purchase Agreement.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, Lessor has caused this Deed of Trust to be executed
as of the day and year first above written.
LEASE PLAN U.S.A., INC.,
a Georgia corporation
By: _____________________________
Name: _______________________
Title: ______________________
(ALL SIGNATURES MUST BE ACKNOWLEDGED)
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STATE OF CALIFORNIA )
)
COUNTY OF________________ )
On ___________ ___, 1997 before me, _______________________, a
Notary Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
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EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
ALL THAT CERTAIN REAL PROPERTY LOCATED IN THE COUNTY OF SANTA CLARA, CALIFORNIA,
DESCRIBED AS FOLLOWS:
APN: __________
A-1
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RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
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CONSTRUCTION DEED OF TRUST
DATED AS OF NOVEMBER 12, 1997
BY
LEASE PLAN U.S.A., INC.,
AS TRUSTOR ("LESSOR")
TO
SANTA CLARA LAND TITLE COMPANY,
AS TRUSTEE
FOR THE BENEFIT OF
ABN AMRO BANK N.V., AS AGENT,
AS BENEFICIARY ("AGENT")
RELATING TO PROPERTY SITUATED IN:
SANTA CLARA COUNTY, CALIFORNIA
<PAGE> 340
RECORDING REQUESTED BY
AND WHEN RECORDED, RETURN TO:
Orrick, Herrington & Sutcliffe
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, CA 94111
Attn: James W. Miller, Esq.
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FIRST AMENDMENT TO CONSTRUCTION DEED OF TRUST
THIS FIRST AMENDMENT TO CONSTRUCTION DEED OF TRUST (this "Amendment"),
dated as of November 14, 1997, is entered into by and between LEASE PLAN U.S.A.,
INC., a Georgia corporation, as trustor ("Lessor") with an address at 135 South
LaSalle Street, Chicago, IL 60603, and ABN AMRO BANK N.V., with an address at
101 California Street, Suite 4550, San Francisco, CA 94111-5812, in its capacity
as Agent, as beneficiary (in such capacity, "Agent"), under the Participation
Agreement, dated as of November 12, 1997 (as amended, supplemented or otherwise
modified from time to time, the "Participation Agreement"), among KLA-Tencor
Corporation, a Delaware corporation ("Lessee"), Lessor, Agent, and the financial
institutions from time to time parties to the Participation Agreement (the
"Participants").
RECITALS
A. Lessor and Agent are parties to a certain Construction Deed of Trust
dated as of November 12, 1997, and recorded on November 12, 1997, in the
Official Records of Santa Clara County, California, as Document No. 13935261
(the "Lessor Deed of Trust").
B. Pursuant to the terms of the Participation Agreement, Lessor has
acquired that certain real property described on Exhibit A attached hereto (the
"Tract 4 Land") and made a part hereof.
C. Lessor and Agent now desire to amend the Lessor Deed of Trust to add
the Tract 4 Land to the property under the Lessor Deed of Trust.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessor and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in Schedule 1.01 to the Participation
Agreement. The rules of construction set forth in Schedule
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1.02 to the Participation Agreement shall, to the extent not inconsistent with
the terms of this Amendment, apply to this Amendment and are hereby incorporated
by reference.
2. AMENDMENT TO LESSOR DEED OF TRUST. The Lessor Deed of Trust is hereby
amended by adding to Exhibit A thereto the property description set forth in
Exhibit A to this Amendment. Without limiting the effect of such addition,
Lessor and Agent specifically acknowledge and agree that, on and after the date
hereof, (a) the lien of the Lessor Deed of Trust includes all of Lessor's right,
title and interest in and to the Tract 4 Land and (b) the terms "Land" and
"Property" as defined in the Lessor Deed of Trust include the Tract 4 Land.
3. EFFECT OF THIS AMENDMENT. On and after the date of this Amendment,
each reference in the Lessor Deed of Trust and the other Operative Documents to
the Lessor Deed of Trust shall mean the Lessor Deed of Trust as amended hereby.
Except as specifically amended above, (a) the Lessor Deed of Trust and the other
Operative Documents shall remain in full force and effect and are hereby
ratified and affirmed and (b) the execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power, or remedy of Lessor, the Participants or Agent, nor constitute
a waiver of any provision of the Lessor Deed of Trust or any other Operative
Document.
4. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any number
of counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument. The
signature page and acknowledgment of any counterpart may be removed
therefrom and attached to any other counterpart to evidence execution
thereof by all of the parties hereto without affecting the validity
thereof.
(b) Headings. Headings in this Amendment are for convenience of
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
[The signature page follows.]
2
<PAGE> 342
IN WITNESS WHEREOF, Lessor and Agent have caused this Amendment
to be executed as of the day and year first above written.
AGENT: ABN AMRO BANK N.V.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
LESSOR: LEASE PLAN U.S.A., INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
3
<PAGE> 343
STATE OF )
-----------------------)
)
COUNTY OF )
----------------------
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
--------------------------------------------------
<PAGE> 344
STATE OF )
-----------------------)
)
COUNTY OF )
----------------------
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
--------------------------------------------
<PAGE> 345
STATE OF )
-----------------------)
)
COUNTY OF )
----------------------
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
---------------------------------------------
<PAGE> 346
EXHIBIT A
TRACT 4 LAND
THAT CERTAIN REAL PROPERTY SITUATED IN THE COUNTY OF SANTA CLARA, STATE
OF CALIFORNIA, AND DESCRIBED AS FOLLOWS:
A-1
<PAGE> 347
ASSIGNMENT OF CONSTRUCTION AGREEMENTS
THIS ASSIGNMENT OF CONSTRUCTION AGREEMENTS (this "Agreement" herein),
dated as of November 12, 1997, is executed by
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"),
in favor of
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility: --------- ------------
(1) Lessor would (a) acquire certain property designated by
Lessee (either through purchase or lease), (b) lease to Lessee such
property and certain other property currently held by Lessor, (c)
appoint Lessee as Lessor's agent to make certain improvements to a
portion of such property, (d) make advances to finance such improvements
and to pay certain related expenses, and (e) grant to Lessee the right
to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase price and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain
other payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including, without
limitation, the execution and delivery of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
<PAGE> 348
1.02. Rules of Construction. Unless otherwise indicated in this
Agreement or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Agreement
and the other Operative Documents.
SECTION 2. ASSIGNMENT.
2.01. Assignment. Lessee hereby assigns to Lessor all of Lessee's right,
title and interest in, to and under all existing and future agreements and
contracts between Lessee and any other Person (collectively, the "Construction
Agreements") relating to the construction of any and all New Improvements on any
portion of the Land described in Exhibit A to the Lease Agreement, including,
without limitation, the agreements and contracts described in Exhibit A and all
future Construction Agreements which may be entered into by Lessee. Upon
execution of any new Construction Agreement, Lessee shall promptly notify Lessor
of such Construction Agreement. Upon Lessor's request, Lessee shall provide
Lessor with copies of the Construction Agreements.
2.02. Absolute Assignment. This Agreement constitutes a present and
absolute assignment to Lessor; provided, however, that Lessor may not enforce
the terms of the Construction Agreements except during continuance of an Event
of Default. Upon the occurrence of any Event of Default, Lessor may, in its sole
discretion, give notice to any of the contractors referred to in the
Construction Agreements or any other party to the Construction Agreements
(collectively, the "Contractors") of its intent to enforce the rights of Lessee
under the Construction Agreements and may initiate or participate in any legal
proceedings respecting the enforcement of said rights. Lessee acknowledges that,
by accepting this assignment, Lessor does not assume any of Lessee's obligations
under the Construction Agreements.
2.03. Contractor's Consent. In connection with the execution and
delivery to Lessor of this Agreement, Lessee shall obtain and deliver to Lessor
consents from each Contractor under each Construction Agreement in the form
attached hereto as Exhibit B (a "Contractor's Consent to Assignment"). Lessee
shall obtain and provide to Lessor a Contractor's Consent to Assignment for any
new Construction Agreements entered into by Lessee after the date hereof.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.
3.01. Representations and Warranties. Lessee represents and warrants to
Lessor that (a) all Construction Agreements entered into by Lessee are in full
force and effect and are enforceable and no default, or event which would
constitute a default after notice or the passage of time, or both, exists with
respect to said Construction Agreements; (b) all copies of the Construction
Agreements delivered to Lessor are complete and correct; and (c) Lessee has not
assigned any of its rights under the Construction
Agreements.
3.02. Covenants. Lessee agrees (a) to pay and perform all obligations of
Lessee under the Construction Agreements; (b) to enforce the payment and
performance of all obligations of any other Person under the Construction
Agreements; (c) not to revise, amend or modify the existing Construction
Agreements if such revision, amendment or modification (either alone or together
with all prior revisions, amendments or modifications to such Construction
Agreements)
2
<PAGE> 349
would result in Lessee's failure to comply with the provisions of
Section 3.01 of the Construction Agency Agreement nor to enter into any future
Construction Agreements without Lessor's prior written approval which shall not
be unreasonably withheld, except as otherwise may be permitted by the Operative
Documents; and (d) not to further assign, for security or any other purposes,
its rights under the Construction Agreements without Lessor's prior written
approval.
SECTION 4. MISCELLANEOUS.
4.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this Agreement shall be given as provided in Subparagraph
2.02(c) and Paragraph 7.01 of the Participation Agreement.
4.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
4.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
4.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
4.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
4.06. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
[The signature page follows.]
3
<PAGE> 350
IN WITNESS WHEREOF, Lessee has caused this Agreement to be executed as
of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By: __________________________________
Name: ____________________________
Title: ___________________________
4
<PAGE> 351
EXHIBIT A
CONSTRUCTION AGREEMENTS
NONE
A-1
<PAGE> 352
EXHIBIT B
CONTRACTOR'S CONSENT TO ASSIGNMENT
1. Reference is made to (a) the property located at [___________] (the
"Property") and (b) the agreement[s] described in Attachment 1 hereto between
KLA-Tencor Corporation ("Lessee") and the undersigned ("Contractor").
2. Lessee has notified Contractor that, pursuant to an Assignment of
Construction Agreements dated as of November 12, 1997 between Lessee and Lease
Plan U.S.A., Inc. ("Lessor") (the "Assignment"), Lessee has assigned to Lessor
the agreement[s] described in Attachment 1 hereto and all future agreements and
contracts between Lessee and Contractor relating to the construction,
maintenance or repair of any improvements to the Property (collectively, the
"Construction Agreements").
3. Contractor hereby consents to the Assignment and agrees as follows
for the benefit of Lessor:
(a) Except with the prior written approval of Lessor, Contractor
shall not perform any construction work pursuant to any change in the
plans and specifications as set forth or attached to the Construction
Agreements where such change would affect the structural integrity,
quality of building material or equipment or overall efficiency of
operating systems or utility systems of the improvements. The liens of
Lessor's security interests shall have priority over any claim of lien
of Contractor arising out of or in any way connected with any
construction work performed by Contractor on the Property.
(b) If requested by Lessor in the exercise of Lessor's rights
under the Assignment, Contractor shall continue to perform its
obligations under the Construction Agreements in accordance with the
terms thereof. Contractor acknowledges that Lessor may have no means of
discovering when or if Contractor claims a default under the
Construction Agreements and agrees that it will give Lessor prior
written notice of any default claimed by Contractor under the
Construction Agreements. Said notice shall set forth a description of
the default and a request to Lessor to cure the same within thirty (30)
days. Said notice shall be deemed served upon delivery or, if mailed,
upon the first to occur of receipt or the expiration of seventy-two (72)
hours after deposit in United States Postal Service certified mail,
postage prepaid and addressed to the address of Lessor appearing below.
No termination of the Construction Agreements by Contractor shall be
binding upon Lessor unless Lessor has received such notice and has
failed to cure the described default within said thirty (30) days.
Contractor further acknowledges that, unless and until Lessor elects to
exercise its rights under the Assignment and requests Contractor's
performance under the Construction Agreements in writing, Lessor neither
undertakes nor assumes any obligations or liability under the
Construction Agreements.
(c) Contractor shall hold in trust all money disbursed to or otherwise
received by Contractor from or on account of Lessee in connection with the
construction of the improvements and shall use such money solely for the payment
of costs incurred in the
B-1
<PAGE> 353
construction of the improvements, including Contractor's fees, and for no other
purpose, until all bills, claims and demands for such costs have been paid in
full.
IN WITNESS WHEREOF, Contractor has executed this Consent on this
___________ day of __________, ____.
[ ]
------------------------------------
By:
-----------------------------------
Name:
----------------------------
Title:
----------------------------
Contractor's Address:
[ ]
------------------------------------
[ ]
------------------------------------
[ ]
------------------------------------
[ ]
------------------------------------
Lessor's Address:
----------------
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street
Suite 711
Chicago, IL 60603
Attn: David M. Shipley
B-2
<PAGE> 354
EXECUTION COPY
================================================================================
ASSIGNMENT OF CONSTRUCTION AGREEMENTS
BY
KLA-TENCOR CORPORATION
IN FAVOR OF
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
<PAGE> 355
LESSOR SECURITY AGREEMENT
THIS LESSOR SECURITY AGREEMENT (this "Agreement" herein), dated as of
November 12, 1997, is executed by:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor"),
in favor of
(2) ABN AMRO BANK N.V., as agent for the Participants under the
Participation Agreement referred to in Recital B below (in such
capacity, "Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), has
requested Lessor and the financial institutions which are "Participants" under
the Participation Agreement referred to in Recital B below (such financial
institutions to be referred to collectively as the "Participants") to provide to
Lessee a certain lease facility. Pursuant to such facility:
(1) Lessor would (a) acquire certain property designated by
Lessee (either through purchase or lease), (b) lease to Lessee such
property and certain other property currently held by Lessor, (c)
appoint Lessee as Lessor's agent to make certain improvements to a
portion of such property, (d) make advances to finance such improvements
and to pay certain related expenses, and (e) grant to Lessee the right
to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain
other payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and
Agent, Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including,
without limitation, the execution and delivery of this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document,
<PAGE> 356
instrument or agreement referenced in such Schedule 1.01. All terms defined in
the UCC shall have the respective meanings given to those terms in the UCC.
1.02. Rules of Construction. Unless otherwise indicated in this
Agreement or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Agreement
and the other Operative Documents.
SECTION 2. GRANT OF SECURITY INTEREST.
2.01. Grant. As security for the Lessor Obligations, Lessor hereby
irrevocably and unconditionally pledges and assigns to Agent, for the benefit of
the Participants and Agent, and grants to Agent, for the benefit of the
Participants and Agent, a security interest in all estate, right, title and
interest of Lessor, whether now owned or hereafter acquired, in and to the
following property (such estate, right, title and interest in such property
herein, collectively and severally, the "Lessor Collateral"):
(a) Operative Documents. The Participation Agreement, the
Construction Agency Agreement, the Purchase Agreement, the Lessee
Security Documents and all other Operative Documents (other than the
Lease Agreement); all exhibits, schedules and other attachments thereto;
and all documents, instruments or agreements issued or executed in
replacement thereof; each as amended, modified and supplemented from
time to time and in effect at any given time;
(b) Collateral. All Collateral for the Lessee Obligations
under the Operative Documents; and
(c) Proceeds. All proceeds of the foregoing (including, without
limitation, whatever is receivable or received when Lessor Collateral or
proceeds is sold, collected, exchanged, returned, substituted or
otherwise disposed of, whether such disposition is voluntary or
involuntary, including rights to payment and return premiums and
insurance proceeds under insurance with respect to any Lessor
Collateral, and all rights to payment with respect to any cause of
action affecting or relating to the Lessor Collateral).
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSOR.
3.01. Representations and Warranties. Lessor represents and warrants to
Agent and the Participants as follows:
(a) Lessor is the legal and beneficial owner of the Lessor
Collateral (or, in the case of after-acquired Lessor Collateral, at the
time Lessor acquires rights in the Lessor Collateral, will be the legal
and beneficial owner thereof).
(b) Lessor has not transferred to any other Person any of its
right, title or interest in the Lessor Collateral, whether by way of
Lien or otherwise.
(c) Lessor's chief executive office is located at 180 Interstate
Parkway North, Atlanta, Georgia 30339.
2
<PAGE> 357
3.02. Covenants. Lessor hereby covenants to Agent and the
Participants as follows:
(a) Lessor shall promptly procure, execute and deliver to Agent
all documents, instruments and agreements and perform all acts which are
necessary or desirable, or which Agent may request, to establish,
maintain, preserve, protect and perfect the Lessor Collateral, the Lien
granted to Agent therein and the first priority of such Lien or to
enable Agent to exercise and enforce its rights and remedies hereunder
with respect to any Lessor Collateral.
(b) Lessor shall not sell, transfer or assign any of its right,
title or interest in the Lessor Collateral to any Person (other than
Agent), whether by way of Lien or otherwise.
(c) Without prompt written notice to Agent, Lessor shall not
change Lessor's name or chief executive office.
SECTION 4. RIGHTS AND REMEDIES OF AGENT.
4.01. Authorized Action by Agent. Lessor hereby irrevocably appoints
Agent as its attorney-in-fact and agrees that Agent may perform (but Agent shall
not be obligated to and shall incur no liability to Lessor or any third party
for failure so to do) any act which Lessor is obligated by this Agreement to
perform, and to exercise such rights and powers as Lessor might exercise with
respect to the Lessor Collateral, including, without limitation, the right to
(a) collect by legal proceedings or otherwise and endorse, receive and receipt
for all dividends, interest, payments, proceeds and other sums and property now
or hereafter payable on or on account of the Lessor Collateral; (b) enter into
any extension, reorganization, deposit, merger, consolidation or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Lessor Collateral; (c) insure, process, preserve and enforce
the Lessor Collateral; (d) make any compromise or settlement, and take any
action it deems advisable, with respect to the Lessor Collateral; (e) pay any
Indebtedness of Lessor relating to the Lessor Collateral; and (f) execute UCC
financing statements. Lessor agrees that such care as Agent gives to the
safekeeping of its own property of like kind shall constitute reasonable care of
the Lessor Collateral when in Agent's possession; provided, however, that Agent
shall not be required to make any presentment, demand or protest, or give any
notice and need not take any action to preserve any rights against any prior
party or any other Person in connection with the Lessor Obligations or with
respect to the Lessor Collateral.
4.02. Other Rights and Remedies Upon Default. In addition to all other
rights and remedies granted to Agent by this Agreement and the other Operative
Documents, the UCC and other applicable Governmental Rules, Agent may, if Lessor
fails to perform any of the Lessor Obligations, exercise any one or more of the
following rights and remedies: (a) collect, receive, appropriate or realize upon
the Lessor Collateral or otherwise foreclose or enforce Agent's security
interests in any or all Lessor Collateral in any manner permitted by applicable
Governmental Rules or in this Security Agreement; (b) notify Lessee to make any
or all payments to be made by Lessee under the Operative Documents to Agent; (c)
sell or otherwise dispose of any or all Lessor Collateral at one or more public
or private sales, whether or not such Lessor Collateral is present at the place
of sale, for cash or credit or future delivery, on such
3
<PAGE> 358
terms and in such manner as Agent may determine; (d) require Lessor to assemble
the Lessor Collateral and make it available to Agent at a place to be designated
by Agent; and (e) prior to the disposition of the Lessor Collateral, store,
process, repair or recondition any Lessor Collateral consisting of goods,
perform any obligations and enforce any rights of Lessor under any Operative
Documents or otherwise prepare and preserve Lessor Collateral for disposition in
any manner and to the extent Agent deems appropriate. In any case where notice
of any sale or disposition of any Lessor Collateral is required, Lessor hereby
agrees that thirty (30) days notice of such sale or disposition is reasonable.
SECTION 5. MISCELLANEOUS.
5.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Agreement shall be given as provided in Paragraph
7.01 of the Participation Agreement.
5.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by Agent in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right. Unless otherwise specified in any such waiver or consent,
a waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.
5.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
5.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and their permitted successors and assigns, any
benefit or legal or equitable right, remedy or claim under or by virtue of this
Agreement or under or by virtue of any provision herein.
5.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
5.06. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
5.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
[The signature page follows.]
4
<PAGE> 359
IN WITNESS WHEREOF, Lessor has caused this Agreement to be executed as
of the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By: ___________________________
Name: _________________________
Title: ________________________
5
<PAGE> 360
EXECUTION COPY
===============================================================================
LESSOR SECURITY AGREEMENT
BY
LEASE PLAN U.S.A., INC.
IN FAVOR OF
ABN AMRO BANK N.V.,
AS AGENT
NOVEMBER 12, 1997
===============================================================================
<PAGE> 361
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement" herein), dated as of November
12, 1997, is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by
Lessee (either through purchase or lease), (b) lease to Lessee such
property and certain other property currently held by Lessor, (c)
appoint Lessee as Lessor's agent to make certain improvements to a
portion of such property, (d) make advances to finance such improvements
and to pay certain related expenses, and (e) grant to Lessee the right
to purchase such property; and
(2) The Participants would participate in such lease facility by
(a) funding the purchase prices and other advances to be made by Lessor
and (b) acquiring participation interests in the rental and certain
other payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including without
limitation the execution and delivery of this Agreement setting forth the terms
for the purchase of the Property by Lessee from Lessor.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
<PAGE> 362
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this
Agreement or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Agreement
and the other Operative Documents.
SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM.
2.01. Term Purchase Option. Subject to the terms and conditions of this
Agreement and the other Operative Documents (including those set forth below in
this Paragraph 2.01), Lessee may, at its option on any Business Day prior to the
Scheduled Expiration Date of the Lease Agreement, terminate the Lease Agreement
and purchase all of the Property (the "Term Purchase Option").
(a) Notice of Term Purchase Option Exercise. Lessee shall notify
Lessor of Lessee's exercise of the Term Purchase Option by delivering to
Lessor an irrevocable written notice in the form of Exhibit A(1),
appropriately completed (the "Notice of Term Purchase Option Exercise"),
which states that Lessee is exercising its right to terminate the Lease
Agreement prior to the Scheduled Expiration Date thereof pursuant to
Paragraph 4.01 of the Lease Agreement and purchase all of the Property
pursuant to this Paragraph 2.01 and specifies the Business Day on which
such termination and purchase are to occur (which date, after the
delivery of such notice, shall be the Expiration Date). Lessee shall
give the Notice of Term Purchase Option Exercise to Lessor at least one
(1) month prior to the Business Day on which such termination and
purchase are to occur. The Notice of Term Purchase Option Exercise shall
be delivered as required by Subparagraph 2.02(c) and Paragraph 7.01 of
the Participation Agreement; provided, however, that Lessee shall
promptly deliver the original of any Notice of Term Purchase Option
Exercise initially delivered by facsimile.
(b) Term Purchase Option Purchase Price. Lessee shall pay to
Lessor on the Expiration Date, as the purchase price for the Property,
an amount equal to the Outstanding Lease Amount on such date.
(c) Effect of Certain Events. Lessee may exercise the Term
Purchase Option as provided in this Paragraph 2.01, notwithstanding (i)
the prior election by Lessee to exercise the Partial Purchase Option
pursuant to Paragraph 2.02, the Marketing Option pursuant to Paragraph
3.01 and Paragraph 3.02 or the Expiration Date Purchase Option pursuant
to Paragraph 3.01 and Paragraph 3.03, provided that Lessor completes the
purchase of the Property pursuant to the Term Purchase Option and this
Agreement prior to the Scheduled Expiration Date and Lessor has not
previously entered into an
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agreement with a Designated Purchaser or an Assignee Purchaser to sell
the Property or (ii) the occurrence of any Event of Default or the
exercise by the Lessor Parties of any of their rights or remedies under
the Operative Documents following the occurrence of such Event of
Default, provided that such exercise by Lessee of the Term Purchase
Option after the occurrence of any Event of Default shall not require
the Lessor Parties to cease exercising such rights and remedies unless
and until Lessee completes the purchase of the Property pursuant to the
Term Purchase Option and this Agreement.
2.02. Partial Purchase Option. Subject to the terms and conditions of
this Agreement and the other Operative Documents (including those set forth
below in this Paragraph 2.02), Lessee may, at its option on any Business Day
prior to the Scheduled Expiration Date of the Lease Agreement, without
terminating the Lease Agreement, purchase one or more Tracts (but less than all)
of the Property (the "Partial Purchase Option").
(a) Notice of Partial Purchase Option Exercise. Lessee shall
notify Lessor of Lessee's exercise of the Partial Purchase Option by
delivering to Lessor an irrevocable written notice in the form of
Exhibit A(2), appropriately completed (the "Notice of Partial Purchase
Option Exercise"), which states that Lessee is exercising its right to
purchase one or more (but less than all) Tracts of the Property prior to
the Scheduled Expiration Date pursuant to this Paragraph 2.02 and
specifies (i) the Tract(s) so to be purchased and (ii) the Business Day
on which such purchase is to occur (a "Partial Purchase Date"). Lessee
shall give each Notice of Partial Purchase Option Exercise to Lessor at
least one (1) month prior to the Partial Purchase Date on which a
purchase is to occur. Each Notice of Partial Purchase Option Exercise
shall be delivered as required by Subparagraph 2.02(c) and Paragraph
7.01 of the Participation Agreement; provided, however, that Lessee
shall promptly deliver the original of any Notice of Partial Purchase
Option Exercise initially delivered by facsimile.
(b) Partial Purchase Option Purchase Price. Lessee shall pay to
Lessor on each Partial Purchase Date, as the purchase price for each
Tract of Property to be purchased on such date, an amount equal to the
portion of the Outstanding Lease Amount on such date attributable to
such Tract of Property.
(c) Conditions to Exercise of Partial Purchase Option. The
purchase by Lessee on any Partial Purchase Date of any Tract of Property
pursuant to this Paragraph 2.02 is subject to receipt by Lessor, on or
prior to such Partial Purchase Date, of new Expiration Date Appraisals
for all Tracts of Property that are to remain subject to the Lease
Agreement after such Partial Purchase Date, which appraisals (i) each
shall be dated a recent date prior to such Partial Purchase Date and
(ii) together shall assess the aggregate Fair Market Value of all such
remaining Tracts of Property at not less than the Outstanding Lease
Amount that will remain after application of all amounts to be applied
thereto on such Partial Purchase Date.
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SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE.
3.01. Alternative. Unless Lessee has exercised the Term Purchase Option,
on the Expiration Date of the Lease Agreement, Lessee shall either:
(a) Marketing Option. Cause another Person to complete the
purchase of the Property pursuant to Paragraph 3.02 (the "Marketing
Option"); or
(b) Expiration Date Purchase Option. Purchase the Property
itself pursuant to Paragraph 3.03 (the "Expiration Date Purchase
Option").
Lessee shall elect either the Marketing Option or the Expiration Date Purchase
Option by delivering to Lessor, not more than nine (9) months nor less than six
(6) months prior to the Scheduled Expiration Date for the Lease Agreement,
either (i) a written notice in the form of Exhibit B, appropriately completed
(the "Notice of Marketing Option Exercise"), or (ii) a written notice in the
form of Exhibit C, appropriately completed (the "Notice of Expiration Date
Purchase Option Exercise"); provided, however, that (A) Lessee shall be deemed
to have elected the Expiration Date Purchase Option if it fails to deliver
either notice as required by this sentence; (B) Lessee's election of the
Expiration Date Purchase Option (whether expressly by a notice so delivered or
implicitly by the failure to deliver any notice) shall be irrevocable; and (C)
Lessee may not elect the Marketing Option if (1) the Expiration Date has been
accelerated to an earlier Termination Date following a Marketing Option Event of
Default under the Lease Agreement or (2) the conditions set forth in Paragraph
3.04 of the Participation Agreement are not satisfied on the date Lessee
delivers its election notice or on the Expiration Date of the Lease Agreement
(unless, in each case, the only event or condition causing such conditions not
to be so satisfied is the occurrence of a Non-Marketing Option Event of Default
under the Lease Agreement). The Notice of Marketing Option Exercise or the
Notice of Expiration Date Purchase Option Exercise shall be delivered as
required by Subparagraph 2.02(c) and Paragraph 7.01 of the Participation
Agreement; provided, however, that Lessee shall promptly deliver to Lessor the
original of any such notice initially delivered by facsimile.
3.02. Marketing Option.
(a) General. If Lessee elects to exercise the Marketing Option by
delivering to Lessor a Notice of Marketing Option Exercise pursuant to
Paragraph 3.01, Lessee shall (i) locate a purchaser which satisfies the
requirements set forth in this Paragraph 3.02, (ii) arrange for such
purchaser to purchase the Property on the Expiration Date for a purchase
price which is not less than the lesser of (A) the sum of the total
Tranche B Proportionate Share and the total Tranche C Proportionate
Share of the Outstanding Lease Amount and (B) the Fair Market Value of
the Property and (iii) otherwise comply, or cause compliance with, the
requirements of this Paragraph 3.02 and the other applicable provisions
of this Agreement.
(b) Lessee's Marketing Obligations.
(i) Initial Marketing Period. During the period
beginning on the date Lessee delivers the Notice of Marketing
Option Exercise and ending on the date which is four (4) months
prior to the Expiration Date of the Lease Agreement (the
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"Initial Marketing Period"), Lessee shall use reasonable efforts
to solicit Conforming Bids from potential purchasers of the
Property. On or prior to the last day of the Initial Marketing
Period, Lessee shall deliver to Lessor any Conforming Bid
selected by Lessee (the "Initial Bid"). If the purchase price
specified in the Initial Bid is equal to or greater than the sum
of the total Tranche B Proportionate Share and the total Tranche
C Proportionate Share of the Outstanding Lease Amount, Lessor
shall accept such bid and Lessee shall have no further
obligations to solicit additional bids.
(ii) Secondary Marketing Period. If Lessee does not
submit an Initial Bid or if the purchase price specified in the
Initial Bid is less than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share
of the Outstanding Lease Amount, Lessor may reject such bid and
Lessee shall, during the period which begins on the day
following the Initial Marketing Period and ends on the date two
(2) months prior to the Expiration Date of the Lease Agreement
(the "Secondary Marketing Period"):
(A) Use its best efforts to solicit additional
Conforming Bids, including the engagement of experienced
and knowledgeable brokers;
(B) Furnish to each Lessor Party copies of all
bids and otherwise provide each Lessor Party with such
information relating to the marketing of the Property as
such Person may reasonably request in writing;
(C) Agree to provide to all potential purchasers
all customary seller's indemnities (including
environmental indemnities), representations and
warranties regarding the Property (including the title
to, except for Lessor Liens, and condition of the
Property);
(D) Furnish to each Lessor Party copies of
environmental reports, architect's certificates,
licenses, permits and other evidence reasonably
requested by such Person to establish that no Default
has occurred and is continuing under the Lease
Agreement;
(E) Permit any Lessor Party or potential
purchaser to inspect the Property and the maintenance
records for the Property upon reasonable prior written
notice and during normal business hours and provide to
each such Person all information regarding the Property
reasonably requested by such Person in writing;
(F) Take all other commercially reasonable steps
to secure the best price for the Property; and
(G) Submit to Lessor on or prior to the last day
of the Secondary Marketing Period any Conforming Bid
selected by Lessee with a purchase price which is equal
to or greater than the sum of the total Tranche B
Proportionate Share and the total Tranche C
Proportionate
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Share of the Outstanding Lease Amount or, if no such
Conforming Bid was received by Lessee, the highest
Conforming Bid received by Lessee during the Secondary
Marketing Period.
During the Secondary Marketing Period, any Lessor Party shall
have the right to submit one or more bids or solicit bids from other
Persons.
(c) Conforming Bids. Each bid must meet each of the following
requirements (each such bid to be referred to herein as a "Conforming
Bid"):
(i) The bid may be submitted by any Person other than
(A) a Person which is an Affiliate of Lessee or (B) a Person
which has an agreement (whether express or implied) with Lessee
or any of its Affiliates to sell, lease or otherwise make
available to Lessee or any of its Affiliates any portion of the
Property;
(ii) The bidder must agree in writing to purchase the
Property on the Expiration Date of the Lease Agreement for a
purchase price to be paid in cash which is not less than the
lesser of (A) the sum of the total Tranche B Proportionate Share
and the total Tranche C Proportionate Share of the Outstanding
Lease Amount on such date and (B) the Fair Market Value of the
Property on such date;
(iii) The bidder must agree to purchase the Property "as
is" without any representations, warranties or indemnities,
except for (A) any representations, warranties or indemnities
provided by Lessor and Lessee pursuant to Subparagraph 4.01(b)
and (B) any representations, warranties or indemnities provided
by Lessee pursuant to clause (ii)(C) of Subparagraph 3.02(b);
and
(iv) The bidder must agree to be bound by the other
terms and conditions of this Agreement applicable to bidders.
(d) Lessor's Obligation to Accept Bids. If, at any time on or
prior to the last day of the Secondary Marketing Period, Lessee submits
to Lessor a Conforming Bid under this Paragraph 3.02 with a purchase
price which is equal to or greater than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share of the
Outstanding Lease Amount, Lessor shall accept such bid. If Lessee
submits to Lessor a Conforming Bid under this Paragraph 3.02 with a
purchase price which is less than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share of the
Outstanding Lease Amount, Lessor shall not accept such bid unless so
directed by Required Participants. If Lessee fails to submit a bid to
Lessor on or prior to the last day of the Secondary Marketing Period
which Lessor is so required to accept, Lessor shall retain the Property
after the Expiration Date of the Lease Agreement; provided, however,
that Lessee's payment obligations on such Expiration Date shall be
limited to the amounts payable pursuant to clause (iii) of Subparagraph
4.06(a) if (i) Lessor retains the Property after Lessee submits a
Conforming Bid on or prior to the last day of the Secondary Marketing
Period in accordance with clause (ii) of Subparagraph 3.02(b) and (ii)
the Marketing Option has not terminated prior to such Expiration Date
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pursuant to Subparagraph 3.02(f). Lessor shall notify Lessee of Lessor's
election to retain the Property by delivering to Lessee, at least ten
(10) days prior to the Expiration Date of the Lease Agreement, a written
notice of such election.
(e) Purchase Price. If Lessor accepts any bid by any Person,
such Person (the "Designated Purchaser") shall pay to Lessor on the
Expiration Date of the Lease Agreement, as the purchase price for the
Property, the amount set forth in such bid as the purchase price.
(f) Termination of the Marketing Option. Lessee's right to
exercise the Marketing Option shall immediately terminate and Lessee
shall purchase the Property on the Expiration Date of the Lease
Agreement pursuant to Paragraph 3.03 if (i) Lessee fails to comply with
any of its obligations under this Paragraph 3.02; (ii) a Marketing
Option Event of Default under the Lease Agreement occurs after Lessee
delivers the Notice of Marketing Option Exercise; (iii) the conditions
precedent set forth in Paragraph 3.04 of the Participation Agreement are
not satisfied on the Expiration Date of the Lease Agreement (unless the
only event or condition causing such conditions not to be so satisfied
is the occurrence of a Non-Marketing Option Event of Default under the
Lease Agreement); or (iv) the Designated Purchaser fails to consummate
the purchase of the Property on the Expiration Date of the Lease
Agreement in accordance with its accepted bid and this Agreement,
without regard to the reason for such failure (except as otherwise
provided in the following proviso); provided, however, that, if the
Designated Purchaser fails to consummate the purchase of the Property on
the Expiration Date solely due to Lessor's failure to remove Lessor
Liens or deliver the required deed and bill of sale or other documents
required to be delivered by Lessor hereunder, Lessee's right to exercise
the Marketing Option shall not terminate, Lessee shall not be required
to purchase the Property on the Expiration Date and Lessee's payment
obligations on the Expiration Date shall be limited to the amounts set
forth in clause (ii) of Subparagraph 4.06(a).
(g) Residual Value Guaranty Amount and Indemnity Amount. Unless
Lessee's right to exercise the Marketing Option has terminated and
Lessee is required to purchase the Property on the Expiration Date of
the Lease Agreement pursuant to Paragraph 3.03, Lessee shall pay to
Lessor on such Expiration Date the following:
(i) An amount equal to the total Tranche A Proportionate
Share of the Outstanding Lease Amount under on such date (the
"Residual Value Guaranty Amount"); and
(ii) An amount equal to the decrease, if any, between
the Commencement Date and the Expiration Date of the Lease
Agreement in the Fair Market Value of the Property caused by (A)
any representation or warranty of Lessee or any of its
Affiliates regarding the Property set forth in any of the
Operative Documents proving to be false or inaccurate when made,
(B) the existence of, or the failure of Lessee to pay any
Governmental Charge, Indebtedness or other obligation which
might give rise to, any Liens in the Property (other than
Permitted Property Liens), (C) the failure of Lessee to complete
any New Improvements or any Modifications or (D) any other
failure of
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Lessee to comply with any of its obligations regarding the
Property set forth in any of the Operative Documents (the
"Indemnity Amount");
Provided, however, that (A) Lessee shall not be obligated to pay any
Residual Value Guaranty Amount or Indemnity Amount if the purchase price paid to
Lessor equals or exceeds the Outstanding Lease Amount on such date and (B) the
sum of any Residual Value Guaranty Amount and Indemnity Amount payable to Lessor
on the Expiration Date of the Lease Agreement shall not exceed the deficiency,
if any, between such Outstanding Lease Amount and such purchase price.
(h) Determination of Fair Market Value and Indemnity Amount. If
the purchase price specified in the Initial Bid is less than the sum of
the total Tranche B Proportionate Share and the total Tranche C
Proportionate Share of the Outstanding Lease Amount, Lessor may, on or
prior to the last day of the Secondary Marketing Period (if Lessee has
not previously delivered to Lessor a Conforming Bid with a purchase
price equal to or greater than the sum of the total Tranche B
Proportionate Share and the total Tranche C Proportionate Share of the
Outstanding Lease Amount), deliver to Lessee a written notice of
Lessor's determination of the current Fair Market Value of the Property
and the Indemnity Amount. To determine such amounts, Lessor shall obtain
Appraisals of the Property which set forth:
(i) A current Appraisal of the Fair Market Value of the
Property in its then existing condition (the "Current
Appraisal"); and
(ii) An Appraisal of the Fair Market Value of the
Property which assumes that (A) all representations and
warranties regarding the Property made by Lessee or any of its
Affiliates in any of the Operative Documents were true and
correct when made; (B) Lessee has maintained the Property in
compliance with all applicable Governmental Rules, Insurance
Requirements and the Operative Documents; (C) Lessee has
completed all Modifications and any other New Improvements in a
good and workmanlike manner and otherwise as required by the
Operative Documents; (D) Lessee has repaired the Property as
required by the Operative Documents following any Casualty; (E)
Lessee has restored the Property as required by the Operative
Documents following any Condemnation; (F) Lessee has paid all
Governmental Charges, Indebtedness and other obligations which,
if unpaid, might give rise to a Lien (other than a Lessor Lien)
on the Property; (G) Lessee has removed all Liens on the
Property except for Permitted Property Liens and Lessor Liens;
and (H) Lessee has performed all of its other obligations as
required by the Operative Documents (the "Assumed Appraisal").
In the absence of manifest error, (A) the Current Appraisal shall
constitute the current Fair Market Value of the Property and (B) the
difference between the Current Appraisal and the Assumed Appraisal shall
constitute the Indemnity Amount if the Current Appraisal is less than
the Assumed Appraisal.
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(i) Lessee not an Agent. Lessee shall not be an agent for any of
the Lessor Parties in arranging for a purchaser of the Property. No
Lessor Party shall be bound by any acts of Lessee.
(j) Excess Proceeds. If, on the Expiration Date of the Lease
Agreement, after the application by Lessor of all amounts received by
Lessor on such date to the Outstanding Lease Amount, all unpaid Rent
accrued through or due and payable on or prior to such date and all
other amounts, if any, due and payable by Lessee under the Operative
Documents on or prior to such date, any excess amount remains, Lessor
shall pay such excess amount to Lessee.
(k) Creditworthiness of Designated Purchaser. Lessee assumes all
responsibility for determining the creditworthiness of any potential
purchaser on any bid submitted by Lessee to Lessor hereunder. If, after
any purchase by a Designated Purchaser hereunder, the purchase price
paid by such Designated Purchaser is recovered from any Lessor Party,
Lessee shall reimburse such Lessor Party for such recovery unless such
recovery is due solely to a material misrepresentation or covenant
breach by such Lessor Party.
(l) Exercise of Marketing Option After Non-Marketing Option
Event of Default. If Lessor notifies Lessee pursuant to Subparagraph
5.03(a) or Subparagraph 5.04(a) of the Lease Agreement that Lessor is
terminating the Lease Agreement on a Termination Date which is prior to
the Scheduled Expiration Date of the Lease Agreement and the only basis
for such early termination is the occurrence of a Non-Marketing Option
Event of Default, Lessee may, subject to Paragraph 3.01, elect to
exercise the Marketing Option if, not later than ten (10) Business Days
after it receives from Lessor such notice of early termination, it (i)
delivers to Lessor a Notice of Marketing Option Exercise, (ii) delivers
to Agent (A) a Cash Collateral Agreement in form and substance
reasonably satisfactory to Lessor and Agent and (B) Cash Collateral in
an amount not less than 105% of the total Tranche A Proportionate Share
of the Outstanding Lease Amount, and (iii) delivers to Lessor an opinion
in form and substance reasonably satisfactory to Lessor regarding the
Cash Collateral Agreement and Lessor's security interest in such Cash
Collateral and (iv) takes such other actions as may be necessary to
grant to Agent first priority perfected security interests in such Cash
Collateral in accordance with the Cash Collateral Agreement. Upon the
delivery by Lessee to Lessor of a Notice of Marketing Option Exercise
and satisfaction of the Cash Collateral requirements set forth in the
preceding sentence of this Subparagraph 3.02(l), the Expiration Date of
the Lease Agreement shall, if the conditions to the exercise of the
Marketing Option set forth in Paragraph 3.01 are satisfied, be extended
to the first Business Day that is six (6) months after the date of
receipt by Lessor of such Notice of Marketing Option Exercise, provided,
however, that in no event shall the Expiration Date of the Lease
Agreement be extended beyond the Scheduled Expiration Date. Any exercise
by Lessee of the Marketing Option pursuant to this Subparagraph 3.02(l)
shall be subject to the terms and conditions otherwise set forth in this
Agreement.
(m) Lessor's Obligation to Sell. If Lessor retains the Property
after the Expiration Date for any reason under the Operative Documents
without a judicial or non-
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judicial foreclosure sale or a deed-in-lieu of foreclosure from Lessee,
Lessor thereafter shall use commercially reasonable efforts to sell the
Property in a reasonable time to one or more unrelated third parties for
the Fair Market Value of the Property; provided, however that Lessor
shall have no obligation to sell the Property at a time, or in a manner,
that would adversely affect the Lessor Parties' ability to be paid in
full the Outstanding Lease Amount, all other amounts payable to the
Lessor Parties under the Operative Documents (including reasonable costs
of maintaining, managing and selling the Property) and carrying costs
for the Outstanding Lease Amount and such other amounts accruing at the
Base Rate. Following such sale, Lessor shall pay to Lessee any amounts
received by Lessor in excess of the amounts referred to in the proviso
to the preceding sentence.
3.03. Expiration Date Purchase Option.
(a) General. If (i) Lessee elects to exercise the Expiration Date
Purchase Option by delivering to Lessor a Notice of Expiration Date
Purchase Option Exercise pursuant to Paragraph 3.01; (ii) Lessee elects
to exercise the Marketing Option by delivering to Lessor a Notice of
Marketing Option Exercise pursuant to Paragraph 3.01 but the Marketing
Option terminates pursuant to Subparagraph 3.02(f); or (iii) Lessee
fails to deliver to Lessor either notice as required by Paragraph 3.01;
Lessee shall purchase the Property on the Expiration Date of the Lease
Agreement and otherwise comply, or cause compliance with, the
requirements of this Paragraph 3.03 and the other applicable provisions
of this Agreement.
(b) Purchase Price. Lessee shall pay to Lessor on the Expiration
Date of the Lease Agreement, as the purchase price for the Property, an
amount equal to the Outstanding Lease Amount under on such date.
SECTION 4. TERMS OF ALL PURCHASES.
4.01. Representations and Warranties of Parties.
(a) Representations and Warranties of Certain Purchasers. Each
Designated Purchaser shall represent and warrant to Lessor on the
Expiration Date of the Lease Agreement (or, in the case of a purchase of
a portion of the Property pursuant to the Partial Purchase Option, on
the applicable Partial Purchase Date) as follows:
(i) Such Person is a legal entity duly organized,
validly existing and in good standing under the laws of its
state of organization or an individual with legal capacity to
purchase the Property (or, in the case of a purchase of a
portion of the Property pursuant to the Partial Purchase Option,
the portion to be purchased).
(ii) The execution, delivery and performance by such
Person of each document, instrument and agreement executed, or to
be executed, by such Person in connection with its purchase of
the Property (or, in the case of a purchase of a
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portion of the Property pursuant to the Partial Purchase Option,
the portion to be purchased) (the "Purchase Documents") and the
consummation of the transactions contemplated thereby (A) are
within the power of such Person and (B) have been duly
authorized by all necessary actions on the part of such Person.
(iii) Each Purchase Document executed, or to be
executed, by such Person has been, or will be, duly executed and
delivered by such Person and constitutes, or will constitute, a
legal, valid and binding obligation of such Person, enforceable
against such Person in accordance with its terms, except as
limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the enforcement of
creditors' rights generally and general principles of equity.
(iv) Such Person has not (A) made a general assignment for
the benefit of creditors, (B) filed any voluntary petition in
bankruptcy or suffered the filing of any involuntary petition by
such Person's creditors, (C) suffered the appointment of a
receiver to take possession of all, or substantially all, of such
Person 's assets, (D) suffered the attachment or other judicial
seizure of all, or substantially all, of such Person 's assets,
(E) admitted in writing its inability to pay its debts as they
come due, or (F) made an offer of settlement, extension or
composition to its creditors generally.
(v) Such Person is not a "party in interest" within the
meaning of Section 3(14) of the ERISA, with respect to any
investor in or beneficiary of Lessor.
(b) Representations and Warranties of Lessor and Lessee. Each of
Lessor and Lessee shall represent and warrant to each purchaser of the
Property, whether Lessee, an Assignee Purchaser or a Designated
Purchaser (a "Purchaser"), on the Expiration Date of the Lease Agreement
as follows:
(i) Such Person is a corporation duly organized, validly
existing and in good standing under the laws of its state of
incorporation.
(ii) The execution, delivery and performance by such
Person of each Purchase Document executed, or to be executed, by
such Person and the consummation of the transactions
contemplated thereby (A) are within the power of such Person and
(B) have been duly authorized by all necessary actions on the
part of such Person.
(iii) Each Purchase Document executed, or to be
executed, by such Person has been, or will be, duly executed and
delivered by such Person and constitutes, or will constitute, a
legal, valid and binding obligation of such Person, enforceable
against such Person in accordance with its terms, except as
limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the enforcement of
creditors' rights generally and general principles of equity.
(iv) Such Person has not (A) made a general assignment
for the benefit of creditors, (B) filed any voluntary petition
in bankruptcy or suffered the filing of
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any involuntary petition by such Person's creditors, (C)
suffered the appointment of a receiver to take possession of
all, or substantially all, of such Person's assets, (D) suffered
the attachment or other judicial seizure of all, or
substantially all, of such Person's assets, (E) admitted in
writing its inability to pay its debts as they come due, or (F)
made an offer of settlement, extension or composition to its
creditors generally.
In addition to the foregoing, (A) Lessee shall represent and warrant to
the Designated Purchaser (or Lessor if Lessor is to retain the Property)
on the Expiration Date of the Lease Agreement that no Liens are attached
to the Property, except for Permitted Property Liens, and (B) Lessor
shall represent and warrant to Purchaser on the Expiration Date of the
Lease Agreement (or, in the case of a purchase of a portion of the
Property pursuant to the Partial Purchase Option, on the applicable
Partial Purchase Date) that no Lessor Liens are attached to the Property
(or, in the case of a purchase of a portion of the Property pursuant to
the Partial Purchase Option, the portion to be purchased). Except for
the foregoing representations and warranties to be made by Lessor on the
Expiration Date of the Lease Agreement (or, in the case of a purchase of
a portion of the Property pursuant to the Partial Purchase Option, on
the applicable Partial Purchase Date), no Lessor Party shall make any
representation or warranty regarding the Property or the sale of the
Property. Lessee shall make such additional representations and
warranties as it may be required to make pursuant to clause (ii) of
Subparagraph 3.02(b).
(c) Survival of Representations and Warranties. The
representations and warranties of Purchaser, Lessor and Lessee shall
survive for a period of twelve (12) months after the Expiration Date of
the Lease Agreement (or, in the case of a purchase of a portion of the
Property pursuant to the Partial Purchase Option, after the applicable
Partial Purchase Date). Any claim which any such party may have at any
time against any other such party for a breach of any such
representation or warranty, whether known or unknown, which is not
asserted by written notice within such twelve (12) month period shall
not be valid or effective, and the party shall have no liability with
respect thereto.
4.02. "As Is" Purchase. All purchases of the Property hereunder shall be
"as is, with all faults" and without any representations, warranties or
indemnities except for any representations, warranties or indemnities provided
by Lessee pursuant to clause (ii)(C) of Subparagraph 3.02(b) or by Lessor or
Lessee pursuant to Subparagraph 4.01(b). Each Purchaser shall specifically
acknowledge and agree that Lessor is selling and such Purchaser is purchasing
the Property on an "as is, with all faults" basis and that such Purchaser is not
relying on any representations or warranties of any kind whatsoever, express or
implied, from any Lessor Party, its agents, or brokers as to any matters
concerning the Property (except for any representations and warranties provided
by Lessor pursuant to Subparagraph 4.01(b)), including (a) the condition of the
Property (including any Improvements to the Property made prior to the
Commencement Date or during the Term of the Lease Agreement); (b) title to the
Property (including possession of the Property by any Person or the existence of
any Lien or any other right, title or interest in or to any of the Property in
favor of any Person); (c) the value, habitability, usability, design, operation
or fitness for use of the Property; (d) the availability or adequacy of
utilities and other services to the Property; (e) any latent, hidden or patent
defect in the Property; (f) the zoning or
12
<PAGE> 373
status of the Property or any other restrictions on the use of the Property; (g)
the economics of the Property; (h) any Casualty or Condemnation; or (i) the
compliance of the Property with any applicable Governmental Rule or Insurance
Requirement.
4.03. Release. Without limiting the foregoing, each Purchaser shall, on
behalf of itself and its successors and assigns, waive its right to recover
from, and forever release and discharge, Lessor and the other Indemnitees from
any and all demands, claims, legal or administrative proceedings, losses,
liabilities, damages, penalties, fines, liens, judgments, costs or expenses
whatsoever (including attorneys' fees and costs), whether direct or indirect,
known or unknown, foreseen or unforeseen, that may arise on account of or in any
way be connected with the physical condition of the Property or any Governmental
Rule applicable thereto, including any Environment Law. Each Purchaser shall
expressly waive the benefits of Section 1542 of the California Civil Code, which
provides that, "a general release does not extend to claims which the creditor
does not know or expect to exist in his favor at the time of executing the
release, which if known to him must have materially affected the settlement with
the debtor."
4.04. Permits, Approvals, Etc. Lessee shall obtain all permits, licenses
and approvals from and make all filings with Governmental Authorities and other
Persons, comply and cause compliance with all applicable Governmental Rules and
take all other actions required for the marketing, purchase and sale of the
Property.
4.05 Costs. Lessee shall pay directly, without deduction from the
purchase price or any other amount payable to Lessor hereunder, all costs and
expenses of Lessee and Lessor associated with the marketing and sale of the
Property, including brokers' fees and commissions; title insurance premiums;
survey charges; utility, tax and other prorations; fees and expenses of
environmental consultants and attorneys; appraisal costs; escrow fees; recording
fees; documentary, transfer and other taxes; and all other fees, costs and
expenses which might otherwise be deducted from the purchase price or any other
amount payable to the Lessor Parties hereunder.
4.06. Lessee's Expiration Date and Partial Purchase Date Payment
Obligations.
(a) Expiration Date. On the Expiration Date of the Lease
Agreement, Lessee shall pay to Lessor the following:
(i) Purchase by Lessee. If the Property is to be
purchased by Lessee or an Assignee Purchaser on such date, (i)
the purchase price payable by Lessee, (ii) all unpaid Rent
accrued through or due and payable on or prior to such date and
(iii) all other amounts, if any, due and payable by Lessee under
the Operative Documents on or prior to such date;
(ii) Purchase by a Designated Purchaser. If the Property
is to be purchased by a Designated Purchaser on such date, (i)
the Residual Value Guaranty Amount (subject to the provisos set
forth at the end of Subparagraph 3.02(g)), (ii) the Indemnity
Amount (subject to the provisos set forth at the end of
Subparagraph 3.02(g)), (iii) all unpaid Rent accrued through or
due and payable
13
<PAGE> 374
on or prior to such date and (iv) all other amounts, if any, due
and payable by Lessee under the Operative Documents on or prior
to such date; or
(iii) Retention by Lessor. If the Property is to be
retained by Lessor on such date pursuant to Subparagraph
3.02(d), (i) the Residual Value Guaranty Amount, (ii) the
Indemnity Amount, (iii) all unpaid Rent accrued through or due
and payable on or prior to such date and (iv) all other amounts,
if any, due and payable by Lessee under the Operative Documents
on or prior to such date.
(b) Partial Purchase Date. On any Partial Purchase Date, Lessee
shall pay to Lessor (i) the purchase price for the Tracts of Property to
be purchased on such date, (ii) all unpaid Rent attributable to such
Tracts of Property accrued through or due and payable on or prior to
such date and (iii) all other amounts attributable to such Tracts of
Property , if any, due and payable by Lessee under the Operative
Documents on or prior to such date.
4.07. Lessor Liens. Lessor shall remove all Lessor Liens from the
Property before the Expiration Date of the Lease Agreement (or, in the case of a
purchase of a portion of the Property pursuant to the Partial Purchase Option,
from the portion to be purchased before the applicable Partial Purchase Date).
4.08. Transfer Documents.
(a) Expiration Date.
(i) Lessor. Subject to receipt by Lessor on the
Expiration Date of the Lease Agreement of the full amount of the
following, without any setoff, deduction or reduction of any
kind:
(A) In the case of a transfer to Lessee or an
Assignee Purchaser, all amounts payable by Lessee
pursuant to clause (i) of Subparagraph 4.06(a); or
(B) In the case of a transfer to a Designated
Purchaser, (1) the purchase price payable by the
Designated Purchaser and (2) all amounts payable by
Lessee pursuant to clause (ii) of Subparagraph 4.06(a);
Lessor shall transfer its interest in the Property to Purchaser
on the Expiration Date of the Lease Agreement (unless Lessor is
to retain the Property) by executing and delivering to Purchaser
a Deed in substantially the form of Exhibit D-1, an
Acknowledgment of Disclaimer of Representations and Warranties
in substantially the form of Exhibit D-2, a Bill of Sale in
substantially the form of Exhibit E and such other documents,
instruments and agreements as such Person may reasonably
request.
(ii) Lessee. On the Expiration Date of the Lease
Agreement, unless Lessee is to purchase the Property, Lessee
shall transfer its interest in the Property to the Designated
Purchaser or the Assignee Purchaser (or Lessor if Lessor is to
14
<PAGE> 375
retain the Property pursuant to Paragraph 3.02(d)) by executing
and delivering to such Person a Deed in substantially the form
of Exhibit F, a Bill of Sale in substantially the form of
Exhibit G and such other documents, instruments and agreements
as such Person may reasonably request.
(b) Partial Purchase Date. Subject to receipt by Lessor on any
Partial Purchase Date of all amounts payable by Lessee pursuant to
Subparagraph 4.06(b), without any setoff, deduction or reduction of any
kind, Lessor shall transfer its interest in the Tracts of Property to be
purchased on such date to Lessee by executing and delivering to Lessee a
Deed in substantially the form of Exhibit D, a Bill of Sale in
substantially the form of Exhibit E and such other documents,
instruments and agreements as Lessee may reasonably request
4.09. Casualty and Condemnation Proceeds. If, on the Expiration Date of
the Lease Agreement, any Casualty and Condemnation Proceeds are held by Lessor
in a Repair and Restoration Account or otherwise, Lessor shall (a) if Lessee is
to purchase the Property on the Expiration Date of the Lease Agreement and
Lessee shall so direct, apply such proceeds to the purchase price to be paid by
Lessee or (b) in all other cases, release such proceeds to Lessee; provided,
however, that Lessor shall not have any obligation so to apply or release such
proceeds unless Lessee and/or any Designated Purchaser has complied with all of
the terms and conditions of this Agreement.
4.10. Payments. Purchaser and Lessee shall make all payments in lawful
money of the United States and in same day or immediately available funds not
later than 11:00 a.m. on the date due.
4.11. Environmental Reports. Lessee shall obtain and deliver to Lessor,
not later than twenty (20) days prior to the Expiration Date of the Lease
Agreement (or, in the case of a purchase of a portion of the Property pursuant
to the Partial Purchase Option, prior to the applicable Partial Purchase Date),
environmental reports with respect to the Property (or, in the case of a
purchase of a portion of the Property pursuant to the Partial Purchase Option,
with respect to the applicable portion thereof) prepared by environmental
consultants acceptable to Lessor.
4.12. Further Assurances. Lessee shall, and shall cause any Designated
Purchaser to, execute and deliver such documents, instruments and agreements and
take such other actions as Lessor may reasonably request to effect the purposes
of this Agreement and comply with the terms hereof. Similarly, Lessor shall
execute and deliver such documents, instruments and agreements and take such
other actions as Lessee or a Designated Purchaser may reasonably request to
effect the purposes of this Agreement and comply with the terms hereof.
SECTION 5. MISCELLANEOUS.
5.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this
15
<PAGE> 376
Agreement shall be given as provided in Subparagraph 2.02(c) and Paragraph 7.01
of the Participation Agreement.
5.02. Waivers, Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
5.03. Successors and Assigns.
(a) General. This Agreement shall be binding upon and inure to
the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and
Lessee shall not sell, assign or delegate their respective rights and
obligations hereunder except as provided in the Participation Agreement
and in Subparagraph 5.03(b).
(b) Assignment by Lessee of Purchase Rights. Lessee may assign to
a third party (an "Assignee Purchaser") its right to purchase the
Property pursuant to the Partial Purchase Option, the Term Purchase
Option or the Expiration Date Purchase Option; provided, however, that
(i) such an assignment shall not relieve Lessee of its obligations to
consummate or cause the consummation of any such purchase in accordance
with the terms of this Agreement and (ii) Lessee assumes all
responsibility for determining the creditworthiness of any such Assignee
Purchaser. If, after any purchase by an Assignee Purchaser hereunder,
the purchase price paid by such Assignee Purchaser is recovered from any
Lessor Party, Lessee shall reimburse such Lessor Party for such recovery
unless such recovery is due solely to a material misrepresentation or
covenant breach by such Lessor Party.
5.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
5.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
5.06. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
16
<PAGE> 377
5.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
5.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to pay the
amounts payable by Lessee under this Agreement and the other Operative
Documents and to perform the other Lessee Obligation are absolute,
unconditional and irrevocable obligations which are separate and
independent of the obligations of the Lessor Parties under this
Agreement and the other Operative Documents and all other events and
circumstances, including the events and circumstances set forth in
Subparagraph 5.08(c).
(b) No Termination or Abatement. This Agreement and the other
Operative Documents and Lessee's obligation to pay all amounts hereunder
and to pay and perform all other Lessee Obligations shall continue in
full force and effect without abatement notwithstanding the occurrence
or existence of any event or circumstance, including any event or
circumstance set forth in Subparagraph 5.08(c).
(c) Full Payment and Performance. Lessee shall make all payments
under this Agreement and the other Operative Documents in the full
amounts and at the times required by the terms of this Agreement and the
other Operative Documents without setoff, deduction or reduction of any
kind and shall perform all other Lessee Obligations as and when
required, without regard to any event or circumstances whatsoever,
including (i) the condition of the Property (including any Improvements
to the Property made prior to the Commencement Date or during the Term
of the Lease Agreement); (ii) title to the Property (including
possession of the Property by any Person or the existence of any Lien or
any other right, title or interest in or to any of the Property in favor
of any Person); (iii) the value, habitability, usability, design,
operation or fitness for use of the Property; (iv) the availability or
adequacy of utilities and other services to the Property; (v) any
latent, hidden or patent defect in the Property; (vi) the zoning or
status of the Property or any other restrictions on the use of the
Property; (g) the economics of the Property; (vii) any Casualty or
Condemnation; (viii) the compliance of the Property with any applicable
Governmental Rule or Insurance Requirement; (ix) any failure by any
Lessor Party to perform any of its obligations under this Agreement or
any other Operative Document; or (x) the exercise by any Lessor Party of
any of its remedies under this Agreement or any other Operative
Document; provided, however, that (A) Lessee shall have no obligation to
purchase the Property on the Expiration Date if Lessor fails to remove
Lessor Liens or deliver the required deed and bill of sale or other
documents required to be delivered by Lessor hereunder and (B) this
Paragraph 5.08 shall not abrogate any right which Lessee may have to
recover damages from any Lessor Party for any material breach by such
Lessor Party of its obligations under this Agreement or any other
Operative Document to the extent permitted hereunder or thereunder.
[The signature page follows.]
17
<PAGE> 378
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
LESSOR: LEASE PLAN U.S.A., INC.
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
18
<PAGE> 379
EXHIBIT A(1)
NOTICE OF TERM PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the
"Lease Agreement"), between Lessee and Lessor; and
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Subparagraph 4.01(a) of the Lease Agreement and Paragraph
2.01 of the Purchase Agreement, Lessee hereby irrevocably notifies Lessor that
Lessee is exercising its right to terminate the Lease Agreement prior to the
Scheduled Expiration Date of the Lease Agreement and purchase the Property on
[_________, ____] (which date is a Business Day and which date, after the
delivery of this notice, shall be the Expiration Date of the Lease Agreement).
IN WITNESS WHEREOF, Lessee has executed this Notice of Term Purchase
Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
A(1)-1
<PAGE> 380
EXHIBIT A(2)
NOTICE OF PARTIAL PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent"); and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 2.02 of the Purchase Agreement, Lessee hereby
irrevocably notifies Lessor that Lessee is exercising its right to purchase a
portion of the Property as follows:
(a) The Tract[s] of Property to be purchased is [are]
________________; and
(b) The date on which such purchase is to occur is [_________,
____] (which date is a Business Day).
3. Lessee hereby certifies to Lessor, Agent and the Participants that,
on the date of this notice:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on
such date (except for representations and warranties expressly made as
of a specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
IN WITNESS WHEREOF, Lessee has executed this Notice of Partial Purchase
Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
A(2)-1
<PAGE> 381
EXHIBIT B
NOTICE OF MARKETING OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent"); and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 3.01 of the Purchase Agreement, Lessee hereby
notifies Lessor that Lessee is electing to exercise the Marketing Option on the
Scheduled Expiration Date of the Lease Agreement of [_____, ____].
3. Lessee hereby certifies to Lessor, Agent and the Participants that,
on the date of this notice:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on
such date (except for representations and warranties expressly made as
of a specified date, which shall be true as of such date);
(b) No Default (other than a Non-Marketing Option Event of
Default under the Lease Agreement) has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
B-1
<PAGE> 382
IN WITNESS WHEREOF, Lessee has executed this Notice of Marketing Option
Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
B-2
<PAGE> 383
EXHIBIT C
NOTICE OF EXPIRATION DATE PURCHASE OPTION EXERCISE
[Date]
Lease Plan U.S.A., Inc.
ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent"); and
(b) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Pursuant to Paragraph 3.01 of the Purchase Agreement, Lessee hereby
notifies Lessor that Lessee is electing to exercise the Expiration Date Purchase
Option on the Scheduled Expiration Date of the Lease Agreement of [_____, ____].
IN WITNESS WHEREOF, Lessee has executed this Notice of Expiration Date
Purchase Option Exercise on the date set forth above.
KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
----------------------------
Title:
---------------------------
C-1
<PAGE> 384
EXHIBIT D(1)
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO
AND MAIL TAX STATEMENTS TO:
[Purchser]
- ------------------------
- ------------------------
- ------------------------
Documentary Transfer Tax is not of public record and is shown on a separate
sheet attached to this deed.
- -------------------------------------------------------------------------------
QUITCLAIM DEED
FOR VALUABLE CONSIDERATION, the receipt of which is hereby
acknowledged, LEASE PLAN U.S.A., INC., a Georgia corporation ("Grantor"), hereby
releases, remises and forever quitclaims to [PURCHASER], a _____________
("Grantee"), the real property located in the City of San Jose, County of Santa
Clara, State of California, described on EXHIBIT A attached hereto and made a
part hereof (the "Property").
Executed as of _____, 19__.
LEASE PLAN U.S.A., INC.,
a Georgia corporation
By:
------------------------------
Its:
-----------------------------
D(1)-1
<PAGE> 385
EXHIBIT A
LEGAL DESCRIPTION
Assessor's Parcel No.:
-----------------------
D(1)-2
<PAGE> 386
State of
------------------------
County of
------------------------
On ___________________ before me, _________________________,
Date Name, Title of Officer
personally appeared
------------------------------------------------------,
Name(s) of signer(s)
( personally known to me -OR- ( proved to me on the basis of satisfactory
evidence to be the person(s) whose name(s)
is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the
same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the
instrument the person(s) or the entity upon
behalf of which the person(s) acted, executed
the instrument.
WITNESS my hand and official seal.
------------------------------------
D(1)-3
<PAGE> 387
______________, 19__
Santa Clara County Recorder
Re: Request That Statement of Documentary
Transfer Tax Not be Recorded
Dear Sir:
Request is hereby made in accordance with Section 11932 of the
Revenue and Taxation Code that this statement of tax due not be recorded with
the attached deed but be affixed to the deed after recordation and before return
as directed on the deed.
The attached deed names LEASE PLAN U.S.A., an Georgia corporation, as
grantor, and [PURCHASER], a _________________, as grantee.
The property being transferred and described in the attached deed is
located in the City of San Jose and County of Santa Clara, State of California.
The amount of Documentary Transfer Tax due on the attached deed is
$__________, computed on full value of the property conveyed.
LEASE PLAN U.S.A.,
a Georgia corporation
By:
-------------------------------
Its:
------------------------------
D(1)-4
<PAGE> 388
EXHIBIT D(2)
ACKNOWLEDGMENT AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THIS ACKNOWLEDGMENT OF DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
(this "Certificate") is made as of ___________, 1997 by [PURCHASER], a
_____________ ("Grantee").
Contemporaneously with execution of this Certificate, LEASE PLAN U.S.A.,
INC., a Georgia corporation ("Lease Plan U.S.A."), is executing and delivering
to Grantee a Quitclaim Deed and a Bill of Sale (the foregoing documents and any
other documents to be executed and delivered to Grantee in connection therewith
are herein called the "Conveyancing Documents" and any of the properties, rights
or other matters assigned, transferred or conveyed pursuant thereto are herein
collectively called the " Property") pursuant to the terms of a Purchase
Agreement dated as of November 12, 1997 by and between Lease Plan U.S.A. and
KLA-Tencor Corporation, a Delaware corporation("KLA-Tencor").
Notwithstanding any provision contained in the Conveyancing Documents to
the contrary, Grantee acknowledges that Lease Plan U.S.A. is selling and Grantee
is purchasing the Property on an "as is, with all faults" basis and that Grantee
is not relying on any representations or warranties of any kind whatsoever,
express or implied, from Lease Plan U.S.A., its agents, or brokers as to any
matters concerning the Property including (a) the condition of the Property
(including any improvements to the Property); (b) title to the Property
(including possession of the Property by any individual or entity or the
existence of any lien or any other right, title or interest in or to any of the
Property in favor of any person, but excluding any Lessor Liens as defined in
that certain Participation Agreement dated as of November 12, 1997 among
KLA-Tencor, Lease Plan U.S.A., the Participants and ABN AMRO Bank N.V., as agent
for the Participants (in such capacity, "Agent")); (c) the value, habitability,
usability, design, operation or fitness for use of the Property; (d) the
availability or adequacy of utilities and other services to the Property; (e)
any latent, hidden or patent defect in the Property; (f) the zoning or status of
the Property or any other restrictions on the use of the Property; (g) the
economics of the Property; (h) any damage to, destruction or, or decrease in the
value of all or any portion of the Property or any condemnation or other taking
or sale of all or any portion of the Property, by or on account of any actual or
threatened eminent domain proceeding or other taking of action by any
governmental authority or other person have the power of eminent domain; or (i)
the compliance of the Property with any applicable law, rule, regulation,
ordinance, order, code, judgment or similar form of decision of any governmental
authority or any terms, conditions or requirements imposed by any policies of
insurance relating to the Property.
[See next page]
D(2)-1
<PAGE> 389
The provisions of this Certificate shall be binding on Grantee, its
successors and assigns and any other party claiming through Grantee. Grantee
hereby acknowledges that Lease Plan U.S.A. is entitled to rely and is relying on
this Certificate.
EXECUTED as of ____________, 1997.
[PURCHASER],
a
-----------------
-------------------
-------------------
D(2)-2
<PAGE> 390
EXHIBIT E
BILL OF SALE
FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is
hereby acknowledged, LEASE PLAN U.S.A., Inc., a Georgia corporation ("Seller")
does hereby sell, transfer and convey to [PURCHASER], a
_________________________ ("Purchaser"): 1) the Related Goods (as defined in
that certain Participation Agreement dated as of November 12, 1997 (the
"Participation Agreement") among KLA-Tencor Corporation ("KLA-Tencor"), Seller,
the Participants and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent")) in connection with that certain real property commonly known
as _______________, San Jose, California, including, without limitation, the
personal property itemized on SCHEDULE 1 attached hereto and incorporated herein
by this reference (the "Property"), and 2) all Appurtenant Rights, Related
Permits and Related Agreements as those terms are defined in the Participation
Agreement.
Seller is selling and Purchaser is purchasing the Property on an "as
is, with all faults" basis and Purchaser is not relying on any representations
or warranties of any kind whatsoever, express or implied, from Seller, its
agents, or brokers as to any matters concerning the Property including (a) the
condition of the Property; (b) title to the Property (including possession of
the Property by any individual or entity or the existence of any lien or any
other right, title or interest in or to any of the Property in favor of any
person but excluding any Lessor Liens as defined in the Participation
Agreement); (c) the value, habitability, usability, design, operation or fitness
for use of the Property; or (d) any latent, hidden or patent defect in the
Property.
Dated: ________, 19__ SELLER:
LEASE PLAN U.S.A., INC.
a Georgia corporation
By:
-------------------------------
Its:
-------------------------------
PURCHASER:
[PURCHASER]
a
---------------------------------
By:
-------------------------------
Its:
-------------------------------
E-1
<PAGE> 391
SCHEDULE 1
PROPERTY
E-2
<PAGE> 392
EXHIBIT F
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO
AND MAIL TAX STATEMENTS TO:
- -------------------------
- -------------------------
Attention:
---------------
Documentary Transfer Tax is not of public record and is shown on a separate
sheet attached to this deed.
- -------------------------------------------------------------------------------
QUITCLAIM DEED
FOR VALUABLE CONSIDERATION, the receipt of which is hereby
acknowledged, KLA-TENCOR CORPORATION, a Delaware corporation ("Grantor"), hereby
releases, remises and forever quitclaims to [PURCHASER] ("Grantee"), the real
property located in the City of San Jose, County of Santa Clara, State of
California, described on EXHIBIT A attached hereto and made a part hereof (the
"Property").
Executed as of __________, 19__.
KLA-TENCOR CORPORATION,
a Delaware corporation
By:
--------------------------------
Its:
-------------------------------
F-1
<PAGE> 393
EXHIBIT A
LEGAL DESCRIPTION
Assessor's Parcel No.:
------------------------
F-2
<PAGE> 394
State of
------------------------
County of
-----------------------
On ___________________ before me, _________________________,
Date Name, Title of Officer
personally appeared ,
----------------------------------------
Name(s) of signer(s)
( personally known to me -OR- ( proved to me on the basis of satisfactory
evidence to be the person(s) whose name(s)
is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the
same in his/her/their authorized capacity(ies),
and that by his/her/their signature(s) on the
instrument the person(s) or the entity upon
behalf of which the person(s) acted, executed
the instrument.
WITNESS my hand and official seal.
-------------------------------------
F-3
<PAGE> 395
_________ , 1997
Santa Clara County Recorder
Re: Request That Statement of Documentary
Transfer Tax Not be Recorded
Dear Sir:
Request is hereby made in accordance with Section 11932 of the
Revenue and Taxation Code that this statement of tax due not be recorded with
the attached deed but be affixed to the deed after recordation and before return
as directed on the deed.
The attached deed names KLA-TENCOR CORPORATION, a Delaware
corporation, as grantor, and [PURCHASER], as grantee.
The property being transferred and described in the attached deed is
located in the City of San Jose and County of Santa Clara, State of California.
The amount of Documentary Transfer Tax due on the attached deed is
$__________, computed on full value of the property conveyed.
KLA-TENCOR CORPORATION,
a Delaware corporation
By:
--------------------
Its:
--------------------
F-4
<PAGE> 396
EXHIBIT G
BILL OF SALE
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, KLA-Tencor Corporation, a Delaware corporation
("Seller"), does hereby sell, transfer, and convey unto [PURCHASER] ("Buyer"):
1) without warranty, the Related Goods (as defined in that certain Participation
Agreement dated as of November 12, 1997 (the "Participation Agreement") among
Lease Plan U.S.A., Inc., Seller, the Participants and ABN AMRO Bank N.V., as
agent for the Participants (in such capacity, "Agent")) in connection with that
certain real property commonly known as _______________, San Jose, California,
including, without limitation, the personal property itemized on SCHEDULE 1
attached hereto and incorporated herein by this reference (the "Property"), and
2) all Appurtenant Rights, Related Permits and Related Agreements as those terms
are defined in the Participation Agreement.
DATED this ____ day of __________, 19__.
SELLER: KLA-Tencor Corporation,
a Delaware corporation
By:
---------------------------
Its:
--------------------------
G-1
<PAGE> 397
SCHEDULE 1
PROPERTY
G-2
<PAGE> 398
EXECUTION COPY
================================================================================
PURCHASE AGREEMENT
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
<PAGE> 399
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. INTERPRETATION............................................................2
1.01. Definitions...............................................................2
1.02. Rules of Construction.....................................................2
SECTION 2. OPTIONAL PURCHASE BY LESSEE DURING THE TERM...............................2
2.01. Term Purchase Option......................................................2
2.02. Partial Purchase Option...................................................3
SECTION 3. OBLIGATIONS OF LESSEE ON THE EXPIRATION DATE..............................4
3.01. Alternative...............................................................4
3.02. Marketing Option..........................................................4
3.03. Expiration Date Purchase Option..........................................10
SECTION 4. TERMS OF ALL PURCHASES...................................................10
4.01. Representations and Warranties of Parties................................10
4.02. As Is Purchase...........................................................12
4.03. Release..................................................................13
4.04. Permits, Approvals, Etc..................................................13
4.05. Costs....................................................................13
4.06. Lessee's Expiration Date and Partial Purchase Date Payment
Obligations..............................................................13
4.07. Lessor Liens.............................................................14
4.08. Transfer Documents.......................................................14
4.09. Casualty and Condemnation Proceeds.......................................15
4.10. Payments.................................................................15
4.11. Environmental Reports....................................................15
4.12. Further Assurances.......................................................15
SECTION 5. MISCELLANEOUS............................................................15
5.01. Notices..................................................................16
5.02. Waivers, Amendments......................................................16
5.03. Successors and Assigns...................................................16
5.04. No Third Party Rights....................................................16
5.05. Partial Invalidity.......................................................16
5.06. Governing Law............................................................16
</TABLE>
i
<PAGE> 400
<TABLE>
<CAPTION>
Page
<S> <C> <C>
5.07. Counterparts.............................................................17
5.08. Nature of Lessee's Obligations...........................................17
</TABLE>
EXHIBITS
A(1) Notice of Term Purchase Option Exercise (2.02)
A(2) Notice of Partial Purchase Option Exercise (2.02)
B Notice of Marketing Option Exercise (3.01)
C Notice of Expiration Date Purchase Option Exercise (2.02)
D(1) Deed (Lessor) (4.08(a))
D(2) Acknowledgment of Disclaimer of Representations and Warranties
(4.08(a))
E Bill of Sale (Lessor) (4.08(a))
F Deed (Lessee) ((4.08(b))
G Bill of Sale (Lessee) 4.08(b))
ii
<PAGE> 401
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
THIS ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT (this
"Assignment" herein), dated as of November 12, 1997, is executed by:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor")
in favor of
(2) ABN AMRO BANK N.V., as agent for the Participants under
the Participation Agreement referred to in Recital B below (in such
capacity, "Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), has
requested Lessor and the financial institutions which are "Participants" under
the Participation Agreement referred to in Recital B below (such financial
institutions to be referred to collectively as the "Participants") to provide to
Lessee a certain lease facility. Pursuant to such facility:
(1) Lessor would (a) acquire certain property designated by
Lessee (either through purchase or lease), (b) lease to Lessee such
property and certain other property currently held by Lessor, (c)
appoint Lessee as Lessor's agent to make certain improvements to a
portion of such property, (d) make advances to finance such
improvements and to pay certain related expenses, and (e) grant to
Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility
by (a) funding the purchase prices and other advances to be made by
Lessor and (b) acquiring participation interests in the rental and
certain other payments to be made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and
Agent, Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including,
without limitation, the execution and delivery of (1) the Lease Agreement dated
as of November 12, 1997 between Lessee and Lessor (the "Lease Agreement"),
pursuant to which Lessee has leased from Lessor the lots, pieces, tracts and
parcels of land described in Exhibit A (the "Land") and the other property
described in the Lease Agreement (the "Property"), (2) the Purchase Agreement
dated as of November 12, 1997 between Lessee and Lessor (the "Purchase
Agreement"), pursuant to which Lessee may purchase the Property from Lessor
under certain circumstances, and (3) this Assignment.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
<PAGE> 402
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Assignment or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Assignment or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Assignment or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this
Assignment or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Assignment
and the other Operative Documents.
SECTION 2. ASSIGNMENT.
2.01. Assignment. As security for the Lessor Obligations, Lessor hereby
irrevocably and unconditionally grants, conveys, transfers and assigns to Agent,
for the benefit of the Participants and Agent, all estate, right, title and
interest of Lessor, whether now owned or hereafter acquired, in the Lease
Agreement and the Purchase Agreement, including all claims and rights to the
payment of money at any time arising in connection with any repudiation,
rejection or breach of either agreement by Lessee or a trustee or receiver of
Lessee in any bankruptcy, insolvency or similar proceeding.
2.02. Receipt of Rents, Etc. Lessor hereby irrevocably designates Agent
(or its designee) to receive all Rents and other payments to be made by Lessee
under the Lease Agreement and the Purchase Agreement. Lessor shall direct (and
hereby directs) Lessee to deliver to Agent (or its designee), at its address set
forth in the Participation Agreement or at such other address or to such other
Person as Agent shall designate, all such payments, and no delivery thereof by
Lessee shall be of any force or effect unless made to Agent (or its designee),
as herein provided. Lessor and Agent agree that Lessee, in making such payments
to Agent pursuant to the directions contained in this Assignment and in reliance
on such directions shall be deemed to have satisfied its obligation for such
payments under the Lease Agreement.
2.03. Irrevocability; Supplemental Instruments. Lessor agrees that (a)
this Assignment is irrevocable, (b) Lessor will not take any action under the
Lease Agreement or the Purchase Agreement or otherwise which is inconsistent
with this Assignment, (c) any action, assignment, designation or direction
inconsistent herewith shall be void and (d) Lessor will from time to time
execute and deliver all instruments of further assurance and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Assignment.
2.04. Validity. Lessor represents, warrants, covenants and agrees that
(a) Lessor has not assigned or executed any assignment of, and will not assign
or execute any assignment of, Lessor's estate, right, title or interest in the
Lease Agreement or the Purchase Agreement to anyone other than Agent, (b) any
such assignment is void, and (c) Lessor has not taken any action that impairs
the rights of Agent hereunder.
2
<PAGE> 403
2.05. Lessor Remains Liable. The assignment made hereby is made for the
purpose of securing the Lessor Obligations only and does not (a) impair or
diminish in any way the obligations of Lessor under the Lease Agreement or the
Purchase Agreement or (b) obligate Agent (or its designee) or any Participant to
perform any of the obligations of Lessor under the Lease Agreement or the
Purchase Agreement. This Assignment shall not operate to cause Agent (or its
designee) to be regarded as a mortgagee in possession.
2.06. Effect of Amendments. If the Lease Agreement or the Purchase
Agreement shall be amended, it shall continue to be subject to the provisions
hereof without the necessity of any further act by any of the parties hereto.
2.07. Absolute Assignment. Lessor has, subject to and in accordance
with the terms and conditions of this Assignment, assigned and transferred unto
Agent all of Lessor's right, title and interest in and to all Rents and other
amounts now or hereafter payable by Lessee under the Lease Agreement and the
Purchase Agreement, it being intended to establish an absolute transfer and
assignment, subject to and in accordance with the terms and conditions of this
Assignment, of all such Rents and other amounts to Agent and not merely to grant
a security interest therein. Subject to the Lease Agreement, Agent (or its
designee) may, in Lessor's name and stead, operate the Property and rent, lease
or let all or any portion of the Property to any party or parties at such rental
and upon such terms as Agent (or its designee) shall, in its discretion,
determine.
2.08. Receivers. If, notwithstanding the terms of this Assignment, a
petition or order for sequestration of rents, or the appointment of a receiver
or some similar judicial action or order is deemed required under applicable
California law to allow Agent to continue to collect the Rents and other amounts
payable by Lessee under the Lease Agreement or the Purchase Agreement, then it
is agreed by Lessor that any proof of claim or similar document filed by Agent
in connection with the breach or rejection of the Lease Agreement or the
Purchase Agreement by Lessee thereunder or the trustee of any lessee under any
federal or state bankruptcy, insolvency or other similar law shall, for the
purpose of perfecting Agent's rights, be deemed to constitute action required
under such California law. Upon the occurrence and during the continuance of an
Event of Default, Lessor hereby consents to the appointment of a receiver for
Lessor's interest in the Property without regard to the solvency of Lessor or to
the collateral that may be available for the satisfaction of the Lessor
Obligations.
SECTION 3. MISCELLANEOUS.
3.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Assignment shall be given as provided in Paragraph
7.01 of the Participation Agreement.
3.02. Waivers; Amendments. Any term, covenant, agreement or condition
of this Assignment may be amended or waived only as provided in the
Participation Agreement. No failure or delay by Agent in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent,
3
<PAGE> 404
a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
3.03. Successors and Assigns. This Assignment shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
3.04. No Third Party Rights. Nothing expressed in or to be implied from
this Assignment is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and their permitted successors and assigns, any
benefit or legal or equitable right, remedy or claim under or by virtue of this
Assignment or under or by virtue of any provision herein.
3.05. Partial Invalidity. If at any time any provision of this
Assignment is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Assignment nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
3.06. Governing Law. This Assignment shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
3.07. Counterparts. This Assignment may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
[The signature page follows.]
4
<PAGE> 405
IN WITNESS WHEREOF, Lessor has caused this Assignment to be
executed as of the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By: _____________________________
Name: _______________________
Title: ______________________
5
<PAGE> 406
STATE OF CALIFORNIA )
) ss
COUNTY OF __________________ )
On _____________, 1997, before me, ___________________ a
Notary Public in and for the State of California, personally appeared ,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
__________________________
<PAGE> 407
EXHIBIT A
LAND
A-1
<PAGE> 408
EXHIBIT B
LESSEE'S CONSENT TO
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
November 12, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street, Suite 711
Chicago, IL 60603
ABN AMRO Bank N.V.,
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the
"Lease Agreement"), between Lessee and Lessor;
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor; and
(d) The Assignment of Lease Agreement and Purchase Agreement,
dated as of November 12, 1997 (the "Assignment of Lease"), executed by
Lessor in favor of Agent.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Consent. Lessee hereby consents to the Assignment of Lease.
3. Payments. Lessee agrees to pay and deliver to Agent (or its
designee) all Rents and other amounts payable by Lessee under the Lease
Agreement and the Purchase Agreement in accordance with the terms thereof.
Lessee will not, for any reason whatsoever, seek to recover from Agent (or its
designee) any moneys paid to Agent (or its designee) by virtue of the Assignment
of Lease.
B-1
<PAGE> 409
4. Lessee's Other Agreements. Lessee hereby further agrees with Lessor
and Agent as follows:
(a) Lessee agrees (i) to deliver to Agent (or its designee)
and Lessor, at their addresses set forth in the Participation Agreement
or at such other addresses as Agent or Lessor, as the case may be, may
designate, duplicate originals or copies of all notices, undertakings,
demands, statements, documents and other communications which Lessee is
required or permitted to deliver pursuant to the Lease Agreement, the
Purchase Agreement or the Assignment of Lease; (ii) that any notice
delivered or declaration made to Lessee by Agent (or its designee)
pursuant to the Lease Agreement or the Purchase Agreement shall be
effective as a notice given or declaration made to Lessee by Lessor;
(iii) that Agent (or its designee) shall not by reason of the
Assignment of Lease be subject to any liability or obligation under the
Lease Agreement or the Purchase Agreement except as set forth in the
Assignment of Lease; and (iv) that any waiver, consent or approval by
Lessor under the Lease Agreement or the Purchase Agreement shall not be
valid unless approved in writing by Agent (or its designee).
(b) Lessee agrees to remain obligated under the Lease
Agreement and the Purchase Agreement in accordance with their
respective terms, and to take no action to terminate (other than in
accordance with the terms thereof), annul, rescind or avoid the Lease
Agreement, the Purchase Agreement or this Consent or to abate, reduce,
offset, suspend or defer or make any counterclaim or raise any defense
(other than the defense of payment to Agent (or its designee)) with
respect to the Rents or other amounts payable thereunder or to cease
paying such amounts to Agent (or its designee) as provided herein.
(c) Lessee hereby agrees that upon the occurrence of any Event
of Default, Agent (or its designee) shall have the right to deliver a
notice of default under the Lease Agreement, which shall be effective
for all purposes under the Lease Agreement as if sent by Lessor.
(d) Lessee shall notify Agent (or its designee) at its address
specified in the Participation Agreement, or such other address as
Agent may designate, of any default by Lessor under the Lease Agreement
and agrees that no such default shall entitle Lessee to terminate
(other than in accordance with the terms of the Lease Agreement),
annul, rescind or avoid the Lease Agreement or reduce or abate the
Rents or other amounts payable thereunder.
5. Amendment or Termination; Agent's Designation. Lessee agrees that it
will not, unilaterally or by agreement, subordinate, amend, supplement, modify,
extend (except in accordance with the express terms thereof), discharge, waive
or terminate (other than in accordance with the terms thereof) the Lease
Agreement, the Purchase Agreement or this Consent without Agent's prior written
consent, and that any attempted subordination, amendment, supplement,
modification, extension, discharge, waiver or termination in violation of this
Section 5 without such consent shall be null and void. In the event that the
Lease Agreement or the Purchase Agreement shall be amended or supplemented as
herein permitted,
B-2
<PAGE> 410
the Lease Agreement or the Purchase Agreement, as so amended or supplemented,
shall continue to be subject to the provisions of the Assignment of Lease and
this Consent without the necessity of any further act by any of the parties
thereto or hereto.
6. Continuing Obligations of Lessor and Lessee. Neither the execution
and delivery of the Assignment of Lease, nor any action or inaction on the part
of Agent shall impair or diminish any obligations of Lessor or Lessee under the
Lease Agreement or the Purchase Agreement, and shall not impose on Agent (or its
designee) any such obligations, nor shall it impose on Agent (or its designee) a
duty to produce Rents or cause Agent to be a mortgagee or pledgee in possession
for any purpose. Except as specifically set forth in this Consent, none of the
terms of the Assignment of Lease shall impose upon Lessee any greater
obligations than those set forth in the Lease Agreement, the Purchase Agreement
and the other Operative Documents.
7. Partial Invalidity. If at any time any provision of this Consent is
or becomes illegal, invalid or unenforceable in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the remaining
provisions of this Consent nor the legality, validity or enforceability of such
provision under the law of any other jurisdiction shall in any way be affected
or impaired thereby.
8. Governing Law. This Consent shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
[SIGNATURE PAGE FOLLOWS]
B-3
<PAGE> 411
IN WITNESS WHEREOF, Lessee has executed this Consent on the date set
forth above.
LESSEE: KLA-TENCOR CORPORATION
By: _______________________________
Name: _________________________
Title: ________________________
B-4
<PAGE> 412
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
================================================================================
ASSIGNMENT OF LEASE AGREEMENT
AND PURCHASE AGREEMENT
BY
LEASE PLAN U.S.A., INC.
IN FAVOR OF
ABN AMRO BANK N.V.,
AS AGENT FOR THE PARTICIPANTS
NOVEMBER 12, 1997
================================================================================
<PAGE> 413
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
THIS ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT (this
"Assignment" herein), dated as of November 12, 1997, is executed by:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor")
in favor of
(2) ABN AMRO BANK N.V., as agent for the Participants under the
Participation Agreement referred to in Recital B below (in such capacity,
"Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), has
requested Lessor and the financial institutions which are "Participants" under
the Participation Agreement referred to in Recital B below (such financial
institutions to be referred to collectively as the "Participants") to provide to
Lessee a certain lease facility. Pursuant to such facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as Lessor's
agent to make certain improvements to a portion of such property, (d) make
advances to finance such improvements and to pay certain related expenses, and
(e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by (a)
funding the purchase prices and other advances to be made by Lessor and (b)
acquiring participation interests in the rental and certain other payments to be
made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and
Agent, Lessor and the Participants have agreed to provide such lease facility
upon the terms and subject to the conditions set forth therein, including,
without limitation, the execution and delivery of (1) the Lease Agreement dated
as of November 12, 1997 between Lessee and Lessor (the "Lease Agreement"),
pursuant to which Lessee has leased from Lessor the lots, pieces, tracts and
parcels of land described in Exhibit A (the "Land") and the other property
described in the Lease Agreement (the "Property"), (2) the Purchase Agreement
dated as of November 12, 1997 between Lessee and Lessor (the "Purchase
Agreement"), pursuant to which Lessee may purchase the Property from Lessor
under certain circumstances, and (3) this Assignment.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
<PAGE> 414
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Assignment or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Assignment or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Assignment or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this
Assignment or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Assignment
and the other Operative Documents.
SECTION 2. ASSIGNMENT.
2.01. Assignment. As security for the Lessor Obligations, Lessor hereby
irrevocably and unconditionally grants, conveys, transfers and assigns to Agent,
for the benefit of the Participants and Agent, all estate, right, title and
interest of Lessor, whether now owned or hereafter acquired, in the Lease
Agreement and the Purchase Agreement, including all claims and rights to the
payment of money at any time arising in connection with any repudiation,
rejection or breach of either agreement by Lessee or a trustee or receiver of
Lessee in any bankruptcy, insolvency or similar proceeding.
2.02. Receipt of Rents, Etc. Lessor hereby irrevocably designates Agent (or
its designee) to receive all Rents and other payments to be made by Lessee under
the Lease Agreement and the Purchase Agreement. Lessor shall direct (and hereby
directs) Lessee to deliver to Agent (or its designee), at its address set forth
in the Participation Agreement or at such other address or to such other Person
as Agent shall designate, all such payments, and no delivery thereof by Lessee
shall be of any force or effect unless made to Agent (or its designee), as
herein provided. Lessor and Agent agree that Lessee, in making such payments to
Agent pursuant to the directions contained in this Assignment and in reliance on
such directions shall be deemed to have satisfied its obligation for such
payments under the Lease Agreement.
2.03. Irrevocability; Supplemental Instruments. Lessor agrees that (a) this
Assignment is irrevocable, (b) Lessor will not take any action under the Lease
Agreement or the Purchase Agreement or otherwise which is inconsistent with this
Assignment, (c) any action, assignment, designation or direction inconsistent
herewith shall be void and (d) Lessor will from time to time execute and deliver
all instruments of further assurance and do such further acts as may be
reasonably necessary or proper to carry out more effectively the purpose of this
Assignment.
2.04. Validity. Lessor represents, warrants, covenants and agrees that
(a) Lessor has not assigned or executed any assignment of, and will not assign
or execute any assignment of, Lessor's estate, right, title or interest in the
Lease Agreement or the Purchase Agreement to anyone other than Agent, (b) any
such assignment is void, and (c) Lessor has not taken any action that impairs
the rights of Agent hereunder.
2.05. Lessor Remains Liable. The assignment made hereby is made for the
purpose of securing the Lessor Obligations only and does not (a) impair or
diminish in any way the
2
<PAGE> 415
obligations of Lessor under the Lease Agreement or the Purchase Agreement or (b)
obligate Agent (or its designee) or any Participant to perform any of the
obligations of Lessor under the Lease Agreement or the Purchase Agreement. This
Assignment shall not operate to cause Agent (or its designee) to be regarded as
a mortgagee in possession.
2.06. Effect of Amendments. If the Lease Agreement or the Purchase
Agreement shall be amended, it shall continue to be subject to the provisions
hereof without the necessity of any further act by any of the parties hereto.
2.07. Absolute Assignment. Lessor has, subject to and in accordance with
the terms and conditions of this Assignment, assigned and transferred unto Agent
all of Lessor's right, title and interest in and to all Rents and other amounts
now or hereafter payable by Lessee under the Lease Agreement and the Purchase
Agreement, it being intended to establish an absolute transfer and assignment,
subject to and in accordance with the terms and conditions of this Assignment,
of all such Rents and other amounts to Agent and not merely to grant a security
interest therein. Subject to the Lease Agreement, Agent (or its designee) may,
in Lessor's name and stead, operate the Property and rent, lease or let all or
any portion of the Property to any party or parties at such rental and upon such
terms as Agent (or its designee) shall, in its discretion, determine.
2.08. Receivers. If, notwithstanding the terms of this Assignment, a
petition or order for sequestration of rents, or the appointment of a receiver
or some similar judicial action or order is deemed required under applicable
California law to allow Agent to continue to collect the Rents and other amounts
payable by Lessee under the Lease Agreement or the Purchase Agreement, then it
is agreed by Lessor that any proof of claim or similar document filed by Agent
in connection with the breach or rejection of the Lease Agreement or the
Purchase Agreement by Lessee thereunder or the trustee of any lessee under any
federal or state bankruptcy, insolvency or other similar law shall, for the
purpose of perfecting Agent's rights, be deemed to constitute action required
under such California law. Upon the occurrence and during the continuance of an
Event of Default, Lessor hereby consents to the appointment of a receiver for
Lessor's interest in the Property without regard to the solvency of Lessor or to
the collateral that may be available for the satisfaction of the Lessor
Obligations.
SECTION 3. MISCELLANEOUS.
3.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessor or Agent under this Assignment shall be given as provided in Paragraph
7.01 of the Participation Agreement.
3.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Assignment may be amended or waived only as provided in the Participation
Agreement. No failure or delay by Agent in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right. Unless otherwise specified in any such waiver or consent,
a waiver or consent given hereunder shall be effective only in the specific
instance and for the specific purpose for which given.
3
<PAGE> 416
3.03. Successors and Assigns. This Assignment shall be binding upon and
inure to the benefit of the Lessor Parties and their permitted successors and
assigns; provided, however, that the Lessor Parties shall not sell, assign or
delegate their respective rights and obligations hereunder except as provided in
the Participation Agreement.
3.04. No Third Party Rights. Nothing expressed in or to be implied from
this Assignment is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and their permitted successors and assigns, any
benefit or legal or equitable right, remedy or claim under or by virtue of this
Assignment or under or by virtue of any provision herein.
3.05. Partial Invalidity. If at any time any provision of this
Assignment is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Assignment nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
3.06. Governing Law. This Assignment shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
3.07. Counterparts. This Assignment may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
[The signature page follows.]
4
<PAGE> 417
IN WITNESS WHEREOF, Lessor has caused this Assignment to be
executed as of the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By: _____________________________
Name: _______________________
Title: ________________________
5
<PAGE> 418
STATE OF CALIFORNIA_________________)
)ss
COUNTY OF __________________________)
On _____________, 1997, before me, ___________________ a Notary Public
in and for the State of California, personally appeared __________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
-------------------------------
<PAGE> 419
EXHIBIT A
LAND
A-1
<PAGE> 420
EXHIBIT B
LESSEE'S CONSENT TO
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
November 12, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street, Suite 711
Chicago, IL 60603
ABN AMRO Bank N.V.,
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation ("Lessee"), Lease
Plan U.S.A., Inc. ("Lessor"), the financial institutions listed in Schedule I to
the Participation Agreement (the "Participants") and ABN AMRO Bank N.V., as
agent for the Participants (in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the
"Lease Agreement"), between Lessee and Lessor;
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor; and
(d) The Assignment of Lease Agreement and Purchase Agreement,
dated as of November 12, 1997 (the "Assignment of Lease"), executed by Lessor in
favor of Agent.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Consent. Lessee hereby consents to the Assignment of Lease.
3. Payments. Lessee agrees to pay and deliver to Agent (or its designee)
all Rents and other amounts payable by Lessee under the Lease Agreement and the
Purchase Agreement in accordance with the terms thereof. Lessee will not, for
any reason whatsoever, seek to recover from Agent (or its designee) any moneys
paid to Agent (or its designee) by virtue of the Assignment of Lease.
B-1
<PAGE> 421
4. Lessee's Other Agreements. Lessee hereby further agrees with Lessor
and Agent as follows:
(a) Lessee agrees (i) to deliver to Agent (or its designee) and
Lessor, at their addresses set forth in the Participation Agreement or
at such other addresses as Agent or Lessor, as the case may be, may
designate, duplicate originals or copies of all notices, undertakings,
demands, statements, documents and other communications which Lessee is
required or permitted to deliver pursuant to the Lease Agreement, the
Purchase Agreement or the Assignment of Lease; (ii) that any notice
delivered or declaration made to Lessee by Agent (or its designee)
pursuant to the Lease Agreement or the Purchase Agreement shall be
effective as a notice given or declaration made to Lessee by Lessor;
(iii) that Agent (or its designee) shall not by reason of the Assignment
of Lease be subject to any liability or obligation under the Lease
Agreement or the Purchase Agreement except as set forth in the
Assignment of Lease; and (iv) that any waiver, consent or approval by
Lessor under the Lease Agreement or the Purchase Agreement shall not be
valid unless approved in writing by Agent (or its designee).
(b) Lessee agrees to remain obligated under the Lease Agreement
and the Purchase Agreement in accordance with their respective terms,
and to take no action to terminate (other than in accordance with the
terms thereof), annul, rescind or avoid the Lease Agreement, the
Purchase Agreement or this Consent or to abate, reduce, offset, suspend
or defer or make any counterclaim or raise any defense (other than the
defense of payment to Agent (or its designee)) with respect to the Rents
or other amounts payable thereunder or to cease paying such amounts to
Agent (or its designee) as provided herein.
(c) Lessee hereby agrees that upon the occurrence of any Event
of Default, Agent (or its designee) shall have the right to deliver a
notice of default under the Lease Agreement, which shall be effective
for all purposes under the Lease Agreement as if sent by Lessor.
(d) Lessee shall notify Agent (or its designee) at its address
specified in the Participation Agreement, or such other address as Agent
may designate, of any default by Lessor under the Lease Agreement and
agrees that no such default shall entitle Lessee to terminate (other
than in accordance with the terms of the Lease Agreement), annul,
rescind or avoid the Lease Agreement or reduce or abate the Rents or
other amounts payable thereunder.
5. Amendment or Termination; Agent's Designation. Lessee agrees that it
will not, unilaterally or by agreement, subordinate, amend, supplement, modify,
extend (except in accordance with the express terms thereof), discharge, waive
or terminate (other than in accordance with the terms thereof) the Lease
Agreement, the Purchase Agreement or this Consent without Agent's prior written
consent, and that any attempted subordination, amendment, supplement,
modification, extension, discharge, waiver or termination in violation of this
Section 5 without such consent shall be null and void. In the event that the
Lease Agreement or the Purchase Agreement shall be amended or supplemented as
herein permitted, the Lease Agreement or the Purchase Agreement, as so amended
or supplemented, shall continue
B-2
<PAGE> 422
to be subject to the provisions of the Assignment of Lease and this Consent
without the necessity of any further act by any of the parties thereto or
hereto.
6. Continuing Obligations of Lessor and Lessee. Neither the execution
and delivery of the Assignment of Lease, nor any action or inaction on the part
of Agent shall impair or diminish any obligations of Lessor or Lessee under the
Lease Agreement or the Purchase Agreement, and shall not impose on Agent (or its
designee) any such obligations, nor shall it impose on Agent (or its designee) a
duty to produce Rents or cause Agent to be a mortgagee or pledgee in possession
for any purpose. Except as specifically set forth in this Consent, none of the
terms of the Assignment of Lease shall impose upon Lessee any greater
obligations than those set forth in the Lease Agreement, the Purchase Agreement
and the other Operative Documents.
7. Partial Invalidity. If at any time any provision of this Consent is
or becomes illegal, invalid or unenforceable in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the remaining
provisions of this Consent nor the legality, validity or enforceability of such
provision under the law of any other jurisdiction shall in any way be affected
or impaired thereby.
8. Governing Law. This Consent shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
[SIGNATURE PAGE FOLLOWS]
B-3
<PAGE> 423
IN WITNESS WHEREOF, Lessee has executed this Consent on the date set
forth above.
LESSEE: KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ________________________
B-4
<PAGE> 424
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
================================================================================
ASSIGNMENT OF LEASE AGREEMENT
AND PURCHASE AGREEMENT
BY
LEASE PLAN U.S.A., INC.
IN FAVOR OF
ABN AMRO BANK N.V.,
AS AGENT FOR THE PARTICIPANTS
NOVEMBER 12, 1997
================================================================================
<PAGE> 425
RECORDING REQUESTED BY
AND WHEN RECORDED, RETURN TO:
Orrick, Herrington & Sutcliffe
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, CA 94111
Attn: James W. Miller, Esq.
- -------------------------------------------------------------------------------
FIRST AMENDMENT TO ASSIGNMENT OF LEASE AGREEMENT
AND PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE
AGREEMENT (this "Amendment"), dated as of November 14, 1997, is entered into by
and between:
(1) LEASE PLAN U.S.A., INC., a Georgia corporation
("Lessor"); and
(2) ABN AMRO BANK N.V., as agent for the Participants
under the Participation Agreement referred to in Recital A below
(in such capacity, "Agent").
RECITALS
A. KLA-Tencor Corporation, a Delaware corporation ("Lessee"), Lessor,
each of the financial institutions listed in Schedule I to the Participation
Agreement (referred to below) (collectively, the "Participants"), and Agent, are
parties to a Participation Agreement dated as of November 12, 1997 (the
"Participation Agreement").
B. Lessee and Lessor are parties to that certain Lease Agreement
dated as of November 12, 1997 and that certain Purchase Agreement dated as of
November 12, 1997.
C. As security for the Lessor Obligations, Lessor has assigned all of
its estate, right, title and interest in the Lease Agreement and the Purchase
Agreement to Agent pursuant to that certain Assignment of Lease Agreement and
Purchase Agreement dated November 12, 1997, and recorded on November 12, 1997,
in the Official Records of Santa Clara County, California, as Document No.
13935262 (the "Assignment of Lease").
D. Pursuant to the terms of the Participation Agreement, Lessee has
requested that Lessor acquire that certain real property described in Exhibit A
attached hereto (the "Tract 4 Land") and made a part hereof, and all
Improvements thereon.
E. Lessee and Lessor have amended the Lease Agreement to add the
Tract 4 Land to the property under the Lease Agreement as provided in that
certain First Amendment to Lease Agreement, Construction Deed of Trust with
Assignment of Rents, Security Agreement and Fixture Filing dated as of November
12, 1997, to be recorded in the Official Records of Santa Clara County,
California prior to this Amendment.
<PAGE> 426
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessor and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in Schedule 1.01 to the Participation
Agreement. The rules of construction set forth in Schedule 1.02 to the
Participation Agreement shall, to the extent not inconsistent with the terms of
this Amendment, apply to this Amendment and are hereby incorporated by
reference.
2. AMENDMENT TO ASSIGNMENT OF LEASE. The Assignment of Lease is hereby
amended by adding to Exhibit A thereto the property description set forth in
Exhibit A to this Amendment. Without limiting the effect of such addition,
Lessor and Agent specifically acknowledge and agree that, on and after the date
hereof, (i) the terms "Land" and "Property" as defined in the Assignment of
Lease include the Tract 4 Land, and (ii) the terms "Lease Agreement" and
"Purchase Agreement" as used herein shall mean those documents as amended to
include the Tract 4 Land.
3. EFFECT OF THIS AMENDMENT. On and after the date of this Amendment,
each reference in the Assignment of Lease and the other Operative Documents to
the Assignment of Lease shall mean the Assignment of Lease as amended hereby.
Except as specifically amended above, (a) the Assignment of Lease and the other
Operative Documents shall remain in full force and effect and are hereby
ratified and affirmed and (b) the execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power, or remedy of Lessor, the Participants or Agent, nor constitute
a waiver of any provision of the Assignment of Lease or any other Operative
Document.
4. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an original,
but all of which taken together shall constitute one and the same
instrument. The signature page and acknowledgment of any counterpart
may be removed therefrom and attached to any other counterpart to
evidence execution thereof by all of the parties hereto without
affecting the validity thereof.
(b) Headings. Headings in this Amendment are for
convenience of reference only and are not part of the substance
hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California
without reference to conflicts of law rules.
2
<PAGE> 427
IN WITNESS WHEREOF, Lessor and Agent have caused this Amendment to be
executed as of the day and year first above written.
LESSOR: LEASE PLAN U.S.A., INC.
By:_________________________________
Name:__________________________
Title:_________________________
AGENT: ABN AMRO BANK N.V.
By:_________________________________
Name:__________________________
Title:_________________________
By:_________________________________
Name:__________________________
Title:_________________________
ACKNOWLEDGED AND AGREED:
LESSEE: KLA-TENCOR CORPORATION
By:_________________________________
Name:__________________________
Title:_________________________
3
<PAGE> 428
STATE OF )
____________________________________________________)
)
COUNTY OF ___________________________________________________)
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
--------------------------------------------
<PAGE> 429
STATE OF )
____________________________________________________)
)
COUNTY OF ___________________________________________________)
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
------------------------------------------
<PAGE> 430
STATE OF )
____________________________________________________)
)
COUNTY OF ___________________________________________________)
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
-----------------------------------------
<PAGE> 431
EXHIBIT A
TRACT 4 LAND
THAT CERTAIN REAL PROPERTY SITUATED IN THE COUNTY OF SANTA CLARA, STATE
OF CALIFORNIA, AND DESCRIBED AS FOLLOWS:
A-1
<PAGE> 432
LESSEE'S CONSENT TO
ASSIGNMENT OF LEASE AGREEMENT AND PURCHASE AGREEMENT
November 12, 1997
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
135 So. LaSalle Street, Suite 711
Chicago, IL 60603
ABN AMRO Bank N.V.,
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
1. Reference is made to the following:
(a) The Participation Agreement, dated as of November 12, 1997
(the "Participation Agreement"), among KLA-Tencor Corporation
("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants
(in such capacity, "Agent");
(b) The Lease Agreement, dated as of November 12, 1997 (the
"Lease Agreement"), between Lessee and Lessor;
(c) The Purchase Agreement, dated as of November 12, 1997 (the
"Purchase Agreement"), between Lessee and Lessor; and
(d) The Assignment of Lease Agreement and Purchase Agreement,
dated as of November 12, 1997 (the "Assignment of Lease"), executed by
Lessor in favor of Agent.
Unless otherwise indicated, all terms defined in the Participation Agreement
have the same respective meanings when used herein.
2. Consent. Lessee hereby consents to the Assignment of Lease.
3. Payments. Lessee agrees to pay and deliver to Agent (or its designee)
all Rents and other amounts payable by Lessee under the Lease Agreement and the
Purchase Agreement in accordance with the terms thereof. Lessee will not, for
any reason whatsoever, seek to recover from Agent (or its designee) any moneys
paid to Agent (or its designee) by virtue of the Assignment of Lease.
4. Lessee's Other Agreements. Lessee hereby further agrees with Lessor
and Agent as follows:
<PAGE> 433
(a) Lessee agrees (i) to deliver to Agent (or its designee) and
Lessor, at their addresses set forth in the Participation Agreement or
at such other addresses as Agent or Lessor, as the case may be, may
designate, duplicate originals or copies of all notices, undertakings,
demands, statements, documents and other communications which Lessee is
required or permitted to deliver pursuant to the Lease Agreement, the
Purchase Agreement or the Assignment of Lease; (ii) that any notice
delivered or declaration made to Lessee by Agent (or its designee)
pursuant to the Lease Agreement or the Purchase Agreement shall be
effective as a notice given or declaration made to Lessee by Lessor;
(iii) that Agent (or its designee) shall not by reason of the Assignment
of Lease be subject to any liability or obligation under the Lease
Agreement or the Purchase Agreement except as set forth in the
Assignment of Lease; and (iv) that any waiver, consent or approval by
Lessor under the Lease Agreement or the Purchase Agreement shall not be
valid unless approved in writing by Agent (or its designee).
(b) Lessee agrees to remain obligated under the Lease Agreement
and the Purchase Agreement in accordance with their respective terms,
and to take no action to terminate (other than in accordance with the
terms thereof), annul, rescind or avoid the Lease Agreement, the
Purchase Agreement or this Consent or to abate, reduce, offset, suspend
or defer or make any counterclaim or raise any defense (other than the
defense of payment to Agent (or its designee)) with respect to the Rents
or other amounts payable thereunder or to cease paying such amounts to
Agent (or its designee) as provided herein.
(c) Lessee hereby agrees that upon the occurrence of any Event of
Default, Agent (or its designee) shall have the right to deliver a
notice of default under the Lease Agreement, which shall be effective
for all purposes under the Lease Agreement as if sent by Lessor.
(d) Lessee shall notify Agent (or its designee) at its address
specified in the Participation Agreement, or such other address as Agent
may designate, of any default by Lessor under the Lease Agreement and
agrees that no such default shall entitle Lessee to terminate (other
than in accordance with the terms of the Lease Agreement), annul,
rescind or avoid the Lease Agreement or reduce or abate the Rents or
other amounts payable thereunder.
5. Amendment or Termination; Agent's Designation. Lessee agrees that it
will not, unilaterally or by agreement, subordinate, amend, supplement, modify,
extend (except in accordance with the express terms thereof), discharge, waive
or terminate (other than in accordance with the terms thereof) the Lease
Agreement, the Purchase Agreement or this Consent without Agent's prior written
consent, and that any attempted subordination, amendment, supplement,
modification, extension, discharge, waiver or termination in violation of this
Section 5 without such consent shall be null and void. In the event that the
Lease Agreement or the Purchase Agreement shall be amended or supplemented as
herein permitted, the Lease Agreement or the Purchase Agreement, as so amended
or supplemented, shall continue to be subject to the provisions of the
Assignment of Lease and this Consent without the necessity of any further act by
any of the parties thereto or hereto.
2
<PAGE> 434
6. Continuing Obligations of Lessor and Lessee. Neither the execution
and delivery of the Assignment of Lease, nor any action or inaction on the part
of Agent shall impair or diminish any obligations of Lessor or Lessee under the
Lease Agreement or the Purchase Agreement, and shall not impose on Agent (or its
designee) any such obligations, nor shall it impose on Agent (or its designee) a
duty to produce Rents or cause Agent to be a mortgagee or pledgee in possession
for any purpose. Except as specifically set forth in this Consent, none of the
terms of the Assignment of Lease shall impose upon Lessee any greater
obligations than those set forth in the Lease Agreement, the Purchase Agreement
and the other Operative Documents.
7. Partial Invalidity. If at any time any provision of this Consent is
or becomes illegal, invalid or unenforceable in any respect under the law of any
jurisdiction, neither the legality, validity or enforceability of the remaining
provisions of this Consent nor the legality, validity or enforceability of such
provision under the law of any other jurisdiction shall in any way be affected
or impaired thereby.
8. Governing Law. This Consent shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflicts of law rules.
IN WITNESS WHEREOF, Lessee has executed this Consent on the date set
forth above.
LESSEE: KLA-TENCOR CORPORATION
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 435
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO:
Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, California 94111
Attn: Thomas Y. Coleman, Esq.
DOCUMENTARY TRANSFER TAX:
[The undersigned declare that the documentary transfer tax is $0.00 as Agreement
is a contract for the sale of real property.]
- --------------------------------------------------------------------------------
MEMORANDUM OF PURCHASE AGREEMENT
By this Memorandum of Purchase Agreement, made November 12, 1997,
concurrently with that certain Purchase Agreement (the "Purchase Agreement")
dated as of November 12, 1997, by and between the parties hereto and covering
the property described in Exhibit A attached hereto and made a part hereof (the
"Property"), KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee"), and
LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor") agree as follows:
Lessor grants to Lessee the right to purchase the Property upon the
terms and subject to the conditions set forth in the Purchase Agreement.
This instrument is a memorandum of the Purchase Agreement and is subject
to all of the terms, covenants and conditions provided in the unrecorded
Purchase Agreement and in no way modifies the provisions of the Purchase
Agreement. If the terms of this instrument are inconsistent with the terms of
the Purchase Agreement, the terms of the Purchase Agreement shall prevail. This
instrument may be executed in counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
LESSEE: KLA-TENCOR CORPORATION
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
LESSOR: LEASE PLAN U.S.A., INC.
By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 436
EXHIBIT A
PROPERTY
A-1
<PAGE> 437
STATE OF CALIFORNIA )
) ss
COUNTY OF )
--------------------------)
On _____________, 1997, before me, ___________________ a Notary Public
in and for the State of California, personally appeared _____________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
------------------------------
<PAGE> 438
STATE OF CALIFORNIA )
) ss
COUNTY OF )
---------------------------)
On _____________, 1997, before me, ___________________ a Notary Public
in and for the State of California, personally appeared ______________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
-----------------------------------------
<PAGE> 439
LEASE AGREEMENT,
CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
THIS LEASE AGREEMENT, CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF
RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Agreement" herein), dated as
of November 12, 1997 is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Delaware corporation ("Lessee");
and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation, as lessor
under this Agreement and as trustee under the deed of trust contained
herein ("Lessor").
RECITALS
A. Lessee has requested Lessor and the financial institutions which are
"Participants" under the Participation Agreement referred to in Recital B below
(such financial institutions to be referred to collectively as the
"Participants") to provide to Lessee a certain lease facility. Pursuant to such
facility:
(1) Lessor would (a) acquire certain property designated by Lessee
(either through purchase or lease), (b) lease to Lessee such property and
certain other property currently held by Lessor, (c) appoint Lessee as Lessor's
agent to make certain improvements to a portion of such property, (d) make
advances to finance such improvements and to pay certain related expenses, and
(e) grant to Lessee the right to purchase such property; and
(2) The Participants would participate in such lease facility by (a)
funding the purchase prices and other advances to be made by Lessor and (b)
acquiring participation interests in the rental and certain other payments to be
made by Lessee.
B. Pursuant to a Participation Agreement dated of even date herewith
(the "Participation Agreement") among Lessee, Lessor, the Participants and ABN
AMRO Bank N.V., as agent for the Participants (in such capacity, "Agent"),
Lessor and the Participants have agreed to provide such lease facility upon the
terms and subject to the conditions set forth therein, including without
limitation the execution and delivery of this Agreement setting forth the terms
of the lease by Lessor to Lessee of the property.
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
<PAGE> 440
SECTION 1. INTERPRETATION.
1.01. Definitions. Unless otherwise indicated in this Agreement or any
other Operative Document, each term set forth in Schedule 1.01 to the
Participation Agreement, when used in this Agreement or any other Operative
Document, shall have the respective meaning given to that term in such Schedule
1.01 or in the provision of this Agreement or other document, instrument or
agreement referenced in such Schedule 1.01.
1.02. Rules of Construction. Unless otherwise indicated in this
Agreement or any other Operative Document, the rules of construction set forth
in Schedule 1.02 to the Participation Agreement shall apply to this Agreement
and the other Operative Documents.
SECTION 2. BASIC PROVISIONS.
2.01. Lease of the Property. Subject to the acquisition thereof by
Lessor pursuant to the Participation Agreement and applicable Acquisition
Agreements either as of the date hereof or during the term hereof, Lessor agrees
to lease to Lessee and Lessee agrees to lease from Lessor the following property
(the "Property") to the extent of Lessor's estate, right, title and interest
therein, thereto or thereunder:
(a) All lots, pieces, tracts and parcels of land described in
Exhibit A together with such additional parcels of real property as may
be added to Exhibit A from time to time during the term hereof (the
"Land");
(b) All Improvements located on the Land;
(c) All Appurtenant Rights belonging, relating or pertaining to
any of the Land or Improvements;
(d) All Related Goods (including those described in Exhibit B
and in each Exhibit B Supplement), Related Permits and Related
Agreements related to any of the foregoing Land, Improvements or
Appurtenant Rights; and
(e) All accessions and accretions to and replacements and
substitutions for the foregoing.
(Lessee understands that Lessor's only interest in the Tract 3 Land is through
the Tract 3 Ground Lease Agreement and is a leasehold interest only.)
2.02. Term.
(a) Original Term. The original term of this Agreement shall
commence on the Closing Date (the "Commencement Date") and shall end on
the first Business Day of
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November, 2002 (such date as it may be extended pursuant to Subparagraph
2.02(b) to be referred to as the "Scheduled Expiration Date").
(b) Extensions. Lessee may request Lessor to extend the
Scheduled Expiration Date in effect for an additional period of two (2)
years, as provided in Subparagraph 2.09(b) of the Participation
Agreement. If Lessor and each Participant consents to such a request in
accordance with such provision, the definition of "Scheduled Expiration
Date" set forth in Subparagraph 2.02(a) shall be deemed extended to the
date which is the first business day of November, 2004. Lessee
acknowledges that neither Lessor nor any Participant has any obligation
or commitment (either express or implied) to extend, or consent to the
extension of, the Scheduled Expiration Date at any time.
2.03. Rent.
(a) Base Rent.
(i) Lessee shall pay to Lessor as base rent hereunder
("Base Rent") for each Rental Period for each Portion of the
Outstanding Lease Amount an amount equal to the product of (A)
the Rental Rate for such Rental Period and Portion, times (B) the
amount of such Portion on the first day of such Rental Period,
times (C) a fraction, the numerator of which is the number of
days in such Rental Period and the denominator of which is 360.
If the Rental Rate shall change during any Rental Period, the
Rental Rate for such Rental Period shall be the weighted average
of the Rental Rates in effect from time to time during such
Rental Period.
(ii) Lessee may select the number and amounts of the
Portions into which the Outstanding Lease Amount is to be divided
and the Rental Period for each such Portion by (y) setting forth
in each Acquisition Advance Request delivered by Lessee pursuant
to Subparagraph 2.03(a) of the Participation Agreement the
Portions into which Advances initially are to be divided and the
initial Rental Periods therefor and (z) delivering to Lessor at
least three (3) Business Days prior to the last day of each
Rental Period for a Portion an irrevocable written notice in the
form of Exhibit C, appropriately completed (a "Notice of Rental
Period Selection"), subject to the following:
(A) Each Portion shall be in the amount of
$5,000,000 or an integral multiple of $100,000 in excess
thereof; provided, however, that (1) during the Commitment
Period, all Improvement/Expense Advances made after the
Closing Date shall be combined as a single Portion (which
may be less than $5,000,000), (2) the total number of
Portions outstanding at any time shall not exceed four
(4), and (3) the Outstanding Lease Amount shall consist of
a single Portion in the amount of the Outstanding Lease
Amount if the Outstanding Lease Amount is less than
$5,000,000).
(B) The initial and each subsequent Rental Period
selected by Lessee for each Portion shall be one (1), two
(2), three (3), six (6) or
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twelve (12) months; provided, however, that (1) the initial
Rental Period for any Portion that is originated on an
Acquisition Date that is not the first Business Day of a
calendar month shall begin on such Acquisition Date and shall
end on the first Business Day of the first calendar month
immediately following the month in which such origination
occurs, (2) every other Rental Period shall begin and end on the
first Business Day of a calendar month, (3) during the
Commitment Period, the Rental Period for the Portion consisting
of all Improvement/Expense Advances made after the Closing Date
shall be one (1) month, (4) no Rental Period shall end after the
Scheduled Expiration Date, (5) no Rental Period shall be longer
than one (1) month if a Default has occurred and is continuing
on the date three (3) Business Days prior to the first day of
such Rental Period and (6) each Rental Period after the initial
Rental Period for any Portion for which Lessee fails to make a
selection by delivering a Notice of Rental Period Selection in
accordance with this clause (ii) shall be one (1) month.
Lessee shall deliver each Notice of Rental Period Selection by
first-class mail or facsimile as required by Subparagraph 2.02(a) and
Paragraph 7.01 of the Participation Agreement; provided, however, that
Lessee shall promptly deliver the original of any Notice of Rental
Period Selection initially delivered by facsimile.
(iii) The rental rate for each Rental Period for a Portion
("Rental Rate") shall be the LIBOR Rental Rate for such Rental Period
and Portion, except as follows:
(A) The Rental Rates for the Rental Periods that begin
on the Closing Date and on the Tract 4 Acquisition Date and end
on December 1, 1997 shall be a rate agreed upon by Lessee and
Lessor; or
(B) If any other Rental Period is less than seven (7)
days, the Rental Rate for such Rental Period shall be the
Alternate Rental Rate; or
(C) If the LIBOR Rental Rate is unavailable for any
Rental Period pursuant to Subparagraph 2.12(a) or Subparagraph
2.12(b) of the Participation Agreement, the Rental Rate for such
Rental Period shall be the Alternate Rental Rate.
(iv) Lessee shall pay Base Rent in arrears (A) for each Portion,
on the last day of each Rental Period therefor and, in the case of any
Rental Period which exceeds three (3) months, each day occurring every
three (3) months after the first day of such Rental Period
(individually, a "Scheduled Rent Payment Date") and (B) for all
Portions, on the Expiration Date.
(b) Supplemental Rent. Lessee shall pay as supplemental rent
hereunder ("Supplemental Rent") all amounts (other than Base Rent, the
purchase price payable by
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Lessee for any purchase of the Property by Lessee pursuant to the
Purchase Agreement and the Residual Value Guaranty Amount payable under
the Purchase Agreement) payable by Lessee under this Agreement and the
other Operative Documents. Lessee shall pay all Supplemental Rent
amounts on the dates specified in this Agreement and the other Operative
Documents for the payment of such amounts or, if no date is specified
for the payment of any such amount, upon the demand of Lessor or any
other Person to whom such amount is payable.
2.04. Use. Lessee may use the Property for office, research and
development, warehouse and manufacturing purposes, and for any other purpose
which is in compliance with applicable zoning laws and ordinances for the
Property.
2.05. "As Is" Lease. Lessee has conducted, or will conduct from time to
time with regard to property that may be added hereto after the date hereof, all
due diligence which it deems appropriate regarding the Property and agrees that
no Lessor Party has any obligation to conduct any such due diligence. Lessee is
leasing the Property "as is, with all faults" without any representation,
warranty, indemnity or undertaking by any Lessor Party regarding any aspect of
the Property, including (a) the condition of the Property (including any
Improvements to the Property made prior to the Commencement Date or during the
Term); (b) title to the Property (including possession of the Property by any
Person or the existence of any Lien or any other right, title or interest in or
to any of the Property in favor of any Person); (c) the value, habitability,
usability, design, operation or fitness for use of the Property; (d) the
availability or adequacy of utilities and other services to the Property; (e)
any latent, hidden or patent defect in the Property; (f) the zoning or status of
the Property or any other restrictions on the use of the Property; (g) the
economics of the Property; (h) any Casualty or Condemnation; or (i) the
compliance of the Property with any applicable Governmental Rule or Insurance
Requirement; provided, however, that Lessor shall be obligated to remove Lessor
Liens to the extent required in Subparagraph 5.04(b) of the Participation
Agreement. Without limiting the generality of the foregoing, Lessee specifically
waives any covenant of quiet enjoyment except as otherwise provided in
Subparagraph 5.04(b) of the Participation Agreement.
2.06. Nature of Transaction. As more fully provided in Paragraph 2.10 of
the Participation Agreement, Lessee and the Lessor Parties intend that the
transaction evidenced by this Agreement and the other Operative Documents
constitute an operating lease in accordance with FASB 13 for accounting purposes
and a loan secured by the Property for all other purposes, including federal,
state and local income tax purposes and commercial, real estate and bankruptcy
law purposes.
2.07. Security, Etc. In order to secure the Lessee Obligations and
otherwise to assure the Lessor Parties the benefits hereof in the event that the
transaction evidenced by this Agreement and the other Operative Documents is,
pursuant to the intent of Lessee and the Lessor Parties, treated as a loan for
certain purposes, Lessee hereby makes the following grants and agrees as
follows:
(a) Real Property Security. As security for the Lessee
Obligations, Lessee hereby irrevocably and unconditionally grants,
conveys, transfers and assigns to Lessor, in trust for the benefit of
the Lessor Parties, with power of sale and right of entry and
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possession, all estate, right, title and interest of Lessee in the
following property, whether now owned or leased or hereafter acquired,
(collectively, the "Real Property Collateral"):
(i) The Land;
(ii) All Improvements located on the Land;
(iii) All Appurtenant Rights belonging, relating or
pertaining to any of the foregoing Land or Improvements;
(iv) All Subleases of and all Issues and Profits
accruing from any of the foregoing Land, Improvements or
Appurtenant Rights to the extent that such Subleases and Issues
and Profits constitute real property;
(v) All Related Goods, Related Permits and Related
Agreements related to any of the foregoing Land, Improvements or
Appurtenant Rights to the extent that such Related Goods,
Related Agreements and Related Permits constitute real property;
(vi) All other Property to the extent that such property
constitutes real property; and
(vii) All proceeds of the foregoing, including Casualty
and Condemnation Proceeds.
(b) Personal Property Security. As security for the Lessee Obligations,
Lessee hereby irrevocably and unconditionally assigns and grants to Lessor, for
the benefit of the Lessor Parties, a security interest in all estate, right,
title and interest of Lessee in the following property, whether now owned or
leased or hereafter acquired, (collectively, the "Personal Property
Collateral"):
(i) All Subleases of and all Issues and Profits accruing from
any of the Land, Improvements or Appurtenant Rights to the extent that
such Subleases and Issues and Profits constitute personal property;
(ii) All Related Goods, Related Permits and Related Agreements
related to any of the Land, Improvements or Appurtenant Rights to the
extent that such Related Goods, Related Agreements and Related Permits
constitute personal property;
(iii) All Cash Collateral and all other deposit accounts,
instruments, investment property and monies held by any Lessor Party in
connection with this Agreement or any other Operative Document
(including any Repair and Restoration Account);
(iv) All other Property to the extent such Property constitutes
personal property; and
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(v) All proceeds of the foregoing, including Casualty and
Condemnation Proceeds.
This Agreement constitutes a fixture filing for purposes of the
California Commercial Code with respect to the Related Goods which are or are to
become fixtures on the Land or Improvements.
(c) Absolute Assignment of Subleases, Issues, and Profits. Lessee hereby
irrevocably assigns to Lessor, for the benefit of the Lessor Parties, all of
Lessee's estate, right, title and interest in, to and under the Subleases and
the Issues and Profits, whether now owned or hereafter acquired. This is a
present and absolute assignment, not an assignment for security purposes only,
and Lessor's right to the Subleases and Issues and Profits is not contingent
upon, and may be exercised without possession of, the Property.
(i) If no Event of Default has occurred and is continuing,
Lessee shall have a revocable license to collect and retain the
Issues and Profits as they become due. Upon the occurrence and
during the continuance of an Event of Default, such license shall
automatically terminate, and Lessor may collect and apply the
Issues and Profits pursuant to Subparagraph 5.02(d) without
further notice to Lessee or any other party and without taking
possession of the Property. All Issues and Profits thereafter
collected by Lessee shall be held by lessee as trustee in a
constructive trust for the benefit of Lessor. Lessee hereby
irrevocably authorizes and directs the sublessees under the
Subleases, without any need on their part to inquire as to
whether an Event of Default has actually occurred or is then
existing, to rely upon and comply with any notice or demand by
Lessor for the payment to Lessor of any rental or other sums
which may become due under the Subleases or for the performance
of any of the sublessees' undertakings under the Subleases.
Collection of any Issues and Profits by Lessor shall not cure or
waive any default or notice of default hereunder or invalidate
any acts done pursuant to such notice.
(ii) The foregoing irrevocable assignment shall not cause
any Lessor Party to be (A) a mortgagee in possession; (B)
responsible or liable for (1) the control, care, management or
repair of the Property or for performing any of Lessee's
obligations or duties under the Subleases, (2) any waste
committed on the Property by the sublessees under any of the
Subleases or by any other Persons, (3) any dangerous or defective
condition of the Property, or (4) any negligence in the
management, upkeep, repair or control of the Property resulting
in loss or injury or death to any sublessee, licensee, employee,
invitee or other Person; or (C) responsible for or impose upon
any Lessor Party any duty to produce rents or profits. No Lessor
Party, in the absence of gross negligence or willful disregard on
its part, shall be liable to Lessee as a consequence of (y) the
exercise or failure to exercise any of the rights, remedies or
powers granted to Lessor hereunder or (z) the failure or refusal
of Lessor to perform or discharge any obligation, duty or
liability of Lessee arising under the Subleases.
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SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS.
3.01. Maintenance, Repair, Etc.
(a) General. Lessee shall not permit any waste of the Property,
except for ordinary wear and tear, and shall, at its sole cost and
expense, maintain the Property in good working order, mechanical
condition and repair and make all necessary repairs thereto, of every
kind and nature whatsoever, whether interior or exterior, ordinary or
extraordinary, structural or nonstructural or foreseen or unforeseen, in
each case as required by all applicable Governmental Rules and Insurance
Requirements and on a basis consistent with the operation and
maintenance of commercial properties comparable in type and location to
the Property and in compliance with prudent industry practice.
(b) New Improvements. Lessee shall make or cause to be made all
of the New Improvements authorized and required by the Construction
Agency Agreement in accordance with the Construction Agency Agreement.
(c) Other Modifications. Lessee, at its sole cost and expense,
may from time to time make alterations, renovations, improvements and
additions to the Property and substitutions and replacements therefor
(collectively, "Modifications") in addition to the New Improvements;
provided that:
(i) No Modification impairs the value, utility or useful
life of the Property or any part thereof from that which existed
immediately prior to such Modification;
(ii) All Modifications are made expeditiously and, in
all cases unless Lessee currently is exercising either the Term
Purchase Option or the Expiration Date Purchase Option,
completed not later than six (6) months prior to the Scheduled
Expiration Date;
(iii) All Modifications are made in a good and
workmanlike manner and in compliance with all applicable
Governmental Rules and Insurance Requirements;
(iv) Subject to Paragraph 3.12 relating to permitted
contests, Lessee pays all costs and expenses and discharges (or
cause to be insured or bonded over) any Liens arising in
connection with any Modification not later than the earlier of
(A) sixty (60) days after the same shall be filed (or otherwise
becomes effective) and (B) unless Lessee currently is exercising
either the Term Purchase Option or the Expiration Date Purchase
Option, six (6) months prior to the Scheduled Expiration Date;
(v) At least one (1) month prior to the commencement of
(A) any Modifications which are anticipated to cost $2,500,000
or more in the aggregate, or (B) any Modifications which cause
the total of all Modifications undertaken during the previous
twelve-month period to exceed an aggregate cost of
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<PAGE> 447
$5,000,000, Lessee shall deliver to Lessor, with sufficient
copies for Agent and each Participant, a brief written
description of such Modifications; and
(vi) All Modifications otherwise comply with this
Agreement and the other Operative Documents.
(d) Abandonment. Lessee shall not abandon the Property or any
material portion thereof for any period in excess of thirty (30)
consecutive days during the term hereof, except as a part of any New
Improvements or Modifications as permitted herein or in the other
Operative Documents.
3.02. Risk of Loss. Lessee assumes all risks of loss arising from any
Casualty or Condemnation which arises or occurs prior to the Expiration Date or
while Lessee is in possession of the Property and all liability for all personal
injuries and deaths and damages to property suffered by any Person or property
on or in connection with the Property which arises or occurs prior to the
Expiration Date or while Lessee is in possession of the Property, except in each
case to the extent any such loss or liability is primarily caused by the gross
negligence or willful misconduct of a Lessor Party. Lessee hereby waives the
provisions of California Civil Code Sections 1932(1), 1932(2) and 1933(4), and
any and all other applicable existing or future Governmental Rules permitting
the termination of this Agreement as a result of any Casualty or Condemnation,
and Lessor shall in no event be answerable or accountable for any risk of loss
of or decrease in the enjoyment and beneficial use of the Property as a result
of any such event.
3.03. Insurance.
(a) Coverage. Lessee, at its sole cost and expense, shall carry
and maintain the following insurance coverage:
(i) At all times during the Term, commercial liability
insurance covering claims for injuries or death sustained by
persons or damage to property while on the Property, and
workers' compensation insurance;
(ii) At all times during the Term, property insurance
covering loss or damage by fire, flood and other risks in an
amount not less than the then current replacement cost of the
Improvements on the Property;
(iii) During the construction of any Improvements,
builders' risk insurance covering fire, flood and other normal
insured risks; and
(iv) At all times during the Term as appropriate, such
other insurance of the types customarily carried by a reasonably
prudent Person owning or operating properties similar to the
Property in the same geographic area as the Property;
Provided, however, that this Subparagraph 3.03(a) (A) shall not be
construed to require Lessee to carry or maintain earthquake insurance
and (B) shall not require Lessee to carry or maintain flood insurance in
an amount in excess of the amount required by any Governmental Rule
applicable to Lessee or any Lessor Party. Except as otherwise
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specifically required above, such insurance shall be in amounts, in a
form and with deductibles customarily carried by a reasonably prudent
Person owning or operating properties similar to the Property in the
same geographic area as the Property.
(b) Carriers. Any insurance carried and maintained by Lessee
pursuant to this Paragraph 3.03 shall be underwritten by an insurance
company which (i) has, at the time such insurance is placed and at the
time of each renewal thereof, a general policyholder rating of "A" and a
financial rating of at least 9 from A.M. Best and Company or any
successor thereto (or if there is none, an organization having a similar
national reputation) or (ii) is otherwise approved by Lessor and
Required Participants; provided, however, that Lessee may, if no Event
of Default has occurred and is continuing, self-insure.
(c) Terms. Each insurance policy maintained by Lessee pursuant
to this Paragraph 3.03 shall provide as follows, whether through
endorsements or otherwise:
(i) Lessor and Agent shall be named as additional
insureds, in the case of each policy of liability and property
insurance, and additional loss payees, in the case of each
policy of property insurance.
(ii) In respect of the interests of Lessor in the
policy, the insurance shall not be invalidated by any action or
by inaction of Lessee or by any Person having temporary
possession of the Property while under contract with Lessee to
perform maintenance, repair, alteration or similar work on the
Property, and shall insure the interests of Lessor regardless of
any breach or violation of any warranty, declaration or
condition contained in the insurance policy by Lessee, Lessor or
any other additional insured (other than by such additional
insured, as to such additional insured); provided, however, that
the foregoing shall not be deemed to (A) cause such insurance
policies to cover matters otherwise excluded from coverage by
the terms of such policies or (B) require any insurance to
remain in force notwithstanding non-payment of premiums except
as provided in clause (iii) below.
(iii) If the insurance policy is cancelled for any
reason whatsoever, or substantial change is made in the coverage
that affects the interests of Lessor, or if the insurance
coverage is allowed to lapse for non-payment of premium, such
cancellation, change or lapse shall not be effective as to
Lessor for thirty (30) days after receipt by Lessor of written
notice from the insurers of such cancellation, change or lapse.
(iv) No Lessor Party shall have any obligation or
liability for premiums, commissions, assessments, or calls in
connection with the insurance.
(v) The insurer shall waive any rights of set-off or
counterclaim or any other deduction, whether by attachment or
otherwise, that it may have against any Lessor Party.
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(vi) The insurance shall be primary without right of
contribution from any other insurance that may be carried by any
Lessor Party with respect to its interest in the Property.
(vii) The insurer shall waive any right of subrogation
against any Lessor Party.
(viii) All provisions of the insurance, except the
limits of liability, shall operate in the same manner as if
there were a separate policy covering each insured party.
(ix) The insurance shall not be invalidated should
Lessee or any Lessor Party waive, in writing, prior to a loss,
any or all rights of recovery against any Person for losses
covered by such policy, nor shall the insurance in favor of any
Lessor Party or Lessee, as the case may be, or their respective
rights under and interests in said policies be invalidated or
reduced by any act or omission or negligence of any Lessee Party
or Lessor, as the case may be, or any other Person having any
interest in the Property.
(x) If the insurer has not received written notice from
Lessor that an Event of Default has occurred and is continuing,
(A) all insurance proceeds in respect of any loss or occurrence
with a value of less than fifteen million Dollars ($15,000,000)
shall be paid to and adjusted solely by Lessee and (B) all other
insurance proceeds shall be paid to Lessor and adjusted jointly
by Lessor and Lessee. From and after the date on which the
insurer receives written notice from Lessor that an Event of
Default has occurred and is continuing (and unless and until
such insurer receives written notice from Lessor that all Events
of Default have been cured), all losses shall be adjusted solely
by, and all insurance proceeds shall be paid solely to, Lessor.
(xi) Each policy shall contain a standard form mortgage
endorsement in favor of Lessor.
(d) Evidence of Insurance. Lessee, at its sole cost and expense, shall
furnish to Lessor from time to time upon the request of Lessor such certificates
or other documents as Lessor may reasonably request to evidence Lessee's
compliance with the insurance requirements set forth in this Paragraph 3.03.
(e) Release of Lessor Parties. Lessee hereby waives, releases and
discharges each Lessor Party and its directors, officers, employees, agents and
advisors from all claims whatsoever arising out of any loss, claim, expense or
damage to or destruction covered or coverable by insurance required under this
Paragraph 3.03 to the extent the policies for such insurance permit such waiver,
notwithstanding that such loss, claim, expense or damage may have been caused by
any such Person, and, as among Lessee and such Persons, Lessee agrees to look to
the insurance coverage only in the event of such loss.
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3.04. Casualty and Condemnation.
(a) Notice. Lessee shall give Lessor prompt written notice of the
occurrence of any Casualty affecting, or the institution of any proceedings for
the Condemnation of, the Property or any portion thereof.
(b) Repair or Purchase Option. After the occurrence of any Casualty or
Condemnation affecting the Property or any portion thereof, Lessee shall either
(i) repair and restore the Property as required by Subparagraph 3.04(c) or (ii)
exercise the Term Purchase Option and purchase the Property pursuant to the
Purchase Agreement; provided, however, that Lessee may not elect to repair and
restore the Property if such casualty or condemnation is a Major Casualty or
Major Condemnation or if an Event of Default has occurred and is continuing,
unless Lessor and the Required Participants shall consent in writing. Not later
than one (1) month after the occurrence of any Casualty or Condemnation, Lessee
shall deliver to Lessor a written notice indicating whether it elects to repair
and restore or purchase the Property
(c) Repair and Restoration. If Lessee elects to repair and restore the
Property following any Casualty or Condemnation, Lessee shall diligently proceed
to repair and restore the Property to the condition in which it existed
immediately prior to such Casualty or Condemnation and shall use reasonable
efforts to complete all such repairs and restoration as soon as reasonably
practicable, but not later than six (6) months prior to the Scheduled Expiration
Date unless Lessee currently is exercising either the Term Purchase Option or
the Expiration Date Purchase Option,. Lessee shall use its own funds to make
such repairs and restoration, except to the extent any Casualty and Condemnation
Proceeds are available and are released to Lessee for such purpose pursuant to
Subparagraph 3.04(f). Lessee's exercise of the repair and restoration option
shall, if Lessor or Required Participants direct, be subject to satisfaction of
the following conditions within one (1) month after the occurrence of the
Casualty or Condemnation:
(i) Deposit in a deposit account acceptable to and controlled by
Lessor (a "Repair and Restoration Account") of funds (including any
Casualty and Condemnation Proceeds which are available and are released
to Lessee pursuant to Subparagraph 3.04(f)) in the amount which Lessor
determines is needed to complete and fully pay all costs of the repair
or restoration (including taxes, financing charges, insurance and rent
during the repair period);
(ii) The establishment of an arrangement for lien releases and
disbursement of funds acceptable to Lessor and in a manner and upon such
terms and conditions as would be required by a prudent interim
construction lender; and
(iii) The delivery to Lessor of the following, each in form and
substance acceptable to Lessor;
(A) Evidence that the Property can, in Lessor's
reasonable judgment, with diligent restoration or repair, be
returned to a condition at least equal to the condition thereof
that existed prior to the Casualty or
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partial Condemnation causing the loss or damage within the
earlier to occur of (A) six (6) months after the occurrence of
the Casualty or Condemnation and (B) unless Lessee currently is
exercising either the Term Purchase Option or the Expiration
Date Purchase Option, six (6) months prior to the Scheduled
Expiration Date;
(B) Evidence that all necessary governmental approvals
can be timely obtained to allow the rebuilding and reoccupancy
of the Property;
(C) Copies of all plans and specifications for the work;
(D) Copies of all contracts for the work, signed by a
contractor reasonably acceptable to Lessor;
(E) A cost breakdown for the work;
(F) A payment and performance bond for the work or other
security satisfactory to Lender;
(G) Evidence that, upon completion of the work, the
size, capacity and total value of the Property will be at least
as great as it was before the Casualty or Condemnation occurred;
and
(H) Evidence of satisfaction of any additional
conditions that Lessor or Required Participants may reasonably
establish to protect their rights under this Agreement and the
other Operative Documents.
All plans and specifications for the work must be reasonably acceptable
to Lessor, except that Lessor's approval shall not be required if the
restoration work is based on the same plans and specifications as were
originally used to construct the Property. To the extent that the funds
in a Repair and Restoration Account include both Casualty and
Condemnation Proceeds and other funds deposited by Lessee, the other
funds deposited by Lessee shall be used first. Lessee acknowledges that
the specific conditions described above are reasonable.
(d) Prosecution of Claims for Casualty and Condemnation Proceeds. Lessee
shall proceed promptly and diligently to prosecute in good faith the settlement
or compromise of any and all claims for Casualty and Condemnation Proceeds;
provided, however, that any settlement or compromise of any such claim shall,
except as otherwise provided in clause (x) of Subparagraph 3.03(c), be subject
to the written consent of Lessor and Required Participants, which consents shall
not be unreasonably withheld. Lessor may participate in any proceedings relating
to such claims, and, after the occurrence and during the continuance of any
Event of Default, Lessor is hereby authorized, in its own name or in Lessee's
name, to adjust any loss covered by insurance or any Casualty or Condemnation
claim or cause of action, and to settle or compromise any claim or cause of
action in connection therewith, and Lessee shall from time to time deliver to
Lessor any and all further assignments and other instruments required to permit
such participation.
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<PAGE> 452
(e) Assignment of Casualty and Condemnation Proceeds. Lessee hereby
absolutely and irrevocably assigns to Lessor all Casualty and Condemnation
Proceeds and all claims relating thereto. Except as otherwise provided in clause
(x) of Subparagraph 3.03(c), Lessee agrees that all Casualty and Condemnation
Proceeds are to be paid to Lessor and Lessee hereby authorizes and directs any
insurer, Governmental Authority or other Person responsible for paying any
Casualty and Condemnation Proceeds to make payment thereof directly to Lessor
alone, and not to Lessor and Lessee jointly. If Lessee receives any Casualty and
Condemnation Proceeds payable to Lessor hereunder, Lessee shall promptly pay
over such Casualty and Condemnation Proceeds to Lessor. Lessee hereby covenants
that until such Casualty and Condemnation Proceeds are so paid over to Lessor,
Lessee shall hold such Casualty and Condemnation Proceeds in trust for the
benefit of Lessor and shall not commingle such Casualty and Condemnation
Proceeds with any other funds or assets of Lessee or any other Person. Except as
otherwise provided in clause (x) of Subparagraph 3.03(c), Lessor may commence,
appear in, defend or prosecute any assigned right, claim or action, and may
adjust, compromise, settle and collect all rights, claims and actions assigned
to Lessor, but shall not be responsible for any failure to collect any such
right, claim or action, regardless of the cause of the failure.
(f) Use of Casualty and Condemnation Proceeds.
(i) If (A) no Event of Default has occurred and is continuing,
(B) Lessee exercises the repair and restoration option pursuant to
Subparagraphs 3.04(b) and 3.04(c) and (C) Lessee complies with any
conditions imposed pursuant to Subparagraph 3.04(c); then Lessor shall
release any Casualty and Condemnation Proceeds to Lessee for repair or
restoration of the Property, but may condition such release and use of
the Casualty and Condemnation Proceeds upon deposit of the Casualty and
Condemnation Proceeds in a Repair and Restoration Account. Lessor shall
have the option, upon the completion of such restoration of the
Property, to apply any surplus Casualty and Condemnation Proceeds
remaining after the completion of such restoration to the payment of
Rent and/or the reduction of the Outstanding Lease Amount,
notwithstanding that such amounts are not then due and payable or that
such amounts are otherwise adequately secured.
(ii) If (A) an Event of Default has occurred and is continuing,
(B) Lessee fails to or is unable to comply with any conditions imposed
pursuant to Subparagraph 3.04(c) or (C) Lessee elects to exercise the
Term Purchase Option and purchase the Property pursuant to the Purchase
Agreement; then, at the absolute discretion of Lessor and the Required
Participants, regardless of any impairment of security or lack of
impairment of security, but subject to applicable Governmental Rules
governing use of Casualty and Condemnation Proceeds, if any, Lessor may
(1) apply all or any of the Casualty and Condemnation Proceeds it
receives to the expenses of Lessor Parties in obtaining such proceeds;
(2) apply the balance to the payment of Rent and/or the reduction of the
Outstanding Lease Amount, notwithstanding that such amounts are not then
due and payable or that such amounts are otherwise adequately secured
and/or (3) release all or any part
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<PAGE> 453
of such proceeds to Lessee upon any conditions Lessor and the Required
Participants may elect.
(iii) Lessor shall apply any Casualty and Condemnation Proceeds
which are to be used to reduce the Outstanding Lease Amount only on the
last day of a Rental Period unless a Default has occurred and is
continuing.
(iv) Application of all or any portion of the Casualty and
Condemnation Proceeds, or the release thereof to Lessee, shall not cure
or waive any Default or notice of default or invalidate any acts done
pursuant to such notice.
3.05. Taxes. Subject to Paragraph 3.12 relating to permitted contests,
Lessee shall promptly pay when due all Indemnified Taxes imposed on or payable
by Lessee or any Lessor Party in connection with the Property, this Agreement or
any of the other Operative Documents, or any of the transactions contemplated
hereby or thereby. As promptly as possible after any Indemnified Taxes are
payable by Lessee, Lessee shall send to Lessor for the account of the applicable
Lessor Party a certified copy of an original official receipt received by Lessee
showing payment thereof. If Lessee fails to pay any such Indemnified Taxes when
due to the appropriate taxing authority or fails to remit to Lessor the required
receipts or other required documentary evidence, Lessee shall indemnify the
Lessor Parties for any incremental taxes, interest or penalties that may become
payable by the Lessor Parties as a result of any such failure. The obligations
of Lessee under this Paragraph 3.05 shall survive the payment and performance of
the Lessee Obligations and the termination of this Agreement.
3.06. Environmental Matters.
(a) Lessee's Covenants. Lessee shall not cause or permit
Hazardous Materials to be used, generated, manufactured, stored,
treated, disposed of, transported or present on or released or
discharged from the Property in any manner that is reasonably likely to
have a Material Adverse Effect. Lessee may use Hazardous Materials in
connection with the operation of its business (or the business of
permitted subtenants) so long as such use is consistent with the
preceding sentence. Lessee shall immediately notify Lessor in writing of
(i) the discovery of any Hazardous Materials on, under or about the
Property; (ii) any knowledge by Lessee that the Property does not comply
with any Environmental Laws; (iii) any claims against Lessee or the
Property relating to Hazardous Materials or pursuant to Environmental
Laws; and (iv) the discovery of any occurrence or condition on any real
property adjoining or in the vicinity of the Property that could cause
the Property or any part thereof to be designated as "border zone
property" under the provisions of California Health and Safety Code
Sections 25220 et seq. or any regulation adopted in accordance
therewith. In response to the presence of any Hazardous Materials on,
under or about the Property, Lessee shall immediately take, at Lessee's
sole expense, all remedial action required by any Environmental Laws or
any judgment, consent decree, settlement or compromise in respect to any
claim based thereon.
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<PAGE> 454
(b) Inspection By Lessor. Upon reasonable prior notice to
Lessee, Lessor, its employees and agents, may from time to time (whether
before or after the commencement of a nonjudicial or judicial
foreclosure proceeding), enter and inspect the Property for the purpose
of determining the existence, location, nature and magnitude of any past
or present release or threatened release of any Hazardous Materials
into, onto, beneath or from the Property.
(c) Indemnity. Without in any way limiting any other indemnity
contained in this Agreement or any other Operative Document, Lessee
agrees to defend, indemnify and hold harmless the Lessor Parties and the
other Indemnitees from and against any claim, loss, damage, cost,
expense or liability directly or indirectly arising out of (i) the use,
generation, manufacture, storage, treatment, release, threatened
release, discharge, disposal, transportation or presence of any
Hazardous Materials which are found in, on, under or about the Property
or (ii) the breach of any covenant, representation or warranty of Lessee
relating to Hazardous Materials or Environmental Laws contained in this
Agreement or any Operative Document. This indemnity shall include (A)
the costs, whether foreseeable or unforeseeable, of any investigation,
repair, cleanup or detoxification of the Property which is required by
any Governmental Authority or is otherwise necessary to render the
Property in compliance with all Environmental Laws; (B) all other direct
or indirect consequential damages (including any third party claims,
claims by any Governmental Authority, or any fines or penalties against
the Indemnitees; and (C) all court costs and attorneys' fees (including
expert witness fees and the cost of any consultants) paid or incurred by
the Indemnitees. Lessee shall pay immediately upon Lessor's demand any
amounts owing under this indemnity. Lessee shall use legal counsel
reasonably acceptable to Lessor in any action or proceeding arising
under this indemnity. The obligations of Lessee under this Subparagraph
3.06(c) shall survive the payment and performance of the Lessee
Obligations and the termination of this Agreement.
(d) Legal Effect of Section. Lessee and Lessor agree that (i)
this Paragraph 3.06 and clause (i) of Subparagraph 4.01(s) of the
Participation Agreement are intended as Lessor's written request for
information (and Lessee's response) concerning the environmental
condition of the real property security as required by California Code
of Civil Procedure Section 726.5 and (ii) each representation and
warranty and covenant herein and therein (together with any indemnity
applicable to a breach of any such representation and warranty) with
respect to the environmental condition of the Property is intended by
Lessor and Lessee to be an "environmental provision" for purposes of
California Code of Civil Procedure Section 736.
3.07. Liens, Easements, Etc.
(a) Lessee's Covenants. Subject to Paragraph 3.12 relating to
permitted contests, Lessee shall not create, incur, assume or permit to
exist any Lien or easement on or with respect to any of the Property of
any character, whether now owned or hereafter acquired, except for the
following ("Permitted Property Liens"):
(i) Liens in favor of a Lessor Party securing the Lessee
Obligations;
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<PAGE> 455
(ii) Liens and easements in existence on the
Commencement Date to the extent reflected in the title insurance
policies delivered to Agent pursuant to Paragraphs 3.01 and 3.02
of and Schedules 3.01 and 3.02 to the Participation Agreement
and approved by Lessor;
(iii) Liens and easements approved by Lessor and
reflected in the title insurance policy or policies or binders
to be delivered in connection with any Land added hereto after
the date hereof;
(iv) Liens for taxes or other Governmental Charges not
at the time delinquent or thereafter payable without penalty;
(v) Liens of carriers, warehousemen, mechanics,
materialmen and vendors and other similar Liens imposed by law
incurred in the ordinary course of business for sums not
overdue; and
(vi) Lessor Liens.
Subject to Paragraph 3.12 relating to permitted contests, Lessee
shall promptly (A) pay all Indebtedness of Lessee and other obligations
prior to the time the non-payment thereof would give rise to a Lien on
the Property and (B) discharge, at its sole cost and expense, any Lien
on the Property which is not a Permitted Property Lien.
(b) No Consents. Nothing contained in this Agreement shall be
construed as constituting the consent or request of any Lessor Party,
express or implied, to or for the performance by any contractor,
mechanic, laborer, materialman, supplier or vendor of any labor or
services or for the furnishing of any materials for any construction,
alteration, addition, repair or demolition of or to the Property or any
part thereof. NOTICE IS HEREBY GIVEN THAT NO LESSOR PARTY IS OR SHALL BE
LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED
TO LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH
OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH
LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF
ANY LESSOR PARTY IN AND TO THE PROPERTY.
3.08. Subletting. Lessee may, in the ordinary course of business,
sublease the Property or any portion thereof to any Person, provided, that (a)
Lessee remains directly and primarily liable for performing its obligations
under this Agreement and all other Lessee Obligations; (b) each sublease is
subject to and subordinated to this Agreement; (c) each sublease has a term
which expires on or prior to the Scheduled Expiration Date (or, if longer,
includes a provision that the sublease terminates on the Expiration Date if such
Expiration Date occurs prior to the Scheduled Expiration Date unless Lessee
purchases the Property on the Expiration Date pursuant to the Purchase
Agreement); (d) each sublease prohibits the sublessee from engaging in any
activities on the Property other than those permitted by Paragraph 2.04; and (e)
no sublease has a Material Adverse Effect. Any sublease which does not satisfy
each of the requirements of the immediately preceding sentence shall be null and
void as to the Lessor Parties and their
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<PAGE> 456
successor and assigns. Except for such permitted subleases, Lessee shall not
assign any of its rights or interests under this Agreement to any other Person.
3.09. Utility Charges. Lessee shall pay all charges for electricity,
power, gas, oil, water, telephone, sanitary sewer service and all other
utilities and services to, on or in connection with the Property during the
Term.
3.10. Removal of Property. Lessee shall not remove any Improvements from
the Land or any other Property from the Land or Improvements, except that,
during the Term, Lessee may remove any Modification or any trade fixture,
machinery, equipment, inventory or other personal property if such Modification
or property (a) was not financed by an Advance, (b) is not required by any
applicable Governmental Rule or Insurance Requirement and (c) is readily
removable without impairing the value, utility or remaining useful life of the
Property.
3.11. Compliance with Governmental Rules and Insurance Requirements.
Lessee, at its sole cost and expense, shall, unless its failure is not
reasonably likely to have a Material Adverse Effect, (a) comply, and cause its
agents, sublessees, assignees, employees, invitees, licensees, contractors and
tenants, and the Property to comply, with all Governmental Rules and Insurance
Requirements relating to the Property (including the construction, use,
operation, maintenance, repair and restoration thereof, whether or not
compliance therewith shall require structural or extraordinary changes in the
Improvements or interfere with the use and enjoyment of the Property), and (b)
procure, maintain and comply with all licenses, permits, orders, approvals,
consents and other authorizations required for the construction, use,
maintenance and operation of the Property and for the use, operation,
maintenance, repair and restoration of the Improvements.
3.12. Permitted Contests. Lessee, at its sole cost and expense, may
contest any alleged Lien or easement on any of the Property or any alleged
Governmental Charge, Indebtedness or other obligation which is payable by Lessee
hereunder to Persons other than the Lessor Parties or which, if unpaid, would
give rise to a Lien on any of the Property, provided that (a) each such contest
is diligently pursued in good faith by appropriate proceedings; (b) the
commencement and continuation of such proceedings suspends the enforcement of
such Lien or easement or the collection of such Governmental Charge,
Indebtedness or obligation; (c) Lessee has established adequate reserves for the
discharge of such Lien or easement or the payment of such Governmental Charge,
Indebtedness or obligation in accordance with GAAP and, if the failure to
discharge such Lien or easement or the failure to pay such Governmental Charge,
Indebtedness or obligation might result in any civil liability for any Lessor
Party, Lessee has provided to such Lessor Party a bond or other security
satisfactory to such Lessor Party; (d) the failure to discharge such Lien or
easement or the failure to pay such Governmental Charge, Indebtedness or
obligation could not result in any criminal liability for any Lessor Party; (e)
the failure to discharge such Lien or easement or the failure to pay such
Governmental Charge, Indebtedness or obligation is not otherwise reasonably
likely to have a Material Adverse Effect; and (f) unless Lessee currently is
exercising either the Term Purchase Option or the Expiration Date Purchase
Option, any such contest is completed and such Lien or easement is discharged
(either pursuant to such proceedings or otherwise) or such Governmental Charge,
Indebtedness or obligation is declared invalid, paid or otherwise satisfied not
later than six (6) months prior to the Scheduled Expiration Date.
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<PAGE> 457
3.13. Lessor Obligations; Right to Perform Lessee Obligations. No Lessor
Party shall have any obligation to (a) maintain, repair or make any improvements
to the Property, (b) maintain any insurance on the Property, (c) perform any
other obligation of Lessee under this Agreement or any other Lessee Obligation,
(d) make any expenditure on account of the Property (except to make Advances as
required by the Participation Agreement) or (e) take any other action in
connection with the Property, this Agreement or any other Operative Document,
except as expressly provided herein or in another Operative Document; provided
however, that Lessor may, in its sole discretion and without any obligation to
do so, perform any Lessee Obligation not performed by Lessee when required.
Lessor may enter the Property or exercise any other right of Lessee under this
Agreement or any other Operative Document to the extent Lessor determines in
good faith that such entry or exercise is reasonably necessary for Lessor to
perform any such Lessee Obligation not performed by Lessee when required. Lessee
shall reimburse Lessor and the other Lessor Parties, within five (5) Business
Days after demand, for all fees, costs and expenses incurred by them in
performing any such obligation or curing any Default.
3.14. Inspection Rights. During the Term, Lessee shall permit any Person
designated by Lessor, upon reasonable notice and during normal business hours,
to visit and inspect any of the Property.
SECTION 4. EXPIRATION DATE.
4.01. Termination by Lessee Prior to Scheduled Expiration Date. Subject
to the terms and conditions of the Purchase Agreement, Lessee may, at any time
prior to the Scheduled Expiration Date, terminate this Agreement and purchase
the Property pursuant to Section 2 of the Purchase Agreement. Lessee shall
notify Lessor of Lessee's election so to terminate this Agreement and purchase
the Property by delivering to Agent a Notice of Term Purchase Option Exercise
pursuant to and in accordance with the provisions of Paragraph 2.01 of the
Purchase Agreement.
4.02. Surrender of Property. Unless Lessee purchases the Property on the
Expiration Date pursuant to the Purchase Agreement, Lessee shall vacate and
surrender the Property to Lessor on the Expiration Date in its then-current
condition, subject to compliance by Lessee on or prior to such date of its
obligations under this Agreement and the other Operative Documents (including
the completion of the New Improvements and all Modifications, the completion of
all permitted contests and the removal of all Liens which are not Permitted
Property Liens of the types described in clauses (i), (ii), (iii), (iv) and (vi)
of Subparagraph 3.07(a)).
4.03. Holding Over. If Lessee does not purchase the Property on the
Expiration Date pursuant to the Purchase Agreement but continues in possession
of any portion of the Property after the Expiration Date, Lessee shall pay rent
for each day it so continues in possession, payable upon demand of Lessor, at a
per annum rate equal to the Alternate Rental Rate plus two percent (2.0%) and
shall pay and perform all of its other Lessee Obligations under this Agreement
and the other Operative Documents in the same manner as though the Term had not
ended; provided, however, that this Paragraph 4.03 shall not be interpreted to
permit such holding over or to limit any right or remedy of Lessor for such
holding over.
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<PAGE> 458
SECTION 5. DEFAULT.
5.01. Events of Default. The occurrence or existence of any one or more
of the following shall constitute an "Event of Default" hereunder:
(a) Non-Payment. Lessee shall (i) fail to pay on the Expiration
Date any amount payable by Lessee under this Agreement or any other
Operative Document on or prior to such date, (ii) fail to pay within
five (5) business days after any Scheduled Rent Payment Date any Base
Rent payable on such Scheduled Rent Payment Date (other than the Base
Rent payable on the Expiration Date) or (iii) fail to pay within thirty
(30) days after the same becomes due, any Supplemental Rent or other
amount required under the terms of this Agreement or any other Operative
Document (other than any such amount payable on the Expiration Date or
Base Rent); or
(b) Specific Defaults. Lessee or any of its Subsidiaries shall
fail to observe or perform any covenant, obligation, condition or
agreement set forth in Subparagraph 3.01(d) hereof or in Paragraph 5.02
or Paragraph 5.03 of the Participation Agreement; or
(c) Other Defaults. Lessee or any of its Subsidiaries shall fail
to observe or perform any other covenant, obligation, condition or
agreement contained in this Agreement or any other Operative Document
and such failure shall continue for a period of thirty (30) days after
written notice thereof from Lessor; provided, however, that, if such
failure cannot reasonably be cured within such thirty (30) day period,
such failure shall not constitute an Event of Default hereunder if
Lessee (i) promptly commences to cure such failure within such thirty
(30) day period, (ii) thereafter diligently pursues such cure to
completion, and (iii) completes such cure not later than the earlier of
(A) the Expiration Date, if Lessee is exercising the Marketing Option,
and (B) one hundred and twenty days (120) days after Lessor's notice of
such failure; or
(d) Representations and Warranties. Any representation,
warranty, certificate, information or other statement (financial or
otherwise) made or furnished by or on behalf of Lessee or any of its
Subsidiaries to any Lessor Party in or in connection with this Agreement
or any other Operative Document, or as an inducement to any Lessor Party
to enter into this Agreement or any other Operative Document, shall be
false, incorrect, incomplete or misleading in any material respect when
made or furnished; or
(e) Cross-Default. (i) Lessee or any of its Subsidiaries shall
fail to make any payment when due on account of any Indebtedness of such
Person (other than the Lessee Obligations and trade payables) and such
failure shall continue beyond any period of grace provided with respect
thereto, if the amount of such Indebtedness exceeds $40,000,000 or the
effect of such failure is to cause, or permit the holder or holders
thereof to cause, Indebtedness of Lessee and its Subsidiaries (other
than the Lessee Obligations) in an aggregate amount exceeding
$40,000,000 to become due or (ii) Lessee or any of its Subsidiaries
shall otherwise fail to observe or perform any agreement, term or
condition contained in any agreement or instrument relating to any
Indebtedness of such Person (other than the Lessee Obligations and trade
payables), or any other event shall occur or condition shall exist, if
the effect of such failure, event or condition is to
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<PAGE> 459
cause, or permit the holder or holders thereof to cause, Indebtedness of
Lessee and its Subsidiaries (other than the Lessee Obligations) in an
aggregate amount exceeding $40,000,000 to become due (and/or to be
secured by cash collateral); or
(f) Insolvency, Voluntary Proceedings. Lessee or any of its
Material Subsidiaries shall (i) apply for or consent to the appointment
of a receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) be unable, or admit in writing
its inability, to pay its debts generally as they mature, (iii) make a
general assignment for the benefit of its or any of its creditors, (iv)
be dissolved or liquidated in full or in part, (v) become insolvent (as
such term may be defined or interpreted under any applicable statute),
(vi) commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in
effect or consent to any such relief or to the appointment of or taking
possession of its property by any official in an involuntary case or
other proceeding commenced against it, or (vi) take any action for the
purpose of effecting any of the foregoing; or
(g) Involuntary Proceedings. Proceedings for the appointment of a
receiver, trustee, liquidator or custodian of Lessee or any of its
Material Subsidiaries or of all or a substantial part of the property
thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to Lessee or
any of its Material Subsidiaries or the debts thereof under any
bankruptcy, insolvency or other similar law now or hereafter in effect
shall be commenced and an order for relief entered or such proceeding
shall not be dismissed or discharged within thirty (30) days of
commencement; or
(h) Judgments. (i) One or more judgments, orders, decrees or
arbitration awards requiring Lessee and/or its Subsidiaries to pay an
aggregate amount of $40,000,000 or more (exclusive of amounts covered by
insurance issued by an insurer not an Affiliate of Lessee and otherwise
satisfying the requirements set forth in Subparagraph 3.03(b)) shall be
rendered against Lessee and/or any of its Subsidiaries in connection
with any single or related series of transactions, incidents or
circumstances and the same shall not be satisfied, vacated or stayed for
a period of thirty (30) consecutive days after issue or levy; (ii) any
judgment, writ, assessment, warrant of attachment, tax lien or execution
or similar process shall be issued or levied against a substantial part
of the property of Lessee or any of its Subsidiaries and the same shall
not be released, stayed, vacated or otherwise dismissed within thirty
(30) days after issue or levy; or (iii) any other judgments, orders,
decrees, arbitration awards, writs, assessments, warrants of attachment,
tax liens or executions or similar processes which, alone or in the
aggregate, are reasonably likely to have a Material Adverse Effect are
rendered, issued or levied; or
(i) Operative Documents. Any Operative Document or any material
term thereof shall cease to be, or be asserted by Lessee or any of its
Subsidiaries not to be, a legal, valid and binding obligation of Lessee
or any of its Subsidiaries enforceable in accordance with its terms; or
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<PAGE> 460
(j) ERISA. Any Reportable Event which constitutes grounds for
the termination of any Employee Benefit Plan by the PBGC or for the
appointment of a trustee by the PBGC to administer any Employee Benefit
Plan shall occur, or any Employee Benefit Plan shall be terminated
within the meaning of Title IV of ERISA or a trustee shall be appointed
by the PBGC to administer any Employee Benefit Plan; or
(k) Major Casualty or Condemnation. Any Major Casualty or Major
Condemnation affecting the Property shall occur; or
(l) Change of Control. Any Change of Control shall occur;
Provided, however, that any such Event of Default (except any Event of Default
under Subparagraph 5.01(f) or Subparagraph 5.01(g)) shall be deemed cured and
shall cease to be an Event of Default hereunder if, prior to the time any Lessor
Party begins to exercise any of its rights and remedies for an Event of Default
under the Operative Documents, Lessee delivers to Lessor:
(A) In the case of any Event of Default occurring under
Subparagraph 5.01(e), written evidence that the Persons owing the
applicable Indebtedness have made the required payment in the case of a
failure to pay and, in all cases (including failure to pay), all holders
of such Indebtedness have waived (without the payment by the Persons
owing such Indebtedness of any waiver fee, penalty or other similar
payment or the provision by such Persons of additional collateral) such
holders' rights to cause such Indebtedness to become due (and/or to be
secured by cash collateral); and
(B) In the case of all other Events of Default (except Events of
Default under Subparagraph 5.01(f) or Subparagraph 5.01(g)), written
evidence that such Events of Default have been cured.
5.02. General Remedies. In all cases, upon the occurrence or existence
of any Event of Default and at any time thereafter unless such Event of Default
is waived, Lessor may, with the consent of the Required Participants, or shall,
upon instructions from the Required Participants, exercise any one or more of
the following rights and remedies (except that the remedy set forth in the first
sentence of Subparagraph 5.02(a) shall be automatic):
(a) Termination of Commitments. If such Event of Default is an
Event of Default of the type described in Subparagraph 5.01(f) or
Subparagraph 5.01(g) affecting Lessee, immediately and without notice
the obligation of Lessor to make Advances and the obligations of the
Participants to fund Advances shall automatically terminate. If such
Event of Default is any other Event of Default, Lessor may by written
notice to Lessee, terminate the obligation of Lessor to make Advances
and the obligations of the Participants to fund Advances.
(b) Appointment of a Receiver. Lessor may apply to any court of
competent jurisdiction for, and obtain appointment of, a receiver for
the Property.
22
<PAGE> 461
(c) Specific Performance. Lessor may bring an action in any
court of competent jurisdiction to obtain specific enforcement of any of
the covenants or agreements of Lessee in this Agreement or any of the
other Operative Documents.
(d) Collection of Issues and Profits. Lessor may collect Issues
and Profits as provided in Subparagraph 2.07(c) and apply the proceeds
to pay Lessee Obligations.
(e) Protection of Property. Lessor may enter, take possession of,
manage and operate all or any part of the Property or take any other
actions which it reasonably determines are necessary to protect the
Property and the rights and remedies of the Lessor Parties under this
Agreement and the other Operative Documents, including (i) taking and
possessing all of Lessee's books and records relating to the Property;
(ii) entering into, enforcing, modifying, or canceling subleases on such
terms and conditions as Lessor may consider proper; (iii) obtaining and
evicting tenants; (iv) fixing or modifying sublease rents; (v)
collecting and receiving any payment of money owing to Lessee; (vi)
completing any unfinished Improvements; and/or (vii) contracting for and
making repairs and alterations.
(f) Other Rights and Remedies. In addition to the specific
rights and remedies set forth above in this Paragraph 5.02 and in
Paragraph 5.03 and Paragraph 5.04, Lessor may exercise any other right,
power or remedy permitted to it by any applicable Governmental Rule,
either by suit in equity or by action at law, or both.
5.03. Lease Remedies. If the transaction evidenced by this Agreement and
the other Operative Documents is treated as a lease, upon the occurrence or
existence of any Event of Default and at any time thereafter unless such Event
of Default is waived, Lessor may, with the consent of the Required Participants,
or shall, upon instructions from the Required Participants, exercise any one or
more of the following rights and remedies in addition to those rights and
remedies set forth in Paragraph 5.02:
(a) Termination of Lease. Lessor may, by written notice to
Lessee, terminate this Agreement on a Termination Date which is prior to
the Scheduled Expiration Date, subject to Subparagraph 3.02(1) of the
Purchase Agreement. Such Termination Date shall be the last day of a
Rental Period unless Required Participants shall otherwise direct. On
such Termination Date (which shall then be the Expiration Date), Lessee
shall pay all unpaid Base Rent accrued through such date, all
Supplemental Rent due and payable on or prior to such date and all other
amounts payable by Lessee on the Expiration Date pursuant to this
Agreement and the other Operative Documents. Lessee also shall pay to
Lessor, in addition to all accrued Base Rent, the worth at the time of
such payment of the amount by which the unpaid Base Rent through the
Scheduled Expiration Date exceeds the amount of such rental loss for the
same period that Lessee proves could reasonably be avoided.
(b) Continuation of Lease. Lessor may exercise the rights and
remedies provided by California Civil Code Section 1951.4, including the
right to continue this Agreement in effect after Lessee's breach and
abandonment and recover Rent as it becomes due. Acts of maintenance or
preservation, efforts to relet the Property, the
23
<PAGE> 462
appointment of a receiver upon Lessor's initiative to protect its
interest under this Agreement or withholding consent to or terminating a
sublease shall not of themselves constitute a termination of Lessee's
right to possession.
(c) Removal and Storage of Property. Lessor may enter the
Property and remove therefrom all Persons and property, store such
property in a public warehouse or elsewhere at the cost of and for the
account of Lessee and sell such property and apply the proceeds
therefrom pursuant to applicable California law.
5.04. Loan Remedies. If the transaction evidenced by this Agreement and
the other Operative Documents is treated as a loan, upon the occurrence or
existence of any Event of Default and at any time thereafter unless such Event
of Default is waived, Lessor may, with the consent of the Required Participants,
or shall, upon instructions from the Required Participants, exercise any one or
more of the following rights and remedies in addition to those rights and
remedies set forth in Paragraph 5.02:
(a) Acceleration of Lessee Obligations. Lessor may, by written
notice to Lessee, terminate this Agreement on a Termination Date which
is prior to the Scheduled Expiration Date, subject to Subparagraph
3.02(1) of the Purchase Agreement, and declare all unpaid Lessee
Obligations due and payable on such Termination Date. Such Termination
Date shall be the last day of a Rental Period unless Required
Participants shall otherwise direct. On such Termination Date (which
shall then be the Expiration Date), Lessee shall pay all unpaid Base
Rent accrued through such date, all Supplemental Rent due and payable on
or prior to such date and all other amounts payable by Lessee on the
Expiration Date pursuant to this Agreement and the other Operative
Documents.
(b) Uniform Commercial Code Remedies. Lessor may exercise any or
all of the remedies granted to a secured party under the California
Uniform Commercial Code.
(c) Judicial Foreclosure. Lessor may bring an action in any
court of competent jurisdiction to foreclose the security interest in
the Property granted to Lessor by this Agreement or any of the other
Operative Documents.
(d) Power of Sale. Lessor may cause some or all of the Property,
including any Personal Property Collateral, to be sold under a power of
sale or otherwise disposed of in any combination and in any manner
permitted by applicable Governmental Rules.
(i) Sales of Personal Property. Lessor may dispose of any
Personal Property Collateral separately from the sale of Real
Property Collateral, in any manner permitted by Division 9 of the
California Uniform Commercial Code, including any public or
private sale, or in any manner permitted by any other applicable
Governmental Rule. Any proceeds of any such disposition shall not
cure any Event of Default or reinstate any Lessee Obligation for
purposes of Section 2924c of the California Civil Code. In
connection with any such sale or other disposition, Lessee agrees
that the following procedures constitute a commercially
reasonable sale:
24
<PAGE> 463
(A) Lessor shall mail written notice of the sale
to Lessee not later than thirty (30) days prior to such
sale.
(B) Once per week during the three (3) weeks
immediately preceding such sale, Lessor will publish
notice of the sale in a local daily newspaper of general
circulation.
(C) Upon receipt of any written request, Lessor
will make the Property available to any bona fide
prospective purchaser for inspection during reasonable
business hours.
(D) Notwithstanding, Lessor shall be under no
obligation to consummate a sale if, in its judgment,
none of the offers received by it equals the fair value
of the Property offered for sale.
(E) If Lessor so requests, Lessee shall assemble
all of the Personal Property Collateral and make it
available to Lessor at the site of the Land. Regardless
of any provision of this Agreement or any other
Operative Document, Lessor shall not be considered to
have accepted any property other than cash or
immediately available funds in satisfaction of any
Lessee Obligation, unless Lessor has given express
written notice of its election of that remedy in
accordance with California Uniform Commercial Code
Section 9505.
The foregoing procedures do not constitute the only procedures
that may be commercially reasonable.
(ii) Lessor's Sales of Real Property or Mixed Collateral.
Lessor may choose to dispose of some or all of the Property which
consists solely of Real Property Collateral in any manner then
permitted by applicable Governmental Rules, including without
limitation a nonjudicial trustee's sale pursuant to California
Civil Code ss.ss. 2924 et seq. In its discretion, Lessor may also
or alternatively choose to dispose of some or all of the
Property, in any combination consisting of both Real Property
Collateral and Personal Property Collateral, together in one sale
to be held in accordance with the law and procedures applicable
to real property, as permitted by Section 9501(4) of the
California Uniform Commercial Code. Lessee agrees that such a
sale of Personal Property Collateral together with Real Property
Collateral constitutes a commercially reasonable sale of the
Personal Property Collateral. (For purposes of this power of
sale, either a sale of Real Property Collateral alone, or a sale
of both Real Property Collateral and Personal Property Collateral
together in accordance with California Uniform Commercial Code
Section 9501(4), will sometimes be referred to as a "Lessor's
Sale.")
(A) Before any Lessor's Sale, Lessor shall give such
notice of default and election to sell as may then be required
by applicable Governmental Rules.
25
<PAGE> 464
(B) When all time periods then legally mandated have
expired, and after such notice of sale as may then be legally
required has been given, Lessor shall sell the property being
sold at a public auction to be held at the time and place
specified in the notice of sale.
(C) Neither Lessor nor Agent shall have any obligation
to make demand on Lessee before any Lessor's Sale.
(D) From time to time in accordance with then applicable
law, Lessor may postpone any Lessor's Sale by public
announcement at the time and place noticed for that sale.
(E) At any Lessor's Sale, Lessor shall sell to the
highest bidder at public auction for cash in lawful money of the
United States.
(F) Lessor shall execute and deliver to the purchaser(s)
a deed or deeds conveying the Property being sold without any
covenant or warranty whatsoever, express or implied. The
recitals in any such deed of any matters or facts, including any
facts bearing upon the regularity or validity of any Lessor's
Sale, shall be conclusive proof of their truthfulness. Any such
deed shall be conclusive against all Persons as to the facts
recited in it.
(e) Foreclosure Sales.
(i) Single or Multiple. If the Property consists of more
than one lot, parcel or item of property, Lessor may:
(A) Designate the order in which the lots,
parcels and/or items shall be sold or disposed of or
offered for sale or disposition; and
(B) Elect to dispose of the lots, parcels and/or
items through a single consolidated sale or disposition
to be held or made under the power of sale granted in
Subparagraph 5.04(d), or in connection with judicial
proceedings, or by virtue of a judgment and decree of
foreclosure and sale; or through two or more such sales
or dispositions; or in any other manner Lessor may deem
to be in its best interests (any such sale or
disposition, a "Foreclosure Sale;" any two or more, "
Foreclosure Sales").
If Lessor chooses to have more than one Foreclosure Sale, Lessor
at its option may cause the Foreclosure Sales to be held
simultaneously or successively, on the same day, or on such
different days and at such different times and in such order as
it may deem to be in its best interests. No Foreclosure Sale
shall terminate or affect the security interests granted to
Lessor in the Property by this Agreement on any part of the
Property which has not been sold, until all of the Lessee
Obligations have been paid in full.
26
<PAGE> 465
(ii) Credit Bids. At any Foreclosure Sale, any Person, including
any Lessor Party, may bid for and acquire the Property or any part of it
to the extent permitted by then applicable Governmental Rules. Instead
of paying cash for that property, Lessor may settle for the purchase
price by crediting the sales price of the Property against the Lessee
Obligations in any order and proportions as Lessor in its sole
discretion may choose.
5.05. Remedies Cumulative. The rights and remedies of Lessor under this
Agreement and the other Operative Documents are cumulative and may be exercised
singularly, successively, or together.
5.06. No Cure or Waiver. Neither the performance by Lessor of any of
Lessee's obligations pursuant to Paragraph 3.13 nor the exercise by Lessor of
any of its other rights and remedies under this Agreement or any other Operative
Document (including the collection of Issues and Profits and the application
thereof to the Lessee Obligations) shall constitute a cure or waiver of any
Default or nullify the effect of any notice of default or sale, unless and until
all Lessee Obligations are paid in full.
5.07. Exercise of Rights and Remedies. The rights and remedies provided
to Lessor under this Agreement may be exercised by Lessor itself, by Agent
pursuant to Subparagraph 2.02(c) of the Participation Agreement, by a
court-appointed receiver or by any other Person appointed by any of the
foregoing to act on its behalf. All of the benefits afforded to Lessor under
this Agreement and the other Operative Documents shall accrue to the benefit of
Agent to the extent provided in Subparagraph 2.02(c) of the Participation
Agreement.
SECTION 6. MISCELLANEOUS.
6.01. Notices. Except as otherwise specified herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lessee or Lessor under this Agreement shall be given as provided in Subparagraph
2.02(c) and Paragraph 7.01 of the Participation Agreement.
6.02. Waivers; Amendments. Any term, covenant, agreement or condition of
this Agreement may be amended or waived only as provided in the Participation
Agreement. No failure or delay by any Lessor Party in exercising any right
hereunder shall operate as a waiver thereof or of any other right nor shall any
single or partial exercise of any such right preclude any other further exercise
thereof or of any other right. Unless otherwise specified in any such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
6.03. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Lessor Parties and Lessee and their permitted
successors and assigns; provided, however, that the Lessor Parties and Lessee
shall not sell, assign or delegate their respective rights and obligations
hereunder except as provided in the Participation Agreement.
27
<PAGE> 466
6.04. No Third Party Rights. Nothing expressed in or to be implied from
this Agreement is intended to give, or shall be construed to give, any Person,
other than the Lessor Parties and Lessee and their permitted successors and
assigns, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
6.05. Partial Invalidity. If at any time any provision of this Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
6.06. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
conflicts of law rules.
6.07. Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
6.08. Nature of Lessee's Obligations.
(a) Independent Obligation. The obligation of Lessee to pay the amounts
payable by Lessee under this Agreement and the other Operative Documents and to
perform the other Lessee Obligation are absolute, unconditional and irrevocable
obligations which are separate and independent of the obligations of the Lessor
Parties under this Agreement and the other Operative Documents and all other
events and circumstances, including the events and circumstances set forth in
Subparagraph 6.08(c).
(b) No Termination or Abatement. This Agreement and the other Operative
Documents and Lessee's obligation to pay Rent and to pay and perform all other
Lessee Obligations shall continue in full force and effect without abatement
notwithstanding the occurrence or existence of any event or circumstance,
including any event or circumstance set forth in Subparagraph 6.08(c).
(c) Full Payment and Performance. Lessee shall make all payments under
this Agreement and the other Operative Documents in the full amounts and at the
times required by the terms of this Agreement and the other Operative Documents
without setoff, deduction or reduction of any kind and shall perform all other
Lessee Obligations as and when required, without regard to any event or
circumstances whatsoever, including (i) the condition of the Property (including
any Improvements to the Property made prior to the Commencement Date or during
the Term); (ii) title to the Property (including possession of the Property by
any Person or the existence of any Lien or any other right, title or interest in
or to any of the Property in favor of any Person); (iii) the value,
habitability, usability, design, operation or fitness for use of the Property;
(iv) the availability or adequacy of utilities and other services to the
Property; (v) any latent, hidden or patent defect in the Property; (vi) the
zoning or status of the Property or any other restrictions on the use of the
Property; (g) the economics of the Property; (vii) any Casualty or Condemnation;
(viii) the compliance of the Property with any applicable Governmental Rule
28
<PAGE> 467
or Insurance Requirement; (ix) any failure by any Lessor Party to perform any of
its obligations under this Agreement or any other Operative Document; or (x) the
exercise by any Lessor Party of any of its remedies under this Agreement or any
other Operative Document; provided however, that this Paragraph 6.08 shall not
abrogate any right which Lessee may have to recover damages from any Lessor
Party for any material breach by such Lessor Party of its obligations under this
Agreement or any other Operative Document to the extent permitted hereunder or
thereunder.
[The signature page follows.]
29
<PAGE> 468
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:_________________________
Name:___________________
Title:__________________
LESSOR: LEASE PLAN U.S.A., INC.
By:_________________________
Name:___________________
Title:__________________
30
<PAGE> 469
STATE OF CALIFORNIA ________________)
)ss
COUNTY OF __________________________)
On _____________, 1997, before me, ___________________ a Notary Public
in and for the State of California, personally appeared ______________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
....................................
<PAGE> 470
STATE OF CALIFORNIA ________________)
)ss
COUNTY OF __________________________)
On _____________, 1997, before me, ___________________ a Notary Public
in and for the State of California, personally appeared ____________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s) or the entity on behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
[SEAL]
....................................
<PAGE> 471
EXHIBIT A
LAND
A-1
<PAGE> 472
EXHIBIT B
RELATED GOODS
The personal property, among other goods, conveyed by BNP Leasing
Corporation to Lease Plan U.S.A., Inc. by Bill of Sale, Assignment of Contract
Rights and Intangible Assets dated as of November 12, 1997 with respect to Tract
2 and Tract 3.
B-1
<PAGE> 473
EXHIBIT B(1)
SUPPLEMENT TO EXHIBIT B TO LEASE AGREEMENT
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndication Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Lease Agreement, dated as of
November 12, 1997 (the "Lease Agreement"), between KLA-Tencor Corporation
("Lessee") and Lease Plan U.S.A., Inc. ("Lessor").
2. Lessee hereby agrees that the description of "Related Goods" set
forth in Exhibit B to the Lease Agreement shall be supplemented by adding
thereto the Related Goods described in Attachment 1 hereto. Lessee hereby
accepts all such Related Goods and agrees that such Related Goods constitute
part of the Property subject to the Lease Agreement.
IN WITNESS WHEREOF, Lessee has executed this Supplement to Exhibit B on
the date set forth above.
LESSEE: KLA-TENCOR CORPORATION
By:_________________________
Name:___________________
Title:__________________
B(1)-1
<PAGE> 474
ATTACHMENT 1
TO
SUPPLEMENT TO EXHIBIT B
B(1)(1)-1
<PAGE> 475
EXHIBIT C
NOTICE OF RENTAL PERIOD SELECTION
[Date]
Lease Plan U.S.A., Inc.
c/o ABN AMRO Bank N.V.
as Agent
Capital Markets-Syndications Group
1325 Avenue of the Americas, 9th Floor
New York, NY 10019
Attn: Linda Boardman
1. Reference is made to that certain Participation Agreement, dated as
of November 12,1997 (the "Participation Agreement"), among KLA-Tencor
Corporation ("Lessee"), Lease Plan U.S.A., Inc. ("Lessor"), the financial
institutions listed in Schedule I to the Participation Agreement (the
"Participants") and ABN AMRO Bank N.V., as agent for the Participants (in such
capacity, "Agent"). Unless otherwise indicated, all terms defined in the
Participation Agreement have the same respective meanings when used herein.
2. [Insert one of the following as appropriate]
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably selects a new Rental Period for a Portion of the Outstanding
Lease Amount as follows:
(a) The Portion for which a new Rental Period is to be selected is the
Portion in the amount of $__________ with a current Rental Period which began on
________, ____ and ends on __________, ____; and
(b) The next Rental Period for such Portion shall be __________
month[s].]
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably elects to divide a Portion of the Outstanding Lease Amount
into further Portions as follows:
(a) The Portion which is to be divided is the Portion in the amount of
$__________ with a current Rental Period which began on ________, ____ and ends
on __________, ____; and
(b) On the last day of the current Rental Period for such Portion, such
Portion is to be divided into the following Portions with the following initial
Rental Periods:
C-1
<PAGE> 476
<TABLE>
<CAPTION>
___Portion___ __Rental Period__
------------- ------------------
<S> <C>
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]
$___________ _______ month[s]]
</TABLE>
[Pursuant to Subparagraph 2.03(a) of the Lease Agreement, Lessee
hereby irrevocably elects to combine into a single Portion certain Portions of
the Outstanding Lease Amount as follows:
(a) The Portions which are to be combined are the Portions in
the amounts of $__________, $_________ and $_______, each with a current
Rental Period which ends on __________, ____; and
(b) The initial Rental Period for such newly created Portion
shall be __________ month[s].]
3. Lessee hereby certifies to the Lessor Parties that, on the date of
this Acquisition Request and after giving effect to the use of the requested
Acquisition Advance[s] as described above:
(a) The representations and warranties of Lessee set forth in
Paragraph 4.01 of the Participation Agreement and in the other Operative
Documents are true and correct in all material respects as if made on
such date (except for representations and warranties expressly made as
of a specified date, which shall be true as of such date);
(b) No Default has occurred and is continuing; and
(c) All of the Operative Documents are in full force and effect.
IN WITNESS WHEREOF, Lessee has executed this Acquisition Request on the
date set forth above.
KLA-TENCOR CORPORATION
By: _____________________________
Name: _______________________
Title: ________________________
C-2
<PAGE> 477
Recording requested by and EXECUTION COPY
when recorded return to:
Thomas Y. Coleman, Esq.
Orrick, Herrington & Sutcliffe
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
================================================================================
LEASE AGREEMENT,
CONSTRUCTION DEED OF TRUST WITH ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
BETWEEN
KLA-TENCOR CORPORATION
AND
LEASE PLAN U.S.A., INC.
NOVEMBER 12, 1997
================================================================================
THIS LEASE IS NOT INTENDED TO CONSTITUTE
A TRUE LEASE FOR INCOME TAX PURPOSES
(SEE PARAGRAPH 2.06)
<PAGE> 478
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
SECTION 1. INTERPRETATION..............................................2
1.01. Definitions......................................................2
1.02. Rules of Construction............................................2
SECTION 2. BASIC PROVISIONS............................................2
2.01. Lease of the Property............................................2
2.02. Term.............................................................2
2.03. Rent.............................................................3
2.04. Use..............................................................5
2.05. "As Is" Lease....................................................5
2.06. Nature of Transaction............................................5
2.07. Security, Etc....................................................5
SECTION 3. OTHER LESSEE AND LESSOR RIGHTS AND OBLIGATIONS..............8
3.01. Maintenance, Repair, Etc.........................................8
3.02. Risk of Loss.....................................................9
3.03. Insurance........................................................9
3.04. Casualty and Condemnation.......................................12
3.05. Taxes...........................................................15
3.06. Environmental Matters...........................................15
3.07. Liens, Easements, Etc...........................................16
3.08. Subletting......................................................17
3.09. Utility Charges.................................................18
3.10. Removal of Property.............................................18
3.11. Compliance with Governmental Rules and Insurance Requirements...18
3.12. Permitted Contests..............................................18
3.13. Lessor Obligations; Right to Perform Lessee Obligations.........19
3.14. Inspection Rights...............................................19
SECTION 4. EXPIRATION DATE............................................19
4.01. Termination by Lessee Prior to Scheduled Expiration Date........19
4.02. Surrender of Property...........................................19
4.03. Holding Over....................................................19
SECTION 5. DEFAULT....................................................20
</TABLE>
-i-
<PAGE> 479
<TABLE>
<S> <C> <C>
5.01. Events of Default...............................................20
5.02. General Remedies................................................22
5.03. Lease Remedies..................................................23
5.04. Loan Remedies...................................................24
5.05. Remedies Cumulative.............................................27
5.06. No Cure or Waiver...............................................27
5.07. Exercise of Rights and Remedies.................................27
SECTION 6. MISCELLANEOUS..............................................27
6.01. Notices.........................................................27
6.02. Waivers; Amendments.............................................27
6.03. Successors and Assigns..........................................27
6.04. No Third Party Rights...........................................28
6.05. Partial Invalidity..............................................28
6.06. Governing Law...................................................28
6.07. Counterparts....................................................28
6.08. Nature of Lessee's Obligations..................................28
EXHIBITS
A Land (2.01(a))
B Related Goods (2.01(d))
C Notice of Rental Period Selection (2.03(a))
</TABLE>
-ii-
<PAGE> 480
RECORDING REQUESTED BY
AND WHEN RECORDED, RETURN TO:
Orrick, Herrington & Sutcliffe
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, CA 94111
Attn: James W. Miller, Esq.
- ------------------------------------------------------------------------------
FIRST AMENDMENT TO LEASE AGREEMENT,
CONSTRUCTION DEED OF TRUST
WITH ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FILING
THIS FIRST AMENDMENT TO LEASE AGREEMENT, CONSTRUCTION DEED OF
TRUST WITH ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this
"Amendment"), dated as of November 14, 1997, is entered into by and between:
(1) KLA-TENCOR CORPORATION, a Deleware corporation ("Lessee"); and
(2) LEASE PLAN U.S.A., INC., a Georgia corporation ("Lessor"). ------
RECITALS
A. Lessee, Lessor, each of the financial institutions listed in
Schedule I to the Participation Agreement (referred to below) (collectively, the
"Participants"), and ABN AMRO BANK, N.V., acting through its San Francisco
International Branch, as agent for the Participants (in such capacity, "Agent"),
are parties to a Participation Agreement dated as of November 12, 1997 (the
"Participation Agreement").
B. Lessee and Lessor are parties to that certain Lease Agreement,
Construction Deed of Trust with Assignment of Rents, Security Agreement and
Fixture Filing dated as of November 12, 1997, and recorded on November 12, 1997,
in the Official Records of Santa Clara County, California, as Document No.
13935258 (the "Lease Agreement").
C. Pursuant to the terms of the Participation Agreement, Lessee
has requested that Lessor acquire that certain real property described in
Exhibit A attached hereto (the "Tract 4 Land") and made a part hereof.
D. Lessee and Lessor now desire to amend the Lease Agreement to
add the Tract 4 Land to the property under the Lease Agreement.
<PAGE> 481
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Lessee and Lessor hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. All capitalized terms defined
above and elsewhere in this Amendment shall be used herein as so defined. Unless
otherwise defined herein, all other capitalized terms used herein shall have the
respective meanings given to those terms in Schedule 1.01 to the Participation
Agreement. The rules of construction set forth in Schedule 1.02 to the
Participation Agreement shall, to the extent not inconsistent with the terms of
this Amendment, apply to this Amendment and are hereby incorporated by
reference.
2. AMENDMENTS TO THE LEASE AGREEMENT. The Lease Agreement is
hereby amended by adding to Exhibit A thereto the property description set forth
in Exhibit A to this Amendment and by adding to Exhibit B thereto the Related
Goods set forth in Exhibit B to this Amendment. Without limiting the effect of
such addition, Lessee and Lessor specifically acknowledge and agree that, on and
after the date hereof, (i) the lien of the Lease Agreement includes all of
Lessee's right, title and interest in and to the Tract 4 Land and (ii) the terms
"Land" and "Property" as defined in the Lease Agreement include the Tract 4
Land.
3. EFFECT OF THIS AMENDMENT. On and after the date of this
Amendment, each reference in the Lease Agreement and the other Operative
Documents to the Lease Agreement shall mean the Lease Agreement as amended
hereby. Except as specifically amended above, (a) the Lease Agreement and the
other Operative Documents shall remain in full force and effect and are hereby
ratified and affirmed and (b) the execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power, or remedy of Lessor, the Participants or Agent, nor constitute
a waiver of any provision of the Lease Agreement or any other Operative
Document.
4. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an original,
but all of which taken together shall constitute one and the same
instrument. The signature page and acknowledgment of any
counterpart may be removed therefrom and attached to any other
counterpart to evidence execution thereof by all of the parties
hereto without affecting the validity thereof.
(b) Headings. Headings in this Amendment are for
convenience of reference only and are not part of the substance
hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California
without reference to conflicts of law rules.
2
<PAGE> 482
IN WITNESS WHEREOF, Lessee and Lessor have caused this Amendment
to be executed as of the day and year first above written.
LESSEE: KLA-TENCOR CORPORATION
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
LESSOR: LEASE PLAN U.S.A., INC.
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
3
<PAGE> 483
STATE OF )
-----------------------)
)
COUNTY OF )
----------------------
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
---------------------------------------
<PAGE> 484
STATE OF )
-----------------------)
)
COUNTY OF )
----------------------
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
-------------------------------------------------
<PAGE> 485
EXHIBIT A
TRACT 4 LAND
THAT CERTAIN REAL PROPERTY SITUATED IN THE COUNTY
OF SANTA CLARA, STATE OF CALIFORNIA, AND DESCRIBED AS FOLLOWS:
A-1
<PAGE> 486
EXHIBIT B
RELATED GOODS
The personal property, among other goods, conveyed
by Amdahl Corporation to Lease Plan U.S.A., Inc. by Assignment of Rights dated
as of November 14, 1997 with respect to Tract 4.
B-1
<PAGE> 487
RECORDING REQUESTED BY
WHEN RECORDED RETURN TO
AND MAIL TAX STATEMENTS TO:
Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, California 94111
Attn.: James W. Miller, Jr.
- ------------------------------------------------------------------------------
FIRST AMENDMENT TO
MEMORANDUM OF PURCHASE AGREEMENT
The First Amendment to Memorandum of Purchase Agreement (this
"Amendment") is made November 14, 1997 by and between KLA-TENCOR CORPORATION, a
Delaware corporation ("Lessee") and LEASE PLAN U.S.A., INC., a Georgia
corporation ("Lessor").
RECITALS
A. Lessee, Lessor, each of the financial institutions listed in
Schedule I to the Participation Agreement (referred to below) (collectively, the
"Participants"), and ABN AMRO BANK, N.V., acting through its San Francisco
International Branch, as agent for the Participants (in such capacity, "Agent"),
are parties to a Participation Agreement dated as of November 12, 1997 (the
"Participation Agreement").
B. Lessor and Lessee are also parties to that certain Purchase
Agreement dated as of November 12, 1997 (the "Purchase Agreement") covering
certain real property referred to in the Purchase Agreement as the "Property"
and evidenced by that certain Memorandum of Purchase Agreement dated as of
November 12, 1997 (the "Memorandum") which Memorandum was recorded on November
12, 1997, in the Official Records of Santa Clara County, California, as Document
No. 13935260.
C. Pursuant to the terms of the Participation Agreement, Lessor has
acquired that certain real property described in Exhibit A attached hereto (the
"Tract 4 Land") and made a part hereof, and such Tract 4 Land has been added to
the Property under the Purchase Agreement.
D. The purpose of this Amendment is to give record notice of the fact
that the Tract 4 Land has been added to the Property under the Purchase
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
The Memorandum is hereby amended by adding to Exhibit A thereto the
property description set forth in Exhibit A to this Amendment. Lessor and Lessee
specifically
<PAGE> 488
acknowledge and agree that, on and after the date hereof, the term
"Property" as defined in the Purchase Agreement shall include the Tract 4 Land.
This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument. The signature page and acknowledgment of
any counterpart may be removed therefrom and attached to any other counterpart
to evidence execution thereof by all of the parties hereto without affecting the
validity thereof.
This instrument is an amendment to the Memorandum and is subject to
all of the terms, covenants and conditions provided in the unrecorded Purchase
Agreement. If the terms of this instrument are inconsistent with the terms of
the Purchase Agreement, the terms of the Purchase Agreement shall prevail.
LESSEE: KLA-TENCOR CORPORATION
By:_________________________________
Name: ___________________________
Title: ____________________________
LESSOR: LEASE PLAN U.S.A., INC.
By:_________________________________
Name: ___________________________
Title: ____________________________
2
<PAGE> 489
EXHIBIT A
TRACT 4 LAND
THAT CERTAIN REAL PROPERTY SITUATED IN THE COUNTY OF SANTA
CLARA, STATE OF CALIFORNIA, AND DESCRIBED AS FOLLOWS:
<PAGE> 490
STATE OF ____________________________________________________)
)
COUNTY OF ___________________________________________________)
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
----------------------------------------
<PAGE> 491
STATE OF ____________________________________________________)
)
COUNTY OF ___________________________________________________)
On _____________, 1997 before me, _______________________, a Notary
Public in and for the State of California, personally appeared
_______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
-------------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 191,133
<SECURITIES> 493,433
<RECEIVABLES> 376,345
<ALLOWANCES> 0
<INVENTORY> 195,045
<CURRENT-ASSETS> 919,661
<PP&E> 236,377
<DEPRECIATION> 105,332
<TOTAL-ASSETS> 1,484,659
<CURRENT-LIABILITIES> 342,659
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 476,112
<OTHER-SE> 644,486
<TOTAL-LIABILITY-AND-EQUITY> 1,484,659
<SALES> 638,781
<TOTAL-REVENUES> 638,781
<CGS> 290,999
<TOTAL-COSTS> 507,216
<OTHER-EXPENSES> 16,888
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,228
<INCOME-PRETAX> 149,681
<INCOME-TAX> 47,901
<INCOME-CONTINUING> 101,780
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,780
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.15
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| LU | https://www.sec.gov/Archives/edgar/data/1006240/0000950146-98-000212.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950146-98-000212.txt : 19980218
<SEC-HEADER>0000950146-98-000212.hdr.sgml : 19980218
ACCESSION NUMBER: 0000950146-98-000212
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980213
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LUCENT TECHNOLOGIES INC
CENTRAL INDEX KEY: 0001006240
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 223408857
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11639
FILM NUMBER: 98539478
BUSINESS ADDRESS:
STREET 1: 600 MOUNTAIN AVE
CITY: MURRAY HILL
STATE: NJ
ZIP: 07974
BUSINESS PHONE: 9085828500
MAIL ADDRESS:
STREET 1: 600 MOUNTAIN AVE
CITY: MURRAY HILL
STATE: NJ
ZIP: 07974
FORMER COMPANY:
FORMER CONFORMED NAME: NS MPG INC
DATE OF NAME CHANGE: 19960124
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes .X.. No ....
At January 31, 1998 650,628,552 common shares were outstanding.
<PAGE>
2 Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
December 31,
1997 1996
Revenues ..................................................... $8,724 $7,938
Costs ........................................................ 4,519 4,296
Gross margin ................................................. 4,205 3,642
Operating Expenses
Selling, general and
administrative expenses .................................... 1,555 1,459
Research and development expenses ............................ 829 634
In-process research
& development expenses ...................................... 427 79
Total operating expenses ..................................... 2,811 2,172
Operating income ............................................. 1,394 1,470
Other income - net ........................................... 163 9
Interest expense ............................................. 79 79
Income before income taxes ................................... 1,478 1,400
Provision for income taxes ................................... 686 541
Net income ................................................... $ 792 $ 859
Earnings per common share - basic ............................ $ 1.23 1.35
Earnings per common share - diluted .......................... $ 1.21 1.35
Dividends declared
per common share ........................................... $ 0.15 0.075
See Notes to Consolidated Financial Statements.
<PAGE>
3 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1997 1997
ASSETS
Cash and cash equivalents ......................... $ 1,225 $ 1,350
Accounts receivable less
allowances of $344 at
December 31, 1997 and $352
September 30, 1997 ............................... 6,295 5,373
Inventories ....................................... 2,604 2,926
Contracts in process (net of contract
billings of $2,363 at
December 31, 1997 and $2,003 at
September 30, 1997 ............................... 1,214 1,046
Deferred income taxes - net ....................... 1,469 1,333
Other current assets .............................. 449 473
Total current assets .............................. 13,256 12,501
Property, plant and equipment, net
of accumulated depreciation of
$6,121 at December 31, 1997 and
$6,407 at September 30, 1997 .................... 4,729 5,147
Prepaid pension costs ............................. 3,322 3,172
Deferred income taxes - net ....................... 1,120 1,262
Capitalized software development costs ............ 246 293
Other assets ...................................... 2,079 1,436
TOTAL ASSETS ...................................... $24,752 $23,811
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE>
4 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1997 1997
LIABILITIES
Accounts payable ................................. $ 1,496 $ 1,931
Payroll and benefit-related
liabilities .................................... 2,178 2,178
Postretirement and postemployment
benefit liabilities ............................ 221 239
Debt maturing within one year .................... 1,757 2,538
Other current liabilities ........................ 4,310 3,852
Total current liabilities ........................ 9,962 10,738
Postretirement and postemployment
benefit liabilities ............................ 6,136 6,073
Long-term debt ................................... 1,945 1,665
Other liabilities ................................ 2,038 1,948
Total liabilities ................................ 20,081 20,424
SHAREOWNERS' EQUITY
Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000
Issued and outstanding shares: None ............. -- --
Common stock-par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
649,336,566 at December 31, 1997
642,062,656 at September 30, 1997 ............... 6 6
Additional paid-in capital ....................... 3,717 3,047
Guaranteed ESOP obligation ....................... (77) (77)
Foreign currency translation ..................... (273) (191)
Retained earnings ................................ 1,298 602
Total shareowners' equity ........................ 4,671 3,387
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY ............................. $ 24,752 $ 23,811
See Notes to Consolidated Financial Statements.
<PAGE>
5 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1997 1996
Operating Activities
Net income ............................................ $ 792 $ 859
Adjustments to reconcile net income
to net cash provided by
operating activities:
Business restructuring charge ...................... -- (54)
Asset impairment and other charges ................. -- (46)
Depreciation and amortization ...................... 343 387
Provision for uncollectibles ....................... 54 42
Deferred income taxes .............................. (22) (67)
Purchased in-process research
and development .................................. 427 79
Increase in accounts receivable .................... (1,255) (1,025)
Decrease in inventories
and contracts in process ......................... 152 813
Decrease in accounts payable ....................... (387) (319)
Changes in other operating assets
and liabilities .................................. 512 645
Other adjustments for noncash
items - net ...................................... (231) (73)
Net cash provided by
operating activities ............................... 385 1,241
Investing Activities
Capital expenditures .................................. (261) (344)
Proceeds from the sale or disposal of
property, plant and equipment ....................... 27 3
Purchases of investments .............................. (47) (16)
Sales of investments .................................. 25 --
Acquisitions, net of cash acquired .................... -- (124)
Dispositions .......................................... 281 179
Other investing activities - net ...................... (35) 33
Net cash used in investing activities ................. (10) (269)
Financing Activities
Repayments of long-term debt .......................... (20) (6)
Issuance of long-term debt ............................ 3 --
Proceeds of issuance of common stock .................. 72 27
Dividends paid ........................................ (48) (48)
Decrease in short-term borrowings - net ............... (485) (14)
Net cash used in financing activities ................. (478) (41)
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE>
6 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1997 1996
Effect of exchange rate
changes on cash ..................................... (22) 5
Net increase(decrease) in
cash and cash equivalents ........................... (125) 936
Cash and cash equivalents
at beginning of year ................................ 1,350 2,241
Cash and cash equivalents
at end of period .................................... $ 1,225 $ 3,177
See Notes to Consolidated Financial Statements.
<PAGE>
7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Lucent pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments
necessary for a fair presentation of the results of operations, financial
position and cash flows for each period shown.
The financial statement results for interim periods are not necessarily
indicative of financial results for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1997.
2. ACQUISITIONS
In December 1997, Lucent completed the purchase of Livingston Enterprises, Inc.
("Livingston"), a provider of remote access networking solutions, in a merger
involving $610 million worth of Lucent stock and options. The acquisition was
accounted for using the purchase method of accounting. The fair market value of
Livingston's assets and liabilities, which were independently determined, have
been included in the balance sheet as of December 31, 1997.
The acquired technology valuation included both existing technology and
in-process research and development. The valuation of these technologies was
made by applying the income forecast method which considers the present value of
cash flows by product lines.
The fair value of existing technology products was valued at $69 and is being
amortized over eight years. In-process research and development valued at $427
was charged to expense as this technology had not reached technological
feasibility and has no alternative use. This technology will require varying
additional development, coding and testing efforts over the next year before
technological feasibility can be determined.
Goodwill was valued at $114 and is being amortized over five years.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at December 31, 1997 and September 30, 1997 were as follows:
December 31, September 30,
1997 1997
Completed goods ............... $ 1,291 $ 1,611
Work in process and
raw materials................ 1,313 1,315
Total inventories ............. $ 2,604 $ 2,926
4. BUSINESS RESTRUCTURING AND OTHER CHARGES
Cash payments of $26 and $115 were made during the quarters ended December 31,
1997 and 1996, respectively for the 1995 business restructuring charge of $2,801
(pre-tax). The reserve for business restructuring as of December 31, 1997 was
$531.
For the quarter ended December 31, 1996, Lucent reversed $54 of the 1995
business restructuring charge primarily related to employee separations. The
reversal was offset by a one-time write-off of $79 of in-process research and
development acquired in the acquisition of Agile Networks, Inc.("Agile").
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. EARNINGS PER SHARE
Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three month period ending December
31, 1997 and 1996, respectively.
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
------------------------------------------
Net income $ 792 $ 859
Earnings per common share - basic $ 1.23 $ 1.35
Earnings per common share - diluted $ 1.21 $ 1.35
Common shares - basic 643,666,791 637,035,279
Effect of dilutive securities:
Stock options 9,180,853 1,173,979
Other 174,835 70,283
Common shares - diluted 653,022,479 638,279,541
Options to purchase approximately 2.7 million and 3.1 million shares of common
stock were outstanding at December 31, 1997 and 1996, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares for the period.
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at December 31, 1997 cannot be ascertained. While these
matters could affect the operating results of any one quarter when resolved in
future periods and while there can be no assurance with respect thereto,
management believes that after final disposition, any monetary liability or
financial impact to Lucent beyond that provided for at December 31, 1997 would
not be material to the annual consolidated financial statements.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T Corp. ("AT&T") as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the Separation and Distribution
Agreement, among Lucent, AT&T and NCR Corporation ("NCR"), dated as of February
1, 1996 as amended and restated, Lucent is responsible for all liabilities
primarily resulting from or relating to the operation of Lucent's business as
conducted at any time prior to or after the separation from AT&T of the
businesses and operations transferred to form Lucent (the "Separation")
including related businesses discontinued or disposed of prior to the
Separation, and Lucent's assets including, without limitation, those associated
with these sites. In addition, under such Separation and Distribution Agreement,
Lucent is required to pay a portion of contingent liabilities paid out in excess
of certain amounts by AT&T and NCR, including environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, without deductions for insurance or
third party indemnity claims. In those cases where insurance carriers or third
party indemnitors have agreed to pay any amounts and management believes that
collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on the financial condition of Lucent or Lucent's results of operations or
cash flows. Any amounts of environmental costs that may be incurred in excess of
those provided for at December 31, 1997 cannot be determined.
7. SUBSEQUENT EVENTS
On January 22, 1998, Lucent completed its acquisition of Prominet Corporation, a
participant in the rapidly emerging Gigabit Ethernet networking industry, in a
merger totaling $164 worth of Lucent stock and options. Under the terms of the
agreement, there are contingent obligations of $35 in stock, which Lucent
expects to pay in the current fiscal year upon resolution of these
contingencies. In that event, goodwill will be recorded under the purchase
method of accounting.
Included in the purchase price was $157 of purchased in-process research and
development which was charged to earnings at the date of acquisition. The
remaining purchase price was allocated to tangible assets and acquired
technology, less liabilities assumed.
<PAGE>
10 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Lucent Technologies Inc. ("Lucent" or the "Company") reported net income of $792
million, or $1.21 per share(diluted) for the quarter ended December 31, 1997.
The year-ago quarterly net income was $859 million, or $1.35 per share(diluted).
The decrease was largely due to the write-off of $427 million of purchased
in-process research and development expenses associated with the acquisition of
Livingston Enterprises, Inc. ("Livingston").
Gross margin increased $563 million for the quarter ended December 31, 1997
compared with the year-ago quarter. The increase in gross margin was primarily
due to an improved mix of products and services as well as higher sales volume
compared with the same quarter last year.
Operating income decreased $76 million in the quarter compared with the same
quarter in 1996.
Lucent is one of the world's leading designers, developers and manufacturers of
communications systems, software and products. Lucent is a global leader in the
sale of public communications systems, and is a supplier of systems and/or
software to the world's largest network operators. Lucent is also a global
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computer manufacturers. Lucent was formed from the
systems and technology units that were formerly part of AT&T Corp. ("AT&T").
Lucent's research and development activities are conducted through Bell
Laboratories ("Bell Labs"), one of the world's foremost industrial research and
development organizations.
During this quarter, Lucent sold its Advanced Technology Systems ("ATS")
business, contributed its Consumer Products business to a new venture formed by
Lucent and Philips Electronics N.V. ("Philips"), and completed its acquisition
of Livingston.
KEY BUSINESS CHALLENGES
Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will increase. Lucent expects that
new and different competitors will enter its markets as a result of both the
trend toward global expansion by foreign and domestic competitors as well as
continued changes in technology and public policy. These competitors may include
entrants from the telecommunications, software, data networking and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capability, technological expertise and well-recognized
brand names.
Lucent's sales continue to be highly seasonal. Many of Lucent's large customers
have historically delayed a disproportionate percentage of their capital
expenditures until the fourth quarter of the calendar year. Consequently,
Lucent's results of operations for the first three quarters of each calendar
year historically have, in the aggregate, been significantly less profitable
than the fourth quarter. However, Lucent has taken steps to manage the
seasonality by changing its year-end and its compensation programs for its
employees.
The purchasing behavior of Lucent's large customers has increasingly been
characterized by the use of fewer, but larger contracts, which contributes to
the variability of Lucent's results. To manage this fluctuation caused by the
buying behaviors of large customers, Lucent continues to seek out new types of
customers both within the United States and outside the United States, such as
competitive local exchange carriers, cable television network operators and
computer manufacturers.
Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues. Lucent is seeking to diversify its
customer base; nevertheless, Lucent expects that a significant portion of its
future revenues will continue to be generated by a limited number of customers.
The loss of any of these customers or any substantial reduction in orders by any
of these customers could materially adversely affect Lucent's operating results.
<PAGE>
11 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES - THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1996
Total revenues increased to $8,724 million, or 9.9% in the quarter ended
December 31, 1997 compared with the same quarter of 1996, due to gains in sales
from Systems for Network Operators, Microelectronic Products and Business
Communications Systems. The overall revenue growth was impacted by the
elimination of Consumer Products sales as a component of total revenues as well
as lower revenues from Other Systems and Products. On October 1, 1997, Lucent's
Consumer Products business became part of a venture with Philips. The decline in
Other Systems and Products was due to the sale of Lucent's ATS and Custom
Manufacturing Services ("CMS") businesses. Total revenue growth was primarily
driven by sales within the United States which grew by 11%. In addition, sales
outside the United States increased by 6%.
The following table presents Lucent's revenues by product line and the
approximate percentage of total revenues for the three months ended December 31,
1997 and 1996:
Three Months
Ended
December 31,
Dollars in Millions -------------------------------
1997 1996
------- -------
Systems for Network Operators............. $5,943 68% $5,026 63%
Business Communications Systems........... 1,930 22 1,733 22
Microelectronic Products.................. 775 9 671 9
Consumer Products......................... - - 330 4
Other Systems and Products................ 76 1 178 2
Total..................................... $8,724 100% $7,938 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $917 million, or 18.2% in
1997 compared with the same quarter in 1996. The increase was driven by sales of
switching and wireless systems, software, transport and access systems and
professional services. Demand for those products was driven by second line
subscriber growth in businesses and residences for Internet services and data
traffic.
<PAGE>
12 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales from Systems for Network Operators within the United States increased by
26.2% over the year-ago quarter. The revenue increase within the United States
was led by sales to competitive local exchange carriers, Regional Bell Operating
Companies, wireless providers and long distance carriers. Revenues generated
outside the United States were flat for the quarter ended December 31, 1997
compared with the same quarter in 1996. Revenues generated outside the United
States represented 25.7% of revenues from Systems for Network Operators for the
quarter ended December 31, 1997 compared with 30.4% in same quarter in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $197 million, or 11.4%
compared with the same quarter in 1996. This increase was led by increased sales
of messaging systems, including systems provided by the recently acquired Octel
Messaging Division, services and Systimax(R) networking systems. Revenues
generated outside the United States increased by 42.9%, largely due to growth in
the Europe/Middle East/Africa, Canada and Caribbean/Latin America regions.
Revenue from outside the United States represented approximately 18.7% of the
revenue for the quarter. For the quarter ended December 31, 1997, sales within
the United States increased 6.0% as compared to the same quarter of 1996.
On January 22, 1998, Lucent completed its acquisition of Prominet Corporation, a
participant in the rapidly emerging Gigabit Ethernet networking industry, in a
merger totaling $164 million worth of Lucent stock and options as well as
contingent obligations of $35 million in stock.
Sales of MICROELECTRONIC PRODUCTS increased $104 million, or 15.5% compared with
the same quarter in 1996 due to higher sales of customized chips for computing
and communications, including components for wireless telephones, local area
networks, data networking and high-end computer workstations. Increases in power
systems, optoelectronic components and the licensing of intellectual property
also contributed to the overall increase. Revenues generated within the United
States increased 24.8% compared to the same quarter in 1996, led by sales to
original equipment manufacturers ("OEMs"). Revenues generated outside the United
States increased 7.1%, driven by sales in the Europe/Middle East/Africa and
Caribbean/Latin America regions. Revenues from outside the United States
represented 48.8% of the Microelectronic Products sales in the quarter ended
December 31, 1997 compared with 52.6% for the same period of 1996.
On October 1, 1997, Lucent contributed its CONSUMER PRODUCTS unit to a venture
formed with Philips. Lucent has an initial equity interest of 40% in the venture
which is called Philips Consumer Communications, L.P.("PCC").
Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $102 million, or
57.3% compared with the same quarter in 1996. The reduction in revenues was
largely due to the sale of Lucent's ATS and CMS businesses.
Total costs increased $223 million, or 5.2% in 1997 compared with the same
quarter in 1996 primarily due to the increase in sales volume. As a percentage
of revenue, gross margin increased to 48.2% from 45.9% in the year-ago quarter.
The increase in gross margin percentage was due to overall favorable changes in
the revenue mix, including record software sales and increased intellectual
property revenues.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
13 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1996
Selling, general and administrative expenses as a percentage of revenues were
17.8% for the quarter ended December 31, 1997 as compared with 18.4% for the
same quarter in 1996.
Selling, general and administrative expenses increased $96 million, or 6.6%
compared with the same quarter in 1996. This increase is attributed to the
increase in sales volume, investment in growth initiatives and the
implementation of SAP, an integrated software platform for information systems.
Research and development expenses represented 9.5% of revenues for the quarter
ended December 31, 1997 as compared with 9.0% of revenues in the same quarter of
1996.
For the quarter ended December 31, 1997, research and development expenses
increased $195 million over the year-ago quarter. This increase was primarily
due to investments in high growth areas such as wireless, data networking,
optical networking and microelectronics.
The purchased in-process research and development expenses for the quarter
reflects $427 million of in-process research and development in connection with
the acquisition of Livingston compared with $79 million for in-process research
and development expenses for Agile Networks, Inc. for the same period in 1996.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31, 1996
Other income -- net increased $154 million for the quarter ended December 31,
1997 compared with the same quarter in 1996. This increase was primarily due to
the pre-tax gain of $149 million associated with the sale of Lucent's ATS
business.
Interest expense for the quarter ended December 31, 1997 was flat compared with
the same quarter in 1996.
The effective income tax rate of 46.4% for the quarter ended December 31, 1997
increased from the effective income tax rate of 38.6%. The increase was due to
the write-off of purchased in-process research and development expenses
associated with the acquisition of Livingston. Excluding the impact of the
purchased in-process research and development associated with the Livingston
acquisition, the effective income tax rate decreased to 36.0%. This decrease was
primarily due to tax impact of foreign activity.
<PAGE>
14 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $941 million, or 4.0%, from fiscal year-end 1997. This
overall increase was due to an increase of receivables of $922 million and an
increase in other assets of $643 million, offset by a decrease in inventories of
$322 million and a decrease in property, plant and equipment of $418 million.
The increase in receivables and decrease in inventories is consistent with the
cyclical nature of business, when receivables are at their highest levels and
inventories at their lowest levels at the close of the calendar year. The
increase in other assets and decrease in property, plant and equipment was
primarily due to Lucent's contribution of its Consumer Products business to PCC.
Total liabilities decreased $343 million, or 1.7% from fiscal year-end 1997.
This decrease was largely due to the pay down of commercial paper.
Working capital, defined as current assets less current liabilities, increased
$1,531 million from fiscal year-end 1997 primarily resulting from the increase
in accounts receivable as discussed above and the following reclassification of
short-term debt to long-term debt. On January 9, 1998, Lucent issued $300
million of 30 year debentures and reclassified the amount from debt maturing
within one year to long-term debt. The proceeds were used to pay down a portion
of Lucent's commercial paper during the second quarter of fiscal 1998.
Lucent expects that, from time to time, outstanding commercial paper balances
may be replaced with short- or long-term borrowings as market conditions permit.
At December 31, 1997, Lucent maintained approximately $5,200 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At December 31, 1997, approximately $5,000 million was unused. Future
financings will be arranged to meet Lucent's requirements with the timing,
amount and form of issue depending on the prevailing market and general economic
conditions. Lucent anticipates that borrowings under its bank credit facilities,
the issuance of additional commercial paper, cash generated from operations and
short- and long-term debt financings will be adequate to satisfy its future cash
requirements, although there can be no assurance that this will be the case.
Network operators, domestically and internationally, increasingly have required
their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
Lucent has increasingly provided or arranged long-term financing for customers.
In this regard, Lucent entered into a credit agreement in October 1996 to
provide Sprint Spectrum* Holdings LPC ("Sprint PCS") long-term financing of
$1,800 million for purchasing equipment and services for its personal
communications services ("PCS") network.
In May 1997, under the $1,800 million credit facility provided by Lucent to
Sprint PCS, Lucent closed transactions to lay off $500 million of loans and
undrawn commitments and $300 million of undrawn commitments to a group of
institutional investors and Sprint Corporation (a partner in Sprint PCS),
respectively. As of December, 31, 1997, all of these commitments were drawn down
by Sprint PCS. Of Lucent's remaining commitment of $1,000 million, about $150
million was drawn down by Sprint PCS as of December 31, 1997.
*Sprint Spectrum is a service mark of Sprint Communications Company, LP.
- -------------------------
<PAGE>
15 Form 10-Q - Part I
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of the additional $150 million of loans and
future loans and commitments to Sprint PCS.
In addition, as of September 30, 1997, Lucent had entered into agreements to
extend credit of up to an aggregate of approximately $850 million to other PCS
operators for possible future sales. During the quarter, commitments for $500
million, included in the $850 million, expired and were not extended. As of
December 31, 1997, no amounts had been advanced under the remaining agreement.
About $135 million was drawn down in January 1998. Lucent has proposed or
committed to provide financing where appropriate for its business, in addition
to the above arrangements. The ability of Lucent to arrange or provide financing
for network operators will depend on a number of factors, including Lucent's
capital structure and level of available credit.
Lucent believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory to Lucent and that it will be able to
obtain bid and performance bonds, to arrange or provide customer financing as
necessary, and to engage in hedging transactions on commercially acceptable
terms, although there can be no assurance that this will be the case.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations and financial
condition. Lucent manages its exposure to these market risks through its regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. Derivative financial instruments are viewed
as risk management tools and are not used for speculative or trading purposes.
In addition, derivative financial instruments are entered into with a
diversified group of major financial institutions in order to manage Lucent's
exposure to nonperformance on such instruments.
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of December 31, 1997 and
1996. The strategy employed by Lucent to manage its exposure to interest rate
fluctuations is unchanged from that date. Management does not foresee or expect
any significant changes in its exposure to interest rate fluctuations or in how
such exposure is managed in the near future.
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
Cash provided by operating activities decreased compared with the same period in
1996 due to a smaller decrease in inventory levels and a larger increase in
accounts receivable. The increase in receivables and decrease in inventories is
consistent with the seasonal nature of business.
Cash payments of $26 million were made for the quarter ended December 31, 1997
for the 1995 business restructuring charge. Of the 23,000 positions that Lucent
announced it would downsize and that are included in the 1995 business
restructuring charge, the workforce has been reduced by approximately 19,000
positions as of December 31, 1997.
Comparing the quarters ended December 31, 1997 and 1996, the reduction in cash
used in investing was due to proceeds from the sale of ATS this quarter, the
fact that no cash was used for the Livingston acquisition and a decrease in
capital expenditures. Capital expenditures, the largest component, were $261
million and $344 million for the three month periods ended December 31, 1997 and
December 31, 1996, respectively. Capital expenditures generally relate to
expenditures for equipment and facilities used in manufacturing and research and
development, including expansion of manufacturing capacity, and expenditures for
cost reduction efforts and international growth.
For the quarter ended December 31, 1997, cash used in financing activities
increased primarily due to the pay down of short-term borrowings.
The ratio of total debt to total capital (debt plus equity) was 44.2% at
December 31, 1997 compared to 55.4% at September 30, 1997.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
among AT&T, Lucent and NCR Corporation ("NCR") dated as of February 1, 1996, and
amended and restated as of March 29, 1996 ("Separation and Distribution
Agreement"), Lucent is responsible for all liabilities primarily resulting from
or related to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or
<PAGE>
17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
circumstances change. The amounts provided for in Lucent's consolidated
financial statements in respect to environmental reserves are the gross
undiscounted amount of such reserves, without deductions for insurance or third
party indemnity claims. In those cases where insurance carriers or third party
indemnitors have agreed to pay any amounts and management believes that
collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital and
other expenditures that will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in Lucent's reserves or will not have a material adverse effect on
Lucent's financial condition, results of operations or cash flows. Any amounts
of environmental costs that may be incurred in excess of those provided for at
December 31, 1997 cannot be determined.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects," anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the mix
of products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes which may affect the level of new
investments and purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in increasing use of
large, multi-year contracts; the cyclical nature of the Company's business; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing, financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this report
including the other sections referred to and also see the discussion in the
Company's Form 10-K for the year ended September 30, 1997 in Item 1 in the
section entitled "OUTLOOK-Forward Looking Statements" and the remainder of the
OUTLOOK section.
Competition:
See discussion above under KEY BUSINESS CHALLENGES.
<PAGE>
18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Dependence On New Product Development:
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, products, software and services successfully on a timely
basis and to reduce costs of existing systems, products, software and services.
The success of these and other new offerings is dependent on several factors,
including proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of the Company's competitors and
market acceptance. In addition, new technological innovations generally require
a substantial investment before any assurance is available as to their
commercial viability, including, in some cases, certification by international
and domestic standards-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
Lucent began work several years ago to prepare its products and its financial,
information and other computer-based systems for the Year 2000, including
replacing and/or updating existing legacy systems. Lucent believes it is taking
the necessary steps to resolve Year 2000 issues, however, given the potential
consequences of failure to resolve significant Year 2000 issues, there can be no
assurance that any one or more such failures would not have a material adverse
effect on Lucent. Lucent continues to evaluate the estimated costs associated
with the efforts to prepare for Year 2000 based on actual experience. While
these efforts will involve additional costs, Lucent believes, based on available
information, that it will be able to manage its total Year 2000 transition
without any material adverse effect on its business operations, products or
financial prospects.
Multi-Year Contracts:
Lucent has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with uncertainties affecting recognition
of revenues, stringent acceptance criteria, implementation of new technologies
and possible significant initial cost overruns and losses. See also discussion
above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, AND KEY BUSINESS
CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.
Growth Outside the U.S., Foreign Exchange and Interest Rates: Lucent intends to
continue to pursue growth opportunities in markets outside the U.S. In many
markets outside the U.S., long-standing relationships between potential
customers of Lucent and their local providers, and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such growth opportunities outside the U.S. may
require significant investments for an extended period before returns on such
investments, if any, are realized. Such projects and investments could be
adversely affected by reversals or delays in the opening of foreign markets to
new competitors, exchange controls, currency fluctuations, investment policies,
repatriation of cash, nationalization, social and political risks, taxation, and
other factors, depending on the country in which such opportunity arises.
Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. A significant change in the value of the dollar against the
currency of one or more countries where Lucent sells products to local customers
or makes purchases from local suppliers may materially adversely affect Lucent's
results. Lucent attempts to mitigate any such effects through the use of foreign
currency contracts, although there can be no assurances that such attempts will
be successful.
While Lucent hedges transactions with non-U.S. customers, the decline in value
of the Asia/Pacific currencies, or declines in currency values in other regions,
may, if not reversed, adversely affect future product sales because Lucent's
products may become more expensive to purchase for local customers doing
business in the countries of the affected currencies.
Legal Proceedings and Environmental:
See discussion above in Note 6 COMMITMENTS AND CONTINGENCIES.
RECENT PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP
97-2 provides guidance on when revenue should be recognized and in what amounts
for licensing, selling, leasing, or otherwise marketing computer software. SOP
97-2 is effective for financial statements for fiscal years beginning after
December 15, 1997. Earlier application for financial statements or information
that has not been issued is encouraged. Lucent is in the process of evaluating
if the adoption of SOP 97-2 will have an impact, if any, on its software revenue
recognition practices.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the current quarter, Lucent adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), as issued by the
Financial Accounting Standards Board. SFAS No. 128 simplifies the standards for
computing earnings per share and requires retroactive restatement of all prior
period earnings per share calculations. The table below reports an update to
Lucent's five year summary table as reported in the Company's Annual Report on
Form 10-K for the Fiscal Year ended September 30, 1997.
Five Year Summary
(Dollars in millions, except per share amounts)
(Unaudited)
Year Ended Nine Months Ended
September 30, September 30, Year Ended December 31,
------------- ----------------- -----------------------
1997 1996 1996 1995 1995 1994 1993
(1) (4) (1)
Earnings(loss)
per common share -
basic (2) 0.85 (1.37) 0.38 0.28 (1.65) n/a n/a
Earnings(loss)
per common share -
diluted (2) 0.84 (1.37) 0.38 0.28 (1.65) n/a n/a
Earnings(loss)
per common share -
Pro Forma(3) n/a (1.25) 0.35 0.24 (1.36) n/a n/a
(1) Includes pretax restructuring and other charges of $2,801 ($1,847 after
taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses.
(2) The calculation of earnings(loss) per common share - basic and
earnings(loss) per common share - diluted includes the retroactive
recognition to January 1, 1995 of the 524,624,894 shares owned by AT&T on
April 10, 1996.
(3) The calculation of earnings(loss) per common share on a pro forma basis
assumes that all 636,661,931 common shares outstanding on April 10, 1996
were outstanding since January 1, 1995 and gives no effect to the use of
proceeds from the IPO.
(4) Beginning September 30, 1996, Lucent changed its fiscal year-end from
December 31 to September 30, and reported results for the nine-month
transition period ended September 30, 1996.
<PAGE>
21 Form 10-Q - Part II
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 21, 1997 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits).
<PAGE>
22 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date February 13, 1998
By James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
23 Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>STATEMENT RE: COMPUTATION OF RATIOS
<TEXT>
Exhibit 12
Form 10-Q
For the Three
Months Ended
December 31, 1997
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
December 31, 1997
Earnings Before Income Taxes ................................ $ 1,478
Less Interest Capitalized during
the Period ................................................ 4
Less Undistributed Earnings of Less than 50%
Owned Affiliates .......................................... 3
Add Fixed Charges ........................................... 122
Total Earnings .............................................. $ 1,593
Fixed Charges
Total Interest Expense Including Capitalized Interest ....... $ 93
Interest Portion of Rental Expense .......................... 29
Total Fixed Charges ..................................... $ 122
Ratio of Earnings to Fixed Charges .......................... 13.1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FDS --
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the unaudited balance
sheet of Lucent at December 31, and the unaudited
consolidated statement of income for the
three-month period ended December 31, 1997 and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,225
<SECURITIES> 0
<RECEIVABLES> 6,639
<ALLOWANCES> 344
<INVENTORY> 2,604
<CURRENT-ASSETS> 13,256
<PP&E> 10,850
<DEPRECIATION> 6,121
<TOTAL-ASSETS> 24,752
<CURRENT-LIABILITIES> 9,962
<BONDS> 1,945
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 6
<OTHER-SE> 4,665
<TOTAL-LIABILITY-AND-EQUITY> 24,752
<SALES> 8,724
<TOTAL-REVENUES> 8,724
<CGS> 4,519
<TOTAL-COSTS> 4,519
<OTHER-EXPENSES> 2,811
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 1,478
<INCOME-TAX> 686
<INCOME-CONTINUING> 792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.21
</TABLE>
</TEXT>
</DOCUMENT>
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|
1998 | 0QTR1
| MDP | https://www.sec.gov/Archives/edgar/data/65011/0000065011-98-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000065011-98-000003.txt : 19980217
<SEC-HEADER>0000065011-98-000003.hdr.sgml : 19980217
ACCESSION NUMBER: 0000065011-98-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MEREDITH CORP
CENTRAL INDEX KEY: 0000065011
STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721]
IRS NUMBER: 420410230
STATE OF INCORPORATION: IA
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05128
FILM NUMBER: 98534017
BUSINESS ADDRESS:
STREET 1: 1716 LOCUST ST
CITY: DES MOINES
STATE: IA
ZIP: 50309
BUSINESS PHONE: 5152843000
FORMER COMPANY:
FORMER CONFORMED NAME: MEREDITH PUBLISHING CO
DATE OF NAME CHANGE: 19710317
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>12/31/97 10-Q FILING
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
Commission file number 1-5128
Meredith Corporation
(Exact name of registrant as specified in its charter)
Iowa 42-0410230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1716 Locust Street, Des Moines, Iowa 50309-3023
(Address of principal executive offices) (ZIP Code)
515 - 284-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
Common Stock, $1 par value 41,399,673
Class B Stock, $1 par value 11,444,370
- 1 -
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Meredith Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
December 31 June 30
Assets 1997 1997
- -----------------------------------------------------------------------------
(in thousands, except share data)
Current assets:
Cash and cash equivalents $ 512 $ 74,498
Marketable securities -- 50,382
Receivables, net 135,910 93,395
Inventories 30,125 30,273
Supplies and prepayments 12,086 9,491
Program rights 23,345 7,809
Deferred income taxes 11,921 11,916
Subscription acquisition costs 54,582 59,444
---------- --------
Total current assets 268,481 337,208
---------- --------
Property, plant and equipment 247,692 193,270
Less accumulated depreciation (109,285) (103,087)
---------- --------
Net property, plant and equipment 138,407 90,183
---------- --------
Subscription acquisition costs 36,465 32,703
Program rights 8,660 5,507
Other assets 26,020 21,951
Goodwill and other intangibles
(at original cost less accumulated amortization) 607,553 273,349
---------- --------
Total assets $1,085,586 $760,901
========== ========
See accompanying Notes to Interim Consolidated Financial Statements.
- 2 -
<PAGE>
(Unaudited)
December 31 June 30
Liabilities and Stockholders' Equity 1997 1997
- -----------------------------------------------------------------------------
(in thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 25,000 $ --
Current portion of long-term program
rights payable 24,238 11,004
Accounts payable 49,166 48,306
Accrued taxes and expenses 76,859 73,548
Unearned subscription revenues 145,116 145,102
---------- --------
Total current liabilities 320,379 277,960
---------- --------
Long-term debt 245,000 --
Long-term program rights payable 13,077 6,028
Unearned subscription revenues 94,579 95,883
Deferred income taxes 29,267 23,051
Other deferred items 35,691 31,049
---------- --------
Total liabilities 737,993 433,971
---------- --------
Stockholders' equity:
Series preferred stock, par value $1 per share
Authorized 5,000,000 shares; none issued -- --
Common stock, par value $1 per share
Authorized 80,000,000 shares; issued and
outstanding 40,901,721 at December 31 and
40,921,537 at June 30 (net of treasury shares,
26,033,526 at December 31 and 25,505,186
at June 30.) 40,902 40,922
Class B stock, par value $1 per share,
convertible to common stock
Authorized 15,000,000 shares; issued and
outstanding 11,960,113 at December 31 and
12,335,361 at June 30. 11,960 12,335
Retained earnings 297,014 276,243
Unearned compensation (2,283) (2,570)
---------- --------
Total stockholders' equity 347,593 326,930
---------- --------
Total liabilities and stockholders' equity $1,085,586 $760,901
========== ========
See accompanying Notes to Interim Consolidated Financial Statements.
- 3-
<PAGE>
Meredith Corporation and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
- ------------------------------------------------------------------------------
(in thousands, except per share)
Revenues (less returns and allowances):
Advertising $141,551 $111,766 $273,191 $216,100
Circulation 67,760 64,161 134,932 126,803
Consumer books 13,854 10,988 21,341 20,786
All other 25,719 22,857 50,319 45,263
-------- -------- -------- --------
Total revenues 248,884 209,772 479,783 408,952
-------- -------- -------- --------
Operating costs and expenses:
Production, distribution
and editorial 102,341 83,567 195,030 168,898
Selling, general and
administrative 94,384 91,338 196,073 177,217
Depreciation and amortization 9,294 5,587 17,386 11,227
-------- -------- -------- --------
Total operating costs and expenses 206,019 180,492 408,489 357,342
-------- -------- -------- --------
Income from operations 42,865 29,280 71,294 51,610
Interest income 298 1,175 766 1,554
Interest expense (4,250) (335) (6,717) (1,071)
-------- -------- -------- --------
Earnings from continuing operations
before income taxes 38,913 30,120 65,343 52,093
Income taxes 16,581 13,044 27,920 22,556
-------- -------- -------- --------
Earnings from continuing operations 22,332 17,076 37,423 29,537
Discontinued operation:
Net gain on disposition -- 27,693 -- 27,693
-------- -------- -------- --------
Net earnings $ 22,332 $ 44,769 $ 37,423 $ 57,230
======== ======== ======== ========
See accompanying Notes to Interim Consolidated Financial Statement.
- 4 -
<PAGE>
Meredith Corporation and Subsidiaries
Consolidated Statements of Earnings (Unaudited), continued
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
- ------------------------------------------------------------------------------
(in thousands, except per share)
Basic earnings per share:
Earnings from continuing operations $0.42 $0.32 $0.71 $0.55
Discontinued operation 0.00 0.52 0.00 0.52
------ ------ ------ ------
Net earnings per share $0.42 $0.84 $0.71 $1.07
====== ====== ====== ======
Average shares outstanding 52,980 53,615 53,048 53,666
====== ====== ====== ======
Diluted earnings per share:
Earnings from continuing operations $0.40 $0.31 $0.67 $0.53
Discontinued operation 0.00 0.50 0.00 0.50
------ ------ ------ ------
Net earnings per share $0.40 $0.81 $0.67 $1.03
====== ====== ====== ======
Average shares and common stock
equivalents outstanding 55,639 55,797 55,511 55,630
====== ====== ====== ======
Dividends paid per share $0.065 $0.055 $0.13 $0.11
====== ====== ====== ======
See accompanying Notes to Interim Consolidated Financial Statement.
- 5 -
<PAGE>
Meredith Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31 1997 1996
- -----------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net earnings $ 37,423 $ 57,230
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 17,386 11,227
Amortization of film contract rights 12,749 8,924
Gain on disposition, net of taxes -- (27,693)
Changes in assets and liabilities:
Accounts receivable (42,515) (4,653)
Inventories 148 6,785
Supplies and prepayments (2,124) (1,179)
Subscription acquisition costs 1,100 4,025
Accounts payable 860 (8,640)
Accruals 3,404 (5,230)
Unearned subscription revenues (1,290) (1,074)
Deferred income taxes 10,966 (1,021)
Other deferred items 4,064 2,935
-------- --------
Net cash provided by operating activities 42,171 41,636
-------- --------
Cash flows from investing activities:
Redemptions of marketable securities 50,371 --
Proceeds from disposition -- 123,275
Acquisitions of businesses (375,000) --
Additions to property, plant, and equipment (23,363) (7,693)
Purchases of marketable securities -- (20,060)
Change in other assets (3,689) (496)
-------- --------
Net cash (used) provided by investing activities (351,681) 95,026
-------- --------
Cash flows from financing activities:
Long-term debt incurred 270,000 --
Long-term debt retired -- (50,000)
Payments for film rental contracts (13,199) (9,792)
Proceeds from common stock issued 3,433 1,596
Purchase of company stock (18,496) (11,864)
Dividends paid (6,887) (5,898)
Other 673 1,630
-------- --------
Net cash provided (used) by financing activities 235,524 (74,328)
-------- --------
Net (decrease) increase in cash and cash equivalents (73,986) 62,334
Cash and cash equivalents at beginning of year 74,498 13,801
-------- --------
Cash and cash equivalents at end of period $ 512 $ 76,135
======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
- 6 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
a. General
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, which are of a
normal recurring nature and necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year. Certain prior-year amounts have
been restated to conform with current-year presentation.
b. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. Goodwill and other intangibles
Goodwill and other intangibles represent the excess of the purchase price over
the estimated fair values of tangible assets acquired in the purchases of
businesses. As of December 31, 1997, these assets primarily consist of
television Federal Communications Commission (FCC) licenses ($267.2 million),
goodwill ($171.4 million) and television network affiliation agreements ($137.9
million), and are presented net of related amortization on the balance sheet.
Virtually all of these assets were acquired subsequent to October 31, 1970, and
are being amortized by the straight-line method over the following periods: 40
years for television FCC licenses; 20 to 40 years for goodwill; and 15 to 40
years for network affiliation agreements. The company evaluates the
recoverability of its intangible assets as current events or circumstances
warrant to determine whether adjustments are needed to carrying values. Such
evaluation may be based on projected income and cash flows on an undiscounted
basis from the underlying business or from operations of related businesses.
Other economic and market variables are also considered in any evaluation.
d. Derivative financial instruments
Interest rate swap agreements entered into by the company are held for purposes
other than trading. The company uses the accrual method to account for all
interest rate swap agreements. Amounts due to or from counterparties are
recorded as an adjustment to interest expense in the periods in which they
accrue.
- 7 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
e. Other
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 replaces the presentation of
primary earnings per share (EPS) with basic EPS and diluted EPS. The
calculation of basic EPS is based on average actual common shares outstanding
and excludes common stock equivalents. Diluted EPS reflects the potential
dilution that could result from the issuance of common stock equivalents using
a different methodology than the previous calculation of primary EPS. SFAS No.
128 was adopted for the periods ending December 31, 1997. All prior-period EPS
calculations have been restated.
2. Acquisitions and disposition of broadcast television stations
On July 1, 1997, the company purchased the net assets of three television
stations affiliated with the Fox television network from First Media
Television, L. P. ("First Media"). The three stations were: KPDX-TV serving
the Portland, Ore. market; WHNS-TV serving the Greenville, S.C./Spartansburg,
S.C./Asheville, N.C. market; and KFXO-TV serving the Bend, Ore. market. The
total purchase price of the three stations was $216 million.
On September 4, 1997, the company acquired the net assets of WFSB-TV, a CBS
network-affiliated television station serving the Hartford/New Haven, Conn.
market, through an exchange of the assets of WCPX-TV in Orlando, Fla. The
asset exchange was with Post-Newsweek Stations, Inc. ("Post-Newsweek"), a
wholly-owned subsidiary of the Washington Post Company and included a $60
million cash payment to Meredith.
WCPX-TV was one of the four television stations which the company agreed in
January 1997 to acquire from First Media. However, in the Orlando, Fla.
market, the company already owned WOFL-TV, a Fox network-affiliated television
station. FCC regulations required the company to dispose of one of these
television stations since the regulations currently prohibit the ownership of
more than one television station in a market. Therefore, for the purposes of
effecting the exchange, the company purchased the net assets of WCPX-TV, a CBS
network-affiliated television station from First Media for $219 million on
September 4, 1997, prior to the exchange for WFSB-TV. The net purchase price
of WFSB-TV to the company was $159 million.
The purchase method of accounting was used to record the acquisitions of the
four television stations in the fiscal 1998 first quarter. Assets acquired in
the purchases of the four television stations included the following
intangibles: FCC licenses of $212.4 million; network affiliation agreements of
$90.7 million; and goodwill of $40.3 million. FCC licenses and goodwill are
being amortized over periods not exceeding 40 years. Network affiliation
contracts are being amortized over periods ranging from 15 to 40 years. The
acquisitions also included property, plant and equipment and film program
rights and payables. (See Note 4 for information on the debt incurred to
finance these acquisitions.)
- 8 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
The results of operations for the three First Media stations, purchased on July
1, 1997, and for WFSB-TV, purchased on September 4, 1997, are included in the
company's consolidated operating results from their respective acquisition
dates.
Pro forma results of operations for the six-month periods ended December 31,
1997 and 1996, as if the acquisitions had occurred respectively at the
beginning of each period are as follows:
Six months ended
December 31
------------------
Consolidated 1997 1996
------------ -------- --------
Total revenue $485,939 $450,715
======== ========
Earnings from
continuing operations $ 37,398 $ 29,809
======== ========
Net earnings $ 37,398 $ 57,502
======== ========
Earnings per share:
Earnings from
continuing operations
Basic $ .71 $ .56
======== ========
Diluted $ .67 $ .54
======== ========
Net earnings
Basic $ .71 $ 1.07
======== ========
Diluted $ .67 $ 1.03
======== ========
3. Inventories
Major components of inventories are summarized below. Of total inventory
values shown, approximately 52 percent, are under the LIFO method at December
31, 1997, and June 30, 1997.
- 9 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
(unaudited)
December 31 June 30
1997 1997
----------- --------
(in thousands)
Raw materials $20,715 $16,787
Work in process 10,861 14,950
Finished goods 7,992 5,874
-------- --------
39,568 37,611
Reserve for LIFO cost valuation (9,443) (7,338)
-------- --------
Total $30,125 $30,273
======== ========
4. Long-term debt and interest rate swap agreements
At December 31, 1997, long-term debt outstanding totaled $270 million under a
credit agreement with a group of seven banks led by Wachovia Bank, N.A. as
agent. This debt was incurred in the first quarter of fiscal 1998 to finance
the acquisitions of the four television stations. The credit agreement
consists of a $210 million, 60-month term loan and a $150 million, 60-month
revolving credit facility. On July 1, 1997, $125 million was borrowed under
the revolving credit facility. On September 4, 1997, the company borrowed the
full amount of the term loan ($210 million) and reduced the borrowing under the
revolving credit facility to $60 million, for total debt of $270 million. The
term loan requires the following annual principal payments on May 31, 1998
through 2002, respectively: $25 million, $40 million, $45 million, $50 million
and $50 million. The revolving credit facility is due and payable on July 1,
2002. The credit agreement includes certain financial covenants. These
include requirements that the ratio of consolidated funded debt-to-EBITDA
(earnings before interest, taxes, depreciation and amortization) be less than
3.5 to 1.0 and the fixed-charge-coverage ratio not be less than 2.0 to 1.0. As
of December 31, 1997, the company was in compliance with all debt covenants.
Interest rates under the credit agreement are based on one of the following,
plus applicable margins: adjusted LIBOR; the higher of Wachovia Bank's prime
rate or the overnight federal funds rate; or money market rates. Meredith is
utilizing interest rate swap contracts to manage interest cost and risk
associated with possible increases in variable interest rates. The company has
entered into two interest rate swap contracts with effective dates of September
30, 1997, for purposes other than trading. Under these contracts, Meredith
pays fixed rates of interest while receiving floating rates of interest based
on three month LIBOR. The notional amount of indebtedness under the swap
contracts was initially $200 million. The remaining debt of $70 million
carried an interest rate of approximately 6.1 percent until December 31, 1997.
Then the notional amount under the contracts increased to cover all of the debt
outstanding. As a result, Meredith will have an effective borrowing cost of
- 10 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
approximately 6.75 percent (including applicable margins and fees) over the
entire term of the loan agreement. The weighted average interest rate at
December 31, 1997, was 6.75 percent.
The swap contracts terminate on March 30, 2001, and the notional amount of
indebtedness varies over the terms of the contracts. The average notional
amount of indebtedness outstanding in fiscal 1998 through 2001 under the
contracts is as follows: $240 million, $220 million, $153 million and $70
million. The company is exposed to credit-related losses in the event of
nonperformance by counterparties to the swap contracts. Management does not
expect any counterparties to fail to meet their obligations given the strong
creditworthiness of the counterparties to the agreements.
The fair value of the interest rate swap agreements is the estimated amount
that the company would pay or receive to terminate the swap agreements. At
December 31, 1997, this value was not material as there has been no significant
change in interest rates or creditworthiness of the swap counterparties since
the swap agreements were entered into.
5. Earnings per share
Reconciliations of the earnings from continuing operations and shares used
in the basic and diluted EPS computations follow:
Three months ended December 31, 1997 December 31, 1996
------------------------ ------------------------
Per Per
(in thousands except Share Share
per share) Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------
Earnings from continuing
operations $22,332 $17,076
Basic EPS
Earnings available to
common stockholders 22,332 52,980 $ .42 17,076 53,615 $ .32
===== =====
Effect of dilutive
stock options - 2,659 - 2,182
------- ------ ------- ------
Diluted EPS
Earnings available to
common stockholders
plus assumed
conversions $22,332 55,639 $ .40 $17,076 55,797 $ .31
======= ====== ===== ======= ====== =====
- 11 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Six months ended December 31, 1997 December 31, 1996
------------------------ ------------------------
Per Per
(in thousands except Share Share
per share) Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------
Earnings from continuing
operations $37,423 $29,537
Basic EPS
Earnings available to
common stockholders 37,423 53,048 $ .71 29,537 53,666 $ .55
===== =====
Effect of dilutive
stock options - 2,463 - 1,964
------- ------ ------- ------
Diluted EPS
Earnings available to
common stockholders
plus assumed
conversion $37,423 55,511 $ .67 $29,537 55,630 $ .53
======= ====== ===== ======= ====== =====
Options to purchase 52,000 shares of common stock at $34.78 and 26,400 shares
of common stock at $35.03 were outstanding at December 31, 1997, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of $34.73 of the common shares during
the latest quarter.
Options to purchase 58,400 shares of common stock at $26.37 and 50,000 shares
of common stock at $25.84 were outstanding at December 31, 1996, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of $25.42 of the common shares during
the latest quarter.
Options to purchase 145,000 shares were exercised during the six months ended
December 31, 1997 (5,600 shares in the six months ended December 31, 1996).
6. Industry segment information
a. Nature of operations
Meredith Corporation is a diversified media company primarily focused on the
home and family marketplace. The company's principal businesses are magazine
publishing and television broadcasting. Operating profits of the publishing
and broadcasting segments were 46 percent and 51 percent, respectively, of
total operating profit before unallocated corporate expenses in the six months
ended December 31, 1997. Magazine operations accounted for more than 90
percent of the revenues and operating profit of the publishing segment, which
- 12 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
also includes book publishing and brand licensing, during that time period.
Better Homes and Gardens is the most significant trademark to the publishing
segment and is used extensively in magazine and book publishing and licensing
operations. The company also operates a residential real estate marketing and
franchising business under the Better Homes and Gardens trademark. Meredith's
operations are diversified geographically within the United States, and the
company has a broad customer base.
Advertising and magazine circulation revenues accounted for approximately 57
percent and 28 percent, respectively, of the company's revenues in the first
half of fiscal 1998. Revenues and operating results can be affected by changes
in the demand for advertising and/or consumer demand for our products.
National and local economic conditions largely affect the overall industry
levels of advertising revenues. Magazine circulation revenues are generally
affected by national and/or regional economic conditions and competition from
other forms of media.
b. Revenues, operating profit and depreciation and amortization by industry
segment are shown below:
(unaudited) (unaudited)
Three Months Six Months
Ended December 31 Ended December 31
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Revenues
Publishing $176,418 $160,679 $350,719 $317,752
Broadcasting 66,055 43,400 116,204 78,879
Real Estate 6,411 5,693 12,860 12,321
-------- -------- -------- --------
Total revenues $248,884 $209,772 $479,783 $408,952
======== ======== ======== ========
Operating profit
Publishing $ 21,282 $ 17,648 $ 38,543 $ 31,300
Broadcasting 26,527 17,735 42,301 30,201
Real Estate 774 469 2,324 2,012
Unallocated corporate expense (5,718) (6,572) (11,874) (11,903)
-------- -------- -------- --------
Income from operations 42,865 29,280 71,294 51,610
Interest income 298 1,175 766 1,554
Interest expense (4,250) (335) (6,717) (1,071)
-------- -------- -------- --------
Earnings from continuing
operations before income
taxes 38,913 30,120 65,343 52,093
Income taxes 16,581 13,044 27,920 22,556
-------- -------- -------- --------
Earnings from
continuing operations $ 22,332 $ 17,076 $ 37,423 $ 29,537
======== ======== ======== ========
- 13 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Depreciation and amortization
Publishing $ 2,314 $ 2,172 $ 4,554 $ 4,379
Broadcasting 6,471 2,924 11,858 5,842
Real Estate 144 129 283 267
Unallocated corporate 365 362 691 739
-------- -------- -------- --------
Total depreciation
and amortization $ 9,294 $ 5,587 $ 17,386 $ 11,227
======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following discussion compares the results of operations of Meredith
Corporation and subsidiaries (Meredith or the company) for the second quarter
and first six months of fiscal 1998 to the comparable periods in the prior
year. This commentary should be read in conjunction with the consolidated
financial statements presented elsewhere in this report and with the company's
Form 10-K for the year ended June 30, 1997. All per-share amounts are computed
on a post-tax basis and reflect a two-for-one stock split in March 1997.
This section contains certain forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated. Reader's are referred to Management's
Discussion and Analysis in the company's Form 10-K for the year ended June 30,
1997, for a summary of such risks and uncertainties.
Significant Events
On July 1, 1997, Meredith completed the acquisition of three television
stations from First Media Television, L.P., for $216 million. The stations
are: KPDX-Portland, Ore., KFXO-Bend, Ore. and WHNS-Greenville,
S.C./Spartanburg, S.C./Asheville, N.C. All three stations are affiliates of
the FOX television network. On September 4, 1997, Meredith acquired and then
exchanged the net assets of the fourth First Media station, WCPX-TV in Orlando,
for WFSB-TV, a CBS network-affiliated television station serving the
Hartford/New Haven, Conn. market. WFSB-TV was acquired from Post-Newsweek
Stations, Inc. through an exchange of assets plus a $60 million cash payment to
Meredith. The result was a net cost to the company of $159 million for WFSB.
The asset exchange was necessitated by Federal Communications Commission (FCC)
regulations which prohibit ownership of multiple stations in one market. The
company owns WOFL-TV, a FOX network affiliate serving Orlando.
- 14 -
<PAGE>
Consolidated
- ------------
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands, except per share)
Total revenues $248,884 $209,772 $479,783 $408,952
======== ======== ======== ========
Income from operations $ 42,865 $ 29,280 $ 71,294 $ 51,610
======== ======== ======== ========
Earnings from continuing
operations $ 22,332 $ 17,076 $ 37,423 $ 29,537
======== ======== ======== ========
Discontinued operations $ -- $ 27,693 $ -- $ 27,693
======== ======== ======== ========
Net earnings $ 22,332 $ 44,769 $ 37,423 $ 57,230
======== ======== ======== ========
Basic earnings per share:
Earnings from continuing
operations $ 0.42 $ 0.32 $ 0.71 $ 0.55
======== ======== ======== ========
Net earnings $ 0.42 $ 0.84 $ 0.71 $ 1.07
======== ======== ======== ========
Diluted earnings per share:
Earnings from continuing
operations $ 0.40 $ 0.31 $ 0.67 $ 0.53
======== ======== ======== ========
Net earnings $ 0.40 $ 0.81 $ 0.67 $ 1.03
======== ======== ======== ========
Net earnings of $22.3 million, or 40 cents per diluted share, were recorded in
the quarter ended December 31, 1997, compared to net earnings of $44.8 million,
or 81 cents per diluted share, in the prior-year second quarter. For the six
months ended December 31, 1997, net earnings were $37.4 million, or 67 cents
per diluted share, compared to net earnings of $57.2 million, or $1.03 per
diluted share, in the prior-year period. Net earnings for both the quarter and
six months ended December 31, 1996, included a post-tax gain of $27.7 million,
or 50 cents per diluted share, from the sale of the discontinued cable
operations.
Earnings from continuing operations for the second quarters ended December 31,
1997 and 1996, were $22.3 million, or 40 cents per diluted share, and $17.1
million, or 31 cents per diluted share, respectively. Earnings from continuing
operations for the comparative six-month periods were $37.4 million, or 67
cents per diluted share, in fiscal 1998 and $29.5 million, or 53 cents per
diluted share, in the prior-year period. Fiscal 1998 diluted earnings per
share from continuing operations increased 29 percent for the second quarter
and 26 percent for the six-month period compared to the prior-year periods.
- 15 -
<PAGE>
Diluted earnings per share are calculated based on the average number of common
shares and common stock equivalents outstanding in the period. Common stock
equivalents represent the potential dilution from stock options outstanding.
The basic earnings per share calculations include only the average number of
actual common shares outstanding in the period. These calculations are
presented in accordance with Statement of Financial Standards No. 128,
"Earnings per Share," which was adopted for the periods ending December 31,
1997. Prior to its adoption, the company reported primary earnings per share,
the calculation of which was not materially different from the diluted earnings
per share currently reported. All prior-period earnings per share calculations
have been restated.
Revenues increased 19 percent in the quarter and 17 percent in the six-month
period due to the first quarter acquisition of four television stations and
higher publishing revenues. The increase in publishing revenues reflected
higher magazine advertising and circulation revenues. Comparable revenues,
excluding the new stations, increased nearly 10 percent in both periods.
Operating costs increased in both periods due to the addition of the four
television stations, growth in existing magazine titles and custom publishing
volumes, and increased investment in newer magazine titles and television
programming efforts. Income from operations increased 46 percent in the
quarter and 38 percent for the year-to-date period. The operating profit
margin grew from 14 percent in the fiscal 1997 second quarter to 17 percent in
the current quarter. For the six months ended December 31, 1997, the operating
profit margin was 15 percent compared to 13 percent in the prior-year period.
The margin improvement reflected increased ad revenues from publishing and the
addition of the four television stations. Depreciation and amortization
expenses increased in total and as a percentage of revenues due to the
amortization of intangibles associated with the acquisition of the four
television stations.
Debt incurred for the acquisitions of the four television stations resulted in
net interest expense in the current quarter and year-to-date periods versus net
interest income in the prior-year periods. Overall, management estimates that
the broadcasting acquisitions were slightly accretive to earnings per share in
the quarter and year-to-date periods. This calculation includes the after-tax
effects of the stations' operating profits after amortization of intangibles,
interest expense on debt and estimated interest income forgone from cash
available for investment. Management had initially projected dilution from the
acquisitions of 8 to 10 cents per share in fiscal 1998. Current projections
indicate expectations of little to no dilution in fiscal 1998. The improvement
results from a lower than anticipated interest rate on debt, improved operating
performance by the stations and lower amortization expense based on final
appraisals.
The company's effective tax rate was approximately 42.6 percent in the current
quarter and six-month period compared with 43.3 percent in the prior-year
periods. The decline reflects an increase in currently estimated fiscal year
earnings, which lessens the effect of nondeductible items on the overall tax
rate.
- 16 -
<PAGE>
Publishing
- ----------
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Revenues
--------
Magazine advertising $ 78,984 $ 70,501 $163,162 $141,061
Magazine circulation 67,760 64,161 134,932 126,803
Consumer book 13,854 10,988 21,341 20,786
Other 15,820 15,029 31,284 29,102
-------- -------- -------- --------
Total revenues $176,418 $160,679 $350,719 $317,752
======== ======== ======== ========
Operating profit $ 21,282 $ 17,648 $ 38,543 $ 31,300
======== ======== ======== ========
Publishing revenues increased 10 percent compared to the prior-year quarter and
six-month period primarily due to increased magazine advertising revenues.
Magazine advertising revenues grew 12 percent in the second quarter and 15
percent in the six-month period ended December 31, 1997, as most titles
reported an increase in ad pages. Better Homes and Gardens and Ladies' Home
Journal, the company's two largest circulation titles, each reported double-
digit percentage growth in ad revenues in both the quarter and year-to-date
period primarily due to increased ad pages. Traditional Home, Wood, Golf for
Women and Crayola Kids magazines also reported strong ad revenue growth in both
periods primarily due to additional ad pages sold.
Magazine circulation revenues increased 6 percent in both the quarter and the
fiscal year-to-date period. Increased newsstand sales of the Better Homes and
Gardens Special Interest Publications and sales of other special and custom
issues were the biggest factors in the second quarter growth. Increased
subscription revenues due to new titles and higher average prices for several
existing titles, combined with the higher newsstand revenues to result in the
year-to-date increase. Strong sales of the Better Homes and Gardens annuals
and Home Improvement 1-2-3, a book developed for The Home Depot, led to
increased consumer book revenues in the quarter. In the year-to-date period,
the second quarter revenue increase was offset by lower first quarter revenues
from lower unit sales of the 11th edition of the Better Homes and Gardens New
Cook Book, that was introduced in August 1996.
Publishing operating profit was up 21 percent in the fiscal 1998 second quarter
and 23 percent for the fiscal year-to-date. The improvements were largely a
result of increased operating profit from magazine publishing due to higher ad
revenues. Lower average paper prices and favorable circulation results, due to
the aforementioned revenue increases, also contributed to the improvements.
Paper is a significant expense of the Publishing segment. Despite a paper
price increase of approximately seven percent on July 1, 1997, average paper
prices were lower in the current-year periods due to the timing of price
decreases in the prior fiscal year. Major suppliers increased coated
- 17 -
<PAGE>
groundwood paper prices approximately five percent on January 1, 1998. Coated
groundwood paper currently accounts for about two-thirds of the company's paper
usage. The price of paper is driven by overall market conditions and,
therefore, is difficult to predict. However, at this time, management does not
anticipate any further increases in paper prices until the first half of fiscal
1999.
Broadcasting
- ------------
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Revenues
--------
Advertising $ 62,567 $ 41,265 $110,029 $ 75,039
Other 3,488 2,135 6,175 3,840
-------- -------- -------- --------
Total revenues $ 66,055 $ 43,400 $116,204 $ 78,879
======== ======== ======== ========
Operating profit $ 26,527 $ 17,735 $ 42,301 $ 30,201
======== ======== ======== ========
Revenues increased 52 percent in the fiscal 1998 second quarter and 47 percent
in the six months ended December 31, 1997, due to the first quarter acquisition
of four television stations. Among comparable stations, KPHO-Phoenix and KVVU-
Las Vegas reported strong advertising revenue growth in both the quarter and
six-month period. However, second quarter ad revenues declined at most of the
other comparable stations primarily due to the prior-year benefit of strong
political advertising. Operating profit increased 50 percent in the second
quarter and 40 percent in the six-month period including results of the newly-
acquired stations. Excluding the new stations, broadcasting reported record
operating profits in both periods. The improvement in comparable stations'
results for the six-month period primarily reflected higher advertising
revenues. Lower programming costs from one-time eliminations of certain
programming at WOFL-Orlando and KPHO-Phoenix were the biggest factor in the
improvement for the quarter.
Real Estate
- ------------
Three Months Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Total revenues $ 6,411 $ 5,693 $ 12,860 $ 12,321
======== ======== ======== ========
Operating profit $ 774 $ 469 $ 2,324 $ 2,012
======== ======== ======== ========
- 18 -
<PAGE>
Revenues and operating profit increased in both the quarter and six months
ended December 31, 1997, largely due to higher transaction fee revenues,
resulting from a stronger home re-sale market.
Liquidity and Capital Resources
Consolidated
- ------------
Six months ended December 31 1997 1996
---------------------------- --------- --------
(in thousands)
Net earnings $ 37,423 $ 57,230
========= ========
Cash flows from operations $ 42,171 $ 41,636
========= ========
Cash flows from investing $(351,681) $ 95,026
========= ========
Cash flows from financing $ 235,524 $(74,328)
========= ========
Net cash flows $ (73,986) $ 62,334
========= ========
EBITDA $ 88,680 $ 62,837
========= ========
Cash and cash equivalents decreased by $74.0 million in the first six months of
fiscal 1998 compared to an increase in cash of $62.3 million in the comparable
prior-year period. The change reflected the acquisition of four television
stations in the current period and the sale of the discontinued cable operation
in the prior-year period. Cash provided by operating activities increased
slightly as higher earnings were nearly offset by increases in accounts
receivable related to the television station acquisitions and increased
publishing revenues. The acquisition of the television stations also resulted
in substantial increases in other balance sheet items from June 30, 1997 to
December 31, 1997, including: program rights; property, plant and equipment;
goodwill and other intangibles; and program rights payable.
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is often used to analyze and compare companies on the
basis of operating performance and cash flow. EBITDA for the first six months
of fiscal 1998 increased 41 percent from the prior-year period due to improved
operating results and the acquisition of the four television stations. EBITDA
is not adjusted for all noncash expenses or for working capital changes,
capital expenditures or other investment requirements. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
- 19 -
<PAGE>
At December 31, 1997, long-term debt outstanding totaled $270 million under a
credit agreement with a group of seven banks led by Wachovia Bank, N.A. as
agent. This debt was incurred in the first quarter of fiscal 1998 to finance
the acquisitions of the four television stations. The credit agreement
consists of a $210 million, 60-month term loan and a $150 million, 60-month
revolving credit facility. Currently the company has debt of $270 million
under this agreement ($210 million term loan and $60 million revolving credit).
The term loan requires the following annual principal payments on May 31, 1998
through 2002, respectively: $25 million, $40 million, $45 million, $50 million
and $50 million. The revolving credit facility is due and payable on July 1,
2002. Funds for payments of interest and principal on the debt are expected to
be provided by cash generated from future operating activities. The credit
agreement includes certain financial covenants. These include requirements
that the ratio of consolidated funded debt-to-EBITDA be less than 3.5 to 1.0
and the fixed-charge-coverage ratio not be less than 2.0 to 1.0. As of
December 31, 1997, the company was in compliance with all debt covenants.
Interest rates under the credit agreement are based on one of the following,
plus applicable margins: adjusted LIBOR; the higher of Wachovia Bank's prime
rate or the overnight federal funds rate; or money market rates. Meredith has
utilized interest rate swap contracts to manage interest cost and risk
associated with possible increases in variable interest rates. The company
entered into two interest rate swap contracts with effective dates of September
30, 1997, for purposes other than trading. Under these contracts, Meredith
pays fixed rates of interest while receiving floating rates of interest based
on three-month LIBOR. The notional amount of indebtedness under the swap
contracts was initially $200 million. The remaining debt of $70 million
carried an interest rate of approximately 6.1 percent until December 31, 1997.
Then the notional amount under the contracts increased to cover all of the debt
outstanding. As a result, Meredith will have an effective borrowing cost of
approximately 6.75 percent (including applicable margins and fees) over the
entire term of the loan agreement. The swap contracts terminate on March 30,
2001, and the notional amount of indebtedness varies over the terms of the
contracts. The company is exposed to credit-related losses in the event of
nonperformance by counterparties to the swap contracts. Management does not
expect any counterparties to fail to meet their obligations given the strong
creditworthiness of the counterparties to the agreements.
In the first six months of fiscal 1998, the company spent $18.5 million for the
repurchase of 592,000 shares of Meredith Corporation common stock at then
current market prices. This compares with spending of $11.9 million for the
repurchase of 533,000 shares in the comparable prior-year period. In November
1997 the board of directors authorized the repurchase of an additional one
million shares of stock subject to market conditions. As of December 31, 1997,
approximately 1.7 million shares could be repurchased under existing
authorizations by the board of directors. Meredith has entered into an
agreement to repurchase approximately 600,000 shares in the next twelve months
under these authorizations. The status of the repurchase program is reviewed at
each quarterly board of directors meeting. The company expects to continue to
repurchase shares in the foreseeable future, subject to market conditions.
Dividends paid in the first six months of fiscal 1998 were $6.9 million, or 13
cents per share, compared with $5.9 million, or 11 cents per share, in the
prior-year period. On February 2, 1998, the board of directors increased the
quarterly dividend by 8 percent (one-half cent per share) to 7 cents per share
effective with the dividend payable on March 13, 1998. On an annual basis, the
- 20 -
<PAGE>
effect of this quarterly dividend increase would be to increase dividends paid
by approximately $1.1 million at the current number of shares outstanding.
Spending for property, plant and equipment increased to $23.4 million in the
first six months of fiscal 1998 from $7.7 million in the prior-year period.
The increase primarily reflected higher spending for the construction of a new
office building and related improvements in Des Moines. Higher spending for
computer hardware and software and broadcasting technical equipment also
contributed. Capital expenditures for fiscal 1998 are expected to be
approximately double the fiscal 1997 spending level. Fiscal 1998 spending will
include approximately $24 million for the completion of the Des Moines building
project. Fiscal 1997 spending for this project totaled $11 million. Other
significant spending in fiscal 1998 will relate to new computer systems, the
introduction of local news programming at three television stations and a
building remodeling project at one television station. Funds for the new Des
Moines building and other capital expenditures are expected to be provided by
available cash, including cash from operating activities or, if necessary,
borrowings under credit agreements.
At this time, management expects that cash on hand, internally-generated cash
flow and debt from credit agreements will provide funds for any additional
operating and recurring cash needs (e.g., working capital, cash dividends) for
foreseeable periods.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on November 10, 1997, at the
Company's headquarters in Des Moines, Iowa.
(b) The name of each director elected at the Annual Meeting is shown under
Item 4.(c). The other directors whose terms of office continued after
the meeting were: Pierson M. Grieve, Joel W. Johnson, Robert E. Lee,
Richard S. Levitt, E. T. Meredith III, Jack D. Rehm and Barbara S.
Uehling.
(c)(1) Proposal 1: Election of four Class II directors for terms expiring in
2000. Each nominee was elected in uncontested elections by the votes
cast as follows:
Number of shareholder votes*
----------------------------
For Withheld
---------- --------
Class II directors
Herbert M. Baum 152,017,377 637,140
Frederick B. Henry 152,037,028 617,489
William T. Kerr 152,030,235 624,282
Nicholas L. Reding 152,017,740 636,777
- 21 -
<PAGE>
(c)(2) Proposal 2: Election of one Class III director for a term expiring
in 1998. The nominee was elected in an uncontested election by the
votes cast as follows:
Number of shareholder votes*
----------------------------
For Withheld
---------- --------
Class III director
Mary Sue Coleman 151,801,014 853,503
*As specified on the proxy card, if no vote For or Withhold was
specified, the shares were voted For the election of the named
director.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27) Financial Data Schedule
99) Additional financial information from the Company's first quarter
press release dated January 20, 1998.
(b) Reports on Form 8-K
No Form 8-K was filed during the quarter ended December 31, 1997.
- 22 -
<PAGE>
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.
MEREDITH CORPORATION
Registrant
(Stephen M. Lacy)
Stephen M. Lacy
Vice President - Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: February 12, 1998
- 23 -
<PAGE>
Index to Exhibits
Exhibit
Number Item
------- -----------------------------------------------------------
27 Financial Data Schedule
99 Additional financial information from the Company's third
quarter press release dated January 20, 1998.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FDS EXHIBIT FOR 12/31/97 10-Q FILING
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the
Consolidated Balance Sheet at December 31, 1997 and the Consolidated Statement
of Earnings for the six months ended December 31, 1997 of Meredith Corporation
and Subsidiaries AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000065011
<NAME> MEREDITH CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 512
<SECURITIES> 0
<RECEIVABLES> 135910<F1>
<ALLOWANCES> 0
<INVENTORY> 30125
<CURRENT-ASSETS> 268481
<PP&E> 247692
<DEPRECIATION> 109285
<TOTAL-ASSETS> 1085586
<CURRENT-LIABILITIES> 320379
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 52862
<OTHER-SE> 294731
<TOTAL-LIABILITY-AND-EQUITY> 1085586
<SALES> 479783
<TOTAL-REVENUES> 479783
<CGS> 195030
<TOTAL-COSTS> 195030
<OTHER-EXPENSES> 17386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6717
<INCOME-PRETAX> 65343
<INCOME-TAX> 27920
<INCOME-CONTINUING> 37423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37423
<EPS-PRIMARY> .71
<EPS-DILUTED> .67
<FN>
<F1>Net of allowances
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 99 FOR 12/31/97 10-Q FILING
<TEXT>
Exhibit 99
----------
MEREDITH CORPORATION
FISCAL 1998 SECOND QUARTER AND YEAR-TO-DATE
EARNINGS PER SHARE AT-A-GLANCE
(Note: All per-share figures reflect a 2-for-1 stock split effective
March 18, 1997)
- -- The chart below depicts comparable quarterly and fiscal-year earnings
per share before special items and discontinued operations:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year
-------- -------- -------- -------- -----------
F1993 .06 .09 .10 .10 .35
F1994 .08 .13 .16 .13 .50
F1995 .14 .19 .18 .20 .71
F1996 .17 .22 .24 .28 .91
F1997 .22 .31 .33 .36 1.22
F1998 .27 .40
- -- Fiscal 1998 second quarter earnings per share from continuing operations
were a record 40 cents,* compared to 31 cents in the prior year.
- -- Fiscal 1998 second quarter net earnings per share also were 40 cents, as
there were no special items in the period. Prior-year second quarter net
earnings per share were 81 cents, including a gain in discontinued
operations of 50 cents per share from the sale of the company's cable
operations.
- -- For the first half of fiscal 1998, earnings per share from continuing
operations were a record 67 cents, versus fiscal 1997 earnings per share
from continuing operations of 53 cents.
- -- Fiscal 1998 year-to-date net earnings per share also were 67 cents. Net
earnings per share for the prior-year period were $1.03, including the
cable gain.
* All per-share figures used in the text of this release are diluted earnings
per share, consistent with the way Meredith Corporation has reported
earnings in the past.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| MEE | https://www.sec.gov/Archives/edgar/data/37748/0000892569-98-000756.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000892569-98-000756.txt : 19980318
<SEC-HEADER>0000892569-98-000756.hdr.sgml : 19980318
ACCESSION NUMBER: 0000892569-98-000756
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980317
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FLUOR CORP/DE/
CENTRAL INDEX KEY: 0000037748
STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600]
IRS NUMBER: 950740960
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-07775
FILM NUMBER: 98567523
BUSINESS ADDRESS:
STREET 1: 3353 MICHELSON DR
CITY: IRVINE
STATE: CA
ZIP: 92730
BUSINESS PHONE: 7149752000
FORMER COMPANY:
FORMER CONFORMED NAME: FLUOR CORP LTD
DATE OF NAME CHANGE: 19710624
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED JANUARY 31, 1998
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to______________
Commission File Number: 1-7775
FLUOR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0740960
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
3353 Michelson Drive, Irvine, CA 92698
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(714) 975-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
As of February 28, 1998 there were 82,075,374 shares of common stock
outstanding.
<PAGE> 2
FLUOR CORPORATION
FORM 10-Q
JANUARY 31, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
-------------------------------------------------------------------------------
<S> <C>
Part I: Financial Information
Condensed Consolidated Statement of Earnings for the Three Months
Ended January 31, 1998 and 1997.......................................2
Condensed Consolidated Balance Sheet at January 31, 1998 and
October 31, 1997.......................................................3
Condensed Consolidated Statement of Cash Flows for the Three
Months Ended January 31, 1998 and 1997.................................5
Notes to Condensed Consolidated Financial Statements...................6
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................8
Changes in Backlog....................................................13
Part II: Other Information...............................................14
Signatures...................................................................15
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Three Months Ended January 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
In thousands, except per share amounts 1998 1997
-------------------------------------- ----------- -----------
<S> <C> <C>
REVENUES $ 3,399,019 $ 3,434,061
COSTS AND EXPENSES
Cost of revenues 3,309,279 3,327,287
Corporate administrative and general expense 448 10,870
Interest expense 9,422 5,542
Interest income (4,588) (5,263)
----------- -----------
Total Costs and Expenses
3,314,561 3,338,436
----------- -----------
EARNINGS BEFORE INCOME TAXES 84,458 95,625
INCOME TAX EXPENSE 29,645 33,590
----------- -----------
NET EARNINGS $ 54,813 $ 62,035
=========== ===========
EARNINGS PER SHARE
BASIC $ .66 $ .75
=========== ===========
DILUTED $ .66 $ .74
=========== ===========
DIVIDENDS PER COMMON SHARE $ .20 $ .19
=========== ===========
SHARES USED TO CALCULATE
BASIC EARNINGS PER SHARE 82,575 83,054
=========== ===========
DILUTED EARNINGS PER SHARE 82,636 83,649
=========== ===========
</TABLE>
See Accompanying Notes.
2
<PAGE> 4
FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
January 31, 1998 and October 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1998 1997*
--------------- ---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 305,413 $ 299,324
Marketable securities -- 10,089
Accounts and notes receivable 915,909 930,104
Contract work in progress 529,664 691,395
Deferred taxes 63,905 58,039
Inventory and other current assets 226,775 236,935
---------- ----------
Total current assets 2,041,666 2,225,886
---------- ----------
Property, Plant and Equipment (net of accumulated
depreciation, depletion and amortization of
$1,047,488 and $1,001,315, respectively) 1,951,083 1,938,790
Investments and goodwill, net 256,711 254,948
Other 293,676 278,216
---------- ----------
$4,543,136 $4,697,840
========== ==========
</TABLE>
(Continued On Next Page)
* Amounts at October 31, 1997 have been derived from audited financial
statements.
3
<PAGE> 5
FLUOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
January 31, 1998 and October 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1998 1997*
--------------- ----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts and notes payable $ 706,070 $ 878,187
Commercial paper 49,871 61,886
Advance billings on contracts 527,043 525,518
Accrued salaries, wages and benefit plans 277,094 303,490
Other accrued liabilities 257,215 221,487
Current portion of long-term debt 118 116
----------- -----------
Total current liabilities 1,817,411 1,990,684
----------- -----------
Long-term debt due after one year 300,439 300,508
Deferred taxes 60,917 66,739
Other noncurrent liabilities 623,805 598,859
Commitments and Contingencies
Shareholders' Equity
Capital stock
Preferred - authorized 20,000,000
shares without par value; none issued
Common - authorized 150,000,000
shares of $.625 par value; issued and outstanding -
82,786,538 shares and 83,748,111
shares, respectively 51,742 52,343
Additional capital 534,027 569,356
Retained earnings 1,198,115 1,159,996
Unamortized executive stock plan expense (28,409) (33,441)
Cumulative translation adjustments (14,911) (7,204)
----------- -----------
Total shareholders' equity 1,740,564 1,741,050
----------- -----------
$ 4,543,136 $ 4,697,840
=========== ===========
</TABLE>
See Accompanying Notes
* Amounts at October 31, 1997 have been derived from audited financial
statements.
4
<PAGE> 6
FLUOR CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended January 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
$ in thousands 1998 1997
--------------- --------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 54,813 $ 62,035
Adjustments to reconcile net earnings to cash
provided by (utilized by) operating activities:
Depreciation, depletion and amortization 69,663 56,987
Deferred taxes (8,052) 18,394
Changes in operating assets and liabilities,
excluding effects of businesses acquired 24,187 (185,221)
Other, net 19,527 (18,931)
--------- ---------
Cash provided by (utilized by) operating activities 160,138 (66,736)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (100,656) (138,119)
E & C businesses acquired -- (30,603)
Proceeds from sales/maturities of marketable securities 10,089 25,257
Proceeds from sale of property, plant and equipment 12,942 7,074
Investments, net (5,454) (9,469)
Contribution to deferred compensation trust -- (22,593)
Other, net (6,773) (6,853)
--------- ---------
Cash utilized by investing activities (89,852) (175,306)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (11,185) 128,544
Cash dividends paid (16,694) (15,941)
Stock options exercised 61 8,615
Purchases of common stock (35,204) --
Other, net (1,175) (1,566)
--------- ---------
Cash (utilized by) provided by financing activities (64,197) 119,652
--------- ---------
Increase (decrease) in cash and cash equivalents 6,089 (122,390)
Cash and cash equivalents at beginning of period 299,324 246,964
--------- ---------
Cash and cash equivalents at end of period $ 305,413 $ 124,574
========= =========
</TABLE>
See Accompanying Notes
5
<PAGE> 7
FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(1) The condensed consolidated financial statements do not include footnotes
and certain financial information normally presented annually under
generally accepted accounting principles and, therefore, should be read in
conjunction with the Company's October 31, 1997 annual report on Form 10-K.
Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year-end. The results of operations for the
three months ended January 31, 1998 are not necessarily indicative of
results that can be expected for the full year.
The condensed consolidated financial statements included herein are
unaudited; however, they contain all adjustments (consisting of normal
recurring accruals) which, in the opinion of the Company, are necessary to
present fairly its consolidated financial position at January 31, 1998 and
its consolidated results of operations and cash flows for the three months
ended January 31, 1998 and 1997.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
(2) Inventories comprise the following:
<TABLE>
<CAPTION>
January 31, October 31,
$ in thousands 1998 1997
------------------------- ----------- -----------
<S> <C> <C>
Coal $ 39,338 $ 54,419
Equipment for sale/rental 79,081 74,574
Supplies and other 46,594 46,455
-------- --------
$165,013 $175,448
======== ========
</TABLE>
6
<PAGE> 8
FLUOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
UNAUDITED
(3) Effective November 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" which specifies the
method of computation, presentation and disclosure for earnings per share
("EPS"). The new standard requires presentation of two EPS amounts, basic
and diluted. Basic EPS is calculated by dividing net earnings by the
weighted average number of common shares outstanding for the period.
Diluted EPS is calculated by dividing net earnings by the weighted average
number of common shares and common share equivalents outstanding for the
period. Currently, the Company's common share equivalents consist solely of
stock options. EPS amounts for prior periods have been adjusted to conform
with the provisions of the new standard.
(4) Cash paid for interest was $3.8 million and $4.6 million for the three
month periods ended January 31, 1998 and 1997, respectively. Income tax
receipts, net of payments, were $15.6 million for the first quarter in 1998
reflecting the receipt of a $30 million tax refund on January 30, 1998.
Income tax payments, net of refunds, were $19 million during the three
month period ended January 31, 1997.
7
<PAGE> 9
FLUOR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the condensed consolidated financial
statements and accompanying notes and the Company's October 31, 1997 annual
report on Form 10-K.
FORWARD-LOOKING INFORMATION
Any of the comments in this Form 10-Q that refer to the Company's estimated or
future results, including its estimates of the cost savings, and the timing of
cost savings, from its previously announced cost reduction program, are
forward-looking and reflect the Company's current analysis of existing trends
and information. Actual results may differ materially from current expectations
or projections based on a number of factors affecting the Company's businesses.
These factors include, but are not limited to, cost overruns on fixed, maximum
or unit-priced contracts, contract performance risk, the uncertain timing of
awards and revenues under contracts, project financing risk, credit risk, risks
associated with government funding of contracts, market conditions impacting
realization of investments, market conditions in the domestic and international
coal market, relatively mild weather conditions which may lower demand for steam
coal and the state of the economic and political conditions worldwide. These
forward-looking statements represent the Company's judgment only as of the date
of this Form 10-Q. As a result, the reader is cautioned not to rely on these
forward-looking statements. The Company disclaims any intent or obligation to
update these forward-looking statements.
Additional information concerning these and other factors can be found in press
releases as well as the Company's public periodic filings with the Securities
and Exchange Commission, including the discussion under the heading "Certain
Factors and Trends Affecting Fluor and Its Businesses--Forward-Looking
Statements" in the Company's Form 8-K filed May 6, 1997, which is hereby
incorporated by reference and attached hereto as Exhibit 99.1.
RESULTS OF OPERATIONS
Revenues decreased one percent for the three month period ended January 31, 1998
compared with the same period of 1997. Net earnings for the three month period
ended January 31, 1998 were $54.8 million compared with $62.0 million for the
same period of 1997. The decrease in net earnings was primarily due to lower
earnings for the Engineering and Construction segment, partially offset by lower
corporate administrative and general expense.
8
<PAGE> 10
ENGINEERING AND CONSTRUCTION
Revenues for the Engineering and Construction segment decreased two percent for
the three month period ended January 31, 1998 compared with the same period of
1997, due primarily to a decrease in the volume of work performed, partially
offset by higher revenues from the segment's Diversified Services units.
Operating profit for the three months ended January 31, 1998 decreased 28
percent to $53.4 million, compared with $74.0 million during the same period of
1997. Operating margins for the first quarter of 1998 reflect lower average
project margins, partially offset by savings from cost initiative actions
undertaken in 1997.
Provisions of $21.0 million were recognized in the first quarter of 1997 for
cost overruns on two fixed price power projects, including a power project
located outside of the United States. The loss in the first quarter on this
project reflected additional costs then identified to be incurred arising
primarily from bad weather, lack of timely site access, unexpected design
changes and low labor productivity. The loss on the second project, which is
located in the United States, was due primarily to startup problems, craft
employee turnover and operation of the plant control system. The company also
recognized in the first quarter of 1997 a credit totaling $25.0 million related
to certain actuarially determined insurance accruals.
New awards for the three months ended January 31, 1998 were $2.6 billion
compared with $3.6 billion for the three months ended January 31, 1997, due to
the effect of a lower percentage of large projects and project selectivity by
the Company in an effort to improve project profitability. Approximately 49
percent of first quarter 1998 new awards were for projects located outside the
United States. There were no project awards in excess of $400 million in the
first quarter of 1998. The uncertain timing and, in some cases, large size of
new awards can create variability in the company's award pattern. Consequently,
future award trends are difficult to predict with certainty. Furthermore, the
global effect of the recent turmoil in Asian financial markets could result in
the delay of awards during the remainder of fiscal year 1998.
9
<PAGE> 11
The following table sets forth backlog for each of the Company's Engineering and
Construction business groups:
<TABLE>
<CAPTION>
January 31, October 31, January 31,
$ in millions 1998 1997 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Process $ 6,563 $ 6,384 $ 5,236
Industrial 4,677 5,178 6,374
Power/Government 1,908 2,092 3,430
Diversified Services 870 716 937
------- ------- -------
Total backlog $14,018 $14,370 $15,977
======= ======= =======
U.S. $ 5,819 $ 5,665 $ 7,486
Outside U.S. 8,199 8,705 8,491
------- ------- -------
Total backlog $14,018 $14,370 $15,977
======= ======= =======
</TABLE>
The composition of backlog by business group has remained relatively unchanged
since year end. At January 31, 1998, approximately 26 percent of the Company's
backlog is in the Asia Pacific region, including Australia. Due to the nature of
the projects included in backlog, the Company has not experienced any
significant disruption in ongoing project execution related to the recent
turmoil in Asian financial markets. Although backlog reflects business which is
considered to be firm, cancellations or scope adjustments may occur. Backlog is
adjusted to reflect any known project cancellations, deferrals, and revised
project scope and cost, both upward and downward.
On March 9, 1998, the Company announced that it intends to pursue options to
either divest or restructure its equipment sales and rental unit, American
Equipment Company. If market conditions warrant, the Company intends to use the
after-tax proceeds from any such transaction to fund its ongoing share
repurchase program.
COAL
Revenues increased 17 percent for the three month period ended January 31, 1998
compared with the same period in 1997. The increase was due primarily to
increased sales volume of both metallurgical and steam coal, partially offset by
lower steam coal prices. The increase in metallurgical coal revenues reflects
primarily an increased demand by steel producers. Steam coal market prices
declined as overall demand was down due to recent mild winter weather
conditions. Despite lower prices, steam coal revenues increased due primarily to
higher sales volume to existing electric utility customers. Operating profit for
the three months ended January 31, 1998 was $36.7 million compared with $32.6
million for the same period in 1997. Gross profit and operating profit increased
for the three months ended January 31, 1998 compared with the same period in
1997 due primarily to the increased sales volume of both metallurgical and steam
coal, offset by lower pricing of steam coal.
10
<PAGE> 12
OTHER
Net interest for the three months ended January 31, 1998 increased compared with
the same period of 1997 due primarily to $300 million in new long-term debt
issued in March 1997.
Corporate administrative and general expense in the first quarter ended January
31, 1998 was lower compared with the same period in 1997 due primarily to a
credit of approximately $10 million related to a long-term incentive
compensation plan. The Company accrues for certain long-term incentive awards
whose ultimate cost is dependent on attainment of various performance targets
set by the Organization and Compensation Committee (the "Committee") of the
Board of Directors. Under the long-term incentive compensation plan referred to
above, the performance target expired, without amendment or extension by the
Committee, on December 31, 1997.
FINANCIAL POSITION AND LIQUIDITY
At January 31, 1998, the Company had cash and cash equivalents of $305.4 million
and a long-term debt to total capital ratio of 14.7 percent. At January 31,
1997, the Company had cash and cash equivalents of $124.6 million and a
long-term debt to total capital ratio of less than one percent.
The Company expects to have adequate resources available from operating cash
flows, cash and short-term investments, revolving credit and other banking
facilities, capital market sources and commercial paper to provide for its
capital needs for the foreseeable future. Operating activities generated $160.1
million in cash during the three month period ended January 31, 1998, compared
with cash utilized by operations of $66.7 million during the same period in
1997. The increase in cash generated from operating activities is due primarily
to a decrease in project related operating assets and liabilities. The change in
operating assets and liabilities from period to period is affected by the mix,
stage of completion, and commercial terms of engineering and construction
projects. Cash was also positively impacted by the receipt of a $30 million tax
refund on January 30, 1998.
During the first quarter of 1998, the Company purchased 942,400 shares of its
common stock for a total of $35 million in connection with its ongoing share
repurchase program initiated during fiscal 1997.
For the three months ended January 31, 1998, capital expenditures were $101
million, including $41 million related to Massey Coal. Dividends paid in the
three months ended January 31, 1998 were $16.7 million ($.20 per share) compared
with $15.9 million ($.19 per share) for the same period of 1997.
11
<PAGE> 13
FINANCIAL INSTRUMENTS
The Company's utilization of derivative financial instruments is substantially
limited to the use of forward exchange contracts to hedge foreign currency
transactions entered into in the ordinary course of business and not to engage
in currency speculation. At January 31, 1998 and October 31, 1997, the Company
had forward foreign exchange contracts of less than one year duration, to
exchange principally Japanese yen, Canadian dollars, Australian dollars, French
francs and Dutch guilders for U.S. dollars. In addition, the Company has a
forward currency contract to exchange U.S. dollars for British pounds sterling
to hedge annual lease commitments which expire in 1999. The total gross notional
amount of these contracts at January 31, 1998 and October 31, 1997 was $146
million and $78 million, respectively. Forward contracts to purchase foreign
currency represented $138 million and $74 million and forward contracts to sell
foreign currency represented $8 million and $4 million, at January 31, 1998 and
October 31, 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes new
standards for reporting information about operating segments in interim and
annual financial statements. This statement is effective for the Company's
fiscal year 1999.
12
<PAGE> 14
FLUOR CORPORATION
CHANGES IN BACKLOG
Three Months Ended January 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
$ in millions 1998 1997
- -------------- ----------- -----------
<S> <C> <C>
Backlog - beginning of period $ 14,370.0 $ 15,757.4
New awards 2,602.1 3,590.6
Adjustments and cancellations, net 2.6 (243.2)
Work performed (2,956.6) (3,128.3)
--------- -----------
Backlog - end of period $ 14,018.1 $ 15,976.5
=========== ===========
</TABLE>
13
<PAGE> 15
PART II : OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3 Restated Bylaws (as amended effective March
10, 1998) of Fluor Corporation.
27 Financial Data Schedule.
99.1 Current Report on Form 8-K filed May 6, 1997.
(b) Reports on Form 8-K.
None.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLUOR CORPORATION
-----------------------------------------------
(Registrant)
Date: March 17, 1998 /s/ J. Michal Conaway
-----------------------------------------------
J. Michal Conaway, Senior Vice President and
Chief Financial Officer
/s/ V. L. Prechtl
-----------------------------------------------
V. L. Prechtl, Vice President and Controller
15
<PAGE> 17
EXHIBIT INDEX
3 Restated Bylaws (as amended effective March 10, 1998) of Fluor
Corporation.
27 Financial Data Schedule.
99.1 Current Report on Form 8-K filed May 6, 1997.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<DESCRIPTION>RESTATED BYLAWS AS AMENDED MARCH 10, 1998
<TEXT>
<PAGE> 1
EXHIBIT 3.0
RESTATED BYLAWS
(as amended March 10, 1998)
OF
FLUOR CORPORATION
(a Delaware corporation)
ARTICLE I
OFFICES
Section 1.01 Registered Office. The registered office of FLUOR
CORPORATION (hereinafter called the "Corporation") in the State of Delaware
shall be at 32 Loockerman Square, Suite L-100, City of Dover, County of Kent,
and the name of the registered agent at that address shall be The Prentice-Hall
Corporation System, Inc.
Section 1.02 Principal Office. The principal office for the
transaction of the business of the Corporation shall be at 3353 Michelson Drive,
Irvine, California 92698. The Board of Directors (hereinafter called the
"Board") is hereby granted full power and authority to change said principal
office from one location to another.
Section 1.03 Other Offices. The Corporation may also have an
office or offices at such other place or places, either within or without the
State of Delaware, as the Board may from time to time determine or as the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01 Annual Meetings. Annual meetings of the stockholders
of the Corporation for the purpose of electing directors and for the transaction
of such other proper business as may come before such meetings may be held at
such time, date and place as the Board shall determine by resolution.
Section 2.02 Special Meetings. Special meetings of the
stockholders of the Corporation for any purpose or purposes may be called at any
time by the Board, or by a committee of the Board which has been duly designated
by the Board and whose powers and authority, as provided in a resolution of the
Board or in the Bylaws, include the power to call such meeting, but such special
meetings may not be called by any other person or persons; provided, however,
that if and to the extent that any special meetings of stockholders may be
called by any other person or persons specified in any provisions of the
Certificate of Incorporation or any amendment thereto or any certificate filed
under Section 151(g) of the Delaware General Corporation Law (or its successor
statute as in effect from time to time
<PAGE> 2
hereafter), then such special meeting may also be called by the person or
persons, in the manner, at the times and for the purposes so specified.
Section 2.03 Place of Meetings. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
Section 2.04 Notice of Stockholder Business. At an annual meeting
of the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who complies with the
notice procedures set forth in this Section 2.04. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal office of the Corporation, not less than 30 days nor more than 60
days prior to the meeting; provided, however, that in the event that less than
40 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the books of the Corporation, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 2.04.
The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 2.04, and if he or she should
so determine, he or she shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 2.05 Notice of Meetings. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than 10 nor more than 60 days before the date of the
meeting to each stockholder of record entitled to vote at such meeting by
delivering a typewritten or printed notice thereof to him or her personally, or
by depositing such notice in the United States mail, in a postage prepaid
envelope, directed to him or her at his or her post office address furnished by
him or her to the Secretary of the Corporation for such purpose or, if he or she
shall not have furnished to the Secretary his or her address for such purposes,
then at his or her post office address last known to the Secretary, or by
transmitting a notice thereof to him or her at such address by telegraph, cable
or wireless. Except as otherwise expressly required by law, no publication of
any notice of a meeting of the stockholders shall be required. Every notice of a
meeting of the stockholders shall state the place, date and hour of the meeting,
and, in the case of a special meeting, shall also state the
2
<PAGE> 3
purpose or purposes for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall have
waived such notice and such notice shall be deemed waived by any stockholder who
shall attend such meeting in person or by proxy, except a stockholder who shall
attend such meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Except as otherwise expressly required by law,
notice of any adjourned meeting of the stockholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken.
Section 2.06 Quorum. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. In the absence of a
quorum at any meeting or any adjournment thereof, a majority in voting interest
of the stockholders present in person or by proxy and entitled to vote thereat
or, in the absence therefrom of all the stockholders, any officer entitled to
preside at, or to act as secretary of, such meeting may adjourn such meeting
from time to time. At any such adjourned meeting at which a quorum is present
any business may be transacted which might have been transacted at the meeting
as originally called.
Section 2.07 Voting.
(a) Each stockholder shall, at each meeting of the stockholders,
be entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him or her and registered in his or her name on
the books of the Corporation:
(i) on the date fixed pursuant to Section 6.05 of the
Bylaws as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed,
then (a) at the close of business on the day next preceding the day on which
notice of the meeting shall be given or (b) if notice of the meeting shall be
waived, at the close of business on the day next preceding the day on which
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he or she shall have expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his or her proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or with respect to
which two or more
3
<PAGE> 4
persons have the same fiduciary relationship, shall be voted in accordance with
the provisions of the General Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by his or her proxy appointed by an instrument in
writing, subscribed by such stockholder or by his or her attorney thereunto
authorized and delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three years from its date
unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he or she shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in the Bylaws or by law, shall be decided by the vote of a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. The vote at
any meeting of the stockholders on any question need not be by ballot, unless so
directed by the chairman of the meeting. On a vote by ballot each ballot shall
be signed by the stockholder voting, or by his or her proxy, if there be such
proxy, and it shall state the number of shares voted.
Section 2.08 List of Stockholders. The Secretary of the
Corporation shall prepare and make, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the entire duration thereof, and may be inspected by any stockholder who
is present.
Section 2.09 Judges. If at any meeting of the stockholders a vote
by written ballot shall be taken on any question, the chairman of such meeting
may appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of his
or her ability. Such judges shall decide upon the qualification of the voters
and shall report the number of shares represented at the meeting and entitled to
vote on such question, shall conduct and accept the votes, and, when the voting
is completed shall ascertain and report the number of shares voted respectively
for and against the question. Reports of the judges shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation. The judges
need not be stockholders of the Corporation, and any officer of the Corporation
may be a judge on any question other than a vote for or against a proposal in
which he or she shall have a material interest.
4
<PAGE> 5
ARTICLE III
BOARD OF DIRECTORS
Section 3.01 General Powers. The property, business and affairs
of the Corporation shall be managed by the Board.
Section 3.02 Number. The authorized number of directors of the
Corporation shall be twelve and such authorized number shall not be changed
except by a Bylaw or amendment thereof duly adopted by the stockholders in
accordance with the Certificate of Incorporation or by the Board amending this
Section 3.02.
Section 3.03 Election of Directors. The directors shall be
elected by the stockholders of the Corporation, and at each election the persons
receiving the greatest number of votes, up to the number of directors then to be
elected, shall be the persons then elected. The election of directors is subject
to any provisions contained in the Certificate of Incorporation relating
thereto, including any provisions for a classified board and for cumulative
voting.
Section 3.04 Notice of Stockholder Nominees. Only persons who are
nominated in accordance with the procedures set forth in the Bylaws shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of stockholders
(a) by or at the direction of the Board of Directors or (b) by any stockholder
of the Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 3.04. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal office of the Corporation not less than
30 days nor more than 60 days prior to the meeting; provided, however, that in
the event that less than 40 days' notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to be named in the proxy statement as a nominee and to
serve as a director if elected); and (b) as to the stockholder proposing such
nomination (i) the name and address, as they appear on the books of the
Corporation, of such stockholder, and (ii) the class and number of shares of the
Corporation which are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in the Bylaws. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures
5
<PAGE> 6
prescribed by the Bylaws, and if he or she should so determine, he or she shall
so declare to the meeting and the defective nomination shall be disregarded.
Section 3.05 Mandatory Retirement. The Chairman of the Board and
the President and any former Chairman of the Board and any former President, if
serving as a director of the Corporation at age 72, shall retire from the Board
at the end of the calendar year in which his or her 72nd birthday occurs. Each
other employee or former employee of the Corporation or its subsidiaries serving
as a director of the Corporation at age 65 shall retire from the Board at the
end of the calendar year in which his or her 65th birthday occurs unless the
Chairman of the Board recommends and the Board approves his or her continued
service as a non-employee director. Each other employee of the Corporation or
its subsidiaries under age 65 serving as a director of the Corporation who
elects to take early retirement or who for any other reason is no longer an
officer of the Corporation or its subsidiaries shall retire from the Board as of
the date he or she ceases to be an officer unless the Chairman of the Board
recommends and the Board approves his or her continued directorship. Each
non-employee director of the Corporation serving at age 72 shall retire from the
Board at the end of the calendar year in which his or her 72nd birthday occurs.
For purposes of this Section, "end of the calendar year" shall include the
period ending with the seventh day of January next following.
Section 3.06 Resignations. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.07 Vacancies. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors, or
any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum. Each director so chosen to fill a
vacancy shall hold office until his or her successor shall have been elected and
shall qualify or until he or she shall resign or shall have been removed.
Section 3.08 Place of Meeting, etc. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated by
the person or persons calling the meeting or in the notice or a waiver of notice
of any such meeting. Directors may participate in any regular or special meeting
of the Board by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board can hear each other, and such participation shall constitute presence in
person at such meeting.
Section 3.09 First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
Section 3.10 Regular Meetings. Regular meetings of the Board may
be held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a meeting shall be a legal holiday at the place
where the meeting is to be held, then the meeting
6
<PAGE> 7
shall be held at the same hour and place on the next succeeding business day not
a legal holiday. Except as provided by law, notice of regular meetings need not
be given.
Section 3.11 Special Meetings. Special meetings of the Board may
be called at any time by the Chairman of the Board or the President or by any
two directors, to be held at the principal office of the Corporation, or at such
other place or places, within or without the State of Delaware, as the person or
persons calling the meeting may designate.
Notice of all special meetings of the Board shall be given to
each director by two days' service of the same by telegram, by letter, or
personally. Such notice may be waived by any director and any meeting shall be a
legal meeting without notice having been given if all the directors shall be
present thereat or if those not present shall, either before or after the
meeting, sign a written waiver of notice of, or a consent to, such meeting or
shall after the meeting sign the approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or be
made a part of the minutes of the meeting.
Section 3.12 Quorum and Manner of Acting. Except as otherwise
provided in the Bylaws or by law, the presence of a majority of the authorized
number of directors shall be required to constitute a quorum for the transaction
of business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
Section 3.13 Action by Consent. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or such committee.
Section 3.14 Compensation. No stated salary need be paid
directors, as such, for their services, but, by resolution of the Board, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board or an annual directors' fee may be paid;
provided that nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefore. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 3.15 Committees. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Former employees of
the Corporation or its subsidiaries who are no longer officers of the
Corporation or its subsidiaries, if serving as a director of the Corporation,
shall not be eligible to serve as a member of any committee of the Board. Except
as otherwise provided in the Board resolution designating a committee, the
presence of a majority of the authorized number of members of such committee
shall be required to constitute a quorum for
7
<PAGE> 8
the transaction of business at any meeting of such committee. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have any power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of the
dissolution, or amending the Bylaws of the Corporation; and unless the
resolution of the Board expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Any such committee shall keep written minutes of its meetings and report the
same to the Board at the next regular meeting of the Board.
Section 3.16 Officers of the Board. The Board shall have a
Chairman of the Board and may, at the discretion of the Board, have a Vice
Chairman and other officers. The Chairman of the Board and the Vice Chairman
shall be appointed from time to time by the Board, unless such positions are
elected offices of the Corporation, currently filled, and shall have such powers
and duties as shall be designated by the Board.
ARTICLE IV
OFFICERS
Section 4.01 Officers. The officers of the Corporation shall be a
Chairman of the Board, a Chief Executive Officer, a Secretary, a Treasurer and
such other officers as may be appointed by the Board as the business of the
Corporation may require. Officers shall have such powers and duties as are
permitted or required by law or as may be specified by or in accordance with
resolutions of the Board. Any number of offices may be held by the same person.
Unless the Board shall otherwise determine, the Chairman of the Board shall be
the Chief Executive Officer of the Corporation. In the absence of any contrary
determination by the Board, the Chief Executive Officer shall, subject to the
power and authority of the Board, have general supervision, direction and
control of the officers, employees, business and affairs of the Corporation.
Section 4.02 Election and Term. The officers of the Corporation
shall be elected annually by the Board. The Board may at any time and from time
to time elect such additional officers as the business of the Corporation may
require. Each officer shall hold his or her office until his or her successor is
elected and qualified or until his or her earlier resignation or removal.
Section 4.03 Removal and Resignation. Any officer may be removed,
either with or without cause, by a majority of the directors at the time in
office, at any regular or special meeting of the Board. Any officer may resign
at any time by giving notice to the Board. Such resignation shall take effect at
the time specified in such notice or, in the absence of such specification, at
the date of the receipt by the Board of such notice. Unless otherwise specified
in such notice, the acceptance of such resignation shall not be necessary to
make it effective.
8
<PAGE> 9
Section 4.04 Vacancies. Any vacancy occurring in any office of
the Corporation by death, resignation, removal or otherwise, shall be filled in
the manner prescribed in these Bylaws for the regular appointment to such
office.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01 Execution of Contracts. The Board, except as in the
Bylaws otherwise provided, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name and on
behalf of the Corporation, and such authority may be general or confined to
specific instances; and unless so authorized by the Board or by the Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
Section 5.02 Checks, Drafts, etc. All checks, drafts or other
orders for payment of money, notes or other evidence of indebtedness, issued in
the name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such person shall give such bond, if any, as
the Board may require.
Section 5.03 Deposit. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, the Chief Executive Officer,
the President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
Section 5.04 General and Special Bank Accounts. The Board may
from time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of the Bylaws, as it may deem expedient.
9
<PAGE> 10
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01 Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him or her. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
President and by the Secretary. Any or all of the signatures on the certificates
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon any such certificate
shall thereafter have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the Corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature shall have been placed thereupon, were
such officer, transfer agent or registrar at the date of issue. A record shall
be kept of the respective names of the persons, firms or corporations owning the
stock represented by such certificates, the number and class of shares
represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation the respective dates of cancellation. Every
certificate surrendered to the Corporation for exchange or transfer shall be
cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.04 of the Bylaws.
Section 6.02 Transfers of Stock. Transfers of shares of stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.03 of the Bylaws,
and upon surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name shares
of stock stand on the books of the Corporation shall be deemed the owner thereof
for all purposes as regards the Corporation. Whenever any transfer of shares
shall be made for collateral security, and not absolutely, such fact shall be
stated expressly in the entry of transfer if, when the certificate or
certificates shall be presented to the Corporation for transfer, both the
transferor and the transferee request the Corporation to do so.
Section 6.03 Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with the Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04 Lost, Stolen, Destroyed, And Mutilated Certificates.
In any case of loss, theft, destruction, or mutilation of any certificate of
stock, another may be issued in its place upon proof of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
10
<PAGE> 11
however, that a new certificate may be issued without requiring any bond when,
in the judgment of the Board, it is proper so to do.
Section 6.05 Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
other change, conversion or exchange of stock or for the purpose of any other
lawful action, the Board may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action. If, in any case involving the
determination of stockholders for any purpose other than notice of or voting at
a meeting of stockholders, the Board shall not fix such a record date, the
record date for determining stockholders for such purpose shall be the close of
business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Seal. The Board shall provide a corporate seal,
which shall be in the form of a circle and shall bear the name of the
Corporation and words and figures showing that the Corporation was incorporated
in the State of Delaware and the year of incorporation.
Section 7.02 Waiver of Notices. Whenever notice is required to be
given by the Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
Section 7.03 Fiscal Year. The fiscal year of the Corporation
shall end on the 31st day of October of each year.
Section 7.04 Amendments. The Bylaws, or any of them, may be
rescinded, altered, amended or repealed, and new Bylaws may be made, (i) by the
Board, by vote of a majority of the number of directors then in office as
directors, acting at any meeting of the Board, or (ii) by the vote of the
holders of not less than 80% of the total voting power of all outstanding shares
of voting stock of the Corporation, at any annual meeting of stockholders,
without previous notice, or at any special meeting of stockholders, provided
that notice of such proposed amendment, modification, repeal or adoption is
given in the notice of special meeting. Any Bylaws made or altered by the
stockholders may be altered or repealed by the Board or may be altered or
repealed by the stockholders.
11
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<COMMON> 51,742
<OTHER-SE> 1,688,822
<TOTAL-LIABILITY-AND-EQUITY> 4,543,136
<SALES> 0
<TOTAL-REVENUES> 3,399,019
<CGS> 0
<TOTAL-COSTS> 3,309,279
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,422
<INCOME-PRETAX> 84,458
<INCOME-TAX> 29,645
<INCOME-CONTINUING> 54,813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,813
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<DESCRIPTION>CURRENT REPORT ON FORM 8-K FILED MAY 6, 1997
<TEXT>
<PAGE> 1
EXHIBIT 99.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 6, 1997
------------------
FLUOR CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-7775 95-0740960
- -------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3353 Michelson Drive, Irvine, California 92698
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 975-2000
------------------
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Certain Factors and Trends Affecting Fluor and its Businesses--Forward-Looking
Statements.
From time to time, certain disclosures in reports and statements released
by Fluor Corporation (the "Company"), or statements made by its officers or
directors, will be forward-looking in nature, such as statements related to the
Company's opinions about trends and factors which may impact future operating
results. The Company is filing this Current Report on Form 8-K to avail itself
of the safe harbor provided in the Securities Act of 1933 and the Securities
Exchange Act of 1934 with respect to any such forward-looking statements that
may be contained in the Company's reports and other documents filed with the
Securities and Exchange Commission under Sections 13 or 15(d) of the Securities
Exchange Act of 1934 and written or oral forward-looking statements made by
the Company's officers and directors on behalf of the Company to the press,
potential investors, securities analysts and others.
Such forward-looking statements could involve, among other things,
statements regarding the Company's intent, belief or expectation with respect to
(i) the Company's results of operations and financial condition, (ii) the
Company's implementation of cost reductions, (iii) the consummation of
acquisition and financing transactions and the effect thereof on the Company's
business, and (iv) the Company's plans and objectives for future operations and
expansion or consolidation. Any such forward-looking statements would be
subject to the risks and uncertainties that could cause actual results of
operations, financial condition, cost reductions, acquisitions, financing
transactions, operations, expansion, consolidation and other events to differ
materially from those expressed or implied in such forward-looking statements.
Any such forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions
as they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control.
The Company wishes to caution readers that forward-looking statements,
including disclosures which use words such as the Company "believes,"
"anticipates," "expects," "estimates" and similar statements, are subject to
certain risks and uncertainties which could cause actual results of operations
to differ materially from expectations. Any such forward-looking statements
should be considered in context with the various disclosures made by the Company
about its businesses, including the risk factors discussed below. Important risk
factors which could cause actual results of operations to differ materially from
those expressed in any forward-looking statements include, but are not limited
to, the following:
Fixed, Maximum or Unit Priced Contracts. An increasing number of the
Company's contracts for the provision of engineering and construction services
are fixed, maximum or unit price contracts and fixed price incentive contracts.
Under fixed, maximum or unit price contracts, the Company agrees to perform the
contract for a fixed price and as a result, benefits from costs savings, but is
unable to recover for any cost overruns. Under fixed price incentive contracts,
the Company shares with the customer any savings up to a negotiated ceiling
price
2
<PAGE> 3
and carries some or all of the burden of costs exceeding the negotiated ceiling
price. Contract prices are established based in part on cost estimates which
are subject to a number of assumptions, such as assumptions regarding future
economic conditions. If in the future these estimates prove inaccurate, or
circumstances change, cost overruns can occur.
Contract Performance Risk. In certain instances, the Company guarantees
facility completion by a scheduled acceptance date or achievement of certain
acceptance and performance testing levels. Failure to meet any such schedule or
performance requirements could result in additional costs and the amount of such
additional costs could exceed project profit margins. Performance problems for
existing and future contracts, whether of the fixed-price or other type, could
cause actual results of operations to differ materially from those contained in
forward-looking statements.
Size and Uncertainty of Timing of Contracts. The Company's future award
prospects include several large-scale domestic and international projects. The
large size and uncertain timing of these projects can create variability in the
Company's award pattern. Consequently, future award trends are difficult to
predict with certainty. The Company's estimates of future performance depend
on, among other things, the likelihood of receiving certain new awards. While
these estimates are based on the good faith judgment of management, these
estimates frequently change based on new facts which become available. In
addition, the timing of receipt of revenue by the Company from engineering and
construction projects can be affected by a number of factors outside the control
of the Company. Frequently, the Company's services on a project take place
over an extended period of time, and are subject to unavoidable delays from
weather conditions, unavailability of equipment from vendors, changes in the
scope of service requested by clients or labor disruptions affecting client job
sites. Uncertainty of contract or award timing can also present difficulties in
matching workforce size with contract needs. In some cases, the Company must
maintain and bear the cost of a ready workforce larger than called for under
existing contracts in anticipation of future workforce needs under expected
awards, which can be delayed or not received.
Government Contracts. Several of the Company's significant contracts are
Government contracts. Generally, Government contracts are subject to oversight
audits by Government representatives, to profit and cost controls and
limitations, and to provisions permitting termination, in whole or in part,
without prior notice at the Government's convenience upon payment of
compensation only for work done and commitments made at the time of termination.
In the event of termination, the Company generally will receive some allowance
for profit on the work performed. In some cases, Government contracts are
subject to the uncertainties surrounding Congressional appropriations or agency
funding. Government business is subject to specific procurement regulations and
a variety of socio-economic and other requirements. Failure to comply with such
regulations and requirements could lead to suspension or debarment, for cause,
from Government contracting or subcontracting for a period of time. Among the
causes for debarment are violations of various statutes, including those related
to employment practices, the protection of the environment, the accuracy of
records and the recording of costs.
Backlog. The dollar amount of the Company's backlog as stated at any given
time is not necessarily indicative of the future earnings of the Company related
to the performance of such
3
<PAGE> 4
work. Cancellations or scope adjustments related to contracts reflected in the
Company's backlog can occur.
Environmental, Safety and Health. It is impossible to predict the full
impact of future legislative or regulatory developments relating to
environmental protection and coal mine and preparation plant safety and health
on the Company's coal operations, because the standards to be met, as well as
the technology and length of time available to meet those standards, continue to
develop and change.
Fluctuation in the Production of Coal. The Company's coal production and
sales are subject to a variety of operational, geological, transportation and
weather-related factors that routinely cause production to fluctuate. For
example, sales may be adversely affected by fluctuations in production and by
transportation delays arising from equipment unavailability and weather-related
events, such as flooding. Labor disruptions also may occur at times or in a
manner that causes current and projected results of operations to deviate from
projections and expectations. Decreases in production from anticipated levels
usually lead to increased mining costs and decreases in results of operations.
Effects of Global Economic and Political Conditions. The Company's
businesses are subject to fluctuations in demand and to changing economic and
political conditions which are beyond the control of the Company and may cause
actual results to differ from forward-looking statements. Coal operations
produce a commodity which is internationally traded and the price of which is
established by market factors outside the control of the Company. Although the
Company has taken actions to reduce its dependence on external economic
conditions, management is unable to predict with certainty the amount and mix of
future business. Revenues and earnings from international operations are
subject to domestic and foreign government policies and regulations, embargoes
and international hostilities.
Competition. The markets served by the engineering and construction
businesses of the Company are highly competitive and for the most part require
substantial resources and particularly highly skilled and experienced technical
personnel. The markets served by the coal business of the Company are also
highly competitive and require substantial capital investment as well as the
ability to produce coal of consistent quality and meet demanding customer
specifications. A large number of well financed, multi-national companies are
competing in the markets served by the Company's businesses. Intense
competition in the engineering and construction business is expected to
continue, presenting the Company with significant challenges in its ability to
maintain strong growth rates while maintaining acceptable profit margins.
4
<PAGE> 5
Cost Reduction Program. In March of 1997, the Company announced a cost
reduction program for its Fluor Daniel operations. The Company's estimates of
the future cost savings from the cost reduction program are forward-looking
statements. The Company may from time to time provide similar estimates with
respect to this or other cost reduction efforts. The actual cost savings may
differ materially from estimates based on a number of factors affecting the
Company's business, including the ability to achieve estimated staff reductions
while maintaining workflow in the functional areas affected and to sublease
vacated facilities within anticipated time frames at anticipated sublease rent
levels.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 6, 1997 FLUOR CORPORATION
By: /s/ J. MICHAL CONAWAY
---------------------------------
J. Michal Conaway,
Senior Vice President and
Chief Financial Officer
5
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| MNR | https://www.sec.gov/Archives/edgar/data/67625/0000067625-98-000001.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000067625-98-000001.txt : 19980217
<SEC-HEADER>0000067625-98-000001.hdr.sgml : 19980217
ACCESSION NUMBER: 0000067625-98-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT CORP
CENTRAL INDEX KEY: 0000067625
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 221897375
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-04258
FILM NUMBER: 98534968
BUSINESS ADDRESS:
STREET 1: 125 WYCKOFF RD
STREET 2: PO BOX 335
CITY: EATONTOWN
STATE: NJ
ZIP: 07724
BUSINESS PHONE: 9085424927
MAIL ADDRESS:
STREET 1: PO BOX 335
STREET 2: 125 WYCKOFF ROAD
CITY: EATONTOWN
STATE: NJ
ZIP: 07724
FORMER COMPANY:
FORMER CONFORMED NAME: MONMOUTH REAL ESTATE INVESTMENT TRUST
DATE OF NAME CHANGE: 19900403
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
For the Quarter ended Commission File
December 31, 1997 No. 2-29442
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-1897375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 Wyckoff Road, Eatontown, New Jersey 07724
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:(732)542-4927
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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 and Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was re-
quired to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the financial statements required
by instruction H have been reviewed by an independent public ac-
countant. Yes No X
The number of shares or other units outstanding of each of the
issuer's classes of securities as of January 30, 1998 was
4,657,588.
Page 1
<PAGE>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
FOR THE QUARTER ENDED DECEMBER 31, 1997
C O N T E N T S
Page No.
Part I - Financial Information
Item 1 - Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-9
Part II- Other Information 10
Signatures 11
Page 2
<PAGE>
<TABLE>
<CAPTION>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
ASSETS
12/31/97 9/30/97
<S> <C> <C>
Real Estate Investments:
Land $ 6,411,724 $ 6,141,724
Buildings, Improvements and
Equipment, Net of Accumulated
Depreciation of $5,755,510
and $5,482,527, respectively 33,606,956 32,606,220
Mortgage Loans Receivable 184,490 195,583
___________ ___________
Total Real Estate Investments 40,203,170 38,943,527
Cash and Cash Equivalents 233,945 269,291
Securities Available for Sale at
Fair Value 1,650,418 3,250,147
Interest and Other Receivables 621,819 542,177
Prepaid Expenses 32,190 125,498
Lease Costs - Net of Accumulated
Amortization 120,003 100,602
Investment in Hollister '97, LLC 1,010,000 1,010,000
Other Assets 445,560 701,481
___________ ___________
TOTAL ASSETS $44,317,105 $44,942,723
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage Notes Payable $21,864,343 $21,079,238
Loans Payable 428,948 3,190,510
Deferred Gain - Installment Sale 132,532 138,532
Other Liabilities 678,357 645,155
___________ ___________
Total Liabilities 23,104,180 25,053,435
___________ ___________
Shareholders' Equity:
Common Stock-Class A-$.01 Par Value,
8,000,000 Shares Authorized,
4,657,588 and 4,421,847 Shares
Issued and Outstanding, respectively 46,576 44,218
Common Stock-Class B-$.01 Par Value,
100,000 Shares Authorized, No shares
Issued or Outstanding -0- -0-
Additional Paid-in Capital 20,914,894 19,450,137
Unrealized Holding Gain on
Securities Available for Sale 141,481 394,933
Undistributed Income 109,974 -0-
___________ ___________
Total Shareholders' Equity 21,212,925 19,889,288
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,317,105 $44,942,723
=========== ===========
Unaudited
See Accompanying Notes to Financial Statements
Page 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
<S> <C> <C>
INCOME:
Rental and Occupancy
Charges $1,628,011 $1,250,158
Interest and Other
Income 271,558 47,773
__________ __________
TOTAL INCOME 1,899,569 1,297,931
__________ __________
EXPENSES:
Interest Expense 464,466 408,901
Real Estate Taxes 158,988 144,969
Operating Expenses 163,356 83,467
Office and General
Expenses 144,216 135,244
Depreciation 272,987 220,307
__________ __________
TOTAL EXPENSES 1,204,013 992,888
__________ __________
INCOME BEFORE GAINS 695,556 305,043
Gain on Sale of
Assets-Investment
Property 6,000 6,000
__________ __________
NET INCOME $ 701,556 $ 311,043
========== ==========
PER SHARE INFORMATION
Weighted Average Shares
Outstanding -
Basic 4,532,751 3,856,890
========== ==========
Diluted 4,537,163 3,856,890
========== ==========
Net Income Per Share-
Basic and Diluted $ 0.15 $ 0.08
========== ==========
Unaudited
See Notes to Financial Statements
Page 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 701,556 $ 311,043
Noncash Items Included in Net Income:
Depreciation 272,987 220,307
Amortization 60,001 43,637
Gain on Sales of Assets &
Investment Property (6,000) (6,000)
Gain on Sales of Securities
Available for Sale (190,233) -0-
Changes In:
Interest and Other Receivables (79,642) (19,210)
Prepaid Expenses 93,308 62,535
Other Assets and Lease Costs 191,519 (126,343)
Other Liabilities 33,202 89,320
__________ ___________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,076,698 575,289
__________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on Installment Sales 11,093 12,153
Additions to Land, Buildings,
Improvements and Equipment (1,543,723) (35,700)
Purchase of Securities
Available for Sale -0- (2,619,926)
Proceeds from Sale of
Securities Available for Sale 1,536,510 -0-
__________ ___________
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 3,880 (2,643,473)
__________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 278,437 5,000,000
Principal Payments on Loans (3,039,999) (1,750,000)
Proceeds from Mortgages 1,100,000 -0-
Principal Payments of Mortgages (314,895) (248,888)
Financing Costs on Debts (15,000) (27,500)
Proceeds from Issuance of Class A
Common Stock 1,194,121 460,683
Dividends Paid (318,588) (277,930)
___________ ___________
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (1,115,924) 3,156,365
___________ ___________
Net (Decrease) Increase in Cash
and Cash Equivalents (35,346) 1,088,181
Cash and Cash Equivalents at Beginning
of Period 269,291 244,394
___________ ___________
Cash and Cash Equivalents at End
of Period $ 233,945 $ 1,332,575
=========== ===========
Unaudited
See Accompanying Notes to Financial Statements
Page 5
</TABLE>
<PAGE>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICY
The interim financial statements furnished herein reflect all adjust-
ments which were, in the opinion of management, necessary to present
fairly the financial position, results of operations and cash flows at
December 31, 1997 and for all periods presented. All adjustments made
in the interim period were of a normal recurring nature. Certain
footnote disclosures which would substantially duplicate the
disclosures contained in the audited financial statements and notes
thereto included in the Annual Report of Monmouth Real Estate
Investment Corporation (the Company) for the year ended September 30,
1997 have been omitted.
NOTE 2 - SECURITIES AVAILABLE FOR SALE
During the three months ended December 31, 1997, the Company sold
$1,346,277 of securities available for sale for a gain of $190,233
which is included in interest and other income. Total securities
available at fair value at December 31, 1997 amounted to $1,650,418
which includes gross unrealized holding gains of $141,481.
NOTE 3 - ACQUISITIONS
On December 18, 1997, the Company purchased a 12,477 square foot
warehouse facility in Burr-Ridge, Illinois from SK Properties II, LLC,
an unrelated entity. This warehouse facility is 100% net leased to
Sherwin-Williams Company. The purchase price, including closing costs,
was approximately $1,500,000. The Company paid approximately $120,000
in cash, used approximately $280,000 of its revolving line of credit
with Summit Bank and obtained a mortgage of $1,100,000. This mortgage
payable is at an interest rate of 8% and is due January 1, 2014. The
property acquired is commercial rental property and will continue to be
used as such.
NOTE 4 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
On December 15, 1997, the Company paid $591,582 as a dividend of $.13
per share to shareholders of record November 17, 1997.
For the quarter ended December 31, 1997, the Company received
$1,467,115 from the Dividend Reinvestment and Stock Purchase Plan
(DRIP). There were 235,741 shares issued, resulting in 4,657,588 shares
outstanding.
Page 6
<PAGE>
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the three months ended December 31, 1997 and 1996 for
interest was $464,466 and $408,901, respectively.
During the three months ended December 31, 1997 and 1996, the Company
had dividend reinvestments of $272,994 and $206,143, respectively,
which required no cash transfers.
NOTE 6 - NET INCOME PER SHARE
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Basic net income per share is calculated by dividing net
income by the weighted-average number of common shares outstanding
during the period. Diluted net income per share is calculated by
dividing net income by the weighted-average number of common shares
outstanding plus the weighted-average number of net shares that would
be issued upon exercise of stock options pursuant to the treasury stock
method. Options in the amount of 4,412 for 1997 are included in the
diluted weighted average shares outstanding.
Page 7
<PAGE>
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MATERIAL CHANGES IN FINANCIAL CONDITION
The Company generated net cash provided from operating activities of
$1,076,698 for the current three months as compared to $575,289 for the
prior period. The Company raised $1,467,115 from the issuance of shares
of common stock through a Dividend Reinvestment and Stock Purchase Plan
(DRIP). Dividends paid for the three months ended December 31, 1997
amounted to $591,582.
Securities Available for Sale decreased by $1,599,729 due primarily to
sales of 1,346,277.
Mortgage notes payable increased by $785,105 during the three months
ended December 31, 1997 due to a new mortgage of $1,100,000 offset by
principal repayments of $314,895.
Loans payable decreased by $2,761,562 as a result of principal
repayments of $3,039,999 offset by an additional borrowing of $278,437
used for the new acquisition.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Rental and occupancy charges increased for the quarter ended December
31, 1997 to $1,682,011 as compared to $1,250,158 for the quarter ended
December 31, 1996. This increase was due primarily to a lease
extension from July 1, 1997 to December 31, 1997 on the South
Brunswick, NJ property at a monthly rental of $162,585. The previous
monthly rental was $54,195. The increase in rental and occupancy
charges was also due to acquisitions made in fiscal 1997 and 1998.
Interest and other income increased by $223,785 and for the three
months ended December 31, 1997 as compared to the three months ended
December 31, 1996. This was due primarily to the $190,233 gain on sale
of Securities Available for Sale.
Interest expense increased by $55,565 for the three months ended
December 31, 1997 as compared to the three months ended December 31,
1996. This was the result of the additional borrowings for the new
acquisitions made during fiscal 1997 and 1998.
Real estate taxes increased by $14,019 for the three months ended
December 31, 1997 as compared to the three months ended December 31,
1996. This was a result of new acquisitions.
Page 8
<PAGE>
Operating expenses increased by $79,889 for the three months ended
December 31, 1997 as compared to the three months ended December 31,
1996. This was primarily due to an increase in repairs and maintenance
and personnel costs at our Monaca, PA and Monsey, NY properties.
Office and general expenses remained relatively stable for the three
months ended December 31, 1997, as compared to the three months ended
December 31, 1996.
Depreciation expense increased by $52,680 for the three months ended
December 31, 1997, as compared to the three months ended December 31,
1996, due to the real estate acquisitions in fiscal 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased during the three
months ended December 31, 1997 to $1,076,698 as compared to $575,289
generated during the three months ended December 31, 1996. This was
primarily due to the increase in net income. Additionally, there was a
decrease in other assets. Other assets at September 30, 1997 included
approximately $130,000 of deposits relating to the new acquisition.
The Company owns seventeen properties of which thirteen carried
mortgage loans totaling $21,864,343 at December 31, 1997. The Company
believes that funds generated from operations, the Dividend
Reinvestment and Stock Purchase Plan, together with the ability to
finance and refinance its properties will provide sufficient funds to
adequately meet its obligations over the next several years.
Page 9
<PAGE>
PART II: OTHER INFORMATION
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
ITEM 1: LEGAL PROCEEDINGS - None
ITEM 2 CHANGES IN SECURITIES - None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5: OTHER INFORMATION - None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - None
(b) REPORTS ON FORM 8-K - None
Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MONMOUTH REAL ESTATE INVESTMENT CORPORATION
Date: February 9, 1997 By: /s/Eugene W. Landy
EUGENE W. LANDY,
President
Date: February 9, 1997 By:/s/Anna T. Chew
ANNA T. CHEW
Controller
Page 11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MONMOUTH REAL ESTATE INVESTMENT CORPORATION AS
OF AND FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 233,945
<SECURITIES> 1,650,418
<RECEIVABLES> 621,819
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,538,372
<PP&E> 45,774,190
<DEPRECIATION> 5,755,510
<TOTAL-ASSETS> 44,317,105
<CURRENT-LIABILITIES> 1,107,305
<BONDS> 21,864,343
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 46,576
<OTHER-SE> 21,166,349
<TOTAL-LIABILITY-AND-EQUITY> 44,317,105
<SALES> 0
<TOTAL-REVENUES> 1,905,569
<CGS> 0
<TOTAL-COSTS> 322,344
<OTHER-EXPENSES> 417,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,466
<INCOME-PRETAX> 701,556
<INCOME-TAX> 0
<INCOME-CONTINUING> 701,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701,556
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| MSFT | https://www.sec.gov/Archives/edgar/data/789019/0001032210-98-000171.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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JCYhFrCwQIX9+BMLuEhpXQ==
<SEC-DOCUMENT>0001032210-98-000171.txt : 19980218
<SEC-HEADER>0001032210-98-000171.hdr.sgml : 19980218
ACCESSION NUMBER: 0001032210-98-000171
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980217
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MICROSOFT CORP
CENTRAL INDEX KEY: 0000789019
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 911144442
STATE OF INCORPORATION: WA
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-14278
FILM NUMBER: 98542874
BUSINESS ADDRESS:
STREET 1: ONE MICROSOFT WAY #BLDG 8
STREET 2: NORTH OFFICE 2211
CITY: REDMOND
STATE: WA
ZIP: 98052
BUSINESS PHONE: 2068828080
MAIL ADDRESS:
STREET 1: ONE MICROSOFT WAY - BLDG 8
STREET 2: NORTH OFFICE 2211
CITY: REDMOND
STATE: WA
ZIP: 98052-6399
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT FOR THE PERIOD ENDING 12-31-1997
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____
_________________
COMMISSION FILE NUMBER 0-14278
MICROSOFT CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1144442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MICROSOFT WAY, REDMOND, WASHINGTON 98052-6399
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (425) 882-8080
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the registrant's common stock as of January
31, 1998 was 1,217,408,864.
================================================================================
<PAGE>
MICROSOFT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
<S> <C>
a) Income Statements
for the Three and Six Months Ended December 31, 1996 and 1997.......... 1
b) Balance Sheets
as of June 30, 1997 and December 31, 1997.............................. 2
c) Cash Flows Statements
for the Six Months Ended December 31, 1996 and 1997.................... 3
d) Notes to Financial Statements.......................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......................... 12
Item 6. Exhibits and Reports on Form 8-K............................................ 12
SIGNATURE....................................................................................... 13
</TABLE>
<PAGE>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
MICROSOFT CORPORATION
INCOME STATEMENTS
(In millions, except earnings per share)(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
1996 1997 1996 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $2,680 $3,585 $4,975 $6,715
Operating expenses:
Cost of revenue 296 313 546 566
Research and development 485 627 917 1,194
Acquired in-process technology 0 0 0 296
Sales and marketing 737 876 1,362 1,664
General and administrative 81 106 167 201
-----------------------------------------------------------------------------------
Total operating expenses 1,599 1,922 2,992 3,921
-----------------------------------------------------------------------------------
Operating income 1,081 1,663 1,983 2,794
Interest income 105 157 197 299
Other expenses (46) (50) (95) (121)
-----------------------------------------------------------------------------------
Income before income taxes 1,140 1,770 2,085 2,972
Provision for income taxes 399 637 730 1,176
-----------------------------------------------------------------------------------
Net income 741 1,133 1,355 1,796
Preferred stock dividends 1 7 1 14
-----------------------------------------------------------------------------------
Net income available for common $ 740 $1,126 $1,354 $1,782
shareholders
===================================================================================
Earnings per share:
Basic $ 0.62 $ 0.93 $ 1.13 $ 1.47
===================================================================================
Diluted $ 0.57 $ 0.85 $ 1.04 $ 1.35
===================================================================================
</TABLE>
See accompanying notes.
- -------------------------------------------------------------------------------
1
<PAGE>
MICROSOFT CORPORATION
BALANCE SHEETS
(In millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 Dec. 31
1997 1997(1)
----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 8,966 $10,105
Accounts receivable 980 1,081
Other 427 450
----------------------------------------------------------------------
Total current assets 10,373 11,636
Property, plant, and equipment 1,465 1,478
Equipment investments 2,346 3,476
Other assets 203 250
----------------------------------------------------------------------
Total assets $14,387 $16,840
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 721 $ 867
Accrued compensation 336 248
Income taxes payable 466 631
Unearned revenue 1,418 2,038
Other 669 712
----------------------------------------------------------------------
Total current liabilities 3,610 4,496
======================================================================
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock -
shares authorized 100; outstanding 13 980 980
Common stock and paid-in capital -
shares authorized 4,000; outstanding
1,204 and 1,211 4,509 6,104
Retained earnings 5,288 5,260
----------------------------------------------------------------------
Total stockholders' equity 10,777 12,344
----------------------------------------------------------------------
Total liabilities and stockholders' equity $14,387 $16,840
======================================================================
</TABLE>
(1) Unaudited
See accompanying notes.
- --------------------------------------------------------------------------------
2
<PAGE>
MICROSOFT CORPORATION
CASH FLOWS STATEMENTS
(In million)(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
Dec, 31
1996 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 1,355 $ 1,796
Depreciation and amortization 306 497
Write-off of acquired in-process technologies 0 296
Unearned revenue 648 1,254
Recognition of unearned revenue from prior periods (195) (634)
Other current liabilities 256 297
Accounts receivable (326) (129)
Other current assets (43) (33)
---------------------------------------------------------------------------------------------------------------
Net cash from operations 2,001 3,344
---------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR FINANCING
Common stock issued 314 328
Common stock repurchased (1,101) (1,596)
Put warrant proceeds 77 325
Preferred stock issued 980 0
Preferred stock dividends 0 (14)
Stock option income tax benefits 226 407
---------------------------------------------------------------------------------------------------------------
Net cash used for financing 496 (550)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS USED FOR INVESTMENTS
Additions to property, plant, and equipment (216) (268)
Cash portion of WebTV purchase price 0 (190)
Equity investments and other (66) (1,164)
Short-term investments (1,725) (2,263)
---------------------------------------------------------------------------------------------------------------
Net cash used for investments (2,007) (3,885)
---------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 490 (1,091)
Effect of exchange rates on cash and equivalents 5 (33)
Cash and equivalents, beginning of period 2,601 3,706
---------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period 3,096 2,582
Short-term investments, end of period 6,064 7,523
---------------------------------------------------------------------------------------------------------------
Cash and short-term investments, end of period $ 9,160 $ 10,105
===============================================================================================================
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
3
<PAGE>
MICROSOFT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
________________________________________________________________________________
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. Examples include
provisions for returns and bad debts and the length of product life cycles and
buildings' lives. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the Microsoft Corporation 1997 Form 10-K.
STOCK SPLIT
On January 24, 1998, the Company's Board of Directors approved a two-for-one
stock split in the form of a 100% stock dividend, effective February 20, 1998
for shareholders of record February 6, 1998. Share and per share amounts have
not been restated for the stock split.
EARNINGS PER SHARE
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the effect of outstanding stock options
using the "treasury stock" method and preferred shares using the "if-converted"
method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Dec. 31 Dec. 31
1996 1997 1996 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (A) $ 741 $ 1,133 $ 1,355 $ 1,796
Preferred stock dividends (1) (7) (1) (14)
- ---------------------------------------------------------------------------------------------------------------
Net income available for common shareholders (B) $ 740 $ 1,126 $ 1,354 $ 1,782
===============================================================================================================
Average outstanding:
Common stock (C) 1,196 1,212 1,195 1,209
Preferred stock 1 10 0 10
Employee stock options 107 112 104 115
- ---------------------------------------------------------------------------------------------------------------
Common stock and common stock equivalents (D) 1,304 1,334 1,299 1,334
===============================================================================================================
Earnings per share:
Basic (B/C) $ 0.62 $ 0.93 $ 1.13 $ 1.47
===============================================================================================================
Diluted (A/D) $ 0.57 $ 0.85 $ 1.04 $ 1.35
===============================================================================================================
</TABLE>
UNEARNED REVENUE
Microsoft believes that Internet technologies are integral to its products and
has committed to integrating these technologies, such as its browser, Microsoft
Internet Explorer, into existing products at no additional cost to its
customers. Given this strategy and other support commitments such as telephone
support, Internet-based technical support, and unspecified product enhancements,
Microsoft recognizes approximately 20% of Windows operating systems revenue over
the product life cycles, currently estimated at two years. The unearned portion
of revenue from Windows operating systems was $860 million at June 30, 1997 and
$1.04 billion at December 31, 1997.
Since Office 97 is also tightly integrated with the rapidly evolving Internet,
and in the view of subsequent delivery of new Internet technologies,
enhancements, and other support, a ratable revenue recognition policy became
effective for Office 97 licenses beginning in the third quarter of fiscal 1997.
Approximately 20% of Office 97
- --------------------------------------------------------------------------------
4
<PAGE>
revenue is recognized ratably over the estimated 18-month product life cycle.
Unearned revenue associated with Office 97 totaled $300 million at June 30, 1997
and $570 million at December 31, 1997.
Unearned revenue also includes maintenance and other subscription contracts,
including custom enterprise license agreements.
STOCKHOLDERS' EQUITY
Microsoft repurchases its common stock on the open market. This program provides
shares for issuance to employees under the Company's stock option and stock
purchase plans. During the first half of fiscal 1998, the Company repurchased
3.7 million shares of Microsoft common stock in the open market. In addition,
under agreements with an independent third party, the Company purchased 10.6
million shares of stock through forward purchase arrangements. Under these two
arrangements, a portion of the purchase price will be paid in the next five or
six years and determined based upon the price of Microsoft common stock at that
time. The timing and method of payment (net-share or cash) is at the discretion
of the Company. The difference between the cash paid and the price of Microsoft
common stock on the date of the agreement is reflected in stockholders' equity.
To enhance its stock repurchase program, Microsoft sells equity put warrants to
independent third parties. These put warrants entitle the purchasers to sell
shares of Microsoft common stock to the Company on certain dates at specified
prices. On December 31, 1997, 23 million warrants were outstanding with strike
prices ranging from $125 to $129 per share. The warrants expire at various dates
between the fourth quarter of fiscal 1998 and the second quarter of fiscal 2001
and are exercisable only at maturity. These put warrant contracts permit a net-
share settlement at the Company's option, and do not result in a put warrant
liability on the balance sheet.
During December 1996, Microsoft issued 12.5 million shares of 2.75% convertible
exchangeable principal-protected preferred stock. Dividends are payable
quarterly in arrears. Preferred shareholders have preference over common
stockholders in dividends and liquidation rights. In December 1999, each
preferred share is convertible into common shares or an equivalent amount of
cash determined by a formula that provides a floor price of $79.875 and a cap of
$102.24 per preferred share. Net proceeds of $980 million from the issuance were
used to repurchase common shares.
ACQUISITION OF WEBTV
On August 1, 1997, the Company acquired WebTV Networks, Inc. (WebTV), an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals. Microsoft paid $190 million in cash and $235
million of common stock for WebTV. The acquired net working capital of WebTV was
not material. The accompanying income statement reflects a one-time write-off of
in-process technologies under development by WebTV of $296 million.
CONTINGENCIES
On October 7, 1997, Sun Microsystems, Inc. brought suit against Microsoft in the
U.S. District Court for the Northern District of California. On October 14,
1997, Sun filed a First Amended Complaint (Complaint). The Complaint alleges
nine claims against Microsoft, all related to the parties' relationship under a
March 11, 1996 Technology License and Distribution Agreement (Agreement)
concerning certain Java programming language technology. The Complaint alleges:
statutory and contractual trademark claims related to Microsoft's alleged
improper use of the Java Compatibility logo; a false advertising claim related
to statements Microsoft allegedly has made about its Java support and products;
a claim that Microsoft has breached the Agreement in several respects; a claim
that Microsoft allegedly made Sun's source code generally available to the
public; a claim for breach of the covenant of good faith and fair dealing; a
claim for unfair competition; a claim for intentional interference with
contractual relations between Sun and its customers or prospective customers;
and a claim that Microsoft induced software developers to breach their license
agreements with Sun. The Complaint seeks: a preliminary and permanent injunction
against Microsoft distributing certain products with the Java Compatibility
logo, and against distributing Internet Explorer 4.0 unless certain alleged
obligations are met (no motion for preliminary injunction had been filed as of
October 29, 1997); an order compelling Microsoft to perform certain alleged
obligations; an accounting; termination of the Agreement; and an award of
damages, including compensatory, exemplary and punitive damages, and liquidated
damages of $35 million for the alleged source code disclosure.
On October 27, 1997, Microsoft filed its Answer, Affirmative Defenses, and
Counterclaims (Answer). In its Answer, Microsoft denies Sun's claims, and
denies that Sun is entitled to any relief. Microsoft alleges that Sun agreed to
limit its remedies for all claims such as those alleged in the Complaint to
compensatory damages capped
- --------------------------------------------------------------------------------
5
<PAGE>
by the total license fees paid (to date, $7 million and $17.5 million over the
life of the Agreement). Microsoft specifically denies that Sun is entitled to
any injunctive relief. Although the Agreement does provide for liquidated
damages of $35 million if Microsoft makes Sun's Source Code generally available
to the public under certain conditions, Microsoft denies that there is any basis
for such a claim. Microsoft asserts other defenses to each of Sun's claims. In
addition, Microsoft alleges counterclaims against Sun, including claims that:
Sun has breached the Agreement in many respects; Microsoft is entitled to a
court order that Microsoft may terminate Sun's license under the Agreement to
certain Microsoft technology and otherwise determining the parties' rights and
responsibilities; Sun has breached the covenant of good faith and fair dealing;
and Sun has violated California's unfair competition statute. Microsoft also
alleges that it has put Sun on notice of other breaches of contract and that
Microsoft will seek to amend its counterclaim to state additional claims if
those breaches are not timely cured. Microsoft seeks a declaratory judgment
consistent with its claims and seeks compensatory damages consistent with the
limitations in the Agreement. On November 17, 1997, Sun filed a motion for
preliminary injunction seeking to enjoin Microsoft from using the Java
compatibility logo on IE 4.0 during the pendency of the litigation on the basis
that IE 4.0 does not pass certain Java compatibility tests. A hearing on this
motion has been set for February 27, 1998.
On October 20, 1997, the Antitrust Division of the U.S. Department of Justice
(DOJ) filed a Petition for An Order To Show Cause in United States District
Court for the District of Columbia. The DOJ contends that Microsoft has violated
a consent decree that was entered into by the DOJ and Microsoft on July 15,
1994, and approved by the Court on August 18, 1995, to conclude an earlier
investigation by the DOJ. In its petition, the DOJ contends that Microsoft has
violated the consent decree by including Internet Explorer technology in Windows
95, and by preventing original equipment manufacturers (OEMs) from removing
Internet Explorer functionality from versions of Windows 95 the OEMs are
licensed to install on computer systems they sell. In addition, the DOJ alleges
that certain non-disclosure agreements between Microsoft and its customers
prohibiting the release of confidential information without prior notice to the
other party are impairing the DOJ's ability to enforce the consent decree. The
DOJ's petition seeks an order from the Court requiring Microsoft to demonstrate
that it has not violated the consent decree. Microsoft does not believe it has
violated the consent decree and intends to vigorously contest this lawsuit.
On December 5, 1997, Judge Jackson heard oral argument on the DOJ's contempt
petition. On December 11, 1997, the court entered two orders. In the first
order, Judge Jackson denied the DOJ's contempt petition, and dismissed the DOJ's
request for relief concerning Microsoft's non-disclosure agreements because the
DOJ had failed to present evidence that the agreements had interfered with any
DOJ investigation. In addition, however, the court ruled that there were
disputed issues of fact regarding Microsoft's violation of the consent decree,
and concluded that the DOJ was likely to prevail on its claim that a violation
had occurred. The court entered a preliminary injunction sua sponte requiring
----------
Microsoft not to condition the licensing of Windows 95 or any successor desktop
operating system on a computer manufacturer also licensing any Microsoft browser
software, including Internet Explorer 3.0 or 4.0. In the second order, the court
appointed Harvard Law Professor Lawrence Lessig as a special master, to whom the
court delegated the authority to conduct discovery, take evidence, and make
proposed findings of fact and conclusions of law on all issues in the case by
May 31, 1998.
Microsoft immediately appealed the preliminary injunction to the District of
Columbia Circuit Court of Appeals and sought an expedited hearing on the grounds
that there are substantial grounds for challenging Judge Jackson's order and
that Microsoft will incur irreparable harm if the appeal is not heard quickly.
The DOJ opposed expedited treatment. On December 30, 1997, the Court of Appeals
entered an order granting Microsoft's motion and set a schedule pursuant to
which oral argument will be heard on April 21, 1998.
On December 23, Microsoft filed a motion in the District Court to revoke the
reference to a special master on the grounds that improper procedure was used
and that the scope of the reference was impermissibly broad. In addition,
Microsoft raised concerns about the impartiality of Professor Lessig based upon
statements in some of his writings. On January 15, 1998 the District Court
denied Microsoft's motion and refused to certify its ruling for appeal. On
January 16, 1998 Microsoft filed a petition for mandamus in the District of
Columbia Circuit Court of Appeals, seeking a stay of all proceedings by the
special master until the Court of Appeals could rule, and seeking an order
reversing the reference to the special master. On February 2, 1998 the Court of
Appeals ordered that the petition for mandamus would be consolidated with the
pending appeal and oral argument heard on April 21, 1998. The Court also stayed
all proceedings before the special master until it rules on the petition.
- --------------------------------------------------------------------------------
6
<PAGE>
In other ongoing investigations, the DOJ and ten state Attorneys General have
requested information from Microsoft concerning various issues. Microsoft is
also subject to various legal proceedings and claims that arise in the ordinary
course of business.
Management currently believes that resolving these matters will not have a
material adverse impact on the Company's financial position or its results of
operations.
- --------------------------------------------------------------------------------
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Microsoft develops, manufactures, licenses, sells, and supports a wide range of
software products, including scalable operating systems for information
appliances, personal computers (PCs), and servers; server applications for
client/server environments; business and consumer productivity applications;
software development tools; and Internet and intranet software and technologies.
The Company has recently expanded its interactive content efforts, including
entertainment and information software programs, MSN/TM/, the Microsoft Network
online service, Internet-based services, and alliances with companies involved
with other forms of digital interactivity. Microsoft also sells personal
computer input devices and books, and researches and develops advanced
technologies for future software products.
REVENUE
Revenue of $3.59 billion in the second quarter of fiscal 1998 increased 34% over
the second quarter of fiscal 1997. On a year to date basis, revenue increased
35% from the prior year to $6.72 billion. The strong growth rate reflected the
continued adoption of Windows(R) 32-bit operating systems and Microsoft(R)
Office 97, particularly as Microsoft software is deployed across entire
organizations. Software license volume increases have been the principal factor
in the Company's revenue growth. The average selling price per license has
decreased, primarily because of general shifts in the sales mix from retail
packaged products to licensing programs, from new products to product upgrades,
and from stand-alone desktop applications to integrated product suites. Average
revenue per license from OEM licenses and organization license programs, such as
Microsoft Select, is lower than average revenue per license from retail
versions. Likewise, product upgrades have lower prices than new products. Also,
prices of integrated suites, such as Microsoft Office, are less than the sum of
the prices for the individual programs included in these suites when such
programs are licensed separately. Microsoft recognizes a portion of Windows
operating systems revenue over the products' life cycles. This revenue
recognition policy was extended to Office 97 licenses in the third quarter of
fiscal 1997. (See notes to financial statements.)
PRODUCT GROUPS
Platforms product revenue grew 26% to $1.88 billion in the second quarter,
compared to $1.49 billion in the comparable quarter of the prior year. Year to
date Platforms revenue was $3.58 billion in fiscal 1998 and $2.68 billion in
fiscal 1997. Platforms product group revenue is primarily licenses of PC
operating systems, business systems with client/server architectures, and
software development tools.
Windows 95 unit volume continued to build, as units licensed through the OEM
channel increased strongly. Additionally, revenue from the Microsoft Windows
NT(R) Workstation operating system showed healthy growth. The revenue growth
rate for Microsoft BackOffice(R) server and server applications products slowed
from the rapid rates experienced in prior periods.
Applications and Content product revenue increased 43% to $1.71 billion in the
December quarter. The comparable quarter of the prior year reflected additional
unearned revenue of $200 million to account for versions of Office for Windows
95 shipped during the quarter which carried a "technological guarantee" coupon
that entitled customers to a free upgrade to the corresponding Office 97 version
of the product. For the first half of fiscal 1998, revenue was $3.14 billion,
compared to $2.30 billion the prior year. Applications and Content product group
revenue includes primarily licenses of desktop and consumer productivity
applications, interactive media programs, and PC input devices. Integrated
suites generate most desktop application revenue. The primary programs in
Microsoft Office are Microsoft Word word processor, Microsoft Excel spreadsheet,
and Microsoft PowerPoint(R) presentation graphics program. Various versions of
Office, which are available for Windows 32-bit, Windows 16-bit, and Macintosh
operating systems, also include applications such as Microsoft Access database
management program, Microsoft Outlook/TM/ desktop manager, Microsoft Schedule+
calendar and scheduling program, and an email client license.
Revenue from the various Microsoft Office integrated suites, including the
Standard, Professional, and Small Business Edition, increased strongly, while
stand-alone versions of Microsoft Excel, Microsoft Word, and Microsoft
PowerPoint continued to decrease.
- --------------------------------------------------------------------------------
8
<PAGE>
SALES CHANNELS
Microsoft distributes its products primarily through OEM licenses,
organizational licenses, and retail packaged products. OEM channel revenue
represents license fees from original equipment manufacturers. Microsoft has
three major geographic sales and marketing organizations: the U.S. and Canada,
Europe, and elsewhere in the world (Other International). Sales of organization
licenses and packaged products in these channels are primarily to distributors
and resellers. The trend has continued toward a higher percentage of
organizational licensing versus packaged products.
Royalties from OEMs reached a record level. Revenue from the OEM channel was
$1.21 billion in the second quarter, up 40% over the prior year. Year to date,
OEM revenue was $2.20 billion compared to $1.53 billion the prior year. The
primary source of OEM revenue is the licensing of desktop operating systems. PC
shipment growth coupled with an increased penetration of higher value 32-bit PC
operating systems drove the OEM revenue increase.
For the second fiscal quarter, finished goods revenue in the U.S. and Canada
increased 31% to $993 million from $759 million the prior year. First half
revenue of $1.96 billion grew 25% over the prior year. The growth rate in the
U.S. and Canada reflected slowing growth of desktop applications and business
systems and flat shipments and licensing of retail versions of 32-bit personal
operating systems.
Second quarter revenue of $842 million in Europe grew 33% and second half
revenue of $1.48 billion grew 40% due to the increased popularity of
organizational licensing of Microsoft Office and Windows products and greater
demand for BackOffice family server products.
Other International channel revenue in the December quarter was $538 million,
compared to $424 million the prior year. Year to date revenue was $1.08 billion
in fiscal 1998 and $817 million in fiscal 1997. Key drivers of growth were
increased organizational licensing of Microsoft Office and sales of BackOffice
packaged product. The second quarter growth rate was lower than recent quarters
due to slowing growth in Japan, Australia, and Southeast Asia, which partially
offset strong growth in Mexico, Brazil, and other South American countries.
Microsoft's operating results are affected by foreign exchange rates. Since a
portion of local currency denominated revenue is hedged and much of the
Company's international manufacturing costs and operating expenses are also
incurred in local currencies, the impact of exchange rates is partially
mitigated.
OPERATING EXPENSES, NONOPERATING ITEMS, AND INCOME TAXES
Cost of revenue as a percent of revenue declined to 8.7% in the second quarter
from 11.0% the prior year. For the first half of fiscal 1998, cost of revenue as
a percent of revenue was 8.4% compared to 11.0% in fiscal 1997. The decrease was
due to the shifts in mix to CD-ROMs (which carry lower cost of goods than
disks), licenses to OEMs and organizations, and higher-margin Windows NT Server
and other BackOffice server products.
Research and development expenses increased 29% in the second quarter to $627
million and increased 30% in the first half to $1.19 billion, primarily driven
by higher development headcount-related costs, third party development, and
charges from purchased R&D.
On August 1, 1997, the Company acquired WebTV Networks, Inc. (WebTV), an online
service that enables consumers to experience the Internet through their
televisions via set-top terminals. Microsoft paid $425 million in stock and cash
for WebTV. The accompanying income statement reflects a one-time write-off of
in-process technologies under development by WebTV of $296 million.
Sales and marketing expenses were $876 million in the second quarter of fiscal
1998, which represented 24.4% of revenue, compared to 27.5% in the second
quarter of the prior year. On a year to date basis, sales and marketing expenses
of $1.66 billion represented 24.8% of revenue, compared to 27.4% in the first
half of fiscal 1997. The total expense as a percent of revenue decreased due to
lower relative marketing costs in the first quarter and lower relative support
costs in the second quarter of fiscal 1998.
General and administrative costs were $106 million in the second quarter
compared to $81 million in the comparable quarter of the prior year. In the
first half of fiscal 1998, general and administrative expenses were $201
million, compared to costs of $167 million the prior year.
- --------------------------------------------------------------------------------
9
<PAGE>
Interest income increased as a result of a larger investment portfolio generated
by cash from operations. Other expenses include primarily the recognition of the
Company's share of joint venture activities, including DreamWorks Interactive
and the MSNBC entities.
The effective income tax rate increased due to the nondeductibility of the
write-off of the WebTV in-process technologies and amortization of other WebTV
intangible assets.
NET INCOME
Net income for the second quarter of fiscal 1998 was $1.13 billion. On a year to
date basis, net income was 26.7% of revenue in fiscal 1997 compared to 27.2% the
prior year. Excluding the one-time write-off of WebTV in-process R&D, net income
represented 31.2% of revenue in the first half of fiscal 1998. Earnings per
share without the write-off were $1.57, a 51% increase compared to the $1.04
earned during the same period the prior year.
FINANCIAL CONDITION
Microsoft's cash and short-term investment portfolio totaled $10.11 billion at
December 31, 1997. The portfolio is diversified among security types,
industries, and individual issuers. Microsoft's investments are generally liquid
and investment grade. The portfolio is invested predominantly in U.S. dollar
denominated securities, but also includes foreign currency positions in
anticipation of continued international expansion. The portfolio is primarily
invested in short-term securities to minimize interest rate risk and facilitate
rapid deployment in the event of immediate cash needs.
During 1996, Microsoft and National Broadcasting Company (NBC) established two
joint ventures: a 24-hour cable news and information channel and an interactive
online news service. Microsoft agreed to pay $220 million over a five-year
period for its interest in the cable venture and to pay one-half of operational
funding of both joint ventures for a multiyear period.
Microsoft has no material long-term debt and has $70 million of standby
multicurrency lines of credit to support foreign currency hedging and cash
management. Stockholders' equity at December 31, 1997 was $12.34 billion.
Microsoft will continue to invest in sales, marketing, and product support
infrastructure. Additionally, research and development activities will include
investments in existing and advanced areas of technology, including using cash
to acquire technology and to fund ventures and other strategic opportunities.
Additions to property and equipment will continue, including new facilities and
computer systems for R&D, sales and marketing, support, and administrative
staff. Commitments for constructing new buildings were $200 million on December
31, 1997.
Cash will also be used to repurchase common stock to provide shares for employee
stock option and purchase plans. Despite recent increases in stock repurchases,
the buyback program has not kept pace with employee stock option grants or
exercises. Beginning in fiscal 1990, Microsoft has repurchased 168 million
common shares for $7.8 billion while 378 million shares were issued under the
Company's employee stock option and purchase plans. The market value of all
outstanding stock options was $32.6 billion as of December 31, 1997. Microsoft
enhances its repurchase program by selling put warrants. During December 1996,
Microsoft issued 12.5 million shares of 2.75% convertible preferred stock. Net
proceeds of $980 million were used to repurchase common shares.
Management currently believes existing cash and short-term investments together
with funds generated from operations will be sufficient to meet operating
requirements for the next 12 months. Microsoft's cash and short-term investments
are available for strategic investments, mergers and acquisitions, other
potential large-scale cash needs that may arise, and to fund the continuation of
its stock buyback program to reduce the dilutive impact of the Company's
employee stock option and purchase programs.
Microsoft has not paid cash dividends on its common stock. The preferred stock
pays $2.196 per annum per share.
NEW ACCOUNTING PRONOUNCEMENT
During October 1997, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 97-2, Software Revenue Recognition. The SOP is effective for transactions
entered into in fiscal years beginning after December 15, 1997. Different
informal and unauthoritative interpretations of certain provisions of SOP 97-2
have arisen. AcSEC is already deliberating amendments to SOP 97-2, including
deferral of the effective date of certain provisions of the SOP so AcSEC can
develop and issue an interpretation regarding the applicability and the method
of application of those provisions. Because of the uncertainties related to the
outcome of these amendments, the impact on the future financial results of the
Company is not currently determinable.
- --------------------------------------------------------------------------------
10
<PAGE>
EMPLOYEE STOCK OPTIONS
The Company encourages broad-based employee ownership of Microsoft stock through
an employee stock option (ESO) program in which all employees are eligible to
participate. At December 31, 1997, 251 million vested and unvested options were
outstanding as compared to 1,211 million common shares outstanding.
The Company follows APB Opinion 25 to account for ESO plans in its published
financial statements. Accordingly, no compensation cost is recognized because
the option exercise price is equal to the market price of the underlying stock
on the date of grant. Earnings per share calculations reflect exercised ESOs
and the effect of outstanding ESOs under the "treasury stock" method.
In addition, as required by Statement of Financial Accounting Standard 123, the
Company discloses the Black-Scholes value of ESO grants and the proforma impact
of expensing such value over the vesting period of the ESOs in the footnotes to
its annual financial statements.
ESOs are a claim on the increase in the value of the Company and Microsoft does
not believe that there is a single income statement presentation that captures
the value of that claim. Nonetheless, in an effort to aid understanding of the
cost of the Company's ESO plan, we are providing alternative proforma "look-
through" income statements as a supplemental presentation of accounting for
stock options. This proforma income statement is not required under generally
accepted accounting principles. In this presentation, the cost of ESO grants,
based on the Black-Scholes value (using similar assumptions to those disclosed
in the 1997 Annual Report), is expensed through the income statement operating
expense line items in the quarter that the ESOs are granted. In addition, it is
assumed that the ESOs granted after fiscal 1995 are "hedged" through the
purchase of offsetting call options and therefore "neutralized" and excluded
from average shares outstanding used to calculate EPS. Also, interest income is
reduced for the proforma use of cash to purchase the hedges.
ESOs are granted upon hire to new employees and annually to current employees.
The annual grant, which represents the majority of ESOs granted during any given
fiscal year, occurs during the first quarter. Accordingly, the alternative
presentation will show the widest variance from reported EPS in that quarter.
ALTERNATIVE PRESENTATION OF ACCOUNTING FOR ESOS
(In millions, except earnings per share)(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
Dec. 31, 1997 Dec. 31, 1997
- -------------------------------------------------------------------------------------------------
Reported Proforma Reported Proforma
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $13,098 $13,098 $3,585 $3,585
Operating expenses:
Cost of revenue 1,105 1,152 313 315
Research and development 2,202 2,891 627 647
Acquired in-process technology 296 296 0 0
Sales and marketing 3,158 3,628 876 894
General and administrative 396 539 106 109
- -------------------------------------------------------------------------------------------------
Total operating expenses 7,157 8,506 1,922 1,965
- -------------------------------------------------------------------------------------------------
Operating income 5,941 4,592 1,663 1,620
Interest income 545 480 157 131
Other expenses (285) (285) (50) (50)
- -------------------------------------------------------------------------------------------------
Income before income taxes 6,201 4,787 1,770 1,701
Provision for income taxes 2,306 1,799 637 612
- -------------------------------------------------------------------------------------------------
Net income 3,895 2,988 1,133 1,089
Preferred stock dividends 22 22 7 7
- -------------------------------------------------------------------------------------------------
Net income available for common shareholders $ 3,873 $ 2,966 $1,126 $1,082
=================================================================================================
Earnings per share $ 2.93 $ 2.30 $ 0.85 $ 0.84
=================================================================================================
Weighted average shares outstanding 1,329 1,301 1,334 1,302
=================================================================================================
Options granted 34 34 1 1
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
See notes to financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on November 14, 1997, the following
proposal was adopted by the margins indicated:
To elect a Board of Directors to hold office until the next annual meeting
of shareholders and until their successors are elected and qualified.
<TABLE>
<CAPTION>
Number of Shares
For Withheld
<S> <C> <C>
William H. Gates 1,089,016,404 6,919,184
Paul G. Allen 1,088,918,842 7,016,746
Jill E. Barad 1,080,362,506 15,573,082
Richard A. Hackborn 1,089,087,674 6,847,914
David F. Marquardt 1,088,942,342 6,993,246
William G. Reed, Jr. 1,089,152,001 6,783,587
Jon A. Shirley 1,089,179,552 6,756,036
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27. Financial Data Schedule
(B) Reports on Form 8-K
Microsoft filed no reports on Form 8-K during the quarter ended December
31, 1997.
ITEMS 2, 3, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
- --------------------------------------------------------------------------------
12
<PAGE>
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.
Microsoft Corporation
Date: February 14, 1998 By: /s/ Gregory B. Maffei
-----------------------------------
Gregory B. Maffei,
Vice President, Finance;
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
- --------------------------------------------------------------------------------
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 10,105
<SECURITIES> 0
<RECEIVABLES> 1,081
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,636
<PP&E> 2,923
<DEPRECIATION> 1,445
<TOTAL-ASSETS> 16,840
<CURRENT-LIABILITIES> 4,496
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 980
<COMMON> 6,104
<OTHER-SE> 5,260
<TOTAL-LIABILITY-AND-EQUITY> 16,840
<SALES> 6,715
<TOTAL-REVENUES> 6,715
<CGS> 566
<TOTAL-COSTS> 566
<OTHER-EXPENSES> 3,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,972
<INCOME-TAX> 1,176
<INCOME-CONTINUING> 1,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,796
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.35
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| MU | https://www.sec.gov/Archives/edgar/data/723125/0001012870-98-000030.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
S/elxMv+W9AgaZoAzlbMmW0g/EFRl181PbG19DzG+B00VI6cPPslX9OJ/QlYFqQl
eCY2sOHdLS14ucSkG/DHXw==
<SEC-DOCUMENT>0001012870-98-000030.txt : 19980113
<SEC-HEADER>0001012870-98-000030.hdr.sgml : 19980113
ACCESSION NUMBER: 0001012870-98-000030
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971127
FILED AS OF DATE: 19980112
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MICRON TECHNOLOGY INC
CENTRAL INDEX KEY: 0000723125
STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674]
IRS NUMBER: 751618004
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0831
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10658
FILM NUMBER: 98504699
BUSINESS ADDRESS:
STREET 1: 8000 S FEDERAL WAY
STREET 2: PO BOX 6
CITY: BOISE
STATE: ID
ZIP: 83707
BUSINESS PHONE: 2083684000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
FORM 10-Q
------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
------------------
Commission File Number: 1-10658
MICRON TECHNOLOGY, INC.
State or other jurisdiction of incorporation or organization: Delaware
------------------
Internal Revenue Service -- Employer Identification No. 75-1618004
8000 S. Federal Way, Boise, Idaho 83716-9632
(208) 368-4000
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
The number of outstanding shares of the registrant's Common Stock as of
January 5, 1998 was 211,605,654.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
(Dollars in millions, except for par value data)
<TABLE>
<CAPTION>
November 27, August 28,
As of 1997 1997
- ----- ---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and equivalents $ 342.4 $ 619.5
Liquid investments 585.8 368.2
Receivables 436.6 458.9
Inventories 481.4 454.2
Prepaid expenses 11.9 9.4
Deferred income taxes 53.4 62.2
-------- --------
Total current assets 1,911.5 1,972.4
Product and process technology, net 67.8 51.1
Property, plant and equipment, net 2,855.1 2,761.2
Other assets 68.3 66.6
-------- --------
Total assets $4,902.7 $4,851.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 659.7 $ 546.1
Short-term debt 10.4 10.6
Deferred income 6.7 14.5
Equipment purchase contracts 31.5 62.7
Current portion of long-term debt 95.3 116.0
-------- --------
Total current liabilities 803.6 749.9
Long-term debt 744.5 762.3
Deferred income taxes 254.7 239.8
Non-current product and process technology 34.0 44.1
Other liabilities 37.1 35.6
-------- --------
Total liabilities 1,873.9 1,831.7
-------- --------
Minority interests 132.6 136.5
Commitments and contingencies
Common stock, $0.10 par value, authorized 1.0 billion shares,
issued and outstanding 211.6 million and 211.3 million
shares, respectively 21.1 21.1
Additional capital 488.1 483.8
Retained earnings 2,387.0 2,378.2
-------- --------
Total shareholders' equity 2,896.2 2,883.1
-------- --------
Total liabilities and shareholders' equity $4,902.7 $4,851.3
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
MICRON TECHNOLOGY, INC.
Consolidated Statements of Operations
(Amounts in millions, except for per share data)
(Unaudited)
November 27, November 28,
For the quarter ended 1997 1996
- --------------------- ----- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Net sales $954.6 $728.1
------ ------
Costs and expenses:
Cost of goods sold 744.1 572.9
Selling, general and administrative 129.1 75.8
Research and development 63.9 47.2
------ ------
Total costs and expenses 937.1 695.9
------ ------
Operating income 17.5 32.2
Gain on sale of investments 0.1 9.2
Interest expense, net (1.3) (2.1)
------ ------
Income before income taxes and minority interests 16.3 39.3
Income tax provision (6.5) (15.6)
Minority interests (0.2) (3.1)
------ ------
Net income $ 9.6 $ 20.6
====== ======
Earnings per share:
Primary $ 0.04 $ 0.10
Fully diluted 0.04 0.10
Number of shares used in per share calculations:
Primary 215.9 214.0
Fully diluted 215.9 214.5
Cash dividend declared per share -- --
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MICRON TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
November 27, November 28,
For the quarter ended 1997 1996
- --------------------- ---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9.6 $ 20.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 136.3 110.3
Decrease in receivables 22.3 32.0
Increase in inventories (27.2) (52.7)
Increase in accounts payable and accrued expenses, net of
plant and equipment purchases 59.1 17.3
Increase in deferred income taxes 17.3 22.1
Decrease in long-term product and process rights liability (10.1) (0.4)
Other (18.1) (1.3)
------- -------
Net cash provided by operating activities 189.2 147.9
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (187.9) (133.5)
Purchase of available-for-sale and held-to-maturity securities (362.0) (2.1)
Proceeds from sales and maturities of securities 151.5 19.4
Purchase of product and process technology (17.8) --
Other 1.1 (0.3)
------- -------
Net cash used for investing activities (415.1) (116.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 10.6 37.6
Net repayments on borrowings on lines of credit -- (90.0)
Payments on equipment purchase contracts (12.9) (17.8)
Repayments of long-term debt (48.6) (18.3)
Other (0.3) 3.3
------- -------
Net cash used for financing activities (51.2) (85.2)
------- -------
Net decrease in cash and equivalents (277.1) (53.8)
Cash and equivalents at beginning of period 619.5 276.1
------- -------
Cash and equivalents at end of period $ 342.4 $ 222.3
======= =======
SUPPLEMENTAL DISCLOSURES
Income taxes paid, net $ (3.3) $ 38.4
Interest paid (6.8) (7.9)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases 24.6 13.4
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Notes to Consolidated Financial Statements
(All tabular dollar amounts are stated in millions)
1. Unaudited interim financial statements
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Micron Technology, Inc., and subsidiaries (the "Company" or "MTI"),
and their consolidated results of operations and cash flows.
This report on Form 10-Q for the quarter ended November 27, 1997, should be
read in conjunction with the Company's Annual Report to Shareholders and/or Form
10-K for the year ended August 28, 1997.
2. Recently issued financial statements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." The
requirements of this Statement are first effective for the Company's interim
period ended February 26, 1998. The Statement requires, in all instances, dual
presentation of a basic earnings per share ("EPS"), which excludes dilution, and
a diluted EPS, which reflects the potential dilution that could occur if actions
taken in respect of convertible securities or other obligations to issue common
stock resulted in the issuance of common stock. It also requires a
reconciliation of the income available to common stockholders and weighted-
average shares of the basic EPS computation to the income available to common
stockholders and weighted-average shares plus dilutive potential common shares
of the diluted EPS computation. Basic and diluted EPS pursuant to the
requirements of Statement No. 128 would be as follows:
<TABLE>
<CAPTION>
Quarter Ended
November 27, 1997 November 28, 1996
----------------- -----------------
<S> <C> <C>
Basic earnings per share $0.05 $0.10
Diluted earnings per share 0.04 0.10
</TABLE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. The adoption of SFAS No. 130 is effective
for the Company in 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements is also to be provided. SFAS No. 131 is
effective for the Company in 1999.
<TABLE>
<CAPTION>
3. Supplemental balance sheet information November 27, August 28,
1997 1997
- --------------------------------------------------------------------------------
Receivables
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $412.3 $447.2
Income taxes receivable 30.4 17.9
Allowance for returns and discounts (18.5) (29.3)
Allowance for doubtful accounts (10.3) (9.0)
Other receivables 22.7 32.1
------ ------
$436.6 $458.9
====== ======
</TABLE>
4
<PAGE>
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
3. Supplemental balance sheet information (continued) November 27, August 28,
1997 1997
- --------------------------------------------------------------------------------
Inventories
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $129.5 $128.6
Work in progress 201.8 195.7
Raw materials and supplies 150.1 129.9
------ ------
$481.4 $454.2
====== ======
Product and process technology
- --------------------------------------------------------------------------------
Product and process technology, at cost $129.5 $108.1
Less accumulated amortization (61.7) (57.0)
------ ------
$ 67.8 $ 51.1
====== ======
Property, plant and equipment
- --------------------------------------------------------------------------------
Land $ 36.7 $ 35.4
Buildings 875.1 817.9
Equipment 2,489.3 2,416.2
Construction in progress 758.3 681.9
--------- ---------
4,159.4 3,951.4
Less accumulated depreciation and amortization (1,304.3) (1,190.2)
--------- ---------
$ 2,855.1 $ 2,761.2
========= =========
</TABLE>
As of November 27, 1997 property, plant and equipment included unamortized
costs of $625.6 million for the Company's semiconductor memory manufacturing
facility in Lehi, Utah, of which $589.2 million has not been placed in service
and is not being depreciated. Test capacity is expected to be provided by the
Lehi facility in the summer of 1998. Completion of the remainder of the Lehi
production facilities is dependent upon market conditions. Market conditions
which the Company expects to evaluate include, but are not limited to, worldwide
market supply and demand of semiconductor products and the Company's operations,
cash flows and alternative uses of capital.
<TABLE>
<CAPTION>
Accounts payable and accrued expenses
- --------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable $416.1 $277.0
Salaries, wages and benefits 71.7 93.7
Product and process technology payable 74.5 99.9
Taxes payable other than income 42.5 37.3
Interest payable 15.6 6.9
Other 39.3 31.3
------ ------
$659.7 $546.1
====== ======
</TABLE>
5
<PAGE>
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
3. Supplemental balance sheet information (continued) November 27, August 28,
1997 1997
- ----------------------------------------------------------------------------------------------
Debt
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Convertible Subordinated Notes payable, due July 2004,
interest rate of 7% $500.0 $ 500.0
Notes payable in periodic installments through July 2015,
weighted average interest rate of 7.43% and 7.33%,
respectively 297.0 331.3
Capitalized lease obligations payable in monthly installments
through August 2002, weighted average interest rate of
7.67% and 7.68%, respectively 37.7 40.7
Other 5.1 6.3
------ -------
839.8 878.3
Less current portion (95.3) (116.0)
------ -------
$744.5 $ 762.3
====== =======
</TABLE>
During the fourth quarter of 1997 the Company issued $500 million in 7%
convertible subordinated notes due July 1, 2004 which are convertible into
shares of the company's common stock at $67.44 per share. The notes were
offered under a $1 billion shelf registration statement pursuant to which the
Company may issue from time to time up to $500 million of additional debt or
equity securities.
MTI has a $500 million unsecured revolving credit agreement expiring in May
2000. The agreement contains certain restrictive covenants pertaining to the
Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant. As of November 27, 1997, MTI was
in compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement. MEI has an aggregate of $157
million in revolving credit agreements which contain certain restrictive
covenants pertaining to MEI's operations, including a minimum EBITDA
covenant, certain minimum financial ratios and limitations on the amount of
dividends declared or paid by MEI. As of November 27, 1997 MEI had aggregate
borrowings of approximately $9 million outstanding under the agreements.
The Company leases certain facilities and equipment under operating leases.
Total rental expense on all operating leases was $2.9 million and $1.4 million
for the first quarter of 1997 and 1996, respectively. Minimum future rental
commitments under operating leases aggregate $11.5 million as of November 27,
1997 and are payable as follows (in millions): 1998, $2.7; 1999, $3.7; 2000,
$3.3; 2001, $1.4 and 2002, $0.4.
4. Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
expensed in the first quarters of 1998 and 1997 were $20.3 million and $9.6
million, respectively.
5. Income taxes
The estimated effective income tax rate for fiscal 1998 is 40.0%. The
effective income tax rate primarily reflects the statutory corporate income tax
rate, the net effect of state taxation, and provision of tax by the parent on
the earnings of domestic subsidiaries not consolidated with the Company for
federal income tax purposes.
6
<PAGE>
6. Earnings per share
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares result from
the assumed exercise of outstanding stock options and affect earnings per share
when they have a dilutive effect.
7. Purchase of minority interest
In the first quarter of 1998 the Company purchased the 12% minority interest
in one of its subsidiaries, Micron Display Technology, Inc. ("MDT"), for $21
million in cash. The cost of the acquired interest was allocated primarily to
intangible assets related to field emission flat panel display technology, which
is being amortized over a three-year period.
8. Commitments
As of November 27, 1997, the Company had commitments of approximately $573.2
million for equipment purchases and $69.5 million for the construction of
buildings.
9. Contingencies
Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product or
process technology rights held by others. The Company has accrued a liability
and charged operations for the estimated costs of settlement or adjudication of
asserted and unasserted claims for infringement prior to the balance sheet date.
Determination that the Company's manufacture of products has infringed on valid
rights held by others could have a material adverse effect on the Company's
financial position, results of operations or cash flows and could require
changes in production processes and products. The Company is currently party to
various other legal actions arising out of the normal course of business, none
of which are expected to have a material effect on the Company's financial
position or results of operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion contains trend information and other forward
looking statements (including statements regarding future operating results,
future capital expenditures and facility expansion, new product introductions,
technological developments and industry trends) that involve a number of risks
and uncertainties. The Company's actual results could differ materially from the
Company's historical results of operations and those discussed in the forward
looking statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Certain Factors." All
period references are to the Company's fiscal periods ended November 27, 1997,
August 28, 1997, or November 28, 1996, unless otherwise indicated.
Micron Technology, Inc. and its subsidiaries are hereinafter referred to
collectively as the "Company" or "MTI". The Company designs, develops,
manufactures and markets semiconductor memory products, primarily DRAM, and
through its approximately 64% owned subsidiary, Micron Electronics, Inc.
("MEI"), the Company develops, markets, manufactures and supports PC systems.
RESULTS OF OPERATIONS
Net income for the first quarter of 1998 was $10 million, or $0.04 per
fully diluted share, on net sales of $955 million. For the first quarter of 1997
net income was $21 million, or $0.10 per fully diluted share, on net sales of
$728 million. For the fourth quarter of 1997, net income was $72 million, or
$0.33 per fully diluted share, on net sales of $946 million.
NET SALES
<TABLE>
<CAPTION>
First Quarter
-------------------------------------------
1998 % Change 1997
--------------------------------------------
Net sales % Net sales %
------------- -------------
<S> <C> <C> <C>
Semiconductor memory products $440.1 46.1 $342.2 47.0
PC systems 445.1 46.6 333.8 45.8
Other 69.4 7.3 52.1 7.2
-------------- --------------
Total net sales $954.6 100.0 31.1% $728.1 100.0
============= ==============
</TABLE>
Net sales reported under "semiconductor memory products" include sales of
MTI semiconductor memory products incorporated in MEI products, which amounted
to $12.4 million and $11.3 million in the first quarters of 1998 and 1997,
respectively. The caption "Other" primarily includes revenue from contract
manufacturing services, government research and development contracts, licensing
fees and remote intelligent communication ("RIC") products. In December 1997,
MEI entered into an agreement to sell, subject to certain conditions, a 90%
interest in its contract manufacturing business. Contract manufacturing services
accounted for approximately $60.6 million of the Company's "Other" revenue in
the first quarter of 1998.
Net sales in the first quarter of 1998 increased by 31% as compared to the
first quarter of 1997, principally due to increased volumes of semiconductor
memory products sold and increased unit sales of PC systems, offset by a sharp
decline in average selling prices of semiconductor memory products and a decline
in average selling prices for PC systems. The relatively flat sales for the
first quarter of 1998 compared to the $946 million of net sales for the fourth
quarter of 1997 reflect an increase in revenue from the Company's PC operations
which was offset by a decrease in net sales of semiconductor memory products.
Net sales of semiconductor memory products for the first quarter of 1998
increased by 29% as compared to the first quarter of 1997, primarily due to
increased production, which was partially offset by a sharp decline in average
selling prices for such products. The Company's principal memory product in the
first quarter of 1998 was the 16 Meg DRAM, which comprised approximately 88% of
the net sales of semiconductor memory. Total megabits shipped in the first
quarter of 1998 more than doubled the megabits shipped in the first quarter of
1997. This increase in production was principally the result of the transition
to the 16 Meg DRAM as the Company's principal memory product, ongoing
transitions to successive reduced die size ("shrink") versions of existing
memory products, enhanced yields on existing memory products and an increase in
total wafer outs primarily due to completion of the conversion to 8-inch wafers.
Average selling prices per megabit of memory declined approximately 44% from the
8
<PAGE>
first quarter of 1997 to the first quarter of 1998 and 25% from the fourth
quarter of 1997 to the first quarter of 1998. Average selling prices for the
Company's semiconductor memory products continue to decline and in December 1997
were approximately 38% lower than in the first quarter of 1998. As a result of
the decline in average selling prices, net sales of semiconductor memory
products for the first quarter of 1998 decreased by 9% as compared to the fourth
quarter of 1997 despite a 24% increase in megabits shipped for the same period.
The increase in megabit shipments for the first quarter of 1998 as compared to
the fourth quarter of 1997 was primarily due to ongoing transitions to
successive shrink versions of existing memory products, enhanced yields on
existing memory products and shifts in the Company's mix of semiconductor memory
products to a higher average density. Total wafer outs for the first quarter of
1998 were 10% lower than for the fourth quarter of 1997, primarily as a result
of a shift in product mix to SDRAM.
Net sales of PC systems increased in the first quarter of 1998 compared to
the first quarter of 1997 primarily due to a 36% increase in unit sales of PC
systems partially offset by a decline in average selling prices for the
Company's PC systems, and an increase in non-system revenue. Non-system revenue
is revenue received from the sale of PC related products and services separate
from the sale of a PC system. The growth in unit sales of PC systems was
partially attributable to a higher level of sales to governmental entities and
corporate customers. Net sales of PC systems for the first quarter of 1998 were
18% higher than for the fourth quarter of 1997 primarily due to a higher level
of non-system revenue, an increase in unit sales of PC systems and a higher
average selling price for the Company's PC systems.
GROSS MARGIN
<TABLE>
<CAPTION>
First Quarter
----------------------
1998 Change 1997
-----------------------
<S> <C> <C> <C>
Gross margin 210.5 35.6% $155.2
As a % of net sales 22.1% 21.3%
</TABLE>
The Company's gross margin percentage was relatively flat for the first
quarter of 1998 compared to the first quarter of 1997. The gross margin
percentage on sales of the Company's semiconductor memory products improved for
the first quarter of 1998 as compared to the fourth quarter of 1997 as a result
of increased production efficiencies. The increase in semiconductor gross
margin was offset by lower gross margins on sales of the Company's PC systems.
The Company's gross margin percentage for the fourth quarter of 1997 was 30%
which exceeded the first quarter of 1998 primarily due to a decline in average
selling prices for semiconductor memory products, increased pricing pressure on
PC systems, and the disposition of PC component inventories.
The Company's gross margin percentage on sales of semiconductor memory
products for the first quarter of 1998 was 32%, compared to 24% and 44% in the
first and fourth quarters of 1997, respectively. The increase in gross margin
percentage on sales of semiconductor memory products for the first quarter of
1998 compared to the first quarter of 1997 was primarily the result of a decline
in per unit manufacturing costs, partially offset by a decline in average
selling prices. Decreases in per unit manufacturing costs for the first quarter
of 1998 compared to the same period in 1997 were achieved through transitions to
shrink versions of existing products, shifts in the Company's mix of
semiconductor memory products to a higher average density, and improved
manufacturing yields. The decrease in gross margin percentage on semiconductor
memory products in the first quarter of 1998 from the fourth quarter of 1997 was
primarily the result of the approximate 25% decline in average selling prices
per megabit of memory, partially offset by lower per megabit manufacturing
costs. The gross margin in the first quarter of 1998 was adversely affected by
a $15 million charge related to the valuation of Flash products and benefited by
$11 million resulting from a change in estimate of a long-term product and
process rights liability.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's ramp of its SDRAM products
reached approximately 55% of DRAM wafer starts at the end of the first quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as its
primary memory product is expected to occur in late calendar 1998. Future gross
margins may be adversely impacted if the Company is unable to transition to
shrink versions of the 16 Meg SDRAM or to the 64 Meg at gross margin rates
comparable to those of the Company's current primary products.
The gross margin percentage for the Company's PC operations for the first
quarter of 1998 was 13%, compared to 20% and 16% in the first and fourth
quarters of 1997, respectively. In the first quarter of 1998 net sales of PC
9
<PAGE>
systems increased but the gross margin decreased due to intense price pressure,
particularly on notebook systems, and the disposition of PC component
inventories.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
First Quarter
----------------------
1998 Change 1997
----------------------
<S> <C> <C> <C>
Selling, general and administrative 129.1 70.3% $75.8
as a % of net sales 13.5% 10.4%
</TABLE>
The higher level of selling, general and administrative expenses during the
first quarter of 1998 as compared to the first quarter of 1997 primarily
reflects an increase in the number of administrative employees associated with
the Company's expanded PC and semiconductor operations. In addition, selling,
general and administrative expenses for the Company's PC operations increased
during the first quarter of 1998 as a result of increased advertising costs, bad
debt expense and increased technical and professional fees primarily associated
with information technology consulting services. Selling, general and
administrative expenses for the first quarter of 1998 also reflect a $6 million
contribution to a university in support of engineering education. This
contribution, along with an increase in advertising costs for the Company's PC
operations, contributed to a 28% increase in selling, general and administrative
expenses for the first quarter of 1998 as compared to the fourth quarter of
1997.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
First Quarter
---------------------
1998 Change 1997
---------------------
<S> <C> <C> <C>
Research and development 63.9 35.4% $47.2
as a % of net sales 6.7% 6.5%
</TABLE>
Research and development expenses vary primarily with the number of wafers
processed, personnel costs, and the cost of advanced equipment dedicated to new
product and process development. Research and development efforts are focused
on advanced process technology, which is the primary determinant in
transitioning to next generation products. Application of advanced process
technology currently is concentrated on development of the Company's 16 Meg, 64
Meg and 256 Meg SDRAMs. The PC industry is in the process of transitioning from
EDO to SDRAM. The Company's transition to SDRAM as the primary DRAM technology
is expected to occur in early calendar 1998. Other research and development
efforts are devoted to the design and development of Flash, SRAM, RIC, flat
panel display products and PC systems.
The Company transitioned a substantial portion of its product lines to .30
micron (u) line width processing from .35(u) line width processing in 1997.
The Company anticipates completion of the .30(u) transition in 1998 and
anticipates that process technology will move to line widths of .25(u), .21(u)
and .18(u) in the next several years as needed for the development of future
generation semiconductor products.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share," issued by the
Financial Accounting Standards Board ("FASB") in February 1997, SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," issued by the FASB in June 1997. Basic
and diluted earnings per share pursuant to the requirements of SFAS No. 128, as
well as a description of SFAS No. 130 and SFAS No. 131 are disclosed in the
notes to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of November 27, 1997, the Company had cash and liquid investments
totaling $928 million, representing a decrease of $59 million during the first
quarter of 1998.
The Company's principal source of liquidity during the first quarter of 1998
was cash flows from operations of $189 million. Cash flow from operations
depends significantly on average selling prices and variable cost per unit
10
<PAGE>
for the Company's semiconductor memory products. The principal uses of funds in
the first quarter of 1998 were $188 million for property, plant and equipment
and $63 million for repayments of equipment contracts and debt. During the first
three months of 1998, the Company's inventories increased by $27 million, of
which $20 million was attributable to an increase in raw materials inventories.
The Company believes that in order to develop new product and process
technologies, support future growth, achieve operating efficiencies and maintain
product quality, it must continue to invest in manufacturing technology,
facilities and capital equipment, research and development, and product and
process technology. The Company currently estimates it will spend approximately
$1 billion in fiscal 1998 for purchases of equipment and construction and
improvement of buildings. Subsequent to its first quarter of 1998, the Company
experienced further price decreases for its semiconductor memory products and,
in consideration of these decreases, is reevaluating its capital expenditures
and will adjust such expenditures as appropriate in response to market
conditions and expected cash flow needs. As of November 27, 1997, the Company
had entered into contracts extending into fiscal 2000 for approximately $573
million for equipment purchases and approximately $69 million for the
construction of facilities. Should the Company elect to cancel its outstanding
equipment purchase commitments, the Company could be subject to cancellation
fees in excess of $135 million. Future capital expenditures will be used
primarily to enhance manufacturing efficiencies and product and process
technology at the Company's existing facilities. As the Company considers its
product and process technology enhancement programs and technology
diversification objectives, the Company has evaluated, and continues to
evaluate, possible acquisitions, strategic alliances and the purchase of the
minority interest of its subsidiaries. In the first quarter of 1998 the Company
purchased the 12% minority interest in Micron Display Technology, Inc. for $21
million in cash. The Company has a $1 billion shelf registration statement. In
July 1997, the Company issued $500 million in convertible subordinated notes
pursuant to the shelf registration statement and may issue from time to time up
to an additional $500 million in debt or equity securities.
MTI has a $500 million unsecured revolving credit agreement expiring in May
2000. The agreement contains certain restrictive covenants pertaining to the
Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant. As of November 27, 1997, MTI was
in compliance with all covenants under the facility and had no borrowings
outstanding under the agreement. There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement. MEI has an aggregate of $157 million
in revolving credit agreements which contain certain restrictive covenants
pertaining to MEI's operations, including a minimum EBITDA covenant, certain
minimum financial ratios and limitations on the amount of dividends declared or
paid by MEI. As of November 27, 1997 MEI had aggregate borrowings of
approximately $9 million outstanding under the agreements. Cash generated by
and credit lines available to MEI are not anticipated to be available to finance
other MTI operations.
CERTAIN FACTORS
In addition to the factors discussed elsewhere in this Form 10-Q and in the
Company's Form 10-K for the fiscal year ended August 28, 1997, the following are
important factors which could cause actual results or events to differ
materially from those contained in any forward looking statements made by or on
behalf of the Company.
The semiconductor memory industry is characterized by rapid technological
change, frequent product introductions and enhancements, difficult product
transitions, relatively short product life cycles, and volatile market
conditions. These characteristics historically have made the semiconductor
industry highly cyclical, particularly in the market for DRAMs, which are the
Company's primary semiconductor memory products. The semiconductor industry has
a history of declining average sales prices as products mature. Long-term
average decreases in sales prices for semiconductor memory products approximate
30% on an annualized basis; however, significant fluctuations from this rate
have occurred from time to time, as evidenced by the 75% decline in average
selling prices for the Company's semiconductor memory products for 1997 and the
25% decline in average selling prices for the first quarter of 1998 compared to
the fourth quarter of 1997. In addition, average selling prices for the
Company's semiconductor memory products in December 1998 were approximately 38%
lower than the average selling prices for the first quarter of 1998.
The selling prices for the Company's semiconductor memory products fluctuate
significantly with real and perceived changes in the balance of supply and
demand for these commodity products. Growth in worldwide supply
11
<PAGE>
has outpaced growth in worldwide demand in recent periods, resulting in a
significant decrease in average selling prices for the Company's semiconductor
memory products. For most of fiscal 1997 the rate at which the Company was able
to decrease per unit manufacturing costs exceeded the rate of decline in average
selling prices, due mainly to a transition to a higher density product. However,
in the fourth quarter of 1997 and the first quarter of 1998 the Company was
unable to decrease per unit manufacturing costs at a rate commensurate with the
decline in average selling prices. In the event that average selling prices
continue to decline at a faster rate than that at which the Company is able to
decrease per unit manufacturing costs, the Company could be materially adversely
affected in its operations, cash flows and financial condition. Although
worldwide excess capacity exists, certain Asian competitors continue to add
capacity for the production of semiconductor memory products. The amount of
capacity to be placed into production and future yield improvements by the
Company's competitors could dramatically increase worldwide supply of
semiconductor memory and increase downward pressure on pricing. Further, the
Company has no firm information with which to determine inventory levels of its
competitors, or to determine the likelihood that substantial inventory
liquidation may occur and cause further downward pressure on pricing.
Worldwide semiconductor pricing is influenced by currency fluctuations. In
calendar 1997 the Korean Won, the New Taiwan Dollar and the Japanese Yen were
devalued significantly, dropping approximately 100%, 20% and 10%, respectively,
compared to the U.S. dollar. The devaluation of these currencies was
particularly severe in the fourth quarter of calendar 1997 and contributed to
the current South Korean credit crisis. South Korean semiconductor competitors
are likely to be particularly affected by the currency devaluations as a result
of substantial debt structures denominated in U.S. dollars. The currency
devaluations and the credit crisis could have a particularly significant impact
on DRAM pricing if the Company's Asian, and particularly Korean, competitors
offer products at significantly lower prices in an effort to maximize cash flows
to service near-term dollar denominated obligations. While the Company cannot
predict the overall impact of the Asian currency devaluations and the Korean
credit crisis, its products may be subject to further downward pricing pressure.
If average selling prices for semiconductor memory products continue to decline,
the Company may not be able to remain profitable.
If pricing for the Company's semiconductor products remains at current
levels for an extended period of time or declines further, the Company may be
required to make changes in its operations, including but not limited to,
reduction of the amount or changes in timing of its capital expenditures,
renegotiation of existing debt agreements, reduction of production and workforce
levels, reduction of research and development, or changes in the products
produced.
Approximately 63% of the Company's sales of semiconductor memory products
during the first quarter of 1998 were directly into the PC or peripheral
markets. DRAMs are the most widely used semiconductor memory component in most
PC systems. Should the rate of growth of sales of PC systems or the rate of
growth in the amount of memory per PC system decrease, the growth rate for sales
of semiconductor memory could also decrease, placing further downward pressure
on selling prices for the Company's semiconductor memory products. The Company
is unable to predict changes in industry supply, major customer inventory
management strategies, or end user demand, which are significant factors
influencing pricing for the Company's semiconductor memory products. In recent
periods the PC industry has seen a shift in demand towards sub-$1000 PCs. While
the Company cannot predict with any degree of accuracy the future impact on the
PC and semiconductor industry of this shift, possible effects include, but are
not limited to, further downward pricing pressure on PC systems and further
downward pricing pressure on semiconductor memory products.
The Company's operating results are significantly impacted by the operating
results of its consolidated subsidiaries, particularly MEI. MEI's past
operating results have been, and its future operating results may be, subject to
seasonality and other fluctuations, on a quarterly and an annual basis, as a
result of a wide variety of factors, including, but not limited to, industry
competition, the Company's ability to accurately forecast demand for its PC
products, the Company's ability to effectively manage PC inventory levels,
fluctuating market pricing for PCs and semiconductor memory products,
fluctuating component costs, changes in product mix, inventory obsolescence, the
timing of new product introductions by the Company and its competitors, the
timing of orders from and shipments to OEM customers, seasonal government
purchasing cycles, manufacturing and production constraints, the effects of
product reviews and industry awards, seasonal cycles common in the PC industry,
critical component availability, and the failure by MEI to successfully
integrate the operations of NetFRAME Systems Incorporated. Changing
circumstances, including but not limited to, changes in the Company's core
operations, uses of capital, strategic objectives and market conditions, could
result in the Company changing its ownership interest in its subsidiaries.
12
<PAGE>
The Company is engaged in ongoing efforts to enhance its semiconductor
production processes to reduce per unit costs by reducing the die size of
existing products. The result of such efforts has led to a significant increase
in megabit production. There can be no assurance that the Company will be able
to maintain or approximate increases in megabit production at a level
approaching that experienced in recent periods or that the Company will not
experience decreases in production volume as it attempts to implement future
technologies. Further, from time to time, the Company experiences volatility in
its manufacturing yields, as it is not unusual to encounter difficulties in
ramping latest shrink versions of existing devices or new generation devices to
commercial volumes. The Company's ability to reduce per unit manufacturing costs
of its semiconductor memory products is largely dependent on its ability to
design and develop new generation products and shrink versions of existing
products and its ability to ramp such products at acceptable rates to acceptable
yields, of which there can be no assurance.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's transition to SDRAM products
reached approximately 55% of DRAM wafer starts at the end of the first quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as
its primary memory product is expected to occur in late calendar 1998. It is
not unusual to encounter difficulties in manufacturing while transitioning to
shrink versions of existing products or new generation products. Future gross
margins will be adversely impacted if the Company is unable to transition to
shrink versions of the 16 Meg SDRAM or to the 64 Meg SDRAM at gross margin rates
at least comparable to those of the Company's current primary products.
Historically, the Company has reinvested substantially all cash flow from
semiconductor memory operations in capacity expansion and enhancement programs.
The Company's cash flow from operations depends primarily on average selling
prices and per unit manufacturing costs of the Company's semiconductor memory
products. If for any extended period of time average selling prices decline
faster than the rate at which the Company is able to decrease per unit
manufacturing costs, the Company may not be able to generate sufficient cash
flows from operations to sustain operations. The Company has a $500 million
unsecured revolving credit agreement which is available to finance its
semiconductor operations. However, the agreement contains certain restrictive
covenants, including a minimum fixed charge coverage ratio and a maximum
operating losses covenant, which the Company may not be able to meet if
semiconductor market conditions continue to deteriorate. In the event that the
Company does not comply with the covenants, there can be no assurance that the
Company would be able to successfully renegotiate the agreement or obtain a
waiver to the covenants of the existing agreement. In either event, the Company
may not be able to draw on the credit facility. Cash generated by, and credit
lines available to, MEI are not anticipated to be available to finance other MTI
operations.
Completion of the Company's semiconductor manufacturing facility in Lehi,
Utah was suspended in February 1996, as a result of the decline in average
selling prices for semiconductor memory products. As of November 27, 1997, the
Company had invested approximately $626 million in the Lehi facility. The cost
to complete the Lehi facility is estimated to approximate $1.7 billion. Although
additional test capacity for Boise production is anticipated to be provided in
Lehi in 1998, completion of the remainder of the Lehi production facilities is
dependent upon market conditions. Market conditions which the Company expects to
evaluate include, but are not limited to, worldwide market supply and demand of
semiconductor products and the Company's operations, cash flows and alternative
uses of capital. There can be no assurance that the Company will be able to fund
the completion of the Lehi manufacturing facility. The failure by the Company to
complete the facility would likely result in the Company being required to write
off all or a portion of the facility's cost, which could have a material adverse
effect on the Company's business and results of operations. In addition, in the
event that market conditions improve, there can be no assurance that the Company
can commence manufacturing at the Lehi facility in a timely, cost effective
manner that enables it to take advantage of the improved market conditions.
The semiconductor and PC industries have experienced a substantial amount of
litigation regarding patent and other intellectual property rights. In the
future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to defend the Company
against claimed infringement of the rights of others. The Company has from time
to time received, and may in the future receive, communications alleging that
its products or its processes may infringe on product or process technology
rights held by others. The Company has entered into a number of patent and
intellectual property license agreements with third parties, some of which
require one-time or periodic royalty payments. It may be necessary or
advantageous in the future for the Company to obtain additional patent licenses
or to renew existing license agreements. The Company is unable to predict
whether these license agreements can be obtained or renewed on terms acceptable
to the Company.
13
<PAGE>
Adverse determinations that the Company's manufacturing processes or products
have infringed on the product or process rights held by others could subject the
Company to significant liabilities to third parties or require material changes
in production processes or products, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company is dependent upon a limited number of key management and
technical personnel. In addition, the Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel,
particularly as the Company adds different product types to its product line,
which will require parallel design efforts and significantly increase the need
for highly skilled technical personnel. The Company competes for such personnel
with other companies, academic institutions, government entities and other
organizations. In recent periods, the Company has experienced increased
recruitment of its existing personnel by other employers. There can be no
assurance that the Company will be successful in hiring or retaining qualified
personnel. Any loss of key personnel or the inability to hire or retain
qualified personnel could have a material adverse effect on the Company's
business and results of operations.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
- -------------------------------------------------------
The registrant's 1997 Annual Meeting of Shareholders was held on November 25,
1997. At the meeting, the following items were submitted to a vote of the
shareholders:
(a) The following nominees for Directors were elected. Each person elected
as a Director will serve until the next annual meeting of shareholders or until
such person's successor is elected and qualified.
<TABLE>
<CAPTION>
Votes Votes Cast
Name of Nominee Cast For Against/Withheld
- ---------------------------- ----------- ----------------
<S> <C> <C>
Steven R. Appleton 189,948,273 2,392,942
James W. Bagley 190,476,132 1,865,083
Jerry M. Hess 190,473,599 1,867,616
Robert A. Lothrop 189,870,675 2,470,540
Thomas T. Nicholson 190,442,144 1,899,071
Don J. Simplot 189,851,706 2,489,509
John R. Simplot 189,721,948 2,619,267
Gordon C. Smith 190,432,525 1,908,690
</TABLE>
(b) The amendment to the 1994 Stock Option Plan to increase the number of
shares reserved for issuance thereunder to 32,000,000 shares was approved with
94,834,478 votes in favor, 55,013,642 votes against, 1,130,052 abstentions and
41,363,043 broker non-votes.
(c) The ratification and appointment of Coopers & Lybrand L.L.P. as
independent public accountants of the Company for the fiscal year ending
September 3, 1998 was approved with 191,163,783 votes in favor, 604,724 votes
against, 572,708 abstentions and 0 broker non-votes.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
Exhibit
Number Description of Exhibit
------ ----------------------
10.110 1994 Stock Option Plan
11 Computation of per share earnings for the quarters
ended November 27, 1997 and November 28, 1996
27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K during the fiscal
quarter ended November 27, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Micron Technology, Inc.
-----------------------------------------------
(Registrant)
Dated: January 12, 1998 /s/ Wilbur G. Stover, Jr.
-----------------------------------------------
Wilbur G. Stover, Jr. Vice President of Finance
and Chief Financial Officer (Principal Financial
and Accounting Officer)
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.110
<SEQUENCE>2
<DESCRIPTION>MICRON TECHNOLOGY, INC. 1994 STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.110
MICRON TECHNOLOGY, INC.
1994 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under Delaware corporate and securities
laws and the Code.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Change in Control" means the acquisition by any person or entity,
-----------------
directly, indirectly or beneficially, acting alone or in concert, of more than
thirty-five percent (35%) of the Common Stock of the Company outstanding at any
time.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means a Committee appointed by the Board in accordance
---------
with Section 4 of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Micron Technology, Inc., a Delaware corporation.
-------
(i) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services and who is compensated
for such services. The term "Consultant" shall also include Directors who are
not Employees of the Company.
<PAGE>
(j) "Continuous Status as and Employee or Consultant" means that the
-----------------------------------------------
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 91st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
(k) "Director" means a member of the Board.
--------
(l) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange, including without limitation the New York Stock Exchange ("NYSE"), or
a national market system, the Fair Market Value of a Share of Common Stock shall
be the average closing price for such stock (or the closing bid, if no sales
were reported) as quoted on such exchange or system (or the exchange with the
greatest volume of trading in Common Stock) for the five business days preceding
the day of determination, as reported in the The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the over-the-counter market
or is regularly quoted by a recognized securities dealer, but selling prices are
not reported, the Fair Market Value of a Share of Common Stock shall be the mean
between the high bid and low asked prices for the Common Stock on the last
market trading day prior to the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
2
<PAGE>
(p) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(q) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(r) "Notice of Grant" means a written notice evidencing certain terms
---------------
and conditions of an individual Option grant. The Notice of Grant is subject to
the terms and conditions of the Option Agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written agreement between the Company
----------------
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(v) "Option Exchange Program" means a program whereby outstanding
-----------------------
options are surrendered in exchange for options with a lower exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(x) "Optionee" means an Employee or Consultant who holds an
--------
outstanding Option.
(y) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(z) "Plan" means this 1994 Option Plan.
----
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(cc) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code. In the case of an
Option that is not intended to qualify as an Incentive Stock Option, the term
"Subsidiary" shall also include any other entity in which the Company, or any
Parent or Subsidiary of the Company has a significant ownership interest.
3
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 32,000,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
--------
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to Directors,
Officers who are not Directors, and Employees who are neither Directors nor
Officers.
(ii) Administration With Respect to Directors and Officers
-----------------------------------------------------
Subject to Section 16(b). With respect to Option grants made to Employees who
- ------------------------
are also Officers or Directors subject to Section 16(b) of the Exchange Act, the
Plan shall be administered by (A) the Board, if the Board may administer the
Plan in compliance with the rules governing a plan intended to qualify as a
discretionary plan under Rule 16b-3, or (B) a committee designated by the Board
to administer the Plan, which committee shall be constituted to comply with the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3. Once appointed, such committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the rules governing
a plan intended to qualify as a discretionary plan under Rule 16b-3.
(iii) Administration With Respect to Other Persons. With respect
--------------------------------------------
to Option grants made to Employees or Consultants who are neither Directors nor
Officers of the Company, the Plan shall be administered by (A) the Board or (B)
a committee designated by the Board, which committee shall be constituted to
satisfy Applicable Laws. Once appointed, such Board may increase the size of
the Committee and appoint additional members, remove members (with or without
cause) and substitute new members, fill vacancies (however caused), and remove
all members of the Committee and thereafter directly administer the Plan, all to
the extent permitted by Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
4
<PAGE>
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
be
granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option (subject to Section 14(c) of
the Plan), including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in the
Plan;
(xi) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option previously granted by
the Administrator;
(xii) to institute and Option Exchange Program; and
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
5
<PAGE>
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations, and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Nonstatutory Stock Options may be granted to Employees
-----------
and Consultants. Incentive Stock Options may be granted only to Employees. If
otherwise eligible, an Employee or Consultant who has been granted an Option may
be granted additional Options.
6. Limitations.
-----------
(a) Each Option shall be designated in the Notice of Grant as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value:
(i) of Shares subject to an Optionee's Incentive Stock Options
granted by the Company or any Parent or Subsidiary, which
(ii) become exercisable for the first time during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time of grant.
(b) Neither the Plan nor any Option shall confer upon an Optionee any
right with respect to continuing the Optionee's employment or consulting
relationship with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options to
Employees:
(i) No employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 12.
(iii) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 12), the canceled Option will be counted against the limit
set forth in Section 6(c)(i). For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall
------------
become effective upon the earlier to occur of its adoption by the Board or its
approval by the shareholders of the Company as described in Section 18 of the
Plan. It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 14 of the Plan.
6
<PAGE>
8. Term of Option. The term of each Option shall be stated in the Notice
--------------
of Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may
be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock
Option granted to an Optionee who, at the time Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or
such shorter term as may be provided in the Notice of Grant.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In doing so, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
7
<PAGE>
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted thereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator and
set forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate, either in book entry form or in certificate form, promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
8
<PAGE>
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it as the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for 30 days following the Optionee's termination of Continuous
Status as an Employee or Consultant. In the case of an Incentive Stock Option,
such period of time shall not exceed thirty (30) days from the date of
termination. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(c) Disability of Optionee. In the event that an Optionee's
----------------------
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination,
the Optionee does not exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at any time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the
Option by bequest or inheritance does not exercise the Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(e) Rule 16b-3. Options granted to individuals subject to Section 16
----------
of the Exchange Act ("Insiders") must comply with the applicable provisions of
Rule 16b-3 and shall contain such additional conditions or restrictions as may
be required thereunder to qualify for the maximum exemption from Section 16 of
the Exchange Act with respect to Plan transactions.
(f) Suspension. Any Optionee who is also a participant in the
----------
Retirement at Micron ("RAM") Section 401(k) Plan and who requests and receives a
hardship distribution from the RAM Plan, is prohibited from making, and must
suspend, his or her employee elective
9
<PAGE>
contributions and employee contributions including, without limitation on the
foregoing, the exercise of any Option granted from the date of receipt by that
employee of the RAM hardship distribution.
11. Non-Transferability of Options. An Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger, or
-------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of issued shares of Common Stock which
have been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding, and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned stock, including Shares as to
which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option may be assumed or an equivalent option
or right may be substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. The Administrator may, in lieu of such
assumption or substitution, provide for the Optionee to have the right to
exercise the Option as to all or a portion of the Optioned Stock, including
Shares as to which it would not otherwise be exercisable. If the Administrator
makes an Option exercisable in lieu of assumption or substitution in the event
of a merger or sale of assets, the Administrator shall notify the Optionee that
the Option shall be fully exercisable for a period of thirty (30) days from the
date of such notice, and the Option will terminate upon the expiration of such
period. For the
10
<PAGE>
purposes of this paragraph, the Option shall be considered assumed if, following
the merger or sale of assets, the option or right confers the right to purchase,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
(d) Change in Control. In the event of a Change in Control, the
-----------------
unexercised portion of the Option shall become immediately exercisable, to the
extent such acceleration does not disqualify the Plan, or cause an Incentive
Stock Option to be treated as a Nonstatutory Stock Option without the consent of
the Optionee.
13. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule, or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such shareholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the applicable law, rule, or
regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension, or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of 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, the Securities Act of
11
<PAGE>
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, Applicable Laws, and the requirements of any stock exchange or
quotation system upon which the Shares may then be listed or quoted, and shall
be further subject to the approval of counsel for the Company with respect to
such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Liability of Company.
--------------------
(a) Inability to Obtain Authority. The inability of the Company to
-----------------------------
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
--------------------------------
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional shareholder approval, such Option shall
be void with respect to such excess Optioned Stock, unless shareholder approval
of an amendment sufficiently increasing the number of shares subject to the Plan
is timely obtained in accordance with Section 14(b) of the Plan.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under applicable federal and Delaware
law.
Revised 09/10/97
12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>3
<DESCRIPTION>COMPUTATION OF PER SHARE EARNINGS
<TEXT>
<PAGE>
EXHIBIT 11
MICRON TECHNOLOGY, INC.
Computation of Per Share Earnings
(Amounts in millions except for per share data)
<TABLE>
<CAPTION>
November 27, November 28,
Quarter Ended 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
PRIMARY
Weighted average shares outstanding 211.5 209.1
Net effect of dilutive stock options 4.4 4.9
------ ------
Total shares 215.9 214.0
====== ======
Net income $ 9.6 $ 20.6
====== ======
Primary earnings per share $ 0.04 $ 0.10
====== ======
FULLY DILUTED
Weighted average shares outstanding 211.5 209.1
Net effect of dilutive stock options 4.4 5.4
------ ------
Total shares 215.9 214.5
====== ======
Net income $ 9.6 $ 20.6
====== ======
Fully diluted earnings per share $ 0.04 $ 0.10
====== ======
</TABLE>
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-03-1998
<PERIOD-END> NOV-27-1997
<CASH> 342
<SECURITIES> 586
<RECEIVABLES> 466
<ALLOWANCES> (29)
<INVENTORY> 481
<CURRENT-ASSETS> 1,912
<PP&E> 4,159
<DEPRECIATION> (1,304)
<TOTAL-ASSETS> 4,903
<CURRENT-LIABILITIES> 804
<BONDS> 745
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 21
<OTHER-SE> 2,875
<TOTAL-LIABILITY-AND-EQUITY> 4,903
<SALES> 955
<TOTAL-REVENUES> 955
<CGS> 744
<TOTAL-COSTS> 937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 16
<INCOME-TAX> 6
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| NAV | https://www.sec.gov/Archives/edgar/data/808450/0000808450-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000808450-98-000002.txt : 19980318
<SEC-HEADER>0000808450-98-000002.hdr.sgml : 19980318
ACCESSION NUMBER: 0000808450-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980317
SROS: CSX
SROS: NASD
SROS: NYSE
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW
CENTRAL INDEX KEY: 0000808450
STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711]
IRS NUMBER: 363359573
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09618
FILM NUMBER: 98567294
BUSINESS ADDRESS:
STREET 1: 455 N CITYFRONT PLAZA DR
CITY: CHICAGO
STATE: IL
ZIP: 60611
BUSINESS PHONE: 3128362000
MAIL ADDRESS:
STREET 1: 455 N CITYFRONT PLAZA DRIVE
STREET 2: 455 N CITYFRONT PLAZA DRIVE
CITY: CHICAGO
STATE: IL
ZIP: 60611
FORMER COMPANY:
FORMER CONFORMED NAME: NAVISTAR HOLDING INC
DATE OF NAME CHANGE: 19870528
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 9, 1998, the number of shares outstanding of the registrant's
common stock was 49,113,774 and the Class B Common was 19,894,103.
- 1 -
<PAGE>
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
--------------------------
INDEX
-----
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements:
Statement of Income --
Three Months Ended January 31, 1998 and 1997............. 3
Statement of Financial Condition --
January 31, 1998 October 31, 1997 and January 31, 1997... 4
Statement of Cash Flow --
Three Months Ended January 31, 1998 and 1997............. 5
Notes to Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................ 12
Part II. Other Information:
Item 1. Legal Proceedings................................. 18
Item 6. Exhibits and Reports on Form 8-K.................. 18
Signature .................................................. 19
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Millions of dollars, except per share data
- -------------------------------------------------------------------------------
Three Months Ended January 31
-----------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Sales and revenues
Sales of manufactured products ................ $1,672 $1,240
Finance and insurance revenue ................. 45 45
Other income .................................. 10 11
------ ------
Total sales and revenues .................... 1,727 1,296
------ ------
Costs and expenses
Cost of products and services sold ............ 1,454 1,076
Postretirement benefits ....................... 45 51
Engineering and research expense .............. 35 30
Marketing and administrative expense .......... 98 83
Interest expense .............................. 17 17
Financing charges on sold receivables ......... 8 7
Insurance claims and underwriting expense ..... 9 8
------ ------
Total costs and expenses .................... 1,666 1,272
------ ------
Income before income taxes ................ 61 24
Income tax expense ........................ 23 9
------ ------
Net income .................................... 38 15
Less dividends on Series G preferred stock .... 7 7
------ ------
Net income applicable to common stock ......... $ 31 $ 8
====== ======
Earnings per share
Basic .................................... $ .43 $ .10
Diluted .................................. $ .42 $ .10
Average shares outstanding (millions)
Basic .................................... 71.6 73.6
Diluted .................................. 72.5 73.7
See Notes to Financial Statements.
- 3 -
<PAGE>
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- -------------------------------------------------------------------------------
Millions of dollars
- -------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-------------------------------------------
January 31 October 31 January 31
1998 1997 1997
------------ ---------- ----------
ASSETS
- -----------------------------------
Cash and cash equivalents ......... $ 188 $ 609 $ 197
Marketable securities ............. 361 356 448
------ ------ ------
549 965 645
Receivables, net .................. 1,543 1,755 1,311
Inventories ....................... 506 483 452
Property, net of accumulated
depreciation and amortization
of $876, $847 and $864........... 896 835 773
Investments and other assets ...... 312 332 238
Intangible pension assets ......... 212 212 314
Deferred tax asset, net .......... 911 934 1,024
------ ------ ------
Total assets ...................... $4,929 $5,516 $4,757
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Liabilities
Accounts payable, principally trade $1,033 $1,100 $ 714
Debt:
Manufacturing operations ........ 125 92 113
Financial services operations ... 1,020 1,224 947
Postretirement benefits liability . 893 1,186 1,278
Other liabilities ................. 885 894 783
------ ------ ------
Total liabilities ............. 3,956 4,496 3,835
------ ------ ------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred
stock (liquidation preference
$240 million) ................... $ 240 $ 240 $ 240
Series D convertible junior
preference stock (liquidation
preference $4 million) .......... 4 4 4
Common stock (55.4 and 51.0 million
shares issued) .................. 1,748 1,659 1,642
Class B Common stock (19.9 and 24.3
million shares issued) ......... 388 471 491
Retained earnings (deficit) ....... (1,271) (1,301) (1,425)
Common stock held in treasury,
at cost ......................... (136) (53) (30)
------ ------ ------
Total shareowners' equity ..... 973 1,020 922
------ ------ ------
Total liabilities $4,929 $5,516 $4,757
and shareowners' equity ......... ====== ====== ======
See Notes to Financial Statements.
- 4 -
<PAGE>
STATEMENT OF CASH FLOW (Unaudited)
- -------------------------------------------------------------------------------
For the Three Months Ended January 31 (Millions of dollars)
- -------------------------------------------------------------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Cash flow from operations
Net income ................................. $ 38 $ 15
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization ............ 39 33
Deferred income taxes .................... 23 8
Postretirement benefits funding in excess
of expense ............................. (271) (71)
Other, net ............................... (34) (24)
Change in operating assets and liabilities:
Receivables .............................. (6) 37
Inventories .............................. (25) 11
Prepaid and other current assets ......... (10) (19)
Accounts payable ......................... (61) (106)
Other liabilities ........................ (25) (24)
------ ------
Cash used in operations .................... (332) (140)
------ ------
Cash flow from investment programs
Purchase of retail notes and lease
receivables .............................. (237) (196)
Collections/sales of retail notes
and lease receivables ................... 485 485
Purchase of marketable securities .......... (129) (165)
Sales or maturities of marketable
securities ............................... 128 113
Capital expenditures ....................... (60) (25)
Property and equipment leased to others .... (41) (16)
Other investment programs, net ............. 7 4
------ ------
Cash provided by investment programs ....... 153 200
------ ------
Cash flow from financing activities
Issuance of debt ........................... 48 79
Principal payments on debt ................. (24) (13)
Net decrease in notes and debt outstanding
under bank revolving credit facility
and asset-backed and other commercial
paper programs ........................... (211) (409)
Mexican credit facility .................... 35 -
Repurchase of common stock ................. (83) -
Dividends paid ............................. (7) (7)
------ ------
Cash used in financing activities .......... (242) (350)
------ ------
Cash and cash equivalents
Decrease during the period ............... (421) (290)
At beginning of the year ................. 609 487
------ ------
Cash and cash equivalents
at end of the period ..................... $ 188 $ 197
====== ======
See Notes to Financial Statements.
- 5 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation is a holding company whose principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). As used hereafter, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. The consolidated
financial statements include the results of the company's manufacturing
operations and its wholly owned financial services subsidiaries. The effects of
transactions between the manufacturing and financial services operations have
been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the 1997 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flow for the
periods presented. Interim results are not necessarily indicative of results for
the full year. Certain 1997 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first three months of 1998 and
1997 were $25 million and $22 million, respectively. There were no consolidated
tax payments made during the first three months of 1998 and 1997.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a
deferred tax asset in the Statement of Financial Condition, while the Statement
of Income includes income taxes calculated at the statutory rate. The amount
reported does not represent cash payment of income taxes except for certain
state income, foreign withholding and federal alternative minimum taxes which
are not material. In the Statement of Financial Condition, the deferred tax
asset is reduced by the amount of deferred tax expense or increased by a
deferred tax benefit recorded during the year. Until the company has utilized
its significant NOL carryforwards, the cash payment of federal income taxes will
be minimal.
- 6 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
January 31 October 31 January 31
Millions of dollars 1998 1997 1997
- -------------------------------------------------------------------------------
Finished products.......... $ 253 $ 212 $ 246
Work in process............ 109 106 83
Raw materials and supplies. 144 165 123
-------- -------- --------
Total inventories.......... $ 506 $ 483 $ 452
======== ======== ========
Note E. Financial Instruments
In November 1997, Navistar Financial Corporation (NFC) sold $500 million of
retail notes, realizing proceeds of $477 million, net of underwriting fees and
credit enhancements, which were used for general working capital purposes. A
gain of approximately $7 million was recognized on the sale.
During the first quarter of 1998, NFC entered into a $50 million forward
treasury lock in anticipation of a May 1998 sale of retail receivables. NFC
intends to close this position on the pricing date of the sale. Any gain or loss
resulting from this transaction will be included in the gain or loss recognized
on the sale of receivables in May 1998.
In anticipation of the $250 million 10-year Senior Subordinated Note
offering, the company entered into four $50 million forward treasury locks
during the first quarter of 1998. The company closed these positions on the
pricing date of the debt resulting in a gain which was not material.
As of January 31, 1998, the company had open positions on future sales of
$103 million of 30-year Treasury bonds and future purchases of a
duration-weighted equivalent of 2-year Treasury bonds. These positions were
closed in February resulting in a gain which was not material.
The company purchases collateralized mortgage obligations (CMOs) that have
predetermined fixed-principal payment patterns which are relatively certain.
These instruments totaled $84 million at January 31, 1998. At January 31, the
unrecognized gain on the CMO's was not material.
- 7 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
Effective for Navistar's consolidated financial statements for the three
months ended January 31, 1998, Navistar adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareowners by the weighted-average number of basic common
shares outstanding for the period. Diluted earnings per share assumes the
issuance of common stock for other potentially dilutive equivalent shares
outstanding. All prior-period earnings per share data has been restated. The
adoption of this new accounting standard did not have a material effect on the
company's reported earnings per share amounts.
Earnings per share was computed as follows:
For The Three Months Ended
January 31
------------------------------
Millions of dollars,
except share and per share data 1998 1997
- ------------------------------- -------- --------
Net income.............................. $ 38 $ 15
Less dividends
on Series G Preferred stock........... 7 7
-------- --------
Net income applicable to
common stock (Basic and Diluted)...... $ 31 $ 8
======== ========
Average shares outstanding (millions)
Basic.............................. 71.6 73.6
Dilutive effect
of options outstanding........ .8 -
Conversion of
Series D Preference Stock..... .1 .1
-------- --------
Diluted............................ 72.5 73.7
======== ========
Earnings per share
Basic.............................. .43 .10
Diluted............................ .42 .10
- 8 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share (continued)
Unexercised employee stock options to purchase 0.7 million and 2.7 million
shares of Navistar common stock during the three months ended January 31, 1998
and 1997, respectively, were not included in the computation of diluted shares
outstanding because the options' exercise prices were greater than the average
market price of Navistar common stock during the respective periods.
Additionally, the diluted calculation excludes the effects of the conversion of
the Series G preferred stock as such conversion would produce anti-dilutive
results. In January 1998, the company repurchased approximately 3.2 million
shares of its Class B Common Stock from the Supplemental Trust.
Note G. New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises standards
for disclosures about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. This standard
expands or modifies disclosure and, accordingly will have no impact on the
company's reported financial position, results of operations and cash flows.
Note H. Subsequent Events
On February 4, 1998 the company completed the private placement of $100
million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes
due 2008 (the Senior Notes, together with the Senior Subordinated Notes, the
"Old Notes"). The proceeds of the Senior Notes were used to prepay an 8% Secured
Note due 2002 and will be used to repay the 9% Sinking Fund Debentures due 2004.
The proceeds of the Senior Subordinated Notes were used to redeem the company's
$240 million, $6.00 Series G Convertible Cumulative Preferred Stock and to pay
accumulated and unpaid dividends thereon. Excess proceeds from both debt issues
will be used for general working capital purposes. On March 5, 1998, the company
initiated an offer to exchange the Old Notes with new notes (the "Exchange
Notes") which have been registered under the Securities Act of 1933, as amended.
The Exchange Notes will evidence the same debt as the Old Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indentures governing the Old Notes.
On March 5, 1998 the company announced that it has been selected to
negotiate an extended term agreement to supply diesel engines for select Ford
Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles.
- 9 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended
January 31
---------------------
Condensed Statement of Income 1998 1997
- -------------------------------------------- -------- -------
Sales of manufactured products.............. $ 1,672 $ 1,240
Other income................................ 10 10
-------- --------
Total sales and revenues.................... 1,682 1,250
-------- --------
Cost of products sold....................... 1,448 1,071
Postretirement benefits..................... 45 51
Engineering and research expense............ 35 30
Marketing and administrative expense........ 89 76
Other expenses.............................. 27 21
-------- --------
Total costs and expenses.................... 1,644 1,249
-------- --------
Income before income taxes
Manufacturing operations................. 38 1
Financial services operations............ 23 23
-------- --------
Income before income taxes............. 61 24
Income tax expense......................... 23 9
-------- --------
Net income................................. $ 38 $ 15
======== ========
Condensed Statement January 31 October 31 January 31
of Financial Condition 1998 1997 1997
- ----------------------------------- ---------- ---------- ----------
Cash, cash equivalents
and marketable securities........ $ 387 $ 802 $ 476
Inventories........................ 506 483 452
Property and equipment, net........ 733 706 656
Equity in financial services
subsidiaries..................... 329 322 319
Other assets....................... 876 864 689
Deferred tax asset, net............ 911 934 1,024
-------- -------- --------
Total assets.................. $ 3,742 $ 4,111 $ 3,616
======== ======== ========
Accounts payable,
principally trade................ $ 994 $ 1,060 $ 664
Postretirement benefits liabilities 885 1,178 1,270
Other liabilities.................. 890 853 760
Shareowners' equity................ 973 1,020 922
-------- -------- --------
Total liabilities
and shareowners' equity.... $ 3,742 $ 4,111 $ 3,616
======== ======== ========
- 10 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information (continued)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended
January 31
----------------------
Condensed Statement of Cash Flow 1998 1997
- ---------------------------------------------- -------- --------
Cash flow from operations
Net income.................................... $ 38 $ 15
Adjustments to reconcile net income to cash
used in operations:
Depreciation and amortization............ 32 29
Postretirement benefits funding
in excess of expense................... (271) (71)
Equity in earnings of nonconsolidated
companies, net of dividends received... (3) (14)
Deferred income taxes.................... 23 8
Other, net............................... (3) (7)
Change in operating assets and liabilities.... (124) (87)
-------- --------
Cash used in operations....................... (308) (127)
-------- --------
Cash flow from investment programs
Purchase of marketable securities............. (118) (150)
Sales or maturities of marketable securities.. 114 91
Capital expenditures.......................... (60) (25)
Receivable from Navistar Financial Corporation 3 (74)
Other investment programs, net................ 7 4
-------- --------
Cash used in investment programs.............. (54) (154)
-------- --------
Cash flow from financing activities........... (56) (10)
-------- --------
Cash and cash equivalents
Decrease during the period.................... (418) (291)
At beginning of the year...................... 573 452
-------- --------
Cash and cash equivalents at end of the period $ 155 $ 161
======== ========
- 11 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Corporation's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under the heading "Business Environment."
The company reported net income of $38 million, or $0.42 per diluted common
share, for the first quarter ended January 31, 1998 reflecting higher sales of
manufactured product. Net income was $15 million, or $.10 per diluted common
share, for the same period last year.
The company's manufacturing operations reported income before income taxes
of $38 million compared with pretax income of $1 million in the first quarter of
1997 reflecting an increase in demand for trucks. The financial services
operations' pretax income for the first three months of 1998 and 1997 was $23
million.
Sales and Revenues. First quarter 1998 industry retail sales of Class 5 through
8 trucks totaled 87,200 units, an increase of 21% from 1997. Class 8 heavy truck
sales of 53,300 units during the first quarter of 1998 were 26% higher than the
1997 level of 42,400 units. Industry sales of Class 5, 6 and 7 medium trucks,
including school buses, increased 14% to 33,900 units. Industry sales of school
buses, which accounted for 16% of the medium truck market, decreased 5%.
Sales and revenues for the first quarter of 1998 totaled $1,727 million,
33% higher than the $1,296 million reported for the comparable quarter in 1997.
Sales of trucks, mid-range diesel engines and service parts for the first
quarter of 1998 totaled $1,672 million compared with $1,240 million reported for
the same period in 1997.
The company maintained its position as sales leader in the combined United
States and Canadian Class 5 through 8 truck market with a 28.6% market share for
the first quarter of 1998, an increase from the 26.4% market share reported in
1997. (Sources: American Automobile Manufacturers Association, the United States
Motor Vehicle Manufacturers Association and R.L. Polk & Company.)
Shipments of mid-range diesel engines by the company to other original
equipment manufacturers during the first quarter of 1998 totaled 42,600 units, a
4% increase from the same period of 1997. Service parts sales of $185 million in
the first quarter of 1998 were consistent with the prior year's level.
Finance and insurance revenue was $45 million for both the first quarter of
1998 and 1997.
Costs and expenses. Manufacturing gross margin was 13.4% of sales for the
first quarter of 1998 consistent with 13.6% for the same period in 1997.
- 12 -
<PAGE>
Marketing and administrative expense increased to $98 million in 1998 from
$83 million in the first quarter of 1997 reflecting investment in the
implementation of the company's truck strategy to reduce costs and complexity in
its manufacturing processes.
Postretirement benefits expense decreased to $45 million in 1998 from $51
million in the first quarter of 1997 mainly as a result of higher expected
return on plan assets.
Engineering and research expense increased $5 million from first quarter
1997 to $35 million, reflecting the company's investment in its next generation
vehicle program.
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks, mid-range
diesel engines and service parts as well as product financing and insurance
coverage provided to the company's dealers and retail customers by the financial
services operations.
Historically, funds to finance the company's products are obtained from a
combination of commercial paper, short- and long-term bank borrowings, medium-
and long-term debt issues, sales of finance receivables and equity capital.
NFC's current debt ratings have made sales of finance receivables the most
economical source of funding.
Insurance operations are funded through internal operations.
Total cash, cash equivalents and marketable securities of the company
amounted to $549 million at January 31, 1998, $965 million at October 31, 1997
and $645 million at January 31, 1997.
Cash used in operations during the first quarter of 1998 totaled $332
million, primarily from excess postretirement benefits funding of $271 million
and from a net change in operating assets and liabilities of $127 million.
During the first quarter, the company contributed $200 million to the Retiree
Health Care Base Plan Trust and $100 million to the hourly pension plan, which
net of expense, resulted in funding of $193 million and $78 million,
respectively. The net change in operating assets and liabilities includes a $61
million decrease in accounts payable resulting from lower production.
Investment programs provided $153 million in cash reflecting a net decrease
in retail notes and lease receivables of $248 million. Other investment
activities used $41 million for property and equipment leased to others and $60
million to fund capital expenditures for construction of a truck assembly
facility in Mexico, to increase mid-range diesel engine capacity and for truck
product improvements.
Financing activities used cash to pay $7 million in dividends on the Series
G Preferred shares and to reduce notes and debt outstanding under the bank
revolving credit facility and asset-backed and other commercial paper program by
$211 million offset by a $24 million net increase in long-term debt at NFC
primarily due to increased capital lease funding and by $35 million of
borrowings under the Mexican credit facility. In addition, $83 million was used
to repurchase 3.2 million shares of Class B common stock during January 1998.
- 13 -
<PAGE>
Receivable sales were a significant source of funding in 1998 and 1997.
During the first quarter of 1998 and of 1997, NFC sold $500 million and $486
million, respectively, of retail notes through Navistar Financial Retail
Receivables Corporation (NFRRC). NFRRC has filed registration statements with
the Securities and Exchange Commission which provide for the issuance of up to
$5,000 million of asset-backed securities. At January 31, 1998, the remaining
shelf registration available to NFRRC was $973 million.
During the first quarter of fiscal 1998, NFC entered into a $50 million
forward treasury lock in anticipation of a May 1998 sale of retail receivables.
NFC intends to close this position on the pricing date of the sale. Any gain or
loss resulting from this transaction will be included in the gain or loss
recognized on the sale of receivables in May 1998.
As of January 1998, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of NFC had in place a $531 million revolving wholesale
note trust that provides for the continuous sale of eligible wholesale notes on
a daily basis. During the next few months $31 million will amortize and the
commitment will be $500 million. At January 31, 1998, the remaining shelf
registration available to NFSC for the issuance of investor certificates was
$200 million.
At January 31, 1998, available funding under NFC's amended and restated
credit facility and the asset-backed commercial paper facility was $767 million,
of which $115 million was used to back short-term debt at January 31, 1998. The
remaining $652 million, when combined with unrestricted cash and cash
equivalents made $658 million available to fund the general business purposes of
NFC at January 31, 1998.
As of January 31, 1998, the company had open positions on future sales of
$103 million of 30-year Treasury bonds and future purchases of a
duration-weighted equivalent of 2-year Treasury bonds. These positions were
closed in February resulting in a gain which was not material.
The company purchases collateralized mortgage obligations (CMOs) that have
predetermined fixed-principal payment patterns which are relatively certain.
These instruments totaled $84 million at January 31, 1998. At January 31, the
unrecognized gain on the CMO's was not material.
In November 1997, the company's Mexican subsidiary established a $125
million credit facility to be used to fund the development of the company's
Mexican operations.
The company had outstanding capital commitments of $107 million at January
31, 1998, primarily for increased manufacturing capacity at the Indianapolis
engine plant, improvements to existing facilities and products, and for
construction of a truck assembly facility in Mexico.
- 14 -
<PAGE>
In January 1998, Moody's, Standard and Poors and Duff and Phelps raised
Transportation's senior debt ratings from Ba2, BB, and BB to Ba1, BB+ and BB+,
respectively. NFC's senior debt ratings increased from Ba2, BB and BB+ to Ba1,
BB+ and BBB-. NFC's subordinated debt ratings were also raised from B1, B+ and
BB to Ba3, BB- and BB+, respectively.
On February 4, 1998 the company completed the private placement of $100
million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes
due 2008 (the Senior Notes, together with the Senior Subordinated Notes, the
"Old Notes"). The net proceeds from the sale of the Senior Notes were
approximately $98 million (after deducting discounts to initial purchasers and
expenses of the offering). The company used approximately $27 million to repay
the 8% Secured Note due 2002 including accrued interest and expects to use
approximately $47 million to repay the 9% Sinking Fund Debentures due 2004
including accrued interest. The net proceeds from the sale of the Senior
Subordinated Notes (after deducting discounts to the initial purchasers and
expenses in connection with the offering) were approximately $244 million and
were used to redeem the company's Series G Convertible Cumulative Preferred
Stock and to pay accumulated and unpaid dividends thereon. Any remaining
proceeds will be used for general corporate purposes, including working capital.
Although the issuance of the new debt will result in higher interest costs, the
redemption of the Series G Preferred Stock eliminates the payment of the $6.00
per share annual preferred dividend. On March 5, 1998, the company initiated an
offer to exchange the Old Notes with new notes (the "Exchange Notes") which have
been registered under the Securities Act of 1933, as amended. The Exchange Notes
will evidence the same debt as the Old Notes (which they replace) and will be
issued under and be entitled to the benefits of the Indentures governing the Old
Notes.
In anticipation of the $250 million 10-year Senior Subordinated Note
offering, the company entered into four $50 million forward treasury locks
during the first quarter of fiscal 1998. The company closed these positions on
the pricing date of the debt resulting in a gain which was not material.
Management continues to evaluate current and forecasted cash flow as a
basis for financing operating requirements and capital expenditures. Management
believes that collections on the outstanding receivables portfolios as well as
funds available from various funding sources will permit the financial services
operations to meet the financing requirements of the company's dealers and
customers.
Year 2000
The company has identified all significant applications that will require
modification to ensure Year 2000 compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 compliance. The
company plans to complete the modifications and testing process of all
significant applications by July 1999, which is prior to any anticipated impact
on its operating systems. The total cost of the Year 2000 project has not been
and is not anticipated to be material to the company's financial position or
results of operations and will be funded through operating cash flows.
- 15 -
<PAGE>
The costs of the project and the date on which the company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
In addition, the company has communicated with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which the company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
company's systems, would not have a material adverse affect on the company.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises standards
for disclosures about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. This standard
expands or modifies disclosure and, accordingly will have no impact on the
company's reported financial position, results of operations and cash flows.
- 16 -
<PAGE>
Business Environment
Sales of Class 5 through 8 trucks are cyclical, with demand affected by
such economic factors as industrial production, construction, demand for
consumer durable goods, interest rates and the earnings and cash flow of dealers
and customers. Reflecting the stability of the general economy, demand for new
trucks remained strong during the first quarter of 1998. An improvement in the
number of new truck orders has increased the company's order backlog to 60,600
units at January 31, 1998 from 29,200 units at January 31, 1997. Retail
deliveries in 1998 continue to be highly dependent on the rate at which new
truck orders are received. The company will evaluate order receipts and backlog
throughout the year and will balance production with demand as appropriate.
A stronger than expected economy has led the company to increase its
estimates of demand. The company currently projects 1998 United States and
Canadian Class 8 heavy truck demand to be 220,000 units, a 12% increase from
1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 123,000 units, a 5% increase from 1997. Demand for school buses is expected
to decline slightly in 1998 to 33,000 units. Mid-range diesel engine shipments
by the company to original equipment manufacturers in 1998 are expected to be
215,300 units, 17% higher than in 1997. The company's service parts sales are
projected to grow 8% to $870 million.
At the currently forecasted 1998 demand of 376,000 units, the entire truck
industry is operating at or near capacity while the company's manufacturing
facilities are near capacity. Additionally, constraints have been placed on the
company's ability to meet certain customers' demands because of component parts
availability.
On March 5, 1998 the company announced that it has been selected to
negotiate an extended term agreement to supply diesel engines for select Ford
Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles.
- 17 -
<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Incorporated herein by reference from Item 3 - "Legal Proceedings"
in the company's definitive Form 10-K dated December 22, 1997,
Commission File No. 1-9618.
Item 6. Exhibits and Reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation
and By-Laws E-1
4. Instruments Defining
The Rights of Security Holders,
Including Indentures E-2
10. Material Contracts E-3
(b) Reports on Form 8-K:
No reports on Form 8-K were
filed for the three months
ended January 31, 1998.
- 18 -
<PAGE>
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.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ J. Steven Keate
- ----------------------------------
J. Steven Keate
Vice President and Controller
(Principal Accounting Officer)
March 17, 1998
- 19 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<TEXT>
<PAGE>
EXHIBIT 3
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
ARTICLES OF INCORPORATION AND BY-LAWS
The following documents of Navistar International Corporation are
incorporated herein by reference:
3.1 Restated Certificate of Incorporation of Navistar International
Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form
10-K dated October 31, 1993, which was filed on January 27, 1994,
Commission File No. 1-9618.
3.2 The By-Laws of Navistar International Corporation effective April
14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K
dated October 31, 1995, which was filed on January 26, 1996, on
Commission File No. 1-9618.
E-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>3
<TEXT>
<PAGE>
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar International Corporation and its
principal subsidiary Navistar International Transportation Corp. and its
principal subsidiary Navistar Financial Corporation defining the rights of
security holders are incorporated herein by reference.
4.1 Indenture, dated as of March 1, 1968, between Navistar
International Transportation Corp. and Manufacturers Hanover
Trust Company, as Trustee, and succeeded by FIDATA Trust Company
of New York, as successor Trustee, for 6 1/4% Sinking Fund
Debentures due 1998 for $50,000,000. Filed on Registration No.
2-28150.
4.2 Indenture, dated as of June 15, 1974, between Navistar
International Transportation Corp. and Harris Trust and Savings
Bank, as Trustee, and succeeded by Commerce Union Bank, now known
as Sovran Bank/Central South, as successor Trustee, for 9%
Sinking Fund Debentures due 2004 for $150,000,000. Filed on
Registration No. 2-51111.
4.3 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Bank of America, Illinois formerly
known as Continental Bank, National Association, as Trustee, for
8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed
on Registration No. 33-50541.
4.4 Indenture, dated as of May 30, 1997, by and between Navistar
Financial Corporation and The Fuji Bank and Trust Company, as
Trustee, for 9% Senior Subordinated Notes due 2002 for
$100,000,000.
Filed on Registration No. 333-30167.
4.5 $125,000,000, Credit Agreement dated as of November 26, 1997, as
amended by Amendment No. 1 dated as of February 4, 1998, among
Navistar International Corporation Mexico, S.A. de C.V., Navistar
International Corporation, certain banks, certain Co-Arranger
banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A.,
Institucion de Banca Multiple, Grupo Financiero, as Peso Agent
and Collateral Agent. The Registrant agrees to furnish to the
Commission upon request a copy of such agreement which it has
elected not to file under the provisions of Regulation 601(b) (4)
(iii).
4.6 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, pursuant to which the 7% Senior Notes due 2003 have been
issued. Filed on Registration No. 333-47063.
4.7 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, pursuant to which the 8% Senior Subordinated Notes due
2008 have been issued. Filed on Registration No. 333-47063.
======
Instruments defining the rights of holders of other unregistered long-term
debt of Navistar and its subsidiaries have been omitted from this exhibit index
because the amount of debt authorized under any such instrument does not exceed
10% of the total assets of the Registrant and its consolidated subsidiaries. The
Registrant agrees to furnish a copy of any such instrument to the Commission
upon request.
E-2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<TEXT>
<PAGE>
EXHIBIT 10
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
MATERIAL CONTRACTS
The following documents of Navistar International Corporation are included
herein.
Form 10-Q Page
--------------
10.3 Navistar 1994 Performance Incentive Plan E-4
amended as of December 16, 1997.
10.20 Navistar 1998 Non-Employee Director E-16
Stock Option Plan.
E-3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<TEXT>
<PAGE>
EXHIBIT 10.3
NAVISTAR 1994 PERFORMANCE INCENTIVE PLAN
Amended as of December 16, 1997
SECTION I
ESTABLISHMENT OF THE PLAN
The Board of Directors of Navistar International Corporation approved the
establishment of the Navistar 1994 Performance Incentive Plan ("Plan"). The Plan
replaces the Navistar 1988 Performance Incentive Plan which consolidated and
modified the Corporation's Annual Incentive Plan, the Long Term Incentive Plan
and the 1984 Stock Option Plan into one plan.
SECTION II
PURPOSE OF THE PLAN
The purpose of the Plan is to enable the Corporation and its subsidiaries
to attract and retain highly qualified personnel, to provide key employees who
hold positions of major responsibility the opportunity to earn incentive awards
commensurate with the quality of individual performance, the achievement of
performance goals and ultimately the increase in shareowner value.
SECTION III
DEFINITIONS
For the purposes of the Plan, the following words and phrases shall have
the meanings described below in this Section III unless a different meaning is
plainly required by the context.
(1) "Annual Incentive Award" means an award of cash approved by the
Committee based on the level of achievement attained against
annual performance goals approved by the Committee on or prior
to the commencement of the applicable Fiscal year.
(2) "Award" means an award made under the Plan.
(3) "Board of Directors" means the Board of Directors of
Navistar International Corporation.
E-4
<PAGE>
(4) "Change in Control" shall be deemed to have occurred if (A) any
"Person" or "group" (as such terms are used in Section 13 (d)
and 14 (d) of the Securities Exchange Act of 1934) other than
employee or retiree benefit plans or trusts sponsored or
established by the Corporation or Navistar International
Transportation Corp. ("NITC") is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities, (B) as
the result of, or in connection with, any cash tender offer,
exchange offer, merger or other business combination, sale of
assets, proxy or consent solicitation, contested election or
substantial stock accumulation (a "Control Transaction"), the
members of the Board of Directors of the Corporation immediately
prior to the first public announcement relating to such Control
Transaction shall immediately thereafter, or within two years,
cease to constitute a majority of the Board of Directors of the
Corporation or (C) any dissolution or liquidation of the
Corporation or NITC or an agreement for the sale or disposition
of all or substantially all (more than 50%) of the assets of the
Corporation or NITC occurs. Notwithstanding the foregoing, the
sale or disposition of any or all of the assets or stock of
Navistar Financial Corporation shall not be deemed a Change in
Control.
(5) "Committee" means the Committee on Organization of the
Board of Directors.
(6) "Common Stock" means the common stock of the Corporation.
(7) "Corporation" means Navistar International Corporation.
(8) "Employee" means a person regularly employed by the Corporation
or any subsidiary of the Corporation, including its officers.
(9) "Fair Market Value" means the average of the high and the low
prices of a share of Common Stock on the effective date of grant
as set forth in the New York Stock Exchange Composite
Transactions listing published in the Midwest Edition of The
Wall Street Journal or equivalent financial publication.
(10) "Fiscal Year" means the fiscal year of the Corporation.
(11) "Incentive Stock Option" means a right, as evidenced by an
agreement between the Participant and the Company in a form
approved by the Committee, to purchase a certain number of
shares of Common Stock at Fair Market Value for a period of ten
(10) years from the date of grant which options are designed to
meet the requirements set out under Section 422 of the Internal
Revenue Code.
E-5
<PAGE>
(12) "Long-term Incentive Award" means an award of Restricted Shares
for a long-term cycle, the amount of the award and the length of
the cycle will be determined by the Committee.
(13) "Nonqualified Stock Option" means a right, as evidenced by an
agreement between the Participant and the Company in a form
approved by the Committee, to purchase a certain number of
shares of Common Stock at Fair Market Value for a period of ten
(10) years and one day from the date of grant on which options
are stated not to be qualified as incentive stock options under
Section 422 of the U.S. Internal Revenue Code.
(14) "Participant" means an Employee selected by the Corporation
for participation in the Plan.
(15) "Plan" means the Navistar 1994 Performance Incentive Plan as set
forth herein and as it may be amended hereafter from time to
time.
(16) "Qualified Retirement" means a retirement from employment of the
Corporation or any of its subsidiaries at any time after the
attainment of age fifty-five (55) with at least ten (10) years
of credited service as defined by the applicable retirement
plan.
(17) "Restricted Share" means a share of Common Stock awarded to a
Participant by the Committee without payment by the Participant
which is restricted as to sale or transfer and subject to
forfeiture pursuant to terms established by the Committee at the
time of issuance.
(18) "Stock Option" means either an Incentive Stock Option or a
Nonqualified Stock Option.
SECTION IV
ELIGIBILITY
Management will, from time to time, select and recommend to the Committee
Employees who are to become Participants in the Plan. Such Employees will be
selected from those who, in the opinion of management, have substantial
responsibility in a managerial or professional capacity. Employees selected for
participation in the Plan may not concurrently participate in any other annual
performance, long term performance, sales incentive or profit sharing plan of
the Corporation or any of its subsidiaries except as specifically approved by
the Committee.
E-6
<PAGE>
SECTION V
ANNUAL INCENTIVE AWARDS
(1) On or before the commencement of each Fiscal Year, the Committee
will approve performance goals for corporate achievement for
such Fiscal Year, and the amount of the Annual Incentive Awards
for such Fiscal Year will be based on the level of achievement
attained against previously approved performance goals. The
Committee also will approve an award percentage for each
organization level for each performance goal.
(2) Performance goals for Annual Incentive Awards will not be
increased or decreased within a Fiscal Year except for
extraordinary circumstances approved by the Committee.
(3) An Annual Incentive Award determination will be made by the
Committee when the financial results and performance levels for
a Fiscal Year are presented to the Committee by management.
(4) Payment of an Annual Incentive Award will be made in cash to the
Participant as soon as practicable after an Annual Incentive
Award determination has been made by the Committee. A
Participant who is not an Employee at the end of a Fiscal Year
will not be entitled to an Annual Incentive Award for that
Fiscal Year unless the Committee determines otherwise.
SECTION VI
LONG TERM INCENTIVE AWARDS
(1) On or before the commencement of each Fiscal Year, the Committee
will approve performance goals for corporate achievement for a
long-term cycle as determined by the Committee. The amount of
any Long Term Incentive Award earned shall be based on the
cumulative level of performance attained against the approved
performance goals.
(2) Criteria for Long Term Incentive Awards will not be increased or
decreased for any long-term cycle which has begun except for
extraordinary circumstances approved by the Committee.
(3) Separate Long-term Incentive Award determinations will be made
by the Committee for each long term cycle.
E-7
<PAGE>
(4) Restricted Shares will be awarded by the Committee to each
Participant approved by the Committee at the beginning of each
cycle unless to do so would present a substantial risk of
causing the Corporation to undergo an ownership change, as such
term is defined in Section 382 of the Internal Revenue Code, in
which event the Committee shall delay the award until there is
no longer such a risk. The amount to be awarded will be pursuant
to a formula approved by the Committee which will be based on
the ability of the Participant to contribute to the efforts to
achieve the performance goals approved by the Committee for the
applicable cycle. The Committee shall designate which shares
shall be subject to performance goals. The Committee will make
the final Long-Term Award determination. No fractional shares
will be issued. A Participant who quits or is involuntarily
separated will forfeit any Restricted Shares. Any Restricted
Shares forfeited shall be forfeited (i) to the Company or (ii)
if the forfeiture to the Company creates a substantial risk of
an ownership change under Section 382 of the Internal Revenue
Code, then to the salaried and hourly pension trusts of the
Corporation's principal operating subsidiary pro rata based on
assets held in the trusts as of the beginning of the prior plan
year. If a Participant dies, becomes permanently and totally
disabled, or retires pursuant to a Qualified Retirement,
Restricted Shares previously awarded which are subject to
performance goals, will be retained until the shares are earned
or forfeited for failure to meet the performance goals.
(5) A Participant may elect, subject to the provisions of Section
VII(2), to pay any withholding tax due on Stock Options or on
Restricted Shares awarded pursuant to the Plan either (i) by
cash including a personal check made payable to the Corporation
or (ii) by delivering at Fair Market Value unrestricted Common
Stock already owned by the Participant or (iii) by any
combination of cash or unrestricted Common Stock. If the
Participant is an officer of the Corporation who is subject to
Section 16(b) of the Securities Exchange Act of 1934, he or she
may make an election pursuant to (ii) or (iii) above only if it
is made in writing (a) at least six (6) months following the
date of grant of an option or an award and at least six (6)
months prior to the date on which the amount of the minimum
required withholding tax related to the option or award is
determined or (b) within a ten-day period following the release
of the Corporation's annual or quarterly financial results. Once
an officer, who is subject to Section 16(b) of the Securities
Exchange Act of 1934, makes an election pursuant to (ii) or
(iii) above with respect to a specific option or award, it shall
be irrevocable unless the election is disapproved by the
Committee at its next meeting following the election. If the
redemption of shares by the Corporation to pay withholding taxes
would present a substantial risk of causing an ownership change
under Section 382 of the Internal Revenue Code, the Corporation
may refuse the redemption. In such a case of refusal to redeem
by the Corporation, the Participant would be permitted to sell
sufficient shares to pay any withholding taxes due.
E-8
<PAGE>
SECTION VII
STOCK OPTIONS
(1) The Committee may grant Nonqualified Stock Options or Incentive
Stock Options or a combination of both to Participants in the
amount and at the time that the Committee approves. Option
grants shall be limited to a maximum of 50,000 shares per year
for any Participant.
(2) Unless otherwise determined by the Committee, a Stock Option
granted under the Plan will become exercisable in whole or in
part after the commencement of the second year of the term of
the Stock Option to the extent of one third of the shares, to
the extent of one third of the shares after commencement of the
third year, and to the extent of one third of the shares after
commencement of the fourth year. The Committee will be
authorized to establish the manner of exercise of a Stock
Option. The effective date of the grant of a Stock Option will,
unless the Committee expressly determines otherwise, be the
business day on which the Committee approves the grant of such
Stock Option, provided that such grant will expire if a written
option agreement is not signed by the Participant receiving a
Stock Option and delivered to the Corporation within thirty (30)
days of such approval by the Committee. The option can be
exercised in whole or in part through cashless exercises or
other arrangements through agents, including stock brokers,
under arrangements established by the Corporation by paying the
amounts required by instructions issued by the Secretary of the
Corporaton for the exercise of the options. If an exercise is
not covered by instructions issued by the Corporate Secretary,
the purchase price is to be paid in full to the Corporation upon
the exercise of a Stock Option either (i) by cash including a
personal check made payable to the Corporation; (ii) by
delivering at Fair Market Value unrestricted Common Stock
already owned by the Participant for six months or more or (iii)
by any combination of cash and unrestricted Common Stock, and in
either case, by payment to the Corporation of any withholding
tax. In no event may successive simultaneous pyramiding be used
to exercise an Option. If permitting the exercise of a Stock
Option at the time notice of intent is given by the Participant
to the Corporation would present a substantial risk of causing
an ownership change under Section 382 of the Internal Revenue
Code, the Corporation may refuse to permit the exercise in which
event as soon as the Corporation determines that a substantial
risk of causing an ownership change no longer exists, it will
issue shares of Common Stock equal in value to the difference
between the exercise price per share and the market price per
share times the number of shares covered by the exercise plus
interest on the total for the period of the delay calculated at
the composite prime rate of interest to corporate borrowers as
published in The Wall Street Journal. The Committee also will be
authorized in its discretion to prescribe in the option
agreement for the exercise of the Stock Option in specific
installments. A Stock Option granted under the Plan will be
exercisable during such period as the Committee may determine,
and will be subject to earlier
E-9
<PAGE>
termination as hereinafter provided. In no event, however, may a
Stock Option governed by the Plan be exercised after the
expiration of its term. Except as provided herein, no Stock
Option may be exercised at any time unless the Participant who
holds the Stock Option is then an Employee. The Participant who
holds a Stock Option will have none of the rights of a
shareowner with respect to the shares subject to a Stock Option
until such shares are issued upon the exercise of a Stock
Option. Shares which otherwise would be delivered to the holder
of a Stock Option may be delivered, at the election of the
holder, to the Corporation in payment of Federal, state and/or
local withholding taxes due in connection with an exercise.
(3) Neither the Corporation nor any subsidiary may directly or
indirectly lend money to any Participant for the purpose of
assisting the individual to acquire shares of Common Stock
issued upon the exercise of Stock Options granted under the
Plan.
(4) In the event of the termination of the employment of a
Participant who holds an outstanding Stock Option, other than by
reason of death, total and permanent disability or a Qualified
Retirement, the Participant may (unless the Stock Option shall
have been previously terminated) exercise the Stock Option at
any time within three (3) months after such termination, but not
after the expiration of the term of the grant, to the extent of
the number of shares which were exercisable at the date of the
termination of employment. Stock Options governed by the Plan
will not be affected by any change of employment so long as the
Participant continues to be an Employee.
(5) Except as provided in the last two sentences of this Section
VII(5), in the event of Qualified Retirement or total and
permanent disability, a Participant who holds an outstanding
Stock Option may exercise the Stock Option, to the extent the
option is exercisable or becomes exercisable under its terms, at
any time within three years after such termination or, if later,
the date on which the option becomes exercisable with respect to
such shares, but not after the expiration of the term of the
grant. In the event of the death of a Participant who holds an
outstanding Stock Option, the Stock Option may be exercised by a
legatee, or by the personal representatives or distributees, at
any time within a period of two (2) years after death, but not
after the expiration of the term of the grant. If death occurs
while employed by the Corporation or a subsidiary, or during the
three-year period specified in the first sentence of this
paragraph, options may be exercised to the extent of the
remaining shares covered by Stock Options whether or not such
shares were exercisable at the date of death. If death occurs
during the three-month period specified in Section VII(4) Stock
Options may be exercised to the extent of the number of shares
which were exercisable at the date of death. Notwithstanding the
other provisions of this Section VII(5), no option which is not
exercisable at the time of a retirement shall become exercisable
after such retirement if, without the written consent of the
Corporation, a Participant engages in a business, whether as
owner, partner,
E-10
<PAGE>
officer, employee, or otherwise, which is in competition with
the Corporation or one of its affiliates, and if the
Participant's participation in such business is deemed by the
Corporation to be detrimental to the best interests of the
Corporation. The determination as to whether such business is in
competition with the Corporation or any of its affiliates, and
whether such participation by such person is detrimental to the
best interests of the Corporation, shall be made by the
Corporation in its absolute discretion, and the decision of the
Corporation with respect thereto, including its determination as
to when the participation in such competitive business
commenced, shall be conclusive.
SECTION VIII
RESTRICTED SHARES
(1) In addition to the Restricted Shares which the Committee may
award pursuant to Section VI(4), the Committee also may award
Restricted Shares to individuals recommended by management for
either retention or performance purposes or as part of an
employment agreement.
(2) The Participant will be entitled to all dividends paid with
respect to all Restricted Shares awarded under the Plan during
the period of restriction and will not be required to return any
such dividends to the Corporation in the event of the forfeiture
of the Restricted Shares. The Participant also will be entitled
to vote Restricted Shares during the period of restriction.
(3) All Restricted Share certificates awarded under the Plan are to
be delivered to the Participant with an appropriate legend
imprinted on the certificate.
SECTION IX
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
Notwithstanding any other provision of the Plan, the option agreements may
contain such provisions as the Committee determines to be appropriate for the
adjustment of the number and class of shares, subject to each outstanding Stock
Option, the option prices in the event of changes in, or distributions with
respect to, the outstanding Common Stock by reason of stock dividends,
recapitalizations, mergers, consolidations, split-ups, combinations or exchanges
of shares, spinoffs and the like, and, in the event of any such changes in, or
distribution with respect to, the outstanding Common Stock, the aggregate number
and class of shares available under the Plan shall be appropriately adjusted by
the Committee, whose determination shall be conclusive.
E-11
<PAGE>
SECTION X
ADMINISTRATION OF THE PLAN
Full power and authority to construe, interpret and administer the Plan is
vested in the Committee. Decisions of the Committee will be final, conclusive
and binding upon all parties, including the Corporation, shareowners and
employees. The foregoing will include, but will not be limited to, all
determinations by the Committee as to (a) the approval of Employees for
participation in the Plan, (b) the amount of the Awards, (c) the performance
levels at which different percentages of the Awards would be earned and all
subsequent adjustments to such levels and (d) the determination of all Awards.
Any person who accepts any Award hereunder agrees to accept as final, conclusive
and binding all determinations of the Committee. The Committee will have the
right, in the case of employees not employed in the United States, to vary from
the provision of the Plan to the extent the Committee deems appropriate in order
to preserve the incentive features of the Plan.
SECTION XI
NON-ASSIGNMENT
Awards under the Plan may not be assigned or alienated. In case of a
Participant's death, the amounts distributable to the deceased Participant under
the Plan with respect to which a designation of beneficiary has been made (to
the extent it is valid and enforceable under applicable law) shall be
distributed in accordance with the Plan to the designated beneficiary or
beneficiaries. The amount distributable to a Participant upon death and not
subject to such a designation shall be distributed to the Participant's estate.
If there is any question as to the right of any beneficiary to receive a
distribution under the Plan, the amount in question may be paid to the estate of
the Participant, in which event the Corporation will have no further liability
to anyone with respect to such amount.
SECTION XII
RIGHTS OF PARTICIPANT
To the extent that any Participant, beneficiary or estate acquires a right
to receive payments or distributions under the Plan, such right will be no
greater than the right of a general unsecured creditor of the Corporation. All
payments and distributions to be made hereunder will be paid from the general
assets of the Corporation. Nothing contained in the Plan, and no action taken
pursuant to its provisions, shall create or be construed to create any
contracted right or trust of any kind or fiduciary relationship between the
Corporation and any Participant, beneficiary or estate.
E-12
<PAGE>
SECTION XIII
MODIFICATION, AMENDMENT OR TERMINATION
The Committee may modify without the consent of the Participant (i) the
Plan, (ii) the terms of any option previously granted or (iii) the terms of
Restricted Shares previously awarded at any time, provided that, no such
modification will, without the approval of the shareowners of the Corporation,
increase the number of shares of Common Stock available hereunder. The Committee
may terminate the Plan at any time.
SECTION XIV
RESERVATION OF SHARES
Each fiscal year, there will be reserved for issue under the Plan one (1)
percent of the outstanding shares of Common Stock including Class B Common Stock
of the Corporation as determined by the number of shares outstanding as of the
end of the immediately preceding fiscal year. No more than Five Hundred Thousand
(500,000) shares shall be granted as Incentive Stock Options in any calendar
year. Such shares may be in whole or in part, as the Board of Directors shall
from time to time determine, authorized and unissued shares of Common Stock or
issued shares of Common Stock which shall have been reacquired by the
Corporation. If less than one (1) percent of the shares is granted or awarded in
any fiscal year, the difference will be available for use in the following year
only and if not used in the following year, those shares will no longer be
available. Any shares available from the prior year will be the last shares to
be granted or awarded.
SECTION XV
AGREEMENT TO SERVE
Each Participant receiving a Nonqualified Stock Option or an Incentive
Stock Option shall, as one of the terms of the option agreement, agree to remain
in the service of the Corporation or of one of its subsidiaries for a period of
at least one (1) year from the date of granting the option. Such service will
(subject to the provisions of any contract between the Corporation or any such
subsidiary and such Participant) be at the pleasure of the Corporation or of
such subsidiary and at such compensation as the Corporation or such subsidiary
shall determine from time to time. Any termination of a Participant's service
for any reason other than death, permanent and total disability or Qualified
Retirement during such period shall be deemed a violation of the Agreement
contained in this Section. In the event of such violation, any Nonqualified
Stock Option or Incentive Stock Option held by the Participant under the Plan
will immediately be canceled. Nothing in the Plan will confer on any Participant
any right to continue in the employ of the Corporation or any of its
subsidiaries or interfere with or prevent in any way the right of the
Corporation or any of its subsidiaries to terminate a Participant's employment
at any time for any reason.
E-13
<PAGE>
SECTION XVI
CHANGE IN CONTROL
Notwithstanding any provision contained herein to the contrary, in the
event of a Change in Control, all awarded Restricted Shares will immediately be
free of all restrictions and performance contingencies and will be deemed fully
earned and not subject to forfeiture and all outstanding options governed by the
Plan will be immediately exercisable and shall continue to be exercisable for a
period of three (3) years from the date of the Change in Control regardless of
the original term or employment status, except that the term of any Incentive
Stock Option shall not be extended beyond ten (10) years from the date of grant.
SECTION XVII
LIMITATION OF ACTIONS
Every right of action by or on behalf of the Corporation or any shareowner
against any past, present or future member of the Board of Directors, officer or
Employee arising out of or in connection with the Plan will, irrespective of the
place where action may be brought and irrespective of the place of residence of
any such director, officer or employee, cease and be barred by the expiration of
three years from whichever is the later of (a) the date of the act or omission
in respect of which such right of action arises or (b) the first date upon which
there has been made generally available to shareowners an annual report of the
Corporation and a proxy statement for the annual meeting of shareowners
following the issuance of such annual report, which annual report and proxy
statement alone or together set forth, for the related period, the aggregate
amount of Awards under the Plan during such period; and any and all right of
action by an Employee (past, present or future) against the Corporation arising
out of or in connection with the Plan shall, irrespective of the place where
action may be brought, cease and be barred by the expiration of three (3) years
from the date of the act or omission in respect of which such right of action
arises.
SECTION XVIII
GOVERNING LAW
The Plan will be governed by and interpreted pursuant to the laws of the
State of Delaware, the place of incorporation of the Corporation.
E-14
<PAGE>
SECTION XIX
SUBSIDIARIES' PLANS
To the extent determined by the Committee, any subsidiary may, without
regard to the limitations under the Plan, have a separate incentive plan or
program. The Committee will have exclusive jurisdiction and sole discretion to
approve or disapprove any such plan or program and, from time to time, to amend,
modify, or suspend any such plan or program. Individuals eligible for Awards
under any such plan or program will not be considered Employees eligible for
Awards under the Plan, unless otherwise determined by the Committee. No
provision of any such plan or program will be included in, or considered a part
of, the Plan and any awards made under any such plan or program will not be
charged against the aggregate amount available under the Plan unless otherwise
determined by the Committee.
SECTION XX
EFFECTIVE DATE
The effective date of the Plan shall be December 16, 1993, if approved by
the shareowners at the 1994 Annual Meeting, and the Plan shall continue in
effect for ten (10) years from the effective date.
E-15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>6
<TEXT>
<PAGE>
EXHIBIT 10.20
NAVISTAR 1998 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
Adopted as of December 16, 1997
1. Administration
The Navistar 1998 Non-Employee Director Stock Option Plan (the "Plan")
will be administered by the Board of Directors ("Board") of Navistar
International Corporation ("Corporation").
The granting of an option pursuant to the Plan will take place the
business day following the day on which the Board approves the grant of such
option at its regularly scheduled December meeting, provided that, such grant
will expire if a written option agreement is not signed by the optionee and
delivered to the Corporation within thirty (30) days of the date of the grant.
Subject to the express provisions of the Plan, the Board will have
complete authority to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to it, to determine the terms and provisions of the
respective option agreements (which need not be identical) and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's determinations on the matters referred to in this paragraph 1 will be
conclusive.
2. Stock Subject to the Plan
Such shares may be in whole or in part, as the Board will from time to
time determine, authorized and unissued shares of Common Stock or issued shares
of Common Stock which shall have been reacquired by the Corporation. If any
option granted under the Plan shall expire or terminate for any reason without
having been exercised or earned in full, the shares subject thereto will again
be available for the purposes of the Plan.
3. Effectiveness of the Plan
The Plan will become effective upon the effective date of its adoption
by the Board.
4. Eligibility
Options may be granted only to non-employee directors of the Board. No
individual who is, at the time of the grant, an employee of the Corporation or
of any subsidiary of the Corporation will be eligible to receive an option under
the Plan.
E-16
<PAGE>
5. Number of Shares to Be Granted
At each regularly scheduled December meeting of the Board, an option
will be granted to each non-employee director for two thousand (2,000) shares of
Common Stock.
6. Option Prices
The purchase price of the Common Stock under each option will be 100%
of the fair market value of the Common Stock on the business day following the
day of grant by the Board. Such fair market value will be determined by the
average of the high and low prices of the Common Stock in the New York Stock
Exchange--Composite Transactions listing published in the Midwest Edition of The
Wall Street Journal or equivalent financial publication.
7. Exercise Options
An option granted under the Plan will become exercisable in whole or in
part after the commencement of the second year of the term of the option. The
Board is authorized to establish the manner and the effective date of the
exercise of an option. Each option will become immediately exercisable in the
event of death, total and permanent disability, retirement in accordance with
the Board's policy or a "change in control" of the Corporation. A "change in
control" shall be deemed to have occurred, if (A) any "person" or "group" (as
such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of
1934) other than employee or retiree benefit plans or trusts sponsored or
established by the Corporation or Navistar International Transportation Corp.
("NITC") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934), directly or indirectly, of securities of
the Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities, (B) as the result of, or in
connection with, any cash tender offer, exchange offer, merger or other business
combination, sale of assets, proxy or consent solicitation, contested election
or substantial stock accumulation (a "Control Transaction"), the members of the
Board of Directors of the Corporation immediately prior to the first public
announcement relating to such Control Transaction shall immediately thereafter,
or within two years, cease to constitute a majority of the Board of Directors of
the Corporation or (C) any dissolution or liquidation of the Corporation or NITC
or an agreement for the sale or disposition of all or substantially all (more
than 50%) of the assets of the Corporation or of NITC occurs. Notwithstanding
the foregoing, the sale or disposition of any or all of the assets or stock of
Navistar Financial Corporation shall not be deemed a Change in Control. The
purchase price is to be paid in full to the Corporation upon the exercise of the
option either (i) by cash including a personal check payable to the order of the
Corporation or (ii) by delivering at fair market value Common Stock already
owned by the optionee or any combination of cash and Common Stock. The fair
market value of the Common Stock so delivered will be the average of the high
and low prices of the Common Stock on the day prior to delivery as
E-17
<PAGE>
published in the New York Stock Exchange--Composite Transactions listed in the
Midwest Edition of the Wall Street Journal or equivalent financial publication.
An option granted under the Plan will be exercisable for a term of ten (10)
years from the date of the grant, and will be subject to earlier termination as
hereinafter provided. Except as provided in paragraphs 10 and 11 hereof, no
option may be exercised at any time unless the holder thereof is then a director
of the Corporation. The holder of an option will have none of the rights of a
stockholder with respect to the shares subject to option until such shares are
issued upon the exercise of the option. Shares which otherwise would be
delivered to the holder of an option may be delivered, at the election of the
holder, to the Corporation in payment of any Federal, state and/or local
withholding taxes due in connection with an exercise.
8. Non-Transferability of Options
No option granted under the Plan will be transferable other than by
will or the laws of descent and distribution, and an option may be exercised,
during the life time of the holder thereof, only by the holder.
9. Agreement to Serve
Each individual receiving an option will, as one of the terms of the
option agreement, agree to remain as a director of the Corporation for a period
of at least one (1) year from the date of granting the option except as provided
in the immediately following sentence. In the event of retirement in accordance
with the Board's policy prior to the end of the one year service period, each
holder will, as one of the terms of the option agreement, agree to serve as a
consultant to the Board for any remaining portion of such one year service
period. Such service will (subject to the provisions of paragraph 10 hereof) be
at the pleasure of the Corporation and at such compensation as the Corporation
will reasonably determine from time to time.
10. Termination of Service
In the event of the termination of the service of the holder of any
option, other than by reason of a retirement, permanent and total disability or
death as set forth in paragraph 11, the holder may (unless the option shall have
been previously terminated pursuant to the provisions of paragraph 9 above or
unless otherwise provided in the option agreement) exercise the option at any
time within three (3) months after such termination, but not after the date
identified in the option agreement as the date the options expire. Nothing in
the Plan or in any option granted pursuant to the Plan will confer on any
individual any right to continue in the service of the Corporation or interfere
in any way with the right of the Board to terminate service at any time.
E-18
<PAGE>
11. Retirement, Total and Permanent Disability or Death of Holder of Option
In the event of retirement in accordance with the Board's policy or in
the event of total and permanent disability, the holder may exercise the option
at any time within three (3) years after such retirement or such disability but
not after the date identified in the option agreement as the date the options
expire. In the event of the death of an individual to whom an option has been
granted under the Plan, while the option is outstanding, the option theretofore
granted to the holder may be exercised by a legatee or legatees of the option
holder, or by the personal representative or distributees, at any time within a
period of one (1) year after death, but not after the date identified in the
option as the date the options expire.
12. Adjustments upon Changes in Capitalization
Notwithstanding any other provision of the Plan, the option agreements
may contain such provisions as the Board shall determine to be appropriate for
the adjustment of the number and class of shares subject to each outstanding
option and the option prices in the event of changes in, or distributions with
respect to, the outstanding Common Stock by reason of stock dividends,
recapitalizations, mergers, consolidations, split-ups, combinations or exchanges
of shares, spin-offs and the like, and, in the event of any such change in, or
distribution with respect to, the outstanding Common Stock, the aggregate number
and class of shares available under the Plan shall be appropriately adjusted by
the committee, whose determination shall be conclusive.
13. No Loans to Holders of Options
Neither the Corporation, nor any of its subsidiaries, may directly or
indirectly lend money to any individual for the purpose of assisting the
individual to acquire or carry shares of Common Stock issued upon the exercise
of options granted under the Plan.
14. Amendment and Termination
Unless the Plan shall theretofore have been terminated as hereinafter
provided, the Plan will terminate on, and no option will be granted after
December 17, 2007. The Plan may be terminated, modified or amended by the Board.
No termination, modification or amendment of the Plan may, without the consent
of the optionee to whom any option or award shall theretofore have been granted,
adversely affect the rights of such optionee.
E-19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>7
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 188
<SECURITIES> 361
<RECEIVABLES> 1575
<ALLOWANCES> 32
<INVENTORY> 506
<CURRENT-ASSETS> 0<F1>
<PP&E> 1772
<DEPRECIATION> 876
<TOTAL-ASSETS> 4929
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 1145
<PREFERRED-MANDATORY> 0
<PREFERRED> 244
<COMMON> 2136
<OTHER-SE> (1407)
<TOTAL-LIABILITY-AND-EQUITY> 4929
<SALES> 1672
<TOTAL-REVENUES> 1727
<CGS> 1454
<TOTAL-COSTS> 1666
<OTHER-EXPENSES> 45
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 61
<INCOME-TAX> 23
<INCOME-CONTINUING> 38
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-PRIMARY> .43<F2>
<EPS-DILUTED> .42
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
<F2>Amount represents Basic Earnings Per Share.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| NKE | https://www.sec.gov/Archives/edgar/data/320187/0000320187-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000320187-98-000002.txt : 19980115
<SEC-HEADER>0000320187-98-000002.hdr.sgml : 19980115
ACCESSION NUMBER: 0000320187-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980114
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NIKE INC
CENTRAL INDEX KEY: 0000320187
STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021]
IRS NUMBER: 930584541
STATE OF INCORPORATION: OR
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10635
FILM NUMBER: 98506927
BUSINESS ADDRESS:
STREET 1: ONE BOWERMAN DR
CITY: BEAVERTON
STATE: OR
ZIP: 97005-6453
BUSINESS PHONE: 5036416453
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1997 Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of November 30, 1997 were:
_________________
Class A 101,487,153
Class B 189,166,005
_________________
290,653,158
==========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Nov. 30, May 31,
1997 1997
________ _______
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 139,686 $ 445,421
Accounts receivable 1,759,450 1,754,137
Inventories (Note 3) 1,448,550 1,338,640
Deferred income taxes 140,030 135,663
Prepaid expenses 188,283 157,058
__________ _________
Total current assets 3,675,999 3,830,919
__________ _________
Property, plant and equipment 1,632,029 1,425,747
Less accumulated depreciation 580,823 503,378
__________ __________
1,051,206 922,369
Identifiable intangible assets and goodwill 454,753 464,191
Deferred income taxes & other assets 201,182 143,728
__________ __________
$5,383,140 $5,361,207
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,976 $ 2,216
Notes payable 241,688 553,153
Accounts payable 495,461 687,121
Accrued liabilities 688,937 570,504
Income taxes payable 67,455 53,923
__________ __________
Total current liabilities 1,495,517 1,866,917
Long-term debt 386,235 296,020
Deferred income taxes & other liabilities 44,851 42,132
Commitments and contingencies (Note 4) - -
Redeemable Preferred Stock 300 300
Shareholders' equity:
Common Stock at stated value (Note 2):
Class A convertible-101,487 and
101,711 shares outstanding 152 152
Class B-189,166 and 187,559 shares
outstanding 2,707 2,706
Capital in excess of stated value 246,862 210,650
Foreign currency translation
adjustment (58,160) (31,333)
Retained earnings 3,264,676 2,973,663
___________ __________
3,456,237 3,155,838
___________ __________
$5,383,140 $5,361,207
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
__________________ __________________
1997 1996 1997 1996
____ ____ ____ ____
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $2,255,272 $2,107,034 $5,021,371 $4,388,960
_________ _________ _________ _________
Costs and expenses:
Cost of sales 1,409,522 1,277,628 3,074,987 2,639,747
Selling and administrative 593,044 530,453 1,251,960 1,059,990
Interest 17,136 10,228 34,055 22,894
Other expense (income) 6,321 (147) 19,490 8,494
________ ________ _________ _________
2,026,023 1,818,162 4,380,492 3,731,125
________ ________ _________ _________
Income before income taxes 229,249 288,872 640,879 657,835
Income taxes 88,200 112,000 246,700 254,900
________ ________ _________ _________
Net income $ 141,049 $ 176,872 $ 394,179 $ 402,935
========= ========= ========== ==========
Net income per common share(Note 2) $ 0.48 $ 0.60 $ 1.33 $ 1.36
========= ========= ========== ==========
Dividends declared per common share $ 0.12 $ 0.10 $ 0.22 $ 0.18
========= ========= ========== ==========
Average number of common and
common equivalent shares (Note 2) 296,721 297,022 297,110 296,693
========= ========= ========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
November 30,
_________________
1997 1996
____ ____
(in thousands)
<S> <C> <C>
Cash provided (used) by operations:
Net income $394,179 $402,935
Income charges (credits) not
affecting cash:
Depreciation 88,058 58,199
Deferred income taxes and
purchased tax benefits (8,765) (5,910)
Other 15,237 11,742
Changes in other working capital
components (199,655) (341,950)
________ _______
Cash provided by operations 289,054 125,016
________ _______
Cash (used) provided by investing activities:
Additions to property, plant and
equipment (241,999) (187,579)
Disposals of property, plant and
equipment 5,369 19,353
Increase in other assets (50,763) (25,476)
Decrease in other liabilities (10,742) (9,652)
_______ _______
Cash used by investing activities (298,135) (203,354)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt 101,295 99,789
Reductions in long-term debt
including current portion (1,118) (10,023)
Decrease in notes payable (311,465) (27,710)
Proceeds from exercise of options 17,699 13,242
Repurchase of stock (33,162) --
Dividends paid - common and preferred (57,978) (43,153)
_______ _______
Cash provided (used) by financing
activities (284,729) 32,145
_______ _______
Effect of exchange rate changes on cash (11,925) 8,606
_______ _______
Effect of May 1996 cash flow activity for certain
subsidiaries (Note 5) -- 43,004
_______ _______
Net (decrease) increase in cash and equivalents (305,735) 5,417
Cash and equivalents, May 31, 1997 and 1996 445,421 262,117
_______ _______
Cash and equivalents, November 30, 1997
and 1996 $139,686 $267,534
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of significant accounting policies:
___________________________________________
Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period(s). The interim financial
information and notes thereto should be read in conjunction with the
Company's latest annual report to shareholders. The results of operations
for the three (3) and six (6) months ended November 30, 1997 are not
necessarily indicative of results to be expected for the entire year.
NOTE 2 - Net income per common share:
___________________________
Net income per common share is computed based on the weighted average
number of common and common equivalent (stock option) shares outstanding
for the period(s).
On October 23, 1996 the Company issued additional shares in connection
with a two-for-one stock split effected in the form of a 100% stock dividend
on outstanding Class A and Class B common stock. The per common share amounts
in the Consolidated Financial Statements and accompanying notes have been
adjusted to reflect this stock split.
NOTE 3 - Inventories:
___________
Inventories by major classification are as follows:
Nov. 30, May 31,
1997 1997
________ ________
(in thousands)
Finished goods $1,372,080 $1,248,401
Work-in-process 36,129 50,245
Raw materials 40,341 39,994
________ ________
$1,448,550 $1,338,640
======== ========
NOTE 4 - Commitments and contingencies:
_____________________________
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
NOTE 5 - Change in year-end of certain subsidiaries:
__________________________________________
Prior to fiscal year 1997, certain of the Company's non-U.S.
operations reported their results of operations on a one month lag
which allowed more time to compile results. Beginning in the first
quarter of fiscal year 1997, the one month lag was eliminated. As a
result, the May 1996 charge from operations for these entities of
$4.1 million was recorded to retained earnings in the first
quarter of fiscal year 1997.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Operating Results
_________________
Net income for the second quarter of fiscal year 1998 decreased 20% to
$141.0 million or $0.48 per share compared to $176.9 million or $0.60
per share last year. Year to date, net income was $394.2
million or $1.33 per share compared to $402.9 million or $1.36 per share
last year, a decrease of two percent. Revenues increased seven percent
(14% year to date) over the prior year's second quarter, rising to $2.3
billion for the quarter from $2.1 billion last year. Gross margins for
the quarter were 37.5 percent of sales and 38.8 percent year to date,
compared to 39.4 percent and 39.9 percent last year, respectively.
Selling and administrative expenses were 26.3 percent of second quarter
revenues, compared to 25.2 percent last year, and 24.9 percent year to
date compared with 24.2percent for the prior year.
Revenues increased $148.2 million for the quarter and $632.4 million
year-to-date, which represents a seven percent and 14% increase over
last year's revenues, respectively. Non-U.S. brand revenues, which
represent the majority of the growth, increased 14% for the quarter and
30% on a year-to-date basis over the prior year. Had the dollar
remained constant with that of the prior year, non-U.S. revenues would
have increased 24% for the quarter and 41% on a year-to -date basis.
For the quarter, Europe increased five percent (17% on a constant dollar
basis), Asia Pacific increased 18% (28% on a constant dollar basis),
with the largest country, Japan, increasing 24% (35% on a constant
dollar basis), and the Americas (which includes Canada and Latin
America) increased 40% (42% on a constant dollar basis). Year
to date, Europe increased 20% (34% on a constant dollar basis), Asia
Pacific increased 39% (49% on a constant dollar basis), Japan
increased 58% (71% on a constant dollar basis), and the Americas
increased 48% (50% on a constant dollar basis).
Total U.S. brand revenues increased two percent for the quarter and six
percent year to date compared to the prior year. U.S. apparel revenues
increased 12% in the quarter and 17% on a year-to-date basis. Training,
the largest apparel category, increased four percent in the quarter.
The key apparel growth categories of golf, running, outdoor and soccer
all experienced double-digit increases in the quarter. U.S. footwear
revenues were down three percent in the quarter and increased one
percent on a year-to-date basis. The primary reason for the decline in
U. S. footwear revenues for the quarter and relative flat comparison on
a year-to-date basis is due to the relative slow down in the U.S. retail
markets as well as the difficult comparison against significant growth
rates experienced in the prior periods and the resulting increased
revenue base. For the quarter, basketball revenues, including the
Jordan brand, increased nine percent; running, after almost three years
of double-digit quarterly gains, was down nine percent; training
declined 15%, while soccer and golf posted increases of 106% and 94%,
respectively.
Other and Other Brands, which includes NIKE brand equipment, Bauer Inc.,
Cole Haan, Sports Specialties, and Tetra Plastics, increased 13% to
$158.6 million for the quarter and five percent to $307.0 million year
to date. The increase for the quarter and year to date was primarily
due to NIKE brand equipment increases against a relatively small base
partially offset by a decline in the Other Brands.
The Company expects total revenue growth for fiscal 1998 to be slightly
higher than the prior year. The reduced level of growth
rates compared with recent years reflects the sluggish U.S. retail
environment and the significant downturn in the Asian markets, offset by
growth in Europe and the Americas.
The breakdown of revenues follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1997 1996 % Change 1997 1996 % Change
____ ____ ___ ____ ____ ___
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Footwear $ 787,635 $ 814,861 -3% $1,843,667 $1,816,454 1%
U.S. Apparel 418,260 372,571 12 843,501 718,772 17
__________ __________ __________ _________
Total United States 1,205,895 1,187,432 2 2,687,168 2,535,226 6
__________ __________ __________ _________
Non-U.S. Footwear 545,161 517,229 5 1,314,782 1,065,767 23
Non-U.S. Apparel 345,594 262,021 32 712,446 494,360 44
__________ __________ __________ _________
Total Non-U.S. 890,755 779,250 14 2,027,228 1,560,127 30
__________ __________ __________ _________
Other & Other Brands 158,622 140,352 13 306,975 293,607 5
__________ __________ _________ _________
Total Revenues $2,255,272 $2,107,034 7% $5,021,371 $4,388,960 14%
========== ========== === ========= ========= ===
</TABLE>
The reduction in gross margins as a percentage of revenues, compared
with the prior year's second quarter, was primarily attributable to a
higher percentage of close-out product sales and, to a lesser extent,
higher levels of research, design and development costs. The increased
mix of close-out product sales compared to total sales is a result of
increased inventory levels from the sudden slow-down in key Asian
markets, the sluggish U.S. retail environment and European sales
returning to a more normal level of close-out sales as a percentage of
total sales. Management expects the fiscal 1998 gross margin percentage
to be lower than the prior year, primarily due to higher levels of
close-out sales and increased sales of lower priced products, higher
product costs and increased spending on infrastructure to support the
higher levels of operations.
Selling and administrative expenses increased $62.6 million over the
previous year's second quarter and $192.0 million year-to-date. The
majority of the increase wass attributable to planned increased spending
to support the long-term growth in the business, including personnel -
and other infrastructure-related costs and endorsement contracts. The
Company continues to invest in long-term growth plans, more
predominately outside the U.S., and expects that selling and
administrative expenses as a percentage of revenues will be higher than
the prior year.
Interest expense increased for both the quarter and year-to-date over
the prior year due to increased short-term borrowings for growing
operations, predominately outside the U.S., financing increased
inventories and receivables. Other expense increased a net
$6.5 million for the quarter due to non-recurring income items
experienced in the prior year, principally a promotional event in Japan
and conversion gains on foreign transactions.
Worldwide futures and advance orders for NIKE Brand athletic footwear
and apparel scheduled for delivery from December 1997 through April 1998
totaled $4.2 billion, one percent lower than such orders for the same
period last year. These orders and the percentage change in these orders
are not necessarily indicative of the change in revenues which the
Company will experience for subsequent periods. This is due to
potential shifts in the mix of advance futures orders in relation to at
once orders and varying cancellation rates. Finally exchange rate
fluctuations will also cause differences in the comparisons. The
relative flat rate of growth in futures compared with the same period
last year is a result of lower than expected orders in the Asian
markets, most notably Japan, difficult growth comparisons against high
prior year base levels and the sluggish U.S. retail environment.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
The Company's financial position remained strong at November 30, 1997.
Compared to May 31, 1997, total assets were relatively unchanged at $5.4
billion while shareholder's equity increased $300 million to $3.5 billion.
Working capital increased $216 million, to $2.2 billion, and the Company's
current ratio increased to 2.5 at November 30, 1997 from 2.1 at 1997
fiscal year-end. The increase in working capital was due to higher
inventory levels resulting from the slowdown in the Asian economies and an
increase in order cancellations coupled with the shift in debt from
short-term to long-term.
Cash provided by operations was $289 million for the six months ended
November 30, 1997, an increase of $164 million over last year's first
six months, primarily due to decreased working capital requirements as a
result of lower growth rates in the U.S. compared to the first six months
of fiscal 1997.
Additions to property, plant and equipment for the first six months of
fiscal 1998 were $242 million. Additions in the U.S. totaled $102
million due to continued overall expansion of U.S. operations which included
warehouse locations, world headquarters expansion, management information
systems and the continued development of NIKETOWN retail locations. Outside
the U.S., additions totaled $131 million and was largely attributable to the
development and expansion of new and existing warehouse facilities. In
addition to the increases in property, plant and equipment, other assets
increased from May 31, 1997 due, in large part, to advance payments made in
the first quarter for long-term endorsement contracts.
Additions to long-term debt totaled $101 million for the first six months
of fiscal 1998. In fiscal 1997 the Company filed a shelf registration with
the Securities and Exchange Commission for the sale of up to $500 million
of debt securities. Under this program, the Company issued $100 million
medium term notes in the first quarter of fiscal 1998, maturing in three
to five years. The proceeds were swapped into Dutch Guilders and
the Company used this long-term fixed rate debt financing, in addition to
excess cash, to pay down the Company's European short-term debt. This
resulted in a net reduction of $311 million in notes payable in the first
two quarters of fiscal 1998.
Management believes that significant funds generated by operations, together
with access to sufficient sources of funds, will adequately meet its
anticipated operating, global infrastructure expansion and capital needs.
Significant short and long-term lines of credit are maintained with banks
which, along with cash on hand, provide adequate operating liquidity.
Liquidity is also provided by the Company's commercial paper program under
which there was $0 outstanding at November 30, 1997.
During the quarter, the Company announced that its Board of Directors
approved a plan to repurchase a maximum of $1 billion shares of NIKE Class B
Common Stock over a period of up to four years. Funding has, and is
expected to continue to, come from operating cash flow in potential
combination with short or medium-term borrowings. The timing and
the amount of shares purchased will be dictated by working capital needs
and stock market conditions. As of November 30, 1997, the Company had
purchased a total of 21.4 million shares for approximately $341.9 million
in the open market in conjunction with the $450 million share repurchase
program previously approved in July 1993. During the second quarter, the
Company purchased a total of 801,400 shares, for approximately $40.2 million.
During the quarter the Company announced a 20% increase in the quarterly cash
dividend to $.12 per share from the previous $.10 per share.
Part II - Other Information
Item 1. Legal Proceedings:
There have been no material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1997.
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 1995).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1995).
4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
4.3 Form of Indenture between the Company and The First National Bank
of Chicago, as Trustee (incorporated by reference from Exhibit
4.01 to Amendment No. 1 to Registration Statement No. 333-15953)
filed by the Company on November 26, 1996.
4.4 Officers' Certificate establishing the terms of the Company's
6-3/8% Notes Due December 1, 2003 (incorporated by reference
from Exhibit 4.1 to the Company's Current Report on Form 8-K
dated December 10, 1996).
4.5 Form of 6-3/8% Note due December 1, 2003 (incorporated by
reference from Exhibit 4.2 to the Company's Current Report on
Form 8-K dated December 10, 1996).
4.6 Form of Officers' Certificate establishing the terms of
the Company's Fixed Rate Medium-Term Note and Floating Rate
Medium-Term Note (incorporated by reference from Exhibit 4.1
to the Company's Current Report on Form 8-K dated April 23, 1997).
4.7 Form of Fixed Rate Medium-Term Note (incorporated by reference
from Exhibit 4.2 to the Company's Current Report on Form 8-K
dated April 23, 1997).
4.8 Form of Floating Rate Medium-Term Note (incorporated by reference
from Exhibit 4.3 to the Company's Current Report on Form 8-K
dated April 23, 1997).
10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc.,
Bank of America National Trust & Savings Association,
individually and as Agent, and the other banks party thereto
(incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 1995).
10.2 Form of non-employee director Stock Option Agreement (incorporated
by reference from Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993).*
10.3 Form of Indemnity Agreement entered into between the Company and
each of its officers and directors (incorporated by reference from
the Company's definitive proxy statement filed in connection with
its annual meeting of shareholders held on September 21, 1987).
10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan
(incorporated by reference from Registration Statement No. 33-29262
on Form S-8 filed by the Company on June 16, 1989).*
10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.6 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.7 Collateral Assignment Split-Dollar Agreement between NIKE, Inc.
and Philip H. Knight dated March 10, 1994 (incorporated by
reference from Exhibit 10.7 to the Company's Annual Report on
Form 10-K for he fiscal year ended May 31, 1994).*
10.8 NIKE, Inc. Executive Performance Sharing Plan (incorporated
by reference from the Company's definitive proxy statement filed
in connection with its annual meeting of shareholders held on
September 18, 1995).*
12.1 Computation of Ratio of Earnings to Charges.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) The following reports on Form 8-K were filed by the Company during
the second quarter of fiscal 1998: NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY: /s/ Robert E. Harold
________________________
Robert E. Harold
Chief Financial Officer
DATED: January 14, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>2
<TEXT>
NIKE, Inc. Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
Six Months Ended
November 30,
________________
1997 1996
____ ____
(dollars in thousands)
Net income $394,179 $402,935
Income taxes 246,700 254,900
________ ________
Income before income taxes 640,879 657,835
________ ________
Add fixed charges
Interest expense (A) 34,874 24,430
Interest component of leases (B) 21,923 11,866
_________ ________
Total fixed charges 56,797 36,296
_________ ________
Earnings before income taxes and
fixed charges (C) $696,857 $692,595
======== ========
Ratio of earnings to total fixed charges 12.27 19.08
======== ========
(A) Interest expense includes interest both expensed and capitalized.
(B) Interest component of leases includes one-third of rental expense,
which approximates the interest component of operating leases.
(C) Earnings before income taxes and fixed charges is exclusive
of capitalized interest.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE NOVEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 139,686
<SECURITIES> 0
<RECEIVABLES> 1,759,450
<ALLOWANCES> 58,485
<INVENTORY> 1,448,550
<CURRENT-ASSETS> 3,675,999
<PP&E> 1,632,029
<DEPRECIATION> 580,823
<TOTAL-ASSETS> 5,383,140
<CURRENT-LIABILITIES> 1,495,517
<BONDS> 386,235
<COMMON> 2,859
<PREFERRED-MANDATORY> 0
<PREFERRED> 300
<OTHER-SE> 3,453,378
<TOTAL-LIABILITY-AND-EQUITY> 5,383,140
<SALES> 5,021,371
<TOTAL-REVENUES> 5,021,371
<CGS> 3,074,987
<TOTAL-COSTS> 3,074,987
<OTHER-EXPENSES> 1,256,177
<LOSS-PROVISION> 15,273
<INTEREST-EXPENSE> 34,055
<INCOME-PRETAX> 640,879
<INCOME-TAX> 246,700
<INCOME-CONTINUING> 394,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,179
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| NOVL | https://www.sec.gov/Archives/edgar/data/758004/0000758004-98-000009.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000758004-98-000009.txt : 19980318
<SEC-HEADER>0000758004-98-000009.hdr.sgml : 19980318
ACCESSION NUMBER: 0000758004-98-000009
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980131
FILED AS OF DATE: 19980317
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: NOVELL INC
CENTRAL INDEX KEY: 0000758004
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 870393339
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-13351
FILM NUMBER: 98567753
BUSINESS ADDRESS:
STREET 1: 122 EAST 1700 SOUTH
CITY: PROVO
STATE: UT
ZIP: 84097
BUSINESS PHONE: 8012226600
MAIL ADDRESS:
STREET 1: 122 E. 1700 S.
CITY: PROVO
STATE: UT
ZIP: 84606
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Quarter Ended January 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______
to ______
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
suchfiling requirements for the past 90 days.
YES X NO ___
As of February 27, 1998 there were 351,627,630 shares of the registrant's
common stock outstanding.
</PAGE>
<TABLE>
Part I. Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
<S> <C> <C>
Jan. 31, Oct. 31,
Dollars in thousands, except per share data 1998 1997
- ---------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 1,045,144 $ 1,033,473
Receivables, less allowances 225,039 234,358
($45,457 - January; $33,053 - October)
Inventories 9,178 10,656
Prepaid expenses 66,205 57,685
Deferred and refundable income taxes 119,833 134,210
- --------------------------------------------------------------------------
Total current assets 1,465,399 1,470,382
Property, plant and equipment, net 363,508 373,865
Other assets 73,754 66,402
- ---------------------------------------------------------------------------
Total assets $ 1,902,661 $ 1,910,649
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 66,490 $ 82,759
Accrued compensation 48,041 51,397
Accrued marketing liabilities 24,059 27,728
Other accrued liabilities 83,336 85,157
Income taxes payable 4,831 --
Deferred revenue 83,586 74,915
- ---------------------------------------------------------------------------
Total current liabilities 310,343 321,956
Minority interests 20,711 23,276
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 351,145,781 shares-January
350,937,812 shares-October 35,115 35,094
Additional paid-in capital 380,117 378,582
Retained earnings 1,202,455 1,188,361
Unearned stock compensation (6,351) (7,189)
Cumulative translation adjustment (552) (666)
Unrealized (loss) on investments (39,177 (28,765)
- ---------------------------------------------------------------------------
Total shareholders' equity 1,571,607 1,565,417
- -----------------------------------------------------------------------------
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
<S> <C> <C>
Fiscal Quarter Ended
Amounts in thousands, Jan. 31, Jan. 31,
except per share data 1998 1997
- ---------------------------------------------------------------------------
Net sales $252,042 $374,847
Cost of sales 55,139 75,971
- ---------------------------------------------------------------------------
Gross profit 196,903 298,876
Operating expenses
Sales and marketing 101,735 127,890
Product development 57,786 71,755
General and administrative 32,450 37,731
- ----------------------------------------------------------------------------
Total operating expenses 191,971 237,376
Income from operations 4,932 61,500
Other income (expense)
Investment income 14,399 16,614
Other, net 244 (2,837)
- ----------------------------------------------------------------------------
Other income, net 14,643 13,777
- ----------------------------------------------------------------------------
Income before taxes 19,575 75,277
Income taxes 5,481 24,465
- ----------------------------------------------------------------------------
Net income $ 14,094 $ 50,812
============================================================================
Weighted average shares outstanding
Basic 351,031 346,506
Diluted 352,971 347,095
============================================================================
Net income per share
Basic $ 0.04 $ 0.15
Diluted $ 0.04 $ 0.15
=============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Fiscal Quarter Ended
Jan. 31, Jan. 31,
Amounts in thousands 1998 1997
- ----------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 14,094 $ 50,812
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 19,889 23,816
Stock plans income tax benefits 132 1,803
Decrease in receivables 9,319 58,837
Decrease (increase) in inventories 1,478 (3,364)
(Increase) decrease in prepaid expenses (8,520) 5,431
Decrease (increase) in deferred
and refundable incometaxes 14,378 (13,049)
(Decrease) in current liabilities, net (11,613) (11,190)
- ----------------------------------------------------------------------------
Net cash provided from operating activities 39,157 113,096
- -----------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 1,424 2,685
Sale of put warrants -- 2,300
Settlement of put warrants -- (6,250)
- -----------------------------------------------------------------------------
Net cash provided (used) from
financing activities 1,424 (1,265)
- -----------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant
and equipment (8,694) (27,543)
Purchases of short-term investments (484,596) (714,467)
Maturities of short-term investments 342,605 507,663
Sales of short-term investments 145,517 166,868
Other (9,804) 1,007
- -----------------------------------------------------------------------------
Net cash (used) by investing activities (14,972) (66,472)
- -----------------------------------------------------------------------------
Total increase in cash and cash equivalents $ 25,609 $ 45,359
Cash and cash equivalents
- - beginning of period 208,543 145,521
- ----------------------------------------------------------------------------
Short-term investments - end of period 810,992 911,441
- ----------------------------------------------------------------------------
Cash and short-term investments
- - end of period $1,045,144 $1,102,321
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE> NOVELL, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. Quarterly Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
accompanying consolidated unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q but do not include
all of the information and footnotes required by generally accepted accounting
principles and should, therefore, be read in conjunction with the Company's
fiscal 1997 Annual Report to Shareholders. These statements do include all
normal recurring adjustments which the Company believes necessary for a
fair presentation of the statements. The interim operating results are
not necessarily indicative of the results for a full year.
Certain reclassifications, none of which affected net income, have been made
to the prior years' amounts in order to conform to the current year's
presentation.
In the first quarter of fiscal 1997, the Company implemented a change to
itsfiscal year and month ending dates. The Company now recognizes its
fiscalyear end on the last calendar day of October, as opposed to prior years
on thelast Saturday in October. Likewise, each fiscal month now ends on the
last calendar day of each month, and each fiscal quarter will have a unique
number of days as opposed to the consistent 13 weeks in prior years.
Implementing this change resulted in an extra five days in the first fiscal
quarter of 1997 which the Company believes did not have a material impact on
its financial position, results of operations, or cash flows.
B. Significant Events
During the third quarter of fiscal 1997, Novell took measures to reduce
and realign its resources and better manage and control its business.
These measures were in response to declines in sales of boxed products
through indirect distribution channel customers, controlled shifts to
multi-product licenses, lower licensing revenue of certain older products to
OEM's, as well as competitive pressures in the small network market.
Specifically, the Company did not ship boxed products to its indirect
distribution channel customers except to accommodate product exchanges and
returns. In addition,the Company reduced its workforce by approximately 1,000
employees, or 17% and consolidated a number of facilities. This resulted in a
one-time restructuring charge of $55 million, principally comprised of
severance and excess facilities costs. The restructuring charge contributed a
loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997.
On March 12, 1998, the Company announced the resignation of James R. Tolonen
as Senior Vice President and Chief Financial Officer. The Company also
announced that Dennis R. Raney has joined the Company as interim Chief
Financial Officer while the Company continues to actively recruit a Chief
Operating Officer.
C. Cash and Short-term Investments are carried at fair market value, with the
unrealized gains and losses, net of tax, included in shareholders equity.
Municipal securities included in short-term investments have contractual
maturities from 1-5 years. Money market preferreds have contractual maturities
of less than 90 days. No other short-term investments have contractual
maturities. The cost of securities sold is based on the
specific identification method. Such securities are available to be used
forcurrent operations and are therefore classified as current assets, even
though some maturities may extend beyond one year.
</PAGE>
<PAGE>
<TABLE>
The following is a summary of cash and short-term investments, all of
which are considered available-for-sale.
<S> <C> <C> <C> <C>
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
Jan. 31, 1998 Gains Losses Jan. 31, 1998
(Dollars in thousands)
- ----------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 75,555 $ -- $ -- $ 75,555
Repurchase agreements 770 -- -- 770
Taxable money market fund 39,362 -- -- 39,362
Municipal securities 118,465 -- -- 118,465
- -----------------------------------------------------------------------------
Cash and cash equivalents $ 234,152 $ -- $ -- $ 234,152
- -----------------------------------------------------------------------------
Short-term investments
Municipal securities $ 468,883 $ 6,073 $ (99) $ 474,857
Money market mutual funds 48 -- -- 48
Money market preferreds 146,065 2 (17) 146,050
Mutual funds 106,226 46 -- 106,272
Equity securities 153,555 24,878 (94,668) 83,765
- -----------------------------------------------------------------------------
Short-term investments $ 874,777 $ 30,999 $ (94,784) $ 810,992
- -----------------------------------------------------------------------------
Cash and short-term
investments $1,108,929 $ 30,999 $ (94,784) $1,045,144
- -----------------------------------------------------------------------------
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
Oct. 31, 1997 Gains Losses Oct. 31, 1997
(Dollars in thousands)
- -----------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 84,151 $ -- $ -- $ 84,151
Repurchase agreements 4,932 -- -- 4,932
Money market fund 42,581 -- -- 42,581
Municipal securities 76,879 -- -- 76,879
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910
Money market mutual funds 88,999 -- -- 88,999
Money market preferreds 150,817 -- (17) 150,800
Mutual funds 14,721 33 (1) 14,753
Equity securities 153,785 25,829 (77,146) 102,468
- -----------------------------------------------------------------------------
Short-term investments $ 871,765 $30,413 $(77,248) $ 824,930
- -----------------------------------------------------------------------------
Cash and short-term
investments $1,080,308 $30,413 $(77,248) $1,033,473
- -----------------------------------------------------------------------------
During the first quarter of fiscal 1998 the Company had realized gains of
$3 million on the sale of securities compared to realized gains of $6 million
in the first quarter of fiscal 1997, while realizing losses on sales
of securities of $1 million in the first quarter of fiscal 1998.
D. Income Taxes
The Company's estimated effective tax rate for the first quarter of fiscal
1998 was 28.0% compared to 32.5% in the first quarter of fiscal 1997. The
Company paid cash amounts for income taxes of $1 million and $3 million, in
the first quarter of fiscal 1998 and 1997, respectively.
</TABLE>
</PAGE>
<PAGE>
E. Commitments and Contingencies
The Company currently has a $10 million unsecured revolving bank line
of credit, with interest at the prime rate. The line can be used for
either letter of credit or working capital purposes. The line is subject to
the terms of a loan agreement containing financial covenants and restrictions,
none of which are expected to significantly affect the Company's operations.
At January 31, 1998 there were no borrowings, letter of credit acceptances or
commitments under such line.
The Company has an additional $5 million line of credit with another bank which
is not subject to a loan agreement. At January 31, 1998 standby letters of
credit of approximately $200,000 were outstanding under this line ofcredit.
In fiscal 1997, the Company entered into agreements to lease buildings
being constructed on land owned by the Company in San Jose, California and in
Provo, Utah. The lessor has committed to fund up to $272 million for
construction ofthe buildings. The leases are for a period of seven years and
can be renewed for two additional five year periods, subject to the approval of
the lender and the Company, at the sole discretion of each party. Rent
obligations will commence upon the Company's occupation of the buildings in
fiscal 1999 and fiscal 2000. If the Company does not purchase the buildings,
or arrange for the sale of the buildings, at the end of the lease, the Company
will guarantee approximately $272 million) as determined at the inception of
the leases. Inaddition, the agreement calls for the Company to maintain a
specific level of restricted cash to serve as collateral for the leases and
maintain compliance with certain financial covenants. The value of restricted
cash held as collateral at January 31, 1998 was approximately $ 28 million, and
is included in other assets.
In 1993, a suit was filed due to a failed contract against a company
that Novell subsequently acquired. The plaintiff obtained a jury verdict
against the acquired company in 1996. Novell does not believe that the
resolution ofthis legal matter will have a material adverse effect on its
financial position, results of operations, or cash flows.
The Company is a party to a number of legal claims arising in the
ordinary course of business. The Company believes the ultimate resolution of
the claims will not have a material adverse effect on its financial
position, results of operations, or cash flows.
F. Put Warrants
In fiscal 1997, the Company sold put warrants on 2 million shares of its
common stock for $2 million, callable on specific dates in the third quarter
of fiscal 1997, giving a third party the right to sell shares of Novell common
stock to the Company at contractually specified prices. The put warrant
liability is the amount the Company would be obligated to pay if all the
outstanding put warrants were exercised at the strike price without a cash
settlement. During fiscal 1997, the Company also settled all of its
remaining put warrants obligations on 6 million shares for cash of $21 million
and therefore reversed the put warrant obligation back to additional
paid-in capital.
G. International Sales
The Company markets internationally both directly to end users and
through distributors who sell to dealers and end users. For the fiscal
quarters ended January 31, 1998 and January 31, 1997, sales to international
customers were approximately $109 million and $172 million, respectively.
In the first quarters of fiscal 1998 and fiscal 1997, 65% and 62%, respectively,
of international sales were to European countries. No one foreign
country accounted for 10% or more of total sales in either period. Except for
one multi-national distributor, which accounted for 15% of revenue in the first
quarter of 1998 and 18% of revenue in the first quarter of fiscal 1997,
no customer accounted for more than 10% of revenue in any period.
</PAGE>
H. Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is what the Company previously reported as earnings
per share. Earnings per share amounts for all periods have been presented
and where appropriate, restated to conform to the Statement No. 128
requirements.
</PAGE>
<PAGE>
<TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
andResults of Operations
Introduction
Novell is the world's leading provider of network software. The Company offers
a wide range of network solutions, education, and support for distributed
network, Internet, and small-business markets.
During the third quarter of fiscal 1997, Novell took measures to reduce
and realign its resources and better manage and control its business.
The measures were in response to declines in sales of boxed products
through indirect distribution channel customers, controlled shifts to
multi-product licenses, lower licensing revenue of certain older products to
OEM's, as well as competitive pressures in the small network market.
Specifically, the Company did not ship boxed products to its indirect
distribution channel customers except to accommodate product exchanges and
returns. The Company believes this action, which significantly reduced reported
revenue in the quarter, brought indirect distribution channel inventories of
boxed software products in line with current market demand. The decision to
withhold shipments to the Company's indirect distributor channel resulted in
an operating loss in the third quarter of fiscal 1997. The Company will
continue to monitor channel inventory levels to keep them in line with estimated
market demand. In addition, the Company reduced its workforce by approximately
1,000 employees, or 17%, and consolidated a number of facilities. This
resulted in a one-time restructuring charge of $55 million, principally
comprised ofseverance and excess facilities costs. The restructuring charge
contributed a loss of $0.10 per share, net of tax, to the reported loss in
fiscal 1997.
The workforce reduction and associated consolidation of facilities returned the
Company to break even for the fourth quarter of fiscal 1997 and is expected to
lower future operating expenses by appproximately $100 million annually.
In the first quarter of fiscal 1997, the Company implemented a change to
its fiscal year and month ending dates. The Company now recognizes its
fiscal year end on the last calendar day of October, as opposed to prior years
which ended on the last Saturday in October. Likewise, each fiscal month end
now ends on the last calendar day of each month, and each fiscal quarter has
a unique number of days as opposed to the consistent 13 weeks in prior years.
quarter of 1997, which the Company believes did not have a material impact
on its financial position, results of operations, or cash flows.
Results of Operations
<S> <C> <C> <C>
Net Sales
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Net sales (millions) $252 -33% $375
=============================================================================
In general, the Company has experience continued competitive pressures in
the marketplace, resulting in the action taken in the third quarter of
fiscal 1997 described above. These competitive pressures also resulted in
lower overall revenues in the first quarter of fiscal 1998 compared to the
first quarter of fiscal 1997.
Novell's product lines can be categorized into server operating environments;
network services; UNIX royalties; and education, service and other.
While revenue decreased from the first quarter of 1997 to the first quarter of
1998, analysis of the individual product categories characterizes the changes
that have occurred.
Server operating environments revenues decreased by $103 million or 41% in
the first quarter of 1998 compared to the first quarter of 1997.
Decreases occurred in both the NetWare 4 product family of $60 million or a 32%
decline from the first quarter of 1997 and in the NetWare 3 product family of
$43 million or a 66% decline from the first quarter of 1997.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
Network services revenues decreased by $13 million or 16% in the
first quarter of 1998 compared to the first quarter of 1997. The decrease is
mainly the result of decreases in TCP/IP access products of $9 million,
GroupWare application products of $6 million, Host Connectivity products of $5
million and Network management products of $4 million, somewhat offset by a $7
million increase in Tuxedo, and the Company's border manager product of $5
million.
UNIX royalties revenues decreased $3 million or 29% in the first quarter
of 1998 compared to the first quarter of 1997. The decrease was attributable
to declining sales of UNIX licenses.
Education, service and other revenues decreased by $5 million or 14% in
the first quarter of 1998 compared to the first quarter of 1997. The decrease
was a result of lower revenues in training and other product categories,
partially offset by an increase in service related revenue.
International sales represented 43% of total sales in the first quarter of 1998
compared to 46% in the first quarter of 1997. This change is a result ofa 30%
decrease in domestic revenues compared to a 36% decrease in international
revenues in the first quarter of fiscal 1998 compared to the first quarter
of fiscal 1997.
<S> <C> <C> <C>
Gross Profit
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Gross profit (millions) $197 -34% $299
Percentage of net sales 78% 80%
==============================================================================
The gross margin percentage decreased in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997 due to the fixed portion of
cost of sales being a higher percentage of the lower revenue in the first
quarter of fiscal 1998 notwithstanding the substantial cost reductions in
absolute dollars.
Operating Expenses
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Sales and marketing (millions) $102 -20% $128
Percentage of net sales 40% 34%
- ------------------------------------------------------------------------------
Product development (millions) $58 -19% $72
Percentage of net sales 23% 19%
- -----------------------------------------------------------------------------
General and administrative (millions)$32 -14% $37
Percentage of net sales 13% 10%
- -----------------------------------------------------------------------------
Total operating expenses (millions) $192 -19% $237
Percentage of net sales 76% 63%
==============================================================================
Sales and marketing expenses decreased by $26 million in the first quarter
of fiscal 1998 compared to the first quarter of fiscal 1997 primarily due
to workforce reductions and lower facilities costs as a result of the Company's
restructuring in the third quarter of fiscal 1997. Sales and marketing
expenses increased as a percentage of net sales in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997 due to a lower revenue
base. Sales and marketing expenses fluctuate as a percentage of net sales in
any given period due to product promotions, advertising or other
discretionary expenses.
Product development expenses decreased by $14 million in the first quarter
of fiscal 1998 compared to the first quarter of fiscal 1997 primarily due to
workforce reductions in fiscal 1997, but decreased in absolute dollars due to
a lower revenue base.
General and administrative expenses decreased by $5 million in the
first quarter of fiscal 1998 compared to the first quarter of fiscal 1997
primarily due to workforce reductions in fiscal 1997, while increasing as a
percentage of net sales due to a lower revenue base.
Overall, operating expenses have declined less rapidly than revenues in
the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997,
but as a percentage of net sales as compared to the fourth quarter of fiscal
1997.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Employees 4,638 -20% 5,796
Annualized revenue per
employee (000's) $214 -17% $257
==============================================================================
In fiscal 1997, the Company reduced its workforce by approximately
1,000 employees as the Company realigned its resources to better manage and
control its business.
Other Income, Net
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Other income, net (millions) $15 7% $14
Percentage of net sales 6% 4%
==============================================================================
The primary component of other income, net is investment income, which was
$14 million in the first quarter of fiscal 1998 compared to $17 million in
the first quarter of fiscal 1997. The decrease is the result of higher
realized capital gains in the first quarter of fiscal 1997. In order to
achieve potentially higher returns, a limited portion of the Company's
investment portfolio is invested in mutual funds which incur some market risk.
The Company believes that the market risk has been limited by diversification
and by use of a funds management timing service which switches funds out
of mutual funds and into money market funds when preset signals occur.
Income Taxes
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Income taxes (millions) $5 -79% $24
Percentage of net sales 2% 6%
Effective tax rate 28% 33%
==============================================================================
The effective tax rate for fiscal 1998 is estimated to be 28% compared to a tax
benefit of 48% in fiscal 1997 due to a loss before taxes in fiscal
1997 compared to anticipated earnings in fiscal 1998.
Net Income and Net Income Per Share
Q1 Q1
1998 Change 1997
- -----------------------------------------------------------------------------
Net income (millions) $14 -73% $51
Percentage of net sales 6% 14%
Net income per share
- - basic and diluted $.04 -73% $.15
==============================================================================
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is what the Company previously reported as earnings per
share. Earnings per share amounts for all periods have been presented and where
appropriate, restated to conform to the Statement No. 128 requirements.
Liquidity and Capital Resources
Q1 Q4
1998 Change 1997
- -----------------------------------------------------------------------------
Cash and short-term
investments (millions) $1,045 1% $1,033
Percentage of total assets 55% 54%
==============================================================================
Cash and short-term investments increased to $1,045 million at January
31, 1998 from $1,033 million at October 31, 1997. The major reason for
this increase was the $39 million provided by operating activities, offset by
the $9 million of cash used for expenditures on property, plant and equipment,
and the $10 million used by other investing activities. The investment
portfolio is diversified among security types, industry groups, and individual
issuers.
</TABLE>
</PAGE>
<PAGE>
The Company's principal source of liquidity has been from operations.
At January 31, 1998, the Company's principal unused sources of
liquidity consisted of cash and short-term investments and available borrowing
capacity of approximately $15 million under its credit facilities. The
Company's liquidity needs are principally for the Company's financing of
accounts receivable, capital assets, strategic investments and flexibility in a
dynamic and competitive operating environment.
During the first fiscal quarter of 1998, the Company has continued to
generate cash from operations. The Company anticipates being able to fund its
current operations and capital expenditures planned for the foreseeable future
with existing cash and short-term investments together with internally
generated funds. The Company believes that borrowings under the Company's
credit facilities, or public offerings of equity or debt securities are
available if the need arises. Investments will continue in product development
and in new and existing areas of technology. Cash may also be used to
acquire technology through purchases and strategic acquisitions. Capital
expenditures in fiscal 1998 are anticipated to be approximately $45 million,
but could be reduced if the growth of the Company is less than presently
anticipated.
The Company's future results of operations involve a number of risks
and uncertainties. Among the factors that could cause actual results to
differ materially from historical results are the following: business
conditions and the general economy; competitive factors, such as rival
operating systems, acceptance of new products and price pressures; availability
of third-party compatible products at reasonable prices; risk of nonpayment of
accounts or notes receivable; risks associated with foreign operations; risk of
product line or inventory obsolescence due to shifts in technologies or market
demand; timing of software product introductions; market fluctuations of
investment securities; and litigation.
The Company is addressing the issues associated with the year 2000.
The Company is utilizing resources to identify, correct, reprogram and test
both its systems used internally as well as the products it sells for year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
during fiscal 1998. Novell believes that it has the product offerings,
facilities, personnel, and competitive and financial resources for
continued business success, but future revenues, costs, margins, product
mix, and profits are all influenced by a number of factors, such as those
discussed above, as well as risks described in detail in the Company's fiscal
1997 report on Form 10K.
Part II. Other Information
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
Item 1. Legal Proceedings.
The information required by this item is incorporated herein by reference to
Footnote E of the Company's financial statements contained in Part I, Item 1 of
this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- -------- ------------
27* Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter
ended January 31, 1998.
______________________
*Filed herewith.
</PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Novell, Inc.
------------------
(Registrant)
Date: March 16, 1998 /s/ Dr. Eric Schmidt
----------------------
Dr. Eric Schmidt
Chairman of the Board
and Chief Executive
Officer
(Principal Executive
Officer)
Date: March 16, 1998 /s/ Dennis R. Raney
---------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial
Officer)
Date: March 16, 1998 /s/ Cliff Simpson
--------------------
Cliff Simpson
Vice President Finance and
Corporate Controller
(Principal Accounting
Officer)
</PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 234,152
<SECURITIES> 810,992
<RECEIVABLES> 225,039
<ALLOWANCES> (45,457)
<INVENTORY> 9,178
<CURRENT-ASSETS> 1,465,399
<PP&E> 767,218
<DEPRECIATION> (403,710)
<TOTAL-ASSETS> 1,902,661
<CURRENT-LIABILITIES> 310,343
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 35,115
<OTHER-SE> 1,536,492
<TOTAL-LIABILITY-AND-EQUITY> 1,902,661
<SALES> 252,042
<TOTAL-REVENUES> 252,042
<CGS> 55,139
<TOTAL-COSTS> 55,139
<OTHER-EXPENSES> 191,971
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,575
<INCOME-TAX> 5,481
<INCOME-CONTINUING> 14,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,094
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
</TEXT>
</DOCUMENT>
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1998 | 0QTR1
| OKE | https://www.sec.gov/Archives/edgar/data/1039684/0000950134-98-000227.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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ACCESSION NUMBER: 0000950134-98-000227
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980114
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ONEOK INC /NEW/
CENTRAL INDEX KEY: 0001039684
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923]
IRS NUMBER: 731520922
STATE OF INCORPORATION: OK
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13643
FILM NUMBER: 98506790
BUSINESS ADDRESS:
STREET 1: 100 WEST 5TH ST
CITY: TULSA
STATE: OK
ZIP: 74103
BUSINESS PHONE: 9185887000
MAIL ADDRESS:
STREET 1: 100 WEST 5TH ST
CITY: TULSA
STATE: OK
ZIP: 74103
FORMER COMPANY:
FORMER CONFORMED NAME: WAI INC
DATE OF NAME CHANGE: 19970519
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q (NOV. 30 1997)
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 for the quarterly period ended November 30, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 for the transition period from to
---------- ---------
Commission file number 001-13643
ONEOK, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1520922
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
100 WEST FIFTH STREET, TULSA, OK 74103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 588-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
On November 30, 1997, the Company had 31,253,119 shares of common stock
outstanding.
<PAGE> 2
ONEOK, INC.
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE NO.
Consolidated Condensed Statements of Income -
Three Months Ended November 30, 1997 and 1996 3
Consolidated Condensed Balance Sheets -
November 30, 1997, and August 31, 1997 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended November 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 14
PART II - OTHER INFORMATION 14 - 15
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Three Months Ended
November 30,
(Thousands of Dollars, except per share amounts) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
Regulated $118,637 $113,246
Nonregulated 195,523 135,506
- -------------------------------------------------------------------------
Total Operating Revenues 314,160 248,752
- -------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 209,273 147,432
Operations and maintenance 53,762 50,566
Depreciation, depletion, and amortization 17,194 16,984
General taxes 5,445 5,092
Income taxes 7,438 7,665
- -------------------------------------------------------------------------
Total Operating Expenses 293,112 227,739
- -------------------------------------------------------------------------
Operating Income 21,048 21,013
Interest 8,528 8,839
- -------------------------------------------------------------------------
NET INCOME 12,520 12,174
Preferred Stock Dividends 0 107
- -------------------------------------------------------------------------
Income Available for Common Stock $12,520 $12,067
=========================================================================
Earnings Per Share of Common Stock $0.44 $0.44
=========================================================================
Dividends Per Share of Common Stock $0.30 $0.30
=========================================================================
Average Shares of Common Stock Outstanding 28,268 27,305
=========================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NOVEMBER 30, August 31,
(Thousands of Dollars) 1997 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property $2,075,037 $1,429,493
Accumulated depreciation, depletion, & amortization 597,296 586,156
- ----------------------------------------------------------------------------------------
Total property 1,477,741 843,337
- ----------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 12,895 14,377
Accounts and notes receivable 322,826 100,937
Inventories 143,801 78,330
Other current assets 53,159 13,633
- ----------------------------------------------------------------------------------------
Total current assets 532,681 207,277
- ----------------------------------------------------------------------------------------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets, net 166,608 144,712
Goodwill 79,871 4,756
Other 37,341 37,325
- ----------------------------------------------------------------------------------------
Total deferred charges and other assets 283,820 186,793
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $2,294,242 $1,237,407
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
COMMON SHAREHOLDERS' EQUITY:
Common stock with $0.01 par value: authorized
60,000,000 shares: issued and outstanding
31,253,119 shares at November 30, 1997 $313 --
and no par value 27,274,322 shares at August 31, 1997. -- $229,803
Premium on capital stock 883,816
Retained earnings 236,914 232,823
- ----------------------------------------------------------------------------------------
Total common shareholders' equity 1,121,043 462,626
Convertible preferred stock: $0.01 par value,
Series A authorized 100,000,000 shares;
issued and outstanding 19,946,448 shares at
November 30, 1997 199 --
- ----------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,121,242 462,626
- ----------------------------------------------------------------------------------------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION 328,214 328,214
CURRENT LIABILITIES:
Long-term debt 18,909 18,909
Notes payable 221,406 45,000
Accounts payable 131,775 80,155
Accrued taxes 32,373 12,996
Accrued interest 6,783 7,376
Other 31,834 24,611
- ----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 443,080 189,047
- ----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 273,650 183,991
Customers' advances for construction
and other deferred credits: 128,056 73,529
- ----------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 401,706 257,520
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,294,242 $1,237,407
========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
ONEOK, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of Dollars) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $12,520 $12,174
Depreciation, depletion, and amortization 17,513 16,984
Net losses of equity investees -- 91
Deferred income taxes (159) (647)
Changes in assets and liabilities (50,252) (31,898)
- ----------------------------------------------------------------------------------------
Cash used by operating activities (20,378) (3,296)
- ----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Changes in other investments, net 928 569
Capital expenditures, net of salvage (26,207) (12,701)
- ----------------------------------------------------------------------------------------
Cash used in investing activities (25,279) (12,132)
- ----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of notes payable, net 50,199 34,997
Issuance of common stock 2,404 578
Dividends paid (8,428) (7,717)
- ----------------------------------------------------------------------------------------
Cash provided by financing activities 44,175 27,858
- ----------------------------------------------------------------------------------------
Change in cash and cash equivalents (1,482) 12,430
Cash and cash equivalents at beginning of period 14,377 598
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $12,895 $13,028
========================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. ONEOK, Inc. (The Company or New ONEOK) is
successor by merger of ONEOK Inc. (Old ONEOK) with and into WAI, Inc. See
footnote B for discussion of transaction.
INTERIM REPORTING. The interim consolidated condensed financial
statements reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results for the interim periods
presented. All such adjustments are of a normal recurring nature. Due to the
seasonal nature of the business, the results of operations for the three months
ended November 30, 1997, are not necessarily indicative of the results that may
be expected for the year ended August 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended August 31, 1997.
RECLASSIFICATION. Certain amounts in the November 1996 consolidated
condensed financial statements have been reclassified to conform with the
November 1997 presentation.
B. SIGNIFICANT EVENTS
On November 26, 1997 (the Acquisition Date), Old ONEOK, through a
series of transactions, acquired certain natural gas assets of Western
Resources, Inc. (Western Resources). The transactions provided for Western
Resources to transfer all of its natural gas assets located in Kansas and
Oklahoma into a wholly-owned subsidiary, WAI, Inc. Old ONEOK then merged into
WAI, Inc. The surviving entity, WAI, Inc., then changed its name to ONEOK, Inc.
The assets included property and interests used, related to, or
generated by the field operations of Western Resources' local natural gas
distribution business and related properties and rights; all of the capital
stock of Western Resources' wholly-owned subsidiaries, Mid Continent Market
Center, Inc. (MCMC), and Westar Gas Marketing, Inc.; and all of the debts,
claims and liabilities that arose out of, related to, or were generated by, the
field operations of Western Resources' local natural gas distribution business
in the states of Kansas and Oklahoma (such liabilities and debts included an
aggregate principal amount of debt of Western Resources of $35 million, subject
to the Working Capital Adjustment) and of the wholly-owned subsidiaries.
The transaction brought 660,000 new distribution customers, 10,068 miles of
pipeline, a Kansas gas processing plan with 15 million cubic feet per day
capacity, an additional 42 percent interest in a New Mexico gas processing plant
with a 200 million cubic feet per day capacity, and a natural gas marketing
company with a retail market focus to the Company.
The transactions were accounted for as a reverse acquisition wherein Old ONEOK
is deemed the acquiring entity and, accordingly, New ONEOK has made a
preliminary assignment of the purchase price of approximately $783 million,
which includes fair value of the stock and debt assumed, to the assets and
liabilities of WAI, Inc. The purchase allocation was made based on the estimated
fair market value of the net assets with the residual assigned to goodwill. The
preliminary allocation of the purchase price estimates the working capital
adjustment to be approximately $117 million. This adjustment will be finalized
in the Company's second fiscal quarter.
6
<PAGE> 7
Simultaneous with closing of the transaction, Western Resources exercised its
rights as defined in the agreement to purchase an additional 97,555 shares of
common stock and an additional 628,864 shares of convertible preferred stock
giving Western Resources a total of 3,094,257 shares of common stock and
19,946,448 shares of convertible preferred stock and maintaining its 45 percent
capital stock interest in the Company including a 9.9 percent common stock
interest. The total cost of the purchase by Western Resources was approximately
$25.6 million and was paid for through a reduction of the Working Capital
Adjustment. A shareholder agreement including standstill provisions prevents
Western Resources from increasing its position in the Company above the 45
percent interest and maintains control of the corporation in the hands of the
public shareholders of the corporation.
As the transaction closed November 26, 1997, and was effective November 30,
1997, no operations of the acquired properties are reflected during this
quarter. Illustrative pro forma data have been prepared as if the merger had
taken place at the beginning of each period presented. These results do not
necessarily reflect the results which would have been obtained if the merger
had actually occurred on the dates indicated or the results which may be
expected in the future. The pro forma operating results of the natural gas
operations acquired for the three months ended November 30, 1997 are
preliminary and subject to change when the working capital adjustment is
finalized.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended
(Thousands of dollars, November 30,
except per share amounts 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Total operating revenues $507,202 $421,469
Operating income $ 23,884 $ 25,322
Net income $ 14,317 $ 15,645
Preferred stock dividends $ 8,975 $ 8,975
Income available for common stock $ 5,342 $ 6,669
Earnings per share of common stock $ 0.17 $ 0.22
- -------------------------------------------------------------------------
</TABLE>
C. Regulatory Assets
The following table is a summary of regulatory assets, net of
amortization, outstanding at November 30, 1997, and August 31, 1997. The
alliance with Western Resources transaction increased recoupable take-or-pay
assets by $655, postretirement costs other than pensions by $14,400,
postemployment benefits by $1,158, and added a regulatory asset for service line
replacement of $8,183.
<TABLE>
<CAPTION>
NOV. 30, Aug. 31,
(Thousands of Dollars) 1997 1997
- -----------------------------------------------------------
<S> <C> <C>
Recoupable take-or-pay $ 94,953 $95,482
Pension costs 28,199 29,244
Postretirement costs other than pension 23,099 8,836
Postemployment benefits 4,484 3,327
Service line replacement 8,183 --
Income tax rate change 7,690 7,823
Regulatory Assets, Net $ 166,608 $144,712
===========================================================
</TABLE>
D. Supplemental Cash Flow Information
The following table is supplemental information relative to the
Company's cash flows for the three months ended November 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30,
(Thousands of Dollars) 1997 1996
- -------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $8,945 $7,019
Income taxes $2,307 --
Noncash transactions:
Gas received as payment in kind $ 59 $ 163
=======================================================
</TABLE>
The Company acquired the following assets and liabilities of Western
Resources: plant, $623,500; accounts receivable, $135,600; inventories, $50,100;
regulatory assets, $24,400; prepayments $1,800; unrecovered gas costs $39,500;
notes and accounts payable, $126,800; customer deposits $7,500; accrued taxes
$10,700; miscellaneous current liabilities, $5,300; deferred credits, $53,700;
and deferred income taxes $89,300. Total consideration paid was $546,916 in
convertible preferred stock and $79,413 in common stock.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS
ONEOK, Inc. provides natural gas and related products and services to
its customers through regulated and nonregulated segments. The regulated
business unit provides natural gas distribution and transmission services in
Oklahoma and Kansas. The closing of the transaction pursuant to the agreement
with Western Resources on November 26, 1997, made the Company the eighth largest
natural gas distribution company in the United States in terms of numbers of
customers. The nonregulated business unit is primarily involved in the
marketing, processing, and production of natural gas and natural gas liquids.
The Company has agreed to sell for cash certain interests in natural gas
processing plants and a small gathering system in Oklahoma. The sale is to
take place after expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976.
CONSOLIDATED OPERATIONS
The closing of the transaction with Western Resources culminated an intensive
effort to acquire additional gas distribution and transmission facilities to
enhance operations. Under the resulting alliance, the Company owns and operates
the natural gas assets previously owned by Western Resources in the states of
Kansas and Oklahoma. Western Resources has become the largest equity holder of
the Company through a combination of common and convertible preferred stock;
however, a shareholder agreement containing standstill provisions prevents
Western Resources from increasing their position in the Company and restricts
the conditions under which Western Resources can vote any common shares received
upon conversion of its preferred stock.
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
FINANCIAL RESULTS
Operating revenues - regulated $118,637 $113,246
Operating revenues - nonregulated 195,523 135,506
- ----------------------------------------------------------------
Total operating revenues 314,160 248,752
Operating costs 268,480 203,090
Depreciation, depletion and amortization 17,194 16,984
- ----------------------------------------------------------------
Operating income before taxes $ 28,486 $ 28,678
================================================================
</TABLE>
EARNINGS PER SHARE
[GRAPH]
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------
<S> <C> <C>
E.P.S. $0.44 $0.44
- ------------------------------------
</TABLE>
8
<PAGE> 9
REGULATED OPERATIONS
ONEOK's regulated operations in Oklahoma are conducted through Oklahoma Natural
Gas Company Division (ONG), an integrated intrastate natural gas distribution
and transmission business which serves residential, commercial, and industrial
customers in the state of Oklahoma. ONG also leases space in its pipeline system
under its Pipeline Capacity Lease (PCL) program to large volume customers for
their use in transporting natural gas to their facilities. ONG is subject to
regulatory oversight by the Oklahoma Corporation Commission (OCC). As a result
of the alliance with Western Resources, the Company also conducts regulated
operations in the state of Kansas through Kansas Gas Service Company Division
(KGS) and Mid Continent Market Center, an affiliated transmission company. KGS
also conducts regulated gas distribution operations in the state of Oklahoma.
KGS is subject to regulatory oversight by the Kansas Corporation Commission and
the Oklahoma Corporation Commission.
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
FINANCIAL RESULTS
Gas Sales $106,365 $102,061
Cost of Gas 57,435 50,214
- -----------------------------------------------------------------
Gross margins on gas sales 48,930 51,847
Pipeline capacity lease margins 8,192 9,606
Other revenues 4,901 1,836
- -----------------------------------------------------------------
Net revenues 62,023 63,289
Operating expenses 32,112 33,390
Depreciation, depletion and amortization 13,295 12,889
- -----------------------------------------------------------------
Operating income before taxes $ 16,616 $ 17,010
=================================================================
</TABLE>
GAS SALES VOLUMES
[GRAPH]
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- ------------------------------------------------------
<S> <C> <C>
Gross Margin per Mcf
Residential $3.50 $3.40
Commercial $2.28 $2.49
Industrial $1.04 $0.96
Pipeline capacity leases $0.18 $0.19
======================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- -------------------------------------------------
<S> <C> <C>
Volumes (MMcf)
Gas sales
Residential 11,358 10,826
Commercial 5,253 5,419
Industrial 1,681 2,758
Pipeline capacity leases 40,865 40,727
- -------------------------------------------------
Total 59,157 59,730
=================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Number of customers 750,104 744,437
Capital expenditures (thousands) $ 20,977 10,201
Identifiable assets (thousands $1,939,168 $1,067,877
=========================================================
</TABLE>
Net revenues and gross margins from base sales rates decreased from the same
period one year ago. Unrecovered gas costs and decreases in average use per
customer contributed to the decrease. Other revenues increased primarily due to
a non-recurring charge during the first quarter of 1996.
Identifiable assets at November 30, 1997, included $744,831 acquired through the
alliance with Western Resources. Operating costs decreased from the same period
one year ago while the number of customers served increased.
9
<PAGE> 10
NONREGULATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
FINANCIAL RESULTS
COMBINED NONREGULATED OPERATIONS
Gas Sales $167,330 $108,665
Cost of Gas 165,655 105,237
- ----------------------------------------------------------------
Gross margins on gas sales 1,675 3,428
Gas and oil production 8,322 9,171
Gas processing (net) 9,326 7,981
Other 5,090 3,918
- ----------------------------------------------------------------
Net revenues 24,413 24,498
Operating expenses 8,644 8,734
Depreciation, depletion and amortization 3,899 4,095
- ----------------------------------------------------------------
Operating income $ 11,870 $11,669
================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- ---------------------------------------------------
<S> <C> <C>
COMBINED NONREGULATED
NATURAL GAS OPERATIONS
Natural gas volumes (MMcf)
Marketing 57,477 54,587
Natural gas production 3,173 3,577
Residue gas 1,478 1,549
- ---------------------------------------------------
62,128 59,713
- ---------------------------------------------------
Less intersegment sales
Marketing 2,886 969
Natural gas production 1,127 1,700
Residue gas 492 1,549
- ---------------------------------------------------
4,505 4,218
- ---------------------------------------------------
Net Natural gas volumes 57,623 55,495
===================================================
</TABLE>
ONEOK's nonregulated operations are involved in the marketing, processing, and
production of natural gas and natural gas liquids. The gas marketing subsidiary
has directed its activities, with a wholesale focus, to the mid-continent region
of the United States. The Company's interest in gas liquids extraction plants
and its producing properties have been concentrated principally in Oklahoma. The
Company also with the closing of the transaction with Western Resources, the
nonregulated operations acquired additional marketing and processing businesses
which compliment the existing businesses. For the marketing operation, the
acquisition provided a marketing business with a retail focus. In the processing
operation, an additional 42 percent interest in the Indian Basin plant in New
Mexico was acquired.
The Company adheres to a prudent risk management strategy of hedging fixed price
or location differential transactions using natural gas contracts or other
derivative agreements to offset potential price risk exposure.
10
<PAGE> 11
MARKETING
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Natural gas sales $167,330 $108,665
Cost of Gas 165,655 105,237
- -----------------------------------------------------------------
Gross margins on gas sales 1,675 3,428
Other 2,441 454
- -----------------------------------------------------------------
Operating revenues 4,116 3,882
Operating costs, net 947 805
Depreciation, depletion and amortization 129 114
- -----------------------------------------------------------------
Operating income $ 3,040 $ 2,963
=================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- --------------------------------------------------------
<S> <C> <C>
OPERATING INFORMATION
Natural gas volumes (MMcf) 57,477 54,587
Capital expenditures (thousands) -- $ 40
Identifiable assets (thousands) $164,993 $97,620
- --------------------------------------------------------
</TABLE>
Gas margins are lower this quarter compared to the same quarter one year ago
when a market anomaly resulted in unprecedented intra-month pricing movement
and increased gas margins. The weather extremes which created fiscal 1997's
increased gas margins have not occurred in fiscal 1998. The increase in other
revenues includes the recovery of prior period costs.
PROCESSING
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Gas processing (net) $8,821 $7,327
Other 24 1
- ----------------------------------------------------------------
Operating revenues 8,845 7,328
Operating costs, net 1,683 1,850
Depreciation, depletion and amortization 566 521
- ----------------------------------------------------------------
Operating income $6,596 $4,957
================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- --------------------------------------------------------
<S> <C> <C>
OPERATING INFORMATION
Residue gas (MMcf) 1,478 1,549
Natural gas liquids (MGal) 58,616 52,772
Average NGL's price (MGal) $ 0.342 $ 0.370
Fuel & Shrink price (MMbtu) $ 2.52 $ 1.84
Capital expenditures (thousands) $ 1,017 $ 316
Identifiable assets (thousands) $58,025 $30,086
- --------------------------------------------------------
</TABLE>
Residue gas sales volumes were slightly lower for the quarter ended November 30,
1997, compared to the same quarter one year ago; however, gas prices were
higher, resulting in higher margins. NGL volumes were significantly higher due
to the additional volumes from the interest acquired in the Indian Basin plant
in the second quarter of fiscal 1997 and the sales this period of NGL's stored
last spring and summer.
11
<PAGE> 12
PRODUCTION
<TABLE>
<CAPTION>
Three Months Ended
November 30,
(Thousands of dollars) 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Natural gas sales $6,997 $7,288
Oil sales 1,325 1,883
Liquids and residue 505 654
Other 378 100
- -----------------------------------------------------------
Operating revenues 9,205 9,925
Operating costs, net 3,460 2,584
Depreciation, depletion and amortization 3,110 3,370
- -----------------------------------------------------------
Operating income $2,635 $3,971
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1997 1996
- ------------------------------------------------------
<S> <C> <C>
Proved reserves
Gas (MMcf) 84,125 74,766
Oil (MBbls) 2,076 1,715
- ------------------------------------------------------
Production
Gas (MMcf) 3,173 3,577
Oil (MBbls) 70 90
- ------------------------------------------------------
Average price
Gas (Mcf) $ 2.21 $ 2.04
Oil (Bbls) $ 18.93 $ 21.00
- ------------------------------------------------------
Capital expenditures (thousands) $ 3,633 $ 1,380
Identifiable assets (thousands) $102,583 $72,606
- ------------------------------------------------------
</TABLE>
Although gas volumes were down this quarter compared to the same quarter one
year ago, this was offset by higher gas prices. Deliverability from the wells
acquired through the PSEC acquisition in the second quarter of fiscal 1997 has
been as good or better than anticipated, but this increased production has been
offset by the natural decline in other fields. Additionally, the gas production
for the first quarter of fiscal 1997 included production adjustments which
increased the volume and sales reported for that quarter. The production
operation experienced a 93 percent success rate for development drilling during
the first quarter of fiscal 1998. Operating costs increased over the same
quarter one year ago primarily due to the additional cost of operating the wells
acquired from PSEC.
During the first quarter of fiscal 1998, a definitive agreement was signed to
acquire 100 percent of the privately held stock of Washita Production Company, a
Tulsa based independent oil and gas producer. This transaction was closed in
December 1997. The acquisition of Washita, valued at approximately $20 million
subject to closing adjustments, was made with a combination of cash and ONEOK
common stock. The transaction includes 235 producing wells and significant
behind pipe and development drilling opportunities with proven reserves of
approximately 23 billion cubic feet equivalent. The wells are primarily located
in the Anadarko and Arkoma Basins of Oklahoma but include some properties in the
Hugoton Basin of Kansas.
FINANCIAL FLEXIBILITY AND LIQUIDITY
Due to the closing of the strategic alliance with Western Resources, the Company
went from a ratio of 54 percent equity and 46 percent debt (including short-term
debt) at August 31, 1997, to 66 percent equity and 34 percent debt at November
30, 1997. On December 1, 1997, Moody's Investors Service announced that it had
upgraded the Company's debt rating from A3 to A2 due to the benefits expected
from the acquisition, including a strengthened market and financial position.
The debt rating by Standard and Poor's Corporation remains at A-. The Company's
long-term debt represents 34 percent of the total capital at November 30, 1997.
Cash provided by operating activities remains strong and continues as the
primary source for meeting cash requirements. However, due to seasonal
fluctuations and additional capital requirements, the Company periodically
accesses funds through short-term credit agreements and, if necessary, through
long-term borrowings.
12
<PAGE> 13
OPERATING CASH FLOWS
Operating cash flows for the three months ended November 30, 1997, as compared
to the same period in 1996 are lower due to increased receivables and gas in
storage.
INVESTING CASH FLOWS
Capital expenditures for the three months ended November 30, 1997 and 1996 are
as follows:
CAPITAL EXPENDITURES
[GRAPH]
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1997 1996
- ------------------------------------------
<S> <C> <C>
Non-regulated $ 4.6 $ 2.0
Processing 1.0 0.3
Production 3.6 1.4
Other -- 0.3
- ------------------------------------------
Regulated $ 20.4 $10.2
==========================================
</TABLE>
FINANCING CASH FLOW
At November 30, 1997, $347 million of long-term debt was outstanding. As of that
date, the Company could have issued $845 million of additional long-term debt
under the most restrictive provisions contained in its various borrowing
agreements.
The Company believes that internally generated funds and access to financial
markets will be sufficient to meet its normal debt service, dividend
requirements, and capital expenditures. However, the adjustment of the debt
acquired from Western Resources or events such as other significant
acquisitions, may require additional debt or equity financing.
LIQUIDITY
The regulated segment continues to face competitive pressure to serve the
substantial market represented by its large volume customers. The loss of a
substantial portion of that load, without recoupment of the revenues from that
loss, could have a materially adverse effect on the Company's financial
condition. However, since 1995, rates have been structured to reduce the
Company's risk in serving its large volume customers.
OTHER
Commodity futures contracts and swaps are periodically used in the production,
gas processing, and marketing operations to hedge the impact of price
fluctuations. Natural gas futures contracts require the Company to buy or sell
natural gas at a fixed price. Swap agreements are non-exchange trades between
parties whereby one party pays a fixed price and the other a floating price.
Swaps allow for the creation of customized transactions. The Company's
production operation periodically uses commodity futures contracts and swaps to
hedge the impact of oil and natural gas price fluctuations. The Company's gas
processing operation uses futures and swaps to hedge the price of gas used in
the natural gas liquid extraction process. The gas marketing operation uses
futures and swaps to lock in margins on preexisting purchase or sale commitments
for physical
13
<PAGE> 14
quantities of natural gas. The Company adheres to policies and procedures which
limit its exposure to market risk. Gains and losses on commodity futures
contracts and swaps are recognized when the related physical gas purchases or
sales transactions are recognized. At November 30, 1997, the net deferred gain
on these contracts was approximately $0.5 million.
NEW ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board issued Statement of financial Accounting Standards NO. 128,
"Earnings per Share" ("SFAS 128"), which is required to be implemented for
fiscal years ending after December 15, 1997 and earlier application is not
permitted. SFAS 128 replaced the current "primary earnings per share" ("primary
EPS") and "fully diluted earnings per share" ("fully diluted EPS") with "basic
earnings per share" ("basic EPS") and "diluted earnings per share" ("diluted
EPS"). Unlike the calculation of primary EPS which includes , in its
denominator, the sum of (1) actual weighted shares outstanding and (2) "common
stock equivalents" as the term is defined in the authoritative literature,
basic EPS is calculated using only the actual weighted average shares
outstanding during the relevant periods.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Fent, et ux v. Oklahoma Natural Gas Company, a division of ONEOK Inc., No.
CJ-88-10148. On December 16, 1997, the Court of Appeals decided in favor of the
Company, upholding the trial court's denial of class certification. Fent filed a
Petition for Rehearing on January 5, 1998.
Application of Oklahoma Natural Gas Company, a division of ONEOK Inc. for a
Determination that under the Commission's existing Natural Gas Utility Rules and
Regulations and Oklahoma Natural's existing Service Rules and Regulations, the
gas utility customers of Oklahoma Natural Gas Company, except Jerry R. Fent and
Margaret B. Fent, are reasonable for installing and maintaining all piping
between the Customers' property or curb lines and such Customers' Points of
Consumption of Gas, Cause PUD No. 95000223. In respect to the Jenks' appeal, on
November 17, 1997, the Court of Appeals reversed the Commission Order finding
that although Jenks and other customers may be similarly situated, it could not
determine that their situations are so similar as to be the same and as such
future action may or may not be identical and fall into the same class. The
Court further stated although the Commission could interpret its rules when a
dispute arises, it could not determine whether there would be liability in any
future case because each situation may be different. As such, the Commission's
Order fails because it was an attempt to pre-judge future disputes. On December
8, 1997, the Company filed a petition for Certiorari with the Oklahoma Supreme
Court. Jenks has also filed Motions for Attorney Fees and publication of the
Order. The Company and the Commission have filed responses to the motions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports
On December 12, 1997, the Company filed two 8-K reports. The first report
concerned the appointment of two new directors to the ONEOK Board of Directors.
The second report concerned the upgrading of ONEOK's senior unsecured debt by
Moody's Investor Service.
No financial statements were filed with the Form 8-K.
15
<PAGE> 16
SIGNATURE
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, on this 14th day of
January 1998.
ONEOK, Inc.
Registrant
By: J. D. Neal
---------------------------------
Vice President, Chief Financial
Officer, and Treasurer (Principal
Financial and Accounting Officer
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS FOR THE 1998 FISCAL YEAR'S FIRST QUARTER
ENDED NOVEMBER 30, 1997, AND THE CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1997,
FOR ONEOK, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 12,895
<SECURITIES> 0
<RECEIVABLES> 322,826
<ALLOWANCES> 0
<INVENTORY> 143,801
<CURRENT-ASSETS> 532,681
<PP&E> 2,075,037
<DEPRECIATION> 597,296
<TOTAL-ASSETS> 2,294,242
<CURRENT-LIABILITIES> 443,080
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 199
<COMMON> 884,129
<OTHER-SE> 236,914
<TOTAL-LIABILITY-AND-EQUITY> 2,294,242
<SALES> 0
<TOTAL-REVENUES> 314,160
<CGS> 0
<TOTAL-COSTS> 209,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,685
<INCOME-PRETAX> 19,958
<INCOME-TAX> 7,438
<INCOME-CONTINUING> 12,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,520
<EPS-PRIMARY> .44
<EPS-DILUTED> 0
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| PG | https://www.sec.gov/Archives/edgar/data/80424/0000080424-98-000008.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000080424-98-000008.txt : 19980218
<SEC-HEADER>0000080424-98-000008.hdr.sgml : 19980218
ACCESSION NUMBER: 0000080424-98-000008
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980213
SROS: CSE
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PROCTER & GAMBLE CO
CENTRAL INDEX KEY: 0000080424
STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840]
IRS NUMBER: 310411980
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-00434
FILM NUMBER: 98536571
BUSINESS ADDRESS:
STREET 1: ONE PROCTER & GAMBLE PLZ
CITY: CINCINNATI
STATE: OH
ZIP: 45202
BUSINESS PHONE: 5139831100
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997 Commission file number 1-434
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-0411980
(State of incorporation) (I.R.S. Employer Identification No.)
One Procter & Gamble Plaza, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 983-1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
There were 1,342,369,018 shares of Common Stock outstanding as of January 27,
1998.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Consolidated Statements of Earnings of The Procter & Gamble Company and
subsidiaries for the three and six months ended December 31, 1997 and 1996, the
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1997, and the
Consolidated Statements of Cash Flows for the six months ended December 31, 1997
and 1996 follow. In the opinion of management, these unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position, results of operations, and cash flows for the interim period
reported. However, such financial statements may not be necessarily indicative
of annual results. Certain reclassifications of prior year's amounts have been
made to conform with the current year's presentation.
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<CAPTION>
Millions of Dollars Except Per Share Amounts
Three Months Ended Six Months Ended
December 31 December 31
1997 1996 1997 1996
------- ------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $9,641 $9,142 $18,996 $18,045
Cost of products sold 5,322 5,095 10,530 10,145
Marketing, research, and
administrative expenses 2,631 2,526 5,039 4,832
-------- -------- --------- ---------
OPERATING INCOME 1,688 1,521 3,427 3,068
Interest expense 141 134 262 246
Other income, net 47 45 98 101
-------- -------- --------- ---------
EARNINGS BEFORE INCOME TAXES 1,594 1,432 3,263 2,923
Income taxes 548 488 1,130 1,000
-------- -------- --------- ---------
NET EARNINGS $1,046 $ 944 $ 2,133 $ 1,923
======== ======== ========= =========
PER COMMON SHARE:
Basic net earnings $ .76 $ .67 $ 1.55 $ 1.37
Dilutive net earnings $ .71 $ .63 $ 1.44 $ 1.28
Dividends $ .253 $ .225 $ .506 $ .45
AVERAGE COMMON SHARES OUTSTANDING 1,346.0 1,364.4
</TABLE>
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
<CAPTION>
Amounts in Millions
December 31 June 30
ASSETS 1997 1997
----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,305 $ 2,350
Investment securities 1,207 760
Accounts receivable 3,009 2,738
Inventories
Materials and supplies 1,200 1,131
Work in process 302 228
Finished products 1,737 1,728
Deferred income taxes 573 661
Prepaid expenses and other current assets 1,520 1,190
--------- ---------
TOTAL CURRENT ASSETS 10,853 10,786
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT 19,337 18,625
LESS ACCUMULATED DEPRECIATION 7,833 7,249
--------- ---------
TOTAL PROPERTY, PLANT, AND EQUIPMENT 11,504 11,376
--------- ---------
GOODWILL AND OTHER INTANGIBLE ASSETS 6,213 3,949
OTHER NON-CURRENT ASSETS 1,145 1,433
--------- ---------
TOTAL ASSETS $29,715 $27,544
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accruals $ 6,522 $ 6,949
Debt due within one year 2,918 849
--------- ---------
TOTAL CURRENT LIABILITIES 9,440 7,798
--------- ---------
LONG-TERM DEBT 4,587 4,143
DEFERRED INCOME TAXES 598 559
OTHER NON-CURRENT LIABILITIES 2,972 2,998
SHAREHOLDERS' EQUITY
Preferred stock 1,842 1,859
Common stock-shares outstanding-Dec. 31 1,341.8 1,342 1,351
-June 30 1,350.8
Additional paid-in capital 667 559
Currency translation adjustments (1,303) (819)
Reserve for ESOP debt retirement (1,613) (1,634)
Retained earnings 11,183 10,730
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 12,118 12,046
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,715 $27,544
========= =========
</TABLE>
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Amounts in Millions
Six Months Ended December 31
1997 1996
-------- --------
<S> <C> <C>
BEGINNING CASH $2,350 $2,074
OPERATING ACTIVITIES
Net earnings 2,133 1,923
Depreciation and amortization 774 667
Deferred income taxes 51 (89)
Changes in:
Accounts receivable (215) (83)
Inventories (212) (102)
Accounts payable and accruals (395) 222
Other operating assets and liabilities (270) 74
Other (31) 10
-------- --------
TOTAL OPERATING ACTIVITIES 1,835 2,622
-------- --------
INVESTING ACTIVITIES
Capital expenditures (1,071) (847)
Proceeds from asset sales 141 268
Acquisitions (2,379) (121)
Change in investment securities (257) (82)
-------- --------
TOTAL INVESTMENT ACTIVITIES (3,566) (782)
-------- --------
FINANCING ACTIVITIES
Dividends to shareholders (732) (667)
Change in short-term debt 2,004 23
Additions to long-term debt 503 8
Reduction of long-term debt (110) (350)
Proceeds from stock options 54 50
Purchase of treasury shares (960) (776)
-------- --------
TOTAL FINANCING ACTIVITIES 759 (1,712)
-------- --------
EXCHANGE EFFECT ON CASH (73) (13)
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (1,045) 115
-------- --------
ENDING CASH $1,305 $2,189
======== ========
</TABLE>
Item 2. Management Discussion and Analysis
RESULTS OF OPERATIONS
- ---------------------
Basic net earnings for the October-December quarter of fiscal year 1998 were
$.76 per share, a 13 percent increase over the same quarter of the prior year.
Worldwide net earnings for the quarter were $1,046 million, an 11 percent
increase. The differential between the earnings per share and net earnings
increases was primarily due to the company's stock repurchase program.
Worldwide net sales for the quarter were $9.6 billion, a five percent increase
over the same quarter of the prior year, on eight percent unit volume growth.
Acquisitions, primarily Tambrands, net of divestitures, contributed two percent
to the unit volume growth rate. The difference between the sales and volume
growth rates was largely due to weaker currencies in Asia and western Europe.
Basic earnings per share for the first six months of the fiscal year were $1.55,
a 13 percent increase over the prior year. Worldwide net earnings were $2,133
million, an 11 percent increase over the prior year. Worldwide net sales for the
first six months were $19.0 billion, up five percent over the prior year, on
eight percent unit volume growth. Unfavorable exchange rates caused the
difference between sales and volume growth rates.
Gross margin was 44.8 percent for the current quarter compared to 44.3 percent
in the same quarter of the prior year and 42.7 percent for the full fiscal year
ended June 30, 1997. The key driver of the margin improvement has been a
continuation of the effective focus on cost control through simplification and
standardization efforts throughout the company. Operating margin was 17.5
percent for the current quarter compared to 16.6 percent in the same quarter
year ago and 15.3 percent for the prior fiscal year. This improvement was a
reflection of the higher gross margins and lower administrative and other costs
relative to sales, partially offset by higher marketing and research costs.
NORTH AMERICA
- -------------
Second quarter net sales for the North America region were up seven percent
versus the same quarter of the prior year, on six percent volume growth. Net
earnings grew 15 percent behind volume growth and continued savings from
simplification and standardization projects partially reduced by increased
investment in product initiatives.
The region's six percent unit volume growth was led by the Paper, Food and
Beverage, and Laundry and Cleaning segments. The growth was driven primarily by
feminine protection, which benefited from the Tambrands acquisition, and by
tissue and towel and snacks, which benefited from increases in production
capacity. The laundry category continued strong shipments behind product
initiatives. Unit volume growth within the Beauty Care segment was achieved
behind new product initiatives in hair care and deodorants. Health Care unit
volume was down due to competitive pressure in oral care.
For the first six months of the fiscal year, net sales for the North America
region were up six percent on equal unit volume growth. Net earnings increased
nine percent over the same period in the prior year, and included the impact of
provisions for simplification and standardization projects in the first quarter.
EUROPE, MIDDLE EAST, AND AFRICA
- -------------------------------
Second quarter net sales in Europe, Middle East, and Africa were up four percent
on a 12 percent unit volume increase, as the favorable impact of volume growth
was partially offset by unfavorable exchange rates across Europe. The region's
net earnings grew 17 percent as the favorable impacts of volume and higher gross
margins were partially offset by higher new brand initiative spending and
unfavorable exchange rates.
The region's unit volume growth was led by continued double digit growth in
Central and Eastern Europe and the Middle East and Africa. Western Europe also
achieved solid unit volume growth led by continued strength in laundry and the
addition of Tambrands.
For the first six months of the fiscal year, the region's net sales and unit
volume grew two percent and 11 percent respectively. Net earnings increased
11 percent over the same period in the prior year.
ASIA
- ----
Asia unit volume for the second quarter was flat due to market contraction
caused by economic troubles which have impacted most Asian countries. Net sales
were down five percent versus the same quarter year ago, with the impact of
weaker currencies across the region partially offset by price increases. The
region's net earnings were down four percent due to unfavorable exchange rates
and higher investment in product initiatives.
On a year to date basis, sales were down one percent while unit volume increased
four percent. Net earnings increased 12 percent reflecting the favorable impact
of volume growth and pricing partially offset by product initiative spending and
unfavorable exchange rates.
Earnings in Asia over the balance of the current fiscal year are expected to be
well below year ago as the full effect of the economic crisis in that region is
felt. However, this is not expected to be significant to the Company's overall
earnings growth rate for the current fiscal year. While the region is expected
to recover from these difficulties, the depth and duration of the economic
effects are still uncertain.
LATIN AMERICA
- -------------
Net sales in Latin America were up 18 percent for the quarter on 15 percent
volume growth. Net earnings increased 10 percent, with the favorable impact of
volume growth partially offset by increased marketing support to counter
competitive pressure in Brazil. Unit volume growth for the region was broad
based with almost all countries recording increases. Mexico led this growth
behind the acquisition of a paper business and volume growth in the base
business. Brazil benefited from prior year acquisitions in the laundry category.
On a year to date basis, sales increased 17 percent with unit volume up
10 percent. Net earnings increased 53 percent, benefiting from the first
quarter sale of a non-strategic brand.
ADOPTION OF NEW ACCOUNTING STANDARD
- -----------------------------------
Effective with the quarter ended December 31, 1997 the Company adopted FAS 128
Earnings Per Share. The impact is not material.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3-1) Amended Articles of Incorporation (Incorporated by reference to
the Company's 8-K filed on October 15, 1997)
(3-2) Regulations (Incorporated by reference to Exhibit (3-2) of the
Company's Annual Report on Form 10-K for the year ended June
30, 1993)
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K containing information
pursuant to Item 9 entitled "Sales of Equity Securities Pursuant to
Regulation S," dated December 2 and December 3, 1997, January 5,
January 6, January 8, January 28 and January 31, 1998.
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.
THE PROCTER & GAMBLE COMPANY
/s/D. R. WALKER
- ------------------------------
D. R. Walker
Vice President and Comptroller
(Principal Accounting Officer)
Date: February 13, 1998
EXHIBIT INDEX
Exhibit No. Page No.
(3-1) Amended Articles of Incorporation (Incorporated
by reference to 8-K filed on October 15, 1997)
(3-2) Regulations (Incorporated by reference to Exhibit
(3-2) of the Company's Annual Report on Form 10-K
for the year ended June 30, 1993)
(11) Computation of Earnings per Share 9
(12) Computation of Ratio of Earnings to Fixed Charges 10
(27) Financial Data Schedule 11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<TEXT>
EXHIBIT (11)
<TABLE>
<CAPTION>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
================================================
COMPUTATION OF EARNINGS PER SHARE
--------------------------------------------------------------
Amounts in Millions, Except Per Share Amounts
Three Months Ended Six Months Ended
December 31 December 31
------------------ ------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE 1997 1996 1997 1996
- ------------------------ -------- -------- -------- -------
Net earnings $1,046 $ 944 $2,133 $1,923
Deduct preferred stock dividends 26 26 52 52
-------- -------- -------- --------
Net earnings applicable to common stock $1,020 $ 918 $2,081 $1,871
- --------------------------------------- ======== ======== ======== ========
Average number of common shares outstanding 1,346.0 1,364.4 1,346.0 1,364.4
Per Share
- ---------
Basic earnings per share $ .76 $ .67 $ 1.55 $ 1.37
======== ======= ======== ========
DILUTIVE EARNINGS PER SHARE
- ---------------------------
Net earnings $1,046 $ 944 $2,133 $1,923
Deduct differential -- preferred
vs. common dividends 6 8 13 16
-------- -------- -------- --------
Net earnings applicable to common stock $1,040 $ 936 $2,120 $1,907
- --------------------------------------- ======== ======== ======== ========
Average number of common shares outstanding 1,346.0 1,364.4 1,346.0 1,364.4
Add potential effect of:
Exercise of options 24.0 21.8 24.0 21.8
Conversion of preferred stock 100.3 102.4 100.3 102.4
-------- -------- -------- --------
Average number of common shares
outstanding, assuming dilution 1,470.3 1,488.6 1,470.3 1,488.6
======== ======== ======== ========
Dilutive earnings per share $ .71 $ .63 $ 1.44 $ 1.28
======== ======== ======== ========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<TEXT>
EXHIBIT (12)
<TABLE>
<CAPTION>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
===============================================
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
----------------------------------------------------------------------------------------
Millions of Dollars
Six Months
Years Ended June 30 Ended Dec. 31
---------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED
- -------------------
Earnings from operations before income taxes
after eliminating undistributed earnings
of equity method investees $294 $3,307 $4,022 $4,695 $5,274 $2,937 $3,304
Fixed charges excluding capitalized interest 631 569 571 576 534 294 312
---- ------ ------ ------ ------ ------ ------
TOTAL EARNINGS, AS DEFINED $925 $3,876 $4,593 $5,271 $5,808 $3,231 $3,616
==== ====== ====== ====== ====== ====== ======
FIXED CHARGES, AS DEFINED
- -------------------------
Interest expense (including capitalized interest) $577 $ 501 $ 511 $ 493 $ 457 $ 246 $ 262
1/3 of rental expense 79 87 83 92 77 48 50
---- ------ ------ ------ ------ ------ ------
TOTAL FIXED CHARGES, AS DEFINED $656 $ 588 $ 594 $ 585 $ 534 $ 294 $ 312
==== ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES 1.4 6.6 7.7 9.0 10.9 11.0 11.6
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000080424
<NAME> THE PROCTER & GAMBLE COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,305
<SECURITIES> 1,207
<RECEIVABLES> 3,009
<ALLOWANCES> 0
<INVENTORY> 3,239
<CURRENT-ASSETS> 10,853
<PP&E> 19,337
<DEPRECIATION> 7,833
<TOTAL-ASSETS> 29,715
<CURRENT-LIABILITIES> 9,440
<BONDS> 4,587
<PREFERRED-MANDATORY> 0
<PREFERRED> 1,842
<COMMON> 1,342
<OTHER-SE> 8,934
<TOTAL-LIABILITY-AND-EQUITY> 29,715
<SALES> 18,996
<TOTAL-REVENUES> 18,996
<CGS> 10,530
<TOTAL-COSTS> 5,039
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262
<INCOME-PRETAX> 3,263
<INCOME-TAX> 1,130
<INCOME-CONTINUING> 2,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,133
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.44
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| PGL | https://www.sec.gov/Archives/edgar/data/77385/0000077385-98-000005.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000077385-98-000005.txt : 19980212
<SEC-HEADER>0000077385-98-000005.hdr.sgml : 19980212
ACCESSION NUMBER: 0000077385-98-000005
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980211
SROS: CSX
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PEOPLES ENERGY CORP
CENTRAL INDEX KEY: 0000077385
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]
IRS NUMBER: 362642766
STATE OF INCORPORATION: IL
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05540
FILM NUMBER: 98531244
BUSINESS ADDRESS:
STREET 1: 24TH FLOOR
STREET 2: 130 EAST RANDOLPH DRIVE
CITY: CHICAGO
STATE: IL
ZIP: 60601-6207
BUSINESS PHONE: 3122404299
MAIL ADDRESS:
STREET 1: 130 EAST RANDOLPH DRIVE
CITY: CHICAGO
STATE: IL
ZIP: 60601
FORMER COMPANY:
FORMER CONFORMED NAME: PEOPLES GAS CO/
DATE OF NAME CHANGE: 19600201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5540
PEOPLES ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-2642766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)
(312) 240-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
35,225,709 shares of Common Stock, without par value, outstanding
at January 31, 1998.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
(Thousands, except per-share amounts)
OPERATING REVENUES:
Gas sales $ 342,429 $ 343,979 $ 1,123,281 $ 1,095,643
Transportation 37,575 38,418 132,732 157,993
Other 5,147 4,761 15,674 14,594
Total Operating Revenues 385,151 387,158 1,271,687 1,268,230
OPERATING EXPENSES:
Gas costs 197,963 188,746 624,751 588,750
Operation 50,146 54,018 196,930 220,206
Maintenance 10,541 11,525 46,641 47,113
Depreciation and amortization 18,879 18,451 74,502 72,430
Taxes - Income 22,238 23,344 53,489 58,453
- State and local revenue 35,521 39,295 122,451 126,702
- Other 5,021 5,027 21,291 21,955
Total Operating Expenses 340,309 340,406 1,140,055 1,135,609
OPERATING INCOME 44,842 46,752 131,632 132,621
OTHER INCOME AND (DEDUCTIONS):
Interest income 683 488 5,605 3,231
Allowance for funds used during construction 236 27 477 51
Interest on long-term debt of subsidiaries (8,934) (8,927) (35,728) (35,803)
Other interest expense (1,260) (915) (3,098) (4,030)
Income taxes (155) (81) (1,914) (6,846)
Miscellaneous - net 131 146 (517) 15,588
Total Other Income and Deductions (9,299) (9,262) (35,175) (27,809)
NET INCOME $ 35,543 $ 37,490 $ 96,457 $ 104,812
Average Shares of Common Stock Outstanding 35,133 34,973 35,043 34,954
Basic Earnings Per Share of Common Stock $ 1.01 $ 1.07 $ 2.75 $ 3.00
Diluted Earnings Per Share of Common Stock $ 1.01 $ 1.07 $ 2.74 $ 2.98
Dividends Declared Per Share $ 0.47 $ 0.46 $ 1.88 $ 1.84
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1997 September 30, 1996
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
<S> <C> <C> <C>
CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $2,131,306 $2,117,509 $2,058,831
Less - Accumulated depreciation 726,278 715,279 678,801
Net property, plant and equipment 1,405,028 1,402,230 1,380,030
Other investments 16,301 16,305 13,794
Total Capital Investments - Net 1,421,329 1,418,535 1,393,824
CURRENT ASSETS:
Cash and cash equivalents 44,073 33,298 25,683
Temporary cash investments 900 15,900 900
Receivables -
Customers, net of allowance for uncollectible accounts
of $26,929, $29,895, and $27,329, respectively 130,650 72,290 137,503
Other 30,714 39,182 25,330
Accrued unbilled revenues 80,615 22,742 90,766
Materials and supplies, at average cost 20,845 19,386 17,408
Gas in storage, at last-in, first-out cost 73,652 77,843 78,496
Gas costs recoverable through rate adjustments 6,584 5,164 41,951
Regulatory assets of subsidiaries 10,518 19,020 42,277
Prepayments 49,122 42,902 16,836
Total Current Assets 447,673 347,727 477,150
OTHER ASSETS:
Regulatory assets of subsidiaries 34,082 35,116 39,654
Deferred charges 21,613 19,427 18,108
Total Other Assets 55,695 54,543 57,762
Total Properties and Other Assets $1,924,697 $1,820,805 $1,928,736
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1997 September 30, 1996
(Unaudited) 1997 (Unaudited)
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITALIZATION:
Common Stockholders' Equity:
Common stock, without par value -
Authorized 60,000,000 shares
Outstanding 35,161,215, 35,069,517, and
34,979,929 shares, respectively $ 284,745 $ 281,847 $ 278,282
Retained earnings 453,666 434,652 424,704
Total Common Stockholders' Equity 738,411 716,499 702,986
Long-term debt of subsidiaries, exclusive of sinking
fund payments and maturities due within one year 527,004 527,004 527,039
Total Capitalization 1,265,415 1,243,503 1,230,025
CURRENT LIABILITIES:
Interim loans of subsidiaries 60,501 2,810 29,025
Accounts payable 137,286 134,870 200,783
Dividends payable on common stock 16,526 16,479 16,091
Customer gas service and credit deposits 46,421 45,386 40,728
Accrued taxes 52,621 20,645 72,420
Gas sales revenue refundable through rate adjustments - 14,894 15,818
Accrued interest 7,151 10,800 7,155
Temporary LIFO liquidation credit 1,625 - 1,603
Total Current Liabilities 322,131 245,884 383,623
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 254,927 249,178 234,882
Investment tax credits being amortized over
the average lives of related property 33,559 33,942 35,032
Other 48,665 48,298 45,174
Total Deferred Credits and Other Liabilities 337,151 331,418 315,088
Total Capitalization and Liabilities $1,924,697 $ 1,820,805 $1,928,736
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1997 1996
(Thousands of Dollars)
Operating Activities:
Net Income $ 35,543 $ 37,490
Adjustments to reconcile net income to net cash:
Depreciation and amortization 18,879 18,451
Deferred income taxes and investment tax credits - net 4,856 1,375
Change in deferred credits and other liabilities 877 4,820
Change in other assets (2,555) 4,198
Change in current assets and liabilities:
Receivables - net (49,892) (61,759)
Accrued unbilled revenues (57,873) (61,452)
Materials and supplies (1,459) (1,280)
Gas in storage 4,191 (12,994)
Gas costs recoverable (1,420) (22,031)
Regulatory assets 8,502 1,788
Prepayments (6,220) (4,549)
Accounts payable 2,416 52,811
Customer gas service and credit deposits 1,035 (1,662)
Accrued taxes 31,976 39,599
Gas sales revenue refundable (14,894) 1,897
Accrued interest (3,649) (3,641)
Temporary LIFO liquidation credit 1,625 1,603
Net Cash Provided by (Used in) Operating Activities (28,062) (5,336)
Investing Activities:
Capital expenditures of subsidiaries - construction (20,257) (15,874)
Other assets (5) 632
Other capital investments (7) (2,203)
Other temporary cash investments 15,000 -
Net Cash Used in Investing Activities (5,269) (17,445)
Financing Activities:
Interim loans of subsidiaries - net 57,691 26,400
Retirement of long-term debt of subsidiaries - (25)
Dividends paid on common stock (16,483) (16,082)
Proceeds from issuance of common stock 2,898 401
Net Cash Provided by (Used in) Financing Activities 44,106 10,694
Net Increase (Decrease) in Cash and Cash Equivalents 10,775 (12,087)
Cash and Cash Equivalents at Beginning of Period 33,298 37,770
Cash and Cash Equivalents at End of Period $ 44,073 $ 25,683
The Notes to Consolidated Financial Statements are an integral
part of these statements.
Peoples Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Peoples Energy Corporation (Company) and its wholly
owned subsidiaries, The Peoples Gas Light and Coke Company
(Peoples Gas), North Shore Gas Company (North Shore Gas), Peoples
District Energy Corporation (Peoples District Energy), Peoples
Energy Services Corporation, Peoples Energy Resources Corp.,
Peoples Energy Ventures Corporation, and Peoples NGV Corp., and
comprise the assets, liabilities, revenues, expenses, and
underlying common stockholders' equity of these companies.
Income is principally derived from the Company's utility
subsidiaries, Peoples Gas and North Shore Gas. The statements
have been prepared by the Company in conformity with the rules
and regulations of the Securities and Exchange Commission (SEC)
and reflect all adjustments that are, in the opinion of
management, necessary to present fairly the results for the
interim periods herein and to prevent the information from being
misleading.
Certain footnote disclosures and other information, normally
included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted from these interim financial statements, pursuant to SEC
rules and regulations. Therefore, the statements should be read
in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997. Certain items
previously reported for the prior periods have been reclassified
to conform with the presentation in the current periods.
The business of the Company's utility subsidiaries is
influenced by seasonal weather conditions because a large element
of the utilities' customer load consists of gas used for space
heating. Weather-related deliveries can, therefore, have a
significant positive or negative impact on net income.
Accordingly, the results of operations for the interim periods
presented are not indicative of the results to be expected for
all or any part of the balance of the current fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
2A Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2B Revenue Recognition
Gas sales revenues are recorded on the accrual basis for all
gas delivered during the month, including an estimate for gas
delivered but unbilled at the end of each month.
2C Regulated Operations
Peoples Gas' and North Shore Gas' utility operations are
subject to regulation by the Illinois Commerce Commission
(Commission). Regulated operations are accounted for in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." This standard controls the application of generally
accepted accounting principles for companies whose rates are
determined by an independent regulator such as the Commission.
Regulatory assets represent certain costs that are expected to be
recovered from customers through the ratemaking process. When
incurred, such costs are deferred as assets in the balance sheet
and subsequently recorded as expenses when those same amounts are
reflected in rates.
2D Income Taxes
The Company follows the liability method of accounting for
deferred income taxes. Under the liability method, deferred
income taxes have been recorded using currently enacted tax rates
for the differences between the tax basis of assets and
liabilities and the basis reported in the financial statements.
Due to the effects of regulation on Peoples Gas and North Shore
Gas, certain adjustments made to deferred income taxes are, in
turn, debited or credited to regulatory assets or liabilities.
2E Statement of Cash Flows
For purposes of the balance sheet and the statement of cash
flows, the Company considers all short-term liquid investments
with maturities of three months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized
interest) were as follows:
For the three months
ended December 31, 1997 1996
(Thousands)
Income taxes paid $ 31 $ 3,877
Interest paid 13,138 13,201
2F Recovery of Gas Costs
Under the tariffs of Peoples Gas and North Shore Gas, the
difference for any month between costs recoverable through the
Gas Charge and revenues billed to customers under the Gas Charge
is refunded to or recovered from customers. Consistent with
these tariff provisions, such difference for any month is
recorded either as a current liability or as a current asset
(with a contra entry to Gas Costs).
For each gas utility, the Commission conducts annual
proceedings regarding the reconciliation of revenues from the Gas
Charge and related costs incurred for gas. In such proceedings,
costs recovered by a utility through the Gas Charge are subject
to challenge. Such proceedings regarding Peoples Gas and North
Shore Gas for fiscal year 1997 are currently pending before the
Commission.
2G Accounting Standard
In February 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, "Earnings Per Share". This statement
simplifies the calculation of earnings per share (EPS) and
increases conformity to international standards. Under SFAS No.
128, primary EPS is replaced by "basic" EPS, which excludes the
effects of any dilution. It is calculated by dividing net income
available to common shareholders by the weighted-average number
of common shares outstanding for the period."Diluted" EPS, which
is computed similarly to fully diluted EPS, reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. This standard was adopted October 1, 1997.
Previous periods have been restated to reflect this
standard.
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
The Company's utility subsidiaries, their predecessors, and
certain former affiliates operated facilities in the past at
multiple sites for the purpose of manufacturing gas and storing
manufactured gas (Manufactured Gas Sites). In connection with
manufacturing and storing gas, various by-products and waste
materials were produced, some of which might have been disposed
of rather than sold. Under certain laws and regulations relating
to the protection of the environment, the subsidiaries might be
required to undertake remedial action with respect to some of
these materials. Three of the Manufactured Gas Sites are
discussed in more detail below. Peoples Gas and North Shore Gas,
under the supervision of the Illinois Environmental Protection
Agency (IEPA), are conducting investigations of an additional 29
Manufactured Gas Sites. These investigations may require the
utility subsidiaries to perform additional investigation and
remediation. The investigations are in a preliminary stage and
are expected to occur over an extended period of time.
In 1990, North Shore Gas entered into an Administrative Order
on Consent (AOC) with the United States Environmental Protection
Agency (EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas
Site located in Waukegan, Illinois, where manufactured gas and
coking operations were formerly conducted (Waukegan Site). The
RI/FS is comprised of an investigation to determine the nature
and extent of contamination at the Waukegan Site and a
feasibility study to develop and evaluate possible remedial
actions. North Shore Gas entered into the AOC after being
notified by the EPA that North Shore Gas, General Motors
Corporation (GMC), and Outboard Marine Corporation were each a
potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended (CERCLA) with respect to the Waukegan Site. A PRP is
potentially liable for the cost of any investigative and/or
remedial work that the EPA determines is necessary. Other
parties identified as PRPs did not enter into the AOC.
Under the terms of the AOC, North Shore Gas is responsible for
the cost of the RI/FS. North Shore Gas believes, however, that
it will recover a significant portion of the costs of the RI/FS
from other entities. GMC has agreed to share equally with North
Shore Gas in funding of the RI/FS cost, without prejudice to
GMC's or North Shore Gas' right to seek a lesser cost
responsibility at a later date.
Peoples Gas has observed what appear to be gas purification
wastes on a Manufactured Gas Site in Chicago, formerly called the
110th Street Station, and property contiguous thereto (110th
Street Station Site). Peoples Gas has fenced the 110th Street
Station Site and is conducting a study under the supervision of
the IEPA to determine the feasibility of a limited removal
action.
The current owner of a site in Chicago, formerly called Pitney
Court Station, filed suit against Peoples Gas in federal district
court under CERCLA. The suit seeks recovery of the past and
future costs of investigating and remediating the site. Peoples
Gas is contesting this suit.
The utility subsidiaries are accruing and deferring the costs
they incur in connection with all of the Manufactured Gas Sites,
including related legal expenses, pending recovery through rates
or from insurance carriers or other entities. At December 31,
1997, the total of the costs deferred by the subsidiaries, net of
recoveries and amounts billed to other entities, was $17.2
million. This amount includes an estimate of the costs of
completing the studies required by the EPA at the Waukegan Site
and the investigations being conducted under the supervision of
the IEPA referred to above. The amount also includes an estimate
of the costs of remediation at the Waukegan Site and at the 110th
Street Station Site in Chicago, at the minimum amount of the
current estimated range of such costs. The costs of
remediation at the other sites cannot be determined at this time.
While each subsidiary intends to seek contribution from other
entities for the costs incurred at the sites, the full extent of
such contributions cannot be determined at this time.
Peoples Gas and North Shore Gas have filed suit against a
number of insurance carriers for the recovery of environmental
costs relating to the utilities' former manufactured gas
operations. The suit asks the court to declare that the insurers
are liable under policies in effect between 1937 and 1986 for
costs incurred or to be incurred by the utilities in connection
with five of their Manufactured Gas Sites in Chicago and
Waukegan. The utilities are also asking the court to award
damages stemming from the insurers' breach of their contractual
obligation to defend and indemnify the utilities against these
costs. At this time, management cannot determine the timing and
extent of the subsidiaries' recovery of costs from their
insurance carriers. Accordingly, the costs deferred at December
31, 1997 have not been reduced to reflect recoveries from
insurance carriers.
The Company believes that the costs incurred by Peoples Gas
and by North Shore Gas for environmental activities relating to
former manufactured gas operations are recoverable from insurance
carriers or other entities or through rates for utility service.
Accordingly, management believes that the costs incurred by the
subsidiaries in connection with former manufactured gas
operations will not have a material adverse effect on the
financial position or results of operations of the utilities.
Peoples Gas and North Shore Gas are recovering the costs of
environmental activities relating to the utilities' former
manufactured gas operations, including carrying charges on the
unrecovered balances, under rate mechanisms approved by the
Commission. At December 31, 1997, the subsidiaries had recovered
$12.5 million of such costs through rates.
3B Former Mineral Processing Site in Denver, Colorado
In 1994, North Shore Gas received a demand from the S.W.
Shattuck Chemical Company, Inc. (Shattuck), a responsible party
under CERCLA, for reimbursement, indemnification, and
contribution for response costs incurred at a former mineral
processing site in Denver, Colorado. Shattuck is a wholly owned
subsidiary of Salomon, Inc. (Salomon). The demand alleges that
North Shore Gas is a successor-in-interest to certain companies
that were allegedly responsible during the period 1934-1941 for
the disposal of mineral processing wastes containing radium and
other hazardous substances at the site. The cost of the remedy
at the site has been estimated by Shattuck to be approximately
$31 million. Salomon has provided financial assurance for the
performance of the remediation at the site.
North Shore Gas filed a declaratory judgment action against
Salomon in the District Court for the Northern District of
Illinois. The suit asks the court to declare that North Shore
Gas is not liable for response costs incurred or to be incurred
at the Denver site. Salomon filed a counterclaim for costs to be
incurred by Salomon and Shattuck with respect to the site. On
March 7, 1997, the District Court granted North Shore Gas' motion
for summary judgment, declaring that North Shore Gas is not
liable for any response costs in connection with the Denver site.
Salomon has appealed the ruling of the District Court to the
United States Court of Appeals, Seventh Circuit.
North Shore Gas does not believe that it has liability for the
response costs, but cannot determine the matter with certainty.
At this time, North Shore Gas cannot reasonably estimate what
range of loss, if any, may occur. In the event that North Shore
Gas incurred liability, it would pursue reimbursement from
insurance carriers, other responsible parties, if any, and
through its rates for utility service.
3C Gasoline Release in Wheeling, Illinois
In June 1995, North Shore Gas received a letter from the IEPA
informing North Shore Gas that it was not in compliance with
certain provisions of the Illinois Environmental Protection Act
which prohibit water pollution within the State of Illinois. On
November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming North Shore
Gas and four other parties as defendants. The complaint alleges
that the violations are the result of a gasoline release that
occurred in Wheeling, Illinois, in June 1992, when a contractor
who was installing a pipeline for North Shore Gas accidentally
struck a gasoline pipeline owned by West Shore Pipeline Company.
North Shore Gas is contesting this suit. Management does not
believe the outcome of this suit will have a material adverse
effect on financial position or results of operations of the
Company or North Shore Gas.
4. COVENANTS REGARDING RETAINED EARNINGS
North Shore Gas' indenture relating to its first mortgage
bonds contains provisions and covenants restricting the payment
of cash dividends and the purchase or redemption of capital
stock. At December 31, 1997, such restrictions amounted to
$11.6 million out of North Shore Gas' total retained earnings of
$70.0 million.
5. LONG-TERM DEBT
Interest-Rate Adjustments
The rate of interest on the City of Joliet 1984 Series C
Bonds, which are secured by Peoples Gas' Adjustable-Rate First
Mortgage Bonds, Series W, is subject to adjustment annually on
October 1. Owners of the Series C Bonds have the right to tender
such bonds at par during a limited period prior to that date.
Peoples Gas is obligated to purchase any such bonds tendered if
they cannot be remarketed. All Series C Bonds that were tendered
prior to October 1, 1997 have been remarketed. The interest rate
on such bonds is 3.875 per cent for the period October 1, 1997
through September 30, 1998.
The rate of interest on the City of Chicago 1993 Series B
Bonds, which are secured by Peoples Gas' Adjustable-Rate First
Mortgage Bonds, Series EE, is subject to adjustment annually on
December 1. Owners of the Series B Bonds have the right to
tender such bonds at par during a limited period prior to that
date. Peoples Gas is obligated to purchase any such bonds
tendered if they cannot be remarketed. All Series B Bonds that
were tendered prior to December 1, 1997, have been remarketed.
The interest rate on such bonds is 3.90 per cent for the period
December 1, 1997, through November 30, 1998.
Peoples Gas classifies these adjustable-rate bonds as long-
term liabilities, since it would refinance them on a long-term
basis if they could not be remarketed. In order to ensure its
ability to do so, on February 1, 1994, Peoples Gas established a
$37.4 million three year line of credit with The Northern Trust
Company, which has since been extended to January 31, 2000.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income decreased $1.9 million, to $35.5 million, for the
current three-month period ended December 31, 1997, as a result
of lower gas deliveries caused by warmer weather and
conservation. These effects were offset, in part, by decreased
pension expense caused by changes in settlement accounting
attributed to employees choosing early retirement and actuarial
assumptions.
Net income decreased $8.4 million, to $96.5 million, for the
current 12-month period ended December 31, 1997, primarily due to
lower gas deliveries due to warmer weather and conservation.
Also contributing was the previous period's one-time gain
associated with the expiration of gas storage contracts.
Partially offsetting these effects were a decrease in the
aforementioned pension expense, a tax accrual adjustment, and
lower interest expense as well as higher interest income.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended 12 Months Ended
December 31, 1997 December 31, 1997
Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period
(Thousands of dollars)
Amount Per Cent Amount Per Cent
Net operating revenues (a) (7,450) (4.7) (28,293) (5.1)
Operation and maintenance expenses (4,856) (7.4) (23,748) (8.9)
Depreciation and amortization expense 428 2.3 2,072 2.9
Income taxes (1,106) (4.7) (4,964) (8.5)
Other income and deductions (37) .04 (7,366) 26.5
Net income (1,947) (5.2) (8,355) (8.0)
(a) Operating revenues, net of gas costs and revenue taxes.
Net Operating Revenues
Gross revenues of Peoples Gas and North Shore Gas are affected
by changes in the unit cost of the subsidiaries' gas purchases
and do not include the cost of gas supplies for customers who
purchase gas directly from producers and marketers rather than
from the subsidiaries. The direct customer purchases have no
effect on net income because the utilities provide transportation
service for such gas volumes and recover margins similar to those
applicable to conventional gas sales. Changes in the unit cost
of gas do not significantly affect net income because the
utilities' tariffs provide for dollar-for-dollar recovery of gas
costs. (See Note 2F of the Notes to Consolidated Financial
Statements.) The utilities' tariffs also provide for dollar-for-
dollar recovery of the cost of revenue taxes imposed by the State
and various municipalities.
Since income is not significantly affected by changes in
revenue from customers' gas purchases from producers or marketers
rather than from the subsidiaries, changes in gas costs, or
changes in revenue taxes, the discussion below pertains to "net
operating revenues" (operating revenues, net of gas costs and
revenue taxes). The Company considers net operating revenues to
be a more pertinent measure of operating results than gross
revenues.
Net operating revenues decreased $7.5 million, to $151.7
million, for the current three-month period, due primarily to
lower gas deliveries caused by weather that was eight percent warmer
and conservation.
Net operating revenues decreased $28.3 million, to $524.5
million, for the current 12-month period, due principally to
reduced gas deliveries due to warmer weather and conservation.
Weather was six and one-half percent warmer than in the year-ago period.
See Other Matters - Operating Statistics for details of
selected financial and operating information by gas service
classification.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $4.9 million, to
$60.7 million, for the current three-month period, due primarily
to a $4.6 million decrease in pension expense caused by changes
in settlement accounting attributed to employees choosing early
retirement and actuarial assumptions, a reduction in
environmental costs ($1.7 million), a decrease in the provision
for uncollectible accounts ($727,000), lower reengineering
expenses ($530,000), and lower group insurance expenses
($472,000). These decreases were offset, in part, by an increase
in amounts paid for outside services ($762,000) and higher
administrative and general expenses.
Operation and maintenance expenses decreased $23.7 million, to
$243.6 million, for the current 12-month period, due principally
to a $22.0 million decrease in the aforementioned pension
expense. Other expenses which were lower in the current period
were reengineering expenses ($3.5 million), environmental costs
($3.4 million), the provision for uncollectible accounts ($2.4
million), costs associated with liability insurance premiums and
claim settlements ($2.1 million), and group insurance expenses
($2.0 million). These reductions were partially offset by an
increase in payments for outside services ($4.2 million) and
higher administrative and general expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $428,000, to
$18.9 million, and $2.1 million, to $74.5 million, for the
current three- and 12-month periods, respectively, due mainly to
depreciable property additions.
Income Taxes
Income taxes, exclusive of taxes in other income and
deductions, decreased $1.1 million, to $22.2 million, and $5.0
million, to $53.5 million, for the current three- and 12-month
periods, respectively, due primarily to lower pre-tax income and
a tax accrual adjustment in the most recent 12-month period.
Other Income and Deductions
Other income and deductions increased $37,000, for the current
three-month period, due mainly to increases in interest expense on
promissory notes and amounts refundable to customers. Partially
offsetting these effects was an increase in other income.
Other income and deductions increased $7.4 million, for the
current 12-month period, due principally to the prior period's
gain associated with the expiration of natural gas storage
contracts. This impact was partially offset by lower interest
expense and higher interest income.
Other Matters
Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income, cash
position, and coverage ratios.
Accounting Standards. In October 1997, the Company adopted SFAS No.
128, "Earnings Per Share". (See Note 2G of the Notes to
Consolidated Financial Statements.)
Large Volume Gas Service Agreements. Peoples Gas has entered
into gas service contracts with certain large volume customers
under a specific rate schedule approved by the Commission. These
contracts were negotiated to overcome the potential threat of
bypassing the utility's distribution system. The impact on the
net income of Peoples Gas as a result of these contracts is not
material.
Small-Volume Transportation Service. On June 25, 1997, the
Commission allowed Riders SVT and AGG to go into effect for
Peoples Gas, thus initiating a two year pilot program designed to
provide transportation service to certain small-volume industrial
and commercial customers of the utility as well as to some of its
large residential customers. The Commission also ordered a
concurrent investigation of the program to ascertain if program
adjustments or revisions are required.
Operating Statistics. The following table represents margin components:
Three Months Ended Twelve Months Ended
December 31, December 31,
1997 1996 1997 1996
Operating Revenues (thousands):
Gas sales
Residential $ 268,722 $ 291,490 $ 918,796 $ 928,055
Commercial 38,008 44,026 140,846 140,736
Industrial 7,371 8,295 28,045 26,648
Non-utility 28,328 168 35,594 204
342,429 343,979 1,123,281 1,095,643
Transportation
Residential 10,848 11,447 36,206 48,994
Commercial 14,813 14,789 47,678 60,266
Industrial 7,996 9,336 29,625 41,453
Contract Pooling 3,485 2,446 18,790 6,880
Other 433 400 433 400
37,575 38,418 132,732 157,993
Other 5,147 4,761 15,674 14,594
Total Operating Revenues 385,151 387,158 1,271,687 1,268,230
Le- Gas Costs 197,963 188,746 624,751 588,750
- Revenues Taxes 35,521 39,295 122,451 126,702
Net Operating Revenues $ 151,667 $ 159,117 $ 524,485 $ 552,778
Deliveries (MDth):
Gas Sales
Residential 41,857 46,666 138,028 150,310
Commercial 6,442 7,669 23,767 25,303
Industrial 1,354 1,575 5,147 5,400
49,653 55,910 166,942 181,013
Transportation (a)
Residential 8,156 8,813 27,252 29,165
Commercial 12,641 12,712 40,408 43,741
Industrial 10,568 11,482 37,993 43,856
31,365 33,007 105,653 116,762
Total Gas Sales and Transportation 81,018 88,917 272,595 297,775
Margin per Dth delivered $ 1.87 $ 1.79 $ 1.92 $ 1.86
(a) Volumes associated with contract pooling revenues are
included in their respective customer classes.
LIQUIDITY AND CAPITAL RESOURCES
Indenture Restrictions. North Shore Gas' indenture relating to
its first mortgage bonds contains provisions and covenants
restricting the payment of cash dividends and the purchase or
redemption of capital stock. At December 31, 1997, such
restrictions amounted to $11.6 million out of North Shore Gas'
total retained earnings of $70.0 million.
Environmental Matters. The Company's utility subsidiaries are
conducting environmental investigations and work at certain sites
that were the location of former manufactured gas operations.
(See Note 3A of the Notes to Consolidated Financial Statements.)
In 1994, North Shore Gas received a demand from a responsible
party under CERCLA for reimbursement, indemnification, and
contribution for response costs incurred at a former mineral
processing site in Denver, Colorado. North Shore Gas filed a
declaratory judgment action asking the court to declare that
North Shore Gas is not liable for response costs relating to the
site. Salomon filed a counterclaim for costs to be incurred by
Salomon and Shattuck with respect to the site. On March 7, 1997,
the District Court granted North Shore Gas' motion for summary
judgment, declaring that North Shore Gas is not liable for any
response costs in connection with the Denver site. Salomon has
appealed the ruling of the District court to the United States
Court of Appeals, Seventh Circuit. (See Note 3B of the Notes to
Consolidated Financial Statements.)
On November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming North Shore
Gas and four other parties as defendants. The complaint alleges
violations arising out of a gasoline release that occurred in
Wheeling, Illinois in June 1992 when a contractor who was
installing a pipeline for North Shore Gas accidentally struck a
gasoline pipeline owned by West Shore Pipeline Company. North
Shore Gas is currently contesting this suit. (See Note 3C of the
Notes to Consolidated Financial Statements.)
Credit Lines. The Company has lines of credit totaling $170 million. At
December 31, 1997, the Company had unused credit available of
$169.3 million.
The utility subsidiaries have lines of credit totaling $129.4
million, At December 31, 1997, the utility subsidiaries had unused
credit available from banks of $68.8 million.
Interest Coverage. The fixed charges coverage ratios for Peoples
Gas for the 12 months ended December 31, 1997, and for fiscal
1997 and 1996 were 4.90, 5.01, and 4.84, respectively.
The corresponding coverage ratios for North Shore Gas for the
same periods were 5.51, 5.74, and 5.62, respectively.
Dividends. On February 4, 1998, the Directors of the Company
voted to increase the regular quarterly dividend on the Company's
common stock to 48 cents per share from 47 cents per share
previously in effect. The annualized dividend rate now amounts
to $1.92 per share.
Year 2000. The Company is modifying all of its computer programs
to be year 2000 compatible. The Company does not believe that
the amount of expenditures it will incur in connection with its
year 2000 modification will have a material adverse effect on the
financial position or results of operations of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
December 31, 1997
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Peoples Energy
Corporation
(Registrant)
February 11, 1998 By: /s/ K. S. BALASKOVITS
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
Principal Accounting Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS
OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED STATEMENTS OF CASH
FLOWS, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1405028
<OTHER-PROPERTY-AND-INVEST> 16301
<TOTAL-CURRENT-ASSETS> 447673
<TOTAL-DEFERRED-CHARGES> 21613
<OTHER-ASSETS> 34082
<TOTAL-ASSETS> 1924697
<COMMON> 284745
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 453666
<TOTAL-COMMON-STOCKHOLDERS-EQ> 738411
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<LONG-TERM-DEBT-NET> 527004
<SHORT-TERM-NOTES> 731
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 59770
<LONG-TERM-DEBT-CURRENT-PORT> 0
<PREFERRED-STOCK-CURRENT> 0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 598781
<TOT-CAPITALIZATION-AND-LIAB> 1924697
<GROSS-OPERATING-REVENUE> 385151
<INCOME-TAX-EXPENSE> 22238
<OTHER-OPERATING-EXPENSES> 318071
<TOTAL-OPERATING-EXPENSES> 340309
<OPERATING-INCOME-LOSS> 44842
<OTHER-INCOME-NET> 895
<INCOME-BEFORE-INTEREST-EXPEN> 45737
<TOTAL-INTEREST-EXPENSE> 10194
<NET-INCOME> 35543
<PREFERRED-STOCK-DIVIDENDS> 0
<EARNINGS-AVAILABLE-FOR-COMM> 35543
<COMMON-STOCK-DIVIDENDS> 16483
<TOTAL-INTEREST-ON-BONDS> 8934
<CASH-FLOW-OPERATIONS> 28062
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| PH | https://www.sec.gov/Archives/edgar/data/76334/0000076334-98-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000076334-98-000003.txt : 19980217
<SEC-HEADER>0000076334-98-000003.hdr.sgml : 19980217
ACCESSION NUMBER: 0000076334-98-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PARKER HANNIFIN CORP
CENTRAL INDEX KEY: 0000076334
STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490]
IRS NUMBER: 340451060
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04982
FILM NUMBER: 98534954
BUSINESS ADDRESS:
STREET 1: 6035 PARKLAND BLVD
CITY: CLEVELAND
STATE: OH
ZIP: 44124-4141
BUSINESS PHONE: 2168963000
FORMER COMPANY:
FORMER CONFORMED NAME: PARKER APPLIANCE CO
DATE OF NAME CHANGE: 19670907
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File number 1-4982
PARKER-HANNIFIN CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-0451060
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
6035 Parkland Blvd., Cleveland, Ohio 44124-4141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 896-3000
Indicate by check mark whether 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.
Number of Common Shares outstanding at December 31, 1997 110,884,096
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Net sales $ 1,114,948 $ 969,587 $ 2,198,117 $ 1,928,915
Cost of sales 862,209 761,323 1,689,348 1,515,821
___________ ___________ ___________ ___________
Gross profit 252,739 208,264 508,769 413,094
Selling, general and
administrative expenses 132,961 119,543 258,236 233,987
___________ ___________ ___________ ___________
Income from operations 119,778 88,721 250,533 179,107
Other income (deductions):
Interest expense (13,082) (11,942) (23,519) (24,256)
Interest and other income, net 3,868 5,351 4,885 7,131
___________ ___________ ___________ ___________
(9,214) (6,591) (18,634) (17,125)
___________ ___________ ___________ ___________
Income before income taxes 110,564 82,130 231,899 161,982
Income taxes 39,250 29,566 82,324 58,313
___________ ___________ ___________ ___________
Net income $ 71,314 $ 52,564 $ 149,575 $ 103,669
=========== =========== =========== ===========
Earnings per share - Basic $ .64 $ .47 $ 1.34 $ .93
Earnings per share - Diluted $ .63 $ .47 $ 1.33 $ .92
Cash dividends per common share $ .15 $ .12 $ .30 $ .24
See accompanying notes to consolidated financial statements.
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
PARKER-HANNIFIN CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
December 31, June 30,
1997 1997
___________ ___________
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,681 $ 68,997
Accounts receivable, net 578,433 601,724
Inventories:
Finished products 377,403 317,494
Work in process 329,783 304,743
Raw materials 117,856 105,610
___________ ___________
825,042 727,847
Prepaid expenses 15,383 17,366
Deferred income taxes 93,801 83,627
___________ ___________
Total current assets 1,549,340 1,499,561
Plant and equipment 2,234,620 2,138,591
Less accumulated depreciation 1,177,452 1,117,848
___________ ___________
1,057,168 1,020,743
Excess cost of investments over
net assets acquired 370,113 285,264
Investments and other assets 220,970 193,378
___________ ___________
Total assets $ 3,197,591 $ 2,998,946
=========== ===========
LIABILITIES
Current liabilities:
Notes payable $ 205,733 $ 69,738
Accounts payable, trade 249,975 266,848
Accrued liabilities 302,294 328,051
Accrued domestic and foreign taxes 44,385 51,374
___________ ___________
Total current liabilities 802,387 716,011
Long-term debt 474,436 432,885
Pensions and other postretirement benefits 256,755 252,709
Deferred income taxes 27,443 26,007
Other liabilities 39,363 24,033
___________ ___________
Total liabilities 1,600,384 1,451,645
SHAREHOLDERS' EQUITY
Serial preferred stock, $.50 par value;
authorized 3,000,000 shares; none issued -- --
Common stock, $.50 par value; authorized
600,000,000 shares; issued 111,812,025 shares at
December 31 and 111,809,085 shares at June 30 55,906 55,905
Additional capital 137,501 150,702
Retained earnings 1,494,435 1,378,297
Foreign currency translation adjustments (50,181) (27,345)
___________ ___________
1,637,661 1,557,559
Common stock in treasury at cost;
927,929 shares at December 31 and
282,915 shares at June 30 (40,454) (10,258)
___________ ___________
Total shareholders' equity 1,597,207 1,547,301
___________ ___________
Total liabilities and shareholders' equity $ 3,197,591 $ 2,998,946
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
PARKER-HANNIFIN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
December 31,
_____________________
1997 1996
_________ _________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 149,575 $ 103,669
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 79,906 75,807
Amortization 13,079 12,195
Deferred income taxes (16,111) (10,401)
Foreign currency transaction loss 1,171 918
Gain on sale of plant and equipment (766) (10,877)
Changes in assets and liabilities:
Accounts receivable 30,376 34,538
Inventories (84,278) 589
Prepaid expenses 2,008 2,314
Other assets (20,674) (8,784)
Accounts payable, trade (20,106) (45,762)
Accrued payrolls and other compensation (21,347) (20,720)
Accrued domestic and foreign taxes (6,135) (5,308)
Other accrued liabilities 8,220 18,123
Pensions and other postretirement benefits 5,418 5,820
Other liabilities 6,602 3,412
_________ _________
Net cash provided by operating activities 126,938 155,533
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (excluding cash of $697 in 1996) (143,546) (17,926)
Capital expenditures (112,000) (83,051)
Proceeds from sale of plant and equipment 2,983 8,419
Other (3,053) (14,566)
_________ _________
Net cash used in investing activities (255,616) (107,124)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) from common share activity (44,732) (2,618)
Proceeds (payments) from notes payable, net 132,021 (27,827)
Proceeds from long-term borrowings 50,086 171
Payments of long-term borrowings (6,213) (11,532)
Dividends (33,407) (26,766)
_________ _________
Net cash provided by (used in)
financing activities 97,755 (68,572)
Effect of exchange rate changes on cash (1,393) (1,058)
_________ _________
Net (decrease) in cash and cash equivalents (32,316) (21,221)
Cash and cash equivalents at beginning of year 68,997 63,953
_________ _________
Cash and cash equivalents at end of period $ 36,681 $ 42,732
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
PARKER-HANNIFIN CORPORATION
BUSINESS SEGMENT INFORMATION BY INDUSTRY
(Dollars in thousands)
(Unaudited)
Parker operates in two industry segments: Industrial and Aerospace. The
Industrial Segment is the largest and includes a significant portion of
International operations.
Industrial - This segment produces a broad range of motion-control and fluid
systems and components used in all kinds of manufacturing, packaging,
processing, transportation, mobile construction, and agricultural and
military machinery and equipment. Sales are direct to major original
equipment manufacturers (OEMs) and through a broad distribution network to
smaller OEMs and the aftermarket.
Aerospace - This segment designs and manufactures products and provides
aftermarket support for commercial, military and general-aviation aircraft,
missile and spacecraft markets. The Aerospace Segment provides a full range
of systems and components for hydraulic, pneumatic and fuel applications.
Results by Business Segment:
Three Months Ended Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Net sales, including intersegment sales
Industrial:
North America $ 595,442 $ 498,975 $ 1,180,941 $ 1,002,725
International 280,926 264,603 545,324 524,363
Aerospace 239,071 206,257 472,625 402,193
Intersegment sales (491) (248) (773) (366)
___________ ___________ ___________ ___________
Total $ 1,114,948 $ 969,587 $ 2,198,117 $ 1,928,915
=========== =========== =========== ===========
Income from operations before corporate
general and administrative expenses
Industrial:
North America $ 82,781 $ 66,422 $ 172,463 $ 135,025
International 18,691 9,190 38,842 22,119
Aerospace 35,405 25,315 72,321 46,239
___________ ___________ ___________ ___________
Total 136,877 100,927 283,626 203,383
Corporate general and administrative
expenses 17,099 12,206 33,093 24,276
___________ ___________ ___________ ___________
Income from operations $ 119,778 $ 88,721 $ 250,533 $ 179,107
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
- 5 -
<PAGE>
PARKER-HANNIFIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
_______________________
1. Management Representation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of December 31, 1997, the results of operations for the three and six
months ended December 31, 1997 and 1996 and cash flows for the six months
then ended.
2. Earnings per share
Earnings per share have been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS 128
replaced the previously reported "primary earnings per share" with "basic
earnings per share" and replaced "fully diluted earnings per share" with
"diluted earnings per share". This Statement had no effect on the
resulting earnings per share for the Company. Earnings per share were
computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
_________________________ _________________________
1997 1996 1997 1996
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
Numerator:
Net income applicable
to common shares $ 71,314 $ 52,564 $ 149,575 $ 103,669
Denominator:
Basic - weighted average
common shares 111,128,438 111,576,773 111,365,904 111,515,685
Increase in weighted average
from dilutive effect of
exercise of stock options 1,052,499 837,390 952,230 854,615
___________ ___________ ___________ ___________
Diluted - weighted average
common shares, assuming
exercise of stock options 112,180,937 112,414,163 112,318,134 112,370,300
=========== =========== =========== ===========
Basic earnings per share $ .64 $ .47 $ 1.34 $ .93
Diluted earnings per share $ .63 $ .47 $ 1.33 $ .92
</TABLE>
3. Stock repurchase program
The Board of Directors has approved a program to repurchase the Company's
common stock on the open market, at prevailing prices. The repurchase
will be funded from operating cash flows and the shares will initially be
held as treasury stock. During the three-month period ended December 31,
1997 the Company purchased 782,127 shares of its common stock at an
average price of $44.291 per share. Year-to-date the Company has
purchased 1,045,772 shares at an average price of $44.091 per share.
- 6 -
<PAGE>
4. Acquisitions
In September 1997 the Company acquired the assets of the Skinner and
Lucifer solenoid valve divisions of Honeywell. Skinner, headquartered in
New Britain, Connecticut and Lucifer, headquartered in Geneva,
Switzerland, had prior-year annual sales of approximately $94 million.
In August 1997 the Company acquired the assets of EWAL Manufacturing of
Belleville, New Jersey, a leading producer of precision fittings and
valves. EWAL, with annual sales of $33 million, serves ultra-high-purity
markets for the semiconductor, analytical, laboratory and specialty gas
industries.
Total purchase price for these businesses was approximately $140.2
million in cash. Both acquisitions are being accounted for by the
purchase method.
- 7 -
<PAGE>
PARKER-HANNIFIN CORPORATION
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1997
AND COMPARABLE PERIODS ENDED DECEMBER 31, 1996
CONSOLIDATED STATEMENT OF INCOME
Net sales increased 15.0 percent for the second quarter and 14.0 percent for
the six-month period ended December 31, 1997. Without the effect of
acquisitions the increases would have been 11.9 percent for both periods. In
addition to acquisitions, these increases are the result of the continuing
strength of the North American Industrial markets, unprecedented demand for
aerospace products and a steady recovery in Europe.
Income from operations was $119.8 million for the current second quarter and
$250.5 million for the current six months, an increase of 35.0 percent for the
quarter and 39.9 percent for the six months. As a percent of sales, Income
from operations increased to 10.7 percent from 9.2 percent for the quarter and
to 11.4 percent from 9.3 percent for the six months. Cost of sales as a
percent of sales decreased to 77.3 percent from 78.5 percent for the quarter
and to 76.9 percent from 78.6 percent for the six-month period. Selling,
general and administrative expenses, as a percent of sales, also decreased,
improving to 11.9 percent of sales from 12.3 percent for the quarter and to
11.7 percent from 12.1 percent for the six months. The improved margins are
the result of higher volume among most of the operations, and therefore better
absorption of fixed costs.
Interest expense increased $1.1 million for the quarter ended December 31,
1997, compared to the same period ended December 31, 1996, due to the
increased borrowings incurred to complete recent acquisitions. Interest
expense for the current six months decreased $.7 million compared to the same
period for the prior year.
Interest and other income for the prior-year quarter and six months includes
$17.1 million income from the sale of real estate in California. This income
was substantially offset by $13.3 million accrued for exit costs and charges
for impaired assets related to the relocation of the corporate headquarters.
Net income increased 35.7 percent for the quarter, and 44.3 percent for the
half, as compared to the prior year. As a percent of sales, Net income
increased to 6.4 percent from 5.4 percent for the quarter and to 6.8 percent
from 5.4 percent for the six months.
Backlog increased to $1.64 billion at December 31, 1997 compared to $1.39
billion the prior year and $1.49 billion at June 30, 1997. A majority of the
increase over the prior year was the result of growth within the Aerospace
Segment. The increase since June 30, 1997 has occurred in both the Industrial
and Aerospace operations.
BUSINESS SEGMENT INFORMATION BY INDUSTRY
INDUSTRIAL - The Industrial Segment operations achieved the following Net
sales increases in the current year when compared to the equivalent prior-year
period:
Period ending December 31,
Three Months Six Months
Industrial North America 19.3 % 17.8 %
Industrial International 6.2 % 4.0 %
Total Industrial 14.8 % 13.0 %
- 8 -
<PAGE>
Without the effect of currency-rate changes, International sales would have
increased over 19 percent for the quarter and over 17 percent for the six
months. Without the effect of acquisitions completed within the past 12
months, the increases in Net sales would have been:
Period ending December 31,
Three Months Six Months
Industrial North America 15.3 % 15.2 %
Industrial International 2.4 % 1.4 %
Total Industrial 10.8 % 10.5 %
Operating income for the Industrial Segment increased 34.2 percent for the
quarter and 34.5 percent for the six months. Industrial North American
Operating income increased 24.6 percent for the quarter and 27.7 percent for
the six months while Industrial International results more than doubled for
the quarter and increased 75.6 percent for the six months. Without the effect
of acquisitions the total Industrial Segment Operating income would have
increased 31.5 percent for the quarter and 33.4 percent for the six months.
As a percent of sales, Industrial North American Operating income increased to
13.9 percent from 13.3 percent for the quarter and to 14.6 percent from 13.5
percent for the six months. Industrial International Operating income
increased to 6.7 percent from 3.5 percent for the quarter, and to 7.1 percent
from 4.2 percent for the six months.
Order demand has been strong for the North American Industrial operations,
especially within industries such as electromagnetic shielding, factory
automation, machine tool and light and heavy-duty truck manufacturing. Based
upon this demand, management expects continuing strength throughout the second
half. Related markets within Europe are also experiencing steady growth which
is helping to utilize existing capacity and improve margins. In addition,
previous years' acquisitions are now fully integrated and able to contribute
higher margins. Management expects this growth and improved margins to
continue during the second half.
The Company's exposure to Asia Pacific markets is relatively minor. Current-
year operations are profitable and experiencing returns equivalent to the
prior year.
Total Industrial Segment backlog increased 16.8 percent compared to December
31, 1996 and 12.1 percent since June 30, 1997. Approximately one-fourth of the
increase in both periods is the result of acquisitions. The remainder of the
growth is internal growth primarily within the North American operations.
AEROSPACE - Aerospace Segment Net sales were up 15.9 percent for the quarter
and 17.5 percent for the six months. Increased commercial aircraft deliveries
and continued penetration of the commercial repair and overhaul businesses
contributed to the higher volume.
Operating income for the Aerospace Segment increased 39.9 percent for the
quarter and 56.4 percent for the six-month period. As a percent of sales
Operating income improved to 14.8 percent from 12.3 percent for the quarter
and to 15.3 percent from 11.5 percent for the six-month period. Prior-year
margins were affected by the lower margins of the Abex operations which are
now more fully integrated with the segment.
Management expects the Aerospace operations will continue to strengthen
through the second half of the fiscal year as orders show excellent prospects
for continued profitable growth. Backlog for the Aerospace Segment increased
17.8 percent from December 31, 1996, and 8.9 percent since June 30, 1997 as
original equipment orders continue to build.
- 9 -
<PAGE>
CONSOLIDATED BALANCE SHEET
Working capital decreased to $747.0 million at December 31, 1997 from $783.6
million at June 30, 1997 with the ratio of current assets to current
liabilities decreasing slightly to 1.9 to 1. The decrease was primarily due to
an increase in Notes payable, partially offset by an increase in Inventories.
Accounts receivable were lower on December 31, 1997 than on June 30, 1997
primarily due to the lower level of sales in the month of December as a result
of the holidays. Days sales outstanding have increased slightly since June 30,
1997.
Inventories increased since June 30, 1997 as a result of acquisitions within
the Industrial segment and volume increases throughout both the Industrial and
Aerospace operations. Months supply increased slightly since June 30, 1997.
Accounts payable, trade decreased $16.9 million since June 30, 1997 with the
reduction occurring consistently throughout the operations. A portion of the
decrease was the result of lower production in the month of December.
The debt to debt-equity ratio increased to 29.9 percent at December 31, 1997
from 24.5 percent at June 30, 1997 as a result of increases in Notes payable
and Long-term debt, both of which were utilized to finance recent
acquisitions.
CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash provided by operating activities was $126.9 million for the six
months ended December 31, 1997, as compared to $155.5 million for the same six
months in 1996. The reduction in cash provided was primarily due to $84.3
million in cash used for an increase in Inventories in the current year,
compared to $.5 million cash provided by a decrease in Inventories in fiscal
1997. Also, increases in long-term investments in the current year resulted in
an incremental use of $11.9 million cash within Other assets. These uses were
partially offset by the $45.9 million increase in Net income and a $25.6
million reduction in the cash used for Accounts payable.
Net cash used in investing activities increased to $255.6 million for the
first six months of fiscal 1998 compared to $107.1 million for same period in
fiscal 1997 primarily due to an additional $125.6 million used for
acquisitions. Capital expenditures also increased to $112.0 million for the
first six months in fiscal 1998 compared to $83.1 million in the first six
months of fiscal 1997.
Financing activities provided net cash of $97.8 million in the first six
months of fiscal 1998 as opposed to using cash of $68.6 million for the six
months ended December 31, 1996. The change resulted primarily from Notes
payable providing cash of $132.0 million in the first six months of fiscal
1998 compared to using cash of $27.8 million the prior year.
- 10 -
<PAGE>
PARKER-HANNIFIN CORPORATION
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
During the quarter ended December 31, 1997, the Registrant issued
3,535 Common Shares, $.50 per value, to three Directors of the Registrant in
lieu of fees pursuant to the Registrant's Non-Employee Directors Stock Plan,
in reliance on Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are furnished as exhibits and numbered
pursuant to Item 601 of Regulation S-K:
Exhibit 27 - Financial Data Schedule
(b) The Registrant filed a report on Form 8-K on December 16,
1997 with respect to the computation of ratio of earnings to fixed charges.
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.
PARKER-HANNIFIN CORPORATION
(Registrant)
Michael J. Hiemstra
Michael J. Hiemstra
Vice President - Finance and
Administration and Chief
Financial Officer
Date: February 12, 1998
- 11 -
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
27 Financial Data Schedule
- 12 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PARKER-HANNIFIN CORPORATION'S REPORT ON FORM 10-Q FOR ITS QUARTERLY PERIOD
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 36,681
<SECURITIES> 0
<RECEIVABLES> 530,912
<ALLOWANCES> 6,998
<INVENTORY> 825,042
<CURRENT-ASSETS> 1,549,340
<PP&E> 2,234,620
<DEPRECIATION> 1,177,452
<TOTAL-ASSETS> 3,197,591
<CURRENT-LIABILITIES> 802,387
<BONDS> 491,444
<COMMON> 55,906
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 1,541,301
<TOTAL-LIABILITY-AND-EQUITY> 3,197,591
<SALES> 2,198,117
<TOTAL-REVENUES> 2,198,117
<CGS> 1,689,348
<TOTAL-COSTS> 1,689,348
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,035
<INTEREST-EXPENSE> 23,519
<INCOME-PRETAX> 231,899
<INCOME-TAX> 82,324
<INCOME-CONTINUING> 149,575
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,575
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.33
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| PTC | https://www.sec.gov/Archives/edgar/data/857005/0000927016-98-000492.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000927016-98-000492.txt : 19980212
<SEC-HEADER>0000927016-98-000492.hdr.sgml : 19980212
ACCESSION NUMBER: 0000927016-98-000492
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980103
FILED AS OF DATE: 19980211
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PARAMETRIC TECHNOLOGY CORP
CENTRAL INDEX KEY: 0000857005
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 042866152
STATE OF INCORPORATION: MA
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-18059
FILM NUMBER: 98532107
BUSINESS ADDRESS:
STREET 1: 128 TECHNOLOGY DR
CITY: WALTHAM
STATE: MA
ZIP: 02154
BUSINESS PHONE: 7813985000
MAIL ADDRESS:
STREET 1: 128 TECHNOLOGY CORP
CITY: WALTHAM
STATE: MA
ZIP: 02154
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended: January 3, 1998 Commission File Number: 0-18059
--------------- -------
PARAMETRIC TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2866152
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
128 Technology Drive, Waltham, MA 02154
-----------------------------------------------------------
(Address of principal executive offices, including zip code)
(781) 398-5000
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 128,344,551
- -------------------------------------- ------------------------------
Class Outstanding at January 3, 1998
Total number of pages: 16
Exhibit index appears on page 15
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
INDEX
-------
Page
----
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheet 3
January 3, 1998 and September 30, 1997
Consolidated Statement of Income 4
Three months ended January 3, 1998 and December 28, 1996
Consolidated Statement of Cash Flows 5
Three months ended January 3, 1998 and December 28, 1996
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
(amounts in thousands)
<TABLE>
<CAPTION>
ASSETS January 3, 1998 September 30, 1997
--------------- ------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $247,608 $154,228
Short-term investments 321,718 354,516
Accounts receivable, net 157,896 154,777
Other current assets 49,283 27,620
-------- --------
Total current assets 776,505 691,141
Marketable investments 37,991 45,580
Property and equipment, net 46,969 47,504
Other assets 45,991 48,198
-------- --------
Total assets $907,456 $832,423
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 36,882 $ 36,417
Accrued compensation 23,716 39,085
Deferred revenue 88,051 81,287
Income taxes 33,627 30,369
-------- --------
Total current liabilities 182,276 187,158
Other liabilities 458 470
Stockholders' equity:
Preferred stock, $.01 par value;
5,000 shares authorized; none
issued -- --
Common stock, $.01 par value;
350,000 shares authorized;
128,345 and 128,149 shares issued 1,283 1,281
Additional paid-in capital 261,044 253,201
Retained earnings 468,554 419,285
Treasury stock, at cost, 0 and 524
shares -- (24,169)
Other equity (6,159) (4,803)
-------- --------
Total stockholders' equity 724,722 644,795
-------- --------
Total liabilities and stockholders'
equity $907,456 $832,423
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
January 3, 1998 December 28, 1996
--------------- ------------------
<S> <C> <C>
Revenue:
License $152,367 $138,442
Service 70,640 45,059
-------- --------
Total revenue 223,007 183,501
-------- --------
Cost of revenue:
License 2,735 1,991
Service 21,328 15,557
-------- --------
Total cost of revenue 24,063 17,548
-------- --------
Gross profit 198,944 165,953
-------- --------
Operating expenses:
Sales and marketing 81,282 71,661
Research and development 15,048 12,134
General and administrative 11,327 8,705
-------- --------
Total operating expenses 107,657 92,500
-------- --------
Operating income 91,287 73,453
Other income, net 3,172 2,625
-------- --------
Income before income taxes 94,459 76,078
Provision for income taxes 32,116 26,627
-------- --------
Net income $ 62,343 $ 49,451
======== ========
Net income per share - Basic $ 0.49 $ 0.39
======== ========
Net income per share - Diluted $ 0.47 $ 0.37
======== ========
Weighted average number of common
shares outstanding 128,047 127,499
======== ========
Weighted average number of common and dilutive
common equivalent shares outstanding 131,893 135,439
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
January 3, 1998 December 28, 1996
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 62,343 $ 49,451
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,864 4,805
Deferred income taxes 1,020 920
Changes in assets and liabilities:
Increase in accounts receivable (4,834) (8,870)
(Increase) decrease in other current assets (20,710) 686
(Increase) decrease in other assets 1,244 (607)
Increase in accounts payable and accrued expenses 861 4,567
Decrease in accrued compensation (15,067) (3,782)
Increase in deferred revenue 8,854 5,681
Increase in income taxes 7,760 5,385
-------- --------
Net cash provided by operating activities 48,335 58,236
-------- --------
Cash flows from investing activities:
Additions to property and equipment, net (5,652) (7,871)
Additions to capitalized and purchased software costs -- (200)
Proceeds from sale of investments 128,572 32,916
Purchases of investments (89,556) (80,876)
-------- --------
Net cash provided (used) by investing activities 33,364 (56,031)
-------- --------
Cash flows from financing activities:
Repayment of long-term obligations (11) (22)
Proceeds from issuance of common stock 13,377 12,521
Purchases of treasury stock -- (40,122)
-------- --------
Net cash provided (used) by financing activities 13,366 (27,623)
-------- --------
Effects of exchange rate changes on cash (1,685) (1,368)
-------- --------
Net increase (decrease) in cash and cash equivalents 93,380 (26,786)
Cash and cash equivalents at beginning of period 154,228 201,614
-------- --------
Cash and cash equivalents at end of period $247,608 $174,828
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
PARAMETRIC TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, and have been
prepared by the Company in accordance with generally accepted accounting
principles. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form 10-
K for the fiscal year ended September 30, 1997.
The results of operations for the three-month period ended January 3, 1998
are not necessarily indicative of the results expected for the full fiscal year.
2. SUBSEQUENT EVENT:
On January 12, 1998, the Company completed its acquisition of
Computervision Corporation ("Computervision"), a publicly held company
headquartered in Bedford, Massachusetts. In connection with the transaction,
the Company issued approximately 5.8 million shares of its common stock to the
shareholders of Computervision and reserved approximately 822,000 shares for
issuance upon exercise of options held by former employees of Computervision and
its subsidiaries. The merger is being accounted for on a pooling-of-interests
basis. The Company expects to recognize a non-recurring charge of approximately
$75,000,000 to $95,000,000 related to certain merger-related, debt prepayment,
consolidation and integration expenses during the second quarter of fiscal 1998.
Also, the Company assumed approximately $240,000,000 in debt from
Computervision, and expects to use cash and short-term investment balances to
repay a substantial portion of such debt in the second quarter of fiscal 1998.
The discussion and analysis below, except where otherwise noted, does not
reflect the effects of the transaction, which was completed after the end of the
Company's first quarter.
Revenue, net income and net income per share of the stand-alone companies
for the periods described are as follows. The 1996 Computervision results
include revenue and expenses from the hardware support services business, which
was sold by Computervision on July 18, 1997. The results below do not reflect
the one-time charge associated with the Computervision acquisition, which will
be recorded in the second quarter of fiscal 1998. The Company continues to
evaluate conforming accounting methods of the separate companies, which may
affect the results of the combined companies. The table below states
Parametric's financial data for the quarter ended January 3, 1998 which will be
combined with Computervision's financial data for the quarter ended December 31,
1997, compared with Parametric's financial data for the quarter ended December
28, 1996 which will be combined with Computervision's financial data for the
quarter ended March 30, 1997.
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
January 3, 1998/ December 28, 1996/
December 31, 1997 March 30, 1997
(amounts in thousands, except per share data)
<S> <C> <C>
Revenue
Parametric Technology Corporation $223,007 $183,501
Computervision Corporation 35,861 77,809
Net Income (Loss)
Parametric Technology Corporation $ 62,343 $ 49,451
Computervision Corporation (20,210) (33,944)
Net Income (Loss) per share - Basic
Parametric Technology Corporation $ 0.49 $ 0.39
Computervision Corporation (0.31) (0.53)
Net Income (Loss) per share - Diluted
Parametric Technology Corporation $ 0.47 $ 0.37
Computervision Corporation (0.31) (0.53)
</TABLE>
6
<PAGE>
3. EARNINGS PER SHARE:
The Company has adopted the Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" in the quarter ended January 3, 1998 and all
historical net income per share data presented has been restated to conform to
the provisions of this statement. SFAS No. 128 establishes a different method of
computing net income per share than was required under the provisions of
Accounting Principles Board Opinion No. 15. The following table reconciles the
numerator and the denominators of the basic and diluted earnings per share (EPS)
computations as shown on the Consolidated Statement of Income included in this
report on Form 10-Q.
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 3, 1998 December 28, 1996
--------------- -----------------
(amounts in thousands, except per share data)
<S> <C> <C>
Basic EPS Computation
Numerator:
Net Income $ 62,343 $ 49,451
Denominator:
Common shares outstanding 128,047 127,499
-------- --------
Basic EPS $ 0.49 $ 0.39
======== ========
Diluted EPS Computation
Numerator:
Net Income $ 62,343 $ 49,451
Denominator:
Common shares outstanding 128,047 127,499
Stock Options 3,846 7,940
-------- --------
Total Shares 131,893 135,439
-------- --------
Diluted EPS $ 0.47 $ 0.37
======== ========
</TABLE>
Options to purchase shares of the Company's common stock of 6,721,995 for the
quarter ended January 3, 1998 and 364,346 for the quarter ended December 28,
1996 were outstanding during the respective periods but were not included in the
computation of diluted EPS because the price of the options, which range from
$48 to $60.5625 per share for the quarter ended January 3, 1998 and $53.875 for
the quarter ended December 28, 1996, was greater than the average market price
of the common stock for the period reported. The outstanding options not
included in the calculation for the quarter ended January 3, 1998 will expire
between September 2007 and November 2007. The outstanding options not included
in the calculation for the quarter ended December 28, 1996 will expire in
October 2006.
7
<PAGE>
4. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. Management has not yet evaluated the
effects of this change on its reporting of income. The Company will adopt SFAS
No. 130 for its fiscal year ending September 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on
the management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. Management is currently
evaluating the effects of this change on its reporting of segment information.
The Company will adopt SFAS No. 131 for its fiscal year ending September 30,
1999.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition". The Company will adopt SOP 97-2 for its fiscal year ending
September 30, 1999 and does not expect any material impact on its revenue
recognition policies.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Parametric Technology Corporation is the CAD/CAM/CAE (computer-aided
design, manufacturing and engineering) industry's leading supplier of software
tools used to automate the mechanical development of a product from its
conceptual design through production.
Information provided by the Company, including information contained in
this Quarterly Report on Form 10-Q, or by its spokespersons from time to time,
may contain forward-looking statements concerning projected financial
performance, market and industry segment growth, product development and
commercialization or other aspects of future operations. Such statements are
based on the assumptions and expectations of management at the time such
statements are made. The Company cautions investors that its performance (and,
therefore, any forward-looking statement) is subject to risks and uncertainties.
Various important factors, including but not limited to those discussed herein,
may cause the Company's future results to differ materially from those projected
in any forward-looking statement. Important information about such factors and
the basis for those assumptions is discussed below and is also contained in
"Important Factors Regarding Future Results" included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in the 1997 Annual Report to Stockholders and in the "Risk Factors"
section of the Company's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on November 12, 1997, which sections are
incorporated herein by reference.
ACQUISITION
On January 12, 1998, the Company completed its acquisition of
Computervision Corporation ("Computervision"), a publicly held company
headquartered in Bedford, Massachusetts. In connection with the transaction,
the Company issued approximately 5.8 million shares of its common stock to the
shareholders of Computervision and reserved approximately 822,000 shares for
issuance upon exercise of options held by former employees of Computervision and
its subsidiaries. The merger is being accounted for on a pooling-of-interests
basis. The Company expects to recognize a non-recurring charge of approximately
$75,000,000 to $95,000,000 related to certain merger-related, debt prepayment,
consolidation and integration expenses during the second quarter of fiscal 1998.
Also, the Company assumed approximately $240,000,000 in debt from
Computervision, and expects to use cash and short-term investment balances to
repay a substantial portion of such debt in the second quarter of fiscal 1998.
The discussion and analysis below, except where otherwise noted, does not
reflect the effects of the transaction, which was completed after the end of the
Company's first quarter.
RESULTS OF OPERATIONS
Revenue, including license and service revenues, for the quarter ended
January 3, 1998 was $223,007,000, compared with $183,501,000 for the quarter
ended December 28, 1996, a 22% increase. Net income, as a percentage of
revenue, was 28% for the quarter ended January 3, 1998, compared to 27% in the
corresponding period in fiscal 1997. This represents an increase in net income
of 26% from the quarter ended December 28, 1996.
The Company derives its revenue from the sale and support of software used
in the mechanical segment of the CAD/CAM/CAE industry. Revenue growth in the
three-month period ended January 3, 1998 reflects the continued demand for the
Company's products and services among both existing customers and first-time
buyers, and the Company's ongoing investment in expanding its worldwide direct
sales force. License revenue was $152,367,000 for the three-month period ended
January 3, 1998, a 10% increase from $138,442,000 for the corresponding period
in fiscal 1997. This growth results from an increase in the number of seats of
software licensed. A seat of software generally consists of various software
products configured to serve the needs of a single end user. The Company
licensed 7,838 seats of software in the three-month period ended January 3,
1998, an increase of 12% from 6,984 seats of software in the comparable period
in fiscal 1997.
Service revenue as a percentage of total revenue increased to 32% in the
three-month period ended January 3, 1998 from 25% in the corresponding period in
fiscal 1997. Service revenue is derived from the sale of software maintenance
contracts and the performance of training and consulting services. Service
revenue was $70,640,000 for the three-month period ended January 3, 1998, an
increase of 57% from $45,059,000 for the comparable period in fiscal 1997. The
increase in service revenue is a result of the growth in the Company's increased
installed customer base and the increased training and consulting services
performed for these customers.
9
<PAGE>
The Company derived 54% of revenue from sales to international customers in
the three-month period ended January 3, 1998, compared with 57% for the same
period in fiscal 1997. The decrease in the percentage of revenue derived from
international sales is attributable primarily to the strengthening of the dollar
in relation to the major European and Asian currencies and, to a lesser extent,
areas of weakness in the Asian market due to current economic uncertainties
affecting that region. The Company is continuing to implement measures to
strengthen its sales and support infrastructure in Japan and to rebuild capacity
in order to re-accelerate revenue growth in this region, but does not expect
Japan's year-over-year revenue growth to contribute to overall revenue growth
until at least the second quarter of fiscal 1998.
The Company anticipates that total revenue will increase during the
remainder of fiscal 1998 from continued penetration in the mechanical
CAD/CAM/CAE industry. However, the rate of continued revenue growth in the
remainder of fiscal 1998 depends upon the Company's ability to successfully
implement the measures taken to strengthen results in Japan, adequately manage
exposure to foreign currency fluctuations, continue to penetrate the mechanical
segment of the CAD/CAM/CAE industry, attract and retain skilled personnel, and
deliver timely product enhancements. Performance during the remainder of fiscal
1998 could also be affected by the efforts to integrate Computervision's
operations with those of the Company and the success of those integration
efforts. In addition, there can be no assurance that quarterly revenue growth
rates for particular geographical areas will be comparable to those achieved in
prior periods.
Cost of license revenue consists of the amortization of capitalized
computer software costs and costs associated with reproducing software, printing
user manuals, royalties, packaging and shipping. The increase in cost of
license revenue is primarily a result of the increase in the number of seats
licensed and the royalty costs associated with those licenses during the three-
month period ended January 3, 1998, as compared to the corresponding period in
fiscal 1997. Cost of service revenue includes the costs associated with
training and consulting personnel, such as salaries and related costs and
travel, and the costs related to software maintenance, including costs incurred
for customer support personnel and the release of maintenance updates. The
increase in cost of service revenue resulted primarily from growth in the
staffing necessary to generate and support increased worldwide service revenue
and provide ongoing quality customer support to the Company's increasing
installed base. Combined, these expenses increased to $24,063,000 for the
three-month period ended January 3, 1998 from $17,548,000 for the corresponding
period in fiscal 1997. Total cost of revenue as a percentage of revenue
increased to 11% for the three-month period ended January 3, 1998 compared with
10% for the corresponding period in fiscal 1997.
Sales and marketing expenses primarily include salaries, sales commissions,
travel and facility costs. Sales and marketing expenses increased to
$81,282,000 for the three-month period ended January 3, 1998 from $71,661,000
for the corresponding period in fiscal 1997. These costs decreased as a
percentage of revenue to 36% for the three-month period ended January 3, 1998,
compared with 39% for the comparable period in fiscal 1997. The decrease in
costs as a percentage of revenue was primarily due to lower selling expenses as
a result of the change in the mix of revenue components for the three-month
period ended January 3, 1998, compared to the corresponding period in fiscal
1997. The absolute increase in these expenses was due primarily to worldwide
expansion of the sales force and sales commissions associated with higher
revenue. Total sales and marketing headcount increased to 2,096 at January 3,
1998, an increase of 19% from 1,759 at December 28, 1996. The Company expects to
continue the growth of its worldwide sales and marketing organization during
fiscal 1998, reflecting the Company's commitment to focus its resources on
increasing its installed base and expanding worldwide acceptance for its
products. The continued growth in the worldwide sales and marketing organization
depends upon the Company's ability to attract and retain highly skilled
technical, managerial and sales personnel.
The Company continued to make investments in research and development,
consisting principally of salaries and benefits, expenses associated with
product translations, costs of computer equipment used in software development,
and facility expenses. Research and development expenses increased to
$15,048,000 for the three-month period ended January 3, 1998 from $12,134,000
for the corresponding period in fiscal 1997. Total research and development
expenses remained constant at 7% of revenue for the three-month periods ended
January 3, 1998 and December 28, 1996.
General and administrative expenses include the costs of corporate,
finance, information technology, human resources and administrative functions of
the Company. These expenses increased to $11,327,000 for the three-month period
ended January 3, 1998 from $8,705,000 for the corresponding period in fiscal
1997. General and administrative expenses as a percentage of revenue remained
constant at 5% for the three-month periods ended January 3, 1998 and December
28, 1996. The absolute increase in these expenses was primarily due to the
hiring of additional employees necessary to support the Company's worldwide
growth.
10
<PAGE>
Other income, net, primarily includes interest income and expense, costs
associated with managing the Company's foreign exchange exposure and foreign
currency gains and losses. Other income increased to $3,172,000 for the three-
month period ended January 3, 1998, compared with $2,625,000 for the
corresponding period in fiscal 1997. The increase in other income consisted
principally of interest income resulting from higher cash and investment
balances. As the Company's international business continues to increase, a
growing amount of the Company's revenue and expenses is transacted in foreign
currencies. In order to reduce its exposure to fluctuations in foreign exchange
rates, the Company, from time to time, engages in hedging transactions involving
the use of forward foreign exchange contracts and foreign exchange option
contracts in the primary European and Asian currencies.
The Company's effective tax rate for the three-month period ended January
3, 1998 was 34%, compared with 35% for the same period in fiscal 1997. The
difference between the effective and statutory federal tax rate was due
primarily to the benefits of tax-exempt interest income and the use of the
foreign sales corporation, offset by the impact of state income taxes.
The number of worldwide employees increased 21% to 3,543 at January 3, 1998
compared with 2,923 at December 28, 1996. Employment increased to support
higher revenues and international expansion, with the largest portion of this
growth occurring in the sales and marketing organization.
LIQUIDITY AND CAPITAL RESOURCES
As of January 3, 1998, the Company had $247,608,000 of cash and cash
equivalents and $359,709,000 of investments. Net cash generated by operating
activities and proceeds from issuance of the Company's stock under stock plans
provided sufficient resources to fund the Company's headcount growth and capital
asset needs for the three months ended January 3, 1998. Net cash provided by
operating activities, consisting primarily of net income from operations before
depreciation and amortization and changes in working capital, was $48,335,000
for the three-month period ended January 3, 1998, compared with $58,236,000 for
the corresponding period in fiscal 1997. The decrease, from $58,236,000 for the
three months ended December 28, 1996 to $48,335,000 for the three months ended
January 3, 1998, in net cash provided by operating activities was primarily due
to an increase in other current assets principally associated with the increase
of software maintenance billings related to deferred revenue. Net cash provided
by investing activities totaled $33,364,000 for the three-month period ended
January 3, 1998, compared with $56,031,000 used by investing activities for the
corresponding period in fiscal 1997. The increase is principally due to the
timing of the purchases and sales of investments. The Company acquired
$5,652,000 of capital equipment, consisting primarily of computer equipment,
software, and office equipment to meet the needs resulting from the growth in
employee headcount and increased investment in information technologies. For
the remainder of fiscal 1998, the level of spending will be dependent on various
factors, including the growth of the business, general economic conditions and
the effect of the Company's acquisition of Computervision. Financing
activities, generally consisting primarily of proceeds from issuance of common
stock, offset by the purchases of treasury stock, provided $13,366,000 for the
three months ended January 3, 1998 and used $27,623,000 for the three months
ended December 28, 1996. The change in the current quarter was due principally
to the Company's suspension of repurchases and the Board of Director's
subsequent rescission of the Company's stock repurchase program in anticipation
of the Computervision acquisition.
The Company believes that existing cash and short-term investment balances,
together with cash generated from operations and issuance of the Company's
common stock under stock plans, will be sufficient to meet the Company's
currently projected working capital, financing and capital expenditure
requirements through at least fiscal 1998.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
Concerns have been widely expressed regarding the inability of certain
computer programs to process date information beyond year 1999. These concerns
focus on the impact of the Year 2000 problem on business operations and the
potential costs associated with identifying and addressing the problem. The
Company is in the process of evaluating and taking steps to deal with the
potential impact of this problem in areas under its control, in particular its
products, its administrative and business systems, and its sources of supply.
Based on its review to date, the Company believes that its own products
are largely "Year 2000 compliant." Legacy systems historically sold by
Computervision may in some cases not be completely compliant. The Company is in
the process of making corrections to currently offered legacy systems to bring
them into compliance with Year 2000 requirements and anticipates that these
corrections will be completed by the end of calendar 1998. The Company plans to
correct or replace its administrative and business systems in time to avoid
material problems. The Company has commenced a program to survey
11
<PAGE>
all major suppliers to determine the status and schedule for their Year 2000
compliance. Where it believes that a particular supplier's situation poses
unacceptable risks, the Company plans to identify an alternative source.
Costs incurred in the compliance effort will be expensed as incurred.
While the Company's Year 2000 compliance evaluation is not yet complete, the
Company does not at this time foresee a material impact on its business or
operating results from the Year 2000 problem. The Company cannot, of course,
predict the nature or materiality of the impact on its operations or operating
results of noncompliance by parties outside its control.
12
<PAGE>
Part II - OTHER INFORMATION
Item 6: (a) Exhibits
2.1 Agreement and Plan of Reorganization dated as of November 3, 1997 by
and among the Company, PTC Acquisition Corporation, and
Computervision Corporation (filed as Exhibit 2.1 to the Current
Report on Form 8-K dated November 4, 1997 and incorporated herein by
reference).
99.1 Annual Report to Stockholders for the fiscal year ended September 30,
1997 (which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated in this Quarterly Report
on Form 10-Q).
99.2 Registration Statement No. 333-39959 on Form S-4 (which is not deemed
to be "filed" except to the extent that portions thereof are
expressly incorporated in this Quarterly Report on Form 10-Q).
(b) Reports on Form 8-K
On November 4, 1997, the Company filed a Current Report on Form 8-
K announcing that the Company and Computervision had entered into
a definitive merger agreement under which the Company acquired
Computervision in a stock-for-stock transaction on January 12,
1998.
13
<PAGE>
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.
PARAMETRIC TECHNOLOGY CORPORATION
Date: February 11, 1998 by: /S/ Edwin J. Gillis
------------------------------
Edwin J. Gillis
Executive Vice President,
Chief Financial Officer and
Treasurer
14
<PAGE>
Exhibit Index
2.1 Agreement and Plan of Reorganization dated as of November 3, 1997 by and
among the Company, PTC Acquisition Corporation, and Computervision
Corporation (filed as Exhibit 2.1 to the Current Report on Form 8-K dated
November 4, 1997 and incorporated herein by reference).
99.1 Annual Report to Stockholders for the fiscal year ended September 30,
1997 (which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated in this Quarterly Report on
Form 10-Q); filed as Exhibit 13.1 to the Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 and incorporated herein by
reference.
99.2 Registration Statement No. 333-39959 on Form S-4 (which is not deemed to
be "filed" except to the extent that portions thereof are expressly
incorporated in this Quarterly Report on Form 10-Q).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-Q FOR THE QUARTER ENDED JANUARY 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JAN-03-1998
<CASH> 247,608
<SECURITIES> 321,718
<RECEIVABLES> 160,523
<ALLOWANCES> 2,627
<INVENTORY> 0
<CURRENT-ASSETS> 776,505
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 907,456
<CURRENT-LIABILITIES> 182,276
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,283
<OTHER-SE> 723,439
<TOTAL-LIABILITY-AND-EQUITY> 907,456
<SALES> 152,367
<TOTAL-REVENUES> 223,007
<CGS> 2,735
<TOTAL-COSTS> 24,063
<OTHER-EXPENSES> 107,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 94,459
<INCOME-TAX> 32,116
<INCOME-CONTINUING> 62,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,343
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| RAD | https://www.sec.gov/Archives/edgar/data/84129/0000893220-98-000032.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000893220-98-000032.txt : 19980113
<SEC-HEADER>0000893220-98-000032.hdr.sgml : 19980113
ACCESSION NUMBER: 0000893220-98-000032
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971129
FILED AS OF DATE: 19980112
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: RITE AID CORP
CENTRAL INDEX KEY: 0000084129
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912]
IRS NUMBER: 231614034
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0302
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05742
FILM NUMBER: 98505023
BUSINESS ADDRESS:
STREET 1: 30 HUNTER LANE
CITY: CAMP HILL OWN
STATE: PA
ZIP: 17011
BUSINESS PHONE: 7177612633
MAIL ADDRESS:
STREET 1: PO BOX 3165
CITY: HARRISBURG
STATE: PA
ZIP: 17105
FORMER COMPANY:
FORMER CONFORMED NAME: LEHRMAN LOUIS & CO
DATE OF NAME CHANGE: 19680510
FORMER COMPANY:
FORMER CONFORMED NAME: RACK RITE DISTRIBUTORS
DATE OF NAME CHANGE: 19680510
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>RITE AID CORPORATION FORM 10-Q
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
----- -----
COMMISSION FILE NUMBER 1-5742
RITE AID CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1614034
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30 HUNTER LANE, CAMP HILL, PENNSYLVANIA 17011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(717) 761-2633
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The registrant had 128,911,067 shares of its $1.00 par value Common
Stock outstanding as of December 27, 1997
Total number of sequentially numbered pages in this filing, including
exhibits thereto: 20
<PAGE> 2
2
RITE AID CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets November 29, 1997 and March 1, 1997 2
Condensed Consolidated Statements of Income
Thirteen Weeks Ended November 29, 1997 and November 30, 1996 3
Condensed Consolidated Statements of Income
Thirty-Nine Weeks Ended November 29, 1997 and November 30, 1996 4
Condensed Consolidated Statements of Cash Flows
Thirty-Nine Weeks Ended November 29, 1997 and November 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Independent Auditors' Review Report 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
-1-
<PAGE> 3
3
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
November 29, 1997 March 1, 1997
----------------- -------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS
Cash $ 83,214 $ 7,042
Accounts and Notes Receivable 127,382 370,588
Inventories 2,844,040 2,336,659
Prepaid Expenses and Other Current Assets 66,919 57,210
----------- -----------
TOTAL CURRENT ASSETS 3,121,555 2,771,499
----------- -----------
Property, Plant and Equipment, at Cost 2,959,411 2,669,856
Accumulated Depreciation 872,157 773,786
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 2,087,254 1,896,070
----------- -----------
INTANGIBLE ASSETS
Excess of Cost Over Underlying Equity in Subsidiaries (Less
Accumulated Amortization of $45,978 and $19,595) 1,557,362 1,260,777
Lease Acquisition Costs and Other Intangible Assets (Less
Accumulated Amortization of $156,991 and $132,696) 405,955 383,862
----------- -----------
TOTAL INTANGIBLE ASSETS 1,963,317 1,644,639
----------- -----------
Other Assets 106,629 104,773
----------- -----------
TOTAL ASSETS $ 7,278,755 $ 6,416,981
=========== ===========
CURRENT LIABILITIES
Short-Term Debt and Current Maturities of Long-Term Debt $ 46,000 $ 44,255
Accounts Payable 912,673 601,301
Income Taxes 110,258 18,484
Sales and Other Taxes Payable 43,895 34,985
Accrued Salaries, Wages and Other Current Liabilities 411,793 472,985
----------- -----------
TOTAL CURRENT LIABILITIES 1,524,619 1,172,010
----------- -----------
Long-Term Debt, Less Current Maturities 2,482,250 2,317,789
Capital Lease Obligations 86,898 97,863
Deferred Income Taxes 233,693 221,855
Noncurrent Liabilities 134,203 118,779
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share; Issued 135,393,686
and 129,342,043 135,394 129,342
Additional Paid-In Capital 1,566,227 1,365,771
Retained Earnings 1,222,084 1,100,185
Cumulative Pension Liability Adjustments (1,867) (1,867)
Treasury Stock, at Cost (6,532,169 Shares) (104,746) (104,746)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,817,092 2,488,685
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,278,755 $ 6,416,981
=========== ===========
</TABLE>
See accompanying independent auditors' review report and notes to condensed
consolidated financial statements.
-2-
<PAGE> 4
4
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
SALES $2,885,666 $1,484,641
---------- ----------
COSTS AND EXPENSES:
Costs of Goods Sold Including Occupancy Costs 2,115,739 1,100,706
Selling, General and Administrative Expenses 613,424 302,697
Interest Expense 42,779 20,703
---------- ----------
2,771,942 1,424,106
---------- ----------
INCOME BEFORE INCOME TAXES 113,724 60,535
Income Taxes 45,830 23,126
----------- ----------
NET INCOME $ 67,894 S 37,409
=========== ==========
EARNINGS PER SHARE $ .54 $ .45
=========== ==========
CASH DIVIDENDS PER COMMON SHARE $ .20 $ .185
=========== ==========
AVERAGE SHARES OUTSTANDING 126,521,000 83,919,000
=========== ==========
</TABLE>
See accompanying independent auditors' review report and notes to condensed
consolidated financial statements.
-3-
<PAGE> 5
5
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
SALES $ 8,184,466 $ 4,313,019
------------ -----------
COSTS AND EXPENSES:
Costs of Goods Sold Including Occupancy Costs 5,964,079 3,185,468
Selling, General and Administrative Expenses 1,769,497 883,148
Interest Expense 121,329 57,902
Nonrecurring Costs -- 16,057
------------ -----------
7,854,905 4,142,575
------------ -----------
INCOME BEFORE INCOME TAXES 329,561 170,444
Income Taxes 132,813 65,110
------------ -----------
NET INCOME $ 196,748 $ 105,334
============ ===========
EARNINGS PER SHARE $ 1.59 $ 1.26
============ ===========
CASH DIVIDENDS PER COMMON SHARE $ .60 $ .555
============ ===========
AVERAGE SHARES OUTSTANDING 124,101,000 83,891,000
============ ===========
</TABLE>
See accompanying independent auditors' review report and notes to condensed
consolidated financial statements.
-4-
<PAGE> 6
6
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES $ 329,561 $ 170,444
Adjustments to Reconcile Net Cash Provided by Operations:
Depreciation and Amortization 203,316 110,662
Accreted Interest on Long-Term Debt 14,097 12,672
Changes in Operating Assets and Liabilities, Net of Effects from Acquisitions:
(Increase) Decrease in Accounts Receivable 259,445 (18,972)
(Increase) in Inventories (407,389) (158,138)
Increase in Accounts Payable 232,685 38,547
Other (106,044) (8,812)
--------- ---------
525,671 146,403
Income Taxes (Paid) (36,418) (23,965)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 489,253 122,438
--------- ---------
INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment (338,459) (336,619)
Purchases of Businesses, Net of Cash Acquired (330,425) (35,087)
Intangible Assets Acquired (47,767) (20,677)
Investments and Advances in Joint Venture -- (30,714)
Proceeds from Dispositions 67,083 --
Other (663) (9,486)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (650,231) (432,583)
--------- ---------
FINANCING ACTIVITIES
Proceeds from Bond Issuance 641,293 76,785
Net Proceeds (Repayments) of Commercial Paper and Other Long-Term Borrowings (332,520) 284,830
Cash Dividends Paid (74,849) (46,593)
Redemption of Stock Rights -- (839)
Proceeds From Sale of Stock 3,226 1,545
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 237,150 315,728
--------- ---------
INCREASE IN CASH 76,172 5,583
CASH AT BEGINNING OF PERIOD 7,042 3,131
--------- ---------
CASH AT END OF PERIOD $ 83,214 $ 8,714
========= =========
</TABLE>
See accompanying independent auditors' review report and notes to condensed
consolidated financial statements.
-5-
<PAGE> 7
7
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- BASIS OF PRESENTATION
The financial information included herein is unaudited. In addition, the
financial information does not include all disclosures required under generally
accepted accounting principles because certain note information included in the
Company's annual report has not been included in this report; however, such
information reflects all adjustments (consisting primarily of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The report of KPMG Peat
Marwick LLP, independent auditors, commenting upon their review accompanies the
condensed consolidated financial statements included in Item 1 of Part I.
The results of operations for the thirteen and thirty-nine weeks ended November
29, 1997 and November 30, 1996 are not necessarily indicative of the results to
be expected for the full year.
NOTE 2- EARNINGS PER SHARE
Earnings per share were computed by dividing net income by the weighted average
number of common stock shares outstanding during the periods.
NOTE 3- RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new standards
for computing and presenting earnings per share (EPS) for entities with
publicly-held common stock. The Company is required to adopt SFAS No. 128 for
the year ending February 28, 1998. If the provisions of SFAS No. 128 had been
used to calculate EPS for the 13-week and 39-week periods ended November 29,
1997 and November 30, 1996, pro forma EPS would have been:
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
Basic Earnings Per Share $.54 $.45
==== ====
Diluted Earnings Per Share $.52 $.44
==== ====
</TABLE>
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
Basic Earnings Per Share $1.59 $1.26
===== =====
Diluted Earnings Per Share $1.54 $1.23
===== =====
</TABLE>
-6-
<PAGE> 8
8
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3- RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In June 1997, the Financial Accounting Standards Board issued two new
pronouncements for which provisions are effective for fiscal year ending
February 27, 1999; SFAS No. 130 "Reporting Comprehensive Income" and SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
while SFAS No. 131 requires an enterprise to report financial and descriptive
information about its reportable segments. Both standards are being evaluated
for implementation by the company.
NOTE 4- ACCOUNTS RECEIVABLE SECURITIZATION
During November 1997, the company and certain of its subsidiaries entered into
an agreement to sell, on an ongoing basis, a pool of receivables to a wholly
owned bankruptcy-remote special purpose funding subsidiary (the "funding
subsidiary") of the company. Accordingly, the company and certain subsidiaries
transfer all their accounts receivable (principally representing amounts owed by
third-party prescription payers) to the funding subsidiary. The funding
subsidiary has sold and, subject to certain conditions, may from time to time
sell an undivided fractional ownership interest in the pool of receivables to a
multi-seller receivables securitization company. Proceeds of approximately
$286,000,000 were received from the sale of receivables and were used to reduce
outstanding commercial paper borrowings and are reflected as operating cash
flows in the accompanying consolidated statement of cash flows.
NOTE 5- ACQUISITIONS
On August 27, 1997, the company completed its acquisitions of Harco, Inc. and
K&B, Incorporated. The combined purchase price of these companies was
approximately $340,000,000 and was financed through commercial paper borrowings.
The value of goodwill assigned to acquisitions was approximately $300,000,000
using the purchase method of accounting for business combinations. Operating
results for Harco, Inc. and K&B, Incorporated are included in the consolidated
financial statements of the company since August 27, 1997.
NOTE 6- LONG-TERM DEBT
In September 1997, the company completed the sale of $650,000,000, 5.25%
Convertible Subordinated Notes due September 15, 2002. The notes are convertible
into shares of Rite Aid Corporation common stock at any time on or after the
90th day following the last issuance of notes and prior to the close of business
on the maturity date, unless previously redeemed or repurchased, at a conversion
price of $72.275 per share (equivalent to a conversion rate of 13.836 shares per
$1,000 principal amount of notes), subject to adjustment in certain events.
Interest on the notes is payable semiannually on March 15 and September 15 of
each year, commencing on March 15, 1998. The notes may be redeemed at the option
of the company on or after September 15, 2000, in whole or in part. The proceeds
from the sale of the notes were used to refinance and repay commercial paper
previously issued by the company.
On October 15, 1997, the company completed redemption of outstanding 6.75% Zero
Coupon Convertible Subordinated Notes. Most noteholders of the 6.75% Zero Coupon
Convertible Subordinated Notes exercised conversion rights prior to the October
15, 1997 redemption date, resulting in issuance of approximately 5.9 million
shares of common stock.
NOTE 7- SUBSEQUENT EVENT
On January 7, 1998 the company announced that the Board of Directors had
declared a quarterly dividend and a 2 for 1 stock split of the company's common
stock. The quarterly dividend was increased to $.215 per share payable February
2, 1998 to stockholders of record on January 20, 1998.
-7-
<PAGE> 9
9
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 1. Financial Statements: (Continued)
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Rite Aid Corporation
Camp Hill, Pennsylvania
We have reviewed the condensed consolidated balance sheet of Rite Aid
Corporation and subsidiaries as of November 29, 1997, and the related condensed
consolidated statements of income for the thirty-nine and thirteen week periods
ended November 29, 1997 and November 30, 1996, and the condensed consolidated
statements of cash flows for the thirty-nine week periods ended November 29,
1997 and November 30, 1996. These condensed consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Rite Aid Corporation and
subsidiaries as of March 1, 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated April 24, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of March 1, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Harrisburg, Pennsylvania
January 12, 1998
-8-
<PAGE> 10
10
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Sales for the thirteen-week and thirty-nine week periods ended November 29, 1997
were $2,885,666,000 and $8,184,466,000, respectively, representing increases of
94.4% and 89.8% over the same periods from the previous year. Same-store sales
for the Rite Aid stores increased 9.7% for the quarter, reflecting a 13.9%
increase in pharmacy comparable sales and a 4.1% increase in front-end same-unit
sales. Thrifty PayLess same-store sales increased 3.7% for the 13 weeks ended
November 29, 1997, consisting of a 10.3% increase in comparable pharmacy sales
and a 0.3% decline in front-end sales. Year-to-date, same-store sales increased
9.7% compared to 7.2% for the comparable, 39-week period last year, and Thrifty
PayLess same-store sales increased 4.5%.
Prescription sales accounted for 51.4% of drugstore sales for the quarter, and
third party prescription sales represent 83.4% of pharmacy sales. Last year,
prescription sales were 57.8% of drugstore sales, and third party prescription
sales represented 80.4% of pharmacy sales. Prescription sales for the first 39
weeks of fiscal 1998 were 50.6% of drugstore sales compared to 56.8% for the
same period last year. Year-to-date third party sales as a percent of pharmacy
sales were 83.3% versus 79.4% last year.
Cost of goods sold including occupancy costs, as a percentage of sales, were
73.3% for the quarter and 72.9% for the year-to-date period compared to 74.1%
and 73.9% for the respective periods a year earlier. The company uses the LIFO
inventory method that requires interim estimates of annual inflation rates.
Accordingly, costs of goods sold included a LIFO provision of $2,700,000 for the
quarter and $15,000,000 for the thirty-nine weeks ended November 29, 1997,
compared to $2,400,000 and $13,000,000, respectively for the same periods last
year. The LIFO method of valuing inventory had the effect of reducing net income
$.01 per share for the 13-week period and $.07 per share for the 39-week period
ended November 29, 1997. For the comparable periods last year, the LIFO
adjustments were $.02 for the quarter and $.10 for the 39 weeks. The trend of
decreasing margins on third party reimbursed prescription sales continued to
negatively impact pharmacy gross margins, but were more than offset by front-end
gross margin improvements when compared to the prior year. Gross margins
benefited from improved front-end margins and a higher percentage of front-end
sales to total sales of 49.4% for the thirty-nine weeks ended November 29, 1997
compared to 43.2% in the prior year. The improvement in front-end sales to total
sales was achieved through Thrifty PayLess stores and new stores, both of which
emphasize a greater front-end merchandise mix.
Selling, general and administrative costs of $613,424,000 for the quarter and
$1,769,497,000 year-to-date were 21.3% and 21.6% of sales, respectively. This
compares to 20.4% and 20.9% for the same periods last year. Thrifty PayLess
stores operating costs exceed that of Rite Aid stores and are the main reason
for the period-to-period increase in the operating expense to sales ratio. Also,
the company experienced expenses associated with acquisition integration
activities which accounted for a slight increase in the operating expense ratio.
Nonrecurring costs of $16,057,000, or .4% of sales, were included in the
thirty-nine weeks ended November 30, 1996 associated with the attempted
acquisition of Revco D. S., Inc.
Interest expense was $42,779,000 for the thirteen-week period and $121,329,000
for the thirty-nine week period this year compared to $20,703,000 and
$57,902,000 for the same periods last year. The increase in interest expense
resulted from higher debt levels that were necessary to finance acquisitions;
capital expenditures and incremental working capital requirements for the new,
larger prototype stores; and other drugstore purchases. Also contributing to the
increased expense were slightly higher weighted average interest rates on the
company's commercial paper of approximately 5.7% for the quarter and
year-to-date periods ended November 29, 1997, compared to 5.4% and 5.5% for the
quarter and year-to-date periods last year.
Income taxes were $45,830,000 for the thirteen-week period and $132,813,000 for
the thirty-nine week period ended November 29, 1997 compared to $23,126,000 and
$65,110,000 for the same periods last year. The effective income tax rate
increased to 40.3% during fiscal 1998, because of the increase in nondeductible
intangible amortization expenses. Depreciation and amortization was $75,233,000
for the quarter and $203,316,000 for the thirty-nine week period ended November
29, 1997 compared to $40,265,000 and $110,662,000 in the comparable periods last
year.
Net income for the thirteen weeks rose 81.5% to $67,894,000 compared to
$37,409,000 in fiscal 1997. Earnings per share increased 20.0% to $.54 from $.45
for the prior year's third quarter. Year-to-date, net income increased 86.8% to
$196,748,000 compared to $105,334,000 or $1.59 per share compared to $1.26 per
share. Net income last year included a charge of $9,923,000, or $.12 per share,
for costs associated with the attempted acquisition of Revco D.S., Inc.
-9-
<PAGE> 11
11
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (Continued)
The company will surpass its goal of opening 1,000 new 10,500 square-foot
prototype stores by February 28, 1998. The new larger prototype stores offer
consumers an enhanced merchandise selection and greater convenience. Annualized
first-year sales of the prototype stores exceed $3 million compared to an
average of $2 million for the company's older, smaller stores. The company has
begun a comprehensive review of its current store base to evaluate the impact on
sales and expenses associated with an aggressive plan to eliminate and relocate
the remaining older, smaller stores. In addition to the greater level of capital
expenditures necessary for the new prototype stores, the company must also
consider store closing costs including charges for future minimum lease
obligations associated with closing older locations.
The company is engaged in a comprehensive project to convert its computer
systems to be year 2000 date compliant and expects to successfully complete the
project on a timely basis. The year 2000 issue creates risk for the company
from unforeseen problems in its own computer systems and from that of the
systems of other companies on which the company's operations rely upon. Year
2000 conversion costs are funded through operating cash flows and expensed in
the period incurred.
On August 27, 1997, the company completed its acquisitions of Harco, Inc. and
K&B, Incorporated. The combined purchase price of these companies was
approximately $340,000,000 and was financed through commercial paper borrowings.
The value of goodwill assigned to acquisitions was approximately $300,000,000
using the purchase method of accounting for business combinations. Operating
results for Harco, Inc. and K&B, Incorporated are included in the consolidated
financial statements of the company since August 27, 1997. During the third
quarter, the company added 49 drugstores, closed 33 smaller outlets, enlarged 13
locations and relocated 71 units. An additional 332 stores were acquired at the
end of August with Harco and K&B. Year-to-date totals include 116 new stores, 90
closings, 23 expansions and 148 relocations. At the end of the third quarter,
the company operated 3,981 drugstores.
Working capital was $1,596,936,000 at November 29, 1997 compared to
$1,123,511,000 at November 30, 1996 and the current ratios were 2.0:1 and 3.1:1,
respectively. Cash from operations is used to fund working capital requirements,
fund dividend distributions to shareholders and contribute to investing
activities including store expansion and acquisitions. The company maintains $1
billion in revolving credit commitments to provide additional borrowing capacity
and support its commercial paper program.
During November 1997, the company and certain of its subsidiaries entered into
an agreement to sell, on an ongoing basis, a pool of receivables to a wholly
owned bankruptcy-remote special purpose funding subsidiary (the "funding
subsidiary") of the company. Accordingly, the company and certain subsidiaries
transfer all their accounts receivable (principally representing amounts owed by
third-party prescription payers) to the funding subsidiary. The funding
subsidiary has sold and, subject to certain conditions, may from time to time
sell an undivided fractional ownership interest in the pool of receivables to a
multi-seller receivables securitization company. Proceeds of approximately
$286,000,000 were received from the sale of receivables and were used to reduce
outstanding commercial paper borrowings and are reflected as operating cash
flows in the accompanying consolidated statement of cash flows.
In September 1997, the company sold $650,000,000, 5.25% Convertible Subordinated
Notes due September 15, 2002. Each $1,000 principal amount of notes will be
convertible into 13.836 shares ($72.275 per share conversion price) of Rite Aid
Corporation common stock pursuant to the terms of the notes. Interest on the
notes is payable semiannually beginning on March 15, 1998. The notes may be
redeemed at the option of the company on or after September 15, 2000, in whole
or in part. The proceeds from the notes were used to refinance and repay
commercial paper previously issued by the company.
On October 15, 1997, the company completed redemption of outstanding 6.75% Zero
Coupon Convertible Subordinated Notes. Most noteholders of the 6.75% Zero Coupon
Convertible Subordinated Notes exercised conversion rights prior to October 15,
1997, resulting in issuance of approximately 5.9 million shares of common stock.
Certain statements contained herein and elsewhere in this Form 10-Q which are
not historical facts are forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements address activities or events which the company
expects will or may occur in the future, such as increases in same-store sales,
increases in third-party prescription volumes, increases in the ratio of
front-end sales to total sales, increases in gross profits, decreases in the
operating expense to total sales ratio, future acquisitions, future capital
-10-
<PAGE> 12
12
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations: (Continued)
expenditures, new prototype store openings, future store closings, remodels,
renovations, expansions and relocations, successful completion of the year 2000
conversion project, additional distribution facilities, and other aspects of the
company's future business and operations. The company cautions that a number of
important factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether written or oral, made by or
on behalf of the company. Such factors include, but are not limited to,
competitive pricing pressures, third party prescription reimbursement levels,
consumer preferences, regulatory changes governing pharmacy practices, general
economic conditions, inflation, merchandise supply constraints, interest rate
movements, availability of real estate, construction and start-up of drugstore
and distribution center facilities, and the effects of commercialization and
technological difficulties. Consequently, all of the forward-looking statements
made are qualified by these and other factors, risks and uncertainties.
-11-
<PAGE> 13
13
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Item 11. Statement re computations of per share earnings
Item 12. Statement re computations of ratios of earnings to
fixed charges
Item 15. Copy of letter from independent accountants regarding
unaudited interim financial information
Item 27. Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K
None.
-12-
<PAGE> 14
14
RITE AID CORPORATION
FORM 10-Q
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RITE AID CORPORATION
(Registrant)
Date: January 12, 1998 /s/ Frank Bergonzi
- ----------------------- -------------------------
Frank Bergonzi
Executive Vice President,
Chief Financial Officer
-13-
<PAGE> 15
15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
ITEM 11 STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS.
ITEM 12 STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
ITEM 15 COPY OF LETTER FROM INDEPENDENT ACCOUNTANTS' REGARDING
UNAUDITED INTERIM FINANCIAL INFORMATION
ITEM 27 FINANCIAL DATA SCHEDULE (EDGAR FILING ONLY).
-14-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<TEXT>
<PAGE> 1
16
EXHIBIT 11
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
THIRTEEN WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
EARNINGS PER COMMON SHARE - ASSUMING NO DILUTION
Net income $ 67,894 $37,409
======== =======
Weighted average number of common shares outstanding 126,521 83,919
======== =======
Earnings per common share - assuming no dilution $ .54 $ .45
======== =======
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION (b)
Earnings
Net income $ 67,894 $37,409
Add after tax interest expense applicable to 6.75% convertible debentures (a) 800 2,092
-------- -------
Net income, as adjusted (b) $ 68,694 $39,501
======== =======
Common Shares
Weighted average number of common shares outstanding 126,521 83,919
Assuming conversion of 6.75% convertible debentures 2,327 5,953
Assuming exercise of options reduced by the number of shares which could have been
purchased with the proceeds from exercise of such options 2,586 933
-------- -------
Weighted average number of common shares outstanding, as adjusted (b) 131,434 90,805
======== =======
Earnings per common share assuming full dilution (b) $ .52 $ .44
======== =======
</TABLE>
(a) Shown net of income taxes which were calculated at the company's
effective tax rate.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by APB Opinion No. 15 since the
dilution is not material.
<PAGE> 2
17
EXHIBIT 11
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
THIRTY-NINE WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
November 29, 1997 November 30, 1996
----------------- -----------------
<S> <C> <C>
EARNINGS PER COMMON SHARE - ASSUMING NO DILUTION
Net income $196,748 $105,334
======== ========
Weighted average number of common shares outstanding 124,101 83,891
======== ========
Earnings per common share - assuming no dilution $ 1.59 $ 1.26
======== ========
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION (b)
Earnings
Net income $196,748 $105,334
Add after tax interest expense applicable to 6.75% convertible debentures (a) 5,281 6,102
-------- --------
Net income, as adjusted (b) $202,029 $111,436
======== ========
Common Shares
Weighted average number of common shares outstanding 124,101 83,891
Assuming conversion of 6.75% convertible debentures 4,690 5,953
Assuming exercise of options reduced by the number of shares which could have been
purchased with the proceeds from exercise of such options 2,581 933
-------- --------
Weighted average number of common shares outstanding, as adjusted (b) 131,372 90,777
======== ========
Earnings per common share assuming full dilution (b) $ 1.54 $ 1.23
======== ========
</TABLE>
(a) Shown net of income taxes which were calculated at the company's
effective tax rate.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by APB Opinion No. 15 since the
dilution is not material.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
18
EXHIBIT 12
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
THIRTY-NINE WEEKS ENDED NOVEMBER 29, 1997 AND
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996, MARCH 4, 1995, FEBRUARY 26, 1994 AND
FEBRUARY 27, 1993
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Thirty-Nine Year Year Year Year Year
Weeks Ended Ended Ended Ended Ended Ended
November 29, March 1, March 2, March 4, February 26, February 27,
1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest Expense $121,329 $ 96,473 $ 68,341 $ 42,300 $ 28,683 $ 29,387
Interest Portion(1)
of Net Rental Expense 80,676 66,067 52,080 40,424 40,427 37,659
-------- -------- -------- -------- -------- --------
Fixed Charges Before
Capitalized Interest 202,005 162,540 120,421 82,724 69,110 67,046
Capitalized Interest 2,703 1,897 1,948 373 217 445
-------- -------- -------- -------- -------- --------
Total Fixed Charges $204,708 $164,437 $122,369 $ 83,097 $ 69,327 $ 67,491
======== ======== ======== ======== ======== ========
Earnings
Income Before Extra-
ordinary Loss and
Income Taxes $329,561 $258,927(3) $256,202 $231,464 $ 45,670(2) $200,569
Fixed Charges Before
Capitalized Interest 202,005 162,540 120,421 82,724 69,110 67,046
-------- -------- -------- -------- -------- --------
Total Adjusted Earnings $531,566 $421,467 $376,623 $314,188 $114,780 $267,615
======== ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges 2.60 2.56 3.08 3.78 1.66 3.97
======== ======== ======== ======== ======== ========
</TABLE>
(1) The interest portion of the net rental expense is estimated to be equal
to one-third of the minimum rental expense for the period.
(2) Income before extraordinary loss and income taxes for fiscal year 1994
includes a $149,196,000 one-time, pre-tax provision for corporate
restructuring and other charges.
(3) Income before extraordinary loss and income taxes for fiscal year 1997
includes a $68,057,000 one-time, pre-tax charge for nonrecurring and
other charges.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-15
<SEQUENCE>4
<DESCRIPTION>LETTER FROM INDEPENDENT ACCOUNTANTS
<TEXT>
<PAGE> 1
19
EXHIBIT 15
RITE AID CORPORATION AND SUBSIDIARIES
COPY OF LETTER FROM INDEPENDENT ACCOUNTANTS'
REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
The Board of Directors
Rite Aid Corporation
Camp Hill, Pennsylvania
Ladies and Gentlemen:
Re: Registration Statements No. 333-08071; No. 333-21207; No. 333-39699
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated January 12, 1998 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
Harrisburg, Pennsylvania
January 12, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FORM 10-Q
QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 29, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-29-1997
<CASH> 83,214
<SECURITIES> 0
<RECEIVABLES> 138,004
<ALLOWANCES> 10,622
<INVENTORY> 2,844,040
<CURRENT-ASSETS> 3,121,555
<PP&E> 2,959,411
<DEPRECIATION> 872,157
<TOTAL-ASSETS> 7,278,755
<CURRENT-LIABILITIES> 1,524,619
<BONDS> 2,482,250
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 135,394
<OTHER-SE> 2,681,698
<TOTAL-LIABILITY-AND-EQUITY> 7,278,755
<SALES> 8,184,466
<TOTAL-REVENUES> 8,184,466
<CGS> 5,964,079
<TOTAL-COSTS> 5,964,079
<OTHER-EXPENSES> 1,769,497
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,329
<INCOME-PRETAX> 329,561
<INCOME-TAX> 132,813
<INCOME-CONTINUING> 196,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196,748
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.54
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| ROK | https://www.sec.gov/Archives/edgar/data/1024478/0001024478-98-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001024478-98-000004.txt : 19980224
<SEC-HEADER>0001024478-98-000004.hdr.sgml : 19980224
ACCESSION NUMBER: 0001024478-98-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980212
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ROCKWELL INTERNATIONAL CORP
CENTRAL INDEX KEY: 0001024478
STANDARD INDUSTRIAL CLASSIFICATION: 3670
IRS NUMBER: 251797617
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-12383
FILM NUMBER: 98535304
BUSINESS ADDRESS:
STREET 1: 600 ANTON BLVD STE 700
CITY: COSTA MESA
STATE: CA
ZIP: 92626-7147
BUSINESS PHONE: 7144244565
MAIL ADDRESS:
STREET 1: 600 ANTON BLVD STE 700
CITY: COSTA MESA
STATE: CA
ZIP: 92626-7147
FORMER COMPANY:
FORMER CONFORMED NAME: NEW ROCKWELL INTERNATIONAL CORP
DATE OF NAME CHANGE: 19961009
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
Commission file number 1-12383
Rockwell International Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-1797617
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
600 Anton Boulevard, Suite 700, Costa Mesa, California 92626-7147
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (714) 424-4565
(Office of the Corporate Secretary)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
200,880,282 shares of registrant's Common Stock, $1.00 par value, were
outstanding on January 31, 1998
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
Condensed Consolidated Balance Sheet--
December 31, 1997 and September 30, 1997........... 2
Consolidated Statement of Income --
Three Months Ended December 31, 1997 and 1996...... 3
Consolidated Statement of Cash Flows--
Three Months Ended December 31, 1997 and 1996...... 4
Notes to Financial Statements...................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................. 12
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds ........ 13
Item 5. Other Information................................. 13
Item 6. Exhibits and Reports on Form 8-K.................. 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROCKWELL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
December 31 September 30
1997 1997
ASSETS (In millions)
<S> <C> <C>
Current assets:
Cash......................................... $ 183 $ 283
Receivables (less allowance for doubtful
accounts: December 31, 1997, $67;
September 30, 1997, $62)................... 1,294 1,319
Inventories.................................. 1,616 1,526
Deferred income taxes........................ 251 254
Other current assets......................... 271 302
Total current assets................. 3,615 3,684
Net property.................................... 2,246 2,245
Intangible assets............................... 1,795 1,789
Other assets.................................... 248 253
TOTAL.................. $ 7,904 $ 7,971
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt.............................. $ 342 $ 66
Accounts payable............................. 757 840
Accrued compensation and benefits............ 409 436
Accrued income taxes......................... 138 96
Other current liabilities.................... 484 532
Total current liabilities............ 2,130 1,970
Long-term debt.................................. 157 156
Accrued retirement benefits..................... 778 795
Other liabilities............................... 239 239
Total liabilities........... 3,304 3,160
Shareowners' equity:
Common Stock (shares issued: 216.4).......... 216 216
Additional paid-in capital................... 904 901
Retained earnings............................ 4,438 4,409
Currency translation......................... (127) (103)
Common Stock in treasury, at cost (shares held:
December 31, 1997, 13.9;
September 30, 1997, 9.6).................. (831) (612)
Total shareowners' equity... 4,600 4,811
TOTAL.................. $ 7,904 $ 7,971
</TABLE>
See Notes to Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1997 1996
(In millions)
<S> <C> <C>
Revenues:
Sales.............................................. $ 1,979 $ 1,853
Other income....................................... 25 18
Total revenues................................... 2,004 1,871
Costs and expenses:
Cost of sales...................................... 1,402 1,285
Selling, general, and administrative............... 356 336
Purchased research and development................. 103 -
Interest........................................... 4 4
Total costs and expenses......................... 1,865 1,625
Income from continuing operations
before income taxes................................ 139 246
Provision for income taxes....................... 50 92
INCOME FROM CONTINUING OPERATIONS.................... 89 154
Income from discontinued operations.................. - 25
NET INCOME........................................... $ 89 $ 179
(In dollars)
Basic earnings per share:
Continuing operations........................... $ 0.43 $ 0.70
Discontinued operations......................... - 0.12
Net Income...................................... $ 0.43 $ 0.82
Diluted earnings per share:
Continuing operations........................... $ 0.43 $ 0.69
Discontinued operations......................... - 0.12
Net Income...................................... $ 0.43 $ 0.81
Cash dividends per share............................. $ 0.26 $ 0.29
(In millions)
Average outstanding shares:
Basic........................................... 204.8 218.7
Diluted......................................... 207.8 221.8
</TABLE>
See Notes to Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31
1997 1996
(In millions)
<S> <C> <C>
CONTINUING OPERATIONS:
Operating Activities
Income from continuing operations....................... $ 89 $ 154
Adjustments to income from continuing operations to
arrive at cash provided by operating activities:
Depreciation........................................ 93 95
Amortization of intangible assets................... 25 22
Deferred income taxes............................... (40) 15
Pension expense, net of contributions............... 9 13
Purchased research and development.................. 103 -
Changes in assets and liabilities, excluding effects
of acquisitions, divestitures and foreign currency
adjustments:
Receivables..................................... 37 28
Inventories..................................... (51) (14)
Accounts payable................................ (83) (166)
Accrued income taxes............................ 46 55
Other assets and liabilities.................... (74) (20)
Cash Provided by Operating Activities........ 154 182
Investing Activities
Property additions...................................... (109) (94)
Acquisition of businesses, net of cash acquired......... (158) (1)
Proceeds from disposition of property and businesses.... 13 557
Cash (Used for) Provided by Investing
Activities................................. (254) 462
Financing Activities
Increase (decrease) in short-term borrowings............ 283 (246)
Payments of long-term debt.............................. - (1)
Net increase (decrease) in debt......................... 283 (247)
Purchase of treasury stock.............................. (239) (61)
Cash dividends.......................................... (52) (63)
Reissuance of common stock.............................. 8 14
Cash Used for Financing Activities........... - (357)
CASH (USED FOR) PROVIDED BY CONTINUING OPERATIONS....... (100) 287
CASH USED FOR DISCONTINUED OPERATIONS.. ................ - (157)
(DECREASE) INCREASE IN CASH............................. (100) 130
CASH AT BEGINNING OF PERIOD............................. 283 663
CASH AT END OF PERIOD................................... $ 183 $ 793
</TABLE>
Income tax payments were $41 million and $25 million in the three months ended
December 31, 1997 and 1996, respectively.
See Notes to Financial Statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management of Rockwell International Corporation (the
company or Rockwell) the unaudited financial statements contain all
adjustments, consisting solely of adjustments of a normal recurring
nature, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented. These statements
should be read in conjunction with the company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997. The results of
operations for the three-month period ended December 31, 1997 are not
necessarily indicative of the results for the full year. Certain prior
year amounts have been reclassified to conform with the current
presentation.
It is the company's practice at the end of each interim reporting period
to make an estimate of the effective tax rate expected to be applicable
for the full fiscal year. The rate so determined is used in providing
for income taxes on a year-to-date basis.
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" in the first quarter of fiscal 1998. The adoption
of this standard had no effect on the company's financial statements.
2. In December 1997, the company acquired the In-Flight Entertainment (IFE)
business of Hughes-Avicom International, Inc. (Hughes-Avicom), a leading
supplier of airborne interactive IFE systems. The acquisition has been
accounted for as a purchase as of December 31, 1997, and the company has
recorded a charge of $103 million ($63 million after-tax) for purchased
research and development. The remaining assets acquired and liabilities
assumed have been recorded at estimated fair values determined by the
company's management based on information currently available.
3. Discontinued operations include the Automotive business and the Aerospace
and Defense businesses (A&D Business). On September 30, 1997, the
company completed the spin-off of its Automotive business into an
independent, separately traded, publicly held company by distributing all
of the issued and outstanding shares of Meritor Automotive, Inc.
(Meritor) to the company's shareowners on the basis of one share of
Meritor Common Stock for every three shares of company common stock
owned. On December 6, 1996, the company completed the merger of its
former A&D Business with a subsidiary of The Boeing Company (Boeing) in a
transaction valued at approximately $3.2 billion, including the
assumption by Boeing of $2.3 billion of liabilities of the company,
principally debt, and the issuance of $0.9 billion of Boeing stock to
Rockwell shareowners in exchange for their interest in the A&D Business
(the Reorganization).
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the results of discontinued operations
(in millions).
Three Months Ended
December 31, 1996
Revenues:
Automotive......................................... $ 767
A&D Business....................................... 535
Total............................................ $ 1,302
Income before income taxes:
Automotive......................................... $ 44
A&D Business....................................... -
Total............................................ $ 44
Net income:
Automotive............................................ $ 25
A&D Business.......................................... -
Total............................................... $ 25
The earnings of the A&D Business for the first two months of 1997 were
entirely offset by expenses relating to the Reorganization.
4. Inventories are summarized as follows (in millions):
December 31 September 30
1997 1997
Finished goods............................. $ 424 $ 414
Work in process............................ 759 702
Raw materials, parts, and supplies......... 429 404
Total.................................... 1,612 1,520
Adjustment to the carrying value of
certain inventories to a LIFO basis...... 4 6
Inventories................................ $ 1,616 $ 1,526
5. Intangible assets are summarized as follows (in millions):
December 31 September 30
1997 1997
Goodwill.................................. $ 1,237 $ 1,249
Trademarks, patents, product technology,
and other intangibles................... 558 540
Intangible assets....................... $ 1,795 $ 1,789
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. Short-term debt consisted of the following (in millions):
December 31 September 30
1997 1997
Commercial paper......................... $ 260 $ -
Short-term foreign bank borrowings....... 80 64
Current portion of long-term debt........ 2 2
Short-term debt......................... $ 342 $ 66
At December 31, 1997, the company had $1.5 billion of unsecured credit
facilities with various banks to support commercial paper borrowings.
There were no significant commitment fees or compensating balance
requirements under these facilities.
Short-term credit facilities available to foreign subsidiaries amounted
to $315 million at December 31, 1997 and consisted of arrangements for
which there are no significant commitment fees.
7. Other current liabilities are summarized as follows (in millions):
December 31 September 30
1997 1997
Contract reserves and advance payments..... $ 129 $ 146
Accrued product warranty................... 119 113
Accrued taxes other than income taxes...... 46 46
Other...................................... 190 227
Other current liabilities................ $ 484 $ 532
8. Long-term debt consisted of the following (in millions):
December 31 September 30
1997 1997
6.8% notes, payable in 2003............... $ 141 $ 141
Other obligations, principally foreign.... 18 17
Total................................... 159 158
Less current portion..................... 2 2
Long-term debt......................... $ 157 $ 156
In January 1998, the company issued $800 million aggregate principal
amount of long-term notes and debentures in a public offering. The
offering included three series of debt: $350 million principal amount
of 6.15% notes due in 2008 issued at par; $250 million principal amount
of 6.70% debentures due in 2028, issued at par; and $200 million principal
amount of 5.20% debentures due in 2098, issued at a discount yielding
approximately $150 million of proceeds.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
9. Accrued retirement benefits consisted of the following (in millions):
December 31 September 30
1997 1997
Accrued retirement medical costs......... $ 682 $ 684
Accrued pension costs.................... 151 166
Total.................................. 833 850
Amount classified as current liability... 55 55
Accrued retirement benefits............ $ 778 $ 795
10. Claims have been asserted against the company for utilizing the
intellectual property rights of others in certain of the company's
products. The resolution of these matters may result in the negotiation
of a license agreement, a settlement or the resolution of such claims
through arbitration or litigation. The company accrues the estimated
cost of the ultimate resolution of these matters. Management believes
that the resolution of these matters will not have a material adverse
effect on the company's financial statements.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against the company relating to the conduct of
its business, including those pertaining to product liability, safety
and health, environmental, and employment matters. Pursuant to the
Reorganization, Rockwell has agreed to indemnify Boeing for certain
government contract and environmental matters related to operations of
the A&D Business for periods prior to the merger. In connection with
the spin-off, Meritor has agreed to indemnify the company for
substantially all contingent liabilities related to the Automotive
business. Although the outcome of litigation cannot be predicted with
certainty and some lawsuits, claims, or proceedings may be disposed of
unfavorably to the company, management believes the disposition of
matters which are pending or asserted will not have a material adverse
effect on the company's financial statements.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
1998 First Quarter Compared to 1997 First Quarter
The contributions to sales and earnings by business segment for the continuing
operations of the company for the first quarter of fiscal 1998 and 1997 are
presented below (in millions).
Three Months Ended
December 31
1997 1996
Sales
Automation $ 1,139 $ 1,061
Avionics & Communications 426 374
Semiconductor Systems 414 418
Total $ 1,979 $ 1,853
Operating Earnings
Automation $ 144 $ 131
Avionics & Communications 74 59
Semiconductor Systems 43 81
Purchased Research & Development (103) -
Operating earnings 158 271
General corporate - net (15) (21)
Interest expense (4) (4)
Provision for income taxes (50) (92)
Income from continuing operations 89 154
Income from discontinued operations - 25
Net Income $ 89 $ 179
Purchased research and development relates to the acquisition of an
Avionics and Communications business.
First quarter fiscal 1998 sales of approximately $2.0 billion were up seven
percent from last year's first quarter due to volume increases and increased
market share penetration in the Automation and Avionics & Communications
businesses. The composition of sales was as follows (in millions):
Three Months Ended
December 31
1997 1996
U.S. Commercial $ 1,125 $ 1,059
International 717 678
U.S. Government 137 116
Total $ 1,979 $ 1,853
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
RESULTS OF OPERATIONS (CONTINUED)
Income from continuing operations for the 1998 first quarter, before an
acquisition-related special charge, was $152 million, or 74 cents per share,
compared to $154 million, or 70 cents per share, for 1997. First quarter 1998
earnings per share were higher due to the company's stock repurchase program.
The 1998 first quarter acquisition-related special charge of $63 million
after-tax, or 31 cents per share, relates to the write-off of purchased
research and development in connection with the December 1997 acquisition of
the in-flight entertainment (IFE) business of Hughes-Avicom International,
Inc. Including this charge, net income for the first quarter of 1998 was
$89 million, or 43 cents per share. Net income for the first quarter of
1997, including discontinued operations, totaled $179 million, or 82 cents
per share.
Automation earnings increased ten percent in the first quarter of 1998 to $144
million from $131 million in 1997's first quarter. Automation's higher
earnings in 1998 are primarily attributable to increased volume in the United
States where sales were up nine percent over the comparable period in 1997.
Automation's first quarter earnings as a percent of sales increased to 12.6
percent from 12.3 percent in last year's first quarter.
Avionics & Communications achieved a 25 percent increase in operating earnings
to $74 million, before an acquisition-related special charge, from $59 million
in 1997's first quarter. Sales were up 14 percent to $426 million from $374
million in last year's first quarter primarily due to a sales increase of over
40 percent for the air transport business in the first quarter of 1998.
Earnings, before the acquisition-related special charge, as a percent of sales
increased to 17.4 percent from 15.8 percent in the first quarter of 1997.
Including the special charge, Avionics & Communications incurred a first
quarter operating loss of $29 million.
Semiconductor Systems earnings for the first quarter of 1998 were 47 percent
lower than 1997's first quarter on approximately the same sales.
Semiconductor Systems achieved unit volume increases in both modem and
non-modem products and reduced manufacturing costs in the first quarter of
1998; however, results were below 1997's first quarter due to lower pricing on
the V.34 modem product, slower ramp-up of the new K56flex modem related to a
delay in reaching a standards agreement, and continuing major investments in
new non-modem product lines. Earnings as a percent of sales for the 1998
first quarter were 10.4 percent compared to 19.4 percent for the first quarter
of 1997 but up from 9.2 percent in the fourth quarter of 1997.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
FINANCIAL CONDITION
The major uses of cash for the first quarter of 1998 were the acquisition of
the IFE business of Hughes-Avicom International, Inc., and the stock
repurchase program.
During the first quarter of 1998, the company completed the $1 billion stock
repurchase program announced in December 1996 and is in the process of
executing the additional $500 million stock repurchase program approved by the
company's Board of Directors in September 1997. In February 1998 the
company's Board of Directors approved an additional $500 million stock
repurchase program. Through December 31, 1997, the company repurchased 18.1
million shares of its common stock for $1.1 billion relating to these
programs, of which 4.7 million shares were repurchased for $239 million during
the first quarter of 1998. Future stock repurchases are expected to be funded
by cash generated by operating activities, commercial paper borrowings and
proceeds from long-term notes and debentures.
A major source of cash for the first quarter of 1997 was from the sale of the
Graphic Systems business for approximately $600 million, consisting of $553
million in cash and $47 million in preferred stock.
In January 1998, the company issued $800 million aggregate principal amount of
long-term notes and debentures in a public offering. The proceeds of this
debt offering of $750 million were used to repay approximately $380 million of
outstanding short-term commercial paper borrowings, and the balance will be
used for general corporate purposes, including the company's ongoing share
repurchase program.
Information with respect to the effect on the company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained under the caption
Environmental Matters in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations of the company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1997. Management
believes that at December 31, 1997 there has been no material change to this
information.
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The company's financial instruments include cash, equity securities, short-
and long-term debt, and foreign currency forward exchange contracts. At
December 31, 1997, the carrying values of the company's financial instruments
approximated their fair values based on current market prices and rates.
It is the policy of the company not to enter into derivative financial
instruments for speculative purposes. The company enters into foreign
currency forward exchange contracts to protect itself from adverse currency
rate fluctuations on foreign currency commitments entered into in the ordinary
course of business. These commitments are generally for terms of less than
one year. The foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. The notional amount of all the company's outstanding foreign
currency forward exchange contracts aggregated $392 million at December 31,
1997 and $239 million at September 30, 1997. The gains and losses relating to
these foreign currency forward exchange contracts are deferred and included in
the measurement of the foreign currency transaction subject to the hedge. The
company believes that any gain or loss incurred on foreign currency forward
exchange contracts is offset by the effects of currency movements on the
respective underlying hedged transactions.
Based on the company's overall currency rate exposure at December 31, 1997, a
10% change in currency rates would not have had a material effect on the
financial position, results of operations or cash flows of the company.
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On October 1, 1997, the company issued 199 shares of restricted
common stock to John D. Nichols, a director of the company; these
shares were issued in payment for the retainer fees otherwise payable
in cash and deferred by Mr. Nichols pursuant to the terms of the
Directors Stock Plan. On December 31, 1997, the company issues 7,792
shares of restricted common stock to Don H. Davis, Jr. in partial
payment of an incentive compensation award under the Annual Incentive
Compensation Plan for Senior Executive Officers. The issuance of all
these shares was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof.
Item 5. Other Information
Government Contracts
For information on the company's United States government contracting
business, certain risks of that business and claims related thereto,
see the information set forth under the caption Government Contracts
in Item 1, Business, on page 3 of the company's Annual Report on Form
10-K for fiscal year ended September 30, 1997, which is incorporated
herein by reference.
Cautionary Statement
The Quarterly Report on Form 10-Q contains statements relating to
future results of the company (including certain projections and
business trends) that are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to changes in
political and economic conditions; domestic and foreign government
spending, budgetary and trade policies; demand for and market
acceptance of new and existing products; successful development of
advanced technologies; and competitive product and pricing pressures;
as well as other risks and uncertainties, including but not limited
to those detailed from time to time in the company's Securities and
Exchange Commission filings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3-b-1 - By-Laws of the company as in effect on the
date hereof.
Exhibit 3-b-2 - Copy of resolution of the Board of Directors
of the company, adopted February 4, 1998,
amending the By-Laws of the company effective
February 4, 1998.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K (Continued)
(a) Exhibits: (continued)
Exhibit 11 - Computation of Earnings Per Share
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges for the Three Months Ended December
31, 1997.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
The company filed a Current Report on Form 8-K dated October
10, 1997 in respect of the completion on September 30, 1997 of
the spin-off of its Automotive business to holders of shares of
common stock, par value $1 per share, of company, by means of
the distribution to such holders of all outstanding shares of
Common Stock, par value $1 per share (including the preferred
share purchase rights associated with such Common Stock), of
Meritor. Meritor began operations as an independent,
separately traded, publicly-held company on October 1, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCKWELL INTERNATIONAL CORPORATION
(Registrant)
Date February 12, 1998 By W. E. Sanders
W. E. Sanders
Vice President and Controller
(Principal Accounting Officer)
Date February 12, 1998 By W. J. Calise, Jr.
W. J. Calise, Jr.
Senior Vice President,
General Counsel and Secretary
<PAGE>
ROCKWELL INTERNATIONAL CORPORATION
INDEX OF EXHIBITS TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
Page
Exhibit 3-b-1 - By-Laws of the company as in effect on the 17
date hereof.
Exhibit 3-b-2 - Copy of resolution of the Board of Directors 18
of the company, adopted February 4, 1998,
amending the By-Laws of the company effective
February 4, 1998.
Exhibit 11 - Computation of Earnings Per Share for the 40
Three Months Ended December 31, 1997.
Exhibit 12 - Computation of Ratio of Earnings to 41
Fixed Charges for the Three Months Ended December
31, 1997.
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<DESCRIPTION>COPY OF RESOLUTION
<TEXT>
Exhibit 3-b-1
ROCKWELL INTERNATION CORPORATION
ADVICE OF ACTION
To: THOSE CONCERNED Date: FEBRUARY 4, 1998
Subject: BY-LAW AMENDMENTS
You are hereby notified of action as follows:
By: BOARD OF DIRECTORS
Place of Meeting: COSTA MESA, CALIFORNIA
Date of Meeting: FEBRUARY 4, 1998
RESOLVED, that the By-Laws of this Corporation be, and they hereby are
amended, effective immediately, by revising Section 8 of Article V to read in
its entirety as follows:
"SECTION 8. Chairman of the Board of Directors. The
Chairman of the Board of Directors shall be the chief executive
officer of the Corporation and, subject to the control of the Board
of Directors, shall have general and overall charge of the business
and affairs of the Corporation and of its officers. He shall preside
at all meetings of the shareowners and of the Board of Directors and
shall enforce the observance of the rules of order for the meetings
of the shareowners and the Board and of the by-laws of the
Corporation. He shall keep the Board of Directors appropriately
informed on the business and affairs of the Corporation."
by deleting Section 9 of Article V and all references in the By-Laws to the
office of President; and by redesignating Sections 10 through 16 of Article V
as Sections 9 through 15 thereof.
I, William J. Calise, Jr., Secretary of Rockwell International Corporation,
hereby certify that the foregoing resolution was duly adopted by the Board of
Directors at a meeting held in Costa Mesa, California on February 4, 1998, and
that the same is in full force and effect.
/s/ William J. Calise, Jr.
Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>3
<DESCRIPTION>BY-LAWS
<TEXT>
BY-LAWS 3-b-2
OF ROCKWELL INTERNATIONAL CORPORATION
(AS AMENDED EFFECTIVE FEBRUARY 4, 1998)
ARTICLE I.
OFFICES
SECTION 1. Registered Office in Delaware; Resident Agent. The address
of the Corporation's registered office in the State of Delaware and the name and
address of its resident agent in charge thereof are as filed with the Secretary
of State of the State of Delaware.
SECTION 2. Other Offices. The Corporation may also have an office or
offices at such other place or places either within or without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Corporation requires.
ARTICLE II.
MEETINGS OF SHAREOWNERS
SECTION 1. Place of Meetings. All meetings of the shareowners of the
Corporation shall be held at such place, within or without the State of
Delaware, as may from time to time be designated by resolution passed by the
Board of Directors.
SECTION 2. Annual Meeting. An annual meeting of the shareowners for the
election of directors and for the transaction of such other proper business,
notice of which was given in the notice of meeting, shall be held on a date and
at a time as may from time to time be designated by resolution passed by the
Board of Directors.
SECTION 3. Special Meetings. A special meeting of the shareowners for
any purpose or purposes shall be called only by the Board of Directors pursuant
to a resolution adopted by a majority of the whole Board.
SECTION 4. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of the shareowners, whether annual or special,
shall be mailed, postage prepaid, not less than ten nor more than sixty days
before the date of the meeting, to each shareowner entitled to vote at such
meeting, at the shareowner's address as it appears on the records of the
Corporation. Every such notice shall state the place, date and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. Notice of any adjourned meeting of the shareowners shall
not be required to be given, except when expressly required by law.
SECTION 5. List of Shareowners. The Secretary shall, from information
obtained from the transfer agent, prepare and make, at least ten days before
<PAGE>
every meeting of shareowners, a complete list of the shareowners entitled to
vote at the meeting, arranged in alphabetical order, and showing the
address of each shareowner and the number of shares registered in the name of
each shareowner. Such list shall be open to the examination of any shareowner,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
shareowner who is present. The stock ledger shall be the only evidence as to who
are the shareowners entitled to examine the stock ledger, the list referred to
in this section or the books of the Corporation, or to vote in person or by
proxy at any meeting of shareowners.
SECTION 6. Quorum. At each meeting of the shareowners, the holders of a
majority of the issued and outstanding stock of the Corporation present either
in person or by proxy shall constitute a quorum for the transaction of business
except where otherwise provided by law or by the Certificate of Incorporation or
by these by-laws for a specified action. Except as otherwise provided by law, in
the absence of a quorum, a majority in interest of the shareowners of the
Corporation present in person or by proxy and entitled to vote shall have the
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until shareowners holding the requisite amount of
stock shall be present or represented. At any such adjourned meeting at which a
quorum may be present, any business may be transacted which might have been
transacted at a meeting as originally called, and only those shareowners
entitled to vote at the meeting as originally called shall be entitled to vote
at any adjournment or adjournments thereof. The absence from any meeting of the
number of shareowners required by law or by the Certificate of Incorporation or
by these by-laws for action upon any given matter shall not prevent action at
such meeting upon any other matter or matters which may properly come before the
meeting, if the number of shareowners required in respect of such other matter
or matters shall be present.
SECTION 7. Organization. At every meeting of the shareowners the
Chairman of the Board, or, in his absence, a director or an officer of the
Corporation designated by the Board, shall act as Chairman. The Secretary,
or, in his absence, an Assistant Secretary, shall act as Secretary at all
meetings of the shareowners. In the absence from any such meeting of the
Secretary and the Assistant Secretaries, the Chairman may appoint any person
to act as Secretary of the meeting.
SECTION 8. Notice of Shareowner Business and Nominations.
(A) Annual Meetings of Shareowners. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the shareowners may be made at an annual meeting of
shareowners (a) pursuant to the Corporation's notice of meeting, (b) by or at
the direction of the Board of Directors or (c) by any shareowner of the
Corporation who was a shareowner of record at the time of giving of notice
provided for in this by-law, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this by-law.
2 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
(2) For nominations or other business to be properly brought before
an annual meeting by a shareowner pursuant to clause (c) of paragraph (A) (1) of
this by-law, the shareowner must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for shareowner action. To be timely, a shareowner's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the shareowner to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a shareowner's
notice as described above. Such shareowner's notice shall set forth (a) as to
each person whom the shareowner proposes to nominate for election or reelection
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule
14a-11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (b) as to
any other business that the shareowner proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareowner and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareowner giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such shareowner, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of shares of
the Corporation which are owned beneficially and of record by such shareowner
and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of
this by-law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there
is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least
70 days prior to the first anniversary of the preceding year's annual
meeting, a shareowner's notice required by this by-law shall also be considered
timely, but only with respect to nominees for any new positions created by
such increase, if it shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on
the 10th day following the day on which such public announcement is first
made by the Corporation.
(B) Special Meetings of Shareowners. Only such business shall be
conducted at a special meeting of shareowners as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
3 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
of shareowners at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any shareowner of the Corporation
who is a shareowner of record at the time of giving of notice provided for in
this by-law, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this by-law. In the event the Corporation
calls a special meeting of shareowners for the purpose of electing one or more
directors to the Board of Directors, any such shareowner may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the shareowner's notice required by
paragraph (A)(2) of this by-law shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a shareowner's notice as described above.
(C) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this by-law shall be eligible to serve as directors
and only such business shall be conducted at a meeting of shareowners as shall
have been brought before the meeting in accordance with the procedures set forth
in this by-law. Except as otherwise provided by law, the Certificate of
Incorporation or these by-laws, the Chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this by-law and, if any proposed
nomination or business is not in compliance with this by-law, to declare that
such defective proposal or nomination shall be disregarded.
(2) For purposes of this by-law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this by-law, a
shareowner shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this by-law. Nothing in this by-law shall be deemed to affect any
rights (i) of shareowners to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the
holders of any series of Preferred Stock to elect directors under specified
circumstances.
SECTION 9. Business and Order of Business. At each meeting of the
shareowners such business may be transacted as may properly be brought before
such meeting, except as otherwise provided by law or in these by-laws. The order
of business at all meetings of the shareowners shall be as determined by the
4 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
Chairman, unless otherwise determined by a majority in interest of the
shareowners present in person or by proxy at such meeting and entitled to vote
thereat.
SECTION 10. Voting. Except as otherwise provided by law, the
Certificate of Incorporation or these by-laws, each shareowner shall at every
meeting of the shareowners be entitled to one vote for each share of stock held
by such shareowner. Any vote on stock may be given by the shareowner entitled
thereto in person or by proxy appointed by an instrument in writing, subscribed
(or transmitted by electronic means and authenticated as provided by law) by
such shareowner or by the shareowner's attorney thereunto authorized, and
delivered to the Secretary; provided, however, that no proxy shall be voted
after three years from its date unless the proxy provides for a longer period.
Except as otherwise provided by law, the Certificate of Incorporation or these
by-laws, at all meetings of the shareowners, all matters shall be decided by the
vote (which need not be by ballot) of a majority in interest of the shareowners
present in person or by proxy and entitled to vote thereat, a quorum being
present.
ARTICLE III.
BOARD OF DIRECTORS
SECTION 1. General Powers. The property, affairs and business of the
Corporation shall be managed by or under the direction of its Board of
Directors.
SECTION 2. Number, Qualifications, and Term of Office. Subject to the
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the number of directors of the
Corporation shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the
whole Board. A director need not be a shareowner.
The directors, other than those who may be elected by the holders of
any series of Preferred Stock or any other series or class of stock, as provided
herein or in any Preferred Stock Designation, shall be divided into three
classes, as nearly equal in number as possible. One class of directors shall be
initially elected for a term expiring at the annual meeting of shareowners to be
held in 1997, another class shall be initially elected for a term expiring at
the annual meeting of shareowners to be held in 1998, and another class shall be
initially elected for a term expiring at the annual meeting of shareowners to be
held in 1999. Members of each class shall hold office until their successors are
elected and shall have qualified. At each annual meeting of the shareowners of
the Corporation, commencing with the 1997 annual meeting, the successors of the
class of directors whose term expires at that meeting shall be elected by a
plurality vote of all votes cast at such meeting to hold office for a term
expiring at the annual meeting of shareowners held in the third year following
the year of their election.
SECTION 3. Election of Directors. At each meeting of the shareowners
for the election of directors, at which a quorum is present, the directors shall
5 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
be the persons receiving the greatest number of votes cast by the holders of
stock entitled to vote for such directors.
SECTION 4. Quorum and Manner of Acting. A majority of the members of
the Board of Directors shall constitute a quorum for the transaction of business
at any meeting, and the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board of Directors
unless otherwise provided by law, the Certificate of Incorporation or these
by-laws. In the absence of a quorum, a majority of the directors present may
adjourn any meeting from time to time until a quorum shall be obtained. Notice
of any adjourned meeting need not be given. The directors shall act only as a
board and the individual directors shall have no power as such.
SECTION 5. Place of Meetings. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time determine or as shall be specified or fixed in the
respective notices or waivers of notice thereof.
SECTION 6. First Meeting. Promptly after each annual election of
directors, the Board of Directors shall meet for the purpose of organization,
the election of officers and the transaction of other business, at the same
place as that at which the annual meeting of shareowners was held or as
otherwise determined by the Board. Notice of such meeting need not be given.
Such meeting may be held at any other time or place which shall be specified in
a notice given as hereinafter provided for special meetings of the Board of
Directors.
SECTION 7. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such places and at such times as the Board shall from time to
time determine. If any day fixed for a regular meeting shall be a legal holiday
at the place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at the same hour on the next
succeeding business day not a legal holiday. Notice of regular meetings need not
be given.
SECTION 8. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board and shall
be called by the Chairman of the Board or the Secretary at the written request
of three directors. Notice of each such meeting stating the time and place of
the meeting shall be given to each director by mail, telephone, other electronic
transmission or personally. If by mail, such notice shall be given not less than
five days before the meeting; and if by telephone, other electronic transmission
or personally, not less than two days before the meeting.
A notice mailed at least two weeks before the meeting need not state the purpose
thereof except as otherwise provided in these by-laws. In all other cases the
notice shall state the principal purpose or purposes of the meeting. Notice of
any meeting of the Board need not be given to a director, however, if waived by
the director in writing before or after such meeting or if the director shall be
present at the meeting.
SECTION 9. Organization. At each meeting of the Board of Directors, the
Chairman of the Board, or, in his absence, a director or an officer of the
Corporation designated by the Board, shall act as Chairman. The Secretary, or,
6 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
in the Secretary's absence, any person appointed by the Chairman, shall act as
Secretary of the meeting.
SECTION 10. Order of Business. At all meetings of the Board of
Directors, business shall be transacted in the order determined by the Board.
SECTION 11. Resignations. Any director of the Corporation may resign at
any time by giving written notice to the Chairman of the Board or the Secretary
of the Corporation. The resignation of any director shall take effect at the
time specified therein, and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 12. Compensation. Each director shall be paid such
compensation, if any, as shall be fixed by the Board of Directors.
SECTION 13. Indemnification of Directors and Officers.
(A) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent (except in each of the foregoing
situations to the extent any agreement, arrangement or understanding of agency
contains provisions that supersede or abrogate indemnification under this
section) of another corporation or of any partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
(B) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent (except in each of the
foregoing situations to the extent any agreement, arrangement or understanding
of agency contains provisions that supersede or abrogate indemnification under
this section) of another corporation or of any partnership, joint venture,
trust, employee benefit plan or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person acted in
7 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of Delaware or such
other court shall deem proper.
(C) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (A) and (B), or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by or on
behalf of such person in connection therewith. If any such person is not wholly
successful in any such action, suit or proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters therein, the Corporation shall indemnify such person against all
expenses (including attorneys' fees) actually and reasonably incurred by or on
behalf of such person in connection with each claim, issue or matter that is
successfully resolved. For purposes of this subsection and without limitation,
the termination of any claim, issue or matter by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter.
(D) Notwithstanding any other provision of this section, to the extent
any person is a witness in, but not a party to, any action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent (except in each of the foregoing situations
to the extent any agreement, arrangement or understanding of agency contains
provisions that supersede or abrogate indemnification under this section) of
another corporation or of any partnership, joint venture, trust, employee
benefit plan or other enterprise, such person shall be indemnified against all
expenses (including attorneys' fees) actually and reasonably incurred by or on
behalf of such person in connection therewith.
(E) Indemnification under subsections (A) and (B) (unless ordered by a
court) shall be made only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in subsections (A) and (B). Such determination
shall be made (1) if a Change of Control (as hereinafter defined) shall not have
occurred, (a) by the Board of Directors by a majority vote of the Disinterested
Directors (as hereinafter defined), even though less than a quorum or (b) if
there are no Disinterested Directors or, even if there are Disinterested
Directors, a majority of such Disinterested Directors so directs, by (i)
Independent Counsel (as hereinafter defined) in a written opinion to the Board
of Directors, a copy of which shall be delivered to the claimant, or (ii) the
shareowners of the Corporation; or (2) if a Change of Control shall have
8 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
occurred, by Independent Counsel selected by the claimant in a written opinion
to the Board of Directors, a copy of which shall be delivered to the claimant,
unless the claimant shall request that such determination be made by or at the
direction of the Board of Directors, in which case it shall be made in
accordance with clause (1) of this sentence. Any claimant shall be entitled to
be indemnified against the expenses (including attorneys' fees) actually and
reasonably incurred by such claimant in cooperating with the person or entity
making the determination of entitlement to indemnification (irrespective of the
determination as to the claimant's entitlement to indemnification) and, to the
extent successful, in connection with any litigation or arbitration with
respect to such claim or the enforcement thereof.
(F) If a Change of Control shall not have occurred, or if a Change of
Control shall have occurred and a director, officer, employee or agent requests
pursuant to clause (2) of the second sentence in subsection (E) that the
determination whether the claimant is entitled to indemnification be made by or
at the direction of the Board of Directors, the claimant shall be conclusively
presumed to have been determined pursuant to subsection (E) to be entitled to
indemnification if (1)(a) within fifteen days after the next regularly scheduled
meeting of the Board of Directors following receipt by the Corporation of the
request therefor, the Board of Directors shall not have resolved by majority
vote of the Disinterested Directors to submit such determination to (i)
Independent Counsel for its determination or (ii) the shareowners for their
determination at the next annual meeting, or any special meeting that may be
held earlier, after such receipt, and (b) within sixty days after receipt by the
Corporation of the request therefor (or within ninety days after such receipt if
the Board of Directors in good faith determines that additional time is required
by it for the determination and, prior to expiration of such sixty-day period,
notifies the claimant thereof), the Board of Directors shall not have made the
determination by a majority vote of the Disinterested Directors, or (2) after a
resolution of the Board of Directors, timely made pursuant to clause (1)(a)(ii)
above, to submit the determination to the shareowners, the shareowners meeting
at which the determination is to be made shall not have been held on or before
the date prescribed (or on or before a later date, not to exceed sixty days
beyond the original date, to which such meeting may have been postponed or
adjourned on good cause by the Board of Directors acting in good faith);
provided, however, that this sentence shall not apply if the claimant has
misstated or failed to state a material fact in connection with his or her
request for indemnification. Such presumed determination that a claimant is
entitled to indemnification shall be deemed to have been made (I) at the end of
the sixty-day or ninety-day period (as the case may be) referred to in clause
(1)(b) of the immediately preceding sentence or (II) if the Board of Directors
has resolved on a timely basis to submit the determination to the shareowners,
on the last date within the period prescribed by law for holding such
shareowners meeting (or a postponement or adjournment thereof as permitted
above).
(G) Expenses (including attorneys' fees) incurred in defending a civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding to a director or officer, promptly after receipt of a request
therefor stating in reasonable detail the expenses incurred, and to an employee
or agent as authorized by the Board of Directors; provided that in each case the
9 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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Corporation shall have received an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the Corporation
as authorized in this section.
(H) The Board of Directors shall establish reasonable procedures for
the submission of claims for indemnification pursuant to this section,
determination of the entitlement of any person thereto and review of any such
determination. Such procedures shall be set forth in an appendix to these
by-laws and shall be deemed for all purposes to be a part hereof.
(I) For purposes of this section,
(1) "Change of Control" means a change of control of the Corporation
at any time after the distribution of the shares of capital stock of the
Corporation to the holders of capital stock of Rockwell International
Corporation of a nature that would be required to be reported in a proxy
statement pursuant to Section 14(a) of the Exchange Act or in a Form 8-K
pursuant to Section 13 of the Exchange Act (or in any similar form or schedule
under either of those provisions or any successor provision), whether or not the
Corporation is then subject to such reporting requirement; provided, however,
that, without limitation, a Change of Control shall be deemed to have occurred
if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 20% or more of the combined voting power of the
Corporation's then outstanding securities without the prior approval of at least
two-thirds of the members of the Board of Directors in office immediately prior
to such person attaining such percentage interest; (ii) the Corporation is a
party to a merger, consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than a
majority of the Board of Directors immediately thereafter; or (iii) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new director
whose election or nomination for election by the Corporation's shareowners was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors.
(2) "Disinterested Director" means a director of the Corporation who
is not and was not a party to an action, suit or proceeding in respect of which
indemnification is sought by a director, officer, employee or agent.
(3) "Independent Counsel" means a law firm, or a member of a law
firm, that (i) is experienced in matters of corporation law; (ii) neither
presently is, nor in the past five years has been, retained to represent the
Corporation, the director, officer, employee or agent claiming indemnification
or any other party to the action, suit, or proceeding giving rise to a claim for
indemnification under this section, in any matter material to the Corporation,
the claimant or any such other party; and (iii) would not, under applicable
standards of professional conduct then prevailing, have a conflict of interest
10 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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in representing either the Corporation or such director, officer, employee or
agent in an action to determine the Corporation's or such person's rights under
this section.
(J) The Indemnification and advancement of expenses herein provided, or
granted pursuant hereto, shall not be deemed exclusive of any other rights to
which any of those indemnified or eligible for advancement of expenses may be
entitled under any agreement, vote of shareowners or Disinterested Directors or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
Notwithstanding any amendment, alteration or repeal of this section or any of
its provisions, or of any of the procedures established by the Board of
Directors pursuant to subsection (H) hereof, any person who is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation or of any partnership, joint venture, employee benefit plan
or other enterprise shall be entitled to indemnification in accordance with the
provisions hereof and thereof with respect to any action taken or omitted prior
to such amendment, alteration or repeal except to the extent otherwise required
by law.
(K) No indemnification shall be payable pursuant to this section with
respect to any action against the Corporation commenced by an officer, director,
employee or agent unless the Board of Directors shall have authorized the
commencement thereof or unless and to the extent that this section or the
procedures established pursuant to subsection (H) shall specifically provide for
indemnification of expenses relating to the enforcement of rights under this
section and such procedures.
ARTICLE IV.
COMMITTEES
SECTION 1. Appointment and Powers. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of two or more directors of the
Corporation, which, to the extent provided in said resolution or in these
by-laws and not inconsistent with Section 141 of the Delaware General
Corporation Law, as amended, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Such committee or committees shall have such name or names as
may be determined from time to time by resolution adopted by the Board of
Directors.
SECTION 2. Term of Office and Vacancies. Each member of a committee
shall continue in office until a director to succeed him or her shall have been
elected and shall have qualified, or until he or she ceases to be a director or
until he or she shall have resigned or shall have been removed in the manner
11 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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hereinafter provided. Any vacancy in a committee shall be filled by the vote of
a majority of the whole Board of Directors at any regular or special meeting
thereof.
SECTION 3. Alternates. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee.
SECTION 4. Organization. Unless otherwise provided by the Board of
Directors, each committee shall appoint a chairman. Each committee shall keep a
record of its acts and proceedings and report the same from time to time to the
Board of Directors.
SECTION 5. Resignations. Any regular or alternate member of a committee
may resign at any time by giving written notice to the Chairman of the Board
or the Secretary of the Corporation. Such resignation shall take effect at the
time of the receipt of such notice or at any later time specified therein, and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 6. Removal. Any regular or alternate member of a committee may
be removed with or without cause at any time by resolution passed by a majority
of the whole Board of Directors at any regular or special meeting.
SECTION 7. Meetings. Regular meetings of each committee, of which no
notice shall be necessary, shall be held on such days and at such places as the
chairman of the committee shall determine or as shall be fixed by a resolution
passed by a majority of all the members of such committee. Special meetings of
each committee will be called by the Secretary at the request of any two members
of such committee, or in such other manner as may be determined by the
committee. Notice of each special meeting of a committee shall be mailed to each
member thereof at least two days before the meeting or shall be given personally
or by telephone or other electronic transmission at least one day before the
meeting. Every such notice shall state the time and place, but need not state
the purposes of the meeting. No notice of any meeting of a committee shall be
required to be given to any alternate.
SECTION 8. Quorum and Manner of Acting. Unless otherwise provided by
resolution of the Board of Directors, a majority of a committee (including
alternates when acting in lieu of regular members of such committee) shall
constitute a quorum for the transaction of business and the act of a majority
of those present at a meeting at which a quorum is present shall be the act
of such committee. The members of each committee shall act only as a
committee and the individual members shall have no power as such.
SECTION 9. Compensation. Each regular or alternate member of a
committee shall be paid such compensation, if any, as shall be fixed by the
Board of Directors.
12 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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ARTICLE V.
OFFICERS
SECTION 1. Officers. The officers of the Corporation shall be a
Chairman of the Board of Directors, who shall be chosen from the members of the
Board of Directors, one or more Vice Presidents (one or more of whom may be
Executive Vice Presidents, Senior Vice Presidents or otherwise as may be
designated by the Board), a Secretary and a Treasurer, all of whom shall be
elected by the Board of Directors. Any two or more offices may be held by the
same person. The Board of Directors may also from time to time elect such other
officers as it deems necessary.
SECTION 2. Term of Office. Each officer shall hold office until his or
her successor shall have been duly elected and qualified in his or her stead, or
until his or her death or until he or she shall have resigned or shall have been
removed in the manner hereinafter provided.
SECTION 3. Additional Officers; Agents. The Chairman of the Board may
from time to time appoint and remove such additional officers and agents as may
be deemed necessary. Such persons shall hold office for such period, have such
authority, and perform such duties as in these by-laws provided or as the
Chairman of the Board may from time to time prescribe. The Board of Directors or
the Chairman of the Board may from time to time authorize any officer to appoint
and remove agents and employees and to prescribe their powers and duties.
SECTION 4. Salaries. Unless otherwise provided by resolution passed by
a majority of the whole Board, the salaries of all officers elected by the Board
of Directors shall be fixed by the Board of Directors.
SECTION 5. Removal. Except where otherwise expressly provided in a
contract authorized by the Board of Directors, any officer may be removed,
either with or without cause, by the vote of a majority of the Board at any
regular or special meeting or, except in the case of an officer elected by the
Board, by any superior officer upon whom the power of removal may be conferred
by the Board or by these by-laws.
SECTION 6. Resignations. Any officer elected by the Board of Directors
may resign at any time by giving written notice to the Chairman of the Board
or the Secretary. Any other officer may resign at any time by giving written
notice to the Chairman of the Board. Any such resignation shall take effect at
the date of receipt of such notice or at any later time specified therein, and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 7. Vacancies. A vacancy in any office because of death,
resignation, removal, or otherwise, shall be filled for the unexpired portion of
the term in the manner provided in these by-laws for regular election or
appointment to such office.
13 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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SECTION 8. Chairman of the Board of Directors. The Chairman of the
Board of Directors shall be the chief executive officer of the Corporation and,
subject to the control of the Board of Directors, shall have general and overall
charge of the business and affairs of the Corporation and of its officers. He
shall preside at all meetings of the shareowners and of the Board of Directors
and shall enforce the observance of the rules of order for the meetings of the
shareowners and the Board and of the by-laws of the Corporation. He shall keep
the Board of Directors appropriately informed on the business and affairs of the
Corporation.
SECTION 9. Executive Vice Presidents. One or more Executive Vice
Presidents shall, subject to the control of the Chairman of the Board, have lead
accountability for components or functions of the Corporation as and to the
extent designated by the Chairman of the Board. Each Executive Vice President
shall keep the Chairman of the Board appropriately informed on the business and
affairs of the designated components or functions of the Corporation.
SECTION 10. Vice Presidents. The Vice Presidents shall perform such
duties as may from time to time be assigned to them or any of them by the
Chairman of the Board.
SECTION 11. Secretary. The Secretary shall keep or cause to be kept in
books provided for the purpose the minutes of the meetings of the shareowners,
of the Board of Directors and of any committee constituted pursuant to Article
IV of these by-laws. The Secretary shall be custodian of the corporate seal and
see that it is affixed to all documents as required and attest the same. The
Secretary shall perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him or her.
SECTION 12. Assistant Secretaries. At the request of the Secretary, or
in his or her absence or disability, the Assistant Secretary designated by him
or her shall perform all the duties of the Secretary and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
Secretary. The Assistant Secretaries shall perform such other duties as from
time to time may be assigned to them.
SECTION 13. Treasurer. The Treasurer shall have charge of and be
responsible for the receipt, disbursement and safekeeping of all funds and
securities of the Corporation. The Treasurer shall deposit all such funds in the
name of the Corporation in such banks, trust companies or other depositories as
shall be selected in accordance with the provisions of these by-laws. From time
to time and whenever requested to do so, the Treasurer shall render statements
of the condition of the finances of the Corporation to the Board of Directors.
The Treasurer shall perform all the duties incident to the office of Treasurer
and such other duties as from time to time may be assigned to him or her.
SECTION 14. Assistant Treasurers. At the request of the Treasurer, or
in his or her absence or disability, the Assistant Treasurer designated by him
or her shall perform all the duties of the Treasurer and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
Treasurer. The Assistant Treasurers shall perform such other duties as from time
to time may be assigned to them.
14 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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SECTION 15. Certain Agreements. The Board of Directors shall have power
to authorize or direct the proper officers of the Corporation, on behalf of the
Corporation, to enter into valid and binding agreements in respect of
employment, incentive or deferred compensation, stock options, and similar or
related matters, notwithstanding the fact that a person with whom the
Corporation so contracts may be a member of its Board of Directors. Any such
agreement may validly and lawfully bind the Corporation for a term of more than
one year, in accordance with its terms, notwithstanding the fact that one of the
elements of any such agreement may involve the employment by the Corporation of
an officer, as such, for such term.
ARTICLE VI.
AUTHORIZATIONS
SECTION 1. Contracts. The Board of Directors, except as in these
by-laws otherwise provided, may authorize any officer, employee or agent of the
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation, and such authority may be general
or confined to specific instances.
SECTION 2. Loans. No loan shall be contracted on behalf of the
Corporation and no negotiable paper shall be issued in its name, unless
authorized by the Board of Directors.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, employee or
employees, of the Corporation as shall from time to time be determined in
accordance with authorization of the Board of Directors.
SECTION 4. Deposits. All funds of the Corporation shall be deposited
from time to time to the credit of the Corporation in such banks, trust
companies or other depositories as the Board of Directors may from time to time
designate, or as may be designated by any officer or officers of the Corporation
to whom such power may be delegated by the Board, and for the purpose of such
deposit the officers and employees who have been authorized to do so in
accordance with the determinations of the Board may endorse, assign and deliver
checks, drafts, and other orders for the payment of money which are payable to
the order of the Corporation.
SECTION 5. Proxies. Except as otherwise provided in these by-laws or in
the Certificate of Incorporation, and unless otherwise provided by resolution of
the Board of Directors, the Chairman of the Board, the President or any other
officer may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation to cast
the votes which the Corporation may be entitled to cast as a shareowner or
otherwise in any other corporation any of whose stock or other securities may be
held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporations, or to consent in writing to any action by
such other corporation, and may instruct the person or persons so appointed as
15 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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to the manner of casting such vote or giving such consent, and may execute or
cause to be executed in the name and on behalf of the Corporation and under
its corporate seal, or otherwise, all such written proxies or other
instruments as he may deem necessary or proper in the premises.
ARTICLE VII.
SHARES AND THEIR TRANSFER
SECTION 1. Certificates of Stock. Certificates for shares of the stock
of the Corporation shall be in such form as shall be approved by the Board of
Directors. They shall be numbered in the order of their issue, by class and
series, and shall be signed by the Chairman of the Board or a Vice President,
and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary, of the Corporation. If such certificate is countersigned (1) by a
transfer agent other than the Corporation or its employee, or (2) by a
registrar other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent, or registrar at
the date of issue.
SECTION 2. Record Ownership. A record of the name and address of the
holder of each certificate, the number of shares represented thereby and the
date of issuance thereof shall be made on the Corporation's books. The
Corporation shall be entitled to treat the holder of record of any share of
stock as the holder in fact thereof and accordingly shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice
thereof, except as required by law.
SECTION 3. Transfer of Stock. Shares of stock shall be transferable on
the books of the Corporation by the person named in the certificate for such
stock in person or by such person's attorney or other duly constituted
representative upon surrender of such certificate with an assignment endorsed
thereon or attached thereto duly executed and with such guarantee of signature
as the Corporation may reasonably require.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The Corporation
may issue a new certificate of stock in the place of any certificate theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the
Corporation may require the owner of the lost, stolen or destroyed certificate,
or such person's legal representative, to give the Corporation a bond sufficient
to indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 5. Transfer Agent and Registrar; Regulations. The Corporation
shall, if and whenever the Board of Directors shall so determine, maintain one
or more transfer offices or agencies, each in charge of a transfer agent
16 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
designated by the Board of Directors, where the shares of the stock of the
Corporation shall be directly transferable, and also one or more registry
offices, each in charge of a registrar designated by the Board of Directors,
where such shares of stock shall be registered, and no certificate for shares of
the stock of the Corporation, in respect of which a registrar and transfer agent
shall have been designated, shall be valid unless countersigned by such transfer
agent and registered by such registrar. The Board of Directors may also make
such additional rules and regulations as it may deem expedient concerning the
issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 6. Fixing Record Date. For the purpose of determining the
shareowners entitled to notice of or to vote at any meeting of shareowners or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. If no record
date is fixed (1) the record date for determining shareowners entitled to notice
of or to vote at a meeting of shareowners shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held and (2) the record date for determining shareowners for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of shareowners
of record entitled to notice of or to vote at a meeting of shareowners shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
SECTION 7. Examination of Books by Shareowners. The Board of Directors
shall, subject to the laws of the State of Delaware, have power to determine
from time to time, whether and to what extent and under what conditions and
regulations the accounts and books of the Corporation, or any of them, shall be
open to the inspection of the shareowners; and no shareowner shall have any
right to inspect any book or document of the Corporation, except as conferred by
the laws of the State of Delaware, unless and until authorized so to do by
resolution of the Board of Directors or of the shareowners of the Corporation.
ARTICLE VIII.
NOTICE
SECTION 1. Manner of Giving Written Notice. Any notice in writing
required by law or by these by-laws to be given to any person may be delivered
personally, may be transmitted by electronic means or may be given by depositing
the same in the post office or letter box in a postpaid envelope addressed to
such person at such address as appears on the books of the Corporation. Notice
by mail shall be deemed to be given at the time when the same shall be mailed,
and notice by other means shall be deemed given when actually delivered (and in
the case of notice transmitted by electronic means, when authenticated if and as
required by law).
17 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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SECTION 2. Waiver of Notice. Whenever any notice is required to be
given to any person, a waiver thereof by such person in writing or transmitted
by electronic means (and authenticated if and as required by law), whether
before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE IX.
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal" and
"Delaware".
ARTICLE X.
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of
October in each year.
18 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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APPENDIX
PROCEDURES FOR SUBMISSION AND DETERMINATION OF CLAIMS FOR INDEMNIFICATION
PURSUANT TO ARTICLE III, SECTION 13 OF THE BY-LAWS.
SECTION 1. Purpose. The Procedures for Submission and Determination of
Claims for Indemnification Pursuant to Article III, Section 13 of the by-laws
(the "Procedures") are to implement the provisions of Article III, Section 13 of
the by-laws of the Corporation (the "by-laws") in compliance with the
requirement of subsection (H) thereof.
SECTION 2. Definitions. For purposes of these Procedures:
(A) All terms that are defined in Article III, Section 13 of the
by-laws shall have the meanings ascribed to them therein when used in these
Procedures unless otherwise defined herein.
(B) "Expenses" include all reasonable attorneys' fees, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service
fees, and all other disbursements or expenses of the types customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, or being or preparing to be a witness in, a Proceeding; and shall
also include such retainers as counsel may reasonably require in advance of
undertaking the representation of an indemnitee in a Proceeding.
(C) "Indemnitee" includes any person who was or is, or is threatened to
be made, a witness in or a party to any Proceeding by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent (except in each of the foregoing situations to the extent any
agreement, arrangement or understanding of agency contains provisions that
supersede or abrogate indemnification under Article III, Section 13 of the
by-laws) of another corporation or of any partnership, joint venture, trust,
employee benefit plan or other enterprise.
(D) "Proceeding" includes any action, suit, arbitration, alternative
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative, except one
initiated by an Indemnitee unless the Board of Directors shall have authorized
the commencement thereof.
SECTION 3. Submission and Determination of Claims.
(A) To obtain indemnification or advancement of Expenses under Article
III, Section 13 of the by-laws, an Indemnitee shall submit to the Secretary of
the Corporation a written request therefor, including therein or therewith such
documentation and information as is reasonably available to the Indemnitee and
is reasonably necessary to permit a determination as to whether and what extent
19 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
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the Indemnitee is entitled to indemnification or advancement of Expenses, as the
case may be. The Secretary shall, promptly upon receipt of a request for
indemnification, advise the Board of Directors thereof in writing if a
determination in accordance with Article III, Section 13(E) of the by-laws is
required.
(B) Upon written request by an Indemnitee for indemnification pursuant
to Section 3(A) hereof a determination with respect to the Indemnitee's
entitlement thereto in the specific case, if required by the by-laws, shall be
made in accordance with Article III, Section 13(E) of the by-laws, and, if it is
so determined that the Indemnitee is entitled to indemnification, payment to the
Indemnitee shall be made within ten days after such determination. The
Indemnitee shall cooperate with the person, persons or entity making such
determination, with respect to the Indemnitee's entitlement to indemnification,
including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to the Indemnitee
and reasonably necessary to such determination.
(C) If entitlement to indemnification is to be made by Independent
Counsel pursuant to Article III, Section 13(E) of the by-laws, the Independent
Counsel shall be selected as provided in this Section 3(C). If a Change of
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Corporation shall give written notice to the
Indemnitee advising the Indemnitee of the identity of the Independent Counsel so
selected. If a Change of Control shall have occurred, the Independent Counsel
shall be selected by the Indemnitee (unless the Indemnitee shall request that
such selection be made by the Board of Directors, in which event the immediately
preceding sentence shall apply), and the Indemnitee shall give written notice to
the Corporation advising it of the identity of the Independent Counsel so
selected. In either event, the Indemnitee or the Corporation, as the case may
be, may, within seven days after such written notice of selection shall have
been given, deliver to the Corporation or to the Indemnitee, as the case may be,
a written objection to such selection. Such objection may be asserted only on
the ground that the Independent Counsel so selected does not meet the
requirements of "Independent Counsel" as defined in Article III, Section 13 of
the by-laws, and the objection shall set forth with particularity the factual
basis of such assertion. If such written objection is made, the Independent
Counsel so selected may not serve as Independent Counsel unless and until a
court has determined that such objection is without merit. If, within twenty
days after the next regularly scheduled Board of Directors meeting following
submission by the Indemnitee of a written request for indemnification pursuant
to Section 3(A) hereof, no Independent Counsel shall have been selected and not
objected to, either the Corporation or the Indemnitee may petition the Court of
Chancery of the State of Delaware or other court of competent jurisdiction for
resolution of any objection which shall have been made by the Corporation or the
Indemnitee to the other's selection of Independent Counsel and/or for the
appointment as Independent Counsel of a person selected by the Court or by such
other person as the Court shall designate, and the person with respect to whom
an objection is favorably resolved or the person so appointed shall act as
Independent Counsel under Article III, Section 13(E) of the by-laws. The
Corporation shall pay any and all reasonable fees and expenses (including
without limitation any advance retainers reasonably required by counsel) of
20 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
Independent Counsel incurred by such Independent Counsel in connection with
acting pursuant to Article III, Section 13(E) of the by-laws, and the
Corporation shall pay all reasonable fees and expenses (including without
limitation any advance retainers reasonably required by counsel) incident to the
procedures of Article III, Section 13(E) of the by-laws and this Section 3(C),
regardless of the manner in which Independent Counsel was selected or appointed.
Upon the delivery of its opinion pursuant to Article III, Section 13 of the
by-laws or, if earlier, the due commencement of any judicial proceeding or
arbitration pursuant to Section 4(A)(3) of these Procedures, Independent Counsel
shall be discharged and relieved of any further responsibility in such capacity
(subject to the applicable standards of professional conduct then prevailing).
(D) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification under the by-laws,
the person, persons or entity making such determination shall presume that an
Indemnitee is entitled to indemnification under the by-laws if the Indemnitee
has submitted a request for indemnification in accordance with Section 3(A)
hereof, and the Corporation shall have the burden of proof to overcome that
presumption in connection with the making by any person, persons or entity of
any determination contrary to that presumption.
SECTION 4. Review and Enforcement of Determination.
(A) In the event that (1) advancement of Expenses is not timely made
pursuant to Article III, Section 13(G) of the by-laws, (2) payment of
indemnification is not made pursuant to Article III, Section 13(C) or (D) of the
by-laws within ten days after receipt by the Corporation of written request
therefor, (3) a determination is made pursuant to Article III, Section 13(E) of
the by-laws that an Indemnitee is not entitled to indemnification under the
by-laws, (4) the determination of entitlement to indemnification is to be made
by Independent Counsel pursuant to Article III, Section 13(E) of the by-laws and
such determination shall not have been made and delivered in a written opinion
within ninety days after receipt by the Corporation of the written request for
indemnification, or (5) payment of indemnification is not made within ten days
after a determination has been made pursuant to Article III, Section 13(E) of
the by-laws that an Indemnitee is entitled to indemnification or within ten days
after such determination is deemed to have been made pursuant to Article III,
Section 13(F) of the by-laws, the Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of the Indemnitee's entitlement to such
indemnification or advancement of Expenses. Alternatively, the Indemnitee, at
his or her option, may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the rules of the American Arbitration Association. The
Indemnitee shall commence such proceeding seeking an adjudication or an award in
arbitration within one year following the date on which the Indemnitee first has
the right to commence such proceeding pursuant to this Section 4(A). The
Corporation shall not oppose the Indemnitee's right to seek any such
adjudication or award in arbitration.
(B) In the event that a determination shall have been made pursuant to
Article III, Section 13(E) of the by-laws that an Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 4 shall be conducted in all respects as a de novo trial, or
21 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
<PAGE>
arbitration, on the merits and the Indemnitee shall not be prejudiced by reason
of that adverse determination. If a Change of Control shall have occurred, the
Corporation shall have the burden of proving in any judicial proceeding or
arbitration commenced pursuant to this Section 4 that the Indemnitee is not
entitled to indemnification or advancement of Expenses, as the case may be.
(C) If a determination shall have been made or deemed to have been made
pursuant to Article III, Section 13(E) or (F) of the by-laws that an Indemnitee
is entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding or arbitration commenced pursuant to
this Section 4, absent (1) a misstatement or omission of a material fact in
connection with the Indemnitee's request for indemnification, or (2) a
prohibition of such indemnification under applicable law.
(D) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 4 that the
procedures and presumptions of these Procedures are not valid, binding and
enforceable, and shall stipulate in any such judicial proceeding or arbitration
that the Corporation is bound by all the provisions of these Procedures.
(E) In the event that an Indemnitee, pursuant to this Section 4, seeks
to enforce the Indemnitee's rights under, or to recover damages for breach of,
Article III, Section 13 of the by-laws or these Procedures in a judicial
proceeding or arbitration, the Indemnitee shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
expenses (of the types described in the definition of Expenses in Section 2
of these Procedures) actually and reasonably incurred in such judicial
proceeding or arbitration, but only if the Indemnitee prevails therein. If it
shall be determined in such judicial proceeding or arbitration that the
Indemnitee is entitled to receive part but not all of the indemnification or
advancement of Expenses sought, the expenses incurred by the Indemnitee in
connection with such judicial proceeding or arbitration shall be appropriately
prorated.
SECTION 5. Amendments. These Procedures may be amended at any time and
from time to time in the same manner as any by-law of the Corporation in
accordance with the Certificate of Incorporation; provided, however, that
notwithstanding any amendment, alteration or repeal of these Procedures or any
provision hereof, any Indemnitee shall be entitled to utilize these Procedures
with respect to any claim for indemnification arising out of any action taken or
omitted prior to such amendment, alteration or repeal except to the extent
otherwise required by law.
22 BY-LAWS OF ROCKWELL INTERNATIONAL CORPORATION
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>4
<DESCRIPTION>COMPUTATAION OF EARNINGS PER SHARE
<TEXT>
EXHIBIT 11
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
December 31
1997 1996
(In millions, except
per share amounts)
Basic earnings per share:
Income from continuing operations................... $ 89 $ 154
Income from discontinued operations................. - $ 25
Net income.......................................... $ 89 $ 179
Average number of common shares outstanding
during the period................................. 204.8 218.7
Basic earnings per share:
Continuing operations............................. $ 0.43 $ 0.70
Discontinued operations........................... - 0.12
Net income........................................ $ 0.43 $ 0.82
Diluted earnings per share:
Income from continuing operations................... $ 89 $ 154
Income from discontinued operations................. - 25
Net income.......................................... $ 89 $ 179
Average number of common shares outstanding
during the period assuming full dilution:
Common stock................................... 204.8 218.7
Assumed issuance of stock under award plans.... 3.0 3.1
Total diluted shares.............................. 207.8 221.8
Diluted earnings per share:
Continuing operations............................. $ 0.43 $ 0.69
Discontinued operations........................... - 0.12
Net income........................................ $ 0.43 $ 0.81
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>5
<DESCRIPTION>COMPUTATION OF RATION OF EARNINGS TO FIXED ASSETS
<TEXT>
Exhibit 12
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED DECEMBER 31, 1997
(In millions, except ratio)
EARNINGS AVAILABLE FOR FIXED CHARGES:
Income from continuing operations before income taxes............ $ 139
Less undistributed income of affiliates........................ (2)
137
Add fixed charges included in earnings:
Interest expense.............................................. 4
Interest element of rentals................................... 14
18
Total earnings available for fixed charges....................... $ 155
FIXED CHARGES:
Fixed charges included in earnings............................... $ 18
Capitalized interest............................................. 3
Total fixed charges........................................... $ 21
RATIO OF EARNINGS TO FIXED CHARGES (1).............................. 7.4
(1) In computing the ratio of earnings to fixed charges, earnings are defined
as income from continuing operations before income taxes, adjusted for
minority interest in income or loss of subsidiaries, undistributed
earnings of affiliates, and fixed charges exclusive of capitalized
interest. Fixed charges consist of interest on borrowings and that
portion of rentals deemed representative of the interest factor.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 CONSOLIDATED BALANCE SHEET, CONSOLIDATED INCOME STATEMENT FOR THE THREE
MONTHS ENDED DECEMBER 31, 1997 AND NOTES TO THE FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 183
<SECURITIES> 0
<RECEIVABLES> 1294
<ALLOWANCES> 67
<INVENTORY> 1616
<CURRENT-ASSETS> 3615
<PP&E> 2246
<DEPRECIATION> 0
<TOTAL-ASSETS> 7904
<CURRENT-LIABILITIES> 2130
<BONDS> 157
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 216
<OTHER-SE> 4384
<TOTAL-LIABILITY-AND-EQUITY> 7904
<SALES> 1979
<TOTAL-REVENUES> 2004
<CGS> 1402
<TOTAL-COSTS> 1865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 139
<INCOME-TAX> 50
<INCOME-CONTINUING> 89
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| SFA | https://www.sec.gov/Archives/edgar/data/87777/0000931763-98-000206.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000931763-98-000206.txt : 19980209
<SEC-HEADER>0000931763-98-000206.hdr.sgml : 19980209
ACCESSION NUMBER: 0000931763-98-000206
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19971226
FILED AS OF DATE: 19980206
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SCIENTIFIC ATLANTA INC
CENTRAL INDEX KEY: 0000087777
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 580612397
STATE OF INCORPORATION: GA
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05517
FILM NUMBER: 98523224
BUSINESS ADDRESS:
STREET 1: ONE TECHNOLOGY PKWY S
CITY: NORCROSS
STATE: GA
ZIP: 30092-2967
BUSINESS PHONE: 7709035000
MAIL ADDRESS:
STREET 1: ONE TECHNOLOGY PKWY S
CITY: NORCROSS
STATE: GA
ZIP: 30092-2967
FORMER COMPANY:
FORMER CONFORMED NAME: SCIENTIFIC ASSOCIATES INC
DATE OF NAME CHANGE: 19671024
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------------------- --------------------
COMMISSION FILE NUMBER 1-5517
SCIENTIFIC-ATLANTA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-0612397
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE TECHNOLOGY PARKWAY, SOUTH
NORCROSS, GEORGIA 30092-2967
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
770-903-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
AS OF JANUARY 23, 1998, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 79,047,945
SHARES OF COMMON STOCK.
1
<PAGE>
PART I - FINANCIAL INFORMATION
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- ----------------------------
December 26, December 27, December 26, December 27,
1997 1996 1997 1996
------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
SALES $294,524 $282,184 $589,025 $543,848
COSTS AND EXPENSES
Cost of sales 208,507 196,847 412,780 379,741
Sales and administrative 39,187 37,624 80,286 73,057
Research and development 26,651 29,108 53,401 57,141
Interest expense 154 120 269 254
Interest income (1,234) (1,112) (2,335) (1,651)
Other (income) expense, net 71 (626) (114) (815)
-------- -------- -------- --------
Total costs and expenses 273,336 261,961 544,287 507,727
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 21,188 20,223 44,738 36,121
PROVISION (BENEFIT) FOR
INCOME TAXES
Current 6,045 9,480 13,016 (734)
Deferred 311 (3,009) 405 12,293
-------- -------- -------- --------
NET EARNINGS FROM CONTINUING
OPERATIONS 14,832 13,752 31,317 24,562
GAIN ON SALE OF DISCONTINUED
OPERATIONS, NET OF TAX -- -- -- 3,400
-------- -------- -------- --------
NET EARNINGS $ 14,832 $ 13,752 $ 31,317 $ 27,962
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC
CONTINUING OPERATIONS $ 0.19 $ 0.18 $ 0.40 $ 0.32
DISCONTINUED OPERATIONS -- -- -- 0.04
-------- -------- -------- --------
NET EARNINGS $ 0.19 $ 0.18 $ 0.40 $ 0.36
======== ======== ======== ========
DILUTED $ 0.19 $ 0.18 $ 0.40 $ 0.36
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING
BASIC 78,885 77,205 78,567 77,166
======== ======== ======== ========
DILUTED 80,149 78,387 80,038 78,249
======== ======== ======== ========
DIVIDENDS PER SHARE PAID $ 0.015 $ 0.015 $ 0.03 $ 0.03
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
In Thousands
----------------------
December 26, June 27,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 89,154 $107,143
Receivables, less allowance for doubtful
accounts of $4,106,000 at December 26
and $4,202,000 at June 27 254,665 238,179
Inventories 202,284 209,570
Deferred income taxes 29,360 31,323
Other current assets 12,074 10,886
-------- --------
TOTAL CURRENT ASSETS 587,537 597,101
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and improvements 19,854 19,854
Buildings and improvements 30,670 32,229
Machinery and equipment 215,775 206,760
-------- --------
266,299 258,843
Less-Accumulated depreciation and amortization 101,660 92,423
-------- --------
164,639 166,420
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 10,724 11,263
-------- --------
OTHER ASSETS 53,403 48,831
-------- --------
TOTAL ASSETS $816,303 $823,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 821 $ 842
Accounts payable 92,068 123,675
Accrued liabilities 90,489 111,737
Income taxes currently payable 7,171 13,507
-------- --------
TOTAL CURRENT LIABILITIES 190,549 249,761
-------- --------
LONG-TERM DEBT, less current maturities 1,493 1,810
-------- --------
OTHER LIABILITIES 44,812 39,394
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 50,000,000 shares;
no shares issued -- --
Common stock, $0.50 par value, authorized
350,000,000 shares; issued 79,086,325 shares at
December 26 and 77,995,475 shares at June 27 39,543 38,998
Additional paid-in capital 190,496 171,857
Retained earnings 352,565 323,608
Accumulated translation adjustments (456) (186)
-------- --------
582,148 534,277
-------- --------
Less - Treasury stock, at cost (164,521 shares at
December 26 and 113,000 shares at June 27) 2,699 1,627
-------- --------
579,449 532,650
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $816,303 $823,615
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
December 26, December 27,
1997 1996
-------- --------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: $(14,508) $91,073
-------- -------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (19,270) (29,626)
Proceeds from sale of discontinued operations -- 18,369
Proceeds from the sale of a business unit 8,059 --
Other 25 1,197
-------- --------
Net cash used by investing activities (11,186) (10,060)
-------- --------
FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- (1,350)
Principal payments on long-term debt (338) --
Dividends paid (2,360) (2,316)
Issuance of common stock 10,403 717
Treasury shares acquired -- (2,973)
-------- --------
Net cash provided (used) by financing activities 7,705 (5,922)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,989) 75,091
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 107,143 20,930
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,154 $96,021
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 242 $ 229
======== =======
Income taxes paid, net $ 15,662 $ 5,810
======== =======
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
NOTES:
(Amounts in thousands except share data).
A. The accompanying consolidated financial statements include the accounts
of the company and all subsidiaries after elimination of all material
intercompany accounts and transactions. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with the consolidated financial statements
and related notes contained in the 1997 Form 10-K. The financial
information presented in the accompanying statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the periods indicated. All such adjustments are of a
normal recurring nature.
B. Basic earnings per common share were computed by dividing net earnings by
the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per common share were computed by dividing
net earnings by the sum of the weighted average shares of common stock
outstanding during the period and incremental shares from the assumed
exercise of dilutive options. See Exhibit 11.
C. Inventories consist of the following:
December 26, June 27,
1997 1997
-------- --------
Raw materials and work-in-process $127,471 $136,699
Finished goods 74,813 72,871
-------- --------
Total inventory $202,284 $209,570
======== ========
D. During the quarter ended September 29, 1995, the company decided to
discontinue its defense-related businesses in San Diego, California,
because these businesses were not aligned with the company's core
business strategies and recorded a one-time charge of $12,172, net of a
tax benefit of $5,728, for the estimated loss on sale of discontinued
operations. During the quarter ended September 27, 1996, the company
completed negotiations with a prime contractor, for whom the defense-
related businesses had performed work as a subcontractor, to settle
issues related to the pricing of unexercised options for additional
products. The company also completed the sale of its defense-related
businesses to Global Associates, Ltd. (Global) for cash of $13,142 and
secured and unsecured notes aggregating approximately $4,700. The net
realizable value of the assets of the defense-related businesses and the
settlement with the prime contractor were more favorable than the company
had anticipated when it decided to exit these businesses; accordingly,
the company recognized a pre-tax gain of $5,000 from these transactions
in the first quarter of fiscal 1997. Sales and losses, net of tax, from
discontinued operations were $1,920 and $817, respectively, for the
quarter ended September 27, 1996. At December 26, 1997, the company had
a reserve of approximately $7,200 for potential sales price adjustments,
indemnifications provided to Global, legal, severance and other
miscellaneous expenses related to the sale and the settlement with the
prime contractor.
Global is currently in default under its promissory notes to the company
and under promissory notes to Global's senior lenders and, in January
1998, filed a voluntary petition for a Chapter 11 reorganization in the
United States Bankruptcy Court. Whether Global will successfully
reorganize in this bankruptcy proceeding is not known at this time. If a
satisfactory resolution of the situation is not reached, the company
believes it has adequate reserves to cover any potential losses related
to Global's default on the promissory note and related to any contracts
of the defense-related businesses from which contracts the company has
not been released.
E. During the quarter ended March 28, 1997, the company decided to dispose
of two business units, microwave and mobile, because these businesses
were not aligned with the company's core business strategies and recorded
a pre-tax charge of $5,526. During the quarter ended December 26, 1997,
the company sold the majority of the net assets of the microwave business
unit for $8,059 of cash. No gain or loss was recognized on the
transaction. At December 26, 1997, the company had a reserve of
approximately $5,200 to adjust the carrying amount of the net assets of
the mobile business unit and to provide for estimated indemnifications to
the purchaser of the microwave business unit, potential losses on
contracts of the microwave business which were retained by the company,
severance, closing costs and other miscellaneous expenses related to the
sale of the microwave business unit.
5
<PAGE>
NOTES: (continued)
(Amounts in thousands except share data).
F. During the six months ended December 27, 1996, the company purchased
225,000 shares of its common stock pursuant to a stock buyback program at
an aggregate cost of $2,973. During the six months ended December 26,
1997, the company obtained an additional 70,496 shares of its common
stock, primarily from the cancellation of unvested, restricted stock
grants. The company re-issues these shares under the company's stock
option plans, 401(k) plan, employee stock purchase plan and other stock-
based employee compensation arrangements.
G. Income taxes paid of $15,662 in the six months ended December 26, 1997
included approximately $5,800 of payments in connection with the filing
of amended federal income tax returns. Payments to foreign tax
authorities were approximately $2,900 higher in the six months ended
December 26, 1997 as compared to the prior year due to the timing of tax
payments by foreign subsidiaries.
H. During the quarter ended December 26, 1997, the company adopted Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" which
superseded Opinion 15. Earnings per share computed under the provisions
of Statement 128 were the same as those computed under Opinion 15 for the
three months ended December 26, 1997 and December 27, 1996, respectively,
and were the same for the six months ended December 27, 1996.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Scientific-Atlanta had stockholders' equity of $579.4 million and cash on
hand of $89.2 million at December 26, 1997. Cash decreased $18.0 million during
the six months ended December 26, 1997 as expenditures for equipment, reductions
in payables, and increases in accounts receivable exceeded cash generated from
earnings, the issuance of common stock and the sale of the net assets of the
microwave business. The current ratio was 3.1:1 at December 26, 1997, compared
to 2.4:1 at June 27, 1997. At December 26, 1997, total debt was $2.3 million or
less than one percent of total capital invested. The company entered into a $38
million off-balance sheet operating lease commitment with an option to purchase
in July 1997 related to the construction of facilities to replace those
currently under lease by the company. The company believes that funds generated
from operations, existing cash balances and its available senior credit facility
will be sufficient to support the company's growth.
RESULTS OF OPERATIONS
- ---------------------
Sales for the quarter ended December 26,1997 were $294.5 million, up 4
percent over the prior year. Sales of Subscriber Network Systems products
increased 13 percent over the prior year primarily on higher sales volume of
analog settops. Sales of Terrestrial Network Systems products increased 9
percent over the prior year primarily due to sales generated by Arcodan A/S
which was acquired in February 1997.
Sales for the six months ended December 26, 1997 were $589.0 million, up 8
percent over the prior year. Sales of Subscriber Network Systems and
Terrestrial Network Systems products increased 14 percent and 9 percent,
respectively. These increases were also the result of higher sales volume of
analog settops and sales generated by Arcodan in fiscal 1998. Delivery of
ground terminals for a satellite-based global system for the Iridium(TM) project
during fiscal 1998 contributed to a 5 percent increase in sales of Satellite
Network Systems. Sales in each sector were negatively impacted by the
deterioration in the economic condition of the Asia/Pacific region during
fiscal 1998 and the company believes that future sales in this region will be
negatively impacted until the economic conditions improve.
The company previously announced that it planned to have production
quantities of the new Prisma(TM) Digital Transport product available in the
third quarter of fiscal 1998, but the availability of such production quantities
is expected to be delayed until the fourth quarter of fiscal 1998.
Orders booked during the three and six months ended December 26, 1997 were
$312.6 million and $575.2 million, respectively, a decline of 9 percent from the
comparable periods of the prior year. Lower orders in fiscal 1998 reflected a
decline in business in the Pacific Rim resulting from currency issues in the
region, which made the company's products more expensive, and a slowdown of a
cable system roll-out in Australia and a softening of the market in the United
Kingdom. These declines were offset partially by strong growth in orders booked
in North America and Latin America.
Gross margins of 29.2 percent and 29.9 percent, for the three and six
months ended December 26, 1997, declined 1.0 and 0.3 percentage points,
respectively, from the prior year. Lower volume of sales in the Asia/Pacific
region, which generally have higher margins than some other geographic regions,
and margin decreases in Terrestrial Network Systems, resulting from market
pressures, more than offset the impact of favorable exchange rates on the
Japanese yen compared to the prior year and favorable product mix.
Certain material purchases are denominated in Japanese yen and,
accordingly, the purchase price in U.S. dollars is subject to change based on
exchange rate fluctuations. The company has forward exchange contracts to
purchase yen to hedge a portion of its exposure on purchase commitments for a
period of approximately twelve months.
Research and development costs were $26.7 million and $53.4 million for the
three and six months ended December 26, 1997, respectively, or 9 percent of
sales, reflecting the company's continued investment in research and development
programs to support new product initiatives. Research and development costs
during fiscal 1998 were lower than the prior year due primarily to decreased
research and development efforts related to cable telephony products which was
offset partially by increased investments in analog and digital settop
programs. In addition, the company capitalized software development costs of
$0.4 million and $1.0 million and non-recurring engineering costs of $3.2
million and $6.2 million during the three and six months ended December 26,
1997, respectively.
7
<PAGE>
Selling and administrative expense increased $1.6 million, or 4 percent,
and $7.2 million, or 10 percent, for the three and six months ended December 26,
1997, respectively, over the comparable periods of the prior year. Increased
selling expenses reflect costs associated with higher sales volumes, ongoing
investments to support expansion into international markets and to support the
introduction of new products and selling expenses of Arcodan A/S which was
acquired in February 1997. Administrative expenses declined in fiscal 1998 due
primarily to lower professional and consulting fees and cost reduction programs
the company has implemented.
Other (income) expense for the three and six months ended December 26, 1997
and December 27, 1996, included the results of foreign currency transactions and
partnership activities and net gains from rental income and other miscellaneous
items. There were no significant items in other (income) expense.
The company's effective income tax rate in fiscal 1998 was 30 percent, two
percentage points lower than the rate in the prior year. The lower effective
income tax rate in fiscal 1998, as compared to fiscal 1997, is due to benefits
from the company's foreign sales corporation (FSC) and a decrease in foreign
earnings taxed at higher rates.
Net earnings from continuing operations were $14.8 million for the quarter
ended December 26, 1997, up $1.1 million or 8 percent, over the prior year. Net
earnings from continuing operations were $31.3 million for the six months ended
December 26, 1997, up $6.8 million, or 28 percent, over the prior year. Higher
sales volume and lower research and development expenses in fiscal 1998 were
offset partially by increased selling and administrative expenses and lower
gross margins.
The company periodically evaluates the contribution of its business units
and products to the company's overall strategic direction. During the quarter
ended September 29, 1995, the company decided to discontinue its defense-related
businesses in San Diego, California because these businesses were not aligned
with the company's core business strategy of being a provider of satellite and
terrestrial based networks and applications. In October 1995, the company
announced its intent to sell its defense-related businesses and recorded a one-
time, after-tax charge of $13.2 million in the quarter ended September 29, 1995.
During the quarter ended September 27, 1996, the company completed
negotiations with a prime contractor, for whom the defense-related businesses
had performed work as a subcontractor, to settle issues related to the pricing
of unexercised options for additional products. The company also completed the
sale of its defense-related businesses to Global Associates, Ltd. for cash of
$13.1 million and secured and unsecured notes aggregating approximately $4.7
million. The net realizable value of the assets of the defense-related
businesses and the settlement with the prime contractor were more favorable than
the company had anticipated when it decided to exit these businesses;
accordingly the company recognized a pre-tax gain of $5.0 million from these
transactions in the quarter ended September 27, 1996.
Global is currently in default under its promissory notes to the company
and under promissory notes to Global's senior lenders and, in January 1998,
filed a voluntary petition for a Chapter 11 reorganization in the United States
Bankruptcy Court. Whether Global will successfully reorganize in this bankruptcy
proceeding is not known at this time. If a satisfactory resolution of the
situation is not reached, the company believes it has adequate reserves to cover
any potential losses related to Global's default on the promissory note and
related to any contracts of the defense-related businesses from which contracts
the company has not been released.
During the quarter end March 28, 1997, the company decided to dispose of
two business units, microwave and mobile, because these business were not
aligned with the company's core business strategies and recorded a pretax charge
of $5.5 million. During the quarter ended December 26, 1997, the company sold
the majority of the net assets of the microwave business unit for $8.1 million
of cash. No gain or loss was recognized on the transaction.
Net earnings for the three months ended December 26, 1997 were $14.8
million, up $1.1 million over the prior year. Net earnings for the six months
ended December 26, 1997 were $31.3 million, up $3.4 million over the prior year
which included an after-tax gain of $3.4 million related to the sale of
discontinued operations.
8
<PAGE>
Any of the above statements that are not statements about historical facts
are forward-looking statements. Such forward-looking statements are based upon
current expectations but involve risks and uncertainties. Investors are
referred to the Cautionary Statements contained in Exhibit 99 to this Form 10-Q
for a description of the various risks and uncertainties that could cause the
company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the company's forward-
looking statements. Such Exhibit 99 is hereby incorporated by reference into
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------ -----------------------------------------------------------
This information is not yet required, per the Instructions to Item 305 of
Regulation S-K.
PRISMA is a registered trademark of Scientific-Atlanta, Inc.
IRIDIUM is a registered trademark and service mark of Iridium LLC.
9
<PAGE>
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
The following information is furnished with respect to matters submitted
to a vote of security holders through the solicitation of proxies:
(a) The matters described below were submitted to a vote of security
holders at the Annual Meeting of Shareholders held on November 12,
1997.
(b) Election of directors:
Votes For Withhold Authority
------------- -------------------
David J. McLaughlin 58,860,026 8,441,689
James V. Napier 58,873,802 8,427,913
Sam Nunn 58,200,636 9,101,079
Marion H. Antonini, William E. Kassling, Wilbur B. King, Mylle Bell
Mangum, Alonzo L. McDonald, and James F. McDonald continue as
directors. Sidney Topol retired from the Board of Directors effective
November 12, 1997.
(c)(i) Approval of the Amended Stock Plan for Non-Employee Directors
Votes For Votes Against Abstain
------------- ---------------- -----------
63,923,175 1,808,106 1,570,434
(ii) Approval of a grant of an option for shares of the Corporation's
Common Stock to an executive officer
Votes For Votes Against Abstain
------------- ---------------- -----------
56,256,407 10,457,890 587,418
(iii) Ratification of the selection of Arthur Andersen LLP as independent
auditors
Votes For Votes Against Abstain
------------- ---------------- -----------
66,883,545 197,078 221,092
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
Exhibit No. Description
----------- -----------
3(b) By-laws of the company, as amended.
10.1 Stock Plan for Non-Employee Directors of Scientific-
Atlanta, Inc., as amended and restated
10.2 Deferred Compensation Plan for Non-Employee Directors
of Scientific-Atlanta, Inc., as amended and restated
10.3 Retirement Plan for Non-Employee Directors, as
amended and restated
11 Computation of Earnings Per Share
27 Financial Data Schedule
99 Cautionary Statements
(b) No reports on Form 8-K were filed during the quarter ended
December 26, 1997.
Date: February 6, 1998 /s/ Harvey A. Wagner
---------------- ------------------------------------------------
Harvey A. Wagner
Senior Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer and duly authorized
signatory of the Registrant)
10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(B)
<SEQUENCE>2
<DESCRIPTION>BY-LAWS OF THE COMPANY
<TEXT>
<PAGE>
EXHIBIT 3(b)
BY-LAWS
OF
SCIENTIFIC-ATLANTA, INC.
(AS AMENDED NOVEMBER 12, 1997)
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office shall be in the state
-----------------
of Georgia, County of Gwinnett.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the state of Georgia as the board of
directors may from time to time determine and the business of the corporation
may require or make desirable.
ARTICLE II
SHAREHOLDERS' MEETINGS
----------------------
Section 1. Annual Meetings. The annual meeting of the shareholders of the
---------------
corporation shall be held at such place and time in the United States as may be
determined by the board of directors, for the purpose of electing directors and
transacting such other business as may properly be brought before the meeting.
To be properly brought before the meeting, business must be either (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary of the corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation, no earlier than 90 days and no later than 60 days
prior to the date of such meeting, regardless of any postponements, deferrals or
adjournments of such meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made, notice by a holder of record must, to be timely, be so delivered
or received not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting is mailed or the day on
which such public disclosure was made; provided that, in the case of an annual
meeting, notice by a holder of record, to be timely, must be so delivered or
received not later than the close of business 60 days prior to the anniversary
of the date of the previous year's annual meeting. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the annual meeting (i) a brief
1
<PAGE>
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the shareholder proposing such business, (iii) the class
and number of securities of the corporation which are beneficially owned by the
shareholder, and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 1, provided, however, that nothing in this Section 1 shall
-------- -------
be deemed to preclude discussion by any shareholder of any business properly
brought before the annual meeting.
The presiding officer at an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 1, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 2. Special Meetings. (a) Special meetings of the shareholders
----------------
shall be held at the principal office of the corporation or at such other place
in the United States as may be designated in the notice of such meetings, and
shall be called by the chief executive officer or the secretary only when so
directed by the board of directors or when so requested in writing by the
holders of at least 75 percent of the issued and outstanding capital stock of
the corporation entitled to vote in an election of directors.
(b) Anything in these by-laws to the contrary notwithstanding, the
following procedures shall apply to the call of any special meeting of
shareholders, or a special meeting in lieu of the annual meeting of
shareholders, at the request of holders of the outstanding capital stock of
the corporation:
(i) Every written request for the call of a special meeting
shall bear the signature and date of signature of each
shareholder who signs the request and shall state the purpose or
purposes for which the meeting is to be called.
(ii) The record date for the determination of shareholders
entitled to request the corporation to call a special meeting
shall be the date which is 45 calendar days prior to the date
(the "Filing Date") that written requests complying with the
requirements of law and these by-laws signed by a sufficient
number of record holders to request a special meeting in
accordance with this Section 2 have been received by the
corporation (the "Minimum Request Condition").
(iii) Promptly after receipt of a written request or requests for
the call of a special meeting, the corporation shall engage
nationally recognized independent inspectors of election for the
purpose of determining the validity of the request or requests
and any revocations thereof. Within 15
2
<PAGE>
calendar days of the Filing Date, such independent inspectors
shall deliver to the corporation a written report stating whether
the Minimum Request Condition has been satisfied. If such written
report states that the Minimum Request Condition has been
satisfied, or if no report is delivered by independent inspectors
within 15 calendar days of the Filing Date, the chief executive
officer or the secretary of the corporation shall call the
special meeting by mailing notice thereof not later than 45
calendar days after the Filing Date.
(iv) The date, time and place of the special meeting shall be
determined by the board of directors and shall be set forth in
the notice of meeting, which notice shall comply with the
provisions of Section 3 of this Article II.
(v) The record date for the determination of shareholders
entitled to notice of and to vote at the special meeting shall be
set by the board of directors in accordance with the provisions
of Section 4 of Article V of these by-laws.
Section 3. Notice of Meetings. Written notice of every meeting of
------------------
shareholders, stating the place, date and hour of the meeting, shall be given
personally or by mail to each shareholder of record entitled to vote at such
meeting not less than 10 nor more than 60 days before the date of the meeting.
If mailed, such notice shall be deemed to be delivered when deposited in the
United States mail with first class postage thereon prepaid (except as
hereinafter provided) addressed to the shareholder at his address as it appears
on the corporation's record of stockholders. The corporation may utilize a class
of mail other than first class if the notice of the meeting is mailed, with
adequate postage prepaid, not less than 30 days before the date of the meeting.
Attendance of a shareholder at a meeting of shareholders (1) waives objection to
lack of notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (2) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when it
is presented. Notice need not be given to any shareholder who signs a waiver of
notice either before or after the meeting.
Section 4. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum for the transaction of business at all meetings
of the shareholders except as otherwise provided by statute, by the articles of
incorporation, or by these by-laws. If a quorum is not present or represented at
any meeting of the shareholders, the holders of a majority of the voting shares,
present in person or represented by proxy, may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is for
more than 120 days, or if a new record date is fixed for the adjourned meeting,
a notice of the adjourned meeting shall be given to each shareholder of record
entitled to vote at the meeting.
3
<PAGE>
Section 5. Voting. When a quorum is present at any meeting, action on a
------
matter (other than the election of directors) is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the
question is one upon which by express provision of law, of the articles of
incorporation or of these by-laws, a different vote is required, in which case
such express provision shall govern and control the decision of the question.
Except as otherwise required by the Articles of Incorporation, each shareholder
shall at every meeting of the shareholders be entitled to one vote in person or
by proxy for each share of the capital stock having voting power registered in
his name on the books of the corporation, but no proxy shall be voted or acted
upon after eleven months from its date, unless otherwise provided in the proxy.
Section 6. Consent of Shareholders. Any action required or permitted to
-----------------------
be taken at any meeting of the shareholders may be taken without a meeting if
all of the shareholders consent thereto in writing, setting forth the action so
taken, and such writing is delivered to the corporation for inclusion in the
minutes or filing with the corporate records. Such consent shall have the same
force and effect as a unanimous vote of shareholders.
Section 7. List of Shareholders. The corporation shall keep at its
--------------------
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving their names
and addresses and the number, class and series, if any, of the shares held by
each. The officer who has charge of the stock transfer books of the corporation
shall prepare and make, before every meeting of shareholders or any adjournment
thereof, a complete list of the shareholders entitled to vote at the meeting or
any adjournment thereof, arranged in alphabetical order, with the address of and
the number and class and series, if any, of shares held by each. The list shall
be produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder during the whole time of the meeting
for the purposes thereof. The said list may be the corporation's regular record
of shareholders if it is arranged in alphabetical order or contains an
alphabetical index.
ARTICLE III
DIRECTORS
---------
Section 1. Powers. Except as otherwise provided or authorized by law, the
------
property, affairs and business of the corporation shall be managed and directed
by its board of directors, which may exercise all powers of the corporation and
do all lawful acts and things which are not by law, by any legal agreement among
shareholders or by the articles of incorporation, directed or required to be
exercised or done by the shareholders.
Section 2. Meetings and Notice. The board of directors of the corporation
-------------------
may hold meetings, both regular and special, either within or without the state
of Georgia. Regular meetings of the board of directors may be held without
notice at such time and place as shall from time to time be determined by
resolution of the board. Special meetings of the board may be called by the
chairman of the board or the chief executive officer or by any three directors
on
4
<PAGE>
one day's oral, telegraphic or written notice duly given or served on each
director personally, or three days' notice deposited, first class postage
prepaid, in the United States mail. Such notice shall state a reasonable time,
date and place of meeting, but the purpose need not be stated therein. Notice
need not be given to any director who signs a waiver of notice either before or
after the meeting. Attendance of a director at a meeting shall constitute a
waiver of notice of such meeting and waiver of all objections to the place and
time of the meeting, or the manner in which it has been called or convened,
except when the director states, at the beginning of the meeting, any such
objection or objections to the transaction of business.
Section 3. Quorum. At all meetings of the board a majority of directors
------
shall constitute a quorum for the transaction of business, and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board, except as may be otherwise specifically provided
by law, by the articles of incorporation, or by these by-laws. If a quorum shall
not be present at any meeting of the board, a majority of the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 4. Consent of Directors. Unless otherwise restricted by the
--------------------
articles of incorporation or these by-laws, any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, setting forth the action so taken, and
the writing or writings are delivered to the corporation for inclusion in the
minutes of the proceedings of the board or committee or filing with the
corporate records. Such consent shall have the same force and effect as a
unanimous vote of the board.
Section 5. Committees. The board of directors may by resolution designate
----------
from among its members one or more committees, each committee to consist of one
or more directors. The board may designate one or more directors as alternate
members of any committee, who may replace any absent member at any meeting of
such committee. Any such committee, to the extent provided in the resolution,
shall have and may exercise all of the authority of the board of directors in
the management of the business and affairs of the corporation, except that it
shall have no authority to (1) approve or propose to shareholders action which
the Georgia Business Corporation Code requires to be approved by shareholders;
(2) fill vacancies on the board of directors or any of its committees; (3) amend
the articles of incorporation; (4) adopt, amend or repeal by-laws; or (5)
approve a plan of merger not requiring shareholder approval. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors. The provisions of Sections 2
and 3 of this Article III shall apply to committees and their members as well as
to the board of directors. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
Section 6. Compensation of Directors. Directors shall be entitled to such
-------------------------
reasonable compensation for their services as directors or members of any
committee of the board as shall be fixed from time to time by resolution adopted
by the board, and shall also be entitled to
5
<PAGE>
reimbursement for any reasonable expenses incurred in attending any meeting of
the board or any such committee.
Section 7. Nominations of Directors. Nominations of candidates for
------------------------
election at any meeting of the shareholders of the corporation as directors of
the corporation may be made (i) by, or at the direction of, the board of
directors or (ii) by any holder of record entitled to vote at such meeting in an
election of directors who complies with the notice procedures set forth in this
Section 7.
Nominations, other than those made by, or at the direction of, the board of
directors, shall be made pursuant to timely notice in writing to the secretary
of the corporation as set forth in this Section 7. To be timely, any such notice
must be delivered to, or mailed and received at, the principal executive offices
of the corporation not less than 60 days nor more than 90 days prior to the date
of such meeting, regardless of any postponements, deferrals or adjournments of
such meeting to a later date; provided, however, that if less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made,
notice by a holder of record must, to be timely, be so delivered or received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting is mailed or the day on which such public
disclosure was made; provided that, in the case of an annual meeting, notice by
a holder of record, to be timely, must be so delivered or received not later
than the close of business 60 days prior to the anniversary of the date of the
previous year's annual meeting. Such notice by a holder of record must set
forth (i) as to each person whom such holder proposes to nominate for election
as a director, all information relating to such person that would be required to
be disclosed, or otherwise required, pursuant to Sections 13 or 14 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"), in connection with any acquisition
of shares and the solicitations of proxies with respect to nominees for election
of directors pursuant to the Exchange Act, regardless of whether such person is
subject to such provisions of such Exchange Act, and (ii) as to the holder of
record giving such notice, (a) the name and address, as they appear on the
records of the corporation, of such holder, together with the name and address
of any other shareholder of the corporation who is a record or beneficial owner
of securities of the corporation and who is known by such holder to be
supporting such nominee(s) and (b) the class and number of securities which are
beneficially owned and owned of record by such holder on the date of such
holder's notice and the class and number of securities of the corporation
beneficially owned and owned of record by any person known by such holder to be
supporting such nominee(s). At the request of the board of directors, any person
nominated by, or at the direction of, the board of directors for election as a
director shall furnish to the secretary of the corporation that information that
would be required to be set forth in any holder's notice of nomination
pertaining to such nominee. Ballots bearing the names of all the persons who
have been nominated for election as directors at any meeting of shareholders in
accordance with the procedures set forth in this Section 7 shall be provided for
use at such meeting.
The board of directors of the corporation may reject any nomination by a
holder of record not timely made in accordance with the procedures set forth in
this Section 7. If the board of directors determines that the information
provided in a holder's notice of nomination does not
6
<PAGE>
satisfy the informational requirements of this Section 7 in any material
respect, the secretary of the corporation shall promptly notify such holder of
the deficiency in such notice. The holder shall have an opportunity to cure the
deficiency by providing additional information to the secretary within such
period of time, not to exceed five days, from the date such notice of deficiency
is given to such holder, as the board of directors shall determine. If the
deficiency is not cured within such period, or if the board of directors
reasonably determines that the additional information provided by such holder,
together with previously provided information, does not satisfy the requirements
of this Section 7 in any material respect, then the board of directors may
reject such holder's nomination. The secretary of the corporation shall notify
in writing any holder making a nomination whether such nomination has been made
in accordance with the time and informational requirements of this Section 7.
Notwithstanding the procedures set forth herein, if the board of directors does
not make a determination as to the validity of any nomination by a holder of
record, the presiding officer at the meeting of shareholders shall determine and
declare at such meeting whether a nomination was or was not made in accordance
with the procedures set forth in this Section 7. If the presiding officer
determines that a nomination was not made in accordance with the procedures set
forth in this Section 7, he shall so declare at such meeting of shareholders and
the defective nomination shall be disregarded.
ARTICLE IV
OFFICERS
--------
Section 1. Number. The officers of the corporation, shall be chosen by
------
the board of directors and shall be a chairman of the board, a chief executive
officer, a vice president, a secretary, and a treasurer. The board of directors
may also choose a vice chairman, additional vice presidents, one or more
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person. The board of directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board of directors.
Section 2. Compensation. The salaries of all officers and agents of the
------------
corporation shall be fixed by the board of directors or a committee or officer
appointed by the board. As used herein the term "salaries" shall include any
bonus, incentive payments, or other plans or programs involving remuneration to
officers.
Section 3. Term of Office. Unless otherwise provided by resolution of the
--------------
board of directors, the principal officers shall be chosen annually by the board
at the first meeting of the board following the annual meeting of shareholders
of the corporation, or as soon thereafter as is conveniently possible.
Subordinate officers may be elected from time to time. Each officer shall serve
until his successor shall have been chosen and qualified, or until his death,
resignation or removal.
Section 4. Removal. Any officer may be removed from office at any time,
-------
with or without cause, by the board of directors whenever in its judgment the
best interest of the corporation will be served thereby.
7
<PAGE>
Section 5. Vacancies. Any vacancy in an office resulting from any cause
---------
may be filled by the board of directors.
Section 6. Powers and Duties. Except as hereinafter provided, the
-----------------
officers of the corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the board of directors. At the annual meeting
at which officers are elected, the board shall by resolution designate a chief
executive officer, who will be responsible to the board for the general
management of the company.
(a) Chairman of the Board. The chairman of the board shall preside at
---------------------
all meetings of the stockholders and directors, and shall see that all
orders and resolutions of the board are carried into effect. He shall have
such powers and perform all such other duties as the board may direct. The
chairman of the board of directors may delegate to any other officer of the
corporation the power to preside at any meeting of the shareholders.
(b) Vice Chairman of the Board. The vice chairman shall have such
--------------------------
duties, responsibilities and authority as the board of directors may
prescribe, subject to the limitations expressed or implied by these by-
laws. In the absence of the chairman or in the event of his inability or
incapacity to act, the vice chairman shall perform the duties and exercise
the powers of the chairman.
(c) President and Chief Executive Officer. The president and chief
-------------------------------------
executive officer shall be responsible for the operation and management of
the company and shall be responsible for the proper utilization and
security of the company's assets and resources. He shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
corporation, within such limitations as the board by resolution may
establish. The president and chief executive officer may delegate his
powers to other officers and agents of the company; provided, however, that
such delegation shall be reported to the board of directors no less
frequently than once a year at the annual meeting, or at such other time as
a significant change is made to a previously reported delegation.
(d) Vice Presidents. The vice presidents shall have such duties,
---------------
responsibilities and authority as the chief executive officer shall
delegate, subject to any limitations imposed by the board and subject to
the limitations expressed or implied by these by-laws. The Board may
designate one or more vice presidents as senior vice president. In the
absence of the chief executive officer or in the event of his inability or
incapacity to act, the person designated as the Chairman of the Operating
Committee shall perform the duties of the chief executive officer and, when
so acting, shall have all the powers of and be subject to all the
restrictions upon the chief executive officer.
8
<PAGE>
(e) Secretary. The secretary shall attend all meetings of the board
---------
of directors and all meetings of the shareholders and record all the
proceedings of the meetings of the corporation and of the board of
directors in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. He shall give, or cause
to be given, notice of all meetings of the shareholders and special
meetings of the board of directors, and shall perform such other duties as
may be prescribed by the board of directors or chief executive officer,
under whose supervision he shall be. He shall have custody of the corporate
seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by his signature or by the signature of such
assistant secretary. The board of directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
(f) Assistant Secretary. The assistant secretary, or if there be more
-------------------
than one, the assistant secretaries in the order determined by the board of
directors (or, if there be no such determination, then in the order of
their election), shall, in the absence of the secretary or in the event of
his inability or refusal to act, perform the duties and exercise the powers
of the secretary and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
(g) Treasurer. The treasurer shall, subject to the direction of a
---------
vice president designated by the chief executive officer, have general
custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all monies and other valuable effects in the
name and to the credit of the corporation in such depositories as may be
designated by the board of directors. The treasurer shall disburse the
funds of the corporation as may be ordered by the board of directors,
taking proper vouchers for such disbursements. If required by the board of
directors, the treasurer shall give the corporation a bond (which shall be
renewed every six years) in such sum and with such surety or sureties as
shall be satisfactory to the board of directors for the faithful
performance of the duties of the treasurer's office and for the restoration
to the corporation, in case of death, resignation, retirement, or removal
from office, of all books, papers, vouchers, money, and other property of
whatever kind in the possession or under control of the treasurer and
belonging to the corporation.
(h) Assistant Treasurer. The assistant treasurer, or if there shall
-------------------
be more than one, the assistant treasurers in the order determined by the
board of directors (or if there be no such determination, then in the order
of their election), shall, in the absence of the treasurer or in the event
of his inability or refusal to act, perform the duties and exercise the
powers of the treasurer and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
(i) Controller. The controller shall be the chief accounting officer
----------
of the corporation. Subject to the direction of a vice president designated
by the chief executive
9
<PAGE>
officer, the controller shall maintain adequate records of all assets,
liabilities, and transactions of the corporation in the conduct of its
business. The controller shall require reports from the other officers and
agents of the corporation who receive or disburse funds for its account, at
such time and in such form as the controller may deem advisable. The
controller shall compile and maintain such accounting and statistical
records and data as may be required, and shall prepare and submit to the
executive officers, including the treasurer, and to the board of directors
such periodical and special financial statements as may be called for by
them. In conjunction with other officers and heads of divisions, the
controller shall initiate and enforce rules and regulations, budgets, and
other measures and procedures for the purpose of enhancing the efficiency,
economy, and profit with which the business of the corporation is
conducted. The controller shall see that adequate internal audits of the
financial records of the corporation are currently and accurately made.
Section 7. Staff and Operating Unit Officers. The chief executive
---------------------------------
officer may from time to time designate one or more "officers" for any function
or operating unit, but such persons shall not be officers of the corporation.
Any such appointee shall serve at the pleasure of the chief executive officer.
Section 8. Voting Securities of the Corporation. Unless otherwise ordered
------------------------------------
by the board of directors, the chief executive officer shall have full power and
authority on behalf of the corporation to attend and to act and vote at any
meetings of security holders of corporations in which the corporation may hold
securities, and at such meetings shall possess and may exercise any and all
rights and powers incident to the ownership of such securities which the
corporation might have possessed and exercised if it had been present. The chief
executive officer from time to time may delegate like powers upon any other
officer or agent of the corporation.
ARTICLE V
CERTIFICATES OF STOCK
---------------------
Section 1. Form of Certificate. Every holder of fully-paid stock in the
-------------------
corporation shall be entitled to have a certificate in such form as the board of
directors may from time to time prescribe.
Section 2. Lost Certificates. A new certificate may be issued in place of
-----------------
any certificate theretofore issued by the corporation and alleged to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed. When
issuing such new certificate, the officer of the corporation responsible for
such issuance may, in his discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as he shall require and/or to give the corporation a bond in such sum as he may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
10
<PAGE>
Section 3. Transfers.
---------
(a) Transfers of shares of the capital stock of the corporation shall
be made only on the books of the corporation by the registered holder
thereof, or by his duly authorized attorney, or with a transfer clerk or
transfer agent appointed as in Section 5 of this Article provided, and on
surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon.
(b) The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and for all other purposes, and
shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
law.
(c) Shares of capital stock may be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on
the back of the certificates or by separate written power of attorney to
sell, assign and transfer the same, signed by the record holder thereof, or
by his duly authorized attorney in fact, but no transfer shall affect the
right of the corporation to pay any dividend upon the stock to the holder
of record as the holder in fact thereof for all purposes, and no transfer
shall be valid, except between the parties thereto, until such transfer
shall have been made upon the books of the corporation as herein provided.
(d) The board may, from time to time, make such additional rules and
regulations as it may deem expedient, not inconsistent with these by-laws
or the articles of incorporation, concerning the issue, transfer, and
registration of certificates for shares of the capital stock of the
corporation.
Section 4. Record Date. In order that the corporation may determine the
-----------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than 70 days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If no record
date is fixed for the determination of shareholders entitled to notice of and to
vote at any meeting of shareholders, the record date shall be at the close of
business on the day next preceding the day on which the notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. If no record date is fixed for determining
shareholders entitled to take action without a meeting, the record date shall be
the date the first shareholder signs the consent. If no record date is fixed for
other purposes, the record date shall be at the close of business on the day on
which the board of directors adopts
11
<PAGE>
the resolution relating thereto. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the board of directors shall fix a new record
date for the adjourned meeting.
Section 5. Transfer Agent and Registrar. The board of directors may
----------------------------
appoint one or more transfer agents or one or more transfer clerks and one or
more registrars, and may require all certificates of stock to bear the signature
or signatures of any of them.
ARTICLE VI
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
---------
corporation, subject to the provisions of the articles of incorporation, if any,
may be declared by the board of directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock, subject to the provisions of the articles of
incorporation. Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 2. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by resolution of the board of directors.
Section 3. Seal. The corporate seal shall have inscribed thereon the name
----
of the corporation, the year of its organization and the words "Corporate Seal"
and "Georgia." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise. In the event it is inconvenient
to use such a seal at any time, the signature of the corporation followed by the
word "Seal" enclosed in parentheses shall be deemed the seal of the corporation.
Section 4. Annual Statements. Not later than four months after the close
-----------------
of each fiscal year, and in any case prior to the next annual meeting of
stockholders, the corporation shall prepare:
(1) A balance sheet showing in reasonable detail the financial
condition of the corporation as of the close of its fiscal year, and
(2) A profit and loss statement showing the results of its operations
during its fiscal year.
Upon written request the corporation promptly shall mail to any shareholder
of record a copy of the most recent such balance sheet and profit and loss
statement.
12
<PAGE>
Section 5. Fair Price to Shareholders; Business Combinations. All of the
-------------------------------------------------
requirements of Part 2 of Article 11 and all of the requirements of Part 3 of
Article 11 of the Georgia Business Corporation Code shall be applicable to the
corporation.
ARTICLE VII
INDEMNIFICATION
---------------
Section 1. Definitions. As used in this Article, the term
-----------
(a) "change of control", for purposes of this Article VII, means (1)
an acquisition by a person of beneficial ownership of 20% or more of the
combined voting power of the corporation's then outstanding voting
securities, provided that any such securities acquired directly from the
corporation shall be excluded from the determination of such person's
beneficial ownership (but shall be included in calculating total
outstanding securities); or (2) the individuals who are members of the
incumbent board (as defined below) cease for any reason to constitute two-
thirds of the Board of Directors; or (3) approval by the shareholders of
the corporation of (i) a merger or consolidation involving the corporation
if the shareholders of the corporation, immediately before such merger or
consolidation, do not own, immediately following such merger or
consolidation, more than 80% of the combined voting power of the
outstanding voting securities of the corporation in substantially the same
proportion as their ownership of voting securities immediately before such
merger or consolidation or (ii) a complete liquidation or dissolution of
the corporation or an agreement for the sale or other disposition of all or
substantially all of the assets of the corporation.
Notwithstanding the foregoing, a change of control shall not be deemed
to occur solely because twenty percent (20%) or more of the then
outstanding voting securities is acquired by (i) a trustee or other
fiduciary holding securities under one or more employee benefit plans
maintained by the corporation or any of its subsidiaries or (ii) any
corporation which, immediately prior to such acquisition, is owned directly
or indirectly by the shareholders of this corporation in the same
proportion as their ownership of shares in this corporation immediately
prior to such acquisition.
Moreover, notwithstanding the foregoing, a change of control shall not
be deemed to occur solely because any person (the "Subject Person")
acquired beneficial ownership of more than the permitted amount of the
outstanding voting securities as a result of the acquisition of voting
securities by the corporation which, by reducing the number of voting
securities outstanding increases the proportional number of shares
beneficially owned by the Subject Person, provided, that if a change of
--------
control would occur (but for the operation of this sentence) as a result of
the acquisition of voting securities by the corporation, and after such
share acquisition by the corporation, the Subject Person
13
<PAGE>
becomes the beneficial owner of any additional voting securities which
increases the percentage of the then outstanding voting securities
beneficially owned by the Subject Person, then a change of control shall
occur.
(b) "corporation" includes any domestic or foreign predecessor entity
of the corporation or a corporation in a merger or other transaction in
which the predecessor's existence ceased upon consummation of the
transaction.
(c) "director" means an individual who is or was a director of the
corporation or an individual who, while a director of the corporation, is
or was serving at the corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or
other enterprise. A director is considered to be serving an employee
benefit plan at the corporation's request if his duties to the corporation
also impose duties on, or otherwise involve services by, him to the plan or
to participants in or beneficiaries of the plan. Director includes, unless
the context requires otherwise, the estate or personal representative of a
director.
(d) "expenses" include attorneys' fees.
(e) "incumbent board" includes the individuals who as of May 11, 1994
are members of the Board of Directors and any individual becoming a
director subsequent to May 11, 1994 whose election, or nomination for
election by the corporation's shareholders was approved by a vote of at
least two-thirds of the directors then comprising the Incumbent Board;
provided, however, that any individual who is not a member of the incumbent
-------- -------
board at the time he or she becomes a member of the Board of Directors
shall become a member of the incumbent board upon the completion of two
full years as a member of the Board of Directors; provided further,
-------- -------
however, that notwithstanding the foregoing, no individual shall be
-------
considered a member of the incumbent board if such individual initially
assumed office (1) as a result of either an actual threatened "election
contest" (within the meaning of Rule 14a-11 promulgated under the 1934 Act)
or other actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board of Directors (a "Proxy Contest") or
(2) with the approval of the other members of the Board of Directors, but
by reason of any agreement intended to avoid or settle a Proxy Contest.
(f) "liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a
proceeding.
(g) "party" includes an individual who was, is, or is threatened to
be made a named defendant or respondent in a proceeding.
14
<PAGE>
(h) "proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
Section 2. Indemnification of Directors, Officers and Employees -
------------------------------------------------------
General.
- -------
(a) Subject to the terms and conditions of this Article VII, the
corporation shall indemnify an individual made a party to a proceeding
because he is or was a director or officer of the corporation against
liability incurred in connection with a proceeding to the fullest extent
permitted by the Georgia Business Corporation Code (the "GBCC"), as the
same now exists or may hereafter be amended (but only to the extent any
such amendment permits the corporation to provide broader indemnification
rights than the GBCC permitted the corporation to provide prior to such
amendment).
(b) The termination of a proceeding by judgment, order, settlement,
or conviction, or upon a plea of nolo contendere or its equivalent is not,
of itself, determinative that the director or officer did not meet the
standard of conduct set forth in the GBCC.
(c) To the extent that a director or officer has been successful, on
the merits or otherwise, in the defense of any proceeding to which he was a
party, or in defense of any claim, issue, or matter therein, because he is
or was a director or officer of the corporation, the corporation shall
indemnify the director or officer against reasonable expenses incurred by
him in connection therewith regardless of whether the director or officer
has met the standards set forth in the GBCC and without any action or
determination under Section 4 of this Article VII.
(d) Subject to the approval of the chief executive officer and the
general counsel for the corporation, the officers of the corporation may
indemnify an individual who is an employee of the corporation and who is
made a party to a proceeding because he is or was an employee of the
corporation against liability incurred in connection with a preceding to
the fullest extent permitted under the GBCC, as the same now exists or may
hereafter be amended (but only to the extent any such amendment permits the
corporation to provide broader indemnification rights than the GBCC
permitted the corporation to provide prior to such amendment).
Section 3. Advance for Expenses.
--------------------
(a) The corporation shall pay for or reimburse the reasonable
expenses incurred by a director or officer who is a party to a proceeding
in advance of final disposition of the proceeding if:
(1) The director or officer furnishes the corporation a written
affirmation of his good faith belief that he has met the standard of
conduct set forth in the GBCC; and
15
<PAGE>
(2) The director or officer furnishes the corporation a written
undertaking, executed personally or on his behalf, to repay any
advances if it is ultimately determined that he is not entitled to
indemnification under this Article
(b) The undertaking required by paragraph (2) of subsection (a) of
this Section 3 must be an unlimited general obligation of the director or
officer but need not be secured and may be accepted without reference to
financial ability to make repayment.
Section 4. Limitations on Indemnification.
------------------------------
(a) The corporation shall not indemnify a director under Section 2 of
this Article VII unless a determination has been made in the specific case
that indemnification of the director is permissible in the circumstances
because he has met the standard of conduct set forth in the GBCC.
(b) The corporation shall indemnify an officer under Section 2 of
this Article VII unless a determination has been made in the specific case
that indemnification of the officer is precluded in the circumstances
because he has failed to meet the standard of conduct set forth in the
GBCC.
(c) In either paragraph (a) or (b) above, such determination shall be
made within 60 days of the request for indemnification:
(I) By the Board of Directors by majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
(ii) If a quorum cannot be obtained under paragraph (i) of this
subsection, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the
time parties to the proceeding;
(iii) By special legal counsel:
(A) Selected by the Board of Directors or its committee in
the manner prescribed in paragraph (i) or (ii) of this
subsection; or
(B) If a quorum of the Board of Directors cannot be
obtained under paragraph (i) of this subsection and a committee
cannot be designated under paragraph (ii) of this subsection,
selected by majority vote of the full Board of Directors (in
which selection directors who are parties may participate); or
(iv) By the shareholders, but the shares owned by or voted under
the control of the officers and directors who are at the time parties
to the proceeding may not be voted on the determination;
16
<PAGE>
provided, however, that following a change of control of the corporation,
with respect to all matters thereafter arising out of acts, omissions or
events prior to the change of control of the corporation concerning the
rights of any person seeking indemnification under this Article VII, such
determination shall be made by special legal counsel selected by such
person and approved by the Board of Directors or its committee in the
manner described in Section 4(c)(iii) above (which approval shall not be
unreasonably withheld), which counsel has not otherwise performed services
(other than in connection with similar matters) within the five years
preceding its engagement to render such opinion for such person or for the
corporation or any affiliates (as such term is defined in Rule 405 under
the Securities Act of 1933, as amended) of the corporation (whether or not
they were affiliates when services were so performed) ("Independent
Counsel"). Unless such person has theretofore selected Independent Counsel
pursuant to this Section 4 and such Independent Counsel has been approved
by the corporation, legal counsel approved by a resolution or resolutions
of the Board of Directors of the corporation prior to a change of control
of the corporation shall be deemed to have been approved by the corporation
as required. Such Independent Counsel shall determine as promptly as
practicable whether and to what extent such person would be permitted to be
indemnified under applicable law and shall render its written opinion to
the corporation and such person to such effect. In making a determination
under this Section 4, the special legal counsel and Independent Counsel
referred to above shall determine that indemnification is permissible
unless clearly precluded by this Article VII or the applicable provisions
of the GBCC. The corporation agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such
Independent Counsel against any and all expenses, claims, liabilities and
damages arising out of or relating to this Article or its engagement
pursuant hereto.
(d) Authorization of indemnification or an obligation to indemnify
and evaluation as to reasonableness of expenses shall be made as set forth
in paragraph (c) above.
(e) Indemnification under this Article VII in connection with a
proceeding by or in the right of the corporation shall be limited to
reasonable expenses incurred in connection with the proceeding.
Section 5. Enforceability. The provisions of this Article shall be
--------------
applicable to all proceedings commenced after its adoption, whether such arise
out of events, acts, omissions or circumstances which occurred or existed prior
or subsequent to such adoption, and shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such person. This Article shall be deemed to
grant each person who is entitled to indemnification hereunder rights against
the corporation to enforce the provisions of this Article, and any repeal or
other modification of this Article or any repeal or modification of the GBCC or
any other applicable law shall not limit any rights of
17
<PAGE>
indemnification then existing or arising out of events, acts, omissions,
circumstances occurring or existing prior to such repeal or modification,
including, without limitation, the right to indemnification for proceedings
commenced after such repeal or modification to enforce this Article with regard
to acts, omissions, events or circumstances occurring or existing prior to such
repeal or modification.
Section 6. Severability. If this Article or any portion hereof shall be
------------
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director or officer of the
corporation as to liabilities incurred in connection with any proceeding,
including an action by or in the right of the corporation, to the full extent
permitted by any applicable portion of this Article that shall not have been
invalidated and to the full extent permitted by applicable law.
Section 7. Statements to Shareholders. If the corporation indemnifies or
--------------------------
advances expenses to an officer or director under this Article VII in connection
with a proceeding by or in the right of the corporation, the corporation shall
report the indemnification or advance in writing to the shareholders with or
before the notice of the next shareholders' meeting.
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<DESCRIPTION>STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
<TEXT>
<PAGE>
EXHIBIT 10.1
SCIENTIFIC-ATLANTA, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
As Amended, Effective November 12, 1997
1. PURPOSES
The purposes of this Plan are to aid the Company in attracting and retaining
highly qualified Non-employee Directors, to provide additional compensation as
an incentive for Non-employee Directors to contribute their best efforts to the
Company's success, and to emphasize and enhance the Company's policy of seeking
to have Non-employee Directors maintain a significant investment in the stock of
the Company and thus a strong commonality of interests with the shareholders.
2. DEFINITIONS
As used in this Plan:
(a) The term "Annual Meeting" means the annual meeting of shareholders
of the Company.
(b) The term "Award" means an Elective Grant, a Stock Award, a
Retirement Award, or a Lump Sum Distribution awarded under this Plan.
(c) The term "Board" means the Board of Directors of the Company.
(d) The term "Board Approval" means approval by a majority of the
directors present at a Board meeting at which a quorum is present.
(e) The term "Company" means Scientific-Atlanta, Inc., a Georgia
corporation.
(f) The term "Committee" shall mean the Governance and Nominations
Committee of the Board or any another committee comprised of directors of the
Board which is vested by the Board with responsibility to administer this Plan.
(g) The term "Elective Grant" shall mean the election by a Non-Employee
Director pursuant to Section 3(a) hereof to receive a portion of his or her
Quarterly Compensation in the form of Shares.
(h) For the purposes of a Stock Award, the term "Eligible Directors"
shall mean those Non-employee Directors who served on the Board for the six
months immediately preceding the Annual Meeting at which a Stock Award is
granted. For the purposes of an Elective Grant, the term "Eligible Directors"
shall mean all Non-employee Directors of the Board. For the purposes
<PAGE>
of a Retirement Award and for purposes of the Lump Sum Distribution, the term
"Eligible Directors" shall mean all Non-employee Directors who were not members
of the Board prior to January 1, 1997, and all Non-employee Directors who were
members of the Board and Participants in the Retirement Plan for Non-employee
Directors prior to January 1, 1997, and who elected on or before September 21,
1997, pursuant to the terms of paragraph 3 of the Retirement Plan for Non-
employee Directors, as amended on June 17, 1997, to receive a Lump Sum
Distribution.
(i) The term "Fair Market Value Per Share" means the closing sale price
of a Share on the New York Stock Exchange on the date such value is determined
or, if there is no trade on such Exchange on that date, then the closing sale
price on the next preceding date on which there is trade of the Company's Common
Stock on such Exchange. In the event that the Company's Common Stock is not
listed on the New York Stock Exchange on the determination date, the Fair Market
Value shall be determined as stated above but with reference to trades on the
largest stock exchange or other public market on which the Company's Common
Stock is then traded.
(j) The term "Lump Sum Distribution" means an award to an Eligible
Director consisting of a number of Shares having an aggregate fair market
value, as of January 1, 1997, determined as provided in Section 2(i) above,
equal to the greater of either (i) the present value, actuarially determined, as
------
of January 1, 1997, of the retirement benefits of such Eligible Director under
the Retirement Plan for Non-employee Directors, as amended on June 17, 1997 (the
"Retirement Plan"), reduced by the present value, actuarially determined by the
----------
Company, as of January 1, 1997, of the stream of annual Retirement Awards
(granted under Section 5(a) hereof) through the electing participant's sixty-
fifth birthday, or (ii) an amount equal to the value of 750 shares of the
--
Company's Common Stock (at the closing price on January 1, 1997) multiplied by
-------------
the Eligible Director's total years of service as a director, as of January 1,
1997, all as determined in accordance with paragraph 3 of the Retirement Plan.
(k) The term "Non-employee Director" means any person who is elected to
the Board and who has not been an employee of the Company or any of its
subsidiaries at any time during the twelve (12) months preceding (i) any
election by such person under Section 3 hereof, (ii) the receipt of a Stock
Award by such person under Section 4 hereof, or (iii) the receipt of a
Retirement Award by such person under Section 5 hereof.
(l) The term "Plan" means this Scientific-Atlanta, Inc. Stock Plan for
Non-employee Directors, as amended from time to time.
(m) The term "Quarterly Compensation" means the sum of all meeting fees,
annual retainer fees, and Committee and Board Chairmanship fees for service as a
director earned by a Non-employee Director during a fiscal quarter. Compensation
paid to Non-employee Directors for their service to the Company in any other
capacity, shall be excluded from the calculation of Quarterly Compensation.
2
<PAGE>
(n) The term "Retirement Award" means an award consisting of 1,500
Shares (subject to adjustment as herein provided) granted to an Eligible
Director pursuant to Section 5 hereof, which Shares shall be either deferred or
restricted for a period of at least two (2) years from the date of the grant, in
accordance with the terms of Section 5 hereof. Depending on the election made by
each Eligible Director under Section 5(a) hereof, each Retirement Award will be
either a Deferred Retirement Award or a Restricted Retirement Award (as such
terms are defined in Section 5(a) hereof).
(o) The term "Share" means a share of the Company's Common Stock, $.50
par value. Shares delivered to the Eligible Directors under this Plan may be
either authorized but previously unissued shares or previously issued shares
reacquired by the Company.
(p) The term "Shareholder Approval" means the affirmative vote of a
majority of the shares of Common Stock present or represented and entitled to
vote at a meeting of the shareholders of the Company at which a quorum is
present.
(q) The term "Stock Award" means an award consisting of 500 Shares
(subject to adjustment as herein provided) granted to an Eligible Director
pursuant to Section 4(a) hereof.
3. ELECTIVE GRANTS
(a) Each Non-employee Director may make an election to receive up to 100
percent (100%) of his or her Quarterly Compensation (in increments of 5%) in the
form of Shares pursuant to an Elective Grant made in accordance with this
Section 3(a). The election by the Non-employee Director to receive an Elective
Grant of Shares must be in writing and must be delivered to the Secretary of the
Company before the start of the fiscal quarter during which services are to be
rendered by the Non-employee Director giving rise to the Quarterly Compensation.
The election made by a Non-employee Director pursuant to this Section 3(a) shall
be in effect as to Quarterly Compensation payable for services rendered during
the fiscal quarter of the Company covered by the election. The Committee shall,
prior to the receipt by a Non-employee Director of shares under an Elective
Grant, approve the issuance of such shares by resolution; however, if the
Committee fails to adopt such an approving resolution, such shares may be issued
to the electing Non-employee Director, but such shares cannot be sold or
otherwise transferred by such Non-employee Director prior to the date which is
six (6) months after the date of such issuance of shares.
(b) The number of Shares to be granted to a Non-employee Director who
makes an Elective Grant shall equal (i) the amount of the Quarterly Compensation
earned during the Company's fiscal quarter subject to the Elective Grant,
divided by (ii) the Fair Market Value Per Share on the last day of such fiscal
quarter. In no event shall the Company be required to issue fractional Shares.
Any fractional Share will be rounded to the nearest whole Share.
3
<PAGE>
(c) As soon as practicable after each Non-employee Director's Elective
Grant of Shares is determined, the Company shall cause to be issued and
delivered to such Non-employee Director a stock certificate registered in the
name of the Non-employee Director evidencing his or her Elective Grant, less any
Shares withheld by the Company pursuant to Section 8 below.
(d) No right to an Elective Grant and no interest therein may be
assigned, pledged, hypothecated, or otherwise transferred by a Non-employee
Director except that, in the event of the death of a Non-employee Director prior
to the issuance of a stock certificate evidencing an Elective Grant, such right
to such Elective Grant may be transferred to the Non-employee Director's
designated beneficiary or, in the absence of such designation, by will or the
laws of descent and distribution.
4. STOCK AWARDS
(a) Beginning with the 1995 Annual Meeting and at the Annual Meeting
every year thereafter through and including the Annual Meeting held in 2009,
every Eligible Director shall be granted a Stock Award.
(b) Subject to the provisions of Section 8 hereof, as soon as
practicable after the applicable Annual Meeting, the Company shall cause to be
issued and delivered to each Eligible Director receiving a Stock Award a stock
certificate registered in the name of such Eligible Director evidencing the
Stock Award, less any Shares withheld by the Company pursuant to Section 8
below.
(c) Eligible Directors shall not be deemed for any purpose to be, or
have any rights as, shareholders of the Company with respect to any Stock Award
until the stock certificates are issued and then only from the date of the
issuance of such stock certificates. Appropriate adjustments shall be made for
dividends or distributions or other rights for which the record date is after an
Annual Meeting and prior to the issuance of such stock certificates.
(d) No right to a Stock Award and no interests therein may be assigned,
pledged, hypothecated, or otherwise transferred by an Eligible Director except
that, in the event of the death of a Non-employee Director prior to the issuance
of a stock certificate evidencing a Stock Award, such right to such Stock Award
may be transferred to the Non-employee Director's designated beneficiary or, in
the absence of such designation, by will or the laws of descent and
distribution.
5. RETIREMENT AWARDS
(a) Beginning with the 1997 Annual Meeting and at the Annual Meeting
every year thereafter through and including the Annual Meeting held 2009, every
Eligible Director shall be granted a Retirement Award. Each Eligible Director
shall elect annually either (i) to defer his or her right to receive such
Retirement Award, under the Deferred Compensation Plan for Non-employee
Directors, for a minimum period of two (2) years after the date of the grant
thereof (a "Deferred Retirement Award"), or (ii) to receive such Retirement
Award as restricted stock that
4
<PAGE>
cannot be sold, assigned or otherwise disposed of by the Eligible Director for a
period of two (2) years after the date of the grant thereof (a "Restricted
Retirement Award").
(b) Subject to the provisions of Section 8, as soon as practicable after
the expiration of (i) the deferral period under the Deferred Compensation Plan
for Non-employee Directors applicable to a Deferred Retirement Award, or (ii)
the restriction period under this Plan applicable to a Restricted Retirement
Award, as applicable, the Company shall cause to be issued to the pertinent
Eligible Director a stock certificate registered in the name of such Eligible
Director evidencing the Deferred Retirement Award or the Restricted Retirement
Award, as applicable.
(c) Eligible Directors shall not be deemed for any purpose to be, or
have any rights as, shareholders of the Company with respect to any Retirement
Award until the stock certificates are issued and then only from the date of the
issuance of such stock certificates. Appropriate adjustments shall be made for
dividends or distributions or other rights for which the record date is after an
Annual Meeting and prior to the issuance of such stock certificates.
(d) No right to a Retirement Award and no interests therein may be
assigned, pledged, hypothecated, or otherwise transferred by an Eligible
Director except that, in the event of the death of a Non-employee Director prior
to the issuance of a stock certificate evidencing a Retirement Award, such right
to such Retirement Award may be transferred to the Non-employee Director's
designated beneficiary or, in the absence of such designation, by will or the
laws of descent and distribution..
(e) During the two (2) year restriction period applicable to a Restricted
Retirement Award, Eligible Directors shall have all rights of a shareholder with
respect to the Shares granted under the Retirement Award, including the right to
vote such Shares and to receive dividends and other distributions paid with
respect to such Shares, but they shall not have the right to sell, exchange,
transfer, pledge, hypothecate or otherwise dispose of such Restricted Retirement
Award, except that such Shares may be transferred upon the death of the Eligible
Director to such of his legal representatives, heirs and legatees as may be
entitled thereto by will or the laws of intestacy.
6. LUMP SUM DISTRIBUTIONS
(a) As soon as practicable after the 1997 Annual Meeting, every Eligible
Director who has elected to receive a Lump Sum Distribution, in accordance with
paragraph 3 of the Retirement Plan for Non-employee Directors, shall be granted
a Lump Sum Distribution under this Plan. Each Eligible Director shall elect to
defer his or her right to receive such Lump Sum Distribution, under the Deferred
Compensation Plan for Non-employee Directors, until not earlier than such
Eligible Director's Retirement, Death or Total Disability (as such terms are
defined in that plan).
5
<PAGE>
(b) Subject to the provisions of Section 8, as soon as practicable after
the expiration of the deferral period under the Deferred Compensation Plan for
Non-employee Directors applicable to such Lump Sum Distribution for an Eligible
Director, the Company shall cause to be issued to such Eligible Director
receiving a Lump Sum Distribution a stock certificate registered in the name of
such Eligible Director evidencing the Lump Sum Distribution.
(c) Eligible Directors shall not be deemed for any purpose to be, or
have any rights as, shareholders of the Company with respect to any Lump Sum
Distribution until the stock certificates are issued and then only from the date
of the issuance of such stock certificates. Appropriate adjustments shall be
made for dividends or distributions or other rights for which the record date is
after an Annual Meeting and prior to the issuance of such stock certificates.
(d) No right to a Lump Sum Distribution and no interests therein may be
assigned, pledged, hypothecated, or otherwise transferred by an Eligible
Director except that, in the event of the death of a Non-employee Director prior
to the issuance of a stock certificate evidencing a Lump Sum Distribution, such
right to such Lump Sum Distribution may be transferred to the Non-employee
Director's designated beneficiary or, in the absence of such designation, by
will or the laws of descent and distribution..
7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
If a reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger, consolidation, rights offering, or any other change in the
corporate structure of the Company or the Shares occurs, then the number and/or
kind of shares to be awarded under the Plan shall be automatically adjusted as
required in order to prevent an unfavorable effect upon the value of the Awards
to be made under this Plan.
8. ELECTION FOR TAX PURPOSES/TAX WITHHOLDING/DEFERRAL
(a) All Awards made pursuant to this Plan shall be subject to the
withholding of state and federal income taxes, FICA tax or other taxes to the
extent required by applicable law. The Company shall, before delivery of a
stock certificate evidencing an Award, require the recipient to make
arrangements satisfactory to the Company to satisfy such withholding
requirement, if any. An Eligible Director receiving an Award may satisfy such
withholding requirement by having the Company withhold Shares otherwise issuable
to the Eligible Director if such Director makes a written election to do so,
which election must be delivered to the Secretary of the Company. Each Eligible
Director receiving a Restricted Retirement Award shall have the right to make an
election, under the terms of Section 83(b) of the U.S. tax code and related
regulations, whereby such Eligible Director would treat such Restricted
Retirement Award as creating income on the date of the grant thereof, rather
than on the date upon which the restriction period expires.
(b) The right to receive any Shares under this Plan, at the election of
the Non-employee Director receiving an Award (without need for Committee
approval), may be deferred under the provisions of the Company's Deferred
Compensation Plan for Non-employee
6
<PAGE>
Directors. In the event of such a deferral, the Eligible Director will not have
any rights of ownership, such as voting, selling or receipt of dividends, until
the deferral period for such Award expires.
9. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have full
authority, consistent with the Plan, to interpret the Plan and to promulgate
such rules and regulations with respect to the Plan as it deems desirable for
the administration of the Plan. The Committee shall have authority to determine
all matters relating to the administration and granting of Awards. All
decisions, determinations and interpretations of the Committee shall be binding
upon all persons.
10. COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS
The Plan, the Awards, and the obligation of the Company to deliver Shares under
the Plan shall be subject to all applicable laws, regulations, and the
requirements of the exchanges on which Shares may, at the time, be listed. In
the event that the Shares to be issued under this Plan are not registered under
the Securities Act of 1933 and/or any applicable state securities laws prior to
the delivery of such Shares, the Company may require, as a condition to the
issuance thereof, that each Eligible Director to whom such Shares are to be
issued represent and warrant in writing to the Company that the Shares are being
acquired by him or her for investment for his or her account and not for resale
or with any intent of participating directly or indirectly in any distribution
of such Shares and a legend to that effect may be placed on the stock
certificates representing such Shares.
11. AMENDMENTS
The Committee with Board Approval may amend this Plan or any provision thereof
from time to time for the purpose of satisfying the requirements of any changes
in applicable laws or regulations or for any other purpose which at the time may
be permitted by law, provided that no amendment, except with shareholder
Approval, shall: (i) change the calculation of the Awards so as to increase the
value of the award to the Non-employee Directors; (ii) increase the frequency of
the Awards, (iii) materially increase in any other way the benefits to the Non-
employee Directors, (iv) materially modify the definitions of Non-employee
Director or Eligible Directors as defined herein, or (v) disqualify a Non-
employee Director from being a "Non-Employee Director" administrator (within the
meaning of Rule 16b-3 or any successor rule of the Securities and Exchange
Commission) of any stock-based plan of the Company. Notwithstanding the
foregoing, in no case may the Plan provisions pertaining to the amount or
determination of a Stock Award, Elective Grant, Retirement Award, or the
determination of Eligible Directors be amended more than once every six months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
7
<PAGE>
12. DISCONTINUANCE
The Board may suspend or discontinue this Plan in whole or in part, but any such
suspension or discontinuance shall not affect Awards granted under this Plan
prior thereto.
13. Governing Law
This Plan is made in accordance with and shall be governed in all respects by
the laws of the State of Georgia.
14. EFFECTIVE DATE
This Plan was effective on August 24, 1995.
15. TERM
The term of this Plan shall be for the period commencing as of the date of Board
Approval and ending with the Annual Meeting held in 2009.
To record the adoption of the Plan by the Board on August 24, 1995, and by the
shareholders on November 8, 1995, and to record the amendment of the Plan by the
Board on November 13, 1996, and on June 17, 1997, with an effective date of
November 12, 1997, the date of Shareholder Approval thereof, the Company has
caused its authorized officers to execute this Plan and affix the corporate name
and seal hereto.
SCIENTIFIC-ATLANTA, INC.
By: /s/ Brian C. Koenig
-------------------------------------------
Name: Brian C. Koenig
Title: Senior Vice President - Human Resources
By: /s/ William E. Eason, Jr.
------------------------------------------
Name: William E. Eason, Jr.
Title: Corporate Secretary
[Corporate Seal]
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<DESCRIPTION>DEFERRED COMPENSATION PLAN FOR NON-EMPL.
<TEXT>
<PAGE>
EXHIBIT 10.2
[Logo of
Scientific
Atlanta DEFERRED COMPENSATION PLAN FOR
Appears NON-EMPLOYEE DIRECTORS OF SCIENTIFIC-ATLANTA, INC.
here] ---------------------------------------------------
As Amended, Effective November 12, 1997
ARTICLE I - INTRODUCTION
- ------------------------
1.1 Name of the Plan
-----------------
This Plan shall be known as the Deferred Compensation Plan for Non-Employee
Directors of Scientific-Atlanta, Inc.
1.2 Purpose of Plan
---------------
The purpose of the Plan is to provide non-employee directors of Scientific-
Atlanta, Inc. the opportunity to defer receipt of cash compensation and
compensation in the form of stock payable to them for services to Scientific-
Atlanta, Inc. as directors.
1.3 Restatement of Plan
-------------------
This document amends and restates the Plan effective as of November 12,
1997. All deferral elections made on or after November 12, 1997, shall be
governed by the terms of the Plan as amended and restated herein. In addition,
deferral elections made before November 12, 1997, by an individual who is a non-
employee member of the Board on November 12, 1997, shall be governed
prospectively by the terms of the Plan as amended and restated herein.
ARTICLE II - DEFINITIONS
- ------------------------
For purposes of this Plan the following words and phrases shall have the
meanings and applications set forth below:
2.1 Plan
----
This Deferred Compensation Plan for Non-Employee Directors of Scientific-
Atlanta, Inc., as amended from time to time.
2.2 Participant
-----------
A non-employee member of the Board of Directors of Scientific-Atlanta, Inc.
who elects to participate in this Plan.
1
<PAGE>
2.3 Plan Year
---------
The period beginning on the first day of July of each calendar year and
ending on and including the last day of June of the next calendar year. The
first Plan Year began on July 1, 1993, and ended on June 30, 1994.
2.4 Compensation
------------
The total of a Participant's Annual Retainer, Meeting Fees, and Committee
Chair Retainer payments paid to the Participant, by Scientific-Atlanta, Inc.
during a Plan Year.
2.5 Annual Retainer
---------------
The amount paid each year, in quarterly payments, to non-employee members
of the Board of Directors of Scientific-Atlanta, Inc.
2.6 Meeting Fees
------------
The amounts paid to a non-employee member of the Board of Directors of
Scientific-Atlanta, Inc. for each meeting of the Board and each meeting of a
standing or special committee he or she attends.
2.7 Committee Chair Retainer
------------------------
The amount paid each year, in quarterly payments to a non-employee director
who chairs a standing or special committee of the Board of Directors.
2.8 Awards
------
The right to receive shares of Scientific-Atlanta Common Stock, granted
under a Stock Award, an Elective Grant, a Retirement Award, or a Lump Sum
Distribution made pursuant to the Stock Plan for Non-Employee Directors, as such
terms are defined in that plan.
2.9 Election Form
-------------
The form completed by a Participant in order to make one or more
Compensation Deferral Elections for the next Plan Year.
2.10 Compensation Deferral Election
------------------------------
Each election made by a Participant to defer a portion of his or her
Compensation and/or Awards by executing and submitting an Election Form.
2
<PAGE>
2.11 Deferred Benefit Account
------------------------
An account maintained pursuant to and in accordance with the terms and
conditions set forth in Article V hereof by or on behalf of Scientific-Atlanta,
Inc. for each Compensation Deferral Election made by a Participant under this
Plan.
2.12 Deferred Benefit Commencement Date
----------------------------------
The date designated by a Participant with respect to each Compensation
Deferral Election entered on an Election Form as the date on which the payment
of the Deferred Benefits that accumulate as a result of each respective election
is to begin. A Participant may change the date designated for a Compensation
Deferral Election by sending a request to the Plan Committee for such changed
date and obtaining the Plan Committee's approval of such change prior to the
effective date of such change.
2.13 Beneficiary
-----------
A person or entity designated in accordance with the terms and conditions
of this Plan to receive benefits upon the death of a Participant.
2.14 Election Amount
---------------
The amount of Compensation (and right to a certain number of shares of
Scientific-Atlanta Common Stock under an Award, if applicable) to be deferred
pursuant to a single Compensation Deferral Election.
2.15 Service Termination Date
------------------------
The last day of the month immediately preceding the date of a Participant's
Retirement, termination of service, determination of Total Disability, or death,
whichever is applicable.
2.16 Retirement
----------
The discontinuation of service on the Board of Directors by a Participant
who is fifty-five years of age or older with at least three years of Board
service.
2.17 Total Disability
----------------
A physical or mental condition which is expected to be totally and
permanently disabling as determined in accordance with the terms and conditions
of the long-term disability insurance plan currently or most recently maintained
by Scientific-Atlanta, Inc. for the benefit of its employees claiming to be
totally disabled.
3
<PAGE>
2.18 Plan Committee
--------------
The Human Resources and Compensation Committee of the Board of Directors of
Scientific-Atlanta, Inc.
2.19 Determination Date
------------------
The last day of each Plan Year.
2.20 Plan Interest Rate
------------------
An annual rate of interest that shall be determined by the Plan Committee
prior to the start of each Plan Year and credited to a Participant's Deferred
Benefit Account during the Plan Year.
2.21 Deferred Benefits
-----------------
The amounts (and right to a certain number of shares of Scientific-Atlanta
Common Stock, if applicable) payable to a Participant or to his or her
Beneficiary or estate following the Participant's Retirement, termination of
service as a non-employee member of the Board, determination of Total
Disability, or death.
2.22 Scientific-Atlanta Common Stock
-------------------------------
The $.50 par value common stock of Scientific-Atlanta, Inc.
2.23 Deferral Period
---------------
The period commencing on the date that an Election Form becomes effective
for a Compensation Deferral Election and continuing until the Deferred Benefit
Commencement Date.
ARTICLE III - ELIGIBILITY AND PARTICIPATION
- -------------------------------------------
3.1 Eligibility
-----------
Directors who are not employees of Scientific-Atlanta, Inc. and who are
actively serving on the Board of Directors of Scientific-Atlanta, Inc. shall be
eligible to participate in this Plan.
3.2 Participation
-------------
The Plan Committee shall notify in writing each director who becomes
eligible to participate in this Plan of his or her eligibility. Eligible
directors may participate in this Plan by completing an Election Form on or
before the end of the quarter immediately preceding the
4
<PAGE>
quarter in which he or she wants to begin deferring Compensation. If timely
received, such election to participate shall be effective on the first day of
the succeeding quarter.
ARTICLE IV - COMPENSATION DEFERRAL
- ----------------------------------
4.1 Compensation Deferral Election
------------------------------
A Participant shall effect a Compensation Deferral Election by executing
and submitting to the Plan Committee an Election Form. Subsequently,
Scientific-Atlanta, Inc. shall defer Election Amounts deferred from the
Participant's Awards and Compensation at the time Compensation would have been
paid (or at the time the right to receive shares of Scientific-Atlanta Common
Stock was granted, as applicable). Awards may only be deferred into an Award
Sub-Account and Compensation may not be deferred into an Award Sub-Account.
Each Election Amount shall be deferred for the Deferral Period specified with
respect to the particular Compensation Deferral Election in the Election Form,
provided, however, that the Participants shall not be entitled to defer
Retirement Awards or Lump Sum Distributions (as such terms are defined in the
Stock Plan for Non-Employee Directors) for Deferral Periods that are shorter
than the minimum Deferral Periods for such Awards that are set forth in the
Stock Plan for Non-Employee Directors. All Compensation Deferral Elections
shall apply solely to Compensation and/or Awards which will be paid (or granted)
to a Participant beginning with the first day of the calendar quarter commencing
subsequent to the calendar quarter in which the Compensation Deferral Election
is received. Any Compensation Deferral Election will apply only to Compensation
and/or Awards paid (or granted) during the Plan Year in which the election
becomes effective.
4.2 Election Amounts
----------------
Each Election Amount specified by a Participant on an Election Form with
respect to any Plan Year shall state in percentages the amount (and, to the
extent applicable, the right to receive a specific number of shares of
Scientific-Atlanta Common Stock), if any, which the Participant wishes to defer.
An election to defer Compensation must equal a minimum of five percent up to a
maximum of one hundred percent, in increments of five percentage points, of the
Compensation which the Participant may be paid during the Plan Year. As to
Awards, the election must be in whole shares, with no right to receive
fractional shares being deferred.
4.3 Investment Election
-------------------
A Participant shall specify in his or her Compensation Deferral Election
the percentage of the Election Amount to be credited to an Interest Sub-Account,
a Phantom Stock Sub-Account or a Split-Dollar Insurance Sub-Account, and the
number of shares to be credited to an Award Sub-Account. Awards may only be
credited into an Award Sub-Account, and Compensation may not be credited into an
Award Sub-Account.
5
<PAGE>
4.4 Deferral Period
---------------
With the exception of any amounts deposited into a Split-Dollar Insurance
Sub-Account, a Participant shall irrevocably specify in his or her Compensation
Deferral Election a Deferred Benefit Commencement Date for all of the Election
Amount to be deferred pursuant to such Compensation Deferral Election, which
date shall be (i) a set date which is no earlier than July 1 of the calendar
year following the end of the Plan Year in which the Election Amount is
deferred; (ii) the Participant's Retirement; or (iii) a date which is either the
fifth or the tenth anniversary following the date of the Participant's
Retirement. In the case of Awards which have minimum Deferral Periods that are
required under the terms of the Stock Plan for Non-Employee Directors, the above
limitations shall apply, and the Participant shall also be required to elect a
Deferral Period that complies with the minimum Deferral Periods required under
the Stock Plan for Non-Employee Directors.
4.5 Deferred Benefit Commencement Date; Method of Payment and Issuance
------------------------------------------------------------------
Except as otherwise provided in Article VI hereof, the Election Amounts
that accumulate in a Deferred Benefit Account as a result of a Participant's
making a Compensation Deferral Election will be paid (or issued, in the case of
deferred Awards) by Scientific-Atlanta, Inc. to the Participant in the manner
and commencing on the Deferred Benefit Commencement Date designated with respect
to the Compensation Deferral Election in an Election Form.
(a) Method of Cash Payments: Except as otherwise provided in Article VI
-----------------------
hereof, the Participant may elect to receive payment of the Deferred
Benefits held in the form of cash, which Deferred Benefits are attributable
to a Compensation Deferral Election and which are held in an Interest Sub-
Account or a Phantom Stock Sub-Account, pursuant to one of the following
methods:
(1) Annual, semi-annual or quarterly installments payable over a
five, ten or fifteen year period, and commencing on the respective
Deferred Benefit Commencement Date; or
(2) A single lump sum payment of the entire balance of the respective
Deferred Benefit Account, determined as of and payable on the Deferred
Benefit Commencement Date.
(b) Method of Issuance of Shares: Except as otherwise provided in Article
----------------------------
VI hereof, the Participant may elect to receive issuance of the Deferred
Benefits held in the form of shares of Scientific-Atlanta Common Stock,
which Deferred Benefits are attributable to a Compensation Deferral
Election and which are held in an Award Sub-Account, pursuant to one of the
following methods:
(1) Annual, semi-annual or quarterly issuance of shares of Scientific-
Atlanta Common Stock from an Award Sub-Account over a five, ten or
fifteen year
6
<PAGE>
period, and commencing on the respective Deferred Benefit Commencement
Date; provided, however, that no fractional shares of Scientific-
-------- -------
Atlanta Common Stock will be issued; or
(2) A single issuance of all shares subject to the specific Award Sub-
Account, determined as of and payable on the Deferred Benefit
Commencement Date.
(c) Change in Payment or Issuance Method. A Participant may change the
------------------------------------
method of payment (or method of issuance of shares) selected, which method
was selected pursuant to the terms of subsection (a) or subsection (b)
above, as applicable, with respect to a Compensation Deferral Election by
submitting a request in writing to the Plan Committee. Prior to a change
in the method of payment or a change in the method of issuance of shares
becoming effective, the Plan Committee must approve such change.
Participants may not move Deferred Benefits from one Sub-Account to another
Sub-Account, except that Participants may move Deferred Benefits from an
Interest Sub-Account to a Split-Dollar Insurance Sub-Account by notifying
the Plan Committee in writing and designating in such notification the date
upon which such Deferred Benefits are to be moved.
4.6 Designation of Beneficiaries
----------------------------
A Participant shall designate a Beneficiary with respect to each
Compensation Deferral Election and may change the Beneficiary designation with
respect to any Compensation Deferral Election at any time by submitting to the
Plan Committee a revised Beneficiary designation in writing reflecting the
change.
ARTICLE V - DEFERRED BENEFIT ACCOUNTS
- -------------------------------------
5.1 Deferred Benefit Accounts
-------------------------
Scientific-Atlanta, Inc. shall cause to be established and maintained a
separate Deferred Benefit Account, and within each such Deferred Benefit Account
an Interest Sub-Account, a Phantom Stock Sub-Account, a Split-Dollar Insurance
Sub-Account and an Award Sub-Account with respect to each Compensation Deferral
Election. Scientific-Atlanta, Inc. shall credit the Election Amount deferred
pursuant to each such election to the Participant's appropriate Deferred Benefit
Account, and to the Interest Sub-Account, Phantom Stock Sub-Account, a Split-
Dollar Insurance Sub-Account and Award Sub-Account as specified in the
Election, as of the date deferred from Participant's Compensation as provided in
Section 4.1 hereof.
5.2 Interest Sub-Account
--------------------
Except as otherwise provided by Section 6.2(a) hereof, interest shall
accrue at the Plan Interest Rate on any amounts credited to an Interest Sub-
Account from the date on which the amount is credited.
7
<PAGE>
5.3 Phantom Stock Sub-Account
-------------------------
If a Participant elects all or a portion of the Election Amount to be
credited to the Phantom Stock Sub-Account, the amount so credited shall, solely
for purposes of determining the value of the Phantom Stock Sub-Account, be
deemed to be a number of shares of Scientific-Atlanta Common Stock determined as
follows:
(a) Conversion into Scientific-Atlanta Common Stock: The amount credited
-----------------------------------------------
to the Phantom Stock Sub-Account shall be converted on the date of such
credit into an equivalent number of hypothetical shares of Scientific-
Atlanta Common Stock (including hypothetical fractional shares) by dividing
the amount credited by the average closing price of Scientific-Atlanta
Common Stock, as reported on the composite tape of New York Stock Exchange
issues, for the 20 business days immediately preceding the last day of the
month in which such amount is credited.
(b) Deemed Reinvestment of Dividends: The number of hypothetical shares
--------------------------------
of Scientific-Atlanta Common Stock credited to a Participant's Phantom
Stock Sub-Account shall be increased on each date that a dividend is paid
on Scientific-Atlanta Common Stock. The number of additional hypothetical
shares of Scientific-Atlanta Common Stock credited to a Participant's
Phantom Stock Sub-Account as a result of such increase shall be determined,
first, by multiplying the total number of hypothetical shares of
Scientific-Atlanta Common Stock credited to such Sub-Account immediately
before such increase by the amount of the dividend paid per share of
Scientific-Atlanta Common Stock on the dividend payment date, and, then, by
dividing the product so determined by the closing sale price of Scientific-
Atlanta Common Stock on the composite tape of New York Stock Exchange
issues on the dividend payment date (or if there was no reported sale of
Scientific-Atlanta Common Stock on such date, on the next preceding day on
which there was such a reported sale).
(c) No Rights as Shareholder: At no time shall the hypothetical shares
------------------------
credited to a Phantom Stock Sub-Account be considered as actual shares of
Scientific-Atlanta Common Stock, and a Participant shall have no rights as
a shareholder of Scientific-Atlanta, Inc. by virtue of such hypothetical
shares.
5.4 Award Sub-Account
-----------------
If a Participant elects that an Award be deferred and credited to an Award
Sub-Account, such Award will remain in such Award Sub-Account until the Deferred
Benefit Commencement Date related to such Award Sub-Account occurs. No interest
will accrue on the Award in such Award Sub-Account, but amounts equivalent to
the dividends that would have been paid if the shares had been issued will
accrue on such Awards ("Accrued Dividends"). Upon accrual, such Accrued
Dividends will be placed in an Interest Sub-Account. A Participant shall not
have any
8
<PAGE>
rights as a shareholder of Scientific-Atlanta, Inc. while an Award is held in an
Award Sub-Account.
5.5 Split-Dollar Insurance Sub-Account
----------------------------------
Amounts credited to a Split-Dollar Insurance Sub-Account shall be used to
pay premiums on life insurance insuring the life of the Participant, or, at the
Participant's election, the lives of the Participant and his or her spouse on a
joint and survivor basis, pursuant to such policies of insurance, and with such
insurers, as the Plan Committee may determine from time to time. Scientific-
Atlanta, Inc. shall be the owner of such insurance policy or policies, and the
proceeds thereof shall be payable as provided in an Endorsement Split-Dollar
Agreement to be entered into between the Participant and Scientific-Atlanta,
Inc.
5.6 Determination of Account Balance
--------------------------------
(a) As of each Determination Date, the current balance of a Participant's
Deferred Benefit Account shall be the sum of (i) the balance credited to
the Interest Sub-Account as of the immediately preceding Determination
Date, plus any Compensation deferred by such Participant and credited to
such Interest Sub-Account since the previous Determination Date, plus the
amount of interest credited to such Interest Sub-Account since the
preceding Determination Date, plus (ii) the value of the hypothetical
----
shares of Scientific-Atlanta Common Stock, determined as set forth in
Section 5.5(a) above, in the Phantom Stock Sub-Account at that time,
including deferred amounts credited to that Sub-Account since the last
Determination Date and deemed reinvestment, if any, of dividends since the
last Determination Date, plus (iii) the number of shares the Participant
----
has the right to receive under Awards credited to the Award Sub-Account and
the total Accrued Dividends credited to the Award Sub-Account, as of the
immediately preceding Determination Date, plus the number of shares the
Participant has the right to receive under additional Awards and additional
Accrued Dividends credited to such Award Sub-Account since the previous
Determination Date, minus any payments to or withdrawals by the Participant
-----
from the Deferred Benefit Account since the previous Determination Date.
(b) The dollar value of the hypothetical shares of Scientific-Atlanta
Common Stock credited to a Participant's Phantom Stock Sub-Account on any
date shall be determined by multiplying the number of hypothetical shares
of Scientific-Atlanta Common Stock credited to such Sub-Account on that
date by the average closing price of Scientific-Atlanta Common Stock, as
reported on the composite tape of New York Stock Exchange issues for the 12
months immediately preceding that date, or for that number of whole months
for which the hypothetical shares have been credited to such sub-account,
if less than 12 months.
(c) Effect of Recapitalization: In the event of a transaction or event
--------------------------
described in this paragraph (c), the number of hypothetical shares of
Scientific-Atlanta Common Stock
9
<PAGE>
credited to a Participant's Phantom Stock Sub-Account and the number of
shares of Scientific-Atlanta Common Stock subject to Awards credited to a
Participant's Award Sub-Account shall be adjusted in such a manner as the
Plan Committee deems equitable. A transaction or event is described in this
paragraph (c) if and only if (i) it is a dividend or other distribution
(whether in the form of cash, shares, other securities, or other property),
extraordinary cash dividend, recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off,
combination, re-purchase, or exchange of shares or other securities, the
issuance of warrants or other rights to purchase shares or other
securities, or other similar corporate transaction or event, and (ii) the
Plan Committee determines that such transaction or event affects the shares
of Scientific-Atlanta Common Stock, such that an adjustment pursuant to
this paragraph (c) is appropriate to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under this
Plan.
5.7 Statement of Accounts
---------------------
Within ninety (90) days after each Determination Date, the Plan Committee
shall submit to each Participant a statement in such form as the Plan Committee
shall deem desirable, setting forth a summary of the Compensation Deferral
Elections made and the current balances of the Deferred Benefit Accounts and
related Sub-Accounts maintained for the Participant as of the Determination
Date.
ARTICLE VI - PAYMENT (AND ISSUANCE) OF DEFERRED BENEFITS
- --------------------------------------------------------
6.1 General
-------
Except as otherwise provided herein, Deferred Benefits credited to the
Interest Sub-Account, the Phantom Stock Sub-Account or the Award Sub-Account
shall be payable (and issued, if applicable) to a Participant upon the Deferred
Benefit Commencement Date and pursuant to the manner of payment (or issuance, if
applicable) selected by the Participant on the applicable Compensation Deferral
Election or any permitted modification thereof, pursuant to Section 4.5(c)
hereof. If the Participant has elected to receive such Deferred Benefits in
installments, the amount payable in the first year of such installments shall be
an amount that will fully amortize the balance in the Participant's Deferred
Benefit Account determined as of the Deferred Benefit Commencement Date over the
five, ten or fifteen year period, based on assumed interest earnings at the Plan
Interest Rate (to the extent applicable) in effect for such first year.
Thereafter, the amount payable (or to be issued) in each succeeding year shall
be adjusted to an amount that will fully amortize the remaining balance in such
Deferred Benefit Account over the remaining years in the aforesaid five, ten, or
fifteen year installment period based on the Plan Interest Rate (to the extent
applicable) for such succeeding year. Proceeds of life insurance purchased with
amounts credited to the Split-Dollar Insurance Sub-Account shall be payable as
provided in the respective policy or policies and the applicable Endorsement
Split-Dollar Agreement.
10
<PAGE>
6.2 Service Termination
-------------------
Deferred Benefits shall be paid (or issued, as appropriate) to a
Participant after his or her termination, as follows:
(a) Upon termination of service as a director by a Participant prior to
the Participant's attaining fifty-five years of age:
(1) the amounts in each of the Participant's Deferred Benefit
Accounts shall cease to earn interest (to the extent applicable) and
the balance of each Deferred Benefit Account shall be determined in
accordance with Article V hereof, and
(2) Scientific-Atlanta, Inc. shall pay (or issue, as appropriate) to
the Participant the balance of each of the Participant's Deferred
Benefit Accounts not according to the Participant's elections as
specified in his or her Election Forms but in a lump sum, to be paid
within sixty days of the termination.
(b) For purposes of this Plan, termination of service as a director by a
Participant who is fifty-five years or older with at least three years of
Board Service will in all instances be construed to be and will be treated
as Retirement by such a Participant, and Scientific-Atlanta, Inc. will pay
(or issue) to such a Participant all amounts in his or her Deferred Benefit
Accounts in accordance with Section 6.1 hereof.
6.3 Total Disability
----------------
Deferred Benefits shall be paid (or issued, as appropriate) to a
Participant after his or her becoming Totally Disabled, as follows:
(a) Upon the determination that a Participant is Totally Disabled, no
further deferrals will be made from his or her Compensation, and Scientific
Atlanta, Inc. shall pay (or issue, as appropriate) to the Participant the
balance in each of the Participant's Deferred Benefit Accounts as follows:
(1) the date of Total Disability shall be deemed to be (i) the
Deferred Benefit Commencement Date, if the Deferred Benefit
Commencement Date for one or more Deferred Benefit Accounts is a set
date prior to the Participant's fifty-fifth birthday and the Total
Disability occurs before such date, or (ii) the Participant's
Retirement, for those Deferred Benefit Accounts, if any, for which the
Deferred Benefit Commencement Date is the Participant's Retirement or
later;
(2) following Total Disability, the amounts in his or her Interest
Sub-Account shall continue to earn interest, and the hypothetical
shares in the Phantom Stock Sub-Account shall continue to earn
dividends, as provided in the Plan, until paid out to the Participant
as provided herein; and
11
<PAGE>
(3) the amount (including shares of Scientific-Atlanta Common Stock)
in any Deferred Benefit Account shall be payable (or issued) to the
Participant on the Deferred Benefit Commencement Date which applies to
such Deferred Benefit Account, taking into consideration the aforesaid
deemed dates (Section 6.3(a)(1)(i) and (ii)) pursuant to the method(s)
requested by the Participant in his or her Election Form.
(b) For purposes of this Plan, once a Participant is determined to be
Totally Disabled, he or she will continue to be deemed Totally Disabled
irrespective of the Participant's ceasing to be considered Totally Disabled
for purposes of any other plan maintained by Scientific-Atlanta, Inc.
(c) In the event that a Totally Disabled Participant resumes service with
the Board following his or her Service Termination Date, such Totally
Disabled Participant may resume participation in this Plan at the
discretion of the Plan Committee; provided, however, that in any event the
-------- -------
Totally Disabled Participant shall continue to receive payments of Deferred
Benefits pursuant to the terms of this Plan.
6.4 Death
-----
Deferred Benefits shall be paid (or issued, as appropriate) after the death
of a Participant, as follows:
(a) After the death of a Participant, Scientific-Atlanta, Inc. shall pay
the amounts (or issue shares of Scientific-Atlanta Common Stock, if
applicable) in each of the Participant's Deferred Benefit Accounts to the
Beneficiary designated by the Participant with respect to each Compensation
Deferral Election in each of his or her respective Election Forms, or, if
the Participant fails to so designate a Beneficiary, to his or her estate.
(b) If the Participant dies prior to Retirement, Scientific-Atlanta, Inc.
shall pay to each respective Beneficiary or to the Participant's estate, as
the case may be, the amounts in each of the Participant's respective
Deferred Benefit Accounts (or issue the shares held in the Award Sub-
Account), in the same manner as set forth in Section 6.3(a).
(c) If the Participant dies following Retirement or being determined to be
Totally Disabled but prior to his or her receiving the full payment of all
Deferred Benefits payable to him or her, Scientific-Atlanta, Inc. shall pay
(or issue, if appropriate) to the respective Beneficiaries or to the
Participant's estate, as the case may be, the same Deferred Benefits in the
same manner as it otherwise would have paid (or issued) to the Participant
as if the Participant had not died, unless the Participant has specified in
his or her Election Form a different manner of payment to a Beneficiary.
12
<PAGE>
(d) Notwithstanding the other provisions of Section 6.4, a Beneficiary may
request a different payment schedule than what has been elected by the
Participant, if such change does not further defer the scheduled payout, by
submitting a request in writing to the Plan Committee. The granting of any
such request shall be within the discretion of the Plan Committee.
(e) If a Beneficiary who is receiving Deferred Benefits pursuant to this
Plan dies, the remainder of the Deferred Benefits to which such Beneficiary
was entitled at the time of his or her death shall continue to be payable
to the Beneficiary or to beneficiaries designated by such Beneficiary in
writing to the Plan Committee (or to the Beneficiary's estate or heirs if
he or she fails to designate a beneficiary or beneficiaries).
ARTICLE VII - PLAN ADMINISTRATION
- ---------------------------------
7.1 Plan Committee
--------------
This Plan and all matters related to it shall be administered by the Plan
Committee. The Plan Committee shall have the authority to interpret the
provisions of this Plan and to determine all questions arising in the
administration, interpretation and application of this Plan. The Plan Committee
may, in its sole discretion, delegate any or all of its responsibilities
relative to administration of this Plan to such officers of Scientific-Atlanta,
Inc. as it designates.
ARTICLE VIII - PARTICIPANT'S RIGHTS
- -----------------------------------
8.1 Ineligibility to Participate in Plan
------------------------------------
In the event that the Plan Committee determines that a Participant has
become ineligible to continue to participate in this Plan, the Plan Committee
may terminate Participant's participation in this Plan upon ten (10) days' prior
written notice to the Participant. In such event, the Participant will not be
entitled to make further Compensation Deferral Elections, but all current
Compensation Deferral Elections shall continue in effect. All Deferred Benefit
Accounts shall be payable as otherwise provided in Article VI hereof.
8.2 Termination of Plan
-------------------
The Board of Directors of Scientific-Atlanta, Inc. may terminate this Plan
at any time, and termination of this Plan shall be effective upon ten (10) days'
written notice to all Participants in the Plan. Upon such termination of this
Plan, Scientific-Atlanta, Inc. shall pay all active Participants their Deferred
Benefits as provided in Section 6.1 as if each such Participant had actually
reached the Deferred Benefit Commencement Date for all of his or her Deferred
Benefit Accounts.
13
<PAGE>
8.3 Participant's Rights
--------------------
The right of a Participant or his or her Beneficiary or estate to receive
any benefits under this Plan shall be solely that of an unsecured creditor of
Scientific-Atlanta, Inc. Any asset acquired or held by Scientific-Atlanta, Inc.
or funds allocated by Scientific-Atlanta, Inc. in connection with the
liabilities assumed by Scientific-Atlanta, Inc. pursuant to this Plan shall not
be deemed to be held under any trust for the benefit of any Participant or of
any of Participant's Beneficiaries or to be security for the performance of
Scientific Atlanta, Inc.'s obligations hereunder but shall be and remain a
general asset of Scientific-Atlanta, Inc.
8.4 Spendthrift Provision
---------------------
Neither a Participant nor any person claiming through a Participant shall
have the right to commute, sell, assign, transfer, pledge, mortgage or otherwise
encumber, transfer, hypothecate or convey any Deferred Benefit payable hereunder
or any part thereof in advance of its actually having been received by a
Participant or other appropriate recipient under this Plan, and the right to
receive all such Deferred Benefits is expressly declared to be non-assignable
and non-transferable. Prior to the actual payment (or issuance, if appropriate)
thereof, no part of the Deferred Benefits payable hereunder shall be subject to
seizure or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any person claiming through a
Participant or be transferable by operation of law in the event of a
Participant's or any such other person's bankruptcy or insolvency.
8.5 Cooperation
-----------
Each Participant will cooperate with Scientific-Atlanta, Inc. by furnishing
any and all information reasonably requested by Scientific-Atlanta, Inc. in
order to facilitate the payment of Deferred Benefits hereunder and by taking any
such other actions as Scientific-Atlanta, Inc. or the Plan Committee may
reasonably request.
ARTICLE IX - MISCELLANEOUS
- --------------------------
9.1 Amendments and Modifications
----------------------------
The Board of Directors of Scientific-Atlanta, Inc. may amend this Plan in
any respect at any time. In addition, the Plan Committee may authorize the
following types of amendments to the Plan without Board approval: (a) amendments
required by law; (b) amendments that relate to the administration of the Plan
and that do not materially increase the cost of the Plan; and (c) amendments
that are designed to resolve possible ambiguities, inconsistencies or omissions
in the Plan and that do not materially increase the cost of the Plan. All
authorized amendments shall be effective upon ten (10) days' written notice to
the Participants. If any such amendment affects a Participant's Deferred
Benefits, such affected Participant may, within ninety (90) days after the
effective date of such amendment, elect to terminate his or her participation in
the Plan pursuant to this Section 9.1, in which event the date of such election
shall be deemed to be such
14
<PAGE>
Participant's Deferred Benefit Commencement Date.
9.2 Inurement
---------
This Plan shall be binding upon and shall inure to the benefit of
Scientific-Atlanta, Inc. and each Participant hereto, and their respective
beneficiaries, heirs, executors, administrators, successors and assigns.
9.3 Governing Law
-------------
This Plan is made in accordance with and shall be governed in all respects
by the laws of the state of Georgia.
9.4 Tax Withholding
---------------
All payments (and issuances of shares) made pursuant to this Plan shall be
subject to the withholding of state and federal income taxes, FICA tax or other
taxes to the extent required by applicable law. The Plan Committee shall,
before delivery of a cash payment or a stock certificate, require the
Participant to make arrangements satisfactory to the Plan Committee to satisfy
such withholding requirements. A Participant receiving shares of Scientific-
Atlanta, Inc. Common Stock may elect to satisfy such withholding requirements by
having the Plan Committee withhold shares otherwise issuable to the Participant,
with the Participant's election being made by delivering to the Plan Committee a
written election stating his or her desire to so satisfy such withholding
requirements.
To record the adoption of the Plan (as amended and restated) by the Board
on June 17, 1997, with an effective date of November 12, 1997, the Company has
caused its authorized officers to execute this Plan and affix the corporate name
and seal hereto.
SCIENTIFIC-ATLANTA, INC.
By: /s/ Brian C. Koenig
-------------------
Name: Brian C. Koenig
Title: Senior Vice President -
Human Resources
By: /s/ William E. Eason, Jr.
-------------------------
Name: William E. Eason, Jr.
Title: Corporate Secretary
[Corporate Seal]
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<DESCRIPTION>RETIREMENT PLAN FOR NON-EMPLOYEES
<TEXT>
<PAGE>
EXHIBIT 10.3
SCIENTIFIC-ATLANTA, INC.
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
------------------------------------------
As Amended, Effective November 12, 1997
1. PURPOSE
The purpose of this plan ("Plan") is to enhance the ability of Scientific-
Atlanta, Inc. ("Company") to attract and retain the service of experienced, able
and knowledgeable persons to serve as members of the Company's board of
directors ("Board") over a substantial period of years during which the full
benefit of their capabilities can be realized to further the growth and
profitability of the Company and return to the shareholders.
2. ADMINISTRATION
The Plan shall be administered by a Plan Administrator, who shall be
appointed by the Board. In addition to the duties stated elsewhere in the Plan,
the Plan Administrator shall have full authority, consistent with the Plan, to
interpret the Plan and to make all determinations necessary or desirable for the
administration of the Plan.
3. ELIGIBLE PARTICIPANTS
Each person who is or becomes a member of the Board on or after the
effective date of this Plan but before January 1, 1997, and who has never been a
participant in an employee retirement plan of the Company shall be deemed a
participant in this Plan after having been a member of the Board for thirty-six
consecutive months (a "Participant"). Each person who was a Participant in the
Plan as of January 1, 1997 (the "Conversion Date"), and who was not already
receiving retirement benefits under the Plan as of the Conversion Date, shall,
on or before September 1, 1997, make an election as to whether he or she desires
(a) to continue as a Participant under this Plan, or (b) to discontinue
participation in this Plan and to receive in lieu thereof (1) annual grants of
retirement awards (currently 1,500 shares of the Company's common stock), under
the terms of the Stock Plan for Non-Employee Directors, and (2) a lump sum
---
distribution equal to the greater of either (i) the present value, actuarially
------
determined by the Company as of the Conversion Date, of the retirement benefits
of such Participant under this Plan through the Conversion Date, reduced by the
----------
present value, actuarially determined by the Company, as of the Conversion Date,
of the stream of annual grants of retirement awards described under clause (1)
above through such Participant's Normal Retirement Date, or (ii) an amount equal
--
to the value of 750 shares of the Company's common stock. $.50 par value (at the
closing price on the Conversion Date) multiplied by such Participant's total
-------------
years of service as a director, as of the Conversion Date, which lump sum
distribution shall be converted, under the terms of the Stock Plan for Non-
Employee Directors, into shares of the Company's common
1
<PAGE>
stock, $.50 par value, at the fair market value on the Conversion Date.
Participants electing to receive a lump sum distribution shall be also entitled
to receive a further distribution in the form of shares to be issued under the
Stock Plan for Non-Employee Directors, upon the death of such Participant, such
further distribution to be equal to the difference, if any, between (a) the
value of the spousal benefits otherwise payable to the spouse of a Participant
under the provisions of paragraph 7 below, and (b) the assumed value (as defined
---
in the assumptions approved by the Board) of the lump sum distribution to such
Participant described above plus the annual retirement awards granted to such
----
Participant under the Stock Plan for Non-Employee Directors prior to his or her
death. Except to the extent otherwise provided in the preceding sentence,
individuals who are Participants under this Plan as of the Conversion Date, and
who elect on or before September 1, 1997, to receive the lump sum distribution
described above, shall cease to be Participants under this Plan, effective as of
the Conversion Date.
4. RETIREMENT DATES
(a) A Participant's "Normal Retirement Date" is the first day of the
calendar month in which a Participant attains the age of sixty-five (65) years
and is no longer a member of the Board or any subsequent month designated by a
Participant in accordance with paragraph 6 below.
(b) A Participant's "Early Retirement Date" is the first day of the
calendar month designated by a Participant in accordance with paragraph 6 below,
prior to the Normal Retirement Date, on or after the month in which a
Participant attains the age of fifty-five (55) years.
5. RETIREMENT BENEFIT
(a) The annual retirement benefit payable to any Participant who retires on
the Normal Retirement Date, or any date thereafter, will be an amount equal to
(i) the regular annual retainer paid by the Company to each director for the
last fiscal year of the Company that the Participant served as a director, plus
(ii) the value, as of the date of grant, of the shares of the Company's Common
Stock granted to the Participant as a "Stock Award" under the Company's Stock
Plan for Non-Employee Directors during the last fiscal year of the Company that
the Participant served as a director. The "regular annual retainer" as used in
the preceding sentence means the annual retainer received by each director of
the Company, excluding any committee chair annual retainer, meeting fees and
other fees received by a director; and, if the Participant elects to receive all
or a portion of his or her annual retainer in the form of shares of the
Company's common stock under the Company's Stock Plan for Non-Employee
Directors, any portion of such annual retainer received in shares shall be
included in the definition of "regular annual retainer."
2
<PAGE>
(b) The annual early retirement benefit payable to any Participant who
retires on the Early Retirement Date will be the amount specified in 5(a) above,
reduced by the following early retirement factors:
Age at Commencement Factor
------------------- ------
64 .933
63 .867
62 .800
61 .733
60 .667
59 .633
58 .600
57 .567
56 .533
55 .500
If a Participant's age at the Early Retirement Date falls between any two
of these ages, these factors shall be adjusted by straight-line interpolation.
(c) No retirement benefit will be payable to any person who is a member of
the Board for less than thirty-six (36) consecutive months.
6. BENEFIT PAYMENTS
A Participant may retire by written notice to the Plan Administrator or the
Secretary of the Company, designating a retirement date in accordance with
paragraph 4 above. Retirement benefit payments will be payable on the first day
of each calendar quarter following retirement or in accordance with such other
schedule of payments as may be requested by the Participant and approved by the
Board. Benefit payments will continue to be paid to the Participant for the
remainder of the Participant's life. Notwithstanding the foregoing, in lieu of
the normal form of payment otherwise provided under this Plan, the Plan
Administrator may direct, in its sole and absolute discretion, that benefits
shall be paid in a single sum that is the actuarial equivalent of the annual
benefit payable to the Participant or, in the event of the Participant's death,
to his or her surviving spouse.
7. SPOUSAL BENEFITS
Should a Participant die before retirement benefits have begun to be paid
to the Participant under this Plan, the Participant shall be deemed to retire on
the later of (i) the day before his/her death, or (ii) the first day of the
first calendar month thereafter in which the Participant would have attained the
age of fifty-five (55), and the Participant's surviving spouse, if any, shall be
entitled to a benefit equal to the benefit that would have been paid to the
3
<PAGE>
Participant. If the Participant dies after retirement benefits have commenced,
the Participant's surviving spouse shall be entitled to annual benefit payments
equal to the annual benefit previously payable to the Participant. In each
case, the benefit shall continue for the lesser of (i) ten years or (ii) a
number of years equal to the number of years that the Participant was a member
of the Board; provided, however, that payments shall not continue after the
death of the spouse.
8. DISABILITY
Should a Participant become totally and permanently disabled prior to
retirement for a period of six (6) consecutive months while a member of the
Board and the Board determines that such disability will continue, the
Participant will be deemed to have retired on the first day of the calendar
month following the month in which the Board makes such determination and the
age of the Participant on such retirement date shall be deemed the older of (i)
fifty-five (55), or (ii) the Participant's actual age on that date. Payments
will be made on the same basis as described in Sections 5, 6, and 7 above.
9. CHANGE OF CONTROL
Notwithstanding anything contained in this Plan to the contrary, the
provisions of this paragraph 9 shall apply to any Participant whose membership
on the Board ends before a Change of Control occurs or who is a member of the
Board on the date that a Change of Control occurs and who ceases within twenty-
four (24) months after a Change of Control to be a member of the Board for any
reason.
(a) Each such Participant shall be immediately vested in his or her
retirement benefit payable under this Plan.
(b) The Company shall contribute to the trust maintained pursuant to the
Scientific-Atlanta, Inc. Benefits Protection Trust Agreement a lump sum amount
equal to the then-present value of the Participant's retirement benefit. This
lump sum payment to the trust shall be due on the later of (i) the date when
the Change of Control occurs or (ii) the date the Participant ceases to be a
member of the Board. The retirement benefit of a Participant who ceases to be a
member of the Board within twenty-four (24) months after a Change of Control
shall be computed as if the Participant would retire on the first day that he or
she is eligible to retire (whether an Early Retirement Date or a Normal
Retirement Date) following the Change of Control and the end of his or her
membership on the Board. Any retirement benefits to which the Participant is
entitled under the terms of this Plan shall be payable from the trust, except to
the extent that the benefits are paid from the general assets of the Company.
(c) Notwithstanding the foregoing, in lieu of the form of payment otherwise
provided for in this paragraph 9, the Plan Administrator may direct, in its sole
and absolute discretion, that upon a Change of Control benefits under this Plan
shall be paid in a single lump sum that is the
4
<PAGE>
actuarial equivalent of the annual benefits payable to the Participant or, in
the event of the Participant's death, to his or her surviving spouse.
(d) "Change of Control" means a change of twenty-five percent (25%) or more
of the membership of the Board (excluding membership changes resulting from
normal retirement of directors) within a twenty-four (24) month period following
the acquisition of beneficial ownership by any person or entity, or group of
persons or entities and their affiliates acting in concert, of twenty percent
(20%) or more of the voting securities of the Company. "Affiliates" and
"beneficial ownership" shall be defined in accordance with Rules 12b-2 and 13d-3
of the Securities and Exchange Commission, as the same may from time to time be
amended.
10. TERMINATION AND AMENDMENT OF THE PLAN
The Board may terminate the Plan at any time and may amend the Plan from
time to time but no such termination and amendment shall adversely affect the
rights of Participants under the Plan, which shall be deemed fully vested and
irrevocable on the date that a director becomes a Participant in accordance with
paragraph 3 above.
11. EFFECTIVE DATE
The effective date of this Plan was February 15, 1989.
To record the adoption of the Plan (as amended and restated) by the Board,
effective as of November 12, 1997, the Company has caused its authorized
officers to execute this Plan and affix the corporate name and seal hereto.
SCIENTIFIC-ATLANTA, INC.
By: /s/ Brian C. Koenig
------------------------------------
Name: Brian C. Koenig
Title: Senior Vice President - Human
Resources
By: /s/ William E. Eason, Jr.
-----------------------------------
Name: William E. Eason, Jr.
Title: Corporate Secretary
[Corporate Seal]
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>6
<DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE
<TEXT>
<PAGE>
Exhibit 11
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 26, 1997 DECEMBER 27, 1996
------------------------------ -------------------------------
PER SHARE PER SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER
COMMON SHARE
Earnings from continuing operations
available to common stockholders $14,832 78,885 $0.19 $13,752 77,205 $0.18
EFFECT OF DILUTIVE SECURITIES
Options -- 1,264 -- -- 1,182 --
------- ------ ----- ------- ------ -----
DILUTED EARNINGS PER
COMMON SHARE
Earnings from continuing operations
available to common stockholders
and assumed conversions $14,832 80,149 $0.19 $13,752 78,387 $0.18
======= ====== ===== ======= ====== =====
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 26, 1997 DECEMBER 27, 1996
------------------------------ -------------------------------
PER SHARE PER SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
------- ------ --------- ------- ------ ---------
BASIC EARNINGS PER
COMMON SHARE
Earnings from continuing operations
available to common stockholders $31,317 78,567 $0.40 $24,562 77,166 $0.32
EFFECT OF DILUTIVE SECURITIES
Options -- 1,471 -- -- 1,083 --
------- ------ ----- ------- ------ -----
DILUTED EARNINGS PER
COMMON SHARE
Earnings from continuing operations
available to common stockholders
and assumed conversions $31,317 80,038 $0.40 $24,562 78,249 $0.32
======= ====== ===== ======= ====== =====
</TABLE>
The following information pertains to options to purchase shares of common stock
which were not included in the computation of Diluted Earnings per Common Share
because the options' exercise price was greater than the average market price of
the common shares:
December 26, 1997 December 27, 1996
----------------- -----------------
Number of options outstanding 3,341 2,926
Weighted average exercise price $22.371 $20.545
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>7
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 26, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> DEC-26-1997
<CASH> 89,154
<SECURITIES> 0
<RECEIVABLES> 258,771
<ALLOWANCES> 4,106
<INVENTORY> 202,284
<CURRENT-ASSETS> 587,537
<PP&E> 266,299
<DEPRECIATION> 101,660
<TOTAL-ASSETS> 816,303
<CURRENT-LIABILITIES> 190,549
<BONDS> 1,493
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 39,543
<OTHER-SE> 539,906
<TOTAL-LIABILITY-AND-EQUITY> 816,303
<SALES> 589,025
<TOTAL-REVENUES> 589,025
<CGS> 412,780
<TOTAL-COSTS> 412,780
<OTHER-EXPENSES> 53,401
<LOSS-PROVISION> 221
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> 44,738
<INCOME-TAX> 13,421
<INCOME-CONTINUING> 31,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,317
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>8
<DESCRIPTION>CAUTIONARY STATEMENTS
<TEXT>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENTS
From time to time, the company may publish, verbally or in written form,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. In fact, this Form 10-
Q (or any other periodic reporting documents required by the 1934 Act) may
contain forward-looking statements reflecting the current views of the company
concerning potential future events or developments. The Private Securities
Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-
looking statements. These Cautionary Statements are being made pursuant to the
provisions of the Act and with the intention of obtaining the benefits of the
"safe harbor" provisions of the Act. In order to comply with the terms of the
"safe harbor," the company cautions investors that any forward-looking
statements made by the company are not guarantees of future performance and that
a variety of factors could cause the company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the company's forward-looking statements. The risks and uncertainties which
may affect the operations, performance, development and results of the company's
business include, but are not limited to, the following: uncertainties relating
to the development and ownership of intellectual property; uncertainties
relating to the ability of the company and other companies to enforce their
intellectual property rights; uncertainties relating to economic conditions
(including, but not limited to, the economic conditions in the Asia / Pacific
region); uncertainties relating to government and regulatory policies;
uncertainties relating to customer plans and commitments; the company's
dependence on the cable television industry and cable television spending;
signal security; the pricing and availability of equipment, materials and
inventories; technological developments; performance issues with key suppliers
and subcontractors; governmental export and import policies; global trade
policies; worldwide political stability and economic growth; regulatory
uncertainties; delays in testing of new products; rapid technology changes; the
highly competitive environment in which the company operates; the entry of new,
well-capitalized competitors into the company's markets; changes in the
financial markets relating to the company's capital structure and cost of
capital; and uncertainties inherent in international operations and foreign
currency fluctuations. The words "believe," "expect," "anticipate," "project,"
"plan" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| SYY | https://www.sec.gov/Archives/edgar/data/96021/0000096021-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000096021-98-000002.txt : 19980210
<SEC-HEADER>0000096021-98-000002.hdr.sgml : 19980210
ACCESSION NUMBER: 0000096021-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971227
FILED AS OF DATE: 19980209
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SYSCO CORP
CENTRAL INDEX KEY: 0000096021
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140]
IRS NUMBER: 741648137
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-06544
FILM NUMBER: 98525866
BUSINESS ADDRESS:
STREET 1: 1390 ENCLAVE PKWY
CITY: HOUSTON
STATE: TX
ZIP: 77077
BUSINESS PHONE: 7135841390
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>2ND QUARTER 10-Q
<TEXT>
<PAGE>
Page 1 of 16
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-6544
SYSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1648137
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1390 Enclave Parkway
Houston, Texas 77077-2099
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code: (281) 584-1390
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
170,037,852 shares of common stock were outstanding as of
January 23, 1998.
<PAGE>
2
PART I. FINANCIAL INFORMATION
---------------------------------------------------
Item 1. Financial Statements
The following consolidated financial statements
have been prepared by the Company, without
audit, with the exception of the June 28, 1997,
consolidated balance sheet which was taken from
the audited financial statements included in the
Company's Fiscal 1997 Annual Report on Form
10-K. The financial statements include
consolidated balance sheets, consolidated
results of operations and consolidated cash
flows. Certain amounts in the prior year have
been reclassified to conform to the current
presentation. In the opinion of management,
all adjustments, which consist of normal
recurring adjustments, necessary to present
fairly the financial position, results of
operations and cash flows for all periods
presented, have been made.
These financial statements should be read in
conjunction with the audited financial
statements and notes thereto included in the
Company's Fiscal 1997 Annual Report on
Form 10-K.
A review of the financial information herein has
been made by Arthur Andersen LLP, independent
public accountants, in accordance with established
professional standards and procedures for such a
review. A letter from Arthur Andersen LLP
concerning their review is included as Exhibit 15.
<PAGE>
3
<TABLE>
SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)
<CAPTION> Dec. 27, June 28, Dec. 28,
1997 1997 1996
----------- ---------- -----------
(Unaudited) (Audited) (Unaudited)
ASSETS
----------
<S> <C> <C> <C>
Current assets
Cash $ 99,824 $ 117,696 $ 87,651
Accounts and notes receivable,
less allowances of $29,843,
$17,240 and $33,550 1,195,930 1,065,002 1,094,169
Inventories 810,192 733,782 766,343
Deferred taxes 27,738 23,720 27,279
Prepaid expenses 24,198 21,429 22,541
---------- ---------- ----------
Total current assets 2,157,882 1,961,629 1,997,983
Plant and equipment at cost,
less depreciation 1,097,718 1,058,432 1,024,961
Goodwill and intangibles, less
amortization 243,496 247,423 251,338
Other assets 131,427 166,339 165,524
---------- ---------- ----------
Total assets $3,630,523 $3,433,823 $3,439,806
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Notes payable $ 24,912 $ 14,267 $ 10,967
Accounts payable 900,433 827,593 806,773
Accrued expenses 235,755 240,928 211,654
Accrued income taxes 10,968 17,741 23,156
Current maturities of
long-term debt 15,289 13,285 13,883
---------- --------- ----------
Total current liabilities 1,187,357 1,113,814 1,066,433
Long-term debt 829,152 685,620 682,953
Deferred taxes 218,152 233,917 222,070
Shareholders' equity
Preferred stock, par value
$1 per share:
Authorized 1,500,000 shares;
issued none --- --- ---
Common stock, par value
$1 per share:
Authorized 500,000,000 shares;
issued 191,293,725 shares 191,294 191,294 191,294
Paid-in capital 30,842 32,258 34,763
Retained earnings 1,855,697 1,771,548 1,671,711
---------- ---------- ----------
2,077,833 1,995,100 1,897,768
Less cost of treasury stock,
20,999,811, 18,855,458 and
14,113,937 shares 681,971 594,628 429,418
---------- ---------- ----------
Total shareholders' equity 1,395,862 1,400,472 1,468,350
---------- ---------- ----------
Total liabilities and
shareholders' equity $3,630,523 $3,433,823 $3,439,806
========== ========== ==========
<FN>
Note: The June 28, 1997 balance sheet has been taken from the audited
financial statements at that date. Certain amounts have been reclassified
to conform to the current presentation.
</TABLE>
<PAGE>
4
<TABLE>
SYSCO Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In Thousands Except for Share Data)
<CAPTION> 26-Week Period Ended 13-Week Period Ended
---------------------------- -----------------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Sales $ 7,614,340 $ 7,289,571 $ 3,786,096 $ 3,610,348
Costs and expenses
Cost of sales 6,213,796 5,982,959 3,082,913 2,954,481
Operating expenses 1,104,921 1,038,423 551,889 518,694
Interest expense 27,640 22,805 14,500 11,888
Other income, net (425) (259) (303) (18)
------------ ----------- ------------ ------------
Total costs and expenses 7,345,932 7,043,928 3,648,999 3,485,045
------------ ----------- ------------ ------------
Earnings before income taxes 268,408 245,643 137,097 125,303
Income taxes 104,679 95,801 53,468 48,868
------------ ------------ ------------ ------------
Earnings before cumulative
effect of accounting change 163,729 149,842 83,629 76,435
Cumulative effect of
accounting change (28,053) --- (28,053) ---
____________ ____________ ____________ ____________
Net earnings $ 135,676 $ 149,842 $ 55,576 $ 76,435
============ ============ ============ ============
Earnings per share before
accounting change:
Basic earnings per share $ 0.96 $ 0.84 $ 0.49 $ 0.43
============ ============ ============ ============
Diluted earnings per
share $ 0.95 $ 0.83 $ 0.49 $ 0.43
============ ============ ============ ============
Cumulative effect of
accounting change:
Basic earnings per share $ (0.16) $ --- $ (0.16) $ ---
============ ============ ============ ============
Diluted earnings per
share $ (0.16) $ --- $ (0.16) $ ---
============ ============ ============ ============
Net earnings:
Basic earnings per share $ 0.79 $ 0.84 $ 0.33 $ 0.43
============ ============ ============ ============
Diluted earnings per
share $ 0.79 $ 0.83 $ 0.32 $ 0.43
============ ============ ============ ============
Average number of shares
outstanding 171,317,862 179,233,095 170,793,423 178,412,247
============ ============ ============ ============
Diluted average number of
shares outstanding 172,571,218 179,978,653 172,279,833 179,307,299
============ ============ ============ ============
Dividends paid per
common share $ 0.30 $ 0.26 $ 0.15 $ 0.13
============ ============ ============ ============
(/Table)
<PAGE>
5
</TABLE>
<TABLE>
SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS - (Unaudited)
(In Thousands)
<CAPTION> 26-Week Period Ended
------------------------
Dec. 27, Dec. 28,
1997 1996
--------- ----------
<S> <C> <C>
Operating activities:
Net earnings $ 135,676 $ 149,842
Add non-cash items:
Cumulative effect of accounting change 28,053 ---
Depreciation and amortization 87,569 78,455
Deferred tax provision (19,783) (4,325)
Provision for losses on accounts receivable 9,732 13,640
Additional investment in certain assets
and liabilities net of effect of business
acquired:
(Increase) in receivables (140,660) (61,466)
(Increase) in inventories (76,410) (39,444)
(Increase) in prepaid expenses (2,769) (3,646)
Increase in accounts payable 72,840 22,325
(Decrease) in accrued expenses (5,173) (1,762)
(Decrease) in accrued income taxes (6,773) (174)
Decrease (Increase) in other assets 1,481 (7,715)
--------- ---------
Net cash provided by operating activities 83,783 145,730
Investing activities:
Additions to plant and equipment (121,042) (101,778)
Sales and retirements of plant and
equipment 3,492 885
Acquisition of business --- (5,330)
--------- ---------
Net cash used for investing activities (117,550) (106,223)
Financing activities:
Bank and commercial paper borrowings 155,457 94,237
Other debt borrowings 724 2,318
Common stock reissued from treasury 20,863 16,307
Treasury stock purchases (109,622) (125,757)
Dividends paid (51,527) (46,720)
--------- ---------
Net cash provided by (used for)
financing activities 15,895 (59,615)
--------- ---------
Net (decrease) in cash (17,872) (20,108)
Cash at beginning of period 117,696 107,759
--------- ---------
Cash at end of period $ 99,824 $ 87,651
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 27,263 $ 22,801
Income taxes 112,294 101,738
</TABLE>
<PAGE>
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
-------------------------------
The liquidity and capital resources discussion
included on page 11 of the Company's Fiscal 1997
Annual Report on Form 10-K remains applicable,
other than the common stock repurchase program
described below.
In Fiscal 1992, the Company began a common stock
repurchase program which was continued through
early Fiscal 1998, resulting in the repurchase
30,000,000 shares of common stock.
In July 1997, the Board of Directors authorized
the repurchase of an additional 6,000,000
shares. Under this latest authorization,
2,287,900 shares were purchased through
December 27, 1997.
Results of Operations
---------------------
Sales increased 4.4% during the 26 weeks and 4.9%
in the second quarter of Fiscal 1998 over comparable
periods of the prior year. Cost of sales also
increased 3.9% during the 26 weeks and 4.4% in the
second quarter of Fiscal 1998 which is in line
with the sales increases. Real sales growth for
the 26 weeks of Fiscal 1998 was 5.1% after
eliminating 0.7% food cost deflation. Real sales
growth for the quarter was 5.2%, with food cost
deflation measuring 0.3%. Deflation occurred
primarily due to lower costs of canned and dry
products, dairy foods, paper and disposable items
and poultry products.
Operating expenses for the periods presented
remained approximately the same as a percent of
sales.
Interest expense in the current periods presented
increased over the prior periods due to increased
borrowings primarily related to the Company's
share repurchase program.
Income taxes for the periods presented reflect
an effective rate of 39%.
<PAGE>
7
Pretax earnings and net earnings before
accounting change increased about 9% for
the periods presented over the prior year
due to the factors discussed above as
well as the Company's continued efforts to
increase sales to the Company's traditional
territorial street customers.
Basic and diluted earnings per share before
accounting change increased about 14%
for the periods presented over the prior
year due to the factors discussed above,
coupled with the decrease in average shares
outstanding for the periods presented,
reflecting purchases of shares made through
the Company's share repurchase program.
Summary of Accounting Policies
==============================
For the period ended December 27, 1997,
SYSCO recorded a one-time, after-tax,
non-cash charge of $28 million to comply
with a new consensus ruling by the
Emerging Issues Task Force of the
Financial Accounting Standards Board
(EITF Issue No. 97-13), requiring
reengineering costs associated with
computer system development to be
expensed as they are incurred. Prior
to this change, SYSCO had capitalized
business process reengineering costs
incurred in connection with its SYSCO
Uniform Systems information systems
redevelopment project in accordance
with generally accepted accounting
principles.
In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary
and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share
excludes any dilutive effects of options.
Diluted earnings per share is very similar to
the previously reported earnings per share.
Earnings per share amounts for each period
have been presented and restated to conform
to the Statement 128 requirements.
A reconciliation of basic and diluted earnings
per share follows on the next page.
<PAGE>
8
<TABLE>
The following table sets forth the computation of
basic and diluted earnings per share:
<CAPTION> 26-Week Period Ended 13-Week Period Ended
============================== ===============================
Dec. 27 Dec. 28 Dec. 27 Dec. 28
1997 1996 1997 1996
============= ============= ============= ==============
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings
per share--income available
to common shareholders $ 135,676,000 $ 149,842,000 $ 55,576,000 $ 76,435,000
Effect of dilutive
securities - - - - - - - - - - - -
------------- ------------- ------------- --------------
Numerator for diluted
earnings per share --
income available to common
shareholders $ 135,676,000 $ 149,842,000 $ 55,576,000 $ 76,435,000
============= ============= ============= ==============
Denominator:
Denominator for basic
earnings per share --
weighted-average shares 171,317,862 179,233,095 170,793,423 178,412,247
Effect of dilutive
securities:
Employee incentive stock
options 1,253,356 745,558 1,486,410 895,052
------------- ------------- ------------- --------------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed
conversions 172,571,218 179,978,653 172,279,833 179,307,299
============= ============= ============= ==============
Basic earnings per share $ 0.79 $ 0.84 $ 0.33 $ 0.43
============= ============= ============= ==============
Diluted earnings per share $ 0.79 $ 0.83 $ 0.32 $ 0.43
============= ============= ============= ==============
(/Table)
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
<PAGE>
9
PART II. OTHER INFORMATION
-------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on
November 7, 1997 ("1997 Annual Meeting"). At the 1997
Annual Meeting the following persons were elected to serve
as directors of the Company for three year terms:
Charles H. Cotros, Jonathan Golden, Richard J. Schnieders,
Arthur J. Swenka and Thomas B. Walker, Jr.
The terms of the following persons as directors of the
Company continued after the 1997 Annual Meeting:
John W. Anderson, Colin G. Campbell, Judith B. Craven,
Frank A. Godchaux III, Donald J. Keller, Bill M. Lindig,
Richard G. Merrill, Frank H. Richardson, Phyllis S.
Sewell and John F. Woodhouse.
The results of such vote were as follows:
</TABLE>
<TABLE>
<CAPTION> Number of Votes Cast
--------------------
Withheld and Broker
Matter Voted Upon For Against Abstained Non-votes
----------------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Election as Director:
Charles H. Cotros 148,608,193 2,419,576 None None
Jonathan Golden 146,734,945 4,292,824 None None
Richard J. Schnieders 148,419,138 2,608,632 None None
Arthur J. Swenka 148,420,228 2,607,541 None None
Thomas B. Walker, Jr. 148,148,821 2,878,948 None None
</TABLE>
<PAGE> 10
PART II. OTHER INFORMATION
========================
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(a) Restated Certificate of Incorporation,
as amended, incorporated by reference
to Form 10-K for the year ended
June 28, 1997.
3(b) Bylaws, as amended, incorporated by
reference to Form 10-K for the year
ended July 2, 1994.
3(c) Amended Certificate of Designation,
incorporated by reference to Form 10-K
for the year ended June 29, 1996.
4(a) Seventh Amendment and Restatement of
Competitive Advance and Revolving
Credit Facility Agreement dated as of
June 27, 1997, incorporated by reference
to Form 10-K for the year ended
June 28, 1997.
4(b) Sysco Corporation Note Agreement dated
as of June 1, 1989, incorporated by
reference to Form 10-K for the year
ended June 28, 1997.
4(c) Indenture, dated as of October 1, 1989,
between Sysco Corporation and Chemical
Bank, Trustee, incorporated by reference
to Registration Statement on Form S-3
(File No. 33-31227).
4(d) Indenture, dated as of June 15, 1995,
between Sysco Corporation and First
Union National Bank of North Carolina,
Trustee, incorporated by reference to
Registration Statement on Form S-3
(File No. 33-60023).
4(e) First Supplemental Indenture, dated as
of June 27, 1995, between Sysco
Corporation and First Union Bank of
North Carolina, Trustee as amended,
incorporated by reference to Form 10-K
for the year ended June 29, 1996.
4(f) Second Supplemental Indenture, dated
as of May 1, 1996, between Sysco
Corporation and First Union Bank of
North Carolina, Trustee as amended,
incorporated by reference to Form 10-K
for the year ended June 29, 1996.
<PAGE>
11
4(g) Third Supplemented Indenture, dated
as of April 25, 1997, between Sysco
Corporation and First Union National
Bank of North Carolina, Trustee,
incorporated by reference to Form 10-K
for the year ended June 28, 1997.
4(h) Fourth Supplemental Indenture, dated
as of April 25, 1997, between Sysco
Corporation and First Union National
Bank of North Carolina, Trustee,
incorporated by reference to Form 10-K
for the year ended June 28, 1997.
15 Letter from Arthur Andersen LLP dated
February 6, 1998, re unaudited
financial statements.
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed
during the quarter for which this
report is filed.
<PAGE>
12
SIGNATURES
------------------
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSCO CORPORATION
(Registrant)
By /s/ JOHN K. STUBBLEFIELD, JR.
-----------------------------
John K. Stubblefield, Jr.
Senior Vice President &
Chief Financial Officer
Date: February 6, 1998
<PAGE>
13
<TABLE>
EXHIBIT INDEX
----------------------
<CAPTION> SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- ----- ----------------------------------------- -------------
<S> <C> <C>
3(a) Restated Certificate of Incorporation,
as amended, incorporated by reference
to Form 10-K for the year ended
June 28, 1997.
3(b) Bylaws, as amended, incorporated by
reference to Form 10-K for the year
ended July 2, 1994.
3(c) Amended Certificate of Designation,
incorporated by reference to Form 10-K
for the year ended June 29, 1996.
4(a) Seventh Amendment and Restatement of
Competitive Advance and Revolving
Credit Facility Agreement dated as
of June 27, 1997, incorporated by
reference to Form 10-K for the year
ended June 28, 1997.
4(b) Sysco Corporation Note Agreement dated
as of June 1, 1989, incorporated by
reference to Form 10-K for the year
ended June 28, 1997.
4(c) Indenture, dated as of October 1, 1989,
between Sysco Corporation and Chemical
Bank, Trustee, incorporated by
reference to Registration Statement
on Form S-3 (File No. 33-31227).
4(d) Indenture, dated as of June 15, 1995,
between Sysco Corporation and First
Union National Bank of North Carolina,
Trustee, incorporated by reference to
Registration Statement on Form S-3
(File No. 33-60023).
4(e) First Supplemental Indenture, dated
as of June 27, 1995, between Sysco
Corporation and First Union Bank of
North Carolina, Trustee as amended,
incorporated by reference to Form
10-K for the year ended June 29, 1996.
4(f) Second Supplemental Indenture, dated
as of May 1, 1996, between Sysco
Corporation and First Union Bank of
North Carolina, Trustee as amended,
incorporated by reference to Form
10-K for the year ended June 29, 1996.
<PAGE>
14
4(g) Third Supplemental Indenture, dated
as of April 25, 1997, between Sysco
Corporation and First Union National
Bank of North Carolina, Trustee,
incorporated by reference to Form 10-K
for the year ended June 28, 1997.
4(h) Fourth Supplemental Indenture, dated
as of April 25, 1997, between Sysco
Corporation and First Union National
Bank of North Carolina, Trustee,
incorporated by reference to Form 10-K
for the year ended June 28, 1997.
15 Letter from Arthur Andersen LLP dated
February 6, 1998, re unaudited financial
statements. 15
27 Financial Data Schedule. 16
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-15
<SEQUENCE>2
<DESCRIPTION>AA LETTER
<TEXT>
<PAGE>
15
Exhibit 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sysco Corporation:
We have reviewed the consolidated balance sheets
of Sysco Corporation (a Delaware corporation)
and its consolidated subsidiaries as of
December 27, 1997, and the related consolidated
statements of results of operations and cash
flows for the twenty-six week and thirteen week
periods then ended included in the Company's
Quarterly Report on Form 10-Q. These financial
statements are the responsibility of the
Company's management.
We conducted our review in accordance with
standards established by the American Institute
of Certified Public Accountants. A review of
interim financial information consists
principally of applying analytical procedures to
financial data and making inquiries of persons
responsible for financial and accounting
matters. It is substantially less in scope than
an audit conducted in accordance with generally
accepted auditing standards, the objective of
which is the expression of an opinion regarding
the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any
material modifications that should be made to
the financial statements referred to above for
them to be in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 6, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>ART. 5 FDS FOR 2ND QUARTER 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from Item 1. Financial Statements and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> DEC-27-1997
<CASH> 99,824
<SECURITIES> 0
<RECEIVABLES> 1,225,773
<ALLOWANCES> (29,843)
<INVENTORY> 810,192
<CURRENT-ASSETS> 2,157,882
<PP&E> 2,029,237
<DEPRECIATION> (931,519)
<TOTAL-ASSETS> 3,630,523
<CURRENT-LIABILITIES> 1,187,357
<BONDS> 829,152
<COMMON> 191,294
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 1,204,568
<TOTAL-LIABILITY-AND-EQUITY> 3,630,523
<SALES> 7,614,340
<TOTAL-REVENUES> 7,614,340
<CGS> 6,213,796
<TOTAL-COSTS> 7,345,932
<OTHER-EXPENSES> 425
<LOSS-PROVISION> 9,732
<INTEREST-EXPENSE> 27,640
<INCOME-PRETAX> 268,408
<INCOME-TAX> 104,679
<INCOME-CONTINUING> 163,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28,053
<NET-INCOME> 135,676
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| TEK | https://www.sec.gov/Archives/edgar/data/96879/0000096879-98-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000096879-98-000002.txt : 19980114
<SEC-HEADER>0000096879-98-000002.hdr.sgml : 19980114
ACCESSION NUMBER: 0000096879-98-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971129
FILED AS OF DATE: 19980113
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TEKTRONIX INC
CENTRAL INDEX KEY: 0000096879
STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825]
IRS NUMBER: 930343990
STATE OF INCORPORATION: OR
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04837
FILM NUMBER: 98506015
BUSINESS ADDRESS:
STREET 1: 2660 SW PKWY
CITY: WILSONVILLE
STATE: OR
ZIP: 97070
BUSINESS PHONE: 5036277111
MAIL ADDRESS:
STREET 1: P O BOX 100
CITY: WILSONVILLE
STATE: OR
ZIP: 97070-1000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>1998 Q2 10-Q REPORT
<TEXT>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarter ended
November 29, 1997 or,
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the transition period
from ________________ to _____________________.
Commission File Number 1-4837
TEKTRONIX, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0343990
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
26600 SW PARKWAY
WILSONVILLE, OREGON 97070-1000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 627-7111
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No______
AT DECEMBER 26, 1997 THERE WERE 50,475,046 COMMON SHARES OF
TEKTRONIX, INC. OUTSTANDING.
(Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.)
<PAGE>
TEKTRONIX, INC. AND SUBSIDIARIES
- --------------------------------
INDEX
- -----
PAGE NO.
--------
Financial Statements:
Condensed Consolidated Balance Sheets - 2
November 29, 1997 and May 31, 1997
Condensed Consolidated Statements of Operations - 3
for the Quarter ended November 29, 1997
and the Quarter ended November 30, 1996
for the Two Quarters ended November 29, 1997
and the Two Quarters ended November 30, 1996
Condensed Consolidated Statements of Cash Flows - 4
for the Two Quarters ended November 29, 1997
and the Two Quarters ended November 30, 1996
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information 13
Signatures 13
<PAGE>
<TABLE>
<CAPTION>
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Nov. 29, May 31,
(In thousands) 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 137,232 $ 142,726
Accounts receivable - net 278,839 305,832
Inventories 229,779 238,040
Other current assets 75,654 64,913
---------- ---------
Total current assets 721,504 751,511
Property, plant and equipment - net 370,974 343,130
Deferred tax assets 19,913 12,540
Other long-term assets 207,492 209,560
---------- ---------
Total assets $1,319,883 $1,316,741
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 6,387 $ 6,155
Accounts payable 196,943 181,366
Accrued compensation 105,308 90,946
Deferred revenue 16,785 25,622
---------- ---------
Total current liabilities 325,423 304,089
Long-term debt 151,006 151,579
Other long-term liabilities 90,395 89,790
Shareholders' equity:
Common stock 228,387 226,591
Retained earnings 468,000 473,582
Currency adjustment 34,371 34,447
Unrealized holding gains - net 22,301 36,663
---------- ---------
Total shareholders' equity 753,059 771,283
---------- ---------
Total liabilities and shareholders' equity $1,319,883 $1,316,741
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 2
<TABLE>
<CAPTION>
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended Two quarters ended
Nov. 29, Nov. 30, Nov. 29, Nov. 30,
(In thousands except for per share amounts) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 529,046 $ 477,166 $1,010,320 $ 917,281
Cost of sales 337,051 277,404 617,052 526,247
---------- ---------- ---------- ----------
Gross profit 191,995 199,762 393,268 391,034
Research and development expenses 50,214 45,616 96,429 92,063
Selling, general, and administrative
expenses 134,532 115,944 251,440 228,039
Equity in business ventures'
earnings 297 250 464 394
Non-recurring charges 40,478 -- 40,478 --
---------- ---------- ---------- ----------
Operating income (loss) (32,932) 38,452 5,385 71,326
Other income - net 1,265 453 2,822 984
---------- ---------- ---------- ----------
Earnings (loss) before taxes (31,667) 38,905 8,207 72,310
Income taxes (10,450) 12,449 2,708 23,139
---------- ---------- ---------- ----------
Net earnings (loss) $ (21,217) $ 26,456 $ 5,499 $ 49,171
========== ========== ========== ==========
Earnings per share $ (0.42) $ 0.54 $ 0.11 $ 1.00
Dividends per share 0.12 0.10 0.24 0.20
Average shares outstanding 50,546 49,287 50,429 49,216
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
TEKTRONIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Two quarters ended
Nov. 29, Nov. 30,
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 5,499 $ 49,171
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation expense 31,335 27,598
Inventory write-down related to restructuring 38,482 --
Non-recurring charges 40,478 --
Gains on sale of investments (12,297) (9,878)
Accounts receivable 36,935 106,278
Inventories (19,713) 4,957
Accounts payable 5,679 (20,936)
Accrued compensation (10,795) (48,016)
Other assets (15,304) 5,522
Other-net (10,229) 6,671
---------- --------
Net cash provided by operating activities 90,070 121,367
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (58,833) (48,748)
Acquisition of CTE (46,600) --
Proceeds from sale of fixed assets 5,000 513
Proceeds from sale of investments 14,416 12,599
---------- --------
Net cash used by investing activities (86,017) (35,636)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 153 (29,934)
Issuance of long-term debt 83 358
Repayment of long-term debt (656) (50,004)
Issuance of common stock 15,232 1,067
Repurchase of common stock (13,436) --
Dividends (11,081) (9,838)
---------- --------
Net cash used by financing activities (9,705) (88,351)
Effect of exchange rate changes 158 1,753
---------- --------
Decrease in cash and cash equivalents (5,494) (867)
Cash and cash equivalents at beginning of year 142,726 36,644
---------- --------
Cash and cash equivalents at end of quarter $ 137,232 $ 35,777
========== =========
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
Income taxes paid- net $ 12,772 $ 3,316
Interest paid 6,541 8,274
NON-CASH INVESTING ACTIVITIES
Fair value adjustment to securities available-for-sale $ (21,928) $ 9,759
Income tax effect related to fair value adjustment 8,772 (2,916)
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The condensed consolidated financial statements and notes have been
prepared by the Company without audit. Certain information and footnote
disclosures normally included in annual financial statements, prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted. Management believes that the condensed statements
include all necessary adjustments which are of a normal and recurring
nature and are adequate to present financial position, results of
operations and cash flows for the interim periods. The condensed
information should be read in conjunction with the financial statements and
notes incorporated by reference in the Company's latest annual report on
Form 10-K. The Company's fiscal year is the 52 or 53 weeks ending the last
Saturday in May. Fiscal year 1998 is 52 weeks and fiscal year 1997 was 53
weeks. The first quarter of 1998 was 13 weeks compared to 14 weeks in the
first quarter of 1997 and the first half of 1998 was 26 weeks compared to
27 weeks in the first half of 1997.
RESTRUCTURING
In the second quarter of 1998, the Company announced and began to implement
a restructuring plan designed to return the Video and Networking Division
business to profitable growth, and recorded a pre-tax provision of $60.0
million to account for these actions, which include streamlining its
product offerings and reducing the unit's cost structure to increase
operational efficiency. The plan will result in the separation of some
employees worldwide and the exiting of certain facilities and product lines
at a cost of $21.5 million. These costs are included in Non-recurring
charges on the Condensed Consolidated Statement of Operations. In
addition, the decision to streamline product offerings required a $38.5
million write-down of inventories in the quarter, which is included in cost
of sales.
ACQUISITION
On September 30, 1997, the Company acquired Siemens' Communications Test
Equipment GmbH (CTE), a wholly owned subsidiary of Siemens based in Berlin,
Germany, for approximately $46.6 million in cash, including direct
acquisition costs. The transaction was accounted for by the purchase
method of accounting, and accordingly, the results of operations of CTE
have been included in the Company's financial statements since the date of
acquisition. Pro forma comparative results of operations are not presented
because they are immaterial relative to the Company's results of
operations. The purchase price was allocated as follows:
(In thousands)
- -------------------------------------------------------------------------
Fair value of identified net assets acquired $ 6,600
Acquired in-process research and development 17,000
Identified intangibles 23,000
----------
$ 46,600
==========
Acquired in-process research and development of $17,000 was expensed in the
current quarter (see Non-recurring charges footnote).
The identified intangibles include $18.0 million of completed
technology and $5.0 million of workforce-in-place and will be amortized on
a straight-line basis over 15 years.
<PAGE> 6
INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
Nov. 30, May 31,
(In thousands) 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Materials and work in process $ 81,361 $ 134,743
Finished goods 148,418 103,297
---------- ---------
Inventories $ 229,779 $ 238,040
========== ==========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
Nov. 30, May 31,
(In thousands) 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,024 $ 6,096
Buildings 189,995 199,396
Machinery and equipment 546,226 493,791
---------- ----------
742,245 699,283
Accumulated depreciation and amortization (371,271) (356,153)
---------- ---------
Property, plant and equipment - net $ 370,974 $ 343,130
========== ==========
</TABLE>
NON-RECURRING CHARGES
Non-recurring charges consisted of:
(In thousands)
- --------------------------------------------------------------------------
Restructuring of the Video and Networking Division $ 59,960
In-process research and development acquired in the
purchase of CTE 17,000
Accrued integration costs associated with the
purchase of CTE 2,000
----------
Total non-recurring charges $ 78,960
Less: Inventory write-down included in cost of sales (38,482)
----------
Non-recurring charges $ 40,478
==========
<PAGE> 7
INCOME TAXES
The provision for (benefit from) income taxes consisted of:
<TABLE>
<CAPTION>
Quarter ended Two quarters ended
Nov. 29, Nov. 30, Nov. 29, Nov. 30,
(In thousands) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States $ (2,078) $ 7,503 $ 765 $ 13,442
State (679) 1,876 32 3,361
Foreign (7,693) 3,070 1,911 6,336
---------- ---------- ---------- ----------
Income taxes $ (10,450) $ 12,449 $ 2,708 $ 23,139
========== ========== ========== ==========
</TABLE>
The provision for income taxes was calculated at estimated annual effective
rates of 33% and 32%, respectively, for the quarters ended November 29,
1997, and November 30, 1996.
COMMON STOCK SPLIT AND DIVIDEND INCREASE
On September 24, 1997, the Company's Board of Directors approved a three-
for-two stock split of the Company's common stock, to be effected in the
form of a 50% stock dividend, to holders of record on October 10, 1997.
The Board of Directors also approved a 20% increase in the quarterly cash
dividend to holders of record on October 10, 1997. The cash dividend rate
was twelve cents on each post-split share. Financial information contained
in this report has been restated to reflect the impact of the common stock
split.
FUTURE ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 requires all companies whose capital structures
include convertible securities and options to make a dual presentation of
basic and diluted earnings per share. The new standard becomes effective
beginning with the Company's third quarter ending on February 28, 1998.
The pro forma diluted earnings per share under SFAS No. 128 is $(0.42) for
the quarter ended November 29, 1997 and $0.53 for the quarter ended
November 30, 1996, based upon average shares outstanding of 50.5 million
and 50.1 million, respectively. The pro forma diluted earnings per share
under SFAS No. 128 is $0.11 for the two quarters ended November 29, 1997
and $0.98 for the two quarters ended November 30, 1996, based upon average
shares outstanding of 51.5 million and 50.0 million, respectively.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company's fiscal year
ending May 1999. Reclassification of earlier financial statements for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
The new standard becomes effective for the Company's fiscal year ending May
1999, and requires that comparative information from earlier years be
restated to conform to the requirements of this standard.
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's financial condition is strong. Cash flows from operating
activities and borrowing capacity from existing lines of credit are
expected to be sufficient to meet current and anticipated future needs. At
the end of the second quarter (November 29, 1997), the Company maintained
bank credit facilities totaling $308.5 million, of which $298.7 million
was unused. Unused facilities include $148.7 million in lines of credit
and $150.0 million under a revolving credit agreement from United States
and foreign banks.
The Company continued to experience significant improvements in
working capital. Compared to the second quarter of fiscal 1997, accounts
receivable improved from 14.3% to 13.2% of annualized sales and inventory
improved from 13.7% to 10.9% of annualized sales. These improvements
reduced accounts receivable and inventory required to support the business
by $83 million.
Current assets decreased by $30.0 million from the year end balance at
May 31, 1997, due primarily to lower accounts receivable and inventory,
partly offset by higher other current assets. The decline in receivables
was primarily the result of faster collections. Inventory was lower
because of the $38.5 million write-down related to the restructuring of the
Video and Networking Division discussed below, partly offset by the
addition of inventory acquired in the quarter as a result of the
acquisition of Siemens' Communications Test Equipment business, and the
normal seasonal increase in finished products. The increase in other
current assets was due primarily to the tax effect of the restructuring of
the Video and Networking Division on current income tax benefits.
Current liabilities increased $21.3 million, due primarily to
restructuring accruals.
Property, plant and equipment increased by $27.8 million due to $60.5
million of capital expenditures as the Company expanded printer facilities
for future manufacturing capacity and continued to invest in information
systems software and hardware. The capital expenditures were partly offset
by depreciation of $31.3 million.
Shareholders' equity decreased by $18.2 million due primarily to a
decline in unrealized holding gains on investments in other companies as a
result of sales and declines in market value.
RESTRUCTURING
In the second quarter of fiscal 1998, the Company announced and began to
implement a restructuring plan designed to return the Video and Networking
Division business to profitable growth, and recorded a pre-tax provision of
$60.0 million to account for these actions, which include streamlining its
product offerings and reducing the unit's cost structure to increase
operational efficiency. The plan will result in the separation of some
employees worldwide and the exiting of certain facilities and product lines
at a cost of $21.5 million. These costs are included in Non-recurring
charges on the Condensed Consolidated Statement of Operations. In
addition, the decision to streamline product offerings required a $38.5
million write-down of inventories in the quarter, which is included in cost
of sales. The Company expects that approximately $16 million of the non-
recurring charges require expenditures of cash, of which about 10% has been
expended in the current quarter and about 50% will be expended in the rest
of this fiscal year. The remaining 40% will affect cash flows in fiscal
year 1999.
<PAGE> 9
ACQUISITION
On September 30, 1997, the Company acquired Siemens' Communications Test
Equipment GmbH (CTE), a wholly owned subsidiary of Siemens based in Berlin,
Germany, for approximately $46.6 million in cash, including direct
acquisition costs. The transaction was accounted for by the purchase
method of accounting. $17.0 million of the purchase was identified as in-
process technology, which had not completed the development process and had
no alternative future use, and was written off in the current quarter. In
addition, integration costs of $2.0 million associated with the acquisition
were accrued.
Results of Operations
TWO QUARTERS ENDED NOVEMBER 29, 1997
vs.
TWO QUARTERS ENDED NOVEMBER 30, 1996
Results for the first half of fiscal 1998 include charges of $79.0 million
($52.9 million after taxes, or $1.05 per share) related to the restructuring
of the Video and Networking Division and the acquisition of CTE.
Shares and earnings per share have been restated to reflect a three-
for-two stock split in October 1997.
Net sales were $1,010.3 million, an increase of 10% from the prior
year's total of $917.3 million. Net earnings were $5.5 million, or $0.11
per share compared with $49.2 million, or $1.00 per share in the first half
of fiscal 1997. Excluding the after-tax charges of $52.9 million, 1998 net
earnings would have been $58.4 million, or $1.16 per share.
Measurement Business Division sales of $475.4 million increased 16%
from the prior year, with growth in broadcast and telecommunications test
products and logic analyzers. Product orders increased 17% from $376.7
million to $439.6 million with strong growth in all geographic regions.
Color Printing and Imaging Division sales increased 21% from $281.8
million to $341.3 million and product orders increased 21% from $265.2
million to $320.9 million, with strong sales of the Phaser* 560 printer,
introduced in the first quarter, and the successful launch of the Phaser
380 during the second quarter. *(Phaser is a registered trademark of
Tektronix, Inc.).
Video and Networking Division sales decreased 14% from $225.4 million
to $193.6 million. The decline in sales was in the network displays
business, as the current results compare with a very strong first half last
year for that business which included two large installations of network
computers. Sales for the video content production business were up, led by
the PDR200 video file server. Product orders declined 13% from $216.7
million to $188.9 million.
Sales to customers in the United States increased from $500.1 million
to $527.8 million, and represented 52% of total sales. International sales
of $482.5 million were up 16%, with growth in all regions, particularly in
the Americas and Japan. Product orders from customers in the United States
of $483.3 million were up 9% from last year while international product
orders of $466.1 million were up 12%. International orders and sales
growth was even stronger when stated in local currencies, particularly in
Europe where some currencies declined significantly, year over year,
against the dollar.
Without the $38.5 million one-time inventory write-down related to the
restructuring of the Video and Networking Division, cost of sales as a
percentage of net sales for 1998 would have declined slightly to 57.3%.
Including the write-down, cost of sales increased as a percentage of net
sales from 57.4% to 61.1%. Research and development expenses decreased as
a percentage of net sales from 10.0% to 9.5%. Selling, general and
administrative expenses were comparable year-to-year as a percentage of sales.
<PAGE> 10
Excluding the non-recurring charges, the operating margin would have
improved from 7.8% to 8.3%. With the charges, operating income as a
percentage of sales declined from 7.8% in the first half of 1997 to 0.5%.
The provision for income taxes declined from $23.1 million to $2.7
million due to the lower earnings before taxes. The estimated effective
annual tax rate is 33% for the current year compared to 32% for the first
half of last year.
QUARTER ENDED NOVEMBER 29, 1997
vs.
QUARTER ENDED NOVEMBER 30, 1996
In the second quarter of fiscal 1998, net sales were $529.0 million, up 11%
from $477.2 million in the prior year. The Company recorded a net loss of
$21.2 million, or $0.42 per share, for the quarter compared to net earnings
of $26.5 million, or $0.54 per share in 1997. Excluding the after-tax
charges of $52.9 million, 1998 net earnings would have been $31.7 million,
or $0.63 per share.
Measurement Business sales of $247.7 million were up 22% from the
prior year reflecting growth across all major product areas, including
logic analyzers, broadcast and telecommunications test products. Product
orders were $230.5 million, an increase of 20% over product orders of
$192.4 million in the second quarter of 1997. Sales were strong in all
regions and orders were significantly higher except in Japan, where orders
were essentially flat.
Color Printing and Imaging sales increased 18% from $157.8 million to
$185.6 million, with strong growth in the office market around the world.
Product orders increased 12% from $153.0 million to $172.0 million, with
unit growth continuing on a more rapid pace. In the second quarter, the
Company introduced the Phaser 380, for sale into the specialty markets, and
experienced good demand.
Video and Networking sales were $95.7 million for the 1998 quarter,
down 18% from $116.1 million in 1997. The decline in sales was in the
network displays business, as the current results compare with a very
strong second quarter of the prior year for that business. Sales for the
video content production business were up, led by the PDR200 video file
server. Product orders were $89.7 million, a decline of 10% over 1997
product orders of $99.5 million. Video and Networking operated at a loss
for the quarter. The Company took a charge of $60.0 million to account for
actions to accelerate the division's return to profitability during the
fourth quarter of the current fiscal year.
Sales to customers in the United States increased by 7% from $256.4
million to $274.9 million, representing 52% of total sales. International
sales of $254.1 million were up 15% from $220.8 million in the prior year,
with particularly strong growth in Japan and the Americas. Product orders
from customers in the United States of $243.4 million were up 13% from last
year's first quarter while international product orders of $248.8 million
rose 8%.
Without the $38.5 million one-time inventory write-down related to the
restructuring of the Video and Networking Division the 1998 cost of sales
as a percentage of sales improved from 58.1% to 56.4%. The improvement is
due primarily to a heavier sales mix of higher margin new products and
supplies, favorable exchange rates on foreign purchases and manufacturing
cost reductions. Including the one-time write-down, cost of sales as a
percentage of net sales was 63.7%. Research and development expenses
decreased as a percentage of sales, from 9.6% to 9.5% while selling,
general and administrative expenses increased from 24.3% to 25.4% because
of a high level of new product introduction costs.
Excluding the non-recurring charges, the operating margin would have
improved from 8.1% to 8.7%. With the charges, operating margin was a
negative 6.2%.
The estimated effective annual tax rate is 33% for the current year
compared to 32% for the first half of last year.
<PAGE> 11
YEAR 2000
In connection with the Company's ongoing program to standardize and
upgrade its key financial, information and operational systems, an
assessment has been made of the ability of these systems to operate in, and
to process transactions and data involving, the year 2000 and beyond.
The Company believes that all key systems that are not already year 2000
compliant will be modified, upgraded or replaced prior to the year 2000,
and that any related costs will not have a material impact on the results
of operations, financial condition or cash flows of future periods.
Forward looking Statements
Statements and information included in this Form 10-Q that relate to the
Company's goals, strategies and expectations as to future results, events
and expectations are based on the Company's current expectations. They
constitute forward looking statements subject to a number of risk factors
that could cause actual results to differ materially from those currently
expected or desired. From time to time, information provided by the
Company, or statements made by its employees, may contain other forward
looking statements. As with many high technology companies, risk factors
that could cause the Company's actual results or activities to differ
materially from these forward looking statements include, but are not
limited to: world-wide economic and business conditions in the electronics
industry, including the effect on purchases by the Company's customers;
competitive factors, including pricing pressures, technological
developments and products offered by competitors; changes in product and
sales mix, and the related effects on gross margins; the Company's ability
to deliver a timely flow of competitive new products and market acceptance
of these products; the availability of parts and supplies from third party
suppliers on a timely basis and at reasonable prices; inventory risks due
to changes in market demand or the Company's business strategies; changes
in effective tax rates; customer demand; currency fluctuations; the fact
that a substantial portion of the Company's sales are generated from orders
received during the quarter, making prediction of quarterly revenues and
earnings difficult; and other risk factors listed from time to time in the
Company's reports filed with the Securities and Exchange Commission and
press releases.
Additional risk factors specific to the Company's current plans and
expectations that could cause the Company's actual results or activities to
differ materially from those stated include: the significant operational
issues the Company faces in executing its strategy in Video and Networking;
changes in the regulatory environment affecting the transition to high-
definition television within the time frame anticipated by the Company; the
timely introduction of new products scheduled during the Company's fiscal
year, which could be affected by engineering or other development program
slippages, the ability to ramp up production or to develop effective sales
channels; and the demand for and acceptance of new and other Company
products by the Company's customers, which could be affected by the current
uncertainties in economic conditions around the world and by activities of
the Company's competitors.
<PAGE> 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) (.1) Financial Data Schedule.
(10) (.1) Amendment No. 1 to Supplemental Executive Retirement
Agreement.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
January 8, 1998 TEKTRONIX, INC.
By /S/ CARL W. NEUN
--------------------------
Carl W. Neun
Senior Vice President and
Chief Financial Officer
<PAGE> 13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1998
<PERIOD-END> NOV-29-1997
<CASH> 137,232
<SECURITIES> 0
<RECEIVABLES> 282,260
<ALLOWANCES> 3,421
<INVENTORY> 229,779
<CURRENT-ASSETS> 721,504
<PP&E> 742,245
<DEPRECIATION> 371,271
<TOTAL-ASSETS> 1,319,883
<CURRENT-LIABILITIES> 325,423
<BONDS> 151,006
<COMMON> 228,387
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 524,672
<TOTAL-LIABILITY-AND-EQUITY> 1,319,883
<SALES> 0
<TOTAL-REVENUES> 1,010,320
<CGS> 0
<TOTAL-COSTS> 617,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,318
<INCOME-PRETAX> 8,207
<INCOME-TAX> 2,708
<INCOME-CONTINUING> 5,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,499
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<TEXT>
[DESCRIPTION] Amendment No. 1 to Supplemental Executive
Retirement Agreement
AMENDMENT NO. 1
TO
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
September 24, 1997
Tektronix, Inc.
an Oregon corporation
26600 SW Parkway
PO Box 1000, M/S 63-LAW
Wilsonville, Oregon 97070-1000 Tektronix
Carl W. Neun
3530 Lakeview Boulevard
Lake Oswego, Oregon 97035 Neun
In order to prevent a loss of Neun's retirement benefit
under the Supplemental Executive Retirement Agreement (SERP)
between Tektronix and Neun dated March 17, 1993 in the event of
termination of employment under certain circumstances involving a
change in control of Tektronix, the SERP is amended as follows.
1. Consequences of Change in Control
* * *
2.1 Section 2.1 is amended in its entirety
to provide: "Neun shall be entitled to retirement
benefits under this Agreement upon Retirement. Subject
to 6.3, "Retirement" means a termination of employment
after age 55 and 5 Years of Service."
2.2 The first clause of section 2.2 is
amended to provide: "Subject to 6.3, a "Year of
Service" means a 12-month period in which an employee
is continuously employed by Tektronix or an affiliate
as follows:."
* * *
4.1 The first clause of section 4.1 is
amended to provide: "A benefit shall be paid to the
surviving spouse if Neun dies when the following
conditions are met, subject to 6.3:."
* * *
6.1 Section 6.1 is amended in its entirety
to provide: "Subject to 5 and 6.3, Neun shall receive
no benefit under this Agreement if a termination of his
employment occurs before he meets the conditions for
Retirement described in 2.1."
* * *
6.3 A new section 6.3 is added as follows:
"If Neun qualifies for and receives benefits under
paragraph (iii) of Section 5 of the letter agreement
between Tektronix and Neun regarding change in control
dated September 10, 1993, the following shall apply:
(a) For 2.1, "Retirement"
shall be on attainment of age 55,
even though not then employed.
(b) For 2.2, if Neun does not
have at least five completed Years
of Service, he shall be credited
with as much additional service as
needed so that his completed Years
of Service equal five.
(c) For 4.1(a), Neun need not
be employed by Tektronix or an
Affiliate, but must die before
being eligible for Retirement.
(d) For 4.2(a), the amount
shall be the amount that would have
been payable under this Agreement
as the spouse's survivor annuity if
Neun had commenced benefits under
this Agreement at Retirement in the
form of a 50 percent joint and
survivor annuity with his spouse
and then died.
(e) For 4.2(b), the benefit
shall start with the month
following the date that Neun would
have been eligible for Retirement."
* * *
2. Effective Date
This amendment shall be effective September 24, 1997.
Tektronix Tektronix, Inc.
By /S/ JEROME J. MEYER
--------------------------------
Executed: November 17, 1997
Neun
/S/ CARL W. NEUN
--------------------------------
Carl W. Neun
Executed: October 20, 1997
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1998 | 0QTR1
| THC | https://www.sec.gov/Archives/edgar/data/70318/0001047469-98-001071.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001047469-98-001071.txt : 19980115
<SEC-HEADER>0001047469-98-001071.hdr.sgml : 19980115
ACCESSION NUMBER: 0001047469-98-001071
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980114
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TENET HEALTHCARE CORP
CENTRAL INDEX KEY: 0000070318
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062]
IRS NUMBER: 952557091
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-07293
FILM NUMBER: 98506598
BUSINESS ADDRESS:
STREET 1: 3820 STATE STREET
CITY: SANTA BARBARA
STATE: CA
ZIP: 93105-
BUSINESS PHONE: 8055637000
MAIL ADDRESS:
STREET 1: P O BOX 4070
CITY: SANTA MONICA
STATE: CA
ZIP: 90404
FORMER COMPANY:
FORMER CONFORMED NAME: NATIONAL MEDICAL ENTERPRISES INC /NV/
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ....... TO ....... .
COMMISSION FILE NUMBER I-7293
- --------------------------------------------------------------------------------
TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CA 93105
(Address of principal executive offices)
(805) 563-7000
(Registrant's telephone number, including area code)
___________________________
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
--- ---
AS OF DECEMBER 31, 1997 THERE WERE 306,194,567 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1997
and November 30, 1997...................................... 2
Condensed Consolidated Statements of Income - Three Months and
Six Months Ended November 30, 1996 and 1997................ 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended November 30, 1996 and 1997........................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 4. Submissions of Matters to a Vote of Security Holders.......... 14
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signature..................................................... 16
________________________
Note: Item 3 of Part I and Items 2, 3 and 5 of Part II are omitted because they
are not applicable.
1
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1997 1997
------- ------------
(DOLLAR AMOUNTS IN MILLIONS)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................................. $ 35 $ 14
Short-term investments in debt securities................................................. 116 125
Accounts receivable, less allowance for doubtful accounts ($224 at May 31 and $215 at
November 30)......................................................................... 1,346 1,559
Inventories of supplies, at cost.......................................................... 193 204
Deferred income taxes..................................................................... 294 213
Other current assets...................................................................... 407 508
------ ------
Total current assets............................................................ 2,391 2,623
------ ------
Investments and other assets................................................................... 678 565
Property and equipment, at cost................................................................ 6,922 7,269
Less accumulated depreciation and amortization............................................ 1,432 1,592
------ ------
Net property and equipment................................................................ 5,490 5,677
------ ------
Intangible assets, at cost less accumulated amortization
($226 at May 31 and $282 at November 30).................................................. 3,146 3,318
------ ------
$11,705 $12,183
------- -------
------- -------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1997 1997
---- ----
(DOLLAR AMOUNTS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt......................................................... $ 28 $ 16
Accounts payable.......................................................................... 540 476
Accrued employee compensation and benefits................................................ 309 329
Accrued interest payable.................................................................. 144 157
Reserves related to discontinued operations and
other non-recurring charges........................................................ 423 199
Other current liabilities................................................................. 425 457
------- -------
Total current liabilities....................................................... 1,869 1,634
------- -------
Long-term debt, net of current portion......................................................... 5,022 5,520
Deferred income taxes.......................................................................... 308 309
Other long-term liabilities and minority interests............................................. 1,282 1,260
Shareholders' equity:
Common stock, $0.075 par value; authorized 450,000,000 shares; 305,501,379 shares
issued at May 31 and 309,730,094 shares issued at November 30 ....................... 23 23
Other shareholders' equity................................................................ 3,240 3,507
Less common stock in treasury, at cost, 2,676,091 shares at May 31 and 3,754,891
shares at November 30................................................................ (39) (70)
------- -------
Total shareholders' equity...................................................... 3,224 3,460
------- -------
$11,705 $12,183
------- -------
------- -------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
---------------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net operating revenues................................................ $2,111 $2,429 $4,102 $4,760
------ ------ ------ ------
Operating expenses:
Salaries and benefits............................................ 873 1,007 1,690 1,973
Supplies......................................................... 290 330 556 651
Provision for doubtful accounts.................................. 111 136 223 284
Other operating expenses......................................... 445 512 867 998
Depreciation..................................................... 88 87 174 168
Amortization..................................................... 27 27 54 51
------ ------ ------ ------
Operating income...................................................... 277 330 538 635
------ ------ ------ ------
Interest expense, net of capitalized portion.......................... (102) (118) (202) (230)
Investment earnings................................................... 8 6 14 12
Minority interests in income of consolidated subsidiaries............. (9) (7) (16) (13)
Gain from change in value of indexed long-term debt................... - 18 - 18
------ ------ ------ ------
Income before income taxes............................................ 174 229 334 422
Taxes on income....................................................... (71) (91) (135) (168)
------ ------ ------ ------
Net income............................................................ $ 103 $ 138 $ 199 $ 254
------ ------ ------ ------
------ ------ ------ ------
Primary and fully diluted earnings per share.......................... $ 0.34 $ 0.44 $ 0.66 $ 0.82
Weighted average shares and share equivalents outstanding--
fully diluted (in thousands)..................................... 302,502 311,345 301,700 310,509
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
4
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1997
1996 1997
---- ----
(IN MILLIONS)
Cash flows from operating activities:
Recurring operations.............................. $106 $244
Net expenditures for discontinued operations
and non-recurring charges...................... (40) (232)
----- -----
Net cash provided by operating activities 66 12
Cash flows from investing activities:
Proceeds from sales of facilities and other
assets.......................................... 40 57
Collection of notes receivable.................... 69 20
Purchases of property and equipment............... (160) (215)
Purchases of new businesses, net of cash
acquired........................................ (458) (381)
Other items....................................... (6) (43)
----- -----
Net cash used in investing activities........ (515) (562)
----- -----
Cash flows from financing activities:
Proceeds from borrowings.......................... 1,120 1,386
Payments of borrowings............................ (723) (889)
Other items, primarily stock option exercises..... 16 32
----- -----
Net cash provided by financing activities.... 413 529
----- -----
Net decrease in cash and cash equivalents.............. (36) (21)
Cash and cash equivalents at beginning of period....... 107 35
Pooling adjustment to beginning balance to conform
fiscal year.......................................... (4) -
----- -----
Cash and cash equivalents at end of period............. $ 67 $ 14
----- -----
----- -----
Supplemental disclosures:
Interest paid, net of amounts capitalized......... $ 93 $201
Income taxes paid, net of refunds received........ 32 12
Fair value of common stock issued for purchase
of new business................................. - 9
Fair value of common stock tendered for note
receivable...................................... - 16
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
5
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The financial information furnished herein is unaudited; however, in the
opinion of management, the information reflects all adjustments that are
necessary to fairly state the financial position of Tenet Healthcare
Corporation (together with its subsidiaries, "Tenet" or the "Company"), the
results of its operations and its cash flows for the interim periods
indicated. All the adjustments are of a normal recurring nature.
The Company presumes that users of this interim financial information have
read or have access to the Company's audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year, and that the adequacy of
additional disclosure needed for a fair presentation may be determined in
that context. Accordingly, footnotes and other disclosure which would
substantially duplicate the disclosure contained in the Company's most
recent annual report to security holders have been omitted.
The patient volumes and net operating revenues of the Company's hospitals
are subject to seasonal variations caused by a number of factors, including
but not necessarily limited to, seasonal cycles of illness, climate and
weather conditions, vacation patterns of both hospital patients and
admitting physicians and other factors relating to the timing of elective
hospital procedures. Quarterly operating results are not necessarily
representative of operations for a full year for various reasons, including
levels of occupancy, interest rates, acquisitions, disposals, revenue
allowance and discount fluctuations, the timing of price changes, unusual
or non-recurring items and fluctuations in quarterly tax rates. These same
considerations apply to all year-to-year comparisons.
2. During the six months ended November 30, 1997, Tenet acquired five general
hospitals and several related healthcare businesses. All these transactions
have been accounted for as purchases. The results of operations of the
acquired businesses, which are not material in the aggregate, have been
included in the Company's consolidated statements of income and cash flows
from the dates of acquisition.
3. During the three-month and six-month periods ended November 30, 1997, net
cash expenditures charged against the Company's reserves for discontinued
operations and other non-recurring charges were approximately $67 million
and $232 million, respectively. The remaining reserve balances are
included in the Company's balance sheets at May 31, 1997 and November 30,
1997 as reserves related to discontinued operations and other non-recurring
charges or as other long-term liabilities.
4. There have been no material changes to the description of i) Professional
and General Liability Insurance set forth in Note 8A or ii) Significant
Legal Proceedings set forth in Note 8B of Notes to Consolidated Financial
Statements of Tenet for its fiscal year ended May 31, 1997.
5. The gain from changes in the value of indexed long-term debt resulted from
a decrease in the fair market value of the Company's investment in common
stock of Vencor, Inc., into which certain of the Company's notes are
exchangeable.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Income before income taxes was $174 million in the quarter ended November
30, 1996, and $229 million in the quarter ended November 30, 1997. For the
six-month periods ended November 30 1996 and 1997, income before income taxes
was $334 million and $422 million, respectively. The following is a summary of
operations for the three months and six months ended November 30, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------------------------------------------
1996 1997 1996 1997
------ ------ ------ ------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals....................... $1,944 $2,198 92.1% 90.5%
Other domestic operations........................ 167 231 7.9% 9.5%
------ ------ ----- ------
Net operating revenues................................ 2,111 2,429 100.0% 100.0%
------ ------ ----- ------
Operating expenses:
Salaries and benefits............................ (873) (1,007) 41.4% 41.5%
Supplies......................................... (290) (330) 13.7% 13.6%
Provision for doubtful accounts.................. (111) (136) 5.3% 5.6%
Other operating expenses......................... (445) (512) 21.0% 21.0%
Depreciation..................................... (88) (87) 4.2% 3.6%
Amortization..................................... (27) (27) 1.3% 1.1%
------ ------ ----- ------
Operating income...................................... $ 277 $ 330 13.1% 13.6%
------ ------ ----- ------
------ ------ ----- ------
SIX MONTHS ENDED NOVEMBER 30,
-------------------------------------------------------------------
1996 1997 1996 1997
------ ------ ------ ------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
Net operating revenues:
Domestic general hospitals....................... $3,762 $4,321 91.7% 90.8%
Other domestic operations........................ 340 439 8.3% 9.2%
------ ------ ----- ------
Net operating revenues................................ 4,102 4,760 100.0% 100.0%
------ ------ ----- ------
Operating expenses:
Salaries and benefits............................ (1,690) (1,973) 41.2% 41.5%
Supplies......................................... (556) (651) 13.6% 13.7%
Provision for doubtful accounts.................. (223) (284) 5.4% 6.0%
Other operating expenses......................... (867) (998) 21.2% 20.9%
Depreciation..................................... (174) (168) 4.2% 3.5%
Amortization..................................... (54) (51) 1.3% 1.1%
------ ------ ----- ------
Operating income...................................... $ 538 $ 635 13.0% 13.3%
------ ------ ----- ------
------ ------ ----- ------
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net operating revenues of other domestic operations in the table above consist
primarily of revenues from (i) physician practices, (ii) rehabilitation
hospitals, long-term care facilities and psychiatric hospitals that are located
on or near the same campuses as the Company's general hospitals; (iii)
healthcare joint ventures operated by the Company; (iv) subsidiaries of the
Company offering managed care and indemnity products; (v) revenues earned by
the Company in consideration of the guarantees of certain indebtedness and
leases of third parties; and (vi) equity in the earnings of unconsolidated
affiliates.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------- --------------------------------
INCREASE INCREASE
1996 1997 (DECREASE) 1996 1997 (DECREASE)
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of period)... 125 129 4 * 125 129 4 *
Licensed beds (at end of period)......... 26,959 28,715 6.5% 26,959 28,715 6.5%
Net inpatient revenues (in millions)..... $1,243 $1,390 11.8% $2,464 $2,731 10.8%
Net outpatient revenues (in millions).... $657 $759 15.5% $1,225 $1,494 22.0%
Admissions............................... 184,312 213,270 15.7% 363,068 418,842 15.4%
Equivalent admissions.................... 283,096 327,578 15.7% 534,354 617,411 15.5%
Average length of stay (days)............ 5.2 5.2 - * 5.2 5.1 (0.1) *
Patient days............................. 955,500 1,099,812 15.1% 1,877,433 2,154,251 14.7%
Equivalent patient days.................. 1,435,893 1,661,469 15.7% 2,731,754 3,148,109 15.2%
Net inpatient revenue per patient day.... $1,301 $1,264 (2.8)% $1,312 $1,268 (3.4)%
Net inpatient revenue per admission...... $6,744 $6,518 (3.4)% $6,787 $6,520 (3.9)%
Utilization of licensed beds............. 40.1% 42.5% 2.4% * 39.6% 41.6% 2.0% *
Outpatient visits........................ 2,417,281 2,642,883 9.3% 4,686,129 5,295,096 13.0%
* The change is the difference between 1996 and 1997 amounts shown.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals on a same-store basis:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------- --------------------------------
INCREASE INCREASE
1996 1997 (DECREASE) 1996 1997 (DECREASE)
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average licensed beds.................... 24,419 24,385 (0.1)% 24,382 24,317 (0.3)%
Patient days............................. 912,439 939,750 3.0% 1,811,268 1,857,610 2.6%
Net inpatient revenue per patient day.... $1,291 $1,282 (0.7)% $1,310 $1,288 (1.7)%
Admissions............................... 176,406 183,028 3.8% 350,488 361,876 3.2%
Net inpatient revenue per admission...... $6,679 $6,582 (1.5)% $6,769 $6,611 (2.3)%
Outpatient visits........................ 2,296,066 2,255,755 (1.8)% 4,511,674 4,551,144 0.9%
Average length of stay (days)............ 5.2 5.1 (0.1) * 5.2 5.1 (0.1) *
</TABLE>
* The change is the difference between 1996 and 1997 amounts shown.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company continues to experience increases in inpatient acuity and
intensity of services as less intensive services shift from an inpatient to an
outpatient basis or to alternative healthcare delivery services because of
technological and pharmaceutical improvements and continued pressures by payors
to reduce admissions and lengths of stay.
The Medicare program accounted for approximately 41.1% of the net patient
revenues of the Company's domestic general hospitals for the quarter ended
November 30, 1996 and 37.8% for the current-year quarter. The percentages for
the six-month periods ended November 30, 1996 and 1997 were 40.1% and 38.0%,
respectively. The Company believes that changes in Medicare reimbursement
mandated by the Balanced Budget Act of 1997 ("the 1997 Act") which became
effective October 1, 1997, as well as certain proposed changes to various
states' Medicaid programs, will reduce payments as the changes are phased in
over the next three years. Such reduced payments, however, are not likely to
have a material adverse effect on the Company's results of operations. The 1997
Act also contains various provisions that create new opportunities for the
Company. Certain of those provisions, such as those allowing for creation of
Provider Service Organizations, allow providers such as Tenet to contract
directly with the federal government for the provision of medical care to
Medicare beneficiaries on a fully capitated basis. Under capitation, the
Company receives a certain amount from the federal government for each Medicare
beneficiary enrolled in its plans and assumes the risks and rewards of meeting
the healthcare needs of those enrolled in its plans. The Company may purchase
insurance to cover all or a portion of the cost of meeting the healthcare needs
of those covered. The Company cannot predict at this time what the ultimate
effect of these opportunities will be.
Pressures to control healthcare costs have resulted in an increase in
the percentage of revenues attributable to managed care payors. The
percentage of net patient revenues of the Company's domestic general
hospitals attributable to managed care increased from approximately 28.1% for
the three months ended November 30, 1996 to approximately 32.8% for the
current-year quarter. The percentages for the six-month periods ended
November 30, 1996 and 1997 were 28.1% and 32.5%, respectively. The Company
anticipates that its managed care business will continue to increase in the
future. The Company generally receives lower payments from managed care
payors than it does from traditional indemnity insurers. The Company also
increasingly is assuming a greater share of risk by entering into capitated
arrangements with managed care payors and employers.
To address the effect of reduced payments for services, while continuing to
provide quality care to patients, the Company has implemented hospital
cost-control programs and overhead reduction plans and continues to form
integrated healthcare delivery systems in an effort to reduce inefficiencies,
create synergies, obtain additional business and control costs. As a result of
these efforts, such reduced payments are not expected to have a material adverse
effect on the Company's results of operations.
Net operating revenues from the Company's other domestic operations were
$167 million for the three months ended November 30, 1996, compared to $231
million for the current-year period, representing an increase of $64 million.
For the six-month periods ended November 30, 1996 and 1997, net operating
revenues from other domestic operations were $340 million and $439 million,
respectively. These increases primarily relates to the growth of its physician
practices. The Company acquired physician practices with
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
approximately 100 physicians during the six months ended November 30, 1997 and
currently owns or manages physician practices with approximately 950
physicians.
Salaries and benefits expense as a percentage of net operating
revenues was 41.4% in the quarter ended November 30, 1996 and 41.5% in the
current-year quarter. Salaries and benefits expense as a percentage of net
operating revenues for the prior and current six-month periods were 41.2% and
41.5%, respectively. The increases, though slight, are due primarily to the
acquisitions of several general hospitals.
Supplies expense as a percentage of net operating revenues was 13.7% in the
quarter ended November 30, 1996 and 13.6% in the current-year quarter. Supplies
expense as a percentage of net operating revenues for the prior and current
six-month periods were 13.6% and 13.7%, respectively. The Company expects to
continue to focus on reducing supplies expense through incorporating acquired
facilities into the Company's existing group-purchasing program and by
developing and expanding various programs designed to improve the purchasing and
utilization of supplies.
The provision for doubtful accounts as a percentage of net operating
revenues was 5.3% in the quarter ended November 30, 1996, and 5.6% in the
current-year quarter. The provision for doubtful accounts as a percentage of net
operating revenues for the prior and current six-month periods were 5.4% and
6.0%, respectively. The increases are partially attributable to a shift in
revenues from Medicare and Medicaid to managed-care. Also, they relate to
recent acquisitions and to an increase in accounts receivable. The Company,
through its collection subsidiary, Syndicated Office Systems, has established
improved follow-up collection systems by consolidating the collection of
accounts receivable in all the Company's facilities.
Other operating expenses as a percentage of net operating revenues was
21.0% for the prior and current-year quarters ended November 30, 1996 and 1997,
respectively. Other operating expenses as a percentage of net operating
revenues for the prior and current six-month periods were 21.2% and 20.9%,
respectively. The improvement in the current quarter is the result of cost
reduction programs.
Depreciation and amortization expense as a percentage of net operating
revenues was 5.5% in the quarter ended November 30, 1996, and 4.7% in the
current-year quarter. Depreciation and amortization expense as a percentage of
net operating revenues for the prior and current six-month periods were 5.5% and
4.6%, respectively. The decrease is primarily due to the effect of the May 1997
write-down for impairment of the carrying values of long-lived assets of certain
general hospitals and medical office buildings and the write-off of goodwill
and other long-lived assets related to some of the Company's physician
practices.
Interest expense, net of capitalized interest, was $102 million in the
quarter ended November 30, 1996 and $118 million in the current-year quarter.
Interest expense, net of capitalized interest for the prior and current
six-month periods was $202 million and $230 million, respectively. The increase
is primarily due to increased borrowings for acquisitions.
The $18 million gain during the quarter ended November 30, 1997 from
changes in the value of the Company's indexed long-term debt instruments (its 6%
Subordinated Exchangeable Notes) resulted from a reduction in the carrying
value of the exchangeable notes due to a decline in the fair market value of the
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Company's investment in the common stock of Vencor, Inc. ("Vencor") to a price
below the $38.55 per share exchange price. The investment in Vencor stock is
treated as available for sale with changes in value recorded in shareholders'
equity. At November 30, 1997 the market price of Vencor's common stock was
$24.25 per share. At the end of the fourth quarter of fiscal 1997, the Company
had recorded a pretax, noncash charge to earnings amounting to $18 million
because and to the extent that the fair market value of its investment in Vencor
stock exceeded the carrying value of the exchangeable notes at the end of that
accounting period. The gain recorded in the current quarter reverses that
charge.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the six months ended November 30, 1997 was
derived primarily from borrowings under the Company's unsecured bank credit
agreement and the sale of certain assets. Net cash provided by recurring
operating activities for the six months ended November 30, 1996 was $106 million
before expenditures of $40 million for discontinued operations and
non-recurring charges. Net cash provided by recurring operating activities for
the six months ended November 30, 1997 was $244 million before expenditures of
$232 million for discontinued operations and non-recurring charges. Management
believes that future cash provided by recurring operating activities, along with
the availability of credit under the Company's unsecured revolving credit
agreement, should be adequate to meet debt service requirements and to finance
planned capital expenditures, acquisitions and other known operating needs, over
the short-term (up to 18 months) and the long-term (18 months to three years).
Net proceeds from borrowings under the Company's unsecured revolving bank
credit agreement were $618 million during the six months ended November 30,
1997. Cash proceeds from the sale of property and equipment were $57 million,
primarily from the sale of an acute hospital. The Company's cash and cash
equivalents at November 30, 1997 were $14 million, a decrease of $21 million
over May 31, 1997. Working capital at November 30, 1997 was $989 million,
compared to $522 million at May 31, 1997.
Cash payments for property and equipment were $160 million in the six
months ended November 30, 1996, compared to $215 million in the current-year
period. The Company expects to spend approximately $400 million to $500 million
annually on capital expenditures, before any significant acquisitions of
facilities and other healthcare operations and before an estimated $355 million
in commitments to fund the construction of two new hospitals over the next three
years. Such capital expenditures relate primarily to the development of
healthcare services networks in selected geographic areas, design and
construction of new buildings, expansion and renovation of existing facilities,
equipment additions and replacements, introduction of new medical technologies
and various other capital improvements.
Purchases of new businesses, net of cash acquired, were $458 million in the
six months ended November 30, 1996 and $381 million for the six months ended
November 30, 1997. These acquisitions were financed substantially by
borrowings under the Company's credit agreement.
The Company's strategy includes the pursuit of growth through acquisitions
and partnerships, including the development of integrated healthcare systems in
certain strategic geographic areas, hospital acquisitions and partnerships and
physician practice acquisitions and partnerships. All or portions of this
growth may be
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
financed through available credit under the existing credit facility or,
depending on capital market conditions, sale of additional debt or equity
securities or other bank borrowings. The Company's unused borrowing capacity
under its unsecured revolving credit agreement was $1.4 billion as of November
30, 1997.
The Company's unsecured revolving credit agreement and the indentures
governing its senior and senior subordinated notes have, among other
requirements, affirmative, negative and financial covenants with which the
Company must comply. These covenants include, among other requirements,
limitations on other borrowings, liens, investments, the sale of all or
substantially all assets and prepayment of subordinated debt, a prohibition
against the Company declaring or paying a dividend or purchasing its common
stock unless its senior long-term unsecured debt securities are rated BBB- or
higher by Standard and Poors' Rating Services and Baa3 or higher by Moody's
Investors Service, Inc., and covenants regarding maintenance of specified levels
of net worth, debt ratios and fixed charge coverages. The Company is in
compliance with its loan covenants.
BUSINESS OUTLOOK
The general hospital industry in the United States and the Company's
general hospitals continue to have significant unused capacity, and thus there
is substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. Increased competition, admission constraints and
payor pressure are expected to continue.
The continuing challenge facing the Company and the healthcare industry as
a whole is to continue to provide quality patient care in an environment of
rising costs, strong competition for patients and a general reduction of
reimbursement rates by both private and government payors. Because of national,
state and private industry efforts to reform healthcare delivery and payment
systems, the healthcare industry as a whole faces increased uncertainty. As
noted above, the Company believes that changes in reimbursement mandated by the
1997 Act, as well as certain proposed changes to various states' Medicaid
programs, will reduce payments as the changes are phased in. The Company is
unable to predict whether any other healthcare legislation at the federal and/or
state level will be passed in the future, but it continues to monitor all
proposed legislation and analyze its potential impact in order to formulate the
Company's future business strategies.
THE YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000. In connection with this problem ("the Year 2000
Issue"), Tenet has initiated a comprehensive assessment of its computer
systems and applications, including the embedded systems which control
certain medical equipment and other equipment. The Company's financial and
general ledger systems are substantially compliant already. Modifications to
payroll and patient accounting systems are underway and are expected to be
completed by early 1999. The Company expects that costs to upgrade these
systems will not be material. It has not yet completed an estimate of the costs
of bringing its other applications, including embedded systems, into
compliance. Furthermore, the Company presently has no assurance that the
systems of the Federal and State governments, other payors or other companies
with which the Company's systems interface or on which they rely, will be
upgraded on a timely basis. The Company, therefore, is not able to determine
whether the Year 2000 Issue will materially affect future financial results
or future financial conditions. Generally accepted accounting principles
require that the costs of modifying computer software for the Year 2000 Issue
be charged to expense as they are incurred.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects," and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
national and in the regions in which the Company operates; industry capacity;
demographic changes; existing laws and government regulations and changes in, or
the failure to comply with laws and governmental regulations; legislative
proposals for healthcare reform; the ability to enter into managed care provider
arrangements on acceptable terms; a shift from fee-for-service payment to
capitated and other risk-
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
based payment systems; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition; the loss
of any significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for, healthcare; changes in
business strategy or development plans; the ability to attract and retain
qualified personnel, including physicians; the significant indebtedness of the
Company; and the availability and terms of capital to fund the expansion of the
Company's business, including the acquisition of additional facilities. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. Tenet disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
There have been no material developments in the legal proceedings described
in the Company's Annual Report on Form 10-K for its fiscal year ended May
31, 1997.
Items 2, 3 and 5 are not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on October 1, 1997.
The shareholders elected all of the Company's nominees for director and
approved the First Amendment to the 1994 Directors Stock Option Plan, the
1997 Annual Incentive Plan and the First Amendment to the 1995 Employee
Stock Purchase Plan and ratified the selection of KPMG Peat Marwick LLP as
the Company's independent auditors for the fiscal year ended May 31, 1998.
The votes were as follows:
1. Election of Directors For Withheld
--- --------
Jeffrey C. Barbakow 262,036,028 2,044,747
Richard S. Schweiker 262,211,115 1,869,660
2. Proposal to approve the First Amendment to the 1994 Directors Stock Option
Plan:
For: 235,706,983
Against: 26,834,036
Abstaining: 691,968
3. Proposal to approve the 1997 Annual Incentive Plan:
For: 255,154,443
Against: 7,323,993
Abstaining: 754,551
4. Proposal to approve the First Amendment to the 1995 Employee Stock
Purchase Plan:
For: 257,513,784
Against: 5,073,747
Abstaining: 645,456
14
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
5. Ratification of selection of KPMG Peat Marwick LLP:
For: 263,593,629
Against: 160,371
Abstaining: 326,775
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(3) Restated By-Laws of Tenet Healthcare Corporation, as
amended October 1, 1997.
(11) (Page 17) Statement Re: Computation of Per Share
Earnings for the three months and six months ended
November 30, 1996 and 1997.
(27.1) Financial Data Schedule for the quarter ended November
30, 1997 (included only in the EDGAR filing).
(27.2) Restated Financial Data Schedule for the quarter ended
November 30, 1996 (included only in the EDGAR filing).
(b) Reports on Form 8-K
(a) None.
15
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
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.
TENET HEALTHCARE CORPORATION
(Registrant)
Date: January 14, 1998 /s/ TREVOR FETTER
---------------------------------------
Trevor Fetter
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ RAYMOND L. MATHIASEN
---------------------------------------
Raymond L. Mathiasen
Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<DESCRIPTION>EXH 3 - RESTATED BY-LAWS OF TENET HEALTHCARE
<TEXT>
<PAGE>
RESTATED BY-LAWS OF
TENET HEALTHCARE CORPORATION
A NEVADA CORPORATION
AS AMENDED OCTOBER 1, 1997
ARTICLE I
SHAREHOLDERS' MEETINGS
SECTION 1.1 PLACE OF MEETINGS.
All meetings of the shareholders shall be held at the principal office
of the Corporation in the State of California, or at any other place within
or without the State of Nevada as may be designated for that purpose from
time to time by the Board of Directors.
SECTION 1.2 ANNUAL MEETINGS.
The Annual meeting of the shareholders shall be held not later than 210
days after the close of the fiscal year, on the date and at the time set by
the Board of Directors, at which time the shareholders shall elect by
plurality vote an annual Class of the Board of Directors, consider reports of
the affairs of the Corporation, and transact such other business as may
properly be brought before the meeting.
SECTION 1.3 SPECIAL MEETINGS.
Special meetings of the shareholders, for any purpose or purposes
whatsoever, may be called at any time by the Chief Executive Officer or by
the Board of Directors.
SECTION 1.4 NOTICE OF MEETINGS.
1.4.1. Notice of each meeting of shareholders, whether annual or
special, shall be given at least 10 and not more than 60 days prior to the day
thereof by the Secretary or any Assistant Secretary causing to be delivered to
each shareholder of record entitled to vote at such meeting a written notice
stating the time and place of the meeting and the purpose or purposes for which
the meeting is called. Such notice shall be signed by the Chief Executive
Officer, the President, the Secretary or any Assistant Secretary and shall be
mailed postage prepaid to each shareholder at his address as it appears on the
stock books of the Corporation. If any shareholder has failed to supply an
address, notice shall be deemed to have been given if mailed to the address of
the principal office of the Corporation, or published at least once in a
newspaper having general circulation in the county in which the principal office
is located.
<PAGE>
-2-
1.4.2. It shall not be necessary to give any notice of the
adjournment of or the business to be transacted at an adjourned meeting other
than by announcement at the meeting at which such adjournment is taken;
provided that when a meeting is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting.
SECTION 1.5 CONSENT BY SHAREHOLDERS.
Any action which may be taken at a regular meeting of the shareholders,
except election of directors, may be taken without a meeting, if authorized
by a writing signed by holders of the number of shares required under the law
to give their approval for such purpose.
SECTION 1.6 QUORUM.
1.6.1. The presence in person or by proxy of the persons
entitled to vote a majority of the voting shares at any meeting constitutes a
quorum for the transaction of business. Shares shall not be counted in
determining the number of shares represented or required for a quorum or in
any vote at a meeting, if voting of them at the meeting has been enjoined or
for any reason they cannot be lawfully voted at the meeting.
1.6.2. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum.
1.6.3. In the absence of a quorum, a majority of the shares
present in person or by proxy and entitled to vote may adjourn any meeting
from time to time, but not for a period of more than 30 days at any one time,
until a quorum shall attend.
SECTION 1.7 VOTING RIGHTS.
1.7.1. Every shareholder of record of the Corporation shall
be entitled at each meeting of the shareholders to one vote for each share of
stock standing in his name on the books of the Corporation. Except as
otherwise provided by law, or by the Articles of Incorporation or any
amendment thereto, or by the By-Laws, if a quorum is present, the majority of
votes cast in person or by proxy shall be binding upon all shareholders of
the Corporation.
1.7.2. The Board of Directors shall designate a day not more
than 60 days prior to any meeting of the shareholders as the day as of which
shareholders entitled to notice of and to vote at such meetings shall be
determined.
<PAGE>
-3-
SECTION 1.8 PROXIES.
Every shareholder entitled to vote or to execute consents may do so
either in person or by written proxy executed in accordance with the
provisions of Section 78.355 of the Nevada Revised Statutes and filed with
the Secretary of the Corporation.
SECTION 1.9 MANNER OF CONDUCTING MEETINGS.
To the extent not in conflict with the provisions of the law relating
thereto, the Articles of Incorporation, or express provisions of these
By-Laws, meetings shall be conducted pursuant to such rules as may be adopted
by the chairman presiding at, or a majority of the shares represented at, the
meeting.
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 2.1 POWERS.
Subject to the limitation of the Articles of Incorporation, of the
By-Laws, and of the laws of the State of Nevada as to action to be authorized
or approved by the shareholders, all corporate powers shall be exercised by
or under authority of, and the business and affairs of this Corporation shall
be controlled by, a Board of Directors.
SECTION 2.2 NUMBER AND QUALIFICATION.
The authorized number of directors of this Corporation shall be not less
than eight nor more than 15, with the exact number to be established from
time to time by resolution of the Board of Directors of this Corporation.
All directors of this Corporation shall be at least 21 years of age and at
least a majority shall be citizens of the United States.
SECTION 2.3 CLASSIFICATION AND ELECTION.
The Board of Directors shall be classified into three annual Classes,
with four directors in Class 1, four directors in Class 2, and five directors
in Class 3. Each Class of directors shall be elected for terms of three
years. Each term shall continue for the number of years stated and until
their successors are elected and have qualified. Their term of office shall
begin immediately after election. These By-Laws are being adopted subsequent
to the initial classification of directors in 1975. The directors in office
as of the date of adoption hereof shall continue to serve the terms for which
they have been previously elected.
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SECTION 2.4 INCREASE IN THE NUMBER OF DIRECTORS.
The Board of Directors may change the number of directors from time to
time; provided, however, neither the Board of Directors nor the shareholders
may ever increase the number of directorships by more than one during any
twelve-month period, except upon the affirmative vote of two-thirds of the
directors of each Class, or the affirmative vote of the holders of two-thirds
of all outstanding shares voting together and not by class. This provision
may not be amended except by a like vote.
SECTION 2.5 VACANCIES.
2.5.1. Any vacancies in the Board of Directors, except
vacancies first filled by the shareholders, may be filled by the affirmative
vote of two-thirds of the remaining directors of each Class, though less than
a quorum, or by a sole remaining director. Each director so elected shall
hold office for the balance of the term of the resigning director and until
his successor is elected. The power to fill vacancies shall in no event be
delegated to any committee appointed in accordance with these By-Laws.
2.5.2. The shareholders may at any time elect a director to
fill any vacancy not filled by the directors, and may elect the additional
directors at the meeting at which an amendment of the By-Laws is voted
authorizing an increase in the number of directors.
2.5.3. A vacancy or vacancies shall be deemed to exist in
case of the death, resignation, or removal of any director, or if the
directors or shareholders shall increase the authorized number of directors
but shall fail at a meeting at which such increase is authorized or at an
adjournment thereof to elect the additional director so provided for, or in
case the shareholders fail at any time to elect the full number of authorized
directors.
2.5.4. If the Board of Directors accepts the resignation of a
director tendered to take effect at a future time, the Board or the
shareholders shall have power to immediately elect a successor who shall take
office when the resignation shall become effective.
2.5.5. No reduction of the number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
SECTION 2.6 REMOVAL OF DIRECTORS.
The entire Board of Directors or any individual director may be removed
from office, with or without cause, by the vote or written consent of
shareholders representing two-thirds of the issued and outstanding capital
stock entitled to vote.
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SECTION 2.7 RESIGNATIONS.
Any director of the Corporation may resign at any time either by oral
tender of resignation at any meeting of the Board or by giving written notice
thereof to the Secretary, the Chief Executive Officer or the President. Such
resignation shall take effect at the time it specifies, and the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 2.8 PLACE OF MEETINGS.
Meetings of the Board of Directors shall be held at the principal office
of the Corporation in the State of California, or at such other place within
or without the State of Nevada as may be designated for that purpose by the
Board of Directors. Any meeting shall be valid, wherever held, if held by the
written consent of all members of the Board of Directors, given before or
after the meeting and filed with the Secretary of the Corporation.
SECTION 2.9 MEETINGS AFTER ANNUAL SHAREHOLDERS' MEETING.
The first meeting of the Board of Directors held after the annual
shareholders' meeting shall be held at such time and place within or without
the State of Nevada as shall be fixed by announcement of the Chief Executive
Officer or the President given at the annual shareholders' meeting, and no
other notice of such meeting shall be necessary, provided a majority of the
whole Board shall be present. Alternatively, such meeting may be held at
such time and place as shall be fixed pursuant to notice given under other
provisions of these By-Laws.
SECTION 2.10 OTHER REGULAR MEETINGS.
2.10.1. Regular meetings of the Board of Directors shall be
held at such time and place within or without the State of Nevada as may be
agreed upon from time to time by the Board.
2.10.2. No notice need be given of regular meetings, except
that a written notice shall be given to each director of the resolution
establishing specific meeting dates or a regular meeting date, which notice
shall set forth the date of the month, the time, and the place of the
meetings.
SECTION 2.11 SPECIAL MEETINGS.
Special meetings of the Board of Directors shall be held whenever called
by the Chief Executive Officer or the President or by two-thirds of the
directors of each Class. Notice of any such meeting shall be mailed to each
director not later than three days before the day on which the meeting is to
be held, or shall be sent to him by telegraph, or delivered personally or by
telephone, not later than midnight of the day before the day of the meeting.
Any meeting of the
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Board of Directors shall be a legal meeting without any notice thereof having
been given, if each director consents to the holding thereof or waives notice
by a writing filed with the Secretary, or is present thereat and their oral
consents are entered on the minutes, or they take part in the deliberations
thereat without objection. Except as otherwise provided in the By-Laws or as
may be indicated in the notice thereof, any and all business may be
transacted at any special meeting.
SECTION 2.12 WAIVER OF NOTICE.
Anything herein to the contrary notwithstanding, notice of any meeting
of directors shall not be required as to any director who shall waive notice
in writing (including telex, facsimile telephonic transmission, telegram,
cablegram or radiogram) before or after such meeting.
SECTION 2.13 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned.
SECTION 2.14 QUORUM.
A majority of the number of directors as fixed by the Articles of
Incorporation or By-Laws shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the directors
present at any meeting at which there is a quorum, when duly assembled, is
valid as a corporate act; provided, that a minority of the directors, in the
absence of a quorum, may adjourn from time to time or fill vacant
directorships in accordance with Section 2.5 but may not transact any
business.
SECTION 2.15 ACTION BY UNANIMOUS WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
of Directors may be taken without a meeting, if all members of the Board
shall individually or collectively consent in writing thereto. Such written
consent shall be filed with the minutes of the proceedings of the Board and
shall have the same force and effect as a unanimous vote of such directors.
SECTION 2.16 COMPENSATION.
The directors may be paid their expenses of attendance at each meeting
of the Board of Directors. Additionally, the Board of Directors may from
time to time, in its discretion, pay to directors either or both a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary
for services as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special
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or standing committees may be allowed like reimbursement and compensation for
attending committee meetings.
SECTION 2.17 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
directors of the Corporation are in any way interested in, or connected with,
any other party to, such contract or transaction or are themselves parties to
such contract or transaction, provided that such transaction satisfies
Section 78.140 of the Nevada Revised Statutes; and each and every person who
may become a director of the Corporation is hereby relieved, to the extent
permitted by law, from any liability that might otherwise exist from
contracting in good faith with the Corporation for the benefit of himself or
any person in which he may be in any way interested or with which he may be
in any way connected. Any director of the Corporation may vote and act upon
any matter, contract or transaction between the Corporation and any other
person without regard to the fact that he is also a stockholder, director or
officer of, or has any interest in, such other person.
SECTION 2.18 EMERITUS POSITIONS.
The Board of Directors may authorize parties to serve in an emeritus
position with respect to the Board of Directors, included by way of example
but not by way of limitation, as an Emeritus Director, as a Chairman Emeritus
of the Board of Directors or as a Vice-Chairman Emeritus of the Board of
Directors. These positions shall be honorary positions and parties elected to
those positions may be asked to attend meetings of the board of directors and
meeting of the shareholders from time to time. A party holding an emeritus
position shall not be an officer or director of the Company, shall have no
vote at a director's meeting, shall receive no fees for service in that
position and shall not be given access to material, non-published information
pertaining, to the Company. A party filling an emeritus position shall be
requested to do so because of his or her experience with and contributions to
the Company.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a Chairman, a Vice
Chairman, a Chief Executive Officer, a President, one or more Senior
Executive Vice Presidents, one or more Executive Vice Presidents, one or more
Group Presidents and Chief Executive Officers, one or more Senior Vice
Presidents, one or more Vice Presidents, a Secretary, and a Treasurer. Any
person may hold two or more offices. The executive officers of the
Corporation shall be elected
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annually by the Board of Directors and shall hold office for one year or
until their respective successors shall be elected and shall qualify.
SECTION 3.2 APPOINTED OFFICERS: TITLES.
3.2.1. The Chief Executive Officer or the Secretary in the
case of Assistant Secretaries or the Treasurer in the case of Assistant
Treasurers may appoint one or more Assistant Secretaries or one or more
Assistant Treasurers, each of whom shall hold such title at the pleasure of
the appointing officer, have such authority and perform such duties as are
provided in the By-Laws, or as the Chief Executive Officer or the appointing
officer may determine from time to time. Any person appointed under this
Section 3.2.1 to serve in any of the foregoing positions shall be deemed by
reason of such appointment or service in such capacity to be an "officer" of
the corporation.
3.2.2. The Chief Executive Officer or a person designated by
the Chief Executive Officer may also appoint a president, one or more
executive vice presidents, one or more senior vice presidents, one or more
vice presidents and one or more assistant vice presidents for each operating
group and division of the Corporation and one or more senior vice presidents,
one or more vice presidents and one or more assistant vice presidents for
each corporate staff function and a corporate controller and one or more
assistant controllers. Each of such persons will hold such title at the
pleasure of the Chief Executive Officer and have authority to act for and
shall perform duties with respect to only the group, division or corporate
staff function for which the person is appointed. Any person appointed under
this Section 3.2.2 to serve in any of the foregoing positions shall not be
deemed by reason of such appointment or service in such capacity to be an
"officer" of the Corporation.
SECTION 3.3 REMOVAL AND RESIGNATION.
3.3.1. Any officer may be removed, either with or without
cause, by a majority of the directors at the time in office, at any regular
or special meeting of the Board. Any appointed person may be removed from
such position at any time by the person making such appointment or his
successor.
3.3.2. Any officer may resign at any time, by giving written
notice to the Board of Directors, the Chief Executive Officer, the President
or the Secretary of the Corporation. Any such resignation shall take effect
at the date of the receipt of such notice, or at any later time specified
therein; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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SECTION 3.4 VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in the By-Laws for regular appointments to such office.
SECTION 3.5 CHAIRMAN AND VICE CHAIRMAN.
The Chairman shall preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time
to time assigned to him by the Board of Directors. The Vice Chairman shall,
in the absence of the Chairman, preside at all meetings of the Board of
Directors and shall exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors.
SECTION 3.6 CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall, subject to the control of the Board
of Directors, have general supervision, direction, and control of the
business and affairs of the Corporation. He shall preside at all meetings of
the shareholders and, in the absence of the Chairman of the Board and the
Vice Chairman of the Board, at all meetings of the Board of Directors. He
shall be ex officio a member of the Executive Committee and shall have the
general powers and duties of management usually vested in the office of chief
executive officer of a corporation and such other powers and duties as may be
prescribed by the Board of Directors.
SECTION 3.7 PRESIDENT.
In the absence or disability of the Chief Executive Officer, the
President shall perform all of the duties of the Chief Executive Officer and
when so acting shall have all the powers and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign
all instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the By-Laws. The
President shall have the general powers and duties usually vested in the
office of president of a corporation and such other powers and duties as may
be prescribed by the Chief Executive Officer or the Board of Directors.
SECTION 3.8 SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENT, SENIOR
VICE PRESIDENT AND VICE PRESIDENT.
In the absence or disability of the Chief Executive Officer and the
President, a Senior Executive Vice President, an Executive Vice President or
a Group President and Chief Executive Officer, in the order of his rank and
seniority shall perform all of the duties of the Chief Executive Officer, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign
all instruments and to
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take all actions which the Chief Executive Officer is authorized to perform
by the Board of Directors or the By-Laws. The Senior Executive Vice
Presidents, Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall have the general powers and duties usually vested in the
office of a vice president of a corporation; the Group Presidents and Chief
Executive Officers shall have the general powers and duties of a principal
executive officer of an operating group of a corporation; and each of them
shall have such other powers and perform such other duties as from time to
time may be prescribed for them respectively by the Board of Directors, the
Executive Committee of the Board of Directors, the Chief Executive Officer or
the By-Laws.
SECTION 3.9 SECRETARY AND ASSISTANT SECRETARIES.
3.9.1. The Secretary shall (1) attend all sessions of the
Board and all meetings of the shareholders; and (2) record and keep, or cause
to be kept, all votes and the minutes of all proceedings in a book to be kept
for that purpose at the principal office of the Corporation, or at such other
place as the Board of Directors may from time to time determine, specifying
therein (i) the time and place of holding, (ii) whether regular or special,
and if special, how authorized, (iii) the notice thereof given, (iv) the
names of those present at directors' meetings, (v) the number of shares
present or represented at shareholders' meetings, and (vi) the proceedings
thereof; and (3) perform like duties for the Executive and other standing
committees, when required. In addition, he shall keep or cause to be kept,
at the principal office of the Corporation in the State of Nevada, those
documents required to be kept thereat by Section 5.2 of the By-Laws and
Section 78.105 of the Nevada Revised Statutes.
3.9.2. The Secretary shall give, or cause to be given, notice
of meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or the Chief Executive Officer, under whose supervision he
shall be. He shall keep in safe custody the seal of the Corporation, and,
when authorized by the Board, affix the same to any instrument requiring it,
and when so affixed, it shall be attested by his signature or by the
signature of the Treasurer or an Assistant Secretary. The Secretary is
hereby authorized to issue certificates, to which the corporate seal may be
affixed, attesting to the incumbency of officers of this Corporation or to
actions duly taken by the Board of Directors or the shareholders.
3.9.3. The Assistant Secretaries, in the order of their
seniority, shall in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary, and shall perform such other
duties as the Chief Executive Officer or the Secretary shall prescribe.
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SECTION 3.10 TREASURER AND ASSISTANT TREASURERS.
3.10.1. The Treasurer shall deposit all moneys and other
valuables in the name, and to the credit, of the Corporation, with such
depositories as may be ordered by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors,
shall render to the Chief Executive Officer and directors, whenever they
request it, an account of all his transactions as Treasurer, and of the
financial condition of the Corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or
the By-Laws.
3.10.2. The Assistant Treasurers, in the order of their
seniority, shall in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer, and shall perform such other
duties as the Chief Executive Officer or the Treasurer shall prescribe.
SECTION 3.11 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS.
In addition to the foregoing powers and duties specifically prescribed
for the respective officers, the Board of Directors may from time to time by
resolution (i) impose or confer upon any of the officers such additional
duties and powers as the Board of Directors may see fit, (ii) determine the
order of seniority among the officers, and/or (iii) except as otherwise
provided above, provide that in the absence of any officer or officers, any
other officer or officers shall substitute for and assume the duties, powers
and authority of the absent officer or officers. Any such resolution may be
final, subject only to further action by the Board of Directors, or the
resolution may grant such discretion, as the Board of Directors deems
appropriate, to the Chairman, the Vice Chairman, the Chief Executive Officer,
the President (or in his absence the Senior Executive Vice President or the
Executive Vice President serving in his place) to impose or confer additional
duties and powers, to determine the order of seniority among officers, and/or
to provide for substitution of officers as above described.
SECTION 3.12 COMPENSATION.
The officers of the Corporation shall receive such compensation as shall
be fixed from time to time by the Board of Directors. No officer shall be
prohibited from receiving such salary by reason of the fact that he is also a
director of the Corporation.
SECTION 3.13 TRANSACTION INVOLVING INTEREST OF OFFICER.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
officers of the Corporation are in any way interested in, or connected with,
any other party to such contract or transaction, or are themselves parties to
such contract or transaction, provided that such transaction complies with
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Section 78.140 of the Nevada Revised Statutes; and each and every person who
is or may become an officer of the Corporation is hereby relieved, to the
extent permitted by law, when acting in good faith, from any liability that
might otherwise exist from contracting with the Corporation for the benefit
of himself or any person in which he may be in any way interested or with
which he may be in any way connected.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 4.1 STANDING COMMITTEES.
The Board of Directors shall appoint an Executive Committee, an Audit
Committee and a Compensation and Stock Option Committee, consisting of such
number of its members as it may designate, consistent with the Articles of
Incorporation, the By-Laws and the laws of the State of Nevada.
4.1.1. The Executive Committee shall have and may exercise,
when the Board is not in session, all of the powers of the Board of Directors
in the management of the business and affairs of the Corporation, but the
Executive Committee shall not have the power to fill vacancies on the Board,
or to change the membership of or to fill vacancies in the Executive
Committee or any other Committee of the Board, or to adopt, amend or repeal
the By-Laws, or to declare dividends.
4.1.2. The Audit Committee shall select and engage on behalf
of the Corporation, subject to the consent of the shareholders, and fix the
compensation of, a firm of certified public accountants whose duty it shall
be to audit the books and accounts of the Corporation and its subsidiaries
for the fiscal year in which they are appointed, and who shall report to such
Committee. The Audit Committee shall confer with the auditors and shall
determine, and from time to time shall report to the Board of Directors upon,
the scope of the auditing of the books and accounts of the Corporation and
its subsidiaries. The Audit Committee shall also be responsible for
determining that the business practices and conduct of employees and other
representatives of the Corporation and its subsidiaries comply with the
policies and procedures of the Corporation. None of the members of the Audit
Committee shall be officers or employees of the Corporation.
4.1.3. The Compensation and Stock Option Committee shall
establish a general compensation policy for the Corporation and shall have
responsibility for the approval of increases in directors' fees and in
salaries paid to officers and senior employees earning in excess of an annual
salary to be determined by the Committee. The Compensation and Stock Option
Committee shall have all of the powers of administration under all of the
Corporation's employee
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benefit plans, including any stock option plans, long-term incentive plans,
bonus plans, retirement plans, stock purchase plans and medical, dental and
insurance plans. In connection therewith, the Compensation and Stock Option
Committee shall determine, subject to the provisions of the Corporation's
plans, the directors, officers and employees of the Corporation eligible to
participate in any of the plans, the extent of such participation and the
terms and conditions under which benefits may be vested, received or
exercised. None of the members of the Compensation and Stock Option
Committee shall be officers or employees of the Corporation.
SECTION 4.2 OTHER COMMITTEES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada as to action to be authorized or approved
by the shareholders, or duties not delegable by the Board of Directors, any
or all of the corporate powers may be exercised by or under authority of, and
the business and affairs of this Corporation may be controlled by, such other
committee or committees as may be appointed by the Board of Directors. The
powers to be exercised by any such committee shall be designated by the Board
of Directors.
SECTION 4.3 PROCEDURES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada regarding the conduct of business by the
Board of Directors and its appointed committees, any committee created under
this Article may use any procedures for conducting its business and
exercising its powers, including but not limited to actions by the unanimous
written consent of its members in the manner set forth in Section 2.15. A
majority (but not less than two members) shall constitute a quorum. Notices
of meetings may be in any reasonable manner and may be waived as for meetings
of directors.
ARTICLE V
CORPORATE RECORDS AND REPORTS - INSPECTION
SECTION 5.1 RECORDS.
The Corporation shall maintain adequate and correct accounts, books and
records of its business and properties. All of such books, records and
accounts shall be kept at its principal place of business in the State of
California, as fixed by the Board of Directors from time to time.
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SECTION 5.2 ARTICLES, BY-LAWS AND STOCK LEDGER.
The Corporation shall maintain and keep the following documents at its
principal place of business in the State of Nevada: (i) a certified copy of
the Articles of Incorporation and all amendments thereto; (ii) a certified
copy of the By-Laws and all amendments thereto; and (iii) a statement setting
forth the following: "The Secretary of the Corporation, whose address is
2700 Colorado Avenue, Santa Monica California 90404, is the custodian of the
duplicate stock ledger of the Corporation."
SECTION 5.3 INSPECTION.
Any person who has been a shareholder of record for at least six months
immediately preceding his demand, or any person holding, or thereunto
authorized in writing by the holders of, at least five percent of all of the
Corporation's outstanding shares, upon at least five days' written demand, or
any judgment creditor without prior demand, shall have the right to inspect
in person or by agent or attorney, during usual business hours, the duplicate
stock ledger of the Corporation and to make extracts therefrom; provided,
however, that such inspection may be denied to any shareholder or other
person upon his refusal to furnish to the Corporation an affidavit that such
inspection is not desired for a purpose which is in the interest of a
business or object other than the business of the Corporation and that he has
not at any time sold or offered for sale any list of shareholders of any
corporation or aided or abetted any person in procuring any such record of
shareholders for any such purpose.
SECTION 5.4 CHECKS, DRAFTS, ETC.
All checks, drafts, or other orders for payment of money, notes, or
other evidences of indebtedness, issued in the name of, or payable to, the
Corporation, shall be signed or endorsed by such person or persons, and in
such manner as shall be determined from time to time by resolution of the
Board of Directors.
ARTICLE VI
OTHER AUTHORIZATIONS
SECTION 6.1 EXECUTION OF CONTRACTS.
The Board of Directors, except as the By-Laws otherwise provide, may
authorize any officer or officers or agent or agents to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation. Such authority may be general, or confined to specific
instances. Unless so authorized by the Board of Directors, no officer, agent
or employee shall have any power or authority, except in the ordinary course
of business, to bind the Corporation
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by any contract or engagement or to pledge its credit, or to render it liable
for any purpose or in any amount.
SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS.
All shares of any other corporation, standing in the name of the
Corporation, shall be voted, represented, and all rights incidental thereto
exercised as directed by written consent or resolution of the Board of
Directors expressly referring thereto. In general, such rights shall be
delegated by the Board of Directors under express instructions from time to
time as to each exercise thereof to the Chief Executive Officer, the
President, any Senior Executive Vice President, any Executive Vice
President, any Senior Vice President, any Vice President, the Treasurer or
the Secretary of this Corporation, or any other person expressly appointed by
the Board of Directors. Such authority may be exercised by the designated
officers in person, or by any other person authorized so to do by proxy, or
power of attorney, duly executed by such officers.
SECTION 6.3 DIVIDENDS.
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and on
the terms and conditions provided by the laws of the State of Nevada, and the
Articles of Incorporation, subject to any contractual restrictions to which
the Corporation is then subject.
ARTICLE VII
CERTIFICATES FOR AND TRANSFER OF SHARES
SECTION 7.1 CERTIFICATES FOR SHARES.
7.1.1. Certificates for shares shall be of such form and
device as the Board of Directors may designate and shall be numbered and
registered as they are issued. Each shall state the name of the record
holder of the shares represented thereby; its number and date of issuance;
the number of shares for which it is issued; the par value; a statement of
the rights, privileges, preferences and restrictions, if any; a statement as
to rights of redemption or conversion, if any; and a statement of liens or
restrictions upon transfer or voting, if any, or, alternatively, a statement
that certificates specifying such matters may be obtained from the Secretary
of the Corporation.
7.1.2. Every certificate for shares must be signed by the
Chief Executive Officer or the President and the Secretary or an Assistant
Secretary, or must be authenticated by facsimiles of the signatures of the
Chief Executive Officer or the President and the Secretary or
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an Assistant Secretary. Before it becomes effective, every certificate for
shares authenticated by a facsimile or a signature must be countersigned by a
transfer agent or transfer clerk, and must be registered by an incorporated
bank or trust company, either domestic or foreign, as registrar of transfers.
7.1.3. Even though an officer who signed, or whose facsimile
signature has been written, printed, or stamped on a certificate for shares
ceases, by death, resignation, or otherwise, to be an officer of the
Corporation before the certificate is delivered by the Corporation, the
certificate shall be as valid as though signed by a duly elected, qualified
and authorized officer, if it is countersigned by the signature or facsimile
signature of a transfer clerk or transfer agent and registered by an
incorporated bank or trust company, as registrar of transfers.
7.1.4. Even though a person whose facsimile signature as, or
on behalf of, the transfer agent or transfer clerk has been written, printed
or stamped on a certificate for shares ceases, by death, resignation, or
otherwise, to be a person authorized to so sign such certificate before the
certificate is delivered by the Corporation, the certificate shall be deemed
countersigned by the facsimile signature of a transfer agent or transfer
clerk for purposes of meeting the requirements of this section.
SECTION 7.2 TRANSFER ON THE BOOKS.
Upon surrender to the Secretary or transfer agent of the Corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 7.3 LOST OR DESTROYED CERTIFICATES.
The Board of Directors may direct, or may authorize the Secretary to
direct, a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate for shares so lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors or Secretary may, in its or his discretion, and as a condition
precedent to the issuance thereof, require the owner of such lost or
destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.
<PAGE>
-17-
SECTION 7.4 TRANSFER AGENTS AND REGISTRARS.
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, who may be the same person, and
may be the Secretary of the Corporation, or an incorporated bank or trust
company, either domestic or foreign, who shall be appointed at such times and
places as the requirements of the Corporation may necessitate and the Board
of Directors may designate.
SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC.
The Board of Directors may fix a time, not exceeding 50 days preceding
the date fixed for the payment of any dividend or distribution, or for the
allotment of rights, or when any change or conversion or exchange of shares
shall go into effect, as a record date for the determination of the
shareholders entitled to receive any such dividend or distribution, or any
such allotment of rights, or to exercise the rights in respect to any such
change, conversion, or exchange of shares, and, in such case, only
shareholders of record on the date so fixed shall be entitled to receive such
dividend, distribution, or allotment of rights, or to exercise such rights,
as the case may be, notwithstanding any transfer of any shares on the books
of the Corporation after any record date fixed as aforesaid.
SECTION 7.6 RECORD OWNERSHIP.
The Corporation shall be entitled to recognize the exclusive right of a
person registered as such on the books of the Corporation as the owner of
shares of the Corporation's stock to receive dividends, and to vote as such
owner, and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not the
Corporation shall have express or other notice thereof, except as otherwise
provided by law.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
SECTION 8.1 BY SHAREHOLDERS.
New or restated by-laws may be adopted, or these By-Laws may be repealed
or amended, at the annual shareholders' meeting or at any other meeting of
the shareholders called for that purpose, by a vote of shareholders entitled
to exercise a majority of the voting power of the Corporation.
<PAGE>
-18-
SECTION 8.2 BY DIRECTORS.
Subject to the right of the shareholders to adopt, amend, or repeal
by-laws, as provided in Section 8.1, the Board of Directors may adopt, amend,
or repeal any of these By-Laws by the affirmative vote of two-thirds of the
directors of each Class except as otherwise provided in Section 2.4. This
power may not be delegated to any committee appointed in accordance with
these By-Laws.
SECTION 8.3 RECORD OF AMENDMENTS.
Whenever an amendment or a new By-Law is adopted, it shall be copied in
the book of minutes with the original By-Laws, in the appropriate place. If
any By-Law is repealed, the fact of repeal, with the date of the meeting at
which the repeal was enacted, or written assent was filed, shall be stated in
said book.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 9.1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN
THOSE BY OR IN THE RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, each person who was or is a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding") (other than an action by or in the right of the
Corporation), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee, fiduciary or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action or inaction in an official capacity or in any other capacity while
serving as a director, officer, employee, fiduciary or agent shall be
indemnified and held harmless by the Corporation to the fullest extent
permitted by the laws of Nevada, as the same exist or may hereafter be
amended, against all costs, charges, expenses, liabilities and losses
(including attorneys' fees, judgments, fines, employee benefit plan exercise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection with such proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably
<PAGE>
-19-
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
SECTION 9.2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee, fiduciary or agent of
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action or inaction in an official
capacity or in any other capacity while serving as a director, officer,
employee, fiduciary or agent, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
SECTION 9.3 AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article IX (unless ordered by a court or
advanced pursuant to Section 9.6 hereof) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section
9.1 or Section 9.2 of this Article IX, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (ii) if a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding so orders, by independent
legal counsel in a written opinion, or (iii) if such a quorum is not
obtainable, by independent legal counsel in a written opinion, or (iv) by the
shareholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, without the necessity of authorization in the specific case.
<PAGE>
-20-
SECTION 9.4 GOOD FAITH DEFINED.
For purposes of any determination under Section 9.3 of this Article IX,
a person shall be deemed to have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe his conduct was unlawful, if his action is
based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 9.4 shall
mean any other corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise of which such person is or was serving at
the request of the Corporation as a director, officer, employee or agent.
The provisions of this Section 9.4 shall not be deemed to be exclusive or to
limit in any way the circumstances in which a person may be deemed to have
met the applicable standard of conduct set forth in Sections 9.1 or 9.2 of
this Article IX, as the case may be.
SECTION 9.5 INDEMNIFICATION BY A COURT.
If a claim under Sections 9.1 or 9.2 is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that
the claimant has failed to meet a standard of conduct which makes it
permissible under Nevada law for the Corporation to indemnify the claimant
for the amount claimed. Neither the failure of the Corporation (including
the Board, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is permissible in the circumstances because he has met such
standard of conduct, nor an actual determination by the Corporation
(including the Board, independent legal counsel, or its shareholders) that
the claimant has not met such standard of conduct, shall be a defense to the
action or create a presumption that the claimant has failed to meet such
standard of conduct.
SECTION 9.6 EXPENSES PAYABLE IN ADVANCE.
The right to indemnification conferred in this Article IX shall include
the right to be paid by the Corporation the expenses incurred in defending
any such proceeding in advance of its
<PAGE>
-21-
final disposition; provided, however, that, if the Nevada General Corporation
Law required, the payment of such expenses incurred by a director or officer
in his capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to any employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
director of officer, to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified
under this Section 9.6 or otherwise.
SECTION 9.7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article IX shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, By-Law, agreement, vote of shareholders or disinterested
directors or otherwise.
SECTION 9.8 INSURANCE.
The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, fiduciary or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under Nevada law.
SECTION 9.9 CERTAIN DEFINITIONS.
For purposes of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that
any person who is or was a director or officer of such constituent
corporation, or is or was a director or officer of such constituent
corporation serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand
in the same position under the provisions of this Article IX with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For
purposes of this Article IX, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a
<PAGE>
-22-
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to
in this Article IX.
SECTION 9.10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by or granted
pursuant to, this Article IX shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee, fiduciary or agent and shall inure to the benefit of his
heirs, executors and administrators.
SECTION 9.11 LIMITATION ON INDEMNIFICATION.
Notwithstanding anything contained in this Article IX to the contrary,
except as provided in Section 9.3, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized or consented to by the Board.
SECTION 9.12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.
The Corporation may, by action of the Board, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 9.13 INDEMNIFICATION OF WITNESSES.
To the extent that any director, officer, employee, fiduciary or agent
of the Corporation is by reason of such position, or a position with another
entity at the request of the Corporation, a witness in any action, suit or
proceeding, he shall be indemnified against all costs and expenses actually
and reasonably incurred by him or on his behalf in connection therewith.
SECTION 9.14 INDEMNIFICATION AGREEMENTS.
The Corporation may enter into agreements with any director, officer,
employee, fiduciary or agent of the Corporation providing for indemnification
to the full extent permitted by Nevada law.
SECTION 9.15 DEFINITION OF BOARD.
For purposes of this Article IX, the term "Board" shall mean the Board
of Directors of the Corporation or, to the extent permitted by the laws of
Nevada, as the same exist or may
<PAGE>
-23-
hereafter be amended, its Executive Committee. On vote of the Board, the
Corporation may assent to the adoption of this Article IX by any subsidiary,
whether or not wholly owned.
SECTION 9.16 ACTIONS PRIOR TO ADOPTION OF ARTICLE IX.
The rights provided by this Article IX shall be available whether or not
the claim asserted against the director, officer, employee, fiduciary or
agent is based on matters which antedate the adoption of this Article IX.
SECTION 9.17 SEVERABILITY.
If any provision of this Article IX shall for any reason be determined
to be invalid, the remaining provisions hereof shall not be affected thereby
but shall remain in full force and effect.
SECTION 9.18 APPLICABILITY TO FEDERAL ELECTION CAMPAIGN ACT OF 1971, AS
AMENDED.
The rights provided by this Article IX shall be applicable to the
officers (including without limitation the Chairman, Vice Chairman, treasurer
and assistant treasurer) appointed from time to time by the Chief Executive
Officer of the Corporation or his designee to serve in the administration and
management of any separate, segregated fund established for purposes of
collecting and distributing voluntary employee political contributions to
federal election campaigns pursuant to the Federal Election Campaign Act of
1971, as amended.
ARTICLE X
CORPORATE SEAL
The corporate seal shall be circular in form and shall have inscribed
thereon the name of the Corporation, and the date of its incorporation, and
the word "Nevada".
ARTICLE XI
INTERPRETATION
Reference in these By-Laws to any provision of the Nevada Revised
Statutes shall be deemed to include all amendments thereto and the effect of
the construction and determination of validity thereof by the Nevada Supreme
Court.
<PAGE>
-24-
ARTICLE XII
APPLICABILITY OF CONTROL SHARE ACT
The provisions of Nevada Revised Statutes Sections 78.378 to 78.3792,
inclusive, shall not apply to any acquisition of a controlling interest by
OrNda Healthcorp in the Corporation pursuant to the terms of that certain
Stock Option Agreement between the Corporation and OrNda Healthcorp, as the
same may be amended, modified, supplemented or otherwise changed.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 11
<TEXT>
<PAGE>
EXHIBIT 11
TENET HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS *
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------- ----------------
1996 1997 1996 1997
------------- ----------------
Weighted average number of shares of common
stock outstanding........................ 297 305 296 304
Dilutive effect of outstanding stock
equivalents (stock options and
warrants)................................ 6 6 6 7
----- ----- ----- -----
TOTAL 303 311 302 311
----- ----- ----- -----
----- ----- ----- -----
Net income.................................... $ 103 $ 138 $ 199 $ 254
----- ----- ----- -----
----- ----- ----- -----
Primary and fully diluted earnings per
common and common equivalent share....... $0.34 $0.44 $0.66 $0.82
----- ----- ----- -----
----- ----- ----- -----
- --------
* All shares in these tables are weighted on the basis of the number of days
the shares were outstanding or assumed to be outstanding during each
period.
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 27 FDS
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 14,000
<SECURITIES> 125,000
<RECEIVABLES> 1,774,000
<ALLOWANCES> 215,000
<INVENTORY> 204,000
<CURRENT-ASSETS> 2,623,000
<PP&E> 7,269,000
<DEPRECIATION> 1,592,000
<TOTAL-ASSETS> 12,183,000
<CURRENT-LIABILITIES> 1,634,000
<BONDS> 5,520,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 23,000
<OTHER-SE> 3,437,000
<TOTAL-LIABILITY-AND-EQUITY> 12,183,000
<SALES> 0
<TOTAL-REVENUES> 4,760,000
<CGS> 0
<TOTAL-COSTS> 3,841,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284,000
<INTEREST-EXPENSE> 230,000
<INCOME-PRETAX> 422,000
<INCOME-TAX> 168,000
<INCOME-CONTINUING> 254,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254,000
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 27.1
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 67,000
<SECURITIES> 103,000
<RECEIVABLES> 1,432,000
<ALLOWANCES> 215,000
<INVENTORY> 180,000
<CURRENT-ASSETS> 2,152,000
<PP&E> 6,564,000
<DEPRECIATION> 1,447,000
<TOTAL-ASSETS> 11,142,000
<CURRENT-LIABILITIES> 1,323,000
<BONDS> 4,667,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 17,000
<OTHER-SE> 3,503,000
<TOTAL-LIABILITY-AND-EQUITY> 11,142,000
<SALES> 0
<TOTAL-REVENUES> 4,102,000
<CGS> 0
<TOTAL-COSTS> 3,341,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 223,000
<INTEREST-EXPENSE> 202,000
<INCOME-PRETAX> 334,000
<INCOME-TAX> 135,000
<INCOME-CONTINUING> 199,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,000
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1998 | 0QTR1
| WOR | https://www.sec.gov/Archives/edgar/data/108516/0000950152-98-000229.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950152-98-000229.txt : 19980115
<SEC-HEADER>0000950152-98-000229.hdr.sgml : 19980115
ACCESSION NUMBER: 0000950152-98-000229
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19971130
FILED AS OF DATE: 19980114
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: WORTHINGTON INDUSTRIES INC
CENTRAL INDEX KEY: 0000108516
STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310]
IRS NUMBER: 311189815
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-04016
FILM NUMBER: 98506736
BUSINESS ADDRESS:
STREET 1: 1205 DEARBORN DR
CITY: COLUMBUS
STATE: OH
ZIP: 43085
BUSINESS PHONE: 6144383210
MAIL ADDRESS:
STREET 1: 1205 DEARBORN DR
CITY: COLUMBUS
STATE: OH
ZIP: 43085
FORMER COMPANY:
FORMER CONFORMED NAME: WORTHINGTON STEEL CO
DATE OF NAME CHANGE: 19720123
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>WORTHINGTON INDUSTRIES, INC. FORM 10-Q
<TEXT>
<PAGE> 1
UNITED STATES 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 Quarter Ended: November 30, 1997 Commission File No. 0-4016
WORTHINGTON INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-1189815
- ------------------------ -----------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1205 Dearborn Drive, Columbus, Ohio 43085
- ----------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
(614) 438-3210
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed From Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 96,819,510
- ---------------------------- ------------------------------
Class Outstanding December 31, 1997
Page 1 of 13
<PAGE> 2
WORTHINGTON INDUSTRIES, INC.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
November 30, 1997 and May 31, 1997...........................3
Consolidated Condensed Statements of Earnings -
Three and Six Months Ended November 30, 1997 and 1996........5
Consolidated Condensed Statements of Cash Flows
Six Months Ended November 30, 1997 and 1996..................6
Notes to Consolidated Condensed Financial Statements.........7
Management's Discussion and Analysis of
Results of Operations and Financial Condition................9
PART II. OTHER INFORMATION................................................13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Per Share)
<TABLE>
<CAPTION>
November 30 May 31
1997 1997
----------- ---------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,300 $ 7,212
Accounts receivable - net 257,343 266,836
Inventories
Raw materials 172,234 187,572
Work in process and finished products 106,405 109,316
---------- ----------
Total Inventories 278,639 296,888
Prepaid expenses and other current assets 37,865 23,192
---------- ----------
TOTAL CURRENT ASSETS 580,147 594,128
Investment in Unconsolidated Affiliates 60,956 57,040
Intangible Assets 96,690 98,132
Other Assets 30,106 32,365
Investment in Rouge 91,494 88,494
Property, plant and equipment 1,189,108 1,036,621
Less accumulated depreciation 373,554 345,594
---------- ----------
Property, Plant and Equipment - net 815,554 691,027
---------- ----------
TOTAL ASSETS $1,674,947 $1,561,186
========== ==========
</TABLE>
3
<PAGE> 4
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Per Share)
<TABLE>
<CAPTION>
November 30 May 31
1997 1997
----------- -----------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 121,370 $ 117,910
Notes payable 107,661 50,000
Accrued compensation, contributions to
employee benefit plans and related taxes 37,785 38,058
Dividends payable 12,587 12,572
Other accrued items 36,047 20,244
Income taxes 3,475 2,026
Current maturities of long-term debt 2,463 5,984
----------- -----------
TOTAL CURRENT LIABILITIES 321,388 246,794
Other Liabilities 16,657 18,839
Long-Term Debt:
Conventional long-term debt 362,595 361,899
Debt exchangeable for common stock 91,494 88,494
----------- -----------
Total Long-Term Debt 454,089 450,393
Deferred Income Taxes 120,657 120,765
Minority Interest 26,142 8,877
Shareholders' Equity
Common shares, $.01 par value 969 968
Additional paid-in capital 115,557 114,052
Unrealized loss on investment (5,556) (5,563)
Foreign currency translation (2,417) (1,861)
Retained earnings 627,461 607,922
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 736,014 715,518
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,674,947 $ 1,561,186
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Thousands Except Per Share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30 November 30
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 520,320 $ 458,349 $ 1,020,747 $ 888,641
Cost of goods sold 447,529 392,661 876,625 759,598
----------- ----------- ----------- -----------
GROSS MARGIN 72,791 65,688 144,122 129,043
Selling, general & administrative expense 37,008 29,689 69,440 56,557
----------- ----------- ----------- -----------
OPERATING INCOME 35,783 35,999 74,682 72,486
Other income (expense):
Miscellaneous income (expense) 685 302 477 729
Interest expense (6,876) (3,290) (13,654) (7,237)
Equity in net income of unconsolidated
affiliates 5,170 3,153 9,375 5,768
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 34,762 36,164 70,880 71,746
Income taxes 12,862 13,497 26,226 27,118
----------- ----------- ----------- -----------
NET EARNINGS $ 21,900 $ 22,667 $ 44,654 $ 44,628
=========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 96,784 96,510 96,761 96,511
EARNINGS PER COMMON SHARE $.23 $.23 $.46 $.46
---- ---- ---- ----
CASH DIVIDENDS DECLARED
PER COMMON SHARE $.13 $.12 $.26 $.24
---- ---- ---- ----
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
WORTHINGTON INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
November 30
-----------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 44,654 $ 44,628
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 30,264 24,126
Deferred income taxes (108) (108)
Equity in undistributed net income of unconsolidated affiliates (4,289) (1,616)
Minority interest in net loss of consolidated subsidiary (16)
Changes in assets and liabilities:
Current assets 12,835 (11,460)
Other assets 2,212 (843)
Current liabilities 20,439 (17,448)
Other liabilities (2,182) (671)
--------- ---------
Net Cash Provided By Operating Activities 103,809 36,608
INVESTING ACTIVITIES
Investment in property, plant and equipment, net (153,295) (78,582)
Acquisitions, net of cash acquired (8,380)
--------- ---------
Net Cash Used By Investing Activities (153,295) (86,962)
FINANCING ACTIVITIES
Proceeds from (payments on) short-term borrowings 57,661 33,500
Proceeds from long-term debt 2,267 28,459
Principal payments on long-term debt (5,092) (8,689)
Proceeds from issuance of common shares 1,607 1,268
Proceeds from minority interest 17,281
Repurchase of common shares (1,211)
Dividends paid (25,150) (21,800)
--------- ---------
Net Cash Provided By Financing Activities 48,574 31,527
--------- ---------
Decrease in cash and cash equivalents (912) (18,827)
Cash and cash equivalents at beginning of period 7,212 17,580
--------- ---------
Cash and cash equivalents at end of period $ 6,300 $ 1,247
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE> 7
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - MANAGEMENT'S OPINION
--------------------
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements contain all adjustments
(consisting of a normal recurring nature) necessary to present fairly
the financial position of Worthington Industries, Inc. and Subsidiaries
(the Company) as of November 30, 1997 and May 31, 1997; the results of
operations for the three and six months ended November 30, 1997 and
1996, and cash flows for the six months ended November 30, 1997 and
1996.
The accounting policies followed by the Company are set forth
in Note A to the consolidated financial statements in the 1997
Worthington Industries, Inc. Annual Report to Shareholders which is
included in the Company's 1997 Form 10-K.
NOTE B - INCOME TAXES
------------
The income tax rate is based on statutory federal and state
rates, and an estimate of annual earnings adjusted for the permanent
differences between reported earnings and taxable income.
NOTE C - EARNINGS PER SHARE
------------------
Earnings per common share for the three and six months ended
November 30, 1997 and 1996 are based on the weighted average common
shares outstanding during each of the respective periods.
NOTE D - RESULTS OF OPERATIONS
---------------------
The results of operations for the three and six months ended
November 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE E - INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
On August 14, 1997, the Company experienced a fire at its steel
processing facility in Monroe, Ohio. The fire significantly damaged the
pickling area of the facility and caused less extensive damage to the
remainder of the plant. The Company has shifted as much business as
possible to its other locations, with the remainder being sent to third
party processors. Blanking operations have resumed with slitting
expected to return within a few months, and pickling in less than one
year.
7
<PAGE> 8
WORTHINGTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The Company carries both property damage and business
interruption insurance and as a result, management does not expect the
fire to have a material adverse impact on the Company's financial
results. The total loss from business interruption, extra expenses and
property damage is expected to be around $75 million. The Company will
record the expected insurance recovery for business interruption and
extra expenses as a receivable, netted with amounts advanced by the
insurance company. The estimated lost net benefit from the business
interruption insurance for the reporting period, which approximates the
operating income which would have resulted had the fire not occurred
thru November 30, 1997 was approximately $4,000,000 and was included
in net sales and other revenues.
NOTE F - DEBT
----
On December 9, 1997, the Company issued $150 million of 6.7%
Notes due 2009. The proceeds were used to pay down $90 million of the
revolving credit facility (leaving $140 million available) and to pay
$60 million of other debt. The Notes were issued against the $450
million shelf registration.
8
<PAGE> 9
WORTHINGTON INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The second quarter sales were a record for the Company. For the three
months ended November 30, 1997, net sales of $520.3 million were 14% higher than
in last year's second quarter. Net earnings were $21.9 million, down 3% from
last year. Earnings per share were $.23, even with the previous year.
Sales for the first six months results were a record. For the six
months ended November 30, 1997, net sales of $1.02 billion were 15% higher than
in last year's first six months. Net earnings were $44.7 million and earnings
per share were $.46, both even with the previous year.
Sales increases for the quarter and six months were achieved for all
segments. Increased earnings for the quarter and six months for processed steel
products were offset by lower results for custom products and cast products.
Gross margin was up 11% for the quarter and 12% for the six months, and
as a percentage of sales was 14.0% for the quarter(14.3% last year) and 14.1%
for the six months (14.5% last year). Material, labor and overhead costs were
higher for the quarter and six months due to the inclusion of acquired
operations in the current year amounts and the startup of the Delta steel
processing plant. The material cost component of cost of goods sold, primarily
in steel processing, contributed to most of the increase in costs.
Selling, general and administrative expense increased 25% for the
quarter and 23% for the six months due mostly to the startup of the Delta and
Decatur steel processing plants and the inclusion of expenses for acquired
operations in the current year. As a percent of sales, this expense was 7.1% for
the quarter (6.5% last year) and 6.8% for the six months (6.4% last year).
Operating income was 1% lower for the quarter and 3% higher for the six months.
As a percentage of sales, operating income was 6.9% for the quarter (7.9% last
year) and 7.3% for the six months (8.2% last year).
Interest expense increased 109% for the three months and 89% year to
date. Average debt outstanding increased due to the high level of capital
expenditures and the average interest rate increased over last year. The Company
capitalized interest of $1,786,000 ($1,968,000 last year) during the quarter and
$3,255,000 ($2,897,000 last year) for the six months.
9
<PAGE> 10
Equity in net income of unconsolidated affiliates was up 64% for the
quarter and 63% for the six months. Equity from Worthington Armstrong Venture,
TWB and Acerex were up significantly for each period.
Income taxes decreased 5% for the three month period and 3% for the six
months as the effective tax rate was lower (37.0% for the quarter and
year-to-date compared to last year's 37.3% for the quarter and 37.8%
year-to-date) due to lower state taxes.
The processed steel products segment posted record sales for both
periods as all lines of business increased sales. Operating income was up
significantly for both periods and margin percentages equal to last year. Last
year's results were up for both periods from fiscal 1996 as the effect of
automotive strikes were more than offset by increased profitability at pressure
cylinders and metal framing. Steel processing sales improved from last year at
the majority of the plants despite summer strikes, shutdowns in the automotive
and appliance markets and a fire at the Monroe, Ohio plant. New sales from the
start-up of the Delta, Ohio plant contributed the largest increase. Steel
processing operating income was up for the quarter and down for the six month
period. Second quarter's profitability was supported by the Delta's startup and
some margin improvements. Steel processing had lower margins in the first six
months and poor volume at the Malvern, PA plant.
On August 14, 1997, the Company experienced a fire at its steel
processing facility in Monroe. The fire significantly damaged the pickling area
of the facility and caused less extensive damage to the remainder of the plant.
The Company has shifted as much business as possible to its other locations,
with the remainder being sent to third party processors. Blanking is now back in
operation, while slitting is expected to return within a few months and pickling
in around one year. The estimated net benefit from the business interruption
insurance, which approximates the lost operating income which would have
resulted had the fire not occurred thru November 30, 1997 was approximately
$4,000,000 and was included in net sales and other revenues.
Pressure cylinders' sales were up for the quarter due to product mix;
however, the change in mix resulted in lower operating income. For the six
months sales and operating income were up due to increased volume from market
share gains. The metal framing business increased sales and operating income due
with higher volume and selling prices due to improved market conditions and
operating efficiency gains. The auto body panel business continued to contribute
significantly to the segment's increased operating income for the quarter and
six month periods. Increased volume continued due to strong demand for its
automotive replacement parts.
Sales for the custom products segment were up for the first quarter and
six months; however, operating income was lower for both periods. Last year's
10
<PAGE> 11
results for each period improved over fiscal 1996 due to higher volume for
automotive contracts and improvement at newer, non-automotive plants. The
Plastics operations increased sales for both periods due to the acquisition of
PMI in December 1996. Operating income was lower for both periods because of the
summer strikes and shutdowns in the automotive and appliance sectors and the end
of a major automotive contract. During August, the plastics operation formed a
strategic alliance with a German plastics company, Troester Systeme und
Komponenten, opening up opportunities for global growth without additional
capital investment. Precision Metals profits increased above last year's second
quarter and six months on sales that were flat for the quarter and slightly
lower for the six month period.
Sales for the cast products segment sales were higher than in last
year's second quarter and first six months; however, operating income was lower
due to lower selling prices, higher material costs and production
inefficiencies. Last year's results were lower than in fiscal 1996 because of
lower volume and the resulting decreases in production efficiencies and coverage
of fixed costs.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1997, the Company's current ratio was 1.8:1, down from
2.4:1 at May 31, 1997, mostly due to an increase in notes and accounts payable.
Total debt as a percentage of total committed capital (total debt and
shareholder's equity), both excluding DECS, increased to 39% from 37% at May 31,
1997. Working capital was $258.8 million, 35% of the Company's total net worth,
down from 49% at May 31, 1997. As a percentage of annualized sales, average
working capital was 14.8%, down from 18.4% for last year's first six months.
During the six months, the Company's cash position decreased by $.9
million. Cash provided by operating activities was $103.8 million, up from $36.6
million last year. Capital expenditures of $153.3 million and dividends paid of
$25.2 million were funded mostly from cash provided from operations, short-term
borrowings and proceeds from minority interest investment. Capital expenditures
were up 95% over last year and will continue at high levels throughout the
fiscal year with the construction of the Decatur, Alabama steel processing plant
and funding of the Spartan Steel joint venture.
At November 30, 1997, $140 million of the $190 million revolving credit
facility was unused. On December 9, 1997, the Company issued $150 million of
6.7% notes due 2009 against the $450 million "shelf" registration established in
May 1996. The Company expects its operating results and cash from normal
operating activities to improve during the remainder of the fiscal year.
Additional borrowings may be needed to support anticipated capital expenditures.
11
<PAGE> 12
Immediate borrowing capacity plus cash generated from operations should be more
than sufficient to fund expected normal operating cash needs, dividends, debt
payments and capital expenditures for existing businesses. The Company will
continue to consider long-term debt issuance as an alternative depending on
financial market conditions.
IMPACT OF YEAR 2000
The Company has completed an assessment regarding modifications of its software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The total Year 2000 project cost is estimated at
approximately $1.8 million ($.6 million incurred to date), the remaining amount
will be evenly expensed between now and the estimated completion date in the
fourth calendar quarter of 1998. The Company believes, that with the
modifications to existing software, the Year 2000 Issue will not pose
significant operational problems. The Company has initiated communications with
significant vendors and customers to confirm their plans to become Year 2000
compliant and assess any possible risk or effects to the Company's operations.
The Company believes their systems will be properly converted and sufficiently
compliant as to not materially affect operations.
FORWARD-LOOKING INFORMATION
The Company wishes to take advantage of the Safe Harbor provisions
included in the Private Securities Litigation Reform Act of 1995 (the "Act").
Statements by the Company relating to future revenues and cash, growth, or plant
start-ups or capabilities and other statements which are not historical
information constitute "forward looking statements" within the meaning of the
Act. All forward looking statements are subject to risks and uncertainties which
could cause actual results to differ from those projected. Factors that could
cause actual results to differ materially include, but are not limited to, the
following: general economic conditions; conditions in the Company's major
markets; competitive factors and pricing pressures; product demand and changes
in product mix; changes in pricing or availability of raw material, particularly
steel; delays in construction or equipment supply; and other risks described
from time to time in the Company's filings with the Securities and Exchange
Commission.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits - Exhibit 4 Second Supplemental Indenture dated as of December
12, 1997 between the Company and PNC Bank, National Association, as
Trustee Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K. There were no reports on Form 8-K during the three
months ended November 30, 1997.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WORTHINGTON INDUSTRIES, INC.
Date: January 13, 1998 By: /s/ Donald G. Barger, Jr.
---------------- -----------------------------------------
Donald G. Barger, Jr.
Vice President-Chief Financial Officer
By: /s/ Michael R. Sayre
----------------------------------------
Michael R. Sayre
Controller
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 4
<TEXT>
<PAGE> 1
Exhibit 4
- -------------------------------------------------------------------------------
WORTHINGTON INDUSTRIES, INC.,
Issuer
and
PNC BANK, OHIO, NATIONAL ASSOCIATION,
Trustee
---------------------------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of December 12, 1997
Supplemental to Indenture dated as of May 15, 1996
- -------------------------------------------------------------------------------
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE dated as of December 12,1997
(this "Supplemental Indenture"), made and entered into by and between
Worthington Industries, Inc., a corporation organized and existing under the
laws of the State of Delaware having its principal office at 1205 Dearborn
Drive, Columbus, Ohio 43085 (the "Company"), and PNC Bank, Ohio, National
Association, a national banking association duly organized and existing under
the laws of the United States, as Trustee (the "Trustee") under the indenture of
the Company (the "Indenture") dated as of May 15, 1996.
WHEREAS, the Company and the Trustee have heretofore executed
and delivered a First Supplemental Indenture dated as of February 27, 1997; the
Indenture and the First Supplemental Indenture being hereinafter collectively
referred to as the "Indenture"); and
WHEREAS, the Indenture provides for the issuance from time to
time of Debt Securities, issuable for the purposes and subject to the
limitations contained in the Indenture; and
WHEREAS, Section 9.01(j) of the Indenture also provides that
the Company and Trustee may enter into one or more indentures supplemental to
the Indenture without the consent of any Holder (a) to add to, change or
eliminate any of the provisions of the Indenture with respect to any series of
Debt Securities if such action becomes effective when no such Debt Security is
outstanding and (b) to provide for the form or terms of Debt Securities of any
series as permitted by Sections 2.01 and 2.03 thereof; and
WHEREAS, the Company has duly authorized the creation of a
series of its Debt Securities denominated its "6.70% Notes Due 2009" in the
principal amount of $150,000,000 (such Debt Securities being referred to herein
as the "Notes"); and
WHEREAS, the entry into this Supplemental Indenture by the
parties hereto is in all respects authorized by the provisions of the Indenture;
and
WHEREAS, the Company has duly authorized the execution and
delivery of this Supplemental Indenture, and all things necessary have been done
to make the Notes, when executed by the Company and authenticated and delivered
hereunder and duly issued by the Company, the valid obligations of the Company,
and to make this Supplemental Indenture a valid agreement of the Company, in
accordance with their and its terms:
NOW, THEREFORE:
For and in consideration of the premises and purchase of the
Debt Securities of any series issued on or after the date hereof by the Holders
thereof, it is
<PAGE> 3
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the securities of any such series, as follows:
ARTICLE I
Certain Provisions of General Application
SECTION 101. Definitions.
For all purposes of the Indenture and this Supplemental
Indenture, except as otherwise expressly provided or unless the context
otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article;
(2) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to the Indenture and this Supplemental Indenture
as a whole and not to any particular Article, Section or other subdivision; and
(3) capitalized terms used but not defined herein are used as
they are defined in the Indenture.
"Comparable Treasury Issue" means the United States Treasury
security selected by an Independent Investment Banker as having a maturity
comparable to the remaining term of the Notes to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such Notes.
"Comparable Treasury Price" means, with respect to any
redemption date, (a) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
on the third Business Day preceding such redemption date, as set forth in the
daily statistical release (or any successor release) published by the Federal
Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (b) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, (i) the average
of the Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains
fewer than four such Reference Treasury Dealer Quotations, the average of all
such Quotations.
"Independent Investment Banker" means one of the Reference
Treasury Dealers appointed by the Trustee after consultation with the Company.
"Reference Treasury Dealer" means each of Salomon Brothers
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery
Securities, Inc. and their respective successors; provided, however, that if any
of the foregoing shall cease to be a primary U.S. Government securities dealer
in New York
2
<PAGE> 4
City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any redemption date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m.
on the third Business Day preceding such redemption date.
"Remaining Scheduled Payments" means, with respect to any
Note, the remaining scheduled payments of the principal thereof to be redeemed
and interest thereon that would be due after the related redemption date but for
such redemption; provided, however, that, if such redemption date is not an
interest payment date with respect to such Notes, the amount of the next
succeeding scheduled interest payment thereon will be reduced by the amount of
interest accrued thereon to such redemption date.
"Treasury Rate" means, with respect to any redemption date,
the rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
SECTION 102. Effect of Headings.
The Article and Section headings herein are for convenience
only and shall not affect the construction hereof.
SECTION 103. Successors and Assigns.
All covenants and agreements in this Supplemental Indenture by
the Company shall bind its successors and assigns, whether so expressed or not.
SECTION 104. Separability.
In case any provision in this Supplemental Indenture or the
Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
3
<PAGE> 5
SECTION 105. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with
another provision hereof which is required to be included in this Supplemental
Indenture by any of the provisions of the Trust Indenture Act, such required
provision shall control.
SECTION 106. Benefits of Supplemental Indenture.
Nothing in this Supplemental Indenture, expressed or implied,
shall give to any person, other than the parties hereto and their successors
hereunder, and the Holders of the Notes any benefit or any legal or equitable
right, remedy or claim under this Supplemental Indenture.
SECTION 107. Governing Law.
THIS SUPPLEMENTAL INDENTURE AND THE NOTES SHALL BE DEEMED TO
BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND THIS SUPPLEMENTAL
INDENTURE AND EACH SUCH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
ARTICLE II
The Notes
SECTION 201. Title and Terms.
There is hereby created under the Indenture a series of Debt
Securities known and designated as the "6.70% Notes Due 2009" of the Company.
The aggregate principal amount of Notes that may be authenticated and delivered
under this Indenture is limited to $150,000,000, except for Notes authenticated
and delivered upon reregistration of, transfer, of, or in exchange for, or in
lieu of, other Notes pursuant to Section 2.07, 2.08, 2.09 or 9.04 of the
Indenture.
The Stated Maturity for payment of principal of the Notes
shall be December 1, 2009, and the Notes shall bear interest at the rate of
6.70% per annum, from December 12, 1997, or the most recent interest payment
date to which interest has been paid or duly provided for, payable semi-annually
in arrears on June 1 and December 1 of each year (commencing June 1, 1998, to
the persons in whose names the Notes (or any predecessor securities) are
registered at the close of business on May 15 or November 15, as the case may
be, next preceding such interest payment date, until principal thereof is paid
or made available for payment.
4
<PAGE> 6
The Notes shall be initially issued in the form of a Global
Security and the depositary for the Notes shall be the Depository Trust Company,
New York, New York (the "Depositary").
The Notes shall not be subject to any sinking fund.
The Notes shall be in registered form without coupons and
shall be issuable in denominations of $1,000 and any integral multiple thereof.
The Notes are subject to redemption upon notice mailed at
least 30 days but not more than 60 days prior to the redemption date to each
Registered Holder. The Notes may be redeemed, as a whole or in part, at the
option of the Company at a redemption price equal to the greater of (a) 100% of
the principal amount to be redeemed and (b) the sum of the present values of the
Remaining Scheduled Payments thereon discounted to the redemption date on a
semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the Treasury Rate plus 15 basis points, plus, in either case, accrued
interest on the principal amount being redeemed to the date of redemption.
Unless the Company defaults in payment of the redemption price, on and after the
applicable redemption date, interest will cease to accrue on the Notes or
portions thereof called for redemption.
The form of Note attached hereto as Exhibit A is hereby
adopted, pursuant to section 9.01(j) of the Indenture, as a form of Debt
Securities of a series that consists of the Notes.
ARTICLE III
Miscellaneous
SECTION 301. Discharge
The Notes and the security provided by this Supplemental
Indenture shall be subject to defeasance in accordance with Article XI of the
Indenture .
SECTION 302. Confirmation of Indenture.
The Indenture, as supplemented and amended by this
Supplemental Indenture and all other indentures supplemental thereto, is in all
respects ratified and confirmed, and the Indenture, this Supplemental Indenture
and all indentures supplemental thereto shall be read, taken and construed as
one and the same instrument.
5
<PAGE> 7
SECTION 303. Concerning the Trustee.
The Trustee assumes no duties, responsibilities or liabilities
by reason of this Supplemental Indenture other than as set forth in the
Indenture.
----------------
This Supplemental Indenture may be executed in any number of
counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first above
written.
WORTHINGTON INDUSTRIES, INC.
By:
--------------------------
Name:
Title:
Attest:
-----------------------
Name:
Title:
PNC BANK, OHIO, NATIONAL
ASSOCIATION, as Trustee
By:
--------------------------
Name:
Title:
Attest:
-----------------------
Name:
Title:
STATE OF )
) SS:
COUNTY OF )
On the day of December, 1997, before me personally came
_______________________, to me known, who, being by me duly sworn, did depose
and say that she/he is the ______________ of WORTHINGTON INDUSTRIES, INC., one
of the corporations described in and which executed the foregoing instrument;
that
6
<PAGE> 8
she/he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that she/he signed her/his name
thereto by like authority.
----------------------------------
Notary Public
SEAL
STATE OF )
) SS:
COUNTY OF )
On the day of December, 1997, before me personally came
______________________, to me known, who, being by me duly sworn, did depose and
say that she/he is the ______________ of PNC BANK, OHIO, NATIONAL ASSOCIATION,
one of the corporations described in and which executed the foregoing
instrument; that she/he knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that she/he signed
her/his name thereto by like authority.
----------------------------------
Notary Public
SEAL
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ON FORM 10Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 6,300
<SECURITIES> 0
<RECEIVABLES> 260,751
<ALLOWANCES> 3,408
<INVENTORY> 278,639
<CURRENT-ASSETS> 580,147
<PP&E> 1,189,108
<DEPRECIATION> 373,554
<TOTAL-ASSETS> 1,674,947
<CURRENT-LIABILITIES> 321,388
<BONDS> 454,089
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 969
<OTHER-SE> 735,045
<TOTAL-LIABILITY-AND-EQUITY> 1,674,947
<SALES> 1,020,747
<TOTAL-REVENUES> 1,020,747
<CGS> 876,625
<TOTAL-COSTS> 876,625
<OTHER-EXPENSES> 69,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,654
<INCOME-PRETAX> 70,880
<INCOME-TAX> 26,226
<INCOME-CONTINUING> 44,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,654
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| AAPL | https://www.sec.gov/Archives/edgar/data/320193/0000320193-99-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000320193-99-000002.txt : 19990209
<SEC-HEADER>0000320193-99-000002.hdr.sgml : 19990209
ACCESSION NUMBER: 0000320193-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981226
FILED AS OF DATE: 19990208
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLE COMPUTER INC
CENTRAL INDEX KEY: 0000320193
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571]
IRS NUMBER: 942404110
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-10030
FILM NUMBER: 99524101
BUSINESS ADDRESS:
STREET 1: 1 INFINITE LOOP
CITY: CUPERTINO
STATE: CA
ZIP: 95014
BUSINESS PHONE: 4089961010
MAIL ADDRESS:
STREET 1: ONE INFINITE LOOP
CITY: CUPERTINO
STATE: CA
ZIP: 95014
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Form 10-Q
___________
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number 0-10030
___________
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
___________
CALIFORNIA 942404110
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1 Infinite Loop 95014
Cupertino, California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 996-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
___________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
136,417,113 shares of Common Stock Issued and Outstanding as of February 1, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except share and per share amounts)
<TABLE>
<CAPTION>
December 26, 1998 December 26, 1997
<S> <C> <C>
Net sales $1,710 $1,578
Cost of sales 1,228 1,225
Gross margin 482 353
Operating expenses:
Research and development 76 79
Selling, general, and administrative 279 234
Total operating expenses 355 313
Operating income 127 40
Gain from sale of investment 32 --
Interest and other income (expense), net 10 7
Total interest and other income (expense), net 42 7
Income before provision for income taxes 169 47
Provision for income taxes 17 --
Net income $ 152 $ 47
Earnings per common share:
Basic $1.12 $ 0.37
Diluted $0.95 $ 0.33
Shares used in computing earnings per share (in thousands):
Basic 135,270 127,989
Diluted 172,062 139,839
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
<TABLE>
<CAPTION>
ASSETS
December 26, 1998 September 25,1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,221 $1,481
Short-term investments 1,357 819
Accounts receivable, less allowances of
$81 and $81, respectively 913 955
Inventories 25 78
Deferred tax assets 166 182
Other current assets 185 183
Total current assets 3,867 3,698
Property, plant, and equipment, net 344 348
Other assets 381 243
Total assets $4,592 $4,289
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 655 $ 719
Accrued expenses 829 801
Total current liabilities 1,484 1,520
Long-term debt 954 954
Deferred tax liabilities 231 173
Total liabilities 2,669 2,647
Commitments and contingencies
Shareholders' equity:
Series A non-voting convertible preferred
stock, no par value; 150,000 shares
authorized, issued and outstanding 150 150
Common stock, no par value; 320,000,000
shares authorized; 135,348,625 and
135,192,769 shares issued and
outstanding, respectively 637 633
Retained earnings 1,050 898
Accumulated other comprehensive
income (loss) 86 (39)
Total shareholders' equity 1,923 1,642
Total liabilities and
shareholders' equity $4,592 $4,289
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
December 26, 1998 December 26, 1997
<S> <C> <C>
Cash and cash equivalents,
beginning of the period $1,481 $1,230
Operating:
Net income 152 47
Adjustments to reconcile net income to cash
generated by operating activities:
Depreciation and amortization 23 28
Provision for deferred income taxes 10 3
Loss on sale of property, plant, and equipment (1) --
Gain on sale of ARM shares (32) --
Changes in operating assets and liabilities:
Accounts receivable 42 133
Inventories 53 33
Other current assets (2) 27
Other assets 14 5
Accounts payable (64) (30)
Accrued restructuring costs -- (32)
Other current liabilities 28 (82)
Cash generated by operating activities 223 132
Investing:
Purchase of short-term investments (1,135) (399)
Proceeds from sales and maturities of short-
term investments 597 194
Net proceeds from property, plant, and
equipment retirements -- 42
Purchase of property, plant, and equipment (5) (7)
Proceeds from sale of ARM shares 37 --
Other 20 --
Cash used for investing activities (486) (170)
Financing:
Decrease in notes payable to banks -- (1)
Increase in long-term borrowings -- 1
Increases in common stock 3 1
Cash generated by financing activities 3 1
Total cash used (260) (37)
Cash and cash equivalents, end of the period $1,221 $1,193
Supplemental cash flow disclosures:
Cash paid for interest $ 20 $ 20
Cash paid (received) for income taxes, net $ (7) $ (18)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
APPLE COMPUTER, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included. All adjustments are of a normal recurring nature unless
specified in a separate note included in these Notes to Condensed
Consolidated Financial Statements (Unaudited). The results for interim
periods are not necessarily indicative of results to be expected for the entire
year. These condensed consolidated financial statements and accompanying
notes should be read in conjunction with the Company's annual consolidated
financial statements and the notes thereto for the fiscal year ended September
25, 1998, included in its Annual Report on Form 10-K for the year ended
September 25, 1998 (the 1998 Form 10-K).
During the first quarter of 1999, the Company amended its By-laws to provide
that beginning with the first fiscal quarter of 1999 each of the Company's
fiscal quarters would end on Saturday rather than Friday. Accordingly, one
day was added to the first quarter of 1999 so that the quarter ended on
Saturday, December 26, 1998. This change did not have a material effect on
the Company's results of operations for the quarter and had no effect on the
amount of revenue recognized during the quarter.
Note 2 - Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of
common shares outstanding during the period increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of convertible securities is
reflected using the if-converted method.
5
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except net income and per share amounts):
<TABLE>
<CAPTION>
December 26, 1998 December 26, 1997
<S> <C> <C>
Numerator:
Numerator for basic earnings per share -
Net income (in millions) $ 152 $ 47
Interest expense on convertible debt 11 --
Numerator for diluted earnings per share
- -- Adjusted net income (in millions) $ 163 $ 47
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 135,270 127,989
Effect of dilutive securities:
Convertible preferred stock 9,091 9,091
Dilutive options 5,059 2,759
Convertible debt 22,642 --
Dilutive potential common shares 36,792 11,850
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversions 172,062 139,839
Basic earnings per share $ 1.12 $ 0.37
Diluted earnings per share $ 0.95 $ 0.33
</TABLE>
Options to purchase approximately 85,000 shares of common stock were
outstanding as of December 26, 1998, that were not included in the
computation of diluted earnings per share for the three months ended December
26, 1998, because the options' exercise price was greater than the average
market price of the Company's common stock during the period and, therefore,
the effect would be antidilutive.
The Company has outstanding $661 million of unsecured convertible
subordinated notes (the Notes) which are convertible by their holders into
approximately 22.6 million shares of common stock at a conversion price of
$29.205 per share subject to the adjustments as defined in the Note agreement.
The common shares represented by these Notes upon conversion were included
in the computation of diluted earnings per share for the three months ended
December 26, 1998, as the effect of using the if-converted method was dilutive
for that period. The common shares represented by these Notes were not
included in the computation of diluted earnings per share for the three months
ended December 26, 1997, because the effect of using the if-converted method
for those periods would be anti-dilutive. For additional disclosures regarding
the outstanding preferred stock, employee stock options and the Notes, see the
1998 Form 10-K.
6
<PAGE>
Note 3 - Consolidated Financial Statement Details (in millions)
<TABLE>
<CAPTION>
Inventories 12/26/98 9/25/98
<S> <C> <C>
Purchased parts $ 10 $ 32
Work in process 3 5
Finished goods 12 41
Total inventories $ 25 $ 78
</TABLE>
<TABLE>
<CAPTION>
Property, Plant, and Equipment 12/26/98 9/25/98
<S> <C> <C>
Land and buildings $ 340 $ 338
Machinery and equipment 277 277
Office furniture and equipment 79 80
Leasehold improvements 129 129
Accumulated depreciation and amortization (481) (476)
Net property, plant, and equipment $ 344 $ 348
</TABLE>
<TABLE>
<CAPTION>
Accrued Expenses 12/26/98 9/25/98
<S> <C> <C>
Accrued compensation and employee benefits $ 80 $ 99
Accrued marketing and distribution 254 205
Accrued warranty and related costs 124 132
Other current liabilities 371 365
Total accrued expenses $ 829 $ 801
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Interest and Other Income (Expense) 12/26/98 12/26/97
<S> <C> <C>
Interest income $ 32 $ 22
Interest expense (16) (16)
Other income (expense), net (6) 1
Interest and other income (expense), net $ 10 $ 7
</TABLE>
7
<PAGE>
Note 4 - Equity Investment Gains
As of September 25, 1998, the Company owned 25.9% of the outstanding stock
of ARM Holdings plc (ARM), a publicly held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. Through September 25, 1998, the Company accounted for this
investment using the equity method. On October 14, 1998, the Company sold
2.9 million shares of ARM stock for net proceeds of approximately $37 million,
a gain of approximately $32 million recorded as other income, and related
income tax expense of approximately $3 million.
As a result of this sale, the Company's ownership interest in ARM fell to
19%. Consequently, beginning in the first quarter of fiscal 1999, the Company
no longer accounts for its remaining investment in ARM using the equity
method and has categorized its remaining shares as available for sale
requiring the shares be carried at fair value, with unrealized gains and
losses reported as a component of shareholders' equity. During the first
quarter of 1999, the Company increased the carrying value of its remaining
shares in ARM by $180 million to adjust their total carrying value at
December 26, 1998, to their market value of approximately $197 million. The
carrying value of the ARM shares is included in other assets. The total
unrealized gain net of taxes recognized in other comprehensive income during
the first quarter of 1999 was approximately $113 million.
Note 5 - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income", beginning with the Company's
first quarter of 1999. SFAS No. 130 separates comprehensive income into two
components, net income and other comprehensive income. Other
comprehensive income refers to revenue, expenses, gains and losses that under
generally accepted accounting principles are recorded as an element of
shareholders' equity but are excluded from net income. While SFAS No. 130
establishes new rules for the reporting and display of comprehensive income,
it has no impact on the Company's net income or total shareholders' equity.
The Company's other comprehensive income is comprised of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar as
their functional currency and from unrealized gains and losses on marketable
securities categorized as available for sale. See Note 4 regarding unrealized
gains on available for sale securities.
The components of comprehensive income, net of tax, are as follows
(in millions):
<TABLE>
<CAPTION>
Three Months Ended
12/26/98 12/26/97
<S> <C> <C>
Net income $ 152 $ 47
Other comprehensive income:
Change in accumulated translation adjustment 12 (4)
Unrealized gain on investments, net 113 --
Total comprehensive income $ 277 $ 43
</TABLE>
8
<PAGE>
Note 6 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and in
June 1998 issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." A discussion of these accounting standards is included in
the notes to consolidated financial statements included in the 1998 Form 10-K
under the subheading "Recent Accounting Pronouncements."
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for the costs of computer
software intended for internal use. SOP 98-1 must be adopted by the Company
effective as of fiscal 2000 and is not expected to have a material impact on
the Company's consolidated results of operations or financial position.
During the fist quarter of 1999, the Company adopted AICPA SOP 97-2,
"Software Revenue Recognition." SOP 97-2 established standards relating to
the recognition of software revenue. SOP 97-2 was effective for transactions
entered into by the Company beginning in the first quarter of fiscal 1999. The
adoption of this accounting standard did not have a material impact on the
Company's results of operations.
Note 7 - Contingencies
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1998 Form 10-K. The Company is also subject to
certain other legal proceedings and claims which have arisen in the ordinary
course of business and which have not been fully adjudicated. The results of
legal proceedings cannot be predicted with certainty; however, in the opinion
of management, the Company does not have a potential liability related to any
legal proceedings and claims that would have a material adverse effect on its
financial condition or results of operations.
The Internal Revenue Service ("IRS") has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made
certain prepayments thereon. The Company contested the proposed deficiencies
by filing petitions with the United States Tax Court, and most of the issues in
dispute have now been resolved. On June 30, 1997, the IRS proposed income
tax adjustments for the years 1992 through 1994. Although a substantial
number of issues for these years have been resolved, certain issues still
remain in dispute and are being contested by the Company. Management
believes that adequate provision has been made for any adjustments that may
result from tax examinations.
Note 8 - Reclassifications
Certain amounts in the Condensed Consolidated Statement of Cash Flows for
the three months ended December 26, 1997, have been reclassified to conform
to the 1999 presentation.
9
<PAGE>
Note 9 - Subsequent Events
On February 1, 1999, the Company took further actions to improve the
flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to original equipment manufacturers. These
restructuring actions will result in the Company recognizing a charge to
operations of approximately $9 million during the second quarter of 1999.
On February 2, 1999, the Company sold 2 million shares of ARM stock for net
proceeds of approximately $59 million and a gain before taxes of approximately
$55 million which will be recognized as other income by the Company in the
second quarter of 1999. Subsequent to this sale, the Company holds
approximately 7.3 million shares of ARM stock which represent approximately
14.9% of the currently outstanding shares.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May
Affect Future Results and Financial Condition" below. The following
discussion should be read in conjunction with the 1998 Form 10-K and the
condensed consolidated financial statements and notes thereto included
elsewhere in this Form 10-Q. All information is based on the Company's fiscal
calendar.
<TABLE>
<CAPTION>
Results of Operations
Tabular information (dollars in millions, except per share amounts):
First First First Fourth
Quarter Quarter Quarter Quarter
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,710 $1,578 8% $1,710 $1.556 10%
Macintosh CPU unit sales
(in thousands) 944 635 49% 944 834 13%
Gross margin $ 482 $ 353 37% $ 482 $ 417 16%
Percentage of net sales 28.2% 22.4% 28.2% 26.8%
Research and development $ 76 $ 79 (4%) $ 76 $ 73 4%
Percentage of net sales 4% 5% 4% 5%
Selling, general and
administrative $ 279 $ 234 19% $ 279 $ 235 19%
Percentage of net sales 16% 15% 16% 15%
Gain from sale of
investment $ 32 $ -- NM $ 32 $ -- NM
Interest and other income
(expense), net $ 10 $ 7 43% $ 10 $ 5 100%
Provision for income taxes $ 17 $ -- NM $ 17 $ 8 112%
Effective tax rate 10% --% 10% 7%
Net income $ 152 $ 47 223% $ 152 $ 106 43%
Basic earnings per share $ 1.12 $ 0.37 203% $ 1.12 $ 0.79 42%
Diluted earnings per share $ 0.95 $ 0.33 188% $ 0.95 $ 0.68 40%
</TABLE>
NM: Not Meaningful
Net income for the first quarter of 1999 includes a $32 million gain before
tax associated with the sale by the Company of 2.9 million shares of its
investment in ARM which were recognized as other income. Income tax expense
recognized in the first quarter on this gain was approximately $3 million.
11
<PAGE>
Net Sales
Net sales for the first quarter of 1999 were $1.71 billion, an 8% increase
over the same quarter in 1998. The increase in net sales is primarily
attributable to a year-over-year 49% increase in Macintosh CPU unit volume.
Volumes were favorably affected by sales of iMac, the Company's moderately
priced Macintosh system designed for education and consumer markets
introduced during the fourth quarter of 1998, which represented 55% or
519,000 of the total Macintosh CPU units sales during the first quarter of
During the first quarter of 1999, the Company also experienced year-over-year
unit volume growth in both its Power Macintosh G3 and Powerbook G3
product lines of 23% and 39%, respectively. Further contributing to the year-
over-year increase in net sales was approximately $33 million of incremental
net sales in the first quarter of 1999 related to the introduction MacOS 8.5,
the most recent version of the Company's Macintosh operating system. The
positive effect of these factors on first quarter 1999 net sales was partially
offset by two principal factors. First, average revenue per Macintosh system,
a function of total net sales related to hardware shipments and total
Macintosh CPU unit sales, fell 26% to $1,776 during the first quarter of 1999
as compared to the same quarter in 1998. The decline in the average revenue
per Macintosh system was the result of lower priced iMac systems comprising a
significant portion of first quarter 1999 net sales, the decline in net sales
from the phase out of certain peripheral products, and the overall industry
trend towards lower priced products. Second, net sales of imaging and display
products decreased by $93 million to $116 million in the first quarter of 1999
compared with the same quarter in 1998 reflecting the Company's continuing
phase-out of most imaging and many display products.
Net sales increased sequentially $154 million or 10% during the first quarter
of 1999 as compared to the fourth quarter of 1998. The sequential revenue
increase is attributable to a 13% rise in Macintosh unit shipments and
incremental net sales from MacOS 8.5 upgrades. The rise in unit sales during
the first quarter is attributable to a 21% increase in iMac unit sales
compared to the fourth quarter of 1998 and a similar 15% increase in unit
shipments of Power Macintosh G3 professional Macintosh systems partially
offset by a 17% sequential decline in unit shipments of G3 Powerbooks
resulting from the introduction of several new Powerbook models during the
fourth quarter of 1998.
International sales for the first quarter of 1999 represented 47% of
consolidated net sales versus 50% in the first quarter of 1998 and 37% during
the fourth quarter of 1998. In total, international net sales during the first
quarter of 1999 were relatively unchanged from the same quarter in 1998, but
rose $229 million or 40% sequentially from the fourth quarter of 1998. This
sequential increase in international net sales was caused by the introduction
of the iMac during the current quarter in Europe and Asia and by strong sales
internationally of the Company's Power Macintosh G3 and Powerbook G3
product lines. On a year-over-year basis, total Macintosh unit sales during
the first quarter of 1999 increased 55% in Europe, 26% in Japan, and 33% in
the rest of Asia. Domestic net sales increased 14% or $114 million during the
first quarter of 1999 as compared to 1998 while declining sequentially from
the fourth quarter of 1998 $75 million or 8%.
12
<PAGE>
Consistent with the historical seasonal pattern, the Company anticipates a
sequential decline in net sales during the second quarter of 1999 but expects
the second quarter to show year-over-year growth in both net sales and unit
shipments. The foregoing statements are forward looking. The Company's
actual results could differ because of several factors, including those set
forth below in the subsection entitled "Factors That May Affect Future Results
and Financial Condition".
Gross Margin
Gross margin for the first quarter of 1999 was 28.2% as compared to 22.4% for
the same quarter in 1998 and 26.8% for the fourth quarter of 1998. The year-
over-year increase in gross margin is attributable to various operational
changes made by the Company throughout fiscal 1998 that improved
operational efficiency and reduced product costs. These changes included
simplification of the Company's product line, focus on the use of industry
standard parts, expanded use of supplier inventory hubs, outsourcing of
various aspects of product manufacturing, and streamlining of product
distribution channels and policies. Margins have also been favorably impacted
during the last year by the declining cost of various components of the
Company's products, particularly those sourced from Asia. The sequential
increase in gross margin from the fourth quarter of 1998 to the first quarter
of 1999 is primarily attributable to high margin incremental net sales of
MacOS 8.5 during the current quarter. Such sales accounted for a sequential
improvement in first quarter 1999 gross margin of approximately 1.5
percentage points.
The Company expects gross margins to decline sequentially during the second
quarter of 1999 due to lower net sales of MacOS upgrades and pricing pressure
on consumer products. The foregoing statements are forward looking. The
Company's actual results could differ because of several factors, including
those set forth in the following paragraph and below in the subsection
entitled "Factors That May Affect Future Results and Financial Condition."
There can be no assurance that current or targeted consolidated gross margin
levels will be achieved or that current margins on existing individual
products will be maintained. In general, gross margins and margins on
individual products will remain under significant downward pressure due to a
variety of factors, including continued industry wide global pricing
pressures, increased competition, compressed product life cycles, potential
increases in the cost of raw material and outside manufacturing services, and
potential changes to the Company's product mix, including higher unit sales of
consumer products with lower average selling prices and lower gross margins.
In response to these downward pressures, the Company expects that it will
continue to take pricing actions with respect to its products. Gross margins
could also be affected by the Company's ability to effectively manage quality
problems and warranty costs and to stimulate demand for certain of its
products. The Company's operating strategy and pricing take into account
anticipated changes in foreign currency exchange rates over time; however,
the Company's results of operations can be significantly affected in the
short term by fluctuations in exchange rates.
13
<PAGE>
Operating Expenses
Selling, general and administrative expenses increased approximately $45
million or 19% during the first quarter of 1999 as compared to both the same
quarter of 1998 and sequentially over the fourth quarter of 1998. These
increases are reflective of increased advertising and promotional spending
during the 1998 holiday season associated with the worldwide introduction of
iMac and MacOS 8.5. Expenditures for research and development remained
relatively consistent in terms of absolute dollars between the first quarter
of 1999, the same quarter in 1998, and the fourth quarter of 1998.
The Company expects operating expenses to decline sequentially during the
second quarter of 1999 by approximately $40 to $45 million due to seasonally
lower marketing expenditures. This expected decline in operating expenses
does not include the effect of the restructuring charge described in the
following paragraph. The foregoing statements are forward looking. The
Company's actual results could differ because of several factors, including
those set forth in the following paragraph and below in the subsection
entitled "Factors That May Affect Future Results and Financial Condition."
On February 1, 1999, the Company took further actions to improve the
flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to original equipment manufacturers. These
restructuring actions will result in the Company recognizing a charge to
operations of approximately $9 million during the second quarter of 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, is comprised of interest income on
the Company's cash and investment balances, interest expense on the
Company's debt, gains and losses recognized on investments accounted for
using the equity method, realized gains and losses on the sale of securities,
certain foreign exchange gains and losses, and other miscellaneous income and
expense items.
As of September 25, 1998, the Company owned 25.9% of the outstanding stock
of ARM Holdings plc ("ARM"), a publicly held company in the United
Kingdom involved in the design of high performance microprocessors and
related technology. Through September 25, 1998, the Company accounted for
this investment using the equity method. On October 14, 1998, the Company
sold 2.9 million shares of ARM stock for net proceeds of approximately $37
million, a gain of approximately $32 million recorded as other income, and
related income tax expense of approximately $3 million.
As a result of this sale, the Company's ownership interest in ARM fell to 19%.
Consequently, beginning in the first quarter of fiscal 1999, the Company no
longer accounts for its remaining investment in ARM using the equity method
and has categorized its remaining shares as available for sale requiring the
shares be carried at fair value, with unrealized gains and losses reported as a
component of shareholders' equity. During the first quarter of 1999, the
14
<PAGE>
Company increased the carrying value of its remaining shares in ARM by $180
million to adjust their total carrying value at December 26, 1998, to their
market value of approximately $197 million. The carrying value of the ARM
shares is included in other assets. The total unrealized gain net of taxes
related to ARM shares recognized in other comprehensive income during the
first quarter of 1999 was approximately $113 million.
On February 2, 1999, the Company sold 2 million shares of ARM stock for net
proceeds of approximately $59 million and a gain before taxes of approximately
$55 million which will be recognized as other income by the Company in the
second quarter of 1999. Subsequent to this sale, the Company holds
approximately 7.3 million shares which represent approximately 14.9% of the
currently outstanding stock of ARM.
Provision for Income Taxes
As of December 26, 1998, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $663 million
before being offset against certain deferred tax liabilities for presentation
on the Company's balance sheet. A substantial portion of this asset is
realizable based on the ability to offset existing deferred tax liabilities.
As of December 26, 1998, a valuation allowance of $180 million was recorded
against the deferred tax asset for the benefits of tax losses which may not be
realized. Realization of approximately $73 million of the asset representing
tax loss and credit carryforwards is dependent on the Company's ability to
generate approximately $209 million of future U.S. taxable income. Management
believes that it is more likely than not that forecasted U.S. income,
including income that may be generated as a result of certain tax planning
strategies, will be sufficient to utilize the tax carryforwards prior
to their expiration in 2011 and 2012 to fully recover this asset. However,
there can be no assurance that the Company will meet its expectations of
future U.S. taxable income. As a result, the amount of the deferred tax assets
considered realizable could be reduced in the near and long term if estimates
of future taxable U.S. income are reduced. Such an occurrence could materially
adversely affect the Company's consolidated financial results. The Company
will continue to evaluate the realizability of the deferred tax assets
quarterly by assessing the need for and amount of the valuation allowance.
The Company's effective tax rate for the first quarter of 1999 was only 10%
due primarily to the reversal of a portion of the previously established
valuation allowance and certain undistributed foreign earnings for which no
U.S. taxes were provided.
16
<PAGE>
Liquidity and Capital Resources
The following table presents selected financial information and statistics for
each of fiscal quarters ending on the dates indicated (dollars in millions):
<TABLE>
<CAPTION>
12/26/98 9/25/98 12/26/97
<S> <C> <C> <C>
Cash, cash equivalents, and short-
term investments $2,578 $2,300 $1,627
Accounts receivable, net $913 $955 $902
Inventory $ 25 $ 78 $404
Working capital $2,383 $2,178 $1,704
Days sales in accounts receivable (a) 49 56 52
Days of supply in inventory (b) 2 6 30
Days payables outstanding (c) 51 60 50
Operating cash flow $223 $282 $132
</TABLE>
(a) Based on ending net trade receivables and most recent quarterly net sales
for each period
(b) Based on ending inventory and most recent quarterly cost of sales for each
period
(c) Based on ending accounts payable and most recent quarterly cost of sales
adjusted for the change in inventory
As of December 26, 1998, the Company had approximately $2.58 billion in
cash, cash equivalents, and short-term investments, an increase of $278
million over the same balances at the end of fiscal 1998. During the first
quarter of 1999, the most significant sources of cash were $152 million of net
income, declines in net accounts receivable of $42 million and inventory of
$53 million, and proceeds on the sales of ARM shares of $37 million. These
factors were partially offset by a decrease in accounts payable of $64
million. The Company's cash and cash equivalent balances as of December 26,
1998, and September 25, 1998, include $4 million and $56 million,
respectively, pledged as collateral to support letters of credit.
The Company's debt ratings are currently non-investment grade. As of March
27, 1998, the Company's senior and subordinated long-term debt ratings were
B- and CCC, respectively, by Standard and Poor's (S&P) Rating Agency, and
B3 and Caa2, respectively, by Moody's Investor Services (Moody's). In June
1998, Moody's upgraded the Company's senior debt to B2 from B3 and
subordinated debt to Caa1 from Caa2 citing strengthened debtholder protection
measurements as the major reason for the upgrade. On November 9, 1998, S&P
upgraded the Company's senior debt to B+ from B- and upgraded its
subordinated debt to B- from CCC citing the Company's improved profitability
and financial profile for the upgrade. Despite these recent upgrades, the
Company's continued non-investment grade debt ratings will maintain pressure
on the Company's cost of funds in future periods and may require the Company
to pledge additional collateral or agree to more stringent debt covenants.
16
<PAGE>
The Company believes that its balances of cash, cash equivalents, and short-
term investments will be sufficient to meet its cash requirements over
the next twelve months. However, given the Company's current debt ratings, if
the Company should need to obtain short-term borrowings, there can no
assurance that such borrowings could be obtained at favorable rates. The
inability to obtain such borrowings at favorable rates could materially
adversely affect the Company's results of operations, financial condition, and
liquidity.
Year 2000 Compliance
The information presented below related to Year 2000 (Y2K) compliance
contains forward looking statements that are subject to risks and
uncertainties. The Company's actual results may differ significantly from
those discussed below and elsewhere in this Form 10-Q regarding Year 2000
compliance.
The Company's Information Systems and Technology department (IS&T)
began addressing the Y2K issue in 1996 as part of its Next Generation
strategy, which addressed the need for ongoing enhancement and replacement
of the Company's various disparate legacy information technology (IT)
Systems. In 1998, the Company established a Year 2000 Executive Steering
Committee (Steering Committee) composed of senior executives of the
Company and the Company's Year 2000 Project Management Office (PMO).
The PMO reports to the Executive Vice President and Chief Financial Officer,
the Steering Committee, and the Audit and Finance Committee of the Board of
Directors.
The PMO developed and manages the Company's worldwide Y2K strategic
plan (Y2K Plan) to address the potential impact of Y2K on the Company's
operations and business processes. In particular, the Y2K Plan addresses four
principal areas that may be impacted by the Y2K issue: Apple Branded
Products; Third Party Relationships; Non-IT Business Systems; and IT
Systems. With respect to the IT Systems and Non-IT Business Systems, the
Y2K Plan consists of four separate but overlapping phases: Phase I - Inventory
and Risk Assessments; Phase II - Remediation Cost Estimation; Phase III -
Remediation; and Phase IV - Remediation Testing. In addition, the Company
has an ongoing Y2K Awareness Program designed to keep employees informed
about Y2K issues. The Company's goal is to substantially complete Phase III -
Remediation during the third quarter of 1999; complete Phase IV -
Remediation Testing during the fourth quarter of 1999, and to continue
compliance efforts throughout the remainder of calendar year 1999. There
have been no significant changes made to this schedule during the first
quarter of 1999, and the Company remains on schedule to meet these goals.
The Company designs and manufacturers microprocessor-based personal
computers, related peripherals, operating system software and application
software, including Macintosh personal computers and the Mac OS which are
marketed under the "Apple" brand (collectively "Apple Branded Products").
17
<PAGE>
The Company tested certain Apple Branded Products to determine Y2K
compliance, although such testing did not include third party products bundled
with Apple Branded Products and certain Apple Branded Products no longer
supported by the Company. For purposes of this discussion, Y2K compliant
means a product will not produce errors processing date data in connection
with the year change from December 31, 1999, to January 1, 2000, when used
with accurate date data in accordance with the its documentation, provided all
other products (including other software, firmware and hardware) used with it
properly exchange date data with it. A Y2K compliant product will recognize
the Year 2000 as a leap year. Information regarding the Y2K readiness of all
Apple Branded Products is available on the Apple corporate web site at
www.apple.com. Such information is not to be considered part of this quarterly
report. The Company believes that the unsupported Apple Branded Products
are Y2K compliant because, unlike other companies personal computers and
related products, the Company's products do not rely upon the two digit date
format but used a long word approach which allows the correct representation
of dates up to the year 2040. The current date and time utilities utilized by
Apple Branded Products are 64 bit signed value which covers dates from 30081
BC to 29940 AD. Since the Company does not control the design of non-Apple
Branded Products or third party products bundled with Apple Branded
Products, it cannot assure they are Y2K compliant. Certain products acquired
from NeXT Software, Inc., including OpenStep and NextStep, are not currently
Y2K compliant. The Company intends to develop and make available during
the third quarter of 1999 a software patch intended to allow such products to
become Y2K compliant.
The Company's business operations are heavily dependent on third party
corporate service vendors, materials suppliers, outsourced operations
partners, distributors and others. The Company is working with key external
parties to identify and attempt to mitigate the potential risks to it of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to the Company. As part of
its overall Y2K program, the Company is actively communicating with third
parties through face to face meetings and correspondence, on an ongoing basis,
to ascertain their state of readiness. Although numerous third parties have
indicated to the Company in writing that they are addressing their Y2K issues
on a timely basis, the readiness of third parties overall varies widely.
Because the Company's Y2K compliance is dependent on the timely Y2K
compliance of third parties, there can be no assurances that the Company's
efforts alone will resolve all Y2K issues.
The costs of the Y2K program are primarily costs associated with the
utilization of existing internal resources and incremental external spending.
The Company previously estimated it had incurred approximately $4.1 million
of incremental external spending directly associated with Y2K issues through
the end of fiscal 1998 and that it would incur future incremental external
spending associated with Y2K issues of approximately $5.1 million to address
those risks identified as high and medium. There have been no material
changes to the Company's costs estimates during the first quarter of 1999.
18
<PAGE>
However, as the Company's Y2K Plan continues, the actual future incremental
spending may prove to be higher. Also, this estimate does not include the
costs that could be incurred by the Company if one or more of its significant
third party service providers fails to achieve Y2K compliance. The Company is
not separately identifying and including in these estimates the Y2K costs
incurred that are the result of utilization of the Company's existing internal
resources.
Based on current information, the Company believes the Y2K issue will not
have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Y2K remediation by the Company or third parties will be
properly and timely completed, and the failure to do so could have a material
adverse effect on the Company, its business, results of operations, and its
financial condition. In particular, the Company has not yet completed its
assessment of the Y2K readiness of its significant third party service
providers. Completion of this assessment may result in the identification of
additional issues which could have a material adverse effect on the Company's
results of operations. In addition, important factors that could cause results
to differ materially include, but are not limited to, the ability of the
Company to successfully identify systems which have a Y2K issue, the nature
and amount of remediation effort required to fix the affected system, and the
costs and availability of labor and resources to successfully address the Y2K
issues.
Further details regarding the Company's Y2K compliance efforts may be found
in the 1998 Form 10-K in Item 7 under the heading "Year 2000 Compliance."
Factors That May Affect Future Results and Financial Condition
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, there are
many factors that will affect the Company's future results and business which
may cause the actual results to differ from those currently expected. The
Company's future operating results and financial condition are dependent upon
the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet dynamic customer demand
patterns. Inherent in this process are a number of factors that the Company
must successfully manage in order to achieve favorable future operating
results and a favorable financial condition.
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, among other things,
continued competitive pressures in the marketplace and the effect of any
reaction by the Company to such competitive pressures, including pricing
actions by the Company; risks associated with international operations,
including economic and labor conditions, the continuing economic problems
being experienced in Asia and Latin America, political instability, tax laws,
and currency fluctuations; increasing dependence on third-parties for
manufacturing and other outsourced functions such as logistics; the
19
<PAGE>
availability of key components on terms acceptable to the Company; the
continued availability of certain components essential to the Company's
business currently obtained by the Company from sole or limited sources,
including PowerPC RISC microprocessors developed by and obtained from
IBM and Motorola; the Company's ability to supply products in certain
categories; the Company's ability to supply products free of latent defects or
other faults; the Company's ability to make timely delivery to the marketplace
of technological innovations, including its ability to continue to make timely
delivery of planned enhancements to the current Mac OS and timely delivery of
future versions of the Mac OS; the availability of third-party software for
particular applications; the Company's ability to attract, motivate and retain
key employees; the effect of Y2K compliance issues; managing the impact of the
European Union's transition to the Euro as its common legal currency; the
Company's ability to retain the operational and cost benefits derived from its
recently completed restructuring program; and the Company's ability to
successfully replace its existing transaction systems in the U.S.
For a discussion of these and other factors affecting the Company's future
results and financial condition, see "Item 7 - Management's Discussion and
Analysis -- Factors That May Affect Future Results and Financial Condition" in
the Company's 1998 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information presented below regarding Market Risk contains forward
looking statements that are subject to risks and uncertainties. The Company's
actual results may differ significantly from those discussed below and
elsewhere in this Form 10-Q regarding market risk. . The following discussion
should be read in conjunction with the 1998 Form 10-K and the condensed
consolidated financial statements and notes thereto included elsewhere in this
Form 10-Q.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investments and long-term debt obligations and
related derivative financial instruments. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company's general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market
and credit risk. All highly liquid investments with a maturity of three months
or less at the date of purchase are considered to be cash equivalents;
investments with maturities between three and twelve months are considered to
be short-term investments. As of December 26, 1998, there are no investments
with maturities greater than 12 months.
Overall, the Company is a net receiver of currencies other than the U.S.
dollar and, as such, benefits from a weaker dollar and is adversely affected
by a stronger dollar relative to major currencies worldwide. Accordingly,
changes in exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively affect the Company's consolidated sales and gross
margins as expressed in U.S. dollars.
20
<PAGE>
The Company enters into foreign exchange forward and option contracts with
financial institutions primarily to protect against currency exchange risks
associated with existing assets and liabilities, certain firmly committed
transactions, and probable but not firmly committed transactions. The
Company's foreign exchange risk management policy requires it to hedge a
majority of its existing material foreign exchange transaction exposures.
However, the Company may not hedge certain foreign exchange transaction
exposures that are immaterial either in terms of their minimal U.S. dollar
value or in terms of the related currency's historically high correlation with
the U.S. dollar. Foreign exchange forward contracts are carried at fair value
in other current liabilities. The premium costs of purchased foreign exchange
option contracts are recorded in other current assets and amortized over the
life of the option.
To ensure the adequacy and effectiveness of the Company's foreign exchange
and interest rate hedge positions, as well as to monitor the risks and
opportunities of the nonhedge portfolios, the Company continually monitors its
foreign exchange forward and option positions, and its interest rate swap,
option and floor positions both on a stand-alone basis and in conjunction with
its underlying foreign currency and interest rate-related exposures,
respectively, from both an accounting and an economic perspective. However,
given the effective horizons of the Company's risk management activities and
the anticipatory nature of the exposures intended to hedge, there can be no
assurance that the aforementioned programs will offset more than a portion of
the adverse financial impact resulting from unfavorable movements in either
foreign exchange or interest rates. In addition, the timing of the accounting
for recognition of gains and losses related to mark-to-market instruments for
any given period may not coincide with the timing of gains and losses related
to the underlying economic exposures and, therefore, may adversely affect the
Company's consolidated operating results and financial position.
For a complete description of the Company's interest rate and foreign currency
related market risks, see the discussion in Part II, Item 7A of the Company's
1998 Form 10-K. There has not been a material change in the Company's
exposure to interest rate and foreign currency risks since September 25, 1998.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims which are
discussed in the 1998 Form 10-K. The Company is also subject to certain other
legal proceedings and claims which have arisen in the ordinary course of
business and which have not been fully adjudicated. The results of legal
proceedings cannot be predicted with certainty; however, in the opinion of
management, the Company does not have a potential liability related to any
legal proceedings and claims that would have a material adverse effect on its
financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
3.3 By-Laws of the Company, as amended through December 15, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated December 23, 1998 to
report under Item 8 (Change in Fiscal Year), an amendment to the Company's
By-laws to provide that each fiscal quarter shall end at midnight Saturday of
the 13th week of such quarter, rather than midnight Friday.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
By: /s/ Fred D. Anderson
Fred D. Anderson
Executive Vice President and Chief Financial Officer
February 8, 1999
23
<PAGE>
INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
3.3 By-Laws of the Company, as amended through December 15, 1998. 25
27 Financial Data Schedule. 49
24
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<TEXT>
EXHIBIT 3.3
BY-LAWS
OF
APPLE COMPUTER, INC.
(a California corporation)
(as amended through December 15, 1998)
Article I
OFFICES
Section 1.1: Principal Office. The principal executive office for the
transaction of the business of this corporation shall be 1 Infinite Loop,
Cupertino, California 95014. The Board of Directors is hereby granted full
power and authority to change the location of the principal executive office
from one location to another.
Section 1.2: Other Offices. One or more branch or other subordinate
offices may at any time be fixed and located by the Board of Directors at
such place or places within or without the State of California as it deems
appropriate.
Article II
DIRECTORS
Section 2.1: Exercise of Corporate Powers. Except as otherwise
provided by these By-Laws, by the Articles of Incorporation of this
corporation or by the laws of the State of California now or hereafter in
force, the business and affairs of this corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
Section 2.2: Number. The number of directors of the corporation
shall be not less than five (5) nor more than nine (9). The exact number of
directors shall be six (6) until changed within the limits specified above, by
a by-law amending this section, duly adopted by the Board of Directors or by
the shareholders. The indefinite number of directors may be changed, or a
definite number fixed without provision for an indefinite number, by a duly
adopted amendment to the Articles of Incorporation or by an amendment to this
by-law duly adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote; provided, however, that an amendment
25
<PAGE>
reducing the fixed number or the minimum number of directors to a number
less than five (5) cannot be adopted if the votes cast against its adoption at
a meeting of the shareholders, or the shares not consenting in the case of
action by written consent, are equal to more than 16-2/3% of the outstanding
shares entitled to vote. No amendment may change the stated maximum
number of authorized directors to a number greater than two times the stated
minimum number of directors minus one.
Section 2.3: Need Not Be Shareholders. The directors of this
corporation need not be shareholders of this corporation.
Section 2.4: Compensation. Directors and members of committees may
receive such compensation, if any, for their services as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any director from serving this corporation in
any other capacity and receiving compensation therefor.
Section 2.5: Election and Term of Office. The directors shall be
divided into two classes, designated Class I and Class II. Each class shall
consist of one-half of the directors or as close an approximation as possible.
The initial term of office of the directors of Class I shall expire at the
annual meeting to be held during fiscal year 1991 and the initial term of
office of the directors of Class II shall expire at the annual meeting to be
held during fiscal year 1992. At each annual meeting, commencing with the
annual meeting to be held during fiscal year 1991, each of the successors to
the directors of the class whose term shall have expired at such annual
meeting shall be elected for a term running until the second annual meeting
next succeeding his or her election and until his or her successor shall have
been duly elected and qualified.
Section 2.6: Vacancies. A vacancy or vacancies on the Board of
Directors shall exist in case of the death, resignation or removal of any
director, or if the authorized number of directors is increased, or if the
shareholders fail, at any annual meeting of shareholders at which any director
is elected, to elect the full authorized number of directors to be voted for
at that meeting. The Board of Directors may declare vacant the office of a
director if he or she is declared of unsound mind by an order of court or
convicted of a felony or if, within 60 days after notice of his or her
election, he or she does not accept the office. Any vacancy, except for a
vacancy created by removal of a director as provided in Section 2.7 hereof,
may be filled by a person selected by a majority of the remaining directors
then in office, whether or not less than a quorum, or by a sole remaining
director. Vacancies occurring in the Board of Directors by reason of removal
of directors shall be filled only by approval of shareholders. The shareholders
may elect a director at any time to fill any vacancy not filled by the
directors. Any such election by written consent requires the consent of a
majority of the outstanding shares entitled to vote. If, after the filling of
any vacancy by the directors, the directors then in office who have been
elected by the shareholders shall constitute less than a majority of the
directors then in office, any holder or holders of an aggregate of 5% or more
of the total number of shares at the time outstanding having the right to vote
26
<PAGE>
for such directors may call a special meeting of shareholders to be held to
elect the entire Board of Directors. The term of office of any director shall
terminate upon such election of a successor. Any director may resign effective
upon giving written notice to the Chairman of the Board, if any, the Chief
Executive Officer, the President, the Secretary or the Board of Directors of
this corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the resignation is effective at a future
time, a successor may be elected to take office when the resignation becomes
effective. A reduction of the authorized number of directors shall not remove
any director prior to the expiration of such director's term of office.
Section 2.7: Removal. The entire Board of Directors or any individual
director may be removed without cause from office by an affirmative vote of a
majority of the outstanding shares entitled to vote; provided that, unless the
entire Board of Directors is removed, no director shall be removed when the
votes cast against removal, or not consenting in writing to such removal,
would be sufficient to elect such director if voted cumulatively (without
regard to whether such shares may be voted cumulatively) at an election at
which the same total number of votes were cast, or, if such action is taken by
written consent, all shares entitled to vote were voted, and either the number
of directors elected at the most recent annual meeting of shareholders, or if
greater, the number of directors for whom removal is being sought, were then
being elected. If any or all directors are so removed, new directors may be
elected at the same meeting or at a subsequent meeting. If at any time a
class or series of shares is entitled to elect one or more directors under
authority granted by the Articles of Incorporation of this corporation, the
provisions of this Section 2.7 shall apply to the vote of that class or series
and not to the vote of the outstanding shares as a whole.
Section 2.8: Powers and Duties. Without limiting the generality or
extent of the general corporate powers to be exercised by the Board of
Directors pursuant to Section 2.1 of these By-Laws, it is hereby provided that
the Board of Directors shall have full power with respect to the following
matters:
(a) To purchase, lease, and acquire any and all kinds of property,
real, personal or mixed, and at its discretion to pay therefor in money, in
property and/or in stocks, bonds, debentures or other securities of this
corporation.
(b) To enter into any and all contracts and agreements which in its
judgment may be beneficial to the interests and purposes of this corporation.
(c) To fix and determine and to vary from time to time the amount or
amounts to be set aside or retained as reserve funds or as working capital of
this corporation or for maintenance, repairs, replacements or enlargements of
its properties.
(d) To declare and pay dividends in cash, shares and/or property
out of any funds of this corporation at the time legally available for the
declaration and payment of dividends on its shares.
27
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(e) To adopt such rules and regulations for the conduct of its
meetings and the management of the affairs of this corporation as it may
deem proper.
(f) To prescribe the manner in which and the person or persons by
whom any or all of the checks, drafts, notes, bills of exchange, contracts
and other corporate instruments shall be executed.
(g) To accept resignations of directors; to declare vacant the
office of a director as provided in Section 2.6 hereof; and, in case of
vacancy in the office of directors, to fill the same to the extent provided in
Section 2.6 hereof.
(h) To create offices in addition to those for which provision is
made by law or these By-Laws; to elect and remove at pleasure all officers of
this corporation, fix their terms of office, prescribe their powers and
duties, limit their authority and fix their salaries in any way it may deem
advisable which is not contrary to law or these By-Laws; and, if it sees fit,
to require from the officers or any of them security for faithful service.
(i) To designate some person to perform the duties and exercise
the powers of any officer of this corporation during the temporary absence or
disability of such officer.
(j) To appoint or employ and to remove at pleasure such agents and
employees as it may see fit, to prescribe their titles, powers and duties,
limit their authority, and fix their salaries in any way it may deem advisable
which is not contrary to law or these By-Laws; and, if it sees fit, to require
from them or any of them security for faithful performance.
(k) To fix a time in the future, which shall not be more than 60
days nor less than 10 days prior to the date of the meeting nor more than
sixty (60) days prior to any other action for which it is fixed, as a record
date for the determination of the shareholders entitled to notice of and to
vote at any meeting, or entitled to receive any payment of any dividend or
other distribution, or allotment of any rights, or entitled to exercise any
rights in respect of any other lawful action; and in such case only
shareholders of record on the date so fixed shall be entitled to notice of
and to vote at the meeting or to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of this corporation
after any record date fixed as aforesaid. The Board of Directors may close
the books of this corporation against transfers of shares during the whole or
any part of such period.
(l) To fix and locate from time to time the principal office for the
transaction of the business of this corporation and one or more branch or
other subordinate office or offices of this corporation within or without the
State of California; to designate any place within or without the State of
California for the holding of any meeting or meetings of the shareholders or
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the Board of Directors, as provided in Sections 10.1 and 11.1 hereof; to
adopt, make and use a corporate seal, and to prescribe the forms of
certificates for shares and to alter the form of such seal and of such
certificates from time to time as in its judgment it may deem best, provided
such seal and such certificates shall at all times comply with the provisions
of law now or hereafter in effect.
(m) To authorize the issuance of shares of stock of this corporation
in accordance with the laws of the State of California and the Articles of
Incorporation of this corporation.
(n) Subject to the limitation provided in Section 14.2 hereof, to
adopt, amend or repeal from time to time and at any time these By-Laws and
any and all amendments thereof.
(o) To borrow money and incur indebtedness on behalf of this
corporation, including the power and authority to borrow money from any of
the shareholders, directors or officers of this corporation, and to cause to
be executed and delivered therefor in the corporate name promissory notes,
bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other
evidences of debt and securities therefor, and the note or other obligation
given for any indebtedness of this corporation, signed officially by any
officer or officers thereunto duly authorized by the Board of Directors shall
be binding on this corporation.
(p) To designate and appoint committees of the Board of Directors
as it may see fit, to prescribe their names, powers and duties and limit their
authority in any way it may deem advisable which is not contrary to law or
these By-Laws.
(q) Generally to do and perform every act and thing whatsoever that
may pertain to the office of a director or to a board of directors.
Article III
OFFICERS
Section 3.1: Election and Qualifications. The officers of this
corporation shall consist of a Chief Executive Officer, a President, one or
more Vice Presidents, a Secretary, a Chief Financial Officer and such other
officers, including, but not limited to, a Chairman of the Board of Directors,
a Treasurer, and Assistant Secretaries and Assistant Treasurers as the Board
of Directors shall deem expedient, who shall be chosen in such manner and
hold their offices for such terms as the Board of Directors may prescribe.
Any two or more of such offices may be held by the same person. Any Vice
President, Assistant Treasurer or Assistant Secretary, respectively, may
exercise any of the powers of the Chief Executive Officer, the President, the
Chief Financial Officer, or the Secretary, respectively, as directed by the
Board of Directors, and shall perform such other duties as are imposed upon
him or her by the By-Laws or the Board of Directors.
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Section 3.2: Term of Office and Compensation. The term of office and
salary of each of said officers and the manner and time of the payment of such
salaries shall be fixed and determined by the Board of Directors and may be
altered by said Board from time to time at its pleasure, subject to the
rights, if any, of an officer under any contract of employment. Any officer
may resign at any time upon written notice to this corporation, without
prejudice to the rights, if any, of this corporation under any contract to
which the officer is a party. If any vacancy occurs in any office of this
corporation, the Board of Directors may elect a successor to fill such vacancy.
Article IV
CHAIRMAN OF THE BOARD
Section 4.1: Powers and Duties. The Chairman of the Board of
Directors, if there be one, shall have the power to preside at all meetings of
the Board of Directors and shall have such other powers and shall be subject
to such other duties as the Board of Directors may from time to time prescribe.
Article V
CHIEF EXECUTIVE OFFICER
Section 5.1: Powers and Duties. The powers and duties of the Chief
Executive Officer are:
(a) To act as the general manager and chief executive officer of
this corporation and, subject to the control of the Board of Directors, to have
general supervision, direction and control of the business and affairs of this
corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board or if there be no Chairman, at all
meetings of the Board of Directors.
(c) To call meetings of the shareholders and meetings of the Board
of Directors to be held at such times and, subject to the limitations
prescribed by law or by these By-Laws, at such places as he or she shall
deem proper.
(d) To affix the signature of this corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which, in the judgment of the Chief Executive Officer, should be
executed on behalf of this corporation; to sign certificates for shares of
stock of this corporation; and, subject to the direction of the Board of
Directors, to have general charge of the property of this corporation and to
supervise and control all officers, agents and employees of this corporation.
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Article VA
PRESIDENT
Section 5A.1: Powers and Duties. The powers and duties of the
President are:
(a) To act as the general manager of this corporation and, subject
to the control of the Board of Directors, to have general supervision,
direction and control of the business and affairs of this corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board and the Chief Executive Officer or if
there be no Chairman or Chief Executive Officer, at all meetings of the Board
of Directors.
(c) To affix the signature of this corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates and other
papers and instruments in writing which have been authorized by the Board of
Directors or which, in the judgment of the President, should be executed on
behalf of this corporation; to sign certificates for shares of stock of this
corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of this corporation and to supervise and
control all officers, agents and employees of this corporation.
Section 5A.2: President Pro Tem. If neither the Chairman of the
Board, the Chief Executive Officer, the President, nor any Vice President is
present at any meeting of the Board of Directors, a President pro tem may be
chosen to preside and act at such meeting. If neither the Chief Executive
Officer, the President nor any Vice President is present at any meeting of the
shareholders, a President pro tem may be chosen to preside at such meeting.
Article VI
VICE PRESIDENT
Section. 6.1: Powers and Duties. The titles, powers and duties of the
Vice President or Vice Presidents shall be prescribed by the Board of
Directors. In case of the absence, disability or death of the Chief Executive
Officer, the President, the Vice President, or one of the Vice Presidents,
shall exercise all his or her powers and perform all his or her duties. If
there is more than one Vice President, the order in which the Vice Presidents
shall succeed to the powers and duties of the Chief Executive Officer or
President shall be as fixed by the Board of Directors.
Article VII
SECRETARY
Section 7.1: Powers and Duties. The powers and duties of the
Secretary are:
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(a) To keep a book of minutes at the principal executive office of
this corporation, or such other place as the Board of Directors may order, of
all meetings of its directors and shareholders with the time and place of
holding, whether regular or special, and, if special, how authorized, the
notice thereof given, the names of those present at directors' meetings, the
number of shares present or represented at shareholders' meetings and the
proceedings thereof.
(b) To keep the seal of this corporation and to affix the same to
all instruments which may require it.
(c) To keep or cause to be kept at the principal executive office
of this corporation, or at the office of the transfer agent or agents, a
record of the shareholders of this corporation, giving the names and
addresses of all shareholders and the number and class of shares held by each,
the number and date of certificates issued for shares and the number and date
of cancellation of every certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of this corporation,
to fill in all certificates issued, and to make a proper record of each such
issuance; provided that so long as this corporation shall have one or more
duly appointed and acting transfer agents of the shares, or any class or
series of shares, of this corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents.
(e) To transfer upon the share books of this corporation any and all
shares of this corporation; provided that so long as this corporation shall
have one or more duly appointed and acting transfer agents of the shares, or
any class or series of shares, of this corporation, such duties with respect
to such shares shall be performed by such transfer agent or transfer agents,
and the method of transfer of each certificate shall be subject to the
reasonable regulations of the transfer agent to which the certificate is
presented for transfer and, also, if this corporation then has one or more
duly appointed and acting registrars, subject to the reasonable regulations of
the registrar to which a new certificate is presented for registration; and
provided, further, that no certificate for shares of stock shall be issued or
delivered or, if issued or delivered, shall have any validity whatsoever until
and unless it has been signed or authenticated in the manner provided in
Section 12.3 hereof.
(f) To make service and publication of all notices that may be
necessary or proper and without command or direction from anyone. In case of
the absence, disability, refusal or neglect of the Secretary to make service or
publication of any notices, then such notices may be served and/or published
by the Chief Executive Officer, the President or a Vice President, or by any
person thereunto authorized by either of them or by the Board of Directors or
by the holders of a majority of the outstanding shares of this corporation.
(g) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
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Article VIII
CHIEF FINANCIAL OFFICER
Section 8.1: Powers and Duties. The powers and duties of the Chief
Financial Officer are:
(a) To supervise and control the keeping and maintaining of adequate
and correct accounts of this corporation's properties and business
transactions, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, surplus and shares. The books of
account shall at all reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidences of
indebtedness and other valuable documents of this corporation and, at his or
her discretion, to cause any or all thereof to be deposited for the account of
this corporation with such depository as may be designated from time to time
by the Board of Directors.
(c) To receive or cause to be received, and to give or cause to be
given, receipts and acquittances for moneys paid in for the account of this
corporation.
(d) To disburse, or cause to be disbursed, all funds of this
corporation as may be directed by the Chief Executive Officer, the President
or the Board of Directors, taking proper vouchers for such disbursements.
(e) To render to the Chief Executive Officer, the President or to the
Board of Directors, whenever either may require, accounts of all transactions
as Chief Financial Officer and of the financial condition of this corporation.
(f) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
Article VIIIA
APPOINTED VICE PRESIDENTS, ETC.
Section 8A.l: Appointed Vice Presidents, Etc.; Appointment, Duties,
etc. The Chief Executive Officer of the corporation shall have the power, in
the exercise of his or her discretion, to appoint additional persons to hold
positions and titles such as vice president of the corporation or a division
of the corporation or president of a division of the corporation, or similar
such titles, as the business of the corporation may require, subject to such
limits in appointment power as the Board may determine. The Board shall be
advised of any such appointment at a meeting of the Board, and the
appointment shall be noted in the minutes of the meeting. The minutes shall
clearly state that such persons are non-corporate officers appointed pursuant
to this Section 8A.l of these By-laws.
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Each such appointee shall have such title, shall serve in such
capacity and shall have such authority and perform such duties as the Chief
Executive Officer of the corporation shall determine.
Appointees may hold titles such as "president" of a division or
other group within the corporation, or "vice president" of the corporation or
of a division or other group within the corporation. However, any such
appointee, absent specific election by the Board as an elected corporate
officer, (i) shall not be considered an officer elected by the Board of
Directors pursuant to Article III of these By-Laws and shall not have the
executive powers or authority of corporate officers elected pursuant to such
Article III, (ii) shall not be considered (a) an "officer" of the corporation
for the purposes of Rule 3b-2 promulgated under the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder
(collectively, the "Act") or an "executive officer" of the corporation for the
purposes of Rule 3b-7 promulgated under the Act, and similarly shall not be
considered an "officer" of the corporation for the purposes of Section 16 of
the Act (as such persons shall not be given the access to inside information
of the corporation enjoyed by officers of the corporation) or an "executive
officer" of the corporation for the purposes of Section 14 of the Act or (b) a
"corporate officer" for the purposes of Section 312 of the California
Corporation Code (the "Code"), except in any such case as otherwise required
by law, and (iii) shall be empowered to represent himself or herself to third
parties as an appointed vice president, etc., only, and shall be empowered to
execute documents, bind the corporation or otherwise act on behalf of the
corporation only as authorized by the Chief Executive Officer or the President
of the Corporation or by resolution of the Board of Directors.
An elected officer of the corporation may also serve in an
appointed capacity hereunder.
Article IX
EXECUTIVE COMMITTEE
Section 9.1: Appointment and Procedure. The Board of Directors may,
by resolution adopted by a majority of the authorized number of directors,
appoint from among its members an Executive Committee of two or more
members. The Executive Committee may make its own rules of procedure
subject to Section 11.9 hereof, and shall meet as provided by such rules or by
a resolution adopted by the Board of Directors (which resolution shall take
precedence). A majority of the members of the Executive Committee shall
constitute a quorum, and in every case the affirmative vote of a majority of
all members of the Committee shall be necessary to the adoption of any
resolution by such Committee.
Section 9.2: Powers. During the intervals between the meetings of the
Board of Directors, the Executive Committee, in all cases in which specific
directions shall not have been given by the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of this corporation in such manner as
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the Committee may deem best for the interests of this corporation, except with
respect to:
(a) any action for which California law also requires shareholder
approval,
(b) the filling of vacancies on the Board of Directors or in the
committee,
(c) the fixing of compensation of the directors for serving on the
Board of Directors or on any committee,
(d) the amendment or repeal of By-Laws or the adoption of new By-
Laws,
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable,
(f) a distribution to the shareholders of this corporation, except
at a rate or in a periodic amount or within a price range determined by the
Board of Directors,
(g) the appointment of other committees of the Board of Directors or
the members thereof.
Article X
MEETINGS OF SHAREHOLDERS
Section 10.1: Place of Meetings. Meetings (whether regular, special or
adjourned) of the shareholders of this corporation shall be held at the
principal executive office for the transaction of business of this corporation,
or at any place within or without the State which may be designated by written
consent of all the shareholders entitled to vote thereat, or which may be
designated by resolution of the Board of Directors. Any meeting shall be
valid wherever held if held by the written consent of all the shareholders
entitled to vote thereat, given either before or after the meeting and filed
with the Secretary of this corporation.
Section 10.2: Annual Meetings. The annual meeting of the shareholders
shall be held at the hour of 10:00 a.m. on the last Wednesday in January in
each year , if not a legal holiday, and if a legal holiday, then on the next
succeeding business day not a legal holiday or at such other time in a
particular year as may be designated by written consent of all the shareholders
entitled to vote thereat or which may be designated by resolution of the Board
of Directors. Such annual meetings shall be held at the place provided
pursuant to Section 10.1 hereof. Said annual meetings shall be held for the
purpose of the election of directors, for the making of reports of the affairs
of this corporation and for the transaction of such other business as may come
before the meeting.
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Section 10.3: Special Meetings. Special meetings of the shareholders
for any purpose or purposes whatsoever may be called at any time by the
President or by the Board of Directors, or by two or more members thereof, or
by one or more holders of shares entitled to cast not less than ten percent
(10%) of the votes on the record date established pursuant to Section 10.8.
Upon request in writing sent by registered mail to the Chief Executive Officer,
President, Vice President or Secretary, or delivered to any such officer in
person, by any person or persons entitled to call a special meeting of
shareholders (such request, if sent by a shareholder or shareholders, to
include the information required by Section 10.13), it shall be the duty of
such officer, subject to the immediately succeeding sentence, to cause notice
to be given to the shareholders entitled to vote that a meeting will be
requested by the person or persons calling the meeting, the date of which
meeting, which shall be set by such officer, to be not less than 35 days nor
more than 60 days after such request or, if applicable, determination of the
validity of such request pursuant to the immediately succeeding sentence.
Within seven days after receiving such a written request from a shareholder or
shareholders of the corporation, the Board of Directors shall determine
whether shareholders owning not less than ten percent (10%) of the shares as
of the record date established pursuant to Section 10.8 for such request
support the call of a special meeting and notify the requesting party or
parties of its finding.
Section 10.4: Notice of Meetings. Notice of any meeting of
shareholders shall be given in writing not less than 10 nor more than 60 days
before the date of the meeting to each shareholder entitled to vote thereat by
the Secretary or an Assistant Secretary, or other person charged with that
duty, or if there be no such officer or person, or in case of his or her
neglect or refusal, by any director or shareholder. The notice shall state the
place, date and hour of the meeting and (i) in the case of a special meeting,
the general nature of the business to be transacted, and no other business may
be transacted, or (ii) in the case of the annual meeting, those matters which
the Board of Directors, at the time of the mailing of the notice, intends to
present for action by the shareholders, but any proper matter may be presented
at the meeting for such action except
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that notice must be given or waived in writing of any proposal relating to
approval of contracts between the corporation and any director of this
corporation, amendment of the Articles of Incorporation, reorganization of
this corporation or winding up of this corporation. The notice of any meeting
at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for election.
Written notice shall be given by this corporation to any shareholder, either
(i) personally or (ii) by mail or other means of written communication,
charges prepaid, addressed to such shareholder at such shareholder's address
appearing on the books of this corporation or given by such shareholder to
this corporation for the purpose of notice. If a shareholder gives no address
or no such address appears on the books of this corporation, notice shall be
deemed to have been given if sent by mail or other means of written
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communication addressed to the place where the principal executive office of
this corporation is located, or if published at least once in a newspaper of
general circulation in the county in which such office is located. The notice
shall be deemed to have been given at the time when delivered personally or
deposited in the United States mail, postage prepaid, or sent by other means
of written communication and addressed as hereinbefore provided. An affidavit
of delivery or mailing of any notice in accordance with the provisions of this
Section 10.4, executed by the Secretary, Assistant Secretary or any transfer
agent, shall be prima facie evidence of the giving of the notice. If any
notice addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation is returned to this corporation by
the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver the notice to the shareholder at such
address, all future notices shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon
written demand of the shareholder at the principal executive office of this
corporation for a period of one year from the date of the giving of the notice
to all other shareholders.
Section 10.5: Consent to Shareholders' Meetings. The transactions of
any meeting of shareholders, however called and noticed, and wherever held,
are as valid as though had at a meeting duly held after regular call and
notice, if a quorum is present either in person or by proxy, and if, either
before or after the meeting, each of the shareholders entitled to vote, not
present in person or by proxy, signs a written waiver of notice or a consent to
the holding of such meeting or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except when the person
objects, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required by law to be included in the notice but not
so included, if such objection is expressly made at the meeting. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of shareholders need be specified in any written waiver of notice, except as
to approval of contracts between this corporation and any of its directors,
amendment of the Articles of Incorporation, reorganization of this corporation
or winding up the affairs of this corporation.
Section 10.6: Quorum. The presence in person or by proxy of the
holders of a majority of the shares entitled to vote at any meeting of
shareholders shall constitute a quorum for the transaction of business. Shares
shall not be counted to make up a quorum for a meeting if voting of such
shares at the meeting has been enjoined or for any reason they cannot be
lawfully voted at the meeting. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
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Section 10.7: Adjourned Meetings. Any shareholders' meeting, whether
or not a quorum is present, may be adjourned from time to time by the vote of
a majority of the shares, the holders of which are either present in person or
represented by proxy thereat, but, except as provided in Section 10.6 hereof,
in the absence of a quorum, no other business may be transacted at such
meeting. When a meeting is adjourned for more than 45 days or if after
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at a meeting. Except as aforesaid, it shall not be necessary to give any
notice of
the time and place of the adjourned meeting or of the business to be
transacted thereat other than by announcement at the meeting at which such
adjournment is taken. At any adjourned meeting the shareholders may transact
any business which might have been transacted at the original meeting.
Section 10.8: Voting Rights. Only persons in whose names shares entitled
to vote stand on the stock records of this corporation at the close of
business on the business day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held or, if some other day be fixed
for the determination of shareholders of record pursuant to Section 2.8(k)
hereof, then on such other day, shall be entitled to vote at such meeting. In
the absence of any contrary provision in the Articles of Incorporation or in
any applicable statute relating to the election of directors or to other
particular matters, each such person shall be entitled to one vote for each
share.
In order that the corporation may determine the shareholders entitled to
consent to corporate action in writing without a meeting or request a special
meeting of the shareholders pursuant to Section 10.3, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors,
and which date shall not be more than fourteen (14) days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. Any shareholder of record seeking to have the shareholders
authorize or take corporate action by written consent or request a special
meeting of the shareholders pursuant to Section 10.3 shall, by written notice
to the Secretary, request the Board of Directors to fix a record date. The
Board of Directors shall promptly, but in no event later than twenty eight (28)
days after the date on which such request is received, adopt a resolution
fixing the record date.
Section 10.9: Action by Written Consents. Any action which may be
taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Within fourteen (14) days after receiving
such written consent or consents from shareholders of the corporation, the
Board of Directors shall determine whether holders of outstanding shares as of
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the record date established pursuant to Section 10.8 having not less than the
minimum number of votes which would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted have properly consented thereto in writing and notify the requesting
party of its finding. Unless the consents of all shareholders entitled to vote
have been solicited in writing, notice of any shareholder approval of (i)
contracts between this corporation and any of its directors, (ii)
indemnification of any person, (iii) reorganization of this corporation or (iv)
distributions to shareholders upon winding up of this corporation in certain
circumstances without a meeting by less than unanimous written consent shall
be given at least 10 days before the consummation of the action authorized by
such approval, and prompt notice shall be given of the taking of any other
corporate action approved by shareholders without a meeting by less than
unanimous written consent, to those shareholders entitled to vote who have not
consented in writing. All notices given hereunder shall conform to the
requirements of Section 10.4 hereto and applicable law. When written consents
are given with respect to any shares, they shall be given by and accepted from
the persons in whose names such shares stand on the books of this corporation
at the time such respective consents are given, or any shareholder's proxy
holder, or a transferee of the shares or a personal representative of the
shareholder or their respective proxy holders, may revoke the consent by a
writing received by this corporation prior to the time that written consents
of the number of shares required to authorize the proposed action have been
filed with the Secretary of this corporation, but may not do so thereafter.
Such revocation is effective upon its receipt by the Secretary of this
corporation. Notwithstanding anything to the contrary, directors may not be
elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.
Section 10.10: Elections of Directors. In any election of directors, the
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected; votes against the directors and votes withheld with
respect to the election of the directors shall have no legal effect.
Elections of directors need not be by ballot except upon demand made by a
shareholder at the meeting and before the voting begins.
Section 10.11: Proxies. Every person entitled to vote or execute
consents shall have the right to do so either in person or by one or more
agents authorized by a written proxy executed by such person or such person's
duly authorized agent and filed with the Secretary of this corporation. No
proxy shall be valid (l) after revocation thereof, unless the proxy is
specifically made irrevocable and otherwise conforms to this Section 10.11 and
applicable law, or (2) after the expiration of eleven months from the date
thereof, unless the person executing it specifies therein the length of time
for which such proxy is to continue in force. Revocation may be effected by a
writing delivered to the Secretary of this corporation stating that the proxy
is revoked or by a subsequent proxy executed by, or by attendance at the
meeting and voting in person by, the person executing the proxy. A proxy is
not revoked by the death or incapacity of the maker unless, before the vote is
counted, a written notice of such death or incapacity is received by this
39
<PAGE>
corporation. A proxy which states that it is irrevocable is irrevocable for
the period specified therein when it is held by any of the following or a
nominee of any of the following: (l) a pledgee, (2) a person who has purchased
or agreed to purchase or holds an option to purchase the shares or a person
who has sold a portion of such person's shares in this corporation to the
maker of the proxy, (3) a creditor or creditors of this corporation or the
shareholder who extended or continued credit to this corporation or the
shareholder in consideration of the proxy if the proxy states that it was
given in consideration of such extension or continuation of credit and the
name of the person extending or continuing the credit, (4) a person who has
contracted to perform services as an employee of this corporation, if a proxy
is required by the contract of employment and if the proxy states that it was
given in consideration of such contract of employment, the name of the
employee and the period of employment contracted for, (5) a person designated
by or under a close corporation shareholder agreement or a voting trust
agreement. In addition, a proxy may be made irrevocable if it is given to
secure the performance of a duty or to protect a title, either legal or
equitable, until the happening of events which, by its terms, discharge the
obligation secured by it. Notwithstanding the period of irrevocability
specified, the proxy becomes revocable when the pledge is redeemed, the option
or agreement to purchase is terminated or the seller no longer owns any shares
of this corporation or dies, the debt of this corporation or the shareholder is
paid, the period of employment provided for in the contract of employment has
terminated or the close corporation shareholder agreement or the voting trust
agreement has terminated. In addition, a proxy may be revoked,
notwithstanding a provision making it irrevocable, by a purchaser of shares
without knowledge of the existence of the provision unless the existence of
the proxy and its irrevocability appears on the certificate representing such
shares. Every form of proxy or written consent, which provides an opportunity
to specify approval or disapproval with respect to any proposal, shall also
contain an appropriate space marked "abstain", whereby a shareholder may
indicate a desire to abstain from voting his or her shares on the proposal. A
proxy marked "abstain" by the shareholder with respect to a particular
proposal shall not be voted either for or against such proposal. In any
election of directors, any form of proxy in which the directors to be voted
upon are named therein as candidates and which is marked by a shareholder
"withhold" or otherwise marked in a manner indicating that the authority to
vote for the election of directors is withheld shall not be voted either for
or against the election of a director.
Section 10.12: Inspectors of Election. Before any meeting of
shareholders, the Board of Directors may appoint any persons other than
nominees for office to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the Chairman of
the meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint inspectors of election at the meeting. The number of
inspectors shall be either one (l) or three (3). If inspectors are appointed
at a meeting on the request of one or more shareholders or proxies, the
holders of a majority of shares or their proxies present at the meeting shall
determine whether one (l) or three (3) inspectors are to be appointed. If any
person appointed as inspector fails to appear or fails or refuses to act, the
40
<PAGE>
Chairman of the meeting may, and upon the request of any shareholder or a
shareholder's proxy shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, and
the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
Section 10.13: Advance Notice of Shareholder Proposals and Director
Nominations. Shareholders may nominate one or more persons for election as
directors at a meeting of shareholders or propose business to be brought
before a meeting of shareholders, or both, only if such shareholder has given
timely notice in proper written form of such shareholder's intent to make such
nomination or nominations or to propose such business. To be timely, a
shareholder's notice must be received by the Secretary of the Corporation not
later than 60 days prior to such meeting; provided, however, that in the event
less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be
timely must be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. To be in proper written form a
shareholder's notice to the Secretary shall set forth (i) the name and address
of the shareholder who intends to make the nominations or propose the
business and, as the case may be, of the person or persons to be nominated or
of the business to be proposed, (ii) a representation that the shareholder is a
holder of record of stock of the Corporation that intends to vote such stock
at such meeting and, if applicable, intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice, (iii)
if applicable, a description of all arrangements or understandings between the
shareholder and each nominee or any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder, (iv) such other information regarding each nominee
or each matter of business to be proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 had the nominee been nominated, or intended
41
<PAGE>
to be nominated, or the matter been proposed, or intended to be proposed, by
the Board of Directors of the Corporation and (v) if applicable, the consent
of each nominee as director of the Corporation if so elected. The chairman of
a meeting of shareholders may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the
foregoing procedure.
Article XI
MEETINGS OF DIRECTORS
Section 11.1: Place of Meetings. Meetings (whether regular, special
or adjourned) of the Board of Directors of this corporation shall be held at
the principal office of this corporation for the transaction of business, as
specified in accordance with Section 1.1 hereof, or at any other place within
or without the State which has been designated from time to time by resolution
of the Board or which is designated in the notice of the meeting.
Section 11.2: Regular Meetings. Regular meetings of the Board of
Directors shall be held after the adjournment of each annual meeting of the
shareholders (which regular directors' meeting shall be designated the
"Regular Annual Meeting") and at such other times as may be designated from
time to time by resolution of the Board of Directors. Notice of the time and
place of all regular meetings shall be given in the same manner as for special
meetings, except that no such notice need be given if (l) the time and place
of such meetings are fixed by the Board of Directors or (2) the Regular Annual
Meeting is held at the principal place of business provided at Section 1.1
hereof and on the date specified in Section 10.2 hereof.
Section 11.3: Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, if any, or
the President, or any Vice President, or the Secretary or by any two or more
directors.
Section 11.4: Notice of Special Meetings. Special meetings of the
Board of Directors shall be held upon no less than four days' notice by mail
or 48 hours' notice delivered personally or by telephone or telegraph to each
director. Notice need not be given to any director who signs a waiver of
notice or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director. Any oral notice given
personally or by telephone may be communicated either to the director or to a
person at the home or office of the director who the person giving the notice
has reason to believe will promptly communicate it to the director. A notice
or waiver of notice need not specify the purpose of any meeting of the Board.
If the address of a director is not shown on the records and is not readily
ascertainable, notice shall be addressed to him at the city or place in which
the meetings of the directors are regularly held. If the meeting is adjourned
for more than 24 hours, notice of any adjournment to another time or place
shall be given prior to the time of the adjourned meeting to all directors not
present at the time of adjournment.
42
<PAGE>
Section 11.5: Quorum. A majority of all directors elected by the
shareholders and appointed to fill vacancies as provided in Section 2.6 hereof
shall constitute a quorum of the Board of Directors for the transaction of
business. Every act or decision done or made by a majority of the directors
present at a meeting duly held at which a quorum is present is the act of the
Board of Directors subject to provisions of law relating to interested
directors and indemnification of agents of this corporation. A majority of the
directors present, whether or not a quorum is present, may adjourn any meeting
to another time and place. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for such meeting.
Section 11.6: Conference Telephone. Members of the Board of Directors
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all directors participating in such
meeting can hear one another. Participation in a meeting pursuant to this
Section 11.6 constitutes presence in person at such meeting.
Section 11.7: Waiver of Notice and Consent. The transactions of any
meeting of the Board of Directors, however called and noticed or wherever
held, shall be as valid as though had at a meeting duly held after regular
call and notice, if a quorum is present, and if, either before or after the
meeting, each of the directors not present signs a written waiver of notice, a
consent to holding such meeting or an approval of the minutes thereof. All
such waivers, consents and approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
Section 11.8: Action Without a Meeting. Any action required or
permitted by law to be taken by the Board of Directors may be taken without a
meeting, if all members of the Board of Directors shall individually or
collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors. Such action by written consent shall have the same force and effect
as the unanimous vote of such directors.
Section 11.9: Committees. The provisions of this Article XI apply
also to committees of the Board of Directors and action by such committees,
mutatis mutandis.
Article XII
SUNDRY PROVISIONS
Section 12.1: Instruments in Writing. All checks, drafts, demands for
money and notes of this corporation, and all written contracts of this
corporation, shall be signed by such officer or officers, agent or agents, as
the Board of Directors may from time to time designate. No officer, agent, or
employee of this corporation shall have the power to bind this corporation by
contract or otherwise unless authorized to do so by these By-Laws or by the
Board of Directors.
43
<PAGE>
Section 12.2: Shares Held by the Corporation. Shares in other
corporations standing in the name of this corporation may be voted or
represented and all rights incident thereto may be exercised on behalf of the
corporation by any officer of this corporation authorized so to do by
resolution of the Board of Directors.
Section 12.3: Certificates of Stock. There shall be issued to every
holder of shares in this corporation a certificate or certificates signed in
the name of this corporation by the Chairman of the Board of Directors, if
any, or the Chief Executive Officer or the President or a Vice President and
by the Chief Financial Officer or an Assistant Chief Financial Officer or the
Secretary or any Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by this
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
Section 12.4: Lost Certificates. Where the owner of any certificate
for shares of this corporation claims that the certificate has been lost,
stolen or destroyed, a new certificate shall be issued in place of the original
certificate if the owner (l) so requests before this corporation has notice
that the original certificate has been acquired by a bona fide purchaser,
(2) files with this corporation an indemnity bond in such form and in such
amount as shall be approved by the Chief Executive Officer, the President or a
Vice President of this corporation, and (3) satisfies any other reasonable
requirements imposed by this corporation. The Board of Directors may adopt
such other provisions and restrictions with reference to lost certificates,
not inconsistent with applicable law, as it shall in its discretion deem
appropriate.
Section 12.5: Certification and Inspection of By-Laws. This
corporation shall keep at its principal executive or business office the
original or a copy of these By-Laws as amended or otherwise altered to date,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
Section 12.6: Annual Reports. The making of annual reports to the
shareholders is dispensed with and the requirement that such annual reports be
made to shareholders is expressly waived, except as may be directed from time
to time by the Board of Directors or the President.
Section 12.7: Fiscal Quarters. Each fiscal quarter of the Corporation
shall be comprised of 13 weeks each of which shall end at midnight on
Saturday of such week, and the fiscal months in any one calendar quarter shall
be comprised of at least four consecutive calendar weeks with one week to be
added, at management's discretion, to any one month during such fiscal year.
44
<PAGE>
Section 12.8: Officer Loans and Guaranties. If the corporation has
outstanding shares held of record by 100 or more persons on the date of
approval by the Board of Directors, the corporation may make loans of money
or property to, or guarantee the obligations of, any officer of the
corporation or its parent or subsidiaries, whether or not the officer is a
director, upon the approval of the Board of Directors alone. Such approval by
the Board of Directors must be determined by a vote of a majority of the
disinterested directors, if it is determined that such a loan or guaranty may
reasonably be expected to benefit the corporation. In no event may an officer
owning 2% or more of the outstanding common shares of the corporation be
extended a loan under this provision.
Article XIII
CONSTRUCTION OF BY-LAWS WITH
REFERENCE TO PROVISIONS OF LAW
Section 13.1: By-Law Provisions Additional and Supplemental to
Provisions of Law. All restrictions, limitations, requirements and other
provisions of these By-Laws shall be construed, insofar as possible, as
supplemental and additional to all provisions of law applicable to the subject
matter thereof and shall be fully complied with in addition to the said
provisions of law unless such compliance shall be illegal.
Section 13.2: By-Law Provisions Contrary to or Inconsistent with
Provisions of Law. Any article, section, subsection, subdivision, sentence,
clause or phrase of these By-Laws which, upon being construed in the manner
provided in Section 13.1 hereof, shall be contrary to or inconsistent with any
applicable provision of law, shall not apply so long as said provisions of law
shall remain in effect, but such result shall not affect the validity or
applicability of any other portions of these By-Laws, it being hereby declared
that these By-Laws, and each article, section, subsection, subdivision,
sentence, clause, or phrase thereof, would have been adopted irrespective of
the fact that any one or more articles, sections, subsections, subdivisions,
sentences, clauses or phrases is or are illegal.
Article XIV
ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS
Section 14.1: By Shareholders. By-Laws may be adopted, amended or
repealed by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote. By-Laws specifying or changing a fixed
number of directors or the maximum or minimum number or changing from a
fixed to a variable board or vice versa may only be adopted by the
shareholders; provided, however, that a By-Law or amendment of the Articles
of Incorporation reducing the number or the minimum number of directors to a
number less than five cannot be adopted if the votes cast against its adoption
at a meeting or the shares not consenting in the case of action by written
consent are equal to more than 16-2/3% of the outstanding shares entitled to
vote.
45
<PAGE>
Section 14.2: By the Board of Directors. Subject to the right of
shareholders to adopt, amend or repeal By-Laws, By-Laws, other than a By-
Law or amendment thereof specifying or changing a fixed number of directors
or the maximum or minimum number or changing from a fixed to a variable
board or vice versa, may be adopted, amended or repealed by the Board of
Directors. A By-Law adopted by the shareholders may restrict or eliminate the
power of the Board of Directors to adopt, amend or repeal By-Laws.
Article XV
RESTRICTIONS ON TRANSFER OF STOCK
Section 15.1: Subsequent Agreement or By-Law. If (a) any two or more
shareholders of this corporation shall enter into any agreement abridging,
limiting or restricting the rights of any one or more of them to sell, assign,
transfer, mortgage, pledge, hypothecate or transfer on the books of this
corporation any or all of the shares of this corporation held by them, and if
a copy of said agreement shall be filed with this corporation, or if (b)
shareholders entitled to vote shall adopt any By-Law provision abridging,
limiting or restricting the aforesaid rights of any shareholders, then, and in
either of such events, all certificates of shares of stock subject to such
abridgments, limitations or restrictions shall have a reference thereto
endorsed thereon by an officer of this corporation and such certificates shall
not thereafter be transferred on the books of this corporation except in
accordance with the terms and provisions of such agreement or ByLaw, as the
case may be; provided, that no restriction shall be binding with respect to
shares issued prior to adoption of the restriction unless the holders of such
shares voted in favor of or consented in writing to the restriction.
Article XVI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
Section 16.1: Indemnification of Directors and Officers. The
corporation shall, to the maximum extent and in the manner permitted by the
Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding (as defined in Section 317(a) of the Code), arising by reason of
the fact that such person is or was an agent of the corporation. For purposes
of this Article XVI, a "director" or "officer" of the corporation includes any
person (i) who is or was a director or officer of the corporation, (ii) who is
or was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
or (iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
46
<PAGE>
Section 16.2: Indemnification of Others. The corporation shall have
the power, to the extent and in the manner permitted by the Code, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (as defined in Section 317(a) of the Code), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding (as defined in Section 317(a) of the Code), arising by
reason of the fact that such person is or was an agent of the corporation.
For purposes of this Article XVI, an "employee" or "agent" of the corporation
(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
Section 16.3: Payment of Expenses in Advance. Expenses incurred in
defending any civil or criminal action or proceeding for which indemnification
is required pursuant to Section 16.1 or for which indemnification is permitted
pursuant to Section 16.2 following authorization thereof by the Board of
Directors, shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or
on behalf of the indemnified party to repay such amount if it shall ultimately
be determined that the indemnified party is not entitled to be indemnified as
authorized in this Article XVI.
Section 16.4: Indemnity Not Exclusive. The indemnification provided
by this Article XVI shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors or otherwise, both as to
action in an official capacity and as to action in another capacity while
holding such office, to the extent that such additional rights to
indemnification are authorized in the Articles of Incorporation.
Section 16.5: Insurance Indemnification. The corporation shall have
the power to purchase and maintain insurance on behalf of any person who is
or was an Agent of the corporation against any liability asserted against or
incurred by such person in such capacity or arising out of such person's
status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article XVI.
Section 16.6: Conflicts. No indemnification or advance shall be made
under this Article XVI, except where such indemnification or advance is
mandated by law or the order, judgment or decree of any court of competent
jurisdiction, in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles
of Incorporation, these bylaws, a resolution of the shareholders or an
47
<PAGE>
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
48
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>ART. 5 FDS FOR FY998 FORM 10-K
<FLAWED>
<TEXT>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-END> DEC-26-1998
<CASH> 1,221
<SECURITIES> 1,357
<RECEIVABLES> 994
<ALLOWANCES> 81
<INVENTORY> 25
<CURRENT-ASSETS> 3,867
<PP&E> 825
<DEPRECIATION> 481
<TOTAL-ASSETS> 4,592
<CURRENT-LIABILITIES> 1,484
<BONDS> 954
<COMMON> 637
<PREFERRED-MANDATORY> 0
<PREFERRED> 150
<OTHER-SE> 1,136
<TOTAL-LIABILITY-AND-EQUITY> 4,592
<SALES> 1,710
<TOTAL-REVENUES> 1,710
<CGS> 1,228
<TOTAL-COSTS> 1,228
<OTHER-EXPENSES> 355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 169
<INCOME-TAX> 17
<INCOME-CONTINUING> 152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 0.95
49
<PAGE>
</TEXT>
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1999 | 0QTR1
| ADM | https://www.sec.gov/Archives/edgar/data/7084/0000007084-99-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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ACCESSION NUMBER: 0000007084-99-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARCHER DANIELS MIDLAND CO
CENTRAL INDEX KEY: 0000007084
STANDARD INDUSTRIAL CLASSIFICATION: FATS & OILS [2070]
IRS NUMBER: 410129150
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-00044
FILM NUMBER: 99535306
BUSINESS ADDRESS:
STREET 1: 4666 FARIES PKWY
CITY: DECATUR
STATE: IL
ZIP: 62526
BUSINESS PHONE: 2174245200
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10Q FOR PERIOD ENDING 12/31/98
<TEXT>
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________________________ TO
________________________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0129150
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
4666 Faries Parkway Box 1470 Decatur, Illinois 62525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code217-424-5200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
___.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common Stock, no par value - 592,071,513 shares
(January 29, 1999)
1
Page 2
PART I - FINANCIAL INFORMATION
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
--------------------------
(In thousands, except
per share amounts)
<S> <C>
<C>
Net sales and other operating income $3,911,53
9 $4,130,2
98
Cost of products sold and other
operating costs 3,490,209
3,767,93
9
_________
________
_
Gross Profit 421,330
362,359
Selling, general and administrative 182,246
expenses 136,745
_________
________
_
Earnings From Operations 239,084
225,614
Other income (expense) (69,191)
(16,209)
_________
________
_
Earnings Before Income Taxes and
Extraordinary Loss 169,893
209,405
Income taxes 59,459
70,197
_________
________
_
Earnings Before Extraordinary 110,434
Loss 139,208
Extraordinary loss, net of tax, on
debt (15,324) -
Repurchase
_________
________
_
Net Earnings $ 95,1 $ 139,20
10 8
========= =========
Average number of shares outstanding 593,580 585,697
Basic and diluted earnings per common
share
Before extraordinary loss $.19 $.24
Extraordinary loss on debt (.03) -
repurchase
____ ____
_
After Extraordinary Loss $.16 $.24
==== =
===
Dividends per common share $.05 $.04
8
</TABLE>
See notes to consolidated financial statements.
2
Page 3
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION> SIX MONTHS ENDED
DECEMBER 31,
1998 1997
--------------------------
(In thousands, except
per share amounts)
<S> <C>
<C>
Net sales and other operating income $7,712,96
0 $7,781,6
00
Cost of products sold and other
operating costs 6,997,994
7,094,07
3
_________
________
_
Gross Profit 714,966
687,527
Selling, general and administrative 349,062
expenses 271,731
_________
________
_
Earnings From Operations 365,904
415,796
Other income (expense) (17,607)
(7,376)
_________
________
_
Earnings Before Income Taxes and
Extraordinary Loss 348,297
408,420
Income taxes 121,008
137,862
_________
________
_
Earnings Before Extraordinary 227,289
Loss 270,558
Extraordinary loss, net of tax, on
debt (15,324) -
Repurchase
_________
________
_
Net Earnings $ 211,9 $ 270,55
65 8
========= =========
Average number of shares outstanding 595,373 585,640
Basic and diluted earnings per common
share
Before extraordinary loss $.39 $.46
Extraordinary loss on debt (.03) -
repurchase
____ ____
_
After Extraordinary Loss $.36 $.46
==== =
===
Dividends per common share $.098 $.09
4
</TABLE>
See notes to consolidated financial statements.
3
Page 4
<TABLE>
<CAPTION>
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, JUNE 30,
1998 1998
-------------------------
--
(In thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 476,357 $ 346,325
Marketable securities 335,835 379,169
Receivables 1,879,282 1,990,686
Inventories 3,123,744 2,562,650
Prepaid expenses 181,097 172,884
__________ __________
Total Current Assets 5,996,315 5,451,714
Investments and Other Assets
Investments in and advances to 1,481,970 1,473,364
affiliates
Long-term marketable securities 838,855 1,168,380
Other assets 400,000 417,372
__________ __________
2,720,825 3,059,116
Property, Plant and Equipment
Land 162,051 148,135
Buildings 1,944,194 1,777,146
Machinery and equipment 8,310,485 7,901,309
Construction in progress 614,583 613,792
Less allowances for depreciation (5,494,964) (5,117,678)
__________ __________
5,536,349 5,322,704
__________ __________
$14,253,489 $13,833,534
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
Page 5
<TABLE>
<CAPTION>
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, JUNE 30,
1998 1998
------------------------
--
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $1,490,100 $1,545,276
Accounts payable 1,991,543 1,634,681
Accrued expenses 540,538 516,287
Current maturities of long-term debt 22,248 21,059
__________ __________
Total Current Liabilities 4,044,429 3,717,303
Long-term Debt 2,908,976 2,847,130
Deferred Credits
Income taxes 631,044 632,893
Other 136,450 131,296
__________ __________
767,494 764,189
Shareholders' Equity
Common stock 4,834,548 4,936,649
Reinvested earnings 1,816,157 1,662,563
Accumulated other comprehensive loss (118,115) (94,300)
__________ __________
6,532,590 6,504,912
__________ __________
$14,253,489 $13,833,534
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
Page 6
<TABLE>
<CAPTION>
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
-------------------------
(In thousands)
<S> <C> <C>
Operating Activities
Net earnings $ 211,965 $ 270,558
Adjustments to reconcile to net cash
provided
by operations
Depreciation and amortization 285,517 241,530
Deferred income taxes 25,757 11,667
Amortization of long-term debt discount 17,535 16,063
Gain on marketable securities (101,674) (36,147)
transactions
Extraordinary loss on debt repurchase 15,324 -
Other 99,455 (8,393)
Changes in operating assets and
liabilities
Receivables 134,012 (302,148)
Inventories (448,298) (135,479)
Prepaid expenses (8,065) (46,531)
Accounts payable and accrued expenses 294,532 144,188
________ ________
Total Operating Activities 526,060 155,308
Investing Activities
Purchases of property, plant and equipment (359,797) (320,081)
Net assets of businesses acquired (60,316) (368,371)
Investments in and advances to affiliates (91,378) (253,142)
Purchases of marketable securities (377,995) (696,257)
Proceeds from sales of marketable 774,179 489,413
securities
________ ________
Total Investing Activities (115,307) (1,148,43
8)
Financing Activities
Long-term debt borrowings 83,020 441,464
Long-term debt payments (65,509) (7,316)
Net borrowings (payments) under line of
credit (103,848) 703,214
Agreements
Purchases of treasury stock (137,445) (42,135)
Cash dividends and other (56,939) (52,473)
________ ________
Total Financing Activities (280,721) 1,042,754
________ ________
Increase In Cash and Cash Equivalents 130,032 49,624
Cash and Cash Equivalents Beginning of 346,325 397,788
Period
________ ________
Cash and Cash Equivalents End of Period $ 476,357 $ 447,412
======== ========
Supplemental Cash Flow Information
Noncash Investing and Financing Activities
Common stock issued in purchase - $298,244
acquisition
</TABLE>
See notes to consolidated financial statements.
6
Page 7
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results for
the quarter and six months ended December 31, 1998 are
not necessarily indicative of the results that may be
expected for the year ending June 30, 1999. For further
information, refer to the consolidated financial
statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended
June 30, 1998.
Note 2.New Accounting Standards
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
Number 131 (SFAS 131) "Disclosures about Segments of an
Enterprise and Related Information." This statement,
which is required to be adopted for financial statements
issued for annual periods beginning after December 15,
1997, establishes standards for the way that public
business enterprises report information about operating
segments in financial reports issued to shareholders.
The Company has not yet determined the financial
statement disclosure impact of SFAS 131.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
Number 133 (SFAS 133) "Accounting for Derivative
Instruments and Hedging Activities." This statement,
which is required to be adopted for annual periods
beginning after June 15, 1999, establishes standards for
recognition and measurement of derivatives and hedging
activities. The Company has not yet determined the
financial statement impact of SFAS 133.
Note 3. Per Share Data
All references to share and per share information have
been adjusted for the 5 percent stock dividend paid
September 21, 1998.
7
Page 8
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4.Comprehensive Income
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards Number 130 (SFAS 130) "Reporting
Comprehensive Income." SFAS 130 establishes standards for the
reporting and display of comprehensive income and its
components. SFAS 130 requires foreign currency translation
adjustments and unrealized gains or losses on the Company's
available-for-sale marketable securities to be included in
"other comprehensive income." Prior to the adoption of SFAS
130, the Company reported such adjustments and unrealized gains
or losses as components of reinvested earnings. Amounts in
prior year financial statements have been reclassified to
conform to SFAS 130. Comprehensive income (net income plus
other comprehensive income) was $171 million and $83 million
for the quarter ended December 31, 1998 and 1997, respectively.
Comprehensive income was $188 million and $204 million for the
six months ended December 31, 1998 and 1997, respectively.
Note 5. Other Income (Expense)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
__________________ __________________
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Investment income $ 27,274 $ 25,602 $ 56,411 $ 53,804
Interest expense (84,512) (72,334) (164,539 (127,753
) )
Gain on marketable securities
Transactions 1,972 12,449 101,685 36,150
Equity in earnings (losses) of
Affiliates (15,032) 16,397 (11,190) 26,954
Other 1,107 1,677 26 3,469
______ ______ ______ ______
$(69,191 $(16,209 $(17,607 $
) ) ) (7,376)
====== ====== ====== ======
</TABLE>
8
Page 9
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6.Antitrust Investigation and Related Litigation
Federal grand juries in the Northern Districts of Illinois,
California and Georgia, under the direction of the United States
Department of Justice ("DOJ"), have been investigating possible
violations by the Company and others with respect to the sale of
lysine, citric acid and high fructose corn syrup, respectively.
In connection with an agreement with the DOJ in fiscal 1997, the
Company paid the United States fines of $100 million. This
agreement constitutes a global resolution of all matters between
the DOJ and the Company and brings to a close all DOJ
investigations of the Company. The federal grand jury in the
Northern District of Illinois (lysine) has been closed.
The Company, along with other domestic and foreign companies,
was named as a defendant in a number of putative class action
antitrust suits and other proceedings involving the sale of
lysine, citric acid and high fructose corn syrup. These actions
and proceedings generally involve claims for unspecified
compensatory damages, fines, costs, expenses and unspecified
relief. The Company intends to vigorously defend these actions
and proceedings unless they can be settled on terms deemed
acceptable by the parties. These matters have resulted and could
result in the Company being subject to monetary damages, other
sanctions and expenses.
The Company has made provisions of $48 million in fiscal 1998,
$200 million in fiscal 1997 and $31 million in fiscal 1996 to
cover the fines, litigation settlements related to the federal
lysine class action, federal securities class action, the
federal citric class action and certain state actions filed by
indirect purchasers of lysine, certain actions filed by parties
that opted out of the class action settlements, certain other
proceedings, and the related costs and expenses associated with
the litigation described above. Because of the early stage of
other putative class actions and proceedings, including those
related to high fructose corn syrup, the ultimate outcome and
materiality of these matters cannot presently be determined.
Accordingly, no provision for any liability that may result
therefrom has been made in the unaudited consolidated financial
statements.
9
Page 10
ARCHER DANIELS MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
OPERATIONS
The Company is in one business segment - procuring,
transporting, storing, processing and merchandising agricultural
commodities and products. A summary of net sales and other
operating income by classes of products and services is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED DECEMBER 31,
DECEMBER 31, 1998
1998 1997
1997
---------------- ----------------
--- -
(In millions) (In millions)
<S> <C> <C> <C>
<C>
Oilseed products $2,314 $2,587 $4,639 $4,896
Corn products 475 556 988 1,091
Wheat and other milled 353 393 714 780
products
Other products and 770 594 1,372 1,015
services
----- ----- ----- -----
$3,912 $4,130 $7,713 $7,782
===== ===== ===== =====
</TABLE>
Net sales and other operating income decreased 5 percent to $3.9
billion for the quarter and decreased 1 percent to $7.7 billion
for the six months due principally to decreases in average
selling prices of 13 percent and 9 percent, respectively. Sales
of oilseed products decreased 11 percent to $2.3 billion for the
quarter and decreased 5 percent to $4.6 billion for the six
months due primarily to lower average selling prices resulting
from the lower cost of raw materials. For both the quarter and
six months, these decreases were partially offset by sales
attributable to recently acquired operations. Sales volumes of
oilseed products increased slightly for both the quarter and six
months as good product demand in both Europe and North American
was offset by weak Asian demand. Sales of corn products
decreased 15 percent for the quarter and 9 percent for the six
months as lower average selling prices for the Company's alcohol
and amino acid products more than offset the increases in both
sales volume and price of the Company's sweetener products.
Demand for the Company's fuel alcohol has been steady, but low
gasoline prices continue to negatively affect average sales
prices. Sweetener sales volumes and prices have been positively
impacted by good demand from the U.S. soft drink industry.
Excess production capacity in the industry as well as low
protein meal and corn prices have depressed selling prices of
amino acid products. Sales of wheat and other milled products
decreased 10 percent for the quarter and 8 percent for the six
months due principally to lower average selling prices resulting
from the lower cost of raw materials. The increase in other
products and services for the quarter and six months was due
primarily to the sales related to the Company's recently
acquired feed and cocoa businesses as well as increased
merchandising and transportation revenues.
10
Page 11
Cost of products sold and other operating costs decreased $278
million for the quarter to $3.5 billion and decreased $96
million for the six months to $7 billion due to lower average
raw material costs. For both the quarter and six months, these
decreases were partially offset by increased costs related to
recently acquired operations.
Gross profit increased $59 million to $421 million for the
quarter and increased $27 million to $715 million for the six
months due principally to gross profit attributable to recently
acquired operations and to increased merchandising and
transportation margins. For the six months, these increases were
partially offset by a decline in gross profit due to the net
effect of decreased sales prices versus lower raw material
costs.
Selling, general and administrative expenses increased $46
million for the quarter to $182 million and increased $77
million for the six months to $349 million due principally to
expenses attributable to recently acquired
operations.
The increase in other expense for the quarter and six months
resulted principally from decreased equity in earnings of
unconsolidated affiliates due primarily to lowered valuations of
the Company's private equity fund investments and to increased
interest expense due to higher average borrowing levels. Gains
on marketable securities transactions were lower for the
quarter, but higher for the six month period.
The decrease in income taxes for the quarter and six months
resulted primarily from lower pretax earnings. The Company's
effective income tax rate for the quarter and six months was 35
percent compared to an effective rate of 34 percent for the
comparable periods of a year ago.
During the quarter, the Company incurred an extraordinary
charge, net of tax, of $15 million resulting from the repurchase
of a portion of its outstanding 7 percent debentures due May
2011.
Liquidity and Capital Resources
At December 31, 1998, the Company continued to show substantial
liquidity with working capital of approximately $2 billion.
Capital resources remained strong as reflected in the Company's
net worth of $6.5 billion. The Company's ratio of long-term debt
to total capital at December 31, 1998 was approximately 29%.
As described in Note 6 to the unaudited consolidated financial
statements, various grand juries under the direction of the
United States Department of Justice ("DOJ") have been
investigating possible violations by the Company and others with
respect to the sale of lysine, citric acid and high fructose
corn syrup. In connection with an agreement with the DOJ in
fiscal 1997, the Company paid the United States fines of $100
million. This agreement constitutes a global resolution of all
matters between the DOJ and the Company and brings to a close
all DOJ investigations of the Company. In addition, related
civil class actions and other proceedings have been filed
against the Company, which could result in the Company being
subject to monetary damages, other sanctions and expenses. As
also described in Note 6 to the unaudited
consolidated financial statements, the Company has settled
certain civil
11
Page 12
federal class action suits involving lysine, citric acid, and
securities, and certain state actions filed by indirect
purchasers of lysine.
The Company has made provisions of $48 million in fiscal 1998,
$200 million in fiscal 1997 and $31 million in fiscal 1996 to
cover the fines, litigation settlements related to the federal
lysine class action, federal securities class action, the
federal citric class action and certain state actions filed by
indirect purchasers of lysine, certain actions filed by parties
that opted out of the class action settlements, certain other
proceedings, and the related costs and expenses associated with
the litigation described above. Because of the early stage of
other putative class actions and proceedings, including those
related to high fructose corn syrup, the ultimate outcome and
materiality of these matters cannot presently be determined.
Accordingly, no provision for any liability that may result
therefrom has been made in the unaudited consolidated financial
statements.
Year 2000 Issues
Readiness
The Company's centralized corporate business and technical
information systems have been fully assessed as to year 2000
compliance and functionality. Presently, these systems are
nearly complete with respect to required software changes,
tests, and migration to the production environment. The
Company's internal business and technical information system
year 2000 compliance issues are substantially remediated. Any
remaining remediation is expected to occur during 1999.
The Company has satisfactorily completed the identification and
review of computer hardware and software suppliers and is in the
process of verifying year 2000 preparedness of general business
partners, suppliers, vendors, and/or service providers that the
Company has identified as critical. This verification process is
expected to be completed by the third quarter of 1999.
Cost
The total historical or anticipated remaining costs for year
2000 remediation activity are not material.
Risks and Contingency Plans
Considering the substantial progress made to date, the Company
does not anticipate delays in finalizing internal year 2000
remediation within remaining time schedules. However, third
parties having a material relationship with the Company may be a
potential risk based on their individual year 2000 preparedness
which may not be within the Company's reasonable control. The
Company is in the process of identifying and reviewing the year
2000 preparedness of critical third parties. This identification
and review process is expected to be completed by the third
quarter of 1999.
Pending the results of that review, the Company will then
determine what course of action and contingencies may need to be
made.
12
Page 13
Euro Conversion
On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing
currencies and the European Union's common currency (Euro). The
transition period for the introduction of the Euro will be
between January 1, 1999 and January 1, 2002. The Company has
prepared for the introduction of the Euro and has evaluated
methods to address the many issues involved with the
introduction of the Euro, including the conversion of
information technology systems, recalculating currency risk,
strategies concerning continuity of contracts, and impacts on
the processes for preparing taxation and accounting records. The
Company believes the Euro conversion will not have a material
impact on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There were no material changes during the quarter ended
December 31, 1998.
13
Page 14
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
In 1993, the State of Illinois Environmental Protection
Agency ("IEPA") brought administrative enforcement
proceedings arising out of the Company's alleged failure
to obtain permits for certain pollution control equipment
at two of the Company's processing facilities in Illinois.
The Company and IEPA have executed settlement agreements
with respect to both of these proceedings. The agreements
are currently before the Illinois Pollution Control Board
for approval. In 1998, the IEPA filed an administrative
enforcement proceeding arising out of certain alleged
permit exceedances relating to one of the Company's
production facilities located in Illinois. Also in 1998,
the Company voluntarily reported to the IEPA certain
permit exceedances relating to another Illinois production
facility operated by the Company. Also in 1998, the State
of Illinois filed a civil administrative action alleging
violations of the Illinois Environmental Protection Act,
and regulations promulgated thereunder, arising from a one
time release of denatured ethanol at one of its Illinois
distribution facilities. In management's opinion the
settlements and the remaining proceedings, all seeking
compliance with applicable environmental permits and
regulations, will not, either individually or in the
aggregate, have a material adverse effect on the Company's
financial condition or results of operations.
The United States Environmental Protection Agency
("USEPA") filed a civil administrative action in September
1998 seeking a $240 thousand civil penalty for violations
of Section 16(a) of the Toxic Substances Control Act, 15
U.S.C. 2601, et. seq ("TSCA"), which requires persons who
annually manufacture or import for commercial purposes
certain chemicals to file reports with USEPA every four
years. USEPA has alleged that the Company's reports were
not timely filed. ADM and USEPA have reached a non-
monetary settlement requiring the appropriate reports to
be filed.
The Company is involved in approximately 30 administrative
and judicial proceedings in which it has been identified
as a potentially responsible party (PRP) under the federal
Superfund law and its state analogs for the study and
clean-up of sites contaminated by material discharged into
the environment. In all of these matters, there are
numerous PRPs. Due to various factors such as the required
level of remediation and participation in the clean-up
effort by others, the Company's future clean-up costs at
these sites cannot be reasonably estimated. However, in
management's opinion, these proceedings will not, either
individually or in the aggregate, have a material adverse
effect on the Company's financial condition or results of
operations.
LITIGATION REGARDING ALLEGED ANTICOMPETITIVE PRACTICES
The Company and certain of its current and former officers
and
14
Page 15
directors are currently defendants in various lawsuits
related to
alleged anticompetitive practices by the Company as
described in more detail below. The Company and the
individual defendants named in these actions intend to
vigorously defend the actions unless they can be settled
on terms deemed acceptable to the parties. The Company has
paid and intends to continue to pay the legal expenses of
its current and former officers and directors and to
indemnify these persons with respect to these actions in
accordance with Article X of the Bylaws of the Company.
GOVERNMENTAL INVESTIGATIONS
Federal grand juries in the Northern Districts of Illinois,
California and Georgia, under the direction of the United
States Department of Justice ("DOJ"), have been
investigating possible violations by the Company and others
with respect to the sale of lysine, citric acid and high
fructose corn syrup, respectively. In connection with an
agreement with the DOJ in fiscal 1997, the Company paid the
United States a fine of $100 million. This agreement
constitutes a global resolution of all matters between the
DOJ and the Company and brought to a close all DOJ
investigations of the Company. The federal grand jury in
the Northern District of Illinois (lysine) has been closed.
The Company has received notice that certain foreign
governmental entities were commencing investigations to
determine whether anticompetitive practices occurred in
their jurisdictions. Except for the investigations being
conducted by the Commission of the European Communities as
described below, all such matters have been resolved as
previously reported. In June 1997, the Company and several
of its European subsidiaries were notified that the
Commission of the European Communities had initiated an
investigation as to possible anticompetitive practices in
the amino acid markets, in particular the lysine market, in
the European Union. On October 29, 1998, the Commission of
the European Communities initiated formal proceedings
against the Company and others and adopted a Statement of
Objections. The reply of the Company was filed on February
1, 1999. In September 1997, the Company received a request
for information from the Commission of the European
Communities with respect to an investigation being
conducted by that Commission into the possible existence of
certain agreements and/or concerted practices in the citric
acid market in the European Union. In November 1998, a
European subsidiary of the Company received a request for
information from the Commission of the European Communities
with respect to an investigation being conducted by that
Commission into the possible existence of certain
agreements and/or concerted practices in the sodium
gluconate market in the European Union. On February 11,
1999 a Mexican subsidiary of the Company was notified that
the Mexican Federal Competition Commission had initiated an
investigation as to possible anticompetitive practices in
the citric acid market in Mexico. The ultimate outcome and
materiality of the proceedings of the Commission of the
European Communities cannot presently be determined. The
Company may become the subject of similar antitrust
investigations conducted by the applicable regulatory
authorities of other countries.
15
Page 16
HIGH FRUCTOSE CORN SYRUP ACTIONS
The Company, along with other companies, has been named as
a defendant in thirty-one antitrust suits involving the
sale of high fructose corn syrup. Thirty of these actions
have been brought as putative class actions.
FEDERAL ACTIONS. Twenty-two of these putative class
actions allege violations of federal antitrust laws,
including allegations that the defendants agreed to fix,
stabilize and maintain at artificially high levels the
prices of high fructose corn syrup, and seek injunctions
against continued alleged illegal conduct, treble damages
of an unspecified amount, attorneys fees and costs, and
other unspecified relief. The putative classes in these
cases comprise certain direct purchasers of high fructose
corn syrup during certain periods in the 1990s. These
twenty-two actions have been transferred to the United
States District Court for the Central District of Illinois
and consolidated under the caption In Re High Fructose
Corn Syrup Antitrust Litigation, MDL No. 1087 and Master
File No. 95-1477. The parties are in the midst of
discovery in this action.
On January 14, 1997, the Company, along with other
companies, was named a defendant in a non-class action
antitrust suit involving the sale of high fructose corn
syrup and corn syrup. This action which is encaptioned
Gray & Co. v. Archer Daniels Midland Co., et al, No. 97-69-
AS, and was filed in federal court in Oregon, alleges
violations of federal antitrust laws and Oregon and
Michigan state antitrust laws, including allegations that
defendants conspired to fix, raise, maintain and stabilize
the price of corn syrup and high fructose corn syrup, and
seeks treble damages, attorneys' fees and costs of an
unspecified amount. The parties are in the midst of
discovery in this action.
STATE ACTIONS. The Company, along with other companies,
also has been named as a defendant in seven putative
class action antitrust suits filed in California state
court involving the sale of high fructose corn syrup.
These California actions allege violations of the
California antitrust and unfair competition laws,
including allegations that the defendants agreed to fix,
stabilize and maintain at artificially high levels the
prices of high fructose corn syrup, and seek treble
damages of an unspecified amount, attorneys fees and
costs, restitution and other unspecified relief. One of
the California putative classes comprises certain direct
purchasers of high fructose corn syrup in the State of
California during certain periods in the 1990s. This
action was filed on October 17, 1995 in Superior Court for
the County of Stanislaus, California and encaptioned
Kagome Foods, Inc. v Archer-Daniels-Midland Co. et al.,
Civil Action No. 37236. This action has been removed to
federal court and consolidated with the federal class
action litigation pending in the Central District of
Illinois referred to above. The other six California
putative classes comprise certain indirect purchasers of
high fructose corn syrup and dextrose in the State of
California during certain periods in the 1990s. One such
action was filed on July 21, 1995 in the Superior Court
16
Page 17
of the County of Los Angeles, California and is
encaptioned Borgeson v. Archer-Daniels-Midland Co., et
al., Civil Action No. BC131940. This action and four other
indirect purchaser actions have been coordinated
before a single court in Stanislaus County, California
under the caption, Food Additives (HFCS) cases, Master
File No. 39693. The other four actions are encaptioned,
Goings v. Archer Daniels Midland Co., et al., Civil Action
No. 750276 (Filed on July 21, 1995, Orange County Superior
Court); Rainbow Acres v. Archer Daniels Midland Co., et
al., Civil Action No. 974271 (Filed on November 22, 1995,
San Francisco County Superior Court); Patane v. Archer
Daniels Midland Co., et al., Civil Action No. 212610
(Filed on January 17, 1996, Sonoma County Superior Court);
and St. Stan's Brewing Co. v. Archer Daniels Midland Co.,
et al., Civil Action No. 37237 (Filed on October 17, 1995,
Stanislaus County Superior Court). On October 8, 1997,
Varni Brothers Corp. filed a complaint in intervention
with respect to the coordinated action pending in
Stanislaus County Superior Court, asserting the same
claims as those advanced in the consolidated class action.
The parties are in the midst of discovery in the
coordinated action.
The Company, along with other companies, also has been
named a defendant in a putative class action antitrust
suit filed in Alabama state court. The Alabama action
alleges violations of the Alabama, Michigan and Minnesota
antitrust laws, including allegations that defendants
agreed to fix, stabilize and maintain at artificially high
levels the prices of high fructose corn syrup, and seeks
an injunction against continued illegal conduct, damages
of an unspecified amount, attorneys fees and costs, and
other unspecified relief. The putative class in the
Alabama action comprises certain indirect purchasers in
Alabama, Michigan and Minnesota during the period March
18, 1994 to March 18, 1996. This action was filed on March
18, 1996 in the Circuit Court of Coosa County, Alabama,
and is encaptioned Caldwell v. Archer-Daniels-Midland Co.,
et al., Civil Action No. 96-17. On April 23, 1997, the
court granted the defendants' motion to sever and dismiss
the non-Alabama claims. The remaining parties are in the
midst of discovery in this action.
LYSINE ACTIONS
The Company, along with other companies, had been named as
a defendant in twenty-one putative class action antitrust
suits involving the sale of lysine. Except for the actions
specifically described below, all such suits have been
settled, dismissed or withdrawn.
STATE ACTIONS. The Company has been named as a defendant,
along with other companies in two putative class action
antitrust suits. These two putative class actions allege
violations of the Alabama antitrust laws, including
allegations that the defendants agreed to fix, stabilize
and maintain at artificially high levels the prices of
lysine, and seek an injunction against continued alleged
illegal conduct, damages of an unspecified amount,
attorneys fees and costs, and other unspecified relief.
The putative classes in these actions comprise certain
indirect purchasers of lysine in the State of Alabama
during certain periods in the 1990s. One such action was
filed on August 17, 1995 in the Circuit
17
Page 18
Court of DeKalb County, Alabama, and is encaptioned Ashley
v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-
336. On March 13, 1998, the court denied plaintiff's
motion for class certification.
Subsequently, the plaintiff amended his complaint to add
approximately 300 individual plaintiffs. The other Alabama
action, encaptioned Bailey v. Archer Daniels Midland Co.,
et al., Civil Action No. 95-165, and filed on December 11,
1995 in the Circuit Court of Tallapoosa County, was
dismissed on January 5, 1999.
CITRIC ACID ACTIONS
The Company, along with other companies, had been named as
a defendant in eleven putative class action antitrust suits
and two non-class action antitrust suits involving the sale
of citric acid. Except for the actions specifically
described below, all such suits have been settled or
dismissed.
STATE ACTIONS. The Company, along with other companies,
has been named as a defendant in one putative class action
antitrust suit filed in Alabama state court involving the
sale of citric acid. This action alleges violations of the
Alabama antitrust laws, including allegations that the
defendants agreed to fix, stabilize and maintain at
artificially high levels the prices of citric acid, and
seeks an injunction against continued alleged illegal
conduct, damages of an unspecified amount, attorneys fees
and costs, and other unspecified relief. The putative
class in the Alabama action comprises certain indirect
purchasers of citric acid in the State of Alabama from
July 1993 until July 1995. This action was filed on July
27, 1995 in the Circuit Court of Walker County, Alabama
and is encaptioned Seven Up Bottling Co. of Jasper, Inc.
v. Archer-Daniels-Midland Co., et al., Civil Action No. 95-
436. The Company currently is seeking appellate review of
the denial of its motion to dismiss this action. The
Company, along with other companies, also has been named
as a defendant in one putative class action antitrust suit
filed in Wisconsin state court involving the sale of
citric acid. This action alleges violations of the laws of
Wisconsin, Minnesota, Alabama, Arizona, California,
District of Columbia, Florida, Tennessee, West Virginia,
Mississippi, New Mexico, North Carolina, South Dakota,
North Dakota, Kansas, Louisiana, Michigan and Maine,
including allegations that defendants conspired to
maintain the price of citric acid at artificially high
levels and seeks injunctive relief, treble damages of an
unspecified amount, attorneys fees and costs and other
unspecified relief. The putative class in this case
comprises certain indirect purchasers of citric acid in
the above referenced states during the period July 1, 1991
through June 27, 1995. This action was filed on December
20, 1996 in the Circuit Court for Milwaukee County,
Wisconsin and is encaptioned Raz, et al. v. Archer-Daniels-
Midland Co., et al., No. 96-CV-9729. On June 26, 1998, the
Company executed a settlement agreement with counsel for
the plaintiff class in which, among other things, the
Company agreed to pay $1,831,634 to the plaintiff class.
This settlement received final court approval and the case
was dismissed on November 16, 1998.
18
Page 19
HIGH FRUCTOSE CORN SYRUP/CITRIC ACID STATE CLASS ACTIONS
The Company, along with other companies, has been named as
a defendant
in five putative class action antitrust suits involving
the sale of both high fructose corn syrup and citric acid.
Two of these actions allege violations of the California
antitrust and unfair competition laws, including
allegations that the defendants agreed to fix, stabilize
and maintain at artificially high levels the prices of
high fructose corn syrup and citric acid, and seek treble
damages of an unspecified amount, attorneys fees and
costs, restitution and other unspecified relief. The
putative class in one of these California cases comprises
certain direct purchasers of high fructose corn syrup and
citric acid in the State of California during the period
January 1, 1992 until at least October 1995. This action
was filed on October 11, 1995 in the Superior Court of
Stanislaus County, California and is entitled Gangi Bros.
Packing Co. v. Archer-Daniels-Midland Co., et al., Civil
Action No. 37217. The putative class in the other
California case comprises certain indirect purchasers of
high fructose corn syrup and citric acid in the state of
California during the period October 12, 1991 until
November 20, 1995. This action was filed on November 20,
1995 in the Superior Court of San Francisco County and is
encaptioned MCFH, Inc. v. Archer-Daniels-Midland Co., et
al., Civil Action No. 974120. The California Judicial
Council has bifurcated the citric acid and high fructose
corn syrup claims in these actions and coordinated them
with other actions in San Francisco County Superior Court
and Stanislaus County Superior Court. As noted in prior
filings, the Company accepted a settlement agreement with
counsel for the citric acid plaintiff class. This
settlement received final court approval and the case was
dismissed on September 30, 1998. The Company, along with
other companies, also has been named as a defendant in at
least one putative class action antitrust suit filed in
West Virginia state court involving the sale of high
fructose corn syrup and citric acid. This action also
alleges violations of the West Virginia antitrust laws,
including allegations that the defendants agreed to fix,
stabilize and maintain at artificially high levels the
prices of high fructose corn syrup and citric acid, and
seeks treble damages of an unspecified amount, attorneys
fees and costs, and other unspecified relief. The putative
class in the West Virginia action comprises certain
entities within the State of West Virginia that purchased
products containing high fructose corn syrup and/or citric
acid for resale from at least 1992 until 1994. This action
was filed on October 26, 1995, in the Circuit Court for
Boone County, West Virginia, and is encaptioned Freda's v.
Archer-Daniels-Midland Co., et al., Civil Action No. 95-C-
125. The Company, along with other companies, also has
been named as a defendant in a putative class action
antitrust suit filed in the Superior Court for the
District of Columbia involving the sale of high fructose
corn syrup and citric acid. This action alleges violations
of the District of Columbia antitrust laws, including
allegations that the defendants agreed to fix, stabilize
and maintain at artificially high levels the prices of
high fructose corn syrup and citric acid, and seeks treble
damages of an unspecified amount, attorneys fees and
costs, and other unspecified relief. The putative class in
the District of Columbia action comprises certain persons
within the District of Columbia that purchased products
containing high fructose corn syrup and/or citric acid
during the period January 1, 1992 through December 31,
1994. This action was filed on April 12, 1996 in the
Superior Court
19
Page 20
for the District of Columbia, and is encaptioned Holder v.
Archer-Daniels-Midland Co., et al., Civil Action No. 96-
2975. On November 13, 1998, Plaintiff's motion for class
certification was granted. The Company, along with other
companies, has been named as a defendant in a putative
class action antitrust suit filed in Kansas state court
involving the sale of high fructose corn syrup and citric
acid. This action alleges violations of the Kansas
antitrust laws, including allegations that the defendants
agreed to fix, stabilize and maintain at artificially high
levels the prices of high fructose corn syrup and citric
acid, and seeks treble damages of an unspecified amount,
court costs and other unspecified relief. The putative
class in the Kansas action comprises certain persons
within the State of Kansas that purchased products
containing high fructose corn syrup and/or citric acid
during at least the period January 1, 1992 through
December 31, 1994. This action was filed on May 7, 1996 in
the District Court of Wyandotte County, Kansas and is
encaptioned Waugh v. Archer-Daniels-Midland Co., et al.,
Case No. 96-C-2029. Plaintiff's motion for class
certification is currently pending.
HIGH FRUCTOSE CORN SYRUP/CITRIC ACID/LYSINE STATE CLASS
ACTIONS
The Company, along with other companies, has been named as
a defendant in six putative class action antitrust suits
filed in California state court involving the sale of high
fructose corn syrup, citric acid and/or lysine. These
actions allege violations of the California antitrust and
unfair competition laws, including allegations that the
defendants agreed to fix, stabilize and maintain at
artificially high levels the prices of high fructose corn
syrup, citric acid and/or lysine, and seek treble damages
of an unspecified amount, attorneys fees and costs,
restitution and other unspecified relief. One of the
putative classes comprises certain direct purchasers of
high fructose corn syrup, citric acid and/or lysine in the
State of California during a certain period in the 1990s.
This action was filed on December 18, 1995 in the Superior
Court for Stanislaus County, California and is encaptioned
Nu Laid Foods, Inc. v. Archer-Daniels-Midland Co., et al.,
Civil Action No. 39693. The other five putative classes
comprise certain indirect purchasers of high fructose corn
syrup, citric acid and/or lysine in the State of
California during certain periods in the 1990s. One such
action was filed on December 14, 1995 in the Superior
Court for Stanislaus County, California and is encaptioned
Batson v. Archer-Daniels-Midland Co., et al., Civil Action
No. 39680. The other actions are encaptioned Nu Laid
Foods, Inc. v. Archer Daniels Midland Co., et al., No
39693 (Filed on December 18, 1995 Stanislaus County
Superior Court); Abbott v. Archer Daniels Midland Co., et
al., No. 41014 (Filed on December 21, 1995, Stanislaus
County Superior Court); Noldin v. Archer Daniels Midland
Co., et al., No. 41015 (Filed on December 21, 1995,
Stanislaus County Superior Court); Guzman v. Archer
Daniels Midland Co., et al., No. 41013 (Filed on December
21, 1995, Stanislaus County Superior Court) and Ricci v.
Archer Daniels Midland Co., et al., No. 96-AS-00383 (Filed
on February 6, 1996, Sacramento County Superior Court). As
noted in prior filings, the plaintiffs in these actions
and the lysine defendants have executed a settlement
agreement that has been approved by the court and the
California
20
Page 21
Judicial Council has bifurcated the citric acid and high
fructose corn syrup claims and coordinated them with other
actions in San Francisco County Superior Court and
Stanislaus County Superior Court.
SODIUM GLUCONATE ACTIONS
The Company, along with other companies, has been named as
a defendant in three federal antitrust class actions
involving the sale of sodium gluconate. These actions
allege violations of federal antitrust laws, including
allegations that the defendants agreed to fix, raise and
maintain at artificially high levels the prices of sodium
gluconate, and seek various relief, including treble
damages of an unspecified amount, attorneys fees and
costs, and other unspecified relief. The putative classes
in these cases comprise certain direct purchasers of
sodium gluconate during periods in the 1990s. One such
action was filed on December 2, 1997, in the United States
District Court for the Northern District of California and
is encaptioned Chemical Distribution, Inc, v. Akzo Nobel
Chemicals BV, et al., No. C -97-4141 (CW). The second
action was filed on December 31, 1997, in the United
States District Court for the District of Massachusetts
and is encaptioned Stetson Chemicals, Inc. v. Akzo Nobel
Chemicals BV, 97-CV-1285 RCL. The third action, which was
amended on February 12, 1998 to name the Company as a
defendant, was filed in the United States District Court
for the Northern District of Illinois. On April 9, 1998,
the Judicial Panel on Multidistrict Litigation transferred
all three sodium gluconate actions to the United States
District Court for the Northern District of California for
coordinated or consolidated pretrial proceedings. On
October 29, 1998, the Company executed a Settlement
Agreement with counsel for the plaintiff class in which,
among other things, the Company agreed to pay $69,600 to
the plaintiff class. Papers will soon be filed with the
Court seeking approval of this settlement.
SHAREHOLDER DERIVATIVE ACTIONS
Following the public announcement of the grand jury
investigations in June 1995 discussed above, three
shareholder derivative suits were filed against certain of
the Company's then current directors and executive officers
and nominally against the Company in the United States
District Court for the Northern District of Illinois and
fourteen similar shareholder derivative suits were filed in
the Delaware Court of Chancery. The derivative suits filed
in federal court in Illinois were consolidated under the
name Felzen, et al. v. Andreas, et al., Civil Action No. 95-
C-4006, 95-C-4535, and a consolidated amended derivative
complaint was filed on September 29, 1995. This complaint
names all then current directors of the Company (except Mr.
Coan) and one former director as defendants and names the
Company as a nominal defendant. It alleges breach of
fiduciary duty, waste of corporate assets, abuse of control
and gross mismanagement, based on the antitrust allegations
described above, as well as other alleged wrongdoing. On
October 31, 1995, the Court granted the defendants' motion
to transfer the Illinois consolidated derivative action to
the Central District of Illinois, wherein it now bears the
case number 95-
21
Page 22
2279. On April 26, 1996, the court dismissed the suit
without prejudice and permitted the plaintiffs twenty-one
days to refile it. The plaintiffs refiled the complaint on
May 17, 1996. The defendants again moved to dismiss the
complaint on June 1, 1996. Plaintiffs have supplemented the
complaint to include the antitrust settlements and guilty
plea described above. The fourteen shareholder derivative
suits filed in the Delaware Court of Chancery have been
consolidated as In Re Archer Daniels Midland Derivative
Litigation, Consolidated No. 14403. An amended and
consolidated complaint was filed on November 19, 1996. ADM
moved to dismiss the complaint on December 12, 1996. On May
29, 1997, the Company executed a Memorandum of
Understanding with counsel for both the Illinois and
Delaware shareholder derivative plaintiffs. This Memorandum
of Understanding provides for, among other things, $8
million to be paid by or on behalf of certain defendants in
these actions to the Company and certain changes in the
structure and policies of the Company's Board of Directors.
On May 30, 1997, the United States District Court for the
Central District of Illinois preliminarily approved this
settlement and on July 7, 1997, final approval was granted.
Certain entities appealed the final settlement approval
order to the United States Court of Appeals for the Seventh
Circuit. On January 21, 1998 the Court of Appeals dismissed
the appeal. On January 20, 1999, the judgement of the Court
of Appeals was affirmed by an equally divided United States
Supreme Court. The parties will soon seek dismissal of the
Delaware actions with prejudice.
OTHER
The Company has made provisions to cover certain legal
proceedings and related costs and expenses as described in
the notes to the unaudited consolidated financial
statements and management's discussion of operations and
financial condition. However, because of the early stage of
other putative class actions and proceedings described
above, including those related to high fructose corn syrup,
the ultimate outcome and materiality of these matters
cannot presently be determined. Accordingly, no provision
for any liability that may result therefrom has been made
in the unaudited consolidated financial statements.
Item 4. Submission of matters to a vote of
Security Holders:
The Annual Meeting of Shareholders was held on
October 22, 1998. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14. There was no
solicitation in opposition to the Board of Director
nominees as listed in the proxy statement and all of
such nominees were elected as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Nominee Shares Cast
Shares
For
Withheld
D. O. Andreas 482,077,823 21,653,524
G. O. Coan 485,743,648 17,987,699
G. A. Andreas 482,737,726 20,993,621
J. K. Vanier 485,442,806 18,288,541
R. Burt 485,510,703 18,220,644
A. Young 483,767,145 19,964,202
O. G. Webb 485,740,225 17,991,122
F. Ross Johnson 484,985,993 18,745,354
R. S. Strauss 485,070,485 18,660,862
M. B. Mulroney 484,433,925 19,297,422
J. R. Block 485,808,624 17,922,723
M. H. Carter 485,867,076 17,864,271
</TABLE>
There were no abstentions or broker non-votes
regarding the election of directors.
The appointment by the Board of Directors of Ernst &
Young LLP as Independent Accountants to audit the
accounts of the Company for the fiscal year ending
June 30, 1999 was ratified as follows:
<TABLE>
<CAPTION>
<C> <C> <C>
For Against Abstain
499,214,837 3,426,770 1,089,740
</TABLE>
The Stockholder's Proposal relative to cumulative
voting was defeated as follows:
<TABLE>
<CAPTION>
<C> <C> <C>
For Against Abstain
125,935,045 301,443,304 8,732,005
</TABLE>
22
Page 23
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Articles of Incorporation and Bylaws
Composite Certificate of Incorporation and
Bylaws filed on November 7, 1986 as Exhibits
3(a) and 3(b), respectively, to Post Effective
amendment No. 1 to Registration Statement on
Form S-3, Registration No. 33-6721, are
incorporated herein by reference.
(27) Financial Data Schedules
b) A Form 8-K was not filed during the
quarter ended December 31,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ARCHER-DANIELS-MIDLAND COMPANY
/s/ D. J. Schmalz
D. J. Schmalz
Vice President
and Chief Financial Officer
/s/ D. J. Smith
D. J. Smith
Vice President, Secretary and
General Counsel
Dated: February 12, 1999
23
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>10Q FINANCIAL DATA FOR PERIOD ENDING 12/31/98
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 476,357
<SECURITIES> 335,835
<RECEIVABLES> 1,879,282
<ALLOWANCES> 0
<INVENTORY> 3,123,744
<CURRENT-ASSETS> 5,996,315
<PP&E> 11,031,313
<DEPRECIATION> 5,494,964
<TOTAL-ASSETS> 14,253,489
<CURRENT-LIABILITIES> 4,044,429
<BONDS> 2,908,976
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 4,834,548
<OTHER-SE> 1,698,042
<TOTAL-LIABILITY-AND-EQUITY> 14,253,489
<SALES> 7,712,960
<TOTAL-REVENUES> 7,712,960
<CGS> 6,997,994
<TOTAL-COSTS> 6,997,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,539
<INCOME-PRETAX> 348,297
<INCOME-TAX> 121,008
<INCOME-CONTINUING> 227,289
<DISCONTINUED> 0
<EXTRAORDINARY> (15,324)
<CHANGES> 0
<NET-INCOME> 211,965
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| ADP | https://www.sec.gov/Archives/edgar/data/8670/0001047469-99-004288.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001047469-99-004288.txt : 19990217
<SEC-HEADER>0001047469-99-004288.hdr.sgml : 19990217
ACCESSION NUMBER: 0001047469-99-004288
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990210
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOMATIC DATA PROCESSING INC
CENTRAL INDEX KEY: 0000008670
STANDARD INDUSTRIAL CLASSIFICATION: 7374
IRS NUMBER: 221467904
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05397
FILM NUMBER: 99527149
BUSINESS ADDRESS:
STREET 1: ONE ADP BOULVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
BUSINESS PHONE: 2019945000
MAIL ADDRESS:
STREET 1: ONE ADP BOULEVARD
CITY: ROSELAND
STATE: NJ
ZIP: 07068
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 1998 Commission File Number 1-5397
------------------------ ------------
Automatic Data Processing, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter )
Delaware 22-1467904
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One ADP Boulevard, Roseland, New Jersey 07068
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (973) 994-5000
-----------------------------
No change
- - --------------------------------------------------------------------------------
Former name, former address & former fiscal year, if changed since last report.
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed with the commission and (2) has
been subject to the filing requirements for at least the past 90 days.
X Yes No
- - ------------------------------------ ------------------------------------
As of January 31, 1999 there were 609,042,989 common shares outstanding.
<PAGE>
Form 10Q
Part I. Financial Information
STATEMENTS OF CONSOLIDATED EARNINGS
-----------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $1,274,864 $1,148,026 $2,485,191 $2,186,524
---------- ---------- ---------- ----------
Operating expenses 535,572 490,202 1,065,429 933,585
General, administrative and
selling expenses 284,430 286,427 607,403 575,873
Depreciation and amortization 68,032 58,193 136,939 115,623
Systems development and
programming costs 105,356 91,361 206,096 178,650
Interest expense 5,554 7,303 11,154 14,813
---------- ---------- ---------- ----------
998,944 933,486 2,027,021 1,818,544
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 275,920 214,540 458,170 367,980
Provision for income taxes 107,530 67,150 166,580 115,180
---------- ---------- ---------- ----------
NET EARNINGS $ 168,390 $ 147,390 $ 291,590 $ 252,800
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ .28 $ .25 $ .48 $ .43
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ .27 $ .24 $ .47 $ .42
========== ========== ========== ==========
Dividends per share $ .07625 $ .06625 $ .1425 $ .12375
========== ========== ========== ==========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1998 1998
- - ------ ----------- ----------
<S> <C> <C>
Cash and cash equivalents $ 699,283 $ 752,240
Short-term marketable securities 196,712 144,936
Accounts receivable 757,585 727,936
Other current assets 199,522 204,192
----------- ----------
Total current assets 1,853,102 1,829,304
----------- ----------
Long-term marketable securities 781,874 765,272
----------- ----------
Long-term receivables 196,243 177,946
----------- ----------
Land and buildings 389,979 386,745
Data processing equipment 571,342 696,424
Furniture, leaseholds and other 438,826 432,654
----------- ----------
1,400,147 1,515,823
Less accumulated depreciation (837,942) (932,150)
----------- ----------
562,205 583,673
Other assets 239,050 166,112
----------- ----------
Intangibles 1,666,729 1,653,048
----------- ----------
$ 5,299,203 $5,175,355
=========== ==========
Liabilities and Shareholders' Equity
Notes payable $ 89,430 $ 239,811
Accounts payable 71,298 119,803
Accrued expenses & other current
liabilities 766,532 806,297
Income taxes 83,998 55,130
----------- ----------
Total current liabilities 1,011,258 1,221,041
----------- ----------
Long-term debt 165,796 192,063
----------- ----------
Other liabilities 126,945 103,056
----------- ----------
Deferred income taxes 165,198 147,397
----------- ----------
Deferred revenue 107,612 105,347
----------- ----------
Shareholders' equity:
Common stock 62,858 62,858
Capital in excess of par value 611,011 586,329
Retained earnings 3,579,591 3,374,729
Treasury stock (485,458) (515,845)
Accumulated other comprehensive income (45,608) (101,620)
----------- ----------
3,722,394 3,406,451
----------- ----------
$ 5,299,203 $5,175,355
=========== ==========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
-----------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 291,590 $ 252,800
Expenses not requiring outlay of cash 134,420 133,842
Changes in operating net assets (30,218) 39,657
--------- ---------
Net cash flows from operating activities 395,792 426,299
--------- ---------
Cash Flows From Investing Activities:
Purchase of marketable securities (209,179) (239,835)
Proceeds from sale of marketable securities 145,462 232,612
Capital expenditures (81,648) (79,853)
Other changes to property, plant and equipment 6,738 4,052
Additions to intangibles (35,243) (48,676)
Net dispositions (acquisitions) of businesses 17,671 (176,606)
--------- ---------
Net cash flows from investing activities (156,199) (308,306)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable 98,471 61,043
Proceeds from issuance of common stock 48,939 30,241
Repurchases of common stock (85,364) (40,907)
Dividends paid (86,727) (72,719)
Repayments of debt (267,869) (180)
--------- ---------
Net cash flows from financing activities (292,550) (22,522)
--------- ---------
Net change in cash and cash equivalents (52,957) 95,471
Cash and cash equivalents, at beginning of
period 752,240 590,578
--------- ---------
Cash and cash equivalents, at end of
period $ 699,283 $ 686,049
========= =========
</TABLE>
See notes to consolidated statements.
<PAGE>
Form 10Q
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods. Adjustments are of a normal recurring nature. These statements
should be read in conjunction with the annual financial statements and related
notes of the Company for the year ended June 30, 1998.
Note A - The results of operations for the six months ended December 31, 1998
may not be indicative of the results to be expected for the year ending
June 30, 1999.
Note B - The Board of Directors declared a two-for-one common stock split
effective on January 1, 1999 to shareholders of record on the close of
business on December 11, 1998.
Note C - A reconciliation of the income and weighted average shares used in the
basic and diluted earnings per share calculations follows:
(In thousands, except EPS)
<TABLE>
<CAPTION>
Periods ended December 31, 1998
----------------------------------------------------
Three month period Six month period
------------------------- ------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $168,390 604,750 $ 0.28 $291,590 605,025 $ 0.48
Effect of zero coupon
subordinated notes 929 6,147 1,981 6,638
Effect of stock
options - 15,319 - 15,054
------------------------- -------------------------
Diluted EPS $169,319 626,216 $ 0.27 $293,571 626,717 $ 0.47
========================= ========================
<CAPTION>
Periods ended December 31, 1997
----------------------------------------------------
Three month period Six month period
------------------------- ------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $147,390 587,264 $0.25 $252,800 586,256 $0.43
Effect of zero coupon
subordinated notes 2,464 17,326 5,218 14,280
Effect of stock
options - 12,504 - 12,002
------------------------- --------------------------
Diluted EPS $149,854 617,094 $0.24 $258,018 612,538 $0.42
========================= =========================
</TABLE>
<PAGE>
Form 10Q
Note D - Effective July 1, 1998, the Company adopted FASB Statement No. 130
"Reporting Comprehensive Income." Comprehensive income for the three
and six months ended December 31, 1998 and 1997 follows:
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31 December 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $168,390 $147,390 $291,590 $252,800
Other comprehensive income:
Foreign currency
translation adjustments 25,182 (8,221) 58,055 (14,611)
Unrealized gains (losses)
on securities (107) (17) (2,043) 1,825
-------- -------- -------- --------
Comprehensive income $193,465 $139,152 $347,602 $240,014
======== ======== ======== ========
</TABLE>
Note E - In November 1998 the Company sold its "front-office" market data
business to Bridge Information Systems, Inc. The transaction gave rise
to a pretax gain of $22 million and a $25 million provision for income
taxes, resulting in a net loss of $3 million.
Note F - In December 1998 the Company entered into an agreement to acquire The
Vincam Group for approximately 7.4 million shares of ADP common stock
in a pooling of interests transaction. Vincam, with net revenues of
approximately $125 million, is a leading Professional Employer
Organization providing a suite of human resource functions to small and
medium sized employers on an outsourced basis. The transaction is
subject to Vincam shareholder and various regulatory approvals and is
expected to close during the quarter ending March 31, 1999.
Note G - In February 1999 the Company reached a definitive agreement to sell its
Peachtree Software business to The Sage Group plc, for $145 million.
The agreement is subject to regulatory approvals and is expected to
close during the quarter ending March 31, 1999.
<PAGE>
Form 10Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OPERATING RESULTS
Revenues and earnings again reached record levels during the quarter ended
December 31, 1998.
Revenues and revenue growth by ADP's major business units are shown below:
<TABLE>
<CAPTION>
Revenues
----------------------------------
3 Months Ended 6 Months Ended
December 31, December 31,
-------------- --------------
1998 1997 1998 1997
------ ------- ------ -------
($ in millions)
<S> <C> <C> <C> <C>
Employer Services $ 770 $ 667 $1,465 $1,254
Brokerage Services 221 232 473 455
Dealer Services 186 173 367 339
Other 98 76 180 139
------ ------ ------ ------
$1,275 $1,148 $2,485 $2,187
====== ====== ====== ======
<CAPTION>
Revenue Growth
----------------------------------
3 Months Ended 6 Months Ended
December 31, December 31,
-------------- --------------
1998 1997 1998 1997
------ ------- ------ -------
<S> <C> <C> <C> <C>
Employer Services 15% 21% 17% 20%
Brokerage Services (5) 16 4 17
Dealer Services 8 7 8 8
Other 29 (8) 29 (14)
----- ----- ----- -----
11% 15% 14% 15%
===== ===== ===== =====
</TABLE>
Consolidated revenues for the quarter grew 11% from last year to $1,275
million. Revenue growth in Employer and Dealer Services was 15% and 8%,
respectively. Brokerage Services revenue, down 5%, was impacted by the sale
of the "front office" market data business in the quarter. Excluding the sale
of the front office business, Brokerage Services revenue grew 14%.
The primary components of "Other" revenues are claims services, interest
income, foreign exchange differences and miscellaneous processing services.
In addition, "Other" revenues have been reduced to adjust for the difference
between actual interest income earned on invested tax filing funds and income
credited to Employer Services at a standard rate of 6%.
The sale of the front office business resulted in a $22 million pretax gain,
a $25 million provision for taxes and a $3 million net loss.
Pretax earnings for the quarter increased 29% from last year, helped by the
gain on the "front office" sale. Prior to the one-time impact of the front
office sale, pretax earnings increased 18%. Systems development and
programming investments increased to accelerate automation, migrate to new
computing technologies, and develop new products.
<PAGE>
Form 10Q
Net earnings for the quarter, after a higher effective tax rate, increased
14% to $168 million. Excluding the impact of the front office sale, net
earnings increased 16%. The effective tax rate of 39.0% increased from 31.3%
in the comparable quarter last year. Excluding the impact of the front office
sale, the effective tax rate increased to 32.6% this quarter, primarily as a
result of the greater weighting of taxable versus non-taxable earnings.
Diluted earnings per share grew 13% to $0.27 from $0.24 last year. Excluding
the front office sale, diluted earnings per share increased 17%.
The Company expects double digit revenue growth for the full year and diluted
earnings per share growth of 13-16%.
FINANCIAL CONDITION
The Company's financial condition and balance sheet remain exceptionally
strong, and operations continue to generate a strong cash flow. At December
31, 1998, the Company had cash and marketable securities of $1.7 billion.
Shareholders' equity was $3.7 billion and the ratio of long-term debt to
equity was 4%.
Capital expenditures for fiscal 1999 are expected to approximate $200
million, compared to $199 million in fiscal 1998.
During the first half of fiscal 1999, ADP purchased 2.6 million shares of
common stock for treasury at an average price of approximately $33. The
Company has remaining Board authorization to purchase up to 14.5 million
additional shares to fund equity related employee benefit plans.
During the first half of fiscal 1999,the Company's zero coupon convertible
subordinated notes were converted to 1.6 million shares of common stock.
The Company's investment portfolio for corporate and client funds consists
primarily of fixed income securities subject to interest rate risk, including
reinvestment risk. The Company has historically had the ability to hold these
investments until maturity and, therefore, this has not had an adverse impact
on income or cash flows.
OTHER MATTERS
The majority of the Company's services involve computer processing and, as
such, the Year 2000 could have a significant impact on the Company's products
and services. As a result, the Company has worked for several years
addressing both internal and third-party Year 2000 compliance issues. The
majority of the Company's mission-critical systems are Year 2000 compliant
and the few remaining systems, primarily from recent acquisitions, are
expected to be compliant by March 31, 1999. In addition, the Company has been
actively working with external agencies and partners, including government
agencies, to determine and conform to their Year 2000 compliance plans. Third
party interface testing and resolution of Year 200 issues with external
agencies and partners is dependent upon those third parties completing their
own Year 2000 remediation efforts.
<PAGE>
Form 10Q
The Year 2000 remediation is not expected to have a material adverse effect
on the Company's overall results, as these costs are not expected to be
substantially different from normal recurring costs that are incurred for
systems development and implementation.
This report contains "forward-looking statements" based on management's
expectations and assumptions and are subject to risks and uncertainties that
may cause actual results to differ from those expressed. Factors that could
cause differences include: ADP's success in obtaining, retaining and selling
additional services to clients; the pricing of products and services; overall
economic trends, including interest rate and foreign currency trends; impact
of Year 2000; stock market activity; auto sales and related industry changes;
employment levels; changes in technology; availability of skilled technical
associates and the impact of new acquisitions.
PART II. OTHER INFORMATION
Except as noted below, all other items are inapplicable or would result in
negative responses and, therefore, have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
All share and vote results are prior to the stock split.
The Company's Annual Meeting of the Stockholders was held on November 10,
1998. The following members were elected to the Company's Board of Directors
to hold office for the ensuing year.
Nominee In Favor Withheld
------- -------- --------
Gary C. Butler 248,065,729 1,597,079
Joseph A. Califano, Jr. 247,872,536 1,790,272
Leon G. Cooperman 248,083,612 1,579,196
George H. Heilmeier 248,060,799 1,602,009
Ann Dibble Jordan 247,999,348 1,663,460
Harvey M. Krueger 245,468,769 4,194,039
Frederic V. Malek 247,982,439 1,680,369
Henry Taub 247,927,042 1,735,766
Laurence A. Tisch 247,650,299 2,012,509
Arthur F. Weinbach 248,051,128 1,611,680
Josh S. Weston 247,824,586 1,838,222
The result of the voting on the following additional item was as follows:
(a) Ratify an amendment to the Company's Employees' Savings-Stock Purchase
Plan approved by the Board of Directors increasing by five million shares
the number of shares of Common Stock of the Company that may be acquired by
employees under such plan.
<PAGE>
Form 10Q
PART II. OTHER INFORMATION, continued
The votes of the stockholders on this ratification were as follows:
In Favor Opposed Abstained
-------- ------- ---------
237,283,659 10,979,070 1,400,079
(b) Ratify an amendment to the Restated Certificate of Incorporation of the
Company to increase the number of authorized shares of Common Stock of the
Company to one billion shares.
The votes of the stockholders on this ratification were as follows:
In Favor Opposed Abstained
-------- ------- ---------
233,808,508 14,894,015 960,285
(c) Ratify the appointment of Deloitte & Touche LLP to serve as the Company's
independent certified public accountants for the fiscal year begun on
July 1, 1998.
The votes of the stockholders on this ratification were as follows:
In Favor Opposed Abstained
-------- ------- ---------
248,202,359 254,705 1,205,744
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Exhibit
------- -------
3.1 Amended and Restated Certificate of Incorporation of
Automatic Data Processing
27.1 Financial Data Schedule
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOMATIC DATA PROCESSING, INC.
-------------------------------
(Registrant)
Date: February 10, 1999 /s/ Richard J. Haviland
-------------------------------
Richard J. Haviland
Chief Financial Officer
(Principal Financial Officer)
-------------------------------
(Title)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>2
<DESCRIPTION>AMENDED AND RESTATED CERTIFICATE OF INC.
<TEXT>
<PAGE>
Exhibit 3.1
AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
OF
AUTOMATIC DATA PROCESSING, INC.
-------------------------------
ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 242 AND 245 OF
THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
-------------------------------
We, the Chairman of the Board and Chief Executive Officer and the
Corporate Vice President and Secretary, respectively, of Automatic Data
Processing, Inc., a corporation existing under the laws of the State of
Delaware, do hereby certify under the seal of said corporation as follows:
I. That the name of the corporation is AUTOMATIC DATA PROCESSING,
INC. (hereinafter called the "Corporation").
II. That the Certificate of Incorporation of the Corporation was
filed by the Secretary of State on the 12th day of June 1961.
III. That this Certificate amends the Certificate of Incorporation by
increasing the number of authorized shares of Common Stock of the
Corporation to 1,000,000,000 shares.
IV. That the amendment and the restatement of the Certificate of
Incorporation of the Corporation have been duly adopted in accordance with
the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware by an affirmative vote of the holders of a majority
of all outstanding stock entitled to vote at a meeting of stockholders.
V. That the text of the Certificate of Incorporation of the
Corporation, as heretofore amended, is hereby restated, as further amended
by this Certificate, to read in its entirety as follows:
CERTIFICATE OF INCORPORATION
OF
AUTOMATIC DATA PROCESSING, INC.
We, the undersigned, in order to form a corporation for the purposes
hereinafter stated, pursuant to the provisions of Chapter 1 of Title 8 of
the Delaware Code of 1953, do hereby certify as follows:
FIRST: The name of the corporation is AUTOMATIC DATA PROCESSING,
INC. (hereinafter called the "Corporation").
<PAGE>
SECOND: The address of the Corporation's registered office is 9 East
Loockerman St, City of Dover; County of Kent, State of Delaware; and its
registered agent at such address is National Registered Agents, Inc.
THIRD: The nature of the business and purposes to be conducted or
promoted by the Corporation are to engage in, carry on and conduct any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware; and in addition to, and
without limiting the generality of; the foregoing, the following:
(a) To engage in the business of preparing payrolls, performing
statistical, tabulating and clerical services of all kinds,
conducting research and analytical or statistical studies, preparing
business reports and surveys, rendering consulting services to
business and performing business services of any and all kinds of a
similar nature;
(b) To engage in, carry on, conduct and/or participate in any
general or specific branch or phase of the activities, enterprises,
or businesses authorized in this Certificate in the State of Delaware
or in any other state of the United States and in all foreign
countries, and in all territories, possessions and other places, and
in connection with the same, or any thereof; to be and act either as
principal, agent, contractor or otherwise;
(c) To do everything necessary, suitable, convenient or proper
for the accomplishment, attainment or furtherance of; to do every
other act or thing incidental or appurtenant to, growing out of or
connected with, the purposes set forth in this Certificate, whether
alone or in association with others; to possess all the rights,
powers and privileges now or hereafter conferred by the laws of the
State of Delaware upon corporations organized under the General
Corporation Law of the State of Delaware (as the same may be amended
from time to time) or any statute which may be enacted to supplement
or replace it, and, in general, to carry on any of the activities and
to do any of the things herein set forth to the same extent and as
fully as a natural person or a partnership, association, corporation
or other entity, or any of them, might or could do; provided, that
nothing herein set forth shall be construed as authorizing the
Corporation to possess any purpose, object, or power; or to do any
act or thing, forbidden by law to a corporation organized under the
General Corporation Law of the State of Delaware. The foregoing
provisions of this Article shall be construed as purposes, objects
and powers, and each as an independent purpose, object and power; in
furtherance, and not in limitation, of the purposes, objects and
powers granted to the Corporation by the laws of the State of
Delaware; and except as otherwise specifically provided in any such
provision, no purpose, object or power herein set forth shall be in
any way limited or restricted by reference to, or inference from, any
other provision of this Certificate.
FOURTH: The total number of shares which the Corporation shall have
authority to issue is One Billion Three Hundred Thousand (1,000,300,000),
consisting of Three Hundred Thousand (300,000) shares of Preferred Stock, of the
par value of One Dollar ($1.00) per share (hereinafter called "Preferred
Stock"), and One Billion (1,000,000,000) shares of Common Stock, of the par
value of Ten Cents ($.10) per share (hereinafter called "Common Stock").
The Board of Directors is hereby authorized to issue the shares of the
Preferred Stock in one or more series, to fix by resolution, to the extent now
or hereafter permitted by the laws of the State of Delaware, the designation
such series, the dividend rate of such series and the date or dates and other
provisions respecting the payment of dividends, the provisions, if any, for a
sinking fund for the shares of
<PAGE>
such series, the preferences of such series with respect to dividends and in the
event of the liquidation or dissolution of the Corporation, the provisions, if
any, respecting the redemption of the shares of such series, the voting rights,
if any, of the shares of such series, the terms, if any, upon which the shares
of such series shall be convertible into or exchangeable for any other shares of
stock of the Corporation and any other relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof;
of the shares of such series.
Subject to the payment or setting apart for payment of any preferential
dividends which the holders of shares of any series of Preferred Stock shall be
entitled to receive, the holders of the Common Stock shall be entitled to
receive such dividends as may be declared thereon from time to time by the Board
of Directors, in its discretion, from any assets legally available for the
payment of dividends.
In the event of the liquidation or dissolution of the Corporation, whether
voluntary or involuntary, after distribution to the holders of all shares of any
series of Preferred Stock which shall be entitled to a preference over the
holders of Common Stock of the full preferential amounts to which they are
entitled, the holders of Common Stock shall be entitled to share ratably in the
distribution of the remaining assets of the Corporation available for
distribution to shareholders.
Except as otherwise expressly provided in any resolution adopted by the
Board of Directors granting voting rights to the holders of shares of any series
of Preferred Stock and except as otherwise required by law the entire voting
power of the Corporation shall be vested in the Common Stock, and each share of
Common Stock shall have one vote for each share thereof held.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and it is expressly
provided that the same are intended to be in furtherance and not in limitation
or exclusion of the powers conferred by law:
1. Members of the Board of Directors may be elected either by
written ballot or by voice-vote.
2. The Board of Directors may from time to time make, alter, or
repeal the By-laws of the Corporation; provided, that any By-laws made,
amended, or repealed by the Board of Directors may be amended or
repealed, and new By-laws may be made, by the stockholders of the
Corporation.
3. The Corporation shall indemnify all directors and officers of the
Corporation to the full extent permitted by the General Corporation Law
of the State of Delaware (and in particular Paragraph 145 thereof), as
from time to time amended, and may purchase and maintain insurance on
behalf of such directors and officers. In addition, the Corporation
shall, in the manner and to the extent as the By-laws of the Corporation
shall provide, indemnify to the full extent permitted by the General
Corporation law of the State of Delaware (and in particular Paragraph 145
thereof), as from time to time amended, such other persons as the By-laws
shall provide, and may purchase and maintain insurance on behalf of such
other persons.
4. A director of the Corporation shall not be held personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; except for liability (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law (iii) under Section 174 of the
General Corporation Law of the State of Delaware, or (iv) for any
<PAGE>
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of any
director of the Corporation existing at the time of; or for or with
respect to any acts or omissions occurring prior to, such repeal or
modification.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may; on the application in a summary
way of this Corporation or of any creditor or stockholder thereof; or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such a manner as the said Court directs. If a majority in
number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the Court to which the said application has been made,
be binding on all creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
IN WITNESS WHEREOF, We, Arthur F. Weinbach, Chairman of the Board and
Chief Executive Officer, and James B. Benson, Corporate Vice President and
Secretary, of AUTOMATIC DATA PROCESSING, INC., have signed this Certificate and
caused the corporate seal of the corporation to be hereunto affixed this 11th
day of November, 1998.
---------------------------------------------
Arthur F. Weinbach
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Attest:
--------------------------------------
James B. Benson
CORPORATE VICE PRESIDENT AND SECRETARY
[Corporate Seal]
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 699,283
<SECURITIES> 196,712
<RECEIVABLES> 802,577
<ALLOWANCES> 44,992
<INVENTORY> 44,944
<CURRENT-ASSETS> 1,853,102
<PP&E> 1,400,147
<DEPRECIATION> 837,942
<TOTAL-ASSETS> 5,299,203
<CURRENT-LIABILITIES> 1,011,258
<BONDS> 165,796
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 62,858
<OTHER-SE> 3,659,536
<TOTAL-LIABILITY-AND-EQUITY> 5,299,203
<SALES> 0
<TOTAL-REVENUES> 2,485,191
<CGS> 0
<TOTAL-COSTS> 2,007,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,080
<INTEREST-EXPENSE> 11,154
<INCOME-PRETAX> 458,170
<INCOME-TAX> 166,580
<INCOME-CONTINUING> 291,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291,590
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| AIT | https://www.sec.gov/Archives/edgar/data/109563/0000950152-99-000891.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000950152-99-000891.txt : 19990215
<SEC-HEADER>0000950152-99-000891.hdr.sgml : 19990215
ACCESSION NUMBER: 0000950152-99-000891
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED INDUSTRIAL TECHNOLOGIES INC
CENTRAL INDEX KEY: 0000109563
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080]
IRS NUMBER: 340117420
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-02299
FILM NUMBER: 99533373
BUSINESS ADDRESS:
STREET 1: 3600 EUCLID AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44115
BUSINESS PHONE: 2168818900
MAIL ADDRESS:
STREET 1: 3600 EUCLID AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44115
FORMER COMPANY:
FORMER CONFORMED NAME: BEARINGS INC /OH/
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: BROWN JIM STORES INC
DATE OF NAME CHANGE: 19600201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>APPLIED INDUSTRIAL TECHNOLOGIES, INC.
<TEXT>
<PAGE> 1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998 .
-------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
--------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----
Shares of common stock outstanding on January 31, 1999 21,652,085
----------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
-------------------------------------
INDEX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Page No.
Part I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Six Months Ended
December 31, 1998 and 1997
Consolidated Balance Sheets - 3
December 31, 1998 and June 30, 1998
Statements of Consolidated Cash Flows - 4
Six Months Ended December 31, 1998 and 1997
Statements of Consolidated Shareholders' Equity - 5
Six Months Ended December 31, 1998 and
Year Ended June 30, 1998
Notes to Consolidated Financial Statements 6 - 8
Item 2: Management's Discussion and Analysis of 9 - 14
Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 17
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 371,395 $ 368,623 $ 750,569 $ 713,349
--------- --------- --------- ---------
Cost and Expenses
Cost of sales 279,160 273,573 563,837 529,999
Selling, distribution and
administrative 81,808 80,786 171,533 159,278
--------- --------- --------- ---------
360,968 354,359 735,370 689,277
--------- --------- --------- ---------
Operating Income 10,427 14,264 15,199 24,072
--------- --------- --------- ---------
Interest
Interest expense 3,080 2,365 5,738 4,829
Interest income (145) (200) (331) (478)
--------- --------- --------- ---------
2,935 2,165 5,407 4,351
--------- --------- --------- ---------
Income Before Income Taxes 7,492 12,099 9,792 19,721
--------- --------- --------- ---------
Income Taxes
Federal 2,770 3,767 3,624 6,497
State and local 334 618 422 1,013
--------- --------- --------- ---------
3,104 4,385 4,046 7,510
--------- --------- --------- ---------
Net Income $ 4,388 $ 7,714 $ 5,746 $ 12,211
========= ========= ========= =========
Net Income per share - Basic $ 0.20 $ 0.36 $ 0.27 $ 0.58
========= ========= ========= =========
Net Income per share - Diluted $ 0.20 $ 0.35 $ 0.26 $ 0.57
========= ========= ========= =========
Cash dividends per common
share $ 0.12 $ 0.12 $ 0.24 $ 0.23
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
December 31 June 30
1998 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and temporary investments $ 13,808 $ 9,344
Accounts receivable, less allowance
of $3,772 and $3,500 186,199 206,313
Inventories (at LIFO) 187,581 192,042
Other current assets 8,946 7,214
------------------ ------------------
Total current assets 396,534 414,913
------------------ ------------------
Property - at cost
Land 12,387 12,363
Buildings 68,108 69,103
Equipment 98,177 94,705
------------------ ------------------
178,672 176,171
Less accumulated depreciation 68,414 63,102
------------------ ------------------
Property - net 110,258 113,069
------------------ ------------------
Goodwill 59,436 53,243
Other assets 19,151 24,866
------------------ ------------------
TOTAL ASSETS $ 585,379 $ 606,091
================== ==================
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 42,973
Current portion of long-term debt 19,429
Accounts payable $ 77,262 79,091
Compensation and related benefits 20,101 22,702
Other accrued liabilities 34,933 28,952
------------------ ------------------
Total current liabilities 132,296 193,147
Long-term debt 137,715 90,000
Other liabilities 23,824 23,442
------------------ ------------------
TOTAL LIABILITIES 293,835 306,589
------------------ ------------------
Shareholders' Equity
Preferred stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,095 shares issued 10,000 10,000
Additional paid-in capital 82,836 82,865
Income retained for use in the business 236,301 235,957
Less 2,477 and 1,993 treasury shares -
at cost (33,053) (24,391)
Less unearned restricted common
stock compensation (4,540) (4,929)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 291,544 299,502
------------------ ------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 585,379 $ 606,091
================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
December 31
--------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 5,746 $ 12,211
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 8,421 7,692
Amortization of goodwill and restricted common
stock compensation 2,432 2,310
Provision for losses on accounts receivable 1,008 989
Gain on sale of property (126) (250)
Treasury shares contributed to employee
benefit plans 2,065 2,597
Changes in current assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable 19,587 18,791
Inventories 5,118 (35,475)
Other current assets (1,654) 5,025
Accounts payable and accrued expenses 989 (13,169)
Other - net 193 576
- -------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 43,779 1,297
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (7,603) (11,008)
Proceeds from property sales 2,405 2,373
Net cash paid for acquisition of businesses (10,460) (33,809)
Deposits and other 7,363 (1,928)
- -------------------------------------------------------------------------------------------------------------------
Net Cash used in Investing Activities (8,295) (44,372)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net borrowings (repayments) under line-of-credit
agreements (42,973) 53,297
Long-term debt borrowings 42,000
Long-term debt repayments (13,714) (6,361)
Exercise of stock options 490 791
Dividends paid (5,258) (4,982)
Purchase of treasury shares (11,565) (7,791)
- -------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities (31,020) 34,954
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease ) in cash and temporary
investments 4,464 (8,121)
Cash and temporary investments
at beginning of period 9,344 22,405
- -------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 13,808 $ 14,284
===================================================================================================================
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes $ 1,134 $ 6,098
Interest $ 5,333 $ 4,607
Significant noncash investing activity:
Issuance of common stock for the acquisition of Invetech Company $ 63,374
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
<TABLE>
<CAPTION>
APPLIED INDUSTIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------------
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1998 (Unaudited)
and Year Ended June 30, 1998
(Thousands, except per share amounts )
Income Unearned Total
Shares of Additional Retained Treasury Restricted Share-
Common Stock Common Paid-in for Use in Shares Common Stock holders'
Outstanding Stock Capital the Business - at Cost Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 18,621 $ 10,000 $ 10,311 $ 216,496 $ (22,983) $ (950) $ 212,874
Net income 30,125 30,125
Cash dividends - $.47 per share (10,277) (10,277)
Purchase of common stock
for treasury (291) (8,148) (8,148)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 152 2,430 1,777 4,207
Exercise of stock options 103 610 1,179 1,789
Deferred compensation plans 28 450 288 738
Restricted common stock awards 201 3,560 2,005 (5,565)
Acquisition of Associated Bearings 123 1,770 1,491 3,261
Amortization of restricted common
stock compensation 360 1,586 1,946
Other (387) (387)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 22,102 10,000 82,865 235,957 (24,391) (4,929) 299,502
Net income 5,746 5,746
Cash dividends - $.24 per share (5,258) (5,258)
Purchase of common stock
for treasury (707) (11,565) (11,565)
Treasury shares issued for:
Retirement Savings Plan contributions 130 382 1,683 2,065
Exercise of stock options 63 (349) 839 490
Deferred compensation plans 11 51 142 193
Restricted common stock awards 19 (113) 239 (126)
Amortization of restricted common
stock compensation 515 515
Other (144) (144)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 21,618 $ 10,000 $ 82,836 $ 236,301 $ (33,053) $ (4,540) $ 291,544
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of December 31, 1998 and June 30, 1998, and the results of
operations for the three months ended and six months ended December 31,
1998 and 1997, and cash flows for the six months ended December 31,
1998 and 1997.
The results of operations for the three and six month periods ended
December 31, 1998 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are
made based on the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
The following is a computation of the basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME
Net income as reported in statements of
consolidated income $4,388 $7,714 $5,746 $12,211
===================================================
AVERAGE SHARES OUTSTANDING
Weighted average common shares outstanding for basic
computation 21,436 21,604 21,634 21,130
Dilutive effect of:
Stock options 93 357 112 353
Performance Accelerated
Restricted Stock (PARS) 8 55 9 51
---------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 21,537 22,016 21,755 21,534
===================================================
NET INCOME PER SHARE
Net income per common share - basic $0.20 $0.36 $0.27 $0.58
===================================================
Net income per common share - diluted $0.20 $0.35 $0.26 $0.57
===================================================
</TABLE>
6
<PAGE> 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
3. DEBT
During the quarter ended December 31, 1998, the Company replaced its
existing short-term lines of credit with a committed revolving credit
agreement with a five year term with a group of lending institutions.
This agreement provides for unsecured borrowings of up to $150,000 at
various interest rate options, none of which is in excess of the banks'
prime rate at interest determination dates. Borrowings under this
agreement totaled $42,000 at December 31, 1998. Fees on this facility
range from .12% to .40% per year on the average amount of the total
revolving credit commitments during the year. This facility enables the
Company to refinance short-term debt on a long-term basis. Accordingly,
the current portion of long-term borrowings intended to be refinanced
are classified as long-term debt. Unused lines under this facility
totaling $108,000 are available to fund future acquisitions or other
capital and operating requirements.
4. BUSINESS COMBINATIONS
During the six months ended December 31, 1998 the Company acquired
three distributors for a total purchase price of $12,300. Two of the
companies are distributors of bearings, mechanical and electrical drive
systems and industrial products. The third company is a distributor of
fluid power products. The acquisitions were accounted for as purchases
and their results of operations are included in the accompanying
consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material
for all periods presented. Goodwill recognized in connection with these
combinations are being amortized over periods of 15 to 20 years.
5. TREASURY SHARES
At December 31, 1998, 476 shares of the Company's common stock held as
treasury shares are restricted as collateral under escrow arrangements
relating to certain change in control and director and officer
indemnification agreements.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement
establishes standards for the reporting of financial information about
reportable segments in annual and interim financial statements. SFAS
No. 131 also requires disclosure of revenues from each group of
products and services, geographic areas and major customers. This
statement is effective for the June
7
<PAGE> 9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
30, 1999 financial statements. The Company has not completed its
evaluation of the impact SFAS No. 131 will have on its financial
statement disclosures.
Effective July 1, 1998, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Adoption of this SOP did not have a
material impact on the consolidated financial statements.
During the quarter ended September 30, 1998, the Company adopted the
Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Earned are Held in a
Rabbi Trust and Invested". All prior periods have been restated to
conform to the new presentation.
8
<PAGE> 10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is Management's Discussion and Analysis of certain significant
factors which have affected the Company's: (1) financial condition at December
31, 1998 and June 30, 1998, and (2) results of operations and cash flows during
the periods included in the accompanying Statements of Consolidated Income and
Consolidated Cash Flows.
FINANCIAL CONDITION
LIQUIDITY AND WORKING CAPITAL
Cash provided by operating activities was $43.8 million in the six months ended
December 31, 1998. This compares to $1.3 million provided by operating
activities in the same period a year ago.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. The Company has continuing programs to monitor
and control these investments. During the six month period ended December 31,
1998, inventories decreased approximately $5.1 million due to Company efforts to
reduce inventory levels. Accounts receivable decreased $19.6 million due to a
slowing of sales in comparison to the previous two quarters.
Cash used in investing activities was $7.9 million in the six months ended
December 31, 1998 as compared to $44.4 million for the period ended December 31,
1997. The primary reason for the decrease was the net cash paid for the Invetech
and other acquisitions in the prior year. Also contributing to the decrease were
lower property and equipment purchases of approximately $3.5 million.
The Company is building a new 160,000 square foot distribution center in the
city of Fontana, California, in the greater Los Angeles area. Construction is
expected to be completed by the end of the third quarter of fiscal 1999. This
build-to-suit facility will be leased by the Company under a 10 year lease which
is expected to be accounted for as an operating lease. The Company is planning
to move out of its current Corona Distribution Center and into the new facility
in March 1999 upon completion of the new facility.
Working capital at December 31, 1998 was $264.2 million compared to $221.8
million at June 30, 1998. This increase is primarily due to refinancing of
short-term debt and reclassification of other current obligations as long-term
debt as these borrowings are intended to be refinanced under the new revolving
credit facility.
CAPITAL RESOURCES
Capital resources are obtained from income retained in the business,
indebtedness under the Company's debt agreements, and operating lease
arrangements. Average combined short-term and long-term borrowing was $150.4 and
$107.9 million for the six months ended December 31, 1998 and 1997,
respectively. The weighted average interest rate on borrowings under revolving
9
<PAGE> 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
credit facilities for the six months ended December 31, 1998 decreased to 5.9%
from an average rate of 6.0% for the six months ended December 31, 1997.
In November 1998, the Company entered into a committed revolving credit
agreement with a five year term with a group of lending institutions. This
agreement provides for unsecured borrowings of up to $150 million. This facility
was used to pay down the current short term line of credit borrowings. The
Company had $42.0 million of borrowings outstanding under this facility at
December 31, 1998. Unused lines under this facility totaling $108.0 million are
available to fund future acquisitions or other capital and operating
requirements. In January 1999, the Company entered into an agreement with a
commercial bank for a $15 million short-term uncommitted line of credit.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs, stock option and
award programs, and future acquisitions. These purchases are made in open market
and negotiated transactions, from time to time, depending upon market
conditions. The Company acquired 707,000 shares of its common stock for $11.6
million during the six months ended December 31, 1998. The Company has remaining
authorization to acquire up to 776,000 shares of Company stock.
Management expects that capital resources provided from operations, available
lines of credit, and long-term debt and operating leases will be sufficient to
finance normal working capital needs, business acquisitions, enhancement of
facilities and equipment, and the purchase of additional Company common stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
YEAR 2000 READINESS DISCLOSURE
The Company's progress in completing its Year 2000 activities is overseen by an
executive task force made up of representatives from all key management areas.
The task force in turn reports to the audit committee of the Board of Directors.
Additionally, the Company has retained an outside Year 2000 consultant to
provide an independent assessment of the Company's Year 2000 compliance efforts.
The Company's plan for assessment, remediation, replacement and testing of those
of its internal computer systems affected by the Year 2000 issue is proceeding
on schedule. For business reasons, the Company's financial information systems
are being replaced with a new Year 2000-compliant system. Certain modules of the
new financial information system are already in use and the Company expects that
the complete system will be operating by early calendar year 1999. The Company's
OMNEX(R) inventory and sales information system and customer billing system have
been remediated and tested, and are now Year 2000-compliant. In addition, the
Company has completed its assessment and remediation, and is currently
conducting testing, of its other critical systems, including its corporate
information system. The Company expects to have completed testing of these
systems in early calendar year 1999.
10
<PAGE> 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Year 2000 issue also affects certain of the Company's non-critical computer
systems and equipment containing embedded technology. The Company has largely
completed its assessment of these non-critical systems, and remediation and
testing are scheduled to be completed by various dates before the end of
calendar year 1999.
If the requisite changes to the Company's critical systems are not made or
completed in a timely manner, then the Year 2000 issue could have a material
adverse effect on the Company's business, financial condition, results of
operations, or cash flow. For example, the Company could be rendered unable to
process ordinary business transactions electronically. The Company's order
fulfillment process could be interrupted, leaving the Company unable to fulfill
commitments to customers. To reduce the risk of business interruption, the
Company is preparing contingency plans to operate its field locations without
computers. These plans are scheduled to be completed by various dates before the
end of calendar year 1999.
Nearly all of the products sold by the Company do not contain date logic. The
Company is attempting, through contacts with its product suppliers, to identify
any products sold by the Company that are susceptible to the Year 2000 issue.
The Company has sought written assurances from key product and service suppliers
as to their Year 2000 compliance plans. Follow-up interviews are being conducted
with those suppliers with whom the Company has the most significant
relationships. The Company will consider appropriate measures, including
substitution of suppliers, in the event that a supplier provides an inadequate
response. If the Company's suppliers or customers fail to achieve Year 2000
compliance in a timely manner, then the Year 2000 issue could have a material
adverse effect on the Company. For example, suppliers' failures to deliver
products to the Company due to the Year 2000 issue could render the Company
unable to fulfill commitments to customers unless those products or adequate
substitutes can be secured elsewhere. Customers affected by the Year 2000 issue
could reduce their volume of purchases from the Company or slow their payments
for products already delivered.
Despite its efforts, the Company will not be able to analyze fully the scope or
nature of the risk represented by the failure of third parties, including
suppliers and customers, to attain Year 2000 compliance. The Company expects,
however, that the actions described in this section will significantly reduce
the likelihood that the Year 2000 issue would have a material adverse effect on
the Company's business, financial condition, results of operations, or cash
flows.
Based on currently available information, the total cost of the Company's Year
2000 activities is not expected to be material to its financial condition or
results of operations. The Company further anticipates that its current
resources and sources of liquidity will be adequate to address the capital needs
arising from its specific Year 2000 issues.
11
<PAGE> 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended Six Months Ended
December 31 December 31
1998 and 1997 1998 and 1997
Amount Change Amount Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $2,772 0.8% $37,220 5.2%
Cost of sales 5,587 2.0% 33,838 6.4%
Selling,distribution and
administrative expenses 1,022 1.3% 12,255 7.7%
Operating income (3,837) (26.9%) (8,873) (36.9)%
Interest expense - net 770 35.6% 1,056 24.3%
Income before income taxes (4,607) (38.1)% (9,929) (50.3)%
Income taxes (1,281) (29.2)% (3,464) (46.1)%
Net income (3,326) (43.1)% (6,465) (52.9)%
Net income per share - diluted (.15) (42.9)% (.31) (54.4)%
</TABLE>
12
<PAGE> 14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------
The increase in net sales from the prior year related primarily to companies
acquired since December 1997. Gross profit as a percentage of sales decreased to
24.8% from 25.8%. This decrease primarily is due to lower discounts and
allowances from suppliers.
Selling, distribution and administrative expenses as a percent of sales,
increased slightly to 22.0% from 21.9%. This was primarily due to increased
goodwill amortization associated with the companies acquired since December
1997.
Interest expense-net for the quarter increased by 35.6% as compared to the prior
year primarily as a result of an increase in average borrowings relating to
acquisitions.
Income tax expense as a percentage of income before taxes was 41.4% in the
quarter ended December 31, 1998 and 36.2% in the quarter ended December 31,
1997. The increase is primarily due to an adjustment of tax liability accounts
from a resolution of certain tax contingencies in December 1997 and the effect
of higher nondeductible goodwill.
As a result of the above factors, net income decreased by 43.1% compared to the
same quarter of last year.
Six Months Ended December 31, 1998 and 1997
- -------------------------------------------
The increase in net sales from the prior year related primarily to the
acquisition of Invetech effective August 1, 1997 and other companies during
fiscal 1998. Gross profit as a percentage of sales decreased to 24.9% from
25.7%. This decrease primarily is due to lower discounts and allowances from
suppliers.
Selling, distribution and administrative expenses as a percent of sales,
increased to 22.9% from 22.3%. This was primarily due to the acquisition of
Invetech and other companies during fiscal 1998. Also contributing to the
increase were higher goodwill amortization, outside consulting and temporary
employment expenses. Additional increases during the period related to a pretax
restructuring and other special charges of $5.4 million for costs of branch
consolidation, downsizing and workforce reductions. This charge decreased net
income by $3.2 million, or $.14 per share. The prior year results included a
$4.0 million pretax restructuring charge that decreased net income by $2.4
million or $.11 per share associated with the acquisition of Invetech.
Interest expense-net for the quarter increased by 24.3% as compared to the prior
year primarily as a result of an increase in average borrowings.
Income tax expense as a percentage of income before taxes was 41.3% in the six
months ended December 31, 1998 and 38.1% in the six months ended December 31,
1997. The increase is
13
<PAGE> 15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
primarily due to an adjustment of tax liability accounts from a resolution of
certain tax contingencies 1997 and the effect of higher nondeductible goodwill.
As a result of the above factors, net income decreased by 52.9% compared to the
same quarter of last year.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
Management's Discussion and Analysis contains statements that are
forward-looking, as that term is defined by the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. All forward-looking
statements are based on current expectations regarding important risk factors.
Accordingly, actual results may differ materially from those expressed in the
forward-looking statements, and the making of such statements should not be
regarded as a representation by the Company or any other person that the results
expressed therein will be achieved.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions and other business opportunities; the
Company's ability to complete, in a timely manner and within cost estimates, its
Year 2000 project; changes in accounting policies and practices; the effect of
organizational changes within the Company; adverse results in significant
litigation matters; adverse state and federal regulation and legislation; and
the occurrence of extraordinary events (including prolonged labor disputes,
natural events and acts of God, fires, floods and accidents).
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
-----------------
(a) The Company incorporates by reference herein the description of the
case captioned WALTER R. REED, ET AL. V. METROPOLITAN LIFE INS. CO., ET
AL., 20th Judicial District Court for the Parish of West Feliciana,
Louisiana, Case No. 13,836, found in Item 3 "Pending Legal Proceedings"
contained in the Company's Form 10-K for the fiscal year ended June 30,
1998. In December 1998, the Company was dismissed without prejudice
from this case.
(b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several other product and employment-related lawsuits.
Based on circumstances presently known, the Company believes that these
cases are not material to its business or financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
At the Annual Meeting of Shareholders of the Company held on October
20, 1998, the Shareholders (i) elected William G. Bares, Dr. Roger D.
Blackwell, Russel B. Every, and John J. Kahl as Directors of Class II
for a term expiring in 2001, and (ii) ratified the appointment of
Deloitte & Touche LLP as the Company's independent auditors for the
fiscal year ending June 30, 1999. Substantially the same information
was previously reported in Part II, Item 5 "Other Information" of the
Company's Form 10-Q for the quarter ended September 30, 1998.
ITEM 5. Other Information.
-----------------
David L. Pugh was elected the Company's President and Chief Operating
Officer as of January 1, 1999.
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
---------
Exhibit No. Description
----------- -----------
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc. (filed as Exhibit
3(a) to the Company's Form 10-Q for the
quarter ended September 30, 1998, SEC
File No. 1-2299, and incorporated here
by reference).
15
<PAGE> 17
3(b) Code of Regulations of Applied
Industrial Technologies, Inc.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(a) Certificate of Merger of Bearings,
Inc. (Ohio) and Bearings, Inc.
(Delaware) filed with the Ohio
Secretary of State on October 18,
1988, including an Agreement and
Plan of Reorganization dated
September 6, 1988 (filed as Exhibit
4(a) to the Company's Registration
Statement on Form S-4 filed May 23,
1997, Registration No. 333-27801,
and incorporated here by reference).
4(b) $80,000,000 Maximum Aggregate
Principal Amount Note Purchase and
Private Shelf Facility dated October
31, 1992 between the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company's Registration Statement
on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and
incorporated here by reference).
4(c) Amendment to $80,000,000 Maximum
Aggregate Principal Amount Note
Purchase and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996,
SEC File No. 1-2299, and
incorporated here by reference).
4(d) $50,000,000 Private Shelf Agreement
dated as of November 27, 1996, as
amended on January 30, 1998, between
the Company and The Prudential
Insurance Company of America (filed
as Exhibit 4(f) to the Company's
Form 10-Q for the quarter ended
March 31, 1998, SEC File No. 1-2299,
and incorporated here by reference).
4(e) $150,000,000 Credit Agreement dated
as of November 5, 1998 among the
Company, KeyBank National
Association as Agent, and various
financial institutions (filed as
Exhibit 4(e) to the Company's Form
10-Q for the quarter ended
16
<PAGE> 18
September 30, 1998, SEC File No.
1-2299, and incorporated here by
reference).
4(f) Rights Agreement, dated as of
February 2, 1998, between the
Company and Harris Trust and Savings
Bank, as Rights Agent, which
includes as Exhibit B thereto the
Form of Rights Certificate (filed as
Exhibit No. 1 to the Company's
Registration Statement on Form 8-A
filed July 20, 1998, SEC File No.
1-2299, and incorporated here by
reference).
10(a) First Amendment to the Supplemental
Executive Retirement Benefits Plan
effective as of August 5, 1998.
10(b) Employment Agreement dated December
21, 1998 between David L. Pugh and
the Company.
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended December 31, 1998.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: February 12, 1999 By: /s/ John C. Dannemiller
-----------------------------
John C. Dannemiller
Chairman & Chief Executive Officer
Date: February 12, 1999 By: /s/ John R. Whitten
-------------------------
John R. Whitten
Vice President-Chief Financial Officer
& Treasurer
17
<PAGE> 19
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998
EXHIBIT NO. DESCRIPTION PAGE
3(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc. (filed as Exhibit
3(a) to the Company's Form 10-Q for
the quarter ended September 30,
1998, SEC File No. 1-2299, and
incorporated here by reference).
3(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6,
1988 (filed as Exhibit 3(b) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(a) Certificate of Merger of Bearings, Inc.
(Ohio) and Bearings, Inc. (Delaware) filed
with the Ohio Secretary of State on October
18, 1988, including an Agreement and Plan of
Reorganization dated September 6, 1988
(filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(b) $80,000,000 Maximum Aggregate Principal Amount Note
Purchase and Private Shelf Facility dated October 31,
1992 between the Company and The Prudential Insurance
Company of America (filed as Exhibit 4(b) to the Company's
Registration Statement on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and incorporated here by
reference).
4(c) Amendment to $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf Facility dated
October 31, 1992 between the Company and The Prudential
Insurance Company of America (filed as Exhibit 4(g) to the
Company's Form 10-Q for the quarter ended March 31, 1996,
<PAGE> 20
SEC File No. 1-2299, and incorporated here by reference).
4(d) $50,000,000 Private Shelf Agreement dated as of
November 27, 1996, as amended on January 30, 1998,
between the Company and The Prudential Insurance
Company of America (filed as Exhibit 4(f) to the
Company's Form 10-Q for the quarter ended March
31, 1998, SEC File No. 1-2299, and incorporated
here by reference).
4(e) $150,000,000 Credit Agreement dated as of November
5, 1998 among the Company, KeyBank National
Association as Agent, and various financial
institutions (filed as Exhibit 4(e) to the
Company's Form 10-Q for the quarter ended
September 30, 1998, SEC File No. 1-2299, and
incorporated here by reference).
4(f) Rights Agreement, dated as of February 2, 1998,
between the Company and Harris Trust and Savings
Bank, as Rights Agent, which includes as Exhibit B
thereto the Form of Rights Certificate (filed as
Exhibit No. 1 to the Company's Registration
Statement on Form 8-A filed July 20, 1998, SEC
File No. 1-2299, and incorporated here by
reference).
10(a) First Amendment to the Supplemental Executive Attached
Retirement Benefits Plan effective as of
August 5, 1998.
10(b) Employment Agreement dated December 21, 1998 Attached
between David L. Pugh and the Company.
27 Financial Data Schedule. Attached
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.A
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10(A)
<TEXT>
<PAGE> 1
FIRST AMENDMENT
TO THE
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(JULY 1, 1997 RESTATEMENT)
WHEREAS, the Applied Industrial Technologies, Inc. Supplemental
Executive Retirement Plan (formerly known as the Bearings, Inc. Supplemental
Executive Retirement Plan and hereinafter referred to as the "Plan") was
established on January 21, 1988, by Applied Industrial Technologies, Inc.
(formerly known as Bearings, Inc. and hereinafter referred to as the "Company")
to provide supplemental retirement benefits for certain key executives of the
Company; and
WHEREAS, effective as of July 1, 1997, the Plan was amended and
restated; and
WHEREAS, the Company desires to amend certain distribution provisions
of the Plan;
NOW, THEREFORE, effective as of August 5, 1998, the Plan is hereby
amended in the respects hereinafter set forth.
1. Section 1.1 of the Plan is hereby amended by the addition of a
Paragraph (16) at the end thereof to provide as follows:
(16) The term "POTENTIAL CHANGE OF CONTROL" shall mean the
occurrence of either of the following events:
(i) any "person" becomes the "beneficial owner"
(as those terms are defined by the
Securities Exchange Act of 1934), directly
or indirectly, of Company securities
representing 15% or more of the combined
voting power of then outstanding securities
of the Company; or
(ii) any person publicly announces an intention
to take or to consider taking actions which,
if consummated, would constitute a Change of
Control.
2. Section 7.3 of the Plan is hereby amended to provide as follows:
7.3 PAYMENT OF BENEFITS UPON A CHANGE IN CONTROL. Except as
otherwise provided in this Section 7.3 any monthly supplemental
retirement benefit which is calculated under Section 7.2 and which
is payable to an eligible Participant shall not be paid in a
monthly annuity form but instead shall be paid in a single sum
<PAGE> 2
determined using the actuarial factors and interest rate set forth
in Section 11.7, unless such Participant elects (i) during the
30-day period after a Potential Change of Control, or (ii) prior
to the occurrence of a Change of Control, whichever occurs
earlier, to receive, after his termination of employment with the
Company such monthly supplemental retirement benefits in one of
the optional payments forms described in Section 6.1 of the Plan.
Moreover, in the event of a Change of Control, each Participant
and each Contingent Annuitant of a deceased Participant, who is
receiving monthly supplemental retirement benefits under the Plan,
shall receive the actuarial present value of future payments of
such monthly benefits in a single sum determined pursuant to the
provisions of Section 11.7. Any such single sum payment payable
under this Section 7.3 shall be made to an eligible Participant or
an eligible Contingent Annuitant as soon as reasonably practicable
but in no event later than 60 days after such Change of Control.
Executed at Cleveland, Ohio this 21st day of December, 1998.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By: /s/ John R. Whitten
------------------------------------
Title: Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.B
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10(B)
<TEXT>
<PAGE> 1
December 21, 1998
Mr. David L. Pugh PERSONAL AND CONFIDENTIAL
2900 Hidden Lake Road
Mequon, Wisconsin 53092
Re: Offer of Employment; President & Chief Operating Officer
Dear David:
This letter sets forth the proposed terms of your employment with
Applied Industrial Technologies, Inc. ("Applied"), commencing effective January
1, 1999:
1. POSITION. Your title will be President & Chief Operating
Officer and you will report to me.
2. BASE SALARY. As is the case with all Applied officers,
compensation and benefits are set by the Board's Executive
Organization & Compensation Committee (the "Committee").
Under present procedures, annual base salary is reviewed in
October of each year, with changes effective November 1.
Your starting annual base salary will be $375,000.
3. 1999 MANAGEMENT INCENTIVE PLAN. You will be designated a
participant in the Management Incentive Plan for the fiscal
year ending June 30, 1999. The Management Incentive Plan
provides for incentive payments based on both Applied and
the officer achieving certain goals. The Committee and the
full Board of Directors set the goals at the beginning of
each fiscal year, with payments, if any, distributed in
August following the end of the year. If Applied fails to
achieve its corporate goals, there are no payments under
the Plan. Assuming the corporate goals are achieved, the
payout is based upon a formula. The target incentive
payment for each officer is a multiple of the salary
midpoint for the officer position as set by the Committee
and a target percentage assigned to the position.
For fiscal 1999, you and I will have Applied's corporate
goals (which were set in July) for our individual goals.
Your midpoint for fiscal 1999 will be $375,000 and the
target percentage assigned is 60%,
<PAGE> 2
Mr. David Pugh
Page 2
giving you a target incentive payment, if all target goals
are met, of $225,000 multiplied by a fraction, the
numerator of which is equal to the number of full months
during fiscal 1999 that you are an Applied employee and the
denominator of which is 12. The maximum payment, if the
maximum levels for all corporate and individual goals are
met, would be 150% of the target payment and the minimum
payment, if only the threshold levels for all goals are
met, would be 50% of the target payment. Your incentive
payment for fiscal 1999 is guaranteed to be at least
$100,000.
Under Applied's Deferred Compensation Plan (described in
greater detail in the "Overview of Executive Benefit
Programs," enclosed), you may defer your receipt of (and
payment of taxes on) all or a portion of your Management
Incentive Plan awards. If you defer at least 50% of an
annual Management Incentive Plan award and elect to have it
invested in Applied common stock, your Deferred
Compensation Plan account will be credited with 110% of
that deferred amount (i.e. a 10% kicker).
4. STOCK-BASED AWARDS. The Committee will grant you the
following stock-based awards under our 1997 Long-Term
Performance Plan promptly following the commencement of
your employment with Applied:
a. Stock Options. You will be awarded non-statutory
options to purchase 60,000 shares of Applied common
stock. The exercise price for the stock options will
be the fair market value of Applied common stock on
the date of grant. The options will become 25%
exercisable after the first year of continuous
employment following the date of grant and an
additional 25% for each year of continuous
employment thereafter. The option agreement term
will be 10 years. In addition, you will be paid cash
in the amount of the aggregate spread on the options
in the event of your termination following a change
in control of Applied under the circumstances
described in "Change in Control Agreement," below.
b. Restricted Stock. You will be awarded 40,000
restricted shares of Applied common stock. The
shares will become 25% vested after the first year
of continuous employment following the date of grant
and an additional 25% for each year of continuous
employment thereafter. The shares will bear transfer
restrictions for a period of two years following
vesting. In the event of a change in control, these
shares will become 100% vested and the transfer
restrictions will be removed.
<PAGE> 3
Mr. David Pugh
Page 3
c. Performance-Accelerated Restricted Stock. You will
be awarded 40,000 shares of Performance-Accelerated
Restricted Stock ("PARS") under the terms of a
standard PARS agreement. The PARS are restricted
shares of Applied common stock that will vest
automatically on August 7, 2003 assuming your
continuous employment through that date. The PARS
can vest at an earlier date, however, if Applied
achieves certain performance hurdles based on stock
price and annual pre-tax return on assets ("ROA").
Fifty percent of the PARS will vest on the
achievement of either an ROA of 13.5%, or a stock
price of $33.33 per share for 20 consecutive trading
days. The remaining 50% will vest on the achievement
of either an ROA of 17.5%, or a stock price of
$37.33 for 20 consecutive trading days. The shares
will become 100% vested in the event of a change in
control.
5. CHANGE IN CONTROL AGREEMENT. You will receive our standard
officer change-in-control agreement. This agreement
provides that if, within three years following a change in
control of Applied, your employment with Applied is
terminated either by you "for good cause" or by Applied
"without cause", then you will receive a severance payment
equal to three times your total compensation (base salary
plus the average of your three most recent years'
incentive pay), plus three years of continued benefits.
6. SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS PLAN ("SERP").
The Committee will name you a participant in the SERP. The
SERP provides a non-qualified straight life retirement
benefit at age 65 equal to 45% of the average of your
highest three years' total compensation (base salary plus
incentive), reduced by 1/20th for each year that the number
of your years of service with Applied is less than 20. The
SERP also provides that in the event of a change in
control, you are eligible to receive the present value
actuarial equivalent of your retirement benefit in a lump
sum. Your annual straight life benefit at age 65 will be
guaranteed to be at least $50,000. In addition, if, while
employed by Applied, you die prior to the end of your fifth
year of service with Applied, you shall be credited with
five years of service for purposes of the SERP. The SERP is
described in greater detail in the enclosed "Overview of
Executive Benefit Programs."
<PAGE> 4
Mr. David Pugh
Page 4
7. OTHER EXECUTIVE PLANS AND PROGRAMS. As an Applied officer,
you will be eligible to participate in the following
executive plans and programs:
a. Life Insurance Program;
b. Long-Term Disability Program; and,
c. Deferred Compensation Plan (also referenced above
under "Management Incentive Plan").
Each of these benefits is detailed in the "Overview of
Executive Benefit Programs." The plan descriptions set
forth in the overview are supplemented and qualified in
their entirety by the plans themselves.
8. VACATION. You will be eligible to take five weeks of
vacation time annually, which amount will be prorated for
fiscal 1999 based on the date you commence employment.
9. RELOCATION. It is understood that you will relocate to
Cleveland immediately following your acceptance of this
offer. You will receive our standard relocation package,
subject to our understanding that you are not using Cendant
Mobility in connection with the sale of your home. I have
enclosed a copy of our relocation policy for your review.
Applied will also reimburse you for your family's
reasonable temporary residence expenses until you find a
permanent residence; this reimbursement obligation will
not, however, extend to expenses incurred after May 1999.
10. AUTOMOBILE ALLOWANCE. You will receive an allowance for
your automobile. The current monthly allowance for your
position is $1,026.10.
11. PERQUISITES. In addition to the foregoing, you are eligible
to receive the following at Applied's expense:
a. Executive tax preparation services;
b. Membership dues for The Union Club and a country
club; and,
c. An annual physical examination.
For personal income tax purposes, the annual value of these
items will be included in your W-2 form.
<PAGE> 5
Mr. David Pugh
Page 5
12. OTHER ASSOCIATE BENEFITS. Normal benefits available to all
Applied employees include:
a. Health Insurance. We offer HMO and PPO options
administered by Aetna and dental coverage
administered by Jardine. Because you become eligible
for this benefit only after a 30-60 day waiting
period, Applied will reimburse you for interim COBRA
costs.
b. Retirement Savings Plan. Applied's section 401(k)
plan provides for compensation deferral and a
company match in Applied common stock with respect
to the first 6% of compensation deferred. A variety
of investment options are available. The company
match ranges from a minimum of 25% to a maximum of
100% per quarter based on Applied achieving certain
earnings hurdles set annually by the Board. An
additional 5% bonus match is made with respect to
officer contributions invested in the Applied Stock
Fund. Applied also makes annual profit sharing
contributions depending on Applied's profitability
during the previous fiscal year. The company match
and profit sharing contributions vest at the rate of
25% for each year of your employment with Applied.
c. Supplemental Defined Contribution Plan (the "Shadow
Plan"). Highly compensated associates are eligible
for the Shadow Plan, a non-qualified plan maintained
in conjunction with the Retirement Savings Plan. The
Shadow Plan provides you a vehicle for saving on a
tax-deferred basis even if the tax laws limit the
amount of contributions you can make to the
Retirement Savings Plan
I have enclosed a copy of our brochure, "Your Ticket to
Your 1998 Benefits," which provides additional information
about various plans available to our associates. The plan
descriptions set forth in this letter are supplemented and
qualified in their entirety by the materials contained in
the enclosed benefits materials and the plans themselves.
13. Your Covenants.
--------------
a. Noncompetition Covenant. During the two-year period
following the date of termination of any and all of
your relationships with Applied (other than as a
shareholder), including any and all relationships as
a director, officer or employee of Applied or its
affiliates, you covenant and agree that you will
not, directly or indirectly, with or through another
individual or organization, whether as a shareholder
(other than as the holder of less than 1%
<PAGE> 6
Mr. David Pugh
Page 6
of the outstanding shares of a publicly held
company), partner, member, director, officer,
employee, agent or consultant, or in any other
capacity, in competition with Applied or any of its
affiliates, anywhere within the United States,
Canada, or any other nation in which Applied or its
affiliates hereafter conducts business, (i)
distribute products that are the same or similar to
products now or hereafter sold, designed, or
distributed by Applied or any of its affiliates, or
(ii) provide services that are the same or similar
to services now or hereafter provided by Applied or
any of its affiliates. The foregoing clause "(ii)"
shall not, however, be deemed to prevent you from
being a shareholder, partner, member, director,
officer, employee, agent or consultant of any
organization whose primary operations are not in
direct competition with Applied or its affiliates so
long as the organization was not among the top 25
product suppliers to Applied and its affiliates (as
determined by the dollar volume of purchases from
the organization) during the fiscal year ending
prior to your termination.
b. Confidential Information. During the five-year
period following the date of termination of any and
all of your relationships with Applied (other than
as a shareholder), including any and all
relationships as a director, officer or employee of
Applied or its affiliates, you covenant and agree to
keep confidential and not disclose to others
information relating to Applied or any of its
affiliates, or their respective businesses,
including, but not limited to, information regarding
(i) customers or potential customers; (ii) vendors
or suppliers; (iii) pricing structure and profit
margins; (iv) business plans and strategies; (v)
employees and payroll policies; (vi) computer
systems; (vii) facilities or properties; and (viii)
other proprietary, confidential or secret
information relating to Applied or any of its
affiliates ("Confidential Information"). You shall
use all reasonable care to protect, and prevent
unauthorized disclosure of, any Confidential
Information unless such information (a) is now or
becomes generally known or available to the public
without any violation of this agreement; or (b) is
required to be disclosed by applicable law or court
or governmental order.
c. Remedies; Severability. You acknowledge that a
breach of your covenants in this Section 13 would
result in irreparable injury to Applied for which
monetary damages alone would not be an adequate
remedy. Therefore, you consent to the issuance of
injunctive relief in the event of a breach of your
covenants, in addition to any other remedies to
which Applied may be entitled at
<PAGE> 7
Mr. David Pugh
Page 7
law or in equity. In addition, if any provision of
this Section 13 or the application of any provision
to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, including
without limitation, as to time, geographic area, or
scope of activity, that provision shall be severable
from the other provisions of this Section and the
remainder of this Section and the application of
that provision to any other person or circumstance
shall not be affected, and the provision so held to
be invalid, unenforceable or otherwise illegal shall
be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid, and legal.
14. YOUR REPRESENTATIONS. You represent to Applied that (a)
entering into an employment relationship with Applied will
not violate any provision of or result in a breach under
any agreement to which you are a party or by which you are
bound; (b) you are not a party to, or bound by, any
agreement, understanding, covenant, policy, other
arrangement, or fiduciary obligation, that would affect or
limit your ability to provide services to, or to carry out
your responsibilities with Applied, including without
limitation any noncompetition, nonsolicitation, employment,
consulting or other agreement; and (c) you have not
retained, nor will you use in connection with your
employment with Applied, any proprietary or confidential
information of any previous employer or other person or
entity.
As with the other Applied officers, you will not have an
employment agreement assuring continued employment. Officers serve at the will
of our Board of Directors.
<PAGE> 8
Mr. David Pugh
Page 8
I hope the foregoing and the enclosures are useful to you in
understanding the program we are offering. We are all excited about the prospect
of having you as our President & Chief Operating Officer.
Please acknowledge your acceptance of our offer and your agreement
to the matters set forth in this letter by signing and returning the enclosed
extra copy of this letter. If you have any questions about the details of our
compensation plans, please call Bob Stinson, our Vice President-Chief
Administrative Officer, General Counsel & Secretary, at 216-426-4510; or if I
can be of any further assistance, please call me.
Cordially,
/s/ John C. Dannemiller
-------------------------------------
John C. Dannemiller
Chairman, Chief Executive Officer
& President
Enclosures
I acknowledge and accept this offer to commence employment
effective January 1, 1999.
Date: December 21 , 1998 /s/ David L. Pugh
-------------------- -------------------------------------
David L. Pugh
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,808
<SECURITIES> 0
<RECEIVABLES> 189,971
<ALLOWANCES> 3,772
<INVENTORY> 187,581
<CURRENT-ASSETS> 396,534
<PP&E> 178,672
<DEPRECIATION> 68,414
<TOTAL-ASSETS> 585,379
<CURRENT-LIABILITIES> 132,296
<BONDS> 137,715
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 10,000
<OTHER-SE> 281,544
<TOTAL-LIABILITY-AND-EQUITY> 585,379
<SALES> 750,569
<TOTAL-REVENUES> 750,569
<CGS> 563,837
<TOTAL-COSTS> 563,837
<OTHER-EXPENSES> 171,533
<LOSS-PROVISION> 1,008
<INTEREST-EXPENSE> 5,407
<INCOME-PRETAX> 9,792
<INCOME-TAX> 4,046
<INCOME-CONTINUING> 5,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,746
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
</TEXT>
</DOCUMENT>
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|
1999 | 0QTR1
| AMAT | https://www.sec.gov/Archives/edgar/data/6951/0000006951-99-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000006951-99-000004.txt : 19990310
<SEC-HEADER>0000006951-99-000004.hdr.sgml : 19990310
ACCESSION NUMBER: 0000006951-99-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19990131
FILED AS OF DATE: 19990309
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: APPLIED MATERIALS INC /DE
CENTRAL INDEX KEY: 0000006951
STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559]
IRS NUMBER: 941655526
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1026
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-06920
FILM NUMBER: 99560617
BUSINESS ADDRESS:
STREET 1: 2881 SCOTT BLVD
CITY: SANTA CLARA
STATE: CA
ZIP: 95050
BUSINESS PHONE: 4085632682
MAIL ADDRESS:
STREET 1: 2881 SCOTT BLVD
CITY: SANTA CLARA
STATE: CA
ZIP: 95050
FORMER COMPANY:
FORMER CONFORMED NAME: APPLIED MATERIALS TECHNOLOGY INC
DATE OF NAME CHANGE: 19730319
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR PERIOD ENDED JANUARY 31, 1999
<TEXT>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-6920
APPLIED MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1655526
-------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054-3299
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 727-5555
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].
Number of shares outstanding of the issuer's common stock as of
January 31, 1999: 372,974,320
===============================================================================
<PAGE>
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
(In thousands, except per Jan. 25, Jan. 31,
share amounts) 1998 1999
- ---------------------------------- ------------ ------------
<S> <C> <C>
Net sales.......................... $1,307,685 $742,477
Cost of products sold.............. 678,244 421,374
------------ ------------
Gross margin....................... 629,441 321,103
Operating expenses:
Research, development and
engineering................... 182,329 141,207
Marketing and selling........... 86,389 70,733
General and administrative...... 65,768 61,594
Non-recurring items ............ 32,227 5,000
------------ ------------
Income from operations............. 262,728 42,569
Income from litigation settlements. 80,000 20,000
Interest expense................... 11,864 11,470
Interest income.................... 21,279 25,546
------------ ------------
Income before taxes................ 352,143 76,645
Provision for income taxes......... 123,250 23,760
------------ ------------
Net income......................... $228,893 $52,885
============ ============
Earnings per share:
Basic........................... $0.62 $0.14
Diluted......................... $0.60 $0.14
Weighted average number of shares:
Basic........................... 366,894 370,530
Diluted......................... 379,101 388,233
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
<TABLE>
<CAPTION>
Oct. 25, Jan. 31,
(In thousands) 1998 1999
- -------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $575,205 $562,401
Short-term investments........................ 1,188,351 1,361,912
Accounts receivable, net...................... 764,472 671,319
Inventories................................... 555,881 552,779
Deferred income taxes......................... 337,906 338,217
Other current assets.......................... 97,140 110,911
------------ ------------
Total current assets............................. 3,518,955 3,597,539
Property, plant and equipment, net............... 1,261,520 1,226,701
Other assets..................................... 149,217 136,497
------------ ------------
Total assets..................................... $4,929,692 $4,960,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................. $644 $ --
Current portion of long-term debt............. 7,367 7,652
Accounts payable and accrued expenses......... 1,041,341 876,618
Income taxes payable.......................... 68,974 158,689
------------ ------------
Total current liabilities........................ 1,118,326 1,042,959
Long-term debt................................... 616,572 616,902
Deferred income taxes and other liabilities...... 74,173 80,761
------------ ------------
Total liabilities................................ 1,809,071 1,740,622
------------ ------------
Stockholders' equity:
Common stock.................................. 3,679 3,730
Additional paid-in capital.................... 792,145 842,664
Retained earnings............................. 2,328,940 2,381,825
Accumulated other comprehensive income........ (4,143) (8,104)
------------ ------------
Total stockholders' equity....................... 3,120,621 3,220,115
------------ ------------
Total liabilities and stockholders' equity....... $4,929,692 $4,960,737
============ ============
</TABLE>
* Amounts as of January 31, 1999 are unaudited. Amounts as of October 25, 1998
are from the October 25, 1998 audited financial statements.
See accompanying notes to consolidated condensed financial statements.
<PAGE>
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
Jan. 25, Jan. 31,
(In thousands) 1998 1999
- --------------------------------------------------- ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $228,893 $52,885
Adjustments required to reconcile net income
to cash provided by operations:
Acquired in-process research and
development expense.......................... 32,227 --
Depreciation and amortization................. 66,889 70,788
Deferred income taxes......................... (383) 92
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable........................ (77,545) 104,530
Inventories................................ (65,223) 3,702
Other current assets....................... (74,662) (7,750)
Other assets............................... (1,572) 9,081
Accounts payable and accrued expenses...... (47,182) (171,883)
Income taxes payable....................... 33,332 86,847
Other liabilities.......................... 8,437 3,904
------------ ------------
Cash provided by operations....................... 103,211 152,196
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of retirements........ (152,636) (39,267)
Cash paid for licensed technology............... (32,227) --
Proceeds from sales of short-term investments... 252,429 194,831
Purchases of short-term investments............. (228,030) (368,392)
------------ ------------
Cash used for investing........................... (160,464) (212,828)
------------ ------------
Cash flows from financing activities:
Short-term debt activity, net................... (1,943) (2,699)
Long-term debt activity, net.................... (1,399) (2,183)
Common stock transactions, net.................. (58,331) 52,130
------------ ------------
Cash provided by/(used for) financing............. (61,673) 47,248
------------ ------------
Effect of exchange rate changes on cash........... (804) 580
------------ ------------
Decrease in cash and cash equivalents............. (119,730) (12,804)
Cash and cash equivalents - beginning of period... 448,043 575,205
------------ ------------
Cash and cash equivalents - end of period......... $328,313 $562,401
============ ============
</TABLE>
For the three months ended January 25, 1998, cash payments for interest and
income taxes were $870 and $86,300, respectively. For the three months ended
January 31, 1999, cash payments for interest were $1,392 and net income tax
refunds were $63,787.
See accompanying notes to consolidated condensed financial statements.
<PAGE>
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED JANUARY 31, 1999
1) Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements of Applied Materials, Inc. (the Company)
included herein have been prepared on a consistent basis with the
October 25, 1998 audited consolidated financial statements and
include all material adjustments, consisting of normal recurring
adjustments, necessary to fairly present the information set forth
therein. These interim consolidated financial statements should
be read in conjunction with the October 25, 1998 audited
consolidated financial statements and notes thereto. The
Company's results of operations for the three months ended January
31, 1999 are not necessarily indicative of future operating
results.
The Company's fiscal year ends on the last Sunday in October of
each year. Fiscal 1998 contained 52 weeks, whereas fiscal 1999
will contain 53 weeks. The extra week in 1999 is in the first
fiscal quarter.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ materially from those estimates.
2) Earnings Per Share
The Company calculates earnings per share according to the
provisions of Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share." Basic earnings per share is
determined using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is
determined using the weighted average number of common shares and
equivalents (representing the dilutive effect of stock options)
outstanding during the period. For purposes of computing basic
and diluted earnings per share, SFAS 128 does not require the
Company's net income to be adjusted for any period presented.
For purposes of computing diluted earnings per share, weighted
average common share equivalents do not include stock options with
an exercise price that exceeds the average fair market value of
the Company's common stock for the period. For the three months
ended January 25, 1998, options to purchase approximately
1,999,000 shares of common stock at an average price of $41.14
were excluded from the computation, and for the three months ended
January 31, 1999, options to purchase approximately 681,000 shares
of common stock at an average price of $48.93 were excluded from
the computation.
3) Inventories
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis. The components
of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
October 25, January 31,
1998 1999
------------ ------------
<S> <C> <C>
Customer service spares............ $239,139 $229,627
Raw materials...................... 98,180 85,540
Work-in-process.................... 126,533 149,218
Finished goods..................... 92,029 88,394
------------ ------------
$555,881 $552,779
============ ============
</TABLE>
4) Other Assets
The components of other assets are as follows (in thousands):
<TABLE>
<CAPTION>
October 25, January 31,
1998 1999
------------ ------------
<S> <C> <C>
Purchased technology, net.......... $91,218 $87,519
Goodwill, net...................... 11,614 11,111
Other.............................. 46,385 37,867
------------ ------------
$149,217 $136,497
============ ============
</TABLE>
Purchased technology and goodwill are presented at cost, net of
accumulated amortization, and are being amortized over their
estimated useful lives of eight years using the straight-line
method. The Company periodically analyzes these assets to
determine whether an impairment in carrying value has occurred.
5) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as
follows (in thousands):
<TABLE>
<CAPTION>
October 25, January 31,
1998 1999
------------ ------------
<S> <C> <C>
Accounts payable................... $182,616 $203,896
Compensation and benefits.......... 185,391 127,097
Installation and warranty.......... 179,742 161,833
Restructuring...................... 91,781 41,160
Other.............................. 401,811 342,632
------------ ------------
$1,041,341 $876,618
============ ============
</TABLE>
6) Accrued Restructuring Costs
Restructuring activity during the first fiscal quarter of 1999 was as
follows (in thousands):
<TABLE>
<CAPTION>
Severance
and
Benefits Facilities Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, October 25, 1998.......... $35,286 $56,495 $91,781
Amount utilized.................... (27,792) (22,829) (50,621)
------------ ------------ ------------
Balance, January 31, 1999.......... $7,494 $33,666 $41,160
============ ============ ============
</TABLE>
During the first fiscal quarter of 1999, $34 million of cash was
used for restructuring costs. The majority of the remaining cash
outlays of $29 million is expected to occur before the end of
fiscal 1999. The remaining non-cash restructuring costs of $12
million relate primarily to asset write-offs.
7) Acquisition
On October 12, 1998, the Company announced that it had entered
into an agreement to acquire Consilium, Inc. (Consilium), a
leading independent supplier of integrated semiconductor and
electronics manufacturing execution systems software and services,
in a stock-for-stock merger. The acquisition was consummated on
December 11, 1998 and has been accounted for as a pooling of
interests. The Company issued 1.7 million shares of its common
stock to complete this transaction. Since Consilium's historical
financial position and results of operations are not material in
relation to the Company's historical financial position and
results of operations, the Company's prior period financial
statements have not been restated. Except for one-time
transaction costs of $5 million, the acquisition did not have a
material effect on the Company's results of operations for the
first fiscal quarter of 1999.
8) Licensed Technology
During the first fiscal quarter of 1998, the Company entered into
an agreement with Trikon Technologies, Inc. for a non-exclusive,
worldwide, perpetual license of MORI(tm) plasma source and Forcefill(tm)
deposition technology. Because the development of this technology
had not yet reached technological feasibility at the time of its
acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired
in-process research and development expense at the time of its
acquisition.
9) Litigation Settlement
During the first fiscal quarter of 1998, the Company settled all
outstanding litigation with ASM International, N.V. (ASMI). As a
result of this settlement, the Company received a convertible note
for $80 million, against which $15 million was collected in
November 1997.
During the fourth fiscal quarter of 1998, the Company determined,
based on facts and circumstances known at the time, that
collection of the remaining note balance was doubtful and recorded
a $65 million pre-tax, non-operating charge to fully reserve the
outstanding note balance.
During the first fiscal quarter of 1999, and subsequent to the
original maturity date of the note, the Company received a $20
million payment from ASMI and recorded the amount as pre-tax, non-
operating income. ASMI's payment was made in accordance with a
restructuring of ASMI's obligations under the November 1997
litigation settlement agreement. Pursuant to the new agreement,
ASMI agreed to pay $20 million upon completion of the
restructuring, $10 million on November 2, 1999 and $35 million no
later than November 2, 2000. The Company will recognize non-
operating income related to the remaining balance of the note
receivable on a cash receipts basis going forward. Certain other
obligations of ASMI were also modified under the new agreement;
however, these modifications are not expected to be material to
the Company's financial condition or results of operations.
Royalties received from ASMI pursuant to the settlement agreement
have not been, and are not expected to be, material.
10) Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income," in the
first fiscal quarter of 1999. SFAS 130 establishes new rules for
the reporting and display of comprehensive income and its
components, but does not impact net income or total stockholders'
equity. The components of comprehensive income, on an after-tax
basis, are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
January 25, January 31,
1998 1999
------------ ------------
<S> <C> <C>
Net income......................... $228,893 $52,885
Foreign currency translation
adjustments...................... (8,649) (3,961)
------------ ------------
Comprehensive income............... $220,244 $48,924
============ ============
</TABLE>
Accumulated other comprehensive income presented in the
accompanying consolidated condensed balance sheets consists
entirely of accumulated foreign currency translation adjustments.
11) Subsequent Event
In February 1999, the Company announced that it had reached a
settlement of patent litigation with STEAG AST Elektronik GmbH and
its subsidiary STEAG AST Elektronik USA, Inc. (collectively
"AST"). Under the settlement, patent suits and countersuits
concerning rapid thermal processing (RTP) technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected
to have a material effect on the Company's financial condition or
results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical statements, this Quarterly Report on Form
10-Q contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those stated or implied. Forward-looking
statements are those that use the words "expects," "estimates,"
"will," "may," "anticipates," "believes" or similar
expressions. These forward-looking statements reflect management's
opinions only as of the date hereof, and Applied Materials, Inc.
(the Company) assumes no obligation to update this information.
Risks and uncertainties include, but are not limited to, those
discussed below and in the section entitled "Trends, Risks and
Uncertainties." Other risks and uncertainties are disclosed in
the Company's prior SEC filings, including the Annual Report on
Form 10-K for the fiscal year ended October 25, 1998.
Results of Operations
There continues to be uncertainty regarding global economies,
demand for semiconductors, advanced technology requirements and the
stability of memory device prices; therefore, for these and other
reasons, the Company's results of operations for the three months
ended January 31, 1999 are not necessarily indicative of future
operating results.
New Orders and Backlog
The Company received new orders of $1.0 billion for the first
fiscal quarter of 1999, versus $684 million for the fourth fiscal
quarter of 1998 and $1.3 billion for the first fiscal quarter of
1998. New orders improved from the fourth fiscal quarter of 1998
primarily due to higher Dynamic Random Access Memory (DRAM) prices
and continued customer migration to advanced technologies. The
decrease in new orders from the first fiscal quarter of 1998 is
primarily the result of a lower level of capacity investments by
semiconductor manufacturers.
<PAGE>
New orders by region were as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
October 25, 1998 January 31, 1999
---------------- ----------------
($) (%) ($) (%)
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America*..................... 357 52 391 38
Europe............................. 83 12 178 17
Japan.............................. 115 17 206 20
Korea.............................. 34 5 64 6
Taiwan............................. 49 7 142 14
Asia-Pacific....................... 46 7 48 5
------- ------- ------- -------
Total.............................. 684 100 1,029 100
======= ======= ======= =======
</TABLE>
*Primarily the United States
The Company's backlog at January 31, 1999 was $1.2 billion, versus
$917 million at October 25, 1998 and $1.6 billion at January 25,
1998.
Net Sales
The Company's net sales for the first fiscal quarter of 1999
increased 10.3 percent from the fourth fiscal quarter of 1998 due
primarily to a stronger DRAM market, as discussed above. Net sales
for the first fiscal quarter of 1999 decreased 43.2 percent from
the corresponding period of fiscal 1998, reflecting the lower order
levels achieved during the industry downturn in the second half of
fiscal 1998. For the first fiscal quarter of 1998, the Company
achieved record net sales of $1.3 billion, driven by strengthening
demand for 0.25 micron and below leading-edge capability from logic
device manufacturers, foundry capacity investments by customers
located primarily in Taiwan and selected strategic investments by
DRAM manufacturers.
<PAGE>
Net sales by region were as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
January 25, January 31,
1998 1999
-------------- --------------
($) (%) ($) (%)
------- ------ ------- ------
<S> <C> <C> <C> <C>
North America*. 471 36 324 44
Europe......... 196 15 135 18
Japan.......... 222 17 121 16
Korea.......... 52 4 30 4
Taiwan......... 288 22 96 13
Asia-Pacific... 79 6 36 5
------- ------ ------- ------
Total......... 1,308 100 742 100
======= ====== ======= ======
</TABLE>
*Primarily the United States
Gross Margin
The Company's gross margin decreased from 48.1 percent for the
three month period ended January 25, 1998 to 43.2 percent for the
three month period ended January 31, 1999. The decrease in gross
margin was caused primarily by a decrease in business volume,
partially offset by the Company's efforts to improve efficiencies,
reduce cycle times and lower material costs.
Operating Expenses (Excluding Non-Recurring Items)
Excluding non-recurring items, operating expenses as a percentage
of net sales for the three months ended January 31, 1999 were 36.8
percent, versus 25.6 percent for the first fiscal quarter of 1998.
The increase as a percentage of net sales is primarily attributable
to lower business volume.
Non-Recurring Items
During the first fiscal quarter of 1998, the Company entered into
an agreement with Trikon Technologies, Inc. for a non-exclusive,
worldwide, perpetual license of MORI(tm) plasma source and Forcefill(tm)
deposition technology. Because the development of this technology
had not yet reached technological feasibility at the time of its
acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired
in-process research and development expense at the time of its
acquisition.
The Company's results of operations for the first fiscal quarter of
1999 include $5 million of pre-tax operating expenses incurred in
connection with the acquisition of Consilium, Inc., which was
completed on December 11, 1998 and has been accounted for as a
pooling of interests.
Litigation Settlements
During the first fiscal quarter of 1999, and subsequent to the
original maturity date of a note received in connection with the
November 1997 settlement of all outstanding litigation with ASM
International, N.V. (ASMI), the Company received a $20 million
payment from ASMI and recorded the amount as pre-tax, non-operating
income. Pursuant to a restructuring of the November 1997
settlement agreement, ASMI has also agreed to pay $10 million on
November 2, 1999 and $35 million no later than November 2, 2000.
The Company will recognize non-operating income related to the
remaining balance of the note receivable on a cash receipts basis
going forward. For further information, see Note 9 of Notes to
Consolidated Condensed Financial Statements.
Interest Expense
Interest expense remained relatively consistent with the prior
year, decreasing from $12 million for the three months ended
January 25, 1998 to $11 million for the three months ended January
31, 1999. The Company's outstanding weighted average interest-
bearing obligations and interest rates did not change significantly
from period to period.
Interest Income
Interest income increased from $21 million for the three months
ended January 25, 1998 to $26 million for the three months ended
January 31, 1999. The increase resulted primarily from higher
average cash, cash equivalents and short-term investment balances.
Provision for Income Taxes
The Company's effective income tax rate for the first fiscal quarter
of 1999 was 31 percent, versus 35 percent for the first fiscal
quarter of 1998. The reduced rate primarily reflects the
reinstatement of the federal research and development (R&D) tax
credit and favorable California income tax legislation with respect
to R&D and manufacturers investment tax credits.
Subsequent Event
In February 1999, the Company announced that it had reached a
settlement of patent litigation with STEAG AST Elektronik GmbH and
its subsidiary STEAG AST Elektronik USA, Inc. (collectively
"AST"). Under the settlement, patent suits and countersuits
concerning rapid thermal processing (RTP) technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected to
have a material effect on the Company's financial condition or
results of operations.
Foreign Currencies
Significant operations of the Company are conducted in foreign
currencies, primarily Japanese yen. Forward exchange and currency
option contracts are purchased to hedge certain existing firm
commitments and foreign currency denominated transactions expected
to occur during the next year. Gains and losses on these contracts
are recognized in income when the related transactions being hedged
are recognized. Because the effect of movements in currency
exchange rates on forward exchange and currency option contracts
generally offsets the related effect on the underlying items being
hedged, these financial instruments are not expected to subject the
Company to risks that would otherwise result from changes in
currency exchange rates. Net foreign currency gains and losses
were not material for the three months ended January 31, 1999 or
January 25, 1998.
Financial Condition, Liquidity and Capital Resources
The Company's financial condition at January 31, 1999 improved,
with a ratio of current assets to current liabilities of 3.4:1,
compared to 3.1:1 at October 25, 1998. The Company ended the
quarter with cash, cash equivalents and short-term investments of
$1.9 billion.
The Company generated $152 million of cash from operations during
the first three months of fiscal 1999. The primary sources of
cash from operations were net income (plus non-cash charges for
depreciation and amortization expense) of $124 million, a decrease
in accounts receivable of $105 million and an increase in income
taxes payable of $87 million. These sources were partially offset
by a decrease in accounts payable and accrued expenses of $172
million. During the first fiscal quarter of 1999, approximately
$159 million of trade notes and accounts receivable were sold at a
discount to financial institutions.
The Company used $213 million of cash for investing activities
during the first three months of fiscal 1999, primarily for net
purchases of property, plant and equipment ($39 million) and short-
term investments ($174 million).
The Company generated $47 million of cash from financing activities
during the first three months of fiscal 1999, primarily from stock
option exercises and stock sales to employees through a stock
purchase plan.
The Company is authorized to systematically repurchase shares of
its common stock in the open market to reduce the dilution
resulting from its stock-based employee benefit and incentive
plans. This authorization is effective until the March 2001 Annual
Meeting of Stockholders. The Company did not repurchase any shares
of its common stock during the three months ended January 31, 1999.
As of January 31, 1999, the Company's principal sources of
liquidity consisted of $1.9 billion of cash, cash equivalents and
short-term investments and approximately $600 million of available
credit facilities. In addition to cash and available credit
facilities, the Company may from time to time raise additional
capital in the debt and equity markets. The Company's liquidity is
affected by many factors, some of which are based on the normal
ongoing operations of the business, and others of which relate to
the uncertainties of global economies and the semiconductor and
semiconductor equipment industries. Although the Company's cash
requirements will fluctuate based on the timing and extent of these
factors, management believes that cash generated from operations,
together with the liquidity provided by existing cash balances and
borrowing capability, will be sufficient to satisfy the Company's
liquidity requirements for the next twelve months.
Acquisition
On October 12, 1998, the Company announced that it had entered into
an agreement to acquire Consilium, Inc. (Consilium), a leading
independent supplier of integrated semiconductor and electronics
manufacturing execution systems software and services, in a stock-
for-stock merger. The acquisition was consummated on December 11,
1998 and has been accounted for as a pooling of interests. The
Company issued 1.7 million shares of its common stock to complete
this transaction. Since Consilium's historical financial position
and results of operations are not material in relation to the
Company's historical financial position and results of operations,
the Company's prior period financial statements have not been
restated. Except for one-time transaction costs of $5 million, the
acquisition did not have a material effect on the Company's results
of operations for the first fiscal quarter of 1999.
Trends, Risks and Uncertainties
Industry Volatility
The semiconductor equipment industry has historically been cyclical
and subject to sudden changes in supply and demand. The timing,
length and severity of these cycles are difficult to predict.
During periods of reduced and declining demand, the Company must be
able to quickly and effectively align its cost structure with
prevailing market conditions, and motivate and retain key
employees. During periods of rapid growth, the Company must be
able to acquire and/or develop sufficient manufacturing capacity to
meet customer demand, and hire and assimilate a sufficient number
of qualified people. There can be no assurance that the Company
will be able to achieve these objectives in a timely manner during
these industry cycles.
DRAM Prices
The DRAM market improved during the first fiscal quarter of 1999 as
device prices reached a level that enabled semiconductor
manufacturers to increase capital spending. If DRAM pricing
deteriorates, demand for the Company's products could be materially
and adversely affected.
PC Demand
Further shifts in demand from more expensive, high-performance
products to lower-priced products (sub-$1,000 PCs), or lower
overall demand for PCs, could result in reduced profitability for,
and lower capital spending by, semiconductor manufacturers, which
could materially and adversely affect demand for the Company's
products.
Asian Economies
Although Asian economies have stabilized to some degree, the
Company remains cautious about macroeconomic developments in Japan
and China. These two countries are primarily responsible for the
overall financial health of the region and if their economies
remain stagnant or deteriorate further, the economies of other
countries, particularly those in Asia, could also be negatively
affected. This could have a material adverse effect on demand for
the Company's products.
Global Business
The Company sells systems and provides services to customers
located throughout the world. Managing global operations and sites
located throughout the world presents challenges associated with,
among other things, cultural diversities and organizational
alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause
capital equipment investment patterns to vary significantly from
period to period. Periodic economic downturns, trade balance
issues, political instability and fluctuations in interest and
currency exchange rates are all risks that could materially and
adversely affect global demand for the Company's products and
services.
Highly Competitive Industry and Rapid Technological Change
The Company operates in a highly competitive industry characterized
by increasingly rapid technological changes. The Company's
competitive advantage and future success depend on its ability to
develop new products and technologies, to develop new markets in
the semiconductor industry for its products and services, to
introduce new products to the marketplace on a timely basis, to
qualify new products with its customers, and to commence production
to meet customer demands.
New products and technologies include those for copper
interconnect, processing of 300mm wafers and production of 0.18
micron and below devices. The introduction of new products and
technologies grows increasingly complex over time. If the Company
does not develop and introduce new products and technologies in a
timely manner in response to changing market conditions or customer
requirements, its financial condition and results of operations
could be materially and adversely affected.
The Company seeks to develop new technologies from both internal
and external sources. As part of this effort, the Company may make
acquisitions of, or significant investments in, businesses with
complementary products, services and/or technologies. Acquisitions
involve numerous risks, including, but not limited to: difficulties
and increased costs in connection with integration of the
operations, technologies, and products of the acquired companies;
possible write-downs of impaired assets; diverting management's
attention; and the potential loss of key employees of the acquired
companies. The inability to effectively manage these risks could
materially and adversely affect the Company's business, financial
condition and results of operations.
Dependence Upon Key Suppliers
The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively "parts") for the manufacture and
support of its products. Although the Company makes reasonable
efforts to ensure that parts are available from multiple suppliers,
this is not always possible; accordingly, certain key parts may be
obtained from a single supplier or a limited group of suppliers.
These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from
the Company and/or a small group of other companies in the
semiconductor industry. The Company has sought, and will continue
to seek, to minimize the risk of production and service
interruptions and/or shortages of key parts by: 1) selecting and
qualifying alternative suppliers for key parts; 2) monitoring the
financial stability of key suppliers; and 3) maintaining
appropriate inventories of key parts. There can be no assurance
that the Company's results of operations will not be materially and
adversely affected if, in the future, the Company does not receive
sufficient parts to meet its requirements in a timely and cost-
effective manner.
Backlog
The Company's backlog increased from $917 million at October 25,
1998 to $1.2 billion at January 31, 1999. The Company schedules
production of its systems based upon order backlog and customer
commitments. Backlog includes only orders for which written
authorizations have been accepted and shipment dates within 12
months have been assigned. However, customers generally may delay
delivery of products or cancel orders. Due to possible customer
changes in delivery schedules and cancellation of orders, the
Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. A reduction
of backlog during any particular period could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Risks Related to "Year 2000" Compliance
The Company has established a Year 2000 Program Office to address
certain Year 2000 issues. This office focuses on four key
readiness programs: 1) Internal Infrastructure Readiness,
addressing internal hardware and software, including both
information technology and non-information technology systems; 2)
Supplier Readiness, addressing the preparedness of suppliers
providing material incorporated into the Company's products; 3)
Product Readiness, addressing product functionality; and 4)
Customer Readiness, addressing customer support and transactional
activity. For each readiness area, the Company is systematically
performing a global risk assessment, conducting testing and
remediation (renovation and implementation), developing contingency
plans to mitigate unknown risk, and communicating Year 2000
information to employees, suppliers, customers and other third
parties.
Internal Infrastructure Readiness Program
The Company, assisted by a third party, has completed an inventory
of internal applications and information technology hardware and has
commenced work on remediation strategies and testing. Readiness
activities are intended to encompass all major categories of
applications in use by the Company, including applications used for
manufacturing, engineering, sales, finance and human resources.
Approximately 70 percent of mission critical applications have
either been tested and determined to be Year 2000 ready or are
undergoing testing but are believed to be Year 2000 ready based upon
representations by the supplier of the application. All other
mission critical applications are in the process of remediation.
All software remediation is scheduled to be completed by July 1,
1999. The Year 2000 compliance evaluation of hardware, including
hubs, routers, telecommunication equipment, workstations and other
items, is complete, and corrective action is scheduled to be
completed by July 1, 1999. In addition to applications and
information technology hardware, the Company has assessed its
non-information technology systems, including embedded systems,
facilities and other operations, such as financial, banking,
security and utility systems. Remediation activity is underway and
scheduled for completion by July 1, 1999. A contingency plan
addressing issues related to the Company's internal infrastructure
will be developed when ongoing testing and remediation activities
are complete. Although the Company believes it is feasible to
complete its evaluation and remediation efforts according to its
current schedule, there can be no assurance that all such activities
will be completed on time, or that such efforts will be successful.
Supplier Readiness Program
This program focuses on minimizing two areas of risk associated with
suppliers: 1) a supplier's product integrity; and 2) a supplier's
business capability to continue providing products and services.
The Company has identified and contacted key suppliers regarding
their relative risks in these two areas. To date, the Company has
received responses from approximately 95 percent of its key
suppliers, most of which indicate that the products provided to the
Company are either Year 2000 compliant or will be made Year 2000
compliant before the year 2000. The responses also indicate that
most suppliers are in the process of developing or executing
remediation plans to address Year 2000 issues that may affect their
ability to continue providing products and services to the Company.
For key suppliers, the Company has entered into an agreement with an
external consultant to conduct onsite audits of the suppliers' Year
2000 readiness. These audits are scheduled to be completed by June
30, 1999. Based on the results of these audits and the Company's
assessment of each supplier's Year 2000 readiness, the Company will
develop a supplier action list and contingency plan for each
supplier at risk. However, no assurance can be provided regarding
the effect or timely implementation of such action list or
contingency plans, or that suppliers will sufficiently address their
Year 2000 issues to enable them to continue providing products and
services to the Company in a timely manner.
Product Readiness Program
This program focuses on identifying and resolving Year 2000 issues
existing in the Company's products. The program encompasses a
number of activities, including testing, evaluation, engineering and
manufacturing implementation. The Company has completed a Year 2000
readiness evaluation for its current generation of released products
based upon a series of industry-recognized testing scenarios.
In connection with the Company's Year 2000 readiness evaluation,
the Company focused on identifying Year 2000 issues in two major
categories: machine control software and product embedded
processors. The Company performed impact studies for each product,
based on a representative configuration. In addition, by focusing
on the Company's parts most likely to include embedded processors,
the Company narrowed the number of parts requiring further
evaluation from several thousand to approximately 600 that could
contain embedded processors that may present potential Year 2000
issues. These 600 parts were evaluated further and tested as
required.
The Company's evaluation indicated that no human or equipment
safety impacts or product process control impacts are expected due
to the Year 2000 problem, but that certain screen displays, log
files and interface programs may be affected. The Company has
taken corrective action to address these affected displays, files
and programs, and has remediated any affected embedded processors.
In addition, the Company has informed customers of certain
potential product-specific impacts of the Year 2000 on the
Company's products.
Testing and engineering activity for the Company's current
generation of products is complete, and unless otherwise requested
by a customer, all products that shipped on or after January 1,
1999 were Year 2000 ready. However, the Company plans to make a
contingency team available to address issues related to product
readiness as a component of its Customer Readiness Program
discussed below. There can be no assurance that product testing
has identified all Year 2000 related issues or that the Company
will effectively address every failure of its products resulting
from Year 2000 issues.
Customer Readiness Program
This program focuses on customer support issues, including the
coordination of retrofit activity, testing existing customer
electronic transaction capability, and providing other services to
the Company's customers. The Company, in cooperation with its
customers, has completed an inventory and assessment of products in
use at substantially all of its customers' sites. The Company is
offering different upgrade packages for its products, including
various parts, software and services in the form of "Year 2000 ready
kits." For any customer requesting an upgrade to a system that
shipped after January 1, 1997, the upgrade is scheduled to be
completed by June 30, 1999. For systems that shipped prior to
January 1, 1997, the upgrade schedule is determined by customer
requirements. The Customer Readiness Program plans to make a
contingency team available, through the year 2000, to customers
experiencing difficulty with the Company's products. There can be no
assurance, however, that these activities will prevent or effectively
address the occurrence of Year 2000 related problems in the Company's
products in use at customer sites.
The Company estimates that total Year 2000 costs will range from
$30 million to $50 million, the majority of which will be incurred
by January 2000. To date, costs incurred directly for Year 2000
activities have totaled $6 million. This amount includes costs to
support customer satisfaction programs and services and other
internal costs, but does not include the cost of internal hardware
and software that was to be replaced in the normal course of
business but has been accelerated because of Year 2000 capability
concerns. The Company is continuing its assessments and developing
alternatives that will require changes to this estimate over time.
There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the programs described in
this section.
In conjunction with the Company's due diligence examination of
Consilium, which was acquired in December 1998, the Company
conducted a limited evaluation of Consilium's Year 2000 readiness.
Since then, the Company has further evaluated certain areas related
to Consilium's internal information technology and other systems,
and has discussed other readiness areas with the employees
responsible for Consilium's Year 2000 program. The Company is
currently evaluating Consilium's Year 2000 policies and programs
regarding their information technology and other systems, suppliers
and products, and is also integrating Consilium's policies and
programs into the Company's Year 2000 program. Until the Company
has completed its evaluation, there can be no assurances concerning
the Year 2000 readiness of Consilium's products and systems, the
probability that remediation efforts related to Consilium's
products and systems will be successful, or the materiality of the
costs of such assessment and remediation.
The programs described in this section are ongoing and, as such,
the Company may not yet have identified all potential Year 2000
complications. Therefore, at this time, the Company cannot
determine the potential impact of these complications and
contingencies on the Company's financial condition and results of
operations. If computer systems used by the Company or its
suppliers, or the software applications used in systems
manufactured and sold by the Company, fail or experience
significant difficulties related to the Year 2000, the Company's
financial condition and results of operations could be materially
and adversely affected.
Foreign Currency
Significant operations of the Company are conducted in foreign
currencies, primarily Japanese yen. The Company actively manages
its exposure to changes in currency exchange rates, but there can
be no assurance that future changes in currency exchange rates will
not have a material and adverse effect on the Company's financial
condition or results of operations.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union established fixed conversion rates between each of their
existing sovereign currencies and the Single European Currency (the
"euro"). The participating countries adopted the euro as their
common legal currency on that date, with a transition period
through January 1, 2002 regarding certain elements of the euro
change. In early January, the Company implemented changes to its
internal systems to make them euro capable. The cost of systems
modifications to date has not been material, nor are future systems
modifications expected to be material. The Company does not expect
the transition to, or use of, the euro to materially and adversely
affect its business, financial condition or results of operations.
Litigation
The Company is currently involved in litigation regarding patent
infringement, intellectual property rights, antitrust and other
matters (see Part II, Item 1) and could become involved in
additional litigation in the future. The Company from time to time
receives and makes inquiries regarding possible patent
infringement, and is subject to various other legal proceedings and
claims, either asserted or unasserted. Any such claims, whether
with or without merit, could be time-consuming and expensive to
defend and could divert management's attention and resources.
There can be no assurance regarding the outcome of current or
future litigation or patent infringement inquiries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has performed an analysis to assess the potential
effect of reasonably possible near-term changes in interest and
foreign currency exchange rates. The effect of such rate changes
is not expected to be material to the Company's cash flows,
financial condition or results of operations. Net foreign currency
gains and losses were not material for the three months ended
January 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
AST and AG
In April 1997, the Company initiated separate lawsuits against
STEAG AST Electronik GmbH and STEAG AST Electronik USA, Inc.
(collectively "AST"), and AG Associates, Inc. (AG) (case no. C-97-
20375-RMW) in the United States District Court for the Northern
District of California, alleging infringement of certain patents
concerning rapid thermal processing (RTP) technology. In October
1997, AST and AG each filed counterclaims against the Company
alleging patent infringement concerning related technology.
In February 1999, the Company announced that it had reached a
settlement of patent litigation with AST. Under the settlement,
patent suits and countersuits concerning RTP technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected to
have a material effect on the Company's financial condition or
results of operations.
Discovery in the case the Company brought against AG has commenced,
and trial has been set for September 1999. In August 1998, AG
filed two separate patent infringement lawsuits against the
Company, one in the United States District Court for the Northern
District of California (case no. C98-03044-WHO) and one in the
United States District Court for the District of Delaware (civil
action no. 98-479). On February 2, 1999, the Delaware District
Court issued an order transferring that case to the Northern
District of California. No trial dates have been set in these
actions. The Company continues to believe it has meritorious
claims and defenses against AG, and intends to pursue them
vigorously.
KLA
As a result of the Company's acquisition of Orbot Instruments, Ltd.
(Orbot), the Company is involved in a lawsuit captioned KLA
Instruments Corporation (KLA) v. Orbot (case no. C93-20886-JW) in
the United States District Court for the Northern District of
California. KLA alleges that Orbot infringes a patent regarding
equipment for the inspection of masks and reticles, and seeks an
injunction, damages and such other relief as the Court may find
appropriate. There has been limited discovery, but no trial date
has been set. Management believes it has meritorious defenses and
intends to pursue them vigorously.
Varian and Novellus
On June 13, 1997, the Company filed a lawsuit against Varian
Associates, Inc. (Varian) captioned Applied Materials, Inc. v.
Varian Associates, Inc. (case no. C-97-20523-RMW), alleging
infringement of several of the Company's patents concerning
physical vapor deposition (PVD) technology. The complaint was
later amended on July 7, 1997 to include Novellus Systems, Inc.
(Novellus) as a defendant as a result of Novellus' acquisition of
Varian's thin film systems PVD business. The Company seeks damages
for past infringement, a permanent injunction, treble damages for
willful infringement, pre-judgment interest and attorneys' fees.
Varian answered the complaint by denying all allegations,
counterclaiming for declaratory judgment of invalidity and
unenforceability and alleging conduct by the Company in violation
of antitrust laws. On June 23, 1997, Novellus filed a separate
lawsuit against the Company captioned Novellus Systems, Inc. v.
Applied Materials, Inc. (case no. C-97-20551-EAI), alleging
infringement by the Company of three patents concerning PVD
technology that were formerly owned by Varian. On July 8, 1997,
Varian filed a separate lawsuit against the Company captioned
Varian Associates, Inc. v. Applied Materials, Inc. (case no. C-97-
20597-PVT), alleging a broad range of conduct in violation of
federal antitrust laws and state unfair competition and business
practice laws. Discovery has commenced in these actions, but no
trial dates have been set. Management believes it has meritorious
claims and defenses and intends to pursue them vigorously.
OKI
In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed suit
against one of the Company's wholly-owned subsidiaries, Applied
Materials Japan (AMJ), in Tokyo District Court in Japan, alleging
that AMJ is obligated to indemnify OKI for a portion of patent
license royalties paid by OKI to Texas Instruments, Inc. Several
hearings have been held, but no trial date has been set.
Management believes it has meritorious defenses and intends to
pursue them vigorously.
The Company is subject to various other legal proceedings and
claims, either asserted or unasserted, that arise in the ordinary
course of business. Although the outcome of these claims cannot be
predicted with certainty, management does not believe that any of
these legal matters will have a material adverse effect on the
Company's financial condition or results of operations.
Item 5. Other Information
The ratio of earnings to fixed charges for the three months ended
January 25, 1998 and January 31, 1999, and for each of the last
five fiscal years, was as follows:
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year ----------------------
------------------------------------------------ Jan. 25, Jan. 31,
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ---------- ----------
<C> <C> <C> <C> <C> <S> <C>
13.37x 21.25x 20.14x 18.96x 6.92x 20.10x 5.26x
======== ======== ======== ======== ======== ========== ==========
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K:
3(ii)(a) Amendment to Bylaws dated September 4, 1998.
3(ii)(b) Bylaws of Applied Materials, Inc. (as amended to
September 4, 1998).
10.1 Applied Materials, Inc. Employees' Stock Purchase Plan
(as amended and restated December 10, 1998),
previously filed as Appendix A to the Company's
Definitive Proxy Statement dated February 22, 1999,
and incorporated herein by reference.
10.2 Amendment dated January 26, 1999 to Receivables
Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial
Services Corporation.
10.3 Receivables Purchase Agreement dated January 26, 1999
between Applied Materials, Inc. and Deutsche Financial
Services (UK) Limited.
27.0 Financial Data Schedule for the three months ended
January 31, 1999: filed electronically.
b) The Company did not file a report on Form 8-K during its
first fiscal quarter of 1999.
<PAGE>
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.
APPLIED MATERIALS, INC.
March 9, 1999 By: /s/ Joseph R. Bronson
------------------------------
Joseph R. Bronson
Senior Vice President,
Office of the President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
By: /s/ Michael K. O'Farrell
------------------------------
Michael K. O'Farrell
Vice President,
Global Controller and
Chief Accounting Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
<S> <C>
3.(ii)(a) Amendment to Bylaws dated September 4, 1998.
3.(ii)(b) Bylaws of Applied Materials, Inc. (as amended to
September 4, 1998).
10.1 Applied Materials, Inc. Employees' Stock Purchase Plan
(as amended and restated December 10, 1998),
previously filed as Appendix A to the Company's
Definitive Proxy Statement dated February 22, 1999,
and incorporated herein by reference.
10.2 Amendment dated January 26, 1999 to Receivables
Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial
Services Corporation.
10.3 Receivables Purchase Agreement dated January 26, 1999
between Applied Materials, Inc. and Deutsche Financial
Services (UK) Limited.
27.0 Financial Data Schedule for the three months ended
January 31, 1999: filed electronically.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(II)(A)
<SEQUENCE>2
<DESCRIPTION>AMENDMENT TO BYLAWS DATED SEPTEMBER 4, 1998.
<TEXT>
RESOLUTIONS OF THE
BOARD OF DIRECTORS OF
APPLIED MATERIALS, INC.
Adopted on September 4, 1998
EXHIBIT A
AMENDMENT TO BYLAWS - ADVANCE NOTICE
RESOLVED, that the first sentence of the first paragraph of
Section 2.5 of this Company's Bylaws be amended to read in full as follows:
"No nominations for director of the corporation by any person other than the
board of directors shall be presented to any meeting of stockholders unless
the person making the nomination is a record stockholder and shall have
delivered a written notice to the secretary of the corporation no later than
the close of business forty-five days prior to the month and day of mailing
the prior year's proxy statement."
RESOLVED, FURTHER, that the first sentence of the second paragraph
of Section 2.5 of this Company's Bylaws be amended to read in full as follows:
"No proposal by any person other than the board of directors shall be
submitted for the approval of the stockholders at any regular or special
meeting of the stockholders of the corporation unless the person advancing
such proposal shall have delivered a written notice to the secretary of the
corporation no later than the close of business forty-five days prior to the
month and day of mailing the prior year's proxy statement."
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(II)(B)
<SEQUENCE>3
<DESCRIPTION>BYLAWS
<TEXT>
BYLAWS
OF
APPLIED MATERIALS, INC.
(a Delaware corporation)
(As amended to September 4, 1998)
ARTICLE I OFFICES 1
1.1 Registered Office 1
1.2 Other Offices 1
ARTICLE II STOCKHOLDERS 1
2.1 Place of Meetings 1
2.2 Annual Meeting 1
2.3 Special Meeting 1
2.4 Notice of Stockholders' Meetings 2
2.5 Advance Notice of Stockholder Nominees 2
2.6 Manner of Giving Notice; Affidavit of Notice 2
2.7 Quorum 2
2.8 Adjourned Meeting; Notice 3
2.9 Conduct of Business 3
2.10 Voting 3
2.11 Waiver of Notice 3
2.12 Record Date for Stockholder Notice; Voting; Giving Consents 3
2.13 Proxies 4
ARTICLE III DIRECTORS 4
3.1 Powers 4
3.2 Number of Directors 4
3.3 Election, Qualification and Term of Office of Directors 4
3.4 Resignation and Vacancies 4
3.5 Place of Meetings; Meetings by Telephone 5
3.6 Regular Meetings 6
3.7 Special Meetings; Notice 6
3.8 Quorum 6
3.9 Waiver of Notice 6
3.10 Board Action by Written Consent Without a Meeting 7
3.11 Fees and Compensation of Directors 7
3.12 Approval of Loans to Officers 7
3.13 Removal of Directors 7
3.14 Chairman of the Board of Directors 7
ARTICLE IV COMMITTEES 7
4.1 Committees of Directors 7
4.2 Committee Minutes 8
4.3 Meetings and Action of Committees 8
ARTICLE V OFFICERS 8
5.1 Officers 8
5.2 Election of Officers 9
5.3 Appointed Officers 9
5.4 Removal and Resignation of Officers 9
5.5 Vacancies in Offices 9
5.6 Chairman of the Board 9
5.7 President 9
5.8 Senior Vice Presidents and Vice Presidents 9
5.9 Secretary 10
5.10 Chief Financial Officer 10
5.11 Representation of Shares of Other Corporations 10
5.12 Authority and Duties of Officers 10
ARTICLE VI RECORDS AND REPORTS 11
6.1 Maintenance and Inspection of Records 11
6.2 Inspection by Directors 11
ARTICLE VII GENERAL MATTERS 11
7.1 Execution of Corporate Contracts and Instruments 11
7.2 Stock Certificates; Partly Paid Shares 11
7.3 Special Designation on Certificates 12
7.4 Lost Certificates 12
7.5 Construction; Definitions 12
7.6 Dividends 13
7.7 Fiscal Year 13
7.8 Seal 13
ARTICLE VIII AMENDMENTS 13
8.1 Amendments 13
<PAGE>
BYLAWS
OF
APPLIED MATERIALS, INC.
ARTICLE I
OFFICES
.1 Registered Office. The registered office of the
corporation in the State of Delaware shall be Corporation Trust Center,
1209 Orange Street, in the City of Wilmington, County of New Castle. The
name of the registered agent of the corporation at such location is The
Corporation Trust Company.
.2 Other Offices. The corporation may also have offices at
such other places both within and without the State of Delaware as the
board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
STOCKHOLDERS
.1 Place of Meetings. Meetings of stockholders shall be
held at such place, either, within or without the State of Delaware, as
may be designated by the board of directors. In the absence of any such
designation, stockholders' meetings shall be held at the corporation's
principal executive offices.
.2 Annual Meeting. The annual meeting of stockholders shall
be held each year on a date and at a time designated by the board of
directors. At the meeting, directors shall be elected and any other
proper business may be transacted.
.3 Special Meeting. Special meetings of the stockholders
may be called at any time by the board of directors, or by the chairman
of the board, or by the president of the corporation.
If a special meeting is called by any person or persons other than
the board of directors, the request shall be in writing, specifying the
time of such meeting and the general nature of the business proposed to
be transacted, and shall be delivered personally or sent by registered
mail or by telegraphic or other facsimile transmission to the chairman of
the board, the president, any vice president, or the secretary of the
corporation. No business may be transacted at such special meeting
otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders
entitled to vote, in accordance with the provisions of Sections 4 and 5
of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than 35 nor more than
60 days after the receipt of the request. If the notice is not given
within 20 days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the
board of directors may be held.
.4 Notice of Stockholders' Meetings. All notices of
meetings with stockholders shall be in writing and shall be sent or
otherwise given in accordance with Section 2.5 of these bylaws not less
than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
.5 Advance Notice of Stockholder Nominees. No nominations
for director of the corporation by any person other than the board of
directors shall be presented to any meeting of stockholders unless the
person making the nomination is a record stockholder and shall have
delivered a written notice to the secretary of the corporation no later
than the close of business forty-five days prior to the month and day of
mailing the prior year's proxy statement. Such notice shall (i) set
forth the name and address of the person advancing such nomination and
the nominee, together with such information concerning the person making
the nomination and the nominee as would be required by the appropriate
Rules and Regulations of the Securities and Exchange Commission to be
included in a proxy statement soliciting proxies for the election of such
nominee, and (ii) shall include the duly executed written consent of such
nominee to serve as director if elected.
No proposal by any person other than the board of directors shall
be submitted for the approval of the stockholders at any regular or
special meeting of the stockholders of the corporation unless the person
advancing such proposal shall have delivered a written notice to the
secretary of the corporation no later than the close of business forty-
five days prior to the month and day of mailing the prior year's proxy
statement. Such notice shall set forth the name and address of the
person advancing the proposal, any material interest of such person in
the proposal, and such other information concerning the person making
such proposal and the proposal itself as would be required by the
appropriate Rules and Regulations of the Securities and Exchange
Commission to be included in a proxy statement soliciting proxies for the
proposal.
.6 Manner of Giving Notice; Affidavit of Notice. Written
notice of any meeting of stockholders, if mailed, is given when deposited
in the United States mail, postage prepaid, directed to the stockholder
at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer
agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
.7 Quorum. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided
by statute or by the certificate of incorporation. Except as otherwise
required by law, the certificate of incorporation or these bylaws, the
affirmative vote of the majority of such quorum shall be deemed the act
of the stockholders. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the
chairman of the meeting or (ii) the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present or represented.
At such adjourned meeting at which a quorum is present or represented,
any business may be transacted that might have been transacted at the
meeting as originally noticed.
.8 Adjourned Meeting; Notice. When a meeting is adjourned
to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken. At the adjourned meeting the corporation
may transact any business that might have been transacted at the original
meeting. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
.9 Conduct of Business. The chairman of any meeting of
stockholders shall determine the order of business and the procedure at
the meeting, including such regulation of the manner of voting and the
conduct of business.
.10 Voting. Except as may be otherwise provided in the
certificate of incorporation, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder. Voting
may be by voice or by ballot as the presiding officer of the meeting of
the stockholders shall determine. On a vote by ballot, each ballot shall
be signed by the stockholder voting, or by such stockholder's proxy, and
shall state the number of shares voted.
.11 Waiver of Notice. Whenever notice is required to be
given under any provision of the General Corporation Law of Delaware or
of the certificate of incorporation or these bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any regular
or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation
or these bylaws.
.12 Record Date for Stockholder Notice; Voting; Giving Consents.
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may
fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior
to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice
is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held.
(ii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which
the board of directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
.13 Proxies. Each stockholder entitled to vote at a meeting
of stockholders may authorize another person or persons to act for him by
a written proxy, signed by the stockholder and filed with the secretary
of the corporation, but no such proxy shall be voted or acted upon after
one year from its date, unless the proxy provides for a longer period. A
proxy shall be deemed signed if the stockholder's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the stockholder or the stockholder's attorney-in-fact.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation
generally.
ARTICLE III
DIRECTORS
.1 Powers. Subject to the provisions of the General
Corporation Law of Delaware and any limitations in the certificate of
incorporation or these bylaws relating to action required to be approved
by the stockholders, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the
direction of the board of directors.
.2 Number of Directors. The board of directors shall
consist of eleven persons until changed by a proper amendment of this
Section 3.2.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office
expires.
.3 Election, Qualification and Term of Office of Directors.
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders. Directors need not be
stockholders. Each director, including a director elected to fill a
vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
.4 Resignation and Vacancies. Any director may resign at
any time upon written notice to the attention of the secretary of the
corporation. When one or more directors so resigns and the resignation
is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill
such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so
chosen shall hold office as provided in this section in the filling of
other vacancies.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by
a majority of the directors then in office, although less than a quorum,
or by a sole remaining director.
Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for
the person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for
a decree summarily ordering an election as provided in Section 211 of the
General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a
majority of the whole board (as constituted immediately prior to any such
increase), then the Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the
total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill
any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the
General Corporation Law of Delaware as far as applicable.
The stockholders may elect a director at any time to fill any
vacancy not filled by the directors.
If a vacancy is the result of action taken by the shareholders
under Section 3.13 of these bylaws, then the vacancy shall be filled by
the holders of a majority of the shares then entitled to vote at an
election of directors.
.5 Place of Meetings; Meetings by Telephone. The board of
directors of the corporation may hold meetings, both regular and special,
either within or outside the State of Delaware.
Members of the board of directors, or any committee designated by
the board of directors, may participate in a meeting of the board of
directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant
to this bylaw shall constitute presence in person at the meeting.
.6 Regular Meetings. Regular meetings of the board of
directors may be held without notice at such time and at such place as
shall from time to time be determined by the board.
.7 Special Meetings; Notice. Special meetings of the board
of directors for any purpose or purposes may be called at any time by the
chairman of the board, the president, any vice president, the secretary
or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail
or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If
the notice is mailed, it shall be deposited in the United States mail at
least four days before the time of the holding of the meeting. If the
notice is delivered personally or by telephone or by telegram, it shall
be delivered personally or by telephone or to the telegraph company at
least 48 hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of
the meeting, if the meeting is to be held at the principal executive
office of the corporation.
.8 Quorum. At all meetings of the board of directors, a
majority of the authorized number of directors shall constitute a quorum
for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the
act of the board of directors, except as may be otherwise specifically
provided by statute or by the certificate of incorporation. If a quorum
is not present at any meeting of the board of directors, then the
directors present thereat may adjourn the meeting from time to time,
without notice other than the announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any
action taken is approved by at least a majority of the required quorum
for that meeting.
.9 Waiver of Notice. Whenever notice is required to be
given under any provision of the General Corporation Law of Delaware or
of the certificate of incorporation or these bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any regular
or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
.10 Board Action by Written Consent Without a Meeting. Any
action required or permitted to be taken at any meeting of the board of
directors, or of any committee thereof, may be taken without a meeting if
all members of the board or committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes
of proceedings of the board or committee.
.11 Fees and Compensation of Directors. The board of
directors shall have the authority to fix the compensation of directors.
.12 Approval of Loans to Officers. The corporation may lend
money to, or guarantee any obligations of, or otherwise assist any
officer or other employee of the corporation or any of its subsidiaries,
including any officer or employee who is a director of the corporation or
any of its subsidiaries, whenever, in the judgment of the directors, such
loan, guaranty or assistance, or an employee benefit or employee
financial assistance plan adopted by the board of directors or any
committee thereof authorizing any such loan, guaranty or assistance, may
reasonably be expected to benefit the corporation. The loan, guaranty or
other assistance may be with or without interest and may be unsecured, or
secured in such a manner as the board of directors shall approve,
including, without limitation, a pledge of shares of stock of the
corporation. Nothing in this section contained shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
.13 Removal of Directors. Any director or the entire board
of directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such
director's term of office.
.14 Chairman of the Board of Directors. The corporation may
also have, at the discretion of the board of directors, a chairman of the
board of directors who may be considered an officer of the corporation.
ARTICLE IV
COMMITTEES
.1 Committees of Directors. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of
the corporation. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members
present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors, or in the bylaws of
the corporation, shall have and may exercise all the powers and authority
of the board of directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to amending the certificate of
incorporation (except that a committee may, to the extent authorized in
the resolution or resolutions providing for the issuance of shares of
stock adopted by the board of directors as provided in Section 151(a) of
the General Corporation Law of Delaware, fix the designations and any of
the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or
the conversion into, or the exchange of such shares for, shares of any
other class or classes or any other series of the same or any other class
or classes of stock of the corporation, or fix the number of shares of
any series of stock or authorize the increase or decrease of the shares
of any series), adopting an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the bylaws of the corporation; and, unless the
resolution, bylaws or certificate of incorporation expressly so provides,
no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate
of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
.2 Committee Minutes. Each committee shall keep regular
minutes of its meetings and report the same to the board of directors
when required.
.3 Meetings and Action of Committees. Meetings and actions
of committees shall be governed by, and held and taken in accordance
with, the provisions of Article III of these bylaws, Section 3.5 (place
of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), and Section 3.10 (action without a
meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular
meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee, that special
meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for
the government of any committee not inconsistent with the provisions of
these bylaws.
ARTICLE V
OFFICERS
.1 Officers. The officers of the corporation shall be a
president, a chief financial officer (who may be a vice president or
treasurer of the corporation) and a secretary. The corporation may also
have, at the discretion of the board of directors, a chairman of the
board of directors, one or more senior vice presidents and one or more
other officers. One or more officers may be appointed in accordance with
the provisions of Section 5.3 of these bylaws. Any number of offices may
be held by the same person.
.2 Election of Officers. The officers of the corporation,
except such officers as may be appointed in accordance with the
provisions of Sections 5.3 or 5.5 of these bylaws, shall be elected by
the board of directors.
.3 Appointed Officers. The chief executive officer of the
corporation, or such other officer as the board of directors shall
select, may appoint, or the board of directors may appoint, such officers
and agents of the corporation as, in his or their judgment, are necessary
to conduct the business of the corporation. Each such officer shall hold
office for such period, have such authority, and perform such duties as
are provided in these bylaws or as the board of directors or the chief
executive officer may from time to time determine.
.4 Removal and Resignation of Officers. Any officer may be
removed, either with or without cause, by an affirmative vote of the
majority of the board of directors at any regular or special meeting of
the board or, except in the case of an officer elected by the board of
directors, by the chief executive officer or such other officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the
receipt of that notice or at any later time specified in that notice;
and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
.5 Vacancies in Offices. Any vacancy occurring in any
office of the corporation shall be filled by the board of directors,
except for vacancies in the offices of subordinate officers which may be
filled pursuant to Section 5.3 hereof.
.6 Chairman of the Board. The chairman of the board, if
such an officer be elected, shall, if present, preside at meetings of the
board of directors and the stockholders and exercise and perform such
other powers and duties as may be from time to time assigned by the board
of directors or prescribed by the bylaws.
.7 President. Subject to such supervisory powers, if any,
as may be given by the board of directors to the chairman of the board,
the president shall be the chief executive officer of the corporation and
shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of
the corporation. In the absence or nonexistence of a chairman of the
board, he shall preside at all meetings of the stockholders and at all
meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the office of president of a
corporation and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
.8 Senior Vice Presidents and Vice Presidents. In the
absence or disability of the president, the vice presidents, if any, in
order of their rank as fixed by the board of directors or, if not ranked,
a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as
from time to time may be prescribed for them respectively by the board of
directors, these bylaws, the president or the chairman of the board.
.9 Secretary. The secretary shall keep or cause to be kept,
at the principal executive office of the corporation or such other place
as the board of directors may direct, a book of minutes of all meetings
and actions of directors, committees of directors, and stockholders. The
minutes shall show the time and place of each meeting, the names of those
present at directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and the
proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the
names of all stockholders and their addresses, the number and classes of
shares held by each, the number and date of certificates evidencing such
shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the board of directors required to be
given by law or by these bylaws. He shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other
powers and perform such other duties as may be prescribed by the board of
directors or by these bylaws.
.10 Chief Financial Officer. The chief financial officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital retained
earnings, and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the board of directors. He shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they
request it, an account of all his transactions as chief financial officer
and of the financial condition of the corporation, and shall have other
powers and perform such other duties as may be prescribed by the board of
directors or the bylaws.
.11 Representation of Shares of Other Corporations. The
chairman of the board, the president, any vice president, the treasurer,
the secretary or assistant secretary of this corporation, or any other
person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation.
The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
.12 Authority and Duties of Officers. In addition to the
foregoing authority and duties, all officers of the corporation shall
respectively have such authority and perform such duties in the
management of the business of the corporation as may be designated from
time to time by the board of directors.
ARTICLE VI
RECORDS AND REPORTS
.1 Maintenance and Inspection of Records. The corporation
shall, either at its principal executive offices or at such place or
places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class
of shares held by each stockholder, a copy of these bylaws as amended to
date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper
purpose the corporation's stock ledger, a list of its stockholders, and
its other books and records and to make copies or extracts therefrom. A
proper purpose shall mean a purpose reasonably related to such person's
interest as a stockholder. In every instance where an attorney or other
agent is the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing
that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation
at its registered office in Delaware or at its principal place of
business.
.2 Inspection by Directors. Any director shall have the
right to examine the corporation's stock ledger, a list of its
stockholders, and its other books and records for a purpose reasonably
related to his position as a director. The Court of Chancery is hereby
vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and
records, the stock ledger, and the stock list and to make copies or
extracts therefrom. The Court may, in its discretion, prescribe any
limitations or conditions with reference to the inspection, or award such
other and further relief as the Court may deem just and proper.
ARTICLE VII
GENERAL MATTERS
.1 Execution of Corporate Contracts and Instruments. The
board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or
within the agency power of an officer, no officer, agent or employee
shall have any power or authority to bind the corporation by any contract
or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.
.2 Stock Certificates; Partly Paid Shares. The shares of a
corporation shall be represented by certificates, provided that the board
of directors of the corporation may provide by resolution or resolutions
that some or all of any or all classes or series of its stock shall be
uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the
board of directors, every holder of stock represented by certificates and
upon request every holder of uncertificated shares shall be entitled to
have a certificate signed by, or in the name of the corporation by the
chairman or vice-chairman of the board of directors, or the president or
vice president, and by the chief financial officer, the treasurer, or an
assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at
the date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to
be paid therefor. Upon the face or back of each stock certificate issued
to represent any such partly paid shares, or upon the books and records
of the corporation in the case of uncertificated partly paid shares, the
total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on fully
paid shares, the corporation shall declare a dividend upon partly paid
shares of the same class, but only upon the basis of the percentage of
the consideration actually paid thereon.
.3 Special Designation on Certificates. If the corporation
is authorized to issue more than one class of stock or more than one
series of any class, then the powers, the designations, the preferences,
and the relative, participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full
or summarized on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock; provided,
however, that, except as otherwise provided in Section 202 of the General
Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the
corporation shall issue to represent such class or series of stock a
statement that the corporation will furnish without charge to each
stockholder who so requests the powers, the designations, the
preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
.4 Lost Certificates. The corporation may issue a new
certificate of stock or uncertificated shares in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the corporation may require the owner of the lost,
stolen or destroyed certificate, or his legal representative to give the
corporation a bond sufficient to indemnify it against any claim that may
be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of such new certificate or
uncertified shares.
.5 Construction; Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions
in the Delaware General Corporation Law shall govern the construction of
these bylaws. Without limiting the generality of this provision, the
singular number includes the plural, the plural number includes the
singular, and the term "person" includes both a corporation and a
natural person.
.6 Dividends. The directors of the corporation, subject to
any restrictions contained in the General Corporation Law of Delaware or
the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock. Dividends may be paid in cash, in property,
or in shares of the corporation's capital stock.
The directors of the corporation may set apart out of any of the
funds of the corporation available for dividends a reserve or reserves
for any proper purpose and may abolish any such reserve.
.7 Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the board of directors and may be changed by the
board of directors.
.8 Seal. The board of directors may adopt a corporate seal,
and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
ARTICLE VIII
AMENDMENTS
.1 Amendments. The bylaws of the corporation may be
altered, amended or repealed or new bylaws may be adopted by the
stockholders or by the board of directors
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<DESCRIPTION>AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT
<TEXT>
EXECUTION COPY
AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT
THIS AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT ("Amendment") is
entered into as of the 26th day of January, 1999 by and between DEUTSCHE
FINANCIAL SERVICES CORPORATION ("Purchaser")and APPLIED MATERIALS, INC.
("Seller").
RECITALS
A. Purchaser and Seller are parties to that certain Receivables
Purchase Agreement dated as of October 22, 1998 (as amended from time to
time, the "Purchase Agreement"). Capitalized terms used but not defined
herein shall have the meanings given them in the Purchase Agreement.
B. Pursuant to the terms of the Purchase Agreement, Purchaser
purchased from Seller certain Receivables, as defined therein.
C. The parties now desire to provide for the purchase of a new pool
of Receivables, as will be described more fully herein.
D. The parties now desire to amend certain terms and conditions of
the Purchase Agreement, on and subject to the terms hereof.
NOW, THEREFORE, in consideration of the forgoing premises and for
other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Tranche B Receivables. For purposes hereof, the "Tranche B
Receivables" shall mean those Receivables that the Purchaser and the
Seller agree shall be treated as Tranche B Receivables. The Tranche B
Receivables are subject to the Payment Terms described on Exhibit III
(Tranche B) attached hereto and incorporated herein by this reference.
All other Receivables shall be referred to as "Tranche A Receivables".
2. Amendments Regarding the Tranche B Receivables. Purchaser and
Seller each hereby agree that the Purchase Agreement is hereby amended
as follows, solely with respect to the Tranche B Receivables:
(a) Section 1.1 - New Definitions. Solely with respect to the
Tranche B Receivables, the following terms are hereby amended in their
entirety to read as follows:
Collection Settlement Date. With respect to each Funding Date
in connection with the sale of Sold Receivables to Purchaser, the
related First Collection Settlement Date (the 90th day after such
Funding Date or if such date is not a Business Day, the Business
Day thereafter), and to the extent the Outstanding Balances of
such Sold Receivables have not been reduced to zero, each
succeeding Business Day.
Defaulted Receivable. (i) A Sold Receivable that the
Collection Agent determines in good faith to be uncollectible, or
(ii) a Sold Receivable which remains unpaid, for any reason,
including without limitation, set off by the Obligor (whether in
connection with the same or a related transaction or unrelated
transaction) or a bankruptcy proceeding of the Obligor where the
Obligor is the debtor, more than 60 days from the Billing Date.
Discount. With respect to any Sold Receivable, an amount equal
to the product of: (a) the LIBOR Rate-Three Month plus ninety-eight
one-hundredths of one percent (0.98%) per annum of the Outstanding
Balance of such Sold Receivable, and (b) 90/365.
First Collection Settlement Date. With respect to each Funding
Date that date which is ninety (90) days after such Funding Date,
provided that if such date is not a Business Day, then the First
Collection Settlement Date shall be the next succeeding Business
Day.
Ineligible Receivables. Shall mean any of the following, as
determined by Purchaser in its reasonable discretion, at the time of
each Purchase hereunder:
(a) Receivables created from the sale of Goods and services
not in accordance with Seller's Payment Terms as described in
Exhibit III (Tranche B), attached hereto;
(b) Receivables created from the sale of Goods that allow for
payment to be made more than sixty (60) days after the Billing
Date and/or Receivables which are unpaid more than sixty (60)
days from the Billing Date;
(c) all Receivables of an Obligor if fifty percent (50%) or
more of the Outstanding Balance of all such Obligor's
Receivables are more than sixty (60) days past the applicable
due date;
(d) all Receivables of an Obligor if the Outstanding Balance
of all Sold Receivables of such Obligor exceeds either (i)
Fifty Million Dollars ($50,000,000.00) (or any other Dollar
limitations as may be set forth on Schedule B hereto, as
amended from time to time) or as otherwise agreed to by
Purchaser, or (ii) fifty percent (50%) of the Outstanding
Balance of all Eligible Receivables;
(e) Receivables with respect to which the Obligor is an
officer, employee, agent, parent, Subsidiary or affiliate of
Seller or has common officers or directors with Seller;
(f) Receivables arising out of any consignment sale;
(g) Receivables with respect to which the payment by the
Obligor is conditional, other than as may be required by
applicable statute;
(h) Receivables with respect to which the Obligor is not a
commercial or institutional entity;
(i) Receivables with respect to which Seller is or may become
liable to the Obligor thereof for goods sold or services
rendered by such Obligor to Seller, other than as may be
required by applicable statute;
(j) Receivables with respect to which any warranty or
representation provided in Sections 7.3, 8.4 or 8.8 is not true
and correct;
(k) Receivables which represent goods purchased for a
personal, family or household purpose;
(l) Receivables which are progress payment, retention or
contra accounts;
(m) Receivables with respect to which the Obligor is in
default of any material provision of any agreement between
Seller and Obligor governing such Receivable, including,
without limitation, Receivables paid with checks returned and
marked "Insufficient Funds" and Receivables which are otherwise
in dispute and, in each case, not resolved within thirty (30)
days;
(n) Receivables arising pursuant to documentation not
satisfactory to Purchaser in its sole discretion;
(o) Receivables on which the Obligor is not located in the
United States if such Receivable is not fully secured by
foreign credit insurance or letter of credit, in each case
acceptable to Purchaser in its sole discretion;
(p) Receivables which were not incurred in the ordinary course
of Seller's business;
(q) Receivables which, prior to sale, were not owned by
Seller; or
(r) any and all other Receivables which Purchaser deems to be
unacceptable; provided, however, that Receivables of the
Obligors listed on Schedule B (Tranche B) which also satisfy
paragraphs (c) through (q) above, shall be deemed acceptable to
Purchaser, subject to any limitations in such Schedule B
(Tranche B);
provided, however, that Seller and Purchaser may agree in
writing that any Receivable that would otherwise be an
Ineligible Receivable shall be treated for all purposes as an
Eligible Receivable.
LIBOR Rate-Three Month. Shall mean for any Purchase, the London
Interbank Offered Rate (LIBOR) for three-month deposits in U.S.
Dollars that appears on Page 3745 of the Bloomberg News Service (or
any other page that may replace any such page on such service in the
reasonable judgment of Purchaser) on the third Business Day
immediately preceding a Funding Date.
Net Purchase Price. With respect to any Eligible Receivable,
the total Outstanding Balance of such Eligible Receivable, minus:
(i) the Discount attributable to such Eligible Receivable, as
determined as of the Settlement Date and (ii) Thirty One-Hundredths
of One Percent (0.30%) of the total Outstanding Balance of such
Eligible Receivable, as of such Settlement Date.
(b) Section 3.1(B)(4). Solely with respect to the Tranche B
Receivables, Section 3.1(B)(4) is hereby amended in its entirety to read
as follows:
"(4) In the enforcement or collection of any Sold Receivable,
the Collection Agent must obtain Purchaser's prior written consent
to name Purchaser as a party in any legal proceeding; provided,
however, that nothing contained herein shall limit Purchaser's
right, exercisable in its sole discretion, following demand made by
Purchaser on Seller and Seller's refusal or inability to proceed
against an Obligor, to sue or proceed against any Obligor in its own
name at any time upon two (2) days prior written notice to Seller
after the 90th day after the applicable Funding Date. Moreover,
notwithstanding the foregoing, (i) following the occurrence and
during the continuance of any Event of Default after notice to
Seller, (ii) if Seller has determined in good faith that a Sold
Receivable is uncollectible, or (iii) if (1) an Obligor becomes
insolvent or becomes subject to the Federal Bankruptcy Code, any
state insolvency law or any similar law, as a debtor, (2) an Obligor
makes a general assignment for the benefit of creditors, or (3) a
receiver is appointed for any assets of an Obligor; no demand by
Purchaser on Seller shall be required before Purchaser may sue or
proceed against any Obligor in its own name."
(c) Section 3.2(B). Solely with respect to the Tranche B
Receivables, Section 3.2(B) is hereby amended in its entirety to read as
follows:
"B. Status Reports. Seller shall submit to Purchaser a Status
Report on the dates specified in the immediately following sentence,
substantially in the form of Exhibit V ("Status Report") consisting
of information concerning Collections, Credit Adjustments, and
Defaulted Receivables. Seller shall submit a Status Report to Seller
(i) no later than the fiftieth (50th) day after a Funding Date, with
respect to the 45-day period which commenced on such Funding Date,
and (ii) no later than two (2) days after a First Collection
Settlement Date, with respect to the 45-day period immediately
preceding such First Collection Settlement Date. The Status Report
shall include such other reports as Purchaser shall reasonably
request. If any date for the delivery of a Status Report is not a
Business Day, then such report shall be due on the next succeeding
Business Day."
(d) Section 3.3(B)(i). Solely with respect to the Tranche B
Receivables, Section 3.3(B)(i) is hereby amended in its entirety to read
as follows:
"(i) Delinquent Receivables. If the Outstanding Balance of a
Sold Receivable has not been paid in full on or before the 90th day
after the Funding Date on which the Purchaser purchased such Sold
Receivable, then, the Seller shall pay to the Purchaser an amount
equal to the Payment Percentage of the unpaid Outstanding Balance of
such Sold Receivable for each day after such 90th day that the
Outstanding Balance is greater than zero until the earlier of (A)
the date on which the Seller notifies Purchaser that it has
determined in good faith that such Sold Receivable is uncollectible,
(B) the date that is the 115th day after the Funding Date on which
the Purchaser purchased such Sold Receivable, and (C) the date on
which the Outstanding Balance is reduced to zero. Any amount
required to be paid under this paragraph shall be paid to the
Purchaser on the immediately following Collection Settlement Date.
As used herein, the "Payment Percentage" is equal to the sum of:
(a) the LIBOR Rate-Three Month relating to the Purchase of such Sold
Receivables plus ninety-eight one-hundredths of one percent (0.98%)
per annum, divided by 365, plus (b) Thirty One-Hundredths of One
Percent (0.30%), divided by 90."
(e) Amendments Generally. The remainder of the Purchase
Agreement, to the extent not amended specifically hereby, shall be
deemed amended with respect to the Tranche B Receivables so that such
terms and conditions apply with the same force and effect to such
Tranche B Receivables and the documents, certificates and agreements
delivered in connection therewith and herewith.
3. Additional Amendments. The Purchase Agreement is hereby further
amended as follows:
(a) Section 6.1.C is hereby amended by inserting immediately
preceding the ";" therein, the following: "provided that Seller may
satisfy this obligation by filing such reports with the SEC".
(b) Section 12.1(f) and all references to Section 12(f) are
hereby deleted in their entirety.
(c) Section 12.2 is hereby amended by deleting the phrase ",
if any" in the second line of such section.
(d) The title of Section 13.1 is hereby deleted in its
entirety and replaced with "Costs and Expenses".
(e) The definition of "Ineligible Receivables" is amended by
adding the following at the end of such definition:
"provided, however, that Seller and Purchaser may agree in writing
that any Receivable that would otherwise be an Ineligible Receivable
shall be treated for all purposes as an Eligible Receivable."
(f) Schedule B is hereby deleted in its entirety and replaced
with the new Schedule B attached hereto.
(g) The defined term "LIBOR Rate-One Month" is hereby deleted
in its entirety and replaced with the following:
LIMEAN Rate-One-Month. Shall mean, for purposes solely of
calculation of the Collection Agent Fee, the London Interbank Mean
Rate (LIMEAN) for one-month deposits in U.S. Dollars that appears on
the London Interbank Rate page (referenced as LIUS01M; "MID"), of
the Bloomberg News Service (or any other page that may replace any
such page on such service in the reasonable judgment of Purchaser)
for the Business Day of any such Collection Agent Fee payment.
(h) Section 4.1 is hereby amended in its entirety to read as
follows:
"Section 4.1. Collection Agent Fee. A fee shall be payable by
Purchaser to Seller in its capacity as Collection Agent (the
"Collection Agent Fee"), in an amount equal to the LIMEAN Rate -One
Month per annum, on the average daily balance of the Collections
received by Purchaser during the 30-day period preceding each
Collection Agent Fee payment date specified in the immediately
following sentence. The Collection Agent Fee shall be payable, in
arrears, every thirty (30) days after a Funding Date and on the
First Collection Settlement; provided, however, that if any such
payment date is not a Business Day, then such payment shall be made
on the next succeeding Business Day. In no event, however, shall
any Collection Agent Fee be payable to Seller for Collections
relating to the applicable Sold Receivables received after the
related First Collection Settlement Date. The Collection Agent Fee
is to be paid by the Purchaser to the Seller as Collection Agent in
consideration of Seller's agreement to serve as a Collection Agent
and as compensation for such Collection Agent's services. Any
amounts due to Purchaser from Seller hereunder, may be deducted from
any Collection Agent Fee and credited to Purchaser, upon notice to
Seller. Following the termination of Seller as a Collection Agent,
Seller shall not continue to earn any Collection Fees."
(i) Sections 3.3.A. and B. are hereby amended by replacing each
reference therein to "2:00 p.m., Pacific time" with "11:30 a.m., Pacific
time".
4. Conditions Precedent. Notwithstanding the foregoing, the
transactions contemplated by this Amendment shall not be effective until
the satisfaction of the following terms and conditions:
(a) Seller shall have satisfied all of the conditions
precedent to such Purchase as are described more fully in Section 9.2 of
the Purchase Agreement, which include but are not limited to preparation
and delivery to Purchaser of: (i) the new Schedule B referred to herein,
(ii) a new Receivables Purchase Settlement Statement for the Receivables
described herein, (iii) new UCC Searches, (iv) new UCC-1s, and (v) the
new Exhibit III (Tranche B) regarding the payment terms applicable to
the Tranche B Receivables.
(b) Seller shall have delivered such other documents,
certificates, submissions, instruments, and agreements as reasonably
requested by Purchaser relating to the transactions herein contemplated.
5. Miscellaneous. The terms of the Purchase Agreement and the
other documents executed and delivered in connection therewith are
hereby ratified and reaffirmed and shall remain in full force and
effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first written above.
APPLIED MATERIALS, INC.
By:/s/ Nancy H. Handel
Print Name: Nancy H. Handel
Title: Vice President Global
Finance and Treasurer
By:/s/ Joseph R. Bronson
Print Name: Joseph R. Bronson
Title: Senior Vice President,
Chief Financial Officer
and Chief Administrative
Officer
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:/s/ R. L. Shirley
Print Name: R. L. Shirley
Title:Executive V.P., Director
of Portfolio
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<DESCRIPTION>RECEIVABLES PURCHASE AGREEMENT
<TEXT>
RECEIVABLES PURCHASE AGREEMENT
THIS RECEIVABLES PURCHASE AGREEMENT ("Agreement") is dated
as of the 26th day of January, 1999, by and between APPLIED
MATERIALS, INC., a Delaware corporation ("Seller") and DEUTSCHE
FINANCIAL SERVICES (UK) LIMITED, a corporation registered in
England and Wales ("Purchaser").
R E C I T A L S
A. Among other things, Seller sells certain manufacturing
products and provides services related thereto in the ordinary
course of its business throughout Europe (the "Products" and
the "Services", respectively, or collectively, the "Goods").
B. Seller may sell and Purchaser may purchase from time to
time, on the terms and conditions set forth herein, all of
Seller's right, title and interest in and to payment for the
Products sold and Services rendered by Seller to the Obligors
(as defined herein) (such accounts collectively referred to
herein as the "Receivables" or, individually, a "Receivable").
C. Purchaser wishes that Seller act as Purchaser's initial
Collection Agent with respect to Receivables sold by Seller in
connection with the collection of the amounts owing on the
Receivables, and wishes to pay the Seller a Collection Agent
Fee, as herein defined, in return for the Seller's services as
Collection Agent.
D. Seller and Purchaser desire to enter into this
Agreement to govern the purchase and sale of the Receivables,
the administration and collection thereof, and related matters.
NOW, THEREFORE, in consideration of the agreements
contained herein and for other good and valuable consideration,
the parties hereto mutually agree as follows:
ARTICLE 1
Definitions
Section 1.1. Definitions.
Except as otherwise specified in this Agreement, all
references (i) to any Person, other than Seller, shall be
deemed to include such Person's successors and assigns, and
(ii) to any law, agreement, statute or contract specifically
defined or referred to in this Agreement shall be deemed
references to such agreement, or contract as the same may be
supplemented, amended, waived, consolidated, replaced or
modified from time to time, but only to the extent permitted
by, and effected in accordance with, the terms hereof. The
words "herein," "hereof" and "hereunder" and words of similar
import, when used in this Agreement shall refer to this
Agreement as a whole and not to any provision of this
Agreement, and "Article," "Section," "paragraph," "Schedule"
and respective references are to this Agreement unless
otherwise specified. Whenever the context so requires, words
importing any gender include the other genders. Any of the
terms defined in this Article 1 may, unless the context
otherwise requires, be used in the singular or the plural
depending on the reference; the singular includes the plural
and the plural includes the singular.
All terms defined in this Article 1 shall have the defined
meanings when used in this Agreement or, except as otherwise
expressly stated therein, any certificate, opinion or other
document delivered pursuant to this Agreement.
All accounting terms not otherwise defined in this Article
1 or elsewhere in this Agreement shall have the meanings
assigned them in conformity with GAAP.
All terms used in Article 9 of the UCC and not specifically
defined in Article 1 or elsewhere in this Agreement shall be
defined herein as such terms are defined in the UCC as in
effect in the State of California on the date hereof.
References to "writing" include printing, typing,
lithography and other means of reproducing words in a tangible
visible form. References to "written" include "printed,"
"typed," "lithographed" and other adjectives relating to words
reproduced in a tangible visible form consistent with the
preceding sentence including electronic mail. The words
"including," "includes" and "include" shall be deemed to be
followed by the words "without limitation."
A/R Limit. As defined in Section 2.1.B.
Balance. As defined in Section 2.1.B.
Billing Date. The date on which an invoice is issued with
respect to the sale of Goods resulting in the creation of a
Receivable.
Business Day. Any day on which dealings in currencies and
exchange may be carried on in the interbank eurodollar market,
excluding Saturday, Sunday and any day which is a day on which
banking institutions in London are authorized or required by
law or other governmental action to close.
Collateral. As defined in Section 5.1.
Collection Agent. A Person that is selected and appointed
by Purchaser, in accordance with Section 3.1, to act on
Purchaser's behalf in the administration, servicing and
collection of the Sold Receivables. Such Person may be Seller.
The term "Collection Agent" includes a Successor Collection
Agent.
Collection Agent Fee. A fee calculated and payable by
Purchaser to Seller in accordance with the terms of Article 4
hereof.
Collection Settlement Date. With respect to each Funding
Date in connection with the sale of Sold Receivables to
Purchaser, the related First Collection Settlement Date (the
75th day after such Funding Date or if such date is not a
Business Day, the Business Day thereafter), and to the extent
the Outstanding Balances of such Sold Receivables have not been
reduced to zero, each succeeding Business Day.
Collections. All amounts received by the Collection Agent
or Purchaser from any Obligor as a payment with respect to a
Sold Receivable.
Contract. An agreement pursuant to which an Obligor agrees
to pay money to Seller for Products sold or Services rendered
by Seller in the ordinary course of its business.
Credit Adjustment. Any refund, rebate, credit, early pay
discount or other adjustment granted to an Obligor with respect
to a Sold Receivable after such Receivable is sold to
Purchaser.
Defaulted Receivable. (i) A Sold Receivable that the
Collection Agent determines in good faith to be uncollectible,
or (ii) a Sold Receivable which remains unpaid, for any reason,
including without limitation, set off by the Obligor (whether
in connection with the same or a related transaction or
unrelated transaction) or a bankruptcy or insolvency proceeding
of the Obligor where the Obligor is the debtor, more than 60
days from the Billing Date.
Discount. [ * ].
Dollars. Lawful money of the United States of America.
[ * ] Confidential portions omitted and filed separately
with the Securities and Exchange Commission.
Eligible Receivable. Any Receivable which does not
otherwise constitute an Ineligible Receivable.
Event of Default. As defined in Section 12.1.
Facility Termination Date. The earlier of the Termination
Date or when Purchaser terminates this Agreement under Section
12.2.
Federal Bankruptcy Code. The bankruptcy code of the United
States of America codified in Title 11 of the United States
Code, as amended.
Financing Statement. The financing statements that are
properly filed with the various Secretaries of State or other
jurisdictions to perfect security interests in any property
described by such financing statements.
First Collection Settlement Date. With respect to each
Funding Date that date which is seventy-five (75) days after
such Funding Date, provided that if such date is not a Business
Day, then the First Collection Settlement Date shall be the
next succeeding Business Day.
Funding Date. The Initial Funding Date, and such other and
further dates as the parties hereto may agree to in writing as
of the date on which Purchaser acquires additional Receivables
hereunder.
GAAP. Generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the
accounting profession, which are applicable to the
circumstances as of the date of determination.
Goods. As defined in the Recitals to this Agreement.
Indemnitees. As defined in Section 10.1.
Ineligible Receivables. Shall mean any of the following,
as determined by Purchaser in its reasonable discretion, at the
time of each Purchase hereunder:
(a) Receivables created from the sale of Goods and Services
not in accordance with Seller's Payment Terms as
described in Exhibit III attached hereto;
(b) [ * ];
(c) [ * ];
(d) [ * ];
(e) Receivables with respect to which the Obligor is an
officer, employee, agent, parent, Subsidiary or
affiliate of Seller or has common officers or directors
with Seller;
(f) Receivables arising out of any consignment sale;
[ * ] Confidential portions omitted and filed separately
with the Securities and Exchange Commission.
(g) Receivables with respect to which the payment by the
Obligor is conditional, other than as may be required
by applicable statute;
(h) Receivables with respect to which the Obligor is not a
commercial or institutional entity;
(i) Receivables with respect to which Seller is or may
become liable to the Obligor thereof for goods sold or
services rendered by such Obligor to Seller, other than
as may be required by applicable statute;
(j) Receivables with respect to which any warranty or
representation provided in Sections 7.3, 8.4 or 8.8 is
not true and correct;
(k) Receivables which represent goods purchased for a
personal, family or household purpose;
(l) Receivables which are progress payment, retention or
contra accounts;
(m) Receivables with respect to which the Obligor is in
default of any material provision of any agreement
between Seller and Obligor governing such Receivable,
including, without limitation, Receivables paid with
checks returned and marked "Insufficient Funds" and
Receivables which are otherwise in dispute and, in each
case, not resolved within thirty (30) days;
(n) Receivables arising pursuant to documentation not
satisfactory to Purchaser in its sole discretion;
(o) Receivables on which the Obligor is not located in
Europe and Israel if such Receivable is not fully
secured by foreign credit insurance or letter of
credit, in each case acceptable to Purchaser in its
sole discretion;
(p) Receivables which were not incurred in the ordinary
course of Seller's business;
(q) Receivables which, prior to sale, were not owned by
Seller; or
(r) any and all other Receivables which Purchaser deems to
be unacceptable; provided, however, that Receivables of
the Obligors listed on Schedule B hereto which also
satisfy paragraphs (c) through (q) above, shall be
deemed acceptable to Purchaser, subject to any
limitations in such Schedule B;
provided, however, that Seller and Purchaser may agree
in writing that any Receivable that would otherwise be
an Ineligible Receivable shall be treated for all
purposes as an Eligible Receivable.
Initial Funding Date. The date that Purchaser makes its
initial Purchase of Receivables, in accordance with Section
2.1, which, unless otherwise agreed to by the parties in
writing, shall be January 28, 1999.
LIMEAN Rate-One Month. Shall mean, for purposes solely of
calculation of the Collection Agent Fee, the London Interbank
Mean Rate (LIMEAN) for one-month deposits in U.S. Dollars that
appears on the London Interbank Rates Page (referenced as
LIUSO1M) of the Bloomberg News Service (or any other page that
may replace any such page on such service in the reasonable
judgment of Purchaser) for the Business Day of any such
Collection Agent Fee payment.
LIBOR Rate-Two Month. Shall mean for any Purchase, the
London Interbank Offered Rate (LIBOR) for two-month deposits in
U.S. Dollars that appears on Page 3745 of the Bloomberg News
Service (or any other page that may replace any such page on
such service in the reasonable judgment of Purchaser) on the
third Business Day immediately preceding a Funding Date.
Lien. A mortgage, pledge, lien, security interest or other
charge or encumbrance of any kind (including without limitation
any conditional sale or other title retention agreement, any
lease in the nature thereof, and any agreement to give any
security interest).
Net Purchase Price. [ * ].
Notices. All notices, requests, demands and other
communications provided for under this Agreement.
Obligor. Each customer to whom Seller has sold Products or
provided Services and who has agreed to pay money to Seller
therefor whether or not pursuant to a Contract.
Officer's Certificate. A certificate executed on behalf of
Seller by its chief financial officer, treasurer or other
authorized officer.
Outstanding Balance. With respect to any Sold Receivable
as of any date, the total outstanding principal balance thereof
as of such date.
Outstanding Eligible Receivables. As at any moment, all
Eligible Receivables which are then outstanding (i.e., not yet
paid by their respective Obligors).
Party. Seller or Purchaser, as defined.
Person. Natural persons, corporations, limited
partnerships, general partnerships, joint stock companies,
joint ventures, incorporated or unincorporated associations,
companies, limited liability companies, trusts or other
organizations, whether or not legal entities, and governments
and agencies and political subdivisions thereof, or any other
entity of any kind.
Prime Rate. The prime rate as published in The Wall Street
Journal. The Prime Rate will change and take effect for
purposes of this Agreement on the day of any change in the
prime rate published in The Wall Street Journal.
Products. As defined in the Recitals to this Agreement.
Purchase. A purchase of Receivables made by Purchaser
pursuant to Section 2.1.
Receivables. As defined in the Recitals to this Agreement.
Receivables Purchase Settlement Statement. A statement
substantially in the form of Exhibit II to be executed by
Seller and Purchaser, prepared in accordance with Section 2.1.C
and other provisions of this Agreement.
Releases. The termination statements or other documents
that are filed with the various Secretaries of State or other
jurisdictions for the purpose of releasing any security
interests that have been filed or perfected through the filing
of one or more Financing Statements.
Request for Information or Copies. The documents that are
submitted to the various Secretaries of State or other
jurisdictions for the purpose of ascertaining whether or not
any financing statements, tax liens, judgment liens or other
filings have been filed with respect to some item of property.
Secretary of State. Any Secretary of State, or any person
acting in an official capacity for such person or for other
jurisdictions, elected or appointed, to receive filings of
Financing Statements, articles of
[ * ] Confidential portions omitted and filed separately
with the Securities and Exchange Commission.
incorporation or other documents pertaining to the business
structure or operation of any of the entities referred to in
this Agreement.
Services. As defined in the Recitals to this Agreement.
Settlement Date. The first Business Day immediately
preceding each Funding Date, and such other dates as may be
agreed to in writing by Seller and Purchaser.
Sold Receivable. A Receivable purchased by Purchaser until
paid in full by the Obligor.
Status Report. As defined in Section 3.2.B.
Subsidiary. With respect to any Person, any corporation,
association or other business entity of which more than 50% of
the total voting power of shares of common stock or units of
ownership or beneficial interest entitled to vote in the
election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by such
Person.
Successor Collection Agent. As defined in Section 3.1.C.
Termination Date. As defined in Section 11.1.
UCC. The California Uniform Commercial Code.
ARTICLE 2
Amount and Terms of Purchase Commitments
Section 2.1. Purchase of Receivables.
A. Sale; Effective Date of Sale.
(i) Generally. On each Funding Date, Purchaser shall
Purchase the Eligible Receivables from Seller, in accordance
with the terms hereof, that Purchaser has elected, in its sole
discretion, to Purchase. Purchaser's decision to make a
Purchase hereunder will not be binding until the funds are
actually paid. A condition of each Purchase on any Funding Date
shall be delivery by Seller of the Receivables Purchase
Settlement Statement required pursuant to Section 2.1.C on the
Settlement Date. No Purchase shall occur after the Facility
Termination Date or if Purchaser exercises its rights under
Section 12.2.
(ii) Limitations. Notwithstanding anything herein,
Seller shall have no obligation to sell, and Purchaser shall
have no obligation to Purchase, any Receivables: (1) on any
dates other than the Funding Dates, and (2) which fail to
comply with the terms hereof.
B. Purchase; Transfer of Receivables. Each Purchase
hereunder shall take place on the applicable Funding Date, at
the office of Seller at 3050 Bowers Avenue, Santa Clara, CA
95054, or such other place as may be mutually agreed upon by
Seller and Purchaser. Purchaser shall purchase the applicable
Receivables on any Funding Date for an aggregate purchase price
equal to the Net Purchase Price of the Eligible Receivables
reflected on the Receivables Purchase Settlement Statement
prepared in connection with such Purchase. Seller agrees
further that, at all times during the term of this Agreement,
the aggregate cumulative amount of all Net Purchase Prices
received by Seller in respect of the then Outstanding Eligible
Receivables, minus all Collections received thereon (the
"Balance"), shall not exceed One Hundred Million Dollars
($100,000,000) (the "A/R Limit"). Title to all Receivables
which are acquired by Purchaser shall pass to Purchaser on the
applicable Funding Date. Each Purchase shall be made without
recourse, except as specifically provided herein.
C. Receivables Purchase Settlement Statements. On each
Settlement Date, Seller shall execute a Receivables Purchase
Settlement Statement, dated as of such date, which, among other
things: (i) assigns and transfers to Purchaser, effective as of
the Funding Date, all right, title and interest of Seller in
and to the Sold Receivables described in the schedule attached
to such Receivables Purchase Settlement Statement, free and
clear of all security interests, liens, charges, encumbrances
and rights of others, other than the respective Obligor's
interest in the Products and/or Services, as appropriate,
relating thereto, (ii) includes copies of all invoices and a
summary of all sales resulting in Sold Receivables, and a
calculation of the Eligible Receivables to be sold, a schedule
of the Sold Receivables, and the Net Purchase Price, and (iii)
provides such other information as Purchaser may reasonably
request at least five (5) days in advance of such Settlement
Date for the purpose of effecting the transactions contemplated
hereby.
D. Collateral Assignment. Certain of the Obligors have
granted Seller a Lien on certain of such Obligor's assets as
security for the obligations of such Obligor to Seller. On or
prior to each Settlement Date, Seller shall deliver to
Purchaser, assignments of all security agreements, instruments
or other documents pursuant to which such Obligors have granted
Seller such a Lien in its assets.
E. Power of Attorney. Seller hereby grants to Purchaser
an irrevocable power of attorney, with full power of
substitution, coupled with an interest, to take in the name of
Seller or in Purchaser's own name all steps necessary or
advisable to (i) whether or not an Event of Default has
occurred and is continuing, endorse and negotiate any writing
or other right of any kind held or owned by Seller or
transmitted to or received by Purchaser as payment on account
or otherwise in respect of any Sold Receivables, and (ii)
effective upon the occurrence and during the continuance of any
Event of Default, enforce, foreclose, demand or accelerate on
any writing or other right of any kind held or owned by Seller
or transmitted to or received by Purchaser as payment on
account or otherwise in respect of any Sold Receivable.
ARTICLE 3
Collections; Maintenance of Records;
Disbursements of Collections
Section 3.1. Collection Procedure.
A. Appointment of Seller as Collection Agent. Purchaser
hereby appoints Seller to act as Collection Agent with respect
to Sold Receivables and Seller hereby accepts such appointment
until a Successor Collection Agent is appointed in accordance
with the terms hereof.
B. Duties and Standard of Care as Collection Agent.
(1) The Collection Agent will endeavor to collect the
amount owing to Purchaser on each Sold Receivable in accordance
with terms hereof, as and when the same becomes due, at
Seller's cost and expense and as agent for Purchaser, but
subject to the right of Purchaser to direct and control such
activities in accordance with the terms hereof.
(2) In performing its functions and duties on behalf
of Purchaser as the Collection Agent, Seller shall exercise the
same care that it would exercise in the collection of
Receivables for its own account, in accordance with, among
other things, Seller's current Collection Procedures attached
hereto as Exhibit IV, which standard of care shall not be less
than the standard of care prevalent in the industry in which
Seller engages. Collection Agent may amend, from time to time,
its Collection Procedures with the consent of Purchaser, such
consent not to be unreasonably withheld.
(3) The Collection Agent may allow such Credit
Adjustments for Purchaser's account as the Collection Agent may
determine in good faith to be either (i) appropriate to
facilitate maximum Collections or (ii) required by applicable
law or any applicable Contract and may receive any Products
relating thereto, subject to Purchaser's aforesaid interests,
as may be returned or rejected by, or repossessed from, the
Obligors; provided, however, that any Credit Adjustment shall
be reflected in a Status Report or other writing delivered by
Collection Agent to Purchaser prepared for the period in which
the Credit Adjustment was made,
and the amount of any such Credit Adjustment shall be paid to
Purchaser in full, in good funds, on each Collection Settlement
Date. With respect to each Defaulted Receivable, the
Collection Agent shall have the power and authority, on behalf
of Purchaser, to take action in accordance with Seller's
standard collection policies (including, in the case of any
such Receivable in respect of which a security interest in
Products shall have been obtained, the repossession and resale
of such Products). Purchaser may request, to the extent
reasonable, from time to time information relating to any
Defaulted Receivable. A Collection Agent other than Seller may
also make Credit Adjustments for Purchaser's account with the
consent of Purchaser. Any such Credit Adjustment made pursuant
to clause (ii) above by a Collection Agent other than Seller,
shall be treated the same as a Credit Adjustment made by Seller
as Collection Agent, including for purposes of requiring
payment or credit by Seller.
(4) In the enforcement or collection of any Sold
Receivable, the Collection Agent must obtain Purchaser's prior
written consent to name Purchaser as a party in any legal
proceeding; provided, however, that nothing contained herein
shall limit Purchaser's right, exercisable in its sole
discretion, following demand made by Purchaser on Seller and
Seller's refusal or inability to proceed against an Obligor, to
sue or proceed against any Obligor in its own name at any time
upon two (2) days prior written notice to Seller after the 75th
day after the applicable Funding Date. Moreover,
notwithstanding the foregoing, (i) following the occurrence and
during the continuance of any Event of Default after notice to
Seller, (ii) if Seller has determined in good faith that a Sold
Receivable is uncollectible, or (iii) if (1) an Obligor becomes
insolvent or becomes subject to the Federal Bankruptcy Code,
any insolvency law or any similar law, as a debtor, (2) an
Obligor makes a general assignment for the benefit of
creditors, or (3) a receiver is appointed for any assets of an
Obligor; no demand by Purchaser on Seller shall be required
before Purchaser may sue or proceed against any Obligor in its
own name.
(5) Purchaser may at any time with contemporaneous
notice to Seller, contact any Obligor utilizing the form of
verification letter attached hereto as Schedule C, for any
purpose related to the performance of audits and verification
analyses, and the determination of account balances and other
data maintained by Seller. Except for sending the verification
letter to the Obligors and except as otherwise provided herein,
Purchaser shall not contact any Obligor with respect to the
transactions contemplated herein. Purchaser may at any time
following (i) the occurrence and during the continuance of an
Event of Default; or (ii) the termination of Seller as
Collection Agent: (a) notify any Obligor of the purchase by
Purchaser of any Sold Receivable hereunder; (b) direct any
Obligor to make all payments in respect of Sold Receivables
directly to Purchaser at an address designated by Purchaser, or
to a third party or a bank or depositary designated by
Purchaser; and/or (c) proceed directly against any Obligor,
either with respect to the collection of any Sold Receivable or
any related matter.
(6) All Collections received by the Collections Agent
on and prior to the related First Collection Settlement Date
shall be paid on each Wednesday (for Collections received by
the Collection Agent during the immediately preceding calendar
week), directly to the Purchaser as provided in Section 3.3.
All Collections received by the Collections Agent after the
related First Collection Settlement Date, shall be paid within
two Business Days directly to the Purchaser as provided in
Section 3.3. On any Collection Settlement Date, Seller shall
remit to Purchaser, for Purchaser's own account, all amounts
representing Credit Adjustments which relate to the Sold
Receivables which are applicable to each such Collection
Settlement Date. All payments and all amounts received in
settlement, adjustment or liquidation of any Sold Receivable
will be credited by Purchaser on the Business Day good funds
are received by Purchaser. All payments in respect of Sold
Receivables of a particular Obligor shall be applied against
specific items of Sold Receivables as specifically identified
in writing by the Obligor thereon. If an Obligor fails to so
specify, then the Collection Agent shall use its best efforts,
including contacting such Obligor, to determine the appropriate
application of the payment.
C. Termination of Appointment. Upon the occurrence and
continuance of an Event of Default or upon termination of this
Agreement, Purchaser may at any time immediately terminate
Seller's appointment as the Collection Agent by delivery of a
notice of such termination in writing to Seller, provided,
however, that if there exists no Event of Default, Purchaser's
termination of Seller as Collection Agent shall be effective
fifteen (15) days after Purchaser's giving of notification
thereof to Seller. Upon the termination of Seller as the
Collection Agent, without limitation, (i) Purchaser, or a
financial institution designated by Purchaser (Purchaser in
such capacity or such third party, a "Successor Collection
Agent"), shall administer the administrative, servicing and
collection functions with respect to Purchases from Seller in
any commercially reasonable manner and in accordance with this
Agreement; (ii) Purchaser shall, at any time thereafter, be
entitled to notify the Obligors on any Sold Receivables to make
payment of amounts due thereunder directly to Purchaser at an
address designated by Purchaser or to such third party or to a
bank or other depositary designated by Purchaser; and (iii)
Seller shall, at its own expense, (a) if so requested by
Purchaser, endorse each instrument, if any, evidencing any Sold
Receivable to Purchaser in such manner as Purchaser shall
reasonably direct and (b) perform any and all acts and execute
any and all documents as may be reasonably requested by
Purchaser in order to effect the purposes of this Agreement and
the Purchase of Receivables and to perfect and protect the
ownership interest of Purchaser in the Sold Receivables.
Section 3.2. Records and Reports.
A. Maintenance of Records. Until the earlier of the
termination of this Agreement or until each Sold Receivable has
been paid in full, Purchaser shall have the right (but not the
obligation), for the purposes hereunder described, to enter
upon Seller's premises from time to time during normal business
hours following three (3) Business Days notice to Seller
(unless an Event of Default has occurred and is continuing, in
which event no advance notice will be required hereunder, but
such entry shall be during normal business hours) during the
term of this Agreement. The purposes for which Purchaser may
enter pursuant to the terms of this Section 3.2 are as follows:
(i) to examine Seller's books, accounts, records or other
papers pertaining to Sold Receivables and otherwise pertaining
to the transactions which are the subject of this Agreement,
and for no other purposes; (ii) to examine the Collateral;
(iii) to appraise the Collateral as security; (iv) to verify
the condition of the Collateral; (v) to verify that all
Collateral has been properly accounted for; and (vi) to verify
that Seller is in compliance with all terms and provisions of
this Agreement; provided, in all cases, that Purchaser shall
have no right to examine any documents covered by attorney-
client privileges or attorney work-product. Any fees, costs or
expenses incurred by Purchaser in connection with such
inspections, audits and examinations as aforesaid, shall be the
sole responsibility of Purchaser (unless an Event of Default
has occurred and is continuing, in which event Seller shall be
solely responsible for such fees, costs and expenses). From
time to time upon the reasonable written request of Purchaser,
Seller, at its own expense, will deliver to Purchaser, or any
agent selected by Purchaser (which agent Seller shall have
consented to, such consent not to be unreasonably withheld), as
the case may be: (i) a schedule of the Sold Receivables (or
Sold Receivables relating to such Obligors as Purchaser may
specify) sold by Seller to Purchaser indicating as to each such
Sold Receivable information as to the Obligor thereon, the
Outstanding Balance thereof, the location of any Contract
evidencing such Sold Receivable and such other information as
Purchaser may reasonably deem appropriate; and (ii) copies of
any such Contract and such records and invoices pertaining
thereto and evidence thereof as Purchaser may reasonably deem
necessary to enable Purchaser to enforce its rights thereunder.
At Purchaser's request, Seller shall: (a) identify and hold as
agent for Purchaser at the offices of Seller listed in Schedule
A hereto (including without limitation for the purpose of
protecting Purchaser's ownership interest therein) all books,
records and documents evidencing or relating to the Sold
Receivables, including any underlying Contracts, and maintain a
current record of all Sold Receivables owned by Purchaser at
any time in such reasonable detail and in form and substance
satisfactory to Purchaser; (b) mark the legend "Receivables
assigned to Deutsche Financial Services (UK) Limited, under a
Receivables Purchase Agreement, dated as of January 26,1999" on
Seller's aging schedule applicable to the Sold Receivables, and
upon the occurrence of an Event of Default, on such instruments
as Purchaser may from time to time reasonably designate; and/or
(c) maintain and implement administrative and operating
procedures (including without limitation an ability to recreate
records evidencing the Sold Receivables in the event of the
destruction of the original records), and keep and maintain all
documents, books, records and other information reasonably
necessary for the collection of the Sold Receivables for
Purchaser.
B. Status Reports. Seller shall submit to Purchaser a
Status Report on the dates specified in the immediately
following sentence, substantially in the form of Exhibit V
("Status Report") consisting of information concerning
Collections, Credit Adjustments, and Defaulted Receivables.
Seller shall submit a Status Report to Purchaser (i) no later
than the thirty-fifth (35th) day after a Funding Date, with
respect to the
30-day period which commenced on such Funding Date; (ii) no
later than the sixty-fifth (65th) day after a Funding Date,
with respect to the 30-day period immediately following the 30-
day period referenced in (i); and (iii) no later than two (2)
days after a First Collection Settlement Date, with respect to
the 15-day period immediately preceding such First Collection
Settlement Date. The Status Report shall include such other
reports as Purchaser shall reasonably request. If any date for
the delivery of a Status Report is not a Business Day, then
such report shall be due on the next succeeding Business Day.
Section 3.3. Manner and Time of Payments.
A. Payments to Seller. (i) On the Funding Date. With
respect to any Funding Date, so long as Purchaser receives the
Receivables Purchase Settlement Statement by 10:00 a.m.,
Pacific time, on the related Settlement Date, Purchaser shall
pay the amounts that are payable to Seller hereunder on such
Funding Date, as applicable, in immediately available funds
deposited to the account of Seller listed in Section 13.2
hereof, no later than 11:30 a.m., Pacific time, and subject to
the provisions of any other information reasonably requested by
Purchaser from Seller in connection therewith in effect on or
prior to such date. (ii) Collection Agent Fee. Purchaser's
payment of the Collection Agent Fee to Seller shall be made in
immediately available funds deposited to the account of Seller
listed in Section 13.2 hereof, no later than 2:00 p.m., Pacific
time, on the dates and as otherwise provided under the terms of
Article 4 hereof. (iii) Generally. The foregoing
notwithstanding, any amounts due Purchaser from Seller
hereunder or in connection herewith, may be deducted by
Purchaser from any amounts owed to Seller, with notice to
Seller.
B. Payments to Purchaser. Seller shall pay the amounts
that are payable to Purchaser hereunder, in immediately
available funds, deposited to the account of Purchaser listed
in Section 13.2 hereof, no later than 11:30 a.m., London time,
on any Collection Settlement Date, or as otherwise provided,
subject to the provisions of any Status Report, or other
information reasonably requested by Purchaser from Seller in
connection therewith in effect on or prior to such date. In no
way limiting the foregoing, Seller agrees to pay Purchaser the
following:
(i) Delinquent Receivables. If the Outstanding Balance
of a Sold Receivable has not been paid in full on or before the
[ * ] day after the Funding Date on which the Purchaser
purchased such Sold Receivable, then, the Seller shall pay to
the Purchaser an amount equal to the Payment Percentage of the
unpaid Outstanding Balance of such Sold Receivable for each day
after such [ * ] day that the Outstanding Balance is greater
than zero until the earlier of (A) the date on which the Seller
notifies Purchaser that it has determined in good faith that
such Sold Receivable is uncollectible, (B) the date that is the
[ * ] day after the Funding Date on which the Purchaser
purchased such Sold Receivable, and (C) the date on which the
Outstanding Balance is reduced to zero. Any amount required to
be paid under this paragraph shall be paid to the Purchaser on
the immediately following Collection Settlement Date. As used
herein, the "Payment Percentage" [ * ].
Section 3.4. Eurodollar Deposits Unavailable or Rate
Unascertainable. In the event that on or prior to the date
the LIBOR Rate-Two Month is determined, Purchaser shall have
determined (which determination shall be conclusive and binding
on the parties hereto) that by reason of circumstances
affecting the interbank eurodollar market, adequate and
reasonable means do not exist for ascertaining the LIBOR Rate-
Two Month applicable to a Purchase, Purchaser shall promptly
give notice of such determination to Seller, and any such
Purchase shall be made using a Discount based upon the Prime
Rate less the difference in the per annum interest rate between
the Prime Rate (at the date the LIBOR Rate-Two Month ceased to
exist) and the average of the LIBOR Rate-Two Month over the 30-
day period immediately preceding the date the LIBOR Rate-Two
Month ceased to exist.
ARTICLE 4
Collection Agent Fee
[ * ] Confidential portions omitted and filed separately
with the Securities and Exchange Commission.
Section 4.1. Collection Agent Fee. A fee shall be
payable by Purchaser to Seller in its capacity as Collection
Agent (the "Collection Agent Fee"), in an amount equal to [ * ]
on the average daily balance of the Collections received by
Purchaser during the 30-day period or the 15-day period, as
applicable, preceding each Collection Agent Fee payment date
specified in the immediately following sentence. The
Collection Agent Fee shall be payable, in arrears, on that date
which is thirty (30) days after a Funding Date (for the 30-day
period preceding such payment date), the date which is 60 days
after a Funding Date (for the 30-day period preceding such
payment date), and the First Collection Settlement Date ( for
the 15-day period preceding such payment date); provided that
if any of such dates is not a Business Day, then on the next
succeeding Business Day). In no event, however, shall any
Collection Agent Fee be payable to Seller for Collections
relating to the applicable Sold Receivables received after the
related First Collection Settlement Date. The Collection Agent
Fee is to be paid by the Purchaser to the Seller as Collection
Agent in consideration of Seller's agreement to serve as a
Collection Agent and as compensation for such Collection
Agent's services. Any amounts due to Purchaser from Seller
hereunder, may be deducted from any Collection Agent Fee and
credited to Purchaser, upon notice to Seller. Following the
termination of Seller as a Collection Agent, Seller shall not
continue to earn any Collection Fees.
ARTICLE 5
Security Interest
Section 5.1. Sale; Grant of Security Interest. The
parties hereto intend that the Purchase by Purchaser of Sold
Receivables pursuant to this Agreement shall constitute a sale
under all applicable laws. Notwithstanding such intent, if for
any reason the Sold Receivables are not under applicable law
deemed to have been Purchased by Purchaser, Purchaser shall be
deemed to have made a loan to Seller in the amount of the
purchase price paid to Seller, secured by the following grant
of security in Seller's assets. In the event of any such
designation as a loan, all provisions of this Agreement
referring to the sale of the Sold Receivables shall be
construed as the context may require as references to the grant
of a security interest in such Receivables. In such regard and
in any event to secure all of Seller's current and future debts
to Purchaser under this Agreement or any side letters entered
into between Purchaser and Seller in connection with this
Agreement, whether now or hereafter existing, due or to become
due, direct or indirect, or absolute or contingent,
indemnification obligations pursuant to Section 10.1 and
payments on account of Collections received, Seller hereby
assigns and grants to Purchaser a security interest in all of
Seller's right, title and interest now or hereafter existing
in, to and under (i) all Sold Receivables, now owned or
hereafter acquired, (ii) all contract rights, chattel paper,
security agreements, instruments, documents of title, deposit
accounts, reserves and general intangibles, now owned or
hereafter acquired, all returned, reclaimed or repossessed
inventory and Products, in each case securing or otherwise
supporting such Sold Receivables, and (iii) all proceeds of any
of the foregoing (the "Collateral"). To the extent so defined,
the above assets shall have the same meanings as in Article 9
of the UCC. Seller will hold all of the Collateral in trust
for Purchaser and will account for and remit directly to
Purchaser all such proceeds when payment is required under
terms of this Agreement. Purchaser's lien or security interest
will not be impaired by any payments Seller may make to any
other person or entity. This Agreement shall constitute a
security agreement under applicable law with regard to the
security interest granted pursuant to this Section 5.1.
ARTICLE 6
Seller's Affirmative Covenants
Seller covenants and agrees that, unless Purchaser shall
otherwise give its express prior written consent, until the
earlier of the termination of this Agreement or each Sold
Receivable has been paid in full, Seller shall comply with and
perform in accordance with all covenants contained in this
Article 6.
Section 6.1. Financial Statements and Other Reports.
Seller will maintain a system of accounting established and
administered in accordance with sound business practices to
permit preparation of financial statements of Seller in
conformity with GAAP. Seller will deliver to Purchaser:
A. as soon as available and in any event within 50
days after the end of each of the first three quarters of each
fiscal year of Seller, consolidated balance sheets of Seller
as of the end of such quarter and
[ * ] Confidential portions omitted and filed separately
with the Securities and Exchange Commission.
consolidated statements of income and of cash flows of Seller
for the period commencing at the end of the previous fiscal
year and ending with the end of such quarter, certified by the
Treasurer of Seller; provided that Seller may satisfy this
obligation by filing its Form 10-Q for such fiscal quarter with
the Securities and Exchange Commission;
B. as soon as available and in any event within 105
days after the end of each fiscal year of Seller a copy of the
annual report of such year for Seller containing consolidated
financial statements for such year certified by Seller's
independent public accountants; provided that Seller may
satisfy this obligation by filing its Form 10-K for such fiscal
year with the Securities and Exchange Commission;
C. promptly after the sending or filing thereof,
copies of all reports which Seller sends to its security
holders generally, and copies of all registration statements
which Seller files with the Securities and Exchange Commission
or any national securities exchange (other than those on Form
S-8); provided that Seller may satisfy this obligation by
filing its reports with the SEC;
D. promptly upon any vice president or president of
Seller obtaining knowledge or becoming aware of an occurrence
of a breach of Seller's obligations under this Agreement which
would give rise to an Event of Default, an Officer's
Certificate specifying the nature and period of existence of
any such breach, condition or event, or specifying the notice
given or action taken by such holder or Person and the nature
of such claimed breach, event or condition, and what action, if
any, Seller has taken, is taking and proposes to take with
respect thereto;
E. thirty (30) days' notice prior to Seller's changing
its name or any name under which it does business or relocating
its chief executive offices or relocating the books, records
and documents evidencing the Receivables owned or to be
purchased by Purchaser hereunder;
F. prior to the implementation of any material change
in Seller's policies, procedures or practices with respect to
extending credit to its customers, making Credit Adjustments or
collecting amounts owed by customers, in each case that would
affect Sold Receivables, a written description of such proposed
change at least ten (10) days in advance of such change;
G. with reasonable promptness, such other information,
reports or documents concerning the Receivables which are owned
or to be purchased by Purchaser hereunder, the underlying
Contracts, or the credit or collection policies, practices and
procedures of Seller, as Purchaser may from time to time
reasonably request; and
H. such other information respecting the financial
condition or operations of Seller as Purchaser may from time to
time reasonably request.
Section 6.2. Corporate Existence, etc. Subject to Section
7.5 hereof, Seller will at all times preserve and keep in full
force and effect its corporate existence and all material
licenses, rights and privileges relating to Sold Receivables,
and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary to
avoid a material adverse effect on the validity, enforceability
and collectibility of Sold Receivables.
Section 6.3. Compliance with Laws, etc. Seller will
comply in all material respects with the requirements of all
applicable laws, rules, regulations and orders of any
governmental authority, noncompliance with which would
adversely affect the validity, enforceability or collectibility
of Sold Receivables.
Section 6.4. Transfer of Receivables. Seller shall take
all steps necessary or, in the reasonable opinion of Purchaser,
advisable to validate or protect the ownership interest of
Purchaser in, or to defeat the assertion by any third party of
any adverse claims with respect to, the Sold Receivables or any
underlying Contracts. If an Event of Default by Seller
hereunder has occurred and is continuing, Seller hereby
irrevocably authorizes Purchaser to execute and deliver, in
Seller's name and on Seller's behalf, such
instruments and documents (including bills of sale and
assignments) necessary or desirable to evidence or protect
Purchaser's ownership interest in the Sold Receivables.
Regardless of whether an Event of Default by Seller has
occurred and is continuing, Seller hereby irrevocably
authorizes Purchaser to execute and file, in Seller's name and
on Seller's behalf, financing statements (including amendments
and continuation statements) under the UCC (or similar law
where the UCC is not enacted) in such jurisdictions where it
may be necessary to validate or protect Purchaser's position as
owner of, or, as provided in Section 5.1, secured party with
respect to, such Sold Receivables. Seller shall execute and
deliver such additional documents and shall take such further
action as Purchaser may reasonably request to effect or
evidence the transfer of the Sold Receivables and shall execute
and deliver to Purchaser such powers-of-attorney as may be
necessary or appropriate to enable Purchaser to endorse for
payment any check, draft or other instrument delivered in
payment of any amount under or in respect of a Sold Receivable.
If, at any time, Seller receives any cash or checks, drafts or
other instruments for the payment of money on account or
otherwise in respect of Sold Receivables, Seller shall
segregate such cash and other items, hold such cash and other
items (properly endorsed, where required, so that such items
may be collected by Purchaser) in trust for Purchaser, and
promptly paid directly to Purchaser in accordance with Section
3.1.B(6).
Section 6.5. Assignment of Contracts; Instruments. Seller
hereby assigns to Purchaser all rights of Seller under each
Contract underlying a Sold Receivable relating to the
collectibility of payments thereunder, security interests and
other liens created in connection therewith and the enforcement
thereof, but Purchaser does not and shall not thereby assume
any obligations of Seller under any such Contract. Such
assignment shall include without limitation security interests
in favor of Seller in any property (including without
limitation any Goods) securing any Sold Receivable, whether
pursuant to the contract underlying such Sold Receivables or
otherwise, and all terms and conditions of this Agreement shall
be deemed applicable to such assigned security interests
generally in the same manner and to the same extent as applied
to the related Sold Receivable. In the event any Sold
Receivable becomes, either at the time of creation of such Sold
Receivable or any time thereafter, evidenced by a promissory
note or other document or instrument (other than a Contract),
Seller will promptly endorse and physically deliver such
promissory note, document or instrument to Purchaser.
ARTICLE 7
Seller's Negative Covenants
Until the earlier of the termination of this Agreement or
each Sold Receivable has been paid in full, unless Purchaser
shall otherwise give prior written consent, Seller will perform
all covenants contained in this Article 7.
Section 7.1. Character of Business. Seller will make no
material change in its Collection Procedures that would
adversely affect the validity, enforceability or collectibility
of the Sold Receivables or materially adversely affect the
ability of Seller to perform its obligations hereunder without
the consent of Purchaser.
Section 7.2. Modification of Contracts. Except as set
forth in Section 3.1.B(3), without the prior written consent of
Purchaser, Seller will not amend, modify or waive any term or
condition of any Contract underlying any Sold Receivable, which
amendment, modification or waiver would adversely affect the
validity, enforceability or collectibility of such Receivable
or adversely affect Purchaser's right to collect any Sold
Receivables.
Section 7.3. Quality of Receivables. Seller will not sell
to Purchaser any Receivable that is not an Eligible Receivable
on the date of sale. Seller will not sell to Purchaser any
Receivable, that, on the date of sale : (i) is an Ineligible
Receivable; (ii) is evidenced by a promissory note or other
document or instrument (other than a Contract); (iii) does not
conform with applicable laws, rules or regulations or is based
on a Contract that does not conform in all material respects
with applicable laws, rules or regulations; (iv) is a Defaulted
Receivable; (v) is a Receivable with respect to which Seller is
engaged in any dispute or warranty claim or which is subject to
any lien, claim, security interest, offset, counterclaims or
defense; (vi) permits the Obligor to pay less than the
Outstanding Balance for any reason other than a Credit
Adjustment; (vii) does not satisfy the requirements of Sections
8.4 and 8.8 hereof in all material respects; or (viii) the
Purchase of
which by Purchaser, or the sale of which by Seller, is subject
to any order, judgment or decree of any court, arbitrator or
similar tribunal or governmental authority, or is the subject
of any proceedings before any such court, arbitrator or similar
tribunal or government authority purporting to enjoin or
restrain Purchaser from making any Purchase, Seller from
selling such Receivable or the Collection Agent or Purchaser
from making any Collection of such Receivables. Purchaser may
from time to time, in its discretion, upon advance written
notification to Seller, withdraw its approval of any or all of
the Obligors, including but not limited to those listed on
Schedule B hereto.
Section 7.4. Financial Statements. Seller will not
prepare, or permit the preparation of, any financial statements
which shall account for the transactions contemplated hereby in
a manner that is inconsistent with Purchaser's ownership
interest in the Sold Receivables.
Section 7.5. Restriction on Fundamental Changes. Seller
can merge with another Person if immediately thereafter, giving
effect to such merger, no Event of Default exists and either
(i) the Seller survives the merger or (ii) the successor agrees
to be bound by this Agreement.
Section 7.6. Seller's Interest. Seller will not retain
any interest in any Sold Receivable hereunder and each sale of
a Sold Receivable hereunder shall be of all of Seller's right,
title and interest in such Sold Receivable.
Section 7.7. Negative Pledge. Seller will not mortgage,
pledge, grant or permit to exist a security interest or Lien
caused by it, in or upon any of the Sold Receivables or the
Collateral.
ARTICLE 8
Seller's Representations and Warranties
In order to induce Purchaser to enter into this Agreement
and to make the Purchases, Seller represents and warrants to
Purchaser that the following statements are true, correct and
complete in all material respects (except to the extent such
representations and warranties are already qualified as to
materiality in which case they are true, correct and complete)
as of the date hereof and as of the date of each sale of
Receivables hereunder (all representations and warranties
concerning Receivables shall be made solely as of the date of
the sale of such Receivables hereunder):
Section 8.1. Organization, Powers and Good Standing.
A. Organization and Powers. Seller is a corporation duly
organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation. Seller has all requisite
corporate power and authority to own and operate its
properties, to carry on its business as such business is now
conducted and as it is proposed to be conducted hereunder, to
enter into this Agreement and to carry out the transactions
contemplated hereby, except where failure to have such licenses
and permits would not have a material adverse effect on the
financial condition or assets of Seller.
B. Good Standing. Seller is in good standing wherever
necessary to carry on its present business and operations,
except in jurisdictions in which the failure to be in good
standing has and will have no material adverse effect on the
conduct of the business of Seller or any adverse effect on the
validity, enforceability or collectibility of any Sold
Receivable.
Section 8.2. Authorization of Sales, etc.
A. Authorization of Sales. The execution, delivery and
performance of this Agreement and the sales of Receivables sold
and to be sold to Purchaser hereunder and the grant of the
security interest in the Collateral have been duly authorized
by all necessary corporate action by Seller.
B. No Conflict. The execution, delivery and performance
by Seller of this Agreement and the sales of Receivables do not
and will not: (i) violate any provision of law applicable to
Seller, the Certificate of Incorporation or Bylaws of Seller,
or any order, judgment or decree of any court or other agency
of government binding on Seller; (ii) conflict with, result in
a breach of or constitute (with due notice or lapse of time or
both) a default under or permit an acceleration or increased
amortization of any material obligation of Seller; (iii) result
in or require the creation or imposition of any Lien, charge or
encumbrance of any nature whatsoever upon any of the properties
or assets of Seller except as provided herein or pursuant to
the terms hereof; or (iv) require any approval of stockholders
or any approval or consent of any Person under any obligation
of Seller or Contract to which Seller is a party other than
approvals or consents that have been obtained and disclosed in
writing to Purchaser.
C. Governmental Consents. The execution, delivery and
performance by Seller of this Agreement and the Purchases of
Receivables do not and will not require any registration with,
consent or approval of, or notice to, or other action to, with
or by, any federal, state or other governmental authority or
regulatory body or other Person, other than a filing with
certain Secretaries of State and other jurisdictions evidencing
the Purchase of Receivables hereunder, and no transaction
contemplated hereby requires compliance with any bulk sales act
or similar law.
D. Binding Obligation. This Agreement creates and
constitutes legal, valid and binding obligations of Seller,
enforceable in accordance with its terms, except as enforcement
may be limited by applicable bankruptcy, insolvency or similar
laws and principles of equity.
Section 8.3. No Material Adverse Change. Since January
20, 1999, there has been no material adverse change in the
business, operations, properties, or financial position of the
Seller and its subsidiaries taken as a whole.
Section 8.4. Protection of Ownership Interest. All
filings or other actions under the UCC have been made or taken
in each jurisdiction that are necessary or appropriate to
validate and perfect Purchaser's ownership interest in and
rights to collect any and all Sold Receivables and the proceeds
thereof; Purchaser has a valid and perfected ownership or
security interest in the Sold Receivables and the proceeds
thereof, free and clear of all security interests, liens,
charges, encumbrances or rights of others except as otherwise
expressly provided herein; and no effective financing statement
or other instrument similar in effect covering all or any part
of the Sold Receivables is currently on file or of record at
any location except as has been filed or recorded from time to
time in favor of Purchaser in accordance with this Agreement.
Section 8.5. Office Locations. As of the date hereof, the
chief executive office of Seller is located at the address of
Seller's business office appearing in Schedule A hereof, and
the books, records and documents evidencing the Receivables to
be sold hereunder are located at Seller's business offices
located at the address appearing in Schedule A hereof.
Section 8.6. Taxes, etc. Seller's federal tax
identification number is 94-1655526. There is no federal,
state or local law or ordinance (other than income or franchise
tax laws applicable to Purchaser generally) under which any
Receivable which is sold to Purchaser under this Agreement
shall be subjected to any property, excise, sales or other tax,
assessment or governmental charge other than income or
franchise taxes of Purchaser. To the extent any such
Receivable is subject to any such tax, assessment or
governmental charge, Seller hereby agrees to pay all such
taxes, assessments and governmental charges.
Section 8.7. Disclosure. No representation or warranty of
Seller contained in this Agreement or any other document,
certificate or written statement furnished to Purchaser by
Seller in connection with the transactions contemplated by this
Agreement contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the
circumstances under which they were made, not misleading;
provided that any projections, proforma or preliminary
financial information furnished are based on good faith
estimates and assumptions believed to be reasonable at the time
made and Purchaser acknowledges that such projections as to
future events are not to be viewed as facts and that actual
results for such period may differ from such projected results.
There is
no fact known to Seller (other than matters of a general
economic nature) that materially adversely affects the
business, operations, property, assets or condition (financial
or otherwise) of Seller and its Subsidiaries, taken as a whole,
that has not been disclosed herein or in such other documents,
certificates and statements furnished to Purchaser for use in
connection with the transactions contemplated hereby.
Section 8.8. Receivables Valid and Binding; No Litigation.
Each Receivable sold to Purchaser hereunder constitutes at the
time of sale the legal, valid and binding obligation of the
Obligor to Seller, subject to laws affecting the rights of
creditors generally. Each such Receivable complies at the time
of sale with the provisions of all applicable laws and
regulations, whether federal, state or local, applicable
thereto, other than provisions as to which the failure to
comply would not adversely affect the validity, enforceability
or collectibility of the Receivables, and satisfies at the time
of sale the requirements of Section 7.3 hereof in all respects.
Each such Receivable is denominated and payable in Dollars.
There are no known counterclaims or rights of set-off limiting
the right of Purchaser to collect the Outstanding Balance, as
adjusted for Credit Adjustments, of each such Receivable. To
the best of Seller's knowledge, there is no order, judgment or
decree of any court, arbitrator or similar tribunal or
governmental authority purporting to enjoin or restrain
Purchaser from making any Purchase, Seller from selling any
Receivable or the Collection Agent or Purchaser from making any
Collection, or which might otherwise adversely affect Seller's
ability to perform its obligations hereunder. To the best of
Seller's knowledge, there are no proceedings before any court,
arbitrator or similar tribunal or governmental authority
seeking to enjoin or restrain Purchaser from making any
Purchase, Seller from selling any Receivable or the Collection
Agent or Purchaser from making any Collection, or which might
otherwise adversely affect Seller's ability to perform its
obligations hereunder.
Section 8.9. Satisfaction of Conditions Precedent. At the
time of each Purchase hereunder, each of the conditions
precedent to such Purchase set forth in Article 9 will have
been (i) waived in writing by Purchaser, or (ii) satisfied.
ARTICLE 9
Conditions To Purchases
Section 9.1. Conditions to Initial Purchases. The
obligation of Purchaser to make its initial Purchase is, in
addition to the conditions precedent specified in Sections 9.2
and 9.3 hereof, subject to prior or concurrent satisfaction of
the following conditions. On or before the Initial Closing
Date, Seller shall deliver to Purchaser:
A. Good Standing, Etc. Evidence reasonably satisfactory
to Purchaser that Seller is duly organized and existing under
the laws of Seller's state of incorporation and in California;
B. Corporate Resolutions. Resolutions of the Board of
Directors of Seller approving and authorizing the execution,
delivery and performance of this Agreement and the sales of
Receivables to be made hereunder, certified as of the Initial
Funding Date by its corporate secretary or an assistant
secretary;
C. Signature and Incumbency Certificate. Signature and
incumbency certificates of the officers of Seller executing
this Agreement;
D. UCC Searches. A certificate copy of each Request for
Information or Copies (Form UCC-11) (or a similar search report
acceptable to Purchaser) listing the Financing Statements filed
with respect to the Collateral (or similar search reports for
jurisdictions where the UCC is not enacted), and showing that
no Financing Statements have been filed with respect to, and
presently cover, such Receivables (except those filed pursuant
to this Agreement); the foregoing notwithstanding, Purchaser
hereby confirms that with respect to the Initial Funding Date,
Purchaser shall obtain such searches required hereunder;
E. Agreement. Executed original of this Agreement;
F. Opinion of Counsel. Executed original of one or more
favorable written opinions of counsel, substantially in the
form of Exhibit I hereto, reasonably satisfactory to Purchaser,
dated as of the Initial Funding Date;
G. UCC-1s. Purchaser shall have received from Seller
acknowledgment copies of all Financing Statements (Form UCC-1)
filed with respect to the Collateral in each jurisdiction where
necessary or appropriate to perfect Purchaser's ownership
interest in such Collateral (or evidence of the satisfaction of
such similar filing or other requirements as may be so
necessary in each jurisdiction where the UCC is not enacted),
Purchaser hereby agreeing that with respect to the Initial
Funding Date, if Purchaser has received duly executed originals
of the Financing Statements required hereunder at least two (2)
days prior to the Initial Funding Date, then the acknowledgment
copies of such filings required hereunder will be acceptable if
received by Purchaser no later than ten (10) Business Days
after such Initial Funding Date;
H. Receivables Purchase Settlement Statement. As of the
Settlement Date in respect of the Initial Funding Date, Seller
shall deliver the Receivables Purchase Settlement Statement
required by Section 2.1.C;
I. Subordination Agreements. Subordination agreements in
form and substance acceptable to Purchaser from any and all
prior filers with conflicting security interests in the
Collateral; and
J. Other Documents. Such other documents, certificates,
submissions, instruments, and agreements as reasonably
requested by Purchaser relating to the transaction herein
contemplated.
Section 9.2. Conditions to All Purchases. The obligation
of Purchaser to make each Purchase, including the initial
Purchase, is subject to the following further conditions
precedent:
A. Purchaser shall have received, in accordance with the
provisions of Section 2.1 as of any Settlement Date, an
originally executed Receivables Purchase Settlement Statement
relating to such Purchase, signed by the chief executive
officer, the chief financial officer, the treasurer or any
other authorized officer or designee of Seller on behalf of
Seller.
B. As of the date of any Purchase:
1. The representations and warranties of Seller contained
herein shall be true, correct and complete in all material
respects on and as of the date of Purchase to the same
extent as though made on and as of that date;
2. All Receivables sold by Seller on such date hereunder
shall comply in all material respects with Section 7.3
hereof;
3. No event shall have occurred and be continuing or would
result from the consummation of the Purchase contemplated
by such Receivables Purchase Settlement Statement that
would constitute an Event of Default or permit the
acceleration or the increased amortization of the
obligations created, or but for the passage of time or the
giving of notice or both would constitute an Event of
Default or permit the acceleration or the increased
amortization of the obligations created, under this
Agreement or any other agreement to which Seller is a
party;
4. Seller shall have performed in all material respects
all agreements and satisfied all conditions which this
Agreement provides shall be performed by it on or before
such date of Purchase;
5. Seller shall have delivered such other and further
Receivables Purchase Settlement Statements as may be
required hereunder;
6. There shall not have occurred and be continuing an
Event of Default by Seller under this Agreement;
7. Seller shall have delivered such other and further UCC-
1s, amendments thereto and Subordination Agreements as
Purchaser shall deem reasonably necessary; and
8. Seller shall have delivered such other documents,
certificates, submissions, instruments, and agreements as
reasonably requested by Purchaser relating to the
transaction herein contemplated.
ARTICLE 10
Indemnities By Seller
Section 10.1. Right to Indemnification. Without prejudice
to any other rights that Purchaser may have hereunder or under
applicable law, Seller agrees to indemnify, pay and hold
Purchaser and the employees and agents of Purchaser
(collectively called the "Indemnitees") harmless from and
against, any and all liabilities, obligations, losses, damages
(including consequential damages, except as expressly set forth
below), penalties, actions, judgments, suits, claims, costs and
expenses (including without limitation the reasonable fees and
disbursements of counsel for such Indemnitees and reasonable
costs of investigation and accountants) (collectively,
"Indemnified Amounts"), which arise or result from: (i) any
breach by Seller of its duties hereunder individually or as the
Collection Agent, in connection with the collection of Sold
Receivables; (ii) any dispute, claim, offset or defense of any
Obligor (other than as a result of the Obligor's bankruptcy or
insolvency) to the payment of any Receivable owned by Purchaser
(including without limitation a defense based on such
Receivable or the underlying Contract not being the legal,
valid and binding obligation of such Obligor enforceable
against such Obligor in accordance with its terms), in either
case other than as a result of an act or omission of Purchaser
not required or permitted under this Agreement; (iii) any other
claim resulting from the sale of the Products and Services
underlying the Receivable (including without limitation any
warranty or product liability claims); or (iv) any breach by
Seller of any of the terms, covenants, conditions or
representations of this Agreement; excluding, in all cases
however, (A) Indemnified Amounts to the extent resulting from
gross negligence or willful misconduct on the part of such
Indemnitee, (B) consequential, indirect, punitive or exemplary
damages, except such damages which are imposed on the
Indemnitee in favor of any third party in connection with the
actions described in (i) through (iv) above, and (C) recourse
for uncollectible Receivables and all income and franchise
taxes on Purchaser; provided, further, that if an arbitrator or
court of competent jurisdiction in a final non-appealable order
determines that such Indemnified Amounts arose in part from
such Indemnitee's gross negligence or willful misconduct,
Seller shall reimburse such Indemnitee for the portion of such
claim not resulting from such Indemnitee's gross negligence or
willful misconduct. The obligations of Seller pursuant to this
Section 10.1 shall survive any termination of this Agreement.
Section 10.2. Notification of Potential Liability. Each
party will make good faith efforts to identify potential
situations involving possible liability under this Article 10,
and to determine the amount, if any, of such liability or
obligations, and will, upon learning of such potential
situations, promptly advise the other party.
Section 10.3. Litigation. The Seller agrees at its
expense, at the Purchaser's request, to cooperate with the
Purchaser in any action, suit or proceeding brought by or
against the Purchaser relating to any of the transactions
contemplated by this Agreement or to any of the Sold
Receivables owned by the Purchaser (other than an action, suit
or proceeding by the Seller against the Purchaser). In
addition, the Seller agrees to notify the Purchaser and the
Purchaser agrees to notify the Seller, at the Seller's expense,
promptly upon learning of any pending or threatened action,
suit or proceeding if the judgment or expenses of defending
such action, suit or proceeding would be covered by Section
10.1 and (except for an action, suit or proceeding by the
Seller against the Purchaser) to consult with the Purchaser,
concerning the defense and prior to settlement; provided,
however, that if (i) the Seller shall have acknowledged that
Section 10.1 would cover any judgment or expenses in any
action, suit or proceeding and (ii) in the Purchaser's sole
determination, the Seller has the financial ability to satisfy
such judgment or expenses, then the Seller shall have the
right, on the Purchaser's behalf but at the Seller's expense,
to defend such action, suit or proceeding with counsel selected
by the Seller and shall have sole discretion as to whether to
litigate, appeal or enter into an exclusively monetary
settlement; and provided further that (i) the Purchaser's
failure to provide any notice pursuant to this Section 10.3
shall not affect the indemnification of any party by the Seller
hereunder, and (ii) the Seller's sole and exclusive remedy in
the event of any such failure to give notice by the Purchaser
shall be a separate action against the Purchaser for damages
actually incurred by the Seller as a direct result of the
Purchaser's failure to provide such notice.
Section 10.4. Seller to Remain Obligated. Anything herein
to the contrary notwithstanding: (i) Seller shall remain
responsible and liable under the Contracts to the extent set
forth in such Contracts or otherwise to perform all of its
duties and obligations thereunder to the same extent as if the
Sold Receivables applicable to such Contracts had not been sold
to Purchaser hereunder; (ii) the exercise by Purchaser of any
of its rights hereunder shall not release Seller from any of
its duties or obligations under such Contracts; and (iii)
Purchaser shall not have any obligation or liability under such
Contracts by reason of the purchase of the applicable Sold
Receivables hereunder, nor shall Purchaser be obligated to
perform any of the obligations or duties of Seller thereunder.
ARTICLE 11
Termination
Section 11.1. Termination. Absent termination of this
Agreement pursuant to Article 12, this Agreement shall continue
in full force and effect until the earlier of the date (i)
which is ninety (90) days after written notice from any Party
to the other Party of its election to terminate this Agreement,
or (ii) on which all obligations of Seller to Purchaser and
Purchaser to Seller, have been satisfied in full (the
"Termination Date"). Subject to the provisions of Article 12,
(i) no termination of this Agreement shall affect any monetary
obligations hereunder of any Party arising prior to the
effective date of such termination, (ii) no termination of this
Agreement shall affect the obligation of Seller to make any
payments to Purchaser required hereunder, including but not
limited to payments of Credit Adjustments, (iii) no termination
of this Agreement shall affect any obligations which,
specifically by their terms, survive termination hereof,
including but not limited to, Seller's indemnification
obligations hereunder, and (iv) payments of any and all amounts
from Obligors with respect to Sold Receivables (regardless of
the existence of any other obligation or indebtedness of such
Obligors then owed to the Seller or any other person or entity)
to the Seller shall continue to be treated as Collections and
shall be applied to repayment of Sold Receivables as set forth
herein. Notwithstanding any such termination, Seller agrees
that from time to time thereafter it will promptly execute and
deliver all further instruments and documents, and take all
further actions, that may be necessary or that Purchaser may
reasonably request, in order to perfect, protect or more fully
evidence Purchaser's right, title and interest in and to the
Sold Receivables owned by Purchaser hereunder; to enable
Purchaser to exercise or enforce any such rights; to facilitate
maximum Collections; and/or otherwise to effectuate the intent
of the Parties hereto with respect to the Sold Receivables and
Collections.
ARTICLE 12
Events of Default
Section 12.1. Events of Default. Any of the following
events will constitute an Event of Default by Seller under this
Agreement:
(a) Except for the breach described in Section 12.1(c)
below, Seller fails to perform any of its obligations contained
herein or in any other related agreements between Seller and
Purchaser, and such breach is not cured within thirty (30) days
of Seller's receipt of written notice of such breach from
Purchaser;
(b) any representation, statement, report, or
certificate made or delivered by Seller to Purchaser is not
accurate in all material respects when made (or when deemed
made);
(c) Seller fails to pay any of its monetary obligations
payable to Purchaser hereunder or under any other agreements
related to this Agreement within five (5) days of when due and
payable;
(d) any event or condition shall occur which results in
the acceleration of the maturity of any debt of Seller or any
subsidiary of Seller to a third party in excess of $50,000,000
or enables (or, with the giving of
notice or lapse of time or both, would enable) the holder of
such debt or any Person acting on such holder's behalf to
accelerate the maturity thereof;
(e) final judgments or orders for the payment of money
in excess of $50,000,000 in the aggregate (excluding amounts
with respect to which a financially sound and reputable insurer
has admitted liability) shall be rendered against the Seller or
any subsidiary of Seller and such judgments or orders shall
continue unsatisfied or unstayed for a period of thirty (30)
consecutive days;
(f) Seller shall cease existence as a corporation,
other than as permitted under Section 7.5 hereof;
(g) Seller or any subsidiary of Seller shall commence a
voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its
debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, or shall consent to
any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any corporate action to
authorize any of the foregoing; provided, however, that no
event that would otherwise constitute an Event of Default under
this Section 12.1(g) shall be an Event of Default if the total
assets of all entities with respect to which such event has
occurred which would otherwise have constituted an Event of
Default under Sections 12.1 , (g), or (h) do not exceed
$50,000,000 in the aggregate; or
(h) an involuntary case or other proceeding shall be
commenced against Seller or any subsidiary of Seller seeking
liquidation, reorganization or other relief with respect to it
or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days; or an order
for relief shall be entered against Seller or any subsidiary of
Seller under the federal bankruptcy laws as now or hereafter in
effect; provided, however, that no event that would otherwise
constitute an Event of Default under this Section 12.1(h) shall
be an Event of Default if the total assets of all entities with
respect to which such event has occurred which would otherwise
have constituted an Event of Default under Sections 12.1 (g) or
(h) do not exceed $50,000,000 in the aggregate.
Section 12.2. Remedies. If any Event of Default is not
cured within the period specified above, (with respect to
Sections 12.1 (g) or (h) Purchaser may act immediately upon the
occurrence of any such Event of Default), Purchaser may, at any
time of its election, without prior notice or demand to Seller,
do any one or more of the following: (i) cease making
Purchases hereunder; (ii) declare the Facility Termination Date
to have occurred; (iii) apply a default charge to Seller's
outstanding monetary obligations then due and payable to
Purchaser hereunder equal to the lesser of four percent (4%)
per annum in excess of the Prime Rate, or the highest lawful
contract rate of interest permitted by applicable law;
provided, however, that such default charge shall accrue only
during the continuance of an Event of Default or until payment
of such monetary obligation and only be applicable to (A)
Collections which Seller has failed to pay to Purchaser in
accordance with the terms hereof after the applicable First
Collection Settlement Date, and (B) Credit Adjustments, any
delinquent Receivables payments described in Section 3.3.B(i)
hereof, and any other obligations payable by Seller to
Purchaser hereunder or under any other related agreements,
which Seller has failed to pay to Purchaser when due (other
than any indemnification obligations), or (iv) exercise any or
all rights under applicable law. All Purchaser's rights and
remedies are cumulative. The Purchaser's failure to exercise
any of its rights or remedies hereunder will not waive any of
its rights or remedies as to any past, current or future Event
of Default.
ARTICLE 13
Miscellaneous
Section 13.1. Costs and Expenses. Seller shall pay on
demand all costs and expenses incurred by Purchaser in
connection with enforcement of this Agreement and the other
documents to be delivered hereunder, including accountants' and
attorneys' fees and expenses. The obligations of Seller under
this Section 13.1 shall survive the termination of this
Agreement.
Section 13.2. Addresses. All Notices provided for
hereunder shall be in writing (including facsimile
transmissions or telegraphic or telex communications) and
mailed (return receipt requested), telecopied, telegraphed,
telexed or delivered, as appropriate, to each party at the
address set forth as follows or at such other address as the
party affected may designate in a written notice to the other
parties hereto complying as to delivery with the terms of this
Article 13. All such Notices and fund transfers shall be
effective when received.
If Notice to Purchaser:
Deutsche Financial Services (UK) Limited
1 Station View
Guildford, Surrey
England, GU1 4JY
Attention: Senior Vice-President
Facsimile No. 011-44-1-483-500340
With a copy to:
Deutsche Financial Services Corporation
655 Maryville Centre Drive
St. Louis, MO 63141-5832
Attention: General Counsel
Facsimile No.: (314) 523-3190
If Notice to Seller:
Applied Materials, Inc.
3050 Bowers Avenue, M/S 2036
Santa Clara, CA 95054
Attention: Diane Gale, Assistant Treasurer
Facsimile No.: (408) 986-7825
With a copy to:
Applied Materials, Inc.
3050 Bowers Avenue, M/S 2062
Santa Clara, CA 95054
Attention: Barry Quan, Managing Director, Legal Affairs
Facsimile No.: (408) 986-2836
All funds transfers shall be made as follows:
If funds transfer to Purchaser:
Bank: Deutsche Bank London
Swift # : DEUTGB2LXXX:
Account No.: 0154344-001
Reference: Deutsche Financial Services
If funds transfer to Seller:
Bank: Mellon Bank, Pittsburgh, PA.
ABA Routing No.: 043000261
Account No.: 020 8830
Reference: Applied Materials Inc.
Section 13.3. Further Cooperation. Seller agrees that from
time to time, at its expense, it will promptly execute and
deliver all further instruments and documents, and take all
further action, that may be necessary or that Purchaser may
reasonably request, in order to perfect, protect or more fully
evidence Purchaser's right, title and interest in and to the
Sold Receivables owned by Purchaser hereunder or to enable
Purchaser to exercise or enforce any such rights. Purchaser
will promptly execute and deliver any release or termination
statement required under the UCC when this Agreement shall have
terminated and all Sold Receivables shall have either been
collected in full or otherwise discharged in a manner
reasonably satisfactory to Purchaser.
Section 13.4. Severability. In case any provision in or
obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and
enforceability of the remaining provisions or obligations, or
of such provision or obligation in any other jurisdiction,
shall, to the extent permitted by law, not in any way be
affected or impaired thereby.
Section 13.5. Amendments and Waivers. No amendment or
waiver of any provision of this Agreement, nor consent to any
departure by Seller or Purchaser therefrom, shall in any event
be effective unless the same shall be in writing and signed by
Seller and Purchaser, and then such waiver or consent shall be
effective only in the specified instance and for the specific
purpose for which given.
Section 13.6. Cumulative Rights. All rights and remedies
of the parties hereto under this Agreement shall, except as
otherwise specifically provided herein, be cumulative and
nonexclusive of any rights and remedies which they may have
under any other agreement or instrument, by operation of law,
or otherwise.
Section 13.7. Effectiveness. This Agreement shall become
effective when it shall have been executed and delivered by all
parties hereto and thereafter shall be binding upon and inure
to the benefit of Seller and Purchaser and their respective
successors and assigns, except that neither party shall have
the right to assign its rights hereunder or any interest herein
without the prior written consent of the other party, which
consent may in the discretion of such other party be withheld;
provided, however, that Purchaser may participate any of its
interest in this Agreement and the Sold Receivables to a third
party, with the consent of Seller if no Event of Default exists
and no consent of Seller but with notice to Seller if an Event
of Default exists.
Section 13.8. Execution in Counterparts. This Agreement
may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which
taken together shall constitute one and the same Agreement.
Section 13.9. Confidentiality. The Purchaser and the Seller
each shall hold all non-public information obtained pursuant to
this Agreement and the transactions contemplated hereby or
effected in connection herewith confidential. Purchaser may
make disclosure reasonably required by any bona fide transferee
or prospective transferee in connection with the contemplated
transfer of any Sold Receivable or participation in this
Agreement by the Purchaser so long as such Person signs a
confidentiality agreement. Either Party may disclose
confidential information as required by law or as requested by
any governmental agency or representative thereof or pursuant
to legal process; provided that, unless specifically prohibited
by applicable law or court order, each party hereto shall
notify the other parties hereto of any request by any
governmental agency or representative thereof (other than any
such request in connection with an examination of the financial
condition of the Purchaser by such governmental agency) for
disclosure of any such non-public information prior to
disclosure of such information to permit the party affected to
contest such disclosure, if
possible; provided further that in no event shall the Purchaser
be obligated or required to return any materials furnished by
the Seller.
Section 13.10. No Affiliation. Purchaser and Seller each
hereby represents and warrants that neither Purchaser nor
Seller is under common control or ownership with the other.
Neither Seller nor Purchaser shall have any right or authority
to bind the other or create any obligation or responsibility,
express or implied, on behalf of the other, or in the other's
name, except as may be herein expressly permitted. Nothing
stated in this Agreement shall be construed as constituting
Seller and Purchaser as partners or joint venturers, or as
creating the relationship of employer and employee, master and
servant, franchisor and franchisee, or principal and, except
for Seller being Collection Agent, agent between Seller and
Purchaser.
Section 13.11. List of Schedules and Exhibits. The
following Schedules and Exhibits are attached to this Agreement
and are incorporated herein by this reference:
Schedule A - Seller's Chief Executive Offices
Schedule B - Acceptable Obligors
Schedule C - Form of Receivable Verification Letter
Exhibit I - Forms of Opinions of Counsel
Exhibit II - Form of Receivables Purchase
Settlement Statement
Exhibit III - Seller's Payment Terms
Exhibit IV - Seller's Collection Procedures
Exhibit V - Form of Monthly Status Report
Section 13.12. Limitation on Damages. Except as may be
expressly provided for in this Agreement or any other agreement
between them, neither Purchaser nor Seller shall be liable to
the other for exemplary, consequential or punitive damages.
Section 13.13. Jurisdiction; Jury Trial Waiver, Etc. ANY
LEGAL PROCEEDING WITH RESPECT TO ANY DISPUTE OR OTHER MATTER
ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE
DOCUMENTS INSTRUMENTS OR AGREEMENTS RELATED HERETO WILL BE
TRIED IN A COURT OF COMPETENT JURISDICTION LOCATED IN SANTA
CLARA COUNTY, CALIFORNIA, BY A JUDGE WITHOUT A JURY. SELLER AND
PURCHASER WAIVE ANY RIGHT TO A JURY TRIAL IN ANY SUCH
PROCEEDING. SELLER AND PURCHASER FURTHER WAIVE ANY RIGHT TO
CLAIM ANY EXEMPLARY OR PUNITIVE DAMAGES IN ANY SUCH PROCEEDING.
Section 14. Governing Law. Purchaser and Seller acknowledge
and agree that this and all other agreements between Purchaser
and Seller have been substantially negotiated, and will be
substantially performed, in the State of California.
Accordingly, Purchaser and Seller agree that this Agreement and
all matters relating hereto shall be governed by and construed
in accordance with the laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement by their officers thereunto duly
authorized as of the date first above written.
THIS AGREEMENT CONTAINS JURY WAIVER AND PUNITIVE DAMAGES
WAIVER PROVISIONS.
APPLIED MATERIALS, INC.
By: /s/ Nancy H. Handel
Title: Vice President Global
Finance and Treasurer
By: /s/ Joseph R. Bronson
Title: Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
DEUTSCHE FINANCIAL SERVICES
(UK) LIMITED
By: /s/ Richard C. Goldman
Title: Director
<PAGE>
SCHEDULE A
CHIEF EXECUTIVE OFFICES
Applied Materials, Inc.
3050 Bowers Avenue,
Santa Clara, CA 95054
<PAGE>
SCHEDULE B
ACCEPTABLE OBLIGORS
The following Obligors shall be deemed acceptable, subject
in all events to the terms of the Agreement and subject further
to the maximum Outstanding Balance limitation set forth
opposite such Obligor's name, which additionally are subject,
in all events to the A/R Limit:
OBLIGOR MAXIMUM
OUTSTANDING
BALANCE LIMITATION
Advanced Micro Devices-Saxony $10,213,579.15
Compagnie IBM France $3,872,538.16
Intel Electronics Ltd. $1,822,071.56
Micron Technology Italia S.R.L. $5,146,919.68
Philips Bedrijven $1,000,000.00
Siemens AG $849,150.00
STMicroelectronics $1,852,668.00
<PAGE>
SCHEDULE C
FORM OF RECEIVABLE VERIFICATION LETTER
SCHEDULE C
Applied Materials, Inc.
1 Station View
Guildford, Surrey
England GU1 4JY
For Comparison Purposes Only
This is not a request for remittance
________________
Gentlemen,
We are conducting an audit of our Invoice Processing
System. Please advise whether the following unpaid charges
against your account as of _______ are in agreement with your
records.
The items indicated may or may not include all of the current
charges. Verification of only those listed is requested.
In either case, please sign below in the space provided and
return this form directly to Applied Materials Inc. at the
address listed above in the postage prepaid envelope enclosed
for your convenience. Please do not make any payments to this
address.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Invoice Number Invoice Date P.O. Number Amount Due
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- --
Total:
Remarks:
- ---------------------------------------------------------------
- ---------------------------------------------------------------
THE ABOVE LISTED INVOICES, NUMBERS, DATES, AND AMOUNTS
Do agree with our records
Do not agree with our records
Authorized Signature
If you have any questions, please call Dan Clayton at (408) 563-7315.
<PAGE>
EXHIBIT I
FORMS OF OPINIONS OF COUNSEL
January 28, 1999
Deutsche Financial Services (UK) Limited
1 Station View
Guilford, Surrey, England, GU1 4JY
Ladies and Gentlemen:
We have acted as counsel to Applied Materials, Inc., a Delaware
corporation (the "Company") in connection with that certain
Receivable Purchase Agreement (the "Agreement") dated as of
January 26, 1999 between the Company and you.
In this regard, we have examined executed originals or copies
of the Agreement, a copy of which have been delivered to you,
including the letter from the Company to you (the
"Assignment") dated January 28, 1999 titled Receivables
Purchase Settlement Statement (Including Assignment of
Receivables) delivered in connection therewith, together with
such other exhibits and schedules delivered in connection with
the Agreement.
Based upon such examination and having regard for legal
considerations which we deem relevant, we are of the opinion
that each of the Agreement and the Assignment are the legal,
valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
With your permission we have assumed the following
(a) authenticity of original documents and the genuineness of
all signatures; (b) the conformity to the originals of all
documents submitted to us as copies; (c) the truth, accuracy,
and completeness of the information, representations and
warranties contained in the records, documents, instruments and
certificates we have reviewed; (d) that the documents referred
to herein were duly authorized, executed and delivered on
behalf of the respective parties thereto and, other than with
respect to the Company, are legal, valid, and binding
obligations of such parties; (e) the compliance by you with any
applicable requirements to file returns and pay taxes under the
California Franchise Tax Law; (f) the compliance by you with
any state or federal laws or regulations applicable to you in
connection with the transactions described in the Agreement and
(g) the absence of any evidence extrinsic to the provisions of
the written agreements between the parties that the parties
intended a meeting contrary to that expressed by those
provisions.
We express no opinion as to matters of law in jurisdictions
other that the State of California and the United States.
Our opinion that any document is legal, valid, binding, or
enforceable in accordance with its terms is qualified as to:
(a) limitations imposed by bankruptcy, insolvency,
reorganization, arrangement, fraudulent conveyance,
moratorium, or other similar laws relating to or affecting
the enforcement of creditors' rights generally;
(b) general principles of equity, including without
limitation concepts of mutuality, reasonableness, good
faith and fair dealing, and the possible unavailability of
specific performance or injunctive relief, regardless of
whether such enforceability is considered in a proceeding
in equity or at law;
(c) rights to indemnification and contribution which
may be limited by applicable law and equitable principles;
and
(d) the unenforceability under certain circumstances
of provisions expressly or by implication waiving
broadly or vaguely stated rights (including,
without limitation, waivers of any objection to
venue and forum non conveniens and the right to a
jury trial), the benefits of statutory
constitutional provisions, unknown future rights,
and defenses to obligations or rights granted by
law, where such waivers are against public policy
or prohibited by law.
We note that you are receiving of even date herewith the
opinion of Barry Quan, Managing Director, Legal Affairs of the
Company, as to certain matters relating to the Company. We
have made no independent examination of such matters.
This opinion is solely for the benefit of Deutsche Financial
Services (UK) Limited in connection with the transaction
covered by the first paragraph of this letter and may not be
relied upon, used, circulated, quoted or referred to by, nor
may copies hereof be delivered to, any other person without our
prior written approval. We disclaim any obligation to update
this opinion letter for events occurring or coming to our
attention after the date hereof.
Very truly yours,
ORRICK, HERRINGTON & SUTCLIFFE
LLP
<PAGE>
EXHIBIT II
FORM OF RECEIVABLES PURCHASE SETTLEMENT STATEMENT
RECEIVABLES PURCHASE SETTLEMENT STATEMENT
(Including Assignment of Receivables)
Deutsche Financial Services (UK) Limited
1 Station View
Guildford, Surrey
England GU1 4JY
Attention: Senior Vice President
Re: Assignment of Receivables
Pursuant to Section 2.1.C of the Receivables Purchase
Agreement (the "Agreement") dated as of January 26, 1999 by and
between Applied Materials, Inc. ("Seller"), as Seller, and
Deutsche Financial Services (UK) Limited ("Purchaser"), as
Purchaser, Seller hereby sells, transfers and assigns to
Purchaser, without recourse, except as provided in the
Agreement, Seller's right, title and interest in and to all of
the Receivables described on the Attachment 1 hereto, and all
collateral, if any, securing such Receivables. Such
Receivables satisfy the requirements of the Agreement for
Purchase by Purchaser, including without limitation Section 7.3
thereof. Seller represents that all such Receivables are free
and clear of all security interests, liens, charges,
encumbrances and rights of others other than the respective
Obligor's interest in the Products and/or Services relating
thereto, and other than as otherwise expressly permitted in the
Agreement. Terms utilized herein which are not otherwise
defined shall bear the meanings set forth in the Agreement.
Seller further certifies that (i) Attachment 1 hereto
is accurate and complete on and as of this date and each
Receivable and Obligor reflected thereon or covered thereby
complies in all respects with Section 7.3 of the Agreement;
(ii) Seller is in compliance in all material respects with all
terms and covenants set forth in the Agreement on and as of
this date, (iii) Seller's representations and warranties set
forth in the Agreement are true, correct and complete in all
material respects on and as of this date to the same extent as
though made on and as of this date; provided, however, no
representation or warranty is made as to any Receivable other
than the Receivables described on Attachment 1; (iv) no event
has occurred and is continuing or will result from the
consummation of the Purchase contemplated hereby that would
constitute an Event of Default, or but for the passage of time
or the giving of notice or both would constitute an Event of
Default under the Agreement; and (v) Seller has performed in
all material respects all agreements and has satisfied all
conditions which the Agreement provides shall be performed by
it on or before this date.
APPLIED MATERIALS, INC.
By:
___________________________
Title:
__________________________
Date:
__________________________
Deutsche Financial Services (UK) Limited, as Purchaser under
the Agreement, hereby accepts the Assignment of Receivables set
forth above.
DEUTSCHE FINANCIAL SERVICES
(UK) LIMITED
By:
___________________________
Title:
__________________________
Date:
__________________________
<PAGE>
Exhibit III
Seller's Payment Terms
Payment Terms
Standard payment terms for Systems shipments for the Applied
Materials Europe (AME) region are "90% due in 30 days from
receipt of equipment not to exceed 45 days from shipment, and
10% not to exceed 75 days from shipment, if no fault of Applied
Materials". Exceptions to the standard payment terms are
often made to accommodate high volume purchase agreements,
customer-satisfaction issues, and competitive issues.
The exceptions normally include a smaller percentage due in 30
days (i.e. 80% due in 30 days, 20% not to exceed 75 days....),
or longer pay periods attached to the first-tier invoice (90%
due in 60 days, ......), or longer pay periods attached to the
second-tier invoice (......, 20% not to exceed 90 days, if no
fault of Applied Materials).
The first-tier invoice is always due based on invoice date
(which approximates the ship date), and is not subject to
technical acceptance or any other measure. The second-tier
invoice is payable subject to technical acceptance (according
to the specifications on the Purchase Order) by the customer.
<PAGE>
Exhibit IV
Seller's Collection Procedures
Applied Materials, Inc.
Accounts Receivable Collections Procedure
The standard systems collections procedure for the first-tier
invoice (which implies that there is no technical acceptance
requirement) is as follows:
a) No later than 5 days prior to the payment due date, the
Applied Materials Inc. (AMAT) collection representative
contacts the Obligor's accounts payable department for
payment status on the invoice.
b) If the Obligor's accounts payable department requires a copy
of the invoice, the AMAT collection representative will
deliver this to the customer on the same day via fax, or
overnight if original copy is required.
c) If there is a pricing or proof of delivery issue, the
collection representative will follow-up with the product
business group and the invoicing group to verify prices
listing vs. purchase order information and obtain a copy of
the airway bill or proof of delivery.
d) Issues that delay or prohibit payment by the Obligor are
immediately escalated to the Obligor's purchasing department
and to the AMAT account team, so that resolution is obtained
as soon as possible.
e) If an Obligor is not paying or slow-paying an invoice(s) for
an undetermined reason, the issue is immediately escalated
to the account team and the global credit & collections
manager. The non-payment issue is escalated within the
Obligor's organization at the purchasing, accounts payable,
and corporate finance levels.
f) Non-payment of a first-tier invoice beyond 30 days from due
date, with no known set payment date or an unacceptable
payment date, results in a "demand" letter that outlines
the total amount due and the expected payment date. Failure
by the Obligor to settle the terms of the "demand" letter
results in a credit hold. The credit hold represents no
shipments or limited shipments, and may impact all systems,
spares, service agreement, labor, etc. services and product
shipments.
g) At the point that a "demand" letter is sent to a customer,
the issue is also escalated internally within AMAT to the
Treasurer, Global Operations Finance Director, Regional
President, and Regional Finance Director levels.
h) In some cases, longer short-term (1-2 months) payment
schedules are agreed to accommodate cash-flow issues.
i) Only as a last resort, collections suits and repossession of
product activities occur.
<PAGE>
Exhibit V
Form of Monthly Status Report
(Seller to Supply)
Receivables Assigned to Deutsche Financial Services (UK) Limited
Under A Receivables Purchase Agreement, Dated As Of Jan. 26, 1999.
Initial Funding Date: 01/28/99
First Collection Settlement Date: 04/13/99
Report Date: 02/27/99
Receivables Status Report
<TABLE>
<CAPTION>
Date of Inelig- Date Balance
Invoice to DFS Invoice ible Collected Date Wired to Out-
Obligor Invoice # Date Due Date Sale Amount($) Amount Amount Collected DFS Aging standing Comments
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Sub-Total By Customer:
Grand Total:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.0
<SEQUENCE>6
<DESCRIPTION>ART. 5 FINANCIAL DATA SCHEDULE FOR Q1 1999 FORM 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED JANUARY 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> JAN-31-1999
<CASH> 562,401
<SECURITIES> 1,361,912
<RECEIVABLES> 671,319 <F1>
<ALLOWANCES> 0
<INVENTORY> 552,779
<CURRENT-ASSETS> 3,597,539
<PP&E> 1,997,659
<DEPRECIATION> 770,958
<TOTAL-ASSETS> 4,960,737
<CURRENT-LIABILITIES> 1,042,959
<BONDS> 616,902
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 3,730
<OTHER-SE> 3,216,385
<TOTAL-LIABILITY-AND-EQUITY> 4,960,737
<SALES> 742,477
<TOTAL-REVENUES> 742,477
<CGS> 421,374
<TOTAL-COSTS> 421,374
<OTHER-EXPENSES> 141,207 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,470
<INCOME-PRETAX> 76,645
<INCOME-TAX> 23,760
<INCOME-CONTINUING> 52,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,885
<EPS-PRIMARY> 0.14 <F3>
<EPS-DILUTED> 0.14
<FN>
<F1>ITEM IS SHOWN NET OF ALLOWANCE, CONSISTENT WITH BALANCE SHEET PRESENTATION.
<F2>ITEM CONSISTS OF RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES.
<F3>ITEM CONSISTS OF BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
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<SEC-HEADER>0000317093-99-000002.hdr.sgml : 19990217
ACCESSION NUMBER: 0000317093-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ANDREW CORP
CENTRAL INDEX KEY: 0000317093
STANDARD INDUSTRIAL CLASSIFICATION: DRAWING AND INSULATING NONFERROUS WIRE [3357]
IRS NUMBER: 362092797
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-14617
FILM NUMBER: 99539232
BUSINESS ADDRESS:
STREET 1: 10500 W 153RD ST
CITY: ORLAND PARK
STATE: IL
ZIP: 60462
BUSINESS PHONE: 7083493300
MAIL ADDRESS:
STREET 1: 10500 WEST 153RD ST
CITY: ORLANDO PARK
STATE: IL
ZIP: 60462
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q 12/31/98
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK-ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER 0-9514
ANDREW CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 36-2092797
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
10500 W. 153RD STREET, ORLAND PARK, ILLINOIS 60462
(Address of principal executive offices and zip code)
(708) 349-3300
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value-- 82,842,178 shares as of January 31, 1999
<PAGE>
INDEX
ANDREW CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets--December 31, 1998 and
September 30, 1998.
Consolidated statements of income--Three months ended
December 31, 1998 and 1997.
Consolidated statements of cash flows--Three months ended
December 31, 1998 and 1997.
Notes to consolidated financial statements--December 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exh. 10(a)c(iii) Executive Severance Benefit Plan Agreement with John E. DeSana.
Exhibit 27 Financial Data Schedule for the period ended December 31, 1998.
SIGNATURES
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31 September 30
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 43,346 $ 78,395
Accounts Receivable, less allowances
(Dec. $3,243; Sep. $3,026 ) 186,666 181,389
Inventories
Finished Products 58,029 56,736
Materials and Work in Process 112,266 111,057
------------ ------------
170,295 167,793
Miscellaneous Current Assets 10,950 9,229
------------ ------------
Total Current Assets 411,257 436,806
OTHER ASSETS
Cost in excess of net assets of businesses
acquired, less accumulated amortization
(Dec. $10,678; Sep. $10,291 ) 22,790 23,177
Investment in and Advances to Affiliates 61,473 59,691
Investments and other assets 9,194 9,267
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 15,818 15,507
Building 84,262 83,789
Equipment 310,941 301,757
Allowances for Depreciation 252,907 247,091
------------ ------------
158,114 153,962
------------ ------------
TOTAL ASSETS $ 662,828 $ 682,903
============ ============
<FN>
The balance sheet at September 30, 1998 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
December 31 September 30
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 4,411 $ 13,897
Accounts Payable 28,775 32,867
Accrued expenses and other liabilities 16,439 17,098
Compensation and related expenses 16,561 32,424
Income taxes 25,554 15,835
Current portion of long-term debt 6,225 4,568
------------ ------------
TOTAL CURRENT LIABILITIES 97,965 116,689
DEFERRED LIABILITIES 13,878 14,044
LONG-TERM DEBT, less current portion 44,871 38,031
MINORITY INTEREST 5,530 5,361
STOCKHOLDERS' EQUITY
Common stock (par value, $.01 a share:
400,000,000 shares authorized; 102,718,210
shares issued, including treasury) 1,027 1,027
Additional paid-in capital 55,096 53,309
Accumulated other comprehensive income (9,430) (7,617)
Retained earnings 674,284 651,103
Treasury stock, at cost (19,840,683 shares
in Dec.; 18,210,250 shares in Sep.) (220,393) (189,044)
------------ ------------
500,584 508,778
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 662,828 $ 682,903
============ ============
<FN>
The balance sheet at September 30, 1998 has been derived from the audited
financial statements at that date.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended
December 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Sales $218,573 $231,136
Cost of Products Sold 139,041 141,539
-------- --------
GROSS PROFIT 79,532 89,597
OPERATING EXPENSES
Research and development 5,631 7,071
Sales and administrative 38,915 38,437
-------- --------
44,546 45,508
-------- --------
OPERATING INCOME 34,986 44,089
OTHER
Interest expense 1,452 1,614
Interest income (2,023) (1,073)
Other (income) expense 435 616
-------- --------
(136) 1,157
-------- --------
PRETAX INCOME 35,122 42,932
Income Taxes 11,941 14,598
-------- --------
NET INCOME $ 23,181 $ 28,334
======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.28 $ 0.32
======== ========
AVERAGE SHARES OUTSTANDING
Basic 83,814 89,187
======== ========
Diluted 83,938 89,719
======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
ANDREW CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Three Months Ended
December 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Net Income $ 23,181 $ 28,334
ADJUSTMENTS TO NET INCOME
Restructuring costs 0 (232)
Depreciation and amortization 8,777 8,642
(Increase) decrease in accounts receivable (5,615) 4,723
(Increase) decrease in inventories (2,896) 5,194
Increase in miscellaneous
current and other assets (1,741) (1,916)
Decrease in accounts payable and other liabilities (5,320) (8,888)
Other 172 12
---------- ----------
NET CASH FROM OPERATIONS 16,558 35,869
INVESTING ACTIVITIES
Capital Expenditures (13,869) (12,505)
Acquisition of business, net of cash acquired 0 (3,000)
Investments in and advances to affiliates (1,835) 11,497
Proceeds from sales of property, plant
and equipment 578 92
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (15,126) (3,916)
FINANCING ACTIVITIES
Proceeds from long-term borrowings 3,153 6,131
Payments on short-term borrowings (3,622) (3,546)
Payments to acquire treasury stock (36,249) (32,463)
Stock option plans 883 380
---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES (35,835) (29,498)
Foreign currency translation adjustments (646) (2,530)
---------- ----------
DECREASE FOR THE PERIOD (35,049) (75)
Cash and equivalents at beginning of period 78,395 93,823
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 43,346 $ 93,748
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
ANDREW CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended December 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1998.
NOTE B--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
December 31
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
(In thousands, except per share amounts)
BASIC EARNINGS PER SHARE
Numerator:
Numerator for net income per share $23,181 $28,334
Denominator:
Weighted average shares outstanding 83,814 89,187
========= =========
Net income per share - basic $0.28 $0.32
========= =========
DILUTED EARNINGS PER SHARE
Numerator:
Numerator for net income per share $23,181 $28,334
Denominator:
Weighted average shares outstanding 83,814 89,187
Effect of dilutive securities:
Stock options 124 532
========= =========
83,938 89,719
========= =========
Net income per share - diluted $0.28 $0.32
========= =========
</TABLE>
Options to purchase 2,899,000 shares of common stock, at prices ranging from
$17.11 - $38.17 per share, were not included in the December 1998 computation of
diluted earnings per share, because the option's exercise price was greater than
the average market price of the common shares. Options to purchase 706,000
shares of common stock at prices ranging from $27.19 - $38.17 per share were not
included in the December 1997 diluted earnings per share calculation since the
option's exercise price was higher than the average market price of the common
shares.
<PAGE>
NOTE C--COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its components. The
adoption of this statement had no impact on the company's net income or
stockholders' equity. Statement No. 130 requires the company to report foreign
currency translation adjustments, which were previously reported as a separate
component of stockholders' equity, as a component of other comprehensive income.
Prior year financial statements have been reclassified to conform with the
requirements of Statement No. 130.
During the first quarter of fiscal years 1999 and 1998, total comprehensive
income amounted to $21,368,000 and $23,277,000, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the quarter ended December 31, 1998 were $218.6 million, 5% lower than
the same period last fiscal year. From a product standpoint, coaxial cable
sales, for the first quarter of fiscal year 1999, were down overall with
declines in domestic and Asian sales offsetting growth in Europe and Latin
America, compared to the same period last fiscal year. Terrestrial microwave
antenna sales increased overall, with gains in the U.S. and Europe offsetting
weakness in Asia and Latin America. Special antennas and other sales in fiscal
year 1999 increased overall compared to the first quarter of fiscal year 1998.
Sales of broadcast antennas, base station antennas and equipment buildings
showed growth in the first quarter of fiscal year 1999 compared to the same
period last fiscal year, while sales of earth station antennas, towers and
distributed communications systems were all down. Wireless accessories sales
decreased during the quarter, mainly in Europe.
From a market standpoint, wireless infrastructure sales, including cellular, PCS
and land mobile radio, were lower overall, with declines in the U.S., Canada and
Asia offsetting growth in Europe and Latin America. Common carrier and private
microwave sales, for the first quarter of fiscal year 1999, declined compared to
the same period last fiscal year. Broadcast and government sales declined
overall, despite growth in the broadcast market.
Gross margin, as a percentage of sales, was 36.4% for the quarter ended
December 31, 1998 compared to 38.8% for the first quarter of fiscal year 1998.
The 2.4% decrease was caused primarily by competitive market conditions
resulting in increased price pressure, which caused prices to be on average 4 to
5% lower than the comparable quarter last fiscal year. Product mix also
contributed to the decrease in gross margin as a percentage of sales.
Operating expenses as a percentage of sales for the quarter ended December 31,
1998 were 20.4% compared to 19.7% for the same period last fiscal year. Research
and development expenses for the first quarter of fiscal year 1999 were $5.6
million, a decrease of 20.4% compared to the same period last fiscal year. As a
percentage of sales, research and development expenses were 2.6% compared to
3.1% to the first quarter of fiscal year 1998. The decrease in research and
development expenses is due in part to the sale of the company's fiber optic
sensors business in fiscal year 1998. Sales and administrative expenses for the
first quarter of fiscal year 1999 remained relatively unchanged compared to the
same period last fiscal year. As a percentage of sales, sales and administrative
expenses were 17.8% for the first quarter of fiscal year 1999 compared to 16.6%
for the comparable quarter last fiscal year.
Interest expense for the quarter ended December 31, 1998 remained relatively
unchanged compared to the first quarter of fiscal year 1998. Interest income
increased $1.0 million or 88.5% primarily due to interest income received on
advances to the company's Russian joint ventures. Other expense for the first
quarter of fiscal year 1999 remained comparable to fiscal year 1998 levels.
<PAGE>
LIQUIDITY
Cash and cash equivalents decreased $35.0 million during the first quarter of
fiscal year 1999 to $43.3 million at December 31, 1998. Working capital totaled
$313.3 million compared to $320.1 million at September 30, 1998. Management
believes the current working capital level is adequate to meet the company's
normal operating needs. During the first quarter of fiscal year 1999, the
company generated $32.0 million in cash from operations, principally from
earnings of $23.2 million, which included non-cash charges of $8.8 million.
These cash inflows were partially offset by growth in accounts receivable and
inventory balances coupled with payments on outstanding accounts payable
balances and the payout of the company's fiscal year 1998 profit sharing
contribution, resulting in net cash from operations totaling $16.6 million for
the quarter. Days sales in billed receivables increased from 70 days at
September 30, 1998 to 73 days at December 31, 1998. The growth in days sales in
billed receivables is attributable to growth in receivable balances in Europe
and Asia.
Net cash used for investing activities during the first quarter of fiscal year
1999 was $15.1 million. Of the $13.9 million spent on capital additions, the
majority of the funds were used for equipment purchases and upgrades, purchases
of additional switches for the Russian telecommunications networks, the
company's continued investment in upgrading its business information systems and
plant expansion at the company's Orland Park facility.
Net cash used for financing activities totaled $35.8 million at December 31,
1998. During the quarter, the company repurchased 2.1 million shares of stock
for $36.2 million. As of December 31, 1998, the company has repurchased 9.1
million shares out of the 15.0 million shares authorized for repurchase at a
total cost of $183.3 million. In the first quarter of fiscal year 1999, the
company's Brazilian operations borrowed additional U.S. Dollar funds, at
significantly lower interest rates, under its long-term line of credit agreement
with Bank Austria Creditanstaldt in order to pay off its outstanding local
currency line of credit with ABN-AMRO totaling $3.6 million. Funds borrowed
under the Bank Austria Creditanstaldt agreement are due to be repaid in fiscal
year 2001.
<PAGE>
YEAR 2000
The "Year 2000 issue" arose because many existing computer programs use only the
last two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of "19". If not
corrected, many computer applications could fail or create erroneous results. In
1994, the company instituted a program to routinely review its computer hardware
and software to increase operational efficiency. As an output from this effort,
the company purchased a new business system in 1994 that would not only meet the
company's needs but was also Year 2000 compliant. To date, the company has
completed testing of the system and is currently in the process of
implementing the system at all operating locations. The company expects to have
the system fully implemented at all major locations by April 1999. Amounts
expended or to be expended on information technology systems exclusively to
ensure year 2000 compliance are not expected to be material to the company's
consolidated results of operations or financial position.
Management has also initiated a comprehensive program to prepare the company's
manufacturing and facility systems for the year 2000. The company is actively
engaged in testing and fixing applications such as security, environmental,
desktop computers and production equipment to ensure they are Year 2000 ready.
The company currently does not expect remediation costs to be material nor does
it expect any significant interruption to its operations because of Year 2000
problems. Most of the company's products do not have Year 2000 readiness issues
because they do not contain date-sensitive functions.
The company is in the process of contacting all third parties with which it has
significant relationships, to determine the extent to which the company could be
vulnerable to failure by any of them to obtain Year 2000 compliance. Some of the
company's major suppliers, customers and financial institutions have confirmed
that they anticipate being Year 2000 compliant on or before December 31, 1999,
although many have only indicated that they have Year 2000 readiness programs.
To date, the company is not aware of any significant third parties with a Year
2000 issue that could materially impact the company operations, liquidity or
capital resources. However, the company has no means of ensuring that third
parties will be Year 2000 ready and the potential effect of third-party
non-compliance is currently not determinable.
The company has devoted and will continue to devote the resources necessary to
ensure that all Year 2000 issues are properly addressed. However, there can be
no assurance that all Year 2000 problems are detected. Further, there can be no
assurance that the company's assessment of its third party vendors and suppliers
will be accurate. Some of the potential worst-case scenarios that could occur
include: (1) corruption of data in the company's internal systems; (2) failure
of infrastructure services provided by government agencies; and (3) health,
environmental and safety issues relating to the company's facilities. If any of
these situations were to occur, the company's operations in certain areas could
be temporarily interrupted.
These interruptions could be more severe in countries outside the U.S. where the
company does a considerable amount of its business. The company intends to
develop Year 2000 contingency plans for continuing operations in the event such
problems arise. The company has operations around the world and is considering
shifting operations to different facilities if there are interruptions to
operations in particular countries or regions.
<PAGE>
RISK FACTORS
Safe Harbor for Forward-Looking Statements. We have made forward-looking
statements in this Form 10-Q under "Management's Discussion and Analysis of
Financial Condition and Results of Operations". In addition, other written or
oral statements which constitute forward-looking statements may be made by or
on behalf of the company. Although we have based these statements on the
beliefs and assumptions of our management and on information currently available
to them, they are subject to risks and uncertainties. We wish to ensure that
such statements are accompanied by meaningful cautionary statements, so as to
obtain the protections of the safe harbor established in the Private Securities
Litigation Reform Act of 1995. Accordingly, such statements are qualified by
reference to the discussion below of certain important factors that could cause
actual results to differ materially from those projected in such forward-looking
statements.
We caution the reader that the list of factors may not be exhaustive. We
operate in a continually changing business environment, and new risk factors
emerge from time to time. We cannot predict such risk factors, nor
can we assess the impact, if any, of such risk factors on our business or the
extent to which any factors may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly, you should not
put undue reliance on any forward looking statements. The company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. While Andrew
Corporation's management is optimistic about the company's long-term prospects,
the following risks and uncertainties, among others, should be considered in
evaluating its growth outlook.
Share Price Volatility. In the past years, the market price of our common stock
has been very volatile. We believe that the price has fluctuated in response to
such things as changes in growth rates of sales, net income and cash flow;
volatility in the U.S. stock market in general and in wireless equipment stocks
in particular; changes in analysts' estimates; and changes in general economic
conditions. We expect that the price of our common stock will fluctuate in the
future, perhaps substantially.
Fluctuations in Operating Results. Historically our quarterly and annual
revenues and operating results have fluctuated. We expect similar fluctuations
in the future. In addition to general economic and political conditions, the
following factors affect our revenues: timing of significant customer orders,
inability to forecast future revenue due to our just-in-time supply approach,
changes in competitive pricing, and wide variations in profitability by product
line. Since our quarterly and annual revenues and operating results vary, we
believe that period-to-period comparisons are not necessarily meaningful and you
should not rely on such comparisons as indicators of our future performance.
Intense Competition and Pricing Pressure. We believe that to be profitable in
the future we must respond effectively to increased competitive pressure. We
consider our principal competitive factors to include product quality and
performance, service and support, pricing and proprietary technology. Over the
past three years, in response to aggressive pricing practices by our
competitors, we have lowered prices for most of our products by 5 to 6% per
year. If we are unable to compete successfully, we may lose market share. We
expect that a significant loss in market share would have a material negative
effect on our business, financial condition and operating results.
Rapid Technological Change and Pressure to Develop New Products. We believe
that our future success depends on our ability to effectively anticipate and
respond to changes in technology, customer needs and industry standards. Failure
to anticipate changes, to adapt current products, to develop and introduce new
products on a timely basis, or to gain market acceptance for new products would
impair our competitiveness and could have a material negative impact on our
business and operating results.
<PAGE>
International Risk. Nearly half of our sales are outside the United States and
in recent years we have significantly increased our international manufacturing
capabilities. We anticipate that international sales will continue to represent
a substantial portion of our revenues and that continued growth and
profitability will require further international expansion. International
business risks include currency fluctuations, tariffs and other trade barriers,
longer customer payment cycles, adverse taxes, restrictions on the repatriation
of earnings, compliance with local laws and regulations, political and economic
instability, and difficulties in managing and staffing operations. In
particular, the recent deterioration of certain economies, such as Brazil, is
expected to have a negative impact on the financial results of our business in
these regions during 1999. We believe that international risk factors could
materially impact our future sales, financial condition and operating results.
Ability to Attract and Retain Qualified People. We believe that our future
success significantly depends on our ability to attract and retain highly
qualified personnel. We cannot be sure that we will be able to attract and
retain key personnel in the future. We believe our inability to do so could
negatively impact our business, financial condition and operating results.
Year 2000 Compliance. We are working toward bringing our business,
manufacturing and facilities systems into Year 2000 compliance. We also are
contacting third parties with whom we have significant relationships to
determine our vulnerability to their failure to achieve Year 2000 compliance.
Our failure to detect and address our own third-party Year 2000 problems could
have a significant negative impact on our business, financial condition and
results of operations.
Dependence on Intellectual Property Rights. Others could obtain or use our
intellectual property without our permission, develop equivalent or superior
technology, or claim that we have infringed on their intellectual property
rights. We rely on a combination of patent, copyright, trademark and trade
secret laws, and non-disclosure and non-competition agreements to protect our
rights. We are dependent on our intellectual property rights as a whole;
however, we do not believe that the loss of exclusivity with respect to any one
right would have a significant negative impact on our business, financial
condition or operating results.
Impact of Governmental Regulation. We are not directly regulated in the U.S.,
but most of our customers and the telecommunications industry generally are
subject to Federal Communications Commission regulation. We believe that
regulatory changes could have a significant negative effect on our business and
operating results by restricting our customers' development efforts, making
current products obsolete or increasing competition. Internationally, where many
of our customers are government owned and operated entities, we also are at risk
of changes in economic policy and communications regulation. In addition, our
joint ventures in Russia and Mexico require telecommunications licenses, which
may limit or otherwise affect the operations of the ventures.
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
a) EXHIBIT INDEX
Exhibit No. Description
- -----------------------------
10.(a)c(iii) Executive Severance Benefit Plan
Agreement with John E. DeSana
27 Financial Data Schedule
December 31, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date February 16, 1999 /s/ F. L. English
---------------------- -----------------
F. L. English
Chairman, President and Chief
Executive Officer
Date February 16, 1999 /s/ C. R. Nicholas
---------------------- ------------------
C. R. Nicholas
Executive Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- -----------------------------
10.(a)c(iii) Executive Severance Benefit Plan
Agreement with John E. DeSana
27 Financial Data Schedule
December 31, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(A)C(III)
<SEQUENCE>2
<DESCRIPTION>EXECUTIVE SEVERANCE AGREEMENT-JOHN DESANA
<TEXT>
ANDREW CORPORATION
EXECUTIVE SEVERANCE BENEFIT PLAN AGREEMENT
THIS AGREEMENT made as of 1 January 1999, between Andrew Corporation,
a Delaware corporation (the "Company"), and John E. DeSana (the "Executive").
W I T N E S S E T H:
1. Participation. The Executive has been designated as a participant
in the Andrew Corporation Executive Severance Benefit Plan (the "Plan") by the
Compensation Committee of the Board of Directors of the Company.
2. Plan Benefits. The Executive agrees to be bound by the provisions
of the Plan, including those provisions which relate to his eligibility to
receive benefits and to the conditions affecting the form, manner, time and
terms of benefit payments under the Plan, as applicable. The Executive
understands and acknowledges that his benefit may be reduced pursuant to
Section 10 of the Plan in order to eliminate any "excess parachute payments" as
defined under Section 4999 of the Internal Revenue Code of 1954, as amended.
The Executive may elect to receive his Plan benefits in installment payments,
as provided under Section 9 of the Plan, by signing the statement included on
page three of this Agreement. The Executive may make an election to receive
installment payments, or may revoke any such election, at any time prior to the
date which is ten days prior to the date on which a Change in Control is deemed
to have occurred; provided that any election subsequent to the execution of this
Agreement or any revocation shall be in writing and shall be subject to the
approval of the Compensation Committee.
3. Federal and State Laws. The Executive shall comply with all
federal and state laws which may be applicable to his participation in this
Plan, including without limitation, his entitlement to, or receipt of, any
benefits under the Plan. If the Executive is subject to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 as amended and in effect at
the time of any Plan benefit payment, he shall comply with the provisions of
Section 16(b), including any applicable exemptions thereto, whether or not such
provisions and exemptions apply to all or any portion of his Plan benefit
payments.
4. Amendment and Termination. The Board of Directors may amend,
modify, suspend or terminate the Plan or this Agreement at any time, subject to
the following:
(a) without the consent of the Executive, no such amendment,
modification, suspension or termination shall reduce or diminish
his right to receive any payment or benefit then due and payable
under the Plan immediately prior to such amendment, modification,
suspension or termination; and
(b) in the event of a Change in Control pursuant to Section 5 of the
Plan, no such amendment, modification, suspension or termination
of benefits, and eligibility therefore, will be effective prior to
the expiration of the 48-consecutive-month period following the
date of the Change in Control.
<PAGE>
5. Beneficiary. The Executive hereby designates his primary
beneficiary(ies) as Patricia J. DeSana, who will receive any unpaid benefit
payments in the event of the Executive's death prior to full receipt thereof.
In the event that the primary beneficiary(ies) predeceases the Executive, his
unpaid benefits shall be paid to Stephanie Marie Chang as secondary
beneficiary(ies). If more than one primary or secondary beneficiary has been
indicated, each primary beneficiary or, if none survives, each secondary
beneficiary will receive an equal share of the unpaid benefits unless the
Executive indicates specific percentages next to the beneficiaries' names.
Except as required by applicable law, the Executive's beneficiary or
beneficiaries shall not be entitled to any medical, life or other insurance-type
welfare benefits.
6. Arbitration. The Executive agrees to be bound by any determination
rendered by arbitrators pursuant to Section 11 of the Plan.
7. Employment Rights. The Plan and this Agreement shall not be
construed to give the Executive the right to be continued in the employment of
the Company or to give the Executive any benefits not specifically provided by
the Plan.
IN WITNESS WHEREOF, Andrew Corporation has caused this Agreement to be
executed and the Executive has executed this Agreement, both as of the day and
year first above written.
ANDREW CORPORATION
/s/ John E. DeSana By: /s/ F.L. English
__________________________ ______________________
John E.DeSana F. L. English
Group President Chairman, President and
HELIAX7 Cables and Accessories Chief Executive Officer
ELECTION OF INSTALLMENTS
I hereby elect to receive my Plan benefits in installment payments
pursuant to the terms of Section 9 of the Plan.
/s/ John E. DeSana
_________________________________________
John E. DeSana
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>ART. 5 FDS FOR 12-31-98 10Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 43,346
<SECURITIES> 0
<RECEIVABLES> 189,909
<ALLOWANCES> 3,243
<INVENTORY> 170,295
<CURRENT-ASSETS> 411,257
<PP&E> 411,021
<DEPRECIATION> 252,907
<TOTAL-ASSETS> 662,828
<CURRENT-LIABILITIES> 97,965
<BONDS> 44,871
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,027
<OTHER-SE> 499,557
<TOTAL-LIABILITY-AND-EQUITY> 662,828
<SALES> 218,573
<TOTAL-REVENUES> 218,573
<CGS> 139,041
<TOTAL-COSTS> 139,041
<OTHER-EXPENSES> 44,546
<LOSS-PROVISION> 239
<INTEREST-EXPENSE> 1,452
<INCOME-PRETAX> 35,122
<INCOME-TAX> 11,941
<INCOME-CONTINUING> 23,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,181
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| APD | https://www.sec.gov/Archives/edgar/data/2969/0000002969-99-000008.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000002969-99-000008.txt : 19990209
<SEC-HEADER>0000002969-99-000008.hdr.sgml : 19990209
ACCESSION NUMBER: 0000002969-99-000008
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990208
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AIR PRODUCTS & CHEMICALS INC /DE/
CENTRAL INDEX KEY: 0000002969
STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810]
IRS NUMBER: 231274455
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04534
FILM NUMBER: 99524286
BUSINESS ADDRESS:
STREET 1: 7201 HAMILTON BLVD
CITY: ALLENTOWN
STATE: PA
ZIP: 18195-1501
BUSINESS PHONE: 6104814911
MAIL ADDRESS:
STREET 1: 7201 HAMILTON BLVD
CITY: ALLENTOWN
STATE: PA
ZIP: 18195-1501
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FOR PERIOD ENDING 31 DECEMBER 1998
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 31 December 1998
----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- -----------
Commission file number 1-4534
AIR PRODUCTS AND CHEMICALS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-1274455
------------------------------- ------------------------------------
(State of Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7201 Hamilton Boulevard, Allentown, Pennsylvania 18195-1501
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 610-481-4911
--------------
Indicate by check |X| whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No
--- --
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at at 4 February 1999
-------------------------- ---------------------------------
Common Stock, $1 par value 229,304,812
<PAGE>
<TABLE>
<CAPTION>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
<S> <C>
Part I. Financial Information
Consolidated Balance Sheets -
31 December 1998 and 30 September 1998 ................... 3
Consolidated Income -
Three Months Ended 31 December 1998 and 1997 ............. 4
Consolidated Statement of Comprehensive Income
Three Months Ended 31 December 1998 and 1997 ............. 5
Consolidated Cash Flows -
Three Months Ended 31 December 1998 and 1997 ............. 6
Summary by Business Segments -
Three Months Ended 31 December 1998 and 1997.............. 7
Summary by Geographic Regions -
Three Months Ended 31 December 1998 and 1997.............. 8
Notes to Consolidated Financial Statements .................. 9
Management's Discussion and Analysis ........................ 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................... 20
Signatures .................................................. 21
</TABLE>
REMARKS:
The consolidated financial statements of Air Products and Chemicals, Inc. and
its subsidiaries (the "Company" or "Registrant") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, the
accompanying statements reflect all adjustments necessary to present fairly the
financial position, results of operations and cash flows for those periods
indicated, and contain adequate disclosure to make the information presented not
misleading. Such adjustments are of a normal, recurring nature unless otherwise
disclosed in the notes to consolidated financial statements. However, the
results for the periods indicated herein reflect certain adjustments, such as
the valuation of inventories on the LIFO cost basis, which can only be finally
determined on an annual basis. It is suggested that these consolidated condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's latest annual report on Form 10-K.
Results of operations for any three month period are not necessarily indicative
of the results of operations for a full year.
2
<PAGE>
<TABLE>
<CAPTION>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Millions of dollars, except per share)
31 December 30 September
ASSETS 1998 1998
------ ---------------- -----------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash items $ 57.8 $ 61.5
Trade receivables, less allowances for doubtful accounts 886.1 881.1
Inventories 452.1 428.6
Contracts in progress, less progress billings 136.6 94.1
Other current assets 129.2 176.4
TOTAL CURRENT ASSETS 1,661.8 1,641.7
---------- ---------
INVESTMENT IN NET ASSETS OF AND ADVANCES TO
UNCONSOLIDATED AFFILIATES 440.8 362.0
---------- ---------
OTHER INVESTMENTS AND ADVANCES 24.5 18.4
---------- ---------
PLANT AND EQUIPMENT, at cost 9,687.2 9,489.5
Less - Accumulated depreciation 4,793.5 4,703.4
---------- ---------
4,893.7 4,786.1
PLANT AND EQUIPMENT, net ---------- ---------
346.4 324.9
GOODWILL ---------- ---------
351.7 356.5
OTHER NONCURRENT ASSETS ---------- ---------
TOTAL ASSETS $7,718.9 $7,489.6
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Payables, trade and other $ 480.4 $ 478.7
Accrued liabilities 269.6 332.8
Accrued income taxes 54.3 30.9
Short-term borrowings 252.7 270.1
Current portion of long-term debt 310.1 153.1
-------- --------
TOTAL CURRENT LIABILITIES 1,367.1 1,265.6
-------- --------
LONG-TERM DEBT 2,123.2 2,274.3
-------- --------
DEFERRED INCOME AND OTHER NONCURRENT LIABILITIES 605.2 570.9
-------- --------
DEFERRED INCOME TAXES 733.9 703.0
-------- --------
TOTAL LIABILITIES 4,829.4 4,813.8
-------- --------
MINORITY INTERESTS IN SUBSIDIARY COMPANIES 117.0 8.5
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share 249.4 249.4
Capital in excess of par value 331.1 329.2
Retained earnings 3,490.5 3,400.0
Accumulated other comprehensive income (203.3) (231.5)
Treasury stock, at cost (681.6) (657.0)
Shares in trust (413.6) (422.8)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 2,772.5 2,667.3
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,718.9 $7,489.6
======== ========
</TABLE>
3
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
(UNAUDITED)
<TABLE>
(Millions of dollars, except per share)
Three Months Ended
31 December
------------------------------
1998 1997
---- ----
<S> <C> <C>
SALES AND OTHER INCOME
Sales $1,274.6 $1,234.8
Other income (expense), net 4.9 (4.9)(a)
-------- --------
1,279.5 1,229.9
-------- --------
COSTS AND EXPENSES
Cost of sales 875.6 831.0 (b)
Selling and administrative 183.2 159.6 (b)
Research and development 31.7 26.3
-------- -------
OPERATING INCOME 189.0 213.0
Income from equity affiliates, net of related expenses 9.8 5.7
Gain on Ref-Fuel Sale and Contract Settlement -- 75.2
Net gain on formation of polymer venture 31.2 --
Interest expense 40.4 40.2
-------- -------
INCOME BEFORE TAXES AND MINORITY INTEREST 189.6 253.7
Income taxes 59.9 92.8
Minority interest 3.3 .4 (a)
-------- -------
NET INCOME $ 126.4 $ 160.5
======== =========
BASIC EARNINGS PER COMMON SHARE $.60 $.74
-------- -------
DILUTED EARNINGS PER COMMON SHARE $.59 $.72
-------- -------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (in millions) 211.4 218.1
-------- -------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
(in millions) 215.4 222.6
-------- -------
DIVIDENDS DECLARED PER COMMON SHARE - Cash $.17 $ .15
-------- -------
</TABLE>
(a) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of distribution expense in cost of
sales.
4
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Millions of dollars)
Three Months Ended
31 December
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
NET INCOME $126.4 $160.5
OTHER COMPREHENSIVE INCOME, net of tax
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 24.3 (32.8)
UNREALIZED GAINS ON INVESTMENTS:
Unrealized holding gains (losses) arising during the period 3.9 (2.4)
Less: reclassification adjustment for gains included in net income -- --
------ ------
NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS 3.9 (2.4)
------ ------
TOTAL OTHER COMPREHENSIVE INCOME 28.2 (35.2)
------ ------
COMPREHENSIVE INCOME $154.6 $125.3
====== ======
</TABLE>
5
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Millions of dollars) Three Months Ended
31 December
----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 126.4 $ 160.5
Adjustments to reconcile income to cash provided by operating activities:
Depreciation 127.8 117.6
Deferred income taxes 21.4 17.5
Ref-Fuel divestiture deferred income taxes -- (80.3)
Gain on formation of polymer venture (31.2) --
Undistributed (earnings) of unconsolidated affiliates 6.7 34.0
(Gain) loss on sale of assets and investments .5 (82.9)
Other 58.5 30.2
Working capital changes that provided (used) cash, net of effects of
acquisitions:
Trade receivables 6.7 53.6
Other receivables 45.5 (17.4)
Inventories and contracts in progress (47.5) 6.0
Payables, trade and other 2.1 (4.4)
Accrued liabilities (73.5) (86.2)
Accrued income taxes 23.7 151.8
Other 6.0 (20.6)
Cash provided by (used for) discontinued operations -- (3.2)
----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 273.1 276.2
----- -----
INVESTING ACTIVITIES
Additions to plant and equipment (189.5) (154.9)
Acquisitions, less cash acquired (4.6) (16.6)
Investment in and advances to unconsolidated affiliates (50.4) (4.5)
Proceeds from sale of assets and investments 17.3 248.3
Other 14.7 (.9)
----- -----
CASH PROVIDED BY (USED FOR)INVESTING ACTIVITIES (212.5) 71.4
----- -----
FINANCING ACTIVITIES
Long-term debt proceeds .8 2.0
Payments on long-term debt 4.2 (43.5)
Net increase (decrease) in commercial paper (16.1) (65.5)
Net increase (decrease) in other short-term borrowings (1.2) (24.6)
Dividends paid to shareholders (36.0) (33.0)
Purchase of Treasury Stock (24.6) (150.0)
Other 7.6 1.4
----- -----
CASH (USED FOR) FINANCING ACTIVITIES (65.3) (313.2)
----- -----
Effect of Exchange Rate Changes on Cash 1.0 (1.0)
----- -----
Increase (decrease) in Cash and Cash Items (3.7) 33.4
Cash and Cash Items - Beginning of Year 61.5 52.5
----- -----
Cash and Cash Items - End of Period $57.8 $ 85.9
----- -----
</TABLE>
6
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY BUSINESS SEGMENTS
(UNAUDITED)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended
31 December
----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales:
Industrial Gases $740.8 $727.0
Chemicals 401.8 380.9
Equipment/Services 132.0 126.9
Corporate/Other -- --
- -------------------------------- -------- --------
CONSOLIDATED $1,274.6 $1,234.8
- -------------------------------- -------- --------
Operating
Income:
Industrial Gases $122.2 (a) $147.2
Chemicals 52.6 (a) 68.4
Equipment/Services 28.8 (a) 12.6
Corporate/Other (14.6)(a) (15.2) (b)
- -------------------------------- -------- --------
CONSOLIDATED $189.0 $213.0
- -------------------------------- -------- --------
Equity Affiliates' Income:
Industrial Gases $6.1 $.4
Chemicals 2.1 --
Equipment/Services 1.1 4.4
Corporate/Other .5 .9
- -------------------------------- -------- --------
CONSOLIDATED $9.8 $5.7
- -------------------------------- -------- --------
Operating Return on Net Assets:
Industrial Gases 11.3 % 11.4 %
Chemicals 16.2 18.1
Equipment/Services 32.7 11.3
Corporate/Other N/A N/A
- -------------------------------- -------- --------
CONSOLIDATED 12.0 % 11.5 %
- -------------------------------- -------- --------
</TABLE>
(a) The results for the three months ended 31 December 1998 include the cost
reduction charge in Industrial Gases ($16.3 million), Chemicals ($1.6
million), Equipment/Services ($1.9 million), and Corporate/Other ($.5
million).
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
7
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
SUMMARY BY GEOGRAPHIC REGIONS
(REVISED)
(UNAUDITED)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended
31 December
----------------------------
1998 1997
---- ----
<S> <C> <C>
Sales:
United States $807.9 $876.0
Europe 399.3 299.4
Canada/Latin America 58.0 51.3
Other 9.4 8.1
- -------------------------------- -------- --------
CONSOLIDATED $1,274.6 $1,234.8
- -------------------------------- -------- --------
Operating
Income:
United States $136.0 (a) $169.2 (b)
Europe 48.3 (a) 41.2 (b)
Canada/Latin America 5.4 3.5
Other (.7) (.9) (b)
- -------------------------------- -------- --------
CONSOLIDATED $189.0 $213.0
- -------------------------------- -------- --------
Equity Affiliates' Income:
United States $1.9 $5.5
Europe 2.9 2.7
Canada/Latin America 4.5 2.9
Other .5 (5.4)
- -------------------------------- -------- --------
CONSOLIDATED $9.8 $5.7
- -------------------------------- -------- --------
</TABLE>
(a) The results for the three months ended 31 December 1998 include the cost
reduction charge in the United States ($10.5 million) and Europe ($9.8
million).
(b) The results for the three months ended 31 December 1997 have been restated
to reflect the current year presentation of minority interest in a separate
line item between income taxes and net income.
8
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective 31 December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share" and SFAS No. 129 "Disclosure of Information about Capital Structure."
SFAS No. 129 does not change the currently reported disclosures, while SFAS
No. 128 establishes new accounting and disclosure for earnings per share (EPS).
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
(Millions, except per share)
Three months ended 31 December 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic EPS
and diluted EPS-net income ..................... $ 126.4 $160.5
Denominator for basic EPS
- -weighted average shares ....................... 211.4 218.1
Effect of diluted securities:
Employee stock options ....................... 3.0 3.6
Other award plans ............................ 1.0 .9
-------- --------
4.0 4.5
Denominator for diluted EPS
- -weighted average shares and
assumed conversions ............................ 215.4 222.6
======== ========
Basic EPS ...................................... $ .60 $ .74
======== ========
Diluted EPS .................................... $ .59 $ .72
======== ========
</TABLE>
Options on 8.1 million and 2.6 million shares of common stock were not included
in computing diluted EPS for the first quarter of fiscal 1999 and 1998,
respectively because their effects were antidilutive. The potential dilutive
effect of these options can not be estimated based on current information.
The results for the three months ended 31 December 1998 include a net gain of
$31.2 million ($21.4 million after-tax or $.10 per share) related to the
formation of Air Products Polymers (a 65% majority owned venture with
Wacker-Chemie GmbH). The gain was partially offset by costs related to an
emulsions facility shutdown not included in the joint venture and for costs
related to indemnities provided by Air Products to the venture.
On 21 December 1998, the Company committed to a global cost reduction plan. The
plan results in a staffing reduction of 206 employees in the areas of
manufacturing, distribution, and overhead. The plan will be completed by
31 December 1999.
9
<PAGE>
$20.3 million ($12.9 million after-tax or $.06 per share) related to employee
termination benefits was charged to expense in the fiscal quarter of which
$4.8 million has been incurred and the balance is included in accrued
liabilities. The charges to cost of sales, selling and administrative and
research and development were $9.9 million, $9.3 million and $1.1 million,
respectively.
In December 1997, the Company sold its 50% interest in American Ref-Fuel
Company, its former waste-to-energy joint venture with Browning-Ferris
Industries, Inc.(BFI), to a limited liability company (LCC) formed by Duke
Energy Power Services and United American Energy Corporation. This transaction
provides for the sale of Air Products' interest in American Ref-Fuel's five
waste-to-energy facilities for $237 million, and the assumption of various
parental support agreements by Duke Energy Capital Corporation, the parent
company of Duke Energy Power Services. The income statement for the three months
ended 31 December 1997 includes a gain of $62.6 million from this sale,
($35.1 million after-tax or $.16 per share).
The results for the three months ended 31 December 1997 also include a gain of
$12.6 million from a cogeneration project contract settlement ($7.6 million
after-tax or $.03 per share).
10
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER FISCAL 1999 VS. FIRST QUARTER FISCAL 1998
------------------------------------------------------------------
RESULTS OF OPERATIONS
Consolidated
Sales in the first quarter of fiscal 1999 were $1,274.6 million, 3% higher than
in the same quarter of the prior year while operating income, was down $24.0
million, or 11%, to $189.0 million. Profits of equity affiliates increased $4.1
million to $9.8 million for the three months ended 31 December 1998. Net income
was $126.4 million, or $.59 diluted earnings per share, compared to net income
of $160.5 million, or $.72 diluted earnings per share, in the year-ago quarter.
The current year included two special items: an after-tax gain of $21.4 million,
or $.10 per share related to the formation of Air Products Polymers and an
after-tax charge of $12.9 million, or $.06 per share related to a global cost
reduction plan. Excluding the impact of these special items, net income was
$117.9 million, and diluted earnings per share was $.55. The prior year also
included two special items: an after-tax gain of $35.1 million, or $.16 per
share from the sale of the Company's 50% interest in American Ref-Fuel Company
and an after-tax gain of $7.6 million, or $.03 per share from a cogeneration
project contract settlement. Excluding these special items, net income was $118
million, and diluted earnings per share was $.53 for the quarter of fiscal 1998.
Excluding these special items, net income for the first quarter of fiscal 1999
of $117.9 million is essentially unchanged from prior year, while diluted
earnings per share of $.55 is up 4%. The remaining discussion and analysis of
the consolidated results of operations excludes the impact of special items.
Consolidated sales were up 3% driven by growth in all three segments, primarily
outside North America. Higher sales in Europe and Asia were offset by decreased
North American sales across several end markets in the industrial gases segment.
Volume gains in the chemicals businesses were due to the new emulsions venture
and prior year acquisitions. The equipment segment sales were slightly higher
than last year.
Operating income was slightly below last year primarily due to slower
electronics, chemical processing and steel market segments. Volume growth
declined from high levels last year in the methylamine, higher amine, and PVOH
businesses of our chemicals segment. The equipment segment generated record
operating income due to improved cost performance and a favorable product mix.
Equity affiliates' income increased principally due to foreign exchange losses
recorded in the prior year. Foreign exchange had a minimal impact on equity
affiliates' income in the current quarter.
11
<PAGE>
Industrial Gases - Sales increased 2% to $740.8 million in the first quarter of
fiscal 1999 while operating income decreased 17% to $122.2 million. Excluding
the cost reduction charge included in the current year results, operating income
was $138.5 million, a decline of 6%. Merchant gases volumes grew 2% in the
United States, with LOX/LIN up 3% including non-cryo. Soft business conditions
in the metals and electronics areas partially offset growth in several other end
use markets. LOX/LIN pricing was down 3% due to continuing competitive pressure.
Tonnage gases volumes in the United States declined 3% due to lower spot HYCO
sales and cutbacks at several large steel accounts. European merchant volumes
were up 4% with LOX/LIN including non-cryo up 8%. Carburos Metalicos continues
to provide strong growth. Continuing competitive pressure in northern Europe
resulted in a 2% decline in LOX/LIN prices. A planned customer outage in
Rotterdam resulted in a tonnage gases decline. Total gases margin of 18.7% was
down 1.5% from the prior year. Almost half of the decline is due to business and
geographic mix and the balance is due to lower volumes in the HYCO and steel
accounts as well as a weak electronics market.
Equity affiliates' income for the first quarter of fiscal 1999 increased to $6.1
million compared to $.4 million in the prior year. This increase was due
primarily to the unfavorable foreign exchange effects recorded in the prior
year. The impact of foreign exchange in the current year was minimal.
Chemicals- Sales in the first quarter of fiscal 1999 of $401.8 million increased
5%, or $20.9 million. Operating income decreased $15.8 million to $52.6 million.
Excluding the cost reduction plan charge included in the current year results,
operating income was $54.2 million, a decline of 21%. Overall volumes increased
8%. Excluding the impact of the emulsions venture and prior year acquisitions,
the current quarter volumes decreased 3%. Methylamine, higher amine, and PVOH
volumes were down from the strong levels in the prior year. The current year
operating margin of 13.5% declined as a result of several factors including
costs related to new facilities brought on-stream, customer outages, and a less
favorable product mix.
Equity affiliates' income for the first quarter of fiscal 1999 was $2.1 million.
This amount mainly reflects the Company's 20% interest in the redispersible
powders venture formed with Wacker-Chemie GmbH.
Equipment and Services - Sales increased slightly from $126.9 million in the
prior year to $132.0 million. Operating income increased from $12.6 million to
$28.8 million. Excluding the cost reduction plan charge included in the current
year results, operating income increased $18.1 million. The record operating
income was achieved as a result of improved cost performance, a favorable
project mix, and early completion of several key projects. Sales backlog for the
equipment product line declined to $212 million at 31 December 1998. This
backlog compares to $302 million at 30 September 1998 and $277 million at 31
December 1997.
Equity affiliates' income for the first quarter of fiscal 1999 decreased $3.3
million to $1.1 million. This decline is mainly a result of lower energy pricing
in the power generation business.
12
<PAGE>
Corporate and Other - Operating loss declined $.6 million to $14.6 million.
Excluding the cost reduction plan charge included in the current year results,
the operating loss decreased $1.1 million. The prior year results included
unfavorable foreign exchange impacts. The current year foreign exchange impacts
were minimal.
Equity affiliates' income for the first quarter of fiscal 1999 decreased $.4
million mainly due to the American Ref-Fuel Company being included as an equity
affiliate for the first two months of the prior year.
INTEREST
Interest expense of $40.4 million is approximately at the level of the prior
fiscal year first quarter. Increased interest incurred on a higher average debt
balance was offset by lower rates and higher capitalized interest.
INCOME TAXES
The consolidated effective tax rate on income was 31.6%. Excluding the tax rate
impact related to the gain from the formation of the emulsions venture and the
cost reduction program, the effective tax rate is 32.2%. This rate is 1.7% lower
than the prior year rate mainly due to higher after-tax equity affiliates'
income.
ACCOUNTING CHANGES
Effective 1 October 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The standard establishes additional disclosure for the
elements of comprehensive income and a computation of total comprehensive
income. The Company's implementation resulted in a new financial statement,
"Consolidated Statement of Comprehensive Income."
As of 1 January 1999, the Company will cease applying highly inflationary
accounting to operations in Mexico. For operations that used the US dollar for
translation, due to hyperinflationary conditions, the functional currency will
now be the Mexican Peso. No material effects on the financial statements are
expected to result from this change.
Beginning with the fiscal quarter ended 31 December 1998, the Company changed
the income statement presentation of distribution expense. Distribution expense
is now included as part of "Cost of sales" and was previously reported as part
of "Selling, distribution and administrative." This change reflects a more
common industry classification of expenses. Results of the period ended 31
December 1997 were restated for comparability. A disclosure of the impacts of
this change on prior periods, 1988 to 1998, is enclosed with this filing.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures during the first three months of fiscal 1999 totaled $245.4
million compared to $186.9 million in the corresponding period of the prior
year. Additions to plant and equipment increased from $154.9 million during the
first three months of fiscal 1998 to $189.5 million during the current period.
Investments in unconsolidated affiliates were $50.4 million during the first
three months of fiscal 1999 versus $4.5 million last year. The current year
results include a cash contribution of $33.5 million related to the formation of
the redispersible powders venture with Wacker-Chemie GmbH. Capital expenditures
are expected to be approximately $1.0 billion in fiscal 1999. It is anticipated
that these expenditures will be funded with cash from operations supplemented
with proceeds from financing activities.
Cash provided by operating activities during the first three months of fiscal
1999 ($273.1 million) combined with proceeds from the sale of assets and
investments ($17.3 million) were used largely for capital expenditures ($245.4
million), purchase of common stock for treasury ($24.6 million), debt repayments
($12.3 million) and cash dividends ($36.0 million). Cash and cash items
decreased $3.7 million from $61.5 million at the beginning of the fiscal year to
$57.8 million at 31 December 1998. The net decrease in commercial paper was
$16.1 million.
Total debt at 31 December 1998 and 30 September 1998, expressed as a percentage
of the sum of total debt and shareholders' equity, was 49% and 50%,
respectively. Total debt decreased slightly from $2,697.5 million at 30
September 1998 to $2,686.0 million at 31 December 1998.
There was $304.6 million of commercial paper outstanding at 31 December 1998.
The Company's revolving credit commitments amounted to $600.0 million at 31
December 1998 with funding available in 13 currencies. No borrowings were
outstanding under these commitments. Additional commitments totaling $100.6
million are maintained by the Company's foreign subsidiaries, of which $13.1
million was utilized at 31 December 1998.
At 31 December 1998, the Company had unutilized shelf registrations for $325.0
million of debt securities.
The Company enters into interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio in order to maintain the
percentage of fixed and variable rate debt within certain parameters set by
management. In accordance with these parameters, the agreements are used to
reduce interest rate risks and costs inherent in the Company's debt portfolio.
Accordingly, the Company enters into agreements to both effectively convert
variable-rate debt to fixed-rate debt and to effectively convert fixed-rate debt
to variable-rate debt, which is principally indexed to LIBOR rates. The Company
has also entered into interest rate swap contracts to effectively convert the
stated variable rates to interest rates based on LIBOR. The fair value gain
(loss) on the variable to variable swaps is equally offset by a fair value loss
(gain) on the related debt agreements.
14
<PAGE>
The notional principal and fair value of interest rate swap agreements at 31
December 1998 and 30 September 1998 were as follows:
<TABLE>
<CAPTION>
(Millions of dollars)
31 December 1998 30 September 1998
-------------------------------- ---------------------------------
Notional Fair Value Notional Fair Value
Amount Gain (Loss) Amount Gain (Loss)
------------ ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Fixed to Variable $361.0 $ 25.0 $461.0 $37.6
Variable to Variable 60.0 110.8 60.0 86.4
------------- ----------------- -------------- ---------------
Total $421.0 $135.8 $521.0 $124.0
============= ================= ============== ===============
</TABLE>
During the first three months of fiscal 1999 two fixed to variable interest rate
swap agreements with a total notional amount of $100 million were terminated,
resulting in a deferred gain of $7.5 million. Additionally, subsequent to 31
December 1998, one fixed to variable interest rate swap agreement with a
notional amount of $50 million was terminated, resulting in a deferred gain of
$3.0 million.
A $55.6 million asset has been recognized in the financial statements related to
the above variable to variable interest rate swap agreements. Additionally, a
$55.6 million liability has been recognized in the financial statements related
to the corresponding debt agreements.
The Company is also party to interest rate and currency swap contracts. These
contracts effectively convert the currency denomination of a debt instrument
into another currency in which the Company has a net equity position while
changing the interest rate characteristics of the instrument. The notional
principal of interest rate and currency swap agreements outstanding at 31
December 1998 was $389.3 million. The fair value of the agreements was a loss of
$2.3 million, of which a $28.0 million gain related to the currency component
was recognized in the financial statements. The remaining $30.3 million loss was
related to the interest component and has not been recognized in the financial
statements. This loss reflects that current interest rates are generally lower
than the interest rates paid under the interest rate and currency swap
agreements. As of 30 September 1998 interest rate and currency swap agreements
were outstanding with a notional principal amount and fair value of $419.3
million and a gain of $1.8 million, respectively.
The estimated fair value of the Company's long-term debt, including current
portion, as of 31 December 1998 is $2,813.2 million compared to a book value of
$2,433.3 million.
During the first quarter of fiscal 1998, .6 million shares of the Company's
outstanding common stock were repurchased at a cost of $24.6 million.
FINANCIAL INSTRUMENTS
There has been no material change in the net financial instrument position or
sensitivity to market risk since the disclosure in the annual report.
15
<PAGE>
POLYMER VENTURE FORMATION AND GAIN
On 1 October 1998, the Company and Wacker-Chemie GmbH (Munich, Germany) formed
two joint ventures to combine their emulsions and redispersible powder
businesses.
The polymer emulsions joint venture, Air Products Polymers, L.P. (APP), is
headquartered in the United States and has facilities in Germany, Mexico, Korea,
and the United States. Air Products has a 65% interest in the venture and
Wacker-Chemie has a 35% interest. Air Products fully consolidated the results of
the venture and the Wacker-Chemie interest has been accounted for as a minority
interest.
The results for the three months ended 31 December 1998 include a net gain of
$31.2 million ($21.4 million after-tax or $.10 per share) related to the
formation of APP. Deferred taxes of $10.2 million were provided as a result
of the gain. The gain was partially offset by costs related to an emulsions
facility shutdown not included in the venture and for costs related to
indemnities provided by Air Products to the venture. The APP purchase price
allocation period remains open.
The assets contributed by the Company to APP were recorded by the venture at
carryover value. The venture applied purchase accounting to the assets provided
by Wacker-Chemie GmbH and recorded them at fair market value. The Company's
contribution was treated as a partial sale of assets thus resulting in a gain.
The Company elected the option of recording the gain to the statement of
consolidated income. The option must be consistently applied to all future gains
and losses due to similar transactions and is adopted as a Company accounting
policy. This form of transaction is not expected to be a common occurrence.
The redispersible powders venture, Wacker Polymer Systems (WPS), is
headquartered in Germany with manufacturing facilities in Germany and the United
States. Air Products has a 20% interest in this venture and reported the results
by the equity accounting method.
COST REDUCTION PLAN
On 21 December 1998, the Company committed to a global cost reduction plan. The
plan results in a staffing reduction of 206 employees in the areas of
manufacturing, distribution and overhead. The plan has been communicated to all
employees and as of the filing, approximately 75% of the employees impacted have
been notified. The plan will be completed by 31 December 1999. $20.3 million
($12.9 million after-tax or $.06 per share) related to employee termination
benefits was charged to expense in the fiscal quarter ended 31 December 1998, of
which $4.8 million was incurred and the balance was included in accrued
liabilities. The charges to cost of sales, selling and administrative, and to
research and development were $9.9 million, $9.3 million and $1.1 million,
respectively. The charges to segments were to Industrial Gases ($16.3 million),
Chemicals ($1.6 million), Equipment/Services ($1.9 million) and Corporate/Other
($.5 million). Benefits of the cost reduction plan will begin to occur in the
second quarter of the
16
<PAGE>
current fiscal year and will reach an annualized savings of approximately
$15 million in early fiscal year 2000.
YEAR 2000 READINESS DISCLOSURE
Year 2000 Preparation
During the fiscal quarter ended 31 December 1998, the Company continued to
achieve the critical milestones in the Year 2000 readiness program. Progress and
exposure are essentially as planned and disclosed in the fiscal year 1998 Annual
Report issued in December 1998. The $40 million cost estimate as previously
disclosed remains currently viable. The next phase, Year 2000 contingency
planning, is in progress and is expected to be ready to address Year 2000 issues
as they arise.
Information Technology
Over 96% of the mission-critical infrastructure and applications portfolio have
been tested and certified as Year 2000 ready. This activity is expected to be
complete by the end of the second fiscal quarter. The Company continues to
believe that the combination of readiness certification and contingency plans
will result in no material adverse impact on the Company's operations or
financial condition due to Information Technology Systems.
Process Control and Embedded Chip Systems
Over 98% of the Company-owned or operated Non-Information Technology Systems
have been inventoried and risk assessment is complete. Year 2000 certification
efforts continue as planned with over 50% of the mission critical systems
certified as Year 2000 ready.
Third Parties
Assessment of the Company's key suppliers is continuing as planned.
EURO IMPACT
The Euro has become operational as of January 1999. The Company does not
anticipate materially adverse operational or competitive impacts from this
event.
17
<PAGE>
AIR PRODUCTS AND CHEMICALS, INC. AND SUBSIDIARIES
RESTATEMENT OF COST OF SALES AND SELLING AND ADMINISTRATIVE
Beginning with the fiscal quarter ending 31 December 1998, the Company is
reporting distribution expense as part of "Cost of sales." Distribution expense
was previously reported as part of "Selling, distribution, and administrative."
The following tables disclose the impact of this change for the fiscal quarters
of 1998 and 1997 and fiscal years 1996 through 1988.
Fiscal Years 1998 and 1997 by Quarter
<TABLE>
<CAPTION>
(In millions)
Fiscal Year 1998 Fiscal Year 1997
Reported Restated Reported Restated
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of sales:
Quarter 1 $ 720.7 $ 831.0 $ 692.7 $ 791.4
Quarter 2 701.9 816.1 686.3 793.8
Quarter 3 708.7 824.1 663.4 771.1
Quarter 4 725.2 845.6 729.2 839.1
- --------------------------------------------------------------------------------------------------------
Total $2,856.5 $3,316.8 $2,771.6 $3,195.4
- --------------------------------------------------------------------------------------------------------
Selling and administrative:
Quarter 1 $ 269.9 $ 159.6 $ 241.5 $ 142.8
Quarter 2 277.3 163.1 264.7 157.2
Quarter 3 287.4 172.0 266.8 159.1
Quarter 4 285.7 165.3 278.3 168.4
- -------------------------------------------------------------------------------------------------------
Total $1,120.3 $ 660.0 $1,051.3 $ 627.5
- --------------------------------------------------------------- -----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years 1996 through 1988
Selling and
Cost of sales administrative
Reported Restated Reported Restated
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 1996 $ 2,408 $ 2,780 $ 920 $ 548
Fiscal Year 1995 $ 2,317 $ 2,678 $ 869 $ 508
Fiscal Year 1994 $ 2,112 $ 2,455 $ 789 $ 446
Fiscal Year 1993 $ 2,030 $ 2,340 $ 744 $ 434
Fiscal Year 1992 $ 1,937 $ 2,233 $ 724 $ 428
Fiscal Year 1991 $ 1,755 $ 2,030 $ 686 $ 411
Fiscal Year 1990 $ 1,775 $ 2,042 $ 659 $ 392
Fiscal Year 1989 $ 1,601 $ 1,843 $ 610 $ 368
Fiscal Year 1988 $ 1,452 $ 1,666 $ 545 $ 331
</TABLE>
18
<PAGE>
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. In addition to important risk factors and
uncertainties referred to in the Management's Discussion and Analysis such as
those relating to the Year 2000, other important risk factors and uncertainties
include the impact of worldwide economic growth, pricing of both the Company's
products and raw materials such as electricity, customer demand and other
factors resulting from fluctuations in interest rates and foreign currencies,
the impact of competitive products and pricing, success of work process programs
to control costs, and the impact of tax and other legislation and other
regulations in the jurisdictions in which the Company and its affiliates
operate.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27) Financial Data Schedule for the three months ended
31 December 1998, which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Current Reports on Form 8-K dated 1 October 1998,
22 October 1998 and 28 October 1998 were filed by the
registrant during the quarter ended 31 December 1998
in which Item 5 of such form was reported.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Air Products and Chemicals, Inc.
--------------------------------
(Registrant)
Date: February 8, 1999 By: /s/ Leo J. Daley
-----------------------------
Leo J. Daley
Vice President - Finance
(Chief Financial Officer)
21
<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
EXHIBITS
To
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended 31 December 1998
Commission File No. 1-4534
-------------------
AIR PRODUCTS AND CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
===============================================================================
<PAGE>
INDEX TO EXHIBITS
(a)(12) Computation of Ratios of Earnings to Fixed Charges.
(a)(27) Financial Data Schedule for the three months ended
31 December 1998, which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Current Reports on Form 8-K dated 1 October 1998,
22 October 1998 and 28 October 1998 were filed by the
registrant during the quarter ended 31 December 1998
in which Item 5 of such form was reported.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TEXT>
Exhibit (a)(12)
AIR PRODUCTS AND CHEMICALS, INC., AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended 30 September 31 Dec
--------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998
Earnings: (Millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item and
the cumulative effect of accounting
changes: $233.5 $368.2 $416.4 $429.3 $546.8 $126.4
Add (deduct):
Provision for income taxes 95.2 186.2 195.5 203.4 280.9 60.8
Fixed charges, excluding capitalized interest 127.1 148.8 184.0 233.0 202.8 48.5
Capitalized interest amortized during the period 8.0 9.1 9.4 8.3 7.4 1.5
Undistributed earnings of
less-than-fifty-percent-owned affiliates (2.8) (25.4) (40.6) (31.1) (25.3) (8.9)
---- ----- ----- ----- ----- ------
Earnings, as adjusted $461.0 $686.9 $764.7 $842.9 $1,012.6 $228.3
====== ====== ====== ====== ======== ======
Fixed Charges:
Interest on indebtedness, including capital lease
obligations $118.2 $139.4 $171.7 $217.8 $186.7 $ 44.3
Capitalized interest 9.7 18.5 20.0 20.9 18.4 6.8
Amortization of debt discount premium and expense .8 .2 1.5 1.8 1.9 .5
Portion of rents under operating leases
representative of the interest factor 8.1 9.2 10.8 13.4 14.2 3.7
------ ------ ------ ------ ------ -----
Fixed charges $136.8 $167.3 $204.0 $253.9 $221.2 $ 55.3
====== ====== ====== ====== ====== =======
Ratio of Earnings to Fixed Charges: 3.4 4.1 3.7 3.3 4.6 4.1
====== ====== ====== ====== ====== =======
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FDS --
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This Schedule contains summary financial information
extracted from the consolidated balance sheet and the
consolidated statement of income filed as part of
Form 10-Q and is qualified in its entirety by reference
to such Form 10-Q
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 898
<ALLOWANCES> 12
<INVENTORY> 452
<CURRENT-ASSETS> 1662
<PP&E> 9687
<DEPRECIATION> 4793
<TOTAL-ASSETS> 7719
<CURRENT-LIABILITIES> 1367
<BONDS> 2123
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 249
<OTHER-SE> 2523
<TOTAL-LIABILITY-AND-EQUITY> 7719
<SALES> 1275
<TOTAL-REVENUES> 1275
<CGS> 876
<TOTAL-COSTS> 876
<OTHER-EXPENSES> 32
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 190
<INCOME-TAX> 60
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156
<EPS-PRIMARY> 0.6
<EPS-DILUTED> 0.59
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| AZO | https://www.sec.gov/Archives/edgar/data/866787/0000866787-99-000001.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000866787-99-000001.txt : 19990106
<SEC-HEADER>0000866787-99-000001.hdr.sgml : 19990106
ACCESSION NUMBER: 0000866787-99-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19981121
FILED AS OF DATE: 19990105
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOZONE INC
CENTRAL INDEX KEY: 0000866787
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531]
IRS NUMBER: 621482048
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0828
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10714
FILM NUMBER: 99501052
BUSINESS ADDRESS:
STREET 1: 123 SOUTH FRONT ST
CITY: MEMPHIS
STATE: TN
ZIP: 38103
BUSINESS PHONE: 9014956500
MAIL ADDRESS:
STREET 1: P O BOX 2198
STREET 2: DEPT 8074
CITY: MEMPHIS
STATE: TN
ZIP: 38101-9842
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended November 21, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ________.
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1482048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 149,995,940 shares as of December 31, 1998.
<PAGE>
PART I. ITEM 1.
AUTOZONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Nov. 21, Aug. 29,
1998 1998
-------- --------
(Unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,060 $ 6,631
Accounts receivable 39,735 42,252
Merchandise inventories 1,004,976 966,560
Prepaid expenses 33,161 37,532
Deferred income taxes 53,089 61,964
Income taxes receivable 2,151
--------- ---------
Total current assets 1,138,021 1,117,090
Property and equipment:
Property and equipment 1,941,230 1,778,485
Less accumulated depreciation and amortization 366,693 350,979
--------- ---------
1,574,537 1,427,506
Other assets:
Cost in excess of net assets acquired 180,245 181,315
Deferred income taxes 22,084 3,510
Other assets 25,360 18,692
------- ------
227,689 203,517
------- -------
$ 2,940,247 $ 2,748,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 659,926 $ 683,372
Accrued expenses 159,347 176,457
Income taxes payable 35,110
------- -------
Total current liabilities 854,383 859,829
Long-term debt 745,091 545,067
Other liabilities 37,170 41,160
Stockholders' equity 1,303,603 1,302,057
--------- -----------
$ 2,940,247 $ 2,748,113
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
--------------------------------
Nov. 21, Nov. 22,
1998 1997
-------- --------
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $ 900,949 $ 675,274
Cost of sales, including
warehouse and delivery expenses 524,467 394,833
Operating, selling, general and
administrative expenses 286,667 201,793
------- -------
Operating profit 89,815 78,648
Interest expense 8,515 2,502
------ ------
Income before income taxes 81,300 76,146
Income taxes 30,000 28,600
------ ------
Net income $ 51,300 $ 47,546
========== ========
Weighted average shares
for basic earnings per share 150,762 151,697
Effect of dilutive stock options 806 2,126
------ -------
Adjusted weighted average shares
for diluted earnings per share 151,568 153,823
======= =======
Basic earnings per share $ 0.34 $ 0.31
====== ======
Diluted earnings per share $ 0.34 $ 0.31
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
---------------------------------
Nov. 21, Nov. 22,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 51,300 $ 47,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,264 19,630
Net increase in merchandise inventories (38,416) (15,413)
Net increase in current liabilities 13,240 10,450
Other - net (13,486) (5,755)
-------- -------
Net cash provided by operating activities 40,902 56,458
Cash flows from investing activities:
Cash outflows for property
and equipment, net (190,743) (70,373)
Cash flows from financing activities:
Net proceeds from debt 200,024 4,600
Purchase of Treasury Stock (50,300)
Proceeds from sale of Common Stock, including
related tax benefit 546 9,012
------- ------
Net cash provided by financing activities 150,270 13,612
------- ------
Net increase (decrease) in cash and cash equivalents 429 (303)
Cash and cash equivalents at beginning of period 6,631 4,668
------- ------
Cash and cash equivalents at end of period $ 7,060 $ 4,365
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the twelve weeks ended November 21, 1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
August 28, 1999. For further information, refer to the financial statements
and footnotes included in the Company's annual report on Form 10-K for the
year ended August 29, 1998.
NOTE B--INVENTORIES
Inventories are stated at the lower of cost or market using the last-
in, first-out (LIFO) method. An actual valuation of inventory under the
LIFO method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations must
necessarily be based on management's estimates of expected year-end
inventory levels and costs.
NOTE C-FINANCING ARRANGEMENTS
The Company's long-term debt as of November 21, 1998 and August 29,
1998 consisted of the following:
NOV. 21, Aug. 29,
1998 1998
------ --------
6.5% Debentures due July 15, 2008 $200,000 $200,000
6% Notes due November 1, 2003 150,000
Commercial Paper, 5.7% weighted
average rate 10,868 305,000
Unsecured bank loan, floating
interest rate averaging 5.4%
at November 21, 1998 and 5.8%
at August 29, 1998 378,500 34,050
Other 5,723 6,017
------- ------
$745,091 $545,067
In October 1998, the Company sold $150 million of 6% Notes due
November 2003 at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In July
1998, the Company sold $200 million of 6.5% Debentures due July 2008 at a
discount. Interest on the Debentures is payable semi-annually on January
15 and July 15 of each year, beginning January 15, 1999. Proceeds from the
Notes and Debentures were used to repay portions of the Company's long-term
variable rate bank debt and for general corporate purposes.
The Company has a commercial paper program that allows borrowing up to
$500 million. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
December 2001 and a 364-day $150 million credit facility with another group
of banks. The 364-day facility includes a renewal feature as well as an
option to extinguish the outstanding debt one year from the maturity date.
Borrowings under the commercial paper program reduce availability under the
credit facilities. Outstanding commercial paper and revolver borrowings at
November 21, 1998 are classified as long-term debt as it is the Company's
intention to refinance them on a long-term basis.
Additionally, the Company has a credit facility with a bank for up to
$150 million which extends until May 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 1999. There were no amounts outstanding under
these agreements at November 21, 1998.
The rate of interest payable under the revolving credit agreements is
a function of the London Interbank Offered Rate (LIBOR) or the lending
bank's base rate (as defined in the agreement) at the option of the
Company. In addition, the $350 million credit facility contains a
competitive bid rate option. All of the revolving credit facilities
contain a covenant limiting the amount of debt the Company may incur
relative to its total capitalization.
NOTE D-STOCKHOLDERS' EQUITY
The Company presents basic and diluted earnings per share (EPS) in
accordance with the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options.
In October 1998, the Company announced Board approval to repurchase up
to $150 million of common stock in the open market. This is in addition to
the $100 million repurchase approved in January 1998. Since January 1998,
approximately $79 million of common stock has been repurchased under the
plan.
NOTE E-COMPREHENSIVE INCOME
As of August 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income is net income, plus
certain other items that are recorded directly to stockholders' equity,
bypassing net income. There are no such items currently applicable to the
Company and therefore comprehensive income for the periods presented equals
net income.
The adoption of this Statement had no effect on the Company's results
of operations or financial position.
NOTE F-CONTINGENCIES
Chief Auto Parts Inc., a wholly owned subsidiary of the Company, is a
defendant in a class action lawsuit entitled "Doug Winfrey, et al. on their
own behalf and on behalf of a class and all others similarly situated, v.
Chief Auto Parts Inc. et al.," filed in the Superior Court of California,
County of San Joaquin on August 22, 1995 and then transferred to The
Superior Court of California, County of San Francisco on October 26, 1995.
The Superior Court denied the plaintiff's motion for class certification on
December 7, 1996. On February 6, 1998, the Court of Appeals reversed the
Superior Court's order denying class certification and remanded the case to
the Superior Court for further proceedings. On November 16, 1998 the
Superior Court certified the class as all persons considered by Chief to be
non-exempt hourly employees who, from August 22, 1991 to the present,
either work or did work in one of Chief's California retail stores, in
excess of total work time of three and one-half (3.5) hours in any one work
day and who were denied an off-duty rest break.
In the complaint, the plaintiffs allege that Chief had a policy and
practice of denying hourly employees in California mandated rest periods
during their scheduled hours of work. The plaintiffs are seeking damages,
restitution, disgorgement of profits, statutory penalties, declaratory
relief, injunctive relief, prejudgment interest, and reasonable attorneys'
fees, expenses and costs. Management is unable to predict the outcome of
this lawsuit at this time. The Company believes that the potential damages
recoverable by any single plaintiff against Chief are minimal. However, if
the plaintiff class were to prevail on all their claims, the amount of
damages could be substantial. The Company is vigorously defending against
this action.
AutoZone, Inc., is a defendant in a lawsuit entitled "Melvin Quinnie
and Zachery P. Brown on behalf of all other similarly situated v. AutoZone,
Inc., and DOES 1 through 100, inclusive" filed in the Superior Court of
California, County of Los Angeles, on November 13, 1998. The plaintiffs
claim that the defendants failed to pay overtime to store managers as
required by California law and failed to pay terminated managers in a
timely manner as required by California law. The plaintiffs are seeking
injunctive relief, restitution, statutory penalties, prejudgment interest,
and reasonable attorneys' fees, expenses and costs. Management is unable to
predict the outcome of this lawsuit at this time. The Company is vigorously
defending against this action.
The Company currently, and from time to time, is involved in various
legal proceedings incidental to the conduct of its business. Although the
amount of liability that may result from these proceedings cannot be
ascertained, the Company does not currently believe that, in the aggregate,
they will result in liabilities material to the Company's financial
condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED NOVEMBER 21, 1998, COMPARED TO
TWELVE WEEKS ENDED NOVEMBER 22, 1997
Net sales for the twelve weeks ended November 21, 1998 increased by
$225.7 million, or 33.4%, over net sales for the comparable period of
fiscal 1998. This increase was due to a comparable store sales increase of
3%, and increases in net sales for stores opened or acquired since the
beginning of fiscal 1998. At November 21, 1998 the Company had 2,623
stores in operation compared with 1,772 stores at November 22, 1997.
Gross profit for the twelve weeks ended November 21, 1998, was $376.5
million, or 41.8% of net sales, compared with $280.4 million, or 41.5% of
net sales, during the comparable period for fiscal 1998. The increase in
the gross profit percentage was due primarily to higher battery and
commodity gross margins.
Operating, selling, general and administrative expenses for the twelve
weeks ended November 21, 1998 increased by $84.9 million over such expenses
for the comparable period for fiscal 1998, and increased as a percentage of
net sales from 29.9% to 31.8%. The increase in the expense ratio was due
primarily to higher payroll and occupancy costs, primarily in recently
acquired stores, and acquisition integration activities.
Interest expense for the twelve weeks ended November 21, 1998 was $8.5
million compared with $2.5 million during the comparable period of 1998.
The increase in interest expense was primarily due to higher levels of
borrowings as a result of the acquisitions.
The Company's effective income tax rate was 36.9% of pre-tax income
for the twelve weeks ended November 21, 1998 and 37.6 % for the twelve
weeks ended November 22, 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve weeks ended November 21, 1998, net cash of $40.9
million was provided by the Company's operations versus $56.5 million for
the comparable period of fiscal year 1998. The comparative decrease in cash
provided by operations was due primarily to increased inventory
requirements for new store expansion in comparison to the twelve weeks
ended November 22, 1997.
Capital expenditures for the twelve weeks ended November 21, 1998 were
$190.7 million, including approximately $108 million for the acquisition of
real estate for 100 Express auto parts store locations from Pep Boys. Year-
to-date, the Company opened 63 net new auto parts stores including 3 stores
that replaced existing stores. Additionally, the Company closed 97 auto
parts stores in conjunction with its acquisition integration activities.
The Express locations were not open at the end of the quarter and therefore
not included in the store count. These stores will be remodeled and opened
during the second and third quarters of fiscal 1999. The Company expects
to operate between 2,800 and 2,850 auto parts stores at the end of the
fiscal year.
The Company anticipates that it will continue to generate significant
operating cash flow. The Company foresees no difficulty in obtaining long-
term financing in view of its credit rating and favorable experiences in
the debt market in the past.
In October 1998, the Company sold $150 million of 6% Notes due
November 2003 at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In July
1998, the Company sold $200 million of 6.5% Debentures due July 2008 at a
discount. Interest on the Debentures is payable semi-annually on January
15 and July 15 of each year, beginning January 15, 1999. Proceeds from the
Notes and Debentures were used to repay portions of the Company's long-term
variable rate bank debt and for general corporate purposes.
The Company has a commercial paper program that allows borrowing up to
$500 million. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
December 2001 and a 364-day $150 million credit facility with another group
of banks. The 364-day facility includes a renewal feature as well as an
option to extinguish the outstanding debt one year from the maturity date.
Borrowings under the commercial paper program reduce availability under the
credit facilities. At November 21, 1998, the Company had total commercial
paper and revolving credit borrowings of $389.4 million. Outstanding
commercial paper and revolver borrowings at November 21, 1998 are
classified as long-term debt as it is the Company's intention to refinance
them on a long-term basis.
Additionally, the Company has a credit facility with a bank for up to
$150 million which extends until May 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 1999. At November 21, 1998, there were no amounts
outstanding under these agreements.
ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use." The Company
adopted this SOP beginning August 30, 1998. The SOP will require the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal-use. Currently, costs related to
developing internal-use software are expensed as incurred. The adoption of
SOP 98-1 is not anticipated to have a material impact on the Company's
results of operations or financial position.
YEAR 2000 READINESS DISCLOSURE
The Company began addressing the Year 2000 issue in June 1996 and
implemented a formal Year 2000 project office in May 1997. As of November
21, 1998 the Company anticipates completing the conversion and testing of
all known programs by July 31, 1999.
The total estimated cost of the Year 2000 project is $12 million,
which is being expensed as incurred. All of the related costs are being
funded through operating cash flows. These costs are less than 10% of the
overall information technology budget. No major information technology
projects or programs have been deferred.
In addition to internal activities, the Company is addressing Year
2000 issues which do not normally fall under information technology such as
embedded chip equipment and the compliance status of business partners.
Although the Company believes that the ongoing assessment and testing will
minimize the Company's risks, there is no guarantee that there will not be
an adverse effect on the Company if third parties, such as merchandise
vendors, service providers, or utility companies are not Year 2000
compliant.
Although the Company does not anticipate any major business
disruptions as a result of Year 2000 issues, it is possible that certain
disruptions may occur including loss of communications with stores,
distribution centers, or business partners; inability to process
transactions in a timely manner or loss of power. The Company is currently
developing contingency plans, which should be finalized by July 31, 1999.
Elements of the Company's contingency plans may include: switching vendors,
back-up systems, or manual processes, and the stockpiling of certain
products prior to the Year 2000.
The cost of conversion and the completion date are based on
management's best estimates and may be updated as additional information
becomes available.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q are
forward-looking statements. These statements discuss, among other things,
expected growth, domestic and international development and expansion
strategy, and future performance. The forward-looking statements are
subject to risks, uncertainties and assumptions including, without
limitation, competition, product demand, the domestic and international
economies, government regulations and approvals, inflation, the ability to
hire and retain qualified employees, the ability to convert acquired stores
in a profitable and timely manner, consumer debt levels and the weather.
Actual results may materially differ from anticipated results. Please
refer to the Risk Factors section in the Annual Report on Form 10-K for
fiscal year ended August 29, 1998, for more details.
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
Chief Auto Parts Inc., a wholly owned subsidiary of the Company, is a
defendant in a class action lawsuit entitled "Doug Winfrey, et al. on their
own behalf and on behalf of a class and all others similarly situated, v.
Chief Auto Parts Inc. et al.," filed in the Superior Court of California,
County of San Joaquin on August 22, 1995 and then transferred to The
Superior Court of California, County of San Francisco on October 26, 1995.
The Superior Court denied the plaintiff's motion for class certification on
December 7, 1996. On February 6, 1998, the Court of Appeals reversed the
Superior Court's order denying class certification and remanded the case to
the Superior Court for further proceedings. On November 16, 1998 the
Superior Court certified the class as all persons considered by Chief to be
non-exempt hourly employees who, from August 22, 1991 to the present,
either work or did work in one of Chief's California retail stores, in
excess of total work time of three and one-half (3.5) hours in any one work
day and who were denied an off-duty rest break.
In the complaint, t he plaintiffs allege that Chief had a policy and
practice of denying hourly employees in California mandated rest periods
during their scheduled hours of work. The plaintiffs are seeking damages,
restitution, disgorgement of profits, statutory penalties, declaratory
relief, injunctive relief, prejudgment interest, and reasonable attorneys'
fees, expenses and costs. Management is unable to predict the outcome of
this lawsuit at this time. The Company believes that the potential damages
recoverable by any single plaintiff against Chief are minimal. However, if
the plaintiff class were to prevail on all their claims, the amount of
damages could be substantial. The Company is vigorously defending against
this action.
AutoZone, Inc., is a defendant in a lawsuit entitled "Melvin Quinnie
and Zachery P. Brown on behalf of all other similarly situated v. AutoZone,
Inc., and DOES 1 through 100, inclusive" filed in the Superior Court of
California, County of Los Angeles, on November 13, 1998. The plaintiffs
claim that the defendants failed to pay overtime to store managers as
required by California law and failed to pay terminated managers in a
timely manner as required by California law. The plaintiffs are seeking
injunctive relief, restitution, statutory penalties, prejudgment interest,
and reasonable attorneys' fees, expenses and costs. Management is unable to
predict the outcome of this lawsuit at this time. The Company is vigorously
defending against this action.
The Company currently, and from time to time, is involved in various
legal proceedings incidental to the conduct of its business. Although the
amount of liability that may result from these proceedings cannot be
ascertained, the Company does not currently believe that, in the aggregate,
they will result in liabilities material to the Company's financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
3.1 Articles of Incorporation of AutoZone, Inc. Incorporated by
reference to Exhibit 3.1 to the Form 10-K for the fiscal year
ended August 27, 1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common
stock to 200,000,000. Incorporated by reference to Exhibit 3.2 to
the Form 10-K for the fiscal year ended August 27, 1994.
3.3 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year
ended August 29, 1998.
10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several
lenders from time to time party thereto, NationsBank, N.A., as
Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent, dated
December 20, 1996. Incorporated by reference to the Form 10-Q for
the quarter ended February 15, 1997.
10.2 Amendment No. 1, dated February 10, 1998, to Credit Agreement
among AutoZone, Inc., as Borrower, the several lenders from time
to time party thereto, NationsBank, N.A., as Agent, and SunTrust
Bank, Nashville, N.A. as Co-Agent, dated December 20, 1996.
Incorporated by reference to Exhibit 10.2 to the Form 10-Q for
the quarter ended February 14, 1998.
10.3 Amendment No. 2 to Credit Agreement among AutoZone, Inc., as
Borrower, the several lenders from time to time party thereto,
NationsBank, N.A., as Agent and SunTrust Bank, Nashville, N.A.,
as Co-Agent, dated November 13, 1998.
10.4 Credit Agreement, dated October 20, 1998, between AutoZone, Inc.,
as Borrower, the several lenders from time to time party thereto,
and NationsBank, N.A., as Agent.
10.5 Credit Agreement, dated November 13, 1998, between AutoZone,
Inc., as Borrower, the several lenders from time to time party
thereto, NationsBank, N.A., as Agent, and SunTrust Bank,
Nashville, N.A., as Documentation Agent.
27.1 Financial Data Schedule (SEC Use Only).
(b) On October 21, 1998, the Company filed a Current Report on Form 8-K
to (a) file its audited financial statements for the fiscal year ended
August 29, 1998, and (b) announce that its Board of Directors had approved
repurchasing an additional $150 million of the Company's common stock
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTOZONE, INC.
By: /S/ ROBERT J. HUNT
----------------------
Robert J. Hunt
Executive Vice President and
Chief Financial Officer-Customer Satisfaction
(Principal Financial Officer)
By: /S/ MICHAEL E. BUTTERICK
------------------------
Michael E. Butterick
Vice President, Controller-Customer Satisfaction
(Principal Accounting Officer)
Dated: January 5, 1999
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation of AutoZone, Inc. Incorporated by reference
to Exhibit 3.1 to the Form 10-K for the fiscal year ended August 27,
1994.
3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated
December 16, 1993, to increase its authorized shares of common stock
to 200,000,000. Incorporated by reference to Exhibit 3.2 to the Form
10-K for the fiscal year ended August 27, 1994.
3.3 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year ended
August 29, 1998.
10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several
lenders from time to time party thereto, NationsBank, N.A., as Agent,
and SunTrust Bank, Nashville, N.A. as Co-Agent, dated December 20,
1996. Incorporated by reference to the Form 10-Q for the quarter ended
February 15, 1997.
10.2 Amendment No. 1, dated February 10, 1998, to Credit Agreement among
AutoZone, Inc., as Borrower, the several lenders from time to time
party thereto, NationsBank, N.A., as Agent, and SunTrust Bank,
Nashville, N.A. as Co-Agent, dated December 20, 1996. Incorporated by
reference to Exhibit 10.2 to the Form 10-Q for the quarter ended
February 14, 1998.
10.3 Amendment No. 2 to Credit Agreement among AutoZone, Inc., as Borrower,
the several lenders from time to time party thereto, NationsBank,
N.A., as Agent and SunTrust Bank, Nashville, N.A., as Co-Agent, dated
November 13, 1998.
10.4 Credit Agreement, dated October 20, 1998, between AutoZone, Inc., as
Borrower, the several lenders from time to time party thereto, and
NationsBank, N.A., as Agent.
10.5 Credit Agreement, dated November 13, 1998, between AutoZone, Inc., as
Borrower, the several lenders from time to time party thereto,
NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A., as
Documentation Agent.
27.1 Financial Data Schedule (SEC Use Only).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>2
<DESCRIPTION>AMENDMENT NO. 2 TO CREDIT AGREEMENT
<TEXT>
EXHIBIT 10.3
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT AGREEMENT (this "AMENDMENT NO. 2"), dated as of
November 13, 1998, among AUTOZONE, INC., a Nevada corporation (the
"BORROWER"), the various lending institutions parties hereto (each a
"Lender" and collectively, the "LENDERS"), and NATIONSBANK, N.A., a
national Lending association, as agent for the Lenders (in such capacity,
the "AGENT");
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Agent are parties to that
certain Credit Agreement, dated as of December 20, 1996, as previously
amended as of February 10, 1998 (the "EXISTING CREDIT AGREEMENT"); and
WHEREAS, the Borrower, the Lenders and the Agent have agreed to
execute this Amendment No. 2 for the purposes set forth herein;
NOW, THEREFORE, in consideration of the agreements herein contained,
the parties hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. CERTAIN DEFINITIONS. Unless otherwise defined herein or
the context otherwise requires, terms used in this Amendment No. 2,
including its preamble and recitals, have the following meanings (such
meanings to be equally applicable to the singular and plural forms
thereof):
"AMENDED CREDIT AGREEMENT" means the Existing Credit Agreement as
amended hereby.
"AMENDMENT NO. 2 EFFECTIVE DATE" is defined in SUBPART 2.1.
SUBPART 1.2. OTHER DEFINITIONS. Unless otherwise defined herein or
the context otherwise requires, terms used in this Amendment No. 2,
including its preamble and recitals, have the meanings provided in the
Amended Credit Agreement.
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 2
Effective Date, the Existing Credit Agreement is hereby amended in
accordance with this PART II. Except as so amended, the Existing Credit
Agreement, the Notes and the other Credit Documents shall continue in full
force and effect.
SUBPART 2.1 AMENDMENTS TO SECTION 1. Section 1 of the Existing
Credit Agreement is hereby amended by inserting, in the alphabetically
appropriate place, the following definitions:
"AMENDMENT NO. 2" means Amendment No. 2 to Credit Agreement,
dated as of November 13, 1998, among the Borrower, the Agent and
the Lenders, amending this Credit Agreement as then in effect.
SUBPART 2.2 AMENDMENTS TO SECTION 6.10. SECTION 6.10 is amended by
deleting the reference to "0.45:1.00" contained therein and replacing it
with a reference to "0.50:1.00".
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. AMENDMENT NO. 2 EFFECTIVE DATE. This Amendment shall be
and become effective on such date (the "AMENDMENT NO. 2 EFFECTIVE DATE") on
or prior to November 13, 1998, when all of the conditions set forth in this
SUBPART 3.1 shall have been satisfied, and thereafter, this Amendment No. 2
shall be known, and may be referred to, as "Amendment No. 2."
SUBPART 3.1.1. EXECUTION OF COUNTERPARTS. The Agent shall have
received counterparts of this Amendment No. 2, each of which shall have
been duly executed on behalf of the Borrower, the Agent and the Required
Lenders.
SUBPART 3.1.2. LEGAL DETAILS, ETC. All documents executed or submitted
pursuant hereto shall be reasonably satisfactory in form and substance to
the Agent and its counsel. The Agent and its counsel shall have received
all information, and such counterpart originals or such certified or other
copies of such originals, as the Agent or its counsel may reasonably
request, and all legal matters incident to the transactions contemplated by
this Amendment No. 2 shall be reasonably satisfactory to the Agent and its
counsel.
PART IV
MISCELLANEOUS
SUBPART 4.1 CROSS-REFERENCES. References in this Amendment No. 2 to
any Part or Subpart are, unless otherwise specified, to such Part or
Subpart of this Amendment No. 2.
SUBPART 4.2 INSTRUMENT PURSUANT TO EXISTING CREDIT AGREEMENT. This
Amendment No. 2 is a document executed pursuant to the Existing Credit
Agreement and shall (unless otherwise expressly indicated therein) be
construed, administered and applied in accordance with the terms and
provisions of the Existing Credit Agreement.
SUBPART 4.3 CREDIT DOCUMENTS. The Borrower hereby confirms and
agrees that the Credit Documents are, and shall continue to be, in full
force and effect, and hereby ratifies and confirms in all respects its
obligations thereunder, except that, upon the effectiveness of, and on and
after the date of, this Amendment No. 2, all references in each Credit
Document to the "Credit Agreement", "thereunder", "thereof" or words of
like import referring to the Existing Credit Agreement shall mean the
Amended Credit Agreement.
SUBPART 4.4 COUNTERPARTS, EFFECTIVENESS, ETC. This Amendment No. 2
may be executed by the parties hereto in several counterparts, each of
which shall be deemed to be an original and all of which shall constitute
together but one and the same agreement.
SUBPART 4.5 GOVERNING LAW; ENTIRE AGREEMENT. THIS AMENDMENT NO. 2
SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF NORTH CAROLINA WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAW PRINCIPLES THEREOF.
SUBPART 4.6 SUCCESSORS AND ASSIGNS. This Amendment No. 2 shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
SUBPART 4.7 REPRESENTATIONS AND WARRANTIES. The Borrower represents
and warrants to the Agent and the Lenders that (i) the representations and
warranties made in Section 5 of the Existing Credit Agreement are true and
correct on and as of the Amendment No. 2 Effective Date as though made on
such date and (ii) no Default or Event of Default has occurred and remains
uncured as of the Amendment No. 2 Effective Date.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to be executed by their respective duly authorized officers as of the day
and year first above written.
AUTOZONE, INC.
By /s/ HARRY L. GOLDSMITH
------------------------
Title SENIOR VICE PRESIDENT
----------------------
By /s/ ROBERT J. HUNT
------------------------
Title EVP, CFO
----------------------
NATIONSBANK, N.A.,
in its capacity as Agent and
in its individual capacity
as a Lender
By /s/ JOHN E. BALL
-------------------------
Title SVP
-----------------------
SUNTRUST BANK, NASHVILLE, N.A.,
individually in its capacity as a Lender
and in its capacity as Co-Agent
By /s/ BRYAN W. FORD
---------------------------
Title VICE PRESIDENT
------------------------
BANK OF AMERICA ILLINOIS
By /s/ JOHN E. BALL
---------------------------
Title SVP
------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ JOHN D. RUNGER
---------------------------
John D. Runger
Title MANAGING DIRECTOR
------------------------
FIRST UNION NATIONAL BANK
By /s/ ORVILLE KRONK
---------------------------
Title VP
------------------------
FIRST TENNESSEE BANK NATIONAL
ASSOCIATION
By /s/ JAMES H. MOORE, JR.
---------------------------
Title VICE PRESIDENT
------------------------
UNION PLANTERS BANK, N.A.
By /s/ LEONARD MCKINNEY
---------------------------
Title SR. VICE PRESIDENT
------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>3
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
EXHIBIT 10.4
CREDIT AGREEMENT
Dated as of October 20, 1998
among
AUTOZONE, INC.,
as Borrower,
THE SEVERAL LENDERS
FROM TIME TO TIME PARTY HERETO
AND
NATIONSBANK, N.A.,
as Agent
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS 1
1.1 Definitions. 1
1.2 Incorporated Definitions. 4
1.3 Computation of Time Periods. 5
1.4 Accounting Terms. 5
SECTION 2 CREDIT FACILITY 5
2.1 Loans. 5
2.2 [intentionally left blank] 7
2.3 [intentionally left blank] 7
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITY 7
3.1 Default Rate. 7
3.2 Extension and Conversion. 7
3.3 Prepayments. 8
3.4 Termination, Reduction and Increase of Committed Amount. 9
3.5 Facility Fee. 9
3.6 Capital Adequacy. 9
3.7 Inability To Determine Interest Rate. 10
3.8 Illegality. 10
3.9 Yield Protection. 11
3.10 Withholding Tax Exemption. 11
3.11 Indemnity. 13
3.12 Pro Rata Treatment. 13
3.13 Sharing of Payments. 14
3.14 Payments, Computations, Etc. 14
3.15 Evidence of Debt. 16
3.16 Replacement of Lenders. 17
SECTION 4 CONDITIONS 17
4.1 Closing Conditions. 17
4.2 Conditions to all Extensions of Credit. 18
SECTION 5 REPRESENTATIONS AND WARRANTIES 18
5.1 Organization; Existence; Compliance with Law. 18
5.2 Power; Authorization; Enforceable Obligations. 19
5.3 No Legal Bar. 19
5.4 Governmental Regulations. 20
5.5 Purpose of Loans. 20
5.6 Incorporated Representations and Warranties. 20
SECTION 6 COVENANTS 21
6.1 Use of Proceeds. 21
6.2 Incorporated Covenants. 21
SECTION 7 [intentionally left blank] 21
SECTION 8 EVENTS OF DEFAULT 22
8.1 Events of Default. 22
8.2 Acceleration; Remedies. 23
SECTION 9 AGENCY PROVISIONS 24
9.1 Appointment. 24
9.2 Delegation of Duties. 24
9.3 Exculpatory Provisions. 24
9.4 Reliance on Communications. 25
9.5 Notice of Default. 25
9.6 Non-Reliance on Agent and Other Lenders. 25
9.7 Indemnification. 26
9.8 Agent in its Individual Capacity. 27
9.9 Successor Agent. 27
SECTION 10 MISCELLANEOUS 27
10.1 Notices. 27
10.2 Right of Set-Off. 28
10.3 Benefit of Agreement. 29
10.4 No Waiver; Remedies Cumulative. 31
10.5 Payment of Expenses, etc. 31
10.6 Amendments, Waivers and Consents. 32
10.7 Counterparts. 33
10.8 Headings. 33
10.9 Survival. 33
10.10 Governing Law; Submission to Jurisdiction; Venue. 33
10.11 Severability. 34
10.12 Entirety. 34
10.13 Binding Effect; Termination. 35
10.14 Confidentiality. 35
10.15 Source of Funds. 36
10.16 Conflict. 36
SCHEDULES
Schedule 1.1 Applicable Percentage
Schedule 2.1(a) Lenders
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Note
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 6.2 Form of Officer's Compliance Certificate
Schedule 10.3(b) Form of Assignment and Acceptance
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of October 20, 1998 (the "Credit
Agreement"), is by and among AUTOZONE, INC., a Nevada corporation (the
"Borrower"), the several lenders identified on the signature pages hereto
and such other lenders as may from time to time become a party hereto (the
"Lenders"), and NATIONSBANK, N.A., as agent for the Lenders (in such
capacity, the "Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a
$150,000,000 credit facility (as such credit facility may be increased or
decreased pursuant to the terms hereof) for the purposes hereinafter set
forth;
WHEREAS, the Lenders have agreed to make the requested credit
facility available to the Borrower on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall have
the meanings specified below unless the context otherwise requires:
"Agency Services Address" means NationsBank, N.A., NC1-001-15-04,
101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency
Services, or such other address as may be identified by written notice from
the Agent to the Borrower.
"Agent" shall have the meaning assigned to such term in the heading
hereof, together with any successors or assigns.
"Applicable Percentage" means (i) for purposes of calculating the
applicable rate of the Facility Fee for any day for purposes of Section
3.5, a percentage equal to .125%; and (ii) for purposes of calculating the
applicable interest rate for any day for any Loan, a percentage equal to
.21%; provided, however, (A) if the average outstanding principal balance
of the Loans for any month is greater than $37,500,000 but equal to or less
than $75,000,000, the "Applicable Percentage" for such month shall be .26%,
(B) if the average outstanding principal balance of the Loans for any month
is greater than $75,000,000 but equal to or less than $112,500,000, the
"Applicable Percentage" for such month shall be .31% and (C) if the average
outstanding principal balance of the Loans for any month is greater than
$112,500,000, the "Applicable Percentage" for such month shall be .36%.
"Base Rate Loan" means any Loan bearing interest at a rate
determined by reference to the Base Rate.
"Borrower" means the Person identified as such in the heading
hereof, together with any permitted successors and assigns.
"Closing Date" means the date hereof.
"Committed Amount" shall have the meaning assigned to such term in
Section 2.1(a).
"Commitment" means, with respect to each Lender, the commitment of
such Lender in an aggregate principal amount at any time outstanding not to
exceed the amount set forth opposite such Lender's name on Schedule 2.1(a)
(as such amount may be reduced or increased from time to time in accordance
with the provisions of this Credit Agreement), to make Loans in accordance
with the provisions of Section 2.1(a).
"Commitment Percentage" means, for any Lender, the percentage which
such Lender's Commitment then constitutes of the aggregate Committed
Amount.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, and all other related agreements and documents issued
or delivered hereunder or thereunder or pursuant hereto or thereto.
"Default" means any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Dollars" and "$" means dollars in lawful currency of the United
States of America.
"Eurodollar Loan" means any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate.
"Event of Default" means such term as defined in Section 8.1.
"Existing Credit Agreement" means that certain Credit Agreement,
dated as of December 20, 1996, as amended, by and among the Borrower, the
lenders parties thereto and NationsBank, NA, as agent for such lenders.
"Facility Fee" shall have the meaning assigned to such term in
Section 3.5.
"Facility Fee Calculation Period" shall have the meaning assigned
to such term in Section 3.5.
"Financial Officer" means, with respect to the Borrower, the
Treasurer, the Chief Accounting Officer, the General Counsel or the Chief
Financial Officer of the Borrower; provided that the Borrower may designate
additional persons or delete persons so authorized by written notice to the
Agent from at least two existing Financial Officers of the Borrower.
"Interest Payment Date" means (i) as to any Base Rate Loan, the
last day of each March, June, September and December, the date of repayment
of principal of such Loan and the Termination Date and (ii) as to any
Eurodollar Loan, the last day of each Interest Period for such Loan, the
date of repayment of principal of such Loan and on the Termination Date,
and in addition where the applicable Interest Period is more than 3 months,
then also on the date 3 months from the beginning of the Interest Period,
and each 3 months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be deemed to
be the next succeeding Business Day, except that in the case of Eurodollar
Loans where the next succeeding Business Day falls in the next succeeding
calendar month, then on the next preceding Business Day.
"Interest Period" means as to any Eurodollar Loan, a period of one,
two, three or six month's duration, as the Borrower may elect, or other
periods mutually agreed upon by the Borrower and the Agent, commencing in
each case, on the date of the borrowing (including conversions, extensions
and renewals); provided, however, (A) if any Interest Period would end on a
day which is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day (except that in the case of Eurodollar
Loans where the next succeeding Business Day falls in the next succeeding
calendar month, then on the next preceding Business Day), (B) no Interest
Period shall extend beyond the Termination Date, and (C) in the case of
Eurodollar Loans, where an Interest Period begins on a day for which there
is no numerically corresponding day in the calendar month in which the
Interest Period is to end, such Interest Period shall end on the last day
of such calendar month.
"Lenders" means each of the Persons identified as a "Lender" on the
signature pages hereto, and each Person which may become a Lender by way of
assignment in accordance with the terms hereof, together with their
successors and permitted assigns.
"Lending Installation" means, with respect to a Lender or the
Agent, any office, branch, subsidiary or affiliate of such Lender or the
Agent.
"Loans" shall have the meaning assigned to such term in Section
2.1(a).
"Master Account" means such account as may be identified from time
to time by written notice from at least two Financial Officers of the
Borrower to the Agent.
"Moody's" means Moody's Investors Service, Inc., or any successor
or assignee of the business of such company in the business of rating
securities.
"NationsBank" means NationsBank, N.A. and its successors.
"Note" means a promissory note of the Borrower in favor of a Lender
delivered pursuant to Section 2.1(e) and evidencing the Loans of such
Lender, as such promissory note may be amended, modified, restated or
replaced from time to time.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b)(i), as required by Section
2.1(b)(i).
"Notice of Extension/Conversion" means the written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Participation Interest" means, the extension of credit by a Lender
by way of a purchase of a participation or in any Loans as provided in
Section 3.13.
"Register" shall have the meaning given such term in Section
10.3(c).
"Required Lenders" means, at any time, Lenders which are then in
compliance with their obligations hereunder (as determined by the Agent)
and holding in the aggregate at least 100% of (i) the Commitment
Percentages or (ii) if the Commitments have been terminated, the
outstanding Loans and Participation Interests.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc., or any successor or assignee of the business of such division
in the business of rating securities.
"Termination Date" means May 31, 1999.
1.2 Incorporated Definitions.
All capitalized terms not otherwise defined herein shall have the
respective meanings assigned to such terms in the Existing Credit
Agreement, as in effect as of the date hereof (the "Incorporated
Definitions"). The incorporation by reference to the Existing Credit
Agreement of the Incorporated Definitions pursuant to this Section 1.2
shall survive the termination of the Existing Credit Agreement. For
purposes of the incorporation of the Incorporated Definitions pursuant to
this Section 1.2, all references in the Incorporated Definitions to the
"Agent" shall be deemed to refer to the Agent hereunder, all references in
the Incorporated Definitions to a "Lender" or the "Lenders" shall be deemed
to refer to one or more of the Lenders hereunder, all references in the
Incorporated Definitions to the "Required Lenders" shall be deemed to refer
to the Required Lenders hereunder, all references in the Incorporated
Definitions to the "Credit Agreement," or any similar references, shall be
deemed to refer to this Credit Agreement, all references in the
Incorporated Definitions to a "Note" or the "Notes" shall be deemed to
refer to one or more of the Notes issued pursuant to Section 2.1(e) hereof
and all references in the Incorporated Definitions to a "Credit Document"
or the "Credit Documents," or any similar references, shall be deemed to
refer to one or more of the Credit Documents as defined in Section 1.1
hereof.
1.3 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the word
"from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
1.4 Accounting Terms.
Except as otherwise expressly provided herein, all accounting terms
used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered
to the Lenders hereunder shall be prepared, in accordance with GAAP applied
on a consistent basis. All calculations made for the purposes of
determining compliance with this Credit Agreement shall (except as
otherwise expressly provided herein) be made by application of GAAP applied
on a basis consistent with the most recent annual or quarterly financial
statements delivered pursuant to Section 6.1 of the Incorporated Covenants;
provided, however, if (a) the Borrower shall object to determining such
compliance on such basis at the time of delivery of such financial
statements due to any change in GAAP or the rules promulgated with respect
thereto or (b) the Agent or the Required Lenders shall so object in writing
within 30 days after delivery of such financial statements, then such
calculations shall be made on a basis consistent with the most recent
financial statements delivered by the Borrower to the Lenders as to which
no such objection shall have been made.
SECTION 2
CREDIT FACILITY
2.1 Loans.
(a) Commitment. Subject to the terms and conditions
hereof and in reliance upon the representations and warranties set forth
herein, each Lender severally agrees to make available to the Borrower
revolving credit loans requested by the Borrower in Dollars ("Loans") up to
such Lender's Commitment from time to time from the Closing Date until the
Termination Date, or such earlier date as the Commitments shall have been
terminated as provided herein for the purposes hereinafter set forth;
provided, however, that the sum of the aggregate principal amount of
outstanding Loans shall not exceed ONE HUNDRED FIFTY MILLION DOLLARS
($150,000,000.00) (as such aggregate maximum amount may be reduced or
increased from time to time as provided in Section 3.4, the "Committed
Amount"); provided, further, with regard to each Lender individually, such
Lender's outstanding Loans shall not exceed such Lender's Commitment.
Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination
thereof, as the Borrower may request, and may be repaid and reborrowed in
accordance with the provisions hereof; provided, however, that no more than
15 Eurodollar Loans shall be outstanding hereunder at any time. For
purposes hereof, Eurodollar Loans with different Interest Periods shall be
considered as separate Eurodollar Loans, even if they begin on the same
date, although borrowings, extensions and conversions may, in accordance
with the provisions hereof, be combined at the end of existing Interest
Periods to constitute a new Eurodollar Loan with a single Interest Period.
Loans hereunder may be repaid and reborrowed in accordance with the
provisions hereof.
(b) Loan Borrowings.
(i) Notice of Borrowing. The Borrower shall
request a Loan borrowing by written notice (or telephone notice promptly
confirmed in writing) to the Agent not later than 11:30 A.M. (Charlotte,
North Carolina time) on the Business Day of the requested borrowing in the
case of Base Rate Loans, and not later than 2:00 P.M. (Charlotte, North
Carolina time) on the third Business Day prior to the date of the requested
borrowing in the case of Eurodollar Loans (or such later time as mutually
agreed upon by the Borrower and the Agent). Each such request for
borrowing shall be irrevocable, executed by a Financial Officer of the
Borrower and shall specify (A) that a Loan is requested, (B) the date of
the requested borrowing (which shall be a Business Day), (C) the aggregate
principal amount to be borrowed, and (D) whether the borrowing shall be
comprised of Base Rate Loans, Eurodollar Loans or a combination thereof,
and if Eurodollar Loans are requested, the Interest Period(s) therefor. If
the Borrower shall fail to specify in any such Notice of Borrowing (I) an
applicable Interest Period in the case of a Eurodollar Loan, then such
notice shall be deemed to be a request for an Interest Period of one month,
or (II) the type of Loan requested, then such notice shall be deemed to be
a request for a Base Rate Loan hereunder. The Agent shall give notice to
each affected Lender promptly upon receipt of each Notice of Borrowing
pursuant to this Section 2.1(b)(i), the contents thereof and each such
Lender's share of any borrowing to be made pursuant thereto.
(ii) Minimum Amounts. Each Eurodollar Loan or
Base Rate Loan that is a Loan shall be in a minimum aggregate principal
amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof
(or the remaining amount of the Committed Amount, if less).
(iii) Advances. Each Lender will make its
Commitment Percentage of each Loan borrowing available to the Agent for the
account of the Borrower as specified in Section 3.14(a), or in such other
manner as the Agent may specify in writing, by 1:00 P.M. (Charlotte, North
Carolina time) on the date specified in the applicable Notice of Borrowing
in Dollars and in funds immediately available to the Agent. Such borrowing
will then be made available to the Borrower by the Agent by crediting the
Master Account with the aggregate of the amounts made available to the
Agent by the Lenders and in like funds as received by the Agent.
(c) Repayment. The principal amount of all Loans shall
be due and payable in full on the Termination Date.
(d) Interest. Subject to the provisions of Section
3.1,
(i) Base Rate Loans. During such periods as
Loans shall be comprised in whole or in part of Base Rate Loans, such Base
Rate Loans shall bear interest at a per annum rate equal to the Base Rate
plus the Applicable Percentage;
(ii) Eurodollar Loans. During such periods as
Loans shall be comprised in whole or in part of Eurodollar Loans, such
Eurodollar Loans shall bear interest at a per annum rate equal to the
Eurodollar Rate plus the Applicable Percentage.
Interest on Loans shall be payable in arrears on each
applicable Interest Payment Date (or at such other times as may be
specified herein).
(e) Notes. The Loans made by each Lender shall be
evidenced by a duly executed promissory note of the Borrower to such Lender
in an original principal amount equal to such Lender's Commitment and in
substantially the form of Schedule 2.1(e).
2.2 [intentionally left blank]
2.3 [intentionally left blank]
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITY
3.1 Default Rate.
Upon the occurrence, and during the continuance, o f an Event of
Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable on demand, at a per annum rate 2%
greater than the rate which would otherwise be applicable (or if no rate is
applicable, whether in respect of interest, fees or other amounts, then 2%
greater than the Base Rate).
3.2 Extension and Conversion.
Subject to the terms of Section 4.2, the Borrower shall have the
option, on any Business Day, to extend existing Loans into a subsequent
permissible Interest Period or to convert Loans into Loans of another
interest rate type; provided, however, that (a) except as provided in
Section 3.8, Eurodollar Loans may be converted into Base Rate Loans only on
the last day of the Interest Period applicable thereto, (b) Eurodollar
Loans may be extended, and Base Rate Loans may be converted into Eurodollar
Loans, only if no Default or Event of Default is in existence on the date
of extension or conversion, (c) Loans extended as, or converted into,
Eurodollar Loans shall be subject to the terms of the definition of
"Interest Period" set forth in Section 1.1 and shall be in such minimum
amounts as provided in Section 2.1(b)(ii), (d) no more than 15 Eurodollar
Loans shall be outstanding hereunder at any time (it being understood that,
for purposes hereof, Eurodollar Loans with different Interest Periods shall
be considered as separate Eurodollar Loans, even if they begin on the same
date, although borrowings, extensions and conversions may, in accordance
with the provisions hereof, be combined at the end of existing Interest
Periods to constitute a new Eurodollar Loan with a single Interest Period)
and (e) any request for extension or conversion of a Eurodollar Loan which
shall fail to specify an Interest Period shall be deemed to be a request
for an Interest Period of one month. Each such extension or conversion
shall be effected by a Financial Officer of the Borrower giving a Notice
of Extension/Conversion (or telephone notice promptly confirmed in writing)
to the Agent prior to 11:30 A.M. (Charlotte, North Carolina time) on the
Business Day of, in the case of the extension of a Base Rate Loan, and
prior to 2:00 P.M. (Charlotte, North Carolina time) on the third Business
Day prior to, in the case of the extension of a Eurodollar Loan as, or
conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the
proposed extension or conversion, specifying the date of the proposed
extension or conversion, the Loans to be so extended or converted, the
types of Loans into which such Loans are to be converted and, if
appropriate, the applicable Interest Periods with respect thereto. Each
request for extension or conversion shall be irrevocable and shall
constitute a representation and warranty by the Borrower of the matters
specified in subsections (b), (c), (d) and (e) of Section 4.2. In the
event the Borrower fails to request extension or conversion of any
Eurodollar Loan in accordance with this Section, or any such conversion or
extension is not permitted or required by this Section, then such
Eurodollar Loan shall be automatically converted into a Base Rate Loan at
the end of the Interest Period applicable thereto. The Agent shall give
each Lender notice as promptly as practicable of any such proposed
extension or conversion affecting any Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. The Borrower shall have the
right to prepay Loans in whole or in part from time to time, subject to
Section 3.11, but otherwise without premium or penalty; provided, however,
that (i) Eurodollar Loans may only be prepaid on three Business Days' prior
written notice to the Agent and specifying the applicable Loans to be
prepaid; (ii) any prepayment of Eurodollar Loans will be subject to Section
3.11; and (iii) each such partial prepayment of Loans shall be in a minimum
principal amount of $5,000,000 and multiples of $1,000,000 in excess
thereof (or, if less, the full remaining amount of the Loan or being
prepaid). Subject to the foregoing terms, amounts prepaid under this
Section 3.3(a) shall be applied as the Borrower may elect.
(b) Mandatory Prepayments. If at any time, the sum of
the aggregate principal amount of outstanding Loans shall exceed the
Committed Amount, the Borrower promises to prepay immediately the
outstanding principal balance on the Loans in an amount sufficient to
eliminate such excess.
(c) General. All prepayments made pursuant to this
Section 3.3 shall (i) be subject to Section 3.11 and (ii) unless the
Borrower shall specify otherwise, be applied first to Base Rate Loans, if
any, and then to Eurodollar Loans in direct order of Interest Period
maturities. Amount prepaid on the Loans may be reborrowed in accordance
with the provisions hereof.
3.4 Termination, Reduction and Increase of Committed Amount.
(a) Voluntary Reductions. The Borrower may from time
to time permanently reduce or terminate the Committed Amount in whole or in
part (in minimum aggregate amounts of $5,000,000 or in integral multiples
of $1,000,000 in excess thereof (or, if less, the full remaining amount of
the then applicable Committed Amount)) upon five Business Days' prior
written notice to the Agent; provided, however, no such termination or
reduction shall be made which would cause the aggregate principal amount of
outstanding Loans to exceed the Committed Amount unless, concurrently with
such termination or reduction, the Loans are repaid to the extent necessary
to eliminate such excess. The Commitments of the Lenders shall
automatically terminate on the Termination Date. The Agent shall promptly
notify each affected Lender of receipt by the Agent of any notice from the
Borrower pursuant to this Section 3.4(a).
(b) Termination Date. The Commitments of the Lenders
shall automatically terminate on the Termination Date.
3.5 Facility Fee.
In consideration of the Commitments of the Lenders hereunder, the
Borrower agrees to pay to the Agent for the account of each Lender a fee
(the "Facility Fee") on the Committed Amount computed at a per annum rate
for each day during the applicable Facility Fee Calculation Period
(hereinafter defined) at a rate equal to the Applicable Percentage in
effect from time to time. The Facility Fee shall commence to accrue on the
Closing Date and shall be due and payable in arrears on the last business
day of each March, June, September and December (and any date that the
Committed Amount is reduced or increased as provided in Section 3.4 and the
Termination Date) for the immediately preceding quarter (or portion
thereof) (each such quarter or portion thereof for which the Facility Fee
is payable hereunder being herein referred to as a "Facility Fee
Calculation Period"), beginning with the first of such dates to occur after
the Closing Date.
3.6 Capital Adequacy.
If any Lender determines the amount of capital required or
expected to be maintained by such Lender, any Lending Installation of such
Lender or any corporation controlling such Lender is increased as a result
of a Change, then, within 15 days of demand by such Lender, the Borrower
shall pay such Lender the amount necessary to compensate for any shortfall
in the rate of return on the portion of such increased capital which such
Lender determines is attributable to this Credit Agreement, its Loans or
its obligation to make Loans hereunder (after taking into account such
Lender's policies as to capital adequacy). "Change" means (i) any change
after the Closing Date in the Risk-Based Capital Guidelines or (ii) any
adoption of or change in any other law, governmental or quasi-governmental
rule, regulation, policy, guideline, interpretation, or directive (whether
or not having the force of law) after the Closing Date which affects the
amount of capital required or expected to be maintained by any Lender or
any Lending Installation or any corporation controlling any Lender.
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines
in effect in the United States on the Closing Date, including transition
rules, and (ii) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the Closing Date.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Agent shall
have reasonably determined that, by reason of circumstances affecting the
relevant market, adequate and reasonable means do not exist for
ascertaining the Eurodollar Rate for such Interest Period, the Agent shall
give telecopy or telephonic notice thereof to the Borrower and the Lenders
as soon as practicable thereafter. If such notice is given (a) any
Eurodollar Loans requested to be made on the first day of such Interest
Period shall be made as Base Rate Loans and (b) any Loans that were to have
been converted on the first day of such Interest Period to or continued as
Eurodollar Loans shall be converted to or continued as Base Rate Loans.
Until such notice has been withdrawn by the Agent, no further Eurodollar
Loans shall be made or continued as such, nor shall the Borrower have the
right to convert Base Rate Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or
any change in any Requirement of Law or in the interpretation or
application thereof occurring after the Closing Date shall make it unlawful
for any Lender to make or maintain Eurodollar Loans as contemplated by this
Credit Agreement, (a) such Lender shall promptly give written notice of
such circumstances to the Borrower and the Agent (which notice shall be
withdrawn whenever such circumstances no longer exist), (b) the commitment
of such Lender hereunder to make Eurodollar Loans, continue Eurodollar
Loans as such and convert a Base Rate Loan to Eurodollar Loans shall
forthwith be canceled and, until such time as it shall no longer be
unlawful for such Lender to make or maintain Eurodollar Loans, such Lender
shall then have a commitment only to make a Base Rate Loan when a
Eurodollar Loan is requested and (c) such Lender's Loans then outstanding
as Eurodollar Loans, if any, shall be converted automatically to Base Rate
Loans on the respective last days of the then current Interest Periods with
respect to such Loans or within such earlier period as required by law. If
any such conversion of a Eurodollar Loan occurs on a day which is not the
last day of the then current Interest Period with respect thereto, the
Borrower shall pay to such Lender such amounts, if any, as may be required
pursuant to Section 3.11.
3.9 Yield Protection.
If any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force
of law) , or any interpretation thereof, or the compliance of any Lender
therewith,
(a) subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on or from payments
due from the Borrower (excluding federal taxation of the overall net income
of any Lender or applicable Lending Installation), or changes the basis of
taxation of payments to any Lender in respect of its Loans or other
amounts due it hereunder;
(b) imposes or increases or deems applicable any
reserve, assessment, insurance charge, special deposit or similar
requirements against assets of, deposits with or for the account of, or
credit extended by, any Lender or any applicable Lending Installation
(other than reserves and assessments taken into account in determining the
Base Rate);
and the result of which is to increase the cost to any Lender of making,
funding or maintaining loans or reduces any amount receivable by any Lender
or any applicable Lending Installation in connection with loans, or
requires any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of loans held or interest
received by it, by an amount deemed material by such Lender;
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an
amount received which such Lender determines is attributable to making,
funding and maintaining its Loans and its Commitments. This covenant shall
survive the termination of this Credit Agreement and the payment of the
Loans and all other amounts payable hereunder.
3.10 Withholding Tax Exemption.
Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(a) (i) on or before the date of any payment by the
Borrower under this Credit Agreement or Notes to such Lender, deliver to
the Borrower and the Agent (A) two (2) duly completed copies of United
States Internal Revenue Service Form 1001 or 4224, or successor applicable
form, as the case may be, certifying that it is entitled to receive
payments under this Credit Agreement and any Notes without deduction or
withholding of any United States federal income taxes and (B) an Internal
Revenue Service Form W-8 or W-9, or successor applicable form, as the case
may be, certifying that it is entitled to an exemption from United States
backup withholding tax;
(ii) deliver to the Borrower and the Agent two
(2) further copies of any such form or certification on or before the date
that any such form or certification expires or becomes obsolete and after
the occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrower; and
(iii) obtain such extensions of time for filing
and complete such forms or certifications as may reasonably be requested by
the Borrower or the Agent; or
(b) in the case of any such Lender that is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code,
(i) represent to the Borrower (for the benefit of the Borrower and the
Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of
the Internal Revenue Code, (ii) agree to furnish to the Borrower on or
before the date of any payment by the Borrower, with a copy to the Agent
two (2) accurate and complete original signed copies of Internal Revenue
Service Form W-8, or successor applicable form certifying to such Lender's
legal entitlement at the date of such certificate to an exemption from U.S.
withholding tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this Credit
Agreement and any Notes (and to deliver to the Borrower and the Agent two
(2) further copies of such form on or before the date it expires or becomes
obsolete and after the occurrence of any event requiring a change in the
most recently provided form and, if necessary, obtain any extensions of
time reasonably requested by the Borrower or the Agent for filing and
completing such forms), and (iii) agree, to the extent legally entitled to
do so, upon reasonable request by the Borrower, to provide to the Borrower
(for the benefit of the Borrower and the Agent) such other forms as may be
reasonably required in order to establish the legal entitlement of such
Lender to an exemption from withholding with respect to payments under this
Credit Agreement and any Notes;
unless in any such case any change in treaty, law or regulation has
occurred after the date such Person becomes a Lender hereunder which
renders all such forms inapplicable or which would prevent such Lender from
duly completing and delivering any such form with respect to it and such
Lender so advises the Borrower and the Agent in either case. Each Person
that shall become a Lender or a participant of a Lender pursuant to
subsection 10.3 shall, upon the effectiveness of the related transfer, be
required to provide all of the forms, certifications and statements
required pursuant to this subsection, provided that in the case of a
participant of a Lender the obligations of such participant of a Lender
pursuant to this Section 3.10 shall be determined as if the participant of
a Lender were a Lender except that such participant of a Lender shall
furnish all such required forms, certifications and statements to the
Lender from which the related participation shall have been purchased.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each
Lender harmless from any loss or expense which such Lender may sustain or
incur (other than through such Lender's gross negligence or willful
misconduct) as a consequence of (a) default by the Borrower in making a
borrowing of, conversion into or continuation of Eurodollar Loans after the
Borrower has given a notice requesting the same in accordance with the
provisions of this Credit Agreement, (b) default by the Borrower in making
any prepayment of a Eurodollar Loan after the Borrower has given a notice
thereof in accordance with the provisions of this Credit Agreement or (c)
the making of a prepayment of Eurodollar Loans on a day which is not the
last day of an Interest Period with respect thereto. With respect to
Eurodollar Loans, such indemnification may include an amount equal to the
excess, if any, of (i) the amount of interest which would have accrued on
the amount so prepaid, or not so borrowed, converted or continued, for the
period from the date of such prepayment or of such failure to borrow,
convert or continue to the last day of the applicable Interest Period (or,
in the case of a failure to borrow, convert or continue, the Interest
Period that would have commenced on the date of such failure) in each case
at the applicable rate of interest for such Eurodollar Loans provided for
herein (excluding, however, the Applicable Percentage included therein, if
any) over (ii) the amount of interest (as reasonably determined by such
Lender) which would have accrued to such Lender on such amount by placing
such amount on deposit for a comparable period with leading banks in the
interbank Eurodollar market. The covenants of the Borrower set forth in
this Section 3.11 shall survive the termination of this Credit Agreement
and the payment of the Loans and all other amounts payable hereunder.
3.12 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Loans. Each Loan, each payment or prepayment of
principal of any Loan, each payment of interest on the Loans, each
reduction of the Committed Amount and each conversion or extension of any
Loan, shall be allocated pro rata among the Lenders in accordance with the
respective principal amounts of their outstanding Loans and Participation
Interests.
(b) Advances. Unless the Agent shall have been
notified in writing by any Lender prior to a borrowing that such Lender
will not make the amount that would constitute its ratable share of such
borrowing available to the Agent, the Agent may assume that such Lender is
making such amount available to the Agent, and the Agent may, in reliance
upon such assumption, make available to the Borrower a corresponding
amount. If such amount is not made available to the Agent by such Lender
within the time period specified therefor hereunder, such Lender shall pay
to the Agent, on demand, such amount with interest thereon at a rate equal
to the Federal Funds Rate for the period until such Lender makes such
amount immediately available to the Agent. A certificate of the Agent
submitted to any Lender with respect to any amounts owing under this
subsection shall be conclusive in the absence of manifest error.
3.13 Sharing of Payments.
The Lenders agree among themselves that, in the event that any
Lender shall obtain payment in respect of any Loan or any other obligation
owing to such Lender under this Credit Agreement through the exercise of a
right of setoff, banker's lien or counterclaim, or pursuant to a secured
claim under Section 506 of Title 11 of the United States Code or other
security or interest arising from, or in lieu of, such secured claim,
received by such Lender under any applicable bankruptcy, insolvency or
other similar law or otherwise, or by any other means, in excess of its pro
rata share of such payment as provided for in this Credit Agreement, such
Lender shall promptly purchase from the other Lenders a participation in
such Loans and other obligations in such amounts, and make such other
adjustments from time to time, as shall be equitable to the end that all
Lenders share such payment in accordance with their respective ratable
shares as provided for in this Credit Agreement. The Lenders further agree
among themselves that if payment to a Lender obtained by such Lender
through the exercise of a right of setoff, banker's lien, counterclaim or
other event as aforesaid shall be rescinded or must otherwise be restored,
each Lender which shall have shared the benefit of such payment shall, by
repurchase of a participation theretofore sold, return its share of that
benefit (together with its share of any accrued interest payable with
respect thereto) to each Lender whose payment shall have been rescinded or
otherwise restored. The Borrower agrees that any Lender so purchasing such
a participation may, to the fullest extent permitted by law, exercise all
rights of payment, including setoff, banker's lien or counterclaim, with
respect to such participation as fully as if such Lender were a holder of
such Loan or other obligation in the amount of such participation. Except
as otherwise expressly provided in this Credit Agreement, if any Lender or
the Agent shall fail to remit to the Agent or any other Lender an amount
payable by such Lender or the Agent to the Agent or such other Lender
pursuant to this Credit Agreement on the date when such amount is due, such
payments shall be made together with interest thereon for each date from
the date such amount is due until the date such amount is paid to the Agent
or such other Lender at a rate per annum equal to the Federal Funds Rate.
If under any applicable bankruptcy, insolvency or other similar law, any
Lender receives a secured claim in lieu of a setoff to which this Section
3.13 applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the
rights of the Lenders under this Section 3.13 to share in the benefits of
any recovery on such secured claim.
3.14 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein,
all payments hereunder shall be made to the Agent in dollars in immediately
available funds, without offset, deduction, counterclaim or withholding of
any kind, at the Agent's office specified in Schedule 2.1(a) not later than
4:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments
received after such time shall be deemed to have been received on the next
succeeding Business Day. The Agent may (but shall not be obligated to)
debit the amount of any such payment which is not made by such time to any
ordinary deposit account of the Borrower maintained with the Agent (with
notice to the Borrower). The Borrower shall, at the time it makes any
payment under this Credit Agreement, specify to the Agent the Loans, Fees,
interest or other amounts payable by the Borrower hereunder to which such
payment is to be applied (and in the event that it fails so to specify, or
if such application would be inconsistent with the terms hereof, the Agent
shall distribute such payment to the Lenders in such manner as the Agent
may determine to be appropriate in respect of obligations owing by the
Borrower hereunder, subject to the terms of Section 3.12(a)). The Agent
will distribute such payments to such Lenders, if any such payment is
received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business
Day in like funds as received prior to the end of such Business Day and
otherwise the Agent will distribute such payment to such Lenders on the
next succeeding Business Day. Whenever any payment hereunder shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day (subject to accrual
of interest and Fees for the period of such extension), except that in the
case of Eurodollar Loans, if the extension would cause the payment to be
made in the next following calendar month, then such payment shall instead
be made on the next preceding Business Day. Except as expressly provided
otherwise herein, all computations of interest and fees shall be made on
the basis of actual number of days elapsed over a year of 360 days, except
with respect to computation of interest on Base Rate Loans which (unless
the Base Rate is determined by reference to the Federal Funds Rate) shall
be calculated based on a year of 365 or 366 days, as appropriate. Interest
shall accrue from and include the date of borrowing, but exclude the date
of payment.
(b) Allocation of Payments After Event of Default.
Notwithstanding any other provisions of this Credit Agreement to the
contrary, after the occurrence and during the continuance of an Event of
Default, all amounts collected or received by the Agent or any Lender on
account of the Loans, Fees or any other amounts outstanding under any of
the Credit Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation reasonable
attorneys' fees) of the Agent in connection with enforcing the rights of
the Lenders under the Credit Documents;
SECOND, to payment of any fees owed to the Agent;
THIRD, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation, reasonable
attorneys' fees) of each of the Lenders in connection with enforcing its
rights under the Credit Documents or otherwise with respect to amounts
owing to such Lender;
FOURTH, to the payment of accrued fees and
interest;
FIFTH, to the payment of the outstanding principal
amount of the Loans;
SIXTH, to all other amounts and other obligations
which shall have become due and payable under the Credit Documents or
otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above;
and
SEVENTH, to the payment of the surplus, if any, to
whoever may be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be
applied in the numerical order provided until exhausted prior to
application to the next succeeding category; and (ii) each of the Lenders
shall receive an amount equal to its pro rata share (based on the
proportion that the then outstanding Loans held by such Lender bears to the
aggregate then outstanding Loans) of amounts available to be applied
pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above.
3.15 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts
evidencing each Loan made by such Lender to the Borrower from time to time,
including the amounts of principal and interest payable and paid to such
Lender from time to time under this Credit Agreement. Each Lender will
make reasonable efforts to maintain the accuracy of its account or accounts
and to promptly update its account or accounts from time to time, as
necessary.
(b) The Agent shall maintain the Register pursuant to
Section 10.3(c) hereof, and a subaccount for each Lender, in which Register
and subaccounts (taken together) shall be recorded (i) the amount, type and
Interest Period of each such Loan hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable to each
Lender hereunder and (iii) the amount of any sum received by the Agent
hereunder from or for the account of the Borrower and each Lender's share
thereof. The Agent will make reasonable efforts to maintain the accuracy
of the subaccounts referred to in the preceding sentence and to promptly
update such subaccounts from time to time, as necessary.
(c) The entries made in the accounts, Register and
subaccounts maintained pursuant to subsection (b) of this Section 3.15
(and, if consistent with the entries of the Agent, subsection (a)) shall be
prima facie, but not conclusive, evidence of the existence and amounts of
the obligations of the Borrower therein recorded; provided, however, that
the failure of any Lender or the Agent to maintain any such account, such
Register or such subaccount, as applicable, or any error therein, shall not
in any manner affect the obligation of the Borrower to repay the Loans made
by such Lender in accordance with the terms hereof.
3.16 Replacement of Lenders.
In the event any Lender delivers to the Borrower any notice in
accordance with Sections 3.6, 3.8, 3.9 or 3.10, then the Borrower shall
have the right, if no Default or Event of Default then exists, to replace
such Lender (the "Replaced Lender") with one or more additional banks or
financial institutions (collectively, the "Replacement Lender"), provided
that (A) at the time of any replacement pursuant to this Section 3.16, the
Replacement Lender shall enter into one or more assignment agreements
substantially in the form of Schedule 10.3(b) pursuant to, and in
accordance with the terms of, Section 10.3(b) (and with all fees payable
pursuant to said Section 10.3(b) to be paid by the Replacement Lender)
pursuant to which the Replacement Lender shall acquire all of the rights
and obligations of the Replaced Lender hereunder and, in connection
therewith, shall pay to the Replaced Lender in respect thereof an amount
equal to the sum of (a) the principal of, and all accrued interest on, all
outstanding Loans of the Replaced Lender, and (b) all accrued, but
theretofore unpaid, fees owing to the Replaced Lender pursuant to Section
3.5(a), and (B) all obligations of the Borrower owing to the Replaced
Lender (including all obligations, if any, owing pursuant to Section 3.6,
3.8 or 3.9, but excluding those obligations specifically described in
clause (A) above in respect of which the assignment purchase price has
been, or is concurrently being paid) shall be paid in full to such Replaced
Lender concurrently with such replacement.
SECTION 4
CONDITIONS
4.1 Closing Conditions.
The obligation of the Lenders to enter into this Credit Agreement
and to make the initial Loans shall be subject to satisfaction of the
following conditions (in form and substance acceptable to the Lenders):
(a) The Agent shall have received original counterparts
of this Credit Agreement executed by each of the parties hereto;
(b) The Agent shall have received an appropriate
original Note for each Lender, executed by the Borrower; and
(c) The Agent shall have received all documents it may
reasonably request relating to the existence and good standing of the
Borrower, the corporate or other necessary authority for and the validity
of the Credit Documents, and any other matters relevant thereto, all in
form and substance reasonably satisfactory to the Agent;
4.2 Conditions to all Extensions of Credit.
The obligations of each Lender to make, convert or extend any Loan
(including the initial Loans) are subject to satisfaction of the following
conditions in addition to satisfaction on the Closing Date of the
conditions set forth in Section 4.1:
(a) The Borrower shall have delivered, in the case of
any Loan, an appropriate Notice of Borrowing or Notice of
Extension/Conversion;
(b) The representations and warranties set forth in
Section 5 shall be, subject to the limitations set forth therein, true and
correct in all material respects as of such date (except for those which
expressly relate to an earlier date);
(c) There shall not have been commenced against the
Borrower an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or any case, proceeding or
other action for the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Borrower or
for any substantial part of its Property or for the winding up or
liquidation of its affairs, and such involuntary case or other case,
proceeding or other action shall remain undismissed, undischarged or
unbonded;
(d) No Default or Event of Default shall exist and be
continuing either prior to or after giving effect thereto; and
(e) Immediately after giving effect to the making of
such Loan (and the application of the proceeds thereof), the sum of the
aggregate principal amount of outstanding Loans shall not exceed the
Committed Amount.
The delivery of each Notice of Borrowing and each Notice of
Extension/Conversion shall constitute a representation and warranty by the
Borrower of the correctness of the matters specified in subsections (b),
(c), (d) and (e) above.
SECTION 5
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents to the Agent and each Lender that:
5.1 Organization; Existence; Compliance with Law.
Each of the Borrower and its Subsidiaries (a) is duly organized,
validly existing and is in good standing under the laws of the jurisdiction
of its incorporation or organization, (b) has the corporate or other
necessary power and authority, and the legal right, to own and operate its
property, to lease the property it operates as lessee and to conduct the
business in which it is currently engaged, except to the extent that the
failure to have such legal right would not be reasonably expected to have a
Material Adverse Effect, (c) is duly qualified as a foreign entity and in
good standing under the laws of each jurisdiction where its ownership,
lease or operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not be reasonably expected to have a
Material Adverse Effect, and (d) is in compliance with all material
Requirements of Law, except to the extent that the failure to comply
therewith would not, in the aggregate, be reasonably expected to have a
Material Adverse Effect.
5.2 Power; Authorization; Enforceable Obligations.
The Borrower has the corporate or other necessary power and
authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party, and in the case of the Borrower, to
borrow hereunder, and has taken all necessary corporate action to authorize
the borrowings on the terms and conditions of this Credit Agreement and to
authorize the execution, delivery and performance of the Credit Documents
to which it is a party. No consent or authorization of, filing with,
notice to or other similar act by or in respect of, any Governmental
Authority or any other Person is required to be obtained or made by or on
behalf of the Borrower in connection with the borrowings hereunder or with
the execution, delivery, performance, validity or enforceability of the
Credit Documents to which the Borrower is a party. This Credit Agreement
has been, and each other Credit Document to which the Borrower is a party
will be, duly executed and delivered on behalf of the Borrower. This
Credit Agreement constitutes, and each other Credit Document to which the
Borrower is a party when executed and delivered will constitute, a legal,
valid and binding obligation of the Borrower enforceable against such party
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings
in equity or at law).
5.3 No Legal Bar.
The execution, delivery and performance of the Credit Documents by
the Borrower, the borrowings hereunder and the use of the proceeds thereof
(a) will not violate any Requirement of Law or contractual obligation of
the Borrower or any of its Subsidiaries in any respect that would
reasonably be expected to have a Material Adverse Effect, (b) will not
result in, or require, the creation or imposition of any Lien on any of the
properties or revenues of any of the Borrower or any of its Subsidiaries
pursuant to any such Requirement of Law or contractual obligation, and (c)
will not violate or conflict with any provision of the Borrower's articles
of incorporation or by-laws.
5.4 Governmental Regulations.
No part of the proceeds of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any "margin stock" in
violation of Regulation G or Regulation U. If requested by any Lender or
the Agent, the Borrower will furnish to the Agent and each Lender a
statement to the foregoing effect in conformity with the requirements of FR
Form U-1 referred to in said Regulation U. No indebtedness being reduced
or retired out of the proceeds of the Loans was or will be incurred for the
purpose of purchasing or carrying any margin stock within the meaning of
Regulation U or any "margin security" within the meaning of Regulation T.
"Margin stock" within the meanings of Regulation U does not constitute more
than 25% of the value of the consolidated assets of the Borrower and its
Subsidiaries. None of the transactions contemplated by this Credit
Agreement (including, without limitation, the direct or indirect use of the
proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, or regulations issued pursuant thereto, or Regulation G, T, U
or X.
5.5 Purpose of Loans.
The proceeds of the Loans hereunder shall be used solely by the
Borrower to (a) repurchase stock in the Borrower, (b) to finance
acquisitions to the extent permitted under this Credit Agreement and (c)
for the working capital, commercial paper back up, capital expenditures and
other lawful corporate purposes of the Borrower and its Subsidiaries.
5.6 Incorporated Representations and Warranties.
The Borrower hereby agrees that the representations and warranties
contained in Sections 5.1, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11(b)-(e) and
5.12 of the Existing Credit Agreement, as in effect as of the date hereof
(the "Incorporated Representations"), are hereby incorporated by reference
and shall be as binding on the Borrower as if set forth fully herein;
provided, however, Schedule 5.12 of the Incorporated Representations shall
be deleted and replaced with Schedule 5.12 attached hereto. The
incorporation by reference to the Existing Credit Agreement of the
Incorporated Representations pursuant to this Section 5.6 shall survive the
termination of the Existing Credit Agreement. For purposes of the
incorporation of the Incorporated Representations pursuant to this Section
5.6, all references in the Incorporated Representations to the "Agent"
shall be deemed to refer to the Agent hereunder, all references in the
Incorporated Representations to a "Lender" or the "Lender" shall be deemed
to refer to one or more of the Lenders hereunder, all references in the
Incorporated Representations to the "Required Lenders" shall be deemed to
refer to the Required Lenders hereunder, all references in the Incorporated
Representations to the "Credit Agreement," or any similar references, shall
be deemed to refer to this Credit Agreement, all references in the
Incorporated Representations to a "Note" or the "Notes" shall be deemed to
refer to one or more of the Notes issued pursuant to Section 2.1(e) hereof
and all references in the Incorporated Representations to a "Credit
Document" or the "Credit Documents," or any similar references, shall be
deemed to refer to one or more of the Credit Documents as defined in
Section 1.1 hereof.
SECTION 6
COVENANTS
The Borrower hereby covenants and agrees that so long as this
Credit Agreement is in effect or any amounts payable hereunder or under any
other Credit Document shall remain outstanding, and until all of the
Commitments hereunder shall have terminated:
6.1 Use of Proceeds.
The Borrower will use the proceeds of the Loans solely for the
purposes set forth in Section 5.5.
6.2 Incorporated Covenants.
The Borrower hereby agrees that the affirmative and negative
covenants contained in Sections 6.1-6.7, Section 6.9, Section 6.10 and
Section 7 of the Existing Credit Agreement, as in effect as of the date
hereof, as modified (if modified) pursuant to the terms of the amendment
thereto currently contemplated by the parties thereto (the "Incorporated
Covenants"), are hereby incorporated by reference and shall be as binding
on the Borrower as if set forth fully herein, except that, for purposes
hereof, Schedule 6.1(c) to the Existing Credit Agreement referred to in
Section 6.1(c) of the Existing Credit Agreement shall be deemed to refer to
Schedule 6.2 attached hereto. The incorporation by reference to the
Existing Credit Agreement of the Incorporated Covenants pursuant to this
Section 6.2 shall survive the termination of the Existing Credit Agreement.
For purposes of the incorporation of the Incorporated Covenants pursuant to
this Section 6.2, all references in the Incorporated Covenants to the
"Agent" shall be deemed to refer to the Agent hereunder, all references in
the Incorporated Covenants to a "Lender" or the "Lenders" shall be deemed
to refer to one or more of the Lenders hereunder, all references in the
Incorporated Covenants to the "Required Lenders" shall be deemed to refer
to the Required Lenders hereunder, all references in the Incorporated
Covenants to the "Credit Agreement," or any similar reference, shall be
deemed to refer to this Credit Agreement, all references in the
Incorporated Covenants to a "Note" or the "Notes" shall be deemed to refer
to one or more of the Notes issued pursuant to Section 2.1(e) hereof and
all references in the Incorporated Covenants to a "Credit Document" or the
"Credit Documents," or any similar reference, shall be deemed to refer to
one or more of the Credit Documents as defined in Section 1.1 hereof.
SECTION 7
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SECTION 8
EVENTS OF DEFAULT
8.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. The Borrower shall
(i) default in the payment when due of any
principal of any of the Loans, or
(ii) default, and such defaults shall continue
for five (5) or more Business Days, in the payment when due of any interest
on the Loans, or of any other amounts owing hereunder, under any of the
other Credit Documents or in connection herewith or therewith; or
(b) Representations. Any representation, warranty or
statement made or deemed to be made by the Borrower herein, in any of the
other Credit Documents, or in any statement or certificate delivered or
required to be delivered pursuant hereto or thereto shall prove untrue in
any material respect on the date as of which it was deemed to have been
made; or
(c) Covenants. The Borrower shall
(i) default in the due performance or
observance of any term, covenant or agreement contained in Sections 6.2,
6.10 or 7.1 through 7.3, inclusive, of the Incorporated Covenants, or
(ii) default in the due performance or
observance by it of any term, covenant or agreement (other than those
referred to in subsections (a), (b) or (c)(i) of this Section 8.1)
contained in this Credit Agreement and such default shall continue
unremedied for a period of at least 30 days after the earlier of a
responsible officer of the Borrower becoming aware of such default or
notice thereof by the Agent; or
(d) Incorporated Events of Default. The occurrence of
an "Event of Default" under and as defined in the Existing Credit
Agreement, as in effect as of the date hereof, which "Events of Default"
(the "Incorporated Events of Default"), are hereby incorporated herein by
reference and shall be as binding on the Borrower as if set forth fully
herein, such incorporation by reference to survive termination of the
Existing Credit Agreement. For purposes of the incorporation of the
Incorporated Events of Default pursuant to this Section 8.1(d), all
references in the Incorporated Events of Default to the "Agent" shall be
deemed to refer to the Agent hereunder, all references in the Incorporated
Events of Default to a "Lender" or the "Lenders" shall be deemed to refer
to one or more of the Lenders hereunder, all references in the Incorporated
Events of Default to the "Required Lenders" shall be deemed to refer to the
Required Lenders hereunder, all references in the Incorporated Events of
Default to the "Credit Agreement," or any similar references, shall be
deemed to refer to this Credit Agreement, all references in the
Incorporated Events of Default to a "Note" or the "Notes" shall be deemed
to refer to one or more of the Notes issued pursuant to Section 2.1(e)
hereof and all references in the Incorporated Events of Default to a
"Credit Document" or the "Credit Documents," or any similar references,
shall be deemed to refer to one or more of the Credit Documents as defined
in Section 1.1 hereof.
8.2 Acceleration; Remedies.
Upon the occurrence of an Event of Default, and at any time
thereafter unless and until such Event of Default has been waived by the
Required Lenders or cured to the satisfaction of the Required Lenders
(pursuant to the voting procedures in Section 10.6), the Agent shall, upon
the request and direction of the Required Lenders, by written notice to the
Borrower take any of the following actions:
(a) Termination of Commitments. Declare the
Commitments terminated whereupon the Commitments shall be immediately
terminated.
(b) Acceleration. Declare the unpaid principal of and
any accrued interest in respect of all Loans and any and all other
indebtedness or obligations of any and every kind owing by the Borrower to
the Agent and/or any of the Lenders hereunder to be due whereupon the same
shall be immediately due and payable without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the
Borrower.
(c) Enforcement of Rights. Enforce any and all rights
and interests created and existing under the Credit Documents and all
rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in
Section 8.1(d) of the Incorporated Events of Default shall occur, then the
Commitments shall automatically terminate and all Loans, all accrued
interest in respect thereof and all and other indebtedness or obligations
owing to the Agent and/or any of the Lenders hereunder automatically shall
immediately become due and payable without the giving of any notice or
other action by the Agent or the Lenders.
SECTION 9
AGENCY PROVISIONS
9.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity as Agent hereunder, the "Agent") of
such Lender to act as specified herein and the other Credit Documents, and
each such Lender hereby authorizes the Agent as the agent for such Lender,
to take such action on its behalf under the provisions of this Credit
Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of
the other Credit Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the
contrary elsewhere herein and in the other Credit Documents, the Agent
shall not have any duties or responsibilities, except those expressly set
forth herein and therein, or any fiduciary relationship with any Lender,
and no implied covenants, functions, responsibilities, duties, obligations
or liabilities shall be read into this Credit Agreement or any of the other
Credit Documents, or shall otherwise exist against the Agent. The
provisions of this Section are solely for the benefit of the Agent and the
Lenders and the Borrower shall have no rights as a third party beneficiary
of the provisions hereof. In performing its functions and duties under
this Credit Agreement and the other Credit Documents, the Agent shall act
solely as agent of the Lenders and does not assume and shall not be deemed
to have assumed any obligation or relationship of agency or trust with or
for the Borrower or any of its Affiliates.
9.2 Delegation of Duties.
The Agent may execute any of its respective duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact
and shall be entitled to advice of counsel concerning all matters
pertaining to such duties; provided that the use of any agents or
attorneys-in-fact shall not relieve the Agent of its duties hereunder.
9.3 Exculpatory Provisions.
The Agent and its officers, directors, employees, agents,
attorneys-in-fact or affiliates shall not be (a) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful
misconduct), or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Borrower
contained herein or in any of the other Credit Documents or in any
certificate, report, document, financial statement or other written or oral
statement referred to or provided for in, or received by the Agent under or
in connection herewith or in connection with the other Credit Documents, or
enforceability or sufficiency therefor of any of the other Credit
Documents, or for any failure of the Borrower to perform its obligations
hereunder or thereunder. The Agent shall not be responsible to any Lender
for the effectiveness, genuineness, validity, enforceability,
collectability or sufficiency of this Credit Agreement, or any of the other
Credit Documents or for any representations, warranties, recitals or
statements made herein or therein or made by the Borrower in any written or
oral statement or in any financial or other statements, instruments,
reports, certificates or any other documents in connection herewith or
therewith furnished or made by the Agent to the Lenders or by or on behalf
of the Borrower to the Agent or any Lender or be required to ascertain or
inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein
or as to the use of the proceeds of the Loans or of the existence or
possible existence of any Default or Event of Default or to inspect the
properties, books or records of the Borrower or any of its Affiliates.
9.4 Reliance on Communications.
The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or conversation
reasonably believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Borrower, independent accountants and other experts selected by the Agent
with reasonable care). The Agent may deem and treat the Lenders as the
owner of their respective interests hereunder for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have
been filed with the Agent in accordance with Section 10.3(b) hereof. The
Agent shall be fully justified in failing or refusing to take any action
under this Credit Agreement or under any of the other Credit Documents
unless it shall first receive such advice or concurrence of the Required
Lenders as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such
action. The Agent shall in all cases be fully protected in acting, or in
refraining from acting, hereunder or under any of the other Credit
Documents in accordance with a request of the Required Lenders (or to the
extent specifically provided in Section 10.6, all the Lenders) and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders (including their successors and assigns).
9.5 Notice of Default.
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent
has received notice from a Lender or the Borrower referring to the Credit
Document, describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Agent receives such
a notice, the Agent shall give prompt notice thereof to the Lenders. The
Agent shall take such action with respect to such Default or Event of
Default as shall be reasonably directed by the Required Lenders.
9.6 Non-Reliance on Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Agent and its
officers, directors, employees, agents, attorneys-in-fact or affiliates has
not made any representations or warranties to it and that no act by the
Agent or any affiliate thereof hereinafter taken, including any review of
the affairs of the Borrower or any of its Affiliates, shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without
reliance upon the Agent or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own appraisal of and
investigation into the business, assets, operations, property, financial
and other conditions, prospects and creditworthiness of the Borrower or its
Affiliates and made its own decision to make its Loans hereunder and enter
into this Credit Agreement. Each Lender also represents that it will,
independently and without reliance upon the Agent or any other Lender, and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Credit Agreement, and to make such
investigation as it deems necessary to inform itself as to the business,
assets, operations, property, financial and other conditions, prospects and
creditworthiness of the Borrower and its Affiliates. Except for notices,
reports and other documents expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, assets, property, financial or other
conditions, prospects or creditworthiness of the Borrower or any of its
Affiliates which may come into the possession of the Agent or any of its
officers, directors, employees, agents, attorneys-in-fact or affiliates.
9.7 Indemnification.
The Lenders agree to indemnify the Agent in its capacity as such
(to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to their respective
Commitments (or if the Commitments have expired or been terminated, in
accordance with the respective principal amounts of outstanding Loans and
Participation Interests of the Lenders), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind whatsoever which may at
any time (including without limitation at any time following the final
payment of all of the obligations of the Borrower hereunder and under the
other Credit Documents) be imposed on, incurred by or asserted against the
Agent in its capacity as such in any way relating to or arising out of this
Credit Agreement or the other Credit Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing; provided that no Lender
shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or willful
misconduct of the Agent. If any indemnity furnished to the Agent for any
purpose shall, in the opinion of the Agent, be insufficient or become
impaired, the Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional
indemnity is furnished. The agreements in this Section shall survive the
repayment of the Loans and other obligations under the Credit Documents and
the termination of the Commitments hereunder.
9.8 Agent in its Individual Capacity.
The Agent and its affiliates may make loans to, accept deposits
from and generally engage in any kind of business with the Borrower, its
Subsidiaries or their respective Affiliates as though the Agent were not
the Agent hereunder. With respect to the Loans made by and all obligations
of the Borrower hereunder and under the other Credit Documents, the Agent
shall have the same rights and powers under this Credit Agreement as any
Lender and may exercise the same as though it were not the Agent, and the
terms "Lender" and "Lenders" shall include the Agent in its individual
capacity.
9.9 Successor Agent.
The Agent may, at any time, resign upon 20 days' written notice to
the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to
appoint a successor Agent; provided that, so long as no Default or Event of
Default has occurred and is continuing, such successor Agent shall be
reasonably acceptable to the Borrower. If no successor Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Agent shall select a successor
Agent provided such successor is a Lender hereunder or a commercial bank
organized under the laws of the United States of America or of any State
thereof and has a combined capital and surplus of at least $400,000,000.
Upon the acceptance of any appointment as Agent hereunder by a successor,
such successor Agent shall thereupon succeed to and become vested with all
the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations as
Agent, as appropriate, under this Credit Agreement and the other Credit
Documents and the provisions of this Section 9 shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent
under this Credit Agreement.
SECTION 10
MISCELLANEOUS
10.1 Notices.
Except as otherwise expressly provided herein, all notices and
other communications shall have been duly given and shall be effective (i)
when delivered, (ii) when transmitted and received (by confirmation of
receipt) via telecopy (or other facsimile device) to the number set out
below, (iii) the day following the day on which the same has been delivered
prepaid to a reputable national overnight air courier service, or (iv) the
third Business Day following the day on which the same is sent by certified
or registered mail, postage prepaid, in each case to the respective parties
at the address, in the case of the Borrower and the Agent, set forth below,
and, in the case of the Lenders, set forth on Schedule 2.1(a), or at such
other address as such party may specify by written notice to the other
parties hereto:
if to the Borrower:
AutoZone, Inc.
123 South Front Street
Memphis, TN 38103
Attn: Chief Financial Officer
Telephone: (901) 495-7181
Telecopy: (901) 495-8317
with a copy to the Treasurer and to the General Counsel for
the Borrower at the same address;
if to the Agent:
NationsBank, N.A.
Independence Center, 15th Floor
NC1-001-15-04
101 N. Tryon Street
Charlotte, North Carolina 28255
Attn: Agency Services
Telephone: (704) 388-3917
Telecopy: (704) 386-9923
with a copy to:
NationsBank, N.A.
NationsBank Corporate Center
NC1-007-8-7
100 N. Tryon Street
Attn: Mark Halmrast
Telephone: (704) 386-0649
Telecopy: (704) 386-1270
10.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable
law , and not by way of limitation of any such rights, upon the occurrence
of an Event of Default, each Lender is authorized at any time and from time
to time, without presentment, demand, protest or other notice of any kind
(all of which rights being hereby expressly waived), to set-off and to
appropriate and apply any and all deposits (general or special) and any
other indebtedness at any time held or owing by such Lender (including,
without limitation branches, agencies or Affiliates of such Lender wherever
located) to or for the credit or the account of the Borrower against
obligations and liabilities of such Person to such Lender hereunder, under
the Notes or the other Credit Documents , irrespective of whether such
Lender shall have made any demand hereunder and although such obligations,
liabilities or claims, or any of them, may be contingent or unmatured, and
any such set-off shall be deemed to have been made immediately upon the
occurrence of an Event of Default even though such charge is made or
entered on the books of such Lender subsequent thereto. Any Person
purchasing a participation in the Loans and Commitments hereunder pursuant
to Section 3.13 or Section 10.3(d) may exercise all rights of set-off with
respect to its participation interest as fully as if such Person were a
Lender hereunder.
10.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that the Borrower
may not assign or transfer any of its interests without prior written
consent of the Lenders; provided further that the rights of each Lender to
transfer, assign or grant participations in its rights and/or obligations
hereunder shall be limited as set forth in this Section 10.3, provided
however that nothing herein shall prevent or prohibit any Lender from (i)
pledging its Loans hereunder to a Federal Reserve Bank in support of
borrowings made by such Lender from such Federal Reserve Bank, or (ii)
granting assignments or selling participations in such Lender's Loans
and/or Commitments hereunder to its parent company and/or to any Affiliate
or Subsidiary of such Lender.
(b) Assignments. Each Lender may assign all or a
portion of its rights and obligations hereunder, pursuant to an assignment
agreement substantially in the form of Schedule 10.3(b), to (i) any Lender
or any Affiliate or Subsidiary of a Lender, or (ii) any other commercial
bank, financial institution or "accredited investor" (as defined in
Regulation D of the Securities and Exchange Commission) that, so long as no
Default or Event of Default has occurred and is continuing, is reasonably
acceptable to the Borrower; provided that (i) any such assignment (other
than any assignment to an existing Lender) shall be in a minimum aggregate
amount of $5,000,000 (or, if less, the remaining amount of the Commitment
being assigned by such Lender) of the Commitments and in integral multiples
of $1,000,000 above such amount, (ii) so long as no Event of Default has
occurred and is continuing, no Lender shall assign more than 50% of such
Lender's original Commitment and (iii) each such assignment shall be of a
constant, not varying, percentage of all such Lender's rights and
obligations under this Credit Agreement. Any assignment hereunder shall be
effective upon delivery to the Agent of written notice of the assignment
together with a transfer fee of $3,500 payable to the Agent for its own
account from and after the later of (i) the effective date specified in the
applicable assignment agreement and (ii) the date of recording of such
assignment in the Register pursuant to the terms of subsection (c) below.
The assigning Lender will give prompt notice to the Agent and the Borrower
of any such assignment. Upon the effectiveness of any such assignment (and
after notice to, and (to the extent required pursuant to the terms hereof),
with the consent of, the Borrower as provided herein), the assignee shall
become a "Lender" for all purposes of this Credit Agreement and the other
Credit Documents and, to the extent of such assignment, the assigning
Lender shall be relieved of its obligations hereunder to the extent of the
Loans and Commitment components being assigned. Along such lines the
Borrower agrees that upon notice of any such assignment and surrender of
the appropriate Note or Notes, it will promptly provide to the assigning
Lender and to the assignee separate promissory notes in the amount of their
respective interests substantially in the form of the original Note (but
with notation thereon that it is given in substitution for and replacement
of the original Note or any replacement notes thereof). By executing and
delivering an assignment agreement in accordance with this Section 10.3(b),
the assigning Lender thereunder and the assignee thereunder shall be deemed
to confirm to and agree with each other and the other parties hereto as
follows: (i) such assigning Lender warrants that it is the legal and
beneficial owner of the interest being assigned thereby free and clear of
any adverse claim; (ii) except as set forth in clause (i) above, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with this Credit Agreement, any of
the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement,
any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto or the financial condition of the
Borrower or any of its respective Affiliates or the performance or
observance by the Borrower of any of its obligations under this Credit
Agreement, any of the other Credit Documents or any other instrument or
document furnished pursuant hereto or thereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
assignment agreement; (iv) such assignee confirms that it has received a
copy of this Credit Agreement, the other Credit Documents and such other
documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such assignment agreement; (v)
such assignee will independently and without reliance upon the Agent, such
assigning Lender or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Credit
Agreement and the other Credit Documents; (vi) such assignee appoints and
authorizes the Agent to take such action on its behalf and to exercise such
powers under this Credit Agreement or any other Credit Document as are
delegated to the Agent by the terms hereof or thereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all the obligations
which by the terms of this Credit Agreement and the other Credit Documents
are required to be performed by it as a Lender.
(c) Maintenance of Register. The Agent shall maintain
at one of its offices in Charlotte, North Carolina (i) a copy of each
Lender assignment agreement delivered to it in accordance with the terms of
subsection (b) above and (ii) a register for the recordation of the
identity of the principal amount, type and Interest Period of each Loan
outstanding hereunder, the names, addresses and the Commitments of the
Lenders pursuant to the terms hereof from time to time (the "Register").
The Agent will make reasonable efforts to maintain the accuracy of the
Register and to promptly update the Register from time to time, as
necessary. The Register shall be prima facie, but not conclusive,
evidence of the information contained therein and the Borrower, the Agent
and the Lenders may treat each Person whose name is recorded in the
Register pursuant to the terms hereof as a Lender hereunder for all
purposes of this Credit Agreement. The Register shall be available for
inspection by the Borrower and each Lender, at any reasonable time and from
time to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer,
grant or assign participations in all or any part of such Lender's
interests and obligations hereunder; provided that (i) such selling Lender
shall remain a "Lender" for all purposes under this Credit Agreement (such
selling Lender's obligations under the Credit Documents remaining
unchanged) and the participant shall not constitute a Lender hereunder,
(ii) no such participant shall have, or be granted, rights to approve any
amendment or waiver relating to this Credit Agreement or the other Credit
Documents except to the extent any such amendment or waiver would (A)
reduce the principal of or rate of interest on or Fees in respect of any
Loans in which the participant is participating or (B) postpone the date
fixed for any payment of principal (including extension of the Termination
Date or the date of any mandatory prepayment), interest or Fees in which
the participant is participating, and (iii) sub-participations by the
participant (except to an affiliate, parent company or affiliate of a
parent company of the participant) shall be prohibited. In the case of any
such participation, the participant shall not have any rights under this
Credit Agreement or the other Credit Documents (the participant's rights
against the selling Lender in respect of such participation to be those set
forth in the participation agreement with such Lender creating such
participation) and all amounts payable by the Borrower hereunder shall be
determined as if such Lender had not sold such participation, provided,
however, that such participant shall be entitled to receive additional
amounts under Sections 3.6, 3.9 and 3.11 on the same basis as if it were a
Lender provided that it shall not be entitled to receive any more than the
selling Lender would have received had it not sold the participation.
10.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Agent or any Lender in
exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Agent or any Lender
and the Borrower shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any
other Credit Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder or thereunder.
The rights and remedies provided herein are cumulative and not exclusive of
any rights or remedies which the Agent or any Lender would otherwise have.
No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Agent or the
Lenders to any other or further action in any circumstances without notice
or demand.
10.5 Payment of Expenses, etc.
The Borrower agrees to: (a) pay all reasonable out-of-pocket costs
and expenses (i) of the Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit
Agreement and the other Credit Documents and the documents and instruments
referred to therein (including, subject to agreed upon limitations, the
reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to
the Agent) and any amendment, waiver or consent relating hereto and thereto
including, but not limited to, any such amendments, waivers or consents
resulting from or related to any work-out, renegotiation or restructure
relating to the performance by the Borrower under this Credit Agreement and
(ii) of the Agent and the Lenders in connection with enforcement of the
Credit Documents and the documents and instruments referred to therein
(including, without limitation, in connection with any such enforcement,
the reasonable fees and disbursements of counsel (including allocated costs
of internal counsel) for the Agent and each of the Lenders); (b) pay and
hold each of the Lenders harmless from and against any and all future stamp
and other similar taxes with respect to the foregoing matters and save each
of the Lenders harmless from and against any and all liabilities with
respect to or resulting from any delay or omission (other than to the
extent attributable to such Lender) to pay such taxes; and (c) indemnify
each Lender, its officers, directors, employees, representatives and agents
from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses incurred by any of them as a
result of, or arising out of, or in any way related to, or by reason of (i)
any investigation, litigation or other proceeding (whether or not any
Lender is a party thereto, but excluding any investigation initiated by the
Person seeking indemnification hereunder) related to the entering into
and/or performance of any Credit Document or the use of proceeds of any
Loans (including other extensions of credit) hereunder or the consummation
of any other transactions contemplated in any Credit Document, including,
without limitation, the reasonable fees and disbursements of counsel
(including allocated costs of internal counsel) incurred in connection with
any such investigation, litigation or other proceeding or (ii) the presence
or Release of any Materials of Environmental Concern at, under or from any
Property owned, operated or leased by the Borrower or any of its
Subsidiaries, or the failure by the Borrower or any of its Subsidiaries to
comply with any Environmental Law (but excluding, in the case of either of
clause (i) or (ii) above, any such losses, liabilities, claims, damages or
expenses to the extent (A) incurred by reason of gross negligence or
willful misconduct on the part of the Person to be indemnified, (B) owing
to the Borrower or (C) owing to another Person entitled to indemnification
hereunder).
10.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any
of the terms hereof or thereof may be amended, changed, waived, discharged
or terminated unless such amendment, change, waiver, discharge or
termination is in writing entered into by, or approved in writing by, the
Required Lenders and the Borrower, provided, however, that:
(a) no such amendment, change, waiver, discharge or
termination shall, without the consent of each Lender directly affected
thereby, (i) reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any post-default
increase in interest rates) on any Loan or fees hereunder, (ii) reduce the
rate or extend the time of payment of any fees owing hereunder, (iii)
extend (A) the Commitments of the Lenders, or (B) the final maturity of any
Loan, or any portion thereof, or (iv) reduce the principal amount on any
Loan;
(b) no such amendment, change, waiver, discharge or
termination shall, without the consent of each Lender directly affected
thereby, (i) increase the Commitments of the Lenders over the amount
thereof in effect (it being understood and agreed that a waiver of any
Default or Event of Default shall not constitute a change in the terms of
any Commitment of any Lender), (ii) amend, modify or waive any provision of
this Section 10.6 or Section 3.6, 3.10, 3.11, 3.12, 3.13, 8.1(a), 10.2,
10.3, 10.5 or 10.9, (iii) reduce or increase any percentage specified in,
or otherwise modify, the definition of "Required Lenders," or (iv) consent
to the assignment or transfer by the Borrower of any of its rights and
obligations under (or in respect of) the Credit Documents to which it is a
party;
(c) no provision of Section 9 may be amended without
the consent of the Agent; and
(d) designation of the Master Account or of any
Financial Officer may not be made without the written consent of at least
two Financial Officers of the Borrower.
10.7 Counterparts.
This Credit Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument.
It shall not be necessary in making proof of this Credit Agreement to
produce or account for more than one such counterpart.
10.8 Headings.
The headings of the sections and subsections hereof are provided
for convenience only and shall not in any way affect the meaning or
construction of any provision of this Credit Agreement.
10.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 3.9, 3.11, 9.7 or 10.5 shall survive the execution and delivery of
this Credit Agreement, the making of the Loans, the repayment of the Loans
and other obligations under the Credit Documents and the termination of the
Commitments hereunder, and all representations and warranties made by the
Borrower herein shall survive delivery of the Notes and the making of the
Loans hereunder.
10.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT
DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or
proceeding with respect to this Credit Agreement or any other Credit
Document may be brought in the courts of the State of North Carolina in
Mecklenburg County, or of the United States for the Western District of
North Carolina, and, by execution and delivery of this Credit Agreement,
the Borrower hereby irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the nonexclusive jurisdiction of
such courts. The Borrower further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or
proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid, to it at the address set out for notices pursuant to
Section 10.1, such service to become effective three (3) days after such
mailing. Nothing herein shall affect the right of the Agent to serve
process in any other manner permitted by law or to commence legal
proceedings or to otherwise proceed against the Borrower in any other
jurisdiction.
(b) The Borrower hereby irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any
of the aforesaid actions or proceedings arising out of or in connection
with this Credit Agreement or any other Credit Document brought in the
courts referred to in subsection (a) hereof and hereby further irrevocably
waives and agrees not to plead or claim in any such court that any such
action or proceeding brought in any such court has been brought in an
inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE AGENT,
THE LENDERS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
10.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable
and the remaining provisions shall remain in full force and effect and
shall be construed without giving effect to the illegal, invalid or
unenforceable provisions.
10.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and
supersede all prior agreements and understandings, oral or written, if any,
including any commitment letters or correspondence relating to the Credit
Documents or the transactions contemplated herein and therein.
10.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at
such time on or after the Closing Date when it shall have been executed by
the Borrower and the Agent, and the Agent shall have received copies hereof
(telefaxed or otherwise) which, when taken together, bear the signatures of
each Lender, and thereafter this Credit Agreement shall be binding upon and
inure to the benefit of the Borrower, the Agent and each Lender and their
respective successors and assigns.
(b) The term of this Credit Agreement shall be until no
Loans or any other amounts payable hereunder or under any of the other
Credit Documents shall remain outstanding and until all of the Commitments
hereunder shall have expired or been terminated.
10.14 Confidentiality.
The Agent and the Lenders agree to keep confidential (and to cause
their respective affiliates, officers, directors, employees, agents and
representatives to keep confidential) all information, materials and
documents furnished to the Agent or any such Lender by or on behalf of the
Borrower (whether before or after the Closing Date) which relates to the
Borrower or any of its Subsidiaries (the "Information"). Notwithstanding
the foregoing, the Agent and each Lender shall be permitted to disclose
Information (i) to its affiliates, officers, directors, employees, agents
and representatives in connection with its participation in any of the
transactions evidenced by this Credit Agreement or any other Credit
Documents or the administration of this Credit Agreement or any other
Credit Documents; (ii) to the extent required by applicable laws and
regulations or by any subpoena or similar legal process, or requested by
any Governmental Authority; (iii) to the extent such Information (A)
becomes publicly available other than as a result of a breach of this
Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Agent or such Lender on a
non-confidential basis from a source other than the Borrower or (C) was
available to the Agent or such Lender on a non-confidential basis prior to
its disclosure to the Agent or such Lender by the Borrower; (iv) to any
assignee or participant (or prospective assignee or participant) so long as
such assignee or participant (or prospective assignee or participant) first
specifically agrees in a writing furnished to and for the benefit of the
Borrower to be bound by the terms of this Section 10.14; or (v) to the
extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 10.14 shall obligate the
Agent or any Lender to return any materials furnished by the Borrower.
10.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower
that at least one of the following statements is an accurate representation
as to the source of funds to be used by such Lender in connection with the
financing hereunder:
(a) no part of such funds constitutes assets allocated
to any separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds
constitutes assets allocated to any separate account maintained by such
Lender, such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total assets of
such account as of the date of such purchase (and, for purposes of this
subsection (b), all employee benefit plans maintained by the same employer
or employee organization are deemed to be a single plan);
(c) to the extent that any part of such funds
constitutes assets of an insurance company's general account, such
insurance company has complied with all of the requirements of the
regulations issued under Section 401(c)(1)(A) of ERISA; or
(d) such funds constitute assets of one or more
specific benefit plans which such Lender has identified in writing to the
Borrower.
As used in this Section 10.15, the terms "employee benefit plan" and
"separate account" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
10.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit
Document, on the other hand, this Credit Agreement shall control.
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Credit Agreement to be duly executed and delivered as
of the date first above written.
BORROWER: AUTOZONE, INC.
a Nevada corporation
By: /s/Tara Elliott
-----------------------
Name: Tara Elliott
----------------------
Title: VP, Treasurer
---------------------
By: /s/ Robert J. Hunt
------------------------
Name: Robert Hunt
----------------------
Title: EVP CFO
---------------------
LENDERS: NATIONSBANK, N.A.,
individually in its
capacity as a
Lender and in its
capacity as Agent
By: /s/ John E. Ball
------------------------
Name: John E. Ball
----------------------
Title: SVP
---------------------
<PAGE>
Schedule 2.1(a)
LENDERS
Lender Commitment Percentage Commitment
- ------ --------------------- ------------
NationsBank, N.A. 100% $150,000,000
NationsBank Corporate Center
NC1007-8-7
Charlotte, NC 28255
Attn: Jeb Ball
Tel: (704) 386-9718
Fax: (704) 388-0373
<PAGE>
Schedule 2.1(b)(i)
FORM OF NOTICE OF BORROWING
NationsBank, N.A.,
as Agent for the Lenders
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Ladies and Gentlemen:
The undersigned, AUTOZONE, INC. (the "Borrower"), refers to the
Credit Agreement dated as of October 20, 1998 (as amended, modified,
extended or restated from time to time, the "Credit Agreement"), among the
Borrower, the Lenders, NationsBank, N.A., as Agent. Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Credit Agreement. The Borrower hereby gives notice
pursuant to Section 2.1 of the Credit Agreement that it requests a Loan
advance under the Credit Agreement, and in connection therewith sets forth
below the terms on which such Loan advance is requested to be made:
(A) Date of Borrowing
(which is a Business Day)
(B) Principal Amount of
Borrowing
(C) Interest rate basis
(D) Interest Period and the
last day thereof
In accordance with the requirements of Section 4.2, the Borrower
hereby reaffirms the representations and warranties set forth in the Credit
Agreement as provided in subsection (b) of such Section, and confirms that
the matters referenced in subsections (c), (d) and (e) of such Section, are
true and correct.
Very truly yours,
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
Schedule 2.1(e)
NOTE
$150,000,000 October 20, 1998
FOR VALUE RECEIVED, AUTOZONE, INC., a Nevada corporation
(the "Borrower"), hereby promises to pay to the order of NATIONSBANK, N.A.,
its successors and assigns (the "Lender"), at the office of NationsBank,
N.A., as Agent (the "Agent"), at 101 N. Tryon Street, Independence Center,
NC1-001-15-04, Charlotte, North Carolina 28255 (or at such other place or
places as the holder hereof may designate), at the times set forth in the
Credit Agreement, dated as of October 20, 1998, among the Borrower, the
Lenders and the Agent (as it may be amended, modified, extended or restated
from time to time, the "Credit Agreement"; all capitalized terms not
otherwise defined herein shall have the meanings set forth in the Credit
Agreement), but in no event later than the Termination Date, in Dollars and
in immediately available funds, the principal amount of ONE HUNDRED FIFTY
MILLION DOLLARS ($150,000,000) or, if less than such principal amount, the
aggregate unpaid principal amount of all Loans made by the Lender to the
Borrower pursuant to the Credit Agreement, and to pay interest from the
date hereof on the unpaid principal amount hereof, in like money, at said
office, on the dates and at the rates selected in accordance with Section
2.1(d) of the Credit Agreement.
Upon the occurrence and during the continuance of an Event of
Default, the balance outstanding hereunder shall bear interest as provided
in Section 3.1 of the Credit Agreement. Further, in the event the payment
of all sums due hereunder is accelerated under the terms of the Credit
Agreement, this Note, and all other indebtedness of the Borrower to the
Lender shall become immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby waived by
the Borrower.
In the event this Note is not paid when due at any stated or
accelerated maturity, the Borrower agrees to pay, in addition to the
principal and interest, all costs of collection, including reasonable
attorneys' fees.
All borrowings evidenced by this Note and all payments and
prepayments of the principal hereof and interest hereon and the respective
dates thereof shall be endorsed by the holder hereof on Schedule A attached
hereto and incorporated herein by reference, or on a continuation thereof
which shall be attached hereto and made a part hereof; provided, however,
that any failure to endorse such information on such schedule or
continuation thereof shall not in any manner affect the obligation of the
Borrower to make payments of principal and interest in accordance with the
terms of this Note.
This Note and the Loans evidenced hereby may be transferred in
whole or in part only by registration of such transfer on the Register
maintained by or on behalf of the Borrower as provided in Section 10.3(c)
of the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Note to be duly
executed by its duly authorized officer as of the day and year first above
written.
AUTOZONE, INC.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
SCHEDULE A TO THE
NOTE
OF AUTOZONE, INC.
DATED OCTOBER 20, 1998
Unpaid Name of
Type Principal Person
of Interest Payments Balance Making
Date Loan Period Principal Interest of Note Notation
- ---- ---- ------- ---------- -------- ------- --------
<PAGE>
Schedule 3.2
FORM OF NOTICE OF EXTENSION/CONVERSION
NationsBank, N.A.,
as Agent for the Lenders
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Ladies and Gentlemen:
The undersigned, AutoZone, Inc. (the "Borrower"), refers to the
Credit Agreement dated as of October 20, 1998 (as amended, modified,
extended or restated from time to time, the "Credit Agreement"), among the
Borrower, the Lenders, NationsBank, N.A., as Agent. Capitalized terms used
herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Credit Agreement. The Borrower hereby gives notice
pursuant to Section 3.2 of the Credit Agreement that it requests an
extension or conversion of a Loan outstanding under the Credit Agreement,
and in connection therewith sets forth below the terms on which such
extension or conversion is requested to be made:
(A) Date of Extension or Conversion
(which is the last day of the
the applicable Interest Period)
(B) Principal Amount of
Extension or Conversion
(C) Interest rate basis
(D) Interest Period and the
last day thereof
In accordance with the requirements of Section 4.2, the Borrower
hereby reaffirms the representations and warranties set forth in the Credit
Agreement as provided in subsection (b) of such Section, and confirms that
the matters referenced in subsections (c), (d) and (e) of such Section, are
true and correct.
Very truly yours,
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
Schedule 5.12
LIST OF SUBSIDIARIES
[Chart of corporate structure appears here]
AutoZone, Inc.
AutoZone de Mexico
Service Zone de Mexico
Data Zone de Mexico
AutoZone Management, LP
ADAP, Inc.
Alldata Corporation
AutoZone Stores, Inc.
AutoZone Properties, Inc.
AutoZone Development Corporation
AutoZoners, Inc.
AutoZone Marketing Company
AutoZone Leadership, Inc.
AutoZone Texas, LP
<PAGE>
Schedule 6.2
FORM OF OFFICER'S COMPLIANCE CERTIFICATE
For the fiscal quarter ended _________________, 19___.
I, ______________________, [Title] of AutoZone, Inc. (the
"Borrower") hereby certify that, to the best of my knowledge and belief,
with respect to that certain Credit Agreement dated as of October 20, 1998
(as amended, modified, extended or restated from time to time, the "Credit
Agreement"; all of the defined terms in the Credit Agreement are
incorporated herein by reference) among the Borrower, the Lenders party
thereto, NationsBank, N.A., as Agent:
a. The company-prepared financial statements which accompany
this certificate are true and correct in all material respects and have
been prepared in accordance with GAAP applied on a consistent basis,
subject to changes resulting from normal year-end audit adjustments.
b. Since ___________ (the date of the last similar
certification, or, if none, the Closing Date) no Default or Event of
Default has occurred under the Credit Agreement; and
Delivered herewith are detailed calculations demonstrating compliance by
the Borrower with the financial covenant contained in Section 6.10 of the
Incorporated Covenants as of the end of the fiscal period referred to
above.
This ______ day of ___________, 19__.
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
Schedule 10.3(b)
FORM OF ASSIGNMENT AND ACCEPTANCE
THIS ASSIGNMENT AND ACCEPTANCE dated as of _______________, 199_ is
entered into between ________________ ("Assignor") and ____________________
("Assignee").
Reference is made to the Credit Agreement dated as of October 20,
1998, as amended and modified from time to time thereafter (the "Credit
Agreement") among AutoZone, Inc., the Lenders party thereto, NationsBank,
N.A., as Agent. Terms defined in the Credit Agreement are used herein with
the same meanings.
1. The Assignor hereby sells and assigns, without recourse, to
the Assignee, and the Assignee hereby purchases and assumes from the
Assignor, effective as of the Effective Date set forth below, the interests
set forth below (the "Assigned Interest") in the Assignor's rights and
obligations under the Credit Agreement, including, without limitation, the
interests set forth below in the Commitments and outstanding Loans of the
Assignor on the effective date of the assignment designated below (the
"Effective Date"), together with unpaid Fees accrued on the assigned
Commitments to the Effective Date and unpaid interest accrued on the
assigned Loans to the Effective Date. Each of the Assignor and the
Assignee hereby makes and agrees to be bound by all the representations,
warranties and agreements set forth in Section 10.3(b) of the Credit
Agreement, a copy of which has been received by the Assignee. From and
after the Effective Date (i) the Assignee, if it is not already a Lender
under the Credit Agreement, shall be a party to and be bound by the
provisions of the Credit Agreement and, to the extent of the interests
purchased and assumed by the Assignee under this Assignment and Acceptance,
have the rights and obligations of a Lender thereunder and (ii) the
Assignor shall, to the extent of the interests sold and assigned by the
Assignor under this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
2. This Assignment and Acceptance shall be governed by and
construed in accordance with the laws of the State of North Carolina.
3. Terms of Assignment
(a) Date of Assignment:
(b) Legal Name of Assignor:
(c) Legal Name of Assignee:
(d) Effective Date of Assignment:
(e) Commitment of Assignee
after giving effect to this
Assignment and Acceptance as
of the Effective Date $_________________
(f) Commitment of Assignor
after giving effect to this
Assignment and Acceptance as
of the Effective Date $_________________
(g) Commitment Percentage of Assignee
after giving effect to this
Assignment and Acceptance
as of the Effective Date
(set forth to at least 8 decimals) %
(h) Commitment Percentage of Assignor
after giving effect to this
Assignment and Acceptance
as of the Effective Date
(set forth to at least 8 decimals) %
4. This Assignment and Acceptance shall be effective only upon
consent of the Borrower and the Agent, if applicable, delivery to the Agent
of this Assignment and Acceptance together with the transfer fee payable
pursuant to Section 10.3(b) in connection herewith and recordation in the
Register pursuant to Section 10.3(c) of the terms hereof.
5. This Assignment and Acceptance may be executed in any
number of counterparts, each of which where so executed and delivered shall
be an original, but all of which shall constitute one and the same
instrument. It shall not be necessary in making proof of this Assignment
and Acceptance to produce or account for more than one such counterpart.
The terms set forth above
are hereby agreed to:
, as Assignor
By:
Name:
Title:
, as Assignee
By:
Name:
Title:
Notice address of Assignee:
<<Assignee>>
Attn:
Telephone: (___)
Telecopy: (___)
CONSENTED TO:
NATIONSBANK, N.A.,
as Agent
By:
Name:
Title:
AUTOZONE, INC.
By:
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>4
<DESCRIPTION>CREDIT AGREEMENT
<TEXT>
EXHIBIT 10.5
CREDIT AGREEMENT
Dated as of November 13, 1998
among
AUTOZONE, INC.,
as Borrower,
THE SEVERAL LENDERS
FROM TIME TO TIME PARTY HERETO
AND
NATIONSBANK, N.A.,
as Agent
and
SUNTRUST BANK, NASHVILLE, N.A.,
as Documentation Agent
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS 1
1.1 Definitions. 1
1.2 Incorporated Definitions. 5
1.3 Computation of Time Periods. 5
1.4 Accounting Terms. 5
SECTION 2 CREDIT FACILITY 6
2.1 Loans. 6
2.2 [intentionally left blank] 8
2.3 [intentionally left blank] 8
SECTION 3 OTHER PROVISIONS RELATING TO CREDIT FACILITY 8
3.1 Default Rate. 8
3.2 Extension and Conversion. 8
3.3 Prepayments. 9
3.4 Termination, Reduction and Increase of Committed Amount. 9
3.5 Facility Fee. 10
3.6 Capital Adequacy. 10
3.7 Inability To Determine Interest Rate. 11
3.8 Illegality. 11
3.9 Yield Protection. 11
3.10 Withholding Tax Exemption. 12
3.11 Indemnity. 13
3.12 Pro Rata Treatment. 14
3.13 Sharing of Payments. 14
3.14 Payments, Computations, Etc. 15
3.15 Evidence of Debt. 16
3.16 Replacement of Lenders. 17
SECTION 4 CONDITIONS 18
4.1 Closing Conditions. 18
4.2 Conditions to all Extensions of Credit. 18
SECTION 5 REPRESENTATIONS AND WARRANTIES 19
5.1 Organization; Existence; Compliance with Law. 19
5.2 Power; Authorization; Enforceable Obligations. 19
5.3 No Legal Bar. 20
5.4 Governmental Regulations. 20
5.5 Purpose of Loans. 20
5.6 Incorporated Representations and Warranties. 21
SECTION 6 COVENANTS 21
6.1 Use of Proceeds. 21
6.2 Incorporated Covenants. 21
SECTION 7 [intentionally left blank] 22
SECTION 8 EVENTS OF DEFAULT 22
8.1 Events of Default. 22
8.2 Acceleration; Remedies. 24
SECTION 9 AGENCY PROVISIONS 24
9.1 Appointment. 24
9.2 Delegation of Duties. 25
9.3 Exculpatory Provisions. 25
9.4 Reliance on Communications. 25
9.5 Notice of Default. 26
9.6 Non-Reliance on Agent and Other Lenders. 26
9.7 Indemnification. 27
9.8 Agent in its Individual Capacity. 27
9.9 Successor Agent. 27
9.10 Documentation Agent. 28
SECTION 10 MISCELLANEOUS 28
10.1 Notices. 28
10.2 Right of Set-Off. 29
10.3 Benefit of Agreement. 30
10.4 No Waiver; Remedies Cumulative. 32
10.5 Payment of Expenses, etc. 32
10.6 Amendments, Waivers and Consents. 33
10.7 Counterparts. 34
10.8 Headings. 34
10.9 Survival. 34
10.10 Governing Law; Submission to Jurisdiction; Venue. 34
10.11 Severability. 35
10.12 Entirety. 35
10.13 Binding Effect; Termination. 35
10.14 Confidentiality. 36
10.15 Source of Funds. 36
10.16 Conflict. 37
SCHEDULES
Schedule 1.1 Applicable Percentage
Schedule 2.1(a) Lenders
Schedule 2.1(b)(i) Form of Notice of Borrowing
Schedule 2.1(e) Form of Note
Schedule 3.2 Form of Notice of Extension/Conversion
Schedule 6.2 Form of Officer's Compliance Certificate
Schedule 10.3(b) Form of Assignment and Acceptance
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of November 13, 1998 (the "Credit
Agreement"), is by and among AUTOZONE, INC., a Nevada corporation (the
"Borrower"), the several lenders identified on the signature pages hereto
and such other lenders as may from time to time become a party hereto (the
"Lenders"), NATIONSBANK, N.A., as agent for the Lenders (in such capacity,
the "Agent"), and SUNTRUST BANK, NASHVILLE, N.A., as Documentation Agent
(in such capacity, the "Documentation Agent").
W I T N E S S E T H
WHEREAS, the Borrower has requested that the Lenders provide a
$150,000,000 credit facility (as such credit facility may be increased or
decreased pursuant to the terms hereof) for the purposes hereinafter set
forth;
WHEREAS, the Lenders have agreed to make the requested credit
facility available to the Borrower on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 Definitions.
As used in this Credit Agreement, the following terms shall have
the meanings specified below unless the context otherwise requires:
"Agency Services Address" means NationsBank, N.A., NC1-001-15-04,
101 North Tryon Street, Charlotte, North Carolina 28255, Attn: Agency
Services, or such other address as may be identified by written notice from
the Agent to the Borrower.
"Agent" shall have the meaning assigned to such term in the heading
hereof, together with any successors or assigns.
"Applicable Percentage" means, for purposes of calculating the
applicable interest rate for any day for any Loan or the applicable rate of
the Facility Fee for any day for purposes of Section 3.5, the appropriate
applicable percentage set forth on Schedule 1.1 The Applicable Percentages
shall be determined and adjusted on the following dates (each a
"Calculation Date"):
(i) where the Borrower has a senior unsecured
(non-credit enhanced) long term debt rating from both S&P and Moody's, five
(5) Business Days after receipt of notice by the Agent of a change in any
such debt rating, based on such debt ratings;
(ii) where the Borrower previously had a senior
unsecured (non-credit enhanced) long term debt rating from both S&P and
Moody's, but either or both of S&P and Moody's withdraws its rating, five
(5) Business Days after receipt by the Agent of notice of the withdrawal of
such debt rating, based on the information contained in the most recent
annual or quarterly financial statements and related certificates provided
in accordance with Sections 6.1(a) and 6.1(b) of the Incorporated
Covenants; and
(iii) five (5) Business Days after the date by which the
Borrower is required to provide the officer's certificate in accordance
with the provisions of Section 6.1(c) of the Incorporated Covenants.
The Applicable Percentage shall be effective from a Calculation
Date until the next such Calculation Date. The Agent shall determine the
appropriate Applicable Percentages promptly upon receipt of the notices and
information necessary to make such determination and shall promptly notify
the Borrower and the Lenders of any change thereof. Such determinations by
the Agent shall be conclusive absent manifest error. The Applicable
Percentage from Closing Date shall be based on Pricing Level II, subject to
adjustment as provided herein.
"Base Rate Loan" means any Loan bearing interest at a rate
determined by reference to the Base Rate.
"Borrower" means the Person identified as such in the heading
hereof, together with any permitted successors and assigns.
"Calculation Date" has the meaning set forth in the definition of
Applicable Percentage.
"Closing Date" means the date hereof.
"Committed Amount" shall have the meaning assigned to such term in
Section 2.1(a).
"Commitment" means, with respect to each Lender, the commitment of
such Lender in an aggregate principal amount at any time outstanding not to
exceed the amount set forth opposite such Lender's name on Schedule 2.1(a)
(as such amount may be reduced or increased from time to time in accordance
with the provisions of this Credit Agreement), to make Loans in accordance
with the provisions of Section 2.1(a).
"Commitment Percentage" means, for any Lender, the percentage which
such Lender's Commitment then constitutes of the aggregate Committed
Amount.
"Credit Documents" means a collective reference to this Credit
Agreement, the Notes, and all other related agreements and documents issued
or delivered hereunder or thereunder or pursuant hereto or thereto.
"Default" means any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Documentation Agent" shall have the meaning assigned to such term
in the heading hereof, together with any successors or assigns.
"Dollars" and "$" means dollars in lawful currency of the United
States of America.
"Eurodollar Loan" means any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate.
"Event of Default" means such term as defined in Section 8.1.
"Existing Credit Agreement" means that certain Credit Agreement,
dated as of December 20, 1996, as amended through the date hereof, by and
among the Borrower, the lenders parties thereto and NationsBank, NA, as
agent for such lenders.
"Facility Fee" shall have the meaning assigned to such term in
Section 3.5.
"Facility Fee Calculation Period" shall have the meaning assigned
to such term in Section 3.5.
"Financial Officer" means, with respect to the Borrower, the
Treasurer, the Chief Accounting Officer, the General Counsel or the Chief
Financial Officer of the Borrower; provided that the Borrower may designate
additional persons or delete persons so authorized by written notice to the
Agent from at least two existing Financial Officers of the Borrower.
"Interest Payment Date" means (i) as to any Base Rate Loan, the
last day of each March, June, September and December, the date of repayment
of principal of such Loan and the Termination Date and (ii) as to any
Eurodollar Loan, the last day of each Interest Period for such Loan, the
date of repayment of principal of such Loan and on the Termination Date,
and in addition where the applicable Interest Period is more than 3 months,
then also on the date 3 months from the beginning of the Interest Period,
and each 3 months thereafter. If an Interest Payment Date falls on a date
which is not a Business Day, such Interest Payment Date shall be deemed to
be the next succeeding Business Day, except that in the case of Eurodollar
Loans where the next succeeding Business Day falls in the next succeeding
calendar month, then on the next preceding Business Day.
"Interest Period" means as to any Eurodollar Loan, a period of one,
two, three or six month's duration, as the Borrower may elect, commencing
in each case, on the date of the borrowing (including conversions,
extensions and renewals); provided, however, (A) if any Interest Period
would end on a day which is not a Business Day, such Interest Period shall
be extended to the next succeeding Business Day (except that in the case of
Eurodollar Loans where the next succeeding Business Day falls in the next
succeeding calendar month, then on the next preceding Business Day), (B) no
Interest Period shall extend beyond the Termination Date, and (C) in the
case of Eurodollar Loans, where an Interest Period begins on a day for
which there is no numerically corresponding day in the calendar month in
which the Interest Period is to end, such Interest Period shall end on the
last day of such calendar month.
"Lenders" means each of the Persons identified as a "Lender" on the
signature pages hereto, and each Person which may become a Lender by way of
assignment in accordance with the terms hereof, together with their
successors and permitted assigns.
"Lending Installation" means, with respect to a Lender or the
Agent, any office, branch, subsidiary or affiliate of such Lender or the
Agent.
"Loans" shall have the meaning assigned to such term in Section
2.1(a).
"Master Account" means such account as may be identified by written
notice from at least two Financial Officers of the Borrower to the Agent.
"Moody's" means Moody's Investors Service, Inc., or any successor
or assignee of the business of such company in the business of rating
securities.
"NationsBank" means NationsBank, N.A. and its successors.
"Note" means a promissory note of the Borrower in favor of a Lender
delivered pursuant to Section 2.1(e) and evidencing the Loans of such
Lender, as such promissory note may be amended, modified, restated or
replaced from time to time.
"Notice of Borrowing" means a written notice of borrowing in
substantially the form of Schedule 2.1(b)(i), as required by Section
2.1(b)(i).
"Notice of Extension/Conversion" means the written notice of
extension or conversion in substantially the form of Schedule 3.2, as
required by Section 3.2.
"Participation Interest" means, the extension of credit by a Lender
by way of a purchase of a participation or in any Loans as provided in
Section 3.13.
"Pricing Level" means the applicable pricing level for the
Applicable Percentage shown in Schedule 1.1.
"Register" shall have the meaning given such term in Section
10.3(c).
"Required Lenders" means, at any time, Lenders which are then in
compliance with their obligations hereunder (as determined by the Agent)
and holding in the aggregate at least 51% of (i) the Commitment Percentages
or (ii) if the Commitments have been terminated, the outstanding Loans and
Participation Interests.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc., or any successor or assignee of the business of such division
in the business of rating securities.
"Termination Date" means November 13, 1999; provided, however, such
date may be extended with the consent of each of the Lenders.
1.2 Incorporated Definitions.
All capitalized terms not otherwise defined herein shall have the
respective meanings assigned to such terms in the Existing Credit
Agreement, as in effect as of the date hereof (the "Incorporated
Definitions"). The incorporation by reference to the Existing Credit
Agreement of the Incorporated Definitions pursuant to this Section 1.2
shall survive the termination of the Existing Credit Agreement. For
purposes of the incorporation of the Incorporated Definitions pursuant to
this Section 1.2, all references in the Incorporated Definitions to the
"Agent" shall be deemed to refer to the Agent hereunder, all references in
the Incorporated Definitions to a "Lender" or the "Lenders" shall be deemed
to refer to one or more of the Lenders hereunder, all references in the
Incorporated Definitions to the "Required Lenders" shall be deemed to refer
to the Required Lenders hereunder, all references in the Incorporated
Definitions to the "Credit Agreement," or any similar references, shall be
deemed to refer to this Credit Agreement, all references in the
Incorporated Definitions to a "Note" or the "Notes" shall be deemed to
refer to one or more of the Notes issued pursuant to Section 2.1(e) hereof
and all references in the Incorporated Definitions to a "Credit Document"
or the "Credit Documents," or any similar references, shall be deemed to
refer to one or more of the Credit Documents as defined in Section 1.1
hereof.
1.3 Computation of Time Periods.
For purposes of computation of periods of time hereunder, the word
"from" means "from and including" and the words "to" and "until" each mean
"to but excluding."
1.4 Accounting Terms.
Except as otherwise expressly provided herein, all accounting terms
used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered
to the Lenders hereunder shall be prepared, in accordance with GAAP applied
on a consistent basis. All calculations made for the purposes of
determining compliance with this Credit Agreement shall (except as
otherwise expressly provided herein) be made by application of GAAP applied
on a basis consistent with the most recent annual or quarterly financial
statements delivered pursuant to Section 6.1 of the Incorporated Covenants;
provided, however, if (a) the Borrower shall object to determining such
compliance on such basis at the time of delivery of such financial
statements due to any change in GAAP or the rules promulgated with respect
thereto or (b) the Agent or the Required Lenders shall so object in writing
within 30 days after delivery of such financial statements, then such
calculations shall be made on a basis consistent with the most recent
financial statements delivered by the Borrower to the Lenders as to which
no such objection shall have been made.
SECTION 2
CREDIT FACILITY
2.1 Loans.
(a) Commitment. Subject to the terms and conditions
hereof and in reliance upon the representations and warranties set forth
herein, each Lender severally agrees to make available to the Borrower
revolving credit loans requested by the Borrower in Dollars ("Loans") up to
such Lender's Commitment from time to time from the Closing Date until the
Termination Date, or such earlier date as the Commitments shall have been
terminated as provided herein for the purposes hereinafter set forth;
provided, however, that the sum of the aggregate principal amount of
outstanding Loans shall not exceed ONE HUNDRED FIFTY MILLION DOLLARS
($150,000,000.00) (as such aggregate maximum amount may be reduced or
increased from time to time as provided in Section 3.4, the "Committed
Amount"); provided, further, with regard to each Lender individually, such
Lender's outstanding Loans shall not exceed such Lender's Commitment.
Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination
thereof, as the Borrower may request, and may be repaid and reborrowed in
accordance with the provisions hereof; provided, however, that no more than
15 Eurodollar Loans shall be outstanding hereunder at any time. For
purposes hereof, Eurodollar Loans with different Interest Periods shall be
considered as separate Eurodollar Loans, even if they begin on the same
date, although borrowings, extensions and conversions may, in accordance
with the provisions hereof, be combined at the end of existing Interest
Periods to constitute a new Eurodollar Loan with a single Interest Period.
Loans hereunder may be repaid and reborrowed in accordance with the
provisions hereof.
(b) Loan Borrowings.
(i) Notice of Borrowing. The Borrower shall
request a Loan borrowing by written notice (or telephone notice promptly
confirmed in writing) to the Agent not later than 11:30 A.M. (Charlotte,
North Carolina time) on the Business Day of the requested borrowing in the
case of Base Rate Loans, and not later than 2:00 P.M. (Charlotte, North
Carolina time) on the third Business Day prior to the date of the requested
borrowing in the case of Eurodollar Loans. Each such request for borrowing
shall be irrevocable, executed by a Financial Officer of the Borrower and
shall specify (A) that a Loan is requested, (B) the date of the requested
borrowing (which shall be a Business Day), (C) the aggregate principal
amount to be borrowed, and (D) whether the borrowing shall be comprised of
Base Rate Loans, Eurodollar Loans or a combination thereof, and if
Eurodollar Loans are requested, the Interest Period(s) therefor. If the
Borrower shall fail to specify in any such Notice of Borrowing (I) an
applicable Interest Period in the case of a Eurodollar Loan, then such
notice shall be deemed to be a request for an Interest Period of one month,
or (II) the type of Loan requested, then such notice shall be deemed to be
a request for a Base Rate Loan hereunder. The Agent shall give notice to
each affected Lender promptly upon receipt of each Notice of Borrowing
pursuant to this Section 2.1(b)(i), the contents thereof and each such
Lender's share of any borrowing to be made pursuant thereto.
(ii) Minimum Amounts. Each Eurodollar Loan or
Base Rate Loan that is a Loan shall be in a minimum aggregate principal
amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof
(or the remaining amount of the Committed Amount, if less).
(iii) Advances. Each Lender will make its
Commitment Percentage of each Loan borrowing available to the Agent for the
account of the Borrower as specified in Section 3.14(a), or in such other
manner as the Agent may specify in writing, by 1:00 P.M. (Charlotte, North
Carolina time) on the date specified in the applicable Notice of Borrowing
in Dollars and in funds immediately available to the Agent. Such borrowing
will then be made available to the Borrower by the Agent by crediting the
Master Account with the aggregate of the amounts made available to the
Agent by the Lenders and in like funds as received by the Agent.
(c) Repayment. The principal amount of all Loans shall
be due and payable in full on the Termination Date; provided, however, so
long as no Default or Event of Default exists on the Termination Date, if
the Borrower so elects, the principal amount of all Loans as of the
Termination Date shall be paid on the date one year after the Termination
Date.
(d) Interest. Subject to the provisions of Section
3.1,
(i) Base Rate Loans. During such periods as
Loans shall be comprised in whole or in part of Base Rate Loans, such Base
Rate Loans shall bear interest at a per annum rate equal to the Base Rate
plus the Applicable Percentage;
(ii) Eurodollar Loans. During such periods as
Loans shall be comprised in whole or in part of Eurodollar Loans, such
Eurodollar Loans shall bear interest at a per annum rate equal to the
Eurodollar Rate plus the Applicable Percentage.
Interest on Loans shall be payable in arrears on each
applicable Interest Payment Date (or at such other times as may be
specified herein).
(e) Notes. The Loans made by each Lender shall be
evidenced by a duly executed promissory note of the Borrower to such Lender
in an original principal amount equal to such Lender's Commitment and in
substantially the form of Schedule 2.1(e).
2.2 [intentionally left blank]
2.3 [intentionally left blank]
SECTION 3
OTHER PROVISIONS RELATING TO CREDIT FACILITY
3.1 Default Rate.
Upon the occurrence, and during the continuance, o f an Event of
Default, the principal of and, to the extent permitted by law, interest on
the Loans and any other amounts owing hereunder or under the other Credit
Documents shall bear interest, payable on demand, at a per annum rate 2%
greater than the rate which would otherwise be applicable (or if no rate is
applicable, whether in respect of interest, fees or other amounts, then 2%
greater than the Base Rate).
3.2 Extension and Conversion.
Subject to the terms of Section 4.2, the Borrower shall have the
option, on any Business Day, to extend existing Loans into a subsequent
permissible Interest Period or to convert Loans into Loans of another
interest rate type; provided, however, that (a) except as provided in
Section 3.8, Eurodollar Loans may be converted into Base Rate Loans only on
the last day of the Interest Period applicable thereto, (b) Eurodollar
Loans may be extended, and Base Rate Loans may be converted into Eurodollar
Loans, only if no Default or Event of Default is in existence on the date
of extension or conversion, (c) Loans extended as, or converted into,
Eurodollar Loans shall be subject to the terms of the definition of
"Interest Period" set forth in Section 1.1 and shall be in such minimum
amounts as provided in Section 2.1(b)(ii), (d) no more than 15 Eurodollar
Loans shall be outstanding hereunder at any time (it being understood that,
for purposes hereof, Eurodollar Loans with different Interest Periods shall
be considered as separate Eurodollar Loans, even if they begin on the same
date, although borrowings, extensions and conversions may, in accordance
with the provisions hereof, be combined at the end of existing Interest
Periods to constitute a new Eurodollar Loan with a single Interest Period)
and (e) any request for extension or conversion of a Eurodollar Loan which
shall fail to specify an Interest Period shall be deemed to be a request
for an Interest Period of one month. Each such extension or conversion
shall be effected by a Financial Officer of the Borrower giving a Notice
of Extension/Conversion (or telephone notice promptly confirmed in writing)
to the Agent prior to 11:30 A.M. (Charlotte, North Carolina time) on the
Business Day of, in the case of the extension of a Base Rate Loan, and
prior to 2:00 P.M. (Charlotte, North Carolina time) on the third Business
Day prior to, in the case of the extension of a Eurodollar Loan as, or
conversion of a Base Rate Loan into, a Eurodollar Loan, the date of the
proposed extension or conversion, specifying the date of the proposed
extension or conversion, the Loans to be so extended or converted, the
types of Loans into which such Loans are to be converted and, if
appropriate, the applicable Interest Periods with respect thereto. Each
request for extension or conversion shall be irrevocable and shall
constitute a representation and warranty by the Borrower of the matters
specified in subsections (b), (c), (d) and (e) of Section 4.2. In the
event the Borrower fails to request extension or conversion of any
Eurodollar Loan in accordance with this Section, or any such conversion or
extension is not permitted or required by this Section, then such
Eurodollar Loan shall be automatically converted into a Base Rate Loan at
the end of the Interest Period applicable thereto. The Agent shall give
each Lender notice as promptly as practicable of any such proposed
extension or conversion affecting any Loan.
3.3 Prepayments.
(a) Voluntary Prepayments. The Borrower shall have the
right to prepay Loans in whole or in part from time to time, subject to
Section 3.11, but otherwise without premium or penalty; provided, however,
that (i) Eurodollar Loans may only be prepaid on three Business Days' prior
written notice to the Agent and specifying the applicable Loans to be
prepaid; (ii) any prepayment of Eurodollar Loans will be subject to Section
3.11; and (iii) each such partial prepayment of Loans shall be in a minimum
principal amount of $5,000,000 and multiples of $1,000,000 in excess
thereof (or, if less, the full remaining amount of the Loan or being
prepaid). Subject to the foregoing terms, amounts prepaid under this
Section 3.3(a) shall be applied as the Borrower may elect.
(b) Mandatory Prepayments. If at any time, the sum of
the aggregate principal amount of outstanding Loans shall exceed the
Committed Amount, the Borrower promises to prepay immediately the
outstanding principal balance on the Loans in an amount sufficient to
eliminate such excess.
(c) General. All prepayments made pursuant to this
Section 3.3 shall (i) be subject to Section 3.11 and (ii) unless the
Borrower shall specify otherwise, be applied first to Base Rate Loans, if
any, and then to Eurodollar Loans in direct order of Interest Period
maturities. Amount prepaid on the Loans may be reborrowed in accordance
with the provisions hereof.
3.4 Termination, Reduction and Increase of Committed Amount.
(a) Voluntary Reductions. The Borrower may from time
to time permanently reduce or terminate the Committed Amount in whole or in
part (in minimum aggregate amounts of $5,000,000 or in integral multiples
of $1,000,000 in excess thereof (or, if less, the full remaining amount of
the then applicable Committed Amount)) upon five Business Days' prior
written notice to the Agent; provided, however, no such termination or
reduction shall be made which would cause the aggregate principal amount of
outstanding Loans to exceed the Committed Amount unless, concurrently with
such termination or reduction, the Loans are repaid to the extent necessary
to eliminate such excess. The Commitments of the Lenders shall
automatically terminate on the Termination Date. The Agent shall promptly
notify each affected Lender of receipt by the Agent of any notice from the
Borrower pursuant to this Section 3.4(a).
(b) Termination Date. The Commitments of the Lenders
shall automatically terminate on the Termination Date.
3.5 Facility Fee.
In consideration of the Commitments of the Lenders hereunder, the
Borrower agrees to pay to the Agent for the account of each Lender a fee
(the "Facility Fee") on the Committed Amount computed at a per annum rate
for each day during the applicable Facility Fee Calculation Period
(hereinafter defined) at a rate equal to the Applicable Percentage in
effect from time to time. The Facility Fee shall commence to accrue on the
Closing Date and shall be due and payable in arrears on the last business
day of each March, June, September and December (and any date that the
Committed Amount is reduced or increased as provided in Section 3.4 and the
Termination Date) for the immediately preceding quarter (or portion
thereof) (each such quarter or portion thereof for which the Facility Fee
is payable hereunder being herein referred to as a "Facility Fee
Calculation Period"), beginning with the first of such dates to occur after
the Closing Date.
3.6 Capital Adequacy.
If any Lender determines the amount of capital required or
expected to be maintained by such Lender, any Lending Installation of such
Lender or any corporation controlling such Lender is increased as a result
of a Change, then, within 15 days of demand by such Lender, the Borrower
shall pay such Lender the amount necessary to compensate for any shortfall
in the rate of return on the portion of such increased capital which such
Lender determines is attributable to this Credit Agreement, its Loans or
its obligation to make Loans hereunder (after taking into account such
Lender's policies as to capital adequacy). "Change" means (i) any change
after the Closing Date in the Risk-Based Capital Guidelines or (ii) any
adoption of or change in any other law, governmental or quasi-governmental
rule, regulation, policy, guideline, interpretation, or directive (whether
or not having the force of law) after the Closing Date which affects the
amount of capital required or expected to be maintained by any Lender or
any Lending Installation or any corporation controlling any Lender.
"Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines
in effect in the United States on the Closing Date, including transition
rules, and (ii) the corresponding capital regulations promulgated by
regulatory authorities outside the United States implementing the July 1988
report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the Closing Date.
3.7 Inability To Determine Interest Rate.
If prior to the first day of any Interest Period, the Agent shall
have reasonably determined that, by reason of circumstances affecting the
relevant market, adequate and reasonable means do not exist for
ascertaining the Eurodollar Rate for such Interest Period, the Agent shall
give telecopy or telephonic notice thereof to the Borrower and the Lenders
as soon as practicable thereafter. If such notice is given (a) any
Eurodollar Loans requested to be made on the first day of such Interest
Period shall be made as Base Rate Loans and (b) any Loans that were to have
been converted on the first day of such Interest Period to or continued as
Eurodollar Loans shall be converted to or continued as Base Rate Loans.
Until such notice has been withdrawn by the Agent, no further Eurodollar
Loans shall be made or continued as such, nor shall the Borrower have the
right to convert Base Rate Loans to Eurodollar Loans.
3.8 Illegality.
Notwithstanding any other provision herein, if the adoption of or
any change in any Requirement of Law or in the interpretation or
application thereof occurring after the Closing Date shall make it unlawful
for any Lender to make or maintain Eurodollar Loans as contemplated by this
Credit Agreement, (a) such Lender shall promptly give written notice of
such circumstances to the Borrower and the Agent (which notice shall be
withdrawn whenever such circumstances no longer exist), (b) the commitment
of such Lender hereunder to make Eurodollar Loans, continue Eurodollar
Loans as such and convert a Base Rate Loan to Eurodollar Loans shall
forthwith be canceled and, until such time as it shall no longer be
unlawful for such Lender to make or maintain Eurodollar Loans, such Lender
shall then have a commitment only to make a Base Rate Loan when a
Eurodollar Loan is requested and (c) such Lender's Loans then outstanding
as Eurodollar Loans, if any, shall be converted automatically to Base Rate
Loans on the respective last days of the then current Interest Periods with
respect to such Loans or within such earlier period as required by law. If
any such conversion of a Eurodollar Loan occurs on a day which is not the
last day of the then current Interest Period with respect thereto, the
Borrower shall pay to such Lender such amounts, if any, as may be required
pursuant to Section 3.11.
3.9 Yield Protection.
If any law or any governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force
of law) , or any interpretation thereof, or the compliance of any Lender
therewith,
(a) subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on or from payments
due from the Borrower (excluding federal taxation of the overall net income
of any Lender or applicable Lending Installation), or changes the basis of
taxation of payments to any Lender in respect of its Loans or other
amounts due it hereunder;
(b) imposes or increases or deems applicable any
reserve, assessment, insurance charge, special deposit or similar
requirements against assets of, deposits with or for the account of, or
credit extended by, any Lender or any applicable Lending Installation
(other than reserves and assessments taken into account in determining the
Base Rate);
and the result of which is to increase the cost to any Lender of making,
funding or maintaining loans or reduces any amount receivable by any Lender
or any applicable Lending Installation in connection with loans, or
requires any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of loans held or interest
received by it, by an amount deemed material by such Lender;
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an
amount received which such Lender determines is attributable to making,
funding and maintaining its Loans and its Commitments. This covenant shall
survive the termination of this Credit Agreement and the payment of the
Loans and all other amounts payable hereunder.
3.10 Withholding Tax Exemption.
Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(a) (i) on or before the date of any payment by the
Borrower under this Credit Agreement or Notes to such Lender, deliver to
the Borrower and the Agent (A) two (2) duly completed copies of United
States Internal Revenue Service Form 1001 or 4224, or successor applicable
form, as the case may be, certifying that it is entitled to receive
payments under this Credit Agreement and any Notes without deduction or
withholding of any United States federal income taxes and (B) an Internal
Revenue Service Form W-8 or W-9, or successor applicable form, as the case
may be, certifying that it is entitled to an exemption from United States
backup withholding tax;
(ii) deliver to the Borrower and the Agent two
(2) further copies of any such form or certification on or before the date
that any such form or certification expires or becomes obsolete and after
the occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrower; and
(iii) obtain such extensions of time for filing
and complete such forms or certifications as may reasonably be requested by
the Borrower or the Agent; or
(b) in the case of any such Lender that is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code,
(i) represent to the Borrower (for the benefit of the Borrower and the
Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of
the Internal Revenue Code, (ii) agree to furnish to the Borrower on or
before the date of any payment by the Borrower, with a copy to the Agent
two (2) accurate and complete original signed copies of Internal Revenue
Service Form W-8, or successor applicable form certifying to such Lender's
legal entitlement at the date of such certificate to an exemption from U.S.
withholding tax under the provisions of Section 881(c) of the Internal
Revenue Code with respect to payments to be made under this Credit
Agreement and any Notes (and to deliver to the Borrower and the Agent two
(2) further copies of such form on or before the date it expires or becomes
obsolete and after the occurrence of any event requiring a change in the
most recently provided form and, if necessary, obtain any extensions of
time reasonably requested by the Borrower or the Agent for filing and
completing such forms), and (iii) agree, to the extent legally entitled to
do so, upon reasonable request by the Borrower, to provide to the Borrower
(for the benefit of the Borrower and the Agent) such other forms as may be
reasonably required in order to establish the legal entitlement of such
Lender to an exemption from withholding with respect to payments under this
Credit Agreement and any Notes;
unless in any such case any change in treaty, law or regulation has
occurred after the date such Person becomes a Lender hereunder which
renders all such forms inapplicable or which would prevent such Lender from
duly completing and delivering any such form with respect to it and such
Lender so advises the Borrower and the Agent in either case. Each Person
that shall become a Lender or a participant of a Lender pursuant to
subsection 10.3 shall, upon the effectiveness of the related transfer, be
required to provide all of the forms, certifications and statements
required pursuant to this subsection, provided that in the case of a
participant of a Lender the obligations of such participant of a Lender
pursuant to this Section 3.10 shall be determined as if the participant of
a Lender were a Lender except that such participant of a Lender shall
furnish all such required forms, certifications and statements to the
Lender from which the related participation shall have been purchased.
3.11 Indemnity.
The Borrower promises to indemnify each Lender and to hold each
Lender harmless from any loss or expense which such Lender may sustain or
incur (other than through such Lender's gross negligence or willful
misconduct) as a consequence of (a) default by the Borrower in making a
borrowing of, conversion into or continuation of Eurodollar Loans after the
Borrower has given a notice requesting the same in accordance with the
provisions of this Credit Agreement, (b) default by the Borrower in making
any prepayment of a Eurodollar Loan after the Borrower has given a notice
thereof in accordance with the provisions of this Credit Agreement or (c)
the making of a prepayment of Eurodollar Loans on a day which is not the
last day of an Interest Period with respect thereto. With respect to
Eurodollar Loans, such indemnification may include an amount equal to the
excess, if any, of (i) the amount of interest which would have accrued on
the amount so prepaid, or not so borrowed, converted or continued, for the
period from the date of such prepayment or of such failure to borrow,
convert or continue to the last day of the applicable Interest Period (or,
in the case of a failure to borrow, convert or continue, the Interest
Period that would have commenced on the date of such failure) in each case
at the applicable rate of interest for such Eurodollar Loans provided for
herein (excluding, however, the Applicable Percentage included therein, if
any) over (ii) the amount of interest (as reasonably determined by such
Lender) which would have accrued to such Lender on such amount by placing
such amount on deposit for a comparable period with leading banks in the
interbank Eurodollar market. The covenants of the Borrower set forth in
this Section 3.11 shall survive the termination of this Credit Agreement
and the payment of the Loans and all other amounts payable hereunder.
3.12 Pro Rata Treatment.
Except to the extent otherwise provided herein:
(a) Loans. Each Loan, each payment or prepayment of
principal of any Loan, each payment of interest on the Loans, each
reduction of the Committed Amount and each conversion or extension of any
Loan, shall be allocated pro rata among the Lenders in accordance with the
respective principal amounts of their outstanding Loans and Participation
Interests.
(b) Advances. Unless the Agent shall have been
notified in writing by any Lender prior to a borrowing that such Lender
will not make the amount that would constitute its ratable share of such
borrowing available to the Agent, the Agent may assume that such Lender is
making such amount available to the Agent, and the Agent may, in reliance
upon such assumption, make available to the Borrower a corresponding
amount. If such amount is not made available to the Agent by such Lender
within the time period specified therefor hereunder, such Lender shall pay
to the Agent, on demand, such amount with interest thereon at a rate equal
to the Federal Funds Rate for the period until such Lender makes such
amount immediately available to the Agent. A certificate of the Agent
submitted to any Lender with respect to any amounts owing under this
subsection shall be conclusive in the absence of manifest error.
3.13 Sharing of Payments.
The Lenders agree among themselves that, in the event that any
Lender shall obtain payment in respect of any Loan or any other obligation
owing to such Lender under this Credit Agreement through the exercise of a
right of setoff, banker's lien or counterclaim, or pursuant to a secured
claim under Section 506 of Title 11 of the United States Code or other
security or interest arising from, or in lieu of, such secured claim,
received by such Lender under any applicable bankruptcy, insolvency or
other similar law or otherwise, or by any other means, in excess of its pro
rata share of such payment as provided for in this Credit Agreement, such
Lender shall promptly purchase from the other Lenders a participation in
such Loans and other obligations in such amounts, and make such other
adjustments from time to time, as shall be equitable to the end that all
Lenders share such payment in accordance with their respective ratable
shares as provided for in this Credit Agreement. The Lenders further agree
among themselves that if payment to a Lender obtained by such Lender
through the exercise of a right of setoff, banker's lien, counterclaim or
other event as aforesaid shall be rescinded or must otherwise be restored,
each Lender which shall have shared the benefit of such payment shall, by
repurchase of a participation theretofore sold, return its share of that
benefit (together with its share of any accrued interest payable with
respect thereto) to each Lender whose payment shall have been rescinded or
otherwise restored. The Borrower agrees that any Lender so purchasing such
a participation may, to the fullest extent permitted by law, exercise all
rights of payment, including setoff, banker's lien or counterclaim, with
respect to such participation as fully as if such Lender were a holder of
such Loan or other obligation in the amount of such participation. Except
as otherwise expressly provided in this Credit Agreement, if any Lender or
the Agent shall fail to remit to the Agent or any other Lender an amount
payable by such Lender or the Agent to the Agent or such other Lender
pursuant to this Credit Agreement on the date when such amount is due, such
payments shall be made together with interest thereon for each date from
the date such amount is due until the date such amount is paid to the Agent
or such other Lender at a rate per annum equal to the Federal Funds Rate.
If under any applicable bankruptcy, insolvency or other similar law, any
Lender receives a secured claim in lieu of a setoff to which this Section
3.13 applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the
rights of the Lenders under this Section 3.13 to share in the benefits of
any recovery on such secured claim.
3.14 Payments, Computations, Etc.
(a) Except as otherwise specifically provided herein,
all payments hereunder shall be made to the Agent in dollars in immediately
available funds, without offset, deduction, counterclaim or withholding of
any kind, at the Agent's office specified in Schedule 2.1(a) not later than
4:00 P.M. (Charlotte, North Carolina time) on the date when due. Payments
received after such time shall be deemed to have been received on the next
succeeding Business Day. The Agent may (but shall not be obligated to)
debit the amount of any such payment which is not made by such time to any
ordinary deposit account of the Borrower maintained with the Agent (with
notice to the Borrower). The Borrower shall, at the time it makes any
payment under this Credit Agreement, specify to the Agent the Loans, Fees,
interest or other amounts payable by the Borrower hereunder to which such
payment is to be applied (and in the event that it fails so to specify, or
if such application would be inconsistent with the terms hereof, the Agent
shall distribute such payment to the Lenders in such manner as the Agent
may determine to be appropriate in respect of obligations owing by the
Borrower hereunder, subject to the terms of Section 3.12(a)). The Agent
will distribute such payments to such Lenders, if any such payment is
received prior to 12:00 Noon (Charlotte, North Carolina time) on a Business
Day in like funds as received prior to the end of such Business Day and
otherwise the Agent will distribute such payment to such Lenders on the
next succeeding Business Day. Whenever any payment hereunder shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day (subject to accrual
of interest and Fees for the period of such extension), except that in the
case of Eurodollar Loans, if the extension would cause the payment to be
made in the next following calendar month, then such payment shall instead
be made on the next preceding Business Day. Except as expressly provided
otherwise herein, all computations of interest and fees shall be made on
the basis of actual number of days elapsed over a year of 360 days, except
with respect to computation of interest on Base Rate Loans which (unless
the Base Rate is determined by reference to the Federal Funds Rate) shall
be calculated based on a year of 365 or 366 days, as appropriate. Interest
shall accrue from and include the date of borrowing, but exclude the date
of payment.
(b) Allocation of Payments After Event of Default.
Notwithstanding any other provisions of this Credit Agreement to the
contrary, after the occurrence and during the continuance of an Event of
Default, all amounts collected or received by the Agent or any Lender on
account of the Loans, Fees or any other amounts outstanding under any of
the Credit Documents shall be paid over or delivered as follows:
FIRST, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation reasonable
attorneys' fees) of the Agent in connection with enforcing the rights of
the Lenders under the Credit Documents;
SECOND, to payment of any fees owed to the Agent;
THIRD, to the payment of all reasonable
out-of-pocket costs and expenses (including without limitation, reasonable
attorneys' fees) of each of the Lenders in connection with enforcing its
rights under the Credit Documents or otherwise with respect to amounts
owing to such Lender;
FOURTH, to the payment of accrued fees and
interest;
FIFTH, to the payment of the outstanding principal
amount of the Loans;
SIXTH, to all other amounts and other obligations
which shall have become due and payable under the Credit Documents or
otherwise and not repaid pursuant to clauses "FIRST" through "FIFTH" above;
and
SEVENTH, to the payment of the surplus, if any, to
whoever may be lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be
applied in the numerical order provided until exhausted prior to
application to the next succeeding category; and (ii) each of the Lenders
shall receive an amount equal to its pro rata share (based on the
proportion that the then outstanding Loans held by such Lender bears to the
aggregate then outstanding Loans) of amounts available to be applied
pursuant to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above.
3.15 Evidence of Debt.
(a) Each Lender shall maintain an account or accounts
evidencing each Loan made by such Lender to the Borrower from time to time,
including the amounts of principal and interest payable and paid to such
Lender from time to time under this Credit Agreement. Each Lender will
make reasonable efforts to maintain the accuracy of its account or accounts
and to promptly update its account or accounts from time to time, as
necessary.
(b) The Agent shall maintain the Register pursuant to
Section 10.3(c) hereof, and a subaccount for each Lender, in which Register
and subaccounts (taken together) shall be recorded (i) the amount, type and
Interest Period of each such Loan hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable to each
Lender hereunder and (iii) the amount of any sum received by the Agent
hereunder from or for the account of the Borrower and each Lender's share
thereof. The Agent will make reasonable efforts to maintain the accuracy
of the subaccounts referred to in the preceding sentence and to promptly
update such subaccounts from time to time, as necessary.
(c) The entries made in the accounts, Register and
subaccounts maintained pursuant to subsection (b) of this Section 3.15
(and, if consistent with the entries of the Agent, subsection (a)) shall be
prima facie, but not conclusive, evidence of the existence and amounts of
the obligations of the Borrower therein recorded; provided, however, that
the failure of any Lender or the Agent to maintain any such account, such
Register or such subaccount, as applicable, or any error therein, shall not
in any manner affect the obligation of the Borrower to repay the Loans made
by such Lender in accordance with the terms hereof.
3.16 Replacement of Lenders.
In the event any Lender delivers to the Borrower any notice in
accordance with Sections 3.6, 3.8, 3.9 or 3.10, then the Borrower shall
have the right, if no Default or Event of Default then exists, to replace
such Lender (the "Replaced Lender") with one or more additional banks or
financial institutions (collectively, the "Replacement Lender"), provided
that (A) at the time of any replacement pursuant to this Section 3.16, the
Replacement Lender shall enter into one or more assignment agreements
substantially in the form of Schedule 10.3(b) pursuant to, and in
accordance with the terms of, Section 10.3(b) (and with all fees payable
pursuant to said Section 10.3(b) to be paid by the Replacement Lender)
pursuant to which the Replacement Lender shall acquire all of the rights
and obligations of the Replaced Lender hereunder and, in connection
therewith, shall pay to the Replaced Lender in respect thereof an amount
equal to the sum of (a) the principal of, and all accrued interest on, all
outstanding Loans of the Replaced Lender, and (b) all accrued, but
theretofore unpaid, fees owing to the Replaced Lender pursuant to Section
3.5(a), and (B) all obligations of the Borrower owing to the Replaced
Lender (including all obligations, if any, owing pursuant to Section 3.6,
3.8 or 3.9, but excluding those obligations specifically described in
clause (A) above in respect of which the assignment purchase price has
been, or is concurrently being paid) shall be paid in full to such Replaced
Lender concurrently with such replacement.
SECTION 4
CONDITIONS
4.1 Closing Conditions.
The obligation of the Lenders to enter into this Credit Agreement
and to make the initial Loans shall be subject to satisfaction of the
following conditions (in form and substance acceptable to the Lenders):
(a) The Agent shall have received original counterparts
of this Credit Agreement executed by each of the parties hereto;
(b) The Agent shall have received an appropriate
original Note for each Lender, executed by the Borrower; and
(c) The Agent shall have received all documents it may
reasonably request relating to the existence and good standing of the
Borrower, the corporate or other necessary authority for and the validity
of the Credit Documents, and any other matters relevant thereto, all in
form and substance reasonably satisfactory to the Agent;
4.2 Conditions to all Extensions of Credit.
The obligations of each Lender to make, convert or extend any Loan
(including the initial Loans) are subject to satisfaction of the following
conditions in addition to satisfaction on the Closing Date of the
conditions set forth in Section 4.1:
(a) The Borrower shall have delivered, in the case of
any Loan, an appropriate Notice of Borrowing or Notice of
Extension/Conversion;
(b) The representations and warranties set forth in
Section 5 shall be, subject to the limitations set forth therein, true and
correct in all material respects as of such date (except for those which
expressly relate to an earlier date);
(c) There shall not have been commenced against the
Borrower an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or any case, proceeding or
other action for the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Borrower or
for any substantial part of its Property or for the winding up or
liquidation of its affairs, and such involuntary case or other case,
proceeding or other action shall remain undismissed, undischarged or
unbonded;
(d) No Default or Event of Default shall exist and be
continuing either prior to or after giving effect thereto; and
(e) Immediately after giving effect to the making of
such Loan (and the application of the proceeds thereof), the sum of the
aggregate principal amount of outstanding Loans shall not exceed the
Committed Amount.
The delivery of each Notice of Borrowing and each Notice of
Extension/Conversion shall constitute a representation and warranty by the
Borrower of the correctness of the matters specified in subsections (b),
(c), (d) and (e) above.
SECTION 5
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents to the Agent and each Lender that:
5.1 Organization; Existence; Compliance with Law.
Each of the Borrower and its Subsidiaries (a) is duly organized,
validly existing and is in good standing under the laws of the jurisdiction
of its incorporation or organization, (b) has the corporate or other
necessary power and authority, and the legal right, to own and operate its
property, to lease the property it operates as lessee and to conduct the
business in which it is currently engaged, except to the extent that the
failure to have such legal right would not be reasonably expected to have a
Material Adverse Effect, (c) is duly qualified as a foreign entity and in
good standing under the laws of each jurisdiction where its ownership,
lease or operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing would not be reasonably expected to have a
Material Adverse Effect, and (d) is in compliance with all material
Requirements of Law, except to the extent that the failure to comply
therewith would not, in the aggregate, be reasonably expected to have a
Material Adverse Effect.
5.2 Power; Authorization; Enforceable Obligations.
The Borrower has the corporate or other necessary power and
authority, and the legal right, to make, deliver and perform the Credit
Documents to which it is a party, and in the case of the Borrower, to
borrow hereunder, and has taken all necessary corporate action to authorize
the borrowings on the terms and conditions of this Credit Agreement and to
authorize the execution, delivery and performance of the Credit Documents
to which it is a party. No consent or authorization of, filing with,
notice to or other similar act by or in respect of, any Governmental
Authority or any other Person is required to be obtained or made by or on
behalf of the Borrower in connection with the borrowings hereunder or with
the execution, delivery, performance, validity or enforceability of the
Credit Documents to which the Borrower is a party. This Credit Agreement
has been, and each other Credit Document to which the Borrower is a party
will be, duly executed and delivered on behalf of the Borrower. This
Credit Agreement constitutes, and each other Credit Document to which the
Borrower is a party when executed and delivered will constitute, a legal,
valid and binding obligation of the Borrower enforceable against such party
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings
in equity or at law).
5.3 No Legal Bar.
The execution, delivery and performance of the Credit Documents by
the Borrower, the borrowings hereunder and the use of the proceeds thereof
(a) will not violate any Requirement of Law or contractual obligation of
the Borrower or any of its Subsidiaries in any respect that would
reasonably be expected to have a Material Adverse Effect, (b) will not
result in, or require, the creation or imposition of any Lien on any of the
properties or revenues of any of the Borrower or any of its Subsidiaries
pursuant to any such Requirement of Law or contractual obligation, and (c)
will not violate or conflict with any provision of the Borrower's articles
of incorporation or by-laws.
5.4 Governmental Regulations.
No part of the proceeds of the Loans will be used, directly or
indirectly, for the purpose of purchasing or carrying any "margin stock" in
violation of Regulation G or Regulation U. If requested by any Lender or
the Agent, the Borrower will furnish to the Agent and each Lender a
statement to the foregoing effect in conformity with the requirements of FR
Form U-1 referred to in said Regulation U. No indebtedness being reduced
or retired out of the proceeds of the Loans was or will be incurred for the
purpose of purchasing or carrying any margin stock within the meaning of
Regulation U or any "margin security" within the meaning of Regulation T.
"Margin stock" within the meanings of Regulation U does not constitute more
than 25% of the value of the consolidated assets of the Borrower and its
Subsidiaries. None of the transactions contemplated by this Credit
Agreement (including, without limitation, the direct or indirect use of the
proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended, or regulations issued pursuant thereto, or Regulation G, T, U
or X.
5.5 Purpose of Loans.
The proceeds of the Loans hereunder shall be used solely by the
Borrower to (a) repurchase stock in the Borrower, (b) to finance
acquisitions to the extent permitted under this Credit Agreement, (c) to
refinance existing indebtedness to the Lenders and (d) for the working
capital, commercial paper back up, capital expenditures and other lawful
corporate purposes of the Borrower and its Subsidiaries.
5.6 Incorporated Representations and Warranties.
The Borrower hereby agrees that the representations and warranties
contained in Sections 5.1, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11(b)-(e) and
5.12 of the Existing Credit Agreement, as in effect as of the date hereof
(the "Incorporated Representations"), are hereby incorporated by reference
and shall be as binding on the Borrower as if set forth fully herein;
provided, however, Schedule 5.12 of the Incorporated Representations shall
be deleted and replaced with Schedule 5.12 attached hereto. The
incorporation by reference to the Existing Credit Agreement of the
Incorporated Representations pursuant to this Section 5.6 shall survive the
termination of the Existing Credit Agreement. For purposes of the
incorporation of the Incorporated Representations pursuant to this Section
5.6, all references in the Incorporated Representations to the "Agent"
shall be deemed to refer to the Agent hereunder, all references in the
Incorporated Representations to a "Lender" or the "Lender" shall be deemed
to refer to one or more of the Lenders hereunder, all references in the
Incorporated Representations to the "Required Lenders" shall be deemed to
refer to the Required Lenders hereunder, all references in the Incorporated
Representations to the "Credit Agreement," or any similar references, shall
be deemed to refer to this Credit Agreement, all references in the
Incorporated Representations to a "Note" or the "Notes" shall be deemed to
refer to one or more of the Notes issued pursuant to Section 2.1(e) hereof
and all references in the Incorporated Representations to a "Credit
Document" or the "Credit Documents," or any similar references, shall be
deemed to refer to one or more of the Credit Documents as defined in
Section 1.1 hereof.
SECTION 6
COVENANTS
The Borrower hereby covenants and agrees that so long as this
Credit Agreement is in effect or any amounts payable hereunder or under any
other Credit Document shall remain outstanding, and until all of the
Commitments hereunder shall have terminated:
6.1 Use of Proceeds.
The Borrower will use the proceeds of the Loans solely for the
purposes set forth in Section 5.5.
6.2 Incorporated Covenants.
The Borrower hereby agrees that the affirmative and negative
covenants contained in Sections 6.1-6.7, Section 6.9, Section 6.10 and
Section 7 of the Existing Credit Agreement, as in effect as of the date
hereof (the "Incorporated Covenants"), are hereby incorporated by reference
and shall be as binding on the Borrower as if set forth fully herein,
except that, for purposes hereof, Schedule 6.1(c) to the Existing Credit
Agreement referred to in Section 6.1(c) of the Existing Credit Agreement
shall be deemed to refer to Schedule 6.2 attached hereto. The
incorporation by reference to the Existing Credit Agreement of the
Incorporated Covenants pursuant to this Section 6.2 shall survive the
termination of the Existing Credit Agreement. For purposes of the
incorporation of the Incorporated Covenants pursuant to this Section 6.2,
all references in the Incorporated Covenants to the "Agent" shall be deemed
to refer to the Agent hereunder, all references in the Incorporated
Covenants to a "Lender" or the "Lenders" shall be deemed to refer to one or
more of the Lenders hereunder, all references in the Incorporated Covenants
to the "Required Lenders" shall be deemed to refer to the Required Lenders
hereunder, all references in the Incorporated Covenants to the "Credit
Agreement," or any similar reference, shall be deemed to refer to this
Credit Agreement, all references in the Incorporated Covenants to a "Note"
or the "Notes" shall be deemed to refer to one or more of the Notes issued
pursuant to Section 2.1(e) hereof and all references in the Incorporated
Covenants to a "Credit Document" or the "Credit Documents," or any similar
reference, shall be deemed to refer to one or more of the Credit Documents
as defined in Section 1.1 hereof.
SECTION 7
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SECTION 8
EVENTS OF DEFAULT
8.1 Events of Default.
An Event of Default shall exist upon the occurrence of any of the
following specified events (each an "Event of Default"):
(a) Payment. The Borrower shall
(i) default in the payment when due of any
principal of any of the Loans, or
(ii) default, and such defaults shall continue
for five (5) or more Business Days, in the payment when due of any interest
on the Loans, or of any other amounts owing hereunder, under any of the
other Credit Documents or in connection herewith or therewith; or
(b) Representations. Any representation, warranty or
statement made or deemed to be made by the Borrower herein, in any of the
other Credit Documents, or in any statement or certificate delivered or
required to be delivered pursuant hereto or thereto shall prove untrue in
any material respect on the date as of which it was deemed to have been
made; or
(c) Covenants. The Borrower shall
(i) default in the due performance or
observance of any term, covenant or agreement contained in Sections 6.2,
6.10 or 7.1 through 7.3, inclusive, of the Incorporated Covenants, or
(ii) default in the due performance or
observance by it of any term, covenant or agreement (other than those
referred to in subsections (a), (b) or (c)(i) of this Section 8.1)
contained in this Credit Agreement and such default shall continue
unremedied for a period of at least 30 days after the earlier of a
responsible officer of the Borrower becoming aware of such default or
notice thereof by the Agent; or
(d) Incorporated Events of Default. The occurrence of
an "Event of Default" under and as defined in the Existing Credit
Agreement, as in effect as of the date hereof, which "Events of Default"
(the "Incorporated Events of Default"), are hereby incorporated herein by
reference and shall be as binding on the Borrower as if set forth fully
herein, such incorporation by reference to survive termination of the
Existing Credit Agreement. For purposes of the incorporation of the
Incorporated Events of Default pursuant to this Section 8.1(d), all
references in the Incorporated Events of Default to the "Agent" shall be
deemed to refer to the Agent hereunder, all references in the Incorporated
Events of Default to a "Lender" or the "Lenders" shall be deemed to refer
to one or more of the Lenders hereunder, all references in the Incorporated
Events of Default to the "Required Lenders" shall be deemed to refer to the
Required Lenders hereunder, all references in the Incorporated Events of
Default to the "Credit Agreement," or any similar references, shall be
deemed to refer to this Credit Agreement, all references in the
Incorporated Events of Default to a "Note" or the "Notes" shall be deemed
to refer to one or more of the Notes issued pursuant to Section 2.1(e)
hereof and all references in the Incorporated Events of Default to a
"Credit Document" or the "Credit Documents," or any similar references,
shall be deemed to refer to one or more of the Credit Documents as defined
in Section 1.1 hereof.
8.2 Acceleration; Remedies.
Upon the occurrence of an Event of Default, and at any time
thereafter unless and until such Event of Default has been waived by the
Required Lenders or cured to the satisfaction of the Required Lenders
(pursuant to the voting procedures in Section 10.6), the Agent shall, upon
the request and direction of the Required Lenders, by written notice to the
Borrower take any of the following actions:
(a) Termination of Commitments. Declare the
Commitments terminated whereupon the Commitments shall be immediately
terminated.
(b) Acceleration. Declare the unpaid principal of and
any accrued interest in respect of all Loans and any and all other
indebtedness or obligations of any and every kind owing by the Borrower to
the Agent and/or any of the Lenders hereunder to be due whereupon the same
shall be immediately due and payable without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the
Borrower.
(c) Enforcement of Rights. Enforce any and all rights
and interests created and existing under the Credit Documents and all
rights of set-off.
Notwithstanding the foregoing, if an Event of Default specified in
Section 8.1(d) of the Incorporated Events of Default shall occur, then the
Commitments shall automatically terminate and all Loans, all accrued
interest in respect thereof and all and other indebtedness or obligations
owing to the Agent and/or any of the Lenders hereunder automatically shall
immediately become due and payable without the giving of any notice or
other action by the Agent or the Lenders.
SECTION 9
AGENCY PROVISIONS
9.1 Appointment.
Each Lender hereby designates and appoints NationsBank, N.A. as
administrative agent (in such capacity as Agent hereunder, the "Agent") of
such Lender to act as specified herein and the other Credit Documents, and
each such Lender hereby authorizes the Agent as the agent for such Lender,
to take such action on its behalf under the provisions of this Credit
Agreement and the other Credit Documents and to exercise such powers and
perform such duties as are expressly delegated by the terms hereof and of
the other Credit Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the
contrary elsewhere herein and in the other Credit Documents, the Agent
shall not have any duties or responsibilities, except those expressly set
forth herein and therein, or any fiduciary relationship with any Lender,
and no implied covenants, functions, responsibilities, duties, obligations
or liabilities shall be read into this Credit Agreement or any of the other
Credit Documents, or shall otherwise exist against the Agent. The
provisions of this Section are solely for the benefit of the Agent and the
Lenders and the Borrower shall have no rights as a third party beneficiary
of the provisions hereof. In performing its functions and duties under
this Credit Agreement and the other Credit Documents, the Agent shall act
solely as agent of the Lenders and does not assume and shall not be deemed
to have assumed any obligation or relationship of agency or trust with or
for the Borrower or any of its Affiliates.
9.2 Delegation of Duties.
The Agent may execute any of its respective duties hereunder or
under the other Credit Documents by or through agents or attorneys-in-fact
and shall be entitled to advice of counsel concerning all matters
pertaining to such duties; provided that the use of any agents or
attorneys-in-fact shall not relieve the Agent of its duties hereunder.
9.3 Exculpatory Provisions.
The Agent and its officers, directors, employees, agents,
attorneys-in-fact or affiliates shall not be (a) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection herewith or in connection with any of the other Credit Documents
(except for its or such Person's own gross negligence or willful
misconduct), or (b) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Borrower
contained herein or in any of the other Credit Documents or in any
certificate, report, document, financial statement or other written or oral
statement referred to or provided for in, or received by the Agent under or
in connection herewith or in connection with the other Credit Documents, or
enforceability or sufficiency therefor of any of the other Credit
Documents, or for any failure of the Borrower to perform its obligations
hereunder or thereunder. The Agent shall not be responsible to any Lender
for the effectiveness, genuineness, validity, enforceability,
collectability or sufficiency of this Credit Agreement, or any of the other
Credit Documents or for any representations, warranties, recitals or
statements made herein or therein or made by the Borrower in any written or
oral statement or in any financial or other statements, instruments,
reports, certificates or any other documents in connection herewith or
therewith furnished or made by the Agent to the Lenders or by or on behalf
of the Borrower to the Agent or any Lender or be required to ascertain or
inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein
or as to the use of the proceeds of the Loans or of the existence or
possible existence of any Default or Event of Default or to inspect the
properties, books or records of the Borrower or any of its Affiliates.
9.4 Reliance on Communications.
The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or conversation
reasonably believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Borrower, independent accountants and other experts selected by the Agent
with reasonable care). The Agent may deem and treat the Lenders as the
owner of their respective interests hereunder for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have
been filed with the Agent in accordance with Section 10.3(b) hereof. The
Agent shall be fully justified in failing or refusing to take any action
under this Credit Agreement or under any of the other Credit Documents
unless it shall first receive such advice or concurrence of the Required
Lenders as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which
may be incurred by it by reason of taking or continuing to take any such
action. The Agent shall in all cases be fully protected in acting, or in
refraining from acting, hereunder or under any of the other Credit
Documents in accordance with a request of the Required Lenders (or to the
extent specifically provided in Section 10.6, all the Lenders) and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders (including their successors and assigns).
9.5 Notice of Default.
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent
has received notice from a Lender or the Borrower referring to the Credit
Document, describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Agent receives such
a notice, the Agent shall give prompt notice thereof to the Lenders. The
Agent shall take such action with respect to such Default or Event of
Default as shall be reasonably directed by the Required Lenders.
9.6 Non-Reliance on Agent and Other Lenders.
Each Lender expressly acknowledges that each of the Agent and its
officers, directors, employees, agents, attorneys-in-fact or affiliates has
not made any representations or warranties to it and that no act by the
Agent or any affiliate thereof hereinafter taken, including any review of
the affairs of the Borrower or any of its Affiliates, shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without
reliance upon the Agent or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own appraisal of and
investigation into the business, assets, operations, property, financial
and other conditions, prospects and creditworthiness of the Borrower or its
Affiliates and made its own decision to make its Loans hereunder and enter
into this Credit Agreement. Each Lender also represents that it will,
independently and without reliance upon the Agent or any other Lender, and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Credit Agreement, and to make such
investigation as it deems necessary to inform itself as to the business,
assets, operations, property, financial and other conditions, prospects and
creditworthiness of the Borrower and its Affiliates. Except for notices,
reports and other documents expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, assets, property, financial or other
conditions, prospects or creditworthiness of the Borrower or any of its
Affiliates which may come into the possession of the Agent or any of its
officers, directors, employees, agents, attorneys-in-fact or affiliates.
9.7 Indemnification.
The Lenders agree to indemnify the Agent in its capacity as such
(to the extent not reimbursed by the Borrower and without limiting the
obligation of the Borrower to do so), ratably according to their respective
Commitments (or if the Commitments have expired or been terminated, in
accordance with the respective principal amounts of outstanding Loans and
Participation Interests of the Lenders), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind whatsoever which may at
any time (including without limitation at any time following the final
payment of all of the obligations of the Borrower hereunder and under the
other Credit Documents) be imposed on, incurred by or asserted against the
Agent in its capacity as such in any way relating to or arising out of this
Credit Agreement or the other Credit Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing; provided that no Lender
shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the gross negligence or willful
misconduct of the Agent. If any indemnity furnished to the Agent for any
purpose shall, in the opinion of the Agent, be insufficient or become
impaired, the Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional
indemnity is furnished. The agreements in this Section shall survive the
repayment of the Loans and other obligations under the Credit Documents and
the termination of the Commitments hereunder.
9.8 Agent in its Individual Capacity.
The Agent and its affiliates may make loans to, accept deposits
from and generally engage in any kind of business with the Borrower, its
Subsidiaries or their respective Affiliates as though the Agent were not
the Agent hereunder. With respect to the Loans made by and all obligations
of the Borrower hereunder and under the other Credit Documents, the Agent
shall have the same rights and powers under this Credit Agreement as any
Lender and may exercise the same as though it were not the Agent, and the
terms "Lender" and "Lenders" shall include the Agent in its individual
capacity.
9.9 Successor Agent.
The Agent may, at any time, resign upon 20 days' written notice to
the Lenders, and may be removed, upon show of cause, by the Required
Lenders upon 30 days' written notice to the Agent. Upon any such
resignation or removal, the Required Lenders shall have the right to
appoint a successor Agent; provided that, so long as no Default or Event of
Default has occurred and is continuing, such successor Agent shall be
reasonably acceptable to the Borrower. If no successor Agent shall have
been so appointed by the Required Lenders, and shall have accepted such
appointment, within 30 days after the notice of resignation or notice of
removal, as appropriate, then the retiring Agent shall select a successor
Agent provided such successor is a Lender hereunder or a commercial bank
organized under the laws of the United States of America or of any State
thereof and has a combined capital and surplus of at least $400,000,000.
Upon the acceptance of any appointment as Agent hereunder by a successor,
such successor Agent shall thereupon succeed to and become vested with all
the rights, powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations as
Agent, as appropriate, under this Credit Agreement and the other Credit
Documents and the provisions of this Section 9 shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent
under this Credit Agreement.
9.10 Documentation Agent.
The Documentation Agent, in its capacity as such, shall have no
rights, powers, duties or obligations under this Credit Agreement or any of
the other Credit Documents.
SECTION 10
MISCELLANEOUS
10.1 Notices.
Except as otherwise expressly provided herein, all notices and
other communications shall have been duly given and shall be effective (i)
when delivered, (ii) when transmitted and received (by confirmation of
receipt) via telecopy (or other facsimile device) to the number set out
below, (iii) the day following the day on which the same has been delivered
prepaid to a reputable national overnight air courier service, or (iv) the
third Business Day following the day on which the same is sent by certified
or registered mail, postage prepaid, in each case to the respective parties
at the address, in the case of the Borrower and the Agent, set forth below,
and, in the case of the Lenders, set forth on Schedule 2.1(a), or at such
other address as such party may specify by written notice to the other
parties hereto:
if to the Borrower:
AutoZone, Inc.
123 South Front Street
Memphis, TN 38103
Attn: Chief Financial Officer
Telephone: (901) 495-7181
Telecopy: (901) 495-8317
with a copy to the Treasurer and to the General Counsel for
the Borrower at the same address;
if to the Agent:
NationsBank, N.A.
Independence Center, 15th Floor
NC1-001-15-04
101 N. Tryon Street
Charlotte, North Carolina 28255
Attn: Agency Services
Telephone: (704) 388-3917
Telecopy: (704) 386-9923
with a copy to:
NationsBank, N.A.
NationsBank Corporate Center
NC1-007-8-7
100 N. Tryon Street
Attn: Jeb Ball
Telephone: (704) 386-9718
Telecopy: (704) 388-0373
10.2 Right of Set-Off.
In addition to any rights now or hereafter granted under applicable
law , and not by way of limitation of any such rights, upon the occurrence
of an Event of Default, each Lender is authorized at any time and from time
to time, without presentment, demand, protest or other notice of any kind
(all of which rights being hereby expressly waived), to set-off and to
appropriate and apply any and all deposits (general or special) and any
other indebtedness at any time held or owing by such Lender (including,
without limitation branches, agencies or Affiliates of such Lender wherever
located) to or for the credit or the account of the Borrower against
obligations and liabilities of such Person to such Lender hereunder, under
the Notes or the other Credit Documents , irrespective of whether such
Lender shall have made any demand hereunder and although such obligations,
liabilities or claims, or any of them, may be contingent or unmatured, and
any such set-off shall be deemed to have been made immediately upon the
occurrence of an Event of Default even though such charge is made or
entered on the books of such Lender subsequent thereto. Any Person
purchasing a participation in the Loans and Commitments hereunder pursuant
to Section 3.13 or Section 10.3(d) may exercise all rights of set-off with
respect to its participation interest as fully as if such Person were a
Lender hereunder.
10.3 Benefit of Agreement.
(a) Generally. This Credit Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided that the Borrower
may not assign or transfer any of its interests without prior written
consent of the Lenders; provided further that the rights of each Lender to
transfer, assign or grant participations in its rights and/or obligations
hereunder shall be limited as set forth in this Section 10.3, provided
however that nothing herein shall prevent or prohibit any Lender from (i)
pledging its Loans hereunder to a Federal Reserve Bank in support of
borrowings made by such Lender from such Federal Reserve Bank, or (ii)
granting assignments or selling participations in such Lender's Loans
and/or Commitments hereunder to its parent company and/or to any Affiliate
or Subsidiary of such Lender.
(b) Assignments. Each Lender may assign all or a
portion of its rights and obligations hereunder, pursuant to an assignment
agreement substantially in the form of Schedule 10.3(b), to (i) any Lender
or any Affiliate or Subsidiary of a Lender, or (ii) any other commercial
bank, financial institution or "accredited investor" (as defined in
Regulation D of the Securities and Exchange Commission) that, so long as no
Default or Event of Default has occurred and is continuing, is reasonably
acceptable to the Borrower; provided that (i) any such assignment (other
than any assignment to an existing Lender) shall be in a minimum aggregate
amount of $5,000,000 (or, if less, the remaining amount of the Commitment
being assigned by such Lender) of the Commitments and in integral multiples
of $1,000,000 above such amount, (ii) so long as no Event of Default has
occurred and is continuing, no Lender shall assign more than 50% of such
Lender's original Commitment and (iii) each such assignment shall be of a
constant, not varying, percentage of all such Lender's rights and
obligations under this Credit Agreement. Any assignment hereunder shall be
effective upon delivery to the Agent of written notice of the assignment
together with a transfer fee of $3,500 payable to the Agent for its own
account from and after the later of (i) the effective date specified in the
applicable assignment agreement and (ii) the date of recording of such
assignment in the Register pursuant to the terms of subsection (c) below.
The assigning Lender will give prompt notice to the Agent and the Borrower
of any such assignment. Upon the effectiveness of any such assignment (and
after notice to, and (to the extent required pursuant to the terms hereof),
with the consent of, the Borrower as provided herein), the assignee shall
become a "Lender" for all purposes of this Credit Agreement and the other
Credit Documents and, to the extent of such assignment, the assigning
Lender shall be relieved of its obligations hereunder to the extent of the
Loans and Commitment components being assigned. Along such lines the
Borrower agrees that upon notice of any such assignment and surrender of
the appropriate Note or Notes, it will promptly provide to the assigning
Lender and to the assignee separate promissory notes in the amount of their
respective interests substantially in the form of the original Note (but
with notation thereon that it is given in substitution for and replacement
of the original Note or any replacement notes thereof). By executing and
delivering an assignment agreement in accordance with this Section 10.3(b),
the assigning Lender thereunder and the assignee thereunder shall be deemed
to confirm to and agree with each other and the other parties hereto as
follows: (i) such assigning Lender warrants that it is the legal and
beneficial owner of the interest being assigned thereby free and clear of
any adverse claim; (ii) except as set forth in clause (i) above, such
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with this Credit Agreement, any of
the other Credit Documents or any other instrument or document furnished
pursuant hereto or thereto, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Credit Agreement,
any of the other Credit Documents or any other instrument or document
furnished pursuant hereto or thereto or the financial condition of the
Borrower or any of its respective Affiliates or the performance or
observance by the Borrower of any of its obligations under this Credit
Agreement, any of the other Credit Documents or any other instrument or
document furnished pursuant hereto or thereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
assignment agreement; (iv) such assignee confirms that it has received a
copy of this Credit Agreement, the other Credit Documents and such other
documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such assignment agreement; (v)
such assignee will independently and without reliance upon the Agent, such
assigning Lender or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Credit
Agreement and the other Credit Documents; (vi) such assignee appoints and
authorizes the Agent to take such action on its behalf and to exercise such
powers under this Credit Agreement or any other Credit Document as are
delegated to the Agent by the terms hereof or thereof, together with such
powers as are reasonably incidental thereto; and (vii) such assignee agrees
that it will perform in accordance with their terms all the obligations
which by the terms of this Credit Agreement and the other Credit Documents
are required to be performed by it as a Lender.
(c) Maintenance of Register. The Agent shall maintain
at one of its offices in Charlotte, North Carolina (i) a copy of each
Lender assignment agreement delivered to it in accordance with the terms of
subsection (b) above and (ii) a register for the recordation of the
identity of the principal amount, type and Interest Period of each Loan
outstanding hereunder, the names, addresses and the Commitments of the
Lenders pursuant to the terms hereof from time to time (the "Register").
The Agent will make reasonable efforts to maintain the accuracy of the
Register and to promptly update the Register from time to time, as
necessary. The Register shall be prima facie, but not conclusive,
evidence of the information contained therein and the Borrower, the Agent
and the Lenders may treat each Person whose name is recorded in the
Register pursuant to the terms hereof as a Lender hereunder for all
purposes of this Credit Agreement. The Register shall be available for
inspection by the Borrower and each Lender, at any reasonable time and from
time to time upon reasonable prior notice.
(d) Participations. Each Lender may sell, transfer,
grant or assign participations in all or any part of such Lender's
interests and obligations hereunder; provided that (i) such selling Lender
shall remain a "Lender" for all purposes under this Credit Agreement (such
selling Lender's obligations under the Credit Documents remaining
unchanged) and the participant shall not constitute a Lender hereunder,
(ii) no such participant shall have, or be granted, rights to approve any
amendment or waiver relating to this Credit Agreement or the other Credit
Documents except to the extent any such amendment or waiver would (A)
reduce the principal of or rate of interest on or Fees in respect of any
Loans in which the participant is participating or (B) postpone the date
fixed for any payment of principal (including extension of the Termination
Date or the date of any mandatory prepayment), interest or Fees in which
the participant is participating, and (iii) sub-participations by the
participant (except to an affiliate, parent company or affiliate of a
parent company of the participant) shall be prohibited. In the case of any
such participation, the participant shall not have any rights under this
Credit Agreement or the other Credit Documents (the participant's rights
against the selling Lender in respect of such participation to be those set
forth in the participation agreement with such Lender creating such
participation) and all amounts payable by the Borrower hereunder shall be
determined as if such Lender had not sold such participation, provided,
however, that such participant shall be entitled to receive additional
amounts under Sections 3.6, 3.9 and 3.11 on the same basis as if it were a
Lender provided that it shall not be entitled to receive any more than the
selling Lender would have received had it not sold the participation.
10.4 No Waiver; Remedies Cumulative.
No failure or delay on the part of the Agent or any Lender in
exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Agent or any Lender
and the Borrower shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder or under any
other Credit Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder or thereunder.
The rights and remedies provided herein are cumulative and not exclusive of
any rights or remedies which the Agent or any Lender would otherwise have.
No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Agent or the
Lenders to any other or further action in any circumstances without notice
or demand.
10.5 Payment of Expenses, etc.
The Borrower agrees to: (a) pay all reasonable out-of-pocket costs
and expenses (i) of the Agent in connection with the negotiation,
preparation, execution and delivery and administration of this Credit
Agreement and the other Credit Documents and the documents and instruments
referred to therein (including, subject to agreed upon limitations, the
reasonable fees and expenses of Moore & Van Allen, PLLC, special counsel to
the Agent) and any amendment, waiver or consent relating hereto and thereto
including, but not limited to, any such amendments, waivers or consents
resulting from or related to any work-out, renegotiation or restructure
relating to the performance by the Borrower under this Credit Agreement and
(ii) of the Agent and the Lenders in connection with enforcement of the
Credit Documents and the documents and instruments referred to therein
(including, without limitation, in connection with any such enforcement,
the reasonable fees and disbursements of counsel (including allocated costs
of internal counsel) for the Agent and each of the Lenders); (b) pay and
hold each of the Lenders harmless from and against any and all future stamp
and other similar taxes with respect to the foregoing matters and save each
of the Lenders harmless from and against any and all liabilities with
respect to or resulting from any delay or omission (other than to the
extent attributable to such Lender) to pay such taxes; and (c) indemnify
each Lender, its officers, directors, employees, representatives and agents
from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses incurred by any of them as a
result of, or arising out of, or in any way related to, or by reason of (i)
any investigation, litigation or other proceeding (whether or not any
Lender is a party thereto, but excluding any investigation initiated by the
Person seeking indemnification hereunder) related to the entering into
and/or performance of any Credit Document or the use of proceeds of any
Loans (including other extensions of credit) hereunder or the consummation
of any other transactions contemplated in any Credit Document, including,
without limitation, the reasonable fees and disbursements of counsel
(including allocated costs of internal counsel) incurred in connection with
any such investigation, litigation or other proceeding or (ii) the presence
or Release of any Materials of Environmental Concern at, under or from any
Property owned, operated or leased by the Borrower or any of its
Subsidiaries, or the failure by the Borrower or any of its Subsidiaries to
comply with any Environmental Law (but excluding, in the case of either of
clause (i) or (ii) above, any such losses, liabilities, claims, damages or
expenses to the extent (A) incurred by reason of gross negligence or
willful misconduct on the part of the Person to be indemnified, (B) owing
to the Borrower or (C) owing to another Person entitled to indemnification
hereunder).
10.6 Amendments, Waivers and Consents.
Neither this Credit Agreement nor any other Credit Document nor any
of the terms hereof or thereof may be amended, changed, waived, discharged
or terminated unless such amendment, change, waiver, discharge or
termination is in writing entered into by, or approved in writing by, the
Required Lenders and the Borrower, provided, however, that:
(a) no such amendment, change, waiver, discharge or
termination shall, without the consent of each Lender directly affected
thereby, (i) reduce the rate or extend the time of payment of interest
(other than as a result of waiving the applicability of any post-default
increase in interest rates) on any Loan or fees hereunder, (ii) reduce the
rate or extend the time of payment of any fees owing hereunder, (iii)
extend (A) the Commitments of the Lenders, or (B) the final maturity of any
Loan, or any portion thereof, or (iv) reduce the principal amount on any
Loan;
(b) no such amendment, change, waiver, discharge or
termination shall, without the consent of each Lender directly affected
thereby, (i) increase the Commitments of the Lenders over the amount
thereof in effect (it being understood and agreed that a waiver of any
Default or Event of Default shall not constitute a change in the terms of
any Commitment of any Lender), (ii) amend, modify or waive any provision of
this Section 10.6 or Section 3.6, 3.10, 3.11, 3.12, 3.13, 8.1(a), 10.2,
10.3, 10.5 or 10.9, (iii) reduce or increase any percentage specified in,
or otherwise modify, the definition of "Required Lenders," or (iv) consent
to the assignment or transfer by the Borrower of any of its rights and
obligations under (or in respect of) the Credit Documents to which it is a
party;
(c) no provision of Section 9 may be amended without
the consent of the Agent; and
(d) designation of the Master Account or of any
Financial Officer may not be made without the written consent of at least
two Financial Officers of the Borrower.
10.7 Counterparts.
This Credit Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument.
It shall not be necessary in making proof of this Credit Agreement to
produce or account for more than one such counterpart.
10.8 Headings.
The headings of the sections and subsections hereof are provided
for convenience only and shall not in any way affect the meaning or
construction of any provision of this Credit Agreement.
10.9 Survival.
All indemnities set forth herein, including, without limitation, in
Section 3.9, 3.11, 9.7 or 10.5 shall survive the execution and delivery of
this Credit Agreement, the making of the Loans, the repayment of the Loans
and other obligations under the Credit Documents and the termination of the
Commitments hereunder, and all representations and warranties made by the
Borrower herein shall survive delivery of the Notes and the making of the
Loans hereunder.
10.10 Governing Law; Submission to Jurisdiction; Venue.
(a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT
DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND
THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NORTH CAROLINA. Any legal action or
proceeding with respect to this Credit Agreement or any other Credit
Document may be brought in the courts of the State of North Carolina in
Mecklenburg County, or of the United States for the Western District of
North Carolina, and, by execution and delivery of this Credit Agreement,
the Borrower hereby irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the nonexclusive jurisdiction of
such courts. The Borrower further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or
proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid, to it at the address set out for notices pursuant to
Section 10.1, such service to become effective three (3) days after such
mailing. Nothing herein shall affect the right of the Agent to serve
process in any other manner permitted by law or to commence legal
proceedings or to otherwise proceed against the Borrower in any other
jurisdiction.
(b) The Borrower hereby irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any
of the aforesaid actions or proceedings arising out of or in connection
with this Credit Agreement or any other Credit Document brought in the
courts referred to in subsection (a) hereof and hereby further irrevocably
waives and agrees not to plead or claim in any such court that any such
action or proceeding brought in any such court has been brought in an
inconvenient forum.
(c) TO THE EXTENT PERMITTED BY LAW, EACH OF THE AGENT,
THE LENDERS AND THE BORROWER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
10.11 Severability.
If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable
and the remaining provisions shall remain in full force and effect and
shall be construed without giving effect to the illegal, invalid or
unenforceable provisions.
10.12 Entirety.
This Credit Agreement together with the other Credit Documents
represent the entire agreement of the parties hereto and thereto, and
supersede all prior agreements and understandings, oral or written, if any,
including any commitment letters or correspondence relating to the Credit
Documents or the transactions contemplated herein and therein.
10.13 Binding Effect; Termination.
(a) This Credit Agreement shall become effective at
such time on or after the Closing Date when it shall have been executed by
the Borrower and the Agent, and the Agent shall have received copies hereof
(telefaxed or otherwise) which, when taken together, bear the signatures of
each Lender, and thereafter this Credit Agreement shall be binding upon and
inure to the benefit of the Borrower, the Agent and each Lender and their
respective successors and assigns.
(b) The term of this Credit Agreement shall be until no
Loans or any other amounts payable hereunder or under any of the other
Credit Documents shall remain outstanding and until all of the Commitments
hereunder shall have expired or been terminated.
10.14 Confidentiality.
The Agent and the Lenders agree to keep confidential (and to cause
their respective affiliates, officers, directors, employees, agents and
representatives to keep confidential) all information, materials and
documents furnished to the Agent or any such Lender by or on behalf of the
Borrower (whether before or after the Closing Date) which relates to the
Borrower or any of its Subsidiaries (the "Information"). Notwithstanding
the foregoing, the Agent and each Lender shall be permitted to disclose
Information (i) to its affiliates, officers, directors, employees, agents
and representatives in connection with its participation in any of the
transactions evidenced by this Credit Agreement or any other Credit
Documents or the administration of this Credit Agreement or any other
Credit Documents; (ii) to the extent required by applicable laws and
regulations or by any subpoena or similar legal process, or requested by
any Governmental Authority; (iii) to the extent such Information (A)
becomes publicly available other than as a result of a breach of this
Credit Agreement or any agreement entered into pursuant to clause (iv)
below, (B) becomes available to the Agent or such Lender on a
non-confidential basis from a source other than the Borrower or (C) was
available to the Agent or such Lender on a non-confidential basis prior to
its disclosure to the Agent or such Lender by the Borrower; (iv) to any
assignee or participant (or prospective assignee or participant) so long as
such assignee or participant (or prospective assignee or participant) first
specifically agrees in a writing furnished to and for the benefit of the
Borrower to be bound by the terms of this Section 10.14; or (v) to the
extent that the Borrower shall have consented in writing to such
disclosure. Nothing set forth in this Section 10.14 shall obligate the
Agent or any Lender to return any materials furnished by the Borrower.
10.15 Source of Funds.
Each of the Lenders hereby represents and warrants to the Borrower
that at least one of the following statements is an accurate representation
as to the source of funds to be used by such Lender in connection with the
financing hereunder:
(a) no part of such funds constitutes assets allocated
to any separate account maintained by such Lender in which any employee
benefit plan (or its related trust) has any interest;
(b) to the extent that any part of such funds
constitutes assets allocated to any separate account maintained by such
Lender, such Lender has disclosed to the Borrower the name of each employee
benefit plan whose assets in such account exceed 10% of the total assets of
such account as of the date of such purchase (and, for purposes of this
subsection (b), all employee benefit plans maintained by the same employer
or employee organization are deemed to be a single plan);
(c) to the extent that any part of such funds
constitutes assets of an insurance company's general account, such
insurance company has complied with all of the requirements of the
regulations issued under Section 401(c)(1)(A) of ERISA; or
(d) such funds constitute assets of one or more
specific benefit plans which such Lender has identified in writing to the
Borrower.
As used in this Section 10.15, the terms "employee benefit plan" and
"separate account" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
10.16 Conflict.
To the extent that there is a conflict or inconsistency between any
provision hereof, on the one hand, and any provision of any Credit
Document, on the other hand, this Credit Agreement shall control.
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Credit Agreement to be duly executed and delivered as
of the date first above written.
BORROWER: AUTOZONE, INC.
a Nevada corporation
By: /s/ Harry L. Goldsmith
---------------------------
Name: Harry L. Goldsmith
--------------------------
Title: Sr. Vice President
------------------------
By: /s/ Robert J. Hunt
----------------------------
Name: Robert J. Hunt
--------------------------
Title: EVP & CFO
------------------------
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as Agent
By: /s/ John E. Ball
---------------------------
Name: John E. Ball
-------------------------
Title: SVP
------------------------
SUNTRUST BANK, NASHVILLE, N.A.,
individually in its capacity as a
Lender and in its capacity as
Documentation Agent
By: /s/ Bryan W. Ford
----------------------------
Name: Bryan W. Ford
-------------------------
Title: Vice President
-------------------------
FLEET BANK,
as a Lender
By: /s/ Thomas J. Bullard
--------------------------
Name: Thomas J. Bullard
--------------------------
Title: Vice President
------------------------
KEYBANK,
as a Lender
By: /s/ Thomas J. Purcell
---------------------------
Name: Thomas J. Purcell
-------------------------
Title: Vice President
------------------------
NORWEST BANK,
as a Lender
By: /s/ Brad A. Hardy
---------------------------
Name: Brad A. Hardy
--------------------------
Title: Vice-President
------------------------
THE FIRST NATIONAL BANK OF
CHICAGO,
as a Lender
By: /s/ John D. Runger
---------------------------
Name: John D. Runger
------------------------
Title: Managing Director
-----------------------
FIRST UNION NATIONAL BANK,
as a Lender
By: /s/ Orville Kronk
---------------------------
Name: Orville Kronk
-------------------------
Title: VP
------------------------
<PAGE>
SCHEDULE 1.1
APPLICABLE PERCENTAGE
<TABLE>
<CAPTION>
Applicable Percentage Applicable Percentage
Pricing S&P/Moody's Consolidated for for
Level Rating Leverage Ratio Eurodollar Loans Facility Fee
- ------- ----------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Level I AA/Aa2 or above N.A. 12.5 bps. 6.25 bps
Level II A/A2 or above Less than or equal to 15.0 bps. 7.0 bps
0.25:1.00
Level III BBB+/Baa1 or above Greater than 0.25:1.00, 18.5 bps. 9.0 bps
but less than or equal to
0.35:1.00
Level IV BBB/Baa2 or above Greater than 0.35:1.00, 25.0 bps. 12.5 bps
but less than or equal to
0.40:1.00
Level V BBB-/Baa3 Greater than 0.40:1.00 35.0 bps. 15.0 bps
</TABLE>
If no Rating exists, the applicable Pricing Level shall be based on the
Consolidated Leverage Ratio. In the event of a Split Rating, the applicable
Pricing Level shall be based on the higher Rating. In the event of a Double
Split Rating, the applicable Pricing Level shall be based on the Pricing Level
which is one above that corresponding to the lower Rating. If the ratings and
the Consolidated Leverage Ratio indicate different Pricing Levels, the
applicable Pricing Level is the numerically lower of the two, except in the
instance of Pricing Level I where the Consolidated Leverage Ratio shall have no
effect.
As used herein:
"RATING" means the senior unsecured (non-credit enhanced) long term debt
rating of the Borrower, as published by S&P and/or Moody's.
"SPLIT RATING" means the ratings of S&P and Moody's would indicate
different Pricing Levels, but the Pricing Levels are not more than one Pricing
Level apart.
"DOUBLE SPLIT RATING" means the ratings of S&P and Moody's would indicate
different Pricing Levels, but the Pricing Levels are two or more Pricing Levels
apart.
<PAGE>
SCHEDULE 2.1(A)
LENDERS
<TABLE>
<CAPTION>
Commitment
Lender Percentage Commitment
- ------ ---------- ----------
<S> <C> <C>
NationsBank, N.A. 20.0000000% $30,000,000
NationsBank Corporate Center
NC1-007-8-7
Charlotte, NC 28255
Attn: Jeb Ball
Tel: (704) 386-9718
Fax: (704) 388-0373
SunTrust Bank, Nashville, N.A. 16.6666667% $25,000,000
6410 Poplar Avenue
Suite 320
Memphis, TN 38119
Attn: Bryan W. Ford
Tel: (901) 766-7561
Fax: (901) 766-7565
Fleet Bank 16.6666667% $25,000,000
One Federal Street
Mail Stop MA OF 0320
Boston, MA 02110-2010
Attn: Thomas J. Bullard
Tel: (617) 346-0146
Fax:
KeyBank 16.6666667% $25,000,000
525 Vine Street
Cincinnati, OH 45202
Attn: Wayne Guessford
Tel: (513) 762-8204
Fax: (513) 762-8222
Norwest Bank 13.3333333% $20,000,000
P.O. Box 2019
Austin, TX 78768-2019
Attn: Scott Bjelde
Tel: (512) 344-7345
Fax:
The First National Bank of Chicago 10.0000000% $15,000,000
One First National Plaza
Mail Suite 0086
Chicago, IL 60670-0324
Attn: John Runger
Tel: (312) 732-7634
Fax: (312) 732-1117
First Union National Bank 6.6666667% $10,000,000
150 4th Avenue
2nd Floor
Nashville, TN 37219
Attn: Orville Kronk
Tel: (615) 251-0857
Fax: (615) 251-4267
</TABLE>
<PAGE>
SCHEDULE 2.1(B)(I)
FORM OF NOTICE OF BORROWING
NationsBank, N.A.,
as Agent for the Lenders
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Ladies and Gentlemen:
The undersigned, AUTOZONE, INC. (the "BORROWER"), refers to the Credit
Agreement dated as of November 13, 1998 (as amended, modified, extended or
restated from time to time, the "CREDIT AGREEMENT"), among the Borrower, the
Lenders, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A., as
Documentation Agent. Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Credit Agreement.
The Borrower hereby gives notice pursuant to Section 2.1 of the Credit
Agreement that it requests a Loan advance under the Credit Agreement, and in
connection therewith sets forth below the terms on which such Loan advance is
requested to be made:
(A) Date of Borrowing
(which is a Business Day)
(B) Principal Amount of
Borrowing
(C) Interest rate basis
(D) Interest Period and the
last day thereof
In accordance with the requirements of Section 4.2, the Borrower hereby
reaffirms the representations and warranties set forth in the Credit Agreement
as provided in subsection (b) of such Section, and confirms that the matters
referenced in subsections (c), (d) and (e) of such Section, are true and
correct.
Very truly yours,
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
SCHEDULE 2.1(E)
FORM OF NOTE
$_________________ November 13, 1998
FOR VALUE RECEIVED, AUTOZONE, INC., a Nevada corporation (the
"BORROWER"), hereby promises to pay to the order of __________________________,
its successors and assigns (the "LENDER"), at the office of NationsBank, N.A.,
as Agent (the "AGENT"), at 101 N. Tryon Street, Independence Center, NC1-001-
15-04, Charlotte, North Carolina 28255 (or at such other place or places as
the holder hereof may designate), at the times set forth in the Credit
Agreement, dated as of November 13, 1998, among the Borrower, the Lenders, the
Agent and the Documentation Agent (as it may be amended, modified, extended or
restated from time to time, the "CREDIT AGREEMENT"; all capitalized terms not
otherwise defined herein shall have the meanings set forth in the Credit
Agreement), but in no event later than the Termination Date, in Dollars and in
immediately available funds, the principal amount of ________________________
DOLLARS ($____________) or, if less than such principal amount, the aggregate
unpaid principal amount of all Loans made by the Lender to the Borrower
pursuant to the Credit Agreement, and to pay interest from the date hereof on
the unpaid principal amount hereof, in like money, at said office, on the dates
and at the rates selected in accordance with Section 2.1(d) of the Credit
Agreement.
Upon the occurrence and during the continuance of an Event of Default, the
balance outstanding hereunder shall bear interest as provided in Section 3.1 of
the Credit Agreement. Further, in the event the payment of all sums due
hereunder is accelerated under the terms of the Credit Agreement, this Note,
and all other indebtedness of the Borrower to the Lender shall become
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are hereby waived by the Borrower.
In the event this Note is not paid when due at any stated or accelerated
maturity, the Borrower agrees to pay, in addition to the principal and
interest, all costs of collection, including reasonable attorneys' fees.
All borrowings evidenced by this Note and all payments and prepayments of
the principal hereof and interest hereon and the respective dates thereof shall
be endorsed by the holder hereof on SCHEDULE A attached hereto and incorporated
herein by reference, or on a continuation thereof which shall be attached
hereto and made a part hereof; PROVIDED, HOWEVER, that any failure to endorse
such information on such schedule or continuation thereof shall not in any
manner affect the obligation of the Borrower to make payments of principal and
interest in accordance with the terms of this Note.
<PAGE>
This Note and the Loans evidenced hereby may be transferred in whole or in
part only by registration of such transfer on the Register maintained by or on
behalf of the Borrower as provided in Section 10.3(c) of the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed
by its duly authorized officer as of the day and year first above written.
AUTOZONE, INC.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
SCHEDULE A TO THE
NOTE
OF AUTOZONE, INC.
DATED NOVEMBER 13, 1998
Unpaid Name of
Type Principal Person
of Interest Payments Balance Making
Date Loan Period Principal Interest of Note Notation
- ---- ---- ------ --------- -------- -------- --------
<PAGE>
SCHEDULE 3.2
FORM OF NOTICE OF EXTENSION/CONVERSION
NationsBank, N.A.,
as Agent for the Lenders
101 N. Tryon Street
Independence Center, 15th Floor
NC1-001-15-04
Charlotte, North Carolina 28255
Attention: Agency Services
Ladies and Gentlemen:
The undersigned, AutoZone, Inc. (the "BORROWER"), refers to the Credit
Agreement dated as of November 13, 1998 (as amended, modified, extended or
restated from time to time, the "CREDIT AGREEMENT"), among the Borrower, the
Lenders, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A., as
Documentation Agent. Capitalized terms used herein and not otherwise defined
herein shall have the meanings assigned to such terms in the Credit Agreement.
The Borrower hereby gives notice pursuant to Section 3.2 of the Credit
Agreement that it requests an extension or conversion of a Loan outstanding
under the Credit Agreement, and in connection therewith sets forth below the
terms on which such extension or conversion is requested to be made:
(A) Date of Extension or Conversion
(which is the last day of the
the applicable Interest Period)
(B) Principal Amount of
Extension or Conversion
(C) Interest rate basis
(D) Interest Period and the
last day thereof
In accordance with the requirements of Section 4.2, the Borrower hereby
reaffirms the representations and warranties set forth in the Credit Agreement
as provided in subsection (b) of such Section, and confirms that the matters
referenced in subsections (c), (d) and (e) of such Section, are true and
correct.
Very truly yours,
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
SCHEDULE 5.12
LIST OF SUBSIDIARIES
[Chart of corporate structure appears here]
AutoZone, Inc.
AutoZone de Mexico
Service Zone de Mexico
Data Zone de Mexico
AutoZone Management, LP
ADAP, Inc.
Alldata Corporation
AutoZone Stores, Inc.
AutoZone Properties, Inc.
AutoZone Development Corporation
AutoZoners, Inc.
AutoZone Marketing Company
AutoZone Leadership, Inc.
AutoZone Texas, LP
<PAGE>
SCHEDULE 6.2
FORM OF OFFICER'S COMPLIANCE CERTIFICATE
For the fiscal quarter ended _________________, 19___.
I, ______________________, [Title] of AutoZone, Inc. (the "BORROWER")
hereby certify that, to the best of my knowledge and belief, with respect to
that certain Credit Agreement dated as of November 13, 1998 (as amended,
modified, extended or restated from time to time, the "CREDIT AGREEMENT"; all
of the defined terms in the Credit Agreement are incorporated herein by
reference) among the Borrower, the Lenders party thereto, NationsBank, N.A., as
Agent, and SunTrust Bank, Nashville, N.A., as Documentation Agent:
a. The company-prepared financial statements which accompany this
certificate are true and correct in all material respects and have
been prepared in accordance with GAAP applied on a consistent basis,
subject to changes resulting from normal year-end audit adjustments.
b. Since ___________ (the date of the last similar certification, or, if
none, the Closing Date) no Default or Event of Default has occurred
under the Credit Agreement; and
Delivered herewith are detailed calculations demonstrating compliance by the
Borrower with the financial covenant contained in Section 6.10 of the
Incorporated Covenants as of the end of the fiscal period referred to above.
This ______ day of ___________, 19__.
AUTOZONE, INC.
By:
Name:
Title:
<PAGE>
SCHEDULE 10.3(B)
FORM OF ASSIGNMENT AND ACCEPTANCE
THIS ASSIGNMENT AND ACCEPTANCE dated as of _______________, 199_ is
entered into between ________________ ("ASSIGNOR") and ____________________
("ASSIGNEE").
Reference is made to the Credit Agreement dated as of November 13, 1998,
as amended and modified from time to time thereafter (the "CREDIT AGREEMENT")
among AutoZone, Inc., the Lenders party thereto, NationsBank, N.A., as Agent,
and SunTrust Bank, Nashville, N.A., as Documentation Agent. Terms defined in
the Credit Agreement are used herein with the same meanings.
1. The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes from the Assignor,
effective as of the Effective Date set forth below, the interests set forth
below (the "ASSIGNED INTEREST") in the Assignor's rights and obligations under
the Credit Agreement, including, without limitation, the interests set forth
below in the Commitments and outstanding Loans of the Assignor on the effective
date of the assignment designated below (the "EFFECTIVE DATE"), together with
unpaid Fees accrued on the assigned Commitments to the Effective Date and
unpaid interest accrued on the assigned Loans to the Effective Date. Each of
the Assignor and the Assignee hereby makes and agrees to be bound by all the
representations, warranties and agreements set forth in Section 10.3(b) of the
Credit Agreement, a copy of which has been received by the Assignee. From and
after the Effective Date (i) the Assignee, if it is not already a Lender under
the Credit Agreement, shall be a party to and be bound by the provisions of the
Credit Agreement and, to the extent of the interests purchased and assumed by
the Assignee under this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent
of the interests sold and assigned by the Assignor under this Assignment and
Acceptance, relinquish its rights and be released from its obligations under
the Credit Agreement.
2. This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the State of North Carolina.
3. Terms of Assignment
(a) Date of Assignment:
(b) Legal Name of Assignor:
(c) Legal Name of Assignee:
(d) Effective Date of Assignment:
(e) Commitment of Assignee
after giving effect to this
Assignment and Acceptance as
of the Effective Date $_________________
(f) Commitment of Assignor
after giving effect to this
Assignment and Acceptance as
of the Effective Date $_________________
(g) Commitment Percentage of Assignee
after giving effect to this
Assignment and Acceptance
as of the Effective Date
(set forth to at least 8 decimals) %
(h) Commitment Percentage of Assignor
after giving effect to this
Assignment and Acceptance
as of the Effective Date
(set forth to at least 8 decimals) %
4. This Assignment and Acceptance shall be effective only upon consent
of the Borrower and the Agent, if applicable, delivery to the Agent of this
Assignment and Acceptance together with the transfer fee payable pursuant to
Section 10.3(b) in connection herewith and recordation in the Register pursuant
to Section 10.3(c) of the terms hereof.
5. This Assignment and Acceptance may be executed in any number of
counterparts, each of which where so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument. It
shall not be necessary in making proof of this Assignment and Acceptance to
produce or account for more than one such counterpart.
The terms set forth above
are hereby agreed to:
, as Assignor
By:
Name:
Title:
, as Assignee
By:
Name:
Title:
Notice address of Assignee:
<<Assignee>>
Attn:
Telephone: (___)
Telecopy: (___)
CONSENTED TO:
NATIONSBANK, N.A.,
as Agent
By:
Name:
Title:
AUTOZONE, INC.
By:
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>5
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted from
the financial statements for the quarter ended November 21, 1998, and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> NOV-21-1998
<CASH> 7,060
<SECURITIES> 0
<RECEIVABLES> 39,735
<ALLOWANCES> 0
<INVENTORY> 1,004,976
<CURRENT-ASSETS> 1,138,021
<PP&E> 1,941,230
<DEPRECIATION> 366,693
<TOTAL-ASSETS> 2,940,247
<CURRENT-LIABILITIES> 854,383
<BONDS> 350,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,530
<OTHER-SE> 1,302,073
<TOTAL-LIABILITY-AND-EQUITY> 2,940,247
<SALES> 900,949
<TOTAL-REVENUES> 900,949
<CGS> 524,467
<TOTAL-COSTS> 524,467
<OTHER-EXPENSES> 286,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,515
<INCOME-PRETAX> 81,300
<INCOME-TAX> 30,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,300
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| AZO | https://www.sec.gov/Archives/edgar/data/866787/0000866787-99-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000866787-99-000003.txt : 19990331
<SEC-HEADER>0000866787-99-000003.hdr.sgml : 19990331
ACCESSION NUMBER: 0000866787-99-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990213
FILED AS OF DATE: 19990330
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AUTOZONE INC
CENTRAL INDEX KEY: 0000866787
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531]
IRS NUMBER: 621482048
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0828
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10714
FILM NUMBER: 99578748
BUSINESS ADDRESS:
STREET 1: 123 SOUTH FRONT ST
CITY: MEMPHIS
STATE: TN
ZIP: 38103
BUSINESS PHONE: 9014956500
MAIL ADDRESS:
STREET 1: P O BOX 2198
STREET 2: DEPT 8074
CITY: MEMPHIS
STATE: TN
ZIP: 38101-9842
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 13, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to ________.
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1482048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 149,630,668 shares as of March 22, 1999.
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
FEB. 13, AUG. 29,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,320 $ 6,631
Accounts receivable 39,997 42,252
Merchandise inventories 995,825 966,560
Prepaid expenses 29,161 37,532
Deferred income taxes 73,785 61,964
Income tax receivable 2,151
----------- -----------
Total current assets 1,145,088 1,117,090
Property and equipment:
Property and equipment 1,995,700 1,778,485
Less accumulated depreciation and amortization 395,499 350,979
----------- -----------
1,600,201 1,427,506
Other assets:
Cost in excess of net assets acquired 280,844 181,315
Deferred income taxes 52,776 3,510
Other assets 15,423 18,692
----------- -----------
349,043 203,517
----------- -----------
$ 3,094,332 $ 2,748,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 634,917 $ 683,372
Accrued expenses 201,561 176,457
Income taxes payable 8,892
----------- -----------
Total current liabilities 845,370 859,829
Long-term debt 839,427 545,067
Other liabilities 90,281 41,160
Stockholders' equity 1,319,254 1,302,057
----------- -----------
$ 3,094,332 $ 2,748,113
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
--------------------------- ------------------------------
Feb. 13, Feb. 14, Feb. 13, Feb. 14,
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net sales $ 852,538 $ 607,097 $ 1,753,487 $ 1,282,371
Cost of sales, including warehouse
and delivery expenses 499,045 353,416 1,023,512 748,249
Operating, selling, general and
administrative expenses 286,220 195,599 572,887 397,392
-------- -------- ----------- -----------
Operating profit 67,273 58,082 157,088 136,730
Interest expense 10,234 3,028 18,749 5,530
-------- -------- ----------- -----------
Income before income taxes 57,039 55,054 138,339 131,200
Income taxes 21,000 20,700 51,000 49,300
-------- -------- ----------- -----------
Net income $ 36,039 $ 34,354 $ 87,339 $ 81,900
======== ========== =========== ===========
Weighted average shares
for basic earnings per share 149,929 152,061 150,345 151,879
Effect of dilutive stock options 1,740 1,640 1,274 1,883
-------- ---------- ----------- -----------
Adjusted weighted average shares
for diluted earnings per share 151,669 153,701 151,619 153,762
======== ========== =========== ===========
Basic earnings per share $ 0.24 $ 0.23 $ 0.58 $ 0.54
======== ========== =========== ===========
Diluted earnings per share $ 0.24 $ 0.22 $ 0.58 $ 0.53
======== ========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-------------------------------
FEB. 13, FEB. 14,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 87,339 $ 81,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56,675 40,092
Net increase in merchandise inventories (66,374) (10,360)
Net decrease in current liabilities (45,872) (59,134)
Other - net 8,817 (3,639)
-------- ---------
Net cash provided by operating activities 40,585 48,859
Cash flows from investing activities:
Cash outflows for property and equipment, net (265,114) (125,595)
Cash flows from financing activities:
Net proceeds from debt 294,360 65,400
Proceeds from sale of Common Stock,
including related tax benefit 7,340 11,471
Purchase of treasury stock (77,482)
--------- ---------
Net cash provided by financing activities 224,218 76,871
--------- ---------
Net increase/(decrease) in cash and cash equivalents (311) 135
Cash and cash equivalents at beginning of period 6,631 4,668
--------- ---------
Cash and cash equivalents at end of period. $ 6,320 $ 4,803
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the twelve weeks ended
February 13, 1999, are not necessarily indicative of the results that may
be expected for the fiscal year ending August 28, 1999. For further
information, refer to the financial statements and footnotes included in
the Company's annual report on Form 10-K for the year ended August 29,
1998.
NOTE B-INVENTORIES
Inventories are stated at the lower of cost or market using the
last-in, first-out (LIFO) method. An actual valuation of inventory under
the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs.
NOTE C-FINANCING ARRANGEMENTS
The Company's long-term debt as of February 13, 1999 and August 29,
1998 consisted of the following:
FEB. 13, Aug. 29,
1999 1998
-------- --------
6.5% Debentures due $ 200,000 $ 200,000
July 15, 2008
6% Notes due November 1, 2003 150,000
Commercial paper, weighted
average rate of 5% at February
13, 1999, and 5.7% at August 344,850 305,000
29, 1998
Unsecured bank loan,
floating interest
rate averaging 5.3% at February
13, 1999, and 5.8% at August 29,
1998 139,000 34,050
Other 5,577 6,017
------- -------
$ 839,427 $ 545,067
In October 1998, the Company sold $150 million of 6% Notes due
November 2003 at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In
July 1998, the Company sold $200 million of 6.5% Debentures due July 2008
at a discount. Interest on the Debentures is payable semi-annually on
January 15 and July 15 of each year, beginning January 15, 1999.
Proceeds from the Notes and Debentures were used to repay portions of the
Company's long-term variable rate bank debt and for general corporate
purposes.
The Company has a commercial paper program that allows borrowing up
to $500 million. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
2001 and a 364-day $150 million credit facility with another group of
banks. The 364-day facility includes a renewal feature as well as an
option to extinguish the outstanding debt one year from the maturity
date. Borrowings under the commercial paper program reduce availability
under the credit facilities. Outstanding commercial paper and revolver
borrowings at February 13, 1999, are classified as long-term debt as it
is the Company's intention to refinance them on a long-term basis.
Additionally, the Company has a credit facility with a bank for up
to $150 million which extends until May 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 1999. At February 13, 1999 there were no
amounts outstanding under these agreements.
The rate of interest payable under the revolving credit agreements
is a function of the London Interbank Offered Rate (LIBOR) or the lending
bank's base rate (as defined in the agreement) at the option of the
Company. In addition, the $350 million credit facility contains a
competitive bid rate option. All of the revolving credit facilities
contain a covenant limiting the amount of debt the Company may incur
relative to its total capitalization.
NOTE D-STOCKHOLDERS' EQUITY
The Company presents basic and diluted earnings per share (EPS) in
accordance with the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." Basic EPS is computed as net earnings divided by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options.
In October 1998, the Company announced Board approval to repurchase
up to $150 million of common stock in the open market. This is in
addition to the $100 million repurchase approved in January 1998. Since
January 1998, approximately $106 million of common stock has been
repurchased under the plan.
NOTE E-COMPREHENSIVE INCOME
As of August 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is net
income, plus certain other items that are recorded directly to
stockholders' equity, bypassing net income. There are no such items
currently applicable to the Company and therefore comprehensive income
for the periods presented equals net income.
The adoption of this Statement had no effect on the Company's
results of operations or financial position.
NOTE F-BUSINESS COMBINATIONS
The Company continues to assess the fair value of the assets and
liabilities acquired during fiscal 1998. The adjustment, as a result of
this analysis, is as follows (in thousands):
INCREASE/
(DECREASE)
Inventory $ (37,109)
Property and equipment (37,916)
Goodwill 101,677
Other assets (11,201)
Deferred income tax asset 65,387
Current liabilities (33,564)
Other liabilities (47,274)
The purchase price for Chief Auto Parts Inc. has been preliminarily
allocated in the consolidated financial statements and the final
adjustment may differ from the preliminary allocation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED FEBRUARY 13, 1999, COMPARED TO
TWELVE WEEKS ENDED FEBRUARY 14, 1998
Net sales for the twelve weeks ended February 13, 1999 increased by
$245.4 million, or 40.4%, over net sales for the comparable period of
fiscal 1998. This increase was due to a comparable store sales increase
of 8%, and increases in net sales for stores opened or acquired since the
beginning of fiscal 1998. At February 13, 1999, the Company had 2,700
stores in operation compared with 1,824 stores at February 14, 1998.
Gross profit for the twelve weeks ended February 13, 1999, was
$353.5 million, or 41.5% of net sales, compared with $253.7 million, or
41.8% of net sales, during the comparable period for fiscal 1998. The
decrease in the gross profit percentage was due primarily to higher
distribution costs and shrink at acquired stores as they are being
converted to the AutoZone systems and format as well as the acquisition
of TruckPro which operates at a lower gross margin. TruckPro was
acquired in the third quarter of fiscal 1998.
Operating, selling, general and administrative expenses for the
twelve weeks ended February 13, 1999 increased by $90.6 million over such
expenses for the comparable period for fiscal 1998, and increased as a
percentage of net sales from 32.2% to 33.6%. The increase in the expense
ratio was due primarily to higher payroll and occupancy costs,
principally in recently acquired stores, and acquisition integration
activities.
Interest expense for the twelve weeks ended February 13, 1999 was
$10.2 million compared with $3.0 million during the comparable period of
1998. The increase in interest expense was primarily due to higher
levels of borrowings as a result of the acquisitions and stock
repurchases.
The Company's effective income tax rate was 36.8% of pre-tax income
for the twelve weeks ended February 13, 1999 and 37.6% for the twelve
weeks ended February 14, 1998.
TWENTY-FOUR WEEKS ENDED FEBRUARY 13, 1999, COMPARED TO
TWENTY-FOUR WEEKS ENDED FEBRUARY 14, 1998
Net sales for the twenty-four weeks ended February 13, 1999,
increased by $471.1 million, or 36.7%, over net sales for the comparable
period of fiscal 1998. This increase was due to a comparable store sales
increase of 5%, and increases in net sales for stores opened or acquired
since the beginning of fiscal 1998.
Gross profit for the twenty-four weeks ended February 13, 1999, was
$730.0 million, or 41.6% of net sales, compared with $534.1 million, or
41.7% of net sales, during the comparable period for fiscal 1998. The
decrease in the gross profit percentage was due primarily to acquisition
integration costs and lower gross margins in the truck parts business.
Operating, selling, general and administrative expenses for the
twenty-four weeks ended February 13, 1999 increased by $175.5 million
over such expenses for the comparable period for fiscal 1998, and
increased as a percentage of net sales from 31.0% to 32.7%. The increase
in the expense ratio was due primarily to integration costs associated
with acquisitions.
The Company's effective income tax rate was 36.9% of pre-tax income
for the twenty-four weeks ended February 13, 1999 and 37.6% for the
twenty-four weeks ended February 14, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-four weeks ended February 13, 1999, net cash of $40.6
million was provided by the Company's operations versus $48.9 million for
the comparable period of fiscal year 1998. The comparative decrease in
cash provided by operations is due primarily to working capital
requirements in acquired businesses.
Capital expenditures for the twenty-four weeks ended February 13,
1999 were $265.1 million, including approximately $108 million for
acquisition of real estate for 100 Express auto parts stores from Pep
Boys. The Company anticipates that capital expenditures for fiscal 1999
will be approximately $425 million. Year to date, the Company opened 170
gross new AutoZone stores, including 54 former Pep Boys Express stores.
Additionally, the Company replaced 25 stores and closed 102 auto parts
stores in conjunction with its acquisition integration activities. The
Company expects to operate between 2,700 and 2,800 auto parts stores at
the end of the fiscal year.
The Company anticipates that it will continue to generate
significant operating cash flow. The Company foresees no difficulty in
obtaining long-term financing in view of its credit rating and favorable
experiences in the debt market in the past.
In October 1998, the Company sold $150 million of 6% Notes due
November 1, 2003, at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In
July 1998, the Company sold $200 million of 6.5% Debentures due July 15,
2008, at a discount. Interest on the Debentures is payable semi-annually
on January 15 and July 15 of each year, beginning January 15, 1999.
Proceeds from the Notes and Debentures were used to repay portions of the
Company's long-term variable rate bank debt and for general corporate
purposes.
The Company has a commercial paper program that allows borrowing up
to $500 million. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
December 2001 and a 364-day $150 million credit facility with another
group of banks. The 364-day facility includes a renewal feature as well
as an option to extinguish the outstanding debt one year from the
maturity date. Borrowings under the commercial paper program reduce
availability under the credit facilities. Outstanding commercial paper
and revolver borrowings at February 13, 1999, of $483.9 million are
classified as long-term debt as it is the Company's intention to
refinance them on a long-term basis.
Additionally, the Company has a credit facility with a bank for up
to $150 million which extends until May 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 1999. At February 13, 1999 there were no
amounts outstanding under these agreements.
Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use." The
Company adopted this SOP beginning August 30, 1998. The SOP will require
the capitalization of certain costs incurred in connection with
developing or obtaining software for internal-use. The adoption of SOP
98-1 is not anticipated to have a material impact on the Company's
results of operations or financial position.
YEAR 2000 READINESS DISCLOSURE
The Company began addressing the Year 2000 issue in June 1996 and
implemented a formal Year 2000 project office in May 1997. As of
February 13, 1999, the Company anticipates completing the conversion and
testing of all known programs by July 31, 1999.
The total estimated cost of the Year 2000 project is $12 million,
which is being expensed as incurred. All of the related costs are being
funded through operating cash flows. These costs are an immaterial part
of the overall information technology budget. No major information
technology projects or programs have been deferred.
In addition to internal activities, the Company is addressing Year
2000 issues which do not normally fall under information technology such
as embedded chip equipment and the compliance status of business
partners. Although the Company believes that the ongoing assessment and
testing will minimize the Company's risks, there is no guarantee that
there will not be an adverse effect on the Company if third parties, such
as merchandise vendors, service providers, or utility companies, are not
Year 2000 compliant.
Although the Company does not anticipate any major business
disruptions as a result of Year 2000 issues, it is possible that certain
disruptions may occur including loss of communications with stores,
distribution centers, or business partners, inability to process
transactions in a timely manner or loss of power. The Company is
currently developing contingency plans which should be finalized by July
31, 1999. Elements of the Company's contingency plans may include:
switching vendors, implementing back-up systems or manual processes, and
the stockpiling of certain products prior to the Year 2000.
The cost of conversion and the completion date are based on
management's best estimates and may be updated as additional information
becomes available.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
are forward-looking statements. These statements discuss, among other
things, expected growth, domestic and international development and
expansion strategy, and future performance. The forward-looking
statements are subject to risks, uncertainties and assumptions including,
without limitation, competition, product demand, domestic and
international economies, government approvals, inflation, the ability to
hire and retain qualified employees, the ability to convert acquired
stores in a profitable and timely manner, consumer debt levels and the
weather. Actual results may materially differ from anticipated results.
Please refer to the Risk Factors section in the Annual Report on Form 10-
K for fiscal year ended August 29, 1998, for more details.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on December 17, 1998.
(b) Not applicable.
(c) 1. Election of Directors. All nominees for director were elected
pursuant to the following vote:
NOMINEE VOTES FOR VOTES WITHHELD
------- ----------- --------------
Johnston C. Adams, Jr. 131,421,369 1,853,614
Andrew M. Clarkson 131,370,458 1,904,525
N. Gerry House 130,986,603 2,288,380
Robert J. Hunt 131,414,610 1,860,373
J.R. Hyde, III 131,370,992 1,903,991
James F. Keegan 131,337,719 1,937,264
Michael W. Michelson 131,348,241 1,926,742
Ronald A. Terry 131,360,113 1,914,870
Timothy D. Vargo 131,420,042 1,854,941
2. Approval of the amendment to the Amended and Restated 1996
Stock Option Plan: 107,103,729 votes in favor, 25,807,388 votes
against, and 363,866 shares abstained from voting.
3. Approval of Ernst & Young LLP as independent auditors:
132,993,467 votes in favor, 38,429 votes against, and 243,087
shares abstained from voting.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
3.1 Restated Articles of Incorporation of AutoZone, Inc.
3.2 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year
ended August 29, 1998.
27.1 Financial Data Schedule (SEC Use Only).
(b) AutoZone, Inc., did not file any reports on Form 8-K during the
fiscal quarter ended February 13, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AUTOZONE, INC.
By: /s/ Robert J. Hunt
-------------------------------
Robert J. Hunt
Executive Vice President and
Chief Financial Officer-Customer Satisfaction
(Principal Financial Officer)
By: /s/ William C. Rhodes, III
-------------------------------
William C. Rhodes, III
Vice President, Finance-Customer Satisfaction
(Chief Accounting Officer)
Dated: March 30, 1999
<PAGE>
EXHIBIT INDEX
3.1 Restated Articles of Incorporation of AutoZone, Inc.
3.2 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year
ended August 29, 1998.
27.1 Financial Data Schedule (SEC Use Only).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>2
<DESCRIPTION>RESTATED ARTICLES OF INCORPORATION
<TEXT>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
AUTOZONE, INC.
Pursuant to the provisions of Section 78.403 of the Nevada Revised
Statutes, the undersigned Corporation adopts the following Restated
Articles of Incorporation:
ARTICLE I
NAME
The name of the corporation shall be AutoZone, Inc.
ARTICLE II
CAPITAL STOCK
Section 1. AUTHORIZED SHARES. The aggregate number of shares which
the Corporation shall have authority to issue is Two Hundred One Million
(201,000,000) shares consisting of Two Hundred Million (200,000,000) shares
of common stock, par value $0.01 per share and One Million (1,000,000)
shares of preferred stock, $0.01 par value.
Section 2. CONSIDERATION FOR SHARES. The common stock authorized by
Section 1 of this Article shall be issued for such consideration as shall
be fixed, from time to time, by the Board of Directors.
Section 3. ASSESSMENT OF STOCK. The capital stock of this
Corporation, after the amount of the subscription price has been fully paid
in, shall not be assessable for any purpose, and no stock issued as fully
paid shall ever be assessable or assessed. No stockholder of the
Corporation is individually liable for the debts or liabilities of the
Corporation.
Section 4. ISSUANCE AND RIGHTS OF PREFERRED SHARES. The shares of
preferred stock may be issued and reissued from time to time in one or more
series. The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption (including sinking fund provisions), the redemption
price or prices, the liquidation preference, and any other rights,
preferences, privileges, attributes or other matters which may be reserved
to the Board of Directors by law, of any wholly-unissued series of
preferred stock, and the number of shares constituting any such series and
the designation thereof; and to increase the number of shares of any series
at any time. In case the outstanding shares of any series shall be
reacquired or shall not be issued, such shares may be designated or
redesignated and altered, and issued or reissued, hereunder, by action of
the Board of Directors.
Section 5. CUMULATIVE VOTING FOR DIRECTORS. No stockholder of the
Corporation shall be entitled to cumulative voting of his or her shares for
election of director.
Section 6. PREEMPTIVE RIGHTS. No stockholder of the Corporation
shall have any preemptive rights.
ARTICLE III
DIRECTORS AND OFFICERS
Section 1. NUMBER OF DIRECTORS. The members of the governing board
of the Corporation are styled as directors. The number of directors may be
changed from time to time in such manner as shall be provided in the bylaws
of the Corporation.
Section 2. LIMITATION OF PERSONAL LIABILITY. No director or officer
of the Corporation shall be personally liable to the Corporation or its
stockholders for damages for breach of fiduciary duty as a director or
officer; provided, however, that the foregoing provision does not eliminate
or limit the liability of a director or officer of the Corporation for:
(a) acts or omissions which involve intentional misconduct, fraud or
a knowing violation of law; or
(b) the payment of distributions in violation of Nevada Revised
Statutes 78.300.
Section 3. REPEAL AND CONFLICTS. Any repeal or modification of
Section 2 above approved by the stockholders of the Corporation shall be
prospective only. In the event of any conflict between Section 2 of this
Article and any other Article of the Corporation's Articles of
Incorporation, the terms and provisions of this Article shall control.
ARTICLE IV
BY-LAWS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, repeal,
alter, amend or rescind the By-Laws of the Corporation.
ARTICLE V
ARTICLES
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in these Articles of Incorporation, in the manner
now or hereinafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted from
the financial statements for the quarter ended February 13, 1999, and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> FEB-13-1999
<CASH> 6,320
<SECURITIES> 0
<RECEIVABLES> 39,997
<ALLOWANCES> 0
<INVENTORY> 995,825
<CURRENT-ASSETS> 1,145,088
<PP&E> 1,995,700
<DEPRECIATION> 395,499
<TOTAL-ASSETS> 3,094,332
<CURRENT-LIABILITIES> 845,370
<BONDS> 350,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,503
<OTHER-SE> 1,317,751
<TOTAL-LIABILITY-AND-EQUITY> 3,094,332
<SALES> 1,753,487
<TOTAL-REVENUES> 1,753,487
<CGS> 1,023,512
<TOTAL-COSTS> 1,023,512
<OTHER-EXPENSES> 572,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,749
<INCOME-PRETAX> 138,339
<INCOME-TAX> 51,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,339
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| BDX | https://www.sec.gov/Archives/edgar/data/10795/0000950130-99-000655.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950130-99-000655.txt : 19990210
<SEC-HEADER>0000950130-99-000655.hdr.sgml : 19990210
ACCESSION NUMBER: 0000950130-99-000655
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990209
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BECTON DICKINSON & CO
CENTRAL INDEX KEY: 0000010795
STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841]
IRS NUMBER: 220760120
STATE OF INCORPORATION: NJ
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04802
FILM NUMBER: 99525182
BUSINESS ADDRESS:
STREET 1: ONE BECTON DR
CITY: FRANKLIN LAKES
STATE: NJ
ZIP: 07417-1880
BUSINESS PHONE: 2018476800
MAIL ADDRESS:
STREET 1: ONE BECTON DR
CITY: FRANKLIN LAKE
STATE: NJ
ZIP: 07417
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
-------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________________ to _____________.
Commission file number 001-4802
----------
Becton, Dickinson and Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-0760120
- ------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Becton Drive Franklin Lakes, New Jersey 07417-1880
---------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 847-6800
--------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class of Common Stock Shares Outstanding as of January 31, 1999
--------------------- -----------------------------------------
Common stock, par value $1.00 249,001,824
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
---------------------
Condensed Consolidated Balance Sheets at December 31, 1998 and
September 30, 1998
Condensed Consolidated Statements of Income for the three months ended
December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Thousands of Dollars
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1998 1998
- ------ ------------ -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and equivalents $ 128,578 $ 83,251
Short-term investments 1,635 7,390
Trade receivables, net 677,663 726,558
Inventories (Note 2):
Materials 132,191 122,232
Work in process 90,392 86,239
Finished products 369,638 328,320
------------ -------------
592,221 536,791
Prepaid expenses, deferred taxes and other 189,820 188,772
------------ ------------
Total Current Assets 1,589,917 1,542,762
Property, plant and equipment 2,781,625 2,727,023
Less allowances for depreciation and amortization 1,463,699 1,424,373
------------ ------------
1,317,926 1,302,650
Goodwill, Net 437,935 412,070
Other Intangibles, Net 335,987 334,275
Other 253,466 254,281
------------ ------------
Total Assets $ 3,935,231 $ 3,846,038
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-term debt $ 464,955 $ 385,162
Payables and accrued expenses 656,617 706,751
------------ ------------
Total Current Liabilities 1,121,572 1,091,913
Long-Term Debt 761,547 765,176
Long-Term Employee Benefit Obligations 337,450 326,620
Deferred Income Taxes and Other 47,940 48,509
Commitments and Contingencies - -
Shareholders' Equity:
Preferred stock 48,638 48,959
Common stock 332,662 332,662
Capital in excess of par value 8,989 -
Retained earnings 2,405,212 2,350,781
Unearned ESOP compensation (24,640) (24,463)
Deferred compensation 4,970 4,903
Shares in treasury - at cost (1,012,278) (1,015,806)
Accumulated other comprehensive income (96,831) (83,216)
------------ ------------
Total Shareholders' Equity 1,666,722 1,613,820
------------ ------------
Total Liabilities and Shareholders' Equity $ 3,935,231 $ 3,846,038
============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Thousands of Dollars, Except Per-share Data
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Revenues $ 768,966 $ 701,640
Cost of products sold 385,710 354,803
Selling and administrative 223,116 199,140
Research and development 49,310 44,630
----------------- -----------------
Total Operating Costs and Expenses 658,136 598,573
----------------- -----------------
Operating Income 110,830 103,067
Interest expense, net (17,871) (10,241)
Other income (expense), net 1,025 (2,233)
----------------- -----------------
Income Before Income Taxes 93,984 90,593
Income tax provision 17,826 26,272
----------------- -----------------
Net Income $ 76,158 $ 64,321
================= =================
Earnings Per Share:
- ------------------
Basic $ .30 $ .26
================= =================
Diluted $ .29 $ .25
================= =================
Dividends Per Common Share $ .085 $ .0725
================= =================
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
BECTON, DICKINSON AND COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Dollars
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Operating Activities:
- ---------------------
Net income $ 76,158 $ 64,321
Adjustments to Net Income to Derive Net Cash
Provided by Operating Activities:
Depreciation and amortization 62,688 52,977
Change in working capital (67,321) 34,043
Other, net 15,340 12,638
------------ ------------
Net Cash Provided by Operating Activities 86,865 163,979
------------ ------------
Investing Activities:
- ---------------------
Capital expenditures (61,778) (43,998)
Acquisitions of businesses, net of cash acquired (41,706) (39,525)
Change in investments, net 2,895 7,133
Other, net (15,195) (12,610)
------------ ------------
Net Cash Used for Investing Activities (115,784) (89,000)
------------ ------------
Financing Activities:
- ---------------------
Change in short-term debt 75,199 (30,207)
Proceeds of long-term debt 185 -
Payments of long-term debt (4,903) (407)
Issuance of common stock 5,701 5,987
Repurchase of common stock - (42,745)
Dividends paid - (687)
------------ ------------
Net Cash Provided by(Used for) Financing Activities 76,182 (68,059)
------------ ------------
Effect of exchange rate changes on cash and equivalents (1,936) (1,082)
------------ ------------
Net increase in cash and equivalents 45,327 5,838
Opening Cash and Equivalents 83,251 112,639
------------ ------------
Closing Cash and Equivalents $ 128,578 $ 118,477
============ ============
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
BECTON, DICKINSON AND COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Per-share Data
December 31, 1998
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, in the opinion of
the management of the Company, include all adjustments which are of a normal
recurring nature, necessary for a fair presentation of financial position and
the results of operations and cash flows for the periods presented. However,
the financial statements do not include all information and footnotes required
for a presentation in accordance with generally accepted accounting principles.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included or
incorporated by reference in the Company's 1998 Annual Report on Form 10-K. The
results of operations for the interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
Note 2 - Inventory Valuation
- ----------------------------
An actual valuation of inventory under the LIFO method can be made only at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs.
Note 3 Comprehensive Income
- ----------------------------
In the quarter ended December 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which specifies the reporting requirements for
comprehensive income and its components. Comprehensive income for the Company
consists of net income and other comprehensive income, which includes foreign
currency translation adjustments and the net change in unrealized gains and
losses on investments classified as available-for-sale. Total comprehensive
income for the three months ended December 31, 1998 and 1997 was $62,543 and
$48,241, respectively.
In accordance with this Statement, accumulated other comprehensive income has
been reported as a separate component of shareholders' equity in the current
quarter. Prior year information has been reclassified to conform to current
year presentation. The adoption of SFAS No. 130 had no effect on the Company's
reported results of operations, financial condition or cash flows.
6
<PAGE>
Note 4 - Earnings per Share
- ---------------------------
The following table sets forth the computations of basic and diluted earnings
per share, restated to reflect the 1998 two-for-one stock split:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 76,158 $ 64,321
Preferred stock dividends (790) (825)
-------- --------
Income available to
common shareholders (A) 75,368 63,496
Preferred stock dividends - using
"if converted" method 790 825
Additional ESOP contribution -
using "if converted" method (202) (252)
-------- --------
Income available to common
shareholders after assumed conversions (B) $ 75,956 $ 64,069
======== ========
Average common shares outstanding (C) 248,320 243,624
Dilutive stock equivalents from stock plans 11,823 7,466
Shares issuable upon conversion of
preferred stock 5,276 5,484
-------- --------
Average common and common equivalent
shares outstanding - assuming dilution (D) 265,419 256,574
======== ========
Basic earnings per share (A/C) $ .30 $ .26
======== ========
Diluted earnings per share (B/D) $ .29 $ .25
======== ========
</TABLE>
Note 5 - Contingencies
- ----------------------
The Company is involved, both as a plaintiff and a defendant, in various legal
proceedings which arise in the ordinary course of business, including product
liability and environmental matters. In the opinion of the Company, the results
of these matters, individually and in the aggregate, are not expected to have a
material impact on its results of operations, financial condition or cash flows.
The Company has developed a Company-wide Year 2000 plan (the "Plan") to, among
other things, prepare its computer equipment and software and devices with date-
sensitive embedded technology for the year 2000. The estimated costs of the
Company's Plan and the dates by which
7
<PAGE>
the Company believes it will have completed each phase of the Plan, are based
upon management's best estimates, which rely upon numerous assumptions regarding
future events, including the continued availability of certain resources, third-
party remediation plans, and other factors. These estimates, however, may prove
not to be accurate, and actual results could differ materially from those
anticipated. Factors that could result in material differences include, without
limitation, the availability and cost of personnel with appropriate training and
experience, the ability to identify, assess, remediate and test all relevant
computer codes and embedded technology, and similar uncertainties. In addition,
Year 2000-related issues may lead to possible third-party claims, the impact of
which cannot yet be estimated. No assurance can be given that the aggregate cost
of defending and resolving such claims, if any, would not have a material
adverse effect on the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
- ---------------------
First quarter revenues of $769 million exceeded prior year revenues by 10%.
Revenue growth for the quarter was unfavorably affected by the strengthened
dollar versus the prior year, which reduced revenues by an estimated $4 million.
Medical Supplies and Devices segment ("Medical") revenues of $425 million
increased 14%, and Diagnostic Systems segment ("Diagnostic") revenues of $344
million increased 4%.
Domestic Medical revenues of $193 million decreased 4%. This growth rate was
unfavorably affected by a decrease in revenues for the diabetes health care
business compared to the first quarter last year, when unusually high revenue
growth in advance of a January 1998 price increase was reported. International
Medical revenues of $233 million increased 35%, reflecting good growth in the
infusion therapy and prefillable syringe businesses. The growth in the infusion
therapy business was largely due to sales resulting from the acquisition of the
Medical Devices Division of The BOC Group in the third quarter of last year.
Excluding the estimated unfavorable impact of foreign currency translation,
Medical revenue growth outside the United States would have been approximately
37%.
Domestic Diagnostic revenues of $187 million decreased 1%. International
Diagnostic revenues of $157 million increased 11%, or 12% excluding the
estimated unfavorable impact of foreign currency translation. Good revenue
growth was achieved in the flow cytometry, sample collection, and tissue culture
businesses, both in the United States and on a worldwide basis. The infectious
disease diagnostic business continues to be adversely affected by cost
containment in testing in the United States.
The gross profit margin increased to 49.8% compared with last year's first
quarter rate of 49.4%, reflecting continuing productivity improvements. Selling
and administrative expense of $223 million was 29% of revenues. This ratio is
higher than last year's first quarter ratio of 28.4% primarily due to expenses
related to recent acquisitions and reengineering charges associated with the
enterprise-wide business systems upgrade program. Investment of $49 million in
research and development increased 10% over last year's first quarter
expenditures, primarily reflecting the continuation of strategic investments in
support of the Company's key businesses.
Operating income of $111 million increased 8% from last year's first quarter
amount of $103 million. Operating margin was 14.4% compared to last year's
first quarter operating margin of 14.7%.
Net interest expense of $18 million was $8 million higher than last year
primarily due to additional borrowings to fund recent acquisitions. Other
income, net was $1 million compared with other expense, net of $2 million last
year. This change was principally due to amounts recognized in connection with
the termination of a third-party supply agreement, and certain
9
<PAGE>
other contractual matters.
The first quarter income tax rate was 19%, which included a favorable $7 million
tax judgment in Brazil, compared with 29% a year ago. The Company expects its
full year reported tax rate to be about 25%, reflecting the aforementioned tax
judgment as well as a more favorable forecasted mix in income among tax
jurisdictions.
Net income was $76 million compared with $64 million a year ago, an increase of
18%. Diluted earnings per share of $.29 increased 16% compared with last year's
$.25. The impact of unfavorable foreign currency translation reduced diluted
earnings per share by an estimated one cent.
Financial Condition
- -------------------
During the first quarter of 1999, cash provided by operations was $87 million
compared to $164 million during the first quarter of last year. This decrease
reflects inventory replenishment following a strong fiscal 1998 fourth quarter.
Capital expenditures during the quarter were $62 million compared with $44
million during the first quarter of last year. For the full year, the Company
expects capital expenditures to be about $225 million.
During the first quarter of 1999, the Company completed the acquisitions of two
businesses for an aggregate purchase price of $42 million, net of cash acquired,
subject to certain post-closing adjustments.
As of December 31, 1998, total debt of $1.2 billion represented 42.2% of total
capital (shareholders' equity, net non-current deferred income tax liabilities,
and debt), an increase from 35.3% a year ago due to additional borrowings to
fund acquisitions. Because of its strong credit rating, the Company believes it
has the capacity to arrange significant additional borrowings should the need
arise.
At its November 1998 meeting, the Board of Directors increased the Company's
quarterly dividend from $.0725 to $.085 per common share.
On January 1, 1999, the eleven member countries of the European Union began the
transition to the euro as a common currency. The Company had completed the
necessary system modifications to accommodate euro-denominated transactions with
suppliers and customers by this transition date and is continuing to convert
historical information from the respective national currencies to the euro. The
Company currently is evaluating the impact of the euro conversion on market risk
and price competition. The Company does not expect this conversion to have a
material impact on its results of operations, financial condition or cash flows.
Recently, Brazil's currency has depreciated significantly against the dollar.
All of the Company's Brazilian Real foreign exchange transaction exposures were
hedged prior to the devaluation of the currency through foreign exchange forward
contracts and foreign currency options.
10
<PAGE>
Year 2000 Readiness Disclosure
- ------------------------------
As described more fully in its 1998 annual report on Form 10-K, the Company has
developed and is well into implementing a Company-wide Year 2000 plan (the
"Plan") with the intent to ensure that its computer equipment and software and
devices with date-sensitive embedded technology will be able to distinguish
between the year 1900 and the year 2000 and will function properly with respect
to all dates, whether in the twentieth or twenty-first centuries (such
functionality is hereafter referred to as being "Year 2000 compliant"). The
table set forth below summarizes, by focus area, the status and projected dates
of completion as of February 1, 1999 for each of the related tasks:
<TABLE>
<CAPTION>
Estimated % of Completion/Projected Date of Completion
- ---------------------------------------------------------------------------------------------------
3rd Party
Focus Area IT Systems Non-IT Systems Considerations Products
===================================================================================================
<S> <C> <C> <C> <C>
Identification and 100%/ 100%/ 100%/ 100%/
Assessment of Completed Completed Completed Completed
Year 2000 Issues
- ---------------------------------------------------------------------------------------------------
Prioritization of 100%/ 100%/ 100%/ 100%/
Identified Issues Completed Completed Completed Completed
- ---------------------------------------------------------------------------------------------------
Assessment of 100%/ 100%/ 30%/ 100%/
Compliance Completed Completed September 1999 Completed
- ---------------------------------------------------------------------------------------------------
Remediation 70%/ 40%/ 5% / 75%/
September 1999 June 1999 September 1999 June 1999
- ---------------------------------------------------------------------------------------------------
Testing 45%/ 20%/ - / 75%/
September 1999 June 1999 September 1999 July 1999
- ---------------------------------------------------------------------------------------------------
Contingency and - / - / - / 50%/
Business September 1999 June 1999 September 1999 May 1999
Continuation Plans
- ---------------------------------------------------------------------------------------------------
</TABLE>
The total cost of the Company's Year 2000 Plan is not expected to be material to
the Company's financial condition. The estimated total cost of the Plan is
approximately $15 million, and is being funded through operating cash flows. As
of December 31, 1998, the Company had incurred to date approximately $4.5
million in costs related to its Year 2000 identification, assessment,
remediation, and testing efforts. Of the total remaining anticipated costs of
the Plan, approximately $1 million is attributable to the purchase of new
software and hardware and approximately $4 million is attributable to
contingency and business continuation plans. The remaining $5.5 million relates
to the repair, reprogramming or modification of hardware and software, of which
approximately $3 million represents the redeployment of existing resources.
None of the Company's other information technology projects have been delayed or
deferred as a result of the implementation of the Plan.
11
<PAGE>
The Company presently believes it has an effective plan in place to anticipate
and resolve any potential Year 2000 issues in a timely manner. In the event,
however, that the Company does not properly identify Year 2000 issues or the
compliance assessment, remediation and testing is not conducted on a timely
basis with respect to the Year 2000 issues that are identified, there can be no
assurance that Year 2000 issues will not materially and adversely affect the
Company's results of operations or relationships with third parties. In
addition, disruptions in the economy generally resulting from Year 2000 issues
also could materially and adversely affect the Company. The amount of potential
liability and lost revenue that would be reasonably likely to result from the
failure by the Company and certain key third parties to achieve Year 2000
compliance on a timely basis cannot be reasonably estimated at this time. A
contingency plan has not yet been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company expects to complete its analysis and contingency
planning by September 30, 1999.
The estimated costs of the Company's Plan, and the dates by which the Company
believes it will have completed each of the phases of the Plan, are based upon
management's best estimates, which rely upon numerous assumptions regarding
future events, including the continued availability of certain resources, third-
party remediation plans, and other factors. These estimates, however, may prove
not to be accurate, and actual results could differ materially from those
anticipated. Factors that could result in material differences include, without
limitation, the availability and cost of personnel with the appropriate training
and experience, the ability to identify, assess, remediate and test all relevant
computer codes and embedded technology, and similar uncertainties. In addition,
Year 2000-related issues may lead to possible third-party claims, the impact of
which cannot yet be estimated. No assurance can be given that the aggregate
cost of defending and resolving such claims, if any, would not have a material
adverse effect on the Company.
Adoption of New Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement establishes a new method by which companies will report operating
segment information. This method is based on the manner in which management
organizes the segments within a company for making operating decisions and
assessing performance. As required by the Statement, the Company will adopt the
provision of SFAS No. 131 in its fiscal year-end 1999 financial statements and
may report different operating segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits". This Statement standardizes the
disclosure requirements, requires additional information on changes in benefit
obligations and fair values of plan assets, and eliminates certain disclosures.
As required by the Statement, the Company will adopt the new disclosure rules in
its fiscal year-end 1999 financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities". The Company is required to adopt the provisions of this Statement
no later than its fiscal year 2000. This SOP provides
12
<PAGE>
guidance on the financial reporting of start-up and organization costs and
requires such costs, as defined, to be expensed as incurred. Adoption of this
Statement is not expected to have a material impact on the Company's results of
operations or financial condition.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company is required to adopt the
provisions of this Statement no later than its fiscal year 2000. This Statement
requires that all derivatives be recorded in the balance sheet as either an
asset or liability measured at fair value. The Statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company is in the process of
evaluating this Statement and has not yet determined the future impact on the
Company's consolidated financial statements.
Forward-Looking Statements
- --------------------------
This interim report on Form 10-Q may contain certain forward looking statements
(as defined under Federal securities laws) regarding the Company's performance,
including future revenues, products and income, which are based upon current
expectations of the Company and involve a number of business risks and
uncertainties. Actual results could vary materially from anticipated results
described in any forward-looking statement. Factors that could cause actual
results to vary materially include, but are not limited to, competitive factors,
changes in regional, national or foreign economic conditions, changes in
interest or foreign currency exchange rates, delays in product introductions,
year 2000 issues, and changes in health care or other governmental regulation,
as well as other factors discussed herein and in other of the Company's filings
with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
There have been no material changes in information reported since the
fiscal year ended September 30, 1998.
13
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
-----------------
The Company is involved, both as a plaintiff and a defendant, in
various legal proceedings which arise in the ordinary course of
business, including product liability and environmental matters.
As described more fully in the Company's 1998 annual report on Form
10-K, the Company, along with a number of other manufacturers, has been
named as a defendant in approximately 214 product liability lawsuits
related to natural rubber latex that have been filed in various state
and Federal courts. Cases pending in Federal court are being coordinated
under the matter In re Latex Gloves Products Liability Litigation (MDL
Docket No. 1148) in Philadelphia, and analogous procedures have been
implemented in the state courts of California, Pennsylvania and New
Jersey. The Company is vigorously defending these lawsuits.
The Company has been named as a defendant in ten product liability
lawsuits relating to health care workers who allegedly sustained
accidental needle sticks, but have not become infected with any disease.
Another manufacturer and several medical product distributors also have
been named as defendants in most of these cases. The cases have been
filed on behalf of an unspecified number of health care workers in ten
different states, seeking class action certification under the laws of
these states. To date no class has been certified in any of these
cases. The actions filed during the first quarter of fiscal 1999 are
pending in state court in Florida, under the caption Delgado vs. Becton
Dickinson et al. (Case No. 98-5608, Hillsborough County Circuit Court),
filed on October 27, 1998; in state court in Oklahoma, under the
caption Palmer vs. Becton Dickinson et al. (Case No. CJ-98-685, Sequoyah
County District Court), filed on October 27, 1998; in state court in
Alabama, under the caption Daniels vs. Becton Dickinson et al. (Case No.
CV 1998 2757 Montgomery County Circuit Court), filed on October 30,
1998; in state court in South Carolina, under the caption Bales vs.
Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland County Court
of Common Pleas), filed on November 25, 1998; in state court in
Pennsylvania, under the caption Snodgrass vs. Becton Dickinson et al.
(Case No. 03474, Philadelphia County Court of Common Pleas), filed on
November 27, 1998; and in state court in New Jersey, under the caption
Swartley vs. Becton Dickinson et al. (Case No. L-009449-98, Camden
County Superior Court), filed on December 7, 1998.
Generally, these actions allege that health care workers have sustained
needle sticks using hollow-bore needle devices manufactured by the
Company and, as a result, require medical testing, counseling and/or
treatment.
14
<PAGE>
In the opinion of the Company, the results of the above matters,
individually and in the aggregate, are not expected to have a material
effect on its results of operations, financial condition or cash flows.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
--------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Not applicable.
Item 5. Other Information.
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits
27 - Financial Data Schedule.
b) Reports on Form 8-K
During the three-month period ended December 31, 1998, the Company
filed one Current Report on Form 8-K under Item 5 - Other Events
concerning the announcement of its results for the fiscal year ended
September 30, 1998. This report was dated November 6, 1998.
15
<PAGE>
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.
Becton, Dickinson and Company
-----------------------------
(Registrant)
Date February 9, 1999
----------------
/s/ Kenneth R. Weisshaar
--------------------------------------
Kenneth R. Weisshaar
Senior Vice President - Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description Method of Filing
- --------------------------------------------------------------------------------
27 Financial Data Schedule Filed with
this report
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 128,578
<SECURITIES> 1,635
<RECEIVABLES> 677,663
<ALLOWANCES> 0 <F1>
<INVENTORY> 592,221
<CURRENT-ASSETS> 1,589,917
<PP&E> 2,781,625
<DEPRECIATION> 1,463,699
<TOTAL-ASSETS> 3,935,231
<CURRENT-LIABILITIES> 1,121,572
<BONDS> 761,547
<COMMON> 332,662
<PREFERRED-MANDATORY> 0
<PREFERRED> 48,638
<OTHER-SE> 1,285,422
<TOTAL-LIABILITY-AND-EQUITY> 3,935,231
<SALES> 768,966
<TOTAL-REVENUES> 768,966
<CGS> 385,710
<TOTAL-COSTS> 385,710
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0 <F1>
<INTEREST-EXPENSE> 18,776
<INCOME-PRETAX> 93,984
<INCOME-TAX> 17,826
<INCOME-CONTINUING> 76,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,158
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
<FN>
<F1> THESE ITEMS ARE CONSOLIDATED ONLY AT YEAR-END
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| BEN | https://www.sec.gov/Archives/edgar/data/38777/0000038777-99-000370.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000038777-99-000370.txt : 19990215
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ACCESSION NUMBER: 0000038777-99-000370
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC
CENTRAL INDEX KEY: 0000038777
STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282]
IRS NUMBER: 132670991
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09318
FILM NUMBER: 99533213
BUSINESS ADDRESS:
STREET 1: 777 MARINERS ISLAND BLVD
STREET 2: 6TH FLOOR
CITY: SAN MATEO
STATE: CA
ZIP: 94404
BUSINESS PHONE: 6503123000
MAIL ADDRESS:
STREET 1: FRANKLIN RESOURCES INC
STREET 2: 901 MARINERS ISLAND BLVD 6TH FLOOR
CITY: SAN MATEO
STATE: CA
ZIP: 94404
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FOR PERIOD ENDED 12/31/98
<TEXT>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to______________
Commission File No. 1-9318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2670991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
777 Mariners Island Blvd., San Mateo, CA 94404
(Address of Principal Executive Offices)
(Zip Code)
(650) 312-2000
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _____ NO ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Outstanding: 252,652,244 shares, common stock, par value $.10 per share at
January 31, 1999.
<PAGE>
PART I -FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
FRANKLIN RESOURCES, INC.
Consolidated Statements of Income
Unaudited
Three months ended
December 31
(In thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
Operating revenues:
Investment management fees $330,370 $348,562
Underwriting and distribution fees 188,604 243,188
Shareholder servicing fees 45,734 37,606
Other, net 2,971 3,043
- --------------------------------------------------------------------------------
Total operating revenues 567,679 632,399
- --------------------------------------------------------------------------------
Operating expenses:
Underwriting and distribution 163,046 205,312
Compensation and benefits 133,814 133,291
Information systems, technology and occupancy 48,479 46,596
Advertising and promotion 28,238 27,362
Amortization of deferred sales commissions 25,019 23,896
Amortization of intangible assets 9,373 8,995
Other 22,805 19,505
Restructuring charge 46,140 -
- --------------------------------------------------------------------------------
Total operating expenses 476,914 464,957
- --------------------------------------------------------------------------------
Operating income 90,765 167,442
Other income/(expenses):
Investment and other income 10,536 14,975
Interest expense (6,173) (6,152)
- --------------------------------------------------------------------------------
Other income, net 4,363 8,823
- --------------------------------------------------------------------------------
Income before taxes on income 95,128 176,265
Taxes on income 26,636 45,750
- --------------------------------------------------------------------------------
Net income $68,492 $130,515
- --------------------------------------------------------------------------------
Earnings per share:
Basic $0.27 $0.52
Diluted $0.27 $0.52
Dividends per share $0.055 $0.05
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited
As of As of
December 31 September 30
(In thousands) 1998 1998
- --------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $634,178 $537,188
Receivables:
Fees from Franklin Templeton funds 212,094 204,826
Other 38,628 25,773
Investment securities,
available-for-sale 271,815 470,065
Prepaid expenses and other 20,353 22,137
- -----------------------------------------------------------------------------
Total current assets 1,177,068 1,259,989
- -----------------------------------------------------------------------------
Banking/Finance assets:
Cash and cash equivalents 16,992 18,855
Loans receivable, net 192,730 165,074
Investment securities,
available-for-sale 22,122 21,847
Other 3,794 4,991
- -----------------------------------------------------------------------------
Total banking/finance assets 235,638 210,767
- -----------------------------------------------------------------------------
Other assets:
Deferred sales commissions 108,327 123,508
Property and equipment, net 365,093 349,229
Intangible assets, net 1,244,340 1,253,713
Receivable from banking/finance group 112,989 87,282
Other 154,698 195,561
- -----------------------------------------------------------------------------
Total other assets 1,985,447 2,009,923
- -----------------------------------------------------------------------------
Total assets $3,398,153 $3,480,049
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Balance Sheets
Unaudited As of As of
December 31 September 30
(In thousands except share data) 1998 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Compensation and benefits $73,059 $156,253
Commissions 56,170 53,174
Income taxes 37,386 67,319
Short-term debt 58,516 117,956
Other 134,589 82,691
- -----------------------------------------------------------------------------
Total current liabilities 359,720 477,393
- -----------------------------------------------------------------------------
Banking/finance liabilities:
Deposits:
Interest bearing 74,569 81,615
Non-interest bearing 5,647 6,166
Payable to parent 112,989 87,282
Other 8,225 3,018
- -----------------------------------------------------------------------------
Total banking/finance liabilities 201,430 178,081
- -----------------------------------------------------------------------------
Other Liabilities:
Long-term debt 413,233 494,459
Other 56,953 49,349
- -----------------------------------------------------------------------------
Total other liabilities 470,186 543,808
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Total liabilities 1,031,336 1,199,282
- -----------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized; none
issued - -
Common stock, $.10 par value,
500,000,000 shares
authorized; 252,441,498 and
252,715,488 shares
issued and outstanding, respectively 25,244 25,174
Capital in excess of par value 115,038 93,033
Retained earnings 2,249,443 2,194,835
Other (3,517) (4,230)
Accumulated other comprehensive income (19,391) (28,045)
- -----------------------------------------------------------------------------
Total stockholders' equity 2,366,817 2,280,767
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $3,398,153 $3,480,049
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Consolidated Statements of Cash Flows
Unaudited Three months ended
December 31
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
Net income $68,492 $130,515
Adjustments to reconcile net income to net cash provided by operating
activities:
(Increase) decrease in receivables,
prepaid expenses and other current assets (39,970) 21,889
Increase in deferred sales commissions (9,838) (51,223)
Increase in restructuring liabilities 46,140 -
Increase in other current liabilities 18,998 32
(Decrease) increase in income taxes payable (29,933) 28,214
Increase in commissions payable 2,996 3,023
Decrease in compensation and benefits (55,425) (40,536)
Depreciation and amortization 51,553 42,448
Losses (gains) on disposition of assets 2,546 (4,036)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 55,559 130,326
- ---------------------------------------------------------------------------
Purchase of investments (61,671) (74,599)
Liquidation of investments 325,479 21,799
Purchase of banking/finance investments (8,319) (214)
Liquidation of banking/finance investments 7,986 -
Net (origination) collections of loans
receivable (27,792) 8,203
Purchase of property and equipment (31,658) (58,058)
Proceeds from sale of property 176 14,517
Other - (1,424)
- ----------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 204,201 (89,776)
- ----------------------------------------------------------------------------
Increase (decrease) in bank deposits (7,566) 1,662
Exercise of common stock options 476 1,039
Dividends paid on common stock (12,587) (11,345)
Purchase of common/treasury stock (7,113) (2,942)
Issuance of debt 40,000 22,986
Payments on debt (177,843) (41,898)
- ----------------------------------------------------------------------------
Net cash used in financing activities (164,633) (30,498)
- ----------------------------------------------------------------------------
Increase in cash and cash equivalents 95,127 10,052
Cash and cash equivalents, beginning of
period 556,043 442,741
- ---------------------------------------------------------------------------
Cash and cash equivalents, end of period $651,170 $452,793
- ---------------------------------------------------------------------------
Supplemental disclosure of non-cash information:
Value of common stock issued in other
transactions, principally for the
Company's incentive plans $27,769 $30,595
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FRANKLIN RESOURCES, INC.
Notes to Consolidated Financial Statements
December 31, 1998
(Unaudited)
1. Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. and
its consolidated subsidiaries (the "Company") included herein have been
prepared in accordance with the instructions to Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all appropriate adjustments
necessary to a fair presentation of the results of operations have been made
for the periods shown. All adjustments are of a normal recurring nature.
Certain prior year amounts have been reclassified to conform to current year
presentation. These financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended
September 30, 1998.
2. Restructuring
During the first fiscal quarter of 1999, the Company announced a total
estimated restructuring charge of $58 million and recorded a pretax
restructuring charge of $46.1 million. Of the $46.1 million, approximately
$10.8 million is expected to be paid in cash. The Company expects to record
an additional $12.3 million pretax restructuring charge during the second
quarter of fiscal 1999 relating to employee severance and termination
benefits.
The restructuring charges reflect the estimated future costs of achieving the
benefits outlined in a restructuring plan developed and approved by
management during the first quarter of fiscal 1999 and subsequently approved
by the Company's Board of Directors. The plan is aimed at improving service
levels and profitability, reducing costs and reprioritizing the Company's
business activities.
The components of the restructuring charge are as follows:
(In millions) As of December 31, 1998
------------------------------------------------------------
Asset write-down $31.9
Lease termination charges 5.8
Other 8.4
====================================================
$46.1
====================================================
Asset write-down includes a discontinued investment management contract and
other assets related to certain other discontinued products.
3. Debt
During the first quarter of fiscal 1999, interest rate swap agreements which
fixed interest rates on $40 million of commercial paper, expired. The
remaining interest rate swap agreements, maturing through October 2000,
effectively fix interest rates on $255 million of commercial paper. The fixed
rates of interest range from 6.24% to 6.645%. At quarter end, the weighted
average effective interest rate, including the effect of interest-rate swap
agreements, was 6.17% on approximately $431.6 million of outstanding
commercial paper and medium-term notes.
4. Adoption of Statement of Financial Accounting Standards Board
During this quarter the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes the disclosure requirements for reporting Comprehensive income in
an entity's financial statements. Total Comprehensive income includes net
income, unrealized gains and losses on investments and foreign currency
translation adjustments. Accumulated other comprehensive income, a component
of stockholders' equity, was formerly reported as "Other", and consists of
total net unrealized losses on available-for-sale securities and foreign
currency adjustments. There was no impact on previously reported net income
arising from the adoption of SFAS 130.
The following table shows comprehensive income for the three months ended
December 31, 1998 and 1997.
(In thousands) 1998 1997
----------------------------------------------------------------------------
Net income $68,492 $130,515
Net unrealized gain (loss) on
available-for-sale securities 5,529 (6,785)
Foreign currency translation adjustment 3,125 (9,380)
============================================================================
Comprehensive income $77,146 $ 114,350
============================================================================
5. Subsequent events
On January 4, 1999, the Company's principal distribution subsidiary began
selling a new class of mutual fund shares, B shares, to the public. These
shares are sold without an upfront sales charge to the shareholder. The
distribution subsidiary will pay eligible third-party intermediaries a sales
commission of between 3% and 4%. Shareholder redemptions will be subject to a
contingent deferred sales charge of 4%, declining to 0% over a six-year
period. The shares will be subject to 12b-1 fees similar to other Company
products. The Company expects to finance the sales commissions through
existing cash flows and other financing arrangements.
On January 28, 1999, the Company's shareholders approved the 1998 Universal
Stock Incentive Plan (the "New Plan"); similar in most respects to the
Universal Stock Plan approved in 1994. The New Plan allows for stock grants
to participating employees of up to a total of 10,000,000 shares.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 which include
phrases with the type of wording further described in Part II Item 5.
"Forward-Looking Statements and Risk Factors," which could cause actual
results to differ materially from historical results and those presently
anticipated or projected. The Company cautions readers not to place undue
reliance on any such forward-looking statements, which speak only as of the
date made.
GENERAL
Franklin Resources, Inc. and its consolidated subsidiaries (the "Company")
derive substantially all of their revenues and net income from providing
investment management, administration, distribution and related services to
the Franklin, Templeton and Mutual Series funds, institutional accounts and
other investment products (collectively, the "Franklin Templeton Group"). The
Company has a diversified base of assets under management and a full range of
investment products and services to meet the needs of most individuals and
institutions.
ASSETS UNDER MANAGEMENT
As of
December 31 September 30 December 31
(In billions) 1998 1998 1997
- -----------------------------------------------------------------------------
Franklin Templeton Group:
Equity:
Global/international $92.8 $84.8 $98.3
Domestic (U.S.) 37.4 34.8 37.6
- -----------------------------------------------------------------------------
Total equity 130.2 119.6 135.9
- -----------------------------------------------------------------------------
Hybrid Funds <F1> 14.5 14.0 14.9
Fixed-income:
Tax-free 50.9 50.5 47.0
Taxable
Domestic (primarily U.S. Gov't.) 16.0 16.0 15.5
Global/international 4.0 3.7 3.8
- -----------------------------------------------------------------------------
Total fixed-income 70.9 70.2 66.3
- -----------------------------------------------------------------------------
Money funds 4.6 4.8 3.9
=============================================================================
Total end of period $220.2 $208.6 $221.0
=============================================================================
Monthly average for the three-month
period $217.0 $221.6 $220.6
=============================================================================
<F1> Hybrid funds include asset allocation, balanced, flexible and
income-mixed funds as defined by the Investment Company Institute. Previously
these funds had been included primarily in the equity category.
Since September 30, 1998, although redemptions have exceeded purchases in the
equity funds managed by the Company, market appreciation has resulted in an
increase in these assets to $130.2 billion as of December 31, 1998 and an
overall increase in the Company's assets under management to $220.2 billion.
Compared to December 31, 1997, the Company's assets under management at
December 31, 1998 have declined slightly. As a result of turmoil in global
equity markets in the preceding eighteen months, and associated market
depreciation, the Company's assets under management in equity funds declined
to $119.6 billion at September 30, 1998, resulting in a decline in total
assets under management to $208.6 billion as of September 30, 1998.
Equity assets now comprise 59% of total assets under management compared to
57% in September 1998 and 61% in December 1997. Fixed income funds now
comprise 32% of total assets under management, as compared to 34% and 30% in
September 1998 and December 1997, respectively. The shift in the Company's
managed asset mix toward lower fee fixed-income products and lower average
assets in the first quarter of 1999 when compared to the same quarter a year
ago, has resulted in lower investment management fee revenues for the three
months ended December 31, 1998, as compared to the same period a year ago.
RESULTS OF OPERATIONS
Three months ended
December 31 Percent
1998 1997 Change
- --------------------------------------------------------------------------------
Net income (millions) $68.5 $130.5 (48)%
Earnings per share
Basic $0.27 $0.52 (48)%
Diluted $0.27 $0.52 (48)%
Operating margin 16% 26%
Operating margin before restructuring
change 24% -
- --------------------------------------------------------------------------------
Net income during the quarter ended December 31, 1998 decreased compared to
the same quarter last year, as a result of a restructuring charge taken in
the quarter as well as decreased investment management fees from reduced
average assets under management. Operating margins decreased to 16% due
primarily to the restructuring charge. Operating margins before the
restructuring charge declined to 24% due to reduction in operating revenues
associated with decreased assets under management and the changing
composition of those assets.
Operating revenue
Three months ended
December 31 Percent
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Investment management fees $330.4 $348.6 (5)%
Underwriting and distribution fees 188.6 243.2 (22)%
Shareholder servicing fees 45.7 37.6 22%
Other, net 3.0 3.0 -
- --------------------------------------------------------------------------------
Total operating revenues $567.7 $632.4 (10)%
- --------------------------------------------------------------------------------
Investment management fees, the largest component of the Company's operating
revenues, are generally calculated under fixed fee arrangements, as a
percentage of the value of assets under management. The Company's investment
management fee revenues are generally affected by market appreciation or
depreciation in assets under management as well as the flow of funds into or
out of these portfolios. There have been no significant changes in the
investment management fee structures for the Franklin Templeton Group in the
periods under review.
The Company's effective investment management fee rate (investment management
fees divided by average assets under management) decreased slightly in the
quarter ended December 1998 to 0.61% compared to 0.63% in the same quarter
last year, primarily due to the relative increase in lower fee fixed-income
assets under management. Future changes in the composition of assets under
management may affect the effective investment management fee rates earned by
the Company.
During fiscal 1998, the Company reclassified revenues relating to the
distribution component of Canadian revenues from Investment management fees
to Underwriting and distribution fees. The Company believes this change more
closely matches revenue generated from distribution services with the
expenses incurred. The quarter ended December 31, 1997 has been reclassified
accordingly. Investment management fees for the quarter ended December 1998
decreased 5% over the same period last year, due to the 2% decrease in
average assets under management between these periods, and to the shift to
relatively lower fee fixed-income products.
Certain subsidiaries of the Company act as distributors for its sponsored
funds and receive commissions and distribution fees. Underwriting commissions
are earned primarily from fund sales. Distribution fees are generally based
on the level of assets under management. Underwriting and distribution fees
decreased 22% over the same period last year primarily as a result of
decreased mutual fund sales and average assets under management.
Shareholder servicing fees are generally fixed charges per account that vary
with the particular type of fund and the service being rendered. Shareholder
servicing fees increased 22% as a result of a 28% increase in billable
shareholder accounts to 10.2 million from 8.0 million a year ago and an
increase in the average per account charge.
Other, net
Three months ended
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Revenues $7.1 $9.7 (27)%
Provision for loan losses (1.5) (2.1) (29)%
Interest expense (2.6) (4.6) (43)%
================================================================================
Total other, net $3.0 $3.0 -
================================================================================
Other, net consists primarily of revenues from the Company's banking and
finance subsidiaries, net of interest expense and the provision for loan
losses. Other, net remained relatively stable in the quarter ended December
1998 compared with the same quarter last year, although each of the component
parts decreased. Revenues and the provision for loan losses decreased as a
result of securitization of auto loans in September 1998. Banking/finance
interest expense decreased in the current quarter due to a reduction in the
average borrowing requirements of the banking/finance group combined with a
reduction in effective interest rates.
Operating expenses
Three months ended
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Underwriting and distribution $163.1 $205.3 (21)%
Compensation and benefits 133.8 133.3 -
Information systems, technology and
occupancy 48.5 46.6 4%
Advertising and promotion 28.2 27.4 3%
Amortization of deferred sales commissions 25.0 23.9 5%
Amortization of intangible assets 9.4 9.0 4%
Other 22.8 19.5 17%
Restructuring charge 46.1 - 100%
================================================================================
Total operating expenses $476.9 $465.0 3%
================================================================================
Underwriting and distribution includes sales commissions and distribution
fees paid to brokers and other third party intermediaries. The decrease in
underwriting and distribution expenses was consistent with the decrease in
mutual fund sales and average assets under management.
Compensation and benefits for the quarter ended December 1998 remained at the
previous year's levels. Despite an increase of 20% in the Company's workforce
since this time last year, attempts at reducing temporary labor costs and
overtime in the current fiscal year have been successful. The Company
continues to experience upward pressure on compensation and benefits due to
the effects of a very competitive labor market.
Information systems, technology and occupancy costs increased 4% over the
same period last year. During the past two years, the Company has experienced
a significant increase in its workforce and has embarked upon major systems
implementations, Year 2000 corrections and European Monetary Unit
preparations, and has upgraded its network, desktop and Internet
environments. The Company anticipates that such major systems undertakings
will continue to have an impact on the Company's operating results through
the year 2000 and beyond. See "Year 2000 Readiness Disclosure" below.
Advertising and promotion expenses increased 3% over the same period last
year, mainly due to increased promotional activity and new marketing
campaigns.
Amortization of deferred sales commissions increased 5% over the same period
last year as cumulative sales of these products increased. Sales commissions
on certain Franklin Templeton Group products sold without a front-end sales
charge are capitalized and amortized over periods not exceeding four years --
the period in which management estimates that they will be recovered from
distribution plan payments and from contingent deferred sales charges. Sales
commissions on B shares, which were introduced in January, 1999, will be
capitalized and amortized over a period not exceeding eight years. As a
result of the capitalization and amortization of these charges, any decrease
in sales levels will not immediately be reflected in decreased expenses.
Restructuring charges of $46.1 million ($35.5 million, or $0.14 per diluted
share after tax) were recorded with respect to a plan initiated by management
during the first quarter aimed at improving service levels and profitability
and reducing costs. The plan details the reprioritization of global business
activities, discontinuing certain products and writing off investments and
other assets related to those products. In connection with this plan, the
value of one management contract, recorded as an intangible asset, was
written off. The plan also recognizes efficiencies from the recent conversion
of all U.S. funds onto a single shareholder record-keeping system by
eliminating approximately 560 positions principally in the United States.
Severance costs of approximately $12.3 million related to this element of the
plan are expected in the second fiscal quarter of 1999. At the completion of
these restructuring efforts, the Company's annual operating expenses are
expected to decrease approximately $100 million from peak levels at the end
of fiscal 1998, assuming a continuation of the current business environment.
Other income/(expenses):
Three months ended
December 31
(In millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Investment and other income $10.5 $15.0 (30)%
Interest expense (6.2) (6.2) -
================================================================================
Other income, net 4.3 8.8 (51)%
================================================================================
Investment and other income for the quarter ended December 1998 decreased 30%
from the same period last year. Interest income for the current quarter
exceeded that earned in the prior year, due to higher average levels of
investment in fiscal 1999, but this increase was offset by realized losses
from the sale of investments in the current quarter, compared to realized
gains in the prior year. Interest expense remained stable over the same
period last year, despite a reduction in total debt in the first fiscal
quarter of 1999. The reduction in expense following the paydown of debt
resulting from the securitization of auto loans in September 1998 was
attributed to the banking/finance group (see Other, net revenues above).
Taxes on income
The Company's effective income tax rate for the quarter ended December 1998
has increased to 28%, compared to 26% for the same period last year. This
increase reflects the decrease in the relative contributions of foreign
earnings that are subject to reduced tax rates and that are not currently
included in U.S. taxable income.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES
At December 31, 1998, the Company's assets aggregated $3.4 billion, down from
$3.5 billion at September 30, 1998. Stockholders' equity approximated $2.4
billion compared to approximately $2.3 billion at September 30, 1998. The
increase in stockholders' equity was primarily a result of increased net
income. Outstanding debt (long-term and short-term) decreased by $140.7
million (23%) at December 31, 1998, from $612.4 million at September 30,
1998.
Cash provided by operating activities for the quarter ended December 1998
decreased 57% from $130.3 million in the same quarter last year. This decline
was due mainly to lower net income in the current quarter. The decrease in
net income was due to lower operating revenues and the restructuring plan,
which required little incremental cash expenditure in the first quarter. The
decrease in income taxes payable was due to lower taxable income in the
current year. The Company sold $325.5 million of its investments in the
period and used $31.7 million to purchase property and equipment, providing
$204.2 million from its investing activities in the quarter. $177.8 million
of these funds were used to pay down and service debt, resulting in cash used
in financing activities of $164.6 million. During the quarter ended December
1998, the Company paid $12.6 million in cash dividends to stockholders.
As of December 31, 1998, the Company had fixed interest rates on
approximately $415 million of its debt through its interest-rate swap
agreements and its medium-term note program.
Management expects that the principal needs for cash will be to advance sales
commissions, fund property and equipment acquisitions, pay shareholder
dividends and service debt. Any future increases in the Company's investment
in its consumer lending activities are expected to be financed through
existing debt facilities, operating cash flows, or through the securitization
of a portion of the receivables from such consumer lending activities.
Management believes that the Company's existing liquid assets, together with
the expected continuing cash flow from operations, its borrowing capacity
under current credit facilities and its ability to issue stock will be
sufficient to meet its present and reasonably foreseeable cash needs.
Year 2000 Readiness Disclosure
In connection with the Company's preparation for the Year 2000, the Company's
mission-critical securities trading systems, portfolio accounting systems and
general ledger systems have now been certified as Year 2000 compliant and are
currently operating in production. In addition, the Company has completed the
prerequisite point-to-point and extended point-to-point testing and
certification of mission-critical and non mission-critical systems necessary
to participate in the Securities Industry Association ("SIA") "Streetwide
Testing" to be held over five weekends beginning in March 1999.
The Company's Year 2000 plan prioritizes the Year 2000 certification of core
mission-critical information technology ("IT") systems over other IT systems
and further prioritizes IT systems in general over non-IT systems. Because
the Year 2000 project is an ongoing Company-wide endeavor, the state of the
Company's progress changes daily. The information provided in this Form 10-Q
about our Year 2000 progress is provided as of February 11, 1999.
The Company's Year 2000 compliance plan is comprised of four phases:
Assessment, Remediation, Testing and Implementation. The Company currently
plans to complete all phases of its Year 2000 plan with respect to
mission-critical IT systems by September 1999 and with respect to other
important systems as soon as possible thereafter, but in any event by
December 31, 1999. During the quarter ended December 31, 1998, the Company
completed the inventory of its end user computing systems. A number of end
user computer systems were identified as mission-critical systems and the
Company re-evaluated which systems it considered to be mission critical. As a
result of this re-evaluation, certain systems which the Company had
previously considered to be mission-critical, and which were close to
certification, were removed from the pool of mission-critical systems. In
addition, certain end user computing systems that had not yet been assessed
were added to the pool of mission-critical systems. Together, these changes
caused the completion percentage of mission-critical systems in the
categories of Testing and Implementation to remain at the same level as was
reported for the quarter ended September 30, 1998.
Phase of % of Mission
Project Critical Complete
-----------------------------------
Assessment 95%
Remediation 79%
Testing 30%
Implementation 30%
The non mission-critical systems of the Company are either maintained by the
Company's Information Systems & Technology ("IS&T") department or are end user
systems. These systems are prioritized with "high", "medium" or "low" in the
Company's Year 2000 plan. The IS&T systems have been given high priority,
while the end user systems have been given lower priorities. The percentages
below include only the IS&T-managed systems, which represent approximately 95
systems.
Phase of % of Non Mission Critical
Project IS&T Systems Complete
-------------------------------------------
Assessment 100%
Remediation 99%
Testing 82%
Implementation 74%
During the past quarter, the Company's Canadian subsidiary, Templeton
Management Limited, was asked by the Ontario Securities Commission to
participate in industry-wide testing in Canada. In order to complete work to
allow participation in this testing, the Company delayed planned Year 2000
certification of a key mission critical system in Canada, the shareholder
management system. However, the Company believes that this system is Year
2000 compliant and currently plans to complete certification of this system
in March 1999.
The Company experienced some delays in its Year 2000 plan during the quarter
because of the need to devote employee and system resources to the successful
implementation of the Euro on January 1, 1999 and the Company's first
offering of B shares, which began on January 4, 1999. The Company is
currently in the process of testing one of its most mission-critical systems,
the domestic transfer agency system. This system and related subsystems make
up approximately 17% of the Company's mission critical systems. Although the
Company is behind its original schedule in this testing due to various
delays, the Year 2000 certification of this system is progressing, including
testing of related sub-systems. No material problems have been encountered to
date.
Non-IT Systems. Other than third-party long distance telephone and data lines
and public utility electrical power, the Company's business operations are
not heavily dependent on non-IT components or systems, and none of the
Company's mission-critical systems is a non-IT system. The Company estimates
that it has completed assessment of approximately 90% of the Company-owned or
-managed non-IT components, and approximately 50% to 75% of third-party owned
components, including building, mechanical, air conditioning, electrical and
security systems. Based on the Company's assessment to date and information
received from third parties, the majority of the Company's non-IT systems
will not require remediation. With the exception of potential general public
utility problems, the Company does not expect to experience any material
effects related to the Year 2000 compliance of non-IT systems.
Third Parties and Year 2000. The Company's business operations are heavily
dependent upon a complex worldwide network of IT systems that are owned and
managed by third parties; including data feeds, trading systems, securities
transfer agent operations and stock market links. The Company has contacted
all of its major external suppliers of goods, services and data (other than
suppliers of electricity or long distance data and voicelines) to assess
their compliance efforts and the Company's exposure in the event of a failure
of third-party compliance efforts. The Company is in the process of
validating and reviewing the responses received to date from these suppliers
of mission-critical systems and in some cases is seeking additional
information, written assurances of certification, or test scripts. As of
February 11, 1999, no mission-critical third-party supplier had informed the
Company that it would not be Year 2000 compliant by the millenium date.
Cost Estimates. The total estimated costs associated with the required
modifications to become Year 2000 compliant range from $50 million to $60
million, not all of which is incremental to the Company's operations. The
estimated costs consist mainly of internal and third-party labor costs which
are expensed as incurred. The total amount expended on the project through
December 31, 1998 was approximately $20.6 million. The Company's estimates of
the total costs to complete the Year 2000 project will continue to be refined
in future periods. As is indicated in the analysis above, approximately 60%
to 66% of the expected costs of the Year 2000 project have not yet been
incurred. The Company believes that its existing liquid assets, together with
expected cash flow from operations, combined with its borrowing capacity
under existing credit facilities will be sufficient to fund anticipated
expenditures.
Contingency Planning. The Company is beginning to develop a contingency plan,
including identification of those mission-critical systems for which it is
practical to develop a contingency plan. The Company currently plans to
complete its contingency plan in September 1999. However, in an operation as
complex and geographically distributed as the Company's business there are
limited alternatives to certain of its mission-critical systems or public
utilities. If certain public utilities or mission-critical systems are not
made Year 2000 compliant or fail, there would be a material adverse impact
upon the Company's business, financial condition and results of operations.
Although the Company is investigating alternative solutions, it is unlikely
that any adequate contingency plan can be developed for such failures.
European Monetary Unit (the "Euro")
In December 1998, the Company successfully converted its international
computer applications software and its business operations to enable
transaction processing and record keeping using the Euro, and has experienced
no material adverse impact as a result. Many of the Company's managed funds
and financial products have substantial investments in countries whose
currencies eventually will be completely replaced by the Euro. All aspects of
the Company's investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custodial accounts and accounting have
been affected by the implementation of the Euro (the "Euro Issue").
Because the use of the Euro will be phased-in over several years, the Company
is not presently able to assess the cost impact of the Euro Issue on the
Company, but does not presently anticipate that it will have a material
adverse effect on the Company's cash flows, operations or operating results.
The Company is generally expensing costs incurred relating to the Euro Issue
during the period in which they are incurred.
Specific Risks Associated with the Year 2000 and the Euro.
The Company's ability to manage the Year 2000 Problem and the Euro Issue are
subject to uncertainties beyond its control that could cause actual results
to differ materially from what has been discussed above. The Company could
become subject to legal claims in the event of any Year 2000 or Euro problem
in the Company's business operations. In addition, the Company and its
subsidiaries are subject to regulation by various governmental authorities
which could impose sanctions or fines or cause the Company to cease certain
operations in the event its systems are not Year 2000 compliant. Also,
investors concerned about the Year 2000 Problem or the Euro Issue could
withdraw monies from the Company's funds resulting in a decline in assets
under management which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Factors that could influence the effect of the Year 2000 Problem include the
success of the Company in identifying systems and programs that are affected
by the Year 2000 Problem (for example, it is possible that the SIA testing
may reveal connectivity problems between the Company's systems and those of
third parties). Other facts include the nature and amount of testing,
remediation, programming, installation and systems work required to upgrade
or to replace each of the affected programs or systems; the rate, magnitude
and availability of related labor and consulting costs; the success of the
Company in correcting its internal systems and the success of the Company's
external partners and suppliers in addressing their respective Year 2000
Problems.
The failure of organizations such as those mentioned above under "Third
Parties and Year 2000" to resolve their own issues with respect to the Year
2000 Problem could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the establishment of the Euro may result in market volatility,
expose investments to currency risk due to fluctuations in multiple
currencies, change the economic environment and behavior of investors, or
change the competitive environment for the Company's business in Europe.
Similarly, companies operating in more than one country, such as the Company,
may gain or lose competitive advantages because of the Euro in ways that are
not predictable. It is not currently possible to predict the impact of the
Euro on the business or financial condition of European issuers which
Company-sponsored funds may hold in their portfolios or the impact on the
value of fund shares.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the last fiscal year the balance of loans receivable for the Company's
banking and finance subsidiaries constituted less than 10% of corporate
assets. The Company considered the potential impact on consolidated results
from a reasonably possible near-term movement in interest rates and judged
that this impact would not be material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has previously reported a complaint filed in September 1998 in
the U.S. District Court for the Southern District of Florida, against
Templeton Asset Management, Ltd., an indirect wholly-owned subsidiary of the
Company and the investment manager of the closed-end investment company,
Templeton Vietnam Opportunities Fund, Inc. (now known as Templeton Vietnam
and Southeast Asia Fund, Inc.); certain of the fund's officers and directors;
the Company; and Templeton Worldwide, Inc., a Company subsidiary.
On January 8, 1999 the Company and the other defendants moved to dismiss the
complaint, captioned Richard Waksman, plaintiff on behalf of himself and all
others similarly situated v. Templeton Asset Management Ltd., et al., (Civil
Action No.98-7059) on various legal grounds, including the fact that the
lawsuit mischaracterizes the "fundamental policies" of the Fund and fails to
acknowledge the basic investment objective of the Fund to pursue long-term
capital appreciation. Management believes that this lawsuit is without merit
and intends to defend this action vigorously.
Other than as stated above, there have been no material developments in the
litigation previously reported in the Form 10-K/A of the Company filed with
the SEC on December 29, 1998.
In addition, the Company is involved from time to time in litigation relating
to claims arising in the normal course of business. Management is of the
opinion that the ultimate resolution of such claims will not materially
affect the Company's business or financial position.
Item 5. Other Information
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
When used in this Form 10-Q and in future filings by the Company with the
SEC, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All assumptions, anticipations, expectations
and forecasts contained herein are forward-looking statements that involve
risks and uncertainties. Discussions in "MD&A" about the anticipated effects
of the Company's restructuring initiative, estimated completion dates for
phases of the Company's Year 2000 plan, related cost estimates, statements
about possible effects of the Year 2000 Problem and the Euro Issue, and
possible contingency plans are also "forward-looking statements." Such
statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and should
be read in conjunction with the risk disclosure below. The Company wishes to
advise readers that the factors listed below could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company will not undertake and specifically declines any obligation to
release publicly the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General Factors
The ability of the Company to achieve the expected benefits of the
restructuring plan, including improved service levels and profitability and
cost reductions, is not certain and depends in part upon the Company's
ability to make certain internal operational changes and also upon world
economic and market conditions.
The Company's revenues and income are derived primarily from the management
of a variety of financial services products. As discussed above, the
financial services industry is highly competitive. Such competition could
negatively impact the Company's market share, which could impact assets under
management, from which the bulk of the Company's revenues and income arise.
The Company is in competition with the financial services and other
investment alternatives offered by stock brokerage and investment banking
firms, insurance companies, banks, savings and loan associations and other
financial institutions. Such competition could negatively impact the
Company's market share, revenues and net income. Sales of mutual fund shares
and other financial services products can also be negatively affected by
adverse general securities market conditions, currency fluctuations,
governmental regulations and recessionary global economic conditions.
Securities dealers, whose large retail distribution systems play an important
role in the sale of shares of the Franklin, Templeton and Mutual Series
funds, also sponsor competing proprietary mutual funds. To the extent that
these firms limit or restrict the sale of Franklin, Templeton or Mutual
Series funds shares through their brokerage systems in favor of their
proprietary mutual funds, future sales may be negatively impacted and the
Company's revenues might be adversely affected. In addition, as the number of
competitors in the investment management industry increases, greater demands
are placed on existing distribution channels, which has caused distribution
costs to increase.
The inability of the Company to compete and to distribute and sell its
products effectively would have a negative effect on the Company's level of
assets under management, related revenues and overall business and financial
condition.
Many of the Company's competitors have substantially greater resources than
the Company. In addition, there has been a trend of consolidation in the
mutual fund industry which has resulted in stronger competitors. The banking
industry also continues to expand its sponsorship of proprietary funds
distributed through third party distributors. To the extent that banks limit
or restrict the sale of Franklin, Templeton or Mutual Series shares through
their distribution systems in favor of their proprietary mutual funds, assets
under management might decline and the Company's revenues might be adversely
affected.
Certain portions of the Company's managed portfolios are invested in various
securities of corporations located or doing business in developing regions of
the world commonly known as emerging markets. These portfolios and the
Company's revenues derived from the management of such portfolios are subject
to significant risks of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in
governmental policies, expropriation, nationalization, confiscation of assets
and changes in legislation relating to foreign ownership. Foreign trading
markets, particularly in some emerging market countries are often smaller,
less liquid, less regulated and significantly more volatile.
The Company's assets under management include a significant number of global
equities, which increase the volatility of the Company's managed portfolios
and its revenue and income streams. From 1992 until mid-1998, equity
investments increased as a percentage of the Company's assets under
management. The shift in the Company's asset mix from primarily fixed-income
to a combination of fixed-income and global equities has increased the
possibility of volatility in the Company's managed portfolios due to the
increased percentage of equity investments managed. Declines in global
securities markets that affect the value of these equities, recently have
caused and in the future will cause, revenue declines and may have a material
adverse impact on the Company's business, financial condition and results of
operations. In addition, the Company derives higher revenues and income from
its equity assets and therefore shifts in assets from equity to fixed-income
would have an adverse impact on the Company's income and revenues.
The Company's ability to meet anticipated cash needs is dependent upon
factors including the value of the Company's assets, the creditworthiness of
the Company as perceived by lenders and the market value of the Company's
stock. Similarly, the Company's ability to securitize future portfolios of
auto loan and credit card receivables would also be affected by the market's
perception of those portfolios, finance rates offered by competitors, and the
general market for private debt. The Company's inability to meet cash needs
for various reasons as and when required could have a negative affect on the
Company's financial condition and business operations.
Market values are affected by many things, including the general condition of
national and world economics and the direction and volume of changes in
interest rates and/or inflation rates. A significant portion of the Company's
assets under management are fixed-income securities. Fluctuations in interest
rates and in the yield curve will have an effect on fixed-income assets under
management as well as on the flow of monies to and from fixed-income funds
and, therefore, on the Company's revenues from such funds. In addition, the
impact of changes in the equity marketplace may significantly affect assets
under management. The effects of the foregoing factors on equity funds and
fixed-income funds often operate inversely and it is, therefore, difficult to
predict the net effect of any particular set of conditions on the level of
assets under management.
A number of mutual fund sponsors presently market their funds without sales
charges. As investor interest in the mutual fund industry has increased,
competitive pressures have increased on sales charges of broker-dealer
distributed funds. In response to such competitive pressures, the Company
might be forced to lower or further adjust sales charges, substantially all
of which are currently paid to broker-dealers and other financial
intermediaries. The reduction in such sales charges could make the sale of
shares of the Franklin, Templeton and Mutual Series funds less attractive to
the broker-dealer community, which could in turn have a material adverse
effect on the Company's revenues. In the alternative, the Company might be
required to pay additional fees, commissions or charges in connection with
the distribution of its shares which could have a negative effect on the
Company's earnings.
As a result of increased competitive pressures, in January 1999 the Company
implemented a new share structure using Class A, B and C shares in many of
its funds. Class B shares have not previously been offered by the Company,
and shares previously sold as "Class II shares" are now termed Class C
shares. Both Class B and C shares require certain charges to be paid by the
Company or a subsidiary of the Company to third-party intermediaries, which
creates a significant cash requirement. Past sales of Class C shares, which
were first introduced in 1995, have caused distribution expenses to exceed
distribution revenues for certain products and put increasing pressure on
the Company's profit margins. In addition, sales of Class C shares have
increased relative to the Company's overall sales, resulting in higher
distribution expenses. The Company anticipates that it will be able to
finance these charges from its existing cash flows and other financing
arrangements. If the Company is unable to fund commissions on Class B or C
shares using existing cash flow and debt facilities, the Company's
liquidity could be negatively impacted and additional funding will be
necessary. Past sales of Class C shares are not necessarily indicative of
future sales volume, and future sales of Class B or C shares may be lower
or higher than sales of other types of share classes as a result of changes
in investor demand or lessened or unsuccessful sales efforts by the
Company.
The Company's auto loan receivables business and credit card receivable
activities are subject to significant fluctuations in those consumer market
places as well as to significant competition from companies with much
larger receivable portfolios. In addition, certain of the Company's
competitors are engaged in the financing of auto loans in connection with a
much larger automobile manufacturing businesses and may at times provide
loans at significantly below market interest rates in order to further the
sale of automobiles.
The consumer loan market is highly competitive. The Company competes with
many types of institutions including banks, finance companies, credit unions
and the finance subsidiaries of large automobile manufacturers. Interest
rates the Company can charge and, therefore, its yields vary based on this
competitive environment. The Company is reliant on its relationships with
various automobile dealers and this relationship is highly dependent on the
rates and service that the Company provides. There is no guarantee that in
this competitive environment the Company can maintain its relationships with
these dealers. Auto loan and credit card portfolio losses can also be
influenced significantly by trends in the economy and credit markets which
negatively impact borrowers' ability to repay loans.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the report:
Exhibit 3(i)(a) Registrant's Certificate of Incorporation, as filed
November 28, 1969, incorporated by reference to Exhibit (3)(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994 (the "1994 Annual Report")
Exhibit 3(i)(b) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed March 1, 1985, incorporated by
reference to Exhibit (3)(ii) to the 1994 Annual Report
Exhibit 3(i)(c) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed April 1, 1987, incorporated by
reference to Exhibit (3)(iii) to the 1994 Annual Report
Exhibit 3(i)(d) Registrant's Certificate of Amendment of Certificate of
Incorporation, as filed February 2, 1994, incorporated by
reference to Exhibit (3)(iv) to the 1994 Annual Report
Exhibit (3)(ii) Registrant's By-Laws incorporated by reference to
Exhibit 3(v) to the Company's Form 10-Q for the Quarterly
Period ended December 31, 1994
Exhibit 10.1 Representative Variable Insurance Fund Fund
Participation Agreement among Templeton Variable
Products Series Fund or Franklin Valuemark Fund,
Franklin Templeton Distributors, Inc. and an insurance
company
Exhibit 11 Computations of per share earnings
Exhibit 12 Computations of ratios of earnings to fixed charges
Exhibit 27 Financial Data Schedule. (Filed with the Securities and
Exchange Commission only)
(b) Reports on Form 8-K:
(i) Form 8-K dated October 23, 1998 reporting under Item 5 "Other
Events" the filing of an earnings press release by the
Registrant on October 23, 1998 and including said press release
as an Exhibit under Item 7 "Financial Statements and Exhibits".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Registrant
Date: February 11, 1999 /S/ Martin L. Flanagan
MARTIN L. FLANAGAN
Senior Vice President,
Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>PARTICIPATION AGREEMENT
<TEXT>
Exhibit 10.1
PARTICIPATION AGREEMENT
AMONG TEMPLETON VARIABLE PRODUCTS SERIES FUND,
FRANKLIN TEMPLETON DISTRIBUTORS, INC. and
[ ] INSURANCE COMPANY
THIS AGREEMENT made as of ____________, 1999, among Templeton Variable
Products Series Fund (the "Trust"), an open-end management investment company
organized as a business trust under Massachusetts law, Franklin Templeton
Distributors, Inc., a California corporation, the Trust's principal underwriter
("Underwriter"), and [ ] Insurance Company, a life insurance company organized
as a corporation under [ ] law (the "Company"), on its own behalf and on behalf
of each segregated asset account of the Company set forth in Schedule A, as may
be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Underwriter desire that Trust shares be used as
an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets, and certain of those series, named in
Schedule B, (the "Portfolios") are to be made available for purchase by the
Company for the Accounts; and
WHEREAS, the Trust has received an order from the SEC, dated November 16,
1993 (File No. 812-8546), granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2 (b) (15) and 6e-3 (T) (b) (15)
thereunder, to the extent necessary to permit shares of the Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised; and has
registered or will register certain variable annuity contracts and variable life
insurance policies, listed on Schedule C attached hereto, under which the
portfolios are to be made available as investment vehicles (the "Contracts")
under the 1933 Act unless such interests under the Contracts in the Accounts are
exempt from registration under the 1933 Act and the Trust has been so advised;
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such account on Schedule A hereto, to set aside
and invest assets attributable to one or more Contracts; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, each investment adviser listed on Schedule B (each, an "Adviser")
is duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended ("Advisers Act") and any applicable state securities laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid Contracts and the Underwriter
is authorized to sell such shares to unit investment trusts such as each Account
at net asset value;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. For purposes of this Article I, the Company shall be the Trust's
agent for receipt of purchase orders and requests for redemption relating to
each Portfolio from each Account, provided that the Company notifies the Trust
of such purchase orders and requests for redemption by 9:00 a.m. Eastern time on
the next following Business Day, as defined in Section 1.3.
1.2. The Trust agrees to make shares of the Portfolios available to the
Accounts for purchase at the net asset value per share next computed after
receipt of a purchase order by the Trust (or its agent), as established in
accordance with the provisions of the then current prospectus of the Trust
describing Portfolio purchase procedures on those days on which the Trust
calculates its net asset value pursuant to rules of the SEC, and the Trust shall
use its best efforts to calculate such net asset value on each day on which the
New York Stock Exchange ("NYSE") is open for trading. The Company will transmit
orders from time to time to the Trust for the purchase of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or if, in the sole discretion of the Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, such action is deemed in the best interests of the shareholders of
such Portfolio. Without limiting the foregoing, the Trustees have determined
that there is a significant risk that the Trust and its shareholders may be
adversely affected by investors whose purchase and redemption activity follows a
market timing pattern, and have authorized the Trust, the Underwriter and the
Trust's transfer agent to adopt procedures and take other action (including
without limitation rejecting specific purchase orders) as they deem necessary to
reduce, discourage or eliminate market timing activity.
1.3 The Company shall submit payment for the purchase of shares of a
Portfolio on behalf of an Account no later than the close of business on the
next Business Day after the Trust receives the purchase order. Payment shall be
made in federal funds transmitted by wire to the Trust or its designated
custodian. Upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust for this purpose. "Business Day" shall mean any day
on which the NYSE is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.4 The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the net
asset value next computed after receipt by the Trust (or its agent) of the
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Trust describing Portfolio redemption procedures.
The Trust shall make payment for such shares in the manner established from time
to time by the Trust. Redemption with respect to a Portfolio will normally be
paid to the Company for an Account in federal funds transmitted by wire to the
Company before the close of business on the next Business Day after the receipt
of the request for redemption. Such payment may be delayed if, for example, the
Portfolio's cash position so requires or if extraordinary market conditions
exist, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act.
1.5 Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of the
Trust's Portfolios under Section 1.4 may be netted against one another on any
Business Day for the purpose of determining the amount of any wire transfer on
that Business Day.
1.6 Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the Account.
Portfolio Shares purchased from the Trust will be recorded in the appropriate
title for each Account or the appropriate subaccount of each Account.
1.7 The Trust shall furnish, on or before the ex-dividend date, notice to
the Company of any income dividends or capital gain distributions payable on the
shares of any Portfolio of the Trust. The Company hereby elects to receive all
such income dividends and capital gain distributions as are payable on a
Portfolio's shares in additional shares of the Portfolio. The Trust shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.8 The Trust shall calculate the net asset value of each Portfolio on
each Business Day, as defined in Section 1.3. The Trust shall make the net asset
value per share for each Portfolio available to the Company or its designated
agent on a daily basis as soon as reasonably practical after the net asset value
per share is calculated (normally by 6:30 p.m. Eastern time) and shall use
reasonable efforts to make such net asset value per share available by 7:00 p.m.
Eastern time each Business Day.
1.9 The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Funding Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that it will use Trust shares only for the
purposes of funding the Contracts through the Accounts listed in Schedule A, as
amended from time to time.
1.10 The Company agrees that all net amounts available under the Contracts
shall be invested in the Trust, in such other Funds advised by an Adviser or its
affiliates as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Trust if: (a) such other investment
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of the
Portfolios; or (b) the Company gives the Trust and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company is
available as a funding vehicle for the Contracts at the date of this Agreement
and the Company so informs the Trust and the Underwriter prior to their signing
this Agreement (a list of such investment companies appearing on Schedule D to
this Agreement); or (d) the Trust or Underwriter consents to the use of such
other investment company.
1.11 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article IV of this Agreement.
1.12 Each party to this Agreement shall have the right to rely on
information or confirmations provided by any other party (or by any affiliate of
any other party), and shall not be liable in the event that an error results
from any incorrect information or confirmations supplied by any other party. If
an error is made in reliance upon incorrect information or confirmations, any
amount required to make a Contract owner's account whole shall be borne by the
party who provided the incorrect information or confirmation.
ARTICLE II.
Obligations of the Parties; Fees and Expenses
2.1 The Trust shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of the Trust.
The Trust shall bear the costs of registration and qualification of its shares
of the Portfolios, preparation and filing of the documents listed in this
Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At the option of the Company, the Trust or the Underwriter shall
either (a) provide the Company with as many copies of portions of the Trust's
current prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
pertaining specifically to the Portfolios as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing and from which information relating to series of
the Trust other than the Portfolios has been deleted to the extent practicable.
The Trust or the Underwriter shall provide the Company with a copy of its
current statement of additional information, including any amendments or
supplements, in a form suitable for duplication by the Company. Expenses of
furnishing such documents for marketing purposes shall be borne by the Company
and expenses of furnishing such documents for current contract owners invested
in the Trust shall be borne by the Trust or the Underwriter.
2.3 The Trust (at its expense) shall provide the Company with copies of
any Trust-sponsored proxy materials in such quantity as the Company shall
reasonably require for distribution to Contract owners. The Company shall bear
the costs of distributing proxy materials (or similar materials such as voting
solicitation instructions), prospectuses and statements of additional
information to Contract owners. The Company assumes sole responsibility for
ensuring that such materials are delivered to Contract owners in accordance with
applicable federal and state securities laws.
2.4 If and to the extent required by law, the Company shall: (i) solicit
voting instructions from Contract owners; (ii) vote the Trust shares in
accordance with the instructions received from Contract owners; and (iii) vote
Trust shares for which no instructions have been received in the same proportion
as Trust shares of such Portfolio for which instructions have been received; so
long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners. The Company
reserves the right to vote Trust shares held in any segregated asset account in
its own right, to the extent permitted by law.
2.5 Except as provided in section 2.6, the Company shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any other Trademark relating to the Trust or Underwriter without
prior written consent, and upon termination of this Agreement for any reason,
the Company shall cease all use of any such name or mark as soon as reasonably
practicable.
2.6 The Company shall furnish, or cause to be furnished to the Trust or
its designee, at least one complete copy of each registration statement,
prospectus, statement of additional information, retirement plan disclosure
information or other disclosure documents or similar information, as applicable
(collectively "disclosure documents"), as well as any report, solicitation for
voting instructions, sales literature and other promotional materials, and all
amendments to any of the above that relate to the Contracts or the Accounts
prior to its first use. The Company shall furnish, or shall cause to be
furnished, to the Trust or its designee each piece of sales literature or other
promotional material in which the Trust or an Adviser is named, at least 15
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within five Business Days after
receipt of such material. For purposes of this paragraph, "sales literature or
other promotional material" includes, but is not limited to, portions of the
following that use any Trademark related to the Trust or Underwriter or refer to
the Trust or affiliates of the Trust: advertisements (such as material published
or designed for use in a newspaper, magazine or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures or electronic communication or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts or
any other advertisement, sales literature or published article or electronic
communication), educational or training materials or other communications
distributed or made generally available to some or all agents or employees, and
disclosure documents, shareholder reports and proxy materials.
2.7 The Company and its agents shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust,
the Underwriter or an Adviser in connection with the sale of the Contracts other
than information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
annual and semi-annual reports of the Trust, Trust-sponsored proxy statements,
or in sales literature or other promotional material approved by the Trust or
its designee, except as required by legal process or regulatory authorities or
with the written permission of the Trust or its designee.
2.8 The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and each
Adviser, in such form as the Company may reasonably require, as the Company
shall reasonably request in connection with the preparation of disclosure
documents and annual and semi-annual reports pertaining to the Contracts.
2.9 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from disclosure documents for the Contracts (as such
disclosure documents may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales literature or
other promotional materials, except as required by legal process or regulatory
authorities or with the written permission of the Company.
2.10 So long as, and to the extent that, the SEC interprets the 1940 Act
to require pass-through voting privileges for Contract owners, the Company will
provide pass-through voting privileges to Contract owners whose Contract values
are invested, through the registered Accounts, in shares of one or more
Portfolios of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each registered Account,
the Company will vote shares of each Portfolio of the Trust held by a registered
Account and for which no timely voting instructions from Contract owners are
received in the same proportion as those shares held by that registered Account
for which voting instructions are received. The Company and its agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without the prior written consent of
the Trust, which consent may be withheld in the Trust's sole discretion.
2.11 The Trust and Underwriter shall pay no fee or other compensation to
the Company under this Agreement except as provided on Schedule E, if attached.
Nevertheless, the Trust or the Underwriter or an affiliate may make payments
(other than pursuant to a Rule 12b-1 Plan) to the Company or its affiliates or
to the Contracts' underwriter in amounts agreed to by the Underwriter in writing
and such payments may be made out of fees otherwise payable to the Underwriter
or its affiliates, profits of the Underwriter or its affiliates, or other
resources available to the Underwriter or its affiliates.
ARTICLE III.
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of its state of incorporation
and that it has legally and validly established each Account as a segregated
asset account under such law as of the date set forth in Schedule A.
3.2 The Company represents and warrants that, with respect to each
Account, (1) the Company has registered or, prior to any issuance or sale of the
Contracts, will register the Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a segregated asset account for
the Contracts, or (2) if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, the Company will make
every effort to maintain such exemption and will notify the Trust and the
Adviser immediately upon having a reasonable basis for believing that such
exemption no longer applies or might not apply in the future.
3.3 The Company represents and warrants that, with respect to each
Contract, (1) the Contract will be registered under the 1933 Act, or (2) if the
Contract is exempt from registration under Section 3(a)(2) of the 1933 Act or
under Section 4(2) and Regulation D of the 1933 Act, the Company will make every
effort to maintain such exemption and will notify the Trust and the Adviser
immediately upon having a reasonable basis for believing that such exemption no
longer applies or might not apply in the future. The Company further represents
and warrants that the Contracts will be sold by broker-dealers, or their
registered representatives, who are registered with the SEC under the 1934 Act
and who are members in good standing of the NASD; the Contracts will be issued
and sold in compliance in all material respects with all applicable federal and
state laws; and the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements.
For any unregistered Accounts which are exempt from registration under the
`40 Act in reliance upon Sections 3(c)(1) or 3(c)(7) thereof, the Company
represents and warrants that:
(a) each Account and sub-account thereof has a principal underwriter
which is registered as a broker-dealer under the Securities Exchange
Act of 1934, as amended;
(b) Trust shares are and will continue to be the only
investment securities held by the corresponding Account
sub-accounts; and
(c) with regard to each Portfolio, the Company, on behalf
of the corresponding sub-account, will:
(1) seek instructions from all Contract owners with regard to the
voting of all proxies with respect to Trust shares and vote such
proxies only in accordance with such instructions or vote such
shares held by it in the same proportion as the vote of all
other holders of such shares; and
(2) refrain from substituting shares of another security for such
shares unless the SEC has approved such substitution in the
manner provided in Section 26 of the `40 Act.
3.4 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Massachusetts and that it does
and will comply in all material respects with the 1940 Act and the rules and
regulations thereunder.
3.5 The Trust represents and warrants that the Portfolio shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
the Trust shall be registered under the 1940 Act prior to and at the time of any
issuance or sale of such shares. The Trust shall amend its registration
statement under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust shall register
and qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust or the
Underwriter.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for variable
annuity, endowment or life insurance contracts set forth in Section 817(h) of
the Internal Revenue Code of 1986, as amended ("Code"), and the rules and
regulations thereunder, including without limitation Treasury Regulation
1.817-5, and will notify the Company immediately upon having a reasonable basis
for believing any Portfolio has ceased to comply or might not so comply and will
in that event immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
3.7 The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it will make
every effort to maintain such qualification and will notify the Company
immediately upon having a reasonable basis for believing it has ceased to so
qualify or might not so qualify in the future.
3.8 The Trust represents and warrants that should it ever desire to make
any payments to finance distribution expenses pursuant to Rule 12b-1 under the
1940 Act, the Trustees, including a majority who are not "interested persons" of
the Trust under the 1940 Act ( "disinterested Trustees" ), will formulate and
approve any plan under Rule 12b-1 to finance distribution expenses.
3.9 The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust in an amount not less that the minimum
coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such
bond shall include coverage for larceny and embezzlement and be issued by a
reputable bonding company.
3.10 The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals or entities
dealing with the money and/or securities of the Trust are and shall be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Trust, in an amount not less than $5 million. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Trust and the Underwriter in the event that such coverage
no longer applies.
3.11 The Underwriter represents that each Adviser is duly organized and
validly existing under applicable corporate law and that it is registered and
will during the term of this Agreement remain registered as an investment
adviser under the Advisers Act.
3.12 The Trust currently intends for one or more classes of shares (each,
a "Class") to make payments to finance its distribution expenses, including
service fees, pursuant to a Plan adopted under Rule 12b-1 under the 1940 Act
("Rule 12b-1"), although it may determine to discontinue such practice in the
future. To the extent that any Class of the Trust finances its distribution
expenses pursuant to a Plan adopted under Rule 12b-1, the Trust undertakes to
comply with any then current SEC and SEC staff interpretations concerning Rule
12b-1 or any successor provisions.
ARTICLE IV.
Potential Conflicts
4.1 The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination by the
Trustees that an irreconcilable material conflict exists and of the implications
thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for the Trustees to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions. All communications from the Company to the Trustees
may be made in care of the Trust.
4.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its own expense and to the extent reasonably practicable (as determined by
the Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such withdrawal should be implemented to a vote of all affected
Contract owners and, as appropriate, withdrawal of the assets of any appropriate
group (i.e. , annuity contract owners, life insurance policy owners, or variable
contract owners of one or more Participating Insurance Companies) that votes in
favor of such withdrawal, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with a
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Trust be required to establish a new funding medium for the Contracts. In
the event that the Trustees determine that any proposed action does not
adequately remedy any irreconcilable material conflict, then the Company will
withdraw the Account's investment in the Trust and terminate this Agreement
within six (6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and termination
shall be limited to the extent required by any such material irreconcilable
conflict as determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Funding
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if reasonably deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then the Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V.
Indemnification
5.1 Indemnification By the Company
(a) The Company agrees to indemnify and hold harmless the
Underwriter, the Trust and each of its Trustees, officers, employees
and agents and each person, if any, who controls the Trust within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually the "Indemnified Party" for purposes of
this Article V) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written
consent of the Company, which consent shall not be unreasonably
withheld) or expenses (including the reasonable costs of
investigating or defending any alleged loss, claim, damage, liability
or expense and reasonable legal counsel fees incurred in connection
therewith) (collectively, "Losses"), to which the Indemnified Parties
may become subject under any statute or regulation, or at common law
or otherwise, insofar as such Losses are related to the sale or
acquisition of Trust Shares or the Contracts and
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
disclosure document for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this indemnity shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was
accurately derived from written information furnished to the
Company by or on behalf of the Trust for use in Company
Documents or otherwise for use in connection with the sale of
the Contracts or Trust shares; or
(ii) arise out of or result from statements or
representations (other than statements or representations
contained in and accurately derived from Trust Documents as
defined in Section 5.2 (a)(i)) or wrongful conduct of the
Company or persons under its control, with respect to the sale
or acquisition of the Contracts or Trust shares; or
(iii) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Trust
Documents as defined in Section 5.2(a)(i) or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance
upon and accurately derived from written information furnished
to the Trust by or on behalf of the Company; or
(iv) arise out of or result from any failure by the Company
to provide the services or furnish the materials required under
the terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company.
(b) The Company shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party
would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Trust or Underwriter, whichever is
applicable. The Company shall also not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case
any such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in the
defense of such action. The Company also shall be entitled to assume
the defense thereof, with counsel satisfactory to the party named in
the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
(c) The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Trust shares or the
Contracts or the operation of the Trust.
5.2 Indemnification By The Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the
Company, the underwriter of the Contracts and each of its directors and
officers and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Underwriter, which consent shall not be unreasonably withheld) or expenses
(including the reasonable costs of investigating or defending any alleged
loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses") to which
the Indemnified Parties may become subject under any statute, at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Trust's Shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement, prospectus or sales literature of the Trust
(or any amendment or supplement to any of the foregoing)
(collectively, the "Trust Documents") or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission of such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Underwriter or Trust by or on behalf of the Company for use in the
Registration Statement or prospectus for the Trust or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained
in the disclosure documents or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or wrongful
conduct of the Trust, Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or
Trust shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a disclosure document or
sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Trust; or
(iv) arise as a result of any failure by the Trust to provide
the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the qualification representation
specified in Section 3.7 of this Agreement and the diversification
requirements specified in Section 3.6 of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Underwriter; as limited by and in accordance
with the provisions of Sections 5.2(b) and 5.2(c) hereof.
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure
to notify the Underwriter of any such claim shall not relieve the
Underwriter from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Underwriter will be entitled to participate, at
its own expense, in the defense thereof. The Underwriter also shall be
entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under
this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the
Contracts or the operation of each Account.
5.3 Indemnification By The Trust
(a) The Trust agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 5.3)
against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust, which
consent shall not be unreasonably withheld) or litigation (including legal
and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to the
operations of the Trust, and arise out of or result from any material
breach of any representation and/or warranty made by the Trust in this
Agreement or arise out of or result from any other material breach of this
Agreement by the Trust; as limited by and in accordance with the
provisions of Section 5.3(b) and 5.3(c) hereof. It is understood and
expressly stipulated that neither the holders of shares of the Trust nor
any Trustee, officer, agent or employee of the Trust shall be personally
liable hereunder, nor shall any resort be had to other private property
for the satisfaction of any claim or obligation hereunder, but the Trust
only shall be liable.
(b) The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against any Indemnified Party as such may
arise from such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations
and duties under this Agreement or to the Company, the Trust, the
Underwriter or each Account, whichever is applicable.
(c) The Trust shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Trust in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claims shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure to
notify the Trust of any such claim shall not relieve the Trust from any
liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified
Parties, the Trust will be entitled to participate, at its own expense, in
the defense thereof. The Trust also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Trust to such party of the Trust's election
to assume the defense thereof, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Trust will
not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
(d) The Company and the Underwriter agree promptly to notify the
Trust of the commencement of any litigation or proceedings against it or
any of its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, with respect to the
operation of either the Account, or the sale or acquisition of share of
the Trust.
ARTICLE VI.
Termination
6.1 This Agreement may be terminated by any party in its entirety or with
respect to one, some or all Portfolios or any reason by sixty (60) days advance
written notice delivered to the other parties, and shall terminate immediately
in the event of its assignment, as that term is used in the 1940 Act.
6.2 This Agreement may be terminated immediately by either the Trust or
the Underwriter following consultation with the Trustees upon written notice to
the Company if :
(a) the Company notifies the Trust or the Underwriter that the
exemption from registration under Section 3(c) of the 1940 Act no longer
applies, or might not apply in the future, to the unregistered Accounts,
or that the exemption from registration under Section 4(2) or Regulation D
promulgated under the 1933 Act no longer applies or might not apply in the
future, to interests under the unregistered Contracts; or
(b) either one or both of the Trust or the Underwriter
respectively, shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity; or
(c) the Company gives the Trust and the Underwriter the written
notice specified in Section 1.10 hereof and at the same time such notice
was given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however, that any termination under
this Section 6.2(c) shall be effective forty-five (45) days after the
notice specified in Section 1.10 was given; or
6.3 If this Agreement is terminated for any reason, except under Article
IV (Potential Conflicts) above, the Trust shall, at the option of the Company,
continue to make available additional shares of any Portfolio and redeem shares
of any Portfolio pursuant to all of the terms and conditions of this Agreement
for all Contracts in effect on the effective date of termination of this
Agreement. If this Agreement is terminated pursuant to Article IV, the
provisions of Article IV shall govern.
6.4 The provisions of Articles II (Representations and Warranties) and V
(Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement shall survive the termination of this
Agreement, as long as shares of the Trust are held on behalf of Contract owners
in accordance with Section 6.3, except that the Trust and the Underwriter shall
have no further obligation to sell Trust shares with respect to Contracts issued
after termination.
6.5 The Company shall not redeem Trust shares attributable to the
Contracts (as opposed to Trust shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated or
approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Trust and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Trust and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Trust or
the Underwriter 90 days notice of its intention to do so.
ARTICLE VII.
Notices.
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or the Underwriter:
Templeton Variable Products Series Fund or
Franklin Templeton Distributors, Inc.
500 E. Broward Boulevard
Fort Lauderdale, FL 33394-3091
Attention: Barbara J. Green, Trust Secretary
WITH A COPY TO
Franklin Resources, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94404
Attention:Karen L. Skidmore, Senior Corporate
Counsel
If to the Company:
[ ] Insurance Company
Attention: [ ]
ARTICLE VIII.
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Florida. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders. Copies of any such orders
shall be promptly forwarded by the Trust to the Company.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD, and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 Each party hereto shall treat as confidential the names and addresses
of the Contract owners and all information reasonably identified as confidential
in writing by any other party hereto, and, except as permitted by this Agreement
or as required by legal process or regulatory authorities, shall not disclose,
disseminate, or utilize such names and addresses and other confidential
information until such time as they may come into the public domain, without the
express written consent of the affected party. Without limiting the foregoing,
no party hereto shall disclose any information that such party has been advised
is proprietary, except such information that such party is required to disclose
by any appropriate governmental authority (including, without limitation, the
SEC, the NASD, and state securities and insurance regulators).
8.8 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.9 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided in Section
1.10.
8.10 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.11 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
The Company:
[ ]Insurance Company
By its authorized officer
By:
Name:
Title:
The Trust:
Templeton Variable Products Series Fund
By its authorized officer
By:
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant
Secretary
The Underwriter:
Franklin Templeton Distributors, Inc.
By its authorized officer
By:
Name: Deborah R. Gatzek
Title: Senior Vice President, Assistant
Secretary
SCHEDULE A
Separate Accounts of
[ ] Insurance Company
1. [ ]
Date Established:
SEC Registration Number:
2. [ ]
Date Established:
SEC Registration Number:
SCHEDULE B
Trust Portfolios and Classes Available
Templeton Variable Products Series Adviser
SCHEDULE C
Variable Annuity Contracts
Issued by [ ] Insurance Company
- -----------------------------------------------------------------------
Contract 1 Contract 2 Contract 3
- -----------------------------------------------------------------------
Contract/Product
Name
- -----------------------------------------------------------------------
Registered
(Y/N)
- -----------------------------------------------------------------------
SEC
Registration
Number
- -----------------------------------------------------------------------
Representative
Form Numbers
- -----------------------------------------------------------------------
Separate
Account Name
- -----------------------------------------------------------------------
SEC
Registration
Number
- -----------------------------------------------------------------------
Templeton
Variable
Products
Series
Portfolios
and Classes
(Adviser)
- -----------------------------------------------------------------------
SCHEDULE D
Other Portfolios Available under the Contracts
SCHEDULE E
RULE 12B-1 PLANS
Compensation Schedule
Each Portfolio named below shall pay the following amounts pursuant to the terms
and conditions referenced below under its Class 2 Rule 12b-1 Distribution Plan,
stated as a percentage per year of Class 2's average daily net assets
represented by shares of Class 2.
Portfolio Name Maximum Annual Payment Rate
Agreement Provisions
If the Company, on behalf of any Account, purchases Trust Portfolio shares
("Eligible Shares") which are subject to a Rule 12b-1 Plan adopted under the
1940 Act (the "Plan"), the Company may participate in the Plan.
To the extent the Company or its affiliates, agents or designees
(collectively "you") you provide administrative and other services which assist
in the promotion and distribution of Eligible Shares or Variable Contracts
offering Eligible Shares, the Underwriter, the Trust or their affiliates
(collectively, "we") may pay you a Rule 12b-1 fee. "Administrative and other
services" may include, but are not limited to, furnishing personal services to
owners of Contracts which may invest in Eligible Shares ("Contract Owners"),
answering routine inquiries regarding a Portfolio, coordinating responses to
Contract Owner inquiries regarding the Portfolios, maintaining such accounts or
providing such other enhanced services as a Trust Portfolio or Contract may
require, maintaining customer accounts and records, or providing other services
eligible for service fees as defined under NASD rules. Your acceptance of such
compensation is your acknowledgment that eligible services have been rendered.
All Rule 12b-1 fees, shall be based on the value of Eligible Shares owned by the
Company on behalf of its Accounts, and shall be calculated on the basis and at
the rates set forth in the Compensation Schedule stated above. The aggregate
annual fees paid pursuant to each Plan shall not exceed the amounts stated as
the "annual maximums" in the Portfolio's prospectus, unless an increase is
approved by shareholders as provided in the Plan. These maximums shall be a
specified percent of the value of a Portfolio's net assets attributable to
Eligible Shares owned by the Company on behalf of its Accounts (determined in
the same manner as the Portfolio uses to compute its net assets as set forth in
its effective Prospectus).
You shall furnish us with such information as shall reasonably be
requested by the Trust's Boards of Trustees ("Trustees") with respect to the
Rule 12b-1 fees paid to you pursuant to the Plans. We shall furnish to the
Trustees, for their review on a quarterly basis, a written report of the amounts
expended under the Plans and the purposes for which such expenditures were made.
The Plans and provisions of any agreement relating to such Plans must be
approved annually by a vote of the Trustees, including the Trustees who are not
interested persons of the Trust and who have no financial interest in the Plans
or any related agreement ("Disinterested Trustees"). Each Plan may be terminated
at any time by the vote of a majority of the Disinterested Trustees, or by a
vote of a majority of the outstanding shares as provided in the Plan, on sixty
(60) days' written notice, without payment of any penalty. The Plans may also be
terminated by any act that terminates the Underwriting Agreement between the
Underwriter and the Trust, and/or the management or administration agreement
between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and the Trust. Continuation of the Plans is also conditioned on
Disinterested Trustees being ultimately responsible for selecting and nominating
any new Disinterested Trustees. Under Rule 12b-1, the Trustees have a duty to
request and evaluate, and persons who are party to any agreement related to a
Plan have a duty to furnish, such information as may reasonably be necessary to
an informed determination of whether the Plan or any agreement should be
implemented or continued. Under Rule 12b-1, the Trust is permitted to implement
or continue Plans or the provisions of any agreement relating to such Plans from
year-to-year only if, based on certain legal considerations, the Trustees are
able to conclude that the Plans will benefit each affected Trust Portfolio and
class. Absent such yearly determination, the Plans must be terminated as set
forth above. In the event of the termination of the Plans for any reason, the
provisions of this Schedule E relating to the Plans will also terminate.
Any obligation assumed by the Trust pursuant to this Agreement shall be limited
in all cases to the assets of the Trust and no person shall seek satisfaction
thereof from shareholders of the Trust. You agree to waive payment of any
amounts payable to you by Underwriter under a Plan until such time as the
Underwriter has received such fee from the Fund.
The provisions of the Plans shall control over the provisions of the
Participation Agreement, including this Schedule E, in the event of any
inconsistency.
You agree to provide complete disclosure as required by all applicable statutes,
rules and regulations of all rule 12b-1 fees received from us in the prospectus
of the contracts.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>3
<DESCRIPTION>COMPUTATIONS OF PER SHARE EARNINGS
<TEXT>
Exhibit 11
COMPUTATIONS OF PER SHARE EARNINGS
Earnings per share are based on net income divided by the average number of
shares outstanding including incremental shares from assumed conversions
during the period.
Three months ended
December 31
- ---------------------------------------------------------------------------
(Dollars and shares in thousands) 1998 1997
- ---------------------------------------------------------------------------
Weighted average shares outstanding 251,860 252,692
Incremental shares from assumed
conversions 195 493
=============================
Adjusted weighted average shares
outstanding 252,055 253,185
=============================
Net income
$68,492 $130,515
Earnings per share:
Basic $0.27 $0.52
Diluted $0.27 $0.52
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>4
<DESCRIPTION>COMPUTATION OF RATIOS TO FIXED CHARGES
<TEXT>
Exhibit 12
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES
Three months ended
December 31
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
Income before taxes
$95,128 $176,265
Add fixed charges:
Interest expense 8,737 10,747
Interest factor on rent 3,577 2,891
--------------------------------
Total fixed charges
$12,314 $13,638
--------------------------------
Earnings before fixed charges
and taxes on income $107,442 $189,903
================================
Ratio of earnings to fixed charges 8.73 13.9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 634,178
<SECURITIES> 271,815
<RECEIVABLES> 250,722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,177,068
<PP&E> 365,093
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,398,153
<CURRENT-LIABILITIES> 359,720
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 25,244
<OTHER-SE> 2,341,573
<TOTAL-LIABILITY-AND-EQUITY> 3,398,153
<SALES> 0
<TOTAL-REVENUES> 567,679
<CGS> 0
<TOTAL-COSTS> 476,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,173
<INCOME-PRETAX> 95,128
<INCOME-TAX> 26,636
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,492
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| BGG | https://www.sec.gov/Archives/edgar/data/14195/0000950124-99-000874.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950124-99-000874.txt : 19990211
<SEC-HEADER>0000950124-99-000874.hdr.sgml : 19990211
ACCESSION NUMBER: 0000950124-99-000874
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19981227
FILED AS OF DATE: 19990210
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BRIGGS & STRATTON CORP
CENTRAL INDEX KEY: 0000014195
STANDARD INDUSTRIAL CLASSIFICATION: ENGINES & TURBINES [3510]
IRS NUMBER: 390182330
STATE OF INCORPORATION: WI
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-01370
FILM NUMBER: 99527226
BUSINESS ADDRESS:
STREET 1: 12301 W WIRTH ST
CITY: WAUWATOSA
STATE: WI
ZIP: 53222
BUSINESS PHONE: 4142595333
MAIL ADDRESS:
STREET 1: P O BOX 702
CITY: MILWAUKEE
STATE: WI
ZIP: 53201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT FOR PERIOD ENDED DECEMBER 27,1998
<TEXT>
<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-1370
BRIGGS & STRATTON CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0182330
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12301 West Wirth Street, Wauwatosa, Wisconsin 53222
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
414/259-5333
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class February 1, 1999
- --------------------------------------------------------------------------------
COMMON STOCK, par value $0.01 per share 23,464,015 Shares
-1-
<PAGE> 2
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
December 27, 1998 and June 28, 1998 3
Consolidated Condensed Statements of Income -
Three Months and Six Months ended
December 27, 1998 and December 28, 1997 5
Consolidated Condensed Statements of Cash Flow -
Six Months ended December 27, 1998 and
December 28, 1997 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
-2-
<PAGE> 3
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
December 27, June 28,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,243 $ 84,527
Receivables, net 302,050 136,629
Inventories -
Finished products and parts 105,974 58,975
Work in process 61,644 45,217
Raw materials 4,885 3,684
-------- --------
Total inventories 172,503 107,876
Future income tax benefits 31,854 31,287
Prepaid expenses 24,860 21,727
-------- --------
Total current assets 533,510 382,046
-------- --------
OTHER ASSETS:
Marketable securities 1,680 -
Deferred income tax assets 6,579 9,555
Capitalized software 7,472 9,881
-------- --------
Total other assets 15,731 19,436
-------- --------
PLANT AND EQUIPMENT -
Cost 829,359 812,428
Less - Accumulated depreciation 433,395 420,501
-------- --------
Total plant and equipment, net 395,964 391,927
-------- --------
$945,205 $793,409
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(In thousands)
LIABILITIES & SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
December 27, June 28,
1998 1998
------------ --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 80,162 $ 76,915
Domestic notes payable 135,020 4,700
Foreign loans 22,254 14,336
Current maturities of long-term debt 15,000 15,000
Accrued liabilities 107,955 101,465
Dividends payable 6,765 -
Federal and state income taxes 23,096 10,529
-------- --------
Total current liabilities 390,252 222,945
-------- --------
OTHER LIABILITIES:
Deferred revenue on sale of plant and equipment 15,848 15,893
Accrued pension cost 21,880 26,477
Accrued employee benefits 12,843 12,571
Accrued postretirement health care obligation 69,992 70,933
Long-term debt 128,205 128,102
-------- --------
Total other liabilities 248,768 253,976
-------- --------
SHAREHOLDERS' INVESTMENT:
Common stock-
Authorized 60,000 shares, $.01 par value,
Issued 28,927 shares 289 289
Additional paid-in capital 37,029 37,776
Retained earnings 549,265 533,805
Unearned compensation on restricted stock (263) -
Unearned loss on marketable securities (64) -
Cumulative translation adjustments (1,341) (2,110)
Treasury stock at cost, 5,731 and 5,103 shares,
respectively (278,730) (253,272)
-------- --------
Total shareholders' investment 306,185 316,488
-------- --------
$945,205 $793,409
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 27 Dec. 28 Dec. 27 Dec. 28
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $359,943 $308,481 $583,924 $479,038
COST OF GOODS SOLD 288,472 257,584 474,841 401,730
-------- -------- -------- --------
Gross profit on sales 71,471 50,897 109,083 77,308
ENGINEERING, SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 29,107 30,065 58,355 59,239
-------- -------- -------- --------
Income from operations 42,364 20,832 50,728 18,069
INTEREST EXPENSE (4,748) (5,248) (8,158) (9,042)
OTHER INCOME, net 1,801 1,020 3,948 3,335
-------- -------- -------- --------
Income before provision
for income taxes 39,417 16,604 46,518 12,362
PROVISION FOR INCOME TAXES 14,780 6,310 17,440 4,700
-------- -------- -------- --------
Net income $ 24,637 $ 10,294 $ 29,078 $ 7,662
======== ======== ======== ========
EARNINGS PER SHARE DATA -
Average shares outstanding 23,308 24,903 23,467 25,034
======== ======== ======== ========
Basic earnings per share $ 1.06 $ .41 $ 1.24 $ .31
======== ======== ======== ========
Diluted average shares outstanding 23,481 25,054 23,588 25,189
======== ======== ======== ========
Diluted earnings per share $ 1.05 $ .41 $ 1.23 $ .30
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ .29 $ .28 $ .58 $ .56
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
December 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,078 $ 7,662
Adjustments to reconcile net income to net
cash used in operating activities -
Depreciation 23,698 22,567
Amortization of discount on long-term debt 103 103
Amortization of compensation on
restricted stock 24 -
Loss on disposition of plant and equipment 195 736
Provision for deferred income taxes 2,450 (316)
Change in operating assets and liabilities -
Increase in accounts receivable (166,692) (115,394)
Increase in inventories (64,625) (87,282)
(Increase)Decrease in prepaid expenses (3,252) 1,927
Increase(decrease) in accounts payable
and accrued liabilities 30,557 (3,133)
Other, net (4,262) (457)
--------- ---------
Net cash used in operating activities (152,726) (173,587)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant and equipment (29,881) (26,124)
Proceeds received on sale of plant and equipment 1,382 336
--------- ---------
Net cash used in investing activities (28,499) (25,788)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on domestic and foreign loans 138,714 142,905
Dividends (13,618) (13,963)
Purchase of common stock for treasury (35,614) (43,501)
Proceeds from exercise of stock options 8,897 8,045
--------- ---------
Net cash provided by financing activities 98,379 93,486
--------- ---------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS 562 (587)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (82,284) (106,476)
CASH AND CASH EQUIVALENTS, beginning 84,527 112,859
--------- ---------
CASH AND CASH EQUIVALENTS, ending $ 2,243 $ 6,383
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 7,559 $ 4,807
========= =========
Income taxes paid $ 2,937 $ 3,713
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, in the opinion of the Company, adequate disclosures have
been presented to make the information not misleading, and all adjustments
necessary to present fair statements of the results of operations and financial
position have been included. All of these adjustments are of a normal recurring
nature. These condensed financial statements should be read in conjunction with
the financial statements and the notes thereto which were included in the
Company's latest Annual Report on Form 10-K.
The caption entitled Marketable Securities represents stock received in
the sale of the Company's software business at the end of the first quarter of
fiscal 1999. These securities are being classified as available-for-sale and are
being reported at fair market value. The unrealized gain or loss incurred on
this stock was recorded as Unearned Loss on Marketable Securities in the
Shareholders' Investment section of the balance sheet.
The Company's Board of Directors authorized awards of a total of 8,000
shares of restricted stock to key employees in August 1998 from the Company's
treasury stock. These shares shall be forfeitable until they become vested upon
the first to occur of the following: five years from the award date; a change in
control; or termination of employment by reason of retirement, disability or
death. The market value of these shares was recorded as Unearned Compensation on
Restricted Stock at the award date and is being amortized to compensation
expense over the five years.
The Company adopted Financial Accounting Standard (FAS) No. 130,
Reporting Comprehensive Income, in the quarter ended September 1998. This
statement requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting method that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
Company has foreign currency translation adjustments accounted for under FAS
Statement No. 52 which fall within this definition. Total comprehensive income
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 27 Dec. 28 Dec. 27 Dec. 28
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $24,637 $10,294 $29,078 $ 7,662
Foreign currency translation adjustments 243 (422) 769 (665)
Unearned loss on marketable securities,
(net of tax) (64) - (64) -
-------- ------- ------- -------
Total comprehensive income $ 24,816 $ 9,872 $29,783 $ 6,997
======== ======= ======= =======
</TABLE>
-7-
<PAGE> 8
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the Company's
financial condition and results of operations for the periods included in the
accompanying consolidated condensed financial statements:
RESULTS OF OPERATIONS
SALES
Net sales for the second fiscal quarter increased $51 million or 17%
compared to the same period of the previous year. This increase resulted
primarily from the following factors: a $50 million increase in sales dollars
resulting from a 17% increase in engine unit shipments, and $6 million from
increased prices, offset by $5 million reduction due to a mix change in engines
sold.
Net sales for the six months ended December 1998 increased $105 million
or 22% when compared to the first half of the prior year. This increase resulted
from the same factors discussed above for the quarter. There was a $115 million
increase in sales dollars due to a 27% increase in engine unit shipments, and $6
million from increased prices, offset by a mix change in engines sold of $16
million.
GROSS PROFIT
The gross percentage increased to 20% in the current quarter from 16%
in the preceding year's second quarter. This increase resulted primarily from
the $6 million of price increases, absorption of fixed expenses over more units
produced of $6 million and lower material costs for aluminum of $2 million, the
major raw material used in engines.
The gross profit margins for the six-month period increased to 19% in
the current year from 16% in the preceding year. The increase resulted primarily
from $6 million of price increases, $6 million attributed to the benefit of
greater production in the second quarter, lower costs for aluminum of $3
million, and $1 million of lower costs for purchased engines caused by favorable
exchange rates.
ENGINEERING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
This category decreased by 3% or $1 million between the second fiscal
quarters of 1999 and 1998. This resulted from a $3 million decrease in costs
related to the software business the Company sold at the end of the first
quarter of the current fiscal year, offset by increased advertising costs of $1
million and a $1 million increase in profit sharing expense due to improved
results.
The 1% or $1 million decrease for the comparative six-month period was
due primarily to the same factors discussed above for the quarter. There was a
$3 million decrease in costs related to the software business and reduced
expenses of $1 million related to the implementation of the Company's new
computer system. These decreases were offset by $1 million increases in both
advertising and profit sharing expenses.
-8-
<PAGE> 9
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
INTEREST EXPENSE
Interest expense decreased $1 million in the three-month comparison and
$1 million in the six-month comparison. These decreases were the result of lower
average interest rates on working capital borrowings and the repayment of $15
million of long-term debt at the end of fiscal year 1998.
OTHER INCOME
This category increased $1 million in both the three-month and
six-month periods. In each period, the primary change is due to reductions in
the loss on the disposition of plant and equipment.
PROVISION FOR INCOME TAXES
The effective rate used in both the three-month and six-month periods
for the current year was 37.5%. This is management's estimate of what the rate
will be for the entire 1999 fiscal year. Last year's rate was 38% in both
periods; however, the final effective rate for the entire 1998 fiscal year was
37.6%.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the six-month period was $153
million in fiscal 1999 and $174 million in 1998. In the six-month period, net
income before depreciation provided cash of $53 million for fiscal 1999 and $30
million for fiscal 1998. Accounts receivable increased $167 million in fiscal
1999 and $115 million in fiscal 1998. The increase in accounts receivable was
caused by increased sales near the end of the six months ended December 1998.
Inventory increased $65 million in fiscal 1999 compared to $87 million in fiscal
1998. Increased sales account for the decrease in the buildup of inventories.
Accounts payable and accrued liabilities increased $31 million in fiscal 1999
compared to a decrease of $3 million in fiscal 1998. The $31 million increase
was primarily due to a $22 million increase in accounts payable as a result of
the timing of payments and an $11 million increase in federal and state income
taxes payable due to the higher level of earnings.
Cash used in investing activities totaled $28 million in the six-month
period and $26 million the same period of the preceding year. Additions to plant
and equipment primarily made up the cash used in each year.
Financing activities provided $98 million of cash in 1999 compared to
$93 million in 1998. Net borrowings were $139 million and $143 million,
respectively. The Company used $36 million in the current year and $44 million
in the preceding year for its stock repurchase program.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
The Company completed the share repurchase program authorized by the
Board of Directors in fiscal 1997 for $300 million of its common stock in the
second quarter of fiscal 1999. In January 1999, the Board of Directors approved
a repurchase of up to 1.3 million additional shares of the Company's common
stock. Purchases will be made from time to time in open market or private
transactions. The share repurchase is intended to minimize dilution from shares
issued for employee benefit plans and will be funded from available cash.
-9-
<PAGE> 10
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
Management expects capital expenditures for reinvestment in equipment
and new products to total $70 million in fiscal 1999.
The Company currently intends to increase future cash dividends per
share at a rate approximating the inflation rate, subject to the discretion of
its Board of Directors and requirements of applicable law.
Management believes that available cash, the credit facility, cash
generated from operations, existing lines of credit and access to public debt
markets will be adequate to fund the Company's capital requirements for the
foreseeable future.
OUTLOOK
Based on customer expectations, orders actually placed and favorable
econometric forecasts, and assuming normal spring weather, the Company expects
higher sales and earnings for the full fiscal year.
Overall, the Company expects that engine unit sales will reflect a
small increase in fiscal 1999 compared to fiscal 1998. Historically, the Company
has built inventory in the first six months of the fiscal year and shipped much
of this inventory in the second half of the fiscal year, primarily in the third
quarter. The Company expects to ship fewer engines in the second half of this
fiscal year because of lower inventories that were caused by increased shipments
in the first six months.
In fiscal 1998 the Company experienced adverse effects on revenue and
gross profit as a result of the strong U.S. dollar compared to European
currencies. Assuming the exchange rates of the U.S. dollar against the European
currencies remain consistent with December 1998, management believes that the
adverse effect on revenue and gross profit will be significantly less in fiscal
1999 than in fiscal 1998.
OTHER MATTERS
Emissions
Environmental Protection Agency (EPA) currently expects to finalize the
Phase II regulation for non hand-held small engines in March of 1999. EPA has
informed industry that the final regulation will impose more stringent standards
over the useful life of the engine. The standards will be phased in from 2001 to
2005 for Class II engines and from 2003 to 2008 for Class I engines. It is not
anticipated that this will have a material effect on the financial condition or
results of operations of the Company.
Year 2000 Issues
The Company has completed implementation of its new company-wide
information system. All business transactions are being processed on the new
system, which addressed the great majority of information technology year 2000
computer issues. The Company has initiated a business recovery program at an
off-site location which will be used for complete testing of the new
company-wide information system. This testing is expected to be completed by the
middle of the 1999 calendar year.
Project expenditures to date total $29 million. The Company expects to
incur an additional $6 million of incremental costs, running through the 2002
fiscal year, because of related projects.
The Company is nearing completion of the assessment phase of its
non-information technology systems. Based on the assessment completed to date,
the Company does not anticipate the need to develop an extensive contingency
plan for non-information systems, so it is not expecting to incur material
incremental costs to do this.
-10-
<PAGE> 11
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "objective", and "think" or
similar expressions are intended to identify forward-looking statements. The
forward-looking statements are based on the Company's current views and
assumptions and involve risks and uncertainties that include, among other
things, the effects of weather on the purchasing patterns of the Company's
customers and end use purchasers of the Company's engines; the seasonal nature
of the Company's business; actions of competitors; changes in laws and
regulations, including accounting standards; employee relations; customer
demand; prices of purchased raw materials and parts; domestic economic
conditions, including housing starts and changes in consumer disposable income;
foreign economic conditions, including currency rate fluctuations; the ability
of the Company's customers and suppliers to meet year 2000 compliance; and
unanticipated internal year 2000 issues. Some or all of the factors may be
beyond the Company's control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since the September 8, 1998 filing
of the Company's Annual Report on Form 10-K.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item was previously reported in the
Company's Form 10-Q for the first quarter ended September 27, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
10.1 Separation Agreement*
10.2 Agreement with Executive Officer*
11 Computation of Earnings Per Share of Common Stock*
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule, December 27, 1998*
*Filed herewith
-11-
<PAGE> 12
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the second quarter ended December
27, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRIGGS & STRATTON CORPORATION
(Registrant)
Date: February 8, 1999 /s/ J. E. Brenn
------------------------------------
J. E. Brenn
Senior Vice President and Chief
Financial Officer
Date: February 8, 1999 /s/ T. J. Teske
------------------------------------
T. J. Teske
Controller
-12-
<PAGE> 13
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Separation Agreement*
10.2 Agreement with Executive Officer*
11 Computation of Earnings Per Share of Common Stock*
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
* Filed herewith.
-13-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>SEPARATION AGREEMENT
<TEXT>
<PAGE> 1
BRIGGS & STRATTON CORPORATION
Form 10-Q for Quarterly Period Ended December 27, 1998
Exhibit No. 10.1
SEPARATION AGREEMENT
<PAGE> 2
SEPARATION AGREEMENT
This agreement is made as of this 30th day of November by and between Briggs &
Stratton Corporation, a Wisconsin corporation (the "Employer") and Robert H.
Eldridge (the "Employee"). In consideration of the promises set forth herein,
the parties hereto agree as follows:
1. Employment. Employment agreement executed on January 30, 1998 between
Robert H. Eldridge and Briggs & Stratton shall remain in force through
October 31, 1999. The Employee's service shall be performed at the location
where he was employed immediately preceding the date hereof or any office
or location less than 35 miles from such location.
2. Other Compensation and Benefits. Except as specified in this Section 2 and
Sections 3 and 4 hereof, Employee shall participate in such executive
compensation structures and employee benefit plans as shall cover senior
executives of the Employer generally and his participation and benefits
(and the participation and benefits of any person claiming through his
status as a participant) shall be governed by the terms and conditions of
such structures and plans through October 31, 1999.
3. Supplemental Pension Benefits. If Employee's employment shall continue
until October 31, 1999, he shall be entitled to a monthly pension benefit
commencing November 1, 1999 equal to $16,667.00, which shall be payable in
the form of a joint and 100% survivor annuity - i.e., the monthly pension
shall be $16,667.00 during Employee's lifetime, and should the spouse to
whom he was legally married on November 1, 1999 survive him, she will be
paid a monthly annuity for her life of $16,667.00. Such amounts shall
include any amounts to which the Employee and such surviving spouse may be
entitled under any qualified defined benefit pension plan maintained by the
Employer and any unfunded supplemental defined benefit pension plan
maintained by the Employer. To the extent that Employee is covered by a
plan or plans described in the preceding sentence, he shall make all such
elections and file all such papers as the Employer shall require so that
benefits under such plans shall be payable in the form and at the time
specified in the first sentence of this Section 3. To the extent that the
benefits specified under this Section 3 exceed the benefits payable under
such plans, any and all such benefits shall be an unfunded obligation of
the Employer as to which the Employee and any person claiming through the
Employee shall be merely a general unsecured creditor of the Employer;
provided that the Company shall cause this benefit to be covered by the
"rabbi" trust which it maintains with respect to other executive benefits.
4. Medical Coverage. If Employee's employment shall continue until October 31,
1999, he shall be entitled to purchase medical coverage for the period
commencing on his separation from active service and continuing until he
reaches age 65 as though he were covered by the medical coverage
continuation rules of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA") for that entire period.
5. Release. As a condition to the receipt of the benefits described in the
first clause of the first sentence of Section 3 hereof, the Employee shall
execute such release as the Employer shall specify.
6. Governing Law. This Agreement shall be governed by the internal laws of the
State of Wisconsin.
<PAGE> 3
7. Binding Effects. The rights and obligations of the Employer hereunder shall
inure to the benefit of and shall be binding upon the respective successors
and assigns of Employer.
8. Non-waiver. The waiver by Employer of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other or
subsequent breach by the Employee.
9. Approval. This Agreement shall be subject to the approval of the
Nominating, Compensation and Governance Committee of the Board of Directors
of the Employer.
10. Headings. Headings are for convenience of reference only.
BRIGGS & STRATTON CORPORATION
By /s/ C. B. Rogers, Jr. /s/ R. H. Eldridge
---------------------------------- -----------------------------
C. B. Rogers, Jr., Chairman Robert H. Eldridge (Employee)
Nominating, Compensation and
Governance Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<DESCRIPTION>AGREEMENT WITH EXECUTIVE OFFICER
<TEXT>
<PAGE> 1
BRIGGS & STRATTON CORPORATION
Form 10-Q for Quarterly Period Ended December 27, 1998
Exhibit No. 10.2
AGREEMENT WITH EXECUTIVE OFFICER
<PAGE> 2
AGREEMENT
This Agreement is made this 30th day of November, 1998, by and
between Briggs & Stratton Corporation, a Wisconsin corporation (the "Employer")
and M. D. Hamilton (the "Employee"). In consideration of the promises set forth
herein, the parties hereto agree as follows:
1. Employment. Employer shall employ Employee from the date
hereof until December 31, 2002, unless such employment shall be
terminated earlier as specified herein. During the term specified in
the preceding sentence, Employee's position (including status, offices,
titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and
assigned immediately preceding the date hereof and the Employee's
service shall be performed at the location where he was employed
immediately preceding the date hereof or any office or location less
than 35 miles from such location.
Employer may terminate Employee's employment at any time for
any of the following causes:
(a) the continuing inability of the Employee, for a
period of at least 90 days, to perform and carry out his
duties and responsibilities under this Agreement for any
reason, including mental or physical disability. The
determination of such inability shall be made in the sole
discretion of the Board of Directors of the Employer;
(b) gross negligence or repeated neglect by Employee
in the performance of duties for Employer;
(c) material breach by Employee of the terms of this
Agreement; or
(d) death.
2. Salary. During the term specified in Section 1 hereof,
Employer shall pay Employee a monthly salary of no less than
$20,936.00, payable in semi-monthly installments, or at such other
intervals as salary is paid to other senior executives of the Employer
generally.
3. Other Compensation and Benefits. Except as specified in
this Section 3 and Sections 4 and 5 hereof, Employee shall participate
in such executive compensation structures and employee benefit plans as
shall cover senior executives of the Employer generally and his
participation and benefits (and the participation and benefits of any
person claiming through his status as a participant) shall be governed
by the terms and conditions of such structures and plans.
Effective with respect to stock option grants made during and
after 1998, the number of stock options which shall be granted Employee
shall be one-half of the number of options which would have been
granted to him by application of the formula or other method of
determination used by the Employer for the grant of options to other
senior executives of the Employer at the time in question.
<PAGE> 3
For purposes of determining any cash bonus to which Employee
may be entitled and the computation of which is a function of base
salary, Employee's monthly base salary during the term covered hereby
shall be deemed to be actual base salary, plus $2,510.00.
4. Supplemental Pension Benefits. If Employee's employment
shall continue until December 31, 2002, he shall be entitled to a
monthly pension benefit commencing January 1, 2003 equal to $20,833.33,
which shall be payable in the form of a joint and 50% survivor annuity
-- i.e., the monthly pension shall be $20,833.33 during Employee's
lifetime, and should the spouse to whom he was legally married on
December 31, 2002 survive him, she will be paid a monthly annuity for
her life of $10,416.67. Such amounts shall include any amounts to which
the Employee and such surviving spouse may be entitled under any
qualified defined benefit pension plan maintained by the Employer and
any unfunded supplemental defined benefit pension plan maintained by
the Employer. To the extent that Employee is covered by a plan or plans
described in the preceding sentence, he shall make all such elections
and file all such papers as the Employer shall require so that benefits
under such plans shall be payable in the form and at the time specified
in the first sentence of this Section 4. To the extent that the
benefits specified under this Section 4 exceed the benefits payable
under such plans, any and all such benefits shall be an unfunded
obligation of the Employer as to which the Employee and any person
claiming through the Employee shall be merely a general unsecured
creditor of the Employer; provided that the Company shall cause this
benefit to be covered by the "rabbi" trust which it maintains with
respect to other executive benefits.
If Employee's employment is terminated prior to December 31,
2002, under the rules of Section l.a. hereof, he shall be entitled to
the benefits described in the first paragraph of this Section 4,
commencing on the first day of the first calendar month commencing
after the date that his employment is so terminated except that the
number set forth in the schedule below, which corresponds to the date
that his employment is so terminated, shall be substituted for
$20,833.33 (and one-half of such number shall be substituted for
$10,416.07).
Date of Termination of Employment Monthly Benefit Amount
On or after December 31, 2001, but prior
to December 31, 2002 $20,000.00
On or after December 31, 2000, but prior
to December 31, 2001 $19,166.67
On or after December 31, 1999, but prior
to December 31, 2000 $18,333.33
Prior to December 31, 1999 $16,666.67
5. Medical Coverage. If Employee's employment shall continue
until December 31, 2002, he shall be entitled to purchase medical
coverage for the period commencing on his separation from service and
continuing until he reaches age 65 as though he were covered by the
medical coverage continuation rules of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") for that entire
period.
<PAGE> 4
6. Competition. As a condition to the receipt of the
benefits described in Section 4 hereof which are in excess of the
benefits which would otherwise be payable to Employee under any
qualified defined benefit pension plan or unfunded supplemental defined
benefit pension plan maintained by Employer and covering other senior
executives of the Employer, Employee agrees to abide by the terms of
this Section 6. For a period of 3 years after the Employee's separation
from service with the Employer, Employee will not, directly or
indirectly, own, manage, operate, control, be connected with the
ownership, management, operation or control of any entity in the United
States of America which competes with the Employer, or be employed by,
perform service for, consult with or solicit business for any such
entity. Employee agrees that the restrictions set forth in this Section
6 are fair and reasonable and are reasonably required for the
protection of the Employer. Employer's sole remedy for Employee's
breach of this Section 6 shall be to forever withhold from Employee,
and any person claiming through Employee, any further payments
described in the first clause of the first sentence of this Section 6.
7. Release. As a condition to the receipt of the benefits
described in the first clause of the first sentence of Section 4
hereof, the Employee shall execute such release as the Employer shall
specify.
8. Integration. This Agreement sets forth the entire
agreement of the parties hereto, and it supersedes any and all prior
agreements, contracts and understandings between the parties hereto,
whether written or oral, with regard to the subject matter hereof,
including without limitation, the two documents each entitled
"Employment Agreement," one of which is dated February 19, 1990, and
the other of which is dated January 30, 1998. This Agreement may be
amended only in writing executed by the parties hereto.
9. Governing Law. This Agreement shall be governed by the
internal laws of the State of Wisconsin.
10. Binding Effect. The rights and obligations of the
Employer hereunder shall inure to the benefit of and shall be binding
upon the respective successors and assigns of Employer.
11. Non-waiver. The waiver by Employer of a breach of any
provision of this Agreement shall not operate or be construed as a
waiver of any other or subsequent breach by the Employee.
12. Approval. This Agreement shall be subject to the approval
of the Nominating, Compensation and Governance Committee of the Board
of Directors of the Employer.
13. Headings. Headings are for convenience of reference only.
BRIGGS & STRATTON CORPORATION
By /s/ C. B. Rogers, Jr. /s/ M. D. Hamilton
--------------------------------- ------------------------------
C.B. Rogers, Jr., Chairman Michael D. Hamilton (Employee)
Nominating, Compensation and
Governance Committee
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>4
<DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
<TEXT>
<PAGE> 1
EXHIBIT 11
BRIGGS & STRATTON CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(In thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-----------------------------------------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
COMPUTATIONS FOR STATEMENTS OF INCOME
Net income $ 24,637 $ 10,294 $ 29,078 $ 7,662
============ ============ ============ ============
Basic earnings per share of common stock:
Average shares of common stock outstanding 23,308 24,903 23,467 25,034
============ ============ ============ ============
Basic earnings per share of common stock: $ 1.06 $ 0.41 $ 1.24 $ 0.31
============ ============ ============ ============
Diluted earnings per share of common stock:
Average shares of common stock outstanding 23,308 24,903 23,467 25,034
Incremental common shares applicable to
common stock options based on the common
stock average market price during the period 172 151 120 155
Incremental common shares applicable to
restricted common stock based on the common
stock average market price during the period 1 - 1 -
------------ ------------ ------------ ------------
Average common shares assuming dilution 23,481 25,054 23,588 25,189
============ ============ ============ ============
Fully diluted earnings per average share of
common stock, assuming conversion of all
applicable securities $ 1.05 $ 0.41 $ 1.23 $ 0.30
============ ============ ============ ============
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>5
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
EXHIBIT 12
BRIGGS & STRATTON CORPORATION AND SUBISIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 29,078 $ 7,662
Add:
Interest 8,158 9,042
Income tax expense and other taxes on income 17,440 4,700
Fixed charges of unconsolidated subsidiaries 153 271
------------ ------------
Earnings as defined $ 54,829 $ 21,675
============ ============
Interest $ 8,158 $ 9,042
Fixed charges of unconsolidated subsidiaries 153 271
------------ ------------
Fixed charges as defined $ 8,311 $ 9,313
============ ============
Ratio of earnings to fixed charges 6.60 x 2.33 x
============ ============
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF BRIGGS & STRATTON CORPORATION FOR THE SIX MONTHS ENDED DECEMBER
27, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> DEC-27-1998
<CASH> 2,243
<SECURITIES> 0
<RECEIVABLES> 302,050
<ALLOWANCES> 0
<INVENTORY> 172,503
<CURRENT-ASSETS> 533,510
<PP&E> 829,358
<DEPRECIATION> 433,394
<TOTAL-ASSETS> 945,205
<CURRENT-LIABILITIES> 390,252
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 289
<OTHER-SE> 305,896
<TOTAL-LIABILITY-AND-EQUITY> 945,205
<SALES> 583,924
<TOTAL-REVENUES> 583,924
<CGS> 474,841
<TOTAL-COSTS> 474,841
<OTHER-EXPENSES> 54,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,158
<INCOME-PRETAX> 46,518
<INCOME-TAX> 17,440
<INCOME-CONTINUING> 29,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,078
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.23
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| BMC | https://www.sec.gov/Archives/edgar/data/835729/0000950129-99-000579.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000950129-99-000579.txt : 19990217
<SEC-HEADER>0000950129-99-000579.hdr.sgml : 19990217
ACCESSION NUMBER: 0000950129-99-000579
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BMC SOFTWARE INC
CENTRAL INDEX KEY: 0000835729
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 742126120
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-17136
FILM NUMBER: 99543115
BUSINESS ADDRESS:
STREET 1: 2101 CITYWEST BLVD
CITY: HOUSTON
STATE: TX
ZIP: 77042-2827
BUSINESS PHONE: 7139188800
MAIL ADDRESS:
STREET 1: 2101 CITYWEST BLVD
CITY: HOUSTON
STATE: TX
ZIP: 77042-2827
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>BMC SOFTWARE, INC. - DATED 12/31/98
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 0-17136
BMC SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2126120
(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
BMC Software, Inc.
2101 CityWest Boulevard
Houston, Texas 77042
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (713)918-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 10, 1999, there were outstanding 217,059,000 shares of Common
Stock, par value $.01, of the registrant.
<PAGE> 2
BMC SOFTWARE, INC. AND SUBSIDIARIES
Quarter Ended December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
---------------------
<S> <C> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets
December 31, 1998 (Unaudited) and March 31, 1998 3
Condensed Consolidated Statements of Earnings Three months and
nine months ended December 31, 1997
and 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows Nine months
ended December 31, 1997 and 1998
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
<CAPTION>
PART II. OTHER INFORMATION
-----------------
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
----------
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,093 $ 123,070
Investment securities 56,174 66,569
Trade accounts receivable, net 170,778 218,443
Income tax receivable 40,805 22,127
Prepaid expenses and other 34,028 34,765
---------- ----------
Total current assets 373,878 464,974
Property and equipment, net 162,996 224,396
Software development costs, net 63,475 86,686
Purchased software, net 32,063 33,287
Investment securities 587,806 835,336
Deferred charges and other assets 28,277 50,187
---------- ----------
$1,248,495 $1,694,866
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
---- ----
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 11,361 $ 12,556
Accrued liabilities and other 81,352 118,191
Current portion of deferred revenue 242,821 300,385
----------- -----------
Total current liabilities 335,534 431,132
Long-term Liabilities:
Deferred revenue and other 104,986 160,247
Other long-term liabilities 48,818 48,207
----------- -----------
Total long-term liabilities 153,804 208,454
----------- -----------
Total liabilities 489,338 639,586
Stockholders' equity:
Common stock 2,101 2,173
Additional paid-in capital 129,098 110,719
Retained earnings 729,925 962,975
Foreign currency translation adjustment (1,543) (1,298)
Unrealized gain on securities available for sale 3,179 7,007
----------- -----------
862,760 1,081,576
Less treasury stock 99,513 19,957
Less unearned portion of restricted stock compensation 4,090 6,339
----------- -----------
Total stockholders' equity 759,157 1,055,280
----------- -----------
$ 1,248,495 $ 1,694,866
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Licenses $140,992 $205,236 $358,939 $532,241
Maintenance 55,010 78,171 158,186 212,669
-------- -------- -------- --------
Total revenues 196,002 283,407 517,125 744,910
-------- -------- -------- --------
Operating expenses:
Selling and marketing 52,836 78,457 146,974 213,005
Research and development 27,152 33,786 71,202 101,440
Cost of maintenance services
and product licenses 17,599 27,832 53,318 76,624
General and administrative 15,433 21,688 39,257 53,278
Acquired research and
development costs -- -- 65,473 17,304
-------- -------- -------- --------
Total operating expenses 113,020 161,763 376,224 461,651
-------- -------- -------- --------
Operating income 82,982 121,644 140,901 283,259
Other income 8,246 13,102 21,542 35,732
-------- -------- -------- --------
Earnings before taxes 91,228 134,746 162,443 318,991
Income taxes 26,451 35,034 63,307 85,918
-------- -------- -------- --------
Net earnings $ 64,777 $ 99,712 $ 99,136 $233,073
======== ======== ======== ========
Basic earnings per share $ .32 $ .46 $ .49 $ 1.08
======== ======== ======== ========
Shares used in computing basic
earnings per share 203,120 216,133 202,864 228,035
======== ======== ======== ========
Diluted earnings per share $ .30 $ .44 $ .46 $ 1.02
======== ======== ======== ========
Shares used in computing diluted 216,086 228,300 216,310 215,111
earnings per share ======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BMC SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 99,136 $ 233,073
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Acquired research and development costs 65,473 17,304
Depreciation and amortization 43,481 49,628
Net change in receivables,
payables and other items (12,063) 108,302
--------- ---------
Total adjustments 96,891 175,234
--------- ---------
Net cash provided by operating activities 196,027 408,307
--------- ---------
Cash flows from investing activities:
Technology acquisitions, net of cash acquired (72,044) (6,638)
Purchased software and related assets (2,480) (4,661)
Capital expenditures (49,436) (78,710)
Capitalization of software development (27,621) (46,350)
Purchases of securities held to maturity (69,547) (293,802)
Proceeds from securities held to maturity 66,629 39,705
Increase in long-term finance receivables (9,181) (24,897)
--------- ---------
Net cash used in investing activities (163,680) (415,353)
--------- =========
Cash flows from financing activities:
Income tax reduction relating to stock options 27,473 38,035
Stock options exercised and other 17,231 19,743
Treasury stock acquired (70,703) --
--------- ---------
Net cash used in financing activities (25,999) 57,778
--------- ---------
Effect of exchange rate changes on cash (664) 245
--------- ---------
Net change in cash and cash equivalents 5,684 50,977
Cash and cash equivalents at beginning of period 79,794 72,093
--------- ---------
Cash and cash equivalents at end of period $ 85,478 $ 123,070
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 37,022 $ 15,774
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include
the accounts of BMC Software, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair presentation of
the results for the interim periods presented. These financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These financial statements should be read in conjunction with the
Company's annual audited financial statements for the year ended March 31, 1998,
as filed with the Securities and Exchange Commission (SEC) on Form 10-K.
Note 2 - Earnings Per Share
The Company presents its earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 requires dual presentation of earnings per share (EPS);
basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
For purposes of this calculation, outstanding stock options and unearned
restricted stock are considered common stock equivalents using the treasury
stock method.
Note 3 - Stock Split
On April 20, 1998, the Company's board of directors declared a
two-for-one stock split. The stock split was effected in the form of a stock
dividend. The stockholders of record received one share of common stock for each
share held. All stock related data in the condensed consolidated financial
statements and related notes reflect this stock split for all periods presented.
7
<PAGE> 8
BMC SOFTWARE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the
presentation of a Comprehensive Income Statement that is to be presented with
other general financial statements. This statement is effective for the
Company's fiscal year end 1999. The following table sets forth the calculation
of comprehensive income for the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
(in thousands) (in thousands)
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 64,777 $ 99,712 $ 99,136 $ 233,073
Foreign currency translation
Gains/(losses) (705) (63) (663) 245
Unrealized gain/(loss) on securities
Available for sale (1,479) 482 1,832 3,828
--------- --------- --------- ---------
Total comprehensive income $ 62,593 $ 100,131 $ 100,305 $ 237,146
========= ========= ========= =========
</TABLE>
Note 5 - Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement also requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that the Company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for the Company at the beginning of its
fiscal year 2000; however the Company will adopt SFAS No. 133 beginning January
1, 1999. One of the Company's principal hedging activities is to purchase
foreign currency option contracts to hedge anticipated revenue transactions.
Upon adopting SFAS No. 133, the Company will reduce deferred option premiums by
approximately $1 million. The Company will report the option contracts at fair
value each reporting period and the change in the intrinsic value of such
contracts will be reported as other comprehensive income. The change in
intrinsic value will be reported as the market value changes in the contract
occur. Accordingly, the effect could increase the volatility of earnings and
other comprehensive income.
Note 6 - Pending Merger
On November 2, 1998, the Company announced its agreement to merge with
Boole & Babbage, Inc. (Boole) (the Merger) through an exchange of common stock
and stock options using an exchange rate of .675 shares of BMC Software common
stock for each share of Boole common stock. The Company expects to account for
this transaction using the pooling of interests method. The Merger is subject to
approval by the Boole stockholders and review by the SEC.
8
<PAGE> 9
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This section of the Form 10-Q includes historical information for the
periods covered, certain forward looking information and the information
provided below under the heading "Certain Risks and Uncertainties that Could
Affect Future Operating Results" about certain risks and uncertainties that
could cause the Company's future operating results to differ from the results
indicated by any forward looking statements made by the Company or others. It is
important that the historical discussion below be read together with the
attached consolidated financial statements and notes thereto, with the
discussion of such risks and uncertainties and with the audited financial
statements and notes thereto, and the Management's Discussion and Analysis of
Results of Operations and Financial Condition, contained in the Company's Form
10-K for fiscal 1998.
A. RESULTS OF OPERATION AND FINANCIAL CONDITION
The following table sets forth, for the periods indicated, the
percentages that selected items in the Condensed Consolidated Statements of
Earnings bear to total revenues. These comparisons of financial results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License 71.9% 72.4% 69.4% 71.5%
Maintenance 28.1 27.6 30.6 28.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Selling and marketing 26.9 27.7 28.4 28.6
Research and development 13.9 11.9 13.8 13.6
Cost of maintenance services
and product licenses 9.0 9.8 10.3 10.3
General and administrative 7.9 7.7 7.6 7.2
Acquired research and development costs -- -- 12.7 2.3
----- ----- ----- -----
Operating income 42.3 42.9 27.2 38.0
Other income 4.2 4.6 4.2 4.8
----- ----- ----- -----
Earnings before taxes 46.5 47.5 31.4 42.8
Income taxes 13.5 12.4 12.2 11.5
----- ----- ----- -----
Net earnings 33.0% 35.2% 19.2% 31.3%
===== ===== ===== =====
</TABLE>
9
<PAGE> 10
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
<TABLE>
<CAPTION>
REVENUES
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
North American license revenues $ 84,945 $ 124,221 46% $ 233,344 $ 347,473 49%
International license revenues 56,047 81,015 45% 125,595 184,768 47%
--------- --------- --------- ---------
Total license revenues 140,992 205,236 46% 358,939 532,241 48%
Maintenance revenues 55,010 78,171 42% 158,186 212,669 34%
--------- --------- --------- ---------
Total revenues $ 196,002 $ 283,407 45% $ 517,125 $ 744,910 44%
========= ========= ========= =========
</TABLE>
Product Line Revenues
The Company's products for the IBM OS/390 mainframe environment accounted
for 69% of total revenues in the quarters ended December 31, 1997 and 1998, and
76% and 73% of total revenues, respectively, in the nine-month periods ended
December 31, 1997 and 1998. The database utilities and administrative tools for
IBM's IMS and DB2 database management systems comprise the largest portion of
the Company's mainframe-based revenues. These product lines accounted for 52% of
both total revenues and license revenues in the quarter ended December 31, 1998
and 55% of both total and license revenues in the nine-month period ended
December 31, 1998. Total revenues and license revenues from these product lines
grew 43% and 56%, respectively, in the third quarter of fiscal 1999, and grew
33% and 44%, respectively, in the nine-month period of fiscal 1999 compared to
the prior year period. The Company's other products for the OS/390 mainframe
environment contributed 17% of total revenues and 15% of license revenues for
the quarter ended December 31, 1998 and contributed 18% and 16% of total and
license revenues, respectively, in the nine-month period ended December 31,
1998. Total revenues and license revenues for these other mainframe products
grew 53% and 58%, respectively, in the third quarter of fiscal 1999 and grew 58%
and 72% in the nine-month period of fiscal 1999.
The Company's distributed systems product lines comprise the PATROL
application and database management solutions, the Best/1 performance management
products, the PATROL DB database administration products and the Company's
high-performance database backup and recovery solutions. In total, these product
lines contributed 31% of total revenues for the quarters ended December 31, 1997
and 1998, respectively, and 38% and 33% of license revenues for the same
periods. In the nine months ended December 31, 1997 and 1998, these product
lines contributed 24% and 27% of total revenues and 30% and 29% of license
revenues, respectively. Total revenues for these product lines grew 44% and
license revenues grew 28% in the third quarter of fiscal 1999, and 62% and 46%,
respectively, for the nine-months ended December 31, 1998.
10
<PAGE> 11
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
License Revenues
The Company's license revenues include product license fees, capacity-based
license upgrade fees and restructuring fees. Product license fees are generated
from the initial licensing of a product and subsequent licenses purchased under
the Company's per copy, central processing unit ("CPU") tier-based licensing
program. Product license fees also include fees associated with the initial
licensing of a product on a MIPS basis. Capacity-based license upgrade fees are
charged when a customer acquires the right to run an already licensed product on
additional processing capacity, as measured by a CPU tier or by the aggregate
processing capacity measured in millions of instructions per second ("MIPS") of
all CPUs for which the Company's products are licensed. These license upgrade
fees include fees associated with customers' purchasing the right to operate a
product on currently installed additional processing capacity and/or on
anticipated future processing capacity. Restructuring fees increase the
discounts associated with a customer's installed base of products, which,
therefore, reduce a customer's future maintenance charges and capacity based
upgrade fees pertaining to such installed products.
The Company's North American operations generated 60% and 61% of total
license revenues in the quarters ended December 31, 1997 and 1998, respectively,
and 65% of total license revenues in the nine-month periods ending on such
dates. The 46% growth in North American license revenues in the third quarter of
fiscal 1999 over the third quarter of fiscal 1998 was principally derived from
increased capacity-based upgrade fees for future capacity, current capacity and,
to a lesser extent, product license fees generated from new licenses of the
Company's mainframe products. For the nine months ended December 31, 1998, the
49% increase in North American license revenues over the comparable prior year
nine-month period is primarily attributable to increased capacity-based upgrade
fees for future and current capacity and product license fees generated from the
Company's distributed systems products. Capacity based upgrade fees for future
capacity represented the single largest component of North American license
revenues for the nine months ended December 31, 1998. International license
revenues represented 40% and 39% of total license revenues for the quarters
ended December 31, 1997 and 1998, respectively, and 35% of total license
revenues in the nine-month periods ending on such dates. International license
revenue growth of 45% from the third quarter of fiscal 1998 to the comparable
quarter of fiscal 1999 was derived principally from capacity-based upgrade fees
associated with current capacity and, to a lesser extent, product license fees
generated from the Company's distributed systems products. For the nine months
ended December 31, 1998, the 47% increase in international license revenues over
the prior year is primarily attributable to product license fees generated from
the Company's distributed systems products and, to a lesser extent, capacity
based upgrade fees for current capacity.
Capacity-based upgrade fees include fees for both current and future
additional processing capacity. These fees accounted for 29% and 34% of total
revenues for the quarters ended December 31, 1997 and 1998, respectively, and
32% and 37% of total revenues for the respective nine-month
11
<PAGE> 12
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
periods. The sustainability and growth of the Company's mainframe-based license
revenues are dependent upon these capacity-based upgrade fees, particularly
within its largest customer accounts. Most of the Company's largest customers
have entered into enterprise license agreements allowing them to install the
Company's products on an unspecified number of CPUs, subject to a maximum limit
on the aggregate power of the CPUs as measured in MIPS. Additional fees are due
if this limit is exceeded. Substantially all of these transactions include
upgrade charges associated with additional processing capacity beyond the
customer's current usage level and/or a restructuring fee, and many include
license fees for additional products. In the quarters ended December 31, 1997
and 1998, the enterprise license fees for future additional processing capacity
and license restructurings comprised approximately 25% and 22% of total
revenues, respectively, and comprised 25% and 28% of total revenues in the
respective nine-month periods. The fees associated with future additional
mainframe processing capacity typically comprise from one-half to substantially
all of the license fees included in the enterprise license transaction. The
Company has experienced a strong increase in demand from its largest customers
for the right to run its products on increased current and anticipated mainframe
processing capacity as enterprises invest heavily in their core OS/390 mainframe
information systems. The Company expects that it will continue to be dependent
upon these capacity-related license revenue components. With the rapid
advancement of distributed systems technology and customers' needs for more
functional and open applications, such as pre-packaged ERP applications, to
replace legacy systems, there can be no assurance that the demand for mainframe
processing capacity or the higher operating efficiencies afforded by the
Company's products will continue at current levels. Should this trend slow
dramatically or reverse, it would adversely impact the Company's mainframe
license revenues and its operating results. See the discussion below under the
heading "Certain Risks and Uncertainties that Could Affect Future Operating
Results."
Maintenance and Support Revenues
Maintenance and support revenues represent the ratable recognition of fees
to enroll licensed products in the Company's software maintenance, enhancement
and support program, and recognition of revenues associated with the Company's
services business. Maintenance and support enrollment entitles customers to
product enhancements, technical support services and ongoing compatibility with
third-party operating systems, database management systems and applications.
These fees are generally charged annually and equal 15% to 20% of the list price
of the product at the time of renewal, less any applicable discounts.
Maintenance revenues also include the ratable recognition of the bundled fees
for any first-year maintenance services covered by the related perpetual license
agreement. The Company continues to invest heavily in product maintenance and
support and believes that maintaining its reputation for superior product
support is a key component of its value pricing model.
Maintenance revenues have increased over the last three fiscal years as a
result of the continuing growth in the base of installed products and the
processing capacity on which they run. Maintenance fees increase as the
processing capacity on which the products are installed increases; consequently,
the Company receives higher absolute maintenance fees as customers install its
products on additional processing capacity. Due to increased discounting at
higher levels of additional processing capacity,
12
<PAGE> 13
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the maintenance fees on a per MIPS basis are typically reduced in enterprise
license agreements. Historically, the Company has enjoyed high maintenance
renewal rates for its mainframe-based products. Should customers migrate from
their mainframe applications or find alternatives to the Company's products,
increased cancellations could adversely impact the sustainability and growth of
the Company's maintenance revenues. To date, the Company has been successful in
extending its traditional maintenance and support pricing model to the
distributed systems market. At this time, there is insufficient historical data
to determine whether customers will continue to accept this pricing model and
renew their maintenance and support contracts at the levels experienced in the
mainframe market.
<TABLE>
<CAPTION>
OPERATING EXPENSES
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
(in thousands) (in thousands)
1997 1998 Change 1997 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing $ 52,836 $ 78,457 48% $146,974 $213,005 45 %
Research and development 27,152 33,786 24% 71,202 101,440 42 %
Cost of maintenance services
and product licenses 17,599 27,832 58% 53,318 76,624 44 %
General and administrative 15,433 21,688 40% 39,257 53,278 36 %
Acquired research and
development -- -- N/A 65,473 17,304 (74)%
-------- -------- -------- --------
Total operating expenses $113,020 $161,763 43% $376,224 $461,651 23 %
======== ======== ======== ========
</TABLE>
Selling and Marketing
The Company's selling and marketing expenses include personnel and
related costs, sales commissions and costs associated with advertising, industry
trade shows and sales seminars. Personnel costs were the largest single
contributor to the expense growth in the three months and nine months ended
December 31, 1998. Selling and marketing headcount increased by 58% from
December 31, 1997 to December 31, 1998. This increase was primarily attributable
to significant hiring of additional open systems sales representatives and
technical sales support consultants. Sales commissions increased in the third
quarter and first nine months of fiscal 1999 as a result of the 46% and 48%
increases, respectively, in license revenues. Improved sales representative
productivity, coupled with normal commission plan modifications, held sales
commission expense growth below license revenue growth. Marketing costs have
continued to increase to meet the requirements of marketing a greater number of
increasingly complex distributed systems products and of supporting a growing
indirect distribution channel. Other contributors to the increase were
significantly higher levels of travel and entertainment expenses.
13
<PAGE> 14
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
Research and Development
Research and development expenses mainly comprise personnel costs
related to software developers and development support personnel, including
software programmers, testing and quality assurance personnel and writers of
technical documentation such as product manuals and installation guides. These
expenses also include computer hardware/software costs and telecommunications
expenses necessary to maintain the Company's data processing center. Increases
in the Company's research and development expenses in the third quarter of
fiscal 1999 were the result of increased compensation costs associated with both
software developers and development support personnel, as well as associated
benefits and facilities costs. The Company increased its headcount in the
research and development organization by 60% from December 31, 1997 to December
31, 1998. Research and development costs were reduced by amounts capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The
Company capitalizes its software development costs when the projects under
development reach technological feasibility as defined by SFAS No. 86. During
the third quarter of fiscal 1998 and 1999, the Company capitalized approximately
$8,963,000 and $17,935,000, respectively, of software development costs.
Capitalized software development costs for the nine months ended December 31,
1997 and 1998 were $27,621,000 and $46,350,000, respectively. The growth in
capitalized costs is primarily due to increases in new distributed systems
product development, the porting of distributed systems products to alternate
environments and increased integration development activity.
Cost of Maintenance Services and Product Licenses
Cost of maintenance services and product licenses consists of
amortization of purchased and internally developed software, costs associated
with the maintenance, enhancement and support of the Company's products and
royalty fees. Growth in the cost of maintenance services and product licenses
during the first nine months of fiscal 1999 was due to increases in customer
support employees and capitalized software amortization. The Company amortized
$4,106,000 and $9,626,000 in the third quarter of fiscal 1998 and 1999,
respectively, of capitalized software development costs pursuant to SFAS No. 86.
In these periods, the Company expensed $1,925,000 and $6,258,000, respectively,
of capitalized software development costs to accelerate the amortization of
certain software products. For the nine months ended December 31, 1997 and 1998,
the Company amortized $13,000,000 and $23,139,000, respectively; including
accelerated amortization of $7,564,000 and $10,508,000, respectively. The
Company accelerated the amortization of these software products as they were not
expected to generate sufficient future revenues which would be required for the
Company to realize the carrying value of the assets. The Company expects its
cost of maintenance services and product licenses will continue to increase as
the Company capitalizes a higher level of software development costs and as the
Company builds its distributed systems product support organization, which is
less cost-effective than its mainframe support organization because of the
complexity and variability of the environments in which the products operate.
The distributed systems products operate in a high number of operating
environments, including operating systems, DBMSs and ERP applications and
require greater ongoing platform support development activity relative to the
Company's OS/390 mainframe products.
14
<PAGE> 15
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
General and Administrative
General and administrative expenses are comprised primarily of
compensation and personnel costs within executive management, finance and
accounting, product distribution, facilities management and human resources.
Other expenses included in general and administrative expenses are fees paid for
legal and accounting services, consulting projects, insurance and costs of
managing the Company's foreign currency exposure. Growth in general and
administrative expenses for both the three months and nine months ended December
31, 1998 over the same periods ended December 31, 1997 was largely due to
increased personnel costs and higher costs associated with the related
infrastructure to support the Company's growth. Headcount within the general and
administrative organizations grew by 42% from December 31, 1997 to December 31,
1998.
Acquired Research and Development and Related Costs
The Company did not incur acquired in-process research and development
(IPR&D) costs during the quarters ended December 31, 1997 and 1998. Acquired
IPR&D costs for the nine months ended December 31, 1997 and 1998 were
$65,473,000 and $17,304,000, respectively. These technology charges related to
the acquisition of DataTools and acquisitions of in-process technologies.
The following table presents information, in thousands, concerning the
purchase price allocations for the acquisitions accounted for under the purchase
method for the nine months ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
Total
Company Name Software Acquired IPR&D Goodwill Other Price
------------ -------- -------------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
DataTools $15,000 $54,372 $ 2,282 $ 1,732 $73,000
Sento 1,800 6,286 -- -- 8,086
Software Partners 1,700 4,815 -- -- 6,515
------- ------- ------- ------- -------
$18,500 $65,473 $ 2,282 $ 1,732 $87,601
======= ======= ======= ======= =======
Fiscal 1999:
Nastel $ -- $ 6,000 $ -- $ -- $ 6,000
Envive 6,400 11,304 -- -- 17,704
------- ------- ------- ------- -------
$ 6,400 $17,304 $ -- $ -- $23,704
======= ======= ======= ======= =======
</TABLE>
The Company acquired DataTools in May 1997, for an aggregate purchase
price of $73 million. DataTools owns certain Relational Database Management
Systems (RDBMS) specific back-up products that were sold as stand-alone
products. Its' flagship product is called SQL Backtrack (SQL-BT). DataTools was
in the process of developing numerous products and enhanced versions of
products, including next generation versions of SQL-BT for the Informix platform
(SQI) and the Oracle platform (SBO), as well as first generation products for
the Microsoft SQL (SBM) and Sybase IDR (SBS/I) platforms. The Company allocated
approximately $18.6 million of the
15
<PAGE> 16
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
purchase price to developed technology, workforce and goodwill. The Company
allocated approximately $54.4 million to acquired IPR&D. The most significant
four specific development projects, which comprised $40.6 million (74%) of the
acquired IPR&D, pertained to the above mentioned projects. The primary remaining
efforts associated with the IPR&D included code completion in several key areas,
such as logical extraction and piecemeal back-up and recovery, large database
support and performance-related functionality. As of the acquisition date, the
expected costs to complete the IPR&D were, on a calendar year basis,
approximately $2.9 million in 1997, $4.7 million in 1998, $2.1 million in 1999,
and $729,000 in 2000. The Company has made significant progress towards the
completion of most of the underlying IPR&D projects. With respect to the
estimated completion costs, the Company is below these forecasted amounts as a
result of decisions to terminate certain of the IPR&D projects (such as the
SBS/I project noted below) and more efficient development efforts than
anticipated. The following summarizes the four primary projects pertaining to
the DataTools IPR&D.
The Company spent approximately $700,000 through March 31, 1998 on the
SBM product in addition to the approximate $750,000 spent by DataTools prior to
the acquisition. The Company released this product in April 1998.
The SBO product was released in June 1998 for both the NT and Unix
environments. The IPR&D was successfully completed resulting in new
functionality in several areas, including back-up and recovery scheduling,
remote BU&R, archive log management and a graphical user interface. The Company
spent approximately $1.7 million in completing these technologies subsequent to
the DataTools acquisition.
BMC abandoned the SBS/I project, on which DataTools had spent
approximately $1 million in research and development. BMC made this decision
based on concerns over market demand and the allocation of Sybase resources to
the core Sybase product. The Company spent less than $500,000 on this technology
prior to deciding to cancel this development project.
The Company spent approximately $1 million on SBI through March 31,
1998, in addition to the approximate $500,000 spent by DataTools prior to the
transaction. As a result, Version 2.0 of this product was released in April
1998.
In June 1997, the Company acquired technology from Sento Technical
Innovations, Inc. The Company has since abandoned the technology and expensed
the entire purchase price.
In July 1997, the Company acquired certain software code from Software
Partners/32, Inc. (Software Partners) for a total purchase price of $6.5
million. The Company allocated $1.7 million of the purchase price to completed
technology and $4.8 million to acquired IPR&D. This code permits file system
back-up and recovery, but was not competitive with the leading products in this
market. While
16
<PAGE> 17
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
the acquired code contained certain key functionality, it was incomplete in
various aspects. As a result, the Company attempted to complete this code by,
among other things, developing support for dual network hosts, enhancing the
interface with the SQL-BT object back-up stream interface (OBSI), developing
support for SBI and SBM and developing support for code and integrating it into
its Patrol recovery manager product. These efforts were unsuccessful, and the
Company is now attempting to complete the code and integrate it into a planned
distributed systems application recovery management product scheduled to be
released in the latter part of fiscal 2000. The expected costs to complete the
IPR&D (and to integrate the technology into the application recovery product)
are approximately $720,000 in fiscal 1999 and $1,200,000 in fiscal 2000. The
allocation of purchase price to completed technology reflects the estimated
discounted future cash flows associated with the twenty or so customers using
the existing technology. Cumulative revenues through March 31, 1998 from such
customers were less than $100,000.
In the latter part of fiscal 1998, the Company was in the process of
designing a middleware management product to assist customers with optimizing
middleware performance and with handling enterprise environmental changes. In
this regard, in April 1998, the Company acquired a license from Nastel
Technologies, Inc. (Nastel) for certain infrastructure source code for use in
its MQ management product that was under development, but had not yet reached
technological feasibility. Accordingly, the Company allocated the entire $6
million purchase price to IPR&D. BMC completed the acquired IPR&D by creating an
effective installation routine, developing an automated MQ configuration
routine, fortifying the underlying Nastel database and modifying the code to
work in environments with complementary management products. Upon completion of
the IPR&D, the Company completed the initial related product after developing
efficient data collection, user interface and business logic code. The Company
incurred approximately $1.6 million in development costs prior to the release of
its middleware management product in the third quarter of fiscal 1999.
In June 1998, BMC entered into a technology agreement with Envive
Corporation (Envive) primarily to strengthen BMC's ERP business management
solutions to provide better diagnostic and correlation ability, service level
management and end-to-end monitoring capability. The Company also secured the
rights to distribute certain products in the SAP management market. The
Company's committed costs associated with the transaction approximated $17.7
million. The Company allocated
17
<PAGE> 18
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
$6.4 million of the transaction to software assets, prepaid royalties and
interest. The remaining $11.3 million was allocated to acquired IPR&D which had
not reached technological feasibility as of the date of the transaction. The
Company believes the acquired IPR&D is approximately 45% complete towards
development of end-to-end and service level management functionality across the
major ERP platforms, but there is no assurance that it will be successful in
developing such marketable technology. The Company expects costs to complete the
IPR&D will approximate $250,000 in fiscal 1999, $1,900,000 in fiscal 2000 and
$400,000 in fiscal 2001.
The values assigned to acquired IPR&D in the above mentioned
transactions were generally determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from the projects and discounting the net cash
flows to their present value. The revenue projections used to value the acquired
in-process research and development were based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introductions by the Company and its competitors.
Operating expenses were estimated based on historical results and anticipated
profit margins. Due to purchasing power increases and general economies of
scale, estimated operating expenses as a percentage of revenues were, in some
cases, estimated to decrease after the acquisitions.
The rates utilized to discount the net cash flows to their present
value were based on cost of capital calculations. Due to the nature of the
forecast and risks associated with the projected growth, profitability and the
developmental nature of the projects, discount rates of 16% to 20% were
generally appropriate for the acquired in-process research and development.
These discount rates were commensurate with the respective stage of development
and the uncertainties in the economic estimates described above. If the acquired
IPR&D projects are not successfully completed, the Company's business, operating
results, and financial condition may be materially adversely affected in future
periods. In addition, the value of other intangible assets acquired may become
impaired.
In connection with the normal Securities and Exchange Commission (SEC)
review of BMC Software's registration statement filed pursuant to its planned
merger with Boole & Babbage, Inc., (Boole) the SEC has requested additional
analysis and information pertaining to certain charges for acquired, in-process
research and development (IPR&D). The charges being challenged are the $54.4
million DataTools charge in fiscal 1998 and the $11.3 million Envive charge in
fiscal 1999. The SEC is reviewing such charges utilizing guidance issued by the
SEC in a letter to the American Institute of Certified Public Accountants
(AICPA) dated September 9, 1998. If the Company were to revise its treatment of
these acquisitions, the impact would be to increase long-term assets and net
income in the quarters of the transactions and to increase non-cash amortization
expense in quarters subsequent to the transactions. While it is the Company's
belief that its original treatment of these transactions was appropriate, it may
be required to apply the guidance mentioned above and revise its previously
reported results. If such revision is required, the Company estimates that the
impact would not exceed $.01 per share, per quarter, which the Company believes
is not material to its previously reported results nor its expected future
results.
OTHER INCOME
For the third quarter of fiscal 1999, other income was $13,102,000,
reflecting an increase of 59% over $8,246,000 of other income in the same
quarter of fiscal 1998. Other income consists primarily of interest earned on
tax-exempt municipal securities, euro bonds, corporate bonds, mortgage
securities and money market funds. The increase in other income is primarily due
to an increase of approximately $473,000,000 in cash and investment securities
from December 31, 1997 to December 31, 1998.
INCOME TAXES
For the third quarter of fiscal 1999, income tax expense was
$35,034,000 compared to $26,451,000 for the same quarter in fiscal 1998. The
Company's income tax expense represents the federal statutory rate of 35%, plus
certain foreign and state taxes, reduced primarily by the benefit from lower
income taxes associated with the Company's European operations and the effect of
tax exempt interest earned from cash investments.
18
<PAGE> 19
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth through funds generated from
operations. As of December 31, 1998, the Company had cash, cash equivalents and
investment securities of $1,024,975,000.
The Company did not repurchase any shares on the open market during the
first nine months of fiscal 1999 as its stock repurchase program was rescinded
by the Board of Directors in connection with the pooling of interests
transaction with BGS Systems, Inc. As a result of the proposed Boole transaction
noted above, the Company does not expect to reinstate its share repurchase
program.
The Company believes that existing cash balances and funds generated
from operations will be sufficient to meet its liquidity requirements for the
foreseeable future.
COMPARATIVE INFORMATION
In connection with the above mentioned SEC review of the proposed
merger with Boole, the SEC has indicated that it disagrees with the Company's
position and that of its independent accountants, Arthur Andersen LLP, that the
BGS Systems, Inc. (BGS) pooling transaction in March of 1998 did not warrant
restatement of prior period results on the basis of materiality. The Company
intends to discuss this matter further with the SEC. However, the Company may
be required to restate its fiscal 1998 Form 10K and its three fiscal 1999
Form 10Q's (inclusive) to reflect BGS's results of operations and financial
position for all periods presented. Such restatement would affect presentation
matters only and have no impact on the Company's current and future results of
operations.
B. CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT FUTURE OPERATING
RESULTS.
BMC's Stock Price is Volatile. BMC's stock price has been and is highly
volatile. BMC's stock price is based almost completely on current expectations
of sustained future revenue and earnings growth rates. Any failure to meet
anticipated revenue and earnings levels in a period or any negative change in
perceived long-term growth prospects of the combined company would likely have a
significant adverse effect on the combined company's stock price. The growth
rates of BMC's license revenues, total revenues, net earnings and earnings per
share, excluding one-time charges, have accelerated over the last seven
quarters. BMC may not achieve, in future periods, these relatively higher rates
of growth.
BMC's Earnings Associated with License Revenues May Fluctuate. The
timing and amount of BMC's license revenues are subject to a number of factors
that make estimation of operating results prior to the end of a quarter
extremely uncertain. BMC generally operates with little or no sales backlog
and, as a result, license revenues in any quarter are dependent upon contracts
entered into or orders booked and shipped in that quarter. Most of BMC's sales
are closed at the end of each quarter, and there has been and continues to be a
trend toward larger enterprise license transactions, which can have sales
cycles of up to a year or more and require approval by a customer's upper
management. These transactions are typically difficult to manage and predict.
Failure to close an expected individually significant transaction could cause
BMC's revenues and earnings in a period to fall short of expectations. BMC
generally does not know whether revenues and earnings will meet expected
results until the final days or day of a quarter.
BMC May Receive Less Revenues From Enterprise Licenses. Fees from
enterprise license transactions remain a fundamental component of BMC's
revenues. There is a risk that BMC's revenues could be adversely affected
because of a reduction in fees from enterprise licenses. Enterprise license fees
continue to represent an increasingly greater percentage of BMC's total
mainframe license revenues. In fiscal 1998, enterprise license fees for future
additional processing capacity and license restructurings comprised
approximately 24% of BMC's total revenues. These revenues are dependent upon
BMC's customers' continuing to perceive an increasing need to use BMC's existing
software products on substantially greater mainframe processing capacity in
future periods. If BMC's customers' processing capacity
19
<PAGE> 20
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
growth were to slow and/or if such customers were to perceive alternatives to
relying upon BMC's current mainframe products, BMC's revenues would be adversely
impacted.
Prices for BMC's Mainframe Products Could Decline. There is a risk that
pricing pressures within the mainframe systems software markets could have an
adverse effect on BMC's revenues and earnings. BMC's capacity-based upgrade fees
associated with both current and future processing capacity contributed 33% of
total revenues in fiscal 1998. The charging of upgrade fees based on running
previously licensed software on more powerful computers is standard among
mainframe systems software vendors, including IBM. The pricing of these
processing capacity-based fees is under constant pressure from customers, and
IBM is aggressively seeking to reduce the costs of its mainframe systems
software.
BMC's High Operating Margins Could Decline. There is a risk that BMC
will not be able to sustain its high operating margins which would adversely
affect its earnings. BMC's operating margins, excluding one-time charges, have
ranged from 37% to 45% in recent quarters, which is at the high-end of the
range for peer companies. Since BMC's mix of business continues to shift to
distributed systems revenues and since research and development, sales, support
and distribution costs for distributed systems software products are generally
higher than for mainframe products, operating margins will experience more
pressure.
IBM Could Affect BMC's Business. If IBM is successful in achieving
performance and functional equivalence with BMC's products at a lower cost,
BMC's business will be materially adversely affected. BMC derived approximately
74% of its total revenues in fiscal 1998 from software products for IBM and
IBM-compatible mainframe computers. IBM continues to focus on reducing the
overall software costs associated with the OS/390 mainframe platform. IBM
continues, directly and through third parties, to aggressively enhance its
utilities for IMS and DB2 to provide lower cost alternatives to the products
provided by BMC and other independent software vendors. IBM has significantly
increased its level of activity in the IMS and DB2 high speed utility markets
over the last twelve months.
Rapid Technological Change Could Adversely Affect BMC's Business. BMC's
inability to keep pace with technological change in its industry would have an
adverse effect on its revenues and earnings. BMC operates in a highly
competitive industry characterized by rapid technological change. The
distributed systems and application management markets in which BMC operates are
far more crowded and competitive than its traditional mainframe systems
management markets. BMC's ability to compete effectively and its growth
prospects depend upon many factors, including:
- the success of its existing client/server systems products;
- the timely introduction and success of future software products; and
- the ability of BMC's products to interoperate and perform well with
existing and future leading databases and other platforms supported
by its products.
BMC has experienced long development cycles and product delays in the
past, particularly with some of its client/server systems products, and expects
to have delays in the future. Delays in new mainframe or client/server systems
product introductions or less-than-anticipated market acceptance of these new
products are possible and would have an adverse effect on BMC's revenues and
earnings. New products or new versions of existing products
20
<PAGE> 21
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
may, despite testing, contain undetected errors or bugs that will delay the
introduction or adversely affect commercial acceptance of such products.
BMC Could Have Difficulty Developing Products for Microsoft
Platforms. Microsoft could significantly lower software price points in some of
BMC's markets, which could place additional pricing pressure on BMC. BMC has
invested and intends to continue to invest in the development of systems
management products for Windows NT and BackOffice environments, but there are
numerous uncertainties associated with BMC's ability to successfully execute
this strategy. Microsoft Corporation has significantly increased its focus on
developing operating systems, systems management products and databases that
will provide business-critical class functionality. Specifically, Microsoft is
aggressively promoting its BackOffice family of software products, including its
Windows NT operating system and its SQL Server relational database management
system, as lower cost alternatives to the UNIX operating systems, coupled with
relational database management systems from Oracle Corporation, Sybase, Inc.,
Informix Corporation and other vendors.
There Are Risks Associated with BMC's International Operations. BMC's
operations and financial results could be significantly adversely affected by
changes in foreign currency exchange rates, sluggish regional economic
conditions, particularly in Europe and the Pacific Rim, and difficulties in
staffing and managing international operations. BMC's future operating results
depend on sustained performance improvement by its international offices. In
this regard, the economies in Europe and the Pacific Rim regions have been
depressed in the past year.
There Are Risks Related to Year 2000 Compliance. The impact of Year
2000 issues on future BMC revenue is difficult to assess, but is a risk to be
considered in evaluating BMC's future growth. BMC believes the current versions
of its products are Year 2000 compliant. BMC does not intend to make all prior
versions of its products Year 2000 compliant and has notified its customers as
to which versions will and will not be Year 2000 compliant. BMC has developed
transition plans for customers who expect to be using noncompliant versions of
BMC's products on or after January 1, 2000 and does not expect to incur
significant costs in accommodating them.
BMC is unaware of any potential material liabilities or operational
difficulties associated with Year 2000 compliance of its own internal
information systems, which are based on Oracle Corporation's enterprise resource
planning system.
Efforts by customers to address Year 2000 issues may absorb a
substantial part of their information technology budgets in the near term.
There is much speculation that the cost of Year 2000 compliance efforts will
significantly reduce spending on non-Year 2000 products through January 1,
2000. BMC believes that its core customers are well into their Year 2000
compliance programs and that this trend has not materially adversely affected
demand for its products to date.
Pending Acquisition. On November 2, 1998, the Company announced its
agreement to acquire Boole through an exchange of common stock and stock options
using an exchange rate of .675 shares of the Company's common stock for each
share of Boole common stock. The acquisition is subject to approval by the Boole
stockholders and to review by the SEC. The Company faces significant technical
and organizational challenges in integrating Boole operations with those of the
Company. The Company has plans to implement retention programs to keep many of
the key technical, sales and marketing employees. Integration of the Boole
products and organizational structure will be difficult, and there can be no
assurance that the integration efforts will be successful. Boole is a party to
the litigation described in Item 1. Legal Proceedings. If the merger is
completed, the combined company will be responsible for any liabilities with
respect to such litigation. For discussion of additional risks related to the
proposed merger, see the Company's Registration Statement on Form S-4 filed with
the SEC on February 3, 1999.
FORWARD-LOOKING INFORMATION
Certain of the information relating to BMC contained or incorporated by
reference in this Form 10-Q is forward-looking in nature. All statements
included or incorporated by reference in this Form 10-Q or made by management of
BMC other than statements of historical fact regarding
21
<PAGE> 22
BMC SOFTWARE, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Results of Operations and Financial Condition
(continued)
BMC are forward-looking statements. Examples of forward-looking statements
include statements regarding BMC's future financial results, operating results,
market positions, product successes, business strategies, projected costs,
future products, competitive positions and plans and objectives of management
for future operations. In some cases, you can identify forward-looking
statements by terminology, such as "may," "will," "should," "would," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of such terms or other comparable terminology. Any
expectations based on these forward-looking statements are subject to risks and
uncertainties and other important factors, including those discussed in this
Risk Factors section. These and many other factors could affect the future
financial and operating results of BMC. These factors could cause actual results
to differ materially from expectations based on forward-looking statements made
in this document or elsewhere by or on behalf of BMC.
22
<PAGE> 23
BMC SOFTWARE, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 13, 1998, Platinum Technology, Inc. ("Platinum") filed a
complaint against the Company and Boole & Babbage, Inc. ("Boole") and a motion
for preliminary injunction in the Circuit Court of the Eighteenth Circuit
Chancery Division, DuPage County, Wheaton, Illinois. The complaint alleged that
Boole was in breach of a standstill and exclusive negotiation agreement with
Platinum, and that the Company tortiously interfered with that alleged agreement
when it negotiated and executed the merger agreement with Boole. Based upon its
complaint, Platinum sought to enjoin the merger between the Company and Boole
and require Boole to negotiate exclusively with Platinum for a full and
uninterrupted 120-day period.
In early January 1999, Platinum withdrew its motion for preliminary
injunction by which it sought to enjoin the merger and to require Boole to
negotiate exclusively with Platinum for a full and uninterrupted 120-day period,
and filed under seal a motion for permission to amend its complaint. On January
5, 1999, Platinum announced that by its proposed amended complaint, it would
seek damages of at least $30 million as its remedy against Boole and it would
dismiss the Company as a defendant in its lawsuit.
On January 22, 1998, the court granted Platinum permission to amend
its complaint to seek damages against Boole and to dismiss the Company from the
litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
January 8, 1999 - Change in status regarding further
developments in the ongoing litigation among Platinum, Boole and BMC.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BMC SOFTWARE, INC.
Date: February 15, 1999 By: /S/ Max P. Watson Jr.
---------------------- ----------------------------------------
Max P. Watson Jr.
Chairman of the Board, President and
Chief Executive Officer
Date: February 15, 1999 By: /S/ William M. Austin
----------------------- ----------------------------------------
William M. Austin
Senior Vice President and
Chief Financial Officer
Date: February 15, 1999 By: /S/ Kevin M. Klausmeyer
---------------------- ----------------------------------------
Kevin M. Klausmeyer
Chief Accounting Officer
24
</TEXT>
</DOCUMENT>
<DOCUMENT>
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<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD
ENDING DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 123,070
<SECURITIES> 901,905
<RECEIVABLES> 228,202
<ALLOWANCES> 11,402
<INVENTORY> 0
<CURRENT-ASSETS> 464,974
<PP&E> 318,355
<DEPRECIATION> 93,959
<TOTAL-ASSETS> 1,694,866
<CURRENT-LIABILITIES> 431,132
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 2,173
<OTHER-SE> 1,053,107
<TOTAL-LIABILITY-AND-EQUITY> 1,694,866
<SALES> 532,241
<TOTAL-REVENUES> 744,910
<CGS> 76,624
<TOTAL-COSTS> 461,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 318,991
<INCOME-TAX> 85,918
<INCOME-CONTINUING> 233,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,073
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.02
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|
1999 | 0QTR1
| BMET | https://www.sec.gov/Archives/edgar/data/351346/0000351346-99-000001.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000351346-99-000001.txt : 19990402
<SEC-HEADER>0000351346-99-000001.hdr.sgml : 19990402
ACCESSION NUMBER: 0000351346-99-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19990228
FILED AS OF DATE: 19990331
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BIOMET INC
CENTRAL INDEX KEY: 0000351346
STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842]
IRS NUMBER: 351418342
STATE OF INCORPORATION: IN
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-12515
FILM NUMBER: 99580825
BUSINESS ADDRESS:
STREET 1: AIRPORT INDUSTRIAL PARK
STREET 2: P O BOX 587
CITY: WARSAW
STATE: IN
ZIP: 46581-0587
BUSINESS PHONE: 2192676639
MAIL ADDRESS:
STREET 1: AIRPORT INDUSTRIAL PARK
STREET 2: P O BOX 587
CITY: WARSAW
STATE: IN
ZIP: 46581-0587
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file Number 0-12515.
BIOMET, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1418342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Industrial Park, P.O. Box 587, Warsaw, Indiana 46581-0587
(Address of principal executive offices)
(219) 267-6639
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of February 28, 1999, the registrant had 112,419,357 common shares
outstanding.
BIOMET, INC.
CONTENTS
Pages
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets 1-2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II. Other Information 12-13
Signatures 14
Index to Exhibits 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of February 28, 1999 and May 31, 1998
(in thousands)
ASSETS
February 28, May 31,
1999 1998
------------ -------
Current assets:
Cash and cash equivalents $ 137,368 $ 117,089
Investments 58,831 31,618
Accounts and notes receivable, net 211,866 188,800
Inventories 202,754 186,535
Prepaid expenses and other 48,916 46,750
--------- -------
Total current assets 659,735 570,792
--------- -------
Property, plant and equipment, at cost 266,565 227,056
Less, Accumulated depreciation 106,644 87,284
--------- -------
Property, plant and equipment, net 159,921 139,772
--------- -------
Investments 121,540 73,175
Excess acquisition costs over fair value
of acquired net assets, net 50,353 52,248
Intangible assets, net 8,249 9,012
Other assets 4,151 3,740
--------- -------
Total assets $1,003,949 $ 848,739
========= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of February 28, 1999 and May 31, 1998
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
February 28, May 31,
1999 1998
------------ -------
Current liabilities:
Short-term borrowings $ 53,362 $ 6,345
Accounts payable 16,562 16,581
Accrued income taxes 18,560 5,873
Accrued wages and commissions 17,550 16,393
Other accrued expenses 40,665 52,867
--------- -------
Total current liabilities 146,699 98,059
Long-term liabilities:
Deferred federal income taxes 9,035 9,345
Other liabilities 324 685
--------- -------
Total liabilities 156,058 108,089
--------- -------
Contingencies (Note 7)
Minority interest 78,102 73,232
--------- -------
Shareholders' equity:
Common shares 76,987 75,712
Additional paid-in capital 19,209 19,209
Retained earnings 678,311 584,920
Accumulated other comprehensive income:
Net unrealized appreciation of
available-for-sale securities 1,823 1,742
Cumulative translation adjustment (6,541) (14,165)
--------- -------
Total shareholders' equity 769,789 667,418
--------- -------
Total liabilities and shareholders' equity $1,003,949 $ 848,739
========= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the nine and three month periods ended February 28, 1999 and 1998
(in thousands, except per share data)
Nine Months Ended Three Months Ended
February 28, February 28,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $552,334 $467,079 $192,330 $160,968
Cost of sales 167,735 145,144 58,633 49,911
------- ------- ------- -------
Gross profit 384,599 321,935 133,697 111,057
Selling, general and
administrative expenses 192,384 164,493 68,405 56,750
Research and development expense 26,100 27,493 8,846 15,845
------- ------- ------- -------
Operating income 166,115 129,949 56,446 38,462
Other income, net 10,416 21,345 2,997 17,518
------- ------- ------- -------
Income before income taxes
and minority interest 176,531 151,294 59,443 55,980
Provision for income taxes 64,816 59,534 21,602 24,243
------- ------- ------- -------
Income before minority interest 111,715 91,760 37,841 31,737
Minority interest 4,870 480 484 480
------- ------- ------- -------
Net income $106,845 $ 91,280 $ 37,357 $ 31,257
======= ======= ======= =======
Earnings per share:
Basic $.95 $.82 $.33 $.28
==== ==== ==== ====
Diluted $.94 $.81 $.33 $.28
==== ==== ==== ====
Shares used in the computation
of earnings per share:
Basic 112,242 111,625 112,361 111,625
======= ======= ======= =======
Diluted 113,426 112,657 113,815 113,416
======= ======= ======= =======
Cash dividends per common share $.12 $.11 $ -- $ --
==== ==== ==== ====
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended February 28, 1999 and 1998
(in thousands)
1999 1998
---- ----
Cash flows from (used in) operating activities:
Net income $106,845 $ 91,280
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 14,871 11,171
Amortization 6,204 5,791
Gain on sale of investments, net (1,148) (1,139)
Minority interest 4,870 480
Deferred federal income taxes (310) --
Changes in current assets and liabilities,
excluding effects of acquisitions:
Accounts and notes receivable, net (21,920) (14,181)
Inventories (15,685) (5,584)
Prepaid expenses and other (493) (2,859)
Accounts payable (77) (4,479)
Accrued income taxes 13,727 558
Accrued wages and commissions 1,386 (286)
Other accrued expenses (10,559) 9,271
------- ------
Net cash from operating activities 97,711 90,023
------- ------
Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments 25,478 24,885
Purchases of investments (99,779) (43,735)
Capital expenditures (33,814) (33,954)
Acquisitions, net of cash acquired (1,182) (11,493)
Increase in other assets (2,238) (1,874)
Other 15 (254)
------- ------
Net cash used in investing activities (111,520) (66,425)
------- ------
Cash flows from (used in) financing activities:
Increase in short-term borrowings, net 45,549 1,935
Issuance of common shares 1,275 1,557
Cash dividends (13,453) (12,256)
------- ------
Net cash from (used in) financing activities 33,371 (8,764)
------- ------
Effect of exchange rate changes on cash 717 (7,970)
------- ------
Increase in cash and cash equivalents 20,279 6,864
Cash and cash equivalents, beginning of year 117,089 82,034
------- -------
Cash and cash equivalents, end of period $137,368 $ 88,898
======= =======
The accompanying notes are a part of the consolidated financial statements.
BIOMET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: OPINION OF MANAGEMENT.
The accompanying consolidated financial statements include the accounts of
Biomet, Inc. and its subsidiaries (individually and collectively referred to as
the "Company"). The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended February 28, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 1999. For further information,
refer to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31. 1998.
The accompanying consolidated balance sheet at May 31, 1998, has been derived
from the audited Consolidated Financial Statements at that date, but does not
include all disclosures required by generally accepted accounting principles.
NOTE 2: INVENTORIES.
Inventories at February 28, 1999 and May 31, 1998 are as follows:
February 28, May 31,
1999 1998
------------ -------
(in thousands)
Raw materials $ 26,449 $ 26,172
Work-in-process 25,131 24,036
Finished goods 82,151 78,552
Consigned inventory 69,023 57,775
-------- --------
$202,754 $186,535
======== ========
NOTE 3: INCOME TAXES.
The difference between the reported provision for income
taxes and a provision computed by applying the federal
statutory rate to pre-tax accounting income is primarily
attributable to state income taxes, tax benefits relating to
operations in Puerto Rico, tax-exempt income and tax credits.
NOTE 4: COMMON SHARES.
During the nine months ended February 28, 1999, the Company
issued 376,337 Common Shares upon the exercise of outstanding
stock options for proceeds aggregating $1,275,000.
NOTE 5: COMPREHENSIVE INCOME.
Effective June 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive
Income." This standard establishes standards for reporting and
display of comprehensive income and its components. Other
comprehensive income includes foreign currency translation
adjustments and unrealized appreciation of available-for-sale
securities, net of taxes. Other comprehensive income (loss) for
the three months ended February 28, 1999 and 1998 was $(1,008)
and $(10,410), respectively. Other comprehensive income (loss)
for the nine months ended February 28, 1999 and 1998 was $7,705
and $(7,600), respectively. Total comprehensive income combines
reported net income and other comprehensive income. Total
comprehensive income for the three months ended February 28,
1999 and 1998 was $36,349 and $20,847, respectively. Total
comprehensive income for the nine months ended February 28, 1999
and 1998 was $114,550 and $83,680, respectively.
NOTE 6: SHORT-TERM DEBT.
During the third quarter, BioMer C.V. (through its wholly owned
financing subsidiary, Biomet Merck B.V.) obtained a $50,000,000
unsecured line of credit at a major European bank for Biomet's
European operations. At February 28, 1999, the Company had
$45,500,000 outstanding on this line of credit. The interest
rate is at the lender's interbank rate plus .4% (effective rate
of 3.53% at February 28, 1999).
NOTE 7: CONTINGENCIES.
In January 1996, a jury returned a verdict in favor of Raymond
G. Tronzo ("Tronzo") awarding him approximately $55 million in
damages on his patent and state law claims. On October 29, 1996,
the United States District Court for the Southern District of
Florida entered a judgment, which implemented and reduced the
jury verdict, awarding $30.2 million to Tronzo on his state law
claims, including compensatory damages of approximately $7.1
million, punitive damages of $20 million, and prejudgment
interest. The trial court dismissed, with prejudice, Tronzo's
claim based upon unjust enrichment. The trial court denied the
Company's motion challenging the validity of Tronzo's patent.
Tronzo was awarded an additional $6.3 million judgment for
patent infringement, including a fifty percent enhancement based
upon willfulness. The trial court also granted an injunction
prohibiting future manufacture, use, promotion or sale, in the
United States, of the finned version of the Mallory-Head
acetabular cup, the device found to have infringed the Tronzo
patent. In August 1998, the U.S. Court of Appeals for the
Federal Circuit (the "Federal Circuit") struck down the jury
award. The Federal Circuit accepted the Company's position on
all patent issues and found that the patent claims asserted by
Tronzo were invalid and, therefore, could not have been
infringed by the Company. The Federal Circuit upheld the
District Court's findings of liability on Tronzo's state law
claims, however, the Federal Circuit vacated the entire damage
award on the state law claims and remanded the case to the
District Court for further consideration on the state law claims
only, narrowly limiting Tronzo's ability to recover any damages.
As a result of the Federal Circuit's decision, the injunction
previously entered against the Company on the Mallory/Head finned
acetabular cup no longer stands and all damages assessed against
the Company have been vacated. The Company has filed a motion
with the District Court requesting that its $36.6 million of
investments be released from escrow. Tronzo did not object to
the motion and the Company expects a decision from the District
Court in the near future on the escrow release.
On June 2, 1997, the Company announced the entry of a jury
verdict against it in the United States District Court of New
Jersey in an action brought by Orthofix SRL ("Orthofix") against
the Company and its wholly-owned subsidiaries, Electro-Biology,
Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the
"Biomet Group") related to the events surrounding the expiration
of a distribution agreement under which EBIMS distributed
Orthofix's external fixation devices in the United States. The
jury found that, notwithstanding Orthofix's refusal to renew the
distribution agreement, EBIMS's commencement of development
activities of a new external fixation system prior to the
expiration of the contract, constituted a breach of the
distribution agreement. The jury awarded compensatory damages
against the Biomet Group for breach of contract and related
claims of approximately $49 million and punitive damages of $100
million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS's
economic relations, but awarded only nominal damages to the
Biomet Group. With respect to certain non-jury issues, the trial
court entered an order denying Orthofix's motions for enhanced
and/or treble damages and attorneys' fees. The trial court also
granted Orthofix's motion for prejudgment interest, but only on
the compensatory portion of the damages commencing from November
29, 1995. On September 2, 1997, the trial court entered an
amended judgment reducing to $50 million, the $100 million in
punitive damages awarded to Orthofix by the jury. The Company
is appealing the final amended judgment entered against the
Biomet Group to the United States Court of Appeals for the Third
Circuit. The briefing by both parties in the appeal has been
completed and oral arguments were held on October 29, 1998. It
is anticipated that the Third Circuit will issue its final
decision on the appeal sometime in mid calendar year 1999. In
connection with the District Court's final judgment and its
order granting a stay of enforcement and execution of the
judgment, the Biomet group was required to deliver to an escrow
agent investments with a value no less than $108 million to be
held in escrow, invested and disbursed for the benefit of the
plaintiff pending the outcomes of all appeals. As of February
28, 1999, $108 million has been delivered to the escrow agent.
This amount is restricted under the terms of the escrow
agreement and is included in investments on the Company's
consolidated balance sheet as of February 28, 1999.
Based on the information currently available and advice from
legal counsel, management believes that the trial court's
judgment in the Orthofix case will not be upheld upon appeal.
Therefore, no amounts related to this case have been recorded in
the Company's financial statements, except for estimated legal
costs associated with the appeal process. If the Company is
unsuccessful in its appeal of this case, the ultimate liability
could be material to the operating results in the period such
loss is recognized. The Company's cash, cash equivalents and
investments are adequate to address the payment of any losses
that could ultimately be determined with respect to this case.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AS OF FEBRUARY 28, 1999
For the nine-month period ended February 28, 1999, the Company's
cash and investments have increased $95,857,000 to $317,739,000,
despite the $13,453,000 cash dividend paid during the first
quarter. The increase in cash balances this quarter was the result
of short-term borrowings of Biomet Merck B.V., which were used
to reduce intercompany debt. This reduced the Company's
exposure to foreign currency exchange losses on the intercompany
debt and took advantage of the interest rate spread between
current interest rate returns on domestic investments and
interest rates on international borrowings.
Cash flows provided by operating activities were $97,711,000 for
the first nine months of fiscal 1999 compared to $90,023,000 in
1998. Net income plus depreciation and amortization and an
increase in accrued income taxes were the principal sources of
cash from operating activities, offset by increases in accounts
receivable and inventories and a decrease in other accrued expenses.
Cash flows used in investing activities were $111,520,000 for
the first nine months of fiscal 1999 compared to a use of
$66,425,000 in 1998. The primary source of cash flows from
investing activities were sales and maturities of investments
offset by purchases of investments and purchases of capital
equipment.
Cash flows from financing activities were $33,371,000 for the
first nine months of fiscal 1999 compared to a use of $8,764,000
in 1998. The primary source of cash flows from financing
activities was the short-term borrowings of Biomet Merck B.V. as
noted above. The primary use of cash flows from financing
activities was the cash dividend paid in the first quarter. In
June 1998, the Company's Board of Directors declared a cash
dividend of twelve cents ($.12) per share payable to
shareholders of record at the close of business on July 10,
1998.
Currently available funds, together with anticipated cash flows
generated from future operations, are believed to be adequate to
cover the Company's anticipated cash requirements, including
capital expenditures, research and development costs and
litigation settlements, if any.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 1999
AS COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 1998
Effective January 1, 1998, the Company and Merck KGaA,
Darmstadt, Germany ("Merck KGaA") entered into a Joint Venture
Agreement to manufacture and sell orthopedic and biomaterial
products in Europe. The Company and Merck KGaA each contributed
its European orthopedic and biomaterials business operations to
a new entity, BioMer C.V. ("BioMer"). The Company controls
BioMer and, accordingly, consolidates the financial statements
of BioMer for financial reporting purposes and reflects Merck
KGaA's 50% interest as a minority interest. The acquisition of
BioMer was accounted for as a purchase and the operating results
of BioMer are consolidated from the date of acquisition.
Accordingly, the nine months ended February 28, 1999 include the
operations of BioMer, while the nine months ended February 28,
1998 included one month of BioMer's operations and eight month's
of the Company's European business operations prior to the
addition of Merck KgaA's European business operations.
Net sales increased 18% to $552,334,000 for the nine-month
period ended February 28, 1999, from $467,079,000 for the same
period last year. The Company's U.S.-based revenue increased
10% to $375,531,000 during the first nine months, while foreign
sales increased 42% to $176,803,000. Biomet's worldwide sales
of reconstructive products during the first nine months of
fiscal 1999 were $327,772,000, representing an 18% increase
compared to the first nine months of last year. This increase
was primarily a result of Biomet's continued penetration of the
reconstructive device market led by revision products, the
Alliance Hip System and the initial launch of the Ascent Knee
System. Sales of fixation products were $119,532,000 for the
first nine months of fiscal 1999, representing a 13% increase as
compared to the same period in 1998. Sales of spinal products
were $32,461,000 for the first nine months of fiscal 1999,
representing a 29% increase as compared to the same period in
1998. The Company's sales of other products totaled
$72,569,000, representing a 27% increase over the first nine
months of fiscal year 1998, primarily as a result of increased
sales of arthroscopy and soft good products and the Indiana Tome
Carpal Tunnel Release System. The formation of BioMer
positively influenced consolidated and foreign revenues
principally in the reconstructive and other product categories
during the first nine months of fiscal year 1999.
Cost of sales decreased as a percentage of net sales to 30.4%
for the first nine months of fiscal 1999 from 31.1% last year
primarily as result of increased sales of higher margin
products, increased in-house manufacturing efficiencies,
improved margins realized through acquisitions of international
distributors and the inclusion of BioMer's higher margin bone
cements and biomaterial products. Selling, general and
administrative expenses decreased as a percentage of net sales
to 34.8%, compared to 35.2% for the first nine months of last
year. This reduction is principally the result of the
consolidation of the operations of BioMer and reduced legal
costs. Research and development expenditures during the first
nine months were $26,100,000 reflecting the addition of the
BioMer research and development projects. Last year's nine
month research and development expenditures were $27,493,000,
which included the expensing of $9.8 million of purchased
in-process research and development relating to the acquisition
of 50% of Merck's European operations. Operating income rose
28% from $129,949,000 for the first nine months of fiscal 1998,
to $166,115,000 for the first nine months of fiscal 1999. Other
income decreased to $10,416,000 for the first nine months of
this year from $21,345,000 for the first nine months of last
year. Included in other income last year was the $15,200,000
gain realized from the sale of 50% of Biomet's European
operations to Merck in connection with the formation of BioMer.
The effective income tax rate decreased slightly to 36.7% for
the first nine months of fiscal 1999, from 39.3% last year.
Last year's tax rate was inflated due to the expensing of the
purchased in-process research and development not having a tax
benefit. Minority interest was $4,870,000 for the current year
compared to $480,000 for last year. Last year's amount included
only one month of BioMer's operations.
These factors resulted in a 17% increase in net income to
$106,845,000 from $91,280,000 for the first nine months of
fiscal 1999, as compared to the same period in fiscal 1998.
Basic and diluted earnings per share increased 16%, from $.82
to $.95 and from $.81 to $.94, respectively, for the periods
presented.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
AS COMPARED TO THE THREE MONTHS ENDED FEBRUARY 28, 1998
Net sales increased 19% to $192,330,000 for the third quarter of
fiscal year 1999, as compared to $160,968,000 for the same
period last year. Operating income increased 47% from
$38,462,000 for the third quarter of fiscal 1998, to
$56,446,000 for the third quarter of fiscal 1999. During the
third quarter, net income increased 20% to $37,357,000 as
compared to $31,257,000 for the same period last year. Basic
and diluted earnings per share both increased 18% from $.28 per
share for the third quarter of fiscal 1998 to $.33 per share for
the same period of fiscal 1999. The business factors resulting
in these changes and relevant trends affecting the Company's
business during the periods in question are comparable to those
described in the preceding discussion for the nine-month period.
OTHER MATTERS
The Year 2000 ("Y2K") issue stems from the way dates are
recorded and computed in many computer systems because such
programs use only the last two digits to indicate the year. If
uncorrected, these computer programs will be unable to interpret
dates beyond the year 1999, which could cause computer system
failure or other computer errors, thereby disrupting operations.
The Company understands the importance of being prepared for
Y2K. The Company's objective is to ensure an uninterrupted
transition into Y2K and is progressing in a comprehensive plan
to assure the achievement of that goal. The scope of the
Year 2000 readiness effort includes (1) information
technology ("IT") such as software and hardware; (2) non-IT
systems or embedded technology such as microcontrollers
contained in various manufacturing and lab equipment,
environmental and safety systems, facilities and utilities, and
Company products with date-sensitivity (the vast majority of
the Company's products are not date-sensitive); and (3)
readiness of key second parties, including suppliers, customers,
and key financial institutions. If needed modifications and
conversions are not made on a timely basis, the Year 2000 issue
could have a material adverse affect on the Company's operations.
The majority of the most vital information systems of the
Company are now Y2K compliant. The Company expects that the
remainder of the information systems located in the United
States will be Y2K compliant by June 1999. Three of the
Company's European subsidiaries are undergoing computer hardware
and software upgrades to insure they are Y2K compliant. These
upgrades will be completed by September 1999. The Company
expects to complete compliancy testing and finalize contingency
plans in the next two quarters. The Company is in contact with
key suppliers and financial institutions to ensure no
interruption in the relationship between the Company and these
important third parties concerning Y2K compliance issues. If
third parties do not convert their systems in a timely manner,
Y2K could have a material adverse affect on the Company's
operations.
The Company is expensing as incurred all costs related to the
assessment and remediation of the Y2K issue. These costs are
being funded through operating cash flows and are not material
to the Company's consolidated financial condition or results of
operations.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.
In January 1996, a jury returned a verdict in favor of Raymond
G. Tronzo ("Tronzo") awarding him approximately $55 million in
damages on his patent and state law claims. On October 29, 1996,
the United States District Court for the Southern District of
Florida entered a judgment, which implemented and reduced the
jury verdict, awarding $30.2 million to Tronzo on his state law
claims, including compensatory damages of approximately $7.1
million, punitive damages of $20 million, and prejudgment
interest. The trial court dismissed, with prejudice, Tronzo's
claim based upon unjust enrichment. The trial court denied the
Company's motion challenging the validity of Tronzo's patent.
Tronzo was awarded an additional $6.3 million judgment for
patent infringement, including a fifty percent enhancement based
upon willfulness. The trial court also granted an injunction
prohibiting future manufacture, use, promotion or sale, in the
United States, of the finned version of the Mallory-Head
acetabular cup, the device found to have infringed the Tronzo
patent. In August 1998, the U.S. Court of Appeals for the
Federal Circuit (the "Federal Circuit") struck down the jury
award. The Federal Circuit accepted the Company's position on
all patent issues and found that the patent claims asserted by
Tronzo were invalid and, therefore, could not have been
infringed by the Company. The Federal Circuit upheld the
District Court's findings of liability on Tronzo's state law
claims, however, the Federal Circuit vacated the entire damage
award on the state law claims and remanded the case to the
District Court for further consideration on the state law claims
only, narrowly limiting Tronzo's ability to recover any damages.
As a result of the Federal Circuit's decision, the injunction
previously entered against the Company on the Mallory/Head
finned acetabular cup no longer stands and all damages assessed
against the Company have been vacated. The Company has filed a
motion with the District Court requesting that its $36.6 million
of investments be released from escrow. Tronzo did not object
to the motion and the Company expects a decision from the
District Court in the near future on the escrow release.
On June 2, 1997, the Company announced the entry of a jury
verdict against it in the United States District Court of New
Jersey in an action brought by Orthofix SRL ("Orthofix") against
the Company and its wholly-owned subsidiaries, Electro-Biology,
Inc. ("EBI") and EBI Medical Systems, Inc. ("EBIMS"), (the
"Biomet Group") related to the events surrounding the expiration
of a distribution agreement under which EBIMS distributed
Orthofix's external fixation devices in the United States. The
jury found that, notwithstanding Orthofix's refusal to renew the
distribution agreement, EBIMS's commencement of development
activities of a new external fixation system prior to the
expiration of the contract, constituted a breach of the
distribution agreement. The jury awarded compensatory damages
against the Biomet Group for breach of contract and related
claims of approximately $49 million and punitive damages of $100
million. The jury also concluded that Orthofix breached the
distribution agreement and tortiously interfered with EBIMS's
economic relations, but awarded only nominal damages to the
Biomet Group. With respect to certain non-jury issues, the trial
court entered an order denying Orthofix's motions for enhanced
and/or treble damages and attorneys' fees. The trial court also
granted Orthofix's motion for prejudgment interest, but only on
the compensatory portion of the damages commencing from November
29, 1995. On September 2, 1997, the trial court entered an
amended judgment reducing to $50 million, the $100 million in
punitive damages awarded to Orthofix by the jury. The Company
is appealing the final amended judgment entered against the
Biomet Group to the United States Court of Appeals for the Third
Circuit. The briefing by both parties in the appeal has been
completed and oral arguments were held on October 29, 1998. It
is anticipated that the Third Circuit will issue its final
decision on the appeal sometime in mid calendar year 1999. In
connection with the District Court's final judgment and its
order granting a stay of enforcement and execution of the
judgment, the Biomet Group was required to deliver to an escrow
agent investments with a value no less than $108 million to be
held in escrow, invested and disbursed for the benefit of the
plaintiff pending the outcomes of all appeals. As of February
28, 1999, $108 million has been delivered to the escrow agent.
This amount is restricted under the terms of the escrow agreement
and is included in investments on the Company's consolidated
balance sheet as of February 28, 1999.
Based on the information currently available and advice from
legal counsel, management believes that the trial court's
judgment in the Orthofix case will not be upheld upon appeal.
Therefore, no amounts related to this case have been recorded in
the Company's financial statements, except for estimated legal
costs associated with the appeal process. If the Company is
unsuccessful in its appeal of this case, the ultimate liability
could be material to the operating results in the period such
loss is recognized. The Company's cash, cash equivalents and
investments are adequate to address the payment of any losses
that could ultimately be determined with respect to this case.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOMET, INC.
------------
DATE: 4/1/99 BY: /s/ GREGORY D. HARTMAN
------ -------------------------
Gregory D. Hartman
Vice President - Finance
(Principal Financial Officer)
(Signing on behalf of the Registrant
and as Principal Financial Officer)
BIOMET, INC.
FORM 10-Q
INDEX TO EXHIBITS
Sequential
Number Assigned Numbering System
in Regulation S-K Page Number
Item 601 Description of Exhibit of Exhibit
- ----------------- -------------------------------- ----------------
(2) No exhibit.
(4) 4.1 Specimen certificate for Common
Shares. (Incorporated by reference
to Exhibit 4.1 to the registrant's
Report on Form 10-K for the fiscal
year ended May 31, 1985).
4.2 Rights Agreement between Biomet,
Inc. and Lake City Bank, as Rights
Agent, dated as of December 2, 1989.
(Incorporated by reference to Exhibit
4 to Biomet, Inc. Form 8-K Current Report
dated December 22, 1989, File No. 0-12515).
(10) No exhibit.
(11) No exhibit.
(15) No exhibit.
(18) No exhibit.
(19) No exhibit.
(22) No exhibit.
(23) No exhibit.
(24) No exhibit.
(27) Financial data schedules.
(99) No exhibit.
</TEXT>
</DOCUMENT>
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<TEXT>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 137368000
<SECURITIES> 58831000
<RECEIVABLES> 216538000
<ALLOWANCES> 4672000
<INVENTORY> 202754000
<CURRENT-ASSETS> 659973500
<PP&E> 266565000
<DEPRECIATION> 106644000
<TOTAL-ASSETS> 1003949000
<CURRENT-LIABILITIES> 146699000
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 76987000
<OTHER-SE> 692802000
<TOTAL-LIABILITY-AND-EQUITY> 1003949000
<SALES> 552334000
<TOTAL-REVENUES> 552334000
<CGS> 167735000
<TOTAL-COSTS> 386219000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363000
<INCOME-PRETAX> 176531000
<INCOME-TAX> 64816000
<INCOME-CONTINUING> 111715000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106845000
<EPS-PRIMARY> .95
<EPS-DILUTED> .94
</TABLE>
</TEXT>
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|
1999 | 0QTR1
| BSC | https://www.sec.gov/Archives/edgar/data/777001/0000777001-99-000006.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000777001-99-000006.txt : 19990217
<SEC-HEADER>0000777001-99-000006.hdr.sgml : 19990217
ACCESSION NUMBER: 0000777001-99-000006
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: BEAR STEARNS COMPANIES INC
CENTRAL INDEX KEY: 0000777001
STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211]
IRS NUMBER: 133286161
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-08989
FILM NUMBER: 99541934
BUSINESS ADDRESS:
STREET 1: 245 PARK AVE
CITY: NEW YORK
STATE: NY
ZIP: 10167
BUSINESS PHONE: 2122722000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 1-8989
The Bear Stearns Companies Inc.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212)272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of February 11, 1999, the latest practicable date, there were 111,361,528
shares of Common Stock, $1 par value, outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at December31,
1998 (Unaudited) and June 30, 1998
Consolidated Statements of Income (Unaudited) for the
three-and six-month periods ended December 31, 1998 and
December 31, 1997
Consolidated Statements of Cash Flows (Unaudited) for the
six-month periods ended December 31, 1998 and December 31,
1997
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
December 31, June 30,
1998 1998
--------------- ---------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 1,664,077 $ 1,073,821
Cash and securities deposited with
clearing organizations or
segregated in compliance with
federal regulations 3,589,615 2,282,729
Securities purchased under agreements
to resell 33,060,960 29,846,716
Receivable for securities provided as
collateral 2,118,696 2,041,546
Securities borrowed 54,592,219 56,844,009
Receivables:
Customers 11,420,908 14,228,678
Brokers, dealers and others 1,812,166 1,337,146
Interest and dividends 393,302 467,456
Financial instruments owned, at
fair value 41,067,854 44,619,672
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 474,477 448,044
Other assets 936,225 1,306,078
--------------- ----------------
Total Assets $ 151,130,499 $ 154,495,895
=============== ================
See Notes to Consolidated Financial Statements.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
December 31, June 30,
1998 1998
--------------- ----------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 10,020,298 $ 14,613,565
Securities sold under agreements
to repurchase 50,005,971 45,346,472
Obligation to return securities received as
collateral 2,726,408 5,257,279
Payables:
Customers 46,844,515 42,119,042
Brokers, dealers and others 4,079,584 5,055,988
Interest and dividends 660,827 636,021
Financial instruments sold, but not
yet purchased, at fair value 16,410,663 21,070,596
Accrued employee compensation and benefits 627,814 1,217,337
Other liabilities and accrued expenses 894,300 1,242,110
--------------- ----------------
132,270,380 136,558,410
--------------- ----------------
Commitments and contingencies
--------------- ----------------
Long-term borrowings 13,843,516 13,295,952
--------------- ----------------
Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities 500,000 200,000
Preferred stock issued by subsidiary 150,000 150,000
--------------- ----------------
Stockholders' Equity
Preferred Stock 800,000 800,000
Common Stock, $1.00 par value;
200,000,000 shares authorized;
167,784,941 shares issued at
December 31, 1998 and June 30, 1998 167,785 167,785
Paid-in capital 1,964,391 1,963,788
Retained earnings 1,736,663 1,590,574
Capital Accumulation Plan 987,212 833,427
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares
at December 31, 1998 and June 30, 1998 (103,421) (103,421)
Common Stock - 56,150,592 shares and
50,191,531 shares at December 31, 1998 and
June 30, 1998, respectively (1,186,027) (953,506)
Note receivable from ESOP Trust (7,114)
--------------- ---------------
Total Stockholders' Equity 4,366,603 4,291,533
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 151,130,499 $ 154,495,895
=============== ================
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- --------------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
--------------- ---------------- -------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 254,676 $ 230,496 $ 495,476 $ 443,940
Principal transactions 419,002 390,512 616,051 782,026
Investment banking 163,664 278,884 285,440 498,212
Interest and dividends 1,138,680 1,081,298 2,286,519 2,045,869
Other income 26,705 11,877 42,845 36,025
--------------- ---------------- -------------- --------------
Total Revenues 2,002,727 1,993,067 3,726,331 3,806,072
Interest expense 981,935 919,304 1,964,638 1,736,219
--------------- ---------------- -------------- --------------
Revenues, net of interest expense 1,020,792 1,073,763 1,761,693 2,069,853
--------------- ---------------- -------------- --------------
Non-interest expenses
Employee compensation and benefits 552,344 535,793 958,225 1,034,990
Floor brokerage, exchange
and clearance fees 41,375 43,522 83,439 83,107
Communications 36,362 28,824 69,457 56,957
Depreciation and amortization 32,758 27,427 65,152 53,444
Occupancy 25,923 25,387 51,811 48,933
Advertising and market development 23,854 20,057 46,892 36,011
Data processing and equipment 15,293 12,460 26,278 24,694
Other expenses 85,405 120,688 159,652 204,974
--------------- ---------------- -------------- --------------
Total non-interest expenses 813,314 814,158 1,460,906 1,543,110
--------------- ---------------- -------------- --------------
Income before provision for
income taxes 207,478 259,605 300,787 526,743
Provision for income taxes 71,558 99,383 100,764 204,903
--------------- ---------------- -------------- --------------
Net income $ 135,920 $ 160,222 $ 200,023 $ 321,840
=============== ================ ============== ==============
Net income applicable to
common shares $ 126,142 $ 154,299 $ 180,150 $ 309,991
=============== ================ ============== ==============
Earnings per share (1) $ 0.84 $ 1.06 $ 1.22 $ 2.11
=============== ================ ============== ==============
Weighted average common and
common equivalent shares
outstanding (1) 158,355,696 159,928,530 158,985,526 160,395,121
=============== ================ ============== ==============
Cash dividends declared
per common share (1) $ .14 $ .14 $ 0.29 $ 0.29
=============== ================ ============== ==============
(1) Adjusted for the 5% stock dividend declared on January 20, 1999.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
-------------------- --------------
December 31, December 31,
1998 1997
---------------- --------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 200,023 $ 321,840
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 65,152 53,444
Deferred income taxes 6,682 (58,468)
Other 36,759 56,738
(Increases) decreases in operating receivables:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (1,306,886) (1,358,076)
Securities purchased under agreements to resell (3,214,244) (5,656,550)
Securities borrowed 2,251,790 (2,110,431)
Receivables:
Customers 2,807,770 (4,111,308)
Brokers, dealers and others (475,020) (230,966)
Financial instruments owned 943,797 (2,380,947)
Other assets 412,993 (14,591)
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 4,659,499 6,812,256
Payables:
Customers 4,725,473 5,742,192
Brokers, dealers and others (979,434) (1,454,246)
Financial instruments sold, but not yet purchased (4,659,933) 1,665,284
Accrued employee compensation and benefits (613,523) (184,391)
Other liabilities and accrued expenses (323,248) 286,743
-------------- ----------------
Cash provided by (used in) operating activities 4,537,650 (2,621,477)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings (4,593,267) 106,297
Net proceeds from issuance of long-term borrowings 1,936,990 3,433,171
Net proceeds from issuance of subsidiary securities 290,550
Capital Accumulation Plan 153,785 51,010
Tax benefit of Common Stock distributions 603 7,552
Note repayment from ESOP Trust 7,114 6,587
Payments for:
Retirement of Senior Notes (1,398,805) (660,299)
Treasury stock purchases (229,491) (71,165)
Cash dividends paid (53,691) (47,160)
---------------- --------------
Cash (used in) provided by financing activities (3,886,212) 2,825,993
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (91,585) (108,498)
Purchases of investment securities and other assets (19,870) (80,807)
Proceeds from sales of investment securities and other assets 50,273 5,402
---------------- --------------
Cash used in investing activities (61,182) (183,903)
---------------- --------------
Net increase in cash and cash equivalents 590,256 20,613
Cash and cash equivalents, beginning of period 1,073,821 1,249,132
---------------- --------------
Cash and cash equivalents, end of period $ 1,664,077 $ 1,269,745
================ ==============
See Notes to Consolidated Financial Statements.
The adoption of SFAS 125, which requires balance sheet recognition of collateral
related to certain secured financing transactions, is a non-cash activity and
did not impact the consolidated statements of cash flow.
</TABLE>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The Bear Stearns Companies Inc. and its subsidiaries (the
"Company"). All material intercompany transactions and balances have been
eliminated. Share data for all periods included in the consolidated
financial statements are presented after giving retroactive effect to the 5%
stock dividend declared by the Company in January 1999. The consolidated
financial statements reflect all adjustments which, in the opinion of
management, are normal and recurring and are necessary for a fair statement
of the results for the interim periods presented. The consolidated financial
statements are prepared in conformity with generally accepted accounting
principles which require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. The
nature of the Company's business is such that the results of any interim
period may not be indicative of the results to be expected for an entire
fiscal year.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold, but not yet
purchased consist of the Company's proprietary trading and investment
accounts, at fair value, as follows:
December 31, June 30,
In thousands 1998 1998
- ------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 6,346,417 $ 9,388,387
Other sovereign governments 3,529,946 2,955,515
Corporate equity and convertible debt 12,197,495 12,255,749
Corporate debt 3,314,348 4,938,541
Derivative financial instruments 3,414,111 3,545,236
Mortgages and other mortgage-backed securities 11,540,446 10,582,090
Other 725,091 954,154
------- -------
$41,067,854 $44,619,672
=========== ===========
Financial instruments sold, but not yet purchased:
US government and agency $ 5,198,303 $ 6,327,074
Other sovereign governments 914,197 3,107,789
Corporate equity 3,655,416 4,336,280
Corporate debt 1,162,579 1,398,025
Derivative financial instruments 5,475,435 5,835,491
Other 4,733 65,937
----- ------
$16,410,663 $21,070,596
============ ===========
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company was contingently liable for unsecured
letters of credit of approximately $1.9 billion and letters of credit of
approximately $24.2 million secured by financial instruments, which are
principally used as collateral for securities borrowed and to satisfy margin
requirements at option and commodity exchanges.
In the normal course of business, the Company has been named as a defendant
in several lawsuits which involve claims for substantial amounts. Although
the ultimate outcome of these suits cannot be ascertained at this time, it
is the opinion of management, after consultation with counsel, that the
resolution of such suits will not have a material adverse effect on the
results of operations or the financial condition of the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns
Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly,
are subject to Securities and Exchange Commission Rule 15c3-1 (the "Net
Capital Rule") and the capital rules of the New York Stock Exchange, Inc.
("NYSE") and other principal exchanges of which Bear Stearns and BSSC are
members. Included in the computation of net capital of Bear Stearns is net
capital of BSSC in excess of 5% of aggregate debit items arising from
customer transactions, as defined. At December 31, 1998, Bear Stearns' net
capital, as defined, of $1.99 billion exceeded the minimum requirement by
$1.95 billion.
Bear, Stearns International Limited ("BSIL") and another wholly owned London
based subsidiary are subject to regulatory capital requirements of the
Securities and Futures Authority. At December 31, 1998, BSIL exceeded
the minimum capital required by $655 million.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable to common
shares by the weighted average number of common shares outstanding during
each period presented. Common shares include the assumed distribution of
shares of common stock issuable under various employee benefit plans
including certain of the Company's deferred compensation arrangements, with
appropriate adjustments made to net income for expenses related thereto.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the six-months
ended December 31, 1998 and December 31, 1997. Income taxes paid totaled
$43.3 million and $227.1 million for the six-months ended December 31, 1998
and December 31, 1997, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making
and trading activities, enters into transactions in a variety of cash and
derivative financial instruments for trading purposes and in order to reduce
its exposure to market risk, which includes interest rate, exchange rate,
equity price and commodity price risk. Statement of Financial Accounting
Standards ("SFAS") No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," defines a derivative
as a future, forward, swap, or option contract, or other financial
instruments with similar characteristics such as caps, floors and collars.
Generally these financial instruments represent future commitments to
exchange interest payment streams or currencies or to purchase or sell other
financial instruments at specific terms at specified future dates. Option
contracts provide the holder with the right, but not the obligation, to
purchase or sell a financial instrument at a specific price before or on an
established date. These financial instruments may have market and/or credit
risk in excess of amounts recorded in the Consolidated Statements of
Financial Condition.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
In order to measure derivative activity, notional or contract amounts are
frequently utilized. Notional/contract amounts, which are not included on
the balance sheet, are used to calculate contractual cash flows to be
exchanged and are generally not actually paid or received, with the
exception of currency swaps and foreign exchange forwards and
mortgage-backed securities forwards. The notional/contract amounts of
financial instruments that give rise to off-balance-sheet market risk are
indicative only of the extent of involvement in the particular class of
financial instrument and are not necessarily an indication of overall market
risk.
The following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments at December 31, 1998
and June 30, 1998:
December 31, June 30,
In billions 1998 1998
---------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options,
swaptions, caps, collars, and floors $325.8 $277.5
Futures contracts 44.8 49.8
Options held 10.9 4.0
Options written 7.0 1.6
Foreign Exchange:
Futures contracts 10.5 20.8
Forward contracts 15.5 29.6
Options held 4.0 9.9
Options written 4.7 7.7
Mortgage-Backed Securities:
Forward Contracts 67.2 70.2
Equity:
Swap agreements 11.6 11.6
Futures contracts 4.3 1.1
Options held 7.7 5.3
Options written 6.6 4.6
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The derivative instruments used in the Company's trading and dealer
activities are recorded at fair value on a daily basis with the resulting
unrealized gains or losses recorded in the Consolidated Statements of
Financial Condition and the related income or loss reflected in revenues
derived from principal transactions.
The fair values of derivative financial instruments held or issued for
trading purposes at December 31, 1998 and June 30, 1998 were as follows:
December 31, June 30,
1998 1998
-------------------------------------------------
In millions Assets Liabilities Assets Liabilities
Swap agreements $2,498 $2,105 $1,872 $2,100
Futures and forward
contracts 171 213 450 551
Options held 767 1,279
Options written 3,262 3,189
The average monthly fair values of the derivative financial instruments for
the six-months ended December 31, 1998 and the fiscal year ended June 30,
1998 were as follows:
December 31, June 30,
1998 1998
-----------------------------------------------
In millions Assets Liabilities Assets Liabilities
Swap agreements $2,288 $2,383 $1,154 $1,494
Futures and forward
contracts 353 438 318 329
Options held 1,031 2,207
Options written 3,022 3,709
The notional/contract amounts of these instruments do not represent the
Company's potential risk of loss due to counterparty nonperformance. Credit risk
arises from the potential inability of counterparties to perform in accordance
with the terms of the contract. The Company's exposure to credit risk associated
with counterparty nonperformance is limited to the net replacement cost of
over-the-counter contracts in a gain position which are recognized in the
Company's Consolidated Statements of Financial Condition. Exchange-traded
financial instruments, such as futures and options, generally do not give rise
to significant counterparty exposure due to the margin requirements of the
individual exchanges. Generally, options written do not give rise to
counterparty credit risk since they obligate the Company (not its
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
counterparty) to perform. The Company has controls in place to monitor
credit exposures by limiting transactions with specific counterparties and
assessing the creditworthiness of counterparties. The Company also seeks to
control credit risk by following an established credit approval process,
monitoring credit limits, and requiring collateral where appropriate.
The following table summarizes the credit quality of the Company's
trading-related derivatives by showing counterparty credit ratings for the
replacement cost of contracts in a gain position, net of $1.7 billion and
$832.4 million of collateral, respectively, at December 31, 1998 and June
30, 1998:
December 31, June 30,
In millions 1998 1998
--------------------------------------------------
RATING (1) NET REPLACEMENT COST
AAA $294.6 $187.7
AA 549.6 607.9
A 291.6 371.0
BBB 85.0 68.1
BB and Lower 49.9 70.8
Non-rated 5.4 27.2
(1) Rating Agency Equivalent
8. PREFERRED SECURITIES ISSUED BY SUBSIDIARY
In December 1998, Bear Stearns Capital Trust II (the "Trust"), a wholly
owned subsidiary of the Company, issued $300 million (12,000,000 shares) of
fixed rate securities with a liquidation value of $25 per security (the
"Preferred Securities"). Holders of the Preferred Securities are entitled to
receive quarterly preferential cash distributions at an annual rate of 7.5%
through December 15, 2028. The issuance proceeds of the Preferred Securities
were used to purchase junior subordinated deferrable interest debentures
from The Bear Stearns Companies Inc. (the "Subordinated Debentures"). The
Subordinated Debentures have terms that correspond to the terms of the
Preferred Securities and are the sole assets of the Trust. The Preferred
Securities will mature on December 15, 2028. The Company, at its option,
may redeem the Preferred Securities at their principal amount plus
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accrued distributions beginning December 15, 2003. The Company used the net
proceeds from the sale of the Subordinated Debentures for general corporate
purposes.
9. SUBSEQUENT EVENT
On January 20, 1999, the Board of Directors declared a 5% stock dividend on
the Company's Common Stock to stockholders of record February 12, 1999, to
be distributed February 26, 1999. Per share amounts and weighted average
shares outstanding for all periods included in the consolidated financial
statements are presented after giving retroactive effect to the stock
dividend.
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this discussion are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties, which could
cause actual results to differ materially from those discussed in the
forward-looking statements.
The Company's principal business activities, investment banking, securities
trading and brokerage, are, by their nature, highly competitive and subject to
various risks, in particular volatile trading markets and fluctuations in the
volume of market activity. Consequently, the Company's net income and revenues
in the past have been, and are likely to continue to be, subject to wide
fluctuations, reflecting the impact of many factors including securities market
conditions, the level and volatility of interest rates, competitive conditions,
liquidity of global markets, international and regional political events,
regulatory developments and the size and timing of transactions.
For a description of the Company's business, including its trading in cash
instruments and derivative products, its underwriting and trading policies, and
their respective risks, and the Company's risk management policies and
procedures, see the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998.
Business Environment
The business environment during the Company's second fiscal quarter ended
December 31, 1998 was characterized by rising domestic equity markets and qrowth
in both New York Stock Exchange ("NYSE") and NASDAQ trading volume. Equity
markets were positively impacted by strong investor interest in internet and
technology stocks. In addition, underwriting and merger and acquisition
activities experienced steady growth during the period.
In the fixed income markets, credit spreads tightened significantly during the
1998 quarter, which led to improved conditions in both the primary and secondary
markets, which was reflected in the Company's results in the mortgage-backed,
asset-backed and government securities business units.
<PAGE>
Results of Operations
Three-Months Ended December 31, 1998 Compared to December 31, 1997
Net income in the 1998 quarter was $135.9 million, a decrease of 15.2% from
the $160.2 million in the comparable prior year quarter. Revenues, net of
interest expense ("net revenues"), decreased 4.9% to $1.0 billion in the
1998 quarter from $1.1 billion in the comparable 1997 quarter. The decrease
was primarily attributable to decreased investment banking revenues
partially offset by increased principal transactions and commission
revenues. Earnings per share were $0.84 for the 1998 quarter versus $1.06
for the comparable 1997 quarter. The earnings per share amounts have been
adjusted for the 5% stock dividend declared by the Company in January 1999.
Commission revenues increased 10.5% in the 1998 quarter to $254.7 million from
$230.5 million in the comparable 1997 quarter. This increase primarily reflects
increases in both institutional and private client services activities which
benefited from a 24.9% increase in NYSE volume in the 1998 quarter compared
to the 1997 quarter.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
December 31, 1998 December 31, 1997
Fixed Income $ 223,582 $ 226,903
Equity 139,170 108,297
Foreign Exchange & Other
Derivative Financial
Instruments 56,250 55,312
------ ------
$ 419,002 $ 390,512
========= =========
Revenues from principal transactions increased 7.3% in the 1998 quarter which
was principally attributable to an increase in equity based revenues, such as
those derived from the arbitrage, over-the-counter and international equity
business areas. Revenues derived from fixed income reflected increases in both
the mortgage-backed and government securities business units as a result of
tightening of credit spreads and increased customer activity.
Investment banking revenues decreased 41.3% to $163.7 million in the 1998
quarter from $278.9 million in the comparable 1997 quarter. This decrease
reflected a decrease in
<PAGE>
merger and acquisition fees as well as a decrease in underwriting revenues.
Market conditions worldwide served to dampen the Company's underwriting
activities and merger and acquisition activity during the 1998 quarter. The
decrease in underwriting revenues was principally due to decreased levels of
equity and high yield new issue volume, partially offset by an increase in
investment-grade corporate debt new issue volume as compared to the 1997
quarter.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) decreased 3.2% to $156.7 million in the 1998 quarter from
$162.0 million in the comparable 1997 quarter. This decrease was primarily
attributable to lower levels of customer margin debt. Average margin debt
balances decreased to $38.4 billion in the 1998 quarter from $44.3 billion in
the comparable 1997 quarter reflecting reduced activity from the Company's prime
brokerage customers. Average customer shorts increased to $61.8 billion in the
1998 quarter from $56.5 billion in the comparable 1997 quarter. Average free
credit balances increased to $12.5 billion in the 1998 quarter from $11.0
billion in the comparable 1997 quarter.
Employee compensation and benefits increased 3.1% to $552.3 million in the 1998
quarter from $535.8 million in the comparable 1997 quarter. This increase was
attributable to an increase in salesmen's compensation resulting from increased
commission revenues and an increase in headcount from the 1997 quarter. Employee
compensation and benefits, as a percentage of net revenues, increased to 54.1%
in the 1998 quarter from 49.9% in the comparable 1997 quarter.
All other expenses decreased 6.2% to $261.0 million in the 1998 quarter from
$278.4 million in the comparable 1997 quarter. Legal expense decreased by $19.9
million in the 1998 quarter from the comparable 1997 quarter due to the accrual
for the NASDAQ antitrust settlement in the 1997 quarter. Expenses associated
with the Capital Accumulation Plan for Senior Managing Directors (the "CAP
Plan") decreased by $15.0 million from the comparable 1997 quarter reflecting
lower pre-tax earnings in the 1998 quarter. Communications, depreciation and
data processing expenses increased by approximately $15.7 million as a result of
both increased usage and the upgrading of existing communication and computer
systems.
The Company's effective tax rate decreased to 34.5% in the 1998 quarter compared
to 38.3% in the comparable 1997 quarter due lower levels of earnings and a
higher level of tax preference items in the 1998 quarter.
Six-Months Ended December 31, 1998
Compared to December 31, 1997
Net income for the six-months ended December 31, 1998 was $200.0 million, a
decrease of 37.9% from $321.8 million for the comparable 1997 period. Net
revenues decreased 14.9% to $1.8 billion in the 1998 period from $2.1 billion in
the 1997 period. The decrease was primarily attributable to decreased investment
banking and principal transactions revenues partially offset by increased
commission revenues. Earnings per
<PAGE>
share were $1.22 for the 1998 period versus $2.11 for the comparable 1997
period. The earnings per share amounts have been adjusted for the 5% stock
dividend declared by the Company in January 1999.
Commission revenues increased 11.6% in the 1998 period to $495.5 million from
$443.9 million in the comparable 1997 period. This increase was primarily
attributable to increased revenues from the firm's institutional equities and
securities clearance services which reflects the 29.4% increase in NYSE volume
in the 1998 period when compared to the 1997 period.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Six-Months Ended Six-Months Ended
December 31, 1998 December 31, 1997
Fixed Income $ 296,136 $ 441,125
Equity 212,790 201,196
Foreign Exchange & Other
Derivative Financial
Instruments 107,125 139,705
------- -------
$616,051 $782,026
======== ========
Revenues from principal transactions decreased 21.2% in the 1998 period to
$616.1 million from $782.0 million in the comparable 1997 period. This decrease
primarily reflects decreased revenues derived from the Company's fixed income
and derivative activities. Revenues from both of these activities decreased due
to the volatility experienced in the equity and fixed income markets and by the
widening of credit spreads during the first quarter of 1998. These conditions
led to the declines in revenues derived from several business units such as high
yield, emerging markets and corporate bonds.
Investment banking revenues decreased 42.7% to $285.4 million in the 1998 period
from $498.2 million in the comparable 1997 period. This decrease reflected a
decrease in merger and acquisition fees and advisory fees as well as a decrease
in underwriting revenues. The decrease in underwriting revenues was principally
due to decreased levels of equity and high yield new issue volume partially
offset by increased levels of corporate debt volume as compared to the 1997
period.
Net interest and dividends remained relatively constant with a slight
increase of 3.9% to $321.9 million in the 1998 period from $309.7 million
in the comparable 1997 period. The increase was primarily attributable to
increased levels of customer activity. Average customer margin debt
declined to $41.5 billion in the 1998 period from $43.5 billion in the
comparable 1997 period, while average customer shorts increased to $63.0
billion from $55.3 billion.
<PAGE>
Average free credit balances increased to $12.8 billion in the 1998 period from
$10.2 billion in the comparable 1997 period.
Employee compensation and benefits decreased 7.4% to $958.2 million in the 1998
period from $1,035.0 million in the comparable 1997 period. The decrease in
employee compensation and benefits was primarily attributable to a decrease in
incentive and discretionary bonus accruals. Employee compensation and benefits,
as a percentage of net revenues, increased to 54.4% in the 1998 period from
50.0% in the comparable 1997 period.
All other expenses decreased 1.1% to $502.7 million in the 1998 period from
$508.1 million in the comparable 1997 period. CAP Plan expense decreased by
$27.0 million in the 1998 period from the comparable 1997 period reflecting
the reduced level of earnings. Legal expense decreased by $19.7 million in
the 1998 period from the comparable 1997 period which reflected the accrual
of the NASDAQ antitrust settlement. These decreases were partially offset
by increases in communications expense and depreciation expense.
Communications expense increased by $12.5 million in the 1998 period from
the comparable 1997 period, reflecting an increase in information services
and the installation of higher capacity telecommunication networks.
Depreciation expense increased by $11.7 million in the 1998 period from the
comparable 1997 period due to computer equipment upgrades throughout the
Company.
The Company's effective tax rate decreased to 33.5% in the 1998 period compared
to 38.9% in the comparable 1997 period due lower levels of earnings and a higher
level of tax preference items in the 1998 period.
Liquidity and Capital Resources
Financial Leverage
The Company maintains a highly liquid balance sheet with a majority of the
Company's assets consisting of marketable securities inventories, which are
marked to market daily, and collateralized receivables arising from
customer-related and proprietary securities transactions. Collateralized
receivables consist of resale agreements secured predominantly by U.S.
government and agency securities, customer margin loans and securities borrowed
which are typically secured by marketable corporate debt and equity securities.
The Company's total assets and financial leverage can fluctuate significantly
depending largely upon economic and market conditions, volume of activity,
customer demand, and underwriting commitments.
The Company's total assets at December 31, 1998 decreased to $151.1 billion from
$154.5 billion at June 30, 1998. The decrease is primarily attributable to
decreases in
<PAGE>
financial instruments owned, customer receivables and securities borrowed,
partially offset by an increase in securities purchased under agreements to
resell.
The Company's ability to support fluctuations in total assets is a function of
its ability to obtain short-term secured and unsecured funding and its access to
sources of long-term capital in the form of long-term borrowings and equity,
which together form its capital base. The Company continuously monitors the
adequacy of its capital base which is a function of asset quality and liquidity.
Highly liquid assets, such as U.S. government and agency securities, typically
are funded by the use of repurchase agreements and securities lending
arrangements which require low levels of margin. In contrast, assets of lower
quality or liquidity require higher levels of overcollateralization, or margin,
in order to obtain secured financing and consequently increased levels of
capital. Accordingly, the mix of assets being held by the Company significantly
influences the amount of leverage the Company can employ and the adequacy of its
capital base.
Funding Strategy
The Company's general funding strategy provides for the diversification of its
short-term funding sources in order to maximize liquidity. Sources of short-term
funding consist principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free credit balances,
unsecured commercial paper, medium-term notes and bank borrowings generally
having maturities from overnight to one year.
Repurchase transactions, whereby securities are sold with a commitment for
repurchase by the Company at a future date, represent the dominant component of
secured short-term funding.
In addition to short-term funding sources, the Company utilizes long-term senior
debt, including medium-term notes, as a longer term source of unsecured
financing. During the six months ended December 31, 1998, the Company issued
$1.9 billion in long-term debt which, net of retirements, served to increase
long-term debt to $13.8 billion at December 31, 1998 from $13.3 billion at June
30, 1998.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the underlying assets. The objective of the strategy
is to maintain sufficient sources of alternative funding to enable the Company
to fund debt obligations without issuing any new unsecured debt, including
commercial paper. The most significant source of alternative funding is the
Company's ability to hypothecate or pledge its unencumbered assets as collateral
for short-term funding.
As part of the Company's alternative funding strategy, the Company regularly
monitors and analyzes the size, composition, and liquidity characteristics of
the assets being financed and evaluates its liquidity needs in light of current
market conditions and available funding alternatives. Through this analysis, the
Company can continuously
<PAGE>
evaluate the adequacy of its equity base and the schedule of maturing term-debt
supporting its present asset levels. The Company can then seek to adjust its
maturity schedule, in light of market conditions and funding alternatives.
As part of the Company's alternative funding strategy, the Company maintains a
committed revolving-credit facility (the "facility") totaling $2.875 billion
which permits borrowing on a secured basis by Bear Stearns, BSSC and certain
affiliates. The facility provides that up to $1.4375 billion of the total
facility may be borrowed by the Company on an unsecured basis. Secured
borrowings can be collateralized by both investment-grade and
non-investment-grade financial instruments. In addition, this agreement provides
for defined margin levels on a wide range of eligible financial instruments that
may be pledged under the secured portion of the facility. The facility
terminates in October 1999 with all loans outstanding at that date payable no
later than October 2000.
Capital Resources
The Company conducts a substantial portion of its operating activities
within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, BSIL and
Bear Stearns International Trading Limited ("BSIT"). In connection therewith, a
substantial portion of the Company's long-term borrowings and equity have been
used to fund investments in, and advances to, Bear Stearns, BSSC, BSIL and BSIT.
The Company regularly monitors the nature and significance of those assets or
activities conducted outside the broker-dealer subsidiaries and attempts to fund
such assets with either capital or borrowings having maturities consistent with
the nature and the liquidity of the assets being financed.
In December 1998, Bear Stearns Capital Trust II (the "Trust"), a wholly owned
subsidiary of the Company, issued $300 million of fixed rate securities (the
"Preferred Securities"). See Note 8 to the Consolidated Financial Statements for
a more complete description of the Preferred Securities issued.
During the six-months ended December 31, 1998, the Company repurchased 5,994,620
shares of Common Stock in connection with the CAP Plan at a cost of
approximately $232.9 million. Included in the shares purchased during this
period were 3,763,083 shares with a cost of $153.8 million, which were credited
to participants' deferred compensation accounts with respect to deferrals made
during fiscal 1998. The Company intends, subject to market conditions, to
continue to purchase, in future periods, a sufficient number of shares of Common
Stock in the open market to enable the Company to issue shares in respect of all
compensation deferred and any additional amounts allocated to participants under
the CAP Plan. Repurchases of Common Stock under the CAP Plan are not made
pursuant to the Company's Stock Repurchase Plan (the "Repurchase Plan")
authorized by the Board of Directors and are not included in calculating the
maximum aggregate number of shares of Common Stock that the Company may
repurchase under the Repurchase Plan. As of February 11, 1999, there have been
no purchases under the Repurchase Plan.
<PAGE>
Cash Flows
Cash and cash equivalents decreased by $246.4 million during the six-months
ended December 31, 1998 to $827.4 million. Cash provided by operating activities
during the six-months ended December 31, 1998 was $3.7 billion, mainly
representing increases in customer payables, securities sold under agreements to
repurchase, and a decrease in customer receivables, partially offset by a
decrease in financial instruments sold, but not yet purchased and an increase in
securities purchased under agreements to resell. Financing activities used cash
of $3.9 billion, primarily due to net repayments of short term borrowings,
partially offset by net proceeds from issuances of long term borrowings.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities Exchange Act of 1934, the New York Stock
Exchange, and the Commodity Futures Trading Commission, which are designed to
measure the general financial soundness and liquidity of broker-dealers. BSIL
and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory
capital requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Additionally, Bear Stearns Bank Plc ("BSB") is subject to the
regulatory capital requirements of the Central Bank of Ireland. At December 31,
1998 Bear Stearns, BSSC, BSIL, BSIT, and BSB were in compliance with such
regulatory capital requirements.
Merchant Banking and Non-Investment-Grade Debt Securities
As part of the Company's merchant banking activities, it participates from time
to time in principal investments in leveraged acquisitions. As part of these
activities, the Company originates, structures and invests in merger,
acquisition, restructuring, and leveraged capital transactions, including
leveraged buyouts. The Company's principal investments in these transactions are
generally made in the form of equity investments or subordinated loans, and have
not required significant levels of capital investment. At December 31, 1998, the
Company's aggregate investments in leveraged transactions and its exposure
related to any one transaction were not material to the Company's consolidated
financial position.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade debt
securities, non-investment-grade mortgage loans and the securities of companies
that are the subject of pending bankruptcy proceedings (collectively "high yield
securities"). Non-investment-grade mortgage loans are principally secured by
residential properties and include both non-performing loans and real estate
owned. At December 31, 1998, the Company held high yield instruments of $1.7
billion in assets and $0.2 billion in liabilities, as compared to $1.8 billion
in assets and $0.3 billion in liabilities as of June 30, 1998.
<PAGE>
These investments generally involve greater risk than investment-grade debt
securities due to credit considerations, liquidity of secondary trading markets
and vulnerability to general economic conditions.
The level of the Company's high yield securities inventories, and the impact of
such activities upon the Company's results of operations, can fluctuate from
period to period as a result of customer demands and economic and market
considerations. Bear Stearns' Risk Committee continuously monitors exposure to
market and credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and concentrations of
risk by both individual issuer and industry group.
Year 2000 Issue
The Year 2000 issue is the result of legacy computer programs being written
using two digits rather than four digits to define the applicable year and
therefore, without consideration of the impact of the upcoming change in the
century. Such programs may not be able to accurately process dates ending in the
year 2000 and thereafter. The Company determined that it needed to modify or
replace portions of its software and hardware so that its computer systems would
properly utilize dates beyond December 31, 1999.
Over three years ago, the Company established a task force to review and develop
an action plan to address the Year 2000 issue. The Company's action plan
addresses both information technology and non-information technology system
compliance issues. Since then, the ongoing assessment and monitoring phase has
continued and includes assessment of the degree of compliance of its significant
vendors, facility operators, custodial banks and fiduciary agents to determine
the extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company has contacted all significant
external vendors in an effort to confirm their readiness for the Year 2000 and
plans to test compatibility with such converted systems. The Company also
participates actively in industry-wide tests.
The Company has and will continue to utilize both internal and external
resources to reprogram, or replace, and test the software and hardware for Year
2000 modifications. To date, the amounts incurred related to the assessment of,
and efforts in connection with, the Year 2000 and the development of a
remediation plan have approximated $31.3 million. The Company's total projected
Year 2000 project cost, including the estimated costs and time associated with
the impact of third party Year 2000 issues, are based on currently available
information. The total remaining Year 2000 project cost is estimated at
approximately $28.7 million, which will be funded through operating cash flows
and primarily expensed as incurred.
The Company presently believes that the activities that it is undertaking in the
Year 2000 project should satisfactorily resolve Year 2000 compliance exposures
within its own systems worldwide. The Company has substantially completed the
reprogramming and
<PAGE>
replacement phase of the project. Testing has commenced and will proceed through
calendar 1999. However, if such modifications and conversions are not
operationally effective on a timely basis, the Year 2000 issue could have a
material impact on the operations of the Company. Additionally, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company. While the Company does not have a
specific, formal contingency plan, the Company's action plan is designed to
safeguard the interests of the Company and its customers. The Company believes
that this action plan significantly reduces the risk of a Year 2000 issue
serious enough to cause a business disruption. With regard to Year 2000
compliance of other external entities, the Company is monitoring developments
closely. Should it appear that a major utility, such as a stock exchange, would
not be ready, the Company will work with other firms in the industry to plan an
appropriate course of action.
Effects of Statements of Financial Accounting Standards
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. This statement is effective
for fiscal years beginning after December 15, 1997. The Company expects to adopt
this standard when required in fiscal year 1999 and is currently determining the
potential impact on the Company's financial statement disclosure.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities." SFAS 133 establishes standards for
accounting and reporting of derivative financial instruments embedded in other
contracts, and hedging activities. SFAS 133 is effective for fiscal quarters of
fiscal years beginning after June 15, 1999. The Company expects to adopt this
standard when required in fiscal year 2000 and is currently determining the
potential impact on the Company's accounting for such activities.
<PAGE>
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------- -----------
The Company's principal business activities by their nature engender significant
market and credit risks. Managing these risks is critical to the success and
stability of the Company. As a result, comprehensive risk management policies
and procedures have been established to identify, control and monitor each of
these major risks. Additionally, the Company's diverse portfolio of business
activities helps to reduce the impact that volatility in any particular market
may have on its net revenues. In addition to market risk, the Company is also
subject to credit risk, operating risk and funding risk.
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments, and accordingly, the scope of the Company's market risk management
procedures extends beyond derivatives to include all market risk sensitive
financial instruments. The Company's exposure to market risk is directly related
to its role as a financial intermediary in customer-related transactions and to
its proprietary trading and arbitrage activities. For a discussion of the
Company's primary market risk exposures, which includes interest rate risk,
foreign exchange rate risk, and equity price risk, and a discussion of how those
exposures are managed see the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
Value at Risk
The estimation of potential losses that could arise from changes in market
conditions is typically accomplished through the use of statistical models which
seek to predict risk of loss based on historical price and volatility patterns.
The output of such statistical models are commonly referred to as value at risk.
Value at risk is used to describe a probabilistic approach to measuring the
exposure to market risk. This approach utilizes statistical concepts to estimate
the probability of the value of a financial instrument rising above or falling
below a specified amount. The calculation utilizes the standard deviation of
historical changes in value (i.e. volatility) of the market risk sensitive
financial instruments to estimate the amount of change in the current value that
could occur at a specified probability level.
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are significantly exposed to changes in the fair value of financial
instruments. The Company believes that statistical models alone do not provide a
reliable method of monitoring and controlling risk. While value at risk models
are relatively sophisticated, the quantitative risk information generated is
limited by the parameters established in creating the related models. The
financial instruments being evaluated may have features which may trigger a
potential loss in excess of the amounts previously disclosed if the changes in
market rates or prices exceed
<PAGE>
the confidence level of the model used. Therefore, such models do not substitute
for the experience or judgment of senior management and traders, who have
extensive knowledge of the markets and adjust positions and revise strategies as
they deem necessary. The Company uses these models only as a supplement to other
risk management tools.
For purposes of Securities and Exchange Commission disclosure requirements, the
Company has performed an entity-wide value at risk analysis of virtually all of
the Company's financial assets and liabilities, including all reported financial
instruments owned and sold, repurchase and resale agreements, and funding assets
and liabilities. The value at risk related to non-trading financial instruments
has been included in this analysis and not reported separately because the
amounts were not material. The calculation is based on a methodology which uses
a one-day interval and a 95% confidence level. Interest rate and foreign
exchange rate risk use a "Monte Carlo" value at risk approach. Monte Carlo
simulation involves the generation of price movements in a portfolio using a
random number generator. The generation of random numbers is based on the
statistical properties of the securities in the portfolio. For interest rates,
each country's yield curve has five factors which describe possible curve
movements. These were generated from principal component analysis. In addition,
volatility and spread risk factors were used, where appropriate. Inter-country
correlations were also used. Equity price risk was measured using a combination
of historical and Monte Carlo value at risk approaches. Equity derivatives were
treated as correlated with various indexes, of which the Company used
approximately forty. Parameter estimates, such as volatilities and correlations,
were based on daily tests through December 31, 1998. The total value at risk
presented below is less than the sum of the individual components (i.e. Interest
Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the benefit of
diversification among the risks.
This table illustrates the value at risk for each component of market risk as
of:
December 31, June 30,
in millions 1998 1998
- ----------- ----- -----
MARKET RISK
Interest $ 9.4 $ 11.1
Currency 1.7 0.9
Equity 14.0 8.9
Diversification benefit (8.2) (6.6)
------ ------
Total $ 16.9 $ 14.3
====== ======
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of
inventory pricing. Additionally, management of each trading department reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
A.I.A. Holding, S.A., et al. v. Lehman Brothers, Inc., et al.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
On January 28, 1999, the court dismissed with prejudice all counterclaims
asserted by Lehman Brothers and Bear Stearns against certain of the plaintiffs,
other than the counterclaim seeking contribution from plaintiff Monhem
Nassereddine, which was dismissed with leave to replead.
Alpha Group Consultants, et al. v. Weintraub, et al./In re Weintraub
Entertainment Group Litigation.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in a class action litigation pending in the United States District
Court for the Southern District of California.
On November 12 and 18, 1998, the court denied Bear Stearns' motion for judgment
notwithstanding the verdict or, in the alternative, for a new trial.
On October 5, 1998, counsel for the class filed a motion on behalf of absent
class members for summary judgment on all claims asserted in the complaint in
this action. The court has not yet issued a ruling on this motion.
A.R. Baron & Company, Inc.
As previously reported in the Company's 1998 Form 10-K and Form 10-Q for
the quarter ended September 25, 1998 (the "First Quarter 1999 Form 10-Q"),
Bear Stearns is a defendant in litigation pending in the United States
District Court for the Southern District of New York.
On December 1, 1998, defendants filed an answer to the complaint in which they
denied liability and asserted affirmative defenses.
<PAGE>
In re Blech Securities Litigation.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
On October 1, 1998, plaintiffs moved for class certification. The court has not
yet issued a ruling on plaintiffs' motion.
Crescent Porter Hale Foundation, et al. v. Bob K. Pryt, et al.
On October 19, 1998, an action was commenced in the Superior Court of the State
of California, San Francisco County, by limited partners of BKP Partners, L.P.
("BKP"), an investment fund that allegedly engaged in a fraudulent scheme
involving unsuitable and excessively risky investments. Named as defendants are
BKP, an individual who allegedly acted as the general partner of BKP, BKP
Capital Management LLC, Bear, Stearns & Co. Inc., Bear, Stearns Securities Corp.
("BSSC"), Deloitte & Touche and a certified public accountant who reviewed
certain of BKP's financial statements. The complaint alleges, among other
things, that the Bear Stearns defendants committed common law fraud, negligent
misrepresentation and civil conspiracy, breached a fiduciary duty and the
covenant of good faith and fair dealing, and aided and abetted a breach of
fiduciary duty and a breach of the covenant of good faith and fair dealing, in
connection with BSSC acting as BKP's prime broker, engaging in securities
transactions with or on behalf of BKP, and making margin loans to BKP.
Compensatory damages in excess of $100 million are sought.
On January 8, 1999, the court granted defendants' motion to compel the
plaintiffs to arbitrate the claims asserted in this action.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
In re Daisy Systems Corporation, Debtor.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Northern District of California.
On or around December 2, 1998, plaintiffs accepted remittitur, and on December
3, 1998, judgment was entered against Bear Stearns in the amount of $36,073,196
plus costs of $138,826.63. On December 29, 1998, Bear Stearns filed a notice of
appeal.
<PAGE>
In re Donna Karan International Inc. Securities Litigation.
As previously reported in the Company's 1998 Form 10-K and the First
Quarter 1999 Form 10-Q, Bear Stearns is a defendant in litigation pending
in the United States District Court for the Southern District of New York.
On December 10, 1998, the United States Court of Appeals for the Second Circuit
dismissed the appeal in this action pursuant to agreement of the parties.
Bernard H. Glatzer v. Bear, Stearns & Co. Inc.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
On October 28, 1998, the parties reached an agreement to settle this action.
Goldberger v. Bear, Stearns & Co. Inc., et al.
On December 8, 1998, a purported class action was commenced in the United States
District Court for the Southern District of New York on behalf of all persons
who purchased securities through certain retail brokerage firms for which BSSC
provided clearing services and financing during the period from July 1, 1991
through the present. Named as defendants are Bear, Stearns & Co. Inc., BSSC and
an officer of BSSC. The complaint alleges, among other things, that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and committed
breach of contract, common law fraud and negligent misrepresentation in
connection with providing clearing services and financing for the brokerage
firms named in the complaint. Compensatory and punitive damages in unspecified
amounts are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund
As previously reported in the Company's 1998 Form 10-K and First Quarter 1999
Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Southern District of New York.
<PAGE>
On January 26, 1999, plaintiffs in the Bambou Action moved to consolidate the
action with the Primavera, ABF Capital, Montpellier and Johnston actions for
pre-trial purposes.
On December 22, 1998, defendants moved to dismiss the second amended complaint
filed by the Litigation Advisory Board in the Granite Partners Action except for
claims alleging breach of contract in connection with improper margin calls and
liquidations.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's 1998 Form 10-K and First Quarter 1999
Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Southern District of New York.
On November 5, 1998, defendants filed an answer to the second amended complaint
in which they denied liability and asserted affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
In re Lady Luck Gaming Corporation Securities Litigation.
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
District of Nevada.
On November 4, 1998, the court granted defendants' motion to dismiss plaintiffs'
third amended complaint with respect to three of the alleged misrepresentations
and omissions on which plaintiffs' claims are based, and denied the motion with
respect to the remaining allegations in the complaint. On November 15, 1998,
plaintiffs filed a fourth amended complaint alleging claims under Sections 11,
12(2) and 15 of the Securities Act of 1933 on behalf of the same purported class
and against the same defendants as in the third amended complaint. Compensatory
damages in an unspecified amount are sought.
On January 15, 1999, defendants moved to strike certain of the allegations in
the fourth amended complaint on the ground that these allegations were dismissed
by the Court's November 4, 1998 order. The court has not yet issued a ruling on
this motion.
On February 5, 1999, defendants filed an answer to the complaint in which they
denied liability and asserted affirmative defenses.
<PAGE>
NASDAQ Antitrust Litigation
As previously reported in the Company's 1998 Form 10-K and First Quarter 1999
Form 10-Q, over 30 market makers, including Bear Stearns, are defendants in
litigation pending in the United States District Court for the Southern District
of New York.
On November 9, 1998, the court in the NASDAQ class action litigation granted
final approval of the proposed settlement between plaintiffs and all defendants.
Greenberg v. Bear, Stearns & Co. Inc., et al.
On January 19, 1999, a purported class action was commenced in the United States
District Court for the Southern District of New York on behalf of all persons
who purchased ML Direct, Inc. common stock or warrants through Sterling Foster &
Co., Inc. between September 4, 1996 and December 31, 1996. Named as defendants
are Bear, Stearns & Co. Inc. and BSSC. The complaint alleges, among other
things, that the defendants violated Sections 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 promulgated thereunder and committed common law fraud in
connection with providing clearing services to Sterling Foster with respect to
certain transactions by customers of Sterling Foster in ML Direct common stock
and warrants. Compensatory damages of $50 million and punitive damages of
approximately $100 million are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
The Company also is involved from time to time in investigations and proceedings
by governmental and self-regulatory agencies.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on October 29, 1998 (the "Annual
Meeting"), the stockholders of the Company approved an amendment to the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendment") and
amendments to the Performance Compensation Plan (the "Performance Compensation
Plan Amendments"). In addition, at the Annual Meeting the stockholders of the
Company elected nine directors to serve until the next Annual Meeting of
Stockholders or until successors are duly elected and qualified.
The affirmative vote of a majority of the shares of Common Stock represented at
the Annual Meeting and entitled to vote on each matter was required to approve
the CAP Plan Amendment and the Performance Compensation Plan Amendments, while
the affirmative vote of a plurality of the votes cast by holders of shares of
Common Stock was required to elect the directors.
With respect to the approval of the CAP Plan Amendment and the Performance
Compensation Plan Amendments, set forth below is information on the results of
the votes cast at the Annual Meeting.
Broker
For Against Abstained Non-Votes
CAP Plan Amendment 71,926,536 2,477,808 516,123 21,710,017
Performance Compensation
Plan 68,950,038 5,490,600 479,829 21,710,017
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
------------------------------------------------ -------------
James E. Cayne 95,726,578 903,906
Carl D. Glickman 95,595,609 1,034,875
Alan C. Greenberg 95,675,549 954,935
Donald J. Harrington 95,718,811 911,673
William L. Mack 95,207,379 1,423,105
Frank T. Nickell 95,735,340 895,144
Frederic V. Salerno 95,714,903 915,581
Vincent Tese 95,653,038 977,446
Fred Wilpon 95,722,593 907,891
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(a)(4) Capital Accumulation Plan for Senior Managing
Directors, as amended and restated as of October 29,
1998
(10)(a)(5) Performance Compensation Plan, as amended and restated as
of October 29, 1998
(11) Statement Re Computation of Per Share Earnings
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the quarter, the Company filed the following Current
Reports on Form 8-K.
(i) A Current Report on Form 8-K dated October 14,
1998 and filed on October 19, 1998, pertaining
to the Company's results of operations for
the three-months ended September 25, 1998.
(ii)A Current Report on Form 8-K dated October 30,
1998 and filed on November 13, 1998, pertaining
to the declaration of quarterly cash dividends.
(iii) A Current Report on Form 8-K dated December 9,
1998 and filed on December 11, 1998, pertaining
to the filing of an underwriting agreement and
an opinion of Weil, Gotshal & Manges LLP as
to certain certain federal income tax
consequences in connection with the offering
of Trust Issued Preferred Securities.
(iv)A Current Report on Form 8-K dated December 16,
1998 and filed on December 17, 1998, pertaining
to the filing of various documents in
connection with the offering of Trust Issued
Preferred Securities.
(v) A Current Report on Form 8-K dated and filed on
December 21, 1998, pertaining to the filing of
an exhibit to be incorporated by reference
into the Registration Statement on Form S-3
(Registration No. 333-61437) as an exhibit to
such Registration Statement.
<PAGE>
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.
The Bear Stearns Companies Inc.
(Registrant)
Date: February 12, 1999 By: /s/MARSHALL J LEVINSON
---------------------------
Marshall J Levinson
Controller and Assistant Secretary
(Principal Accounting Officer)
<PAGE>
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(10) (a) (4) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of October 29, 1998 35
(10) (a) (5) Performance Compensation Plan, as amended and restated as
of October 29, 1998 71
(11) Statement Re Computation of Per Share Earnings 76
(12) Statement Re Computation of Earnings to Fixed Charges 77
(27) Financial Data Schedule 78
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<DESCRIPTION>CAP PLAN DOCUMENT
<TEXT>
Exhibit 10 (a) (4)
THE BEAR STEARNS COMPANIES INC.
CAPITAL ACCUMULATION PLAN FOR
SENIOR MANAGING DIRECTORS
(Amended and Restated as of October 29, 1998)
SECTION 1
Purpose
The purpose of the Plan is to promote the interests of the
Company and its stockholders by providing long-term incentives to certain key
executives of the Company and Bear Stearns who contribute significantly to the
long-term performance and growth of the Company.
SECTION 2
Definitions
2.1 Terms Defined. When used herein, the following terms
shall have the following meanings:
"Account" means a Capital Accumulation Account or a Cash
Balance Account, as the context may require.
"Accredited Investor" means an "accredited investor" as
defined in Rule 501 under the Securities Act, or any successor rule or
regulation.
"Additional Deferral Amount" has the meaning assigned to such
term in Section 4.1.
"Additional Plan Election" has the meaning assigned to such
term in Section 4.1.
"Adjusted Book Value Per Share" means the amount determined as
of the end of any Fiscal Year by dividing Adjusted Common Stockholders' Equity
by the sum of (a) the number of shares of Common Stock outstanding on such date,
(b) the number of CAP Units credited to the Capital Accumulation Accounts of all
Participants as of such date and the number of Earnings Units credited to the
Earnings Unit Accounts of all participants in the PUP Plan as of such date, (c)
the number of CAP Units to be credited to all such Accounts as a result of
making any adjustment to such Accounts required by Sections 5.1 and 5.10 in
respect of all Fiscal Years ending on or prior to the date of determination and
the number of Earnings Units credited to the Earnings Unit Accounts of all
participants in the PUP Plan as a result of making any adjustment to such
accounts required by Section 4.2 of the PUP Plan in respect of all Fiscal Years
ending on or prior to the date of such determination, and (d) the number of
shares of Common Stock purchased by the Company for purposes other than for the
Plan and the PUP Plan during all Fiscal Years ending on or prior to the date of
such determination, less (e) the number of shares of Common Stock issued by the
Company (whether from Treasury shares or otherwise) other than pursuant to the
Plan or the PUP Plan during all Fiscal Years ending on or prior to the date of
such determination.
"Adjusted Common Stockholders' Equity" means, for the first
Fiscal Year of any Deferral Period, Consolidated Common Stockholders' Equity as
of the last day of the preceding Fiscal Year and for Fiscal Years following the
first Fiscal Year of such Deferral Period, means Adjusted Common Stockholders'
Equity determined for the prior Fiscal Year of such Deferral Period, plus all
increases (or less any decreases) in retained earnings of the Company and its
subsidiaries attributable to net income (or loss), determined on a consolidated
basis, minus all amounts accrued in respect of cash dividends declared with
respect to any capital stock of the Company during such Fiscal Year.
"Adjusted Earnings Per Share" means, for any Fiscal Year, (a)
the Company's consolidated net income or loss for such Fiscal Year, less the
amount of the Preferred Stock Dividend Requirement for such Fiscal Year, plus
the product obtained by multiplying the product of the Net Earnings Adjustment
multiplied by the Average Cost Per Share for such Fiscal Year by the fraction
which is 1 minus the Marginal Tax Rate, divided by (b) the sum of (i) the number
of shares of Common Stock outstanding during such Fiscal Year, computed on a
weighted average basis based on the number of days outstanding during such
Fiscal Year, (ii) the aggregate number of CAP Units credited to the Accounts of
all Participants computed on a weighted average basis based on the number of
days outstanding during such Fiscal Year but not including in such computation
the day that CAP Units are credited, increased or decreased pursuant to Section
5.1, 5.3 or 5.10 of the Plan, and (iii) the aggregate number of Earnings Units
credited to the Earnings Unit Accounts of all participants in the PUP Plan
computed on a weighted average basis based on the number of days outstanding
during such Fiscal Year but not including in such computation the day that
Earnings Units are credited, increased or decreased pursuant to Section 4.2 or
4.5 of the PUP Plan.
"Adjusted Preferred Stock Dividend Requirement" means, for any
Fiscal Year, the quotient obtained by dividing (i) the aggregate amount of all
dividends actually declared by the Company on, or, if no such dividends are
actually declared, required to be declared by the Company in accordance with the
terms of, any Preferred Stock, in such Fiscal Year, by (ii) the fraction which
is one minus the Marginal Tax Rate for such Fiscal Year.
"Advisory Committee" means a committee of five Participants,
of which two shall be appointed by the President of the Company, two by the
President's Advisory Council of Bear Stearns and one by the Management and
Compensation Committee.
"Affiliate" means (a) Bear Stearns, (b) any other subsidiary
of the Company and (c) any other corporation or other entity which is
controlled, directly or indirectly, by, or under common control with, the
Company and which the Board Committee designates as an "Affiliate" for purposes
of the Plan.
"Aggregate Imputed Cost" means, with respect to any Fiscal
Year, the sum of (a) the aggregate of the Cost of Carry for such Fiscal Year for
all Participants in the Plan plus (b) the Capital Reduction Charge for such
Fiscal Year plus (c) the product of (i) the sum of the Net Earnings Adjustments
for such Fiscal Year for all Participants in the Plan multiplied by (ii) the
Average Cost Per Share for such Fiscal Year, minus (d) the Dividend Savings for
such Fiscal Year.
"Appropriate Committee" means the Management and Compensation
Committee or, in the case of Participants who are Reporting Persons, the Board
Committee.
"Associate" of a Person means (a) any corporation or
organization of which such Person is an officer or partner or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of equity
securities, (b) any trust or other estate in which such Person has a substantial
beneficial interest or as to which such Person serves as trustee or in a similar
fiduciary capacity and (c) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or who is a
director or officer of such Person or any of its parents or subsidiaries.
"Available Shares" means, with respect to any Fiscal Year or
portion thereof, the sum of (a) the number of shares of Common Stock purchased
by the Company in the open market or in private transactions or otherwise during
such period that have not been previously allocated under the Plan and
designated by the Board Committee at the time of purchase as having been
purchased for issuance under the Plan with respect to the Fiscal Year or portion
thereof specified by the Board Committee and (b) shares of Common Stock
purchased prior to such period that were designated as Available Shares but were
not allocated under the Plan which the Company makes available to the Plan
subsequent to the period in which such shares were purchased and the Board
Committee thereafter designates as Available Shares for issuance under the Plan
with respect to the Fiscal Year or portion thereof specified by the Board
Committee.
"Average Cost Per Share" means with respect to any period the
weighted average of the sum of (a) the average price paid (including
commissions) by the Company in respect of Available Shares purchased by the
Company during such period and (b) in respect of Available Shares purchased by
the Company prior to such period that the Company makes available to the Plan
and that are accepted by the Board Committee, the Fair Market Value as of the
last trading day of such period.
"Average Federal Funds Rate" means, with respect to any Fiscal
Year, the percentage (expressed as a decimal fraction) obtained by taking the
sum of the Federal Funds Rates for each day during the Fiscal Year and dividing
such amount by the number of days in such Fiscal Year.
"Base Year" means the first Fiscal Year of a Required Deferral
Period
"Bear Stearns" means Bear, Stearns & Co. Inc., a Delaware
corporation, and its successors and assigns.
"Beneficial Owner" has the meaning ascribed thereto in Rule
13d-3 under the Exchange Act, except that, in any case, a Person shall be deemed
the Beneficial Owner of any securities owned, directly or indirectly, by the
Affiliates and Associates of such Person.
"Beneficiary" of a Participant means the beneficiary or
beneficiaries designated by such Participant in accordance with Section 10 to
receive the amount, if any, payable hereunder upon the death of such
Participant.
"Board Committee" means the Compensation Committee of the
Board of Directors or another committee of the Board of Directors designated by
the Board of Directors to perform the functions of the Board Committee
hereunder. To the extent required by Rule 16b-3, the Board Committee shall be
composed solely of directors who are not Participants in the Plan and are in
other respects "Non-Employee Directors" within the meaning of Rule 16b-3.
"Board of Directors" means the Board of Directors of the
Company.
"Book Value Adjustment" has the meaning assigned to such term
in Section 5.5.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or permitted
by law to be closed.
"CAP Units" means the units, each such unit corresponding to
one share of Common Stock, credited to a Participant's Capital Accumulation
Account pursuant to Section 5. All calculations and determinations of the number
of CAP Units hereunder shall be made in whole and fractional units, with such
fractional units rounded to the nearest one-thousandth of a unit.
"Capital Accumulation Account" has the meaning assigned to
such term in Section 5.1.
"Capital Reduction Charge" means (a) for Fiscal Years 1991 and
1992, zero; (b) for Fiscal Year 1993, the product of (i) the excess of (A) the
amount determined by multiplying the Aggregate Imputed Cost of the Plan for
Fiscal Year 1992 by the fraction which is one minus the Marginal Tax Rate for
Fiscal Year 1992, over (B) the aggregate amount of all cash dividends that would
have been paid by the Company during Fiscal Year 1992 on the aggregate number of
shares of Common Stock purchased by the Company and taken into account for
purposes of the Plan in respect of Fiscal Year 1991, if all such shares had
remained outstanding, and (ii) the Average Federal Funds Rate for Fiscal Year
1993; and (c) for each Fiscal Year thereafter, the product of (x) the sum of (A)
the amount determined by multiplying the Aggregate Imputed Cost of the Plan for
the Fiscal Year preceding the year for which the determination is being made by
the fraction which is one minus the Marginal Tax Rate for such preceding Fiscal
Year (the "Tax-Effected Aggregate Imputed Cost" for such Fiscal Year), plus (B)
the aggregate Tax-Effected Aggregate Imputed Cost of the Plan for all preceding
Fiscal Years, other than the Fiscal Year immediately preceding the year for
which the determination is being made, plus (C) the sum of the respective
amounts obtained by multiplying the Capital Reduction Charge for each preceding
Fiscal Year by the fraction which is one minus the Marginal Tax Rate for the
corresponding Fiscal Year, less (D) the aggregate amount of all cash dividends
that would have been paid by the Company on the aggregate number of shares of
Common Stock purchased by the Company for purposes of the Plan and taken into
account pursuant to Section 5.1, 5.3 or 5.10(a) prior to the end of the Fiscal
Year preceding the year for which the determination is being made, measured from
the date the corresponding CAP Units were first credited to such Accounts, if
all such shares had remained outstanding and (y) the Average Federal Funds Rate
for such Fiscal Year.
"Cash Balance" means the amount from time to time credited to
a Participant's Cash Balance Account.
"Cash Balance Account" has the meaning assigned to such term
in Section 5.2.
"Change in Control" means (a) a majority of the Board of
Directors ceases to consist of Continuing Directors; (b) any Person becomes the
Beneficial Owner of 50% or more of the outstanding voting power of the Company
unless such acquisition is approved by a majority of the Continuing Directors;
(c) the stockholders of the Company approve an agreement to merge or consolidate
into any other entity, unless such merger or consolidation is approved by a
majority of the Continuing Directors; or (d) the stockholders of the Company
approve an agreement to dispose of all or substantially all of the assets of the
Company, unless such disposition is approved by a majority of the Continuing
Directors.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes.
"Committee" means each of the Advisory Committee, the Board
Committee and the Management and Compensation Committee.
"Common Stock" means the common stock, par value $1.00 per
share, of the Company.
"Company" means The Bear Stearns Companies Inc., a Delaware
corporation, and its successors and assigns.
"Consolidated Common Stockholders' Equity" means, as of any
date of determination, the consolidated stockholders' equity of the Company and
its subsidiaries applicable to Common Stock.
"Continuing Director" means any member of the Board of
Directors who is a member on the Effective Date or who is elected to the Board
of Directors after the Effective Date upon the recommendation or with the
approval of a majority of the Continuing Directors at the time of such
recommendation or approval.
"Cost of Carry" means, with respect to a Participant, the sum
of (a) the amount obtained by multiplying the Deferred Tax Benefit for each Plan
Year by the Average Federal Funds Rate in the Fiscal Year for which the
determination is being made, and (b) the amounts obtained by compounding the
amounts so obtained for each preceding Fiscal Year for which a Cost of Carry was
calculated less the tax benefits associated with the amounts so determined,
calculated on the basis of the Marginal Tax Rate in each such Fiscal Year, on an
annual basis, at the Average Federal Funds Rate in effect during each succeeding
Fiscal Year; and, with respect to the Plan as a whole, means the aggregate Cost
of Carry of all Participants in any Fiscal Year.
"Deferral Period" means the period of five Fiscal Years
commencing on the first day of the Fiscal Year following the Plan Year for which
a Participant's compensation being deferred pursuant to this Plan was payable,
or such greater or lesser number of whole Fiscal Years as the Appropriate
Committee may approve pursuant to Section 4.1, 4.3, 4.5 or 4.6. Notwithstanding
the foregoing, the Deferral Period applicable to compensation being deferred for
a particular Plan Year for any Participant who will attain age 56 prior to the
last day of any such Plan Year and who elects in any Plan Election to be
governed by this sentence in the manner specified by the Company shall be, (i)
in the case of Participants who attain the age of 56 in such Plan Year, four
Fiscal Years, (ii) in the case of Participants who attain the age of 57 in such
Plan Year, either three or four Fiscal Years, (iii) in the case of Participants
who attain the age of 58 in such Plan Year, either two, three or four Fiscal
Years, or (iv) in the case of Participants who attain the age of 59 or older in
such Plan Year, either one, two, three or four Fiscal Years, in each such case
as the Participant may so elect for each such Plan Year.
"Deferral Year" means any Fiscal Year during a Deferral Period.
"Deferred Tax Benefit" means, for each Plan Year of a
Participant, the sum of (a) the amounts obtained by multiplying such
Participant's Total Deferral Amount, if any, for such Plan Year by the Marginal
Tax Rate for such Plan Year and (b) the respective amounts obtained by
multiplying the dollar amount of all Net Earnings Adjustments made with respect
to the subaccount of such Participant's Capital Accumulation Account
corresponding to such Plan Year by the respective Marginal Tax Rates for each
Deferral Year for which such adjustments are made. The Deferred Tax Benefit
shall be computed and recorded separately for each Plan Year.
"Disability" means the complete and permanent inability of an
individual to perform his duties due to his physical or mental incapacity, all
as determined by the Appropriate Committee upon the basis of such evidence,
including independent medical reports and data, as the Appropriate Committee
deems necessary or appropriate.
"Dividend Savings" means (a) for Fiscal Year 1991, zero; (b)
for Fiscal Year 1992, the sum of (i) the amount obtained by multiplying (A) the
aggregate number of CAP Units credited to the Capital Accumulation Accounts of
all Participants pursuant to Section 5.1 in respect of Fiscal Year 1991 by (B)
the weighted average per share amount of all cash dividends paid by the Company
on its Common Stock in such Fiscal Year (such weighted average amount to be
determined by multiplying the amount of each such dividend by the number of days
in the Fiscal Year on and after the date on which such dividend is paid, adding
all the amounts so obtained and dividing the total by the number of days in such
Fiscal Year) and by multiplying the product so obtained by (C) the Average
Federal Funds Rate for such Fiscal Year, and (ii) the amounts (the "Partial Year
Dividend Savings") obtained by multiplying (x) for each fiscal quarter in such
Fiscal Year, the aggregate number of CAP Units credited to the Capital
Accumulation Accounts of all Participants pursuant to Section 5.3 during such
Fiscal Year by (y) the respective weighted average per share amounts of all cash
dividends paid by the Company on its Common Stock in fiscal quarters of such
Fiscal Year beginning after the date on which such CAP Units were so credited
(each such weighted average amount to be determined in the manner described in
the preceding clause (b)(i)(B)), and by multiplying the product so obtained by
(z) the Average Federal Funds Rate for such Fiscal Year; and (c) for Fiscal Year
1993 and each succeeding Fiscal Year of the Plan, means the amount obtained by
first (i) multiplying the sum of (A) all CAP Units credited to the Capital
Accumulation Accounts of all Participants pursuant to Section 5.1 in respect of
all preceding Fiscal Years of the Plan and all CAP Units credited to such
Accounts pursuant to Section 5.10(a) in respect of Net Earnings Adjustments, if
any, for such Fiscal Years by (B) the weighted average per share amount of all
cash dividends paid by the Company on its Common Stock in the Fiscal Year for
which the determination is being made (determined in the manner described in the
preceding clause (b)(i)(B)), (ii) calculating the amount of cash dividends that
would have been paid by the Company in all preceding Fiscal Years on the
aggregate number of shares of Common Stock purchased by the Company and taken
into account for purposes of this Plan pursuant to Section 5.1, 5.3 or 5.10(a),
measured from the date on which the corresponding CAP Units were credited to
Participants' Accounts, if all such shares had remained outstanding and (iii)
multiplying the respective Dividend Savings determined as provided herein for
each preceding Fiscal Year by the fraction which is one minus the Marginal Tax
Rate for the corresponding preceding Fiscal Year, and then multiplying the sum
of the amounts so determined in clauses (i), (ii) and (iii) by the Average
Federal Funds Rate for such Fiscal Year, and finally adding to such sum the
Partial Year Dividend Savings for such Fiscal Year determined in the manner
provided in the preceding clause (b)(ii).
"Earnings Adjustment" has the meaning assigned to such term
in Section 5.4(a).
"Earnings Unit Account" has the meaning specified in the PUP
Plan.
"Earnings Units" has the meaning specified in the PUP Plan.
"Effective Date" means September 6, 1990.
"Effective Tax Rate" means, for any Fiscal Year, the fraction
the numerator of which is the consolidated tax expense of the Company and its
subsidiaries for such Fiscal Year and the denominator of which is the
consolidated income or loss before income taxes of the Company and its
subsidiaries for such Fiscal Year. For this purpose, consolidated income or loss
of the Company and its subsidiaries shall be calculated by including
extraordinary items and the income or loss of discontinued operations, and
income tax expense shall be calculated by including the income tax expense
attributable to such extraordinary items or discontinued operations.
"Elective Plan Year" has the meaning assigned to such term in
Section 4.3.
"Eligible Employee" means any individual who is employed by
Bear Stearns as a Senior Managing Director and is an Accredited Investor.
"Enrollment Period" in respect of a Plan Year means the period
commencing with the first day of the fiscal quarter immediately preceding such
Plan Year and ending on December 31 of such Plan Year, or such shorter period
contained therein designated by the Board Committee, provided that, unless
otherwise determined by the Board Committee, the Enrollment Period with respect
to an individual who becomes an Eligible Employee after December 31 of a Plan
Year shall be the period commencing on the date such individual becomes an
Eligible Employee and ending on the earliest of (a) the 30th day thereafter, (b)
March 31 of the Plan Year in the case of an individual who was an employee prior
to becoming an Eligible Employee or (c) the end of the Plan Year. Without
limiting the generality of the foregoing, the Board Committee may designate one
Enrollment Period for individuals who are Eligible Employees on the first day of
a Base Year and one or more Enrollment Periods for individuals who become
Eligible Employees after the first day of a Base Year; provided, however, with
respect to participants in The Bear Stearns Companies Inc. Management
Compensation Plan in no event shall any Enrollment Period in respect of any Plan
Year extend more than 90 days into such Plan Year so as to allow a Participant
to make an election to increase or decrease the deferral amount or Deferral
Period relating to such Plan Year.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes.
"Executive Committee" means the Executive Committee of the
Board of Directors.
"Fair Market Value" of a share of Common Stock as of any date
means the closing sales price of a share of Common Stock on the composite tape
for New York Stock Exchange listed securities on such date or, if the Common
Stock is not quoted on the composite tape or is not listed on the New York Stock
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which the Common Stock is listed or, if the Common Stock is
not listed on any such exchange, on the National Association of Securities
Dealers, Inc. Automated Quotation National Market System ("NASDAQ-NMS") or, if
the Common Stock is not quoted on NASDAQ-NMS, the average closing bid quotation
of a share on the National Association of Securities Dealers, Inc. Automated
Quotation System or any similar system then in use or, if the Common Stock is
not listed or quoted, the fair value thereof as of such date as determined by
the Appropriate Committee.
"Federal Funds Rate" means, for any day which is a Business
Day, the rate for U.S. dollar funds settled through the Federal Reserve System
or other immediately available U.S. dollar funds, as quoted by an independent
broker of such funds selected by the Company, for the last transaction completed
prior to 9:30 A.M. (Eastern time) on the Business Day on which such rate is
determined, rounded up or down on a daily alternating basis to the nearest whole
multiple of one-eighth of one percent, and for any day which is not a Business
Day means such rate as determined for the next preceding day which was a
Business Day.
"Fiscal Year" means the fiscal year of the Company commencing
on July 1 and ending on June 30. "Fiscal Year 1991" shall mean the Fiscal Year
ending on June 30, 1991; "Fiscal Year 1992" shall mean the Fiscal Year ending on
June 30, 1992; and "Fiscal Year 1993" shall mean the Fiscal Year ending on June
30, 1993. If the Company shall change its Fiscal Year after the Effective Date
so as to end on a date other than June 30 ("Year-end Date") then, if such new
Year-end Date falls after June 30 and on or prior to December 31, the Fiscal
Year in which such change occurs shall be deemed to consist, for purposes of
this Plan, of the period of not more than 18 months beginning on the July 1
following the last Fiscal Year preceding such change and ending such new
Year-end Date or, if such new Year-end Date falls on or after January 1 and
prior to June 30, the Fiscal Year in which such change occurs shall be deemed to
consist, for purposes of this Plan, of the period of less than 12 months
beginning on the first day of the Fiscal Year in which such change occurs and
ending on such new Year-end Date.
"Full Year Units" has the meaning assigned to such term in
Section 5.4.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time.
"Historical Book Value" means, with respect to a CAP Unit
credited to a Participant's Account pursuant to Section 5.1 or 5.10(a), an
amount determined by dividing (a) Consolidated Common Stockholders' Equity as of
the end of the Fiscal Year for which such CAP Unit was credited by (b) the sum
of (i) the aggregate number of shares of Common Stock outstanding on the last
day of such Fiscal Year, (ii) the aggregate number of CAP Units credited to the
Capital Accumulation Accounts of all Participants as of the end of such Fiscal
Year, and, with respect to a CAP Unit credited to a Participant's Account
pursuant to Section 5.3, an amount determined by dividing (x)(i) Consolidated
Common Stockholders' Equity, as of the last day of the Fiscal quarter for which
such CAP Unit was credited, and (iii) the aggregate number of Earnings Units
credited to the Earnings Unit Accounts of all Participants in the PUP Plan as of
the end of such Fiscal Year, less (ii) all increases (or plus any decreases) in
retained earnings of the Company and its subsidiaries attributable to net income
(or loss), determined on a consolidated basis for all fiscal quarters of the
Fiscal Year prior to and including the fiscal quarter during which such CAP Unit
was credited, plus (iii) the amount determined by multiplying (A) a fraction,
the numerator of which is the number of fiscal quarters in the Fiscal Year prior
to and including the fiscal quarter during which such CAP Unit was credited, and
the denominator of which is 4, by (B) the increase (or decrease) in retained
earnings of the Company and its subsidiaries, attributable to net income (or
loss), determined on a consolidated basis for the Fiscal Year during which such
CAP Unit was credited, less (iv) the amount determined by multiplying (C) a
fraction, the numerator of which is the number of fiscal quarters in the Fiscal
Year prior to and including the fiscal quarter during which such CAP Unit was
credited, and the denominator of which is 4, by (D) the total amount accrued in
respect of cash dividends with respect to any capital stock of the Company for
the Fiscal Year during which such CAP Unit was credited, plus (v) the total
amount accrued in respect of cash dividends with respect to any capital stock of
the Company for all fiscal quarters of the Fiscal Year prior to and including
the fiscal quarter during which such CAP Unit was credited by (y) the sum of (i)
the aggregate number of shares of Common Stock outstanding on the last day of
such fiscal quarter, (ii) the aggregate number of CAP Units credited to the
Capital Accumulation Accounts of all Participants as of the end of such date and
(iii) the aggregate number of Earnings Units credited to the Earnings Unit
Accounts of all Participants in the PUP Plan as of the end of such Fiscal Year.
"Income Per Share" for any Fiscal Year means the consolidated
income or loss before income taxes of the Company and its subsidiaries, adjusted
as hereinafter provided, divided by the sum of (a) the number of shares of
Common Stock outstanding during such Fiscal Year, computed on a weighted average
basis based on the number of days outstanding during such Fiscal Year, (b) the
number of CAP Units credited to the Capital Accumulation Accounts of all
Participants computed on a weighted average basis based on the number of days
outstanding during such Fiscal Year but not including in such computation the
day that CAP Units are credited, increased or decreased pursuant to Section 5.1,
5.3 or 5.10 of the Plan and (c) the aggregate number of Earnings Units credited
to the Earnings Unit Accounts of all Participants in the PUP Plan computed on a
weighted average basis based on the number of days outstanding during such
Fiscal Year but not including in such computation the day that Earnings Units
are credited, increased or decreased pursuant to Section 4.2 or 4.5 of the PUP
Plan. For purposes of this Plan, consolidated income or loss before income taxes
of the Company and its subsidiaries (i) shall be determined prior to any charge
or credit to income required in such Fiscal Year by reason of Net Earnings
Adjustments pursuant to Section 5.10(a), (ii) shall include the amounts of any
pre-tax earnings or loss attributable to discontinued operations or
extraordinary items and (iii) shall be reduced by the Adjusted Preferred Stock
Dividend Requirement during such Fiscal Year, and may be decreased, but not
increased, by such amount determined by the Board Committee in its sole
discretion as appropriate to carry out the purposes of the Plan.
"Initial Plan Election" has the meaning assigned to such term
in Section 4.1.
"Investment Letter" means a letter, in a form to be approved
by the Appropriate Committee, by which a Participant represents that he is an
accredited Investor and that he is acquiring his interest in the Plan and any
shares of Common Stock that may be acquired hereunder for investment and without
a view to any distribution thereof.
"Management and Compensation Committee" means the Management
and Compensation Committee of the Company or another committee of the Company or
the Board of Directors designated by the Board of Directors to perform the
functions of the Management and Compensation Committee hereunder.
"Marginal Tax Rate" means the maximum combined marginal rate
of tax expressed as a fraction to which the Company is subject for the
applicable Fiscal Year, including Federal, New York State and New York City
income taxes (including any minimum or alternative tax), net of any tax benefit
resulting from the deductibility of state and local taxes for federal income tax
purposes.
"Net Earnings Adjustment" has the meaning assigned to such
term in Section 5.10(a).
"Part Year Units" has the meaning assigned to such term in
Section 5.4(a).
"Participant" means any Eligible Employee who has validly
elected to participate in the Plan pursuant to Section 4.l.
"Person" means an individual, a corporation, a partnership, an
association, a joint stock company, a trust, any unincorporated organization or
a government or a political subdivision thereof.
"Personal Leave of Absence" means the absence from the Company
by a Participant, with the consent of the Company, for an extended period of
time without salary under circumstances in which a return to full-time
employment by the Participant is contemplated.
"Plan" means The Bear Stearns Companies Inc. Capital
Accumulation Plan for Senior Managing Directors as set forth herein and as
amended and restated from time to time.
"Plan Election" means the election to defer compensation made
by a participant pursuant to Section 4.
"Plan Year" means Fiscal Year 1991, Fiscal Year 1992, Fiscal
Year 1993 and any other Fiscal Year with respect to which the Board Committee
makes the determination provided for in Section 3.1.
"Preferred Stock" means any capital stock of the Company that
has a right to dividends or distributions in liquidation (or both) prior to the
holders of the Common Stock.
"Preferred Stock Dividend Requirement" means, for any Fiscal
Year, the amount of all dividends actually declared by the Company on, or
required to be declared by the Company in accordance with the terms of, any
Preferred Stock, in such Fiscal Year.
"Pre-Plan Earnings Per Share" means, for any Fiscal Year, (a)
the sum of (i) the Company's consolidated net income or loss for such Fiscal
Year less (ii) the amount of the Preferred Stock Dividend Requirement for such
Fiscal Year, plus (iii) the amount obtained by multiplying the Aggregate Imputed
Costs of the Plan deducted in the calculation of consolidated net income or loss
for such Fiscal Year by the fraction which is one minus the Marginal Tax Rate
for such Fiscal Year, divided by (b) the sum of (x) the number of shares of
Common Stock outstanding during such Fiscal Year, computed on a weighted average
basis based on the number of days outstanding during such Fiscal Year, (y) the
aggregate number of CAP Units credited to the Accounts of all Participants
computed on a weighted average basis based on the number of days outstanding
during such Fiscal Year but not including in such computation the day that CAP
Units are credited, increased or decreased pursuant to Section 5.1, 5.3 or 5.10
of the Plan, and (z) the aggregate number of Earnings Units credited to the
Earnings Unit Accounts of all participants in the PUP Plan computed on a
weighted average basis based on the number of days outstanding during such
Fiscal Year but not including in such computation the day that Earnings Units
are credited, increased or decreased pursuant to Section 4.2 or 4.5 of the PUP
Plan.
"PUP Plan" means The Bear Stearns Companies Inc. Performance
Unit Plan for Senior Managing Directors, as the same shall be amended,
supplemented or modified from time to time.
"Quarter End Date" has the meaning assigned to such term in
Section 5.3.
"Registration Statement" has the meaning assigned to such term
in Section 6.7.
"Reporting Person" means a director or officer of the
Company who is subject to the reporting requirements of Section 16(a) of
the Exchange Act.
"Required Deferral Amount" means, for any Plan Year, the
following percentages of that portion of a Participant's current compensation
for such Plan Year (prior to giving effect to any effective election hereunder
to defer receipt of a portion of such amount but after giving effect to any
effective election to defer compensation under any other plan sponsored by the
Company or any Affiliate) which exceeds $200,000 (or the then prevailing annual
base salary for Senior Managing Directors of Bear Stearns for such Plan Year):
25% of the first $ 300,000
30% of the next $ 500,000
40% of the next $1,000,000
50% of compensation exceeding $2,000,000
Notwithstanding the foregoing, (a) the Required Deferral Amount for any
Participant who will attain age 55 prior to the last day of any Plan Year and
who elects in his Plan Election to be governed by this sentence in the manner
specified by the Appropriate Committee shall be 25% of such compensation of such
Participant for each Plan Year in which he attains age 55 or older and (b) no
Participant shall be required or entitled to defer any portion of his
compensation for any Plan Year for which he was entitled to receive payment
prior to the date of his Plan Election. The Required Deferral Amount in his
initial Plan Year for any Participant who first becomes an Eligible Employee
after the first day of any Plan Year shall be determined by multiplying each of
the foregoing amounts in this paragraph by a fraction, the numerator of which is
the number of whole months remaining in the Plan Year following his date of
employment and the denominator of which is 12.
"Required Deferral Period" has the meaning assigned to such
term in Section 3.1.
"Rule 16b-3" means Rule 16b-3 of the Securities and Exchange
Commission promulgated under the Exchange Act, as the same may be modified or
amended from time to time, and any successor rule.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, or any successor statute or statutes.
"Special Plan Election" has the meaning assigned to such term
in Section 4.6.
"Termination Date" means the last day of any Deferral Period.
"Total CAP Units" means the aggregate number of CAP Units,
adjusted through any date of determination thereof, theretofore credited to a
Participant's Capital Accumulation Account.
"Total Deferral Amount" for any Participant means, for each
Plan Year, the sum of the Required Deferral Amount and the Additional Deferral
Amount.
2.2 Accounting Terms. Whenever any accounting term is used
herein, or the character or amount of any asset or liability or item of income
or expense is required to be determined, or any consolidation or other
accounting computation is required to be made, for the purposes of this Plan,
such accounting term shall have the meaning assigned to such term or such
determination or computation shall be made (as the case may be), to the extent
applicable and except as otherwise specified herein, in accordance with GAAP.
SECTION 3
Eligibility
3.1 Not later than 90 days after the commencement of any
Fiscal Year, the Board Committee shall determine whether Eligible Employees who
are not then Participants shall be entitled to defer a portion of their
compensation for such Fiscal Year and the two Fiscal Years next succeeding such
Fiscal Year (such three Fiscal Years being referred to collectively as a
"Required Deferral Period"); provided, however, that in the case of the Required
Deferral Period of which the Base Year is the Fiscal Year ending June 30, 1992,
such determination may be made not later than October 30, 1991.
3.2 Each individual who is an Eligible Employee at any time
during the Enrollment Period in respect of a Plan Year and is not then a
Participant shall be eligible to participate in the Plan by deferring
compensation as provided in Section 4.1; provided, however, that an Eligible
Employee who does not elect to participate in the Plan during the Enrollment
Period for the first Plan Year in which he is an Eligible Employee shall not be
entitled to participate in the Plan in respect of subsequent Plan Years unless
such participation is approved by the Appropriate Committee not later than the
last day of the Enrollment Period for such Plan Year; and provided, further,
that no individual shall be eligible to participate in the Plan unless such
individual agrees to execute such documents or agrees to such restrictions,
including but not limited to the execution of an Investment Letter, as the
Appropriate Committee in its sole discretion may require.
SECTION 4
Deferrals of Compensation
4.1 Plan Election. Each Eligible Employee who satisfies the
eligibility requirements of Section 3.2 during a Plan Year may, during the
applicable Enrollment Period, execute and file with the Appropriate Committee a
Plan Election (an "Initial Plan Election"), in the form provided by the Company,
(a) electing to defer (i) the Required Deferral Amount of his current
compensation for each of the three Fiscal Years in the Required Deferral Period
and (ii) subject to the approval of the Appropriate Committee, any amount of his
current compensation in excess of the Required Deferral Amount for his Base Year
(the "Additional Deferral Amount") and (b) electing, subject to the approval of
the Appropriate Committee, a Deferral Period (in whole Fiscal Years) in respect
of the Required Deferral Amount and any Additional Deferral Amount for such Base
Year of more than Five Fiscal Years. During the Enrollment Period occurring
during the second and third Fiscal Years of a Required Deferral Period (or if
there is no Enrollment Period for such Fiscal Year, the period commencing on the
anniversary of the first day of the most recent preceding Enrollment Period and
ending on the anniversary of the last day of such Enrollment Period), a
Participant may execute and file with the Appropriate Committee an additional
Plan Election (an "Additional Plan Election"), in the form provided by the
Company electing, if applicable, a shorter Deferral Period or, subject to the
approval of the Appropriate Committee, an Additional Deferral Amount for such
Fiscal Year or a Deferral Period in respect of the Required Deferral Amount and
any Additional Deferral Amount for such Fiscal Year of more than five Fiscal
Years. The Appropriate Committee may approve any election of an Additional
Deferral Amount and any election of a Deferral Period in excess of five Fiscal
Years, or may deny any such request, in its sole discretion. If the Appropriate
Committee shall deny any election of any Additional Deferral Amount, then the
Additional Plan Election shall be deemed to relate only to the Participant's
Required Deferral Amount for the Fiscal Year involved and, if the Appropriate
Committee shall deny any election of a Deferral Period in excess of five Fiscal
Years, then the Deferral Period applicable to the Required Deferral Amount and
any Additional Deferral Amount for the Fiscal Year involved shall be five Fiscal
Years.
4.2 Effect of Initial Plan Election. An Initial Plan Election
filed during the Enrollment Period in respect of a Plan Year in accordance with
Section 4.1 shall constitute an election (a) to become a Participant in this
Plan with respect to such Fiscal Year and the two succeeding Fiscal Years, (b)
to defer for Deferral Period receipt of the Required Deferral Amount and the
Additional Deferral Amount (if any) approved by the Appropriate Committee for
such Fiscal Year and (c) to defer receipt of the Required Deferral Amount for
the second and third Fiscal Years of the Required Deferral Period beginning with
such Fiscal Year for the Deferral Period or such other period as may be approved
by the Appropriate Committee pursuant to Section 4.1, unless, in the case of
such second and third Fiscal Years, such Participant is excluded from
participation in respect of subsequent Fiscal Years of a Required Deferral
Period upon approval of the Appropriate Committee pursuant to Section 4.5(a).
4.3 Elective Deferrals. For each Plan Year occurring after the
third Fiscal Year of a Participant's Required Deferral Period as to which such
Participant has not theretofore had the opportunity to elect to defer
compensation (each such Plan Year being referred to as an "Elective Plan Year"),
such Participant may, subject as provided below, during the Enrollment Period in
respect of any Plan Year during which the Board Committee has determined
pursuant to Section 3.1 to allow any Eligible Employees to defer compensation
for such Elective Plan Year, execute and file with the Appropriate Committee an
Additional Plan Election electing to defer for the applicable Deferral Period
the Required Deferral Amount of his current compensation for such Elective Plan
Year. Thereafter, during the Enrollment Period occurring during each such
Elective Plan Year (or if there is no Enrollment Period for such Fiscal Year,
the period commencing on the anniversary of the first day of the most recent
preceding Enrollment Period and ending on the anniversary of the last day of
such Enrollment Period) a Participant may execute and file an Additional Plan
Election, electing, subject to the approval of the Appropriate Committee, an
Additional Deferral Amount for such Elective Plan Year and a Deferral Period (in
whole Fiscal Years) in respect of the Required Deferral Amount and any
Additional Deferral Amount for such Elective Plan Year of more than five Fiscal
Years or, if applicable, a shorter Deferral Period. The Appropriate Committee
may approve any election under this Section 4.3 to defer an Additional Deferral
Amount and any election of a Deferral Period in excess of five Fiscal Years, or
may deny any such request, in its sole discretion. If the Appropriate Committee
shall deny any election of an Additional Deferral Amount, then the additional
Plan Election shall be deemed to relate only to the Participant's Required
Deferral Amount for the Elective Plan Year involved and, if the Appropriate
Committee shall deny any election of a Deferral Period in excess of five Fiscal
Years, then the Deferral Period applicable to the Required Deferral Amount and
any Additional Deferral Amount for the Elective Plan Year involved shall be five
Fiscal Years. If at any time there is more than one Elective Plan Year as to any
Participant, then the Appropriate Committee shall determine whether or not the
additional Plan Election which may be submitted in respect of such Elective Plan
Years by such Participant shall relate to one or more than one of such Elective
Plan Years. If the Appropriate Committee determines that such Plan Election
shall relate to more than one Elective Plan Year, then the additional Plan
Election to be filed by such Participant shall constitute an election to defer
the Required Deferral Amount of his current compensation for each of such
Elective Plan Years. Notwithstanding the foregoing, however, if an Eligible
Employee does not elect to defer at least the Required Deferral Amount in
respect of any Elective Plan Year, such Eligible Employee shall be ineligible to
submit an additional Plan Election in respect of any succeeding Elective Plan
Year unless the Appropriate Committee, in its sole discretion, shall determine
(including, without limitation, by reason of hardship as contemplated by Section
4.5(a)) that such Eligible Employee shall once again be eligible to elect to
defer compensation under this Section 4.3. In the event that the Appropriate
Committee shall make the determination contemplated by the preceding sentence in
respect of any Elective Plan Year for which the Enrollment Period has already
expired, then the Appropriate Committee, may, in its discretion, establish a
supplementary enrollment period for the Eligible Employee involved, in which
case such supplementary enrollment period shall be deemed the Enrollment Period
for such Eligible Employee for purposes of this Plan in respect of the Elective
Plan Year involved.
4.4 Election Irrevocable. The election to defer compensation
pursuant to a Plan Election or Additional Plan Election, once made for the
first, second and third Fiscal Years of a Required Deferral Period or for any
Elective Plan Year, shall be irrevocable and shall not be subject to
cancellation by the Participant or, except as expressly provided herein, by the
Appropriate Committee or the Company. Without limiting the generality of the
foregoing, such an election for the first, second and third Fiscal Years of a
Required Deferral Period or for any Elective Plan Year shall not be subject to
cancellation by a Participant by reason of termination of his employment with
the Company or an Affiliate.
4.5 Hardship Exceptions.
(a) A Participant may request to be excluded from
participating in the Plan in respect of any Plan Year other than his Base Year
by filing with the Appropriate Committee during the Enrollment Period occurring
during such Fiscal Year (or if there is no Enrollment Period for such Fiscal
Year, the period commencing on the anniversary of the first day of the most
recent preceding Enrollment Period and ending on the anniversary of the last day
of such Enrollment Period) a written request for non-participation, which
request shall set forth the circumstances that have arisen since the Enrollment
Period in respect of such Plan Year that would make continued participation in
the Plan an unanticipated financial hardship for such Participant. The
Appropriate Committee, in its sole discretion, shall determine whether or not to
grant any such request. A Participant who requests and is granted such an
exclusion shall not be eligible to participate in the Plan in respect of the
Plan Year for which such request is granted, but shall continue to participate
in the Plan in respect of any other Plan Years for which an election has
previously been made hereunder and shall be eligible to participate in the Plan
for future Plan Years.
(b) A Participant may request a reduction in any Deferral
Period by one or more Fiscal Years at any time by filing with the Appropriate
Committee a written request setting forth the circumstances that have arisen
since the Enrollment Period for the related Plan Year that would make the
failure to reduce the Deferral Period an unanticipated financial hardship for
such Participant. The Appropriate Committee, in its sole discretion, shall
determine whether or not to grant any such request and, if so, the number of
whole Fiscal Years by which the Deferral Period shall be so reduced.
4.6 Special Elections. The Appropriate Committee shall have
the right in its sole discretion to permit a Participant to execute and file
with the Appropriate Committee, at such times and on such terms and conditions
as the Appropriate Committee shall determine, a Plan Election (a "Special Plan
Election") in form provided by the Company, electing to extend the Deferral
Period previously selected with respect to any Required Deferral Amount and/or
Additional Deferral Amount for such periods and in such proportions as shall be
determined by the Appropriate Committee, provided that the Deferral Period being
extended shall terminate no earlier than the end of the Fiscal Year following
the Fiscal Year in which the Special Plan Election is made, except that any
election with respect to the Deferral Period ending on June 30, 1997 shall be
made on or before December 31, 1996. The Earnings Adjustment with respect to
each Plan Year in any such additional Deferral Period shall be calculated in
accordance with Section 5.4(e).
SECTION 5
Capital Accumulation Accounts;
Cash Balance Accounts
5.1 Annual Credits to Capital Accumulation Accounts. For each
Plan Year, the Company shall credit to each Participant, as of the last day of
such Plan Year, by means of a bookkeeping entry established and maintained by
the Company for each such Participant (a "Capital Accumulation Account"), a
number of CAP Units equal to the quotient obtained by dividing the Total
Deferral Amount for such Plan Year by the Average Cost Per Share of the
Available Shares for such Plan Year. The Available Shares for this purpose shall
be the total number of Available Shares for such Plan Year less a number of
shares equal to any CAP Units credited to Participants in respect of any fiscal
quarter during such Plan Year pursuant to Section 5.3 and less a number of
shares equal to the number of CAP Units to be credited to Participants as a Net
Earnings Adjustment pursuant to Section 5.10(a) for such Plan Year.
Notwithstanding the foregoing, if the aggregate number of CAP Units that
otherwise would be credited to the Capital Accumulation Accounts of all
Participants pursuant to the first sentence of this Section 5.1 would exceed the
number of Available Shares, then the aggregate number of CAP Units to be
credited to the Capital Accumulation Accounts of all Participants shall be
limited to the number of Available Shares and such aggregate number of CAP Units
shall be allocated on a pro rata basis, based on the respective Total Deferral
Amounts of each Participant in respect of such Plan Year. The Company shall
record CAP Units credited in respect of each Plan Year in a separate subaccount
of each Participant's Capital Accumulation Account and any credits or
adjustments hereunder to such CAP Units shall be made separately with respect to
the CAP Units credited to each such subaccount.
5.2 Cash Balance Account. If the number of CAP Units which the
Company is able to credit to Participants in respect of any Plan Year is limited
by the third sentence of Section 5.1, then the Company shall also credit to each
Participant an amount equal to (a) the Total Deferral Amount for such Plan Year
for such Participant, less (b) the product of (i) the number of CAP Units
credited to such Participant in respect of such Plan Year and (ii) the Average
Cost per Share of the Available Shares taken into account in such determination.
Such amounts shall be credited as of the last day of such Plan Year by means of
a bookkeeping entry established and maintained by the Company for each
Participant (a "Cash Balance Account"). The Company shall record Cash Balances
credited in respect of each Plan Year in a separate subaccount of each
Participant's Cash Balance Account and any credits or adjustments hereunder to
such Cash Balances shall be made separately with respect to each such
subaccount.
5.3 Quarterly Credits in Respect of Cash Balances. If there
shall exist a Cash Balance in the Cash Balance Account of any Participant on the
last day of any fiscal quarter of the Company, including the last day of a Plan
Year (a "Quarter End Date"), the Company shall credit the Capital Accumulation
Account of each such Participant, as of such Quarter End Date, with a number of
additional CAP Units determined by dividing such Cash Balance by the Average
Cost Per Share of the Available Shares acquired by the Company and designated by
the Board Committee as being allocated to such period. If the aggregate number
of CAP Units required to be credited to the Capital Accumulation Accounts of all
such Participants pursuant to the preceding sentence would exceed the number of
Available Shares, then the aggregate number of CAP Units to be credited shall be
limited to the number of Available Shares and such CAP Units shall be allocated
on a pro rata basis, based on the respective Cash Balances of each Participant.
In connection with any crediting of CAP Units pursuant to this Section 5.3, the
Cash Balance of each such Participant shall be reduced by debiting to his Cash
Balance Account an amount equal to the product of the number of CAP Units
credited to his Capital Accumulation Account and the Average Cost Per Share of
the Available Shares acquired by the Company during the annual or quarterly
period specified by the Board Committee.
5.4 Earnings Adjustments. For purposes of calculating the Net
Earnings Adjustment with respect to any Deferral Year pursuant to Section 5.10,
the Earnings Adjustment shall be calculated with respect to such Deferral Year,
after making any credits to the Capital Accumulation Accounts of the
Participants in respect of the fourth fiscal quarter of such Deferral Year
pursuant to Section 5.3, as follows:
(a) first, the Company shall determine a dollar amount of
interest to be credited to each Participant who had a positive Cash Balance at
any time during the Deferral Year by multiplying the daily weighted average
amount of each such Participant's Cash Balance (such weighted average to be
determined by adding the amounts of the Participant's Cash Balance on each day
during such Deferral Year and dividing the total so obtained by the number of
days in such Deferral Year) by a percentage equal to the daily average of the
highest rates of interest paid by Bear Stearns to its employees from time to
time during such Deferral Year on free credit balances;
(b) the Company next shall determine a dollar amount to be
credited or debited to each Participant in respect of CAP Units credited to such
Participant's Capital Accumulation Account as of the first day of the Deferral
Year and at all times throughout such Deferral Year ("Full Year Units") by
multiplying such number of Full Year Units by the Income Per Share for the
Deferral Year; provided, however, that the amount to be credited or debited
pursuant to this clause (b) to a Participant whose employment with the Company
and its Affiliates was terminated during such Deferral Year shall be the amount
determined as aforesaid multiplied by a fraction, the numerator of which shall
be the number of whole months in such Deferral Year prior to the month in which
his employment terminated and the denominator of which shall be 12;
(c) the Company then shall determine a dollar amount to be
credited to each Participant in respect of CAP Units credited or debited to his
Capital Accumulation Account as of any date subsequent to the first day of the
Deferral Year ("Part Year Units") by multiplying such number of Part Year Units
by the Income Per Share for the Deferral Year and multiplying the product so
obtained by a fraction, the numerator of which shall be the number of whole
months in such Deferral Year during which such Part Year Units were so credited
(less, in the case of a Participant whose employment by the Company and its
Affiliates is terminated in such Deferral Year, the number of whole months
following the effective date of such termination, plus one) and the denominator
of which shall be 12 (if a Participant's Capital Accumulation Account has been
credited with Part Year Units which initially were credited to such Account as
of different dates during the Deferral Year, then the calculation required by
this clause (c) shall be made separately for each such group of Part Year
Units);
(d) the Company then shall calculate a dollar amount to be
charged to each Participant who has any Additional Deferral Amount by
determining the Cost of Carry for such Participant with respect to each Plan
Year for which he has any such Additional Deferral Amount and multiplying each
such amount by a fraction, the numerator of which shall be the Participant's
Additional Deferral Amount for such Plan Year and the denominator of which shall
be his Total Deferral Amount for such Plan Year; provided that the charge
computed pursuant to this subparagraph (d) resulting from an Additional Deferral
Amount in Plan Year 1993 or Plan Year 1994 shall be taken into account only with
respect to a Participant who has elected to defer such Additional Deferral
Amount for more than five Fiscal Years and then only with respect to Deferral
Years after the fifth Deferral Year;
(e) the Company then shall calculate a dollar amount to be
charged to each Participant who elected to defer any Required Deferral Amount in
respect of any Plan Year for more than five Fiscal Years by determining the Cost
of Carry for such Participant with respect to each such Plan Year and
multiplying each such amount by a fraction, the numerator of which shall be the
Participant's Required Deferral Amount for such Plan Year and the denominator of
which shall be his Total Deferral Amount for such Plan Year; provided that the
charge computed pursuant to this subparagraph (e) shall be taken into account
only with respect to Deferral Years after the fifth Deferral Year;
(f) the Company shall then calculate an amount to be charged
to each Participant whose employment with the Company and its Affiliates has
terminated equal to the Cost of Carry for such Participant for such Deferral
Year or, if his employment terminated in such Deferral Year, for the portion
thereof beginning with the month in which his employment terminated; and
(g) finally, (i) if the sum (or net amount) of the amounts
determined for a Participant in subparagraphs (a), (b) and (c) above is a
positive number and such sum (or net amount) exceeds the aggregate of the
charges, if any, determined for such Participant pursuant to subparagraphs (d),
(e) and (f) above, then the Earnings Adjustment shall equal such sum (or net
amount), as determined for purposes of this Section 5.4, or (ii) if the net
amount of the amounts determined for a Participant in subparagraphs (a), (b) and
(c) less the aggregate of the charges, if any, determined pursuant to
subparagraphs (d), (e) and (f) is a negative number (an "Earnings Charge") and
such Participant has a positive Cash Balance, then (A) such Cash Balance first
shall be reduced by an amount equal to such Earnings Charge (provided that no
such reduction shall be made to the extent the Earnings Charge relates to a
negative result from sub-paragraph (b) or (c)) and (B) if, after reducing such
Cash Balance to zero, any amount determined in accordance with the preceding
clause (ii)(A) remains unapplied, or if such Participant has no Cash Balance,
then the Earnings Adjustment shall be zero.
5.5 Book Value Adjustment. For purposes of calculating the Net
Earnings Adjustment with respect to any Deferral Year pursuant to Section 5.10,
the Book Value Adjustment shall equal the sum of (1) the amount maintained in
the Book Value Adjustment Carry Forward Account pursuant to Section 5.10(a), if
any, and (2) the product of (a) the total number of CAP Units credited to the
Capital Accumulation Account of each Participant as of the last day of such
Deferral Year but without including any CAP Units credited on such date pursuant
to Sections 5.1, 5.3 and 5.10 multiplied by (b) the difference between Adjusted
Book Value Per Share as of the last day of the Deferral Year and Adjusted Book
Value Per Share as of the last day of the preceding Deferral Year.
5.6 Overall Cost Limitation. Notwithstanding the provisions of
Section 5.10, if the operation of the Plan (without giving effect to this
Section 5.6) would result in Adjusted Earnings Per Share for any Fiscal Year
being less than 98.5% of Pre-Plan Earnings Per Share for such Fiscal Year, then,
after making the other credits and adjustments required by Section 5.3, (a) the
Net Earnings Adjustments required by Section 5.10(a) first shall be reduced or
eliminated, and (b) if necessary after eliminating all such Net Earnings
Adjustments, the Cash Balance Accounts of all Participants shall be reduced or
eliminated so that to the extent possible, after giving effect to all such
reductions and eliminations, Adjusted Earnings Per Share for such Fiscal Year
will be 98.5% of Pre-Plan Earnings Per Share.
5.7 Antidilution Adjustments. In the event of a stock split or
if the Company makes any distribution (other than a cash dividend) with respect
to Common Stock after the date CAP Units initially are credited to a
Participant's Capital Accumulation Account in accordance with this Section 5,
the number of CAP Units held in each Participant's Capital Accumulation Account
shall be equitably adjusted (as determined by the Appropriate Committee in its
sole discretion) to reflect such event. If there shall be any other change in
the number or kind of outstanding shares of Common Stock as a result of a
recapitalization, combination of shares, merger, consolidation or otherwise, the
number of CAP Units credited to each Participant's Capital Accumulation Account
shall be equitably adjusted (as determined by the Appropriate Committee in its
sole discretion) to reflect such event.
5.8 Apportionment of Credits. Whenever CAP Units are credited
to a Participant's Capital Accumulation Account pursuant to Section 5.3 or 5.10
in respect of any Deferral Year, they shall be apportioned among the CAP Units
originally credited to such Account in respect of each Plan Year on a pro rata
basis, based on the respective number of the CAP Units originally credited in
respect of each such Plan Year, and such additional CAP Units shall have the
same Termination Date as the original CAP Units to which they are so
apportioned.
5.9 Amounts Vested. A Participant shall be fully vested at all
times in the CAP Units credited to his Capital Accumulation Account and in the
Cash Balance credited to his Cash Balance Account; provided, however, that the
establishment and maintenance of, or credits to, such Capital Accumulation
Account and Cash Balance Account shall not vest in any Participant or his
Beneficiary any right, title or interest in or to any specific asset of the
Company.
5.10 Net Earnings Adjustments.
(a) After making any credits to the Capital Accumulation
Accounts of the Participants in respect of the fourth fiscal quarter of such
Deferral Year pursuant to Section 5.3, each Participant's Account shall be
adjusted, effective as of the last day of such Deferral Year, as provided in
this Section 5.10(a). The Company shall credit the Capital Accumulation Account
of each Participant with an additional number of CAP Units (a "Net Earnings
Adjustment") equal to the quotient of (i) the difference between the Earnings
Adjustment calculated in accordance with Section 5.4 and the Book Value
Adjustment calculated in accordance with Section 5.5 for such Deferral Year,
divided by (ii) the Average Cost Per Share of the Available Shares acquired by
the Company and designated by the Board Committee as being allocated to such
period. Notwithstanding the foregoing, however, if (i) the Earnings Adjustment
is a negative number or (ii) the Book Value Adjustment exceeds the Earnings
Adjustment then no CAP Units shall be credited to the Accounts of any
Participants and the amounts of each of such Book Value Adjustment and Earnings
Adjustment shall be disregarded and shall not be taken into account for purposes
of the Plan in any subsequent Deferral Year.
If the aggregate number of CAP Units required to be credited
to the Accounts of all Participants pursuant to this Section 5.10(a) shall
exceed the number of Available Shares in respect of such Plan Year, then the
Company shall credit to each Participant only that number of CAP Units as shall
equal the number of Available Shares, on a pro rata basis, based on the number
of CAP Units which each Participant otherwise would have been entitled to be
credited. In such event, the Company shall also carry forward to subsequent
Deferral Years the respective amounts obtained by multiplying each of the
Earnings Adjustment and the Book Value Adjustment applicable for each
Participant by the fraction which is one minus the quotient obtained by dividing
(a) the number of Available Shares by (b) the aggregate number of CAP Units
required to be credited pursuant to this Section 5.10(a). Such respective amount
shall be credited (or debited) by means of separate bookkeeping entries
established and maintained by the Company to the Cash Balance Account in respect
of the Earnings Adjustment and a "Book Value Adjustment Carryforward Account" in
respect of the applicable Book Value Adjustment of each Participant. The amounts
credited to the Cash Balance Account in respect of the Earnings Adjustment shall
equal the product of (a) the applicable amount carried forward in respect of
Earnings Adjustment and (b) the Average Cost Per Share for the Plan Year
involved.
(b) Notwithstanding anything in the Plan to the contrary, for
purposes of determining Historical Book Value Per Share and Adjusted Book Value
Per Share, the Net Earnings Adjustments credited to each Participants' Capital
Accumulation Account pursuant to Section 5.10(a) shall be disregarded and in
lieu thereof the Earnings Adjustments provided for in Section 5.4 and the Book
Value Adjustments provided for in Section 5.5 shall be deemed made without
giving effect to Section 5.10(a). In addition, for purposes of calculating the
Earnings Adjustment and the Book Value Adjustment (except as required by Section
5.2 any amounts credited to a Book Value Adjustment Carryforward Account in a
prior Deferral Year shall be deemed made as a Book Value Adjustment in the year
so credited and not carried forward to subsequent Deferral Years.
5.11 Certification of the Board Committee. As a condition to
the right of any Participant to receive any shares payable in respect of CAP
Units credited to such Participant's Capital Accumulation Account or cash in
respect of such Participant's Cash Account, in respect of fractional CAP Units
credited to such Participant's Capital Accumulation Account or payable pursuant
to Section 6.6, prior to the time CAP Units or cash is credited to the
appropriate Accounts of such Participant or a Participant receives cash pursuant
to Section 6.6, the Board Committee shall be required to certify, by resolution
of the Board Committee or other appropriate action, that the amounts to which
such Participant is entitled have been accurately determined in accordance with
the provisions of the Plan.
SECTION 6
Payment of Benefits
6.1 Distributions. As soon as practicable following each
Termination Date, each Participant shall be entitled to receive from the
Company, in respect of the Total Deferral Amount for the related Plan Year, a
number of shares of Common Stock equal to the Total CAP Units credited to his
Capital Accumulation Account in respect of such Plan Year and an amount in cash
equal to his Cash Balance, if any, in respect of such Plan Year, each determined
as of such Termination Date.
6.2 Accelerated Distributions. Notwithstanding the provisions
of Section 6.1 and in lieu of any distribution on a Termination Date selected by
a Participant, a Participant may receive a distribution prior to a Termination
Date as follows:
(a) If a Participant shall die during any Fiscal Year prior to
the end of all of his Deferral Periods, the Participant's estate (or his
Beneficiary) shall be entitled to receive from the Company, as soon as
practicable after the end of the Fiscal Year in which such Participant's death
occurs, a number of shares of Common Stock equal to the Total CAP Units credited
to his Capital Accumulation Account, as adjusted pursuant to Sections 5.6 and
5.10 as of the end of the Fiscal Year in which such Participant's death occurs,
and an amount in cash equal to his Cash Balance, if any, as of the end of the
Fiscal Year in which such Participant's death occurs.
(b) If a Participant's employment with the Company and its
Affiliates shall be terminated for any reason prior to the end of all of his
Deferral Periods (other than by reason of death), or if such Participant shall
suffer a Disability or shall become a Managing Director Emeritus of Bear
Stearns, then such Participant (or his Beneficiary) shall, unless otherwise
determined by the Appropriate Committee as hereinafter provided, continue to be
bound by, and to be subject to, all the terms and provisions of this Plan,
except that (i) in lieu of making any calculations pursuant to subparagraphs
(ii) and (iii) of Section 5.4 in respect of the portion of the Deferral Year
beginning with the month in which his employment terminates and for any
subsequent Deferral Year prior to any Termination Date, the Company shall credit
to the Cash Balance Account of such Participant, on an annual basis as of the
last day of each Fiscal Year, a dollar amount equal to the cash dividends
declared by the Company, in the fiscal quarter of the Company following the
fiscal quarter in which his employment terminated or in any subsequent fiscal
quarter ending on or prior to a Termination Date, on that number of shares of
Common Stock corresponding to the number of CAP Units credited to his Capital
Accumulation Account (A) as of the last day of the month before his employment
terminates in respect of the Fiscal Year in which his employment terminated and
(B) as of the first day of the Fiscal Year after which his employment terminated
in respect of all subsequent Fiscal Years, and (ii) notwithstanding the
provisions of Section 5.5, the Book Value Adjustment for any Fiscal Year
following the Fiscal Year in which his employment terminated shall be zero. For
purposes of calculating the Book Value Adjustment for the Fiscal Year in which
the employment of a Participant is terminated, the denominator of the fraction
referred to in Section 5.5 of the Plan shall be (in lieu of the Adjusted Book
Value Per Share on the last day of the Deferral Year for which the adjustment is
being made) the Adjusted Book Value Per Share calculated by including in the
definition of Adjusted Common Stockholder Equity (in lieu of all increases (or
decreases) in retained earnings attributable to net income (or loss) minus all
amounts accrued in respect of cash dividends declared with respect to any
capital stock of the Company) the amount determined by multiplying (A) the
increase (or decrease) in retained earnings in such Fiscal Year attributable to
net income (or loss) minus all amounts accrued in respect of cash dividends
declared with respect to any capital stock of the Company by (B) a fraction, the
numerator of which is the number of months in the Fiscal Year prior to but not
including the month in which his employment terminates, and the denominator of
which is 12.
Notwithstanding the foregoing:
(i) the Appropriate Committee shall have the right in
its sole discretion (A) to treat a Participant who has suffered a
Disability or who has become a Managing Director Emeritus of Bear
Stearns as a Participant (1) in all respects under this Plan, (2) to
whom the provisions of Section 5.4 but not the provisions of Section
4.1 shall apply or (3) whose employment with the Company and its
Affiliates has terminated and to whom the foregoing provisions of this
paragraph (b) shall apply, and (B) at any time or from time to time, to
change any such treatment with respect to any such Participant to any
other such treatment;
(ii) the Appropriate Committee shall have the right
in its sole discretion to accelerate any Termination Date with respect
to any Plan Year of a Participant whose employment with the Company and
its Affiliates terminates to the last day of the Fiscal Year in which
such employment terminates or to the last day of any subsequent Fiscal
Year, in which case the date so determined by the Appropriate Committee
with respect to each such Plan Year shall be the Participant's
Termination Date for all purposes of this Plan with respect to each
such Plan Year. The Appropriate Committee shall give notice of any such
determination to the Participant at least ten days prior to the
earliest of such accelerated Termination Dates. In addition, if a
Participant whose employment with the Company has terminated shall
request the Appropriate Committee to accelerate the Termination Date
with respect to any Plan Year of such Participant to the last day of
the Fiscal Year immediately preceding the Fiscal Year in which such
Participant's employment terminates, the Appropriate Committee may in
its sole discretion so accelerate the Termination Date with respect to
any such Plan Year of such Participant. If the Appropriate Committee
takes such action, such Participant's distribution from the Plan for
any Plan Year the Termination Date of which is so accelerated shall be
based on the Total CAP Units and his Cash Balance at the end of such
prior Fiscal Year for each such Plan Year, without giving effect to any
adjustments otherwise required to be made during the Fiscal Year in
which his employment terminates, including, without limitation, for Net
Earnings Adjustments, dividends on the Common Stock, or interest, and
the distributions called for in Section 6.1 of the Plan shall be made
as soon as practicable after such action is taken by the Appropriate
Committee;
(iii) Notwithstanding clause (ii) above, the
Appropriate Committee shall have the right in its sole discretion to
determine that, regardless of the Termination Date with respect to any
other Plan Year or Plan Years, the Termination Date with respect to the
Plan Year in which the employment of the Participant with the Company
and its Affiliates terminates, and the Plan Year immediately preceding
such Plan Year if such employment terminates prior to the date on which
the Capital Accumulation Account of such Participant is credited
pursuant to Section 5.1 hereof with respect to such immediately
preceding Plan Year, shall be the last day of the Fiscal Year
immediately preceding the Plan Year in which such employment terminates
or, if applicable, the prior Plan Year; and
(iv) the Appropriate Committee may permit a
Participant whose employment with the Company and its Affiliates
terminates more than five years after the last day of his first Plan
Year and who has elected a Deferral Period of more than five Fiscal
Years for any Plan Year to participate in the Plan with respect to any
such Plan Year for one or more Fiscal Years (but not beyond his
Termination Date as determined in accordance with his applicable Plan
Election) on substantially the same terms as other Participants whose
employment has not terminated, in which case the Capital Accumulation
Account of such Participant shall continue to be adjusted in the manner
provided in Section 5.10 for other Participants except that
subparagraph (f) of Section 5.4 shall apply to such a Participant, and
the Termination Date with respect to each such Plan Year shall be the
last day of such Fiscal Year as shall be determined by the Appropriate
Committee.
(c) If a Participant shall take a Personal Leave of Absence
prior to the end of all his Deferral Periods, the Appropriate Committee shall
have the right in its sole discretion to require the Participant to become
subject to the provisions of paragraph (b) above (to the same extent as a
Participant whose employment had terminated) during the period of such Personal
Leave of Absence, except that in the event the Participant resumes full-time
employment after the first day of a Fiscal Year, all calculations under this
Plan with respect to such Fiscal Year shall be made by treating the Participant
in the same manner as a full-time employee for the number of full months of such
employment during such Fiscal Year and as a Participant whose employment had
been terminated for the balance of such Fiscal Year. If the Appropriate
Committee shall not take such action the Participant shall continue to be
treated under this Plan on the same basis as a Participant who is not on a
Personal Leave of Absence.
(d) In addition, in the event of hardship, actual or
prospective change in tax laws, or any other unforeseen or unintended
circumstance or event (including, without limitation, if the tax laws of any
foreign jurisdiction do not provide for tax consequences to Participants or the
Company that are comparable to those provided under United States tax laws), or
if desirable to preserve the deductibility for federal income taxes of
compensation paid or payable by the Company to any Participant, the Appropriate
Committee, in its sole discretion, may accelerate any Termination Date of any
Participant to the last day of any Fiscal Year, in which case the accelerated
date determined by the Appropriate Committee shall be the Termination Date for
all purposes of this Plan.
6.3 Change in Control and Parachute Limitation.
Notwithstanding the provisions of Sections 6.1 and 6.2, within sixty (60) days
of the occurrence of a Change in Control, each Participant shall be entitled to
receive from the Company that number of shares of Common Stock which is equal to
the Total CAP Units credited to his Capital Accumulation Account as of the date
of such Change in Control and an amount in cash equal to his Cash Balance, if
any, as of such date; provided, however, no amount shall be immediately
distributable or payable under the Plan if and to the extent that the
Appropriate Committee determines that such distribution or payment (taken
together with any other payment received or to be received by the Participant
from the Company or any of its Affiliates in connection with a Change in
Control) would constitute an "excess parachute payment" under section 280G of
the Code, which would cause such amount to be subject to an excise tax to the
recipient or to be nondeductible to the Company or any of its Affiliates, or
would subject a Reporting Person to liability under Section 16(b) of the
Exchange Act or any rule or regulation thereunder by reason of transactions or
events occurring on or prior to the occurrence of the Change in Control. Payment
of amounts not distributed by reason of this Section 6.3 shall be made as soon
as practicable, consistent with this Section 6.3.
6.4 Additional Distributions in Certain Cases. In addition to
the amounts provided by Section 6.1, 6.2 or 6.3, if (a) upon making any
distribution to any Participant, the Company determines that the Company or Bear
Stearns would realize a tax benefit calculated at its Marginal Tax Rate in the
year of such distribution (without giving effect to any carryovers or carrybacks
of losses, credits or deductions from any prior or succeeding Fiscal Year) in
excess of the amount of Deferred Tax Benefit in respect of its liability to such
Participant on account of such distribution, and (b) such Participant's Cash
Balance Account or the number of CAP Units credited to his Capital Accumulation
Account had been reduced in a prior Fiscal Year as a result of the application
of subparagraphs (d) or (e) of Section 5.4 or Section 5.6, then at the time of
the distribution pursuant to this Section 6 the Company also shall pay to such
Participant, in cash, an additional amount equal to the lesser of (i) the amount
by which the actual tax benefit to be received by the Company or Bear Stearns
exceeds such Deferred Tax Benefit and (ii) the amount by which such
Participant's Cash Balance Account or Capital Accumulation Account was so
reduced. Notwithstanding the foregoing, a Participant shall not be entitled to
any payment from the Company pursuant to this Section 6.4 in respect of any
reduction in his Cash Balance Account or in the number of CAP Units credited to
his Capital Accumulation Account for any period commencing with the first day of
the month following the month in which his employment by the Company and its
Affiliates was terminated.
6.5 Special Provisions for Reporting Persons. If required by
Rule 16b-3, shares of Common Stock distributed to Participants who are Reporting
Persons shall bear an appropriate legend to the effect that such shares of
Common Stock may not be transferred for a period of six (6) months after they
are credited to the Account of such Participant.
6.6 Form of Payments. Except as otherwise provided herein, all
distributions in respect of CAP Units to be made to a Participant (or his
Beneficiary) under the Plan shall be made in whole shares of Common Stock.
Payment in respect of any fractional CAP Unit shall be made in cash based upon
the Fair Market Value of a share of Common Stock on the second Business Day
preceding the payment date. Shares of Common Stock distributed hereunder may be
treasury shares, shares of authorized but unissued Common Stock, or a
combination thereof, and shall be fully paid and nonassessable. If shares of
Common Stock are distributed pursuant to Sections 6.1, 6.2(a) or 6.2(b) to any
Participant after the record date for any cash dividend occurring after the
Termination Date with respect to which such shares are distributed or, in the
cases of Sections 6.2(a) or 6.2(b), after the end of the Fiscal Year in which
the death or Disability of a Participant occurs, then such Participant (or his
estate or Beneficiary) shall be entitled to receive from the Company an amount
of cash equal to the cash dividends per share payable to holders of record on
such record date multiplied by the number of shares of Common Stock so
distributed to such Participant after such record date.
6.7 Registration and Listing of Common Stock. Prior to the
date on which any shares of Common Stock are required to be issued to any
Participant under this Plan without taking into account any acceleration of such
distribution date pursuant to the provisions of Section 6.2 of the Plan, the
Company shall file a registration statement (a "Registration Statement") on Form
S-3 and/or Form S-8 (or any successor form then in effect) under the Securities
Act, with respect to all shares of Common Stock which the Company then estimates
are distributable under the Plan; provided, however, that the Company need not
file a Registration Statement hereunder if, prior to such date, the Company
receives a written opinion of counsel to the effect that such shares of Common
Stock may be sold, transferred or otherwise disposed of under the Securities Act
without registration thereunder. The Company shall use its best efforts to have
any such Registration Statement declared effective as soon as reasonably
practicable after filing and shall use reasonable efforts to keep each such
Registration Statement continuously in effect until all shares of Common Stock
to which such Registration Statement relates have been so issued, and for a
two-year period thereafter. From time to time the Company also shall amend such
Registration Statement to cover any additional shares of Common Stock which
become distributable under the Plan and otherwise would not be covered by such
Registration Statement. In the event that Participants would be precluded from
selling any shares of Common Stock distributable hereunder unless such shares
were registered or qualified under the securities or "blue sky" laws of any
state (or otherwise received the approval of any state governmental or
regulatory authority), then the Company shall use its best efforts to cause such
shares of Common Stock to be duly registered or qualified (or to receive such
approval) as may be required. If the shares of Common Stock distributable
hereunder satisfy the criteria for listing on any exchange on which the Common
Stock is then listed, then (unless such shares of Common Stock already are
listed on such exchange) the Company shall apply for and use its best efforts to
obtain a listing of all such shares of Common Stock on such exchange. All costs
and expenses incurred by the Company in connection with the satisfaction of its
obligations under this Section 6.7 shall be borne by the Company. The Company
shall immediately notify each Participant in the event that a Registration
Statement which has been filed and remains effective contains an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. Upon
receipt of such notice, no Participant shall sell or agree to sell any shares of
Common Stock pursuant to such Registration Statement unless and until the
Company has notified each Participant that such Registration Statement no longer
contains such misstatement or omission. In the event that shares of Common Stock
are issued to Participants hereunder other than pursuant to a Registration
Statement, then, unless the Company shall have obtained the opinion of counsel
referred to above, each certificate representing such shares shall bear a legend
substantially to the following effect:
The securities represented by this Certificate have not been
registered under the Securities Act of 1933, as amended, or applicable state
securities laws, and may not be sold, assigned, transferred, pledged or
otherwise disposed of except in compliance with the requirements of such Act.
By submitting a Plan Election, Each Participant shall be
deemed to have agreed to the foregoing provisions of this Section 6.7.
6.8 Reservation of Shares. The Company, as soon as practicable
after the end of each Fiscal Year prior to the termination of this Plan, shall
reserve such number of shares of Common Stock (which may be authorized but
unissued shares or treasury shares) as shall be required so that the total of
all shares reserved hereunder, including shares reserved pursuant to this
Section 6.8 in preceding Fiscal Years, shall be equal to the number of shares of
Common Stock which the Company would be obligated to issue to all Participants
in accordance with the terms of the Plan if the Plan were to be terminated at
such time.
SECTION 7
Source of Payments
Notwithstanding any other provision of this Plan, the Company
shall not be required to establish a special or separate fund or otherwise
segregate any assets to assure any payments hereunder. If the Company shall make
any investment to aid it in meeting its obligations hereunder, a Participant and
his Beneficiary shall have no right, title or interest whatsoever in or to any
such investments. Nothing contained in this Plan, and no action taken pursuant
to its provisions, including without limitation the acquisition of any shares of
Common Stock by the Company, shall create or be construed to create a trust of
any kind between the Company and any Participant or Beneficiary. To the extent
that any Participant or Beneficiary acquires a right to receive payments from
the Company hereunder, such right shall be no greater than the right of a
general unsecured creditor of the Company.
SECTION 8
Administration of the Plan
8.1 Authority of Committee. The Plan shall be administered by
the Appropriate Committees, which shall have full power and authority as set
forth herein to interpret, to construe and to administer the Plan and to review
claims for benefits under the Plan. Each Appropriate Committee's interpretations
and constructions of the Plan and actions thereunder, including but not limited
to the determination of the amounts to be credited to any Capital Accumulation
Account or Cash Balance Account, shall be binding and conclusive on all persons
and for all purposes.
8.2 Duties of Committee. The Appropriate Committees shall
cause the Company to establish and maintain records of the Plan, of each Capital
Accumulation Account and Cash Balance Account and of each subaccount thereof
established for any Participant hereunder. Either of the Appropriate Committees
may engage such certified public accountants, who may be accountants for the
Company, as it shall require or may deem advisable for purposes of the Plan, may
arrange for the engagement of such legal counsel, who may be counsel for the
Company, and may make use of such agents and clerical or other personnel as it
shall require or may deem advisable for purposes of the Plan. Each such
Committee may rely upon the written opinion of the accountants and counsel
engaged by it. Subject to any limitations imposed by applicable law (including
Rule 16b-3), either Appropriate Committee may delegate to any agent or to any
subcommittee or member of such Committee its authority to perform any act
hereunder, including, without limitation, those matters involving the exercise
of discretion, provided that such delegation of authority shall be subject to
revocation at any time at the discretion of such Committee.
8.3 Purchase of Common Stock. The Company intends to purchase
shares of Common Stock in the open market or in private transactions or
otherwise during the term of the Plan for issuance to Participants in accordance
with the terms hereof. Shares of Common Stock shall be purchased for purposes of
the Plan and for purposes of the PUP Plan on a combined or joint basis without
identifying shares so purchased as having been purchased for this Plan or the
PUP Plan. Notwithstanding the foregoing, the Company will specifically designate
all such shares at the time they are purchased as having been purchased for the
purpose of making determinations under this Plan and the PUP Plan; provided,
however, that any shares so purchased shall be the sole property of the Company
and no Participant or Beneficiary shall have any right, title or interest
whatsoever in or to any such shares. All shares of Common Stock purchased by the
Company on or after July 1, 1992 and designated by the Company as having been
purchased for the CAP Plan shall be considered, notwithstanding such
designation, to have been purchased for purposes of both this Plan and the PUP
Plan. The acquisition of Common Stock as described above will be subject to the
sole discretion of the Board Committee, which shall determine the time and price
at which and the manner in which such shares are to be acquired, subject to
applicable law. In making any such determination, the Board Committee may, but
shall in no event be obligated to, consider the recommendations of the Advisory
Committee.
8.4 Plan Expenses. The Company shall pay the fees and expenses
of accountants, counsel, agents and other personnel and all other costs of
administration of the Plan.
8.5 Indemnification. To the maximum extent permitted by
applicable law, no member of any Committee shall be personally liable by reason
of any contract or other instrument executed by him or on his behalf in his
capacity as a member of such Committee or for any mistake of judgment made in
good faith, and the Company shall indemnify and hold harmless, directly from its
own assets (including the proceeds of any insurance policy the premiums of which
are paid from the Company's own assets), each member of each Committee and each
other director, officer, employee or agent of the Company to whom any duty or
power relating to the administration or interpretation of the Plan or to the
management or control of the assets of the Plan may be delegated or allocated,
against any cost or expense (including fees, disbursements and other charges of
legal counsel) or liability (including any sum paid in settlement of a claim
with the approval of the Company) arising out of any act or omission to act in
connection with the Plan, unless arising out of such person's own fraud, willful
misconduct or bad faith. The foregoing shall not be deemed to limit the
Company's obligation to indemnify any member of any Committee under the
Company's Restated Certificate of Incorporation or Bylaws, or under any other
agreement between the Company and such member.
8.6 Maximum Number of Shares.
(a) The aggregate number of CAP Units that may be credited to
Participants' Capital Accumulation Accounts under the Plan for any Plan Year
shall not exceed the equivalent number of shares of Common Stock equal to the
sum of 15% of the outstanding shares of Common Stock as of the last day of such
Plan Year (the "Base Shares") and the number, if any, by which the sum of the
Base Shares in all prior Fiscal Years beginning on or after July 1, 1993 exceeds
the number of shares credited to Participants' Capital Accumulation Accounts
under this Plan in all such prior Fiscal Years. For purposes of determining the
number of shares of Common Stock outstanding as of the last day of any Plan
Year, such number shall be calculated as the sum of (i) the number of shares of
Common Stock outstanding at such year end, (ii) the number of shares underlying
CAP Units credited to Participants' Capital Accumulation Accounts as of such
date and Earnings Units credited to Participants' Earnings Unit Accounts under
the PUP Plan as of such date and (iii) the number of shares underlying CAP Units
to be credited to all such Accounts as a result of making any adjustment to such
Accounts required by Sections 5.1 and 5.10 in respect of all Fiscal Years ending
on or prior to the date of determination and the number of Earnings Units
credited to the Earnings Unit Accounts of all Participants in the PUP Plan as a
result of making any adjustment to such Accounts required by Section 4.2 of the
PUP Plan in respect of all Fiscal Years ending on or prior to the date of such
determination.
(b) If there shall be any change in the Common Stock of the
Company, through merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, spinoff, split up, dividend in kind or other change in
the corporate structure or distribution to the stockholders, appropriate
adjustments may be made by the Board Committee (or if the Company is not the
surviving corporation in any such transaction, the board of directors of the
surviving corporation) in the aggregate number and kind of shares subject to the
Plan, and the number and kind of shares which may be issued under the Plan.
Appropriate adjustments may also be made by the Board Committee in the terms of
any awards under the Plan to reflect such changes and to modify any other terms
of outstanding awards on an equitable basis as the Board Committee in its
discretion determines.
8.7 Forward Repurchases of Common Stock.
The Company shall have the right, upon authorization of the
Board Committee, to enter into forward contracts for the repurchase from one or
more Participants of any or all shares of Common Stock representing CAP Units
previously credited to the Capital Accumulation Accounts of such Participants
with respect to any Plan Year and distributed on or after the relevant
Termination Date of the Deferral Period ending in the then current Fiscal Year,
having such terms and conditions as shall be determined by the Board Committee,
for a purchase price per share equal to the average of the closing prices of the
Common Stock as reported on the New York Stock Exchange Consolidated Tape for
each day of trading in the Common Stock during the period from the effective
date of the contract to the date of repurchase, provided that a contract may not
be entered into more than twelve (12) months prior to the expiration of the
applicable Deferral Period and will terminate, and be null and void, unless the
Company satisfies performance goals established by the Board Committee in
writing, by resolution of the Board Committee or other appropriate action, not
later than ninety (90) days after the commencement of the Fiscal Year to which
the performance goals relate, and certified by the Board Committee in writing as
having been satisfied prior to the relevant Termination Date. The formula for
calculating the performance goals shall be based upon one or more of the
following criteria, individually or in combination, adjusted in such manner as
the Board Committee shall determine, for a period of not less than nine (9)
months of the applicable Fiscal Year: (a) pre-tax or after-tax return on equity;
(b) earnings per share; (c) pre-tax or after-tax net income; (d) business unit
or departmental pre-tax or after-tax income; (e) book value per share; (f)
market price per share; (g) relative performance to peer group companies; (h)
expense management; and (i) total return to stockholders.
SECTION 9
Amendment and Termination
The Plan shall terminate when all distributions required to be
made hereunder have been made following the last Termination Date. The Plan may
be amended, suspended or earlier terminated, in whole or in part as to a
particular Plan Year, and at any time and from time to time, by the Board
Committee, but except as provided below no such action shall retroactively
impair or otherwise adversely affect the rights of any person to benefits under
the Plan which have accrued prior to the date of such action. Except as provided
in the following sentence, if the Plan is terminated prior to the end of any
Fiscal Year, (i) Participants' Plan Elections in respect of the Plan Year in
which such termination occurs and any subsequent Plan Year shall be canceled,
(ii) the Company shall credit the Capital Accumulation Accounts of all
Participants (other than those whose employment with the Company and its
Affiliates had terminated prior to the date the Plan terminates, except a
Participant referred to in subparagraph (iii) of Section 6.2(b)) in the manner
provided in Section 5.10 in respect of the portion of the Company's Fiscal Year
ended on the date of such termination, and (iii) as soon as practicable
following the end of the Fiscal Year in which such termination occurs, the
Company shall deliver to each Participant the number of shares of Common Stock
corresponding to the number of CAP Units credited to his Capital Accumulation
Account and an amount in cash equal to his Cash Balance which the Participant
otherwise would be entitled to receive pursuant to Section 6 as of the
designated Termination Date in respect of the Plan Year or Plan Years involved.
Notwithstanding the foregoing, if the Company shall determine that the Plan
should be terminated immediately, either in its entirety or in part in respect
of any Plan Year, no adjustments or credits shall be made to the Capital
Accumulation Accounts of the Participants pursuant to Section 5 in respect of
the Fiscal Year in which such termination occurs and each Participant shall be
entitled to receive from the Company, as soon as practicable following the date
of such termination, shares of Common Stock and/or amounts in cash determined in
accordance with Section 6 hereof as if the Termination Date in respect of the
Plan Year or Plan Years involved were the last day of the Fiscal Year preceding
the Fiscal Year in which such termination occurs.
In such event, however, the Capital Accumulation Account of
each Participant who is an employee of the Company and/or its Affiliates (or who
is a Participant who has suffered a Disability or who has become a Managing
Director Emeritus of Bear Stearns and whom the Appropriate Committee shall have
determined to treat in the manner specified in clause (1) or (2) of subparagraph
(i) of Section 6.2(b)) on the date of such termination shall be adjusted in
respect of the Fiscal Year in which such termination occurs as follows: Each
such Account shall be credited with a Net Earnings Adjustment for the Fiscal
Year in which such termination occurs except that, for purposes of computing
such Net Earnings Adjustment, Income Per Share for purposes of calculating the
Earnings Adjustment shall be computed for each terminated Plan Year based only
on the consolidated income or loss before taxes of the Company and its
subsidiaries accrued from the beginning of such Fiscal Year through and
including the end of the month in which such termination occurred, and the Book
Value Adjustment for the Fiscal Year in which such termination occurs shall be
calculated on the basis of the shares distributed pursuant to the preceding
sentence in respect of each terminated Plan Year, provided that for purposes of
computing such Book Value Adjustment, the definition of Adjusted Common
Stockholders' Equity used in the computation of Adjusted Book Value Per Share
shall be modified by deleting the adjustments to Adjusted Common Stockholders'
Equity specified therein and substituting in lieu thereof the following: "plus
all increases (or less any decreases) in retained earnings of the Company and
its subsidiaries attributable to net income (or loss), determined on a
consolidated basis, minus all amounts accrued in respect of cash dividends
declared with respect to any capital stock of the Company during such Fiscal
Year, for the period from the beginning of such Fiscal Year through and
including the month in which such termination occurred." If the Plan is not
terminated in its entirety but one or more Plan Years are terminated, then any
amounts credited to Participants' Accounts pursuant to the preceding sentence
shall continue to be subject to the provisions of the Plan for the balance of
the original Deferral Period with respect to the terminated Plan Year or Plan
Years, as if such Plan Year or Plan Years had not been terminated. If the Plan
is terminated in its entirety, then as soon as may be practicable thereafter,
the Company shall deliver to each Participant (in addition to amounts
distributable pursuant to the fourth sentence of this paragraph) a number of
shares of Common Stock equal to the number of CAP Units credited to each such
Participant's Account pursuant to the second preceding sentence, provided that
if the aggregate number of such CAP Units exceeds the number of Available Shares
for such Fiscal Year as of the date of determination, then the Company shall
deliver to each such Participant only that number of shares of Common Stock as
shall equal the number of Available Shares on a pro rata basis, based on the
number of shares which each Participant otherwise would have been entitled to
receive, and shall distribute to each Participant an amount in cash equal to the
number of additional shares of Common Stock that would have been distributed to
such Participant but for the limitation contained in this sentence, multiplied
by the Average Cost Per Share of the Available Shares in respect of such Fiscal
Year.
SECTION 10
Designation of Beneficiaries
10.1 General. Each Participant may file with the Appropriate
Committee a written designation of one or more persons as the Beneficiary who
shall be entitled to receive the amount, if any, which the Participant is
entitled to receive under the Plan upon his death. A Participant, from time to
time, may revoke or change his Beneficiary designation without the consent of
any prior Beneficiary by filing a new such designation with the Appropriate
Committee. The most recent such designation received by the Appropriate
Committee shall be controlling; provided, however, that no designation, or
change of revocation thereof, shall be effective unless received by the
Appropriate Committee prior to the Participant's death, and in no event shall
any such designation be effective as of a date prior to such receipt.
10.2 Lack of Designated Beneficiary. If no such Beneficiary
designation is in effect at the time of a Participant's death, or if no
designated Beneficiary survives the Participant, or if such designation
conflicts with law, the Participant's estate shall be deemed to have been
designated as his Beneficiary and shall receive the payment of the amount, if
any, payable under the Plan upon his death. If the Appropriate Committee is in
doubt as to the right of any person to receive such amount, the Committee may
cause the Company to retain such amount, without liability for any interest
thereon, until the rights thereto are determined, or the Appropriate Committee
may pay and deliver such amount into any court of appropriate jurisdiction, and
such payment shall be a complete discharge of the liability of the Plan and the
Company therefor.
SECTION 11
General Provisions
11.1 Successors. The Plan shall be binding upon and inure to
the benefit of the Company, its successors and assigns, and each Participant and
his Beneficiary.
11.2 No Continued Employment. Neither the Plan nor any action
taken thereunder shall be construed as giving to a Participant the right to be
retained in the employ of the Company or any of its Affiliates or as affecting
the right of the Company or any of its Affiliates to dismiss any Participant.
11.3 Withholding. As a condition to receiving any distribution
or payment of amounts hereunder, the Company may require the Participant to make
a cash payment to the Company or, in its sole discretion, upon the request of a
Participant, may withhold from any amount or amounts payable under the Plan, in
either case, in an amount equal to all federal, state, city or other taxes as
may be required to be withheld in respect of such payments pursuant to any law
or governmental regulation or ruling.
11.4 Non-alienation of Benefits. No right to any amount
payable at any time under the Plan may be assigned, transferred, pledged or
encumbered, either voluntarily or by operation of law, except as expressly
provided herein or as may otherwise be required by law. If, by reason of any
attempted assignment, transfer, pledge or encumbrance, or any bankruptcy or
other event happening at any time, any amount payable under the Plan would be
made subject to the debts or liabilities of the Participant or his Beneficiary
or would otherwise not be enjoyed by him, then the Appropriate Committee, if it
so elects, may terminate such person's interest in any such payment and direct
that the same be held and applied to or for the benefit of the Participant, his
Beneficiary or any other person or persons deemed to be the natural objects of
his bounty, taking into account the expressed wishes of the Participant (or, in
the event of his death, his Beneficiary).
11.5 Incompetency. If the Appropriate Committee shall find
that any person to whom any amount is or was distributable or payable hereunder
is unable to care for his affairs because of illness or accident, or has died,
then the Appropriate Committee, if it so elects, may direct that any payment due
him or his estate (unless a prior claim therefor has been made by a duly
appointed legal representative) or any part thereof be paid or applied for the
benefit of such person or to or for the benefit of his spouse, children or other
dependents, an institution maintaining or having custody of such person, any
guardian or any other person deemed by such Appropriate Committee to be a proper
recipient on behalf of such person otherwise entitled to payment, or any of
them, in such manner and proportion as such Appropriate Committee may deem
proper. Any such payment shall be in complete discharge of the liability
therefor of the Company, the Plan, the Committee or any member, officer or
employee thereof.
11.6 Offsets. To the extent permitted by law, the Company or
any of its Affiliates shall have the absolute right to withhold any shares of
Common Stock or any amounts otherwise required to be distributed or paid to any
Participant or Beneficiary under the terms of the Plan, to the extent of any
amount owed or which in the sole judgment of the Appropriate Committee may in
the future be owed for any reason by such Participant, in the case of a payment
to such Participant, or to the extent of any amount owed or which in the sole
judgment of the Appropriate Committee may in the future be owed for any reason
by the Participant or such Beneficiary, in the case of payment to a Beneficiary,
to the Company or any of its Affiliates, and to set off and apply the amounts so
withheld to payment of any such amount ultimately determined by the Appropriate
Committee, in its sole discretion, to be owed to the Company or any of its
Affiliates, whether or not such amounts shall then be immediately due and
payable and in such order or priority as among such amounts owed as the
Appropriate Committee, in its sole discretion, shall determine. In determining
the amount of a permitted offset under this Section 11.6, any shares of Common
Stock required to be distributed to a Participant or a Beneficiary shall be
valued at the Fair Market Value of such Shares on the date of offset.
11.7 Notices, etc. All elections, designations, requests,
notices, instructions and other communications from a Participant, Beneficiary
or other person to any Appropriate Committee required or permitted under the
Plan shall be in such form as is prescribed from time to time by the Appropriate
Committee, shall be mailed by first-class mail or delivered to such location as
shall be specified by the Appropriate Committee, and shall be deemed to have
been given and delivered only upon actual receipt thereof at such location.
11.8 Other Benefits. The benefits, if any, payable
under the Plan shall be in addition to any other benefits provided for
Participants.
11.9 Interpretation, etc. The captions of the sections and
paragraphs of this Plan have been inserted solely as a matter of convenience and
in no way define or limit the scope or intent of any provisions of the Plan.
References to sections herein are to the specified sections of this Plan unless
another reference is specifically stated. The masculine pronoun wherever used
herein shall include the feminine pronoun, and a singular number shall be deemed
to include the plural unless a different meaning is plainly required by the
context.
11.10 Laws; Severability. The Plan shall be governed by, and
construed in accordance with, the laws of the State of New York, except to the
extent preempted by the Employee Retirement Income Security Act of 1974, as
amended. If any provision of the Plan shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions shall
continue to be effective.
11.11 Effective Date; Board Committee and Stockholder
Approval. This Plan shall be subject to the approval by a vote of the
stockholders of the Company at the 1993 Annual Meeting, and such stockholder
approval shall be a condition to the right of a Participant to receive any
benefits hereunder other than CAP Units and cash credited to Participants'
Accounts prior to such approval.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>PERFORMANCE COMPENSATION PLAN
<TEXT>
Exhibit 10 (a) (5)
THE BEAR STEARNS COMPANIES INC.
PERFORMANCE COMPENSATION PLAN
(Amended and Restated as of October 29, 1998)
Section 1. Purpose. The purposes of The Bear
Stearns Companies Inc. Performance Compensation Plan, as amended and
restated (the "Plan") are (i) to compensate certain Senior Managing Directors
of The Bear Stearns Companies Inc. and its subsidiaries (the "Company") on an
individual basis for significant contributions to the Company and (ii) to
stimulate the efforts of such persons by giving them a direct interest in the
performance of the Company.
Section 2. Term. The Plan shall be effective as of July 1,
1998 (the "Effective Date"), and shall be applicable for the five (5) full
fiscal years of the Company ending June 30, 2003, unless earlier terminated by
the Company pursuant to Section 9.
Section 3. Coverage. For purposes of the Plan, the term
"Participant" shall include for each fiscal year each Senior Managing Director
so designated by the Compensation Committee within 90 days following the first
day of such fiscal year.
Section 4. Base Salary.
4.1. Each Participant shall receive a salary of $200,000 per
annum ("Base Salary"). The Base Salary of the Participants may be increased from
time to time by the Compensation Committee of the Board (the "Compensation
Committee") by amendment of the Plan pursuant to Section 9.
4.2. Notwithstanding the provisions of Section 4.1 above, in
the event a Participant is not a Senior Managing Director for an entire fiscal
year, his Base Salary for such fiscal year shall be computed by multiplying such
Base Salary as computed under Section 4.1 by a fraction, the numerator of which
is the number of days in such fiscal year during which such Participant was a
Senior Managing Director and the denominator of which is the number of days in
the fiscal year. Any Base Salary shall be in addition to any base salary payable
with respect to periods during the fiscal year in which a Participant was not a
Senior Managing Director.
Section 5. Annual Bonus Pools.
5.1. For each fiscal year of the Company, each Participant
shall be entitled to receive an award of a bonus (the "Bonus"), payable from one
or more annual bonus funds (the "Annual Bonus Pools") in an amount not to exceed
the amount provided for in Section 6. A Bonus under the Plan shall be the sole
bonus payable with respect to a fiscal year to each Participant ("Full Year
Participant") who was a Senior Managing Director on the date that proportionate
shares of the Annual Bonus Pools for such fiscal year were determined by the
Compensation Committee and who remains a Senior Managing Director at all times
thereafter during such fiscal year. For each fiscal year, each Participant who
was not a Full Year Participant shall be entitled to such a Bonus, if any, for
the portion of such fiscal year not covered by the Plan, determined in
accordance with the procedures applicable to employees who are not Senior
Managing Directors, in addition to the Bonus, if any, payable pursuant to the
Plan.
5.2. For each fiscal year, the formula for calculating the
Annual Bonus Pools shall be determined by the Compensation Committee in writing,
by resolution of the Compensation Committee or other appropriate action, not
later than 90 days after the commencement of such fiscal year. Such formula
shall be based upon one or more of the following criteria, individually or in
combination, adjusted in such manner as the Compensation Committee shall
determine: (a) pre-tax or after-tax return on equity; (b) earnings per share;
(c) pre-tax or after-tax net income; (d) business unit or departmental pre-tax
or after-tax income; (e) book value per share; (f) market price per share; (g)
relative performance to peer group companies; (h) expense management; and (i)
total return to stockholders.
5.3. As a condition to the right of a Participant to receive
any Bonus under this Plan, the Compensation Committee shall first be required to
certify in writing, by resolution of the Compensation Committee or other
appropriate action, that the Bonus has been accurately determined in accordance
with the provisions of this Plan.
5.4. The Compensation Committee shall have the right to reduce
the Bonus of any Participant in its sole discretion at any time and for any
reason prior to the certification of the Bonus otherwise payable to such
Participant pursuant to Section 5.3 hereof.
5.5. The maximum amount allocable by the Compensation
Committee to the Annual Bonus Pool related to Participants who are members of
the Executive Committee in the aggregate for any fiscal year shall not exceed
$150,000,000. The maximum amount allocable to any individual Participant who is
not a member of the Executive Committee shall not exceed $15,000,000.
Section 6. Allocations.
6.1. Prior to the commencement of each fiscal year, or not
later than 90 days after the commencement of each fiscal year, the Compensation
Committee shall determine in writing, by resolution of the Compensation
Committee or other appropriate action, each Participant's proportionate share of
the Annual Bonus Pools for such fiscal year, which shall not exceed in respect
of any Participant who is a member of the Executive Committee 30% of the amount
of such Annual Bonus Pool.
6.2. Notwithstanding anything in Section 6.1 to the contrary,
any Participant who ceases to be a Senior Managing Director for any reason prior
to the end of such fiscal year shall be entitled to a Bonus computed as follows:
A Bonus first shall be computed as if such Participant had been a Senior
Managing Director for the full fiscal year, and such Bonus then shall be
multiplied by a fraction the numerator of which shall be the number of days in
the fiscal year through the date the Participant ceased to be a Senior Managing
Director and the denominator of which shall be the number of days in the fiscal
year; provided, however, that if the application of the preceding clause would
cause the total Bonuses payable under the Plan to exceed the Annual Bonus Pools,
the Bonuses payable to each Participant shall be reduced pro rata, so that the
total of all Bonuses shall equal the Annual Bonus Pools. If a Participant ceases
to be a Senior Managing Director after the end of the fiscal year in respect of
which such Bonus is payable, the amounts thereof nonetheless shall be payable to
him or his estate, as the case may be.
6.3. Except as hereinafter provided, Bonuses for a fiscal year
shall be payable as soon as practicable following the certification thereof by
the Compensation Committee for such fiscal year. In its discretion, the
Compensation Committee may authorize, prior to the final determination of
Participants' Bonuses for such fiscal year, payments on account of Bonuses
payable hereunder to one or more Participants entitled to such Bonuses, (a)
during the last month of such fiscal year, in an amount not exceeding 95% of the
aggregate amount that would be payable to such Participant or Participants
hereunder as determined by the Controller or Chief Accounting Officer of the
Company (so long as he is not a Participant) on the basis of his good faith
estimate, (b) during the last ten calendar days of such fiscal year or after the
end of such fiscal year, in an amount not to exceed 98% of the aggregate amount
that would be payable to such Participant or Participants hereunder as
determined by the Controller or Chief Accounting Officer of the Company (so long
as he is not a Participant) on the basis of his good faith estimate, and (c) at
any time during such fiscal year or after the end of such fiscal year to a
Participant who ceases to be a Senior Managing Director for any reason prior to
the end of such fiscal year. Within the limitations set forth in the preceding
sentence, the Compensation Committee may authorize one or more such "on account"
payments, but the aggregate amount of any such on account payments shall not
exceed the aggregate amount permitted to be paid pursuant to the Plan with
respect to the same fiscal year. In connection with any such "on account"
payments, the Compensation Committee shall require an undertaking or other
assurance by or on behalf of the Participant receiving such payment to repay the
Company the amount, if any, by which such "on account" payment exceeds the
actual amount determined to be due to such person under the Plan in respect of
such fiscal year. Any "on account" payments received prior to the end of a
fiscal year shall be discounted to reasonably reflect the time value of money
from the date of payment to the date 30 days after the end of the fiscal year.
6.4. The Compensation Committee may determine that payment of
a portion of the Bonuses shall be deferred, the periods of such deferrals and
any interest, not to exceed a reasonable rate, to be paid in respect of deferred
payments. The Compensation Committee may also define such other conditions of
payments of Bonuses as it may deem desirable in carrying out the purposes of the
Plan.
6.5. In any fiscal year, any balance in the Annual Bonus Pools
for any reason, including the limitation contained in Section 6.1, the
forfeiture of a Bonus under Section 6.2, the reduction of a Bonus under Section
5.4, or otherwise, shall not be distributed to other Participants and shall not
be carried forward or be available for distribution as Bonuses under the Plan in
a future year or years.
Section 7. Administration and Interpretation. The Plan shall
be administered by the Compensation Committee, which shall have the sole
authority to interpret and to make rules and regulations for the administration
of the Plan. The Compensation Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan in the manner and to the
extent the Compensation Committee deems necessary or desirable to carry it into
effect. Any decision of the Compensation Committee in the interpretation and
administration of the Plan, as described herein, shall lie within its sole and
absolute discretion and shall be final, conclusive and binding on all parties
concerned. No member of the Compensation Committee and no officer of the Company
shall be liable for anything done or omitted to be done by him or her, by any
other member of the Compensation Committee or by any officer of the Company in
connection with the performance of duties under the Plan, except for his or her
own willful misconduct or as expressly provided by statute. The Compensation
Committee may request advice or assistance or employ such persons (including,
without limitation, legal counsel and accountants) as it deems necessary for the
proper administration of the Plan.
Section 8. Administrative Expenses. Any expense incurred in
the administration of the Plan shall be borne by the Company out of its general
funds and not charged against the Annual Bonus Pools, except insofar as such
expenses shall be taken into account in determining the components of the Annual
Bonus Pools hereunder.
Section 9. Amendment or Termination. The Compensation
Committee of the Company may from time to time amend the Plan in any respect or
terminate the Plan in whole or in part, provided that no such action shall
retroactively impair or otherwise adversely affect the rights of any Participant
to benefits under the Plan which have accrued prior to the date of such action.
Section 10. No Assignment. The rights hereunder, including
without limitation rights to receive a Base Salary or Bonus, shall not be sold,
assigned, transferred, encumbered or hypothecated by an employee of the Company
(except by testamentary disposition or intestate succession), and, during the
lifetime of any recipient, any payment of Base Salary or a Bonus shall be
payable only to such recipient.
Section 11. The Company. For purposes of this Plan, the
"Company" shall include the successors and assigns of the Company, and this Plan
shall be binding on any corporation or other person with which the Company is
merged or consolidated, or which acquires substantially all of the assets of the
Company, or which otherwise succeeds to its business.
Section 12. Stockholder Approval. This Plan shall be subject
to approval by the affirmative vote of a majority of the shares cast in a
separate vote of the stockholders of the Company at the 1998 Annual Meeting of
Stockholders, and such stockholder approval shall be a condition to the right of
a Participant to receive any Bonus hereunder.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>4
<DESCRIPTION>STATEMENT RE COMPUTATION OF SHARE EARNINGS
<TEXT>
<TABLE>
EXHIBIT 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<CAPTION>
Three-Months Ended Six-Months Ended
--------------------------------------- ------------------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
--------------------------------------- ------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Weighted average common
and common equivalent
shares outstanding: (1)
Average Common Stock
outstanding 118,196 123,413 118,833 123,882
Average Common Stock
equivalents:
Common Stock issuable
under employee
benefit plans 497 489 490 486
Common Stock issuable
assuming conversion
of CAP Units 39,663 36,027 39,663 36,027
------------------ ------------------ ------------------ --------------
Total weighted average
common and common
equivalent shares
outstanding 158,356 159,929 158,986 160,395
================== ================== ================== ==============
Net income
$ 135,920 $ 160,222 $ 200,023 $ 321,840
Preferred Stock dividend
requirements (9,778) (5,923) (19,873) (11,849)
Income adjustment
(net of tax) applicable
to deferred compensation
arrangements 6,777 15,223 13,555 28,755
------------------ ------------------ ------------------ --------------
Adjusted net income $ 132,919 $ 169,522 $ 193,705 $ 338,746
================== ================== ================== ==============
Earnings per share (1) $ 0.84 $ 1.06 $ 1.22 $ 2.11
================== ================== ================== ==============
(1) Adjusted for the 5% stock dividend declared on January 20, 1999.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>5
<DESCRIPTION>COMPUTATION OF RATIOS
<TEXT>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
(In thousands, except for ratio)
<CAPTION>
(Unaudited) (Unaudited)
Six Months Six Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended Ended
December 31, 1998 December 31, 1997 June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before taxes
on income $ 300,787 $ 526,743 $ 1,063,492 $ 1,013,690 $ 834,926 $ 388,082 $ 642,799
------- ------- --------- --------- ------- ------- -------
Add: Fixed Charges
Interest 1,964,638 1,736,219 3,638,513 2,551,364 1,981,171 1,678,515 1,023,866
Interest factor
in rents 15,336 14,790 30,130 26,516 25,672 24,594 21,772
------ ------ ------ ------ ------ ------ ------
Total fixed charges 1,979,974 1,751,009 3,668,643 2,577,880 2,006,843 1,703,109 1,045,638
Earnings before fixed
charges and taxes on
income $2,280,761 $ 2,277,752 $ 4,732,135 $ 3,591,570 $2,841,769 $ 2,091,191 $ 1,688,437
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to
fixed charges 1.2 1.3 1.3 1.4 1.4 1.2 1.6
=== === === === === === ===
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<DESCRIPTION>FDS
<TEXT>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited Consolidated Statement of Financial Condition at December 31,
1998 and the unaudited Consolidated Statement of Income for the six-months
ended December 31, 1998, which are contained in the body of the
accompanying Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,664,077
<RECEIVABLES> 13,233,074
<SECURITIES-RESALE> 33,060,960
<SECURITIES-BORROWED> 54,592,219
<INSTRUMENTS-OWNED> 41,067,854
<PP&E> 474,477
<TOTAL-ASSETS> 151,130,499
<SHORT-TERM> 10,020,298
<PAYABLES> 50,924,099
<REPOS-SOLD> 50,005,971
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 16,410,663
<LONG-TERM> 13,843,516
<PREFERRED-MANDATORY> 0
<PREFERRED> 800,000
<COMMON> 167,785
<OTHER-SE> 3,398,818
<TOTAL-LIABILITY-AND-EQUITY> 151,130,499
<TRADING-REVENUE> 616,051
<INTEREST-DIVIDENDS> 2,286,519
<COMMISSIONS> 495,476
<INVESTMENT-BANKING-REVENUES> 285,440
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1,964,638
<COMPENSATION> 958,225
<INCOME-PRETAX> 300,787
<INCOME-PRE-EXTRAORDINARY> 300,787
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,023
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CA | https://www.sec.gov/Archives/edgar/data/356028/0000356028-99-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000356028-99-000002.txt : 19990205
<SEC-HEADER>0000356028-99-000002.hdr.sgml : 19990205
ACCESSION NUMBER: 0000356028-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990204
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COMPUTER ASSOCIATES INTERNATIONAL INC
CENTRAL INDEX KEY: 0000356028
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 132857434
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09247
FILM NUMBER: 99521539
BUSINESS ADDRESS:
STREET 1: ONE COMPUTER ASSOCIATES PLAZA
CITY: ISLANDIA
STATE: NY
ZIP: 11788
BUSINESS PHONE: 5163425224
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1998
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended from _____ to _____
Commission File Number 1-9247
Computer Associates International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2857434
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Computer Associates Plaza
Islandia, New York 11788-7000
(Address of principal executive offices) (Zip Code)
(516) 342-5224
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest
practicable date:
Title of Class Shares Outstanding
Common Stock as of January 29, 1999
par value $.10 per share 538,748,495
<PAGE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information: Page No.
Item 1. Consolidated Condensed Balance Sheets -
December 31, 1998 and March 31, 1998 1
Consolidated Statements of Income -
Three Months Ended December 31, 1998 and 1997 2
Consolidated Statements of Income -
Nine Months Ended December 31, 1998 and 1997 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended December 31, 1998 and 1997 4
Notes to Consolidated Condensed Financial Statement 5
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. Other Information:
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE> 1
<TABLE>
Part I. FINANCIAL INFORMATION
Item 1:
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 219 $ 251
Marketable securities 106 59
Trade and installment accounts receivable 1,789 1,859
Inventories and other current assets 80 86
----------- --------
TOTAL CURRENT ASSETS 2,194 2,255
Installment accounts receivable, due after one year 2,941 2,490
Property and equipment 548 459
Purchased software products 214 289
Excess of cost over net assets acquired 1,240 1,099
Investments and other noncurrent assets 141 114
----------- --------
TOTAL ASSETS $ 7,278 $ 6,706
=========== ========
LIABILITIES AND STOCKHOLDERS EQUITY:
Loans payable and current portion of long term debt $ 142 $ 571
Other current liabilities 1,160 1,305
Long-term debt 2,030 1,027
Deferred income taxes 1,044 952
Deferred maintenance revenue 344 370
Stockholders equity 2,558 2,481
----------- ---------
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $ 7,278 $ 6,706
=========== =========
<FN>
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE> 2
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
<CAPTION>
For the Three Months
Ended December 31,
--------------------
<S> <C> <C>
1998 1997
---- ----
Product revenue and other related income $ 1,176 $ 1,056
Maintenance fees 185 183
------- -------
TOTAL REVENUE 1,361 1,239
Costs and expenses:
Selling, marketing and administrative 510 432
Product development and enhancements 105 90
Commissions and royalties 68 61
Depreciation and amortization 78 83
Interest expense - net 33 29
------- -------
TOTAL COSTS AND EXPENSES 794 695
------- -------
Income before income taxes 567 544
Provision for income taxes 212 204
------- -------
NET INCOME $ 355 $ 340
------- -------
BASIC EARNINGS PER SHARE $ .66 $ .62
------- -------
Basic weighted average shares used in
computation* 538 546
DILUTED EARNINGS PER SHARE $ .64 $ .60
------- -------
Diluted weighted average shares used
computation* 554 568
<FN>
* Shares and per share amounts adjusted for a three-for-two stock split
effective November 5, 1997.
<FN>
See Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE> 3
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
For the Nine Months
Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Product revenue and other related income $ 3,073 $ 2,707
Maintenance fees 551 545
------- -------
TOTAL REVENUE 3,624 3,252
Costs and expenses:
Selling, marketing and administrative 1,454 1,242
Product development and enhancements 307 269
Commissions and royalties 183 160
Depreciation and amortization 241 263
Interest expense - net 91 90
1995 Stock Plan charge 1,071 -
------- -------
TOTAL COSTS AND EXPENSES 3,347 2,024
------- -------
Income before income taxes 277 1,228
Provision for income taxes 109 461
------- -------
NET INCOME $ 168 $ 767
------- -------
BASIC EARNINGS PER SHARE $ .31 $ 1.41
------- -------
Basic weighted average shares used
computation* 548 546
DILUTED EARNINGS PER SHARE $ .30 $ 1.36
------- -------
Diluted weighted average shares used in
computation* 565 566
<FN>
* Shares and per share amounts adjusted for a three-for-two stock split
effective November 5, 1997.
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<PAGE> 4
<TABLE>
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
For the Nine Months
Ended December 31,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 168 $ 767
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 241 263
Provision for deferred income taxes 100 180
Compensation expense related to stock and
pension plans 776 21
Increase in noncurrent installment accounts
receivable (415) (281)
Decrease in deferred maintenance revenue (31) (6)
Gain on sale of property and equipment (14) -
Changes in other operating assets and liabilities,
excludes effects of acquisitions (127) (300)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 698 644
INVESTING ACTIVITIES:
Acquisitions, primarily purchased software, marketing
rights and intangibles (217) (39)
Purchase of property and equipment (142) (61)
Proceeds from sale of property and equipment 38 -
Increase in current marketable securities (47) (4)
Capitalized development costs (21) (15)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (389) (119)
FINANCING ACTIVITIES:
Debt borrowings (repayments) - net 567 (406)
Dividends paid (23) (18)
Exercise of common stock options/other 31 55
Purchases of treasury stock (920) (116)
------ ------
NET CASH USED IN FINANCING ACTIVITIES (345) (485)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
BEFORE EFFECT OF EXCHANGE RATE CHANGES ON CASH (36) 40
Effect of exchange rate changes on cash 4 (8)
------ ------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32) 32
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 251 143
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 219 $ 175
====== ======
<FN>
See notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 5
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended December 31, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in Computer
Associates International, Inc.s (the Registrant or the Company) Annual Report
on Form 10-K for the fiscal year ended March 31, 1998.
Cash Dividends: In December 1998, the Companys Board of Directors declared its
regular, semi-annual cash dividend of $.04 per share. The dividend was paid on
January 7, 1999 to stockholders of record on December 28, 1998.
Statements of Cash Flows: For the nine months ended December 31, 1998 and
1997,interest payments were $98 million and $99 million, respectively, and
income taxes paid were $171 million and $285 million, respectively.
Net Income per Share: The Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. SFAS No. 128 requires the Company to present basic and diluted earnings
per share (EPS) on the face of the income statement. Basic earnings per share
is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the sum of the weighted-average number of common shares
outstanding for the period end, plus the assumed exercise of all dilutive
securities, such as stock options.
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Earnings $ 355 $ 340 $ 168 $ 767
======== ======== ======== ========
Diluted Earnings Per Share
Weighted average shares
outstanding and common share
equivalents 554 568 565 566
Diluted Earnings Per Share $ .64 $ .60 $ .30 $ 1.36
======== ======== ======== ========
Diluted Share Computation:
Average common shares
outstanding 538 546 548 546
Average common share
equivalents net 16 22 17 20
-------- -------- -------- --------
Weighted average shares
Outstanding and common share
equivalents 554 568 565 566
======== ======== ======== ========
</TABLE>
<PAGE> 6
COMPUTER ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130,
Reporting Comprehensive Income, which was adopted by the Company in fiscal year
1999. SFAS No. 130 establishes new rules for reporting and displaying
comprehensive income and its components; however, the adoption has no impact on
the Companys net income or shareholders equity. Comprehensive Income includes
foreign currency translation adjustments and unrealized gains or losses on
the Companys available for sale securities which prior to adoption were
reported separately in shareholders equity. The components of comprehensive
income, net of related tax, for the three month and nine month periods ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In millions)
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
-------------------- -------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $ 355 $ 340 $ 168 $ 767
Foreign Currency Translation
(Losses) Gains (5) (20) 29 (46)
------- ------- ------- -------
Total Comprehensive Income $ 350 $ 320 $ 197 $ 721
======= ======= ======= =======
</TABLE>
Software Revenue Recognition: In October 1997, the Accounting Standards
Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2 Software
Revenue Recognition, as amended in 1998 by SOP 98-4 and further amended more
recently by SOP 98-9. These SOPs provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The Company is currently evaluating the requirements of the SOPs which may have
a material impact on the Companys revenue recognition policies effective for the
quarter ending June 30, 1999 and beyond. Such changes in the Companys
operational and revenue recognition practices including, but not limited to
changes in the period over which revenue is recognized up to and including
recognition of revenue over the contract term may have a material adverse
effect on the Companys reported revenue, increase administrative costs,
or otherwise adversely modify existing operations.
NOTE B - THE 1995 KEY EMPLOYEE STOCK OWNERSHIP PLAN
Under the 1995 Key Employee Stock Ownership Plan (1995 Plan), if the closing
price of the Companys common stock on the New York Stock Exchange exceeded
$53.33 for 60 trading days within any twelve month period, Additional Grants
(as defined in the 1995 Plan) of 13.5 million shares, plus 6.75 million shares
from an Initial Grant (as defined in the 1995 Plan), or a total of 20.25
million shares, to three key executives would vest and no longer be subject to
forfeiture. However, the 20.25 million shares would continue to be
subject to significant limitations on transfer for up to seven years following
vesting. On May 21, 1998, the closing price of the Companys common
stock exceeded $53.33 for the sixtieth trading day within the twelve month
period ending May 21, 1998. Subsequent to May 21, 1998, the Compensation
Committee of the Companys Board of Directors reviewed the performance
objectives of the 1995 Plan and certified the vesting of an aggregate of 20.25
million shares to the three key executives. As a result, in the first quarter
of fiscal year 1999, the Company recorded a one time charge of $1,071
million ($675 million after tax). The executives elected to have a portion of
the vested shares withheld for tax purposes.
<PAGE> 7
Item 2:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the companys future prospects are
forward looking statements under the federal securities laws. There can be no
assurances that future results will be achieved and actual results could differ
materially from forecasts and estimates. Important factors that could cause
actual results to differ materially are discussed below in the section Results
of Operations.
RESULTS OF OPERATIONS
Revenue:
Total revenue for the quarter ended December 31, 1998 increased 10%, or $122
million, over the prior years comparable quarter. The increase was attributable
to growth in the client/server business which accounted for approximately 46%
of the Companys overall revenue for the third quarter. The client/server growth
was led by Unicenter TNG (The Next Generation), a family of integrated business
solutions for monitoring and administering systems management across multi
platform environments, which accounted for approximately 24% of total revenue
for the third quarter. Professional services grew by 97% or $38 million over
the prior year. The Company intends to increase the level of professional
services provided to clients through internal growth as well as acquisitions of
services companies. Total North American revenue for the third quarter grew 5%
over the prior years third quarter. This resulted from lower mainframe software
sales offset by continued growth in client/server product sales. In the
current quarter, North American sales represented 64% of revenue compared to
67% of revenue one year ago. The impact of foreign currencies versus the US
dollar did not have a material effect on revenue in the third quarter.
Maintenance revenues remained essentially unchanged from last years comparable
quarter. Additional maintenance revenue from prior year license arrangements
was offset by the ongoing trend of site consolidations and expanding
client/server revenues, which yield lower maintenance. Price changes did not
have a material impact in this quarter or the prior years third quarter.
On a year to date basis, total revenue increased 11% or $372 million from the
prior year. The increase was primarily attributable to growth in the
client/server business which accounted for 47% of the Companys overall revenue
year to date. Year to date client/server and professional services revenue
increased 30% and 77%, or $399 and $85 million, respectively, over the prior
year. Unicenter TNG revenue accounted for over 25% of total revenue year to
date. Total North American revenue for the nine months ended December 31,
1998 grew 10% over the prior years comparable period. On a year to date basis,
North American sales represented 65% of revenue for fiscal year 1999 and 66% of
revenue for fiscal year 1998. On a year to date basis, international
revenue increased by nearly $160 million, or 15%, over the prior year. In
addition, the effect of foreign exchange rates on the US dollar versus most
currencies decreased revenue by $33 million for the current year. Maintenance
revenues remained essentially unchanged year to date. Price changes did not
have a material impact year to date in fiscal year 1999 or in the comparable
period in fiscal year 1998.
Costs and Expenses:
Selling, marketing and administrative expenses as a percentage of total revenue
for the third quarter increased to 37% from 35% the prior year. The increase
was largely attributable to an overall increase in personnel expense. The
Company is continuing its ongoing effort to expand its Global Professional
Services division and worldwide sales organization. Marketing costs related
to new product introductions including the Enterprise Edition and Workgroup
Solutions also contributed to the increase. The Enterprise Edition products
<PAGE> 8
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
are the Companys state of the art mid market solutions addressing security,
network management, asset management, application development, information
management, and E commerce. The Workgroup Editions provide the same solutions
as the Enterprise Editions with a focus on smaller computing environments. Net
research and development expenditures increased $15 million, or 16%, for the
third quarter compared to last years third quarter. There was continued emphasis
on adapting and enhancing products for the client/server environment, in
particular Unicenter TNG, Jasmine, Opal, the Enterprise and Workgroup Solutions,
as well as broadening of the Companys Internet/Intranet product offerings.
Commissions and royalties as a percentage of revenue were 5% for the third
quarter for both fiscal year 1999 and fiscal year 1998. Depreciation and
amortization expense in the third quarter decreased $5 million from the
comparable quarter in the prior year. The decrease was primarily due to
scheduled reductions in the amortization associated with The ASK Group, Inc.,
Legent Corporation, and Cheyenne Software, Inc. acquisitions, partially offset
by smaller acquisitions in the current year. Net interest expense increased $4
million, or 14%, for the third quarter compared to last years third quarter.
The additional interest expense related to the April 1998 issuance of $1.75
billion of unsecured senior notes, reduced by the repayment of $1.2 billion
under the Companys credit facilities, was offset by the interest earned on the
corresponding increase in cash and marketable securities.
On a year to date basis, selling, marketing and administrative expenses as a
percentage of total revenue increased to 40% from 38% the prior year. The
increase was largely attributable to an overall increase in personnel expense
as well as major promotional events including: CA-World, the Companys major
annual user conference; the bi annual sales kickoff, an assembly of the
Companys sales force to inaugurate the new years sales plan; and increased
marketing costs related to new product introductions including the Enterprise
Edition and Workgroup Solutions. Net research and development expenditures
increased $38 million, or 14%, year to date. Continued emphasis on adapting and
enhancing products for the client/server environment as well as broadening of
the Companys Internet/Intranet product offerings were largely responsible for
the increase. Commissions and royalties as a percentage of revenue were 5%
year to date for both fiscal year 1999 and fiscal year 1998. On a year to date
basis, depreciation and amortization expense decreased by $22 million from the
prior year. The decrease was primarily due to scheduled reductions in the
amortization associated with The ASK Group, Inc., Legent Corporation, and
Cheyenne Software, Inc. acquisitions. Net interest expense remained unchanged
year to date from last years comparable period.
Operating Margins:
The pretax income of $567 million for the third quarter is an increase of 4%,
or $23 million, over the third quarter in the prior year. The year to date net
income, excluding the one time charge of $1,071 million associated with the
vesting of 20.25 million shares under the 1995 Key Employee Stock Ownership
Plan, was $842 million, compared to net income of $767 million in the prior
year, an increase of $75 million, or 10%.
The Companys consolidated effective tax rate for the December 1998 quarter and
the prior years December quarter was 37.5%. On a year to date basis, the
consolidated effective tax rate, including the current year charge, was 39.4%
compared with 37.5% for the prior year. The higher current year effective tax
rate is attributable to the charge in the current year. Without the charge,
the current years effective rate would have been 37.5%.
<PAGE> 9
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operations:
In fiscal years 1997 and 1996, the Company incurred charges for the write-off
Of purchased research and development technology related to the Cheyenne and
Legent acquisitions. In both valuations, the Income Approach was utilized.
This approach focuses on the income producing capability of the asset and the
present value of the net benefit to be received over the life of the property.
The revenues generated are offset by the corresponding expenses including all
operating, research and development, and income tax expenses. The Cheyenne
products consist of network data storage, security and communications software
across multiple standalone, as well as heterogeneous computer environments and
Legent is comprised of many systems management and database products. To date,
the vast majority of the projects in the aggregate have not varied materially
from original projections. Consistent with original projections, the Company
expects a seven year asset life, however,more rapid technological change, market
acceptance of competing technologies, and other internal and external factors
may negatively affect the total net benefit obtained from the technology
acquired.
Risks and Uncertainties:
The Companys products are designed to improve the productivity and efficiency
of its clients information processing resources. Accordingly, in a
recessionary environment, the Companys products are often a reasonable
economic alternative to customers faced with the prospect of incurring
expenditures to increase their existing information processing resources.
However, a general or regional slowdown in world economies could adversely
affect the Companys operations.
The effects of the Asian economic turmoil on our multinational clients and its
potentially adverse impact on our near term business is a concern. This,
coupled with deferred software purchasing decisions as clients deal with their
year 2000 projects, as well as mainframe hardware transition issues, may impact
revenue and earnings growth.
The Company has traditionally reported lower profit margins in the first two
quarters of each fiscal year than those experienced in the third and fourth
quarters. As part of the annual budget process, management establishes higher
discretionary expense levels in relation to projected revenue for the first
half of the year. Historically, the Companys combined third and fourth quarter
revenues have been greater than the first half of the year, as these two
quarters coincide with clients calendar year budget periods and culmination of
the Companys annual sales plan. These historically higher second half revenues
have resulted in significantly higher profit margins since total expenses have
not increased in proportion to revenue. However, past financial performance
should not be considered to be a reliable indicator of future performance.
The Companys future operating results may be affected by a number of other
factors, including, but not limited to: the adequacy of the Companys internal
administrative systems to efficiently process transactions and store and
retrieve data subsequent to the year 2000; the significant percentage of the
Companys quarterly sales recorded in the last few days of the quarter, making
financial predictions especially difficult and raising a substantial risk of
variance in actual results; the Companys increasing reliance on a single family
of products for a material portion of its sales; market acceptance of competing
technologies; the availability and cost of new solutions; delays in delivery of
new products or features; uncertainty of customer acceptance; the ability to
recruit and retain qualified personnel; the ability to incorporate changes to
its business application products to conform to the new, common European
currency known as the Euro; the Companys ability to successfully maintain or
<PAGE> 10
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
increase market share in its core business while expanding into other and new
markets such as professional services; the strength of its distribution
channels; the ability either internally or through third party service
providers to support client implementation of the Companys products; the
Companys ability to manage fixed and variable expense growth relative to
revenue growth; the outcome of litigation to which the Company is a party; the
Companys ability to effectively integrate acquired products and operations;
the assimilation of business or technology acquisitions; fluctuations in
foreign currency exchange rates; the volatility of the international
marketplace, including the recent Asian and Latin American turmoil; and other
risks described in filings with the Securities and Exchange Commission.
Within Europe, the European Economic and Monetary Union (EMU) introduced a new
currency, the Euro, on January 1, 1999, initially available for currency
trading and noncash (banking) transactions. The existing local currencies
will remain legal tender through January 1, 2002. The Company has conducted
risk assessments and began implementing corrective actions to ensure
preparedness for the introduction of the Euro. Because of the staggered
introduction of the Euro regarding noncash and cash transactions, the Company
has developed a plan to address its accounting and business systems first.
Compliance will be achieved primarily through upgrading administrative
systems. The Company does not expect to experience significant operational
disruptions or incur costs which could materially affect the Companys
liquidity or capital resources.
Year 2000:
The Company may experience future uncertainties regarding year 2000 compliance
of its products. The Company has designed and tested the vast majority of its
recent product offerings to be year 2000 compliant. However, there is
currently a small minority of the product offerings that have not been updated
to meet year 2000 compliance specifications. The Company continues to update
and test its product offerings for year 2000 compliance. Such costs are
included in net research and development expenses. The Company has
publicly identified any products that will not be updated to be year 2000
compliant and has been encouraging clients using these products to migrate to
compliant versions. It is possible that the Company may experience increased
expense levels addressing migration issues for such customers. There can be no
assurance that all of the Companys products will be year 2000 compliant prior
to January 1, 2000 (except those the Company previously identified will not be
year 2000 compliant) nor can there be assurances that the Companys currently
compliant products do not contain undetected problems associated with year 2000
compliance. Such problems may result in litigation and/or increased expenses
negatively affecting future operating results.
The Company recognizes the significance of the year 2000 problem as it relates
to our internal systems and understands that the impact extends beyond
traditional hardware and software to automated facility systems and third
parties. The Company has created and implemented an overall plan to make its
internal financial and administrative systems year 2000 ready by June 1999.
With regard to facility related systems (phone, voicemail, security systems,
etc.), the Company internally conducted assessment audits and has sent
questionnaires to vendors and service providers to confirm year 2000 readiness.
As part of its contingency planning efforts, the Company is identifying
alternative strategies, when necessary, if significant exposures are
identified. The Company expects substantial completion of year 2000 readiness
preparations by June 1999 and to continue comprehensive testing through
calendar 1999. The total cost of preparing internal systems to be year 2000
compliant is not expected to be material to the Companys operations,
liquidity, or capital resources. Total expenditures, excluding personnel
costs of existing staff, related to internal systems year 2000 readiness is
expected to be less than $20 million. Such expenses commenced in 1996 and are
<PAGE> 11
Item 2: (Continued)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
projected to continue through calendar 1999. However, there can be no
assurances that the Company will not experience significant unanticipated
negative performance and/or flaws in the technology used in its internal
systems. The Company is in the process of completing its contingency plan for
potential hardware and software failures.
Liquidity and capital resources:
During the third quarter, the Companys cash, cash equivalents, and marketable
securities decreased by approximately $136 million. The decrease was primarily
attributable to the purchase of nearly 11 million shares of the Companys stock
under its open market repurchase programs, various professional service and
product acquisitions, and progress payments for the expansion and renovation
projects at the Islandia, NY World Headquarters and other facilities. The
decrease was partially offset by cash provided from operations of $467
million, a 46% increase from the quarter ended September 1998.
On a year to date basis, cash provided by operations totaled $698 million,
After reflecting a $318 million withholding tax payment made in lieu of shares
issued to certain executives under the 1995 Key Employee Stock Ownership Plan.
Year to date cash generated from operations, excluding this withholding tax
payment, totaled $1,016 million, an increase of 58% from the prior year. This
increase is primarily attributable to accelerated cash collections of trade
accounts receivable as well as lower taxes paid associated with the tax benefit
received for the one time charge recorded in the first quarter of fiscal year
1999 related to the 1995 Key Employee Stock Ownership Plan.
On December 31, 1998, total debt outstanding consisted primarily of $1.75
billion of registered unsecured Senior Notes issued April 24, 1998 and $320
million of unsecured Senior Notes issued April 1, 1996. At December 31,
1998, the Company had no drawings outstanding under its $2.6 billion credit
facility.
At December 31, 1998, the cumulative number of shares purchased under the
Companys various open market Common Stock repurchase programs was approximately
146.6 million shares. The remaining number of shares available for repurchase
under these programs at December 31, 1998 was approximately 53.4 million. This
amount includes the authorization to repurchase an additional 36.875 million
shares approved by the Companys Board of Directors in October 1998.
The Company is proceeding with construction of its European Headquarters in the
United Kingdom and its various expansion and renovation projects at its World
Headquarters in Islandia, New York. These projects will be completed over the
next 10 months and will result in total cashflow obligations of $225 million.
In addition, various capital resource requirements as of December 31, 1998
consisted of lease obligations for office space, computer equipment, mortgage
and loan obligations and amounts due as a result of product and company
acquisitions.
The Company anticipates that existing cash, cash equivalents, short-term
marketable securities, the availability of borrowings under committed and
uncommitted credit lines, as well as cash generated from operations, will be
sufficient to meet ongoing cash requirements.
<PAGE> 12
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and certain of its officers are defendants in a number of
shareholder class action lawsuits alleging that a class consisting of all
persons who purchased the Companys stock during the period January 20, 1998
until July 22, 1998 were harmed by misleading statements, representations, and
omissions regarding the Companys future financial performance. These cases
have been consolidated into a single action (the Shareholder Action) in the
United States District Court for the Eastern District of New York (NY Federal
Court). In addition, three derivative actions alleging similar facts were
brought in the NY Federal Court. An additional derivative action,
alleging that the Company issued 14.25 million more shares than were authorized
under the 1995 Key Employee Stock Ownership Plan (the 1995 Plan), was also
filed in the NY Federal Court. In all but one of these derivative actions,
all of the Companys directors were named as defendants. All of these
derivative actions have been consolidated into a single action (the Derivative
Action) in the NY Federal Court. The plaintiffs are expected to file an
amended complaint in both the Shareholder Action and the Derivative Action.
Lastly, a derivative action was filed in the Chancery Court in Delaware (the
Delaware Action) alleging that 9.5 million more shares were issued than were
authorized under the 1995 Plan. The Company and its directors have filed a
motion to dismiss the Delaware Action and the plaintiff has moved for summary
judgment. Although the ultimate outcome and liability, if any, cannot be
determined, management, after consultation and review with counsel, believes
that the facts in each of the actions do not support the plaintiffs claims and
that the Company and its officers and directors have meritorious defenses.
<PAGE> 13
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
3.(i)(a) Restated Certificate of Incorporation
dated February 3, 1999.
3.(ii)(a) Registrants By Laws, as amended,
effective January 19, 1999.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Dated: February 3, 1999 By: /s/Sanjay Kumar
---------------------------
Sanjay Kumar, President
and Chief Operating Officer
Dated: February 3, 1999 By: /s/Ira Zar
---------------------------
Ira Zar
Sr. Vice President Finance
Chief Financial and
Accounting Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(I)
<SEQUENCE>2
<TEXT>
RESTATED CERTIFICATE OF INCORPORATION
OF
COMPUTER ASSOCIATES INTERNATIONAL, INC.
Under Section 245
of the Delaware General Corporation Law
Computer Associates International, Inc., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. That the name of the corporation is Computer Associates International, Inc.
and the name under which the corporation was originally incorporated was
Computer Associates Incorporated.
2. That the original Certificate of Incorporation of the corporation was
filed with the Delaware Secretary of State, on the 26th day of March, 1974 and
that said Certificate of Incorporation was restated by the filing of a Restated
Certificate of Incorporation with the Delaware Secretary of State on October
23, 1981.
3. That this restatement of the Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Section 245 of the
General Corporation Law of the State of Delaware and that this Restated
Certificate of Incorporation only restates and integrates (including the
Certificate of Designation of Series One Junior Participating Preferred Stock,
Class A as filed with the Delaware Secretary of State on June 26, 1991) and
does not further amend the provisions of the corporations Restated Certificate
of Incorporation as theretofore restated, amended or supplemented, and that
there is no discrepancy between those provisions and the provisions of this
Restated Certificate of Incorporation.
4. That the text of the Restated Certificate of Incorporation of said
Computer Associates International, Inc., as heretofore amended, is hereby
restated, without further amendment or change, to read in its entirety as
follows:
CERTIFICATE OF INCORPORATION
OF
COMPUTER ASSOCIATES INTERNATIONAL, INC.
<PAGE> 2
FIRST: The name of the corporation (hereinafter called the "corporation")
is COMPUTER ASSOCIATES INTERNATIONAL, INC.
SECOND: The address, including street, number, city, and county, of
the registered office of the corporation in the State of Delaware is 1013
Centre Road, New Castle County, Wilmington, Delaware 19805, and the name of the
registered agent of the corporation in the State of Delaware at such address is
United States Corporation Company.
THIRD: The nature of the business and of the purposes to be conducted
and promoted by the corporation, which shall be in addition to the authority of
the corporation to conduct any lawful business, to promote any lawful purpose,
and to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware, is as
follows:
To provide services, facilities, concepts, programs, manuals and
equipment of any and all kinds in the fields of electronic data processing
and the sales, licensing, franchising and any other disposition of computer
hardware, software, peripherals and related supplies, equipment and
facilities.To purchase, receive, take by grant, gift, devise, bequest or
otherwise, lease,or otherwise acquire, own, hold, improve, employ, use and
otherwise deal in and with real or personal property, or any interest therein,
wherever situated, and to sell, convey, lease, exchange, transfer or otherwise
dispose of, or mortgage or pledge, all or any of its property and assets, or
any interest therein, wherever situated.
To take, lease, purchase or otherwise acquire, and to own, use,
hold, sell, convey, exchange, lease, mortgage, work, clear, improve,
develop, divide, and otherwise handle, manage, operate, deal in and
dispose of real estate, real property, lands, multiple-dwelling structures,
houses, buildings and other works and any interest or right therein; to
take, lease, purchase or otherwise acquire, and to own, use, hold, sell,
convey, exchange, hire, lease, pledge, mortgage, and otherwise handle,
and deal in and dispose of, as principal, agent, broker, and in any lawful
capacity, such personal property, chattels, chattels real, rights,
easements, privileges, choses in action, notes, bonds, mortgages, and
securities as may lawfully be acquired, held, or disposed of; and to
acquire, purchase, sell, assign, transfer, dispose of, and generally deal in
and with, as principal, agent, broker, and in any lawful capacity,
mortgages and other interests in real, personal, and mixed properties.
To carry on a general mercantile, industrial, investing, and trading
business in all its branches; to devise, invent, manufacture, fabricate,
assemble, install, service, maintain, alter, buy, sell, import, export,
<PAGE> 3
license as licensor or licensee, lease as lessor or lessee, distribute, job,
enter into, negotiate, execute, acquire, and assign contracts in respect of,
acquire, receive, grant, and assign licensing arrangements, options,
franchises, and other rights in respect of, and generally deal in and with,
at wholesale and retail, as principal, and as sales, business, special, or
general agent, representative, broker, factor, merchant, distributor,
jobber, advisor, and in any other lawful capacity, goods, wares,
merchandise, commodities, and unimproved, improved, finished,
processed, and other real, personal, and mixed property of any and all
kinds, together with the components, resultants, and by-products
thereof.
To apply for, register, obtain, purchase, lease, take licenses in
respect of or otherwise acquire, and to hold, own, use, operate, develop, enjoy,
turn to account, grant licenses and immunities in respect of,
manufacture under and to introduce, sell, assign, mortgage, pledge or
otherwise dispose of, and, in any manner deal with and contract with
reference to:
(a) inventions, devices, formulas, processes and
improvements and modifications thereof;
(b) letters patent, patent rights, patented processes,
copyrights, designs, and similar rights, trade-marks, trade names,
trade symbols and other indications of origin and ownership granted
by or recognized under the laws of the United States of America, the
District of Columbia, any state or subdivision thereof, and any
commonwealth, territory, possession, dependency, colony,
possession, agency or instrumentality of the United States of
America and of any foreign country, and all rights connected
therewith or appertaining thereunto;
(c) franchises, licenses, grants, and concessions.
To guarantee, purchase, take, receive, subscribe for, and otherwise
acquire, own, hold, use, and otherwise employ, sell, lease, exchange,
transfer, and otherwise dispose of, mortgage, lend, pledge, and otherwise
deal in and with securities (which term, for the purpose of this Article
THIRD, includes, without limitation of the generality thereof, any shares
of stock, bonds, debentures, notes, mortgages, other obligations, and any
certificates, receipts or other instruments representing rights to receive,
purchase or subscribe for the same, or representing any other rights or
interests therein or in any property or assets) of any persons, domestic
and foreign firms, associations, and corporations, and by any
government or agency or instrumentality thereof; to make payment
therefor in any lawful manner; and, while owner of any such securities,
to exercise any and all rights, powers and privileges in respect thereof,
including the right to vote.
<PAGE> 4
To make, enter into, perform and carry out contracts of every kind
and description with any person, firm, association, corporation or
government or agency or instrumentality thereof.
To acquire by purchase, exchange or otherwise, all, or any part of,
or any interest in, the properties, assets, business and good will of any
one or more persons, firms, associations or corporations heretofore or
hereafter engaged in any business for which a corporation may now or
hereafter be organized under the laws of the State of Delaware; to pay for
the same in cash, property or its own or other securities; to hold,
operate, reorganize, liquidate, sell or in any manner dispose of the whole
or any part thereof; and in connection therewith, to assume or guarantee
performance of any liabilities, obligations or contracts of such persons,
firms, associations or corporations, and to conduct the whole or any part
of any business thus acquired.
To lend money in furtherance of its corporate purposes and to
invest and reinvest its funds from time to time to such extent, to such
persons, firms, associations, corporations, governments or agencies or
instrumentalities thereof, and on such terms and on such security, if
any, as the Board of Directors of the corporation may determine.
To make contracts of guaranty and suretyship of all kinds and
endorse or guarantee the payment of principal, interest or dividends
upon, and to guarantee the performance of sinking fund or other
obligations of, any securities, and to guarantee in any way permitted by
law the performance of any of the contracts or other undertakings in
which the corporation may otherwise be or become interested, of any
persons, firm, association, corporation, government or agency or
instrumentality thereof, or of any other combination, organization or
entity whatsoever.
To borrow money without limit as to amount and at such rates of
interest as it may determine; from time to time to issue and sell its own
securities, including its shares of stock, notes, bonds, debentures, and
other obligations, for such purposes and for such prices, now or
hereafter permitted by the laws of the State of Delaware and by this
certificate of incorporation, as the Board of Directors of the corporation
may determine; and to secure any of its obligations by mortgage, pledge,
or other encumbrance of all or any of its property, franchises and
income.
To be a promoter or manager of other corporations of any type or
kind; and to participate with others in any corporation, partnership,
limited partnership, joint venture, or other association of any kind, or in
<PAGE> 5
any transaction, undertaking or arrangement which the corporation
would have power to conduct by itself, whether or not such participation
involves sharing or delegation of control with or to others.
To draw, make, accept, endorse, discount, execute, and issue
promissory notes, drafts, bills of exchange, warrants, bonds, debentures,
and other negotiable or transferable instruments and evidences of
indebtedness whether secured by mortgage or otherwise, as well as to
secure the same by mortgage or otherwise, so far as may be permitted by
the laws of the State of Delaware.
To purchase, receive, take, reacquire or otherwise acquire, own
and hold, sell, lend, exchange, reissue, transfer or otherwise dispose of,
pledge, use, cancel, and otherwise deal in and with its own shares and
its other securities from time to time to such an extent and in such
manner and upon such terms as the Board of Directors of the
corporation shall determine; provided that the corporation shall not use
its funds or property for the purchase of its own shares of capital stock
when its capital is impaired or when such use would cause any
impairment of its capital, except to the extent permitted by law.
To organize, as an incorporator, or cause to be organized under the
laws of the State of Delaware, or of any other State of the United States
of America, or of the District of Columbia, or of any commonwealth,
territory, dependency, colony, possession, agency, or instrumentality of
the United States of America, or of any foreign country, a corporation or
corporations for the purpose of conducting and promoting any business
or purpose for which corporations may be organized, and to dissolve,
wind up, liquidate, merge or consolidate any such corporation or
corporations or to cause the same to be dissolved, wound up, liquidated,
merged or consolidated.
To conduct its business, promote its purposes, and carry on its
operations in any and all of its branches and maintain offices both within
and without the State of Delaware, in any and all States of the United
States of America, in the District of Columbia, and in any or all
commonwealths, territories, dependencies, colonies, possessions,
agencies, or instrumentalities of the United States of America and of
foreign governments.
To promote and exercise all or any part of the foregoing purposes
and powers in any and all parts of the world, and to conduct its business
in all or any of its branches as principal, agent, broker, factor,
contractor, and in any other lawful capacity, either alone or through or in
conjunction with any corporations, associations, partnerships, firms,
trustees, syndicates, individuals, organizations, and other entities in any
<PAGE> 6
part of the world, and, in conducting its business and promoting any of
its purposes, to maintain offices, branches and agencies in any part of
the world, to make and perform any contracts and to do any acts and
things, and to carry on any business, and to exercise any powers and
privileges suitable, convenient, or proper for the conduct, promotion, and
attainment of any of the business and purposes herein specified or which
at any time may be incidental thereto or may appear conducive to or
expedient for the accomplishment of any of such business and purposes
and which might be engaged in or carried on by a corporation
incorporated or organized under the General Corporation Law of the
State of Delaware, and to have and exercise all of the powers conferred
by the laws of the State of Delaware upon corporations incorporated or
organized under the General Corporation Law of the State of Delaware.
The foregoing provisions of this Article THIRD shall be construed both as
purposes and powers and each as an independent purpose and power. The
foregoing enumeration of specific purposes and powers shall not be held to
limit or restrict in any manner the purposes and powers of the corporation, and
the purposes and powers herein specified shall, except when otherwise
provided in this Article THIRD, be in no wise limited or restricted by
reference to, or inference from, the terms of any provision of this or any
other Article of this certificate of incorporation; provided, that the
corporation shall not conduct any business, promote any purpose, or exercise
any power or privilege within or without the State of Delaware which, under the
laws thereof, the corporation may not lawfully conduct, promote, or exercise.
FOURTH: 4.1 The total number of shares of all classes of capital
stock which the corporation shall have authority to issue is one billion one
hundred ten million (1,110,000,000 shares) of which ten million (10,000,000)
shares shall be Preferred Stock, Class A without par value, issuable in one or
more series, and one billion one hundred million (1,100,000,000) shares will be
Common Stock, par value $.10 per share.
4.2 The Board of Directors is hereby expressly authorized, at any time
or from time to time, to divide any or all of the shares of Preferred Stock,
Class A, into one or more series, and in the resolution or resolutions
establishing a particular series, before issuance of any of the shares
thereof,to fix and determine the number of shares and the designation of such
series so as to distinguish it from the shares of all other series and
classes,and to fix and determine the preferences, voting rights,
qualifications,privileges, limitations, options, conversion rights,restrictions
and other special or relative rights of the Preferred Stock, Class A, or of
such series to the fullest extent now or hereafter permitted by the laws of the
State of Delaware, including, but not limited to, the variations between
different series in the following respects
<PAGE> 7
(a) The distinctive designation of such series and the number of
shares which shall constitute such series, which number
may be increased or reduced (but not below the number of
shares thereof then outstanding) from time to time by the
Board of Directors;
(b) the annual dividend rate for such series, and the date or
dates from which dividends shall commence to accrue;
(c) the price or prices at which, and the terms and conditions
on which the shares of such series may be made redeemable;
(d) the purchase or sinking fund provision, if any, for the
purchase or redemption of shares of such series;
(e) the preferential amount or amounts payable upon shares of
such series in the event of the liquidation, dissolution or
winding up of the corporation;
(f) the voting rights, if any, of shares of such series;
(g) the terms and conditions, if any, upon which shares of such
series may be converted and the class or classes or series of
shares of the corporation, or other securities, into which
such shares may be converted;
(h) the relative terms, qualifications, privileges, limitations,
options, restrictions, and special or relative rights and
preferences, if any, of shares of such series as the Board of
Directors may, at the time of such resolution or resolutions,
lawfully fix and determine under the laws of the State of
Delaware.
Unless otherwise provided in a resolution or resolutions establishing any
particular series, the aggregate number of authorized shares of Preferred
Stock,Class A, may be increased by an amendment of the Certificate of
Incorporation approved solely by a majority vote of the outstanding shares of
Common Stock (or solely with a lesser vote of the Common Stock, or solely by
action of the Board of Directors, if permitted by law at the time).
All shares of any one series shall be alike in every particular, except with
respect to the accrual of dividends prior to the date of issuance.
Series One Junior Participating Preferred Stock, Class A, shall have the
voting powers, preferences and relative, participating, optional or other
rights, if any, or the qualifications, limitations or restrictions as set forth
on Exhibit A hereto.
<PAGE> 8
4.3 Except for and subject to those rights expressly granted to the
holders of Preferred Stock or any series thereof by resolution or resolutions
adopted by the Board of Directors pursuant to Section 4.2 of this Article
Fourth and except as may be provided by the laws of the State of Delaware,
the holders of Common Stock shall have exclusively all other rights of
shareholders.
4.4 Shares of Common Stock of the corporation may be issued from time
to time for such consideration as may be fixed from time to time by the Board
of Directors, but not less than the par value thereof; and any and all shares
so issued, the full consideration for which shall have been paid and delivered,
shall be deemed fully paid and non-assessable stock and not liable to any
further call or assessment thereon.
FIFTH: The corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may
be,and also on this corporation.
SEVENTH: For the management of the business and for the conduct of
the affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in
<PAGE> 9
the manner provided in, the By Laws. The phrase Whole Board and the phrase
total number of directors shall be deemed to have the same meaning, to wit,
the total number of directors which the corporation would have if there were no
vacancies. No election of directors need be by written ballot.
2. The original By Laws of the corporation shall be adopted by the
incorporator. Thereafter, the power to make, alter, or repeal, the By Laws,
and to adopt any new By Law, except a By Law classifying directors for
election for staggered terms, shall be vested in the Board of Directors.
3. Whenever the corporation shall be authorized to issue only one class
of stock, each outstanding share shall entitle the holder thereof to notice
of, and the right to vote at, any meeting of stockholders. Whenever the
corporation shall be authorized to issue more than one class of stock, no
outstanding share of any class of stock which is denied voting power under the
provisions of the certificate of incorporation shall entitle the holder
thereof to the right to vote at any meeting of stockholders except as the
provisions of Paragraph (c)(2) of Section 242 of the General Corporation Law
shall otherwise require; provided, that no share of any such class which is
otherwise denied voting power shall entitle the holder thereof to vote upon
the increase or decrease in the number of authorized shares of said class.
EIGHTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have
power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein, shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
NINTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and
all rights at any time conferred upon the stockholders of the corporation by
this certificate of incorporation are granted subject to the provisions of this
Article NINTH.
TENTH: No director shall be personally liable to the corporation or its
shareholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
<PAGE> 10
to the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Law of Delaware is amended after approval
by the shareholders of this article to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the corporation shall be eliminated or limited to the full
extent permitted by the General Corporation Law of Delaware, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by its officer thereunto duly authorized this third day of
February,1998.
COMPUTER ASSOCIATES INTERNATIONAL, INC.
By: /s/Michael McElroy
------------------------
Name: Michael McElroy
Title: Secretary
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATION
OF
SERIES ONE JUNIOR PARTICIPATING PREFERRED STOCK, CLASS A
OF
COMPUTER ASSOCIATES INTERNATIONAL, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Computer Associates International, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the Corporation), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on June 18, 1991:
RESOLVED, that pursuant to the authority granted to and vested in the Board of
Directors of this Corporation (hereinafter called the Board of Directors or the
Board) in accordance with the provisions of the Restated Certificate of
Incorporation, as amended, of the Corporation, the Board of Directors hereby
creates a series of Preferred Stock, Class A, without par value (the Preferred
Stock) of the Corporation and hereby states the designation and
number of shares, and fixes the relative rights, preferences, and limitations
thereof as follows:
Series One Junior Participating Preferred Stock, Class A
Section 1. Designation and Amount. The shares of such series shall be
designated as Series One Junior Participating Preferred Stock, Class A (the
Series One Preferred Stock) and the number of shares constituting the Series One
Preferred Stock shall be Five Hundred Thousand (500,000). Such number of shares
may be increased or decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series One Preferred Stock
to a number less than the number of share then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series One Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any other stock) ranking prior and superior to the
Series One Preferred Stock with respect to dividends, the holders of shares
<PAGE> 2
of Series One Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, dividends in an amount per share (rounded to the nearest cent),
equal to 1,000 times the aggregate per share amount of all cash dividends
declared on the Common Stock, par value $.10 per share (the Common Stock),
and 1,000 times the aggregate per
share amount (payable in kind) of all non cash dividends or other distributions
declared on the Common stock, other than a dividend payable in shares of
Common Stock, or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise). Any such dividend on the Preferred Stock shall
be payable on the same date as any dividend payable with respect to the Common
Stock. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series One Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series One
Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(C) The Board of Directors may fix a record date for the determination of
holders of shares of Series One Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be the same
date as the record date for the determination of shares of Common Stock entitled
to receive payment of a dividend or distribution thereon and shall be not more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series One Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of
Series One Preferred Stock shall entitle the holder thereof to 1,000 votes on
all matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
<PAGE> 3
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series One
Preferred Stock were entitled immediately prior to such event shall
be adjusted by multiplying such number by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series One Preferred Stock and the holders of
shares of Common Stock and any other capital stock of the Corporation having
general voting rights shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders of
Series One Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.(A) Whenever semi-annual or quarterly dividends
or other dividends or distributions payable on the Series One Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of Series
One Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series One Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series One Preferred Stock, except dividends
paid ratably on the Series One Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled; or
<PAGE> 4
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series One Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (as to dividends and upon dissolution, liquidation or winding up) to the
Series One Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under Paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series One Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in
the Restated Certificate of Incorporation, or in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the Corporation, the
holders of shares of Series One Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any assets of the Corporation to
the holders of Common Stock, the amount of $1,000.00 per share for each share of
Series One Preferred Stock then held by them. Thereafter, the holders of shares
of Series One Preferred Stock shall be entitled to receive an aggregate amount
per share, subject to the provision for adjustment hereinafter set forth, equal
to 1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock plus an amount equal to any accrued and unpaid dividends.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock, then in
each such case the aggregate amount to which holders of shares of Series One
Preferred Stock were entitled immediately prior to such event under the
<PAGE> 5
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) If the assets of the Corporation legally available for distribution to the
holders of shares of Series One Preferred Stock upon liquidation, dissolution or
winding up of the Corporation are insufficient to pay the full preferential
amount set forth in the first sentence of paragraph (A) above, then the entire
assets of the Corporation legally available for distribution to the holders of
Series One Preferred Stock shall be distributed among such holders in proportion
to the shares of Series One Preferred Stock then held by them.
(C) The foregoing rights upon liquidation, dissolution or winding up provided
to the holders of Series One Preferred Stock shall be subject to the rights of
the holders of any other series of Preferred Stock (or any other stock) ranking
prior and superior to the Series One Preferred Stock upon liquidation,
dissolution or winding up.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or other property, then in any such case each share of
Series One Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchange. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series One Preferred Stock
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series One Preferred Stock shall not
be redeemable.
<PAGE> 6
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the
Corporation by its President and attested by its Secretary this 18th Day of
June, 1991.
Company:
COMPUTER ASSOCIATES INTERNATIONAL, INC.
By:/s/Anthony W. Wang
----------------------
Anthony W. Wang, President
ATTEST:
BY:/s/Belden A. Frease
-------------------
Belden A. Frease, Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(II)
<SEQUENCE>3
<TEXT>
BY-LAWS
OF
COMPUTER ASSOCIATES INTERNATIONAL, INC.
(As Amended, Effective as of January 19, 1999)
The registered office of the corporation in the State of Delaware
shall be located at 1013 Centre Road, Wilmington, Delaware, New
Castle County, 19805, and the resident agent of the corporation
thereat shall be United States Corporation Company. The
Corporation may have such other offices, either within or without
the State of Delaware, as the Board of Directors may designate or
as the business of the corporation may require from time to time.
ARTICLE II. STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of stockholders
shall be held for the election of directors at such date, time and
place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors from time to
time. Any other proper business may be transacted at the annual
meeting. If the day fixed for the annual meeting shall be a legal
holiday, such meeting shall be held on the next succeeding
business day. If the election of Directors shall not be held on
the day designated herein for any annual meeting of the
stockholders, or at any adjournment thereof, the Board of
Directors shall cause the election to be held at a special meeting
of the stockholders as soon thereafter as conveniently may be.
Section 2. Special Meeting. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by
statute, may be called only by the President or by the Board of
Directors.
Section 3. Place of Meeting. The Board of Directors may designate
any place within or without the State of Delaware as the place of
meeting for any annual meeting or special meeting. If no such
designation is made, the place of meeting shall be as specified in
the call of the meeting and if not so specified, then at the
registered office of the corporation in the State of Delaware.
Section 4. Notice of Meeting. Written or printed notice stating
the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is
called, shall be delivered, unless otherwise provided in the DGCL,
the certificate of incorporation of the Corporation, or these
bylaws, not less than 10 nor more than 60 days before the date of
<PAGE> 2
the meeting, either personally or by mail, by or at the direction
of the President, or the Secretary, or of the officer or persons
calling the meeting, to each stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to
be delivered when deposited in the United States mail, addressed
to the stockholder at his address as it appears on the stock
transfer books of the corporation, with postage thereon prepaid.
When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is
taken, unless the adjournment is for more than 30 days or unless,
after adjournment, a new record date is fixed for the adjourned
meeting, in either of which cases notice of the adjourned meeting
will be given to each stockholder of record entitled to vote at
the meeting.
Section 5. Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or entitled to
express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors and which record date: (1) in
the case of determination of stockholders entitled to vote at any
meeting of stockholders or adjournment thereof, shall, unless
otherwise required by law, not be more than 60 nor less than 10
days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to
corporate action in writing without a meeting, shall not be more
than 10 days from the date upon which the resolution fixing the
record date is adopted by the Board of Directors; and (3) in the
case of any other action, shall not be more than 60 days prior to
such other action. If no record date is fixed: (1) the record
date for determining stockholders entitled to notice of or to vote
at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (2)
the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no
prior action of the Board of Directors is required by law, shall
be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to
the corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at
the close of business on the day on which the Board of Directors
adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination
of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting. Any stockholder of
record seeking to have the stockholders authorize or take
<PAGE> 3
corporate action by written consent shall, by written notice to
the secretary, request the board of directors to fix a record
date. The board of directors shall promptly, but in all events
within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If
no record date has been fixed by the board of directors within ten
(10) days of the date on which such a request is received, the
record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall the first date
on which a signed written consent setting forth the actin taken or
proposed to be taken is delivered to the corporation as provided
in Section 228(a) of the Delaware General Corporation Law.
Section 6. Voting Lists. The officer or agent having charge of
the stock ledger of the corporation shall make, at least 10 days
before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order with the address of and
the number of shares held by each, which list, for a period of 10
days prior to such meeting, shall be kept on file at the place
where the meeting is to be held or at a place specified in the
notice of the meeting in the city where the meeting is to be held.
Such list shall be subject to inspection by any stockholder at any
time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the
whole time of the meeting. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine such
list or to vote at any meeting of stockholders.
Section 7. Quorum. A majority of the outstanding shares of the
corporation entitled to vote, present in person or represented by
proxy, shall constitute a quorum at a meeting of stockholders. If
less than a majority of the outstanding shares are represented at
a meeting, [the chairman of the meeting] may adjourn the meeting
from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented,
any business may be transacted which might have been transacted at
the meeting as originally called. The stockholders present at a
duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders
to leave less than a quorum. At all meetings of stockholders for
the election of directors, a plurality of the votes cast shall be
sufficient to elect. Unless otherwise provided by law,
the certificate of incorporation or these bylaws, in all matters
other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at
the meeting and entitled to vote on the subject matter shall be
the act of the stockholders.
Section 8. Proxies. At all meetings of stockholders, a
stockholder may vote by proxy (i) executed in writing by the
stockholder or by his duly authorized attorney in fact; or (ii) by
transmitting or authorizing the transmission of a telegram,
cablegram or other means of electronic transmission to the person
<PAGE> 4
who will be the holder of the proxy or an agent duly
authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such telegram,
cablegram or other means of electronic transmission must either
set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder; or (iii) as
otherwise permitted pursuant to Section 212 of the Delaware
General Corporation Law. Such proxy shall be filed with the
Secretary of the corporation before or at the time of the meeting.
No proxy shall be valid after three years from the date of
its execution, unless otherwise provided in the proxy.
Section 9. Voting of Shares. Unless otherwise provided in the
certificate of incorporation of the Corporation, each outstanding
share entitled to vote shall be entitled to one vote upon each
matter submitted to a vote at a meeting of stockholders, as set
forth in the Certificate of Incorporation. Shares standing in the
name of another corporation may be voted by such officer,
agent or proxy as the by-laws of such corporation may prescribe,
or, in the absence of such provision, as the Board of Directors of
such corporation may determine. Shares of its own capital stock
belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote
nor be counted for quorum purposes; provided, however, that the
foregoing shall not limit the right of any corporation to vote
stock, including but not limited to its own stock, held by it
in a fiduciary capacity.
Section 10. Consent of Stockholders in Lieu of Meeting.
(a) Any action required to be taken at a meeting of the
stockholders, or any other action which may be taken at a meeting
of the stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing
setting forth the action so taken shall be signed by the holders
of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at
a meeting at which all shares entitled to vote thereon were
present and voted. The Corporation shall give prompt notice of
the taking of corporate action without a meeting by less than
unanimous written consent to stockholders who have not consented
in writing and who, if the acion had been taken at a meeting,
would have been entitled to notice of the meeting if
the record date for such meeting had been the date that written
consents signed by a sufficient number of stockholders to take the
action were delivered to the Corporation in the manner provided in
Section 228(c) of the Delaware General Corporation Law.
(b) Inspectors of Election; Procedures for Counting Consents.
Within three (3) business days after receipt of the earliest dated
consent delivered to the Corporation in the manner provided in
Section 228(c) of the Delaware General Corporation Law or the
determination by the Board of Directors of the Corporation that
<PAGE> 5
the Corporation should seek corporate action by written consent,
as the case may be, the Secretary shall engage nationally
recognized independent inspectors of elections for the purpose of
performing a ministerial review of the validity of the consents
and revocations. The cost of retaining inspectors of election
shall he borne by the Corporation. No action by written consent
without a meeting shall be effective until such date as the
inspectors certify to the Corporation that the consents delivered
to the Corporation in accordance with this section represent at
least the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and votes.
Consents and revocations shall be delivered to the inspectors upon
receipt by the Corporation, the soliciting stockholders or their
proxy solicitors or other designated agents. As soon as consents
and revocations are received, the inspectors shall review the
consents and revocations and shall maintain a count of the number
of valid and unrevoked consents. The inspectors shall keep such
count confidential and shall not reveal the count to the
Corporation, the soliciting stockholder or their representatives
or any other entity. As soon as practicable after the earlier if
(i) sixty (60) days after the date of the earliest dated consent
delivered to the Corporation in the manner provided in Section
228(c) of the Delaware General Corporation law or (ii) a written
request therefor by the Corporation or the soliciting stockholders
(whichever is soliciting consents), notice of which request shall
be given to the party opposing the solicitation of consents, if
any, which request shall state that the Corporation or soliciting
stockholders, as the case may be, have a good faith belief that
the requisite number of valid and unrevoked consents to authorize
or take the action specified in the consents has been received in
accordance with these Bylaws, the inspectors shall issue a
preliminary report to the Corporation and the soliciting
stockholders stating: (i) the number of valid consents: (ii) the
number of valid revocations; (iii) the number of valid and
unrevoked consents: (iv) the number of invalid consents; (v) the
number of invalid revocations; (vi) whether, based on their
preliminary count, the requisite number of valid and unrevoked
consents has been obtained to authorize or take the action
specified in the consents.
Unless the Corporation and the soliciting stockholders shall agree
to a shorter or longer period, the Corporation and the soliciting
stockholders shall have 48 hours to review the consents and
revocations and to advise the inspectors and the opposing party in
writing as to whether they intend to challenge the preliminary
report of the inspectors. If no written notice of in intention to
challenge the preliminary report is received within 48 hours after
the inspectors issuance of the preliminary report, the inspectors
shall issue to the Corporation and the soliciting stockholders
their final report containing the information from the inspectors
determination with respect to whether the requisite number of
valid and unrevoked consents was obtained to authorize and take
the action specified in the consents. If the Corporation or the
soliciting stockholders issue written notice of an intention to
<PAGE> 6
challenge the inspectors preliminary report within 48 hours after
the issuance of that report, a challenge session shall be
scheduled by the inspectors as promptly as practicable. Following
completion of the challenge session, the inspectors shall
as promptly as practicable issue their final report to the
soliciting stockholders and the Corporation, which report shall
contain the information included in the preliminary report, plus
all changes in the vote totals as a result of the challenge and a
certification of whether the requisite number of valid and
unrevoked consents was obtained to authorize or take the action
specified in the consents. A copy of the final report of the
inspectors shall be included in the book in which the proceedings
of meetings of stockholders are recorded.
Section 11. Nominations of Directors.
(a) Only persons who are nominated in accordance with the
procedures set forth in these by-laws shall be eligible to serve
as Directors. Nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of
stockholders (i) by or at the direction of the Board of Directors
or (ii) by any stockholder of the corporation who is a stockholder
of record at the time of giving of notice provided for in this
bylaw, who shall be entitled to vote for the election of Directors
at the meeting and who complies with the notice procedures set forth in this by-
law.
(b) Nominations by stockholders shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To
be timely, a stockholders notice shall be delivered to or mailed
and received at the principal executive offices of the corporation
(i) in the case of an annual meeting, not less than 60 days nor
more than 90 days prior to the first anniversary of the
preceding years annual meeting; provided, however, that in the
event that the date of the annual meeting is changed by more than
30 days from such anniversary date, notice by the stockholder to
be timely must be so received not later than the close of business
on the 10th day following the earlier of the day on which notice
of the date of the meeting was mailed or public disclosure
was made, and (ii) in the case of a special meeting at which
Directors are to be elected, not later than the close of business
on the 10th day following the earlier of the day on which notice
of the date of the meeting was mailed or public disclosure was
made. Such stockholders notice shall set forth (1) as to
each person whom the stockholder proposes to nominate for election
or reelection as a Director all information relating to such
person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such persons written consent to
being named in the proxy statement as a nominee and to serving as
a Director if elected); (II) as to the stockholder giving the
notice (A) the name and address, as they appear on the
corporations books, of such stockholder and (B) the class and
number of shares of the corporation which are beneficially owned
by such stockholder and also which are owned of record by
such stockholder; and (III) as to the beneficial owner, if any, on
<PAGE> 7
whose behalf the nomination is made, (A) the name and address of
such person and (B) the class and number of shares of the
corporation which are beneficially owned by such person. At the
request of the Board of Directors, any person nominated
by the Board of Directors for election as a Director shall furnish
the Secretary of the corporation that information required to be
set forth in the stockholders notice of nomination which pertains
to the nominee.
(c) No person shall be eligible to serve as a Director of the
corporation unless nominated in accordance with the procedures set
forth in this bylaw. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall
be disregarded. Notwithstanding the foregoing provisions of this
bylaw, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the
matters set forth in this bylaw.
Section 12. Notice of Stockholder Business.
(a) At an annual or special meeting of the stockholders, only
such business shall be conducted as shall have been brought before
the meeting (i) pursuant to the corporations notice of meeting,
(ii) by or at the direction of the Board of Directors or (iii) by
a stockholder of the corporation who is a stockholder of record at
the time of giving of the notice provided for in this bylaw, who
shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this bylaw.
(b) For business to be properly brought before a meeting by a
stockholder pursuant to clause (iii) of paragraph (a) of this
bylaw, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a
stockholders notice with respect to an annual meeting must be
delivered to or mailed and received at the principal executive
offices of the corporation not less than 60 days nor more than 90
days prior to the first anniversary of the preceding years annual
meeting; provided, however, that in the event that the date of the
meeting is changed by more than 30 days from such anniversary
date, notice by the stockholder to be timely must be received no
later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was
mailed or public disclosure was made. To be timely, a
stockholders notice with respect to a special meeting must be
received no later than the close of business on the
10th day following the earlier of the day on which notice of the
meeting was mailed or public disclosure was made. A stockholders
notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (A) a brief
description of the business desired to be brought before the
meeting and the reasons for conducting such business at the
<PAGE> 8
meeting, (B) the name and address, as they appear on the
corporations books, of the stockholder proposing such business,
and the name and address of the beneficial owner, if any, on whose
behalf the proposal is made, (C) the class and number of shares of
the corporation which are owned beneficially and of record by such
stockholder of record and by the beneficial owner, if any, on
whose behalf the proposal is made and (D) any material interest of
such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
(c) Notwithstanding anything in these bylaws to the contrary,
no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this bylaw. The
Chairman of the meeting shall, if the fact warrant, determine and
declare to the meeting that business was not properly brought
before the meeting and in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he
shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this bylaw, a
stockholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder with respect to the matters set
forth in this by law.
ARTICLE III. BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the
corporation shall be managed by its Board of Directors.
Section 2. Number and Tenure. The Board of Directors shall
consist of three or more members, the number thereof to be
determined from time to time by resolution of the Board of
Directors. Directors need not be stockholders. Each Director
shall hold office until the next annual meeting of stockholders
and until his successor shall have been elected and shall have
qualified.
Section 3. Annual and Regular Meetings. An annual meeting of the
Board of Directors shall be held, without other notice than this
bylaw, immediately after, and at the same place as, the annual
meeting of stockholders. The Board of Directors may also provide,
by resolution, the time and place, either within or without the
State of Delaware, for the holding of other regular meetings
without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the President,
Secretary or any two Directors. The persons authorized to call
special meetings of the Board of Directors may fix any place,
either within or without the State of Delaware, as the place for
holding any special meeting of the Board of Directors called by
them.
<PAGE> 5
Section 5. Notice. Notice of any special meeting of the Board of
Directors shall be given at least forty-eight (48) hours prior
thereto by written notice delivered personally or mailed to each
Director at his business address or by telegram or facsimile
transmission. If mailed, such notice shall be deemed to
be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid. If notice be given by
telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. If notice be
given by facsimile, such notice shall be deemed to be delivered
upon receipt of a facsimile delivery confirmation from the
addressees last known facsimile number. Any Director may waive
notice of any meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where
a Director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is
not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
Section 6. Quorum. A majority of the Directors shall constitute a
quorum for the transaction of business at any meeting of the Board
of Directors, but if less than such majority is present at a
meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
Section 7. Manner of Acting. The act of the majority of the
Directors present at a meeting at which a quorum is present shall
be the act of the Board of Directors, provided, that any action
required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a
meeting if all the members of the Board of Directors or such
committee, as the case may be, consent thereto in writing or
writings filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 8. Vacancies. Any vacancy occurring in the Board of
Directors, including a vacancy resulting from enlargement of the
Board, may be filled by the Directors by vote of a majority of the
Directors then in office though less than a quorum of the Board of
Directors, or by the plurality of the votes cast at a meeting of
stockholders. A Director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office, or in
the case of an enlargement of the board, until the next annual
meeting of stockholders and until his successor shall have been
elected and shall have qualified.
Section 9. Compensation. By resolution of the Board of Directors,
the Directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors, and with the exception of
Directors who are also officers of the corporation may be paid a
fixed sum for attendance at each meeting of the Board of Directors
and/or a stated salary as a Director.
<PAGE> 10
Section 10. Telephonic Meetings. Members of the Board of
Directors, or any Committee thereof, may participate in a meeting
of the Board or Committee by means of conference telephone or
similar communications equipment, by means of which all persons
participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section shall
constitute presence in person at the meeting.
Section 11. Committees.
(a) Powers and Authority. The Corporation shall be governed by
the provisions of 8 Del.C. 141(c)(2), as that statute may be
amended from time to time, in respect to the powers and authority
of any committee of the Board of Directors.
(b) Formation. The Board of Directors may designate one or
more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification
of a member of the committee, the member or members thereof
present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in
place of any such absent or disqualified member. Any such
committee, to the extent permitted by law and to the extent
provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
(c) Committee Rules. Unless the Board of Directors otherwise
provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In
the absence of such rules each committee shall conduct its
business in the same manner as the Board of Directors conducts its
business pursuant to Article III of these bylaws.
ARTICLE IV. OFFICERS
Section 1. Number. The officers of the corporation shall be a
Chairman of the Board, President, one or more Vice-Presidents (the
number thereof to be determined by the Board of Directors), a
Secretary, and a Treasurer, each of whom shall be elected by the
Board of Directors. One or more Assistant Secretaries and
Assistant Treasurers and such other officers and assistant
officers as may be deemed necessary may also be appointed from
time to time by the Board of Directors. Any two or more offices
may be held by the same person, except the offices of President
and Secretary.
<PAGE> 11
Section 2. Election and Term of Office. The officers of the
corporation to be elected by the Board of Directors shall be
elected annually by the Board of Directors at the first meeting of
the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at
such meeting, such election shall be held as soon thereafter as
conveniently may be. Each officer shall hold office until his
successor shall have been duly elected and shall have qualified or
until his death or until he shall resign or shall have been
removed in the manner hereinafter provided.
Section 3. Removal. Any officer or agent elected or appointed by
the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interests of the corporation
would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. A vacancy of any office because of death,
resignation, removal, disqualification or otherwise, may be filled
by the Board of Directors for the unexpired portion of the term.
Section 5. Chairman of the Board and Vice Chairman of the Board.
The Board of Directors may appoint a Chairman of the Board and may
designate the Chairman of the Board as Chief Executive Officer.
If the Board of Directors appoints a Chairman of the Board, he
shall perform such duties and possess such powers as are assigned
to him by the Board of Directors. The Chairman of the Board shall
preside at all meetings of the Board of Directors and the
stockholders at which he is present. If the Board of Directors
appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and
exercise the powers of the Chairman of the Board and shall perform
such other duties and possess such other powers as may from time
to time be vested in him by the Board of Directors.
Section 6. President. The President shall be the Chief Operating
Officer of the corporation. Unless the Board of Directors has
designated the Chairman of the Board as Chief Executive Officer,
the President shall also be the Chief Executive Officer of the
corporation. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the
business of the corporation, unless otherwise provided by the
Board of Directors. The President shall, when present and in the
absence of the Chairman of the Board and the Vice-Chairman of the
Board, if one shall be appointed, preside at all meetings of the
stockholders and of the Board of Directors. He may sign, with the
Secretary or any other proper officer of the corporation thereunto
authorized by the Board of Directors, certificates for shares of
the corporation, any deeds, mortgages, bonds, contracts, or other
instruments which the Board of Directors has authorized to be
executed, except in cases where the signing and execution thereof
shall be expressly delegated by the Board of Directors or by these
by laws to some other officer or agent of the corporation, or
shall be required by law to be otherwise signed or executed; and
in general shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Board
of Directors from time to time.
<PAGE> 12
Section 7. The Vice President. In the absence of the President or
in the event of his death, inability or refusal to act, the Vice
President (or in the event there be more than one Vice President,
the Vice Presidents in the order designated at the time of their
election, or in the absence of any designation, then in the order
of their election) shall perform the duties of the President,
and when so acting, shall have all powers of and be subject to all
the restrictions upon the President. Any Vice President may sign,
with the Secretary or an Assistant Secretary, certificates for
shares of the corporation; and shall perform such other duties as
from time to time may be assigned to him by the President or by
the Board of Directors.
Section 8. The Secretary. The Secretary shall: (a) keep the
minutes of the stockholders and of the Board of Directors meetings
in one or more books provided for that purpose; (b) see that all
notices are duly given in accordance with the provisions of these
by laws or as required by law; (c) be custodian of
the corporate records and of the seal of the corporation and see
that the seal of the corporation is affixed to all documents the
execution of which on behalf of the corporation under its seal is
duly authorized; (d) keep a register of the post office address of
each stockholder; (e) sign with the President, or a Vice
President, certificates for shares of the corporation, the
issuance of which shall have been authorized by resolution of the
Board of Directors; and (f) in general perform all duties incident
to the office of Secretary and such other duties as from time to
time may be assigned to him by the President or by the Board of
Directors.
Section 9. The Treasurer. If required by the Board of Directors,
the Treasurer shall give a bond for the faithful discharge of his
duties in such sum and with such surety or sureties as the Board
of Directors shall determine. He shall: (a) have charge and
custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit
all such moneys in the name of the corporation in such banks,
trust companies or other depositories as shall be selected in
accordance with the provisions of Article V of these by laws; (b)
have general charge of the stock transfer books of the corporation
unless a transfer agent shall have been appointed; (c) sign with
the President, or a Vice President, certificates for shares of the
corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors; and (d) in general perform
all the duties incident to the office of Treasurer and such other
duties as may from time to time be assigned to him by the
President or by the Board of Directors.
Section 10. Assistant Secretaries and Assistant Treasurers. The
Assistant Secretaries, when authorized by the Board of Directors,
may sign with the President or a Vice-President certificates for
shares of the corporation the issuance of which shall have been
authorized by a resolution of the Board of Directors. The
<PAGE> 13
Assistant Treasurers shall respectively, if required by the
Board of Directors, give bonds for the faithful discharge of their
duties in such sums and with such surety or sureties as the Board
of Directors shall determine. The Assistant Secretaries and
Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or the Treasurer,
respectively, or by the President or the Board of Directors.
Section 11. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors and no officer shall
be prevented from receiving such salary by reason of the fact that
he is also a Director of the corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contract. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract
or execute and deliver any instrument in the name of and on behalf
of the corporation, and such authority may be general or confined
to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in
its name unless authorized by a resolution of the Board of
Directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other
orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the corporation, shall be
signed by such officer or officers, agent or agents of the
corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the
corporation in such banks, trust companies or other depositories
as the Board of Directors may select.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing
shares of the corporation shall be in such form as shall be
determined by the Board of Directors. Such certificates shall be
signed by or impressed with the facsimile signature of the
President or Vice President and the Secretary or any Assistant
Secretary or the Treasurer or any Assistant Treasurer, and signed
manually or impressed with a facsimile signature by a Transfer
Agent and/or a Registrar. All certificates for shares shall be
<PAGE> 14
consecutively numbered or otherwise identified. The name and
address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the corporation. All
certificates surrendered to the corporation for transfer shall
be canceled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed
or mutilated certificate a new one may be issued thereof upon such
terms and indemnity of the corporation as the Board of Directors
may prescribe.
Section 2. Transfer of Shares. Transfer of shares of the
corporation shall be made only on the stock transfer books of the
corporation by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of authority to
transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Treasurer of the
corporation or, if appointed, the stock transfer agent of the
corporation, and on surrender for cancellation of the certificate
for such shares. The person in whose name shares stand on the
stock ledger of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
Section 3. Transfer Agents and Registrars. The Board of Directors
may appoint one or more transfer agents and one or more registrars
of transfer other than the corporation or an employee of the
corporation, and may require that all stock certificates bear the
certification or countersignature of any such transfer agent or
registrar. If any stock certificate is so certified or
countersigned with a manual signature by a transfer agent or by a
registrar other than the corporation or an employee of the
corporation, any other signature on the certificate may be a
facsimile, and if any person whose facsimile signature has been
placed upon a stock certificate as an officer, transfer agent or
registrar of the corporation shall have ceased to be an officer,
transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the corporation
with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
ARTICLE VII. FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of
April and end on the last day of March in each year.
ARTICLE VIII. SEAL
The Board of Directors shall provide a corporate seal which shall
be circular in form and shall have inscribed thereon the name of
the corporation and the state of incorporation and the words,
Corporate Seal.
ARTICLE IX. AMENDMENTS
Unless otherwise provided by the Certificate of Incorporation or
these By Laws, these By Laws may be amended or repealed, or new By
Laws may be adopted, (1) at any annual or special meeting of the
stockholders, by the affirmative vote of 51% of the stockholders,
present or in person or represented by proxy and entitled to vote
<PAGE> 15
on such action; provided, however, that the notice of such meeting
shall have been given as provided in these By Laws, which
notice shall mention that amendment or repeal of these By Laws, or
the adoption of new By Laws, is one of the purposes of such
meeting; (2) by written consent of the stockholders pursuant to
Section 10 of Article II; or (3) by action of the Board of
Directors.
ARTICLE X. INDEMNIFICATION
To the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, the Corporation shall indemnify any
director or officer of the Corporation who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, and whether brought by a third
party or by or in the right of the Corporation, by reason of the
fact that he is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a
director or officer against expenses (including attorneys fees),
liability, loss, judgment, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding.
Expenses (including attorneys fees) actually and reasonably
incurred by a director or officer in defending any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, and whether brought by
a third party or by or in the right of the Corporation, and
in which the director or officer is made or threatened to be made
a party by reason of the fact that he is or was a director or
officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer, shall be paid on behalf
of the director or officer by the Corporation in advance of the
final disposition of such action, suit, or proceeding and within
30 days of receipt by the secretary of the Corporation of (i) an
application from such director or officer setting forth the basis
for such indemnification, and (ii) if required by law at the time
such application is made, an undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be
determined that the director or officer is not entitled to be
indemnified by the Corporation as authorized in this Article. The
financial ability of any director or officer to make a repayment
contemplated by this provision shall not be a prerequisite to the
making of an advance. Expenses incurred by other representatives
or employees of the Corporation who are not directors or officers
of the Corporation may be paid upon terms and conditions, if any,
as the Board of Directors deems appropriate.
Such indemnity and right to advancement of expenses shall inure to
the benefit of the heirs, executors and administrators of any
director or officer so indemnified pursuant to this Article. The
right to indemnification and to advancement of expenses under this
Article shall be a contract right. Such indemnification and
advancement of expenses shall be in addition to any other
rights to which those directors and officers seeking
<PAGE> 16
indemnification and advancement of expenses may be entitled under
any law, agreement, vote of stockholders, or otherwise.
Any repeal or amendment of this Article by the directors or
stockholders of the Corporation or by changes in applicable law
shall, to the extent permitted by applicable law, be prospective
only, and shall not adversely affect any right to indemnification
or advancement of expenses of a director or officer of the
Corporation existing at the time of such repeal or amendment. In
addition to the foregoing, the right to indemnification and
advancement of expenses shall be to the fullest extent permitted
by the General Corporation Law of the State of Delaware or any
other applicable law and all amendments to such laws as hereafter
enacted from time to time.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>ART. 5 FDS FOR COMPUTER ASSOCIATES 3RD QTR 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 219
<SECURITIES> 106
<RECEIVABLES> 1789
<ALLOWANCES> 0
<INVENTORY> 80
<CURRENT-ASSETS> 2194
<PP&E> 548
<DEPRECIATION> 0
<TOTAL-ASSETS> 7278
<CURRENT-LIABILITIES> 1302
<BONDS> 2030
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 0
<OTHER-SE> 2558
<TOTAL-LIABILITY-AND-EQUITY> 7278
<SALES> 3073
<TOTAL-REVENUES> 3624
<CGS> 0
<TOTAL-COSTS> 3347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> 277
<INCOME-TAX> 109
<INCOME-CONTINUING> 168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CAG | https://www.sec.gov/Archives/edgar/data/23217/0001047469-99-000939.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001047469-99-000939.txt : 19990113
<SEC-HEADER>0001047469-99-000939.hdr.sgml : 19990113
ACCESSION NUMBER: 0001047469-99-000939
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981129
FILED AS OF DATE: 19990112
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CONAGRA INC /DE/
CENTRAL INDEX KEY: 0000023217
STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011]
IRS NUMBER: 470248710
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-07275
FILM NUMBER: 99505142
BUSINESS ADDRESS:
STREET 1: ONE CONAGRA DR
CITY: OMAHA
STATE: NE
ZIP: 68102
BUSINESS PHONE: 4025954000
FORMER COMPANY:
FORMER CONFORMED NAME: NEBRASKA CONSOLIDATED MILLS CO
DATE OF NAME CHANGE: 19721201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q
<TEXT>
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7275
--------------------------------------------------
CONAGRA, INC.
---------------------------------------------------
(Exact name of registrant, as specified in charter)
Delaware 47-0248710
------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One ConAgra Drive, Omaha, Nebraska 68102-5001
------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(402) 595-4000
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NA
------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of issuer's common stock, as of December 27, 1998
was 489,334,935.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions except per share amounts)
(unaudited)
- --------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
NOVEMBER 29, NOVEMBER 23, NOVEMBER 29, NOVEMBER 23,
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 6,404.4 $ 6,548.1 $ 12,887.8 $ 12,810.9
Costs and expenses
Cost of goods sold 5,298.5 5,510.9 10,864.4 10,890.3
Selling, administrative and general expenses 658.9 609.8 1,322.2 1,228.1
Interest expense 91.0 75.5 167.4 149.1
----------- ------------ ------------ ------------
6,048.4 6,196.2 12,354.0 12,267.5
----------- ------------ ------------ ------------
Income before income taxes 356.0 351.9 533.8 543.4
Income taxes 137.0 134.7 205.5 207.9
----------- ------------ ------------ ------------
Net income $ 219.0 $ 217.2 $ 328.3 $ 335.5
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Income per share - basic $ .47 $ .47 $ .70 $ .72
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Income per share - diluted $ .46 $ .46 $ .69 $ .71
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
- --------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
NOVEMBER 29, NOVEMBER 23, NOVEMBER 29, NOVEMBER 23,
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 219.0 $ 217.2 $ 328.3 $ 335.5
Other comprehensive income/(loss):
Currency translation adjustment 23.1 (5.0) 5.2 (16.5)
------------ ------------ ------------- ------------
Comprehensive income $ 242.1 $ 212.2 $ 333.5 $ 319.0
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amount)
(unaudited)
- -------------------------------------------------------------------------------------------------------
ASSETS NOVEMBER 29, MAY 31, NOVEMBER 23,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 44.3 $ 108.4 $ 64.2
Receivables, less allowance for doubtful accounts
of $80.6, $68.2 and $79.8 2,687.0 1,546.9 2,523.5
Inventories 4,189.6 3,540.8 4,129.5
Prepaid expenses 318.7 341.6 390.5
------------ ------------ ------------
Total current assets 7,239.6 5,537.7 7,107.7
------------ ------------ ------------
Property, plant and equipment 6,086.7 5,761.1 5,515.9
Less accumulated depreciation (2,486.0) (2,311.4) (2,201.6)
------------ ------------ ------------
Property, plant and equipment, net 3,600.7 3,449.7 3,314.3
------------ ------------ ------------
Brands, trademarks and goodwill 2,640.7 2,391.7 2,403.7
Other assets 465.9 429.4 406.8
------------ ------------ ------------
$ 13,946.9 $ 11,808.5 $ 13,232.5
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 3,432.1 $ 858.1 $ 3,007.1
Current installments of long-term debt 16.4 52.7 78.8
Accounts payable 1,823.9 1,971.0 1,893.5
Advances on sales 253.9 829.7 245.4
Other accrued liabilities 1,456.0 1,382.2 1,511.5
------------ ------------ ------------
Total current liabilities 6,982.3 5,093.7 6,736.3
------------ ------------ ------------
Senior long-term debt, excluding current installments 1,854.0 1,753.5 1,662.0
Other noncurrent liabilities 784.6 847.3 894.0
Subordinated debt 750.0 750.0 750.0
Preferred securities of subsidiary company 525.0 525.0 525.0
Common stockholders' equity
Common stock of $5 par value, authorized 1,200,000,000
Shares; issued 519,547,668, 519,424,034 and 522,683,194 2,597.7 2,597.1 2,613.4
Additional paid-in capital 350.3 320.0 528.0
Retained earnings 1,507.7 1,337.7 1,276.6
Foreign currency translation adjustment (62.4) (67.6) (48.2)
Less treasury stock, at cost, common
Shares 30,197,659, 30,011,958 and 34,328,054 (710.6) (705.2) (800.2)
------------ ------------ ------------
3,682.7 3,482.0 3,569.6
Less unearned restricted stock and value of 19,168,681,
21,376,632 and 23,726,267 common shares held
In Employee Equity Fund (631.7) (643.0) (904.4)
------------ ------------ ------------
Total common stockholders' equity 3,051.0 2,839.0 2,665.2
------------ ------------ ------------
$ 13,946.9 $ 11,808.5 $ 13,232.5
------------ ------------ ------------
------------ ------------ ------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CONAGRA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
- ---------------------------------------------------------------------------------------------------------------
TWENTY-SIX WEEKS ENDED
NOVEMBER 29, NOVEMBER 23,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 328.3 $ 335.5
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and other amortization 210.8 189.6
Goodwill amortization 34.2 34.9
Other noncash items (includes nonpension postretirement benefits) 50.0 46.4
Change in assets and liabilities before effects
from business acquisitions (2,494.7) (2,521.8)
------------ ------------
Net cash flows from operating activities (1,871.4) (1,915.4)
------------ ------------
Cash flows from investing activities
Additions to property, plant and equipment (274.2) (206.2)
Payment for business acquisitions (401.4) -
Sale of businesses and property, plant and equipment 7.2 140.6
Notes receivable and other items (10.6) (53.2)
------------ ------------
Net cash flows from investing activities (679.0) (118.8)
------------ ------------
Cash flows from financing activities
Net short-term borrowings 2,571.5 2,466.2
Proceeds from issuance of long-term debt 595.2 310.8
Repayment of long-term debt (532.1) (553.4)
Cash dividends paid (144.7) (122.4)
Cash distributions of pooled companies (1.2) (3.0)
Treasury stock purchases - (145.7)
Employee Equity Fund stock transactions 6.4 28.0
Other items (8.8) 11.0
------------ ------------
Net cash flows from financing activities 2,486.3 1,991.5
------------ ------------
Net increase (decrease) in cash and cash equivalents (64.1) (42.7)
Cash and cash equivalents at beginning of period 108.4 106.9
------------ ------------
Cash and cash equivalents at end of period $ 44.3 $ 64.2
------------ ------------
------------ ------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the condensed consolidated financial statements.
5
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 29, 1998
(COLUMNAR DATA IN MILLIONS)
1. ACCOUNTING POLICIES
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
results of operations, financial position, and cash flows for the periods
presented. Such interim information should be read in conjunction with the
financial statements and notes thereto included in the Company's report on
Form 8-K dated September 29, 1998.
The results of operations for any interim period are not necessarily
indicative of the results to be expected for other interim periods or the
full year.
ACCOUNTING CHANGES
In the first quarter of fiscal 1999, ConAgra adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No.
130), which establishes standards for reporting comprehensive income in
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by or distributions
to stockholders. The adoption of this statement had no impact on net income
or shareholders' equity.
Comprehensive income for all periods presented consists of net income and
foreign currency translation adjustments. Amounts in prior year financial
statements have been reclassified to conform to SFAS No. 130 requirements.
ConAgra deems its foreign investments to be permanent in nature and does
not provide for taxes on currency translation adjustments arising from
converting the investment in a foreign currency to U.S. dollars. There are
no reclassification adjustments to be reported in periods presented.
2. BUSINESS COMBINATIONS
On July 31, 1998, GoodMark Foods, Inc. (GoodMark) merged with ConAgra
through an exchange of shares. ConAgra issued approximately 7.8 million
shares of common stock for all outstanding shares of GoodMark. On July 31,
1998, Fernando's Foods Corporation (Fernando's) merged with ConAgra through
an exchange of shares. ConAgra issued approximately 1.3 million shares of
common stock for all outstanding shares of Fernando's.
During fiscal 1998, ConAgra completed mergers with Hester Industries, Inc.
(Hester) and A.M. Gilardi & Sons, Inc. (Gilardi), exchanging 3.7 million
and 3.8 million shares of ConAgra stock, respectively, for all outstanding
shares of Hester and Gilardi.
The above business combinations have been accounted for as poolings of
interest. The historical financial statements of the Company have been
restated to give effect to all of the above acquisitions as though the
companies had operated together from the beginning of the earliest period
presented.
6
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 29, 1998
(COLUMNAR DATA IN MILLIONS)
Results of operations of the acquired businesses prior to acquisition
date were as follows:
<TABLE>
<CAPTION>
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
NOVEMBER 23, NOVEMBER 23,
1997 1997
------------ ------------
<S> <C> <C>
Net sales $ 114.5 $ 236.9
Net income $ 6.6 $ 14.8
</TABLE>
3. INCOME PER SHARE
The following table reconciles the income and average share amounts used to
compute both basic and diluted income per share:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------- -----------------------
NOV. 29, NOV. 23, NOV. 29, NOV. 23,
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
INCOME PER SHARE - BASIC
Net income $ 219.0 $ 217.2 $ 328.3 $ 335.5
--------- --------- --------- ----------
--------- --------- --------- ----------
Weighted average shares outstanding - basic 469.8 464.0 469.3 464.6
--------- --------- --------- ----------
--------- --------- --------- ----------
INCOME PER SHARE - DILUTED
Net income $ 219.0 $ 217.2 $ 328.3 $ 335.5
--------- --------- --------- ----------
--------- --------- --------- ----------
Weighted average shares outstanding - basic 469.8 464.0 469.3 464.6
Add shares contingently issuable upon
exercise of stock options 7.1 10.5 6.8 10.7
--------- --------- --------- ----------
Weighted average shares outstanding - diluted 476.9 474.5 476.1 475.3
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
4. INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
NOV. 29, MAY 31, NOV. 23,
1998 1998 1997
---------- --------- -----------
<S> <C> <C> <C>
Hedged commodities $ 1,531.3 $ 1,199.3 $ 1,454.8
Food products and livestock 1,271.8 1,263.3 1,480.9
Agricultural chemicals, fertilizer and feed 660.8 581.4 539.7
Other, principally ingredients and supplies 725.7 496.8 654.1
---------- ---------- -----------
$ 4,189.6 $ 3,540.8 $ 4,129.5
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
7
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED NOVEMBER 29, 1998
(COLUMNAR DATA IN MILLIONS)
5. CONTINGENCIES
In fiscal 1991, ConAgra acquired Beatrice Company ("Beatrice"). As a result
of the acquisition and the significant pre-acquisition tax and other
contingencies of the Beatrice businesses and its former subsidiaries, the
consolidated post-acquisition financial statements of ConAgra reflected
significant liabilities and valuation allowances associated with the
estimated resolution of these contingencies. The material pre-acquisition
tax contingencies were resolved in fiscal 1995.
Beatrice is also engaged in various litigation and environmental
proceedings related to businesses divested by Beatrice prior to its
acquisition by ConAgra. The environmental proceedings include litigation
and administrative proceedings involving Beatrice's status as a potentially
responsible party at 44 Superfund, proposed Superfund or state-equivalent
sites. Beatrice has paid or is in the process of paying its liability share
at 40 of these sites. Substantial reserves for these matters have been
established based on the Company's best estimate of its undiscounted
remediation liabilities, which estimates include evaluation of
investigatory studies, extent of required cleanup, the known volumetric
contribution of Beatrice and other potentially responsible parties and its
experience in remediating sites.
ConAgra is a party to a number of other lawsuits and claims arising out of
the operation of its businesses. After taking into account liabilities
recorded for all of the foregoing matters, management believes the ultimate
resolution of such matters should not have a material adverse effect on
ConAgra's financial condition, results of operations or liquidity.
6. ACQUISITIONS
On August 17, 1998, ConAgra acquired the Egg Beaters and Tablespreads
businesses from Nabisco, Inc. for $400 million. The Tablespreads business
manufactures and markets margarine under Parkay, Blue Bonnet,
Fleischmann's, Touch of Butter, Chiffon and Move Over Butter brand names.
Egg Beaters is an egg alternative product. Annual sales of the combined
businesses are approximately $480 million. The acquisition was accounted
for as a purchase.
8
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of certain significant factors
which have affected the Company's financial condition and operating results for
the periods included in the accompanying condensed consolidated financial
statements. Results for the thirteen and twenty-six week periods ended
November 29, 1998 are not necessarily indicative of results that may be
attained in the future.
This report contains forward-looking statements. The statements reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and financial results. The statements
are based on many assumptions and factors including availability and prices of
raw materials, product pricing, competitive environment and related market
conditions, operating efficiencies, access to capital and actions of
governments. Any changes in such assumptions or factors could produce
significantly different results.
All prior period results have been restated to give effect to mergers accounted
for as poolings of interest. See Note 2 above.
FINANCIAL CONDITION
ConAgra's earnings are generated principally from its capital investment, which
consists of working capital (current assets less current liabilities) plus all
noncurrent assets. Capital investment is financed with stockholders' equity,
long-term debt and other noncurrent liabilities.
Capital investment increased $249.8 million, or 3.7%, compared to May 31, 1998.
Working capital decreased $186.7 million, and noncurrent assets increased $436.5
million. The decrease in working capital was primarily caused by normal seasonal
increases in accounts receivable and inventory and was funded by short-term
debt. The increase in noncurrent assets was primarily caused by the Egg Beaters
and Tablespreads acquisitions.
ConAgra invested $274.2 million in property, plant and equipment and $401.4
million for business acquisitions in the first half of fiscal 1999 compared to
$206.2 million in additions to property, plant and equipment in the same half of
fiscal 1998. Sales of property and businesses totaled $7.2 million in the first
half of fiscal 1999 versus $140.6 million in the first half of fiscal 1998.
Depreciation and amortization totaled $245.0 million in the first half compared
to $224.5 million in the same half last year.
In the second quarter of fiscal 1999, ConAgra issued $400 million of 7.0%
senior notes, due October 1, 2028 and $200 million of 5.5% senior notes, due
October 15, 2002. In the first half of fiscal 1999, ConAgra repaid $61
million of senior long-term debt and reduced the amount of short-term
borrowings backed by long-term credit agreements and classified as long-term
by $471 million. In the first half of fiscal 1998, ConAgra repaid $327
million of senior long-term debt and reduced the amount of short-term
borrowings backed by long-term credit agreements and classified as long-term
by $226 million. During the first half of fiscal 1998, ConAgra issued $311
million of senior long-term notes, with $300 million issued at 6.70%.
The Company's objective is that senior long-term debt normally will not exceed
30 percent of total long-term debt plus equity. This objective was met for all
periods presented.
9
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
A summary of the period to period increases (decreases) in the principal
components of operations is shown below (dollars in millions, except per share
amounts).
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
NOV. 29, 1998 AND NOV. 23, 1997 NOV. 29, 1998 AND NOV. 23, 1997
------------------------------- -------------------------------
DOLLAR PERCENT DOLLAR PERCENT
CHANGE CHANGE CHANGE CHANGE
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ (143.7) (2.2)% $ 76.9 0.6%
Costs and expenses
Cost of goods sold (212.4) (3.9) (25.9) (0.2)
Selling, administrative and general expenses 49.1 8.1 94.1 7.7
Interest expense 15.5 20.5 18.3 12.3
--------- ------- --------- -------
(147.8) (2.4) 86.5 0.7
--------- ------- --------- -------
Income before income taxes 4.1 1.2 (9.6) (1.8)
Income taxes 2.3 1.7 (2.4) (1.2)
--------- ------- --------- -------
Net income $ 1.8 0.8% $ (7.2) (2.1)%
--------- ------- --------- -------
--------- ------- --------- -------
Income per share - basic $ - 0.0% $ (.02) (2.8)%
--------- ------- --------- -------
--------- ------- --------- -------
Income per share - diluted $ - 0.0% $ (.02) (2.8)%
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
In ConAgra's Grocery & Diversified Products business segment, operating profit
increased 1.5 percent in the second quarter and 4.5 percent in the first half.
Segment sales increased 2 percent in the second quarter and 1 percent in the
first half. ConAgra's frozen foods businesses increased unit volumes and
operating profit in fiscal 1999's second quarter and first half. In ConAgra
Foodservice Sales Company, which includes Lamb-Weston potato products, operating
profit was down slightly in the second quarter and up in the first half. ConAgra
Grocery Products, the shelf-stable foods group, equaled prior year operating
profit in both periods.
In ConAgra's Food Inputs & Ingredients business segment, operating profit was
down 16 percent in the second quarter and 3 percent in the first half of fiscal
1999 versus the same periods in fiscal 1998. Segment sales decreased 14 percent
in the second quarter and 1 percent in the first half. Business dispositions,
lower commodity selling prices and sales reclassification reduced segment sales
over 4 percent in both periods. A shift in crop input sales from the second
quarter to the first quarter of fiscal 1999 also was a factor in the segment's
second quarter sales decline. ConAgra's major crop inputs business, United Agri
Products, increased operating profit in fiscal 1999's second quarter and first
half. In the ingredients sector, second quarter and first half operating growth
in international operations, specialty food ingredients and corn processing was
more than offset by a sharp decline in grain merchandising and commodity
services operating profit in both periods.
In ConAgra's Refrigerated Foods business segment, operating profit was up 46
percent in the second quarter and 9 percent in the first half of fiscal 1999
versus the same periods in fiscal 1998. Segment sales increased 2 percent in the
second quarter and 1 percent in the first half. Net of sales added by
acquisitions, lower pork and beef raw materials prices passed through as lower
selling prices reduced segment sales nearly 2 percent in the second quarter and
over 2 percent in the first half.
10
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The branded packaged meats business increased unit volumes and operating
profit in fiscal 1999's second quarter and first half. An acquisition
contributed to strong second quarter and first half operating profit growth
in the cheese and tablespreads business. Pork products, poultry products and
Australia beef raised operating profit in fiscal 1999's second quarter and
first half. U.S. beef operating profit was down in both periods, though the
year-over-year profit decline in dollars narrowed in the second quarter.
For ConAgra in total, fiscal 1999 second quarter net income was $219.0 million,
up 1 percent from $217.2 million in fiscal 1998's restated second quarter, and
up 4 percent from $210.6 million before restatement. Fiscal 1999 first half net
income was $328.3 million, down 2 percent from $335.5 million in fiscal 1998's
restated first half, and up 2 percent from $320.8 million before restatement.
Fiscal 1999 second quarter net sales were $6.40 billion, down 2 percent from
$6.55 billion in fiscal 1999's restated second quarter, and down .5 percent from
$6.43 billion before restatement. Fiscal 1999 first half net sales were $12.89
billion, up .6 percent from $12.81 billion in fiscal 1998's restated first half,
and up 2.5 percent from $12.57 billion before restatement.
YEAR 2000
The Year 2000 ("Y2K") computer software compliance issues affect ConAgra and
most companies in the world. Historically, certain computer programs were
written using two digits rather than four to define the applicable year. As a
result, software may recognize a date using the two digits "00" as 1900 rather
than the year 2000. Computer programs that do not recognize the proper date
could generate erroneous data or cause systems to fail. ConAgra has established
a Y2K project office and has retained an independent consulting group to provide
assistance with regard to ConAgra's Y2K compliance. ConAgra's Y2K project covers
both traditional computer systems and infrastructure ("IT systems") and
computer-based manufacturing, logistical and related systems ("non-IT systems").
The Y2K project has six phases: systems inventory, assessment, renovation,
validation, implementation, and contingency planning.
ConAgra operates on a decentralized independent operating company ("IOC")
structure. Consequently, the Y2K project efforts may vary by IOC. For IT
systems, the status of the project generally ranges from renovation to
implementation. For non-IT systems, the status of the project generally
ranges from assessment to implementation. Based on its assessment of its
major information technology systems, ConAgra expects that necessary
modifications and/or replacements will be completed in a timely manner to
insure that each IOC's systems are Y2K compliant.
ConAgra's Y2K project also considers the readiness of significant customers
and suppliers. ConAgra does not have any suppliers or customers that are
material to its operations as a whole. Each IOC is verifying the readiness of
suppliers and customers that may be significant for such IOC.
Due to the decentralized IOC structure, there are few IT systems and non-IT
systems, the failure of which would have a material effect on ConAgra as a
whole. Such material systems include general ledger, payroll, fixed assets
and cash management systems. ConAgra's Y2K project includes contingency plans
for these systems that involve, among other things, manual workarounds and
extra staffing. ConAgra's Y2K project includes the development of a full
contingency plan for each IOC and ConAgra presently expects to have such
contingency arrangements completed by June 1999.
ConAgra has incurred approximately $19 million of Y2K project expenses to
date. Future expenses are expected to include $40 to $50 million of
additional costs, plus approximately $10 million of systems initiatives that
have been accelerated in connection with the Y2K project. Such cost estimates
are based upon presently available information and may change as ConAgra
continues with its Y2K project.
11
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
twenty-six weeks ended November 29, 1998. For additional information, refer
to pages 6-8 of the Company's report on Form 8-K, dated September 29, 1998.
12
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ConAgra previously reported an action filed by the Environmental Protection
Agency in March 1996 in Federal District Court in Idaho against the Company
as owner and operator of a beef packing plant in Nampa, Idaho seeking civil
monetary penalties for alleged violations of the Clean Water Act. The
matter was completed with the entry of a consent decree in the second
quarter of fiscal 1999, which consent decree provides for the payment of $1
million by the Company and the implementation of certain remediation
measures at the Nampa facility.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
ConAgra issued 94,859 shares of its common stock during the second quarter
of fiscal 1999 in connection with the acquisition of Lovette Company, Inc.
The common stock was issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 and Regulation D
thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
12 - Statement regarding computation of ratio of earnings to fixed
charges.
(B) Reports on Form 8-K
None
CONAGRA, INC.
By:
/s/ James P. O'Donnell
---------------------------
James P. O'Donnell
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By:
/s/ Kenneth W. DiFonzo
--------------------------
Kenneth W. DiFonzo
Senior Vice President and
Corporate Controller
Dated this 12th day of January, 1999.
13
<PAGE>
CONAGRA, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
<S> <C> <C>
12 Statement regarding computation of ratio of 15
earnings to fixed charges
</TABLE>
14
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>EX-12
<TEXT>
<PAGE>
EXHIBIT 12
CONAGRA, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
NOVEMBER 29, 1998
-----------------
<S> <C>
Fixed charges
Interest expense $ 193.5
Capitalized interest 3.2
Interest in cost of goods sold 8.7
One third of noncancelable lease rent 17.1
-------
Total fixed charges (A) $ 222.5
-------
-------
Earnings
Pretax income $ 533.8
Add fixed charges 222.5
Less capitalized interest (3.2)
-------
Earnings and fixed charges (B) $ 753.1
-------
-------
Ratio of earnings to fixed charges (B/A) 3.4
</TABLE>
For the purpose of computing the above ratio of earnings to fixed charges,
earnings consist of income before taxes and fixed charges. Fixed charges, for
the purpose of computing earnings, are adjusted to exclude interest
capitalized. Fixed charges include interest on both long and short-term debt
(whether said interest is expensed or capitalized and including interest
charged to cost of goods sold), and a portion of noncancelable rental expense
representative of the interest factor. The ratio is computed using the
amounts for ConAgra as a whole, including its majority-owned subsidiaries,
whether or not consolidated, and its proportionate share of any 50% owned
subsidiaries, whether or not ConAgra guarantees obligations of these
subsidiaries.
15
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 27 FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-29-1998
<CASH> 44,300
<SECURITIES> 0
<RECEIVABLES> 2,767,600
<ALLOWANCES> 80,600
<INVENTORY> 4,189,600
<CURRENT-ASSETS> 7,239,600
<PP&E> 6,086,700
<DEPRECIATION> 2,486,000
<TOTAL-ASSETS> 13,946,900
<CURRENT-LIABILITIES> 6,982,300
<BONDS> 2,604,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 525,000
<COMMON> 2,597,700
<OTHER-SE> 453,300
<TOTAL-LIABILITY-AND-EQUITY> 13,946,900
<SALES> 12,887,800
<TOTAL-REVENUES> 12,887,800
<CGS> 10,864,400
<TOTAL-COSTS> 10,864,400
<OTHER-EXPENSES> 1,322,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,400
<INCOME-PRETAX> 533,800
<INCOME-TAX> 205,500
<INCOME-CONTINUING> 328,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328,300
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.69
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CAH | https://www.sec.gov/Archives/edgar/data/721371/0000950152-99-000868.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950152-99-000868.txt : 19990212
<SEC-HEADER>0000950152-99-000868.hdr.sgml : 19990212
ACCESSION NUMBER: 0000950152-99-000868
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990211
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CARDINAL HEALTH INC
CENTRAL INDEX KEY: 0000721371
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]
IRS NUMBER: 310958666
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11373
FILM NUMBER: 99532300
BUSINESS ADDRESS:
STREET 1: 5555 GLENDON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
BUSINESS PHONE: 6147175000
MAIL ADDRESS:
STREET 1: 5555 GLEDNON COURT
CITY: DUBLIN
STATE: OH
ZIP: 43016
FORMER COMPANY:
FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>CARDINAL HEALTH, INC. FORM 10-Q
<TEXT>
<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended December 31, 1998 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
(614) 717-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of Registrant's Common Shares outstanding at the close of
business on February 4, 1999 was as follows:
Common Shares, without par value: 272,056,928
-----------------
<PAGE> 2
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
---------------------
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three and Six Months
Ended December 31, 1998 and 1997 ................................................ 3
Condensed Consolidated Balance Sheets at December 31, 1998 and
June 30, 1998 ................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1998 and 1997....................................................... 5
Notes to Condensed Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 12
Part II. Other Information:
------------------
Item 1. Legal Proceedings................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.............................. 13
Item 5. Other Information................................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................................. 14
</TABLE>
* Items not listed are inapplicable.
<PAGE> 3
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Operating revenue $ 4,062,702 $ 3,277,748 $ 7,913,717 $ 6,300,157
Bulk deliveries to customer warehouses 999,813 750,590 1,781,493 1,431,745
----------- ----------- ----------- -----------
Total revenue 5,062,515 4,028,338 9,695,210 7,731,902
Cost of products sold:
Operating cost of products sold 3,701,325 2,978,705 7,231,233 5,723,468
Cost of products sold - bulk deliveries 999,813 750,590 1,781,493 1,431,745
----------- ----------- ----------- -----------
Total cost of products sold 4,701,138 3,729,295 9,012,726 7,155,213
Gross margin 361,377 299,043 682,484 576,689
Selling, general and administrative expenses 188,093 160,337 366,308 320,660
Merger-related costs (3,095) (3,189) (37,465) (5,372)
----------- ----------- ----------- -----------
Operating earnings 170,189 135,517 278,711 250,657
Other income (expense):
Interest expense (9,527) (7,211) (18,240) (14,454)
Other, net (2,383) 660 71 3,232
----------- ----------- ----------- -----------
Earnings before income taxes 158,279 128,966 260,542 239,435
Provision for income taxes 58,572 48,526 103,009 89,673
----------- ----------- ----------- -----------
Net earnings $ 99,707 $ 80,440 $ 157,533 $ 149,762
=========== =========== =========== ===========
Earnings per Common Share:
Basic $ 0.50 $ 0.40 $ 0.79 $ 0.75
Diluted $ 0.49 $ 0.40 $ 0.77 $ 0.74
Weighted average number of Common Shares outstanding:
Basic 200,836 199,388 200,655 198,996
Diluted 204,209 203,154 204,086 202,673
Cash dividends declared per Common Share $ 0.025 $ 0.0167 $ 0.05 $ 0.0333
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 236,543 $ 338,263
Trade receivables, net 1,105,931 989,583
Current portion of net investment in sales-type leases 103,343 75,450
Merchandise inventories 2,443,375 1,964,382
Prepaid expenses and other 148,272 137,417
----------- -----------
Total current assets 4,037,464 3,505,095
----------- -----------
Property and equipment, at cost 1,168,941 1,046,405
Accumulated depreciation and amortization (399,015) (347,468)
----------- -----------
Property and equipment, net 769,926 698,937
Other assets:
Net investment in sales-type leases, less current
portion 322,232 195,013
Goodwill and other intangibles 277,801 285,571
Other 100,567 98,490
----------- -----------
Total $ 5,507,990 $ 4,783,106
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 106,371 $ 24,653
Current portion of long-term obligations 10,407 7,294
Accounts payable 1,918,800 1,714,108
Other accrued liabilities 239,413 247,661
----------- -----------
Total current liabilities 2,274,991 1,993,716
----------- -----------
Long-term obligations, less current portion 642,813 441,170
Deferred income taxes and other liabilities 371,307 324,145
Shareholders' equity:
Common Shares, without par value 976,250 944,833
Retained earnings 1,279,838 1,122,230
Common Shares in treasury, at cost (10,629) (9,469)
Cumulative foreign currency adjustment (21,050) (28,034)
Other (5,530) (5,485)
----------- -----------
Total shareholders' equity 2,218,879 2,024,075
----------- -----------
Total $ 5,507,990 $ 4,783,106
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 157,533 $ 149,762
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 49,752 45,336
Provision for bad debts 5,119 5,856
Change in operating assets and liabilities:
Increase in trade receivables (116,058) (103,736)
Increase in merchandise inventories (476,602) (510,438)
Increase in net investment in sales-type leases (155,112) (28,451)
Increase in accounts payable 200,059 307,922
Other operating items, net 37,123 (26,857)
--------- ---------
Net cash used in operating activities (298,186) (160,606)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,506 1,365
Additions to property and equipment (110,096) (104,024)
Other - 1,715
--------- ---------
Net cash used in investing activities (107,590) (100,944)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 80,881 101,278
Reduction of long-term obligations (19,222) (8,327)
Proceeds from long-term obligations, net of issuance costs 219,696 26,827
Proceeds from issuance of Common Shares 18,695 14,590
Tax benefit of stock options 11,309 8,922
Dividends on Common Shares and cash paid
in lieu of fractional shares (8,609) (5,805)
Purchase of treasury shares (1,160) (983)
--------- ---------
Net cash provided by financing activities 301,590 136,502
EFFECT OF CURRENCY TRANSLATION ON CASH AND EQUIVALENTS 2,462 (578)
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (101,724) (125,626)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 338,263 270,536
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 236,539 $ 144,910
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The condensed consolidated financial statements of Cardinal Health,
Inc. (the "Company") include the accounts of all majority-owned
subsidiaries and all significant intercompany amounts have been
eliminated. The condensed consolidated financial statements contained
herein have been restated to give retroactive effect to the merger
transactions with MediQual Systems, Inc. ("MediQual") on February 18,
1998 and R.P. Scherer Corporation ("Scherer") on August 7, 1998, both
of which were accounted for as pooling of interests business
combinations (see Note 5).
These condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and include all of
the information and disclosures required by generally accepted
accounting principles for interim reporting. In the opinion of
management, all adjustments necessary for a fair presentation have
been included. Except as disclosed elsewhere herein, all such
adjustments are of a normal and recurring nature.
The condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1998, and in the
Company's Current Report on Form 8-K/A (Amendment No. 1) filed on
September 28, 1998.
Note 2. Basic earnings per Common Share ("Basic") is computed by dividing
net earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 3. On August 12, 1998, the Company declared a three-for-two stock
split which was effected as a stock dividend and distributed on
October 30, 1998 to shareholders of record at the close of business on
October 9, 1998. All share and per share amounts included in the
condensed consolidated financial statements have been adjusted to
retroactively reflect the stock split.
Note 4. As of September 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the presentation of comprehensive income and
its components in a full set of general purpose financial statements.
The Company's comprehensive income consists of net earnings and
foreign currency translation adjustments. For the three months ended
December 31, 1998, total comprehensive income was $106.3 million,
comprised of $99.7 million of net earnings and $6.6 million of gain on
foreign currency translation. Total comprehensive income for the
comparable period of fiscal year 1997 was $75.0 million, comprised of
$80.4 million of net earnings offset by $5.4 million of loss on
foreign currency translation. For the six months ended December 31,
1998, total comprehensive income was $164.5 million, comprised of
$157.5 million of net earnings and $7.0 million of gain on foreign
currency translation. Total comprehensive income for the first six
months of fiscal year 1997 was $143.2 million, comprised of $149.8
million of net earnings offset by $6.6 million of loss on foreign
currency translation.
Note 5. On August 7, 1998, the Company completed a merger transaction with
Scherer (the "Scherer Merger"). The Scherer Merger was accounted for
as a pooling of interests. The Company issued approximately 34.2
million Common Shares to Scherer stockholders and Scherer's
outstanding stock options were converted into options to purchase
approximately 3.5 million Common Shares.
The Company's fiscal year end is June 30 and Scherer's fiscal year end
was March 31. The condensed consolidated financial statements for the
three and six months ended December 31, 1998, combine the Company's
and Scherer's results for the same periods. For the three and six
months ended December 31, 1997, the condensed consolidated financial
statements combine the Company's three and six months ended December
31, 1997 results with Scherer's three and six months ended September
30, 1997 results, respectively. Due to the change in Scherer's fiscal
year end from March 31 to conform with the Company's June 30 fiscal
year end, Scherer's results of operations for the three months ended
June 30, 1998 will not be included in the combined results of
operations but will be reflected as an adjustment to combined retained
earnings. Scherer's net revenue and net earnings for this period were
$161.6 million
<PAGE> 7
and $8.6 million, respectively. Scherer's cash flows from operating
and financing activities for this period were $12.6 million and $32.6
million, respectively, while cash flows used in investing activities
were $12.2 million.
Note 6. Costs of effecting mergers and subsequently integrating the operations
of the various merged companies are recorded as merger-related costs
when incurred. During the three and six months ended December 31,
1998, merger-related costs totaling $3.1 million ($1.9 million, net of
tax) and $37.5 million ($29.7 million, net of tax) were recorded,
respectively. Of this amount, approximately $22.3 million related to
transaction and employee-related costs, and $12.5 million related to
business restructuring and asset impairment costs associated with the
Company's merger transaction with Scherer, which were recorded during
the first quarter of fiscal 1999. In addition, the Company recorded
costs of $1.1 million related to severance costs for a restructuring
associated with the change in management that resulted from the merger
with Owen Healthcare, Inc. and $4.8 million, of which $1.8 million was
recorded during the first quarter of fiscal 1999, related to
integrating the operations of companies that previously engaged in
merger transactions with the Company. Partially offsetting the charge
recorded was a $3.2 million credit, of which $2.2 million was recorded
during the first quarter of fiscal 1999, to adjust the estimated
transaction and termination costs previously recorded in connection
with the canceled merger transaction with Bergen Brunswig Corporation
("Bergen") (see Note 7). This adjustment relates primarily to services
provided by third parties engaged by the Company in connection with
the terminated Bergen transaction. The cost of such services was
estimated and recorded in the prior periods when the services were
performed. Actual billings were less than the estimate originally
recorded, resulting in a reduction of the current period
merger-related costs.
During the three and six month periods ended December 31, 1997,
merger-related costs recorded totaled $3.2 million ($1.9 million, net
of tax) and $5.4 million ($3.3 million, net of tax), respectively.
These charges related to integrating the operations of companies that
previously merged with the Company.
The net effect of the various merger-related costs recorded during the
three months ended December 31, 1998 and 1997 was to reduce net
earnings by $1.9 million to $99.7 million and by $1.9 million to $80.4
million, respectively, and to reduce reported diluted earnings per
Common Share by $0.01 per share to $0.49 per share and by $0.01 per
share to $0.40 per share, respectively. In addition, the net effect of
the various merger-related costs recorded during the six months ended
December 31, 1998 and 1997 was to reduce net earnings by $29.7 million
to $157.5 million and by $3.3 million to $149.8 million, respectively,
and to reduce reported diluted earnings per Common Share by $0.15 per
share to $0.77 per share and by $0.02 per share to $0.74 per share,
respectively.
Note 7. On August 24, 1997, the Company and Bergen announced that they had
entered into a definitive merger agreement, as amended, pursuant to
which a wholly owned subsidiary of the Company would be merged with
and into Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the
United States District Court for the District of Columbia granted the
Federal Trade Commission's request for a preliminary injunction to
halt the proposed merger. On August 7, 1998, the Company and Bergen
jointly terminated the Bergen Merger Agreement and, in accordance with
the terms of the Bergen Merger Agreement, the Company reimbursed
Bergen for $7 million of transaction costs. Additionally, the
termination of the Bergen Merger Agreement caused the costs incurred
by the Company (that would not have been deductible had the merger
been consummated) to become tax deductible for federal income tax
purposes, resulting in a tax benefit of $12.2 million. The obligation
to reimburse Bergen and the additional tax benefit were recorded in
the fourth quarter of the fiscal year ended June 30, 1998.
Note 8. On October 9, 1998, the Company announced that it had entered into a
definitive merger agreement with Allegiance Corporation
("Allegiance"). This merger transaction was completed on February 3,
1999, and will be accounted for as a pooling of interests for
financial reporting purposes. As part of the merger transaction with
Allegiance, the Company issued approximately 70.7 million Common
Shares to Allegiance stockholders and Allegiance's outstanding stock
options were converted into options to purchase approximately 10.3
million Common Shares. The Company has assumed approximately $892.1
million in long-term debt as part of the merger. The Company expects
to record a merger-related charge to reflect transaction and other
costs incurred as a result of the merger transaction with Allegiance
in the quarter ended March 31, 1999.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below has been prepared to
give retroactive effect to the pooling of interests business combinations with
MediQual Systems, Inc. ("MediQual") on February 18, 1998 and R.P. Scherer
Corporation ("Scherer") on August 7, 1998. The discussion and analysis is
concerned with material changes in financial condition and results of operations
for the Company's condensed consolidated balance sheets as of December 31, 1998
and June 30, 1998, and for the condensed consolidated statements of earnings for
the three and six month periods ended December 31, 1998 and 1997.
This discussion and analysis should be read together with management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 and in the Company's Current Report on Form
8-K/A (Amendment No. 1) filed with the Securities and Exchange Commission on
September 28, 1998.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to materially differ from those made, projected
or implied. The most significant of such risks, uncertainties and other factors
are described in this report and in Exhibit 99.01 to this Form 10-Q. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
RESULTS OF OPERATIONS
Operating Revenue. Operating revenue for the second quarter and six month
period of fiscal 1999 increased 24% and 26%, respectively, as compared to the
prior year. Distribution businesses (those whose primary operations involve the
wholesale distribution of pharmaceuticals, representing approximately 88% of
total operating revenue) grew at a rate of 25% and 28%, respectively, during the
three and six month periods ended December 31, 1998, while Service businesses
(those that provide services to the healthcare industry, primarily through
pharmacy franchising, pharmacy automation equipment, pharmacy management,
pharmaceutical packaging, drug delivery systems development and healthcare
information systems development) grew at a rate of 20% and 18%, respectively,
during the comparable periods of fiscal year 1998, primarily due to the
Company's pharmacy automation and pharmaceutical packaging businesses. The
majority of the operating revenue increase (approximately 74% and 75% for the
three and six month periods ended December 31, 1998, respectively) came from
existing customers in the form of increased volume and price increases. The
remainder of the growth came from the addition of new customers.
Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within the chain
drugstore industry, decisions by chains to either begin or discontinue
warehousing activities, and changes in policies by manufacturers related to
selling directly to chain drugstore customers. Due to the lack of margin
generated through bulk deliveries, fluctuations in their amount have no
significant impact on the Company's operating earnings.
Gross Margin. For the three month periods ended December 31, 1998 and 1997,
gross margin as a percentage of operating revenue was 8.89% and 9.12%,
respectively. For the six month periods ended December 31, 1998 and 1997, gross
margin as a percentage of operating revenue was 8.62% and 9.15%, respectively.
The decrease in the gross margin percentage is due primarily to a greater mix of
lower margin Distribution business in the three and six months ended December
31, 1998, and a general decline in the Distribution businesses gross margin.
The Distribution businesses' gross margin as a percentage of operating
revenue decreased for the second quarter of the current fiscal year from 5.40% a
year ago to 5.29%. In addition, Distribution's gross margin as a percentage of
operating revenue was 5.17% and 5.47%, respectively for the six month periods
ended December 31, 1998 and 1997. These decreases were primarily due to the
impact of lower selling margins, as a result of a highly competitive market and
a greater mix of high volume customers, where a lower cost of distribution and
better asset
<PAGE> 9
management enable the Company to offer lower selling margins to its customers.
The Distribution businesses achieved 25% and 28% operating revenue growth during
the three and six months ended December 31, 1998, respectively, primarily
through the addition or expansion of business with large, high volume customers.
The Service businesses' gross margin as a percentage of operating revenue
for the second quarter of fiscal 1999 and fiscal 1998 was 32.73% and 31.96%,
respectively. For the six month periods ended December 31, 1998 and 1997,
Service's gross margin as a percentage of operating revenue was 31.92% and
31.76%, respectively. The slight improvement in gross margin rates experienced
by the Service businesses is a function of the mix of the various businesses.
Increased operating revenue for the Company's relatively high margin pharmacy
automation business was the primary contributor to the gross margin improvement.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of operating revenue declined to 4.63%
in the second quarter of fiscal 1999 compared to 4.89% for the same period of
fiscal 1998, and 4.63% for the six month period ended December 31, 1998 compared
to 5.09% for the same period in the prior year. The improvements in the second
quarter and six month period reflect economies associated with the Company's
revenue growth, as well as significant productivity gains resulting from
continued cost control efforts and the consolidation and selective automation of
operating facilities. The 17% and 14% growth in selling, general and
administrative expenses experienced in the three and six months ended December
31, 1998, respectively, was due primarily to increases in personnel costs and
depreciation expense, and compares favorably to the 24% and 26% growth in
operating revenue for the same respective periods.
Merger-Related Costs. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. During the three and six months ended
December 31, 1998, merger-related costs totaling $3.1 million ($1.9 million, net
of tax) and $37.5 million ($29.7 million, net of tax) were recorded,
respectively. Of this amount, approximately $22.3 million related to transaction
and employee-related costs, and $12.5 million related to business restructuring
and asset impairment costs associated with the Company's merger transaction with
Scherer, which were recorded during the first quarter of fiscal 1999. In
addition, the Company recorded costs of $1.1 million related to severance costs
for a restructuring associated with the change in management that resulted from
the merger transaction with Owen Healthcare, Inc. and $4.8 million, of which
$1.8 million was recorded during the first quarter of fiscal 1999, related to
integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded was a
$3.2 million credit, of which $2.2 million was recorded during the first quarter
of fiscal 1999, to adjust the estimated transaction and termination costs
previously recorded in connection with the canceled merger transaction with
Bergen Brunswig Corporation ("Bergen") (see Note 7 of "Notes to Condensed
Consolidated Financial Statements"). This adjustment relates primarily to
services provided by third parties engaged by the Company in connection with the
terminated Bergen transaction. The cost of such services was estimated and
recorded in the prior periods when the services were performed. Actual billings
were less than the estimate originally recorded, resulting in a reduction of the
current period merger-related costs.
During the three and six months ended December 31, 1997, the Company
recorded costs of $3.2 million ($1.9 million, net of tax) and $5.4 million ($3.3
million, net of tax) respectively, related to integrating the operations of
companies that previously merged with Cardinal.
The Company estimates that it will incur additional merger-related costs
associated with the various mergers it has completed to date (primarily related
to the Scherer merger) of approximately $29.2 million ($17.9 million, net of
tax) in future periods (primarily fiscal 1999 and 2000) in order to properly
integrate operations and implement efficiencies. Such amounts will be charged to
expense when incurred. The estimate does not include merger-related costs
associated with the Company's merger transaction with Allegiance (see Note 8 of
"Notes to Condensed Consolidated Financial Statements" and "Other - Allegiance
Merger").
The effect of merger-related costs recorded during the three months ended
December 31, 1998 and 1997 was to reduce net earnings by $1.9 million to $99.7
million and by $1.9 million to $80.4 million, respectively, and to reduce
reported diluted earnings per Common Share by $0.01 per share to $0.49 per share
and by $0.01 per share to $0.40 per share, respectively. In addition,
merger-related costs recorded during the six month periods ended December 31,
1998 and 1997 reduced net earnings by $29.7 million to $157.5 million and by
$3.3 million to $149.8 million, respectively, and reduced reported diluted
earnings per Common Share by $0.15 per share to $0.77 per share and by $0.02 per
share to $0.74 per share, respectively.
Other Income (Expense). The increase in interest expense of $2.3 million in
the second quarter and $3.8 million during the first six months of fiscal 1999
compared to the same respective periods of fiscal 1998 is primarily due to the
Company's issuance of $150 million, 6.25% Notes due 2008, in a public offering
in July 1998 (see "Liquidity
<PAGE> 10
and Capital Resources"). The decrease in other income of $3.0 million in the
second quarter and $3.2 million during the first six months of fiscal 1999
compared to the same respective periods of fiscal 1998 is primarily due to the
increase in minority interests in the earnings of less than wholly owned
subsidiaries. The increase in minority interests was primarily the result of
increased profitability at the Company's majority owned German subsidiary.
Provision for Income Taxes. The Company's provision for income taxes
relative to pre-tax earnings was 37% and 38% for the second quarter of fiscal
1999 and 1998, respectively. The decrease is due primarily to the current year
utilization of certain net operating loss carryforwards for which no prior
benefit had been recognized. For the six month periods ended December 31, 1998
and 1997, the Company's income tax provision as a percentage of pre-tax earnings
was 40% and 38%, respectively. The increase in the effective tax rate for the
six months ended December 31, 1998 compared to the same period a year ago is due
primarily to nondeductible items associated with the current year's business
combinations (see Note 6 of "Notes to Condensed Consolidated Financial
Statements").
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,762 million at December 31, 1998 from
$1,511 million at June 30, 1998. This increase included additional investments
in merchandise inventories and trade receivables of $479.0 million and $116.3
million, respectively. Offsetting the increases in working capital was a
decrease in cash and equivalents of $101.7 million and an increase in accounts
payable of $204.7 million. The increase in merchandise inventories reflects
normal seasonal purchases of pharmaceutical inventories and the higher level of
current and anticipated business volume in pharmaceutical distribution
activities. The increase in trade receivables is consistent with the Company's
operating revenue growth (see "Operating Revenue" above). The change in cash and
equivalents and accounts payable is due primarily to the timing of inventory
purchases and related payments.
On July 13, 1998, the Company issued $150 million of 6.25% Notes due 2008,
the proceeds of which are expected to be used for working capital needs due to
the growth in the Company's business. The Company currently has the capacity to
issue $250 million of additional debt securities pursuant to a shelf
registration statement filed with the Securities and Exchange Commission.
Property and equipment, at cost, increased by $122.5 million from June 30,
1998. The increase was primarily due to ongoing plant expansion and
manufacturing equipment purchases in certain service businesses and additional
investments made for management information systems and upgrades to distribution
facilities.
Shareholders' equity increased to $2.2 billion at December 31, 1998 from
$2.0 billion at June 30, 1998, primarily due to net earnings of $157.5 million,
the investment of $18.7 million by employees of the Company through various
stock incentive plans and the adjustment related to the change in Scherer's
fiscal year of $8.6 million during the six month period ended December 31, 1998
(See Note 5 to the "Notes to Condensed Consolidated Financial Statements").
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to pending business combinations. See "Other" below.
OTHER
Allegiance Merger. On October 9, 1998, the Company announced that it had
entered into a definitive merger agreement with Allegiance Corporation
("Allegiance"). This merger transaction was completed on February 3, 1999, and
will be accounted for as a pooling of interests for financial reporting
purposes. As part of the merger transaction with Allegiance, the Company issued
approximately 70.7 million Common Shares to Allegiance stockholders and
Allegiance's outstanding stock options were converted into options to purchase
approximately 10.3 million Common Shares. The Company has assumed approximately
$892.1 million in long-term debt as part of the merger. The Company expects to
record a merger-related charge to reflect transaction and other costs incurred
as a result of the merger transaction with Allegiance in the third quarter of
fiscal 1999. Additional merger-related costs associated with integrating the
separate companies and instituting efficiencies will be charged to expense in
subsequent periods when incurred. (See Note 8 of "Notes to the Condensed
Consolidated Financial Statements").
Termination Agreement. On August 24, 1997, the Company and Bergen announced
that they had entered into a definitive merger agreement, as amended, pursuant
to which a wholly owned subsidiary of the Company would be merged with and into
Bergen (the "Bergen Merger Agreement"). On July 31, 1998, the United States
District Court
<PAGE> 11
for the District of Columbia granted the Federal Trade Commission's request for
a preliminary injunction to halt the proposed merger. On August 7, 1998, the
Company and Bergen jointly terminated the Bergen Merger Agreement and, in
accordance with the terms of the Bergen Merger Agreement, the Company reimbursed
Bergen for $7 million of transaction costs. Additionally, the termination of the
Bergen Merger Agreement caused the costs incurred by the Company (that would not
have been deductible had the merger been consummated) to become tax deductible
for federal income tax purposes, resulting in a tax benefit of $12.2 million.
The obligation to reimburse Bergen and the additional tax benefit were recorded
in the fourth quarter of the fiscal year ended June 30, 1998.
Year 2000 Project. The Company utilizes computer technologies in each of
its businesses to effectively carry out its day-to-day operations. Computer
technologies include both information technology in the form of hardware and
software, as well as embedded technology in the Company's facilities and
equipment. Similar to most companies, the Company must determine whether its
systems are capable of recognizing and processing date sensitive information
properly as the year 2000 approaches. The Company is utilizing a multi-phased
concurrent approach to address this issue. The phases included in the Company's
approach are the awareness, assessment, remediation, validation and
implementation phases. The Company has completed the awareness phase of its
project. The Company has also substantially completed the assessment phase and
is well into the remaining phases. The Company is actively correcting and
replacing those systems which are not year 2000 ready in order to ensure the
Company's ability to continue to meet its internal needs and those of its
suppliers and customers. The Company currently intends to substantially complete
the remediation, validation and implementation phases of the year 2000 project
prior to June 30, 1999. This process includes the testing of critical systems to
ensure that year 2000 readiness has been accomplished. The Company currently
believes it will be able to modify, replace, or mitigate its affected systems in
time to avoid any material detrimental impact on its operations. If the Company
determines that it is unable to remediate and properly test affected systems on
a timely basis, the Company intends to develop appropriate contingency plans for
any such mission-critical systems at the time such determination is made. While
the Company is not presently aware of any significant probability that its
systems will not be properly remediated on a timely basis, there can be no
assurances that all year 2000 remediation processes will be completed and
properly tested before the year 2000, or that contingency plans will
sufficiently mitigate the risk of a year 2000 readiness problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $24 million, including costs incurred to date. A
significant portion of these costs are not likely to be incremental costs, but
rather will represent the redeployment of existing resources. This reallocation
of resources is not expected to have a significant impact on the day-to-day
operations of the Company. During the three and six month periods ended December
31, 1998, total costs of approximately $1.9 million and $3.2 million,
respectively, were incurred by the Company for this project, of which
approximately $0.7 million and $1.1 million, respectively, represented
incremental costs. Total accumulated costs of approximately $8.9 million have
been incurred by the Company through December 31, 1998, of which approximately
$2.7 million represented incremental expense. The anticipated impact and costs
of the project, as well as the date on which the Company expects to complete the
project, are based on management's best estimates using information currently
available and numerous assumptions about future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Based on its current estimates and information
currently available, the Company does not anticipate that the costs associated
with this project will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows in future
periods.
The Company has initiated formal communications with its significant
suppliers, customers, and critical business partners to determine the extent to
which the Company may be vulnerable in the event that those parties fail to
properly remediate their own year 2000 issues. The Company has taken steps to
monitor the progress made by those parties, and intends to test critical system
interfaces as the year 2000 approaches. The Company is in the process of
developing appropriate contingency plans in the event that a significant
exposure is identified relative to the dependencies on third-party systems.
Although the Company is not presently aware of any such significant exposure,
there can be no guarantee that the systems of third parties on which the Company
relies will be converted in a timely manner, or that a failure to properly
convert by another company would not have a material adverse effect on the
Company.
The potential risks associated with the year 2000 issues include, but are
not limited, to: temporary disruption of the Company's operations, loss of
communication services and loss of other utility services. The Company believes
that the most reasonably likely worst-case year 2000 scenario would be a loss of
communication services which could result in problems with receiving,
processing, tracking and billing customer orders; problems receiving, processing
and tracking orders placed with suppliers; and problems with banks and other
financial institutions. Currently, as part of the Company's normal business
contingency planning, a plan has been developed for business disruptions due to
natural disasters and power failures. The Company is in the process of enhancing
these contingency plans to include provisions for year 2000 issues, although it
will not be possible to develop contingency
<PAGE> 12
plans for all potential disruption. Although the Company anticipates that
minimal business disruption will occur as a result of the year 2000 issues,
based upon currently available information, incomplete or untimely resolution of
year 2000 issues by either the Company or significant suppliers, customers and
critical business partners could have a material adverse impact on the Company's
consolidated financial position, results of operations and/or cash flows in
future periods. The above discussion does not include the impact of the
Company's merger transaction with Allegiance which was completed on February 3,
1999.
The Euro Conversion. On January 1, 1999, certain member countries of the
European Union irrevocably fixed the conversion rates between their national
currencies and a common currency, the "Euro", which became their legal currency
on that date. The participating countries' former national currencies will
continue to exist as denominations of the Euro between January 1, 1999 and
January 1, 2002. The Company has addressed the business implications of
conversion to the Euro, including the need to adapt internal systems to
accommodate Euro-denominated transactions, the competitive implications of
cross-border price transparency, and other strategic implications. The Company
does not expect the conversion to the Euro to have a material impact on its
consolidated financial position, results of operations or cash flows in future
periods.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's Form 8-K/A (Amendment No. 1)
filed on September 28, 1998.
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The following disclosure should be read together with the disclosure
set forth in the Company's Form 10-K for the fiscal year ended June 30, 1998,
the Company's Form 10-Q for the quarter ended September 30, 1998, and the
Company's Forms 8-K filed with the Securities and Exchange Commission subsequent
to the end of the fiscal year ended June 30, 1998, and to the extent any such
statements constitute "forward looking statements", reference is made to Exhibit
99.01 of this Form 10-Q.
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action lawsuits which were later consolidated and transferred by the
Judicial Panel for Multi-District Litigation to the United States District Court
for the Northern District of Illinois. Subsequent to the consolidation, a new
consolidated complaint was filed which included allegations that the wholesaler
defendants, including the Company and Whitmire, conspired with manufacturers to
inflate prices using a chargeback pricing system. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
$1,000,000 or 1% of any judgment against the wholesalers and the manufacturers,
whichever is less, and provided for the reimbursement mechanism of legal fees
and expenses. The trial of the class action lawsuit began on September 23, 1998.
On November 19, 1998, after the close of plaintiffs' case-in-chief, both the
wholesaler defendants and the manufacturer defendants moved for a judgment as a
matter of law in their favor. On November 30, 1998, the Court granted both of
these motions and ordered judgment as a matter of law in favor of both the
wholesaler defendants and the manufacturer defendants. On January 25, 1999, the
class plaintiffs filed notice of appeal of the District Court's decision by the
Court of Appeals for the Seventh Circuit. In addition to the federal court cases
described above, the Company and Whitmire have also been named as defendants in
a series of related antitrust lawsuits brought by chain drug stores and
independent pharmacies who opted out of the federal class action lawsuits, and
in a series of state court cases alleging similar claims under various state
laws regarding the sale of brand name prescription drugs. The Judgment Sharing
Agreement described above also covers these litigation matters.
On January 17, 1995, Burlington Drug Company ("Burlington Drug") filed
a complaint in the United States District Court for the District of Vermont
alleging that certain agreements between VHA, Inc. ("VHA") and the Company
violated federal antitrust statutes and that the Company had tortiously
interfered with Burlington Drug's contractual relations. The Company filed an
answer denying the allegations contained in the complaint. The District Court
granted Burlington Drug leave to file an amended and supplemental complaint on
July 10, 1997, and the trial was set to begin on February 8, 1999. On January
13, 1999, the District Court dismissed this action based upon a tentative
settlement agreement among the parties, allowing Burlington Drug to petition,
upon good cause shown within sixty days, to reopen the action if a settlement is
not consummated.
The Company consummated a merger transaction with Allegiance on
February 3, 1999. With respect to the legal proceedings in which Allegiance is
involved, reference is made to the Quarterly and Annual Reports on Forms 10-Q
and Form 10-K, respectively, filed by Allegiance with the Securities and
Exchange Commission.
On September 3, 1998, the United States Attorney for the District of
Massachusetts filed a civil complaint against the Company in the United States
District Court for the District of Massachusetts. The Complaint sought civil
penalties for alleged multiple violations of the Controlled Substance Abuse Act.
On December 17, 1998, the parties entered into a settlement agreement pursuant
to which all claims contained in the complaint were withdrawn, without admission
of liability by the Company, in exchange for a payment of $487,500.
The Company also becomes involved from time-to-time in other litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced in this Item 1 cannot be forecast with certainty, the Company does
not believe that the outcome of these lawsuits will have a material adverse
effect on the Company's financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Registrant's 1998 Annual Meeting of Shareholders was held on November
23, 1998.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in the
proxy statement; and all director nominees were elected to the class
indicated in the proxy statement pursuant to the vote of the
Registrant's shareholders.
<PAGE> 14
(c) Matters voted upon at the Annual Meeting were as follows:
(1) Election of Robert L. Gerbig, George R. Manser, Jerry E.
Robertson, and Melburn G. Whitmire. The results of the
shareholder vote were as follows: Mr. Gerbig - 115,225,283
for, 0 against, 4,102,439 withheld, and 0 broker
non-votes; Mr. Manser - 115,210,909 for, 0 against,
4,116,813 withheld, and 0 broker non-votes; Dr. Robertson
- 115,199,117 for, 0 against, 4,133,605 withheld, and 0
broker non-votes; and Mr. Whitmire - 115,229,768 for, 0
against, 4,097,954 withheld, and 0 broker non-votes.
(2) Amendment of the Registrant's Articles of Incorporation
increasing the number of authorized Company common shares
from 300 million to 500 million. The results of the
shareholder vote were as follows: 114,841,226 for,
4,186,648 against, 299,848 withheld, and 0 broker
non-votes.
(3) Amendment and restatement of the Registrant's Code of
Regulations primarily to increase the maximum number of
members of the Registrant's Board of Directors from 14 to
16. The results of the shareholder vote were as follows:
105,649,422 for, 3,825,832 against, 343,493 withheld, and
9,508,975 broker non-votes.
(4) Amendment of the Registrant's Equity Incentive Plan
increasing the number of the Registrant's common shares
available for grant of awards under such plan. The results
of the shareholder vote were as follows: 73,309,518 for,
36,085,384 against, 422,653 withheld, and 9,510,167 broker
non-votes.
(5) Amendment of the Registrant's Performance-Based Incentive
Compensation Plan increasing the maximum award that may be
paid to a participant for any performance period. The
results of the shareholder vote were as follows:
113,197,420 for, 5,716,171 against, 413,131 withheld, and
1,000 broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
3.01 Amended and Restated Articles of Incorporation of the Registrant,
as amended (1)
3.02 Restated Code of Regulations of the Registrant, as amended (1)
10.01 Registrant's Equity Incentive Plan, as amended*
10.02 Registrant's Performance-Based Incentive Compensation Plan, as
amended*
27.01 Financial Data Schedule - Six months ended December 31, 1998
27.02 Financial Data Schedule - Six months ended December 31, 1997
99.01 Statement Regarding Forward-Looking Information
- ------------------
(1) Included as an exhibit to the Registrant's Form 8-K filed November
24, 1998.
* Management contract or compensation plan or arrangement
(b) Reports on Form 8-K:
On October 13, 1998, the Company filed a Current Report on Form 8-K
under Item 5 which reported that the Company had signed an Agreement and Plan of
Merger, dated as of October 8, 1998, among the Company, Boxes Merger Corp. and
Allegiance Corporation.
<PAGE> 15
On November 24, 1998, the Company filed a Current Report on Form 8-K
under Item 5 which filed the Company's Amended and Restated Articles of
Incorporation of the Registrant, as amended, and the Company's Restated Code of
Regulations of the Registrant, as amended.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: February 11, 1999 By: /s/ Robert D. Walter
---------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ Richard J. Miller
---------------------
Richard J. Miller
Vice President, Controller and
Acting Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.01
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10.01
<TEXT>
<PAGE> 1
Exhibit 10.01
[Logo]
CARDINAL HEALTH, INC.
EQUITY INCENTIVE PLAN,
As Amended Through November 1998
SECTION 1. PURPOSE.
The purpose of the Cardinal Health, Inc. Equity Incentive Plan (the
"Plan") is to assist Cardinal Health, Inc. ("CAH") and its subsidiaries (CAH and
its subsidiaries, collectively, the "Company") in attracting and retaining
capable employees and directors. The Plan provides for long and short term
incentives to employees by encouraging and enabling them to participate in the
Company's future prosperity and growth. The Plan provides for equity ownership
opportunities and appropriate incentives to better match the interests of
employees and directors with those of shareholders.
These objectives will be promoted through the granting to employees of
equity-based awards (the "awards") including (i) Incentive Stock Options
("ISOs"), which are intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) options which are not
intended to so qualify ("NQSOs") (ISOs and NQSOs are referred to together
hereinafter as "Stock Options"); (iii) Restricted Shares; (iv) Performance
Shares; (v) Performance Share Units and (vi) Incentive Compensation Restricted
Shares. Members of CAH's Board of Directors (the "Board") who do not serve as
employees of the Company ("Outside Directors") shall receive NQSOs from the Plan
only as provided herein.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Compensation and Personnel
Committee (the "Committee") of the Board which shall have the power and
authority to grant to eligible employees Stock Options, Restricted Shares,
Performance Shares, Performance Share Units and Incentive Compensation
Restricted Shares. In particular, the Committee shall have the authority to: (i)
select employees of the Company as recipients of awards; (ii) determine the
number and type of awards to be granted; (iii) determine the terms and
conditions, not inconsistent with the terms hereof, of any award; (iv) adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan as it shall,
<PAGE> 2
from time to time, deem advisable; (v) interpret the terms and provisions of the
Plan and any award granted and any agreements relating thereto; and (vi) take
any other actions the Committee considers appropriate in connection with, and
otherwise supervise the administration of, the Plan. All decisions made by the
Committee pursuant to the provisions hereof shall be made in the Committee's
sole discretion and shall be final and binding on all persons. Members of the
Committee shall be "disinterested persons" within the meaning of Rule 16b-3
("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
The Committee may designate persons other than its members to carry out
its responsibilities under such conditions and limitations as it may set, other
than its authority with regard to awards granted to persons subject to Section
16 of the Exchange Act ("Reporting Persons").
SECTION 3. ELIGIBILITY.
Employees of the Company and its subsidiaries who are responsible for
or contribute to the management, growth and/or profitability of the business of
the Company and/or subsidiary, in each case as determined by the Committee, are
eligible to be granted awards. The participants under the Plan who are not
Outside Directors shall be selected from time to time by the Committee, in its
sole discretion, from among those eligible. In addition, Outside Directors are
eligible to receive NQSOs as set forth in Section 9 ("Outside Director
Options"), and may not receive any other awards under this Plan. Members of the
Committee are eligible to receive Outside Director Options.
SECTION 4. SHARES SUBJECT TO PLAN.
The total number of the Company's common shares, without par value
("Shares"), reserved and available for distribution pursuant to awards
(including without limitation Outside Director Options) hereunder ("Available
Shares") shall be an amount equal to the sum of (a) 1.5% of the total
outstanding Shares as of the last day of the Company's immediately preceding
fiscal year, plus (b) the number of Shares available for grant under the Plan as
of November 23, 1998, plus (c) any Shares related to awards that, in whole or in
part, expire or are unexercised, forfeited, terminated, surrendered, canceled,
settled in such a manner that all or some of the Shares covered by an award are
not issued to a participant, or returned to the Company in payment of the
exercise price or tax withholding obligations in connection with outstanding
awards, plus (d) any unused portion of the Shares available under section (a)
above for the immediately preceding two fiscal years (but not prior to the
Company's fiscal year ending June 30, 1999) as a result of not being made
subject to a grant or award in such preceding two fiscal years. Notwithstanding
the foregoing, for the Company's fiscal year ending June 30, 1999, the number of
total outstanding Shares in section (a), above, shall be calculated as of
November 23, 1998, rather than June 30, 1998 (the last day of the immediately
preceding fiscal year). No more than 50% of the Available Shares shall be
granted in the form of Restricted Shares, Incentive Compensation Restricted
Shares, Performance Shares and
2
<PAGE> 3
Performance Share Units. The Available Shares may consist, in whole or in part,
of authorized but unissued Shares, treasury Shares, or previously issued Shares
re-acquired by the Company, including Shares purchased on the open market. The
maximum number of Shares with respect to which Stock Options, Performance Shares
and Performance Share Units may be granted to any single participant during any
single fiscal year of the Company shall be 375,000 Shares. The number of Shares
with respect to which ISOs may be granted shall not exceed 3,000,000. Any of the
Shares delivered upon the assumption of or in substitution for outstanding
grants made by a company or division acquired by the Company shall not decrease
the number of Shares available for grant under the Plan, except to the extent
otherwise provided by applicable law or regulation.
In the event of any stock dividend, stock split, share combination,
corporate separation or division (including, but not limited to, split-up,
spin-off, split-off or distribution to CAH shareholders other than a normal cash
dividend), or partial or complete liquidation, or any other corporate
transaction or event having any effect similar to any of the foregoing, then the
aggregate number of Shares reserved for issuance under the Plan, the limitation
on the number of Shares available under the Plan for issuance of Restricted
Shares, Incentive Compensation Restricted Shares, Performance Shares and
Performance Share Units, the limitation on the number of Shares subject to ISOs,
the limitations on the number of Shares subject to Stock Options or Performance
Shares or Performance Share Units granted to any single participant, the number
and exercise price of Shares subject to outstanding Stock Options, the purchase
price for Restricted Shares, the financial Performance Goals, if any, of the
Shares the subject of a Performance Share or Performance Share Unit award, the
number of Shares subject to a Performance Share or Performance Share Unit award
or granted by a Restricted Share or Incentive Compensation Restricted Share
award, and any other characteristics or terms of the awards or Plan limitations
as the Committee shall deem necessary or appropriate to reflect equitably the
effects of such changes, shall be appropriately substituted for new shares or
adjusted, as determined by the Committee in its discretion. Any such adjustments
made to NQSOs shall also be made to Outside Director Options.
If any recapitalization, reorganization, reclassification,
consolidation, merger of CAH or the Company or any sale of all or substantially
all of CAH's or the Company's assets to another person or entity or other
transaction which is effected in such a way that holders of Shares are entitled
to receive (either directly or upon subsequent liquidation) stock, securities,
or assets with respect to or in exchange for Shares (each an "Organic Change")
shall occur, in lieu of the Shares issuable upon exercise of a Stock Option or
Outside Director Option or pursuant to any other award under the Plan, the Stock
Option or Outside Director Option shall thereafter be exercisable for and other
awards shall be issuable in such shares of stock, securities or assets
(including cash) as may be issued or payable with respect to or in exchange for
the number of Shares immediately theretofore acquirable pursuant to such award
had such Organic Change not taken place (whether or not such Stock Option or
Outside Director Option is then exercisable or other awards are then vested)
after giving effect to any adjustments otherwise required or permitted under
this Plan.
3
<PAGE> 4
SECTION 5. STOCK OPTIONS.
References to Stock Options in this Section 5 shall not apply to
Outside Director Options. Stock Options may be granted alone or in addition to
other awards granted under the Plan. Any Stock Options granted under the Plan
shall be in such form as the Committee may from time to time approve and the
provisions of Stock Option awards need not be the same with respect to each
optionee. Stock Options granted under the Plan may be either ISOs or NQSOs. The
Committee may grant to any optionee ISOs, NQSOs or both types of Stock Options.
Anything in the Plan to the contrary notwithstanding, without the
consent of the optionee(s) affected, no provision of this Plan relating to ISOs
shall be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code or to disqualify any ISO under such Section 422.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions not
inconsistent with the terms of the Plan as the Committee deems appropriate. Each
Stock Option grant shall be evidenced by an agreement executed on behalf of the
Company by an officer designated by the Committee and accepted by the optionee.
Such agreement shall describe the Stock Options and state that such Stock
Options are subject to all the terms and provisions of the Plan and shall
contain such other terms and provisions, not inconsistent with the Plan, as the
Committee may approve.
(a) Exercise Price. The exercise price per Share issuable upon exercise
of a Stock Option shall be no less than the fair market value per share on the
date the Stock Option is granted; provided, that if the optionee, at the time an
ISO is granted, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of CAH or any subsidiary, the exercise price shall
be at least 110% of the fair market value of the Shares subject to the ISO on
the date of grant. Fair market value on the date of grant shall be determined by
the Committee in good faith.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten years after
the date such Stock Option is granted.
(c) Exercise of Stock Options. Stock Options shall become exercisable
at such time or times and subject to such terms and conditions (including,
without limitation, installment or cliff exercise provisions) as shall be
determined by the Committee. The Committee shall have the authority, in its
discretion, to accelerate the time at which a Stock Option shall be exercisable
whenever it may determine that such action is appropriate by reason of changes
in applicable tax or other law or other changes in circumstances occurring after
the award of such Stock Options.
4
<PAGE> 5
(d) Method of Exercise. Stock Options may be exercised in whole or in
part by giving written notice of exercise to the Company specifying the number
of Shares to be purchased. Payment in full of the exercise price shall be paid
in cash, or such other instrument as may be permitted in accordance with rules
or procedures adopted by the Committee. If approved by the Committee, payment in
full or in part may also be made: (i) by delivering Shares already owned by the
optionee having a total fair market value on the date of such delivery equal to
the option exercise price; (ii) by the delivery of cash on the extension of
credit by a broker-dealer to whom the optionee has submitted a notice of
exercise or an irrevocable election to effect such extension of credit; or (iii)
by any combination of the foregoing. No Shares shall be transferred until full
payment therefor has been made.
(e) Transferability of Stock Options. Except as otherwise provided
hereunder, Stock Options shall be transferable by the optionee only with prior
approval of the Committee and only in compliance with the restrictions imposed
under Section 16(b) of the Exchange Act and Section 422 of the Code, if
applicable. Any attempted transfer without Committee approval shall be null and
void. Unless Committee approval of the transfer shall have been obtained, all
Stock Options shall be exercisable during the optionee's lifetime only by the
optionee or the optionee's legal representative. Without limiting the generality
of the foregoing, the Committee may, in the manner established by the Committee,
provide for the irrevocable transfer, without payment of consideration, of any
Stock Option other than any ISO by an optionee to a member of the optionee's
family or to a trust or partnership whose beneficiaries are members of the
optionee's family. In such case, the Stock Option shall be exercisable only by
such transferee. For purposes of this provision, an optionee's "family" shall
include the optionee's spouse, children, grandchildren, nieces and nephews.
(f) Termination by Death. If an optionee's employment by or service to
the Company terminates by reason of death, then, unless otherwise determined by
the Committee within five days of such death, each Stock Option held by such
optionee shall thereafter be exercisable in full and any unvested portion
thereof shall immediately vest. Each Stock Option held by such optionee may
thereafter be exercised by the legal representative of the estate or by the
legatee of the optionee under the will of the optionee, for a period of one year
(or such other period as the Committee may specify at or after grant or death)
from the date of death or until the expiration of the stated term of such Stock
Option, whichever period is shorter.
(g) Termination by Reason of Retirement. If an optionee's employment by
or service to the Company terminates by reason of retirement, then, unless
otherwise determined by the Committee within sixty days of such retirement each
Stock Option held by such optionee may thereafter be exercised by the optionee
for a period of ninety days (or such other period as the Committee may specify
at or after grant or retirement) from the date of such termination of employment
or service, or until the expiration of the stated term of such Stock Option,
whichever period is shorter; provided, however, that, if
5
<PAGE> 6
the optionee dies within such ninety day period (or such other period), any
unexercised Stock Option held by such optionee shall thereafter be exercisable,
in full, for a period of one year (or such other period as the Committee may
specify at or after grant or death) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is shorter.
In the event of termination of employment by reason of retirement, if an ISO is
exercised after the expiration of the exercise periods that apply for purposes
of Section 422 of the Code, such ISO shall thereafter be treated as an NQSO. For
purposes of the Plan, retirement shall mean voluntary termination of employment
by a participant from the Company after attaining age 55 and having at least
three years of service with the Company.
(h) Other Termination of Employment. If an optionee's employment by or
service to the Company terminates for any reason other than death or retirement,
any Stock Option held by such optionee which has not vested on such date of
termination will automatically terminate on the date of such termination. Unless
otherwise determined by the Committee at or after grant or termination, the
optionee will have ninety days (or such other period as the Committee may
specify at or after grant or termination) from the date of termination to
exercise any and all Stock Options that are then exercisable on the date of
termination; provided, however, that if the termination was for Cause, any and
all Stock Options held by that optionee may be immediately canceled by the
Committee. For purposes of the Plan, "Cause" means on account of any act of
fraud or intentional misrepresentation or embezzlement, misappropriation or
conversion of assets of the Company or any subsidiary, or the intentional and
repeated violation of the written policies or procedures of the Company.
(i) Effect of Termination of Optionee on Transferee. Except as
otherwise permitted by the Committee in its absolute discretion, no Stock Option
held by a transferee of an optionee pursuant to the fourth sentence of Section
5(e) shall remain exercisable for any period of time longer than would otherwise
be permitted under Sections 5(f), 5(g) or 5(h) without specification of other
periods by the Committee as provided in those Sections.
(j) ISO Limitations. To the extent required for "incentive stock
option" status under Section 422 of the Code, the aggregate fair market value
(determined as of the time of grant) of the Shares with respect to which ISOs
are exercisable for the first time by the optionee during any calendar year
under the Plan and any other stock option plan of the Company and its
affiliates, shall not exceed $100,000.
SECTION 6. RESTRICTED SHARES.
Restricted Shares may be granted alone or in addition to other awards
granted under the Plan. Any Restricted Shares granted under the Plan shall be
subject to the following restrictions and conditions, and shall contain such
additional terms and conditions not inconsistent with the terms of the Plan as
the Committee deems
6
<PAGE> 7
appropriate. The provisions of Restricted Share awards need not be the same with
respect to each recipient.
(a) Price. The purchase price for Restricted Shares shall be any price
set by the Committee and may be zero. Payment in full of the purchase price, if
any, shall be made in cash, or such other instrument as may be permitted in
accordance with rules or procedures adopted by the Committee. If approved by the
Committee, payment in full or part may also be made: (i) by delivering Shares
already owned by the grantee having a total fair market value on the date of
such delivery equal to the Restricted Share price; (ii) by the delivery of cash
on the extension of credit by a broker-dealer or an irrevocable election to
effect such extension of credit; or (iii) by any combination of the foregoing.
(b) Restricted Share Award Agreement. Each Restricted Share grant shall
be evidenced by an agreement executed on behalf of the Company by an officer
designated by the Committee. Such Restricted Share Award Agreement shall
describe the Restricted Shares and state that such Restricted Shares are subject
to all the terms and provisions of the Plan and shall contain such other terms
and provisions, consistent with the Plan, as the Committee may approve. At the
time the Restricted Shares are awarded, the Committee may determine that such
Shares shall, after vesting, be further restricted as to transferability or be
subject to repurchase by the Company upon occurrence of certain events
determined by the Committee, in its sole discretion, and specified in the
Restricted Share Award Agreement. Awards of Restricted Shares must be accepted
by a grantee thereof within a period of 30 days (or such other period as the
Committee may specify at grant) after the award date by executing the Restricted
Share Award Agreement and paying the price, if any, required under Section 6(a).
The prospective recipient of a Restricted Share award shall not have
any rights with respect to such award, unless and until such recipient has
executed an agreement evidencing the award and has delivered a fully executed
copy thereof to the Company, and has otherwise complied with the applicable
terms and conditions of such award.
(c) Share Restrictions. Subject to the provisions of this Plan and the
applicable Restricted Share Award Agreement, during a period set by the
Committee commencing with the date of such award and ending on such date as
determined by the Committee at grant (the "Restriction Period"), the participant
shall not be permitted to sell, transfer, pledge, assign or otherwise encumber
shares of Restricted Shares awarded under the Plan. In no event shall more than
10% of the Shares authorized for issuance under this Plan (as adjusted as
provided in Section 4) be granted in the form of Restricted Shares having a
restriction period of less than 3 years. The Committee shall have the authority,
in its absolute discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect to any Restricted Shares or to remove any
or all restrictions after the grant of such Restricted Shares, provided,
however, that such discretion shall be exercised subject to the limitations set
forth in the preceding sentence, excluding discretion exercised in connection
with a Grantee's termination of employment from the Company. Unless otherwise
determined by the Committee at or after grant or termination, if a participant's
employment by or service to the Company terminates during the Restriction
Period, all
7
<PAGE> 8
Restricted Shares held by such participant still subject to restriction shall be
forfeited by the participant.
(d) Stock Certificate and Legends. Each participant receiving a
Restricted Share award shall be issued a stock certificate in respect of such
Restricted Shares. Such certificate shall be registered in the name of such
participant. The Committee may require that the stock certificates evidencing
such shares be held in custody by the Company until the restrictions thereon
shall have lapsed, and that, as a condition of any Restricted Shares award, the
participant shall have delivered a stock power, endorsed in blank, relating to
the Shares covered by such award.
(e) Shareholder Rights. Except as provided in this Section 6, the
recipient shall have, with respect to the Restricted Shares covered by any
award, all of the rights of a shareholder of the Company, including the right to
vote the Shares, and the right to receive any dividends or other distributions,
with respect to the Shares, but subject, however, to those restrictions placed
on such Shares pursuant to this Plan and as specified by the Committee in the
Restricted Share Award Agreement.
(f) Expiration of Restriction Period. If and when the Restriction Period
expires without a prior forfeiture of the Restricted Shares subject to such
Restriction Period, unrestricted certificates for such shares shall be delivered
to the participant.
SECTION 7. PERFORMANCE SHARES AND PERFORMANCE SHARE UNITS.
Subject to the terms and conditions described herein, Performance
Shares and Performance Share Units may be granted to eligible participants at
any time and from time to time as determined by the Committee.
(a) Price. The purchase price for Performance Shares and Performance
Share Units shall be zero unless otherwise specified by the Committee.
(b) Performance Share Agreement. Subject to the provisions of this
Plan, all the terms and conditions of an award of Performance Shares or
Performance Share Units shall be determined by the Committee in its discretion.
Each Performance Share and Performance Share Unit shall be evidenced by an
agreement executed by the recipient of the Performance Share or Performance
Share Unit and on behalf of the Company by an officer designated by the
Committee. Such Performance Share or Performance Share Unit Award Agreement
shall describe the Performance Share or Performance Share Unit and state that
such Performance Share or Performance Share Unit is subject to all the terms and
provisions of the Plan and shall contain such other terms and provisions, not
inconsistent with the Plan, as the Committee may approve. Award of Performance
Shares and Performance Share Units must be accepted by a grantee thereof within
a period of 60 days (or such other period as the Committee may specify at grant)
after the award date by executing the Performance Share or Performance Share
Unit Award Agreement, and paying the price, if any, as required under Section
7(a).
8
<PAGE> 9
(c) Performance Periods. Any time period (the "Performance Period")
relating to a Performance Share or Performance Share Unit award shall be at
least one year in length. No more than two Performance Periods may begin in any
one fiscal year of the Company.
(d) Performance Goals. Performance Shares and Performance Share Units
shall be earned based upon the financial performance of the Company or an
operating group of the Company during a Performance Period. As to each
Performance Period, within such time as established by Section 162(m) of the
Code, the Committee will establish in writing targets for one of the following
performance measures of the Company (and/or an operating group of the Company,
if applicable) over the Performance Period ("Performance Goals"): (i) earnings,
(ii) return on capital, or (iii) any Performance Goal approved by the
shareholders of the Company in accordance with Section 162(m) of the Code. The
Performance Goals, depending on the extent to which they are satisfied, will
determine the number of Performance Shares or Performance Share Units, if any,
that will be earned by each participant. Attainment of the Performance Goals
will be calculated from the consolidated financial statements of the Company but
shall exclude (i) the effects of changes in federal income tax rates, (ii) the
effects of unusual, non-recurring and extraordinary items as defined by
Generally Accepted Accounting Principles ("GAAP"), and (iii) the cumulative
effect of changes in accounting principles in accordance with GAAP. The
Performance Goals may vary for different Performance Periods and need not be the
same for each participant receiving an award for a Performance Period. The
Committee may, in its absolute discretion, subject to the limitations of Section
11, vary the terms and conditions of any Performance Share or Performance Share
Unit award, including, without limitation, the Performance Period and
Performance Goals, without shareholder approval, as applied to any recipient who
is not a "covered employee" with respect to the Company as defined in Section
162(m) of the Code. In the event applicable tax or securities laws change to
permit the Committee discretion to alter the governing performance measures as
they pertain to covered employees without obtaining shareholder approval of such
changes, the Committee shall have sole discretion to make such changes without
obtaining shareholder approval.
(e) Earning of Performance Shares. Performance Shares shall be issued
to each recipient thereof on the later of such time as the Performance Goals are
established or the first day of the applicable Performance Period. The number of
Performance Shares awarded at such time shall be calculated based upon the
assumption that the Performance Goals for the applicable Performance Period will
be satisfied to the fullest extent. The Company, or its designated agent, shall
hold all Performance Shares issued to recipients prior to completion of the
Performance Period. Participants shall be entitled to all dividends and other
distributions earned in respect of such Performance Shares and shall be entitled
to vote such Performance Shares during the period from the initial award date to
the final adjustment of the Performance Shares. After the applicable Performance
Period shall have ended, the Committee shall certify in writing the extent to
which the established Performance Goals have been achieved. Subsequently, the
number of
9
<PAGE> 10
Performance Shares, if any, earned by the recipient over the Performance Period
shall be determined as a function of the extent to which the Performance Goals
for such Performance Period were achieved. If the Performance Goals are not
satisfied to the fullest extent, a recipient may earn less than the number of
Performance Shares originally awarded, or no Performance Shares at all. In
addition, whether or not the Performance Goals are satisfied to the fullest
extent, the Committee may exercise negative discretion to reduce the number of
Performance Shares or Performance Share Units to be issued if, in the
Committee's sole judgment, such negative discretion is appropriate in order to
act in the best interest of the Company and its shareholders. The factors to be
taken into account by the Committee when exercising negative discretion include,
but are not limited to, the achievement of measurable individual performance
objectives established by the Committee and communicated to the participant no
later than the ninetieth day of the Performance Period, and competitive pay
practices. Performance Shares shall be paid in the form of Shares. Unrestricted
certificates representing such number of Shares as equals the number of
Performance Shares earned under the award shall be delivered to the participant
as soon as practicable after the end of the applicable Performance Period.
(f) Earning of Performance Share Units. An account documenting
Performance Share Units awarded shall be established for each recipient thereof
on the later of such time as the Performance Goals are established or the first
day of the applicable Performance Period. The number of Performance Share Units
credited to a recipient's account at such time shall be calculated based upon
the assumption that the Performance Goals for the applicable Performance Period
will be satisfied to the fullest extent. After the applicable Performance Period
shall have ended, the Committee shall certify in writing the extent to which the
established Performance Goals have been achieved. Subsequently, the number of
Performance Share Units, if any, earned by the recipient over the Performance
Period shall be determined as a function of the extent to which the Performance
Goals for such Performance Period were achieved, adjusted, if applicable, in
accordance with the negative discretion of the Committee. A recipient may earn
less than the number of Performance Share Units originally awarded, or no
Performance Share Units at all. Performance Share Units shall be paid in the
form of Company check, the amount of which shall be calculated by multiplying
the fair market value per Share on the last day of the Performance Period by the
number of Performance Share Units, as adjusted pursuant to the last paragraph of
Section 4.
(g) Termination of Employment or Service Due to Death or at the Request
of the Company Without Cause. In the event the employment by or service of a
participant is terminated by reason of death, or by the Company without Cause
during a Performance Period, unless determined otherwise by the Committee, the
participant or his legal representative, as applicable, shall receive a prorated
payout with respect to the Performance Shares and Performance Share Units
relating to such Performance Period. The prorated payout shall be based upon the
length of time that the participant held the Performance Shares or Performance
Share Units during the Performance Period and the progress toward achievement of
the established Performance Goals. Distribution of earned Performance Shares and
Performance Share Units, if any, shall be made at the
10
<PAGE> 11
same time payments are made to participants who did not terminate employment
during the applicable Performance Period.
(h) Termination of Employment or Service for Other Reasons. In the
event that a participant's employment or service terminates for any reason other
than those reasons set forth in paragraph (g) of this Section 7, all Performance
Shares and Performance Share Units shall be forfeited by the participant to the
Company, except as otherwise determined by the Committee.
(i) Nontransferability. Except as otherwise provided herein, no
Performance Share or Performance Share Unit may be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated. Further, a participant's rights
under the Plan shall be exercisable during the participant's lifetime only by
the participant or the participant's legal representative.
SECTION 8. INCENTIVE COMPENSATION RESTRICTED SHARES.
Each employee participating in this Plan who also participates in the
Company's Management Incentive Plan (the "Incentive Compensation Plan") may be
eligible, in the Committee's sole discretion, to elect to receive all or a
portion of the annual incentive compensation ("Incentive Compensation") payable
to the employee under the Incentive Compensation Plan in the form of Incentive
Compensation Restricted Shares. To elect the payout of all or a portion of
annual Incentive Compensation in Incentive Compensation Restricted Shares, an
employee must complete and submit to the Committee an Incentive Compensation
Restricted Shares Election Form after the Committee has determined the factor
set forth in Section 8(c)(B) and the vesting schedule of the Incentive
Compensation Restricted Shares, but in any event, prior to the date established
by the Committee for election of such deferral. The Incentive Compensation
Restricted Shares shall be evidenced by an Incentive Compensation Restricted
Shares Agreement executed on behalf of the Company by an officer designated by
the Committee and accepted by the employee. Such agreement shall describe the
Incentive Compensation Restricted Shares and state that such Incentive
Compensation Restricted Shares are subject to all terms and provisions, not
inconsistent with the Plan, as the Committee may approve. Terms and conditions
of Incentive Compensation Restricted Shares shall include the following:
(a) Deferral Election. Within such limits as the Committee may
establish, any portion of annual Incentive Compensation can be elected for
payout in Incentive Compensation Restricted Shares, in a dollar amount or as a
percentage of total Incentive Compensation, or as a percentage of total
Incentive Compensation with a stated maximum dollar amount.
(b) Issuance of Incentive Compensation Restricted Shares. Incentive
Compensation Restricted Shares will be issued on the same date that cash payouts
are
11
<PAGE> 12
made under the Incentive Compensation Plan, based on the fair market value of
the Shares on the date of the issuance.
(c) Number of Shares. The number of Incentive Compensation Restricted
Shares granted to an employee will equal the product of (A) that number of
Shares as have an aggregate fair market value equal to the dollar amount of the
annual Incentive Compensation to be received in the form of Incentive
Compensation Restricted Shares multiplied by (B) a factor greater than or equal
to 1.00, but less than or equal to 1.30, as determined by the Committee prior to
the date established by the Committee for the deferral election to be made.
(d) Termination of Employment Due to Death, Disability or Retirement or
at the Request of the Company Without Cause. If the employee's employment is
terminated by reason of death, disability or retirement or by the Company
without Cause, all of the restrictions applicable to unvested Incentive
Compensation Restricted Shares shall be waived and all Incentive Compensation
Restricted Shares shall be immediately vested. If the employee's employment is
terminated for any other reason, the Incentive Compensation Restricted Shares
held by that employee will be forfeited as of the date of such termination;
provided, however, that the Committee may, in its sole discretion, provide that
such Incentive Compensation Restricted Shares will not so terminate. In such
event, such Incentive Compensation Restricted Shares will vest in accordance
with the vesting schedule set forth in the Incentive Compensation Restricted
Shares Agreement or on such accelerated basis as the Committee may determine at
or after grant or termination of employment.
(e) Application of Section 6. Except to the extent inconsistent with
this Section 8, the provisions of Section 6 and all other provisions of the Plan
pertaining to Restricted Shares shall be applicable to Incentive Compensation
Restricted Shares.
SECTION 9. OUTSIDE DIRECTOR OPTIONS.
(a) Administration. Outside Directors shall be eligible to participate
in the Plan only as expressly set forth in this Section 9. The Committee shall
have no power to determine which Outside Directors will receive Outside Director
Options, the amount of such Outside Director Options, or the terms of such
Outside Director Options to the extent provided in subsections (b) through (i)
below. None of the provisions of Section 5 applicable to Stock Options shall be
applicable to Outside Director Options.
(b) Eligibility and Grant. Outside Director Options shall be NQSOs. All
Outside Director Options shall be evidenced by a written agreement, which shall
be dated as of the date on which an Outside Director Option is granted, signed
by an officer of the Company authorized by the Committee, and signed by the
Outside Director. Such agreement shall describe the Outside Director Options and
state that such Outside Director Options are subject to all terms and provisions
of the Plan.
12
<PAGE> 13
(c) Vesting. All Outside Director Options shall be fully vested on the
date of grant.
(d) Number of Shares. Each individual first elected or appointed to
serve as a director of the Company at or after adjournment of the Company's
annual meeting of shareholders (an "Annual Meeting") in 1997 who is an Outside
Director shall, upon such election or appointment, automatically be granted
options for that number of Shares having a fair market value of $150,000 (each
an "Initial Grant"). In addition, commencing immediately after the adjournment
of the Annual Meeting in 1997 and continuing on an annual basis, immediately
following the adjournment of each succeeding Annual Meeting thereafter during
the term of this Plan each Outside Director whose term did not expire at that
Annual Meeting and who has then served as a director of the Company for a
consecutive period of time which includes each of the last three Annual Meetings
(i.e., including the Annual Meeting then just adjourned) shall automatically be
granted additional Outside Director Options for that number of Shares having a
fair market value of $100,000 (each an "Annual Grant"). Beginning on July 1,
2000 and on every third July 1 thereafter, the dollar value of the Initial
Grants and Annual Grants shall automatically be increased under this Plan by a
percentage equal to that percentage by which the fair market value per Share has
increased in the immediately preceding three-year period, not to exceed a 45%
aggregate increase over any such three-year period. For purposes of this Section
9, fair market value means the last sale price of the Shares on the applicable
date (or, if no sale of Shares occurs on such date, on the next preceding date
on which a sale occurred) as reported on the New York Stock Exchange Composite
Tape.
(e) Exercise Price. The exercise price per Share purchasable under an
Outside Director Option shall be equal to the fair market value on the day the
Outside Director Option is granted.
(f) Maximum Term. Each Outside Director Option shall be exercisable for
ten years from the date of grant; provided, however, that in the event an
Outside Director's service to the Company is terminated for Cause, each Outside
Director Option held by that Outside Director on the date of termination shall
be canceled effective as of such termination date.
(g) Transferability of Outside Director Options. Outside Director
Options shall be transferable to the maximum extent permissible under Rule
16b-3, as amended from time to time.
(h) Method of Exercise. Outside Director Options may be exercised in
whole or in part by giving written notice of exercise to the Company specifying
the number of Shares to be purchased. No Shares shall be transferred until full
payment therefor has been made. Payment for exercise of an Outside Director
Option may be made (i) in cash, (ii) by delivery of Shares already owned by the
Outside Director, (iii) by delivery of cash on the extension of credit by a
broker-dealer to whom the Outside Director has submitted
13
<PAGE> 14
a notice of exercise or an irrevocable election to effect such extension of
credit, or (iv) by any combination of the foregoing.
(i) Termination of Option. Except as otherwise provided herein, if an
Outside Director ceases to be a member of the Board for any reason, then all
Outside Director Options or any unexercised portion of such Outside Director
Options which otherwise are exerciseable shall terminate unless such Outside
Director Options are exercised within six months after the date such Outside
Director ceases to be a member of the Board (but in no event after expiration of
the original term of such Outside Director Options); provided that if such
Outside Director ceases to be a member of the Board by reason of such Outside
Director's death, the six-month period shall instead be a one-year period.
(j) Applicability of Other Provisions to Outside Director Options.
Except for Section 5 and except to the extent inconsistent with the provisions
of this Section 9, all other terms applicable to Stock Options set forth in
other sections of this Plan are applicable to Outside Director Options.
SECTION 10. CHANGE OF CONTROL PROVISIONS.
(a) Impact of Event. In the event of a "Change of Control" as defined
in Section 10(b), the following acceleration and valuation provisions shall
apply:
(i) On the date that such Change of Control is determined to
have occurred, any or all Stock Options awarded under this Plan not previously
exercisable and vested shall become fully exercisable and vested.
(ii) The restrictions applicable to any or all Restricted
Shares, Incentive Compensation Restricted Shares, Performance Shares and
Performance Share Units shall lapse and such shares and awards shall be fully
vested.
(b) Definition of "Change of Control". For purposes of Section 10(a), a
"Change of Control" shall mean:
(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 25% or more of either (x) the then outstanding common shares of
CAH (the "outstanding CAH Common Shares") or (y) the combined voting power of
the then outstanding voting securities of CAH entitled to vote generally in the
election of directors (the "Outstanding CAH Voting Securities"); provided,
however, that for purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition directly from CAH
or any
14
<PAGE> 15
corporation controlled by CAH, (B) any acquisition by CAH or any corporation
controlled by CAH, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by CAH or any corporation controlled by CAH or
(D) any acquisition by any corporation pursuant to a transaction which complies
with clauses (x), (y) and (z) of subsection (iii) of this Section 10(b); or
(ii) individuals who, as of the Effective Date of this Plan,
constitute the Board of CAH (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of CAH; provided, however, that any
individual becoming a director subsequent to the Effective Date whose election,
or nomination for election by CAH's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(iii) approval by the shareholders of CAH of a reorganization,
merger or consolidation or sale or other disposition of all or substantially all
of the assets of the Company or the acquisition of assets of another corporation
(a "Business Combination"), in each case, unless, following such Business
Combination, (x) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding CAH Common Shares
and Outstanding CAH Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% (or such
lower percentage as may be determined by the Board of Directors of CAH prior to
such Business Combination) of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns CAH
or all or substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership immediately prior to such Business Combination of the Outstanding CAH
Common Shares and Outstanding CAH Voting Securities, as the case may be, (y) no
Person (excluding any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 25% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination (including any ownership that existed in the
Company or the company being acquired, if any) and (z) at least a majority of
the members of the board of directors of the corporation resulting from such
Business Combination were members of the
15
<PAGE> 16
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(iv) approval by the shareholders of CAH of a complete
liquidation or dissolution of CAH.
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan; provided, however,
no amendment, alteration or discontinuation shall be made which would impair the
rights of an optionee, participant or transferee pursuant to Section 5(e) under
any award theretofore granted, without the optionee's, participant's or
transferee's consent, or which, without the approval of CAH's shareholders,
would:
(a) except as expressly provided in the Plan, increase the total number
of Shares reserved for purposes of the Plan;
(b) change the class of individuals eligible to participate in the
Plan;
(c) extend the maximum option period of Stock Options or Outside
Director Options; or
(d) increase materially the benefits under the Plan.
The Committee may amend the terms of any award theretofore granted
(except an Outside Director Option), prospectively or retroactively; provided no
such amendment shall impair the rights of any holder without the holder's
consent; provided, further, no Stock Option may be amended so as to decrease the
exercise price of such Stock Option to reflect a decrease in the fair market
value of the underlying stock.
The provisions regarding Outside Director Options pursuant to Section 9
above shall not in any case be amended more often than once in any six-month
period other than to comply with changes in the Code or ERISA, or the rules
thereunder.
Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in applicable tax and securities
laws and accounting rules, as well as other developments.
SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments or deliveries of Shares not
yet made by the Company to a participant, optionee or transferee, nothing
contained herein shall give any such participant, optionee or transferee any
rights that are greater than those of a general creditor of the Company. The
Committee may authorize the creation of trusts or other
16
<PAGE> 17
arrangements to meet the obligations created under the Plan to deliver Shares or
payments hereunder consistent with the foregoing.
SECTION 13. GENERAL PROVISIONS.
(a) SHARE TRANSFER AND DISTRIBUTION. The Committee may require each
person purchasing Shares pursuant to a Stock Option, Outside Director Option,
Performance Share, Restricted Share or Incentive Compensation Restricted Share
award under the Plan to represent to and agree with the Company in writing that
the optionee or participant is acquiring the Shares without a view to the
distribution thereof. Any certificates for such Shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All Shares or other securities delivered under the Plan shall be
subject to such stop-transfer orders and other restrictions as the Committee may
deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Shares are
then listed and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any certificates evidencing
such Shares to make appropriate reference to such restrictions.
The Company shall not be required to deliver any Shares or other
securities under the Plan prior to such registration or other qualification of
such Shares or other securities under any state or federal law, rule or
regulation as the Committee shall determine to be necessary or advisable.
(b) Additional Arrangements. Nothing contained in this Plan shall
prevent the Company from adopting other or additional compensation arrangements
for its employees, consultants or Outside Directors.
(c) No Right to Award or Employment. No person shall have any claim or
right to be granted an award under this Plan and the grant of an award shall not
confer upon any participant any right to be retained as an employee or director
of CAH or any subsidiary, nor shall it interfere in any way with the right of
CAH or any subsidiary to terminate the employment or service as a director of
any of the Plan's participants at any time.
(d) Tax Withholding. The Company shall have the right to require the
grantee of Restricted Shares, Incentive Compensation Restricted Shares,
Performance Shares or Performance Share Units or other person receiving such
Shares to pay the Company the amount of any taxes which the Company is required
to withhold with respect to such Shares or, in lieu thereof, to retain, or sell
without notice, a sufficient number of Shares held by it to cover the amount
required to be withheld. The Company shall have the right to deduct from all
dividends paid with respect to Restricted Shares, Incentive Compensation
Restricted Shares, and Performance Shares the amount of any taxes which the
Company is required to withhold with respect to such dividend payments.
17
<PAGE> 18
The Company shall also have the right to require an optionee to pay to
the Company the amount of any taxes which the Company is required to withhold
with respect to the receipt by the optionee of Shares pursuant to the exercise
of a Stock Option, or, in lieu thereof, to retain, or sell without notice, a
number of Shares sufficient to cover the amount required to be withheld.
(e) Beneficiaries. The Committee shall establish such procedures as it
deems appropriate for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
(f) Laws Governing. The Plan and all awards made and action taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent superseded by federal law.
(g) Government Regulation. Notwithstanding any provisions of the Plan
or any agreement made pursuant to the Plan, the Company's obligations under the
Plan and such agreement shall be subject to all applicable laws, rules and
regulations and to such approvals as may be required by any governmental or
regulatory agencies.
SECTION 14. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date (the "Effective Date") it is
approved by the shareholders of CAH. No grants shall be made under this Plan
prior to the Effective Date.
SECTION 15. TERM OF PLAN.
No award shall be granted pursuant to the Plan on or after the tenth
anniversary of the Effective Date of the Plan, but awards granted prior to such
tenth anniversary may extend beyond that date.
SECTION 16. INDEMNIFICATION.
No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any award
granted under the Plan. Each person who is or shall have been a member of the
Committee or of the Board shall be indemnified and held harmless by the Company
against and from any loss, cost, liability or expense that may be imposed upon
or reasonably incurred by him in connection with or resulting from any claim,
action, suit or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under or in connection
with this Plan or any award granted under this Plan and against
18
<PAGE> 19
and from any and all amounts paid by him in settlement thereof, with the
Company's approval, or paid by him, except a judgment based upon a finding of
bad faith, provided he shall give the Company an opportunity, at its own
expense, to handle and defend the same before he undertakes to handle and defend
it on his own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such person may be
entitled under the Company's Articles of Incorporation or Code of Regulations,
contained in any indemnification agreements, as a matter of law, or otherwise,
or any power that the Company may have to indemnify him or hold him harmless.
SECTION 17. SAVINGS CLAUSE.
In case any one or more of the provisions of this Plan shall be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby and the invalid, illegal or unenforceable provision shall be
deemed null and void; however, to the extent permissible by law, any provision
which could be deemed null and void shall first be construed, interpreted or
revised retroactively to permit this Plan to be construed so as to foster the
intent of this Plan.
This Plan is intended to comply in all respects with applicable law and
regulation, including Code Section 422 and, with respect to Reporting Persons,
Rule 16b-3. In case any one or more of the provisions of this Plan shall be held
to violate or be unenforceable in any respect under Code Section 422 or Rule
16b-3, then to the extent permissible by law, any provision which could be
deemed to violate or be unenforceable under Code Section 422 or Rule 16b-3 shall
first be construed, interpreted, or revised retroactively to permit the Plan to
be in compliance with Code Section 422 and Rule 16b-3. Notwithstanding anything
in this Plan to the contrary, the Committee, in its sole and absolute
discretion, may bifurcate this Plan so as to restrict, limit or condition the
use of any provision of this Plan to participants who are Reporting Persons or
covered employees as defined under Code Section 162(m) without so restricting,
limiting or conditioning this Plan with respect to other participants.
SECTION 18. AWARDS TO PARTICIPANTS OUTSIDE OF UNITED STATES.
The Committee may modify the terms of any award under the Plan granted
to a participant who, at the time of grant or during the term of the award, is
resident or employed outside of the United States in any manner deemed by the
Committee to be necessary or appropriate in order to accommodate differences in
local law, regulation, tax policy or custom, or so that the value and other
benefits of the award to the participant, as affected by foreign tax laws and
other restrictions applicable as a result of the participant's residence or
employment abroad, will be comparable to the value of such an award to a
participant who is resident or employed in the United States. Moreover, the
Committee may approve such supplements to, or amendments, restatements or
alternative versions of, this Plan as it may consider necessary or appropriate
for such purposes
19
<PAGE> 20
without thereby affecting the terms of this Plan as in effect for any other
purpose, provided that no such supplements, amendments, restatements or
alternative versions shall include any provisions that are inconsistent with the
terms of this Plan, as then in effect, unless this Plan could have been amended
to eliminate such inconsistency without further approval of the shareholders of
CAH.
20
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.02
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.02
<TEXT>
<PAGE> 1
Exhibit 10.02
[CARDINAL LOGO]
CARDINAL HEALTH, INC.
PERFORMANCE-BASED INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purpose of the Cardinal Health, Inc. Performance-Based Incentive
Compensation Plan (the "Plan") is to advance the interests of Cardinal Health,
Inc. and its shareholders by providing certain of its key executives with
incentive compensation which is tied to the achievement of pre-established and
objective performance goals. The Plan is intended to provide participants with
incentive compensation which is not subject to the deduction limitation rules
prescribed under Section 162(m) ("Section 162(m)") of the Internal Revenue Code
of 1986, as amended from time to time (the "Code"), and should be construed to
the extent possible as providing for remuneration which is performance-based
compensation within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2. DEFINITIONS. Whenever used herein, the following terms shall have their
respective meanings set forth below:
a. "Award" means the amount payable to a Participant in accordance with
Section 6 of the Plan.
b. "Committee" means the Compensation and Personnel Committee (the
"Committee") of the Board of Directors of Cardinal Health, Inc. The Committee
shall be comprised of two or more "outside directors" as that term is defined in
Section 162(m) of the Code and the regulations promulgated thereunder, as
amended from time to time.
c. "Company" means Cardinal Health, Inc. and its subsidiaries.
d. "Effective Date" means the date set forth in Section 9(a) of the
Plan.
e. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
f. "Participant" means an individual eligible to participate hereunder,
as determined by the Committee, each of whom shall be an executive officer of
the Company.
g. "Performance Period" means any time period established by the
Committee for which the attainment of Performance Goal(s) relating to an Award
will be determined.
h. "Performance Goal" means any performance goal determined by the
Committee in accordance with Section 5 of the Plan.
i. "Target Award" means the amount of any Award as established by the
Committee that would be payable to a Participant for any Performance Period if
the Performance
<PAGE> 2
Goals for the Performance Period were fully (100%) achieved and no negative
discretion was exercised by the Committee in regard to that Award pursuant to
the last sentence of Section 6.
3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject to
the provisions of the Plan, the Committee will have full authority to interpret
the Plan, to establish and amend rules and regulations relating to it, to
determine the terms and provisions for making Awards and to make all other
determinations necessary or advisable for the administration of the Plan. All
decisions made by the Committee pursuant to the provisions hereof shall be made
in the Committee's sole discretion and shall be final and binding on all
persons.
4. ELIGIBILITY. The Committee shall designate the Participants eligible to
receive Awards for each Performance Period and establish the Performance Goals
applicable to each Participant for each Performance Period. An individual who
becomes eligible to participate in the Plan during the Performance Period may be
approved by the Committee for a partial period of participation. In such case,
the Participant's Target Award and Award will be based upon performance during
the portion of the Performance Period during which the Participant participates
in the Plan, and the amount of the Target Award will be pro-rated based on the
percentage of time the Participant participates in the Plan during the
Performance Period.
5. ESTABLISHMENT OF TARGET AWARDS, PERFORMANCE PERIODS AND PERFORMANCE GOALS.
For each Performance Period established by the Committee, the Committee shall
establish a Target Award for each Participant. Awards shall be earned based upon
the financial performance of the Company or one or more operating groups of the
Company during a Performance Period; provided, however, the maximum Award that
may be paid to any single Participant for any Performance Period is the product
of $3 million multiplied by the number of 12-month periods contained within the
relevant Performance Period. As to each Performance Period, within such time as
established by Section 162(m) of the Code, the Committee will establish in
writing Performance Goals based on one or more of the following performance
measures of the Company (and/or one or more operating groups of the Company, if
applicable) over the Performance Period: (i) return on equity, (ii) earnings per
share, (iii) earnings from operations, and/or (iv) any other objective business
criteria approved by the shareholders of Cardinal Health, Inc. in accordance
with the requirements for "qualified performance-based compensation" within the
meaning of the regulations under Section 162(m). Except as otherwise provided
herein, the extent to which the Performance Goals are satisfied will determine
the amount of the Award, if any, that will be earned by each Participant. The
Performance Goals may vary for different Performance Periods and need not be the
same for each Participant eligible for an Award for a Performance Period.
6. EARNING OF AWARDS. At the end of each Performance Period, the Award will be
computed for each Participant. Payment of Awards, if any, will be made in cash,
subject to applicable tax withholding. Prior to payment of any Award, the
Committee shall certify in writing the extent to which the established
Performance Goals have been achieved. If the Performance Goals are not satisfied
to the fullest extent, a recipient may earn less than the full Target Award or
no Award at all. In addition, the Committee may in its sole discretion reduce
individual Awards otherwise payable pursuant to the Performance Goals.
2
<PAGE> 3
7. TERMINATION OF EMPLOYMENT. In the event the employment of a Participant is
terminated by reason of death or disability during a Performance Period, unless
determined otherwise by the Committee, the Participant or his legal
representative, as applicable, shall receive a prorated payout with respect to
the Award relating to such Performance Period. The prorated payout shall be
based upon the length of time that the Participant was employed by the Company
during the Performance Period and the progress toward achievement of the
established Performance Goal(s) during the portion of the Performance Period
during which the Participant was employed by the Company. Payment of the Award,
if any, shall be made at the same time payments are made to Participants who did
not terminate employment during the applicable Performance Period. In the event
of a Participant's termination of employment by the Company for any other reason
prior to the end of the Performance Period with respect to an Award, the
Participant shall not be entitled to any payment with respect to such Award.
8. AMENDMENT AND TERMINATION. The Committee may amend, modify or terminate the
Plan at any time and from time to time. Shareholder approval of such actions
will be required only as required by applicable law. Notwithstanding the
foregoing, no amendment, modification or termination shall affect the payment of
an Award for a Performance Period that has already ended or increase the amount
of any Award.
9. GENERAL PROVISIONS.
a. EFFECTIVE DATE. The Plan shall become effective as of July 1, 1996,
subject to its approval by the shareholders of Cardinal Health, Inc.
b. NON-TRANSFERABILITY. Any interest of any Participant under the Plan
may not be sold, transferred, alienated, assigned or encumbered, other than by
will or pursuant to the laws of descent and distribution, and any attempt to
take any such action shall be null and void.
c. SEVERABILITY. In the event any provision of the Plan is held to be
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be construed and
enforced as if such illegal or invalid provisions had never been contained in
the Plan.
d. ADDITIONAL ARRANGEMENTS. Nothing contained in this Plan shall
prevent the Company from adopting other or additional compensation arrangements
for any Participant.
e. NO RIGHT TO AWARD OR EMPLOYMENT; UNIFORMITY. No person shall have
any claim or right to be granted an Award under this Plan and the grant of an
Award shall not confer upon any Participant any right to be retained as an
employee of Cardinal Health, Inc. or any of its subsidiaries, nor shall it
interfere in any way with the right of Cardinal Health, Inc. or any subsidiary
to terminate the employment of any Participant at any time or to increase or
decrease the compensation of any Participant. There is no obligation for
uniformity of treatment of Participants.
f. TAX WITHHOLDING. The Company shall have the right to withhold or
require Participants to pay the Company the amount of any taxes which the
Company is required to withhold with respect to such Award.
3
<PAGE> 4
g. BENEFICIARIES. The Committee may establish such procedures as it
deems appropriate for a participant to designate a beneficiary to whom any
amounts payable in the event of the Participant's death are to be paid. If no
beneficiary is designated, the right of the Participant to receive any payment
under this Plan will pass to the Participant's estate.
h. LAWS GOVERNING. The Plan and all Awards made and action taken
hereunder shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent superseded by federal law.
i. GOVERNMENT REGULATION. Notwithstanding any provisions of the Plan or
any agreement made pursuant to the Plan, the Company's obligations under the
Plan and such agreement shall be subject to all applicable laws, rules and
regulations and to such approvals as may be required by any governmental or
regulatory agencies.
j. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an
unfunded plan for incentive compensation. With respect to any payments not yet
made by the Company to a Participant or beneficiary, nothing contained herein
shall give any such Participant or beneficiary any rights that are greater than
those of a general creditor of the Company.
4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.01
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 27.01
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 236,543
<SECURITIES> 0
<RECEIVABLES> 1,145,328
<ALLOWANCES> (39,397)
<INVENTORY> 2,443,375
<CURRENT-ASSETS> 4,037,464
<PP&E> 1,168,941
<DEPRECIATION> (399,015)
<TOTAL-ASSETS> 5,507,990
<CURRENT-LIABILITIES> 2,274,991
<BONDS> 642,813
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 976,250
<OTHER-SE> 1,242,629
<TOTAL-LIABILITY-AND-EQUITY> 5,507,990
<SALES> 9,695,210
<TOTAL-REVENUES> 9,695,210
<CGS> 9,012,726
<TOTAL-COSTS> 9,012,726
<OTHER-EXPENSES> 366,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (18,240)
<INCOME-PRETAX> 260,542
<INCOME-TAX> 103,009
<INCOME-CONTINUING> 157,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,533
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.77
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.02
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 27.02
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 144,910
<SECURITIES> 0
<RECEIVABLES> 933,713
<ALLOWANCES> (38,417)
<INVENTORY> 2,005,938
<CURRENT-ASSETS> 3,212,456
<PP&E> 990,292
<DEPRECIATION> (337,615)
<TOTAL-ASSETS> 4,395,263
<CURRENT-LIABILITIES> 1,894,820
<BONDS> 439,139
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 932,584
<OTHER-SE> 928,784
<TOTAL-LIABILITY-AND-EQUITY> 4,395,263
<SALES> 7,731,902
<TOTAL-REVENUES> 7,731,902
<CGS> 7,155,213
<TOTAL-COSTS> 7,155,213
<OTHER-EXPENSES> 320,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,454)
<INCOME-PRETAX> 239,435
<INCOME-TAX> 89,673
<INCOME-CONTINUING> 149,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,762
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.74
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.01
<SEQUENCE>6
<DESCRIPTION>EXHIBIT 99.01
<TEXT>
<PAGE> 1
Exhibit 99.01
CARDINAL HEALTH, INC.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for "forward-looking statements" (as defined in the
Act). The Company's Form 10-K, the Company's Annual Report to Shareholders, any
Form 10-Q or any Form 8-K of the Company, or any other written or oral
statements made by or on behalf of the Company may include or incorporate by
reference forward-looking statements which reflect the Company's current view
(as of the date such forward-looking statement is made) with respect to future
events, prospects, projections or financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from those made, implied or projected
in such statements. These uncertainties and other factors include, but are not
limited to:
- - uncertainties relating to general economic conditions;
- - the loss of one or more key customer or supplier relationships,
including pharmaceutical and medical/surgical manufacturers for which
alternative supplies may not be available;
- - the malfunction or failure of the Company's information systems,
including malfunctions or failures associated with Year 2000 readiness
problems;
- - the costs and/or difficulties related to the integration of recently
acquired businesses;
- - changes to the presentation of financial results and position resulting
from adoption of new accounting principles or upon the advice of the
Company's independent auditors, or the staff of the Securities and
Exchange Commission;
- - changes in the distribution or outsourcing pattern for pharmaceutical
and medical/surgical products and/or services, including any increase
in direct distribution or decrease in contract packaging by
pharmaceutical manufacturers;
- - changes in, or failure to comply with, government regulations;
- - the costs and other effects of legal and administrative proceedings;
- - injury to person or property resulting from the Company's packaging,
repackaging, delivery system development, and manufacturing operations
or pharmacy management services;
- - competitive factors in the Company's healthcare service businesses,
including pricing pressures;
- - unforeseen changes in the Company's existing agency and distribution
arrangements;
- - the continued financial viability and success of the Company's
customers, suppliers, and franchisees;
- - technological developments and products offered by competitors;
- - failure to retain or continue to attract senior management or key
personnel;
- - risks associated with international operations, including fluctuations
in currency exchange ratios and risks associated with implementation of
the Euro currency;
- - successful challenges to the validity of the Company's patents,
copyrights and/or trademarks;
- - difficulties or delays in the development, production and marketing of
new products and services;
- - strikes or other labor disruptions;
- - labor and employee benefit costs;
- - pharmaceutical and medical/surgical manufacturers' pricing policies and
overall drug price inflation;
- - changes in hospital buying groups or hospital buying practices; and
- - other factors referenced in the Form 10-K, Form 10-Q or other filings
or written or oral statements made by or on behalf of the Company.
The words "believe", "expect", "anticipate", "project", and similar
expressions identify "forward-looking statements", which speak only as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CB | https://www.sec.gov/Archives/edgar/data/896159/0000902561-99-000098.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000902561-99-000098.txt : 19990217
<SEC-HEADER>0000902561-99-000098.hdr.sgml : 19990217
ACCESSION NUMBER: 0000902561-99-000098
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ACE LTD
CENTRAL INDEX KEY: 0000896159
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 000000000
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11778
FILM NUMBER: 99539822
BUSINESS ADDRESS:
STREET 1: ACE BLDG
STREET 2: P O BOX HM 1015
CITY: HAMILTON HM 08 BERMU
STATE: D0
BUSINESS PHONE: 8092955200
MAIL ADDRESS:
STREET 1: P O BOX HM 1015
CITY: HAMITON BERMUDA
STATE: D0
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission File No. 1-11778
I.R.S. Employer Identification No. 98-0091805
ACE LIMITED
(Incorporated in the Cayman Islands)
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES __X__ NO _____
The number of registrant's Ordinary Shares ($0.041666667 par value)
outstanding as of February 10, 1999 was 193,725,126.
<PAGE>
<TABLE>
<CAPTION>
ACE LIMITED
INDEX TO FORM 10-Q
<S> <S> <C>
Part I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1998 (Unaudited) and September 30, 1998 3
Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 1998 and December 31, 1997 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended December 31, 1998 and December 31, 1997 5
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended December 31, 1998 and December 31, 1997 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 1998 and December 31, 1997 7
Notes to Interim Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 14
Part II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1998
---- ----
(Unaudited)
(in thousands of U.S. dollars
except share and per share data)
<S> <C> <C>
Assets
Investments and cash
Fixed maturities available for sale, at fair value
(amortized cost - $4,784,412 and $4,910,792) $ 4,866,366 $ 5,056,807
Equity securities, at fair value (cost - $196,375 and $198,447) 220,843 189,717
Short-term investments, at fair value
(amortized cost - $757,788 and $480,236) 757,804 480,190
Other investments, at fair value (cost-$128,119 and $156,758) 129,331 156,646
Cash 240,556 317,714
------------- -------------
Total investments and cash 6,214,900 6,201,074
Goodwill 535,920 540,355
Premiums and insurance balances receivable 347,810 377,307
Reinsurance recoverable 1,159,270 1,116,753
Accrued investment income 54,491 57,153
Deferred acquisition costs 67,502 76,445
Prepaid reinsurance premiums 201,529 205,022
Deferred income taxes 42,796 25,264
Other assets 210,087 189,380
------------- -------------
Total assets $ 8,834,305 $ 8,788,753
============= =============
Liabilities
Unpaid losses and loss expenses $ 3,678,269 $ 3,737,869
Unearned premiums 705,712 773,702
Premiums received in advance 62,671 53,794
Insurance and reinsurance balances payable 72,993 75,898
Accounts payable and accrued liabilities 137,383 165,527
Dividend payable 17,700 17,693
Bank debt 250,000 250,000
------------- -------------
Total liabilities 4,924,728 5,074,483
============= =============
Commitments and contingencies
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 300,000,000 shares authorized;
193,687,126 and 193,592,519 shares issued and outstanding) 8,070 8,066
Additional paid-in capital 1,767,188 1,765,261
Unearned stock grant compensation (15,087) (6,181)
Retained earnings 2,040,664 1,819,554
Accumulated other comprehensive income 108,742 127,570
------------- -------------
Total shareholders' equity 3,909,577 3,714,270
------------- -------------
Total liabilities and shareholders' equity $ 8,834,305 $ 8,788,753
============= =============
See accompanying notes to interim consolidated financial statements
3
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
------------- ------------
(in thousands of U.S. dollars,
except per share data )
<S> <C> <C>
Revenues
Gross premiums written $ 254,068 $ 207,456
Reinsurance premiums ceded (99,965) (54,307)
------------ ------------
Net premiums written 154,103 153,149
Change in unearned premiums 63,904 52,181
------------ ------------
Net premiums earned 218,007 205,330
Net investment income 85,095 63,672
Net realized gains on investments 130,154 27,493
------------ ------------
Total revenues 433,256 296,495
------------ ------------
Expenses
Losses and loss expenses 111,169 122,255
Acquisition costs 27,812 24,828
Administrative expenses 41,218 19,802
Amortization of goodwill 4,435 2,271
Interest expense 4,741 1,361
------------ ------------
Total expenses 189,375 170,517
------------ ------------
Income before income taxes 243,881 125,978
Income taxes 5,342 3,768
------------ ------------
Net income $ 238,539 $ 122,210
============ ============
Basic earnings per share $ 1.23 $ 0.68
============ ============
Diluted earnings per share $ 1.21 $ 0.67
============ ============
See accompanying notes to interim consolidated financial statements
4
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
------------ ------------
(in thousands of U.S. dollars)
<S> <C> <C>
Ordinary Shares
Balance at beginning of period $ 8,066 $ 7,508
Exercise of stock options 4 2
Repurchase of shares - (104)
------------ ------------
Balance at end of period 8,070 7,406
------------ ------------
Additional paid-in capital
Balance at beginning of period 1,765,261 1,177,954
Exercise of options 1,927 424
Repurchase of shares - (16,446)
------------ ------------
Balance at end of period 1,767,188 1,161,932
------------ ------------
Unrealized stock grant compensation
Balance at beginning of period (6,181) (1,993)
Stock grants awarded (9,924) (3,123)
Amortization 1,018 866
------------ ------------
Balance at end of period (15,087) (4,250)
------------ ------------
Retained earnings
Balance at beginning of period 1,819,554 1,403,463
Net income 238,539 122,210
Dividends declared (17,429) (13,085)
Repurchase of Ordinary Shares - (59,954)
------------ ------------
Balance at end of period 2,040,664 1,452,634
------------ ------------
Accumulated other comprehensive income
Net unrealized appreciation (depreciation) on investments
Balance at beginning of period 127,845 196,655
Change in period, net of taxation (25,574) (23,227)
------------ ------------
Balance at end of period 102,271 173,428
------------ ------------
Cumulative translation adjustments
Balance at beginning of period (275) 1,568
Change in period 6,746 (369)
------------ ------------
Balance at end of period 6,471 1,199
------------ ------------
Accumulated other comprehensive income 108,742 174,137
------------ ------------
Total shareholders' equity $ 3,909,577 $ 2,791,859
============ ============
See accompanying notes to interim consolidated financial statements
5
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
------------ ------------
(in thousands of U.S. dollars)
<S> <C> <C>
Net income $ 238,539 $ 122,210
Other comprehensive income (loss)
Unrealized appreciation (depreciation) on investments
Unrealized appreciation (depreciation) on investments (4,158) 8,207
Less: reclassification adjustment for realized gains
included in net income (25,319) (31,434)
------------ ------------
(29,477) (23,227)
Cumulative translation adjustments 6,746 (369)
------------ ------------
Other comprehensive income (loss), before income taxes (22,731) (23,596)
Income taxes related to other comprehensive income items 3,903 -
------------ ------------
Other comprehensive income (loss) (18,828) (23,596)
------------ ------------
Comprehensive income $ 219,711 $ 98,614
============ ============
See accompanying notes to interim consolidated financial statements
6
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
--------------- ---------------
(in thousands of U.S. dollars)
<S> <C> <C>
Cash flows from operating activities
Net income $ 238,539 $ 122,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Unearned premiums (67,990) (51,449)
Unpaid losses and loss expenses, net of reinsurance (102,117) (13,557)
recoverable
Prepaid reinsurance premiums 3,493 (11,013)
Deferred income taxes (17,532) 6,588
Net realized gains on investments (130,154) (27,493)
Amortization of premium/discounts on fixed maturities (1,958) (867)
Amortization of goodwill 4,435 431
Deferred acquisition costs 8,943 20,742
Premiums and insurance balances receivable 29,497 45,628
Premiums received in advance 8,877 18,334
Insurance and reinsurance balances payable (2,905) 12,214
Accounts payable and accrued liabilities (28,144) 18,971
Other (14,375) (22,065)
--------------- --------------
Net cash flows (used for) from operating activities (71,391) 118,674
--------------- --------------
Cash flows from investing activities
Purchases of fixed maturities (3,169,088) (1,407,957)
Purchase of equity securities (29,015) (89,533)
Sales of fixed maturities 3,032,461 1,430,276
Sales of equity securities 25,338 85,537
Maturities of fixed maturities 4,310 13,000
Net realized gains (losses) on financial future contracts 121,542 8,687
Other investments 26,103 (7,547)
--------------- --------------
Net cash provided by investing activities 11,651 32,463
--------------- --------------
Cash flows from financing activities
Repurchase of Ordinary Shares - (76,504)
Dividends paid (17,422) (12,165)
Repayment of bank debt (250,000) -
Proceeds from bank debt 250,000 -
Proceeds from exercise of options for ordinary shares 4 426
--------------- --------------
Net cash used for financing activities (17,418) (88,243)
--------------- --------------
Net (decrease) increase in cash (77,158) 62,894
Cash - beginning of period 317,714 165,865
=============== ==============
Cash - end of period $ 240,556 $ 228,759
=============== ==============
See accompanying notes to interim consolidated financial statements
</TABLE>
7
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements, which include the accounts
of the Company and its subsidiaries, have been prepared on the basis of
accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements, and related notes thereto, included in the Company's
1998 Annual Report on Form 10-K.
On January 12, 1999, the Company announced that it had agreed to acquire
the international and domestic property and casualty businesses of CIGNA
Corporation for $3.45 billion in cash. Under the terms of the agreement the
Company, through a newly created U.S. holding company, ACE INA Holdings
Inc. (ACE INA), will acquire CIGNA's domestic property and casualty
insurance operations including its run-off business and also its
international property and casualty insurance companies and branches,
including most of the accident and health business written through those
companies. In connection with the acquisition, National Indemnity, a
subsidiary of Berkshire Hathaway, will provide $1.25 billion of protection
against adverse development with respect to the loss and loss adjustment
expense reserves of the operations to be acquired. The acquisition,
which is subject to receipt of necessary regulatory approvals and other
customary closing conditions, is expected to be completed by the end of
ACE's fiscal 1999 third quarter. The Company expects to finance this
transaction with a combination of available cash and newly issued equity,
debt and preferred and mandatorily convertible securities (see "Management's
Discussion and Analysis - Liquidity and Capital Resources").
At December 31, 1998, approximately 48 percent of the Company's written
premiums came from companies headquartered in North America with
approximately 19 percent coming from companies headquartered in the United
Kingdom and continental Europe and approximately 33 percent from companies
headquartered in other countries.
2. Significant Accounting Policies
a) Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"), which is effective for fiscal years beginning after December
15, 1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. As of October 1, 1998, the Company adopted SFAS 130;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities and cumulative
translation adjustments, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
b) New accounting pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for
years beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Because SFAS
131 in not required to be applied to interim financial statements in the
initial year of adoption, the Company is not required to disclose segment
information in accordance with SFAS 131 until its September 1999 annual
report. In the Company's first quarter 2000 report, and in subsequent
quarters, it will present the interim disclosures required by SFAS 131 for
both 1999 and 2000.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Commitments and Contingencies
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits including class actions,
involving thousands of implant recipients have been filed in both state and
federal courts throughout the United States. Most of the federal cases have
been consolidated pursuant to the rules for Multidistrict Litigation to a
Federal District Court in Alabama, although cases are in the process of
being transferred back to federal courts or remanded to state courts.
In October 1995, negotiators for three of the major defendants agreed on
the essential elements of a revised individual settlement plan for U.S.
claimants with at least one implant from any of those manufacturers ("the
Settlement"). In November 1995, the Settlement was approved by the three
major defendants and in December 1995 the multidistrict litigation judge
approved the Settlement. In addition, two other defendants became part of
the Settlement, although certain of their settlement terms are different.
At June 30, 1994, the Company increased its then existing reserves relating
to breast implant claims. Although the reserve increase was partially
satisfied by an allocation from existing IBNR, it also required an increase
in the Company's total reserve for unpaid losses and loss expenses at June
30, 1994 of $200 million. The increase in reserves was based on information
made available in conjunction with the lawsuits and information made
available from the Company's insureds and was predicated upon an allocation
between coverage provided before and after the end of 1985 (when the
Company commenced underwriting operations). No additional reserves relating
to breast implant claims have been added since June 30, 1994.
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its insureds.
The Company has made payments to date of approximately $470 million with
respect to breast implant claims, which includes a payment of $100 million
made during the quarter ended December 31, 1998. These payments, along with
commitments to make additional future payments, are made pursuant to
agreements reached with a majority of the Company's significant breast
implant insureds. These agreements had the effect of limiting the Company's
exposure to breast implant claims to amounts which were anticipated in the
Company's reserves. While the Company is unable at this time to determine
whether additional reserves, which could have a material adverse effect
upon the financial condition, results of operations and cash flows of the
Company, may be necessary in the future, the Company believes that its
reserves for unpaid losses and loss expenses including those arising from
breast implant claims are adequate as at December 31, 1998.
The Company has considered asbestos and environmental claims and claims
expenses in establishing the liability for unpaid losses and loss expenses.
The estimation of ultimate losses arising from asbestos and environmental
exposures has presented a challenge because traditional actuarial reserving
methods, which primarily rely on historical experience, are inadequate for
such estimation. The problem of estimating reserves for asbestos and
environmental exposures resulted in the development of reserving methods
which incorporate new sources of data with historical experience. The
Company believes that the reserves carried for these claims are adequate
based on known facts and current law.
4. Restricted Stock Awards
Under the terms of the 1995 Long-Term Incentive Plan 335,000 restricted
Ordinary Shares were awarded during the current quarter to officers of the
Company and its subsidiaries. These shares vest at various dates through
November 2003.
At the time of grant the market value of the shares awarded under these
grants is recorded as unearned stock grant compensation and is presented as
a separate component of shareholders' equity. The unearned compensation is
charged to operations over the vesting period.
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31
1998 1997
---- ----
(in thousands of U.S. dollars,
except share and per share data)
<S> <C> <C>
Numerator:
Net Income $ 238,539 $ 122,210
Denominator:
Denominator for basic earnings per share -
weighted average shares 193,642,270 178,979,488
Effect of dilutive securities 3,707,086 4,028,982
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed conversions 197,349,356 183,008,470
Basic earnings per share $ 1.23 $ 0.68
Diluted earnings per share $ 1.21 $ 0.67
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. Credit Facilities
In December 1997, the Company arranged certain syndicated credit
facilities. J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as
co-arrangers in the arranging, structuring and syndication of these credit
facilities. Each facility requires that the Company and/or certain of its
subsidiaries maintain specific covenants, including a consolidated tangible
net worth covenant and a maximum leverage covenant. The facilities provide:
|X| A $200 million 364 day revolving credit facility and a $200 million
five year revolving credit facility which together make up a combined
$400 million committed, unsecured syndicated revolving credit
facility. In December 1998, the expiry date of the 364 day revolving
credit facility was extended to March 31, 1999. At December 31, 1998,
the five-year revolving credit facility had a $150 million letter of
credit ("LOC") sub-limit (increased from $50 million during
September 1998).
|X| A syndicated fully secured five year LOC facility totaling
approximately (pound)154 million ($262 million) which was used to
fulfill the requirements of Lloyd's to support underwriting capacity
on Lloyd's syndicates in which the Company participates. As discussed
below, this facility was replaced on November 27, 1998.
|X| A syndicated $250 million seven year amortizing term loan facility,
which was used on January 2, 1998 to partially finance the acquisition
of ACE USA. The interest rate on the term loan was LIBOR plus an
applicable spread. As discussed below, this term loan was refinanced
on October 27, 1998.
10
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Credit Facilities (cont'd)
On October 27, 1998, ACE US Holdings, Inc. ("ACE US") refinanced the
outstanding $250 million term loan with the proceeds from the issuance of
$250 million in aggregate principal amount of unsecured credit sensitive
senior notes maturing in October 2008. Interest payments, based on the
initial fixed rate coupon on these notes of 8.63 percent, are due
semi-annually in arrears. Total interest expense to be recorded by ACE US
including amortized fees and hedging costs will initially be $23.3 million
per year. The indenture related to these notes includes certain events of
default for ACE US. The senior notes are callable subject to certain
breakage costs, however, ACE US has no current intention of calling the
debt. Simultaneously, the Company has entered into a notional $250 million
credit default swap transaction that has the economic effect of reducing
the cost of debt to the consolidated group, excluding fees and expenses, to
6.47 percent for 10 years. Certain assets totaling approximately $90
million are pledged as security in connection with the swap transaction. In
the event that the Company terminates the credit default swap prematurely,
the Company would be liable for certain transaction costs. However, the
Company has no current intention of terminating the swap. The swap
counter-party is a major financial institution with a long- term S&P Senior
Debt Rating of AA- and the Company does not anticipate non-performance.
On November 27, 1998, the Company arranged a new syndicated partially
secured five year LOC facility in the amount of (pound)270 million
(approximately $450 million) to fulfill the requirements of Lloyd's for the
1999 year of account. This new facility was arranged by Citibank N.A., with
ING Barings and Barclays Bank PLC acting as co-arrangers, and replaced the
facility arranged in December 1997. This new LOC facility requires that the
Company continue to maintain certain covenants, including a minimum
consolidated tangible net worth covenant and a maximum leverage covenant.
Certain assets totaling approximately $201 million are pledged as partial
security for this facility, replacing the security pledged in connection
with the December 1997 facility.
The Company also maintains an unsecured, syndicated revolving credit
facility in the amount of $72.5 million. This facility was put in place by
CAT prior to its acquisition by the Company and in September 1998, was
assigned to Tempest Re. At September 30, 1998, no amounts have been drawn
down under this facility. The facility requires that Tempest Re comply with
specific covenants.
7. Reinsurance
The Company purchases reinsurance to manage various exposures including
catastrophic risks. Although reinsurance agreements contractually obligate
the Company's reinsurers to reimburse it for the agreed upon portion of its
gross paid losses, they do not discharge the primary liability of the
Company. The amounts for net premiums written and net premiums earned in
the statements of operations are net of reinsurance. Direct, assumed and
ceded amounts for these items for the three months ended December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Premiums written
Direct $ 208,501 $ 184,985
Assumed 45,567 22,471
Ceded (99,965) (54,307)
============ ===========
Net $ 154,103 $ 153,149
============ ===========
Premiums earned
Direct $ 233,567 $ 211,985
Assumed 97,850 46,622
Ceded (113,410) (53,277)
============ ===========
Net $ 218,007 $ 205,330
============ ===========
</TABLE>
11
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Reinsurance (cont'd)
The Company's provision for reinsurance recoverable at December 31, 1998
and September 30, 1998 is as follows:
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
--------------- --------------
(in thousands )
<S> <C> <C>
Reinsurance recoverable on paid losses and loss expenses $ 58,806 $ 57,225
Reinsurance recoverable on unpaid losses and loss expenses 1,184,978 1,143,121
Provision for uncollectable balances on unpaid losses and loss expenses (84,514) (83,593)
============== =============
Reinsurance recoverable $ 1,159,270 $ 1,116,753
============== =============
</TABLE>
8. Taxation
Under current Cayman Islands law, the Company is not required to pay any
taxes on its income or capital gains. The Company has received an
undertaking that, in the event of any taxes being imposed, the Company will
be exempt from taxation in the Cayman Islands until the year 2013. Under
current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes on their income or capital gains. The Company and
its Bermuda subsidiaries will be exempt from taxation in Bermuda until
March 2016.
Income from the Company's operations at Lloyd's are subject to United
Kingdom corporation taxes. ACE USA is subject to income taxes imposed by
U.S. authorities.
The provision for income taxes detailed below represents the Company's
estimate of tax liability in respect of the Company's operations at Lloyd's
and at ACE USA and is calculated at rates equal to the statutory income tax
rate in each jurisdiction.
The income tax provision for the three months ended December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands )
<S> <C> <C>
Current tax (benefit) expense $ (476) $ 2,062
Deferred tax expense 5,818 1,706
-------------- -------------
Provision for income taxes $ 5,342 $ 3,768
============== =============
</TABLE>
12
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Taxation (cont'd)
The components of the net deferred tax asset as of December 31, 1998 and
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------------- -----------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Loss reserve discount $ 47,649 $ 50,581
Unearned premium adjustment 3,849 3,874
Uncollectable reinsurance 6,685 5,185
Other 66,626 49,646
------------ ---------------
Total deferred tax assets 124,809 109,286
------------ ---------------
Deferred tax liabilities
Deferred policy acquisition costs 3,753 3,741
Unrealized appreciation on investments 5,379 9,282
Other 46,247 43,696
------------ ---------------
Total deferred tax liabilities 55,379 56,719
------------ ---------------
Valuation allowance 26,634 27,303
============ ===============
Net deferred tax asset $ 42,796 $ 25,264
============ ===============
</TABLE>
9. Reclassification
Certain items in the prior period financial statements have been
reclassified to conform with the current period presentation.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Any written or oral statements made
by or on behalf of the Company may include forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other
factors (which are described in more detail elsewhere in documents filed by
the Company with the Securities and Exchange Commission) include, but are
not limited to, (i) uncertainties relating to government and regulatory
policies (such as subjecting the Company to insurance regulation or
taxation in additional jurisdictions), (ii) the occurrence of catastrophic
events with a frequency or severity exceeding the Company's estimates,
(iii) the legal environment, (iv) the uncertainties of the reserving
process, (v) loss of the services of any of the Company's executive
officers, (vi) changing rates of inflation and other economic conditions,
(vii) losses due to foreign currency exchange rate fluctuations, (viii)
ability to collect reinsurance recoverables, (ix) the competitive
environment in which the Company operates, (x) the impact of mergers and
acquisitions, (xi) the impact of Year 2000 related issues, (xii)
developments in global financial markets which could affect the Company's
investment portfolio, (xiii) risks associated with the global financial
markets which could affect the Company's investment portfolio, and (xiv)
risks associated with the introduction of new products and services. The
words "believe", "anticipate", "project", "plan", "expect", "intend", "will
likely result" or "will continue" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
General
The following is a discussion of the Company's results of operations,
financial condition, liquidity and capital resources as of and for the
three months ended December 31, 1998. The results of operations and cash
flows for any interim period are not necessarily indicative of results for
the full year. This discussion should be read in conjunction with the
consolidated financial statements, related notes thereto and the
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in the Company's 1998 Annual Report on Form 10-K.
ACE Limited ("ACE") is a holding company which, through its Bermuda-based
operating subsidiaries, ACE Bermuda Insurance Ltd. (formerly A.C.E.
Insurance Company, Ltd.) ("ACE Bermuda"), Corporate Officers & Directors
Assurance Ltd. ("CODA"), Tempest Reinsurance Company Limited ("Tempest Re")
and CAT Limited ("CAT") and its Dublin, Ireland based subsidiaries, ACE
Insurance Company Europe Limited and ACE Reinsurance Company Europe Limited
provides a broad range of insurance and reinsurance products to a diverse
group of international clients. Following the acquisition of CAT, the CAT
business was integrated into the Tempest Re book of business and effective
January 1, 1999 CAT was actually merged into Tempest Re. Through its U.S.
based subsidiary, ACE USA, Inc. ("ACE USA"), the Company provides insurance
products to a broad range of clients in the United States. In addition,
since 1996 the Company has provided funds at Lloyd's, primarily in the form
of letters of credit, to support underwriting capacity for Lloyd's
syndicates managed by Lloyd's managing agencies which are indirect wholly
owned subsidiaries of ACE. Underwriting capacity is the maximum amount of
gross premiums that a syndicate at Lloyd's can underwrite in a given year
of account. Unless the context otherwise indicates, the term "Company"
refers to one or more of ACE and its consolidated subsidiaries. The
operations of the Company in the Lloyd's market are collectively referred
to herein as "ACE Global Markets".
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General (cont'd)
On January 12, 1999, the Company announced that it had agreed to acquire
the international and domestic property and casualty businesses of CIGNA
Corporation for $3.45 billion in cash. Under the terms of the agreement the
Company, through a newly created U.S. holding company, ACE INA Holdings
Inc. (ACE INA), will acquire CIGNA's domestic property and casualty
insurance operations and also its international property and casualty
insurance companies and branches, including most of the accident and health
business written through those companies. In connection with the
acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, will
provide $1.25 billion of protection against adverse development with
respect to the loss and loss adjustment expense reserves of the operations
to be acquired. The acquisition, which is subject to receipt of necessary
regulatory approvals and other customary closing conditions is expected to
be completed by the end of ACE's fiscal 1999 third quarter. The Company
expects to finance this transaction with a combination of available cash
and newly issued equity, debt and preferred and mandatorily convertible
securities (see "Liquidity and Capital Resources").
The Company will continue to evaluate potential new product lines and other
opportunities in the insurance and reinsurance markets. In addition, the
Company regularly evaluates potential acquisitions of other companies and
businesses and holds discussions with potential acquisition candidates. As
a general rule, the Company publicly announces such acquisitions only after
a definitive agreement has been reached.
Results of Operations - Three Months ended December 31, 1998
- --------------------------------------------------------------------------------
Net Income
Three Months Ended % Change
December 31 from
1998 1997 Prior year
---- ---- ----------
(in millions)
Income excluding net realized
gains on investments $ 108.4 $ 94.7 14.5%
Net realized gains on investments 130.1 27.5 N.M.
----- ------ -------
Net income $ 238.5 $122.2 N.M.
===== ======= =======
(N.M. - Not meaningful)
- --------------------------------------------------------------------------------
Income excluding net realized gains on investments for the first quarter of
fiscal 1999 increased by 14.5 percent compared with the first quarter of
fiscal 1998. This increase is due in part to the inclusion, this quarter,
of the results of ACE USA and CAT which were acquired on January 2, 1998
and April 1, 1998, respectively. These acquisitions increased the asset
base of the company resulting in an increase in investment income for the
first quarter of 1998 compared with the first quarter of 1997.
Positive movements in the investment markets produced net realized gains on
investments in both the current quarter and the first quarter of fiscal
1998 and are described in detail under "net realized gains on investments".
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - Three Months ended December 31, 1998 (cont'd)
- --------------------------------------------------------------------------------
Premiums
Three Months ended % Change
December 31 from
1998 1997 Prior year
---- ---- ----------
(in millions)
Gross premiums written:
ACE Bermuda $ 125.6 $ 127.5 (1.5)%
ACE Global Markets 87.9 80.0 9.9%
Tempest Re 7.4 - N.M.
ACE USA 33.2 - N.M.
------------ -------- --------
$ 254.1 $ 207.5 22.5%
============ ========= ========
Net premiums written:
ACE Bermuda $ 87.7 $ 94.8 (7.5)%
ACE Global Markets 41.5 58.3 (28.8)%
Tempest Re 4.3 - N.M.
ACE USA 20.6 - N.M.
------------ --------- --------
$ 154.1 $ 153.1 0.6%
============ ========= =========
Net premiums earned:
ACE Bermuda $ 82.6 $ 113.3 (27.1)%
ACE Global Markets 65.1 63.6 2.4%
Tempest Re 48.4 28.4 70.3%
ACE USA 21.9 - N.M.
============ =========== =========
$ 218.0 $ 205.3 6.2%
============ =========== =========
(N.M. - Not meaningful)
- --------------------------------------------------------------------------------
During the quarter, most insurance markets faced significant competitive
pressures as a result of relatively low loss activity over the past several
years and excess capital in these markets. This has resulted in continuing
price pressure on most insurance and reinsurance lines.
Gross premiums written increased by $46.6 million or 22.5 percent to $254.1
million from $207.5 million in the quarter ended December 31, 1997, despite
these continuing competitive market conditions. The increase is primarily the
result of the inclusion of the results of ACE USA for the current quarter.
ACE USA contributed $33.2 million to gross premiums written for the quarter
ended December 31, 1998. Gross premiums written in ACE Bermuda were at
comparable levels with last year. New business in the financial lines
division resulted in significant growth over last year. This growth was
offset by declines in the excess liability and directors and officers
liability divisions which both continue to face difficult markets.
Satellite and excess property divisions also experienced declines during
the quarter. The Company recorded an increase of $8.0 million in gross
premiums written with respect to the Company's participation in the Lloyd's
syndicates managed by ACE Global Markets. This growth was a result of the
Company's increased participation in the syndicates under management.
Tempest Re renewals occur primarily in January and July each year and
therefore premium transactions are not significant for Tempest Re during
this quarter. With respect to the January 1999 renewals, Tempest Re was
offered renewals on substantially all of the CAT business as well as the
Tempest Re business. However, merger and acquisition activity among clients
and the downward trend in pricing resulted in some declines in premium at
Tempest Re.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - Three Months ended December 31, 1998 (cont'd)
Net premiums written increased by $1.0 million to $154.1 million for the
quarter ended December 31, 1998 compared with $153.1 million for the
quarter ended December 31, 1997. The property division's premium levels at
ACE USA contributed significantly to the net premiums written for the
quarter. This was offset by a decrease in net premiums written in ACE
Bermuda and ACE Global Markets, primarily the result of an increase in the
use of reinsurance. ACE Bermuda continued its use of reinsurance with this
quarter seeing the restructuring of its satellite reinsurance program.
Negotiations were also finalized on the expansion of the excess liability
reinsurance program at ACE Bermuda, which increased the quota share to 50
percent effective January 1, 1999.
Net premiums earned increased by $12.7 million or 6.2 percent compared to
the comparable quarter last year. The increase in net earned premiums is
primarily due to the inclusion of the results of ACE USA and the CAT book
of business during the current quarter and an increase in net premiums
earned by ACE Global Markets as a result of the Company's increased share
of capacity. These increases were offset somewhat by a decline in net
premiums earned by ACE Bermuda as a result of declining net written
premiums.
- -------------------------------------------------------------------------------
Net Investment Income
Three Months ended % Change
December 31 from
1998 1997 Prior year
---- ---- ----------
(in millions)
Net investment income $ 85.1 $ 63.7 33.6%
==== ==== =====
- --------------------------------------------------------------------------------
Net investment income increased 33.6 percent to $85.1 million compared with
$63.7 million in the quarter ended December 31, 1997. This increase is due
to a larger investable asset base primarily due to the inclusion of ACE USA
and CAT this quarter compared to the same quarter last year and the
reinvestment of funds generated by the portfolio. The average yield on the
investment portfolio remained relatively unchanged in the quarter ended
December 31, 1998 compared with the quarter ended December 31, 1997.
- --------------------------------------------------------------------------------
Net Realized Gains on Investment
Three Months ended
December 31
1998 1997
---- ----
(in millions)
Fixed maturities and short-term investments $ 14.5 $ 21.4
Equity securities 2.0 7.3
Financial futures and option contracts 121.3 8.7
Other investments (7.4) -
Currency (0.3) (9.9)
========= ----------
$ 130.1 $ 27.5
========= ==========
- --------------------------------------------------------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - Three Months ended December 31, 1998 (cont'd)
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of other
comprehensive income.
During the first quarter of fiscal 1999, the fair market value of the
Company's investment portfolio increased primarily due to the strength in
equity markets. In the first fiscal quarter, the S&P 500 Stock Index rose
21.3 percent and generated net realized gains on the Company's equity index
futures contracts of $124.9 million. Net realized gains on the sale of
equity securities amounted to $2.0 million for the quarter.
Fixed income markets were stable relative to the volatility seen in recent
quarters. The sales proceeds for fixed maturity securities were generally
higher than their amortized cost during the quarter resulting in net
realized gains of $14.5 million being recognized on fixed income and
short-term investments. Certain of the company's fixed income investment
portfolios utilize fixed income futures contracts to manage duration
exposure, and losses of $3.6 million were recognized on these during the
quarter.
During the quarter the Company sold a private investment held by CAT, which
resulted in a realized loss of $7.4 million.
- -------------------------------------------------------------------------------
Combined Ratio
Three months ended
December 31
1998 1997
--------- -------
Loss and loss expense ratio 51.0% 59.5%
Underwriting and administrative expense ratio 31.7% 21.7%
========= --------
Combined ratio 82.7% 81.2%
========= ========
- -------------------------------------------------------------------------------
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss and loss expense ratio, underwriting
and administrative expense ratio and combined ratio. Each ratio is derived
by dividing the relevant expense amounts by net premiums earned. The
combined ratio is the sum of the loss and loss expense ratio and the
underwriting and the administrative expense ratio. A combined ratio under
100 percent indicates underwriting income and a combined ratio exceeding
100 percent indicates underwriting losses. Property catastrophe reinsurance
companies generally expect to have overall lower combined ratios as
compared with other reinsurance companies with long-tail exposures.
However, property catastrophe loss experience is generally characterized by
low frequency but high severity short-tail claims which may result in
significant volatility in results.
Several aspects of the Company's operations, including the low frequency
and high severity of losses in the high excess layers in certain lines of
business in which the Company provides insurance and reinsurance,
complicate the actuarial reserving techniques utilized by the Company.
Management believes, however, that the Company's reserves for unpaid losses
and loss expenses, including those arising from breast implant litigation,
are adequate to cover the ultimate cost of losses and loss expenses
incurred through December 31, 1998. Since such provisions are necessarily
based on estimates, future developments may result in ultimate losses and
loss expenses significantly greater or less than such amounts (see "Breast
Implant Litigation").
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - Three Months ended December 31, 1998 (cont'd)
For the quarter ended December 31, 1998, the loss and loss expense ratio
decreased to 51.0 percent compared with 59.5 percent for the first quarter
of fiscal 1998. This decrease is the result of the changing mix of premiums
written and earned by the Company, highlighted by the inclusion of ACE USA
and CAT whose loss ratios are lower than the Company's traditional book of
business. During the quarter, the Company incurred significant property
catastrophe losses through Tempest Re in the quarter, ending a calendar
1998 year which is considered the third worst year for catastrophe losses.
Industry sources have estimated U.S. insurers will pay policyholders in
excess of $10.0 billion for 1998 catastrophes. These losses were offset by
very favorable loss and loss expenses in ACE Bermuda for the quarter,
primarily the result of a large multi-year financial lines contract written
by ACE Bermuda, where the original policy term ended in 1998. The policy
was not renewed and the program generated significant earnings during the
quarter.
Underwriting and administrative expenses increased in the quarter compared to
the first quarter of fiscal 1998 primarily due to the inclusion of
underwriting and adminstrative expenses from ACE USA and CAT since their
acquisition. The underwriting and administrative expense ratio also increased,
from 21.7 percent in 1997 to 31.7 percent in the current quarter. The increase
in this ratio is primarily due to the change in the mix of business,
highlighted by the inclusion of administrative costs of ACE USA and our
increased participation in the Lloyd's market. The underwriting and
administrative expense ratios in ACE USA and ACE Global Markets is generally
higher than the Company's traditional book of business and thus contributed to
the increase in the underwriting and administrative expense ratio.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, ACE's assets consist primarily of the stock of its
subsidiaries as well as other investments. In addition to investment income,
its cash flows currently depend primarily on dividends or other statutorily
permissible payments from its Bermuda-based operating subsidiaries (the
"Bermuda subsidiaries"). There are currently no legal restrictions on the
payment of dividends from retained earnings by the Bermuda subsidiaries as the
minimum statutory capital and surplus requirements are satisfied by the share
capital and additional paid-in capital of each of the Bermuda subsidiaries.
However, the payment of dividends or other statutorily permissible
distributions by the Bermuda subsidiaries is subject to the need to maintain
shareholder's equity at a level adequate to support the level of insurance and
reinsurance operations. ACE received a dividend of $300 million from ACE
Bermuda in November 1998.
The payment of any dividends from the Company's UK subsidiaries would be
subject to applicable United Kingdom insurance law including those promulgated
by the Society of Lloyd's. Under various U.S. insurance laws to which ACE US's
insurance subsidiaries are subject, ACE US's insurance subsidiaries may pay a
dividend only from earned surplus subject to the maintenance of a minimum
capital requirement, without prior regulatory approval. No dividends were
received from ACE US or ACE Global Markets during fiscal 1998 and the Company
does not anticipate receiving dividends from ACE US or ACE Global Markets
during fiscal 1999.
The Company's consolidated sources of funds consist primarily of net premiums
written, investment income, and proceeds from sales and maturities of
investments. Funds are used primarily to pay claims, operating expenses and
dividends and for the purchase of investments.
The Company's insurance and reinsurance operations provide liquidity in that
premiums are normally received substantially in advance of the time claims are
paid. For the three months ended December 31, 1998, the Company's consolidated
net cash flow from operating activities was $(71.4) million, compared with
$118.7 million for the three months ended December 31, 1997. Cash flows are
affected by claim payments, which due to the nature of the Company's
operations, may comprise large loss payments on a limited number of claims and
therefore can fluctuate significantly from year to year. The irregular timing
of these loss payments, for which the source of cash can be from operations,
available net credit facilities or routine sales of investments, can create
significant variations in cash flows from operations between periods. For the
three month periods ended December 31, 1998 and 1997, loss and loss expense
payments amounted to $216.4 million (of which $100 million related to breast
implant payments) and $126.4 million respectively. Total loss and loss expense
payments amounted to $583.8 million, $421.9 million and $115.0 million in
fiscal 1998, 1997 and 1996, respectively, of which approximately $250 million
and $120 million in fiscal 1998 and 1997, respectively, related to breast
implant payments.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
The Company maintains loss reserves for the estimated unpaid ultimate
liability for losses and loss expenses under the terms of its policies and
agreements. The reserve for unpaid losses and loss expenses of $3.7 billion
at December 31, 1998 includes $1.4 billion of case and loss expense
reserves. While the Company believes that its reserve for unpaid losses and
loss expenses at December 31, 1998 is adequate, future developments may
result in ultimate losses and loss expenses significantly greater or less
than the reserve provided.
At December 31, 1998 and September 30, 1998 total investments and cash
amounted to approximately $6.2 billion. The Company's investment portfolio
is structured to provide a high level of liquidity to meet insurance
related or other obligations. The consolidated investment portfolio is
externally managed by independent professional investment managers and is
invested in high quality investment grade marketable fixed income and
equity securities, the majority of which trade in active, liquid markets.
The Company believes that its cash balances, cash flow from operations,
routine sales of investments and the liquidity provided by its credit
facilities (discussed below) are adequate to allow the Company to pay
claims within the time periods required under its policies.
In December 1997, the Company arranged certain syndicated credit facilities.
J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in
the arranging, structuring and syndication of these credit facilities.
Each facility requires that the Company and/or certain of its subsidiaries
comply with specific covenants, including a consolidated tangible net worth
covenant and a maximum leverage covenant. The facilities provide:
|X| A $200 million 364 day revolving credit facility and a $200 million
five year revolving credit facility which together make up a combined
$400 million committed, unsecured syndicated revolving credit
facility. In December 1998, the expiry date of the 364 day revolving
credit facility was extended to March 31, 1999. At December 31, 1998,
the five-year revolving credit facility had a $150 million letter of
credit ("LOC") sub-limit (increased from $50 million during September
1998). As discussed below, the Company drew down $385 million on the
revolving credit facilities to finance the acquisition of CAT Limited
on April 1, 1998. The debt was subsequently repaid from a portion of
the proceeds from the sale of 16.5 million new Ordinary Shares of the
Company (discussed below).
|X| A syndicated fully secured five year LOC facility totaling
approximately (pound)154 million ($262 million) which was used to
fulfill the requirements of Lloyd's to support underwriting capacity
on Lloyd's syndicates in which the Company participates. As discussed
below, this facility was replaced on November 27, 1998.
|X| A syndicated $250 million seven year amortizing term loan facility,
which was used on January 2, 1998 to partially finance the acquisition
of ACE USA. The interest rate on the term loan was LIBOR plus an
applicable spread. As discussed below, this term loan was refinanced
on October 27, 1998.
On October 27, 1998, ACE US refinanced the outstanding $250 million term
loan with the proceeds from the issuance of $250 million in aggregate
principal amount of unsecured credit sensitive senior notes maturing in
October 2008. Interest payments, based on the initial fixed rate coupon on
these notes of 8.63 percent, are due semi-annually in arrears. Total
interest expense to be recorded by ACE US including amortized fees and
hedging costs, will initially be $23.3 million per year. The indenture
related to these notes include certain restrictive covenants applicable to
ACE US. The senior notes are callable subject to certain breakage costs,
however, ACE US has no current intention of calling the debt.
Simultaneously, the Company has entered into a notional $250 million credit
default swap transaction that has the economic effect of reducing the cost
of debt to the consolidated group, excluding fees and expenses, to 6.47
percent for 10 years. Certain assets totaling approximately $90 million are
pledged as security in connection with the swap transaction. In the event
that the Company terminates the credit default swap prematurely, the
Company would be liable for certain transaction costs. However, the Company
has no current intention of terminating the swap. The swap counter-party is
a major financial institution with a long- term S&P Senior Debt Rating of
AA- and the Company does not anticipate non-performance.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
On November 27, 1998, the Company arranged a new syndicated partially
secured five year LOC facility in the amount of (pound)270 million
(approximately $450 million) to fulfill the requirements of Lloyd's for the
1999 year of account. This new facility was arranged by Citibank N.A., with
ING Barings and Barclays Bank PLC acting as co-arrangers, and will replace
the facility arranged in December 1997. This new LOC facility requires that
the Company continue to maintain certain covenants, including a minimum
consolidated tangible net worth covenant and a maximum leverage covenant.
Certain assets totaling approximately $201 million are pledged as partial
security for this facility, replacing the security pledged in connection
with the December 1997 facility.
The Company also maintains an unsecured, syndicated revolving credit
facility in the amount of $72.5 million. This facility was put in place by
CAT prior to its acquisition by the Company and in September 1998, was
assigned to Tempest Re. At December 31, 1998, no amounts have been drawn
down under this facility. The facility requires that Tempest Re comply with
specific covenants.
On January 12, 1999, the Company announced that it had agreed to acquire
the international and domestic property and casualty businesses of CIGNA
Corporation for $3.45 billion in cash. Under the terms of the agreement the
Company, through a newly created U.S. holding company, ACE INA Holdings
Inc. (ACE INA), will acquire CIGNA's domestic property and casualty
insurance operations and also its international property and casualty
insurance companies and branches, including most of the accident and health
business written through those companies. In connection with the
acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, will
provide $1.25 billion of protection against adverse development with
respect to the loss and loss adjustment expense reserves of the operations
to be acquired. The acquisition, which is subject to receipt of necessary
regulatory approvals and other customary closing conditions is expected to
be completed by the end of ACE's fiscal 1999 third quarter. The Company
expects to finance this transaction as follows:
(a) approximately $700 million to $1 billion of available cash, which will
be contributed to ACE INA, and
(b) the remainder through the issuance of; (i) Ordinary Shares by the
Company, the proceeds of which will also be contributed to ACE INA;
(ii) preferred securities by ACE INA that are mandatorily convertible
into Ordinary Shares of the Company; (iii) capital securities (e.g.,
trust-preferred securities) by ACE INA; and (iv) senior debt by ACE
INA and together with the ACE Ordinary Shares, the ACE INA Mandatorily
Convertible Securities and the ACE INA (collectively, the "Permanent
Financing").
The Company or ACE INA will issue each of the Permanent Financing
instruments either before or after the closing of the transaction at the
time when the Company considers market conditions to be most favorable for
issuance. Accordingly, on behalf of itself and ACE INA, the Company has
secured interim bank financing sufficient to close the transaction.
On October 16, 1998 and January 15, 1999, the Company paid quarterly
dividends of 9 cents per share, respectively to shareholders of record on
September 30, 1998 and December 15, 1998. On February 5, 1999, the Board of
Directors declared a quarterly dividend of 9 cents per share payable on
April 16, 1999 to shareholders of record on March 31, 1999. The declaration
and payment of future dividends is at the discretion of the Board of
Directors and will be dependent upon the profits and financial requirements
of the Company and other factors, including legal restrictions on the
payment of dividends and such other factors as the Board of Directors deems
relevant.
Fully diluted net asset value per share was $20.18 at December 31, 1998,
compared with $19.14 at September 30, 1998.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES (cont'd)
The Company's financial condition, results of operations and cash flow are
influenced by both internal and external forces. Claims settlements,
premium levels and investment returns may be impacted by changing rates of
inflation and other economic conditions. In many cases, significant periods
of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss to the Company and
the settlement of the Company's liability for that loss. The liquidity of
its investment portfolio, cash flows and the credit facilities are, in
management's opinion, adequate to meet the Company's expected cash
requirements.
Breast Implant Litigation
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits, including class actions,
involving thousands of implant recipients have been filed in both state and
federal courts throughout the United States. Most of the federal cases have
been consolidated pursuant to the rules for Multidistrict Litigation to a
Federal District Court in Alabama, although cases are in the process of
being transferred back to federal courts or remanded to state courts.
In October 1995, negotiators for three of the major defendants agreed on
the essential elements of an individual settlement plan for U.S. claimants
with at least one implant from any of those manufacturers (" the
Settlement"). In November 1995, the Settlement was approved by the three
major defendants and in December 1995 the multidistrict litigation judge
approved the Settlement. In addition, two other defendants became part of
the Settlement, although certain of their settlement terms are different
and more restricted than the plan offered by the original three defendants.
At June 30, 1994, the Company increased its then existing reserves relating
to breast implant claims. Although the reserve increase was partially
satisfied by an allocation from existing IBNR, it also required an increase
in the Company's total reserve for unpaid losses and loss expenses at June
30, 1994 of $200 million. The increase in reserves was based on information
made available in the pending lawsuits and information from the Company's
insureds and was predicated upon an allocation between coverage provided
before and after the end of 1985 (when the Company commenced underwriting
operations). No additional reserves relating to breast implant claims have
been added since June 30, 1994.
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its insureds.
The Company has made payments to date of approximately $470 million with
respect to breast implant claims, which includes a payment of $100 million
made during the quarter ended December 31, 1998. These payments, along with
commitments to make additional future payments, are made pursuant to
agreements reached with a majority of the Company's significant breast
implant insureds. Those agreements had the effect of limiting the Company's
exposure to breast implant claims to amounts which were anticipated in the
Company's reserves. While the Company is unable at this time to determine
whether additional reserves, which could have a material adverse effect
upon the financial condition, results of operations and cash flows of the
Company, may be necessary in the future, the Company believes that its
reserves for unpaid losses and loss expenses including those arising from
breast implant claims are adequate as at December 31, 1998.
IMPACT OF THE YEAR 2000 ISSUE
General
The management of ACE Limited, recognizing that the Year 2000 problem, if
left untreated, could have a material effect on the Company's business,
results of operations or financial condition, has in progress a project to
address this issue. It is the expectation of ACE's management that this
project will reduce the impact of the Year 2000 problem to an immaterial
level, although not all risks can be eliminated.
The Year 2000 problem stems from the inability, in some cases, of computer
programs and embedded microchips to correctly process certain data. The
problem is most evident because dates which fall in the year 2000 and in
later years may not be properly distinguished from those which fell in the
corresponding years of the present century.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF THE YEAR 2000 ISSUE (cont'd)
General (cont'd)
Although all ACE group companies had individually taken steps earlier
towards alleviating the Year 2000 problem, a formal group-wide project was
established in March 1998. At that time, an executive steering committee
was formed to oversee the project. This committee meets on a monthly basis
to review progress and take corrective action if necessary. In each of the
ACE subsidiary companies, a senior member of the management has been
appointed as Year 2000 coordinator. Each Year 2000 coordinator has
responsibility for ensuring the success of that part of the Year 2000 plan
relevant to its company. A detailed quarterly report on the status of the
Year 2000 project is delivered to the audit committee of the Board of
Directors.
A consultant who is an experienced project manager has been retained to
assist the Year 2000 coordinator. In addition, certain subsidiaries have
engaged external consultants to assist in monitoring their plans.
The project is substantially on schedule, though some components have been
finished earlier than expected and some are taking more time than
originally estimated. At the end of 1998, all ACE group companies were
running Year 2000 compliant versions of most of the IT systems that are
critical to the business. The replacement or remedy of the remaining
critical systems and some residual testing will continue during the first
and possibly the second quarter of calendar year 1999. One subsidiary (ACE
USA) has one critical business area for which a Year 2000 compliant
replacement system is now scheduled to go live in August 1999. A
contingency plan exists for this business area should the replacement
system be delayed or problematic.
The Company's Year 2000 project is divided into four sections: Underwriting;
Information Technology; Trading Partners; and Physical Plant.
Underwriting
Underwriting teams within each ACE group subsidiary have considered the
risks with respect to the Year 2000 problem that might be associated with
underwriting their various lines of business and have developed internal
guidelines which seek to minimize these risks. Compliance with these
guidelines is the subject of internal audits and/or peer reviews. These
guidelines are under regular review. In some cases, exclusionary language
has been added to policies and in all cases there is a requirement for
underwriters to consider information about our clients and potential
clients that is relevant to the Year 2000 problem and based on this, to
underwrite risks prudently or to decline them.
Information Technology
Each ACE subsidiary has a plan to ensure that all information technology
components such as hardware, software and network equipment that will be in
use in the Year 2000 (and beyond) for use by any business-critical function
will not suffer from the Year 2000 problem. Inventories have been prepared
of all such components, and appropriate action decided.
Most application software (such as insurance processing and accounting
systems) which is in use within the ACE group has been supplied as packages
(often tailored to meet ACE's needs) from various vendors. Several
application software packages have already been replaced with Year 2000
compliant versions. Testing of these is complete in some cases, in progress
for some systems and is scheduled for others. Remaining software packages
will be replaced, or, in a few cases, remedied to free them of Year 2000
problems.
Testing of hardware and network components has commenced and is scheduled
for completion before the end of March 1999. Testing of other software,
such as operating systems and PC desktop applications is in progress or
scheduled, though in a few cases we are relying on assurances from
established software manufacturers that their systems will operate
correctly.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF THE YEAR 2000 ISSUE (cont'd)
Trading Partners and Physical Plant
The trading partners section of the project focuses on Year 2000 issues
relating to the Company's trading partners. Examples of the Company's
trading partners are: insurance brokers, banks, reinsurance companies,
vendors and service providers in information technology and general
suppliers.
The Physical Plant section of the project focuses on items such as
elevators, fire suppression systems, security systems, building management
systems (which may control air-conditioning, heating and lighting systems)
which may be controlled by software programs or embedded chips, and may
thus fail or act unpredictably in, or after the year 2000. Furthermore,
supply of electrical power and telecommunications services are considered
here.
All material trading partners and those vendors and service providers
connected with physical plant have been inventoried and questionnaires sent
to them soliciting information about their Year 2000 readiness. Responses
have not been provided in all cases, despite follow-up letters. ACE has
made significant progress in assessing those responses which have been
forthcoming. Some of these responses appear to give evidence of
satisfactory progress and others do not. In those cases where additional
follow-up fails to provide satisfactory responses, contingency plans will
be drawn up in early 1999 to minimize the effect of potential failure of a
trading partner.
Costs
The total cost of the Year 2000 project is not expected to be material to
the Company's financial position. The total estimated cost is approximately
$4 million, of which just over $2 million is for the information technology
component of the project. Total expenditure to date on the whole project is
approximately $1.2 million.
Risks
It is not feasible to assign probabilities to many of the events associated
with the Year 2000. The arrival of January 1, 2000 presents novel problems
about which there is no body of evidence upon which to base statistical
predictions. Furthermore, world infrastructure in areas such as
telecommunications, banking, law enforcement, energy production and
distribution, manufacturing, transportation and government and military
systems are inextricably linked in such a manner that a small failure in
one area could produce large and unexpected effects in others. Each
business has a dependence upon its customers and suppliers and through them
(or directly) upon many or all of the infrastructural areas noted above.
ACE management believes that the risks associated with its own information
technology project component are small. For reasons noted above, it is
impossible to quantify all risks associated with trading partners and
physical plant. Possibly the greatest risk for the Company lies in the
possibility of unpredictable events affecting insureds producing a number
of claims (valid or otherwise) which, if valid, are expensive to pay, or if
not, expensive in defense litigation costs.
24
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
1) The Annual General Meeting was held on February 5, 1999.
2) The following matters were voted on at the Annual General Meeting:
a) The following directors were elected.
Term Expiring Votes In Favor Votes Withheld
------------- --------------- --------------
Jeffrey W. Greenberg 2002 147,814,324 12,772,519
Meryl D. Hartzband 2002 157,650,530 2,936,313
Donald Kramer 2002 157,653,319 2,933,524
Walter A. Scott 2002 157,644,906 2,941,937
Sidney F. Wentz 2002 157,612,767 2,974,076
b) A special resolution was voted upon to approve the ACE Limited 1998
Long-Term Incentive Plan.
The holders of 127,409,320 shares voted in favor, 32,482,050
shares voted against and 695,473 shares abstained.
c) The appointment of PricewaterhouseCoopers LLP as independent
public accountants for the Company for the year ended September
30, 1999 was ratified and approved.
The holders of 160,527,588 shares voted in favor, 25,383 shares
voted against and 33,872 shares abstained.
ITEM 5. OTHER INFORMATION
- --------------------------
1) On February 5, 1999, the Company declared a dividend of $0.09 per
Ordinary Share payable on April 16, 1999 to shareholders of record on
March 31, 1999.
25
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
1) Exhibits
10.1 Ace Limited 1998 Long-Term Incentive Plan (as amended
through the first amendment)
27 Financial Data Schedule
2) Reports on Form 8-K
The Company filed a Form 8-K current report (date of earliest event
reported: December 22,1998) announcing that the Company and CIGNA
Corporation were discussing a global strategic alliance, including
the possible acquisition of CIGNA'S international and domestic property
and casualty business by the Company.
The Company filed a Form 8-K current report (date of earliest event
reported : January 12, 1999) pertaining to its agreement to acquire
the international and domestic property and casualty insurance
businesses of CIGNA Corporation for $3.45 billion in cash.
26
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE LIMITED
--------------------------------------------
February 12, 1999 /s/ Brian Duperreault
--------------------------------------------
Brian Duperreault
Chairman, President and Chief
Executive Officer
February 12, 1999 /s/ Christopher Z. Marshall
--------------------------------------------
Christopher Z. Marshall
Chief Financial Officer
27
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit
Number Description Numbered Page
- --------- ------------ -------------
10.1 Ace Limited 1998 Long-Term Incentive Plan
(as amended through the first amendment)
27 Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>ACE LIMITED 1998 LONG-TERM INCENTIVE PLAN
<TEXT>
ACE LIMITED 1998
LONG-TERM INCENTIVE PLAN
(As Amended Through the First Amendment)
<PAGE>
ACE LIMITED 1998
LONG-TERM INCENTIVE PLAN
(As Amended Through the First Amendment)
SECTION 1
GENERAL
1.1. Purpose. The ACE Limited Long-Term Incentive Plan (the
"Plan") has been established by ACE Limited (the "Company") to (i) attract
and retain persons eligible to participate in the Plan; (ii) motivate
Participants, by means of appropriate incentives, to achieve long-range
goals; (iii) provide incentive compensation opportunities that are
competitive with those of other similar companies; and (iv) further
identify Participants' interests with those of the Company's other
shareholders through compensation that is based on the Company's ordinary
shares of stock; and thereby promote the long-term financial interest of
the Company and the Subsidiaries, including the growth in value of the
Company's equity and enhancement of long-term shareholder return.
1.2. Participation. Subject to the terms and conditions of the
Plan, the Committee shall determine and designate, from time to time, from
among the Eligible Individuals (including transferees of Eligible
Individuals to the extent the transfer is permitted by the Plan and the
applicable Award Agreement), those persons who will be granted one or more
Awards under the Plan, and thereby become "Participants" in the Plan. In
the discretion of the Committee, a Participant may be granted any Award
permitted under the provisions of the Plan, and more than one Award may be
granted to a Participant. Awards may be granted as alternatives to or
replacement of awards granted or outstanding under the Plan, or any other
plan or arrangement of the Company or a Subsidiary (including a plan or
arrangement of a business or entity, all or a portion of which is acquired
by the Company or a Subsidiary).
1.3. Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards made under the Plan, shall
be subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set
forth in the Plan (including the definition provisions of Section 8 of the
Plan).
1
<PAGE>
SECTION 2
OPTIONS AND SARS
2.1. Definitions.
(a) The grant of an "Option" entitles the Participant to purchase
shares of Stock at an Exercise Price established by the
Committee. Any Option granted under this Section 2 may be either
an incentive stock option (an "ISO") or a non-qualified option
(an "NQO"), as determined in the discretion of the Committee. An
"ISO" is an Option that is intended to satisfy the requirements
applicable to an "incentive stock option" described in section
422(b) of the Code. An "NQO" is an Option that is not intended to
be an "incentive stock option" as that term is described in
section 422(b) of the Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with
subsection 2.5), value equal to (or otherwise based on) the excess
of: (a) the Fair Market Value of a specified number of shares of
Stock at the time of exercise; over (b) an Exercise Price
established by the Committee.
2.2. Exercise Price. The "Exercise Price" of each Option and SAR
granted under this Section 2 shall be established by the Committee or shall
be determined by a method established by the Committee at the time the
Option or SAR is granted; except that the Exercise Price shall not be less
than 100% of the Fair Market Value of a share of Stock on the date of grant
(or, if greater, the par value of a share of Stock).
2.3. Exercise. An Option and an SAR shall be exercisable in
accordance with such terms and conditions and during such periods as may be
established by the Committee.
2.4. Payment of Option Exercise Price. The payment of the Exercise
Price of an Option granted under this Section 2 shall be subject to the
following:
(a) Subject to the following provisions of this subsection 2.4, the
full Exercise Price for shares of Stock purchased upon the
exercise of any Option shall be paid at the time of such exercise
(except that, in the case of an exercise arrangement approved by
the Committee and described in paragraph 2.4(c), payment may be
made as soon as practicable after the exercise).
2
<PAGE>
(b) The Exercise Price shall be payable in cash or by tendering, by
either actual delivery of shares or by attestation, shares of
Stock acceptable to the Committee, and valued at Fair Market Value
as of the day of exercise, or in any combination thereof, as
determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the
Exercise Price upon the exercise of an Option by irrevocably
authorizing a third party to sell shares of Stock (or a sufficient
portion of the shares) acquired upon exercise of the Option and
remit to the Company a sufficient portion of the sale proceeds to
pay the entire Exercise Price and any tax withholding resulting
from such exercise.
2.5. Settlement of Award. Shares of Stock delivered pursuant to
the exercise of an Option or SAR shall be subject to such conditions,
restrictions and contingencies as the Committee may establish in the
applicable Award Agreement. Settlement of SARs may be made in shares of
Stock (valued at their Fair Market Value at the time of exercise), in cash,
or in a combination thereof, as determined in the discretion of the
Committee. The Committee, in its discretion, may impose such conditions,
restrictions and contingencies with respect to shares of Stock acquired
pursuant to the exercise of an Option or an SAR as the Committee determines
to be desirable.
SECTION 3
OTHER STOCK AWARDS
3.1. Definitions.
(a) A "Stock Unit" Award is the grant of a right to receive shares of
Stock in the future.
(b) A "Performance Share" Award is a grant of a right to receive
shares of Stock or Stock Units which is contingent on the
achievement of performance or other objectives during a specified
period.
(c) A "Performance Unit" Award is a grant of a right to receive a
designated dollar value amount of Stock which is contingent on the
achievement of performance or other objectives during a specified
period.
(d) A "Restricted Stock" Award is a grant of shares of Stock, and a
"Restricted Stock Unit" Award is the grant of a right to receive
shares of Stock in the future, with such shares of Stock or right
to future delivery of such shares of
3
<PAGE>
Stock subject to a risk of forfeiture or other restrictions that
will lapse upon the achievement of one or more goals relating to
completion of service by the Participant, or achievement of
performance or other objectives, as determined by the Committee.
3.2. Restrictions on Awards. Each Stock Unit Award, Restricted Stock
Award, Restricted Stock Unit Award, Performance Share Award and Performance
Unit Award shall be subject to the following:
(a) Any such Award shall be subject to such conditions, restrictions
and contingencies as the Committee shall determine.
(b) The Committee may designate whether any such Award being granted to
any Participant is intended to be "performance-based compensation"
as that term is used in section 162(m) of the Code. Any such
Awards designated as intended to be "performance-based
compensation" shall be conditioned on the achievement of one or
more Performance Measures, to the extent required by Code section
162(m). The Performance Measures that may be used by the Committee
for such Awards shall be based on any one or more of the following
Company, Subsidiary, operating unit or division performance
measures, as selected by the Committee: gross premiums written;
net premiums written; net premiums earned; net investment income;
losses and loss expenses; underwriting and administrative
expenses; operating expenses; cash flow(s); operating income;
earnings before interest and taxes; net income; stock price;
dividends; strategic business objectives, consisting of one or
more objectives based on meeting specified cost targets, business
expansion goals, and goals relating to acquisitions or
divestitures; or any combination thereof. Each goal may be
expressed on an absolute and/or relative basis, may be based on or
otherwise employ comparisons based on internal targets, the past
performance of the Company and/or the past or current performance
of other companies, and in the case of earnings-based measures,
may use or employ comparisons relating to capital, shareholders'
equity and/or shares outstanding, investments or to assets or net
assets. For Awards under this Section 3 intended to be
"performance-based compensation," the grant of the Awards and the
establishment of the Performance Measures shall be made during the
period required under Code section 162(m).
(c) If the right to become vested in a Restricted Stock Award or
Restricted Stock Unit Award granted under this Section 3 is
conditioned on the completion of a specified period of service
with the Company or the Subsidiaries, without achievement of
Performance Measures or other performance objectives being
4
<PAGE>
required as a condition of vesting, and without it being granted
in lieu of other compensation, then the required period of service
for vesting shall be not less than three years (subject to
acceleration of vesting, to the extent permitted by the Committee,
in the event of the Participant's death, disability, retirement,
change in control or involuntary termination).
SECTION 4
OPERATION AND ADMINISTRATION
4.1. Effective Date. Subject to the approval of the shareholders
of the Company at the Company's 1999 annual meeting of its shareholders,
the Plan shall be effective as of November 13, 1998 (the "Effective Date");
provided, however, that to the extent that Awards are granted under the
Plan prior to its approval by shareholders, the Awards shall be contingent
on approval of the Plan by the shareholders of the Company at such annual
meeting. The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any Awards under it are
outstanding; provided, however, that no Awards may be granted under the
Plan after the ten-year anniversary of the Effective Date.
4.2. Shares Subject to Plan. The shares of Stock for which Awards
may be granted under the Plan shall be subject to the following:
(a) The shares of Stock with respect to which Awards may be made under
the Plan shall be currently authorized but unissued shares, or
shares purchased in the open market by a direct or indirect
wholly-owned subsidiary of the Company (as determined by the
Chairman or any Executive Vice President of the Company). The
Company may contribute to the subsidiary an amount sufficient to
accomplish the purchase in the open market of the shares of Stock
to be so acquired (as determined by the Chairman or any Executive
Vice President of the Company).
(b) Subject to this subsection 4.2, the number of shares of Stock
available for Awards under the Plan shall be 9,682,823 shares.
(c) To the extent provided by the Committee, any Award may be settled
in cash rather than Stock. To the extent any shares of Stock
covered by an Award are not delivered to a Participant or
beneficiary because the Award is forfeited or canceled, or the
shares of Stock are not delivered because the Award is settled in
cash or used to satisfy the applicable tax withholding obligation,
such shares
5
<PAGE>
shall not be deemed to have been delivered for purposes of
determining the maximum number of shares of Stock available for
delivery under the Plan.
(d) If the exercise price of any Option granted under the Plan is
satisfied by tendering shares of Stock to the Company (by either
actual delivery or by attestation), only the number of shares of
Stock issued net of the shares of Stock tendered shall be deemed
delivered for purposes of determining the maximum number of shares
of Stock available for delivery under the Plan.
(e) Subject to paragraph 4.2(f), the following additional maximums are
imposed under the Plan:
(i) The maximum number of shares of Stock that may be issued by
Options intended to be ISOs shall be 8,000,000 shares.
(ii) The maximum number of shares that may be covered by Awards
granted to any one individual pursuant to Section 2 (relating to
Options and SARs) shall be 6,000,000 shares during any
one-calendar-year period.
(iii) The maximum number of shares of Stock that may be issued in
conjunction with Awards granted pursuant to Section 3 (relating to
Other Stock Awards) shall be 2,000,000 shares.
(iv) For Stock Unit Awards, Restricted Stock Awards, Restricted
Stock Unit Awards and Performance Share Awards that are intended
to be "performance-based compensation" (as that term is used for
purposes of Code section 162(m)), no more than 2,000,000 shares of
Stock may be subject to such Awards granted to any one individual
during any one-calendar-year period (regardless of when such
shares are deliverable).
(v) For Performance Unit Awards that are intended to be
"performance-based compensation" (as that term is used for
purposes of Code section 162(m)), no more than $5,000,000 may be
subject to such Awards granted to any one individual during any
one-calendar-year period (regardless of when such amounts are
deliverable).
(f) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reorganization,
merger, consolidation, split-up, spin-off, combination or exchange
of shares), the Committee may adjust Awards to preserve the
benefits or potential benefits of the Awards. Action by the
6
<PAGE>
Committee may include: (i) adjustment of the number and kind of
shares which may be delivered under the Plan; (ii) adjustment of
the number and kind of shares subject to outstanding Awards; (iii)
adjustment of the Exercise Price of outstanding Options and SARs;
and (iv) any other adjustments that the Committee determines to be
equitable.
4.3. General Restrictions. Delivery of shares of Stock or other
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or
make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws
(including, without limitation, the requirements of the United
States Securities Act of 1933), and the applicable requirements of
any securities exchange or similar entity.
(b) To the extent that the Plan provides for issuance of stock
certificates to reflect the issuance of shares of Stock, the
issuance may be effected on a non- certificated basis, to the
extent not prohibited by applicable law or the applicable rules of
any stock exchange.
4.4. Tax Withholding. All distributions under the Plan are subject
to withholding of all applicable taxes, and the Committee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of
the applicable withholding obligations. The Committee, in its discretion,
and subject to such requirements as the Committee may impose prior to the
occurrence of such withholding, may permit such withholding obligations to
be satisfied through cash payment by the Participant, through the surrender
of shares of Stock which the Participant already owns, or through the
surrender of shares of Stock to which the Participant is otherwise entitled
under the Plan.
4.5. Use of Shares. Subject to the overall limitation on the
number of shares of Stock that may be delivered under the Plan, the
Committee may use available shares of Stock as the form of payment for
compensation, grants or rights earned or due under any other compensation
plans or arrangements of the Company or a Subsidiary, including the plans
and arrangements of the Company or a Subsidiary assumed in business
combinations.
4.6. Dividends and Dividend Equivalents. An Award (including
without limitation an Option or SAR Award) may provide the Participant with
the right to receive dividend payments or dividend equivalent payments with
respect to Stock
7
<PAGE>
subject to the Award (both before and after the Stock subject to the Award
is earned, vested, or acquired), which payments may be either made
currently or credited to an account for the Participant, and may be settled
in cash or Stock as determined by the Committee. Any such settlements, and
any such crediting of dividends or dividend equivalents or reinvestment in
shares of Stock, may be subject to such conditions, restrictions and
contingencies as the Committee shall establish, including the reinvestment
of such credited amounts in Stock equivalents.
4.7. Payments. Awards may be settled through cash payments, the
delivery of shares of Stock, the granting of replacement Awards, or
combination thereof as the Committee shall determine. Any Award settlement,
including payment deferrals, may be subject to such conditions,
restrictions and contingencies as the Committee shall determine. The
Committee may permit or require the deferral of any Award payment, subject
to such rules and procedures as it may establish, which may include
provisions for the payment or crediting of interest, or dividend
equivalents, including converting such credits into deferred Stock
equivalents. Each Subsidiary shall be liable for payment of cash due under
the Plan with respect to any Participant to the extent that such benefits
are attributable to the services rendered for that Subsidiary by the
Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.
4.8. Transferability. Except as otherwise provided by the
Committee, Awards under the Plan are not transferable except as designated
by the Participant by will or by the laws of descent and distribution.
4.9. Form and Time of Elections. Unless otherwise specified
herein, each election required or permitted to be made by any Participant
or other person entitled to benefits under the Plan, and any permitted
modification, or revocation thereof, shall be in writing filed with the
Committee at such times, in such form, and subject to such restrictions and
limitations, not inconsistent with the terms of the Plan, as the Committee
shall require.
4.10. Agreement With Company. An Award under the Plan shall be
subject to such terms and conditions, not inconsistent with the Plan, as
the Committee shall, in its sole discretion, prescribe. The terms and
conditions of any Award to any Participant shall be reflected in such form
of written document as is determined by the Committee. A copy of such
document shall be provided to the Participant, and the Committee may, but
need not require that the Participant sign a copy of such document. Such
document is referred to in the Plan as an "Award Agreement" regardless of
whether any Participant signature is required.
8
<PAGE>
4.11. Action by Company or Subsidiary. Any action required or
permitted to be taken by the Company or any Subsidiary shall be by
resolution of its board of directors, or by action of one or more members
of the board (including a committee of the board) who are duly authorized
to act for the board, or (except to the extent prohibited by applicable law
or applicable rules of any stock exchange) by a duly authorized officer of
such company.
4.12. Gender and Number. Where the context admits, words in any
gender shall include any other gender, words in the singular shall include
the plural and the plural shall include the singular.
4.13. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any
assets, funds or property of the Company or any Subsidiary
whatsoever, including, without limitation, any specific funds,
assets, or other property which the Company or any Subsidiary, in
their sole discretion, may set aside in anticipation of a
liability under the Plan. A Participant shall have only a
contractual right to the Stock or amounts, if any, payable under
the Plan, unsecured by any assets of the Company or any
Subsidiary, and nothing contained in the Plan shall constitute a
guarantee that the assets of the Company or any Subsidiary shall
be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and
selection as a Participant will not give any participating
employee or other individual the right to be retained in the
employ of the Company or any Subsidiary or the right to continue
to provide services to the Company or any Subsidiary, nor any
right or claim to any benefit under the Plan, unless such right or
claim has specifically accrued under the terms of the Plan. Except
as otherwise provided in the Plan, no Award under the Plan shall
confer upon the holder thereof any rights as a shareholder of the
Company prior to the date on which the individual fulfills all
conditions for receipt of such rights.
4.14. Benefits Under Qualified Retirement Plans. Except as
otherwise provided by the Committee, Awards to a Participant (including the
grant and the receipt of benefits) under the Plan shall be disregarded for
purposes of determining the Participant's benefits under any Qualified
Retirement Plan and other plans maintained by the Participant's employer.
The term "Qualified Retirement Plan" means any plan of the Company or a
Subsidiary that is intended to be qualified under section 401(a) of the
Code.
9
<PAGE>
4.15. Evidence. Evidence required of anyone under the Plan may be
by certificate, affidavit, document or other information which the person
acting on it considers pertinent and reliable, and signed, made or
presented by the proper party or parties.
SECTION 5
CHANGE IN CONTROL
Subject to the provisions of paragraph 4.2(f) (relating to the
adjustment of shares), and except as otherwise provided in the Plan or the
Award Agreement reflecting the applicable Award, upon the occurrence of a
Change in Control:
(a) All outstanding Options (regardless of whether in tandem with
SARs) shall become fully exercisable.
(b) All outstanding SARs (regardless of whether in tandem with
Options) shall become fully exercisable.
(c) All Stock Units, Restricted Stock, Restricted Stock Units,
Performance Shares, and Performance Units shall become fully
vested.
SECTION 6
COMMITTEE
6.1. Administration. The authority to control and manage the
operation and administration of the Plan shall be vested in a committee
(the "Committee") in accordance with this Section 6. The Compensation
Committee of the Board shall serve as the "Committee" under the Plan,
except as otherwise determined by the Board. If the Committee does not
exist, or for any other reason determined by the Board, the Board may take
any action under the Plan that would otherwise be the responsibility of the
Committee.
6.2. Powers of Committee. The Committee's administration of the
Plan shall be subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible
Individuals those persons who shall receive Awards, to determine
the time or times of receipt, to determine the types of Awards and
the number of shares covered by the Awards, to establish
10
<PAGE>
the terms, conditions, performance criteria, restrictions, and other
provisions of such Awards, and (subject to the restrictions imposed
by Section 7) to cancel or suspend Awards.
(b) To the extent that the Committee determines that the restrictions
imposed by the Plan preclude the achievement of the material
purposes of the Awards in jurisdictions outside the United States,
the Cayman Islands, and Bermuda, the Committee will have the
authority and discretion to modify those restrictions as the
Committee determines to be necessary or appropriate to conform to
applicable requirements or practices of jurisdictions outside of
the United States, the Cayman Islands, and Bermuda.
(c) The Committee will have the authority and discretion to interpret
the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan, to determine the terms and
provisions of any Award Agreement made pursuant to the Plan, and
to make all other determinations that may be necessary or
advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision
made by it under the Plan is final and binding on all persons.
(e) In controlling and managing the operation and administration of
the Plan, the Committee shall take action in a manner that
conforms to the Memorandum and Articles of Association of the
Company, and applicable corporate law.
6.3. Delegation by Committee. Except to the extent prohibited by
applicable law or the applicable rules of a stock exchange, the Committee
may allocate all or any portion of its responsibilities and powers to any
one or more of its members and may delegate all or any part of its
responsibilities and powers to any person or persons selected by it. Any
such allocation or delegation may be revoked by the Committee at any time.
6.4. Information to be Furnished to Committee. The Company and
Subsidiaries shall furnish the Committee with such data and information as
it determines may be required for it to discharge its duties. The records
of the Company and Subsidiaries as to an employee's or Participant's
employment (or other provision of services), termination of employment (or
cessation of the provision of services), leave of absence, reemployment and
compensation shall be conclusive on all persons unless determined to be
incorrect. Participants and other persons entitled to benefits under the
Plan must furnish the Committee such evidence, data or information as the
Committee considers desirable to carry out the terms of the Plan.
11
<PAGE>
SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided
that no amendment or termination may, in the absence of written consent to
the change by the affected Participant (or, if the Participant is not then
living, the affected beneficiary), adversely affect the rights of any
Participant or beneficiary under any Award granted under the Plan prior to
the date such amendment is adopted by the Board; provided that adjustments
pursuant to subject to paragraph 4.2(f) shall not be subject to the
foregoing limitations of this Section 7.
SECTION 8
DEFINED TERMS
In addition to the other definitions contained herein, the
following definitions shall apply:
(a) Award. The term "Award" shall mean any award or benefit granted
under the Plan, including, without limitation, the grant of
Options, SARs, Stock Unit Awards, Restricted Stock Awards,
Restricted Stock Unit Awards, Performance
Share Awards, and Performance Unit Awards.
(b) Board. The term "Board" shall mean the Board of Directors of the
Company.
(c) Change in Control. The term "Change in Control" shall mean the
occurrence of any one of the following events:
(i) any "person," as such term is used in Sections 3(a)(9) and
13(d) of the United States Securities Exchange Act of 1934,
becomes a "beneficial owner," as such term is used in Rule 13d-3
promulgated under that act, of 50% or more of the Voting Stock (as
defined below) of the Company;
(ii) the majority of the Board consists of individuals other than
Incumbent Directors, which term means the members of the Board on
the Effective Date; provided that any person becoming a director
subsequent to such date whose election or nomination for election
was supported by three-quarters of the directors who then
comprised the Incumbent Directors shall be considered to be an
Incumbent Director;
12
<PAGE>
(iii) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of the
Company is disposed of pursuant to a merger, consolidation or
other transaction (unless the shareholders of the Company
immediately prior to such merger, consolidation or other
transaction beneficially own, directly or indirectly, in
substantially the same proportion as they owned the Voting Stock
of the Company, all of the Voting Stock or other ownership
interests of the entity or entities, if any, that succeed to the
business of the Company); or
(v) the Company combines with another company and is the surviving
corporation but, immediately after the combination, the
shareholders of the Company immediately prior to the combination
hold, directly or indirectly, 50% or less of the Voting Stock of
the combined company (there being excluded from the number of
shares held by such shareholders, but not from the Voting Stock of
the combined company, any shares received by Affiliates (as
defined below) of such other company in exchange for stock of such
other company).
For the purpose of this definition of "Change in Control," (I) an
"Affiliate" of a person or other entity shall mean a person or
other entity that directly or indirectly controls, is controlled
by, or is under common control with the person or other entity
specified and (II) "Voting Stock" shall mean capital stock of any
class or classes having general voting power under ordinary
circumstances, in the absence of contingencies, to elect the
directors of a corporation.
(d) Code. The term "Code" means the United States Internal Revenue
Code of 1986, as amended. A reference to any provision of the Code
shall include reference to any successor provision of the Code.
(e) Dollars. As used in the Plan, the term "dollars" or numbers
preceded by the symbol "$" shall mean amounts in United States
dollars.
(f) Eligible Individual. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a
Subsidiary, and any consultant, director, or other person
providing services to the Company or a Subsidiary. An Award may be
granted to an employee or other individual providing services, in
connection with hiring, retention or otherwise, prior to the date
the employee or service provider first performs services for the
13
<PAGE>
Company or the Subsidiaries, provided that such Awards shall not
become vested prior to the date the employee or service provider
first performs such services.
(g) Fair Market Value. Except as otherwise provided by the Committee,
the "Fair Market Value" of a share of Stock as of any date shall
be the closing market composite price for such Stock as reported
for the New York Stock Exchange Composite Transactions on that
date or, if Stock is not traded on that date, on the next
preceding date on which Stock was traded.
(h) Subsidiaries. For purposes of the Plan, the term "Subsidiary"
means any corporation, partnership, joint venture or other entity
during any period in which at least a fifty percent voting or
profits interest is owned, directly or indirectly, by the Company
(or by any entity that is a successor to the Company), and any
other business venture designated by the Committee in which the
Company (or any entity that is a successor to the Company) has a
significant interest, as determined in the discretion of the
Committee.
(i) Stock. The term "Stock" shall mean ordinary shares of stock of the
Company.
14
<PAGE>
TABLE OF CONTENTS
GENERAL............................................................1
Purpose ............................................1
Participation ............................................1
Operation, Administration, and Definitions................1
OPTIONS AND SARS...................................................2
Definitions ............................................2
Exercise Price............................................2
Exercise ............................................2
Payment of Option Exercise Price..........................2
Settlement of Award.......................................3
OTHER STOCK AWARDS.................................................3
Definitions ............................................3
Restrictions on Awards....................................4
OPERATION AND ADMINISTRATION.......................................5
Effective Date............................................5
Shares Subject to Plan....................................5
General Restrictions......................................7
Use of Shares ............................................7
Dividends and Dividend Equivalents........................8
Payments ............................................8
Transferability...........................................8
Form and Time of Elections................................8
Agreement With Company....................................8
Action by Company or Subsidiary...........................9
Gender and Number.........................................9
Limitation of Implied Rights..............................9
Benefits Under Qualified Retirement Plans.................9
Evidence ...........................................10
CHANGE IN CONTROL.................................................10
COMMITTEE.........................................................10
Administration...........................................10
Powers of Committee......................................10
Delegation by Committee..................................11
Information to be Furnished to Committee.................11
AMENDMENT AND TERMINATION.........................................12
DEFINED TERMS.....................................................12
i
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 4,866,366
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 220,843
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,974,344
<CASH> 240,556
<RECOVER-REINSURE> 58,806
<DEFERRED-ACQUISITION> 67,502
<TOTAL-ASSETS> 8,834,305
<POLICY-LOSSES> 3,678,269
<UNEARNED-PREMIUMS> 705,712
<POLICY-OTHER> 135,664
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 8,070
<OTHER-SE> 3,901,507
<TOTAL-LIABILITY-AND-EQUITY> 8,834,305
<PREMIUMS> 218,007
<INVESTMENT-INCOME> 85,096
<INVESTMENT-GAINS> 130,154
<OTHER-INCOME> 0
<BENEFITS> 111,169
<UNDERWRITING-AMORTIZATION> 27,812
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 243,881
<INCOME-TAX> 5,342
<INCOME-CONTINUING> 238,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,539
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.21
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| CFC | https://www.sec.gov/Archives/edgar/data/25191/0000025191-99-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000025191-99-000002.txt : 19990423
<SEC-HEADER>0000025191-99-000002.hdr.sgml : 19990423
ACCESSION NUMBER: 0000025191-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19981130
FILED AS OF DATE: 19990115
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COUNTRYWIDE CREDIT INDUSTRIES INC
CENTRAL INDEX KEY: 0000025191
STANDARD INDUSTRIAL CLASSIFICATION: 6162
IRS NUMBER: 132641992
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-12331-01
FILM NUMBER: 99506696
BUSINESS ADDRESS:
STREET 1: 4500 PARK GRANADA BLVD
CITY: CALABASAS
STATE: CA
ZIP: 91302
BUSINESS PHONE: 8182253000
MAIL ADDRESS:
STREET 1: 4500 PARK GRANADA BLVD
CITY: CALABASAS
STATE: CA
ZIP: 91302
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q
<TEXT>
Page 3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________
Commission File Number: 1-8422
COUNTRYWIDE CREDIT INDUSTRIES, INC.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2641992
- - -------------------------------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4500 Park Granada, Calabasas, California 91302
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 225-3000
-----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 13, 1999
----- -------------------------------
Common Stock $.05 par value 112,566,729
<PAGE>
Page 2
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollar amounts in thousands)
A S S E T S
<TABLE>
November 30, February 28,
1998 1998
------------------ -------------------
<S> <C> <C>
Cash $ 52,330 $ 10,707
Mortgage loans and mortgage-backed securities held for sale 7,779,742 5,292,191
Property, equipment and leasehold improvements, at cost - net of
accumulated depreciation and amortization 282,097 226,330
Mortgage servicing rights, net 3,732,003 3,612,010
Other assets 4,356,671 3,041,973
------------------ -------------------
Total assets $16,202,843 $12,183,211
================== ===================
Borrower and investor custodial accounts (segregated in special
accounts - excluded from corporate assets) $5,444,408 $3,945,606
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $10,002,891 $7,475,221
Drafts payable issued in connection with mortgage loan closings 1,089,045 764,285
Accounts payable, accrued liabilities and other 1,156,852 482,678
Deferred income taxes 1,034,079 873,084
------------------ -------------------
Total liabilities 13,282,867 9,595,268
Commitments and contingencies - -
Company-obligated mandatorily redeemable capital trust pass-through securities
of subsidiary trusts holding solely Company
guaranteed related subordinated debt 500,000 500,000
Shareholders' equity
Preferred stock - authorized, 1,500,000 shares of $0.05 par value;
issued and outstanding, none - -
Common stock - authorized, 240,000,000 shares of $0.05 par
value; issued and outstanding, 111,957,095 shares at
November 30, 1998 and 109,205,579 shares at February 28, 1998 5,598 5,460
Additional paid-in capital 1,138,878 1,049,365
Accumulated other comprehensive income (11,075) 3,697
Retained earnings 1,286,575 1,029,421
------------------ -------------------
Total shareholders' equity 2,419,976 2,087,943
------------------ -------------------
Total liabilities and shareholders' equity $16,202,843 $12,183,211
================== ===================
Borrower and investor custodial accounts $5,444,408 $3,945,606
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Page 3
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollar amounts in thousands, except earnings per share)
<TABLE>
Three Months Nine Months
Ended November 30, Ended November 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Revenues
<S> <C> <C> <C> <C>
Loan origination fees $166,934 $ 78,907 $462,740 $ 197,561
Gain on sale of loans, net of commitment fees 186,241 103,323 517,073 288,954
-------------- -------------- -------------- --------------
Loan production revenue 353,175 182,230 979,813 486,515
Interest earned 184,869 119,743 556,294 305,605
Interest charges (177,751) (110,113) (528,017) (291,935)
-------------- -------------- -------------- --------------
Net interest income 7,118 9,630 28,277 13,670
Loan servicing income 261,349 234,499 755,523 670,582
Amortization and impairment/recovery of
mortgage servicing rights (243,726) (1,271,231) (375,067)
(680,927)
Servicing hedge benefit 533,030 161,506 822,891 150,225
-------------- -------------- -------------- --------------
Net loan administration income 113,452 152,279 307,183 445,740
Commissions, fees and other income 40,452 31,002 131,346 95,636
Gain on sale of subsidiary - - - 57,381
-------------- -------------- -------------- --------------
Total revenues 514,197 375,141 1,446,619 1,098,942
Expenses
Salaries and related expenses 176,015 110,458 484,255 299,043
Occupancy and other office expenses 73,391 49,179 202,208 128,667
Guarantee fees 45,634 43,467 135,655 128,855
Marketing expenses 17,085 9,711 47,189 30,353
Other operating expenses 41,464 30,878 112,063 85,989
-------------- --------------
-------------- --------------
Total expenses 353,589 243,693 981,370 672,907
-------------- -------------- -------------- --------------
Earnings before income taxes 160,608 131,448 465,249 426,035
Provision for income taxes 62,637 51,265 181,447 166,154
-------------- -------------- -------------- --------------
NET EARNINGS $97,971 $ 80,183 $283,802 $ 259,881
============== ============== ============== ==============
Earnings per share
Basic $0.88 $0.75 $2.56 $2.43
Diluted $0.84 $0.71 $2.43 $2.34
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
Nine Months
Ended November 30,
1998 1997
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 283,802 $ 259,881
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Gain on sale of available-for-sale securities (56,820) -
Gain on sale of subsidiary - (57,381)
Amortization and impairment/recovery of mortgage 1,271,231 375,065
servicing rights
Depreciation and other amortization 41,418 32,559
Deferred income taxes 181,848 181,509
Origination and purchase of loans held for sale (67,812,248) (32,654,304)
Principal repayments and sale of loans 65,324,697 30,740,856
---------------- ----------------
Increase in mortgage loans and mortgage-backed
securities held for sale (2,487,551) (1,913,448)
Increase in other assets (1,526,884) (1,191,679)
Increase in accounts payable and accrued liabilities 674,181 231,705
---------------- ----------------
Net cash provided (used) by operating activities (1,618,775) (2,081,789)
---------------- ----------------
Cash flows from investing activities:
Additions to mortgage servicing rights (1,391,224) (785,057)
Purchase of property, equipment and leasehold
improvements - net (85,483) (52,922)
Proceeds from sale of available-for-sale securities 231,555 -
---------------- ----------------
Net cash used by investing activities (1,245,152) (837,979)
---------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in warehouse debt and other
short-term borrowings (64,844) 1,580,560
Issuance of long-term debt 3,062,070 1,192,513
Repayment of long-term debt (144,796) (86,732)
Issuance of Company obligated mandatorily redeemable
securities of subsidiary trusts holding company guaranteed
related subordinated debt - 200,000
Issuance of common stock 79,768 58,302
Cash dividends paid (26,648) (25,706)
---------------- ----------------
Net cash provided by financing activities 2,905,550 2,918,937
---------------- ----------------
Net increase (decrease) in cash 41,623 (831)
Cash at beginning of period 10,707 18,269
================ ================
Cash at end of period $ 52,330 $ 17,438
================ ================
Supplemental cash flow information:
Cash used to pay interest $ 422,788 $ 286,310
Cash used to pay income taxes $ $
1,367 50
Noncash financing activities:
Unrealized gain (loss) on available-for-sale securities,
net of tax $ (14,772) $ 24,083
</TABLE>
The accompanying notes are an integral part of these statements.
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
Three Months Nine Months
Ended November 30, Ended November 30,
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET EARNINGS $97,971 $80,183 $283,802 $259,881
Other comprehensive income, net of taxes:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising
during the period (9,342) 24,510 19,888 24,083
Less: reclassification adjustment for gains
included in net earnings (25,604) - (34,660) -
-------------
-------------- ------------- -------------- -------------
Other comprehensive income (34,946) 24,510 (14,772) 24,083
-------------- ------------- -------------
============== ============= ==============
COMPREHENSIVE INCOME $63,025 $104,693 $269,030 $283,964
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended November 30, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K for the fiscal year ended February 28, 1998 of Countrywide
Credit Industries, Inc. (the "Company").
Certain amounts reflected in the consolidated financial statements for the
nine-month period ended November 30, 1997 have been reclassified to conform to
the presentation for the nine-month period ended November 30, 1998.
NOTE B - MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights was as follows.
<TABLE>
--------------------------------------------- ---------------------- --------------------------
Nine Months
Ended
(Dollar amounts in thousands) November 30, 1998
--------------------------------------------- -- ---------------- -- ----------------------- --
Mortgage Servicing Rights
<S> <C>
Balance at beginning of period $3,653,318
Additions 1,391,224
Scheduled amortization (416,425)
Hedge losses (gains) applied (804,279)
-----------------------
Balance before valuation reserve
at end of period 3,823,838
-----------------------
Reserve for Impairment of Mortgage Servicing Rights
Balance at beginning of period (41,308)
Reductions (additions) (50,527)
-----------------------
Balance at end of period (91,835)
=======================
Mortgage Servicing Rights, net $3,732,003
=======================
--------------------------------------------- -- ---------------- -- ----------------------- --
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE C - OTHER ASSETS
Other assets consisted of the following.
<TABLE>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands) November 30, 1998 February 28,
1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Servicing hedge instruments $1,270,684 $ 801,335
Trading securities 831,260 243,947
Receivables related to broker-dealer activities 191,370 148,976
Mortgage-backed securities retained in securitization 484,686 466,259
Rewarehoused FHA and VA loans 435,148 426,407
Servicing related advances 207,940 231,437
Short term investment 175,000 -
Loans held for investment 120,051 115,713
Accrued interest 101,002 84,601
Equity securities 79,798 96,152
Other 459,732 427,146
----------------- ----------------
$4,356,671 $3,041,973
================= ================
</TABLE>
NOTE D - AVAILABLE FOR SALE SECURITIES
Amortized cost and fair value of available for sale securities were as
follows. In October 1998, mortgage-backed securities retained in securitization
were reclassified as available for sale securities; see note I.
<TABLE>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
November 30, 1998
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
Mortgage-backed
securities retained in
<S> <C> <C> <C> <C>
securitization $509,464 $ 265 ($25,043) $484,686
CMOs 32,380 4,504 - 36,884
Equity Securities 7,315 2,117 - 9,432
----------------
================ ================= ================
$549,159 $ 6,886 ($25,043) $531,002
================ ================= ================ ================
</TABLE>
<TABLE>
-------------------------------- ---------------- - ------------------------------------ -- ---------------- ---
February 28, 1998
---------------- - ------------------------------------ -- ----------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
-------------------------------- ---------------- - ----------------- - ---------------- -- ---------------- ---
<S> <C> <C> <C>
CMOs $204,234 - ($12,411) $191,823
Equity Securities 7,315 18,471 - 25,786
================ ================= ================ ================
$211,549 $18,471 ($12,411) $217,609
================ ================= ================ ================
</TABLE>
<PAGE>
NOTE E - NOTES PAYABLE
Notes payable consisted of the following.
<TABLE>
------------------------------------------------------------------ -------------------- -------------------------
(Dollar amounts in thousands) November 30, February 28,
1998 1998
------------------------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Commercial paper $1,982,631 $2,119,330
Medium-term notes, Series A, B, C, D, E, F, G and Euro 6,982,255 4,137,185
Repurchase agreements 762,139 181,121
Subordinated notes 200,000 200,000
Unsecured notes payable 75,000 835,000
Other notes payable 866 2,585
================= ================
$10,002,891 $7,475,221
================= ================
</TABLE>
Revolving Credit Facility and Commercial Paper
As of November 30, 1998, Countrywide Home Loans, Inc. ("CHL"), the Company's
mortgage banking subsidiary, had an unsecured credit agreement (revolving credit
facility) with forty-five commercial banks permitting CHL to borrow an aggregate
maximum amount of $4.0 billion. This revolving credit facility consists of a
five-year facility of $3.0 billion, which expires on September 24, 2002, and a
one-year facility of $1.0 billion which expires on September 22, 1999. The
facility contains various financial covenants and restrictions, certain of which
limit the amount of dividends that can be paid by the Company or CHL. As
consideration for the facility, CHL pays annual commitment fees of $3.8 million.
On April 15, 1998, CHL entered into an additional one year unsecured credit
agreement (revolving credit facility), which expires April 14, 1999, with
sixteen of the forty-five banks referenced above for total commitments of $1.3
billion. This facility contains terms consistent with the $4.0 billion revolving
credit facility and as consideration for the facility, CHL pays annual
commitment fees of $1.05 million. The purpose of the revolving credit facilities
is to provide liquidity back-up for CHL's commercial paper program.
No amount was outstanding under either revolving credit facility at November 30,
1998.
The interest rate on direct borrowings is based on a variety of sources,
including the prime rate and the London Interbank Offered Rates ("LIBOR") for
U.S. dollar deposits. This interest rate varies, depending on CHL's credit
ratings. The weighted average borrowing rate on commercial paper borrowings for
the nine months ended November 30, 1998 was 5.56%. The weighted average
borrowing rate on commercial paper outstanding as of November 30, 1998 was
5.36%.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
Medium-Term Notes
As of November 30, 1998, outstanding medium-term notes issued by CHL under
various shelf registrations filed with the Securities and Exchange Commission or
issued by CHL pursuant to its Euro medium-term note program were as follows.
<TABLE>
- - -----------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Outstanding Balance Interest Rate Maturity Date
------------------------------------------ ----------------------- ----------------------------
Floating-Rate Fixed-Rate Total From To From To
------------------------------------------ ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Series A $ $ 173,500 $ 173,500 7.29% 8.79% Mar. 1999 Mar. 2002
-
Series B - 351,000 351,000 6.08% 6.98% Jul. Aug. 2005
1999
Series C 208,000 197,000 405,000 3.88% 8.43% Apr. Mar. 2004
1999
Series D 75,000 385,000 460,000 5.57% 6.88% Aug. 2000 Sep. 2005
Series E 310,000 690,000 1,000,000 5.37% 7.45% Feb. 2000 Oct. 2008
Series F 656,000 1,344,000 2,000,000 5.09% 7.00% Oct. 1999 May 2013
Series G 919,000 581,000 1,500,000 5.19% 7.00% Jul. 1999 Nov. 2018
Euro Notes 1,019,600 73,155 1,092,755 5.22% 6.30% Jul 1999 Aug. 2008
------------------------------------------
Total $3,187,600 $3,794,655 $6,982,255
==========================================
</TABLE>
As of November 30, 1998, principally all of the outstanding fixed-rate notes
had been effectively converted through interest rate swap agreements to
floating-rate notes. The weighted average borrowing rate on medium-term note
borrowings for the nine months ended November 30, 1998, including the effect of
the interest rate swap agreements, was 6.01%. See Note J.
On October 30, 1998, the Company filed a $2.0 billion shelf registration
with the Securities and Exchange Commission ("SEC") covering Series H
Medium-Term Notes. The Company intends to use the proceeds from the sale of the
medium-term notes for general corporate purposes, which may include retirement
of indebtedness of the Company and investment in servicing rights through the
current production of loans and the bulk acquisition of contracts to service
loans.
Repurchase Agreements
As of November 30, 1998, the Company had entered into short-term financing
arrangements to sell mortgage-backed securities ("MBS") under agreements to
repurchase. The weighted average borrowing rate for the nine months ended
November 30, 1998 was 5.56%. The weighted average borrowing rate on repurchase
agreements outstanding as of November 30, 1998 was 5.20%. The repurchase
agreements were collateralized by MBS. All MBS underlying repurchase agreements
are held in safekeeping by broker-dealers, and all agreements are to repurchase
the same or substantially identical MBS.
<PAGE>
NOTE E - NOTES PAYABLE (Continued)
In addition, on November 25, 1998, CHL entered into a $1.5 billion committed
mortgage loan repurchase facility, with four commercial banks. The facility has
a maturity date of November 24, 1999. As consideration for this facility, CHL
pays annual commitment fees of $1.9 million. CHL may sell, subject to an
obligation to repurchase, conforming and non-conforming mortgage loans under the
mortgage loan repurchase agreement. There were no outstanding amounts under this
facility as of November 30, 1998.
Pre-Sale Funding Facilities
As of November 30, 1998, CHL had uncommitted revolving credit facilities
with the Federal National Mortgage Association ("Fannie Mae") and the Federal
Home Loan Mortgage Corporation ("Freddie Mac"). The credit facilities are
secured by conforming mortgage loans which are in the process of being pooled
into MBS. Interest rates are based on LIBOR, federal funds and/or the prevailing
rates for MBS repurchase agreements. The weighted average borrowing rate for
both facilities for the nine months ended November 30, 1998 was 5.65%. As of
November 30, 1998, the Company had no outstanding borrowings under these
facilities.
NOTE F - FINANCIAL INSTRUMENTS
The following summarizes the notional amounts of Servicing Hedge derivative
contracts.
<TABLE>
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
(Dollar amounts in millions) Balance, Balance,
February 28, 1998 Dispositions/ November 30,
Additions Expirations 1998
- - ------------------------------------- ------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Rate Floors $33,000 9,500 (18,000) $24,500
Long Call Options on
Interest Rate Futures $79,400 38,320 (107,420) $10,300
Long Put Options on
Interest Rate Futures $ 9,800 64,880 (19,180) $55,500
Short Call Options on
Interest Rate Futures $ - 41,800 (41,500) $ 300
Short Put Options on
Interest Rate Futures $ - 5,030 (2,030) $ 3,000
Interest Rate Futures $ 5,000 36,425 (18,925) $22,500
Capped Swaps $ 1,000 - $ 1,000
-
Interest Rate Swaps $ 3,900 7,500 (500) $10,900
Interest Rate Cap $ 4,500 - $ 4,500
-
Swaptions $ 1,850 28,500 (1,800) $28,550
Options on Callable
Pass-through $ 2,561 1,800 - $ 4,361
Certificates
</TABLE>
NOTE G - LEGAL PROCEEDINGS
For a discussion of Briggs v. Countrywide, et. al and two similar cases,
see the Company's report on Form 10Q for the quarter ended May 31, 1998.
The Company and certain subsidiaries are defendants in various lawsuits
involving matters generally incidental to their business. Although it is
difficult to predict the ultimate outcome of these cases, management believes,
based on discussions with counsel, that any ultimate liability will not
materially affect the consolidated financial position or results of operations
of the Company and its subsidiaries.
NOTE H - SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Summarized financial information for CHL was as follows.
<TABLE>
-- ----------------------------------------- ---- ------------------------------------------------- ---------
(Dollar amounts in thousands) November 30, 1998 February 28, 1998
-- ---------------------------------------------- --------------------------- -- ----------------------------
Balance Sheets:
Mortgage loans and mortgage-backed
<S> <C> <C>
securities held for sale $ 7,779,742 $ 5,292,191
Other assets 7,339,737 6,216,382
============== ==============
Total assets $15,119,479 $11,508,573
============== ==============
Debt $10,859,223 $ 8,747,794
Other liabilities 2,004,542 1,027,884
Equity 2,255,714 1,732,895
============== ==============
Total liabilities and equity $15,119,479 $11,508,573
============== ==============
</TABLE>
<TABLE>
--- ----------------------------------------- --- -------------------------------------------------- --------
(Dollar amounts in thousands) Nine Months Ended November 30,
--------------- ---------- ---------------
1998 1997
--- --------------------------------------------- ------- --------------- ---------- --------------- --------
Statements of Earnings:
<S> <C> <C>
Revenues $1,224,689 $914,084
Expenses 844,303 603,599
Provision for income taxes 148,351 120,774
=============== ===============
Net earnings $232,035 $189,711
=============== ===============
</TABLE>
NOTE I - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement becomes effective in the fiscal year ending February
28, 2001. The Company has not yet determined the impact upon adoption of this
standard on the Consolidated Financial Statements.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and, as a consequence, reclassified
mortgage-backed securities retained in securitization as available for sale
securities.
NOTE J - SUBSEQUENT EVENTS
On December 16, 1998, the Company declared a cash dividend of $0.08 per
common share payable on February 1, 1999 to shareholders of record on January
15, 1999.
On December 7, 1998, CHL entered into a committed short-term financing
arrangement to sell conforming mortgage loans under agreement to repurchase. The
facility has a maturity date of December 6, 1999. As consideration for this
facility, CHL paid annual commitment fees of $0.2 million.
On December 15, 1998, CHL issued DM 1,000 million, 5 1/4% Deutsche Mark
Notes due in 2005. CHL utilized a cross-currency swap to convert the fixed-rate
Deutsche Mark borrowing into floating US dollars. On December 15, 1998, the DM
1,000 million was converted into $593 million.
NOTE K - EARNINGS PER SHARE
On February 28, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128"), which supersedes
Accounting Principles Board Opinion No. 15 of the same name. SFAS No. 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. Upon adoption, all prior EPS data was
restated.
Basic EPS is determined using net income divided by the weighted average
shares outstanding during the period. Diluted EPS is computed by dividing net
income by the weighted average shares outstanding, assuming all dilutive
potential common shares were issued.
The following table presents the computation of basic and diluted EPS for the
three and nine month periods ended November 30, 1998 and 1997, under the
provisions of SFAS No. 128.
<TABLE>
- - ----------------------- -- -- ----- ------------------------------------ -- ----- ------
Three Months Ended November 30,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- --------- --------- ----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- - -------------------------------------------------------- ------------------------------
<S> <C> <C>
Net earnings $97,971 $ 80,183
=========== =========
Basic EPS
Net earnings available
to common shareholders $ 97,971 111,923 $ 0.88 $ 80,183 107,572 $0.75
Effect of dilutive
stock options - 5,071 - 4,918
----------- -------- --------- ---------
Diluted EPS
Net earnings available
to common shareholders $ 97,971 116,994 $ 0.84 $ 80,183 112,490 $0.71
=========== ======== ========= ========= ======== ========
</TABLE>
- - -
<TABLE>
- - ------------------------ -- -- ----- ------------------------------------ -- ----- ------
Nine Months Ended November30,
-- -- ----- ------------------------------------ -- ----- ------
1998 1997
----------- -------- --------- ---------- -------- ----------
(Dollar amounts in Per-Share Per-Share
thousands, except per Net Amount Net Amount
share data) Earnings Shares Earnings Shares
- - ------------------------------------------------------- ------------------------------
<S> <C> <C>
Net earnings $283,802 $ 259,881
=========== ==========
Basic EPS
Net earnings available
to common shareholders $ 283,802 111,065 $ 2.56 $ 259,881 107,111 $ 2.43
Effect of dilutive
stock options - 5,749 - 4,062
----------- -------- ---------- --------
Diluted EPS
Net earnings available
to common shareholders $ 283,802 116,814 $ 2.43 $ 259,881 111,173 $ 2.34
=========== ======== ========= ========== ======= ========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly Report on Form
10-Q may contain forward-looking statements that reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "believe,"
"expect," "anticipate," "intend," "estimate," "should" and other expressions
which indicate future events and trends identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. The following
factors could cause actual results to differ materially from historical results
or those anticipated: (1) the level of demand for mortgage credit, which is
affected by such external factors as the level of interest rates, the strength
of the various segments of the economy and demographics of the Company's lending
markets; (2) the direction of interest rates; (3) the relationship between
mortgage interest rates and the cost of funds; (4) federal and state regulation
of the Company's mortgage banking operations; and (5) competition within the
mortgage banking industry.
RESULTS OF OPERATIONS
Quarter Ended November 30, 1998 Compared to Quarter Ended November 30, 1997
Revenues for the quarter ended November 30, 1998 increased 37% to $514.2
million from $375.1 million for the quarter ended November 30, 1997. Net
earnings increased 22% to $98.0 million for the quarter ended November 30, 1998
from $80.2 million for the quarter ended November 30, 1997. The increase in
revenues and net earnings for the quarter ended November 30, 1998 compared to
the quarter ended November 30, 1997 was primarily attributable to higher loan
production volume for the quarter ended November 30, 1998. An increase in the
size of the Company's servicing portfolio also contributed to the increase in
revenues and net earnings for the quarter ended November 30, 1998 compared to
the quarter ended November 30, 1997. These positive factors were partially
offset by an increase in amortization of the servicing asset and an increase in
expenses for the quarter ended November 30, 1998 over the quarter ended November
30, 1997.
The total volume of loans produced increased 89% to $24.0 billion for the
quarter ended November 30, 1998 from $12.7 billion for the quarter ended
November 30, 1997. The increase in loan production was primarily due to
increased loan refinance activity, driven by generally lower interest rates that
prevailed during the quarter ended November 30, 1998 compared to the quarter
ended November 30, 1997, as well as to the continued expansion of the Company's
Consumer Markets and Wholesale Lending Divisions. Refinancings totaled $14.2
billion, or 59% of total fundings, for the quarter ended November 30, 1998, as
compared to $5.1 billion, or 40% of total fundings, for the quarter ended
November 30, 1997. Fixed-rate mortgage loan production totaled $22.9 billion, or
96% of total fundings, for the quarter ended November 30, 1998, as compared to
$9.9 billion, or 77% of total fundings, for the quarter ended November 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Total loan volume in the Company's production Divisions is summarized below.
<TABLE>
- - ------------------------------------------- ------------------------------------
(Dollar amounts in millions) Three Months Ended November 30,
- - ------------------------------------------- ------------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Consumer Markets Division $8,037 $ 3,437
Wholesale Lending Division 7,601 4,194
Correspondent Lending Division 8,185 5,041
Full Spectrum Lending, Inc. 180 61
============= =============
Total Loan Volume $24,003 $12,733
============= =============
Electronic Commerce (1) $848 $26
</TABLE>
(1) Includes loans sourced through the Company's website of $205 million
and $26 million for the quarters ended November 30, 1998 and November 30, 1997
respectively, as well as loans submitted to the Correspondent Lending Division
via its correspondent website of $643 million for the quarter ended November 30,
1998.
- - --------------------------------------------------------------------------------
The factors that affect the relative volume of production among the
Company's Divisions include the price competitiveness of each Division's product
offerings, the level of mortgage lending activity in each Division's market and
the success of each Division's sales and marketing efforts.
Included in the Company's total volume of loans produced is $625 million of
home equity loans funded in the quarter ended November 30, 1998 and $372 million
funded in the quarter ended November 30, 1997. Sub-prime loan production, which
is also included in the Company's total production volume, was $603 million in
the quarter ended November 30, 1998 and $427 million in the quarter ended
November 30, 1997.
At November 30, 1998 and 1997, the Company's pipeline of loans in process
was $16.2 billion and $7.9 billion, respectively. Historically, approximately
43% to 77% of the pipeline of loans in process have funded. In addition, at
November 30, 1998, the Company had committed to make loans in the amount of $1.2
billion, subject to property identification and approval of the loans (the "LOCK
'N SHOP (R) Pipeline"). At November 30, 1997, the LOCK 'N SHOP Pipeline was $1.1
billion. For the quarters ended November 30, 1998 and 1997, the Company received
331,903 and 180,702 new loan applications, respectively, at an average daily
rate of $596 million and $315 million, respectively. The factors that affect the
percentage of applications received and funded during a given time period
include the movement and direction of interest rates, the average length of loan
commitments issued, the creditworthiness of applicants, the production
Divisions' loan processing efficiency and loan pricing decisions.
Loan origination fees increased during the quarter ended November 30, 1998
as compared to the quarter ended November 30, 1997 due to higher production and
a change in the Divisional mix. The Consumer Markets Division (which, due to its
higher cost structure, charges higher origination fees per dollar loaned)
comprised a greater percentage of total production in the quarter ended November
30, 1998 than in the quarter ended November 30, 1997. Gain on sale of loans
improved in the quarter ended November 30, 1998 as compared to the quarter ended
November 30, 1997 primarily due to higher loan production volume during the
quarter ended November 30, 1998. The sale of home equity loans contributed $13.5
million and $17.8 million to gain on sale of loans in the quarters ended
November 30, 1998 and 1997, respectively. Sub-prime loans contributed $20.6
million and $13.0 million to the gain on sale of loans for the quarters ended
November 30, 1998 and 1997, respectively. In general, loan origination fees and
gain (loss) on sale of loans are affected by numerous factors including the
volume and mix of loans produced and sold, loan pricing decisions, interest rate
volatility and the general direction of interest rates.
Net interest income (interest earned net of interest charges) decreased to
$7.1 million for the quarter ended November 30, 1998 from $9.6 million for the
quarter ended November 30, 1997. Net interest income is principally a function
of: (i) net interest income earned from the Company's mortgage loan inventory
($24.4 million and $21.4 million for the quarters ended November 30, 1998 and
1997, respectively); (ii) interest expense related to the Company's investment
in servicing rights ($88.9 million and $56.2 million for the quarters ended
November 30, 1998 and 1997, respectively) and (iii) interest income earned from
the custodial balances associated with the Company's servicing portfolio ($70.0
million and $41.9 million for the quarters ended November 30, 1998 and 1997,
respectively). The Company earns interest on, and incurs interest expense to
carry, mortgage loans held in inventory. The increase in net interest income
from the mortgage loan inventory was primarily attributable to higher production
levels. The increase in interest expense on the investment in servicing rights
resulted primarily from a larger servicing portfolio and an increase in the
payments of interest to certain investors pursuant to customary servicing
arrangements with regard to paid-off loans in excess of the interest earned on
these loans through their respective payoff dates ("Interest Costs Incurred on
Payoffs"). The increase in net interest income earned from the custodial
balances was related to an increase in the average custodial balances (caused by
growth of the servicing portfolio and an increase in the amount of prepayments)
from the quarter ended November 30, 1997 to the quarter ended November 30, 1998.
During the quarter ended November 30, 1998, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. At
November 30, 1998, the Company serviced $205.4 billion of loans (including $2.3
billion of loans subserviced for others) compared to $175.2 billion (including
$6.2 billion of loans subserviced for others) at November 30, 1997, a 17%
increase. The growth in the Company's servicing portfolio during the quarter
ended November 30, 1998 was the result of loan production volume and the
acquisition of bulk servicing rights, partially offset by prepayments, partial
prepayments and scheduled amortization of mortgage loans. The weighted average
interest rate of the mortgage loans in the Company's servicing portfolio at
November 30, 1998 and 1997 was 7.6% and 7.8%, respectively. It is the Company's
strategy to build and retain its servicing portfolio because of the returns the
Company can earn from such investment and because the Company believes that
servicing income is counter-cyclical to loan production income. See "Prospective
Trends - Market Factors."
During the quarter ended November 30, 1998, the annual prepayment rate of
the Company's servicing portfolio was 30% compared to 16% for the quarter ended
November 30, 1997. In general, the prepayment rate is affected by the level of
refinance activity, which in turn is driven by the relative level of mortgage
interest rates, and activity in the home purchase market. The increase in the
prepayment rate from the quarter ended November 30, 1997 to the quarter ended
November 30, 1998 was primarily attributable to the increase in refinance
activity caused by lower interest rates during the quarter ended November 30,
1998 than during the quarter ended November 30, 1997.
The primary means used by the Company to reduce the sensitivity of its
earnings to changes in interest rates is through a strong production capability
and a growing servicing portfolio. In addition, to mitigate the effect on
earnings of impairment that may result from increased current and projected
future prepayment activity, the Company acquires financial instruments,
including derivative contracts, that increase in aggregate value when interest
rates decline (the "Servicing Hedge"). These financial instruments include
options on interest rate futures and MBS, interest rate futures, interest rate
floors, interest rate swaps, interest rate swaps with the Company's maximum
payment capped ("Capped Swaps"), options on interest rate swaps ("Swaptions"),
interest rate caps, certain tranches of collateralized mortgage obligations
("CMOs") and options on callable pass-through certificates ("options on CPC").
With the Capped Swaps, the Company receives and pays interest on a specified
notional amount. The rate received is fixed; the rate paid is adjustable, is
indexed to the London Interbank Offered Rates for U.S. dollar deposits ("LIBOR")
and has a specified maximum or "cap".
With Swaps, the Company receives and pays interest on a specified notional
amount. The rate received is fixed; the rate paid is adjustable and is indexed
to LIBOR.
With the Swaptions, the Company has the option to enter into
areceive-fixed, pay-floating interest rate swap at a future date or to settle
the transaction for cash.
The CMOs, which consist primarily of P/O securities, have been purchased at
deep discounts to their par values. As interest rates decrease, prepayments on
the collateral underlying the CMOs should increase. This should result in a
decline in the average lives of the P/O securities and a corresponding increase
in the present values of their cash flows. Conversely, as interest rates
increase, prepayments on the collateral underlying the CMOs should decrease.
These changes should result in an increase in the average lives of the P/O
securities and a decrease in the present values of their cash flows.
An option on CPC gives the holder the right to call a mortgage-backed
security at par and receive the remaining cash flows from the particular pool.
This option has a one year lockout, meaning it cannot be exercised until the end
of the first year. After the lockout period, the option can be exercised at
anytime subject to certain restrictions on the minimum price of the underlying
security in some cases.
The Servicing Hedge is designed to protect the value of the investment in
mortgage servicing rights ("MSRs") from the effects of increased prepayment
activity that generally results from declining interest rates. To the extent
that interest rates increase, the value of the MSRs increases while the value of
the hedge instruments declines. With respect to the floors, options, caps,
Swaptions, options on CPC and CMOs, the Company is not exposed to loss beyond
its initial outlay to acquire the hedge instruments. The Company's exposure to
loss on futures is related to changes in the Eurodollar rate over the life of
the contract. The Company estimates that its maximum exposure to loss over the
contractual term is $73.0 million. With respect to the Capped Swaps contracts
entered into by the Company as of November 30, 1998, the Company estimates that
its maximum exposure to loss over the contractual term is $21.0 million. With
respect to the Swap contracts entered into by the Company as of November 30,
1998, the Company estimates that its maximum exposure to loss over the
contractual term is $237.0 million. In the quarter ended November 30, 1998, the
Company recognized a net benefit of $533.0 million from its Servicing Hedge. The
net benefit included unrealized net gains of $174.7 million and net realized
gains of $358.3 million from the sale of various financial instruments that
comprise the Servicing Hedge and premium amortization. In the quarter ended
November 30, 1997, the Company recognized a net benefit of $161.5 million from
its Servicing Hedge. The net benefit included unrealized gains of $148.0 million
and net realized gains of $13.5 million from premium amortization and the sale
of various financial instruments that comprise the Servicing Hedge. There can be
no assurance that the Servicing Hedge will generate gains in the future, or if
gains are generated, that they will fully offset impairment of the MSRs.
The Company recorded amortization and impairment of its MSRs in the quarter
ended November 30, 1998 totaling $680.9 million (consisting of amortization
amounting to $147.4 million and impairment of $533.5 million), compared to
$243.7 million of amortization and impairment (consisting of amortization
amounting to $76.8 million and impairment of $166.9 million) in the quarter
ended November 30, 1997. The factors affecting the amount of amortization and
impairment or recovery of the MSRs recorded in an accounting period include the
level of prepayments during the period, the change in estimated future
prepayments and the amount of Servicing Hedge gains or losses.
<PAGE>
Salaries and related expenses are summarized below for the quarters ended
November 30, 1998 and 1997.
<TABLE>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended November 30, 1998
thousands)
------------------------------ -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $56,175 $13,502 $23,347 $10,124 $103,148
Incentive Bonus 41,148 529 5,500 5,570 52,747
Payroll Taxes and Benefits 12,664 3,048 2,893 1,515 20,120
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $109,987 $17,079 $31,740 $17,209 $176,015
============ ============= ============= ============= ------------
Average Number of 5,849 2,026 1,885 695 10,455
Employees
</TABLE>
<PAGE>
<TABLE>
-- --------------------------- -- -- ------ ------------------------------------------------- ----- -- ---- -----
(Dollar amounts in Quarter Ended November 30, 1997
thousands)
-------------------------------- -- ------ ------------------------------------------------- ----- -- ---- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- -- ------------- -- ------------- -- ------------
<S> <C> <C> <C> <C> <C>
Base Salaries $35,462 $11,262 $17,853 $6,514 $71,091
Incentive Bonus 20,826 316 4,096 2,606 27,844
Payroll Taxes and Benefits 5,373 2,138 3,440 572 11,523
------------ ------------- ------------- ------------- ------------
Total Salaries and Related
Expenses $61,661 $13,716 $25,389 $9,692 $110,458
============ ============= ============= ============= ------------
Average Number of Employees 3,452 1,669 1,431 488 7,040
</TABLE>
The amount of salaries increased during the quarter ended November 30, 1998
reflecting the Company's strategy of expanding and enhancing its Consumer
Markets and Wholesale branch networks, including new retail sub-prime branches.
In addition, growth in the Company's non-mortgage banking subsidiaries and a
larger servicing portfolio contributed to the increase. Incentive bonuses earned
during the quarter ended November 30, 1998 increased primarily due to higher
production and a change in production mix.
Occupancy and other office expenses for the quarter ended November 30, 1998
increased to $73.4 million from $49.2 million for the quarter ended November 30,
1997 primarily due to: (i) the continued effort by the Company to expand its
retail branch network, particularly outside of California; (ii) higher loan
production; (iii) a larger servicing portfolio; and (iv) growth in the Company's
non-mortgage banking activities.
Guarantee fees represent fees paid to guarantee timely and full payment of
principal and interest on MBS and whole loans sold to permanent investors and to
transfer the credit risk of the loans in the servicing portfolio. For the
quarter ended November 30, 1998, guarantee fees increased 5% to $45.6 million
from $43.5 million for the quarter ended November 30, 1997. The increase
resulted from an increase in the servicing portfolio, changes in the mix of
permanent investors and terms negotiated at the time of loan sales.
Marketing expenses for the quarter ended November 30, 1998 increased 76% to
$17.1 million from $9.7 million for the quarter ended November 30, 1997,
reflecting the increased level of mortgage originations, particularly
refinances, as well as the Company's continued implementation of a marketing
plan to increase consumer brand awareness of the Company in the residential
mortgage market.
Other operating expenses for the quarter ended November 30, 1998 increased
from the quarter ended November 30, 1997 by $10.6 million, or 34%. This increase
was due primarily to higher loan production and growth in the Company's
non-mortgage banking subsidiaries in the quarter ended November 30, 1998 as
compared to the quarter ended November 30, 1997.
Profitability of Loan Production and Servicing Activities
In the quarter ended November 30, 1998, the Company's pre-tax earnings from
its loan production activities (which include loan origination and purchases,
warehousing and sales) were $141.5 million. In the quarter ended November 30,
1997, the Company's comparable pre-tax earnings were $62.9 million. The increase
of $78.6 million was primarily attributable to increased production and a shift
in production mix towards the Consumer Markets Division. These positive results
were partially offset by higher production costs. In the quarter ended November
30, 1998, the Company's pre-tax earnings from its loan servicing activities
(which include administering the loans in the servicing portfolio, selling
homeowners and other insurance, acting as tax payment agent, marketing
foreclosed properties and acting as reinsurer) was $4.9 million as compared to
pre-tax income of $58.4 million in the quarter ended November 30, 1997. The
decrease of $53.5 million was primarily attributed to the increased amortization
of the servicing asset and Interest Costs Incurred on Payoffs due to declining
interest rates and an increase in prepayments from the quarter ended November
30, 1997 to the quarter ended November 30, 1998. These negative factors were
partially offset by the increase in servicing fees, miscellaneous income and
interest earned on escrow balances derived by the larger servicing portfolio.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title and flood insurance, escrow services, home appraisals,
credit reporting, securities brokerage and servicing rights brokerage. For the
quarter ended November 30, 1998, these activities contributed $14.2 million to
the Company's pre-tax income compared to $10.2 million for the quarter ended
November 30, 1997. This increase in pre-tax income primarily results from
improved performance of the title insurance, flood insurance, escrow and Capital
Markets business.
Nine Months Ended November 30, 1998 Compared to Nine Months Ended November
30, 1997
Revenues from ongoing operations for the nine months ended November 30, 1998
increased 39% to $1.4 billion from $1.0 billion for the nine months ended
November 30, 1997. Net earnings from ongoing operations increased 26% to $283.8
million for the nine months ended November 31, 1998 from $224.9 million for the
nine months ended November 30, 1997. Both revenues and net earnings from ongoing
operations for the nine months ended November 30, 1997 exclude a nonrecurring
pre-tax gain of $57.4 million from the sale of a subsidiary. The increase in
revenues and net earnings from ongoing operations for the nine months ended
November 30, 1998 compared to the nine months ended November 30, 1997 was
primarily attributable to higher loan production for the nine months ended
November 30, 1998. This positive factor was partially offset by an increase in
amortization and net impairment of the servicing asset and an increase in
expenses for the nine months ended November 30, 1998 over the nine months ended
November 30, 1997.
The total volume of loans produced increased 108% to $67.8 billion for the
nine months ended November 30, 1998 from $32.7 billion for the nine months ended
November 30, 1997. Refinancings totaled $37.6 billion, or 55% of total fundings,
for the nine months ended November 30, 1998, as compared to $10.9 billion, or
33% of total fundings, for the nine months ended November 30, 1997. Fixed-rate
loan production totaled $64.0 billion, or 94% of total fundings, for the nine
months ended November 30, 1998, as compared to $23.6 billion, or 72% of total
fundings, for the nine months ended November 30, 1997.
Included in the Company's total volume of loans produced are $1.7 billion of
home equity loans funded in the nine months ended November 30, 1998 and $1.0
billion funded in the nine months ended November 30, 1997. Sub-prime credit
quality loan production, which is also included in the Company's total
production volume, was $2.0 billion for the nine months ended November 30, 1998
and $1.1 billion during the nine months ended November 30, 1997.
Total loan volume in the Company's production divisions is summarized below.
<TABLE>
- - -------------------------------------------- -----------------------------------
(Dollar amounts in millions) Nine Months Ended November 30,
- - -------------------------------------------- -----------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Consumer Markets Division $21,294 $ 8,752
Wholesale Lending Division 22,590 10,024
Correspondent Lending Division 23,434 13,760
Full Spectrum Lending, Inc. 494 118
------------- ------------
Total Loan Volume $67,812 $32,654
============= ============
Electronic Commerce (1) $1,403 $33
</TABLE>
(1) Includes loans sourced through the Company's website of $440 million and
$33 million for the nine months ended November 30, 1998 and November 30,
1997, respectively, as well as loans submitted to the Correspondent Lending
Division via its correspondent website of $963 million for the nine months
ended November 30, 1998.
- - --------------------------------------------------------------------------------
Loan origination fees increased during the nine months ended November 30,
1998 as compared to the nine months ended November 30, 1997 due to higher
production and change in the Divisional mix. The Consumer Markets Division and
the Wholesale Lending Division (which, due to their cost structures, charge
higher origination fees per dollar loaned than the Correspondent Division),
comprised a greater percentage of total production in the nine months ended
November 30, 1998 than in the nine months ended November 30, 1997. Gain on sale
of loans improved during the nine months ended November 30, 1998 as compared to
the nine months ended November 30, 1997 primarily due to higher production.
Net interest income (interest earned net of interest charges) increased to
$28.3 million for the nine months ended November 30, 1998, from $13.7 million
for the nine months ended November 30, 1997. Consolidated net interest income is
principally a function of: (i) net interest income earned from the Company's
mortgage loan warehouse ($86.2 million and $53.4 million for the nine months
ended November 30, 1998 and 1997, respectively); (ii) interest expense related
to the Company's investment in servicing rights ($263.1 million and $152.4
million for the nine months ended November 30, 1998 and 1997, respectively) and
(iii) interest income earned from the custodial balances associated with the
Company's servicing portfolio ($200.9 million and $106.0 million for the nine
months ended November 30, 1998 and 1997, respectively). The Company earns
interest on, and incurs interest expense to carry, mortgage loans held in its
warehouse. The increase in net interest income from mortgage loan inventory was
primarily attributable to increased production. The increase in interest expense
related to the investment in servicing rights resulted primarily from a larger
servicing portfolio and an increase in interest costs incurred on payoffs. The
increase in net interest income earned from the custodial balances was related
to an increase in the average custodial balances (caused by growth of the
servicing portfolio and an increase in the amount of prepayments) from the nine
months ended November 30, 1997 to the nine months ended November 30, 1998.
During the nine months ended November 30, 1998, loan servicing income was
positively affected by the continued growth of the loan servicing portfolio. The
growth in the Company's servicing portfolio during the nine months ended
November 30, 1998 was the result of loan production volume and the acquisition
of bulk servicing rights, partially offset by prepayments, partial prepayments,
scheduled amortization of mortgage loans and the transfer out of $6.5 billion of
subservicing.
The annual prepayment rate of the Company's servicing portfolio was 28% for
the nine months ended November 30, 1998 compared to 13% for the nine months
ended November 30, 1997. The increase in the prepayment rate from the nine
months ended November 30, 1997 to the nine months ended November 30, 1998 was
primarily attributable to the increase in refinance activity caused by lower
interest rates during the nine months ended November 30, 1998 than during the
nine months ended November 30, 1997.
During the nine months ended November 30, 1998, the Company recognized a net
benefit of $822.9 million from its Servicing Hedge. The net benefit included
unrealized gains of $447.4 million and net realized gains of $375.5 million from
the sale of various financial instruments that comprise the Servicing Hedge and
premium amortization. During the nine months ended November 30, 1997, the
Company recognized a net benefit of $150.2 million from its Servicing Hedge. The
net benefit included unrealized gains of $139.2 million and net realized gains
of $11.0 million from the amortization and sale of various financial instruments
that comprise the Servicing Hedge.
The Company recorded amortization and impairment of its MSRs in the nine
months ended November 30, 1998 totaling $1.3 billion (consisting of normal
amortization amounting to $416.4 million and impairment of $854.8 million),
compared to amortization and impairment of its MSRs of $375.1 million
(consisting of normal amortization amounting to $213.8 million and impairment of
$161.3 million) in the nine months ended, November 30, 1997.
Salaries and related expenses are summarized below for the nine months ended
November 30, 1998 and 1997.
<TABLE>
-- --------------------------- -- -- --------- ------------------------------
(Dollar amounts in Nine months Ended November 30, 1998
thousands)
-------------- ------------------------------------------------- -- --- ---
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $149,277 $38,370 $65,972 $26,859 $280,478
Incentive Bonus 112,344 1,462 15,392 13,787 142,985
Payroll Taxes and Benefits 36,848 8,667 11,214 4,063 60,792
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $298,469 $48,499 $92,578 $44,709 $484,255
============ ============= ============= ============= -------------
Average Number of Employees 5,189 1,917 1,757 603 9,466
</TABLE>
<TABLE>
-- --------------------------- -- -- --------- ------------------------------------------------- -- --- --- -----
(Dollar amounts in Nine months Ended November 30, 1997
thousands)
- - -- --------- ------------------------------------------------- -- --- --- -----
Production Loan Corporate Other
Activities Administration Administration Activities Total
-- --------------------------- -- ------------ -- ------------- - ------------- -- ------------- -- -------------
<S> <C> <C> <C> <C> <C>
Base Salaries $ 95,626 $ 32,936 $ 51,079 $ 17,417 $ 197,058
Incentive Bonus 51,199 901 12,541 7,576 72,217
Payroll Taxes and Benefits 15,279 6,220 6,645 1,624 29,768
------------ ------------- ------------- ------------- -------------
Total Salaries and Related
Expenses $162,104 $40,057 $70,265 $ 26,617 $ 299,043
======== ============ ============= ============= =============
Average Number of Employees 3,132 1,637 1,364 434 6,567
</TABLE>
The amount of salaries increased during the nine months ended November 30,
1998 from the nine months ended November 30, 1997 primarily due to an increased
number of employees resulting from expansion of the Consumer Markets and
Wholesale division branch networks, including new retail sub-prime branches. In
addition, a larger servicing portfolio and growth in the Company's non-mortgage
banking activities also contributed to the increase. The increase in incentive
bonuses was due primarily to the increased production.
Occupancy and other office expenses for the nine months ended November 30,
1998 increased to $202.2 million from $128.7 million for the nine months ended
November 30, 1997, primarily due to: (i) the continued effort by the Company to
expand its retail branch network, particularly outside California; (ii) higher
loan production; (iii) a larger servicing portfolio; and (iv) growth in the
Company's non-mortgage banking activities.
Guarantee fees for the nine months ended November 30, 1998 increased 5% to
$135.7 million from $128.9 million for the nine months ended November 30, 1997.
This increase resulted from an increase in the servicing portfolio, changes in
the mix of permanent investors and terms negotiated at the time of loan sales.
Marketing expenses for the nine months ended November 30, 1998 increased 55%
to $47.2 million from $30.4 million for the nine months ended November 30, 1997,
reflecting the increased level of mortgage originations, particularly
refinances, as well as the Company's continued implementation of a marketing
plan to increase brand awareness of the Company in the residential mortgage
market.
Other operating expenses for the nine months ended November 30, 1998
increased from the nine months ended November 30, 1997 by $26.1 million, or 30%.
This increase was due primarily to higher loan production, a larger servicing
portfolio, increased reserves for bad debts, increased systems development and
growth in the Company's non-mortgage banking subsidiaries in the nine months
ended November 30, 1998 as compared to the nine months ended November 30, 1997.
Profitability of Loan Production and Servicing Activities
In the nine months ended November 30, 1998, the Company's pre-tax income
from its loan production activities (which include loan origination and
purchases, warehousing and sales) was $424.0 million. In the nine months ended
November 30, 1997, the Company's comparable pre-tax income was $158.1 million.
The increase of $265.9 million was primarily attributable to increased
production and a shift in production mix towards the Consumer Markets and
Wholesale Divisions. These positive results were partially offset by higher
production costs. In the nine months ended November 30, 1998, the Company's
pre-tax earnings from its loan servicing activities (which include administering
the loans in the servicing portfolio, selling homeowners and other insurance,
acting as tax payment agent and marketing foreclosed properties) was $1.9
million as compared to $178.8 million in the nine months ended November 30,
1997. The decrease of $176.9 million was principally attributed to the increased
amortization and impairment of the servicing asset and Interest Costs Incurred
on Payoffs due to declining interest rates and increase in prepayments from the
nine months ended November 30, 1997 to the nine months ended November 30, 1998.
These negative factors were partially offset by an increase in servicing fees,
miscellaneous income and interest earned on escrow balances derived by the
larger servicing portfolio.
Profitability of Other Activities
In addition to loan production and loan servicing, the Company offers
ancillary products and services related to its mortgage banking activities.
These include title and flood insurance, escrow services, home appraisals,
credit reporting securities brokerage and servicing rights brokerage. For the
nine months ended November 30, 1998, these activities contributed $39.3 million
to the Company's pre-tax income compared to $31.8 million during the nine months
ended November 30, 1997. This increase in pre-tax income primarily results from
improved performance of the title insurance, and flood insurance, escrow and
Capital Markets businesses.
During the nine months ended November 30, 1997, Countrywide Asset Management
Corporation, a subsidiary of the Company, was sold to INMC Mortgage Holdings,
Inc. ("INMC"), a publicly traded real estate investment trust for 3.44 million
shares of INMC stock. The principal impact of this sale on earnings was a $57.4
million gain on sale recorded in the second quarter of fiscal 1998.
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk. From an
enterprise perspective, the Company manages this risk by striving to balance its
loan origination and loan servicing business segments, which are
counter-cyclical in nature. In addition, the Company utilizes various financial
instruments, including derivatives contracts, to manage the interest rate risk
related specifically to its committed pipeline, mortgage loan inventory and MBS
held for sale, MSRs, MBS retained in securitizations and debt securities. The
overall objective of the Company's interest rate risk management policies is to
offset changes in the values of these items resulting from changes in interest
rates. The Company does not speculate on the direction of interest rates in its
management of interest rate risk.
As part of its interest rate risk management process, the Company performs
various sensitivity analyses that quantify the net financial impact of changes
in interest rates on its interest rate-sensitive assets, liabilities and
commitments. These analyses incorporate scenarios including selected
hypothetical (instantaneous) parallel shifts in the yield curve. Various
modeling techniques are employed to value the financial instruments. For
mortgages, MBS and MBS forward contracts and CMOs, an option-adjusted spread
("OAS") model is used. The primary assumptions used in this model are the
implied market volatility of interest rates and prepayment speeds. For options
and interest rate floors, an option-pricing model is used. The primary
assumption used in this model is implied market volatility of interest rates.
MSRs and residual interests are valued using discounted cash flow models. The
primary assumptions used in these models are prepayment rates, discount rates
and credit losses.
Utilizing the sensitivity analyses described above, as of the quarter ended
November 30, 1998, the Company estimates that a permanent 0.50% reduction in
interest rates, all else being constant, would result in a $0.2 million
after-tax gain related to its trading securities and a $34.5 million after-tax
loss related to its other financial instruments, for the fiscal year ended
February 28, 1999. The Company estimates that this combined after-tax loss of
$34.3 million is the largest such loss that would occur within the range of
reasonably possible interest rate changes. These sensitivity analyses are
limited by the fact that they are performed at a particular point in time and do
not incorporate other factors that would impact the Company's financial
performance in such a scenario. Consequently, the preceding estimates are not
and should not be viewed as a forecast.
INFLATION
Inflation affects the Company in the areas of loan production and servicing.
Interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. Historically, as interest rates increase, loan
production, particularly from loan refinancings, decreases, although in an
environment of gradual interest rate increases, purchase activity may actually
be stimulated by an improving economy or the anticipation of increasing real
estate values. In such periods of reduced loan production, production margins
may decline due to increased competition resulting from overcapacity in the
market. In a higher interest rate environment, servicing-related earnings are
enhanced because prepayment rates tend to slow down thereby extending the
average life of the Company's servicing portfolio thereby reducing amortization
and impairment of the MSRs. In addition, Interest Costs Incurred on Payoffs
decline and the rate of interest earned from the custodial balances tends to
increase. Conversely, as interest rates decline, loan production, particularly
from loan refinancings, increases. However, during such periods, prepayment
rates tend to accelerate (principally on the portion of the portfolio having a
note rate higher than the then-current interest rates), thereby decreasing the
average life of the Company's servicing portfolio and adversely impacting its
servicing-related earnings primarily due to increased amortization and
impairment of the MSRs, a decreased rate of interest earned from the custodial
balances and increased Interest Costs Incurred on Payoffs. The impact of
changing interest rates on servicing-related earnings are reduced by performance
of the Servicing Hedge, which is designed to mitigate the impact on earnings of
impairment that may result from declining interest rates.
SEASONALITY
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs. However, late charge income has
historically been sufficient to offset such incremental expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan funding
activities and the investment in servicing rights. To meet these needs, the
Company currently utilizes commercial paper backed by revolving credit
facilities, medium-term notes, MBS repurchase agreements, subordinated notes,
pre-sale funding facilities, unsecured short-term bank loans, an optional cash
purchase feature in the dividend reinvestment plan, redeemable capital trust
pass-through securities and cash flow from operations. In addition, in the past
the Company has utilized whole loan repurchase agreements, servicing-secured
bank facilities, private placements of unsecured notes and other financings,
direct borrowings from the revolving credit facility and public offerings of
common and preferred stock.
Certain of the debt obligations of the Company and Countrywide Home Loans,
Inc. ("CHL") contain various provisions that may affect the ability of the
Company and CHL to pay dividends and remain in compliance with such obligations.
These provisions include requirements concerning net worth, current ratio and
other financial covenants. These provisions have not had, and are not expected
to have, an adverse impact on the ability of the Company and CHL to pay
dividends.
The Company continues to investigate and pursue alternative and
supplementary methods to finance its operations through the public and private
capital markets. These may include such methods as mortgage loan sale
transactions designed to expand the Company's financial capacity and reduce its
cost of capital and the securitization of servicing income cash flows.
In connection with its derivative contracts, the Company may be required to
deposit cash or certain government securities or obtain letters of credit to
meet margin requirements. The Company considers such potential margin
requirements in its overall liquidity management.
In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates and purchases but generally
retains the right to service the loans, thereby increasing the Company's
investment in loan servicing rights. The Company views the sale of loans on a
servicing-retained basis in part as an investment vehicle. Significant
unanticipated prepayments in the Company's servicing portfolio could have a
material adverse effect on the Company's future operating results and liquidity.
Cash Flows
Operating Activities In the nine months ended November 30, 1998, the
Company's operating activities used cash of approximately $1.6 billion. In the
nine months ended November 30, 1997, operating activities used approximately
$2.1 billion, primarily to support the increase in its mortgage loans and MBS
held for sale.
Investing Activities The primary investing activity for which cash was used
by the Company was the investment in MSRs. Net cash used by investing activities
was $1.2 billion for the nine months ended November 30, 1998 and $0.8 billion
for the nine months ended November 30, 1997.
Financing Activities Net cash provided by financing activities amounted to
$2.9 billion for the nine months ended November 30, 1998. Net cash provided by
financing activities amounted to $2.9 billion for the nine months ended November
30, 1997.
PROSPECTIVE TRENDS
Applications and Pipeline of Loans in Process
For the month ended December 31, 1998, the Company received new loan
applications at an average daily rate of $569 million and at December 31, 1998,
the Company's pipeline of loans in process was $15.5 billion. This compares to a
daily application rate in the month end December 31, 1997 of $303 million and a
pipeline of loans in process at December 31, 1997 of $7.6 billion. The size of
the pipeline is generally an indication of the level of future fundings, as
historically 43% to 77% of the pipeline of loans in process has funded. In
addition, the Company's LOCK `N SHOP(R) Pipeline at December 31, 1998 was $1.1
billion and at December 31, 1997 was $769.1 million. Future application levels
and loan fundings are dependent on numerous factors, including the level of
demand for mortgage credit, the extent of price competition in the market, the
direction of interest rates, seasonal factors and general economic conditions.
Market Factors
Loan production increased 89% from quarter ended November 30, 1997 to
quarter end November 30, 1998. This increase was due to several factors. First,
mortgage interest rates generally were lower in the quarter ended November 30,
1998. This drove a 179% increase in refinance loan production in the quarter
ended November 30, 1998 as compared to the quarter ended November 30,1997. In
addition, home purchase market activity was stronger during the quarter ended
November 30, 1998 than in the quarter ended November 30, 1997. On top of the
increase in the loan origination market, the Company increased its market share
from the quarter ended November 30, 1997 to the quarter ended November 30, 1998,
in arge part due to its ongoing expansion of the Consumer Markets and Wholesale
Divisions.
The annual prepayment rate in the servicing portfolio increased from 16% for
the quarter ended November 30, 1997 to 30% for the quarter ended November 30,
1998 due to lower interest rates in the quarter ended November 30, 1998 than in
the quarter ended November 30, 1997.
The Company's primary competitors are commercial banks, savings and loans,
mortgage banking subsidiaries of diversified companies, as well as other
mortgage bankers. Over the past several years, certain commercial banks have
expanded their mortgage banking operations through acquisition of formerly
independent mortgage banking companies and through internal growth. The Company
believes that these transactions and activities have not had a material impact
on the Company or on the degree of competitive pricing in the market.
The Company's California mortgage loan production (measured by principal
balance) constituted 23% of its total production during the quarter ended
November 30, 1998 and 26% during the quarter ended November 30, 1997. The
Company is continuing its efforts to expand its production capacity outside of
California. Some regions in which the Company operates may have experienced
slower economic growth, and real estate financing activity in these regions may
have been negatively impacted. To the extent the Company's loan production is
concentrated in a particular geographic region, the Company's operations will be
adversely affected if that region experiences slow or negative economic growth
resulting in decreased residential real estate lending activity.
The delinquency rate in the Company-owned servicing portfolio decreased to
3.61% at November 30, 1998 from 4.29% at November 30, 1997. The proportion of
government and high loan-to-value conventional loans, which tend to experience
higher delinquency rates than low loan-to-value conventional loans, was 46% and
49% of the portfolio at November 30, 1998 and November 30, 1997, respectively.
The weighted average age of the portfolio is 27 months at November 30, 1998 and
November 30, 1997. Delinquency rates tend to increase as loans age, generally
reaching a peak at three to five years of age. However, because the loans in the
portfolio are generally serviced on a non-recourse basis, the Company's exposure
to credit loss is substantially limited. Further, related late charge income has
historically been sufficient to offset incremental servicing expenses resulting
from an increased delinquency rate.
The percentage of loans in the Company's owned servicing portfolio that are
in foreclosure decreased to 0.36% at November 30, 1998 from 0.62% at November
30, 1997 primarily due to the sale of $347 million of mortgage loans in
foreclosure as of November 30, 1998. Because the Company services substantially
all conventional and FHA loans on a non-recourse basis, foreclosure losses are
generally the responsibility of the investor or insurer and not the Company. The
Company retains credit risk on the home equity and sub-prime loans it
securitizes through retention of a subordinated interest. At November 30, 1998,
the Company had investments in such subordinated interests amounting to $261
million. While the Company generally does not retain credit risk with respect to
the prime credit quality first mortgage loans it sells, it does have potential
liability under representations and warranties made to purchasers and insurers
of the loans. In the event of a breach of the representations and warranties,
the Company may be required to repurchase a mortgage loan and any subsequent
credit loss on such mortgage loan would be borne by the Company. In addition,
the Company is exposed to credit losses on loans partially guaranteed by the
Department of Veterans Administration ("VA") for any amount of loss above such
partial guarantee. Loans which are partially guaranteed by the VA totaled 8.0%
of the Company's servicing portfolio at November 30, 1998.
Servicing Hedge
As previously discussed, the Company's Servicing Hedge is designed to
protect the value of its investment in MSRs from the effects of increased
prepayment activity that generally results from declining interest rates. In
periods of increasing interest rates, the value of the Servicing Hedge generally
declines and the value of MSRs generally increases. There can be no assurance
that, in periods of increasing interest rates, the increase in value of the MSRs
will offset the decline in value of the Servicing Hedge; or in periods of
declining interest rates, that the Company's Servicing Hedge will generate
gains, or if gains are generated, that they will fully offset impairment of the
MSRs.
Implementation of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. This statement will become effective in the fiscal year ended
February 28, 2001. The impact of the adoption of this statement on the Company's
financial statements is not known at this time.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for sale by a Mortgage Banking Enterprise ("SFAS No.
134"). SFAS No. 134 is an amendment of SFAS No.65, Accounting for Certain
Mortgage Banking Activities. It requires that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities and other retained interest
based on its ability and intent to sell or hold those instruments. The Company
adopted this statement in October 1998 and reclassified mortgage-backed
securities retained in securitization as available for sale securities.
Year 2000 Update
The Company has five distinct Year 2000 Projects, each of which focuses on a
particular critical area.
The Company's primary platform is the IBM AS/400 which contains all of the
data relating to the origination and servicing of the home loans in the
Company's portfolio. As of December 31, 1998 the Company has substantially
reprogrammed and re-engineered the system to incorporate four-digit century date
fields or appropriate widowing techniques, tested the function and accuracy of
the reprogrammed fields, implemented the revised code and forward-date tested
the more than 17,000 production programs on the AS/400. Programming errors
discovered
in the forward-date testing process are being corrected, and the Company
anticipates that the revisions will be forward-date tested before January 31,
1999.
Many of the Company's Client Server applications have been developed
in-house and in a Year 2000 compliant format. The majority of these applications
interface with the AS/400. The Company has reviewed each of its mission critical
Client Server applications to confirm their Year 2000 readiness. Additionally,
as part of this project, the Company has tested the interfaces between the
individual mission critical Client Server applications and the AS/400 to confirm
that accurate data is exchanged with the revised AS/400 programs. All but one of
the Company's mission critical Client Server applications have been forward-date
tested. The programming errors discovered in the forward-date testing process
are being corrected, and the Company anticipates that the revisions will be
forward-date tested before January 31, 1999. The Company estimates that
forward-date testing of the remaining mission critical Client Server
applications and most of its less critical applications will be completed by
June 30, 1999.
The Company's Infrastructure Project has inventoried the personal computers
used by the Company's employees nationwide to determine the Year 2000 readiness
of these computers. Where necessary, older computers and related hardware which
are not Year 2000 compliant will be upgraded or replaced before December 31,
1999. As part of the Infrastructure Project, the Company also identified
"shrink-wrapped" and desktop software purchased company-wide, as well as desktop
software supporting individuals and individual business units, in order to
determine whether the vendor is bringing its products into compliance. This
Project also monitors websites and other available information of software and
hardware vendors and disseminates the latest available information to those
business units relying on the product. In the event the products are not or will
not be compliant, the Company is assessing its needs for the applications. With
respect to non-compliant software, the Company will either seek alternative
sources of similar applications, develop its own applications or attempt to
obtain the source code and the vendor's authorization to re-engineer it.
The Infrastructure Project has inventoried, assessed and completed necessary
corrective action with respect to the Company's mission critical wide area
network components, telecommunications systems and unique business systems, and
approximately 95% of those systems have been forward-date tested. The Company
anticipates that the remaining systems and components will be forward-date
tested prior to February 28, 1999. Additionally, the Infrastructure Project
personnel, along with personnel from the Company's Facilities and Property
Management Departments, have evaluated building systems of the Company's
corporate facilities to assess whether they will operate satisfactorily in the
Year 2000 and beyond. These building systems include energy management,
environmental, and safety and security systems. Where necessary, non-compliant
systems or components will be upgraded or replaced before December 31, 1999.
The Communications Project personnel have developed a database for
collecting information regarding the Year 2000 status of the Company's strategic
business partners and other vendors and suppliers. Individual business units
identify in the database contact information regarding their respective business
partners, vendors and suppliers, and the database tracks the inquiry made of
each such entity, that entity's response to the Company's inquiry and the
Company's response to each entity's inquiry. Analysis of the information
contained in the database and development of additional features and functions
of the database are ongoing. The goal is to achieve a reasonable understanding
of the Year 2000 readiness and contingency plans of the Company's business
partners, vendors and suppliers well in advance of the Year 2000. In December
1998, the Company successfully completed company-wide testing of electronic
interfaces with FHLMC. Similar testing with FNMA is scheduled for January 1999.
Additionally, the Communications Project personnel represent the Company in
its participation as one of the leading mortgage banking companies involved in
the Mortgage Bankers Association (MBA) inter-industry testing project. Other
participants include GNMA, FNMA and FHLMC, as well as banks, insurance companies
and credit bureaus. The MBA project involves inter-industry testing of
transactions from loan origination, secondary marketing and loan servicing areas
and its mission is to make sure the various interfaces work together across the
entire industry
Contingency Planning
The Company has retained a vendor specializing in business continuity
planning to review its business continuity procedures on a company-wide basis
and assist in its assessment of the contingency plans of each business unit, as
well as those of mission critical business partners, vendors and suppliers. The
Year 2000 aspect of this process is expected to be completed in early 1999. The
business analysis aspect of the contingency planning process also serves as a
means of verifying the Company's existing inventories of Client Server
applications, Infrastructure hardware and software, business partners, vendors
and suppliers and external and internal interfaces.
Costs
The total cost associated with the Company's Year 2000 efforts is not
expected to be material to the Company's financial position. These costs are
being expensed by the Company during the period in which they are incurred. The
estimated total cost of the Year 2000 Project is approximately $36 million, of
which $20 million has been incurred through November 30, 1998.
Risks
Due to the global nature of the Year 2000 issue, the Company cannot
determine all of the consequences the Year 2000 may have on its business and
operations. The Company believes that in light of the efforts of its Year 2000
Projects, including the Contingency Planning aspect, the possibility of material
business interruptions is unlikely. However, there may be instances where the
Company will rely on third party information which may be unreliable or
unverifiable. The Company cannot be assured that third parties upon which it
relies, including utilities and telecommunications service providers, will not
have business interruptions which could have an adverse effect on the Company.
Forward-looking statements contained in this Year 2000 Update should be read
in conjunction with the Company's disclosures under the heading:
"FORWARD-LOOKING STATEMENTS" which appears in Item 2 on page 13 of this Form
10Q.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
Any proposal that a stockholder wishes to present for consideration at the
1999 Annual Meeting of Stockholders must be received by the Company no later
than February 9, 1999 for inclusion in the 1999 Notice of Annual Meeting, Proxy
Statement and Proxy. Any other proposal that a stockholder wishes to bring
before the 1999 Annual Meeting of Stockholders must also be received by the
Company no later than February 9, 1999. All proposals must comply with the
applicable requirements or conditions established by the Securities and Exchange
Commission and Article II, Section 13 of the Company's Bylaws, which requires
among other things, certain information to be provided in connection with the
submission of stockholder proposals. All proposals must be directed to the
Secretary of the Company at 4500 Park Granada, MSN CH-19, Calabasas, California
91302.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL
(incorporated by reference to Exhibit 4.3 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and
333-66467-01) filed with the SEC on October 30, 1998).
4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467
and 333-66467-01) filed with the SEC on October 30, 1998).
10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day of
November,1998 by and among CHL, the Lenders under (as that term is
defined in)the Revolving Credit Agreement dated as of September
24, 1997, and Bankers Trust Company as Credit Agent.
10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day
of November, 1998 by and among CHL, the Lenders under (as that term
is defined in) the Revolving Credit Agreement dated as of April 15,
1998 and Royal Bank of Canada, as lead administrative agent for the
Lenders.
10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement.
10.27.1 First Amendment to Change in Control Severance Plan.
(b) Reports on Form 8-K. None.
<PAGE>
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.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: January 14, 1999
------------------------
Stanford L. Kurland
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1999
------------------------
Carlos M. Garcia
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
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.
COUNTRYWIDE CREDIT INDUSTRIES, INC.
(Registrant)
DATE: January 14, 1999 /s/ Stanford L. Kurland
------------------------
Senior Managing Director and
Chief Operating Officer
DATE: January 14, 1999 /s/ Carlos M. Garcia
------------------------
Managing Director; Chief Financial
Officer and Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Document Description
4.19 Form of Medium-Term Notes, Series H (fixed rate) of CHL (incorporated
by reference to Exhibit 4.3 to the registration statement on Form S-3
of the Company and CHL (File Nos. 333-66467 and 333-66467-01) filed
with the SEC on October 30, 1998).
4.20 Form of Medium-Term Notes, Series H (floating rate) of CHL
(incorporated by reference to Exhibit 4.4 to the registration
statement on Form S-3 of the Company and CHL (File Nos. 333-66467 and
333-66467-01) filed with the SEC on October 30, 1998).
10.8.3 Amendment to Revolving Credit Agreement dated as of the 25th day
of November,1998 by and among CHL, the Lenders under (as that term is
defined in)the Revolving Credit Agreement dated as of September 24,
1997, and Bankers Trust Company as Credit Agent.
10.8.4 Amendment to Revolving Credit Agreement dated as of the 20th day of
November, 1998 by and among CHL, the Lenders under (as that term is
defined in) the Revolving Credit Agreement dated as of April 15, 1998
and RoyalBank of Canada, as lead administrative agent for the
Lenders.
10.24.1 Amended and Restated Split-Dollar Life Insurance Agreement.
10.27.1 First Amendment to Change in Control Severance Plan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<DESCRIPTION>AMENDMENT TO REVOLVING CREDIT AGREEMENT
<TEXT>
AMENDMENT TO REVOLVING CREDIT AGREEMENT
THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment")
is made and dated as of the 25th day of November, 1998 by and among COUNTRYWIDE
HOME LOANS, INC. (the "Company"), the Lenders under (and as that term and
capitalized terms not otherwise defined herein are defined in) the Revolving
Credit Agreement described below, and BANKERS TRUST COMPANY, as Credit Agent (in
such capacity, the "Credit Agent").
RECITALS
A. Pursuant to that certain Revolving Credit Agreement dated
as of September 24, 1997 by and among the Company, the Lenders party thereto,
the Credit Agent and others (as amended, extended and replaced from time to
time, the "Revolving Credit Agreement"), the Lenders agreed to extend credit to
the Company on the terms and subject to the conditions set forth therein.
B. The Company has requested that the Lenders currently party
to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement
in certain respects as provided more particularly herein.
NOW, THEREFORE, in consideration of the above Recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Amendment of Negative Covenant. To reflect the agreement of
the Lenders to exclude certain of the Company's Advances to Affiliates from the
limitations thereon set forth in the Revolving Credit Agreement, Paragraph 10(g)
of the Revolving Credit Agreement is hereby amended to read in its entirety as
follows:
"10(g) Investments; Advances; Receivables. Make or commit to
make any advance, loan or extension of credit ("Advances") to, or hold
any receivable ("Receivable") of, or make or commit to make any capital
contribution to, or purchase any stock, bonds, notes, debentures or
other securities ("Investments") of, or make any other investment in,
any Person, except: (1) Advances constituting Mortgage Loans made in
the ordinary course of the Company's business and (2) Investments in,
unsecured and secured Advances to, and Receivables of, any Affiliate
(and Servicing Pass-Through Ventures which are not otherwise
Affiliates) in an aggregate amount not to exceed ten percent (10%) of
the net worth of the Company determined in accordance with GAAP;
provided, however, that: (i) any unsecured Advances made by the Company
to any Affiliate must be funded with equity of the Company, (ii) any
secured Advances made by the Company to any Affiliate must be fully
secured on a first priority, perfected basis, by readily marketable
securities pledged by such Affiliate, and (iii) for purposes of
determining the Company's compliance with the requirements of
subparagraph (2) above Advances to Affiliates shall not include
Advances made by the Company to any of Countrywide Capital Markets,
Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or
Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are
secured on a first priority, perfected basis by Mortgage-Backed
Securities owned by any of CCMI, CSC or CSEI."
2. Reaffirmation of Loan Documents. The Company hereby affirms
and agrees that (a) the execution and delivery by the Company of and the
performance of its obligations under this Amendment shall not in any way amend,
impair, invalidate or otherwise affect any of the obligations of the Company or
the rights of the Credit Agent, the Lenders or any other Person under the
Revolving Credit Agreement or any other Credit Document, (b) the term
"Obligations" as used in the Credit Documents includes, without limitation, the
Obligations of the Company under the Revolving Credit Agreement as amended
hereby, and (c) the Revolving Credit Agreement as amended hereby and the other
Credit Documents remain in full force and effect.
3. Reaffirmation of Guaranties. By executing this Amendment as
provided below, the Parent acknowledges the terms and conditions of this
Amendment and affirms and agrees that (a) the execution and delivery by the
Company and the performance of its obligations under this Amendment shall not in
any manner or to any extent affect any of the obligations of the Parent or the
rights of the Credit Agent, the Lenders or any other Person under the Guaranty,
the Subordination Agreement or any other document or instrument made or given by
the Parent in connection therewith, (b) the term "Obligations" as used in the
Guaranty and the Subordination Agreement includes, without limitation, the
Obligations of the Company under the Revolving Credit Agreement as amended
hereby, and (c) the Guaranty and the Subordination Agreement remain in full
force and effect.
4. Amendment Effective Date. This Amendment shall be effective
as of the day and year first above written upon the date (the
"Amendment Effective Date") that there has been delivered to
the Credit Agent:
(a) A copy of this Amendment, duly executed
by each party hereto and acknowledged by the
Parent; and
(b) Such corporate resolutions, incumbency
certificates and other authorizing
documentation as the Credit Agent may
request.
5.Representations and Warranties. The Company hereby
represents and warrants to the Credit Agent and each of the
Lenders that at the date hereof and at and as of the Amendment
Effective Date:
(a) Each of the Company and the Parent has
the corporate power and authority and the legal right to execute, deliver and
perform this Amendment and has takenall necessary corporate action to authorize
the execution, delivery and performance of this Amendment. This Amendment
has been duly executed anddelivered on behalf of the Company and the Parent
and constitutes the legal,valid and binding obligation of such Person,
enforceable against such Person in accordance with its terms.
(b) Both prior to and after giving effect
hereto: (1) the representations and warranties of the Company and the Parent
contained in the Credit Documents are accurate and complete in all respects,
and (2) there has not occurred an Event of Default or Potential Default.
6. No Other Amendment. Except as expressly
amended hereby, the Credit Documentsshall remain in full force and effect as
written and amended to date.
7. Counterparts. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above written.
COUNTRYWIDE HOME LOANS, INC.,
a New York corporation
By
Name
Title
BANKERS TRUST COMPANY,
as Credit Agent
By
Name
Title
<PAGE>
THE ASAHI BANK, LTD., LOS ANGELES AGENCY, as a Lender
By
Name
Title
BANCA CRT S.p.A., as a Lender
By
Name
Title
By
Name
Title
BANCA DI NAPOLI S.p.A., NEW YORK BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANCA DI ROMA, SAN FRANCISCO BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANCA MONTE DEI PASCHI DI SIENA S.p.A., NEW YORK BRANCH, as a Lender
By
Name
Title
By
Name
Title
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender
By
Name
Title
BANK OF HAWAII, as a Lender
By
Name
Title
BANK OF MONTREAL, as a Lender
By
Name
Title
THE BANK OF NEW YORK, as a Lender
By
Name
Title
BANK OF TOKYO - MITSUBISHI TRUST COMPANY, as a Lender
By
Name
Title
BANK ONE, TEXAS, N.A., as a Lender
By
Name
Title
BANKERS TRUST COMPANY, as a Lender
By
Name
Title
BANQUE NATIONALE DE PARIS, as a Lender
By
Name
Title
By
Name
Title
PARIBAS, as a Lender
By
Name
Title
By
Name
Title
BARCLAYS BANK PLC, as a Lender
By
Name
Title
THE DAI-ICHI KANGYO BANK, LTD.,
LOS ANGELES AGENCY, as a Lender
By
Name
Title
<PAGE>
BAYERISCHE LANDESBANK GIROZENTRALE, CAYMAN ISLANDS BRANCH, as a Lender
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender
By
Name
Title
THE CHASE MANHATTAN BANK, as a Lender
By
Name
Title
CREDIT LYONNAIS, SAN FRANCISCO BRANCH, as a Lender
By
Name
Title _____________________________________________________
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a Lender
By
Name
Title
By
Name
Title
THE FIFTH THIRD BANK, as a Lender
By
Name
Title
THE FIRST NATIONAL BANK OF CHICAGO, as a Lender
By
Name
Title
FIRST UNION NATIONAL BANK, as a Lender
By
Name
Title
FLEET BANK, N.A., as a Lender
By
Name
Title
THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
KBC BANK N.V., as a Lender
By
Name
Title
By ________________________________________________________
Name ______________________________________________________
Title _____________________________________________________
LASALLE NATIONAL BANK, as a Lender
By
Name
Title
THE LONG TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as a
Lender
By
Name
Title
MELLON BANK, N.A., as a Lender
By
Name
Title
THE MITSUBISHI TRUST AND BANKING CORPORATION, LOS ANGELES AGENCY, as a Lender
By
Name
Title
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender
By
Name
Title
NATIONSBANK, N.A., as a Lender
By
Name
Title
NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN
ISLANDS BRANCH, as a Lender
By
Name
Title
By
Name
Title
ROYAL BANK OF CANADA, as a Lender
By
Name
Title
THE SAKUR BANK LIMITED, LOS ANGELES AGENCY, as a Lender
By
Name
Title
By
Name
Title
STAR BANK, NATIONAL ASSOCIATION, as a Lender
By
Name
Title
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender
By
Name
Title
THE TOYO TRUST AND BANKING CO., LTD., LOS ANGELES AGENCY, as a Lender
By
Name
Title
UNION BANK OF CALIFORNIA, N.A., as a Lender
By
Name
Title
U. S. BANK NATIONAL ASSOCIATION, formerly known as U.S. National Bank
of Oregon, as a Lender,
By
Name
Title
WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH/CAYMAN ISLANDS
BRANCH, as a Lender
By
Name
Title
ACKNOWLEDGED and AGREED TO as of the date first written above:
COUNTRYWIDE CREDIT INDUSTRIES, INC.,
a Delaware corporation
By _______________________________________________
Name _____________________________________________
Title ____________________________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>AMENDMENT TO REVOLVING CREDIT AGREEMENT
<TEXT>
<PAGE>
AMENDMENT TO REVOLVING CREDIT AGREEMENT
__________________ THIS AMENDMENT TO REVOLVING CREDIT AGREEMENT (the
"Amendment") is made and dated as of the 20th day of November, 1998 by and among
COUNTRYWIDE HOME LOANS, INC. (the "Company") the Lenders under (and as that term
and capitalized terms not otherwise defined herein are defined in) the Revolving
Credit Agreement described below and ROYAL BANK OF CANADA, as lead
administrative agent for the Lenders (in such capacity, the "Lead Agent").
RECITALS
__________________ A. Pursuant to that certain Revolving Credit Agreement dated
as of April 15, 1998 by and among the Company, the Lenders signatory thereto,
the Lead Agent, The Bank of New York ("BNY"), as co-administrative agent, Morgan
Guaranty Trust Company of New York ("MGTC"), as syndication agent, Credit
Lyonnais, San Francisco Branch ("CL"), as documentation agent, RBC, as arranger,
BNY, MGTC and CL, as co-arrangers and the Lenders acting as co-agents, as
indicated on the signature pages thereof (as amended, extended and replaced from
time to time, the "Revolving Credit Agreement"), the Lenders agreed to extend
credit to the Company on the terms and subject to the conditions set forth
therein.
__________________ B. The Company has requested that the Lenders currently party
to the Revolving Credit Agreement agree to amend the Revolving Credit Agreement
in certain respects as provided more particularly herein.
__________________ NOW, THEREFORE, in consideration of the above Recitals and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
__________________ 1. Amendment of Negative Covenant. To reflect the agreement
of the Lenders to exclude certain of the Company's Advances to Affiliates from
the limitations thereon set forth in the Revolving Credit Agreement, Paragraph
10(g) of the Revolving Credit Agreement is hereby amended to read in its
entirety as follows:
"10(g) Investments; Advances; Receivables. Make or commit to
make any advance, loan or extension of credit ("Advances") to, or hold
any receivable ("Receivable") of, or make or commit to make any capital
contribution to, or purchase any stock, bonds, notes, debentures or
other securities ("Investments") of, or make any other investment in,
any Person, except: (1) Advances constituting Mortgage Loans made in
the ordinary course of the Company's business and (2) Investments in,
unsecured and secured Advances to, and Receivables of, any Affiliate
(and Servicing Pass-Through Ventures which are not otherwise
Affiliates) in an aggregate amount not to exceed ten percent (10%) of
the net worth of the Company determined in accordance with GAAP;
provided, however, that: (i) any unsecured Advances made by the Company
to any Affiliate must be funded with equity of the Company, (ii) any
secured Advances made by the Company to any Affiliate must be fully
secured on a first priority, perfected basis, by readily marketable
securities pledged by such Affiliate, and (iii) for purposes of
determining the Company's compliance with the requirements of
subparagraph (2) above Advances to Affiliates shall not include
Advances made by the Company to any of Countrywide Capital Markets,
Inc. ("CCMI"), Countrywide Securities Corporation ("CSI") and/or
Countrywide Servicing Exchange, Inc. ("CSEI") which Advances are
secured on a first priority, perfected basis by Mortgage-Backed
Securities owned by any of CCMI, CSC or CSEI."
2. Reaffirmation of Loan Documents. The
Company hereby affirms and agrees that (a) the execution and delivery by the
Company of and the performance of its obligations under this Amendment shall not
in any way amend, impair, invalidate or otherwise affect any of the obligations
of the Company or the rights of the Lead Agent, the Lenders or any other Person
under the Revolving Credit Agreement or any other Credit Document, (b) the term
"Obligations" as used in the Credit Documents includes, without limitation, the
Obligations of the Company under the Revolving Credit Agreement as amended
hereby, and (c) the Revolving Credit Agreement as amended hereby and the other
Credit Documents remain in full force and effect.
3. Reaffirmation of Guaranties. By executing
this Amendment as provided below, the Parent acknowledges the terms and
conditions of this Amendment and affirms and agrees that (a) the execution and
delivery by the Company and the performance of its obligations under this
Amendment shall not in any manner or to any extent affect any of the obligations
of the Parent or the rights of the Lead Agent, the Lenders or any other Person
under the Guaranty, the Subordination Agreement or any other document or
instrument made or given by the Parent in connection therewith, (b) the term
"Obligations" as used in the Guaranty and the Subordination Agreement includes,
without limitation, the Obligations of the Company under the Revolving Credit
Agreement as amended hereby, and (c) the Guaranty and the Subordination
Agreement remain in full force and effect.
4.Amendment Effective Date. This Amendment
shall be effective as of the day and year first above written upon the date (the
"Amendment Effective Date") that there has been delivered to the Lead Agent:
(a) A copy of this Amendment, duly executed by each party hereto and
acknowledged by the Parent; and
(b) Such corporate resolutions, incumbency certificates and other
authorizing documentation as the Lead Agent may request.
5. Representations and Warranties. The Company hereby represents and
warrants to the Lead Agent and each of the Lenders that at the date hereof and
at and as of the Amendment Effective Date:
(a) Each of the Company and the
Parent has the corporate power and authority and the legal right to execute,
deliver and perform this Amendment and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Amendment. This
Amendment has been duly executed and delivered on behalf of the Company and the
Parent and constitutes the legal, valid and binding obligation of such Person,
enforceable against such Person in accordance with its terms.
(b) Both prior to and after giving effect hereto: (1) the representations
and warranties of the Company and the Parent contained in the Credit Documents
are accurate and complete in all respects, and (2) there has not occurred an
Event of Default or Potential Default.
6. No Other Amendment. Except as expressly amended hereby, the Credit Documents
shall remain in full force and effect as written and amended to date.
7. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
COUNTRYWIDE HOME LOANS, INC.,
a New York corporation
By
Name
Title
ROYAL BANK OF CANADA, as Lead Administration Agent, Arranger and a
Lender
By
Name
Title
<PAGE>
THE BANK OF NEW YORK, as Co-Administrator Agent, a Co-Arranger, a
Co-Agent a and Lender
By
Name
Title
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Syndication Agent, a
Co-Arranger, a Co-Agent and a
Lender
By
Name
Title
CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent, a
Co-Arranger, a Co-Agent and a Lender
By
Name
Title
ABN AMRO BANK, N.V., as a Co-Agent and a Lender
By
Name
Title
By
Name
Title _____________________________________________________
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Co-Agent
and a Lender Agent
By
Name
Title
BARCLAYS BANK PLC, as a Co-Agent and a Lender
By
Name
Title
THE CHASE MANHATTAN BANK, as a Co-Agent and a Lender
By
Name
Title
DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES, as a
Co-Agent and a Lender
By
Name
Title
By
Name
Title
NATIONSBANK OF TEXAS, N.A., as a Co-Agent and a Lender
By
Name
Title
BANQUE NATIONALE DE PARIS, as a Lender
By
Name
Title
By
Name
Title
CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender
By
Name
Title
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH, as a Lender
By
Name
Title
BANQUE PARIBAS, as a Lender
By
Name
Title
By
Name
Title
BANK ONE, TEXAS, N.A., as a Lender
By
Name
Title
BANK OF HAWAII, as a Lender
By
Name
Title
ACKNOWLEDGED and AGREED TO as of the day and year first written above:
COUNTRYWIDE CREDIT INDUSTRIES, INC.,
By _______________________________________________
Name _____________________________________________
Title ____________________________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<DESCRIPTION>FIRST AMENDMENT LIFE INSURANCE AGREEMENT
<TEXT>
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
This Split Dollar Life Insurance Agreement ("Agreement") is made, as of
____________, 199__, by and between Countrywide Credit Industries, Inc., a
Delaware corporation (the "Corporation"), and ____________ (the "Executive").
RECITALS
A. The Executive desires to insure his or her life for the benefit and
protection of his or her family or designated beneficiary under the Policy (as
defined below);
B. The Corporation desires to help the Executive provide certain
insurance for the benefit and protection of his or her family or designated
beneficiary by providing funds from time to time to pay the premiums due on
the Policy in accordance with this Agreement; and
C. The Executive, as Owner of the Policy, desires to assign
certain rights and interests in the Policy to the Corporation, to the
extent provided herein, as security for repayment of certain funds provided
by the Corporation for the acquisition and/or maintenance of the Policy.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual
agreements and covenants set forth below, the parties to this Agreement agree as
follows:
1. Definitions. For purposes of this Agreement, unless otherwise
clearly apparent from the context, the following phrases or terms
shall have the following indicated meanings:
(a) "Aggregate Premiums Paid" shall mean, at any time, an amount equal to
(i) the cumulative premiums paid by the Corporation on the Policy, less (ii) any
Policy loans to the Corporation and accrued and unpaid interest thereon, less
(iii) any amounts, if any, received by the Corporation from the Executive for
life insurance coverage provided under this Agreement. Despite the foregoing,
Aggregate Premiums Paid shall not include extra benefit riders or agreements,
other than those providing additional life insurance coverage on the insured,
and shall not include premiums waived pursuant to the terms of any disability
waiver of a premium rider.
(b) "Base Annual Salary" shall mean the base annual
compensation, excluding bonuses, commissions,
overtime, relocation expenses, incentive payments,
non-monetary awards, directors fees and other fees,
paid to the Executive for employment services
rendered to the Corporation, before reduction for
compensation deferred pursuant to all qualified,
non-qualified and Code Section 125 plans of the
Corporation, in effect at the later of (1) March 1,
1997, (2) the date of an increase associated with a
promotion to a higher corporate title, or (3) the
date of entry into the Plan.
(c) "Benefit Measurement Date" shall mean the date on
which the first of any of the following events
occurs:
(i) The Executive's Termination of Employment;
(ii) Termination of this Agreement in accordance with Section 9 below; or
(iii) The Executive's death.
(iv) The Executive's Retirement
(d) "Cash Surrender Value" shall mean an amount that
equals, at any specified time, the cash surrender
value as determined under the terms of the Policy.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Collateral Assignment" shall mean an assignment made
by the Executive in favor of the Corporation in a
form mutually agreed to by the Corporation and the
Executive and accepted by the Insurer.
(g) "Collateral Interest" shall mean the Corporation's
rights and interests in the Policy, as set forth in
Section 6 below.
(h) "Executive's Death Benefit" shall mean an amount that
is equal to the result of multiplying the Executive's
Base Annual Salary by two (2).
(i) "Insurer" shall mean Aetna Life Insurance and Annuity Company and/or
Manufacturers Life Insurance Company.
(j) "Minimum Retirement Cash Value" shall mean, on the
Benefit Measurement Date, the minimum amount of cash
value that is needed in the Policy to maintain a
death benefit that is equal to one half of the
Executive's Death Benefit, determined on the Benefit
Measurement Date, assuming that the Policy will be
held without surrender, withdrawal or loan until the
Executive reaches age 90 and that the fixed interest
rate to be used to project earnings on the Policy up
to the specified age is the Insurer's announced
interest rate under the Policy on the Benefit
Measurement Date.
(k) "Plan" shall mean the plan described in Section 8(a) below.
(l) "Policy" shall mean the following policy or policies
on the life of the Executive that are issued by the
Insurer:
Policy Number Type of Policy Insurance Company
----------------------- ------------------- -----------------------------------
Universal Life Aetna Life Insurance and Annuity Company
-------------------
----------------------- ----------------------------------------------
Universal Life Manufacturers Life Insurance Company
----------------------- ------------------- -----------------------------------
(m) "Retirement" or "Retire" shall mean severance from
employment from the Corporation for any reason other
than an authorized leave of absence, death, or
Termination of Employment, on or after the attainment
of age sixty-five (65).
(n) "Tax Limitation Date" shall mean the date on which
the Policy will no longer be subject to those
provisions of Section 7702(f)(7) of the Code that
would cause any distribution or surrender from or
under the Policy to be taxed under that Section (or
Section 72 of the Code by reason of that Section).
(o) "Termination of Employment" shall mean the ceasing of
employment with the Corporation for any reason other
than death, an authorized leave of absence or a
disability that does not constitute a ceasing of
employment under the Corporation's employment
policies.
2. Acquisition of Policy; Ownership of Insurance. The parties to
this Agreement shall cooperate in applying for and obtaining the
Policy. The Policy shall be issued to the Executive, as the sole
and exclusive owner of the Policy, subject to the rights and
interests granted to the Corporation, as provided in this
Agreement and the Collateral Assignment.
3. Premium Payments on Policy.
(a) Payments and Reimbursements. Prior to the occurrence of the Benefit
Measurement Date, the Corporation shall pay to the Insurer, on or before each
applicable premium due date, all applicable premiums for the Policy. In the
event that the Corporation fails to make any such payment, the Executive may
make (but is not required to make) any such payment, and the Corporation shall
immediately reimburse the Executive for any amount so paid. All such premium
payments made by the Corporation under this Agreement shall constitute advances
by the Corporation to the Executive for which the Executive shall be responsible
for repayment in accordance with the terms of this Agreement, but only up to an
amount equal to the Corporation's Collateral Interest.
(b) Additional Compensation. Each calendar year, the Executive shall be
considered to have taxable compensation income for that portion of the premiums
paid by the Corporation that is equal in amount to the value of the "economic
benefit" derived by the Executive from the Policy's life insurance protection,
as determined for Federal income tax purposes under Revenue Rulings 64-328 and
66-110. The Corporation shall withhold from the Executive's Base Annual Salary,
or other compensation paid to the Executive, in a manner determined by the
Corporation, the Executive's share of FICA and other employment and income taxes
relating to that taxable amount.
4. Corporation's Rights. The Corporation's rights and interests in and to
the Policy shall be specifically limited to (i) the right to increase or
decrease Policy death benefits annually in accordance with maintaining the
"Executives Death Benefit" as defined in Section 1(h), (ii) the right to be paid
its Collateral Interest in accordance with Section 6 below, (iii) the rights
specified in the Collateral Assignment, and (iv) the right to obtain one or more
loans or advances on the Policy, provided, however, that any such loans shall
not, in the aggregate, exceed the Aggregate Premiums Paid by the Corporation at
any specified date without the written consent of the Executive.
5. Executive's Rights. Subject to the terms of this Agreement and
the Collateral Assignment, the Executive shall be the owner of
the Policy, and shall be entitled to exercise all rights in the
Policy while the Collateral Assignment is in effect, except for
the following, which may be exercised only in accordance with
Section 6:
(a) To borrow against or pledge the Policy; (b) To surrender,
cancel or assign the Policy; or (c) To take a distribution or
withdrawal from the Policy.
6. Collateral Interest.
(a) The Corporation's Collateral Interest in the Policy
shall be paid as soon as is reasonably practical
after the Benefit Measurement Date.
(b) On the Benefit Measurement Date, the Corporation's
interest in the Policy (the "Collateral Interest")
shall be determined in the following manner:
(i) If the Benefit Measurement Date occurs
due to the Executive's Termination of
Employment or the termination of this
Agreement by either party in accordance
with Section 9 below, the Corporation
shall be entitled to receive from the
Policy an amount equal to that portion
of the Policy's Cash Surrender Value
that does not exceed the Aggregate
Premiums Paid.
(ii) If the Benefit Measurement Date occurs
due to the death of the Executive
(except as provided in Section 6(b)(iii)
below), the Corporation shall be
entitled to that portion of the Policy's
death proceeds that exceeds the
Executive's Death Benefit.
(iii) If the Benefit Measurement Date occurs
due to the suicide of the Executive, and
the proceeds from the Policy are limited
by either a suicide or contestability
provision under the Policy, the
Corporation shall be entitled to that
portion of the Policy's Cash Surrender
Value and/or death proceeds that does
not exceed the Aggregate Premiums Paid.
(iv) If the Benefit Measurement Date occurs due to the Executive's
Retirement, the Corporation shall be entitled to receive from the Policy an
amount equal to that portion of the Policy's Cash Surrender Value that does not
exceed the Aggregate Premiums Paid. Despite the foregoing, if, on the Benefit
Measurement Date, the Policy's remaining Cash Surrender Value (after taking into
account the Corporation's Collateral Interest described in the preceding
sentence) is less than the Minimum Retirement Cash Value, then the Corporation's
Collateral Interest specified in the preceding sentence shall be reduced by the
amount that the Minimum Retirement Cash Value exceeds the remaining Cash
Surrender Value.
(c) If the Benefit Measurement Date is other than the
date of the Executive's death, the Corporation's
Collateral Interest in the Policy, as determined in
Section 6(b)(i) and (iv) above, shall be paid to the
Corporation in one of the following ways, as elected
by the Executive in writing within 30 days after the
date the Corporation first notifies the Executive in
writing of the occurrence of the Benefit Measurement
Date:
(i) By the Executive's surrender or partial
surrender of, or withdrawal from, the
Policy in an amount equal to the
Corporation's Collateral Interest and
payment of the proceeds to the
Corporation;
(ii) By the Executive taking a loan out on
the Policy in an amount equal to the
Corporation's Collateral Interest, and
payment of the loan proceeds to the
Corporation, provided that the
Corporation shall not be responsible for
any interest that may accrue on any such
loan;
(iii) By the Executive's payment to the
Corporation, from the Executive's
separate funds, an amount equal to the
Corporation's Collateral Interest; or
(iv) By the Executive's transfer of the
ownership of the Policy, and all rights
thereunder, to the Corporation.
(d) If the Benefit Measurement Date is the date of the
Executive's death, the Corporation's Collateral
Interest in the Policy, as determined in Section
6(b)(ii) above, shall be paid to the Corporation from
the Policy's proceeds as soon as is reasonably
practicable after the Executive's death.
(e) Despite Section 6(c) above and Section 6(f) below,
if, at the time of the Benefit Measurement Date, the
Tax Limitation Date has not occurred, (i) the
Corporation shall have the right, in its sole
discretion, to require the Executive to elect to pay
the Corporation's Collateral Interest in accordance
with Section 6(c)(ii) above, and (ii) the
Corporation's rights under Section 6(f) shall be
limited to taking a loan in accordance with Section
6(f)(ii) below.
(f) If the Executive fails to exercise any of the options under
Section 6(c) above, by delivering written notice of such election to the
Corporation no later than 30 days after the date the Corporation first
notifies the Executive in writing of the occurrence of the Benefit
Measurement Date, the Corporation shall be entitled to: (i) surrender the
Policy and receive the Policy's Cash Surrender Value, to the extent of the
Corporation's Collateral Interest, or (ii) take out a loan on the Policy in
an amount equal to the Corporation's Collateral Interest, with the loan
proceeds paid to the Corporation and the Corporation not responsible for
any interest that may accrue on such loan, or (iii) transfer the ownership
of and beneficial interest in the Policy to the Corporation. In the case of
(i) or (iii) above, the Corporation shall pay to the Executive the Cash
Surrender Value or death proceeds that remain after the Corporation has
been paid its Collateral Interest. (g) The Corporation agrees to keep
records of its premium payments and to furnish the Insurer with a statement
of its Collateral Interest whenever the Insurer requires such statement.
(h) Concurrent with the signing of this Agreement, the
Executive will collaterally assign the Policy to the
Corporation, in the form of the Collateral
Assignment, as security for the payment of the
Collateral Interest, which assignment shall not be
altered or changed without the consent of the
Corporation and the Executive.
(i) Promptly following the Executive's death, the Corporation and the
Executive's designated beneficiary under the Policy shall take all steps
necessary to collect the death proceeds of the Policy by submitting the
proper claims forms to the Insurer. The Corporation shall notify the
Insurer of the amount of the Executive's Death Benefit (except when the
Policy's proceeds are limited because of the Executive's death by suicide)
and the Corporation's Collateral Interest in the Policy at the time of such
death. Such amounts shall be paid, respectively, by the Insurer to the
Executive's designated beneficiary and the Corporation.
(j) If the Executive elects to retain the Policy in accordance with
Section 6(c) above, the Corporation shall (i) assign its Collateral
Interest in the Policy to the Executive, (ii) execute and file with the
Insurer an appropriate release of the Corporation's Collateral Interest in
the Policy and (iii) have no further interest in the Policy; provided that,
in all instances, the Corporation receives payment in full for its
Collateral Interest in the Policy. Further, the Executive hereby
acknowledges, understands and agrees that, upon the release of the
Corporation's Collateral Interest, the Corporation shall not have any
responsibility for the future performance of the Policy and shall have no
obligation to make any additional premium payments.
(k) If the Executive elects to transfer the Policy to the
Corporation, or the Corporation makes such an
election in accordance with Section 6(f)(iii) above,
the Executive agrees to execute within thirty (30)
days of such election all documents necessary to
transfer the Policy to the Corporation, and the
Executive shall have no further interest in and to
the Policy. Executive hereby appoints Corporation as
its lawful attorney-in-fact to execute any document
necessary to transfer the Policy to the Corporation
and not executed by Executive within thirty (30) days
of such election.
(l) Upon payment to the Corporation of its Collateral
Interest in accordance with this Section 6, this
Agreement, and the Executive's participation in the
Plan, shall terminate and neither party shall have
any further rights or obligations under the Agreement
or the Plan with respect to the Executive.
(m) The Corporation shall cooperate in effecting any full
or partial policy surrender, withdrawal or policy
loan requested by the Executive related to the
Executive's exercise of any options provided in
Section 6(c) above, provided that the Corporation
receives payment in full for its Collateral Interest
in the Policy. Moreover, the Executive shall
cooperate in effecting any right granted to the
Corporation under this Agreement.
7. Insurer.
(a) The Insurer is not a party to this Agreement, shall
in no way be bound by or charged with notice of its
terms, and is expressly authorized to act only in
accordance with the terms of the Policy. The Insurer
shall be fully discharged from any and all liability
under the Policy upon payment or other performance of
its obligations in accordance with the terms of the
Policy.
(b) The signature(s) required for the Insurer to
recognize the exercise of a right under the Policy
shall be specified in the Collateral Assignment.
8. Plan; Named Fiduciary; Claims Procedure.
(a) This Agreement is part of the Countrywide Credit
Industries, Inc. Split-Dollar Life Insurance Plan,
which consists of all Countrywide Credit Industries,
Inc. Split Dollar Life Insurance Agreements that so
reference their association with the Plan.
(b) The Corporation is the named fiduciary of the Plan for purposes of
this Agreement.
(c) The following claims procedure shall be followed in
handling any benefit claim under this Agreement and
the Plan:
(i) The Executive, or his or her beneficiary, if he or she is dead
(the "Claimant"), shall file a claim for benefits by notifying the
Corporation in writing. If the claim is wholly or partially denied, the
Corporation shall provide a written notice within 90 days specifying the
reasons for the denial, the provisions of this Agreement on which the
denial is based, and additional material or information, if any, that is
necessary for the Claimant to receive benefits. Such written notice shall
also indicate the steps to be taken by the Claimant if a review of the
denial is desired.
(ii) If a claim is denied, and a review is desired, the Claimant shall
notify the Corporation in writing within 60 days after receipt of written
notice of a denial of a claim. In requesting a review, the Claimant may
review plan documents and submit any written issues and comments the
Claimant feels are appropriate. The Corporation shall then review the claim
and provide a written decision within 60 days of receipt of a request for a
review. This decision shall state the specific reasons for the decision and
shall include references to specific provisions of this Agreement, if any,
upon which the decision is based.
(iii) In no event shall the Corporation's
liability under this Agreement exceed
the amount of proceeds from the Policy.
9. Amendment of Agreement; Termination. This Agreement shall not be
modified or amended except by a writing signed by the Corporation
and the Executive. Either party may terminate this Agreement, and
Executive's participation in the Plan, at any time provided that
the obligations of the party terminating the Agreement and the
Plan with respect to the Executive are performed in full under
the Agreement as of the time of the termination.
10. Binding Agreement. This Agreement shall be binding upon the
heirs, administrators, executors, successors and assigns of each
party to this Agreement. This Agreement is not assignable by the
Executive without the Corporation's consent.
11. State Law. This Agreement shall be subject to and be construed
under the internal laws of the State of California, without
regard to its conflicts of laws principles.
12. Validity. In case any provision of this Agreement shall be
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts of this Agreement, but this
Agreement shall be construed and enforced as if such illegal or
invalid provision had never been inserted in this Agreement.
13. Not a Contract of Employment. The terms and conditions of this
Agreement shall not be deemed to constitute a contract of
employment between the Corporation and the Executive. Such
employment is hereby acknowledged to be an "at will" employment
relationship that can be terminated at any time for any reason,
with or without cause, unless expressly provided in a separate
written employment agreement. Nothing in this Agreement shall be
deemed to give the Executive the right to be retained in the
service of the Corporation or to interfere with the right of the
Corporation to discipline or discharge the Executive at any time.
14. Notice. Any notice or filing required or permitted to be given
under this Agreement to the Executive or the Corporation shall be
sufficient if in writing and hand-delivered, or sent by
registered or certified mail, to the address below:
To the Executive: ______________________
Address: ___________________________
To the Corporation:Managing Director, Human Resources
Countrywide Credit Industries, Inc.
4500 Park Granada
Calabasas, CA 91302-1613
or to such other address as may furnished to the Executive or the
Corporation, as the case may be, in writing in accordance with
this notice provision. Such notice shall be deemed given as of
the date of delivery or, if delivery is made by mail, as of the
date shown on the postmark on the receipt for registration or
certification. Any notice or filing required or permitted to be
given to the Executive or the Executive's beneficiary under this
Agreement shall be sufficient if in writing and hand-delivered,
or sent by mail, to the last known address of the Executive.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with regard to the subject matter of
this Agreement and supersedes all previous negotiations,
agreements and commitments in respect thereto. No oral
explanation or oral information by either of the parties to this
Agreement shall alter the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first written above.
"Corporation"
Countrywide Credit Industries, Inc.,
a Delaware corporation
By:
Its:
"Executive"
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<DESCRIPTION>FIRST AMENDMENT TO SEVERANCE PLAN
<TEXT>
<PAGE>
FIRST AMENDMENT
TO
COUNTRYWIDE CREDIT INDUSTRIES, INC.
CHANGE IN CONTROL SEVERANCE PLAN
(As Adopted September 12, 1996)
WHEREAS, Countrywide Credit Industries, Inc. (the "Company") desires to
amend the Countrywide Credit Industries, Inc. Change in Control Severance Plan
(As Adopted September 12, 1996) (the "Plan") to clarify the severance benefit
that Eligible Employee Classification is entitled to receive upon participation.
NOW, THEREFORE, APPENDIX A of the plan is hereby deleted in its
entirety as enumerated in Appendix A of the Plan and New APPENDIX A, attached
hereto as Exhibit A, is inserted in its place.
IN WITNESS WHEREOF, the Company has caused this FIRST AMENDMENT to be
executed this 30th day of September 1998.
Countrywide Credit Industries, Inc.
By ___________________________
Anne McCallion
Managing Director
Attest: ________________________
Susan Bow
Assistant Secretary
<PAGE>
Exhibit A
NEW APPENDIX A
Eligible Employee
Classifications Members
A Managing Directors
B Executive Vice Presidents and Operating Unit Presidents
C Countrywide Home Loans ("CHL"), Senior Vice Presidents and Operating Unit
Executive Vice Presidents
D First Vice Presidents, Vice Presidents and Regional Vice Presidents
E Branch Managers and all other Exempt Employees
F All Non-Exempt Employees
Salary Separation Payment
The Salary Separation Payment to which a Participant is entitled shall be based
on the Participant's employee classification as of the date immediately
preceding the date of the Participant's Qualifying Termination or, if greater,
as of the date on which the Change-in Control occurs, and shall equal the amount
described in the table below; provided, however, that the Salary Separation
Payment for each Participant who is a member of Employee Classification C, D, E
or F shall also include an additional amount equal to one-quarter (1/4) of one
month of Base Pay for each full year of service with the Company or Operating
Unit in excess of five (5) years; provided, further, however, that such
additional amount, if any, when added to the amount of Base Pay provided in the
table below, shall not exceed twelve (12) months Base Pay.
Employee
Classification Salary Separation Payment
A Two (2) years Base Pay (as defined in Section 6.1(a)) plus 200% of
the Average Bonus (as defined in Section 6.1(a)).
B One (1) year Base Pay plus 100% of the Average Bonus.
C Six (6) months Base Pay plus 50% of the Average Bonus.
D Four (4) months Base Pay plus 33% of the Average Bonus.
E Three (3) months Base Pay plus 25% of the Average Bonus.
F Two (2) months Base Pay plus 15% of the Average Bonus.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>6
<DESCRIPTION>COMPUTATION OF PER SHARE EARNINGS
<TEXT>
Exhibit 11.1
COUNTRYWIDE CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Nine Months
Ended November 30,
1998 1997
---------------- -----------------
(Dollar amounts in thousands,
except per share data)
Basic
<S> <C> <C>
Net earnings applicable to common stock $283,802 $259,881
================ =================
Average shares outstanding 111,065 107,111
---------------- -----------------
Per share amount $2.56 $2.43
================ =================
Diluted
Net earnings applicable to common stock $283,802 $259,881
================ =================
Average shares outstanding 111,065 107,111
Net effect of dilutive stock options --
based on the treasury stock method using
the closing market price, if higher than
average market price. 5,749 4,062
---------------- -----------------
Total average shares 116,814 111,173
================ =================
Per share amount $2.43 $2.34
================ =================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>7
<DESCRIPTION>COMPUTATION OF RATIOS
<TEXT>
COUNTRYWIDE CREDIT INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 12.1 - COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
The following table sets forth the ratio of earnings to fixed charges of the
Company for the nine months ended November 30, 1998 and 1997 and for the five
fiscal years ended February 28, 1998 computed by dividing net fixed charges
(interest expense on all debt plus the interest element (one-third) of operating
leases) into earnings (income before income taxes and fixed charges).
<TABLE>
Nine Months Ended
November 30, Fiscal Years Ended February 29(28),
------------------------- ------------------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings $283,802 $259,881 $344,983 $257,358 $195,720 $ 88,407 $179,460
Income tax expense 181,447 166,154 220,563 164,540 130,480 58,938 119,640
Interest charges 528,017 291,935 424,341 316,705 281,573 205,464 219,898
Interest portion of rental
Expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Earnings available to cover
fixed charges $997,180 $720,673 $999,942 $746,023 $614,576 $360,188 $525,370
============ ============ ============= ============ ============= ============ ============
Fixed charges
Interest charges $528,017 $291,935 $424,341 $316,705 $281,573 $205,464 $219,898
Interest portion of rental
expense 3,914 2,703 10,055 7,420 6,803 7,379 6,372
------------ ------------ ------------- ------------ ------------- ------------ ------------
Total fixed charges $531,931 $294,638 $434,396 $324,125 $288,376 $212,843 $226,270
============ ============ ============= ============ ============= ============ ============
Ratio of earnings to fixed
charges 1.87 2.45 2.30 2.30 2.13 1.69 2.32
============ ============ ============= ============ ============= ============ ============
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>8
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> Nov-30-1998
<CASH> 52,330
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 445,166
<DEPRECIATION> 163,069
<TOTAL-ASSETS> 16,202,843
<CURRENT-LIABILITIES> 0
<BONDS> 6,982,255
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 5,598
<OTHER-SE> 2,414,378
<TOTAL-LIABILITY-AND-EQUITY> 16,202,843
<SALES> 0
<TOTAL-REVENUES> 1,446,619
<CGS> 0
<TOTAL-COSTS> 981,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 465,249
<INCOME-TAX> 181,447
<INCOME-CONTINUING> 283,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283,802
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.43
<FN>
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CLX | https://www.sec.gov/Archives/edgar/data/21076/0000021076-99-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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MIC-Info: RSA-MD5,RSA,
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<SEC-DOCUMENT>0000021076-99-000003.txt : 19990215
<SEC-HEADER>0000021076-99-000003.hdr.sgml : 19990215
ACCESSION NUMBER: 0000021076-99-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CLOROX CO /DE/
CENTRAL INDEX KEY: 0000021076
STANDARD INDUSTRIAL CLASSIFICATION: SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS [2842]
IRS NUMBER: 310595760
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-07151
FILM NUMBER: 99534264
BUSINESS ADDRESS:
STREET 1: THE CLOROX COMPANY
STREET 2: 1221 BROADWAY
CITY: OAKLAND
STATE: CA
ZIP: 94612-1888
BUSINESS PHONE: 510-271-7000
MAIL ADDRESS:
STREET 1: P.O. BOX 24305
CITY: OAKLAND
STATE: CA
ZIP: 94612-1305
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q TEXT
<TEXT>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-07151
-------
THE CLOROX COMPANY
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-0595760
- ---------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification number)
1221 Broadway - Oakland, California 94612 - 1888
- ---------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, (including area code) (510) 271-7000
--------------
(Former name, former address and former fiscal year, if changed
since last report)
- ---------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed
all report required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
------------ ---------------
As of December 31, 1998 there were 103,723,864 shares outstanding
of the registrant's common stock (par value - $1.00), the
registrant's only outstanding class of stock.
- ---------------------------------------------------------------------
Total pages 24 1
THE CLOROX COMPANY
PART 1. Financial Information Page No.
--------------------- ---------
Item 1. Financial Statements
Condensed Statements of Consolidated
Earnings
Three and Six Months Ended
December 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets
December 31, 1998 and June 30, 1998 4
Condensed Statements of Consolidated
Cash Flows
Six Months Ended December 31, 1998
and 1997 5
Notes to Condensed Consolidated
Financial Statements 6-16
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 17-22
Item 5. Other information 23-24
2
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Earnings
---------------------------------------------
(In thousands, except per-share amounts)
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
12/31/98 12/31/97 12/31/98 12/31/97
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 648,172 $ 591,795 $1,334,055 $ 1,241,079
---------- ------------ ---------- -----------
Costs and Expenses
Cost of products sold 283,927 258,189 572,478 537,883
Selling, delivery and
administration 148,262 139,789 290,880 270,188
Advertising 90,585 83,408 182,177 174,952
Research and development 13,952 13,007 26,901 24,613
Interest expense 16,667 16,525 35,463 32,019
Other (income) expense, net 3,529 (242) 379 (1,601)
---------- ------------ ---------- ------------
Total costs and expenses 556,922 510,676 1,108,278 1,038,054
---------- ----------- ---------- ------------
Earnings before Income Taxes 91,250 81,119 225,777 203,025
Income Taxes 33,304 31,636 82,409 79,179
---------- ------------ ---------- -----------
Net Earnings $ 57,946 $ 49,483 $ 143,368 $ 123,846
========== =========== ========== ============
Earnings per Common Share
Basic $ 0.56 $ 0.48 $ 1.38 $ 1.20
Diluted 0.55 0.47 1.36 1.17
Weighted Average Shares
Outstanding
Basic 103,628 103,393 103,616 103,305
Diluted 105,735 105,429 105,732 105,427
Dividends per Share $ 0.36 $ 0.32 $ 0.72 $ 0.64
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Consolidated Balance Sheets
-------------------------------------
(In thousands)
12/31/98 6/30/98
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and short-term investments $ 102,242 $ 89,681
Accounts receivable, less allowance 365,468 411,868
Inventories 228,742 211,913
Prepaid expenses and other 45,035 45,354
Deferred income taxes 18,753 23,242
------------ -----------
Total current assets 760,240 782,058
Property, Plant and Equipment - Net 604,025 596,293
Brands, Trademarks, Patents and Other Intangibles 1,254,862 1,240,532
Investments in Affiliates 84,247 84,449
Other Assets 343,051 310,018
------------ -----------
Total $ 3,046,425 $ 3,013,350
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 116,528 $ 154,348
Accrued liabilities 183,908 268,583
Short-term debt 659,256 768,616
Income taxes payable 38,855 15,370
Current maturities of long-term debt 1,392 1,517
------------ -----------
Total current liabilities 999,939 1,208,434
Long-term Debt 508,454 316,260
Other Obligations 220,055 203,000
Deferred Income Taxes 178,784 200,421
Stockholders' Equity
Common stock 110,844 110,844
Additional paid-in capital 95,613 84,124
Retained earnings 1,455,702 1,382,943
Treasury shares, at cost (410,845) (391,864)
Accumulated other comprehensive income (loss) (101,083) (89,861)
Other (11,038) (10,951)
------------ -----------
Stockholders' Equity 1,139,193 1,085,235
------------ -----------
Total $ 3,046,425 $ 3,013,350
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Condensed Statements of Consolidated Cash Flows
-------------------------------------------------
(In thousands)
Six Months Ended
--------------------------------------
12/31/98 12/31/97
-------------- --------------
<S> <C> <C>
Operations:
Net earnings $ 143,368 $ 123,846
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 70,838 65,005
Deferred income taxes 3,528 2,855
Other (6,884) (2,669)
Effects of changes in:
Accounts receivable 49,554 15,750
Inventories (14,628) (48,726)
Prepaid expenses 319 4,597
Accounts payable (39,343) (26,909)
Accrued liabilities (79,011) (84,816)
Income taxes payable 23,368 1,221
-------------- --------------
Net cash provided by operations 151,109 50,154
Investing Activities:
Property, plant and equipment (47,244) (39,681)
Disposal of property, plant and equipment 4,057 1,686
Businesses purchased (57,473) (80,120)
Other (39,437) (48,468)
-------------- --------------
Net cash used for investment (140,097) (166,583)
-------------- --------------
Financing Activities:
Short-term debt borrowings - 13,407
Short-term debt repayments (387,540) (161,719)
Long-term debt and other obligations borrowings 201,235 193,736
Long-term debt and other obligations repayments (6,461) (61,525)
Commercial paper, net 277,480 186,451
Cash dividends (74,574) (65,999)
Treasury stock purchased (32,455) (33,815)
Issuance of common stock under employee stock plans and other 23,864 (4,255)
-------------- --------------
Net cash provided by financing 1,549 66,281
-------------- --------------
Net Increase (Decrease) in Cash and Short-Term Investments 12,561 (50,148)
Cash and Short-Term Investments:
Beginning of period 89,681 101,046
-------------- --------------
End of period $ 102,242 $ 50,898
============== ==============
See Notes to Condensed Financial Statements.
5
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ------------------------------------------------------
(1) The condensed consolidated financial information for the
three and six months ended December 31, 1998 and 1997 has not
been audited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the consolidated results
of operations, financial position, and cash flows of The
Clorox Company and its subsidiaries (the "Company"). The
results of the three and six months ended December 31, 1998
and 1997 should not be considered as necessarily indicative
of the results for the respective year.
(2) Inventories at December 31, 1998 and at June 30, 1998
consisted of (in thousands):
12/31/98 6/30/98
--------- -------
Finished goods and work in process $150,591 $130,185
Raw materials and supplies 78,151 81,728
--------- -------
Total $228,742 $211,913
========= ========
(3) Businesses purchased for the six months ended December 31,
1998 and December 31, 1997 totalling $57,473,000 and $ 80,120,000,
respectively, were funded using a combination of cash and debt
and were accounted for as purchases. These acquisitions in 1998
included a bleach and cleaners business in Venezuela, an
insecticide business in Korea, a cleaning brand business in
Australia and an increase in ownership in Tecnoclor, S.A. in
Colombia.
(4) In July 1998, the Company refinanced $150,000,000 of
commercial paper by entering into a Deutsche Mark denominated
financing arrangement with private investors. In October 1998,
the private investors exercised an option to finance an
additional $50,000,000 under the same terms of this financing
arrangement. The Company entered into a series of swaps with
notional amounts totaling $200,000,000 to eliminate foreign
currency exposure risk generated by this Deutsche Mark
denominated obligation. The swaps effectively convert the
Company's 2.876% fixed Deutsche Mark obligation to a floating
U.S. dollar rate of 90 day LIBOR less 278 basis points or an
effective rate of approximately 3%.
In December 1998, the Company redeemed preference shares totalling
$387,540,000 which was classified as short-term debt.
This financing was replaced with commercial paper
borrowings at a rate of approximately 5.2%.
6
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(5) SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of all earnings statements
issued after December 15, 1997 for all entities with complex
capital structures. Basic EPS is computed by dividing net
earnings by the weighted average number of common shares
outstanding each period. Diluted EPS is computed by dividing
net earnings by the diluted weighted average number of common
shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable
through stock options, restricted stock, warrants and other
convertible securities. The weighted average number of shares
outstanding (denominator) used to calculate basic EPS is reconciled
to those used in calculating diluted EPS as follows (in thousands):
<TABLE>
<CAPTION>
Weighted Average Number of Shares Outstanding
---------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------- -----------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic 103,628 103,393 103,616 103,305
Stock options 2,068 1,987 2,075 2,073
Other 39 49 41 49
-------- --------- -------- --------
Diluted 105,735 105,429 105,732 105,427
======== ========= ======== =========
</TABLE>
(6) Effective July 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting of Comprehensive
Income. Comprehensive income for the Company includes net income
and foreign currency translation adjustments that are excluded
from net income but included as a component of total stockholders'
equity. Comprehensive income for the three and six months ended
December 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- ------------------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net Earnings $ 57,946 $ 49,483 $143,368 $123,846
Other comprehensive
income (loss):
Foreign currency
translation
adjustments 5,793 (22,967) (11,222) (27,867)
-------- --------- -------- ---------
Comprehensive Income $ 63,739 $ 26,516 $132,146 $ 95,979
========= ========= ======== ==========
</TABLE>
(7) Certain reclassifications of prior periods' amounts have
been made to accounts receivable, accrued liabilities,
interest expense and other (income) expense to conform with
the current period presentation.
7
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(8) Subsequent Event - Completion of First Brands Corporation Merger
On January 29, 1999, the Company completed the First Brands
Corporation ("First Brands") merger when the Company's wholly
owned subsidiary, Pennant, Inc. ("Pennant"), merged into
First Brands. As a result of the merger ("Merger"), First
Brands became a wholly owned subsidiary of the Company and
continues to operate its business as the Company's subsidiary.
First Brands develops, manufactures, markets and sells consumer
products under the Glad, Scoop Away, and STP brands, among
others. The Merger is structured to be treated as a pooling of
interests for accounting purposes.
Pursuant to the Agreement and Plan of Reorganization and Merger
dated as of October 18, 1998 among the Company, First Brands,
and Pennant ("Merger Agreement"), First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each share of
First Brands' common stock, with cash paid in lieu of fractional
shares. Pursuant to the Merger, approximately 40,320,500 shares
of First Brands' common stock were converted into approximately
14,071,850 shares of the Company's common stock. In addition,
options to acquire 1,755,010 shares of First Brands' common
stock were converted to 612,484 options to acquire shares of the
Company's common stock. As a result of the Merger, Clorox also
assumed approximately $440 million of First Brands' debt. See
also the discussion in "Management's Discussion and Analysis"
under "Subsequent Event - Completion of First Brands Corporation
Acquisition."
(9) Pro forma financial information
The following unaudited pro forma combined condensed
consolidated financial statements have been prepared to
give effect to the Merger, using the pooling of interests
method of accounting.
No adjustments to the unaudited pro forma combined condensed
consolidated financial information have been made to conform
the accounting policies of the combined company, as the
nature and amounts of such adjustments are deemed insignificant.
Certain reclassifications have been made to conform First
Brands' balance sheet and income and expense to the Company's
classifications as of December 31, 1998. The share information
used in the unaudited pro forma information assumes the actual
exchange ratio of .349.
The unaudited pro forma combined condensed consolidated balance
sheet as of December 31, 1998 gives effect to the Merger as if
it had occurred on December 31, 1998, and combines the unaudited
consolidated balance sheet of the Company and the unaudited
consolidated balance sheet of First Brands as of December 31, 1998.
The unaudited pro forma combined condensed consolidated statements
of earnings for all periods presented give effect to the Merger
as if it had occurred at the beginning of the periods presented.
For purposes of the unaudited pro forma combined condensed
consolidated statements of earnings, First Brands' consolidated
statements of earnings for the three and six months ended
December 31, 1997 and 1998 have been combined with the Company's
consolidated statements of earnings for the three and six months
ended December 31, 1997 and 1998, respectively.
8
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
The Company and First Brands estimate they will incur combined
aggregate direct transaction costs of approximately $15.5
million associated with the Merger, consisting of transaction
fees for investment bankers, attorneys, accountants and other
related costs. These nonrecurring transaction costs will be
charged to operations upon consummation of the Merger. It is
expected that following the Merger, the Company will incur
additional nonrecurring costs currently estimated to be
approximately $125 million, including non-cash charges
currently estimated at $30 million. No estimate for these
charges has been reflected in the pro forma combined
condensed consolidated balance sheet or pro forma combined
condensed statements of earnings. There can be no assurance
that the Company will not incur additional charges in excess
of $140.5 million to reflect transaction costs and costs
associated with the Merger or that management will be successful
in its efforts to integrate the operations of the two companies.
The unaudited pro forma combined condensed consolidated
financial information is presented for illustrative purposes
only and is not necessarily indicative of the financial
position or results of operations that would have actually
been reported had the Merger occurred at the beginning of the
periods presented (or as of December 31, 1998), nor is it
necessarily indicative of the financial position or results of
operations of the Company in the future. Such unaudited pro
forma combined condensed consolidated financial statements are
based upon the respective historical consolidated financial
statements and notes thereto of the Company and First Brands
and do not incorporate, nor do they assume, any benefits from
cost savings or synergies that the Company may realize after the
Merger.
9
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet (a), (b)
(In thousands)
December 31, 1998
----------------------------------------------------------------------
Pro Forma
Adjusments and Pro Forma
Clorox First Brands Reclassifications Combined
------------- ---------------- -------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and short-term investments $ 102,242 $ 22,472 $ $ 124,714
Accounts and notes receivable, net 365,468 106,322 (25,799)(ii) 445,991
Inventories 228,742 151,912 380,654
Prepaid expenses and other 45,035 4,417 49,452
Deferred income taxes 18,753 12,591 31,344
------------- ---------------- -------------------- ------------
Total current assets 760,240 297,714 (25,799) 1,032,155
------------- ---------------- -------------------- ------------
Property, Plant and Equipment - Net 604,025 420,269 1,024,294
Brands, Trademarks, Patents and Other
Intangibles 1,254,862 333,961 1,588,823
Investments in Affiliates 84,247 - 5,853 (ii) 90,100
Other Assets 343,051 48,899 (5,853)(ii) 386,097
------------- ---------------- -------------------- ------------
Total $ 3,046,425 $ 1,100,843 $ (25,799) $ 4,121,469
============== ================= =================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 116,528 $ 43,127 $ $ 159,655
Accrued liabilities 183,908 71,919 (25,799)(ii) 230,028
Accrued merger costs - - 15,500 (i) 15,500
Short-term debt and notes payable 659,256 4,665 663,921
Income taxes payable 38,855 18,417 57,272
Current maturities of long-term debt 1,392 3,280 4,672
------------- ---------------- -------------------- ------------
Total current liabilities 999,939 141,408 (10,299) 1,131,048
Long-term Debt 508,454 429,414 937,868
Other Obligations 220,055 28,248 248,303
Deferred Income Taxes 178,784 79,389 258,173
Stockholders' Equity
Common stock and additional
paid in capital 206,457 152,929 359,386
Retained earnings 1,455,702 424,720 (15,500)(i) 1,864,922
Treasury shares, at cost (410,845) (125,872) (536,717)
Accumulated other comprehensive income (101,083) (29,393) (130,476)
Other (11,038) - (11,038)
------------- ---------------- -------------------- ------------
Stockholders' Equity 1,139,193 422,384 (15,500) 1,546,077
------------- ---------------- -------------------- ------------
Total $ 3,046,425 $ 1,100,843 $ (25,799) $ 4,121,469
============= ================= ==================== =============
See notes to unaudited pro forma combined condensed consolidated financial statements.
10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings (a), (c), (d)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 946,961 $ 887,768 $1,911,631 $1,801,573
Costs and Expenses
Cost of products sold 458,570 435,147 916,716 880,145
Selling, delivery and administration 201,213 188,560 392,568 363,754
Advertising 122,322 115,660 236,775 228,534
Research and development 15,281 14,499 29,646 27,410
Restructuring - 2,700 - 2,700
Interest expense 25,184 25,517 52,666 49,272
Other (income) expense, net 6,790 2,712 7,562 4,914
--------- --------- ---------- ---------
Total costs and expenses 829,360 784,795 1,635,933 1,556,729
--------- --------- ---------- ---------
Earnings before Income Taxes and
cumulative effect of change in
accounting principle 117,601 102,973 275,698 244,844
Income Taxes 43,523 40,183 101,878 95,518
--------- --------- ---------- ---------
Earnings before cumulative effect of
change in accounting principle $ 74,078 $ 62,790 $ 173,820 $ 149,326
========= ========= ========== =========
Earnings per Common Share
before cumulative effect of change
in accounting principle
Basic $ 0.63 $ 0.54 $ 1.48 $ 1.27
Diluted 0.62 0.52 1.45 1.25
Weighted Average Shares Outstanding
Basic 117,294 117,247 117,261 117,202
Diluted 119,799 119,614 119,674 119,632
See notes to unaudited pro forma combined condensed consolidated financial statements.
11
</TABLE>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(a) Pro forma basis of presentation
The unaudited condensed statements of earnings for the three
and six months ended December 31, 1997 and 1998 reflect the
combination of the statements of earnings of the Company and First
Brands for those periods. No adjustments have been made in these
pro forma combined condensed consolidated financial statements to
conform the accounting policies of the combined company, as the
nature and amounts of such adjustments are deemed insignificant.
The unaudited pro forma combined condensed consolidated
financial statements reflect the issuance of 13,858,522 shares
of the Company's Common Stock in exchange for an aggregate of
39,709,232 shares of First Brands' Common Stock outstanding as
of December 31, 1998 in connection with the Merger, based on the
actual Exchange Ratio of .349 (which uses an average closing
price for the Company's Common Stock of $111.86 per share) as set
forth in the following table:
Shares of First Brands' Common Stock outstanding
as of December 31, 1998 39,709,232
Exchange Ratio .349
--------------
Number of shares of the Company's Common
Stock exchanged for
First Brands Common Stock 13,858,522
Number of shares of the Company's Common
Stock outstanding at
December 31, 1998 103,723,864
--------------
Number of shares of the Company's Common
Stock outstanding at December 31, 1998
after giving effect to the Merger 117,582,386
===============
(b) Unaudited pro forma combined condensed consolidated balance sheet
(i) The Company and First Brands estimate they will incur
combined aggregate direct transaction costs of approximately $15.5
million associated with the Merger, consisting of transaction fees
for investment bankers, attorneys, accountants and other related
costs. These non-recurring transaction costs will be charged
to operations upon consummation of the Merger. These charges
have been reflected in the unaudited pro forma combined condensed
consolidated balance sheet but have not been included in the
unaudited pro forma combined condensed consolidated statement of
earnings.
(ii) Represents certain reclassifications to conform
First Brands' balance sheet classifications to the Company's
balance sheet classifications at December 31, 1998.
12
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(iii) It is expected that, following the Merger, the
Company will incur additional nonrecurring costs currently
estimated to be approximately $125,000,000, including
non-cash charges estimated at $30,000,000, in connection
with the Merger. No estimate for these charges has been
reflected in the pro forma combined condensed consolidated
balance sheet or combined condensed consolidated statements
of earnings. There can be no assurance that the Company
will not incur additional charges in excess of $125,000,000
to reflect additional nonrecurring costs associated with
the Merger, or that management will be successful in its
efforts to integrate the operations of the two companies.
(c) Unaudited pro forma combined condensed consolidated
statement of earnings
The following are certain classifications of historical
results of operations of the Company and First Brands and
their pro forma combined amounts included in the unaudited
pro forma combined condensed consolidated statements of
earnings. Certain reclassifications were made to the
historical results of First Brands to conform to the
Company's classifications. These pro forma amounts
reflect the Merger as if it were effected for all periods
presented on the following two pages.
13
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings
(In thousands)
Three Months Ending December 31, 1998 Six Months Ending December 31, 1998
--------------------------------------------- -----------------------------------------
Pro Forma Pro Forma
Reclass- Pro Forma Reclass- Pro Forma
Clorox First Brands ifications Combined Clorox First Brands ifications Combined
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 648,172 $ 314,386 $ (15,597) $ 946,961 $1,334,055 $ 605,895 $ (28,319) $1,911,631
Costs and Expenses
Cost of products
sold 283,927 196,158 (21,515) 458,570 572,478 385,017 (40,779) 916,716
Selling, delivery
and administration 148,262 79,319 (26,368) 201,213 290,880 145,039 (43,351) 392,568
Depreciation and
amortization - 3,798 (3,798) - - 7,802 (7,802) -
Advertising 90,585 - 31,737 122,322 182,177 - 54,598 236,775
Research and
development 13,952 - 1,329 15,281 26,901 - 2,745 29,646
Restructuring - - - - - - - -
Interest expense 16,667 7,140 1,377 25,184 35,463 14,339 2,864 52,666
Discount on sale
of receivables - 1,377 (1,377) - - 2,864 (2,864) -
Other (income)
expense, net 3,529 243 3,018 6,790 379 913 6,270 7,562
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Total costs and
expenses 556,922 288,035 (15,597) 829,360 1,108,278 555,974 (28,319) 1,635,933
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
income taxes and
cumulative effect
of change in
accounting principle 91,250 26,351 - 117,601 225,777 49,921 - 275,698
Income Taxes 33,304 10,219 - 43,523 82,409 19,469 - 101,878
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
cumulative effect
of change in
accounting principle $ 57,946 $ 16,132 $ - $ 74,078 $ 143,368 $ 30,452 $ - $ 173,820
========= ============= =========== ========== ========== ============== ========== ==========
14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Unaudited Pro Forma Combined Condensed Consolidated Statements of Earnings
(In thousands)
Three Months Ending December 31, 1997 Six Months Ending December 31, 1997
--------------------------------------------- -----------------------------------------
Pro Forma Pro Forma
Reclass- Pro Forma Reclass- Pro Forma
Clorox First Brands ifications Combined Clorox First Brands ifications Combined
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 591,795 $ 309,282 $ (13,309) $ 887,768 $1,241,079 $ 578,762 $ (18,268) $ 1,801,573
Costs and Expenses
Cost of products
sold 258,189 196,994 (20,036) 435,147 537,883 380,189 (37,927) 880,145
Selling, delivery
and administration 139,789 75,406 (26,635) 188,560 270,188 129,317 (35,751) 363,754
Depreciation and
amortization - 3,595 (3,595) - - 7,455 (7,455) -
Advertising 83,408 - 32,252 115,660 174,952 - 53,582 228,534
Research and
development 13,007 - 1,492 14,499 24,613 - 2,797 27,410
Restructuring - 2,700 - 2,700 - 2,700 - 2,700
Interest expense 16,525 7,843 1,149 25,517 32,019 14,957 2,296 49,272
Discount on sale of
receivables - 1,149 (1,149) - - 2,296 (2,296) -
Other (income)
expense, net (242) (259) 3,213 2,712 (1,601) 29 6,486 4,914
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Total costs
and expenses 510,676 287,428 (13,309) 784,795 1,038,054 536,943 (18,268) 1,556,729
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before income
taxes and
cumulative effect of
change in accounting
principle 81,119 21,854 - 102,973 203,025 41,819 - 244,844
Income Taxes 31,636 8,547 - 40,183 79,179 16,339 - 95,518
--------- ------------- ----------- ---------- ---------- ------------- ----------- ----------
Earnings before
cumulative effect of
change in accounting
principle $ 49,483 $ 13,307 $ - $ 62,790 $ 123,846 $ 25,480 $ - $ 149,326
========= ============= =========== ========== ========== ============== ========== ==========
15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
The Clorox Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
(d) Unaudited pro forma earnings per share
The following table reconciles the number of shares used in
the pro forma earnings per share computations to the number of s
hares set forth in the Company's and First Brands' historical
statements of earnings (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Shares used in calculations:
Historical basic shares - Clorox 103,628 103,393 103,616 103,305
--------- ---------- --------- ----------
Historical basic shares -
First Brands 39,157 39,696 39,098 39,819
Conversion ratio .349 .349 .349 .349
--------- ---------- --------- ----------
13,666 13,854 13,645 13,897
--------- ---------- --------- ----------
Pro forma combined basic shares 117,294 117,247 117,261 117,202
========= ========== ========= ==========
Historical diluted shares - Clorox 105,735 105,429 105,732 105,427
--------- ---------- --------- ----------
Historical diluted shares -
First Brands 40,299 40,644 39,948 40,703
Conversion ratio .349 .349 .349 .349
--------- ---------- --------- ----------
14,064 14,185 13,942 14,205
--------- ---------- --------- ----------
Pro forma combined
diluted shares 119,799 119,614 119,674 119,632
========= ========== ========= ==========
16
</TABLE>
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Results of Operations
- ---------------------
Comparison of the Three Months Ended December 31, 1998
- -------------------------------------------------------
with the Three Months Ended December 31, 1997
- ------------------------------------------------
Diluted earnings per share increased 17% to $0.55 from $0.47 a
year ago and net earnings grew 17% to $57,946,000 from $49,483,000
a year ago.
Net sales increased 10% to $648,172,000 primarily due to a
13% volume increase. Increased trade spending in Latin America
depressed sales growth relative to volume growth. Volume growth
was due to both increases in existing brands and the introduction
of new products. Domestic products such as Formula 409
cleaners, Clorox toilet bowl cleanser, Clorox 2 color-safe
bleach, Hidden Valley bottled dressings, and cat litter
products contributed to this quarterly growth. Introduction
of new products such as Rain Clean Pine-Sol dilutable cleaner,
Lemon Fresh Pine-Sol cleaner and antibacterial spray, and
Tilex Fresh Shower daily shower cleaner also fueled this
volume growth. Clorox liquid bleach volume was favorably
impacted by a second quarter price increase in the prior
year which resulted in lower shipments in the prior year second
quarter. Volume performance of charcoal products benefited
from the late season warm weather extending the barbecue
season. International shipments increased primarily due to
acquisition activity partially offset by lower volumes
experienced by the Company's Asian businesses due to economic
instability. Declines in the Company's Asian operations have
not materially impacted the Company.
Gross margin as a percent of sales remained relatively flat
in comparison with the prior year.
Selling, delivery, and administration expenses increased
approximately 6% from a year ago primarily due to continued
growth and expenditures related to investment in international
infrastructure, partially offset by a reduction in corporate
administration costs primarily due to reduced use of outside
contractors related to the Company's Year 2000 effort.
Increased advertising spending is driven by increased domestic
volume activity and the introduction of new products, partially
offset by lower international spending.
Other expense includes costs associated with the redemption
of redeemable subsidiary preference shares, classifed as short-term
debt, in December 1998, and the effect of translation on certain
international operations.
Income tax expense as a percent of pretax earnings declined to
36.5% from 39% principally due to international investment
activities and international operations.
17
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Results of Operations
- ---------------------
Comparison of the Six Months Ended December 31, 1998
- ----------------------------------------------------
with the Six Months Ended December 31, 1997
- -------------------------------------------
Diluted earnings per share increased 16% to $1.36 from $1.17 a
year ago and net earnings grew 16% to $143,368,000 from
$123,846,000 a year ago.
Net sales increased 7% to $1,334,055,000 primarily due to a 9%
volume increase. The volume growth is attributable primarily
to strong performance from the Company's domestic products,
new product launches, and increased international shipments due
to acquisitions. These increases are partially offset by
weakened volume performance experienced by the Company's Asian
businesses and volume decreases in the Company's insecticide
business.
Gross margin as a percent of sales improved 43 basis points
from the preceding year primarily from on-going cost savings
initiatives programs and lower raw material costs.
Selling, delivery, and administration expenses increased
approximately 8% from a year ago primarily due to continued
growth and expenditures related to investment in international
infrastructure. Increased advertising spending is driven by
increased domestic volume and introduction of new products
partially offset by lower international spending.
Interest expense increased approximately $3,444,000 from the
prior year primarily due to the issuance of new debt to fund
business growth and international acquisitions.
Other expense includes costs associated with the redemption of
redeemable subsidiary preference shares in December 1998,
classifed as short-term debt in December 1998, and
the effect of translation on certain international operations.
Income tax expense as a percent of pretax earnings declined
to 36.5% from 39% principally due to international investment
activities and international operations.
18
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ------------------------------------------------
Liquidity and Capital Resources
- ---------------------------------
The Company's financial position and liquidity remain strong due to
cash provided by operations during the quarter. Normal seasonal
variations experienced by the Company's seasonal businesses
and higher shipment volumes recorded in the prior year fourth
quarter by the Company's domestic household products business
were the primary drivers causing reductions in receivables,
payables, and accrued liabilities and the increase in inventories.
International acquisitions since June 30, 1998 totalled $57,473,000
and were funded using a combination of cash and debt. These
acquisitions included a bleach and cleaners business in Venezuela,
an insecticide business in Korea, a cleaning brand business in
Australia, and an increase in ownership in Tecnoclor, S.A. in
Colombia.
In September 1996, the Board of Directors authorized a share
repurchase program to offset the dilutive effect of employee
stock option exercises. During the six month period ended
December 31, 1998, 400,000 shares were acquired at a cost of
$32,455,000. The Company has discontinued this share repurchase
program in connection with the First Brands Corporation
acquisition described below. As a result, the issuance of shares
pursuant to the Company's stock incentive plans may have a
dilutive effect.
The Company has approved the use of interest rate derivative
instruments such as interest rate swaps in order to manage the
impact of interest rate movements on interest expense. These
instruments have the effect of converting fixed rate interest
to floating, or floating to fixed. The conditions under which
derivatives can be used are set forth in a Company Policy
Statement that includes a specific prohibition on the use of
any leveraged derivatives. In July 1998, the Company refinanced
$150,000,000 of commercial paper by entering into a Deutsche
Mark denominated financing arrangement with private investors.
The private investors exercised an option to finance an
additional $50,000,000 under the same terms of this financing
arrangement in October 1998. The Company entered into a series
of swaps with notional amounts totalling $200,000,000 to
eliminate foreign currency exposure risk generated by this
Deutsche Mark denominated obligation. The swaps effectively
convert the Company's 2.876% fixed Deutsche Mark obligation to
a floating U.S. dollar rate of 90 day LIBOR less 278 basis
points or an effective rate of approximately 3%.
In December 1998, the Company redeemed preference shares
totalling $387,540,000 which was classifed as short-term debt.
This financing was replaced with commercial paper borrowings
at a rate of approximately 5.2%.
As of December 31, 1998, the Company has increased its available
lines of credit from $550 million to $750 million. Management
believes the Company has adequate access to additional capital
from other public and private sources should the need arise.
19
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Year 2000 Compliance
- --------------------
Many financial information and operations systems used today
may be unable to interpret dates after December 31, 1999
because these systems allow only two digits to indicate the
year in a date. Consequently, these systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could
have adverse consequences on the operations of an entity and
the integrity of information processing. This potential
problem is referred to as the "Year 2000" or "Y2K" issue.
In 1997, the Company established a corporate-wide program to
address Y2K issues. This effort is comprehensive and encompasses
software, hardware, electronic data interchange, networks,
personal computers, manufacturing and other facilities,
embedded chips, century certification, supplier and customer
readiness, contingency planning, and domestic and
international operations.
In the United States and Canada, the Company is currently on
schedule and is over 70% complete as of December 31, 1998,
excluding plant floor efforts. The Company has replaced or
upgraded most of its critical business applications and
systems and has completed approximately 20% of its century
testing for these systems. The target date to repair or
replace the remaining critical business information systems
is March 31, 1999. In international operations other than
Canada, the Company is currently in the remediation phase
for its critical business systems and is approximately 75%
complete. The target date to repair or replace the
remaining international systems is June 30, 1999.
The Company has completed the assessment of its plant floor
systems and equipment, and has finalized its remediation
plans for its domestic and Canadian plant facilities. The
Company expects to complete its plant floor assessment and
remediation plans for its international operations by April 30,
1999. The target date to complete all domestic and
international manufacturing plant floor and facilities
efforts is September 30, 1999. The Company has prioritized
its third-party relationships as critical, severe or
sustainable, has completed the assessment phase for third
parties (except for assessment of its key customers which
is scheduled to be complete in March 1999, and certain
international suppliers which is expected to be complete by
June 30, 1999), has requested a Y2K contract warranty in
many new key contracts and is developing contingency plans
for critical third parties, including key customers,
suppliers and other service providers.
If necessary modifications and conversions by the Company
are not made on a timely basis, or if key third parties are
not Y2K compliant, Y2K problems could have a material
adverse effect on the Company's operations. The Company's
most reasonably likely worst case scenario is a regional
utility failure that would interrupt manufacturing
operations and distribution centers in the affected region.
To mitigate this risk, and to address the possible
uncertainty of whether the Company will be able to solve
all potential Y2K issues, the Company has begun contingency
planning for its critical operations, including key third-party
relationships, and will require written contingency plans for
these areas. The Company has completed approximately twenty
percent (20%) of its contingency planning efforts and expects
to complete all of its contingency planning by September 30, 1999.
20
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Y2K costs are expensed as incurred and funded through operating
cash flows. Through December 31, 1998, the Company has
expensed incremental remediation costs of $18.8 million with
remaining incremental remediation costs estimated at $12
million. In addition, through December 31, 1998, the Company
has expensed accelerated strategic upgrade costs of $12.3
million with anticipated remaining accelerated strategic
upgrade costs of $4 million. The Company spent approximately
17% of its 1998 fiscal year information technology budget,
and expects to spend approximately 16% of its 1999 fiscal
year information technology budget, on Y2K remediation issues.
As of December 31, 1998, the Company has spent approximately
40% of its 1999 fiscal year Y2K program budget. The Company
has not deferred any critical information technology projects
because of its Year 2000 program efforts, which are primarily
being addressed through a dedicated team within the Company's
information technology group. Time and cost estimates are
based on currently available information and could be affected
by the ability to correct all relevant computer codes and
equipment, and the Y2K readiness of the Company's business
partners, among other factors.
On January 29, 1999, the Company completed the First Brands
Merger when the Company's wholly owned subsidiary, Pennant,
merged into First Brands. The Company has not yet completed
the assessment of the Merger's impact on its Y2K costs and
the Company's summary above does not include the impact of
the First Brands Merger. The Company expects that its
overall Y2K costs will increase, however, based on a
preliminary Y2K assessment of First Brands' business systems,
plant floors, and facilities. Y2K efforts of both the Company
and First Brands are being combined and the Company will
extend its comprehensive Y2K program to First Brands' Y2K
efforts. Although First Brands' timetables may affect the
target dates and contingency plans of the Company's original
Y2K program, the Company still expects to be Y2K compliant
for the merged companies before the arrival of January 1, 2000.
Subsequent Event - Completion of First Brands Corporation Merger
- ----------------------------------------------------------------
On January 29, 1999, the Company completed the First Brands
Merger when the Company's wholly owned subsidiary, Pennant,
merged into First Brands. As a result of the Merger,
First Brands became a wholly owned subsidiary of the Company
and continues to operate its business as the Company's
subsidiary. First Brands develops, manufactures, markets
and sells consumer products under the Glad, Scoop Away,
and STP brands, among others. The Merger is structured to
be treated as a pooling of interests for accounting purposes.
Pursuant to the Merger Agreement, First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each of their
shares of First Brands' common stock, with cash paid in
lieu of fractional shares. Pursuant to the Merger,
approximately 40,320,500 shares of First Brands' common stock
were converted into approximately 14,071,850 shares of the
Company's common stock. In addition, options to acquire
1,755,010 shares of First Brands' common stock were converted
to options to acquire 612,484 shares of the Company's
common stock. As a result of the Merger, the Company also
assumed approximately $440 million of First Brands' debt.
As is generally the case with mergers, there can be no
assurance that the Company will be able to successfully
integrate or profitably manage the First Brands businesses.
In addition, there can be no assurance that, following the
Merger, the First Brands businesses will achieve sales levels,
profitability, cost savings or synergies that justify the
investment made or that the acquisition will be accretive to
earnings in any future period.
21
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
- ---------------------------------------------
Subsequent Event - Completion of First Brands Corporation Merger
- ----------------------------------------------------------------
(Continued)
- ------------
The Company expects to incur significant costs (currently
estimated to be approximately $140.5 million, including non-cash
charges currently estimated at $30 million) in connection with
the Merger to reflect transaction-related expenses as well as
expenses relating to the integration of First Brands. This
amount is an estimate only and is therefore subject to change.
In addition, there can be no assurance that the Company will
not incur additional costs associated with the Merger.
22
PART I - FINANCIAL INFORMATION (Continued)
Item 5. Other Information
- ---------------------------
Acquisition or Disposition of Assets
- ------------------------------------
On January 29, 1999, the Company completed the First Brands
Merger as discussed in Item 2. First Brands develops,
manufactures, markets and sells consumer products under
the Glad, Scoop Away, and STP brands, among others. The
Merger is structured to be treated as a pooling of
interests for accounting purposes.
Pursuant to the Merger Agreement, First Brands' stockholders
received in the Merger the right to receive .349 of a share
of the Company's common stock in exchange for each of their
shares of First Brands' common stock, with cash paid in
lieu of fractional shares. Pursuant to the Merger,
approximately 40,320,500 shares of First Brands' common
stock were converted into approximately 14,071,850 shares
of the Company's common stock. In addition, options to
acquire 1,755,010 shares of First Brands' common stock were
converted to options to acquire 612,484 shares of the
Company's common stock. As a result of the Merger, the
Company also assumed approximately $440 million of First
Brands' debt.
Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Merged.
First Brands' statements of earnings and cash flow and balance
sheets for the fiscal years ended June 30, 1996, June 30, 1997
and June 30, 1998 are hereby incorporated by reference to the
First Brands Annual Report on Form 10-K for and as of the year
ended June 30, 1998. First Brands' statements of earnings and
cash flow and balance sheets for the three months ended
September 30, 1997 and September 30, 1998, respectively, are
hereby incorporated by reference to the First Brands' Quarterly
Report on Form 10-Q for and as of the quarter ended September 30,
1998. The pertinent portions of those reports so incorporated
by reference are attached as Exhibits 99.1 and 99.2, respectively.
(b) Pro Forma Financial Information.
Pro forma financial information relating to the First Brands
merger is contained in (i) Footnote 9 to the financial statements
included in this Form 10-Q and (ii) the Proxy Statement/Prospectus
contained in the Company's Form S-4 Registration Statement
(333-69455) ("S-4 Registration Statement"), which information
is incorporated herein by this reference.
23
PART I - FINANCIAL INFORMATION (Continued)
Item 5. Other Information
- ---------------------------
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Reorganization and Merger,
dated as of October 18, 1998, by and among the
Company, First Brands and Pennant (filed as
Appendix A to the S-4 Registration Statement
(333-69455), which appendix is incorporated
herein by this reference)
99.1 First Brands' consolidated statements of income and
cash flow for the fiscal years ended June 30,
1996, June 30, 1997 and June 30, 1998 and
consolidated balance sheet as of June 30, 1997
and June 30, 1998 (pages 17 to 32 of the First
Brands' Annual Report on Form 10-K for and as
of the year ended June 30, 1998)
99.2 First Brands' consolidated statements of income
and cash flow for the three months ended September 30,
1997 and September 30, 1998 and consolidated balance
sheet as of June 30, 1997 and September 30, 1998
(pages 3 to 9 of the First Brands' Quarterly Report
on Form 10-Q for and as of the quarter ended
September 30, 1998)
99.3 Consent of Independent Auditor of First Brands to
inclusion of Exhibits 99.1 and 99.2
Cautionary Statement
- ---------------------
Except for historical information, matters discussed in this
Form 10-Q, including statements about future growth or the
realization of benefits from the First Brands' transaction, are
forward-looking statements based on management's estimates,
assumptions and projections. In addition to the factors discussed
in this Form 10-Q, important factors that could cause results to
differ materially from management's expectations are described
in "Forward-Looking Statements and Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report on Form 10-K for the year
ending June 30, 1998, as updated from time to time in the
Company's SEC filings. Those factors include, but are not
limited to, marketplace conditions and events, the Company's
cost, risks inherent in international operations, the success
of new products, integration of acquisitions, and environmental,
regulatory and intellectual property matters, and with respect
to the First Brands' transaction, risks related to the
successful management of the acquired businesses.
The acquisition of First Brands can be expected to present
challenges to management, including the integration of the
operations, technologies and personnel of the companies, and
special risks, including unanticipated liabilities and
contingencies, and diversion of management attention.
24
S I G N A T U R E
-----------------
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.
THE CLOROX COMPANY
(Registrant)
DATE February 12, 1999 BY /s/ HENRY J. SALVO, JR.
----------------- ----------------------
Henry J. Salvo, Jr.
Vice-President - Controller
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>2
<DESCRIPTION>EX99-1 (FB 10K)
<TEXT>
First Brands Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------
June 30, June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,203,670 $1,119,898 $1,073,022
Cost of goods sold 775,870 713,203 687,103
Selling, general and administrative expenses 291,156 268,086 241,711
Amortization and other depreciation 14,585 13,411 15,607
Restructuring expense (Note 3) 2,700 19,000 --
Interest expense and amortization of debt discount and expenses 29,604 20,383 17,546
Discount on sale of receivables (Note 5) 4,561 3,992 3,963
Other income (expense), net (500) 1,575 1,827
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, extraordinary loss and
cumulative effect of change in accounting principle 84,694 83,398 108,919
Provision for income taxes (Note 14) 32,364 32,533 43,819
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and cumulative effect of change in
accounting principle 52,330 50,865 65,100
Extraordinary loss relating to the repurchase of subordinated
debt, net of taxes (Note 11) -- (633) --
Cumulative effect of change in accounting principle, net of taxes (Note 2) (6,922) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 45,408 $ 50,232 $ 65,100
====================================================================================================================================
Per common share (Note 1):
Basic:
Income before extraordinary loss and cumulative effect of change
in accounting principle $ 1.32 $ 1.25 $ 1.56
Extraordinary loss -- (0.02) --
Cumulative effect of change in accounting principle (0.17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.15 $ 1.23 $ 1.56
====================================================================================================================================
Diluted:
Income before extraordinary loss and cumulative effect of change
in accounting principle $ 1.29 $ 1.22 $ 1.53
Extraordinary loss -- (0.02) --
Cumulative effect of change in accounting principle (0.17) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.12 $ 1.20 $ 1.53
====================================================================================================================================
Weighted average outstanding common shares (Note 1):
Basic 39,615,855 40,771,610 41,661,624
Diluted 40,501,876 41,756,802 42,600,021
====================================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements
17
<PAGE>
First Brands Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Years Ended
---------------------------
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,029 $ 7,465
Accounts and notes receivable
(net of allowances for doubtful accounts and
discounts of $8,297 and $6,842) (Note 5) 118,326 134,554
Inventories (Note 1) 155,480 151,976
Deferred tax assets (Note 14) 11,827 15,992
Prepaid expenses 10,170 9,434
- ----------------------------------------------------------------------------------------
Total current assets 307,832 319,421
Property, plant and equipment
(net of accumulated depreciation of $160,529 and
$141,691) (Notes 1 and 6) 419,755 377,128
Patents, trademarks, proprietary technology and
other intangibles (net of accumulated amortization
of $204,916 and $192,631) (Notes 1 and 7) 284,849 310,095
Deferred charges and other assets
(net of accumulated amortization of $52,687 and $52,029) 47,765 40,137
- ----------------------------------------------------------------------------------------
Total assets $1,060,201 $1,046,781
========================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<PAGE>
First Brands Corporation and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
Years Ended
---------------------------------
June 30, June 30,
(Dollars in thousands, except per share data) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 4,562 $ 8,432
Current maturities of long-term debt (Note 11) 3,384 2,811
Accrued income and other taxes (Note 14) 8,253 7,373
Accounts payable 71,692 61,877
Accrued liabilities (Note 9) 92,919 106,084
- -------------------------------------------------------------------------------------------------
Total current liabilities 180,810 186,577
Long-term debt (Note 11) 388,054 380,467
Deferred tax liability (Note 14) 78,788 65,348
Other long-term obligations (Note 15) 26,401 20,473
Preferred stock, $1 par value, 10,000,000
shares authorized; none issued -- --
Common stock, $0.01 par value, 120,000,000 shares
authorized; 43,553,846 shares issued at June 30, 1998
and 43,394,044 shares issued at June 30, 1997 435 434
Capital in excess of par value 134,166 130,994
Cumulative foreign currency translation adjustment (27,556) (12,455)
Common stock in treasury, at cost; 4,407,000 shares at
June 30, 1998 and 3,355,000 shares at June 30, 1997 (123,039) (96,837)
Retained earnings 402,142 371,780
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 386,148 393,916
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,060,201 $1,046,781
=================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
19
<PAGE>
First Brands Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended June 30, 1998, 1997 and 1996
--------------------------------------------------------------------------------------
Cumulative
Common Stock Capital Foreign
---------------------- In Excess Currency
Shares Par of Par Translation Retained Treasury
(Dollars in thousands) Outstanding Value Value Adjustment Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1995 20,935,314 $221 $120,914 $(7,173) $278,649 $(40,433) $352,178
Cash dividends (Note 1) -- -- -- -- (9,903) -- (9,903)
Exercise of stock options 199,196 2 4,470 -- -- -- 4,472
Tax benefit related to the exercise
of employee stock options -- -- 1,256 -- -- -- 1,256
Net income -- -- -- -- 65,100 -- 65,100
Purchase of treasury stock (279,300) -- -- -- -- (12,130) (12,130)
Foreign currency translation
adjustment -- -- -- (2,148) -- -- (2,148)
Two-for-one stock split 20,795,376 208 (208) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1996 41,650,586 $431 $126,432 $(9,321) $333,846 $(52,563) $398,825
Cash dividends (Note 1) -- -- -- -- (12,298) -- (12,298)
Exercise of stock options 253,458 3 3,350 -- -- -- 3,353
Tax benefit related to the exercise
of employee stock options -- -- 1,212 -- -- -- 1,212
Net income -- -- -- -- 50,232 -- 50,232
Purchase of treasury stock (1,865,000) -- -- -- -- (44,274) (44,274)
Foreign currency translation
adjustment -- -- (3,134) -- -- (3,134)
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1997 40,039,044 $434 $130,994 $(12,455) $371,780 $(96,837) $393,916
Cash dividends (Note 1) -- -- -- -- (15,046) -- (15,046)
Exercise of stock options 159,802 1 2,101 -- -- -- 2,102
Tax benefit related to the exercise
of employee stock options -- -- 1,071 -- -- -- 1,071
Net income -- -- -- -- 45,408 -- 45,408
Purchase of treasury stock (1,052,000) -- -- -- -- (26,202) (26,202)
Foreign currency translation
adjustment -- -- -- (15,101) -- -- (15,101)
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1998 39,146,846 $435 $134,166 $(27,556) $402,142 $(123,039) $386,148
====================================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
20
<PAGE>
First Brands Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
June 30, June 30, June 30,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $45,408 $50,232 $65,100
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 44,427 41,448 38,282
Restructuring expense 2,700 19,000 --
Deferred income taxes 19,722 5,808 25,808
Amortization of gain on sale/leaseback -- (909) (1,580)
Cumulative effect of change in accounting principle 6,922 -- --
Loss on repurchase of subordinated notes -- 633 --
Change in non-cash current assets and liabilities, net of effect of
businesses acquired:
(Increase) in accounts receivable (5,712) (25,674) (12,052)
(Increase) decrease in inventories (8,239) 4,405 11,836
(Increase) in prepaid expenses (1,072) (3,942) (1,048)
Increase (decrease) in accrued income and other taxes 5,712 4,306 (7,263)
Increase (decrease) in accounts payable 12,207 (9,808) (10,937)
(Decrease) in accrued liabilities (14,184) (14,700) (36,171)
Other changes (4,053) (1,440) (3,687)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 58,430 19,127 3,188
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 103,838 69,359 68,288
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (44,480) (41,960) (42,293)
Acquisition of leased assets (44,208) (22,320) (9,797)
Acquisition of businesses, net of cash acquired -- (160,210) (32,255)
Retirements of plant and equipment 8,218 1,109 1,072
Purchase and installation of software (13,514) (10,564) (5,518)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (93,984) (233,945) (88,791)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving credit facilities, net 18,899 135,143 35,000
(Decrease) increase in other borrowings, net (728) 4,149 (3,835)
Increase in securitization of accounts receivable, net 15,000 15,000 10,000
Issuance of 7 1/4% senior subordinated notes, net of underwriting discount -- 149,025 --
Repurchase of 9 1/8% senior subordinated notes -- (100,000) --
Proceeds from settlement of Prestone note receivable -- 13,000 --
Proceeds from exercise of stock options 2,102 3,353 4,472
Purchase of common stock for treasury (26,202) (44,274) (12,130)
Dividends paid (14,361) (11,671) (9,903)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,290) 163,725 23,604
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,564 (861) 3,101
Cash and cash equivalents at beginning of year 7,465 8,326 5,225
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12,029 $ 7,465 $ 8,326
==================================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
21
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant
Accounting Policies
First Brands Corporation and subsidiaries ("First Brands" or the "Company")
engages in the development, manufacture, marketing and sale of consumer products
sold under branded and private labels. Principal branded products include: GLAD
and GLAD-LOCK (plastic wrap and bags); GLADWARE (plastic containers); STP (oil
and fuel additives and other specialty automotive appearance products); SCOOP
AWAY, EVER CLEAN, EVERFRESH and JOHNNY CAT (cat litters); and STARTERLOGG and
HEARTHLOGG (wood fire starters and fire logs).
Basis of Presentation
The accompanying financial statements reflect the consolidated accounts of the
Company for all periods presented. All material intercompany transactions and
balances have been eliminated. To prepare financial statements in conformity
with generally accepted accounting principles, management must make a number of
assumptions and estimates which affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statement, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. All
information presented is for a fiscal year, unless otherwise noted.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method for substantially all inventories in the
United States. In general, the average cost or FIFO method is used by the
international operations.
Inventories were composed of the following as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------
<S> <C> <C>
Raw materials $ 34,160 $ 34,518
Work in process 5,485 5,795
Finished goods 115,835 111,663
- -------------------------------------------------
$155,480 $151,976
=================================================
</TABLE>
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Expenditures for replacements
are capitalized and the replaced assets are retired. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the respective
assets for accounting purposes. The Company capitalizes interest on major fixed
asset additions during construction. Interest capitalized totaled $2,297,000,
$1,864,000 and $2,017,000 in 1998, 1997 and 1996, respectively.
Patents, Trademarks, Proprietary Technology and Other Intangibles
Patents, trademarks, proprietary technology and other intangibles are carried at
cost less accumulated amortization which is calculated on a straight-line basis
over the estimated useful lives of the assets, not to exceed 40 years.
Deferred Charges and Other Assets
Deferred charges and other assets include financing costs that are amortized
over the terms of the respective financing agreements, as well as long-term
notes receivable, purchased software, investments and assets relating to the
securitization of accounts receivable.
Research and Development
Research and development expenditures are charged to expense as incurred.
Expenditures were $4,778,000, $5,043,000 and $4,789,000 in 1998, 1997 and 1996,
respectively.
Income and Dividends per Share
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 replaces primary
and fully diluted earnings per share ("EPS") with basic and diluted EPS, and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all companies with complex capital structures. Basic EPS
represents the earnings available for each common share outstanding during the
period. Diluted EPS reflects earnings available for each common share after the
affect of all potentially dilutive common shares, such as options, warrants and
convertible securities. The number of weighted average shares used to calculate
diluted EPS differs slightly from those shares used to calculate basic EPS due
to the effect of employee stock options.
Cash dividends declared for fiscal 1998, 1997 and 1996 were $0.38, $0.30 and
$0.24 per share, respectively.
Statement of Cash Flows
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
22
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $32,705 $18,821 $23,674
Income Taxes $16,378 $27,385 $34,380
====================================================================
</TABLE>
Interest payments during fiscal 1996 include $6,325,000 paid in settlement of
an IRS audit.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the customer.
Risk Management
The Company periodically enters into various hedging transactions to minimize
the effect of fluctuations in currency exchange rates, raw material pricing and
interest rates. The foreign currency forward contracts limit the Company's
exposure to currency fluctuations associated with certain transactions, while
raw material contracts stabilize a portion of the costs associated with the
Company's resin purchases. Interest rate swaps allow the Company to better
balance its interest rate exposure between fixed and floating interest rates.
The Company does not hold or issue these financial instruments for trading
purposes.
Foreign Currency Translation
The assets and liabilities of the international subsidiaries are translated to
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated at the average monthly exchange rate.
Resulting adjustments are recorded in a separate component of stockholders'
equity as "Cumulative foreign currency translation adjustment."
Reclassification
Certain amounts for fiscal 1997 and 1996 have been reclassified to conform to
the fiscal year 1998 classifications.
2. Accounting Change
During the second quarter of fiscal 1998, the Company changed its accounting
policy for costs associated with the business process re-engineering activities
which relate to the Company's information system upgrade. In accordance with the
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force Issue
No. 97-13, the Company is now expensing these process re-engineering costs.
Prior to fiscal 1998, the Company capitalized these costs, intending to amortize
them over a five to seven year period commencing with the implementation of the
new information system. The cumulative effect of the accounting change principle
resulted in a charge to earnings of $11,434,000 ($6,922,000 after taxes or $0.17
per diluted share). On a pro forma basis, the Company's reported net income for
fiscal 1997 and 1996 would have been reduced by $5,069,000 ($0.12 per diluted
share) and $1,022,000 ($0.02 per diluted share), respectively.
3. Restructuring
In fiscal 1997, the Company recorded a $19,000,000 restructuring charge
($11,590,000 after taxes or $0.28 per diluted share), for initiatives aimed at
streamlining certain operating and administrative functions, reducing costs and
improving operating efficiencies. During fiscal 1998, an additional charge of
$2,700,000 ($1,668,000 after taxes or $0.04 per diluted share), was recorded to
reflect greater than anticipated participation in the early retirement program
along with revisions to earlier estimates, principally costs associated with
employees. The total charge of $21,700,000 was composed of a $10,000,000 charge
for employee related costs, primarily an early retirement window package and
related costs to obtain personnel reductions and $11,700,000 related to asset
write-downs and disposals, mainly of a distribution facility and adjacent office
center in East Hartford, Connecticut. Substantially all restructuring
liabilities have been paid or settled during fiscal 1998.
4. Acquisitions and Divestitures
Acquisitions
During fiscal 1998, the Company's New Zealand subsidiary acquired, for
approximately $750,000, the XLO sponge brand in the New Zealand market. In
fiscal 1997, the Company's South African subsidiary acquired 76% of the
outstanding stock of Sealapac (PVT) LTD., a Zimbabwe manufacturer and marketer
for the consumer products and commercial markets.
On March 14, 1997, the Company purchased, for approximately $160,000,000,
the NationalPak business in Australia and New Zealand from National Foods
Limited. NationalPak manufacturers and markets consumer products such as plastic
wrap and bags, aluminum foil and wiping cloths under the GLAD, CHUX, OSO, MONO
and ROTA brand names. The acquisition was funded by long-term borrowings in the
United States, Canada, Australia and New Zealand (see Note 11). During fiscal
1998, the Company sold to local management a 4.4% interest in the Australian
subsidiary.
On March 19, 1996, the Company purchased, for approximately $32,000,000,
the net assets of Forest Technology Incorporated, the manufacturer and marketer
of the STARTERLOGG and HEARTHLOGG brand of wood fire starters and fire logs.
All of the above business and brand acquisitions have been accounted for by
the purchase method, and accord-
23
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
ingly, the results of operations of NationalPak, Forest Technology, Sealapac and
XLO are included in the Company's Consolidated Statements of Income from the
respective dates of acquisition. The excess of costs over net assets acquired
for the NationalPak and Forest Technology acquisitions were $63,100,000 and
$30,100,000, respectively, and are being amortized over a forty year period on a
straight line basis.
Divestitures
During fiscal 1997, the Company sold its SIMONIZ wax and polish business. The
gain associated with the sale of the SIMONIZ business is reflected in Other
income (expense), net in the fiscal 1997 Consolidated Statement of Income.
Early in fiscal 1995, First Brands sold the Prestone antifreeze/coolant and
car care business to Prestone Products Corporation ("Prestone"). During fiscal
1997, Prestone repaid a $13,000,000 loan (which for financial reporting purposes
was valued at $9,000,000 at the time of the divestiture), resulting in a gain of
approximately $2,700,000 that is reflected in Other income (expense), net, in
the Consolidated Statement of Income.
5. Accounts Receivable
During fiscal 1998, the Company exercised its option to terminate a previous
agreement to sell up to $100,000,000 in eligible trade accounts receivable.
After terminating its previous agreement, the Company entered into a new three
year agreement, with an automatic yearly renewal provision thereafter, for the
sale of $100,000,000 in fractional ownership interest in a defined pool of
eligible receivables. The new program increases the receivable pool which may be
considered eligible, reduces the yearly service fees and provides for a lower
discount rate. As of June 30, 1998 the entire $100,000,000 had been sold,
reflecting a $15,000,000 increase over the prior year-end balance. The amounts
sold are presented as reductions in accounts receivable on the accompanying
Consolidated Balance Sheets. The costs associated with this program are reported
as "Discount on sale of receivables."
6. Property, Plant and Equipment
Property, plant and equipment as of June 30, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
Useful
(In thousands) 1998 1997 Lives
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Land and
Improvements $ 14,052 $ 18,713 --
Buildings 70,552 77,847 30-40 years
Machinery and
Equipment 479,060 404,019 13-15 years
Other 16,620 18,240 3-5 years
- -------------------------------------------------------------------------
580,284 518,819
Less: Accumulated
depreciation (160,529) (141,691)
- -------------------------------------------------------------------------
$ 419,755 $ 377,128
=========================================================================
</TABLE>
Depreciation expense was $31,009,000, $29,042,000 and $25,149,000 in fiscal
1998, 1997 and 1996, respectively.
7. Patents, Trademarks, Proprietary Technology and Other Intangibles
The Company periodically reviews the carrying value of intangible assets to
determine whether the carrying amount of an asset is recoverable. The primary
indicators of recoverability are current or forecasted profitability of the
related acquired business, measured as profit before interest and amortization
of the related intangible assets compared to their carrying values. For the
three-year periods ended June 30, 1998, 1997 and 1996 there were no material
adjustments to the carrying values of intangible assets resulting from these
evaluations.
Patents, trademarks, proprietary technology and other intangibles as of June 30,
1998 and 1997 consisted of:
<TABLE>
<CAPTION>
Useful
(In thousands) 1998 1997 Lives
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Trademarks $ 117,201 $ 116,866 40 years
Patents, proprietary
technology and
other intangibles 163,371 162,658 10-17 years
Excess of cost over
net assets
acquired 209,193 223,202 40 years
- -------------------------------------------------------------------------
489,765 502,726
Less: Accumulated
amortization (204,916) (192,631)
- -------------------------------------------------------------------------
$ 284,849 $ 310,095
=========================================================================
</TABLE>
24
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Notes Payable
The Notes payable consisted of international subsidiaries' working capital
borrowings with local banks totaling $4,562,000 and $8,432,000 at June 30, 1998
and 1997, respectively. The international credit facilities, which aggregate
$17,456,000, are generally secured by the assets of the respective international
subsidiary, with approximately $2,024,000 at one international subsidiary
guaranteed by First Brands Corporation (U.S.). The Company also borrows against
an unsecured domestic line of credit and at June 30, 1998 and 1997, the entire
$15,000,000 available under this facility was unused. The average borrowings
outstanding and average interest rates charged during fiscal 1998 and 1997 were
$14,600,000 at 11.3% and $10,750,000 at 10.2%, respectively.
9. Accrued Liabilities
Accrued liabilities as of June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 5,764 $ 6,494
Employee benefits and wages 9,410 9,295
Marketing and sales programs 44,997 54,384
Raw material purchases 16,220 14,314
Other 16,528 21,597
- --------------------------------------------------------------------------------
$92,919 $106,084
================================================================================
</TABLE>
10. Financial Instruments
The Company has entered into various interest rate swap agreements to transform
a portion of its variable rate debt into fixed rate obligations. According to
the provisions of these agreements, the Company will pay between 5.45% and 7.07%
fixed interest for up to five years and will receive floating rate counter
payments (5.64% at June 30, 1998). A majority of the swap agreements provide for
a five year renewal at the counterparties discretion. The difference between
interest paid and received is included as an adjustment to interest expense. The
notional amount of the contracts is approximately $127,000,000. The fair value
of each swap agreement may generate a gain or loss depending on the estimated
amounts that the Company would pay to terminate the agreement based on the
prevailing and anticipated interest rates at the reporting dates.
To limit the impact of exchange rate fluctuations resulting from
anticipated inventory purchases and intercompany transactions, the Company
periodically enters into foreign currency contracts. Outstanding contracts
totaled approximately $24,775,000 and $40,875,000 as of June 30, 1998 and 1997,
respectively. Contracts outstanding as of June 30, 1998 will mature over the
next ten years.
The Company has entered into various contracts to partially stabilize the
cost, at or below the market average over the last four years, of its
polyethylene resin requirements. Fixed price contracts cover about 37% of the
Company's domestic resin requirements and have various maturities through 2006.
There is also a "collar" contract protecting a range of prices covering an
additional 20% of the Company's domestic resin requirements.
The Company considers the risks associated with its interest, currency and
resin contracts to be relatively low because of the Company's policy to only
enter into agreements with strong credit worthy counterparties. Gains and losses
on the currency impact of cross border transactions and the effect of foreign
currency contracts are recorded in Other income (expense), net in the
Consolidated Statement of Income. During fiscal 1998 a net credit of $1,900,000
was recorded from these transactions and during fiscal 1997 the net loss was
immaterial. Gains and losses on resin and interest contracts are recognized into
earnings when the related transactions being hedged are completed. There were no
significant gains or losses associated with these contracts in fiscal 1998 and
1997.
Other financial instruments include cash and cash equivalents, accounts and
notes receivable, notes payable, accounts payable and long-term debt. Because of
the short-term nature of cash and cash equivalents, accounts and notes
receivable, notes payable and accounts payable, their carrying value
approximates fair value. A portion of the Company's long-term debt consists of
variable rate instruments, therefore the carrying value approximates fair value.
The fair value of the Company's long-term fixed rate debt approximates the
carrying value as of June 30, 1998 and 1997.
25
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Long-term Debt
First Brands had the following long-term debt as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Senior Debt(a):
$300,000,000 Revolving Credit
Facility, 5 year term expiring
February 2002, interest at prime
rate, LIBOR plus .275% or CD rate
plus .4%; facility fee of .15% $190,000 $162,000
$59,354,000 Australian and New Zealand
Credit Facility, 7 year term
expiring March 2004, interest at
local Bill Rate plus .7% 42,745 58,727
$9,575,000 Canadian Credit Facility,
5 year term expiring March 2002,
interest at Canadian prime rate,
LIBOR plus .425% or Canadian
Bankers Acceptance plus .425% 3,424 8,619
Other 5,269 3,932
- --------------------------------------------------------------------------------
241,438 233,278
Less current maturities (3,384) (2,811)
- --------------------------------------------------------------------------------
Senior Debt 238,054 230,467
Subordinated Debt(b):
7 1/4% Senior Notes Due 2007 150,000 150,000
- --------------------------------------------------------------------------------
$388,054 $380,467
================================================================================
</TABLE>
(a) The Company's revolving credit facility is unsecured and requires no
compensating balance, however it does have certain restrictive covenants,
the most significant of which relates to the ratio of debt to equity,
dividend payments and stock repurchases.
The seven-year $59,354,000 Australian and New Zealand credit facility is
composed of two parts; one of which was used to acquire the NationalPak
business (see Note 4) and a second part that can be used for working capital
needs. There are fixed periodic payments associated with the acquisition
borrowing and the working capital borrowing can be drawn on and repaid at
NationalPak's discretion. The facility is secured by the accounts
receivable, inventory and fixed assets of NationalPak.
The five-year $9,575,000 Canadian credit facility requires fixed periodic
payments. The facility is secured by the accounts receivable, inventory and
fixed assets of the Canadian business.
(b) The $150,000,000, 7 1/4% Senior Notes (the "7 1/4% Notes") which were issued
during fiscal 1997 will become due on March 1, 2007. Proceeds from the sale
of the 7 1/4% Notes were used to redeem all of the Company's previously
issued 9 1/8% Senior Subordinated Notes (the "9 1/8% Notes") and to reduce
bank debt. The write-off of unamortized issuance costs and other expenses
associated with the repurchase of the 9 1/8% Notes was recorded as an
extraordinary charge on the Company's Consolidated Statement of Income.
The 7 1/4% Note Indenture contains certain restrictive covenants and
limitations the most significant of which relates to the Company's right to
incur debt and to engage in certain sale and leaseback transactions.
First Brands was in compliance with all the covenants of the senior and
subordinated debt agreements at June 30, 1998.
Principal payments due on long-term debt (including current maturities)
will require the following future payments: $3,384,000 in fiscal 1999,
$4,223,000 in fiscal 2000, $4,834,000 in fiscal 2001, $199,002,000 in fiscal
2002, $6,309,000 in fiscal 2003 and $173,686,000 thereafter.
12. Leases
During fiscal 1998, the Company acquired all remaining domestic production
equipment which had been previously leased. These assets were associated with
sale and leaseback agreements and were classified as operating leases in
accordance with SFAS No. 13 "Accounting for Leases."
The Company leases various warehousing, production and office facilities
under operating lease agreements. Lease terms generally range from one to
fifteen years with options to renew.
Lease commitments under non-cancelable operating leases extending for one
year or more require the following future payments: $5,955,000 in 1999,
$5,200,000 in 2000, $4,680,000 in 2001, $4,185,000 in 2002, $3,950,000 in 2003
and $13,785,000 thereafter. The total rental expense under operating leases was
$10,338,000, $16,035,000 and $20,856,000 for the years ended June 30, 1998, 1997
and 1996, respectively.
13. Capital Stock
First Brands has four stock option plans ("the plans") three of which are for
certain key employees and one for non-employee directors. The plans' objectives
are to establish a direct link between the financial interest of eligible
employees and the performance of the Company and to attract and retain the most
qualified personnel. Stock options are primarily performance-based and have
terms that are not more than ten years from the date of grant. The exercise
price for
26
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
stock options may not be less than the fair market value of the Common Stock on
the date of grant and such options will vest over a period determined by the
Compensation Committee of the Board of Directors. As of June 30, 1998, the total
number of options available for grant are 2,017,652.
Options granted to certain personnel contain restricted and limited stock
appreciation rights ("LSAR's"). LSAR's may be granted in tandem with a stock
option grant or at any time following the stock option grant and are only
exercisable upon a change of control of the Company. LSAR's will exercise
automatically following certain changes in control of the Company, and upon such
exercise the grantee, in cancellation of the underlying stock options, will
receive cash equal to the excess of the fair market value of each share of
Common Stock subject to the limited stock appreciation right over the exercise
price of the underlying stock option. LSAR's have been granted with respect to
1,288,000 shares.
A summary of the options transactions for the years ended June 30, 1998,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding,
beginning of fiscal
year 3,257,472 2,943,822 2,613,380
Options granted--
per share
$22.53-$28.25 20,000 573,000 669,000
Options exercised--
per share
$9.50-$22.52 (159,802) (253,350) (328,558)
Options canceled--
per share
$16.38-$28.25 (26,500) (6,000) (10,000)
- --------------------------------------------------------------------------------
Options outstanding,
end of fiscal year 3,091,170 3,257,472 2,943,822
- --------------------------------------------------------------------------------
Exercisable at June 30 1,934,670 2,028,472 2,287,822
================================================================================
</TABLE>
The following tables set forth information regarding stock options
outstanding and those options which are exercisable as of June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS Weighted Weighted
OUTSTANDING Stock Average Average
Range of Options Exercise Remaining
Exercise Prices Outstanding Price Life
- -----------------------------------------------------------------------------
<C> <C> <C> <C>
$9.50-$12.66 699,170 $11.81 2.7
$14.66-$22.60 1,786,000 $18.03 6.2
$26.00-$28.25 606,000 $25.87 8.8
- -----------------------------------------------------------------------------
3,091,170 $18.16 5.9
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS Weighted
EXERCISABLE Stock Average
Range of Options Exercise
Exercise Prices Exercisable Price
- -------------------------------------------------------------------------------
<S> <C> <C>
$9.50-$12.66 699,170 $11.81
$14.66-$22.60 1,192,500 $15.79
$26.00-$28.25 43,000 $23.84
- -------------------------------------------------------------------------------
1,934,670 $14.53
===============================================================================
</TABLE>
The Company adopted the disclosure-only provision of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for its time vested option plans. If the Company had elected to
adopt the recognition provision of SFAS No. 123, income and per share amounts
would be the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before
extraordinary loss and
accounting change:
As reported $52,330 $50,865 $65,100
Pro forma 51,744 50,265 64,461
Basic earnings per share:
As reported $ 1.32 $ 1.25 $ 1.56
Pro forma 1.31 1.23 1.55
Diluted earnings per share:
As reported $ 1.29 $ 1.22 $ 1.53
Pro forma 1.28 1.20 1.51
================================================================================
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model based on the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.5% 1.3% 1.3%
Risk free interest rate 5.5% 5.3% 5.3%
Expected volatility rate 42.6% 25.8% 21.9%
Expected life 7.7 years 7.6 years 7.3 years
===============================================================================
</TABLE>
14. Income Taxes
The geographic components of earnings before income taxes, extraordinary loss
and cumulative change in accounting principle are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $74,951 $75,790 $100,236
International 9,743 7,608 8,683
- --------------------------------------------------------------------------------
$84,694 $83,398 $108,919
================================================================================
</TABLE>
27
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Total income taxes for the years ended June 30, 1998, 1997 and 1996 were
allocated as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before
extraordinary loss and
cumulative change in
accounting principle $32,364 $32,533 $43,819
Extraordinary loss -- (415) --
Cumulative change in
accounting principle (4,512) -- --
Stockholders' equity, for
compensation expense
for tax purposes in
excess of amounts
recognized for financial
reporting purposes (1,071) (1,212) (1,256)
- --------------------------------------------------------------------------------
$26,781 $30,906 $42,563
================================================================================
</TABLE>
Income tax expense attributable to income before extraordinary loss and
cumulative change in accounting principle for the years ended June 30, 1998,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,765 $20,418 $11,640
State 1,071 3,539 2,566
Foreign 4,806 2,768 3,805
- -------------------------------------------------------------------------------
Total current 12,642 26,725 18,011
- -------------------------------------------------------------------------------
Deferred:
Federal 17,037 4,638 20,916
State 3,355 1,028 5,275
Foreign (670) 142 (383)
- -------------------------------------------------------------------------------
Total deferred 19,722 5,808 25,808
- -------------------------------------------------------------------------------
$32,364 $32,533 $43,819
===============================================================================
</TABLE>
The fiscal 1998 increase in deferred income tax expense and decrease in
current income tax expense relate primarily to information system expenditures,
restructuring charges and changes in various accruals.
Income tax expense attributable to income before extraordinary loss differs
from the amounts computed by applying the U.S. federal tax rate of 35 percent to
pre-tax income before extraordinary loss as a result of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $29,643 $29,189 $38,122
Adjustments resulting
from:
Amortization of
goodwill 788 703 440
State income taxes,
net of federal
income tax benefit 2,877 2,919 4,713
Foreign income tax in
excess of statutory
rate 726 238 478
Other, net (1,670) (516) 66
- --------------------------------------------------------------------------------
Actual tax expense $32,364 $32,533 $43,819
================================================================================
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable reserves $ 2,557 $ 2,969
Difference between book and
tax basis of inventories 3,539 3,882
Accrued liabilities, not
deductible until paid 5,731 9,141
- -------------------------------------------------------------------------------
Total current deferred tax assets 11,827 15,992
- -------------------------------------------------------------------------------
Long-term deferred tax assets:
Pensions, other post employment
benefits and deferred
compensation 9,127 6,423
Intangible asset, not
amortized for tax 7,344 7,374
- -------------------------------------------------------------------------------
Total long-term deferred tax assets 16,471 13,797
- -------------------------------------------------------------------------------
Long-term deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation (82,472) (73,373)
Deferred charges, principally
purchase accounting and
information systems (11,715) (4,110)
Foreign subsidiaries (1,072) (1,662)
- -------------------------------------------------------------------------------
Total long-term deferred
tax liabilities (95,259) (79,145)
- -------------------------------------------------------------------------------
Long-term deferred tax
liability, net (78,788) (65,348)
- -------------------------------------------------------------------------------
Net deferred tax liability $(66,961) $(49,356)
================================================================================
</TABLE>
28
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Management of the Company has determined, based on the Company's history of
operating earnings and its expected income, that operating income will more
likely than not be sufficient to fully utilize these deferred tax assets as they
mature.
The Company has not provided for Federal income taxes on the undistributed
income of its international subsidiaries because it is the Company's intention
to reinvest such undistributed income. Cumulative undistributed earnings for
which no U.S. tax has been provided were $51,403,000, $48,787,000 and
$44,921,000 for the years ended June 30, 1998, 1997 and 1996 respectively.
15. Employee Benefits
Retirement Plans
In the U.S., First Brands maintains a non-contributory defined benefit
retirement plan ("pension plan") for some employees and a defined contribution
pre and post-tax savings plans ("savings plan") for all employees.
The Company contributes to the savings plan account of each eligible
employee. Any regular employee of First Brands or its domestic subsidiaries is
eligible to participate in the amended savings plan. The Company matches 50% of
employee contributions up to the lower of statutory limits or 3% of base pay.
Savings plan expense for the years ended June 30, 1998, 1997 and 1996 totaled
$2,442,000, $2,194,000 and $2,028,000, respectively. The Company also maintains
a noncontributory profit sharing plan, to which it provides a profit sharing
contribution to each eligible employee's account in the savings plan. The
contribution is discretionary and is based on the Company's operating
performance. The Company's profit sharing contributions are in the form of
existing issued and outstanding shares of First Brands Common Stock. The costs
associated with the profit sharing plan were approximately $423,000, $445,000
and $730,000 for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
The pension plan for First Brands in the U.S., and certain of its
international subsidiaries provides defined benefits that are based on years of
credited service, highest average compensation (as defined) and the primary
social security benefit. Beginning January 2000, in the U.S. the pension plan
formula changes to a defined benefit plan based on years of credited service and
career average compensation. Pension plan assets primarily consist of corporate
equities, as well as corporate and government fixed income obligations.
Contributions to the plan are based upon the projected unit credit actuarial
cost funding method and are limited to amounts that are currently deductible for
tax purposes. Prior service costs are amortized on a straight-line basis over
the average remaining service period for active plan participants.
The Company's U.S. early retirement program (see Note 3) resulted in a
special actuarial termination charge of $1,400,000 for fiscal 1997. This charge
was increased by an additional $28,000 during fiscal 1998 to reflect actual
participation in the early retirement program. The Company's Canadian subsidiary
terminated its defined pension plan and transferred all eligible employees to a
new group registered retirement savings plan ("RRSP") which provides essentially
the same benefits as the former plan. As a result of the plan termination, the
Company recognized a $530,000 curtailment gain during fiscal 1997. Costs
associated with the Canadian RRSP were approximately $250,000 for fiscal 1998.
The following table sets forth the combined domestic and international
plans' net pension cost, funded status and amounts recognized in the Company's
Consolidated Financial Statements at June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net pension cost
included the following
components:
Service cost--
benefits earned
during the period $ 3,229 $ 3,275 $ 3,455
Interest cost on
projected benefit
obligations 6,307 6,177 4,984
Actual return on plan
assets (6,724) (6,898) (6,838)
Net amortization and
deferral (797) (816) (81)
Cost of Special
termination benefit 28 1,400 --
Curtailment (gain) -- (530) --
- --------------------------------------------------------------------------------
$ 2,043 $ 2,608 $ 1,520
================================================================================
</TABLE>
29
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funded status:
Vested accumulated benefit
obligation $ 74,250 $ 57,755
Non-vested accumulated benefit
obligation 8,104 6,753
- --------------------------------------------------------------------------------
Accumulated benefit obligation 82,354 64,508
Additional liability based on
projected compensation 14,793 18,251
- --------------------------------------------------------------------------------
Projected benefit obligation 97,147 82,759
Fair value of plan assets 89,489 80,375
- --------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation 7,658 2,384
Unrecognized prior service
benefit 6,940 7,577
Unrecognized net (loss) (3,499) (407)
- --------------------------------------------------------------------------------
Net pension liability recognized in
the consolidated balance sheet 11,099 9,554
================================================================================
</TABLE>
To calculate the expense and liability associated with its pension plans,
the Company utilizes the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC
Discount rate 7.0% 8.0% 8.0%
Compensation
increase rate 4.0% 4.5% 4.5%
Expected long-term
return on plan assets 9.5% 9.5% 9.5%
INTERNATIONAL
Discount rate 5.5% 6.0%-8.5% 8.5%
Compensation
increase rate 4.0% 4.0%-5.0% 5.0%
Expected long-term
return on plan assets 7.0% 7.5%-8.5% 8.5%
- -----------------------------------------------------------------------------
</TABLE>
In the U.S. federal law restricts the amount of benefits that can be paid
from a qualified plan. First Brands maintains an unfunded non-qualified plan,
the effect of which is to award retirement benefits to all employees on a
uniform basis. Expenses associated with this plan were $485,000, $564,000,
$297,000 during 1998, 1997 and 1996, respectively.
Postretirement Benefits
The Company provides certain medical and life insurance benefits for retirees
and their dependents in the United States. Employees who have reached the age of
55, and have met the Company's minimum service requirements, become eligible for
these benefits. The medical and life insurance benefits available are partially
contributory in nature, and it is the Company's practice to fund these benefits
as incurred. Retirees outside the United States are generally covered by locally
sponsored government programs.
Following is an analysis of postretirement benefit costs for fiscal 1998,
1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 274 $ 370 $ 297
Interest cost 1,371 1,129 1,112
Unrecognized net (gain) -- (36) --
Amortization of prior
service cost 92 92 --
Amortization of
transition obligation 583 583 583
- --------------------------------------------------------------------------------
Net postretirement
benefit cost 2,320 2,138 1,992
Cost of special
termination benefit 183 1,600 --
- --------------------------------------------------------------------------------
$ 2,503 $ 3,738 $ 1,992
================================================================================
</TABLE>
During fiscal 1997, the Company announced an early retirement program (see
Note 3) for which it recorded a special actuarial termination charge of
$1,600,000. This charge was increased by an additional $183,000 during fiscal
1998 to reflect actual participation in the early retirement program.
The Company's accumulated postretirement benefit obligation (the transition
obligation) at June 30, 1998 and 1997 is composed of the following components:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 13,551 $ 7,926
Fully eligible active plan
participants 1,033 3,011
Active plan participants not
fully eligible 5,157 5,770
- --------------------------------------------------------------------------------
Total 19,741 16,707
Unrecognized transition obligation (8,798) (9,381)
Unrecognized prior service cost (1,140) (1,232)
Unrecognized gain (loss) (115) 2,202
- --------------------------------------------------------------------------------
Accrued unfunded postretirement
benefit cost $ 9,688 $ 8,296
================================================================================
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7% and 8% for fiscal 1998 and 1997, respectively. The
assumed health care cost trend rate used to measure the accumulated
postretirement benefit obligation was 9.5% in 1998 and is expected to gradually
decline .5% per year to an ultimate rate of 5% in fiscal year 2007. A 1%
increase in the assumed health care cost trend rate for each year would increase
the accumulated
30
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
postretirement benefit obligation as of June 30, 1998 by $670,000 and increase
the service and interest cost for 1998 by $62,000.
16. Commitments, Contingencies and Related Parties
Litigation
The Company is subject to various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of
business. Management believes that the ultimate liability, if any, arising from
these claims and contingencies is not likely to have a material adverse effect
on the Company's annual results of operations or financial condition.
Related Parties
Beginning in January, 1997, Alfred E. Dudley, a Director and former Chairman of
the Company, was retained as a consultant. For these services, he was paid a
yearly consulting fee of $100,000 in fiscal 1998 and 1997.
The Company has utilized the services of Lee Hill Incorporated, a marketing
services company, of which James R. McManus, a Director of First Brands, was the
owner. For fiscal 1998 the total fees paid to Lee Hill Incorporated were
$118,000. During September 1997, Mr. McManus sold his interest in Lee Hill.
The Company believes that each of the related party transactions described
above were on terms as fair to the Company as could have been obtained from
unaffiliated third parties.
Other
The Company is a party to a contract with Union Carbide that provides for the
purchase of a substantial portion of the Company's primary raw material
requirements for plastic wrap and bags through December 31, 1999. The pricing
provisions in the Company's present supply contracts are designed to be
responsive to market conditions of the relevant raw materials.
17. Geographic Segment Data
The following is a summary of net sales, operating profit, and identifiable
assets in the United States and internationally in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
United States $ 972,638 $ 954,411 $ 932,183
International 231,032 165,487 140,839
- -------------------------------------------------------------------------------
$ 1,203,670 $ 1,119,898 $ 1,073,022
===============================================================================
Operating profit:
United States $ 118,663 $ 130,032 $ 135,500
International 23,493 15,355 12,513
Less Corporate
Expense (20,097) (20,189) (19,412)
Restructuring
Expense (2,700) (19,000) --
- --------------------------------------------------------------------------------
$ 119,359 $ 106,198 $ 128,601
================================================================================
Identifiable assets:
United States $ 876,092 $ 835,821 $ 775,447
International 184,109 210,960 85,433
- --------------------------------------------------------------------------------
$ 1,060,201 $ 1,046,781 $ 860,880
================================================================================
</TABLE>
Operating profit reflects net sales less cost of goods sold, selling,
general and administrative expenses, amortization and other depreciation and
restructuring expenses.
Included in U.S. revenues are export sales totaling $36,780,000,
$42,076,000 and $37,055,000 during the years ended June 30, 1998, 1997 and 1996,
respectively. The Company does not believe that it is dependent on any single
customer, however, net sales to its largest customer accounted for approximately
12% of total sales for the years ended June 30, 1998, 1997 and 1996.
18. Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of prior year financial statements is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which expands annual financial statement
disclosures about operating segments and establishes disclosure requirements
concerning a company's products, customers and geographic areas. Selected
information about operating segments is also required for interim financial
reports issued to shareholders. Financial statement disclosures for prior
periods are required to be restated.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the disclosure
requirements previously established by SFAS No. 87, 88 and 106. The new
disclosure requirements are intended to
31
<PAGE>
First Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
standardize the reporting of pensions and other postretirement benefits. While
SFAS No. 132 does not change the measurement or recognition requirements of
those plans, it does require some new information from plan sponsors and allows
for the elimination of other information which is no longer considered useful.
Restatement of disclosure for earlier periods is required, unless such
information is not readily available.
The Company plans to adopt each of the above pronouncements in its fiscal
year beginning July 1, 1998. While the adoption of SFAS No. 130, 131 and 132
will have no impact on First Brands results of operations, cash flows or
financial position, the Company is currently evaluating the appropriate format
of disclosure for each pronouncement.
19. Subsequent Event
On July 2, 1998, the Company entered into an agreement to acquire, for
approximately $53,000,000, the HANDI WIPES and WASH 'N DRI brands from the
Colgate-Palmolive Company. The acquisition, which will be accounted for as a
purchase, is expected to be completed during the first quarter of fiscal 1999
and will be financed through borrowings from the Company's revolving credit
facility.
20. Quarterly Financial Data (Unaudited)
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------
(In thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1997 1997 1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $269,480 $309,282 $296,414 $328,494
Gross profit 86,285 112,288 105,436 123,791
Income before
cumulative
change(a) 12,173 13,307 16,038 10,812
Net income 12,173 6,385 16,038 10,812
Per common
share:
Basic
Income
before
cumulative
change(a) $0.30 $0.33 $0.41 $0.28
Net income $0.30 $0.16 $0.41 $0.28
- --------------------------------------------------------------------------------
Diluted
Income
before
cumulative
change(a) $0.30 $0.33 $0.40 $0.27
Net income $0.30 $0.16 $0.40 $0.27
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997
Quarters Ended
--------------------------------------------------------
(In thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1996 1996 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $255,597 $279,952 $264,886 $319,463
Gross profit 88,189 101,719 96,122 120,182
Income before
extraordinary
loss(a) 18,007 15,351 16,054 1,453
Net income 18,007 15,351 15,421 1,453
Per common
share:
Basic
Income
before
extraordinary
loss(a) $0.44 $0.38 $0.40 $0.04
Net income $0.44 $0.38 $0.38 $0.04
- --------------------------------------------------------------------------------
Diluted
Income
before
extraordinary
loss(a) $0.43 $0.37 $0.39 $0.04
Net income $0.43 $0.37 $0.37 $0.04
================================================================================
</TABLE>
(a) The fourth quarter of fiscal 1997 and the second quarter of fiscal 1998,
include a $19,000 and $2,700 charge for restructuring expenses,
respectively.
32
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>3
<DESCRIPTION>EX99-2 (FB 10Q)
<TEXT>
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
(in thousands - except per share amounts)
Net sales........................................ $ 291,509 $ 269,480
Cost of goods sold............................... 188,859 183,195
Selling, general and
administrative expenses........................ 65,720 53,911
Amortization and other depreciation.............. 4,004 3,860
Interest expense and amortization of debt
discount and expense........................... 7,199 7,114
Discount on sale of receivables.................. 1,487 1,147
Other income (expense), net...................... (670) (288)
--------- ----------
Income before provision for income taxes......... 23,570 19,965
Provision for income taxes....................... 9,250 7,792
--------- -------
Net income....................................... $ 14,320 $ 12,173
======== ========
Basic earnings per common share (Note 6):
Net income.................................... $ 0.37 $ 0.30
======= =======
Based on the following number of shares.......... 39,039 39,942
====== ======
Diluted earnings per common share (Note 6):
Net income....................................... $ 0.36 $ 0.30
======= =======
Based on the following number of shares.......... 39,677 40,775
====== ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-3-
<PAGE>
FIRST BRANDS CORPORATION
------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
(dollars in thousands - except share amounts) 1998 1998
--------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................... $ 19,115 $ 12,029
Accounts and notes receivable - net................. 95,103 130,874
Inventories......................................... 154,106 155,480
Deferred tax assets................................. 12,209 11,827
Prepaid expenses.................................... 4,564 10,170
-------------- -----------
Total current assets.............................. 285,097 320,380
Property, plant and equipment (net of accumulated
depreciation of $169,126 and $160,529)............ 418,199 419,755
Patents, trademarks, proprietary technology
and other intangibles (net of accumulated
amortization of $207,857 and $204,916)............ 332,505 284,849
Deferred charges and other assets (net of
accumulated amortization of $53,166 and $52,687).. 35,404 35,217
------------- ----------
Total assets.............................. $ 1,071,205 $ 1,060,201
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities
Notes payable....................................... $ 4,280 $ 4,562
Current maturities of long-term debt................ 3,184 3,384
Accrued income and other taxes...................... 15,871 8,253
Accounts payable.................................... 40,294 71,692
Accrued liabilities................................. 67,837 92,919
------------- ---------
Total current liabilities...................... 131,466 180,810
Long-term debt...................................... 443,785 388,054
Deferred taxes payable.............................. 79,023 78,788
Other long-term obligations......................... 26,955 26,401
Stockholders' Equity
Preferred stock, $1 par value, 10,000,000
shares authorized; none issued.................... - -
Common stock, $0.01 par value, 120,000,000 shares
authorized and 43,553,846 shares issued at September 30,
1998 and June 30, 1998............................ 435 435
Capital in excess of par value...................... 134,166 134,166
Cumulative foreign currency translation adjustment.. (31,310) (27,556)
Common stock in treasury, at cost; 4,534,000 shares at
September 30, 1998 and 4,407,000 shares at June 30, 1998 (125,872) (123,039)
Retained earnings................................... 412,557 402,142
------------ ----------
Total stockholders' equity..................... 389,976 386,148
------------ ----------
Total liabilities and stockholders' equity $ 1,060,201 $ 1,071,205
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-4-
<PAGE>
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
---------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Capital Foreign
Common in Excess Currency
Stock of Par Translation Treasury Retained
(in thousands) Par Value Value Adjustment Stock Earnings Total
--------- --------- ----------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of
June 30, 1998 ......... $ 435 $ 134,166 $ (27,556) $ (123,039) $ 402,142 $ 386,148
Cash Dividends ......... -- -- -- -- (3,905) (3,905)
Purchase of
Treasury Stock ........ -- -- -- (2,833) -- (2,833)
Net Income ............. -- -- -- -- 14,320 14,320
Foreign Currency
Translation Adjustment -- -- (3,754) -- -- (3,754)
--------- --------- --------- --------- --------- --------- ---------
Balance as of
September 30, 1998 .... $ 435 $ 134,166 $ (31,310) $ (125,872) $ 412,557 $ 389,976
========= ========= ========== =========== ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-5-
<PAGE>
FIRST BRANDS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------- -------------
<S> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income ............................................. $ 14,320 $ 12,173
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 13,214 11,625
Deferred income taxes ................................ 214 2,997
Change in certain non-cash current assets and liabilities:
Decrease in accounts receivable ................... 34,841 32,897
(Increase) in inventories ......................... (39) (12,642)
Decrease in prepaid expenses ...................... 5,558 252
Increase in accrued income and other taxes ........ 7,697 3,557
(Decrease) in accounts payable .................... (31,076) (15,212)
(Decrease) in accrued liabilities ................. (24,686) (32,552)
Other changes .......................................... 546 1,984
-------- --------
Total adjustments .................................. 6,269 (7,094)
-------- --------
Net cash provided by operating activities ................ 20,589 5,079
-------- --------
Cash flows from investing activities:
Capital expenditures .................................. (9,667) (8,234)
Acquisition of leased assets .......................... -- (10,208)
Acquisition of business ............................... (53,000) --
Purchase and installation of information system ....... (1,237) (2,727)
-------- --------
Net cash (used for) investing activities ................. (63,904) (21,169)
-------- --------
Cash flows from financing activities:
Increase in credit facility borrowings, net .......... 57,331 26,345
(Decrease) increase in other borrowings, net ......... (181) 14,522
(Decrease) in securitization of accounts receivable .. --
(15,000)
Proceeds from exercise of stock options .............. -- 787
Purchase of common stock for treasury ................ (2,833) (5,627)
Dividends paid ....................................... (3,916) (3,207)
-------- --------
Net cash provided by financing activities ............... 50,401 17,820
-------- --------
Net increase in cash and cash equivalents ................ 7,086 1,730
Cash and cash equivalents at beginning of period ......... 12,029 7,465
-------- --------
Cash and cash equivalents at end of period ............... $ 19,115 $ 9,195
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
-6-
<PAGE>
FIRST BRANDS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements include all adjustments (all of which were of a normal
recurring nature) necessary to fairly present the results of operations for the
interim periods. All material intercompany transactions and balances have been
eliminated. The results of operations for the three month period ended September
30, 1998 are not necessarily indicative of the results for a full year.
First Brands Corporation ("First Brands" or the "Company") is engaged in the
development, manufacture, marketing and sale of consumer products under branded
and private labels. Principal branded products include: GLAD and GLAD-LOCK
(plastic wrap and bags); GLADWARE (plastic containers); HANDI WIPES and WASH `N
DRI (cleaning cloths); STP (oil and fuel additives and other specialty
automotive products); SCOOP AWAY, EVER CLEAN, EVERFRESH and JONNY CAT (cat
litters) and STARTERLOGG (fire starters) and HEARTHLOGG (fire logs).
INVENTORIES
Inventories were comprised of:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------- --------
(in thousands)
<S> <C> <C>
Raw materials................................... $ 33,261 $ 34,160
Work-in-process................................. 5,416 5,485
Finished goods.................................. 115,429 115,835
--------- ---------
Total....................................... $ 154,106 $ 155,480
========= =========
</TABLE>
2. Long-term Debt
First Brands had long-term debt outstanding as of September 30, 1998 and June
30, 1998 as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
(in thousands)
<S> <C> <C>
$300,000,000 Revolving Credit Facility, 5 year term expiring February 2002,
interest at prime rate, LIBOR plus .275% or CD rate plus .4%; facility
fee of .15% ............................................................. $ 247,000 $ 190,000
$150,000,000 7 1/4% Senior Notes Due 2007 ................................. 150,000 150,000
$54,717,000 Australian and New Zealand Credit
Facility, 7 year term expiring September 2004,
interest at local Bill Rate plus .7% ................................... 38,996 42,745
$9,139,000 Canadian Credit Facility, 5 year term expiring September 2002,
interest at Canadian prime rate, LIBOR plus .425% or Canadian
Bankers Acceptance plus .425% .......................................... 5,493 3,424
Other ..................................................................... 5,480 5,269
--------- ---------
446,969 391,438
Less: current maturities .................................................. (3,184) (3,384)
--------- ---------
Total long-term debt .......................................................... $ 443,785 $ 388,054
========= =========
</TABLE>
-7-
<PAGE>
The Company's revolving credit facility is unsecured, however, it does contain
certain restrictive covenants pertaining to the ratio of debt to equity,
dividend payments and stock repurchases.
The Australian and New Zealand credit facility is composed of two parts; one of
which was used to acquire the NationalPak business and a second part which can
be used for working capital needs. There are fixed periodic payments associated
with the acquisition borrowing. The working capital borrowing can be drawn on
and repaid at NationalPak's discretion. The facility is secured by the accounts
receivable, inventory and fixed assets of NationalPak.
The Canadian credit facility requires fixed periodic payments. The facility is
secured by the accounts receivable, inventory and fixed assets of the Canadian
business.
The 7 1/4% Note Indenture contains certain restrictive covenants and limitations
principally relating to the Company's right to incur debt and to engage in
certain sale and leaseback transactions.
First Brands was in compliance with the covenants of all debt agreements at
September 30, 1998.
3. ACCOUNTS RECEIVABLE
The Company is engaged in a program to sell up to $100,000,000 in fractional
ownership interest in a defined pool of eligible trade accounts receivable. As
of September 30, 1998 the entire $100,000,000 had been sold. The amounts sold
are reflected as a reduction in accounts receivable on the accompanying
Consolidated Condensed Balance Sheets and costs associated with this program are
recorded on the Consolidated Condensed Statements of Income as discount on sale
of receivables.
4. NOTES PAYABLE
Notes payable at September 30, 1998 of $4,280,000 consisted of the Company's
international subsidiaries' working capital borrowings with local lenders. The
Company's international working capital credit facilities aggregate $16,978,000
and are generally secured by the assets of the respective subsidiaries, with
approximately $2,000,000 of the availability at one subsidiary being guaranteed
by First Brands Corporation (U.S.). The Company also borrows against an
unsecured domestic line of credit and at September 30, 1998, the entire
$15,000,000 available under this facility was unused.
5. TAXES
The provision for income tax expense for the three months ended September 30,
1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Current:
Federal...................... $ 6,683 $ 3,200
State........................ 1,454 754
Foreign...................... 899 841
------ ------
Total current............ 9,036 4,795
Deferred:
Federal...................... 87 2,397
State........................ 19 531
Foreign...................... 108 69
------- -------
Total deferred........... 214 2,997
------ -----
Total provision...... $ 9,250 $ 7,792
===== =====
</TABLE>
-8-
<PAGE>
6. EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share ("EPS") represents the earnings available to each
common share outstanding during the reporting period. Diluted EPS reflects the
earnings available to each common share after the effect of dilutive stock
options. For the Company, the numerator is constant for both the basic and
diluted calculation. The denominator used in the diluted EPS calculation was
increased by 638,000 and 833,000 common share equivalents pertaining to stock
options for the three months ended September 30, 1998 and 1997, respectively.
The Company has paid its shareholders quarterly cash dividends of $0.10 and
$0.08 per share for the first quarter of fiscal 1999 and 1998, respectively.
7. ACQUISITION
On August 31, 1998, the Company acquired, for approximately $53,000,000, the
HANDI WIPES and WASH `N DRI business from the Colgate-Palmolive Company. This
business is the leader in sales of reusable cleaning cloths and individually
wrapped pre-moistened towelettes in the U.S. and Puerto Rico. The
acquisition was accounted for as a purchase and was financed through borrowings
from the Company's revolving credit facility.
8. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and displaying comprehensive income and its components. The only
component of comprehensive income which affects the Company is foreign currency
translation adjustments. Since the Company does not provide for U.S. taxes on
undistributed foreign earnings, the impact of foreign currency translation
adjustments is not tax effected. Comprehensive income for the three months ended
September 30, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------
1998 1997
---- ----
(thousands)
<S> <C> <C>
Net income................................. $ 14,320 $ 12,173
Foreign currency translation adjustments... (3,754) (2,699)
------- -------
Comprehensive income....................... $ 10,566 $ 9,474
======== =========
</TABLE>
Accumulated other comprehensive income as of September 30, 1998 and June 30,
1998 consisted solely of foreign currency translation adjustments with debit
balances of $31,310,000 and $27,556,000, respectively.
9. SUBSEQUENT EVENTS
On October 18, 1998, the Company's Board of Directors approved an Agreement and
Plan of Merger, providing for the acquisition of First Brands by The Clorox
Company. In the merger, each outstanding share of First Brands stock will be
converted into a fraction of a Clorox share with a value equal to $39, provided
the average closing price of Clorox stock stays between $80 and $115 in the 10
day period ending 5 days before the date of the merger. If the average closing
price of Clorox stock is higher than $115 during such period, each outstanding
share of First Brands stock will be converted into 0.3391 of a Clorox share. If
the average closing price of Clorox stock is less than $80 during such period,
each share of First Brands stock will be converted into 0.4875 of a Clorox
share. The transaction, which is expected to be completed in the first quarter
of calendar 1999, will be treated as a pooling of interests for accounting
purposes and is structured to be non-taxable to stockholders (except for cash
received in lieu of fractional shares).
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<DESCRIPTION>EX99-3 (KPMG LTR)
<TEXT>
Exhibit 99.3
Independent Auditors' Consent
The Board of Directors
The Clorox Company:
We consent to the inclusion of our audit reports dated
August 6, 1998, relating to the consolidated balance
sheets of First Brands Corporation and subsidiaries as
of June 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows
for each of the years in the three year period ended
June 30, 1998, and the related schedule, which audit
reports appear in the June 30, 1998 annual report on
Form 10-K of First Brands Corporation, in the Quarterly
Report on Form 10-Q of The Clorox Company for the
fiscal quarter ended December 31, 1998.
Also with respect to such Quarterly Report, we acknowledge
our awareness of the use therein of our report dated
October 23, 1998 related to our review of the First Brands
Corporation interim financial information as of and for
the three months ended September 30, 1998.
Pursuant to Rule 436(c) under the Securities Act of
1933, such report is not considered part of a registration
statement prepared or certified by an accountant or a
report prepared or certified by an accountant within
the meaning of sections 7 and 11 of the Act.
/S/ KPMG LLP
New York, New York
February 12, 1999
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>12/31/98 FDS
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1998,
AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 49395
<SECURITIES> 52847
<RECEIVABLES> 366989
<ALLOWANCES> 1521
<INVENTORY> 228742
<CURRENT-ASSETS> 760240
<PP&E> 1165944
<DEPRECIATION> 561919
<TOTAL-ASSETS> 3046425
<CURRENT-LIABILITIES> 999939
<BONDS> 508454
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 110844
<OTHER-SE> 1028349
<TOTAL-LIABILITY-AND-EQUITY> 3046425
<SALES> 1334055
<TOTAL-REVENUES> 1334055
<CGS> 572478
<TOTAL-COSTS> 1072436
<OTHER-EXPENSES> 379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35463
<INCOME-PRETAX> 225777
<INCOME-TAX> 82409
<INCOME-CONTINUING> 143368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143368
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.36
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<DESCRIPTION>12/31/97 FDS (RESTATED)
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997,
AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND AS
RESTATED HEREIN, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 36003
<SECURITIES> 14895
<RECEIVABLES> 346980
<ALLOWANCES> 1521
<INVENTORY> 219711
<CURRENT-ASSETS> 680111
<PP&E> 1071040
<DEPRECIATION> 500229
<TOTAL-ASSETS> 2831744
<CURRENT-LIABILITIES> 800936
<BONDS> 702185
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 110845
<OTHER-SE> 885553
<TOTAL-LIABILITY-AND-EQUITY> 2831744
<SALES> 1241079
<TOTAL-REVENUES> 1241079
<CGS> 537883
<TOTAL-COSTS> 1007636
<OTHER-EXPENSES> (1601)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32019
<INCOME-PRETAX> 203025
<INCOME-TAX> 79179
<INCOME-CONTINUING> 123846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123846
<EPS-PRIMARY> 1.2
<EPS-DILUTED> 1.17
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>7
<DESCRIPTION>12/31/96 FDS (RESTATED)
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF THE CLOROX COMPANY FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1996,
AS PRESENTED IN THE CLOROX COMPANY'S FORM 10-Q FILED FOR THAT PERIOD, AND AS
RESTATED HEREIN, AND IS INCORPORATATED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000021076
<NAME> THE CLOROX COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 80911
<SECURITIES> 0
<RECEIVABLES> 303523
<ALLOWANCES> 1521
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<PP&E> 1017559
<DEPRECIATION> 448373
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<SALES> 1120988
<TOTAL-REVENUES> 1120988
<CGS> 492987
<TOTAL-COSTS> 921934
<OTHER-EXPENSES> (4959)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22242
<INCOME-PRETAX> 181771
<INCOME-TAX> 72346
<INCOME-CONTINUING> 109425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109425
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<EPS-DILUTED> 1.04
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</TEXT>
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|
1999 | 0QTR1
| COMS | https://www.sec.gov/Archives/edgar/data/738076/0000738076-99-000001.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000738076-99-000001.txt : 19990112
<SEC-HEADER>0000738076-99-000001.hdr.sgml : 19990112
ACCESSION NUMBER: 0000738076-99-000001
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981127
FILED AS OF DATE: 19990111
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: 3COM CORP
CENTRAL INDEX KEY: 0000738076
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 942605794
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-12867
FILM NUMBER: 99503962
BUSINESS ADDRESS:
STREET 1: 5400 BAYFRONT PLZ
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8145
BUSINESS PHONE: 4087645000
MAIL ADDRESS:
STREET 1: 5400 BAYFRONT PLAZA
CITY: SANTA CLARA
STATE: CA
ZIP: 95052-8145
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the Quarterly Period Ended November 27, 1998 Commission File No. 0-12867
or
Transition report pursuant to section 13 or 15(d) of
the securities exchange act of 1934
For the transition period from to
____________
3Com Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2605794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Bayfront Plaza 95052
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (408) 326-5000
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ....XX.... No ..........
As of December 25, 1998, 358,764,498 shares of the Registrant's Common Stock
were outstanding.
3Com Corporation
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Three and Six Months Ended November 27, 1998 and
November 30, 1997
Condensed Consolidated Balance Sheets
November 27, 1998 and May 31, 1998
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 27, 1998 and November 30, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
3Com, AccessBuilder, Graffiti, Palm Computing and U.S. Robotics are
registered trademarks of 3Com Corporation or its subsidiaries. Palm III
and x2 are trademarks of 3Com Corporation or its subsidiaries.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3Com Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales $1,540,537 $1,197,189 $2,946,048 $2,794,705
Cost of sales 817,503 645,344 1,593,278 1,476,773
---------- ---------- ---------- ----------
Gross margin 723,034 551,845 1,352,770 1,317,932
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 321,693 338,334 625,271 640,712
Research and
development 157,758 144,978 306,592 287,776
General and
administrative 64,588 71,265 123,994 134,130
Merger-related
charges (credits)
and other 638 (1,229) (9,580) 268,558
---------- ---------- ---------- ----------
Total operating
expenses 544,677 553,348 1,046,277 1,331,176
---------- ---------- ---------- ----------
Operating income
(loss) 178,357 (1,503) 306,493 (13,244)
Interest and other
income, net 12,274 7,637 21,919 10,598
---------- ---------- ---------- ----------
Income (loss) before
income taxes 190,631 6,134 328,412 (2,646)
Income tax provision 57,718 2,113 101,808 44,566
---------- ---------- ---------- ----------
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14)
Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14)
Shares used in computing per share amounts:
Basic 358,302 350,600 358,418 346,159
Diluted 368,207 365,085 367,316 346,159
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par value)
November 27, May 31,
1998 1998
------------ -------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 607,106 $ 528,981
Short-term investments 743,749 547,097
Accounts receivable, net 1,117,449 849,640
Inventories, net 443,488 644,771
Deferred income taxes 368,772 430,182
Other 93,060 134,001
---------- ----------
Total current assets 3,373,624 3,134,672
Property and equipment, net 839,945 858,779
Deposits and other assets 102,812 87,069
---------- ----------
Total assets $4,316,381 $4,080,520
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 383,611 $ 332,992
Accrued liabilities and other 677,218 673,311
Income taxes payable 196,093 177,612
---------- ----------
Total current liabilities 1,256,922 1,183,915
Long-term debt 24,000 35,878
Deferred income taxes and other
long-term obligations 58,365 53,232
Stockholders' equity:
Preferred stock, no par value,
10,000 shares authorized;
none outstanding - -
Common stock, $.01 par value,
990,000 shares authorized;
shares issued: November 27,
1998, 359,129; May 31, 1998,
358,870 1,754,399 1,730,676
Treasury stock at cost: 912
shares at November 27, 1998
and none at May 31, 1998 (31,650) -
Unamortized restricted stock
grants (6,168) (4,157)
Retained earnings 1,260,722 1,079,775
Unrealized gain on investments,
net 1,710 827
Accumulated translation
adjustments (1,919) 374
---------- ----------
Total stockholders' equity 2,977,094 2,807,495
---------- ----------
Total liabilities and
stockholders' equity $4,316,381 $4,080,520
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
---------------------------
November 27, November 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 226,604 $ (47,212)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 131,836 128,201
Deferred income taxes 60,830 (81,971)
Adjustment to conform fiscal year of
pooled entity-U.S. Robotics - 15,052
Merger-related charges (credits)
and other (9,580) 268,558
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable (267,809) 87,679
Inventories 198,770 (173,432)
Other current assets 38,592 (22,010)
Accounts payable 50,619 19,281
Accrued liabilities and other 11,429 145,227
Income taxes payable 37,568 54,572
---------- ----------
Net cash provided by operating
activities 478,859 393,945
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (318,999) (269,631)
Proceeds from short-term investments 120,538 209,603
Purchase of property and equipment (118,201) (211,222)
Proceeds from the sale of property and
equipment 14,746 -
Business acquired in purchase transaction (6,258) -
Other, net (2,402) (25,418)
---------- ----------
Net cash used for investing activities (310,576) (296,668)
---------- ----------
Cash flows from financing activities:
Issuance of common stock 53,147 234,110
Repurchase of common stock (130,398) -
Repayments of short-term debt, notes
payable and capital lease obligations - (168,066)
Repayments of long-term borrowings (12,000) (12,397)
Net proceeds from issuance of debt - 33,300
Other, net (907) 4,287
---------- ----------
Net cash (used for) provided by financing
activities (90,158) 91,234
---------- ----------
Increase in cash and equivalents 78,125 188,511
Cash and equivalents, beginning of period 528,981 351,237
---------- ----------
Cash and equivalents, end of period $ 607,106 $ 539,748
========== ==========
See Notes to Condensed Consolidated Financial Statements.
3Com Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated financial
statements have been prepared by 3Com Corporation (the
Company) and include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. In the
opinion of management, these unaudited condensed
consolidated financial statements include all adjustments
necessary for a fair presentation of the Company's
financial position as of November 27, 1998, and the
results of operations for the three and six months ended
November 27, 1998 and November 30, 1997 and cash flows
for the six months ended November 27, 1998 and November
30, 1997.
On June 1, 1998, the Company adopted a 52-53 week
fiscal year ending on the Friday nearest to May 31, which
for fiscal 1999 will be May 28, 1999. Previously, the
Company operated on a 52-53 week fiscal year ending on
the Sunday nearest to May 31. This change did not have a
significant effect on the Company's condensed
consolidated financial statements for the three and six
months ended November 27, 1998 as compared to the three
and six months ended November 30, 1997. The results of
operations for the three and six months ended November
27, 1998 may not necessarily be indicative of the results
to be expected for the fiscal year ending May 28, 1999.
These condensed consolidated financial statements should
be read in conjunction with the consolidated financial
statements and related notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998.
2. U.S. Robotics Merger-Related Charges (Credits) and Other
On June 12, 1997, the Company completed the merger with
U.S. Robotics Corporation (U.S. Robotics), the leading
supplier of products and systems for accessing
information across the wide area network (WAN), including
modems and remote access products. This merger was
accounted for as a pooling-of-interests. The Company
issued approximately 158 million shares of its common
stock in exchange for all outstanding common stock of
U.S. Robotics. The Company also assumed all options to
purchase U.S. Robotics' stock, which were converted into
options to purchase approximately 31 million shares of
the Company's common stock, pursuant to the terms of the
merger.
In connection with this merger, through November 27,
1998, the Company has recorded aggregate merger-related
charges of $253.8 million, which included approximately
$210.0 million of integration expenses and $43.8 million
of direct transaction costs (consisting primarily of
investment banking and other professional fees).
Integration expenses included:
- - $49.3 million related to the closure and elimination
of owned and leased facilities, primarily duplicate
corporate headquarters, distribution sites and sales
offices;
- - $57.6 million for severance and outplacement costs
related to the merger, including amounts related to
termination benefits associated with employment
agreements. Employee groups impacted by the merger
included personnel involved in duplicate corporate
services, manufacturing and logistics, product
organizations and sales;
- - $38.1 million associated with certain long-term
assets, primarily including duplicate finance,
manufacturing, human resource and other management
information systems, and capitalized purchased research
and development costs related to a discontinued
product; and
- - $65.0 million primarily associated with the
elimination and phase-out of duplicate wide area
networking products (i.e., 3Com's AccessBuilder(registered
trademark) 2000, 4000, 5000 and 8000 products and U.S.
Robotics(registered trademark) TOTALswitch, ATM switch,
LANLinker and related small office, home office products),
and the discontinuance of U.S. Robotics' telephony products.
The charge primarily included inventory write-offs, costs
related to return of discontinued products, and noncancelable
purchase commitments.
During the second quarter of fiscal 1999, the
Company recorded approximately $3.8 million of merger
charges primarily related to an increase in the estimates
for remaining charges associated with duplicate
facilities which were included in merger-related charges
(credits) and other.
The remaining U.S. Robotics merger-related accrual at November 27,
1998 was approximately $25.3 million. Total expected
cash expenditures relating to the U.S. Robotics merger
charge are estimated to be approximately $116 million, of
which approximately $104 million was disbursed prior to
November 27, 1998. Benefits paid to approximately 900
employees terminated through November 27, 1998 were
approximately $57 million. Substantially all benefits
have been paid.
Other charges (credits) includes a $4.2 million net
gain on the sale of land, which had previously been
deferred pending resolution of certain contingencies that
were resolved during the quarter. Also included in other
charges (credits) was a charge of $1.0 million related to
a manufacturing plant in Chicago that was closed in the
fourth quarter of fiscal 1998. The charge reflects a
change in the estimated net realizable value of the
plant, reflecting current market conditions.
3. Business Combinations
During the second quarter of fiscal 1999, the
Company acquired EuPhonics, Inc. (EuPhonics), a leading
developer of DSP-based audio software that drives
integrated circuits, sound cards, consumer electronics,
and other hardware. The transaction, valued at $8.3
million, included cash for the outstanding shares,
assumption of EuPhonics employee stock options, and
direct transaction costs, and was accounted for as a
purchase. The charge for purchased in-process technology
associated with the acquisition was not material, and was
included in research and development expenses in the
second quarter of fiscal 1999.
4. Comprehensive Income
On June 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which requires that an enterprise
report, by major components and as a single total, the
change in net assets during the period from non-owner
sources. The reconciliation of net income (loss) to
comprehensive income (loss) is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
Other comprehensive
gain (loss):
Unrealized gain (loss)
on investments, net (213) (1,868) 883 (1,784)
Accumulated translation
adjustments 5,801 (2,675) (2,293) 794
---------- ---------- ---------- ----------
Total comprehensive
income (loss) $ 138,501 $ (522) $ 225,194 $ (48,202)
========== ========== ========== ==========
5. Net Income (Loss) Per Share
The following table presents the calculation of basic and
diluted earnings per share (in thousands, except per
share data):
Three Months Ended Six Months Ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) $ 132,913 $ 4,021 $ 226,604 $ (47,212)
========== ========== ========== ==========
Weighted average
shares-Basic 358,302 350,600 358,418 346,159
Effect of dilutive
securities:
Employee stock options 9,721 14,246 8,696 -
Restricted stock 184 239 202 -
---------- ---------- ---------- ----------
Weighted average shares-
Diluted 368,207 365,085 367,316 346,159
========== ========== ========== ==========
Net income (loss) per
share-Basic $ 0.37 $ 0.01 $ 0.63 $ (0.14)
Net income (loss) per
share-Diluted $ 0.36 $ 0.01 $ 0.62 $ (0.14)
6. Inventories
Inventories, net consisted of (in thousands):
November 27, May 31,
1998 1998
---- ----
Finished goods $ 291,732 $ 457,726
Work-in-process 53,961 51,510
Raw materials 97,795 135,535
---------- ----------
Total $ 443,488 $ 644,771
========== ==========
7. Litigation
The Company is a party to lawsuits in the normal
course of its business. The Company notes that (i)
litigation in general, and intellectual property and
securities litigation in particular, can be expensive and
disruptive to normal business operations and (ii) the
results of complex legal proceedings can be very
difficult to predict with any certainty. The Company
believes that it has defenses in each of the cases set
forth below and is vigorously contesting each of these
matters. An unfavorable resolution of one or more of the
following lawsuits could have a material adverse affect
on the business, results of operations or financial
condition of the Company.
Securities Litigation
On March 24 and May 5, 1997, putative securities class
action lawsuits, captioned Hirsch v. 3Com Corporation, et
al., Civil Action No. CV764977 (Hirsch), and Kravitz v.
3Com Corporation, et al., Civil Action No. CV765962
(Kravitz), respectively, were filed against the Company
and certain of its officers and directors in the
California Superior Court, Santa Clara County. The
complaints allege violations of Sections 25400 and 25500
of the California Corporations Code and seek unspecified
damages on behalf of a purported class of purchasers of
3Com common stock during the period from September 24,
1996 through February 10, 1997. The actions are in
discovery. No trial date has been set.
On February 10, 1998, a putative securities class action,
captioned Euredjian v. 3Com Corporation, et al., Civil
Action No. C-98-00508CRB (Euredjian), was filed against
3Com and several of its present and former officers and
directors in United States District Court for the
Northern District of California asserting the same class
period and factual allegations as the Hirsch and Kravitz
actions. The complaint alleges violations of the federal
securities laws, specifically Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and seeks
unspecified damages. The Company has filed a motion to
dismiss the complaint.
In December 1997, a putative securities class action,
captioned Reiver v. 3Com Corporation, et al., Civil
Action No. C-97-21083JW (Reiver), was filed in the United
States District Court for the Northern District of
California. Several similar actions have been
consolidated into this action, including Florida State
Board of Administration and Teachers Retirement System of
Louisiana v. 3Com Corporation, et al., Civil Action No.
C-98-1355. On August 17, 1998, plaintiffs filed a
consolidated amended complaint which alleges violations
of the federal securities laws, specifically Sections
10(b) and 20(a) of the Securities and Exchange Act of
1934, and which seeks unspecified damages on behalf of a
purported class of purchasers of 3Com common stock during
the period from April 23, 1997 through November 5, 1997.
The Company has filed a motion to dismiss the complaint.
In October 1998, a putative securities class action
lawsuit, captioned Adler v. 3Com Corporation, et al.,
Civil Action No. CV777368 (Adler), was filed against the
Company and certain of its officers and directors in the
California Superior Court, Santa Clara County, asserting
the same class period and factual allegations as the
Reiver action. The complaint alleges violations of
Sections 25400 and 25500 of the California Corporations
Code and seeks unspecified damages. The Company has not
responded to the complaint.
In January 1998, two purported shareholder complaints
relating to the Company's June 1997 merger with U.S.
Robotics, captioned Stanley Grossman v. 3Com Corporation,
et al., Civil Action No. CV771335, and Jason v. 3Com
Corporation, et al., Civil Action No. CV771713, were
filed in California Superior Court, Santa Clara County.
The actions allege that 3Com, several of its officers and
directors, and several former U.S. Robotics officers
violated Sections 11 and 15 of the Securities Act of 1933
by making alleged misrepresentations and omissions in a
May 8, 1997 registration statement. The complaints seek
damages in an unspecified amount on behalf of a purported
class of persons who received the Company's stock during
the merger pursuant to the registration statement. On
September 25, 1998, the Delaware Chancery Court issued an
injunction preventing plaintiffs from proceeding with
these actions, finding that plaintiffs' claims are barred
by a settlement in a prior action. Plaintiffs have
filed a motion seeking to set aside that settlement.
In February 1998, a shareholder derivative action
purportedly on behalf of the Company, captioned,
Wasserman v. Benhamou, et al., Civil Action No. 16200-NC,
was filed in Delaware Chancery Court. The complaint
alleges that the Company's directors breached their
fiduciary duties to the Company by engaging in alleged
wrongful conduct from mid-1996 through November 1997,
including the conduct complained of in the securities
litigation described above. The Company is named solely
as a nominal defendant, against whom the plaintiff seeks
no recovery. The Company and the individual defendants
have filed a motion to dismiss the complaint.
In October 1998, two shareholder derivative actions
purportedly on behalf of the Company, captioned Shaev v.
Barksdale, et al., Civil Action No. 16721-NC, and Blum v.
Barksdale, et al., Civil Action No. 16733-NC, were filed
in Delaware Chancery Court. The complaints allege that
the Company's directors breached their fiduciary duties
to the Company through the issuance of and disclosures
concerning stock options. The Company is named solely as
a nominal defendant, against whom the plaintiffs seek no
recovery. The Company and the individual defendants have
filed a motion to dismiss.
Intellectual Property Litigation
On April 28, 1997, Xerox Corporation filed suit against
U.S. Robotics Corporation and U.S. Robotics Access Corp.
in the United States District Court for the Western
District of New York. The case is now entitled: Xerox
Corporation v. U.S. Robotics Corporation, U.S. Robotics
Access Corp., Palm Computing, Inc. and 3Com Corporation,
Civil Action No. 97-CV-6182T. The complaint alleges
willful infringement of a United States patent relating
to computerized interpretation of handwriting. The
complaint further prays for unspecified damages and
injunctive relief. Xerox has asserted that Graffiti
(registered trademark) software and certain products of
Palm Computing, Inc. infringe the patent.
Consumer Litigation
A putative consumer class action pending against the
Company and U.S. Robotics in the California Superior
Court, Marin County, Bendall, et al. v. U.S. Robotics
Corporation, et al., Civil Action No. 170441, arising out
of the purchase of x2(trademark) products and products
upgradeable to x2, was coordinated with a previously filed
individual action in the California Superior Court, San
Francisco County, Intervention Inc. v. U.S. Robotics
Corporation, Civil Action No. 984352. Two putative consumer
class action lawsuits pending against the Company and U.S.
Robotics in state court of Illinois arising out of the
same facts as those alleged in the California cases are
stayed, Lippman, et al. v. 3Com, Civil Action
No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics
Access Corporation, et al., Civil Action No. 97 CH 14417.
A class has not been certified, and discovery is under
way.
8. Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement
requires that financial information be reported on the
basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. SFAS
131 will be effective for the Company's fiscal year ended
May 28, 1999 and requires disclosure of historical
information for comparative purposes. Management of the
Company is currently evaluating the effects of this
Statement on its reporting of segment information.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This
Statement requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS 133 will be
effective for the Company's fiscal year 2001. Management
believes that this Statement will not have a significant
impact on the Company.
3Com Corporation
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of total sales represented by the line items
reflected in the Company's condensed consolidated statements
of operations:
Three months ended Six months ended
------------------------- -------------------------
November 27, November 30, November 27, November 30,
1998 1997 1998 1997
---- ---- ---- ----
Sales ..................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales ............. 53.1 53.9 54.1 52.8
---- ---- ---- ----
Gross margin .............. 46.9 46.1 45.9 47.2
Operating expenses:
Sales and marketing ....... 20.9 28.2 21.2 22.9
Research and development .. 10.2 12.1 10.4 10.3
General and administrative 4.2 6.0 4.2 4.8
Merger-related charges
(credits) and other .. - (0.1) (0.3) 9.7
---- ---- ---- ----
Total operating expenses .. 35.3 46.2 35.5 47.7
---- ---- ---- ----
Operating income (loss) ... 11.6 (0.1) 10.4 (0.5)
Interest and other income,
net...................... 0.8 0.6 0.7 0.4
---- ---- ---- ----
Income (loss) before
income taxes............. 12.4 0.5 11.1 (0.1)
Income tax provision ...... 3.8 0.2 3.4 1.6
---- ---- ---- ----
Net income (loss) ......... 8.6 % 0.3 % 7.7 % (1.7)%
==== ==== ==== ====
Excluding merger-related charges
(credits) and other:
Total operating expenses. 35.3 % 46.3 % 35.8 % 38.0 %
Operating income (loss).. 11.6 (0.2) 10.1 9.1
Net income............... 8.7 0.3 7.5 6.2
Sales
- -----
Sales in the second quarter of fiscal 1999 totaled $1.54
billion, an increase of $135.0 million or ten percent from
the first quarter of fiscal 1999, and an increase of $343.3
million or 29 percent from the corresponding quarter a year
ago. Sales in the first six months of fiscal 1999 totaled
$2.9 billion, an increase of $151.3 million or five percent
compared to the first six months of fiscal 1998.
Client Access. Sales of client access products (e.g., modems,
network interface cards (NICs) and a pro-rata allocation of
handheld connected organizer products) in the second quarter
of fiscal 1999 increased ten percent from the first quarter of
fiscal 1999, and increased 33 percent from the same quarter a
year ago. Sales of client access products in the second
quarter of fiscal 1999 and the first quarter of fiscal 1999
represented 52 percent and 51 percent of total sales,
respectively, compared to 50 percent in the second quarter of
fiscal 1998.
Sales of client access products in the first six months of
fiscal 1999 increased two percent from the first six months of
fiscal 1998. Sales of client access products in the first six
months of fiscal 1999 represented 52 percent of total sales
compared to 53 percent in the first six months of fiscal 1998.
Excluding sales of handheld connected organizer products,
sales for client access products declined three percent in the
first six months of fiscal 1999 when compared to the first six
months of fiscal 1998.
Systems. Sales of network systems products (e.g., switches,
routers, hubs, remote access concentrators and a pro-rata
allocation of handheld connected organizer products) in the
second quarter of fiscal 1999 increased nine percent compared
to the first quarter of fiscal 1999 and increased 25 percent
compared to the same quarter a year ago. Sales of network
systems products in the second quarter of fiscal 1999 and
first quarter of fiscal 1999 represented 48 percent and 49
percent of total sales, respectively, compared to 50 percent
in the second quarter of fiscal 1998.
Sales of network systems products in the first six months of
fiscal 1999 increased nine percent from the first six months
of fiscal 1998. Sales of network systems products in the
first six months of fiscal 1999 represented 48 percent of
total sales compared to 47 percent in the first six months of
fiscal 1998. Excluding sales of handheld connected organizer
products, sales of network systems products increased four
percent in the first six months of fiscal 1999 when compared
to the first six months of fiscal 1998.
Geographic. Sales in the U.S. represented 55 percent of total
sales for the second quarter of fiscal 1999. U.S. sales
increased four percent sequentially and increased 22 percent
compared to the same period a year ago. International sales
increased 17 percent sequentially and 38 percent over the same
period a year ago.
Sales in the U.S. represented 56 percent of total sales for
the first six months of fiscal 1999. U.S. sales increased five
percent when compared to the first six months of fiscal 1998.
International sales increased six percent when compared to the
first six months of fiscal 1998.
Sales for the second quarter and the first six months of
fiscal 1999 were affected by the following factors:
Industry Growth Rates. Networking industry growth rates
slowed in calendar year 1998. Industry reports indicate
that the networking industry worldwide grew by less than 20
percent during 1997 and less than 15 percent during 1998.
Global Economic Turmoil. Historically, the Asia Pacific and
Latin America regions have been high growth regions for the
networking industry and the Company. During the first quarter
of fiscal 1999, the Asia Pacific and Latin America regions
experienced a weakening of their local currencies and turmoil
in their financial markets and institutions. In the second
quarter of fiscal 1999, sales in the Latin America and Asia
Pacific regions improved sequentially. However, sales in the
Asia Pacific region decreased 14 percent during the first six
months of fiscal 1999 compared to the first six months of
fiscal 1998.
Pricing and Competition. Price decreases for networking
products in the first half of fiscal 1999 were less than those
experienced in previous periods. However, the industry
remains highly competitive, and therefore the Company believes
that networking prices will be subject to further decreases at
a high rate.
Handheld Connected Organizers, NICs, Modems and Switching
Products. Sales of handheld connected organizer products in
the second quarter and first six months of fiscal 1999 more
than doubled compared to the same periods in the prior year.
In addition, sales of handheld connected organizer products
grew significantly from the first quarter of fiscal 1999. The
Company's workgroup switching and NIC products also
experienced significant unit volume and sales growth in the
second quarter and first six months of fiscal 1999 compared to
the same periods in fiscal 1998, despite declines in average
selling prices, primarily in workgroup switching products.
Sales of modem products for the second quarter of fiscal 1999
increased compared to the second quarter of fiscal 1998 and
the first quarter of fiscal 1999, but decreased for the six
months of fiscal 1999 compared with the same period a year
ago.
Seasonality. Sales in the second quarter of fiscal 1999
increased ten percent compared to the first quarter of fiscal
1999, due primarily to strength in international regions and
consumer products. The Company's sales are typically subject
to seasonal patterns. Historically, sales in the first
quarter, which includes the summer months of June, July and
August, have exhibited little or no growth sequentially, in
part due to slower sales in the European region. The second
quarter of the fiscal year has historically been the strongest
sales quarter due to seasonal strength in international
regions. Third quarter sales have historically had either
sequentially lower sales, or only slightly increased sales
from the prior quarter. These historical patterns are likely
to become more pronounced due to the increasing mix of
consumer-related products, such as handheld connected
organizers and modems, which tend to have strong growth in the
second quarter and decline sequentially in the third quarter.
Gross Margin
- ------------
Gross margin as a percentage of sales was 46.9 percent in the
second quarter of fiscal 1999, compared to 44.8 percent in the
first quarter of fiscal 1999 and 46.1 percent in the second
quarter of fiscal 1998. The gross margin improvement from the
first quarter of fiscal 1999 reflected a relatively stable
pricing environment and continued improvement in the Company's
inventory levels and turns. The gross margin increase from the
same quarter a year ago is primarily due to a significant increase
in unit volume in workgroup switching and NICs with little change
in average selling prices for NICs. Gross margin as a percentage of
sales was 45.9 percent in the first six months of fiscal 1999,
compared to 47.2 percent in the first six months of fiscal
1998.
Operating Expenses
- ------------------
Operating expenses in the second quarter of fiscal 1999 were
$544.7 million, or 35.3 percent of sales, compared to $501.6
million, or 35.7 percent of sales in the first quarter of
fiscal 1999 and $553.3 million, or 46.2 percent of sales in
the second quarter of fiscal 1998. Excluding the net pre-tax
merger-related charges (credits) and other, operating expenses
for the second quarter of fiscal 1999 were $544.0 million, or
35.3 percent of sales, compared to $511.8 million, or 36.4
percent of sales for the first quarter and $554.6 million, or
46.3 percent of sales in the second quarter of fiscal 1998.
Operating expenses for the first six months of fiscal 1999
were $1.0 billion, or 35.5 percent of sales, compared to $1.3
billion, or 47.7 percent in the first six months of fiscal
1998. Excluding the net pre-tax merger-related charges
(credits) and other, operating expenses for the first six
months of fiscal 1999 were $1.1 billion, or 35.8 percent of
sales compared to $1.1 billion, or 38.0 percent of sales for
the first six months of fiscal 1998.
Sales and Marketing. Sales and marketing expenses in the
second quarter of fiscal 1999 increased $18.1 million or six
percent from the first quarter of fiscal 1999 and decreased as
a percentage of sales to 20.9 percent in the second quarter of
fiscal 1999, from 21.6 percent in the first quarter of fiscal
1999. The sequential increase in absolute dollars in sales
and marketing expenses was related, in part, to higher
spending on handheld connected organizer products and customer
service consistent with sales growth, and increased holiday
advertising costs associated with modem products and handheld
connected organizer products. Sales and marketing expenses in
the second quarter of fiscal 1999 decreased $16.6 million or
five percent from the second quarter a year ago and decreased
as a percentage of sales to 20.9 percent in the second quarter
of fiscal 1999, from 28.2 percent in the second quarter of
fiscal 1998. The decrease was primarily a result of a
significant marketing promotion and higher product advertising
on certain modem products that occurred in the second quarter
of fiscal 1998. In addition, the Company reduced its
worldwide sales spending as it worked to combine the 3Com and
U.S. Robotics sales forces. Partially offsetting the
decreased sales and marketing expenses in the second quarter
of fiscal 1999 compared to the second quarter of fiscal 1998
were increases in handheld connected organizer sales and
marketing costs as well as global customer support costs.
Sales and marketing expenses for the first six months of
fiscal 1999 decreased $15.4 million compared to the first six
months of fiscal 1998.
Research and Development. Research and development expenses
in the second quarter of fiscal 1999 increased $8.9 million,
or six percent when compared to the first quarter of fiscal
1999 and decreased to 10.2 percent of sales in the second quarter
of fiscal 1999 from 10.6 percent of sales in the first quarter of
fiscal 1999. Research and development expenses increased $12.8
million or nine percent from the year-ago period, and decreased to
10.2 percent of total sales in the second quarter of fiscal 1999,
compared to 12.1 percent in the second quarter of fiscal 1998. The
decrease as a percentage of sales both sequentially and year-
over-year was a result of research and development spending
growing slower than sales. Research and development expenses
for the first six months of fiscal 1999 increased $18.8
million compared to the first six months of fiscal 1998, but
as a percentage of sales, remained relatively flat.
General and Administrative. General and administrative
expenses in the second quarter of fiscal 1999 increased $5.2
million or nine percent from the first quarter of fiscal 1999
but remained flat as a percentage of sales at 4.2 percent.
General and administrative expenses in the second quarter of
fiscal 1999 decreased $6.7 million or nine percent from the
same period a year ago, and decreased to 4.2 percent of total
sales in the second quarter of fiscal 1999, compared to 6.0
percent in the second quarter of fiscal 1998. The decrease in
dollars and as a percentage of sales in the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998
resulted from lower spending in corporate administration expenses,
reflecting elimination of duplicate infrastructure resulting from
the merger with U.S. Robotics. This decrease was partially offset
by an increase in provisions for bad debt. General and
administrative expenses for the first six months of fiscal
1999 decreased $10.1 million compared to the first six months
of fiscal 1998.
Merger-Related Charges (Credits) and Other. During the second
quarter of fiscal 1999, the Company recorded a charge of
approximately $0.6 million. This charge represented $4.8
million of expenses primarily related to the U.S. Robotics
merger, net of a $4.2 million gain on the sale of land, which
had previously been deferred pending resolution of certain
contingencies that were resolved during the quarter. The $4.8
million charge was primarily due to revisions in the estimated
sales prices for duplicate facilities, reflecting current
market conditions. During the first quarter of fiscal 1999,
the Company reversed approximately $10.2 million of previously
recorded merger charges related to reductions in estimates for
remaining charges associated with duplicate facilities and
employee termination benefits. During the second quarter of
fiscal 1998, merger-related charges associated with the merger
with U.S. Robotics were a net credit of $1.2 million. The net
credit of $1.2 million consisted of a $15.4 million reduction
in previously recorded merger-related costs, primarily due to
a reduction in the estimate of costs associated with duplicate
facilities, which was partially offset by $14.2 million of
product swap-out costs incurred during the quarter.
Interest and Other Income, Net
- ------------------------------
Interest and other income, net in the second quarter of fiscal
1999 increased $2.6 million compared to the first quarter of
fiscal 1999 primarily due to increased interest income as a
result of higher cash and investment balances. Interest and
other income, net in the second quarter of fiscal 1999
increased $4.6 million compared to the second quarter of
fiscal 1998, primarily due to reduced interest expense due to
lower debt balances and increased interest income due to
higher cash and investment balances. Interest and other
income, net increased $11.3 million in the first six months of
fiscal 1999 compared to the first six months of fiscal 1998.
This increase was attributable to reduced interest expense,
increased interest income, and improved foreign currency
results. The majority of the Company's sales are denominated
in U.S. Dollars. Where available, the Company enters into
foreign exchange forward contracts to hedge significant
balance sheet exposures and intercompany balances against
future movements in foreign exchange rates.
Income Tax Provision
- --------------------
The Company's effective income tax rate was 30.3 percent in
the second quarter of fiscal 1999 compared to 32.0 percent in
the first quarter of fiscal 1999 and 34.4 percent in the
second quarter of fiscal 1998. The decrease in the tax rate
from the first quarter of fiscal 1999 was attributable to the
Tax and Trade Relief Extension Act of 1998 which retroactively
extended the research and development tax credit. The
decrease in the tax rate from the second quarter of fiscal
1998 relates to increased offshore manufacturing in countries
with tax rates significantly below the U.S. statutory rate.
The effective tax rate for the first six months of fiscal 1999
was 31.0 percent. The Company recorded a tax provision of
$101.8 million for the first six months of fiscal 1999
compared to $44.6 million for the first six months of fiscal
1998. The provision in the first six months of 1998 reflected
the non-deductibility of certain costs associated with the
U.S. Robotics merger. Excluding these costs, the pro forma
effective income tax rate was 35.0 percent for the first six
months of fiscal 1998.
Net Income (Loss) and Net Income (Loss) Per Share
- -------------------------------------------------
Net income for the second quarter of fiscal 1999 was $132.9
million, or $0.36 per share, compared to net income of $93.7
million, or $0.26 per share for the first quarter of fiscal
1999 and net income of $4.0 million, or $0.01 per share, for
the second quarter of fiscal 1998. Excluding the net pre-tax
merger-related charges (credits) and other, net income was
$133.4 million, or $0.36 per share for the second quarter of
fiscal 1999 compared to $86.7 million, or $0.24 per share for
the first quarter of fiscal 1999 and $3.2 million, or $0.01
per share for the second quarter of fiscal 1998.
Net income for the first six months of fiscal 1999 was $226.6
million, or $0.62 per share compared to a net loss of $47.2
million, or ($0.14) per share for the first six months of
fiscal 1998. Excluding the net pre-tax merger-related charges
(credits) and other, net income was $220.1 million, or $0.60
per share for the first six months of fiscal 1999 compared to
$172.8 million, or $0.48 per share for the first six months of
fiscal 1998.
Business Environment and Industry Trends
The forward-looking statements of 3Com Corporation, including
those in this report on Form 10-Q, are subject to risks and
uncertainties. Some of the factors that could cause future
results to materially differ from the Company's recent results
or those projected in the forward-looking statements include,
but are not limited to, the factors set forth below.
Industry Growth Rates. The Company's success is dependent, in
part, on the overall growth rate of the networking industry.
In 1997 and 1998, industry growth was below historical rates.
Industry reports indicate that the networking industry
worldwide grew by less than 20 percent during calendar year
1997 and less than 15 percent during calendar year 1998.
There can be no assurance that the networking industry will
continue to grow or that it will achieve higher growth rates.
The Company's business, operating results or financial
condition may be adversely affected by any further decrease in
industry growth rates. In addition, there can be no assurance
that the Company's results in any particular period will fall
within the ranges for growth forecast by market researchers.
Industry Consolidation and Strategic Relationships. The
networking industry continues to be in a period of significant
consolidation. For example, during calendar year 1998, the
Company acquired Lanworks Technologies, Inc. and EuPhonics,
Inc.; Lucent Technologies acquired nine companies; Cisco
Systems acquired nine companies; and Northern Telecom acquired
four companies, including Bay Networks. The Company expects
that networking industry consolidation will continue,
including combinations between traditional telecommunications
suppliers and networking companies. Future business
combinations may result in companies with strong competitive
positions and products. Continued consolidation may have a
material adverse effect on the Company's operating results or
financial condition.
In addition to mergers and acquisitions, companies are
continually entering into strategic relationships. For
example, in the second quarter of fiscal 1999, the Company
announced strategic relationships with IBM, Hewlett-Packard
and Toshiba America. In December, the Company announced plans
to form a joint venture with Siemens AG and expanded its
relationship with Dell Computer. If the Company experiences
difficulties managing relationships with its partners or if
the partners' projects are unsuccessful, there could be an
adverse impact on the Company's results of operations or
financial condition.
Competition and Pricing. The Company participates in a highly
volatile industry characterized by vigorous competition for
market share, rapid product and technology development,
uncertainty over adoption of industry standards and declining
prices. The Company's competition comes from start-up
companies, well-capitalized computer systems and
communications companies, and other technology companies.
Many of the Company's current and potential competitors have
greater financial, marketing and technical resources than the
Company. In addition, with the highly competitive nature of
the Company's industry, new products are routinely introduced
by competitors. For example, in recent months several
competitors have emerged in the handheld connected organizer
market space with products based upon the Microsoft Windows CE
platform. The Company's business may be adversely impacted by
the development by competitors of products and technologies
that render certain of the Company's products obsolete or
noncompetitive. In particular, growth rates in the handheld
connected organizer market may not be sustainable in the face
of increasing competition.
There can be no assurance that intense competition in the
industry and particular actions of the Company's competitors
will not have an adverse effect on the Company's business,
operating results or financial condition. In particular, the
Company expects that prices on many of its products will
continue to decrease in the future and that the pace and
magnitude of such price decreases may have an adverse impact
on the results of operations or financial condition of the
Company.
Product Integration and Bundling. Certain OEMs in the PC
industry have, from time to time, chosen to integrate NICs and
modem functions on the PC motherboard. For example, the
Company currently sells networking chipsets to Dell Computer
that are integrated directly onto the PC motherboard of
Dell's high-end Optiplex line of PCs. In addition, the
Company has become a primary supplier of networking products
for Hewlett-Packard's full family of PCs. Should the shift to
product integration and bundling increase, the Company's
ability to become and/or continue to be a supplier of the
integrated components could impact future sales growth and
profitability.
Electronic Commerce and Electronic Data Interchange (EDI).
Many vendors, distributors and resellers have been successful
in the direct sale of products to customers who wish to order
products on the Internet or through EDI. These trends have
enabled manufacturers to increase business volume and lower
their cost structures. There can be no assurance that the
Company will successfully implement or continue to expand such
systems in a timely manner, and a failure to do so could
adversely affect results of operations or financial condition.
In addition, as the industry and 3Com move to do more business
over the Internet, it may become more difficult to sell product
through the distributor channel, which could impact the Company's
sales levels.
International Markets. The Company operates internationally
and expects that international markets will continue to
account for a significant percentage of the Company's sales.
Many international markets are characterized by economic and
political instability and currency fluctuations that can
adversely affect the Company's operating results or financial
condition.
For example, during the first six months of fiscal 1999, the
Company experienced lower sales in the Asia Pacific region
compared to the first six months of fiscal 1998, due in large
part to economic and political instability and currency
fluctuations. The instability in the Asian financial markets
negatively impacted the Company's sales in those markets by,
among other things, decreasing end-user purchases, increasing
competition from local competitors, and reducing access to
sources of capital needed by customers to make purchases. In
addition to reducing sales, difficulties in the Asia Pacific
region subject the Company's resellers to financial hardships,
which may increase the Company's credit risk as customers
become insolvent or otherwise have their ability to meet
obligations impaired. There can be no assurance that other
regions will not experience similar economic or political
instability which would have an adverse effect on the
Company's operating results or financial condition. Significant
fluctuations in foreign currency could have an adverse impact
on the Company's sales, collection of accounts receivable, and/or
foreign currency exchange exposures.
Euro-Currency. The Single European Currency (Euro) was
introduced on January 1, 1999 with complete transition to this
new currency required by January 2002. The Company has made
and expects to continue to make changes to its internal
systems in order to accommodate doing business in the Euro.
The Company expects that introduction and use of the Euro will
affect the Company's foreign exchange and hedging activities,
and may result in increased fluctuations in foreign currency
hedging results. Any delays in the Company's ability to be
Euro-compliant could have an adverse impact on the Company's
results of operations or financial condition.
Telecommunication Deregulation and Public Policy. Significant
changes in U.S. telecommunication regulations are anticipated
in the near future, which could impact the rate of expansion
of service providers' network infrastructures. Future changes
by regulatory agencies or application of new requirements
could affect sales of the Company's products for certain
classes of customers. Additionally, the Company's products
must comply with various Federal Communication Commission and
local telecommunications requirements and regulations.
Changes in regulations, or failure by the Company to obtain
timely approval of products could have a material adverse
effect on the Company's results of operations or financial
condition.
Certain of the Company's products are subject to export
controls, import controls and/or use restrictions under the
laws of the United States and other countries. For example,
because of U.S. Government controls on the exportation of
encryption products and technology, the Company is unable to
freely export some of its products with the most powerful
encryption technology. The continuing evolution of export and
import laws and regulations could negatively impact the
Company's sales and also increase the Company's cost of
selling its products. In addition, there are currently few
laws or regulations that apply directly to access or commerce
on the Internet. Changes in laws or regulations governing the
Internet and Internet commerce could have a material adverse
impact on the Company's operating results or financial
condition.
Accounting For Business Combinations. Recent actions and
comments from the Securities and Exchange Commission have
indicated they are reviewing the current valuation methodology
for determining the amount of the accounting charge for
purchased in-process technology acquired in a business
combination. There can be no assurance that the Commission
will not seek to retroactively apply new guidance and change
the amount of purchased in-process technology previously
expensed by the Company. This could result in the restatement
of previously filed financial statements of the Company and
could have a material impact on future financial results.
Company-Specific Trends and Risks
Financial Model. In managing its business, the Company
periodically establishes a long-term financial model based on
observed and anticipated trends in technology and the
marketplace. The model, which includes ranges for gross
margin, operating expenses and operating income, is not
intended to be a prediction of future financial results,
rather, it is used to assist the Company's management in
making decisions about the allocation of resources and
investments. During the second quarter of fiscal 1999, the
Company revised the model. As reflected below, the ranges for
gross margin and operating expenses as a percentage of sales
were increased and narrowed while the range for operating
income as a percentage of sales was decreased and narrowed.
Both the new and old models are as follows:
New model Old model
--------- ---------
Gross margin 46.5 - 48.0% 45.5 - 47.5%
Operating expenses 30.0 - 31.5% 27.5 - 29.5%
Operating income 15.0 - 18.0% 16.0 - 20.0%
The change in gross margin reflects a stronger new product
cycle as well as improvements in supply chain management. The
change in operating expenses reflects incremental investments
that the Company intends to make in research and development
and sales and marketing in certain emerging segments, such as
LAN telephony, Voice over IP, handheld connected organizers,
storage area networking, home networking, wireless
connectivity, and broadband access. The Company currently is
not operating within some ranges of the model and does not
expect to achieve performance within all of the ranges in
fiscal 1999. It will be difficult for the Company to make
further progress toward these ranges in the third quarter of
fiscal 1999, as the third quarter of the fiscal year has
historically had either sequentially lower sales, or only
slightly increased sales from the prior quarter.
Fluctuations in Quarterly Results. The Company's operating
results for any particular quarter are difficult to predict
and may be subject to significant fluctuations. These
fluctuations can be caused by a wide variety of factors,
including seasonality with respect to the volume and timing of
orders (see Seasonality in Results of Operations), the
introduction and acceptance of new products and technologies,
price competition, general conditions and trends in the
networking industry and technology sector, disruption in
international markets, general economic conditions, and
extraordinary events such as industry consolidation,
acquisitions, or litigation. In addition, as the portion of
the Company's consumer-related business grows, for example
with products such as the Palm III(trademark) handheld connected
organizer, this seasonality will likely become more
pronounced. These factors, and accompanying fluctuations in
periodic operating results, could have a significant adverse
impact on the market price of the Company's common stock.
Ability to Satisfy Product Orders. The timing and amount of
the Company's sales are dependent on a number of factors that
make estimating operating results prior to the end of any
period uncertain. For example, the Company does not typically
maintain a significant backlog and, as a result, product sales
in any quarter are dependent on orders booked and shipped in
that quarter. In addition, the Company's customers
historically request fulfillment of orders in a short period
of time, resulting in limited visibility to sales trends. As
a result, the Company's operating results depend on the volume
and timing of orders and the Company's ability to fulfill the
orders in a timely manner. The Company's results of
operations or financial condition would be adversely affected
if incoming order rates decline, if ordered products are not
readily available, or if the Company is not able to
immediately fill orders.
Shipment Linearity. In the last two quarters, the Company
recorded approximately half of its sales in the last five
weeks of the fiscal quarter. This subjects the Company to
risks such as unexpected disruptions in functions including
manufacturing, order management, information systems and
shipping. Should the percentage of sales in the last five
weeks of a quarter escalate further, or should a significant
disruption in the Company's internal business functions occur,
there could be an adverse affect on the Company's results of
operations or financial condition.
Development and Introduction of New Products. The Company is
actively engaged in the research and development of new
technologies and products. The Company's success depends, in
substantial part, on the identification of new market and
product opportunities and the timely development and market
acceptance of new products. This includes the Company's next
generation products under development in the areas of LAN
telephony, Voice over IP, handheld connected organizers,
storage area networking, home networking, wireless
connectivity, and broadband access. The Company's operating
results or financial condition may be adversely affected by a
change in one or more of the technologies affecting network
communications, a change in market demand for products based
on a particular technology, a failure to develop new products
on a successful and timely basis, delays in manufacturing and
shipment of new products, or technical problems with new
products or critical components.
The Company's success also depends, in part, on the timely
adoption of industry standards, resolution of conflicting U.S.
and international standards requirements created by the
convergence of technology such as voice onto data networks,
the timely introduction of new standards-compliant products,
and market acceptance of these products. Slow market
acceptance of new technologies and industry standards could
have an adverse impact on the Company's results of operations
or financial condition.
Product Warranties and International Homologation. The
Company's products are often covered by legal and contractual
warranties, and the Company may be subject to contractual
and/or legal commitments to perform under such warranties. In
addition, as the Company's products are sold and marketed in
many countries, the Company's products are required to
function in many different telecommunications environments and
in connection with various telecommunications systems and
products. If circumstances arise such that certain of the
Company's products fail to perform as intended and the Company
is not successful in timely resolution of such product quality
or performance issues, such failure could have a material
adverse impact on the operating results or financial condition
of the Company. Likewise, failure to meet commitments related
to installation of enterprise networks may subject the Company
to claims for business disruption or consequential damages if
a network cutover is not successfully or timely completed.
Reliance on Distributors, Resellers and OEMs. The Company
sells a significant portion of its products to distributors,
resellers and OEMs. The Company's reliance on these channels
subjects the Company to many risks, including inventory,
credit and business concentration.
The Company's distributors and resellers maintain significant
levels of the Company's products in their inventories. The
Company attempts to ensure that appropriate levels of products
are available to end users by working closely with
distributors and resellers to manage inventory levels. There
can be no assurance that the Company will be successful in
efforts to manage the inventory levels of its distributors and
resellers or that the Company will be able to successfully
operate its business within its desired channel inventory
business model. Any failure by the Company to do so could
adversely affect the Company's operating results or financial
condition.
The distribution and reseller channels utilized by the Company
have undergone a significant level of consolidation. As a
result, the Company has an increased concentration of credit
risk. While the Company monitors and attempts to manage this
risk, financial difficulties on the part of one or more of the
Company's distributors or resellers may have a material
adverse effect on the Company's results of operations or
financial condition.
The Company derives a significant portion of its sales from
OEMs, including PC companies that bundle 3Com NICs and modems,
and incorporate 3Com chipsets into their products. As a
result, the Company's future operating results are dependent,
in part, on the Company's ability to establish, maintain and
strengthen relationships with OEMs. Because sales to OEMs are
typically at lower prices and result in lower margins to the
Company, the Company's sales and gross margins may be
adversely impacted if OEMs become a larger percentage of the
business.
Reliance on Suppliers. Some key components of the Company's
products are currently available only from single or limited
sources. Likewise, certain services on which the Company
relies are furnished from single or limited service providers.
In addition, certain of the Company's suppliers are
competitors of the Company. While the Company has generally
been able to obtain adequate supplies of components from
existing sources, there can be no assurance that in the future
the Company's suppliers will be able to meet the Company's
demand for components in a timely and cost-effective manner.
The Company's business, operating results, financial condition
or customer relationships could be adversely affected by
either an increase in prices for, or an interruption or
reduction in supply of, key components, or a similar
disruption in the availability of key services.
Commercial Commitments. The Company sometimes enters into
minimum or other non-cancelable purchase commitments. Should
sales volumes fluctuate significantly, the obligation to meet
purchase commitments could adversely affect the Company's
results of operations or financial condition.
Intellectual Property Rights. Many of the Company's
competitors, in particular, the large, well established
telecommunications and computer equipment manufacturers, have
large intellectual property portfolios, including patents
which may cover technologies that are relevant to the
Company's business. In addition, many smaller companies,
universities and individual inventors are actively engaged in
research and development and have obtained or applied for
patents in areas of technology that may relate to the
Company's business. The industry is trending toward
aggressive assertion, licensing and litigation of patents and
other intellectual property rights.
In the course of its business, the Company frequently receives
assertions of infringement and invitations to take licenses or
otherwise becomes aware of potentially relevant patents or
other intellectual property rights held by third parties. For
example, in recent periods, the Company has received a
significant increase in assertions of infringement and
invitations to take licenses. The Company evaluates the
validity and applicability of any such intellectual property
rights and the merits of any such third party claims, and
determines in each case whether it must negotiate licenses or
cross-licenses to incorporate or use the subject proprietary
technologies, protocols or specifications in the Company's
products. Any failure by the Company to obtain and maintain
licenses, on favorable terms, for intellectual property rights
required for the manufacture, sale and use of its products,
particularly those which must comply with industry standard
protocols and specifications to be commercially viable, could
have a material adverse effect on the Company's business,
results of operations or financial condition.
In connection with the enforcement of its own intellectual
property rights or in connection with disputes relating to the
validity or alleged infringement of third party rights, the
Company may be subject to complex, protracted litigation.
Intellectual property litigation is typically very costly and
can be highly disruptive to business operations by diverting
the attention and energies of management and key technical
personnel. Further, plaintiffs in intellectual property cases
often seek injunctive relief and the measures of damages in
intellectual property litigation are complex and often
subjective or uncertain. Thus, the existence of or any
adverse determinations in such litigation could subject the
Company to significant liabilities and costs, require the
Company to seek licenses from others, prevent the Company from
manufacturing or selling its products, or cause severe
disruptions to the Company's operations or the markets in
which it competes, any one of which could have a material
adverse effect on the results of operations or financial
condition of the Company.
Information Systems. The Company is in the process of
transitioning its manufacturing, distribution, order
administration, and finance functions to the Company's primary
transaction processing application systems. As a result of
such transitions, the Company may experience system
disruptions, which may have an adverse effect on the results
of operations or financial condition. In particular, during
the fourth quarter of fiscal 1999, the Company plans to
convert a large number of U.S. and international locations to
the Company's primary transaction processing systems.
In addition, the Company is dependent on its information
systems and software to capture, process and store data.
Should the Company experience technical difficulties with any
of its critical information systems or software applications,
there could be an adverse effect on the Company's results of
operations or financial condition.
Key Personnel and Recruiting. The success of the Company will
depend to a significant extent upon a number of key employees
and management. The loss of the services of key employees
could have a material adverse effect on the Company's
business, operating results or financial condition. Recruiting
and retaining skilled personnel, including engineers, is
highly competitive. If the Company cannot successfully
recruit and retain skilled personnel, the Company's financial
results may be adversely affected. In addition, the Company
must carefully manage the growth in employees commensurate
with anticipated growth in the Company. Should the Company's
revenue growth or attrition levels vary significantly, there
could be an adverse effect on results of operations or
financial condition.
Year 2000 Readiness Disclosure
As is true for most companies, the Year 2000 issue creates a
risk for 3Com. If systems do not correctly recognize date
information when the year changes to 2000, there could be an
adverse impact on the Company's operations. The Year 2000
issue not only impacts the Company at the end of the calendar
year 1999, but also, in certain instances, the Company's
fiscal year 2000, which begins on May 29, 1999. The risk for
3Com exists primarily in the following areas: systems used by
the Company to run its business including information systems,
equipment and facilities; systems used by the Company's
suppliers; potential warranty or other claims from 3Com
customers; and the potential for reduced spending by other
companies on networking solutions as a result of significant
information systems spending on Year 2000 remediation. The
Company is continuing to evaluate and mitigate its exposure in
these areas where appropriate.
State of Readiness and Risks. The Company has identified four
key exposure areas within the Company with respect to the Year
2000 issue, namely: key transaction processing applications,
equipment and facilities, 3Com products, and key suppliers.
Key transaction processing applications
- ---------------------------------------
Key transaction processing applications include those used to
run the Company's business, such as finance, manufacturing,
order processing and distribution. The Company has completed
its evaluation of most of these applications for Year 2000
compliance, and has begun remediation or replacement of
systems, where necessary. The Company expects to achieve
fiscal year 2000 readiness by the end of May 1999, and to
achieve calendar year 2000 readiness by the end of September
1999. In the event that implementation of replacement systems
is delayed, or if significant new non-compliance issues are
identified, the Company's ability to conduct its business or
record transactions could be disrupted, which could adversely
affect results of operations or financial condition.
Equipment and facilities
- ------------------------
The Company is in the process of evaluating Year 2000 compliance
of its equipment and facilities. Critical equipment, such as
manufacturing equipment, has been identified, and the Company is
currently in the process of contacting the suppliers to ascertain
Year 2000 compliance. The Company expects to achieve Year 2000
readiness for critical equipment by the end of September 1999.
In the event that identification of non-compliant equipment
and any upgrade or replacement of equipment is delayed, the
Company's design, production and shipping capabilities could
be disrupted, which could adversely affect the Company's
results of operations or financial condition.
The Company is assessing the Year 2000 readiness of its owned
and leased facilities worldwide. Priority is being placed on
the 3Com owned facilities and other critical facilities that
house large numbers of employees or significant operations.
The Company expects to complete its assessment activities by
March 1999 and expects to complete remediation efforts by
September 1999. The function of these facilities is critical
to operations, and as such, any delays in achieving Year 2000
compliance with respect to these facilities could adversely
affect the Company's results of operations or financial
condition.
Products
- --------
The Company has conducted extensive evaluation of its currently
available and installed base of products. The Company believes
that its current products are largely Year 2000 compliant. There
can be no assurance that certain previous releases of the Company's
products will prove to be Year 2000 compliant with customers' systems
or within existing networks. To assist customers in evaluating
Year 2000 readiness of 3Com's products, the Company has developed a
list that indicates the capability of its products. The list is
located on the Company's website (www.3Com.com) and is
periodically updated as assessment of additional products is
completed. Certain of the Company's disclosures and
announcements concerning its products and Year 2000 programs,
including those in this report on Form 10-Q, are intended to
constitute "Year 2000 Readiness Disclosures" as defined in the
recently enacted Year 2000 Information and Readiness
Disclosure Act. The inability of any of the Company's
products to operate properly in the year 2000 could result in
increased warranty costs, customer satisfaction issues,
litigation or other material costs and liabilities, which
could adversely affect the Company's results of operations or
financial condition.
Key suppliers
- -------------
The Company is currently in the process of contacting its critical
suppliers of products and services to determine that the suppliers'
operations and the products and services they provide are Year 2000
compliant. Follow-up efforts are underway to obtain feedback from
these suppliers. The Company believes that critical non-compliant
suppliers will be identified by the end of January 1999, and plans
to work with such suppliers for assessment, remediation and
testing of Year 2000 compliance. As needed, the Company will
identify alternative sources of supply. The Company expects
to complete confirmation of supplier Year 2000 readiness by
the end of September 1999. If key suppliers fail to
adequately address the Year 2000 issue for the products or
services they provide to the Company, critical materials,
products and services may not be delivered in a timely manner,
which could adversely affect the Company's results of
operations or financial condition.
Contingency Plans. As the Company is still assessing its Year
2000 compliance in all areas, contingency plans have not yet
been determined. As the assessments are completed,
contingency plans will be developed as needed. For example,
contingency plans for production facilities could include
shifting production and distribution to other Company
facilities or engaging subcontractors.
Costs to Address Year 2000 Issues. Based on the Company's
current assessments, it is expected that the total cost of
these programs will range between $25 million and $35 million.
Approximately $2 million has been spent on the programs to
date. All expected costs are based on the Company's current
evaluation of the Year 2000 programs and are subject to change
as the programs progress. It is anticipated that the majority
of the Year 2000 costs incurred will include consultant fees
and internal hardware and software upgrades or replacements.
The Company does not separately track the internal labor costs
associated with the Year 2000 project unless it is an
individual's primary focus. These costs, including employee
efforts involved in assessing the Company's Year 2000
exposures, testing, and remediating non-compliant Year 2000
systems, communicating with customers, and various other
employee-related tasks, have not been included in the total
estimated costs. Any costs associated with potential Year
2000 litigation exposure are not estimable and are not
included in the total cost estimate above.
The majority of the Company's Year 2000 costs relate to the
Company's key transaction processing applications and
products. The Company has adequate funds to pay for the
expected costs of Year 2000 programs. As of the end of the
second quarter of fiscal 1999, no significant internal
information technology projects have been deferred due to the
Company's Year 2000 efforts.
Future Sales Impact. Year 2000 compliance is an issue for
virtually all businesses whose computer systems and
applications may require significant hardware and software
upgrades or modifications. Companies owning and operating
such systems may plan to devote a substantial portion of their
information systems' spending to fund such upgrades and
modifications and divert spending away from networking
solutions. Such changes in customers' spending patterns could
have a material adverse impact on the Company's sales,
operating results or financial condition.
Liquidity and Capital Resources
Cash and equivalents and short-term investments at November
27, 1998 were $1.4 billion, an increase of $274.8 million from
May 31, 1998.
For the six months ended November 27, 1998, net cash generated
from operating activities was $478.9 million. Accounts
receivable at November 27, 1998 increased $267.8 million from
May 31, 1998 to $1.1 billion. Days sales outstanding in
receivables increased to 65 days at November 27, 1998,
compared to 56 days at May 31, 1998 primarily due to a higher
concentration of sales in the third month of the quarter ended
November 27, 1998, compared to the third month of the quarter
ended May 31, 1998. Inventory levels at November 27, 1998
decreased $201.3 million, of which $166.0 million was finished
goods, from the prior fiscal year-end to $443.5 million.
Average inventory turnover was 6.9 turns for the quarter ended
November 27, 1998, compared to 4.4 turns for the quarter ended
May 31, 1998, primarily as a result of the decrease in
inventory balances.
During the six months ended November 27, 1998, the Company
made $118.2 million in capital expenditures. Major capital
expenditures included upgrades and expansion of the Company's
facilities in the U.S. and purchases and upgrades of desktop
systems and other equipment. Additionally, in the first six
months of fiscal 1999, the Company sold two facilities and
equipment in the Chicago area for total net proceeds of $14.7
million. As of November 27, 1998, the Company had
approximately $34.2 million in capital expenditure commitments
outstanding, primarily associated with the consolidation of
facilities in the Chicago area. In addition, the Company has
commitments related to operating lease arrangements in the
U.S., under which the Company has an option to purchase the
properties for an aggregate of $322.2 million, or arrange for
the sale of the properties to a third party. If the
properties are sold to a third party at less than the option
price, the Company retains an obligation for the difference,
subject to certain provisions of the lease.
In June 1998, the Company's Board of Directors authorized the
repurchase of up to 10 million shares of the Company's common
stock. Such purchases are made in the open market from time
to time. During the first six months of fiscal 1999, the
Company repurchased 4.3 million shares of common stock at a
total cost of $130.4 million. During the first six months of
fiscal 1999, the Company received net cash of $53.1 million
from the sale of shares of its common stock to employees
through its employee stock purchase and option plans.
The Company has a $100 million revolving bank credit
agreement, which expires December 20, 1999. Payment of cash
dividends are permitted under the credit agreement, subject to
certain limitations based on net income levels of the Company.
The Company has not paid and does not anticipate it will pay
cash dividends on its common stock. The credit agreement
requires the Company to maintain specified financial
covenants. As of November 27, 1998, there were no outstanding
borrowings under the credit agreement, and the Company was in
compliance with all required covenants.
During the first six months of fiscal 1999, the Company repaid
$12.0 million of borrowings under the 7.52% Unsecured Senior
Notes agreement. As of November 27, 1998, $36.0 million of
this debt remained outstanding, of which $12.0 million is
classified as current, and is included in accrued liabilities
and other.
The remaining U.S. Robotics merger-related accrual at November
27, 1998 was approximately $25.3 million. Total expected cash
expenditures relating to the U.S. Robotics merger charge are
estimated to be approximately $116 million, of which
approximately $104 million was disbursed prior to November 27,
1998. Benefits paid to approximately 900 employees terminated
through November 27, 1998 were approximately $57 million.
Substantially all benefits have been paid.
During the first six months of fiscal 1999, the Company
recorded a tax benefit on stock option transactions of $19.1
million. During the same period a year ago, the Company
recorded a tax benefit on stock option transactions totaling
$131.4 million.
Based on current plans and business conditions, the Company
believes that its existing cash and equivalents, short-term
investments, cash generated from operations and the available
credit agreement will be sufficient to satisfy anticipated
cash requirements for at least the next twelve months.
Effects of Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." This
Statement requires that financial information be reported on
the basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. SFAS 131
will be effective for the Company's fiscal year ended May 28,
1999 and requires disclosure of historical information for
comparative purposes. Management of the Company is currently
evaluating the effects of this Statement on its reporting of
segment information.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This
Statement requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the Company's
fiscal year 2001. Management believes that this Statement will
not have a significant impact on the Company.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Reference is made to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits in the normal course of its
business. The Company notes that (i) litigation in general,
and intellectual property and securities litigation in
particular, can be expensive and disruptive to normal business
operations and (ii) the results of complex legal proceedings
can be very difficult to predict with any certainty. The
Company believes that it has defenses in each of the cases set
forth below and is vigorously contesting each of these
matters. An unfavorable resolution of one or more of the
following lawsuits could have a material adverse affect on the
business, results of operations or financial condition of the
Company.
Securities Litigation
On March 24 and May 5, 1997, putative securities class action
lawsuits, captioned Hirsch v. 3Com Corporation, et al., Civil
Action No. CV764977 (Hirsch), and Kravitz v. 3Com Corporation,
et al., Civil Action No. CV765962 (Kravitz), respectively,
were filed against the Company and certain of its officers and
directors in the California Superior Court, Santa Clara
County. The complaints allege violations of Sections 25400
and 25500 of the California Corporations Code and seek
unspecified damages on behalf of a purported class of
purchasers of 3Com common stock during the period from
September 24, 1996 through February 10, 1997. The actions are
in discovery. No trial date has been set.
On February 10, 1998, a putative securities class action,
captioned Euredjian v. 3Com Corporation, et al., Civil Action
No. C-98-00508CRB (Euredjian), was filed against 3Com and
several of its present and former officers and directors in
United States District Court for the Northern District of
California asserting the same class period and factual
allegations as the Hirsch and Kravitz actions. The complaint
alleges violations of the federal securities laws,
specifically Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and seeks unspecified damages. The
Company has filed a motion to dismiss the complaint.
In December 1997, a putative securities class action,
captioned Reiver v. 3Com Corporation, et al., Civil Action No.
C-97-21083JW (Reiver), was filed in the United States District
Court for the Northern District of California. Several
similar actions have been consolidated into this action,
including Florida State Board of Administration and Teachers
Retirement System of Louisiana v. 3Com Corporation, et al.,
Civil Action No. C-98-1355. On August 17, 1998, plaintiffs
filed a consolidated amended complaint which alleges
violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934, and which seeks unspecified damages on behalf of a
purported class of purchasers of 3Com common stock during the
period from April 23, 1997 through November 5, 1997. The
Company has filed a motion to dismiss the complaint.
In October 1998, a putative securities class action lawsuit,
captioned Adler v. 3Com Corporation, et al., Civil Action No.
CV777368 (Adler), was filed against the Company and certain of
its officers and directors in the California Superior Court,
Santa Clara County, asserting the same class period and
factual allegations as the Reiver action. The complaint
alleges violations of Sections 25400 and 25500 of the
California Corporations Code and seeks unspecified damages.
The Company has not responded to the complaint.
In January 1998, two purported shareholder complaints relating
to the Company's June 1997 merger with U.S. Robotics,
captioned Stanley Grossman v. 3Com Corporation, et al., Civil
Action No. CV771335, and Jason v. 3Com Corporation, et al.,
Civil Action No. CV771713, were filed in California Superior
Court, Santa Clara County. The actions allege that 3Com,
several of its officers and directors, and several former U.S.
Robotics officers violated Sections 11 and 15 of the
Securities Act of 1933 by making alleged misrepresentations
and omissions in a May 8, 1997 registration statement. The
complaints seek damages in an unspecified amount on behalf of
a purported class of persons who received the Company's stock
during the merger pursuant to the registration statement. On
September 25, 1998, the Delaware Chancery Court issued an
injunction preventing plaintiffs from proceeding with these
actions, finding that plaintiffs' claims are barred by a
settlement in a prior action. Plaintiffs have filed a motion
seeking to set aside that settlement.
In February 1998, a shareholder derivative action purportedly
on behalf of the Company, captioned, Wasserman v. Benhamou, et
al., Civil Action No. 16200-NC, was filed in Delaware Chancery
Court. The complaint alleges that the Company's directors
breached their fiduciary duties to the Company by engaging in
alleged wrongful conduct from mid-1996 through November 1997,
including the conduct complained of in the securities
litigation described above. The Company is named solely as a
nominal defendant, against whom the plaintiff seeks no
recovery. The Company and the individual defendants have
filed a motion to dismiss the complaint.
In October 1998, two shareholder derivative actions
purportedly on behalf of the Company, captioned Shaev v.
Barksdale, et al., Civil Action No. 16721-NC, and Blum v.
Barksdale, et al., Civil Action No. 16733-NC, were filed in
Delaware Chancery Court. The complaints allege that the
Company's directors breached their fiduciary duties to the
Company through the issuance of and disclosures concerning
stock options. The Company is named solely as a nominal
defendant, against whom the plaintiffs seek no recovery. The
Company and the individual defendants have filed a motion to
dismiss.
Intellectual Property Litigation
On April 28, 1997, Xerox Corporation filed suit against U.S.
Robotics Corporation and U.S. Robotics Access Corp. in the
United States District Court for the Western District of New
York. The case is now entitled: Xerox Corporation v. U.S.
Robotics Corporation, U.S. Robotics Access Corp., Palm
Computing, Inc. and 3Com Corporation, Civil Action No. 97-CV-
6182T. The complaint alleges willful infringement of a United
States patent relating to computerized interpretation of
handwriting. The complaint further prays for unspecified
damages and injunctive relief. Xerox has asserted that
Graffiti (registered trademark) software and certain products
of Palm Computing, Inc. infringe the patent.
Consumer Litigation
A putative consumer class action pending against the Company
and U.S. Robotics in the California Superior Court, Marin
County, Bendall, et al. v. U.S. Robotics Corporation, et al.,
Civil Action No. 170441, arising out of the purchase of x2
(trademark) products and products upgradeable to x2, was
coordinated with a previously filed individual action in the
California Superior Court, San Francisco County, Intervention
Inc. v. U.S. Robotics Corporation, Civil Action No. 984352. Two
putative consumer class action lawsuits pending against the
Company and U.S. Robotics in state court of Illinois arising
out of the same facts as those alleged in the California cases
are stayed, Lippman, et al. v. 3Com, Civil Action
No. 97 CH 09773, and Michaels, et al. v. U.S. Robotics Access
Corporation, et al., Civil Action No. 97 CH 14417. A class
has not been certified, and discovery is under way.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on
September 24, 1998.
(b) Each of the persons named in the Proxy Statement
as a nominee for director was elected and the proposals listed below
were approved. The following are the voting results of the proposals:
Broker
Proposal I For Withheld Non-Votes
---------- --- -------- ---------
Election of Directors:
James L. Barksdale 316,114,579 3,924,859 0
Eric A. Benhamou 315,810,612 4,228,826 0
Gordon A. Campbell 316,148,193 3,891,245 0
James E. Cowie 316,344,683 3,694,755 0
Phillip C. Kantz 316,339,152 3,700,286 0
Broker
Proposal II For Against Abstain Non-Votes
----------- --- ------- ------- ---------
To approve an increase
in the share reserve
under the Company's 1984
Employee Stock Purchase
Plan by 2,000,000 shares
of Common Stock. 308,490,622 10,283,030 1,265,786 0
Broker
Proposal III For Against Abstain Non-Votes
------------ --- ------- ------- ---------
To approve an increase
in the share reserve
under the Company's
Director Stock Option
Plan by 1,000,000 shares
of Common Stock. 252,327,456 66,254,691 1,457,291 0
Broker
Proposal IV For Against Abstain Non-Votes
----------- --- ------- ------- ---------
To ratify the appointment
of Deloitte & Touche LLP
as the Company's independent
public accountants for the
fiscal year ending May 28, 1999.
317,855,653 1,473,968 709,817 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation (13)
3.2 Certificate of Correction Filed to Correct a Certain
Error in the Certificate of Incorporation (13)
3.3 Certificate of Merger (13)
3.4 Bylaws of 3Com Corporation, As Amended
4.1 Amended and Restated Rights Agreement dated
December 31, 1994 (Exhibit 10.27 to Form 10-Q) (6)
4.2 Amended and Restated Senior Notes Agreement between
U.S. Robotics Corporation, Metropolitan Life Insurance Company, The
Northwestern Mutual Life Insurance Company, and Metropolitan Property
and Casualty Insurance Company (7)
10.1 1983 Stock Option Plan, as amended (Exhibit 10.1 to
Form 10-K) (3)*
10.2 Amended and Restated Incentive Stock Option Plan (2)*
10.3 License Agreement dated March 19, 1981 (1)
10.4 Second Amended and Restated 1984 Employee Stock Purchase
Plan (Exhibit 10.5 to Form 10-Q) (8)*
10.5 3Com Corporation Director Stock Option Plan, as amended
(Exhibit 19.3 to Form 10-Q) (4)*
10.6 Amended 3Com Corporation Director Stock Option Plan
(Exhibit 10.8 to Form 10-Q) (8)*
10.7 3Com Corporation Restricted Stock Plan, as amended
(Exhibit 10.17 to Form 10-Q) (8)*
10.8 1994 Stock Option Plan (Exhibit 10.22 to Form 10-K) (5)*
10.9 Lease Agreement between BNP Leasing Corporation, as
Landlord, and 3Com Corporation, as Tenant, effective as of November 20, 1996
(Exhibit 10.37 to Form 10-Q) (10)
10.10 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of November 20, 1996 (Exhibit 10.38 to Form 10-Q)
(10)
10.11 Agreement and Plan of Reorganization among 3Com Corporation,
OnStream Acquisition Corporation and OnStream Networks, Inc. dated as of
October 5, 1996 (Exhibit 2.1 to Form S-4) (9)
10.12 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of February 3, 1997 for the
Combined Great America Headquarters site (Exhibit 10.19 to Form 10-Q) (12)
10.13 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of February 3, 1997 for the Combined Great America
Headquarters site (Exhibit 10.20 to Form 10-Q) (12)
10.14 Credit Agreement dated as of December 20, 1996 among 3Com
Corporation, Bank of America National Trust and Savings Association, as
Agent, and the Other Financial Institutions Party Hereto Arranged by BA
Securities, Inc. (Exhibit 10.21 to Form 10-Q) (12)
10.15 Amended and Restated Agreement and Plan of Merger by and
among 3Com Corporation, TR Acquisitions Corporation, 3Com (Delaware)
Corporation, and U.S. Robotics Corporation, dated as of February 26, 1997
and amended as of March 14, 1997 (11)
10.16 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of July 25, 1997 for the Great
America Phase III (PAL) site (13)
10.17 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 25, 1997 for the Great America Phase III
(PAL) site (13)
10.18 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of July 29, 1997 for the
Marlborough site(13)
10.19 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of July 29, 1997 for the Marlborough site (13)
10.20 Lease Agreement between BNP Leasing Corporation, as Landlord,
and 3Com Corporation, as Tenant, effective as of August 11, 1997 for the
Rolling Meadowssite (13)
10.21 Purchase Agreement between BNP Leasing Corporation and 3Com
Corporation, effective as of August 11, 1997 for the Rolling Meadows site
(13)
10.22 First Amendment to Credit Agreement (13)
- -----------------------------------------------------------------------------
* Indicates a management contract or compensatory plan.
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 filed on January 25, 1984 (File No. 2-89045)
(2) Incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement on Form S-4 filed on August 31, 1987 (File No. 33-
16850)
(3) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-K filed
on August 27, 1991 (File No. 0-12867)
(4) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
January 10, 1992 (File No. 0-12867)
(5) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-K filed
on August 31, 1994 (File No. 0-12867)
(6) Incorporated by reference to the Exhibit
identified in parentheses previously filed as an Exhibit to Registrant's
Form 10-Q filed on January 13, 1995 (File No. 0-12867)
(7) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q,
filed on May 16, 1995 (File No. 0-19550)
(8) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on January 15, 1996 (File No. 0-12867)
(9) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4, originally filed on October 11, 1996 (File No. 333-
13993)
(10) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q filed
on January 13, 1997 (File No. 0-12867)
(11) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4, filed on March 17, 1997 (File No. 333-23465)
(12) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on April 11, 1997 (File No. 0-12867)
(13) Incorporated by reference to the Exhibit identified in
parentheses previously filed as an Exhibit to Registrant's Form 10-Q, filed
on October 14, 1997 (File No. 0-12867)
(b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3Com Corporation
(Registrant)
Dated: January 8, 1999 By: /s/ Christopher B. Paisley
----------------- --------------------------
Christopher B. Paisley
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-1
<SEQUENCE>2
<TEXT>
[ARTICLE] 5
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] MAY-28-1999
[PERIOD-END] NOV-27-1998
[CASH] 607,106
[SECURITIES] 743,749
[RECEIVABLES] 1,117,449
[ALLOWANCES] (85,232)
[INVENTORY] 443,488
[CURRENT-ASSETS] 3,373,624
[PP&E] 1,570,096
[DEPRECIATION] (730,151)
[TOTAL-ASSETS] 4,316,381
[CURRENT-LIABILITIES] 1,256,922
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,754,399
[OTHER-SE] 1,222,695
[TOTAL-LIABILITY-AND-EQUITY] 4,316,381
[SALES] 2,946,048
[TOTAL-REVENUES] 2,946,048
[CGS] 1,593,278
[TOTAL-COSTS] 2,218,549
[OTHER-EXPENSES] 373,533
[LOSS-PROVISION] 23,763
[INTEREST-EXPENSE] 1,791
[INCOME-PRETAX] 328,412
[INCOME-TAX] 101,808
[INCOME-CONTINUING] 226,604
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 226,604
[EPS-PRIMARY] 0.63
[EPS-DILUTED] 0.62
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2
<SEQUENCE>3
<TEXT>
BYLAWS
OF
3COM CORPORATION
TABLE OF CONTENTS
- -----------------
ARTICLE I STOCKHOLDERS
Section 1.1 Annual Meeting
Section 1.2 Special Meetings
Section 1.3 Notice of Meetings
Section 1.4 Quorum
Section 1.5 Organization
Section 1.6 Conduct of Business
Section 1.7 Notice of Stockholder Business
Section 1.8 Proxies and Voting
Section 1.9 Stock List
Section 1.10 Stockholder Action by Written Consent
ARTICLE II BOARD OF DIRECTORS
Section 2.1 Number and Term of Office
Section 2.2 Vacancies and Newly Created Directorships
Section 2.3 Removal
Section 2.4 Regular Meetings
Section 2.5 Special Meetings
Section 2.6 Quorum
Section 2.7 Participation in Meetings by Conference
Telephone
Section 2.8 Conduct of Business
Section 2.9 Powers
Section 2.10 Action Without Meeting
Section 2.11 Compensation of Directors
Section 2.12 Nomination of Director Candidates
ARTICLE III COMMITTEES
Section 3.1 Committees of the Board of Directors
Section 3.2 Conduct of Business
ARTICLE IV OFFICERS
Section 4.1 Generally
Section 4.2 Chairman of the Board
Section 4.3 Chief Executive Officer
Section 4.4 President
Section 4.5 Chief Operating Officer
Section 4.6 Vice President
Section 4.7 Chief Financial Officer
Section 4.8 Secretary
Section 4.9 Delegation of Authority
Section 4.10 Removal
Section 4.11 Action With Respect to Securities of
Other Corporations
ARTICLE V STOCK
Section 5.1 Certificates of Stock
Section 5.2 Transfers of Stock
Section 5.3 Record Date
Section 5.4 Lost, Stolen or Destroyed Certificates
Section 5.5 Regulations
ARTICLE VI NOTICES
Section 6.1 Notices
Section 6.2 Waivers
ARTICLE VII MISCELLANEOUS
Section 7.1 Facsimile Signatures
Section 7.2 Corporate Seal
Section 7.3 Reliance Upon Books, Reports and Records
Section 7.4 Fiscal Year
Section 7.5 Time Periods
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification
Section 8.2 Right of Claimant to Bring Suit
Section 8.3 Indemnification of Employees and Agents
Section 8.4 Non-Exclusivity of Rights
Section 8.5 Indemnification Contracts
Section 8.6 Insurance
Section 8.7 Effect of Amendment
Section 8.8 Savings Clause
ARTICLE IX AMENDMENTS
BYLAWS
OF
3Com CORPORATION
ARTICLE I
STOCKHOLDERS
Section 1.1. Annual Meeting.
An annual meeting of the stockholders of 3Com Corporation (the
"Corporation"), for the election of directors and for the
transaction of such other business as may properly come before
the meeting, shall be held at such place, on such date, and at
such time as the Board of Directors shall each year fix, which
date shall be within thirteen months after the organization of
the Corporation or after its last annual meeting of
stockholders.
Section 1.2. Special Meetings.
Special meetings of the stockholders, for any purpose or
purposes prescribed in the notice of the meeting, may be
called by (a) the Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such
resolution is presented to the Board for adoption), (b) the
Chairman of the Board, (c) the President or (d) the holders of
shares entitled to cast not less than twenty percent (20%) of
the votes at the meeting, and shall be held at such place, on
such date, and at such time as they shall fix. Business
transacted at special meetings shall be confined to the
purpose or purposes stated in the notice.
Section 1.3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of
the stockholders shall be given, not less than ten (10) nor
more than sixty (60) days before the date on which the meeting
is to be held, to each stockholder entitled to vote at such
meeting, except as otherwise provided herein or required by
law (meaning, here and hereinafter, as required from time to
time by the Delaware General Corporation Law or the
Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time,
written notice need not be given of the adjourned meeting if
the place, date and time thereof are announced at the meeting
at which the adjournment is taken; provided, however, that if
the date of any adjourned meeting is more than thirty (30)
days after the date for which the meeting was originally
noticed, or if a new record date is fixed for the adjourned
meeting, written notice of the place, date, and time of the
adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which
might have been transacted at the original meeting.
Section 1.4. Quorum.
At any meeting of the stockholders, the holders of a majority
of all of the shares of the stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a
quorum for all purposes, unless or except to the extent that
the presence of a larger number may be required by law or by
the Certificate of Incorporation.
If a quorum shall fail to attend any meeting, the chairman of
the meeting or the holders of a majority of the shares of
stock entitled to vote who are present, in person or by proxy,
may adjourn the meeting to another place, date, or time.
If a notice of any adjourned special meeting of stockholders
is sent to all stockholders entitled to vote thereat, stating
that it will be held with those present constituting a quorum,
then except as otherwise required by law, those present at
such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at
such meeting.
Section 1.5. Organization.
Such person as the Board of Directors may have designated or,
in the absence of such a person, the President of the
Corporation or, in his absence, such person as may be chosen
by the holders of a majority of the shares entitled to vote
who are present, in person or by proxy, shall call to order
any meeting of the stockholders and act as chairman of the
meeting. The secretary of the meeting shall be such person as
the chairman appoints.
Section 1.6. Conduct of Business.
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the
conduct of discussion as seem to him in order.
Section 1.7. Notice of Stockholder Business.
At an annual or special meeting of the stockholders, only such
business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) properly brought
before the meeting by or at the direction of the Board of
Directors, or (c) properly brought before an annual meeting by
a stockholder and if, and only if, the notice of a special
meeting provides for business to be brought before the meeting
by stockholders, properly brought before the special meeting
by a stockholder. For business to be properly brought before
a meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal offices
of the Corporation no later than (i) in the case of an annual
meeting, ninety (90) days before the anticipated date of the
next annual meeting, under the assumption that the next annual
meeting will occur on the same calendar day as the day of the
most recent annual meeting, and (ii) in the case of a special
meeting, ten (10) days prior to date of such meeting. A
stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the
annual or special meeting (1) a brief description of the
business desired to be brought before the annual or special
meeting and the reasons for conducting such business at the
annual or special meeting, (2) the name and address, as they
appear on the Corporation's books, of the stockholder
proposing such business, (3) the class and number of shares of
the Corporation which are beneficially owned by the
stockholder, and (4) any material interest of the stockholder
in such business. Notwithstanding anything in the Bylaws to
the contrary, no business shall be conducted at an annual or
special meeting except in accordance with the procedures set
forth in this Section 1.7. The chairman of an annual or
special meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of
this Section 1.7, and if he should so determine, he shall so
declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Section 1.8. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled
to vote may vote in person or by proxy authorized by an
instrument in writing filed in accordance with the procedure
established for the meeting.
Each stockholder shall have one vote for every share of stock
entitled to vote which is registered in his name on the record
date for the meeting, except as otherwise provided herein or
required by law.
All voting, including on the election of directors, and except
where otherwise required by law, may be by a voice vote;
provided, however, that upon demand therefor by a stockholder
entitled to vote or by his proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and
such other information as may be required under the procedure
established for the meeting. Every vote taken by ballots
shall be counted by an inspector or inspectors appointed by
the chairman of the meeting.
All elections shall be determined by a plurality of the votes
cast, and except as otherwise required by law or the
Certificate of Incorporation or the Bylaws of this
Corporation, all other matters shall be determined by a
majority of the votes cast.
Section 1.9. Stock List.
A complete list of stockholders entitled to vote at any
meeting of stockholders, arranged in alphabetical order for
each class of stock and showing the address of each such
stockholder and the number of shares registered in his name,
shall be open to the examination of any such stockholder, for
any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the
meeting is to be held.
The stock list shall also be kept at the place of the meeting
during the whole time thereof and shall be open to the
examination of any such stockholder who is present. This list
shall presumptively determine the identity of the stockholders
entitled to vote at the meeting and the number of shares held
by each of them.
Section 1.10. Stockholder Action by Written Consent.
An action which may be taken at any annual or special meeting
of stockholders may be taken without a meeting and without
prior notice, if a consent in writing, setting forth the
actions so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were
present and voted. All such consents shall be filed with the
Secretary of the Corporation and shall be maintained in the
corporate records. Prompt notice of the taking of a corporate
action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not
consented in writing.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. Number and Term of Office.
The authorized number of directors shall initially be one (1)
and thereafter shall be fixed from time to time exclusively by
the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. The
Board of Directors shall be comprised of ten (10) Directors.
The number of Directors provided in this Section 2.1 may be
changed by a Bylaw duly adopted by the affirmative vote of a
majority of the outstanding shares entitled to vote.
Section 2.2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting
from death, resignation, retirement, disqualification, or
other cause (other than removal from office by a vote of the
stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at
the next annual meeting of stockholders. No decrease in the
number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 2.3. Removal.
Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director, or the entire
Board of Directors, may be removed from office at any time,
with or without cause, but only by the affirmative vote of the
holders of at least a majority of the voting power of the then
outstanding shares of stock of the Corporation entitled to
vote generally in the election of directors, voting together
as a single class. Vacancies in the Board of Directors
resulting form such removal may be filled by (i) a majority of
the directors then in office, though less than a quorum, or
(ii) the stockholders at a special meeting of the stockholders
properly called for that purpose, by the vote of the holders
of a plurality of the shares entitled to vote at such special
meeting. Directors so chosen shall hold office until the next
annual meeting of stockholders.
Section 2.4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at
such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of
Directors and publicized among all directors. A notice of
each regular meeting shall not be required.
Section 2.5. Special Meetings.
Special meetings of the Board of Directors may be called by a
majority of the directors then in office (rounded up to the
nearest whole number), by the Chairman of the Board or by the
President and shall be held at such place, on such date, and
at such time as they or he shall fix. Notice of the place,
date, and time of each such special meeting shall be given to
each director who does not waive the right to a notice by (i)
mailing written notice not less than five (5) days before the
meeting, (ii) sending notice one (1) day before the meeting by
an overnight courier service and two (2) days before the
meeting if by overseas courier service, or (iii) by
telephoning, telecopying, telegraphing or personally
delivering the same not less than twenty-four (24) hours
before the meeting. Unless otherwise indicated in the notice
thereof, any and all business may be transacted at a special
meeting.
Section 2.6. Quorum.
At any meeting of the Board of Directors, a majority of the
total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or
waiver thereof.
Section 2.7. Participation in Meetings by Conference Telephone.
Members of the Board of Directors, or of any committee of the
Board of Directors, may participate in a meeting of such Board
or committee by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other and such
participation shall constitute presence in person at such
meeting.
Section 2.8. Conduct of Business.
At any meeting of the Board of Directors, business shall be
transacted in such order and manner as the Board may from time
to time determine, and all matters shall be determined by the
vote of a majority of the directors present, except as
otherwise provided herein or required by law.
Section 2.9. Powers.
The Board of Directors may, except as otherwise required by
law, exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, including,
without limiting the generality of the foregoing, the
unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every
kind, negotiable or non-negotiable, secured or unsecured, and
to do all things necessary in connection therewith;
(4) To remove any officer of the Corporation with or without
cause, and from time to time to pass on the powers and duties
of any officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power
to appoint, remove and suspend subordinate officers, employees
and agents;
(6) To adopt from time to time such stock option, stock
purchase, bonus or other compensation plans for directors,
officers, employees and agents of the Corporation and its
subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement,
and other benefit plans for directors, officers, employees and
agents of the Corporation and its subsidiaries as it may
determine; and
(8) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's
business and affairs.
Section 2.10. Action Without Meeting.
Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting, if all
members of the Board shall individually or collectively
consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of
the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
Section 2.11. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the
Board of Directors, fixed fees and other compensation for
their services as directors, including, without limitation,
their services as members of committees of the Board of
Directors.
Section 2.12. Nomination of Director Candidates.
Subject to any limitations stated in the Certificate of
Incorporation of this Corporation, nominations for the
election of directors may be made by the Board of Directors or
a proxy committee appointed by the Board of Directors or by
any stockholder entitled to vote in the election of directors.
ARTICLE III
COMMITTEES
Section 3.1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the whole
Board, may from time to time designate one or more committees
of the Board, with such lawfully delegable powers and duties
as it thereby confers, to serve at the pleasure of the Board
and shall, for those committees and any others provided for
herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified
member at any meeting of the committee. Any committee so
designated may exercise the power and authority of the Board
of Directors to declare a dividend, to authorize the issuance
of stock or to adopt a certificate of ownership and merger if
the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of
any committee and any alternate member in his place, the
member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or they
constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member.
Section 3.2. Conduct of Business.
Each committee may determine the procedural rules for meeting
and conducting its business and shall act in accordance
therewith, except as otherwise provided herein or required by
law. Adequate provision shall be made for notice to members
of all meetings; one-half of the authorized members shall
constitute a quorum unless the committee shall consist of one
or two members, in which event all members of the committee
shall constitute a quorum; and all matters shall be determined
by a majority vote of the members present. Action may be
taken by any committee without a meeting if all members
thereof consent thereto in writing. Such written consent or
consents shall be filed with the minutes of the proceedings of
such committee.
ARTICLE IV
OFFICERS
Section 4.1. Generally.
The officers of the Corporation shall consist of a President,
a Secretary and a Chief Financial Officer. The Corporation
may also have, at the discretion of the Board of Directors, a
Chairman of the Board, a Chief Executive Officer, a Chief
Operating Officer, a President, one or more Vice Presidents, a
Treasurer, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers as may from time
to time be appointed by the Board of Directors. Officers
shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual
meeting of stockholders. Each officer shall hold office at
the pleasure of the Board, until his or her successor is
elected and qualified or until his or her earlier resignation
or removal. Any number of offices may be held by the same
person.
Section 4.2. Chairman of the Board.
The Chairman of the Board, if there shall be such an officer,
shall, if present, preside at all meetings of the Board of
Directors, and exercise and perform such other powers and
duties as may be from time to time assigned to him or her by
the Board of Directors or as provided by these Bylaws.
Section 4.3. Chief Executive Officer.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, if there
be such an officer, the Chief Executive Officer (the "CEO")
shall perform the duties normally expected of a chief
executive officer and shall, subject only to the higher
authority and control of the Board of Directors, have primary
responsibility for general supervision, direction and control
of the business (including long-term strategy and policy) and
of the other officers, employees and agents of the
Corporation. The CEO shall preside at all meetings of the
stockholders. He or she shall be an ex-officio member of all
the standing committees including the executive committee, if
any, shall have the general powers and duties of management
usually vested in the office of chief executive officer of a
corporation, and shall have such other powers and duties as
may be prescribed by the Board of Directors or these Bylaws.
The CEO shall have power to sign all stock certificates,
contracts and other instruments of the Corporation that are
authorized by the Board of Directors.
Section 4.4. President.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board and the
CEO, if there be such officers, the President shall be the
general manager of the Corporation and shall, subject to the
control of the Board of Directors and the powers of the CEO,
have general day-to-day supervision, direction and control of
the business and other officers (other than the Chairman of
the Board, the CEO and the CEO's staff), employees and agents
of the Corporation. In the absence of the CEO, the President
shall have all of the powers of the CEO (as enumerated in
Section 4.3 hereof) and shall preside at all meetings of the
stockholders. The President shall have the general powers and
duties of management usually vested in the office of president
of a corporation, and shall have such other powers and duties
as may be prescribed by the CEO, the Board of Directors or
these Bylaws. The President shall have power to sign all
stock certificates, contracts and other instruments of the
Corporation that are authorized by the Board of Directors.
Section 4.5. Chief Operating Officer.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, the Chief
Executive Officer and the President, if there be such
officers, the Chief Operating Officer (the "COO") shall be
responsible for implementing on an operational basis the
strategy and policies of the Corporation (as set by the Board
of Directors and the CEO) and shall, subject to the control of
the Board of Directors and the powers of the CEO and the
President, have general day-to-day supervision, direction and
control of the business and other officers (other than the
Chairman of the Board, the CEO and the President, and their
respective staffs), employees and agents of the Corporation.
The COO shall have the general powers and duties of management
usually vested in the office of a chief operating officer or
general manager of operations of a corporation, and shall have
such other powers and duties as may be prescribed by the CEO,
the President, the Board of Directors or these Bylaws. The
COO shall have power to sign all stock certificates, contracts
and other instruments of the Corporation that are authorized
by the Board of Directors.
Section 4.6. Vice President.
In the absence or disability of the CEO, the President and the
COO, the Vice Presidents, if any, in order of their rank as
fixed by the Board of Directors, or, if not ranked, the Vice
President designated by the Board of Directors, shall perform
the duties of the CEO, President or COO, as the case may be,
and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the CEO, President or
COO, as the case may be. The Vice Presidents, if any, shall
have such other powers and perform such other duties as from
time to time may be prescribed for them by the Board of
Directors or these Bylaws.
Section 4.7. Chief Financial Officer.
The Chief Financial Officer (the "CFO") shall keep and
maintain, or cause to be kept and maintained, adequate and
correct financial books and records of account of the
Corporation in written form or any other form capable of being
converted into written form.
The CFO shall deposit all monies and other valuables in the
name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors.
The CFO shall disburse all funds of the Corporation as may be
ordered by the Board of Directors, shall render to the CEO,
the President and the Board of Directors, whenever they or any
of them request it, an account of all of his or her
transactions as CFO and of the financial condition of the
Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or
by these Bylaws.
Section 4.8. Secretary.
The Secretary shall keep, or cause to be kept, a book of
minutes in written form of the proceedings of the Board of
Directors, committees of the Board and stockholders. Such
minutes shall include all waivers of notice, consents to the
holding of meetings and approvals of the minutes of meetings
executed pursuant to these Bylaws or the Delaware General
Corporation Law. The Secretary shall keep, or cause to be
kept, at the principal executive office or at the office of
the Corporation's transfer agent or registrar, a record of its
stockholders, giving the names and addresses of all
stockholders and the number and class of shares held by each.
The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors
required by these Bylaws or by law to be given, and shall keep
the seal of the Corporation in safe custody, and shall have
such other powers and perform such other duties as may be
prescribed by the Board of Directors or these Bylaws.
Section 4.9. Delegation of Authority.
The Board of Directors may from time to time delegate the
powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 4.10. Removal.
Any officer of the Corporation may be removed at any time,
with or without cause, by the Board of Directors.
Section 4.11. Action With Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the CEO,
the President, the COO and any officer of the Corporation
authorized by the CEO shall have power to vote and otherwise
act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action
of stockholders of any other corporation in which this
Corporation may hold securities and otherwise to exercise any
and all rights and powers that this Corporation may possess by
reason of its ownership of securities in such other
corporation.
ARTICLE V
STOCK
Section 5.1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by,
or in the name of the Corporation by, the President or a Vice
President, and the Secretary, an Assistant Secretary or the
Chief Financial Officer, certifying the number of shares owned
by him or her. Any or all the signatures on the certificate
may be facsimile.
Section 5.2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books
of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in
accordance with Section 5.4 of these Bylaws, an outstanding
certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is
issued therefor.
Section 5.3. Record Date.
The Board of Directors may fix a record date, which shall not
be more than sixty (60) nor fewer than ten (10) days before
the date of any meeting of stockholders, nor more than sixty
(60) days prior to the time for the other action hereinafter
described, as of which there shall be determined the
stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to express
consent to corporate action in writing without a meeting; to
receive payment of any dividend or other distribution or
allotment of any rights; or to exercise any rights with
respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any
certificate of stock, another may be issued in its place
pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction
and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5.5. Regulations.
The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1. Notices.
Except as otherwise specifically provided herein or required
by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and
may in every instance be effectively given by hand delivery to
the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram,
mailgram or commercial courier service. Any such notice shall
be addressed to such stockholder, director, officer, employee
or agent at this last known address as the same appears on the
books of the Corporation. The time when such notice is
received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of
such person, if hand delivered, or dispatched, if delivered
through the mails or by telegram, courier or mailgram, shall
be the time of the giving of the notice.
Section 6.2. Waivers.
A written waiver of any notice, signed by a stockholder,
director, officer, employee or agent, whether before or after
the time of the event for which notice is to be given, shall
be deemed equivalent to the notice required to be given to
such stockholder, director, officer, employee or agent.
Neither the business nor the purpose of any meeting need be
specified in such a waiver. Attendance of a person at a
meeting shall constitute a waiver of notice for such meeting,
except when the person attends a meeting for the express
purpose of objecting, and does in fact object, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these Bylaws, facsimile
signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors
or a committee thereof.
Section 7.2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing
the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of
Directors or a committee thereof, duplicates of the seal may
be kept and used by the Chief Financial Officer or by an
Assistant Secretary or other officer designated by the Board
of Directors.
Section 7.3. Reliance Upon Books, Reports and Records.
Each director, each member of any committee designated by the
Board of Directors, and each officer of the Corporation shall,
in the performance of his duties, be fully protected in
relying in good faith upon the books of account or other
records of the Corporation, including reports made to the
Corporation by any of its officers, by an independent
certified public accountant, or by an appraiser.
Section 7.4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the
Board of Directors.
Section 7.5. Time Periods.
In applying any provision of these Bylaws which require that
an act be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified
number of days prior to an event, calendar days shall be used,
the day of the doing of the act shall be excluded, and the day
of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1. Right to Indemnification.
Each person who was or is made a party or is threatened to be
made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or
investigative ("Proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal
representative, is or was a director or officer of the
Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to
employee benefit plans, whether the basis of such Proceeding
is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while
serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the
fullest extent authorized by the General Corporation Law of
Delaware, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses,
liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided,
however, that, except as provided in Section 8.2, the
Corporation shall indemnify any such person seeking indemnity
in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. Such
right shall be a contract right and shall include the right to
be paid by the Corporation expenses incurred in defending any
such Proceeding in advance of its final disposition; provided,
however, that, if required by the General Corporation Law of
Delaware, the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer
(and not in any other capacity in which service was or is
rendered by such person while a director or officer,
including, without limitation, service to an employee benefit
plan) in advance of the final disposition of such Proceeding,
shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
Any indemnification as provided herein (unless ordered by a
court) shall be made by the Corporation only as authorized in
the specific case upon a determination that indemnification of
a director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of Delaware.
Such determination shall be made (1) by the Board of Directors
by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the
stockholders.
Section 8.2. Right of Claimant to Bring Suit.
If a claim under Section 8.1 is not paid in full by the
Corporation within ninety (90) days after a written claim has
been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the
expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a
claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the
required undertaking, if any, has been tendered to the
Corporation) that the claimant has not met the standards of
conduct which make it permissible under the General
Corporation Law of Delaware for the Corporation to indemnify
the claimant for the amount claimed. Neither the failure of
the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of Delaware, nor an
actual determination by the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders)
that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a
presumption that claimant has not met the applicable standard
of conduct.
Section 8.3. Indemnification of Employees and Agents.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to
indemnification, and to the advancement of related expenses,
to any employee or agent of the Corporation to the fullest
extent of the provisions of this Article with respect to the
indemnification of and advancement of expenses to directors
and officers of the Corporation.
Section 8.4 Non-Exclusivity of Rights.
The rights conferred on any person by Sections 8.1, 8.2 and
8.3 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute,
provisions of the Certificate of Incorporation, bylaw,
agreement, vote of stockholders or disinterested directors or
otherwise.
Section 8.5. Indemnification Contracts.
The Board of Directors is authorized to enter into a contract
with any director, officer, employee or agent of the
Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or
other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to those provided for in
this Article VIII.
Section 8.6. Insurance.
The Corporation may maintain insurance, at its expense, to
protect itself and any such director, officer, employee or
agent of the Corporation or another corporation, partnership,
joint venture trust or other enterprise against any such
expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such
expenses, liability or loss under Delaware General Corporation
Law.
Section 8.7. Effect of Amendment.
Any amendment, repeal or modification of any provision of this
Article VIII by the stockholders or the directors of the
Corporation shall not adversely affect any right or protection
of a director or officer of the Corporation existing at the
time of such amendment, repeal or modification.
Section 8.8. Savings Clause.
If this Article or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director,
officer, employee and agent of the Corporation as to costs,
charges and expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement with respect to any
action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or in
the right of the Corporation, to the fullest extent permitted
by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by
applicable law.
ARTICLE IX
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend,
alter or repeal Bylaws of the Corporation, subject to the
right of the stockholders to adopt, amend, alter or repeal the
Bylaws of the Corporation. Any adoption, amendment or repeal
of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of
authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any
resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have
power to adopt, amend, alter or repeal the Bylaws of the
Corporation.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| COST | https://www.sec.gov/Archives/edgar/data/909832/0001047469-99-009377.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0001047469-99-009377.txt : 19990312
<SEC-HEADER>0001047469-99-009377.hdr.sgml : 19990312
ACCESSION NUMBER: 0001047469-99-009377
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990214
FILED AS OF DATE: 19990311
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COSTCO COMPANIES INC
CENTRAL INDEX KEY: 0000909832
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331]
IRS NUMBER: 330572969
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0830
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 333-04355
FILM NUMBER: 99563264
BUSINESS ADDRESS:
STREET 1: 999 LAKE DRIVE
CITY: ISSAQUAH
STATE: WA
ZIP: 98027-
BUSINESS PHONE: (206)-313-8100
MAIL ADDRESS:
STREET 1: 999 LAKE DRIVE
CITY: ISSAQUAD
STATE: WA
ZIP: 98027
FORMER COMPANY:
FORMER CONFORMED NAME: PRICE/COSTCO INC
DATE OF NAME CHANGE: 19930728
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 14, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20355
------------------------
COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0572969
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(425) 313-8100
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The registrant had 219,651,922 common shares, par value $.01, outstanding at
March 1, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEM 1--FINANCIAL STATEMENTS............................................................................... 3
Condensed Consolidated Balance Sheets.................................................................... 11
Condensed Consolidated Statements of Income.............................................................. 12
Condensed Consolidated Statements of Cash Flows.......................................................... 13
Notes to Condensed Consolidated Financial Statements..................................................... 14
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS.................................................................................. 8
ITEM 2--CHANGES IN SECURITIES.............................................................................. 8
ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................................................... 8
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 8
ITEM 5--OTHER INFORMATION.................................................................................. 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................... 9
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................................................... 18
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of February 14, 1999, the condensed consolidated
balance sheet as of August 30, 1998, and the unaudited condensed consolidated
statements of income and cash flows for the 12- and 24-week periods ended
February 14, 1999 and February 15, 1998 are included elsewhere herein. Also,
included elsewhere herein are notes to the unaudited condensed consolidated
financial statements and the results of the limited review performed by Arthur
Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1999 is a
52-week year with period 13 ending on August 29, 1999. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 16
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this document constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. For these purposes, forward-looking statements are statements that include
words such as "plans", "intends", "expects", "anticipates", "believes", or
similar expressions. Such forward-looking statements involve risks and
uncertainties that may cause actual events, results or performance to differ
materially from those indicated by such statements. These risks and
uncertainties include, but are not limited to, domestic and international
economic conditions including exchange rates, the effects of competition and
regulation, conditions affecting the acquisition, development and ownership or
use of real estate, actions of vendors, and other risks identified from time to
time in the Company's reports filed with the SEC.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 14, 1999 AND FEBRUARY 15, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 1999 increased 21% to $152,032,
or $0.66 per share (diluted), from $125,993, or $0.56 per share (diluted),
during the second quarter of fiscal 1998.
Net sales increased 14% to $6,484,445 during the second quarter of fiscal
1999 from $5,697,098 during the second quarter of fiscal 1998. This increase was
due to opening a net of 14 new warehouses (16 opened, 2 closed) since the end of
the second quarter of fiscal 1998 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 10 percent during the second quarter of fiscal 1999, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods and
various ancillary businesses to certain existing locations. Changes in prices of
merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased 10% to $107,913 or 1.66% of net
sales in the second quarter of fiscal 1999 from $97,908 or 1.72% of net sales in
the second quarter of fiscal 1998. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the second quarter of
fiscal 1998. Membership fees reflect a change from a cash to a deferred method
of accounting for membership fees, beginning in the first quarter of fiscal
1999, whereby membership fee income is recognized ratably over the one-year life
of the membership. On a proforma basis, assuming the newly adopted accounting
treatment for deferring membership fees had been in effect in fiscal 1998,
membership fees and other in the second quarter of fiscal 1998 would have been
$93,897, or 1.65% of net sales, and the year-over-year second quarter increase
in membership fees and other would have been 15%.
Gross margin (defined as net sales minus merchandise costs) increased 16% to
$695,792 or 10.73% of net sales in the second quarter of fiscal 1999 from
$598,106 or 10.50% of net sales in the second quarter of fiscal 1998. The 23
basis point increase in gross margin as a percentage of net sales reflects a
one-time
3
<PAGE>
benefit related to sales of tobacco products, as well as increased sales
penetration of certain higher gross margin ancillary businesses and private
label products, the expanded use of the Company's depot facilities, improved
performance of the international operations, and strong mid-year physical
inventory shrink results. The gross margin figures reflect accounting for
merchandise costs on the last-in, first-out (LIFO) method. The second quarter of
fiscal 1999 includes a $3,500 LIFO provision compared to a $2,500 LIFO provision
in the second quarter of fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.38% during the second quarter of fiscal 1999 from 8.40% during
the second quarter of fiscal 1998. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations, which was partially offset by higher
expenses associated with international expansion and continued expansion and
rollout of certain ancillary businesses.
Preopening expenses totaled $3,951 or 0.06% of net sales during the second
quarter of fiscal 1999 compared to $4,071 or 0.07% of net sales during the
second quarter of fiscal 1998. One warehouse was opened in the second quarter of
fiscal 1999, compared to one warehouse opened during last year's second quarter.
Preopening expenses also include costs related to remodels, including expanded
fresh foods and ancillary operations at existing warehouses, as well as new
international expansion.
A provision for warehouse closing costs of $3,000 was recorded in the second
quarter of fiscal 1999 as compared to no provision recorded in the second
quarter of fiscal 1998. The provision included closing costs for warehouses
being relocated to new facilities during fiscal 1999.
Interest expense totaled $10,995 in the second quarter of fiscal 1999
compared to $10,965 in the second quarter of fiscal 1998. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes.
Interest income and other totaled $11,192 in the second quarter of fiscal
1999 compared to $7,743 in the second quarter of fiscal 1998. The increase
primarily reflects interest earned on higher balances of cash and cash
equivalents and short-term investments during the second quarter of fiscal 1999,
as compared to the year-earlier second quarter period.
The effective income tax rate on earnings in the second quarter of both
fiscal 1999 and 1998 was 40.0%.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 14, 1999 AND FEBRUARY 15, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first half of fiscal 1999 reflect net income
of $138,243, or $0.61 per share (diluted), compared to net income of $223,919,
or $0.99 per share (diluted) during the first half of fiscal 1998. Net income in
the first half of fiscal 1999 included a $118,023 non-cash, after-tax charge,
reflecting the cumulative effect of the Company's change in accounting for
membership fees from a cash to a deferred method. Before the impact of this
non-cash charge, net earnings were $256,266, or $1.11 per share. Assuming the
newly adopted accounting treatment for deferring membership fees had been in
effect in fiscal 1998, last year's first half membership fees and other income
would have been reduced by $20,610 to $185,805; net earnings in the first half
of fiscal 1998 would have been $211,553, or $0.94 per share; and the
year-over-year first half earnings increase would have been 21%.
Net sales increased 12% to $12,378,683 during the first half of fiscal 1999
from $11,018,354 during the first half of fiscal 1998. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
14 warehouses (16 opened, 2 closed) since the end of the second quarter of
fiscal 1998. Comparable sales, that is sales in warehouses open for at least a
year, increased 9 percent during the first half of fiscal 1999, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods
4
<PAGE>
and various ancillary businesses to certain existing locations. Changes in
prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $211,753 or 1.71% of net
sales in the first half of fiscal 1999 from $206,415 or 1.87% of net sales in
the first half of fiscal 1998. Membership fees include new membership sign-ups
at the new warehouses opened since the end of the second quarter of fiscal 1998.
On a proforma basis, assuming the newly adopted accounting treatment for
deferring membership fees had been in effect in fiscal 1998, membership fees and
other in the first half of fiscal 1998 would have been $185,805, or 1.69% of
sales, and the year-over-year first half increase in membership fees and other
would have been 14%.
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$1,302,245 or 10.52% of net sales in the first half of fiscal 1999 from
$1,140,066 or 10.35% of net sales in the first half of fiscal 1998. The 17 basis
point increase in gross margin as a percentage of net sales reflects increased
sales penetration of certain higher gross margin ancillary businesses and
private label products, expanded use of the Company's depot facilities, improved
international operations, and strong mid-year physical inventory shrink results.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The first half of fiscal 1999 includes a
$6,000 LIFO provision compared to a $5,000 LIFO provision in the first half of
fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.58% during the first half of fiscal 1999 from 8.62% during the
first half of fiscal 1998. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations, which was partially offset by higher
expenses associated with international expansion and continued expansion and
rollout of certain ancillary businesses.
Preopening expenses totaled $14,658 or 0.12% of net sales during the first
half of fiscal 1999 compared to $11,414 or 0.10% of net sales during the first
half of fiscal 1998. Nine warehouses were opened in the first half of fiscal
1999 (including two relocated warehouses), compared to nine new locations during
the last year's first half (including one relocated warehouse). The increase in
preopening expenses is primarily attributable to higher relative costs of
opening in the new Chicago and international markets. Preopening expenses also
include costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses.
In the first half of fiscal 1999 the Company recorded a pre-tax provision
for warehouse closing costs of $5,000, or $.01 per share on an after-tax basis
(diluted), compared to a pre-tax provision for warehouse closing costs of $2,000
or $.01 per share on an after-tax basis (diluted) recorded in the first half of
fiscal 1998. The provisions included closing costs for warehouses closed in each
respective fiscal year, including closing costs associated with warehouses which
were or are being relocated to new facilities. There were two relocations in the
first half of fiscal 1999 compared to one relocation in the first half of fiscal
1998.
Interest expense totaled $21,907 in the first half of fiscal 1999 compared
to $21,888 in the first half of fiscal 1998. Interest expense primarily includes
interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes.
Interest income and other totaled $17,231 in the first half of fiscal 1999
compared to $11,463 in the first half of fiscal 1998. The increase primarily
reflects interest earned on higher balances of cash and cash equivalents and
short-term investments during the first half of fiscal 1999, as compared to the
year-earlier first half.
The effective income tax rate on earnings in the first half of fiscal 1999
and 1998 was 40.0%.
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
EXPANSION PLANS
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $525,000 to $575,000 during
fiscal 1999 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $75,000 to $125,000 for international expansion, including the
United Kingdom, Asia, Mexico and other potential ventures. These expenditures
will be financed with a combination of cash provided from operations, the use of
cash and cash equivalents and short-term investments (which totaled $628,509 at
February 14, 1999), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans are to open a net of 18 to 21 new warehouse clubs in fiscal
1999, plus seven relocations of existing warehouses to larger and better-located
facilities. Through the end of the first half of fiscal 1999, the Company opened
a net of 7 new warehouses (9 total openings, including 2 relocations). Expansion
plans for the remainder of the fiscal year include 9 to 12 new openings in the
U.S. and Canada (plus five relocations), one warehouse in Taiwan, and one in
Japan. Fiscal 1999 plans also include the continuation of a remodeling and
retrofitting program, which will upgrade a number of older facilities to include
expanded fresh foods and ancillary departments--including expanded food courts,
pharmacy and optical departments and gas stations.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of February 14, 1999,
Price Club Mexico operated 16 membership warehouses in Mexico.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
February 14, 1999, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in March
2001. At February 14, 1999, no amounts were outstanding under the bank credit
facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $325,000. The outstanding
commitments under these facilities at February 14, 1999 totaled approximately
$148,000, including approximately $53,000 in standby letters of credit for
workers' compensation requirements.
6
<PAGE>
DERIVATIVES
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at the end of second quarter or
in place during the first 24 weeks of fiscal 1999 were not material to the
Company's results of operations or its financial position.
YEAR 2000
The Company uses a number of computer software programs and embedded
operating systems that were not originally designed to process dates beyond the
year 1999. Like most automated companies, Costco is addressing the Year 2000
challenge to make sure all of its systems are Year 2000 compliant and fully
operational prior to the year 2000 and beyond. As far back as the early 1990's,
the Company began taking initial measures to ensure that its systems would
function in the year 2000 and beyond. The Company has completed testing of all
key systems, and believes that the Year 2000 issues will not present any
significant operational problems. Total costs related to the year 2000 effort
are estimated to be less than $5,000, of which approximately 85% has been
incurred by the Company through February 14, 1999. While it is possible that
systems currently being reviewed and/or tested may produce an unexpected cost
increase, the Company does not believe it would add materially to the current
estimate.
Additionally, Costco has contacted and will continue to contact significant
vendors, suppliers, financial institutions and other third party providers upon
which its business depends. These efforts are designed to minimize the impact to
the Company should these third parties fail to remediate their Year 2000 issues.
However, the Company can give no assurances that such third parties will in fact
be successful in resolving all of their Year 2000 issues, and the failure of
such third parties to comply on a timely basis could have an adverse effect on
the Company. The Company anticipates minimal business disruption as a result of
Year 2000 issues; however, possible consequences include, but are not limited
to, delays in delivery or receipt of merchandise, inability to process
transactions, loss of communications, and similar interruptions of normal
business activities. To the extent practicable, the Company is evaluating
contingency plans to minimize the effect on the Company's operations in the
event of any third party system or product failure. The Company will continue to
make every effort to ensure that its business, financial condition and results
of operations will not be adversely impacted by a failure of its systems or the
systems of others.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $382,000 at February 14, 1999,
compared to $431,000 at August 30, 1998. The decrease in working capital is
primarily attributable to deferred membership income of approximately $230,000,
resulting from the Company's change in accounting for membership fees from a
cash to a deferred method in the first quarter of fiscal 1999.
Net cash provided by operating activities totaled $424,294 in the first half
of fiscal 1999 compared to $433,865 in the first half of fiscal 1998. The
decrease in net cash from operating activities is primarily a result of an
increase in owned inventory (inventory less trade payables), during the first
half of fiscal 1999 compared to the first half of fiscal 1998, offset by
increased operating income and a positive change in net receivables, other
current assets, and accrued and other current liabilities.
Net cash used in investing activities totaled $571,942 in the first half of
fiscal 1999 compared to $268,587 in the first half of fiscal 1998. The investing
activities primarily relate to additions to property and equipment for new and
remodeled warehouses of $367,075 and $281,079 in the first half of fiscal 1999
and 1998, respectively. Net cash used in investing activities also reflects an
increase in short-term investments of $228,361 since the beginning of the fiscal
year.
7
<PAGE>
Net cash provided by financing activities totaled $106,543 in the first half
of fiscal 1999 compared to $1,705 in the first half of fiscal 1998. The increase
is primarily attributable to increases in bank checks outstanding and proceeds
from the exercise of stock options.
The Company's balance sheet as of February 14, 1999 reflects a $717,470 or
11% increase in total assets since August 30, 1998. The increase is primarily
due to increases in merchandise inventory, short-term investments and property
and equipment primarily related to the Company's expansion program.
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on January 28, 1999 at
the Meydenbauer Center Hall in Bellevue, Washington. Stockholders of record at
the close of business on December 11, 1998 were entitled to notice of and to
vote in person or by proxy at the annual meeting. At the date of record, there
were 218,475,251 shares outstanding. The matters presented for vote received the
required votes for approval and had the following total, for, against and
abstained votes as noted below.
(1) To elect four Class III directors to hold office until the 2002 Annual
Meeting of Stockholders and until their successors are elected and
qualified.
<TABLE>
<CAPTION>
WITHHELD AUTHORITY
TOTAL SHARES AND
VOTED/(%) FOR VOTES/(%) AGAINST VOTES/(%) ABSTAINED VOTES/(%)
------------- ------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Richard D. DiCerchio..................... 190,345,047 184,310,803 -- 6,034,244
(Class III) 87.12% 96.83% -- 3.17%
Richard M. Libenson...................... 190,345,047 184,733,148 -- 5,611,899
(Class III) 87.12% 97.05% -- 2.95%
John W. Meisenbach....................... 190,345,047 184,328,084 -- 6,016,963
(Class III) 87.12% 96.84% -- 3.16%
Charles T. Munger........................ 190,345,047 184,776,364 -- 5,568,683
(Class III) 87.12% 97.07% -- 2.93%
</TABLE>
8
<PAGE>
(2) To amend The Costco Companies, Inc. 1993 Combined Stock Grant and Stock
Option Plan to increase the number of shares of common stock available
for issuance from 20 million shares to 30 million shares.
<TABLE>
<CAPTION>
WITHHELD AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
190,345,247 138,441,232 51,314,441 589,574
87.12% 72.73% 26.96% .31%
</TABLE>
(3) To approve a change in the state of incorporation of the Company from
Delaware to Washington, through a merger of Costco Companies, Inc. into
its wholly owned subsidiary Costco Wholesale Corporation.
<TABLE>
<CAPTION>
WITHHELD AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
190,345,047 157,920,538 11,137,874 21,286,635
87.12% 82.97% 5.85% 11.18%
</TABLE>
(4) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
<TABLE>
<CAPTION>
WITHHELD AUTHORITY
TOTAL SHARES AND
VOTED/(%) FOR VOTES/(%) AGAINST VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ----------------- ---------------------
<S> <C> <C> <C>
190,345,047 189,800,764 94,649 449,634
87.12% 99.71% .05% .24%
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27.1) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended February 14,
1999.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
COSTCO COMPANIES, INC.
REGISTRANT
Date:
- ------------------------------ -----------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date:
- ------------------------------ -----------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
10
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 14, AUGUST 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 324,599 $ 361,974
Short-term investments............................................. 303,910 75,549
Receivables, net................................................... 162,489 171,613
Merchandise inventories, net....................................... 2,055,546 1,910,751
Other current assets............................................... 218,414 108,343
------------- -------------
Total current assets............................................. 3,064,958 2,628,230
------------- -------------
PROPERTY AND EQUIPMENT
Land and land rights............................................... 1,198,694 1,119,663
Buildings and leasehold and land improvements...................... 2,302,224 2,170,896
Equipment and fixtures............................................. 1,056,696 948,515
Construction in progress........................................... 135,571 91,901
------------- -------------
4,693,185 4,330,975
Less-accumulated depreciation and amortization..................... (1,023,529) (935,603)
------------- -------------
Net property and equipment....................................... 3,669,656 3,395,372
------------- -------------
OTHER ASSETS......................................................... 242,676 236,218
------------- -------------
$ 6,977,290 $ 6,259,820
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $ 1,739,119 $ 1,605,533
Accrued salaries and benefits...................................... 397,297 352,903
Accrued sales and other taxes...................................... 112,446 102,367
Deferred membership income......................................... 230,043 --
Other current liabilities.......................................... 203,621 136,139
------------- -------------
Total current liabilities........................................ 2,682,526 2,196,942
LONG-TERM DEBT....................................................... 934,921 930,035
DEFERRED INCOME TAXES AND OTHER LIABILITIES.......................... 61,809 61,483
------------- -------------
Total liabilities................................................ 3,679,256 3,188,460
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.................................................... 110,946 105,474
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized; no
shares issued and outstanding.................................... -- --
Common stock $.01 par value; 900,000,000 shares authorized;
219,538,000 and 217,589,000 shares issued and outstanding........ 2,195 2,176
Additional paid-in capital......................................... 867,372 817,628
Accumulated foreign currency translation........................... (118,646) (151,842)
Retained earnings.................................................. 2,436,167 2,297,924
------------- -------------
Total stockholders' equity....................................... 3,187,088 2,965,886
------------- -------------
$ 6,977,290 $ 6,259,820
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
----------------------------- -----------------------------
FEBRUARY 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Net sales................................... $ 6,484,445 $ 5,697,098 $ 12,378,683 $ 11,018,354
Membership fees and other................... 107,913 97,908 211,753 206,415
------------- ------------- ------------- -------------
Total revenue........................... 6,592,358 5,795,006 12,590,436 11,224,769
OPERATING EXPENSES
Merchandise costs........................... 5,788,653 5,098,992 11,076,438 9,878,288
Selling, general and administrative......... 543,565 478,732 1,062,555 949,443
Preopening expenses......................... 3,951 4,071 14,658 11,414
Provision for impaired assets and warehouse
closing costs............................. 3,000 -- 5,000 2,000
------------- ------------- ------------- -------------
Operating income........................ 253,189 213,211 431,785 383,624
OTHER INCOME (EXPENSE)
Interest expense............................ (10,995) (10,965) (21,907) (21,888)
Interest income and other................... 11,192 7,743 17,231 11,463
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE............... 253,386 209,989 427,109 373,199
Provision for income taxes.................. 101,354 83,996 170,843 149,280
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE......................... 152,032 125,993 256,266 223,919
Cumulative effect of accounting change, net
of tax.................................... -- -- 118,023 --
------------- ------------- ------------- -------------
NET INCOME.................................. $ 152,032 $ 125,993 $ 138,243 $ 223,919
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of
accounting change..................... $ .69 $ .59 $ 1.17 $ 1.05
Cumulative effect of accounting change,
net of tax............................ -- -- (.54) --
------------- ------------- ------------- -------------
Net income.............................. $ .69 $ .59 $ .63 $ 1.05
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted earnings per share:
Income before cumulative effect of
accounting change..................... $ .66 $ .56 $ 1.11 $ .99
Cumulative effect of accounting change,
net of tax............................ -- -- (.50) --
------------- ------------- ------------- -------------
Net income.............................. $ .66 $ .56 $ .61 $ .99
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in calculation (000's):
Basic..................................... 218,891 214,590 218,365 214,211
Diluted................................... 235,227 230,482 234,394 229,962
Pro forma amounts assuming accounting change
had been in effect in fiscal 1998:
Net income................................ $ 152,032 $ 123,586 $ 256,266 $ 211,553
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per common share--basic.......... $ .69 $ .58 $ 1.17 $ .99
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per common share--diluted........ $ .66 $ .55 $ 1.11 $ .94
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS ENDED
-----------------------------
FEBRUARY 14, FEBRUARY 15,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 138,243 $ 223,919
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 98,493 86,720
Accretion of discount on zero coupon notes......................... 7,586 7,326
Cumulative effect of accounting change, net of tax................. 118,023 --
Change in receivables, accrued and other current liabilities....... 154,424 86,321
Increase in merchandise inventories................................ (130,368) (80,768)
Increase in accounts payable....................................... 49,150 113,865
Other.............................................................. (11,257) (3,518)
------------- -------------
Total adjustments................................................ 286,051 209,946
------------- -------------
Net cash provided by operating activities.......................... 424,294 433,865
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................. (367,075) (281,079)
Proceeds from the sale of property and equipment..................... 30,101 15,385
Increase in short-term investments................................... (228,361) --
Other................................................................ (6,607) (2,893)
------------- -------------
Net cash used in investing activities.............................. (571,942) (268,587)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term borrowings................................ -- (24,979)
Increase (decrease) in bank checks outstanding....................... 70,793 (7,958)
Net proceeds from long-term borrowings............................... 2,807 2,338
Payments on long-term debt and notes payable......................... (5,517) (3,660)
Proceeds from minority interests, net................................ 5,277 10,222
Exercise of stock options............................................ 33,183 25,742
------------- -------------
Net cash provided by financing activities.......................... 106,543 1,705
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. 3,730 (1,802)
------------- -------------
Net increase/(decrease) in cash and cash equivalents............... (37,375) 165,181
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 361,974 175,508
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 324,599 $ 340,689
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized).............................. $ 14,193 $ 16,367
Income taxes....................................................... 108,393 102,463
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco"
or the "Company"). Costco is a holding company which operates primarily through
its major subsidiaries, Costco Wholesale Corporation and subsidiaries, and The
Price Company and subsidiaries. All intercompany transactions between the
Company and its subsidiaries have been eliminated in consolidation. Costco
primarily operates membership warehouses under the "Costco Wholesale" name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. At February 14, 1999, Costco operated 285 warehouse clubs: 217 in
the United States (in 26 states); 57 in Canada (in nine Canadian provinces);
seven in the United Kingdom; three in Korea, and one in Taiwan. As of February
14, 1999, the Company also operated (through a 50%-owned joint venture) 16
warehouses in Mexico.
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended August 30, 1998.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1999 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 29, 1999, consisting of 16 weeks.
CASH AND CASH EQUIVALENTS
The Company considers all investments in highly liquid debt instruments
maturing within 90 days after purchase as cash equivalents unless amounts are
held in escrow for future property purchases or restricted by agreements.
SHORT-TERM INVESTMENTS
Short-term investments include highly liquid investments in United States
and Canadian government obligations, along with other investment vehicles, some
of which have maturities of three months or less at the time of purchase. The
Company's policy is to classify these investments as short-term investments
rather than cash equivalents if they are acquired and disposed of through its
investment trading account,
14
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
held for future property purchases, or restricted by agreement. The fair value
of the short-term investments approximates their carrying value and unrealized
holding gains and losses were not significant.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined primarily by the retail inventory method, and are stated using the
last-in, first-out (LIFO) method for substantially all U.S. merchandise
inventories. The Company believes the LIFO method more fairly presents the
results of operations by more closely matching current costs with current
revenues. If all merchandise inventories had been valued using the first-in,
first-out (FIFO) method, inventories would have been higher by $22,150 at
February 14, 1999 and $21,150 at February 15, 1998.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
ACCOUNTS PAYABLE
The Company's banking system provides for the daily replenishment of major
bank accounts as checks are presented. Accordingly, included in Accounts Payable
are $81,661 and $10,376 at February 14, 1999 and August 30, 1998, respectively,
representing the excess of outstanding checks over cash on deposit at the banks
on which the checks were drawn.
MEMBERSHIP FEES
Membership fee revenue represents annual membership fees paid by
substantially all of the Company's members. Effective with the first quarter of
fiscal 1999, the Company changed its method of accounting for membership fee
income from a "cash basis", which historically was consistent with generally
accepted accounting principles and industry practice, to a "deferred basis"
whereby membership fee income is recognized ratably over the one-year life of
the membership. The change to the deferred method of accounting for membership
fees resulted in a one-time, non-cash, pre-tax charge of approximately $196,705
($118,023 after-tax, or $.50 per share) to reflect the cumulative effect of the
accounting change as of the beginning of fiscal 1999.
INCOME TAXES
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The Company adopted Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share" (SFAS No. 128) in the second quarter of fiscal
1998. SFAS No. 128 established new standards for computing and presenting
earnings per share (EPS) for entities with publicly-held common stock.
15
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
----------------------------- -----------------------------
FEBRUARY 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income available to common stockholders
used in basic EPS............................ $ 152,032 $ 125,993 $ 138,243 $ 223,919
Interest on convertible bonds.................. 2,276 2,198 4,552 4,396
------------- ------------- ------------- -------------
Net income available to common stockholders
after assumed conversions of dilutive
securities................................... $ 154,308 $ 128,191 $ 142,795 $ 228,315
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares used
in basic EPS (000's)......................... 218,891 214,590 218,365 214,211
Stock options (000's).......................... 6,117 5,673 5,810 5,532
Conversion of convertible bonds (000's)........ 10,219 10,219 10,219 10,219
------------- ------------- ------------- -------------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS
(000's)...................................... 235,227 230,482 234,394 229,962
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE (2)--COMPREHENSIVE INCOME
Effective with the first quarter of fiscal 1999 the Company implemented
Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income", which requires companies to
16
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--COMPREHENSIVE INCOME (CONTINUED)
report by major components and in total, the change in equity (net assets)
during the period from non-owner sources. Consolidated comprehensive income is
as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
FEBRUARY 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net income................................................ $ 152,032 $ 125,993 $ 138,243 $ 223,919
Other comprehensive income (expense):
Foreign currency translation............................ 16,048 (17,575) 33,196 (27,713)
Income tax (expense), benefit........................... (6,419) 7,030 (13,278) 11,085
------------- ------------- ------------- -------------
Other comprehensive income (expense), net of income
taxes............................................... 9,629 (10,545) 19,918 (16,628)
------------- ------------- ------------- -------------
Comprehensive income...................................... $ 161,661 $ 115,448 $ 158,161 $ 207,291
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
NOTE (3)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
February 15, 1999, no amount was outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in March
2001. At February 14, 1999, no amount was outstanding under the bank credit
facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $325,000. The outstanding
commitments under these facilities at February 14, 1999 totaled approximately
$148,000, including approximately $53,000 in standby letters of credit for
workers' compensation requirements.
NOTE (4)--COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-START> AUG-31-1998
<PERIOD-END> FEB-14-1999
<CASH> 324,599
<SECURITIES> 303,910
<RECEIVABLES> 166,740
<ALLOWANCES> 4,251
<INVENTORY> 2,055,546
<CURRENT-ASSETS> 3,064,958
<PP&E> 4,693,185
<DEPRECIATION> 1,023,529
<TOTAL-ASSETS> 6,977,290
<CURRENT-LIABILITIES> 2,682,526
<BONDS> 934,921
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 869,567
<OTHER-SE> 2,317,521
<TOTAL-LIABILITY-AND-EQUITY> 6,977,290
<SALES> 12,378,683
<TOTAL-REVENUES> 12,590,436
<CGS> 11,076,438
<TOTAL-COSTS> 12,158,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,907
<INCOME-PRETAX> 427,109
<INCOME-TAX> 170,843
<INCOME-CONTINUING> 256,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 118,023
<NET-INCOME> 138,243
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.61
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-28
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 28
<TEXT>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of February
14, 1999, and the related condensed consolidated statements of income for the
twelve-week and twenty-four-week periods ended February 14, 1999 and February
15, 1998, and the condensed consolidated statements of cash flows for the
twenty-four-week periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
March 2, 1999
18
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CPB | https://www.sec.gov/Archives/edgar/data/16732/0000893220-99-000335.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000893220-99-000335.txt : 19990318
<SEC-HEADER>0000893220-99-000335.hdr.sgml : 19990318
ACCESSION NUMBER: 0000893220-99-000335
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990131
FILED AS OF DATE: 19990317
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CAMPBELL SOUP CO
CENTRAL INDEX KEY: 0000016732
STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000]
IRS NUMBER: 210419870
STATE OF INCORPORATION: NJ
FISCAL YEAR END: 0729
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-03822
FILM NUMBER: 99566752
BUSINESS ADDRESS:
STREET 1: CAMPBELL PL
CITY: CAMDEN
STATE: NJ
ZIP: 08103
BUSINESS PHONE: 6093424800
MAIL ADDRESS:
STREET 1: CAMPBELL PL
CITY: CAMDEN
STATE: NJ
ZIP: 08103
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q 1/31/99
<TEXT>
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
JANUARY 31, 1999 1-3822
CAMPBELL SOUP COMPANY
NEW JERSEY 21-0419870
STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO.
CAMPBELL PLACE
CAMDEN, NEW JERSEY 08103-1799
PRINCIPAL EXECUTIVE OFFICES
TELEPHONE NUMBER: (609) 342-4800
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ].
THERE WERE 436,187,108 SHARES OF CAPITAL STOCK OUTSTANDING AS OF MARCH 9,
1999.
================================================================================
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF EARNINGS
(unaudited)
(millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------
January February January February
31, 1999 1, 1998 31, 1999 1, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $1,832 $2,012 $3,636 $3,825
- ----------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of products sold 856 955 1,686 1,848
Marketing and selling expenses 511 459 931 829
Administrative expenses 74 80 152 160
Research and development expenses 17 16 33 34
Other expenses 3 16 16 41
- ----------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,461 1,526 2,818 2,912
- ----------------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes 371 486 818 913
Interest, net 42 43 86 86
- ----------------------------------------------------------------------------------------------------------------------
Earnings before taxes 329 443 732 827
Taxes on earnings 110 152 249 284
- ----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 219 291 483 543
Earnings from discontinued operations -- 20 -- 35
Cumulative effect of change in accounting principle -- (11) -- (11)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 219 $ 300 $ 483 $ 567
======================================================================================================================
Per share - basic
Earnings from continuing operations $ .49 $ .64 $ 1.08 $ 1.19
Earnings from discontinued operations -- .04 -- .07
Cumulative effect of change in accounting principle -- (.02) -- (.02)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ .49 $ .66 $ 1.08 $ 1.24
======================================================================================================================
Dividends $ .225 $ .210 $ .435 $ .403
======================================================================================================================
Weighted average shares outstanding - basic 444 457 446 457
======================================================================================================================
Per share - assuming dilution
Earnings from continuing operations $ .49 $ .63 $ 1.07 $ 1.18
Earnings from discontinued operations -- .04 -- .07
Cumulative effect of change in accounting principle -- (.02) -- (.02)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ .49 $ .65 $ 1.07 $ 1.23
======================================================================================================================
Weighted average shares outstanding - assuming dilution 449 462 451 463
======================================================================================================================
</TABLE>
See Notes to Financial Statements
2
<PAGE> 3
CAMPBELL SOUP COMPANY CONSOLIDATED
BALANCE SHEETS
(unaudited)
(millions)
<TABLE>
<CAPTION>
JANUARY August
31, 1999 2, 1998
-------- -------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 30 $ 16
Accounts receivable 705 656
Inventories 621 564
Other current assets 217 204
- --------------------------------------------------------------------------
Total current assets 1,573 1,440
- --------------------------------------------------------------------------
Plant assets, net of depreciation 1,719 1,723
Intangible assets, net of amortization 2,001 1,904
Other assets 581 566
- --------------------------------------------------------------------------
Total assets $ 5,874 $ 5,633
==========================================================================
Current liabilities
Notes payable $ 1,721 $ 1,401
Payable to suppliers and others 468 506
Accrued liabilities 518 638
Dividend payable 100 95
Accrued income taxes 217 163
- --------------------------------------------------------------------------
Total current liabilities 3,024 2,803
- --------------------------------------------------------------------------
Long-term debt 1,338 1,169
Nonpension postretirement benefits 401 405
Other liabilities, including deferred
income taxes of $245 and $246 420 382
- --------------------------------------------------------------------------
Total liabilities 5,183 4,759
- --------------------------------------------------------------------------
Shareowners' equity
Preferred stock; authorized 40 shares;
None issued -- --
Capital stock, $.0375 par value; authorized
560 shares; issued 542 shares 20 20
Capital surplus 386 395
Earnings retained in the business 3,996 3,706
Capital stock in treasury, at cost (3,541) (3,083)
Accumulated other comprehensive income (170) (164)
- --------------------------------------------------------------------------
Total shareowners' equity 691 874
- --------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 5,874 $ 5,633
==========================================================================
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
(millions)
<TABLE>
<CAPTION>
Six Months Ended
----------------
JANUARY February
31, 1999 1, 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings, excluding discontinued operations $ 483 $ 532
Non-cash charges to net earnings
Cumulative effect of accounting change -- 11
Depreciation and amortization 123 133
Deferred income taxes (3) 7
Other, net (1) 20
Changes in working capital
Accounts receivable (47) (223)
Inventories (62) 39
Other current assets and liabilities (104) (5)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 389 514
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant assets (126) (90)
Sales of plant assets 8 9
Businesses acquired (105) (472)
Sale of businesses -- 21
Other, net (8) (5)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (231) (537)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term borrowings 325 370
Repayments of long-term borrowings (2) (16)
Short-term borrowings 737 1,054
Repayments of short-term borrowings (588) (716)
Dividends paid (188) (272)
Treasury stock purchases (489) (304)
Treasury stock issuances 64 49
- ----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (141) 165
- ----------------------------------------------------------------------------------------------------
Net cash used in discontinued operations -- (50)
- ----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3) (11)
- ----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 14 81
Cash and cash equivalents - beginning of period 16 17
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 30 $ 98
====================================================================================================
</TABLE>
See Notes to Financial Statements
4
<PAGE> 5
CAMPBELL SOUP COMPANY CONSOLIDATED
STATEMENTS OF SHAREOWNERS' EQUITY
(unaudited)
(millions, except per share amounts)
<TABLE>
<CAPTION>
Capital stock
---------------------------------
Issued In treasury Earnings Accumulated
--------------- --------------- retained other Total
Capital in the comprehensive shareowners'
Shares Amount Shares Amount surplus business income equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 3, 1997 542 $20 (84) ($2,459) $338 $3,571 ($50) $1,420
Comprehensive income
Net earnings 567 567
Foreign currency translation adjustments (62) (62)
Dividends ($.403 per share) (183) (183)
Treasury stock purchased (6) (304) (304)
Treasury stock issued under
management incentive and
stock option plans 2 14 32 46
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1998 542 $20 (88) ($2,749) $370 $3,955 ($112) $1,484
===================================================================================================================================
Balance at August 2, 1998 542 $20 (94) ($3,083) $395 $3,706 ($164) $874
Comprehensive income
Net earnings 483 483
Foreign currency translation adjustments (6) (6)
Dividends ($.435 per share) (193) (193)
Treasury stock purchased (9) (489) (489)
Treasury stock issued under
management incentive and
stock option plans 2 31 (9) 22
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1999 542 $20 (101) ($3,541) $386 $3,996 ($170) $691
===================================================================================================================================
</TABLE>
See Notes to Financial Statements
5
<PAGE> 6
CAMPBELL SOUP COMPANY CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(millions)
(a) The financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the results for the
indicated periods. All such adjustments are of a normal recurring nature.
Certain reclassifications were made to the prior year amounts to conform
with current presentation, including classifying the Specialty Foods
segment as a discontinued operation.
(b) New Accounting Pronouncement
As of August 3, 1998, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
issued in June 1997. SFAS 130 establishes a standard for reporting of
comprehensive income, which is comprised of net income and "other"
comprehensive income items, in the financial statements. "Other"
comprehensive income includes items recorded in shareowners' equity that
are not the result of transactions with shareowners, such as foreign
currency translation adjustments. Prior year financial statements have
been reclassified to conform to SFAS 130.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January February January February
31, 1999 1, 1998 31, 1999 1, 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 219 $ 300 $ 483 $ 567
Foreign currency
translation adjustments (14) (61) (6) (62)
----- ----- ----- -----
Comprehensive income $ 205 $ 239 $ 477 $ 505
===== ===== ===== =====
</TABLE>
As of January 31, 1999 and February 1, 1998, accumulated other
comprehensive income is comprised entirely of the cumulative translation
adjustment.
(c) Discontinued Operations
Effective March 30, 1998, the company spun off the Specialty Foods segment
to its shareowners as an independent publicly-traded company. The spin-off
qualified as a tax-free distribution to U.S. shareholders. Shareowners of
record as of March 9, 1998 received one share of the common stock of the
new company, Vlasic Foods International Inc. (Vlasic), for every ten
shares of Campbell Soup Company capital stock.
6
<PAGE> 7
Results of discontinued operations were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 1, 1998 February 1, 1998
---------------- ----------------
<S> <C> <C>
Net sales $ 330 $ 637
===== =====
Earnings before taxes $ 32 $ 56
Taxes on earnings $ (12) $ (21)
----- -----
Earnings from discontinued operations $ 20 $ 35
===== =====
</TABLE>
(d) Restructuring Charge
A restructuring charge included in earnings from continuing operations of
$262 million ($193 million after-tax or $.42 per share), was recorded in
the third quarter fiscal 1998. This charge relates to the rationalization
of certain U.S., European and Australian production and administrative
facilities and anticipated losses on the divestitures of non-strategic
businesses with annual sales of approximately $170 million. The
restructuring program includes the elimination of approximately 750
employee positions.
The restructuring charge includes approximately $78 million in cash
charges primarily related to severance, employee benefit costs and lease
termination fees. The balance relates to non-cash charges for estimated
losses on the disposition of plant assets and divestitures of businesses.
The company expects to complete the restructuring program by the fourth
quarter fiscal 1999.
A summary of the original reserve and related activity through January 31,
1999 is as follows:
<TABLE>
<CAPTION>
Balance at Balance at
Original August January
Reserves Activity 2, 1998 Activity 31, 1999
<S> <C> <C> <C> <C> <C>
Loss on asset dispositions and
divestitures $ 209 $ (58) $ 151 $ (49) $ 102
Severance and benefits 41 (9) 32 (7) 25
Other 12 (2) 10 (6) 4
---------------------------------------------------------------------------------------------------------------------
TOTAL $ 262 $ (69) $ 193 $ (62) $ 131
====================================================================================================================
</TABLE>
(e) Earnings Per Share
The company adopted the provisions of SFAS No. 128, "Earnings per
Share"("EPS") as of the second quarter fiscal 1998. For the periods
presented in the Statements of Earnings, the calculations of basic EPS and
EPS assuming dilution vary in that the weighted average shares outstanding
assuming dilution includes the incremental effect of stock options.
7
<PAGE> 8
(f) Cumulative Effect of Change In Accounting Principle
In the second quarter fiscal 1998, the company adopted the provisions of
the Emerging Issues Task Force (EITF) consensus ruling on Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract
that Combines Business Process Reengineering and Information Technology
Transformation." The unamortized balance of previously capitalized
business process reengineering costs was written off as a cumulative
effect of change in accounting principle of $11 million or $.02 per share,
net of an income tax benefit of approximately $7 million.
(g) Segment Information
The company operates in three business segments: Soup and Sauces, Biscuits
and Confectionery, and Away From Home. The segments are managed as
strategic units due to their distinct manufacturing processes, marketing
strategies and distribution channels.
The Soup and Sauces segment includes the worldwide soup businesses, Prego
spaghetti sauces, Pace Mexican sauces, Franco-American pastas and gravies,
Swanson broths, and V8 beverages. The Biscuits and Confectionery segment
includes the Godiva Chocolatier, Pepperidge Farm, Arnotts Limited and
Delacre businesses. The Delacre business was sold in June 1998. Away From
Home represents products, including Campbell's Soups and Campbell's
Specialty Kitchen entrees, which are distributed to the food service and
home meal replacement markets. See Note (c) regarding the Specialty Foods
segment, which has been reclassified as a discontinued operation.
Accounting policies for measuring segment assets and earnings before
interest and taxes are substantially consistent with those described in
the summary of significant accounting policies included in the fiscal 1998
Annual Report. The company evaluates segment performance based on earnings
before interest and taxes, excluding certain non-recurring charges. Away
From Home products are principally produced by the tangible assets of the
company's other segments. Accordingly, tangible assets have not been
allocated to the Away From Home segment. Depreciation and amortization are
allocated to Away From Home based on budgeted production hours. Transfers
between segments are recorded at cost plus mark-up or at market.
8
<PAGE> 9
JANUARY 31, 1999
<TABLE>
<CAPTION>
Away Corporate
Soup and Biscuits and From and
THREE MONTHS ENDED Sauces Confectionery Home Other(1) Eliminations(2) Total
- ------------------ ------ ------------- ---- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 1,278 407 135 36 (24) $ 1,832
Earnings before
interest and taxes $ 291 71 16 4 (11) $ 371
Depreciation and
amortization $ 33 21 3 2 5 $ 64
Capital expenditures $ 53 14 - 6 6 $ 79
</TABLE>
<TABLE>
<CAPTION>
Away Corporate
SIX MONTHS ENDED Soup and Biscuits and From and
- ---------------- Sauces Confectionery Home Other(1) Eliminations(2) Total
------ ------------- ---- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,567 769 262 75 (37) $ 3,636
Earnings before
interest and taxes $ 681 129 32 7 (31) $ 818
Depreciation and
amortization $ 64 41 6 4 8 $ 123
Capital expenditures $ 80 27 - 9 10 $ 126
Segment assets $ 3,210 1,466 318 172 708 $ 5,874
</TABLE>
(1) Represents financial information of certain prepared convenience food
businesses not categorized as reportable segments.
(2) Represents elimination of intersegment sales, unallocated corporate
expenses, and unallocated assets, including corporate offices, deferred
income taxes and prepaid pension assets.
9
<PAGE> 10
FEBRUARY 1, 1998
<TABLE>
<CAPTION>
Away Corporate
Soup and Biscuits and From and
Three Months Ended Sauces Confectionery Home Other(1) Eliminations(2) Total
- ------------------ ------ ------------- ---- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 1,383 428 118 103 (20) $ 2,012
Earnings before
interest and taxes $ 396 76 16 5 (7) $ 486
Depreciation and
amortization $ 30 22 2 5 5 $ 64
Capital expenditures $ 25 14 - 3 4 $ 46
</TABLE>
<TABLE>
<CAPTION>
Away Corporate
Six Months Ended Soup and Biscuits and From and
- ----------------- Sauces Confectionery Home Other(1) Eliminations(2) Total
------ ------------- ---- -------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,598 837 225 207 (42) $ 3,825
Earnings before
interest and taxes $ 767 135 31 6 (26) $ 913
Depreciation and
amortization $ 66 44 4 9 10 $ 133
Capital expenditures $ 45 30 - 8 7 $ 90
Segment assets(3) $ 3,047 1,725 220 382 696 $ 6,070
</TABLE>
(1) Represents financial information of certain prepared convenience food
businesses not categorized as reportable segments.
(2) Represents elimination of intersegment sales, unallocated corporate
expenses and unallocated assets, including corporate offices, deferred
income taxes and prepaid pension assets.
(3) Segment assets as of February 1, 1998 exclude net assets of discontinued
operations of $720.
10
<PAGE> 11
(h) Inventories
<TABLE>
<CAPTION>
JANUARY August
31, 1999 2, 1998
-------- -------
<S> <C> <C>
Raw materials, containers and supplies $ 215 $ 205
Finished products 406 359
- ---------------------------------------------------------------------------
$ 621 $ 564
===========================================================================
</TABLE>
Approximately 70% of inventory is accounted for on the last in, first out
(LIFO) method of determining cost. If the first in, first out inventory
valuation method had been used exclusively, inventories would not differ
materially from the amounts reported at January 31, 1999 and August 2,
1998.
(i) Notes Payable and Long-Term Debt
In October 1998, the company issued $300 million of notes due October 2003
bearing interest at 4.75%. The issuance was the third draw down on the
company's $1 billion shelf registration filed with the Securities and
Exchange Commission in fiscal 1997. As of February 1, 1999, $100 million
remains available for issuance under the shelf registration.
(j) Forward Stock Purchase Program
In October 1998, the company entered into a forward stock purchase
contract to partially hedge the company's equity exposure from its stock
option program. The contract, which matures in fiscal 2004, allows the
company to repurchase approximately 8 million shares at an average price
of approximately $49 per share. The company may elect to settle the
contract on a net share basis in lieu of physical settlement. The contract
permits early settlement and may be extended for an additional five-year
term.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CAMPBELL SOUP COMPANY
RESULTS OF CONTINUING OPERATIONS
OVERVIEW
The company's sales and earnings from continuing operations declined in the
second quarter ended January 31, 1999 due to lower shipments of U.S. wet soup
and increased marketing investment across the portfolio. On January 11, 1999 the
company announced major cost savings initiatives in its supply chain operations.
The immediate effect of these initiatives was lower U.S. wet soup shipments.
Going forward these initiatives should result in the pattern of shipments across
the year being more level than in the past with resulting efficiencies in supply
chain operations which are expected to generate $100 million in annualized cost
savings. These savings are expected to be realized through reduced trade
spending and lower costs of procurement, manufacturing, shipping and storage of
products. Net sales, as reported, declined 9%, while sales excluding currency
and divestitures declined 4%. Earnings from continuing operations and diluted
earnings per share from continuing operations were down 25% and 22%,
respectively.
In the second quarter ended February 1, 1998, the company adopted Emerging
Issues Task Force Consensus No. 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract that Combines Business Process
Reengineering and Information Technology Transformation." The impact of this
required accounting change was $11 million after-tax or $.02.
For the six months ended January 31, 1999, sales and earnings declined due to
lower shipments of U.S. wet soup and increased marketing spending. Net sales, as
reported, declined 5%, however, excluding currency and divestitures, sales from
ongoing businesses increased 2%. Earnings from continuing operations and diluted
earnings per share from continuing operations declined 11% and 9%, respectively.
SECOND QUARTER
SALES
Sales in the quarter declined 9% to $1.83 billion from $2.01 billion last year.
The change in sales was due to an 8% decrease from volume and mix, a 5% decline
due to divestitures, offset by 2% from higher selling prices and 2% from
acquisitions.
12
<PAGE> 13
An analysis of net sales by segment follows:
<TABLE>
<CAPTION>
(millions) 1999 1998 % CHANGE
- ---------- ---- ---- --------
<S> <C> <C> <C>
Soup and Sauces $1,278 $1,383 (8)
Biscuits and Confectionery 407 428 (5)
Away From Home 135 118 14
- -----------------------------------------------------------------------------
Subtotal 1,820 1,929 (6)
Other 36 103 (65)
Intersegment (24) (20)
- -----------------------------------------------------------------------------
$1,832 $2,012 (9)
=============================================================================
</TABLE>
The Soup and Sauces decrease was due to worldwide wet soup volume decline of
15%, including a U.S. wet soup volume decline of 20%. As previously discussed,
the U.S. wet soup volume decline was a result of the company's decision to
implement changes to its supply chain operations which primarily impacted
shipments of condensed soup. This worldwide wet soup volume decline was in
contrast to increased consumer demand for U.S. soups driven by ready-to-serve
products including Chunky and Simply Home, and Swanson broths.
Outside the U.S., Canada delivered strong wet soup sales. In Europe, Erasco
soups in Germany and Liebig soups in France, acquired in December 1997,
contributed to sales growth. In Asia-Pacific, soup sales were up due primarily
to strong gains in Australia where we are increasing our market leadership and
Cheong Chan in Malaysia.
In beverages, V8 Splash continued its stellar top-line performance.
Biscuits and Confectionery reported a decline in sales compared to second
quarter 1998. The decline was primarily due to the divestiture of Delacre, the
company's European biscuit business, and adverse currency translation impact in
Australia. Excluding the impact of the divestiture and currency, sales increased
approximately 7%. This increase was led by Pepperidge Farm Goldfish crackers,
Chocolate Chunk classic cookies and Swirl bread. Godiva Chocolatier contributed
double-digit sales growth through expansion of its North American, European and
Japanese retail outlets. Arnotts Limited (Arnotts) reported increased sales led
by strong performance from TimTams biscuits and Kettle chips. In addition,
Arnotts' introduction of Goldfish crackers in the Australian market earlier in
the fiscal year continued to exceed expectations.
Away From Home sales increased by 14% primarily due to Stockpot, a premium
refrigerated soup brand acquired in the first quarter of fiscal 1999. In
addition, U.S. foodservice sales increased due to growth in soup and V8 Splash.
New Campbell soup kettles, which provide Campbell's branded soup in university
cafeterias, convenience stores and other outlets, continued to build volume.
13
<PAGE> 14
GROSS MARGIN
Gross margin, defined as net sales less cost of products sold, decreased $81
million in the quarter. As a percent of sales, gross margin was 53.3% compared
to 52.5% last year. The improvement in margin percentage was principally due to
higher selling prices, cost savings generated from global procurement
initiatives and continued productivity gains in manufacturing facilities.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses as a percent of sales increased to 27.9% from
22.8% last year. The increase is attributable to a double-digit increase in
trade marketing spending driven by increased investment in the U.S. retail wet
soup business and competitive pressures on the Pepperidge Farm frozen business
and Arnotts' biscuits business in Australia.
ADMINISTRATIVE EXPENSES
Administrative expenses were flat as a percent of sales compared to last year.
OTHER EXPENSES
Other expenses declined as compared to last year primarily due to lower
long-term incentive plan costs.
OPERATING EARNINGS
Segment operating earnings decreased 23% for the second quarter versus the prior
year.
An analysis of operating earnings by segment follows:
<TABLE>
<CAPTION>
(millions) 1999 1998 % CHANGE
- ---------- ---- ----- --------
<S> <C> <C> <C>
Soup and Sauces $ 291 $ 396 (27)
Biscuits and Confectionery 71 76 (7)
Away From Home 16 16 --
- ---------------------------------------------------------------------------------------
Subtotal 378 488 (23)
Other 4 5
- ---------------------------------------------------------------------------------------
382 493 (23)
Corporate (11) (7)
- ---------------------------------------------------------------------------------------
$ 371 $ 486
- ---------------------------------------------------------------------------------------
</TABLE>
Soup and Sauces earnings were down 27% due to lower U.S. condensed soup
shipments and increased marketing spending. This earnings shortfall was slightly
offset by strong earnings performance by U.S. ready-to-serve soups and several
international wet soup businesses including Erasco in Germany, Campbell's in
Australia, Cheong Chan in Malaysia and the contribution of Liebig in France,
which was acquired in December 1997.
14
<PAGE> 15
Biscuits and Confectionery earnings declined to $71 million due to the
divestiture of Delacre in June 1998 and heavy trade spending in Pepperidge
Farm's frozen business and Arnotts' biscuits business in Australia. This decline
was slightly mitigated by Pepperidge Farm's Goldfish crackers and Chocolate
Chunk classic cookies earnings performance and Godiva's double-digit earnings
growth.
Away From Home earnings were flat versus last year.
NON-OPERATING ITEMS
Net interest expense was flat versus prior year.
The effective tax rate was 33.4% compared to 34.3% last year due to a shift in
the mix of earnings to lower tax jurisdictions.
SIX MONTHS
SALES
Sales for the six months declined 5% to $3.64 billion from $3.83 billion last
year. The change in sales was due to a 1% decrease from volume and mix, a 7%
decline due to divestitures and currency, offset by 2% from higher selling
prices and 1% from acquisitions.
An analysis of net sales by segment follows:
<TABLE>
<CAPTION>
(millions) 1999 1998 % CHANGE
- ---------- ---- ---- --------
<S> <C> <C> <C>
Soup and Sauces $2,567 $2,598 (1)
Biscuits and Confectionery 769 837 (8)
Away From Home 262 225 16
- -------------------------------------------------------------------------------
Subtotal 3,598 3,660 (2)
Other 75 207 (64)
Intersegment (37) (42)
- -------------------------------------------------------------------------------
$3,636 $3,825 (5)
================================================================================
</TABLE>
The Soup and Sauces decline was due to worldwide wet soup volume decline of 5%,
including U.S. wet soup volume decrease of 9%. This worldwide wet soup volume
decline was offset by continued strong consumer demand for U.S. ready-to-serve
soups including Chunky and Simply Home and Swanson broths.
Outside the U.S., Liebig soups in France contributed to European sales growth
and Cheong Chan in Malaysia led sales growth in Asia-Pacific.
V8 Splash also continued its strong sales performance.
15
<PAGE> 16
Biscuits and Confectionery reported a decline in sales compared to 1998. The
decline was primarily due to the divestiture of Delacre and adverse currency
translation impact in Australia. Excluding the impact of the divestiture and
currency, sales increased approximately 8%. This increase was led by Pepperidge
Farm Goldfish crackers, Chocolate Chunk classic cookies and Swirl bread. Godiva
Chocolatier contributed double-digit sales growth through expansion of its North
American, European and Japanese retail outlets. Arnotts Limited reported
increased sales, before the impact of currency, led by strong performance from
its TimTams biscuits.
Away From Home sales increased by 16% primarily due to Stockpot, a premium
refrigerated soup brand acquired during the first quarter of fiscal 1999. In
addition, U.S. foodservice sales increased due to growth in soup and V8 Splash.
New Campbell soup kettles increased branded soup sales in university cafeterias,
convenience stores and other outlets, and continue to expand the Campbell's
brand presence in the away-from-home market.
GROSS MARGIN
Gross margin, defined as net sales less cost of products sold, decreased $27
million year-to-date. As a percent of sales, gross margin was 53.6% compared to
51.7% last year. The improvement in margin percentage was principally due to
selling price increases, cost savings generated from global procurement
initiatives and continued productivity gains in manufacturing facilities.
MARKETING AND SELLING EXPENSE
Marketing and selling expenses as a percent of sales increased to 25.6% from
21.7% last year. The increase is attributable to a double-digit increase in
trade marketing spending driven by increased investment in the U.S. retail wet
soup business and competitive pressures on the Pepperidge Farm and Arnotts'
businesses.
ADMINISTRATIVE EXPENSES
Administrative expenses were flat as a percent of sales compared to last year.
OTHER EXPENSES
Other expenses declined as compared to last year primarily due to lower minority
interest expense, reflecting the buy-out of Arnotts Limited in fiscal 1998, and
lower long-term incentive plan costs.
OPERATING EARNINGS
Segment operating earnings decreased 10% versus the prior year. Excluding the
impact of currency, operating earnings in ongoing businesses decreased 8%.
16
<PAGE> 17
An analysis of operating earnings by segment follows:
<TABLE>
<CAPTION>
(millions) 1999 1998 % CHANGE
- ---------- ---- ---- --------
<S> <C> <C> <C>
Soup and Sauces $ 681 $ 767 (11)
Biscuits and Confectionery 129 135 (4)
Away From Home 32 31 3
- -------------------------------------------------------------------
Subtotal 842 933 (10)
Other 7 6
- -------------------------------------------------------------------
849 939 (10)
Corporate (31) (26)
- -------------------------------------------------------------------
$ 818 $ 913
- -------------------------------------------------------------------
</TABLE>
Soup and Sauces earnings were down 11% due to lower U.S. condensed soup
shipments and increased marketing spending. This earnings shortfall was slightly
offset by strong earnings performance by U.S. ready-to-serve soups and several
international wet soup businesses including Erasco, Liebig, Campbell's in
Australia and Cheong Chan in Malaysia. In addition, V8 Splash continues to
deliver exceptional year-to-date earnings growth.
Biscuits and Confectionery earnings declined to $129 million due to the
divestiture of Delacre in June 1998 and adverse currency impact in Australia.
Excluding the impact of the divestiture and currency, earnings increased 4%.
Pepperidge Farm's Goldfish crackers and Chocolate Chunk classic cookies
delivered outstanding earnings performance and Godiva posted double-digit
earnings growth.
Away From Home reported earnings growth to $32 million versus last year. Wet
soup and V8 Splash in the U.S. foodservice channel were the primary contributors
to the earnings growth.
NON-OPERATING ITEMS
Net interest expense was flat at $86 million versus prior year.
The effective tax rate was 34.0% compared to 34.3% last year.
DISCONTINUED OPERATIONS
On September 9, 1997, the company announced its intention to spin off the
Specialty Foods segment to its shareowners as an independent publicly-traded
company. The spin-off, which qualified as a tax-free distribution to U.S.
shareholders, was effective March 30, 1998. On this date, shareowners of record
as of March 9, 1998 received one share of the common stock of the new company,
Vlasic Foods International Inc. (Vlasic), for every ten shares of Campbell Soup
Company capital stock.
17
<PAGE> 18
In March 1998, the company entered into a revolving credit facility and borrowed
$500 million. In connection with the spin-off, the revolving credit facility and
outstanding obligation of $500 million were assumed by Vlasic. In addition, the
company received approximately $75 million from subsidiaries of Vlasic for
repayment of certain advances. See Note (c) of the Notes to Financial Statements
for further discussion of the discontinued operations.
RESTRUCTURING CHARGE
A restructuring charge included in earnings from continuing operations of $262
million ($193 million after-tax or $.42 per share), was recorded in the third
quarter fiscal 1998. This charge relates to the rationalization of certain U.S.,
European and Australian production and administrative facilities and anticipated
losses on the divestitures of non-strategic businesses with annual sales of
approximately $170 million. The restructuring program includes the elimination
of approximately 750 positions.
The restructuring charge includes $78 million in cash charges primarily related
to severance, employee benefit costs and lease termination fees. The balance
relates to non-cash charges for estimated losses on the disposition of plant
assets and divestitures of businesses. The company expects to realize
approximately $74 million of ongoing annual pre-tax savings from this plan.
Expected annual savings are not necessarily indicative of future incremental
earnings due to management's commitment to fund investments to grow brands and
drive volume growth. The company expects to complete the restructuring program
by the fourth quarter fiscal 1999. See Note (d) of the Notes to Financial
Statements for further discussion of the program and the related activity
analysis.
LIQUIDITY AND CAPITAL RESOURCES
The company generated cash from operations of $389 million compared to $514
million last year. This decline is primarily due to lower earnings and changes
in working capital, including an increase in inventories due to lower U.S. wet
soup shipments and spending on restructuring programs.
Capital expenditures were $126 million, an increase from $90 million last year.
The company continues to aggressively manage its capital outlays and expects
total expenditures to approximate $325 million in fiscal 1999.
In the first quarter, the company acquired Stockpot, a premium refrigerated soup
brand, for approximately $105 million.
In October 1998, the company issued $300 million of notes due October 2003 and
bearing interest of 4.75%.
In the first six months, the company repurchased 9.3 million shares versus 5.7
million last year. By repurchasing shares, the company expects to utilize
existing cash and debt capacity to lower its cost of capital and increase
returns to shareowners. The company's long-term strategy is to repurchase
approximately two percent of its outstanding shares annually.
In October 1998, the company entered into a forward stock purchase contract to
partially hedge the company's equity exposure from its stock option program. See
Note (j) of the Notes to Financial Statements for further discussion of the
contract.
18
<PAGE> 19
YEAR 2000
Historically, certain computer programs were written using two digits rather
than four to define the applicable year. Accordingly, the company's software may
recognize a date using "00" as 1900 rather than the year 2000, which could
result in computer systems failures or miscalculations, commonly referred to as
the Year 2000 ("Y2K") issue. The Y2K issue can arise at any point in the
company's supply, manufacturing, processing, distribution and financial chains.
Incomplete or untimely resolution of the Y2K issue by the company, key
suppliers, customers and other parties could have a material adverse effect on
the company's results of operations, financial condition and cash flows. To
address the Y2K issue, the company has established a Worldwide Year 2000
Business Action Council, led by an Executive Steering Committee of the company's
senior management, including representatives of each of the company's business
segments and corporate functions, to oversee and regularly review the status of
the readiness plan discussed below. In addition, the company has established a
Worldwide Project Office responsible for the day-to-day oversight and
coordination of the Y2K remediation, replacement and testing of business
systems. This project office reports to the company's Chief Information Officer.
The company's plan for addressing the Y2K issue is divided into three major
phases: Business Systems Inventory and Assessment, Remediation and Replacement
and Testing.
- - Business Systems Inventory and Assessment - The internal inventory portion
of this phase, which commenced in 1997, was designed to identify internal
business systems that were susceptible to system failure or processing
errors as a result of the Y2K issue. This phase is complete. Approximately
700 worldwide information technology business systems (IT) were
inventoried and approximately 200 were Y2K compliant and 500 were
identified as non-compliant. It was determined that approximately 400 of
the non-compliant systems require remediation and the remaining 100
systems will be retired or replaced. In addition, the company has
completed the inventory and assessment of its non-information technology
systems (Non-IT). The remediation and replacement of these systems, which
include manufacturing production lines and equipment, elevators, heating,
ventilation and air conditioning systems and water treatment systems, is
included in the remediation and replacement plan discussed below. As part
of this phase, significant service providers, vendors, suppliers,
customers and governmental entities that are believed to be critical to
business operations after January 1, 2000, were being identified and steps
undertaken to ascertain their stage of Y2K readiness through
questionnaires, interviews, on-site visits and other available means.
- - Remediation and Replacement - The company has developed and is in the
process of implementing its remediation and replacement plan for all
affected systems including IT and Non-IT systems. This phase, which
commenced in 1998, is approximately 69% complete. The company's plan
established priorities for remediation or replacement. The business
systems considered most critical to ongoing operations are being given the
highest priority. The company has prioritized its business systems into
"Mission Critical" and "All Other". "Mission Critical" systems are defined
as business systems such as Business Planning and Control Process
manufacturing, Sales Order Billing and Warehouse Management systems, that,
if shut down or interrupted, could have a material adverse effect on the
company's results of operations, financial condition and cash flows. "All
Other" systems are defined as business systems such as Data Warehouse and
Job Bidding systems that, if shut down or interrupted, may have an adverse
impact on the company. The company is utilizing internal and
19
<PAGE> 20
external resources to execute the plan and expects to substantially
complete all remediation and replacement of "Mission Critical" systems by
third quarter fiscal 1999 and "All Other" systems by fourth quarter fiscal
1999. The company is on schedule to meet these objectives.
- - Testing - This phase is ongoing as systems are remediated and replaced.
The company's efforts in this phase include testing by users and approval
by appropriate local and Y2K project management that the remediated or
replaced systems are Y2K compliant. The company expects to substantially
complete testing of "Mission Critical" systems by third quarter fiscal
1999 and "All Other" systems by first quarter fiscal 2000.
Because the company's Y2K compliance is dependent upon key third parties also
being Y2K compliant on a timely basis, there can be no guarantee that the
company's efforts will prevent a material adverse impact on its results of
operations, financial condition and cash flows. The possible consequences to the
company or its business partners not being fully Y2K compliant include temporary
plant closings, delays in the delivery of finished products, delays in the
receipt of key ingredients, containers and packaging supplies, invoice and
collection errors and inventory and supply obsolescence. These consequences
could have a material adverse effect on the company's results of operations,
financial condition and cash flows if the company is unable to conduct its
business in the ordinary course as a result of the Y2K issue. The company
believes that its readiness program, including the contingency plans discussed
below, should significantly reduce the adverse effect any such disruptions may
have.
The company is developing contingency plans to mitigate the potential
disruptions that may result from the Y2K issue. These plans may include
identifying and securing alternate suppliers of ingredients, containers,
packaging materials and utilities, adjusting manufacturing facility production,
shutdown and start-up schedules, stockpiling of finished product inventories and
other measures considered appropriate by management. Once developed and
approved, contingency plans, and the related cost estimates, will be continually
refined, as additional information becomes available.
The company currently estimates that the aggregate cost of its Y2K efforts will
be approximately $50 million, of which $24 million has been incurred to date.
These costs, except for capital costs of approximately $4 million, are being
expensed as incurred and are being funded through operating cash flows. The
company expects to incur Y2K costs of approximately $30-35 million in fiscal
1999.
(millions)
<TABLE>
<CAPTION>
Current Costs Estimated Costs
Components Estimates Incurred to Complete
- ---------- --------- -------- -----------
<S> <C> <C> <C>
External Consulting $ 27 (14) $ 13
Hardware/Software Upgrades 17 (10) 7
Other 6 -- 6
---- ---- ----
$ 50 (24) $ 26
==== ==== ====
</TABLE>
The company believes that such costs will not have a material impact on the
company's results of operations, financial condition or cash flows.
20
<PAGE> 21
RECENT DEVELOPMENTS
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. This standard,
effective for fiscal years beginning after June 15, 1999, requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded in earnings or other comprehensive
income, based on whether the instrument is designated as part of a hedge
transaction and, if so, the type of hedge transaction. The company is currently
assessing the impact of the adoption on the company's financial statements.
Based on the company's current portfolio, it is not expected that adoption of
this statement will have a material effect on the company's results of
operations, financial condition or cash flows.
The existing currencies of certain member countries of the European Union are
being phased out and have been effectively replaced with the European Union's
common currency, the Euro, as of January 1, 1999. On this date, a fixed
conversion rate was established between the existing currencies and the Euro.
National currencies will be eliminated over a period ending January 1, 2002. The
company does not believe that the conversion to the Euro will have a material
impact on its financial condition.
21
<PAGE> 22
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain statements which reflect the company's
current expectations regarding future results of operations, economic
performance, financial condition and achievements of the company. The company
has tried, wherever possible, to identify these forward looking statements by
using words such as "anticipate," "believe," "estimate," "expect" and similar
expressions. These statements reflect the company's current plans and
expectations and are based on information currently available to it. They rely
on a number of assumptions and estimates which could be inaccurate and which are
subject to risks and uncertainties.
The company wishes to caution the reader that the following important factors
and those important factors described elsewhere in the commentary, or in other
Securities and Exchange Commission filings of the company, could affect the
company's actual results and could cause such results to vary materially from
those expressed in any forward looking statements made by, or on behalf of, the
company:
- the impact of strong competitive response to the company's efforts
to leverage its brand power with product innovation and new
advertising;
- the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer
acceptance;
- the company's ability to achieve sales and earnings forecasts, which
are based on assumptions about sales volume;
- the continuation of the company's successful record of integrating
acquisitions into its existing operations and the availability of
new acquisition and alliance opportunities that build shareowner
wealth;
- the company's ability to achieve its cost savings and capacity
utilization objectives;
- the impact of unforeseen economic and political changes in
international markets where the company competes such as currency
exchange rates, inflation rates, recession, foreign ownership
restrictions and other external factors over which the company has
no control; and
- the ability of the company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Y2K
issue. Specific factors that might cause actual results to vary
materially from the results anticipated include the ability to
identify and correct all relevant computer codes and embedded chips,
unanticipated difficulties or delays in the implementation of the
company's remediation plans and the ability of third parties to
adequately address their own Y2K issues.
This discussion of uncertainties is by no means exhaustive but is designed to
highlight important factors that may impact the company's outlook.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the company's exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Annual Report on Form 10-K for fiscal 1998. Except as described in Note (j) of
the Notes to Financial Statements, there have been no significant changes in the
company's portfolio of financial instruments or market risk exposures which have
occurred since year-end.
23
<PAGE> 24
PART II
ITEM 1. LEGAL PROCEEDINGS
In management's opinion, there are no pending claims or litigation, the outcome
of which would have a material effect on the consolidated results of operations,
financial position or cash flows of the company.
As previously reported, in October 1995, at the request of the Environmental
Protection Agency (EPA), the United States of America (USA) instituted an action
in the United States District Court for the Eastern District of California,
alleging, inter alia, that the company violated the Clean Air Act by operating
certain can manufacturing equipment at its Sacramento, California facility
without a valid permit and by failing to apply control technology to reduce air
emissions. In August 1997, at the request of the EPA, the USA filed a second
complaint alleging that the company violated the Clean Air Act by modifying
certain can manufacturing equipment at the same facility without a permit, and
without installing control technology. The second complaint also alleged that
the company exceeded certain daily and quarterly emission limits. The USA
asserted in its complaints that it was seeking the imposition of civil
penalties, calculated on a per diem/per violation basis, for each of the alleged
violations. The company disputed liability for any and all of the violations
alleged and also disputed the application of the maximum statutory penalty to
any of the alleged violations and the USA's method of calculating applicable
penalties, if any. In or about late October 1998, the company, EPA and the
Department of Justice agreed to resolve the two cases amicably under the terms
of a consent decree, which was published in the Federal Register on November 13,
1998. The District Court for the Eastern District of California approved the
consent decree on February 4, 1999. Under the terms of the consent decree, the
company admits no liability. The consent decree also provides that the company
will pay a civil penalty of $1,215,000, the three-piece can line at the
Sacramento facility will be shut down by August 1, 2000 and the company will
transfer certain emission reduction credits to the Environmental Resource Trust,
a non-profit organization. The company paid the civil penalty on February 22,
1999. The consent decree is not expected to have a material effect on the
consolidated results of operations, financial position or cash flows of the
company.
Communities for a Better Environment (CBE) sent a Clean Air Act Notice of Intent
to Sue letter dated April 6, 1998 to the company. CBE claimed that the company's
Sacramento facility has used certain solvents allegedly in violation of emission
limitations set by the Sacramento Metropolitan Air Quality Management District's
(Air District) Rules and has not complied with certain record-keeping
requirements. These are the same issues that were raised in notices of violation
issued to the company by the Air District which were settled in October 1997,
without admitting liability. CBE contends, however, that the settlement with the
Air District did not resolve the alleged violation arising from the use of
certain solvents on the grounds that the Air District's method of settling the
issue is not federally approved. The company disputes the alleged violation and
denies liability. The company and CBE have agreed to settle CBE's claim under
the terms of a consent decree, which was approved by the District Court for the
Eastern District of California on February 16, 1999. Under the consent decree,
in which the company admits no liability, certain equipment which used solvents
that were the subject of CBE's claim will be shut down at the Sacramento,
California facility by August 1, 2000. Other significant provisions of the
proposed consent decree are that the company will donate certain emission
reduction credits to the Air District and will donate the total amount of
$85,000 to two non-profit organizations, in
24
<PAGE> 25
lieu of paying any civil penalty or CBE attorney's fee. The terms of the consent
decree are not expected to have a material effect on the consolidated results of
operations, financial position or cash flows of the company.
The company has also been named as a potentially responsible party in a number
of proceedings brought under the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund. Although the impact
on these proceedings cannot be predicted at this time due to the large number of
other potentially responsible parties and the speculative nature of clean-up
cost estimates, the ultimate disposition is not expected to have a material
effect on the consolidated results of operations, financial position, or cash
flows of the company.
25
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Campbell's Annual Meeting of Shareowners was held on November 19, 1998.
(c) The matters voted upon and the results of the vote are as follows:
Election of Directors
<TABLE>
<CAPTION>
======================================================================
Number of Shares
======================================================================
Name For Withheld
======================================================================
<S> <C> <C>
Alva A. App 396,426,644 1,008,546
======================================================================
Edmund M. Carpenter 396,523,897 911,293
======================================================================
Bennett Dorrance 396,511,291 923,899
======================================================================
Thomas W. Field, Jr. 396,521,735 913,455
======================================================================
Kent B. Foster 396,328,454 1,106,736
======================================================================
Harvey Golub 370,238,758 27,196,432
======================================================================
David W. Johnson 396,451,465 983,725
======================================================================
David K. P. Li 367,688,676 29,746,514
======================================================================
Philip E. Lippincott 396,491,909 943,281
======================================================================
Mary Alice Malone 396,505,760 929,430
======================================================================
Dale F. Morrison 396,515,322 919,868
======================================================================
Charles H. Mott 396,505,557 929,633
======================================================================
George M. Sherman 396,510,092 925,098
======================================================================
Donald M. Stewart 396,509,293 925,897
======================================================================
George Strawbridge, Jr. 396,497,687 937,503
======================================================================
Charlotte C. Weber 396,501,722 933,468
======================================================================
</TABLE>
Ratification of Appointment of Independent Accountants
<TABLE>
<CAPTION>
======================================================================================================
Broker Non-
For Against Abstentions Votes
======================================================================================================
<S> <C> <C> <C> <C>
Ratification of Appointment of 396,152,199 473,475 809,516 -0-
Accountants
======================================================================================================
</TABLE>
Shareowner Proposal Concerning Proxy Format
<TABLE>
<CAPTION>
======================================================================================================
Broker Non-
For Against Abstentions Votes
======================================================================================================
<S> <C> <C> <C> <C>
Shareowner Proposal Concerning 6,578,210 356,595,840 10,725,171 23,535,969
Proxy Format
======================================================================================================
</TABLE>
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
No.
4 There is no instrument with respect to long-term debt of the company
that involves indebtedness or securities authorized thereunder
exceeding 10 percent of the total assets of the company and its
subsidiaries on a consolidated basis. The company agrees to file a
copy of any instrument or agreement defining the rights of holders
of long-term debt of the company upon request of the Securities and
Exchange Commission.
27 Financial Data Schedules.
b. Reports on Form 8-K
There were no reports on Form 8-K filed by the company during the
second quarter of fiscal 1999.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMPBELL SOUP COMPANY
Date: March 17, 1999 By: /s/ Basil Anderson
--------------------------------
Basil Anderson
Executive Vice President and
Chief Financial Officer
By: /s/ Ellen Oran Kaden
--------------------------------
Ellen Oran Kaden
Senior Vice President
Law and Government Affairs
28
<PAGE> 29
INDEX TO EXHIBITS
Exhibit Number
- --------------
<TABLE>
<CAPTION>
<S> <C>
27 Financial Data Schedule.
27.1 Financial Data Schedule.
</TABLE>
29
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FDS
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-01-1999
<PERIOD-START> AUG-03-1998
<PERIOD-END> JAN-31-1999
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 745
<ALLOWANCES> 40
<INVENTORY> 621
<CURRENT-ASSETS> 1,573
<PP&E> 3,238
<DEPRECIATION> 1,519
<TOTAL-ASSETS> 5,874
<CURRENT-LIABILITIES> 3,024
<BONDS> 1,338
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 20
<OTHER-SE> 671
<TOTAL-LIABILITY-AND-EQUITY> 5,874
<SALES> 3,636
<TOTAL-REVENUES> 3,636
<CGS> 1,686
<TOTAL-COSTS> 1,686
<OTHER-EXPENSES> 16
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 732
<INCOME-TAX> 249
<INCOME-CONTINUING> 483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 483
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>3
<DESCRIPTION>FDS
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-02-1998
<PERIOD-START> AUG-04-1997
<PERIOD-END> FEB-01-1998
<CASH> 98
<SECURITIES> 0
<RECEIVABLES> 956
<ALLOWANCES> 46
<INVENTORY> 558
<CURRENT-ASSETS> 1,565
<PP&E> 3,548
<DEPRECIATION> 1,607
<TOTAL-ASSETS> 6,790
<CURRENT-LIABILITIES> 3,272
<BONDS> 1,261
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 20
<OTHER-SE> 1,464
<TOTAL-LIABILITY-AND-EQUITY> 6,790
<SALES> 3,825
<TOTAL-REVENUES> 3,825
<CGS> 1,848
<TOTAL-COSTS> 1,848
<OTHER-EXPENSES> 41
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 827
<INCOME-TAX> 284
<INCOME-CONTINUING> 543
<DISCONTINUED> 35
<EXTRAORDINARY> 0
<CHANGES> 11
<NET-INCOME> 567
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.23
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CPWR | https://www.sec.gov/Archives/edgar/data/859014/0000950124-99-001062.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
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gQbEaBSUuyKGIFEQY3ivVQ==
<SEC-DOCUMENT>0000950124-99-001062.txt : 19990215
<SEC-HEADER>0000950124-99-001062.hdr.sgml : 19990215
ACCESSION NUMBER: 0000950124-99-001062
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COMPUWARE CORPORATION
CENTRAL INDEX KEY: 0000859014
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 382007430
STATE OF INCORPORATION: MI
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-20900
FILM NUMBER: 99538166
BUSINESS ADDRESS:
STREET 1: 31440 NORTHWESTERN HWY
CITY: FARMINGTON HILLS
STATE: MI
ZIP: 48334-2564
BUSINESS PHONE: 8107377300
MAIL ADDRESS:
STREET 1: 31440 NORTHWESTERN HIGHWAY
CITY: FARMINGTON HILLS
STATE: MI
ZIP: 48334-2564
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
COMMISSION FILE NUMBER 0-20900
COMPUWARE CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334-2564
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (248)737-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of February 2, 1999, there were outstanding 183,754,630 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 17 pages
<PAGE> 2
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended 4
December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
- ----------
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1998
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 157,064 $ 206,278
Investments 351,997 54,349
Accounts receivable, net 437,858 388,573
Deferred tax asset 16,155 14,133
Income taxes refundable 2,594
Prepaid expenses and other current assets 18,816 10,348
----------- -----------
Total current assets 981,890 676,275
----------- -----------
INVESTMENTS 174,379 107,721
----------- -----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 92,245 84,494
----------- -----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 50,476 50,455
----------- -----------
OTHER:
Accounts receivable 123,870 64,282
Deferred tax asset 10,438 12,926
Excess of cost over fair value of net assets acquired,
less accumulated amortization 58,885 57,607
Other 16,007 18,880
----------- -----------
Total other assets 209,200 153,695
----------- -----------
TOTAL ASSETS $ 1,508,190 $ 1,072,640
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 20,737 $ 19,985
Accrued expenses 149,213 113,792
Income taxes payable 22,474
Deferred revenue 222,633 180,174
----------- -----------
Total current liabilities 415,057 313,951
DEFERRED REVENUE 54,308 43,437
LONG TERM DEBT 3,719 6,956
----------- -----------
Total liabilities 473,084 364,344
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 1,850 1,802
Additional paid-in capital 383,182 282,668
Retained earnings 653,350 427,455
Foreign currency translation adjustment (3,276) (3,629)
----------- -----------
Total shareholders' equity 1,035,106 708,296
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,508,190 $ 1,072,640
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 187,313 $ 134,486 $ 450,986 $ 298,845
Maintenance fees 87,516 61,746 242,158 176,986
Professional services fees 158,289 113,403 445,166 305,663
---------- ---------- ---------- ----------
Total revenues 433,118 309,635 1,138,310 781,494
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 6,992 5,798 20,892 15,966
Cost of maintenance 9,452 7,942 27,761 22,715
Cost of professional services 127,358 95,589 363,767 263,102
Software product development 16,803 14,901 48,121 42,144
Sales and marketing 111,456 88,465 298,594 223,543
Administrative and general 19,737 15,419 52,888 42,701
Purchased research and development 1,600 4,350
Merger-related costs 3,606 3,606
---------- ---------- ---------- ----------
Total operating expenses 293,398 231,720 816,373 613,777
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 139,720 77,915 321,937 167,717
OTHER INCOME 7,644 3,750 20,274 8,284
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 147,364 81,665 342,211 176,001
INCOME TAX PROVISION 50,104 27,194 116,316 58,608
---------- ---------- ---------- ----------
NET INCOME $ 97,260 $ 54,471 $ 225,895 $ 117,393
========== ========== ========== ==========
Basic earnings per share $ 0.53 $ 0.31 $ 1.24 $ 0.67
========== ========== ========== ==========
Diluted earnings per share $ 0.48 $ 0.28 $ 1.13 $ 0.61
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 225,895 $ 117,393
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 30,661 26,864
Tax benefit from exercise of stock options 77,102 27,481
Deferred income taxes 466 (487)
Other 731 (471)
Net change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (108,873) (65,340)
Prepaid expenses and other current assets (8,468) (1,506)
Other assets 2,453 (771)
Accounts payable and accrued expenses 36,173 9,312
Deferred revenue 53,330 1,825
Income taxes 25,068 (10,433)
--------- ---------
Net cash provided by operating activities 334,538 103,867
--------- ---------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (4,624) (709)
Property and equipment (19,304) (21,670)
Capitalized software (12,946) (10,686)
Investments:
Proceeds from maturity 217,479 53,465
Purchases (585,038) (134,230)
--------- ---------
Net cash used in investing activities (404,433) (113,830)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 13,948 14,871
Net proceeds from sale of common stock 9,512 3,710
Payment of long term debt (2,779) (3,890)
--------- ---------
Net cash provided by financing activities 20,681 14,691
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (49,214) 4,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 206,278 107,341
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 157,064 $ 112,069
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
results for the interim periods presented. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto for the year ended March 31, 1998 included in the Company's
Annual Report to Shareholders and the Company's Form 10-K filed with the
Securities and Exchange Commission.
NOTE 2 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EPS:
Numerator: Net Income $ 97,260 $ 54,471 $225,895 $117,393
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 184,170 178,531 182,606 174,953
-------- -------- -------- --------
Basic EPS $ 0.53 $ 0.31 $ 1.24 $ 0.67
======== ======== ======== ========
DILUTED EPS:
Numerator: Net Income $ 97,260 $ 54,471 $225,895 $117,393
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 184,170 178,531 182,606 174,953
Dilutive effect of stock options 17,394 18,207 18,132 17,205
-------- -------- -------- --------
Total shares 201,564 196,738 200,738 192,158
-------- -------- -------- --------
Diluted EPS $ 0.48 $ 0.28 $ 1.13 $ 0.61
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998
(CONTINUED)
NOTE 3 - COMPREHENSIVE INCOME
Effective April 1, 1998, Compuware adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 establishes standards for reporting and presenting comprehensive income and
its components in consolidated financial statements. Comprehensive income is
defined as net income plus the change in equity of a business enterprise during
a period from transactions and other events and circumstances from nonowner
sources. For the three-month and nine-month periods ended December 31, 1998 and
1997, Compuware had other comprehensive income resulting from foreign currency
translation adjustments. Comprehensive income for the three-month and nine-month
periods ended December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 97,260 $ 54,471 $ 225,895 $ 117,393
Foreign currency translation
adjustment, net of tax 233 (831) 233 (1,672)
--------- --------- --------- ---------
Total comprehensive income $ 97,493 $ 53,640 $ 226,128 $ 115,721
========= ========= ========= =========
</TABLE>
NOTE 4 - ACQUISITIONS
In December 1998, the Company acquired certain software products from Cardume
Software Ltd. for $2,250,000 in cash and notes payable that are due within one
year. Of the total purchase price, $1,400,000 was allocated to in-process
research and development and in accordance with SFAS No. 2, this amount was
expensed as of the purchase date.
In October 1998, the Company acquired certain software products from Vireo
Software Inc., for $4,100,000 in cash and notes payable that are due within one
year. Of the total purchase price, $200,000 was allocated to in-process research
and development and in accordance with SFAS No. 2, this amount was expensed as
of the purchase date.
In July 1998, the Company acquired certain software products from Centerline
Software, Inc. for approximately $2,900,000 in cash and notes payable that are
due within one year. Of the total purchase price, $2,750,000 was allocated to
in-process research and development and in accordance with SFAS No. 2, this
amount was expensed as of the purchase date.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of Period-
Total Revenues to-Period
---------------------------- Change
Three Months Ended --------------
December 31, 1997
---------------------------- to
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
REVENUES:
Software license fees 43.3% 43.4% 39.3%
Maintenance fees 20.2 20.0 41.7
Professional services fees 36.5 36.6 39.6
------------- -------------
Total revenues 100.0 100.0 39.9
------------- -------------
OPERATING EXPENSES:
Cost of software license fees 1.6 1.9 20.6
Cost of maintenance 2.2 2.5 19.0
Cost of professional services 29.4 30.9 33.2
Software product development 3.9 4.8 12.8
Sales and marketing 25.7 28.6 26.0
Administrative and general 4.5 5.0 28.0
Purchased research and development 0.4 *
Merger-related costs 1.1 *
------------- -------------
Total operating expenses 67.7 74.8 26.6
------------- -------------
INCOME FROM OPERATIONS 32.3 25.2 79.3
OTHER INCOME 1.8 1.2 103.8
------------- -------------
INCOME BEFORE INCOME TAXES 34.1 26.4 80.4
INCOME TAX PROVISION 11.6 8.8 84.2
------------- -------------
NET INCOME 22.5% 17.6% 78.6%
============= =============
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased research
and development associated with the acquisition of products from Vireo Software,
Inc., in October 1998, and Cardume Software Limited, in December 1998, and
NuMega merger expense from the calculations for the three months ended December
31, 1998 and December 31, 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 32.6% 26.3% 73.4%
Other income 1.8 1.2 103.8
----------- -----------
Income before income taxes 34.4 27.5 74.7
Income tax provision 11.7 9.1 78.4
=========== ===========
Net income 22.7% 18.4% 72.8%
=========== ===========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of Period-
Total Revenues to-Period
----------------------------- Change
Nine Months ended ------------
December 31, 1997
----------------------------- to
1998 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
REVENUES:
Software license fees 39.6% 38.2% 50.9%
Maintenance fees 21.3 22.7 36.8
Professional services fees 39.1 39.1 45.6
------------ ------------
Total revenues 100.0 100.0 45.7
------------ ------------
OPERATING EXPENSES:
Cost of software license fees 1.8 2.0 30.9
Cost of maintenance 2.4 2.9 22.2
Cost of professional services 32.0 33.7 38.3
Software product development 4.2 5.4 14.2
Sales and marketing 26.2 28.6 33.6
Administrative and general 4.7 5.5 23.9
Purchased research and development 0.4 *
Merger-related costs 0.5 *
------------ ------------
Total operating expenses 71.7 78.6 33.0
------------ ------------
INCOME FROM OPERATIONS 28.3 21.4 92.0
OTHER INCOME 1.8 1.1 144.7
------------ ------------
INCOME BEFORE INCOME TAXES 30.1 22.5 94.4
INCOME TAX PROVISION 10.2 7.5 98.5
------------ ------------
NET INCOME 19.9% 15.0% 92.4%
============ ============
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased research
and development expenses associated with the acquisition of products from
CenterLine Software, Inc., Vireo Software, Inc., and Cardume Software Limited,
for the nine months ended December 31, 1998 and NuMega merger expense from the
calculations for the nine months ended December 31, 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 28.7% 21.9% 90.5%
Other income 1.8 1.1 144.7
------------ -----------
Income before income taxes 30.5 23.0 93.0
Income tax provision 10.4 7.7 97.0
============ ===========
Net income 20.1% 15.3% 90.9%
============ ===========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1997
Total revenues for the third quarter of fiscal 1999 were $433.1 million, an
increase of $123.5 million, or 39.9%, as compared to $309.6 million for the
third quarter of fiscal 1998. The Company experienced growth in license fees,
maintenance fees and professional services fees during the third quarter ended
December 31, 1998 as compared to the third quarter ended December 31, 1997.
Software license fees increased $52.8 million, or 39.3%, to $187.3 million in
the third quarter of fiscal 1999 from $134.5 million in the third quarter of
fiscal 1998. The majority of the Company's product families experienced growth
in license fees, with the largest percentage increase in its client/server
testing and implementation products.
Maintenance fee revenues increased $25.8 million, or 41.7%, to $87.5 million in
the third quarter of fiscal 1999 from $61.7 million in the third quarter of
fiscal 1998. The Company continues to experience growth in maintenance fees for
all of its product families due to the growth in the number of installed copies
of its products.
Revenues from professional services increased $44.9 million, or 39.6%, to $158.3
million in the third quarter of fiscal 1999 from $113.4 million in the third
quarter of fiscal 1998. All of the Company's professional services offices
experienced growth in revenues. The overall increase was due primarily to
increased business at new and existing clients.
The costs of software license fees increased $1.2 million, or 20.6%, to $7.0
million in the third quarter of fiscal 1999 from $5.8 million in the third
quarter of fiscal 1998. The increase was due primarily to an increase in
amortization of internally developed software products. As a percentage of
software license fees, these costs decreased to 3.7% in the third quarter of
fiscal 1999 from 4.3% for the same period in fiscal 1998.
Cost of maintenance increased $1.5 million, or 19.0%, to $9.5 million in the
third quarter of fiscal 1999 from $7.9 million in the third quarter of fiscal
1998. The increase in cost of maintenance was due primarily to the increase in
maintenance and support staff in order to support the worldwide growth of the
installed base. As a percentage of maintenance fees, these costs decreased to
10.8% in the third quarter of fiscal 1999 from 12.9% in the third quarter of
fiscal 1998.
Cost of professional services increased $31.8 million, or 33.2%, to $127.4
million in the third quarter of fiscal 1999 from $95.6 million in the third
quarter of fiscal 1998. The increase in these expenses was due primarily to the
growth in the services division billable staff by 1,457 to 5,667 people at
December 31, 1998 from 4,210 at December 31, 1997 and to an increase in training
costs in the professional services division. As a percentage of professional
services fees, these costs decreased to 80.5% in the third quarter of fiscal
1999 from 84.3% in the third quarter of fiscal 1998.
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $1.9 million, or 12.8%, to $16.8
million in the third quarter of fiscal 1999 from $14.9 million in the third
quarter of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $2.1
million to $19.9 million, or 11.9%, in the third quarter of fiscal 1999 from
$17.7 million in the third quarter of fiscal 1998. Capitalized research and
development expenditures increased $218,000 to $3.1 million, or 7.7%, in the
third quarter of fiscal 1999 from $2.8 million in the third quarter of fiscal
1998. Capitalized research and development expenditures as a percentage of total
research and development expenditures decreased to 15.4% in the third quarter of
fiscal 1999 from 16.0% in the third quarter of fiscal 1998.
Sales and marketing costs increased $23.0 million, or 26.0%, to $111.5 million
in the third quarter of fiscal 1999 from $88.5 million in the third quarter of
fiscal 1998. The increase in sales and marketing costs was due primarily to the
expansion of the worldwide sales force, higher sales commissions associated with
increased product sales, and increased advertising expenditures. As a percentage
of software license fees these costs declined to 59.5% in the third quarter of
fiscal 1999 as compared to 65.8% in the third quarter of fiscal 1998.
Administrative and general costs increased $4.3 million, or 28.0%, to $19.7
million in the third quarter of fiscal 1999 from $15.4 million in the third
quarter of fiscal 1998. The increase in these costs was due primarily to the
increase in the expenses associated with corporate systems and facilities needed
to support the Company's growth. As a percentage of total revenue, these costs
decreased to 4.5% in the third quarter of fiscal 1999 from 5.0% in the third
quarter of fiscal 1998.
During the third quarter of fiscal 1999, the Company recognized $1.6 million of
expense for purchased research and development associated with the acquisition
of products from Vireo Software, Inc. and Cardume Software Limited. During the
third quarter of fiscal 1998 the Company incurred merger related costs of $3.6
million associated with the acquisition of NuMega Technologies, Inc.
Income from operations increased $61.8 million, or 79.3%, to $139.7 million in
the third quarter of fiscal 1999 from $77.9 million in the third quarter of
fiscal 1998. As a percentage of revenues, income from operations increased to
32.3% in the third quarter of fiscal 1999 from 25.2% in the same period of
fiscal 1998. Excluding the purchased research and development expense of $1.6
million described above, and the merger related expenses incurred with the
NuMega acquisition, the Company's income from operations would have increased
$59.8 million, or 73.4%, to $141.3 million in the third quarter of fiscal 1999
from $81.5 million in the third quarter of fiscal 1998. As a percentage of total
revenues, income from operations, exclusive of special charges, increased to
32.6% in the third quarter of fiscal 1999 from 26.3% in the third quarter of
fiscal 1998.
Net interest and investment income for the third quarter of fiscal 1999 was $7.6
million as compared to $3.8 million in the third quarter of fiscal 1998. This
increase in income was due to higher average cash and investment balances
resulting from cash generated from higher operating earnings.
In the third quarter of fiscal 1999, the Company recognized an income tax
provision of $50.1 million, an effective tax rate of 34.0%, as compared to an
income tax provision of $27.2 million, an effective tax rate of 33.3%, for the
same period in the prior year. The increase in the effective tax rate was due to
the growth in pre-tax earnings which dilutes the effect of tax credits on the
effective tax rate.
11
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1997
Total revenues for the first nine months of fiscal 1999 were $1.1 billion, an
increase of $356.8 million, or 45.7%, as compared to $781.5 million for the
first nine months of fiscal 1998. The Company experienced growth in license
fees, maintenance fees, and professional services fees during the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997.
Software license fees increased $152.1 million, or 50.9%, to $451.0 million in
the first nine months of fiscal 1999 from $298.8 million in the first nine
months of fiscal 1998. All of the Company's product families experienced growth
in license fees, with the largest percentage increase in its client/server
testing and implementation products.
Maintenance fee revenues increased $65.2 million, or 36.8%, to $242.2 million in
the first nine months of fiscal 1999 from $177.0 million in the first nine
months of fiscal 1998. The Company continues to experience growth in maintenance
fees for all of its product families due to the growth in the number of
installed copies of its products.
Revenues from professional services increased $139.5 million, or 45.6%, to
$445.2 million in the first nine months of fiscal 1999 from $305.7 million in
the first nine months of fiscal 1998. The majority of the Company's professional
services offices experienced growth in revenues. The overall increase was due
primarily to increased business at new and existing clients.
Cost of software license fees increased $4.9 million, or 30.9%, to $20.9 million
in the first nine months of fiscal 1999 from $16.0 million in the first nine
months of fiscal 1998. The increase was due primarily to an increase in
amortization of internally developed software products and to a lesser extent
increased author royalties. As a percentage of software license fees, these
costs decreased to 4.6% in the first nine months of fiscal 1999 from 5.3% for
the same period in fiscal 1998.
Cost of maintenance increased $5.0 million, or 22.2%, to $27.8 million in the
first nine months of fiscal 1999 from $22.7 million in the first nine months of
fiscal 1998. The increase in the cost of maintenance was due primarily to the
increase in maintenance and support staff needed to support the worldwide growth
of the installed product base. As a percentage of maintenance fees, these costs
decreased to 11.5% in the first nine months of fiscal 1999 from 12.8% during the
same period of fiscal 1998.
Cost of professional services increased $100.7 million, or 38.3%, to $363.8
million in the first nine months of fiscal 1999 from $263.1 million in the first
nine months of fiscal 1998. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 1,457 to 5,667 people at
December 31, 1998 from 4,210 at December 31, 1997. As a percentage of
professional services fees, these costs decreased to 81.7% in the first nine
months of fiscal 1999 from 86.1% in the first nine months of fiscal 1998.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $6.0 million, or 14.2%, to $48.1
million in the first nine months of fiscal 1999 from $42.1 million in the first
nine months of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $7.3
million to $57.0 million, or 14.6%, in the first nine months of fiscal 1999 from
$49.7 million in the first nine months of fiscal 1998. Capitalized research and
development expenditures increased $1.3 million to $8.9 million, or 17.1%, in
the first nine months of fiscal 1999 from $7.6 million in the first nine months
of fiscal 1998.
Sales and marketing costs increased $75.1 million, or 33.6%, to $298.6 million
in the first nine months of fiscal 1999 from $223.5 million in the first nine
months of fiscal 1998. The increase in sales and marketing costs was due
primarily to the expansion of the worldwide sales force, higher sales
commissions associated with increased product sales and increased advertising
expenditures. As a percentage of software license fees these costs declined to
66.2% in the first nine months of fiscal 1999 as compared to 74.8% in the first
nine months of fiscal 1998.
Administrative and general costs increased $10.2 million, or 23.9%, to $52.9
million in the first nine months of fiscal 1999 from $42.7 million in the first
nine months of fiscal 1998. The increase in these costs was due primarily to the
increase in corporate support systems, facilities, and employee development
programs in order to support the Company's growth. As a percentage of total
revenue, these costs decreased to 4.7% in the first nine months of fiscal 1999
from 5.5% in the first nine months of fiscal 1998.
During the first nine months of fiscal 1999, the Company recognized $4.4 million
of expense for purchased research and development associated with the
acquisition of products from CenterLine Software, Inc., Vireo Software, Inc.,
and Cardume Software Limited. During the first nine months of fiscal 1998, the
Company recognized $3.6 million for merger-related costs associated with the
merger of NuMega Technologies, Inc.
Income from operations increased $154.2 million, or 92.0%, to $321.9 million in
the first nine months of fiscal 1999 from $167.7 million in the first nine
months of fiscal 1998. As a percentage of revenues, income from operations
increased to 28.3% in the first nine months of fiscal 1999 from 21.4% in the
same period of fiscal 1998. Excluding special charges of $4.4 million for the
fiscal 1999 purchased research and development discussed above and the NuMega
merger related expenses of $3.6 million in fiscal 1998, income from operations
would have increased $155.0 million, or 90.5%, to $326.3 million in the first
nine months of fiscal 1999 from $171.3 million in the first nine months of
fiscal 1998. As a percentage of total revenues, income from operations,
exclusive of special charges, increased to 28.7% in the first nine months of
fiscal 1999 from 21.9% in the same period of fiscal 1998.
Net interest and investment income for the first nine months of fiscal 1999 was
$20.3 million as compared to $8.3 million in the first nine months of fiscal
1998. This increase in income was due to higher average cash and investment
balances resulting from cash generated from higher operating earnings.
In the first nine months of fiscal 1999, the Company had an income tax provision
of $116.3 million, which was an effective tax rate of 34.0%, as compared to an
income tax provision of $58.6 million, which was an effective tax rate of 33.3%
in the first nine months of fiscal 1998. The increase in the effective tax rate
was due to the growth in pre-tax earnings which dilutes the effect of the tax
credits on the effective tax rate.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company held $683.4 million in cash and
investments. The Company has no debt other than the $3.7 million of notes issued
in connection with certain acquisitions.
The Company continues to evaluate business acquisition opportunities that fit
the Company's strategic plans.
The Company believes that its available cash resources, together with cash flow
from operations will be sufficient to meet its cash needs for the foreseeable
future.
YEAR 2000
The Year 2000 problem is the result of the widespread practice of using only 2
digits instead of 4 to represent the year in computing equipment and computer
software. Failure to address this problem could cause erroneous results in the
proper interpretation of years after 1999. The Company has instituted various
projects to address this issue which include three major areas: the software
products which the Company develops and markets, its internal information
technology (IT) assets, and aspects not directly related to the Company's IT
assets or software products ("non-IT assets"). This last area includes such
items as embedded systems in infrastructure components (such as building
security and HVAC systems), as well as the business relationships the Company
has with its customers and suppliers, especially those third parties with whom
the Company has a systems interaction.
The Company undertook a project to inventory and assess the impact of the Year
2000 on its software products in the middle of 1994. As a part of this project
the Company identified the software products that would be supported beyond
December 31, 1999. Plans were put in place to complete the necessary changes to
make the identified software products Year 2000 compliant. The Company believes
that all of the Company's current product offerings are Year 2000 compliant and
that plans are on schedule to ensure compliance for those products the Company
will continue to support.
The Company has established a WEB page to update customers on the Year 2000
status of the software products. This site assists the customers in
understanding the Year 2000 strategy. Part of the site gives customers access to
frequently asked Year 2000 questions. The Company is committed to supporting our
customers into the year 2000 and beyond. The strategy provides leadership and
tools needed to meet the challenge of the millennium change.
The Company has undertaken a project to inventory, assess and remediate its
significant internal software applications and other IT assets. Many of these
applications are essential for day-to-day operations. The Company believes it
has completed remediation, testing, and implementation for all critical
software. The remediation and testing activities have been performed exclusively
by internal resources.
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company is also in the process of assessing and remediating its other IT and
non-IT assets. These include areas such as PCs, networks, voice mail, email,
building security, etc. This portion of the project is planned for completion by
October 1, 1999, and appears to be on schedule.
The Company has also undertaken a project to identify and assess its significant
third-party suppliers, and is developing a plan to address vendor or supplier
Year 2000 issues (through remediation, repair, replacement, or upgrade) so as to
avoid any business disruption. In most cases, the Company is forced to rely on
third party representations, without any ability to do independent testing or
evaluation. Contingency plans are being developed for certain key third parties
which are deemed to be critical for the Company's operation. Based upon the
information received to date, the company does not expect any material financial
impacts from third party vendors. Embedded systems and other non-IT systems are
being evaluated for Year 2000 compliance, and being repaired or replaced as
necessary.
The costs for Year 2000-related activities are being budgeted as necessary.
Costs of the Company's Year 2000 compliance activities have not been and are not
expected to have a material impact on the Company's results of operations or
financial position. This expectation assumes that the Company will not be
obligated to incur significant Year 2000 related costs on behalf of its
customers or suppliers, and that the Company's critical vendors will be able to
meet their commitments to the Company.
The Company will be adequately prepared to meet the challenges of the coming of
Year 2000 without significant impact to the Company's ability to carry on its
normal business operations. Management estimates that we are approximately 85%
complete with all remediation efforts, which includes 100% completion of all
critical business systems and supported software products. The balance of the
efforts yet to be expended are in the areas of non-IT assets, monitoring
supplier compliance, and contingency planning.
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by
reference.
Exhibit
Number Description of Document
------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: February 12, 1999 By:/s/ Joseph A. Nathan
----------------- ------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: February 12, 1999 By: /s/ Laura L. Fournier
----------------- ------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
17
<PAGE> 18
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 157,064
<SECURITIES> 0
<RECEIVABLES> 449,406
<ALLOWANCES> 11,548
<INVENTORY> 0
<CURRENT-ASSETS> 981,890
<PP&E> 155,064
<DEPRECIATION> 62,819
<TOTAL-ASSETS> 1,508,190
<CURRENT-LIABILITIES> 415,057
<BONDS> 3,719
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,850
<OTHER-SE> 1,036,532
<TOTAL-LIABILITY-AND-EQUITY> 1,508,190
<SALES> 1,138,310
<TOTAL-REVENUES> 1,138,310
<CGS> 816,373
<TOTAL-COSTS> 816,373
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 441
<INCOME-PRETAX> 342,211
<INCOME-TAX> 116,316
<INCOME-CONTINUING> 225,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,895
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.13
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| CSCO | https://www.sec.gov/Archives/edgar/data/858877/0000891618-99-000863.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000891618-99-000863.txt : 19990310
<SEC-HEADER>0000891618-99-000863.hdr.sgml : 19990310
ACCESSION NUMBER: 0000891618-99-000863
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19990123
FILED AS OF DATE: 19990309
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CISCO SYSTEMS INC
CENTRAL INDEX KEY: 0000858877
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 770059951
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0731
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-18225
FILM NUMBER: 99560712
BUSINESS ADDRESS:
STREET 1: 170 WEST TASMAN DRIVE
CITY: SAN JOSE
STATE: CA
ZIP: 95134-1706
BUSINESS PHONE: 4085264000
MAIL ADDRESS:
STREET 1: 225 WEST TASMAN DRIVE
CITY: SAN JOSE
STATE: CA
ZIP: 95134-1706
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDED JANUARY 23, 1999
<TEXT>
<PAGE> 1
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 23, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 77-0059951
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days.
YES [X] NO [ ]
As of March 2, 1999, 1,597,195,347 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
CISCO SYSTEMS, INC.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 23, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Facing sheet 1
Index 2
Part I. Financial information
Item 1. Financial Statements and Supplementary Data
a) Consolidated statements of operations for the three and six months
ended January 23, 1999 and January 24, 1998 3
b) Consolidated balance sheets at January 23, 1999 and July 25, 1998 4
c) Consolidated statements of cash flows for the six months
ended January 23, 1999 and January 24, 1998 5
d) Notes to consolidated financial statements 6
Item 2. Management's discussion and analysis of financial
condition and results of operations 11
Part II. Other information 26
Signature 28
Exhibit Exhibit 27, Financial data schedule 29
</TABLE>
2
<PAGE> 3
PART I.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------- -------- --------------------
Jan. 23, Jan. 24, Jan. 23, Jan. 24,
1999 1998 1999 1998
-------------------- --------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $2,827 $2,016 $5,415 $3,885
Cost of sales 985 697 1,879 1,349
------ ------ ------ ------
Gross margin 1,842 1,319 3,536 2,536
Operating expenses:
Research and development 357 239 684 463
Sales and marketing 570 363 1,084 697
General and administrative 90 58 174 114
Purchased research and development 349 -- 390 127
------ ------ ------ ------
Total operating expenses 1,366 660 2,332 1,401
------ ------ ------ ------
Operating income 476 659 1,204 1,135
Realized gain on sale of investment -- -- -- 5
Interest and other income, net 80 44 145 81
------ ------ ------ ------
Income before provision for income taxes 556 703 1,349 1,221
Provision for income taxes 268 246 543 427
------ ------ ------ ------
Net income $ 288 $ 457 $ 806 $ 794
====== ====== ====== ======
Net income per share--basic $ .18 $ .30 $ .51 $ .52
====== ====== ====== ======
Net income per share--diluted $ .17 $ .29 $ .48 $ .50
====== ====== ====== ======
Shares used in per-share
calculation--basic 1,585 1,523 1,578 1,518
====== ====== ====== ======
Shares used in per-share
calculation--diluted 1,679 1,594 1,668 1,589
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
<TABLE>
<CAPTION>
January 23, July 25,
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,421 $ 535
Short-term investments 886 1,157
Accounts receivable, net of allowance for doubtful
accounts of $37 at January 23, 1999 and
$40 at July 25, 1998 1,477 1,298
Inventories, net 472 362
Deferred income taxes 408 345
Prepaid expenses and other current assets 144 65
------- -------
Total current assets 4,808 3,762
Investments 4,225 3,463
Restricted investments 800 554
Property and equipment, net 679 595
Other assets, net 922 543
------- -------
Total assets $11,434 $ 8,917
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 345 $ 249
Income taxes payable 462 410
Accrued payroll and related expenses 506 391
Other accrued liabilities 921 717
------- -------
Total current liabilities 2,234 1,767
Minority interest 44 43
Shareholders' equity:
Preferred stock, no par value, 5 shares authorized:
none issued or outstanding at January 23, 1999
and July 25, 1998
Common stock and additional paid-in capital,
$0.001 par value,
2,700 shares authorized: 1,593 shares
Issued and outstanding at January 23, 1999
and 1,563 at July 25, 1998 4,361 3,220
Retained earnings 4,634 3,828
Accumulated comprehensive income 161 59
------- -------
Total shareholders' equity 9,156 7,107
------- -------
Total liabilities and shareholders' equity $11,434 $ 8,917
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
January 23, January 24,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 806 $ 794
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 229 138
Deferred income taxes (85) (83)
Tax benefits from employee stock plans 398 142
Purchased research and development from acquisitions 298 19
Change in operating assets and liabilities:
Accounts receivable (173) (86)
Inventories (109) (13)
Prepaid expenses and other current assets (77) 30
Income taxes payable 51 63
Accounts payable 93 32
Accrued payroll and related expenses 114 27
Other accrued liabilities 170 104
------- -------
Net cash provided by operating activities 1,715 1,167
------- -------
Cash flows from investing activities:
Purchases of short-term investments (309) (855)
Proceeds from sales and maturities of short-term
investments 890 914
Purchases of investments (1,895) (1,430)
Proceeds from sales of investments 970 507
Purchases of restricted investments (496) (191)
Proceeds from sales and maturities of restricted
investments 251 116
Acquisition of property and equipment (277) (140)
Acquisition of Selsius Systems, net of
purchased research and development (19) --
Increase in lease receivables (137) (66)
Other (133) (10)
------- -------
Net cash used in investing activities (1,155) (1,155)
------- -------
Cash flows from financing activities:
Issuance of common stock 315 199
Other 11 (4)
------- -------
Net cash provided by financing activities 326 195
------- -------
Net increase in cash and equivalents 886 207
Cash and equivalents, beginning of period 535 270
------- -------
Cash and equivalents, end of period $ 1,421 $ 477
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Cisco Systems, Inc. (the "Company") provides networking solutions that connect
computing devices and computer networks, allowing people to access or transfer
information without regard to differences in time, place or type of computer
system. The Company sells its products in approximately 105 countries through a
combination of direct sales and reseller and distribution channels.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is the 52- or 53-week period ending on the last
Saturday in July. Fiscal year 1999 is a 53-week year while 1998 was a 52-week
year.
Basis of Presentation
The accompanying financial data as of January 23, 1999 and July 25, 1998, and
for the three and six month periods ended January 23, 1999 and January 24, 1998,
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The July 25, 1998 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended July 25, 1998.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of January 23, 1999 and for the three
and six month periods ended January 23, 1999 and January 24, 1998, have been
made. The
6
<PAGE> 7
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results of operations for the period ended January 23, 1999 are not necessarily
indicative of the operating results for the full year.
Advertising Costs
The Company expenses all advertising costs as they are incurred.
Software Development Costs
Software development costs which are required to be capitalized pursuant to
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," have not
been material to the Company to date.
Computation of Net Income Per Share
Basic net income per common share is computed using the weighted average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options.
Share and per share data presented reflect the three-for-two stock splits
effective September 1998 and December 1997.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information" and in
June 1998, issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Readers are referred to the "Recent Accounting
Pronouncements" section of the Company's 1998 Annual Report to Shareholders for
further discussion.
The Company adopted Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition" in the first quarter of fiscal year 1999 and its adoption had no
material impact on the Company's results from operations or financial position.
7
<PAGE> 8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS COMBINATIONS
The Company has made a number of purchase acquisitions. The consolidated
financial statements include the operating results of each business from the
date of acquisition. Pro forma results of operations have not been presented,
because the effects of these acquisitions were not material on either an
individual or an aggregated basis.
The amounts allocated to purchased research and development were determined
based on appraisals completed by an independent third party using established
valuation techniques in the high-technology communications industry and were
expensed upon acquisition, because technological feasibility had not been
established and no future alternative uses existed. Research and development
costs to bring the products from the acquired companies to technological
feasibility are not expected to have a material impact on the Company's future
results of operations or cash flows. Amounts allocated to goodwill and other
intangibles are amortized on a straight-line basis over periods not exceeding
five years.
In November, the Company completed its purchase of Summa Four, Inc. ("Summa
Four"), a provider of programmable switch products. The Company's acquired
technology consists of two existing programmable switch products and one
programmable switch currently under development. Also in November, the Company
completed its purchase of Clarity Wireless, Inc.("Clarity"), a developer of
high-bandwidth wireless access technology for the computer networking and
Internet access markets. The Company's acquired technology consists of two
high-bandwidth access products currently under development, patents and patents
pending. Also in November, the Company completed its purchase of Selsius
Systems, Inc.("Selsius"), a developer of voice over data network products. The
Company's acquired technology consists of the core technology in Selsius'
existing public broadcast exchange (PBX) system and technology currently under
development for an enterprise-wide PBX system. Selsius' technology is focused on
developing products that will deliver voice over data network solutions. In
December, the Company acquired PipeLinks, Inc.("Pipelinks"), a developer of
SONET/SDH routers. The
8
<PAGE> 9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's acquired technology consists of two research and development projects
in process which are expected to result in the ability to transport both voice
and IP(Internet Protocol) traffic over the same network.
Total purchased research and development expense was $390 million for the six
months ending January 23, 1999. The purchased research and development expense
that was attributable to stock purchase acquisitions for the six month period
was $298 million and the purchased research and development expense attributable
to the cash purchase transaction, consisting of Selsius only, was $92 million
for the six month period ending January 23, 1999.
Each of the acquisition transactions is further outlined below:
Summary of purchase transactions (in millions):
<TABLE>
<CAPTION>
Purchased
Research &
Development Form of Consideration and Other
Entity Name Consideration Charge Notes to Acquisition
----------- ------------- ------------- -------------------------------
<S> <C> <C> <C>
Quarter Ended -
October 24, 1998
American Internet Corp. $56 $41 Common stock and options assumed;
goodwill and other intangibles
recorded of $18
Quarter Ended-
January 23, 1999
Summa Four, Inc. $129 $64 Common stock and options assumed, $16
in liabilities assumed; goodwill and
other intangibles recorded of $29
Clarity Wireless, Inc. $153 $94 Common stock and options assumed;
goodwill and other intangibles
recorded of $73
Selsius Systems, Inc. $134 $92 $111 in cash; options assumed;
goodwill and other intangibles
recorded of $41
PipeLinks, Inc. $118 $99 Common stock and options assumed;
goodwill and other intangibles
recorded of $11
</TABLE>
9
<PAGE> 10
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BALANCE SHEET DETAIL
(In millions)
<TABLE>
<CAPTION>
Inventories: January 23, July 25,
1999 1998
----------- ---------
(Unaudited)
<S> <C> <C>
Raw materials $ 74 $ 76
Work in process 197 143
Finished goods 168 111
Demonstration systems 33 32
----- -----
$ 472 $ 362
===== =====
</TABLE>
<TABLE>
<CAPTION>
Intangible Assets: January 23, July 25,
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Gross Intangible Assets $ 415 $ 200
Less: Accumulated Amortization (52) (30)
----- -----
$ 363 $ 170
===== =====
</TABLE>
Amortization expense for the three and six month periods ending January 23,
1999 and January 24, 1998 was $12 million, $22 million, $4 million and $8
million, respectively.
5. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", as of the first quarter of fiscal 1999.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however, it has no impact on the
Company's net income or total shareholders' equity.
10
<PAGE> 11
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of comprehensive income, net of tax, are as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
Jan. 23, Jan. 24, Jan. 23, Jan. 24,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 288 $ 457 $ 806 $ 794
Other comprehensive income (loss):
Change in unrealized gain (loss)
on investments, net 74 (3) 91 (7)
Change in accumulated translation
Adjustments 0 (3) 11 (5)
----- ----- ----- -----
Total comprehensive income $ 362 $ 451 $ 908 $ 782
===== ===== ===== =====
</TABLE>
6. INCOME TAXES
The Company paid income taxes of $184 million in the six months ended January
23, 1999 and $307 million in the six months ended January 24, 1998. The
Company's income taxes currently payable for federal, state and foreign purposes
have been reduced by the tax benefits of disqualifying dispositions of stock
options. This benefit totaled $398 million in the first six months of fiscal
1999, and was credited directly to shareholders' equity.
7. SHAREHOLDERS' EQUITY AND STOCK SPLIT
In August 1998, the Company's Board of Directors approved a three-for-two split
of the Company's common stock that was applicable to shareholders of record on
August 14, 1998 and effective on September 15, 1998. All references to share and
per-share data for all periods presented have been adjusted to give effect to
this three-for-two stock split as well as the three-for-two stock split
effective December 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of
11
<PAGE> 12
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Readers are referred to
the "Financial Risk Management" and "Potential Volatility in Operating Results"
sections of the Company's 1998 Annual Report to Shareholders, to the
"Acquisitions, Investments and Alliances", "Backlog", "Competition", "Research
and Development", "Manufacturing", "Patents, Intellectual Property and
Licensing", "Future Growth Subject to Risks" and "Other Risk Factors" sections,
among others, contained in the Company's 1998 Form 10-K filed on September 25,
1998, and to the "Financial Risk Management", "Future Growth Subject to Risks"
and "Potential Volatility in Operating Results" sections contained herein which
identify important risk factors that could cause actual results to differ from
those contained in the forward looking statements.
Net sales grew to $2.83 billion in the second quarter of 1999 from $2.02 billion
in the second quarter of 1998. Net sales for the first half of 1999 were $5.42
billion, compared to $3.89 billion in the first half of 1998. The 40.2% increase
in net sales between the two three-month periods and the 39.4% increase in net
sales between the two six- month periods was primarily a result of increasing
unit sales of LAN switching products such as the Catalyst(R) 5000 family and the
Catalyst(R) 2900 series of switches for smaller enterprise networks, access
servers such as the Cisco 3600 family, growth in the sales of add-on boards that
provide increased functionality, and increased maintenance service contract
sales. The sales growth rate for lower-priced access and switching products
targeted toward small and medium-sized businesses has increased faster than that
of the Company's high-end core router products. However, these products
typically carry lower average selling prices. Additionally, sales of some of the
Company's more established product lines, such as the Cisco 2500 and Cisco 4000
product families, have decreased as a percentage of total revenue. Sales to
international customers increased to 42.8% in the second quarter of 1999 versus
41.7% for the second quarter of 1998. The increase reflects sales growth in
certain international markets, particularly Germany and the United Kingdom, and
to a lesser extent Japan. Sales growth in other markets, including Latin America
and Eastern Europe, have been negatively impacted by certain factors including
weaker economic conditions, delayed government spending, a stronger dollar
versus the local currencies, and slower adoption of networking technologies.
Gross margins decreased slightly to 65.2% in the second quarter of 1999 from
65.4% in the second quarter of 1998. Gross margins for the first six months of
1999 were 65.3%, which remained consistent with the same period in 1998. The
decrease in the quarterly period
12
<PAGE> 13
is due principally to the Company's continued shift in revenue mix towards its
lower-margin products and the recent stabilization in the supply of memory chips
which has resulted in an increase in prices. The prices of component parts have
fluctuated in the recent past, and the Company expects that this trend may
continue. An increase in the price of component parts may have a material
adverse impact on gross margins. The Company expects that gross margins will
continue to decrease in the future, because it believes that the market for
lower-margin remote access and switching products for small to medium-sized
businesses will continue to increase at a faster rate than the market for the
Company's higher-margin router and high-performance switching products.
Additionally, as the Company focuses on new market opportunities, it faces
increasing competitive pressure from large telecommunications equipment
suppliers and well funded start-up companies, which may adversely effect gross
margins. The Company is attempting to mitigate this trend through various means,
such as increasing the functionality of its products, continued value
engineering, controlling royalty costs, and improving manufacturing
efficiencies. There can be no assurance that any efforts made by the Company in
these and other areas will successfully offset decreasing margins.
Research and development expenses increased by $118 million in the second
quarter of 1999 over the second quarter of 1998, an increase to 12.6% from 11.9%
of net sales. Research and development expenses increased by $221 million in the
first six months of 1999 over the first six months of 1998, an increase to 12.6%
from 11.9% of net sales. The increase reflects the Company's ongoing research
and development efforts in a wide variety of areas such as voice, video, and
data integration, Digital Subscriber Line (DSL) technologies, cable modem
technology, wireless access, dial access, enterprise switching, security,
network management, and high-end routing technologies, among others. A
significant portion of the increase was due to the addition of new personnel,
partly through acquisitions, as well as higher expenditures on prototypes and
depreciation on additional lab equipment. For the near future, research and
development expenses are expected to increase at a greater rate than the sales
growth rate, as the Company invests in technology to address potential market
opportunities. The Company also continues to purchase technology in order to
bring a broad range of products to the market in a timely fashion. If the
Company believes that it is unable to enter a particular market in a timely
manner, with internally developed products, it may license technology from other
businesses or acquire other businesses as an alternative to internal research
and development. All of the Company's research and development costs are
expensed as incurred.
13
<PAGE> 14
Sales and marketing expenses increased by $207 million in the second quarter of
1999 over the second quarter of 1998, and increased $387 million in the first
six months of 1999 over the first six months of 1998. This represents an
increase from 18.0% to 20.2% of net sales for the quarter to quarter period and
from 17.9% to 20.0% for the first six months of each fiscal year. The increase
is due principally to an increase in the size of the Company's direct sales
force and its commissions, additional marketing and advertising costs associated
with the introduction of new products and the expansion of distribution
channels. The increase also reflects the Company's efforts to invest in certain
key areas such as expansion of its end-to-end strategy and service provider
coverage in order to position itself to take advantage of future market
opportunities.
General and administrative expenses rose $32 million between the second quarters
of 1999 and 1998, an increase to 3.2% from 2.9% of net sales. These expenses
increased $60 million in the first half of 1999 over the first half of 1998,
representing an increase from 2.9% to 3.2% of net sales. The increase primarily
reflects increased levels of amortization for acquisition-related intangible
assets. It is management's intent to keep general and administrative costs
relatively constant as a percentage of net sales; however, this is dependent
upon the level of acquisition activity and amortization of the resulting
intangible assets, among other factors.
The amount expensed to purchased research and development in the second quarter
of fiscal 1999 arose from the acquisitions of Summa Four, Clarity, Selsius and
PipeLinks (See also Note 3).
The fair value of the existing products and patents for these acquisitions
ranged from a low of approximately $20 million for Summa Four and Selsius, up to
$53 million for Clarity. The fair value of the existing products and patents as
well as the technology currently under development was determined by using the
income approach, which discounts expected future cash flows to present value.
The discount rates used in the present value calculations were typically derived
from a weighted average cost of capital analysis, adjusted upward to reflect
additional risks inherent in the development life cycle. These risk factors have
increased the overall discount rate between 4% and 7.5% for acquisitions in the
current year. The Company expects that the pricing model for products related to
these acquisitions will be considered standard within the high-technology
communications industry. However, the Company does not expect to achieve a
material amount of expense reductions or synergies as a result of
14
<PAGE> 15
integrating the acquired in-process technology. Therefore, the valuation
assumptions do not include significant anticipated cost savings. The Company
expects that products incorporating the acquired technology from these
acquisitions will be completed and begin to generate cash flows over the next 6
to 9 months. However, development of these technologies remains a significant
risk to the Company due to the remaining effort to achieve technical viability,
rapidly changing customer markets, uncertain standards for new products and
significant competitive threats from numerous companies. The nature of the
efforts to develop the acquired technology into commercially viable products
consists principally of planning, designing and testing activities necessary to
determine that the product can meet market expectations, including functionality
and technical requirements. Failure to bring these products to market in a
timely manner could result in a loss of market share, or a lost opportunity to
capitalize on emerging markets, and could have a material adverse impact on the
Company's business and operating results.
Regarding the Company's purchase acquisitions completed in fiscal 1998,
actual results to date have been consistent, in all material respects, with the
assumptions that the Company provided to the independent appraisers for use in
determining the value of purchased in-process research and development. The
assumptions primarily consist of an expected completion date for the in-process
projects, estimated costs to complete the projects and revenue and expense
projections once the products have entered the market. Products from these 1998
acquisitions have been introduced to the market in the last 3 - 6 months.
Shipment volumes are not material to the Company's overall position at the
present time, therefore, it is difficult to determine the accuracy of overall
revenue projections early in the technology or product lifecycle. Failure to
achieve the expected levels of revenues and net income from these products will
negatively impact the return on investment expected at the time that the
acquisition was completed and potentially result in impairment of any other
assets related to the development activities.
15
<PAGE> 16
The following table summarizes the significant assumptions underlying the
valuations in 1998 and 1999 (in millions, except percentages):
<TABLE>
<CAPTION>
Acquisition Assumptions
Approximate ------------------------------------------
Costs Incurred Estimated Cost
to Date on to Complete
Acquired Technology at
In-Process Time of Risk Adjusted Discount
Entity Name Technology Acquisition Rate on In-Process R&D
----------- -------------- -------------- ----------------------
<S> <C> <C> <C>
1998 Purchase Acquisitions
DAGAZ Technologies $10 $10 35%
Lightspeed International, $15 $13 26%
Inc.
WheelGroup Corp. $6 $8 24%
NetSpeed International, $16 $12 32%
Inc.
CLASS Data Systems $2 $3 24%
1999 Purchase Acquisitions
American Internet Corp. $* $1 24.9%
Summa Four, Inc. $* $5 25.5%
Clarity Wireless, Inc. $* $42 32%
Selsius Systems, Inc. $* $15 31%
PipeLinks, Inc. $* $5 31%
</TABLE>
* - Costs incurred negligible to date
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" and in June 1998, issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." Readers are
referred to the "Recent
16
<PAGE> 17
Accounting Pronouncements" section of the Company's 1998 Annual Report to
Shareholders for further discussion.
The Company adopted Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition," in the first quarter of fiscal year 1999 and its adoption had no
material impact on the Company's results from operations or financial position.
FINANCIAL RISK MANAGEMENT
As a global concern, the Company faces exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on the Company's
financial results. Historically, the Company's primary exposures related to
nondollar-denominated sales in Japan, Canada, and Australia and
nondollar-denominated operating expenses in Europe, Latin America, and Asia
where the Company sells primarily in U.S. dollars. Additionally, the Company has
recently seen its exposures to emerging market currencies, such as the Korean
Won and Russian Ruble, among others, increase because of the Company's expanding
presence in these markets and the extreme currency volatility. The Company
currently does not hedge against these or any other emerging market currencies
and could suffer unanticipated gains or losses as a result.
The increasing use of the Euro as a common currency for members of the European
Union could impact the Company's foreign exchange exposure. The Company is
prepared to hedge against fluctuations in the Euro if this exposure becomes
material. The Company will continue to evaluate the impact of the Euro on its
foreign exchange exposure as well as on its internal systems.
At the present time, the Company hedges only those currency exposures associated
with certain assets and liabilities denominated in nonfunctional currencies and
does not generally hedge anticipated foreign currency cash flows. The hedging
activity undertaken by the Company is intended to offset the impact of currency
fluctuations on certain nonfunctional currency assets and liabilities. The
success of this activity depends upon estimations of intercompany balances
denominated in various currencies, primarily the Japanese yen, Canadian dollar,
Australian dollar, and certain European currencies. To the extent that these
forecasts are over- or understated during periods of currency volatility, the
Company could experience unanticipated currency gains or losses.
17
<PAGE> 18
The Company is experiencing a greater proportion of its sales activity through
its partners in two-tier distribution channels. These customers are generally
given privileges to return inventory, receive credits for changes in the
Company's selling prices and participate in cooperative marketing programs. The
Company maintains appropriate reserves and allowances for such exposures.
However, such partners tend to have access to more limited financial resources
than other resellers and end user customers and therefore represent potential
sources of increased credit risk. Additionally, the Company is experiencing
increased demands for customer financing and leasing solutions. The Company also
continues to monitor increased credit exposures because of the weakened
financial conditions in Asia, and other emerging market regions, and the impact
that such conditions may have on the worldwide economy. Although the Company has
not experienced significant losses due to customers failing to meet their
obligations to date, such losses, if incurred, could have a material adverse
impact on the Company's business, operating results, and financial position.
The Company maintains investment portfolio holdings of various issuers, types,
and maturities. These securities are generally classified as available for sale,
and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of accumulated
comprehensive income, net of tax. Part of this portfolio includes minority
equity investments in several publicly-traded companies, the values of which are
subject to market price volatility. The Company also has certain real estate
lease commitments with payments tied to short-term interest rates. At any time,
a sharp rise in interest rates could have a material adverse impact on the fair
value of the Company's investment portfolio while increasing the costs
associated with its lease commitments. Conversely, declines in interest rates
could have a material impact on interest earnings for the Company's investment
portfolio. The Company does not currently hedge these interest rate exposures.
Readers are referred to pages 23-25 of the Company's 1998 Annual Report to
Shareholders for further discussion of the Company's interest rate exposures.
FUTURE GROWTH SUBJECT TO RISKS
The networking business is highly competitive, and as such, the Company's growth
is dependent upon market growth and its ability to enhance its existing products
and introduce new products on a timely basis. One of the ways the Company has
addressed and will
18
<PAGE> 19
continue to address the need to develop new products is through acquisitions of
other companies. Acquisitions involve numerous risks, including difficulties in
integration of the operations, technologies, and products of the acquired
companies; the risk of diverting management's attention from normal daily
operations of the business; potential difficulties in completing projects
associated with purchased in process research and development; risks of entering
markets in which the Company has no or limited direct prior experience and where
competitors in such markets have stronger market positions; and the potential
loss of key employees of the acquired company. The Company must also maintain
its ability to manage any such growth effectively. Failure to manage growth
effectively and successfully integrate acquisitions made by the Company could
materially adversely affect the Company's business and operating results.
There are currently few laws or regulations that apply directly to access or
commerce on the Internet. The Company could be materially adversely affected by
regulation in any country where the Company operates, on such technology as,
voice over the Internet, encryption technology and access charges for Internet
service providers, as well as the continuing deregulation of the
telecommunications industry. The adoption of such measures could decrease demand
for the Company's products, and at the same time increase the Company's cost of
selling its products.
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions, and
evolving methods of building and operating networks. There can be no assurance
that the Company will successfully identify new product opportunities and
develop and bring new products to market in a timely manner, or that products
and technologies developed by others will not render the Company's products or
technologies obsolete or noncompetitive.
As the Company focuses on new market opportunities, such as transporting voice,
video, and data traffic across the same network, it will increasingly compete
with large telecommunications equipment suppliers such as Lucent, Ericsson and
Nortel, among others, and well funded start-up companies. Several of the
Company's current and potential competitors have greater financial, marketing
and technical resources than the Company. Additionally, as customers in these
markets complete infrastructure deployments, they may require greater levels of
service, support and financing than the Company has experienced in the past. The
Company has not entered into a material amount of labor intensive service
contracts which require significant production or customization, however, the
Company expects that demand for these types of service contracts
19
<PAGE> 20
will increase in the future. There can be no assurance that the Company can
provide products, service, support and financing to effectively compete for
these market opportunities. Further, provision of greater levels of services by
the Company may result in less favorable revenue recognition treatment than has
historically been experienced. Readers are also referred to the "Competition"
section of the Company's Form 10-K filed on September 25, 1998 for further
discussion.
The Company's growth and ability to meet customer demands also depend in part on
its ability to obtain timely deliveries of parts from its suppliers. The Company
has experienced component shortages in the recent past that have adversely
affected its operations. Although the Company works closely with its suppliers
to avoid these types of shortages, there can be no assurance that the Company
will not encounter these problems in the future.
The Company's corporate headquarters, including most of its research and
development operations and its manufacturing facilities, are located in the
Silicon Valley area of Northern California, a region known for seismic activity.
Additionally, one of the Company's manufacturing facilities is located near a
river that has experienced flooding in the past. A significant natural disaster,
such as an earthquake or a flood, could have a material adverse impact on the
Company's business, financial condition and operating results.
POTENTIAL VOLATILITY IN OPERATING RESULTS
The Company expects that in the future, its net sales may grow at a slower rate
than was experienced in previous periods, and that on a quarter-to-quarter
basis, the Company's growth in net sales may be significantly lower than its
historical quarterly growth rate. As a consequence, operating results for a
particular quarter are extremely difficult to predict. The Company's ability to
meet financial expectations could be hampered if the nonlinear sales pattern
seen in past quarters reoccurs in future periods. The Company generally has had
one quarter of the fiscal year when backlog has been reduced. Although such
reductions have not occurred consistently in recent years, they are difficult to
predict and may occur in the future. In addition, in response to customer
demand, the Company continues to attempt to reduce its product manufacturing
lead times, which may result in corresponding reductions in order backlog. A
decline in backlog levels could result in more variability and less
predictability in the Company's quarter-to-quarter net sales and operating
results going forward. On the other hand, for certain products, lead times are
longer than the Company's goal. If the Company cannot reduce manufacturing
20
<PAGE> 21
lead times for such products, the Company's customers may cancel orders or not
place further orders if shorter lead times are available from other
manufacturers, thus creating additional variability.
As a result of recent unfavorable economic conditions, sales to certain
countries in Latin America and the Pacific Rim have declined as a percentage of
the Company's total revenue. If the economic conditions in these markets, or
other markets which recently experienced unfavorable conditions, such as Eastern
Europe, worsen, or if these unfavorable conditions result in a wider regional or
global economic slowdown, this decline may have a material adverse impact on the
Company's business, operations and financial condition.
Recent actions and comments from the Securities and Exchange Commission have
indicated they are reviewing the current valuation methodology of purchased
in-process research and development related to business combinations. The
Commission is concerned that some companies are writing off more of the value of
an acquisition than is appropriate. The Company believes it is in compliance
with all of the rules and related guidance as they currently exist. However,
there can be no assurance that the Commission will not seek to reduce the amount
of purchased in-process research and development previously expensed by the
Company. This would result in the restatement of previously filed financial
statements of the Company and could have a material adverse impact on financial
results for the periods subsequent to acquisitions.
The Company also expects that gross margins may be adversely affected by
increases in material or labor costs, heightened price competition, and changes
in channels of distribution or in the mix of products sold. For example, the
Company believes that gross margins may decline over time, because the markets
for lower-margin access products targeted toward small to medium-sized customers
have continued to grow at a faster rate than the markets for the Company's
higher-margin router and high-performance switching products targeted toward
enterprise and service provider customers. The Company has recently introduced
several new products with additional new products scheduled to be released in
the near future. If warranty costs associated with these new products are
greater than the Company has experienced historically, gross margins may be
adversely affected. The Company's gross margins may also be impacted by
geographic mix, as well as the mix of configurations within each product group.
The Company continues to expand into third-party or indirect distribution
channels, which generally results in lower gross margins. In addition,
increasing
21
<PAGE> 22
third-party and indirect distribution channels generally results in greater
difficulty in forecasting the mix of the Company's products, and to a certain
degree, the timing of its orders.
The Company also expects that its operating margins may decrease as it continues
to hire additional personnel and increases other operating expenses to support
its business. The Company plans its operating expense levels based primarily on
forecasted revenue levels. Because these expenses are relatively fixed in the
short term, a shortfall in revenue could lead to operating results being below
expectations.
The results of operations for the quarter ended January 23, 1999 are not
necessarily indicative of results to be expected in future periods, and the
Company's operating results may be subject to quarterly fluctuations as a result
of a number of factors. These factors include the integration of people,
operations, and products from acquired businesses and technologies; increased
competition in the networking industry; the overall trend toward industry
consolidation; the introduction and market acceptance of new technologies and
standards, including switch routers, Gigabit Ethernet switching, Tag Switching
(currently also known as multiprotocol label switching (MPLS)) and voice, video
and data capabilities; variations in sales channels, product costs, or mix of
products sold; the timing of orders and manufacturing lead times; and changes in
general economic conditions, any of which could have a material adverse impact
on operations and financial results.
Year 2000
The Company is continuing to assess the impact of the Year 2000 issue on its
current and future products, internal information systems and non-information
technology systems (equipment and systems) and has begun, and in many cases
completed, corrective efforts in these areas.
The Company is using a four phase approach to address the issue. The first phase
consists of the inventorying of all potential business disruption problems,
including those with products and systems, as well as potential disruption from
suppliers and other third parties. The second phase consists of the
prioritization of all the potential problems to allocate the appropriate level
of resources to the most critical areas. The third phase addresses the
remediation programs to solve or mitigate any identified Year 2000 problems. The
fourth phase, if necessary, will be to develop contingency plans if it appears
the Company or its key suppliers will not be Year 2000 compliant, and such
noncompliance is expected to have a material adverse impact on the Company's
operations.
22
<PAGE> 23
The Company has largely completed the implementation of Year 2000 compliant
internal computer applications for its main financial, manufacturing and order
processing systems. The systems are being tested for compliance; the Company
does not currently expect any significant issues to be identified during this
review. However, the failure of any internal system to achieve Year 2000
readiness could result in material disruption to the Company's operations.
The Company has also conducted extensive work regarding the status of its
currently available, developing and installed base of products. The Company
believes that its current products are largely Year 2000 compliant. There can be
no assurance that certain previous releases of the Company's products which are
no longer under support will prove to be Year 2000 compliant with customers'
systems or within an existing network. Further information about the Company's
products is available on its Year 2000 Internet Website. The Company has
developed programs for customers who have indicated a need to upgrade components
of their systems. However, the inability of any of the Company's products to
properly manage and manipulate data in the year 2000 could result in increased
warranty costs, customer satisfaction issues, potential lawsuits and other
material costs and liabilities.
The Company has completed phases I and II of its review of its supplier bases
and, in the third phase of the compliance approach, is in the process of
reviewing the state of readiness of its supplier base. This exercise includes
compliance inquiries and reviews that will continue throughout 1999. Where
issues are identified with a particular supplier, contingency plans will be
developed as discussed below. Even where assurances are received from third
parties there remains a risk that failure of systems and products of other
companies on which the Company relies could have a material adverse effect on
the Company. Further, if these suppliers fail to adequately address the Year
2000 issue for the products they provide to the Company, critical materials,
products and services may not be delivered timely and the Company may not be
able to manufacture sufficient product to meet sales demand.
Based on the work done to date, the Company has not incurred material costs and
does not expect to incur future material costs in the work to address the Year
2000 problem for its systems (as a result of relatively new legacy information
systems) and products.
The Company has taken and will continue to take corrective action to mitigate
any significant Year 2000 problems with its systems and products and believes
that the Year 2000 issue for information systems will not have a material impact
on its operations or
23
<PAGE> 24
financial results. However, there can be no assurance that the Company will not
experience significant business disruptions or loss of business due to an
inability to adequately address the Year 2000 issue. The Company is concerned
that many enterprises will be devoting a substantial portion of their
information systems spending to addressing the Year 2000 issue. This expense may
result in spending being diverted from networking solutions in the near future.
This diversion of information technology spending could have a material adverse
impact on the Company's future sales volume.
Contingency plans will be developed in certain key areas, in particular
surrounding third party manufacturers and other suppliers, to ensure that any
potential business interruptions caused by the Year 2000 issue are mitigated.
Such contingency plans include identification of alternative sources of supply
and test exercises to ensure that such alternatives are able to provide the
Company with an adequate level of support. These plans are expected to be
developed beginning in May 1999.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Year 2000 issue. The Company's evaluation is on-going and it expects that
new and different information will become available to it as that evaluation
continues. Consequently, there is no guarantee that all material elements will
be Year 2000 ready in time.
Liquidity and Capital Resources
Cash and equivalents, short-term investments, and investments were $6.5 billion
at January 23, 1999 an increase of $1.4 billion from July 25, 1998. The increase
is primarily a result of cash generated by operations and financing activities,
primarily the exercise of employee stock options. These cash flows were
24
<PAGE> 25
partially offset by cash outflows from operating activities including tax
payments of approximately $184 million, and cash outflows from investing
activities including capital expenditures of approximately $277 million.
Accounts receivable increased 13.8% from July 25, 1998 to January 23, 1999,
while sales grew by 18.3% over the same period. Days sales outstanding in
receivables improved to 48 days at January 23, 1999 from 49 days at July 25,
1998. Inventories increased 30.4% between July 25, 1998 and January 23, 1999,
which reflects the Company's new product introductions and continued growth in
the Company's two-tiered distribution system. Inventory management remains an
area of focus as the Company balances the need to maintain strategic inventory
levels to ensure competitive lead times versus the risk of inventory
obsolescence because of rapidly changing technology and customer requirements.
Accounts payable increased by 38.6% at January 23, 1999 over July 25, 1998
primarily due to increasing levels of raw material purchases. Other accrued
liabilities increased by 28.5% primarily due to higher deferred revenue on
service contracts.
At January 23, 1999, the Company had a line of credit totaling $500 million,
which expires July 2002. There have been no borrowings under this facility.
The Company has entered into certain lease arrangements in San Jose, California,
and Research Triangle Park, North Carolina, where it has established its
headquarters operations and certain research and development and customer
support activities. In connection with these transactions, the Company pledged
$800 million of its investments as collateral for certain obligations of the
leases. The Company anticipates that it will occupy more leased property in the
future that will require similar pledged securities; however, the Company does
not expect the impact of this activity to be material to liquidity.
The Company's management believes that its current cash and equivalents,
short-term investments, line of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements
through fiscal 1999.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter, the Company issued an aggregate of
2,083,039 shares of its Common Stock in exchange for the
outstanding capital stock of Clarity Wireless Incorporated.
The shares were issued pursuant to an exemption by reason of
Section 4(2) of the Securities Act of 1933. These sales were
made without general solicitation or advertising. Each
purchaser was an accredited investor or a sophisticated
investor with access to all relevant information necessary.
The Company has filed a Registration Statement on Form S-3
covering the resale of such securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Company held its annual meeting of shareholders on
November 12, 1998. At such meeting the following actions were
voted upon:
<TABLE>
<CAPTION>
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
a. Election of Directors
Carol A. Bartz 1,281,794,722 -- 60,466,399 --
John T. Chambers 1,281,960,087 -- 60,301,035 --
Mary Cirillo 1,281,813,286 -- 60,447,835 --
James F. Gibbons 1,281,756,316 -- 60,509,305 --
Edward R. Kozel 1,281,950,448 -- 60,310,674 --
James Morgan 1,281,897,183 -- 60,363,939 --
John P. Morgridge 1,281,916,333 -- 60,344,788 --
Robert L. Puette 1,281,936,169 -- 60,324,952 --
Masayoshi Son 1,281,891,534 -- 60,369,588 --
Donald T. Valentine 1,281,844,510 -- 60,416,611 --
Steven M. West 1,282,021,678 -- 60,239,443 --
b. Approval of Amendment to the
1996 Stock Incentive Plan,
to extend the automatic share
increase provisions for an
additional three-year period. 652,056,816 370,831,534 6,128,676 313,244,095
c. Ratification of
PricewaterhouseCoopers as
the Company's independent
accountants for the fiscal
year ending July 31, 1999. 1,329,482,476 1,530,555 11,247,715 375
</TABLE>
26
<PAGE> 27
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit
27 Financial data schedule
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the fiscal quarter
ended January 23, 1999. One report was filed on November 2, 1999 and
reported on the November acquisition of Clarity Wireless
Incorporated. The second report was filed on November 4, 1999 and
reported on the November acquisition of Summa Four, Inc.
27
<PAGE> 28
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.
Cisco Systems, Inc.
Date: March 8, 1999 By /s/ Larry R. Carter
-------------------------------------
Larry R. Carter,
Senior Vice President Finance, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations included in
the Company's Form 10-Q for the period ended January 23, 1999, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> JUL-26-1998
<PERIOD-END> JAN-23-1999
<CASH> 1,421
<SECURITIES> 886
<RECEIVABLES> 1,514
<ALLOWANCES> 37
<INVENTORY> 472
<CURRENT-ASSETS> 4,808
<PP&E> 1,519
<DEPRECIATION> 840
<TOTAL-ASSETS> 11,434
<CURRENT-LIABILITIES> 2,234
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 4,361
<OTHER-SE> 4,795
<TOTAL-LIABILITY-AND-EQUITY> 11,434
<SALES> 5,415
<TOTAL-REVENUES> 5,415
<CGS> 1,879
<TOTAL-COSTS> 4,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,349
<INCOME-TAX> 543
<INCOME-CONTINUING> 806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 806
<EPS-PRIMARY> 0.51<F1>
<EPS-DILUTED> 0.48
<FN>
<F1>For Purposes of This Exhibit Primary means Basic.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| CTX | https://www.sec.gov/Archives/edgar/data/18532/0000950134-99-000959.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950134-99-000959.txt : 19990215
<SEC-HEADER>0000950134-99-000959.hdr.sgml : 19990215
ACCESSION NUMBER: 0000950134-99-000959
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CENTEX CORP
CENTRAL INDEX KEY: 0000018532
STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531]
IRS NUMBER: 750778259
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-06776
FILM NUMBER: 99535330
BUSINESS ADDRESS:
STREET 1: P O BOX 199000
STREET 2: 2728 N HARWOOD
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596500
MAIL ADDRESS:
STREET 1: PO BOX 199000
STREET 2: 2728 N HARWOOD
CITY: DALLAS
STATE: TX
ZIP: 75219
FORMER COMPANY:
FORMER CONFORMED NAME: CENTEX CONSTRUCTION CO INC
DATE OF NAME CHANGE: 19681211
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: 3333 HOLDING CORP
CENTRAL INDEX KEY: 0000818762
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500]
IRS NUMBER: 752178860
STATE OF INCORPORATION: NV
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09624
FILM NUMBER: 99535331
BUSINESS ADDRESS:
STREET 1: 3333 LEE PKWY
STREET 2: SUITE 500
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596700
MAIL ADDRESS:
STREET 1: PO BOX 19000
STREET 2: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CENTEX DEVELOPMENT CO LP
CENTRAL INDEX KEY: 0000818764
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500]
IRS NUMBER: 752168471
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-09625
FILM NUMBER: 99535332
BUSINESS ADDRESS:
STREET 1: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
BUSINESS PHONE: 2145596700
MAIL ADDRESS:
STREET 1: PO BOX 19000
STREET 2: PO BOX 19000
CITY: DALLAS
STATE: TX
ZIP: 75219
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1998
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
JOINT QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended
DECEMBER 31, 1998
Commission File No. 1-6776
CENTEX CORPORATION
A Nevada Corporation
IRS Employer Identification No. 75-0778259
2728 N. Harwood
Dallas, Texas 75201
(214) 981-5000
Commission File Nos. 1-9624 and 1-9625, respectively
3333 HOLDING CORPORATION
A Nevada Corporation
CENTEX DEVELOPMENT COMPANY, L.P.
A Delaware Limited Partnership
IRS Employer Identification Nos. 75-2178860 and 75-2168471, respectively
3100 McKinnon, Suite 370
Dallas, Texas 75201
(214) 981-6700
The registrants have 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
have been subject to such filing requirements for the past 90 days.
Indicate the number of shares of each of the registrants' classes of common
stock (or other similar equity securities) outstanding as of the close of
business on January 29, 1999:
<TABLE>
<S> <C> <C>
Centex Corporation Common Stock 59,488,014 shares
3333 Holding Corporation Common Stock 1,000 shares
Centex Development Company, L.P. Class A Units of Limited Partnership Interest 32,260 units
Centex Development Company, L.P. Class C Units of Limited Partnership Interest 26,987 units
</TABLE>
<PAGE> 2
CENTEX CORPORATION
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
Form 10-Q Table of Contents
December 31, 1998
CENTEX CORPORATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements 1
Condensed Consolidated Statement of Earnings
for the Three Months Ended December 31, 1998 2
Condensed Consolidated Statement of Earnings
for the Nine Months Ended December 31, 1998 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended December 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 9
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10 - 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
-i-
<PAGE> 3
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Combining Financial Statements 21
Condensed Combining Statement of Operations
for the Three Months Ended December 31, 1998 22
Condensed Combining Statement of Operations
for the Nine Months Ended December 31, 1998 23
Condensed Combining Balance Sheets 24
Condensed Combining Statement of Cash Flows
for the Nine Months Ended December 31, 1998 25
Notes to Condensed Combining Financial Statements 26 - 27
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 28 - 29
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31 - 32
</TABLE>
-ii-
<PAGE> 4
CENTEX CORPORATION
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1.
The condensed consolidated financial statements include the accounts of
Centex Corporation and subsidiaries ("Centex" or the "Company"), and have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest Annual Report on Form 10-K. In the opinion of
the Company, all adjustments necessary to present fairly the information in the
following condensed consolidated financial statements of the Company have been
included. The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
-1-
<PAGE> 5
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES
Home Building
Conventional Homes $ 671,404 $ 557,484
Manufactured Homes 39,819 38,239
Investment Real Estate 8,566 6,088
Financial Services 116,234 64,604
Construction Products 84,863 70,510
Contracting and Construction Services 335,200 246,158
--------------- ---------------
1,256,086 983,083
--------------- ---------------
COSTS AND EXPENSES
Home Building
Conventional Homes 613,305 515,194
Manufactured Homes 36,345 34,768
Investment Real Estate 196 (986)
Financial Services 92,085 56,097
Construction Products 53,314 49,811
Contracting and Construction Services 331,511 243,652
Other, net 2,844 2,025
Corporate General and Administrative 7,084 5,014
Interest Expense 10,929 8,293
Minority Interest 13,839 10,292
--------------- ---------------
1,161,452 924,160
--------------- ---------------
EARNINGS BEFORE INCOME TAXES 94,634 58,923
Income Taxes 35,591 21,543
--------------- ---------------
NET EARNINGS $ 59,043 $ 37,380
=============== ===============
EARNINGS PER SHARE
Basic $ 0.99 $ 0.63
=============== ===============
Diluted $ 0.96 $ 0.61
=============== ===============
AVERAGE SHARES OUTSTANDING
Basic 59,410,876 59,366,822
Common Share Equivalents
Options 1,851,083 1,992,650
Convertible Debenture 400,000 400,000
--------------- ---------------
Diluted 61,661,959 61,759,472
=============== ===============
CASH DIVIDENDS PER SHARE $ 0.04 $ 0.04
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE> 6
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES
Home Building
Conventional Homes $ 1,881,586 $ 1,605,169
Manufactured Homes 130,748 103,727
Investment Real Estate 17,479 18,199
Financial Services 324,133 169,141
Construction Products 256,485 231,876
Contracting and Construction Services 999,343 708,092
--------------- ---------------
3,609,774 2,836,204
--------------- ---------------
COSTS AND EXPENSES
Home Building
Conventional Homes 1,730,613 1,493,910
Manufactured Homes 120,522 95,200
Investment Real Estate (4,752) (3,643)
Financial Services 252,508 147,866
Construction Products 163,007 160,066
Contracting and Construction Services 987,939 703,384
Other, net 7,605 4,945
Corporate General and Administrative 19,195 14,278
Interest Expense 29,164 24,818
Minority Interest 42,251 35,343
--------------- ---------------
3,348,052 2,676,167
--------------- ---------------
EARNINGS BEFORE INCOME TAXES 261,722 160,037
Income Taxes 97,955 59,256
--------------- ---------------
NET EARNINGS $ 163,767 $ 100,781
=============== ===============
EARNINGS PER SHARE
Basic $ 2.75 $ 1.71
=============== ===============
Diluted $ 2.65 $ 1.65
=============== ===============
AVERAGE SHARES OUTSTANDING
Basic 59,496,866 58,854,384
Common Share Equivalents
Options 1,991,600 1,794,009
Convertible Debenture 400,000 400,000
--------------- ---------------
Diluted 61,888,466 61,048,393
=============== ===============
CASH DIVIDENDS PER SHARE $ 0.12 $ 0.095
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE> 7
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
Centex Corporation and
Subsidiaries Centex Corporation Financial Services
------------------------- ------------------------- -------------------------
December 31, March 31, December 31, March 31, December 31, March 31,
1998* 1998** 1998* 1998** 1998* 1998**
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 111,839 $ 98,316 $ 86,006 $ 87,491 $ 25,833 $ 10,825
Receivables -
Residential Mortgage Loans 1,479,171 1,191,450 -- -- 1,479,171 1,191,450
Other 422,665 390,891 350,117 337,558 72,548 53,333
Affiliates -- -- -- -- (74,973) (58,299)
Inventories 1,541,106 1,064,554 1,541,106 1,064,554 -- --
Investments -
Centex Development Company, L. P. 63,984 34,526 63,984 34,526 -- --
Joint Ventures and Other 40,265 7,558 40,265 7,558 -- --
Unconsolidated Subsidiaries -- -- 181,422 146,592 -- --
Property and Equipment, net 301,250 295,992 277,187 276,008 24,063 19,984
Other Assets -
Deferred Income Taxes 103,603 147,607 90,785 144,090 12,818 3,517
Goodwill, net 218,683 133,847 201,270 123,709 17,413 10,138
Mortgage Securitization Residual Interest 60,100 14,747 -- -- 60,100 14,747
Deferred Charges and Other 50,618 36,731 33,437 23,730 17,181 13,001
----------- ----------- ----------- ----------- ----------- -----------
$ 4,393,284 $ 3,416,219 $ 2,865,579 $ 2,245,816 $ 1,634,154 $ 1,258,696
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Liabilities $ 931,512 $ 799,154 $ 846,492 $ 711,564 $ 85,020 $ 87,590
Short-term Debt 1,822,647 1,152,873 385,276 73,823 1,437,371 1,079,050
Long-term Debt 284,151 237,715 284,151 237,715 -- --
Minority Stockholders' Interest 147,671 152,468 142,357 148,705 5,314 3,763
Negative Goodwill 70,837 82,837 70,837 82,837 -- --
Stockholders' Equity -
Preferred Stock, Authorized 5,000,000 -- -- -- -- -- --
Shares, None Issued
Common Stock $.25 Par Value; Authorized 14,867 14,883 14,867 14,883 1 1
100,000,000 Shares; Issued and Outstanding
59,466,599 and 59,531,758 respectively
Capital in Excess of Par Value 25,447 36,761 25,447 36,761 75,944 74,944
Retained Earnings 1,096,152 939,528 1,096,152 939,528 30,504 13,348
----------- ----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity 1,136,466 991,172 1,136,466 991,172 106,449 88,293
----------- ----------- ----------- ----------- ----------- -----------
$ 4,393,284 $ 3,416,219 $ 2,865,579 $ 2,245,816 $ 1,634,154 $ 1,258,696
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
* Unaudited
** Condensed from audited financial statements.
In the supplemental data presented above, "Centex Corporation" represents the
adding together of all subsidiaries other than those included in Financial
Services. Transactions between Centex Corporation and Financial Services have
been eliminated from the Centex Corporation and Subsidiaries balance sheets.
-4-
<PAGE> 8
CENTEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Earnings $ 163,767 $ 100,781
Adjustments -
Depreciation, Depletion and Amortization 27,180 18,265
Deferred Income Taxes 42,814 38,986
Equity in Loss (Earnings) of CDC and Joint Ventures 396 (3,742)
Minority Interest 42,251 35,343
--------------- ---------------
276,408 189,633
(Increase) Decrease in Receivables (31,774) 7,525
Increase in Residential Mortgage Loans (287,721) (192,543)
Increase in Inventories (476,552) (151,120)
Increase (Decrease) in Payables and Accruals 132,358 (34,606)
Increase in Other Assets (152,488) (25,272)
Other, net (47,048) (32,684)
--------------- ---------------
(586,817) (239,067)
--------------- ---------------
CASH FLOWS - INVESTING ACTIVITIES
(Increase) Decrease in Investments (62,561) 7,344
Property and Equipment Additions, net (34,836) (33,594)
--------------- ---------------
(97,397) (26,250)
--------------- ---------------
CASH FLOWS - FINANCING ACTIVITIES
Increase in Debt
Secured by Residential Mortgage Loans 358,321 218,739
Other 357,889 93,914
Proceeds from Stock Option Exercises 7,719 16,455
Retirement of Common Stock (19,049) --
Dividends Paid (7,143) (5,612)
--------------- ---------------
697,737 323,496
--------------- ---------------
NET INCREASE IN CASH 13,523 58,179
CASH AT BEGINNING OF PERIOD 98,316 31,320
--------------- ---------------
CASH AT END OF PERIOD $ 111,839 $ 89,499
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 9
CENTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(unaudited)
(A) A summary of changes in stockholders' equity is presented below:
<TABLE>
<CAPTION>
Capital in
Preferred Common Excess of Retained
Stock Stock Par Value Earnings Total
------------- ------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1998 $ -- $ 14,883 $ 36,761 $ 939,528 $ 991,172
Net Earnings -- -- -- 163,767 163,767
Exercise of Stock Options -- 120 7,599 -- 7,719
Retirement of 545,400 Shares -- (136) (18,913) -- (19,049)
Cash Dividends -- -- -- (7,143) (7,143)
------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ -- $ 14,867 $ 25,447 $ 1,096,152 $ 1,136,466
============= ============= ============= ============= =============
</TABLE>
(B) On November 30, 1987, the Company distributed to a nominee all of the
issued and outstanding shares of common stock of 3333 Holding Corporation
and warrants to purchase approximately 80% of the Class B units of limited
partnership interest in Centex Development Company, L. P. ("CDC"). A
wholly-owned subsidiary of 3333 Holding Corporation serves as general
partner of Centex Development Company, L. P. These securities are held by
the nominee on behalf of Centex stockholders, and will trade in tandem
with the common stock of Centex, until such time as they are detached.
Supplementary condensed combined financial statements for Centex,
3333 Holding Corporation and Subsidiary and Centex Development Company,
L.P. are as follows:
-6-
<PAGE> 10
NOTES - continued
CENTEX CORPORATION, 3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L. P.
SUPPLEMENTARY CONDENSED COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998 *
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 112,771 $ 98,576
Receivables 1,907,000 1,588,247
Inventories 1,635,148 1,107,941
Investments in Joint Ventures and Other 40,433 10,598
Property and Equipment, net 301,508 296,080
Other Assets 434,024 333,044
--------------- ---------------
$ 4,430,884 $ 3,434,486
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Liabilities $ 940,132 $ 802,547
Short-term Debt 1,851,358 1,166,694
Long-term Debt 284,151 237,715
Minority Stockholders' Interest 147,671 152,468
Negative Goodwill 70,837 82,837
Stockholders' Equity 1,136,735 992,225
--------------- ---------------
$ 4,430,884 $ 3,434,486
=============== ===============
</TABLE>
*Condensed from audited financial statements.
SUPPLEMENTARY CONDENSED COMBINED STATEMENT OF EARNINGS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues $ 3,626,072 $ 2,847,726
Costs and Expenses 3,365,134 2,687,629
--------------- ---------------
Earnings Before Income Taxes 260,938 160,097
Income Taxes 97,955 59,256
--------------- ---------------
NET EARNINGS $ 162,983 $ 100,841
=============== ===============
</TABLE>
-7-
<PAGE> 11
Notes - continued
(C) In order to ensure the future availability of land for homebuilding, the
Company has made deposits totaling approximately $37 million as of
December 31, 1998 for options to purchase undeveloped land and developed
lots having a total purchase price of approximately $777 million. These
options and commitments expire at various dates to the year 2003. The
Company has also committed to purchase land and developed lots totaling
approximately $10 million. In addition, the Company has executed lot
purchase contracts with CDC which aggregate approximately $4 million.
(D) Interest expense relating to the Financial Services operations is
included in its costs and expenses. Interest related to non-financial
services is included as interest expense.
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Total Interest Incurred $ 89,447 $ 56,491
Less - Financial Services (60,283) (31,673)
---------------- ----------------
Interest Expense $ 29,164 $ 24,818
================ ================
</TABLE>
(E) During April 1994, Centex Construction Products, Inc. ("CXP") completed
an initial public offering of its stock which began trading on the New
York Stock Exchange under the symbol "CXP." Centex's ownership interest
in CXP was 59.2% as of December 31, 1998.
(F) During the quarter ended June 30, 1996, Centex's Home Building subsidiary
completed a business combination transaction and reorganization with
Vista Properties, Inc. As a result of the combination, Centex's
Investment Real Estate portfolio, valued in excess of $125 million, was
reduced to a nominal "book basis" after recording certain Vista-related
tax benefits. As these properties are developed or sold, the net sales
proceeds are reflected as operating margin. "Negative Goodwill" recorded
as a result of the business combination is being amortized to earnings
over approximately seven years which represents the estimated period over
which the land will be developed and/or sold.
All investment property operations are being reported through Centex's
"Investment Real Estate" business segment.
(G) In December 1997, Centex adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." All per
share data has been restated to conform to the provisions of this
Statement. Basic earnings per share is computed based on the
weighted-average number of shares of common stock outstanding. Diluted
earnings per share, computed similarly to fully diluted earnings per
share, are computed based upon basic plus the dilution of the stock
options and the convertible debenture.
-8-
<PAGE> 12
Notes - continued
Options to purchase approximately two million shares of common stock at
approximately $38.60 per share (expiring in April 2008) were outstanding
during the nine months ended December 31, 1998 but were not included in
the computation of diluted earnings per share because they were
anti-dilutive.
(H) Effective April 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components. There are no items that the Company is
required to recognize as components of comprehensive income.
(I) Statement of Financial Accounting Standards No. 131, issued in June 1997,
changes the way public companies report information about segments. SFAS
No. 131, which is based on the management approach to segment reporting,
requires companies to report selected quarterly segment information and
entity-wide disclosures about products and services, major customers and
the material countries in which the entity holds assets and reports
revenues. Although this Statement will be effective for the Company's
1999 annual financial statements, the Company does not expect a
significant effect on the presentation of these financial statements.
-9-
<PAGE> 13
CENTEX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Centex's consolidated revenues for the quarter were $1.26 billion,
a 28% increase over $983.1 million for the same quarter last year. Earnings
before income taxes were $94.6 million, 61% higher than $58.9 million last year.
Net earnings were $59.0 million and diluted earnings per share were $.96 for
this quarter compared to $37.4 million and $.61, respectively, for the same
quarter last year.
For the nine months ended December 31, 1998, corporate revenues
totaled $3.61 billion, 27% higher than $2.84 billion for the same period last
year. Earnings before income taxes were $261.7 million, 64% higher than $160.0
million for the same period last year. Net earnings were $163.8 million and
diluted earnings per share were $2.65 for the nine months ended December 31,
1998 compared to $100.8 million and $1.65, respectively, for the nine months
ended December 31, 1997.
Net earnings for both the quarter and the nine months ended
December 31, 1998 increased by a higher percentage than earnings per share due
to more average shares outstanding in the fiscal 1999 periods.
HOME BUILDING
Conventional Homes
The following summarizes Conventional Homes' results for the
quarter and fiscal year-to-date ended December 31, 1998 compared to the quarter
and fiscal year-to-date ended December 31, 1997 (dollars in millions, except per
unit data):
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
12/31/98 12/31/97
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Conventional Homes Revenues $ 671.4 100.0% $ 557.5 100.0%
Cost of Sales (518.9) (77.3%) (441.9) (79.3%)
Selling, General & Administrative (94.4) (14.1%) (73.3) (13.1%)
-------------- -------------- --------------- ------------
Operating Earnings $ 58.1 8.6% $ 42.3 7.6%
============== ============== =============== ============
Units Closed 3,601 3,025
% Change 19.0% (6.2%)
Unit Sales Price $ 183,522 $ 181,266
% Change 1.2% 5.1%
Operating Earnings per Unit $ 16,134 $ 13,980
% Change 15.4% 22.4%
</TABLE>
-10-
<PAGE> 14
<TABLE>
<CAPTION>
Fiscal Fiscal
Year-to-Date Year-to-Date
12/31/98 12/31/97
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Conventional Homes Revenues $ 1,881.6 100.0% $ 1,605.2 100.0%
Cost of Sales (1,464.3) (77.8%) (1,278.6) (79.7%)
Selling, General & Administrative (266.3) (14.2%) (215.3) (13.4%)
------------- ------------- --------------- -----------
Operating Earnings $ 151.0 8.0% $ 111.3 6.9%
============= ============= =============== ===========
Units Closed 10,050 8,709
% Change 15.4% (11.4%)
Unit Sales Price $ 184,113 $ 181,716
% Change 1.3% 7.0%
Operating Earnings per Unit $ 15,022 $ 12,775
% Change 17.6% 20.8%
</TABLE>
Home sales (orders) were 3,610 for the quarter this year compared
to 2,591 units for the same quarter a year ago. Home sales (orders) were 10,816
for the nine months this year compared to last year's 8,824 units. The backlog
of homes sold but not closed at December 31, 1998 was 6,419 units, including 214
units related to the newly acquired Calton Homes operation, 45% higher than
4,423 units at December 31, 1997. Centex is currently operating slightly more
neighborhoods than it did a year ago.
Manufactured Homes
The following summarizes Manufactured Homes' results for the
quarter and fiscal year-to-date ended December 31, 1998 compared to the quarter
and fiscal year-to-date ended December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
12/31/98 12/31/97
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Manufactured Homes Revenues (Construction) $ 29,548 100.0% $ 38,239 100.0%
Cost of Sales (22,532) (76.3%) (30,967) (81.0%)
Selling, General & Administrative (2,791) (9.4%) (3,228) (8.4%)
--------------- ----------- -------------- ------------
Earnings Before Goodwill & Minority Interest (Construction) 4,225 14.3% 4,044 10.6%
======== ============
Earnings Before Goodwill & Minority Interest (Retail) 38 --
--------------- -------------
Total Earnings Before Goodwill & Minority Interest 4,263 4,044
Goodwill Amortization (789) (573)
Minority Interest (640) (742)
--------------- -------------
Operating Earnings $ 2,834 $ 2,729
=============== =============
Units Produced 1,625 1,601
Units Sold - Retail 247 --
Less: Intersegment Sales (239) --
--------------- ---------------
Units Sold 1,633 1,601
=============== ===============
</TABLE>
-11-
<PAGE> 15
<TABLE>
<CAPTION>
Fiscal Fiscal
Year-To-Date Year-To-Date
12/31/98 12/31/97
----------------------------- --------------------------
<S> <C> <C> <C> <C>
Manufactured Homes Revenues (Construction) $ 101,575 100.0% $ 103,727 100.0%
Cost of Sales (79,177) (77.9%) (83,387) (80.4%)
Selling, General & Administrative (10,021) (9.9%) (10,094) (9.7%)
-------------- --------- ------------ ----------
Earnings Before Goodwill & Minority Interest (Construction) 12,377 12.2% 10,246 9.9%
========= ==========
Earnings Before Goodwill & Minority Interest (Retail) 258 --
-------------- ------------
Total Earnings 12,635 10,246
Goodwill Amortization (2,409) (1,719)
Minority Interest (1,994) (2,042)
-------------- ------------
Operating Earnings $ 8,232 $ 6,485
============== ============
Units Produced 4,670 4,219
Units Sold - Retail 696 --
Less: Intersegment Sales (586) --
-------------- ------------
Units Sold 4,780 4,219
============== ============
</TABLE>
INVESTMENT REAL ESTATE
For the quarter ended December 31, 1998, Centex's Investment Real
Estate operation, through which all investment property transactions are
reported, had operating earnings of $8.4 million, 18% higher than $7.1 million
for the same quarter a year ago.
For the current nine months, operating earnings from Investment
Real Estate were $22.2 million, a 2% increase from $21.8 million for the same
period in fiscal 1998.
-12-
<PAGE> 16
FINANCIAL SERVICES
The following summarizes Financial Services' results for the
quarter and fiscal year-to-date ended December 31, 1998 compared to the quarter
and fiscal year-to-date ended December 31, 1997 (dollars in millions):
<TABLE>
<CAPTION>
Fiscal Fiscal
Quarter Ended Quarter Ended Year-to-Date Year-to-Date
12/31/98 12/31/97 12/31/98 12/31/97
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 116.2 $ 64.6 $ 324.1 $ 169.1
Operating Earnings $ 24.1 $ 8.5 $ 71.6 $ 21.3
Origination Volume $ 3,096 $ 1,744 $ 8,368 $ 4,836
% Change 78% 33% 73% 18%
Number of Loans Originated
CTX Mortgage Company ("CTX") -
Centex-built Homes ("Builder") 2,308 2,127 6,728 6,085
Non-Centex Homes ("Retail") 19,117 10,426 51,450 30,258
--------------- --------------- --------------- ---------------
21,425 12,553 58,178 36,343
Centex Home Equity Corporation
("CHEC") 4,032 2,341 11,341 5,161
Centex Finance Company 255 -- 610 --
--------------- --------------- --------------- ---------------
25,712 14,894 70,129 41,504
=============== =============== =============== ===============
% Change 73% 27% 69% 16%
</TABLE>
CTX's Builder applications for the quarter of 2,452 increased 23%
over last year while Retail applications rose 80% to 18,046. CTX's Builder
applications of 7,695 for the nine-month period were 18% higher than a year ago.
Retail applications for the nine months increased 65% from 30,626 a year ago to
50,676. The profit per loan of $1,139 for this year's quarter was a 35% increase
over last year's per loan profit of $841. For the nine-month period, the profit
per loan increased 59% to $1,141. This increase in profit per loan is a result
of increased originations and the centralization of certain back-office
functions.
CHEC generated 22,746 sub-prime loan applications for the quarter,
an increase of 198% compared to the same quarter a year ago. CHEC applications
for the nine months rose 234% to 54,433.
The recently opened manufactured-home finance unit, Centex Finance
Company, incurred net start-up costs of approximately $700,000 and $1.8 million
for the quarter and nine months ended December 31, 1998, respectively.
CONSTRUCTION PRODUCTS
Revenues from CXP were $84.9 million for the quarter this year,
20% higher than last year. CXP's operating earnings, net of minority interest,
were $18.3 million for the quarter this year, 63% higher than last year's
earnings. CXP's revenues for the current nine months were $256.5 million, 11%
-13-
<PAGE> 17
higher than last year. CXP's operating earnings, net of minority interest, were
$53.2 million, a 38% improvement over results for the same period a year ago.
CXP's record operating earnings resulted from improved results in
each of its businesses as pricing and sales volumes improved for every product
line.
CONTRACTING AND CONSTRUCTION SERVICES
The following summarizes Contracting and Construction Services
results for the quarter and fiscal year-to-date ended December 31, 1998 compared
to the quarter and fiscal year-to-date ended December 31, 1997 (dollars in
millions):
<TABLE>
<CAPTION>
Quarter Quarter Fiscal Fiscal
Ended Ended Year-to-Date Year-to-Date
12/31/98 12/31/97 12/31/98 12/31/97
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 335.2 $ 246.2 $ 999.3 $ 708.1
Operating Earnings $ 3.7 $ 2.5 $ 11.4 $ 4.7
New Contracts Received $ 298 $ 122 $ 1,022 $ 613
Backlog of Uncompleted Contracts $ 1,182 $ 1,019 $ 1,182 $ 1,019
</TABLE>
The Harrah's New Orleans Casino contract was suspended on November
22, 1995 due to a bankruptcy filing by the Harrah's Jazz Company partnership,
the developer of the casino. Centex Landis Construction Co., Inc. ("Landis") and
its subcontractors filed claims against the partnership for completed but unpaid
work. Landis also filed a lawsuit against Harrah's Entertainment, Inc., parent
company of the major partner in the partnership, to recover its claims. In late
November 1996, Landis and Harrah's reached a settlement conditioned upon
Harrah's plan of reorganization becoming effective. Harrah's plan became
effective on October 30, 1998, at which time Harrah's paid $34 million to Landis
in settlement of the claims of Landis and its subcontractors, and Landis has
resumed construction of the casino.
In October 1992, Martin County sued one of the Company's general
contracting subsidiaries, Centex-Rooney Construction Co., Inc. ("Rooney"),
alleging defects in the design and construction of the Martin County Courthouse
in Stuart, Florida. Rooney was construction manager of the project. In July
1996, a judgment of $14.2 million was returned against Rooney, and in April
1997, Martin County also obtained a judgment of $3.2 million in attorney's fees
and costs. The 4th District Court of Appeals affirmed the $14.2 million
judgment, and Rooney filed an appeal with the Supreme Court of Florida. In
August 1998, the Florida Supreme Court denied Rooney's petition for review and
shortly thereafter, Rooney paid Martin County $17.35 million in satisfaction of
the judgment. Rooney's appeal of the $3.2 million award was recently affirmed in
large part (and reversed in small part) rendering Rooney liable for
approximately $3.1 million. At this time, Rooney is prosecuting claims and
lawsuits against subcontractors, their insurance carriers, and Rooney's own
insurance carriers for recovery of the judgments, and settlements are underway.
While there is no assurance that Rooney will recover from its subcontractors,
their insurance carriers, and its own carriers, management believes that Rooney
will be able to recover substantially all of both judgments. In any case, these
judgments would not have a material impact on the financial condition of the
Company.
-14-
<PAGE> 18
YEAR 2000 COMPLIANCE
The Company has a variety of operating systems, computer software
applications, computer hardware equipment and other equipment with embedded
electronic circuits, including applications that the Company uses in its
administrative functions and in the operations of its various subsidiaries and
business divisions (collectively, the "Systems"). Because resolution of Year
2000 issues is considered a priority of the Company, the Company created a Year
2000 Task Force to oversee the Company's Year 2000 compliance. The Task Force,
consisting of members of the Company's management and accounting, financial
planning, legal, and internal audit departments, has oversight of the
information systems managers and other administrative personnel charged with
implementing the Company's Year 2000 compliance program (collectively, the "Year
2000 Compliance Team").
The Task Force has surveyed the Year 2000 Compliance Team
regarding the Year 2000 compliance of the Systems. The surveys indicated that a
small number of the Systems are not Year 2000 compliant. Affected Systems are
primarily Systems that are not critical to the material operations of the
Company and its subsidiaries. The Company and its subsidiaries have replaced
several of these Systems and is in the process of replacing others. All
non-compliant Systems will be replaced no later than the fourth quarter of
fiscal 1999 (i.e. the quarter ending March 31, 1999). In substantially all of
the cases, the replacement or upgrading of, or other changes to, the
non-compliant Systems (i) has occurred or will occur for reasons unrelated to
the non-compliance of the Systems and (ii) has not been accelerated as a result
of the non-compliance of such Systems.
The Company does not believe (i) that the non-compliant Systems
pose a material risk to the financial condition of the Company as a whole, or of
the individual operations or subsidiaries or operating divisions that currently
have non-compliant Systems or (ii) that the cost of replacing, upgrading or
otherwise changing the non-compliant Systems is material to the Company as a
whole, or to the individual subsidiaries or operations divisions. The Company
has used, and believes that it will be able to continue to use, internally
generated cash to fund the correction of Systems that are not compliant.
The Task Force is currently developing its Year 2000 contingency
plan. Additionally, in order to further confirm the Company's Year 2000
readiness, the Company has engaged the services of a third-party consulting firm
to evaluate its Year 2000 readiness. The contingency plan and the consulting
firm's review will be completed by mid 1999.
As a result of the Company's Year 2000 compliance program, the
Company believes that it is highly unlikely that any interruption to its
operations resulting from a compliance failure will have a material adverse
effect on the Company's operations or financial condition. Achieving Year 2000
compliance is dependent on many factors, however, and some of these factors are
not completely within the Company's control. Although the Company and its
subsidiaries obtain information, materials and services from numerous sources
and provide goods and services to numerous customers, the failure of these
third-parties (including U.S. government agencies) to achieve Year 2000
readiness may adversely impact the Company's operations.
The Company believes the most likely Year 2000 worst-case scenario
would be the failure of some vendors, subcontractors or other third parties to
achieve compliance, resulting in a slowdown of the Company's operations. The
Company is not aware of any such third parties that are not Year 2000
-15-
<PAGE> 19
compliant. In order to address the potential non-compliance of third parties
affecting the Company's operations, the Company will continue to survey its
largest customers, subcontractors, and vendors.
Year 2000 Forward-looking Statements
Certain statements in this section, other than historical
information, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties relative to the Company's ability to assess and remediate any Year
2000 compliance issues, the ability of third parties to correct material
non-compliant systems, and the Company's assessment of the Year 2000 issue's
impact on its financial results and operations.
STOCK REPURCHASES
Since April 1998, the Company has repurchased 545,400 shares of
common stock under its stock option-related repurchase program. The Company
intends to continue to repurchase shares under this program.
FINANCIAL CONDITION AND LIQUIDITY
Centex fulfills its short-term financing requirements with cash
generated from its operations and funds available under its credit facilities.
These credit facilities also serve as back-up lines for overnight borrowings
under its uncommitted bank facilities and commercial paper program. In addition,
CTX Mortgage Company has its own $1 billion of committed and $1.2 billion of
uncommitted credit facilities to finance mortgages that are held during the
period they are being securitized and readied for delivery against forward sale
commitments. Centex Home Equity Corporation has its own $300 million of
committed and $110 million of uncommitted credit facilities to finance sub-prime
mortgages held until securitization.
The $716.2 million increase in debt was primarily used to fund the
increase in both residential mortgage loans and inventories. The increase in
residential mortgage loans is primarily due to an increase in mortgage
refinancing activity, which is attributed to continuing favorable mortgage
interest rates.
The Company believes it has adequate resources and sufficient
credit facilities to satisfy its current needs and to provide for future growth.
OTHER DEVELOPMENTS AND OUTLOOK
On December 31, 1998, Centex Real Estate Corporation, the home
building subsidiary of Centex Corporation, purchased Calton Homes, Inc., the
wholly-owned single-family home building subsidiary of Calton, Inc., for $48.1
million in cash and the assumption of about $20.5 million of bank debt. In
addition, Calton agreed to provide consulting services to Centex Homes over a
three-year period for $1.3 million annually. Calton Homes builds and sells
single-family homes in central New Jersey. During its fiscal year ended November
30, 1997 Calton Homes delivered 226 homes at an average sales price of $277,000.
Calton Homes' customers include second and third-time move-up as well as "active
adult" home buyers. Management believes this acquisition will substantially
increase the Company's presence in New Jersey and that Calton Homes' strong
management team will help expand Centex's operations in the Northeast.
-16-
<PAGE> 20
Also during the quarter, Centex announced the formation of a new
subsidiary, Centex Latin America, Inc., which will pursue investments with
companies operating in Mexico and in other Latin American markets, including
Argentina, Brazil and Chile.
Favorable interest rates during the first nine months of fiscal
1999 continue to positively impact Centex's home sales and mortgage
applications, and the Company's home building and financial services operations
are on track to report record performances for fiscal 1999. Contracting and
Construction Services operations are also expected to report strong results as
well as CXP, which is positioned to post its fifth consecutive year of record
results. Consequently, the Company expects fiscal 1999 earnings to significantly
exceed the record levels posted in fiscal 1998.
FORWARD-LOOKING STATEMENTS
The information contained in this Report includes forward-looking
statements involving a number of risks and uncertainties. Forward-looking
statements may be identified by the context of the statement and generally arise
when the Company is discussing its beliefs, estimates or expectations. In
addition to the factors discussed elsewhere in this document, other determinants
that could cause actual results to differ include increases in short and/or
long-term interest rates or a change in the relationship between short and
long-term interest rates; business conditions; growth in the home building,
investment real estate, financial services, construction products, and
contracting and construction services industries in the local markets in which
the Company through its subsidiaries conducts business and in the economy in
general: competitive factors, governmental regulation and the cost and
availability of raw materials. These and other factors are described in the
Joint Annual Report on Form 10-K of Centex Corporation and 3333 Holding
Corporation and Centex Development Company, L.P., and in the Annual Report on
Form 10-K for Centex Construction Products, Inc., for the fiscal year ended
March 31, 1998. Both reports are filed with the Securities and Exchange
Commission.
-17-
<PAGE> 21
CENTEX CORPORATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
1. Current Report on Form 8-K of Centex Corporation dated
October 30, 1998.
2. Current Report on Form 8-K of Centex Corporation dated
December 9, 1998.
All other items required under Part II are omitted because they are not
applicable.
-18-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CENTEX CORPORATION
-------------------------------------------
Registrant
February 12, 1999 /s/ David W. Quinn
-------------------------------------------
David W. Quinn
Vice Chairman and
Chief Financial Officer
(principal financial officer)
February 12, 1999 /s/ Barry G. Wilson
-------------------------------------------
Barry G. Wilson
Controller
(chief accounting officer)
-19-
<PAGE> 23
[This page intentionally left blank.]
-20-
<PAGE> 24
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
PART I. FINANCIAL INFORMATION
CONDENSED COMBINING FINANCIAL STATEMENTS
ITEM 1.
The condensed combining financial statements include the accounts of
3333 Holding Corporation and subsidiary and Centex Development Company, L.P.
(collectively the "Companies"), and have been prepared by the Companies, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Companies believe that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed combining financial statements be read in conjunction with the
financial statements and the notes thereto included in the Companies' latest
Annual Report on Form 10-K. In the opinion of the Companies, all adjustments
necessary to present fairly the information in the following condensed financial
statements of the Companies have been included. The results of operations for
such interim periods are not necessarily indicative of the results for the full
year.
-21-
<PAGE> 25
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF OPERATIONS
(dollars in thousands, except per unit/share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
--------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- -------------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 5,694 $ 5,653 $ 194 $ 9,228 $ 9,123 $ 310
Costs and Expenses 5,681 5,262 572 6,194 6,069 330
----------- ----------- ----------- ----------- ----------- -----------
Earnings (Loss) Before Income Taxes 13 391 (378) 3,034 3,054 (20)
Income Taxes -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 13 $ 391 $ (378) $ 3,034 $ 3,054 $ (20)
=========== =========== =========== =========== =========== ===========
NET EARNINGS (LOSS) PER UNIT/SHARE $ 6.99 $ (378) $ 94.67 $ (20)
=========== =========== =========== ===========
WEIGHTED-AVERAGE UNITS/
SHARES OUTSTANDING 55,911 1,000 32,260 1,000
=========== =========== =========== ===========
</TABLE>
See notes to condensed combining financial statements.
-22-
<PAGE> 26
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF OPERATIONS
(dollars in thousands, except per unit/share data)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
--------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- -------------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
----------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 19,774 $ 19,385 $ 951 $ 16,063 $ 15,748 $ 1,059
Costs and Expenses 19,732 18,559 1,735 11,890 11,635 999
----------- ----------- ----------- ----------- ----------- -----------
Earnings (Loss) Before Income Taxes 42 826 (784) 4,173 4,113 60
Income Taxes -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 42 $ 826 $ (784) $ 4,173 $ 4,113 $ 60
=========== =========== =========== =========== =========== ============
NET EARNINGS (LOSS) PER UNIT/SHARE $ 15.65 $ (784) $ 127.50 $ 60
=========== =========== =========== ============
WEIGHTED-AVERAGE UNITS/
SHARES OUTSTANDING 52,783 1,000 32,260 1,000
=========== =========== =========== ============
</TABLE>
See notes to condensed combining financial statements.
-23-
<PAGE> 27
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998* March 31, 1998**
----------------------------------------- -----------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
---------- ------------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash $ 932 $ 884 $ 48 $ 260 $ 259 $ 1
Accounts Receivable 1,953 1,128 1,451 976 8,552 761
Notes Receivable -
Centex Corporation and Subsidiaries -- -- -- 7,700 -- 7,700
Other 3,735 3,735 -- 5,110 5,110 --
Investment in Affiliate -- -- 1,092 -- -- 849
Investment in Real Estate Joint Ventures 168 668 524 3,040 2,478 562
Commercial Properties, net 1,909 1,909 -- 1,946 1,946 --
Projects Under Development and
Held for Sale 92,338 90,413 901 41,265 40,815 450
Property and Equipment, net 258 96 162 88 -- 88
Other Assets 1,020 945 75 112 100 12
---------- ---------- ---------- ---------- ---------- ----------
$ 102,313 $ 99,778 $ 4,253 $ 60,497 $ 59,260 $ 10,423
========== ========== ========== ========== ========== ==========
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Accounts Payable and Accrued
Liabilities $ 9,369 $ 9,402 $ 593 $ 4,341 $ 4,370 $ 8,390
Notes Payable -
Centex Corporation and Subsidiaries 3,891 -- 3,891 1,480 -- 1,480
Bank Development Facilities 28,711 28,711 -- 13,821 13,821 --
---------- ---------- --------- ---------- ---------- ----------
Total Liabilities 41,971 38,113 4,484 19,642 18,191 9,870
Stockholders' Equity and
Partners' Capital 60,342 61,665 (231) 40,855 41,069 553
---------- ---------- ---------- ---------- ---------- ----------
$ 102,313 $ 99,778 $ 4,253 $ 60,497 $ 59,260 $ 10,423
========= ========== ========== ========== ========== ==========
</TABLE>
* Unaudited
** Condensed from audited financial statements.
See notes to condensed combining financial statements.
-24-
<PAGE> 28
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
--------------------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------------------
3333 HOLDING 3333 HOLDING
CENTEX CORPORATION CENTEX CORPORATION
DEVELOPMENT AND DEVELOPMENT AND
COMBINED COMPANY, L.P. SUBSIDIARY COMBINED COMPANY, L.P. SUBSIDIARY
---------- ------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net Earnings (Loss) $ 42 $ 826 $ (784) $ 4,173 $ 4,113 $ 60
Net Change in Payables, Accruals
and Receivables 4,051 12,538 (8,487) 1,655 (1,999) 3,654
Decrease (Increase) in Notes Receivable 1,375 1,375 -- (5,877) (5,877) --
Decrease in Advances to Joint Venture 2,872 1,810 38 133 133 --
(Increase) Decrease in Projects Under
Development and Held for Sale (51,073) (49,598) (451) 3,439 3,439 --
Decrease in Commercial Properties, net 37 37 -- -- -- --
Property and Equipment Additions, net (170) (96) (74) -- -- --
Increase in Other Assets (908) (845) (63) (100) (100) --
---------- ---------- ---------- ---------- ---------- ----------
(43,774) (33,953) (9,821) 3,423 (291) 3,714
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS - FINANCING ACTIVITIES
Increase (Decrease) in Notes Payable -
Centex Corporation and Subsidiaries 2,411 -- 2,411 (3,712) -- (3,712)
Other 14,890 14,890 -- 4,751 4,751 --
Decrease in Notes Receivable -
Centex Corporation and Subsidiaries 7,700 -- 7,700 -- -- --
Capital Contributions 19,445 19,688 (243) -- -- --
Capital Distributions -- -- -- (4,500) (4,500) --
---------- ---------- ---------- ---------- ---------- ----------
44,446 34,578 9,868 (3,461) 251 (3,712)
---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH 672 625 47 (38) (40) 2
CASH AT BEGINNING OF YEAR 260 259 1 630 625 5
---------- ---------- ---------- ---------- ---------- ----------
CASH AT END OF PERIOD $ 932 $ 884 $ 48 $ 592 $ 585 $ 7
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to condensed combining financial statements.
-25-
<PAGE> 29
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
NOTES TO CONDENSED COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 1998
(unaudited)
(A) On November 30, 1987 Centex Corporation ("Centex") distributed to a
nominee all of the issued and outstanding shares of common stock of
3333 Holding Corporation ("Holding") and warrants to purchase
approximately 80% of the Class B units of limited partnership interest
in Centex Development Company, L.P. ("CDC" or the "Partnership"). 3333
Development Corporation ("Development"), a wholly-owned subsidiary of
Holding, serves as general partner of the Partnership. These
securities are held by the nominee on behalf of Centex stockholders
and will trade in tandem with the common stock of Centex until such
time as they are detached.
See Note (B) to the condensed consolidated financial statements of
Centex Corporation and subsidiaries included elsewhere in this Form
10-Q for supplementary condensed combined financial statements for
Centex Corporation and Subsidiaries, Holding and Subsidiary and the
Partnership.
(B) Holding entered into a services agreement in May 1987 with Centex
Service Company ("CSC"), a wholly-owned subsidiary of Centex, whereby
CSC provides certain tax, accounting, and other similar services for
Holding at a fee of $2,500 per month. In April 1998, the service
agreement was amended to also include certain real estate development
and management services and the related fee was increased to $30,000
per month.
In connection with Holding's acquisition of additional shares of common
stock of Development in 1987, Holding borrowed $7.7 million from Centex
pursuant to a secured promissory note (the "Holding Note"). On May 29,
1998, the outstanding principal balance on the Holding Note was repaid.
The Holding Note, which had a fluctuating balance during April and May
1998, bore interest, payable quarterly, at the prime rate of interest
of NationsBank, N.A. plus 1%. Interest expense on the Holding Note
during the nine months ended December 31, 1998 totaled $62,000.
In 1987, Development loaned $7.7 million to a wholly owned subsidiary
of Centex pursuant to an unsecured promissory note and related loan
agreement. The note bore interest, payable quarterly, at the prime rate
of interest of NationsBank, N.A. plus 7/8%. On May 29, 1998, the
outstanding principal balance on the note was repaid. Interest income
on the note totaled $116,000 for the nine months ended December 31,
1998.
CDC sells lots to Centex Homes pursuant to certain purchase and sale
agreements. Revenues from these sales totaled $55,000 and $2.9 million
for the quarter and nine months ended December 31, 1998, and $220,000
and $855,000 for the quarter and nine months ended December 31, 1997,
respectively. Additionally, during the nine months ended December 31,
1997, the Partnership sold property located in Carrollton, Texas to
Centex Homes for $2.9 million.
-26-
<PAGE> 30
During the current fiscal year, Centex Office Southpointe I, L.P., a
subsidiary of CDC, executed a construction contract with one of
Centex's construction subsidiaries in the amount of $9.4 million for
the construction of a 140,000 square foot office building in
Plantation, Florida, near Ft. Lauderdale. Additionally, during the
current fiscal year, Centex Multi-Family Sheffield I, L.P., also a
subsidiary of CDC, executed a construction contract with one of
Centex's construction subsidiaries in the amount of $16.2 million for
the construction of a 400-unit apartment project in Grand Prairie,
Texas. During fiscal year 1998, Centex Multi-Family Company, L.P.
("Multi-Family"), a subsidiary of CDC, executed a construction contract
with one of Centex's construction subsidiaries in the amount of $13.2
million for the construction of a 304-unit apartment project north of
Dallas in The Colony, Texas.
In April 1998, CDC acquired a 49% equity interest in an entity, which
purchased real estate assets from a Centex subsidiary for $3.1 million.
(C) During fiscal year 1998, the partnership agreement governing CDC was
amended to allow for the issuance of a new class of limited partnership
units, Class C Preferred Partnership Units ("Class C Units"), to be
issued in exchange for assets contributed by a limited partner, or by
an individual or entity who is to be admitted as a limited partner.
During the nine months ended December 31, 1998, Centex Homes, CDC's
sole limited partner, contributed assets valued at $19.4 million in
exchange for 19,445 Class C Units.
(D) A summary of changes in stockholders' equity and partners' capital is
presented below (dollars in thousands):
<TABLE>
<CAPTION>
For the Nine months Ended December 31, 1998
----------------------------------------------------------------------------------------
3333 Holding Corporation
Centex Development Company, L.P. and Subsidiary
------------------------------------ ------------------------------------
CLASS B GENERAL LIMITED CAPITAL IN
UNITS PARTNERS PARTNER'S STOCK EXCESS OF RETAINED
COMBINED WARRANTS CAPITAL CAPITAL WARRANTS PAR VALUE EARNINGS
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 $ 40,855 $ 500 $ 767 $ 39,802 $ 1 $ 800 $ (248)
Capital Contributions 19,445 -- 325 19,445 -- -- --
Net Earnings 42 -- -- 826 -- -- (784)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 $ 60,342 $ 500 $ 1,092 $ 60,073 $ 1 $ 800 $ (1,032)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The Partnership agreement provides that Class A and Class C limited
partners are entitled to a cumulative preferred return of 9% per annum
on the average outstanding balance of their Unrecovered Capital.
Unrecovered Capital represents initial capital contributions as reduced
by repayments and is the basis for preference accruals. No preference
payments were made during the three months or nine months ended
December 31, 1998. Preference payments in arrears at December 31, 1998
for Class A and Class C limited partners amounted to $6.3 million and
$1.3 million, respectively, and Unrecovered Capital for Class A and
Class C limited partners aggregated approximately $59.8 million.
-27-
<PAGE> 31
3333 HOLDING CORPORATION AND SUBSIDIARY
AND CENTEX DEVELOPMENT COMPANY, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
On a combined basis, revenues for the quarter and nine months
ended December 31, 1998 totaled $5.7 million and $19.8 million, respectively
compared to $9.2 million and $16.1 million for the same periods of the prior
year. Revenues during the current year periods resulted primarily from the sale
of single family homes in New Jersey and residential property in Texas and
Florida. Revenues for the three and nine month periods ended December 31, 1997
resulted primarily from the sale of commercial property in Texas and residential
property in Texas and Florida.
The Companies had combined net earnings for the quarter and nine
months ended December 31, 1998 of $13,000 and $42,000, respectively, compared to
combined net earnings of $3.0 million and $4.2 million for the quarter and nine
months ended December 31, 1997, respectively. Margins on real estate sales for
the nine months ended December 31, 1998 were 5.6% versus 27.8% for the nine
months ended December 31, 1997.
YEAR 2000 COMPLIANCE
The Companies have a variety of operating systems, computer
software applications, computer hardware equipment, and other equipment with
embedded electronic circuits. Pursuant to the services agreement Holding has
with Centex Service Company ("CSC"), Year 2000 compliance issues are being
addressed by a Year 2000 Task Force Team comprised of key personnel in the
management information systems, legal, internal audit and accounting areas of
Centex as well as by management of the Companies. Since fiscal year 1997, the
Companies have been engaged in an ongoing process of identifying, evaluating,
and implementing changes to their systems in order to ensure Year 2000
compliance. As a result of this process, a small number of systems were
identified as being unable to interpret dates after December 31, 1999. In all of
the cases, the replacement or upgrading of the non-compliant systems has already
occurred as part of their normal ongoing systems updating.
The Companies have engaged the services of a third-party
consulting firm to evaluate their Year 2000 readiness. It is anticipated that
the evaluation will be concluded during the March 1999 quarter.
Achieving Year 2000 compliance is dependent on many factors, some
of which are not completely within the Companies' control. The Companies obtain
information, materials, and services from numerous sources, and provide goods
and services to numerous customers. The failure of these third parties
(including U.S. state and local governments and agencies) to achieve Year 2000
readiness could adversely affect the Companies' financial condition and results
of operations. In order to address
-28-
<PAGE> 32
the potential non-compliance by third parties, the Companies will continue to
survey their largest customers, contractors and vendors.
Year 2000 Forward-looking Statements
Certain statements in this section, other than historical
information, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties relative to the Companies' ability to assess and remediate any
Year 2000 compliance issues, the ability of third parties to correct material
non-compliant systems, and the Companies' assessment of the Year 2000 issue's
impact on their financial results and operations.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1998, 19,445 Class C
Preferred Partnership Units were issued in exchange for assets valued at $19.4
million. The revenues, earnings and liquidity of the Companies for the next 12
to 18 months will be largely dependent on future real estate and home sales, the
timing of which are uncertain. Commercial development operations have recently
been initiated and are not anticipated to provide a significant source of
earnings or liquidity for approximately 18 months.
The Companies believe that they will be able to provide or obtain
the necessary funding for their current operations and future expansion needs.
The ability of the Partnership to obtain external debt or equity capital is
subject to the partnership agreement (as amended) governing the Partnership.
FORWARD-LOOKING STATEMENTS
The information contained in this Report includes forward-looking
statements involving a number of risks and uncertainties. Forward-looking
statements may be identified by the context of the statement and generally arise
when the Companies are discussing their beliefs, estimates, or expectations. In
addition to the factors discussed elsewhere in this document, other determinants
that could cause actual results to differ include increases in short and/or
long-term interest rates or a change in the relationship between short and
long-term interest rates; business conditions; growth in the investment real
estate industry in the local markets in which the Companies conduct business and
in the economy in general: competitive factors, and governmental regulation.
These and other factors are described in the Joint Annual Report on Form 10-K of
Centex Corporation and 3333 Holding Corporation and Centex Development, L.P. for
the fiscal year ended March 31, 1998, which is filed with the Securities and
Exchange Commission.
-29-
<PAGE> 33
3333 HOLDING CORPORATION
CENTEX DEVELOPMENT COMPANY, L.P.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
Exhibit 27.2 - Financial Data Schedule
Exhibit 27.3 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter
ended December 31, 1998.
All other items required under Part II are omitted because they are not
applicable.
-30-
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
3333 HOLDING CORPORATION
------------------------------------------
Registrant
February 12, 1999 /s/ Richard C. Decker
------------------------------------------
Richard C. Decker
President and Chief Executive Officer
(principal executive officer)
February 12, 1999 /s/ Kimberly A. Pinson
------------------------------------------
Kimberly A. Pinson
Vice President, Treasurer and Controller
(principal financial officer and
chief accounting officer)
-31-
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CENTEX DEVELOPMENT COMPANY, L.P.
-----------------------------------------
Registrant
By: 3333 Development Corporation,
General Partner
February 12, 1999 /s/ Richard C. Decker
-----------------------------------------
Richard C. Decker
President and Chief Executive Officer
(principal executive officer)
February 12, 1999 /s/ Kimberly A. Pinson
-----------------------------------------
Kimberly A. Pinson
Vice President, Treasurer and Controller
(principal financial officer
and chief accounting officer)
-32-
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27.1 - Financial Data Schedule - Centex Corporation
27.2 - Financial Data Schedule - 3333 Holding Corporation
27.3 - Financial Data Schedule - Centex Development Company, L.P.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE - CENTEX CORPORATION
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX
CORPORATION'S DECEMBER 31, 1998, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000018532
<NAME> CENTEX CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 111,839
<SECURITIES> 0
<RECEIVABLES> 1,901,836
<ALLOWANCES> 0
<INVENTORY> 1,541,106
<CURRENT-ASSETS> 0
<PP&E> 536,637
<DEPRECIATION> 235,387
<TOTAL-ASSETS> 4,393,284
<CURRENT-LIABILITIES> 0
<BONDS> 284,151
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 14,867
<OTHER-SE> 1,121,599
<TOTAL-LIABILITY-AND-EQUITY> 4,393,284
<SALES> 3,609,774
<TOTAL-REVENUES> 3,609,774
<CGS> 3,257,442
<TOTAL-COSTS> 3,257,442
<OTHER-EXPENSES> 61,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,164
<INCOME-PRETAX> 261,722
<INCOME-TAX> 97,955
<INCOME-CONTINUING> 163,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,767
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.65
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.2
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE - 3333 HOLDING CORPORATOIN
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 3333 Holding
Corporation's December 31, 1998, Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000818762
<NAME> 3333 HOLDING CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 1,451
<ALLOWANCES> 0
<INVENTORY> 901
<CURRENT-ASSETS> 0
<PP&E> 205
<DEPRECIATION> 43
<TOTAL-ASSETS> 4,253
<CURRENT-LIABILITIES> 0
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1
<OTHER-SE> (232)
<TOTAL-LIABILITY-AND-EQUITY> 4,253
<SALES> 951
<TOTAL-REVENUES> 951
<CGS> 1,735
<TOTAL-COSTS> 1,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (784)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.3
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE - CENTEX DEVELOPMENT CO LP
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CENTEX
DEVELOPMENT COMPANY, L.P.'S DECEMBER 31, 1998, FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000818764
<NAME> CENTEX DEVELOPMENT COMPANY, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 884
<SECURITIES> 0
<RECEIVABLES> 1,128
<ALLOWANCES> 0
<INVENTORY> 90,413
<CURRENT-ASSETS> 0
<PP&E> 119
<DEPRECIATION> 23
<TOTAL-ASSETS> 99,778
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<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 500
<OTHER-SE> 61,165
<TOTAL-LIABILITY-AND-EQUITY> 99,778
<SALES> 19,385
<TOTAL-REVENUES> 19,385
<CGS> 18,559
<TOTAL-COSTS> 18,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 826
<INCOME-TAX> 0
<INCOME-CONTINUING> 826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 826
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|
1999 | 0QTR1
| DE | https://www.sec.gov/Archives/edgar/data/315189/0000315189-99-000009.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000315189-99-000009.txt : 19990311
<SEC-HEADER>0000315189-99-000009.hdr.sgml : 19990311
ACCESSION NUMBER: 0000315189-99-000009
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990131
FILED AS OF DATE: 19990310
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: DEERE & CO
CENTRAL INDEX KEY: 0000315189
STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523]
IRS NUMBER: 362382580
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04121
FILM NUMBER: 99561490
BUSINESS ADDRESS:
STREET 1: ONE JOHN DEERE PLACE
CITY: MOLINE
STATE: IL
ZIP: 61265
BUSINESS PHONE: 3097658000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-Q
------------------------
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1999
--------------------------
Commission file no: 1-4121
--------------------------
DEERE & COMPANY
Delaware 36-2382580
(State of incorporation) (IRS employer identification no.)
One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
----------------------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
At January 31, 1999, 231,713,393 shares of common stock, $1
par value, of the registrant were outstanding.
- ----------------------------------------------------------------
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY CONSOLIDATED
STATEMENT OF CONSOLIDATED INCOME (Deere & Company and
Consolidated
Subsidiaries)
Millions of dollars except per Three Months Ended
share amounts January 31
(Unaudited) 1999 1998
Net Sales and Revenues
Net sales of equipment $1,973.2 $2,404.7
Finance and interest income 259.0 233.2
Insurance and health care premiums 179.8 169.0
Investment income 18.7 17.1
Other income 27.8 22.1
Total 2,458.5 2,846.1
Costs and Expenses
Cost of goods sold 1,653.8 1,866.5
Research and development expenses 95.9 94.7
Selling, administrative and general
expenses 301.8 283.1
Interest expense 134.1 114.7
Insurance and health care claims
and benefits 153.9 138.6
Other operating expenses 42.7 27.6
Total 2,382.2 2,525.2
Income of Consolidated Group
Before Income Taxes 76.3 320.9
Provision for income taxes 26.5 117.8
Income of Consolidated Group 49.8 203.1
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit .4 (.2)
Insurance
Health Care
Other (.5) .4
Total (.1) .2
Net Income $ 49.7 $ 203.3
Per Share:
Net income $ .21 $ .81
Net income - diluted $ .21 $ .81
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations"
and "Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
STATEMENT OF CONSOLIDATED INCOME (Deere & Company with
Financial Services
on the Equity Basis)
Millions of dollars except per Three Months Ended
share amounts January 31
(Unaudited) 1999 1998
Net Sales and Revenues
Net sales of equipment $1,973.2 $2,404.7
Finance and interest income 21.8 32.1
Insurance and health care premiums
Investment income
Other income 15.5 10.9
Total 2,010.5 2,447.7
Costs and Expenses
Cost of goods sold 1,658.5 1,871.0
Research and development expenses 95.9 94.7
Selling, administrative and general
expenses 207.8 194.6
Interest expense 39.9 21.7
Insurance and health care claims
and benefits
Other operating expenses (2.2) 1.6
Total 1,999.9 2,183.6
Income of Consolidated Group
Before Income Taxes 10.6 264.1
Provision for income taxes 3.8 97.2
Income of Consolidated Group 6.8 166.9
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit 41.6 32.9
Insurance (1.1) 5.5
Health Care 2.9 (2.4)
Other (.5) .4
Total 42.9 36.4
Net Income $ 49.7 $ 203.3
DEERE & COMPANY FINANCIAL SERVICES
STATEMENT OF CONSOLIDATED INCOME
Millions of dollars except per Three Months Ended
share amounts January 31
(Unaudited) 1999 1998
Net Sales and Revenues
Net sales of equipment
Finance and interest income $ 240.7 $ 203.2
Insurance and health care premiums 186.6 175.4
Investment income 18.7 17.1
Other income 20.7 12.5
Total 466.7 408.2
Costs and Expenses
Cost of goods sold
Research and development expenses
Selling, administrative and general
expenses 95.2 90.9
Interest expense 97.6 95.1
Insurance and health care claims
and benefits 155.7 139.4
Other operating expenses 52.5 25.9
Total 401.0 351.3
Income of Consolidated Group
Before Income Taxes 65.7 56.9
Provision for income taxes 22.7 20.7
Income of Consolidated Group 43.0 36.2
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit .4 (.2)
Insurance
Health Care
Other
Total .4 (.2)
Net Income $ 43.4 $ 36.0
<PAGE>
DEERE & COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED (Deere & Company and
BALANCE SHEET Consolidated Subsidiaries)
Millions of dollars January 31 October 31 January 31
(Unaudited) 1999 1998 1998
Assets
Cash and short-term
investments $ 325.5 $ 309.7 $ 319.2
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 325.5 309.7 319.2
Marketable securities 870.8 867.3 867.6
Receivables from
unconsolidated subsidiaries
and affiliates 48.4 36.2 14.9
Trade accounts and notes
receivable - net 3,828.8 4,059.2 3,526.4
Financing receivables - net 6,696.7 6,332.7 6,613.6
Other receivables 519.3 536.8 395.3
Equipment on operating
leases - net 1,256.5 1,209.2 820.8
Inventories 1,614.7 1,286.7 1,464.3
Property and equipment - net 1,674.3 1,700.3 1,534.8
Investments in unconsolidated
subsidiaries and affiliates 173.8 172.0 148.2
Intangible assets - net 212.0 217.6 183.8
Prepaid pension costs 662.3 674.3 574.7
Deferred income taxes 400.2 396.3 528.9
Other assets and
deferred charges 219.9 203.2 194.8
Total $18,503.2 $18,001.5 $17,187.3
Liabilities and Stockholders'
Equity
Short-term borrowings $ 5,871.2 $ 5,322.1 $ 4,934.0
Payables to unconsolidated
subsidiaries and affiliates 31.9 31.1 43.2
Accounts payable and
accrued expenses 2,359.5 2,853.2 2,458.1
Insurance and health care
claims and reserves 402.9 411.3 405.1
Accrued taxes 141.7 144.9 178.3
Deferred income taxes 18.3 19.7 21.3
Long-term borrowings 3,275.7 2,791.7 2,642.3
Retirement benefit accruals
and other liabilities 2,373.5 2,347.7 2,359.0
Total liabilities 14,474.7 13,921.7 13,041.3
Common stock, $1 par value
(issued shares at January 31,
1999 - 263,852,871) 1,788.5 1,789.8 1,778.5
Retained earnings 3,824.3 3,839.5 3,194.3
Minimum pension liability
adjustment (18.7) (18.7) (14.0)
Cumulative translation
adjustment (89.6) (80.5) (87.5)
Unrealized gain on marketable
securities 29.0 24.5 26.6
Unamortized restricted
stock compensation (25.1) (7.2) (16.1)
Common stock in treasury (1,479.9) (1,467.6) (735.8)
Stockholders' equity 4,028.5 4,079.8 4,146.0
Total $18,503.2 $18,001.5 $17,187.3
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations"
and "Financial Services." Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED CONSOLIDATED (Deere & Company with Financial
BALANCE SHEET Services on the Equity Basis)
Millions of dollars January 31 October 31 January 31
(Unaudited) 1999 1998 1998
Assets
Cash and short-term
investments $ 80.3 $ 68.3 $ 73.5
Cash deposited with
unconsolidated subsidiaries 92.8 139.6 180.5
Cash and cash equivalents 173.1 207.9 254.0
Marketable securities
Receivables from
unconsolidated subsidiaries
and affiliates 227.4 95.5 107.7
Trade accounts and notes
receivable - net 3,828.8 4,059.2 3,526.4
Financing receivables - net 83.4 85.8 82.7
Other receivables 42.2 139.4
Equipment on operating
leases - net 218.6 186.6
Inventories 1,614.7 1,286.7 1,464.3
Property and equipment - net 1,625.7 1,653.9 1,491.0
Investments in unconsolidated
subsidiaries and affiliates 1,693.9 1,620.4 1,510.5
Intangible assets - net 204.8 210.1 174.4
Prepaid pension costs 662.3 674.3 574.7
Deferred income taxes 379.1 372.6 485.6
Other assets and
deferred charges 159.4 141.6 125.9
Total $10,694.8 $10,766.0 $9,983.8
Liabilities and Stockholders'
Equity
Short-term borrowings $ 2,076.2 $ 1,512.4 $1,036.6
Payables to unconsolidated
subsidiaries and affiliates 31.9 43.0 43.2
Accounts payable and
accrued expenses 1,473.8 2,098.1 1,693.1
Insurance and health care
claims and reserves
Accrued taxes 136.3 142.1 165.9
Deferred income taxes 5.5 19.7 20.8
Long-term borrowings 601.2 552.9 551.9
Retirement benefit accruals
and other liabilities 2,341.4 2,318.0 2,326.3
Total liabilities 6,666.3 6,686.2 5,837.8
Common stock, $1 par value
(issued shares at January 31,
1999 - 263,852,871) 1,788.5 1,789.8 1,778.5
Retained earnings 3,824.3 3,839.5 3,194.3
Minimum pension liability
adjustment (18.7) (18.7) (14.0)
Cumulative translation
adjustment (89.6) (80.5) (87.5)
Unrealized gain on marketable
securities 29.0 24.5 26.6
Unamortized restricted
stock compensation (25.1) (7.2) (16.1)
Common stock in treasury (1,479.9) (1,467.6) (735.8)
Stockholders' equity 4,028.5 4,079.8 4,146.0
Total $10,694.8 $10,766.0 $9,983.8
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED CONSOLIDATED
BALANCE SHEET
Millions of dollars January 31 October 31 January 31
(Unaudited) 1999 1998 1998
Assets
Cash and short-term
investments $ 245.2 $ 241.5 $ 245.7
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 245.2 241.5 245.7
Marketable securities 870.8 867.3 867.6
Receivables from
unconsolidated subsidiaries
and affiliates 6.7
Trade accounts and notes
receivables - net
Financing receivables - net 6,613.2 6,246.9 6,530.9
Other receivables 477.1 397.3 395.3
Equipment on operating
leases - net 1,256.5 990.6 634.2
Inventories
Property and equipment - net 48.6 46.4 43.8
Investments in unconsolidated
subsidiaries and affiliates 20.9 20.3 12.7
Intangible assets - net 7.2 7.6 9.4
Prepaid pension costs
Deferred income taxes 21.0 23.7 43.4
Other assets and
deferred charges 60.5 61.5 68.9
Total $9,627.7 $8,903.1 $8,851.9
Liabilities and Stockholders'
Equity
Short-term borrowings $3,795.0 $3,809.7 $3,897.4
Payables to unconsolidated
subsidiaries and affiliates 278.5 187.0 273.3
Accounts payable and
accrued expenses 885.6 755.1 765.0
Insurance and health care
claims and reserves 402.9 411.3 405.1
Accrued taxes 5.4 2.8 12.4
Deferred income taxes 12.8 .5
Long-term borrowings 2,674.6 2,238.8 2,090.4
Retirement benefit accruals
and other liabilities 32.1 29.7 32.7
Total liabilities 8,086.9 7,434.4 7,476.8
Common stock, $1 par value
(issued shares at January 31,
1999 - 263,852,871) 247.5 237.1 237.1
Retained earnings 1,284.5 1,223.2 1,121.5
Minimum pension liability
adjustment
Cumulative translation
adjustment (20.2) (16.1) (10.1)
Unrealized gain on marketable
securities 29.0 24.5 26.6
Unamortized restricted
stock compensation
Common stock in treasury
Stockholders' equity 1,540.8 1,468.7 1,375.1
Total $9,627.7 $8,903.1 $8,851.9
<PAGE>
DEERE & COMPANY CONSOLIDATED
CONDENSED STATEMENT OF (Deere & Company and
CONSOLIDATED CASH FLOWS Consolidated Subsidiaries)
Three Months Ended
January 31
Millions of dollars (Unaudited) 1999 1998
Cash Flows from Operating Activities
Net income $ 49.7 $ 203.3
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities (446.8) (809.0)
Net cash provided by (used for)
operating activities (397.1) (605.7)
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,700.5 1,492.7
Proceeds from maturities and
sales of marketable securities 37.3 36.9
Cost of financing receivables
acquired (2,042.2) (1,725.7)
Purchases of marketable securities (33.8) (76.8)
Purchases of property and
equipment (54.9) (73.0)
Cost of operating leases acquired (125.2) (117.9)
Acquisitions of businesses (38.5)
Other 109.9 82.6
Net cash used for investing
activities (408.4) (419.7)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings 541.7 979.5
Change in intercompany
receivables/payables
Proceeds from long-term borrowings 675.0 306.0
Principal payments on long-term
borrowings (297.5) (92.6)
Proceeds from issuance of
common stock .4 6.6
Repurchases of common stock (46.1) (132.8)
Dividends paid (51.7) (50.2)
Other
Net cash provided by
financing activities 821.8 1,016.5
Effect of Exchange Rate
Changes on Cash (.5) (1.9)
Net Increase (Decrease) in Cash
and Cash Equivalents 15.8 (10.8)
Cash and Cash Equivalents at
Beginning of Period 309.7 330.0
Cash and Cash Equivalents at
End of Period $ 325.5 $ 319.2
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations"
and "Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED STATEMENT OF (Deere & Company with
CONSOLIDATED CASH FLOWS Financial Services on the
Equity Basis)
Three Months Ended
January 31
Millions of dollars (Unaudited) 1999 1998
Cash Flows from Operating Activities
Net income $ 49.7 $203.3
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities (566.4) (879.8)
Net cash provided by (used for)
operating activities (516.7) (676.5)
Cash Flows from Investing Activities
Collections and sales of
financing receivables 7.5 10.1
Proceeds from maturities and
sales of marketable securities
Cost of financing receivables
acquired (9.0) (10.3)
Purchases of marketable securities
Purchases of property and
equipment (50.9) (71.2)
Cost of operating leases acquired (16.1)
Acquisitions of businesses (38.5)
Other 3.5 10.9
Net cash used for investing
activities (48.9) (115.1)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings 561.2 869.9
Change in intercompany
receivables/payables 17.6 (56.1)
Proceeds from long-term borrowings 50.0
Principal payments on long-term
borrowings (1.1)
Proceeds from issuance of
common stock .4 6.6
Repurchases of common stock (46.1) (132.8)
Dividends paid (51.7) (50.2)
Other (.1)
Net cash provided by
financing activities 531.3 636.3
Effect of Exchange Rate
Changes on Cash (.5) (1.9)
Net Increase (Decrease) in Cash
and Cash Equivalents (34.8) (157.2)
Cash and Cash Equivalents at
Beginning of Period 207.9 411.2
Cash and Cash Equivalents at
End of Period $173.1 $254.0
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED STATEMENT OF Three Months Ended
CONSOLIDATED CASH FLOWS January 31
Millions of dollars (Unaudited) 1999 1998
Cash Flows from Operating Activities
Net income $ 43.4 $ 36.0
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities 81.2 54.1
Net cash provided by (used for)
operating activities 124.6 90.1
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,693.0 1,482.6
Proceeds from maturities and
sales of marketable securities 37.3 36.9
Cost of financing receivables
acquired (2,033.2) (1,715.4)
Purchases of marketable securities (33.8) (76.8)
Purchases of property and
equipment (4.0) (1.8)
Cost of operating leases acquired (125.2) (101.8)
Acquisitions of businesses
Other 106.4 72.9
Net cash used for investing
activities (359.5) (303.4)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings (19.5) 109.6
Change in intercompany
receivables/payables (64.4) (113.3)
Proceeds from long-term borrowings 625.0 306.0
Principal payments on long-term
borrowings (297.5) (91.5)
Proceeds from issuance of
common stock
Repurchases of common stock
Dividends paid (5.0) (19.3)
Other (1.3)
Net cash provided by
financing activities 238.6 190.2
Effect of Exchange Rate
Changes on Cash
Net Increase (Decrease) in Cash
and Cash Equivalents 3.7 (23.1)
Cash and Cash Equivalents at
Beginning of Period 241.5 268.8
Cash and Cash Equivalents at End
of Period $245.2 $245.7
<PAGE>
Notes to Interim Financial Statements
1. The consolidated financial statements of Deere & Company
and consolidated subsidiaries have been prepared by the
Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted as permitted by such rules and regulations. All
adjustments, consisting of normal recurring adjustments, have
been included. Management believes that the disclosures are
adequate to present fairly the financial position, results of
operations and cash flows at the dates and for the periods
presented. It is suggested that these interim financial
statements be read in conjunction with the financial
statements and the notes thereto included in the Company's
latest annual report on Form 10-K. Results for interim
periods are not necessarily indicative of those to be expected
for the fiscal year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ
from those estimates.
2. The Company's consolidated financial statements and some
information in the notes and related commentary are presented
in a format which includes data grouped as follows:
EQUIPMENT OPERATIONS - These data include the Company's
agricultural equipment, construction equipment and commercial
and consumer equipment operations with Financial Services
reflected on the equity basis. Data relating to the above
equipment operations, including the consolidated group data in
the income statement, are also referred to as "Equipment
Operations" in this report.
FINANCIAL SERVICES - These data include the Company's credit,
insurance and health care subsidiaries.
CONSOLIDATED - These data represent the consolidation of the
Equipment Operations and Financial Services in conformity with
Financial Accounting Standards Board (FASB) Statement No. 94.
References to "Deere & Company" or "the Company" refer to the
entire enterprise.
3. An analysis of the Company's retained earnings follows in
millions of dollars:
Three Months Ended
January 31
1999 1998
Balance, beginning of period $3,839.5 $3,048.4
Net income 49.7 203.3
Dividends declared (50.7) (54.8)
Other (14.2) (2.6)
Balance, end of period $3,824.3 $3,194.3
<PAGE>
4. An analysis of the cumulative adjustment follows in
millions of dollars:
Three Months Ended
January 31
1999 1998
Balance, beginning of period $(80.5) $(57.4)
Translation adjustment (7.4) (29.9)
Income taxes applicable to
translation adjustments (1.7) (.2)
Balance, end of period $(89.6) $(87.5)
5. Substantially all inventories owned by Deere & Company and
its United States equipment subsidiaries are valued at cost on
the "last-in, first-out" (LIFO) method. If all of the
Company's inventories had been valued on a "first-in, first-
out" (FIFO) method, estimated inventories by major
classification in millions of dollars would have been as
follows:
January 31 October 31 January 31
1999 1998 1998
Raw Materials and supplies $ 341 $ 250 $ 259
Work-in-process 555 475 532
Finished machines and parts 1,776 1,612 1,686
Total FIFO value 2,672 2,337 2,477
Adjustment to LIFO basis 1,057 1,050 1,013
Inventories 1,615 1,287 1,464
6. During the first three months of 1999, the Financial
Services operations received proceeds from the sale of retail
notes of $102 million. At January 31, 1999, the net unpaid
balance of all retail notes previously sold by the Financial
Services operations was $1,951 million and the Company's
maximum exposure under all related recourse provisions was
$184 million.
At January 31, 1999, the Company had commitments of
approximately $85 million for construction and acquisition of
property and equipment.
7. Dividends declared and paid on a per share basis were as
follows:
Three Months Ended
January 31
1999 1998
Dividends declared $.22 $.22
Dividends paid $.22 $.20
<PAGE>
8. Worldwide net sales and revenues and operating profit in
millions of dollars follow:
Three Months Ended
January 31
%
1999 1998 Change
Net sales:
Agricultural equipment $1,123 $1,451 -23
Construction equipment 443 578 -23
Commercial and consumer equipment 407 376 + 8
Total net sales 1,973 2,405 -18
Financial Services revenues 460 401 +15
Other revenues 26 40 -35
Total net sales and revenues $2,459 $2,846 -14
United States and Canada:
Equipment net sales $1,401 $1,815 -23
Financial Services revenues 460 401 +15
Total 1,861 2,216 -16
Overseas net sales 572 590 - 3
Other revenues 26 40 -35
Total net sales and revenues $2,459 $2,846 -14
Operating profit**:
Agricultural equipment $ 25 $ 206 -88
Construction equipment 12 64 -81
Commercial and consumer equipment 14 18 -22
Equipment Operations 51 288 -82
Financial Services 66 57 +16
Total operating profit* 117 345 -66
Interest and corporate expenses-net (40) (24) +67
Income taxes (27) (118) -77
Net income $ 50 $ 203 -75
* Includes overseas operating
profit as follows: $ 54 $ 57 - 5
** Operating profit is income before interest expense,
foreign exchange gains and losses, income taxes and
certain corporate expenses. However, operating profit of
Financial Services includes the effect of interest
expense.
<PAGE>
9. A reconciliation of basic and diluted net income per share
in millions, except per share amounts, follows:
Three Months Ended
January 31
1999 1998
Net income $49.7 $203.3
Average shares outstanding 231.7 249.5
Basic net income per share $ .21 $ .81
Average shares outstanding 231.7 249.5
Effect of dilutive securities:
Stock options .9 2.6
Other .1 .3
Total potential shares outstanding 232.7 252.4
Diluted net income per share $ .21 $ .81
Stock options to purchase 4.3 million shares during the first
quarter of 1999 and 2.2 million shares during the first
quarter of 1998 were outstanding, but not included in the
above diluted per share computation because the options'
exercise prices were greater than the average market price of
the Company's common stock during the period.
10. The Company is subject to various unresolved legal
actions which arise in the normal course of its business, the
most prevalent of which relate to product liability, retail
credit, software licensing, patent and trademark matters.
Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of
possible loss, the Company believes these unresolved legal
actions will not have a material effect on its financial
position or results of operations.
11. In the first quarter of 1999, the Company adopted FASB
Statement No. 130, Reporting Comprehensive Income.
Comprehensive income includes all changes in the Company's
equity during the period, except transactions with stockholders
of the Company. Comprehensive income for the first quarter of
1999 and 1998 consisted of the following in millions of
dollars:
Three Months Ended
January 31
1999 1998
Net income $49.7 $203.3
Change in cumulative translation adjustment (9.1) (30.1)
Unrealized gain on marketable securities 4.5 4.4
Comprehensive income $45.1 $177.6
12. In December 1998, the Company granted options to employees
for the purchase of 3.8 million shares of common stock at an
exercise price of $32.53 per share and .7 million shares at an
exercise price of $50.97 per share. At January 31, 1999,
options for 12.1 million shares were outstanding at option
prices in a range of $13.63 to $82.19 per share and a
weighted-average exercise price of $38.37 per share. A total
of 8.1 million shares remained available for the granting of
future options.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Deere & Company's net income in the first quarter of 1999 was
$49.7 million, or $.21 per share (basic and diluted), compared
with $203.3 million, or $.81 per share (basic and diluted),
last year. The farm sector is continuing to feel the effects
of depressed agricultural commodity prices and demand for
agricultural equipment, especially large tractors, remained
extremely weak during the quarter. In support of the
Company's emphasis on cash flow and asset management,
agricultural equipment production schedules have been set
below the level of retail demand, resulting in a decline in
trade receivables for the quarter. Although earnings were
adversely affected by the lower production, all equipment
businesses remained profitable.
Worldwide net sales and revenues for the quarter decreased 14
percent, to $2,459 million, compared with $2,846 million last
year. Net sales to dealers of agricultural, construction, and
commercial and consumer equipment were $1,973 million,
compared to $2,405 million last year. Overseas sales were
down 3 percent in comparison with the previous year. Overall,
the Company's worldwide physical volume of sales decreased 18
percent for the quarter.
The Company's worldwide Equipment Operations, which exclude
the Financial Services operations and unconsolidated
affiliates, had income of $6.8 million for the first quarter,
compared with $166.9 million last year. Contributing to the
lower results were reduced sales and production volumes, lower
margins and higher interest costs. Worldwide equipment
operating profit, which excludes certain corporate expenses,
interest and taxes, was $51 million, compared with $288
million last year.
. Worldwide agricultural equipment operating profit totaled
$25 million for the quarter, compared with $206 million last
year. Results were severely affected by lower sales and
production levels, especially of large tractors and combines,
as well as by inefficiencies related to the production
cutbacks. In addition, sales incentive costs moved higher,
with a particular emphasis on used goods. Overseas
operations, which continued to benefit from many management
initiatives, were primary contributors to the segment's
profit.
. Worldwide construction equipment operating profit totaled
$12 million for the quarter, compared with $64 million last
year. During the quarter, the segment began implementation of
its Estimate to Cash program, which is aimed at better
matching product availability to customer requirements while
reducing field inventories. Initial stages of the program, as
expected, resulted in lower sales to dealers and had an
adverse impact on the first quarter's operating results.
Retail demand, however, remained at favorable levels.
. Worldwide commercial and consumer equipment operating profit
was $14 million for the quarter, compared with $18 million last
year. Results were negatively affected by higher costs
associated with the start-up of new facilities and the
introduction of new products, as well as by the impact of a
strengthening Japanese yen. Partly offsetting these factors were
higher worldwide sales and production volumes, resulting from the
success of many new products and a continuation of strong retail
demand.
Additional information on business segments is presented in Note
8 to the interim financial statements.
<PAGE>
Net income of the Company's credit operations was $41.6 million
in the first quarter of 1999, compared with $32.9 million in last
year's first quarter. The 1999 first quarter results benefited
from higher income on a larger average receivable and lease
portfolio, higher gains on retail note sales, a temporary
reduction in leverage position and improved financing spreads,
partially offset by higher operating expenses. Total revenues of
the credit operations increased 21 percent from $216 million in
the first quarter of 1998 to $261 million in the current quarter.
The average balance of receivables and leases financed was 11
percent higher in the first quarter, compared with the same
period last year. Interest expense increased 3 percent in the
current quarter, compared with 1998, primarily as a result of an
increase in average borrowings. The credit operations'
consolidated ratio of earnings to fixed charges was 1.63 to 1 for
the first quarter this year, compared with 1.54 to 1 in 1998.
The insurance operations had a net loss of $1.1 million in the
first quarter of 1999, compared with net income of $5.5 million
last year. The quarterly decrease primarily reflected
unfavorable underwriting results and lower investment income.
For the first quarter, insurance premiums increased 3 percent in
1999, compared with the same period last year, while total
claims, benefits, and selling, administrative and general
expenses increased 17 percent this year.
Net income from health care operations was $2.9 million in the
first quarter of 1999, compared with a net loss of $2.4 million
last year. The 1999 results benefited primarily from improved
margins, higher premium revenues and higher investment income.
For the first quarter, health care premiums and administrative
services revenues increased 9 percent in 1999, compared with the
same period last year, while total claims, benefits, and selling,
administrative and general expenses increased 4 percent this
year.
MARKET CONDITIONS AND OUTLOOK
. AGRICULTURAL EQUIPMENT. Farm commodity prices remain under
pressure due to large supplies of grains, oilseeds and livestock
and the effects of slowing growth in global demand. While the
United States government has supplemented farm income through
additional direct payments, farmers' net cash income is expected
to fall by approximately 9 percent this year with declines also
anticipated in other parts of the world. Credit availability for
equipment purchases in emerging markets also should remain under
pressure. As a result, retail demand for farm equipment is
projected to decline by 20 to 25 percent in North America this
year, with declines of 10 to 15 percent expected in other major
markets.
. CONSTRUCTION EQUIPMENT. Slower United States economic growth
is expected in 1999. However, low inflation and interest rates
should help keep housing starts near last year's levels.
Nonresidential construction is expected to show little growth
this year, but public construction, led by highway expenditures,
is expected to grow 3 to 4 percent. In this environment,
construction machinery sales should remain near 1998 levels.
. COMMERCIAL AND CONSUMER EQUIPMENT. A continuation of current
economic conditions, strong retail sales momentum, and the
introduction of a number of innovative products are expected to
support higher sales of commercial and consumer equipment during
the year.
. FINANCIAL SERVICES. A larger overall receivable and lease
portfolio should support continued improvement in the credit
operations in 1999. Health care is also well positioned for
improved results, while the Company's insurance organization
continues to face severe competitive pressures.
<PAGE>
Based on these conditions, the Company's worldwide physical
volume of sales is currently projected to decrease by
approximately 13 to 15 percent in 1999, compared with 1998.
Physical volumes in the second quarter of 1999 are projected to
be 13 percent lower than in the comparable 1998 period.
The Company enters this period of weakening demand for farm
machinery in strong financial condition. Furthermore,
performance is being supported by the Company's nonagricultural
businesses and overseas operations, which are seeing benefits
from many growth and quality initiatives. Aggressive asset
management actions, as well, are having a positive impact. Steps
to reduce agricultural equipment receivables, while contributing
to lower earnings, are helping the Company generate solid levels
of cash flow in support of its long-range global growth
objectives.
YEAR 2000
The Company has established a global program (the "Year 2000
Program") to address the inability of certain computer and
infrastructure systems to process dates in the Year 2000 and
later. The major assessment areas include business information
systems, mainframe and personal computers, software, the
distributed network, the shop floor, facilities systems, the
Company's products, product research and development facilities,
and the readiness of the Company's suppliers and distribution
network. The program includes the following phases:
identification and assessment, business criticality analysis,
project work prioritization, compliance plan development,
remediation and testing, production implementation, and
contingency plan development for mission critical systems.
The Company is on schedule to become Year 2000 ready with its
mission critical activities and systems, allowing substantial
time for further testing, verification and the final conversion
of less important systems. Over 95 percent of the Company's
systems identified as being mission critical have been tested and
verified as being Year 2000 compliant. The Company's goal has
been to have all remaining mission critical and non-mission
critical systems compliant by October 31, 1999, and the progress
to date makes this goal realistic. The Company has initiated
information and infrastructure systems modifications in its
effort to ensure that both information technology (IT) and non-IT
systems are compliant. The Company is requiring suppliers of new
software or equipment and third parties who develop or modify
software to provide written certification that their products are
Year 2000 compliant and have been tested accordingly. In some
instances, the Company is independently testing the software.
The Company is also working with suppliers to confirm embedded
systems are compliant and perform the necessary testing.
The Company is assessing the Year 2000 readiness of its product
suppliers and dealers, raising awareness among its supply base by
sponsoring seminars and developing contingency plans for its
mission critical suppliers. The Company has surveyed its major
suppliers and is following up as appropriate with risk assessment
and prioritization based on mission criticality. Date testing is
in process with many suppliers. A survey of the Company's
dealers is also in process and readiness progress will be
assessed throughout 1999. A dealer communications team has been
established to provide dealers with pertinent information,
possible areas of investigation and follow-up on dealers'
readiness.
The total cost of the modifications and upgrades to date has not
been material and the future costs to become Year 2000 ready are
not expected to be material. These costs are expensed as
incurred and do not include the cost of scheduled replacement
software. Other major systems projects have not been deferred
due to the Year 2000 compliance projects.
Although no assurances can be given as to the Company's
readiness, particularly as it relates to third parties, based
upon the progress to date, the Company does not expect the
consequences of any of the Company's unanticipated or
unsuccessful modifications to have a material adverse effect on
its financial position or
<PAGE>
results of operations. However, the failure to correct a
material Year 2000 problem could result in the interruption of
certain normal business activities and operations. The Company's
most reasonably likely worst case scenario is that the Year 2000
noncompliance of a critical third party could cause the supplier
to fail to deliver, with the result that production is
interrupted at one or more facilities. Such a disruption in
production could result in lost sales or profits. The Company is
developing contingency plans, which will be an ongoing activity
for the first three calendar quarters of 1999, should any Year
2000 failures occur in any of the assessment areas noted above.
EURO CONVERSION
The Company is well advanced in the process of identification,
implementation and testing of its systems to adopt the euro
currency in its operations affected by this change. The
Company's affected suppliers, distribution network and
financial institutions have been contacted and the Company
does not believe the currency change will significantly impact
these relationships. As a result, the Company expects to have
its systems ready to process the euro conversion during the
transition period from January 1, 1999 through January 1,
2002. The cost of information systems modifications, effects
on product pricing and purchase contracts, and the impact on
foreign currency financial instruments, including derivatives,
are not expected to be material.
SAFE HARBOR STATEMENT
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995: Statements under the "Outlook," "Year 2000"
and "Euro Conversion" headings and other statements herein that
relate to future operating periods are subject to important risks
and uncertainties that could cause actual results to differ
materially. Forward-looking statements relating to the Company's
businesses involve certain factors that are subject to change,
including: the many interrelated factors that affect farmers'
confidence, including worldwide demand for agricultural products
(including the impact on United States grain and meat exports of
economic difficulties in Asia and other parts of the world),
world grain stocks, commodities prices, weather conditions, real
estate values, animal diseases, crop pests, harvest yields and
government farm programs; general economic conditions and housing
starts; legislation, primarily legislation relating to
agriculture, the environment, commerce and government spending on
infrastructure; actions of competitors in the various industries
in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor
relations; interest and currency exchange rates (including the
effect of conversion to the euro); technological difficulties
(including Year 2000 compliance); accounting standards; and other
risks and uncertainties. Economic difficulties in Asia and other
parts of the world could continue to adversely affect North
American grain and meat exports. The number of housing starts is
especially important to sales of construction equipment. Sales
of commercial and consumer equipment during the spring are
affected by spring weather patterns. The company's outlook is
based upon assumptions relating to the factors described above,
which are sometimes based upon estimates and data prepared by
government agencies. Such estimates and data are often revised.
Further information concerning the Company and its businesses,
including factors that potentially could materially affect the
Company's financial results, is included in the Company's most
recent annual report on Form 10-K and other filings with the
Securities and Exchange Commission.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been
organized to review separately, where appropriate, the Company's
Equipment Operations, Financial Services operations and the
consolidated totals.
EQUIPMENT OPERATIONS
The Company's equipment businesses are capital intensive and are
subject to large seasonal variations in financing requirements
for trade receivables from dealers and inventories. Accordingly,
to the extent necessary, funds provided from operations are
supplemented from external borrowing sources.
In the first three months of 1999, negative cash flows from
operating activities of $517 million resulted primarily from a
decrease in accounts payable and accrued expenses and an increase
in Company-owned inventories. Partially offsetting these
operating cash outflows were positive cash flows from a decrease
in trade receivables and net income. The resulting net cash
requirement for operating activities, along with payment of
dividends, purchases of property and equipment and repurchases of
common stock were provided primarily from an increase in
borrowings.
Negative cash flows from operating activities in the first three
months of 1998 of $677 million resulted primarily from an
increase in trade receivables and Company-owned inventories, and
a decrease in accounts payable and accrued expenses. Partially
offsetting these operating cash outflows were positive cash flows
from net income. The resulting net cash requirement for
operating activities, along with repurchases of common stock,
purchases of property and equipment, an increase in receivables
from Financial Services and payment of dividends, were provided
primarily from an increase in borrowings and a decrease in cash
and cash equivalents.
Net trade accounts and notes receivable result mainly from sales
to dealers of equipment that is being carried in their
inventories. Trade receivables decreased $230 million during the
first three months of 1999 and increased $302 million, compared
to one year ago. While remaining above year-ago levels, trade
receivables for agricultural and construction equipment declined
for the quarter as production volumes trailed retail demand.
Receivables related to used agricultural equipment continued at a
high level. Commercial and consumer equipment trade receivables
increased seasonally in the current quarter, and were higher than
a year ago primarily due to higher sales volumes. North American
agricultural, and commercial and consumer equipment trade
receivables increased approximately $260 million and $105
million, respectively, while construction equipment receivables
decreased approximately $155 million, compared with the levels 12
months earlier. Total overseas trade receivables were
approximately $90 million higher than a year ago. The ratios of
worldwide net trade accounts and notes receivable to the last 12
months' net sales were 33 percent at January 31, 1999, compared
to 34 percent at October 31, 1998 and 31 percent at January 31,
1998. The percentage of total worldwide trade receivables
outstanding for periods exceeding 12 months was 7 percent, 8
percent and 5 percent at January 31, 1999, October 31, 1998 and
January 31, 1998, respectively.
Company inventories at January 31, 1999 increased by $328 million
during the first three months and $150 million during the past 12
months, primarily reflecting a seasonal increase in the first
quarter and the start-up of new facilities and the introduction
of new products, compared to a year ago. Most of the Company's
inventories are valued on the last-in, first-out (LIFO) basis.
Inventories valued on an approximate current cost basis increased
by 8 percent from a year ago.
Total interest-bearing debt of the Equipment Operations was
$2,677 million at January 31, 1999, compared with $2,065 million
at the end of fiscal year 1998 and $1,588 million at January 31,
1998, generally corresponding to the levels of trade receivables,
inventories, accounts payable and accrued expenses, and
<PAGE>
treasury stock. The ratio of total debt to total capital (total
interest-bearing debt and stockholders' equity) was 40 percent,
34 percent and 28 percent at January 31, 1999, October 31, 1998
and January 31, 1998, respectively. During the first three
months, Deere & Company received proceeds of $50 million from the
issuance of medium-term notes.
FINANCIAL SERVICES
The Financial Services' credit operations rely on their ability
to raise substantial amounts of funds to finance their receivable
and lease portfolios. Their primary sources of funds for this
purpose are a combination of borrowings and equity capital.
Additionally, the credit operations periodically sell substantial
amounts of retail notes. The insurance and health care
operations generate their funds through internal operations and
intercompany loans.
During the first quarter of 1999, the aggregate cash provided
from operating and financing activities was used primarily to
increase financing receivables and leases. Cash provided from
Financial Services operating activities was $125 million in the
current quarter. Cash provided by financing activities totaled
$239 million in the first three months of 1999, primarily
resulting from $244 million of proceeds from total borrowings,
which was partially offset by payment of a $5 million dividend to
the Equipment Operations. Cash used for investing activities
totaled $360 million in the current quarter, primarily due to the
cost of financing receivables and leases acquired exceeding
collections and sales of retail notes.
In the first quarter of 1998, the aggregate cash provided from
operating and financing activities was used primarily to increase
financing receivables. Cash provided from Financial Services
operating activities was $90 million in the first quarter of
1998. Cash provided by financing activities totaled $190 million
in 1998, primarily resulting from a $211 million increase in
total borrowings, which was partially offset by payment of a $19
million dividend to the Equipment Operations. Cash used for
investing activities totaled $303 million in the first quarter of
1998, primarily due to the cost of financing receivables and
leases acquired exceeding collections. Cash and cash equivalents
decreased $23 million during the first quarter of 1998.
Marketable securities consist primarily of debt securities held
by the insurance and health care operations in support of their
obligations to policyholders. During the first three months of
1999 and the last 12 months, the balance has not changed
significantly.
Financing receivables and leases held by the credit operations
consist of retail notes originating in connection with retail
sales of new and used equipment by dealers of John Deere
products, retail notes from non-Deere-related customers,
revolving charge accounts, wholesale notes receivable, and
financing and operating leases. These receivables and leases
increased by $632 million in the first three months of 1999 and
$705 million during the past 12 months due to the cost of
acquisitions exceeding collections and sales of retail notes.
Total acquisitions of financing receivables and leases were 19
percent higher in the first three months of 1999, compared with
the same period last year. Acquisition volumes of retail notes,
wholesale notes, revolving charge accounts and leases were all
higher in the first three months of 1999, compared to the same
period last year. Financing receivables and leases administered
by the credit operations, which include receivables previously
sold, amounted to $9,820 million at January 31, 1999, compared
with $9,625 million at October 31, 1998 and $8,347 million at
January 31, 1998. At January 31, 1999, the unpaid balance of all
retail notes previously sold was $1,951 million, compared with
$2,388 million at October 31, 1998 and $1,182 million at January
31, 1998.
Total outside interest-bearing debt of the credit operations was
$6,470 million at January 31, 1999, compared with $6,049 million
at the end of fiscal year 1998 and $5,988 million at January 31,
1998. Total outside borrowings increased during the first three
months of 1999 and the past 12 months, generally corresponding
with the level of the financing receivable and lease portfolio,
the level of cash and cash equivalents and the
<PAGE>
change in payables owed to the Equipment Operations. The credit
operations' ratio of total interest-bearing debt to stockholder's
equity was 6.2 to 1 at January 31, 1999, compared with 6.1 to 1
at October 31, 1998 and 6.7 to 1 at January 31, 1998.
During the first quarter of 1999, the Capital Corporation retired
$150 million of 9-5/8% subordinated notes, $97 million of 5%
Swiss franc bonds and $50 million of medium-term notes all due in
the first quarter. The Capital Corporation also received
proceeds of $625 million from the issuance of medium-term notes
during the first three months of 1999.
CONSOLIDATED
The Company maintains unsecured lines of credit with various
banks in North America and overseas. Some of the lines are
available to both the Equipment Operations and certain credit
operations. Worldwide lines of credit totaled $5,475 million at
January 31, 1999, $1,463 million of which were unused. For the
purpose of computing unused credit lines, total short-term
borrowings, excluding the current portion of long-term
borrowings, were considered to constitute utilization. Included
in the total credit lines is a long-term credit agreement
commitment totaling $3,500 million.
Stockholders' equity was $4,029 million at January 31, 1999,
compared with $4,080 million at October 31, 1998 and $4,146
million at January 31, 1998. The decrease of $51 million for the
first three months of 1999 resulted primarily from dividends
declared of $51 million, a change in unamortized restricted stock
compensation of $18 million, other adjustments to retained
earnings of $14 million for treasury stock transactions and an
increase in common stock in treasury of $12 million, partially
offset by net income of $50 million.
The Board of Directors at its meeting on February 24, 1999
declared a quarterly dividend of 22 cents per share payable May
3, 1999 to stockholders of record on March 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See the Company's most recent annual report filed on Form 10-K
(Item 7A). There has been no material change in this
information.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note (10) to the Interim Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the index to exhibits immediately preceding the exhibits
filed with this report.
Certain instruments relating to long-term debt constituting
less than 10% of the registrant's total assets are not filed
as exhibits herewith pursuant to Item 601 (b) (4) (iii) (A) of
Regulation S-K. The registrant will file copies of such
instruments upon request of the Commission.
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 24, 1998 (Item 7).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DEERE & COMPANY
Date: March 9, 1999 By: s/ Nathan J. Jones
Nathan J. Jones
Senior Vice President
Principal Financial Officer
and Principal Accounting Officer
<PAGE>
INDEX TO EXHIBITS
Number
2 Not applicable
3 Not applicable
4 Not applicable
10 Not applicable
11 Not applicable
12 Computation of ratio of earnings to fixed charges
15 Not applicable
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial data schedule
99 Not applicable
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<TEXT>
EXHIBIT 12
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Year
Ended Ended
January 31, October 31,
1999 1998 1998
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $ 76,315 $320,896 $1,560,032
Dividends received from less-
than-fifty percent owned
affiliates 394 329 5,555
Fixed charges excluding
capitalized interest 137,187 117,912 531,817
Total earnings $213,896 $439,137 $2,097,404
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $134,497 $115,372 $ 521,418
Portion of rental charges
deemed to be interest 3,113 3,184 12,451
Total fixed charges $137,610 $118,556 $ 533,869
Ratio of earnings to
fixed charges* 1.55 3.70 3.93
The computation of the ratio of earnings to fixed charges is
based on applicable amounts of the Company and its
consolidated subsidiaries plus dividends received from less-
than-fifty percent owned affiliates. "Earnings" consist of
income before income taxes, the cumulative effect of changes
in accounting and fixed charges excluding capitalized
interest. "Fixed charges" consist of interest on
indebtedness, amortization of debt discount and expense, an
estimated amount of rental expense which is deemed to be
representative of the interest factor, and capitalized
interest.
* The Company has not issued preferred stock. Therefore, the
ratios of earnings to combined fixed charges and preferred
stock dividends are the same as the ratios presented above.
<PAGE>
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended
October 31,
1997 1996
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $1,507,070 $1,286,634
Dividends received from less-
than-fifty percent owned
affiliates 3,591 7,937
Fixed charges excluding
capitalized interest 433,673 410,764
Total earnings $1,944,334 1,705,335
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $ 422,588 $ 402,168
Portion of rental charges
deemed to be interest 11,497 8,596
Total fixed charges $ 434,085 $ 410,764
Ratio of earnings to
fixed charges* 4.48 4.15
<PAGE>
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended
October 31,
1995 1994
(In thousands of dollars)
Earnings:
Income of consolidated group
before income taxes
and changes in accounting $1,092,751 $ 920,920
Dividends received from less-
than-fifty percent owned
affiliates 2,023 2,329
Fixed charges excluding
capitalized interest 399,056 310,047
Total earnings $1,493,830 $1,233,296
Fixed charges:
Interest expense of con-
solidated group including
capitalized interest $ 392,408 $ 303,080
Portion of rental charges
deemed to be interest 6,661 7,008
Total fixed charges $ 399,069 310,088
Ratio of earnings to
fixed charges* 3.74 3.98
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000315189
<NAME> DEERE&COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 326
<SECURITIES> 871
<RECEIVABLES> 11,215
<ALLOWANCES> 122
<INVENTORY> 1,615
<CURRENT-ASSETS> 0
<PP&E> 4,700
<DEPRECIATION> 3,026
<TOTAL-ASSETS> 18,503
<CURRENT-LIABILITIES> 0
<BONDS> 3,276
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,789
<OTHER-SE> 2,240
<TOTAL-LIABILITY-AND-EQUITY> 18,503
<SALES> 1,973
<TOTAL-REVENUES> 2,459
<CGS> 1,654
<TOTAL-COSTS> 1,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> 76
<INCOME-TAX> 26
<INCOME-CONTINUING> 50
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| DRI | https://www.sec.gov/Archives/edgar/data/940944/0000940944-99-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000940944-99-000004.txt : 19990113
<SEC-HEADER>0000940944-99-000004.hdr.sgml : 19990113
ACCESSION NUMBER: 0000940944-99-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19981129
FILED AS OF DATE: 19990112
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: DARDEN RESTAURANTS INC
CENTRAL INDEX KEY: 0000940944
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812]
IRS NUMBER: 593305930
STATE OF INCORPORATION: FL
FISCAL YEAR END: 0526
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13666
FILM NUMBER: 99505207
BUSINESS ADDRESS:
STREET 1: 5900 LAKE ELLENOR DR
CITY: ORLANDO
STATE: FL
ZIP: 32809
BUSINESS PHONE: 4072454000
MAIL ADDRESS:
STREET 1: 5900 LAKE ELLENOR DRIVE
CITY: ORLANDO
STATE: FL
ZIP: 32809
FORMER COMPANY:
FORMER CONFORMED NAME: GENERAL MILLS RESTAURANTS INC
DATE OF NAME CHANGE: 19950313
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT ON FORM 10-Q
<TEXT>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
----------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 29, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ................ to .................
----------------------------------
1-13666
Commission File Number
----------------------------------
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3305930
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5900 Lake Ellenor Drive,
Orlando, Florida 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
----------------------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of January 1, 1999:
137,758,717 (excluding 25,995,078 shares held in treasury).
===============================================================================
<PAGE>
DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 5
Consolidated Statements of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
- ------------------------------------------------------------------------------------------
November 29, 1998 November 23, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sales.......................................... $ 791,168 $ 745,263
Costs and Expenses:
Cost of sales:
Food and beverages......................... 257,616 241,859
Restaurant labor........................... 265,753 252,929
Restaurant expenses........................ 120,688 117,941
--------- ---------
Total Cost of Sales...................... $ 644,057 $ 612,729
Selling, general and administrative.......... 86,357 84,412
Depreciation and amortization................ 31,311 31,613
Interest, net................................ 4,786 4,723
--------- ---------
Total Costs and Expenses............... $ 766,511 $ 733,477
--------- ---------
Earnings before Income Taxes................... 24,657 11,786
Income Taxes................................... (8,738) (4,256)
--------- ---------
Net Earnings................................... $ 15,919 $ 7,530
========= =========
Net Earnings per Share:
Basic ...................................... $ 0.11 $ 0.05
========= =========
Diluted..................................... $ 0.11 $ 0.05
========= =========
Average Number of Common Shares Outstanding:
Basic ...................................... 138,700 150,300
========= =========
Diluted..................................... 144,100 152,300
========= =========
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
- ------------------------------------------------------------------------------------------
November 29, 1998 November 23, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sales......................................... $ 1,677,225 $ 1,554,594
Costs and Expenses:
Cost of sales:
Food and beverages........................ 554,031 507,809
Restaurant labor.......................... 548,304 511,946
Restaurant expenses....................... 252,675 240,685
----------- -----------
Total Cost of Sales .................... $ 1,355,010 $ 1,260,440
Selling, general and administrative......... 171,143 173,617
Depreciation and amortization............... 62,323 63,085
Interest, net............................... 10,221 9,416
----------- -----------
Total Costs and Expenses.............. $ 1,598,697 $ 1,506,558
----------- -----------
Earnings before Income Taxes.................. 78,528 48,036
Income Taxes.................................. (27,430) (16,098)
----------- -----------
Net Earnings.................................. $ 51,098 $ 31,938
=========== ===========
Net Earnings per Share:
Basic ...................................... $ 0.37 $ 0.21
=========== ===========
Diluted..................................... $ 0.35 $ 0.21
=========== ===========
Average Number of Common Shares Outstanding:
Basic ...................................... 139,200 151,500
=========== ===========
Diluted..................................... 145,000 152,900
=========== ===========
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
- ------------------------------------------------------------------------------------------
November 29, 1998 May 31, 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................... $ 13,064 $ 33,505
Receivables................................. 26,224 27,312
Inventories................................. 137,112 182,399
Net assets held for disposal................ 39,673 49,230
Prepaid expenses and other current assets... 12,242 20,498
Deferred income taxes....................... 75,532 84,597
----------- -----------
Total Current Assets...................... $ 303,847 $ 397,541
Land, Buildings and Equipment................. 1,478,651 1,490,348
Other Assets.................................. 96,923 96,853
----------- -----------
Total Assets............................ $ 1,879,421 $ 1,984,742
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................ $ 121,769 $ 132,938
Short-term debt............................. 10,500 75,100
Current portion of long-term debt........... 5 5
Accrued payroll............................. 59,205 73,240
Accrued income taxes........................ 374 1,067
Other accrued taxes......................... 23,043 24,172
Other current liabilities................... 254,065 252,142
----------- -----------
Total Current Liabilities................. $ 468,961 $ 558,664
Long-term Debt................................ 310,408 310,603
Deferred Income Taxes......................... 80,468 77,054
Other Liabilities............................. 19,139 18,576
----------- -----------
Total Liabilities......................... $ 878,976 $ 964,897
----------- -----------
Stockholders' Equity:
Common stock and surplus.................... $ 1,311,828 $ 1,286,191
Retained earnings........................... 93,894 48,327
Treasury stock.............................. (326,571) (239,876)
Accumulated other comprehensive income...... (13,275) (11,749)
Unearned compensation....................... (65,431) (63,048)
----------- -----------
Total Stockholders' Equity................ $ 1,000,445 $ 1,019,845
----------- -----------
Total Liabilities and Stockholders'
Equity................................ $ 1,879,421 $ 1,984,742
=========== ===========
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Twenty-Six Weeks Ended November 29, 1998 and November 23, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Total
and Retained Treasury Comprehensive Unearned Stockholders'
Surplus Earnings Stock Income Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1998.......................... $1,286,191 $ 48,327 $(239,876) $(11,749) $(63,048) $1,019,845
Comprehensive income:
Net earnings................................... 51,098 51,098
Other comprehensive income, foreign currency
adjustment................................... (1,526) (1,526)
----------
Total comprehensive income................. 49,572
Cash dividends declared.......................... (5,531) (5,531)
Stock option exercises (1,710 shares)............ 14,700 14,700
Issuance of restricted stock (303 shares),
net of forfeiture adjustments.................. 3,595 (3,567) 28
Earned compensation.............................. 934 934
ESOP note receivable repayments.................. 250 250
Income tax benefit credited to equity............ 5,158 5,158
Proceeds from issuance of equity put options..... 2,184 2,184
Purchases of common stock for treasury
(5,325 shares)................................. (86,695) (86,695)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at November 29, 1998..................... $1,311,828 $ 93,894 $(326,571) $(13,275) $(65,431) $1,000,445
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Total
and Retained Treasury Comprehensive Unearned Stockholders'
Surplus Earnings Stock Income Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 25, 1997.......................... $1,268,656 $(41,706) $ (69,184) $(10,037) $(66,516) $1,081,213
Comprehensive income:
Net earnings................................... 31,938 31,938
Other comprehensive income, foreign currency
adjustment.................................. (1,053) (1,053)
----------
Total comprehensive income................ 30,885
Cash dividends declared.......................... (6,005) (6,005)
Stock option exercises (392 shares).............. 2,496 2,496
Issuance of restricted stock (132 shares),
net of forfeiture adjustments.................. 104 (124) (20)
Earned compensation.............................. 485 485
ESOP note receivable repayments.................. 1,800 1,800
Income tax benefit credited to equity............ 579 579
Proceeds from issuance of equity put options..... 311 311
Purchases of common stock for treasury
(4,474 shares)................................. (46,665) (46,665)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at November 23, 1997..................... $1,272,146 $(15,773) $(115,849) $(11,090) $(64,355) $1,065,079
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
- -----------------------------------------------------------------------------------------------------
November 29, 1998 November 23, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows--Operating Activities
Net earnings............................................. $ 15,919 $ 7,530
Adjustments to reconcile net earnings to cash flow:
Depreciation and amortization............................ 31,311 31,613
Amortization of unearned compensation and loan costs..... 1,090 821
Change in current assets and liabilities................. 2,102 (65,498)
Change in other liabilities ............................. 297 190
Loss on disposal of land, buildings and equipment........ 264 1,290
Deferred income taxes.................................... 7,955 5,798
Other, net............................................... 256 384
--------- ---------
Net Cash Provided by (Used by) Operating Activities.. $ 59,194 $ (17,872)
--------- ---------
Cash Flows--Investment Activities
Purchases of land, buildings and equipment............... (31,091) (27,544)
Purchases of intangibles................................. (566) (524)
Increase in other assets................................. (428) (721)
Proceeds from disposal of land, buildings and
equipment (including net assets held for disposal)..... 8,863 4,186
--------- ---------
Net Cash Used by Investment Activities............... $ (23,222) $ (24,603)
--------- ---------
Cash Flows--Financing Activities
Proceeds from issuance of common stock................... 4,819 2,086
Income tax benefit credited to equity.................... 1,525 352
Dividends paid........................................... (5,531) (6,005)
Purchases of treasury stock.............................. (34,069) (24,855)
ESOP note receivable repayment........................... 250
Increase (decrease) in short-term debt................... (19,000) 62,300
Repayment of long-term debt.............................. (250)
Proceeds from issuance of equity puts.................... 1,358 311
--------- ---------
Net Cash Provided by (Used by) Financing
Activities......................................... $ (50,898) $ 34,189
--------- ---------
Decrease in Cash and Cash Equivalents...................... (14,926) (8,286)
Cash and Cash Equivalents - Beginning of Period............ 27,990 30,355
--------- ---------
Cash and Cash Equivalents - End of Period.................. $ 13,064 $ 22,069
========= =========
Cash Flow from Changes in Current Assets and Liabilities
Receivables.............................................. (3,123) (3,281)
Refundable income taxes, net............................. (5,489)
Inventories.............................................. 8,065 (60,560)
Prepaid expenses and other current assets................ 847 560
Accounts payable......................................... 17,365 7,784
Accrued payroll.......................................... (1,024) 1,256
Accrued income taxes..................................... (22,776)
Other accrued taxes...................................... (2,471) (1,894)
Other current liabilities................................ 5,219 (3,874)
--------- ---------
Change in Current Assets and Liabilities................... $ 2,102 $ (65,498)
========= =========
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
- -----------------------------------------------------------------------------------------------------
November 29, 1998 November 23, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows--Operating Activities
Net earnings............................................. $ 51,098 $ 31,938
Adjustments to reconcile net earnings to cash flow:
Depreciation and amortization.......................... 62,323 63,085
Amortization of unearned compensation and loan costs... 2,189 1,717
Change in current assets and liabilities............... 22,092 (27,746)
Change in other liabilities ........................... 563 266
(Gain) loss on disposal of land, buildings and
equipment............................................ (602) 1,551
Deferred income taxes.................................. 12,479 7,041
Other, net............................................. (318) 106
---------- ----------
Net Cash Provided by Operating Activities.......... $ 149,824 $ 77,958
---------- ----------
Cash Flows--Investment Activities
Purchases of land, buildings and equipment............... (55,455) (56,113)
Purchases of intangibles................................. (1,074) (871)
Increase in other assets................................. (635) (3,067)
Proceeds from disposal of land, buildings and
equipment (including net assets held for disposal)..... 21,688 9,061
---------- ----------
Net Cash Used by Investment Activities............. $ (35,476) $ (50,990)
---------- ----------
Cash Flows--Financing Activities
Proceeds from issuance of common stock................... 14,700 2,496
Income tax benefit credited to equity.................... 5,158 579
Dividends paid........................................... (5,531) (6,005)
Purchases of treasury stock.............................. (86,695) (46,665)
ESOP note receivable repayment........................... 250 1,800
Increase (decrease) in short-term debt................... (64,600) 18,900
Repayment of long-term debt.............................. (255) (1,805)
Proceeds from issuance of equity puts.................... 2,184 311
---------- ----------
Net Cash Used by Financing Activities.............. $ (134,789) $ (30,389)
---------- ----------
Decrease in Cash and Cash Equivalents....................... (20,441) (3,421)
Cash and Cash Equivalents - Beginning of Period............. 33,505 25,490
---------- ----------
Cash and Cash Equivalents - End of Period................... $ 13,064 $ 22,069
========== ==========
Cash Flow from Changes in Current Assets and Liabilities
Receivables.............................................. 1,088 (3,167)
Refundable income taxes, net............................. 5,015
Inventories.............................................. 45,287 (50,593)
Prepaid expenses and other current assets................ 1,231 2,262
Accounts payable......................................... (11,169) 19,157
Accrued payroll.......................................... (14,035) 1,152
Accrued income taxes..................................... (693)
Other accrued taxes...................................... (1,129) 1,162
Other current liabilities................................ 1,512 (2,734)
---------- ----------
Change in Current Assets and Liabilities................... $ 22,092 $ (27,746)
========== ==========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar Amounts in Thousands, Except per Share Data)
Note 1. Background
----------
These consolidated financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature. Operating results for the thirteen and
twenty-six weeks ended November 29, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending May 30, 1999.
These statements should be read in conjunction with the consolidated
financial statements and footnotes included in our annual report on Form 10-K
for the year ended May 31, 1998. The accounting policies used in preparing these
consolidated financial statements are the same as those described in our annual
report on Form 10-K, except that during the current period the Company adopted
the provisions of Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income". The Company adopted SFAS 130 by
reporting all items of comprehensive income in the consolidated statements of
changes in stockholders' equity.
Note 2. Consolidated Statements of Cash Flows
-------------------------------------
During the thirteen and twenty-six weeks ended November 29, 1998,
Darden paid $0 and $8,673 respectively, for interest (net of amount capitalized)
and $20,545 and $10,494 respectively, for income taxes. During the thirteen and
twenty-six weeks ended November 23, 1997, Darden paid $0 and $8,194,
respectively, for interest (net of amount capitalized) and $3,691 and $4,071,
respectively, for income taxes.
Note 3. Net Earnings Per Share
----------------------
Options to purchase 64,032 and 5.3 million shares of common stock
were excluded from the calculation of diluted EPS for the thirteen weeks ended
November 29, 1998 and November 23, 1997, respectively, because their exercise
prices exceeded the average market price of common shares for the period.
Options to purchase 29,109 and 8.9 million shares of common stock were excluded
from the calculation of diluted EPS for the twenty-six weeks ended November 29,
1998 and November 23, 1997, respectively, for the same reason.
Note 4. Derivative Financial and Commodity Instruments
----------------------------------------------
On January 31, 1997, the Securities and Exchange Commission (SEC)
issued amended disclosure rules for derivatives and exposures to market risk
from derivative and other financial and certain commodity instruments. Enhanced
accounting policy disclosures in accordance with this SEC release follow.
The Company may, from time to time, use financial and commodities
derivatives in the management of interest rate and commodities pricing risks
that are inherent in its business operations. Such instruments are not held or
issued for trading or speculative purposes.
The Company may, from time to time, use interest rate swap and cap
agreements in the management of interest rate exposure. The interest rate
differential to be paid or received is normally accrued as interest rates
change, and is recognized as a component of interest expense over the life of
the agreements. If an agreement is terminated prior to the maturity date and is
characterized as a hedge, any accrued rate differential would be deferred and
recognized as interest expense over the life of the hedged item.
The Company uses commodities hedging instruments, including forwards,
futures and options, to reduce the risk of price fluctuations related to future
raw materials requirements for commodities such as coffee, soybean oil, and
shrimp. The terms of such instruments generally do not exceed twelve months, and
depend on the
9
<PAGE>
commodity and other market factors. Deferred gains and losses are subsequently
recorded as cost of products sold in the consolidated statements of earnings
when the inventory is sold. If the inventory is not acquired and the hedge is
disposed of, the deferred gain or loss is recognized immediately in cost of
products sold.
The Company does not have any material risk from any of the above
financial instruments, and the Company does not anticipate any material losses
from the use of such instruments.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth selected restaurant operating data as
a percentage of sales for the periods indicated. All information is derived from
the consolidated statements of earnings for the thirteen and twenty-six weeks
ended November 29, 1998 and November 23, 1997.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
- -------------------------------------------------------------------------------------------------------------------
November 29, November 23, November 29, November 23,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales.................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverages................... 32.6 32.5 33.0 32.7
Restaurant labor..................... 33.6 33.9 32.7 32.9
Restaurant expenses.................. 15.2 15.8 15.1 15.5
------ ------ ------ ------
Total Cost of Sales................ 81.4% 82.2% 80.8% 81.1%
Selling, general and administrative.... 10.9 11.3 10.2 11.2
Depreciation and amortization.......... 4.0 4.3 3.7 4.0
Interest, net.......................... 0.6 0.6 0.6 0.6
------ ------ ------ ------
Total Costs and Expenses......... 96.9% 98.4% 95.3% 96.9%
------ ------ ------ ------
Earnings before Income Taxes............. 3.1 1.6 4.7 3.1
Income Taxes............................. (1.1) (0.6) (1.7) (1.0)
------ ------ ------ ------
Net Earnings............................. 2.0% 1.0% 3.0% 2.1%
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of Operations
- ---------------------
For the fiscal 1999 second quarter ended November 29, 1998, earnings
after tax were $15.9 million or eleven cents per diluted share, compared to
earnings after tax of $7.5 million or five cents per diluted share in the second
quarter of fiscal 1998. The increase in second quarter earnings was primarily
attributable to strong same restaurant sales at both Red Lobster and The Olive
Garden. Sales of $791.2 million for the quarter were over 6% higher than last
year.
For the first six months of fiscal 1999, net earnings were $51.1
million or 35 cents per diluted share, compared to $31.9 million or 21 cents per
diluted share in the same fiscal 1998 period. Sales approximating $1.68 billion
for the first six months of fiscal 1999 were 7.9% higher than last year.
Food and beverage costs for the quarter were 32.6% of sales, compared
to 32.5% of sales last year. Restaurant labor decreased to 33.6% of sales
compared to last year's 33.9% due to efficiencies resulting from higher sales
volumes. Restaurant expenses, also benefiting from higher sales volumes,
decreased to 15.2% of sales compared to 15.8% last year. The decrease in second
quarter selling, general and administrative expense to 10.9% of sales compared
to 11.3% of sales last year was attributable to reduced marketing expenses.
Although the dollar amount of depreciation and amortization expense for the
quarter was comparable to last year, that expense as a percentage of sales
decreased to 4.0% from 4.3% last year. That percentage of sales decrease also
resulted from higher sales volumes.
10
<PAGE>
The effective tax rate for the second quarter of fiscal 1999 was
35.4%, compared to 36.1% last year. Last year's second quarter effective tax
rate was unusually high because it included the cumulative impact of raising
1998's annual expected tax rate.
Food and beverage costs for the first six months of fiscal 1999 were
33.0% of sales, up from last year's 32.7% primarily attributable to two very
successful high volume, lower margin promotions run by Red Lobster during the
first quarter. Restaurant labor decreased to 32.7% of sales compared to last
year's 32.9% also due to efficiencies resulting from higher sales volumes.
Restaurant expenses decreased to 15.1% of sales compared to 15.5% last year. The
decrease in first half selling, general and administrative expense to 10.2% of
sales compared to 11.2% of sales last year was also attributable to reduced
marketing expenses. Although the dollar amount of depreciation and amortization
expense for the first half of fiscal 1999 was comparable to last year, that
expense as a percentage of sales decreased to 3.7% from 4.0% last year. That
percentage of sales decrease also resulted from higher sales volumes.
The effective tax rate for the first six months of fiscal 1999 was
34.9% compared to 33.5% last year due to a higher level of expected pre-tax
income for the year.
Division Results
- ----------------
Red Lobster sales of $434.6 million were 4.0% above last year's
second quarter. Same-restaurant sales in the United States were up 5.4% for the
quarter. Second quarter operating profits were substantially improved over the
prior year due primarily to decreased restaurant labor as a percentage of sales
and an overall decrease in marketing expenses. Through the first six months of
fiscal 1999, Red Lobster's sales increased 6.8% to $947.9 million and
same-restaurant sales in the United States increased by 8.7%.
The Olive Garden continued its positive momentum in the second
quarter of fiscal 1999 with an 8.6% increase in sales to $352.1 million.
Same-restaurant sales in the United States increased 8.7%, marking the
seventeenth consecutive quarter of same-restaurant sales increases. Second
quarter operating profits were substantially improved over the prior year
primarily due to decreases as a percentage of sales in food and beverage costs,
restaurant labor, restaurant expenses and marketing expenses. Through the first
six months of fiscal 1999, Olive Garden sales increased 9.0% to $719.4 million
and same-restaurant sales in the United States increased by 9.7%.
Darden's newest concept, Bahama Breeze, continued to produce strong
sales at all three restaurants. A fourth restaurant opened November 30th. Two
additional restaurants are currently under construction, both with projected
fiscal 1999 opening dates.
Additional locations are also under development throughout the United States.
The table below details the number of restaurants open at the end of
the second quarter, compared with the number open at the end of May 1998 and the
end of last fiscal year's second quarter.
NUMBER OF RESTAURANTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
November 29, 1998 May 31, 1998 November 23, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Red Lobster - USA........................... 642 648 649
Red Lobster - Canada........................ 34 34 35
------ ------ ------
Total.................................. 676 682 684
Olive Garden - USA.......................... 459 461 460
Olive Garden - Canada....................... 5 5 5
------ ------ ------
Total.................................. 464 466 465
Bahama Breeze............................... 3 3 2
------ ------ ------
Total.................................. 1,143 1,151 1,151
====== ====== ======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Year 2000
- ---------
Background
In the past, many computers, software programs, and other information
technology ("IT systems"), as well as other equipment relying on microprocessors
or similar circuitry ("non-IT systems"), were written or designed using two
digits, rather than four, to define the applicable year. As a result,
date-sensitive systems (both IT systems and non-IT systems) may recognize a date
identified with "00" as the year 1900, rather than the year 2000. This is
generally described as the Year 2000 issue. If this situation occurs, the
potential exists for system failures or miscalculations, which could impact
business operations.
The Securities and Exchange Commission ("SEC") has asked public
companies to disclose four general types of information related to Year 2000
preparedness: the company's state of readiness, costs (historical and
prospective), risks, and contingency plans. See SEC Release No. 33-7558 (July
29, 1998). Accordingly, the Company has included the following discussion in
this report, in addition to the Year 2000 disclosures previously filed with the
SEC.
State of Readiness
The Company began a concerted effort and established a dedicated
project team to address its Year 2000 issues in fiscal year 1997. In fiscal year
1998, the Company formalized a task force (the "Year 2000 Project Office") to
coordinate the Company's response to Year 2000 issues. The Year 2000 Project
Office reports to the Chief Executive Officer, his executive team, and the Audit
Committee of the Company's Board of Directors.
Under the auspices of the Year 2000 Project Office, the Company
believes that it has identified all significant IT systems and non-IT systems
that require modification in connection with Year 2000 issues. Internal and
external resources have been used and are continuing to be used, to make the
required modifications and test Year 2000 readiness. The required modifications
of all significant systems are well under way. The Company plans on completing
the modifications and testing of all significant systems by the end of fiscal
1999.
In addition, through its Year 2000 Project Office, the Company has
communicated with suppliers, banks, vendors and others with whom it does
significant business (collectively, its "business partners") to determine their
Year 2000 readiness and the extent to which the Company is vulnerable to any
other organization's Year 2000 issues. Based on these communications and related
responses, the Company is monitoring the Year 2000 preparations and state of
readiness of its business partners. Although the Company is not aware of any
significant Year 2000 problems with its business partners, there can be no
guarantee that the systems of other organizations on which the Company's systems
rely will be converted in a timely manner, or that a failure to convert by
another organization, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
Costs
The total cost to the Company of Year 2000 activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year. As of the end of the second quarter of fiscal
1999, the Company had spent approximately $2.1 million on Year 2000 issues. The
total costs to the Company of addressing Year 2000 issues is estimated to be
less than $5 million. These total costs, as well as the date on which the
Company plans to complete the Year 2000 modification and testing processes, are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ from those estimates.
12
<PAGE>
Risks
The Company utilizes IT systems and non-IT systems in many aspects of
its business. Year 2000 problems in some of the Company's systems could possibly
disrupt operations at some restaurants, but the Company does not expect that any
such disruption would have a material adverse impact on the Company's operating
results.
The Company is also exposed to the risk that one or more of its
suppliers or vendors could experience Year 2000 problems that could impact the
ability of such suppliers or vendors to provide goods and services. Although
this risk is lessened by the availability of alternative suppliers, the
disruption of certain services, such as utilities, could, depending upon the
extent of the disruption, potentially have a material adverse impact on the
Company's operations.
Contingency Plans
The Year 2000 Project Office is in the process of developing
contingency plans for the Company's significant IT systems and non-IT systems
requiring Year 2000 modification. In addition, the Company is developing
contingency plans to deal with the possibility that some suppliers or vendors
might fail to provide goods and services on a timely basis as a result of Year
2000 problems. These contingency plans will include the identification,
acquisition and/or preparation of backup systems, suppliers and vendors.
Forward-Looking Statements
- --------------------------
Certain information included in this report and other materials filed
or to be filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or written statements made or to
be made by the Company) may contain statements that are forward-looking within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include information relating to current expansion plans, business development
activities, and Year 2000 compliance. Such forward-looking information is based
on assumptions concerning important risks and uncertainties that could
significantly affect anticipated results in the future and, accordingly, such
results may differ from those expressed in any forward-looking statements made
by or on behalf of the Company. These risks and uncertainties include, but are
not limited to, those relating to real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development and operation, economic conditions, changes in federal or state laws
or the administration of such laws, and the Year 2000 readiness of suppliers,
banks, vendors and others having a direct or indirect business relationship with
the Company.
13
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Information contained on pages 3 through 11 of the Company's Proxy
Statement dated August 10, 1998, filed with the Securities and Exchange
Commission on August 10, 1998, describing matters submitted to a vote at the
Annual Meeting of Shareholders on September 24, 1998, is incorporated by
reference in this report.
(a) The Annual Meeting of Shareholders was held on September 24, 1998.
(b) The name of each director elected at the meeting is provided in Item
4(c) of this report. There are no other directors with a term of
office that continued after the Annual Meeting. All nominees described
in the Proxy Statement, referenced above, were elected.
(c) At the Annual Meeting, the Shareholders took the following actions:
(i) Elected the following ten directors:
H. B. Atwater, Jr. For 123,502,296
Withheld 889,476
Bradley D. Blum For 123,744,036
Withheld 647,736
Daniel B. Burke For 123,728,584
Withheld 663,188
Odie C. Donald For 123,670,044
Withheld 721,728
Joe R. Lee For 123,669,020
Withheld 722,752
Richard E. Rivera For 123,738,689
Withheld 653,083
Michael D. Rose For 123,662,885
Withheld 728,888
Maria A. Sastre For 123,694,923
Withheld 696,808
Jack A. Smith For 123,634,786
Withheld 756,986
Blaine Sweatt, III For 123,691,606
Withheld 700,156
(ii) Approved appointment of KPMG Peat Marwick LLP as independent
auditor.
For 123,610,162
Against 238,974
Abstain 542,636
14
<PAGE>
(iii) Approved the Darden Restaurants, Inc. Employee Stock Purchase
Plan, as further described in that portion of the Proxy Statement
referenced above.
For 122,089,170
Against 782,876
Abstain 507,909
Broker Non-Vote 1,011,817
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Consolidated Earnings to
Fixed Charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K on September 24, 1998,
reporting certain financial results for the first quarter of fiscal
year 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: January 6, 1998 By: /s/ C.L. Whitehill
--------------------------------------------
C.L. Whitehill
Senior Vice President,
General Counsel and Secretary
Dated: January 6, 1998 By: /s/ Linda Dimopoulos
--------------------------------------------
Linda Dimopoulos
Senior Vice President - Corporate Controller
and Business Information Systems
(Principal accounting officer)
16
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title Page
- ------- ------------- ----
12 Computation of Ratio of Consolidated Earnings
to Fixed Charges 18
27 Financial Data Schedule 19
17
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 12
<TEXT>
Exhibit 12
----------
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
- --------------------------------------------------------------------------------------------------------------------
November 29, November 23, November 29, November 23,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Earnings from Operations
Before Income Taxes..................... $ 24,657 $ 11,786 $ 78,528 $ 48,036
Plus Fixed Charges........................ 9,921 9,259 20,447 18,311
Less Capitalized Interest................. (260) (295) (520) (581)
---------- ---------- --------- ---------
Consolidated Earnings from Operations
Before Income Taxes Available to
Cover Fixed Charges..................... $ 34,318 $ 20,750 $ 98,455 $ 65,766
========= ========= ========= =========
Ratio of Consolidated Earnings to Fixed
Charges................................. 3.46 2.24 4.82 3.59
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
18
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Darden Restaurants, Inc. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-END> NOV-29-1998
<CASH> 13,064
<SECURITIES> 0
<RECEIVABLES> 26,224
<ALLOWANCES> (332)
<INVENTORY> 137,112
<CURRENT-ASSETS> 303,847
<PP&E> 2,389,627
<DEPRECIATION> (910,976)
<TOTAL-ASSETS> 1,879,421
<CURRENT-LIABILITIES> 468,961
<BONDS> 310,413
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,311,828
<OTHER-SE> (311,383)
<TOTAL-LIABILITY-AND-EQUITY> 1,879,421
<SALES> 1,677,225
<TOTAL-REVENUES> 1,677,225
<CGS> 554,031
<TOTAL-COSTS> 1,355,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 10,221
<INCOME-PRETAX> 78,528
<INCOME-TAX> 27,430
<INCOME-CONTINUING> 51,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,098
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.35
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| EMR | https://www.sec.gov/Archives/edgar/data/32604/0000032604-99-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000032604-99-000004.txt : 19990217
<SEC-HEADER>0000032604-99-000004.hdr.sgml : 19990217
ACCESSION NUMBER: 0000032604-99-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EMERSON ELECTRIC CO
CENTRAL INDEX KEY: 0000032604
STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823]
IRS NUMBER: 430259330
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-00278
FILM NUMBER: 99541146
BUSINESS ADDRESS:
STREET 1: 8000 W FLORISSANT AVE
STREET 2: P O BOX 4100
CITY: ST LOUIS
STATE: MO
ZIP: 63136
BUSINESS PHONE: 3145532000
MAIL ADDRESS:
STREET 1: 8000 W. FLORISSANT
STREET 2: P.O. BOX 4100
CITY: ST LOUIS
STATE: MO
ZIP: 63136
FORMER COMPANY:
FORMER CONFORMED NAME: EMERSON ELECTRIC MANUFACTUING CO
DATE OF NAME CHANGE: 19730710
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number 1-278
EMERSON ELECTRIC CO.
(Exact name of registrant as specified in its charter)
Missouri 43-0259330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8000 W. Florissant Ave.
P.O. Box 4100
St. Louis, Missouri 63136
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 553-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Common stock outstanding at December 31, 1998: 437,380,167 shares.
1
<PAGE>
PART I. FINANCIAL INFORMATION FORM 10-Q
Item 1. Financial Statements.
EMERSON ELECTRIC CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in millions except per share amounts; unaudited)
Three Months Ended
December 31,
---------------------
1998 1997
-------- --------
Net sales $3,426.7 3,171.5
-------- --------
Costs and expenses:
Cost of sales 2,211.6 2,029.8
Selling, general and administrative expenses 691.4 646.4
Interest expense 44.9 35.8
Other deductions, net 6.4 18.4
-------- --------
Total costs and expenses 2,954.3 2,730.4
-------- --------
Income before income taxes 472.4 441.1
Income taxes 170.0 158.8
-------- --------
Net earnings $ 302.4 282.3
======== ========
Basic earnings per common share $ .69 .64
======== ========
Diluted earnings per common share $ .69 .64
======== ========
Cash dividends per common share $ .325 .295
======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE> EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amounts; unaudited)
December 31, September 30,
ASSETS 1998 1998
------ --------- --------
CURRENT ASSETS
Cash and equivalents $ 321.7 209.7
Receivables, less allowances of $55.9 and $54.6 2,396.1 2,416.1
Inventories 1,998.4 1,996.5
Other current assets 374.5 379.0
--------- --------
Total current assets 5,090.7 5,001.3
--------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 3,053.9 3,011.6
--------- --------
OTHER ASSETS
Excess of cost over net assets of purchased
businesses 4,002.3 3,702.7
Other 1,014.7 944.2
--------- --------
Total other assets 5,017.0 4,646.9
--------- --------
$13,161.6 12,659.8
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short-term borrowings and current maturities
of long-term debt $ 2,009.2 1,524.4
Accounts payable 831.3 1,036.7
Accrued expenses 1,138.7 1,252.7
Income taxes 320.3 207.9
--------- --------
Total current liabilities 4,299.5 4,021.7
--------- --------
LONG-TERM DEBT 1,243.3 1,056.6
--------- --------
OTHER LIABILITIES 1,646.9 1,778.2
--------- --------
STOCKHOLDERS' EQUITY
Preferred stock of $2.50 par value per share.
Authorized 5,400,000 shares; issued - none -- --
Common stock of $.50 par value per share.
Authorized 1,200,000,000 shares; issued
476,677,006 shares 238.3 238.3
Additional paid in capital 26.8 27.9
Retained earnings 7,216.5 7,056.5
Cumulative translation adjustments (166.9) (236.2)
Cost of common stock in treasury, 39,296,839
shares and 38,452,823 shares (1,342.8) (1,283.2)
--------- --------
Total stockholders' equity 5,971.9 5,803.3
--------- --------
$13,161.6 12,659.8
========= ========
See accompanying notes to consolidated financial statements.
3
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in millions; unaudited)
1998 1997
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 275.6 246.0
-------- --------
INVESTING ACTIVITIES
Capital expenditures (136.8) (112.5)
Purchases of businesses, net of cash and
equivalents acquired (468.0) --
Other, net .8 6.1
-------- --------
Net cash used in investing activities (604.0) (106.4)
-------- --------
FINANCING ACTIVITIES
Net increase in short-term borrowings 495.6 403.5
Proceeds from long-term debt 175.1 1.4
Principal payments on long-term debt (6.0) (6.1)
Dividends paid (142.4) (130.2)
Net purchases of treasury stock (94.3) (152.4)
-------- --------
Net cash provided by financing activities 428.0 116.2
-------- --------
Effect of exchange rate changes on cash and equivalents 12.4 (12.7)
-------- --------
INCREASE IN CASH AND EQUIVALENTS 112.0 243.1
Beginning cash and equivalents 209.7 221.1
-------- --------
ENDING CASH AND EQUIVALENTS $ 321.7 464.2
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
Notes to Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements, in
the opinion of management, include all adjustments necessary for
a fair presentation of the results for the interim periods
presented. These adjustments consist of normal recurring
accruals. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do
not include all the disclosures required by generally accepted
accounting principles. For further information refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
2. Other Financial Information
(Dollars in millions; unaudited)
December 31, September 30,
Inventories 1998 1998
----------- -------- --------
Finished products $ 870.2 858.6
Raw materials and work in process 1,128.2 1,137.9
-------- --------
$1,998.4 1,996.5
======== ========
December 31, September 30,
Property, plant and equipment, net 1998 1998
---------------------------------- -------- --------
Property, plant and equipment, at cost $6,212.7 6,070.7
Less accumulated depreciation 3,158.8 3,059.1
-------- --------
$3,053.9 3,011.6
======== ========
3. During the first quarter of 1999, the Company completed the acquisition
of the Westinghouse Process Control Division (PCD) from CBS Corporation
for approximately $257 million. PCD is a supplier of process controls
for the power generation, water and wastewater treatment industries. In
addition, in the first quarter the Company paid $202 million to increase
its ownership of Astec (BSR) Plc to 96 percent and has subsequently
acquired the remaining interest.
During the second quarter of 1999, the Company announced that Caterpillar
has agreed to acquire the Company's joint venture interest in F.G. Wilson
(Engineering) Ltd. In addition, the Company has entered into agreements
in principle to acquire two generator operations.
5
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
4. In the quarter ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement requires the reporting of changes in stockholders' equity
that do not result from transactions with stockholders. As reflected in
the financial statements, nonstockholder changes in equity for the quarter
ended December 31, 1998, were $371.7 million, comprised of net earnings
of $302.4 million and foreign currency translation adjustments of $69.3
million. The corresponding amount for the quarter ended December 31,
1997, was $297.3 million, comprised of net earnings of $282.3 million
and foreign currency translation adjustments of $15.0 million. The
adoption of this statement had no impact on the Company's results of
operations or financial condition.
5. The weighted average number of common shares outstanding (in millions)
was 436.0 and 439.2 for the three months ended December 31, 1998 and
1997, respectively. The weighted average number of shares outstanding
assuming dilution (in millions) was 440.6 and 443.9 for the three months
ended December 31, 1998 and 1997, respectively. Dilutive shares
primarily relate to stock plans.
6
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES 10-Q
Items 2 and 3. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Results of Operations
Sales, net earnings and earnings per share for the first quarter of
fiscal 1999 were the highest for any first quarter in the Company's
history.
Net sales for the quarter ended December 31, 1998, were $3,426.7 million,
an increase of 8.0 percent over net sales of $3,171.5 million for the
quarter ended December 31, 1997. These results were achieved despite
continued weakness in Asia and other developing markets and the continuing
low price of crude oil, which affects process and other industrial markets.
In the Commercial and Industrial segment, sales in the electronics business
increased significantly due in part to the contributions of Advanced Power
Systems and Hiross, recent acquisitions that expand Emerson's position in the
telecommunications equipment market. In addition, demand for power
conditioning equipment and services continued to be very strong. Industrial
motors and drives business realized a solid increase in sales due to the
contribution of acquisitions and U.S. and European demand. Sales for the
process business were up slightly versus 1998, supported by strong demand for
PlantWeb (TM) products and systems. The industrial components and equipment
business reported a modest increase in sales due to acquisitions.
In the Appliance and Construction-Related segment, the heating, ventilating
and air conditioning business achieved very strong sales growth, driven by
both the U.S. and Asia-Pacific regions. The fractional motors and appliance
components business reported a strong increase in sales driven by recent
acquisitions and solid demand in the United States. Underlying tools business
sales declined moderately compared with very strong growth in the prior year.
Cost of sales for the first quarter was $2,211.6 million or 64.5
percent of sales, compared with $2,029.8 million, or 64.0 percent of
sales, for the first quarter of 1998. Selling, general and
administrative expenses for the three months ended December 31, 1998,
were $691.4 million, or 20.2 percent of sales, compared to $646.4
million, or 20.4 percent of sales for the same period a year ago.
7
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
Financial Condition
A comparison of key elements of the Company's financial condition at
the end of the first quarter as compared to the end of the prior
fiscal year follows:
December 31, September 30,
1998 1998
--------- ---------
Working capital (in millions) $ 791.2 $ 979.6
Current ratio 1.2 to 1 1.2 to 1
Total debt to total capital 35.3% 30.8%
Net debt to net capital 32.9% 29.0%
The Company's interest coverage ratio (earnings before income taxes and
interest expense, divided by interest expense) was 11.5 times for the
quarter ended December 31, 1998, compared to 13.3 times for the same
period one year earlier. The decrease in the interest coverage ratio
reflects higher average borrowings resulting from share repurchases and
acquisitions, partially offset by earnings growth.
Cash and equivalents increased by $112.0 million during the three months
ended December 31, 1998. Cash flow provided by operating activities of
$275.6 million and an increase in borrowings of $664.7 million were used
primarily to fund acquisitions of $468.0 million, fund capital expenditures
of $136.8 million, pay dividends of $142.4 million, and fund net treasury
stock purchases of $94.3 million.
The Company is in a strong financial position, continues to generate
strong operating cash flow, and has the resources available for
reinvestment in existing businesses, strategic acquisitions and managing
the capital structure on a short- and long-term basis.
Year 2000 readiness was discussed in the Company's 1998 Annual Report on
Form 10-K under the caption "Year 2000 Readiness." Subsequently, the Company
has completed the assessment phase. Remediation and testing activities
at the Company's divisions are at various stages, with more than three-
fourths of the work completed on critical systems. Substantially all
computer applications and systems are expected to be Year 2000 compliant
by June 30, 1999.
Statements in this report that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties.
These include economic and currency conditions, market demand, pricing,
and competitive and technological factors, among others, which are set
forth in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
8
<PAGE>
EMERSON ELECTRIC CO. AND SUBSIDIARIES FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (Listed by numbers corresponding to the Exhibit Table
of Item 601 in Regulation S-K).
3(a) Restated Articles of Incorporation of Emerson Electric Co.,
incorporated by reference to Emerson Electric Co. Form 10-Q
for the quarter ended March 31, 1997, Exhibit 3(a).
3(b) Bylaws of Emerson Electric Co., as amended through November 3,
1998, incorporated by reference to Emerson Electric Co. 1998
Form 10-K, Exhibit 3(b).
27 Financial Data Schedule
(b) Reports on Form 8-K. Pursuant to Item 5, the Company filed a Report on
Form 8-K dated October 6, 1998, regarding the adoption of a Preferred
Stock Purchase Rights plan.
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.
EMERSON ELECTRIC CO.
Date: February 16, 1999 By /s/ Walter J. Galvin
-----------------------
Walter J. Galvin
Senior Vice President - Finance
and Chief Financial Officer
(on behalf of the registrant and
as Chief Financial Officer)
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5 EXHIBIT 27
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMERSON
ELECTRIC CO. CONSOLIDATED STATEMENT OF EARNINGS AND CONSOLIDATED BALANCE SHEET
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1998, FILED WITH THE
COMPANY'S 1999 FIRST QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 321,700
<SECURITIES> 0
<RECEIVABLES> 2,452,000
<ALLOWANCES> 55,900
<INVENTORY> 1,998,400
<CURRENT-ASSETS> 5,090,700
<PP&E> 6,212,700
<DEPRECIATION> 3,158,800
<TOTAL-ASSETS> 13,161,600
<CURRENT-LIABILITIES> 4,299,500
<BONDS> 1,243,300
<COMMON> 238,300
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 5,733,600
<TOTAL-LIABILITY-AND-EQUITY> 13,161,600
<SALES> 3,426,700
<TOTAL-REVENUES> 3,426,700
<CGS> 2,211,600
<TOTAL-COSTS> 2,211,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,900
<INCOME-PRETAX> 472,400
<INCOME-TAX> 170,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,400
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| ETS | https://www.sec.gov/Archives/edgar/data/846909/0000846909-99-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000846909-99-000002.txt : 19990115
<SEC-HEADER>0000846909-99-000002.hdr.sgml : 19990115
ACCESSION NUMBER: 0000846909-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981130
FILED AS OF DATE: 19990114
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CABLETRON SYSTEMS INC
CENTRAL INDEX KEY: 0000846909
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576]
IRS NUMBER: 042797263
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-10228
FILM NUMBER: 99506498
BUSINESS ADDRESS:
STREET 1: 35 INDUSTRIAL WAY
CITY: ROCHESTER
STATE: NH
ZIP: 03886
BUSINESS PHONE: 6033329400
MAIL ADDRESS:
STREET 1: 35 INDUSTRIAL WAY
CITY: ROCHESTER
STATE: NH
ZIP: 03886
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FOR THE PERIOD ENDING NOVEMBER 30, 1998
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10228
CABLETRON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2797263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
35 Industrial Way, Rochester, New Hampshire 03867
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (603) 332-9400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES - X NO -
As of January 11, 1999 there were 172,173,011 shares of the Registrant's common
stock outstanding.
This document contains 22 pages
Exhibit index on page 21
<PAGE>
INDEX
CABLETRON SYSTEMS, INC.
Page
----
Facing Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - November 30, 1998 (unaudited) and
February 28, 1998 3
Consolidated Statements of Operations - Three and nine months
ended November 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows - Nine months ended
November 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements -
November 30, 1998 (unaudited) 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Index to the Exhibits 21
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CABLETRON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
November 30, 1998 February 28, 1998
----------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .................................................. $ 129,266 $ 207,078
Short-term investments ..................................................... 87,019 116,979
Accounts receivable, net ................................................... 225,303 241,181
Inventories, net ........................................................... 243,008 309,667
Deferred income taxes ...................................................... 78,032 81,161
Prepaid expenses and other assets .......................................... 113,697 78,084
---------- ----------
Total current assets ................................................ 876,325 1,034,150
---------- ----------
Long-term investments ........................................................ 178,199 123,272
Long-term deferred income taxes .............................................. 167,295 167,308
Property, plant and equipment, net ........................................... 211,498 244,730
Intangible assets ............................................................ 98,364 36,867
---------- ----------
Total assets ........................................................ $1,531,681 $1,606,327
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ........................................................... $ 95,607 $ 79,969
Current portion of long-term obligation .................................... 159,002 157,719
Accrued expenses ........................................................... 234,167 235,062
---------- ----------
Total current liabilities ........................................... 488,776 472,750
Long-term obligation ......................................................... -- 132,500
Long-term deferred income taxes .............................................. 22,037 12,057
---------- ----------
Total liabilities ................................................... 510,813 617,307
---------- ----------
Stockholders' equity:
Preferred stock, $1.00 par value. Authorized
2,000 shares; none issued ................................................ -- --
Common stock $0.01 par value. Authorized
240,000 shares; issued and outstanding
171,672 and 158,267, respectively ........................................ 1,717 1,583
Additional paid-in capital ................................................. 543,975 300,834
Retained earnings .......................................................... 474,973 685,823
---------- ----------
1,020,665 988,240
Accumulated other comprehensive income ....................................... 203 780
---------- ----------
Total stockholders' equity .......................................... 1,020,868 989,020
---------- ----------
Total liabilities and stockholders' equity .......................... $1,531,681 $1,606,327
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................... $ 329,868 $ 331,827 $ 1,066,206 $ 1,065,808
Cost of sales ............................... 197,041 164,254 618,156 476,847
----------- ----------- ----------- -----------
Gross profit ....................... 132,827 167,573 448,050 588,961
----------- ----------- ----------- -----------
Operating expenses:
Research and development ................. 51,484 46,552 159,633 134,583
Selling, general and administrative ...... 116,965 95,521 327,950 261,848
Special charges .......................... 74,650 -- 224,650 --
----------- ----------- ----------- -----------
Total operating expenses ........... 243,099 142,073 712,233 396,431
----------- ----------- ----------- -----------
Income (loss) from operations ............... (110,272) 25,500 (264,183) 192,530
Interest income, net ........................ 3,493 4,648 11,413 14,269
----------- ----------- ----------- -----------
Income (loss) before income taxes .. (106,779) 30,148 (252,770) 206,799
Income tax expense (benefit) ................ (21,761) 10,250 (21,045) 70,490
----------- ----------- ----------- -----------
Net income (loss) .................. $ (85,018) $ 19,898 $ (231,725) $ 136,309
=========== =========== =========== ===========
Net income (loss) per share - basic ......... $ (0.50) $ 0.13 $ (1.40) $ 0.87
=========== =========== =========== ===========
Weighted average number of shares outstanding
- basic ............................ 169,658 157,986 165,884 157,527
=========== =========== =========== ===========
Net income (loss) per share - diluted ....... $ (0.50) $ 0.12 $ (1.40) $ 0.85
=========== =========== =========== ===========
Weighted average number of shares outstanding
- diluted .......................... 169,658 159,875 165,884 159,906
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CABLETRON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Nine Months Ended
November 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) ................................. ($231,725) $ 136,309
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Depreciation and amortization ................. 66,884 50,205
Provision for losses on accounts receivable ... 3,929 1,098
Deferred taxes ................................ 2,472 (8,239)
Loss (gain) on disposal of property ........... 1,018 (446)
Purchased research and development from
acquisitions ................................ 224,650 --
Other ......................................... 575 --
Changes in assets and liabilities:
Accounts receivable ........................... 25,259 (82,031)
Inventories ................................... 75,444 (84,233)
Prepaid expenses and other assets ............. 21 (1,755)
Accounts payable, accrued expenses and
long-term obligations.............. ......... (155,731) 39,244
Income taxes payable .......................... (28,481) (4,892)
--------- ---------
Net cash (used in) provided by operating
activities ...................................... (15,685) 45,260
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................ (35,840) (64,037)
Proceeds from sale of fixed assets .............. 24,531 --
Acquisitions of businesses, net of cash acquired (32,193) --
Purchases of available-for-sale securities ...... (82,375) (86,478)
Purchases of held-to-maturity securities ........ (69,596) (37,228)
Maturities of securities ........................ 126,888 113,943
--------- ---------
Net cash used in investing activities ............. (68,585) (73,800)
--------- ---------
Cash flows from financing activities:
Proceeds from stock option exercise ............. 1,593 17,097
Common stock issued to employee stock
purchase plan ................................. 5,384 3,311
--------- ---------
Net cash provided by financing activities ......... 6,977 20,408
--------- ---------
Effect of exchange rate changes on cash ........... (519) 230
--------- ---------
Net decrease in cash and cash equivalents ......... (77,812) (7,902)
Cash and cash equivalents, beginning of period .... 207,078 214,828
--------- ---------
Cash and cash equivalents, end of period .......... $ 129,266 $ 206,926
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and Article 2 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments consisting of normal recurring accruals necessary
for a fair presentation of the results of operations for the interim periods
presented have been reflected herein. Certain amounts in the consolidated
financial statements and notes thereto have been reclassified to conform to
current classifications. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the entire year.
The accompanying financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 28, 1998.
2. Business Combinations
DSLAM division of Ariel Corporation
On September 1, 1998, Cabletron acquired the assets and assumed certain
liabilities of the DSLAM division of Ariel Corporation ("Ariel"), a privately
held designer and manufacturer of digital subscriber line network access
products. Cabletron recorded the cost of the acquisition at approximately $45.1
million, including fees and expenses of $1.1 million related to the acquisition,
which consisted of cash payments of $33.5 million and other assumed liabilities.
This acquisition has been accounted for under the purchase method of accounting.
Based on an independent appraisal, approximately $27.8 million of the purchase
price was allocated to in-process research and development. Accordingly,
Cabletron recorded special charges of approximately $27.8 million ($23.7
million, net of tax) for this in-process research and development, at the date
of acquisition. The excess of cost over the estimated fair value of net assets
acquired was allocated to goodwill. A total of $16.4 million was allocated to
goodwill, and is being amortized on a straight-line basis over a period of 10
years. Cabletron's consolidated results of operations include the operating
results of the DSLAM division of Ariel Corporation from the acquisition date.
FlowPoint Corp.
On September 9, 1998, Cabletron acquired all of the outstanding stock of
FlowPoint Corp., a privately held manufacturer of digital subscriber line router
networking products. Prior to the agreement, Cabletron owned 42.8% of the
outstanding shares of stock. Pursuant to the terms of the agreement, $20.6
million is to be paid in 4 installments, within 9 months after the merger date.
Each installment may be paid in either cash or Cabletron common stock, as
determined by Cabletron management at the time of distribution. In addition,
Cabletron assumed 494,000 options, valued at approximately $2.7 million.
Cabletron recorded the cost of the acquisition at approximately $25.0 million,
including direct costs of $0.4 million. This acquisition has been accounted for
under the purchase method of accounting. Based on an independent appraisal,
approximately $13.0 million of the purchase price was allocated to in-process
research and development. Accordingly, Cabletron recorded special charges of
$13.0 million ($11.1 million, net of tax) for this in-process research and
development, at the date of acquisition The excess of cost over net assets
acquired was allocated to goodwill and other intangible assets. A total of $10.9
million was allocated to goodwill and other intangible assets, and is being
amortized on a straight-line basis over a period of 5 - 10 years. Cabletron's
consolidated results of operations include the operating results of FlowPoint
Corp. from the acquisition date.
<PAGE>
NetVantage, Inc.
On September 25, 1998, Cabletron acquired NetVantage, Inc., a publicly held
manufacturer of ethernet workgroup switches. Under the terms of the Merger
Agreement, Cabletron issued 6.4 million shares of Cabletron common stock to the
shareholders of NetVantage in exchange for all of the outstanding shares of
stock of NetVantage. In addition, Cabletron assumed 1,309,000 options, valued at
approximately $4.8 million.
Cabletron recorded the cost of the acquisition at approximately $77.8 million,
including direct costs of $4.2 million. This acquisition has been accounted for
under the purchase method of accounting. The cost represents 6.4 million shares
at $9.9375 per share, in addition to direct acquisition costs. Based on an
independent appraisal, approximately $33.9 million of the purchase price was
allocated to in-process research and development. Accordingly, Cabletron
recorded special charges of $33.9 million ($29.0 million, net of tax) for this
in-process research and development, at the date of acquisition. The excess of
cost over net assets acquired was allocated to goodwill and other intangible
assets. A total of $31.1 million was allocated to goodwill and other intangible
assets and is being amortized on a straight-line basis over a period of 5 - 10
years. Cabletron's consolidated results of operations include the operating
results of NetVantage, Inc. from the acquisition date.
Yago Systems, Inc.
On March 17, 1998, Cabletron acquired Yago Systems, Inc. ("Yago"), a privately
held manufacturer of wire speed routing and layer-4 switching products and
solutions. Under the terms of the merger agreement, Cabletron issued 6.0 million
shares of Cabletron common stock to the shareholders of Yago in exchange for all
of the outstanding shares of Yago, not then owned by Cabletron. In addition,
Cabletron assumed Yago stock options for approximately 2.1 million shares of
Cabletron common stock. Prior to the closing of the acquisition, Cabletron held
approximately twenty-five percent of Yago's capital stock, calculated on a
fully-diluted basis. Cabletron also agreed, pursuant to the terms of the merger
agreement, to issue up to 5.5 million shares of Cabletron common stock to the
former shareholders of Yago in the event the shares originally issued in the
transaction do not attain a market value of $35 per share eighteen months after
the closing of the transaction.
Cabletron recorded the cost of the acquisition at approximately $165.7 million,
including direct costs of $2.6 million. This acquisition has been accounted for
under the purchase method of accounting. The cost represents 11.5 million shares
at $14.1875 per share, in addition to direct acquisition costs. Based on an
independent appraisal, approximately $150.0 million of the purchase price was
allocated to in-process research and development. Accordingly, Cabletron
recorded special charges of $150.0 million for this in-process research and
development, at the date of acquisition. The excess of cost over net assets
acquired was allocated to goodwill and other intangible assets. A total of $16.3
million was allocated to goodwill and other intangible assets and is being
amortized on a straight-line basis over a period of 5 - 10 years. Cabletron's
consolidated results of operations include the operating results of Yago from
the acquisition date.
<PAGE>
Pro Forma Information
The unaudited pro forma consolidated historical results for the nine months
ended November 30, 1998 and for the nine month period ended November 30, 1997
below assume the acquisitions of Ariel, FlowPoint, NetVantage and Yago occurred
at the beginning of fiscal 1998:
(in thousands, except per share amounts)
Nine months ended
November 30,
1998 1997
---- ----
Net sales $1,069,868 $1,082,720
Net income (loss) $ (56,471) $ 112,916
Net income (loss) per share $ (0.34) $ 0.66
The pro forma results include amortization of the goodwill and other intangible
assets described above. The pro forma results do not include the write-off of
in-process research and development expenses at the date of acquisition. The pro
forma results are not necessarily indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor are they necessarily indicative of future consolidated results.
3. Restated acquisition related charges
As previously disclosed in the Form 10-Q for its quarter ended August 31, 1998,
the Company received a letter from the staff of the Securities and Exchange
Commission (the "Staff") commenting on the Company's Form 10-K for the year
ended February 28, 1998 and its Form 10-Q for the quarter ended May 31, 1998.
For a more complete description of the Staff's letter and its potential
ramifications for the Company see "Item 5. Other Information" later in this
report. Upon receiving advice from its auditors and other professionals in
reviewing the Forms 10-K and 10-Q and formulating a response to the Staff, the
Company determined to reduce the $57.7 million in special charges the Company
recorded in the fourth quarter of fiscal 1998 in connection with its acquisition
of the DNPG by approximately $33.2 million, and to reflect these expenses as
incurred. As a result of this reduction, (i) the Company's loss from operations
for the first quarter of fiscal 1999 increased by approximately $8.7 million of
acquisition related expenses from the amount previously disclosed (including as
disclosed in the Company's Form 10-Q for such quarter) and (ii) the Company's
income from operations for the second quarter of fiscal 1999 decreased by
approximately $5.0 million of acquisition related expenses from the amount
disclosed in a press release dated September 21, 1998. As a consequence, loss
per share for the first quarter increased by approximately $0.04 to ($0.97) and
earnings per share for the second quarter reduced by approximately $0.02 to
$0.07. In addition, the Company has determined to reclassify $13.6 million of
special charges recorded in its acquisition of Yago Systems, Inc. associated
with the elimination and phase out of superceded product lines to cost of sales
in the first quarter of fiscal 1999. The adjustments described above have been
fully incorporated into the financial statements contained in this report,
excluding the Company's February 28, 1998 balance sheet which does not reflect
these adjustments. The Company intends, after reaching a final resolution with
the Staff, to amend its Form 10-K for fiscal 1998 (including the balance sheet
contained in this report), its Form 10-Q for the first quarter of fiscal 1999
and possibly other filings to reflect the adjustments related to special charges
described above and any additional adjustments required by the Staff.
<PAGE>
Total DNPG acquisition related charges reported in the year
ended February 28, 1998 (in millions) $57.7
Less reductions:
Contract employee benefits and contract
compensation write-offs (12.5)
Professional fees and some facility costs
reclassified to purchase price ( 3.2)
Software licenses and software tools costs (7.0)
Customer warranty and stock rotation (3.0)
Other integration costs reductions in
estimates and classifications (7.5)
-----
Total merger related costs as revised, consisting
of elimination and phase out of overlapping
products $24.5
=====
Offsetting the $33.2 million adjustments were period expenses which relate to
the fourth quarter of fiscal year 1998 totaling $1.6 million. The net pre-tax
adjustment required for fiscal year 1998 totals $31.6 million.
4. New Accounting Pronouncements
Effective March 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" (SFAS 130) which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. For the Company, comprehensive
income includes net income and unrealized gains and losses from foreign currency
translation.
In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement
becomes effective for the Company in its fiscal year ending February 28, 1999.
The Company is in the process of determining the impact of SFAS 131 on its
footnote disclosures.
In October 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition" which provides
guidance on applying generally accepted accounting principles in recognizing
revenue for licensing, selling, leasing or otherwise marketing computer software
and supersedes SOP 91-1. The Company will adopt SOP 97-2 for its fiscal year
ended February 28, 1999 and does not anticipate any material impact on revenues
or results from operations.
In June 1998, the FASB issued Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities (SFAS 133)." This Statement
requires companies to record derivative instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. SFAS
133 will be effective for the Company's first quarter of fiscal year ending
February 28, 2001. Management believes that this Statement will not have a
significant impact on the Company.
<PAGE>
5. Inventories
Inventories consist of:
(in thousands)
November 30, February 28,
1998 1998
----------- -----------
Raw materials $ 68,319 $ 70,415
Work-in-process 14,303 24,521
Finished goods 160,386 214,731
-------- --------
Total inventories $243,008 $309,667
======== ========
6. EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and diluted
income (loss) per common share computations for the Company's reported net
income (loss) is as follows:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net income (loss) ................... $ (85,018) $ 19,898 $ (231,725) $136,309
========= ======== ========== ========
Weighted average shares outstanding - basic 169,658 157,986 165,884 157,527
Dilutive Effect:
Net additional common shares upon
exercise of common stock options -- 1,889 -- 2,379
--------- -------- ---------- --------
Weighted average shares outstanding -
diluted ................................ 169,658 159,875 165,884 159,906
========= ======== ========== ========
Net income (loss) per share - basic ....... $ (0.50) $ 0.13 $ (1.40) $ 0.87
========= ======== ========== ========
Net income (loss) per share - diluted ..... $ (0.50) $ 0.12 $ (1.40) $ 0.85
========= ======== ========== ========
</TABLE>
7. Comprehensive Income (Loss)
The Company's total of comprehensive income (loss) was as follows:
(in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ............... ($85,018) $19,898 ($231,725) $ 136,309
Other comprehensive income:
Foreign currency translation
adjustment ................... (2,641) 474 (577) 435
-------- ------- --------- ---------
Total comprehensive income (loss) ($87,659) $20,372 ($232,302) $ 136,744
======== ======= ========= =========
</TABLE>
<PAGE>
8. Supplemental Information
Supplemental Cash Flow Information and Noncash Investing and Financing
Activities are as follows:
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
1998 1997
---- ----
<S> <C> <C>
Cash paid during the period for:
Income taxes ..................................................... $10,220 $46,109
======= =======
Supplemental schedule of non-cash investing and financing activities:
Acquisitions:
Cash Paid ..................................................... $38,656 --
Less cash acquired ............................................ $ 6,463 --
------- -------
Net cash paid for acquisitions ................................ $32,193 --
======= =======
Fair value of assets acquired ................................. $30,322 --
======= =======
Liabilities assumed ........................................... $16,081 --
======= =======
Stock issued .................................................. $226,989 --
======== =======
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of the Three Months ended November 30, 1998 vs Three Months ended
November 30, 1997
Cabletron Systems' worldwide net sales in the third quarter of fiscal 1999 (the
three month period ended November 30, 1998) were $329.9 million, a decrease of
less than one percent, compared to net sales of $331.8 million for the third
quarter of fiscal 1998. The slight decrease in net sales for the third quarter
of fiscal 1999 was primarily a result of the continued weakening of sales of
shared media products. The decrease in sales of shared media products was
partially offset by the sales of products from Digital Network Products Group
("DNPG"), a division the Company acquired from Digital Equipment Corporation
("Digital") on February 7, 1998 and which did not contribute to the revenues in
the third quarter of fiscal 1998, increased sales of switched products and
increased service revenues. Sales of switched products increased by
approximately $16.0 million, or 9.1%, to $191.4 million in the third quarter of
fiscal 1999 compared to $175.4 million in the third quarter of fiscal 1998.
Sales of shared media products decreased $33.2 million to $33.0 million in the
third quarter of fiscal 1999 compared to $66.2 million in the same quarter of
fiscal 1998, a decline of approximately 50.2%. Also offsetting the decrease in
sales of shared media products was an increase in service revenue by
approximately $16.4 million, or 38.1%, to $59.4 million in the third quarter of
fiscal 1999 compared to $43.0 million in the third quarter of 1998. Service
revenue increased largely as a result of the Company's continuing efforts to
grow this portion of the business. The sales of switched products increased due
to sales of the Company's newer switched products. Offsetting this increase was
pricing pressure on the switched 10/100 products and decreased sales of some
older switched products. These factors were partially offset by The decrease in
sales of shared media products was a result of declining unit shipments. The
Company expects sales of its shared media products may continue to decrease this
fiscal year as customers continue to migrate from shared media products to
switched products.
International sales were $131.6 million or 39.9% of net sales in the third
quarter of fiscal 1999 as compared to $115.7 million or 34.9% of net sales for
the same period in fiscal 1998. The increase in international sales was largely
a result of sales by DNPG, which has a large percentage of its sales in the
European and Pacific Rim ("Pac Rim") regions. Sales in Europe were $87.3
million, which was an increase of $18.0 million from sales of $69.3 million in
the third quarter of fiscal 1998. Sales in the Pac Rim Region were $25.7
million, which was an increase of $11.7 million from sales of $14.0 million in
the third quarter of fiscal 1998.
Gross profit as a percentage of net sales in the third quarter of fiscal 1999
decreased to 40.3% from 50.5% for the third quarter of fiscal 1998. The decrease
was primarily due to an increase of obsolescence recognition of slower moving
products and the discontinuance of older products. Secondary factors which
negatively impacted the gross margin were (i) that lower than expected sales
resulted in fixed manufacturing expenses, which had been increased in
anticipation of higher sales, being a higher percentage of sales and (ii) a more
competitive pricing environment.
Research and development expenses in the third quarter of fiscal 1999 increased
10.6% to $51.5 million from $46.6 million in the third quarter of fiscal 1998.
The increase in research and development spending reflected the additional
software and hardware engineers acquired as a result of acquisitions, and
associated costs related to the development of new products, offset by a
decrease in spending at existing locations. Research and development spending as
a percentage of net sales increased to 15.6% from 14.0% in the third quarter of
fiscal 1999.
Selling, general and administrative ("SG&A") expenses in the third quarter of
fiscal 1999 increased 22.4% to $117.0 million from $95.5 million in the third
quarter of fiscal 1998. The increase in expenses was due to an increase in
marketing expenses, a revised incentive program and amortization of stay bonuses
and incentive payments to employees added through the recent acquisitions by the
Company.
<PAGE>
Special charges in the third quarter of fiscal 1999 were $74.7 million. This
amount relates to in-process research and development projects which were
ongoing, at the time of acquisition, at the DSLAM division of Ariel Corporation,
FlowPoint Corp. and NetVantage, Inc..
Net interest income in the third quarter of fiscal 1999 decreased $1.1 million
to $3.5 million, as compared to $4.6 million in the same quarter of fiscal 1998.
The decrease reflects lower cash and short-term investments balances due to
payments relating to the acquisitions completed during the last four quarters.
Loss before income taxes was $106.8 million in the third quarter of fiscal 1999
compared to income before income taxes of $30.1 million in the third quarter of
fiscal 1998. The decrease in income (loss) before income taxes was due primarily
to special charges of $74.7 million relating to the acquisitions of the DSLAM
division of Ariel Corporation, FlowPoint Corp. and NetVantage, Inc., and
secondarily, lower gross margins and higher operating expenses. Excluding the
special charges, loss before income taxes was $32.1 million, in the third
quarter of fiscal 1999. For the three months ended November 30, 1998 the actual
tax rate differs from the expected tax rate due to the non-deductibility of the
in-process research and development charges taken in connection with certain
acquisitions completed during the quarter.
Results of the Nine Months ended November 30, 1998 vs Nine Months ended November
30, 1997
Cabletron Systems' worldwide net sales of $1,066.2 million for the nine months
ended November 30, 1998 represented a less than one percent increase over net
sales of $1,065.8 million reported for the same period of the preceding year.
Sales of switched products increased from $509.2 million, during the nine month
period ended November 30, 1997 to $592.0 million, during the nine month period
ended November 30, 1998. The sales of switched products increased due largely to
increased sales of the Company's newer switched products, including switched
products acquired in the Company's acquisition of the DNPG. These sales were
offset by pricing pressure on the switched 10/100 products and decreased sales
of some older switched products. Sales of shared media products decreased from
$267.6 million, during the nine month period ended November 30, 1997, to $139.7
million, during the nine month period ended November 30, 1998. The decrease in
sales of shared media products was a result of declining unit shipments. Also,
offsetting the decrease in shared media revenue was an increase of $34.7 million
in service revenue from $138.3 million, during the nine month period ended
November 30, 1997, to $173.0 million, during the nine month period ended
November 30, 1998. Service revenue increased largely as a result of the
Company's continuing efforts to grow this portion of the business.
International sales as a percentage of total net sales increased to 41.0%
($437.6 million) from 30.2% ($322.1 million) for the same period of the
preceding year. The increase in international sales was largely a result of
sales by DNPG, which has a large percentage of its sales in the European and Pac
Rim regions. Sales in Europe increased $102.4 million, from $189.6 million to
$292.0 million and sales in the Pac Rim Region increased $29.6 million, from
$41.9 million to $71.5 million.
Gross profit as a percentage of net sales for the nine months ended November 30,
1998 was 42.0% compared to 55.3% for the nine months ended November 30, 1997.
The decreased gross profit percentage was due to higher inventory obsolescence,
a more competitive pricing environment and higher relative expenses resulting
from lower than expected sales. Another factor contributing to the lower gross
profit margin is that the Company acquired products that contribute to the
revenue mix at lower-margins than the Company's core products.
Research and development costs increased to $159.6 million compared to $134.6
million for the same period of the preceding fiscal year. As a percentage of net
sales, spending for research and development increased to 15.0% from 12.6%. The
higher spending for research and development reflected increased numbers of
software and hardware engineers hired and acquired as a result of acquisitions
and associated costs related to development of new products.
<PAGE>
Spending for selling, general and administrative expenses increased to $328.0
million compared to $261.8 million for the same period of the preceding year. As
a percentage of net sales, spending for selling, general and administration
increased to 30.8% from 24.6% for the same period of the preceding year. The
increase in spending was the result of an increase in sales and technical
personnel, incentive payments to employees added through the recent acquisitions
by the Company and increased marketing programs.
Special charges for the nine months of fiscal 1999 were $224.7 million. This
amount relates to in-process research and development projects which were
ongoing, at the time of acquisition, at Yago Systems, Inc., the DSLAM division
of Ariel Corporation, FlowPoint Corp. and NetVantage, Inc..
Net interest income was $11.4 million compared to $14.3 million in the same
period last year. The decrease reflects lower cash and short-term investments
balances due to cash expended for acquisitions.
Loss before income taxes of $252.8 million represented a decrease from income
before income taxes of $206.8 million for the same period a year ago. The
decrease was due largely to one-time acquisition expenses, special charges, for
Yago Systems, the DSLAM division of Ariel Corporation, FlowPoint Corp. and
NetVantage, Inc. These special charges totaled $224.7 million. Additionally, the
decrease in income before income taxes was due to lower gross margins and higher
expenses. For the nine months ended November 30, 1998 the actual tax rate
differs from the expected tax rate due to the non-deductibility of the
in-process research and development charges taken in connection with certain
acquisitions completed during the period.
Liquidity and Capital Resources
Cash, cash equivalents, marketable securities and long-term investments
decreased to $394.5 million at November 30, 1998 from $447.3 million at February
28, 1998. Net cash used in operating activities was $15.7 million in the nine
month period ended November 30, 1998, compared to net cash provided by operating
activities of $45.3 million in the comparable period of fiscal 1998. The primary
reason operating activities used cash during the period was that the Company
experienced increased costs as it prepared for an increase in sales activity
which increased sales level never occurred. Additionally, the decrease was due
to the use of product credits by Digital. In the Company's acquisition of the
DNPG, Digital received product credits which Digital can use until February 7,
2000 to purchase products from the Company. No cash is exchanged when Digital
purchases products using product credits; instead Digital's remaining product
credits are reduced by the amount of the purchase. The effect of Digital's use
of product credits on net cash provided by operating activities in this period
was partially offset by the Company's reduction of inventories due to improved
inventory controls. Net cash used in investing activities decreased by $5.2
million due in part to the Company having net purchases of securities of $25.1
million. The Company sold buildings, during the third quarter of fiscal 1999,
which provided $24.5 million, while the Company paid $32.2 million, net of cash
received, for acquisitions completed during the quarter.
Net accounts receivable decreased by $15.9 million to $225.3 million at November
30, 1998 from $241.2 million at February 28, 1998. Average days sales
outstanding were 61 days at November 30, 1998 compared to 78 days at February
28, 1998. The decrease in days sales outstanding was due primarily to the use of
product credits by Digital and, secondarily, to the increased collection efforts
of the Company. Digital's use of product credits reduces days sales outstanding
because the Company deems purchases paid in product credits to be collected
immediately.
The Company has historically maintained higher levels of inventory than its
competitors in the LAN industry in order to implement its policy of shipping
most orders requiring immediate delivery within 24 to 48 hours. Worldwide
inventories at November 30, 1998 were $243.0 million, or 111 days of inventory,
compared to $309.7 million, or 157 days of inventory at the end of the prior
fiscal year. Inventory turnover was 3.3 turns at November 30, 1998, compared to
2.3 turns at February 28, 1998. Inventories decreased and inventory turnover
increased due both to improved inventory control performance and increased
reserves for inventory in connection with reducing the scope of the Company's
product offerings.
<PAGE>
Capital expenditures for the first nine months of fiscal 1999 were $35.8 million
compared to $64.0 million for the same period of the preceding year. Capital
expenditures were principally related to upgrades of computer, computer related
equipment and manufacturing equipment.
On November 23, 1998, the Company sold buildings acquired as part of its
acquisition of the Network Products Group of Digital Equipment Corporation. The
Company received cash totaling $24.5 million. Since the sale of the buildings
occurred within 12 months of the business acquisition date, the Company recorded
a $2.6 million gain as an adjustment to goodwill recorded as part of the
business acquisition.
Current liabilities at November 30, 1998 were $488.8 million compared to $472.8
million at the end of the prior fiscal year. This increase was mainly due to
timing of disbursements.
In the opinion of management, internally generated funds from operations and
existing cash, cash equivalents and short-term investments will provide adequate
funds to support the Company's working capital and capital expenditure
requirements for the next twelve months.
Year 2000-compliance
As widely reported, many computer systems were not designed to handle any dates
beyond the year 1999 and, therefore, computer hardware and software will need to
be modified prior to the year 2000 in order to remain functional. The Year 2000
Issue is the result of computer programs being written using two digits rather
than four, to define a specific year. Absent corrective measures, a computer
program that has date-sensitive software may recognize a date using "00" as 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions to various activities and operations. As is
true for most companies, the Year 2000 computer issue creates a risk for the
Company. If the Company's internal systems or the systems of its suppliers do
not correctly recognize date information when the year changes to 2000, there
could be an adverse impact on the Company's operations. To address this issue,
the Company initiated a project to assess and address Year 2000 compliance
issues for its infrastructure, internal systems and suppliers. In addition, the
project is responsible for assessing and addressing the Year 2000 compliance of
the Company's products.
With respect to the Company's infrastructure and internal systems (consisting of
facilities, telecommunications, and the corporate network) and enterprise,
manufacturing, engineering systems, as well as those of third party suppliers,
the phases of the project include: (1) inventorying Year 2000 items; (2)
assigning priorities to identified items and assessing the Year 2000 compliance
of items determined to be critical to the Company; (3) remediation of critical
items that are determined not to be Year 2000 compliant; (4) testing critical
items; and (5) designing and implementing contingency plans.
Cabletron has substantially completed its inventory of critical systems, and
expects to complete the overall inventory within the next two months. The
Company is currently in the process of prioritizing and assessing the
inventoried systems, equipment and facilities. The Company expects to complete
most facets of this assessment program during mid 1999. Remediation and testing
of critical systems is under way and it is expected that this process will be
complete by the end of October 1999. Cabletron Systems is currently contacting
its critical suppliers to determine that the suppliers' operations and the
products and services they provide are Year 2000 compliant. This process will
continue throughout 1999. Even where assurances are received from third parties
there remains a risk that failure of systems and products of other companies on
which the Company relies could have a materially adverse effect on the
Company. In order to achieve these dates, the Company is continuing to allocate
additional resources to the Year 2000 project. At this time, the Company is
still assessing the likely worse case scenario if its critical systems are not
Year 2000 compliant by the Year 2000, but it expects to do so within the next
three months.
<PAGE>
The Company has conducted extensive work regarding the status of its current,
developing and installed base of products. The Company has published a list of
its major products indicating their status of Year 2000 compliance. This list is
available on the Company's World Wide Web page
(http://www.cabletron.com/year-2000) and is updated periodically. The Company
believes that substantially all of its current hardware products are Year 2000
compliant. The Company believes that its older hardware products that are not
Year 2000 compliant will continue to perform all essential and material
functions after the year 2000 but may, in limited circumstances, incorrectly
report the date of events (i.e., events on the network that are reported to a
network management software package) after the year 2000. The Company believes
that its current version of (Version 5.1) Spectrum, its network management
platform is Year 2000 compliant. Older versions of Spectrum are not Year 2000
compliant. The Company is offering upgrades for some, but not all, of the
non-compliant products previously sold by the Company. For other non-compliant
products, previously sold, the Company is offering customers the opportunity to
purchase equipment offering equivalent functionality. Given that most
non-compliant products previously sold will continue to perform their standard
functions, the Company expects that many customers will decide not to replace
those products. Despite the Company's efforts to date to identify the Year 2000
compliance of its current and installed base of products and the effects of any
non-compliance, the Company cannot be sure that it has identified all areas of
non-compliance or that any solutions it implements to address the non-compliance
will prove satisfactory. Further, since all customer situations cannot be
anticipated, particularly those involving third party products, the Company may
experience an increase in warranty and other claims as a result of the Year 2000
transition. For these reasons, the impact of customer claims could have a
material adverse impact on the Company's results of operations or financial
condition.
Based on the work performed to date, the Company has not incurred material
costs. The Company presently estimates it will incur between $15 and $18 million
of costs, of which approximately 85% will be for capital expenditures, in
connection with its Year 2000 efforts. This estimate is based on information
gathered to date, and may be materially revised as the inventory is completed
and work progresses. If implementation of replacement systems is delayed, or if
significant new non-compliance issues are identified, the Company's results of
operations or financial condition could be materially adversely affected.
Contingency plans are being developed in critical areas, to ensure that any
potential material business interruptions caused by the Year 2000 issue are
mitigated. Preliminary contingency plans are expected to be formalized by March
31, 1999. However, the foregoing statements are based upon management's best
estimates at the present time which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party modification plans and other factors. The Company has taken and will
continue to take corrective action to mitigate any significant Year 2000
problems. There can be no guarantee that the Company will not experience
significant business disruptions or loss of business due to the Year 2000 issue.
Specific factors may later become known which could result in a material adverse
impact on the Company's results of operations or financial condition.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
FOREIGN EXCHANGE RISK MANAGEMENT
As the Company's international sales grow as a percentage of total sales,
exposure to volatility in exchange rates could have a material impact on the
Company's financial results.
The Company uses foreign currency forward and option contracts to manage the
risk of exchange fluctuations. The Company uses these derivative instruments to
reduce its exchange risk by essentially creating offsetting market exposures.
The instruments are not held for trading or speculative purposes.
Based on the Company's overall currency rate exposure at November 30, 1998
including derivative and other foreign currency sensitive instruments, a
near-term change in currency rates based on historic currency rate movements
would not materially affect the consolidated financial position, results of
operations, or cash flows of the Company.
The success of the hedging program depends on forecasts of transaction activity
in various currencies. To the extent that these forecasts are over or
understated during periods of currency volatility, the Company could experience
unanticipated currency gains or losses.
Euro Conversion
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies (the "legacy currencies") and one common currency (the
"Euro"). The participating countries adopted the Euro as their common legal
currency on that date (the "Euro Conversion"). Since that date, the Euro began
trading on currency exchanges and has been used in business transactions. On
January 1, 2002, participating countries will issue new Euro-denominated bills
and coins. The legacy currencies will be withdrawn from circulation as legal
tender effective January 1, 2002. During the period from January 1, 1999 and
June 30, 2002, parties may use either the Euro or a participating country's
legacy currency as legal tender.
Earlier this year, the Company formed a Euro Committee. The Euro Committee has
analyzed the impact of the Euro conversion on the Company in a number of areas,
including the Company's information systems, product pricing, finance and
banking resources, foreign exchange management, contracts and accounting and tax
departments. While the Company has made certain adjustments to its business and
operations to accommodate the Euro conversion, the Euro Committee believes that
the Euro conversion will not have a material adverse impact on the Company's
financial position and results of operations.
INTEREST RATE RISK
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. A portion
of the investments is classified as available for sale. These instruments are
not held for purposes of trading. The securities are recorded at amortized cost
which approximates market value. Unrealized gains or losses associated with
these securities are not material. Due to the average maturity and conservative
nature of the investment portfolio, a sudden change in interest rates would not
have a material effect on the value of the portfolio.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed in Cabletron's annual report on Form 10-K for fiscal
1998, a consolidated class action lawsuit purporting to state claims against
Cabletron and certain officers and directors of Cabletron was filed and
currently is pending in the United States District Court for the District of New
Hampshire. The complaint alleges that Cabletron and several of its officers and
directors disseminated materially false and misleading information about
Cabletron's operations and acted in violation of Section 10(b) and Rule 10b-5 of
the Exchange Act during the period between March 3, 1997 and December 2, 1997.
The complaint also alleges that certain of the Company's alleged accounting
practices resulted in the disclosure of materially misleading financial results
during the same period. The Complaint does not specify the amount of damages
sought on behalf of the class. Cabletron and other defendants moved to dismiss
the complaint and, by Order dated December 23, 1998, the District Court
expressed its intention to grant Cabletron's motion to dismiss unless the
plaintiffs amended their complaint within 30 days (or January 22, 1999). As of
the date of this filing, no such amendment has been served on Cabletron or the
individual defendants. The legal costs incurred by Cabletron in defending itself
and its officers and directors against this litigation, whether or not it
prevails, could be substantial, and in the event that the plaintiffs prevail,
Cabletron could be required to pay substantial damages. This litigation may be
protracted and may result in a diversion of management and other resources of
Cabletron. The payment of substantial legal costs or damages, or the diversion
of management and other resources, could have a material adverse effect on
Cabletron's business, financial condition or results of operations.
<PAGE>
Item 5. Other Information
As previously disclosed, the Company received a letter from the staff of the
Securities and Exchange Commission (the "Staff") commenting on the Company's
Form 10-K for the year ended February 28, 1998 and its Form 10-Q for the quarter
ended May 31, 1998. The Staff proposes that the Company amend its Forms 10-K and
10-Q to reflect the Staff's comments. The Staff's comments focus primarily on
accounting issues related to the Company's acquisition of the DNPG, Yago
Systems, Inc., and certain earlier acquisitions, including principally the
amount of the purchase price in the DNPG and Yago acquisitions allocated by the
Company to in-process research and development, as well as the extent of the
disclosure related to such allocations, and to special charges the Company
recorded in connection with these acquisitions. The Company believes that the
comments by the Staff are similar to those made to a number of public companies,
particularly in the technology industry, that have reported acquisitions in the
recent past. The accounting for acquisitions reflected in the Forms 10-K and
10-Q is, the Company believes, consistent with industry practice and was based
upon consultation with its auditors and, with respect to in-process research and
development, with an independent third party appraiser.
Upon receiving further advice from its auditors and other professionals in
reviewing the Forms 10-K and 10-Q and formulating a response to the Staff, the
Company has determined to reduce the $57.7 million in special charges the
Company recorded in the fourth quarter of fiscal 1998 in connection with its
acquisition of the DNPG by approximately $33.2 million. The amount being reduced
is comprised primarily of (i) approximately $13 million related to the buy-out
of certain Digital benefits and employee starting bonuses which amount will be
amortized over the six quarters following the closing of the acquisition, (ii)
approximately $3 million of professional fees which will be allocated to the
purchase price and (iii) approximately $16 million of other estimated
acquisition related obligations, which estimates have subsequently been reduced.
As a result, (i) the Company's loss from operations for the first quarter of
fiscal 1999 has been increased by approximately $8.7 million of acquisition
related expenses from the amount previously disclosed (including as disclosed in
the Company's Form 10-Q for such quarter) and (ii) the Company's income from
operations for the second quarter of fiscal 1999 has been decreased by
approximately $5.0 million of acquisition related expenses from the amount
disclosed in a press release dated September 21, 1998. As a consequence, loss
per share for the first quarter of fiscal 1999 has been increased by
approximately $0.04 to ($0.97) and earnings per share for the second quarter has
been reduced by approximately $0.02 to $0.07. The adjustments described in this
paragraph have been fully incorporated into the financial statements contained
in this report, excluding the Company's February 28, 1998 balance sheet which
does not incorporate these adjustments. The Company expects that this
reallocation of acquisition related expenses will have the effect of increasing
operating expenses between $2 and $4 million in each of its next three quarters
(beginning with the third fiscal quarter). In addition, the Company has
determined to reclassify $13.6 million of special charges associated with the
elimination and phase out of superceded product lines recorded in its
acquisition of Yago Systems, Inc. into its cost of sales for the first quarter
of fiscal 1999. This reclassification will not effect future financial results.
The Company is engaged in communication with the Staff. The Staff may seek
additional adjustments of special charges related to the DNPG or other
acquisitions. Together with the adjustments reflected in this report, any such
additional adjustments may have a material adverse impact upon the Company's
operating expenses and earnings in future periods. In addition, the Staff may
seek reductions in the amount of the purchase prices allocated to in-process
research and development in the DNPG and Yago Systems, Inc. acquisitions. The
Company allocated $325.0 million of the DNPG purchase price and $150.0 million
of the Yago purchase price to in-process research and development. In the event
that the Company is required to reduce the charges for in-process research and
development, these amounts will be allocated to other intangible assets, which
would be amortized against earnings on a straight line basis over approximately
5 - 10 years. Any such allocation may have a material adverse impact upon the
Company's operating expenses and earnings in future periods. The Staff has not
expressed any comment on the Company's accounting for its acquisitions of the
DSLAM division of Ariel Corporation, FlowPoint or NetVantage, but the Staff
could also take exception to the accounting in those acquisitions as well. As in
the DNPG and Yago acquisitions, the Company allocated substantial amounts of the
purchase price in these three recent acquisitions to in-process research and
development. A reallocation of the amounts allocated to in-process research and
development in these three acquisitions could also have a material adverse
impact upon the Company's operating expenses and earnings in future periods. The
Company intends, after reaching a final resolution with the Staff, to amend its
Form 10-K for fiscal 1998 (including the balance sheet contained in this
report), its Form 10-Q for the first quarter of fiscal 1999 and possibly other
filings to reflect the adjustments related to special charges described above
and any additional adjustments required by the Staff and to add additional
textual disclosure concerning these special charges, the in-process research and
development allocations and certain other matters.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) There were no exhibits filed during the quarter ended November 30, 1998.
(b) The Registrant filed two reports on Form 8-K during the quarter for which
this report is filed. On September 9, 1998 the Registrant announced the
appointment of Michael A. Skubisz to Chief Technology Officer. On October 5,
1998 the Registrant announced the sale of 89,921 shares of its common stock
pursuant to Regulation S under the Securities Act of 1933.
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.
CABLETRON SYSTEMS, INC.
(Registrant)
January 14, 1999 /s/ Craig R. Benson
Date Craig R. Benson
Chairman, President,
Chief Executive Officer and
Treasurer
January 14, 1999 /s/ David J. Kirkpatrick
Date David J. Kirkpatrick
Corporate Executive Vice President
of Finance and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit No. Page
11.1 Included in notes to consolidated financial statements --
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>ART 5 FDS FOR 3RD QUARTER
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and the
consolidated statement of cash flows included in the Company's Form 10-Q for the
period ended November 30, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000846909
<NAME> Cabletron Systems, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 129,266
<SECURITIES> 87,019
<RECEIVABLES> 250,369
<ALLOWANCES> 25,066
<INVENTORY> 243,008
<CURRENT-ASSETS> 876,325
<PP&E> 486,028
<DEPRECIATION> 274,530
<TOTAL-ASSETS> 1,531,681
<CURRENT-LIABILITIES> 488,776
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,717
<OTHER-SE> 1,019,151
<TOTAL-LIABILITY-AND-EQUITY> 1,531,681
<SALES> 1,066,206
<TOTAL-REVENUES> 1,066,206
<CGS> 618,156
<TOTAL-COSTS> 618,156
<OTHER-EXPENSES> 712,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,413)
<INCOME-PRETAX> (252,770)
<INCOME-TAX> (21,045)
<INCOME-CONTINUING> (231,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (231,725)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| FDX | https://www.sec.gov/Archives/edgar/data/1048911/0001047469-99-001085.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001047469-99-001085.txt : 19990114
<SEC-HEADER>0001047469-99-001085.hdr.sgml : 19990114
ACCESSION NUMBER: 0001047469-99-001085
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 19981130
FILED AS OF DATE: 19990113
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FDX CORP
CENTRAL INDEX KEY: 0001048911
STANDARD INDUSTRIAL CLASSIFICATION: AIR COURIER SERVICES [4513]
IRS NUMBER: 621721435
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 333-39483
FILM NUMBER: 99505862
BUSINESS ADDRESS:
STREET 1: C/O FDX CORPORATION
STREET 2: 2005 CORPORATE AVENUE
CITY: MEMPHIS
STATE: TN
ZIP: 38132
BUSINESS PHONE: 9013955029
MAIL ADDRESS:
STREET 1: C/O FDX CORPORATION
STREET 2: 2005 CORPORATE AVE
CITY: MEMPHIS
STATE: TN
ZIP: 38132
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1998, OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
COMMISSION FILE NUMBER: 333-39483
FDX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 62-1721435
(State of incorporation) (I.R.S. Employer
Identification No.)
6075 Poplar Avenue, Suite 300
Memphis, Tennessee 38119
(Address of principal (Zip Code)
executive offices)
(901) 369-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding Shares at December 31, 1998
Common Stock, par value $.10 per share 147,963,830
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FDX CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Condensed Consolidated Balance Sheets
November 30, 1998 and May 31, 1998............................................. 3-4
Condensed Consolidated Statements of Income
Three and Six Months Ended November 30, 1998 and 1997.......................... 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended November 30, 1998 and 1997.................................... 6
Notes to Condensed Consolidated Financial Statements................................ 7-11
Review of Condensed Consolidated Financial Statements
by Independent Public Accountants.............................................. 12
Report of Independent Public Accountants............................................ 13
Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................................ 14-23
PART II. OTHER INFORMATION
Legal Proceedings................................................................... 24
Exhibits and Reports on Form 8-K.................................................... 24
EXHIBIT INDEX....................................................................... E-1
</TABLE>
- 2 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 30,
1998 May 31,
(Unaudited) 1998
------------- ---------
<S> <C> <C>
(In thousands)
Current Assets:
Cash and cash equivalents................................... $ 664,443 $ 229,565
Receivables, less allowances of
$67,374,000 and $61,409,000............................... 2,102,834 1,943,423
Spare parts, supplies and fuel.............................. 332,050 364,714
Deferred income taxes....................................... 256,731 232,790
Prepaid expenses and other.................................. 56,245 109,640
----------- -----------
Total current assets.................................... 3,412,303 2,880,132
----------- -----------
Property and Equipment, at Cost.................................. 13,198,930 12,463,874
Less accumulated depreciation and amortization.............. 6,927,917 6,528,824
----------- -----------
Net property and equipment.............................. 6,271,013 5,935,050
----------- -----------
Other Assets:
Goodwill.................................................... 349,954 356,272
Equipment deposits and other assets......................... 520,636 514,606
----------- -----------
Total other assets...................................... 870,590 870,878
----------- -----------
$10,553,906 $ 9,686,060
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
November 30,
1998 May 31,
(Unaudited) 1998
-------------- ----------
<S> <C> <C>
(In thousands)
Current Liabilities:
Short-term borrowings...................................... $ 422,512 $ -
Current portion of long-term debt.......................... 114,087 257,529
Salaries, wages and benefits............................... 678,905 611,750
Accounts payable............................................. 1,099,123 1,145,410
Accrued expenses........................................... 890,939 789,150
----------- ----------
Total current liabilities.............................. 3,205,566 2,803,839
----------- ----------
Long-Term Debt, Less Current Portion............................ 1,362,013 1,385,180
Deferred Income Taxes........................................... 271,766 274,147
Other Liabilities............................................... 1,414,660 1,261,664
Commitments and Contingencies (Notes 7 and 8)
Common Stockholders' Investment:
Common Stock, $.10 par value;
400,000,000 shares authorized, 147,655,638
and 147,410,578 issued................................. 14,766 14,741
Additional paid-in capital................................. 998,979 992,821
Retained earnings ......................................... 3,331,513 2,999,354
Deferred compensation and other............................ (21,934) (18,409)
Cumulative foreign currency
translation adjustments.................................. (23,423) (27,277)
----------- ----------
Total common stockholders' investment.................. 4,299,901 3,961,230
----------- ----------
$10,553,906 $9,686,060
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
--------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues........................................ $ 4,209,237 $3,942,018 $8,291,539 $7,808,509
Operating Expenses:
Salaries and employee benefits.............. 1,756,999 1,614,592 3,505,115 3,251,633
Purchased transportation.................... 397,142 367,979 768,363 696,685
Rentals and landing fees.................... 347,717 336,254 679,228 628,647
Depreciation and amortization............... 252,196 236,713 502,373 466,857
Maintenance and repairs..................... 236,367 210,436 484,077 423,035
Fuel........................................ 153,710 186,330 303,141 365,068
Other....................................... 728,119 700,765 1,428,412 1,383,730
---------- ---------- --------- ---------
3,872,250 3,653,069 7,670,709 7,215,655
---------- ---------- --------- ---------
Operating Income................................. 336,987 288,949 620,830 592,854
Other Income (Expense):
Interest, net............................... (24,853) (32,110) (50,087) (61,778)
Other, net.................................. 270 (120) (2,991) 10,429
---------- ---------- --------- --------
(24,583) (32,230) (53,078) (51,349)
---------- ---------- --------- --------
Income Before Income Taxes....................... 312,404 256,719 567,752 541,505
Provision for Income Taxes....................... 129,648 106,895 235,617 226,904
---------- ---------- --------- ---------
Net Income....................................... $ 182,756 $ 149,824 $ 332,135 $ 314,601
========== ========== ========== =========
Earnings per common share:
Basic....................................... $ 1.24 $ 1.02 $ 2.25 $ 2.15
========== ========== ========== =========
Assuming dilution........................... $ 1.23 $ 1.00 $ 2.23 $ 2.11
========== ========== ========== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FDX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
----------------------------
1998 1997
---------- ---------
<S> <C> <C>
(In thousands)
Net Cash Provided by Operating Activities.................................... $887,115 $671,312
Investing Activities:
Purchases of property and equipment, including
deposits on aircraft of $100,000
and $6,392,000......................................................... (964,163) (824,303)
Proceeds from disposition of property
and equipment:
Sale-leaseback transactions......................................... 80,995 162,900
Reimbursements of A300 deposits..................................... 25,130 106,991
Other dispositions.................................................. 154,087 121,498
Other, net.............................................................. (692) 5,162
-------- --------
Net cash used in investing activities........................................ (704,643) (427,752)
-------- --------
Financing Activities:
Short-term borrowings, net.............................................. 422,512 -
Proceeds from long-term debt issuances.................................. - 267,105
Principal payments on long-term debt.................................... (167,690) (414,952)
Proceeds from stock issuances........................................... 5,753 8,007
Other, net.............................................................. (8,169) (11,337)
-------- --------
Net cash provided by (used in) financing
activities.................................................................. 252,406 (151,177)
-------- --------
Net increase in cash and cash equivalents.................................... 434,878 92,383
Cash and cash equivalents at beginning of period............................. 229,565 161,361
-------- --------
Cash and cash equivalents at end of period................................... $664,443 $253,744
-------- --------
-------- --------
Cash payments for:
Interest (net of capitalized interest).................................. $ 56,798 $ 60,886
-------- --------
-------- --------
Income taxes............................................................ $202,257 $212,053
-------- --------
-------- --------
Non-cash investing and financing activities:
Fair value of assets surrendered under
exchange agreements (with two airlines)............................... $ 26,006 $ 59,718
Fair value of assets acquired under
exchange agreements................................................... 14,300 47,606
-------- --------
Fair value of assets surrendered in excess
of assets acquired.................................................... $ 11,706 $ 12,112
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FDX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BUSINESS COMBINATION AND BASIS OF PRESENTATION
On January 27, 1998, Federal Express Corporation ("FedEx") and Caliber
System, Inc. ("Caliber") became wholly-owned subsidiaries of a newly-formed
holding company, FDX Corporation (the "Company"). In this transaction, which was
accounted for as a pooling of interests, Caliber shareholders received 0.8
shares of the Company's common stock for each share of Caliber common stock.
Each share of FedEx common stock was automatically converted into one share of
the Company's common stock. There were approximately 146,800,000 of $0.10 par
value shares so issued or converted. The accompanying financial statements have
been restated to include the financial position and results of operations for
both FedEx and Caliber for all periods presented.
The Company operates on four, three-month quarters with a fiscal year
ending May 31. Prior to the current fiscal year, Caliber operated on a 13
four-week period calendar ending December 31, with 12 weeks in each of the
first three quarters and 16 weeks in the fourth quarter. FedEx's fiscal year
ending May 31 consisted of four, three-month quarters. The Company's
consolidated results of operations for the quarter ended November 30, 1997
comprise Caliber's prior year period from August 17, 1997 to November 8, 1997
consolidated with FedEx's quarter ended November 30, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information, the
instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended May 31, 1998. Accordingly, significant accounting policies
and other disclosures normally provided have been omitted since such items are
disclosed therein.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the consolidated financial position of the Company as of
November 30, 1998 and the consolidated results of its operations for the
three and six-month periods ended November 30, 1998 and 1997, and its
consolidated cash flows for the six-month periods ended November 30, 1998 and
1997. Operating results for the three and six-month periods ended November
30, 1998 are not necessarily indicative of the results that may be expected
for the year ending May 31, 1999.
Effective June 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement
requires the Company to include within its financial statements information
on comprehensive income, which is defined as all activity impacting equity
from non-owner sources. For the Company, comprehensive income includes net
income and foreign currency translation adjustments. Total comprehensive
income, net of taxes, for the three months ended November 30, 1998 and 1997
was $200,055,000 and $143,165,000, respectively. For the six months ended
November 30, 1998 and 1997, total comprehensive income, net of taxes, was
$335,989,000 and $304,040,000, respectively.
Effective June 1, 1998, the Company also adopted Statement of Position
("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on accounting for
these costs, requiring certain of them to be capitalized. For the three and
six months ended November 30, 1998, incremental costs of $9,200,000 and
$16,400,000, respectively, were capitalized.
- 7 -
<PAGE>
Certain prior period amounts have been reclassified to conform to the
current presentation.
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
November 30,
1998 May 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
(In thousands)
Unsecured notes payable, interest rates of
7.60% to 10.57%, due through 2098.............................. $1,087,974 $1,253,770
Unsecured sinking fund debentures, interest
rate of 9.63%, due through 2020................................ 98,564 98,529
Capital lease obligations and tax exempt bonds,
interest rates of 5.35% to 7.88%,
due through 2017............................................... 254,032 253,425
Less bond reserves............................................. 9,024 9,024
---------- ----------
245,008 244,401
Other, interest rates of 9.68% to 9.98%.......................... 44,554 46,009
---------- ----------
1,476,100 1,642,709
Less current portion........................................... 114,087 257,529
---------- ----------
$1,362,013 $1,385,180
---------- ----------
---------- ----------
</TABLE>
(4) OTHER FINANCING ARRANGEMENTS
At November 30, 1998, short-term borrowings comprise commercial paper, net
of related discounts. Interest rates on these borrowings approximate 6.2%. As in
the past, the Company may from time to time refinance its commercial paper
borrowings with the facilities described below.
During November, the Company entered into an agreement to obtain a business
interruption facility as one component of contingency plans implemented in
response to a threatened strike by the Fedex Pilots Association ("FPA"). This
agreement became effective December 10, 1998 and provides for a commitment of
$1,000,000,000 through December 9, 1999. The facility, which bears interest at
LIBOR plus 200 basis points, is cancelable at any time by the Company or
immediately upon ratification of a collective bargaining agreement with the FPA.
The facility contains various covenants including restrictions on additional
indebtedness and potential collateralization of certain assets of the Company
and its subsidiaries if the Company's debt rating ceases to be investment grade.
In connection with entering into the business interruption facility
described above, the Company's existing $1,000,000,000 revolving credit
agreement with domestic and foreign banks was amended to allow for the
business interruption facility. Concurrently, the Company extended a portion
of the agreement. The revolving credit agreement comprises two parts. The
first part provides for a commitment of $800,000,000 through January 27,
2003. The second part, which expires initially on January 14, 1999 and was
amended to provide a one-year extension through January 14, 2000, provides
for a 364-day commitment of $200,000,000. Interest rates on borrowings under
this agreement are generally determined by maturities selected and prevailing
market conditions. Commercial paper borrowings are backed by unused
commitments under this revolving credit agreement and reduce the amount
available under the agreement. At November 30, 1998, $572,360,000 of the
commitment amount was available.
- 8 -
<PAGE>
(5) PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, at its
discretion, to issue up to 4,000,000 shares of Series Preferred Stock. The stock
is issuable in series which may vary as to certain rights and preferences and
has no par value. As of November 30, 1998, none of these shares had been issued.
(6) COMPUTATION OF EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for the three and
six-month periods ended November 30, 1998 and 1997 was as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to common
stockholders.................................. $182,756 $149,824 $332,135 $314,601
======== ======== ======== ========
Average shares of common stock
outstanding................................... 147,554 146,475 147,494 146,406
======== ======== ======== ========
Basic earnings per share......................... $ 1.24 $ 1.02 $ 2.25 $ 2.15
======== ======== ======== ========
Average shares of common stock
outstanding................................... 147,554 146,475 147,494 146,406
Common equivalent shares:
Assumed exercise of outstanding
dilutive options............................. 5,374 6,895 5,866 6,947
Less shares repurchased from
proceeds of assumed exercise
of options................................... (4,002) (4,092) (4,211) (4,359)
-------- -------- -------- --------
Average common and common equivalent shares...... 148,926 149,278 149,149 148,994
======== ======== ======== ========
Diluted earnings per share....................... $ 1.23 $ 1.00 $ 2.23 $ 2.11
======== ======== ======== ========
</TABLE>
(7) COMMITMENTS
As of November 30, 1998, the Company's purchase commitments for the
remainder of 1999 and annually thereafter under various contracts are as follows
(in thousands):
<TABLE>
<CAPTION>
Aircraft-
Aircraft Related(1) Other(2) Total
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
1999 (remainder) $ 77,600 $273,100 $312,000 $ 662,700
2000 641,800 565,400 177,100 1,384,300
2001 269,800 509,000 69,500 848,300
2002 240,600 156,200 18,100 414,900
2003 457,400 156,600 - 614,000
</TABLE>
(1) Primarily aircraft modifications, rotables and spare parts and engines.
(2) Vehicles, facilities, computers and other equipment.
FedEx is committed to purchase six Airbus A300s, 33 MD11s and 50 Ayres ALM
200s to be delivered through 2007. Deposits and progress payments of $68,594,000
have been made toward these purchases.
- 9 -
<PAGE>
FedEx has entered into agreements with two airlines to acquire 53 DC10
aircraft, spare parts, aircraft engines and other equipment, and maintenance
services in exchange for a combination of aircraft engine noise reduction kits
and cash. Delivery of these aircraft began in 1997 and will continue through
2001. Additionally, these airlines may exercise put options through December 31,
2003, requiring FedEx to purchase up to 29 additional DC10s along with
additional aircraft engines and equipment.
During the six-month period ended November 30, 1998, FedEx acquired six
Airbus A300s under operating leases. These aircraft were included as purchase
commitments as of May 31, 1998. At the time of delivery, FedEx sold its rights
to purchase these aircraft to third parties who reimbursed FedEx for its
deposits on the aircraft and paid additional consideration. FedEx then entered
into operating leases with each of the third parties who purchased the aircraft
from the manufacturer.
Lease commitments added since May 31, 1998 for the six Airbus A300s and one
MD11 purchased in the first quarter of 1999 and subsequently sold and leased
back, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 19,800
2000 37,100
2001 36,800
2002 38,400
2003 38,200
Thereafter 788,700
</TABLE>
(8) LEGAL PROCEEDINGS
Customers of FedEx have filed four separate class-action lawsuits against
FedEx generally alleging that FedEx has breached its contract with the
plaintiffs in transporting packages shipped by them. These lawsuits allege that
FedEx continued to collect a 6.25% federal excise tax on the transportation of
property shipped by air after the tax expired on December 31, 1995, until it was
reinstated in August 1996. The plaintiffs seek certification as a class action,
damages, an injunction to enjoin FedEx from continuing to collect the excise tax
referred to above, and an award of attorneys' fees and costs. Three of those
cases were consolidated in Minnesota Federal District Court. That court stayed
the consolidated cases in favor of a case filed in Circuit Court of Greene
County, Alabama. The stay was lifted in July 1998. The complaint in the Alabama
case also alleges that FedEx continued to collect the excise tax on the
transportation of property shipped by air after the tax expired again on
December 31, 1996.
A fifth case, filed in the Supreme Court of New York, New York County,
containing allegations and requests for relief substantially similar to the
other four cases was dismissed with prejudice on FedEx's motion on October 7,
1997. The Court found that there was no breach of contract and that the other
causes of action were preempted by federal law. The plaintiffs have appealed.
This case originally alleged that FedEx continued to collect the excise tax on
the transportation of property shipped by air after the tax expired on December
31, 1996. The New York complaint was later amended to cover the first expiration
period of the tax (December 31, 1995 through August 27, 1996) covered in the
original Alabama complaint.
The air transportation excise tax expired on December 31, 1995, was
reenacted by Congress effective August 27, 1996, and expired again on December
31, 1996. The excise tax was then reenacted by Congress effective March 7, 1997.
The expiration of the tax relieved FedEx of its obligation to pay the tax during
the periods of expiration. The Taxpayer Relief Act of 1997, signed by President
Clinton in August 1997, extended the tax for 10 years through September 30,
2007.
- 10 -
<PAGE>
FedEx intends to vigorously defend itself in these cases. No amount has
been reserved for these contingencies.
The Company and its subsidiaries are subject to other legal proceedings and
claims which arise in the ordinary course of their business. In the opinion of
management, the aggregate liability, if any, with respect to these other actions
will not materially adversely affect the financial position or results of
operations of the Company.
- 11 -
<PAGE>
REVIEW OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, has performed a review
of the condensed consolidated balance sheet of the Company as of November 30,
1998, and the related condensed consolidated statements of income for the three
and six-month periods ended November 30, 1998 and 1997 and the condensed
consolidated statements of cash flows for the six-month periods ended November
30, 1998 and 1997, included herein, as indicated in their report thereon
included on page 13.
- 12 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of FDX Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
FDX Corporation and subsidiaries as of November 30, 1998 and the related
condensed consolidated statements of income for the three and six-month periods
ended November 30, 1998 and 1997 and the condensed consolidated statements of
cash flows for the six-month periods ended November 30, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of FDX Corporation and subsidiaries as
of May 31, 1998 and the related consolidated statements of income, changes in
common stockholders' investment and cash flows for the year then ended. In our
report dated July 8, 1998, we expressed an unqualified opinion on those
financial statements, which are not presented herein. In our opinion, the
accompanying condensed consolidated balance sheet of FDX Corporation and
subsidiaries as of May 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Memphis, Tennessee
December 16, 1998
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the second quarter ended November 30, 1998, the Company recorded
consolidated net income of $183 million ($1.23 per share, assuming dilution) on
revenues of $4.2 billion compared with net income of $150 million ($1.00 per
share, assuming dilution) on revenues of $3.9 billion for the same period in the
prior year. For the six months ended November 30, 1998, the Company recorded
consolidated net income of $332 million ($2.23 per share, assuming dilution) on
revenues of $8.3 billion compared with net income of $315 million ($2.11 per
share, assuming dilution) on revenues of $7.8 billion for the same period in the
prior year. These results reflect improved domestic operations at Federal
Express Corporation ("FedEx"), RPS, Inc. ("RPS") and Viking Freight,
Inc.("Viking").
The prior year's year-to-date results of operations included the impact of
the Teamsters strike against United Parcel Service ("UPS") in August 1997.
During the 12 operating days of the strike, FedEx delivered approximately
800,000 additional U.S. domestic express packages per day, and RPS delivered
approximately 300,000 additional packages per day. The Company analytically
calculated that the volume not retained at the end of the first quarter of 1998
contributed approximately $170 million in revenues and approximately $.25
additional earnings per share to that quarter.
Revenues
The following table shows a comparison of revenues (in millions):
<TABLE>
<CAPTION>
Second Quarter YTD Period
Ended Ended
November 30, November 30,
------------------- Percent ------------------- Percent
1998 1997 Change 1998 1997 Change
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
FedEx:
U.S. domestic express......................... $2,442 $2,266 + 8 $4,865 $4,601 + 6
International Priority (IP)................... 762 699 + 9 1,487 1,354 +10
International Express Freight
(IXF) and Airport-to-Airport
(ATA)..................................... 139 166 -17 272 317 -14
Charter, Logistics services
and other................................. 139 168 -17 275 324 -15
------ ------ ------ ------
3,482 3,299 + 6 6,899 6,596 + 5
----- ------ ------ ------
RPS .......................................... 481 420 +14 921 778 +18
Viking .......................................... 94 88 + 7 190 190 --
Other .......................................... 152 135 +13 282 245 +15
------ ------ ------ ------
$4,209 $3,942 + 7 $8,292 $7,809 + 6
====== ====== ====== ======
</TABLE>
- 14 -
<PAGE>
The following table shows a comparison of selected operating statistics
(packages, pounds and shipments in thousands):
<TABLE>
<CAPTION>
Second Quarter YTD Period
Ended Ended
November 30, November 30,
-------------------- Percent -------------------- Percent
1998 1997 Change 1998 1997 Change
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
FedEx:
U.S. domestic express:
Average daily packages.................... 2,860 2,732 + 5 2,791 2,712 + 3
Revenue per package....................... $13.55 $13.17 + 3 $13.51 $13.36 + 1
IP:
Average daily packages.................... 285 265 + 8 275 256 + 8
Revenue per package....................... $42.45 $41.89 + 1 $41.96 $41.73 + 1
IXF/ATA:
Average daily pounds...................... 2,719 2,984 - 9 2,669 2,816 - 5
Revenue per pound......................... $ .81 $ .88 - 8 $ .79 $ .89 -11
Operating weekdays............................ 63 63 129 127
RPS:
Average daily packages.................... 1,464 1,410 + 4 1,386 1,322 + 5
Revenue per package....................... $ 5.30 $ 5.05 + 5 $ 5.28 $ 5.03 + 5
Operating weekdays............................ 62 59 126 117
Viking:
Shipments per day......................... 13.1 12.9 + 1 12.9 14.9 -14
Revenue per hundred weight................ $ 9.76 $ 9.52 + 3 $ 9.70 $ 9.06 + 7
Operating weekdays............................ 62 59 127 117
</TABLE>
FedEx's U.S. domestic package revenue rose as both package volume and
revenue per package (yield) increased for the quarter and year-to-date periods.
During these periods, FedEx experienced increased volume of its higher-priced,
overnight services and increased average weight per package. Both of these
factors contributed to the rise in U.S. domestic yield for the quarter and
six-month periods. A threatened strike by the Fedex Pilots Association ("FPA")
in late November had a nominal negative effect on U.S. domestic package volume
growth. The year-to-date results for the prior year included the additional
volume during the UPS strike, which was primarily in the deferred service
category and generally at list price. Excluding the revenue and volume
associated with the UPS strike and the proceeds from a temporary fuel surcharge
in the prior year, U.S. domestic average daily package volume and yield
increased 5% and 3% year over year, respectively, for the six-month period.
Management expects total U.S. domestic express package volume in 1999 to
continue to grow at a lower rate than that experienced in the past two fiscal
years. Management believes that U.S. domestic yield should remain stable or
increase slightly, year over year, during the remainder of 1999 due to continued
effects of yield-management actions and FedEx's improved ability to capture
incremental revenue due to it based upon certain package characteristics, such
as weight and package dimensions. Actual results may vary depending on the
impact of domestic economic conditions, competitive pricing changes, customer
responses to yield-management initiatives and changing customer demand patterns.
FedEx's IP revenue increased 9% and 10% for the quarter and year-to-date
periods, respectively, as average daily packages and yields increased during
- 15 -
<PAGE>
these periods. FedEx's IP volume growth rates continue to lag behind those
experienced in prior years primarily due to weakness in Asian markets,
especially in U.S. outbound traffic to that region. IP yields increased 1% for
the quarter and year-to-date periods as FedEx initiated limited pricing changes
to offset various international currency fluctuations. Management expects IP
growth rates to be constrained during the remainder of the fiscal year,
primarily due to continuing international economic weakness. Management expects
IP yields to remain constant or improve slightly as a result of currency-related
pricing changes. Actual IP results will depend on international economic
conditions, actions by FedEx's competitors and regulatory conditions for
international aviation rights.
FedEx's airfreight (IXF/ATA) volume, revenue and yield declined year over
year for the quarter and six-month periods. IXF volume (a space-confirmed,
time-definite service) decreased 2% for the quarter and was flat year-to-date,
but yield declined 9% and 11% for the same periods. ATA volume (a lower-priced,
space-available service) decreased 23% and 16% for the quarter and year-to-date
periods, respectively, with yield lower by 13% and 14% for the same periods.
Management expects airfreight volume and yield to continue to decline, year over
year, through the balance of 1999. Due to the impact of difficult international
economic conditions on IP and airfreight traffic, management has adjusted
FedEx's expansion and aircraft deployment plans accordingly. Actual airfreight
results will depend on international economic conditions, actions by FedEx's
competitors, including capacity fluctuations, and regulatory conditions for
international aviation rights.
RPS's year-over-year revenue growth of 14% and 18% for the quarter and
year-to-date periods reflected three and nine additional operating days in these
current year periods. For the second quarter and six-month period ending
November 30, 1998, RPS's revenue increased 9% and 13% year over year after
adjusting for the additional operating days and the incremental revenue
associated with the UPS strike. This revenue growth is a result of 4% and 7%
increases in average daily volume, after adjusting for the prior year's
strike-related volume, and a 5% increase in yields for both periods. Yields
improved primarily as a result of various yield-management actions, including a
3.7% rate increase in February 1998.
RPS's year-over-year comparison for the third quarter will be impacted by a
difference in the number of operating weekdays in these periods. The current
year's third quarter will have 62 operating weekdays; whereas, the prior year's
third quarter (November 9, 1997 to February 28, 1998) had 75 operating weekdays.
Revenue increased 2% for the quarter and decreased 8% for the year-to-date
period on a daily basis considering three and ten additional operating days in
the current year for these periods. Viking's prior year year-to-date revenues
and shipment statistics reflect the operations of Central Freight Lines Inc.,
which was sold at the end of June 1997 in conjunction with Viking's
restructuring in March 1997. Revenue per hundredweight increased 3% and 7% for
the quarter and six months ended November 30, 1998, respectively.
Operating Expenses
The increase in salaries and employee benefits for the quarter and
year-to-date periods was primarily driven by volume-related increases at FedEx.
Salaries and wages, as well as group insurance, increased for these periods
primarily due to an increase in the number of employees.
- 16 -
<PAGE>
The increases in purchased transportation for the quarter and year-to-date
periods were primarily related to volume growth at RPS.
A 3% and 8% increase in rentals and landing fees for the quarter and
year-to-date periods, respectively, was primarily due to additional facilities
being leased by FedEx. The current year's expense includes additional building
leases at the Indianapolis and Alliance-Fort Worth hubs. In the second quarter,
supplemental aircraft lease and equipment lease expense declined year over year.
In the prior year's second quarter, supplemental leased aircraft had been added
to meet the demands of increased package volume during peak season and to
replace an MD11 destroyed in July 1997, whereas in the current quarter, leased
fleet aircraft were available for capacity needs. As of November 30, 1998, FedEx
had 93 wide-bodied aircraft under operating lease compared with 84 as of
November 30, 1997. During the six-month period, the additional leased fleet
aircraft contributed to the rise in rental and landing fees. The prior year's
first quarter expense was favorably impacted by approximately $9 million of a
$17 million net gain resulting from the destruction of a leased MD11 aircraft in
an accident in July 1997 (described below in Other Income and Expense).
Management expects year-over-year increases in lease expense to continue as
FedEx enters into additional aircraft rental agreements during 1999 and
thereafter. FedEx expects to be able to convert its A300 purchase commitments
into direct operating leases. (See Note 7 of Notes to Condensed Consolidated
Financial Statements.)
Maintenance and repairs expense increased 12% and 14% for the quarter and
year-to-date periods, respectively, primarily due to higher year-over-year
engine maintenance expense on MD11 and B727 aircraft. In the first quarter of
1998, an accrual for the disposition of leased B747 aircraft was increased $9
million, with the majority of this increase recorded as maintenance and repairs
expense. Management believes that maintenance and repairs expense will continue
a long-term trend of year-over-year increases for the foreseeable future due to
the increasing size and age of FedEx's fleet and the variety of aircraft types.
Fuel expense fell 18% and 17% for the quarter and six-month periods,
respectively, primarily as a result of declines in jet fuel price per gallon
(22% and 23%, respectively), partially offset by increases in jet fuel gallons
consumed (2% and 6%, respectively). The prior year's fuel expense included
payments made by FedEx under contracts which were designed to limit FedEx's
exposure to fluctuations in jet fuel prices. Effective August 1, 1997, FedEx
lifted its temporary 2% fuel surcharge that had been in place on certain U.S.
domestic and U.S. export shipments. This surcharge was implemented on February
3, 1997 to mitigate the impact of rising jet fuel prices.
Other operating expense increased 4% and 3% for the quarter and
year-to-date periods, respectively. Other operating expense includes temporary
labor and other outside service contracts, communications expense and the cost
of sales of engine noise reduction kits.
On October 30, 1998, contract negotiations between FedEx and the FPA
were discontinued. In November, the FPA began actively encouraging its
members to decline all overtime work and issued ballots seeking strike
authorization. To avoid service interruptions related to a threatened strike,
the Company and FedEx began strike contingency planning including entering
into agreements for additional third party air and ground transportation and
establishing special financing arrangements. Subsequently, the FPA agreed to
end all job actions for 60 days and negotiations resumed. Such negotiations
have resulted in a tentative agreement subject to ratification by the FPA
membership in February 1999. Costs associated with these contingency plans,
including contracts for supplemental airlift and ground transportation, are
expected to reduce pretax earnings between $110 million to $120 million,
adversely affecting FedEx's earnings for the second half of 1999. These costs
did not materially affect the second quarter.
- 17 -
<PAGE>
Operating Income
The Company's consolidated operating income increased 17% and 5% for the
quarter and year-to-date periods, respectively, from the prior year. Excluding
the impact of the UPS strike in the prior year, operating income increased 16%
for the year-to-date period due to improved results domestically at FedEx, RPS
and Viking.
FedEx's U.S. domestic operating income was $217 million and $422 million
for the quarter and year-to-date periods ended November 30, 1998. Prior year
amounts were $167 million and $408 million for these same periods. The prior
year's first quarter operating income included approximately $50 million related
to the UPS strike as well as proceeds from a 2% temporary fuel surcharge through
August 1, 1997. Excluding these prior year factors, operating income increased
30% and 26% for the quarter and year-to-date periods. These increases were due
to yield increases (2.9% and 2.6% for the quarter and year-to-date periods,
respectively) exceeding increases in cost per package (0.8% for the quarter and
year-to-date periods) and package volume growth of 5% for both of these periods.
Cost per package rose only slightly for the periods primarily due to lower jet
fuel prices, the effect of cost controls and increased productivity through
higher service levels. Sales of engine noise reduction kits contributed $28
million and $57 million to U.S. domestic operating income in the second quarter
and year-to-date periods ended November 30, 1998, compared with $34 million and
$71 million in the same periods in the prior year. FedEx's U.S. domestic
operating margins were 8.6% and 8.4% for the quarter and six-month periods,
respectively, compared with 7.1% and 8.5% (7.1% and 7.2%, excluding the
aforementioned prior year items) for the same periods in the prior year.
FedEx's international operating income was $34 million and $48 million for
the quarter and year-to-date periods, respectively, compared with $46 million
and $70 million for the same periods of the prior year. International operating
results declined as a result of slower IP volume growth and declining airfreight
volumes and yields at a time of year-over-year capacity increases. Fixed costs
associated with the increased capacity, including salaries and employee benefits
and aircraft lease expense, also negatively impacted international results, but
were partially offset by lower fuel costs. FedEx's international operating
margins were 3.5% and 2.5% for the quarter and year-to-date periods,
respectively, compared with 4.9% and 3.8% for the same periods in the prior
year.
RPS reported operating income of $61 million and $110 million for the
second quarter and first six months of 1999, respectively, compared with $54
million and $89 million for these periods of the prior year. The current quarter
and year-to-date periods have three and nine additional operating days,
respectively, as compared to the same periods of the prior year. The prior
year's results include approximately $6 million of operating income related to
the UPS strike. RPS achieved operating margins of 12.7% and 11.9% for the
quarter and year-to-date periods, respectively, compared with 12.9% and 11.4%
for the same periods in the prior year due to continued package volume growth
and yield-management actions.
Viking's operating income for the quarter and year-to-date periods was $7
million and $14 million, respectively, compared with $6 million and $1 million
in the prior year. Prior year results include the operations of divisions that
were subsequently sold or shut down. Viking's operating margins were 7.1% and
7.4% for the quarter and year-to-date periods, respectively, compared with 6.8%
and 0.5% for the same periods in the prior year.
Other Income and Expense
Net interest expense declined 23% and 19% for the quarter and year-to-date
periods, respectively, due to lower average debt levels at the Company.
- 18 -
<PAGE>
Other, net for the prior year's first quarter included a gain from an
insurance settlement for an MD11 aircraft destroyed in an accident in July 1997.
At that time, FedEx realized a net gain of $17 million from the insurance
settlement and the release from certain related liabilities on the leased
aircraft. Approximately $8 million of this gain was recorded in non-operating
income.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents totaled $664 million at November 30, 1998, an
increase of $435 million since May 31, 1998, reflecting additional short-term
borrowings in anticipation of potential job actions by the FPA. Cash provided
from operations for the first six months of 1999 was $887 million compared with
$671 million for the same period in the prior year. The Company currently has a
$1.0 billion bank revolving credit facility (of which $572 million was available
at November 30, 1998) that is generally used to finance temporary operating cash
requirements and to provide support for the issuance of commercial paper.
In December 1998, the Company established a $1.0 billion business
interruption facility with a 364-day maturity to fund, among other things,
working capital needs and contingency plan expenses in the event of an actual
or threatened business interruption due to labor issues with the FPA. In
addition, the Company amended its existing $1.0 billion revolving credit
agreement to allow for this business interruption facility. Concurrently, the
Company extended part of the agreement, previously expiring in January 1999,
to January 2000. See Note 4 of Notes to Condensed Consolidated Financial
Statements for additional information about the Company's financing
arrangements.
Management believes that cash flow from operations, the commercial paper
program, the bank revolving credit facility and the business interruption
facility will adequately meet the Company's working capital needs for the
foreseeable future.
Capital Resources
The Company's operations are capital intensive, characterized by
significant investments in aircraft, vehicles, computer and telecommunication
equipment, package handling facilities and sort equipment. The amount and timing
of capital additions depend on various factors including global economic
conditions, volume growth, new or enhanced services, geographical expansion of
services, competition, availability of satisfactory financing and actions of
regulatory authorities.
Capital expenditures for the first six months of 1999 totaled $964 million
and included one MD11, aircraft modifications, vehicles and ground support
equipment and customer automation and computer equipment. In comparison, prior
year expenditures totaled $824 million and included two MD11's, aircraft
modifications, vehicles and ground support equipment and customer automation and
computer equipment. An MD11 purchased in June 1998 was sold and leased back in
September 1998. In June and September 1997, two MD11's purchased in February and
June 1997 were sold and leased back. For information on the Company's purchase
commitments, see Note 7 of Notes to Condensed Consolidated Financial Statements.
Proceeds from the disposition of property and equipment for the
year-to-date period ended November 30, 1997 included proceeds from the sale of
Viking's southwestern division and other assets in conjunction with the
restructuring of Viking's operations.
- 19 -
<PAGE>
Management believes that the capital resources available to the Company
provide flexibility to access the most efficient markets for financing capital
acquisitions, including aircraft, and are adequate for the Company's future
capital needs.
Market Risk Sensitive Instruments and Positions
There have been no material changes in the Company's market risk sensitive
instruments and positions since May 31, 1998. A description of these instruments
and positions is disclosed in the Company's Annual Report on Form 10-K for the
year ended May 31, 1998.
Euro Currency Conversion
On January 1, 1999, the euro became the common legal currency of 11 of the
15 member countries of the European Union. On that date, the participating
countries fixed conversion rates between their existing sovereign currencies
("legacy currencies") and the euro. On January 4, 1999, the euro began trading
on currency exchanges and became available for non-cash transactions. The legacy
currencies will remain legal tender through December 31, 2001. Beginning January
1, 2002, euro-denominated bills and coins will be introduced, and by July 1,
2002, legacy currencies will no longer be legal tender.
The Company established euro task forces to develop and implement euro
conversion plans. The work of the task forces in preparing for the introduction
of the euro and the phasing out of the various legacy currencies includes
numerous facets such as converting information technology systems, adapting
billing and payment systems and modifying processes for preparing financial
reports and records. Costs associated with the euro project are being expensed
as incurred and are being funded entirely by internal cash flows.
Since January 1, 1999, the Company's subsidiaries have been prepared to
quote rates to customers, generate billings and accept payments in both euros
and legacy currencies. Based on the work of the Company's euro task forces to
date, the Company believes that the introduction of the euro, any price
transparency brought about by its introduction and the phasing out of the legacy
currencies are not likely to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
YEAR 2000 COMPLIANCE
Introduction
The Company's operating subsidiaries rely heavily on sophisticated
information technology ("IT") for their business operations. For example, FedEx
maintains electronic connections with more than a million customers via its
proprietary products and technologies. The Company's Year 2000 ("Y2K") computer
compliance issues are, therefore, broad and complex. The FedEx Y2K Project
Office, which was established in 1996, coordinates and supports FedEx's Y2K
compliance effort. The Company has engaged a major international consulting firm
to assist its subsidiaries in their Y2K program management.
The Company's Y2K compliance efforts are focused on business-critical
items. Hardware, software, systems, technologies and applications are considered
"business-critical" if a failure would either have a material adverse impact on
the Company's business, financial condition or results of operations or involve
a safety risk to employees or customers.
- 20 -
<PAGE>
State of Readiness
Generally, the Company believes that FedEx's Y2K compliance effort is on
schedule. The Company's other operating subsidiaries have accelerated their Y2K
programs, and they are now substantially on schedule.
FedEx's compliance effort for all business-critical infrastructure and
applications software (collectively, "IT Systems") is 95% complete. FedEx has
inventoried all IT Systems. Assessment/design (researching the compliance status
and determining the impact of, and renovation requirements for, IT Systems) and
renovation (making IT Systems compliant) are substantially complete. Testing,
which involves validating compliance, is approximately 95% complete. Within IT
Systems, certification of application software, which involves FedEx's
independent, internal review to verify that the appropriate testing process has
occurred, was approximately 95% complete as of December 31, 1998. Certification
of the operating system software and program product software, (collectively,
"infrastructure") at FedEx is 55% complete. FedEx's IT Systems compliance effort
is targeted to be 100% complete by September 1, 1999.
The Company's other operating subsidiaries have completed the inventory and
assessment phases relating to business-critical IT Systems. The remaining phases
relating to IT Systems are underway. The IT Systems compliance effort of the
Company's other operating subsidiaries is targeted to be 100% complete by
November 1, 1999.
The inventory and assessment phases of FedEx's Y2K program relating to
business-critical purchased hardware and software, customized software
applications, facilities/equipment and other embedded chip systems
(collectively, "Non-IT Systems") are 100% complete. The remaining phases
relating to FedEx's Non-IT Systems are targeted for completion by May 31,
1999. FedEx is 45% complete with the remediation effort on Non-IT Systems.
The inventory and assessment phases relating to the Non-IT Systems of the
Company's other operating subsidiaries are targeted for completion by July
31, 1999, with the remaining phases targeted to be complete by November 1,
1999.
Y2K Interfaces with Material Third Parties
FedEx and the Company's other operating subsidiaries are making concerted
efforts to understand the Y2K status of third parties (including, among others,
domestic and international government agencies, customs bureaus, U.S. and
international airports and air traffic control systems, vendors and suppliers)
whose Y2K non-compliance could either have a material adverse effect on the
Company's business, financial condition or results of operations or involve a
safety risk to employees or customers. All of the Company's operating
subsidiaries are actively encouraging Y2K compliance on the part of third
parties and are developing contingency plans in the event of their Y2K
non-compliance.
In conjunction with the International Air Transport Association (IATA) and
the Air Transport Association of America (ATA), FedEx is involved in a global
and industry-wide effort to understand the Y2K compliance status of airports,
air traffic systems, customs clearance and other U.S. and international
government agencies, and common vendors and suppliers.
FedEx's vendor and product compliance program includes the following tasks:
assessing vendor compliance status; product testing; tracking vendor compliance
progress; developing contingency plans, including identifying alternate
suppliers, as needed; addressing contract language; replacing, renovating or
upgrading parts; requesting presentations from vendors or making on-site
assessments, as required; and sending questionnaires. Failure to respond to
these questionnaires results in further mail or phone correspondence,
contingency plan development or vendor/product replacement. The Company's other
operating subsidiaries have begun to develop a supply chain dependency model to
assess the risk levels associated with the Y2K non-compliance of material third
parties.
- 21 -
<PAGE>
Testing
FedEx's Y2K testing effort includes functional testing of remedial
measures and regression testing to validate that changes have not altered
existing functionality. FedEx's test plans include sections which define the
scope of the testing effort, roles and responsibilities of test participants,
the test approach planned, software, hardware and data requirements, and test
environments/techniques to be used, as well as other sections defining the
test effort. System functionality for future date accuracy is being verified
and documented.
A separate homogenous Y2K mainframe environment has been created to test
all operating system software and program product software. The Y2K
environment is designed to accomplish future date "end to end" testing of the
larger applications and to validate interface communications between
applications. FedEx uses an independent, internal process to verify that the
appropriate testing process has occurred.
Costs to Address Y2K Compliance
Since 1996, the Company has incurred approximately $70 million in
expense on Y2K compliance which includes internal and external
software/hardware analysis, repair and related costs. The Company expects
that its Y2K compliance efforts will require additional total costs of
approximately $80 million, including capital expenditures of $14 million. In
order to provide a consistent, objective method for identifying financial
resources consumed for Y2K efforts, the Company classifies expenditures as
Y2K costs for reporting purposes if they remedy only Y2K risks and would
otherwise be unnecessary in the normal course of business.
The Company's Y2K compliance effort is being funded entirely by internal
cash flows. For the fiscal year ending May 31, 1999, Y2K expenditures are
expected to represent less than 10% of the Company's total IT expense budget.
Although there are opportunity costs to the Company's Y2K compliance effort,
management believes that no significant information technology projects have
been deferred due to this work.
Contingency Planning and Risks
FedEx has begun developing contingency plans for Y2K non-compliance.
These plans will include identifying alternate suppliers, vendors, procedures
and operational sites, generating supply/equipment lists, conducting staff
training and developing communication plans. Any significant incremental
costs associated with these plans will not become known until these plans are
fully developed. A FedEx-wide contingency planning task force has been formed
to ensure appropriate coverage and coordination of these plans and to
integrate these with FedEx's existing contingency plans. FedEx's goal for
completion of key Y2K contingency plans is January 31, 1999, with all other
Y2K contingency plans targeted for completion by September 30, 1999. FedEx
plans to establish a contingency command and control center by April 30, 1999
to address any issues caused by Y2K non-compliance, with key personnel on
call beginning in November 1999. The Company's other operating subsidiaries
are beginning to formulate their contingency plans for Y2K non-compliance.
Their goal for completion of key Y2K contingency plans is May 31, 1999.
Due to the general uncertainty inherent in the Company's Y2K compliance,
mainly resulting from the Company's dependence upon the Y2K compliance of the
government agencies, third-party suppliers, vendors and customers with whom
the Company deals, the Company is unable to determine at this time the most
reasonably likely worst case scenario. However, the Company believes that the
greatest Y2K exposure exists in the following areas: lack of readiness of
airports, air traffic and customs systems and the global utilities and
telecommunications infrastructure; lack of compliance and business continuance
- 22 -
<PAGE>
capabilities of suppliers, vendors, customers and independent contractors; and
lack of readiness of third party pick-up and delivery providers on whom FedEx
relies in some offshore locations. The Company believes, however, that the Y2K
programs in place at each of its operating subsidiaries, including related
contingency planning, should lessen significantly the possibility of substantial
interruptions of normal operations. While costs related to the lack of Y2K
compliance of third parties, business interruptions, litigation and other
liabilities related to Y2K issues could materially and adversely affect the
Company's business, results of operations and financial condition, the Company
expects its Y2K compliance efforts to reduce significantly the Company's level
of uncertainty about the impact of Y2K issues affecting both its IT Systems and
Non-IT Systems.
Statements in this "Management's Discussion and Analysis of Results of
Operations and Financial Condition" or made by management of the Company
which contain more than historical information may be considered
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) which are subject to risks and uncertainties.
Actual results may differ materially from those expressed in the
forward-looking statements because of important factors identified in this
section.
- 23 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 7 Legal Proceedings in Part I is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
--------- -----------------------
<S> <C>
10.1 Credit Agreement dated as of December 10, 1998 among the
Company, Morgan Guaranty Trust Company of New York, as
Paying Agent, and certain Lenders.
10.2 Amendment No. 1 dated as of December 10, 1998 to Credit
Agreement dated as of January 15, 1998 among the Company,
The First National Bank of Chicago, as Agent, and certain
Lenders.
10.3 Amendment No. 2 (Temporary) dated as of December 10, 1998 to
Credit Agreement dated as of January 15, 1998 among the
Company, The First National Bank of Chicago, as Agent, and
certain Lenders.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
</TABLE>
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended November
30, 1998.
- 24 -
<PAGE>
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.
FDX CORPORATION
(Registrant)
Date: January 11, 1999 /s/ JAMES S. HUDSON
----------------------------
JAMES S. HUDSON
CORPORATE VICE PRESIDENT
STRATEGIC FINANCIAL PLANNING & CONTROL
(PRINCIPAL ACCOUNTING OFFICER)
- 25 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- -------- ----------------------
<S> <C>
10.1 Credit Agreement dated as of December 10, 1998 among the Company,
Morgan Guaranty Trust Company of New York, as Paying Agent, and
certain Lenders.
10.2 Amendment No. 1 dated as of December 10, 1998 to Credit Agreement
dated as of January 15, 1998 among the Company, The First
National Bank of Chicago, as Agent, and certain Lenders.
10.3 Amendment No. 2 (Temporary) dated as of December 10, 1998 to
Credit Agreement dated as of January 15, 1998 among the Company,
The First National Bank of Chicago, as Agent, and certain
Lenders.
12.1 Computation of Ratio of Earnings to Fixed Charges.
15.1 Letter re Unaudited Interim Financial Statements.
27 Financial Data Schedule (electronic filing only).
</TABLE>
E-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
<PAGE>
[FDX Corporate Logo]
CREDIT AGREEMENT
Among
FDX CORPORATION,
THE LENDERS,
J.P. MORGAN SECURITIES INC.,
SALOMON SMITH BARNEY, INC.,
CHASE SECURITIES INC.,
CREDIT SUISSE FIRST BOSTON
and
FIRST CHICAGO CAPITAL MARKETS, INC.,
as Co-Arrangers,
CHASE SECURITIES INC. and J.P. MORGAN SECURITIES INC.,
As Joint Book Managers,
FIRST CHICAGO CAPITAL MARKETS, INC.,
as Documentation Agent,
CREDIT SUISSE FIRST BOSTON
and
THE CHASE MANHATTAN BANK,
as Co-Syndication Agents,
CITIBANK, N.A.,
as Administrative Agent
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Paying Agent
Dated as of December 10, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE I: DEFINITIONS 1
ARTICLE II: THE CREDITS 19
2.1. COMMITMENTS..................................................................................19
2.2. MANDATORY PAYMENTS; TERMINATION..............................................................19
2.3. RATABLE LOANS; TYPES OF ADVANCES.............................................................20
2.4. RESERVED.....................................................................................20
2.5. FACILITY FEES; REDUCTIONS IN AGGREGATE COMMITMENT............................................20
2.6. MINIMUM AMOUNT OF EACH ADVANCE...............................................................20
2.7. OPTIONAL PRINCIPAL PAYMENTS..................................................................20
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES..............................21
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES..........................................21
2.10. INTEREST.....................................................................................22
2.11. RATES APPLICABLE AFTER MATURITY OF ADVANCES..................................................22
2.12. METHOD OF PAYMENT............................................................................22
2.13. EVIDENCE OF DEBT; TELEPHONIC NOTICES.........................................................23
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS...............................................23
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND COMMITMENT REDUCTIONS..............24
2.16. LENDING INSTALLATIONS........................................................................24
2.17. NON-RECEIPT OF FUNDS BY THE PAYING AGENT.....................................................24
2.18. WITHHOLDING TAX EXEMPTION....................................................................25
ARTICLE III: CHANGE IN CIRCUMSTANCES 25
3.1. YIELD PROTECTION.............................................................................25
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS......................................................26
3.3. AVAILABILITY OF TYPES OF ADVANCES............................................................26
3.4. FUNDING INDEMNIFICATION......................................................................26
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY.....................................................27
ARTICLE IV: CONDITIONS PRECEDENT 27
4.1. CLOSING......................................................................................27
4.2. EACH ADVANCE.................................................................................29
</TABLE>
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ARTICLE V: REPRESENTATIONS AND WARRANTIES 29
5.1. CORPORATE EXISTENCE AND STANDING.............................................................29
5.2. AUTHORIZATION AND VALIDITY...................................................................29
5.3. NO CONFLICT; GOVERNMENT CONSENT..............................................................30
5.4. FINANCIAL STATEMENTS.........................................................................30
5.5. TAXES........................................................................................30
5.6. LITIGATION AND CONTINGENT OBLIGATIONS........................................................31
5.7. SUBSIDIARIES.................................................................................31
5.8. ERISA........................................................................................31
5.9. ACCURACY OF INFORMATION......................................................................31
5.10. REGULATION U.................................................................................31
5.11. MATERIAL AGREEMENTS..........................................................................31
5.12. COMPLIANCE WITH LAWS.........................................................................31
5.13. EXISTING LIENS...............................................................................32
5.14. INVESTMENT COMPANY ACT.......................................................................32
5.15. CITIZENSHIP..................................................................................32
5.16. STATUS AS AIR CARRIER........................................................................32
5.17. PARI PASSU...................................................................................32
5.18. MATERIAL ADVERSE EFFECT......................................................................32
5.19. YEAR 2000 COMPLIANCE.........................................................................33
ARTICLE VI: COVENANTS 33
6.1. FINANCIAL REPORTING..........................................................................33
6.2. USE OF PROCEEDS..............................................................................35
6.3. NOTICE OF DEFAULT............................................................................35
6.4. CONDUCT OF BUSINESS..........................................................................36
6.5. CITIZENSHIP AND REGULATORY CERTIFICATES......................................................36
6.6. PAYMENT OF TAXES.............................................................................36
6.7. INSURANCE....................................................................................37
6.8. COMPLIANCE WITH LAWS.........................................................................37
6.9. MAINTENANCE OF PROPERTIES....................................................................37
6.10. INSPECTION...................................................................................37
6.11. DIVIDEND DECLARATIONS........................................................................37
6.12. LEVERAGE.....................................................................................37
6.13. FIXED CHARGE COVERAGE........................................................................37
6.14. RESTRICTED INVESTMENTS.......................................................................37
6.15. MERGER AND CONSOLIDATION.....................................................................38
6.16. SALES OF ASSETS..............................................................................38
6.17. LOANS, ADVANCES AND INVESTMENTS..............................................................39
6.18. CONTINGENT LIABILITIES.......................................................................41
6.19. LIENS........................................................................................42
</TABLE>
ii
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6.20. GUARANTIES...................................................................................44
6.21. CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES..................................................44
6.22. INDEBTEDNESS OF CALIBER AND SUBSIDIARIES.....................................................45
6.23. EXISTING REVOLVING CREDIT DOCUMENTS..........................................................45
6.24. VALUE OF DESIGNATED COLLATERAL...............................................................45
6.25. NO NEGATIVE PLEDGES..........................................................................46
6.26. GRANT OF SECURITY INTEREST IN COLLATERAL.....................................................46
6.27. APPROVAL OF FORMS OF SECURITY DOCUMENTS......................................................48
ARTICLE VII: DEFAULTS 48
7.1. BREACH OF REPRESENTATION OR WARRANTY.........................................................48
7.2. FAILURE TO PAY...............................................................................48
7.3. BREACH OF CERTAIN COVENANTS..................................................................48
7.4. BREACH OF OTHER COVENANTS, LOAN DOCUMENTS, EXISTING REVOLVING CREDIT DOCUMENTS OR EXISTING
L/C FACILITY DOCUMENTS.......................................................................48
7.5. CROSS-DEFAULT................................................................................49
7.6. VOLUNTARY BANKRUPTCY, ETC....................................................................49
7.7. INVOLUNTARY BANKRUPTCY, ETC..................................................................49
7.8. JUDGMENTS....................................................................................50
7.9. ERISA........................................................................................50
7.10. SEIZURE......................................................................................50
7.11. ENVIRONMENTAL MATTERS........................................................................50
7.12. INVALIDITY, ETC. OF LOAN DOCUMENTS; FAILURE OF SECURITY......................................50
ARTICLE VIII: ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 51
8.1. ACCELERATION.................................................................................51
8.2. AMENDMENTS...................................................................................51
8.3. PRESERVATION OF RIGHTS.......................................................................52
ARTICLE IX: GENERAL PROVISIONS 53
9.1. SURVIVAL OF REPRESENTATIONS..................................................................53
9.2. GOVERNMENTAL REGULATION......................................................................53
9.3. TAXES........................................................................................53
9.4. HEADINGS.....................................................................................53
9.5. ENTIRE AGREEMENT.............................................................................53
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT..............................................53
9.7. EXPENSES; INDEMNIFICATION....................................................................53
9.8. NUMBERS OF DOCUMENTS.........................................................................54
9.9. SEVERABILITY OF PROVISIONS...................................................................54
9.10. NONLIABILITY OF LENDERS......................................................................54
</TABLE>
iii
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9.11. CHOICE OF LAW................................................................................54
9.12. CONSENT TO JURISDICTION......................................................................54
9.13. WAIVER OF JURY TRIAL.........................................................................55
9.14. CONFIDENTIALITY..............................................................................55
9.15. ACCOUNTING...................................................................................55
9.16. RELEASE OF GUARANTORS........................................................................55
ARTICLE X: THE PAYING AGENT 56
10.1. APPOINTMENT..................................................................................56
10.2. POWERS.......................................................................................56
10.3. GENERAL IMMUNITY.............................................................................56
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC...................................................57
10.5. ACTION ON INSTRUCTIONS OF LENDERS............................................................57
10.6. EMPLOYMENT OF AGENTS AND COUNSEL.............................................................57
10.7. RELIANCE ON DOCUMENTS; COUNSEL...............................................................57
10.8. Paying AGENT'S REIMBURSEMENT AND INDEMNIFICATION.............................................58
10.9. RIGHTS AS A LENDER...........................................................................58
10.10. LENDER CREDIT DECISION.......................................................................58
10.11. SUCCESSOR PAYING AGENT.......................................................................58
10.12. DISTRIBUTION OF INFORMATION..................................................................59
ARTICLE XI: SETOFF; RATABLE PAYMENTS 59
11.1. SETOFF.......................................................................................59
11.2. RATABLE PAYMENTS.............................................................................60
ARTICLE XII: BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 60
12.1. SUCCESSORS AND ASSIGNS.......................................................................60
12.2. PARTICIPATIONS...............................................................................60
12.2.1. PERMITTED PARTICIPANTS; EFFECT 60
12.2.2. VOTING RIGHTS 61
12.2.3. BENEFIT OF SETOFF 61
12.3. ASSIGNMENTS..................................................................................61
12.3.1. PERMITTED ASSIGNMENTS 61
12.3.2. REQUIRED ASSIGNMENTS 62
12.3.3. EFFECT; EFFECTIVE DATE 63
12.4. DISSEMINATION OF INFORMATION.................................................................63
12.5. TAX TREATMENT................................................................................63
ARTICLE XIII: NOTICES 64
13.1. GIVING NOTICE................................................................................64
</TABLE>
iv
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<CAPTION>
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13.2. CHANGE OF ADDRESS............................................................................64
ARTICLE XIV: COUNTERPARTS 64
EXHIBIT "A"-FORM OF GUARANTY 1
EXHIBIT "B"-OPINION OF COUNSEL 1
EXHIBIT "C"-ASSIGNMENT AGREEMENT 1
EXHIBIT "D"-FORM OF RELEASE OF SECURITY DOCUMENTS 1
SCHEDULE "1"-REAL ESTATE AND AIRCRAFT 3
SCHEDULE "2"-SIGNIFICANT SUBSIDIARIES 4
SCHEDULE "3"-COMPLIANCE CALCULATIONS 5
</TABLE>
v
<PAGE>
EXECUTION COPY
FDX CORPORATION
CREDIT AGREEMENT
This Agreement, dated as of December 10, 1998, is among FDX
CORPORATION, the Lenders and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Paying Agent.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Acknowledged Participant" is defined in Section 12.2.3.
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business or all or
substantially all of the assets of any Person or division thereof, whether
through purchase of assets, merger or otherwise or (ii) directly or indirectly
acquires (in one transaction or as the most recent transaction in a series of
transactions) at least a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of directors
(other than securities having such power only by reason of the happening of a
contingency) or a majority (by percentage or voting power) of the outstanding
partnership interests of a partnership.
"Adjusted Net Income" means, on a consolidated basis, for the Borrower
and its Consolidated Subsidiaries for the twelve most recent complete fiscal
months, income (loss) before income taxes MINUS, to the extent included in
determining income (loss) before income taxes, any net loss or gain realized in
connection with any sale or disposition of any asset (other than in the ordinary
course of business) or any extraordinary or non-recurring loss or gain resulting
from an actual or threatened business interruption relating to any self-help
actions or strike, by members of the FPA, or contingency plans related thereto,
provided that the aggregate amount of the foregoing reductions to income (loss)
before income taxes shall not exceed $1,000,000,000.
"Administrative Agent" means the Person designated as such on the cover
page of this Agreement.
<PAGE>
"Advance" means a borrowing hereunder consisting of the aggregate
amount of the several Loans made by the Lenders to the Borrower of the same Type
and, in the case of Eurodollar Advances, for the same Interest Period.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
when used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Aggregate Commitment" means the aggregate of the Commitments of all of
the Lenders, as reduced from time to time pursuant to the terms hereof. As of
the Effective Date, the Aggregate Commitment equals $1,000,000,000.
"Agreement" means this Credit Agreement, as it may be amended or
modified and in effect from time to time.
"Aircraft Mortgage" means an Aircraft Mortgage and Security Agreement
to be executed by FedEx pursuant to Section 6.26, substantially in the form
approved pursuant to Section 6.27.
"Applicable Margin" means 1.625% per annum.
"Appraisal Report" means, with respect to any aircraft or engine, an
extended desktop appraisal of the Appraiser, which does not include any on-site
inspection of such aircraft or engine or its maintenance records, but may
include consideration of maintenance status information that is provided to the
Appraiser from the client and/or aircraft operator, and may include adjustments
from the mid-time, mid-life baseline to account for the actual maintenance
status of such aircraft or engine.
"Appraiser" means BK Associates, or another independent appraiser
selected by the Borrower with the prior written consent of the Paying Agent.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Authorized Officer" means any one of the Chief Executive Officer, the
Executive Vice President and Chief Financial Officer, the Treasurer, or the
Staff Director Corporate Finance and Assistant Treasurer of the Borrower or any
other officer or employee of the Borrower designated in writing as an
"Authorized Officer" under this Agreement by any one of the Chief Executive
Officer, the Executive Vice President and Chief Financial Officer, the
Treasurer, or the Staff Director Corporate Finance and Assistant Treasurer of
the Borrower.
2
<PAGE>
"Base Rate" means, for any day, a rate of interest per annum equal to
the higher of (i) the Prime Rate for such day and (ii) the sum of (x) the
Federal Funds Effective Rate for such day plus (y) 1/2%.
"Beneficial Owner" means a Person deemed the "Beneficial Owner" of any
securities as to which such Person or any of such Person's Affiliates is or may
be deemed to be the beneficial owner pursuant to Rule 13d-3 or 13d-5 under the
Securities Exchange Act of 1934 (as the same may from time to time be amended,
modified or readopted), as well as any securities as to which such Person or any
of such Person's Affiliates has the right to become such a beneficial owner
(whether such right is exercisable immediately or only after the passage of time
or the occurrence of a specified event) pursuant to any agreement, arrangement
or understanding, or upon the exercise of conversion rights, exchange rights,
rights, warrants or options, or otherwise. In determining the percentage of the
outstanding Voting Stock with respect to which a Person is the Beneficial Owner,
all shares as to which such Person is deemed the Beneficial Owner shall be
deemed outstanding.
"BK Associates" means BK Associates, Inc, an independent aircraft
appraisal firm.
"Borrower" means FDX Corporation, a Delaware corporation.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities and on which dealings
in United States dollars are carried on in the London interbank market and (ii)
for all other purposes, a day (other than a Saturday or Sunday) on which banks
generally are open in New York for the conduct of substantially all of their
commercial lending activities.
"Caliber" means Caliber System, Inc., an Ohio corporation.
"Caliber Collateral" is defined in Section 6.26.
"Caliber Operating Income" means, as of any date, the operating income
(or loss) of Caliber and its consolidated Subsidiaries for the four most recent
fiscal quarters then ended, determined on a consolidated basis in accordance
with GAAP.
"Caliber Stock" means the capital stock of Caliber and the Subsidiaries
of Caliber other than the Designated Immaterial Subsidiaries.
"Cancellation Notice" is defined in Section 2.2.
3
<PAGE>
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with GAAP.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with GAAP.
"Capitalized Operating Lease Value" means the present value, using a
discount rate equal to 12.5%, of the Borrower's and the Consolidated
Subsidiaries' future minimum lease payments for aircraft leases scheduled to
terminate more than 365 days after their respective dates of execution.
"Co-Arrangers" means the Persons designated as such on the cover page
of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral" means all the Property and interests in Property now owned
or hereafter acquired by the Borrower and its Subsidiaries upon which a Lien is
granted or purported to be granted under any of the Security Documents.
"Collateral Trust Agreement" means a Collateral Trust Agreement to be
executed pursuant to Section 6.26, substantially in the form approved pursuant
to Section 6.27.
"Commitment" means, with respect to each Lender, the obligation of such
Lender to make Loans not exceeding the amount set forth opposite its signature
below, as such amount may be modified from time to time pursuant to the terms
hereof.
"Computation Period" is defined in Section 6.17.
"Consolidated Adjusted Net Worth" means, at any date as of which the
amount thereof is to be determined, (a) the sum of the amounts set forth as
preferred stock, common stock, capital in excess of par value or paid-in surplus
and retained earnings on a consolidated balance sheet of the Borrower and the
Consolidated Subsidiaries prepared as of such date in accordance with GAAP,
minus (b) the sum of the amounts set forth on such consolidated balance sheet as
(i) the cost of any shares of the Borrower's common stock held in the treasury
and (ii) any surplus resulting from any write-up of assets after the date of
this Agreement and (iii) the aggregate value of all goodwill, all determined in
accordance with GAAP.
"Consolidated Adjusted Total Assets" means, at any date as of which the
amount thereof is to be determined, (a) the aggregate amount set forth as the
assets of the Borrower and the
4
<PAGE>
Consolidated Subsidiaries on a consolidated balance sheet of the Borrower and
the Consolidated Subsidiaries prepared as of such date in accordance with GAAP,
minus (b) the aggregate book value as of such date of determination of all
assets of the Borrower or any Consolidated Subsidiary subject on such date of
determination to a Lien permitted by Section 6.19(j).
"Consolidated Cash Flow" means, on a consolidated basis for the
Borrower and its Consolidated Subsidiaries for the twelve most recent complete
fiscal months, the sum of (i) Adjusted Net Income, PLUS (ii) Interest Expense,
PLUS (iii) Rent Expense, in each case as determined in accordance with GAAP.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Borrower and the Consolidated Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP and after giving
appropriate effect to any outside minority interests in the Consolidated
Subsidiaries, excluding
(a) any aggregate net gain arising from the sale or other
disposition of any assets other than any such gain arising from the
sale or other disposition of assets (including aircraft) in the
ordinary course of business,
(b) any gain arising from any write-ups of assets,
(c) any unrealized capital gain or loss on any investment,
(d) any portion of the earnings of any Consolidated
Subsidiary which for any reason is unavailable for payment of dividends
to the Borrower or another Consolidated Subsidiary,
(e) any amount representing the interest of the Borrower and
the Consolidated Subsidiaries in the undistributed earnings of any
other Person (other than a Consolidated Subsidiary), and
(f) the net income (or net loss) of any Person prior to the
date it became a Consolidated Subsidiary.
"Consolidated Subsidiary" means at any date any Subsidiary or other
entity the accounts of which would be consolidated with those of the Borrower
(or FedEx, for any date prior to the date the Borrower was established as the
parent of FedEx) in its consolidated financial statements in accordance with
GAAP if such statements were prepared as of such date.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
5
<PAGE>
against loss, including, without limitation, any comfort letter, operating
agreement, take-or-pay contract or application for a Letter of Credit.
"Continuing Director" means an individual who is a member of the Board
of Directors of the Borrower on the date of this Agreement or who shall have
become a member of the Board of Directors of the Borrower subsequent to such
date and who shall have been nominated or elected by a majority of the other
Continuing Directors then members of the Board of Directors of the Borrower.
"Conversion/Continuation Notice" is defined in Section 2.9.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Co-Syndication Agents" means the Persons designated as such on the
cover page of this Agreement.
"Current Market Price" means, with respect to any security on any date,
the last sale price or, in case no such sale takes place on such date, the
average of the closing bid and asked prices for such security, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange, Inc.
or, if such security is not then listed or admitted to trading on the New York
Stock Exchange, Inc., as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
if such security is not then listed or admitted to trading on any national
securities exchange, on the Nasdaq Stock Market, Inc. or, if such security is
not then quoted on the Nasdaq Stock Market, Inc., the average of the closing bid
and asked prices for such security in the over-the-counter market, as reported
by the Nasdaq Stock Market, Inc. or such other system then in use, or, if on any
such date such security is not then quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market-maker
then making a market in such security selected by the Board of Directors of the
Borrower or a duly authorized committee thereof; PROVIDED, HOWEVER, that if on
any such date such security is not listed or admitted to trading on a national
securities exchange or traded in the over-the-counter market, the "Current
Market Price" of such security on such date shall mean the fair value thereof on
such date as determined in good faith by the Board of Directors of the Borrower
or a duly authorized committee thereof.
"Current Maturities" means, as of any date with respect to the Long
Term Debt or the Capitalized Lease Obligations of any Person, any portion of
such Long Term Debt or Capitalized Lease Obligations, as the case may be, which
would in accordance with GAAP be classified as a current liability of such
Person.
6
<PAGE>
"Dealer" means a Lender or any other national or state bank or trust
company or dealer or broker of government securities having either (A) capital,
surplus and undivided profits or (B) total equity of at least $250,000,000, or
any affiliate thereof authorized to deal in the commercial products described in
clauses (i), (ii), and (iii) of Section 6.17(e).
"Default" means an event described in Article VII.
"Designated Collateral" means (i) all now owned and hereafter acquired
or arising (a) capital stock of Caliber and its domestic operating Subsidiaries
(other than any Designated Immaterial Subsidiaries), (b) accounts receivable of
FedEx and its Subsidiaries, (c) intercompany indebtedness owed to the Borrower
by its Subsidiaries and (d) motor vehicles (other than passenger vehicles) and
real estate of FedEx and its Subsidiaries, except such motor vehicles and real
estate which are subject to Liens as of the date hereof (such real estate to
include, without limitation, the real estate set forth on Schedule "1" attached
hereto), and (ii) all aircraft (including airframes and engines) of FedEx listed
on Schedule "1" attached hereto and such additional unencumbered aircraft
(including airframes and engines) as the Borrower may designate in writing to
the Paying Agent from time to time.
"Designated Immaterial Subsidiaries" means, during each fiscal year of
the Borrower, any Subsidiary of Caliber which had revenues (determined in
accordance with GAAP) for the immediately preceding fiscal year of Caliber not
in excess of 2.0% of the consolidated revenues (determined in accordance with
GAAP) of Caliber and the consolidated Subsidiaries of Caliber for such
immediately preceding fiscal year.
"Documentation Agent" means the Person designated as such on the cover
page of this Agreement.
"Effective Date" means the Business Day on or before December 22, 1998
on which (a) the Borrower, the Paying Agent and the Lenders have executed this
Agreement, (b) the Borrower has satisfied all of the terms and conditions of
Section 4.1, and (c) the Borrower has paid all fees then due to the Paying
Agent, the Co-Arrangers and the Lenders in connection with this Agreement.
"Eligible Receivables" means, at any date of determination thereof, and
with respect to any Person, the aggregate of all Receivables of such Person at
such date (net of maximum discounts, allowances, retainage and any other amounts
deferred with respect thereto), which is not, except as otherwise agreed by the
Paying Agent in its sole discretion exercised in a commercially reasonable
manner, of any of the following types:
(i) (A) it arises out of a sale the original terms of which
provide for payment more than 90 days after the date of the original
invoice issued by such Person in connection with such sale or (B) it is
more than 60 days past due, according to the original terms of sale; or
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(ii) it arises out of a sale not made in the ordinary course
of such Person's business or a sale to a Person which is an Affiliate
of such Person or controlled by an Affiliate of such Person; or
(iii) it fails to meet or violates any warranty,
representation or covenant contained in this Agreement or any of the
other Loan Documents; or
(iv) the account debtor is also a supplier or creditor of any
Borrower or Guarantor and the Receivable is subject to any contractual
right of setoff by the account debtor, and such account debtor has not
entered into an agreement with the Paying Agent with respect to the
waiver of rights of setoff, or the account debtor has disputed
liability with respect to such Receivable, or made any claim with
respect to any other Receivable due from such account debtor to such
Person, in which case the Receivable shall be ineligible to the extent
of such dispute, claim or setoff (without duplication); or
(v) the account debtor has filed a petition for bankruptcy or
any other petition for relief under the federal bankruptcy code or
similar statute, or made an assignment for the benefit of creditors, or
any petition or other application for relief under the federal
bankruptcy code or any similar statute has been filed against the
account debtor, or the account debtor has failed, suspended its
business operations, become insolvent, suffered a receiver or a trustee
to be appointed for any of its assets or affairs, or is generally
failing to pay its debts as they become due; or
(vi) the sale is to an account debtor which is not located in
the United States or Canada, unless the account debtor's obligations
with respect to such sale are secured by a letter of credit, guaranty
or eligible bankers' acceptance having terms, and from such issuers and
confirmation banks, as are acceptable to the Paying Agent in its sole
discretion exercised in a commercially reasonable manner; or
(vii) the sale is on a bill-and-hold, guaranteed sale,
sale-and-return, sale on approval, consignment, or any other repurchase
or return basis; or
(viii) the Paying Agent believes, in the exercise of its
reasonable credit judgment, that collection of such Receivable is
insecure or that such Receivable may not be paid by reason of the
account debtor's financial inability to pay; or
(ix) the account debtor is the United States of America or any
department, agency or instrumentality thereof, unless such Person
assigns its right to payment of such Receivable to the Paying Agent
pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C.
Section 3727); or
(x) the goods, the delivery of which has given rise to such
Receivable, have not been delivered to or, if delivered, have been
rejected by the account debtor or the services, the performance of
which has given rise to such Receivable, have not been performed by
such Person and accepted by the account debtor; or
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(xi) the amount of the Receivable(s) owing to FedEx and its
Subsidiaries in the aggregate by any account debtor exceeds (A) a
concentration limit of ten percent (10%) of the aggregate amount of the
Receivables of FedEx and its Subsidiaries at such time, or (B) such
other credit or concentration limit determined by the Paying Agent, in
the exercise of its reasonable credit judgment, at any time or times
hereafter, in which case such Receivable(s) shall be ineligible to the
extent such Receivable(s) exceed(s) such limits; or
(xii) to the extent such Receivable constitutes Collateral,
the Paying Agent, as collateral agent as contemplated by Section 6.26,
does not have a senior, perfected security interest in such Receivable
or such Receivable is subject to a Lien which is not permitted under
Section 6.19; or
(xiii) the sale is to an account debtor with respect to which
fifty percent (50%) or more of all Receivables owing by such account
debtor are ineligible for any reason (except with respect to those
categories of ineligibility where the Paying Agent determines in its
sole discretion exercised in a commercially reasonable manner that this
clause shall not apply); or
(xiv) such Receivable arises out of or in connection with a
retainage or similar arrangement (I.E., the payment of such Receivable
is subject to further performance), in which case that portion of such
Receivable subject to such arrangement shall be ineligible until such
time as the requisite performance has been completed.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurodollar Advance" means an Advance which bears interest at a
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the rate determined by the Paying Agent to be the
arithmetic average of the rates reported to the Paying Agent by each Reference
Lender as the rate at which deposits in U.S. dollars are offered by such
Reference Lender to first-class banks in the London interbank market at
approximately 11 a.m. (London time) two Business Days prior to the first day of
such Interest Period, in the approximate amount of such Reference Lender's
relevant Eurodollar Loan and having a maturity approximately equal to such
Interest Period. If any Reference Lender fails to provide such quotation to the
Paying Agent, then the Paying Agent shall determine the Eurodollar Base Rate on
the basis of the quotations of the remaining Reference Lender(s).
"Eurodollar Loan" means a Loan which bears interest at a Eurodollar
Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (i) an amount equal to (a) the Eurodollar
Base Rate applicable to such Interest Period, divided by (b) one minus the
Reserve Requirement (expressed as a decimal), if any, applicable to such
Interest Period, and (ii) the Applicable Margin. The Eurodollar Rate shall be
rounded to the next higher multiple of 1/16 of 1% if the rate is not such a
multiple.
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"Existing L/C Facility Documents" means the Syndicated Revolving
Standby Letter of Credit Facility dated as of July 7, 1998, among the Borrower,
the issuing banks named therein, The Sumitomo Bank, Limited, as agent
thereunder, and the co-agents named therein, and all instruments, agreements and
contractual obligations entered into in connection therewith, as amended by that
certain First Amendment and Second Amendment (Temporary) thereto , each of even
date herewith, and as the same may be further amended, supplemented or otherwise
modified from time to time.
"Existing Revolving Credit Documents" means the Credit Agreement dated
as of January 15, 1998 among the Borrower, the lenders named therein and The
First National Bank of Chicago, as agent thereunder, and all instruments,
agreements and contractual obligations entered into in connection therewith, as
amended by that certain Amendment No. 1 and Amendment No. 2 (Temporary) thereto,
each of even date herewith, and as the same may be amended, supplemented or
otherwise modified from time to time.
"FAA" means the Federal Aviation Administration or any other
governmental agency succeeding to the jurisdiction thereof.
"Facility" means the Commitments and the Loans.
"Facility Fee Percentage" means .375% per annum.
"Fair Market Value" means (i) as to securities which are publicly
traded, the average of the Current Market Prices of such securities for each day
during the period of 10 consecutive trading days immediately preceding the date
of determination and (ii) as to securities which are not publicly traded or any
other property, the fair value thereof as determined in good faith by the Board
of Directors of the Borrower or a duly authorized committee thereof.
"FDX Collateral" is defined in Section 6.26.
"Federal Aviation Act" means the Federal Aviation Act of 1958, as
amended from time to time.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (New York
time) on such day on such transactions received by the Paying Agent from three
Federal funds brokers of recognized standing selected by the Paying Agent in its
sole discretion.
"FedEx" means Federal Express Corporation, a Delaware corporation.
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"Flight Equipment" means, collectively, aircraft, aircraft engines,
appliances and spare parts, all as defined in the Federal Aviation Act, and
related parts.
"Floating Rate" means, for any day, a rate per annum equal to the Base
Rate for such day, changing when and as the Base Rate changes.
"Floating Rate Advance" means an Advance which bears interest at the
Floating Rate.
"Floating Rate Loan" means a Loan which bears interest at the Floating
Rate.
"FPA" means the FedEx Pilots Association.
"FPA Membership" means those flight crewmembers at FedEx who are active
members of the FPA in accordance with the constitution and by-laws of the FPA.
"Funded Debt" means any Indebtedness (other than items characterized as
Indebtedness pursuant to clause (vii) of the definition thereof) of the Borrower
and its Consolidated Subsidiaries that is outstanding on the date of
determination.
"GAAP" means generally accepted principles of accounting as in effect
at the time of application to the provisions hereof provided that any
modification in generally accepted accounting principles which is made within
twelve months prior to any such application and which would result in a Default
or Unmatured Default shall be disregarded.
"Granting Lender" is defined in Section 12.3.1.
"Guarantor" means FedEx, RPS, Caliber, Viking Freight, Inc., a
California corporation, and Roberts Express, Inc., an Ohio corporation, and each
other Subsidiary that executes the Guaranty in accordance with Section 6.20
hereof.
"Guaranty" means that certain Guaranty of even date herewith, executed
by each Guarantor, substantially in the form of Exhibit "A" attached hereto.
"Indebtedness" of a Person means without duplication, such Person's (i)
obligations for borrowed money, (ii) obligations representing the deferred
purchase price of Property or services (other than accounts payable arising in
the ordinary course of such Person's business payable on terms customary in the
trade), (iii) obligations, whether or not assumed, secured by Liens or payable
out of the proceeds or production from property now or hereafter owned or
acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or other instruments, (v) Capitalized Lease Obligations, (vi) net
liabilities under interest rate swap, exchange or cap agreements, (vii)
Contingent Obligations, and (viii) obligations created through asset
securitization financing programs.
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"Interest Expense" means, for any period, the gross interest expense
(without regard to any offsetting interest income or reduction for capitalized
interest) of the Borrower and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with GAAP.
"Interest Period" means, with respect to a Eurodollar Advance, a period
of one, two, three, or six months commencing on a Business Day selected by the
Borrower pursuant to this Agreement. Such Interest Period shall end on (but
exclude) the day which corresponds numerically to such date one, two, three, or
six months thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second, third, or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third,
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day, provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade), deposit account (other than a demand deposit account maintained in the
ordinary course of business) or contribution of capital by such Person to any
other Person or any investment in, or purchase or other acquisition of, the
stock, partnership interests, notes, debentures or other securities of any other
Person made by such Person.
"Investment Grade Rating" means an S&P Rating greater than or equal to
BBB- or a Moody's Rating greater than or equal to Baa3.
"Labor Agreement Date" is defined in Section 2.2.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Paying
Agent, any office, branch, subsidiary or affiliate of such Lender or the Paying
Agent.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).
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"Loan" means each loan made pursuant to Section 2.1.
"Loan Documents" means this Agreement, the Guaranty and, after the
execution and delivery thereof and before the release thereof in accordance with
Section 6.26, the Security Documents.
"Long Term Debt" means, as of any date with respect to any Person, all
liabilities of such Person outstanding on such date which would in accordance
with GAAP be classified as long term debt of such Person.
"Material Adverse Effect" means a material adverse effect (excluding
the effects of an actual or threatened business interruption, including but not
limited to self-help actions or a strike, by members of the FPA, or contingency
plans related thereto) on (i) the business, Property, condition (financial or
otherwise), results of operations, or prospects of the Borrower and its
Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its
obligations under the Loan Documents, or (iii) the validity or enforceability of
any of the Loan Documents or the rights or remedies of the Paying Agent or the
Lenders thereunder.
"Maturity Date" means December 9, 1999, or any earlier date on which
the Loans become due and payable pursuant to the terms hereof.
"Moody's" means Moody's Investors Service, Inc. or, if Moody's shall
cease rating Indebtedness of the Borrower and its ratings business with respect
to Indebtedness of the Borrower shall have been transferred to a successor
Person, such successor Person; PROVIDED, HOWEVER, that if Moody's ceases rating
securities similar to Indebtedness of the Borrower and its ratings business with
respect to such securities shall not have been transferred to any successor
Person, then "Moody's" shall mean any other nationally recognized rating agency
(other than S&P) selected by the Borrower that rates any Indebtedness of the
Borrower.
"Moody's Rating" means, at any particular time, the rating issued by
Moody's with respect to the Borrower's senior unsecured non-credit enhanced
long-term public debt.
"Morgan Guaranty" means Morgan Guaranty Trust Company of New York in
its individual capacity, and its successors.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"1996 Caliber Indenture" means that certain Indenture dated as of
August 1, 1996 between Caliber and The Chase Manhattan Bank, as Trustee, as the
same may be amended, supplemented or otherwise modified from time to time.
"Notice of Assignment" is defined in Section 12.3.3.
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"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Loans (including, without limitation, interest accruing at the
then-applicable rate provided herein after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding), all accrued and unpaid
fees and all expenses, reimbursements, indemnities and other obligations of the
Borrower to the Lenders or to any Lender, the Paying Agent or any indemnified
party hereunder arising under the Loan Documents.
"Participants" is defined in Section 12.2.1.
"Paying Agent" means Morgan Guaranty Trust Company of New York in its
capacity as contractual representative for the Lenders pursuant to Article X,
and not in its individual capacity as a Lender, and any successor Paying Agent
appointed pursuant to Article X.
"Payment Date" means the last day of each January, April, July and
October after the date of this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any natural person, corporation, firm, joint venture,
partnership, limited liability company, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"Pledge Agreements" means the pledge agreements to be executed by the
Borrower and certain Subsidiaries pursuant to Section 6.26, substantially in the
form approved pursuant to Section 6.27.
"Prime Rate" means the per annum rate of interest publicly announced by
Morgan Guaranty in New York City from time to time as its Prime Rate, changing
when and as said Prime Rate changes.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned
or leased by such Person.
"Purchaser" is defined in Section 12.3.1.
"Rating" means the Moody's Rating or the S&P Rating.
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"Real Estate Mortgages" means the mortgages and deeds of trust to be
executed by FedEx pursuant to Section 6.26, substantially in the form approved
pursuant to Section 6.27.
"Receivable" means all present and future "accounts", as such term is
defined in section 9-106 of the Uniform Commercial Code as in effect in the
State of New York, and shall include, without limitation, all accounts
receivable, related contract rights and all forms of obligations whatsoever
owing, whether now existing or hereafter arising and wherever arising, and
whether or not they have been earned by performance; together with all
promissory notes, instruments and documents of title representing any of the
foregoing, all rights in merchandise or goods (including returned goods) which
any of the same may represent, all right, title, security and guaranties with
respect to any of the foregoing, including any right of stoppage in transit and
all insurance proceeds and corporate and other business records relating to any
of the foregoing; together with all proceeds thereof.
"Reference Lenders" means Morgan Guaranty, Citibank, N.A. and The First
National Bank of Chicago.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stock applicable to member banks of the Federal Reserve System.
"Rent Expense" means, for any period, the rental expense of the
Borrower and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with GAAP excluding rental expense with respect to leases of aircraft
scheduled to terminate no more than 365 days after their respective dates of
execution.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation has waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 51%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 51% of the aggregate unpaid principal
amount of the outstanding Advances.
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"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Restructuring Event" means any of the following: (1) any Person or
group (within the meaning of the Securities Exchange Act of 1934 and the rules
of the Securities and Exchange Commission thereunder as in effect on the date
thereof) becoming the Beneficial Owner of Voting Stock of the Borrower having
more than 30 percent of the voting power of all of the then outstanding Voting
Stock of the Borrower; (2) individuals who are not Continuing Directors
constituting a majority of the Board of Directors of the Borrower, or
individuals who are not appointed or designated by the Borrower constituting a
majority of the Board of Directors of FedEx or RPS; (3) the Borrower
consolidating with or merging into any other Person, or any other Person
consolidating with or merging into the Borrower, pursuant to a transaction in
which capital stock of the Borrower then outstanding (other than capital stock
held by the Borrower or capital stock held by any Person which is a party to
such consolidation or merger) is changed or exchanged unless the Borrower is the
surviving entity and no Default or Unmatured Default shall occur upon giving
effect to such consolidation or merger; (4) FedEx or RPS consolidating with or
merging into any other Person which is not a Subsidiary of the Borrower, or any
other such Person consolidating with or merging into FedEx or RPS, pursuant to a
transaction in which capital stock of FedEx or RPS then outstanding (other than
capital stock held by FedEx or RPS, respectively, or capital stock held by any
such Person which is a party to such consolidation or merger) is changed or
exchanged unless FedEx or RPS, as the case may be, is the surviving entity and
no Default or Unmatured Default shall occur upon giving effect to such
consolidation or merger; (5) the Borrower, in one transaction or a series of
related transactions, conveying, transferring or leasing, directly or
indirectly, all or substantially all of the assets of the Borrower and its
Subsidiaries taken as a whole, or of FedEx or RPS (other than to a Wholly-Owned
Subsidiary of the Borrower); (6) the Borrower and one or more of its
Wholly-Owned Subsidiaries ceasing to own and control eighty percent (80%) of the
issued and outstanding capital stock of FedEx and RPS; or (7) the Borrower or
any of its Subsidiaries paying or effecting a dividend or distribution
(including by way of recapitalization or reclassification) in respect of its
capital stock (other than solely to the Borrower or any of its Wholly-Owned
Subsidiaries and other than solely for capital stock of the Borrower), or
purchasing, redeeming, retiring, exchanging or otherwise acquiring for value any
of its capital stock (other than solely from the Borrower or any of its
Wholly-Owned Subsidiaries and other than solely for capital stock of the
Borrower), if the cash and Fair Market Value of the securities and assets paid
or distributed in connection therewith (determined on the record date for such
dividend or distribution or the effective date for such purchase, redemption,
retirement, exchange or other acquisition), together with the cash and Fair
Market Value of the securities and assets paid or distributed in connection with
all other such dividends, distributions, purchases, redemptions, retirements,
exchanges and acquisitions effected within the 12-month period preceding the
record date for such dividend or distribution or the effective date for such
purchase, redemption, retirement, exchange or other acquisition (determined on
the respective record or effective dates for such other dividends,
distributions, purchases, redemptions, retirements, exchanges and acquisitions),
exceeds 30 percent of the
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aggregate Fair Market Value of all capital stock of the Borrower outstanding on
the record date for such dividend or distribution or the effective date for such
purchase, redemption, retirement, exchange or other acquisition (determined on
such record or effective date).
"RPS" means RPS, Inc., a Delaware corporation.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., or, if S&P shall cease rating Indebtedness of the Borrower and its ratings
business with respect to Indebtedness of the Borrower shall have been
transferred to a successor Person, such successor Person; PROVIDED, HOWEVER,
that if S&P ceases rating securities similar to Indebtedness of the Borrower and
its ratings business with respect to such securities shall not have been
transferred to any successor Person, then "S&P" shall mean any other nationally
recognized rating agency (other than Moody's) selected by the Borrower that
rates any Indebtedness of the Borrower.
"S&P Rating" means, at any particular time, the rating issued by S&P
with respect to the Borrower's senior unsecured non-credit enhanced long-term
public debt.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Security Agreements" means the security agreements to be executed
pursuant to Section 6.26, substantially in the form approved pursuant to Section
6.27.
"Security Documents" means the Collateral Trust Agreement, the Pledge
Agreements, the Aircraft Mortgage, the Real Estate Mortgages and the Security
Agreements.
"Significant Subsidiary" means, during each fiscal year of the
Borrower, any Subsidiary of the Borrower which had revenues (determined in
accordance with GAAP) for the immediately preceding fiscal year of the Borrower
in excess of 2.0% of the consolidated revenues (determined in accordance with
GAAP) of the Borrower and the Consolidated Subsidiaries for such immediately
preceding fiscal year.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"SPC" is defined in Section 12.3.1.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding Voting Stock of which shall at the time be owned or controlled,
directly or indirectly, by such Person or by one or more of its Subsidiaries or
by such Person and one or more of its Subsidiaries, or (ii) any partnership,
association, joint venture or similar business organization more than 50% of the
ownership interests having power to direct the ordinary affairs thereof of which
shall at the time be so owned or controlled. Unless otherwise expressly
provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the
Borrower.
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"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 10% of
the consolidated assets of the Borrower and its Subsidiaries as would be shown
in the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which such
determination is made (or of the consolidated assets of FedEx and its
Subsidiaries, as would be shown in the consolidated financial statements of
FedEx and its Subsidiaries, in the case of financial statements dated prior to
the date the Borrower was established as the parent of FedEx), or (ii) is
responsible for more than 10% of the consolidated net sales or of the
consolidated net income of the Borrower and its Subsidiaries (or of FedEx and
its Subsidiaries) as reflected in the financial statements referred to in clause
(i) above.
"Supermajority Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 66-2/3% of the aggregate
unpaid principal amount of the outstanding Advances.
"Termination Date" means December 9, 1999, or any earlier date on which
the Commitments are canceled by the Borrower or otherwise terminated pursuant to
this Agreement.
"Transferee" is defined in Section 12.4.
"Type" means, with respect to any Advance, its nature as a Floating
Rate Advance or Eurodollar Advance.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested nonforfeitable benefits under all Single Employer Plans
exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Voting Stock" means all outstanding shares of capital stock of the
Borrower entitled to vote generally in the election of directors.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
Subsidiaries of such Person, or (ii) any Person 100% of the ownership interests
having ordinary voting power of which shall at the time be so owned or
controlled.
"Year 2000 Problem" means the risk that computer applications used by
the Borrower or any of its Subsidiaries (or their respective suppliers and
vendors) may be unable to recognize or
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properly perform date-sensitive functions involving certain dates prior to and
any date after December 31, 1999.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1. COMMITMENTS. From and including the date of this Agreement and
prior to the Termination Date, each Lender severally agrees, on the terms and
conditions set forth in this Agreement, to make Loans to the Borrower from time
to time in amounts not to exceed in the aggregate at any one time outstanding
the amount of its Commitment. Subject to the terms of this Agreement, the
Borrower may borrow, repay and reborrow Loans at any time prior to the
Termination Date. The Commitments shall expire on the Termination Date.
2.2. MANDATORY PAYMENTS; TERMINATION. (a) The Borrower will promptly
give notice to the Paying Agent and the Lenders of the occurrence of a
Restructuring Event. If, within 30 days after the later of the occurrence of a
Restructuring Event or the date on which the Paying Agent and the Lenders have
received notice from the Borrower that a Restructuring Event has occurred, the
Paying Agent on behalf of the Required Lenders notifies the Borrower in writing
that the Required Lenders desire the prepayment and cancellation of this
Agreement (such notice hereinafter a "Cancellation Notice"), then (i) the
Borrower shall within 30 days after its receipt of such Cancellation Notice
prepay in full the entire outstanding principal amount of the Loans, if any, and
all of the other Obligations, and (ii) on the earlier of (1) the date that the
Borrower prepays the Loans and all of the other Obligations pursuant to clause
(i) of this sentence, or (2) the 30th day after the Borrower receives such
Cancellation Notice, the outstanding balance of the Loans and all other
Obligations shall mature and be due and payable in full and the Aggregate
Commitment and the Commitments of each Lender shall be automatically and
permanently terminated and reduced to zero. As of the date of such Cancellation
Notice, the Borrower shall no longer be permitted to borrow additional Advances
under this Agreement.
(b) The Borrower will give notice to the Paying Agent and the Lenders
on the date (the "Labor Agreement Date") on which a comprehensive collective
bargaining agreement between FedEx and the FPA is ratified by the FPA
Membership. On the Labor Agreement Date, the Aggregate Commitment and the
Commitments of each Lender shall be automatically and permanently terminated and
reduced to zero. As of the Labor Agreement Date, the Borrower shall no longer be
permitted to borrow additional Advances under this Agreement. The Borrower
unconditionally promises to pay the unpaid principal amount of each Loan and all
other Obligations to the extent not previously required to be paid under this
Agreement on the earlier of (i) 180 days after the date of the Labor Agreement
Date or (ii) the Maturity Date.
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(c) The Borrower unconditionally promises to pay the unpaid principal
amount of each Loan on the Maturity Date. The Borrower also unconditionally
promises to pay all other Obligations on the Maturity Date.
2.3. RATABLE LOANS; TYPES OF ADVANCES. Each Advance hereunder shall
consist of Loans made from the several Lenders ratably in proportion to the
ratio that their respective Commitments bear to the Aggregate Commitment. The
Advances may be Floating Rate Advances or Eurodollar Advances, or a combination
thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9. Not
more than fifteen Eurodollar Advances may be outstanding at any one time.
2.4. RESERVED.
2.5. FACILITY FEES; REDUCTIONS IN AGGREGATE COMMITMENT. (a) The
Borrower agrees to pay to the Paying Agent for the account of each Lender a
facility fee on the daily amount of such Lender's Commitment, whether drawn or
undrawn (or if such Commitment has terminated, on the aggregate outstanding
principal balance of such Lender's Loans), from the Effective Date to and
including the Maturity Date, at a per annum rate equal to the Facility Fee
Percentage. Such facility fee shall be payable on each Payment Date hereafter
and on the Maturity Date.
(b) Reserved.
(c) The Borrower may permanently reduce the Aggregate Commitment in
whole, or in part ratably among the Lenders, in the minimum amount of
$20,000,000 and in integral multiples of $10,000,000 in excess thereof, upon at
least three Business Days' written notice to the Paying Agent, which notice
shall specify the amount of any such reduction, provided, however, that the
amount of the Aggregate Commitment may not be reduced below the aggregate
principal amount of the outstanding Advances. All accrued facility fees shall be
payable on the effective date of any termination of the obligations of the
Lenders to make Loans hereunder.
2.6. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be in the
minimum amount of $10,000,000 (and in integral multiples of $1,000,000 if in
excess thereof), provided, however, that any Floating Rate Advance may be in the
amount of the unused Aggregate Commitment.
2.7. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from time to time
pay, without penalty or premium, all outstanding Floating Rate Advances, or, in
a minimum aggregate amount of $10,000,000 or any integral multiple thereof, any
portion of the outstanding Floating Rate Advances, upon one Business Day's prior
notice to the Paying Agent. A Eurodollar Advance may not be paid prior to the
last day of the applicable Interest Period except (i) pursuant to an
acceleration or a mandatory prepayment in accordance with this Agreement, or
(ii) if the Borrower complies with all funding indemnification requirements
under Section 3.4.
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2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW ADVANCES.
The Borrower shall select the Type of Advance and, in the case of each
Eurodollar Advance, the Interest Period applicable to each Advance from time to
time. The Borrower shall give the Paying Agent irrevocable notice (a "Borrowing
Notice") not later than 10:00 a.m. (New York time) on the Borrowing Date of each
Floating Rate Advance, and at least three Business Days before the Borrowing
Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period
applicable thereto.
Not later than 1:00 p.m. (New York time) on each Borrowing Date, each Lender
shall make available its Loan or Loans, in funds immediately available in New
York to the Paying Agent at its address specified pursuant to Article XIII. Upon
satisfaction or waiver in accordance with the terms of this Agreement of the
applicable conditions precedent set forth in Article IV, the Paying Agent will
make the funds so received from the Lenders available to the Borrower at the
Paying Agent's aforesaid address.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. Floating Rate
Advances shall continue as Floating Rate Advances unless and until such Floating
Rate Advances are converted into Eurodollar Advances. Each Eurodollar Advance of
any Type shall continue as a Eurodollar Advance of such Type until the end of
the then applicable Interest Period therefor, at which time such Eurodollar
Advance shall be automatically converted into a Floating Rate Advance unless the
Borrower shall have given the Paying Agent a Conversion/Continuation Notice
requesting that, at the end of such Interest Period, such Eurodollar Advance
shall either continue as a Eurodollar Advance of such Type for the same or
another Interest Period or be converted into a Floating Rate Advance. Subject to
the terms of Section 2.6, the Borrower may elect from time to time to convert
all or any part of an Advance of any Type into any other Type or Types of
Advances; provided that any conversion of any Eurodollar Advance shall be made
on, and only on, the last day of the Interest Period applicable thereto. The
Borrower shall give the Paying Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of an Advance or
continuation of a Eurodollar Advance not later than 10:00 a.m. (New York time)
on the date of the requested conversion, in the case of a conversion of any
Advance into a Floating Rate Advance, or at least three Business Days prior to
the date of the requested conversion or continuation, in the case of a
conversion into or continuation of a Eurodollar Advance, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation;
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(ii) the aggregate amount and Type of the Advance which is to be
converted or continued; and
(iii) the amount and Type(s) of Advance(s) into which such Advance is
to be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Advance, the duration of the Interest Period
applicable thereto.
2.10. INTEREST. Each Floating Rate Advance shall bear interest on the
outstanding principal amount thereof, for each day from and including the date
such Advance is made or is converted from a Eurodollar Advance into a Floating
Rate Advance pursuant to Section 2.9 to but excluding the date it becomes due or
is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate
per annum equal to the Floating Rate for such day. Changes in the rate of
interest on that portion of any Advance maintained as a Floating Rate Advance
will take effect simultaneously with each change in the Base Rate. Each
Eurodollar Advance shall bear interest from and including the first day of the
Interest Period applicable thereto to (but not including) the last day of such
Interest Period at a rate per annum equal to the Eurodollar Rate applicable
thereto. No Interest Period for any Loans may end after the Maturity Date.
2.11. RATES APPLICABLE AFTER MATURITY OF ADVANCES. Notwithstanding
anything to the contrary contained in Section 2.8 or 2.9, no Advance may be made
as, converted into or continued as a Eurodollar Advance (except with the consent
of the Required Lenders) when any Default or Unmatured Default has occurred and
is continuing. If any Advance is not paid at maturity, whether by acceleration
or otherwise, (i) each Eurodollar Advance shall bear interest for the remainder
of the applicable Interest Period at the rate otherwise applicable to such
Eurodollar Advance for such Interest Period plus 1% per annum and at the end of
each Interest Period shall automatically convert to a Floating Rate Advance
bearing interest in accordance with clause (ii) of this Section, and (ii) each
Floating Rate Advance shall bear interest at a rate per annum equal to the
Floating Rate otherwise applicable to the Floating Rate Advance plus 1% per
annum.
2.12. METHOD OF PAYMENT. All payments of the Obligations hereunder
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Paying Agent at the Paying Agent's address specified
pursuant to Article XIII, or at any other Lending Installation of the Paying
Agent specified in writing by the Paying Agent to the Borrower, by noon (local
time) on the date when due. Each such payment shall be applied to any Advances
and other amounts then due in accordance with the written instructions from the
Borrower to the Paying Agent accompanying such payment and shall be applied
ratably by the Paying Agent among the Lenders. Each payment delivered to the
Paying Agent for the account of any Lender shall be delivered promptly by the
Paying Agent to such Lender in the same type of funds that the Paying Agent
received at such Lender's address specified pursuant to Article XIII or at any
Lending Installation specified in a notice received by the Paying Agent from
such Lender. The Borrower authorizes the Paying Agent to charge the Borrower's
account maintained with Morgan Guaranty for each payment of principal, interest
and fees as it becomes due hereunder.
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2.13. EVIDENCE OF DEBT; TELEPHONIC NOTICES. (a) Each Lender shall
maintain in accordance with its usual practice an account or accounts evidencing
the indebtedness of the Borrower to such Lender resulting from each Loan made by
such Lender, including the amounts of principal and interest payable and paid to
such Lender from time to time hereunder.
(b) The Paying Agent shall maintain accounts in which it shall record
(i) the amount of each Loan made hereunder, the Type thereof and the Interest
Period, if any, applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrower to each Lender
hereunder and (iii) the amount of any sum received by the Paying Agent hereunder
for the account of the Lenders and each Lender's share thereof.
(c) The entries made in the accounts maintained pursuant to subsections
(a) or (b) of this Section shall be PRIMA FACIE evidence of the existence and
amounts of the obligations recorded therein; PROVIDED that the failure of any
Lender or the Paying Agent to maintain such accounts or any error therein shall
not in any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.
(d) Any Lender may request that the Loans made by it each be evidenced
by a promissory note. In such event, the Borrower shall prepare, execute and
deliver to such Lender one promissory note, payable to the order of such Lender
(or, if requested by such Lender, to such Lender and its registered assigns) and
in a form approved by the Paying Agent. Thereafter, the Loans evidenced by such
promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 12.3) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).
(e) The Borrower authorizes the Lenders and the Paying Agent to extend,
convert or continue Advances, effect selections of Types of Advances and to
transfer funds based on telephonic notices made by any person or persons the
Paying Agent or any Lender in good faith believes to be an Authorized Officer
acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the
Paying Agent a written confirmation of each telephonic notice signed by an
Authorized Officer. If the written confirmation differs in any material respect
from the action taken by the Paying Agent and the Lenders, the records of the
Paying Agent and the Lenders shall govern absent manifest error.
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest accrued
on each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof, on any date on which
the Floating Rate Advance is prepaid, whether due to acceleration or otherwise,
and at maturity. Interest accrued on that portion of the outstanding principal
amount of any Floating Rate Advance converted into a Eurodollar Advance on a day
other than a Payment Date shall be payable on the date of conversion. Interest
accrued on each Eurodollar Advance shall be payable on the last day of its
applicable Interest Period, on
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any date on which the Eurodollar Advance is prepaid, whether by acceleration or
otherwise, and at maturity. Interest accrued on each Eurodollar Advance having
an Interest Period longer than three months shall also be payable on the last
day of each three-month interval during such Interest Period. Interest on
Eurodollar Advances shall be calculated for actual days elapsed on the basis of
a 360-day year. All other interest and fees shall be calculated for actual days
elapsed on the basis of a 365- or 366-day year, as appropriate. Interest shall
be payable for the day an Advance is made but not for the day of any payment on
the amount paid if payment is received prior to noon (local time) at the place
of payment. If any payment of principal of or interest on an Advance shall
become due on a day which is not a Business Day, such payment shall be made on
the next succeeding Business Day and, in the case of a principal payment, such
extension of time shall be included in computing interest in connection with
such payment.
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Paying Agent will
notify each Lender of the contents of each Aggregate Commitment reduction
notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice
received by it hereunder. The Paying Agent will notify each Lender of the
interest rate applicable to each Eurodollar Advance promptly upon determination
of such interest rate and will give each Lender prompt notice of each change in
the Base Rate. Each Reference Lender agrees to furnish timely information for
the purpose of determining the Eurodollar Rate.
2.16. LENDING INSTALLATIONS. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Loans shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written notice to
the Paying Agent and the Borrower, designate a Lending Installation through
which Loans will be made by it and for whose account Loan payments are to be
made.
2.17. NON-RECEIPT OF FUNDS BY THE PAYING AGENT. Unless the Borrower or
a Lender, as the case may be, notifies the Paying Agent prior to the date on
which it is scheduled to make payment to the Paying Agent of (i) in the case of
a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment
of principal, interest or fees to the Paying Agent for the account of the
Lenders, that it does not intend to make such payment, the Paying Agent may
assume that such payment has been made. The Paying Agent may, but shall not be
obligated to, make the amount of such payment available to the intended
recipient in reliance upon such assumption. If such Lender or the Borrower, as
the case may be, has not in fact made such payment to the Paying Agent, the
recipient of such payment shall, on demand by the Paying Agent, repay to the
Paying Agent the amount so made available together with interest thereon in
respect of each day during the period commencing on the date such amount was so
made available by the Paying Agent until the date the Paying Agent recovers such
amount at a rate per annum equal to (i) in the case of payment by a Lender, the
Federal Funds Effective Rate for such day or (ii) in the case of payment by the
Borrower, the interest rate applicable to the relevant Loan.
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2.18. WITHHOLDING TAX EXEMPTION. At least five Business Days prior to
the first date on which interest or fees are payable hereunder for the account
of any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, agrees that it will deliver to each of
the Borrower and the Paying Agent two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224, certifying in either case that such
Lender is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes. Each Lender which so
delivers a Form 1001 or 4224 further undertakes to deliver to each of the
Borrower and the Paying Agent two additional copies of such form (or a successor
form) on or before the date that such form expires (currently, three successive
calendar years for Form 1001 and one calendar year for Form 4224) or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent forms so delivered by it, and such amendments thereto or extensions or
renewals thereof as may be reasonably requested by the Borrower or the Paying
Agent, in each case certifying that such Lender is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes, unless an event (including without limitation any change
in treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender advises the Borrower and the Paying
Agent that it is not capable of receiving payments without any deduction or
withholding of United States federal income tax.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether or
not having the force of law), or any interpretation thereof, or the compliance
of any Lender therewith,
(i) subjects any Lender or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due
from the Borrower (excluding federal taxation of the overall
net income of any Lender or applicable Lending Installation),
or changes the basis of taxation of payments to any Lender in
respect of its Loans or other amounts due it hereunder, or
(ii) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar
requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender or any
applicable Lending Installation (other than reserves and
assessments taken into account in determining the Eurodollar
Rate), or
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(iii) imposes any other condition the result of which is to
increase the cost to any Lender or any applicable Lending
Installation of making, funding or maintaining loans or
reduces any amount receivable by any Lender or any applicable
Lending Installation in connection with loans, or requires
any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of loans held
or interest received by it, by an amount deemed material by
such Lender,
then, within 15 days after demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitments.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender determines
that the amount of capital required or expected to be maintained by such Lender,
any Lending Installation of such Lender or any corporation controlling such
Lender is increased as a result of a Change, then, within 15 days after demand
by such Lender, the Borrower shall pay such Lender the amount necessary to
compensate such Lender for any shortfall in the rate of return on the portion of
such increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "Change" means (i)
any change after the date of this Agreement in the Risk-Based Capital Guidelines
or (ii) any adoption of or change in any other law, governmental or
quasi-governmental rule, regulation, policy, guideline, interpretation, or
directive (whether or not having the force of law) after the date of this
Agreement which affects the amount of capital required or expected to be
maintained by any Lender or any Lending Installation or any corporation
controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based
capital guidelines in effect in the United States on the date of this Agreement,
including transition rules, and (ii) the corresponding capital regulations
promulgated by regulatory authorities outside the United States implementing the
July 1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines that
maintenance of its Eurodollar Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation, or directive, whether or not
having the force of law, or if the Required Lenders determine that (i) deposits
of a type and maturity appropriate to match fund Eurodollar Advances are not
available or (ii) the interest rate applicable to a Eurodollar Advance does not
accurately reflect the cost of making or maintaining such Advance, then the
Paying Agent shall suspend the availability of Eurodollar Advances and require
any Eurodollar Advances to be converted to Floating Rate Advances.
3.4. FUNDING INDEMNIFICATION. If any payment or conversion of a
Eurodollar Advance occurs on a date which is not the last day of the applicable
Interest Period, whether because of
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acceleration, prepayment or otherwise, or a Eurodollar Advance is not made on
the date specified by the Borrower for any reason other than default by the
Lenders, the Borrower will indemnify each Lender for any loss or cost incurred
by it resulting therefrom, including, without limitation, any loss or cost in
liquidating or employing deposits acquired to fund or maintain the Eurodollar
Advance.
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably
possible, each Lender shall designate an alternate Lending Installation with
respect to its Eurodollar Loans to reduce any liability of the Borrower to such
Lender under Sections 3.1 and 3.2 or to avoid the unavailability of Eurodollar
Advances under Section 3.3, so long as such designation is not disadvantageous
to such Lender as determined by such Lender in its sole discretion. Each Lender
shall deliver a written statement of such Lender as to the amount due, if any,
under Section 3.1, 3.2 or 3.4. Such written statement shall set forth in
reasonable detail the calculations upon which such Lender determined such amount
and shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Loan shall be calculated as though each Lender
funded its Eurodollar Loan through the purchase of a deposit of the type and
maturity corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement shall be payable on demand after receipt by the Borrower of the
written statement. The obligations of the Borrower under Sections 3.1, 3.2 and
3.4 shall survive payment of the Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. CLOSING. The Lenders shall not be required to make the initial
Advance hereunder unless:
(a) on or before the Effective Date the Paying Agent shall have
received, with sufficient copies for the Lenders:
(i) Counterpart signature pages of this Agreement executed by each
party hereto;
(ii) Counterparts of the Guaranty, executed by each Guarantor;
(iii) Copies of the charter of the Borrower and each Guarantor,
together with all amendments, and a certificate of good
standing for each such Person, all certified on or within 15
days prior to the Effective Date by the appropriate
governmental officer in such Person's jurisdiction of
incorporation;
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(iv) Copies, certified as of the Effective Date by the Secretary or
Assistant Secretary of the Borrower and each Guarantor, of its
by-laws and of its Board of Directors' resolutions (and
resolutions of other bodies, if any are reasonably deemed
necessary by counsel for any Lender) authorizing the
execution, delivery, and performance of the Loan Documents;
(v) Incumbency certificates, executed as of the Effective Date by
the Secretary or Assistant Secretary of the Borrower and each
Guarantor, which shall identify by name and title and bear the
signature of the officers of the Borrower or such Guarantor,
as the case may be, authorized to sign the Loan Documents and
to make borrowings hereunder, upon which certificate the
Paying Agent and the Lenders shall be entitled to rely until
informed of any change in writing by the Borrower;
(vi) A certificate, dated the Effective Date, signed by the Chief
Financial Officer or Treasurer of the Borrower, stating that
on such date no Default or Unmatured Default has occurred and
is continuing;
(vii) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit "B" hereto. The
Borrower requests its counsel to issue such opinion;
(viii) The Company shall have paid all fees and expenses due and
payable on or before the Effective Date;
(ix) A written representation and warranty by the Borrower that, as
of the Effective Date, since May 31, 1998, there has been no
change in the business, Property, prospects, condition
(financial or otherwise) or results of operations of the
Borrower and its Subsidiaries taken as a whole which could
reasonably be expected to have a Material Adverse Effect;
(x) A summary of the Eligible Receivables of FedEx and its
Subsidiaries as of November 30, 1998, and a calculation of the
value of the Designated Collateral (determined in accordance
with Section 6.26(b)), in each case in form satisfactory to
the Paying Agent; and
(xi) such other documents as any Lender or its counsel may
reasonably request; and
(b) the following additional conditions precedent have been satisfied:
(i) amendments to the Existing Revolving Credit Documents and the
Existing L/C Facility Documents shall have been executed and
delivered, to permit the execution, delivery and performance
of the Loan Documents, and copies of such amendments shall
have been delivered to the Paying Agent; and
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(ii) no amounts shall be outstanding under the Existing Revolving
Credit Documents.
4.2. EACH ADVANCE. The Lenders shall not be required to make any
Advance, unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default and no Default or
Unmatured Default shall occur upon giving effect to the
application of the proceeds of such Advance.
(ii) The representations and warranties contained in Article V are
true and correct as of such Borrowing Date except for changes
in the Schedules hereto reflecting transactions permitted by
this Agreement.
(iii) All legal matters incident to the making of such Advance shall
be satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that the conditions
contained in Sections 4.2(i) and (ii) have been satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. CORPORATE EXISTENCE AND STANDING. Each of the Borrower, each of
the Guarantors and each of the Significant Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite authority to conduct its
business in each jurisdiction in which its business is conducted and where the
failure to have such requisite authority would have a material adverse effect on
the business of the Borrower, the Guarantors and the Significant Subsidiaries
taken as a whole.
5.2. AUTHORIZATION AND VALIDITY. The Borrower and each of the
Guarantors has the corporate power and authority and legal right to execute and
deliver the Loan Documents executed (or, with respect to the Security Documents,
to be executed) by it and to perform its obligations thereunder. The execution
and delivery by the Borrower and the Guarantors of the Loan Documents and the
performance of their respective obligations thereunder have been duly authorized
by proper corporate proceedings, and the Loan Documents constitute (or, with
respect to the Security Documents, when executed will constitute) legal, valid
and binding obligations of the Borrower and the Guarantors, enforceable in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency or similar laws affecting the
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enforcement of creditors' rights generally and subject also to the availability
of equitable remedies if equitable remedies are sought.
5.3. NO CONFLICT; GOVERNMENT CONSENT. Neither the Borrower's nor any
Guarantor's execution and delivery of the Loan Documents, nor the consummation
of the transactions therein contemplated, nor compliance with the provisions
thereof will violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on the Borrower, any Guarantor or any of the
Significant Subsidiaries or the Borrower's, any Guarantor's or any Significant
Subsidiary's articles or certificate of incorporation or by-laws or the
provisions of any indenture, instrument or agreement to which the Borrower, any
Guarantor or any of the Significant Subsidiaries is a party or is subject, or by
which it, or its Property, is bound, or conflict with or constitute a default
thereunder, or, except pursuant to the Security Documents, result in or require
the creation or imposition of any Lien in, of or on the Property of the
Borrower, any Guarantor or any Significant Subsidiary pursuant to the terms of
any such indenture, instrument or agreement. Except for the (i) 1996 Caliber
Indenture and (ii) certain additional Indebtedness in an aggregate principal
amount of not greater than $50,000,000, none of the Borrower, any Guarantor or
any Subsidiary is a party to any indenture, instrument or agreement that
requires the Indebtedness governed thereby to be equally and ratably secured
with the Obligations as a result of the execution and delivery of any of the
Security Documents. No order, consent, approval, license, authorization or
validation of, or filing, recording or registration with, or exemption by, any
governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with the execution, delivery
and performance of, or the legality, validity, binding effect or enforceability
of, any of the Loan Documents (other than filings in connection with the
Security Documents).
5.4. FINANCIAL STATEMENTS. The May 31, 1998 audited consolidated
financial statements and August 31, 1998 unaudited consolidated financial
statements of the Borrower and its Consolidated Subsidiaries heretofore
delivered to the Lenders were prepared in accordance with GAAP in effect on the
dates such statements were prepared and fairly present the consolidated
financial condition and operations of the Borrower and its Consolidated
Subsidiaries at such dates and the consolidated results of their operations for
the periods then ended (except, in the case of such unaudited statements, for
normal year-end adjustments).
5.5. TAXES. The Borrower and its Significant Subsidiaries have filed
all United States federal tax returns and all other material tax returns which
are required to be filed and have paid all taxes due pursuant to said returns or
pursuant to any assessment received by the Borrower or any of its Significant
Subsidiaries, except such taxes, if any, as are being contested in good faith
and as to which adequate reserves determined in accordance with GAAP have been
provided. The charges, accruals and reserves on the books of the Borrower and
its Significant Subsidiaries in respect of any taxes or other governmental
charges are adequate.
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5.6. LITIGATION AND CONTINGENT OBLIGATIONS. Except for such matters as
are referenced in the form of opinion of counsel attached hereto as Exhibit "B",
there is no litigation, arbitration, governmental investigation, proceeding or
inquiry pending or, to the knowledge of any of their officers, threatened
against or affecting the Borrower or any of its Significant Subsidiaries which
could reasonably be expected to have a Material Adverse Effect. Other than any
liability incident to such litigation, arbitration or proceedings, the Borrower
and its Significant Subsidiaries have no material contingent obligations not
provided for or disclosed in the financial statements referred to in Section
5.4.
5.7. SUBSIDIARIES. Schedule "2" hereto contains an accurate list of all
of the presently existing Significant Subsidiaries of the Borrower, setting
forth their respective jurisdictions of incorporation and the percentage of
their respective capital stock owned by the Borrower or other Subsidiaries. All
of the issued and outstanding shares of capital stock of such Subsidiaries have
been duly authorized and issued and are fully paid and non-assessable.
5.8. ERISA. The Unfunded Liabilities of all Single Employer Plans do
not in the aggregate exceed $80,000,000. Each Plan complies in all material
respects with all applicable requirements of law and regulations, no Reportable
Event has occurred with respect to any Plan, neither the Borrower nor any other
member of the Controlled Group has withdrawn from any Plan or initiated steps to
do so, and no steps have been taken to reorganize or terminate any Plan.
5.9. ACCURACY OF INFORMATION. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Paying Agent or to
any Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
5.10. REGULATION U. Margin stock (as defined in Regulation U)
constitutes less than 25% of the value of those assets of the Borrower and its
Subsidiaries which are subject to any limitation on sale or pledge, or any other
restriction, hereunder.
5.11. MATERIAL AGREEMENTS. Neither the Borrower nor any Subsidiary is a
party to any agreement (including, without limitation, this Agreement) or
instrument or subject to any charter or other corporate restriction which could
reasonably be expected to have a Material Adverse Effect. Neither the Borrower
nor any Subsidiary is in default in the performance, observance or fulfillment
of any of the obligations, covenants or conditions contained in any agreement to
which it is a party, which default could reasonably be expected to have a
Material Adverse Effect.
5.12. COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have
complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof, having jurisdiction over the conduct of
their respective businesses or the ownership of their respective Property.
Neither the Borrower nor any Subsidiary has received any notice to the effect,
nor does any Authorized
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Officer have any actual knowledge, that its operations are not in material
compliance with any of the requirements of applicable federal, state and local
environmental, health and safety statutes and regulations or the subject of any
federal or state investigation evaluating whether any remedial action is needed
to respond to a release of any toxic or hazardous waste or substance into the
environment, which non-compliance or remedial action could reasonably be
expected to have a Material Adverse Effect.
5.13. EXISTING LIENS. None of the assets of the Borrower or any of its
Subsidiaries is subject to any Lien other than those permitted by Section 6.19.
5.14. INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary
thereof is an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
5.15. CITIZENSHIP. FedEx is a citizen of the United States, as defined
in 49 U.S.C. Sec. 40102(a)(15) (a "Citizen"). Each other Subsidiary that must be
a Citizen in order to conduct its business as currently conducted is a Citizen.
Neither FedEx nor any such other Subsidiary is a national of any foreign country
designated in Presidential Executive Order No. 8389 or 9193, as amended, and the
regulations issued thereunder, as amended, or a national of any foreign country
designated in the Foreign Assets Control Regulations or in the Cuban Assets
Control Regulations of the United States Treasury Department, 31 C.F.R., Chapter
V, as amended.
5.16. STATUS AS AIR CARRIER. FedEx, and each other Subsidiary that must
be so authorized in order to conduct its business as currently conducted, (i) is
authorized to engage in all cargo domestic and international air service under
certificates issued pursuant to 49 U.S.C. Sec. 41103 and 49 U.S.C. Sec.
41102(a), respectively, and (ii) is the holder of a valid and effective
operating certificate issued by the FAA pursuant to Part 121 of the Federal
Aviation Regulations. Such certificates are in full force and effect and are
adequate for the conduct of the business of the Borrower and its Subsidiaries as
now conducted. There are no actions, proceedings or investigations pending or,
to the knowledge of any of its officers, threatened (or any basis therefor known
to the Borrower) to amend, modify, suspend or revoke any such certificate in
whole or in part, which would have any material adverse effect on any such
certificate or any of the operations of the Borrower or its Subsidiaries.
5.17. PARI PASSU. All the payment obligations of the Borrower and the
Guarantors arising under or pursuant to the Loan Documents will at all times
rank pari passu with all other unsecured and unsubordinated payment obligations
and liabilities (including contingent obligations and liabilities) of the
Borrower and the Guarantors (other than obligations under the Existing Revolving
Credit Documents, provided that no Default has occurred hereunder, and
obligations which are mandatorily preferred by laws or regulations of general
application).
5.18. MATERIAL ADVERSE EFFECT. Since May 31, 1998 there has been no
change in the business, Property, prospects, condition (financial or otherwise)
or results of operations of the
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Borrower and its Subsidiaries taken as a whole which could reasonably be
expected to have a Material Adverse Effect.
5.19. YEAR 2000 COMPLIANCE. The Borrower has (i) initiated a review and
assessment of all areas within the business and operations of the Borrower and
any of its Subsidiaries (including those areas affected by suppliers and
vendors) that could be adversely affected by the Year 2000 Problem, (ii)
developed a plan and timeline for addressing the Year 2000 Problem on a timely
basis and (iii) to the date hereof, implemented such plan in accordance with
such timetable. The Borrower reasonably believes that all computer applications
(including those of suppliers and vendors) that are material to the business or
operations of the Borrower or any of its Subsidiaries will, on a timely basis,
be able to properly perform date-sensitive functions for all dates before and
from and after January 1, 2000, except to the extent that a failure to do so
could not reasonably be expected to have a Material Adverse Effect.
ARTICLE VI
COVENANTS
During the term of this Agreement and so long as any Obligations are
outstanding or any Commitment is in effect hereunder, unless the Required
Lenders shall otherwise consent in writing:
6.1. FINANCIAL REPORTING. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with GAAP, and furnish to the Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified
public accountants of recognized national standing acceptable
to the Lenders, prepared in accordance with GAAP on a
consolidated basis for itself and the Consolidated
Subsidiaries, including a balance sheet as of the end of such
period, related profit and loss and reconciliation of surplus
statements, and a statement of cash flows, accompanied by (a)
any management letter prepared by said accountants, and (b) a
certificate of said accountants that, in the course of their
examination necessary for their certification of the
foregoing, they have obtained no knowledge of any Default or
Unmatured Default, or if, in the opinion of such accountants,
any Default or Unmatured Default shall exist, stating the
nature and status thereof.
(ii) Within 45 calendar days after the end of each of the first
three quarters of each fiscal year of the Borrower, for itself
and the Consolidated Subsidiaries, an unaudited consolidated
balance sheet as at the close of such period and consolidated
profit and loss and reconciliation of surplus statements and a
statement of cash flows for the period from the beginning of
such fiscal year to the
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end of such quarter, all certified as complete and accurate
and prepared in accordance with GAAP by its Chief Financial
Officer, Treasurer or Controller.
(iii) Within 45 calendar days after the end of each of the first
three quarters of each fiscal year of the Borrower and within
90 calendar days after the end of the fourth quarter of each
fiscal year of the Borrower, and from time to time as
reasonably requested by the Paying Agent, for Caliber and its
Subsidiaries on a consolidated basis, a certificate signed by
the Borrower's Chief Financial Officer, Treasurer or
Controller certifying as to, (i) for such period, the Caliber
Operating Income and (ii) at the end of such period, the
aggregate principal amount of all outstanding Indebtedness of
Caliber and its Subsidiaries.
(iv) Together with the financial statements required hereunder, a
certificate signed by its Chief Financial Officer or Treasurer
stating that no Default or Unmatured Default exists, or if any
Default or Unmatured Default exists, stating the nature and
status thereof, and stating the steps the Borrower is taking
to cure such Default or Unmatured Default.
(v) As soon as available, and in any event within 45 calendar days
after the end of each of the first three quarters of each
fiscal year of the Borrower and within 90 calendar days after
the end of the fourth quarter of each fiscal year of the
Borrower, a schedule in substantially the form of Schedule "3"
hereto, certified as accurate by the Borrower's Chief
Financial Officer, Treasurer or Controller, showing, as of the
end of such quarter, the Borrower's calculation, in form and
detail satisfactory to the Paying Agent, of the calculations
required to be made to determine compliance with each of
Sections 6.12, 6.13 and 6.24.
(vi) Promptly upon becoming available, copies of:
(a) All financial statements, reports, notices and proxy
statements sent by the Borrower, any Guarantor or any
Significant Subsidiary to its public stockholders (if
any).
(b) All prospectuses (other than on Form S-8 or a similar
form) of the Borrower or any Consolidated Subsidiary
filed with the Securities and Exchange Commission or
any other governmental agency succeeding to the
jurisdiction thereof.
(c) All regular and periodic reports filed by the
Borrower or any Consolidated Subsidiary with any
securities exchange or with the Securities and
Exchange Commission or any other governmental agency
succeeding to the jurisdiction thereof.
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(vii) As soon as possible and in any event within 10 days after
receipt by the Borrower, a copy of (a) any notice or claim to
the effect that the Borrower or any of its Subsidiaries is or
may be liable to any Person as a result of the release by the
Borrower, any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the environment,
and (b) any notice alleging any violation of any federal,
state or local environmental, health or safety law or
regulation by the Borrower or any of its Subsidiaries, which,
in either case, could reasonably be expected to have a
Material Adverse Effect.
(viii) Promptly after any Authorized Officer learns thereof, notice
of any change in any Rating, or any publicly-announced
decision by Moody's or S&P to consider a change in any Rating.
(ix) On or before January 15, 1999, and thereafter from time to
time as reasonably requested by the Paying Agent within 15
Business Days after each such request, an Appraisal Report
setting forth the fair market value of the airframes and
engines of FedEx included in Schedule "1".
(x) Not more than 15 Business Days after the end of each calendar
month following the Effective Date, or more frequently as the
Paying Agent may reasonably request from time to time, a
report summarizing the Eligible Receivables of FedEx and its
Subsidiaries as of the end of such month or such other date.
(xi) Within 15 Business Days after the Paying Agent may reasonably
request from time to time, an appraisal setting forth the fair
market value of all or any part of the Designated Collateral
described in clause (iv) of Section 6.26(b).
(xii) Such other information (including non-financial information)
as the Paying Agent or any Lender may from time to time
reasonably request.
6.2. USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Advances as liquidity support for the issuance of
commercial paper by the Borrower, for Acquisitions not prohibited under the
following sentence, for general corporate purposes and working capital of the
Borrower and its Subsidiaries (including working capital needs in connection
with self-help actions or a strike by members of the FPA, or contingency plans
related thereto), and to repay outstanding Advances. The Borrower will not, nor
will it permit any Subsidiary to, use any of the proceeds of the Advances to
purchase or carry any "margin stock" (as defined in Regulation U) or to make any
Acquisition which has not been approved or consented to by the board of
directors or equivalent governing body of the Person whose assets or equity
interests are to be acquired.
6.3. NOTICE OF DEFAULT. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of
any Default or Unmatured Default
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and of any other development, financial or otherwise, which could reasonably be
expected to have a Material Adverse Effect.
6.4. CONDUCT OF BUSINESS. Except as permitted by Sections 6.15 and
6.16, the Borrower will, and will cause each Guarantor and Significant
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted (except for changes in the conduct of business resulting from an
actual or threatened business interruption, including but not limited to
self-help actions or a strike, by members of the FPA, or contingency plans
related thereto) and to do all things necessary to remain duly incorporated,
validly existing and in good standing as a domestic corporation in its
jurisdiction of incorporation and maintain all requisite authority to conduct
its business in each jurisdiction in which its business is conducted and where
the failure to have such requisite authority could reasonably be expected to
have a Material Adverse Effect.
6.5. CITIZENSHIP AND REGULATORY CERTIFICATES. The Borrower will cause
FedEx and each other applicable Subsidiary to continue to be (a) a citizen of
the United States, as defined in 49 U.S.C. Sec. 40102(a)(15), (b) authorized to
engage in all cargo domestic and international air service under certificates
issued pursuant to 49 U.S.C. Sec. 41103 and 49 U.S.C. Sec. 41102(a),
respectively, (c) the holder of all other certificates, rights, permits,
franchises and concessions from appropriate governments or governmental
authorities necessary or appropriate to enable the Borrower and its Subsidiaries
to conduct their business in all material respects as presently being conducted,
and (d) the holder of a valid and effective operating certificate issued by the
FAA pursuant to Part 121 of the Federal Aviation Regulations. The Borrower will,
and will cause each of its Subsidiaries to, use its best efforts to maintain,
preserve and keep in full force and effect its certificates, rights, permits,
franchises and concessions from appropriate governments or governmental
authorities and use its best efforts from time to time to obtain appropriate
renewals or replacements, provided, that nothing in this Section 6.5 shall
prevent the Borrower or any of its Subsidiaries from abandoning, or permitting
the amendment, expiration or termination of, any such certificate, right,
permit, franchise or concession if, in the opinion of the Borrower, such
abandonment, amendment, expiration or termination is in the interest of the
Borrower and not prejudicial in any material respect to the Lenders.
6.6. PAYMENT OF TAXES. The Borrower will, and will cause each
Subsidiary to, pay and discharge all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits, or upon any property
belonging to it, and all lawful claims which, if unpaid, would become a Lien,
except where failure to do any of the foregoing would not have a Material
Adverse Effect and provided that neither the Borrower nor a Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim the payment of
which is being contested in good faith and by appropriate proceedings; and make
monthly accruals of all of the estimated liability of the Borrower and
Subsidiaries for such taxes, assessments, charges and levies, determined in
accordance with GAAP, and establish adequate reserves determined in accordance
with GAAP,
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for such thereof as may be contested, and reflect such accruals and reserves in
all financial statements furnished hereunder.
6.7. INSURANCE. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all its respective Property in such amounts and covering such risks as is
consistent with sound business practice, and the Borrower will furnish to any
Lender upon request full information as to the insurance carried.
6.8. COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject, except
where failure to do so could not reasonably be expected to have a Material
Adverse Effect.
6.9. MAINTENANCE OF PROPERTIES. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times, except where
failure to do any of the foregoing could not reasonably be expected to have a
Material Adverse Effect.
6.10. INSPECTION. The Borrower will, and will cause each Subsidiary to,
permit the Lenders, by their respective representatives and agents, to inspect
any of the Property, corporate books and financial records of the Borrower and
each Subsidiary, to examine and make copies of the books of accounts and other
financial records of the Borrower and each Subsidiary, and to discuss the
affairs, finances and accounts of the Borrower and each Subsidiary with, and to
be advised as to the same by, their respective officers at such reasonable times
and intervals as the Lenders may designate upon reasonable notice to the
Borrower.
6.11. DIVIDEND DECLARATIONS. The Borrower will not, nor will it permit
any Consolidated Subsidiary to, declare any dividend on any of its shares
payable more than 60 calendar days after the declaration date.
6.12. LEVERAGE. The Borrower will maintain at all times a ratio of (i)
the sum of (a) the aggregate unpaid principal amount of all outstanding Funded
Debt, PLUS (b) Capitalized Operating Lease Value, to (ii) the sum of (a) the
items listed in clause (i) above PLUS (b) Consolidated Adjusted Net Worth, of
not more than .70 to l.
6.13. FIXED CHARGE COVERAGE. The Borrower will at all times maintain a
ratio of (a) Consolidated Cash Flow to (b) the sum of Interest Expense and Rent
Expense in an amount not less than 1.2 to 1.
6.14. RESERVED.
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6.15. MERGER AND CONSOLIDATION. The Borrower will not, nor will it
permit any Consolidated Subsidiary to, merge or consolidate with or into or
enter into any analogous reorganization or transaction with any other Person,
except
(a) Any Consolidated Subsidiary (other than Caliber) or other
corporation may merge or consolidate with the Borrower, provided that,
after giving effect to any such merger or consolidation, (i) the
Borrower shall be the continuing or surviving corporation and (ii) no
Default or Unmatured Default shall exist,
(b) Any Wholly-Owned Subsidiary (other than Caliber) may
merge with any other Wholly-Owned Subsidiary,
(c) Any Consolidated Subsidiary other than Caliber, FedEx or
RPS may be liquidated or dissolved,
(d) Any Consolidated Subsidiary (other than Caliber) may
merge or consolidate with any other Person, provided that, after giving
effect to any such merger or consolidation, no Default or Unmatured
Default shall exist, and provided, further, that, unless after giving
effect to any such merger or consolidation the Borrower owns, directly
or indirectly, 100% of such Consolidated Subsidiary, (i) such merger or
consolidation shall be deemed to be a sale of such Consolidated
Subsidiary to such other Person pursuant to either Section 6.16(c) or
6.16(e) (as appropriate under the terms of Section 6.16) and (ii) such
merger or consolidation shall be a violation of this Section 6.15
unless such deemed sale is permitted by either Section 6.16(c) or
6.16(e) and the Borrower complies with all of the terms of Section
6.16(c) or Section 6.16(e), as the case may be, regarding such deemed
sale, and
(e) Any other corporation may merge or consolidate with any
Consolidated Subsidiary, provided that, after giving effect to any such
merger or consolidation, (i) the continuing or surviving corporation
shall be a Consolidated Subsidiary, (ii) no Default or Unmatured
Default shall exist, and (iii) the Borrower owns, directly or
indirectly, 100% of such Consolidated Subsidiary.
6.16. SALES OF ASSETS. The Borrower will not, nor will it permit any
Consolidated Subsidiary to, sell, transfer, convey (including, without
limitation, any sale, transfer or conveyance related to a sale and leaseback
transaction but excluding sales of inventory in the ordinary course of business)
or lease (or enter into any commitment to sell, transfer, convey or lease) all
or any part of its assets (whether in one or a series of transactions) except
(a) Leases by the Borrower and Consolidated Subsidiaries of
Flight Equipment to others provided that the aggregate book value of
all Flight Equipment leased to any other Person or Persons by the
Borrower or any such Consolidated Subsidiary shall not at any time
exceed $500,000,000;
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(b) Sales of property by the Borrower or a Consolidated
Subsidiary provided that at the time of any such sale or other
disposition the Borrower or Consolidated Subsidiary making such sale or
disposition shall have previously acquired or shall be simultaneously
acquiring, in contemplation of such sale or other disposition,
substantially similar property, or shall have previously entered into,
or shall be simultaneously entering into, a binding purchase agreement
or purchase agreements to acquire substantially similar property, which
property is acquired within three years of such sale or other
disposition;
(c) Sales of property (other than sales of property permitted
by Section 6.16(e) but including any deemed sales of property pursuant
to Section 6.15(d)) determined by the Borrower to be surplus or
obsolete provided that the aggregate net book value of all such surplus
or obsolete property sold in any one fiscal year of the Borrower shall
not exceed 12.5% of Consolidated Adjusted Net Worth as of the last day
of the fiscal year of the Borrower immediately preceding the fiscal
year of the Borrower during which any such sale of assets shall take
place;
(d) Sales of any property in order concurrently or
subsequently to lease as lessee such or similar property, provided that
(i) any such sale takes place within 360 days after (A) in the case of
personal property, the date on which the Borrower or the applicable
Consolidated Subsidiary acquired such property, and (B) in the case of
real property or fixtures, the later of the date on which the Borrower
or the applicable Consolidated Subsidiary acquired such property or the
date on which construction of all improvements on such property was
completed, and (ii) after giving effect to the creation of the
Capitalized Lease Obligations, if any, of the Borrower or a
Consolidated Subsidiary resulting from the lease of such property by
the Borrower or a Consolidated Subsidiary, the Borrower is in
compliance with Section 6.12;
(e) Dispositions in connection with the restructuring at
Viking Freight, Inc. which was publicly announced prior to the date
hereof; and
(f) Sales of Property commonly known as "Federal Express
Stage 3 Kits" in accordance with FedEx's ordinary business practices.
Notwithstanding any provision of this Section 6.16 to the contrary, the Borrower
will not, nor will it permit any Consolidated Subsidiary to, make any such sale,
transfer, conveyance or lease of any Collateral or Designated Collateral without
the prior written consent of the Required Lenders, except that the Borrower and
its Consolidated Subsidiaries may sell, transfer, convey or lease, in accordance
with the foregoing provisions of this Section 6.16, Designated Collateral
consisting of motor vehicles and real estate without such written consent,
provided that after giving effect thereto, the Borrower is in compliance with
Section 6.24.
6.17. LOANS, ADVANCES AND INVESTMENTS. The Borrower will not, nor will
it permit any Consolidated Subsidiary to, make or suffer to exist any
Investments, or commitments therefor, except
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(a) Marketable direct obligations of the United States of
America, or an instrumentality or agency thereof, having a remaining
term to maturity of not more than one year;
(b) Certificates of deposit or other obligations having a
remaining term to maturity of not more than one year and issued by a
Lender or any other national or state bank or trust company having
capital, surplus and undivided profits in excess of $250,000,000 in the
aggregate;
(c) Other certificates of deposit having a remaining term to
maturity of not more than one year and issued by a bank or other
financial institution approved in accordance with the Borrower's
corporate investment guidelines and procedures provided that the
aggregate outstanding principal amount of all such certificates of
deposit shall not at any one time exceed $1,000,000;
(d) Time deposits in any currency having a remaining term to
maturity of not more than one year and held by (i) foreign branches of
American banks, each such bank having capital, surplus and undivided
profits in excess of $250,000,000, or (ii) foreign banks, each such
bank having total capital, surplus and undivided profits in excess of
$250,000,000 or its equivalent in other currencies;
(e) For a period not in excess of one year, (i) marketable
direct obligations of the United States of America, or an
instrumentality or agency thereof, or (ii) instruments fully supported
by marketable direct obligations of the United States of America, or an
instrumentality or agency thereof, or (iii) open market commercial
paper maturing within one year after acquisition of such commercial
paper, which is rated A1 or better by S&P or P1 or better by Moody's;
in each case, purchased by the Borrower or a Consolidated Subsidiary
and actually delivered to or held by a Dealer for the account of the
Borrower or a Consolidated Subsidiary under a repurchase agreement with
the Dealer from which such obligations or commercial paper was
purchased obligating such Dealer to repurchase such obligations or
commercial paper within fourteen calendar days after the date of such
repurchase agreement;
(f) Open-market commercial paper maturing within one year
after the acquisition thereof, which is rated A1 or better by S&P or P1
or better by Moody's;
(g) Investments in the capital stock of a Consolidated
Subsidiary;
(h) Loans and advances by the Borrower to a Consolidated
Subsidiary;
(i) Loans and advances by a Consolidated Subsidiary to any
other Consolidated Subsidiary or to the Borrower;
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(j) Investments in any Person not otherwise permitted by this
Section 6.17, which together with all other Investments at the time
outstanding under this Section 6.17(j), do not exceed 12.5% of
Consolidated Adjusted Net Worth provided that at least 66-2/3% of such
Investments are reasonably related to the same fields of enterprise as
those in which the Borrower and the Consolidated Subsidiaries are now
engaged; and
(k) Investments made by the Borrower or a Consolidated
Subsidiary provided that, after giving effect to any such Investment,
(i) the aggregate amount of all such Investments existing on the date
of such proposed action shall not exceed (x) $750,000,000 plus (y) 75%
(or in the case of a deficit, minus 100%) of the Consolidated Net
Income for the period commencing on June 1, 1997 and ending on and
including the date of any such proposed action (the "Computation
Period") plus (z) the aggregate amount of the net cash proceeds
received by the Borrower during the Computation Period from the sale of
its stock and Indebtedness of the Borrower convertible into stock of
the Borrower (but only to the extent that any such Indebtedness has
been converted into shares of such stock during such period), and (ii)
there shall exist no Default or Unmatured Default.
In determining from time to time the amount of the Investments permitted by this
Section 6.17, loans and advances shall be taken at the principal amount thereof
then remaining unpaid at the time of such determination and other Investments
shall be taken at the original cost thereof, regardless of any subsequent
appreciation or depreciation therein.
6.18. CONTINGENT LIABILITIES. The Borrower will not, nor will it permit
any Consolidated Subsidiary to, assume, guarantee (including entering into any
contract which is, in economic effect, substantially equivalent to a guaranty),
endorse, contingently agree to purchase or to provide funds for the payment of,
agree to maintain the net worth or working capital or any other financial test
of, or otherwise become liable upon, any obligation of, any Person, except
(a) the Guaranties;
(b) By the endorsement of negotiable instruments for deposit
or collection (or similar transactions) in the ordinary
course of business;
(c) Guaranties of customs fees in the ordinary course of
business;
(d) Any other Contingent Obligation which after having given
effect thereto would not cause the Borrower to fail to be
in compliance with Section 6.12; and
(e) Guaranties included or required under the Existing
Revolving Credit Documents and the Existing L/C Facility
Documents.
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In determining from time to time the amount of guaranties and contingent
liabilities permitted by this Section 6.18, guaranties and contingent
liabilities shall be taken at the principal amount then remaining unpaid at the
time of such determination on the indebtedness and obligations so guaranteed or
related to such contingent liabilities.
6.19. LIENS. The Borrower will not, nor will it permit any Consolidated
Subsidiary to, create, incur, assume or suffer to exist, any Lien, or enter
into, or make any commitment to enter into, any arrangement for the acquisition
of any Property through conditional sales, lease-purchase or other title
retention agreement, except:
(a) Liens which may be hereafter created to secure payment of
the Obligations;
(b) Deposits or pledges, made in the ordinary course of
business, to secure payment of workers' compensation, unemployment
insurance, old age pensions or other social security obligations;
(c) Deposits or pledges, made in the ordinary course of
business, to secure performance of bids, tenders, contracts (other than
contracts for Indebtedness), leases, public or statutory obligations,
surety bonds, or other deposits or pledges for purposes of like general
nature made in the ordinary course of business;
(d) Deposits or pledges for the purpose of securing an
appeal, stay or discharge in the course of legal proceedings, or Liens
for judgments or awards which were not incurred in connection with
Indebtedness or the obtaining of advances or credits, provided such
deposits, pledges and Liens do not, in the aggregate for the Borrower
and the Consolidated Subsidiaries, materially detract from the value of
their assets or properties or materially impair the use thereof in the
ordinary course of business and such appeal, judgment or award, as the
case may be, is being diligently contested or litigated in good faith
by appropriate proceedings being diligently conducted, and provided
further there has been set aside on the books of the Borrower or the
Consolidated Subsidiaries, as the case may be, reserves in accordance
with GAAP with respect thereto, which reserves shall be maintained
until the related liabilities are paid or otherwise discharged, and
provided further execution is not levied upon any such judgment or
award;
(e) Liens for taxes, fees, assessments and governmental
charges not delinquent or which are being contested in good faith by
appropriate proceedings being diligently conducted, provided there has
been set aside on the books of the Borrower or the Consolidated
Subsidiaries, as the case may be, adequate reserves in accordance with
GAAP with respect thereto, which reserves shall be maintained until the
related liabilities are paid or otherwise discharged, and provided
further, execution is not levied upon any such Lien;
(f) Mechanics', carriers', workers', repairmen's or other
like Liens arising in the ordinary course of business securing
obligations which are not overdue for a period of
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more than 90 calendar days, or which are being contested in good faith
by appropriate proceedings being diligently conducted provided there
has been set aside on the books of the Borrower and the Consolidated
Subsidiaries, as the case may be, adequate reserves in accordance with
GAAP with respect thereto, which reserves shall be maintained until the
related liabilities are paid or otherwise discharged, and provided
further, execution is not levied upon any such Lien;
(g) Lessors' interests under Capitalized Leases;
(h) Liens on property acquired or constructed with the
proceeds of any tax-exempt airport bond financing;
(i) Liens securing Indebtedness of a Consolidated Subsidiary
to the Borrower;
(j) Liens existing on the property of a corporation or other
business entity immediately prior to its being consolidated with or
merged into the Borrower or a Consolidated Subsidiary or its becoming a
Consolidated Subsidiary, or Liens existing on any property acquired by
the Borrower or a Consolidated Subsidiary at the time such is so
acquired (whether or not the Indebtedness secured thereby shall have
been assumed), provided that (i) no such Lien was created or assumed in
contemplation of such consolidation or merger or such entity's becoming
a Consolidated Subsidiary or such acquisition of property and (ii) each
such Lien shall only cover the acquired property and, if required by
the terms of the instrument originally creating such Lien, property
which is an improvement to or is acquired for specific use in
connection with such acquired property;
(k) Liens on Flight Equipment acquired on or after the date
of this Agreement which (i) secure the payment of all or any part of
the purchase price of such Flight Equipment or improvements thereon,
(ii) are limited to the Flight Equipment so acquired and improvements
thereon, and (iii) attach to such Flight Equipment within one year
after the acquisition or improvement of such Flight Equipment;
(l) Liens on the Designated Collateral granted in accordance
with Section 6.26; and
(m) Liens not otherwise permitted by Sections 6.19(a) through
(l) provided that at all times the sum of (i) the aggregate principal
amount of all outstanding Long Term Debt of the Consolidated
Subsidiaries (excluding the Current Maturities of any such Long Term
Debt and any Long Term Debt of a Consolidated Subsidiary owing to the
Borrower) which is unsecured, plus (ii) the aggregate principal amount
of all outstanding Long Term Debt of the Borrower or any Consolidated
Subsidiary (excluding the Current Maturities of any such Long Term Debt
and any Long Term Debt of a Consolidated Subsidiary owing to the
Borrower) which is secured as permitted by this Section 6.19(m), does
not exceed 8% of Consolidated Adjusted Total Assets.
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Notwithstanding any provision of this Section 6.19 to the contrary, the Borrower
will not, and will not permit any Consolidated Subsidiary to, create, incur,
assume or suffer to exist, any Lien on any of the Designated Collateral, except
in accordance with clause (l) of this Section 6.19, or enter into, or make any
commitment to enter into, any arrangement for the acquisition of any Designated
Collateral through conditional sales, lease-purchase or other title retention
agreements, except Liens securing a principal amount of not more than
$200,000,000 in the aggregate.
6.20. GUARANTIES. (a) Within thirty (30) days after acquiring or
establishing any Subsidiary that constitutes a Significant Subsidiary (other
than Federal Express Canada Ltd. or Federal Express (Hong Kong) Limited) upon
its acquisition or establishment or the consummation of any transactions
contemplated at the time of its establishment, the Borrower shall cause such
Significant Subsidiary to execute the Guaranty pursuant to an Addendum thereto
in the form of Annex I to the Guaranty, and to deliver documentation similar to
that described in Section 4.1(a)(iii), (iv), (v) and (vii) relating to the
authorization for, execution and delivery of, and validity of such Significant
Subsidiary's obligations as a Guarantor, such documentation to be in form and
substance reasonably satisfactory to the Paying Agent.
(b) If at any time the Guarantors do not consist of Subsidiaries of the
Borrower which, in the aggregate, had revenues (determined in accordance with
GAAP) for the immediately preceding fiscal year of the Borrower in excess of 90%
of the consolidated revenues (determined in accordance with GAAP) of the
Borrower and the Consolidated Subsidiaries for such immediately preceding fiscal
year, then the Borrower shall promptly cause one or more additional Subsidiaries
each to execute the Guaranty pursuant to an Addendum thereto in the form of
Annex I to the Guaranty, and to deliver documentation similar to that described
in Section 4.1(a)(iii), (iv), (v) and (vii) relating to the authorization for,
execution and delivery of, and validity of such Subsidiary's obligations as a
Guarantor, such documentation to be in form and substance reasonably
satisfactory to the Paying Agent, so that the aggregate consolidated revenues
(determined in accordance with GAAP) of the Guarantors for such fiscal year
equal or exceed 90% of the consolidated revenues (determined in accordance with
GAAP) of the Borrower and the Consolidated Subsidiaries for such fiscal year.
6.21. NEGATIVE COVENANTS IN SUBSIDIARY AGREEMENTS. The Borrower will
not permit any of its Subsidiaries to enter into, after the date hereof, any
agreement, instrument or indenture that, directly or indirectly, contains
negative covenants restricting any of the following (or otherwise prohibits or
restricts, or has the effect of prohibiting or restricting, any of the
following):
(i) the incurrence or payment of Indebtedness owed to the Borrower
or any other Subsidiary of the Borrower;
(ii) the granting of Liens;
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(iii) the declaration or payment of dividends; and
(iv) the making of loans, advances or other Investments to or in the
Borrower or any other Subsidiary of the Borrower.
6.22. INDEBTEDNESS OF CALIBER AND SUBSIDIARIES. None of Caliber or its
Subsidiaries will directly or indirectly create, incur, assume or otherwise
become or remain liable with respect to (a) any Indebtedness of the types set
forth in clauses (i), (iii), (iv), (v), (vi), (vii) and (viii) of the definition
of "Indebtedness", or (b) Indebtedness consisting of purchase-money obligations
representing the deferred purchase price of Property, except:
(i) all such Indebtedness existing under the 1996 Caliber Indenture
or otherwise existing on the date hereof and reflected in the
consolidated financial statements of the Borrower and its
Consolidated Subsidiaries;
(ii) such Indebtedness owed to the Borrower or any Wholly-Owned
Subsidiary of the Borrower; and
(iii) other Indebtedness in an aggregate principal amount not to
exceed $50,000,000.
6.23. EXISTING REVOLVING CREDIT DOCUMENTS. At any time when no Default
exists, the Borrower shall make no prepayments of principal under the Existing
Revolving Credit Documents unless the principal amount of all Obligations
hereunder has been paid in full. The Borrower shall not request any "Advance"
(as defined in the Existing Revolving Credit Documents) unless the Aggregate
Commitment is at such time utilized in full.
6.24. VALUE OF DESIGNATED COLLATERAL AND COLLATERAL; AIRCRAFT CASUALTY.
(a) The aggregate value of the Designated Collateral shall at all times equal or
exceed 1.75 TIMES the sum of (i) the Aggregate Commitment, or if the Aggregate
Commitment has been terminated, the aggregate outstanding principal amount of
the Obligations, (ii) the "Aggregate Commitment" (as defined in the Existing
Revolving Credit Documents), or if such "Aggregate Commitment" has been
terminated, the aggregate outstanding principal amount of the "Obligations" (as
defined in the Existing Revolving Credit Documents) and (iii) the aggregate
amount of the "Commitments" (as defined in the Existing L/C Facility Documents),
or if such "Commitments" have been terminated, the aggregate outstanding
principal amount of the "Obligations" (as defined in the Existing L/C Facility
Documents).
(b) The Borrower and its applicable Subsidiaries shall be required to
grant Liens on Designated Collateral as provided in Section 6.26(a) only to the
extent necessary so that the value, as determined pursuant to Section 6.26(b),
of all such Collateral as to which a Lien is granted, equals or exceeds, at all
times prior to the release of such Liens pursuant to Section 6.26(c), 1.75 TIMES
the sum of (i) the Aggregate Commitment, or if the Aggregate Commitment has been
terminated, the aggregate outstanding principal amount of the Obligations, (ii)
the
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"Aggregate Commitment" (as defined in the Existing Revolving Credit
Documents), or if such "Aggregate Commitment" has been terminated, the aggregate
outstanding principal amount of the "Obligations" (as defined in the Existing
Revolving Credit Documents) and (iii) the aggregate amount of the "Commitments"
(as defined in the Existing L/C Facility Documents), or if such "Commitments"
have been terminated, the aggregate outstanding principal amount of the
"Obligations" (as defined in the Existing L/C Facility Documents), provided
that, if at any time the aggregate value of such Collateral is less than the
amount required by this sentence, then the Borrower shall (i) promptly notify
the Paying Agent of such shortfall, and (ii) promptly grant Liens on additional
Designated Collateral, in accordance with Section 6.26(a), to the extent
necessary to reduce such shortfall to zero.
(c) If any airframe or engine set forth on Schedule "1" hereto shall be
destroyed or materially damaged, regardless of the cause of such destruction or
damage, then the Borrower shall promptly notify the Paying Agent thereof and,
within 45 days thereafter, designate in writing one or more airframes and/or
engines, as applicable, in each case free and clear of any Lien, to be added to
Schedule "1" hereto, as provided in the definition of "Designated Collateral",
having an aggregate value, in accordance with Section 6.26 hereof, equal to or
exceeding the value of the destroyed or damaged airframe or engine. If the
damaged or destroyed airframe or engine constitutes part of the Collateral, then
the Borrower shall, or shall cause its Subsidiaries to, enter into such
amendments to the Aircraft Mortgage as the Paying Agent may reasonably request
in order to grant to Morgan Guaranty, as collateral agent for the Lenders and
for the lenders under the Existing Revolving Credit Documents and the Existing
L/C Facility Documents, a first priority Lien on such replacement airframes or
engines.
6.25. NO NEGATIVE PLEDGES. From and after the date hereof, neither the
Borrower nor any of its Subsidiaries shall limit, restrict or delay its right or
power to sell, assign, pledge, grant any Lien on, transfer, dispose of or
otherwise encumber the Designated Collateral or any part thereof, including,
without limitation, any such restriction on capital stock, except as provided on
the date hereof in the Loan Documents, the Existing Revolving Credit Documents
or the Existing L/C Facility Documents.
6.26. GRANT OF SECURITY INTEREST IN COLLATERAL. (a) Promptly (but in
any event within 10 Business Days) after any one or more dates on which either
Rating ceases to be an Investment Grade Rating, the Borrower shall, to the
extent provided for in Section 6.24(b), (i) grant, and cause its Subsidiaries to
grant, to Morgan Guaranty, as collateral agent for the Lenders and for the
lenders under the Existing Revolving Credit Documents and the Existing L/C
Facility Documents, a first priority Lien on the Designated Collateral other
than Designated Collateral owned by Caliber and its Subsidiaries (the "FDX
Collateral"), which Lien shall equally and ratably secure the Obligations under
the Loan Documents and the obligations under each of the Existing Revolving
Credit Documents and the Existing L/C Facility Documents, and (ii) cause Caliber
and Caliber's Subsidiaries to grant, to a collateral trustee designated by
Morgan Guaranty, a first priority Lien on all the capital stock of Caliber's
Subsidiaries which constitute part of the
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Designated Collateral (the "Caliber Collateral"), which Lien shall equally and
ratably secure the Obligations under the Loan Documents, the obligations under
each of the Existing Revolving Credit Documents and the Existing L/C Facility
Documents and the notes issued under the 1996 Caliber Indenture. All such Liens
granted pursuant to this Section 6.26 shall be granted in the following order:
first, on the capital stock of Caliber and all Caliber Collateral; second, on
the airframes and engines of FedEx; third, on all (and not part) of the accounts
receivable of FedEx and its Subsidiaries; and fourth, as designated by the
Paying Agent, on the motor vehicles and real estate of FedEx and its
Subsidiaries and the intercompany indebtedness owed to the Borrower by its
Subsidiaries, in each case, to the extent constituting part of the Designated
Collateral. From time to time, the Borrower and its Subsidiaries shall execute
and deliver, or cause to be executed and delivered, such additional agreements,
instruments, certificates (including, without limitation, any good standing
certificates), legal opinions or documents, and take all such actions, as the
Paying Agent may reasonably request, for the purposes of implementing or
effectuating this Section 6.26 or the Security Documents, or of more fully
perfecting, preserving or renewing the rights of the Paying Agent and the
Lenders with respect to the Collateral (or with respect to any additions thereto
or replacements or proceeds thereof or with respect to any other Property or
assets hereafter acquired by the Borrower or its Subsidiaries which is or may be
deemed to be part of the Collateral) pursuant hereto or thereto.
(b) Designated Collateral and Collateral shall at all times be
valued as follows:
(i) the value of the Caliber Stock shall equal 9.0 times Caliber
Operating Income, less the aggregate principal amount of all
outstanding Indebtedness (including, without limitation,
intercompany indebtedness) of Caliber and its Subsidiaries;
(ii) the value of the airframes and engines listed on Schedule "1"
shall equal the fair market value thereof set forth in the most
recently delivered Appraisal Report delivered pursuant to
Section 6.1, and prior to the delivery of the first such
Appraisal Report, such Property shall be valued at
$1,892,600,000;
(iii) the value of the accounts receivable of FedEx and its
Subsidiaries shall equal 0.75 times the aggregate amount of
Eligible Receivables of FedEx and its Subsidiaries, as
determined on the report of Eligible Receivables most recently
delivered pursuant to Section 4.1 or Section 6.1; and
(iv) the value of the motor vehicles and real estate of FedEx and its
Subsidiaries and the intercompany indebtedness owed to the
Borrower by its Subsidiaries shall equal the fair market value
thereof as determined in the most recent appraisal provided by a
nationally recognized firm of appraisers pursuant to Section
6.1, and prior to the delivery of the first such appraisal with
respect to any such Property, such Property shall be valued at
$633,300,000.
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(c) Any Liens granted under this Section 6.26 shall be released by
Morgan Guaranty, as collateral agent, pursuant to a Release of Security
Documents substantially in the form of Exhibit "D" attached hereto, at the
written request of the Borrower if the S&P Rating and Moody's Rating both become
Investment Grade Ratings, but shall be reinstated on any one or more additional
dates thereafter on which either Rating ceases to be an Investment Grade Rating.
Notwithstanding the foregoing, (i) all such Liens shall be released pursuant to
a Release of Security Documents substantially in the form of Exhibit "D"
attached hereto when all of the Obligations have been paid in full and the
Commitments have been terminated, and (ii) the Lien on any asset sold or
otherwise disposed of in accordance with Section 6.16 shall be released promptly
after the Borrower's written request therefor.
6.27. APPROVAL OF FORMS OF SECURITY DOCUMENTS. The Borrower shall, as
soon as practicable, and in any event no later than the later of (i) January 15,
1999 and (ii) seven Business Days after the Paying Agent delivers drafts of such
documents to the Borrower, give written notice to the Paying Agent that it has
approved a final form of each Security Document which is in form and substance
satisfactory to the Paying Agent and the agents under the Existing Revolving
Credit Documents and the Existing L/C Facility Documents.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. BREACH OF REPRESENTATION OR WARRANTY. Any representation or
warranty made or deemed made by or on behalf of the Borrower or any of its
Subsidiaries to the Lenders or the Paying Agent under or in connection with this
Agreement, any Loan or any certificate or information delivered in connection
with this Agreement or any other Loan Document shall be materially false on the
date as of which made or deemed made.
7.2. FAILURE TO PAY. Nonpayment of principal of any Loan when due, or
nonpayment of interest on any Loan or of any facility fee or other obligations
under any of the Loan Documents within five days after the same becomes due.
7.3. BREACH OF CERTAIN COVENANTS. The breach by the Borrower of any of
the terms or provisions of Section 6.2, 6.3, 6.5, 6.11, 6.12, 6.13, 6.15, 6.16,
6.17, 6.18, 6.19, 6.22, 6.23, 6.24, 6.25 or 6.26.
7.4. BREACH OF OTHER COVENANTS, LOAN DOCUMENTS, EXISTING REVOLVING
CREDIT DOCUMENTS OR EXISTING L/C FACILITY DOCUMENTS. The breach by the Borrower
(other than a breach which constitutes a Default under Section 7.1, 7.2 or 7.3)
of any of the terms or provisions of this Agreement or any other Loan Document
which is not remedied within five days after
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written notice from the Paying Agent or any Lender; or the occurrence of any
"Default" (as defined in any of the Existing Revolving Credit Documents) or any
"Event of Default" (as defined in the Existing L/C Facility Documents).
7.5. CROSS-DEFAULT. Failure of the Borrower or any Consolidated
Subsidiary to pay when due or within any applicable grace period any portion of
either any single obligation constituting Indebtedness in excess of $20,000,000
(or the equivalent thereof in any other currency) or Indebtedness in an
aggregate principal amount in excess of $60,000,000 (or the equivalent thereof
in any other currency); or any default or other event shall occur under or with
respect to either any agreement under which any single obligation constituting
Indebtedness in excess of $20,000,000 (or the equivalent thereof in any other
currency) was created or is governed, or any agreements under which Indebtedness
in an aggregate principal amount in excess of $60,000,000 (or the equivalent
thereof in any other currency) was created or is governed, the effect of which,
in either case, is to cause, or to permit the holder or holders of such
Indebtedness to cause, such Indebtedness to become due prior to its stated
maturity; or either any single obligation constituting Indebtedness in excess of
$20,000,000 (or the equivalent thereof in any other currency) or Indebtedness in
an aggregate principal amount in excess of $60,000,000 (or the equivalent
thereof in any other currency) shall be declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled payment), prior to
the stated maturity thereof.
7.6. VOLUNTARY BANKRUPTCY, ETC. The Borrower or any Consolidated
Subsidiary shall (i) fail to pay, or admit in writing its inability to pay, its
debts generally as they become due, (ii) have an order for relief entered with
respect to it under the Federal bankruptcy laws as now or hereafter in effect,
(iii) make an assignment for the benefit of creditors, (iv) apply for, seek,
consent to, or acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any Substantial Portion of
its Property, (v) institute any proceeding seeking an order for relief under the
Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or fail to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (vi) take any corporate
action to authorize or effect any of the foregoing actions set forth in this
Section 7.6 or (vii) fail to contest in good faith any appointment or proceeding
described in Section 7.7.
7.7. INVOLUNTARY BANKRUPTCY, ETC. Without the application, approval or
consent of the Borrower or any Consolidated Subsidiary, a receiver, trustee,
examiner, liquidator or similar official shall be appointed for the Borrower or
any Consolidated Subsidiary or any Substantial Portion of its Property, or a
proceeding described in Section 7.6(v) shall be instituted against the Borrower
or any Consolidated Subsidiary and such appointment continues undischarged or
such proceeding continues undismissed or unstayed for a period of 45 consecutive
days.
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7.8. JUDGMENTS. The Borrower or any Consolidated Subsidiary shall fail
within 45 days to pay, bond or otherwise discharge any judgment or order for the
payment of money in excess of $1,000,000, which is not stayed on appeal or
otherwise being appropriately contested in good faith.
7.9. ERISA. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $80,000,000 or any Reportable Event shall occur in
connection with any Plan.
7.10. SEIZURE. An administrator, custodian or other representative, by
or pursuant to any legislative act, resolution or rule (other than the Federal
bankruptcy laws or any similar law, State or Federal, whether now or hereafter
existing) or any order or decree of any court or any governmental board or
agency (other than any order or decree issued pursuant to the Federal bankruptcy
laws or any similar law, State or Federal, whether now or hereafter existing)
shall take possession or control of all or such portions of the property of any
one or more of the Borrower and the Consolidated Subsidiaries as would, in the
sole opinion of the Required Lenders, materially interfere with the operation of
the business of the Borrower and the Consolidated Subsidiaries, on a
consolidated basis, and such possession or control shall continue for 45
calendar days.
7.11. ENVIRONMENTAL MATTERS. The Borrower or any of its Subsidiaries
shall be the subject of any proceeding or investigation pertaining to the
release by the Borrower or any of its Subsidiaries, or any other Person, of any
toxic or hazardous waste or substance into the environment, or any violation of
any federal, state or local environmental, health or safety law or regulation,
which, in either case, could reasonably be expected to have a Material Adverse
Effect.
7.12. INVALIDITY, ETC. OF LOAN DOCUMENTS; FAILURE OF SECURITY. At any
time, for any reason (i) any provision of any Loan Document shall at any time
for any reason cease to be valid and binding and enforceable against the
Borrower or any Guarantor, or the validity, binding effect or enforceability
thereof against the Borrower or any Guarantor shall be contested by any Person,
or the Borrower or any Guarantor shall deny that it has any or further liability
or obligation thereunder, or any Loan Document shall be terminated, invalidated
or set aside, or be declared ineffective or inoperative or in any way cease to
give or provide to the Lenders and the Paying Agent the benefits purported to be
created thereby, or (ii) Liens in favor of the Paying Agent or the Lenders
shall, while the Security Documents are in effect or purported to be in effect
pursuant hereto, be invalidated or otherwise cease to be in full force and
effect, or such Liens shall be subordinated or shall not have the priority
contemplated hereby or by the Security Documents.
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ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in Section 7.6 or 7.7
occurs as a result of any action taken by or against the Borrower, the
obligations of the Lenders to make Loans hereunder shall automatically terminate
and the Obligations shall immediately become due and payable without any
election or action on the part of the Paying Agent or any Lender. If any other
Default occurs, the Required Lenders (or the Paying Agent, with the written
consent of the Required Lenders) may terminate or suspend the obligations of the
Lenders to make Loans hereunder, or declare the Obligations to be due and
payable, or both, whereupon the Obligations shall become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which the Borrower hereby expressly waives.
If, within 14 days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Paying Agent shall, by notice to the Borrower, rescind and annul such
acceleration and/or termination, provided that the Borrower certifies to the
Lenders to their satisfaction that, upon giving effect to such rescission, no
other Indebtedness of the Borrower shall be accelerated by virtue of a
cross-default or cross-acceleration to Indebtedness under this Agreement.
8.2. AMENDMENTS. Subject to the provisions of this Article VIII, the
Required Lenders (or the Paying Agent with the consent in writing of the
Required Lenders) and the Borrower may enter into agreements supplemental hereto
for the purpose of adding or modifying any provisions to the Loan Documents or
changing in any manner the rights of the Lenders or the Borrower hereunder or
waiving any Default hereunder; provided, however, that no such supplemental
agreement shall, without the consent of each Lender affected thereby:
(i) Extend the maturity or the time of payment of any Loan or
reduce the principal amount thereof, or reduce the rate or
extend the time of payment of interest thereon or fees
hereunder.
(ii) Reduce the percentages specified in the definitions of
Required Lenders or Supermajority Lenders, respectively, or
amend, modify or waive any provision requiring action by the
Required Lenders or the Supermajority Lenders to require
action by any other Person in lieu of the Required Lenders or
the Supermajority Lenders, respectively.
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(iii) Extend the Termination Date or the Maturity Date, reduce the
amount or extend the payment date for the mandatory payments
required under Section 2.2, increase the amount of the
Commitment of any Lender hereunder, or permit the Borrower to
assign its rights under this Agreement.
(iv) Amend, modify, or waive Section 2.2(a), Section 4.1, Section
4.2, Sections 6.24(a) or (b), this Section 8.2, or Section
12.1.
(v) Release FedEx or RPS from any of their material obligations
under the Guaranty.
(vi) Release all or substantially all of the Collateral, or release
the Borrower or any Guarantor from any of its material
obligations under the Security Documents, in each case other
than pursuant to Section 6.26(c) or 9.16;
and provided further, however, that no such supplemental agreement shall,
without the consent of the Supermajority Lenders, amend, modify or waive Section
6.24(c), Section 6.26 or the last sentence of Section 6.16.
No amendment of any provision of this Agreement relating to the Paying Agent
shall be effective without the written consent of the Paying Agent. The Paying
Agent may waive payment of the fee required under Section 12.3.3 without
obtaining the consent of any other party to this Agreement. No amendment of
Section 12.3.1 of this Agreement affecting any SPC shall be effective without
the written consent of such SPC.
8.3. PRESERVATION OF RIGHTS. No delay or omission of the Lenders or the
Paying Agent to exercise any right under the Loan Documents shall impair such
right or be construed to be a waiver of any Default or an acquiescence therein,
and the making of a Loan notwithstanding the existence of a Default or the
inability of the Borrower to satisfy the conditions precedent to such Loan shall
not constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained in
the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Paying Agent and the Lenders until the Obligations have been
paid in full.
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ARTICLE IX
GENERAL PROVISIONS
9.1. SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Borrower contained in this Agreement shall survive delivery of this
Agreement and the making of the Loans herein contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this Agreement to
the contrary notwithstanding, no Lender shall be obligated to extend credit to
the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. TAXES. Any taxes (excluding income taxes on the overall net income
of any Lender) or other similar assessments or charges payable or ruled payable
by any governmental authority in respect of the Loan Documents shall be paid by
the Borrower, together with interest and penalties, if any.
9.4. HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.5. ENTIRE AGREEMENT. The Loan Documents embody the entire agreement
and understanding among the Borrower, the Paying Agent and the Lenders and
supersede all prior agreements and understandings among the Borrower, the Paying
Agent and the Lenders relating to the subject matter thereof.
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The respective
obligations of the Lenders hereunder are several and not joint and no Lender
shall be the partner or agent of any other. The failure of any Lender to perform
any of its obligations hereunder shall not relieve any other Lender from any of
its obligations hereunder. This Agreement shall not be construed so as to confer
any right or benefit upon any Person other than the parties to this Agreement
and their respective successors and assigns.
9.7. EXPENSES; INDEMNIFICATION. The Borrower shall reimburse the
Co-Arrangers and the Paying Agent for any and all reasonable costs, internal
charges and out-of-pocket expenses (including attorneys' fees and time charges
of attorneys for the Co-Arrangers and the Paying Agent, which attorneys may be
employees of the Co-Arrangers and the Paying Agent) paid or incurred by the
Co-Arrangers and the Paying Agent in connection with the preparation,
negotiation, execution, delivery, amendment, modification or waiver, of the Loan
Documents and the creation, perfection, modification and release of the Liens
contemplated by the Security Documents; provided, however, that such costs,
charges and expenses shall not include the fees or expenses of any outside
counsel other than Sidley & Austin, counsel to the Paying Agent. The
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Borrower also agrees to reimburse the Paying Agent and the Lenders for any and
all reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Paying Agent and the
Lenders, which attorneys may be employees of the Paying Agent or the Lenders)
paid or incurred by the Paying Agent or any Lender in connection with the
collection and enforcement of the Loan Documents and the protection of rights
thereunder. The Borrower further agrees to indemnify the Paying Agent and each
Lender, its directors, officers and employees against all losses, claims,
damages, penalties, judgments, liabilities and expenses (including, without
limitation, all expenses of litigation or preparation therefor whether or not
the Paying Agent or any Lender is a party thereto) which any of them may pay or
incur arising out of or relating to this Agreement, the other Loan Documents,
the transactions contemplated hereby or the direct or indirect application or
proposed application of the proceeds of any Loan hereunder, provided, however,
that the Borrower shall not have an obligation pursuant to this Section to
indemnify any Person for any such amounts which result from the willful
misconduct or gross negligence of such Person, as determined by a court of
competent jurisdiction. The obligations of the Borrower under this Section shall
survive the termination of this Agreement, the cancellation of the Commitments,
and the payment of all outstanding Obligations.
9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing documents,
and requests hereunder shall be furnished to the Paying Agent with sufficient
counterparts so that the Paying Agent may furnish one to each of the Lenders.
9.9. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.10. NONLIABILITY OF LENDERS. The relationship between the Borrower
and the Lenders and the Paying Agent shall be solely that of borrower and
lender. Neither the Paying Agent nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Paying Agent nor any Lender
undertakes any responsibility to the Borrower to review or inform the Borrower
of any matter in connection with any phase of the Borrower's business or
operations.
9.11. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE
TO NATIONAL BANKS.
9.12. CONSENT TO JURISDICTION. The Borrower hereby irrevocably submits
to the non-exclusive jurisdiction of any United States federal or New York state
court sitting in New York, New York in any action or proceeding arising out of
or relating to any Loan Document and the Borrower hereby irrevocably agrees that
all claims in respect of such action or proceeding
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may be heard and determined in any such court and irrevocably waives any
objection it may now or hereafter have as to the venue of any such suit, action
or proceeding brought in such a court or that such court is an inconvenient
forum. Nothing herein shall limit the right of the Paying Agent or any Lender to
bring proceedings against the Borrower in the courts of any other jurisdiction.
Any judicial proceeding by the Borrower against the Paying Agent or any Lender
or any Affiliate of the Paying Agent or any Lender involving, directly or
indirectly, any matter in any way arising out of, related to, or connected with
any Loan Document shall be brought only in a court in New York, New York.
9.13. WAIVER OF JURY TRIAL. THE BORROWER, THE PAYING AGENT AND EACH
LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY
OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN
ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
9.14. CONFIDENTIALITY. The Paying Agent and each Lender agrees to hold
any confidential information which it may receive from the Borrower pursuant to
this Agreement or in the course of an inspection pursuant to Section 6.10 in
confidence, except for disclosure (i) to other Lenders and their respective
Affiliates, each of whom shall be made aware of the terms of this Section 9.14
and shall agree to abide thereby, (ii) to legal counsel, accountants, and other
professional advisors to the Paying Agent or that Lender, (iii) to regulatory
officials (provided that, to the extent practicable and permissible, the Paying
Agent and each Lender shall give the Borrower prior notice of such disclosure),
(iv) as required by law, regulation, or legal process, (v) in connection with
any legal proceeding to which the Paying Agent or that Lender is a party, and
(vi) permitted by Section 12.4; provided that, in connection with any disclosure
permitted under clause (iv) or (v) hereinabove, the Paying Agent or such Lender,
as appropriate, shall give the Borrower prior notice of such disclosure unless
such notice is prohibited by law, regulation, or process.
9.15. ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP.
9.16. RELEASE OF GUARANTORS. Upon the consummation of any liquidation,
dissolution, merger, consolidation, sale or other transfer of a Guarantor other
than Caliber, FedEx or RPS (collectively, a "Transfer"), and provided (i) no
Default or Unmatured Default has occurred and is continuing or would occur as a
result of such Transfer, and (ii) the Liens and security interests contemplated
by the Security Documents are not then in effect or purported to be in effect,
such Guarantor shall automatically be released from all of its obligations under
the Guaranty, and, if the Borrower so requests, the Lenders shall promptly
execute an instrument, in form and substance reasonably satisfactory to the
Borrower and the Paying Agent, evidencing such release.
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ARTICLE X
THE PAYING AGENT
10.1. APPOINTMENT. Morgan Guaranty is hereby appointed Paying Agent
hereunder and under each other Loan Document, and each of the Lenders
irrevocably authorizes the Paying Agent to act as the contractual representative
of such Lender with the rights and duties expressly set forth herein and in the
other Loan Documents. The Paying Agent agrees to act as such contractual
representative upon the express conditions contained in this ARTICLE X. The
defined terms "Paying Agent", "Co-Arranger", "Documentation Agent",
"Co-Syndication Agent" and Administrative Agent" are used in this Agreement
solely as a matter of market convention. Each Lender expressly understands and
agrees that none of such Persons shall have any fiduciary responsibilities to
any Lender by reason of this Agreement and that the Paying Agent is merely
acting as the representative of the Lenders with only those duties as are
expressly set forth in this Agreement and the other Loan Documents. In its
capacity as the Lenders' contractual representative, the Paying Agent does not
assume any fiduciary duty to any of the Lenders and is acting as an independent
contractor, the rights and duties of which are limited to those expressly set
forth in this Agreement and the other Loan Documents. Each of the Lenders hereby
agrees to assert no claim against the Paying Agent on any agency theory or any
other theory of liability for breach of fiduciary duty, all of which claims each
Lender waives. None of the Co-Arrangers or the Administrative Agent, as such,
shall have any duties under or in connection with this Agreement or the other
Loan Documents.
10.2. POWERS. The Paying Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the Paying Agent by
the terms of each thereof, together with such powers as are reasonably
incidental thereto. The Paying Agent shall have the right to negotiate and
approve the form, terms and provisions of the Security Documents, and to enter
into the Security Documents for the benefit of the Lenders, in accordance with
Section 6.26 (but in any event subject to Section 8.2). Any action taken by the
Paying Agent in accordance with the provisions of this Agreement, the Security
Documents or the other Loan Documents, and the exercise by the Paying Agent of
the powers set forth herein or therein, together with such other powers as are
reasonably incidental thereto, are hereby authorized by, and shall be binding
upon, each of the Lenders. The Paying Agent shall have no implied duties to the
Lenders, or any obligation to the Lenders to take any action thereunder except
any action specifically provided by the Loan Documents to be taken by the Paying
Agent. Without limiting the generality of the foregoing, the Paying Agent shall
not be required to take any action with respect to any Default except as
expressly provided in Article VII.
10.3. GENERAL IMMUNITY. None of the Paying Agent or its Affiliates, nor
any of their respective directors, officers, agents or employees, shall be
liable to the Borrower, the Lenders or any Lender for any action taken or
omitted to be taken by it or them hereunder or under any other Loan Document or
in connection herewith or therewith except that any such Person shall not have
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such immunity for acts or omissions it takes which are both (i) not at the
request or with the consent of the Required Lenders, and (ii) instances of its
own gross negligence or willful misconduct.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. The Paying Agent
shall be deemed not to have knowledge of any Default or Unmatured Default unless
and until written notice thereof is given to the Paying Agent by the Borrower or
a Lender, and neither the Paying Agent or its Affiliates, nor any of their
respective directors, officers, agents or employees shall be responsible for or
have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement, (ii) the contents
of any certificate, report or other document delivered hereunder or in
connection herewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth herein, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement or any
other agreement, instrument or document, or (v) the satisfaction of any
condition set forth in Article IV or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Paying Agent.
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Paying Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder and
under any other Loan Document in accordance with written instructions signed by
the requisite number of Lenders, and such instructions and any action taken or
failure to act pursuant thereto shall be binding on all of the Lenders and on
all holders of Loans. The Paying Agent shall be fully justified in failing or
refusing to take any action hereunder and under any other Loan Document unless
it shall first be indemnified to its satisfaction by the Lenders pro rata
against any and all liability, cost and expense that it may incur by reason of
taking or continuing to take any such action.
10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Paying Agent may execute
any of its duties as Paying Agent hereunder and under any other Loan Document by
or through employees, agents, and attorneys-in-fact and shall not be answerable
to the Lenders, except as to money or securities received by it or its
authorized agents, for the default or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. The Paying Agent shall be
entitled to seek advice of counsel (who may be counsel for the Borrower)
concerning all matters pertaining to its duties hereunder and under any other
Loan Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Paying Agent shall be
entitled to rely upon any notice, consent, certificate, affidavit, letter,
telegram, telex, telecopy, telefacsimile, statement, paper or document believed
by it to be genuine and correct and to have been signed or sent by the proper
person or persons, and, (i) in respect to legal matters, upon the opinion of
counsel selected by the Paying Agent, which counsel may be employees of the
Paying Agent, (ii) in respect of accounting and related matters, upon
accountants selected by the Paying Agent, and (iii) in respect of other matters,
upon experts selected by the Paying Agent.
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10.8. PAYING AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders
agree to reimburse and indemnify the Paying Agent, its Affiliates and their
respective directors, officers, agents and employees, as applicable, ratably in
proportion to their respective Commitments (i) for any amounts not reimbursed by
the Borrower for which the Paying Agent is entitled to reimbursement by the
Borrower under the Loan Documents, (ii) for any other expenses incurred by the
Paying Agent or any of such Persons on behalf of the Lenders, in connection with
the preparation, execution, delivery, administration and enforcement of the Loan
Documents to the extent such expenses are or may be obligations of the Borrower
to the Paying Agent or any of such Persons and (iii) for any liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever which may be imposed
on, incurred by or asserted against the Paying Agent or any such Persons in any
way relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby, or
the enforcement of any of the terms thereof or of any such other documents,
provided that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Paying Agent.
The obligations of the Lenders under this Section 10.8 shall survive payment of
the Obligations and termination of this Agreement.
10.9. RIGHTS AS A LENDER. With respect to its Commitment and the Loans
made by it, the Paying Agent shall have the same rights and powers hereunder and
under any other Loan Document as any Lender and may exercise the same as though
it were not the Paying Agent, and the term "Lender" or "Lenders" shall, at any
time when the Paying Agent is a Lender, unless the context otherwise indicates,
include the Paying Agent in its individual capacity. The Paying Agent may accept
deposits from, lend money to, and generally engage in any kind of trust, debt,
equity or other transaction, in addition to those contemplated by this Agreement
or any other Loan Document, with the Borrower or any of its Subsidiaries in
which the Borrower or such Subsidiary is not restricted hereby from engaging
with any other Person. The Paying Agent, in its individual capacity, is not
obligated to remain a Lender except as provided under Article XII.
10.10. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Paying Agent or any other Lender and
based on the financial statements prepared by the Borrower and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and the other Loan Documents.
Each Lender also acknowledges that it will, independently and without reliance
upon the Paying Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement and the
other Loan Documents.
10.11. SUCCESSOR PAYING AGENT. The Paying Agent may resign at any time
by giving written notice thereof to the Lenders and the Borrower, and the Paying
Agent may be removed at any time with or without cause by written notice
received by the Paying Agent from the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to
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appoint, on behalf of the Borrower and the Lenders and with the consent of the
Borrower (which shall not be unreasonably withheld), a successor Paying Agent.
If no successor Paying Agent shall have been so appointed by the Required
Lenders and consented to by the Borrower and shall have accepted such
appointment within thirty days after the retiring Paying Agent's giving notice
of resignation, then the retiring Paying Agent may appoint, on behalf of the
Lenders, a successor Paying Agent, provided that the Borrower shall have the
right to remove such successor Paying Agent and replace it with a successor of
its own designation with the consent of the Required Lenders (which shall not be
unreasonably withheld). Such successor Paying Agent shall be a commercial bank
having capital and retained earnings of at least $250,000,000. Upon the
acceptance of any appointment as Paying Agent hereunder by a successor Paying
Agent, such successor Paying Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring or removed
Paying Agent, and the retiring or removed Paying Agent shall be discharged from
its duties and obligations hereunder and under the other Loan Documents. After
any retiring or removed Paying Agent's resignation or removal hereunder as
Paying Agent, the provisions of this Article X shall continue in effect for its
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as the Paying Agent hereunder and under the other Loan Documents.
10.12. DISTRIBUTION OF INFORMATION. The Borrower authorizes the Paying
Agent, as the Paying Agent may elect in its sole discretion, to discuss with and
furnish to the Lenders or to any other Person having an interest in the
Obligations (whether as a guarantor, pledgor of collateral, participant,
purchaser or otherwise) all financial statements, audit reports and other
information pertaining to the Borrower and its Subsidiaries whether such
information was provided by the Borrower or prepared or obtained by the Paying
Agent, subject to Section 9.14. Neither the Paying Agent nor any of its
employees, officers, directors or agents makes any representation or warranty
regarding any audit reports or other analyses of the Borrower's and its
Subsidiaries condition which the Paying Agent may elect to distribute, whether
such information was provided by the Borrower or prepared or obtained by the
Paying Agent, nor shall the Paying Agent or any of its employees, officers,
directors or agents be liable to any person or entity receiving a copy of such
reports or analyses for any inaccuracy or omission contained in or relating
thereto. Except as expressly set forth herein, the Paying Agent shall have no
duty to disclose, and shall not be liable for the failure to disclose, any
information relating to the Borrower or any of the Subsidiaries that is
communicated to or obtained by the bank serving as Paying Agent, or any of such
bank=s Affiliates, in any capacity.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any rights of
the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default or
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Unmatured Default occurs, any and all deposits (including all account balances,
whether provisional or final and whether or not collected or available) and any
other Indebtedness at any time held or owing by any Lender to or for the credit
or account of the Borrower may be offset and applied toward the payment of the
Obligations owing to such Lender, whether or not the Obligations, or any part
hereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or otherwise,
has payment made to it upon its Loans (other than payments received pursuant to
Section 3.1, 3.2 or 3.4) in a greater proportion than that received by any other
Lender, such Lender agrees, promptly upon demand, to purchase a portion of the
Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral (other than pursuant to the Security Documents) or other protection
for its Obligations or such amounts which may be subject to setoff, such Lender
agrees, promptly upon demand, to take such action necessary such that all
Lenders share in the benefits of such collateral ratably in proportion to their
Loans. In case any such payment is disturbed by legal process, or otherwise,
appropriate further adjustments shall be made to accomplish the intent of this
Section.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may
at any time, without the consent of the Borrower or the Paying Agent, assign all
or any portion of its rights under this Agreement to a Federal Reserve Bank;
provided, however, that no such assignment shall release the transferor Lender
from its obligations hereunder. The Paying Agent may treat each Lender as the
owner of the Loans made by such Lender for all purposes hereof unless and until
such Lender complies with Section 12.3 in the case of an assignment thereof or,
in the case of any other transfer, a written notice of the transfer is filed
with the Paying Agent. Any assignee or transferee of a Loan agrees by acceptance
thereof to be bound by all the terms and provisions of the Loan Documents. Any
request, authority or consent of any Person, who at the time of making such
request or giving such authority or consent is the owner of any Loan, shall be
conclusive and binding on any subsequent holder, transferee or assignee of such
Loan.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in
the ordinary course of its business and in accordance with applicable
law, at any time and from time to time
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sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any note held
by such Lender evidencing any such Loan, any Commitment of such Lender
or any other interest of such Lender under the Loan Documents. In the
event of any such sale by a Lender of participating interests to a
Participant, such Lender's obligations under the Loan Documents shall
remain unchanged, such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations, such
Lender shall remain the owner of all Loans made by it for all purposes
under the Loan Documents, all amounts payable by the Borrower under
this Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrower and the Paying Agent shall
continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole
right to approve, without the consent of any Participant, any
amendment, modification or waiver of any provision of the Loan
Documents other than any amendment, modification or waiver with respect
to any Loan or Commitment in which such Participant has an interest
which requires the approval of all of the Lenders pursuant to Section
8.2.
12.2.3. BENEFIT OF SETOFF. Upon selling any participating
interest to a Participant pursuant to Section 12.2.1, each Lender will
have the option to, but shall not be required to, give the Borrower and
the Paying Agent written notice of the fact that it has made such a
sale (without being required to specify the amount or any other
information concerning the participating interest sold) and the name of
the purchasing Participant (each Participant named in such a notice is
hereinafter referred to as an "Acknowledged Participant"). The Borrower
agrees that each Acknowledged Participant shall be deemed to have the
right of setoff provided in Section 11.1 as of the date of the
Borrower's receipt of the aforementioned notice in respect of its
participating interest in amounts owing under the Loan Documents to the
same extent as if the amount of its participating interest were owing
directly to it as a Lender under the Loan Documents, provided that each
Lender shall retain the right of setoff provided in Section 11.1 with
respect to the amount of participating interests sold to each
Acknowledged Participant. The Lenders agree to share with each
Acknowledged Participant, and each Acknowledged Participant, by
exercising the right of setoff provided in Section 11.1, agrees to
share with each Lender, any amount received pursuant to the exercise of
its right of setoff, such amounts to be shared in accordance with
Section 11.2 as if each Acknowledged Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the
ordinary course of its business and in accordance with applicable law,
at any time and from time to time, make one or more assignments to one
or more banks or other entities (each a "Purchaser") of all or any part
of its rights and obligations under the Loan Documents. Any assignment
61
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under this Section 12.3 shall be substantially in the form of Exhibit
"C" hereto or in such other form as may be agreed to by the parties
thereto. Unless an acceleration of the Obligations has occurred and is
continuing, the consent of the Borrower and the Paying Agent shall be
required prior to an assignment becoming effective with respect to a
Purchaser which is not a Lender or an Affiliate thereof. Such consent
shall not be unreasonably withheld. Notwithstanding anything in this
Article XII to the contrary, (a) nothing in this Agreement shall
prohibit or limit the right of any Lender to make assignments (and no
consent shall be required in connection with such assignments) of all
or any part of its interests under the Loan Documents (i) to a
Purchaser which is a Lender or an Affiliate thereof and (ii) after the
occurrence and during the continuance of an acceleration of the
Obligations, to any Purchaser, and (b) any Lender (a "Granting Lender")
may grant to a special purpose funding vehicle (a "SPC") identified as
such in writing from time to time by the Granting Lender to the Paying
Agent and the Borrower, the option to provide to the Borrower all or
any part of any Loan that such Granting Lender would otherwise be
obligated to make to the Borrower pursuant to this Agreement; PROVIDED
that (i) nothing herein shall constitute a commitment by any SPC to
make any Loan, (ii) if an SPC elects not to exercise such option or
otherwise fails to provide all or any part of such Loan, the Granting
Lender shall be obligated to make such Loan pursuant to the terms
hereof. The making of a Loan by an SPC hereunder shall utilize the
Commitment of the Granting Lender to the same extent, and as if, such
Loan were made by such Granting Lender. Each party hereto agrees that
no SPC shall be liable for any indemnity or similar payment obligation
under this Agreement (all liability for which shall remain with the
Granting Lender). In furtherance of the foregoing, each party hereto
agrees (which agreement shall survive the termination of this
Agreement) that, prior to the date that is one year and one day after
the payment in full of all outstanding commercial paper or other senior
indebtedness of any SPC, it will not institute against, or join any
other person in instituting against, such SPC any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings
under the laws of the United States or any State thereof. In addition,
notwithstanding anything to the contrary contained in this Section
12.3, any SPC may (i) with notice to, but without the prior written
consent of, the Borrower and the Paying Agent and without paying any
processing fee therefor, assign all or any part of its interests in any
Advances to its Granting Lender or to any financial institutions
(consented to by the Borrower and the Paying Agent) providing liquidity
and/or credit support to or for the account of such SPC to support the
funding or maintenance of Loans and (ii) disclose on a confidential
basis any non-public information relating to its Loans to any rating
agency, commercial paper dealer or provider of any surety, guarantee or
credit or liquidity enhancement to such SPC.
12.3.2. REQUIRED ASSIGNMENTS. The Borrower shall have the
right, by giving at least 15 Business Days' prior written notice to the
affected Lender and the Paying Agent, at any time when no Default or
Unmatured Default has occurred and is continuing, to require any Lender
to assign all of its rights and obligations under the Loan Documents to
a Purchaser approved by the Borrower. Such assignment shall be
substantially in the form of Exhibit "C" hereto or in such other form
as may be agreed to by the parties thereto but
62
<PAGE>
shall be on terms and conditions reasonably satisfactory to the
affected Lender. If the affected Lender is a Reference Lender, the
Paying Agent, with the consent of the Borrower (which shall not be
unreasonably withheld), shall appoint a new Reference Lender from among
the Lenders. The Borrower shall remain liable to the affected Lender
for any indemnification provided under Section 3.4 with respect to
Loans of such Lender outstanding on the effective date of an assignment
required under this Section 12.3.2, as well as for all other
Obligations owed to such Lender under this Agreement as of such
effective date.
12.3.3. EFFECT; EFFECTIVE DATE. Upon (i) delivery to the
Paying Agent of a notice of assignment, substantially in the form
attached as Exhibit "I" to Exhibit "C" hereto (a "Notice of
Assignment"), together with any consents required by Section 12.3.1,
and (ii) payment by the assignor or assignee of a $4,000 fee to the
Paying Agent for processing such assignment, such assignment shall
become effective on the effective date specified in such Notice of
Assignment. On and after the effective date of such assignment, such
Purchaser shall for all purposes be a Lender under this Agreement and
any other Loan Document executed by the Lenders and shall have all the
rights and obligations of a Lender under the Loan Documents, to the
same extent as if it were an original party hereto, and no further
consent or action by the Borrower, the Lenders or the Paying Agent
shall be required to release the transferor Lender with respect to the
Commitments and Loans assigned to such Purchaser and such Lender shall
be immediately so released. Upon the consummation of any assignment to
a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the
Paying Agent and the Borrower shall make appropriate arrangements so
that, to the extent one or more notes have been issued to evidence any
of the transferred Loans, a replacement note is issued to such
transferor Lender and, if so requested by such Purchaser, a new note
or, as appropriate, replacement note, is issued to such Purchaser, in
each case in principal amounts reflecting their respective Commitments,
as adjusted pursuant to such assignment.
12.4. DISSEMINATION OF INFORMATION. The Borrower authorizes each Lender
to disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries; provided
that each Transferee and prospective Transferee agrees to be bound by Section
9.14 of this Agreement.
12.5. TAX TREATMENT. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 2.18.
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<PAGE>
ARTICLE XIII
NOTICES
13.1. GIVING NOTICE. Except as otherwise permitted by Section 2.13 with
respect to borrowing notices, all notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing or by telex or by facsimile and addressed or delivered to such party at
its address set forth below its signature hereto or at such other address as may
be designated by such party in a notice to the other parties. Any notice, if
mailed and properly addressed with postage prepaid or if delivered to the
Borrower's delivery service and properly addressed, shall be deemed given when
received; any notice, if transmitted by telex or facsimile, shall be deemed
given when transmitted (answerback confirmed in the case of telexes).
13.2. CHANGE OF ADDRESS. The Borrower, the Paying Agent and any Lender
may each change the address for service of notice upon it by a notice in writing
to the other parties hereto.
ARTICLE XIV
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective upon receipt by the Paying Agent of original or
faxed copies of such counterparts executed by the Borrower, the Paying Agent and
the Lenders.
64
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Paying Agent have
executed this Agreement as of the date first above written.
FDX CORPORATION
By: /s/ Charles M. Buchas, Jr.
-------------------------------------------
Charles M. Buchas, Jr.
Corporate Vice President and Treasurer
FDX Corporation
2600 Thousand Oaks Boulevard
Suite 3110
Memphis, Tennessee 38118
Attn: Treasurer
Telephone: 901-224-7040
Telecopy: 901-224-7061
Copy all notices and credit matters to:
FDX Corporation
6075 Poplar Avenue
Suite 300
Memphis, Tennessee 38119
Attn: General Counsel
Telephone: 901-395-3382
Telecopy: 901-395-5034
<PAGE>
CO-ARRANGERS:
MORGAN GUARANTY TRUST
COMMITMENT: COMPANY OF NEW YORK,
$60,000,000 Individually and as Paying Agent
By: /s/ Diana H. Imhof
-------------------------------------------
Diana H. Imhof
Vice President
60 Wall Street
5th Floor
New York, New York 10260-0060
Attn: Diana H. Imhof
Telephone: 212-648-1356
Telecopy: 212-648-5018
Copy all notices and credit matters to:
Morgan Guaranty Trust Company of New York
60 Wall Street
5th Floor
New York, New York 10260-0060
Attn: Diana H. Imhof
Telephone: 212-648-1356
Telecopy: 212-648-5018
Copy all Borrowing Notices to:
Morgan Guaranty Trust Company of New York
c/o J. P. Morgan Services, Inc.
500 Stanton-Christiana Road
Newark, Delaware 19713-2107
Attn: Thomas Lazlo/Scott Kasprenski
Telephone: 302-634-1893/1874
Telecopy: 302-634-1852
67
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THE FIRST NATIONAL BANK OF
COMMITMENT: CHICAGO
$60,000,000
By: /s/
-------------------------------------------
Authorized Agent
One First National Plaza
Mail Suite 0362
Chicago, Illinois 60670
Attn: Transportation Division
Administrative Coordinator
Telephone: 312-732-8142
Telecopy: 312-732-3885
Copy all notices and credit matters to:
The First National Bank of Chicago
One First National Plaza
Mail Suite 0336
Chicago, Illinois 60670-0362
Attn: Christina Jamieson
Telephone: 312-732-1336
Telecopy: 312-732-7455
Copy all Borrowing Notices to:
The First National Bank of Chicago
One First National Plaza
Mail Suite 0634
Chicago, Illinois 60670-0634
Attn: Mattie Reed
Telephone: 312-732-5219
Telecopy: 312-732-4840
68
<PAGE>
THE CHASE MANHATTAN BANK
COMMITMENT:
$60,000,000
By: /s/ Matthew H. Massie
--------------------------------------------
Matthew H. Massie
Managing Director
270 Park Avenue
38th Floor
New York, New York 10017
Attn: Matthew H. Massie
Telephone: 212-270-5432
Telecopy: 212-270-5100
Copy all notices and credit matters to:
The Chase Manhattan Bank
270 Park Avenue
38th Floor
New York, New York 10017
Attn: Vilma Francis
Telephone: 212-270-5484
Telecopy: 212-270-4016
All Borrowing Notices to:
The Chase Manhattan Bank
One Chase Plaza
8th Floor
c/o The Loan & Agency Services Group
New York, New York 10081
Attn: Mo-Lin Sum
Telephone: 212-552-7312
Telecopy: 212-552-5650
69
<PAGE>
CITIBANK, N.A.
COMMITMENT:
$60,000,000
By: /s/
-------------------------------------------
Name:
Title:
399 Park Avenue
12th Floor/Zone 2
New York, New York 10043
Attn: Portfolio Management
Telephone: 212-559-6413
Telecopy: 212-793-3734
Copy all notices and credit matters to:
Citibank, N.A.
399 Park Avenue
New York, New York 10043
Attn: Tom Boyle
Telephone: 212-559-6149
Telecopy: 212-793-1246
Copy all Borrowing Notices to:
Citibank, N.A.
Global Loan Support Services
Two Penns Way Suite 200
New Castle, DE 19720
Attn: Timothy E. Smith
Telephone: 302-894-6059
Telecopy: 302-894-6120
70
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CREDIT SUISSE FIRST BOSTON
COMMITMENT:
$60,000,000
By: /s/Thomas G. Muoio /s/Robert N. Finney
-------------------------------------------
Thomas G. Muoio Robert N. Finney
Title: Vice President Managing Director
Eleven Madison Avenue
New York, New York 10010-3629
Attn: Thomas G. Muoio
Telephone: 212-325-9098
Telecopy: 212-325-8319
Copy all notices and credit matters to:
Credit Suisse First Boston
Eleven Madison Avenue
New York, New York 10010-3629
Attn: Thomas G. Muoio
Telephone: 212-325-9098
Telecopy: 212-325-8319
Copy all Borrowing Notices to:
Credit Suisse First Boston
Eleven Madison Avenue
New York, New York 10010-3629
Attn: Patti Matos
Telephone: 212-325-9754
Telecopy: 212-325-6508
71
<PAGE>
SENIOR MANAGING AGENTS:
BANK OF AMERICA NATIONAL TRUST
COMMITMENT: AND SAVINGS ASSOCIATION
$55,000,000
By: /s/ Mary Therese Carlson
---------------------------------------------
Mary Therese Carlson
Vice President
231 South LaSalle Street
10th Floor
Chicago, Illinois 60697
Attn: Mary Therese Carlson
Telephone: 312-828-7968
Telecopy: 312-828-1997
Copy all notices and credit matters to:
Bank of America National Trust
and Savings Association
231 South LaSalle Street
10th Floor
Chicago, Illinois 60697
Attn: Lee Nunery
Telephone: 312-234-5621
Telecopy: 312-234-5601
Copy all Borrowing Notices to:
Bank of America National Trust
and Savings Association
Corporate Service Center #5693
1850 Gateway Boulevard
Concord, California 94520
Attn: Kelsey Robinson
Telephone: 925-675-7719
Telecopy: 925-675-7531
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<PAGE>
COMMERZBANK AKTIENGESELLSCHAFT,
COMMITMENT: ATLANTA AGENCY
$55,000,000
By: /s/ Eric Kagerer
---------------------------------------------
Name: Eric Kagerer
Title: Vice President
By: /s/ Subash Viswanathan
--------------------------------------------
Name: Subash Viswanathan
Title: Vice President
1230 Peachtree Street, N.E.
Suite 3500
Atlanta, GA 30309
Attn: Eric Kagerer
Telephone: 404-888-6517
Telecopy: 404-888-6539
Copy all notices and credit matters to:
1230 Peachtree Street, N.E.
Suite 3500
Atlanta, GA 30309
Attn: Eric Kagerer/Amy Greiner
Telephone: 404-888-6517/404-888-6510
Telecopy: 404-888-6539
Copy all administrative/ operational matters to:
2 World Financial Center
33rd Floor
New York, NY 10281-1050
Attn: Dianne Morgenegg/Christine Scaffidi
Telephone: 212-266-7562/212-266-7204
Telecopy: 212-266-7593
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<PAGE>
CO-AGENTS:
BANCA COMMERCIALE ITALIANA,
COMMITMENT: NEW YORK BRANCH
$50,000,000
By: /s/ C. Dougherty
--------------------------------------------
Name: C. Dougherty, VP
Title:
By: /s/ Karen Purelis
--------------------------------------------
Name: Karen Purelis, VP
Title:
One William Street
New York, NY 10004
Attn: John Michalisin
Telephone: 212-607-3918
Telecopy: 212-809-2124
Copy all Borrowing Notices to:
Banca Commerciale Italiana
One William Street
New York, NY 10004
Attn: Tony O'Mahony
Telephone: 212-607-3852
Telecopy: 212-809-2124
74
<PAGE>
THE BANK OF NOVA SCOTIA
COMMITMENT
$50,000,000
By: /s/ A.S. Norsworthy
--------------------------------------------
Name: A.S. Norsworthy
Title: Sr. Team Leader Loan Operations
The Bank of Nova Scotia
Atlanta Agency
600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Attn: Phyllis Walker
Telephone: 404-877-1552
Telecopy: 404-888-8998
With a copy to:
The Bank of Nova Scotia
Houston Representative Office
1100 Louisiana, Suite 3000
Houston, Texas 77002
Attn: Paul G. Gonin
Telephone: 713-759-3443
Telecopy: 713-752-2425
75
<PAGE>
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
COMMITMENT
$50,000,000
By: /s/ Joseph P. Devoe
--------------------------------------------
Name: Joseph P. Devoe
Title: Vice President
1251 Avenue of the Americas, 12th Floor
New York, NY 10020-1104
Attn: Joseph P. Devoe
Telephone: 212-782-4318
Telecopy: 212-782-4979
Copy all Borrowing Notices to:
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas, 12th Floor
New York, NY 10020-1104
Attn: Rolando Uy, Operations Officer
Telephone: 212-782-5637
Telecopy: 212-782-5635
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<PAGE>
FIRST UNION NATIONAL BANK
COMMITMENT
$50,000,000
By: /s/
--------------------------------------------
Name:
Title: V.P.
1339 Chestnut St.
11th Floor Widener Bldg.
Philadelphia, PA 19107
Attn: Michael J. Labrum,
Vice President
Telephone: 215-973-7045
Telecopy: 215-786-7704
Copy all administrative/operations matters to:
First Union National Bank
1339 Chestnut St.
11th Floor Widener Bldg.
Philadelphia, PA 19107
Attn: John McDonald
Assistant Vice President
Telephone: 215-973-3961
Telecopy: 215-973-6054
77
<PAGE>
UNION PLANTERS BANK, N.A.
COMMITMENT:
$50,000,000.00
By: /s/ Leonard L. McKinnon
---------------------------------------------
Leonard L. McKinnon
Senior Vice President
6200 Poplar Avenue
4th Floor
Memphis, TN 38119
Attn: Leonard L. McKinnon
Telephone: 901-580-5481
Telecopy: 901-580-5451
Copy all notices and credit matters to:
Union Planters Bank, N.A.
6200 Poplar Avenue
HQ4
Memphis, TN 38119
Attn: Leonard L. McKinnon
Telephone: 901-580-5481
Telecopy: 901-580-5451
Copy all Borrowing Notices to:
Union Planters Bank, N.A.
6200 Poplar Avenue
HQ4
Memphis, TN 38119
Attn: Shea Buchignani
Telephone: 901-580-5583
Telecopy: 901-580-5451
78
<PAGE>
WACHOVIA BANK, N.A.
COMMITMENT:
$50,000,000
By: /s/ Karin E. Reel
--------------------------------------------
Name: Karin E. Reel
Title: Vice President
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: Karin E. Reel
Telephone: 404-332-5187
Telecopy: 404-332-5016
Copy all notices and credit matters to:
Wachovia Bank, N.A.
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: Karin E. Reel
Telephone: 404-332-5187
Telecopy: 404-332-5016
Copy all Borrowing Notices to:
Wachovia Bank, N.A.
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attn: Jay Corbett
Telephone: 404-332-1039
Telecopy: 404-332-5016
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<PAGE>
PARTICIPANTS:
THE FUJI BANK, LIMITED,
COMMITMENT: NEW YORK BRANCH
$34,000,000
By: /s/ Raymond Ventura
--------------------------------------------
Name: Raymond Ventura
Title: Vice President & Manager
Two World Trade Center, 79th Floor
New York, NY 10048
Attn: Raymond Ventura, U.S. Corporate Finance
Telephone: 212-898-2062
Telecopy: 212-321-9407
Copy all notices and credit matters to:
The Fuji Bank, Limited, New York Branch
Two World Trade Center, 79th Floor
New York, NY 10048
Attn: Felix Amerasinghe/U.S. Corporate Finance
Telephone: 212-898-2597
Telecopy: 212-488-8216
Copy all Borrowing Notices to:
The Fuji Bank, Limited, New York Branch
Two World Trade Center, 79th Floor
New York, NY 10048
Attn: Tina Catapano/Loan Administration
Telephone: 212-898-2099
Telecopy: 212-488-8216
80
<PAGE>
INTERNATIONAL TRANSPORT FINANCE LIMITED
COMMITMENT
$34,000,000
By: /s/ Constance Laudenschlager
--------------------------------------------
Constance Laudenschlager
Title: Director
By: /s/ Lori Nabhan
--------------------------------------------
Lori Nabhan
Title: Marketing Representative
c/o LTCB
165 Broadway
New York, NY 10006
Attn: Constance Laudenschlager/Lori
Nabhan
Telephone: 212-335-4596/4537
Telecopy: 212-608-3058
Copy all notices and credit matters to:
International Transport Finance Limited
c/o LTCB
165 Broadway
New York, NY 10006
Attn: Constance Laudenschlager/Lori
Nabhan
Telephone: 212-335-4596/4537
Telecopy: 212-608-3058
Copy all Borrowing Notices to:
International Transport Finance Limited
c/o LTCB
165 Broadway
New York, NY 10006
Attn: Constance Laudenschlager/Lori
Nabhan
Telephone: 212-335-4596/4537
Telecopy: 212-608-3058
81
<PAGE>
KBC BANK N.V.
COMMITMENT
$34,000,000
By: /s/ Robert Snauffer /s/ Michael V. Curran
--------------------------------------------
Name: Robert Snauffer Michael V. Curran
Title: First Vice President Vice President
KBC Bank N.V.
New York Branch
125 West 55th Street
New York, NY 10019
Attn: Lynda Resuma, Loan Administration
Telephone: 212-541-0657
Telecopy: 212-956-5581
Copy all notices and credit matters to:
KBC Bank N.V.
Atlanta Representative Office
1349 West Peachtree Street, Suite 1750
Atlanta, GA 30309
Attn: Jackie Brunetto, Vice President
Telephone: 404-876-2556
Telecopy: 404-876-3212
Copy all Borrowing Notices to:
KBC Bank N.V.
Atlanta Representative Office
1349 West Peachtree Street, Suite 1750
Atlanta, GA 30309
Attn: Jackie Brunetto, Vice President
Telephone: 404-876-2556
Telecopy: 404-876-3212
82
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MELLON BANK, N.A.
COMMITMENT
$34,000,000
By: /s/ Mark F. Johnston
--------------------------------------------
Name: Mark F. Johnston
Title: A V.P.
Three Mellon Bank Center - Room 1203
Pittsburgh, PA 15259-0003
Telecopy: 412-209-6138
Copy all notices and credit matters to:
Mellon Bank, N.A.
Three Mellon Bank Center - Room 1203
Pittsburgh, PA 15259-0003
Attn: Mark Johnston
Telephone: 412-236-2793
Telecopy: 412-236-1914
Copy all Borrowing Notices to:
Mellon Bank, N.A.
Three Mellon Bank Center - Room 1203
Pittsburgh, PA 15259-0003
Attn: Lloyd Martin-Loan Administration
Telephone: 412-234-9448
Telecopy: 412-209-6138
83
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THE BANK OF NEW YORK
COMMITMENT
$34,000,000
By: /s/ Ann Marie Hughes
--------------------------------------------
Name: Ann Marie Hughes
Title: Vice President
One Wall Street
22nd Floor
New York, NY 10286
Attn: Ann Marie Hughes
Telephone: 212-635-1339
Telecopy: 212-635-6434
Copy all administrative and operations matters to:
The Bank of New York
One Wall Street
22nd Floor
New York, NY 10286
Attn: Annette Megargel
Telephone: 212-635-6780
Telecopy: 212-635-6399
84
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THE NORTHERN TRUST COMPANY
COMMITMENT:
$34,000,000
By: /s/ James E.T. Monhart
--------------------------------------------
Name: James E.T. Monhart
Title: S VP
50 S. LaSalle Street, 11th Floor
Chicago, IL 60076
Attn: James Monhart
Telephone: 312-444-5646
Telecopy: 312-444-5055
Copy all administrative and operational matters to:
The Northern Trust Company
50 S. LaSalle Street, 11th Floor
Chicago, IL 60076
Attn: Linda Honda
Telephone: 312-444-3532
Telecopy: 312-630-1566
85
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SUNTRUST BANK, NASHVILLE, N.A.
COMMITMENT
$30,000,000
By: /s/ Bryan W. Ford
---------------------------------------------
Name: Bryan W. Ford
Title: Vice President
6410 Poplar Avenue, Suite 320
Memphis, Tennessee 38119
Telephone: 901-762-9868
Telecopy: 901-766-7565
Copy all notices and credit matters to:
Suntrust Bank, Nashville, N.A.
6410 Poplar Avenue, Suite 320
Memphis, Tennessee 38119
Attn: Renee DeRubeis Drake
Telephone: 901-762-9868
Telecopy: 901-766-7565
Copy all Borrowing Notices to:
Suntrust Bank, Nashville, N.A.
P.O. Box 305110
Commercial Loan Operation
Nashville, Tennessee 37230-5110
Attn: Leigh Anne Gregory/Tina Marie Edwards
Telephone: 615-748-5461/4031
Telecopy: 615-748-4611
86
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FIRST TENNESSEE BANK
COMMITMENT NATIONAL ASSOCIATION
$26,000,000
By: /s/ James H. Moore, Jr.
--------------------------------------------
Name: James H. Moore, Jr.
Title: Vice President
165 Madison Avenue, 9th Floor
Memphis, TN 38103-2723
Attn: Sonel Patel
Telephone: 901-523-4118
Telecopy: 901-523-4267
Copy all notices and credit matters to:
First Tennessee Bank National Association
165 Madison Avenue, 9th Floor
Memphis, TN 38103-2723
Attn: Jim Moore
Telephone: 901-523-4108
Telecopy: 901-523-4267
87
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THE SUMITOMO BANK, LIMITED
COMMITMENT
$20,000,000
By: /s/ Gary Franke
---------------------------------------------
Name: Gary Franke
Title: Vice President and Manager
Suntrust Plaza
Suite 4420
303 Peachtree Street
Atlanta, GA 30308
Attn: Gary Franke
Telephone: 404-526-8511
Telecopy: 404-521-1187
Copy all administrative/ operational notices to:
The Sumitomo Bank, Limited
277 Park Avenue
New York, NY 10072
Attn: Yvette Dowling
Telephone: 212-224-4069
Telecopy: 212-224-4537
88
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FIRST AMERICAN NATIONAL BANK
COMMITMENT:
$10,000,000
By: /s/ William R. Stutts
--------------------------------------------
Name: William R. Stutts
Title: Senior Vice President
6000 Poplar Ave., Suite 300
Memphis, TN 38119
Attn: William R. Stutts
Telephone: 901-762-5675
Telecopy: 901-762-5665
Copy all administrative and operational matters to:
First American National Bank
490 Metroplex Drive
Nashville, TN 37211
Attn: Frenisa Joy
Telephone: 615-365-5683
Telecopy: 615-365-5684
89
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EXHIBIT "A"
FORM OF GUARANTY
THIS GUARANTY (this "Guaranty") is made as of the 10th day of December,
1998, by Federal Express Corporation, a Delaware corporation, RPS, Inc., a
Delaware corporation, Caliber System, Inc., an Ohio corporation, Viking Freight,
Inc., a California corporation, and Roberts Express, Inc., an Ohio corporation
(collectively, the "Initial Guarantors" and along with any Significant
Subsidiaries which become parties to this Agreement by executing an Addendum
hereto in the form attached as Annex I, the "Guarantors") in favor of the Paying
Agent, for the ratable benefit of the Lenders, under (and as defined in) the
Credit Agreement referred to below. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to them in the Credit
Agreement.
WITNESSETH:
WHEREAS, FDX Corporation, a Delaware corporation (the "Borrower"),
Morgan Guaranty Trust Company of New York, as paying agent (the "Paying Agent"),
and certain Lenders have entered into a certain Credit Agreement dated as of
December 10, 1998 (as the same may be amended, modified, supplemented and/or
restated, and as in effect from time to time, the "Credit Agreement"),
providing, subject to the terms and conditions thereof, for extensions of credit
to be made by the Lenders to the Borrower;
WHEREAS, it is a condition precedent to the initial extensions of
credit by the Lenders under the Credit Agreement that each of the Guarantors
execute and deliver this Guaranty, whereby each of the Guarantors shall
guarantee the payment when due, subject to SECTION 8 hereof, of any and all of
the Obligations; and
WHEREAS, in consideration of the financial and other support that the
Borrower has provided, and such financial and other support as the Borrower may
in the future provide, to the Guarantors, and in order to induce the Lenders and
the Paying Agent to enter into the Credit Agreement, each of the Guarantors is
willing to guarantee the obligations of the Borrower under the Credit Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION l. DEFINITIONS. Terms defined in the Credit Agreement and not
otherwise defined herein have, as used herein, the respective meanings provided
for therein.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the
Guarantors represents and warrants (which representations and warranties shall
be deemed to have been renewed at the time of the making of any Advance) that:
<PAGE>
(a) It is a corporation, limited liability company,
partnership or other commercial entity duly incorporated or formed, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation and has all requisite authority to conduct its
business as a foreign Person in each jurisdiction in which its business is
conducted, except where the failure to have such requisite authority would not
have a Material Adverse Effect.
(b) It has the power and authority and legal right to execute
and deliver this Guaranty and to perform its obligations hereunder. The
execution and delivery by it of this Guaranty and the performance by it of its
obligations hereunder have been duly authorized by proper proceedings, and this
Guaranty constitutes a legal, valid and binding obligation of such Guarantor
enforceable against such Guarantor in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.
(c) Neither the execution and delivery by it of this Guaranty,
nor the consummation by it of the transactions herein contemplated, nor
compliance by it with the terms and provisions hereof, will violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
it or its certificate or articles of incorporation or by-laws, limited liability
company or partnership agreement or the provisions of any indenture, instrument
or material agreement to which it is a party or is subject, or by which it, or
its property, is bound, or conflict with or constitute a default thereunder, or
result in the creation or imposition of any Lien in, of or on its property
pursuant to the terms of any such indenture, instrument or material agreement.
No order, consent, approval, license, authorization, or validation of, or
filing, recording or registration with, or exemption by, any governmental
authority, is required to authorize, or is required in connection with the
execution, delivery and performance by it of, or the legality, validity, binding
effect or enforceability of, this Guaranty.
In addition to the foregoing, each of the Guarantors covenants
that, so long as any Lender has any Commitment outstanding under the Credit
Agreement or any amount payable under the Credit Agreement or any other
Obligations shall remain unpaid, it will, and, if necessary, will enable the
Borrower to, fully comply with those covenants and agreements of the Borrower
applicable to such Guarantor set forth in the Credit Agreement.
SECTION 3. THE GUARANTY. Subject to SECTION 8 hereof, each of the
Guarantors hereby unconditionally guarantees, jointly with the other Guarantors
and severally, the full and punctual payment when due (whether at stated
maturity, upon acceleration or otherwise) of the Obligations, (the foregoing,
subject to the provisions of SECTION 8 hereof, being referred to collectively as
the "Guaranteed Obligations"). Upon failure by the Borrower to pay punctually
any such amount, each of the Guarantors agrees that it shall forthwith on demand
pay such amount at the place and in the manner specified in the Credit Agreement
or the relevant Loan Document, as the case may be. Each of the Guarantors hereby
agrees that this Guaranty is an absolute, irrevocable and unconditional guaranty
of payment and is not a guaranty of collection.
2
<PAGE>
SECTION 4. GUARANTY UNCONDITIONAL. Subject to SECTION 8 hereof, the
obligations of each of the Guarantors hereunder shall be unconditional and
absolute and, without limiting the generality of the foregoing, shall not be
released, discharged or otherwise affected by:
(i) any extension, renewal, settlement, indulgence, compromise,
waiver or release of or with respect to the Guaranteed
Obligations or any part thereof or any agreement relating
thereto, or with respect to any obligation of any other
guarantor of any of the Guaranteed Obligations, whether (in
any such case) by operation of law or otherwise, or any
failure or omission to enforce any right, power or remedy with
respect to the Guaranteed Obligations or any part thereof or
any agreement relating thereto, or with respect to any
obligation of any other guarantor of any of the Guaranteed
Obligations;
(ii) any modification or amendment of or supplement to the Credit
Agreement or any other Loan Document, including, without
limitation, any such amendment which may increase the amount
of the Obligations guaranteed hereby;
(iii) any release, surrender, compromise, settlement, waiver,
subordination or modification, with or without consideration,
of any collateral securing the Guaranteed Obligations or any
part thereof, any other guaranties with respect to the
Guaranteed Obligations or any part thereof, or any other
obligation of any person or entity with respect to the
Guaranteed Obligations or any part thereof, or any
nonperfection or invalidity of any direct or indirect security
for the Guaranteed Obligations;
(iv) any change in the corporate, partnership or other existence,
structure or ownership of the Borrower or any other guarantor
of any of the Guaranteed Obligations, or any insolvency,
bankruptcy, reorganization or other similar proceeding
affecting the Borrower or any other guarantor of the
Guaranteed Obligations, or any of their respective assets or
any resulting release or discharge of any obligation of the
Borrower or any other guarantor of any of the Guaranteed
Obligations;
(v) the existence of any claim, setoff or other rights which the
Guarantors may have at any time against the Borrower, any
other guarantor of any of the Guaranteed Obligations, the
Paying Agent, any Lender or any other Person, whether in
connection herewith or in connection with any unrelated
transactions, PROVIDED that nothing herein shall prevent the
assertion of any such claim by separate suit or compulsory
counterclaim;
(vi) the enforceability or validity of the Guaranteed Obligations
or any part thereof or the genuineness, enforceability or
validity of any agreement relating thereto or with respect to
any collateral securing the Guaranteed Obligations or any part
thereof, or any other invalidity or unenforceability relating
to or against the Borrower or any other guarantor of any of
the Guaranteed Obligations, for any reason related to the
Credit Agreement, any other Loan Document, or any provision of
applicable
3
<PAGE>
law or regulation purporting to prohibit the payment by the
Borrower or any other guarantor of the Guaranteed Obligations,
of any of the Guaranteed Obligations;
(vii) the failure of the Paying Agent to take any steps to perfect
and maintain any security interest in, or to preserve any
rights to, any security or collateral for the Guaranteed
Obligations, if any;
(viii) the election by, or on behalf of, any one or more of the
Lenders, in any proceeding instituted under Chapter 11 of
Title 11 of the United States Code (11 U.S.C. 101 et seq.)
(the "Bankruptcy Code"), of the application of Section
1111(b)(2) of the Bankruptcy Code;
(ix) any borrowing or grant of a security interest by the Borrower,
as debtor-in-possession, under Section 364 of the Bankruptcy
Code;
(x) the disallowance, under Section 502 of the Bankruptcy Code, of
all or any portion of the claims of any of the Lenders or the
Paying Agent for repayment of all or any part of the
Guaranteed Obligations;
(xi) the failure of any other Guarantor to sign or become party to
this Guaranty or any amendment, change, or reaffirmation
hereof; or
(xii) any other act or omission to act or delay of any kind by the
Borrower, any other guarantor of the Guaranteed Obligations,
the Paying Agent, any Lender or any other Person or any other
circumstance whatsoever which might, but for the provisions of
this SECTION 4, constitute a legal or equitable discharge of
any Guarantor's obligations hereunder.
SECTION 5. DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN
CERTAIN CIRCUMSTANCES. Except as otherwise provided in Section 9.16 of the
Credit Agreement, each of the Guarantors' obligations hereunder shall remain in
full force and effect until all Guaranteed Obligations shall have been paid in
full and the Commitments under the Credit Agreement shall have terminated or
expired. If at any time any payment of any portion of the Obligations is
rescinded or must be otherwise restored or returned upon the insolvency,
bankruptcy or reorganization of the Borrower or otherwise, each Guarantor's
obligations hereunder with respect to such payment shall be reinstated as though
such payment had been due but not made at such time.
SECTION 6. GENERAL WAIVERS. Each of the Guarantors irrevocably waives
acceptance hereof, presentment, demand or action on delinquency, protest, the
benefit of any statutes of limitations and, to the fullest extent permitted by
law, any notice not provided for herein, as well as any requirement that at any
time any action be taken by any Person against the Borrower, any other guarantor
of the Guaranteed Obligations, or any other Person.
4
<PAGE>
SECTION 7. SUBORDINATION OF SUBROGATION RIGHTS. Until the Obligations
have been indefeasibly paid in full in cash, the Guarantors (i) shall have no
right of subrogation with respect to such Obligations and (ii) waive any right
to enforce any remedy which the Lenders or the Paying Agent now have or may
hereafter have against the Borrower, any endorser or any guarantor of all or any
part of the Obligations or any other Person, and the Guarantors waive any
benefit of, and any right to participate in, the security or collateral given to
the Lenders and the Paying Agent, if any, to secure the payment or performance
of all or any part of the Obligations or any other liability of the Borrower to
the Lenders. Should any Guarantor have the right, notwithstanding the foregoing,
to exercise its subrogation rights, each Guarantor hereby expressly and
irrevocably (a) subordinates any and all rights at law or in equity to
subrogation, reimbursement, exoneration, contribution, indemnification or setoff
that the Guarantor may have to the indefeasible payment in full in cash of the
Obligations and (b) waives any and all defenses available to a surety, guarantor
or accommodation co-obligor until the Obligations are indefeasibly paid in full
in cash. Each Guarantor acknowledges and agrees that this subordination is
intended to benefit the Paying Agent and the Lenders and shall not limit or
otherwise affect such Guarantor's liability hereunder or the enforceability of
this Guaranty, and that the Paying Agent, the Lenders and their respective
successors and assigns are intended third party beneficiaries of the waivers and
agreements set forth in this SECTION 7.
SECTION 8. LIMITATION. Notwithstanding any provision herein contained
to the contrary, each Guarantor's liability under this Guaranty (which liability
is in any event in addition to amounts for which such entity may be primarily
liable) shall be limited to an amount not to exceed as of any date of
determination the greater of:
(a) the net amount of all Loans advanced to the Borrower
under this Agreement and then re-loaned or otherwise transferred to, or for the
benefit of, such Guarantor; and
(b) the amount which could be claimed by the Paying Agent and
the Lenders from such Guarantor under this Guaranty without rendering such claim
voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or
under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent
Conveyance Act or similar statute or common law after taking into account, among
other things, such Guarantor's right of contribution and indemnification from
each other Guarantor under SECTION 9.
SECTION 9. CONTRIBUTION WITH RESPECT TO GUARANTY OBLIGATIONS.
(a) To the extent that any Guarantor shall make a payment
under this Guaranty (a "Guarantor Payment") which, taking into account all other
Guarantor Payments then previously or concurrently made by any other Guarantor,
exceeds the amount which such Guarantor would otherwise have paid if each
Guarantor had paid the aggregate Obligations satisfied by such Guarantor Payment
in the same proportion that such Guarantor's "Allocable Amount" (as defined
below) (as determined immediately prior to such Guarantor Payment) bore to the
aggregate Allocable Amounts of each of the Guarantors as determined immediately
prior to the making of such Guarantor Payment, THEN, following indefeasible
payment in full in cash of the Obligations and termination of the Commitments,
such Guarantor shall be entitled to receive contribution and
5
<PAGE>
indemnification payments from, and be reimbursed by, each other Guarantor for
the amount of such excess, PRO RATA based upon their respective Allocable
Amounts in effect immediately prior to such Guarantor Payment.
(b) As of any date of determination, the "Allocable Amount"
of any Guarantor shall be equal to the maximum amount of the claim which could
then be recovered from such Guarantor under this Guaranty without rendering such
claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy
Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform
Fraudulent Conveyance Act or similar statute or common law.
(c) This SECTION 9 is intended only to define the relative
rights of the Guarantors and nothing set forth in this SECTION 9 is intended to
or shall impair the obligations of the Guarantors, jointly and severally, to pay
any amounts as and when the same shall become due and payable in accordance with
the terms of this Agreement.
(d) The parties hereto acknowledge that the rights of
contribution and indemnification hereunder shall constitute assets of the
Guarantor to which such contribution and indemnification is owing.
(e) The rights of the indemnifying Guarantors against other
Guarantors under this SECTION 9 shall be exercisable upon the full and
indefeasible payment of the Obligations and the termination of the Commitments.
SECTION 10. STAY OF ACCELERATION. If acceleration of the time for
payment of any of the Obligations is stayed upon the insolvency, bankruptcy or
reorganization of the Borrower, all such amounts otherwise subject to
acceleration under the terms of the Credit Agreement, or any other Loan Document
shall nonetheless be payable by each of the Guarantors hereunder forthwith on
demand by the Paying Agent.
SECTION 11. NO WAIVERS. No failure or delay by the Paying Agent or any
Lender in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies provided in this Guaranty, the Credit
Agreement, and the other Loan Documents shall be cumulative and not exclusive of
any rights or remedies provided by law.
SECTION 12. SUCCESSORS AND ASSIGNS. This Guaranty is for the benefit of
the Paying Agent and the Lenders and their respective successors and permitted
assigns and in the event of an assignment of any amounts payable under the
Credit Agreement, or the other Loan Documents in accordance with the respective
terms thereof, the rights hereunder, to the extent applicable to the
indebtedness so assigned, may be transferred with such indebtedness. This
Guaranty shall be binding upon each of the Guarantors and their respective
successors and assigns.
SECTION 13. CHANGES IN WRITING. Neither this Guaranty nor any provision
hereof may be changed, waived, discharged or terminated orally, but only in
writing signed by each of the
6
<PAGE>
Guarantors and the Paying Agent with the consent of the Lenders required for
such change, waiver, discharge or termination pursuant to the terms of the
Credit Agreement.
SECTION 14 GOVERNING LAW. ANY DISPUTE BETWEEN ANY GUARANTOR AND THE
PAYING AGENT OR ANY LENDER ARISING OUT OF, CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS
GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT,
TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL
LAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW
YORK.
SECTION 15. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL.
(A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH
OF THE PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG
THEM IN CONNECTION WITH, THIS GUARANTY OR ANY OF THE OTHER LOAN DOCUMENTS
WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED
EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN NEW YORK, BUT THE PARTIES
HERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF NEW YORK. EACH OF THE PARTIES HERETO WAIVES IN ALL
DISPUTES BROUGHT PURSUANT TO THIS SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE
TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE.
(B) OTHER JURISDICTIONS. EACH OF THE GUARANTORS AGREES THAT THE PAYING
AGENT, ANY LENDER OR ANY INDEMNITEE SHALL HAVE THE RIGHT TO PROCEED AGAINST SUCH
GUARANTOR OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO
(1) OBTAIN PERSONAL JURISDICTION OVER SUCH GUARANTOR OR (2) ENFORCE A JUDGMENT
OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. EACH OF THE GUARANTORS
AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING
BROUGHT BY SUCH PERSON TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
SUCH PERSON. EACH OF THE GUARANTORS WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE
LOCATION OF THE COURT IN WHICH SUCH PERSON HAS COMMENCED A PROCEEDING DESCRIBED
IN THIS SUBSECTION (B).
(C) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES
ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING
IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR
7
<PAGE>
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS
GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(D) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER
PARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE
PROVISIONS OF THIS SECTION 15, WITH ITS COUNSEL.
SECTION 16. NO STRICT CONSTRUCTION. The parties hereto have
participated jointly in the negotiation and drafting of this Guaranty. In the
event an ambiguity or question of intent or interpretation arises, this Guaranty
shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Guaranty.
SECTION 17. TAXES, EXPENSES OF ENFORCEMENT, ETC. All payments required
to be made by any of the Guarantors hereunder shall be made without setoff or
counterclaim and free and clear of and without deduction or withholding for or
on account of, any present or future taxes, levies, imposts, duties or other
charges of whatsoever nature imposed by any government or any political or
taxing authority thereof, PROVIDED, HOWEVER, that if any of the Guarantors is
required by law to make such deduction or withholding, such Guarantor shall
forthwith pay to the Paying Agent or any Lender, as applicable, such additional
amount as results in the net amount received by the Paying Agent or any Lender,
as applicable, equaling the full amount which would have been received by the
Paying Agent or any Lender, as applicable, had no such deduction or withholding
been made. The Guarantors also agree to reimburse the Paying Agent and the
Lenders for any reasonable costs, internal charges and out-of-pocket expenses
(including reasonable attorneys' fees and time charges of attorneys for the
Paying Agent and the Lenders, which attorneys may be employees of the Paying
Agent or the Lenders) paid or incurred by the Paying Agent or any Lender in
connection with the collection and enforcement of amounts due under the Loan
Documents, including without limitation this Guaranty.
SECTION 18. SETOFF. At any time after all or any part of the Guaranteed
Obligations have become due and payable (by acceleration or otherwise), each
Lender and the Paying Agent may, without notice to any Guarantor and regardless
of the acceptance of any security or collateral for the payment hereof,
appropriate and apply toward the payment of all or any part of the Guaranteed
Obligations (i) any indebtedness due or to become due from such Lender or the
Paying Agent to any Guarantor, and (ii) any moneys, credits or other property
belonging to any Guarantor, at any time held by or coming into the possession of
such Lender or the Paying Agent or any of their respective affiliates.
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<PAGE>
SECTION 19. FINANCIAL INFORMATION. Each Guarantor hereby assumes
responsibility for keeping itself informed of the financial condition of the
Borrower and any and all endorsers and/or other Guarantors of all or any part of
the Guaranteed Obligations, and of all other circumstances bearing upon the risk
of nonpayment of the Guaranteed Obligations, or any part thereof, that diligent
inquiry would reveal, and each Guarantor hereby agrees that none of the Lenders
or the Paying Agent shall have any duty to advise such Guarantor of information
known to any of them regarding such condition or any such circumstances. If any
Lender or the Paying Agent, in its sole discretion, undertakes at any time or
from time to time to provide any such information to a Guarantor, such Lender or
the Paying Agent shall be under no obligation (i) to undertake any investigation
not a part of its regular business routine, (ii) to disclose any information
which such Lender or the Paying Agent, pursuant to accepted or reasonable
commercial finance or banking practices, wishes to maintain confidential or
(iii) to make any other or future disclosures of such information or any other
information to such Guarantor.
SECTION 20. SEVERABILITY. Wherever possible, each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
SECTION 21. MERGER. This Guaranty represents the final agreement of
each of the Guarantors with respect to the matters contained herein and may not
be contradicted by evidence of prior or contemporaneous agreements, or
subsequent oral agreements, between the Guarantor and any Lender or the Paying
Agent.
SECTION 22. EXECUTION IN COUNTERPARTS. This Guaranty may be executed in
any number of counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this Guaranty by signing
any such counterpart.
SECTION 23. HEADINGS. Section headings in this Guaranty are for
convenience of reference only and shall not govern the interpretation of any
provision of this Guaranty.
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IN WITNESS WHEREOF, each of the Guarantors has caused this Guaranty to
be duly executed by its authorized officer as of the day and year first above
written.
FEDERAL EXPRESS CORPORATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
RPS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
CALIBER SYSTEM, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
VIKING FREIGHT, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
ROBERTS EXPRESS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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<PAGE>
ANNEX I TO GUARANTY
Reference is hereby made to the Guaranty (the "Guaranty") made as of
the 10th day of December, 1998 by Federal Express Corporation, a Delaware
corporation, RPS, Inc., a Delaware corporation, Caliber System, Inc., an Ohio
corporation, Viking Freight, Inc., a California corporation, and Roberts
Express, Inc., an Ohio corporation (collectively, the "Initial Guarantors" and
along with any Significant Subsidiaries which have become parties thereto and
together with the undersigned, the "Guarantors") in favor of the Paying Agent,
for the ratable benefit of the Lenders, under the Credit Agreement. Capitalized
terms used herein and not defined herein shall have the meanings given to them
in the Guaranty. By its execution below, the undersigned [NAME OF NEW
GUARANTOR], a ____________________, agrees to become, and does hereby become, a
Guarantor under the Guaranty and agrees to be bound by such Guaranty as if
originally a party thereto. By its execution below, the undersigned represents
and warrants as to itself that all of the representations and warranties
contained in SECTION 2 of the Guaranty are true and correct in all respects as
of the date hereof.
IN WITNESS WHEREOF, [NAME OF NEW GUARANTOR], a ______________, has
executed and delivered this Annex I counterpart to the Guaranty as of this
__________ day of _________, ____.
[NAME OF NEW GUARANTOR]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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EXHIBIT "B"
OPINION OF COUNSEL
The Paying Agent and the Lenders who are parties to the Credit Agreement
described below.
December 10, 1998
Ladies and Gentlemen:
This is in regard to the Credit Agreement dated as of December 10, 1998
among FDX Corporation, the Lenders named therein and Morgan Guaranty Trust
Company of New York, as Paying Agent (the "Agreement"). Unless the context
otherwise requires, all terms used in this opinion which are specifically
defined in the Agreement shall have the meanings given such terms in the
Agreement.
I am the Corporate Vice President and Corporate Counsel of the Borrower
and have acted as such in connection with the Agreement. I, or attorneys under
my supervision, have made such examination and investigation as I or they have
deemed necessary in order to give the following opinion.
Based upon the foregoing, it is my opinion that:
1. The Borrower is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware. The
Borrower is duly authorized to execute and deliver the Agreement and
perform its obligations under the Agreement and to borrow under the
Agreement. The Borrower has all corporate power required to carry on
its ordinary course of business.
2. Each Significant Subsidiary, and each Guarantor as of the
date hereof, is a corporation duly incorporated and validly existing in
good standing under the laws of the jurisdiction of its incorporation.
3. Each of the Borrower and each Significant Subsidiary and
Guarantor as of the date hereof is duly qualified as a foreign
corporation in good standing to do business in all jurisdictions where
the failure to so qualify would have a material adverse effect on the
business of the Borrower and the Significant Subsidiaries taken as a
whole.
<PAGE>
4. The execution and delivery of the Loan Documents by the
Borrower and each of the Guarantors, the borrowings by the Borrower
under the Agreement and the performance by the Borrower and the
Guarantors of their respective obligations under the Loan Documents
have been duly authorized by all necessary corporate action and
proceedings on the part of the Borrower and each Guarantor and do not
at this time:
(a) require any consent of the Borrower's or any
Guarantor's shareholders; or
(b) contravene, or constitute a default under, any
provision of any law or regulation applicable to the Borrower
or any Guarantor or of the certificate or articles of
incorporation or by-laws of the Borrower or any Guarantor or
of any material contract, agreement, judgment, order, decree,
adjudication or other instrument, including, without
limitation, the 1996 Caliber Indenture, binding upon the
Borrower or any Guarantor, or by which the Borrower or any
Guarantor or any of their respective property may be bound or
affected, or result in the creation of any Lien (other than
the Liens created pursuant to the Security Documents) on any
property now owned by the Borrower, any Guarantor or any
Significant Subsidiary pursuant to the provisions of any
agreement, indenture or other instrument binding upon it.
5. The Loan Documents delivered as of the date hereof have
been duly executed and delivered by the Borrower and each of the
Guarantors, and constitute the legal, valid and binding obligations of
the Borrower and the Guarantors, respectively, to the extent each is a
party thereto, enforceable in accordance with their terms, except as
such enforceability may be limited by bankruptcy or similar laws
relating generally to the enforcement of creditors' rights and subject
also to the availability of equitable remedies if equitable remedies
are sought.
6. There is no action, suit, proceeding or investigation of
which I am aware pending or threatened against or affecting the
Borrower, any Guarantor or any Significant Subsidiary before any court,
regulatory commission, arbitration tribunal, governmental department,
administrative agency or instrumentality which, if such action, suit,
proceeding or investigation were determined adversely to the interest
of the Borrower, the Guarantors and the Significant Subsidiaries, would
have a material, adverse effect on the business, condition (financial
or otherwise) or operations of the Borrower, any Guarantor or any
Significant Subsidiary, except as discussed in the Borrower's Annual
Report on Form 10-K for the fiscal year ended May 31, 1998 as updated
in the Borrower's Quarterly Report on Form 10-Q for the quarter ended
August 31, 1998.
7. Neither the Borrower nor any Guarantor or Significant
Subsidiary is in default or violation in any respect which would have a
material adverse effect on the business or condition (financial or
otherwise) of the Borrower, any Guarantor or any Significant Subsidiary
with respect to any law, rule, regulation, order, writ, judgment,
injunction, decree, adjudication, determination or award presently in
effect and applicable to it.
2
<PAGE>
8. No approval, authorization, consent, adjudication or order
of any governmental authority, which has not been obtained by the
Borrower or any Guarantor, is required to be obtained by the Borrower
or any Guarantor in connection with the execution and delivery of the
Loan Documents delivered as of the date hereof, the borrowings under
the Agreement or in connection with the performance by the Borrower or
any of the Guarantors of their respective obligations under the Loan
Documents.
9. The Borrower is not engaged principally or as one of its
important activities in the business of extending credit for the
purpose of purchasing or carrying any "margin stock" (as such term is
defined in Regulation U of the Board of Governors of the Federal
Reserve System).
10. The Borrower is not an "investment company", within the
meaning of the Investment Company Act of 1940, as currently in effect.
11. The laws of the State of Tennessee which limit interest
rates or other amounts payable with respect to borrowed money or
interest thereon are not applicable to the Agreement.
12. FedEx is not a national of any foreign country designated
in Presidential Executive Order No. 8389 or 9193, as amended, and the
regulations issued thereunder, as amended, or a national of any foreign
country designated in the Foreign Assets Control Regulations or in the
Cuban Assets Control Regulations of the United States Treasury
Department, 31 C.F.R., Subtitle B, Chapter V, as amended.
13. The certificates issued to FedEx pursuant to 49 U.S.C.
Section 41102(a) and 49 U.S.C. Section 41103 and the operating
certificates issued to FedEx pursuant to Part 121 of the Federal
Aviation Regulations are in full force and effect and are adequate
for the conduct of the business of the Borrower and its Subsidiaries
as now conducted. There are no actions, proceedings or
investigations pending or, to my knowledge, threatened (or any basis
therefor known to me) to amend, modify, suspend or revoke any such
certificate in whole or in part which would have any material
adverse effect on any such certificate or the operations of the
Borrower and its Subsidiaries.
This opinion is limited to the effect of the laws of the State of
Tennessee, the General Corporation Law of the State of Delaware and the laws of
the United States of America, and I express no opinion with respect to the laws
of any other jurisdiction. As a result, I have with your permission assumed for
purposes of this opinion that, notwithstanding the contrary choice of law
provisions contained therein, the Loan Documents are governed by the laws of the
State of Tennessee.
3
<PAGE>
This opinion may be relied upon by the Paying Agent, the Lenders, and
their respective permitted participants, assignees, and other transferees. It is
understood that this opinion speaks as of the date given, notwithstanding any
delivery as contemplated above on any other date.
4
<PAGE>
EXHIBIT "C"
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between________
______________ (the "Assignor") and _________________ (the "Assignee") is dated
as of ___________________,____. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit Agreement
(which, as it may be amended, modified, renewed or extended from time to time,
is herein called the "Credit Agreement") described in Item 1 of Schedule 1
attached hereto ("Schedule 1"). Capitalized terms used herein and not otherwise
defined herein shall have the meanings attributed to them in the Credit
Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to
the Assignee, and the Assignee hereby purchases and assumes from the Assignor,
an interest in and to the Assignor's rights and obligations under the Credit
Agreement such that after giving effect to such assignment the Assignee shall
have purchased pursuant to this Assignment Agreement the percentage interest
specified in Item 3 of Schedule 1 of all outstanding rights and obligations
under the Credit Agreement relating to the facilities listed in Item 3 of
Schedule 1 and the other Loan Documents. The aggregate Commitments (or Loans, if
the applicable Commitments have been terminated) purchased by the Assignee
hereunder are set forth in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the
"Effective Date") shall be the later of the date specified in Item 5 of Schedule
1 or two Business Days (or such shorter period agreed to by the Paying Agent)
after a Notice of Assignment substantially in the form of Exhibit "I" attached
hereto has been delivered to the Paying Agent. Such Notice of Assignment must
include any consents required to be delivered to the Paying Agent by Section
12.3.1 of the Credit Agreement. In no event will the Effective Date occur if the
payments required to be made by the Assignee to the Assignor on the Effective
Date under Sections 4 and 5 hereof are not made on the proposed Effective Date.
The Assignor will notify the Assignee of the proposed Effective Date no later
than the Business Day prior to the proposed Effective Date. As of the Effective
Date, (i) the Assignee shall have the rights and obligations of a Lender under
the Loan Documents with respect to the rights and obligations assigned to the
Assignee hereunder and (ii) the Assignor shall relinquish its rights and be
released from its corresponding obligations under the Loan Documents with
respect to the rights and obligations assigned to the Assignee hereunder.
4. PAYMENT OBLIGATIONS. On and after the Effective Date, the Assignee
shall be entitled to receive from the Paying Agent all payments of principal,
interest and fees with respect to the interest assigned hereby. The Assignee
shall advance funds directly to the Paying Agent with respect to all Loans and
reimbursement payments made on or after the Effective Date with respect to the
interest assigned hereby. [In consideration for the sale and assignment of Loans
hereunder, (i) the Assignee shall pay the Assignor, on the Effective Date, an
amount equal to the principal amount of the portion of all Floating Rate Loans
assigned to the Assignee hereunder and (ii) with respect to each Eurodollar Loan
made by the Assignor and assigned to the Assignee
<PAGE>
hereunder which is outstanding on the Effective Date, (a) on the last day of the
Interest Period therefor or (b) on such earlier date agreed to by the Assignor
and the Assignee or (c) on the date on which any such Eurodollar Loan either
becomes due (by acceleration or otherwise) or is prepaid (the date as described
in the foregoing clauses (a), (b) or (c) being hereinafter referred to as the
"Payment Date"), the Assignee shall pay the Assignor an amount equal to the
principal amount of the portion of such Eurodollar Loan assigned to the Assignee
which is outstanding on the Payment Date. If the Assignor and the Assignee agree
that the Payment Date for such Eurodollar Loan shall be the Effective Date, they
shall agree to the interest rate applicable to the portion of such Loan assigned
hereunder for the period from the Effective Date to the end of the existing
Interest Period applicable to such Eurodollar Loan (the "Agreed Interest Rate")
and any interest received by the Assignee in excess of the Agreed Interest Rate
shall be remitted to the Assignor. If interest for the period from the Effective
Date to but not including the Payment Date is not paid by the Borrower with
respect to any Eurodollar Loan sold by the Assignor to the Assignee hereunder,
the Assignee shall pay to the Assignor interest for such period on the portion
of such Eurodollar Loan sold by the Assignor to the Assignee hereunder at the
applicable rate provided by the Credit Agreement. If a prepayment of any
Eurodollar Loan which is existing on the Payment Date and assigned by the
Assignor to the Assignee hereunder occurs after the Payment Date but before the
end of the Interest Period applicable to such Eurodollar Loan, the Assignee
shall remit to the Assignor the excess of the prepayment indemnity paid with
respect to the portion of such Eurodollar Loan assigned to the Assignee
hereunder over the amount which would have been paid if such prepayment
indemnity had been calculated based on the Agreed Interest Rate. The Assignee
will also promptly remit to the Assignor (i) any principal payments received
from the Paying Agent with respect to Eurodollar Loans prior to the Payment Date
and (ii) any amounts of interest on Loans and fees received from the Paying
Agent which relate to the portion of the Loans assigned to the Assignee
hereunder for periods prior to the Effective Date, in the case of Floating Rate
Loans, or the Payment Date, in the case of Eurodollar Loans, and not previously
paid by the Assignee to the Assignor.]1 If either party hereto receives any
payment to which the other party hereto is entitled under this Assignment
Agreement, then the party receiving such amount shall promptly remit it to the
other party hereto.
5. FEES PAYABLE BY THE ASSIGNEE. The [Assignee shall pay to the
Assignor a fee on each day on which a payment of interest or facility fees is
made under the Credit Agreement with respect to the amounts assigned to the
Assignee hereunder (other than a payment of interest or facility fees for the
period prior to the Effective Date or, in the case of Eurodollar Loans, the
Payment Date, which the Assignee is obligated to deliver to the Assignor
pursuant to Section 4 hereof). The amount of such fee shall be the difference
between (i) the interest or fee, as applicable, paid with respect to the amounts
assigned to the Assignee hereunder and (ii) the interest or fee, as applicable,
which would have been paid with respect to the amounts assigned to the Assignee
hereunder if each interest rate were of 1% less than the interest rate paid by
the Borrower or if the facility fee were of 1% less than the facility fee paid
by the Borrower, as
- ---------------------
(1) Each Assignor may insert its standard payment provisions in lieu
of the payment terms included in this Exhibit.
2
<PAGE>
applicable. In addition, the] Assignee agrees to pay % of the processing fee
required to be paid to the Paying Agent in connection with this Assignment
Agreement.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim. It is understood and agreed
that the assignment and assumption hereunder are made without recourse to the
Assignor and that the Assignor makes no other representation or warranty of any
kind to the Assignee. Neither the Assignor nor any of its officers, directors,
employees, agents or attorneys shall be responsible for (i) the due execution,
legality, validity, enforceability, genuineness, sufficiency or collectability
of any Loan Document, including without limitation, documents granting the
Assignor and the other Lenders a security interest in assets of the Borrower or
any guarantor, (ii) any representation, warranty or statement made in or in
connection with any of the Loan Documents, (iii) the financial condition or
creditworthiness of the Borrower or any guarantor, (iv) the performance of or
compliance with any of the terms or provisions of any of the Loan Documents, (v)
inspecting any of the Property, books or records of the Borrower, (vi) the
validity, enforceability, perfection, priority, condition, value or sufficiency
of any collateral securing or purporting to secure the Loans or (vii) any
mistake, error of judgment, or action taken or omitted to be taken in connection
with the Loans or the Loan Documents.
7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements requested by the Assignee and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment Agreement, (ii) agrees that it will,
independently and without reliance upon the Paying Agent, the Assignor or any
other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Loan Documents, (iii) appoints and authorizes the
Paying Agent to take such action on its behalf and to exercise such powers under
the Loan Documents as are delegated to the Paying Agent by the terms thereof,
together with such powers as are reasonably incidental thereto, (iv) agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of the Loan Documents are required to be performed by it as a Lender,
[and] (v) agrees that its payment instructions and notice instructions are as
set forth in the attachment to Schedule 1, [and (vi) attaches the forms
prescribed by the Internal Revenue Service of the United States certifying that
the Assignee is entitled to receive payments under the Loan Documents without
deduction or withholding of any United States federal income taxes].(2)
8. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor
harmless against any and all losses, costs and expenses (including, without
limitation, reasonable attorneys'
- --------------------------
(2) To be inserted if the Assignee is not incorporated under the laws
of the United States, or a state thereof.
3
<PAGE>
fees) and liabilities incurred by the Assignor in connection with or arising in
any manner from the Assignee's non-performance of the obligations assumed under
this Assignment Agreement.
9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall
have the right or obligation pursuant to Article XII of the Credit Agreement to
assign the rights which are assigned to the Assignee hereunder to any entity or
person, provided that (i) any such subsequent assignment does not violate any of
the terms and conditions of the Loan Documents or any law, rule, regulation,
order, writ, judgment, injunction or decree and that any consent required under
the terms of the Loan Documents has been obtained and (ii) unless the prior
written consent of the Assignor is obtained, the Assignee is not thereby
released from its obligations to the Assignor hereunder, if any remain
unsatisfied, including, without limitation, its obligations under Sections 4, 5
and 8 hereof.
10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the
Aggregate Commitment occurs between the date of this Assignment Agreement and
the Effective Date, [the percentage interests specified in Item 3 of Schedule 1
shall remain the same, but the dollar amount purchased shall be recalculated
based on the reduced Aggregate Commitment] [the dollar amounts specified in Item
4 of Schedule 1 shall remain the same, but the percentage interests purchased
shall be recalculated based on the reduced Aggregate Commitment].(3)
11. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice
of Assignment embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings between the parties
hereto relating to the subject matter hereof.
12. GOVERNING LAW. This Assignment Agreement shall be governed by the
internal law, and not the law of conflicts, of the State of New York.
13. NOTICES. Notices shall be given under this Assignment Agreement in
the manner set forth in the Credit Agreement. For the purpose hereof, the
addresses of the parties hereto (until notice of a change is delivered) shall be
the addresses set forth in the attachment to Schedule 1.
- ---------------------------
(3) At option of parties.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above written.
[NAME OF ASSIGNOR]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
[NAME OF ASSIGNEE]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
5
<PAGE>
SCHEDULE 1
to Assignment Agreement
1. Description and Date of Credit Agreement:
Credit Agreement dated as of December 10, 1998 by and among FDX
Corporation, the Lenders party thereto, and Morgan Guaranty Trust Company
of New York, as Paying Agent
2. Date of Assignment Agreement:______________ ,_____
3. Amounts (As of Date of Item 2 above):
a. Total of Commitment
(Loans)(4) under
Credit Agreement $_____________
b. Assignee's Percentage
purchased under the
Assignment Agreement(5) _____________%
4. Assignee's (Loan Amount)
Commitment Amount
Purchased Hereunder: $_____________
5. Proposed Effective Date: _________, _____
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------------ ---------------------------
Title: Title:
--------------------------- ------------------------
- ----------------------------------
(4) If the Commitment has been terminated, insert outstanding Loans in
place of Commitment.
(5) Percentage taken to 10 decimal places.
6
<PAGE>
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which
must include notice address for the Assignor and the
Assignee
7
<PAGE>
EXHIBIT "I"
to Assignment Agreement
NOTICE
OF ASSIGNMENT
-------------
,
------------- -------
To: FDX CORPORATION
2600 Thousand Oaks Boulevard
Suite 3110
Memphis, Tennessee 38118
Attn: Treasurer
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
60 Wall Street
22nd Floor
New York, New York 10260-0060
Attn: James Condon
From: [NAME OF ASSIGNOR] (the "Assignor")
[NAME OF ASSIGNEE] (the "Assignee")
1. We refer to the Credit Agreement (the "Credit Agreement") described
in Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used
herein and not otherwise defined herein shall have the meanings attributed to
them in the Credit Agreement.
2. This Notice of Assignment (this "Notice") is given and delivered to
the Borrower and the Paying Agent pursuant to Section 12.3.3 of the Credit
Agreement.
3. The Assignor and the Assignee have entered into an Assignment
Agreement, dated as of , (the "Assignment"), pursuant to which, among
other things, the Assignor has sold, assigned, delegated and transferred to
the Assignee, and the Assignee has purchased, accepted and assumed from the
Assignor the percentage interest specified in Item 3 of Schedule 1 of all
outstanding, rights and obligations under the Credit Agreement relating to
the facility identified in Item 3 of Schedule 1, including, without
limitation, such interest in the Assignor's Commitments (if applicable) and
the Loans owing to the Assignor relating to such facilities. The Effective
Date of the Assignment shall be the later of the date specified in Item 5 of
Schedule 1 to the Assignment ("Schedule 1") or two Business Days (or such
shorter period as agreed to by the Paying Agent) after this Notice of
Assignment and any consents and fees required by Sections 12.3.1 and 12.3.3
of the Credit Agreement have been delivered to the Paying Agent, provided
that the Effective Date shall not occur if any condition precedent agreed to
by the Assignor and the Assignee has not been satisfied.
8
<PAGE>
4. The Assignor and the Assignee hereby give to the Borrower and the
Paying Agent notice of the assignment and delegation referred to herein. The
Assignor will confer with the Paying Agent before the date specified in Item 5
of Schedule 1 to determine if the Assignment Agreement will become effective on
such date pursuant to Section 3 hereof, and will confer with the Paying Agent to
determine the Effective Date pursuant to Section 3 hereof if it occurs
thereafter. The Assignor shall notify the Paying Agent if the Assignment
Agreement does not become effective on any proposed Effective Date as a result
of the failure to satisfy the conditions precedent agreed to by the Assignor and
the Assignee. At the request of the Paying Agent, the Assignor will give the
Paying Agent written confirmation of the satisfaction of the conditions
precedent.
5. The Assignor or the Assignee shall pay to the Paying Agent on or
before the Effective Date the processing fee of $4,000 required by Section
12.3.3 of the Credit Agreement.
6. If notes evidencing the Assignor's Loans are outstanding on the
Effective Date, the Assignor and the Assignee request and direct that the Paying
Agent prepare and cause the Borrower to execute and deliver new notes or, as
appropriate, replacement notes, to the Assignor and the Assignee. The Assignor
and, if applicable, the Assignee each agree to deliver to the Paying Agent the
original notes received by it from the Borrower upon its receipt of new notes in
the appropriate amounts.
7. The Assignee advises the Paying Agent that its notice and payment
instructions are set forth in the attachment to Schedule 1.
8. Each party consenting to the Assignment in the space indicated below
hereby releases the Assignor from any obligations to it which have been assigned
to and assumed by the Assignee.
NAME OF ASSIGNOR NAME OF ASSIGNEE
By: By:
------------------------------ ---------------------------
Name: Name:
--------------------------- ------------------------
Title: Title:
--------------------------- ------------------------
Acknowledged by and Acknowledged by and
Consented to: Consented to:
MORGAN GUARANTY TRUST FDX CORPORATION
COMPANY OF NEW YORK,
as Paying Agent
By: By:
------------------------------ ---------------------------
Name: Name:
--------------------------- ------------------------
Title: Title:
--------------------------- -----------------------
9
<PAGE>
[Attach photocopy of Schedule 1 to Assignment]
10
<PAGE>
EXHIBIT "D"
FORM OF RELEASE OF SECURITY DOCUMENTS
--------- --, ----
FDX CORPORATION
2600 Thousand Oaks Boulevard
Suite 3110
Memphis, Tennessee 38118
Attn: Treasurer
[Insert any applicable Subsidiaries]
Ladies and Gentlemen:
Reference is hereby made to the Credit Agreement dated as of December
10, 1998 among FDX Corporation, the Lenders named therein and Morgan Guaranty
Trust Company of New York, as Paying Agent (the "Agreement"). Unless the context
otherwise requires, all terms used in this release which are specifically
defined in the Agreement shall have the meanings given such terms in the
Agreement.
The Borrower and certain of its Subsidiaries have granted to the Paying
Agent for the benefit of (i) the Lenders and (ii) the lenders under each of the
Existing Revolving Credit Documents and the Existing L/C Facility Documents, a
Lien in certain Property (the "Specified Property") of such Persons, which
Property constitutes Designated Collateral, pursuant to the Security Documents
specified on Schedule "1" attached hereto (the "Specified Security Documents").
The Paying Agent, on behalf of itself, each of the Lenders, and the lenders
under each of the Existing Revolving Credit Documents and the Existing L/C
Facility Documents, hereby releases all Liens held by the Paying Agent for the
benefit of such Persons on the Specified Property pursuant to the Specified
Security Documents.
The Paying Agent further agrees to execute and deliver to you such
other documents, instruments and agreements, and to take such other action, as
you may request, from time to time, to give effect to the provisions of this
letter.
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK,
as Paying Agent
By:
--------------------------------
<PAGE>
Schedule "1"
to Release of Security Documents
LIST OF SPECIFIED SECURITY DOCUMENTS
------------------------------------
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.2
<TEXT>
<PAGE>
AMENDMENT NO. 1
DATED AS OF DECEMBER 10, 1998
TO
CREDIT AGREEMENT
DATED AS OF JANUARY 15, 1998
THIS AMENDMENT NO. 1 TO THE CREDIT AGREEMENT (the "Amendment") is made
as of December 10, 1998 by and among FDX Corporation, a Delaware corporation
(the "Borrower"), the Lenders and The First National Bank of Chicago, in its
capacity as agent ("Agent"). Defined terms used herein and not otherwise defined
herein shall have the meanings given to them in that certain Credit Agreement
dated as of January 15, 1998 by and among the Borrower, the Lenders, First
Chicago Capital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as
Co-Arranger and Syndication Agent, Chase Securities Inc., as Co-Arranger and
Documentation Agent, and the Agent (the "Credit Agreement").
WITNESSETH
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement;
WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend
the Credit Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower, the Lenders and the Agent agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of December 10, 1998
subject to the satisfaction of the conditions precedent set forth in SECTION 4
below, the Credit Agreement is hereby amended as follows:
1.1. Article I is amended as follows:
(a) The definitions of "Applicable Tranche A Facility Fee
Percentage" and "Applicable Tranche B Facility Fee Percentage" are
amended in their entirety to read as follows:
"'Applicable Tranche A Facility Fee Percentage' means, subject
to the following provisions of this definition, the per annum
rate corresponding to the Level in effect from time to time,
as set forth in the following table:
<PAGE>
<TABLE>
<CAPTION>
Level Applicable Tranche A Facility Fee Percentage
- ----- --------------------------------------------
<S> <C>
I .100%
II .125%
III .150%
IV .200%
V .250%
</TABLE>
Each change in the Applicable Tranche A Facility Fee
Percentage resulting from a change in a Rating shall take
effect at the time such change in such Rating is publicly
announced by the relevant rating agency."
"'Applicable Tranche B Facility Fee Percentage' means, subject
to the following provisions of this definition, the per annum
rate corresponding to the Level in effect from time to time,
as set forth in the following table:
<TABLE>
<CAPTION>
Level Applicable Tranche B Facility Fee Percentage
- ----- --------------------------------------------
<S> <C>
I .075%
II .100%
III .125%
IV .175%
V .225%
</TABLE>
Each change in the Applicable Tranche B Facility Fee
Percentage resulting from a change in a Rating shall take
effect at the time such change in such Rating is publicly
announced by the relevant rating agency."
(b) The definitions of "Applicable Tranche A Margin" and
"Applicable Tranche B Margin" are amended in their entirety to read as
follows:
"'Applicable Tranche A Margin' means, subject to the following
provisions of this definition, the per annum rate of interest
corresponding to the Level in effect from time to time, as set
forth in the following table:
2
<PAGE>
<TABLE>
<CAPTION>
Level Applicable Tranche A Margin
- ----- ---------------------------
<S> <C>
I .275%
II .375%
III .475%
IV .675%
V 1.125%
</TABLE>
Each change in the Applicable Tranche A Margin resulting from
a change in a Rating shall take effect at the time such change
in such Rating is publicly announced by the relevant rating
agency."
"'Applicable Tranche B Margin' means, subject to the following
provisions of this definition, the per annum rate of interest
corresponding to the Level in effect from time to time, as set
forth in the following table:
<TABLE>
<CAPTION>
Level Applicable Tranche B Margin
- ----- ---------------------------
<S> <C>
I .300%
II .400%
III .500%
IV .700%
V 1.15%
</TABLE>
Each change in the Applicable Tranche B Margin resulting from
a change in a Rating shall take effect at the time such change
in such Rating is publicly announced by the relevant rating
agency."
(c) The definition of "Consolidated Cash Flow" is amended in
its entirety to read as follows:
"'Consolidated Cash Flow' means, on a consolidated basis for
the Borrower and its Consolidated Subsidiaries for the twelve
most recent complete fiscal months, the sum of (i) Adjusted
Net Income, PLUS (ii) Interest Expense, PLUS (iii) Rent
Expense, in each case as determined in accordance with GAAP."
(d) The definition of "Material Adverse Effect" is amended in
its entirety to read as follows:
3
<PAGE>
"Material Adverse Effect" means a material adverse effect
(excluding the effects of an actual or threatened business
interruption, including but not limited to self-help actions
or a strike, by members of the FedEx Pilots Association in
late 1998 or 1999, or contingency plans related thereto) on
(i) the business, Property, condition (financial or
otherwise), results of operations, or prospects of the
Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the
Loan Documents, or (iii) the validity or enforceability of any
of the Loan Documents or the rights or remedies of the Agent
or the Lenders thereunder.
(e) The definitions of "Moody's Rating" and "S&P Rating" are
amended to add the phrase "non-credit enhanced" after the word
"unsecured" in the second line of each such definition.
(f) The following definitions are added to Article I in
appropriate alphabetical order:
"Adjusted Net Income" means, on a consolidated basis, for the
Borrower and its Consolidated Subsidiaries for the twelve most
recent complete fiscal months, income (loss) before income
taxes MINUS, to the extent included in determining income
(loss) before income taxes, any net loss or gain realized in
connection with any sale or disposition of any asset (other
than in the ordinary course of business) or any extraordinary
or non-recurring loss or gain resulting from an actual or
threatened business interruption relating to any self-help
actions or strike, by members of the FedEx Pilots Association
in late 1998 or 1999, or contingency plans related thereto,
provided that the aggregate amount of the foregoing reductions
to income (loss) before income taxes shall not exceed
$1,000,000,000.
"L/C Facility" means the Syndicated Revolving Standby Letter
of Credit Facility dated as of July 7, 1998, among the
Borrower, the issuing banks named therein, The Sumitomo Bank,
Limited, as agent thereunder, and the co-agents named therein,
and all instruments, agreements and contractual obligations
entered into in connection therewith, as amended by that
certain First Amendment and Second Amendment (Temporary)
thereto, each dated as of December 10, 1998, and as the same
may be further amended, modified or supplemented from time to
time.
"Year 2000 Problem" means the risk that computer applications
used by the Borrower or any of its Subsidiaries (or their
respective suppliers and vendors) may be unable to recognize
or properly perform date-sensitive functions involving certain
dates prior to and any date after December 31, 1999.
1.2 Section 2.5 is amended to add the following at the end
thereof:
4
<PAGE>
"(e) The Borrower agrees to pay to the Agent, for the
account of each Lender, for each calendar month in which the
average daily amount of all Advances outstanding hereunder
during such calendar month exceeds 25% of the average daily
Aggregate Commitment during such month, a utilization fee on
the average daily amount of Advances outstanding during such
calendar month, at a per annum rate equal to 0.125%. Such
utilization fee shall be payable in arrears on each Payment
Date hereafter and on the Tranche A Facility Termination Date
and the Tranche B Facility Termination Date."
1.3 The first sentence of Section 5.4 is deleted and the
following is substituted therefor:
"5.4. FINANCIAL STATEMENTS. The May 31, 1998 audited
consolidated financial statements and August 31, 1998
unaudited consolidated financial statements of the Borrower
and its Consolidated Subsidiaries heretofore delivered to the
Lenders were prepared in accordance with GAAP in effect on the
dates such statements were prepared and fairly present the
consolidated financial condition and operations of the
Borrower and its Consolidated Subsidiaries at such dates and
the consolidated results of their operations for the periods
then ended (except, in the case of such unaudited statements,
for normal year-end adjustments)."
1.4 The Credit Agreement is amended to add the following after
Section 5.17:
"5.18 YEAR 2000 COMPLIANCE. The Borrower has (i)
initiated a review and assessment of all areas within the
business and operations of the Borrower and any of its
Subsidiaries (including those areas affected by suppliers and
vendors) that could be adversely affected by the Year 2000
Problem, (ii) developed a plan and timeline for addressing the
Year 2000 Problem on a timely basis and (iii) to the date
hereof, implemented such plan in accordance with such
timetable. The Borrower reasonably believes that all computer
applications (including those of suppliers and vendors) that
are material to the business or operations of the Borrower or
any of its Subsidiaries will, on a timely basis, be able to
properly perform date-sensitive functions for all dates before
and from and after January 1, 2000, except to the extent that
a failure to do so could not reasonably be expected to have a
Material Adverse Effect."
1.5 Section 6.13 is amended in its entirety to read as
follows:
"6.13. FIXED CHARGE COVERAGE. The Borrower will at
all times maintain a ratio of (a) Consolidated Cash Flow to
(b) the sum of Interest Expense and Rent Expense, in an amount
not less than 1.20 to 1 through May 31, 2000, and 1.25 to 1
thereafter."
5
<PAGE>
1.6 Section 6.18 is amended to delete the "and" at the end of
clause (c) and the period at the end of clause (d), and add the
following immediately thereafter:
"; and
(e) Guaranties included or required under the L/C
Facility."
1.7 Section 6.20 is amended to:
(a) add "(other than Federal Express Canada Ltd. or
Federal Express (Hong Kong) Limited)" after the
phrase "Significant Subsidiary" in the second line
thereof.
(b) add "(a)" after the words "Section 4.1" in the sixth
line of clause (a) and in the seventh line of clause
(b).
1.8 Section 6.21 is amended in its entirety to read as
follows:
"6.21. NEGATIVE COVENANTS IN SUBSIDIARY AGREEMENTS.
The Borrower will not permit any of its Subsidiaries to enter
into, after the date hereof, any agreement, instrument or
indenture that, directly or indirectly, contains negative
covenants restricting any of the following (or otherwise
prohibits or restricts, or has the effect of prohibiting or
restricting, any of the following):
(i) the incurrence or payment of Indebtedness
owed to the Borrower or any other Subsidiary
of the Borrower;
(ii) the granting of Liens;
(iii) the declaration or payment of dividends; and
(iv) the making of loans, advances or other
Investments to or in the Borrower or any
other Subsidiary of the Borrower."
1.9 Schedule 2 of the Credit Agreement is hereby replaced with
Schedule 2 attached to Amendment No. 1 hereto.
2. WAIVER. Subject to the satisfaction of the conditions precedent set
forth in SECTION 4 of this Amendment and the accuracy of the representations and
warranties set forth in SECTION 5 of this Amendment, the Agent and Lenders waive
the Borrower's noncompliance with Section 6.21 of the Credit Agreement as a
result of the execution of guaranties by certain of the Borrower's Subsidiaries
in connection with the L/C Facility. The foregoing waiver is only effective to
the extent set forth in this SECTION 2. Nothing herein constitutes a waiver of
any other Default or Unmatured Default under the Credit Agreement or of any
other provision of the Credit
6
<PAGE>
Agreement, and except as provided in this SECTION 2, the foregoing waiver does
not affect or diminish the right of the Lenders and the Agent to require strict
performance by the Borrower of each provision of the Credit Agreement and the
Loan Documents.
3. EXTENSION OF TRANCHE B FACILITY TERMINATION DATE. Each of the
Lenders listed on EXHIBIT B attached hereto consents to the extension of the
Tranche B Facility Termination Date to January 14, 2000, subject to Section 2.19
of the Credit Agreement, and waives its right under Section 2.19 to revoke such
consent.
4. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective
as of the date set forth above when the Agent shall have received:
(i) a counterpart of this Amendment executed by the Borrower,
the Agent and Lenders constituting the Required Lenders; PROVIDED,
HOWEVER, that as to each Lender listed on EXHIBIT B, Section 3 hereof
shall become effective only when the Agent shall have received a
counterpart of this Amendment executed by each such Lender;
(ii) a counterpart of the Acknowledgment attached hereto as
EXHIBIT A executed by each of the Guarantors; and
(iii) such documents evidencing corporate existence, action
and authority of the Borrower and the Guarantors as the Agent may
reasonably request.
5. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants that:
(a) This Amendment, and the Credit Agreement as previously
executed and as amended hereby, constitute legal, valid and binding
obligations of the Borrower and are enforceable against the Borrower in
accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
reaffirms all covenants, representations and warranties made in the
Credit Agreement.
(c) No Default or Unmatured Default has occurred and is
continuing.
6. EFFECT ON CREDIT AGREEMENT.
(a) During the period that this Amendment is effective, each
reference in the Credit Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents, instruments and agreements executed
and/or delivered in connection therewith, shall remain in full force
and effect, and are hereby ratified and confirmed.
7
<PAGE>
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of the Agent or the Lenders, nor
constitute a waiver of any provision of the Credit Agreement or any
other Loan Documents, instruments and agreements executed and/or
delivered in connection therewith.
(d) In the event of any inconsistency between the provisions
of this Amendment and the provisions of that certain Amendment No. 2
(Temporary) dated as of December 10, 1998 among the Borrower, the Agent
and the Lenders (the "Temporary Amendment"), the Temporary Amendment
shall govern and control, so long as such Temporary Amendment is in
effect.
7. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Illinois.
8. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. COUNTERPARTS. This Amendment may be executed by one or more of the
parties to the Amendment on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
8
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Amendment as of the date first above written.
FDX CORPORATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE CHASE MANHATTAN BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
KREDIETBANK N.V., GRAND
CAYMAN BRANCH
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
CITICORP USA, INC.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
COMMERZBANK
AKTIENGESELLSCHAFT, ATLANTA
AGENCY
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
NATIONSBANK, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
CIBC INC.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE FUJI BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
MELLON BANK, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
KEYBANK NATIONAL ASSOCIATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
FIRST AMERICAN NATIONAL BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
BANK OF HAWAII
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
THE BANK OF NEW YORK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE BANK OF NOVA SCOTIA
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
CREDIT SUISSE FIRST BOSTON
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
DEUTSCHE VERKEHRS BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE SANWA BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
BANCA NAZIONALE DEL LAVORO
SPA
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE SUMITOMO BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
EXHIBIT A
TO
AMENDMENT NO. 1
DATED AS OF DECEMBER 10, 1998
TO
CREDIT AGREEMENT
DATED AS OF JANUARY 15, 1998
ACKNOWLEDGMENT
--------------
Each of the undersigned hereby (i) acknowledges receipt of a copy of
Amendment No. 1 dated as of December 10, 1998 to the Credit Agreement dated as
of January 15, 1998 by and among the Borrower, the Lenders, First Chicago
Capital Markets, Inc., as Arranger, J.P. Morgan Securities Inc., as Co-Arranger
and Syndication Agent, Chase Securities Inc., as Co-Arranger and Documentation
Agent, and the Agent (the "Credit Agreement"), (ii) reaffirms the terms and
conditions of that certain Guaranty dated as of January 27, 1998 (the
"Guaranty") and (iii) acknowledges and agrees that the Guaranty (A) remains in
full force and effect and (B) is hereby ratified and confirmed.
FEDERAL EXPRESS CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
RPS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
CALIBER SYSTEM, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
VIKING FREIGHT, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
ROBERTS EXPRESS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
Dated as of December 10, 1998
<PAGE>
EXHIBIT B
LENDERS CONSENTING TO
TRANCHE B FACILITY TERMINATION DATE EXTENSION
THE FIRST NATIONAL BANK OF CHICAGO
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
THE CHASE MANHATTAN BANK
KREDIETBANK N.V.
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
CITICORP USA, INC.
COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY
NATIONSBANK, N.A.
THE FUJI BANK, LIMITED
MELLON BANK, N.A.
KEYBANK NATIONAL ASSOCIATION
FIRST AMERICAN NATIONAL BANK
BANK OF HAWAII
THE BANK OF NEW YORK
THE BANK OF NOVA SCOTIA
CREDIT SUISSE FIRST BOSTON
DEUTSCHE VERKEHRS BANK
THE SANWA BANK, LIMITED
SUNTRUST BANK
BANCA NAZIONALE DEL LAVORO SPA
THE SUMITOMO BANK, LIMITED
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 10.3
<TEXT>
<PAGE>
AMENDMENT NO. 2 (TEMPORARY)
DATED AS OF DECEMBER 10, 1998
TO
CREDIT AGREEMENT
DATED AS OF JANUARY 15, 1998
THIS AMENDMENT NO. 2 (TEMPORARY) TO THE CREDIT AGREEMENT (the
"Amendment") is made as of December 10, 1998 by and among FDX Corporation, a
Delaware corporation (the "Borrower"), the Lenders and The First National Bank
of Chicago, in its capacity as agent ("Agent"). Defined terms used herein and
not otherwise defined herein shall have the meanings given to them in that
certain Credit Agreement dated as of January 15, 1998 by and among the Borrower,
the Lenders, First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan
Securities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc., as
Co-Arranger and Documentation Agent, and the Agent (as amended by that certain
Amendment No. 1 dated as of the date hereof, the "Credit Agreement").
WITNESSETH
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement;
WHEREAS, the Borrower wishes to enter into a new Credit Agreement of
even date herewith among the Borrower, the lenders parties thereto and Morgan
Guaranty Trust Company of New York, as Paying Agent, as the same may be amended,
modified or supplemented from time to time (the "New Credit Agreement"), to
finance, among other things, the working capital needs of the Borrower in the
event of an actual or threatened business interruption and to finance
contingency plans related thereto;
WHEREAS, the New Credit Agreement will terminate on the date (the "New
Facility Termination Date") when (i) all of the "Obligations" (as defined in the
New Credit Agreement) have been paid in full and (ii) all of the "Commitments"
(as defined in the New Credit Agreement) have been terminated in accordance with
the terms of the New Credit Agreement;
WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend
the Credit Agreement on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Borrower, the Lenders and the Agent agree as follows:
<PAGE>
1. TEMPORARY AMENDMENTS TO CREDIT AGREEMENT. Effective as of December
10, 1998 subject to the satisfaction of the conditions precedent set forth in
SECTION 2 below, and remaining in effect only until the New Facility Termination
Date, the Credit Agreement is hereby amended as follows:
1.1. Article I is amended as follows:
(a) The definitions of "Applicable Tranche A Margin" and
"Applicable Tranche B Margin" are amended in their entirety to read as
follows:
"`Applicable Tranche A Margin' means, subject to the following
provisions of this definition, the per annum rate of interest
corresponding to the Level in effect from time to time, as set
forth in the following table:
<TABLE>
<CAPTION>
Level Applicable Tranche A Margin
<S> <C>
I 1.900%
II 1.875%
III 1.850%
IV 1.800%
V 1.750%
</TABLE>
Each change in the Applicable Tranche A Margin resulting from
a change in a Rating shall take effect at the time such change
in such Rating is publicly announced by the relevant rating
agency."
"`Applicable Tranche B Margin' means, subject to the following
provisions of this definition, the per annum rate of interest
corresponding to the Level in effect from time to time, as set
forth in the following table:
<TABLE>
<CAPTION>
Level Applicable Tranche B Margin
<S> <C>
I 1.925%
II 1.900%
III 1.875%
IV 1.825%
V 1.775%
</TABLE>
2
<PAGE>
Each change in the Applicable Tranche B Margin resulting from
a change in a Rating shall take effect at the time such change
in such Rating is publicly announced by the relevant rating
agency."
(b) The definition of "Loan Documents" is amended in its
entirety to read as follows:
"Loan Documents" means this Agreement, the Guaranty and, after
the execution and delivery thereof and before the release
thereof in accordance with Section 6.26, the Security
Documents.
(c) The definition of "Material Adverse Effect" is amended in
its entirety to read as follows:
"Material Adverse Effect" means a material adverse effect
(excluding the effects of an actual or threatened business
interruption, including but not limited to self-help actions
or a strike, by members of the FedEx Pilots Association, or
contingency plans related thereto) on (i) the business,
Property, condition (financial or otherwise), results of
operations, or prospects of the Borrower and its Subsidiaries
taken as a whole, (ii) the ability of the Borrower to perform
its obligations under the Loan Documents, or (iii) the
validity or enforceability of any of the Loan Documents or the
rights or remedies of the Agent or the Lenders thereunder.
(d) The following new definitions are added to Article I in
appropriate alphabetical order:
"Adjusted Net Income" means, on a consolidated basis, for the
Borrower and its Consolidated Subsidiaries for the twelve most
recent complete fiscal months, income (loss) before income
taxes MINUS, to the extent included in determining income
(loss) before income taxes, any net loss or gain realized in
connection with any sale or disposition of any asset (other
than in the ordinary course of business) or any extraordinary
or non-recurring loss or gain resulting from an actual or
threatened business interruption relating to any self-help
actions or strike, by members of the FedEx Pilots Association,
or contingency plans related thereto, provided that the
aggregate amount of the foregoing reductions to income (loss)
before income taxes shall not exceed $1,000,000,000.
"Aircraft Mortgage" means an Aircraft Mortgage and Security
Agreement to be executed by FedEx pursuant to Section 6.26,
substantially in the form approved pursuant to Section 6.27.
"Amendment No. 2" means that certain Amendment No. 2
(Temporary), dated as of December 10, 1998, by and among the
Borrower, the Lenders party thereto and the Agent.
3
<PAGE>
"Appraisal Report" means, with respect to any aircraft or
engine, an extended desktop appraisal of the Appraiser, which
does not include any on-site inspection of such aircraft or
engine or its maintenance records, but may include
consideration of maintenance status information that is
provided to the Appraiser from the client and/or aircraft
operator, and may include adjustments from the mid-time,
mid-life baseline to account for the actual maintenance status
of such aircraft or engine.
"Appraiser" means BK Associates, or another independent
appraiser selected by the Borrower with the prior written
consent of Morgan.
"BK Associates" means BK Associates, Inc., an independent
aircraft appraisal firm.
"Caliber Collateral" is defined in Section 6.26.
"Caliber Operating Income" means, as of any date, the
operating income (or loss) of Caliber and its consolidated
Subsidiaries for the four most recent fiscal quarters then
ended, determined on a consolidated basis in accordance with
GAAP.
"Caliber Stock" means the capital stock of Caliber and the
Subsidiaries of Caliber other than the Designated Immaterial
Subsidiaries.
"Collateral" means all the Property and interests in Property
now owned or hereafter acquired by the Borrower and its
Subsidiaries upon which a Lien is granted or purported to be
granted under any of the Security Documents.
"Collateral Trust Agreement" means a Collateral Trust
Agreement to be executed pursuant to Section 6.26,
substantially in the form approved pursuant to Section 6.27.
"Designated Collateral" means (i) all now owned and hereafter
acquired or arising (a) capital stock of Caliber and its
domestic operating Subsidiaries (other than any Designated
Immaterial Subsidiaries), (b) accounts receivable of FedEx and
its Subsidiaries, (c) intercompany indebtedness owed to the
Borrower by its Subsidiaries and (d) motor vehicles (other
than passenger vehicles) and real estate of FedEx and its
Subsidiaries), except such motor vehicles and real estate
which are subject to Liens as of the date of Amendment No. 2
(such real estate to include, without limitation, the real
estate listed on SCHEDULE 1 attached to such Amendment No. 2),
and (ii) all aircraft (including airframes and engines) of
FedEx listed on SCHEDULE 1 attached to Amendment No. 2 hereto
and such additional unencumbered aircraft (including airframes
and engines) as the Borrower may designate in writing to the
Agent from time to time.
4
<PAGE>
"Designated Immaterial Subsidiaries" means, during each fiscal
year of the Borrower, any Subsidiary of Caliber which had
revenues (determined in accordance with GAAP) for the
immediately preceding fiscal year of Caliber not in excess of
2.0% of the consolidated revenues (determined in accordance
with GAAP) of Caliber and the consolidated Subsidiaries of
Caliber for such immediately preceding fiscal year.
"Eligible Receivables" means, at any date of determination
thereof, and with respect to any Person, the aggregate of all
Receivables of such Person at such date (net of maximum
discounts, allowances, retainage and any other amounts
deferred with respect thereto), which is not, except as
otherwise agreed by Morgan in its sole discretion exercised in
a commercially reasonable manner, of any of the following
types:
(i) (A) it arises out a sale the original terms
of which provide for payment more than 90
days after the date of the original invoice
issued by such Person in connection with
such sale or (B) it is more than 60 days
past due according to the original terms of
sale; or
(ii) it arises out of a sale not made in the
ordinary course of such Person's business or
a sale to a Person which is an Affiliate of
such Person or controlled by an Affiliate of
such Person; or
(iii) it fails to meet or violates any warranty,
representation or covenant contained in this
Agreement or any of the other Loan
Documents; or
(iv) the account debtor is also a supplier or
creditor of any Borrower or Guarantor and
the Receivable is subject to any contractual
right of setoff by the account debtor, and
such account debtor has not entered into an
agreement with Morgan with respect to the
waiver of rights of setoff, or the account
debtor has disputed liability with respect
to such Receivable, or made any claim with
respect to any other Receivable due from
such account debtor to such Person, in which
case the Receivable shall be ineligible to
the extent of such dispute, claim or setoff
(without duplication); or
(v) the account debtor has filed a petition for
bankruptcy or any other petition for relief
under the federal bankruptcy code or similar
statute, or made an assignment for the
benefit of creditors, or any petition or
other application for relief under the
federal bankruptcy code or any similar
statute has been filed against the account
debtor, or the account debtor has failed,
suspended its business operations, become
insolvent, suffered a receiver or a trustee
to be
5
<PAGE>
appointed for any of its assets or affairs,
or is generally failing to pay its debts as
they become due; or
(vi) the sale is to an account debtor which is
not located in the United States or Canada,
unless the account debtor's obligations with
respect to such sale are secured by a letter
of credit, guaranty or eligible bankers'
acceptance having terms, and from such
issuers and confirmation banks, as are
acceptable to Morgan in its sole discretion
exercised in a commercially reasonable
manner; or
(vii) the sale is on a bill-and-hold, guaranteed
sale, sale-and-return, sale on approval,
consignment, or any other repurchase or
return basis; or
(viii) Morgan believes, in the exercise of its
reasonable credit judgment, that collection
of such Receivable is insecure or that such
Receivable may not be paid by reason of the
account debtor's financial inability to pay;
or
(ix) the account debtor is the United States of
America or any department, agency or
instrumentality thereof, unless such Person
assigns its rights to payment of such
Receivable to Morgan pursuant to the
Assignment of Claims Act of 1940, as amended
(31 U.S.C. Section 3727); or
(x) the goods, the delivery of which has given
rise to such Receivable, have not been
delivered to or, if delivered, have been
rejected by the account debtor or the
services, the performance of which has given
rise to such Receivable, have not been
performed by such Person and accepted by the
account debtor; or
(xi) the amount of the Receivable(s) owing to
FedEx and its Subsidiaries in the aggregate
by any account debtor exceeds (A) a
concentration limit of ten percent (10%) of
the aggregate amount of the Receivables of
FedEx and its Subsidiaries at such time, or
(B) such other credit or concentration limit
determined by Morgan, in the exercise of its
reasonable credit judgment, at any time or
times hereafter, in which case such
Receivable(s) shall be ineligible to the
extent such Receivable(s) exceed(s) such
limits; or
(xii) to the extent such Receivable constitutes
Collateral, Morgan, as collateral agent as
contemplated by Section 6.26, does not have
a senior, perfected security interest in
such Receivable or such
6
<PAGE>
Receivable is subject to a Lien which is not
permitted under Section 6.19; or
(xiii) the sale is to an account debtor with
respect to which fifty percent (50%) or more
of all Receivables owing by such account
debtor are ineligible for any reason (except
with respect to those categories of
ineligibility where Morgan determines in its
sole discretion exercised in a commercially
reasonably manner that this clause shall not
apply); or
(xiv) such Receivable arises out of or in
connection with a retainage or similar
arrangement (I.E., the payment of such
Receivable is subject to further
performance), in which case that portion of
such Receivable subject to such arrangement
shall be ineligible until such time as the
requisite performance has been completed.
"FDX Collateral" is defined in Section 6.26.
"FDX Rating" means the Moody's FDX Rating or the S&P FDX
Rating.
"Investment Grade Rating" means an S&P FDX Rating greater than
or equal to BBB- or a Moody's FDX Rating greater than or equal
to Baa3.
"Moody's FDX Rating" means, at any particular time, the rating
issued by Moody's with respect to the Borrower's senior
unsecured non-credit enhanced long-term public debt.
"Morgan" means Morgan Guaranty Trust Company of New York, and
its successors.
"New Credit Agreement" means the Credit Agreement, dated as of
December 10, 1998, by and among the Borrower, the lenders
party thereto and Morgan, as Paying Agent, as amended,
modified or supplemented from time to time.
"New Credit Agreement Documents" means the New Credit
Agreement and all instruments, agreements and contractual
obligations entered into in connection therewith, as amended,
modified or supplemented from time to time.
"Paying Agent" means the "Paying Agent" (as defined in the New
Credit Agreement.)
"Pledge Agreements" means the pledge agreements to be executed
by the Borrower and certain Subsidiaries pursuant to Section
6.26, substantially in the form approved pursuant to Section
6.27.
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"Real Estate Mortgages" means the mortgages and deeds of trust
to be executed by FedEx pursuant to Section 6.26,
substantially in the form approved pursuant to Section 6.27.
"Receivable" means all present and future "accounts", as such
term is defined in section 9-106 of the Uniform Commercial
Code as in effect in the State of Illinois, and shall include,
without limitation, all accounts receivable, related contract
rights and all forms of obligations whatsoever owing, whether
now existing or hereafter arising and wherever arising, and
whether or not they have been earned by performance; together
with all promissory notes, instruments and documents of title
representing any of the foregoing, all rights in merchandise
or goods (including returned goods) which any of the same may
represent, all right, title, security and guaranties with
respect to any of the foregoing, including any right of
stoppage in transit and all insurance proceeds and corporate
and other business records relating to any of the foregoing;
together with all proceeds thereof.
"S&P FDX Rating" means, at any particular time, the rating
issued by S&P with respect to the Borrower's senior unsecured
non-credit enhanced long-term public debt.
"Security Agreements" means the security agreements to be
executed pursuant to Section 6.26, substantially in the form
approved pursuant to Section 6.27.
"Security Documents" means the Collateral Trust Agreement,
Pledge Agreements, the Aircraft Mortgage, the Real Estate
Mortgages and the Security Agreements.
1.2 Section 2.7 of the Credit Agreement is amended to add the
following sentence at the end thereof:
"Notwithstanding any provision of this Section 2.7 to the
contrary, when no Default exists, the Borrower shall make no
prepayments of any Advance hereunder unless all 'Advances' (as
defined in the New Credit Agreement ) have been repaid in
full."
1.3 The following new Section 4.3 is added immediately after
Section 4.2:
"4.3 ADDITIONAL CONDITION TO EACH ADVANCE. The
Lenders shall not be required to make any Advance, unless on
the applicable Borrowing Date, the 'Aggregate Commitment' (as
defined in the New Credit Agreement) shall have been fully
utilized. Each Borrowing Notice with respect to each such
Advance shall constitute a representation and warranty by the
Borrower that the condition contained in this Section 4.3 has
been satisfied."
1.4 Section 5.3 is amended in its entirety to read as follows:
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<PAGE>
" 5.3. NO CONFLICT; GOVERNMENT CONSENT. Neither the
Borrower's nor any Guarantor's execution and delivery of the
Loan Documents, nor the consummation of the transactions
therein contemplated, nor compliance with the provisions
thereof will violate any law, rule, regulation, order, writ,
judgment, injunction, decree or award binding on the Borrower,
any Guarantor or any of the Significant Subsidiaries or the
Borrower's, any Guarantor's or any Significant Subsidiary's
articles or certificate of incorporation or by-laws or the
provisions of any indenture, instrument or agreement to which
the Borrower, any Guarantor or any of the Significant
Subsidiaries is a party or is subject, or by which it, or its
Property, is bound, or conflict with or constitute a default
thereunder, or, except pursuant to the Security Documents,
result in or require the creation or imposition of any Lien
in, of or on the Property of the Borrower, any Guarantor or
any Significant Subsidiary pursuant to the terms of any such
indenture, instrument or agreement. Except for (i) that
certain Indenture between Caliber and The Chase Manhattan
Bank, as Trustee, dated as of August 1, 1996 (the "Caliber
Indenture") and (ii) certain additional Indebtedness in an
aggregate amount of not greater than $50,000,000, none of the
Borrower, any Guarantor or any Subsidiary is a party to any
indenture, instrument or agreement that requires the
Indebtedness governed thereby to be equally and ratably
secured with the Obligations as a result of the execution and
delivery of any of the Security Documents. No order, consent,
approval, license, authorization or validation of, or filing,
recording or registration with, or exemption by, any
governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in
connection with the execution, delivery and performance of, or
the legality, validity, binding effect or enforceability of,
any of the Loan Documents (other than filings in connection
with the Security Documents).
1.5 Section 5.17 is amended in its entirety to read as
follows:
"5.17. PARI PASSU. All the payment obligations of the
Borrower and the Guarantors arising under or pursuant to the
Loan Documents will at all times rank pari passu with all
other unsecured and unsubordinated payment obligations and
liabilities (including contingent obligations and liabilities)
of the Borrower and the Guarantors (other than obligations
under the New Credit Agreement Documents, PROVIDED that no
Default has occurred thereunder, and obligations mandatorily
preferred by laws or regulations of general application)."
1.6 The Credit Agreement is amended to add the following after
Section 5.18:
"5.19 MATERIAL ADVERSE EFFECT. Since May 31, 1998,
there has been no change in the business, Property, prospects,
condition (financial or otherwise) or results of operations of
the Borrower and its Subsidiaries taken as a whole which could
reasonably be expected to have a Material Adverse Effect."
9
<PAGE>
1.7 Section 6.1 is amended in its entirety to read as follows:
"6.1. FINANCIAL REPORTING. The Borrower will
maintain, for itself and each Subsidiary, a system of
accounting established and administered in accordance with
GAAP, and furnish to the Lenders:
(i) Within 90 days after the close of each of its
fiscal years, an unqualified audit report
certified by independent certified public
accountants of recognized national standing
acceptable to the Lenders, prepared in
accordance with GAAP on a consolidated basis
for itself and the Consolidated Subsidiaries,
including a balance sheet as of the end of such
period, related profit and loss and
reconciliation of surplus statements, and a
statement of cash flows, accompanied by (a) any
management letter prepared by said accountants,
and (b) a certificate of said accountants that,
in the course of their examination necessary
for their certification of the foregoing, they
have obtained no knowledge of any Default or
Unmatured Default, or if, in the opinion of
such accountants, any Default or Unmatured
Default shall exist, stating the nature and
status thereof.
(ii) Within 45 calendar days after the end of each
of the first three quarters of each fiscal year
of the Borrower, for itself and the
Consolidated Subsidiaries, an unaudited
consolidated balance sheet as at the close of
such period and consolidated profit and loss
and reconciliation of surplus statements and a
statement of cash flows for the period from the
beginning of such fiscal year to the end of
such quarter, all certified as complete and
accurate and prepared in accordance with GAAP
by its Chief Financial Officer, Treasurer or
Controller.
(iii) Within 45 calendar days after the end of each
of the first three quarters of each fiscal year
of the Borrower and within 90 calendar days
after the end of the fourth quarter of each
fiscal year of the Borrower, and from time to
time as reasonably requested by Morgan, for
Caliber and its Subsidiaries on a consolidated
basis, a certificate signed by the Borrower's
Chief Financial Officer, Treasurer or
Controller, certifying as to (i) for such
period, the Caliber Operating Income and (ii)
at the end of such period, the aggregate
principal amount of all outstanding
Indebtedness of Caliber and its Subsidiaries.
(iv) Together with the financial statements required
hereunder, a certificate signed by its Chief
Financial Officer or Treasurer stating
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that no Default or Unmatured Default exists, or
if any Default or Unmatured Default exists,
stating the nature and status thereof, and
stating the steps the Borrower is taking to
cure such Default or Unmatured Default.
(v) As soon as available, and in any event within
45 calendar days after the end of each of the
first three quarters of each fiscal year of the
Borrower and within 90 calendar days after the
end of the fourth quarter of each fiscal year
of the Borrower, a schedule in substantially
the form of Schedule "2" hereto, certified as
accurate by the Borrower's Chief Financial
Officer, Treasurer or Controller, showing, as
of the end of such quarter, the Borrower's
calculation, in form and detail satisfactory to
the Agent, of the calculations required to be
made to determine compliance with each of
Sections 6.12, 6.13 and 6.24.
(vi) Promptly upon becoming available, copies of:
(a) All financial statements, reports, notices
and proxy statements sent by the Borrower,
any Guarantor or any Significant
Subsidiary to its public stockholders (if
any).
(b) All prospectuses (other than on Form S-8
or a similar form) of the Borrower or any
Consolidated Subsidiary filed with the
Securities and Exchange Commission or any
other governmental agency succeeding to
the jurisdiction thereof.
(c) All regular and periodic reports filed by
the Borrower or any Consolidated
Subsidiary with any securities exchange or
with the Securities and Exchange
Commission or any other governmental
agency succeeding to the jurisdiction
thereof.
(vii) As soon as possible and in any event within 10
days after receipt by the Borrower, a copy of
(a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may
be liable to any Person as a result of the
release by the Borrower, any of its
Subsidiaries, or any other Person of any toxic
or hazardous waste or substance into the
environment, and (b) any notice alleging any
violation of any federal, state or local
environmental, health or safety law or
regulation by the Borrower or any of its
Subsidiaries, which, in either case, could
reasonably be expected to have a Material
Adverse Effect.
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(viii) Promptly after any Authorized Officer learns
thereof, notice of any change in any Rating or
any publicly-announced decision by Moody's or
S&P to consider a change in any Rating.
(ix) On or before January 15, 1999, and thereafter
from time to time as reasonably requested by
Morgan within 15 Business Days after each such
request, an Appraisal Report setting forth the
fair market value of the airframes and engines
of FedEx included in SCHEDULE 1 attached to
Amendment No. 2 hereto.
(x) Not more than 15 Business Days after the end
of each calendar month following the Effective
Date (as defined in the New Credit Agreement),
or more frequently as Morgan may reasonably
request from time to time, a report
summarizing the Eligible Receivables of FedEx
and its Subsidiaries as of the end of such
month or such other date.
(xi) Within 15 Business Days after Morgan may
reasonably request from time to time, an
appraisal setting forth the fair market value
of all or any part of the Designated
Collateral described in clause (iv) of Section
6.26(b).
(xii) Such other information (including
non-financial information) as the Agent or any
Lender may from time to time reasonably
request."
1.8 Section 6.4 is amended to add "(except for changes in the
conduct of business resulting from an actual or threatened business
interruption, including but not limited to self-help actions or a
strike, by members of the FedEx Pilots Association, or contingency
plans related thereto)" after the word "conducted" in the fourth line.
1.9 Section 6.15 is amended to add the phrase "(other than
Caliber)" after the word "Subsidiary" in the first line of clause (a),
clause (b), and clause (d), and to add "Caliber," before the word
"FedEx" in clause (c).
1.10 Section 6.16 is amended to add the following immediately
after clause (f):
"Notwithstanding any provision of this Section 6.16 to the
contrary, the Borrower will not, nor will it permit any
Consolidated Subsidiary to, make any such sale, transfer,
conveyance or lease of any Collateral or Designated Collateral
without the prior written consent of the Required Lenders,
except that the Borrower and its Consolidated Subsidiaries may
sell, transfer, convey or lease, in accordance with the
foregoing provisions of Section 6.16, Designated Collateral
consisting of motor vehicles and real estate without such
written consent, provided that after giving effect thereto,
the Borrower is in compliance with Section 6.24."
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<PAGE>
1.11 Section 6.18(e) is amended in its entirety to read as
follows:
"(e) Guaranties included or required under the
New Credit Agreement Documents and the L/C Facility."
1.12 Section 6.19 is amended to:
(a) delete paragraph (l) in its entirety and substitute the
following therefor:
"(l) Liens on Designated Collateral granted in
accordance with Section 6.26; and"
(b) add the following immediately after clause (l):
"(m) Liens not otherwise permitted by Sections 6.19(a)
through (l) provided that at all times the sum of (i) the
aggregate principal amount of all outstanding Long Term
Debt of the Consolidated Subsidiaries (excluding the
Current Maturities of any such Long Term Debt and any Long
Term Debt of a Consolidated Subsidiary owing to the
Borrower) which is unsecured, plus (ii) the aggregate
principal amount of all outstanding Long Term Debt of the
Borrower or any Consolidated Subsidiary (excluding the
Current Maturities of any such Long Term Debt and any Long
Term Debt of a Consolidated Subsidiary owing to the
Borrower) which is secured as permitted by this Section
6.19(m), does not exceed 8% of Consolidated Adjusted Total
Assets.
Notwithstanding any provision of this Section 6.19 to the
contrary, the Borrower will not, and will not permit any
Consolidated Subsidiary to, create, incur, assume or suffer to
exist, any Lien on any of the Designated Collateral except in
accordance with clause (l) of this Section 6.19, or enter
into, or make any commitment to enter into, any arrangement
for the acquisition of any Designated Collateral through
conditional sales, lease-purchase or other title retention
agreements, except Liens securing a principal amount of not
more than $200,000,000 in the aggregate."
1.13 Section 6.21 is amended to delete the words "The
Borrower" at the beginning thereof and replace them with "Except for
the New Credit Agreement Documents, the Borrower".
1.14 The following provisions are added after Section 6.21:
"6.22 INDEBTEDNESS OF CALIBER AND SUBSIDIARIES. None
of Caliber or its Subsidiaries will directly or indirectly
create, incur, assume or otherwise become or remain liable
with respect to (a) any Indebtedness of the types set forth in
clauses
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(i), (iii), (iv), (v), (vi), (vii) and (viii) of the
definition of "Indebtedness", or (b) Indebtedness consisting
of purchase-money obligations representing the deferred
purchase price of Property, except:
(i) all such Indebtedness existing under the
Caliber Indenture or otherwise existing on the
date hereof and reflected in the consolidated
financial statements of the Borrower and its
Consolidated Subsidiaries;
(ii) such Indebtedness owed to the Borrower; and
(iii) other Indebtedness in an aggregate principal
amount not to exceed $50,000,000.
6.23 NEW CREDIT AGREEMENT DOCUMENTS. At any time when
no Default exists, the Borrower shall not voluntarily reduce
the "Commitments" (as defined in the New Credit Agreement) in
part. Nothing in this Section 6.23 shall prohibit the Borrower
from terminating the "Commitments" (as defined in the New
Credit Agreement) in full.
6.24 VALUE OF DESIGNATED COLLATERAL AND COLLATERAL;
AIRCRAFT CASUALTY. (a) The aggregate value of the Designated
Collateral shall at all times equal or exceed 1.75 TIMES the
sum of (i) the Aggregate Commitment, or if the Aggregate
Commitment has been terminated, the aggregate outstanding
principal amount of the Obligations, (ii) the "Aggregate
Commitment" (as defined in the New Credit Agreement), or if
such "Aggregate Commitment" has been terminated, the aggregate
outstanding principal amount of the "Obligations" (as defined
in the New Credit Agreement) and (iii) the aggregate amount of
the "Commitments" (as defined in the L/C Facility), or if such
"Commitments" have been terminated, the aggregate outstanding
principal amount of the "Obligations" (as defined in the L/C
Facility).
(b) The Borrower and its applicable Subsidiaries
shall be required to grant Liens on Designated Collateral as
provided in Section 6.26(a) only to the extent necessary so
that the value, as determined pursuant to Section 6.26(b), of
all such Collateral as to which a Lien is granted, equals or
exceeds, at all times prior to the release of such Liens
pursuant to Section 6.26(c), 1.75 TIMES the sum of (i) the
Aggregate Commitment, or if the Aggregate Commitment has been
terminated, the aggregate outstanding principal amount of the
Obligations, (ii) the "Aggregate Commitment" (as defined in
the New Credit Agreement), or if such "Aggregate Commitment"
has been terminated, the aggregate outstanding principal
amount of the "Obligations" (as defined in the New Credit
Agreement) and (iii) the aggregate amount of the "Commitments"
(as defined in the L/C Facility), or if such "Commitments"
have been terminated, the aggregate
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<PAGE>
outstanding principal amount of the "Obligations" (as defined
in the L/C Facility), provided that, if at any time the
aggregate value of such Collateral is less than the amount
required by this sentence, then the Borrower shall (i)
promptly notify the Agent of such shortfall, and (ii) promptly
grant Liens to Morgan on additional Designated Collateral, in
accordance with Section 6.26(a), to the extent necessary to
reduce such shortfall to zero.
(c) If any airframe or engine set forth on SCHEDULE 1
attached to Amendment No. 2 hereto shall be destroyed or
materially damaged, regardless of the cause of such
destruction or damage, then the Borrower shall promptly notify
the Agent thereof and, within 45 days thereafter, designate in
writing one or more airframes and/or engines, as applicable,
in each case free and clear of any Lien, to be added to such
SCHEDULE 1, as provided in the definition of "Designated
Collateral", having an aggregate value, in accordance with
Section 6.26 hereof, equal to or exceeding the value of the
destroyed or damaged airframe or engine. If the damaged or
destroyed airframe or engine constitutes part of the
Collateral, then the Borrower shall, or shall cause its
Subsidiaries to, enter into such amendments to the Aircraft
Mortgage as Morgan may reasonably request in order to grant to
Morgan, as the collateral agent for the Lenders and for the
lenders under the New Credit Agreement Documents and the L/C
Facility (the "Collateral Agent"), a first priority Lien on
such replacement airframes or engines.
6.25 NO NEGATIVE PLEDGE. From and after the date
hereof, neither the Borrower nor any of its Subsidiaries shall
limit, restrict or delay, its right or power to sell, assign,
pledge, grant any Lien on, transfer, dispose of or otherwise
encumber the Designated Collateral or any part thereof,
including, without limitation, any such restriction on capital
stock, except as provided on the date hereof in the Loan
Documents, the New Credit Agreement Documents or the L/C
Facility.
6.26 GRANT OF SECURITY INTEREST IN COLLATERAL. (a)
Promptly (but in any event within 10 Business Days) after any
one or more dates on which either FDX Rating ceases to be an
Investment Grade Rating, the Borrower shall, to the extent
provided for in Section 6.24 (b), (i) grant, and cause its
Subsidiaries to grant, to the Collateral Agent, a first
priority Lien on the Designated Collateral other than
Designated Collateral owned by Caliber and its Subsidiaries
(the "FDX Collateral"), which Lien shall equally and ratably
secure the Obligations under the Loan Documents and the
obligations under each of the New Credit Agreement Documents
and the L/C Facility, and (ii) cause Caliber and Caliber's
Subsidiaries to grant, to a collateral trustee designated by
Morgan, a first priority Lien on all the capital stock of
Caliber's Subsidiaries which constitute part of the Designated
Collateral (the "Caliber Collateral"), which Lien shall
equally and ratably secure the Obligations under the Loan
Documents, the obligations under each of the New Credit
Agreement Documents and the L/C Facility and the notes issued
under the
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<PAGE>
Caliber Indenture. All such Liens granted pursuant to this
Section 6.26 shall be granted in the following order: first,
on the capital stock of Caliber and all Caliber Collateral;
second, on the airframes and engines of FedEx; third, on all
(and not part) of the accounts receivable of FedEx and its
Subsidiaries; and fourth, as designated by Morgan, on the
motor vehicles and real estate of FedEx and its Subsidiaries,
and the intercompany indebtedness owed to the Borrower by its
Subsidiaries, in each case, to the extent constituting part of
the Designated Collateral. From time to time, the Borrower and
its Subsidiaries shall execute and deliver, or cause to be
executed and delivered, such additional agreements,
instruments, certificates (including without limitation any
good standing certificates), legal opinions or documents, and
take all such actions, as Morgan may reasonably request, for
the purposes of implementing or effectuating this Section 6.26
or the Security Documents, or of more fully perfecting,
preserving or renewing the rights of Morgan and the Lenders
with respect to the Collateral (or with respect to any
additions thereto or replacements or proceeds thereof or with
respect to any other Property or assets hereafter acquired by
the Borrower or its Subsidiaries which is or may be deemed to
be part of the Collateral) pursuant hereto or thereto.
(b) Designated Collateral and Collateral shall at all
times be valued as follows:
(i) the value of the Caliber Stock shall equal
9.0 times Caliber Operating Income, less the
aggregate principal amount of all
outstanding Indebtedness (including, without
limitation, intercompany indebtedness) of
Caliber and its Subsidiaries;
(ii) the value of the airframes and engines
listed on SCHEDULE 1 attached to Amendment
No. 2 hereto shall equal the fair market
value thereof set forth in the most recently
delivered Appraisal Report delivered
pursuant to Section 4.1 or 6.1, and prior to
the delivery of the first such Appraisal
Report, such Property shall be valued at
$1,892,600,000.
(iii) the value of the accounts receivable of
FedEx and its Subsidiaries shall equal 0.75
TIMES the aggregate amount of Eligible
Receivables of FedEx and its Subsidiaries,
as determined on the report of Eligible
Receivables most recently delivered pursuant
to Section 4.1 or Section 6.1; and
(iv) the value of the motor vehicles and real
estate of FedEx and its Subsidiaries and the
intercompany indebtedness owed to the
Borrower by its Subsidiaries shall equal the
fair market value thereof as determined in
the most recent appraisal provided by a
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nationally recognized firm of appraisers
pursuant to Section 6.1, and prior to the
delivery of the first such appraisal with
respect to any such Property, such Property
shall be valued at $633,300,000.
(c) Any Liens granted under this Section 6.26 shall
be released at the written request of the Borrower in
accordance with the Security Documents if the S&P FDX Rating
and Moody's FDX Rating both become Investment Grade Ratings,
but shall be reinstated on any one or more additional dates
thereafter on which either FDX Rating ceases to be an
Investment Grade Rating. Notwithstanding the foregoing, (i)
all such Liens shall be released when all of the "Obligations"
(under and as defined in the New Credit Agreement) have been
paid in full and the "Commitments" (under and as defined in
the New Credit Agreement) have been terminated, and (ii) the
Lien on any asset sold or otherwise disposed of in accordance
with Section 6.16 shall be released promptly after the
Borrower's written request therefor.
6.27. APPROVAL OF FORMS OF SECURITY DOCUMENTS. The
Borrower shall, as soon as practicable, and in any event no
later than the later of (i) January 15, 1999 and (ii) seven
Business Days after Morgan delivers drafts of such documents
to the Borrower, give written notice to Morgan that it has
approved a final form of each Security Document which is in
form and substance satisfactory to the Agent and the agents
under the New Credit Agreement Documents and under the L/C
Facility."
1.15 Section 7.3 is amended to delete such section in its
entirety and substitute the following therefor:
" 7.3. BREACH OF CERTAIN COVENANTS. The breach by the
Borrower of any of the terms or provisions of Section 6.2,
6.3, 6.5, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, 6.18,
6.19, 6.22, 6.23, 6.24, 6.25 or 6.26."
1.16 Section 7.4 is amended in its entirety to read as
follows:
" 7.4. BREACH OF OTHER COVENANTS, LOAN DOCUMENTS, NEW
CREDIT AGREEMENT DOCUMENTS OR L/C FACILITY. The breach by the
Borrower (other than a breach which constitutes a Default
under Section 7.1, 7.2 or 7.3) of any of the terms or
provisions of this Agreement or any other Loan Document which
is not remedied within five days after written notice from the
Agent or any Lender; or the occurrence of any "Default" (as
defined in the New Credit Agreement) or any "Event of Default"
(as defined in the L/C Facility)."
1.17 Section 7.12 is amended in its entirety to read as
follows:
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<PAGE>
"7.12. INVALIDITY, ETC. OF LOAN DOCUMENTS; FAILURE OF
SECURITY. At any time, for any reason (i) any provision of any Loan
Document shall at any time for any reason cease to be valid and binding
and enforceable against the Borrower or any Guarantor, or the validity,
binding effect or enforceability thereof against the Borrower or any
Guarantor shall be contested by any Person, or the Borrower or any
Guarantor shall deny that it has any or further liability or obligation
thereunder, or any Loan Document shall be terminated, invalidated or
set aside, or be declared ineffective or inoperative or in any way
cease to give or provide to the Lenders and the Agent the benefits
purported to be created thereby, or (ii) Liens in favor of the Lenders
or any collateral agent for the Lenders shall, while the Security
Documents are in effect or purported to be in effect pursuant hereto,
be invalidated or otherwise cease to be in full force and effect, or
such Liens shall be subordinated or shall not have the priority
contemplated hereby or by the Security Documents."
1.18 Section 8.2 is amended in its entirety to read as
follows:
"8.2. AMENDMENTS. Subject to the provisions of this Article
VIII, the Required Lenders (or the Agent with the consent in writing
of the Required Lenders) and the Borrower may enter into agreements
supplemental hereto for the purpose of adding or modifying any
provisions to the Loan Documents or changing in any manner the rights
of the Lenders or the Borrower hereunder or waiving any Default
hereunder; provided, however, that no such supplemental agreement
shall, without the consent of each Lender affected thereby:
(i) Extend the maturity or the time of payment
of any Loan or reduce the principal amount
thereof, or reduce the rate or extend the
time of payment of interest thereon or fees
hereunder.
(ii) Reduce the percentage specified in the
definition of Required Lenders or amend,
modify or waive any provision requiring
action by the Required Lenders to require
action by any other Person in lieu of the
Required Lenders.
(iii) Extend the Tranche A Facility Termination
Date, extend the Tranche B Facility
Termination Date other than as provided in
Section 2.19, or reduce the amount or extend
the payment date for, the mandatory payments
required under Section 2.2, or increase the
amount of the Commitment of any Lender
hereunder, or permit the Borrower to assign
its rights under this Agreement.
(iv) Amend, modify, or waive Section 2.2(a),
Section 4.1, Section 4.2, Sections 6.24(a)
or (b), this Section 8.2, or Section 12.1.
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(v) Release FedEx or RPS from any of their
material obligations, respectively, under
the Guaranty.
(vi) Release all or substantially all of the
Collateral, or release the Borrower or any
Guarantor from any of its material
obligations under the Security Documents, in
each case other than pursuant to Section
6.26(c) or 9.16;
No amendment of any provision of this Agreement relating to
the Agent shall be effective without the written consent of
the Agent. The Agent may waive payment of the fee required
under Section 12.3.3 without obtaining the consent of any
other party to this Agreement."
1.19 Section 9.16 is amended in its entirety to read as
follows:
"9.16. RELEASE OF GUARANTORS. Upon the consummation
of any liquidation, dissolution, merger, consolidation, sale
or other transfer of a Guarantor other than Caliber, FedEx or
RPS (collectively, a "Transfer"), and provided (i) no Default
or Unmatured Default has occurred and is continuing or would
occur as a result of such Transfer, and (ii) the Liens and
security interests contemplated by the Security Documents are
not then in effect or purported to be in effect, such
Guarantor shall automatically be released from all of its
obligations under the Guaranty, and, if the Borrower so
requests, the Lenders shall promptly execute an instrument, in
form and substance reasonably satisfactory to the Borrower and
the Agent, evidencing such release."
1.20 Section 10.2 is amended in its entirety to read as
follows:
"10.2. POWERS. The Agent shall have and may exercise
such powers under the Loan Documents as are specifically
delegated to the Agent by the terms of each thereof, together
with such powers as are reasonably incidental thereto. The
Agent shall have the right to negotiate and approve the form,
terms and provisions of the Security Documents, and to enter
into the Security Documents for the benefit of the Lenders, in
accordance with Section 6.26. Any action taken by the Agent in
accordance with the provisions of the Security Documents, and
the exercise by the Agent of the powers set forth therein,
together with such other powers as are reasonably incidental
thereto, are hereby authorized by, and shall be binding upon,
each of the Lenders. The Agent shall have no implied duties to
the Lenders, or any obligation to the Lenders to take any
action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent."
1.21 Section 11.2 is amended to add "(other than pursuant to
the Security Documents)" after the word "collateral" in the sixth line.
19
<PAGE>
1.22 SCHEDULE 2 of the Credit Agreement is hereby replaced
with SCHEDULE 2 attached to Amendment No. 2 hereto.
2. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective
as of the date set forth above when each of the following conditions has been
satisfied:
(a) the Agent shall have received a counterpart of this
Amendment executed by the Borrower, the Agent and Lenders, and a
counterpart of the Acknowledgment attached hereto as Exhibit A,
executed by each of the Guarantors; PROVIDED, however, that SECTION
1.18 of this Amendment shall only become effective when the Agent shall
have received a counterpart of this Amendment executed by the Borrower,
the Agent and each of the Lenders;
(b) the Borrower has furnished to the Agent such documents
evidencing corporate existence, action and authority of the Borrower
and the Guarantors as the Agent may reasonably request;
(c) the L/C Facility shall have been amended to permit the
execution, delivery and performance of the Loan Documents;
(d) the New Credit Agreement shall have been executed and
delivered by the parties thereto and shall have become effective in
accordance with its terms; and
(e) the Agent shall have received a summary of the Eligible
Receivables of FedEx and its Subsidiaries as of November 30, 1998, and
a calculation of the value of the Designated Collateral (determined in
accordance with Section 6.26(b)), in each case in form satisfactory to
the Agent.
3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants that:
(a) This Amendment, and the Credit Agreement as previously
executed and as amended hereby, constitute legal, valid and binding
obligations of the Borrower and are enforceable against the Borrower in
accordance with their terms.
(b) Upon the effectiveness of this Amendment, the Borrower
reaffirms all covenants, representations and warranties made in the
Credit Agreement.
(c) No Default or Unmatured Default has occurred and is
continuing.
4. EFFECT ON CREDIT AGREEMENT.
20
<PAGE>
(a) During the period that this Amendment is effective, each
reference in the Credit Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents, instruments and agreements executed
and/or delivered in connection therewith, shall remain in full force
and effect, and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of the Agent or the Lenders, nor
constitute a waiver of any provision of the Credit
Agreement or any other Loan Documents, instruments and agreements
executed and/or delivered in connection therewith.
(d) In the event of any inconsistency between the provisions
of this Amendment and the provisions of that certain Amendment No. 1
dated as of December 10, 1998 among the Borrower, the Agent and the
Lenders, this Amendment shall govern and control so long as this
Amendment remains in effect.
5. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Illinois.
6. HEADINGS. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
7. COUNTERPARTS. This Amendment may be executed by one or more of the
parties to the Amendment on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of the date first above written.
FDX CORPORATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE CHASE MANHATTAN BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
KREDIETBANK N.V., GRAND
CAYMAN BRANCH
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
CITICORP USA, INC.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
COMMERZBANK
AKTIENGESELLSCHAFT, ATLANTA AGENCY
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
NATIONSBANK, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
CIBC INC.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
THE FUJI BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
MELLON BANK, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
KEYBANK NATIONAL ASSOCIATION
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
FIRST AMERICAN NATIONAL BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
BANK OF HAWAII
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE BANK OF NEW YORK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
CREDIT SUISSE FIRST BOSTON
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
DEUTSCHE VERKEHRS BANK
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
THE SANWA BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
BANCA NAZIONALE DEL LAVORO
SPA
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
THE SUMITOMO BANK, LIMITED
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
<PAGE>
EXHIBIT A
TO
AMENDMENT NO. 2 (TEMPORARY)
DATED AS OF DECEMBER 10, 1998
ACKNOWLEDGMENT
--------------
Each of the undersigned (i) acknowledges receipt of a copy of
Amendment No. 2 (Temporary) dated as of December 10, 1998, to the Credit
Agreement dated as of January 15, 1998 by and among the Borrower, the
Lenders, First Chicago Capital Markets, Inc., as Arranger, J.P. Morgan
Securities Inc., as Co-Arranger and Syndication Agent, Chase Securities Inc.,
as Co-Arranger and Documentation Agent, and the Agent (the "Credit
Agreement"), (ii) reaffirms the terms and conditions of that certain Guaranty
dated as of January 27, 1998 (the "Guaranty") and (iii) acknowledges and
agrees that the Guaranty (A) remains in full force and effect and (B) is
hereby ratified and confirmed.
FEDERAL EXPRESS CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
RPS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
CALIBER SYSTEM, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
VIKING FREIGHT, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
ROBERTS EXPRESS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
Dated as of December 10, 1998
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 12.1
<TEXT>
<PAGE>
EXHIBIT 12.1
FDX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended May 31, November 30,
1994 1995 1996 1997 1998 1997 1998
--------- ---------- ---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Earnings:
Income before income taxes............. $540,131 $ 693,564 $ 702,094 $425,865 $ 899,518 $541,505 $567,752
Add back:
Interest expense, net of
capitalized interest............... 152,170 130,923 109,249 110,080 135,696 66,498 54,606
Amortization of debt
issuance costs..................... 2,860 2,493 1,628 1,328 1,481 679 431
Portion of rent expense
representative of
interest factor.................... 288,716 333,971 393,775 439,729 508,325 246,350 279,980
-------- ---------- ---------- -------- ---------- -------- --------
Earnings as adjusted................... $983,877 $1,160,951 $1,206,746 $977,002 $1,545,020 $855,032 $902,769
======== ========== ========== ======== ========== ======== ========
Fixed Charges:
Interest expense, net of
capitalized interest................. $152,170 $ 130,923 $ 109,249 $110,080 $ 135,696 $ 66,498 $ 54,606
Capitalized interest................... 29,738 27,381 44,654 45,717 33,009 16,953 20,960
Amortization of debt
issuance costs....................... 2,860 2,493 1,628 1,328 1,481 679 431
Portion of rent expense
representative of
interest factor...................... 288,716 333,971 393,775 439,729 508,325 246,350 279,980
-------- ---------- ---------- -------- ---------- -------- --------
$473,484 $ 494,768 $ 549,306 $596,854 $ 678,511 $330,480 $355,977
======== ========== ========== ======== ========== ======== ========
Ratio of Earnings to Fixed Charges..... 2.1 2.3 2.2 1.6 2.3 2.6 2.5
======== ========== ========== ======== ========== ======== ========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-15.1
<SEQUENCE>6
<DESCRIPTION>EXHIBIT 15.1
<TEXT>
<PAGE>
EXHIBIT 15.1
December 16, 1998
FDX Corporation
6075 Poplar Avenue
Memphis, Tennessee 38119
We are aware that FDX Corporation will be incorporating by reference in its
previously filed Registration Statement No. 333-45037 its Report on Form 10-Q
for the quarter ended November 30, 1998, which includes our report dated
December 16, 1998 covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered part of this registration statement prepared or certified by
our firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
Arthur Andersen LLP
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>7
<DESCRIPTION>EXH 27
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME ON PAGES 3-5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 664,443
<SECURITIES> 0
<RECEIVABLES> 2,170,208
<ALLOWANCES> 67,374
<INVENTORY> 332,050
<CURRENT-ASSETS> 3,412,303
<PP&E> 13,198,930
<DEPRECIATION> 6,927,917
<TOTAL-ASSETS> 10,553,906
<CURRENT-LIABILITIES> 3,205,566
<BONDS> 1,362,013
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 14,766
<OTHER-SE> 4,285,135
<TOTAL-LIABILITY-AND-EQUITY> 10,553,906
<SALES> 0
<TOTAL-REVENUES> 8,291,539
<CGS> 0
<TOTAL-COSTS> 7,670,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,087
<INCOME-PRETAX> 567,752
<INCOME-TAX> 235,617
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,135
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.23
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| GAS | https://www.sec.gov/Archives/edgar/data/1004155/0001004155-99-000002.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001004155-99-000002.txt : 19990217
<SEC-HEADER>0001004155-99-000002.hdr.sgml : 19990217
ACCESSION NUMBER: 0001004155-99-000002
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AGL RESOURCES INC
CENTRAL INDEX KEY: 0001004155
STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]
IRS NUMBER: 582210952
STATE OF INCORPORATION: GA
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-14174
FILM NUMBER: 99539897
BUSINESS ADDRESS:
STREET 1: 303 PEACHTREE ST NE
CITY: ATLANTA
STATE: GA
ZIP: 30308
BUSINESS PHONE: 4045849470
MAIL ADDRESS:
STREET 1: 303 PEACHTREE ST
STREET 2: STE 400
CITY: ATLANTA
STATE: GA
ZIP: 30308
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification Number
1-14174 AGL RESOURCES INC. 58-2210952
(A Georgia Corporation)
303 PEACHTREE STREET, NE
ATLANTA, GEORGIA 30308
404-584-9470
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1998.
Common Stock, $5.00 Par Value
Shares Outstanding at December 31, 1998 ............................57,524,148
<PAGE>
AGL RESOURCES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended December 31, 1998
Table of Contents
Item Page
Number Number
PART I -- FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Income Statements 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
3 Quantitative and Qualitative Disclosure About Market Risk 25
PART II -- OTHER INFORMATION
1 Legal Proceedings 26
5 Other Information 26
6 Exhibits and Reports on Form 8-K 26
SIGNATURES 27
Page 2 of 27 Pages
<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997
(MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
1998 1997
<S> <C> <C>
Operating Revenues $ 323.9 $ 399.1
Cost of Gas 187.0 254.0
-----------------------------------------
Operating Margin 136.9 145.1
Other Operating Expenses 89.2 92.7
-----------------------------------------
Operating Income 47.7 52.4
Other Income (Loss) (7.9) 5.2
-----------------------------------------
Income Before Interest and Income Taxes 39.8 57.6
Interest Expense and Preferred Stock Dividends
Interest expense 14.2 14.1
Dividends on preferred stock of subsidiaries 1.5 2.4
-----------------------------------------
Total interest expense and preferred stock dividends 15.7 16.5
-----------------------------------------
Income Before Income Taxes 24.1 41.1
Income Taxes 8.2 15.4
=========================================
Net Income $ 15.9 $ 25.7
=========================================
Earnings per Common Share
Basic $ 0.28 $ 0.45
Diluted $ 0.28 $ 0.45
Weighted Average Number of Common Shares Outstanding
Basic 57.4 56.7
Diluted 57.7 56.8
Cash Dividends Paid Per Share of Common Stock $ 0.27 $ 0.27
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 3 of 27 Pages
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS)
(Unaudited)
December 31, September 30,
---------------------------------------------------
<CAPTION>
ASSETS 1998 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ - $ 7.9 $ 0.9
Receivables (less allowance for uncollectible accounts
of $4.9 at December 31, 1998, $5.0 at December 31,
1997, and $4.1 at September 30, 1998) 214.6 223.9 121.7
Inventories
Natural gas stored underground 106.4 109.3 138.1
Liquefied natural gas 16.0 17.7 17.7
Other 12.5 13.0 14.6
Deferred purchased gas adjustment 3.3 33.1 3.5
Other 2.0 1.9 1.9
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 354.8 406.8 298.4
- ------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Utility plant 2,150.2 2,091.3 2,133.5
Less: accumulated depreciation 694.6 661.4 680.9
- ------------------------------------------------------------------------------------------------------------------------
Utility plant - net 1,455.6 1,429.9 1,452.6
- ------------------------------------------------------------------------------------------------------------------------
Nonutility property 114.0 108.7 105.6
Less: accumulated depreciation 27.1 30.9 24.6
- ------------------------------------------------------------------------------------------------------------------------
Nonutility property - net 86.9 77.8 81.0
- ------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment - net 1,542.5 1,507.7 1,533.6
- ------------------------------------------------------------------------------------------------------------------------
Deferred Debits and Other Assets
Unrecovered environmental response costs 76.9 53.7 77.6
Investments in joint ventures 41.8 39.5 46.7
Other 32.3 42.9 29.0
- ------------------------------------------------------------------------------------------------------------------------
Total deferred debits and other assets 151.0 136.1 153.3
========================================================================================================================
Total Assets $ 2,048.3 $ 2,050.6 $ 1,985.3
========================================================================================================================
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 4 of 27 Pages
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS)
(Unaudited)
December 31, September 30,
<CAPTION>
---------------------------------------------------
------------------------------- -----------------
LIABILITIES AND CAPITALIZATION 1998 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 71.0 $ 93.7 $ 48.4
Short-term debt 113.0 150.5 76.5
Customer deposits 31.7 31.6 30.5
Accrued interest 21.6 20.4 32.8
Taxes 11.1 30.3 10.1
Deferred purchased gas adjustment 8.4 12.4
Other 52.8 32.9 42.8
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 309.6 359.4 253.5
- ------------------------------------------------------------------------------------------------------------------------
Accumulated Deferred Income Taxes 207.0 188.6 203.0
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Accrued environmental response costs 47.0 37.3 47.0
Accrued postretirement benefits costs 33.9 35.1 33.4
Deferred credits 54.3 59.7 57.8
Other 3.7 0.4 2.1
- ------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 138.9 132.5 140.3
- ------------------------------------------------------------------------------------------------------------------------
Capitalization
Long-term debt 660.0 660.0 660.0
Subsidiary obligated mandatorily redeemable
preferred securities 74.3 74.3 74.3
Common stock, $5 par value, shares issued and
outstanding of 57.5 at December 31, 1998, 56.8 at
December 31, 1997, and 57.3 at September 30, 1998 658.5 635.8 654.2
- ------------------------------------------------------------------------------------------------------------------------
Total capitalization 1,392.8 1,370.1 1,388.5
========================================================================================================================
Total Liabilities and Capitalization $ 2,048.3 $ 2,050.6 $ 1,985.3
========================================================================================================================
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 5 of 27 Pages
<PAGE>
<TABLE>
AGL RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(MILLIONS OF DOLLARS)
(UNAUDITED)
Three Months
-----------------------------
-----------------------------
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 15.9 $ 25.7
Adjustments to reconcile net income to net
cash flow from operating activities
Depreciation and amortization 21.0 18.4
Deferred income taxes 4.0 (1.3)
Other (0.3) (0.3)
Changes in certain assets and liabilities (37.6) (72.4)
- ----------------------------------------------------------------------------------------------------------
Net cash flow from operating
activities 3.0 (29.9)
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Short-term borrowings, net 36.5 121.0
Sale of common stock, net of expenses 1.3 0.7
Redemption of preferred securities (44.5)
Dividends paid on common stock (12.9) (13.0)
- ----------------------------------------------------------------------------------------------------------
Net cash flow from financing
activities 24.9 64.2
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Utility plant expenditures (25.5) (25.2)
Non-utility property expenditures (3.9) (2.5)
Investment in joint ventures (3.0)
Cash received from joint ventures 0.3
Other 0.6 (0.8)
- ----------------------------------------------------------------------------------------------------------
Net cash flow from investing
activities (28.8) (31.2)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (0.9) 3.1
Cash and cash equivalents at
beginning of period 0.9 4.8
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ - $ 7.9
==========================================================================================================
Cash paid during the period for
Interest $ 25.5 $ 23.6
Income taxes $ 0.1 $ 1.4
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 6 of 27 Pages
<PAGE>
AGL RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. General
AGL Resources Inc. is the holding company for Atlanta Gas Light
Company and its wholly owned subsidiary, Chattanooga Gas Company
which are local natural gas distribution utilities. Additionally,
AGL Resources Inc. owns several nonutility subsidiaries and has
interests in several nonutility joint ventures. We collectively
refer to AGL Resources Inc. and its subsidiaries as "AGL Resources."
We refer to Atlanta Gas Light Company as "AGLC."
In the opinion of management, the unaudited consolidated financial
statements included herein reflect all normal recurring adjustments
necessary for a fair statement of the results of the interim periods
reflected. These interim financial statements and notes are condensed
as permitted by the instructions to Form 10-Q, and should be read in
conjunction with the financial statements and the notes included in the
annual report on Form 10-K of AGL Resources for the fiscal year ended
September 30, 1998. Due to the seasonal nature of AGL Resources'
business, the results of operations for a three-month period are not
necessarily indicative of results of operations for a twelve-month
period.
We make estimates and assumptions when preparing financial statements
under generally accepted accounting principles. Those estimates and
assumptions affect various matters, including :
- reported amounts of assets and liabilities in our Condensed
Consolidated Balance Sheets as of the dates of the financial
statements;
- disclosure of contingent assets and liabilities as of the
dates of the financial statements; and
- reported amounts of revenues and expenses in our Condensed
Consolidated Income Statements during the reporting periods.
Those estimates involve judgments with respect to, among other things,
future economic factors that are difficult to predict and are beyond
management's control. Consequently, actual amounts could differ from
our estimates.
Certain amounts in financial statements of prior years have been
reclassified to conform to the presentation of the current year.
2. Impact of New Regulatory Rate Structure and Deregulation
Due to changes in the regulatory rate structure and the enactment of
Georgia's Natural Gas Competition and Deregulation Act (the
Deregulation Act), AGLC has begun to unbundle, or separate, the various
components of its services to its customers. As a result, numerous
changes have occurred with respect to the services being offered by
AGLC and with respect to the manner in which AGLC prices and accounts
for those services Consequently, AGLC's future revenues and expenses
will not follow the same pattern as they have historically.
Page 7 of 27 Pages
<PAGE>
2. Impact of New Regulatory Rate Structure and Deregulation (Continued)
New Regulatory Rate Structure
Beginning July 1, 1998, AGLC's charges for delivery service to utility
customers in Georgia have been based on a straight fixed variable (SFV)
rate design. Under SFV rates, fixed delivery service costs (as opposed
to gas commodity sales costs discussed below) are recovered evenly
throughout the year consistent with the way those costs are incurred.
The effect of the rate structure is to levelize throughout the year the
revenues collected by AGLC for gas delivery services. Prior to July 1,
1998, rates to provide delivery service were based principally on the
amount of gas customers used. Therefore, delivery rates were typically
lower in the summer when customers used less gas, and higher in the
winter when customers used more gas. Going forward AGLC will collect
such rates evenly throughout the year regardless of volumetric summer
and winter differences in gas usage. Consequently, substantial changes
to the quarterly results of operations are expected when compared to
the historical quarterly results due to the transition to this new
regulatory approach.
Deregulation
Pursuant to the Deregulation Act, regulated rates for natural gas
commodity sales service to AGLC customers (as opposed to delivery
service rates discussed above) ended on October 6, 1998. In the
deregulated environment, AGLC intended to price deregulated gas sales
in a manner that, at a minimum, would have allowed it to recover its
annual gas costs.
On January 5, 1999, the GPSC issued a Procedural and Scheduling Order
for the purpose of hearing evidence to consider whether unregulated
prices charged by AGLC for gas sales services subsequent to October 6,
1998 were constrained by market forces. The GPSC initiated the
proceeding in response to numerous complaints from customers who
received gas sales service from AGLC in November and December 1998.
Those complaints stemmed primarily from the effects of record warm
weather on November and December bills that, in many cases, reflected
higher fixed costs associated with gas sales and lower gas usage than
historical comparisons.
AGLC's gas sales rates were designed to enable the Company to recover
its fixed costs associated with gas sales from the customers for whom
the costs were incurred. AGLC intended to bill much of those fixed
costs during the winter, when consumption is typically higher, and
fewer of those fixed costs in the summer, when consumption is typically
lower. Under normal weather conditions, this billing approach would
have produced monthly bills in amounts similar to bills of
corresponding months in recent years. However, unseasonably warm
weather resulted in fixed costs comprising a higher percentage of
customers' bills due to lower gas usage by many customers in November
and December.
On January 26, 1999, AGLC entered into a joint stipulation with the
GPSC to resolve certain gas sales service issues. Among other
requirements in the stipulation, the Company has implemented a new rate
structure for gas sales, beginning with February 1999 bills, that more
closely reflects customers' actual gas usage which includes a demand
charge for fixed costs associated with gas sales that is entirely
volumetric. The new rate structure for gas sales service is intended to
ensure AGLC's recovery of its purchased gas costs incurred from October
6, 1998 to September 30, 1999 as accurately as possible without
creating any significant income or loss. The joint stipulation
agreement provides for a true-up of gas costs and revenues for fiscal
1999 for any amounts over or under a relatively small adjustable dead
band. To the extent that such overage or underage exceeds the
applicable dead band, AGLC will either refund to or collect from its
customers the applicable overage or underage that exists on September
30, 1999.
Page 8 of 27 Pages
<PAGE>
2. Impact of New Regulatory Rate Structure and Deregulation (Continued)
As part of the joint stipulation, AGLC also agreed to issue checks to
customers or credits to customer bills in the total amount of
approximately $14.7 million to lessen the effects of the Company's
earlier rate methodology. Of that amount, $8.2 million will be refunded
to AGLC customers based on the over-collection of gas costs during
fiscal 1998 before deregulation began and as reported in our balance
sheet as of December 31, 1998. The remaining $6.5 million will be
allocated during the second quarter to certain AGLC customers who were
most adversely affected by the change in AGLC's rate structure for gas
sales service.
Regulatory Accounting
We have recorded regulatory assets and liabilities in our Consolidated
Balance Sheets in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71).
In July 1997, the Emerging Issues Task Force (EITF) concluded that once
legislation is passed to deregulate a segment of a utility and that
legislation includes sufficient detail for the enterprise to determine
how the transition plan will affect that segment, SFAS 71 should be
discontinued for that segment of the utility. The EITF consensus
permits assets and liabilities of a deregulated segment to be retained
if they are recoverable through a segment that remains regulated.
Georgia has enacted legislation, the Deregulation Act, which allows
deregulation of natural gas sales and the separation of some ancillary
services of local natural gas distribution companies. However, the
rates that AGLC, as the local gas distribution company, charges to
deliver natural gas through its intrastate pipe system will continue to
be regulated by the GPSC. Therefore, we have concluded that the
continued application of SFAS 71 remains appropriate for regulatory
assets and liabilities related to AGLC's delivery services.
Pursuant to the Deregulation Act, regulated rates ended on October 6,
1998 for natural gas commodity sales to AGLC customers. Consequently,
SFAS 71 was discontinued as it relates to natural gas commodity sales
on October 6, 1998. In accordance with the EITF consensus, the
following represents the utility's operating revenues, cost of gas and
operating margin between regulated and non-regulated operations for the
three months ended December 31, 1998 (in millions):
Operating Revenues
Nonregulated $ 173.8
Regulated 143.4
============
Total Utility $ 317.2
============
Cost of Sales
Nonregulated $ 172.7
Regulated 12.2
============
Total Utility $ 184.9
============
Operating Margins
Nonregulated $ 1.1
Regulated 131.2
============
Total Utility $ 132.3
============
Page 9 of 27 Pages
<PAGE>
3. Earnings Per Share and Equity
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur when common stock
equivalents are added to common shares outstanding. AGL Resources' only
common stock equivalents are stock options whose exercise price was
less than the average market price of the common shares for the
respective periods. Additional options to purchase 22,252 and 509,189
shares of common stock were outstanding as of December 31, 1998 and
1997, respectively, but were not included in the computation of diluted
earnings per share because the exercise price of those options was
greater than the average market price of the common shares for the
respective periods.
During the three months ended December 31, 1998, we issued 211,379
shares of common stock under ResourcesDirect, a direct stock purchase
and dividend reinvestment plan; the Retirement Savings Plus Plan; the
Long-Term Stock Incentive Plan; the Nonqualified Savings Plan; and the
Non-Employee Directors Equity Compensation Plan. Those issuances
increased common equity by $3.7 million.
4. Change in Inventory Costing Method
In Georgia's new competitive environment, certificated marketing
companies, including AGLC's marketing affiliate, began selling natural
gas to firm end-use customers at market-based prices in November 1998.
Part of the unbundling process that provides for this competitive
environment is the assignment of certain pipeline services that AGLC
has under contract. AGLC will assign the majority of its pipeline
storage services that it has under contract to the certificated
marketing companies along with a corresponding amount of inventory.
Consequently, the GPSC has approved AGLC's tariff provisions to govern
the sale of its gas storage inventories to certificated marketers.
Following the rules of the tariff, the sale price will be the
weighted-average cost of the storage inventory at the time of sale.
AGLC changed its inventory costing method for its gas inventories from
first-in, first-out to weighted-average effective October 1, 1998. In
management's opinion, the weighted-average inventory costing method
provides for a better matching of costs and revenue from the sale of
gas.
Because AGLC recovered all of its gas costs through a PGA mechanism
until October 6, 1998, there is no cumulative effect resulting from the
change in the inventory costing method.
5. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.130, "Reporting Comprehensive
Income" (SFAS 130) which establishes standards for the reporting and
display of comprehensive income and its components in the financial
statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and was adopted by AGL Resources in October 1998.
Comprehensive income includes net income and other comprehensive
income. SFAS 130 presently identifies only the following items as
components of other comprehensive income:
- foreign currency translation adjustment;
- minimum pension liability adjustment; and
- unrealized gains and losses on certain investments in debt and
equity securities classified as available-for-sale securities.
Because AGL Resources does not have any components of other
comprehensive income for any of the periods presented, there is no
difference between net income and comprehensive income and the adoption
of SFAS No. 130 has no impact on AGL Resources' consolidated financial
statements.
Page 10 of 27 Pages
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Forward-Looking Statements
Portions of the information contained in this Form 10-Q, particularly
in the Management's Discussion and Analysis of Results of Operations
and Financial Condition, 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, and we intend that such
forward-looking statements be subject to the safe harbors created
thereby. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that such expectations
will be achieved.
Important factors that could cause our actual results to differ
substantially from those in the forward-looking statements include, but
are not limited to, the following:
- changes in price and demand for natural gas and related products;
- the impact of changes in state and federal legislation and
regulation on both the gas and electric industries;
- the effects and uncertanties of deregulation and competition,
particularly in markets where prices and providers historically
have been regulated;
- changes in accounting policies and practices; - interest rate
fluctuations and financial market condition; - uncertainties about
environmental issues; and - other factors discussed in the following
section: Year 2000
Readiness Disclosure - Forward-Looking Statements.
Nature of Our Business
AGL Resources Inc. is the holding company for:
- Atlanta Gas Light Company (AGLC) and its wholly owned subsidiary,
Chattanooga Gas Company (Chattanooga), which are local natural gas
distribution utilities;
- AGL Energy Services, Inc., (AGLE) a gas supply services company;
and
- several nonutility subsidiaries.
AGLC conducts our primary business: the distribution of natural gas in
Georgia, including Atlanta, Athens, Augusta, Brunswick, Macon, Rome,
Savannah, and Valdosta. Chattanooga distributes natural gas in the
Chattanooga and Cleveland areas of Tennessee. The Georgia Public
Service Commission (GPSC) regulates AGLC, and the Tennessee Regulatory
Authority (TRA) regulates Chattanooga. AGLE is a nonregulated company
that buys and sells the natural gas which is supplied to AGLC's
customers during the transition period to full competition in Georgia.
AGLC comprises substantially all of AGL Resources' assets, revenues,
and earnings. When we discuss the operations and activities of AGLC,
AGLE, and Chattanooga, we refer to them, collectively, as the
"utility."
Page 11 of 27 Pages
<PAGE>
AGL Resources also owns or has an interest in the following nonutility
businesses:
- AGL Interstate Pipeline Company, which owns a 50% interest in
Cumberland Pipeline Company; Cumberland Pipeline Company was
formed for the purpose of providing interstate pipeline services
to customers in Georgia and Tennessee;
- AGL Peaking Services, Inc., which owns a 50% interest in Etowah
LNG Company LLC; Etowah LNG Company LLC is a joint venture with
Southern Natural Gas Company and was formed for the purpose of
constructing, owning, and operating a liquefied natural gas
peaking facility;
- SouthStar Energy Services LLC (SouthStar), a joint venture among
a subsidiary of AGL Resources and subsidiaries of Dynegy, Inc.
and Peidmont Natural Gas Company. Southstar was established to
sell natural gas, propane, fuel oil, electricity, and related
services to industrial, commercial, and residential customers in
Georgia and the Southeast. SouthStar began marketing naturalgas
to all customers in Georgia during the first quarter of fiscal
1999;
- AGL Investments, Inc., which was established to develop and
manage certain nonutility businesses including:
- AGL Gas Marketing, Inc., which owns a 35% interest in Sonat
Marketing Company, L.P. (Sonat Marketing); Sonat Marketing
engages in wholesale and retail natural gas trading;
- AGL Power Services, Inc., which owns a 35% interest in Sonat
Power Marketing, L.P.; Sonat Power Marketing, L.P. engages
in wholesale power trading;
- AGL Propane, Inc., which engages in the sale of propane and
related products and services;
- Trustees Investments, Inc., which owns Trustees Gardens, a
residential and retail development located in Savannah,
Georgia; and
- Utilipro, Inc., which engages in the sale of integrated
customer care solutions to energy marketers.
Results of Operations
In this section we compare the results of our operations for the
three-month periods ended December 31, 1998 and 1997.
Operating Margin Analysis
(Dollars in Millions)
Three Months Ended
12/31/98 12/31/97 Increase/(Decrease)
---------- ---------- ----------------------
Operating Revenues
Utility $ 317.2 $ 377.6 $ (60.4) (16.0%)
Non Utility 6.7 21.5 (14.8) (68.8%)
========== ========== ============
Total $ 323.9 $ 399.1 $ (75.2) (18.8%)
========== ========== ============
Cost of Sales
Utility $ 184.9 $ 236.6 $ (51.7) (21.9%)
Non Utility 2.1 17.4 (15.3) (87.9%)
========== ========== ============
Total $ 187.0 $ 254.0 $ (67.0) (26.4%)
========== ========== ============
Operating Margins
Utility $ 132.3 $ 141.0 $ (8.7) (6.2%)
Non Utility 4.6 4.1 0.5 12.2%
========== ========== ============
Total $ 136.9 $ 145.1 $ (8.2) (5.7%)
========== ========== ============
Page 12 of 27 Pages
<PAGE>
Operating Revenues
Our operating revenues for the three months ended December 31, 1998
decreased to $323.9 million from $399.1 million for the same period
last year, a decrease of 18.8%.
Utility. Utility revenues decreased to $317.2 million for the three
months ended December 31, 1998 from $377.6 million for the same period
last year. The decrease of $60.4 million in utility revenues was
primarily due to the following factors:
- The utility's cost of gas decreased by $51.7 million. (See
discussion of the utility cost of sales below regarding the
effect of warmer weather and migration of customers to
marketers). Prior to deregulation, AGLC passed the actualcost of
gas through to its customers on a dollar for dollar basis under
the PGA mechanism contained in its rate schedule. Now that the
sale of gas by AGLC has been deregulated, AGLC intends to
continue to recover only its actual gas costs from its customers
within the parameters of the joint stipulation agreement of
January 26, 1999. The reduction in gas costs therefore results\
in a corresponding reduction in revenue.
- The utility's base revenue decreased by $4.8 million when
compared to last year primarily due to the new SFV rate
structure for AGLC delivery service that became effective
July 1, 1998. (See Note 2 to the Condensed Consolidated
Financial Statements)
- The Integrated Resource Plan (IRP) was phased out during fiscal
1998 and did not exist during the first quarter of fiscal year
1999, resulting in a $3.6 million decrease in revenue associated
with the plan. AGLC passed through to its customers, on a dollar
for dollar basis, IRP expenses incurred, which were included in
operating expenses. Therefore, the phase out of IRP had no effect
on net income .
Nonutility. Nonutility operating revenues decreased to $6.7 million for
the three months ended December 31, 1998 from $21.5 million for the
same period last year. The decrease of $14.8 million in nonutility
revenues was primarily due to the formation of SouthStar in July 1998.
Prior to the formation of SouthStar (including the first quarter of
fiscal year 1998) we had a wholly owned subsidiary which was engaged in
this same business. Upon the formation of SouthStar, the customers and
operations of this business unit became the customers and operations of
SouthStar. Since the formation of the joint venture, the results of our
interest in SouthStar have been accounted for under the equity method
and our portion of their results of operations is contained in Other
Income for the three months ended December 31, 1998.
Cost of Sales
Our cost of sales decreased to $187.0 million for the three months
ended December 31, 1998 from $254.0 million for the same period last
year, a decrease of 26.4%.
Utility. The utility's cost of sales decreased to $184.9 million for
the three months ended December 31, 1998 from $236.6 million for the
same period last year. The decrease of $51.7 million in the utility's
cost of sales was primarily due to the following factors:
- The utility sold less gas to its customers due to weather that was
44% warmer for the three months ended December 31, 1998 as compared
with the same period last year. This resulted in less volume of gas
sold as compared with last year.
- Beginning November 1, 1998, customers began to switch from AGLC to
certificated marketers for gas purchases. As a result, AGLC sold less
gas.
Page 13 of 27 Pages
<PAGE>
Nonutility. Nonutility cost of sales decreased to $2.1 million for the
three months ended December 31, 1998 from $17.4 million for the same
period last year. The decrease of $15.3 million was primarily due to
the formation of SouthStar as described above under nonutility
operating revenues.
Operating Margin
Our operating margin decreased to $136.9 million for the three months
ended December 31, 1998 from $145.1 million for the same period last
year, a decrease of 5.7%.
Utility. The utility's operating margin decreased to $132.3 million for
the three months ended December 31, 1998 from $141.0 million for the
same period last year. The decrease of $8.7 million was primarily due
to the following factors as mentioned above under utility operating
revenues:
- The utility's base revenue decreased by $4.8 million when compared
with the same period last year primarily due to the new SFV rate
structure for AGLC delivery service that became effective on July
1, 1998.
- A $3.6 million decrease in revenue associated with the phase-out
of the IRP.
Nonutility. Operating margin for the nonutility business increased by
$0.5 million to $4.6 million for the three months ended December 31,
1998 as compared with $4.1 million for the same period last year. This
increase is primarily attributable to Utilipro, our customer care
subsidiary which was acquired during the first quarter of fiscal 1998.
Other Operating Expenses
Other operating expenses decreased slightly to $89.2 million for the
three months ended December 31, 1998 compared to $92.7 million for the
same period last year. The components of other operating expenses are
as follows (dollars in millions):
Three Months Ended
12/31/98 12/31/97 (Increase/(Decrease)
-------- -------- -------------------
Operations $53.1 $58.6 $(5.5) $(9.4%)
Maintenance 9.0 9.3 (0.3) (3.2%)
Depreciation &
Amortization 20.2 17.7 2.5 14.1%
Taxes Other than Income
Taxes 6.9 7.1 (0.2) (2.8%)
-------- -------- --------
Total $89.2 $92.7 $(3.5) (3.8%)
======== ======== ========
Operations expenses decreased primarily due to the phase out of the IRP
during fiscal 1998 which resulted in $3.6 million less expense than the
same period last year. AGLC passed through to its customers, on a
dollar for dollar basis, IRP expenses incurred. Therefore, the phase
out of IRP had no effect on net income .
Depreciation and amortization expenses increased primarily due to
increased depreciable property and increased depreciation rates for
AGLC ordered by the GPSC.
Page 14 of 27 Pages
<PAGE>
Other Income/(Loss)
Other losses totaled $7.9 million for the three months ended December
31, 1998 compared with other income of $5.2 million for the same period
last year. The decrease in other income of $13.1 million is primarily
due to:
- Our portion of the loss recorded by Sonat Marketing, a joint
venture in which we own a 35% interest. The loss by Sonat
Marketing was the result of a combination of significantly warmer
weather than last year and charges recorded in December 1998
associated with changes in certain accounting estimates. We
recorded a pre-tax loss related to our interest in Sonat of
approximately $6.5 million for the three months ended December 31,
1998 as compared with pre-tax income of approximately $3.3 million
for the same period last year.
- Our portion of SouthStar's loss was approximately $1.4 million for
the three months ended December 31, 1998. SouthStar was not formed
until July 1998, therefore there was no income or loss for this
joint venture for the three months ended December 31, 1997.
Income Taxes
Income taxes decreased to $8.2 million for the three months ended
December 31, 1998 from $15.4 million for the same period last year. The
effective tax rate (income tax expense expressed as a percentage of
pretax income) for the three months ended December 31, 1998 was 34.0%
as compared to 37.5% for the same period last year. The reduction in
the effective income tax rate is primarily due to a reduction in tax
expense resulting from our Leveraged Employee Stock Ownership Plan.
Preferred Stock of Subsidiaries
Dividends on preferred stock decreased to $1.5 million for the three
months ended December 31, 1998 compared to $2.4 million for the same
period last year. This decrease is due to the redemption of $44.5
million of 7.70% preferred stock of AGLC on December 1, 1997.
Financial Condition
Our utility business is seasonal in nature which typically results in a
substantial increase in accounts receivable from customers from
September 30 to December 31 as a result of higher billings during
colder weather. The utility also uses gas stored underground to serve
its customers during periods of colder weather resulting in a
substantial decrease in gas inventories when comparing September 30
with December 31. Consequently, accounts receivable increased $92.9
million and inventory of gas stored underground decreased $31.7 million
during the quarter ended December 31, 1998. Accounts payable increased
$22.6 million during the quarter ended December 31, 1998, primarily due
to an increase in accounts payable to gas suppliers.
Our deferred PGA asset was $3.3 million as of December 31, 1998
compared to $33.1 million as of December 31, 1997. The PGA mechanism
and regulated rates ended on October 6, 1998 for natural gas commodity
sales to AGLC customers. Beginning in October 1998, AGLC priced
deregulated gas sales in a manner that more closely matched gas costs
and revenues. The deferred PGA asset that remains as of December 31,
1998 relates to Chattanooga.
We generally meet our liquidity requirements through our operating cash
flow and the issuance of short-term debt. We also use short-term debt
to meet our seasonal working capital requirements and to temporarily
fund capital expenditures. Lines of credit with various banks provide
for direct borrowings and are subject to annual renewal. Availability
under the current lines of credit varies from $230 million in the
summer to $260 million for peak winter financing.
Page 15 of 27 Pages
<PAGE>
Short-term debt increased $36.5 million to $113.0 million as of
December 31, 1998, from $76.5 million as of September 30, 1998, to meet
our normal seasonal working capital requirements for the three months
ended December 31, 1998. Short-term debt decreased $37.5 when comparing
December 31, 1998 to December 31, 1997 due to less borrowing needs
during the first quarter of this year as compared to last year. We
generated operating cash flow of $3.0 million for the three months
ended December 31, 1998 as compared to $(29.9) million for the same
period last year. This increase in operating cash flow is primarily due
to the decrease in our deferred PGA asset as a result of AGLC designing
its prices for deregulated gas sales in a manner that more closely
matched gas costs and revenues for the three months ended December 31,
1998.
We believe available credit will be sufficient to meet our working
capital needs both on a short and a long-term basis. However, our
capital needs depend on many factors and we may seek additional
financing through debt or equity offerings in the private or public
markets at any time.
Capital Expenditures
Capital expenditures for construction of distribution facilities,
purchase of equipment, and other general improvements were $29.4
million for the three-month period ended December 31, 1998. Typically,
we provide funding for capital expenditures through a combination of
internal sources and the issuance of short-term debt.
Common Stock
During the three months ended December 31, 1998, we issued 211,379
shares of common stock under ResourcesDirect, a direct stock purchase
and dividend reinvestment plan; the Retirement Savings Plus Plan; the
Long-Term Stock Incentive Plan; the Nonqualified Savings Plan; and the
Non-Employee Directors Equity Compensation Plan. Those issuances
increased common equity by $3.7 million.
Ratios
As of December 31, 1998, our capitalization ratios consisted of:
- 47.4% long-term debt;
- 5.3% preferred securities; and
- 47.3% common equity.
State Regulatory Activity
Deregulation
The Deregulation Act became law on April 14, 1997. It provides a legal
framework for comprehensive deregulation of many aspects of the natural
gas business in Georgia and provides for a transition period before
competition is fully in effect. AGLC will unbundle, or separate, all
services to its natural gas customers; allocate delivery capacity to
approved marketers who sell the gas commodity to residential and small
commercial users; and create a secondary market for large commercial
and industrial transportation capacity.
Approved marketers, including our marketing affiliate, will compete to
sell natural gas to all end-use customers at market-based prices. AGLC
will continue to deliver gas to all end-use customers through its
existing pipeline system, subject to the GPSC's continued regulation.
The GPSC's order acknowledges that under the Deregulation Act, the PGA
mechanism will be deregulated when at least five nonaffiliated
marketers are authorized to serve an area of Georgia. The GPSC issued
more than five such authorizations on October 6, 1998.
Page 16 of 27 Pages
<PAGE>
Going forward, AGLC intends to price deregulated gas sales in a manner
that, at a minimum, will allow it to recover its annual gas costs. Even
though the recovery of gas costs is not currently subject to price
regulation, the GPSC continues to regulate delivery rates, safety,
access to AGLC's system, and quality of service for all aspects of
delivery service.
Generally, under the Deregulation Act, the transition to full-scale
competition occurs when residential and small commercial customers who
represent one-third of the peak day requirements for a particular
delivery group have voluntarily selected a marketer. When the GPSC
determines such market conditions exist, there will be a 120-day
process to notify and assign customers who have not selected a
marketer. Following the 120-day period, residential and small
commercial customers who have not yet selected a marketer will be
randomly assigned a marketer under the rules issued by the GPSC.
The Deregulation Act provides marketing standards and rules of business
practice to ensure the benefits of a competitive natural gas market are
available to all customers on our system. It imposes on marketers an
obligation to serve end-use customers, and creates a universal service
fund. The universal service fund provides a method to fund the recovery
of marketers' uncollectible accounts, and it enables AGLC to expand its
facilities to serve the public interest.
Retail marketing companies, including our marketing affiliate, filed
separate applications with the GPSC to sell natural gas to AGLC's
residential and small commercial customers. On October 6, 1998, the
GPSC approved 19 marketers' applications to begin selling natural gas
services at market prices to Georgia customers on November 1, 1998.
As of December 31, 1998, more than 168,000 residential and small
commercial customers had elected to purchase natural gas services from
one of the 11 active approved marketers in Georgia. As of February 5,
1999, more than 367,000 residential and small commercial customers had
elected to purchase natural gas services from those same marketers.
Commodity Sales Service Rate Issues
Pursuant to the Deregulation Act, regulated rates for natural gas
commodity sales service to AGLC customers (as opposed to delivery
service rates discussed above) ended on October 6, 1998. In the
deregulated environment, AGLC intended to price deregulated gas sales
in a manner that, at a minimum, would have allowed it to recover its
annual gas costs.
On January 5, 1999, the GPSC issued a Procedural and Scheduling Order
for the purpose of hearing evidence to consider whether unregulated
prices charged by AGLC for gas sales services subsequent to October 6,
1998 were constrained by market forces. The GPSC initiated the
proceeding in response to numerous complaints from customers who
received gas sales service from AGLC in November and December 1998.
Those complaints stemmed primarily from the effects of record warm
weather on November and December bills that, in many cases, reflected
higher fixed costs associated with gas sales and lower gas usage than
historical comparisons.
AGLC's gas sales rates were designed to enable the Company to recover
its fixed costs associated with gas sales from the customers for whom
the costs were incurred. AGLC intended to bill much of those fixed
costs during the winter, when consumption is typically higher, and
fewer of those fixed costs in the summer, when consumption is typically
lower. Under normal weather conditions, this billing approach would
have produced monthly bills in amounts similar to bills of
corresponding months in recent years. However, unseasonably warm
weather resulted in fixed costs comprising a higher percentage of
customers' bills due to lower gas usage by many customers in November
and December.
Page 17 of 27 Pages
<PAGE>
On January 26, 1999, AGLC entered into a joint stipulation with the
GPSC to resolve certain gas sales service issues. Among other
requirements in the stipulation, the Company has implemented a new rate
structure for gas sales, beginning with February 1999 bills, that more
closely reflects customers' actual gas usage which includes a demand
charge for fixed costs associated with gas sales that is entirely
volumetric. The new rate structure for gas sales service is intended to
ensure AGLC's recovery of its purchased gas costs incurred from October
6, 1998 to September 30, 1999 as accurately as possible without
creating any significant income or loss. The joint stipulation
agreement provides for a true-up of gas costs and revenues for fiscal
1999 for any amounts over or under a relatively small adjustable dead
band. To the extent that such overage or underage exceeds the
applicable dead band, AGLC will either refund to or collect from its
customers the applicable overage or underage that exists on September
30, 1999.
As part of the joint stipulation, AGLC also agreed to issue checks to
customers or credits to customer bills in the total amount of
approximately $14.7 million to lessen the effects of the Company's
earlier rate methodology. Of that amount, $8.2 million will be refunded
to AGLC customers based on the over-collection of gas costs during
fiscal 1998 before deregulation began and as reported in our balance
sheet as of December 31, 1998. The remaining $6.5 million will be
allocated during the second quarter to certain AGLC customers who were
most adversely affected by the change in AGLC's rate structure for gas
sales service.
Risk Management
AGLCs Gas Supply Plan for fiscal 1998 included limited gas supply
hedging activities. AGLC was authorized to begin an expanded program to
hedge up to one-half its estimated monthly winter wellhead purchases
and to establish a price for those purchases at an amount other than
the beginning-of-the-month index price. Such a program creates an
additional element of diversification and price stability. The
financial results of all hedging activities were passed through to
residential and small commercial customers under the PGA mechanism of
AGLC's rate schedules. Accordingly, the hedging program did not affect
our earnings.
During the first quarter of fiscal 1999, AGLC entered into certain
hedge agreements that will continue until the end of February 1999.
However, as part of the joint stipulation with the GPSC entered into in
January 1999 to resolve certain gas sales service issues, AGLC will not
participate in hedging activities for the remainder of the fiscal year
and all costs incurred for the fixed-price option agreements prior to
the date of the joint stipulation will be included in gas costs which
will be recovered from AGLC's customers.
AGLC Pipeline Safety
On January 8, 1998, the GPSC issued procedures and set a schedule for
hearings about alleged pipeline safety violations. On July 21, 1998,
the GPSC approved a settlement between AGLC and the Adversary Staff of
the GPSC that details a 10-year replacement program for approximately
2,300 miles of cast iron and bare steel pipelines. Over that 10-year
period, AGLC will recover from customers the costs related to the
program net of any cost savings resulting from the replacement program.
During the three months ended December 31, 1998, AGLC spent
approximately $5.4 million related to the pipeline replacement program.
Environmental
Before natural gas was available in the Southeast in the early 1930s,
AGLC manufactured gas from coal and other materials. Those
manufacturing operations were known as manufactured gas plants. Because
of recent environmental concerns, we are required to investigate
possible contamination at those plants and, if necessary, clean them
up. Additional information relating to environmental matters and
disclosures is contained below in the section entitled "Environmental
Matters".
Page 18 of 27 Pages
<PAGE>
We have two ways of recovering investigation and cleanup costs. First,
the GPSC has approved an "Environmental Response Cost Recovery Rider."
It allows us to recover our costs of investigation, testing, cleanup,
and litigation. Because of that rider, we have recorded an asset in the
same amount as our investigation and cleanup liability. The second way
we can recover costs is by exercising the legal rights we believe we
have to recover a share of our costs from other potentially responsible
parties - typically former owners or operators of the MGP sites.
Previously we also recovered costs by exercising legal rights we
believed we had to recover a share of our costs from various insurance
companies. We settled our final insurance company claim in January
1999.
Federal Regulatory Activity
Information related to federal regulatory activity is contained in our
Form 10-K for the year ended September 30, 1998 under the caption
"Federal Regulatory Matters".
Environmental Matters
Before natural gas was available in the Southeast in the early 1930s,
AGLC manufactured gas from coal and other materials. Those
manufacturing operations were known as "manufactured gas plants," or
"MGPs." Because of recent environmental concerns, we are required to
investigate possible contamination at those plants and, if necessary,
clean them up.
Through the years, AGLC has been associated with twelve MGP sites in
Georgia and three in Florida. Based on investigations to date, we
believe that some cleanup is likely at most of the sites. In Georgia,
the state Environmental Protection Division supervises the
investigation and cleanup of MGP sites. In Florida, the U.S.
Environmental Protection Agency has that responsibility.
For each of those sites, we estimated our share of the likely costs of
investigation and cleanup. We used the following process to do the
estimates: First, we eliminated the sites where we believe no cleanup
or further investigation is likely to be necessary. Second, we
estimated the likely future cost of investigation and cleanup at each
of the remaining sites. Third, for some sites, we estimated our likely
"share" of the costs. We developed our estimate based on any agreements
for cost sharing we have, the legal principles for sharing costs, our
evaluation of other entities' ability to pay, and other similar
factors.
We currently estimate that our total future cost of investigating and
cleaning up our MGP sites is between $47.0 million and $81.3 million.
Within that range, we cannot identify a single number as the "best"
estimate. We therefore have recorded the lower value, or $47.0 million,
as a liability as of December 31, 1998. We are in the process of
reviewing our estimates of the cost of investigation and clean up of
our MGP sites. We believe that the estimates will increase. At the
present time, however, we do not have sufficient information to
estimate the magnitude of that increase with a reasonable degree of
certainty.
We have two ways of recovering investigation and cleanup costs. First,
the GPSC has approved an "Environmental Response Cost Recovery Rider."
It allows us to recover our costs of investigation, testing, cleanup,
and litigation. Because of that rider, we have recorded an asset in the
same amount as our investigation and cleanup liability. On December 3,
1997, the GPSC issued a Rule Nisi ordering AGLC to show cause why the
GPSC should not take certain actions with respect to the rider.
Following hearings, the GPSC Staff and AGLC entered into a settlement
agreement on December 3, 1998, resolving the outstanding issues in the
Rule Nisi. On January 6, 1999, the GPSC issued an order approving the
settlement. The settlement is not expected to have a material effect on
the recovery of costs under the rider.
Page 19 of 27 Pages
<PAGE>
The second way we can recover costs is by exercising the legal rights
we believe we have to recover a share of our costs from other
potentially responsible parties - typically former owners or operators
of the MGP sites. Previously we also recovered costs by exercising
legal rights we believed we had to recover a share of our costs from
various insurance companies. We have been actively pursuing those
recoveries. We settled our final insurance company claim in January
1999. For the quarter ended December 31, 1998, we recovered $4.3
million from other potentially responsible parties and insurance
companies. As required by the rider, we retained $2.2 million of that
amount, and we credited the balance to our customers.
Year 2000 Readiness Disclosure
The widespread use by governments and businesses, including us, of
computer software that relies on two digits, rather than four digits,
to define the applicable year may cause computers, computer-controlled
systems, and equipment with embedded software to malfunction or
incorrectly process data as we approach and enter the year 2000.
Our Year 2000 Readiness Initiative
In view of the potential adverse impact of the "Year 2000" issue on our
business, operations, and financial condition, we have established a
cross-functional team to coordinate, and to report to management on a
regular basis about, our assessment, remediation planning, and plan
implementation processes directed to Year 2000. We also have engaged
independent consultants to assist us in the assessment, remediation,
planning, and implementation phases of our Year 2000 initiative. Our
Year 2000 initiative is proceeding on a schedule that management
believes will achieve Year 2000 readiness.
The mission of our Year 2000 initiative is to define and provide a
continuing process for assessment, remediation, planning, and plan
implementation to achieve a level of readiness that will meet the
challenges presented to us by the Year 2000 in a timely manner.
Achieving Year 2000 readiness does not mean correcting every Year 2000
limitation. Achieving Year 2000 readiness does mean that critical
systems, critical electronic assets, and relationships with key
business partners have been evaluated and are expected to be suitable
for continued use into and beyond the Year 2000, and that contingency
plans are in place.
Our Year 2000 readiness initiative involves a three-phase process. The
initiative is a continuing process with all phases of the initiative
progressing concurrently with respect to both IT and non-IT assets, as
defined below, and with respect to key business relationships. The
three phases of our Year 2000 initiative are as follows:
1. Assessment -Assessment involves identifying and inventorying
business assets and processes. It also involves determining the
Year 2000 readiness status of our assets and of key business
partners. Key business partners are those customers and suppliers
who we believe may be material to our business, results of
operations, or financial condition. In appropriate circumstances,
pre-remediation testing is conducted as a part of the assessment
phase. The assessment phase of our Year 2000 initiative includes
assessment for Year 2000 readiness of the following:
- information technology (IT) assets - Computer systems and
software maintained by our Information Systems (IS) Department;
- noninformation technology (non-IT) assets - including
microprocessors embedded in equipment, and information
technology purchased and maintained by business units other than
our IS Department; and
- key business partners (customers and suppliers).
Page 20 of 27 Pages
<PAGE>
2. Preparation of Remediation Plans - The purpose of this phase is to
develop plans which, when implemented, will enable assets and
business relationships to be Year 2000 ready. This phase involves
implementation planning and prioritizing the implementation of
remediation plans.
3. Implementation - This step involves the implementation of
remediation plans, including post-remediation testing and
contingency planning.
State of Readiness
We continue to assess the impact of the Year 2000 issue throughout our
business and operations, including our customer and supplier base. The
scope of our Year 2000 initiative includes AGL Resources and its
subsidiaries. Sonat Power Services, L.P., and Sonat Marketing, are not
within the scope of our Year 2000 initiative. We plan to address the
Year 2000 readiness of those joint ventures using the same processes we
use to assess the Year 2000 readiness of key business partners. (See
"Key Business Partners" below) The following is a description of the
progress of our Year 2000 initiative in all business units that are
within the scope of our Year 2000 initiative, with the exception of
SouthStar, and of Utilipro, Inc., a recently acquired subsidiary. With
respect to SouthStar, we have completed the assessment phase and are
beginning remediation planning. Management expects SouthStar's business
and operations to achieve Year 2000 readiness. The Year 2000 initiative
recently commenced with respect to Utilipro, Inc., and management
expects Utilipro's business and operations to achieve Year 2000
readiness.
IT Assets
Assessment of IT assets is complete. Remediation planning and
implementation are underway. As part of our IT assessment process, we
completed the assessment of our 79 mainframe and personal computer
systems. We deem 13 of those 79 systems to be critical systems. The
results of our Year 2000 initiative with respect to IT assets indicate
that, to date:
- 29 systems now are ready for Year 2000, including 12 of the 13
critical systems;
- nine systems are in testing to verify Year 2000
readiness;
- three systems, including one critical system, are in
remediation for purposes of correcting noncompliant Year 2000
code;
- three systems have been eliminated;
- five systems have been replaced, and
- 30 systems are scheduled for either testing, replacement,
remediation, or elimination in the future.
We expect our one critical IT asset that is not yet Year 2000 ready to
be Year 2000 ready by April 30, 1999. Remediation completion schedules
for achieving Year 2000 readiness of noncritical IT assets are expected
to extend through September 1999.
Non-IT Assets
Assessment of non-IT assets is complete. Our non-IT asset assessment
process involved the following:
- identifying business processes;
- identifying non-IT assets and defining the business process or
processes to which such assets relate;
- identifying the mission criticality of each non-IT asset and
business process; and
- documenting in a tracking database the existence, and the
mission-criticality, of each non-IT asset and business process.
Page 21 of 27 Pages
<PAGE>
We expect to complete remediation planning for critical non-IT assets
by March 15, 1999. The expected completion date for remediation plan
implementation for critical non-IT assets will depend on the results of
the remediation planning phase for non-IT assets, but is not expected
to extend beyond June 30, 1999.
Key Business Partners
We are contacting key business partners, including suppliers and
customers, to evaluate their Year 2000 readiness plans and status of
readiness. We have contacted over 1,400 suppliers by letter. That group
of suppliers includes suppliers whom we consider key business partners
as well as other selected suppliers. However, to date, we have not
received responses from the majority of suppliers we contacted. We have
begun following up by telephone with those key suppliers from whom we
have not yet received responses. We also initiated contact with more
than 2,500 commercial and industrial customers by personal or telephone
interview or by fax survey. That group of customers includes customers
whom we consider key business partners as well as other selected
customers. To date, we have not received responses from most of those
customers. Our first step in the process of following up with those key
customers who did not respond by January 1, 1999, was to categorize
those customers based on the amount of gas used and the revenue
generated by each of them. We have completed the categorizing process
and are about to begin following up by fax or telephone with key
customers.
We are assessing the state of readiness of key business partners who
have responded to our request for information and will continue to do
so as we receive additional responses. As a general matter, we, like
other businesses, are vulnerable to key business partners' inability to
achieve Year 2000 readiness. We cannot predict the outcome of our
business partners' readiness efforts. However, we plan to develop
contingency plans to mitigate risks associated with the Year 2000
readiness of certain business partners, including key business
partners. At this stage of our review of key business partners, we do
not have sufficient information to determine whether the Year 2000
readiness of key business partners is likely to have a material impact
on our business, results of operations, or financial condition.
Costs to Address Year 2000 Issues
Management intends to devote the resources necessary to achieve a level
of readiness that will meet our Year 2000 challenges in a timely
manner. Through December 31, 1998, our cumulative expenses in
connection with our Year 2000 assessment, remediation planning, and
plan implementation processes were approximately $ 3.8 million. Through
December 31, 1998, we had spent an additional $7.4 million for the
replacement of our general ledger and human resources information
systems. Our primary reason for replacing those systems was to achieve
increased efficiency and functionality. An added benefit of replacing
those systems was the avoidance of the costs of remediating Year 2000
problems associated with our previous general ledger and human
resources information systems. We have capitalized the costs of our new
general ledger and human resources information systems, in accordance
with our accounting policies and with generally accepted accounting
principles.
We expect to spend approximately $6 million in fiscal 1999 in
connection with our Year 2000 initiative. That estimate includes costs
associated with the use of outside consultants as well as hardware and
software costs. It also includes direct costs associated with employees
of our IS Department who work on the Year 2000 initiative. It does not
include costs associated with employees of other departments such as
Legal and Internal Audit, and of other business units, who are
involved, on a limited basis, in the Year 2000 initiative. Nor does the
estimate include our potential share of Year 2000 costs that may be
incurred by partnerships and joint ventures, other than Southstar, in
which we participate. The fiscal 1999 estimate is subject to change,
based on the results of our ongoing Year 2000 processes.
On June 30, 1998, the GPSC issued a rate case order in response to a
filing by AGLC. The GPSC provided for the deferral and amortization of
some Year 2000 costs over a five-year period, beginning
Page 22 of 27 Pages
<PAGE>
July 1, 1998. The portion of those costs that will be deferred in this
way includes costs that are required to be expensed under
generally accepted accounting principles and that are attributable to
AGLC. Going forward, we estimate that approximately 90% of our Year
2000 costs will be attributable to AGLC. At December 31, 1998, AGLC
had deferred total costs of approximately $2 million.
At present, the cost estimates associated with achieving Year 2000
readiness are not expected to materially impact our consolidated
financial statements. We will account for costs related to achieving
Year 2000 readiness in accordance with our accounting policies, with
regulatory treatment, and with generally accepted accounting
principles.
Risks of Year 2000 Issues
We are in the process of finalizing our most reasonably likely worst
case Year 2000 scenarios. As such, we are not yet able to comment on
whether the consequences of such scenarios could have a material impact
on our business, results of operations, or financial condition. The
process of defining our most reasonably likely worst case scenarios is
part of the contingency planning effort that is currently underway. Our
process for identifying our most reasonably likely worst case scenarios
includes the following:
- identifying core business processes;
- identifying key business partners (including suppliers and
customers);
- conducting Year 2000 business impact analyses; and - reviewing
experts' views of factors likely to contribute to such a
scenario.
To date, we have identified our core business processes. We have also
completed the majority of our Year 2000 business impact analyses for
the core business processes. We are in the process of finalizing our
contingency planning assumptions, including our most reasonably likely
worst case scenarios.
Although we are finalizing our most reasonably likely worst case
scenarios and our contingency planning assumptions, the contingency
planning process and the process of refining our most reasonably likely
worst case scenarios will be ongoing processes, requiring continuing
development and modification as we obtain additional information
regarding (a) our internal systems and equipment during the
implementation phase of our Year 2000 initiative, and (b) the status,
and the impact on us, of the Year 2000 readiness of others.
Page 23 of 27 Pages
<PAGE>
Business Continuity and Contingency Planning
We are developing Year 2000 contingency plans. Those plans, which are
intended to enable us to deliver an acceptable level of service despite
Year 2000 failures, include performing certain processes manually,
changing suppliers, and reducing or suspending certain noncritical
aspects of our operations. We expect our contingency planning effort to
focus on our potential internal risks as well as potential risks
associated with our suppliers and customers. Identifying our most
reasonably likely worst case scenarios as described above will define
the boundaries of our contingency planning effort. The contingency
planning process also includes, but is not limited to the following:
- identifying the nature of Year 2000 risks to understand the
business impact of those risks;
- identifying our minimal acceptable service levels; - identifying
alternative providers of goods and services; - identifying
necessary investments in additional back-up
equipment such as generators and communications equipment; and
- developing manual methods of performing critical functions
currently performed by electronic systems and equipment.
From February through June 1999, we expect to be testing and refining
our contingency plans, with a planned testing completion date of June
30, 1999. Although the expected completion date for our contingency
planning effort is June 30, 1999, during the last half of 1999 we will
update and refine our contingency plans, as needed, to reflect system
and business changes as they evolve.
Presently, management believes that its assessment, remediation
planning, plan implementation and contingency planning processes will
be effective to achieve Year 2000 readiness in a timely manner.
Forward-Looking Statements
The preceding "Year 2000 Readiness Disclosure" discussion contains
various forward-looking statements that represent our beliefs or
expectations regarding future events. When used in the "Year 2000
Readiness Disclosure" discussion, the words "believes," "intends,"
"expects," "estimates," "plans," "goals," and similar expressions are
intended to identify forward-looking statements. Forward-looking
statements include, without limitation, our expectations as to when we
will complete the assessment, remediation planning, and implementation
phases of our Year 2000 initiative as well as our Year 2000 contingency
planning; our estimated cost of achieving Year 2000 readiness; and our
belief that our internal systems and equipment will be Year 2000 ready
in a timely and appropriate manner. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual
results to differ materially from the projected results. Factors that
may cause those differences include availability of information
technology resources; customer demand for our products and services;
continued availability of materials, services, and data from our
suppliers; the ability to identify and remediate all date-sensitive
lines of computer code and to replace embedded computer chips in
affected systems and equipment; the failure of others to timely achieve
appropriate Year 2000 readiness; and the actions or inaction of
governmental agencies and others with respect to Year 2000 problems.
Page 24 of 27 Pages
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All financial instruments and positions held by AGL Resources described
below are held for purposes other than trading.
Interest Rate Risk
AGL Resources' exposure to market risk related to changes in interest
rates relates primarily to its borrowing activities. A hypothetical 10%
increase or decrease in interest rates related to AGL Resources
variable rate debt ($113.0 million as of December 31, 1998) would not
have a material effect on our results of operations or financial
condition over the next year. The fair value of AGL Resources'
long-term debt and capital securities are also affected by changes in
interest rates. The carrying value of AGL Resources' long-term debt and
capital securities has been the same for the past two years. A
hypothetical 10% increase or decrease in interest rates would not have
a material effect on the estimated fair value of our long-term debt or
capital securities. Additionally, the fair value of our long-term debt
and capital securities has not materially changed since September 30,
1998.
Page 25 of 27 Pages
<PAGE>
PART II -- OTHER INFORMATION
"Part II -- Other Information" is intended to supplement information
contained in the Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, and should be read in conjunction therewith.
ITEM 1. LEGAL PROCEEDINGS
With regard to legal proceedings, AGL Resources is a party, as both
plaintiff and defendant, to a number of suits, claims and counterclaims on
an ongoing basis. Management believes that the outcome of all litigation in
which it is involved will not have a material adverse effect on the
consolidated financial statements of AGL Resources.
ITEM 5. OTHER INFORMATION
Information related to State Regulatory Activity, Federal Regulatory
Activity, and Environmental matters is contained in Item 2 of Part I under
the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Bylaws, as amended and restated on January 15, 1999.
10.1 Seventh Amendment to the AGL Resources Inc. Long-Term
Stock Incentive Plan of 1990.
10.2 Extension of Service Agreements #904480 under Rate
Schedule FT; #904481 under Rate Schedule FT-NN; and
#S20140 under Rate Schedule CSS, all dated November 1,
1994, between Atlanta Gas Light Company and Southern
Natural Gas Company (Exhibits 10.30; 10.32 and 10.33,
respectively, AGL Resources Inc. Form 10-K for the
fiscal year ended September 30, 1998).
18 Independent Auditor's preferability letter concerning a
change in accounting method.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarterly
period ended December 31, 1998.
Page 26 of 27 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AGL Resources Inc.
(Registrant)
Date February 15, 1999 /s/ J Michael Riley
J. Michael Riley
Senior Vice President and Chief Financial
Officer
(Principal Accounting and Financial Officer)
Page 27 of 27 Pages
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 3
<TEXT>
Exhibit 3
BYLAWS
OF
AGL RESOURCES INC.
ARTICLE I
SHAREHOLDERS
SECTION 1.1. Date, Time and Place of Meetings. Annual and special
meetings of the Shareholders shall be held on such date and at such time and
place, within or without the State of Georgia, as may be stated in the notice of
the meeting, or in a duly executed waiver of notice thereof. If no designation
is made, the place of the meeting shall be the principal executive offices of
the Corporation.
SECTION 1.2. Annual Meetings. The annual meeting of the Shareholders of
the Corporation shall be held each year for the purposes of electing Directors
and of transacting such other business as properly may be brought before the
meeting. To be properly brought before the meeting, business must be brought
before the meeting (i) by or at the direction of the Board of Directors or (ii)
by any Shareholder of the Corporation entitled to vote at the meeting who
complies with the procedures set forth in Section 1.2 of this Article; provided,
in each case, that such business proposed to be conducted is, under the law, an
appropriate subject for Shareholder action.
For business to be properly brought before an annual meeting by a
Shareholder, the Shareholder must give timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a Shareholder's notice must be
received by the Secretary at the principal executive offices of the Corporation
at least 120 calendar days before the first anniversary of the date that the
Corporation's proxy statement was released to Shareholders in connection with
the previous year's annual meeting of Shareholders. However, if no annual
meeting of Shareholders was held in the previous year or if the date of the
annual meeting of Shareholders has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
the notice shall be received by the Secretary at the principal executive offices
of the Corporation not fewer than the later of (i) 150 calendar days prior to
the date of the contemplated annual meeting or (ii) the date which is 10
calendar days after the date of the first public announcement or other
notification to the Shareholders of the date of the contemplated annual meeting.
Such Shareholder's notice to the Secretary shall set forth with respect
to any proposal such Shareholder proposes to bring before the annual meeting (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and address, as they appear on the Corporation's books, of the
Shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by such Shareholder; (iv) the dates
upon which the Shareholder acquired such shares; (v) documentary support for any
claim of beneficial ownership; (vi) any material interest of such Shareholder in
such business; (vii) a statement in support of the matter and, for proposals
sought to be included in the Corporation's proxy statement, any other
information required by Securities and Exchange Commission Rule 14a-8; and
(viii) as to each person whom the Shareholder proposes to nominate for election
or reelection as Director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a Director if elected, and evidence satisfactory to the
Corporation that such nominee has no interests that would limit their ability to
fulfill their duties of office).
<PAGE>
In addition, if the Shareholder intends to solicit proxies from the
shareholders of the Corporation, such Shareholder shall notify the Corporation
of this intent in accordance with Securities and Exchange Commission Rule 14a-4
and/or Rule 14a-8.
SECTION 1.3. Special Meetings. The Corporation shall hold a special
meeting of Shareholders on call of the Board of Directors or the Executive
Committee, the Chairman of the Board of Directors, the President, or, upon
delivery to the Corporation's Secretary of a signed and dated written demand for
the meeting describing the purpose or purposes for the meeting, on call of the
holders of 100% of the votes entitled to be cast on any issue proposed to be
considered at the proposed special meeting. Only business within the purpose or
purposes described in the notice of special meeting required by Section 1.5
below may be conducted at a special meeting of the Shareholders.
For business to be properly brought before a special meeting by a
Shareholder, the Shareholder must give timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a Shareholder's notice must be
received by the Secretary at the principal executive offices of the Corporation
at least 120 calendar days prior to the date of the special meeting.
Such Shareholder's notice to the Secretary shall set forth with respect
to any proposal such Shareholder proposes to bring before the special meeting
(i) a brief description of the business desired to be brought before the special
meeting and the reasons for conducting such business at the special meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
Shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by such Shareholder; (iv) the dates
upon which the Shareholder acquired such shares; (v) documentary support for any
claim of beneficial ownership; (vi) any material interest of such Shareholder in
such business; (vii) a statement in support of the matter and, for proposals
sought to be included in the Corporation's proxy statement, any other
information required by Rule 14a-8; and (viii) if the Shareholders requesting
the special meeting propose to nominate one or more persons for election or
reelection as Director, all information relating to such person that is required
to be disclosed in solicitations of proxies for election of Directors in an
election contest, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected, and evidence reasonably satisfactory to the
Corporation that such nominee has no interests that would limit their ability to
fulfill their duties of office).
In addition, if the Shareholder intends to solicit proxies from the
shareholders of the Corporation, such Shareholder shall notify the Corporation
of this intent in accordance with Securities and Exchange Commission Rule 14a-4
and/Rule or 14a-8.
SECTION 1.4. Determination of Validity of Notice of Shareholder
Proposal for Business. The chairman of a meeting may, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of Sections 1.2 and 1.3 of
this Article, and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted, or in the case of persons so nominated, not be
eligible for election.
SECTION 1.5. Notice of Meetings. The Secretary or an Assistant
Secretary shall deliver, either personally or by mailing it, postage prepaid, a
written notice of the place, day, and time of all meetings of the Shareholders
not less than ten (10) nor more than sixty (60) days before the meeting date to
each Shareholder of record entitled to vote at such meeting. Unless otherwise
required or permitted by law, written notice is effective when mailed, if mailed
with postage prepaid and correctly addressed to the Shareholder's address shown
in the Corporation's current record of Shareholders. It shall not be necessary
that notice of an annual meeting include a description of the purpose or
purposes for which the meeting is called. In the case of a special meeting, the
purpose or purposes for which the meeting is called shall be included in the
notice of the special meeting. If an annual or special Shareholders' meeting is
adjourned to a different date, time, or place, notice of the new date, time, or
place need not be given if the new date, time, or place is announced at
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the meeting before adjournment. However, if a new record date for the adjourned
meeting is or must be fixed under Section 1.9 herein, notice of the adjourned
meeting must be given to persons who are Shareholders as of the new record date.
SECTION 1.6. Record Date. The Board of Directors, in order to determine
the Shareholders entitled to notice of or to vote at any meeting of the
Shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or to receive payment of any dividend or
other distribution or allotment of any rights, or to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, shall fix in advance a record date that may not be more
than seventy (70) days before the meeting or action requiring a determination of
Shareholders. Only such Shareholders as shall be Shareholders of record on the
date fixed shall be entitled to such notice of or to vote at such meeting or any
adjournment thereof, or to receive payment of any such dividend or other
distribution or allotment of any rights, or to exercise any such rights in
respect of stock, or to take any such other lawful action, as the case may be,
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid. The record date shall apply to any
adjournment of the meeting except that the Board of Directors shall fix a new
record date for the adjourned meeting if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
SECTION 1.6. Shareholders' List for Meeting. After fixing a record date
for a meeting, the Corporation shall prepare an alphabetical list of the names
of all Shareholders who are entitled to notice of the Shareholders' meeting. The
list shall be arranged by voting group (and within each voting group by class or
series of shares) and show the address of and number of shares held by each
Shareholder. The Corporation shall make the Shareholders' list available for
inspection by any Shareholder, his agent, or his attorney at the time and place
of the meeting.
SECTION 1.8. Quorum. Subject to any express provision of law or the
Articles of Incorporation, a majority of the votes entitled to be cast by all
shares voting together as a group shall constitute a quorum for the transaction
of business at all meetings of the Shareholders. Whenever a class of shares or
series of shares is entitled to vote as a separate voting group on a matter, a
majority of the votes entitled to be cast by each voting group so entitled shall
constitute a quorum for purposes of action on any matter requiring such separate
voting. Once a share is represented, either in person or by proxy, for any
purpose at a meeting other than solely to object to holding a meeting or
transacting business at the meeting, it is deemed present for quorum purposes
for the remainder of the meeting and for any adjournment of that meeting unless
a new record date is set for the adjourned meeting.
SECTION 1.9. Adjournment of Meetings. The holders of a majority of the
voting shares represented at a meeting, or the Chairman of the Board or the
President, whether or not a quorum is present, shall have the power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transac__d at
the meeting as originally notified. If after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each Shareholder of record entitled to vote at the adjourned meeting.
SECTION 1.10. Vote Required. When a quorum exists, action on a matter
(other than the election of Directors) by a voting group is approved if the
votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless the Articles of Incorporation, a bylaw authorized by
the Articles of Incorporation or express provision of law requires a greater
number of affirmative votes. Unless otherwise provided in the Articles of
Incorporation, Directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. Shareholders do not have the right to cumulate their votes unless the
Articles of Incorporation so provide.
SECTION 1.11. Voting Entitlement of Shares. Unless otherwise provided
in the Articles of Incorporation, each Shareholder, at every meeting of the
Shareholders, shall be entitled to cast one vote, either in person or by written
proxy, for each share standing in his or her name on the books of the
Corporation as of the record date. A
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Shareholder may vote his shares in person or by proxy. An appointment of proxy
is effective when received by the Secretary of the Corporation or other officer
or agent authorized to tabulate votes and is valid for eleven (11) months unless
a longer period is expressly provided in the appointment of proxy form. An
appointment of proxy is revocable by the Shareholder unless the appointment form
conspicuously states that it is irrevocable and the appointment is coupled with
an interest.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. General Powers. Subject to the Articles of Incorporation,
and Bylaws approved by the Shareholders, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
managed under the direction of, the Board of Directors.
SECTION 2.2. Number and Tenure. The Board of Directors shall consist of
at least five (5) members and not more than fifteen (15) members, the exact
number of Directors to be fixed from time to time by resolution of the Board of
Directors of the Corporation. No decrease in the number or minimum number of
Directors, through amendment of the Articles of Incorporation or of the Bylaws
or otherwise, shall have the effect of shortening the term of any incumbent
Director. The Board of Directors shall be divided into three classes as nearly
equal in number as possible, with the term of office of one class expiring each
year. At the first annual meeting of shareholders, the Directors shall be
divided into three classes, as nearly equal in size as may be, with the
Directors of one class to be elected to hold office for a term expiring at the
third annual meeting following the election and until their successors shall
have been duly elected and qualified; with the Directors of the second class to
be elected to serve for a term expiring at the second annual meeting following
the election and until their successors shall have been duly elected and
qualified; and the Directors of the third class to be elected to serve for a
term expiring at the first annual meeting following the election and until their
successors shall have been duly elected and qualified. Thereafter, Directors
shall be elected for terms of three years, and until their successors have been
duly elected and qualified or until there is a decrease in the number of
Directors.
SECTION 2.3. Qualifications of Directors. Directors shall be natural
persons who have attained the age of 18 years who shall own at least 100 shares
of the Common Stock of the Corporation but need not be residents of the State of
Georgia.
SECTION 2.3.1. Re-election After Termination of Principal Employment.
If any Director ceases to hold the position in his or her principal employment
profession, trade or calling that he or she held at he beginning of the current
term for which he or she was elected a Director, such person shall not be
eligible for re-election to the Board of Directors after the expiration of such
current term unless the Board of Directors decides that such person should be
eligible for re-election.
SECTION 2.3.2. Terminating Events; Honorary Directors. Any Director who
either (i) attains his or her seventieth (70th) birthday or (ii) retires from or
discontinues his or her employment with the Corporation, whichever first occurs,
shall thereafter, upon completion of the term for which he or she was elected a
Director, cease to be an active Director; provided, however, anyone who, upon
his or her retirement is Chairman of the Board or President of the Corporation
may, notwithstanding the above provisions of this Section, continue to serve as
an active Director until his attains his seventieth (70th) birthday, and
thereafter until completion of the term for which he or she was elected a
Director.
SECTION 2.3.3. Honorary Directors. Upon appointment by the Board of
Directors, a Director who ceases to be an active Director because of age or
retirement, or any other person who shall be so elected by the Board of
Directors, shall become an Honorary Director for such term or terms as the Board
of Directors may determine, but subject to removal from the position of Honorary
Director at any time at the pleasure of the Board. Except for the regular
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November meeting of the Board of Directors, Honorary Directors will not be
expected to attend meetings of the Board unless specially invited. The expenses
of Honorary Directors in attending such November meeting or any other meeting of
the Board of Directors to which they are specially invited will be reimbursed by
the Corporation but they will not receive fees for attending such meetings.
Honorary Directors may participate in an advisory capacity in all discussions
and deliberations of the Board of Directors, but shall have no vote at the
meetings which they attend in accordance with the foregoing provisions. An
Honorary Director shall not be included in any calculation of the number of
active Directors authorized and serving under Section 2.2.
SECTION 2.4. Vacancies. Unless the Articles of Incorporation provide
otherwise, if a vacancy occurs on the Board of Directors, including a vacancy
resulting from an increase in the number of Directors, the vacancy may be filled
only by the Board of Directors, or, if the Directors remaining in office
constitute fewer than a quorum of the Board, by the affirmative vote of a
majority of all Directors remaining in office. If the vacant office was held by
a Director elected by a voting group of Shareholders, only the remaining
Directors elected by that voting group are entitled to vote to fill the vacancy.
SECTION 2.5. Meetings. The Board of Directors shall meet annually
immediately following the annual meeting of Shareholders. The annual meeting of
the Board of Directors shall be held at the time and place, within or without
the State of Georgia, as may be stated in the notice of the meeting or in a duly
executed waiver of notice thereof. If no designation is made, the place of the
annual meeting shall be the principal executive offices of the Corporation.
Regular meetings of the Board of Directors or any committee may be held between
annual meetings without notice at such time and at such place, within or without
the State of Georgia, as from time to time shall be determined by the Board or
committee, as the case may be. A majority of the Board of Directors, the
Chairman of the Board, the President or the Executive Committee may call a
special meeting of the Directors at any time by giving each Director two (2)
days notice of the date, time and place of the meeting. Such notice may be given
orally or in writing in accordance with the provisions of Section 4.1. Unless
otherwise provided in the Articles of Incorporation, these Bylaws or by law,
neither the business to be transacted at, nor the purpose of, any regular or
special meeting need be specified in the notice or any waiver of notice.
SECTION 2.6. Quorum and Voting. At all meetings of the Board of
Directors or any committee thereof, a majority of the number of Directors
prescribed, or if no number is prescribed, the number in office immediately
before the meeting begins, shall constitute a quorum for the transaction of
business. The affirmative vote of a majority of the Directors present at any
meeting at which there is a quorum at the time of such act shall be the act of
the Board or of the committee, except as might be otherwise specifically
provided by statute or by the Articles of Incorporation or Bylaws. In the
absence of a quorum, the Directors present by majority vote may adjourn the
meeting from time to time without notice other than by verbal announcement at
the meeting until a quorum shall attend. At any such adjourned meeting at which
a quorum shall be present, any business may be transacted which might have been
transacted at the meeting as originally notified.
SECTION 2.7. Action Without Meeting. Unless the Articles of
Incorporation or Bylaws provide otherwise, any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if the action is taken by all members of the Board or
committee, as the case may be. The action must be evidenced by one or more
written consents describing the action taken, signed by each Director, and filed
with the minutes of the proceedings of the Board or committee or filed with the
corporate records.
SECTION 2.8. Remote Participation in a Meeting. Unless otherwise
restricted by the Articles of Incorporation or the Bylaws, any meeting of the
Board of Directors may be conducted by the use of any means of communication by
which all Directors participating may simultaneously hear each other during the
meeting. A Director participating in a meeting by this means is deemed to be
present in person at the meeting.
<PAGE>
SECTION 2.9. Compensation of Directors. The Board of Directors may fix
the compensation of the Directors for their services as Directors. Compensation
shall be fixed from time to time by a resolution of the Board of Directors, and
may be on the basis of an annual sum or a fixed sum for attendance at each
regular or special meeting and every adjournment thereof, or a combination of
these methods. Members may be reimbursed for all reasonable traveling expenses
incurred in attending meetings. No provision of these Bylaws shall be construed
to preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
SECTION 2.10. Removal of Directors by Shareholders. Subject to the
requirements of Section 14-2-808 of the Georgia Business Corporation Code (the
"Code") for the removal of Directors elected by cumulative voting, voting group
or staggered terms, any one or more Directors may be removed from office, only
with cause, at any meeting of Shareholders with respect to which notice of such
purpose has been given, by the affirmative vote of the holder or holders of a
majority of the outstanding shares of the Corporation.
SECTION 2.11. Nomination of Directors. Only persons who are nominated
in accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of Shareholders (i) by the Board of
Directors or at the direction of the Board by any nominating committee or person
appointed by the Board or (ii) by any Shareholder of the Corporation entitled to
vote for the election of Directors at the meeting who complies with the notice
procedures set forth in Sections 1.2 and 1.3 of Article I of these Bylaws. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. Such notice to the Secretary shall set forth the information
required in Section 1.2 and 1.3 of Article I of these Bylaws. The Corporation
may require any proposed nominee to furnish such other information as reasonably
may be required by the Corporation to determine the eligibility of such proposed
nominee to serve as a Director of the Corporation. The chairman of the meeting
may, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the foregoing procedures, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 2.15. Indemnification. The indemnification authorized
in the Articles of Incorporation shall be subject to the following provisions
and procedures:
SECTION 2.15.1. Determination of Eligibility for Indemnification. In
the case of actions brought by or in the right of the Corporation, a Director's
right to indemnification as authorized in the Articles of Incorporation shall be
determined:
(i) If there are two or more directors not at the time parties
to the proceeding ("Disinterested Directors"), by the board of
directors by a majority vote of all the Disinterested Directors (a
majority of whom shall for such purpose constitute a quorum), or by a
majority of the members of a committee of two or more Disinterested
Directors appointed by such a vote;
(ii) By special legal counsel:
(a) Selected in the manner prescribed in
paragraph (i) of this subsection; or
(b) If there are fewer than two
Disinterested Directors, the Board of
Directors (in which selection directors who
do not qualify as Disinterested Directors
may participate); or
(iii) By the shareholders, but shares owned by or voted under
the control of a director who at the time does not qualify as a
disinterested director may not be voted on the determination.
SECTION 2.15.2. Rights Not Exclusive. The rights to indemnification and
advance of expenses granted in the Articles of Incorporation and in these Bylaws
are not exclusive, and do not limit the Corporation's power to pay or
<PAGE>
reimburse expenses to which a Director may be entitled, whether by agreement
vote of shareholders or Disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
office, and do not limit the Corporation's power to pay or reimburse expenses
incurred by a Director in connection with his appearance as a witness in a
proceeding at a time when he has not been made a named defendant or respondent
to the proceeding.
SECTION 2.15.3. Insurance. The Corporation and its officers shall have
the power to purchase and maintain insurance on behalf of an individual who is
or was a Director, officer, employee or agent of the Corporation or who, while a
Director, officer, employee, or agent of the Corporation, is or was serving as a
Director, officer, partner, trustee employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise against liability asserted against or incurred by him in
that capacity or arising from his status as a Director, officer, employee or
agent, whether or not the Corporation would have the power to indemnify him
against the same liability under the provisions of these Bylaws.
SECTION 2.15.4. Reports to Shareholders. If the Corporation indemnifies
or advances expenses to a Director, otherwise than by action of the shareholders
or by an insurance carrier pursuant to insurance maintained by the Corporation
shall report the indemnification or advance in writing to the shareholders with
or before the notice of the next annual shareholders' meeting.
ARTICLE III
COMMITTEES
SECTION 3.1. Committees. The Board of Directors may, by resolution,
designate from among its members one or more committees, each committee to
consist of one or more Directors, except that committees appointed to take
action with respect to indemnification of Directors, Directors' conflicting
interest transactions or derivative proceedings shall consist of two or more
Directors qualified to serve pursuant to the Code. Any such committee, to the
extent specified by the Board of Directors, Articles of Incorporation or Bylaws,
shall have and may exercise all of the authority of the Board of Directors in
the management of the business affairs of the Corporation, except that it may
not (i) approve or propose to Shareholders action that the Code requires to be
approved by Shareholders; (ii) fill vacancies on the Board of Directors or any
of its committees; (iii) amend the Articles of Incorporation; (iv) adopt, amend,
or repeal Bylaws; or (v) approve a plan of merger not requiring Shareholder
approval. All action by any committee shall be reported to the Board of
Directors at its meeting next succeeding such action, and shall be subject to
revision and alteration by the Board of Directors, except that no rights of
third person shall be affected by any such revision or alteration. Vacancies in
any committee shall be filled by the Board of Directors.
SECTION 3.2. Meetings of Committees. Regular meetings of any committee
may be held without notice at such time and at such place, within or without the
State of Georgia, as from time to time shall be determined by such committee.
The Chairman of the Board of Directors, the President, the Board of Directors or
the committee by vote at a meeting, or by two members of any committee in
writing without a meeting, may call a special meeting of any such committee at
any time by giving each such committee member two (2) days notice of the date,
time and place of the meeting. Such notice may be given orally or in writing in
accordance with the provisions of Section 4.1. Unless otherwise provided in the
Articles of Incorporation, these Bylaws or by law, neither the business to be
transacted at, nor the purpose of, any regular or special meeting of any such
committee need be specified in the notice or any waiver of notice.
SECTION 3.3. Quorum of Committee. At all meetings of any committee a
majority of the total number of its members shall constitute a quorum for the
transaction of business. Except in cases in which it is by law, by the Articles
of Incorporation, by these Bylaws, or by resolution of the Board of Directors
otherwise provided, a majority of such quorum shall decide any questions that
may come before the meeting. In the absence of a quorum, the members of the
committee present by majority vote may adjourn the meeting from time to time,
without notice other than by verbal announcement at
<PAGE>
the meeting, until a quorum shall attend.
SECTION 3.4. Compensation of Committee Members. The Board of Directors
may fix the compensation of the Directors for their services as members of
committees of the Board of Directors. Compensation shall be fixed from time to
time by a resolution of the Board of Directors, and may be on the basis of an
annual sum or a fixed sum for attendance at each regular or special meeting and
every adjournment thereof, or a combination of these methods. Members of
committees shall be reimbursed for all reasonable traveling expenses incurred in
attending meetings. No provision of these Bylaws shall be construed to preclude
any Director from serving the Corporation in any other capacity and receiving
compensation therefor.
SECTION 3.5. Executive Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board of Directors, may designate an
Executive Committee of three or more Directors, which designation shall include
the Chairman of the Board of Directors and the President. Each Director of the
Corporation who is not designated as a member of the Executive Committee hereby
is designated as an alternate member of the Executive Committee, who may act in
the place and stead of any absent member or members at any meeting of such
Executive Committee in the event (i) a quorum of the Executive Committee is not
present and (ii) the Chairman of the Board or, in his absence, the President,
appoints such alternate member to act for that meeting as a member of the
Executive Committee; and such alternate member shall serve only at the meeting
for which such appointment is made, but shall have at that meeting all the
powers of a regular member of the Executive Committee. During the intervals
between the meetings of the Board of Directors the Executive Committee shall
have and may exercise all of the authority of the Board of Directors in the
management of the business affairs of the Corporation to the extent authorized
by the resolution providing for such Executive Committee or by subsequent
resolution adopted by a majority of the whole Board of Directors, except that it
may not (i) approve or propose to Shareholders action that the Code requires to
be approved by Shareholders; (ii) fill vacancies on the Board of Directors or
any of its committees; (iii) amend the Articles of Incorporation; (iv) adopt,
amend, or repeal bylaws; or (v) approve a plan of merger not requiring
Shareholder approval.
SECTION 3.5.1. Honorary Members of Executive Committee. Upon
appointment by the Board of Directors, a Director who ceases to be an active
Director because of age or retirement, and who at the time has been a member of
the Executive Committee for twelve or more years, shall become an Honorary
Member of the Executive Committee for such term or terms as the Board of
Directors may determine, but subject to removal from the position of Honorary
Member of the Executive Committee at any time at the pleasure of the Board.
Honorary Members of the Executive Committee shall receive the customary fees for
attending regular meetings, and may participate in an advisory capacity in all
discussions and deliberations of the Executive Committee, but shall have no vote
at the meetings which they attend in accordance with the foregoing provisions.
An Honorary Member shall not be included in any calculation of the number of
active Directors authorized and serving under Section 3.5.
SECTION 3.6. Audit Committee. The Board of Directors, by resolution
adopted by a majority of the whole Board of Directors, may designate an Audit
Committee of four (4) or more Directors. The members of the Audit Committee
shall serve at the pleasure of the Board of Directors or until their successors
shall be duly designated. Each Director of the Corporation who is not designated
as a member of the Audit Committee hereby is designated as an alternate member
of the Audit Committee, who may act in the place and stead of any absent member
or members at any meeting of such Audit Committee in the event (i) a quorum of
the Audit Committee is not present and (ii) the Chairman of the Board or, in his
absence, the President, appoints such alternate member to act for that meeting
as a member of the Audit Committee; and such alternate member shall serve only
at the meeting for which such appointment is made, but shall have at that
meeting all the powers of a regular member of the Audit Committee. The Audit
Committee shall consider the choice of the independent public accountants for
the Corporation, shall review the planned scope of the audit and the results of
their examinations of the financial statements of the Corporation, their
opinions thereon and their recommendations with respect to accounting, internal
controls and other matters, shall convey information to and from the Board of
Directors and its independent public accountants and auditors, shall be
available for discussions of internal auditing problems and procedures, and
shall make their report to the Board of Directors or the Executive Committee, or
to both. The Audit Committee shall keep full and fair accounts of its
transactions. All action by the Audit Committee shall
<PAGE>
be reported to the Board of Directors at its meeting next succeeding such
action, and shall be subject to revision and alteration by the Board of
Directors; provided that no rights of third persons shall be affected by any
such revision or alteration. Vacancies in the Audit Committee shall be filled by
the Board of Directors.
SECTION 3.7. Nominating and Compensation Committee. The Board of
Directors, by resolution adopted by a majority of the whole Board of Directors,
may designate a Nominating and Compensation Committee of four (4) or more
Directors. The members of the Nominating and Compensation Committee shall serve
at the pleasure of the Board of Directors or until their successors shall be
duly designated. Each Director of the Corporation who is not designated as a
member of the Nominating and Compensation Committee hereby is designated as an
alternate member of the Nominating and Compensation Committee, who may act in
the place and stead of any absent member or members at any meeting of such
Nominating and Compensation Committee in the event (i) a quorum of the
Nominating and Compensation Committee is not present and (ii) the Chairman of
the Board or, in his absence, the President, appoints such alternate member to
act for that meeting as a member of the Nominating and Compensation Committee;
and such alternate member shall serve only at the meeting for which such
appointment is made, but shall have at that meeting all the powers of a regular
member of the Nominating and Compensation Committee. The Nominating and
Compensation Committee shall review and develop, with the Chief Executive
Officer, management succession and executive development plans; recommend to the
Board for election the officers of the Corporation and Atlanta Gas Light
Company, and the presidents of each of the other principal subsidiaries of the
Corporation; and review the performance of and recommend to the Board of
Directors the appropriate compensation level for such officers, including base
salaries, stock based compensation, other incentive compensation, and
perquisites. The Nominating and Compensation Committee also shall review and
recommend to the Board of Directors any changes in the various benefit programs
of the Corporation; and shall review the level of fees paid and the manner in
which fees are paid to members of the Corporation's Board of Directors and shall
make recommendations for adjustments as appropriate. The Nominating and
Compensation Committee also shall identify and recommend to the Board of
Directors the nominees for the Board. The Nominating and Compensation Committee
shall keep full and fair accounts of its transactions. All action by the
Nominating and Compensation Committee shall be reported to the Board of
Directors at its meeting next succeeding such action, and shall be subject to
revision and alteration by the Board of Directors; provided that no rights of
third persons shall be affected by any such revision or alteration. Vacancies in
the Nominating and Compensation Committee shall be filled by the Board of
Directors.
SECTION 3.8. Corporate Responsibility Committee. The Board of
Directors, by resolution adopted by a majority of the whole Board of Directors,
may designate a Corporate Responsibility Committee of four (4) or more
Directors. The members of the Corporate Responsibility Committee shall serve at
the pleasure of the Board of Directors or until their successors shall be duly
designated. Each Director of the Corporation who is not designated as a member
of the Corporate Responsibility Committee hereby is designated as an alternate
member of the Corporate Responsibility Committee, who may act in the place and
stead of any absent member or members at any meeting of such Corporate
Responsibility Committee in the event (i) a quorum of the Corporate
Responsibility Committee is not present and (ii) the Chairman of the Board or,
in his absence, the President, appoints such alternate member to act for that
meeting as a member of the Corporate Responsibility Committee; and such
alternate member shall serve only at the meeting for which such appointment is
made, but shall have at that meeting all the powers of a regular member of the
Corporate Responsibility Committee. The Corporate Responsibility Committee shall
make periodic reviews of pension plans (including the investment of funds); it
shall identify and monitor broad governmental, social and environmental trends
that could affect the Corporation's performance and the related interests of its
employees, shareholders, customers and the general public; it shall review and
monitor matters relating to employee and community health and safety; and it
shall review and monitor corporate policy with respect to charitable giving. The
results of said reviews shall be reported to the Board of Directors. The
Corporate Responsibility Committee shall keep full and fair accounts of its
transactions. All action by the Corporate Responsibility Committee shall be
reported to the Board of Directors at its meeting next succeeding such action,
and shall be subject to revision and alteration by the Board of Directors;
provided that no rights of third persons shall be affected by any such revision
or alteration. Vacancies in the Corporate Responsibility Committee shall be
filled by the Board of Directors.
<PAGE>
SECTION 3.9. Strategy and Finance Committee. The Board of Directors, by
resolution adopted by a majority of the whole Board of Directors, may designate
a Strategy and Finance Committee of four (4) or more Directors. The members of
the Strategy and Finance Committee shall serve at the pleasure of the Board of
Directors or until their successors shall be duly designated. Each Director of
the Corporation who is not designated as a member of the Strategy and Finance
Committee hereby is designated as an alternate member of the Strategy and
Finance Committee, who may act in the place and stead of any absent member or
members at any meeting of such Strategy and Finance Committee in the event (i) a
quorum of the Strategy and Finance Committee is not present and (ii) the
Chairman of the Board or, in his absence, the President, appoints such alternate
member to act for that meeting as a member of the Strategy and Finance
Committee; and such alternate member shall serve only at the meeting for which
such appointment is made, but shall have at that meeting all the powers of a
regular member of the Strategy and Finance Committee. The Strategy and Finance
Committee shall consider and make recommendations to the Board relating to short
and long term business objectives and strategies; strategic business
combinations; entry into new businesses; the Corporation's operating plans and
budgets for each fiscal year; the Corporation's capitalization; financing plans,
including short and long term needs for capital; and dividend policy. The
results of said reviews shall be reported to the Board of Directors. The
Strategy and Finance Committee shall keep full and fair accounts of its
transactions. All action by the Strategy and Finance Committee shall be reported
to the Board of Directors at its meeting next succeeding such action, and shall
be subject to revision and alteration by the Board of Directors; provided that
no rights of third persons shall be affected by any such revision or alteration.
Vacancies in the Strategy and Finance Committee shall be filled by the Board of
Directors.
ARTICLE IV
NOTICES
SECTION 4.1. Notice. Whenever, under the provisions of the Articles of
Incorporation or these Bylaws or by law, notice is required to be given to any
Director or Shareholder, such notice may be given in writing, by mail; by
telegram, telex or facsimile transmission; by other form of wire or wireless
communication; or by private carrier. Unless otherwise required or permitted by
law, such notice shall be deemed to be effective at the earliest of when
received, or when delivered, properly addressed, to the addressee's last known
principal place of business or residence; or five days after the same shall be
deposited in the United States mail if mailed with first-class postage prepaid
and correctly addressed; or on the date shown on the return receipt, if sent by
registered or certified mail, and the receipt is signed by or on behalf of the
addressee. Notice to any Director or Shareholder may also be oral if oral notice
is reasonable under the circumstances. Oral notice is effective when
communicated if communicated in a comprehensible manner. If these forms of
personal notice are impractical, notice may be communicated by a newspaper of
general circulation in the area where published, or by radio, television, or
other form of public broadcast communication.
SECTION 4.2. Waiver of Notice. Whenever any notice is required to be
given under provisions of the Articles of Incorporation or of these Bylaws or by
law, a waiver thereof, signed by the person entitled to notice and delivered to
the Corporation for inclusion in the minutes or filing with the corporate
records, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting and of all objections to the place or time of
the meeting or the manner in which it has been called or convened, except when
the person attends a meeting for the express purpose of stating, at the
beginning of the meeting, any such objection and, in the case of a Director,
does not thereafter vote for or assent to action taken at the meeting. Neither
the business to be transacted at nor the purpose of any regular or special
meeting of the Shareholders, Directors or a committee of Directors need be
specified in any written waiver of notice; provided, however, that any waiver of
notice of a meeting of Shareholders required with respect to a plan of merger or
a plan of consolidation shall be effective only upon compliance with Section
14-2-706(c) of the Code or successor provisions.
ARTICLE V
<PAGE>
OFFICERS
SECTION 5.1. Appointment. The Board of Directors at its first meeting
following the Annual Meeting of Shareholders shall elect such officers as it
shall deem necessary, including, for the Corporation and Atlanta Gas Light
Company, a Chairman of the Board, a President, a Secretary, a Treasurer, one or
more Vice Presidents (one or more of whom may be designated Executive Vice
President or Senior Vice President), Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers. The Board of Directors at its first
meeting following the Annual Meeting of Shareholders also shall elect, for each
of the Corporation's major subsidiaries, a President. Each of the officers
elected by the Board shall exercise such powers and perform such duties as shall
be determined from time to time by the Board of Directors. Each such officer
shall hold office until the corresponding meeting of the Board of Directors in
the next year and until his successor shall have been duly elected and qualified
or until he shall have resigned or shall have been removed in the manner
provided in Section 5.2 of this Article V. Any number of offices may be held by
the same person unless the Articles of Incorporation or these Bylaws otherwise
provide. The appointment of an officer does not itself create contract rights.
SECTION 5.2. Resignation and Removal of Officers. An officer may resign
at any time by delivering notice to the Corporation and such resignation is
effective when the notice is delivered unless the notice specifies a later
effective date. The Board of Directors (except in the case of an officer elected
by the Board of Directors) or the Executive Committee or an officer upon whom
such power of removal may have been conferred may remove any officer at any time
with or without cause.
SECTION 5.3. Vacancies. Any vacancy in office resulting from any
cause may be filled by the Board of Directors at any regular or special meeting.
SECTION 5.4. Powers and Duties. Each officer has the authority and
shall perform the duties set forth below or, to the extent consistent with these
Bylaws, the duties prescribed by the Board of Directors or by direction of an
officer authorized by the Board of Directors to prescribe the duties of other
officers.
SECTION 5.4.1. Chairman of the Board of Directors. The Chairman of the
Board of Directors may be chosen from among the Directors of the Corporation and
need not be an Executive Officer or employee of the Corporation. The Chairman
shall preside at all meetings of the Board of Directors. He shall have the usual
powers and duties incident to the office of the chairman of the board of
directors of a corporation and such other powers and duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 5.4.2. Chief Executive Officer. The Board of Directors may
designate as the Chief Executive Officer of the Corporation the President or any
other officer of the Corporation including the Chairman if the Chairman is a
full-time officer and employee of the Corporation. The Chief Executive Officer
of the Corporation shall have general and active management responsibility for
the business of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect. The Chief Executive Officer
shall preside at all meetings of the shareholders. The Chief Executive Officer
shall be the Chairman of the Executive Committee and preside at all meetings of
that committee. Except where by law the signature of the President is required,
the Chief Executive Officer shall have the same powers as the President to sign
all authorized certificates, contracts, bonds, deeds, mortgages and other
instruments. He shall have the usual powers and duties incident to the position
of chief executive officer of a corporation and such other powers and duties as
from time to time may be assigned by the Board of Directors. The Board of
Directors may, or if it does not, the Chief Executive Officer may, from time to
time designate an Executive Officer of the Corporation to assume and perform the
duties and powers of the Chief Executive Officer during the absence or
disability of the Chief Executive Officer.
SECTION 5.4.3. President. The President shall be responsible for the
general supervision of the affairs of the Corporation and general and active
management of the financial affairs of the Corporation. He shall have the power
to make and execute certificates, contracts, bonds, deeds, mortgages and other
instruments on behalf of the Corporation,
<PAGE>
except in cases in which the signing thereof shall have been expressly delegated
to some other officer or agent of the Corporation and to delegate such power to
others. He also shall have such powers and perform such duties as are
specifically imposed on him by law and as may be assigned to him by the Board of
Directors. In the event there is no Chairman of the Board, the President shall
also have all the powers and authority that the Chairman is given in these
Bylaws or otherwise. During the absence or disability of the Chairman of the
Board, the President shall preside at all meetings of the Shareholders, the
Board of Directors and the Executive Committee. He shall have the usual powers
and duties incident to the office of a president of a corporation and such other
powers and duties as from time to time may be assigned to him by the Board of
Directors. If the Board of Directors designates the President as the Chief
Executive Officer of the Corporation, the President shall also have the powers
and duties of the Chief Executive Officer.
SECTION 5.4.4. Vice Presidents. The Executive Vice Presidents shall be
senior in authority among the Vice Presidents. During the absence or disability
of the President, the Board of Directors shall designate which of the Executive
Vice Presidents shall exercise all the powers and discharge all of the duties of
the President, provided, however, that if he is not a Director he shall not
preside at any meetings of the Board of Directors or the Executive Committee.
The Vice Presidents, shall perform such duties as vice presidents customarily
perform and shall perform such other duties and shall exercise such other powers
as the President or the Board of Directors may from time to time designate.
SECTION 5.4.5. Secretary. The Secretary shall attend all meetings of
the Shareholders and all meetings of the Board of Directors and shall record all
votes and minutes of all proceedings in books to be kept for that purpose, and
shall perform like duties for the standing committees when required. He shall
have custody of the corporate seal of the Corporation, shall have the authority
to affix the same to any instrument the execution of which on behalf of the
Corporation under its seal is duly authorized and shall attest to the same by
his signature whenever required. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest to the same by his signature. The Secretary shall give, or cause to be
given, any notice required to be given of any meetings of the Shareholders, the
Board of Directors and of the standing committees when required. The Secretary
shall cause to be kept such books and records as the Board of Directors, the
Chairman of the Board or the President may require and shall cause to be
prepared, recorded, transferred, issued, sealed and canceled certificates of
stock as required by the transactions of the Corporation and its Shareholders.
The Secretary shall attend to such correspondence and shall perform such other
duties as may be incident to the office of a Secretary of a Corporation or as
may be assigned to him by the Board of Directors, the Chairman of the Board or
the President.
SECTION 5.4.6. Treasurer. The Treasurer shall be charged with the
management of financial affairs of the Corporation and shall have charge of and
be responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust
companies, or other depositaries as shall from time to time be selected by the
Board of Directors. He shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation. In general, he shall perform such duties as treasurers usually
perform and shall perform such other duties and shall exercise such other powers
as the Board of Directors, the Chairman of the Board or the President may from
time to time designate and shall render to the Chairman of the Board, the
President and to the Board of Directors, whenever requested, an account of the
financial condition of the Corporation.
SECTION 5.4.7. Controller. The Controller shall have charge of and be
responsible for preparation of financial and management reports, budgeting, rate
material, property accounting, taxes and such other duties as are commonly
incident to the office of Controller. The Controller shall have such power and
duties as from time to time may be properly delegated by the President and such
other powers and duties as may from time to time be assigned by the Board of
Directors.
SECTION 5.4.8. Assistant Vice President, Assistant Secretary and
Assistant Treasurer. One or more Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers, in the absence or disability of any Vice
President, the Secretary or the Treasurer, respectively, shall perform the
duties and exercise the powers of those offices, and, in general, they shall
perform such other duties as shall be assigned to them by the Board of Directors
or by the
<PAGE>
person appointing them. Specifically the Assistant Secretaries may affix the
corporate seal to all necessary documents and attest the signature of any
officer of the Corporation.
SECTION 5.4.9. Subordinate Officers. The Board of Directors may elect
such subordinate officers as it may deem desirable. Each such officer shall hold
office for such period, have such authority and perform such duties as the Board
of Directors may prescribe. The Board of Directors may from time to time
authorize any officer to appoint and remove subordinate officers and prescribe
the powers and duties thereof. The Board of Directors may from time to time
authorize the Chairman of the Board of Directors or the President to appoint any
employee or officer of the Corporation (except the President, the Secretary or
an Assistant Secretary elected by the Board of Directors) as an Assistant
Secretary of the Corporation, to prescribe the powers, term, duties and salary,
if any, of such Assistant Secretary, and to remove any Assistant Secretary thus
appointed.
SECTION 5.5. Officers Holding Two or More Offices. Any two of the above
mentioned offices, except those of President and Secretary or Assistant
Secretary, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument be required by statute, by the Articles of Incorporation or by these
Bylaws to be executed, acknowledge or verified by any two or more officers.
SECTION 5.6. Compensation. The Board of Directors shall have power to
fix the compensation of all officers of the Corporation. It may authorize any
officer, upon whom the power of appointing subordinate officers may have been
conferred, to fix the compensation of such subordinate officers.
ARTICLE VI
CAPITAL STOCK
SECTION 6.1. Share Certificates. Unless the Articles of Incorporation
or these Bylaws provide otherwise, the Board of Directors may authorize the
issue of some or all of the shares of any or all of its classes or series with
or without certificates. Unless the Code provides otherwise, there shall be no
differences in the rights and obligations of Shareholders based on whether or
not their shares are represented by certificates.
In the event that the Board of Directors authorizes shares with
certificates, each certificate representing shares of stock of the Corporation
shall be in such form as shall be approved by the Board of Directors and shall
set forth upon the face thereof the name of the Corporation and that it is
organized under the laws of the State of Georgia, the name of the person to whom
the certificate is issued, and the number and class of shares and the
designation of the series, if any, the certificate represents. The Board of
Directors may designate any one or more officers to sign each share certificate,
either manually or by facsimile. In the absence of such designation, each share
certificate must be signed by the President or a Vice President and the
Secretary or an Assistant Secretary. If the person who signed a share
certificate, either manually or in facsimile, no longer holds office when the
certificate is issued, the certificate is nevertheless valid.
SECTION 6.2. Record of Shareholders. The Corporation or an agent
designated by the Board of Directors shall maintain a record of the
Corporation's Shareholders in a form that permits preparation of a list of names
and addresses of all Shareholders, in alphabetical order by class or shares
showing the number and class of shares held by each Shareholder. The Corporation
shall be entitled to treat the person in whose name shares are registered in the
records of the Corporation as the owner thereof for all purposes unless it
accepts for its records a nominee certificate naming a beneficial owner of
shares other than the record owner, and shall not otherwise be bound to
recognize any equitable or other claim to or interest in such shares except as
may be provided by law.
SECTION 6.3. Lost Certificates. In the event that a share certificate
is lost, stolen, mutilated or destroyed, the Board of Directors may direct that
a new certificate be issued in place of such certificate. When authorizing the
issue of a new certificate, the Board of Directors may require such proof of
loss as it may deem appropriate as a condition precedent to the issuance
thereof, including a requirement that the owner of such lost, stolen or
destroyed certificate, or his legal
<PAGE>
representative, advertise the same in such manner as the Board shall require
and/or that he give the Corporation a bond in such sum as the Board may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 6.4. Transfers of Shares. Transfers of shares of the capital
stock of the Corporation shall be made only upon the books of the Corporation by
the registered holder thereof, or by his duly authorized attorney, or with a
transfer clerk or transfer agent appointed as provided in Section 6.5 hereof,
and, in the case of a share represented by certificate, on surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, to vote as such owner, and for all other purposes, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
SECTION 6.5. Transfer Agents and Registrars. The Board of Directors may
establish such other regulations as it deems appropriate governing the issue,
transfer, conversion and registration of share certificates, including
appointment of transfer agents, clerks or registrars.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1. Indemnification of Officers, Employees and Agents. The
Corporation shall indemnify any officer who was or is made a party to or is
otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, derivative, criminal, administrative or investigative
(hereinafter, a "proceeding") to the same extent as it is obligated to indemnify
any Director of the Corporation, but without being subject to the same
procedural conditions imposed for the indemnification of Directors. The
Corporation may indemnify and advance expenses to an employee or agent who is
not a Director or officer to the extent permitted by the Articles of
Incorporation, the Bylaws or by law.
SECTION 7.2. Seal. The Corporation may have a seal, which shall be in
such form as the Board of Directors may from time to time determine. In the
event that the use of the seal is at any time inconvenient, the signature of an
officer of the Corporation, followed by the word "Seal" enclosed in parentheses,
shall be deemed the seal of the Corporation.
SECTION 7.3. Voting Shares in Other Corporations. In the absence of
other arrangements by the Board of Directors, shares of stock issued by another
corporation and owned or controlled by the Corporation, whether in a fiduciary
capacity or otherwise, may be voted by the President or any Vice President, in
the absence of action by the President, in the same order as they preside in the
absence of the President, or, in the absence of action by the President or any
Vice President, by any other officer of the Corporation, and such person may
execute the aforementioned powers by executing proxies and written waivers and
consents on behalf of the Corporation.
SECTION 7.4. Amendment of Bylaws. These Bylaws may be amended or
repealed and new bylaws may be adopted by the Board of Directors at any regular
or special meeting of the Board of Directors unless the Articles of
Incorporation or the Code reserve this power exclusively to the Shareholders in
whole or in part or the Shareholders, in amending or repealing the particular
bylaw, provide expressly that the Board of Directors may not amend or repeal
that bylaw. Unless the Shareholders have fixed a greater quorum or voting
requirement, these Bylaws also may be altered, amended or repealed and new
bylaws may be adopted, unless such action has been recommended by the Board of
Directors, by an affirmative vote of the holders of at least two-thirds of all
outstanding shares entitled to vote.
<PAGE>
SECTION 7.5. Execution of Bonds, Debentures, Evidences of Indebtedness,
Checks, drafts and other Obligations and Orders for Payment. The signatures of
any officer or officers of the Corporation executing a corporate bond, debenture
or other debt security of the Corporation or attesting the corporate seal
thereon, or upon any interest coupons annexed to any such corporate bond,
debenture or other debt security of the Corporation, and the corporate seal
affixed to any such bond, debenture or other debt security of the Corporation,
may be facsimiles, engraved or printed, provided that such bond, debenture or
other debt security of the Corporation is authenticated or countersigned with
the manual signature of an authorized officer of the corporate trustee
designated by the indenture or other agreement under which said security is
issued by a transfer agent, or registered by a registrar, other than the
Corporation itself, or an employee of the Corporation. If the person who signed
such, bond, debenture or other debt security of the Corporation, either manually
or in facsimile, no longer holds office when the certificate is issued, the
certificate is nevertheless valid.
SECTION 7.6. Business Combinations. All of the requirements of Sections
14-2-1131 to 1133, inclusive, of the Code, as now in effect and as hereafter
from time to time amended, shall be applicable to this Corporation and to any
business combination approved or recommended by the Board of Directors.
ARTICLE VIII
EMERGENCY BYLAWS
SECTION 8.1. Emergency Bylaws. This Article shall be operative during
any emergency resulting from some catastrophic event that prevents a quorum of
the Board of Directors or any committee thereof from being readily assembled (an
"emergency"), notwithstanding any different or conflicting provisions set forth
elsewhere in these Bylaws or in the Articles of Incorporation. To the extent not
inconsistent with the provisions of this Article, the bylaws set forth elsewhere
herein and the provisions of the Articles of Incorporation shall remain in
effect during such emergency, and upon termination of such emergency, the
provisions of this Article shall cease to be operative.
SECTION 8.2. Meetings. During any emergency, a meeting of the Board of
Directors or any committee thereof may be called by any Director, or by the
President, any Vice President, the Secretary or the Treasurer (the "Designated
Officers") of the Corporation. Notice of the time and place of the meeting shall
be given by any available means of communication by the person calling the
meeting to such of the Directors and/or Designated Officers as may be feasible
to reach. Such notice shall be given at such time in advance of the meeting as,
in the judgement of the person calling the meeting, circumstances permit.
SECTION 8.3 Quorum. At any meeting of the Board of Directors or any
committee thereof called in accordance with this Article, the presence or
participation of two Directors, one Director and a Designated Officer, or two
Designated Officers shall constitute a quorum for the transaction of business.
SECTION 8.4. Bylaws. At any meeting called in accordance with this
Article, the Board of Directors or committee thereof, as the case may be, may
modify, amend or add to the provisions of this Article so as to make any
provision that may be practical or necessary for the circumstance of the
emergency.
SECTION 8.5. Liability. Corporate action taken in good faith in
accordance with the emergency bylaws may not be used to impose liability on a
Director, officer, employee or agent of the Corporation.
SECTION 8.6. Repeal or Change. The provisions of this Article shall be
subject to repeal or change by further action of the Board of Directors or by
action of Shareholders, but no such repeal or change shall modify the provisions
of the immediately preceding section of this Article with regard to action taken
prior to the time of such repeal or change.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
SEVENTH AMENDMENT TO THE
AGL RESOURCES INC.
LONG-TERM STOCK INCENTIVE PLAN OF 1990
This Seventh Amendment to the AGL Resources Inc. Long-Term Stock
Incentive Plan of 1990 (the "Plan") is made and entered into this 6th day of
November 1998, by AGL Resources Inc. (the "Company").
W I T N E S S E T H:
WHEREAS, the Company sponsors the Plan to provide incentive and to
encourage proprietary interest in the Company by its key employees, officers and
inside directors; and
WHEREAS, the Company believes that it is in the best interest of the
Company and its employees to amend the Plan to increase the number of shares
which may be subject to the Plan; and
WHEREAS, the Company desires to increase the number of shares available
under the Plan from 3,200,000 shares to 3,520,000 shares; and
WHEREAS, the Company desires that the maximum number of shares
available for issuance with respect to incentive stock options under the Plan
shall remain at 3,200,000; and
WHEREAS, Section 10 of the Plan provides that the Company may amend the
Plan at any time; and
WHEREAS, the Board of Directors of the Company has adopted a resolution
authorizing the amendment of the Plan;
NOW, THEREFORE BE IT RESOLVED, that, effective as of November 6, 1998,
the Plan hereby is amended as follows:
1.
Section 3 of the Plan is hereby amended by replacing the second
sentence thereof with the following sentence:
"Subject to readjustment in accordance with the provisions of
Section 8, the total number of shares of Common Stock for which Stock
Rights may be granted to persons participating in the Plan shall not
exceed in the aggregate 3,520,000 shares of Common Stock, less any
shares used as payment for SARs pursuant to Section 6(a); provided,
however, that no person participating in the Plan shall be granted
options and SARs with respect to more than 250,000 shares of Common
Stock (as adjusted) in any fiscal year; provided, further, that ISOs
may not be granted with respect to more than 3,200,000 shares of Common
Stock (as adjusted)."
<PAGE>
2.
Except as specifically set forth herein, the terms of the Plan shall
remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Seventh Amendment to
the Plan to be executed by its duly authorized officer as of the date first
above written.
AGL RESOURCES INC.
By: /s/ Melanie M. Plat
Title: Vice President and Corporate Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 10.2
<TEXT>
Southern Natural Gas Company
Post Office Box 2563
Birmingham AL 35202 2563
205 325 7410
SOUTHERN NATURAL GAS
December 3, 1998
Mr. Mike Wingo
Atlanta Gas Light Company
Post Office Box 4569
Atlanta, Georgia 30302-4569
Dear Mr. Wingo:
Atlanta Gas Light Company ("Atlanta") and Southern Natural Gas Company
("Southern") are parties to a firm transportation agreement dated November 1,
1994 (#904480) for 5,173 Mcf/day ("FT Agreement"), a firm transportation
no-notice agreement dated November 1, 1994 (#904481) for 6,764 Mcf/day ("FT-NN
Agreement"), and a contract storage service agreement dated November 1, 1994
(#S20140) for 334,997 Mcf ("CSS Agreement"), as amended by Amendatory Agreement
dated March 1, 1995 (collectively, the "Agreements"). Pursuant to Section 4.1 of
each agreement, the agreement is effective through February 28, 1998, and may be
extended for successive terms of one year each year thereafter if the parties
mutually agree in writing to each yearly extension at least 60 days prior to the
end of the primary term or any subsequent yearly extension. Southern herewith
states its election to extend the Agreements for an additional term of one year,
commencing on March 1, 1999, and terminating on February 29, 2000. If Atlanta is
in agreement, please so indicate by signing both originals and returning one
original to Southern.
Very truly yours,
/s/ Larry E. Powell
Accepted and agreed to this 4th day of Accepted and agreed to this 3rd day of
December, 1998. December, 1998.
ATLANTA GAS LIGHT COMPANY SOUTHERN NATURAL GAS COMPANY
By: /s/ Mike P. Wingo By: /s/ Larry E. Powell
---------------------------------- ----------------------------------
Its:: Vice President Its: Sr. Vice President
A SONAT COMPANY
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-18
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 18
<TEXT>
February 12, 1999
AGL Resources Inc.
303 Peachtree Street, N.E.
Atlanta, Georgia 30303
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
December 31, 1998, of the facts relating to the change in accounting for natural
gas inventories from first-in, first-out to weighted average cost. We believe,
on the basis of the facts so set forth and other information furnished to us by
appropriate officials of AGL Resources Inc. (the Company), that the accounting
change described in your Form 10-Q is an alternative accounting principle that
is preferable under the circumstances.
We have not audited any consolidated financial statements of the Company and its
subsidiaries as of any date or for any period subsequent to September 30, 1998.
Therefore, we are unable to express, and we do not express, an opinion on the
facts set forth in the above-mentioned Form 10-Q, on the related information
furnished to us by officials of the Company, or on the financial position,
results of operations, or cash flows of the Company as of any date or for any
period subsequent to September 30, 1998.
Yours truly,
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<DESCRIPTION>EXHIBIT 27
<TEXT>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0001004155
<NAME> AGL RESOURCES INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,455
<OTHER-PROPERTY-AND-INVEST> 87
<TOTAL-CURRENT-ASSETS> 355
<TOTAL-DEFERRED-CHARGES> 151
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,048
<COMMON> 288
<CAPITAL-SURPLUS-PAID-IN> 196
<RETAINED-EARNINGS> 175
<TOTAL-COMMON-STOCKHOLDERS-EQ> 659
<PREFERRED-MANDATORY> 74
<PREFERRED> 0
<LONG-TERM-DEBT-NET> 660
<SHORT-TERM-NOTES> 113
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
<PREFERRED-STOCK-CURRENT> 0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 542
<TOT-CAPITALIZATION-AND-LIAB> 2,048
<GROSS-OPERATING-REVENUE> 324
<INCOME-TAX-EXPENSE> 8
<OTHER-OPERATING-EXPENSES> 89
<TOTAL-OPERATING-EXPENSES> 276
<OPERATING-INCOME-LOSS> 48
<OTHER-INCOME-NET> (8)
<INCOME-BEFORE-INTEREST-EXPEN> 40
<TOTAL-INTEREST-EXPENSE> 14
<NET-INCOME> 17
<PREFERRED-STOCK-DIVIDENDS> 1
<EARNINGS-AVAILABLE-FOR-COMM> 16
<COMMON-STOCK-DIVIDENDS> 15
<TOTAL-INTEREST-ON-BONDS> 12
<CASH-FLOW-OPERATIONS> 3
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| GIS | https://www.sec.gov/Archives/edgar/data/40704/0000040704-99-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000040704-99-000004.txt : 19990111
<SEC-HEADER>0000040704-99-000004.hdr.sgml : 19990111
ACCESSION NUMBER: 0000040704-99-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19981129
FILED AS OF DATE: 19990108
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GENERAL MILLS INC
CENTRAL INDEX KEY: 0000040704
STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040]
IRS NUMBER: 410274440
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0525
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-01185
FILM NUMBER: 99503362
BUSINESS ADDRESS:
STREET 1: NUMBER ONE GENERAL MILLS BLVD
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55426
BUSINESS PHONE: 6125402311
MAIL ADDRESS:
STREET 1: P O BOX 1113
CITY: MINNEAPOLIS
STATE: MN
ZIP: 55440
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDED NOVEMBER 29, 1998
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 29, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-1185
GENERAL MILLS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-0274440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Number One General Mills Boulevard
Minneapolis, MN 55426
(Mail: P.O. Box 1113) (Mail: 55440)
(Address of principal executive offices) (Zip Code)
(612) 540-2311
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of December 18, 1998, General Mills had 153,352,325 shares of its $.10 par
value common stock outstanding (excluding 50,801,007 shares held in treasury).
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
GENERAL MILLS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited) (In Millions, Except per Share Data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
November 29, November 23, November 29, November 23,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 1,677.4 $1,638.3 $ 3,150.5 $3,054.8
Costs and Expenses:
Cost of sales 699.0 690.4 1,282.7 1,272.1
Selling, general and administrative 667.8 657.2 1,301.9 1,245.9
Interest, net 29.4 27.3 59.2 58.5
Unusual items 51.6 166.8 51.6 166.4
--------- -------- --------- --------
Total Costs and Expenses 1,447.8 1,541.7 2,695.4 2,742.9
--------- -------- --------- --------
Earnings before Taxes and Earnings
(Losses) from Joint Ventures 229.6 96.6 455.1 311.9
Income Taxes 83.7 31.6 166.8 113.1
Earnings (Losses) from Joint Ventures (2.3) (.4) .3 .1
--------- -------- --------- --------
Net Earnings $ 143.6 $ 64.6 $ 288.6 $ 198.9
========= ======== ========= ========
Earnings per Share $ .94 $ .41 $ 1.88 $ 1.25
========= ====== ========= =========
Average Number of Common Shares 152.9 158.2 153.5 158.9
========= ========= ========= =========
Earnings per Share - Assuming Dilution $ .92 $ .40 $ 1.84 $ 1.22
========= ========= ========= =========
Average Number of Common Shares -
Assuming Dilution 156.7 162.3 157.1 163.0
========= ======== ========= ========
Dividends per Share $ .53 $ .53 $ 1.06 $ 1.06
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
<CAPTION>
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited) (Unaudited)
November 29, November 23, May 31,
1998 1997 1998
----------- ----------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9.5 $ 29.9 $ 6.4
Receivables 468.4 442.8 395.1
Inventories:
Valued primarily at FIFO 206.5 219.7 168.3
Valued at LIFO (FIFO value exceeds LIFO by
$39.1, $48.2 and $39.1, respectively) 231.9 251.9 221.4
Prepaid expenses and other current assets 77.4 111.5 107.2
Deferred income taxes 119.9 103.8 136.9
--------- -------- ---------
Total Current Assets 1,113.6 1,159.6 1,035.3
--------- -------- ---------
Land, Buildings and Equipment, at Cost 2,592.0 2,416.8 2,489.0
Less accumulated depreciation (1,367.2) (1,243.9) (1,302.7)
--------- -------- ---------
Net Land, Buildings and Equipment 1,224.8 1,172.9 1,186.3
Intangibles 621.4 641.0 630.4
Other Assets 1,061.0 975.6 1,009.4
--------- -------- ---------
Total Assets $ 4,020.8 $3,949.1 $ 3,861.4
========= ======== =========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $ 638.8 $ 689.2 $ 593.1
Current portion of long-term debt 196.4 93.8 153.2
Notes payable 396.0 183.8 264.1
Accrued taxes 137.0 114.0 148.5
Other current liabilities 282.5 304.1 284.8
--------- -------- ---------
Total Current Liabilities 1,650.7 1,384.9 1,443.7
Long-term Debt 1,592.8 1,596.9 1,640.4
Deferred Income Taxes 282.3 271.3 284.8
Deferred Income Taxes - Tax Leases 120.2 136.4 129.1
Other Liabilities 177.5 170.4 173.2
--------- -------- ---------
Total Liabilities 3,823.5 3,559.9 3,671.2
--------- -------- --------
Stockholders' Equity:
Cumulative preference stock, none issued - - -
Common stock, 204.2 shares issued 626.8 596.8 619.6
Retained earnings 1,749.1 1,566.6 1,622.8
Less common stock in treasury, at cost,
shares of 51.2, 46.0 and 49.4, respectively (2,071.5) (1,660.8) (1,935.7)
Unearned compensation (73.0) (78.8) (75.4)
Accumulated other comprehensive income (34.1) (34.6) (41.1)
--------- -------- ---------
Total Stockholders' Equity 197.3 389.2 190.2
--------- -------- ---------
Total Liabilities and Equity $ 4,020.8 $3,949.1 $ 3,861.4
========= ======== =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENERAL MILLS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) (In Millions)
Twenty-Six Weeks Ended
November 29, November 23,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows - Operating Activities:
Net earnings $288.6 $198.9
Adjustments to reconcile earnings to cash flow:
Depreciation and amortization 94.4 97.4
Deferred income taxes 12.1 (2.4)
Change in current assets and liabilities (112.8) (19.1)
Unusual items 51.6 166.4
Other, net (22.5) (11.5)
------ ------
Cash provided by continuing operations 311.4 429.7
Cash used by discontinued operations (2.1) (3.8)
------ ------
Net Cash Provided by Operating Activities 309.3 425.9
------ ------
Cash Flows - Investment Activities:
Purchases of land, buildings and equipment (123.8) (80.5)
Investments in businesses, intangibles and affiliates,
net of investment returns and dividends (8.8) 8.7
Purchases of marketable investments (4.8) (5.5)
Proceeds from sale of marketable investments 17.7 31.2
Other, net (11.6) (39.1)
------ ------
Net Cash Used by Investment Activities (131.3) (85.2)
------ ------
Cash Flows - Financing Activities:
Change in notes payable 129.2 (18.3)
Issuance of long-term debt 56.9 103.8
Payment of long-term debt (52.5) (77.8)
Common stock issued 32.0 53.4
Purchases of common stock for treasury (169.7) (215.2)
Dividends paid (163.1) (168.8)
Other, net (7.7) (.7)
------ ------
Net Cash Used by Financing Activities (174.9) (323.6)
------ ------
Increase in Cash and Cash Equivalents $ 3.1 $ 17.1
====== ======
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Background
These financial statements do not include certain information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal
recurring nature. Operating results for the twenty-six weeks ended November 29,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending May 30, 1999.
These statements should be read in conjunction with the financial statements and
footnotes included in our annual report for the year ended May 31, 1998. The
accounting policies used in preparing these financial statements are the same as
those described in our annual report.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
(2) Unusual Items
In the second quarter of fiscal 1999, we recorded restructuring charges of $51.6
million pretax, $32.3 million after tax ($.21 per diluted share) primarily
related to streamlining manufacturing and distribution activities that are
expected to deliver significant cost savings and contribute to future earnings
growth. The restructuring actions primarily reflect further streamlining of our
supply chain as part of the broad consolidation of these activities announced in
May 1998. Actions include consolidating manufacturing of certain products into
fewer locations, and consolidating warehouse, distribution and sales activities
across the company's packaged food, foodservice and milling operations. In
addition, the second-quarter charge includes our share of restructuring by Snack
Ventures Europe, our joint venture with PepsiCo, to improve its manufacturing
cost structure. Slightly more than half of the total charge reflects write-down
of assets; the remaining cash portion is primarily related to severance and
asset redeployment expenses. We expect that these restructuring activities will
be substantially completed by the end of fiscal 1999. Annual cost savings
beginning in fiscal 2000 are estimated at $16.8 million after tax ($.11 per
diluted share).
In the first quarter of fiscal 1998, we recorded several unusual items resulting
in a net after-tax charge of $.1 million. We received an insurance settlement
from one of our carriers related to costs incurred in fiscal 1995 and 1996
(charged against fiscal 1994) from the improper use of a pesticide by an
independent contractor in treating some of the company's oat supplies. Our Snack
Ventures Europe joint venture recorded restructuring charges for productivity
initiatives primarily related to production consolidation. We also recorded
charges associated with restructuring our sales regions and our trade and
promotion organization.
In the second quarter of fiscal 1998, we recorded restructuring charges of
$166.8 million pretax, $100.1 million after tax ($.62 per diluted share)
primarily related to improving the cost structure of our North American cereal
operations. We shut down one cereal system at our Lodi, California facility and
closed our two smallest plants, located in South Chicago, Illinois and
Etobicoke, Ontario. The charges included approximately $137 million in non-cash
charges primarily related to asset write-offs, and approximately $30 million of
cash charges, primarily related to costs to dispose of assets and pay severance.
We expect that these restructuring activities will be substantially completed by
the end of fiscal 1999.
(3) Statements of Cash Flows
During the first six months, we made interest payments of $67.1 million (net of
amount capitalized) and paid $167.9 million in income taxes.
(4) Comprehensive Income
We adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," effective June 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components, including all changes in equity during a period except those
resulting from investments by owners or distributions to owners. The following
table summarizes total comprehensive income for the periods presented (in
millions):
Thirteen Weeks Ended Twenty-Six Weeks Ended
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
1998 1997 1998 1997
Net Earnings $143.6 $ 64.6 $288.6 $198.9
Other comprehensive
income (loss):
Unrealized gain
on securities 1.3 3.6 4.0 5.9
Foreign currency
translation adjustments 4.4 4.0 3.0 (3.6)
------ ------ ------ ------
5.7 7.6 7.0 2.3
------ ------ ------ ------
Total comprehensive income $149.3 $ 72.2 $295.6 $201.2
====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Continuing operations generated $118.3 million less cash in the first half of
fiscal 1999 than in the same prior-year period. The decrease in cash provided by
operations as compared to last year was caused by a $93.7 million increase in
the unfavorable working capital change and by a $24.6 million decrease in cash
from operations, after adjustment for non-cash items.
Fiscal 1999 capital expenditures are estimated to be approximately $215 million.
During the first six months, capital expenditures totaled $123.8 million.
Our short-term outside financing is obtained through private placement of
commercial paper and bank notes. Our level of notes payable fluctuates based on
cash flow needs.
Our long-term outside financing is obtained primarily through our medium-term
note program. Activity through six months under this program consisted of the
issuance of $52.5 million in notes and debt payments of $50.0 million.
In the first half of fiscal 1999, we acquired 2.5 million shares of common stock
for our treasury for $169.7 million.
RESULTS OF OPERATIONS
All per share references in the following discussion are based on diluted
shares, except where indicated.
Second quarter sales of $1,677.4 million grew 2 percent from the prior year.
First half sales of $3,150.5 million grew 3 percent. Second quarter earnings
from operations of $175.9 million ($1.12 per share) before restructuring charges
of $32.3 million ($.21 per share) (See Note (2) Unusual Items), increased by 7
percent from $164.7 million ($1.01 per share) before restructuring charges of
$100.1 million ($.62 per share) (See Note (2) Unusual Items), reported last
year. Including restructuring charges, second quarter earnings this year and
last year were $143.6 million ($.92 per share), and $64.6 million ($.40 per
share), respectively. Cumulative earnings from operations of $320.9 million
($2.04 per share) before unusual items of $32.3 million ($.21 per share), were
up 7 percent from last year's $299.1 million ($1.83 per share) before unusual
items of $100.2 million, ($.62 per share). Including unusual items, first half
earnings this year and last year were $288.6 million ($1.84 per share), and
$198.9 million ($1.22 per share), respectively. Earnings per share of $1.12 and
$2.04 for the second quarter and first half were both up 11 percent from $1.01
and $1.83 before unusual items. Basic earnings per share of $1.15 and $2.09 for
the second quarter and first half were also both up 11 percent from $1.04 and
$1.88 before unusual items.
The second-quarter earnings gain reflected good unit volume growth for our major
businesses, including a 5 percent increase in Big G cereal volume, as well as
strong productivity gains. Results for the quarter met our expectations. Through
the first half of fiscal 1999, our earnings per share grew at a double-digit
rate.
During the quarter, we announced restructuring actions, primarily related to
streamlining supply chain activities, that are expected to deliver annual cost
savings beginning in fiscal 2000 of approximately 11 cents per share. Charges
associated with these actions totaled $32.3 million after-tax, or 21 cents per
share. Last year's second-quarter results included an unusual charge of $100.1
million after tax, or 62 cents per share, primarily related to restructuring our
North American cereal operations.
In the United States, our total retail unit volume was up 3 percent for both the
second quarter and first half. Big G cereals led second-quarter performance,
with 5 percent volume growth that reflected strong gains for Cheerios, Total,
and other established brands. New Honey Nut Chex cereal, available in 20 percent
of the U.S. since August 1998, also contributed to the volume increase. This new
extension of the Chex brand family is recording consistently strong market
shares where available, and distribution will be expanded nationally in March
1999. Big G's second-quarter performance outpaced the industry. Category pound
volume in all measured outlets was down for the period, versus 2 percent growth
in the prior year. Through six months, Big G cereals' pound market share was
25.5 percent and dollar share was 31.1 percent.
Combined unit volume for our other retail food businesses grew 1 percent in the
quarter and 3 percent in the first half. Convenience foods volume (yogurt and
snacks) was up 1 percent in the second quarter, following a 9 percent
first-quarter increase. Yoplait and Colombo yogurt, Chex Mix snacks and Pop
Secret microwave popcorn led the second-quarter growth. Volume for the Betty
Crocker baking, dinner and side dish mix businesses also grew 1 percent in the
quarter. Foodservice volume was down 5 percent, as growth in core cereal
segments and snacks was offset by declines in frozen yogurt and baking mixes.
Unit volume for our international operations grew 5 percent in the second
quarter. Cereal Partners Worldwide, our joint venture with Nestle, achieved 7
percent volume growth. Strong performance in western Europe, Poland and Mexico
more than offset market-related softness in Russia, Brazil and the ASEAN
countries. Volume for Snack Ventures Europe was down 4 percent overall,
reflecting divestiture of the BN cookie business as well as sharp volume
declines in Russia. However, volume for continuing businesses was up 8 percent.
Second quarter volume in Canada was up 14 percent, with cereal volume growing at
an even stronger rate. Through six months, total international volume was up 7
percent.
During the second quarter, General Mills repurchased .6 million shares of common
stock. Through six months, share repurchases totaled 2.5 million shares at an
average price of approximately $66 per share. Average shares outstanding
(diluted) totaled 156.7 million for the second quarter compared to 162.3 million
in the prior year, reflecting shares issued in the February 1997 Ralcorp
acquisition. Interest expense in the second quarter totaled $29.4 million, up
from $27.3 million last year reflecting higher debt levels primarily associated
with share repurchase activity.
Our tax rates (excluding unusual items) for the second quarter and first half of
fiscal 1999 were 36.6 percent and 36.7 percent, respectively, compared to 37.3
percent and 37.5 percent in last year's second quarter and first half. Our
reported tax rates for the first six months of fiscal 1999 and 1998 were 36.7
percent and 36.3 percent, respectively.
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs written using two digits
(rather than four) to define years. Computers or other equipment with
date-sensitive software may recognize "00" as 1900 rather than 2000. This could
result in system failures or miscalculations. If we, or our significant
customers, suppliers or other third parties fail to correct year 2000 issues,
our ability to operate our businesses could be adversely affected.
We have completed the assessment, inventory and classification of year 2000
issues on all of our information systems infrastructure and non-technical assets
(e.g., plant production equipment). Any systems which are year 2000 deficient
will be modified, upgraded or replaced (and if replaced, tested for compliance).
Project plans anticipate all existing, critical information systems
infrastructure to be year 2000 compliant by early in calendar 1999 and all plant
production equipment to be year 2000 compliant by the middle of calendar 1999.
Currently we are on schedule to meet this timetable. Based on assessments and
testing to date, we do not expect the financial impact of addressing internal
system year 2000 issues to be material to our financial position, results of
operations or cash flows. Total costs are estimated to be approximately $26
million, of which about half has been incurred to date.
We have surveyed significant customers, suppliers and other third parties
critical to our business operations to determine their year 2000 compliance.
Contingency plans will be in place by the middle of calendar 1999 to address any
third party failures that may disrupt our operations. These plans will continue
to be evaluated and modified through the year 2000 transition period as
additional information becomes available. However these contingency plans will
not guarantee that circumstances beyond our control will not adversely impact
our operations.
Our year 2000 compliance program is an ongoing process and the risk assessments
and timetable described above are forward-looking statements which are subject
to change. Factors that may cause such changes include, among others, the
ability to timely remediate all date-sensitive computer-related assets; the
actions of third parties, such as public utilities; and the occurrence of
broad-based systemic failures.
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on September 28, 1998.
(b) All directors nominated were elected at the Annual Meeting.
(c) For the election of directors, the results were as follows:
Richard M. Bressler For 130,429,685
Withheld 1,174,146
Livio D. DeSimone For 130,517,700
Withheld 1,086,131
William T. Esrey For 130,422,188
Withheld 1,181,643
Charles W. Gaillard For 130,514,606
Withheld 1,089,225
Raymond V. Gilmartin For 130,756,461
Withheld 847,370
Judith R. Hope For 130,452,972
Withheld 1,150,859
Kenneth A. Macke For 130,454,286
Withheld 1,149,545
Michael D. Rose For 130,438,445
Withheld 1,165,386
Stephen W. Sanger For 130,505,851
Withheld 1,097,980
A. Michael Spence For 130,487,198
Withheld 1,116,633
Dorothy A. Terrell For 130,488,867
Withheld 1,114,964
Raymond G. Viault For 130,533,174
Withheld 1,070,657
C. Angus Wurtele For 130,511,484
Withheld 1,092,347
The ratification of the appointment of KPMG Peat Marwick LLP as auditors for
fiscal 1999 was approved:
For: 131,132,272
Against: 302,846
Abstain: 168,713
The proposal to adopt the 1998 Senior Management Stock Plan (the "1998 Plan")
was approved:
For: 96,862,271
Against: 33,608,062
Abstain: 1,133,498
The stockholder proposal requesting that the directors take action to adopt
cumulative voting was rejected:
For: 29,157,667
Against: 82,179,238
Abstain: 8,279,940
Broker Non-Vote: 11,986,986
The stockholder proposal requesting that the directors refrain from making
charitable contributions was rejected:
For: 4,598,148
Against: 111,971,565
Abstain: 3,047,132
Broker Non-Vote: 11,986,986
Item 5. Other Information.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and financial
performance. These statements are qualified by reference to the section
"Cautionary Statement Relevant to Forward-Looking Information" in Item 1 of our
Annual Report on Form 10-K for the fiscal year ended May 31, 1998, which lists
important factors that could cause actual results to differ materially from
those discussed in this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 Statement of Computation of Earnings per Share.
Exhibit 12 Statement of Ratio of Earnings to Fixed Charges.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second
quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL MILLS, INC.
(Registrant)
Date January 8, 1999 /s/ S. S. Marshall
--------------- -------------------------------------
S. S. Marshall
Senior Vice President,
General Counsel
Date January 8, 1999 /s/ K. L. Thome
--------------- -------------------------------------
K. L. Thome
Senior Vice President,
Financial Operations
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 11 TO 2ND QUARTER FORM 10-Q, FISCAL 1999
<TEXT>
Exhibit 11
GENERAL MILLS, INC.
COMPUTATION OF EARNINGS PER SHARE
(In Millions, Except per Share Data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
November 29, November 23, November 29, November 23,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Earnings $143.6 $ 64.6 $288.6 $198.9
====== ====== ====== ======
Average Number of Common Shares -
Basic EPS (a) 152.9 158.2 153.5 158.9
Incremental Share Effect from:
-Stock options (b) 3.8 4.0 3.5 4.0
-Restricted stock, stock rights
and puts .- .1 .1 .1
------ ------ ----- -----
Average Number of Common Shares -
Diluted EPS 156.7 162.3 157.1 163.0
====== ====== ----- ======
Earnings per Share - Basic $ .94 $ .41 $ 1.88 $ 1.25
====== ====== ====== ======
Earnings per Share - Assuming
Dilution $ .92 $ .40 $ 1.84 $ 1.22
====== ====== ====== ======
Notes to Exhibit 11:
(a) Computed as the weighted average of net shares outstanding on stock-exchange
trading days.
(b) Incremental shares from stock options are computed by the "treasury stock"
method. This method first determines the number of shares issuable under
stock options that had an option price below the average market price for
the period, and then deducts the number of shares that could have been
repurchased with the proceeds of options exercised.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 12 TO 2ND QUARTER FORM 10-Q, FISCAL 1999
<TEXT>
Exhibit 12
<TABLE>
<CAPTION>
RATIO OF EARNINGS TO FIXED CHARGES
Twenty-Six Weeks Ended Fiscal Year Ended
November 29, November 23, May 31, May 25, May 26, May 28, May 29,
1998 1997 1998 1997 1996 1995 1994
------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings
to Fixed Charges 7.32 5.36 5.63 6.54 6.94 4.10 6.18
For purposes of computing the ratio of earnings to fixed charges, earnings
represent pretax income from continuing operations, plus pretax earnings or
losses of joint ventures plus fixed charges (net of capitalized interest). Fixed
charges represent interest (whether expensed or capitalized) and one-third (the
proportion deemed representative of the interest factor) of rents of continuing
operations.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FDS, 2ND QUARTER 10-Q, FISCAL 1999
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from our
Form 10-Q for the twenty-six week period ended November 29, 1998, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-1-1998
<PERIOD-END> NOV-29-1998
<CASH> 9,500,000
<SECURITIES> 0
<RECEIVABLES> 468,400,000
<ALLOWANCES> 0
<INVENTORY> 438,400,000
<CURRENT-ASSETS> 1,113,600,000
<PP&E> 2,592,000,000
<DEPRECIATION> (1,367,200,000)
<TOTAL-ASSETS> 4,020,800,000
<CURRENT-LIABILITIES> 1,650,700,000
<BONDS> 1,592,800,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 626,800,000
<OTHER-SE> (429,500,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,020,800,000
<SALES> 3,150,500,000
<TOTAL-REVENUES> 3,150,500,000
<CGS> 1,282,700,000
<TOTAL-COSTS> 1,282,700,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,200,000
<INCOME-PRETAX> 455,100,000
<INCOME-TAX> 166,800,000
<INCOME-CONTINUING> 288,600,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 288,600,000
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>5
<DESCRIPTION>RESTATED FDS FOR QUARTER ENDED NOVEMBER 23, 1997
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from our
Form 10-Q for the twenty-six week period ended November 23, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAY-26-1997
<PERIOD-END> NOV-23-1997
<CASH> 29,900,000
<SECURITIES> 0
<RECEIVABLES> 442,800,000
<ALLOWANCES> 0
<INVENTORY> 471,600,000
<CURRENT-ASSETS> 1,159,600,000
<PP&E> 2,416,800,000
<DEPRECIATION> (1,243,900,000)
<TOTAL-ASSETS> 3,949,100,000
<CURRENT-LIABILITIES> 1,384,900,000
<BONDS> 1,596,900,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 596,800,000
<OTHER-SE> (207,600,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,949,100,000
<SALES> 3,054,800,000
<TOTAL-REVENUES> 3,054,800,000
<CGS> 1,272,100,000
<TOTAL-COSTS> 1,272,100,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,500,000
<INCOME-PRETAX> 311,900,000
<INCOME-TAX> 113,100,000
<INCOME-CONTINUING> 198,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,900,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| HNZ | https://www.sec.gov/Archives/edgar/data/46640/0000950132-99-000210.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950132-99-000210.txt : 19990316
<SEC-HEADER>0000950132-99-000210.hdr.sgml : 19990316
ACCESSION NUMBER: 0000950132-99-000210
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19990127
FILED AS OF DATE: 19990315
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEINZ H J CO
CENTRAL INDEX KEY: 0000046640
STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030]
IRS NUMBER: 250542520
STATE OF INCORPORATION: PA
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-03385
FILM NUMBER: 99564668
BUSINESS ADDRESS:
STREET 1: 600 GRANT ST
CITY: PITTSBURGH
STATE: PA
ZIP: 15219
BUSINESS PHONE: 4124565700
MAIL ADDRESS:
STREET 2: P O BOX 57
CITY: PITTSBURGH
STATE: PA
ZIP: 15230
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 27, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For the Nine Months Ended January 27, 1999 Commission File Number 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Grant Street, Pittsburgh, 15219
Pennsylvania (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: 412-456-5700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of February 26, 1999 was 359,477,782 shares.
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales................... $2,282,062 $2,236,034
Cost of products sold... 1,429,482 1,379,218
---------- ----------
Gross profit............ 852,580 856,816
Selling, general and
administrative expenses. 586,191 512,776
---------- ----------
Operating income........ 266,389 344,040
Interest income......... 5,993 7,462
Interest expense........ 63,522 64,848
Other expense, net...... 7,634 18,041
---------- ----------
Income before income
taxes................... 201,226 268,613
Provision for income
taxes................... 80,672 80,457
---------- ----------
Net income.............. $ 120,554 $ 188,156
========== ==========
Net income per share--
diluted................. $ 0.33 $ 0.50
========== ==========
Average common shares
outstanding--diluted.... 368,476 373,509
========== ==========
Net income per share--
basic................... $ 0.33 $ 0.51
========== ==========
Average common shares
outstanding--basic...... 361,750 366,403
========== ==========
Cash dividends per
share................... $ 0.34 1/4 $ 0.31 1/2
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
2
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales................... $6,832,694 $6,733,386
Cost of products sold... 4,175,262 4,196,835
---------- ----------
Gross profit............ 2,657,432 2,536,551
Selling, general and
administrative expenses. 1,545,594 1,369,517
---------- ----------
Operating income........ 1,111,838 1,167,034
Interest income......... 20,145 23,004
Interest expense........ 195,081 190,956
Other expense, net...... 33,545 31,829
---------- ----------
Income before income
taxes................... 903,357 967,253
Provision for income
taxes................... 337,684 346,930
---------- ----------
Net income.............. $ 565,673 $ 620,323
========== ==========
Net income per share--
diluted................. $ 1.54 $ 1.66
========== ==========
Average common shares
outstanding--diluted.... 368,476 373,509
========== ==========
Net income per share--
basic................... $ 1.56 $ 1.69
========== ==========
Average common shares
outstanding--basic...... 361,750 366,403
========== ==========
Cash dividends per
share................... $ 1.00 $ 0.92
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
3
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................... $ 148,313 $ 96,300
Short-term investments, at cost which
approximates market........................... 8,325 3,098
Receivables, net.............................. 1,089,812 1,071,837
Inventories................................... 1,482,737 1,328,843
Prepaid expenses and other current assets..... 191,028 186,441
---------- ----------
Total current assets........................ 2,920,215 2,686,519
---------- ----------
Property, plant and equipment................. 4,081,057 4,068,123
Less accumulated depreciation................. 1,781,384 1,673,461
---------- ----------
Total property, plant and equipment, net.... 2,299,673 2,394,662
---------- ----------
Goodwill, net................................. 1,695,902 1,764,574
Trademarks, net............................... 529,746 416,918
Other intangibles, net........................ 186,821 194,560
Other non-current assets...................... 546,196 566,188
---------- ----------
Total other non-current assets.............. 2,958,665 2,942,240
---------- ----------
Total assets................................ $8,178,553 $8,023,421
========== ==========
</TABLE>
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
4
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998*
---------------- ---------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 293,373 $ 301,028
Portion of long-term debt due within one year. 16,420 38,598
Accounts payable.............................. 820,150 978,365
Salaries and wages............................ 53,567 66,473
Accrued marketing............................. 199,505 163,405
Accrued restructuring costs................... 30,314 94,400
Other accrued liabilities..................... 322,153 360,608
Income taxes.................................. 255,243 161,396
---------- ----------
Total current liabilities................... 1,990,725 2,164,273
---------- ----------
Long-term debt................................ 3,204,907 2,768,277
Deferred income taxes......................... 262,968 291,161
Non-pension postretirement benefits........... 207,580 209,642
Other liabilities............................. 405,401 373,552
---------- ----------
Total long-term debt and other liabilities.. 4,080,856 3,642,632
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,948 107,973
Additional capital............................ 274,037 252,773
Retained earnings............................. 4,594,195 4,390,248
---------- ----------
4,976,180 4,750,994
Less:
Treasury stock at cost (71,529,986 shares at
January 27, 1999 and 67,678,632 shares at
April 29, 1998)............................ 2,405,401 2,103,979
Unearned compensation relating to the ESOP... 12,649 14,822
Accumulated other comprehensive income....... 451,158 415,677
---------- ----------
Total shareholders' equity.................. 2,106,972 2,216,516
---------- ----------
Total liabilities and shareholders' equity.. $8,178,553 $8,023,421
========== ==========
</TABLE>
*Summarized from audited fiscal year 1998 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
------------
5
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 27, 1999 January 28, 1998
---------------- ----------------
FY 1999 FY 1998
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash Provided by Operating Activities........ $ 475,372 $ 554,715
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (211,785) (258,421)
Acquisitions, net of cash acquired......... (196,390) (136,351)
Proceeds from divestitures................. 179,000 490,739
Purchases of short-term investments........ (718,279) (857,067)
Sales and maturities of short-term
investments............................... 706,721 880,710
Other items, net........................... 31,456 28,864
--------- ---------
Cash (used for) provided by investing
activities.............................. (209,277) 148,474
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............... 255,928 3,934
Proceeds from commercial paper and short-
term borrowings, net...................... 214,484 481,438
Payments on long-term debt................. (54,395) (563,065)
Dividends.................................. (361,726) (337,670)
Purchases of treasury stock................ (373,597) (480,306)
Exercise of stock options.................. 70,765 170,598
Other items, net........................... 32,030 77,549
--------- ---------
Cash used for financing activities....... (216,511) (647,522)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ 2,429 (16,674)
--------- ---------
Net increase in cash and cash equivalents.... 52,013 38,993
Cash and cash equivalents at beginning of
year........................................ 96,300 156,986
--------- ---------
Cash and cash equivalents at end of period... $ 148,313 $ 195,979
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
6
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's annual report on Form 10-K for the fiscal year ended April
29, 1998 includes additional information about the company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the company's business. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 1999 presentation.
(3) In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the results of
operations of these interim periods have been included.
(4) The composition of inventories at the balance sheet dates was as follows:
<TABLE>
<CAPTION>
January 27, 1999 April 29, 1998
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Finished goods and work-in-process.......... $1,127,462 $ 988,322
Packaging material and ingredients.......... 355,275 340,521
---------- ----------
$1,482,737 $1,328,843
========== ==========
</TABLE>
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) In the third quarter, as part of the initial phase of Operation Excel (the
transformative four-year growth and restructuring initiative, announced on
February 17, 1999) the company recognized restructuring and related costs
of $141.7 million pretax ($0.27 per diluted share), primarily due to
combining the company's Ore-Ida Foods and Weight Watchers Gourmet Food
Company units into the newly formed Heinz Frozen Food Company. These costs
are classified as costs of products sold ($87.6 million) and as selling,
general and administrative expenses ($54.1 million) in the Consolidated
Statement of Income. In its entirety, Operation Excel will require a pre-
tax restructuring charge of $900 million, which includes the charge taken
in this third quarter. This $900 million charge will be spread over four
years, with most of the cost accrued this year. Implementation costs will
be approximately $200 million over the four years.
As part of this plan to streamline and focus the North American frozen
food operations, Heinz Frozen Food Company headquarters will be located in
Pittsburgh. The company's current frozen food manufacturing operations
will also be realigned to create "Centers of Manufacturing Excellence."
This manufacturing realignment includes the closure of the West Chester,
Pennsylvania factory and downsizing of the Pocatello, Idaho facility. In
addition, the company will discontinue the pocket sandwich business and
exit certain non-strategic frozen food businesses in order to focus on the
key frozen brands.
7
<PAGE>
The major components of this charge and the remaining accrual balance as
of January 27, 1999 were as follows:
<TABLE>
<CAPTION>
Accrued
Amounts Restructuring
Charge Utilized Costs
------ -------- -------------
(Thousands of Dollars)
<S> <C> <C> <C>
Employee termination and severance costs.... $ 19,696 $ 13,980 $5,716
Exit costs.................................. 7,674 4,397 3,277
Non-cash asset write-downs.................. 89,295 89,295 --
Implementation costs........................ 25,060 25,060 --
-------- -------- ------
$141,725 $132,732 $8,993
======== ======== ======
</TABLE>
Employee termination and severance costs do not represent all of the
amounts to be recorded in connection with the separation of the affected
employees, as additional costs will be recognized over the next year as
eligibility requirements are met. The restructuring initiatives will
result in a net workforce reduction of approximately 400 employees due to
the termination of approximately 800 employees at closed or downsized
locations, which will be partially offset by increased employment at other
locations.
Asset write-downs consist primarily of fixed asset and other long-term
asset impairments that were recorded as a direct result of the company's
decision to exit businesses or facilities ($86 million). Of this amount,
$61.4 million represents write-downs of property, plant and equipment and
other depreciable assets and $24.6 million represents the write-down of
goodwill on businesses to be discontinued. Write-downs were also
recognized for estimated losses from disposals of inventories, packaging
materials and other assets as a direct result of the company's decision to
exit businesses or facilities ($3.3 million).
Implementation costs consist primarily of consulting fees and employee
relocation costs related to Operation Excel and are recognized as
incurred.
(7) In the second quarter of Fiscal 1999, the company reversed $25.7 million
of unutilized Project Millennia (the company's reorganization and
restructuring program announced in March, 1997) accruals for severance and
exit costs. This reversal reflected efficiencies on a number of
initiatives where the original estimates were higher than the actual costs
to complete the projects. This reversal reduced accrued restructuring
costs on the balance sheet and was recorded in cost of products sold
($20.7 million) and selling, general and administrative expenses ($5.0
million) in the Consolidated Statement of Income. The remaining Project
Millennia accrual balance of $21.3 million is included in accrued
restructuring costs on the Condensed Consolidated Balance Sheet.
(8) On October 2, 1998, the company completed the sale of its bakery products
unit to The Pillsbury Company for $178 million. The transaction resulted
in a pretax gain of $5.7 million, which was recorded in selling, general
and administrative expenses. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998. Pro forma results of
the company, assuming this transaction had been made at the beginning of
each period presented, would not be materially different from the results
reported.
(9) On June 1, 1998, the company acquired the Vidalia O's frozen onion rings
brand from Vidalia Frozen Foods, Inc. to complement the company's Ore-Ida
frozen vegetable lines.
On June 26, 1998, the company acquired the Eta brand of dressings
(mayonnaise, salad dressings) and peanut butter from Griffins Foods
Limited of Auckland, New Zealand.
On July 6, 1998, the company acquired the College Inn brand of canned
broths from Nabisco Inc.
8
<PAGE>
On January 4, 1999, the company acquired Sonnen Bassermann, Germany's
leading marketer of ready-to-serve soups and meals, from Danone Group.
During Fiscal 1999, the company also made other acquisitions.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
Pro forma results of the company, assuming all of the acquisitions had
been made at the beginning of each period presented, would not be
materially different from the results reported.
(10) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 27, 1999,
the company had $1.55 billion of domestic commercial paper outstanding,
all of which has been classified as long-term debt due to the long-term
nature of the credit agreement. As of April 29, 1998, the company had
$1.34 billion of domestic commercial paper outstanding and classified as
long-term debt.
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
(11) On September 8, 1998, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.34 1/4 per share
from $0.31 1/2 per share, for an indicated annual rate of $1.37 per share.
9
<PAGE>
(12) The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 27, 1999 January 28, 1998 January 27, 1999 January 28, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FY 1999 FY 1998 FY 1999 FY 1998
(In Thousands, Except per Share Amounts)
Net income per share--basic:
Net income.................... $120,554 $188,156 $565,673 $620,323
Preferred dividends........... 7 9 23 28
-------- -------- -------- --------
Net income applicable to
common stock................. $120,547 $188,147 $565,650 $620,295
======== ======== ======== ========
Average common shares
outstanding--basic........... 361,750 366,403 361,750 366,403
======== ======== ======== ========
Net income per share--basic... $ 0.33 $ 0.51 $ 1.56 $ 1.69
======== ======== ======== ========
Net income per share--diluted:
Net income.................... $120,554 $188,156 $565,673 $620,323
======== ======== ======== ========
Average common shares
outstanding.................. 361,750 366,403 361,750 366,403
Effect of dilutive securities:
Convertible preferred stock. 245 304 245 304
Stock options............... 6,481 6,802 6,481 6,802
-------- -------- -------- --------
Average common shares
outstanding--diluted......... 368,476 373,509 368,476 373,509
======== ======== ======== ========
Net income per share--diluted. $ 0.33 $ 0.50 $ 1.54 $ 1.66
======== ======== ======== ========
</TABLE>
10
<PAGE>
(13) As of April 30, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The adoption of this statement had no impact on
the company's net income or shareholders' equity. SFAS No. 130
establishes standards for reporting comprehensive income in financial
statements. Comprehensive income includes all changes in equity during a
period except those resulting from investments by or distributions to
shareholders. For the company, comprehensive income for all periods
presented consisted of net income, foreign currency translation
adjustments and the adjustment to the minimum pension liability. Amounts
in prior year financial statements have been reclassified to conform to
SFAS No. 130 requirements.
The components of comprehensive income, net of related tax, for the
periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 27, 1999 January 28, 1998 January 27, 1999 January 28, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FY 1999 FY 1998 FY 1999 FY 1998
(Thousands of Dollars)
Net income........... $120,554 $188,156 $565,673 $620,323
Other comprehensive
income (loss):
Foreign currency
translation
adjustment........ (15,218) (106,883) (39,955) (153,246)
Minimum pension
liability
adjustment........ 2,681 1,089 4,474 1,586
-------- -------- -------- --------
Comprehensive income. $108,017 $ 82,362 $530,192 $468,663
======== ======== ======== ========
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
THREE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998
On November 10, 1998, the company announced the formation of Heinz Frozen
Food Company, combining the operations of its Ore-Ida Foods and Weight
Watchers Gourmet Food Company units. This program is the initial phase of
Operation Excel and includes consolidating Ore-Ida's headquarters staff in
Boise with the Weight Watchers Gourmet Food Company in Pittsburgh. The
company's frozen food manufacturing operations will also be realigned to
create "Centers of Manufacturing Excellence." This manufacturing realignment
includes the closure of the West Chester, Pennsylvania factory and downsizing
the Pocatello, Idaho facility. In addition, the company will discontinue the
pocket sandwich business and exit certain non-strategic frozen food businesses
in order to focus on the key frozen brands. In connection with this initial
phase of Operation Excel the company expects to make capital expenditures
totaling approximately $17 million, with a significant portion to be spent in
Fiscal 2000. This phase of the restructuring initiatives will result in a net
workforce reduction of approximately 400 employees due to the termination of
approximately 800 employees at closed or downsized locations, which will be
partially offset by increased employment at other locations.
In the third quarter, the company recorded restructuring and related costs
of $141.7 million pretax ($0.27 per diluted share) primarily for this initial
phase of Operation Excel. This charge is classified as cost of products sold
($87.6 million) and as selling, general and administrative expenses ($54.1
million) in the Consolidated Statement of Income. Components of the third
quarter Operation Excel costs requiring the utilization of cash total
approximately $42 million, of which approximately $33 million was spent in the
third quarter.
Results of Operations
For the three months ended January 27, 1999, sales increased $46.0 million,
or 2.1%, to $2,282.1 million from $2,236.0 million last year. The increase is
due to improved volume of 2.6%, acquisitions of 2.3% and pricing of 0.5%,
partially offset by the unfavorable effect of foreign exchange translation
rates of 1.0% and divestitures of 2.3%. Domestic operations provided 53.1% of
sales in both the current and prior year periods.
Volume increases were recorded in seafood, single serve condiments, Smart
Ones frozen entrees, sauces, soups, Heinz ketchup, weight loss classroom
activities and infant foods. These increases were partially offset by volume
decreases in dog food, coated products, Budget Gourmet frozen entrees, and
frozen potatoes. Price increases in infant foods were offset by price
decreases in seafood and Heinz ketchup.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$21.5 million or 1.0%. This decrease came primarily from sales in the
Asia/Pacific region, Canada and Africa.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
include the College Inn brand of canned broths and other smaller acquisitions,
primarily in South Africa. The sales impact of these acquisitions was offset
by divestitures, primarily the bakery products unit in Fiscal 1999.
Gross profit decreased $4.2 million to $852.6 million from $856.8 million
and the gross profit margin decreased to 37.4% from 38.3%. Excluding the
Operation Excel costs in the current quarter and Project Millennia
implementation costs ($14.8 million) in the prior year's same quarter, gross
profit increased $68.5 million to $940.2 million from $871.7 million, and the
gross profit margin increased to 41.2% from 39.0%. Cost savings from Project
Millennia, stronger sales volume, a favorable product mix due to acquisitions
and divestitures, and gross profit margin improvements in the Weight Watchers
classroom business (attributable to the Weight Watchers 1-2-3 Success(TM)
Plan) increased gross profit and gross profit margin.
12
<PAGE>
Operating income decreased $77.7 million to $266.4 million from $344.0
million. Excluding the Operation Excel costs in the current quarter and
Project Millennia implementation costs ($29.4 million) in last year's third
quarter, operating income increased $34.7 million, or 9.3% to $408.1 million
from $373.4 million and the operating margin increased to 17.9% from 16.7%.
The increase in operating income, excluding these non-recurring items, is
primarily attributable to the increase in gross profit; partially offset by
increased selling, general and administrative expenses, due primarily to
increased marketing expense. Poor results in the pet food business, primarily
due to the disappointing performance of the 9-Lives four pack, an unfavorable
mix shift and inefficient trade spending, were largely offset by the favorable
results of the Weight Watchers classroom business. Excluding the results of
the pet food and the Weight Watchers classroom businesses, operating income
increased more than 12%.
Net interest expense was flat as higher borrowings were offset by lower
average interest rates. Other expenses decreased $10.4 million to $7.6 million
from $18.0 million, primarily due to currency losses in the Asia/Pacific
region last year.
The effective tax rate for the third quarter of Fiscal 1999 was 40.1%
compared to 30.0% for the same period last year. This quarter's higher rate
includes the impact of nondeductible expenses related to the restructuring.
Excluding the impact of the Operation Excel restructuring and related costs,
the effective tax rate for this year's third quarter was 36.0%. Last year's
effective tax rate included a benefit from tax legislation in Italy and a
reduction in the full-year projected rate.
Net income for the third quarter of Fiscal 1999 was $120.6 million compared
to $188.2 million for the same period last year, and diluted earnings per
share was $0.33 compared to $0.50 a year ago. Excluding the impact of the non-
recurring items noted above, net income would have increased 6.2% to $219.5
million from $206.7 million, and diluted earnings per share would have
increased 9.1% to $0.60 from $0.55 last year.
NINE MONTHS ENDED JANUARY 27, 1999 AND JANUARY 28, 1998
Results of Operations
For the nine months ended January 27, 1999, sales increased $99.3 million,
or 1.5% to $6,832.7 million from $6,733.4 million. The increase is due to
improved volume of 3.2%, acquisitions of 2.4% and pricing of 1.0%, partially
offset by the unfavorable impact of foreign exchange translation rates of 2.9%
and divestitures of 2.2%. Domestic operations provided 53.2% of sales in both
the current and prior year periods.
Volume increases were recorded in weight loss classroom activities, Heinz
ketchup, Smart Ones frozen entrees, single serve condiments, sauces, seafood
and soups. These increases were partially offset by volume decreases in dog
food, coated products and frozen potatoes. Price increases in infant foods and
sauces were partially offset by price decreases in dog food.
Foreign currencies declined against the U.S. dollar, decreasing sales by
$192.6 million, or 2.9%. This decrease came primarily from sales in the
Asia/Pacific region, Africa and Canada.
During the first nine months of Fiscal 1999, the company acquired the
College Inn brand of canned broths, the Eta brand of dressings and peanut
butter in New Zealand, the convenience meals business of Sonnen Bassermann in
Germany, the Vidalia O's frozen onion rings brand and also made some other
small acquisitions. Fiscal 1998 acquisitions impacting the period-to-period
sales dollar comparison include John West Foods Limited in Europe and other
acquisitions, primarily in South Africa and Europe. The sales impact of these
acquisitions was partially offset by divestitures, primarily the Ore-Ida
frozen foodservice business in Fiscal 1998 and the bakery products unit in the
second quarter of Fiscal 1999.
During the first nine months of Fiscal 1999, the company reversed $25.7
million of unutilized Project Millennia accruals for severance and exit costs.
This reversal reflected efficiencies on a number of initiatives where the
original estimates were higher than the actual costs to complete the projects.
This reversal was recorded in cost of products sold ($20.7 million) and
selling, general and
13
<PAGE>
administrative expenses ($5.0 million) in the Consolidated Statement of
Income. Also during Fiscal 1999, the company incurred additional costs of
$22.3 million related to the implementation of Project Millennia. These costs
consisted primarily of start-up, consulting, and training costs. On October 2,
1998, the company completed the sale of its bakery products unit, resulting in
a pretax gain of $5.7 million, which was recorded in selling, general and
administrative expenses in the Consolidated Statement of Income. The net
impact, on diluted earnings per share, of these items and the Operation Excel
costs described above was a decrease of $0.26.
During the first nine months of Fiscal 1998, the company recognized a pretax
gain of $96.6 million from the sale of its Ore-Ida frozen foodservice
business, which was recorded in selling, general and administrative expenses,
and also incurred additional costs of $60.4 million related to the
implementation of Project Millennia. The net impact of these items on diluted
earnings per share for last year's nine-month period was an increase of $0.04
per share.
Gross profit increased $120.9 million to $2,657.4 million from $2,536.6
million last year, and the gross profit margin increased to 38.9% from 37.7%.
Excluding the Operation Excel costs, the reversal of unutilized Project
Millennia accruals in the current period, and Project Millennia implementation
costs in both periods, gross profit increased $176.9 million to $2,739.1
million from $2,562.2 million, and the gross profit margin increased to 40.1%
from 38.1%. Cost savings from Project Millennia, stronger sales volume, a
favorable product mix due to acquisitions and divestitures, and gross profit
margin improvements in the Weight Watchers classroom business (attributable to
the Weight Watchers 1-2-3 Success(TM) Plan) increased gross profit and gross
profit margin.
Operating income decreased $55.2 million to $1,111.8 million from $1,167.0
million last year. The current period includes the Operation Excel costs; the
reversal of unutilized Project Millennia accruals; the gain on the sale of the
bakery products unit; and Project Millennia implementation costs. Last year's
first nine months included the gain on the sale of the Ore-Ida frozen
foodservice business and Project Millennia implementation costs. Excluding
these items in both periods, operating income increased $113.6 million, or
10.0%, to $1,244.5 million from $1,130.8 million and the operating margin
increased to 18.2% from 16.8%. The increase in operating income, excluding
these items, is primarily attributable to the increase in gross profit;
partially offset by increased selling, general and administrative expenses,
driven by increased marketing expense. Poor results in the pet food business,
primarily due to the disappointing performance of the 9-Lives four pack, an
unfavorable mix shift and inefficient trade spending, were largely offset by
the favorable results of the Weight Watchers classroom business. The company
expects that continued exceptional performance by several core businesses,
along with tight cost controls, will keep it on track to meet expectations for
the year despite an anticipated reduction in the fourth quarter operating
income for the pet food business.
Net interest expense increased to $174.9 million from $168.0 million last
year due to higher borrowings offset by lower average interest rates.
The effective tax rate for the current nine-month period was 37.4% compared
to 35.9% last year. Excluding the impact of the Operation Excel costs and the
bakery sale, the effective tax rate for the current nine-month period was
36.0%. Last year's effective tax rate reflected the benefits of tax
legislation in Italy and the United Kingdom, partially offset by a
significantly higher tax rate associated with the sale of Ore-Ida's frozen
foodservice business. Excluding these items, last year's effective tax rate
was 37.0% for the nine-month period.
Net income for the first nine months of Fiscal 1999 was $565.7 million
compared to $620.3 million last year, and diluted earnings per share was $1.54
compared to $1.66 a year ago. Excluding the impact of the non-recurring items
noted above, net income would have increased 9.5% to $663.0 million from
$605.2 million last year, and diluted earnings per share would have increased
11.1% to $1.80 from $1.62 last year.
14
<PAGE>
Liquidity and Financial Position
Cash provided by operating activities totaled $475.4 million for the nine-
month period ended January 27, 1999 compared to $554.7 million last year.
Cash used for investing activities totaled $209.3 million this year compared
to providing $148.5 million last year. Acquisitions in the current period
required $196.4 million, due mainly to the purchases of the College Inn brand
of canned broths, the Eta brand of dressings and peanut butter in New Zealand,
the convenience meals business of Sonnen Bassermann in Germany, and the
Vidalia O's frozen onion rings brand. Acquisitions in last year's comparable
period required $136.4 million, due mainly to the purchases of John West Foods
Limited in Europe, the single-serve foodservice business of CPC (United
Kingdom) and its Frank Cooper's brand, a majority interest in Pudliszki S. A.
of Poland, and other acquisitions primarily in South Africa and the
Asia/Pacific region. Capital expenditures required $211.8 million in the
current period compared to $258.4 million last year. Cash provided by
divestitures totaled $179.0 million in the current period, due primarily to
the sale of the bakery products unit. Last year, cash provided by divestitures
totaled $490.7 million due to the sale of the Ore-Ida frozen foodservice
business.
In the current period, financing activities required $216.5 million compared
to $647.5 million last year. Share repurchases totaled $373.6 million (6.7
million shares) versus $480.3 million (10.2 million shares) last year.
Dividend payments totaled $361.7 million compared to $337.7 million last year.
Payments on long-term debt required $54.4 million compared to $563.1 million a
year ago. Proceeds from long-term debt provided $255.9 million versus $3.9
million last year. Net proceeds from commercial paper and short-term
borrowings provided $214.5 million compared to $481.4 million last year. Stock
options exercised provided $70.8 million in the current period versus $170.6
million last year.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 27, 1999, the
company had $1.55 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 29, 1998, the company had $1.34 billion of
domestic commercial paper outstanding and classified as long-term debt.
On July 15, 1998, the company, under its current shelf registration
statement, issued $250 million of 6.375% debentures due 2028. The proceeds
were used to repay domestic commercial paper.
On September 8, 1998, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.34 1/4 per share from $0.31 1/2
per share, for an indicated annual rate of $1.37 per share. On March 10, 1999,
the company's board of directors declared the quarterly dividend on the
company's common stock of $0.34 1/4 per share, payable on April 10, 1999, to
shareholders of record at the close of business on March 22, 1999.
On October 2, 1998, the company completed the sale of its bakery products
unit to the Pillsbury Company for $178.0 million. The transaction resulted in
a pretax gain of $5.7 million. The bakery products unit contributed
approximately $200 million in sales for Fiscal 1998.
The company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders.
Year 2000 Issue
The Year 2000 issue arises because many computer hardware and software
systems use only two digits rather than four digits to refer to a year.
Therefore, computers or other equipment with date sensitive programming may
not properly recognize a year that begins with "20." If not corrected, this
could cause system failures or miscalculations that could significantly
disrupt the company's business.
15
<PAGE>
Beginning in 1996, the company initiated a worldwide plan to address the
Year 2000 issues that could affect its operations. The company's Chief
Information Officer is in charge of the Year 2000 project. Each of the
company's business units and corporate headquarters have established Year 2000
teams. The project is called "Operation Ready," a name that helps focus the
organization on the overall challenge of being operationally ready to address
the expected consequences of the Year 2000 issue, including compliance by
third parties who have material relationships with the company, such as
vendors, customers and suppliers, and the development of contingency plans.
The company's progress is monitored by senior management and periodically
reported to the Audit Committee and Board of Directors.
The first phase of Operation Ready was to conduct a worldwide review to
identify and evaluate areas impacted by the Year 2000 issue. The review and
evaluation focused on both traditional computer information systems ("IT
systems") and non-information systems such as manufacturing, process and
logistical systems which rely on embedded chips or similar devices ("non-IT
systems"). The assessment of the company's internal IT systems has been
completed, and the assessment of its non-IT systems is continuing on schedule
and is expected to be complete by June 1999.
The second phase of the company's Year 2000 readiness plan is remediation
which involves replacement, upgrading, modification and testing of affected
hardware, software and process systems. Management estimates that nearly 60%
of its core worldwide IT systems are Year 2000 ready. It is expected that the
remaining IT systems will be operationally ready by July 1999. The remediation
of non-IT systems is progressing on schedule, and it is estimated that these
efforts will be substantially complete by August 1999. The testing of
remediated systems has been ongoing and is progressing on schedule.
The Company's Corporate Audit Department has dedicated efforts to evaluating
the company's Year 2000 preparedness. During the first quarter of calendar
year 1999, Corporate Audit with the assistance of outside consultants
performed on-site preparedness reviews at the company's 11 largest affiliate
locations and its Corporate Headquarters. These reviews addressed IT systems
remediation efforts as well as contingency planning and non-IT issues. Over
the course of the remainder of the year, Corporate Audit will be performing
similar reviews of other affiliates in addition to monitoring progress with
respect to earlier reviews.
It is currently estimated that the cost to make the company's IT systems and
non-IT systems Year 2000 operationally ready will be approximately $65
million, of which over 70% has been incurred to date. All of the costs are
being funded through operating cash flow. These estimated costs have not had
nor are expected to have a material adverse effect on the company's
consolidated financial position, results of operations or liquidity. This
amount does not include any costs for implementation of the company's
contingency plans described below.
A critical part of Operation Ready involves the investigation and assessment
of the Year 2000 preparedness of important suppliers, vendors, customers,
utilities and other third parties. The company's initial round of assessments
has been completed. Generally, these third parties have indicated that they
are progressing on schedule with their Year 2000 issues. The company has begun
on-site interviews and face-to-face visits with the critical suppliers,
vendors and customers. These efforts will continue throughout the year in
order to minimize the risk that any significant adverse consequences will
result due to the failure of these third parties to be Year 2000 ready.
While the company has no reason to believe that its exposure to the risks of
the failure of it or third parties to be Year 2000 ready is any greater than
the exposure to such risks that affect its competitors generally, there can be
no assurance that the consequences of such failures would not have a material
adverse impact on the company's operations. Although the company does not
anticipate any major noncompliance issues, the company believes the most
likely worst case scenario would be the temporary disruption of its business
in certain locations in the event of noncompliance by the company or such
third parties, which could include temporary plant closings, delays in the
delivery and receipt
16
<PAGE>
of products and supplies, invoice and collection errors and inventory
obsolescence. The company believes that its Operation Ready contingency planning
should significantly reduce the adverse effect any such disruptions may have.
The company's headquarters and affiliate Year 2000 readiness teams are
working to allow the company to continue critical operations in the event
either the company or major key suppliers or customers fail to resolve their
respective Year 2000 issues in a timely manner. In addition, each major
function involving the company (purchasing, manufacturing, sales, etc.) has a
contingency planning team working on Year 2000 issues specific to that
function. The plans developed by the functional teams have been shared with
the affiliate teams, so that Year 2000 issues will be addressed from two
separate perspectives. Contingency plans include stockpiling raw and packaging
materials, increasing finished goods inventory levels, developing emergency
back-up and recovery procedures, securing alternate suppliers, replacing
electronic applications with manual processes or other appropriate measures.
In early March, the key managers from corporate headquarters and each major
affiliate participated in a three-day conference to share best practices, with
particular emphasis on contingency planning. The company anticipates that this
conference will help to accelerate its overall plan and readiness efforts.
The company's Year 2000 readiness plan, including the further development
and refinement of contingency plans, is an ongoing process and will continue
to evolve and change as new information becomes available.
Euro Conversion
A single currency, the Euro, was introduced in Europe on January 1, 1999. Of
the fifteen member countries of the European Union, eleven adopted the Euro as
their legal currency on that date. Fixed conversion rates between the national
currencies of these eleven countries and the Euro were established on that
date. The national currencies are scheduled to remain legal tender as
denominations of the Euro during the transition period ending December 31,
2001. During this transition period, parties may settle transactions using
either the Euro or a participating country's national currency. At the current
time, the company does not believe that the conversion to the Euro will have a
material impact on its business or its financial condition.
The foregoing discussion of the company's Year 2000 issue and Euro
conversion contains forward- looking statements regarding anticipated costs,
projections or risks, descriptions of expected outcomes and results and other
matters that are not historical facts. These statements are subject to risks,
uncertainties and unanticipated events, including among others with respect to
the Year 2000 issue, those that could arise from Year 2000 actions and plans
of entities that do business with the company, the ability to identify,
assess, remediate and test all affected equipment and systems, including those
using embedded technology and the continued availability of qualified
personnel. As a consequence, actual results and costs may differ materially
from those expressed above. In addition, actual results may differ as a result
of other factors not enumerated above as well as changes in current
circumstances that are impossible to predict at this time.
Other Matters
On February 11, 1999, the company announced that it has completed a joint
venture transaction involving Indonesia's leading ketchup and sauce producer,
ABC Central Food Industry of Jakarta. The new joint venture, named PT Heinz
ABC Indonesia, will continue ABC Central Food's business. The company holds a
majority interest in the joint venture. The ABC brand is Indonesia's market
leader in "kecap" (a sweet soy sauce consumed with virtually every meal as
either a tabletop condiment or ingredient). ABC produces Indonesia's top
brands of "sambal" (a hot chili sauce) and "kecap asin" (a salty soy sauce).
Additionally, the joint venture will produce ABC tomato ketchup and fruit
drink concentrates. ABC products are sold to both the grocery and foodservice
trade.
17
<PAGE>
On February 17, 1999, the company announced a transformative four-year
growth and restructuring initiative, named Operation Excel, that is expected
to generate $200 million in annual savings upon completion and growth in
earnings per share of 10 to 12% annually over the next four years.
Financially, Operation Excel is expected to deliver over four years:
. More than $200 million in annual savings to reinvest against Heinz's
brands;
. $2.5 billion in free cash flow;
. Volume growth of 3 to 4% annually;
. Return on invested capital to almost 40%;
. Increased gross profit margins to 42%;
. A sustained tax rate of between 35 to 36%; and
. An additional $100 million investment in the coming year to support
marketing and pricing initiatives against key brands (including ketchup,
tuna and frozen potatoes).
Operationally, the initiative will:
. Focus on six core food categories (ketchup, condiments and sauces;
frozen foods; tuna; soups, beans and pasta meals; infant foods; and pet
products) and six key countries (the U. S.; the U. K.; Italy; Canada;
Australia; and New Zealand) to provide a platform for growth in our
other new markets worldwide;
. Realign global manufacturing and distribution and create "Centers of
Manufacturing Excellence" through expansion of 13 to 15 factories,
closure or sale of 15 to 20 factories and the downsizing of at least 10
more;
. Result in a net reduction of the worldwide workforce by approximately
3,000 to 4,000 over four years; and
. Sell the Weight Watchers classroom business (while keeping Weight
Watchers brand frozen foods), resulting in a reduction in future EPS
projections by approximately 7 cents per share.
Restructuring initiatives from Operation Excel are expected to generate
savings of at least $50 million in Fiscal 2000, $145 million in Fiscal 2001,
surpassing $200 million in Fiscal 2002 and beyond. Delivering these savings
will require a pre-tax restructuring charge of approximately $900 million,
which includes the charge taken in this third quarter. This $900 million
charge will be spread over four years, with most of the cost accrued this
year. Implementation costs that cannot be accrued under the accounting rules
will be approximately $200 million over the four years.
With the exception of the projects reflected in the third quarter
restructuring charge, the remainder of Operation Excel, including the sale of
the Weight Watchers classroom business, is subject to the approval of the
company's Board of Directors. Action by the Board of Directors on Operation
Excel is expected to take place prior to the end of the fiscal year. For
additional information regarding Operation Excel, please refer to the
company's Current Report on Form 8-K dated February 22, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the company's market risk during the
nine months ended January 27, 1999. For additional information, refer to pages
31 through 33 of the company's Annual Report to Shareholders for the fiscal
year ended April 29, 1998.
18
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nothing to report under this item.
ITEM 2. CHANGES IN SECURITIES
Nothing to report under this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Nothing to report under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report under this item.
ITEM 5. OTHER INFORMATION
See Notes 6 and 9 to the Condensed Consolidated Financial Statements in Part
I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part
I--Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 29, 1998 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-
K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
12. Computation of Ratios of Earnings to Fixed Charges.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 27,
1999.
19
<PAGE>
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.
H. J. HEINZ COMPANY
(Registrant)
Date: March 15, 1999 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 15, 1999 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
20
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE>
Exhibit 12
H. J. HEINZ COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Years Ended
Nine Months -----------------------------------------------------
Ended April 29, April 30, May 1, May 3, April 27,
January 27, 1999 1998 1997 1996 1995 1994
---------------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense*...... $ 196,524 $ 260,401 $277,818 $ 279,368 $ 212,123 $ 150,598
Capitalized interest... 896 1,542 2,688 1,007 414 770
Interest component of
rental expense........ 22,338 30,828 27,382 26,728 24,200 26,638
---------- ---------- -------- ---------- ---------- ----------
Total fixed charges.. $ 219,758 $ 292,771 $307,888 $ 307,103 $ 236,737 $ 178,006
---------- ---------- -------- ---------- ---------- ----------
Earnings:
Income before income
taxes................. $ 903,357 $1,254,981 $479,064 $1,023,661 $ 938,007 $ 922,386
Add: Interest expense*. 196,524 260,401 277,818 279,368 212,123 150,598
Add: Interest component
of rental expense..... 22,338 30,828 27,382 26,728 24,200 26,638
Add: Amortization of
capitalized interest.. 2,427 3,525 3,454 3,399 3,465 3,327
---------- ---------- -------- ---------- ---------- ----------
Earnings as adjusted. $1,124,646 $1,549,735 $787,718 $1,333,156 $1,177,795 $1,102,949
---------- ---------- -------- ---------- ---------- ----------
Ratio of earnings to
fixed charges....... 5.12 5.29 2.56 4.34 4.98 6.20
========== ========== ======== ========== ========== ==========
</TABLE>
*Interest expense includes amortization of debt expense and any discount or
premium relating to indebtedness.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JANUARY 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-28-1999
<PERIOD-START> APR-30-1998
<PERIOD-END> JAN-27-1999
<EXCHANGE-RATE> 1
<CASH> 148,313
<SECURITIES> 8,325
<RECEIVABLES> 1,089,812
<ALLOWANCES> 0
<INVENTORY> 1,482,737
<CURRENT-ASSETS> 2,920,215
<PP&E> 4,081,057
<DEPRECIATION> 1,781,384
<TOTAL-ASSETS> 8,178,553
<CURRENT-LIABILITIES> 1,990,725
<BONDS> 3,204,907
<PREFERRED-MANDATORY> 0
<PREFERRED> 174
<COMMON> 107,774
<OTHER-SE> 1,999,024
<TOTAL-LIABILITY-AND-EQUITY> 8,178,553
<SALES> 6,832,694
<TOTAL-REVENUES> 6,832,694
<CGS> 4,175,262
<TOTAL-COSTS> 4,175,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,081
<INCOME-PRETAX> 903,357
<INCOME-TAX> 337,684
<INCOME-CONTINUING> 565,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565,673
<EPS-PRIMARY> 1.56<F1>
<EPS-DILUTED> 1.54
<FN>
<F1>Represents basic earnings per share in accordance with SFAS No. 128.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| HP | https://www.sec.gov/Archives/edgar/data/46765/0000950134-99-001083.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950134-99-001083.txt : 19990217
<SEC-HEADER>0000950134-99-001083.hdr.sgml : 19990217
ACCESSION NUMBER: 0000950134-99-001083
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HELMERICH & PAYNE INC
CENTRAL INDEX KEY: 0000046765
STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381]
IRS NUMBER: 730679879
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04221
FILM NUMBER: 99540101
BUSINESS ADDRESS:
STREET 1: UTICA AT 21ST ST
CITY: TULSA
STATE: OK
ZIP: 74114
BUSINESS PHONE: 9187425531
MAIL ADDRESS:
STREET 1: UTICA AT 21ST ST
CITY: TULSA
STATE: OK
ZIP: 74114
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1998
<TEXT>
<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 30549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 1-4221
HELMERICH & PAYNE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
73-0679879
(I.R.S. Employer I.D. Number)
UTICA AT TWENTY-FIRST STREET, TULSA, OKLAHOMA 74114
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (918) 742-5531
Former name, former address and former fiscal year, if changed since last
report:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
CLASS OUTSTANDING AT DECEMBER 31, 1998
Common Stock, .10 par value 49,416,682
<PAGE> 2
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
December 31, 1998 and September 30, 1998 . . . . . . . . . 3
Consolidated Condensed Statements of Income -
Three Months Ended December 31, 1998 and 1997. . . . . . . 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended December 31, 1998 and 1997. . . . . . . 5
Consolidated Condensed Statement of Shareholders' Equity
Three Months Ended December 31, 1998 . . . . . . . . . . . 6
Notes to Consolidated Condensed Financial Statements . . . 7, 8 & 9
Revenues and Income by Business Segments . . . . . . . . . 10
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . 11 - 16
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . 17
Signature Page . . . . . . . . . . . . . . . . . . . . . . 17
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 27,890 $ 24,476
Short-term investments 244 262
Accounts receivable, net 116,893 119,395
Inventories 26,982 25,401
Prepaid expenses and other 25,924 14,811
------------ ------------
Total Current Assets 197,933 184,345
------------ ------------
Investments 199,141 200,400
Property, Plant and Equipment, net 709,721 692,371
Other Assets 13,053 13,314
------------ ------------
Total Assets $ 1,119,848 $ 1,090,430
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 33,102 $ 41,851
Accrued liabilities 40,603 38,833
Notes payable 73,500 44,800
------------ ------------
Total Current Liabilities 147,205 125,484
------------ ------------
Noncurrent Liabilities
Long-term notes payable 50,000 50,000
Deferred income taxes 103,218 103,469
Other 17,790 18,329
------------ ------------
Total Noncurrent Liabilities 171,008 171,798
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per
share 5,353 5,353
Preferred stock, no shares issued -- --
Additional paid-in capital 59,250 59,004
Retained earnings 726,267 716,875
Unearned compensation (5,549) (5,605)
Accumulated other comprehensive income 53,178 54,689
------------ ------------
838,499 830,316
Less treasury stock, at cost 36,864 37,168
------------ ------------
Total Shareholders' Equity 801,635 793,148
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,119,848 $ 1,090,430
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 4
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
12/31/98 12/31/97
-----------------------------
<S> <C> <C>
REVENUES:
Sales and other operating revenues $ 142,518 $ 144,112
Income from investments 1,346 7,711
------------ ------------
143,864 151,823
------------ ------------
COST AND EXPENSES:
Operating costs 86,614 76,490
Depreciation, depletion and
amortization 23,999 18,651
Dry holes and abandonments 1,759 4,137
Taxes, other than income taxes 6,421 5,194
General and administrative 3,590 2,556
Interest 1,602 25
------------ ------------
123,985 107,053
------------ ------------
INCOME BEFORE INCOME TAXES AND
EQUITY IN INCOME OF AFFILIATE 19,879 44,770
INCOME TAX EXPENSE 7,862 16,822
EQUITY IN INCOME OF AFFILIATE,
net of income taxes 794 1,217
------------ ------------
NET INCOME $ 12,811 $ 29,165
============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.26 $ 0.58
Diluted $ 0.26 $ 0.57
CASH DIVIDENDS (Note 2) $ 0.07 $ 0.07
AVERAGE COMMON SHARES OUTSTANDING:
Basic 49,182 50,006
Diluted 49,664 51,066
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
12/31/98 12/31/97
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 12,811 $ 29,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 23,999 18,651
Dry holes and abandonments 1,759 4,137
Equity in income of affiliate before income taxes (1,281) (1,963)
Amortization of deferred compensation 386 209
Gain on sale of securities (116) (6,015)
Gain on sale of property, plant & equipment (4,957) (526)
Other, net 287 348
Change in assets and liabilities-
Accounts receivable 2,502 (13,782)
Inventories (1,581) (1,316)
Prepaid expenses and other (10,852) (6,639)
Accounts payable (8,749) (32)
Accrued liabilities 1,770 1,023
Deferred income taxes 675 7,508
Other noncurrent liabilities (539) 1,416
------------ ------------
Total adjustments 3,303 3,019
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,114 32,184
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including dry hole costs (44,418) (48,633)
Proceeds from sales of property, plant and equipment 6,248 10,756
Purchase of investments (3) (103)
Proceeds from sale of investments 53 21,070
Proceeds from sale of short-term investments 18 32
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (38,102) (16,878)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 58,000 33,000
Payments made on notes payable (29,300) (23,000)
Dividends paid (3,458) (3,524)
Proceeds from exercise of stock options 160 669
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,402 7,145
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,414 22,451
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,476 27,963
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,890 $ 50,414
============ ============
</TABLE>
-5-
<PAGE> 6
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands - except per share data)
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-In Unearned Retained Treasury Stock Other
------------- ----------------- Comprehensive
Shares Amount Capital Compensation Earnings Shares Amount Income Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1998 53,529 $5,353 $59,004 $(5,605) $716,875 4,146 $(37,168) $ 54,689 $793,148
Comprehensive Income:
Net Income 12,811 12,811
Other comprehensive income,
net of tax
Unrealized losses on available-
for-sale securities (1,511) (1,511)
-------
Comprehensive income 11,300
-------
Cash dividends ($0.07 per share) (3,460) (3,460)
Exercise of Stock Options 109 (17) 152 261
Stock issued under Restricted Stock
Award Plan 137 (289) (17) 152
Amortization of deferred
compensation 345 41 386
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998 53,529 $5,353 $59,250 $(5,549) $726,267 4,112 $(36,864) $53,178 $801.635
===============================================================================================
</TABLE>
-6-
<PAGE> 7
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited
condensed financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
results of the periods presented. The results of operations for
the three months ended December 31, 1998, and December 31, 1997,
are not necessarily indicative of the results to be expected for
the full year.
2. The $.07 cash dividend declared in September, 1998, was paid
December 1, 1998. On December 2, 1998, a cash dividend of $.07 per
share was declared for shareholders of record on February 15,
1999, payable March 1, 1999.
3. Inventories consist of materials and supplies.
4. Income from investments includes $116,000 and $6,015,000 from
gains on sales of available-for-sale securities during the first
quarter of fiscal years 1999 and 1998, respectively.
5. The following is a summary of available-for-sale securities, which
excludes those accounted for under the equity method of
accounting. The recorded investment in securities accounted for
under the equity method is $36,702,000.
<TABLE>
<CAPTION>
Gross Gross Est.
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Equity Securities 12/31/98 $76,668 $94,199 $8,428 162,439
Equity Securities 09/30/98 $76,770 $93,364 $5,156 164,978
</TABLE>
6. As of October 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact
on the Company's net income or shareholders' equity. SFAS 130
requires the Company's unrealized gains or losses on
available-for-sale securities to be included in other
comprehensive income. Prior to adoption this item was reported
separately in shareholders' equity. Prior year financial
statements have been reclassified to conform to the requirements
of SFAS 130.
-7-
<PAGE> 8
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
The components of comprehensive income, net of related tax, for
the three month periods ended December 31, 1998, and 1997, are as
follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1998 1997
------- -------
<S> <C> <C>
Net Income $12,811 $29,165
Unrealized losses on securities (1,511) (6,064)
------- -------
Comprehensive income $11,300 $23,101
======= =======
</TABLE>
The only component of accumulated other comprehensive income is
unrealized gains on available-for-sale securities.
7. At December 31, 1998, the Company had committed bank lines of
credit totaling $130 million; $20 million may be borrowed through
February 1999, $50 million may be borrowed through May 1999, $10
million may be borrowed through May 2000, and $50 million may be
borrowed through October 2003. Additionally, the Company had
uncommitted credit facilities totaling $63 million. Collectively,
the Company had $123.5 million in outstanding borrowings and
outstanding letters of credit totaling $8.2 million against these
lines at December 31, 1998. The average rate on the borrowings at
December 31, 1998, was 5.6 percent.
Concurrent with a $50 million borrowing under one of its committed
facilities, the Company has entered into a 5-year, $50 million
interest rate swap, which closely correlates with the terms and
maturity of the facility. The swap effectively fixes the interest
rate on this facility at 5.38% for the entire 5 year term of the
note.
8. Earnings per Share - Basic earnings per share is based on the
weighted-average number of common shares outstanding during the
period. Diluted earnings per share includes the dilutive effect of
stock options and restricted stock.
A reconciliation of the weighted-average common shares outstanding
on a basic and diluted basis is as follows:
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) 12-31-98 12-31-97
-----------------------------------------------------------------------------
<S> <C> <C>
Basic weighted-average shares 49,182 50,006
Effect of dilutive shares:
Stock options 472 984
Restricted stock 10 76
-------- -------
482 1,060
-------- -------
Diluted weighted-average shares 49,664 51,066
======== =======
</TABLE>
-8-
<PAGE> 9
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Restricted stock of 180,000 shares at a weighted-average price of
$37.73 and options to purchase 919,000 shares of common stock at a
weighted-average price of $32.40 were outstanding at December 31, 1998,
but were not included in the computation of diluted earnings per common
share. Inclusion of these shares would be antidilutive, as the exercise
prices of the options exceed the average market price of the common
shares.
9. New Accounting Pronouncements -
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133 is effective for fiscal years beginning after June 15,
1999. This standard requires that all derivatives be recognized as
assets or liabilities in the balance sheet and that those instruments
be measured at fair value. The Company has not yet determined what the
effect of SFAS 133 will be on the earnings and the financial position
of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information". This statement, which is effective for fiscal years
beginning after December 15, 1997, expands or modifies disclosures and
will have no impact on the Company's consolidated financial position,
results of operations or cash flows.
The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP)98-5, "Reporting on the Costs of Start-Up
Activities", effective for fiscal years beginning after December 15,
1998. The SOP requires that all start-up costs be expensed and that the
effect of adopting the SOP be reported as the cumulative effect of a
change in accounting principle. The effect of this SOP on the Company's
results of operations and financial position is not expected to be
material.
10. Restricted Stock Awards -
In the first quarter of fiscal year 1999, the Company issued to certain
employees 17,000 shares of treasury stock as restricted stock awards
under the 1996 Stock Incentive Plan. The Company recognized unearned
compensation of $289,000, which was the fair market value of the stock
at the time of issuance. Treasury stock was reduced by the book value
of the shares issued ($152,396) with the difference recognized as an
increase in paid-in-capital. The unearned compensation is being
amortized over a five-year period as compensation expense.
-9-
<PAGE> 10
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
REVENUES AND INCOME BY BUSINESS SEGMENTS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
12/31/98 12/31/97
-------- --------
SALES AND OTHER REVENUES:
<S> <C> <C>
Contract Drilling-Domestic $ 45,985 $ 41,736
Contract Drilling-Internat'l 54,685 51,994
-------- --------
Total Contract Drilling
Division 100,670 93,730
-------- --------
Exploration and Production 26,428 32,171
Natural Gas Marketing 13,175 16,056
-------- --------
Total Oil & Gas Division 39,603 48,227
-------- --------
Real Estate Division 2,193 2,091
Investments and other 1,398 7,775
-------- --------
TOTAL REVENUES $143,864 $151,823
======== ========
OPERATING PROFIT:
Contract Drilling-Domestic $ 7,664 $ 9,371
Contract Drilling-Internat'l 9,941 14,055
-------- --------
Total Contract Drilling
Division 17,605 23,426
-------- --------
Exploration and Production 4,505 14,859
Natural Gas Marketing 941 587
-------- --------
Total Oil & Gas Division 5,446 15,446
-------- --------
Real Estate Division 1,391 1,308
-------- --------
Total Operating Profit 24,442 40,180
-------- --------
OTHER (4,563) 4,590
--------- --------
INCOME BEFORE INCOME TAXES AND
EQUITY IN INCOME OF AFFILIATE $ 19,879 $ 44,770
========= ========
</TABLE>
-10-
<PAGE> 11
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. The Company's
future operating results may be affected by various trends and factors, which
are beyond the Company's control. These include, among other factors,
fluctuations in natural gas and crude oil prices, expiration or termination of
drilling contracts, currency exchange losses, changes in general economic
conditions, rapid or unexpected changes in technologies and uncertain business
conditions that affect the Company's businesses. Accordingly, past results and
trends should not be used by investors to anticipate future results or trends.
With the exception of historical information, the matters discussed in
Management's Discussion & Analysis of Results of Operations and Financial
Condition includes forward-looking statements. These forward-looking statements
are based on various assumptions. The Company cautions that, while it believes
such assumptions to be reasonable and makes them in good faith, assumed facts
almost always vary from actual results. The differences between assumed facts
and actual results can be material. The Company is including this cautionary
statement to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf of, the Company. The factors identified in this cautionary
statement are important factors (but not necessarily all important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company.
RESULTS OF OPERATIONS
The Company reported net income of $12,811,000 ($0.26 per share on a diluted
basis) from revenues of $143,864,000 for the first quarter ended December 31,
1998, compared with net income of $29,165,000 ($0.57 per share, diluted) from
revenues of $151,823,000 for the first quarter of the prior fiscal year. Net
income in the first quarter of fiscal 1998 included $3,675,000 ($0.07 per share,
diluted) from the sale of investment securities.
The Company's Exploration and Production Division reported operating profit of
$4,505,000 for the first quarter ended December 31, 1998, compared with
operating profit of $14,859,000 for the same period in fiscal 1998. This
significant decrease is the result of lower oil and gas revenues, increased
exploration costs and increased depreciation and depletion, offset by decreased
dry hole expense and a gain recorded from the sale of producing properties.
Oil and gas revenues decreased approximately 32% from the first quarter of
fiscal 1998 to $21.6 million in the first quarter of fiscal 1999. Crude oil
prices for the first quarter of fiscal 1999 averaged $10.95 per bbl, compared
with $18.50 per bbl in the same period of 1998. Crude oil volumes were 1,951
bbls/d and 2,220 bbls/d for the first quarter of 1999 and 1998, respectively.
Natural gas prices for the first quarter of fiscal 1999 averaged $1.79 per mcf,
compared with $2.61 per mcf in the same period of 1998. Natural gas volumes for
the first quarter of fiscal 1999 averaged 119.4 mmcf/d, compared with 117.1
mmcf/d in the same period of 1998. The first quarter of fiscal 1999 also
included gains from the sale of producing properties of approximately $4.6
million.
-11-
<PAGE> 12
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
(Continued)
Exploration costs, primarily geophysical charges, increased to $6.8 million in
the first quarter of fiscal 1999, compared with $.9 million in the first quarter
of fiscal 1998. Dry hole expense was $17,000 in first quarter of fiscal 1999,
compared with $2,581,000 in the same period of fiscal 1998. Depreciation and
depletion increased $1.3 million (21%) in the first quarter of fiscal 1999,
compared with first quarter of fiscal 1998. A portion of the increase in
depreciation and depletion was the recognition of an impairment charge of
approximately $.7 million for proved exploration and production properties,
which is included in depreciation, depletion and amortization expense.
Operating profit from the Company's domestic drilling operations for the first
three months of fiscal 1999 and 1998 was $7,664,000 and $9,371,000,
respectively. Domestic land rig activity averaged 85% for the first quarter of
fiscal 1999, down from the 100% utilization experienced in the same period of
fiscal 1998. Revenue days for land rigs were essentially the same as last year,
while average dayrates were down approximately 7% from last year's first
quarter. Continued softening of land dayrates and rig utilization are expected
for the remainder of the fiscal year.
Domestic offshore platform rig activity was at 100% for the first quarter of
both fiscal 1999 and 1998. Recent increases in offshore platform rig revenues
and earnings from the Company's commencement of operations on Shell's Ursa
Tension Leg Platform, together with fees earned from managing the construction
of a large platform rig, should help offset declines in land rig revenues and
earnings during the next three quarters.
Operating profit from the Company's international drilling operations for the
first three months of fiscal 1999 and 1998 was $9,941,000 and $14,055,000,
respectively. Revenues for the same periods were $54,685,000 and $51,994,000.
Included in revenues and operating profit for the first quarter of fiscal 1999
were recently negotiated retroactive billings in Colombia and incentive payments
in Venezuela, as well as revenues from Rig 91, which did not commence operations
until late in the first quarter of fiscal 1998. During the second quarter, Rig
91 was moved from offshore Venezuela to the Company's domestic operations and
will be working in the Gulf of Mexico for a major oil company.
Rig utilization in South America has fallen from 91% in the first quarter of
fiscal 1998 to 65% in this year's first quarter. As volatility in dayrates and
utilization continues, revenues and operating profit from international
operations are expected to be lower in the next three quarters.
IMPACT OF YEAR 2000
Readers are cautioned that forward-looking statements contained in the following
Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading: "Risk Factors and Forward-Looking Statements".
This discussion shall constitute the Company's "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Act.
-12-
<PAGE> 13
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
(Continued)
THE COMPANY'S STATE OF READINESS
The Company has undertaken various initiatives in an attempt to ensure that its
hardware, software and equipment will function properly with respect to dates
before and after January 1, 2000. For this purpose, the phrase "hardware,
software and equipment" includes systems that are commonly thought of as
Information Technology ("IT") systems, as well as those Non-Information
Technology ("Non-IT") systems and equipment which include imbedded technology.
IT systems include computer hardware and software, and other related systems.
Non-IT systems include certain oil and gas drilling and production equipment,
security systems and other miscellaneous systems. The Non-IT systems present the
greatest compliance challenge since identification of embedded technology is
difficult and because the Company is, to a great extent, reliant on third
parties for Non-IT compliance.
The Company has formed a Year 2000 ("Y2K") Project team which is chaired by the
Director of IT. The team includes IT staff, corporate staff and representatives
from the Company's business units. The Company has organized its compliance
efforts into a four-phase approach as follows:
Phase 1: Identification - Identify and inventory mission
critical components of Company operations and systems which
may be affected.
Phase 2: Assessment - Determine which hardware, software and
equipment must be modified, upgraded or replaced.
Phase 3: Remediation - Modify, upgrade or replace non-compliant
hardware, software and equipment.
Phase 4: Testing - Fully test all IT systems which are material to
the Company's operations. Selectively test those Non-IT
systems and equipment which are material to the Company's
operations.
For the purposes of the Y2K Project material items are those items the Company
believes to have a risk involving safety of individuals, damage to the
environment, material effect on revenues or material damage to property.
The following represents the status of the Company's IT and Non-IT Compliance
Project:
<TABLE>
<CAPTION>
STATUS OF TARGET FOR
IT COMPLETION COMPLETION
- -- ---------- ------------
<S> <C> <C>
o Core accounting and operational Phases 1,2 & 3 March 1999
(mainframe) systems Complete; 4 in
Progress
o Human Resources & Payroll Systems Phases 1,2 & 3 March 1999
Complete; 4 in
Progress.
</TABLE>
-13-
<PAGE> 14
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
(Continued)
<TABLE>
<CAPTION>
STATUS OF TARGET FOR
IT COMPLETION COMPLETION
- -- ---------- ----------
<S> <C> <C>
o Network Completed
o Desktop Computer Hardware Phases 1 & 2 March 1999
Complete; 3 in
Progress
o Standard Company Desktop Phases 1 & 2 March 1999
Computer Software Complete; 3 in
Progress
o Business Unit User Software Phase 1 in September 1999
Progress
Non-IT
- ------
o Systems and Equipment Phases 1 & 2 in September 1999
Progress
</TABLE>
As reflected in the above table, the Company is in the process of identifying
embedded technology and determining the extent to which such technology is Y2K
compliant. As part of this process, the Company has mailed letters to its
significant vendors and service providers to confirm that the products and
services purchased from or by such entities are Y2K compliant. Also, the Company
is in the process of obtaining information from significant customers regarding
the extent to which Y2K issues may affect the amount of business the Company
currently conducts with such customers. As of February 1, 1999, the Company had
received responses from approximately 57% of such vendors and service providers.
Approximately 86% of such vendors and service providers have provided written
assurances that they expect to address their significant Y2K issues on a timely
basis. A follow-up mailing to significant vendors and services providers that
did not initially respond, or whose responses were deemed unsatisfactory, has
been completed. As a result of these activities, the Company expects discussions
will be conducted with the vendors or manufacturers of such mission critical
equipment to determine the most effective solutions to Y2K compliance issues.
THE COST TO ADDRESS Y2K ISSUES
The Company believes that the cost of its Y2K Project should not exceed
$1,000,000, including costs of employees working on the Y2K Project. Costs
incurred for new software and hardware purchases are being capitalized, and
other costs are being expensed as incurred. The costs relating to the Company's
Y2K Project are paid from the Company's general funds. To date, the Company has
incurred Y2K Project costs of approximately $600,000. This expenditure mainly
relates to repair, upgrading or replacement of existing software and hardware,
and solicitation and evaluation of information received from significant
vendors, service providers, or customers. The $1,000,000 figure does not include
the costs of independent Y2K consultants. The Company has not determined whether
it will engage independent Y2K consultants. The cost of such consultants would
not be material to the Company.
-14-
<PAGE> 15
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
(Continued)
THE COMPANY'S CONTINGENCY PLAN
The Company is in the process of developing its contingency plans on a business
unit and departmental basis. These plans are projected to be complete by May 31,
1999. These contingency plans will include, but will not be limited to:
development of backup and recovery procedures for IT Systems; remediation of
existing systems or equipment; installation of new systems or equipment;
stockpiling of Y2K compliant goods and supplies; stockpiling old equipment which
does not contain embedded technology; replacement of current services with
temporary manual processes; finding non-technological alternatives or sources
for information; or identification of alternative customers, suppliers or
outsourcing subcontractors who stand ready to receive or provide critical goods,
equipment and services. The Company has engaged a computer recovery services
contractor as a potential source of alternative computer systems as part of its
contingency plan.
THE RISKS OF THE COMPANY'S Y2K ISSUES
The Company is in the process of completing an analysis of the operational
problems and costs (including loss of revenues) that would be reasonably likely
to result from the failure by the Company and certain third parties to complete
efforts necessary to achieve Y2K compliance on a timely basis. The Company
presently believes that the Y2K issue will not pose significant operational
problems for the Company. However, if all significant Y2K issues are not
properly identified, or assessment, remediation and testing are not effected
timely, there can be no assurance that the Y2K issue will not materially and
adversely impact the Company's results of operations, liquidity and financial
condition or materially and adversely affect the Company's relationships with
customers, vendors, or others. Additionally, there can be no assurance that the
lack of Y2K compliance by other entities will not have a material and adverse
impact on the Company's operations or financial condition.
The preceding Y2K disclosure is based upon certain forward-looking information
including, but not limited to, the dates on which the Company believes that
various phases of the Y2K Project will be completed. This forward-looking
information is based on Management's good faith estimates. These estimates were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party plans and other factors. However,
there can be no guarantee that these estimates will be achieved, or that there
will not be a delay in, or increased costs associated with, the implementation
of the Y2K Project. Specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in Y2K issues, including the uncertainty of third party Y2K
compliance, the Company cannot ensure its ability to timely and cost-effectively
resolve problems associated with Y2K issues that may affect its operations and
business, or expose it to third party liability.
-15-
<PAGE> 16
PART I. FINANCIAL INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
DECEMBER 31, 1998
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $16,114,000 for the first quarter
of fiscal 1999, compared with $32,184,000 for the same period in 1998. Capital
expenditures were $44,418,000 and $48,633,000 for the first quarter of fiscal
1999 and 1998, respectively.
It is anticipated for fiscal 1999 that capital expenditures will approach $135
million, which is close to the Company's projected internally generated cash
flows. The Company would, if necessary, borrow under its line of credit
agreement to fund capital expenditures in excess of cash flows. The Company
borrowed an additional $28,700,000 during the current quarter. The Company's
indebtedness totaled $123,500,000 as of December 31, 1998, as described in Note
7 to the Consolidated Condensed Financial Statements.
There were no other significant changes in the Company's financial position
since September 30, 1998.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
HELMERICH & PAYNE, INC. AND SUBSIDIARIES
Item 6(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended December
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: FEBRUARY 16, 1999 /S/ DOUGLAS E. FEARS
----------------------- -----------------------------------------
Douglas E. Fears, Chief Financial Officer
Date: FEBRUARY 16, 1999 /S/ HANS C. HELMERICH
----------------------- -----------------------------------------
Hans C. Helmerich, President
-17-
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,890
<SECURITIES> 199,141
<RECEIVABLES> 120,301
<ALLOWANCES> 3,408
<INVENTORY> 26,982
<CURRENT-ASSETS> 197,933
<PP&E> 1,399,884
<DEPRECIATION> 690,163
<TOTAL-ASSETS> 1,119,848
<CURRENT-LIABILITIES> 147,205
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 5,353
<OTHER-SE> 796,282
<TOTAL-LIABILITY-AND-EQUITY> 1,119,848
<SALES> 142,518
<TOTAL-REVENUES> 143,864
<CGS> 110,765
<TOTAL-COSTS> 110,765
<OTHER-EXPENSES> 8,028
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,602
<INCOME-PRETAX> 19,879
<INCOME-TAX> 7,862
<INCOME-CONTINUING> 12,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,811
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| HPQ | https://www.sec.gov/Archives/edgar/data/47217/0000047217-99-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
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<SEC-DOCUMENT>0000047217-99-000003.txt : 19990301
<SEC-HEADER>0000047217-99-000003.hdr.sgml : 19990301
ACCESSION NUMBER: 0000047217-99-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19990131
FILED AS OF DATE: 19990226
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEWLETT PACKARD CO
CENTRAL INDEX KEY: 0000047217
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570]
IRS NUMBER: 941081436
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-04423
FILM NUMBER: 99552699
BUSINESS ADDRESS:
STREET 1: 3000 HANOVER ST
CITY: PALO ALTO
STATE: CA
ZIP: 94304
BUSINESS PHONE: 4158571501
MAIL ADDRESS:
STREET 1: 3000 HANOVER ST
STREET 2: MS 20BQ
CITY: PALO ALTO
STATE: CA
ZIP: 94304
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>10-Q FILING FOR QUARTER ENDING JANUARY 31, 1999
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
___
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 1999
OR
___
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___________ to __________
Commission file number: 1-4423
HEWLETT-PACKARD COMPANY
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1081436
----------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3000 Hanover Street, Palo Alto, California 94304
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 857-1501
-------------
________________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1999
----------------------------- -------------------------------
Common Stock, $0.01 par value 1.015 billion shares
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
-----
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Balance Sheet
January 31, 1999 (Unaudited) and October 31, 1998 2
Consolidated Condensed Statement of Earnings
Three months ended January 31, 1999
and 1998 (Unaudited) 3
Consolidated Condensed Statement of Cash Flows
Three months ended January 31, 1999 and 1998 (Unaudited) 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations and Factors That May
Affect Future Results (Unaudited) 7-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 17
Signature 18
Exhibit Index 19
<PAGE> 1
<PAGE>
Item 1. Financial Statements.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(Millions except par value and number of shares)
January 31 October 31
1999 1998
----------- ----------
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 3,694 $ 4,046
Short-term investments 4 21
Accounts receivable 5,790 6,232
Financing receivables 1,780 1,520
Inventory 6,302 6,184
Other current assets 3,370 3,581
------- ------
Total current assets 20,940 21,584
------- -------
Property, plant and equipment (less accumulated
depreciation: January 31, 1999 - $6,383;
October 31, 1998 - $6,212) 6,139 6,358
Long-term investments and other assets 5,789 5,731
------- -------
$32,868 $33,673
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable and short-term borrowings $ 1,288 $ 1,245
Accounts payable 2,835 3,203
Employee compensation and benefits 1,740 1,768
Taxes on earnings 1,903 2,796
Deferred revenues 1,605 1,453
Other accrued liabilities 3,088 3,008
------- -------
Total current liabilities 12,459 13,473
------- -------
Long-term debt 1,708 2,063
Other liabilities 1,191 1,218
Shareholders' equity:
Preferred stock, $1 par value; 300,000,000
shares authorized; none issued - -
Common stock and capital in excess of $0.01
par value; 4,800,000,000 shares authorized;
1,015,339,000 and 1,015,403,000 shares
issued and outstanding at January 31, 1999
and October 31, 1998, respectively 64 10
Retained earnings 17,446 16,909
------- -------
Total shareholders' equity 17,510 16,919
------- -------
$32,868 $33,673
======= =======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 2>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
--------------------------------------------
(Unaudited)
(Millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended
January 31
------------------
1999 1998
---- ----
<S> <C> <C>
Net revenue:
Products $10,116 $10,158
Services 1,821 1,658
------- -------
11,937 11,816
Costs and expenses:
Cost of products sold and
services 7,984 7,837
Research and development 799 803
Selling, general and
administrative 1,955 1,872
------- -------
10,738 10,512
------- -------
Earnings from operations 1,199 1,304
Interest income and other, net 163 90
Interest expense 47 67
------- -------
Earnings before taxes 1,315 1,327
Provision for taxes 355 398
------- -------
Net earnings $ 960 $ 929
======= =======
Net earnings per share:
Basic $ 0.95 $ 0.89
======= =======
Diluted $ 0.92 $ 0.86
======= =======
Cash dividends declared per share $ 0.16 $ 0.14
======= =======
Average shares used in computing
basic net earnings per share 1,011 1,038
======= =======
Average shares and equivalents
used in computing diluted net
earnings per share 1,049 1,076
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 3>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Millions)
Three month ended
January 31
-----------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings $ 960 $ 929
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 420 411
Deferred taxes on earnings 350 (108)
Change in assets and liabilities:
Accounts and financing receivables (23) (64)
Inventories (119) (326)
Accounts payable (368) (210)
Taxes on earnings (890) 495
Other current assets and liabilities (100) 34
Other, net 60 (17)
------- -------
Net cash provided by operating activities 290 1,144
------- -------
Cash flows from investing activities:
Investment in property, plant and equipment (311) (450)
Disposition of property, plant and equipment 178 152
Purchase of short-term investments (475) (1,605)
Maturities of short-term investments 492 925
Other, net 48 (21)
------- -------
Net cash used in investing activities (68) (999)
Cash flows from financing activities:
Change in notes payable and short-term borrowings 175 462
Issuance of long-term debt 28 139
Payment of long-term debt (529) (446)
Issuance of common stock under employee stock plans 179 96
Repurchase of common stock (265) (589)
Dividends (162) (146)
------- -------
Net cash used in financing activities (574) (484)
------ ------
Decrease in cash and cash equivalents (352) (339)
Cash and cash equivalents at beginning of period 4,046 3,072
------ ------
Cash and cash equivalents at end of period $3,694 $2,733
====== ======
The accompanying notes are an integral part of these consolidated
condensed financial statements.
<PAGE 4>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. In the opinion of the Company's management, the accompanying consolidated
condensed financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the
financial position as of January 31, 1999 and October 31, 1998, the
results of operations for the three months ended January 31, 1999 and
1998, and the cash flows for the three months ended January 31, 1999 and
1998.
The results of operations for the three months ended January 31, 1999
are not necessarily indicative of the results to be expected for the
full year. The information included in this Form 10-Q should be read
in conjunction with Management's Discussion and Analysis and the
consolidated financial statements and notes thereto included in the
Hewlett-Packard Company 1998 Form 10-K.
2. The Company's basic EPS is calculated based on net earnings available
to common shareholders and the weighted-average number of shares
outstanding during the reported period. Diluted EPS includes additional
dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options outstanding and the conversion of debt.
Three Months Ended
January 31
------------------
1999 1998
---- ----
(in millions except
per share data)
Numerator:
Net earnings $ 960 $ 929
Adjustment for interest
expense, net of income
tax effect 6 6
------ ------
Net earnings, adjusted 966 935
Denominator:
Weighted-average shares
outstanding 1,011 1,038
Effect of dilutive
securities:
Dilutive options 27 28
Convertible zero-coupon
notes due 2017 11 10
------ ------
Dilutive potential
common shares 38 38
<PAGE 5>
Weighted-average shares
and dilutive potential
common shares 1,049 1,076
Basic earnings per share $0.95 $0.89
Diluted earnings per share $0.92 $0.86
3. Income tax provisions for interim periods are based on estimated
effective annual income tax rates. The effective income tax rate varies
from the U.S. federal statutory income tax rate primarily because of
variations in the tax rates on foreign income.
4. Inventory
(In Millions)
January 31 October 31
1999 1998
---- ----
Finished Goods $4,327 $4,170
Purchased parts and fabricated
assemblies 1,975 2,014
------ ------
$6,302 $6,184
====== ======
5. The Company paid interest of $99 million and $96 million during the three
months ended January 31, 1999 and 1998, respectively. During the same
periods, the Company paid income taxes of $871 million and received an
income tax refund, net of income taxes paid, of $40 million,
respectively. The effect of foreign currency exchange rate fluctuations
on cash balances held in foreign currencies was not material.
6. In June 1998, the Financial Accounting Standards Board (FASB)issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of
those instruments at fair value. The statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt the standard
no later than the first quarter of fiscal 2000 and is in the process of
determining the impact that adoption will have on its consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." The statement changes
standards for the way that public business enterprises identify and
report operating segments in annual and interim financial statements.
This statement requires selected information about an enterprise's
operating segments and related disclosure about products and services,
geographic areas and major customers. The Company expects to report
multiple segments when it adopts the standard for fiscal year-end 1999.
<PAGE 6>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Factors That May Affect Future
Results (Unaudited).
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
---------------------
Net Revenue - Net revenue for the first quarter ended January 31, 1999 was
$11.9 billion, an increase of 1 percent from the same period of fiscal
1998. Product sales decreased by less than 1 percent and service revenue
grew 10 percent over the corresponding period of fiscal 1998. Net revenue
grew 3 percent to $6.8 billion internationally and declined 2 percent to
$5.1 billion in the U.S. Currency had no significant impact on the
Company's reported net revenue growth for the quarter.
The first quarter's net revenue growth was principally due to solid demand
for the Company's family of DeskJet and LaserJet printers and related
supplies, strong demand for the Company's HP Pavilion home personal
computers and strong growth in service and support revenue, primarily
customer support, outsourcing and financing services. Net revenue growth
from these products and services was offset by declines in revenue growth
in the Company's measurement businesses, enterprise server products and
commercial personal computers. The decline in net revenue in the Company's
measurement business was primarily attributable to test and measurement
which experienced a 14% decline in net revenue during the first quarter of
1999. Growth in test and measurement net revenue continued to be impacted
by economic weakness in Asia as well as the worldwide semiconductor
industry slowdown that began in 1998.
Costs and Expenses - Cost of products sold and services as a percentage of
net revenue was 66.9 percent for the first quarter of fiscal 1999,
compared to 66.3 percent for the first quarter of fiscal 1998, a 0.6
percentage point increase. The slight increase in the cost of sales
percentage was attributed to a number of factors. The effect of lower
volumes for the Company's measurement products as well as an overall
continued shift in the Company's product sales mix to lower-gross-margin
products resulted in an increase in the cost of sales percentage. This
increase in the cost of sales ratio was partially offset by operational
efficiencies in personal computers, increased volume in printers and lower
component costs in some enterprise servers. The Company expects continued
variability in the cost of sales trend over time, with an overall upward
trend over the long-term, as competitive pricing pressures and mix shifts
continue.
Operating expenses as a percentage of net revenue were 23.1 percent for
the first quarter of fiscal 1999, compared to 22.7 percent for the first
quarter of fiscal 1998, a 0.4 percentage point increase. Despite the
increase in the operating expense percentage, operating expenses grew only
3 percent for the first quarter of fiscal 1999, compared to 15 percent
growth experienced in the first quarter of fiscal 1998. The first quarter
1999 increase of 3 percent resulted primarily from higher expenses
including the effect of stock appreciation rights. Fluctuations in foreign
currency exchange rates had no significant impact on the year-over-year
operating expense growth rate.
<PAGE 7>
The Company continues to focus on the reduction of operating expense
ratios and optimization of manufacturing processes in order to improve
profitability.
Provision for Taxes - The provision for taxes as a percentage of earnings
before taxes was 27 percent for the first quarter of fiscal 1999 compared
to 30 percent for the corresponding period in the prior year and 28
percent for the entire fiscal 1998. The annual effective tax rate
decreased as a result of changes in the expected geographic mix of the
Company's earnings.
Net Earnings - Net earnings for the first quarter of fiscal 1999 were $960
million, compared to net earnings of $929 million for the first quarter of
fiscal 1998. Earnings per share for the first quarter of fiscal 1999 on a
diluted basis were 92 cents per share on 1.05 billion weighted-average
shares and equivalents, compared to 86 cents per share on an average of
1.08 billion shares for the first quarter of fiscal 1998. Basic earnings
per share for the first quarter of fiscal 1999 were 95 cents per share on
an average of 1.01 billion shares, compared to 89 cents per share on an
average of 1.04 billion shares for the first quarter of fiscal 1998.
FINANCIAL CONDITION
-------------------
Liquidity and Capital Resources - The Company's financial position
continues to be strong, with cash and cash equivalents and short-term
investments of $3.7 billion at January 31, 1999, compared with $4.1
billion at October 31, 1998. In addition, other long-term investments of
$1.9 billion, relatively low levels of debt compared to assets, and a
large equity base continue to contribute to the Company's financial
flexibility.
Cash flows from operating activities were $290 million during the first
three months of fiscal 1999, compared to $1.1 billion for the
corresponding period of fiscal 1998. The decrease in cash flows from
operating activities in fiscal 1999 was attributable primarily to tax
payments made in the first quarter of fiscal 1999 and the change in
accounts payable, partially offset by increased net earnings and slower
growth in accounts and financing receivables and inventory. Inventory as
a percentage of net revenue has decreased from 16.0 percent at the end of
the first quarter of fiscal 1998 to 13.4 percent at January 31, 1999, due
primarily to ongoing progress in supply-chain management. In addition,
accounts and financing receivables as a percentage of net revenue
decreased from 16.5 percent at January 31, 1998 to 16.0 percent as of
January 31, 1999.
Capital expenditures for the first three months of fiscal 1999 were $311
million, compared to $450 million for the corresponding period in fiscal
1998. The decrease in capital expenditures was due in part to a Company-
wide emphasis on reducing non-essential expenditures combined with
increased outsourcing of certain production processes and slowing capacity
requirements.
Shares of the Company's common stock are repurchased under a systematic
program to manage the dilution created by shares issued under employee
stock plans. During July 1998, the Company's Board of Directors
authorized a new incremental repurchase program under which up to $2
billion of the Company's common stock can be repurchased in the open
market or in private transactions. Under both these plans, during the
first quarter ended January 31, 1999, the Company purchased and retired
approximately 4.2 million shares for an aggregate price of $265 million.
Under the systematic program, during the first quarter ended January 31,
1998, the Company purchased and retired approximately 9.4 million shares
for an aggregate price of $589 million.
<PAGE 8>
FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------
Competition. The Company encounters aggressive competition in all areas
of its business activity. The Company's competitors are numerous, ranging
from some of the world's largest corporations to many relatively small and
highly specialized firms. The Company competes primarily on the basis of
technology, performance, price, quality, reliability, distribution and
customer service and support. Product life cycles are short, and, to
remain competitive, the Company will be required to develop new products,
periodically enhance its existing products and compete effectively on the
basis of the factors described above. In particular, the Company
anticipates that it will have to continue to adjust prices of many of its
products to stay competitive and it will have to effectively manage
financial returns with reduced gross margins.
New Product Introductions. The Company's future operating results may
be adversely affected if the Company is unable to continue to develop,
manufacture and market innovative products and services rapidly that meet
customer requirements for performance and reliability. The process of
developing new high technology products and solutions is inherently
complex and uncertain. It requires accurate anticipation of customers'
changing needs and emerging technological trends. The Company
consequently must make long-term investments and commit significant
resources before knowing whether its predictions will eventually result in
products that achieve market acceptance. After a product is developed, the
Company must quickly manufacture sufficient volumes at acceptable costs.
This is a process that requires accurate forecasting of volumes, mix of
products and configurations. Moreover, the supply and timing of a new
product or service must match customers' demand and timing for the
particular product or service. Given the wide variety of systems,
products and services the Company offers, the process of planning
production and managing inventory levels becomes increasingly difficult.
Inventory Management. Inventory management has become increasingly complex
as the Company continues to sell a greater mix of products, especially
printers and personal computers, through third-party distribution
channels. Channel partners constantly adjust their ordering patterns in
response to the Company's and its competitors' supply into the channel and
the timing of their new product introductions and relative feature sets,
as well as seasonal fluctuations in end-user demand such as the
back-to-school and holiday selling periods. Channel partners may increase
orders during times of shortages, cancel orders if the channel is filled
with currently available products, or delay orders in anticipation of new
products. Any excess supply could result in price reductions and
inventory writedowns, which in turn could adversely affect the Company's
gross margins.
Short Product Life Cycles. The short life cycles of many of the Company's
products pose a challenge for the effective management of the transition
from existing products to new products and could adversely affect the
Company's future operating results. Product development or manufacturing
delays, variations in product costs, and delays in customer purchases of
<PAGE 9>
existing products in anticipation of new product introductions are among
the factors that make a smooth transition from current products to new
products difficult. In addition, the timing of introductions by suppliers
and competitors of new products and services may negatively affect future
operating results of the Company, especially when competitive product
introductions coincide with periods leading up to the Company's own
introduction of new or enhanced products. Furthermore, some of the
Company's own new products may replace or compete with certain of the
Company's current products.
Intellectual Property. The Company generally relies upon patent,
copyright, trademark and trade secret laws in the United States and in
selected other countries to establish and maintain its proprietary rights
in its technology and products. However, there can be no assurance that
any of the Company's proprietary rights will not be challenged,
invalidated or circumvented, or that any such rights will provide
significant competitive advantages. Moreover, because of the rapid pace
of technological change in the information technology industry, many of
the Company's products rely on key technologies developed by others.
There can be no assurance that the Company will be able to continue to
obtain licenses to such technologies. In addition, from time to time, the
Company receives notices from third parties regarding patent or copyright
claims. Any such claims, with or without merit, could be time-consuming
to defend, result in costly litigation, divert management's attention and
resources and cause the Company to incur significant expenses. In the
event of a successful claim of infringement against the Company and
failure or inability of the Company to license the infringed technology or
to substitute similar non-infringing technology, the Company's business
could be adversely affected.
Reliance on Suppliers. Portions of the Company's manufacturing operations
are dependent on the ability of suppliers to deliver quality components,
subassemblies and completed products in time to meet critical
manufacturing and distribution schedules. The Company periodically
experiences constrained supply of certain component parts in some product
lines as a result of strong demand in the industry for those parts. Such
constraints, if persistent, may adversely affect the Company's operating
results until alternate sourcing can be developed. In order to secure
components for production and introduction of new products, the Company at
times makes advance payments to certain suppliers, and often enters into
noncancelable purchase commitments with vendors for such components.
Volatility in the prices of these component parts, the possible inability
of the Company to secure enough components at reasonable prices to build
new products in a timely manner in the quantities and configurations
demanded or, conversely, a temporary oversupply of these parts, could
adversely affect the Company's future operating results.
Reliance on Third-Party Distribution Channels. The Company continues to
expand into third-party distribution channels to accommodate changing
customer preferences. As a result, the financial health of wholesale and
retail distributors of the Company's products, and the Company's
continuing relationships with such distributors, are becoming more
important to the Company's success. Some of these companies are thinly
capitalized and may be unable to withstand changes in business conditions.
The Company's financial results could be adversely affected if the
financial condition of certain of these third parties substantially
weakens or if the Company's relationship with them deteriorates.
<PAGE 10>
International. Sales outside the United States make up more than half of
the Company's revenues. In addition, a portion of the Company's product
and component manufacturing, along with key suppliers, are located outside
the United States. Accordingly, the Company's future results could be
adversely affected by a variety of factors, including changes in a
specific country's or region's political conditions or changes or
continued weakness in economic conditions, trade protection measures,
import or export licensing requirements, the overlap of different tax
structures, unexpected changes in regulatory requirements and natural
disasters.
Derivative Financial Instruments. The Company is also exposed to foreign
currency exchange rate risk inherent in its sales commitments, anticipated
sales and assets and liabilities denominated in currencies other than the
U.S. dollar, as well as interest rate risk inherent in the Company's debt,
investment and finance receivable portfolio. As more fully described in
the notes to the Company's 1998 annual report to shareholders, the
Company's risk management strategy utilizes derivative financial
instruments, including forwards, swaps and purchased options to hedge
certain foreign currency and interest rate exposures, with the intent of
offsetting gains and losses that occur on the underlying exposures with
gains and losses on the derivative contracts hedging them. The Company
does not enter into derivatives for trading purposes.
The Company has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in foreign exchange rates and interest rates applied
to the hedging contracts and underlying exposures described above. As of
January 31, 1999 and 1998, the analysis indicated that such market
movements would not have a material effect on the Company's consolidated
financial position, results of operations or cash flows. Actual gains and
losses in the future may differ materially from that analysis, however,
based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the Company's actual exposures and
hedges.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures. As a
matter of course, the Company frequently engages in discussions with a
variety of parties relating to possible acquisitions, strategic alliances,
joint ventures and divestitures. Although consummation of any transaction
is unlikely to have a material effect on the Company's results as a whole,
the implementation or integration of a transaction may contribute to the
Company's results differing from the investment community's expectation in
a given quarter. Divestitures may result in the cancellation of orders
and charges to earnings. Acquisitions and strategic alliances may
require, among other things, integration or coordination with a different
company culture, management team organization and business infrastructure.
They may also require the development, manufacture and marketing of
product offerings with the Company's products in a way that enhances the
performance of the combined business or product line. Depending on the
size and complexity of the transaction, successful integration depends on
a variety of factors, including the hiring and retention of key employees,
management of geographically separate facilities, and the integration or
coordination of different research and development and product
manufacturing facilities. All of these efforts require varying levels of
management resources, which may temporarily adversely impact other
business operations.
<PAGE 11>
Earthquake. A portion of the Company's research and development
activities, its corporate headquarters, other critical business operations
and certain of its suppliers are located near major earthquake faults.
The ultimate impact on the Company, its significant suppliers and the
general infrastructure is unknown, but operating results could be
materially affected in the event of a major earthquake. The Company is
predominantly uninsured for losses and interruptions caused by
earthquakes.
Environmental. Certain of the Company's operations involve the use of
substances regulated under various federal, state, and international laws
governing the environment. It is the Company's policy to apply strict
standards for environmental protection to sites inside and outside the
U.S., even if not subject to regulations imposed by local governments.
The liability for environmental remediation and related costs is accrued
when it is considered probable and the costs can be reasonably estimated.
Environmental costs are presently not material to the Company's operations
or financial position.
Profit Margin. The profit margins realized by the Company vary somewhat
among its products, its customer segments and its geographic markets.
Consequently, the overall profitability of the Company's operations in any
given period is partially dependent on the product, customer and geographic
mix reflected in that period's net sales.
Year 2000. The information provided below constitutes a "Year 2000
Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of
a single century, the 1900s. Any program so created may read, or attempt
to read, "00" as the year 1900. There are two other related issues which
could also lead to incorrect calculations or failure, such as (i) some
systems' programming assigns special meaning to certain dates, such as
9/9/99, and (ii) the year 2000 is a leap year. Accordingly, some computer
hardware and software, including programs embedded within machinery and
parts, will need to be modified prior to the year 2000 to remain
functional. The Company's Y2K initiatives are focusing primarily on four
areas of potential impact: internal information technology (IT) systems;
internal non-IT systems and processes, including services and embedded
chips (controllers); the Company's products and services, and the
readiness of significant third parties with whom the Company has material
business relationships. The Company established a Y2K Program Office in
1997 to coordinate these programs across the enterprise and to provide a
single point of contact for information about the Company's Y2K programs.
The Company's Y2K efforts in these areas are led by the Y2K General
Manager who reports directly to the Company's Senior Management.
The Company expects to implement successfully the systems and programming
changes necessary to address Y2K internal IT and non-IT readiness issues
and material third party relationships, and based on current estimates, does
not believe that the costs associated with such actions will have a
material effect on the Company's results of operations or financial
condition. However, the costs of such actions may vary from quarter to
quarter. There can be no assurance, however, that there will not be a
delay in, or increased costs associated with the implementation of such
changes. In addition, failure to achieve Y2K readiness for the Company's
internal systems could delay its ability to manufacture and ship products
and deliver services, disrupt its customer service and technical support
facilities, and interrupt customer access to its online products and
services. The Company's inability to perform these functions could have an
adverse effect on future results of operations or financial condition.
<PAGE 12>
Internal IT Systems. - The Company has established a dedicated Y2K IT
Internal Readiness Program Organization to oversee the Company's worldwide
Y2K internal IT application and infrastructure readiness activities. The
Internal Readiness IT Program Organization provides monthly progress
reports to the Company's senior management. The Internal Readiness IT
Program Organization is charged with raising awareness throughout the
Company, developing tools and methodologies for addressing the Y2K issue,
monitoring the development and implementation of business and
infrastructure plans to bring non-compliant applications into compliance
on a timely basis and identifying and assisting in resolving high-risk
issues.
The Company is approaching its Y2K IT internal readiness program in the
following four phases: (1) assessment, (2) planning, (3) preparation and
(4) implementation. The assessment phase involves taking an inventory of
the Company's internal IT applications to prioritize risk, identifying
failure dates, defining a solution strategy, estimating repair costs and
communicating across and within business units regarding the magnitude of
the problem and the need to address Y2K issues. The planning phase
consists of identifying the tasks necessary to ensure readiness,
scheduling remediation plans for applications and infrastructure, and
determining resource requirements and allocations. The third phase,
preparation, involves readying the development and testing environments,
and piloting the remediation process. Implementation, the last phase,
consists of executing the Company's plans to fix, test and implement
critical applications and associated infrastructure, and putting in place
contingency plans for processes that have a high impact on the Company's
businesses.
The Company is targeting its efforts to ensure that its IT applications
will be Y2K compliant by July 31, 1999. The assessment, planning and
preparation phases have been completed. As of January 31, 1999, the
implementation phase is approximately 60 percent complete.
Internal Non-IT Systems and Processes. - Non-IT systems include, but are
not limited to, those systems that are not commonly thought of as IT
systems, such as telephone/PBX systems; fax machines; facilities systems
regulating alarms, building access and sprinklers; manufacturing, assembly
and distribution equipment; and other miscellaneous systems and processes.
Y2K readiness for these internal non-IT systems is the responsibility of
the Company's worldwide operating units and their respective functions and
operations, e.g., facilities, research and development, manufacturing,
distribution, logistics, sales and customer support.
The Company's Y2K Program Office has developed a comprehensive process to
assure all Company operations and global business units use a structured
and standardized methodology to organize, plan and implement their Y2K
readiness.
<PAGE 13>
The Company has also established a Year 2000 Council to coordinate its
overall internal readiness and its business continuity planning efforts.
It is composed of representatives from the major business units within the
Company and the critical corporate and infrastructure functions that
support them. The Council is chaired by the Company's Year 2000 General
Manager and has initiated a comprehensive program to ensure timely and
consistent business continuity planning by all of the Company's business
units. The program objective is to assure that substantially all Y2K
testing, internal mitigation and remediation activities, and business
contingency plans are finalized by July 31, 1999. From July 31, 1999,
until November 30, 1999, the company's Y2K internal readiness solutions,
contingency plans, crisis management and recovery mechanisms will be
further stress-tested to ensure full preparation.
Product and Customer Readiness. - The Company's newly introduced products
are Y2K compliant. However, certain hardware and software products
currently installed at customer sites will require upgrade or other
remediation. Some of these products are used in critical applications
where the impact of non-performance to these customers and other parties
could be significant. The Company believes that its customers are
responsible for costs to achieve their Y2K compliance. The Company,
however, is taking steps to preserve customer satisfaction and brand
reputation. In 1997, the Company established a dedicated Y2K Product
Compliance Program Office to coordinate the Company's worldwide Y2K
product compliance activities. The Product Compliance Program Office is
charged with developing and overseeing implementation of plans to identify
all standard products delivered since January 1, 1995; to test those
products for compliance; to identify an appropriate path to compliance for
non-compliant standard products; and to communicate the status and
necessary customer action for non-compliant standard products.
The Company has an internet website dedicated to communicating Y2K issues
to a broad customer base. This website includes a product compliance
search page that allows customers to look up the status of the Company's
products they have installed. In certain areas, the Company is taking
additional steps to identify affected customers, raise customer awareness
related to non-compliance of certain Company products and assist the
customer base to assess their risks. The Company is in the process of
implementing plans to accommodate increased levels of customer assistance
in the first quarter of fiscal 2000 and currently anticipates that a
significant portion of the costs related to such actions would occur in
the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000.
All of these efforts are coordinated by the HP Year 2000 Products and
Customers Board of Directors ("Board"), which is composed of
representatives for all of the Company's product and service business
units, and which works in conjunction with the Product Compliance Program
Office to develop and implement the Company's Year 2000 policies for
products and services. The Company's Year 2000 General Manager chairs
the Board.
The costs of the readiness program for products are primarily costs of
existing internal resources largely absorbed within existing engineering
spending levels. These costs were incurred primarily in fiscal 1998 and
earlier years and were not broken out from other product engineering
costs. Historical Y2K customer satisfaction costs were not material.
Future product readiness costs, including those for customer satisfaction,
are not anticipated to be material. In addition, while the Company is
aware of the potential for legal claims against it and other companies for
damages arising from products that are not Y2K compliant, management
believes that reasonable customer satisfaction steps are under way so that
any such claims against the Company would be without merit.
<PAGE 14>
It is unknown how Y2K issues may affect customer spending patterns. As
customers focus their attention and capital budgets in the near term on
preparing their own businesses for the Year 2000, they may either delay or
accelerate purchases of new applications, services and systems from the
Company. Many of the Company's products run custom software or connect to
other systems or peripheral products that may be adversely affected by
operating system or hardware upgrades. Although these factors may
increase demand for certain of the Company's products and services, it
could also soften the demand for other offerings. As a result, these
events may affect the Company's future revenues and revenue patterns.
Material Third-Party Relationships. - The Company has developed a Y2K
process for dealing with its key suppliers, contract manufacturers,
distributors, vendors and partners. The process generally involves the
following steps: (i) initial supplier survey, (ii) risk assessment and
contingency planning, (iii) follow-up supplier reviews and escalation, if
necessary, and where relevant, (iv) testing. To date, the Company has
received formal responses from all of its critical suppliers. Most of them
have responded that they expect to address all their significant Y2K
issues on a timely basis. The Company regularly reviews and monitors the
suppliers' Y2K readiness plans and performance. Based on the Company's
risk assessment, selective on-site reviews may be performed. Risk analysis
has been completed with the Company's base of suppliers and contingency
plans are now being developed and tested. All testing is targeted to be
complete by June 1, 1999. In some cases, to meet Y2K readiness, the
Company has replaced suppliers or eliminated suppliers from consideration
for new business. The Company has also contracted with multiple
transportation companies to provide product delivery alternatives. The
Company has also completed substantially all Electronic Data Interchange
(EDI) migration and testing with its supply base.
The Company is working to identify and analyze the most reasonably likely
worst-case scenarios for third-party relationships affected by Y2K. These
scenarios could include possible infrastructure collapse, the failure of
power and water supplies, major transportation disruptions, unforeseen
product shortages due to hoarding of products and sub-assemblies and
failures of communications and financial systems. Any one of these
scenarios could have a major and material effect on the Company's ability
to build its products and deliver services to its customers. While the
Company has contingency plans in place to address most issues under its
control, an infrastructure problem outside of its control or some
combination of several of these problems could result in a delay in
product shipments depending on the nature and severity of the problems.
The Company would expect that most utilities and service providers would
be able to restore service within days although more pervasive system
problems involving multiple providers could last two to four weeks or more
depending on the complexity of the systems and the effectiveness of their
contingency plans.
Although the Company is dedicating substantial resources towards attaining
Y2K readiness, there is no assurance it will be successful in its efforts
to identify and address all Y2K issues. Even if the Company acts in a
timely manner to complete all of its assessments; identifies, develops and
implements remediation plans believed to be adequate; and develops
contingency plans believed to be adequate some problems may not be
identified or corrected in time to prevent material adverse consequences
to the Company.
<PAGE 15>
The discussion above regarding estimated completion dates, costs, risks
and other forward-looking statements regarding Y2K is based on the
Company's best estimates given information that is currently available and
is subject to change. As the Company continues to progress with its Y2K
initiatives, it may discover that actual results will differ materially
from these estimates.
Adoption of the Euro. In 1997, the Company established a dedicated task
force to address the issues raised by the introduction of a European single
currency (the Euro) for initial implementation as of January 1, 1999 and
during the transition period through January 1, 2002. The Company's primary
focus has been on the changes needed to deal with a mix of Euro and local
denomination transactions from the first day of changeover - January 1, 1999.
Since the beginning of the transition period, product prices in local
currencies are being converted to Euros as required. At an appropriate
point during the transition period, product prices in participating
countries will be established and stored in Euros, and converted to local
denominations. System changes were implemented to give multi-currency
capability to the few internal applications that did not have it yet, or
to ensure that external partners facing systems processing euro conversions
be compliant with the European council regulations.
The Company has developed plans to support display and printing of the
Euro character by impacted Hewlett-Packard products. Most products are
currently able to perform these functions while plans are still in process
for a few remaining products. Current information about the impact of the
adoption of the Euro on the Company's products and businesses is available
at the Hewlett-Packard Euro Web site.
The Company does not presently expect that introduction and use of the
Euro will materially affect the Company's foreign exchange and hedging
activities or the Company's use of derivative instruments. Management does
not expect that the introduction of the Euro will result in any material
increase in costs to the Company and all costs associated with the
introduction of the Euro will be expensed to operations as incurred.
While the Company will continue to evaluate the impact of the Euro
introduction over time, based on currently available information,
management does not believe that the introduction of the Euro currency
will have a material adverse impact on the Company's financial condition
or overall trends in results of operations.
Quarterly Fluctuations and Volatility of Stock Prices. Although the
Company believes that it has the product offerings and resources needed
for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations,
which could cause period-to-period fluctuations in operating results.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. The announcement of new products,
services or technological innovations by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community and speculation
in the press or investment community are among the factors affecting the
Company's stock price. In addition, the stock price may be affected by
general market conditions and domestic and international macroeconomic
factors unrelated to the Company's performance. Because of the foregoing
reasons, recent trends should not be considered reliable indicators of
future stock prices or financial results.
<PAGE 16>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
A discussion of the Company's exposure to, and management of, market risk
appears in Item 2 of this Form 10-Q under the heading "Factors That May
Affect Future Results".
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on
page 19 of this report.
(b) Reports on Form 8-K:
None
<PAGE 17>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
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.
HEWLETT-PACKARD COMPANY
(Registrant)
Dated: February 26, 1999 By:/s/Robert P. Wayman
--------------------------
Robert P. Wayman
Executive Vice President,
Finance and Administration
(Chief Financial Officer)
<PAGE 18>
<PAGE>
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
-------------
Exhibits:
1. Not applicable.
2-4 None.
5-9. Not applicable.
10. None
11. See Item 2 in Notes to Consolidated Condensed Financial
Statement on Page 4.
12-14. Not applicable.
15. None.
16-17. Not applicable.
18-19. None.
20-21. Not applicable.
22-24. None.
25-26. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
99. None.
<PAGE 19>
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<SEC-DOCUMENT>0000950124-99-001828.txt : 19990317
<SEC-HEADER>0000950124-99-001828.hdr.sgml : 19990317
ACCESSION NUMBER: 0000950124-99-001828
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19990131
FILED AS OF DATE: 19990316
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: H&R BLOCK INC
CENTRAL INDEX KEY: 0000012659
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200]
IRS NUMBER: 440607856
STATE OF INCORPORATION: MO
FISCAL YEAR END: 0430
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-06089
FILM NUMBER: 99566349
BUSINESS ADDRESS:
STREET 1: 4410 MAIN ST
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
BUSINESS PHONE: 8167536900
MAIL ADDRESS:
STREET 1: 4410 MAIN STREET
CITY: KANSAS CITY
STATE: MO
ZIP: 64111
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT DATED JANUARY 31, 1999
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-6089
H&R BLOCK, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 44-0607856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Main Street
Kansas City, Missouri 64111
(Address of principal executive offices, including zip code)
(816) 753-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, without par
value, at March 1, 1999 was 97,188,921 shares.
<PAGE> 2
TABLE OF CONTENTS
Page
----
PART I Financial Information
Consolidated Balance Sheets
January 31, 1999 and April 30, 1998........................... 1
Consolidated Statements of Operations
Three Months Ended January 31, 1999 and 1998.................. 2
Nine Months Ended January 31, 1999 and 1998................... 3
Consolidated Statements of Cash Flows
Nine Months Ended January 31, 1999 and 1998................... 4
Notes to Consolidated Financial Statements....................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Quantitative and Qualitative Disclosures about Market Risk....... 21
PART II Other Information................................................ 22
SIGNATURES................................................................ 23
<PAGE> 3
H&R BLOCK, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share amounts
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
---- ----
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 188,340 $ 900,856
Marketable securities 91,582 346,158
Receivables, less allowance for doubtful accounts of $21,302
and $45,314 896,363 793,237
Prepaid expenses and other current assets 94,477 48,944
---------- ----------
TOTAL CURRENT ASSETS 1,270,762 2,089,195
INVESTMENTS AND OTHER ASSETS
Investments in marketable securities 221,069 343,178
Excess of cost over fair value of net tangible assets
acquired, net of accumulated amortization 355,987 288,580
Other 127,084 105,809
---------- ----------
704,140 737,567
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization 100,597 77,321
---------- ----------
$2,075,499 $2,904,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 805,985 $ 643,002
Accounts payable, accrued expenses and deposits 135,394 114,875
Accrued salaries, wages and payroll taxes 55,229 96,168
Accrued taxes on earnings 26,648 422,847
---------- ----------
TOTAL CURRENT LIABILITIES 1,023,256 1,276,892
LONG-TERM DEBT 249,692 249,675
OTHER NONCURRENT LIABILITIES 43,269 35,884
STOCKHOLDERS' EQUITY
Common stock, no par, stated value $.01 per share 1,089 1,089
Additional paid-in capital 411,428 432,335
Retained earnings 857,837 1,010,545
Accumulated other comprehensive income (loss) (27,017) (24,515)
---------- ----------
1,243,337 1,419,454
Less cost of 11,751,531 and 1,992,043 shares of common stock
in treasury 484,055 77,822
---------- ----------
759,282 1,341,632
---------- ----------
$2,075,499 $2,904,083
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE> 4
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 31,
-----------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Service revenues $213,156 $151,185
Product revenues 60,110 36,176
Royalties 12,961 10,562
Other 5,255 853
-------- --------
291,482 198,776
-------- --------
OPERATING EXPENSES
Employee compensation and benefits 124,718 93,703
Occupancy and equipment 54,829 48,796
Interest 23,689 12,371
Marketing and advertising 17,824 13,978
Supplies, freight and postage 22,616 16,077
Other 56,156 38,872
-------- --------
299,832 223,797
-------- --------
Operating loss (8,350) (25,021)
OTHER INCOME
Investment income, net 4,641 1,107
Other, net (879) (17)
-------- --------
3,762 1,090
Loss from continuing operations before income tax benefit (4,588) (23,931)
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (less applicable income
tax benefit of ($175) and ($663)) (273) (2,452)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
Weighted average number of common shares outstanding 97,481 105,050
======== ========
Basic and diluted net loss per share from continuing operations $ (.03) $ (.14)
======== ========
Basic and diluted net earnings (loss) per share $ (.24) $ 2.04
======== ========
Dividends per share $ .25 $ .20
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE> 5
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share amounts
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
<S> <C> <C>
REVENUES
Service revenues $ 308,466 $ 219,426
Product revenues 111,906 64,388
Royalties 17,023 14,980
Other 10,273 3,596
--------- ---------
447,668 302,390
--------- ---------
OPERATING EXPENSES
Employee compensation and benefits 216,711 162,546
Occupancy and equipment 137,058 122,012
Interest 53,889 26,819
Marketing and advertising 30,088 24,646
Supplies, freight and postage 31,230 23,794
Other 103,602 73,587
--------- ---------
572,578 433,404
--------- ---------
Operating loss (124,910) (131,014)
OTHER INCOME
Investment income, net 28,177 9,490
Other, net (879) (5)
--------- ---------
27,298 9,485
Loss from continuing operations before income tax benefit (97,612) (121,529)
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (less applicable income
tax benefit of ($953) and ($11,823)) (1,490) (21,307)
Net gain (loss) from sale of discontinued operations (less
applicable income taxes (benefit) of ($12,773) and $251,701) (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
Weighted average number of common shares outstanding 100,526 104,568
========= =========
Basic and diluted net loss per share from continuing operations $ (.60) $ (.72)
========= =========
Basic and diluted net earnings (loss) per share $ (.82) $ 1.29
========= =========
Dividends per share $ .70 $ .60
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE> 6
H&R BLOCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
January 31,
-----------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (82,008) $ 135,212
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 45,066 34,637
Net (gain) loss on sale of discontinued operations 19,978 (231,867)
Other noncurrent liabilities 7,385 2,480
Changes in:
Receivables (232,429) 82,717
Prepaid expenses and other current assets (45,533) (44,304)
Net assets of discontinued operations - 13,665
Accounts payable, accrued expenses and deposits 18,477 (64,385)
Accrued salaries, wages and payroll taxes (40,939) (65,796)
Accrued taxes on earnings (385,928) (123,339)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (695,931) (260,980)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (227,381) (133,774)
Maturities of marketable securities 709,106 202,473
Purchases of property and equipment (52,365) (30,633)
Excess of cost over fair value of net tangible assets acquired,
net of cash acquired (83,048) (237,786)
Other, net (28,040) (14,283)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 318,272 (214,003)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (7,301,430) (8,499,105)
Proceeds from issuance of notes payable 7,464,413 8,405,163
Proceeds from issuance of long-term debt - 249,663
Dividends paid (70,700) (62,676)
Payments to acquire treasury shares (490,868) -
Proceeds from stock options exercised 63,728 32,416
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (334,857) 125,461
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (712,516) (349,522)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 900,856 457,079
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 188,340 $ 107,557
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 360,959 $ 58,746
Interest paid 59,392 35,492
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE> 7
H&R BLOCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited, dollars in thousands, except share data
1. The Consolidated Balance Sheet as of January 31, 1999, the Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998, and the Consolidated Statements of Cash Flows for the nine months
ended January 31, 1999 and 1998 have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at January 31, 1999 and for
all periods presented have been made.
Reclassifications have been made to prior periods to conform with the current
period presentation.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, all majority-owned subsidiaries and companies
that are directly or indirectly controlled by the Company through majority
ownership or otherwise.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's April 30, 1998 Annual Report to
Shareholders.
Operating revenues are seasonal in nature with peak revenues occurring in the
months of January through April. Thus, the nine-month results are not
indicative of results to be expected for the year.
2. On January 29, 1999, the Company completed the sale of its WebCard Visa
portfolio. The Company recorded a $20.0 million loss, net of taxes, on the
transaction. The $127.6 million receivable for the sale of the portfolio was
treated as a noncash investing activity in the Consolidated Statement of Cash
Flows for the nine months ended January 31, 1999. The Consolidated
Statements of Operations for the three and nine months ended January 31, 1999
and 1998 have been reclassified to reflect the Company's Credit Card
operations segment as discontinued operations.
3. On January 31, 1998, the Company completed the sale of all of its interest
in CompuServe Corporation (CompuServe) to a subsidiary of WorldCom, Inc.
(WorldCom). The Consolidated Statements of Operations for the three and nine
months ended January 31, 1998 and the Consolidated Statement of Cash Flows
for the nine months ended January 31, 1998 reflect CompuServe as discontinued
operations.
-5-
<PAGE> 8
4. Revenues from discontinued operations for the nine months ended January 31,
1999 and 1998 were $24.1 million and $657.2 million, respectively. Revenues
for the three months ended January 31, 1999 and 1998 were $7.8 million and
$227.2 million, respectively.
5. Receivables consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
<S> <C> <C>
Mortgage loans held for sale $387,500 $448,102
Participation in refund anticipation loans 201,890 39,165
Receivable from sale of discontinued operations 127,639 -
Credit card loans - 202,852
Other 200,636 148,432
-------- --------
917,665 838,551
Allowance for doubtful accounts 21,302 45,314
-------- --------
$896,363 $793,237
======== ========
</TABLE>
6. The Company files its Federal and state income tax returns on a calendar
year basis. The Consolidated Statements of Operations reflect the effective
tax rates expected to be applicable for the respective full fiscal years.
7. The Company securitized $1.7 billion in mortgage loans during the nine
months ended January 1999. The retained interests from the securitizations
of $104.3 million were treated as noncash investing activities in the
Consolidated Statement of Cash Flows for the nine months ended January 31,
1999.
8. Basic and diluted net earnings (loss) per share is computed using the
weighted average number of shares outstanding during each period. Diluted
net loss per share excludes the impact of common stock options outstanding
of 5,884,733 shares and the conversion of 712 shares of preferred stock to
common stock, as they are antidilutive. The weighted average shares
outstanding for the nine months ended decreased to 100,526,000 from
104,568,000 last year, due to the purchase of treasury shares by the Company
during the period from February 1998 to January 1999. The decrease was
partially offset by stock option exercises during fiscal 1998 and 1999.
9. During the nine months ended January 31, 1999 and 1998, the Company issued
1,996,012 and 1,025,326 shares, respectively, pursuant to provisions for
exercise of stock options under its stock option plans. During the nine
months ended January 31, 1999, the Company acquired 11,792,500 shares of its
common stock at an aggregate cost of $490,868.
10. CompuServe, certain current and former officers and directors of CompuServe
and the registrant have been named as defendants in six lawsuits pending
before the state and Federal courts in Columbus, Ohio. All suits allege
similar violations of the Securities Act of 1933 based on assertions of
omissions and misstatements of fact in connection with CompuServe's public
filings related to its initial public offering in April 1996. One state
lawsuit also alleges certain oral omissions and misstatements in connection
with such offering. Relief sought in the
-6-
<PAGE> 9
lawsuits is unspecified, but includes pleas for rescission and damages. One
Federal lawsuit names the lead underwriters of CompuServe's initial public
offering as additional defendants and as representatives of a defendant
class consisting of all underwriters who participated in such offering. The
Federal suits were consolidated, the defendants filed a motion to dismiss
the consolidated suits, the district court stayed all proceedings pending
the outcome of the state court suits, and the United States Court of Appeals
for the Sixth Circuit affirmed such stay. The four state court lawsuits
also allege violations of various state statutes and common law of negligent
misrepresentation in addition to the 1933 Act claims. The state lawsuits
were consolidated for discovery purposes and defendants filed a motion for
summary judgment covering all four state lawsuits. In the state lawsuits,
the court entered an order in July 1998 that the suits entitled Harvey
Greenfield v. CompuServe Corporation, et al., Jeffrey Schnipper v.
CompuServe Corporation, and Philip Silverglate v. CompuServe Corporation, et
al. be maintained as a class action on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were
damaged thereby. All named defendants to these consolidated actions,
members of their immediate families, any entity in which they have a
controlling interest, and their legal representatives, heirs, successors or
assigns are excluded from the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the
class certification order as the plaintiff in such case did not seek class
certification of its action. As a part of the sale of its interest in
CompuServe, the Company agreed to indemnify WorldCom and CompuServe against
80.1% of any losses and expenses incurred by them with respect to these
lawsuits. The defendants are vigorously defending these lawsuits.
11. Summarized financial information for Block Financial Corporation, an
indirect, wholly owned subsidiary of the Company, is presented below.
<TABLE>
<CAPTION>
January 31, April 30,
----------- ---------
1999 1998
---- ----
(Audited)
<S> <C> <C>
Condensed balance sheets:
Cash and cash equivalents $ 48,724 $ 30,895
Finance receivables, net 659,658 737,005
Other assets 558,536 311,759
---------- ----------
Total assets $1,266,918 $1,079,659
========== ==========
Commercial paper $ 804,672 $ 643,002
Long-term debt 249,692 249,675
Other liabilities 77,032 57,372
Stockholder's equity 135,522 129,610
---------- ----------
Total liabilities and stockholder's equity $1,266,918 $1,079,659
========== ==========
</TABLE>
-7-
<PAGE> 10
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed statements of
operations:
Revenues $110,472 $59,648 $217,699 $115,104
Earnings from continuing
operations 19,904 7,960 35,357 11,497
Net earnings (loss) (8,026) 2,291 233 (297)
</TABLE>
12. The Company sells short treasury securities under an open repurchase
agreement that can be adjusted at any time by either party. The position on
certain or all of the fixed rate mortgages is closed when the Company enters
into a forward commitment to sell those mortgages. The effectiveness of the
hedge is measured by a historical and probable future high correlation of
changes in the fair value of the hedging instruments with changes in value
of the hedged item. If correlation ceases to exist, hedge accounting will
be terminated and gains or losses are recorded in revenues. During the
second quarter of fiscal 1999, the Company's short treasury securities no
longer correlated with the hedged item and, therefore, the hedge was
terminated. A loss of $2.5 million was recognized upon termination in the
second quarter. At January 31, 1999, the Company had no hedging instruments
in place.
13. The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in the first quarter of fiscal
1999. SFAS 130 requires that all changes in equity during the period,
except those resulting from investments by and distributions to owners, be
reported as "comprehensive income" in the financial statements. The
Company's comprehensive income is comprised of net earnings (loss), foreign
currency translation adjustments and the change in the net unrealized gain
or loss on marketable securities. The adoption of SFAS 130 had no effect on
the Company's consolidated financial statements. The components of
comprehensive income (loss) during the three and nine months ended January
31, 1999 and 1998 were:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $(23,096) $214,578 $(82,008) $135,212
Change in net unrealized
gain (loss) on mkt. securities 2,113 226 3,945 121
Change in foreign currency
translation adjustments 2,458 (5,813) (6,447) (7,082)
-------- -------- -------- --------
Comprehensive income (loss) $(18,525) $208,991 $(84,510) $128,251
======== ======== ======== ========
</TABLE>
14. In the third quarter of fiscal 1999, the Company elected early adoption of
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134). SFAS 134
requires that mortgage-backed securities or other interests retained after a
securitization be classified based on the intent to sell or hold the
-8-
<PAGE> 11
investments. The Company has classified its retained interests as
available-for-sale securities, which are included in Investments in
marketable securities on the Consolidated Balance Sheet.
15. In the first quarter of fiscal year 1999, the Company acquired operations
that management determined to be a new reportable operating segment. The
new segment, Business services, is primarily engaged in providing
accounting, tax and consulting services to business clients and tax, estate
planning and financial planning services to individuals. The Business
services segment currently offers its services through regional accounting
firms based in Kansas City, Missouri; Chicago, Illinois; Indianapolis,
Indiana; Buffalo, New York and Dallas, Texas. Revenues of this segment are
seasonal in nature, with peak revenues occurring during January through
April.
Information concerning the Company's operations by reportable operating
segments for the three and nine months ended January 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
January 31, January 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
U.S. tax operations $189,083 $152,773 $ 219,662 $ 181,912
International tax operations 6,776 7,371 22,030 24,221
Mortgage operations 79,333 37,522 184,926 93,039
Business services 15,271 - 18,135 -
Unallocated corporate 1,019 1,110 2,915 3,218
-------- -------- --------- ---------
$291,482 $198,776 $ 447,668 $ 302,390
======== ======== ========= =========
Earnings (loss) from
continuing operations:
U.S. tax operations $(18,845) $(19,050) $(137,977) $(123,233)
International tax operations (7,508) (6,925) (15,742) (13,174)
Mortgage operations 24,305 7,682 48,630 19,756
Business services (8) - (220) -
Unallocated corporate (2,735) (2,314) (7,161) (5,029)
Interest exp. on LT debt (4,438) (4,431) (13,319) (9,339)
Investment income, net 4,641 1,107 28,177 9,490
-------- -------- --------- ---------
Loss from continuing operations
before income tax benefit $ (4,588) $(23,931) $ (97,612) $(121,529)
======== ======== ========= =========
</TABLE>
-9-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED IN
THIS DISCUSSION ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, YEAR 2000 READINESS OF THE
COMPANY, ITS FRANCHISEES OR THIRD PARTIES; AND ECONOMIC, COMPETITIVE,
GOVERNMENTAL AND VARIOUS OTHER FACTORS AFFECTING THE COMPANY'S OPERATIONS,
MARKETS, PRODUCTS, SERVICES AND PRICES.
FINANCIAL CONDITION
These comments should be read in conjunction with the Consolidated Balance
Sheets and Consolidated Statements of Cash Flows found on pages 1 and 4,
respectively.
Working capital decreased to $247.5 million at January 31, 1999 from $812.3
million at April 30, 1998. The working capital ratio at January 31, 1999 is 1.2
to 1, compared to 1.6 to 1 at April 30, 1998. The decrease in working capital
and the working capital ratio is primarily due to the repurchase of treasury
shares and, to a lesser extent, the seasonal nature of the Company's U.S. tax
operations segment. Tax return preparation occurs almost entirely in the fourth
quarter and has the effect of increasing certain assets and liabilities during
this time.
The Company maintains seasonal lines of credit to support short-term borrowing
facilities in the United States and Canada. The credit limits of these lines
fluctuate according to the amount of short-term borrowings outstanding during
the year.
The Company incurs short-term borrowings throughout the year to fund receivables
associated with its nonconforming mortgage loan and other financial services
programs. These short-term borrowings in the U.S. are supported by a $1.85
billion back-up credit facility through November 1999, subject to renewal.
The Company's capital expenditures, treasury share purchases and dividend
payments during the first nine months were funded through internally-generated
funds.
At January 31, 1999, short-term borrowings used to fund mortgage loans and other
programs increased to $806.0 million from $643.0 million at April 30, 1998 due
mainly to the funding of mortgage operations. For the nine months ended January
31, 1999 and 1998, interest expense was $53.9 million and $26.9 million,
respectively. The increase in interest expense is primarily attributable to the
funding of mortgage operations with short-term borrowings and the debt incurred
to fund the acquisition of Option One Mortgage Corporation (Option One) in June
1997.
-10-
<PAGE> 13
The Company announced in December 1993 its intention to repurchase from time to
time up to 10 million of its shares on the open market. In July 1996, the
Company announced its intention to repurchase up to 10 million additional shares
in the open market over a two-year period following the separation of CompuServe
Corporation. At January 31, 1999, 17.0 million shares had been repurchased.
The Company plans to continue to purchase its shares on the open market in
accordance with these authorizations, subject to various factors including the
price of the stock, availability of excess cash, the ability to maintain
financial flexibility, securities laws restrictions and other investment
opportunities available.
-11-
<PAGE> 14
RESULTS OF OPERATIONS
- ---------------------
FISCAL 1999 COMPARED TO FISCAL 1998
The analysis that follows should be read in conjunction with the table below
and the Consolidated Statements of Operations found on pages 2 and 3.
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO
-----------------------------------------------
THREE MONTHS ENDED JANUARY 31, 1998
-----------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $189,083 $152,773 $(18,845) $(19,050)
International tax operations 6,776 7,371 (7,508) (6,925)
Mortgage operations 79,333 37,522 24,305 7,682
Business services 15,271 - (8) -
Unallocated corporate 1,019 1,110 (2,735) (2,314)
Interest expense on LT debt - - (4,438) (4,431)
Investment income, net - - 4,641 1,107
-------- -------- -------- --------
$291,482 $198,776 (4,588) (23,931)
======== ========
Income tax benefit (1,743) (9,094)
-------- --------
Net loss from continuing operations (2,845) (14,837)
Net loss from discontinued operations (273) (2,452)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
-------- --------
Net earnings (loss) $(23,096) $214,578
======== ========
</TABLE>
Consolidated revenues for the three months ended January 31, 1999 increased
46.6% to $291.5 million from $198.8 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $79.3 million, a 111.4%
increase over last year and U.S. tax operations, a 23.8% increase. The new
Business services segment, acquired in May 1998, also contributed $15.3 million
to the increase.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $23.9 million in the third quarter of
last year. The decrease is attributable to increased earnings from Mortgage
operations and higher investment income.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $14.8 million, or $.14 per share, for the same period last year.
-12-
<PAGE> 15
An analysis of operations by reportable operating segments follows.
U.S. TAX OPERATIONS
Revenues increased 23.8% to $189.1 million from $152.8 million last year,
resulting primarily from increased revenues from tax-related services that are
attributable to an increase in the number of clients served and price increases.
During the first month of the U.S. tax-filing season, the number of clients
served in company-owned offices increased 4.8%. Improved software sales and
revenues from Refund Anticipation Loan (RAL) participations also contributed to
the increase.
The pretax loss decreased 1.1% to $18.8 million from $19.1 million in the third
quarter of last year due to the strong increase in revenues. The increase in
revenues completely offset the increase in expenses over the prior year. The
increase in expenses is attributable to normal increases in compensation and
benefits related to tax services, a more conservative loss reserve related to
RAL participations than in the same period last year and an increase in the
number of tax offices. Due to the nature of this segment's business, the results
for the first month of the tax-filing season are not necessarily indicative of
expected results for the entire tax season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 8.1% to $6.8 million compared to $7.4 million in the prior
year's third quarter. The decrease is principally attributable to increased
competitive conditions related to discounted returns and a slower start to the
Canadian tax-filing season. The number of regular and discounted returns
prepared in company-owned offices in Canada during the month of January
decreased 27.5% from the prior year. The decline in Canada was partially offset
by increased revenues in Australia.
The pretax loss increased 8.4% to $7.5 million from $6.9 million last year. The
increase is due to compensation and other facility-related expenses in Canada
primarily attributable to normal operational increases and an increase in the
number of tax offices, as well as decreased revenues. Due to the nature of this
segment's business, third quarter operating results are not indicative of
expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 111.4% to $79.3 million from $37.5 million in the same period
last year. The increase is attributable to a higher volume of loans sold or
securitized and increased interest income over the prior year. Option One
originated and sold or securitized $930.2 million and $1.3 billion in loans,
respectively, during the third quarter of fiscal 1999, compared to $507.0
million originated and $466.0 million sold in the third quarter last year. Both
Option One and Companion Mortgage had higher interest income earned related to
higher balances of mortgage loans held for sale during the quarter.
Mortgage operations pretax earnings of $24.3 million increased 216.4% this year
compared to $7.7 million during the third quarter of fiscal 1998, driven
entirely by the increase in revenues. Increases in compensation and benefits and
marketing and advertising expense had a negative impact on pretax earnings due
primarily to the continued expansion of Option One's operations.
-13-
<PAGE> 16
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $15.3 million and a pretax loss of $8
thousand for the third quarter of fiscal 1999, including goodwill amortization
of $1.1 million. Due to the nature of this segment's business, revenues are
seasonal, while expenses are relatively fixed throughout the year. Results for
the third quarter are not indicative of the expected results for the entire
year.
INVESTMENT INCOME, NET
Net investment income increased 319.2% to $4.6 million from $1.1 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 18.2% to $2.7 million from $2.3 million in the comparable period last
year. The increase is a result of higher employee costs.
-14-
<PAGE> 17
THREE MONTHS ENDED JANUARY 31, 1999 (THIRD QUARTER) COMPARED TO
---------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31, 1998 (SECOND QUARTER)
----------------------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
----------------- -------------------
3rd Qtr 2nd Qtr 3rd Qtr 2nd Qtr
-------- ------- -------- --------
<S> <C> <C> <C> <C>
U.S. tax operations $189,083 $18,400 $(18,845) $(61,316)
International tax operations 6,776 11,817 (7,508) (2,263)
Mortgage operations 79,333 52,888 24,305 10,538
Business services 15,271 1,534 (8) (98)
Unallocated corporate 1,019 974 (2,735) (2,318)
Interest expense on LT debt - - (4,438) (4,438)
Investment income, net - - 4,641 9,646
-------- ------- -------- --------
$291,482 $85,613 (4,588) (50,249)
======== =======
Income tax benefit (1,743) (19,094)
-------- --------
Net loss from continuing operations (2,845) (31,155)
Net loss from discontinued operations (273) (18)
Net loss on sale of discontinued operations (19,978) -
-------- --------
Net loss $(23,096) $(31,173)
======== ========
</TABLE>
Consolidated revenues for the three months ended January 31, 1999 increased
240.5% to $291.5 million from $85.6 million reported in the second quarter of
fiscal 1999. The increase is primarily due to revenues from U.S. tax operations
related to the beginning of the U.S. tax-filing season, as well as increased
revenues from Mortgage operations and Business services.
The consolidated pretax loss from continuing operations for the third quarter of
fiscal 1999 decreased to $4.6 million from $50.2 million in the second quarter
of this year. The decrease is attributable to U.S. tax operations, which
incurred a pretax loss of $18.8 million this quarter compared to a pretax loss
of $61.3 million in the second quarter, and improved results from Mortgage
operations.
The net loss from continuing operations was $2.8 million, or $.03 per share,
compared to $31.2 million, or $.31 per share, for the second quarter.
An analysis of operations by reportable operating segments follows.
-15-
<PAGE> 18
U.S. TAX OPERATIONS
Revenues increased 927.6% to $189.1 million from $18.4 million in the second
quarter. The pretax loss decreased 69.3% to $18.8 million from $61.3 million in
the three months ended October 31, 1998. The improved results are due to the
onset of the U.S. tax-filing season.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 42.7% to $6.8 million compared to the second quarter revenues
of $11.8 million. The pretax loss increased 231.8% to $7.5 million from $2.3
million in the second quarter. The decreased results are due to the timing of
the tax-filing seasons in Australia and Canada. The Australian tax season ends
in October while the Canada tax season begins in late January.
MORTGAGE OPERATIONS
Revenues increased 50.0% to $79.3 million from $52.9 million in the prior
quarter. Pretax earnings increased 130.6% to $24.3 million from $10.5 million in
the three months ended October 31, 1998. The improved results are due to the
timing of loan sales, increased interest income earned on higher loan balances
and a one-time loss of $2.5 million on the termination of a hedging instrument
incurred during the second quarter. The increased earnings were partially
reduced by increases in compensation and benefits expenses. Option One sold or
securitized $1.3 billion in loans in the current quarter compared to $539.6
million in the second quarter.
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Revenues increased 895.5% to $15.3 million from $1.5 million in the three months
ended October 31, 1998. The pretax loss decreased 91.8% to $8 thousand from $98
thousand in the prior quarter. The improved results are due to acquisitions made
during the third quarter and the onset of the accounting firms' tax and
accounting season.
INVESTMENT INCOME, NET
Net investment income decreased 51.9% to $4.6 million from $9.6 million in the
second quarter of fiscal 1999. The decrease resulted from less funds available
for investment due to the purchase of treasury shares.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the third quarter
increased 18.0% to $2.7 million from $2.3 million in the second quarter. The
increase is due to higher charitable contributions, employee costs and
consultant fees. Improved results at the Company's captive insurance subsidiary
partially offset the increased loss.
-16-
<PAGE> 19
NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO
----------------------------------------------
NINE MONTHS ENDED JANUARY 31, 1998
----------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
Revenues Earnings (loss)
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. tax operations $219,662 $181,912 $(137,977) $(123,233)
International tax operations 22,030 24,221 (15,742) (13,174)
Mortgage operations 184,926 93,039 48,630 19,756
Business services 18,135 - (220) -
Unallocated corporate 2,915 3,218 (7,161) (5,029)
Interest expense on LT debt - - (13,319) (9,339)
Investment income, net - - 28,177 9,490
-------- -------- --------- ---------
$447,668 $302,390 (97,612) (121,529)
======== ========
Income tax benefit (37,072) (46,181)
--------- ---------
Net loss from continuing operations (60,540) (75,348)
Net loss from discontinued operations (1,490) (21,307)
Net gain (loss) on sale of discontinued operations (19,978) 231,867
--------- ---------
Net earnings (loss) $ (82,008) $ 135,212
========= =========
</TABLE>
Consolidated revenues for the nine months ended January 31, 1999 increased 48.0%
to $447.7 million from $302.4 million reported last year. The increase is
primarily due to revenues from Mortgage operations of $184.9 million, a 98.8%
increase over last year, a 20.8% increase in revenues from U.S. tax operations
and revenues from the new Business services segment.
The consolidated pretax loss from continuing operations for the first nine
months of fiscal 1999 decreased to $97.6 million from $121.5 million last year.
The decrease is attributable to higher earnings from Mortgage operations and
increased investment income, which were reduced by increased losses from U.S.
tax operations.
The net loss from continuing operations was $60.5 million, or $.60 per share,
compared to $75.3 million, or $.72 per share, for the same period last year.
An analysis of operations by reportable operating segments follows.
-17-
<PAGE> 20
U.S. TAX OPERATIONS
Revenues increased 20.8% to $219.7 million from $181.9 million last year,
resulting primarily from higher revenues from tax related services that are
attributable to a 3.8% increase in clients served and price increases. Revenues
from software sales and RAL participations also contributed to the increase.
The pretax loss increased 12.0% to $138.0 million from $123.2 million in the
comparable period last year due to normal operational increases in compensation,
rent and other facility-related expenses. Also contributing to the increases in
rent and other facility-related expenses is an increase in the amount of tax
office space maintained under lease during this year's off-season, as well as an
additional 236 tax offices this tax season compared to last year's tax season.
The increased loss was partially offset by earnings from software sales. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
INTERNATIONAL TAX OPERATIONS
Revenues decreased 9.0% to $22.0 million compared to $24.2 million in the prior
year. The decrease is due to foreign currency translation of Australia
operations and a decline in tax preparation and discounted return fees in
Canada. Discounted returns prepared in company-owned offices declined 19.0% from
the prior year. The number of tax returns prepared in company-owned offices
declined 12.6% from last year.
The pretax loss increased 19.5% to $15.7 million from $13.2 million last year.
The increase is due to higher facility-related expenses in Canada, which is
attributable to the increase in the number of offices and normal operational
increases, and increased compensation and benefits in the United Kingdom. Due to
the nature of this segment's business, the nine month operating results are not
indicative of expected results for the entire fiscal year.
MORTGAGE OPERATIONS
Revenues increased 98.8% to $184.9 million from $93.0 million in the same period
last year. The increase is essentially attributable to Option One, which was
acquired on June 17, 1997. Option One contributed revenues of $157.8 million for
the nine months, a $76.9 million increase over the seven-and-a-half month period
last year. Option One originated and sold or securitized $2.5 billion in loans
during the first nine months of fiscal 1999. Companion Mortgage also contributed
revenues of $27.1 million, a 123.9% increase over last year, due to interest
income earned on higher balances of mortgage loans held for sale.
Pretax earnings increased 146.2% to $48.6 million from $19.8 million in the
prior year. The increase is primarily due to Option One, which contributed
earnings of $46.7 million compared to earnings of $19.3 million last year and
increased earnings from Companion Mortgage. Earnings were reduced by increased
losses from an equity investment.
-18-
<PAGE> 21
BUSINESS SERVICES
Business services is a new reportable operating segment for fiscal year 1999.
Business services contributed revenues of $18.1 million and a pretax loss of
$220 thousand for the nine months ended January 31, 1999, including goodwill
amortization of $1.3 million. Due to the nature of this segment's business,
revenues are seasonal, while expenses are relatively fixed throughout the year.
Results for the nine months are not indicative of the expected results for the
entire year.
INVESTMENT INCOME, NET
Net investment income increased 196.9% to $28.2 million from $9.5 million last
year. The increase is due to additional funds available for investment resulting
from the proceeds of the monetization of WorldCom, Inc. stock during fiscal
1998.
UNALLOCATED CORPORATE AND ADMINISTRATIVE
The unallocated corporate and administrative pretax loss for the nine months
increased 42.4% to $7.2 million from $5.0 million in the comparable period last
year. The increase is a result of increased employee costs and the start-up of a
business that offers financial planning services through the Company's tax
offices.
OTHER ISSUES
- ------------
YEAR 2000 READINESS DISCLOSURE
The Company has established a program to identify, evaluate and mitigate
potential Year 2000 related issues. As part of its program, the Company has
identified three key categories of software and systems, including information
technology (IT) systems, non-IT systems (systems with internal clocks or
imbedded microprocessors) and systems of third parties with which it interacts,
for which the Company has developed detailed plans to address the Year 2000
issue.
The Company has identified 9 mission critical business functions (i.e. U.S. tax
preparation services, wholesale loan services, etc.) and 28 non-mission critical
business functions (i.e. TaxCut(R) software, Australian tax operations, etc.).
Within each of the business functions, key IT and non-IT systems have been
inventoried and assessed for compliance and detailed plans are in place for
required system modifications or replacements. Currently remediation projects
are at different phases of completion. One hundred and thirty-five remediation
projects, including both IT and non-IT systems, were identified within the 9
mission critical business functions. Of these projects, 87 are complete and
successfully tested, 23 are in the testing phase and 25 are still in progress.
Of the projects currently in the testing phase, 82% are scheduled to be
completed by April 30, 1999. The remaining projects will be completed after the
1998 tax season due to the nature of the Company's business.
The Company has initiated communications and surveyed state, Federal and foreign
governments and suppliers with which it interacts to determine their plans for
addressing Year 2000 issues. The Company is relying on their responses to
determine if key suppliers will be Year 2000 compliant. One of the Company's key
third parties is the Internal Revenue Service (IRS). In a report given to the
House Committee on Ways and Means on Year 2000 Conversion Efforts on
-19-
<PAGE> 22
February 24, 1999, the Commissioner of the IRS reported the status of the IRS's
Year 2000 effort. He stated: "Nearly all of our (IRS) mission critical systems
were made Y2K compliant and were placed back into production for the 1999 Filing
Season. Approximately half of these systems have been successfully tested
"end-to-end" with the clocks rolled forward. We (IRS) will continue focusing our
repair efforts on mission critical systems from now until the end of March. From
April through the end of 1999, most of the effort will be applied to wrapping up
some smaller systems and, most importantly, completing the full-scale End-to-End
Testing." The Company is also in the process of completing a survey and
inventory of tax franchisees. Some readiness issues have been identified and the
Company is assisting its franchisees with their remediation programs to help
mitigate their risk. Assurances from franchisees of Year 2000 readiness are
scheduled to be obtained after the end of the current tax season. The Company
will continue to monitor its third party relationships for Year 2000 issues.
Costs associated with the Year 2000 issue are being expensed as incurred. Total
costs are currently estimated at $3.7 million, with approximately $1.8 million
incurred to date. The costs associated with the replacement of computer systems,
hardware or equipment (currently estimated to be $12.9 million in total, with
$10.4 million incurred to date), substantially all of which would be
capitalized, are not included in the above estimates. All costs related to the
Year 2000 issue are being funded through internally-generated funds.
The Company's most likely, worst case potential risk is that the IRS will not be
Year 2000 compliant and the Company would not be able to process electronic
filings or refund anticipation loans. The Company believes that its competitors
will face the same risks.
The Company is currently identifying and developing contingency plans for Year
2000 related interruptions in the event that internal and/or external
remediation projects are not completed on a timely basis or that they fail to
meet anticipated needs. The contingency plans are scheduled to be completed by
June 1999.
The Company's Year 2000 program is an ongoing process and the estimates of
costs, risks and completion dates are based on currently available information
and are subject to change.
While the Company does not anticipate any major interruptions of its business
activities, it can not make any assurances that its systems, the systems of the
state, Federal and foreign governments, tax franchisees and suppliers will be
Year 2000 compliant and will not interrupt business. While the impact can not be
fully determined, the inability of these systems to be ready could result in
significant difficulties in processing and completing fundamental transactions.
In such event, the Company's results of operations and financial position could
be adversely affected in a material manner.
-20-
<PAGE> 23
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As of January 31, 1999, there has been no change in the Company's market risk
exposure related to interest rates on investments in fixed-rate mortgage loans
held for resale or securitization from what was reported in the Company's Form
10-Q for the quarter ended October 31, 1998. As previously reported in the
Company's Annual Report on Form 10-K for April 30, 1998, the Company hedged its
fixed-rate mortgage portfolio by selling short treasury securities and utilizing
forward commitments. This is still the Company's policy, however, due to market
conditions it became apparent that the performance of selling short treasury
securities was not correlating with the value of fixed-rate mortgages in the
whole loan market. Therefore, at January 31, 1999 the Company had no outstanding
hedges to minimize market risk on the fixed-rate mortgage loan portfolio. The
Company is evaluating other alternatives to minimize market risk. At January 31,
1999, the fixed-rate portfolio represents 20.3% of all mortgage loans held for
sale and 3.8% of total assets. Mortgage loans held for sale are recorded at the
lower of cost or market value. If it is determined that the market value drops
below cost, a valuation allowance would be set up and the loss would be
recognized in the current period. No valuation allowance has been recorded at
January 31, 1999.
The Company estimates that an increase in interest rates on fixed-rate mortgages
of 50 basis points would result in a decline in value of approximately $3.4
million, which would be recorded as a loss in the consolidated income statement
to the extent that the market value dropped below cost. Such impact would
represent approximately 6.9% of the pretax earnings from Mortgage operations and
3.5% of the Company's consolidated pretax loss for the nine months ended January
31, 1999, assuming the entire decline was recognized as a lower of cost or
market adjustment.
-21-
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The lawsuits discussed herein were reported in the Form 10-Q for the first
and second quarters of fiscal 1999. CompuServe, certain current and former
officers and directors of CompuServe and the registrant have been named as
defendants in six lawsuits pending before the state and Federal courts in
Columbus, Ohio. All suits involve claims based on allegations of omissions
and misstatements of fact in connection with CompuServe's initial public
offering in April 1996. Relief sought in the lawsuits is unspecified, but
includes pleas for rescission and damages. The Federal suits were
consolidated, the defendants filed a motion to dismiss the consolidated
suits, the district court stayed all proceedings pending the outcome of the
state court suits, and the United States Court of Appeals for the Sixth
Circuit affirmed such stay. The state lawsuits were consolidated for
discovery purposes and defendants filed a motion for summary judgment
covering all four state lawsuits. In the state lawsuits, the court entered an
order in July 1998 that the suits entitled Harvey Greenfield v. CompuServe
Corporation, et al., Jeffrey Schnipper v. CompuServe Corporation, and Philip
Silverglate v. CompuServe Corporation, et al. be maintained as a class action
on behalf of the following class:
"All persons and entities who purchased shares of common stock of CompuServe
Corporation between April 18, 1996 pursuant to the CompuServe's initial
public offering or on the open market and July 16, 1996, and who were damaged
thereby. All named defendants to these consolidated actions, members of their
immediate families, any entity in which they have a controlling interest, and
their legal representatives, heirs, successors or assigns are excluded from
the class."
Plaintiffs Greenfield, Schnipper and Silverglate were designated as class
representatives. The Florida State Board of Administration v. CompuServe
Corporation, et al. case pending in state court was not included in the class
certification order as the plaintiff in such case did not seek class
certification of its action. The defendants continue to vigorously defend
these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
10.1 H&R Block Deferred Compensation Plan for Executives, as
Amended and Restated.
for Executives, as Amended and Restated.
10.2 Amendment No. 1 to the H&R Block Deferred Compensation Plan for
Executives, as Amended and Restated.
27 Financial Data Schedule
b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the third
quarter of fiscal 1999.
-22-
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H&R BLOCK, INC.
-------------------------------
(Registrant)
DATE 03/16/99 BY /s/ Ozzie Wenich
--------------- ---------------------------------
Ozzie Wenich
Senior Vice President and
Chief Financial Officer
DATE 03/16/99 BY /s/ Cheryl L. Givens
--------------- ---------------------------------
Cheryl L. Givens
Vice President and Corporate Controller
-23-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<DESCRIPTION>H&R BLOCK DEFERRED COMPENSATION PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.1
H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
JANUARY 1, 1999
<PAGE> 2
H & R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT........................................ 3
Section 1.1 Establishment of Account....................................... 3
Section 1.2 Property of Company and Participating Affiliates............... 3
ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER...................................... 3
Section 2.1 Definitions.................................................... 3
Section 2.2 Gender and Number.............................................. 9
ARTICLE 3 PARTICIPATION........................................................ 9
Section 3.1 Who May Participate............................................ 9
Section 3.2 Time and Conditions of Participation........................... 9
Section 3.3 Termination of Participation................................... 9
Section 3.4 Missing Persons................................................ 9
Section 3.5 Relationship to Other Plans.................................... 10
Section 3.6 Participants Employed By CompuServe............................ 10
ARTICLE 4 ENTRIES TO THE ACCOUNT............................................... 10
Section 4.1 Contributions.................................................. 10
Section 4.2 Crediting Rate................................................. 12
Section 4.3 Crediting Rate Upon Retirement, Disability, Continued
Employment After Reaching the Age of 75, Death or
Termination of Employment with all Affiliates as a
Result of a Change in Control.................................. 13
Section 4.4 Crediting Rate Upon Resignation or Discharge................... 13
ARTICLE 5 VESTING.............................................................. 14
Section 5.1 Participant Deferrals and Vesting Schedule for Company
Contributions.................................................. 14
Section 5.2 Exceptions to Vesting Schedule................................. 14
ARTICLE 6 DISTRIBUTION OF BENEFITS............................................. 14
Section 6.1 Payments After Termination of Employment....................... 14
Section 6.2 Form of Benefits Upon Retirement, Disability or Continued
Employment After Reaching the Age of 75........................ 15
Section 6.3 Form of Benefits Upon Resignation or Discharge, or Termination
of Employment with all Affiliates as Result of a Change in
Control........................................................ 16
Section 6.4 Amount of Benefit.............................................. 17
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
Section 6.5 Time of Payment............................................. 18
Section 6.6 Death Benefits.............................................. 19
Section 6.7 Hardships................................................... 20
Section 6.8 Claims Procedure............................................ 21
Section 6.9 Alternate Forms of Benefit Distribution..................... 21
Section 6.10 Distributions on Plan Termination........................... 21
ARTICLE 7 FUNDING.............................................................. 22
Section 7.1 Source of Benefits.......................................... 22
Section 7.2 No Claim on Specific Assets................................. 22
ARTICLE 8 ADMINISTRATION AND FINANCES......................................... 22
Section 8.1 Administration.............................................. 22
Section 8.2 Powers of Committee......................................... 22
Section 8.3 Actions of the Committee.................................... 22
Section 8.4 Delegation.................................................. 22
Section 8.5 Reports and Records......................................... 22
ARTICLE 9 AMENDMENTS AND TERMINATION.......................................... 23
Section 9.1 Amendments.................................................. 23
Section 9.2 Termination................................................. 23
Section 9.3 Accelerated Vesting. ....................................... 23
ARTICLE 10 ACCELERATED VESTING................................................ 24
Section 10.1 Accelerated Vesting......................................... 24
Section 10.2 Change in Control........................................... 24
ARTICLE 11 MISCELLANEOUS....................................................... 24
Section 11.1 No Guarantee of Employment.................................. 24
Section 11.2 Individual Account Plan..................................... 24
Section 11.3 Release..................................................... 24
Section 11.4 Notices..................................................... 24
Section 11.5 Non-Alienation.............................................. 24
Section 11.6 Tax Liability............................................... 24
Section 11.7 Captions.................................................... 25
Section 11.8 Applicable Law.............................................. 25
</TABLE>
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H&R BLOCK
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES,
AS AMENDED AND RESTATED
H&R Block, Inc. (the "Company") established, effective August 1, 1987, a
nonqualified deferred compensation plan for the benefit of specified Executives
of the Company, and specified affiliates of the Company. This plan became known
as the H&R Block Deferred Compensation Plan for Executives (the "DCP"). The
Company amended the DCP by Amendment No. 1 effective December 15, 1990; by
Amendment No. 2 effective January 1, 1990; by Amendment No. 3 effective
September 1, 1991; by Amendment No. 4 effective January 1, 1994; by Amendment
No. 5 effective May 1, 1994; by Amendment No. 6 effective August 1, 1995; by
Amendment No. 7 effective December 11, 1996; by Amendment No. 8 effective
January 1, 1998; by Amendment No. 9 effective as of January 1, 1997; by
Amendment No. 10 effective in part March 1, 1998 and in part April 1, 1998; and
by Amendment No. 11 effective as of May 15, 1998.
The Company adopted the H&R Block Supplemental Deferred Compensation Plan
for Executives (the "Supplemental Plan") effective as of May 1, 1994. The
Company amended said Supplemental Plan by Amendment No. 1 effective September
7, 1994; by Amendment No. 2 effective August 1, 1995; by Amendment No. 3
effective December 11, 1996; by Amendment No. 4 effective January 1, 1998; by
Amendment No. 5 effective May 1, 1997; by Amendment No. 6 effective in part
March 1, 1998 and in part April 1, 1998; and by Amendment No. 7 effective as of
May 15, 1998.
The Company continues to retain the right to amend the DCP and the
Supplemental Plan pursuant to action by the Company's Board of Directors. The
Company hereby exercises that right by combining the DCP and the SDCP into one
plan to be known as the H&R Block Deferred Compensation Plan for Executives, as
Amended and Restated (the "Plan") and by making other amendments to the Plan.
The Plan shall be effective as of January 1, 1999. Like its predecessors, the
Plan is intended to be an unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees as described in Sections 201(2), 301 (a)(3) and 401(a)(1)
of the Employee Retirement Income Security Act of 1974 ("ERISA").
ARTICLE 1 DEFERRED COMPENSATION ACCOUNT
Section 1.1 Establishment of Account. The Company shall establish an
account ("Account") for each Participant which shall be utilized solely as a
device to measure and determine the amount of deferred compensation to be paid
under the Plan. For each Participant in the DCP or each Participant in both the
DCP and the Supplemental Plan as of December 31, 1998, the "Account" shall
include those accounts that existed under such plans for such Participant as of
the close of business on December 31, 1998.
Section 1.2 Property of Company and Participating Affiliates. Any amounts
so set aside for benefits payable under the Plan are the property of the
Company and its participating affiliates ("Participating Affiliates"), except,
and to the extent, of any assignment of such assets to an irrevocable trust.
ARTICLE 2 DEFINITIONS, GENDER, AND NUMBER
Section 2.1 Definitions. Whenever used in the Plan, the following words
and phrases
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shall have the meanings set forth below unless the context plainly requires a
different meaning, and when a defined meaning is intended, the term is
capitalized.
2.1.1 "Account" means the device used to measure and determine
the amount of deferred compensation to be paid to a Participant or
Beneficiary under the Plan, and may refer to the separate Accounts that
represent amounts deferred by a Participant under separate Permissible
Deferral elections or by the Company pursuant to Section 4.1.
2.1.2 "Account Executive" means a person who has the title of
Account Executive, is employed on a full-time basis by a Participating
Affiliate, and is responsible for managing, overseeing, directing or
handling the accounts of clients of the Participating Affiliate.
2.1.3 "Accounting Firm" means an accounting firm in which the
Company has no direct or indirect ownership interest but with which an
Accounting Subsidiary has a contractual relationship in respect of one or
more employees who are employees of both such accounting firm and such
Accounting Subsidiary.
2.1.4 "Accounting Subsidiary" means an indirect accounting firm
subsidiary of the Company that is involved in the provision of non-attest
accounting services, the management of one or more Accounting Firms,
and/or the ownership of one or more other accounting firm subsidiaries of
the Company.
2.1.5 "Affiliates" or "Affiliate" means a group of entities,
including the Company, which constitutes a controlled group of
corporations (as defined in section 414(b) of the Code), a group of
trades or businesses (whether or not incorporated) under common control
(as defined in section 414(c) of the Code), and members of an affiliated
service group (within the meaning of section 414(m) of the Code.)
2.1.6 "Age" of a Participant means the number of whole calendar
years that have elapsed since the date of the Participant's birth.
2.1.7 "Annual Deferral Amount" means the amount of Base Salary,
and/or Bonus that a Participant elects to defer each Plan Year under a
Permissible Deferral. The amount of Base Salary included in the Annual
Deferral Amount shall be equal to a percentage of the Participant's Base
Salary that is not less than three percent (3%) and not greater than
fifty percent (50%), and the amount of Bonus or Bonuses included in the
Annual Deferral Amount shall be equal to (i) a flat dollar amount,
expressed in one thousand dollar ($1,000) increments, or (ii) a
percentage of the Bonus or Bonuses paid during the Plan Year that is not
less than five percent (5%) and not greater than fifty percent (50%),
expressed in five percent (5%) increments. In the case of a Participant
who is an employee of both an Accounting Subsidiary and an Accounting
Firm, the calculation of the amount of the Annual Deferral Amount that
the Participant is permitted to elect shall be made by taking into
account the amount of salary and bonus paid to such Participant by the
Accounting Firm, but the actual deferral under the Plan shall only be
made out of the Base Salary and/or Bonus or Bonuses paid by all
Affiliates.
2.1.8 "Assumed Interest Rate" has the meaning specified in
Section 6.4.3.
2.1.9 "Base Salary" of an Executive for any Plan Year means the
total annual salary and wages paid by all Affiliates to such individual
during that Plan Year, including any amount which would be included in
the definition of Base Salary, but for the
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individual's election to defer some of his or her salary pursuant to this
Plan or some other deferred compensation plan established by an
Affiliate; but excluding any other remuneration paid by Affiliates, such
as overtime, net commissions, bonuses, stock options, distributions of
compensation previously deferred, restricted stock, allowances for
expenses (including moving, travel expenses, and automobile allowances),
and fringe benefits payable in a form other than cash. The "Base Salary"
of an Account Executive for any Plan Year means the total earnings and
wages, including any and all commissions, incentives and bonuses, paid by
all Affiliates to such individual during that Plan Year, including any
amount which would be included in the definition of Base Salary, but for
the individual's election to defer some of his or her earnings pursuant
to this Plan or some other deferred compensation plan established by an
Affiliate; but excluding any other remuneration paid by Affiliates, such
as overtime, stock options, distributions of compensation previously
deferred, restricted stock, allowances for expenses (including moving,
travel expenses, and automobile allowances), and fringe benefits payable
in a form other than cash. In the case of an individual who is a
participant in a plan sponsored by an Affiliate which is described in
Section 401(k) of the Code, the term Base Salary shall include any amount
which would be included in the definition of Base Salary, but for the
individual's election to reduce his salary or earnings and have the
amount of the reduction contributed to the 401(k) plan on his behalf.
2.1.10 "Beneficiary" or "Beneficiaries" means the persons or
trusts designated by a Participant in writing pursuant to Section 6.6.4
of the Plan as being entitled to receive any benefit payable under the
Plan by reason of the death of a Participant, or, in the absence of such
designation, the persons specified in Section 6.6.5 of the Plan.
2.1.11 "Board" means the Board of Directors of the Company as
constituted at the relevant time.
2.1.12 "Bonus" or "Bonuses" of an Executive for any Plan Year
means the total remuneration paid under the various annual management
bonus programs ("annual bonuses") by Affiliates to such individual for
that Plan Year including any amount which would be included in the
definition of Bonus, but for the individual's election to defer some or
all of his or her annual bonus pursuant to this Plan or some other
deferred compensation plan established by an Affiliate; but excluding any
other remuneration paid by Affiliates, such as Base Salary, overtime, net
commissions, stock options, distributions of compensation previously
deferred, restricted stock, allowances for expenses (including moving,
travel expenses, and automobile allowances), and fringe benefits payable
in a form other than cash. For purposes of this Plan, the terms Bonus and
Bonuses specifically exclude any and all types of commissions, incentives
or bonuses paid by any Affiliate to an Account Executive.
2.1.13 "Change in Control" has the meaning specified in
Section 10.2
2.1.14 "Closing Price" means the closing price of the Company's
Common Stock on the New York Stock Exchange as of the applicable date;
provided, however, that if no closing price is available for such date,
"Closing Price" means the closing price of the Company's Common Stock as
of the next most recent date for which a price is available.
2.1.15 "Code" means the Internal Revenue Code of 1986, as
amended from time to time and any successor statute. References to a
Code section shall be deemed to be to that section or to any successor to
that section.
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2.1.16 "Committee" means the Compensation Committee of the
Company's Board.
2.1.17 "Common Stock" means the common stock of the Company.
2.1.18 "Company" means H&R Block, Inc.
2.1.19 "Company Contribution" or "Company Contributions" means
the sum of (i) the Company Matching Contributions described in Section
4.1.2, and (ii) the additional Company contributions described in Section
4.1.3.
2.1.20 "DCP" means the H&R Block Deferred Compensation Plan for
Executives initially adopted by the Company effective as of August 1,
1987, as subsequently amended prior to the Effective Date of this Plan.
2.1.21 "Deferred Compensation Unit" means a unit equal in value
to one share of Common Stock and posted to a Participant's Account for
the purpose of measuring the benefits payable under the Plan.
2.1.22 "Disabled" or "Disability" with respect to a Participant
shall have the same definition as in the Company's then existing long
term group disability insurance program.
2.1.23 "Early Retirement Date" of a Participant means the first
day of the first calendar month commencing on or after the date on which
(i) the Participant has reached Age 55 while in the employ of an
Affiliate and (ii) the Participant has completed at least ten (10) Years
of Service."
2.1.24 "Effective Date" or "Effective Date of this Plan" means
the date on which the DCP became effective, i.e., August 1, 1987.
2.1.25 "Enrollment Period" for a Plan Year commencing on January
1 means the immediately preceding period of October 1 through December
15, inclusive. At its sole and absolute discretion, the Committee may
grant to a person eligible to participate in the Plan an "Enrollment
Period" consisting of the 30-day period immediately following the date on
which such person is first employed by a Participating Affiliate.
2.1.26 "Executive" means a person other than an Account
Executive with substantial responsibility in the management of a
Participating Affiliate employed on a full-time basis by that
Participating Affiliate.
2.1.27 "5-year payout" has the meaning specified in
Section 6.3.2.
2.1.28 "Fixed 120 Account" means an Account that represents
amounts deferred by a Participant under a Permissible Deferral
election(s) as a part of which the Participant elected the fixed rate
investment option described in the second paragraph of Section 4.2.1.
2.1.29 "Group A Participant" has the meaning specified in
Section 3.1.1.
2.1.30 "Group B Participant" has the meaning specified in
Section 3.1.2.
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2.1.31 "Hours of Service" means hours of service determined in
accordance with the provisions of the then existing H&R Block Employee
Profit Sharing Retirement Plan.
2.1.32 "Initial Payment Period" has the meaning specified in
Section 6.4.2.
2.1.33 "Matching Contributions" has the meaning specified in
Section 4.1.2.
2.1.34 "Normal Retirement Date" of a Participant means the last
day of the calendar month in which the Participant reaches the Age of 65
while in the employ of an Affiliate.
2.1.35 "Overall Payment Period" has the meaning specified in
Section 6.4.1.
2.1.36 "Participant" means an Executive or an Account Executive
who is eligible to participate in the Plan and has elected to participate
in the Plan.
2.1.37 "Participating Affiliate" or "Participating Affiliates"
means the Company and the following indirect subsidiaries of the Company,
each of which is an Affiliate: HRB Management, Inc., H&R Block Tax
Services, Inc., Block Financial Corporation, HRB Business Services, Inc.,
and the U.S. subsidiaries of such indirect subsidiaries; and such other
Affiliates as may be designated as such by the Company from time to time.
2.1.38 "Permissible Deferral" means, with respect to a Plan
Year, a deferral in that Plan Year of an Annual Deferral Amount. For all
Participants, the aggregate of all deferrals made under the Plan,
including the DCP and the Supplemental Plan, for all Plan Years may not
exceed one million dollars ($1,000,000.00).
In the case of a Participant who is an employee of both an
Accounting Subsidiary and an Accounting Firm, the calculation of the
amount of the Permissible Deferral shall be made by taking into account
the amount of salary and bonus paid to such Participant by the Accounting
Firm, but the actual deferral under the Plan shall only be made out of
Base Salary and/or Bonus or Bonuses paid by all Affiliates.
Deferrals may be made from Base Salary for a Plan Year and/or
from a Bonus or Bonuses applicable to the Plan Year. Deferrals from the
Base Salary or from a Bonus or Bonuses are made in separate elections by
the Participant during the Enrollment Period prior to the Plan Year
during which such Base Salary would otherwise be paid to the Participant
or the Bonus would be earned without further contingency (regardless of
when such Bonus is paid). Deferral elections must specify (i) the
percentage (stated as an integer) of the deferral that is intended to be
deducted from the Base Salary and (ii) the percentage (stated as an
integer) or the flat dollar amount of the deferral that is intended to be
deducted from the Bonus or Bonuses. Deferrals made from the Base Salary
shall be made in installments, as instructed and approved by the
Committee. Deferrals made from each Bonus shall be made at the time or
times during the applicable Plan Year that the Bonus would otherwise be
paid to the Participant (based upon the deferral election in effect for
the Plan Year when the Bonus was earned without further contingency).
Each installment of a deferral shall be rounded to the nearest whole
dollar amount.
A Participant may irrevocably elect at the time of making a
Permissible Deferral election to have the entire amount of his or her
Base Salary deferral for a Plan Year deferred from such Participant's
Bonus or Bonuses earned during such Plan Year without
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<PAGE> 9
further contingency. The amount of the Base Salary deferral will be
determined as of January 1 of such Plan Year based on the annual rate of
Base Salary in effect for the Participant on that date. Such election may
be in addition to an election to defer Bonus itself and both the Base
Salary deferral amount and the Bonus deferral amount are eligible for
Company Contributions (subject to the limits specified in Article 4). For
example, Participant A, a 5-year Plan Participant, is paid a Base Salary
at an annual rate of $100,000 on January 1 of Plan Year X, and earns a
Bonus of $50,000 without further contingency during Plan Year X. During
the Enrollment Period prior to Plan Year X, A elected to defer 25% of
Base Salary and 25% of Bonus in Plan Year X. A also elected to have all
of the Base Salary deferral deferred from the Bonus. In this example,
$37,500 would be deferred from A's bonus ($25,000 of salary deferrals
(25% of $100,000) and $12,500 of bonus deferrals ($25% of $50,000)). The
entire $37,500 would be subject to Company Contributions under Article 4.
If, in such example, the actual Bonus amount is $35,000, all of the bonus
would be deferred and $2,500 of elected Base Salary deferrals would not
be deferred from Base Salary or Bonus applicable to such Plan Year
because the Bonus was not sufficiently large to cover both the elected
Base Salary deferral and the Bonus deferral.
2.1.39 "Plan" means the "H&R Block Deferred Compensation Plan
for Executives, as Amended and Restated" as of January 1, 1999, as set
forth herein and as further amended and/or restated from time to time.
2.1.40 "Plan Year" means the calendar year for all Permissible
Deferrals and for all purposes when used in Sections 4.3, 4.4, 6.2, 6.3,
6.4, 6.6 and 6.7. Except for Permissible Deferrals elected to commence on
March 1, 1998, and Permissible Deferrals elected during a discretionary
Enrollment Period in accordance with Section 2.1.25, "Plan Year " means
the calendar year (a) for all Permissible Deferrals elected by Group B
Participants, and (b) for Permissible Deferrals of Group A Participants
elected to commence January 1, 1991 or later. For Permissible Deferrals
of Group A Participants elected to commence on or before May 1, 1990,
"Plan Year" means the 12-month period ending each April 30, through April
30, 1997, the period between May 1, 1997 and December 31, 1997,
inclusive, and the calendar year thereafter. For Permissible Deferrals of
Participants elected to commence on March 1, 1998, "Plan Year" means the
10-month period between March 1, 1998 and December 31, 1998, inclusive,
and the calendar year thereafter. If the Committee grants to a person
eligible to participate in the Plan a discretionary Enrollment Period in
accordance with Section 2.1.25 and such person submits to the Company a
Permissible Deferral election, such Participant's first "Plan Year" shall
be the period (i) beginning on the first day of his or her first regular
pay period commencing not less than 30 days after the Company's receipt
of his or her Permissible Deferral election, and (ii) ending on December
31 of the year in which such pay period falls. Plan Years under the DCP
and Supplemental Plan shall constitute Plan Years under this Plan,
provided that, for all purposes hereunder, a Participant that
participated in both the DCP and the Supplemental Plan simultaneously
shall be considered to have participated in this Plan for only one Plan
Year for each Plan Year of simultaneous participation in the DCP and
Supplemental Plan.
2.1.41 "Plan Year Payment Period" has the meaning specified in
Section 6.4.2.
2.1.42 "Remainder Payment Period" has the meaning specified in
Section 6.4.2.
2.1.43 "Standard Form of Benefit" as to any Participant means
semimonthly payments for a fifteen (15) year period.
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2.1.44 "Supplemental Plan" means the H&R Block Supplemental
Deferred Compensation Plan for Executives initially adopted by the
Company effective as of May 1, 1994, as subsequently amended prior to the
Effective Date of this Plan.
2.1.45 "10-year payout" has the meaning specified in
Section 6.3.2.
2.1.46 "Trust" means the H&R Block, Inc. Deferred Compensation
Trust Agreement.
2.1.47 "Years of Service" means the number of consecutive Plan
Years (including years prior to the Effective Date of this Plan) for
which the Participant had at least 1,000 Hours of Service.
Section 2.2 Gender and Number. Except as otherwise indicated by
context, masculine terminology used herein also includes the feminine and
neuter, and terms used in the singular may also include the plural.
ARTICLE 3 PARTICIPATION
Section 3.1 Who May Participate. Participation in the Plan is
limited to Group A and Group B Participants, described as follows:
3.1.1 "Group A Participant" is an Executive of the
Company or of a Participating Affiliate (i) serving as a Vice
President of the Company or applicable Participating Affiliate,
or (ii) participating in the DCP as a "Group A Participant"
under the DCP as of December 31, 1998, as such term was defined
as of such date.
3.1.2 "Group B Participant" is an Executive or Account
Executive who does not qualify as a Group A Participant, but who
is designated by the Committee as eligible to participate in the
Plan.
Section 3.2 Time and Conditions of Participation. An eligible
Executive or Account Executive shall become a Participant only upon (i)
the individual's completion of a Permissible Deferral election for the
succeeding Plan Year or Plan Years during an Enrollment Period, in
accordance with a form established by the Company from time to time, and
(ii) compliance with such terms and conditions as the Committee may from
time to time establish for the implementation of the Plan, including, but
not limited to, any condition the Committee may deem necessary or
appropriate for the Company to meet its obligations under the Plan. An
individual may make a Permissible Deferral election for any succeeding
Plan Year during an Enrollment Period provided the total Permissible
Deferral elections do not exceed the limitation set forth in Section
2.1.38.
Section 3.3 Termination of Participation. Once an individual
has become a Participant in the Plan, participation shall continue until
the first to occur of (i) payment in full of all benefits to which the
Participant or Beneficiary is entitled under the Plan, or (ii) the
occurrence of an event specified in Section 3.4 which results in loss of
benefits, or (iii) for a Group B Participant, having an Annual Deferral
Amount that causes the Participant's Base Salary and Bonus for the Plan
Year, after reduction for the Annual Deferral Amount, to be less than
ninety-nine percent (99%) of the United States Social Security
Contribution and Benefit Base determined under Section 230 of
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the Social Security Act for such Plan Year. A Group B Participant whose
participation in the Plan is terminated under clause (iii) of the preceding
sentence shall be deemed for purposes of all Plan provisions (including Section
4.4, Section 5.1 and Section 6.3) to have voluntarily terminated employment with
the Company as of the date the Participant's Plan participation is terminated.
Such a Participant may then reenter the Plan during the following Enrollment
Period, assuming the Participant continues to be eligible to participate in the
Plan as provided in Section 3.1. Except as otherwise specified in the Plan, the
Company may not terminate an individual's participation in the Plan.
Section 3.4 Missing Persons. If the Company is unable to locate the
Participant or his Beneficiary for purposes of making a distribution, the amount
of a Participant's benefits under this Plan that would otherwise be considered
as non-forfeitable shall be forfeited effective four (4) years after (i) the
last date a payment of said benefit was made, if at least one such payment was
made, or (ii) the first date a payment of said benefit was directed to be made
by the Company pursuant to the terms of the Plan, if no payments had been made.
If such person is located after the date of such forfeiture, the benefits for
such Participant or Beneficiary shall not be reinstated hereunder.
Section 3.5 Relationship to Other Plans. Participation in the Plan shall
not preclude participation of the Participant in any other fringe benefit
program or plan sponsored by an Affiliate for which such Participant would
otherwise be eligible. For persons participating in the DCP and, if applicable,
the Supplemental Plan, as of December 31, 1998, who continue as Participants in
this Plan as of January 1, 1999, participation in this Plan shall be deemed to
be continued participation in the DCP and, if applicable, the Supplemental Plan,
but under the terms of this Plan.
Section 3.6 Changes in Employment Status. If a Participant has a change in
his or her employment responsibilities, title and/or compensation, such that the
Participant would not qualify for initial participation in the Plan as a Group A
Participant or Group B Participant, as determined by the Committee, (i) the
Participant shall continue to make deferrals in accordance with the
Participant's Permissible Deferral election for the Plan Year during which the
change in employment responsibilities, title and/or compensation occurs, (ii)
the Participant shall not be eligible to make Permissible Deferrals in Plan
Years following the Plan Year during which the change in employment
responsibilities, title and/or compensation occurs unless and until the
Participant again qualifies for initial participation as a Group A Participant
or a Group B Participant, as determined by the Committee, and (iii) the
Participant shall otherwise continue to participate in the Plan.
ARTICLE 4 ENTRIES TO THE ACCOUNT
Section 4.1 Contributions
4.1.1 Deferrals. During each Plan Year, if the Participant
elects the fixed rate and/or variable crediting rate option for measuring
the performance of the Account under Section 4.2, the Company shall post
to the Account of such Participant the dollar amount of Base Salary and
Bonuses to be deferred as designated by the Participant's Permissible
Deferral election in effect for that Plan Year. Deferrals from Base
Salary each calendar month shall be posted as of the first day of such
month and deferrals from Bonuses shall be posted as of the first day of
the calendar month in which the Bonus would otherwise have been paid to
the Participant.
During each Plan Year, if the Participant elects the Common
Stock crediting rate option for measuring the performance of the Account
under Section 4.2, the Company
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shall post to the Account of such Participant a number of Deferred
Compensation Units equivalent to the amount of Base Salary and Bonuses to
be deferred as designated by the Participant's Permissible Deferral
election in effect for that Plan Year. Deferrals from Base Salary each
calendar month (and the corresponding number of Deferred Compensation
Units) shall be posted as of the first day of such month and deferrals
from Bonuses shall be posted as of the first day of the calendar month in
which the Bonus would otherwise have been paid to the Participant. The
number of Deferred Compensation Units posted for each calendar month
shall be calculated by dividing: (i) the dollar amount deferred during
that month; by (ii) the Closing Price on the first business day (i.e., a
day on which the Common Stock is traded on the New York Stock Exchange)
of that month.
4.1.2 Company Matching Contributions. The Company shall post
"Matching Contributions" to the Account of each Participant as follows.
For each $1.00 of Base Salary or Bonus deferred pursuant to Section
4.1.1, the Company shall post an additional $.25 to the Participant's
Account, provided, however, that the maximum percentage of each of Base
Salary and Bonus to which a Matching Contribution shall be made with
respect to a Plan Year shall be dependent upon the number of Plan Years
in which the Participant has participated in the Plan, as follows:
Maximum Percentage
of Base Salary and Bonus
Plan Year of Participation Matched by a Company Contribution
-------------------------- ---------------------------------
1st and 2nd Year of Participation 10%
3rd and 4th Year of Participation 20%
5th Year of Participation and After 25%
and, provided further, that the total of all Matching Contributions made
pursuant to this Plan after December 31, 1998 shall not exceed
twenty-five percent (25%) of the amount by which $1,000,000.00 exceeds
the aggregate amount of Permissible Deferrals completed by the
Participant pursuant to the Plan on or before December 31, 1998.
The combination of the DCP and the Supplemental Plan into this
Plan shall not result in the posting of any Company Matching
Contributions to any accounts applicable to the Supplemental Plan (which
had no Matching Contributions), nor shall such combination affect any
Company Matching Contributions posted to accounts pursuant to the DCP.
Deferrals made on and after January 1, 1999, by Participants who were
participants in the Supplemental Plan shall result in the posting of
Company Matching Contributions to the extent permitted by the immediately
preceding paragraph of this Section 4.1.2.
If the Participant elects the Common Stock crediting rate option
for measuring the performance of the Account under Section 4.2, the
Company shall post to the Account of such Participant for each calendar
month a number of Deferred Compensation Units equal to (i) the dollar
amount of Matching Contributions posted to the Account during such month;
divided by (ii) the Closing Price on the first business day of that
month. Deferred Compensation Units attributable to Matching
Contributions shall be posted as of the same time as the corresponding
Matching Contributions.
4.1.3 Additional Company Contributions. The Company shall also
post to the Account of each Participant once each Plan Year the
difference, if any, between (a) the amount for that Plan Year which would
have been contributed on behalf of the Participant to any profit sharing
plan which is deemed to be a "qualified plan" under the Code if the
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Participant had not made a Permissible Deferral election under the Plan;
and (b) the amount for that Plan Year contributed on behalf of the
Participant to such a plan.
If the Participant elects the Common Stock crediting rate option
for measuring the performance of the Account under Section 4.2, the
Company shall post to the Account of such Participant for the calendar
month in which any Plan Year contribution is made by the Company pursuant
to the first paragraph of this Section 4.1.3 a number of Deferred
Compensation Units equal to (i) the dollar amount of any such Plan Year
contribution made during such month; divided by (ii) the Closing Price on
the first business day of that month. Deferred Compensation Units
attributable to any contribution made by the Company pursuant to the
first paragraph of this Section 4.1.3 shall be posted as of the same time
as such corresponding contributions.
4.1.4 Disability. During the first 90-day period in which a
Participant is Disabled, deferrals and Company Contributions (and, if
applicable, the corresponding number of Deferred Compensation Units)
shall continue to be posted as described in Sections 4.1.1, 4.1.2 and
4.1.3. If a Participant continues to be Disabled after such 90-day
period, deferrals will cease but Company Contributions will continue for
the balance of the Participant's Permissible Deferral period as if the
Participant's deferrals had continued. A Participant may resume deferrals
upon his or her return to work.
4.1.5 Fixed 120 Account Permissible Deferral Elections. A
Participant making Base Salary and/or Bonus deferrals into a Fixed 120
Account under the DCP as of December 31, 1997 who did not make the
special, one-time election provided under the DCP to have all then
outstanding and incomplete Fixed 120 Account deferral cycles deemed
completed as of December 31, 1997, shall continue to make such deferrals
in accordance with the Participant's original Permissible Deferral
election.
Section 4.2 Crediting Rate. Gains or losses shall be posted to the
Account in accordance with the Participant's election of investment options
which will be a reference for measuring the performance of the Account, as
modified, if applicable, by Section 4.3 or Section 4.4. The Company intends to
measure the performance of the Account in accordance with the Participant's
election but reserves the right to do otherwise. The Participant shall elect
from among the following investment options: (i) a fixed rate as described in
4.2.1, (ii) a variable rate as described in 4.2.2, or (iii) a Common Stock
crediting rate as described in 4.2.3. On a monthly basis, Participants may elect
to reallocate all or any portion of their Account balances, including the entire
balance in a Fixed 120 Account, among the available investment options,
including those funds selected by the Company for the variable rate investment
option, provided said reallocations are in at least ten percent (10%)
increments. If a Participant does elect to reallocate his or her entire Fixed
120 Account balance to another investment option, said Fixed 120 Account will be
deemed closed and terminated. In no event shall a Participant be entitled to
reallocate an Account balance that is not a Fixed 120 Account balance into a
Fixed 120 Account.
Participants may change their crediting rate elections during an
Enrollment Period or once each calendar month by giving the Company written
notice of such change on a form provided by the Company for that purpose. Upon
receipt of such notice submitted with enrollment materials during an Enrollment
Period, the crediting rate change shall be made as of the first day of the Plan
Year to which the Enrollment Period relates. Upon receipt of such notice other
than in connection with enrollment materials, the Company will effect the change
on the first day of the calendar month immediately following the month in which
such notice was received. Any change in crediting rate made in accordance with
such notice procedures will govern the Participant's
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Account balance and future deferrals occurring after the effective date.
4.2.1 Fixed Rate. If a Participant elects a fixed rate, the
interest will be compounded on a daily basis and posted to the
Participant's Account per each pay period at an effective annual yield
equal to the rate of ten-year United States Treasury notes. The rate will
be determined once each Plan Year and will be the rate in effect as of
September 30 of the Plan Year immediately prior to the Plan Year to which
it applies, as published by Salomon Brothers Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
For Permissible Deferrals elected under the DCP and commencing
prior to January 1, 1995, the effective annual yield for the fixed rate
crediting option shall be equal to one hundred twenty percent (120%) of
the ten-year rolling average rate of ten-year United States Treasury
notes. The ten-year rolling average rate will be the rate in effect as of
September 30 of the Plan Year immediately prior to the Plan Year to which
it applies, as published by Salomon Brothers Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
4.2.2 Variable Rate. If a Participant elects a variable rate,
the Participant's Account will be credited or debited as if the Account
balance were invested in one or more funds selected by the Company in the
proportions elected by the Participant. Statements will be provided on a
quarterly basis. Initially the funds will be from the Pruco Variable
Appreciable Life Insurance Contracts and include the Equity Portfolio,
the Flexible Managed Portfolio, the Conservative Balanced Portfolio, the
Money Market Portfolio, the Diversified Bond Portfolio, the High Yield
Bond Portfolio and the Real Property Portfolio. Participants may elect to
have their Accounts treated as if they were invested in one or more of
the funds selected, provided the election is in at least ten percent
(10%) increments of the Account.
4.2.3 Common Stock Crediting Rate. If a Participant elects the
Common Stock crediting rate, the Participant's Account will be valued as
if his or her Account were invested in shares of Common Stock equal to
the number of Deferred Compensation Units posted to his or her Account.
The value of a Participant's Account will vary with the value of the
Company's Common Stock. The Participant's Account will be credited, as of
the applicable dividend payment date, with additional Deferred
Compensation Units equal in value to any dividends declared on the
Company's Common Stock based on the number of Deferred Compensation Units
posted to the Participant's Account as of the record date with respect to
the declaration of such dividend. As of any date of valuation, the value
of a Participant's Account will be equal to the value (at the Closing
Price on such date) of the number of shares of Common Stock represented
by the Deferred Compensation Units credited to the Account as of that
date.
Section 4.3 Crediting Rate Upon Retirement, Disability, Continued
Employment After Reaching the Age of 75, Death or Termination of Employment with
all Affiliates as a Result of a Change in Control. If a Participant (i)
terminates employment at or after Normal Retirement Date or Early Retirement
Date, (ii) is Disabled, or (iii) continues employment after reaching the Age of
75 and has completed ten (10) Years of Service, gains and losses shall be
credited as described in Section 4.2 to that Participant's Accounts. If a
Participant dies prior to termination of employment, gains and losses shall be
credited, to date of death, as described in Section 4.2 to that Participant's
Accounts. If a Participant terminates employment with all Affiliates before
Normal Retirement Date or Early Retirement Date as a result of a Change in
Control, gains and losses to all of that Participant's Accounts shall be
credited as described in Section 4.2 up to, but not after,
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<PAGE> 15
the date of the Change in Control.
Section 4.4 Crediting Rate Upon Resignation or Discharge.
4.4.1 For a Participant whose employment with all Affiliates
terminates on or after August 1, 1995, but before the Normal Retirement
Date or the Early Retirement Date, for reasons other than death,
Disability or a Change in Control, gains and losses shall be credited to
that Participant's Account as described in Section 4.2 up to the date of
termination of employment, and the crediting shall continue after such
date for those Participants who elected a 10-year payout or a 5-year
payout, as such terms are defined in Section 6.3.2. If a Participant
elected to be paid in a lump sum, there shall be no further crediting to
the Participant's Account following the date of termination of
employment.
4.4.2 For a Participant whose employment with all Affiliates
terminated prior to August 1, 1995, and before the Normal Retirement Date
or the Early Retirement Date, for reasons other than death, Disability or
a Change in Control, gains and losses to that Participant's Accounts that
represent completed deferral cycles shall be credited as described in
Section 4.2 up to the date of termination of employment. Gains and losses
to that Participant's Accounts that do not represent completed deferral
cycles and gains and losses after the date of termination of employment
shall be credited at an interest rate equal to the average of (i) the
interest rate set by the Chief Financial Officer of the Company in his
discretion for the Plan Year in which the termination of employment
occurs, which rate shall not be less than the rate then payable on
Investment Savings Accounts of $1,000 or less at Commerce Bank of Kansas
City, N.A., Kansas City, Missouri, or any successor thereto, and (ii) the
respective interest rates so set by the Chief Financial Officer of the
Company for each of the two Plan Years immediately prior to the Plan Year
in which the termination of employment occurs.
ARTICLE 5 VESTING
Section 5.1 Participant Deferrals and Vesting Schedule for Company
Contributions. Participant deferrals pursuant to Section 4.1.1 are fully vested
immediately. The Participant's interest in the Company Matching Contributions
under Section 4.1.2 and the Company Contributions described in Section 4.1.3
shall vest according to the following schedule:
Percentage of
Company Contributions
Years of Service Vested
---------------- ---------------------
Less than 2 None
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
For purposes of crediting Years of Service under the foregoing Schedule,
Participants will be credited with Years of Service beginning with the year in
which the Participant began participation
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in the Plan. A Disabled Participant will be credited with any Hours of Service
with which he or she would have been credited but for the Disability.
Section 5.2 Exceptions to Vesting Schedule. Company Contributions are
fully vested upon a Participant's death prior to termination of employment, and
upon a Change in Control as defined in Section 10.2. Participants who have
attained Age 65 prior to the date on which they first became eligible to
participate in the Plan and who have completed ten (10) Years of Service are
fully vested. Participants who have attained Age 55 (but are less than Age 65)
prior to the date on which they first became eligible to participate in the Plan
and who have completed ten (10) Years of Service, vest according to the
following formula:
Years of Service since initial Plan eligibility date
------------------------------------------------------------
65 minus Participant's Age on initial Plan eligibility date.
ARTICLE 6 DISTRIBUTION OF BENEFITS
Section 6.1 Payments After Termination of Employment. Generally, payments
of benefits to a Participant shall be made by the Company only upon the
termination, voluntary or involuntary, of the Participant's employment with all
Affiliates, except where (i) a Participant is Disabled, (ii) the provisions of
Section 6.2.2 apply, or (iii) the provisions of Section 6.7 apply.
Section 6.2 Form of Benefits Upon Retirement, Disability or Continued
Employment After Reaching the Age of 75.
6.2.1 Retirement or Disability. Payments from the
Account shall be made in accordance with the Standard Form of
Benefit for Participants who terminate employment on or after
Normal Retirement Date or Early Retirement Date or are
Disabled. However, no less than 13 months prior to such
termination of employment, the Participant may petition the
Committee for, and the Committee may approve at such time, an
optional form of benefit.
6.2.2 Continued Employment After Reaching the Age of
75. If a Participant reaches the Age of 75 while in the employ
of an Affiliate, and has completed ten (10) Years of Service,
payment of benefits shall commence in the first pay period of
the first calendar quarter that begins at least forty-five (45)
days after the date on which the Participant reaches the Age of
75. Payments from the Account shall be made in accordance with
the Standard Form of Benefit. However, no less than 13 months
prior to the date on which the Participant reaches the Age of
75, the Participant may petition the Committee for, and the
Committee may approve at such time, an optional form of
benefit.
6.2.3 Lump-Sum Payment. Notwithstanding any other
provisions of the Plan, a Participant who terminates employment
on or after Normal Retirement Date or Early Retirement Date,
and a Participant who reaches the Age of 75 while in the employ
of an Affiliate may, at any time before or after a Change in
Control, as defined in Section 10.2, elect to receive an
immediate lump-sum payment of the
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<PAGE> 17
aggregate of the balances of said Participant's Accounts
reduced by a penalty, which shall be forfeited to the Company,
in lieu of payments in accordance with the Standard Form of
Benefit or such optional form of benefit as may have previously
been approved by the Committee under this Section 6.2.3. The
penalty shall be equal to ten percent (10%) of the aggregate of
the balances of such Accounts if the election is made before a
Change in Control and shall be equal to five percent (5%) of
the aggregate of the balances of such Accounts if the election
is made after a Change in Control. However, the penalty shall
not apply if the Committee determines, based on advice of
counsel or a final determination or ruling by the Internal
Revenue Service or any court of competent jurisdiction, that by
reason of the provisions of this paragraph any Participant has
recognized or will recognize gross income for federal income
tax purposes under this Plan in advance of payment to the
Participant of Plan benefits. The Company shall notify all
Participants of any such determination by the Committee and
shall thereafter refund all penalties which were imposed
hereunder in connection with any lump-sum payments made at any
time during or after the first year to which the Committee's
determination applies (i.e., the first year for which, by
reasons of the provisions of this paragraph, gross income under
this Plan is recognized for federal income tax purposes in
advance of payment of benefits). Interest compounded annually
shall be paid by the Company to the Participant (or the
Participant's Beneficiary if the Participant is deceased) on
any such refund from the date of the Company's payment of the
lump sum at an annual rate equal to the rate of one-year United
States Treasury notes in effect as of September 30 of the Plan
Year immediately prior to the Plan Year in which such refund is
paid, as published by Salomon Brothers, Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the
Company. The Committee may also reduce or eliminate the penalty
if it determines that the right to elect an immediate lump-sum
payment under this paragraph, with the reduced penalty or with
no penalty, as the case may be, will not cause any Participant
to recognize gross income for federal income tax purposes under
this Plan in advance of payment to the Participant of Plan
benefits.
Section 6.3 Form of Benefits Upon Resignation or Discharge, or
Termination of Employment with all Affiliates as a Result of a Change in
Control.
6.3.1 Upon a Participant's termination of employment with all
Affiliates before Normal Retirement Date or Early Retirement Date, but
following a Change in Control, payments from the Account shall be paid in
a lump sum within forty-five (45) days after the date of the termination
of employment.
6.3.2 If a Change in Control has not occurred, for Participants
who terminate employment with all Affiliates on or after August 1, 1995,
but before the Normal Retirement Date or the Early Retirement Date, for
reasons other than Disability or death, payment(s) from the Account shall
be in the form of (a) semimonthly payments over a 10-year period (a
"10-year payout"); (b) semimonthly payments over a five-year period (a
"5-year payout"); or (c) a lump sum, as elected by the Participant at the
time of said Participant's first Permissible Deferral election, or, in
the case of a Participant who made one or more Permissible Deferral
elections prior to August 1, 1995, as elected by the Participant in
writing during a special election period between August 15, 1995 and
September 15, 1995, inclusive.
6.3.3 If a Change in Control has not occurred, for Participants
who terminated employment with all Affiliates prior to August 1, 1995,
but before the Normal Retirement
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<PAGE> 18
Date or the Early Retirement Date, for reasons other than Disability or
death, payment(s) from the Account shall be in the form of (a)
semi-monthly payments over a three-year period for all Permissible
Deferrals that satisfy a completed deferral cycle, or (b) a lump sum for
all Permissible Deferrals that do not satisfy a completed deferral cycle.
6.3.4 If no election under Section 6.3.2 is made by the
Participant eligible to make such an election, payment from the Account
shall be in the form of a lump sum. An election made in accordance with
Section 6.3.2 shall apply to all Permissible Deferral elections made by
the Participant under the Plan and is irrevocable.
6.3.5 If an eligible Participant has elected a 10-year payout or
a 5-year payout pursuant to Section 6.3.2, and the amount of each
semimonthly installment, as initially calculated, is less than $500 (such
calculation to be accomplished by amortizing the aggregate of the
Participant's Account balances over the payment period using a crediting
rate equal to the rate of one-year United States Treasury notes in effect
as of September 30 of the Plan Year prior to the Plan Year in which the
termination of employment occurs), the form of payment(s) for such
Participant shall be a 5-year payout in lieu of an elected 10-year payout
(unless the amount of each semimonthly installment under a 5-year payout,
as so calculated, is also less than $500, in which case the form of
payment will be a single lump sum), or a lump sum in lieu of an elected
5-year payout, as the case may be.
6.3.6 Notwithstanding any other provisions of the Plan, an
eligible Participant who (1) elects either a 10-year payout or a 5-year
payout and either such payout is not automatically converted to a lump
sum pursuant to Section 6.3.5, and (2) terminates employment before the
Normal Retirement Date or the Early Retirement Date may, at any time
before or after a Change in Control, as defined in Section 10.2, elect to
receive an immediate lump-sum payment of the aggregate of the balances of
said Participant's Accounts reduced by a penalty, which shall be
forfeited to the Company, in lieu of payments in accordance with the
10-year payout or the 5-year payout, whichever is applicable. The penalty
shall be equal to ten percent (10%) of the aggregate of the balances of
such Accounts if the election is made before a Change in Control and
shall be equal to five percent (5%) of the aggregate of the balances of
such Accounts if the election is made after a Change in Control. However,
the penalty shall not apply if the Committee determines, based on advice
of counsel or a final determination or ruling by the Internal Revenue
Service or any court of competent jurisdiction, that by reason of the
provisions of this paragraph any Participant has recognized or will
recognize gross income for federal income tax purposes under this Plan in
advance of payment to the Participant of Plan benefits. The Company shall
notify all Participants of any such determination by the Committee and
shall thereafter refund all penalties which were imposed hereunder in
connection with any lump-sum payments made at any time during or after
the first year to which the Committee's determination applies (i.e., the
first year for which, by reasons of the provisions of this paragraph,
gross income under this Plan is recognized for federal income tax
purposes in advance of payment of benefits). Interest compounded
annually shall be paid by the Company to the Participant (or the
Participant's Beneficiary if the Participant is deceased) on any such
refund from the date of the Company's payment of the lump sum at an
annual rate equal to the rate of one-year United States Treasury notes in
effect as of September 30 of the Plan Year immediately prior to the Plan
Year in which such refund is paid, as published by Salomon Brothers,
Inc., or any successor thereto, or as determined by the Chief Financial
Officer of the Company. The Committee may also reduce or eliminate the
penalty if it determines that the right to elect an immediate lump-sum
payment under this paragraph, with the reduced penalty or with no
penalty, as the
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<PAGE> 19
case may be, will not cause any Participant to recognize gross income for
federal income tax purposes under this Plan in advance of payment to the
Participant of Plan benefits.
Section 6.4 Amount of Benefit.
6.4.1 Except for distributions in the form of a lump sum,
benefit payments shall be in the form of semimonthly cash installments
paid during the applicable payment period (the "Overall Payment Period").
6.4.2 Except as provided in Section 6.4.4, the amount of each
installment payment shall be level during the portion of the Overall
Payment Period ending on December 31 of the Plan Year in which benefit
payments commence (the "Initial Payment Period"), during each complete
Plan Year of the Overall Payment Period thereafter (a "Plan Year Payment
Period"), and during any remaining period of the Overall Payment Period
following the last Plan Year Payment Period (the "Remainder Payment
Period"), but will vary from one such portion of the Overall Payment
Period to the next. If a Participant was receiving benefits pursuant to
Section 6.2 as of August 1, 1995, payments due on and after January 1,
1996 shall be made in accordance with this Section 6.4.2 and with Section
6.4.3.
6.4.3 The amount of each level payment for the Initial Payment
Period, if any, shall be calculated using the balance in the Account as
of the beginning of the Initial Payment Period and amortizing such
balance over the remaining Overall Payment Period using an assumed
interest rate equal to the rate of one-year United States Treasury notes,
said rate to be determined once each Plan Year and to be the rate in
effect as of the September 30 immediately preceding the payment period to
which it applies, as published by Solomon Brothers, Inc., or any
successor thereto, or as determined by the Chief Financial Officer of the
Company (the "Assumed Interest Rate"). The amount of each level payment
for each Plan Year Payment Period shall be calculated by taking the
balance in the Account as of November 30 of the Plan Year immediately
prior to such Plan Year Payment Period, subtracting the benefit payments
made during the portion of such preceding Plan Year following November
30, and amortizing the difference over the remaining Overall Payment
Period using the Assumed Interest Rate. The amount of each level payment
for the Remainder Payment Period, if any, shall be calculated by taking
the balance in the Account as of November 30 of the Plan Year immediately
prior to the Remainder Payment Period, subtracting the benefit payments
made during the portion of such preceding Plan Year following November
30, and amortizing the difference over the Remainder Payment Period using
an assumed interest rate of zero percent (0%) per annum. If the actual
crediting rate for the Remainder Payment Period is more than zero
percent, the additional gain resulting from the difference in crediting
rates shall be paid to the Participant in a single payment within six
months after the last day of the Remainder Payment Period.
6.4.4 If the Participant terminates employment with all
Affiliates prior to August 1, 1995, and receives benefits pursuant to
Section 6.3.3, semimonthly payments for Permissible Deferrals that
satisfy a completed deferral cycle shall be level during the entire
Overall Payment Period and shall be calculated using the balance in the
Account at the commencement of benefit payments, and amortizing such
balance over three years at the crediting rate determined in accordance
with Section 4.4.2.
6.4.5 Generally, the Account shall continue to be credited
during the Overall Payment Period with gains and losses as provided in
Section 4.3. However, if a Participant
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<PAGE> 20
receives benefits pursuant to Section 6.3 (other than pursuant to Section
6.3.1), the Account shall be credited with gains and losses as provided
in Section 4.4. Except as provided otherwise, if a Participant dies,
Section 6.6 shall apply.
6.4.6 Notwithstanding anything in this Plan to the contrary, the
Committee may, in its sole discretion, (i) increase or reduce any assumed
interest rate set forth in this Section 6.4 and any such assumed interest
rate, as so adjusted, shall be effective for calculating level
semimonthly installments for Participants whose benefit payments commence
after the date of such adjustment, and (ii) change the date set forth in
Section 6.4.3 on which the balance in the Participant's Account is to be
determined for purposes of calculating the amount of each level payment
for each Plan Year Payment Period and each Remainder Payment Period, and
any such revised date shall be effective for calculating level
semimonthly installments for the Plan Year Payment Period or the
Remainder Payment Period beginning on or after the effective date of such
revision.
Section 6.5 Time of Payment. Generally, benefit payments to a Participant
shall commence in the first pay period of the calendar quarter that begins at
least forty-five (45) days after the date of termination of employment.
Notwithstanding the preceding sentence, if a Participant elected to be paid in a
lump sum, the benefit payment shall be made within forty-five (45) days after
the date of termination of employment. In the case of a Disabled Participant,
benefits shall commence no later than six (6) months after the Participant's
Early Retirement Date.
With respect to Permissible Deferral elections made under the DCP prior
to January 1, 1997, a Participant was permitted elect at the time of each
Permissible Deferral election to defer commencement of the payment of benefits
after termination of employment with respect to such Permissible Deferral
election until the earlier of: (a) five (5) years after termination of
employment; or (b) Age 70. If the Participant made such an election and did not
revoke such election pursuant to a one-time opportunity during the Enrollment
Period prior to the Plan Year commencing January 1, 1998, the Participant shall
receive benefit payments in accordance with said election, provided that the
Committee, upon written petition of the Participant, may begin benefit payments
at an earlier time after termination if it determines that compelling reasons
exist for such earlier payments. No elections to defer commencement of benefits
shall be permitted under this Plan with respect to Permissible Deferrals
commencing on or after January 1, 1998.
Section 6.6 Death Benefits.
6.6.1 Death After Benefit Commencement. In the event a
Participant dies after benefit payments have commenced (other than
payments made pursuant to Section 6.7), the remaining benefit payments,
if any, shall be paid to the Participant's Beneficiary in the same manner
such benefits would have been paid to the Participant had the Participant
survived. A Beneficiary may petition the Committee for an alternative
method of payment. If such benefits were payable pursuant to Section 6.3,
the Account shall continue to be credited during the payout period as
provided in Section 4.4, except that, if such benefits were payable
because of the Participant's termination of employment with all
Affiliates following a Change in Control, the Account shall continue to
be credited as provided in Section 4.3. If such benefits were payable
pursuant to Section 6.2, the Account shall be credited from the date of
the Participant's death at a rate equal to the rate of one-year United
States Treasury notes, said rate to be determined once each Plan Year and
to be the rate in effect as of September 30 of the Plan Year immediately
prior to the Plan Year to which it applies, as published by Salomon
Brothers, Inc., or any successor thereto, or as determined by the Chief
Financial Officer of the Company. The Participant's Beneficiary
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<PAGE> 21
may make the election to receive an immediate lump-sum payment of the
balance of said Participant's Account in accordance with the provisions
of Section 6.2.3 or Section 6.3.6, whichever is applicable, and all
provisions set forth therein relating to penalties shall apply to any
such election.
In addition, if a Participant dies on or after such
Participant's Normal Retirement Date or Early Retirement Date after
having retired, or after benefits have commenced because of the
Participant's Disability, an annuity shall be paid to the Participant's
surviving spouse, if any (to whom he has been married at least one (1)
year prior to the date of death). The annuity shall be for the life of
the Participant's surviving spouse with each semimonthly payment equal to
fifty percent (50%) of the average amount which would have been payable
to the Participant and his or her Beneficiary if, on the date benefits
commenced, the Participant had received the Standard Form of Benefit
payment. If the Participant's surviving spouse is more than thirty-six
(36) months younger than the Participant, the survivor life annuity
payable to such spouse shall be reduced by one-half of one percent (.5%)
for each month the spouse is more than thirty-six (36) months younger
than the Participant. Payment shall commence on the first day of the
month following the later of (a) the Participant's death, (b) the
completion of the death benefits under the first paragraph of this
Section 6.6.1, or (c) fifteen (15) years from the date benefits commenced
or would have commenced to the Participant.
6.6.2 Death Prior to Benefit Commencement. In the event a
Participant dies before benefit payments have commenced, the Company
shall pay a pre-retirement death benefit to the Participant's
Beneficiary. The amount of such pre-retirement death benefit is the
greater of:
(a) the Participant's Account as of the date of
the Participant's death annuitized over a ten-year
period at an interest rate equal to the rate of
one-year United States Treasury notes in effect as of
September 30 of the Plan Year immediately prior to the
Plan Year in which payment of the pre-retirement death
benefit commences, as published by Salomon Brothers,
Inc., or any successor thereto, or as determined by
the Chief Financial Officer of the Company; or
(b) An annual benefit of twenty-five percent
(25%) of the total deferrals and Company Contributions
made as of the date of the Participant's death.
The pre-retirement death benefit shall be paid semimonthly for a ten-year
period. The Beneficiary may petition the Committee for an alternative
method of payment. If the pre-retirement death benefit is computed
pursuant to 6.6.2(a), the Account shall continue to be credited during
the payment period at an interest rate equal to the rate of one-year
United States Treasury notes, said rate to be determined once each Plan
Year and to be the rate in effect as of September 30 of the Plan Year
immediately prior to the Plan Year to which it applies, as published by
Salomon Brothers, Inc., or any successor thereto, or as determined by the
Chief Financial Officer of the Company. Commencement of benefits under
this Section 6.6.2 shall begin no later than six (6) months following the
death of the Participant notwithstanding any election which the
Participant may have made to defer benefits pursuant to Section 6.5.
6.6.3 Marital Deduction. Any benefits which become payable
under this Article 6 to the surviving spouse of a Participant shall be
paid in a manner which will qualify such
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benefits for a marital deduction in the estate of a deceased Participant
under the terms of Section 2056 of the Code, and unless specifically
directed by a Participant to the contrary pursuant to an effective
beneficiary designation, any portion of a Participant's death benefit
payable to a surviving spouse which remains unpaid at the death of such
spouse shall be paid to the spouse's estate.
6.6.4 Designation by Participant. Each Participant has the
right to designate primary and contingent Beneficiaries for death
benefits payable under the Plan. Such Beneficiaries may be individuals or
trusts for the benefit of individuals. A Beneficiary designation by a
Participant shall be in writing on a form acceptable to the Committee and
shall only be effective upon delivery to the Company. A Beneficiary
designation may be revoked by a Participant at any time by delivering to
the Company either written notice of revocation or a new Beneficiary
designation form. The Beneficiary designation form last delivered to the
Company prior to the death of a Participant shall control.
6.6.5 Failure to Designate Beneficiary. In the event there is
no Beneficiary designation on file with the Company, or all Beneficiaries
designated by a Participant have predeceased the Participant, the
benefits payable by reason of the death of the Participant shall be paid
to the Participant's spouse, if living; if the Participant does not leave
a surviving spouse, to the Participant's issue by right of
representation; or, if there are no such issue then living, to the
Participant's estate. In the event there are benefits remaining unpaid at
the death of a sole Beneficiary and no successor Beneficiary has been
designated, either by the Participant or the Participant's spouse
pursuant to 6.6.3, the remaining balance of such benefit shall be paid to
the deceased Beneficiary's estate; or, if the deceased Beneficiary is one
of multiple concurrent Beneficiaries, such remaining benefits shall be
paid proportionally to the surviving Beneficiaries.
Section 6.7 Hardships. Upon the application of any Participant, the
Committee, in accordance with its uniform, non-discriminatory policy, may permit
such Participant to terminate future deferrals or to withdraw his total Account.
A Participant must give a written petition of the termination of his or her
Permissible Deferral election at least thirty (30) days prior to the next
periodic (for Base Salary) or single sum (for Bonuses) deferral. A Participant
must give a written petition of the intent to withdraw the Account at least
sixty (60) days (or such shorter time as permitted by the Committee) prior to
the date of withdrawal. No termination or withdrawal shall be made under the
provisions of this Section except for the purpose of enabling a Participant to
meet immediate needs created by a financial hardship for which the Participant
does not have other reasonably available sources of funds, as determined by the
Committee in accordance with uniform rules. The term financial hardship shall
include the need for funds to: meet uninsured medical expenses for the
Participant or his dependents, meet a significant uninsured casualty loss for
the Participant or his dependents, and meet other catastrophes of a "sudden and
serious nature."
The Committee may permit a withdrawal of any deferrals. If a withdrawal
is permitted, a Participant's deferrals shall be credited at the lesser of (a)
the amount as described in Section 4.2; or (b) an interest rate equal to the
rate of one-year United States Treasury notes in effect as of September 30 of
the Plan Year immediately prior to the Plan Year in which application for such
withdrawal is made, as published by Salomon Brothers, Inc., or any successor
thereto, or as determined by the Chief Financial Officer of the Company.
Withdrawals shall be distributed in the form of a lump sum as soon as is
reasonably convenient.
If a termination of deferrals or a withdrawal is made under this Section,
the Participant may not enter into a new Permissible Deferral election for two
(2) complete Plan Years after the date of
21
<PAGE> 23
the termination or withdrawal.
Section 6.8 Claims Procedure. The Committee shall notify a Participant in
writing within ninety (90) days of the Participant's written application for
benefits of his eligibility or non-eligibility for benefits under the Plan. If
the Committee determines that a Participant is not eligible for benefits or full
benefits, the notice shall set forth (a) the specific reasons for such denial,
(b) a specific reference to the provision of the Plan on which the denial is
based, (c) a description of any additional information or material necessary for
the claimant to perfect his claim, and a description of why it is needed, and
(d) an explanation of the Plan's claims review procedure and other appropriate
information as to the steps to be taken if the Participant wishes to have his
claim reviewed. If the Committee determines that there are special circumstances
requiring additional time to make a decision, the Committee shall notify the
Participant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional 90-day
period. If a Participant is determined by the Committee to be not eligible for
benefits, or if the Participant believes that he is entitled to greater or
different benefits, he shall have the opportunity to have his claim reviewed by
the Committee by filing a petition for review with the Committee within sixty
(60) days after receipt by him of the notice issued by the Committee. Said
petition shall state the specific reasons the Participant believes he is
entitled to benefits or greater or different benefits. Within sixty (60) days
after receipt by the Committee of said petition, the Committee shall afford the
Participant (and his counsel, if any) an opportunity to present his position to
the Committee orally or in writing, and said Participant (or his counsel) shall
have the right to review the pertinent documents, and the Committee shall notify
the Participant of its decision in writing within said sixty (60) day period,
stating specifically the basis of said decision written in a manner calculated
to be understood by the Participant and the specific provisions of the Plan on
which the decision is based. If, because of the need for a hearing, the sixty
(60) day period is not sufficient, the decision may be deferred for up to
another sixty (60) day period at the election of the Committee, but notice of
this deferral shall be given to the Participant.
Section 6.9 Alternate Forms of Benefit Distribution. Participants shall have
the right to petition the Committee to request methods of benefit distribution
other than those provided to Participants pursuant to this Article 6.
Section 6.10 Distributions on Plan Termination. Notwithstanding anything in
this Article 6 to the contrary, if the Plan is terminated, distributions shall
be made in accordance with Section 9.2.
ARTICLE 7 FUNDING
Section 7.1 Source of Benefits. All benefits under the Plan shall be paid
when due by the Company out of its assets or from an irrevocable trust
established by the Company for that purpose. The Company may, but shall have no
obligations to, make such advance provision for the payment of such benefit as
the Board may from time to time consider appropriate.
Section 7.2 No Claim on Specific Assets. No Participant shall be deemed to
have, by virtue of being a Participant in the Plan, any claim on any specific
assets of the Company such that the Participant would be subject to income
taxation on his benefits under the Plan prior to distribution and the rights of
Participants and Beneficiaries to benefits to which they are otherwise entitled
under the Plan shall be those of an unsecured general creditor of the Company.
ARTICLE 8 ADMINISTRATION AND FINANCES
22
<PAGE> 24
Section 8.1 Administration. The Plan shall be administered by the Committee.
The Company shall bear all administrative costs of the Plan other than those
specifically charged to a Participant or Beneficiary.
Section 8.2 Powers of Committee. In addition to the other powers granted
under the Plan, the Committee shall have all powers necessary to administer the
Plan, including, without limitation, powers:
(a) to interpret the provisions of the Plan;
(b) to establish and revise the method of accounting for the
Plan and to maintain the Accounts; and
(c) to establish rules for the administration of the Plan
and to prescribe any forms required to administer the Plan.
Not in limitation, but in amplification of the foregoing and of the authority
conferred upon the Committee in Section 8.1, the Company specifically intends
that the Committee have the greatest permissible discretion to construe the
terms of the Plan and to determine all questions concerning eligibility,
participation and benefits. Any such decision made by the Committee is intended
to be subject to the most deferential standard of judicial review. Such standard
of review is not to be effected by any real or alleged conflict of interest on
the part of the Company or any member of the Committee.
Section 8.3 Actions of the Committee. Except as modified by the Company, all
determinations, interpretations, rules, and decisions of the Committee shall be
conclusive and binding upon all persons having or claiming to have any interest
or right under the Plan.
Section 8.4 Delegation. The Committee, or any officer designated by the
Committee, shall have the power to delegate specific duties and responsibilities
to officers or other employees of the Company or other individuals or entities.
Any delegation may be rescinded by the Committee at any time. Each person or
entity to whom a duty or responsibility has been delegated shall be responsible
for the exercise of such duty or responsibility and shall not be responsible for
any act or failure to act of any other person or entity.
Section 8.5 Reports and Records. The Committee and those to whom the
Committee has delegated duties under the Plan shall keep records of all their
proceedings and actions and shall maintain books of account, records, and other
data as shall be necessary for the proper administration of the Plan and for
compliance with applicable law.
ARTICLE 9 AMENDMENTS AND TERMINATION
Section 9.1 Amendments. The Company, by action of the Board, may amend the
Plan, in whole or in part, at any time and from time to time. Any such amendment
shall be filed with the Plan documents. No amendment, however, may be effective
to eliminate or reduce the benefits of any retired Participant or the
Beneficiary of any deceased Participant then eligible for benefits or the vested
portion of the benefits, if any, in any active Participant's Account immediately
before the effective date of such amendment, and each such Account will be
credited to the date of such amendment in accordance with Section 4.2.
Notwithstanding anything in this Section 9.1 to the contrary, the Committee may,
in its discretion, amend the Plan to reduce the rates set forth in Section 4.2
effective for crediting of Accounts from the date of any such amendment.
23
<PAGE> 25
Notwithstanding anything in this Section 9.1 to the contrary, the Committee may,
in its discretion, (i) amend the Plan to reduce or eliminate the penalty
described in Section 6.2.3 and/or the penalty described in Section 6.3.6, in
accordance with the provisions of such Section 6.2.3 and/or such Section 6.3.6,
(ii) amend the Plan to increase or reduce any assumed interest rate set forth in
Section 6.4, in accordance with the provisions of Section 6.4.6, or (iii) amend
the Plan to change the date set forth in Section 6.4.3 on which the balance in
the Participant's Account is to be determined for purposes of calculating the
amount of each level payment for each Plan Year Payment Period and each
Remainder Payment Period, in accordance with the provisions of Section 6.4.6.
Section 9.2 Termination. The Company expects the Plan to be permanent, but
necessarily must, and hereby does, reserve the right to terminate the Plan at
any time by action of the Board. In all events, the Plan will be terminated if
the existence of a trust causes a federal court to hold that the Plan is
"funded" for ERISA purposes, as defined in Section 2.02-4 of the Trust and
appeals from that holding are no longer timely or have been exhausted, and the
trust is therefore terminated with respect to the Plan. Upon termination of the
Plan, all deferrals and Company Contributions will cease and no future deferrals
or Company Contributions will be made. Termination of the Plan shall not operate
to eliminate or reduce benefits of any retired Participant or the Beneficiary of
any deceased Participant then eligible for benefits. Active Participants shall
become vested in their accrued benefits to the extent and in the manner provided
in Section 9.3 as of the effective date of such termination and each account of
an active Participant shall be credited, to the date of distribution of all
benefits in each such Account, in accordance with Section 4.2., as it may be
amended from time to time pursuant to Section 9.1.
If the Plan is terminated, payments from the Accounts of all Participants
and Beneficiaries shall be made as soon as administratively convenient in the
form of monthly payments over a five (5) year period; however, the Committee in
its sole discretion may pay the benefits in a lump sum. Notwithstanding the
preceding sentence, if the termination occurs because the Plan is held to be
"funded" as described in the first paragraph of this Section 9.2, the
distribution will be paid in a lump sum not later than ninety (90) days after
such termination.
Section 9.3 Accelerated Vesting. Notwithstanding Article 5, upon termination
of the Plan a Participant shall vest in Company Contributions according to the
following schedule:
Percentage of Company
Years of Service Contributions Vested
---------------- ---------------------
Less than 1 None
1 20%
2 40%
3 60%
4 80%
5 or more 100%
Years of Service shall be credited in accordance with Section 5.1.
ARTICLE 10 ACCELERATED VESTING
Section 10.1 Accelerated Vesting. Notwithstanding Article 5, upon a Change
in Control as defined in Section 10.2, a Participant shall be fully vested in
Company Contributions.
Section 10.2 Change in Control. A Change in Control for any Participant
shall occur if there is a Change in Control of the Company as defined in Section
1.01-2 of the Trust or there is a
24
<PAGE> 26
Change in Control of a Participating Subsidiary, as defined in Section 1.01-2 of
the Trust, of the Participating Affiliate by whom the Participant is employed.
ARTICLE 11 MISCELLANEOUS
Section 11.1 No Guarantee of Employment. Neither the adoption and
maintenance of the Plan nor the execution by the Company of a Permissible
Deferral agreement with any Executive shall be deemed to be a contract of
employment between the Company and any Participant. Nothing contained herein
shall give any Participant the right to be retained in the employ of the Company
or to interfere with the right of the Company to discharge any Participant at
any time, nor shall it give the Company the right to require any Participant to
remain in its employ or to interfere with the Participant's right to terminate
his employment at any time.
Section 11.2 Individual Account Plan. If it is determined that the Plan is
not an unfunded deferred compensation plan maintained primarily for a select
group of management or highly compensated employees as described in Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA, then the Plan is intended to be an
individual account plan (other than a money purchase plan) as described in
Section 301(a)(8) of ERISA and the vesting schedule set forth in Article 5 shall
be replaced by the vesting schedule in the then current H&R Block Profit Sharing
Retirement Plan.
Section 11.3 Release. Any payment of benefits to or for the benefit of a
Participant or a Participant's Beneficiaries that is made in good faith by the
Company in accordance with the Company's interpretation of its obligations
hereunder, shall be in full satisfaction of all claims against the Company for
benefits under this Plan to the extent of such payment.
Section 11.4 Notices. Any notice permitted or required under the Plan shall
be in writing and shall be hand delivered or sent, postage prepaid, certified or
registered mail with return receipt requested, to the principal office of the
Company, if to the Company, or to the address last shown on the records of the
Company, if to a Participant or Beneficiary. Any such notice shall be effective
as of the date of hand delivery or mailing.
Section 11.5 Non-Alienation. No benefit payable at any time under this Plan
shall be subject in any manner to alienation, sale, transfer, assignment,
pledge, levy, attachment, or encumbrance of any kind.
Section 11.6 Tax Liability. The Company may direct the trustee of the Trust
to withhold from any payment of benefits under the Plan such amounts as the
Company determines are reasonably necessary to pay any taxes (and interest
thereon) required to be withheld or for which the trustee of the Trust may
become liable under applicable law. The Company may also direct the trustee of
the Trust to forward to the appropriate taxing authority any amounts required to
be paid by the Company or the Trust under the preceding sentence. Any amounts
withheld pursuant to this Section 11.6 in excess of the amount of taxes due (and
interest thereon) shall be paid to the Participant or Beneficiary upon final
determination, as determined by the Company, of such amount. No interest shall
be payable by the Company to any Participant or Beneficiary by reason of any
amounts withheld pursuant to this Section 11.6.
Section 11.7 Captions. Article and section headings and captions are
provided for purposes of reference and convenience only and shall not be relied
upon in any way to construe, define, modify, limit, or extend the scope of any
provision of the Plan.
Section 11.8 Applicable Law. The Plan and all rights hereunder shall be
governed by and construed according to the laws of the State of Missouri, except
to the extent such laws are
25
<PAGE> 27
preempted by the laws of the United States of America.
Dated: November 1, 1998 H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
---------------------------------------
Its: President and Chief Executive Officer
---------------------------------------
26
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<DESCRIPTION>AMENDMENT NO.1 TO THE H&R BLOCK DEFERRED PLAN
<TEXT>
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1
TO THE
H&R BLOCK DEFERRED COMPENSATION PLAN
FOR EXECUTIVES, AS AMENDED AND RESTATED
H&R Block, Inc. (the "Company") adopted the H&R Block Deferred Compensation
Plan for Executives, as Amended and Restated (the "Plan"), effective as of
January 1, 1999. The Company retains the right to amend the Plan pursuant to
action by the Company's Board of Directors. The Company hereby exercises that
right. This Amendment No. 1 is effective as of January 1, 1999.
AMENDMENT
1. Section 2.1.25 of the Plan is amended by adding the following sentence
at the end of such Section:
"For persons eligible to participate in the Plan who were
employed prior to January 1, 1999 by a subsidiary of HRB
Business Services, Inc. that was incorporated after May 15,
1998, an 'Enrollment Period' is granted consisting of the period
between January 4, 1999 and January 31, 1999, inclusive."
2. Section 2.1.40 of the Plan is amended by (a) deleting the second
sentence thereof and replacing such second sentence with the following new
sentence:
"Except for Permissible Deferrals elected to commence on March
1, 1998, and Permissible Deferrals elected during an Enrollment
Period described in Section 2.1.25 other than a period comprised
of October 1 through December 15, inclusive, 'Plan Year' means
the calendar year (a) for all Permissible Deferrals elected by
Group B Participants, and (b) for Permissible Deferrals of Group
A Participants elected to commence January 1, 1991 or later.";
(b) deleting the fifth sentence thereof and replacing such fifth sentence with
the following new sentence:
"If the Committee grants to a person eligible to participate in
the Plan a discretionary Enrollment Period in accordance with
Section 2.1.25 and such person submits to the Company a
Permissible Deferrable election during such Enrollment Period,
such Participant's first 'Plan Year' shall be the period (i)
beginning on the first day of the first calendar month
commencing not less than 45 days after the date that such
Participant is first employed by a Participating Affiliate, and
(ii) ending on December 31 of the year in which such calendar
month falls."; and
<PAGE> 2
(c) adding the following new sentence after the new fifth sentence of such
Section 2.1.40 and prior to the sixth sentence of said Section:
"For Permissible Deferrals of Participants elected during the
Enrollment Period consisting of the period between January 4,
1999 and January 31, 1999, inclusive, 'Plan Year' means the
10-month period between March 1, 1999 and December 31, 1999,
inclusive, and the calendar year thereafter."
3. Section 4.1.2 of the Plan is amended by (a) adding the following words
and punctuation after the words and punctuation "provided, however, that" and
before the words "the maximum percentage" in the first paragraph of said
Section:
"(i) each Participating Affiliate may elect before each
Enrollment Period to have no Matching Contributions posted
during the Plan Year (to which the Enrollment Period relates) to
the Accounts of Participants employed by such Participating
Affiliate, and (ii)";
and (b) adding the following new sentence at the end of the first paragraph of
said Section:
"If a Participating Affiliate elects to have Matching
Contributions posted to the Accounts of Participants employed by
such Participating Affiliate during a Plan Year, Matching
Contributions shall continue to be posted to such Accounts
during all subsequent Plan Years, provided that, not less than
four months prior to the beginning of any such subsequent Plan
Year, the Participating Affiliate may petition the Committee,
and the Committee may approve at such time, for no Matching
Contributions to be posted to the Accounts of such Participants
during such Plan Year."
4. Except as modified in this Amendment No. 1, the Plan shall remain in
full force and effect, including the Company's right to amend or terminate the
Plan as set forth in Article 9 of the Plan.
H&R BLOCK, INC.
By: /s/ Frank L. Salizzoni
---------------------------------------
Its: President and Chief Executive Officer
--------------------------------------
2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 188,340
<SECURITIES> 91,582
<RECEIVABLES> 917,665
<ALLOWANCES> 21,302
<INVENTORY> 0
<CURRENT-ASSETS> 1,270,762
<PP&E> 100,597<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,075,499
<CURRENT-LIABILITIES> 1,023,256
<BONDS> 0
<COMMON> 1,089
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 758,193
<TOTAL-LIABILITY-AND-EQUITY> 2,075,499
<SALES> 0
<TOTAL-REVENUES> 447,668
<CGS> 0
<TOTAL-COSTS> 572,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (97,612)
<INCOME-TAX> (37,072)
<INCOME-CONTINUING> (60,540)
<DISCONTINUED> (21,468)<F2>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,008)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
<FN>
<F1>PP&E BALANCE IS NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION.
<F2>NET OF TAX BENEFIT OF ($13,726)
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| IKN | https://www.sec.gov/Archives/edgar/data/3370/0001010410-99-000029.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0001010410-99-000029.txt : 19990215
<SEC-HEADER>0001010410-99-000029.hdr.sgml : 19990215
ACCESSION NUMBER: 0001010410-99-000029
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: IKON OFFICE SOLUTIONS INC
CENTRAL INDEX KEY: 0000003370
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045]
IRS NUMBER: 230334400
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05964
FILM NUMBER: 99537170
BUSINESS ADDRESS:
STREET 1: 70 VALLEY STREAM
CITY: MALVERN
STATE: PA
ZIP: 19355
BUSINESS PHONE: 6102968000
MAIL ADDRESS:
STREET 1: BOX 834
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
FORMER COMPANY:
FORMER CONFORMED NAME: ALCO STANDARD CORP
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: ALCO CHEMICAL CORP
DATE OF NAME CHANGE: 19680218
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1998 or [ ] Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to
Commission file number 1-5964
IKON OFFICE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
OHIO 23-0334400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 834, Valley Forge, Pennsylvania 19482
(Address of principal executive offices)
(Zip Code)
(610) 296-8000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ___ No ___
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 31, 1999.
Common Stock, no par value 147,696,695 shares
<PAGE>
INDEX
IKON OFFICE SOLUTIONS, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--December 31, 1998
and September 30, 1998
Consolidated Statements of Income--Three months
ended December 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows--Three months
ended December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements--
December 31, 1998
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Liquidity
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
( in thousands )
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1998 1998
------------- -------------
Current Assets
<S> <C> <C>
Cash $ 12,058 $ 963
Accounts receivable, net 765,370 793,934
Finance receivables, net 676,378 827,363
Inventories 417,979 431,837
Prepaid expenses and other current assets 137,088 97,534
Deferred taxes 112,404 112,609
----------- -----------
Total current assets 2,121,277 2,264,240
----------- -----------
Investments and Long-Term Receivables 24,260 25,109
Long-Term Finance Receivables, net 1,522,766 1,565,674
Equipment on Operating Rental, net 110,559 110,891
Property and Equipment, at cost 509,059 499,546
Less accumulated depreciation 249,581 239,440
----------- -----------
259,478 260,106
----------- -----------
Goodwill 1,398,816 1,387,390
Miscellaneous 153,707 149,400
----------- -----------
$ 5,590,863 $ 5,762,810
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 70,017 $ 56,358
Current portion of long-term debt, finance subsidiaries 560,068 726,159
Notes payable 163,943 87,180
Trade accounts payable 197,702 245,520
Accrued salaries, wages and commissions 88,932 115,101
Deferred revenues 202,547 211,824
Other accrued expenses 347,545 326,725
----------- -----------
Total current liabilities 1,630,754 1,768,867
----------- -----------
Long-Term Debt 711,831 712,384
Long-Term Debt, Finance Subsidiaries 1,302,377 1,374,478
Deferred Taxes 335,044 325,488
Other Long-Term Liabilities 155,977 154,305
Shareholders' Equity
Series BB conversion preferred stock, no par value,
9/98 - 3,877 depositary shares issued and outstanding 290,170
Common stock, no par value:
Authorized - 300,000 shares
Issued 12/98 - 147,338 shares; 9/98 - 137,139 shares 983,635 689,195
Retained earnings 474,814 452,051
Accumulated other comprehensive income 31 (473)
Cost of common shares in treasury: 12/98 - 103 shares;
9/98 - 124 shares (3,600) (3,655)
----------- -----------
1,454,880 1,427,288
----------- -----------
$ 5,590,863 $ 5,762,810
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
December 31
----------------------------
1998 1997
---------- ----------
Revenues
Net sales $ 707,719 $ 728,105
Service and rentals 591,417 575,822
Finance income 97,281 70,330
---------- ----------
1,396,417 1,374,257
---------- ----------
Costs and Expenses
Cost of goods sold 471,746 468,200
Service and rental costs 341,589 332,155
Finance interest expense 32,680 30,746
Selling and administrative 477,255 441,219
Transformation costs 19,519
---------- ----------
1,323,270 1,291,839
---------- ----------
Operating income 73,147 82,418
Interest expense 19,547 17,029
---------- ----------
Income before taxes 53,600 65,389
Income taxes 24,924 28,405
---------- ----------
Net Income 28,676 36,984
Less: Preferred Dividends 4,885
---------- ----------
Available to Common Shareholders $ 28,676 $ 32,099
========== ==========
Basic and Diluted Earnings Per Share $ 0.19 $ 0.24
========== ==========
Cash Dividends Per Share of Common Stock $ 0.04 $ 0.04
========== ==========
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31
---------------------------
1998 1997
---------------------------
Operating Activities
<S> <C> <C>
Net income $ 28,676 $ 36,984
Additions (deductions) to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 34,342 31,617
Amortization 15,105 15,052
Provisions for losses on accounts receivable 10,567 13,188
Provision for deferred taxes 10,000 15,000
Gain on asset securitizations (16,676) (564)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in accounts receivable 19,080 (53,763)
Decrease (increase) in inventories 15,058 (95,246)
Increase in prepaid expenses and other current assets (11,966) (15,755)
Decrease in accounts payable, deferred
revenues and accrued expenses (86,295) (42,126)
Miscellaneous 4,551 4,885
--------- ---------
Net cash provided by (used in) operating activities 22,442 (90,728)
Investing activities
Cost of companies acquired, net of cash acquired (15,880) (26,149)
Expenditures for property and equipment (18,328) (30,340)
Expenditures for equipment on operating rental (12,907) (20,578)
Purchase of miscellaneous assets (6,398) (9,969)
Finance subsidiaries receivables - additions (305,843) (344,812)
Finance subsidiaries receivables - collections 221,727 182,808
Proceeds from sale of finance subsidiaries lease receivables 281,135 25,760
--------- ---------
Net cash provided by (used in) investing activities 143,506 (223,280)
Financing activities
Proceeds (payments) of short-term borrowings, net 76,763 (120,958)
Proceeds from issuance of long-term debt 27,162 253,654
Proceeds from option exercises and sale of treasury shares 1,250 5,600
Long-term debt repayments (15,941) (5,071)
Finance subsidiaries debt - additions 2,181 275,328
Finance subsidiaries debt - repayments (240,373) (85,000)
Dividends paid (5,881) (10,240)
Purchase of treasury shares (14) (10)
--------- ---------
Net cash (used in) provided by financing activities (154,853) 313,303
Net increase (decrease) in cash 11,095 (705)
Cash at beginning of year 963 21,341
--------- ---------
Cash at end of period $ 12,058 $ 20,636
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1998.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Note 2: Asset Securitization
In addition to the $275 million of asset securitizations in place at
the end of fiscal 1998, in December 1998, the Company's U.S. finance subsidiary
entered into an asset securitization transaction whereby it sold $366.6 million
in direct financing lease receivables for $250 million in cash and a retained
interest in the remainder. The agreement is for an initial three year term with
certain renewal provisions and was structured as a revolving asset
securitization so that as collections reduce previously sold interests in this
new pool of leases, additional leases can be sold up to $250 million. The terms
of the agreement provide that the Company continues to service the lease
portfolio for the securitization provider. At December 31, 1998, the
interest-only strip of $27.9 million related to the sale is included in prepaid
expenses and other current assets and the recourse and servicing obligations of
$8.6 million and $5.5 million, respectively, are included in other accrued
expenses. The retained interest is classified in current finance receivables
($38.5 million) and long-term finance receivables ($71.4 million). The Company
recognized a pretax gain of $14.3 million during the first quarter of fiscal
1999 on this agreement.
Note 3: Transformation Costs
In September 1995, the Company announced its transformation program to
change its organization into a more cohesive and efficient network by building a
uniform information technology system and implementing best practices for
critically important management functions throughout the IKON companies. The
Company substantially completed the transformation program as of September 30,
1998. The transformation involved a variety of activities that the Company
believes will ultimately lower administrative costs and improve gross margins
through the creation of marketplace-focused field operations with greater
attention to customer sales and service. These activities included consolidating
purchasing, inventory control, logistics and other activities into thirteen
customer service centers in the U.S., establishing a single financial processing
center, building a common information technology system, adopting a common name
and common benefit programs. Transformation costs in the first three months of
fiscal 1998 of $19.5 million relate principally to severance and other
employee-related costs, including temporary labor ($14.3 million), facility
consolidation costs, including lease buyouts and write-offs of leasehold
improvements ($3.3 million) and technology conversion costs ($1.9 million). Cash
of $2.7 million was expended during the first quarter of fiscal 1999 reducing
the September 30, 1998 severance and lease buyout accruals to $7.2 million and
$10.2 million, respectively, at December 31, 1998.
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
Note 4: Comprehensive Income
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes rules for the reporting and presentation of comprehensive income
and its components. SFAS 130 requires foreign currency translation adjustments,
equity adjustments related to pension liabilities and mark to market adjustments
on retained interests in lease receivables to be included in other comprehensive
income. Equity accounts as of September 30, 1998 have been reclassified to
conform to the requirements of SFAS 130. The adoption of SFAS 130 did not impact
the Company's net income or total shareholders' equity.
Total comprehensive income is as follows (in thousands):
Three Months Ended
December 31
----------------------
1998 1997
---- ----
Net income $28,676 $36,984
Foreign currency translation adjustments (465) 12
Mark to market adjustment, net of tax 969
------- -------
Total comprehensive income $29,180 $36,996
======= =======
Note 5: Conversion of Series BB Preferred Stock
On October 1, 1998, each of the outstanding depositary shares of the
Series BB Preferred Stock automatically converted to 2.4972 shares of common
stock per depositary share, resulting in the issuance of 9,682,143 common
shares. The common stock account increased by $290.2 million to reflect the
conversion. There was no change to total shareholders' equity.
Note 6: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
For the fiscal quarter ended 12/31/98 12/31/97
Numerator:
<S> <C> <C>
Net income $ 28,676 $ 36,984
Preferred stock dividends 4,885
------------- ------------
Numerator for basic earnings per
share - income available to
common shareholders 28,676 32,099
Effect of dilutive securities:
Convertible loan notes 77
------------- ------------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed conversions $ 28,676 $ 32,176
============= ============
Denominator:
Weighted average shares 146,965 133,729
Contingently issuable shares 1,384
------------- ------------
Denominator for basic earnings per
share - weighted average shares 148,349 133,729
<PAGE>
IKON OFFICE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1998
Note 6: Earnings Per Share (continued)
Effect of dilutive securities:
Additional contingently issuable shares 522
Employee stock options 36 780
Convertible loan notes 258
------------- ------------
Dilutive potential common shares 558 1,038
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 148,907 134,767
============= ============
Basic earnings per share $0.19 $0.24
===== =====
Diluted earnings per share $0.19 $0.24
===== =====
</TABLE>
Options to purchase 4,945,964 shares of common stock at $8.70 per share
to $62.45 per share were outstanding during the first quarter of fiscal 1999 and
options to purchase 3,034,759 shares of common stock at $28.88 per share to
$61.08 per share were outstanding during the first quarter of fiscal 1998 but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
The Company's Series BB conversion preferred stock is excluded from the
diluted calculation for the quarter ended December 31, 1997 because the effect
of adding 9,682,143 shares and deleting the preferred dividends to reflect
assumed conversion would be antidilutive.
Note 7: Shareholder Lawsuit
The Company and certain current and former principal officers and
employee directors were named as defendants in a series of purported class
action complaints which were purportedly filed on behalf of purchasers of the
Company's common stock. The complaints were filed in the United States District
Court for the Eastern District of Pennsylvania following the issuance of the
Company's August 14, 1998 earnings release. By court order dated November 30,
1998 the Court appointed co-lead counsel. By court order dated December 3, 1998,
all the complaints were consolidated. The consolidated complaint was filed on
December 18, 1998 and alleges that the defendants publicly disseminated a series
of false and misleading statements, including filings with the Securities and
Exchange Commission, concerning the Company's revenue, profitability and
financial condition, in violation of the federal securities law. The plaintiffs
seek to represent a class of persons who purchased or acquired the Company's
common stock between January 24, 1996 and August 14, 1998. The complaint seeks
unspecified compensatory and punitive damages, prejudgment interest, attorneys'
fees and costs. The Company has responded to the complaint and believes that
the allegations contained therein are without merit and that the outcome of the
proceedings will not have a material adverse effect on the financial position or
overall trends in the results of operations of the Company. However, due to the
inherent uncertainties of litigation, the Company cannot predict the ultimate
outcome of these proceedings or the probability of any liability or losses
relating thereto, and, accordingly, no provision has been made for any liability
or loss that may result from the adjudication or settlement of these proceedings
in the financial statements for the first quarter of fiscal 1999. An unfavorable
outcome of these proceedings could have a material adverse impact on the
Company's financial condition and results of operations.
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity
The Company sells, rents and leases photocopiers, digital printers and
other automated office equipment for use in both traditional and integrated
office environments. The Company also provides outsourcing and imaging services
and offers consulting, design, computer networking and technology training for
the networked office environment.
Results of Operations
The discussion of the results of operations reviews the operations of
the Company as reported in the Consolidated Statements of Income.
Three Months Ended December 31, 1998
Compared with the Three Months Ended December 31, 1997
Results of operations for the first quarter of fiscal 1999 compared to
the first quarter of fiscal 1998 were as follows:
Three Months Ended
December 31 %
1998 1997 Change
(in millions)
REVENUES $ 1,396 $ 1,374 1.6%
======== ========
INCOME BEFORE TAXES:
Operating income, excluding
transformation costs $ 73.1 $ 101.9 (28.3%)
Transformation costs (19.5)
-------- --------
Operating income 73.1 82.4
Interest expense (19.5) (17.0)
-------- --------
$ 53.6 $ 65.4 (18.0%)
======== ========
The Company's first quarter revenues increased $22 million, or 1.6%
over the first quarter of fiscal 1998. The first quarter of fiscal 1999 included
a $14.3 million gain from an asset securitization. Excluding the gain, overall
revenue was essentially flat compared to the first quarter of fiscal 1998. The
flat revenue reflects the elimination of unprofitable revenue streams and a
transition away from low-margin commodity products. Net sales, which includes
equipment revenue, decreased $20 million or 2.8%. Equipment revenue has been
affected by the shift from analog to digital, color and high volume copiers and
the sales activity has been impacted by the transition to a common sales
strategy and a centralized, tighter credit policy. Service and rental revenue
increased $15 million or 2.7%. This increase is lower than in prior periods due
to the closure of several Document Services locations during the first quarter
of fiscal 1999. Finance income increased $13 million, or 17.9%, excluding the
gain, due to the growth in the lease portfolio.
Revenues from the Company's operations outside the U.S. were $198
million for the first quarter of fiscal 1999 compared to $177 million for the
same period of the prior fiscal year. European operations increased $30 million,
due primarily to acquisitions, while Canadian revenues decreased $8 million and
other foreign operations revenue decreased $1 million in the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998. In the first quarter
of fiscal 1999, the Company completed five acquisitions, all in Europe, as the
Company continues to concentrate on its core business in North America.
<PAGE>
The Company's operating income decreased by $9.3 million compared to
the prior year's quarter. Excluding transformation costs in fiscal 1998 and the
gain from the asset securitization in fiscal 1999, operating income decreased
$43.1 million to $58.8 million for the first quarter of fiscal 1999 compared to
$101.9 million in the prior year. Gross margins in the first quarter of fiscal
1999, excluding the gain, were 38.8% compared to 39.5% in the prior year.
However, gross margins in the first quarter of fiscal 1999 are higher than the
34.3% in the fourth quarter of fiscal 1998. The improvement reflects greater
profitability in both equipment and service sales, due to the elimination of
inappropriate discounting, an increased focus on controlling services costs and
the turnaround in underperforming units compared to the fourth quarter of fiscal
1998. Selling and administrative expense as a percent of revenue was 34.5% in
the first quarter of fiscal 1999 compared to 32.1% in the first quarter of
fiscal 1998. Selling and administrative expense as a percent of revenue was
essentially flat compared to the fourth quarter of fiscal 1998, adjusted for the
special charges in that quarter of $40.4 million. This is due in part to the
lower revenue levels and to the lag in the benefits of cost cutting programs.
The Company has made strides in the first quarter of fiscal 1999 in workforce
reductions and facility closures and expects to see benefits in future quarters.
Costs associated with the Company's transformation program were $19.5
million in the first quarter of fiscal 1998. Severance and other employee costs
were $14.3 million, facility consolidation costs were $3.3 million and
technology conversion costs were $1.9 million. The transformation is essentially
complete and there are no significant transformation expenses in fiscal 1999.
Operating income from foreign operations was $3.6 million for the first
quarter of fiscal 1999, down $9 million from $12.6 million for the first quarter
of fiscal 1998. European operations decreased $1.7 million in the first quarter,
while Canadian operating income decreased $6.6 million. Other foreign operations
decreased $.7 million in the first quarter of fiscal 1999. There was no material
effect of foreign currency exchange rate fluctuations on the results of
operations in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998.
Interest expense increased $2.5 million in the first quarter of fiscal
1999. The increased expense is due to higher debt levels and slightly higher
interest rates than in the first quarter of fiscal 1998.
Income before taxes decreased by $11.8 million in the first quarter as
a result of decreasing gross margins, increasing selling and administrative
expenses and increasing interest expense, offset by no transformation expense in
the first quarter of fiscal 1999. The effective income tax rate for the first
quarter of fiscal 1999 is 46.5% compared to 43.4% for the comparable period in
fiscal 1998. The increase in the effective tax rate is due to the effect of a
lower pretax income on non-tax-deductible items, primarily goodwill
amortization.
Diluted earnings per common share decreased from $.24 per share for the
first quarter of fiscal 1998 to $.19 per share for the first quarter of fiscal
1999. Excluding the after-tax gain on the asset securitization that was
completed in December 1998, diluted earnings per common share were $.13 in the
first quarter of fiscal 1999 and, excluding transformation costs, diluted
earnings per common share were $.33 per share in the first quarter of fiscal
1998. Diluted weighted average shares increased 14.1 million as a result of the
conversion of the Series BB preferred stock on October 1, 1998 (9.7 million
weighted shares) and the full period impact of 1998 common share issuances
related to acquisitions (4.7 million weighted shares).
<PAGE>
Impact of Year 2000
State of Readiness. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded technology (non-IT systems) may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The potential
for a problem exists with all computer hardware and software, as well as in
products with embedded technology: copiers and fax machines; security and HVAC
systems; voice/telephony systems; elevators, etc.
The Company has appointed a Year 2000 Corporate Compliance Team, which
has prepared an international compliance program for the Company and is
responsible for coordinating and inspecting compliance activities in all
business units. The compliance program requires all business units and locations
in every country to inventory potentially affected systems and products, assess
risk, take any required corrective actions, test and certify compliance. The
Company's Year 2000 Testing and Certification Guidelines delineate the Year 2000
compliance process, testing and quality assurance guidelines, certification and
reporting processes and contingency planning. An independent consulting company
has reviewed the compliance program and any appropriate recommendations have
been implemented. All internal IT systems and non-IT systems have been
inventoried. Risk assessment and testing plans are 23% complete, remediation is
16% complete, testing and validation are 14% complete and implementation is 12%
complete. The Company anticipates completing all phases of the Year 2000 project
no later than October 31, 1999, which is prior to any anticipated material
impact on its operating systems.
Product warranties and certifications are being sought from vendors and
suppliers. The Company has obtained "Year 2000 Statements" from national vendors
including Canon, Oce, Ricoh and Sharp.
Costs. The Company will use both internal and external resources to
reprogram or replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
on the Year 2000 project. Such costs are principally payroll and related costs
for its internal IT personnel. The total cost of the Year 2000 project,
excluding these internal costs, is estimated at $11.4 million and is being
funded through operating cash flows. Of the total estimated project cost,
approximately $2.4 million is attributable to the purchase of new software which
will be capitalized. The remaining $9.0 million will be expensed as incurred. To
date, the Company has incurred approximately $1.8 million ($1.5 million expensed
and $291,000 capitalized), related to its Year 2000 project.
Risks. Management believes, based on the information currently available to
it, that the most reasonably likely worse case scenario that could be caused by
technology failures relating to the Year 2000 could pose a significant threat
not only to IKON, its customers and suppliers, but to all businesses. Risks
include:
o Legal risks, including customer, supplier, employee or shareholder lawsuits
over failure to deliver contracted services, product failure, or health and
safety issues.
o Loss of sales due to failure to meet customer quality expectations or
inability to ship products.
o Increased operational costs due to manual processing, data corruption or
disaster recovery.
o Inability to bill or invoice.
The Company has taken steps to limit the scope of product and service
warranties to customers to either the replacement of noncompliant products or to
reimbursement of the cost of the product or service provided. With respect to
products sold by the Company prior to the inclusion of such limited warranties,
differing interpretations of the warranties included with such products will
likely result in litigation against the Company. The Company is not able to
assess the impact of such potential litigation at this time.
<PAGE>
The Company is engaged in the provision of certain Year 2000 services to
customers, whereby the Company evaluates the Year 2000 compliance of customers'
software and hardware, and works with customers to find solutions to Year 2000
problems. The Company has taken steps to limit its warranties with respect to
the Company's provision of such services.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based in management's best estimates,
which were derived using numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Contingency Plans. The Company's Guidelines require that contingency plans
be developed and validated in the event that any critical system cannot be
corrected and certified before the system's failure date. Contingency plans are
currently being developed and are approximately 29% complete at this time. The
Company expects to have its contingency plans in place by October 31, 1999. In
addition, the Company is forming a rapid response team as part of its IT group
that will respond to any operational problems during the Year 2000 date change
period.
Financial Condition and Liquidity
Net cash provided by operating activities for the first quarter of
fiscal 1999 was $22 million. During the same period, the Company generated $144
million in cash from investing activities, which included net finance subsidiary
activity of $197 million, less acquisition activity at a cash cost of $16
million, capital expenditures for property and equipment of $18 million and
capital expenditures for equipment on operating rental of $13 million. Cash used
in financing activities includes $88 million net increase in corporate debt,
excluding the effects of acquisitions, and $238 million decrease in finance
subsidiaries debt. Debt, excluding finance subsidiaries, was $946 million at
December 31, 1998, an increase of $90 million from the debt balance at September
30, 1998 of $856 million. The debt to capital ratio, excluding finance
subsidiaries, was 39.4% at December 31, 1998 compared to 37.5% at September 30,
1998. The Company continues to focus on goals to reduce working capital and
related debt levels.
As of December 31, 1998, short-term borrowings supported by a $600
million credit agreement totaled $149 million. The Company also has $700 million
available for either stock or debt offerings under its shelf registration
statement.
Finance subsidiaries debt decreased by $238 million from September 30,
1998, as a result of payments on medium term notes and bank borrowings. During
the three months ended December 31, 1998, the U.S. finance subsidiary repaid
$135 million of its medium term notes and $100 million of bank debt. No new
notes were issued. At December 31, 1998, $1.7 billion of medium term notes were
outstanding with a weighted interest rate of 6.5%, while $1.1 billion remains
available under this program. In December 1998, the U.S. finance subsidiary
entered into a new asset securitization agreement under which it received cash
of $250 million. Under its previously existing $275 million asset securitization
programs, the U.S. finance subsidiary sold $31 million in direct financing
leases during the first quarter of fiscal 1999, replacing those leases
liquidated and leaving the amount of contracts sold unchanged. No additional
leases were sold under the Canadian CN$175 million asset securitization
agreement during the first quarter of fiscal 1999.
The Company filed a shelf registration for 10 million shares of common
stock in April 1997. Shares issued under the registration statement are being
used for acquisitions. Approximately 2.3 million shares have been issued under
this shelf registration through December 31, 1998, leaving 7.7 million shares
available for issuance.
<PAGE>
On April 17, 1997, the Company announced that it may repurchase from
time to time as much as five percent of the outstanding IKON common stock in
open market transactions. Through fiscal 1998, the Company repurchased 4.6
million common shares for $113 million under this program.
The Company believes that its operating cash flow together with unused
bank credit facilities and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures,
acquisitions, dividends, stock repurchases and the remaining accrued costs
associated with the Company's transformation program.
Forward-Looking Information
This document includes or incorporates by reference information which
may constitute forward-looking statements within the meaning of the federal
securities laws. Although the Company believes the expectations contained in
such forward-looking statements are reasonable, no assurances can be given that
such expectations will prove correct. Such forward-looking information is based
upon management's current plans or expectations and is subject to a number of
uncertainties and risks that could significantly affect current plans,
anticipated actions and the Company's future financial condition and results.
These uncertainties and risks include, but are not limited to, those relating to
successfully managing the integration of acquired companies, including companies
with technical services and products that are relatively new to the Company, and
also including companies outside the United States, which present additional
risks relating to international operations; risks and uncertainties relating to
conducting operations in a competitive environment; delays, difficulties,
technological changes, management transitions and employment issues associated
with consolidation of business operations; risks and uncertainties associated
with the implementation of a preferred vendor porgram; risks and uncertainties
relating to potential year 2000 deficiencies associated with the operation of
IKON's internal systems and distributed products; debt service requirements
(including sensitivity to fluctuations in interest rates); and general economic
conditions. As a consequence, current plans, anticipated actions and future
financial condition and results may differ materially from those expressed in
any forward-looking statements made by or on behalf of the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are furnished pursuant to Item 601 of
Regulation S-K:
Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
On November 5, 1998, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, information contained in its
press release dated November 4, 1998 concerning earnings for the
fiscal quarter and year ended September 30, 1998.
On January 26, 1999, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, its press release dated
January 19, 1999, indicating that the Company anticipated first
quarter earnings to exceed the First Call consensus estimate of
$.05 per share for the quarter ending December 31, 1998 and that
based on preliminary results, the Company expects earnings per
share for the quarter to be in the range of $.12 to $.15, excluding
a gain from asset securitization of $.04 to $.06 per share and that
revenues for the quarter are expected to be in the range of $1.36
billion to $1.39 billion, excluding the gain from the asset
securitization of $12 million to $16 million. The Company also
stated that, based on a single quarter of performance and the
balance of the initiatives being rolled out, it would not adjust
its full-year earnings expectation at this time and that the
Company's complete first quarter earnings report will be released
on January 27, 1999.
On February 5, 1999, the registrant filed a Current Report on Form
8-K to file, under Item 5 of the form, information contained in its
press release dated January 27, 1999 concerning earnings for the
first quarter ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
IKON OFFICE SOLUTIONS, INC.
Date February 12, 1999 /s/ Michael J. Dillon
-------------------------- ------------------------------------
Michael J. Dillon
Vice President and Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
(27) Financial Data Schedule
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of IKON Office Solutions, Inc. and
subsidiaries and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 12,058,000
<SECURITIES> 0
<RECEIVABLES> 829,411,000
<ALLOWANCES> 64,041,000
<INVENTORY> 417,979,000
<CURRENT-ASSETS> 2,121,277,000
<PP&E> 783,538,000<F1>
<DEPRECIATION> 413,501,000<F2>
<TOTAL-ASSETS> 5,590,863,000
<CURRENT-LIABILITIES> 1,630,754,000
<BONDS> 2,014,208,000
<COMMON> 983,635,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<OTHER-SE> 471,245,000
<TOTAL-LIABILITY-AND-EQUITY> 5,590,863,000
<SALES> 707,719,000
<TOTAL-REVENUES> 1,396,417,000
<CGS> 471,746,000
<TOTAL-COSTS> 846,015,000<F3>
<OTHER-EXPENSES> 477,255,000<F4>
<LOSS-PROVISION> 10,567,000
<INTEREST-EXPENSE> 19,547,000
<INCOME-PRETAX> 53,600,000
<INCOME-TAX> 24,924,000
<INCOME-CONTINUING> 28,676,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,676,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<FN>
<F1> Includes equipment on operating leases, at cost, of $274,479,000.
<F2> Includes accumulated depreciation for equipment on operating leases of
$163,920,000.
<F3> Includes Finance Subsidiaries interest of $32,680,000.
<F4> Represents selling, general and administrative expenses.
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| JAVA | https://www.sec.gov/Archives/edgar/data/709519/0000891618-99-000396.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000891618-99-000396.txt : 19990210
<SEC-HEADER>0000891618-99-000396.hdr.sgml : 19990210
ACCESSION NUMBER: 0000891618-99-000396
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981227
FILED AS OF DATE: 19990209
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SUN MICROSYSTEMS INC
CENTRAL INDEX KEY: 0000709519
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571]
IRS NUMBER: 942805249
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-15086
FILM NUMBER: 99526522
BUSINESS ADDRESS:
STREET 1: 901 SAN ANTONIO RD
CITY: PALO ALTO
STATE: CA
ZIP: 94303
BUSINESS PHONE: 6509601300
MAIL ADDRESS:
STREET 1: 901 SAN ANTONIO ROAD
CITY: PALO ALTO
STATE: CA
ZIP: 94303
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 27, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number:0-15086
SUN MICROSYSTEMS, INC.
(Exact Name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2805249
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
901 SAN ANTONIO ROAD PALO ALTO, CA 94303
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (650) 960-1300
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT DECEMBER 27, 1998
Common Stock - $0.00067 par value 385,264,651
</TABLE>
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8 - K 25
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 25
SIGNATURES 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 27, June 30,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 669,862 $ 822,267
Short-term investments 902,929 476,185
Accounts receivable, net 2,108,237 1,845,765
Inventories 363,664 346,446
Deferred tax assets 373,541 371,841
Other current assets 327,461 285,021
----------- -----------
Total current assets 4,745,694 4,147,525
Property, plant and equipment, at cost 2,593,985 2,257,228
Accumulated depreciation and amortization (1,141,377) (956,616)
----------- -----------
1,452,608 1,300,612
Other assets, net 363,218 262,925
----------- -----------
$ 6,561,520 $ 5,711,062
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 12,351 $ 7,169
Accounts payable 611,412 495,603
Accrued liabilities 1,230,718 1,166,491
Income taxes payable 205,340 188,641
Other current liabilities 288,169 264,967
-----------
Total current liabilities 2,347,990 2,122,871
Deferred income taxes and other obligations 112,527 74,563
Total stockholders' equity 4,101,003 3,513,628
-----------
$ 6,561,520 $ 5,711,062
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Products $2,384,740 $2,161,992 $4,540,858 $4,009,880
Services 399,700 288,251 734,766 538,967
---------- ---------- ---------- ----------
Total net revenues 2,784,440 2,450,243 5,275,624 4,548,847
---------- ---------- ---------- ----------
Cost and expenses:
Cost of sales-products 1,121,500 997,301 2,109,737 1,858,628
Cost of sales-services 225,710 174,329 453,810 340,436
Research and development 303,482 259,228 586,762 481,846
Selling, general and administrative 747,603 696,450 1,459,191 1,311,943
Purchased in-process research and
development 12,000 110,100 92,000 162,284
---------- ---------- ---------- ----------
Total costs and expenses 2,410,295 2,237,408 4,701,500 4,155,137
Operating income 374,145 212,835 574,124 393,710
Interest income, net 20,306 10,197 35,661 20,768
---------- ---------- ---------- ----------
Income before income taxes 394,451 223,032 609,785 414,478
Provision for income taxes 133,364 73,600 234,824 156,613
---------- ---------- ---------- ----------
Net income $ 261,087 $ 149,432 $ 374,961 $ 257,865
========== ========== ========== ==========
Net income per common share - basic $ 0.68 $ 0.40 $ 0.99 $ 0.69
========== ========== ========== ==========
Net income per common share - diluted $ 0.64 $ 0.38 $ 0.93 $ 0.65
========== ========== ========== ==========
Shares used in the calculation of
net income per share - basic 382,547 373,875 379,883 372,968
========== ========== ========== ==========
Shares used in the calculation of
net income per share - diluted 405,288 393,231 401,445 394,165
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 27, December 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 374,961 $ 257,865
Adjustments to reconcile net income
to operating cash flows:
Depreciation and amortization 313,370 183,472
Tax benefit of options exercised 96,740 74,466
Purchased in-process research and development 92,000 162,284
Net (increase) decrease in accounts receivable (258,651) 16,004
Net increase in inventories (17,218) (15,765)
Net increase in accounts payable 114,749 14,414
Net increase in other current
and non-current assets (87,687) (97,594)
Net increase in other current
and non-current liabilities 143,529 19,301
--------- ---------
Net cash provided from operating activities 771,793 614,447
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and equipment (360,322) (410,453)
Acquisition of spare parts and other assets (68,481) (49,080)
Payments for acquisitions, net of cash acquired (31,269) (227,655)
Acquisition of short-term investments (935,266) (305,738)
Sale of short-term investments 235,617 224,309
Maturities of short-term investments 252,268 214,122
--------- ---------
Net cash used by investing activities (907,453) (554,495)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 92,228 37,189
Acquisition of treasury stock (164,286) (140,537)
Proceeds from employee stock purchase plans 58,529 50,649
Net reduction of short-term borrowings and
other obligations (3,216) (94,155)
--------- ---------
Net cash used by financing activities (16,745) (146,854)
--------- ---------
Net decrease in cash and cash equivalents (152,405) (86,902)
--------- ---------
Cash and cash equivalents, beginning of period 822,267 660,170
--------- ---------
Cash and cash equivalents, end of period $ 669,862 $ 573,268
========= =========
</TABLE>
5
<PAGE> 6
SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
December 27, December 28,
1998 1997
--------- ---------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 745 $ 388
Income taxes $ 58,448 $ 55,503
Supplemental schedule of non-cash investing activities:
Stock issued in conjunction with an acquisition $142,028 --
Fair value of assets acquired $198,629 $ 284,294
Cash paid for assets $ 35,684 $ 233,111
Liabilities assumed $ 20,737 $ 51,183
--------- ---------
</TABLE>
See accompanying notes.
6
<PAGE> 7
SUN MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sun
Microsystems, Inc. ("Sun" or the "Company") and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been eliminated.
Certain amounts from prior years have been reclassified to conform to
current year presentation.
While the interim financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting of
normal recurring accruals) that the Company considers necessary for a fair
presentation of the results of operations for the interim periods covered
and of the financial condition of the Company at the date of the interim
balance sheet. The results for the interim periods are not necessarily
indicative of the results for the entire year. The information included in
this report should be read in conjunction with the 1998 Annual Report to
Stockholders which is incorporated by reference in the Company's 1998 Form
10-K .
INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 27, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Raw materials $127,115 $ 92,197
Work in process 40,577 58,765
Finished goods 195,972 195,484
-------- --------
$363,664 $346,446
======== ========
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the liability method of Statement of
Financial Accounting Standards No. 109. The provision for income taxes during
the interim periods considers anticipated annual income before taxes, earnings
of foreign subsidiaries permanently invested in foreign operations, and other
differences.
RECENT PRONOUNCEMENTS
The Company adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" effective July 1, 1998. The adoption of
SOP 98-1 did not have a material effect on the Company's consolidated financial
position or operating results.
In June 1998, Financial Accounting Standard No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" was issued and is effective for
all fiscal years beginning after June 15, 1999. FAS 133 requires the Company to
recognize all derivatives as either assets or liabilities and measure those
instruments at
7
<PAGE> 8
fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow and foreign currency hedges and establishes
respective accounting standards for reporting changes in the fair value of the
derivative instruments. Upon adoption, the Company will be required to adjust
hedging instruments to fair value in the balance sheet and recognize the
offsetting gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. The Company is evaluating its expected
adoption date and currently expects to comply with the requirements of FAS 133
in fiscal year 2000. The Company does not expect the adoption will be material
to the Company's financial position or results of operations.
COMPREHENSIVE NET INCOME
As of July 1, 1998, the Company adopted Financial Accounting Standards No. 130
("FAS 130") , "Reporting Comprehensive Income." FAS 130 establishes new rules
for the reporting and display of comprehensive net income and its components,
however, it has no impact on the Company's net income or stockholders' equity.
FAS 130 requires foreign currency translation adjustments and changes in fair
value for available for sale securities, which prior to adoption were reported
in stockholders' equity, to be included in comprehensive income.
The components of comprehensive net income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 261,087 $ 149,432 $ 374,961 $ 257,865
Unrealized gain (loss) on securities (6,513) 9,406 (20,637) 9,592
Change in cumulative translation
adjustment 242 7,515 2,201 (1,622)
--------- --------- --------- ---------
Comprehensive net income $ 254,816 $ 166,353 $ 356,525 $ 265,835
========= ========= ========= =========
</TABLE>
ACQUISITIONS
On August 28, 1998 the Company acquired all of the outstanding capital stock of
NetDynamics, Inc. ("NetDynamics") by means of a merger transaction pursuant to
which all the shares of NetDynamics capital stock were converted into the right
to receive Sun common stock based upon an agreed-upon exchange ratio which was
calculated using an agreed-upon average market price for Sun common stock. The
Company issued 2,746,785 shares of Sun common stock (with a fair market value of
$48.26875 per share) as the consideration for the acquisition. The transaction
was accounted for as a purchase and the excess purchase price over the estimated
fair value of net tangible assets has been allocated to various intangible
assets, primarily consisting of developed technology ($20 million) and goodwill
($36.2 million), customer base ($10 million) and assembled workforce ($2
million). In addition to the intangible assets acquired, the Company recorded an
$80 million charge, representing the write-off of in-process research and
development ("IPRD").
On September 28, 1998 the Company acquired all of the outstanding capital stock
of i-Planet, Inc. ("i-Planet") by means of a merger transaction pursuant to
which all the shares of i-Planet capital stock were converted into the right to
receive cash. The transaction was accounted for as a purchase and the excess
purchase price over the estimated fair value of net tangible assets has been
allocated to various intangible assets, primarily consisting of developed
technology ($3.3 million) and goodwill type assets ($18.3 million). In addition
to the intangible assets acquired, the Company recorded an $8.4 million charge,
representing the write-off of IPRD.
8
<PAGE> 9
On October 16, 1998, the Company acquired all of the outstanding capital stock
of Beduin Communications Incorporated ("Beduin") by means of a share purchase
transaction pursuant to which all the shares of Beduin capital stock were
converted into the right to receive cash. The transaction was accounted for as a
purchase and the excess purchase price over the estimated fair value of net
tangible assets has been allocated to various intangible assets, primarily
consisting of developed technology ($3.1 million) and goodwill type assets ($1.4
million). In addition to the intangible assets acquired, the Company recorded an
$3.6 million charge, representing the write-off of IPRD.
For financial reporting purposes, the Company is required for each acquisition
to determine the fair value of all identified intangible assets acquired and
expense the fair value associated with IPRD for which there is no alternative
future use. The allocation of $80 million, $8.4 million, and $3.6 million of the
purchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun
acquisitions, respectively, represents the estimated fair value based on risk
adjusted cash flows related to each incomplete project. The Company believes
that such fair values do not exceed the amount a third party would pay for each
such in-process technology. At the date of each of the acquisitions, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the in-progress technology had no alternative future use.
Accordingly, these costs were expensed.
In making its purchase price allocations for the NetDynamics, i-Planet, and
Bediun acquisitions, the Company considered present value calculations of
income, an analysis of project accomplishments and completion costs, an
assessment of overall contribution, as well as project risks. The values
assigned to IPRD related to each acquisition were determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows from each project, excluding
the cash flows related to the portion of each project that was incomplete at the
acquisition date, and discounting the resulting net cash flows to their present
value. Each of these forecasts were based upon future discounted cash flows,
taking into account the state of development of each in-process project, the
cost to complete that project, the expected income stream, the life cycle of the
product ultimately developed, and the associated risks. Projected future net
cash flows attributable to the in-process technology, assuming successful
development of such technologies, were discounted to their present value using a
discount rate which was derived based on the Company's estimated weighted
average cost of capital plus a risk premium to account for the inherent
uncertainty surrounding the successful completion of each project and the
associated estimated cash flows.
The values assigned to developed technologies related to each acquisition were
based upon future discounted cash flows related to each of the existing
products' projected income stream. The values of the customer bases were
determined based upon the value of existing relationships and the expected
revenue stream. The value of the assembled workforces were based upon the cost
to replace that workforce. Intangible assets, including goodwill, are being
amortized over their estimated useful lives, generally two to five years.
9
<PAGE> 10
SUN MICROSYSTEMS, INC. AND AMERICA ONLINE, INC. STRATEGIC DEVELOPMENT AND
MARKETING AGREEMENT
On November 23, 1998, Sun and America Online, Inc. ("AOL") entered into a
Strategic Alliance consisting of several agreements between the parties,
including the Strategic Development and Marketing Agreement ("SDMA"). A copy of
the SDMA has been filed as exhibit 10.93 to this Form 10-Q and is incorporated
herein by reference. Under terms of the SDMA, AOL and Sun committed to
collaboratively develop, market and sell client and server software and
collaboratively develop an AOL specific Java environment that will enable AOL
services to be accessed through a variety of hardware devices. The SDMA provides
that over a three year period, AOL will develop and market, together with Sun,
client software and network application and server software based in part on the
Netscape Communications, Inc. ("Netscape") code base, on Sun code and
technology, and on certain AOL services features to business enterprises. In
addition, AOL and Sun have agreed to coordinate their sales efforts and share
revenues with respect to designated collaboratively developed client software
and network application and server software and associated services.
Under the terms of the SDMA, Sun has committed that the total revenue earned by
AOL from certain existing Netscape contracts, the sale or license of certain AOL
and Netscape software and services, the sale or license of certain
collaboratively developed software products and services and the license to Sun
to distribute commercially existing Netscape software will not be less than $312
million, $330 million and $333 million in the first, second and third years of
the SDMA's three year term, respectively; for these purposes a portion of the
total revenue is determined as a percentage of the gross margin or net of sales
commissions earned by Sun. In addition, Sun will pay to AOL approximately $275
million in licensing and other fees in connection with licenses granted to Sun
by AOL. In a separate transaction, AOL signed a definitive agreement to acquire
Netscape (the "Merger"). The SDMA provides that in the event the Merger is not
consummated by June 30, 1999, AOL and Sun will negotiate in good faith for a
period of 30 days thereafter in an effort to agree to alternative terms, and
either party may terminate the SDMA if the parties fail to agree on alternative
terms during that period.
SUBSEQUENT EVENTS
On January 21, 1999 the Company announced a two-for-one stock split (to be
effected in the form of a stock dividend) to stockholders of record as of the
close of business on March 18, 1999. This dividend is subject to stockholder
approval of an increase in the number of authorized shares of the Company's
Common Stock to 1.8 billion shares which will be sought
at the Company's Special Meeting of Stockholders on March 17, 1999.
On January 22, 1999, the Company acquired all of the outstanding capital stock
of Maxstrat Corporation ("Maxstrat"), by means of a merger transaction pursuant
to which all of the shares of Maxstrat capital stock were converted into the
right to receive cash. The transaction will be accounted for as a purchase, and
the purchase price will be allocated to tangible and intangible assets and IPRD.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following table sets forth items from the Condensed Consolidated Statements
of Income as a percentage of total net revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues:
Products 85.6% 86.5% 86.1% 88.2%
Services 14.4 13.5 13.9 11.8
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Products 40.3 40.7 40.0 40.8
Services 8.1 7.1 8.6 7.5
----- ----- ----- -----
Total cost of sales 48.4 47.8 48.6 48.3
----- ----- ----- -----
Gross margin 51.6 52.2 51.4 51.7
Research and development 10.9 10.6 11.1 10.6
Selling, general and administrative 26.8 28.4 27.7 28.85
Purchased in-process research
and development 0.4 4.5 1.7 3.6
----- ----- ----- -----
Operating income 13.4 8.7 10.9 8.7
Interest income, net 0.8 0.4 0.7 0.4
----- ----- ----- -----
Income before income taxes 14.2 9.1 11.6 9.1
Provision for income taxes 4.8 3.0 4.5 3.4
----- ----- ----- -----
Net income 9.4% 6.1% 7.1% 5.7%
===== ===== ===== =====
</TABLE>
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below, specifically those contained in "Future Operating Results" identify
important factors that could cause actual results over the next few quarters to
differ materially from those predicted in any such forward-looking statements.
Such factors include, but are not limited to, adverse changes in general
economic conditions, including adverse changes in the specific markets for the
Company's products, adverse business conditions, decreased or lack of growth in
the computing industry, adverse changes in customer order patterns, increased
competition, lack of acceptance of new products, pricing pressures, lack of
success in technological advancements, risks associated with foreign operations
(including the downturn of economic trends and unfavorable currency movements in
the Asia Pacific and Latin American marketplace),
11
<PAGE> 12
risks associated with the Company's efforts to comply with Year 2000
requirements, risks associated with the Company's new business practices,
processes and information systems, and other factors, including those listed
below. Other facts that may affect such results and financial condition are set
forth in the Company's 1998 Annual Report to Stockholders which is incorporated
by reference in the Company's Form 10-K.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues were $2,784.4 million for the second quarter of fiscal 1999 and
$5,275.6 million for the first six months of fiscal 1999, representing increases
of 13.6% and 16.0%, respectively, over the corresponding periods of fiscal 1998.
Sun's products net revenues were $2,384.7 million for the second quarter of
fiscal 1999, an increase of $222.7 million or 10.3% over the second quarter of
fiscal 1998. Net product revenues were $4,540.9 million for the six months ended
December 27, 1998, an increase of $531.0 million or 13.2% over the corresponding
period of fiscal 1998. More than 50% of the growth in products revenues for
the quarter ended December 27, 1998 resulted from strong demand for low-end
desktop products and workgroup servers, and to a lesser extent from increased
revenues generated by richly configured enterprise servers. More than 50% of
the growth in products revenues for the six month period ended December 27, 1998
resulted from strong demand for low-end desktop products and workgroup servers
and to a lesser extent, the Company's storage products. The growth in product
revenues in both the quarter and year to date periods was partially offset by a
decline in high-end desktop product volumes as the result of a shift in customer
purchasing patterns towards low-end desktop products and workgroup servers.
Sun's services net revenues were $399.7 million for the second quarter of fiscal
1999, an increase of $111.4 million or 38.6% over the second quarter of fiscal
1998. Net revenues from services were $734.8 million for the six months ended
December 27, 1998, an increase of $195.8 million or 36.3% over the corresponding
period of fiscal 1998. The increases in services revenues are primarily the
result of a larger installed product base due to increased product unit sales,
as well as increased revenues associated with Sun's professional and educational
services.
Domestic net revenues increased by 10.1% and 14.9 % in the second quarter and
first six months of fiscal 1999, respectively. International net revenues
(including United States exports) grew 17.2% and 17.1% in the second quarter and
first six months of fiscal 1999, respectively, compared with the corresponding
periods of fiscal 1998. In US dollars, European net revenues increased 22.7% and
28.7%, Rest of World (ROW) net revenues increased 7.1% and 10.8%, and Japanese
net revenues increased 13.8% and decreased 3.3%, in the second quarter and first
six months of fiscal 1999, respectively, when compared with the corresponding
periods of fiscal 1998. The increases in Europe and the ROW are due to continued
market acceptance of Sun's network computing products and services primarily in
the United Kingdom and Germany. The Company attributes the increase in Japanese
revenues in the second quarter to increased demand within the region for Sun's
products, rather than a sign of strengthening in the Asian economies. Sun
remains cautious with regard to the Japanese market and does not expect the
current Japanese Macroeconomic trends to change significantly or materially in
the near term. The foregoing is a forward-looking statement that is subject to
risks and uncertainties, and actual results may differ materially from those set
forth in such statement as the result of a number of factors. In particular, if
the economic trends in Japan significantly worsen in a quarter or decline over
an extended period of time, the Company's results from operations and cash flows
would be adversely affected.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. As a result, the Company's results could be
significantly adversely affected by factors such as changes in foreign currency
exchange rates or economic conditions in the foreign markets in which the
Company distributes its
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products. The Company is primarily exposed to changes in exchange rates on the
Japanese yen, British pound sterling, French franc and German mark. When the
U.S. dollar strengthens against these currencies, the U.S. dollar value of
non-U.S. dollar-based sales decreases. When the U.S. dollar weakens against
these currencies, the U.S. dollar value of non-U.S. dollar-based sales
increases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs
increases when the U.S. dollar weakens and decreases when the U.S. dollar
strengthens. Overall the Company is a net receiver of currencies other than the
U.S. dollar and, as such, benefits from a weaker dollar, and is adversely
affected by a stronger dollar relative to major currencies worldwide.
Accordingly, changes in exchange rates, and in particular a strengthening of the
U.S. dollar, may adversely affect the Company's consolidated sales and gross
margins as expressed in U.S. dollars.
To mitigate the short-term effect of changes in currency exchange rates on the
Company's non-US dollar-based sales, product procurement, and operating
expenses, the Company regularly hedges its net non-U.S. dollar-based exposures
by entering into foreign exchange forward and option contracts to hedge
transactions. Currently, hedge contracts do not extend beyond three months.
Given the short-term nature of the Company's foreign exchange forward and
options contracts, the Company's exposure to risk associated with currency
market movement on these instruments is not material.
GROSS MARGIN
Total gross margin was 51.6% for the second quarter of fiscal 1999 and 51.4% for
the first six months of fiscal 1999, compared with 52.2% and 51.7%,
respectively, for the corresponding periods of fiscal 1998.
Products gross margin was 53.0% in the second quarter of fiscal 1999 and 53.5%
for the first six months of fiscal 1999, compared with 53.9% and 53.6%,
respectively, for the corresponding periods of fiscal 1998. The decrease in the
products gross margin for the second quarter of fiscal 1999 reflects the effects
of increased volumes of lower margin low-end desktop products, partially offset
by higher margin servers and reduced component costs across product lines. There
could be a further impact upon products gross profit margins as the result of
any continued shift in customer purchasing patterns towards low-end desktop
products and workgroup servers. The foregoing is a forward-looking statement
that is subject to risks and uncertainties, and actual results may differ
materially from those set forth in such statement as the result of a number of
factors. Services gross margin was 43.5% for the second quarter of fiscal 1999
and 38.2% for the first six months of fiscal 1999, compared with 39.5% and
36.8%, respectively, for the corresponding periods of fiscal 1998. The increases
in services gross margin reflect increased market penetration in Enterprise
datacenter accounts, increased enrollment in datacenter training courses and
other offerings, and continued growth in professional services offerings. These
increases have been partially offset by increased investment by the Company in
its services business.
The Company continuously evaluates the competitiveness of its product offerings.
These evaluations could result in repricing actions in the near term. Sun's
future operating results would be adversely affected if such repricing actions
were to occur and the Company were unable to mitigate the resulting margin
pressure by maintaining a favorable mix of systems, software, service, and other
products and by achieving component cost reductions, operating efficiencies and
increasing volumes.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased to $303.5 million in the
second quarter of fiscal 1999, compared with $259.2 million for the second
quarter of fiscal 1998. R&D expenses were $586.8 million for the first six
months of fiscal 1999, compared with $481.8 million for the corresponding period
of fiscal 1998. As a percentage of total net revenues, R&D expenses increased to
10.9% and 11.1% for the second quarter and first six months of fiscal 1999,
respectively, compared with 10.6% in each of the corresponding periods of fiscal
1998. Both the dollar and percentage increase in R&D expenses in the second
quarter and first half of fiscal 1999 over the corresponding periods in fiscal
1998 primarily reflect increased expenditures focused on the development of
hardware and software products which utilize the Java (TM) platform and new
server and storage products. The remaining increase in R&D expenses is due to
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further development of products acquired through acquisitions and increased
compensation due primarily to higher levels of R&D staffing. The increase in R&D
expenses reflects the Company's belief that to maintain its competitive position
in a market characterized by rapid rates of technological advancement, the
Company must continue to invest significant resources in new systems, software
products and microprocessor development, as well as enhancements to existing
products. The Company continues to expect the level of R&D expenses to be in the
range of 10 to 11% of revenue for fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses increased to $747.6 million
in the second quarter of fiscal 1999, compared with $696.5 million for the
second quarter of fiscal 1998. SG&A expenses were $1,459.2 million for the first
six months of fiscal 1999, compared with $1,311.9 million for the corresponding
period of fiscal 1998. As a percentage of total net revenues, SG&A expenses
decreased to 26.8% and 27.7% in the second quarter and first six months of
fiscal 1999, respectively, from 28.4% and 28.8%, respectively, in the
corresponding periods of fiscal 1998. Overall SG&A spending increased by
approximately $51.1 million or 7.3% in the second quarter of fiscal 1999 in
comparison with the same period of fiscal 1998. For the six month period ended
December 27, 1998, overall SG&A spending increased by approximately $147.2
million or 11.2% in comparison to the corresponding period of fiscal 1998. The
dollar increases in fiscal 1999 are primarily attributable to increased
compensation resulting from higher levels of headcount, principally in the sales
organization, annual salary adjustments and to a lesser extent marketing costs
related to promotional programs. The dollar increase also reflects investments
aimed at improving Sun's own business processes. The Company expects to continue
to hire personnel, although at a lower rate than in fiscal 1998 and early 1999,
to further expand its demand creation programs and support organizations.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
NETDYNAMICS, INC.
On August 28, 1998, the Company acquired all of the outstanding capital stock of
NetDynamics by means of a merger transaction pursuant to which all the shares of
NetDynamics capital stock were converted into the right to receive shares of Sun
common stock based upon an agreed-upon exchange ratio which was calculated using
an agreed-upon average market price for Sun common stock. The Company issued
2,746,785 shares of Sun common stock (with a fair market value of $48.26875 per
share) as the consideration for the acquisition. The transaction was accounted
for as a purchase and the excess purchase price over the estimated fair value of
net tangible assets has been allocated to various intangible assets, primarily
consisting of developed technology ($20 million), goodwill ($36.2 million),
customer base ($10 million) and assembled workforce ($2 million). In addition to
the intangible assets acquired, the Company recorded an $80 million charge,
representing the write-off of IPRD.
At the acquisition date, NetDynamics was conducting development, engineering,
and testing activities associated with the completion of a new enterprise
application platform product scheduled to be released in mid calendar 1999. It
is anticipated that this new product offering ("NetDynamics New Product
Offering") will employ a new server-side component model, based on the
Enterprise JavaBeans (TM) ("EJB") architecture, which will allow business logic
to reside in the middle tier of the enterprise computing model independent of
the client presentation layer and independent of legacy and database systems.
This architecture is significantly different than the business logic
architecture in NetDynamics' existing product offering in which the server
components are tightly integrated with the presentation interface. The EJB
architecture will allow for the development of more robust applications with
improved reusability, better connectivity to a wide variety of data sources, and
a more-industry standard interface through the use of Java enterprise
application
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programming interfaces. Other new features include significant security
enhancements and performance and scalability improvements and the addition of
new platform adaptor components for legacy systems integration.
At the acquisition date, NetDynamics was in mid-stages of development and
substantial progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the NetDynamics New
Product Offering relate primarily to coding, testing, and addressing additional
implementation issues. The Company anticipates that the NetDynamics New Product
Offering will be complete by the end of the Company's fiscal year ending June
30, 1999, after which the Company expects to begin generating economic benefits
from the value of the completed development associated with the IPRD. The
Company continues to expect expenditures to complete the NetDynamics New Product
Offering to total approximately $5.7 million in fiscal 1999 of which $2.4
million has been incurred. The preceding two sentences are forward-looking
statements that are subject to risks and uncertainties and actual results may
differ materially from those set forth in such sentences as a result of a number
of factors. In particular, there can be no assurance that the NetDynamics New
Product Offering will be completed by the end of the Company's fiscal year
ending June 30, 1999, that it will meet either technological or commercial
success or that the Company will receive any economic benefit from the
NetDynamics New Product Offering. In addition, the expenditures related to
completing the NetDynamics New Product Offering may exceed the Company's current
estimates as a result of delays in the development of the technology, the
complexity of the technology, changes in customer needs, or for other reasons.
I-PLANET, INC.
On September 28, 1998 the Company acquired all of the outstanding capital stock
of i-Planet by means of a merger transaction pursuant to which all the shares of
i-Planet capital stock were converted into the right to receive cash. The
transaction was accounted for as a purchase and the excess purchase price over
the estimated fair value of net tangible assets has been allocated to various
intangible assets, primarily consisting of developed technology ($3.3 million)
and goodwill type assets ($18.3 million). In addition to the intangible assets
acquired, the Company recorded an $8.4 million charge, representing the
write-off of IPRD.
At the acquisition date, i-Planet was conducting development, engineering, and
testing activities associated with the completion of a new Java technology-based
remote Internet access product scheduled to be released in early calendar 1999.
It is anticipated that this new product offering ("i-Planet New Product
Offering") when combined with a new Sun software product will be designed to
allow cost-effective, secure, and ubiquitous internet access for applications
such as remote access to corporate intranets, supply chain management and
commerce applications.
At the acquisition date, i-Planet was in mid-stages of development and
substantial progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the i-Planet New Product
Offering relate primarily to coding, testing, and addressing additional
implementation issues. The Company anticipates that the i-Planet New Product
Offering will be complete by the end of the Company's third quarter of fiscal
1999, after which the Company expects to begin generating economic benefits from
the value of the completed development associated with the IPRD. Expenditures to
complete the i-Planet New Product Offering are expected to total approximately
$6 million in fiscal 1999. The preceding two sentences are forward-looking
statements that are subject to risks and uncertainties and actual results may
differ materially from those set forth in such sentences as a result of a number
of factors. In particular, there can be no assurance that the i-Planet New
Product Offering will be completed by the end of the Company's fiscal year
ending June 30, 1999, that it will meet either technological or commercial
success or that the Company will receive any economic benefit from the i-Planet
New Product Offering. In addition, the expenditures related to completing the
i-Planet New Product Offering may exceed the Company's current estimates as a
result of delays in the development of the technology, the complexity of the
technology, changes in customer needs, or for other reasons.
BEDIUN COMMUNICATIONS INCORPORATED
On October 16, 1998, the Company acquired all of the outstanding capital stock
of Beduin by means of a share purchase transaction pursuant to which all the
shares of Beduin capital stock were converted into the right to receive cash.
The transaction was accounted for as a purchase and the excess purchase price
over the estimated fair value of net tangible assets has been allocated to
various intangible assets, primarily consisting of developed technology ($3.1
million) and goodwill type assets ($1.4 million). In addition to the intangible
assets acquired, the Company recorded an $3.6 million charge, representing the
write-off of IPRD.
At the acquisition date, Bediun was conducting development, engineering, and
testing activities associated with the completion of a suite of products
("Bediun New Product Offerings") which included: Lifestyle Manager Personal
Information Manager ("PIM") (a next generation PIM targeted at smart devices
incorporating Java technology), and email Client (a next generation email client
specialized to take advantage of the benefits of
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these smart devices). The Lifestyle PIM and the email client were scheduled to
be released in the second quarter of calendar year 1999. It is anticipated that
these Bediun New Product Offerings will provide the core functionality for smart
devices incorporating Java technology and enable more efficient communication,
regardless of time, location or type of device. These Bediun New Product
Offerings are designed to integrate and synchronize communications and data
processing systems to enable communications across time and space.
At the acquisition date, Bediun was in mid-stages of development and substantial
progress had been made in the areas of specifications, design, and
implementation. Remaining efforts necessary to complete the Bediun New Product
Offerings relate primarily to coding, testing, and addressing additional
implementation issues. The Company anticipates that the Bediun New Product
Offerings will be complete during the fourth quarter of the Company's fiscal
year ending June 30, 1999, after which the Company expects to begin generating
economic benefits from the value of the completed development associated with
the IPRD. Expenditures to complete the Bediun New Product Offerings are expected
to total approximately $1 million in fiscal 1999. The preceding two sentences
are forward-looking statements that are subject to risks and uncertainties and
actual results may differ materially from those set forth in such sentences as a
result of a number of factors. In particular, there can be no assurance that the
Bediun New Product Offerings will be completed by the end of the Company's
fiscal year ending June 30, 1999, that it will meet either technological or
commercial success or that the Company will receive any economic benefit from
the Bediun New Product Offerings. In addition, the expenditures related to
completing the Bediun New Product Offerings may exceed the Company's current
estimates as a result of delays in the development of the technology, the
complexity of the technology, changes in customer needs, or for other reasons.
VALUATIONS OF IPRD
For financial reporting purposes, the Company is required to determine the fair
value of all identified intangible assets and expense the fair value associated
with IPRD for which there is no alternative future use for each of its
acquisitions. The allocation of $80 million, $8.4 million, and $3.6 million of
the purchase price to IPRD in the case of the NetDynamics, i-Planet and Bediun
acquisitions, respectively, represents the estimated fair values based on risk
adjusted cash flows related to each incomplete project. The Company believes
that such fair values do not exceed the amount a third party would pay for each
such in-process technology. At the date of each of the acquisitions, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the R&D in progress had no alternative future uses. Accordingly,
these costs were expensed.
Forecasts of future results that management believes are likely to occur were
the basis for assigning value to IPRD. For the NetDynamics, i-Planet, and Bediun
acquisitions, the values assigned to IPRD were determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows from each project, excluding
the cash flows related to the portion of each project that was incomplete at the
acquisition date, and discounting the resulting net cash flows to their present
value. Each of these forecasts were based upon future discounted cash flows,
taking into account the state of development of each in-process project, the
cost to complete that project, the expected income stream, the life cycle of the
product ultimately developed, and the risks associated with successful
development and commercialization of each project. Projected future net cash
flows attributable to the in-process technology, assuming successful development
of such technologies, were discounted to their present value using a discount
rate which was derived based on the Company's estimated weighted average cost of
capital ("WACC") plus a risk premium to account for the inherent uncertainty
surrounding the successful completion of each project and the associated
estimated cash flows. The discount rates used in valuing the net cash flows from
each purchased in-process technology were 20% for the NetDynamics acquisition,
25% for the i-Planet acquisition, and 40% for the Bediun acquisition. These
discount rates are higher than the WACC due to the inherent uncertainties in the
estimates described above, including the uncertainty surrounding the successful
development of the purchased in-process technologies, the useful life of such
technologies, the profitability levels of such technology and the uncertainty of
technological advances that are unknown at this time.
The estimates utilized in the valuation of the IPRD charges are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. Management expects
to continue its development each project and believes that there is a reasonable
chance of successfully completing such development. However, there is risk
associated with the completion of the in-process projects and there can be no
assurance that any project will meet with either technological or commercial
success. Failure to successfully develop and commercialize these in-process
projects would result
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in the loss of the expected economic return inherent in the fair value
allocation. Additionally, the value of other intangible assets acquired may
become impaired. The foregoing statements in this paragraph are forward-looking
statements that are subject to risks and uncertainties, and actual results may
differ materially from those set forth in such statements as the result of a
number of factors, including those stated in this paragraph.
Purchased IPRD of $110.1 million and $162.3 million in the second quarter and
first six months of fiscal 1998, respectively, represent the write-off of
purchased IPRD associated with the Company's acquisitions of Chorus Systems
S.A., and the storage products business of Encore Computer Corporation in the
second quarter of fiscal 1998 and Diba, Inc. and Integrity Arts, Inc. in the
first quarter of fiscal 1998.
INTEREST INCOME, NET
Net interest income was $20.3 million for the second quarter and $35.7 million
for the first six months of fiscal 1999, compared with $10.2 million and $20.8
million, respectively for the corresponding periods in fiscal 1998. The
increases in 1999 are primarily the result of higher interest earnings due to a
larger average portfolio of cash and short-term investments.
INCOME TAXES
The Company's effective income tax rate was 33% for the second quarter and first
six months of fiscal 1999, before non-recurring tax charges of $3.2 million
resulting from a write-off of IPRD associated with the acquisition of i-Planet
in the second quarter of fiscal 1999 and $30.4 million resulting from a
write-off of IPRD associated with the acquisition of NetDynamics in the first
quarter of fiscal 1999. The effective tax rate including such charges for the
second quarter and six months ended December 27, 1998 was 33.8% and 38.5%,
respectively. The Company's effective income tax rate for the second quarter and
six months ended December 28, 1997 was 33% before a tax charge of $19.8 million
resulting from a write-off of IPRD associated with the acquisitions of Diba Inc.
and Integrity Arts, Inc. in the first quarter of fiscal 1998. The Company
currently expects its effective tax rate to remain at 33% for the balance of
fiscal 1999, exclusive of any acquisition- related charges.
FUTURE OPERATING RESULTS
COMPETITION
The markets for Sun's hardware and software products and services are intensely
competitive and subject to continuous, rapid technological change, short product
life cycles and frequent product performance improvements and price reductions.
Due to the breadth of the Company's product lines and the scalability of its
products and network computing model, Sun competes principally with
Hewlett-Packard Company, International Business Machines Corporation, Compaq
Computer Corporation, Silicon Graphics, Inc. and EMC Corporation, in many
segments of the network computing market across a broad spectrum of customers.
The Company expects the markets for its products, technologies, and services, as
well as its competitors within such markets, will continue to change as the
rightsizing trend shifts customer buying patterns to network-based systems which
often employ solutions from multiple vendors. Competition in these markets will
also continue to intensify as Sun and many of its competitors, aggressively
position themselves to benefit from this shifting of customer buying patterns
and demand. The Company is also facing competition from certain systems
manufacturers, including Dell Computer Corporation and certain of its
competitors listed above, whose products are based on microprocessors from Intel
Corporation coupled with Windows NT operating system software from Microsoft
Corporation. These products demonstrate the viability of certain networked
personal computer solutions and have increased the competitive pressure,
particularly in the Company's workstation and
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lower-end server product lines. Finally, the timing of introductions of new
products and services by Sun's competitors may negatively impact the future
operating results of the Company, particularly when such introductions occur in
periods leading up to the Company's introduction of its own new enhanced
products. The Company expects this pressure to continue and intensify throughout
fiscal 1999. While many other technical, service and support capabilities affect
a customer's buying decision, the Company's future operating results will
depend, in part, on its ability to compete with these technologies.
PRODUCT DEVELOPMENT
The Company's future operating results will depend to a considerable extent on
its ability to rapidly and continuously develop, introduce, and deliver in
quantity new systems, software, and service products, as well as new
microprocessor technologies, that offer its customers enhanced performance at
competitive prices. The development of new high-performance computer products,
such as the Company's recent development of the UltraSPARC microprocessor is a
complex and uncertain process requiring high levels of innovation from the
Company's designers and suppliers, as well as accurate anticipation of customer
requirements and technological trends. Once a hardware product is developed, the
Company must rapidly bring such products to volume manufacturing, a process that
requires accurate forecasting of volumes, mix of products and configurations,
among other things, in order to achieve acceptable yields and costs. Future
operating results will depend to a considerable extent on the Company's ability
to closely manage product introductions in order to minimize unfavorable
patterns of customer orders, to reduce levels of older inventory and to ensure
that adequate supplies of new products can be delivered to meet customer demand.
The ability of the Company to match supply and demand is further complicated by
the Company's need to adjust prices to reflect changing competitive market
conditions as well as the variability and timing of customer orders with respect
to the Company's older products. As a result, the Company's operating results
could be materially adversely affected if the Company is not able to correctly
anticipate the level of demand for the mix of products. Because the Company is
continuously engaged in this product development, introduction, and transition
process, its operating results may be subject to considerable fluctuation,
particularly when measured on a quarterly basis.
MANUFACTURING AND SUPPLY
Sun uses many standard parts and components in its products and believes there
are a number of competent vendors for most parts and components. However, a
number of important components are developed by and purchased from single
sources due to price, quality, technology or other considerations. In some
cases, those components are available only from single sources. In particular,
Sun is dependent on Sony Corporation for various monitors and on Texas
Instruments Incorporated for different implementations of SPARC(TM)
microprocessors. Certain custom silicon parts are designed by and produced on a
contractual basis for Sun. The process of substituting a new producer of such
parts could materially adversely affect Sun's operating results. Some suppliers
of certain components, including color monitors and custom silicon parts,
require long lead times such that it can be difficult for the Company to plan
inventory levels of components to consistently meet demand for Sun's products.
Certain other components, especially memory integrated circuits such as DRAMs,
SRAMs, and VRAMs, have from time to time been subject to industry wide
shortages. Future shortages of components could negatively affect the Company's
ability to match supply and demand, and therefore could materially adversely
impact the Company's future operating results.
The Company is increasingly dependent on the ability of its suppliers to design,
manufacture, and deliver advanced components required for the timely
introduction of new products. The failure of any of these suppliers to deliver
components on time or in sufficient quantities, or the failure of any of the
Company's own designers to develop advanced innovative products on a timely
basis, could result in a material adverse impact on the Company's operating
results. The inability to secure enough components to build products, including
new products, in the quantities and configurations required, or to produce, test
and deliver sufficient products to meet demand in a timely manner, would
materially adversely affect the Company's net revenues and operating
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results. To secure components for development, production, and introduction of
new products, the Company frequently makes advanced payments to certain
suppliers and often enters into noncancelable purchase commitments with vendors
early in the design process. Due to the variability of material requirement
specifications during the design process, the Company must closely manage
material purchase commitments and respective delivery schedules. In the event of
a delay or flaw in the design process, the Company's operating results could be
materially adversely affected due to the Company's obligations to fulfill such
noncancelable purchase commitments.
SALES, DISTRIBUTION AND MARKETING
Generally, the computer systems sold by Sun, such as products based on
UltraSPARC (TM) processors, are the result of hardware and software development,
such that delays in the software development can delay the ability of the
Company to ship new hardware products. In addition, adoption of a new release of
an operating system may require effort on the part of the customer and porting
by software vendors providing applications. As a result, the timing of
conversion to a new release is inherently unpredictable. Moreover, delays by
customers in adopting a new release of an operating system can limit the
acceptability of hardware products tied to that release. Such delays could
materially adversely affect the future operating results of the Company.
A significant portion of the Company's revenues is derived from international
sales and is therefore subject to inherent risks related thereto, including the
general economic and political conditions in each country, currency exchange
rate fluctuations, the effect of the tax structures of various jurisdictions,
changes to and compliance with a variety of foreign laws and regulations, trade
protection measures and import and export licensing requirements. There can be
no assurance that the economic crisis and currency issues currently being
experienced in certain parts of Asia will not have an adverse effect on the
Company's revenue or revenue growth rates in the future. The impact of any of
the foregoing factors could have a material adverse effect on the Company's
future financial condition and operating results.
Seasonality also affects the Company's operating results, particularly in the
first and third quarter of each fiscal year. In addition, the Company's
operating expenses are increasing as the Company continues to expand its
operations, and future operating results will be adversely affected if revenues
do not increase accordingly. Additionally, the Company plans to continue to
evaluate and, when appropriate, make acquisitions of complementary technologies,
products or businesses. As part of this process, the Company will continue to
evaluate the changing value of its assets, and when necessary, make adjustments
thereto. Acquisitions may involve amortization of acquired intangible assets in
periods following such acquisitions. In addition, acquisition transactions are
accompanied by a number of risks, including, among other things, those
associated with integrating operations, personnel, and technologies acquired,
and the potential for unknown liabilities of the acquired business.
One customer accounted for more than 10% of revenues in fiscal 1998. Any
termination by a significant customer of its relationship with the Company or
material reduction in the amount of business such a customer does with the
Company could materially adversely effect the Company's business, financial
condition or operating results.
BUSINESS PRACTICES, PROCESSES AND INFORMATION SYSTEMS
In order to remain competitive in a rapidly changing industry, the Company is
continually improving and changing its business practices, processes, and
information systems. In this regard, during fiscal 1999 the Company implemented
a number of new business practices and a series of related information systems
across the enterprise that affect numerous operational and financial systems and
processes. Although the systems were fully operational by the end of the second
quarter of fiscal 1999, these systems will be further tested in the second half
of the Company's fiscal year, and in particular, the fourth quarter to the
extent that the Company
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experiences higher volumes of orders and shipments as it has typically
experienced during these periods. In addition, during the balance of fiscal
1999, the Company expects to continue its efforts to optimize usage of systems
capabilities, enhance user skills surrounding system features, and reduce
runtime errors. However, there can be no assurance that the system will be able
to support the increased volume of activities expected at the Company's fiscal
year end.
The time period in which the new business practices and related information
systems will be fully tested and leveraged are forward-looking statements
subject to risks and uncertainties, and actual results may differ materially
from those set forth above as a result of a number of risk factors. In
particular, the ability to fully leverage systems capabilities are subject to a
number of risks, including the complexity of the new systems themselves and the
need for substantial and comprehensive employee training in connection with the
adoption of such new business practices and information systems. While the
Company has tested these new systems and processes in advance of their
implementation and continues to monitor the systems and processes ability to
support increased volumes of transactions, there are inherent limitations in the
Company's ability to simulate a full-scale operating environment in advance of
actual transaction volumes. Any increase in the volume of orders and shipments
of products during the last half of the fiscal year may have a material adverse
effect on the Company's business and operating results, if the systems and
processes are unable to support the increased volume of activity. In addition,
to the extent that the Company encounters problems with these new systems and
practices that prevent or limit their full utilization, there could be a
material adverse impact on the Company's operating results.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to be able to distinguish years
beginning with "19" from those beginning with "20." As a result, in less than a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such Year 2000 requirements. The Company is
currently expending resources to review its products and services, as well as
its internal use software in order to identify and modify those products,
services and systems that are not Year 2000 compliant. The Company believes that
the vast majority of these costs are not incremental to the Company but
represent a reallocation of existing resources and include regularly scheduled
system upgrades and maintenance. In addition, the Company is working to make
custom coding enhancements to its internal systems (described in the above
paragraphs) so that such systems will be Year 2000 compliant by the end of
fiscal year 1999.
Although the Company believes that the costs associated with the aforementioned
Year 2000 efforts are not material, the Company currently estimates that such
costs will be approximately $35 million, of which approximately $5 million has
been spent to date. The aforementioned costs are estimates due in large part to
the fact that the Company does not separately track the internal labor costs
associated with Year 2000 compliance, unless such costs are incurred by
individuals devoted primarily to Year 2000 compliance efforts. These cost
estimates do not include any potential costs related to any customer or other
claim. In addition, these cost estimates are based on the current assessment of
the ongoing activities described above, and are subject to change as the Company
continuously monitors these activities. The Company believes any modifications
deemed necessary will be made on a timely basis and does not believe that the
cost of such modifications will have a material adverse effect on the Company's
operating results. The Company currently expects the aforementioned evaluation
of its products, services, and systems and any remediation necessary will be
completed by the end of fiscal year 1999. The Company's expectations as to the
extent and timeliness of any modifications required in order to achieve Year
2000 compliance and the costs related thereto are forward-looking statements
subject to risks and uncertainties. Actual results may vary materially as a
result of a number of factors, including, among others, those described in this
section. There can be no assurance however, that the Company will be able to
successfully
20
<PAGE> 21
modify on a timely basis such products, services and systems to comply with Year
2000 requirements, which failure could have a material adverse effect on the
Company's operating results.
The Company has established a program to assess whether certain of its products
are Year 2000 compliant. Under the program, the Company is in the process of
performing tests on its products listed on the Company's price lists. To monitor
this program and to help customers evaluate their Year 2000 issues the Company
has created a web site at http://sun.com/y2000/cpl.html which identifies the
following categories: products that were released Year 2000 compliant; products
that require modifications to be Year 2000 compliant; products under review;
products that are not Year 2000 compliant and need to be replaced with a Year
2000 compliant product; source code products that could be modified and
implemented without Sun's review; and products that do not process or manipulate
date data or have no date-related technology. This list is periodically updated
as analysis of additional products is completed.
Based on the Company's assessment to date, most newly introduced products and
services of the Company are Year 2000 compliant, however, there can be no
assurance that the Company's current products do not contain undetected errors
or defects associated with Year 2000 functions that may result in material costs
to the Company. In addition, some of the Company's customers are running
products that are not Year 2000 compliant and will require an upgrade or other
remediation to become Year 2000 compliant. The Company provides limited
warranties as to Year 2000 compliance on certain of its products and services.
Except as specifically provided for in the limited warranties, the Company does
not believe it is legally responsible for costs incurred by customers to achieve
Year 2000 compliance. The Company has been taking steps to identify affected
customers, raise customer awareness related to noncompliance of the Company's
older products and encourage such customers to migrate to current products or
product versions. It is possible that the Company may experience increased
expenses in addressing migration issues for such customers or customer
dissatisfaction as a result of Year 2000 issues, which may have a material
adverse effect on the Company's operating results.
The Company also faces risks to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not have business systems or products that
comply with Year 2000 requirements. To the extent that Sun is not able to test
technology provided by third party hardware or software vendors, Sun is in the
process of obtaining Year 2000 compliance certifications from each of its major
vendors that their products and internal systems, as applicable, are Year 2000
compliant. In the event any such third parties cannot timely provide the Company
with products, services or systems that meet the Year 2000 requirements, the
Company's operating results could be materially adversely affected. Furthermore,
a reasonably likely worst case scenario would be if one of the Company's major
vendors experienced a material disruption in business, which caused the Company
to experience a material disruption in business, such a disruption would have a
material adverse effect on the Company's business, financial condition and
operating results. Should either the Company's internal systems or the internal
systems, products or services of one or more of the Company's major vendors fail
to achieve Year 2000 compliance, the Company's business, financial position or
results of operations could be materially adversely affected. The Company is
currently developing contingency plans to deal with potential Year 2000 problems
related to its internal systems and products and services provided by outside
vendors and expects these plans to be complete by the end of fiscal year 1999.
Although the Company believes that the cost of Year 2000 modifications for both
internal use software and systems, as well as the Company's products are not
material, there can be no assurance that various factors relating to the Year
2000 compliance issues will not have a material adverse effect on the Company's
business, operating results or financial position. For example, a significant
amount of litigation may arise out of Year 2000 compliance issues and there can
be no assurance as to the extent the Company may be affected by any such
litigation. Even though the Company does not believe that it is legally
responsible for its customer's Year 2000 compliance obligations, it is unclear
whether different governments or governmental agencies may decide
21
<PAGE> 22
to allocate liability relating to Year 2000 compliance to the Company without
regard to specific warranties or warranty disclaimers. Such allocation of
liability could have a materially adverse effect on the Company's financial
condition and results of operations in any given quarter. Furthermore, it is
unknown how customer spending patterns may be impacted by Year 2000 issues. As
customers focus on preparing their businesses for the Year 2000, capital budgets
may be spent on remediation efforts, potentially delaying the purchase and
implementation of new systems, thereby creating less demand for the Company's
products and services. These as well as other factors could have a material
adverse effect on the Company's revenues or operating results.
EURO COMPLIANCE
Eleven of the fifteen member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the Euro and
adopted the Euro as their common legal currency effective for the initial
implementation date of January 1, 1999. The Euro trades on currency exchanges
and is available for non-cash transactions, while the legacy currencies will
remain legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During the transition period,
cash-less payments can be made in the Euro and parties can elect to pay for
goods and services and transact business using either the Euro or the legacy
currency. Between January 1, 2002 and July 1, 2002, the participating countries
will introduce Euro notes and coins and withdraw all legacy currencies.
The Company has expended and continues to expend resources to review and modify
its products to support the Euro's requirements, determine pricing strategies in
the new economic environment, analyze the legal and contractual implications for
contracts, evaluate system capabilities, and ensure banking vendors can support
the Company's operations with respect to Euro transactions for the initial
implementation as of January 1, 1999 and during the transition period through to
January 1, 2002 and thereafter. The Company does not expect that the
introduction and use of the Euro will materially affect the Company's foreign
exchange and hedging activities, expects that modifications will be made to its
business operations and systems, as necessary, on a timely basis and does not
believe that the cost of such modifications will have a material adverse impact
on the Company's operating results. The Company's expectations as to the extent
and timeliness of modifications required to accommodate the conversion to Euro
transactions is a forward-looking statement subject to risks and uncertainties.
Actual results may vary materially, as a result of a number of factors,
including among others, those described in this paragraph. There can be no
assurance that the Company will be able to complete such modifications to comply
with Euro requirements, which could have a material adverse effect on the
Company's operating results. In addition, the Company faces risks to the extent
that vendors upon whom the Company relies and their suppliers are unable to make
appropriate modifications to support Euro transactions. The Company has not yet
completed its evaluation of the impact of the Euro upon its functional currency
designations.
While the Company cannot predict what effect these various factors may have on
its financial results, the aggregate effect of these and other factors could
result in significant volatility in the Company's future performance and stock
price.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition strengthened as of December 27, 1998 when
compared with June 30, 1998. During the first six months of fiscal 1999, cash
flows from operating activities generated $771.8 million in cash and cash
equivalents. Non-cash expenses affecting cash provided by operating activities
in the first six months of fiscal 1999 included depreciation and amortization
expense of $313.4 million, tax benefits of options exercised of $96.8 million
and charges for IPRD of $92 million in connection with the acquisitions of
22
<PAGE> 23
NetDynamics, i-Planet and Bediun. Favorably impacting cash provided by
operations were increases in accounts payable and other liabilities of $114.7
million and $144.5 million, respectively, which reflect the timing of payments
for inventory and other items. Offsetting these items, accounts receivable
increased $258.7 million which reflects an increase in days sales outstanding.
Additionally, other current assets increased due to the timing of payments for
insurance and other taxes. Other long-term assets increased primarily due to an
increase in intangible assets in connection with the acquisition of NetDynamics.
The Company's investing activities used $907.5 million of cash in the first six
months of fiscal 1999, an increase of $353 million from the prior year's
comparable period. The increase resulted primary from increased acquisitions of
short-term investments during the first six months of fiscal 1999, as compared
with the prior year's comparable period. Also included in investing activities
is capital spending for real estate development, as well as capital additions to
support increased headcount, primarily in the Company's engineering, services
and marketing organizations.
At December 27, 1998, the Company's primary sources of liquidity consisted of
cash, cash equivalents and short-term investments of $1,572.8 million and a
revolving credit facility with banks aggregating $500 million, which was
available subject to compliance with certain covenants. Additionally, on October
16, 1997, the Company filed a Registration Statement with the Securities and
Exchange Commission relating to the registration for public offering of senior
and subordinated debt securities and common stock with an aggregate initial
public offering price of up to $1 billion. On October 24, 1997, the Registration
Statement became effective, so that the Company may now choose to offer, from
time to time, the securities pursuant to Rule 415 in one or more separate
series, in amounts, at prices and on terms to be set forth in the prospectus
contained in the Registration Statement and in one or more supplements to the
prospectus. The Company believes that the liquidity provided by existing cash
and short-term investment balances and the borrowing arrangements described
above will be sufficient to meet the Company's capital requirements through
fiscal 1999. However, the Company believes the level of financial resources is a
significant competitive factor in its industry and may choose at any time to
raise additional capital through debt or equity financing to strengthen its
financial position, facilitate growth and provide the Company with additional
flexibility to take advantage of business opportunities that may arise.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 7, 1997, the Company filed suit against Microsoft Corporation in the
United States District Court for the Northern District of California alleging
breach of contract, trademark infringement, false advertising, unfair
competition, interference with prospective economic advantage and inducing
breach of contract. The Company filed an amended complaint on October 14, 1997.
Microsoft Corporation filed its answer, affirmative defenses and counterclaims
to the amended complaint. The counterclaims include breach of contract, breach
of the covenant of good faith and fair dealing, violation of the California
Business & Professions Code and declaratory judgment. The Company believes that
the counterclaims are without merit and/or that the Company has affirmative
defenses and intends vigorously to defend itself with respect thereto. On March
24, 1998 the United States District Court judge ruled in favor of the Company
granting a preliminary injunction directing Microsoft Corporation to cease using
the Company's Java Compatible Logo(TM) on Microsoft products that failed to pass
the applicable test suites from Sun. In addition, on May 12, 1998, the Company
filed a second amended complaint alleging copyright infringement by Microsoft
and motions requesting further preliminary injunctive relief directed against
the planned release by Microsoft of additional products that failed to pass the
applicable test suites from Sun. The Court held hearings and arguments on such
motions on September 8, 9, and 10, 1998. On November 17, 1998, the District
Court issued an Order granting, in substantial part, Sun's request for
preliminary injunctions. On December 15, 1998 Microsoft filed notice of its
intent to appeal the District Court's Order and on December 18, 1998 Microsoft
filed Motions with the District Court to extend the time for compliance with the
Order and to clarify or modify the Order. On December 29, 1998 the District
Court issued a further Order directing the parties to schedule a settlement
conference with respect to certain issues before a designated Magistrate or
mutually selected individual. On January 13, 1999, Microsoft filed an appeal to
the District Court's Order issued on November 17, 1998. The Company believes
that the outcome of this matter will not have a material adverse impact on Sun's
financial condition, results of operations or cash flows in any given fiscal
year.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 11, 1998 the Annual Meeting of Stockholders of the Company was
held in Menlo Park, California. The results of voting of the 313,381,495 shares
of Common Stock represented at the meeting or by proxy are described below.
An election of directors was held with the following individuals being
elected to the Board of Directors of the Company:
<TABLE>
<CAPTION>
Name Shares Voted For Votes Withheld
- ---- ---------------- --------------
<S> <C> <C>
Scott G. McNealy 314,513,658 1,581,681
L. John Doerr 305,306,845 10,788,494
Judith L. Estrin 314,554,906 1,540,433
Robert J. Fisher 314,551,674 1,543,665
Robert L. Long 314,544,221 1,551,118
M. Kenneth Oshman 314,556,052 1,539,287
A. Michael Spence 314,511,203 1,584,136
</TABLE>
24
<PAGE> 25
The seven nominees who received the highest number of votes (all of the
above individuals) were elected to the Board of Directors.
The stockholders approved an amendment to the Company's 1990 Long-Term
Equity Incentive Plan in order to increase the number of shares of Common Stock
authorized for issuance thereunder by 18,000,000 shares of Common Stock to an
aggregate of 119,400,000 shares. There were 193,531,834 votes cast for the
amendment, 121,004,835 votes cast against the amendment and 1,558,670
abstentions.
The stockholders approved an amendment to the Company's 1988 Directors'
Stock Option Plan in order to decrease the number of shares of Common Stock
subject to the one-time automatic nonemployee director grant (granted on the
date of the initial appointment of a director who is not affiliated with an
entity having an equity investment in the Company) from 80,000 shares to 30,000
shares. There were 259,580,690 votes cast for the amendment, 54,345,777 votes
cast against the amendment and 2,168,872 abstentions.
ITEM 5 - OTHER INFORMATION
a) SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER
None
b) NON-RULE 14a-8 STOCKHOLDER PROPOSALS
Proposals of the Company's stockholders that such stockholders intend to present
at the Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting"), but
not included in the Company's Proxy Statement and form of Proxy related to the
Annual Meeting (a "Non-Rule 14a-8 Proposal"), must be received by the Company's
Secretary at the Company's offices at 901 San Antonio Road, Palo Alto,
California 94303 no later than September 13, 1999 and no earlier than August 12,
1999. In the event that the Company does not receive timely notice with respect
to a Non-Rule 14a-8 Proposal, management of the Company would use its
discretionary authority to vote the shares it represents as the Board of
Directors may recommend.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<S> <C>
10.64 Registrant's 1998 Directors' Stock Option Plan as amended on
August 12, 1998.
10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended
on August 12, 1998.
10.93+ Strategic Development and Marketing Agreement dated November 23,
1998 by and between America Online, Inc. and the Registrant.
27.0 Financial Data Schedule for the period ended December 27, 1998.
</TABLE>
+ Confidentiality Treatment Requested.
(1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to
Registrant's Amendment No. 1 to Registration Statement Form S-8/A file
number 333-67183 filed with the Securities and Exchange Commission on
January 26, 1999.
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 27,
1998.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in the 1998 Form 10-K have not
changed significantly through the quarter ended December 27, 1998.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN MICROSYSTEMS, INC.
BY
/s/ Michael E. Lehman
----------------------------------------
Michael E. Lehman
Vice President, Corporate Resources
and Chief Financial Officer
/s/ George Reyes
----------------------------------------
George Reyes
Vice President and Corporate Controller,
Chief Accounting Officer
Dated: February 8, 1999
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<S> <C> <C>
10.64 Registrant's 1998 Directors' Stock Option Plan as amended on
August 12, 1998.
10.66(1) Registrant's 1990 Long-Term Equity Incentive Plan, as amended
on August 12, 1998.
10.93+ Strategic Development and Marketing Agreement dated November 23,
1998 by and between America Online, Inc. and the Registrant.
27.0 Financial Data Schedule for the period ended December 27, 1998.
</TABLE>
+ Confidentiality Treatment Requested.
(1) Incorporated by reference to Exhibit 4.2 filed as an exhibit to
Registrant's Amendment No. 1 to Registration Statement Form S-8/A file number
333-67183 filed with the Securities and Exchange Commission on January 26, 1999.
27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.64
<SEQUENCE>2
<DESCRIPTION>1998 DIRECTORS' STOCK OPTION PLAN AS AMENDED
<TEXT>
<PAGE> 1
Exhibit 10.64
SUN MICROSYSTEMS, INC.
1988 DIRECTORS' STOCK OPTION PLAN
(AMENDED AS OF NOVEMBER 11, 1998)
1. Purposes of the Plan. The purposes of this Directors' Stock Option
Plan are to attract and retain the best available personnel for services as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Common Stock" shall mean the Common Stock of the Company.
(c) "Company" shall mean Sun Microsystems, Inc., a Delaware
corporation.
(d) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(e) "Director" shall mean a member of the Board.
(f) "Employee" shall mean any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Option" shall mean a stock option granted pursuant to the Plan.
(i) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(j) "Optionee" shall mean an Outside Director who receives an Option.
(k) "Outside Director" shall mean a Director who is not an Employee.
(l) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Internal Revenue Code of
1986.
(m) "Plan" shall mean this 1988 Directors' Stock Option Plan.
(n) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(o) "Subsidiary" shall mean a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 425(f) of the Internal Revenue Code
of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the
<PAGE> 2
maximum aggregate number of Shares which may be optioned and sold under the Plan
is 2,200,000 Shares (the "Pool") of Common Stock. The Shares may be authorized,
but unissued, or required Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, shall become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. Administration of and Grants of Options under the Plan.
(a) Administrator. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
automatic and non-discretionary and shall be made strictly in accordance with
the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director who is a partner, officer or director
of an entity having an equity investment in the Company (or who was so
affiliated with such an entity at the time of his or her initial appointment or
election to the Board) shall be automatically granted an Option to purchase
20,000 Shares (the "First Option") upon the effective date of the Plan, as
determined in accordance with Section 6 hereof, or the date on which such person
first becomes a Director, whether through election by the shareholders of the
Company or appointment by the Board of Directors to fill a vacancy; provided,
however, that no Option shall be issued under the Plan or become exercisable
until shareholder approval of the Plan has been obtained. Each Outside Director
who is not, on the date of his or her initial appointment or election to the
Board, affiliated with an investment entity as described above, shall
automatically be granted a First Option of 30,000 Shares, subject to the above
provision.
(iii) After the First Option has been granted to an Outside
Director, such Outside Director shall thereafter be automatically granted an
Option to purchase 20,000 Shares (a "Subsequent Option") on the date of and
immediately following each Annual Meeting of Shareholders of the Company at
which such non-employee director is re-elected, if on such date,
2
<PAGE> 3
he shall have served on the Board for at least six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Directors on the automatic grant date. Any
further grants shall then be deferred until such time, if any, as additional
Shares become available for grant under the Plan of Shares which may be issued
under the Plan or through cancellation or expiration of Options previously
granted hereunder.
(v) The terms of an Option granted hereunder shall be as
follows:
(A) The term of the Option shall be five (5) years.
(B) The Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section 9
hereof.
(C) The exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Option.
(D) The Option shall become exercisable in installments
cumulatively as to twenty-five percent (25%) of the Shares subject to the Option
on each of the first, second, third and fourth anniversaries of the date of
grant of the Option.
(c) Powers of the Board. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to exercise on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) Effect of the Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
Officer or his designee reasonably believes that an Optionee has committed an
act of misconduct, the Chief
3
<PAGE> 4
Executive Officer may suspend the Optionee's right to exercise any option
pending a determination by the Board of Directors (excluding the Outside
Director accused of such misconduct). If the Board of Directors (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation
owed to the Company, breach of fiduciary duty or deliberate disregard of the
Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any option whatsoever. In making such determination, the Board of
Directors (excluding the Outside Director accused of such misconduct) shall act
fairly and shall give the Optionee an opportunity to appear and present evidence
on Optionee's behalf at a hearing before the Board or committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof. An Outside Director who has been granted an Option may, if
he is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect until December 31, 2008
unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be five (5) years from
the date of grant thereof.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option. In the case of an Option granted
to an Optionee who, immediately before the grant of such Option, owns stock
representing more than ten percent (10%) of the voting power or
4
<PAGE> 5
value of all classes of stock of the Company or its parents or subsidiaries, the
per Share exercise price for the Shares to be issued pursuant to exercise of
such Option shall be at least 110% of the fair market value per Share on the
date of grant of the Option.
(b) Fair Market Value. The fair market value shall be the closing
price of the Common Stock on the date of grant, as reported on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System or, in
the event the Common Stock is traded on a stock exchange, the fair market value
per Share shall be the closing price on such exchange on the date of grant of
the Option.
(c) Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, or any combination of such methods of payment.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
(b) Termination of Status as a Director. If an Outside Director
ceases to serve as
5
<PAGE> 6
a Director, he may, but only within ninety (90) days after the date he ceases to
be a Director of the Company, exercise his Option to the extent that he was
entitled to exercise it at the date of such termination. Notwithstanding the
foregoing, in no event may the Option be exercised after its five (5) year term
has expired. To the extent that he was not entitled to exercise an Option at the
date of such termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event a Director is unable to continue his service as a
Director with the Company as a result of his total and permanent disability (as
defined in Section 22(e)(3) of the Internal Revenue Code), he may, but only
within six (6) months from the date of termination, exercise his Option to the
extent he was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
five (5) year term has expired. To the extend that he was not entitled to
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
(i) During the term of the Option, Optionee who is, at the time
of his death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had the Optionee continued living and remained in Continuous
Status as Director for six (6) months after the date of death. Notwithstanding
the foregoing, in no event may the Option be exercised after its five (5) year
term has expired.
(ii) Within one (l) month after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within six (6)
months following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
five (5) year term has expired.
10. Non-Transferability of Options. Options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of
6
<PAGE> 7
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title l of the Employee Retirement Income Security Act,
or the rules thereunder. The designation of a beneficiary by an Optionee does
not constitute a transfer. An Option may be exercised, during the lifetime of
the Optionee, only by the Optionee or a transferee permitted by this Section 10.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Common Stock subject to
an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action. In the event of a proposed sale of all or substantially all of
the assets of the Company or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event that such successor corporation refuses to
assume the Option or to substitute an equivalent option, the Board shall, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option as to all of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable, in which case, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
7
<PAGE> 8
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the termination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule l6b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the shareholders of the Company of Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in
Sections 2(k), 4(b), 5, 7 and 8(a) of this Plan (and any other Sections of this
Plan that affect the formula award terms required to be specified in this Plan
by Rule l6b-3) shall not be amended more than once every six months, other than
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.
(i) any increase in the number of Shares subject to the Plan,
other than in connection with an adjustment under Section 11 of the Plan; or
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any material increase in the benefits accruing to
participants under the Plan; or
(iv) any change in the number of shares subject to Options to be
granted hereunder or in the terms thereof as set forth in Section 4(b) hereof.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such
8
<PAGE> 9
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended the
Exchange Act, the rules and regulations promulgated thereunder, state securities
laws, and the requirements of any stock exchange upon which the Shares may then
be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports to shareholders, proxy statements and other
information provided to all shareholders of the Company.
9
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.93
<SEQUENCE>3
<DESCRIPTION>STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT
<TEXT>
<PAGE> 1
Exhibit 10.93
CONFIDENTIAL INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
ASTERISKS (*) DENOTE SUCH OMISSIONS
STRATEGIC DEVELOPMENT AND MARKETING AGREEMENT
This Strategic Development and Marketing Agreement (this "Agreement") is made
and entered into this 23rd day of November, 1998, by and between America Online,
Inc. ("AOL") and Sun Microsystems, Inc. ("Sun").
Certain terms used in this Agreement are defined in Section 24 hereof. This
agreement is confidential between the parties, provided that either party may
disclose the terms of this Agreement, and any associated collateral documents,
in order to comply with applicable laws and regulations, including securities
laws and regulations, and further provided that either party may disclose
information regarding portions of the financial provisions of this Agreement
after consulting with and obtaining the approval of the other party's Executive
Representative, which consent will not be unreasonably withheld or delayed. AOL
and Sun hereby agree as follows:
1.0 OBJECTIVES. AOL and Sun intend to cooperate in the development and marketing
of software and services in the area of electronic commerce and extended
communities and connectivity ("EC(2)") to businesses worldwide. The parties
intend to offer together an integrated, end-to-end solution including consumer
traffic, dial-up connectivity, network services, client software, server
software, computer systems, computer hardware, professional services, help desk
and service and support, but, subject to the terms and conditions herein, each
party would be free to offer its components in conjunction with competitive
components from third-parties. As described in this Agreement, some components
of such solution will be collaboratively developed, and some will be developed
principally or entirely by AOL or Sun. The solution offered by the parties is
expected to include traffic from AOL's multiple brands and related directory
services, configurable Netcenter or AOL.Com services and information, AOL
network access services, AOL instant messaging functionality, Sun support
services, Sun or AOL consulting services and Netscape or AOL outsourcing
services. As described in this Agreement, some components of such solution will
be marketed and sold by both parties pursuant to collaborative marketing and
sales plans, and some components would be marketed and sold by AOL or Sun only.
The business objectives of the parties include the following:
1.1 Establish a cooperative relationship between AOL, the world's
leading internet content provider, and Sun, the world's leading network
computing platform supplier, to create and deliver the best, integrated,
end-to-end enterprise commerce solutions using, where appropriate, the
Java and Jini technology from Sun.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
<PAGE> 2
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
1.2 Sustain and grow leadership in the browser marketplace for both
consumers and the enterprise to deeply penetrate the enterprise desktop
environment.
1.3 Accelerate revenues from merchants and build deep relationships with
top merchants by speeding their adoption of electronic commerce.
1.4 Create more value from relationships with electronic commerce
merchants and customers by *** creating new services revenues.
1.5 Sustain and grow a strong electronic commerce and enterprise
middleware software and services business, including developing a
leading commerce software and service platform that enables powerful
turnkey and customized solutions.
1.6 Sustain and grow the Sun Solaris, SPARC, Java and Jini business
technologies, as the choice for enterprises and service providers
worldwide.
1.7 *** APPROXIMATELY 3 LINES OMITTED ***
1.8 Establish and operate productive research and development,
marketing, sales and services to support this strategy.
2.0 SOFTWARE TO BE DEVELOPED. The parties intend to develop the following
products:
2.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. The "AOL Distributed
Communicator Client" will be a client application that will include the
fullest and most robust set of features and functions of any of the
client applications to be developed pursuant to this Section 2,***
APPROXIMATELY 2 LINES OMITTED ***. The AOL Distributed Communicator
Client *** will include the initial Release of the AOL Distributed
Communicator Client and all subsequent Releases of such application. ***
APPROXIMATELY 9 LINES OMITTED ***
2.2 THIRD PARTY COMMUNICATOR CLIENT. The "Third Party Communicator
Client" will be a client application.*** APPROXIMATELY 6 LINES OMITTED
*** The specification of the features and functions included in the
Third Party Communicator Client may be modified from time to time by
AOL, after consultation with Sun. The Third Party Communicator Client
*** will include the initial Release of the Third Party Communicator
Client and all subsequent Releases of such application that are
commercially released during the term of this Agreement.
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
2
<PAGE> 3
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
2.3 OEM COMMUNICATOR CLIENT. The "OEM Communicator Client" will be a
client application incorporating a browser component, with features and
functions as set forth in the Collaborative Work Plans. The OEM
Communicator Client will include the initial Release of such application
and all subsequent Releases of such application that are commercially
released during the term of this Agreement.
2.4 NEW BROWSER. The "New Browser" will consist of a basic browser with
functions for browsing, rendering display of and accessing the Internet,
including enabling access to a portal, *** APPROXIMATELY 4 LINES OMITTED
***. The functions and features to be included in the New Browser will
be described in more detail in the Collaborative Work Plans. The New
Browser will include the initial Release of such application and all
subsequent Releases of such application that are commercially released
during the term of this Agreement. *** APPROXIMATELY 3 LINES OMITTED ***
2.5 NETWORK APPLICATION AND SERVER SOFTWARE. The "Network Application
and Server Software" will consist of network applications and server
software as specified in the Collaborative Development Work Plans, and
will include, without limitation, an application server, email server,
commerce server and directory software, as well as other software
specified in the Collaborative Development Work Plans.
2.6 COMMENCEMENT OF DEVELOPMENT. No collaborative development work shall
commence pursuant to this Agreement, and Sun shall not be provided with
access to any Netscape or AOL code, prior to the Closing Date.
3.0 DEVELOPMENT RESPONSIBILITIES.
3.1 AOL DISTRIBUTED COMMUNICATOR CLIENT. AOL will develop the AOL
Distributed Communicator Client, *** APPROXIMATELY 4 LINES OMITTED ***
3.2 THIRD PARTY COMMUNICATOR CLIENT. AOL will, with assistance from Sun,
develop the Third Party Communicator Client, *** APPROXIMATELY 6 LINES
OMITTED ***
3.3 OEM COMMUNICATOR CLIENT. AOL will, with assistance from Sun, develop
the OEM Communicator Client,*** APPROXIMATELY 6 LINES OMITTED ***
3.4 NEW BROWSER. AOL will, with assistance from Sun, develop the New
Browser, *** APPROXIMATELY 8 LINES OMITTED ***
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
3
<PAGE> 4
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
3.5 NETWORK APPLICATION AND SERVER SOFTWARE. AOL and Sun will
collaboratively develop the Network Application and Server Software, ***
APPROXIMATELY 3 LINES OMITTED ***. AOL and Sun shall cooperate and
coordinate their development efforts so that, to the extent commercially
reasonable, the Client Software shall be compatible with and support the
interfaces, protocols and APIs of the Network Application and Server
Software in the Product Suites and vice versa.
3.6 JAVA TECHNOLOGY. The parties agree to use reasonable efforts to
modify the existing Netscape browser to develop the New Browser to
incorporate, for each System Platform, the most current release
available of the complete Java Runtime Environment (JRE) on all System
Platforms for which Sun has a JRE available. The parties agree to use
all reasonable efforts to ensure that Java code executing on the JRE so
invoked has the same access privileges and capabilities as Java code
running native on the operating system and can display user interfaces
within the browser window consistent with the user experience of running
Java applets today, provided that Sun provides such JRE to AOL, *** in
binary form in a fully operational and commercially viable form. Without
limiting the foregoing, AOL shall have no obligation to incorporate into
any browser any JRE provided by Sun that fails to operate properly on
the applicable System Platform for such version of such browser due to
the fault of Sun or any party other than AOL, or *** or which would
cause a material degradation in the performance characteristics of such
browser relative to competitive browsers in the marketplace, or which
cannot ***APPROXIMATELY 8 LINES OMITTED*** Without limiting the
foregoing, with respect to the *** AOL shall have no obligation to
***APPROXIMATELY 3 LINES OMITTED*** Sun agrees to provide error
corrections and bug fixes for the JREs on all supported System Platforms
pursuant to its standard terms of support (but without fee to AOL). In
the event Sun fails to provide such error corrections and bug fixes in a
timely commercially reasonable manner, Sun shall, pursuant to the TLDA
entered into between AOL and Sun, provide AOL with the source code, test
suites and related development tools for such JREs and the right to use
such source code, test suites and related development tools for the
purpose of supporting and maintaining such JREs in accordance with the
TLDA. Sun agrees to use reasonable efforts to *** In order to permit the
binary JRE to be integrated into such browsers, AOL agrees to use
reasonable efforts to incorporate and support the Open Java Interface in
such browsers. AOL and Sun agree to collaborate and consult with one
another and to cooperate with one another in good faith in an effort to
define and integrate this interface into such browsers for use by the
JREs in such browsers. AOL further agrees that if such incorporation of
the JRE is successfully implemented in a version of such browser for any
applicable System Platform, AOL will incorporate such version of such
browser in the versions of the OEM Communicator Client, Third Party
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
4
<PAGE> 5
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Client and AOL Distributed Communicator Client for such System Platform
*** If the JRE is so incorporated in the OEM Communicator Client, Third
Party Client or AOL Distributed Communicator Client, and AOL elects to
distribute any version of such product via download, such version shall
either be the JRE enabled version of such product, or AOL will make the
JRE enabled version of such product available for download in addition
to any non-JRE enabled version of such product made available for
download. If the JRE is so incorporated in the OEM Communicator Client,
Third Party Client or AOL Distributed Communicator Client, and AOL
elects to distribute any version of such product via CD-ROM, the version
of the product distributed by AOL via CD-ROM will be such JRE-enabled
version, to the extent contractually permissible and subject to size
limitations, and provided that AOL shall have no obligation to require
that its OEMs include the JRE-enabled version. AOL shall have the right
to distribute via download a smaller version of the New Browser without
the JRE, provided such version has hooks that permit the user optionally
to download and install the JRE. AOL will consider as part of the
Collaborative Development Work Plans whether to expose to the JRE all
public and private developer interfaces within the browser (including,
without limitation those in NSHTML.DLL), but shall have no obligation to
do so. AOL's obligations pursuant to this Section 3.6 are conditioned
upon Sun's granting to AOL *** any rights to Java technology necessary
to comply with this Section 3.6. In the event of any inconsistency or
conflict between this Section 3.6 or Section 9.8.1 of this Agreement and
the TLDA entered into between Sun and AOL, the terms of this Section 3.6
and the terms of Section 9.8.1 shall control.
3.7 INTENT TO DEVELOP LEADING PRODUCTS. The parties agree to use their
reasonable efforts to maintain the existing Netscape browser and the New
Browser as competitive alternatives to the browser component of Internet
Explorer from Microsoft, and agree that it is their intention to make
all products developed and distributed pursuant to this Agreement
leading and competitive products in their respective product categories.
3.8 JRE BUNDLING ON CD-ROMS. On any CD-ROMs on which AOL ships the AOL
classic client and on which AOL provides installation options permitting
third party software other than AOL classic client software to be a
separate installable item, ***APPROXIMATELY 3 LINES OMITTED*** AOL
agrees, subject to any third party contractual limitations, to use
reasonable efforts to co-package the latest version of the JRE with such
client and to offer to users an installation option to install such JRE,
provided that the JRE meets commercially reasonable standards making it
suitable for inclusion and installation, including without limitation
reasonable quality assurance and size limitations. AOL shall have no
obligation to display such installation option until after
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
5
<PAGE> 6
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
the user has gone through any included registration process for any AOL
Service Offering. AOL will also consider including*** APPROXIMATELY 6
LINES OMITTED ***
3.9 DESIGN OF CLIENTS. *** APPROXIMATELY 7 LINES OMITTED ***.
3.10 THIRD PARTY COMPONENTS AND PROTOCOLS; DIVERGENCE OF DEVELOPMENT. In
the event AOL (i) elects to use third party software or technology for
core functionality and features of the browser component of any of the
Client Software, (ii) adopts and maintains protocols or interfaces that
are inconsistent with Sun's reasonable server-dictated requirements; or
(iii) fails to support protocols or interfaces that are reasonably
required by Sun's server-dictated requirements, Sun shall have the
right, but not the obligation, to have AOL provide to Sun the source
code, test suites, and related development tools reasonably required for
Sun to pursue independent development of a browser based on the Existing
Netscape Software and/or Collaborative Software and to create client
applications incorporating such independently developed Sun browser. Any
resulting products developed by Sun shall be deemed to constitute
Designated Collaborative Software for purposes of this Agreement.
4.0 SALES AND MARKETING.
4.1 CUSTOMERS.
4.1.1 GENERAL. In accordance with the Marketing and Sales
Plan, the parties will work together to actively market
Product Suites, as well as other related products,
including Sun, Netscape, and AOL products and services,
to customers.
4.1.2 AOL COMMITTED SALES FORCE. Sun acknowledges that AOL
intends to commit an AOL sales force to target sales by
AOL to AOL EC Service Opportunities. Such sales force
may consist of (i) AOL interactive marketing sales
personnel and (ii) the current Netscape Netcenter sales
personnel. AOL shall bear all costs of such committed
sales force. Sun shall provide reasonable assistance to
AOL, as reasonably requested by AOL from time to time,
in connection with this AOL committed sales effort. Sun
shall provide such assistance through the sales and
marketing resources that Sun is required to provide
pursuant to the provisions of Section 4.1.3 and the
Marketing and Sales Plan, which may include access to
and participation of Sun employees who are not part of
the collaborative
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
6
<PAGE> 7
sales team, such as Sun technical personnel. Sun also
acknowledges that AOL intends to maintain a professional
services group to support AOL EC Services Opportunities
independent of any persons providing collaborative
services pursuant to this Agreement.
4.1.3 COLLABORATIVE SALES. AOL and Sun shall each form their
own respective sales forces targeting sales of the
Product Suites to non AOL EC Service Opportunities. The
AOL collaborative sales force shall consist of AOL and
Netscape enterprise sales and marketing, professional
services and technical support personnel selected by
AOL. The Sun collaborative sales force shall consist of
Sun sales personnel selected by Sun. The AOL and the Sun
collaborative sales forces shall both sell only off a
common pricelist and on standard terms and conditions,
with such pricelist and terms and conditions to be
designated by the Lead Executive for marketing and
sales. Each of AOL and Sun will, as specified in the
Marketing and Sales Plan, commit specified target levels
of sales and marketing resources (personnel and a
portion of marketing budget) to the staffing and support
of their respective collaborative sales forces and
coordinate the efforts of their respective collaborative
sales forces. In addition, Sun will support the
collaborative sales activities of the AOL collaborative
sales force with respect to any Sun products and
services, which may include access to and participation
of Sun employees who are not part of the collaborative
team, such as Sun technical personnel, and AOL will
support the collaborative sales activities of the Sun
collaborative sales force with respect to AOL Services
Offerings, which may include access to and participation
of AOL employees who are not part of the collaborative
team, such as AOL technical personnel.
4.1.4 SHARING OF REVENUES COLLECTED FROM CUSTOMERS. Subject to
the provisions of Section 4.2, revenues from the sale or
license of products or services shall be shared as set
forth below. Each party acknowledges that these
provisions are intended to reflect how revenues are
allocated and are not controlling as to which revenues
are recognized by which parties, which recognition shall
be at the sole discretion of each party in accordance
with Generally Accepted Accounting Principles.
4.1.4.1 AOL AND NETSCAPE SOFTWARE AND ASSOCIATED
SERVICES. AOL will receive 100% of the revenues
(and pay all of the associated cost of goods)
collected from any sale or license of AOL and
Netscape products and Associated Services,
including without limitation from sales or
licenses of the AOL Distributed Communicator
Client and Associated Services (but excluding
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
7
<PAGE> 8
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Existing Netscape Software and Existing Netscape
Software Upgrades and Associated Services), less
a sales commission equal to *** of such revenues
which shall be payable to Sun if a Sun
salesperson was primarily responsible for making
the sale of the AOL products or Associated
Services.
4.1.4.2 THIRD PARTY COMMUNICATOR AND EXISTING NETSCAPE
SOFTWARE AND ASSOCIATED SERVICES. AOL will
receive 100% of the revenues (and pay all of the
associated cost of goods) collected from any
sale or license of the Third Party Communicator
and Associated Services and Existing Netscape
Software and Existing Netscape Software Upgrades
and Associated Services, less a sales commission
equal to *** of such revenues, which shall be
payable to Sun if a Sun salesperson not on the
collaborative marketing and sales force was
primarily responsible for making the sale of the
AOL products or Associated Services.
4.1.4.3 SUN SOFTWARE AND SERVICES. Sun will receive 100%
of the revenues collected (and pay all of the
costs of goods) from any sale or license of Sun
software and professional services, less a sales
commission equal to *** of such revenues, which
shall be payable to AOL if an AOL salesperson
was primarily responsible for making the sale of
the Sun products or Associated Services. This
Section 4.1.4.3 shall not apply to "Sun
Products" as defined in the Service Provider
Agreement between the parties of even date
herewith.
4.1.4.4 DESIGNATED COLLABORATIVE SOFTWARE AND SERVICES.
AOL will receive *** of the Gross Margin
collected from any sale or license of Designated
Collaborative Software products and Associated
Services and Sun will receive *** of the Gross
Margin collected from such sales or licenses.
Whichever party to this Agreement enters into
the sales contract with the customer will
receive the revenues from such contract and
remit *** of the Gross Margin to the other party
as provided in this Section.
4.1.4.5 SALES BONUS. To the extent the amounts payable
to AOL in any quarter that are applied to the
Minimum Commitment exceed one
AOL CONFIDENTIAL AND PROPRIETARY Final
SUN CONFIDENTIAL AND PROPRIETARY
8
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
hundred twenty-five percent (125%) of the
applicable Minimum Commitment for such quarter
as set forth in Section 4.5, Sun shall, in
addition to any other amounts payable by Sun to
AOL, pay to AOL a bonus equal to*** of the
amount by which such amounts payable to AOL
exceed one hundred twenty-five percent (125%) of
the applicable Minimum Commitment for such
quarter.
4.1.5 MARKETING CO-OP FEE. During the term of this Agreement,
as consideration for the marketing and selling of Sun
products and services and the products and services
developed under the Collaborative Activity, Sun will pay
AOL a marketing co-op fee, which shall be applied as
determined by AOL. The marketing co-op fee shall be Ten
Million Dollars ($10,000,000) for the first year
following the Closing Date, Ten Million ($10,000,000)
for the second year following the Closing Date, and Ten
Million Dollars ($10,000,000) for the third year
following the Closing Date, payable each year in
quarterly payments as provided in Section 8.l.
4.2 ADDITIONAL REVENUE DETERMINATION AND ALLOCATION PROVISIONS
4.2.1 REVENUE CALCULATION. For purposes of determining the
appropriate revenue or Gross Margin allocation under
Section 4.1.4, in cases where a single product or
service is sold, the revenues received shall be deemed
to equal the gross revenues (before sales commission)
collected from the end user or the OEM customer and the
Gross Margin shall be calculated in accordance with
Section 21.20. In cases where multiple products or
services are sold in a bundled sale, the revenues per
product or service will be calculated by computing the
overall discount (or ***, whichever is lower) from list
price for the bundled sale (or the aggregate sum of the
list prices for each individual component in the bundled
sale, if there is no list price for the bundled sale)
and applying that discount to the list price for the
product. *** APPROXIMATELY 10 LINES OMITTED ***.
4.2.2 SPECIAL REVENUE ALLOCATIONS. Notwithstanding anything to
the contrary herein, including without limitation the
provisions of Section 4.1.4, AOL shall retain all
collected revenues from existing Netscape OEM and
customer contracts (including without limitation
revenues collected in connection with any existing
service, development, support, maintenance, reseller,
VAR, OEM and other contracts) and existing contracts for
the
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
sale and distribution of Existing Netscape Software and
any updates, enhancements and/or new releases thereof.
As used in this Section 4.2.2, the term "existing
contracts" shall mean any contracts entered into on or
before the Closing Date for the duration of the
remaining term of such contracts as well as any
extensions or renewals of the term of such contracts to
the extent the customer or OEM elects to exercise any
unilateral right of extension or renewal contained in
such existing contracts. AOL and Sun each shall retain
their existing customer contracts for the Netscape
client software, with all service, maintenance and
support provided by AOL, to the extent Netscape is
obligated to provide such service, maintenance and
support under existing service, maintenance and support
agreements, and all service, maintenance and support
provided by Sun, to the extent Sun is obligated to
provide such service, maintenance and support under
existing service, support and maintenance agreements.
AOL and Sun will each have the right to fulfill its
respective obligations under existing contracts,
notwithstanding anything to the contrary contained in
this Agreement
4.3 PRIORITY OF MARKETING BY SUN. In conducting its marketing
activities, Sun shall prioritize the marketing of the following client
products, where they exist for the customer platform, in the following
manner:
(a) As part of the standard Product Suites offering and any
other time Sun is marketing, distributing or selling a browser
component, Sun will give first priority to the marketing and
sale of ***.
(b) If a customer indicates that it does not want ***,Sun will
next attempt to market and sell ***.
(c) If a customer indicates that it does not want ***, Sun will
next attempt to market and sell ***.
*** APPROXIMATELY 7 LINES OMITTED ***
4.4 AOL SERVICE COMPONENTS AND SERVICE OFFERINGS. AOL and Sun each
agrees actively to market, promote and support the Product Suites.
Without limiting the foregoing, Sun will actively market, promote and
support the AOL Service Components and AOL Service Offerings that are
incorporated into products comprising the Product
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Suites in connection with its marketing, promotion and sales of the
Product Suites, provided that Sun customers will not be required to use
or maintain any AOL Service Components included in the Product Suites.
Notwithstanding anything to the contrary herein, including without
limitation the provisions of Section 4.1.4, AOL shall retain all
collected revenues related to or derived from sales or licenses of AOL
Service Components and AOL Service Offerings. Neither Sun nor the
collaborative sales team shall have any right to sell any AOL Service
Offerings without AOL's prior written consent, and AOL shall have no
obligation to provide such consent.
4.5 MINIMUM REVENUE COMMITMENTS BY SUN. Sun will commit that, during the
term of this Agreement, the total of the net amounts paid per year to
AOL under Sections, 4.1.4.2, 4.1.4.4, 9.6.2 (including, without
limitation, net of commissions payable to Sun sales personnel) and under
4.2.2 (which includes revenues derived by AOL from the sale of Existing
Netscape Software and Existing Netscape Software Upgrades and Associated
Services), will be not less than Three Hundred Twelve Million Dollars
($312,000,000) for the first year following the Closing Date, Three
Hundred Thirty Million Dollars ($330,000,000) for the second year
following the Closing Date, and Three Hundred Thirty Three Million Two
Hundred Fifty Thousand Dollars ($333,250,000) for the third year
following the Closing Date, payable in quarterly minimum payments the
("Minimum Commitment") as set forth in Section 8.1.
4.6 PENETRATION RATE FOR BUSINESS DESKTOP. So long as certain specified
milestone deliverable dates are satisfied as set forth in the
Collaborative Development Work Plans, Sun shall use all reasonable
efforts to achieve penetration of enterprise desktops by the Third Party
Communicator Client and AOL Distributed Communicator Client as set forth
in the Marketing and Sales Plan as mutually-agreed in writing prior to
the Closing Date, including without limitation bundling the Third Party
Communicator with Sun's Solaris operating system, actively promoting the
Third Party Communicator on Sun's website, and such other actions as Sun
normally takes to promote and market its products, provided that Sun
shall be relieved of such obligations to achieve such penetration if Sun
embarks on a divergent development path with respect to the Third Party
Communicator Client pursuant to Section 3.10. If the agreed level of
penetration is not achieved, Sun will take reasonable steps (e.g.,
increased marketing, promotion and salesforce incentives) to increase
the penetration rate to the required level within six months; provided
that, if Sun believes that the failure to achieve the requisite level of
penetration was due to factors beyond its reasonable control and/or that
the penetration rate shortfall cannot reasonably be remedied through
increased marketing and promotion unless additional remedial action is
also taken during such six month period, Sun will so inform AOL and the
parties shall discuss Sun's concerns and attempt to agree through good
faith negotiation on an appropriate plan to increase the penetration
rate within such six month period. Such plan may include actions by Sun
and/or AOL, depending on the circumstances. The Executive
Representatives shall facilitate such negotiation. If either
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Executive Representative believes that negotiation will not succeed in a
timely fashion, he or she may refer such dispute to the two chief
executive officers to resolve. The Incentive Plan referred to in Section
13.1 will set forth the method by which Sun will provide incentives to
its sales force to achieve the requisite penetration rate. The
escalation procedures set forth in this Section 4.6 shall constitute
AOL's sole and exclusive remedy for any failure to achieve the specified
target penetration rate.
4.7 MARKETING AND SALES PLAN. The Marketing and Sales Plan will set
forth a detailed description of how the two sales and marketing teams
(i.e., the sale forces described in Sections 4.1.2 and 4.1.3,
respectively) will collaborate, including the initial sales force
compensation and incentive plans (as further described in Section 13.1)
to be implemented independently by the parties, the goal of which will
be to provide appropriate incentives for the sales forces to meet and
exceed the Minimum Commitments.
4.8 WARRANTIES, INDEMNIFICATION AND SUPPORT. Sun shall have the
exclusive right to provide and will provide all warranty and support
services in connection with sales and licenses (other than pursuant to
existing contracts as set forth in Section 4.2.2) by the collaborative
sales force and by the dedicated AOL sales force of the Product Suites,
including warranty and support services for supported Systems Platforms
other than the Sun Systems Platform, which may include Systems Platforms
such as Windows NT, HP-UX, Linux and IBM AIX. Sun will fulfill warranty
and support obligations in connection with all sales and licenses by AOL
arising from sales by the collaborative sales force and by the dedicated
AOL sales force of the Product Suites (other than pursuant to existing
contracts as set forth in Section 4.2.2). In consideration of Sun's
providing such support services, AOL will pay to Sun the sum of One
Million Dollars ($1,000,000) per month during the term of this
Agreement. In addition, Sun will, at the request of AOL, fulfill
warranty and support obligations for existing contracts as set forth in
Section 4.2.2 ***. Such support services shall include frontline
technical support, including call receipt, call screening, installation
assistance, problem identification and diagnosis, and other standard
support services customarily provided by Sun's twenty-four hour per day,
seven day per week support center. Backline escalation support shall be
provided by the collaborative development team. Sun shall defend,
indemnify and hold AOL harmless from all third party claims and
allegations relating to alleged breach or failure to provide support
services or breach of support service obligations under Sun's standard
maintenance contracts under which it is obligated to support the Product
Suites. AOL will promptly notify Sun in writing of any such claim or
allegation giving Sun the sole right of defense and settlement, and will
assist Sun, at Sun's expense (except for the value
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of time of AOL employees), to defend or settle such claim or allegation.
AOL shall have the right to employ separate counsel and to participate
in the defense of such claim at its own cost. Sun shall not be liable
for litigation expenses of or settlements by any third parties unless
Sun agrees in writing.
5.0 MANAGEMENT PROCESS FOR DEVELOPMENT AND SALES AND MARKETING.
5.1 EXECUTIVE REPRESENTATIVES. Each party shall designate a senior
executive reporting to its chief executive officer, president or chief
operating officer as its Executive Representative to the other for the
purpose of this Agreement. AOL's initial Executive Representative shall
be David Colburn, and Sun's initial Executive Representative shall be
William J. Raduchel. The Executive Representatives shall collaboratively
report quarterly in writing (which may be electronic) to both chief
executive officers on the progress of development under this Agreement
and shall work to facilitate cooperation between the parties to achieve
the development goals of this Agreement. The chief executive officers
shall consult prior to changing the Executive Representatives.
5.2 EXECUTIVE MEETING. In January and July of each year, the chief
executive officers and the relevant members of their management teams
including the Executive Representatives shall meet to review the
development progress and sales and marketing progress under this
Agreement. The January meetings shall be in California hosted by Sun and
the July meetings in Virginia, hosted by AOL. The host Executive
Representative shall be responsible, in consultation with the
participants and the other Executive Representative, for organizing such
meeting and establishing its agenda.
5.3 MANAGEMENT PROCESS FOR CLIENT SOFTWARE DEVELOPMENT AND NETWORK
APPLICATION AND SERVER SOFTWARE DEVELOPMENT.
5.3.1 LEAD EXECUTIVES. The initial Lead Executives and Deputy
Lead Executives for each major component ("MC") of the
collaborative development activity are set forth in
Sections 5.3.3 and 5.3.4. Future Lead Executives will be
designated by AOL after consultation with Sun. AOL shall
have the right, after consultation with Sun, to replace
the Lead Executive for either MC at any time if in its
good faith judgement such action is in the best
interests of the parties. The Lead Executive and Deputy
Lead Executive must be replaced by a person of similar
rank and stature unless the parties otherwise agree. The
Lead Executives and Deputy Lead Executives shall not be
changed prior to the Closing Date.
5.3.2 POWERS OF DEVELOPMENT LEAD EXECUTIVES; DEPUTY LEAD
EXECUTIVES. The Lead Executive shall maintain and revise
the corresponding
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Collaborative Development Work Plan for each MC in
accordance with its terms and will have the right, after
consultation with the Deputy Lead Executive, to
designate the project leader for each major project and
to establish teams and team leaders for various
development projects. For each Lead Executive there
shall be a Deputy Lead Executive. The Deputy Lead
Executive shall be assigned by the party other than the
party employing the Lead Executive, after consultation
with the Lead Executive. Each party shall structure all
employees and resources for each MC under the Lead
Executive or Deputy Lead Executive for that MC, and the
Lead and Deputy Lead Executives and project leaders
shall direct such resources in accordance with and to
achieve the objectives of the Collaborative Development
Work Plan.
5.3.3 CLIENT SOFTWARE. The initial Lead Executive for the
Client Software MC shall be Barry Schuler. The Lead
Executive for the Client Software MC shall have the
right, after consultation with the Deputy Lead
Executive, to make all decisions with respect to the
design and development of the Client Software and the
New Browser, including without limitation the features
and functions to be included in each such product design
and all decisions regarding development priorities and
resource allocation.
5.3.4 NETWORK APPLICATION AND SERVER SOFTWARE. The initial
Lead Executive for the Network Application and Server
Software MC shall be Ed Zander. As part of the
Collaborative Development Work Plans, with the consent
of each party through its Lead Executive or Deputy Lead
Executive, which consent shall not be unreasonably
withheld or delayed, the Lead Executive will establish
mutually agreeable targets for development of the
Network Application and Server Software. It is AOL's
present intention not to replace the initial Lead
Executive for Network Application and Server Software
unless such development targets are missed in a material
fashion, but AOL shall have the right, after
consultation with Sun, to replace the Lead Executive for
the Network Application and Server Software MC at any
time after the Closing Date. The Lead Executive for the
Network Application and Server Software may be an
employee of either party. In selecting the project
leader and team leaders for various development projects
to be undertaken in the development of the Network
Application and Server Software, the Lead Executive for
the Network Application and Server Software shall
appoint a significant number of AOL employees as project
and/or team leaders.
5.3.5 COLLABORATIVE DEVELOPMENT WORK PLANS. Prior to the
Closing Date, the Lead Executive and Deputy Lead
Executives shall establish and attach
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hereto as Schedule 5.3 the initial Collaborative
Development Work Plans for the two MCs of the initial
Collaborative Development Activity (consisting of an MC
for Client Software development and an MC for Network
Application and Server Software development), setting
forth the objectives, principal deliverables of each
such MC and providing for priorities in going forward.
Changes to the principal deliverables or priorities
sections of the Collaborative Development Work Plan for
Network Application and Server Software shall require
the consent of both parties not to be unreasonably
withheld or delayed, but all other changes to such
Collaborative Development Work Plans may be made by the
Lead Executive for the applicable MC after consultation
with the Deputy Lead Executive for such MC. In making
such changes, the Lead Executive must act solely in
accordance with the terms and objectives of this
Agreement.
5.3.6 CROSS PLATFORM DEVELOPMENT. Understanding that it is the
parties' intention to offer cross platform solutions,
the parties shall, to the extent commercially
reasonable, develop the Client Software and the Network
Applications and System Software to operate on a variety
of System Platforms, including the Sun System Platform
as well as other Systems Platforms including Windows NT,
IBM AIX, Linux, HP-UX and other Systems Platforms. Any
decision to support a platform other than Solaris or
Windows NT shall require a financial analysis showing a
reasonably appropriate return on investment, and in all
cases all Collaboratively Developed Software at the date
of first customer shipment must ship on Solaris.
5.3.7 NON-DISCLOSURE; LIMITATIONS ON WORK ON OTHER
DEVELOPMENT. All individuals engaged in Collaborative
Development Activities will be prohibited from using or
disclosing any confidential information or trade secrets
learned or developed in the course of such Collaborative
Development Activities other than in the course of their
work on the Collaborative Development Activities or
their work for AOL or Sun, respectively. AOL and Sun
each acknowledges that the parties may have to establish
procedures and/or enter into supplemental
confidentiality agreements to address issues that may
arise in connection with Collaborative Development
Activities, such as, by way of example, the use of
confidential information of third parties which one
party may not have the right to disclose to the other
party. In addition, AOL and Sun each agrees that after
it has assigned developers to the Collaborative
Development Activities, it shall use reasonable efforts
to keep such individuals assigned to the Collaborative
Development Activities, and
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AOL and Sun each agrees that it will not reassign
multiple employees engaged in the Collaborative
Development Activities to work on similar or competitive
development activities for other customers, clients, or
strategic partners. If AOL or Sun reassigns an
individual employee to work on similar or competitive
development activities for a customer, client, strategic
partner or other third party, such party to this
agreement shall advise the customer, client, strategic
partner or other third party that such employee was
involved in similar or competitive development
activities pursuant to this Agreement and that such
individual is subject to a confidentiality and
non-disclosure agreement prohibiting such individual
from using or disclosing any confidential information or
trade secrets learned or developed in the course of such
Collaborative Development Activities.
5.3.8 PROTECTION OF SOFTWARE. AOL and Sun will agree on
procedures so that development is conducted in a such a
manner that AOL Service Components, other AOL and
Netscape proprietary software, Sun software, and the
Collaborative Software are not inadvertently placed in
the public domain or required to be publicly disclosed
pursuant to the Mozilla Public License or Netscape
Public License. Both parties shall comply with such
procedures, and notwithstanding anything to the contrary
contained in this Agreement, in no event may a Lead
Executive make any decision to implement development in
a manner inconsistent with such procedures without the
written consent of both AOL and Sun, which either party
may withhold in its sole discretion.
5.4 MANAGEMENT PROCESS FOR SALES AND MARKETING.
5.4.1 MARKETING AND SALES PLANS. An initial draft of the
Marketing and Sales Plan for the Collaborative Marketing
and Sales Activity will be mutually agreed upon prior to
the Closing Date by the Lead Executive and Deputy Lead
Executive for marketing and sales, setting forth the
objectives and targets, and principal methods for
marketing and sales of the Product Suites and components
thereof. Major substantive changes to such initial
Marketing and Sales Plan shall require the consent of
both parties, such consent not to be unreasonably
withheld, but any minor changes may be made by the
corresponding Lead Executive after consultation with the
Deputy Lead Executive. In making such changes, the Lead
Executive must act solely in accordance with the terms
and objectives of this Agreement. The Lead Executive and
Deputy Lead Executive shall not be changed prior to the
Closing Date.
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5.4.2 POWERS OF MARKETING AND SALES LEAD EXECUTIVE. The Lead
Executive for Marketing and Sales shall maintain and
revise the Marketing and Sales Plan in accordance with
its terms. For each Lead Executive there shall be a
Deputy Lead Executive. The Deputy Lead Executive shall
be assigned by the party other than the party employing
the Lead Executive. The Lead Executive for Marketing and
Sales, after consultation with the Deputy Lead Executive
for Marketing and Sales, shall have the right to
establish projects and teams and project and team
leaders for various major sales efforts ("SE's") of the
Marketing and Sales Plan. Each party shall structure all
employees and resources of such party's respective
collaborative sales team under the Lead Executive or
Deputy Lead Executive, and the Lead Executive and Deputy
Lead Executives and their subordinates shall direct such
resources in accordance with and to achieve the
objectives of the applicable Marketing and Sales Plan.
5.4.3 LEAD EXECUTIVES. The initial Lead Executive for
Marketing and Sales shall be Ed Zander. The initial
Deputy Lead Executive for Marketing and Sales shall be
Barry Schuler. As part of the Marketing and Sales Plans,
AOL and Sun will establish mutually agreeable targets
for marketing and sales of the Product Suites. It is
AOL's present intention not to replace the initial Lead
Executive for Marketing and Sales unless such targets
are not met, but AOL shall have the right, after
consultation with Sun, to replace the Lead Executive for
Marketing and Sales at any time after the Closing Date.
In the event replaced, the Lead Executive and Deputy
Lead Executive may only be replaced by a person of
similar rank and stature unless the parties otherwise
agree. The Lead Executive for Marketing and Sales must
be an employee of either AOL or Sun.
5.4.4 COORDINATION. The AOL collaborative sales force and the
Sun collaborative sales force shall coordinate their
sales efforts and endeavor to cooperate with one another
to achieve maximum sales of the Product Suites in
accordance with the Marketing and Sales Plan.
5.4.5 CROSS PLATFORM MARKETING AND SALES. The collaborative
sales forces of AOL and Sun will be trained and
knowledgeable about and shall, to the extent
commercially reasonable, actively market and promote the
sale or license of the Product Suites on the Sun Systems
Platform, Windows NT and on a variety of other System
Platforms to which the Product Suites have been ported,
which may include IBM AIX, Linux, HP-UX and other
Systems Platforms, which marketing and promotion shall
include efforts to license the Product Suites on an OEM
basis.
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6.0 OTHER DEVELOPMENT AND MARKETING RIGHTS AND LIMITATIONS.
6.1 AOL. During the term of this Agreement, AOL will market Network
Application and Server Software only to AOL EC Service Opportunities and
only to enable such opportunities. In sales to AOL EC Service
Opportunities made by AOL personnel, AOL may elect to have the sales and
licensing agreements for the goods and services sold be between the
customer and AOL or may elect to have such agreements be between Sun and
the customer. AOL shall have the unrestricted right to market and
distribute the Client Software and New Browser during and after the term
of this Agreement in any manner whatsoever, including without limitation
through OEM licensing arrangements.
6.2 SUN. During the term of this Agreement, Sun will have the right to
market, including through reseller and OEM arrangements, the
Collaborative Software through the Collaborative Marketing and Sales
Activities as well as its independent sales force, subject to the
provisions of Section 4.1.4.
6.3 SUN DEVELOPMENT. Subject to the provisions of Sections 6.6 and 6.7,
Sun is free to develop at its own expense additional client, server and
application software, functionality and features for EC(2). Any such
software developed by Sun independently which is not a derivative work
of the Existing Netscape Software or the Collaborative Software and was
not developed pursuant to any Collaborative Development Work Plan shall
not constitute Collaborative Software or Designated Collaborative
Software, and Sun shall own such independent developments and all
proprietary rights therein.
6.4 AOL DEVELOPMENT. AOL is free to develop at its own expense and to
collaborate with one or more third parties in developing additional
client, server and application software, and functionality and features
for electronic commerce and extended communities and connectivity,
including without limitation software based on and derived from the
Existing Netscape Software. Any such software developed by AOL
independent of any Collaborative Development Work Plan shall not
constitute Collaborative Software or Designated Collaborative Software,
and AOL shall own such independent developments and all proprietary
rights therein.
6.5 REPLACEMENT OF IE BROWSER. To the extent contractually permissible,
AOL will periodically evaluate replacing the browser component of
Microsoft Internet Explorer browser with the New Browser in the AOL
classic online service offering and to use the New Browser in clients
for other brands such as ICQ and CompuServe, provided that the parties
acknowledge that AOL has no present intention to make any such
replacement or use and shall have no obligation to make any such
replacement or use, and that it is AOL's present expectation that it
will not seek to terminate or limit its present agreement
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
and may seek to renew and/or extend and expand its present agreement
with Microsoft Corporation to continue to distribute Microsoft Internet
Explorer. It is acknowledged that among the critical issues for AOL in
evaluating the merits of any such possible replacement would be ***
APPROXIMATELY 8 LINES OMITTED ***
6.6 NO DEVELOPMENT OR MARKETING OF COMPETITIVE CLIENTS. Except as
provided in Section 3.10, for any System Platform for which AOL
implements, in the OEM Communicator Client and Third Party Communicator
Client, the most recent version of Sun's JRE pursuant to Section 3.6,
Sun shall not during the term of this Agreement, directly or indirectly
through any third party, develop, market, advertise, or distribute any
software product or assist in advertising, marketing, or distributing
any software product on such System Platform (including without
limitation any other browser component) including or bundled with
features and functions which make it competitive with a desktop client
such as the client for the AOL classic online service, AOL Distributed
Communicator Client, the Third Party Communicator Client, the OEM
Communicator Client or Microsoft Internet Explorer (as it continues to
evolve away from a browser to a fully featured online desktop
client),*** APPROXIMATELY 11 LINES OMITTED *** This Section 6.6 shall
not be deemed to limit or prohibit Sun from continuing to develop,
market, advertise, promote and distribute browsers that are 100% Pure
Java or are for platforms other than personal computers or workstations,
subject to the provisions of Section 4.3, nor from continuing to
develop, market and promote client software other than browsers except
as provided in this Section.
6.7 SUPPORT FOR PRODUCT SUITES STANDARDS. It is the intention of the
parties that all client software will support industry-standard
protocols and the standards, protocols and defaults in the Product
Suites, including without limitation the standards, protocols and
defaults of the AOL Services Components in the Product Suites, and
except as provided in Section 3.10, Sun agrees not to implement, in the
Sun Systems Platform or in other software competitive with or offering
similar functionality to the Product Suites, inconsistent or conflicting
standards, protocols or defaults, including without limitation
inconsistent or conflicting with the components, features,
functionality, interfaces, protocols and APIs of the New Browser.
6.8 IMPACT OF LICENSE TO COMPETING OEM. If, during the term of this
Agreement, AOL grants an OEM license to any of the network application
and server software comprising the Existing Netscape Software or any
derivative works thereof developed by
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
AOL to any other Systems Platform suppliers, each such transaction must
be structured so that the revenues to AOL reflect *** and in such event
the Minimum Commitment as set forth in Section 4.5 for each quarter
subsequent to AOL granting such a license shall be reduced by *** of the
consideration received by AOL during the preceding quarter pursuant to
such license agreement for the rights granted to such OEM with respect
to any such software, provided that in the event AOL receives an upfront
large sum or advance pursuant to such an agreement, the reduction
arising from such amount shall be applied pro rata across all then
remaining quarterly Minimum Commitments.
6.9 LICENSES BY SUN. During the term of this Agreement, Sun shall
structure its license transactions for the Existing Netscape Software
and Designated Collaborative Software so that the revenues to Sun ***
and Sun shall not enter into licenses for such software intending to (a)
have a material adverse impact on the penetration rate for the business
desktop as set forth in Section 4.6 or (b) materially reduce the amounts
payable to AOL hereunder.
6.10 RESOURCES. AOL and Sun shall each provide a minimum level of
staffing through their respective collaborative sales forces, as set
forth in the Marketing and Sales Plan, to achieve the objectives of the
SE's, and AOL and Sun shall each provide a minimum level of development
staffing, as set forth in the initial Collaborative Development Work
Plans, to achieve the objectives of the Network Application and Server
Software development MC. Sun shall be responsible for using all
reasonable efforts at its expense to provide whatever remaining
resources are needed to achieve the goals of each SE as set forth in the
Marketing and Sales Plan and to achieve the goals set forth in the
Collaborative Development Work Plan for Network Application and Server
Software, but in no event will Sun be required to provide more than the
maximum levels of Sun staffing set forth in the Marketing and Sales Plan
and the Collaborative Development Work Plan for Network Application and
Server Software. Sun will provide a level of staffing for Sun's
collaborative sales force at least as large as that of AOL's
collaborative sales force, and Sun shall provide a level of staffing for
the Collaborative Development Activities at least as great as the
staffing AOL provides for the Collaborative Development Activities.
Either party may reduce its level of staffing if such party concludes
that then current and reasonably anticipated business conditions no
longer justify then current staffing levels. In the event the aggregate
level of staffing provided by AOL in any quarter for Collaborative
Development Activities and Collaborative Marketing and Sales Activities
is less than ***, the otherwise applicable Minimum Sales Commitment for
the next quarter shall be reduced by *** per person for such shortfall
(i.e., for each person by which such staffing by AOL is below ***),
provided that in the event the composition of
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
such AOL staffing with respect to mix of salary levels changes
materially, Sun and AOL will negotiate in good faith adjustments to such
*** per person shortfall reduction.
7.0 ESCALATION AND DISPUTE RESOLUTION FOR COLLABORATIVE DEVELOPMENT AND
MARKETING AND SALES.
7.1 GENERAL. The parties shall attempt to promptly resolve through good
faith negotiation any dispute or disagreement between them directly
relating to design and development priorities and decisions and resource
allocation under the Collaborative Development Work Plan for Network
Application and Server Software and marketing and sales priorities and
decisions under the Marketing and Sales Plans. ***APPROXIMATELY 10 LINES
OMITTED***
7.2 DEADLOCK ON MAJOR DISPUTES. ***APPROXIMATELY 48 LINES OMITTED***
8.0 PAYMENT TIMING PROVISIONS.
8.1 TIMING. Fees payable pursuant to Section 4.1.5, 4.5 and 9.8.2 shall
be paid quarterly in advance not later than the fifth business day of
the quarter for which due, except that amounts payable pursuant to such
Sections for the first quarter shall be paid on the Closing Date, and,
in the event to first quarter is not a complete quarter, amounts payable
pursuant to such Sections for the first partial quarter and the first
full quarter shall be payable on the Closing Date. Unless otherwise
specified, other fees shall be paid no later than 45 calendar days after
the end of the quarter for which due (including fees in excess of the
minimum amounts due with respect to any quarter). No fees are payable
until the quarter in which the Closing Date occurs, and any fees for
that quarter, including minimum quarterly fees specified in this
Agreement, including in Sections 4.1.5, 4.5 and 9.8.2, shall be a pro
rata amount based on the number of days remaining in such quarter. In
the event the first quarter is not a complete quarter (i.e., the Closing
Date occurs other than at the beginning of the quarter), any reductions
in minimum revenues or other fees specified in this Agreement, including
in Sections 4.1.5, 4.5 and 9.8.2, shall not apply until the second full
quarter. For partial quarters at the beginning and the end of each year
of the term of this Agreement, the quarterly amount payable shall be a
prorated portion of the full quarterly amount specified for such year,
based on the number of days in such partial quarter period. (For
example, if the first anniversary of the Closing Date is March 20, 2000,
the prorated Minimum Commitment payable pursuant to Section 4.5 for the
partial period running from January 1, 2000 through March 20, 2000 shall
be the applicable prorated portion of $78,000,000, which amount shall be
due and payable on January 1, 2000, and the prorated Minimum Commitment
for the partial period running
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from March 21, 2000 through March 30, 2000 shall be the applicable
prorated portion of $82,500,000, which amount shall also be due and
payable on January 1, 2000.
8.2 NO RIGHT TO WITHHOLD OR OFFSET. Sun will have no right whatsoever to
withhold payment of any minimum fees or revenues provided for in
Sections 4.1.5, 4.5 or 9.8.1 on the basis of any alleged right of offset
or any alleged breach by AOL of any of its obligations pursuant to this
Agreement or for any other reasons except to the extent permitted
pursuant to a final, non-appealable judgment obtained from a court of
competent jurisdiction in litigation between AOL and Sun.
Notwithstanding anything to the contrary set forth in this Agreement, in
the event Sun believes that AOL has breached any obligations under this
Agreement, Sun shall have no right to cease paying any such minimum fees
and revenues, even if Sun has terminated or purported to terminate this
Agreement, and Sun's sole and exclusive remedy shall be to litigate the
dispute and to continue making such payments during the pendency of the
litigation. AOL shall be entitled to injunctive relief to compel Sun to
continue making such payments during the pendency of such litigation.
8.3 LATE CHARGES. In the event that either party does not receive any
amounts from the other party hereunder on or before the day upon which
such amounts are due and payable, and fails to cure such breach within
ten (10) business days following written notice from the other party,
such outstanding amounts shall thereupon be subject to payment of a late
charge which shall accrue until payment at the rate of one percent (1%)
per month. Amounts received by shall first be credited against any
unpaid late charges accrued pursuant to this Section, and accrual of
such late charges shall be in addition to and without limitation of any
and all additional rights or remedies under this Agreement or at law or
in equity.
9.0 INTELLECTUAL PROPERTY RIGHTS.
9.1 OWNERSHIP. Each party shall own all preexisting software and/or
technology which it makes available to the Collaborative Development
Activity or which it developed or develops with its own resources
without use of any intellectual property of the other party and not as
part of the Collaborative Development Activities and all proprietary
rights therein. To the extent such software and/or technology is
incorporated into the Designated Collaborative Software, it shall, to
the extent so incorporated, be subject to the provisions of Sections
9.2, 9.3 and 9.4.
9.2 DESIGNATED COLLABORATIVE SOFTWARE. AOL shall own all improvements
and modifications to any preexisting software or technology of either
party, any new software and technology created through Collaborative
Development Activity to create the Client Software and/or New Browser,
and all newly-created intellectual property rights therein, whether
completed or work in progress. Sun shall own all improvements and
modifications to any preexisting software of either party and any new
software and
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technology created through Collaborative Development Activity to create
the Network Application and Server Software and all newly-created
intellectual property rights therein.
9.3 AOL LICENSE TO SUN. AOL hereby grants to Sun and its subsidiary, Sun
Microsystems International, B.V. ("Sun International B.V.") a Software
License to all Designated Collaborative Software owned by AOL pursuant
to Sections 9.1 and/or 9.2, subject only to the payment by Sun of the
amounts provided in this Agreement. Such license shall be unrestricted
as to field of use, except for those limitations set forth in Section
6.6 and 6.7. AOL also hereby grants to Sun a non-exclusive, perpetual,
non-terminable, fully sublicensable right under any patents issued
anywhere in the world for which AOL is or becomes the beneficial or
legal owner which were reduced to practice in the course of the
Collaborative Development Activity to make, have made, practice, have
practiced, use, lease, sell and otherwise transfer any and all
inventions, methods or processes which are the subject of any claim of
any such patent.
9.4 SUN LICENSE TO AOL. Sun shall grant to AOL a Software License to all
Designated Collaborative Software owned by Sun pursuant to Sections 9.1
and/or 9.2, whether written in Java or any other programming language.
Such license shall be unrestricted as to field of use. Notwithstanding
the foregoing grant to AOL, AOL's rights to the Java Platform shall be
governed solely by the TLDA executed concurrently herewith by the
parties. Sun also hereby grants to AOL a non-exclusive, perpetual,
non-terminable, fully sublicensable right under any patents issued
anywhere in the world for which Sun is or becomes the beneficial or
legal owner which were reduced to practice in the course of the
Collaborative Development Activity to make, have made, practice, have
practiced, use, lease, sell and otherwise transfer any and all
inventions, methods or processes which are the subject of any claim of
any such patent.
9.5 PROCEDURES FOR LITIGATING PROPRIETARY RIGHTS CLAIMS AGAINST THIRD
PARTIES. AOL and Sun agree to cooperate with one another and to
negotiate in good faith procedures and terms and conditions permitting
each party to pursue infringement claims against third parties with
respect to the Designated Collaborative Software and other rights
licensed to one another pursuant to this Agreement. The parties will
consider and discuss whatever arrangements might most efficiently and
fairly permit such actions to be pursued, which might include, by way of
example, an assignment of an undivided joint interest in the software at
issue in order to confer standing to sue on the party seeking to bring
such action, an agreement by which the other party is joined as a party
plaintiff in the action with provisions allocating the responsibilities
and costs of litigating such claims, or some other mechanism.
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9.6 LICENSE TO EXISTING NETSCAPE SOFTWARE.
9.6.1 LICENSE FOR DEVELOPMENT. As of the Closing Date, as
between AOL and Sun, AOL shall own all rights in and
shall grant to Sun a Software License to the Existing
Netscape Software. AOL may also elect to grant to Sun a
Software License to any Existing Netscape Software
Upgrades that AOL makes available for Collaborative
Development Activities pursuant to this Agreement. Such
license shall be subject to the limitations set forth in
this Agreement on Sun's marketing and licensing thereof
during the term of this Agreement, which shall include
those limitations set forth in Sections 6.3, 6.6 and 6.7
of this Agreement as well as limitations during and
after the term of this Agreement permitting Sun and Sun
International B.V. to use the Existing Netscape Software
(and any Existing Netscape Software Upgrades, if any,
licensed to Sun) solely for purpose of developing the
New Browser, the OEM Communicator Client, and the
Designated Collaborative Software as part of the
Collaborative Development Activity. Such licenses shall
also be subject to any contractual restrictions with
third parties for the duration of such contractual
restrictions. AOL represents that concurrently with the
execution of this Agreement, AOL is obtaining from
Netscape contractual commitments requiring that Netscape
cooperate with AOL between the date of this Agreement
and the Closing Date to identify any "Encumbrances" (as
defined in this Section) that may adversely affect AOL's
rights to Netscape Existing Software and/or any
components thereof as set forth below, including without
limitation AOL's rights to grant others access to source
code and sublicense such rights. Such cooperation shall
include granting AOL full access to Netscape technology
licenses, agreements by which technology rights were
acquired by Netscape and information regarding
intellectual property infringement or misappropriation
claims, if any, relating to the Netscape Existing
Software and all components thereof. As used in this
Section, "Encumbrances" means any restriction or limit
that would prevent or materially limit or restrict AOL
from granting pursuant to this Agreement the applicable
source and binary access, use and distribution rights
under Sections 9.6.1, 9.6.2 and 14.7 of the Agreement
with respect to the Netscape Existing Software or any
component thereof ("Sun License Rights"), including,
without limitation, limitations and restrictions on
source access and sublicensing fights, as well as
prohibitions or requirements to obtain consents to
assignment of rights from Netscape to AOL upon the
Closing Date where to failure to obtain such consent
would materially limit or restrict AOL's rights,
including sublicensing rights. AOL further represents
that it is obtaining from Netscape concurrently with the
execution of this Agreement contractual commitments
obligating Netscape to use reasonable efforts to remove,
limit or diminish such
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
Encumbrances, in a priority order to be specified by
AOL. After the Closing Date, AOL shall continue such
efforts. *** APPROXIMATELY 4 LINES OMITTED *** Sun and
AOL will consider the scope and impact of any such
Encumbrances in determining what work to undertake
pursuant to the Collaborative Development Plans and the
products to be included in the Product Suites.
9.6.2 RESELLER RIGHTS. AOL shall grant to Sun, effective as of
the Closing Date and continuing for the term of this
Agreement, (a) the right to distribute the Existing
Netscape Software in binary form only except as set
forth below; (b) the right to use the source code for
the Existing Netscape Software solely for purposes of
supporting and maintaining the binary copies distributed
to Sun customers; and (c) the right to license the
source code for the Existing Netscape Software to OEM
licensees solely for the purpose of permitting such OEM
licensees to support and maintain the binary copies
distributed by such OEMs, provided that Sun may provide
such source code to OEM licensees only pursuant to the
terms of a written agreement substantially in
conformance with a form approved by AOL, which approval
shall not be unreasonably withheld or delayed,
containing customary terms and conditions to preserve
the confidentiality of such source code and containing
customary limitations and disclaimers of warranties and
exclusions and limitations of liability. The rights
granted to Sun pursuant to this Section 9.6.2 with
respect to the Existing Netscape Software shall
terminate upon expiration or termination of this
Agreement, except that Sun shall retain thereafter a
limited source code license to retain and use such
software solely for the support of existing customers as
of such expiration or termination.
9.6.3 DELIVERY. Promptly following the Closing Date, AOL will
deliver to Sun a copy of all Existing Netscape Software
that is subject to the license granted pursuant to
Section 9.6.1 and 9.6.2.
9.7 POST TERMINATION RIGHTS. The license rights of the parties following
expiration or termination of this Agreement are set forth in Sections
14.5 and 14.7.
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
9.8 LICENSE FEES.
9.8.1 PAYMENTS FROM AOL TO SUN. AOL shall pay to Sun quarterly
license fees of $5 million per quarter during the term
of this Agreement for the Sun-owned components licensed
to AOL by Sun pursuant to Section 9.4. No license fee
shall be required after expiration or termination of
this Agreement for any such license rights that survive
termination. AOL may allocate up to *** of the fees
under this section to any payments required under any
TLDA between Sun and AOL, and any unused balance of such
amounts not applied to TLDA fees may be carried forward
and applied to future fees under any TLDA.
9.8.2 PAYMENTS FROM SUN TO AOL. Sun shall pay to AOL quarterly
license fees during the term of this Agreement for the
software and trademark rights granted to Sun by AOL
pursuant to Sections 9.3, 9.6 and 12, which shall be
Eighty-Six Million Dollars ($86,000,000) for the first
year following the Closing Date, Ninety-Five Million
Five Hundred Thousand Dollars ($95,500,000) for the
second year following the Closing Date, and Ninety-Seven
Million Dollars ($97,000,000) for the third year
following the Closing Date, payable in quarterly
payments as provided in Section 8.1. No license fee
shall be required after expiration or termination of the
definitive agreement for any such license rights that
survive termination.
10.0 NETCENTER.
10.1 OBJECTIVES. AOL shall develop the Netcenter to be a portal for a
variety of customers with a focus on business customers in terms of the
services, information and customization options offered.
10.2 OWNERSHIP. AOL owns and controls the Netcenter without restriction
and shall be responsible for all of its associated costs.
10.3 PORTAL REVENUES. Notwithstanding anything to the contrary herein,
AOL shall retain all revenue, and bear all costs, related to or derived
from the Netcenter.
10.4 PROMOTION. Sun agrees to cooperate with AOL to make the Netcenter
the Sun default network portal for the Product Suites and to help gain
additional traffic for the Netcenter. Without limiting the foregoing,
the Netcenter will be the default home page in the New Browser, Third
Party Communicator Client and OEM Communicator Client, any client
applications developed by Sun pursuant to Section 3.10, the HotJava
browser
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
and, to the extent practicable and commercially reasonable, the Bedouin
browser or any other thin client browser used on platforms other than
personal computers and workstations, although Sun customers shall not be
required to maintain such home page against their will. ***
APPROXIMATELY 5 LINES OMITTED *** Sun shall always position the
Netcenter in its meetings, promotions and advertising no less favorably
than any other portal addressed in such meetings, promotions and
advertising, if any, but the parties recognize and agree that the
objectives of this Agreement require that Sun market and distribute the
Product Suites and System Platform to other connectivity and portal
vendors without restriction, and in such cases such other connectivity
and portal vendors shall have the right to use and promote their own
home pages and/or portals in connection with the Products Suites and
System Platform.
11.0 SYSTEMS PLATFORM.
11.1 OWNERSHIP. Sun owns and controls the Sun System Platform without
restriction and shall be responsible for all of its associated costs.
Sun shall develop the Sun System Platform to be the premiere foundation
for Product Suites customers in terms of its performance, scalability,
reliability and cost-effectiveness.
11.2 PROMOTION. AOL agrees to cooperate with Sun to make the Sun System
Platform the AOL preferred System Platform for Products Suites for both
AOL and AOL EC Service Opportunities. AOL shall always position the Sun
System Platform in its meetings, promotions and advertising no less
favorably than any other Systems Platform addressed in such meetings,
promotions and advertising, if any, but the parties recognize and agree
that the objectives of this Agreement may require that AOL market and
distribute the Product Suites on other System Platforms to meet customer
requirements.
12.0 BRANDING.
12.1 OWNERSHIP. Each party shall retain all rights, title and other
interest to its brand names, service marks, trademarks and other
proprietary markings except as expressly provided otherwise in this
Agreement.
12.2 BRAND NAMES AND TRADEMARKS. Subsequent to the execution of this
Agreement and prior to the Closing Date, AOL and Sun shall negotiate in
good faith and enter into a written trademark license, which shall
include reasonable and customary terms, including appropriate quality
control provisions, pursuant to which AOL shall license to Sun on a
royalty-free, non-sublicensable basis effective as of the Closing Date:
(a) the right to use the Netscape Communicator trademark in connection
with the Third-Party Communicator
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Client and related sales and marketing materials, and shall license to
Sun the right to use successors or replacements of the Netscape
Communicator trademark in connection with the Third-Party Communicator
Client and related sales and marketing materials, provided the
Third-Party Communicator Client meets the requirements for branding with
such mark(s); (b) the right to use the Netscape trademarks that Netscape
currently uses as the titles for the Existing Netscape Software in
connection with the collaborative marketing and sales of the Existing
Netscape Clients pursuant to this Agreement; and (c) such other
trademarks, if any, as AOL and Sun may mutually agree. Such trademarks
shall be licensed to Sun following expiration or termination of this
Agreement subject to reasonable quality control requirements and a
reasonable transition period (not to exceed fifteen (15) months) and
plan which shall be set forth in the definitive trademark license. Such
trademark license shall also provide for a trademark license from AOL to
Sun to use the Netscape Communicator trademark, and such other
trademarks, if any, as AOL and Sun may mutually agree, for any software
developed by Sun pursuant to Section 3.10, subject to such software
meeting AOL's reasonable quality control and other transition
requirements for such branding and subject to a phase-out of Sun's use
of such trademarks in connection with such products after a reasonable
transition period (not to exceed fifteen (15) months).
12.3 BRANDING OF COLLABORATIVE SOFTWARE. The branding for the
Collaborative Software shall be determined by mutual agreement of the
Lead Executive and Deputy Lead Executive for marketing and sales, and
each party shall have the right to use such marks in connection with the
Product Suites and related sales and marketing materials during the term
of this Agreement. Following any expiration or termination of this
Agreement, Sun shall retain ownership of any trademark by which the
entire Product Suites are identified, subject to transition or phase-out
terms permitting continued use by AOL for a reasonable transition period
(not to exceed fifteen (15) months), which terms and conditions shall be
negotiated in good faith and embodied in a written trademark license
agreement. Following any expiration or termination of the Agreement, Sun
and AOL shall each have the non-exclusive right to use any titles by
which the individual Network Application and Server Products in the
Product Suites were identified during the term of this Agreement,
provided that AOL and Sun shall differentiate their uses of such marks
following any expiration or termination of this Agreement by always
using any such mark in connection with a name or trademark prominently
identifying AOL or Sun as the source of such goods or services (for
example, AOL Commerce Server and Sun Commerce Server).
13.0 EMPLOYEE INCENTIVES.
13.1 INCENTIVE PLAN. The parties recognize and agree that proper
motivation and economic incentives for their respective employees
engaged in the Collaborative Development Activity and collaborative
marketing and sales is essential to its success and shall create and
operate an Incentive Plan ("Incentive Plan") for all employees
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
engaged full-time in the Collaborative Development Activity or in
collaborative marketing and sales. Each party shall bear its own
expenses in connection with its respective Incentive Plans. Compensation
for the collaborative marketing and sales force will consist of base
salary with an additional commission/incentive opportunity, and the
commission incentive plan will (i) represent a significant part of each
individual's total annual compensation (base salary plus
commission/incentive plan) and (ii) support the metrics included in the
Marketing and Sales Plan. The parties commit to cooperate with one
another to complete the Incentive Plan as soon as practicable and
commercially reasonable and prior to the Closing.
13.2 SENIOR MANAGERS. All senior managers and above shall receive a
significant portion of their compensation through an annual bonus
program, tied to performance under the Collaborative Development Work
Plans and/or Marketing and Sales Plans, and paid annually to those
employees still employed by either party as of the date of payment of
the bonus.
13.3 SALES REPRESENTATIVES. All sales representatives shall receive a
significant portion of their compensation through an incentive bonus
program tied to meeting objectives under the Marketing and Sales Plans.
13.4 POOL FOR ALL PERSONNEL. The Lead Executives and Deputy Lead
Executive from each party, respectively, may make periodic project and
spot bonus payments tied to performance under the Collaborative
Development Work Plans and/or Marketing and Sales Plans, to employees of
such party from a pool of funds of up to*** of total salaried
compensation for all personnel employed by such party in such
activities.
13.5 LEAD EXECUTIVES AND DEPUTY LEAD EXECUTIVES. At least one-half of
the total incentive compensation by MC for any Lead Executives or Deputy
Lead Executives (other than an Executive Officer of Sun or AOL, if a
Lead Executive or Deputy Lead Executive is an Executive Officer) must be
provided under the IP.
14.0 TERMINATION.
14.1 TERM. This Agreement shall terminate at midnight Pacific Daylight
Time on the date three (3) years following the Closing Date.
14.2 EARLY TERMINATION. This Agreement assumes the intended merger of
Netscape and AOL. If the Closing Date does not occur on or before June
30, 1999, the parties agree to negotiate in good faith for a period of
thirty (30) days thereafter in an effort to
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agree on alternative terms to achieve as much as possible the same
effect as this Agreement using solely Sun technology, provided that if
the parties fail to agree on such alternative terms within such thirty
(30) day period, either party may elect to terminate this Agreement by
giving written notice to the other party.
14.3 TERMINATION FOR BREACH. Subject to Section 7.2 of this Agreement,
either party may terminate this Agreement for a material breach of its
terms by the other party by giving the other party written notice at
least ninety (90) days in advance of such termination date, and the
Agreement shall terminate on that date unless the breaching party has
cured or corrected such breach prior to that time, provided that such
ninety (90) day period shall be shortened to a ten (10) business day
cure period following written notice in the event of a failure to pay
amounts due pursuant to this Agreement. Without limiting the foregoing,
in the event Sun fails to pay any amounts due to AOL pursuant to this
Agreement, including without limitation minimum fees or revenues
provided for in Sections 4.1.5, 4.5 and 9.8.2, and fails to cure such
breach within the ten (10) business day cure period provided for in this
Section, AOL shall have the right, exercisable upon written notice to
Sun, without limiting any of AOL's other rights or remedies, to
terminate this Agreement and all licenses granted to Sun by AOL,
including all licenses granted to Sun by AOL pursuant to Sections 9.3,
9.6 and 12 (in which event Sun will have no license rights pursuant to
Section 14.7.1 or 14.7.2). In the event of a termination of this
Agreement and all licenses granted to Sun by AOL as a result of Sun's
failure to pay any minimum fees and revenues in a timely manner, Sun's
obligation to pay all minimum fees and revenues provided for in Sections
4.1.5, 4.5 and 9.8.2 shall be accelerated so as to make all such fees
and revenues be due and payable immediately. Notwithstanding anything to
the contrary set forth in this Agreement, AOL shall have no right to
terminate the licenses granted to Sun by AOL pursuant to Sections 9.3,
9.6 and 12, except for a failure by Sun to pay any fees and revenues due
pursuant to this Agreement and a failure to cure such breach in a timely
manner as provided in this Section 14.3.
14.4 LIMITATION ON AOL RIGHT TO TERMINATE LICENSES. Except in the event
Sun fails to pay the fees payable under Sections 4.1.5, 4.5 and 9.8.2 as
required in Section 8 (the "Specified Payment Obligations"), AOL shall
have no right whatsoever to terminate or reduce Sun's license rights set
forth in Sections 9.4, 9.6.1, 9.6.2, 12.2, 12.3, 14.7.1 or 14.7.2 (the
"Licenses") on the basis of any alleged breach by Sun of any of its
obligations pursuant to this Agreement or for any other reasons, except
to the extent permitted pursuant to a final, non-appealable judgment
obtained from a court of competent jurisdiction in litigation between
AOL and Sun. Notwithstanding anything to the contrary set forth in this
Agreement, in the event AOL believes that Sun has breached any
obligations under this Agreement, other than the Specified Payment
Obligations, AOL shall have no right to terminate or reduce such
licenses, even if AOL has terminated or purported to terminate this
Agreement, and AOL's sole and exclusive remedy shall be to litigate the
dispute, provided that nothing contained herein shall be deemed to limit
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AOL's right to enforce the limitations set forth in this Agreement on
the scope or duration of such licenses. Sun shall be entitled to
injunctive relief to prevent AOL from terminating or limiting such
licenses in any way other than as expressly allowed in this Section.
14.5 TERMINATION ON A CHANGE IN CONTROL. During the term of this
Agreement, if either party is acquired or if any third-party acquires
effective voting control of either party, such party shall promptly
notify the other party in writing, and the other party may terminate
this Agreement effective six (6) months after receipt of such notice;
provided that if Sun terminates this Agreement pursuant to this Section
14.4, it shall be obligated to continue to pay all then remaining
minimum payments and fees that would have been due if this Agreement had
expired on the date set forth in Section 14.1, when and as such minimum
payments and fees would otherwise be payable pursuant to this Agreement.
14.6 AOL POST TERMINATION LICENSE RIGHTS. Following any expiration or
termination of this Agreement, AOL shall be free to further develop and
enhance the Designated Collaborative Software for its own account in all
respects, shall be entitled to full ownership of any AOL separately
developed code based on or derived from the Designated Collaborative
Software, including without limitation any AOL separately developed
modifications and enhancements to the Designated Collaborative Software
(such as, by way of example, the Third Party Communicator Client and AOL
Distributed Communicator Client), shall have no duty to account to or
pay Sun with respect to any use or exploitation of the Designated
Collaborative Software, and shall not be subject to any limitations on
field of use with respect to the Designated Collaborative Software.
Following any expiration or termination of this Agreement, AOL shall
have no rights of any kind to any software developed by Sun, which does
not constitute Collaborative Software or Designated Collaborative
Software.
14.7 SUN POST TERMINATION LICENSE RIGHTS.
14.7.1 DESIGNATED PRODUCTS. As used in this Agreement,
"Designated Products" means (a) any network applications
and server software included in the Product Suites or
marketed and sold through Collaborative Marketing and
Sales Activities pursuant to the Marketing and Sales
Plan at any time during the term of this Agreement, and
(b) the Designated Collaborative Software. Except as
provided in Section 14.3, Sun and Sun International B.V.
shall be granted effective upon expiration or
termination of this Agreement a Software License to the
Designated Products and shall be free following any
expiration or termination of this Agreement to further
develop and enhance any Designated Products for their
own respective accounts in all respects, shall be
entitled to full ownership of any Sun and Sun
International B.V. separately developed code based on or
derived from the Designated Products, including without
limitation any Sun
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<PAGE> 32
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
separately developed modifications and enhancements to
the Designated Products, shall have no duty to account
to or pay AOL with respect to any use or exploitation of
the Designated Products, and shall not be subject to any
limitations on field of use with respect to the
Designated Products (including without limitation those
limitations set forth in Sections 6.3, 6.6 and 6.7 of
this Agreement), provided that (a) AOL may elect to
require that, within one hundred eighty (180) days
following any expiration or termination of this
Agreement, Sun cease to distribute and remove from any
Designated Products and derivative works thereafter
marketed or distributed by Sun and Sun International
B.V. any or all AOL Service Components, as specified by
AOL, and (b) such license shall be subject to any
contractual restrictions with third-parties for the
duration of such contractual restrictions.
14.7.2 THIRD PARTY COMMUNICATOR CLIENT AND AOL DISTRIBUTED
COMMUNICATOR CLIENT. Following any expiration or
termination of this Agreement, Sun shall have no rights
of any kind to the Third Party Communicator Client or
the AOL Distributed Communicator Client or any software
developed by AOL which does not constitute Designated
Software, other than a limited source code license to
retain and use such software solely for the support of
existing customers as of such expiration or termination.
14.7.3 DELIVERY. Promptly following expiration or termination
of this Agreement, AOL shall deliver to Sun a copy of
all source code and binary code comprising the
Designated Products to the extent Sun does not already
have such code in its possession.
14.8 PURCHASE OF SUN PRODUCTS AND SERVICES POST-TERMINATION.
14.8.1 EC(2) PRODUCTS AND SERVICES. For seven years after the
expiration or termination of this Agreement for any
reason other than (a) a termination by Sun arising from
a material breach by AOL or (b) a termination pursuant
to Section 14.2 resulting from a failure of the Closing
Date to occur, AOL will be entitled to purchase Sun ***
14.8.2 OTHER PRODUCTS AND SERVICES. For seven years after the
expiration or termination of this Agreement for any
reason other than (a) a termination
by Sun arising from a material breach by AOL or (b) a
termination
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
pursuant to Section 14.2 resulting from a failure of the
Closing Date to occur, AOL will be entitled to purchase
***
14.9 POST TERMINATION LIMITATIONS. For a period of eighteen (18) months
following any termination or expiration of this Agreement (other than a
termination arising from a material breach by the other party), each
party agrees to continue to market and distribute the Network
Applications and Server Software in a manner generally consistent with
the manner in which such Network Applications and Server Software were
marketed and distributed by such party during the term of this
Agreement, and each party agrees not to sell or dispose of all or
substantially all of its respective rights in such software during such
eighteen (18) month period, provided that this Section shall not be
deemed to limit or prohibit either party from selling or disposing of
such rights in connection with a merger or sale of assets in which a
third party acquires or succeeds to all or substantially all of such
party's assets, including such rights.
15.0 GENERAL REPRESENTATIONS AND WARRANTIES.
15.1 AOL REPRESENTATIONS AND WARRANTIES. AOL warrants, covenants and
represents to Sun that:
15.1.1 AOL has the full corporate right, power and authority to
enter into this Agreement and to perform the acts
required of it pursuant to this Agreement;
15.1.2 the execution of this Agreement and the performance by
AOL of its obligations and duties under this Agreement
shall not violate any agreement to which AOL is a party
or the rights of any other party; and
15.1.3 AOL is not relying on nor does Sun make any
representations, warranties or agreements not expressly
provided for in this Agreement.
15.2 SUN REPRESENTATIONS AND WARRANTIES. Sun warrants, covenants and
represents to AOL that:
15.2.1 Sun has the full corporate right, power and authority to
enter into this Agreement, to perform the acts required
of it;
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15.2.2 the execution of this Agreement and the performance by
Sun of its obligations and duties under this Agreement
shall not violate any agreement to which Sun is a party
or the rights of any other party; and
15.2.3 Sun is not relying on nor does AOL make any
representations, warranties or agreements not expressly
provided for in this Agreement; and
16.0 NO PROPRIETARY RIGHTS INDEMNITY. Neither AOL nor Sun makes any warranties
with respect to noninfringement and expressly disclaim all implied warranties of
title and against infringement. Neither AOL nor Sun shall have any obligation to
defend or indemnify the other against any third party claims of infringement or
misappropriation of any proprietary rights in any materials or technology
provided by either party to the other or developed pursuant to this Agreement.
17.0 OTHER REMEDIES CUMULATIVE. Except where otherwise specified, the rights and
remedies granted to a party under this Agreement are cumulative and in addition
to, and not in lieu of, any other rights or remedies which the party may possess
at law or in equity, including, without limitation, rights or remedies under
applicable patent, copyright, trade secret or proprietary rights laws, rules or
regulations.
18.0 AUDIT RIGHTS. AOL and Sun agree to allow mutually acceptable independent
CPA auditors, which auditors shall not be compensated on a contingency basis and
shall be bound to keep all information confidential except as necessary to
disclose discrepancies to the other party, to audit and analyze relevant
accounting records of each other to ensure compliance with all terms of this
Agreement. Any such audit shall be permitted within thirty (30) days of one
party's receipt from the other of a written request to audit, during normal
business hours, at a time mutually agreed upon. The cost of such an audit shall
be borne by the requesting party unless a material discrepancy is found, in
which case the cost of the audit shall be borne by the other party. A
discrepancy shall be deemed material if it involves a payment or adjustment of
more than five percent (5%) of the amount actually due from the paying party in
any given quarter. Audits shall occur no more frequently than once per calendar
year and shall not interfere unreasonably with the audited party's business
activities and shall be conducted in the audited party's facilities during
normal business hours on reasonable notice. An audit may cover any period;
provided that: (i) the period has not been previously audited; and (ii) the
period under audit is within a three year period immediately preceding the
commencement of the audit. A party shall promptly reimburse the other for the
amount of any discrepancy arising out of such audit which indicates that such
party is owed amounts hereunder as well as the costs of the audit, if
applicable, as provided above.
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19.0 LIMITATION OF LIABILITY; EXCLUSION OF DAMAGES; DISCLAIMER OF WARRANTIES.
19.1 EXCLUSION OF DAMAGES. NEITHER PARTY HERETO SHALL, UNDER ANY
CIRCUMSTANCES, BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL,
SPECIAL OR EXEMPLARY DAMAGES, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH
DAMAGES OCCURRING.
19.2 LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER
PARTY'S TOTAL LIABILITY OF ALL KINDS ARISING OUT OF OR RELATED TO THIS
AGREEMENT REGARDLESS OF THE FORUM AND REGARDLESS OF WHETHER ANY ACTION
OR CLAIM IS BASED IN CONTRACT, TORT NEGLIGENCE OR OTHERWISE, EXCEED THE
SUM OF (a) FIFTY MILLION DOLLARS; PLUS (b) ALL AGGREGATE AMOUNTS PAID BY
SUCH PARTY TO THE OTHER FOLLOWING NOTIFICATION TO THE OTHER PARTY OF AN
ALLEGED MATERIAL BREACH GIVING RISE TO AN ALLEGED RIGHT OF TERMINATION.
19.3 EXCEPTIONS. THE EXCLUSIONS OF DAMAGES AND LIMITATIONS OF LIABILITY
SET FORTH IN SECTIONS 19.1 AND 19.2 SHALL NOT OPERATE TO LIMIT (a)
AMOUNTS ACTUALLY DUE AND PAYABLE PURSUANT TO THE EXPRESS TERMS OF THIS
AGREEMENT, OR (b) AMOUNTS OTHERWISE RECOVERABLE BY ONE PARTY FROM THE
OTHER IN AN ACTION AT LAW OR IN EQUITY ARISING FROM THE OTHER PARTY'S
INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENTS, COPYRIGHTS, TRADE
SECRETS OR OTHER PROPRIETARY RIGHTS DURING OR AFTER THE TERM OF THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION INFRINGEMENT OR MISAPPROPRIATION
CLAIMS ARISING FROM THE OTHER PARTY'S BREACH OF THIS AGREEMENT.
19.4 DISCLAIMER OF WARRANTIES. NEITHER SUN NOR AOL MAKES ANY WARRANTIES
TO THE OTHER WITH RESPECT TO THE OPERATION OR PERFORMANCE OF ANY OF THE
SOFTWARE DEVELOPED OR LICENSED BY EITHER PARTY TO THE OTHER PURSUANT TO
THIS AGREEMENT, AND SUN AND AOL EACH HEREBY DISCLAIMS ALL SUCH
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
20.0 MISCELLANEOUS PROVISIONS
20.1 NOTICES. Any notice, consent, approval, request, authorization,
direction or other communication under this Agreement ("Notice") that is
required to be given in writing will be deemed to have been delivered
and given for all purposes (i) on the delivery date if delivered by
confirmed facsimile; (ii) on the delivery date if delivered personally
to the
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<PAGE> 36
party to whom the same is directed; (iii) one business day after deposit
with a commercial overnight carrier, with written verification of
receipt; or (iv) five business days after the mailing date, whether or
not actually received, if sent by U.S. mail, return receipt requested,
postage and charges prepaid, or any other means of rapid mail delivery
for which a receipt is available. In the case of AOL, such notice will
also be deemed to have been delivered and given for all purposes on the
delivery date if delivered by electronic mail from an AOL.com email
address via the U.S. America Online brand service to screenname
"AOLNotice@AOL.com." Notices shall be addressed as follows:
To Sun:
In the case of Sun, such notice will be provided to
both:
Chief Strategy Officer
Sun Microsystems, Inc.
901 San Antonio Road
MS CUP-01
Palo Alto, California 94033
Fax no.
And
Vice President and General Counsel
Sun Software and Technology
901 San Antonio Road
MS CUP-01
Palo Alto, California 94033
Fax No. (408) 517-1757
To AOL:
In the case of AOL, such notice will be provided to
both:
Senior Vice President for Business Affairs
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax no. 703-265-1206
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<PAGE> 37
And
Deputy General Counsel
American Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax no. 703-265-1105
20.2 SECTION 365(n) OF BANKRUPTCY CODE. All rights and licenses granted
under or pursuant to this Agreement by Sun to AOL or by AOL to Sun are,
and shall otherwise be deemed to be, for purposes of Section 365(n) of
the United States Bankruptcy Code, 11 U.S.C. Section 101, et seq. (the
"Bankruptcy Code"), licenses of rights to "intellectual property" as
defined under Section 101(56) of the Bankruptcy Code. The parties agree
that AOL and Sun, as licensees of such rights and licenses, shall retain
and may fully exercise all of their respective rights and elections
under the Bankruptcy Code; provided such licensee party abides by the
terms of this Agreement.
20.3 DUE DILIGENCE. In connection with the intended merger of AOL and
Netscape, AOL and Sun has each conducted certain due diligence with
respect to Netscape and its products, services, business and technology.
At Sun's request, AOL has made available to Sun certain information and
analysis learned or developed by AOL in the course of its due diligence.
Neither Sun nor AOL makes any representations or warranties to the other
regarding Netscape or any aspect of its business, products, services or
technology, and Sun and AOL each understands, acknowledges and agrees
that it is responsible for conducting whatever due diligence it may
desire to conduct. Neither AOL nor Sun makes any representations or
warranties to the other regarding the accuracy of any materials provided
to either party by Netscape or the accuracy of any analysis or
conclusions which either party may have made based on any such
information provided by Netscape or the accuracy of any such
information, materials, analysis or conclusions which AOL and Sun may
have provided to the other party.
20.4 EMPLOYEES. Each party shall be responsible for paying all salaries,
wages, employee benefits and associated expenses for which its own
employees are eligible under such party's employment policies, any
legally required benefits or insurance, any taxes or governmental
charges payable or subject to withholding in connection with the
employment of such party, and any expenses associated with such
employees activities under this Agreement. Each party shall have
exclusive supervision and control with respect to its own respective
employees and shall have no right to supervise, control, discipline,
terminate or reassign any employees of the other party. In the event
that either party makes a reasonable and good faith determination that
an employee of the other party working on Collaborative Development
Activities or Collaborative Marketing and Sales Activities lacks
requisite skills or experience, does not work well with other project
team members, or is otherwise unsatisfactory, the parties will consult
with one another in
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good faith regarding whether such employee should be replaced, provided
that the final determination as to whether to retain, reassign or
terminate any employee shall be made solely by the party employing such
individual.
20.5 NON-EXCLUSIVITY. Sun and AOL agree except for any express
obligations of AOL and Sun as set forth in this Agreement, nothing in
this Agreement is intended or shall be construed to prohibit or restrict
either AOL or Sun from developing or acquiring products or services
similar to or competitive with products or services of the other party.
20.6 WAIVER. The waiver by either party of a breach of or a default
under any provision of this Agreement, shall not be construed as a
waiver of any subsequent breach of the same or any other provision of
the Agreement, nor shall any delay or omission on the part of either
party to exercise or avail itself of any right or remedy that it has or
may have hereunder operate as a waiver of any right or remedy. Except as
expressly provided herein to the contrary, no amendment or modification
of any provision of this Agreement shall be effective unless in writing
and signed by a duly authorized signatory of Sun and AOL.
20.7 COSTS AND EXPENSES. Except as expressly provided herein to the
contrary, each party shall be responsible for its costs and expenses
incurred in connection with the negotiation and execution of this
Agreement and its performance hereunder.
20.8 NO PARTNERSHIP. No agency, partnership, joint venture, or
employment is created as a result of this Agreement and neither AOL nor
AOL's agents shall have any authority of any kind to bind Sun in any
respect whatsoever, nor shall Sun or Sun's agents have any authority of
any kind to bind AOL.
20.9 HEADINGS. The captions and section and paragraph headings used in
this Agreement are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement.
20.10 ATTORNEYS' FEES. If any party to this Agreement brings an action
against the other party to enforce its rights under this Agreement, the
prevailing party shall be entitled to recover its costs and expenses,
including without limitation, attorneys' fees and costs incurred in
connection with such action, including any appeal of such action.
20.11 SEVERABILITY. If the application of any provision or provisions of
this Agreement to any particular facts of circumstances shall be held to
be invalid or unenforceable by any court of competent jurisdiction,
then: (i) the validity and enforceability of such provision or
provisions as applied to any other particular facts or circumstances and
the validity of other provisions of this Agreement shall not in any way
be affected or impaired thereby, and (ii) such provision or provisions
shall be reformed without further
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<PAGE> 39
action by the parties hereto and only to the extent necessary to make
such provision or provisions valid and enforceable when applied to such
particular facts and circumstances.
20.12 ENTIRE AGREEMENT. This Agreement, including the attachments
hereto, constitute the entire agreement between the parties concerning
the subject matter hereof and supersedes all proposals or prior
agreements whether oral or written, and all communications between the
parties relating to the subject matter of this Agreement and all past
courses of dealing or industry custom.
20.13 NO PRESUMPTIONS. No presumption shall arise in interpreting the
provisions of this Agreement by virtue of the role a party or its
counsel played in drafting this Agreement or any provision hereof.
20.14 ASSIGNMENT AND SUBLICENSES. This Agreement may not be assigned by
either party without the prior written consent of the other party,
except that subject to the provisions of Section 14.4 of this Agreement
permitting termination of this Agreement by either party in the event of
an acquisition or change of control of the other party during the term
of this Agreement: (a) either party shall have the right, without the
other party's consent, to assign this Agreement and its rights and
obligations thereunder to any successor of such party by way of merger
or consolidation or the acquisition of substantially all or a material
portion of the business and assets of the assigning party relating to
this Agreement or the licenses granted pursuant to the definitive
Agreement (a "Successor"); and (b) either party shall have the right,
without the other party's consent, and without limiting any of its other
rights under the licenses, to sublicense any and all licenses granted
pursuant to this Agreement to any Successor. These rights shall be
retained provided that such Successor or sublicensee shall expressly
assume all of the obligations and liabilities of the assigning or
sublicensing party to the other party relating to such definitive
agreement or licenses.
20.15 APPLICABLE LAW. This Agreement shall be governed by the laws of
the State of California.
21.0 DEFINITIONS. As used in this Agreement, the following terms have the
indicated meanings:
21.1 AOL EC SERVICE OPPORTUNITIES are sales opportunities to sell to a
specific business opportunity within a commercial customer, including
both new commerce startup companies and major established companies,
looking to establish EC(2) relationships with AOL, where the essence of
the sale and relationship with AOL is the provision of EC2 services
(including, for example, providing Netcenter services, Netcenter
offerings and/or consumer traffic) and the sale of the Product Suites is
secondary to the transaction.
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CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS (*) DENOTE SUCH OMISSIONS.
21.2 AOL DISTRIBUTED COMMUNICATOR CLIENT or AOL DISTRIBUTED COMMUNICATOR
CLIENT shall have the meaning specified in Section 2.1.
21.3 AOL SERVICE COMPONENTS are software, services or linkages to AOL
Service Offerings, such as, without limitation,***, built-in software
links to AOL default home page, etc.
21.4 AOL SERVICE OFFERINGS means AOL service offerings providing
customers with content, electronic commerce, communication and other
services, such as, without limitation, service portions of AOL services
such***, default home page,***, remote dial-up access, AOL calendar,
etc.
21.5 ASSOCIATED SERVICES means with respect to any software or hardware,
any support, maintenance, training, installation, and other professional
services associated with the applicable software or hardware and any
development and customization services associated with the applicable
software.
21.6 CLIENT SOFTWARE means the New Browser, the OEM Communicator Client,
the Third Party Communicator Client and the AOL Distributed Communicator
Client.
21.7 CLOSING DATE means the date on which the intended merger of AOL and
Odyssey closes in accordance with the Agreement and Plan of Merger
between AOL and Odyssey.
21.8 COLLABORATIVE DEVELOPMENT ACTIVITY means all activities
contemplated under this Agreement to be conducted under Collaborative
Development Work Plans relating to the development of certain software
packages comprising those components of the Product Suites that are to
be developed collaboratively by the parties.
21.9 COLLABORATIVE DEVELOPMENT WORK PLANS shall have the meaning
specified in Section 5.3.5.
21.10 COLLABORATIVE MARKETING AND SALES ACTIVITY means all activities
contemplated under this Agreement related to collaborative marketing and
sales of the Product Suites, including all activities under the
Marketing and Sales Plans
21.11 COLLABORATIVE SOFTWARE means all software developed through
Collaborative Development Activity, including without limitation the OEM
Communicator Client, the Third Party Communicator Client, the New
Browser and the Network Application and Server Software. Collaborative
Software does not include the Netcenter, the AOL
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Distributed Communicator Client, the AOL Service Components, the AOL
Service Offerings, or the Sun Systems Platform. Collaborative Software
does not include the Existing Netscape Software except to the extent
that such Existing Netscape Software is modified or enhanced through
Collaborative Development Activity to create a derivative work based on
such Existing Netscape Software.
21.12 DESIGNATED COLLABORATIVE SOFTWARE means the Collaborative Software
other than the Third Party Communicator Client.
21.13 DESIGNATED PRODUCTS shall have the meaning specified in Section
14.7.1.
21.14 DEPUTY LEAD EXECUTIVES for collaborative development activity
shall have the meaning specified in Section 5.3.
21.15 DEPUTY LEAD EXECUTIVE for collaborative marketing and sales
activity shall have the meaning specified in Section 5.4.
21.16 EC(2) shall have the meaning specified in Section 1.0.
21.17 EXECUTIVE REPRESENTATIVE shall have the meaning specified in
Section 5.1.
21.18 EXISTING NETSCAPE SOFTWARE means all Netscape client and server
software (including without limitation development tools, tests and
other development components) in existence as of the Closing Date, and
any maintenance upgrades and new releases of such software, if any,
which were already in progress at Netscape, provided such upgrades or
releases are completed and either scheduled to be commercially released
by AOL or actually released by AOL within a period of three (3) months
following the Closing Date. Existing Netscape Software does not include
any software developed pursuant to Collaborative Development Activity
contemplated under this Agreement and does not include the Third Party
Communicator Client or AOL Distributed Communicator Client.
21.19 EXISTING NETSCAPE SOFTWARE UPGRADES means all updates,
modifications, enhancements and new releases of the Existing Netscape
Software, if any, which AOL elects to develop based on the Existing
Netscape Software, which AOL develops outside of Collaborative
Development Activities and that therefore do not constitute
Collaborative Software pursuant to this Agreement.
21.20 GROSS MARGIN means gross revenues booked by a party in connection
with the sale and or licensing of software and/or Associated Services
less (a) such party's Cost of Goods associated with such software and/or
Associated Services and (b) sales commissions paid by such party in
connection with the sale or licensing of such software and/or Associated
Services. For purposes of this definition, "Cost of Goods" means, with
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respect to software, costs of goods calculated in accordance with
Generally Accepted Accounting Principles. For purposes of this
definition, "Cost of Goods" means, with respect to Associated Services,
all personnel and associated costs of providing such services,
calculated in accordance with generally accepted accounting principles.
21.21 JAVA PLATFORM means the Java Virtual Machine and, with respect to
any particular level or implementation of Java technology, such as, by
way of example, the Java Development Kit or Personal Java, those Java
classes required in the Sun specification for such level or
implementation of the Java Platform technology.
21.22 JRE shall have the meaning specified in Section 3.6.
21.23 LEAD EXECUTIVES for collaborative development shall have the
meaning specified in Section 5.3.
21.24 LEAD EXECUTIVE for collaborative marketing and sales shall have
the meaning specified in Section 5.4.
21.25 MARKETING AND SALES PLAN shall have the meaning specified in
Section 5.4.1.
21.26 MC shall have the meaning specified in Section 5.3.1.
21.27 MINIMUM COMMITMENT shall have the meaning specified in Section
4.5.
21.28 NEW BROWSER shall have the meaning specified in Section 2.4.
21.29 NETCENTER means the web site(s) operated and branded by Netscape
as it may change from time to time, but which currently includes web
site hosting, search engine capabilities, free email, and a variety of
content channels covering sports, finance, entertainment and other
topics and service offerings.
21.30 OEM COMMUNICATOR CLIENT shall have the meaning specified in
Section 2.3.
21.31 PRODUCT SUITES means suites of products and services assembled and
marketed pursuant to the Marketing and Sales Plan, which may include the
Third Party Communicator Client, the OEM Communicator Client, the New
Browser, the Network Application and Server Software, and any other
software assembled and marketed pursuant to the Marketing and Sales
Plan, as well as communication services, directory services, commerce
servers, application servers, electronic mail, electronic collaboration
software, web servers, proxy servers and other related software.
21.32 RELEASE means, with respect to any software product, the first
commercially released version of such product and any subsequent
commercially released versions of
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such product incorporating modifications, updates, enhancements,
corrections, patches and/or improvements.
21.33 SDK shall have the meaning specified in Section 2.4.
21.34 SE shall have the meaning specified in Section 5.4.2.
21.35 SOFTWARE LICENSE means a non-exclusive, irrevocable, perpetual,
worldwide, royalty-free license, which (except as otherwise specified in
this Agreement) survives termination of this Agreement, to use, modify,
publish, reproduce, distribute, transmit, display and perform, through
any and all methods and technologies now known or hereafter invented, in
source or binary form, in whole or in part, alone or with other software
or technology including the right to sublicense such rights through
multiple tiers of distribution and being subject only to the provisions
specifically contained in this Agreement on license fees during the term
of this Agreement and permitted fields of use during and after the term
of this Agreement, as applicable.
21.36 SYSTEMS PLATFORM means those platforms comprising software and
hardware on which the Product Suites operate, whether Sun's or a third
party's and shall include, as applicable, Microsoft Windows NT, HP-UX,
IBM AIX and Linux in addition to Sun's software and hardware.
21.37 THIRD PARTY COMMUNICATOR CLIENT shall have the meaning specified
in Section 2.2.
21.38 TLDA means the Technology License and Distribution Agreement
entered into between Sun and AOL concurrently herewith.
21.39 SUN SYSTEMS PLATFORM means the Sun software and Sun hardware on
which the Product Suites operate.
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IN WITNESS WHEREOF, the parties have executed this Strategic Development and
Marketing Agreement this 23rd day of November, 1998.
AMERICA ONLINE, INC. SUN MICROSYSTEMS, INC.
By: /s/ DAVID M. COLBURN By: /s/ WILLIAM J. RADUCHEL
-------------------------------- --------------------------------------
David M. Colburn William J. Raduchel
Senior Vice President, Chief Strategy Officer
Business Affairs
44
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<TOTAL-COSTS> 2,563,547
<OTHER-EXPENSES> 2,137,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 609,785
<INCOME-TAX> 234,824
<INCOME-CONTINUING> 374,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,961
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.93
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| JCI | https://www.sec.gov/Archives/edgar/data/833444/0000950135-99-000797.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000950135-99-000797.txt : 19990217
<SEC-HEADER>0000950135-99-000797.hdr.sgml : 19990217
ACCESSION NUMBER: 0000950135-99-000797
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TYCO INTERNATIONAL LTD /BER/
CENTRAL INDEX KEY: 0000833444
STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569]
IRS NUMBER: 000000000
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13836
FILM NUMBER: 99541714
BUSINESS ADDRESS:
STREET 1: THE GIBBONS BUILDING
STREET 2: 10 QUEENS STREET SUITE 301
CITY: HAMILTON HM 12 BERMU
STATE: D0
BUSINESS PHONE: 4412928674
MAIL ADDRESS:
STREET 1: C/O TYCO INTERNATIONAL (US) INC
STREET 2: ONE TYCO PARK
CITY: EXETER
STATE: NH
ZIP: 03833
FORMER COMPANY:
FORMER CONFORMED NAME: ADT LIMITED
DATE OF NAME CHANGE: 19930601
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>TYCO INTERNATIONAL LTD.
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
0-16979
(COMMISSION FILE NUMBER)
------------------------
TYCO INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
BERMUDA NOT APPLICABLE
(JURISDICTION OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
THE GIBBONS BUILDING, 10 QUEEN STREET, SUITE 301, HAMILTON, HM11, BERMUDA
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
441-292-8674*
(REGISTRANT'S TELEPHONE NUMBER)
------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
[X] No [ ].
The number of shares of common stock outstanding as of February 12,
1999 was 652,110,358.
------------------------
* The Executive Offices of the Registrant's principal United States
subsidiary, Tyco International (US) Inc., are located at One Tyco Park,
Exeter, New Hampshire 03833. The telephone number there is (603)
778-9700.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I -- FINANCIAL INFORMATION:
Item 1 -- Financial Statements --
Consolidated Balance Sheets -- December 31, 1998
(unaudited) and September 30, 1998.................... 1
Consolidated Statements of Operations for the Quarters
ended December 31, 1998
and 1997 (unaudited)................................. 2
Consolidated Statements of Cash Flows for the Quarters
ended December 31, 1998
and 1997 (unaudited)................................. 3
Notes to Consolidated Financial Statements
(unaudited)........................................... 4-10
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Operating Results........................... 11-14
PART II -- OTHER INFORMATION:
Item 6 -- Exhibits and Reports on Form 8-K.................. 15
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(IN MILLIONS, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 834.2 $ 836.9
Accounts receivable, less allowance for doubtful
accounts of $266.9 at December 31, 1998 and $274.6 at
September 30, 1998..................................... 2,823.7 2,418.5
Contracts in process.................................... 630.8 565.3
Inventories............................................. 1,838.8 1,706.6
Deferred income taxes................................... 558.0 646.3
Prepaid expenses and other current assets............... 389.6 316.3
--------- ---------
7,075.1 6,489.9
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land.................................................... 223.9 197.0
Buildings............................................... 1,232.6 1,021.0
Subscriber systems...................................... 2,541.8 2,171.5
Machinery and equipment................................. 2,790.9 2,554.6
Leasehold improvements.................................. 198.5 264.5
Construction in progress................................ 378.2 269.9
Accumulated depreciation................................ (2,864.3) (2,319.1)
--------- ---------
4,501.6 4,159.4
--------- ---------
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 7,767.9 7,006.5
LONG-TERM INVESTMENTS....................................... 138.0 141.6
DEFERRED INCOME TAXES....................................... 363.2 296.7
OTHER ASSETS................................................ 571.2 628.5
--------- ---------
TOTAL ASSETS........................................ $20,417.0 $18,722.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable and current maturities of long-term
debt................................................... $ 250.0 $ 355.9
Accounts payable........................................ 1,146.1 1,340.4
Accrued expenses and other current liabilities.......... 2,633.5 2,660.7
Contracts in process -- billings in excess of costs..... 434.3 332.9
Deferred revenue........................................ 272.3 260.6
Income taxes............................................ 573.3 591.5
Deferred income taxes................................... 19.4 12.5
--------- ---------
5,328.9 5,554.5
--------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 7,100.9 5,254.3
OTHER LONG-TERM LIABILITIES................................. 628.1 631.8
DEFERRED INCOME TAXES....................................... 86.1 82.4
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 1,503,750,000 shares
authorized; 648,690,353 shares outstanding at December 31,
1998 and 645,883,118 shares outstanding at September 30,
1998, net of 1,382,758 and 3,371,003 shares owned by
subsidiaries at December 31, 1998 and September 30, 1998,
respectively.............................................. 129.7 129.2
Capital in excess:
Share premium........................................... 4,128.7 4,032.8
Contributed surplus, net of deferred compensation of
$51.0 at December 31, 1998 and $46.3 at September 30,
1998................................................... 2,849.4 2,850.5
Retained earnings........................................... 369.1 413.7
Accumulated other comprehensive income...................... (203.9) (226.6)
--------- ---------
7,273.0 7,199.6
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $20,417.0 $18,722.6
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
1
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED DECEMBER 31,
----------------------
1998 1997
-------- --------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
NET SALES................................................... $3,819.6 $2,990.0
Cost of sales............................................... 2,350.4 1,910.3
Selling, general and administrative expenses................ 820.5 647.9
Merger, restructuring and other non-recurring charges....... 434.9 12.0
Charges for the impairment of long-lived assets............. 76.0 --
-------- --------
OPERATING INCOME............................................ 137.8 419.8
Interest expense, net....................................... (95.6) (39.6)
-------- --------
Income before income taxes and extraordinary item........... 42.2 380.2
Income taxes................................................ (68.2) (124.4)
-------- --------
(Loss) income before extraordinary item..................... (26.0) 255.8
Extraordinary item, net of taxes of $1.0 and $0.5,
respectively.............................................. (2.4) (0.9)
-------- --------
NET (LOSS) INCOME........................................... $ (28.4) $ 254.9
======== ========
BASIC (LOSS) EARNINGS PER COMMON SHARE:
(Loss) income before extraordinary item..................... $ (.04) $ .42
Extraordinary item, net of taxes............................ -- --
Net (loss) income........................................... (.04) .42
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
(Loss) income before extraordinary item..................... $ (.04) $ .41
Extraordinary item, net of taxes............................ -- --
Net (loss) income........................................... (.04) .41
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic....................................................... 646.7 602.9
Diluted..................................................... 646.7 626.8
CASH DIVIDENDS PER COMMON SHARE (SEE NOTE 6)................ $ .025 $ .025
</TABLE>
See notes to consolidated financial statements (unaudited).
2
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED DECEMBER 31,
---------------------
1998 1997
--------- ------
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (28.4) $254.9
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Restructuring and other non-recurring charges.......... 142.9 12.0
Charges for the impairment of long-lived assets........ 76.0 --
Depreciation........................................... 137.2 118.1
Goodwill and other intangible amortization............. 65.1 39.6
Deferred income taxes.................................. 65.5 58.7
Other non-cash items................................... 10.0 (17.9)
Changes in assets and liabilities net of the effects of
acquisitions:
Accounts receivable and contracts in process...... (262.0) (10.6)
Inventories....................................... (76.2) (7.6)
Prepaid expenses and other current assets......... (39.8) (40.9)
Accounts payable, accrued expenses and other
current liabilities............................. (367.7) (184.9)
Income taxes...................................... (23.1) (9.5)
Deferred revenue.................................. 10.6 (6.5)
Other............................................. (93.9) (52.6)
--------- ------
Net cash (used in) provided by operating activities.... (383.8) 152.8
--------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (216.3) (163.0)
Purchase of leased property (Note 2)........................ (234.0) --
Acquisition of businesses, net of cash acquired............. (831.8) (103.3)
Other....................................................... (3.5) (9.4)
--------- ------
Net cash used in investing activities.................. (1,285.6) (275.7)
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) on long-term debt and lines of
credit.................................................... 1,606.7 (39.1)
Dividends paid.............................................. (16.3) (16.4)
Proceeds from exercise of options and warrants.............. 96.4 152.7
Other....................................................... (20.1) (2.4)
--------- ------
Net cash provided by financing activities.............. 1,666.7 94.8
--------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (2.7) (28.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 836.9 411.2
--------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 834.2 $383.1
========= ======
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein include the
consolidated accounts of Tyco International Ltd. (the "Company" or "Tyco"), a
company incorporated in Bermuda, and its subsidiaries. The financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 ("Form 10-K") and the financial statements and notes thereto
included in the Company's Current Report on Form 8-K filed on December 10, 1998
("Form 8-K"). As described more fully in Note 2, on October 1, 1998, Tyco merged
with United States Surgical Corporation ("USSC"). As the merger with USSC was
consummated subsequent to Tyco's year end, the Form 8-K was filed to present
supplemental consolidated financial statements reflecting the combination of
Tyco and USSC for all periods presented in accordance with the pooling of
interests method of accounting. Upon publication of the Company's consolidated
financial statements for a period including October 1, 1998, the supplemental
consolidated financial statements included in the Company's Form 8-K became the
historical consolidated financial statements of the Company.
The consolidated financial statements presented herein have also been
prepared following the pooling of interests method of accounting for the merger
with USSC and therefore reflect the combined financial position, operating
results and cash flows of Tyco and USSC as if they had been combined for all
periods presented.
The accompanying financial statements have not been examined by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. Certain prior period
amounts have been reclassified to conform with the current period presentation.
2. MERGERS
On October 1, 1998, Tyco consummated a merger with USSC. A total of
approximately 59.2 million shares were issued to the former shareholders of
USSC.
Aggregate fees and expenses related to the merger and to the integration of
the combined companies have been expensed in the accompanying consolidated
statement of operations for the quarter ended December 31, 1998, as required
under the pooling of interests method of accounting. This includes transaction
costs of approximately $53.3 million consisting of legal, printing, accounting,
financial advisory services and other direct expenses. It also includes charges
of approximately $368.5 million to reflect the combination of the companies,
including severance costs, integration costs, the costs associated with the
elimination of excess facilities and the satisfaction of certain liabilities,
and $71.5 million for the impairment of long-lived assets. See Notes 7 and 8.
In connection with the merger, the Company assumed an operating lease for
USSC's North Haven facilities. In December 1998, the Company assumed the debt
related to the North Haven property of approximately $211 million. The
assumption of the debt combined with the settlement of certain other obligations
in the amount of $23 million resulted in the Company acquiring ownership of the
North Haven property. The total cost incurred to acquire the property of $234
million was recorded on the balance sheet at December 31, 1998.
On November 22, 1998, a subsidiary of Tyco entered into a definitive merger
agreement for the acquisition of AMP Incorporated ("AMP"). It is estimated that
Tyco will issue up to approximately 186.0 million common shares for delivery by
the subsidiary to the former shareholders of AMP in the merger. The actual
number of shares will be based on Tyco's weighted average stock price for a
fifteen day trading period ending four trading days prior to AMP's shareholder
vote on the merger. AMP, with annual revenues of
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
approximately $5.5 billion, designs, manufactures and markets electronic,
electrical and electro-optic connection devices and associated application tools
and machines. The acquisition of AMP, which will be accounted for as a pooling
of interests, is subject to the approval of AMP's shareholders. Issuance of the
Tyco stock to be delivered to AMP shareholders in the merger is subject to
approval of Tyco shareholders. The transaction is expected to close in April
1999.
3. ACQUISITIONS
During the first quarter of fiscal 1999, the Company purchased businesses
in its Healthcare and Specialty Products, Fire and Security Services and Flow
Control Products segments for an aggregate of $972.2 million, including $831.8
million in cash, net of cash acquired, and the assumption of approximately
$140.4 million in debt. The acquisitions were made utilizing cash on hand and
borrowings under the Company's bank credit agreement and uncommitted lines of
credit. Each of these acquisitions was accounted for as a purchase and the
results of operations of the acquired companies have been included in the
consolidated results of the Company from their respective acquisition dates. As
a result of the acquisitions, approximately $827.3 million in goodwill and other
intangibles was recorded by the Company, which reflects the adjustments
necessary to allocate the individual purchase prices to the fair value of assets
acquired, liabilities assumed and additional purchase liabilities recorded.
The fiscal 1999 first quarter acquisitions include the acquisition of
Graphic Controls Corporation, which was purchased for approximately $460
million, including the assumption of certain outstanding debt. Graphic Controls,
a leading designer, manufacturer, marketer and distributor of disposal medical
products, will be integrated with Ludlow Technical Products within the Tyco
Healthcare Group.
Additional purchase liabilities recorded during fiscal 1999 include
approximately $28.2 million for transaction and other direct costs, $42.8
million for severance and related costs and $25.7 million for costs associated
with the shut down and consolidation of certain acquired facilities. The $42.8
million for severance costs and the $25.7 million for the shut down and
consolidation of facilities primarily relate to the acquisition of Graphic
Controls discussed above. These costs include employee termination benefits for
approximately 625 employees located throughout the United States, consisting of
approximately 370 manufacturing and distribution employees, 140 sales and
marketing associates, 65 technical support staff and 50 administrative
personnel. The costs associated with the shut down of facilities primarily
relate to the closing of three large manufacturing plants and, to a lesser
extent, the consolidation of corporate facilities, sales offices and other
locations. At December 31, 1998, approximately 130 employees had been
terminated. None of the manufacturing plants was shut down as of December 31,
1998.
In connection with acquisitions accounted for as purchases consummated
during and prior to the quarter ended December 31, 1998, liabilities for
approximately $45.7 million in transaction and other costs, $162.2 million for
severance and related costs and $299.2 million for the shutdown and
consolidation of acquired facilities remained on the balance sheet at December
31, 1998. The Company expects that the termination of employees and
consolidation of facilities related to these acquisitions will be substantially
complete within one year of the related dates of acquisition.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed as of the
beginning of the periods presented. The pro forma data give effect to actual
operating results prior to the acquisitions and adjustments to interest expense,
goodwill amortization and income taxes. No effect has been given to cost
reductions or operating synergies in this presentation. These pro forma amounts
do not purport to be indicative of the results that would have actually been
obtained if the acquisitions had occurred as of the beginning of the periods
presented or that may be obtained in the future. The pro forma data do not give
effect to acquisitions completed subsequent to December 31, 1998.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
QUARTER ENDED DECEMBER 31,
DECEMBER 31, 1998 1997
----------------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales........................................... $3,865.5 $3,111.3
(Loss) income before extraordinary item............. (30.5) 242.8
Net (loss) income................................... (32.9) 241.9
Net (loss) income per common share:
Basic.......................................... (.05) .40
Diluted........................................ (.05) .39
</TABLE>
4. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(IN MILLIONS)
<S> <C> <C>
Bank and acceptance facilities............................. $ -- $ 0.8
Bank credit agreement...................................... 2,162.0 1,359.0
Bank credit facilities..................................... 22.1 206.9
Uncommitted lines of credit................................ 125.0 --
8.125% public notes due 1999............................... 10.5 10.5
8.25% senior notes due 2000................................ 9.5 9.5
6.5% public notes due 2001................................. 299.0 299.0
6.125% public notes due 2001............................... 747.3 747.0
9.25% senior subordinated notes due 2003................... -- 14.1
5.875% private placement notes due 2004.................... 397.4 --
6.375% public notes due 2004............................... 104.6 104.6
6.375% public notes due 2005............................... 742.8 742.6
12.0% notes due 2005 - Graphic Controls.................... 75.0 --
6.125% private placement notes due 2008.................... 394.5 --
7.25% senior notes due 2008................................ 300.0 300.0
Zero coupon Liquid Yield Option Notes due 2010............. 114.0 115.3
6.25% public Dealer Remarketable Securities ("Drs.") due
2013..................................................... 762.1 762.8
9.5% public debentures due 2022............................ 49.0 49.0
8.0% public debentures due 2023............................ 50.0 50.0
7.0% public notes due 2028................................. 492.2 492.1
Financing lease obligation................................. 76.2 76.5
Other...................................................... 417.7 270.5
-------- --------
Total debt....................................... 7,350.9 5,610.2
Less current portion....................................... 250.0 355.9
-------- --------
Long-term debt............................................. $7,100.9 $5,254.3
======== ========
</TABLE>
In October 1998, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiary of the Company, issued $800 million of debt in a private placement
offering consisting of two series of Notes: $400 million of 5.875% Notes due
November 2004 and $400 million of 6.125% Notes due November 2008. Interest on
each series of Notes is payable on May 1 and November 1 of each year, beginning
May 1, 1999. The Notes are fully and unconditionally guaranteed by Tyco. The net
proceeds of approximately $791.7 million were used to repay borrowings under
TIG's $2.25 billion bank credit facility. At the same time, TIG also entered
into an interest rate swap agreement with a notional amount of $400 million to
hedge the fixed rate terms of the 6.125% Notes due 2008. Under this agreement,
which expires in November 2008, TIG will receive payments at a fixed rate of
6.125% and will make floating rate payments based on LIBOR, as defined therein.
During the quarters ended December 31, 1998 and 1997, respectively, 6,631
and 124,264 of the Liquid Yield Option Notes ("LYONs") with a carrying value of
$3.1 million and $55.1 million were exchanged for
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
180,204 and 3,376,990 common shares of the Company. The extraordinary item of
$2.4 million in the quarter ended December 31, 1998 relates to the write-off of
net unamortized deferred financing costs related to the LYONs and deferred costs
associated with USSC's revolver facility fees which the Company refinanced. The
extraordinary item of $0.9 million in the quarter ended December 31, 1997 was
the write-off of net unamortized deferred financing costs related to the LYONs.
Under TIG's bank credit agreement, the Company is required to meet certain
covenants, none of which is considered restrictive to the operations of the
Company.
5. EARNINGS PER COMMON SHARE
The reconciliations between basic and diluted (loss) earnings per common
share are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------- -----------------------------
PER SHARE PER SHARE
(LOSS) SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC (LOSS) INCOME PER COMMON SHARE
Net (loss) income available to common shareholders... $(28.4) 646.7 $(.04) $254.9 602.9 $.42
Stock options and warrants........................... -- -- -- 10.8
Exchange of LYONs debt............................... -- -- 2.2 13.1
------ ----- ------ -----
DILUTED (LOSS) INCOME PER COMMON SHARE
Net (loss) income available to common shareholders
plus assumed conversions........................... $(28.4) 646.7 $(.04) $257.1 626.8 $.41
====== ===== ====== =====
</TABLE>
The computation of diluted loss per common share in the quarter ended
December 31, 1998 excludes the effect of the assumed exercise of all outstanding
stock options and warrants for approximately 42.1 million shares and the assumed
exchange of outstanding LYONs for approximately 6.5 million shares because the
effect would be anti-dilutive. The computation of diluted income per common
share in the quarter ended December 31, 1997 excludes the effect of the assumed
exercise of approximately 16.1 million stock options that were outstanding as of
December 31, 1997 because the effect would be anti-dilutive.
6. CASH DIVIDENDS PER COMMON SHARE
Tyco paid a quarterly cash dividend of $0.025 per common share in the
quarters ended December 31, 1998 and 1997. Prior to its merger with Tyco, USSC
paid a dividend of $0.04 per share in the quarter ended December 31, 1997.
7. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the first quarter of fiscal 1999, the Company recorded merger,
restructuring and other non-recurring charges of $434.9 million primarily
related to the merger with USSC (Notes 1 and 2). Transaction costs of $53.3
million to effect the merger consists of legal, accounting, financial advisory
services, and other costs payable at the effective time of the merger, as well
as other direct expenses. These were expensed as required under the pooling of
interests method of accounting. Costs incurred to combine USSC's disposable
medical products business with the related business of Tyco include the cost of
announced workforce reductions of $124.8 million involving the elimination of
approximately 800 positions in the United States, 200 positions in Puerto Rico
and 600 positions in Europe; the combination of certain facilities of $51.8
million involving the closure of 20 manufacturing and distribution facilities in
Europe and the shut down and consolidation of 30 sales and administrative
offices located primarily throughout the United States and/or Europe; lease
termination costs of $156.8 million; and other costs of $35.1 million relating
to the consolidation of certain product lines and other non-recurring charges.
Approximately $183.4 million of accrued merger and restructuring costs are
included in other current liabilities at December 31, 1998. The Company
currently anticipates that the restructuring will be substantially completed by
December 31, 1999.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
During the first quarter of fiscal 1998, the Company recorded restructuring
charges of $12.0 million related to employee severance costs, facility disposals
and asset write-downs as part of USSC's cost cutting objectives, which was
substantially completed as of December 31, 1998.
8. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
During the first quarter of fiscal 1999, the Company recorded charges of
$76.0 million for the impairment of long-lived assets in Tyco's Healthcare and
Specialty Products segment. This charge primarily relates to the combination of
property, plant and equipment in USSC's operations in the United States and
Europe with that of Tyco's and was determined following a review of the carrying
value of their assets.
9. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No.130, "Reporting Comprehensive
Income." SFAS No.130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. The purpose of
reporting comprehensive income is to report a measure of all changes in equity,
other than transactions with owners. Total comprehensive (loss) income was
$(5.6) million and $206.6 million for the quarters ended December 31, 1998 and
1997, respectively. Components of other comprehensive income (loss) include
foreign currency translation adjustments of $22.8 million and $(46.3) million
and unrealized loss on marketable securities of $0 and $(2.0) million for the
quarters ended December 31, 1998 and 1997, respectively. Certain prior year
amounts within shareholders' equity have been reclassified as Accumulated Other
Comprehensive Income to comply with the reporting requirements of SFAS No. 130.
10. CONSOLIDATED SEGMENT DATA
Selected information for the Company's four industry segments is as follows
(in millions):
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES:
Healthcare and Specialty Products........................... $1,342.8 $ 979.1
Fire and Security Services.................................. 1,384.3 1,126.6
Flow Control Products....................................... 652.5 550.0
Electrical and Electronic Components........................ 440.0 334.3
-------- --------
$3,819.6 $2,990.0
======== ========
OPERATING INCOME (LOSS):
Healthcare and Specialty Products........................... $ (237.1)(1) $ 145.3(2)
Fire and Security Services.................................. 205.4 146.4
Flow Control Products....................................... 93.5 71.9
Electrical and Electronic Components........................ 95.0 71.6
Corporate and other expenses................................ (19.0) (15.4)
-------- --------
$ 137.8 $ 419.8
======== ========
</TABLE>
- ---------------
(1) Includes merger, restructuring and other non-recurring charges of $434.9
million and charges for the impairment of long-lived assets of $76.0
million, primarily related to the USSC merger.
(2) Includes restructuring charges of $12.0 million related to USSC's
operations.
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
11. INVENTORIES
Inventories are classified as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Purchased materials and manufactured parts............ $ 577.5 $ 566.0
Work in process....................................... 324.0 295.4
Finished goods........................................ 937.3 845.2
-------- --------
$1,838.8 $1,706.6
======== ========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract
completion and product performance. In addition, the Company is involved in
various stages of investigation and cleanup related to environmental remediation
matters at a number of sites. In the opinion of management, such obligations
will not materially affect the Company's financial position or results of
operations.
13. TYCO INTERNATIONAL GROUP S.A. ("TIG")
During fiscal 1998, TIG issued $2.75 billion of public debt securities,
which are fully and unconditionally guaranteed by Tyco. TIG, a Luxembourg
holding company, is the parent company of substantially all the operating
subsidiaries of the Company. The Company has not included separate financial
statements and footnotes for TIG because of the full and unconditional guarantee
by Tyco of TIG's debt obligations and the Company's belief that such information
is not material to holders of the debt securities. The following presents
consolidated summary financial information for TIG and its subsidiaries, as if
TIG and its current organizational structure has been in place for all periods
presented.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
<S> <C> <C>
Total current assets...................................... $ 7,175.2 $ 6,639.5
Total non-current assets.................................. 13,215.7 12,090.0
Total current liabilities................................. 5,299.4 5,519.5
Total non-current liabilities............................. 8,020.9 6,401.5
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................... $3,819.2 $2,990.0
Gross profit................................................ 1,466.2 1,079.7
(Loss) income before extraordinary item(1).................. (184.4) 241.5
Net (loss) income(2)........................................ (186.8) 240.6
</TABLE>
- ---------------
(1) Loss before extraordinary item in the quarter ended December 31, 1998
includes merger, restructuring and other non-recurring charges of $434.9
million and charges for the impairment of long-lived assets of $76.0 million
primarily related to the USSC merger. Income before extraordinary item in
the quarter ended December 31, 1997 includes restructuring charges of $12.0
million related to USSC's operations.
(2) Extraordinary item was comprised of losses on the write-off of net
unamortized deferred financing costs relating to the early extinguishment of
debt.
14. SUBSEQUENT EVENTS
In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and
$800 million of its 6.875% notes due 2029 in a public offering. Interest is
payable semi-annually in January and July. Repayment of amounts outstanding
under these securities is fully and unconditionally guaranteed by Tyco (Note
13). The
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
net proceeds of approximately $1.17 billion were used to repay borrowings under
TIG's $2.25 billion bank credit facility. At the same time, TIG also entered
into an interest rate swap agreement to hedge the fixed rate terms of the $400
million notes due 2009. Under the agreement, which expires in January 2009, TIG
will receive payments at a fixed rate of 6.125% and will make floating rate
payments based on an average of three different LIBO rates, as defined, plus a
spread.
In January 1999, TIG initiated a commercial paper program under which it
can issue notes with an aggregate face value of up to $1.75 billion from time to
time outstanding. The Company expects to increase the size of the commercial
paper program to $3.25 billion in connection with the increase of TIG's credit
agreement discussed below. The notes are unsecured and are fully and
unconditionally guaranteed by Tyco. Proceeds from the sale of the notes will be
used for working capital and other corporate purposes. The Company is required
to maintain an available unused balance under its bank credit agreement
sufficient to support amounts outstanding under this commercial paper program.
In February 1999, TIG renegotiated its $2.25 billion credit agreement with
a group of commercial banks, giving it the right to borrow up to $3.25 billion
until February 11, 2000, with the option to extend to February 11, 2001, and
borrow up to an additional $0.5 billion until February 12, 2003. TIG has the
option to increase the $3.25 billion part of the credit facility up to $4.0
billion. Interest payable on borrowings is variable based upon TIG's option to
select a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a certificate
of deposit rate plus margins ranging from 0.535% to 0.555%, or a base rate, as
defined. If the outstanding principal amount of loans equals or exceeds 25% of
the commitments, the Eurodollar and certificate of deposit margins are increased
by 0.125%. Repayments of amounts outstanding under this agreement are guaranteed
by the Company. The Company plans to use the $3.25 billion part of the credit
facility principally to fully support its commercial paper program discussed
above and therefore expects this part to remain largely undrawn.
On February 5, 1999, USSC completed a tender offer for its 7 1/4% Senior
Notes due 2008 in which $292 million of the $300 million principal amount of the
notes outstanding were tendered. Graphic Controls has made an offer, scheduled
to expire February 23, 1999, to purchase its 12% Senior Subordinated Notes due
2005, in which all $75 million principal amount of the notes outstanding have
been tendered. See Note 4.
10
<PAGE> 13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS
On October 1, 1998, Tyco consummated a merger with United States Surgical
Corporation ("USSC"). The transaction was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements reflect the
combined financial position, results of operations and cash flows of Tyco and
USSC for all periods presented. See Notes 1 and 2 to the Consolidated Financial
Statements presented herein.
RESULTS OF OPERATIONS
Information for all periods presented below reflects the grouping of the
Company's businesses into four business segments consisting of Healthcare and
Specialty Products, Fire and Security Services, Flow Control Products, and
Electrical and Electronic Components.
Overview
(Loss) income before extraordinary item was $(26.0) million, or $(.04) per
share on a diluted basis, for the quarter ended December 31, 1998, as compared
to $255.8 million, or $.41 per diluted share, for the quarter ended December 31,
1997. During the quarter ended December 31, 1998, the Company incurred an
after-tax charge of $427.6 million ($.65 per share) for merger and transaction
costs, write-offs and integration costs primarily associated with the USSC
merger. During the quarter ended December 31, 1997, the Company incurred an
after-tax charge of $9.2 million ($.01 per share) for restructuring charges in
USSC's operations. Excluding these non-recurring charges, income before
extraordinary item rose 51.5% to $401.6 million, or $.61 per diluted share, for
the quarter ended December 31, 1998, as compared to $265.0 million, or $.43 per
diluted share, for the quarter ended December 31, 1997. The increase was
attributable to increased sales, margin improvements and results of acquired
companies in each of the Company's business segments.
After each acquisition, acquired companies are immediately integrated, and
Tyco does not separately track post-acquisition financial results. Accordingly,
the impact of certain acquired companies in the following analysis is based on
estimates and assumes that acquisitions were completed as of the beginning of
the periods discussed.
Quarter ended December 31, 1998 Compared to Quarter ended December 31, 1997
Sales increased 27.7% during the quarter ended December 31, 1998 to $3.82
billion from $2.99 billion in the quarter ended December 31, 1997.
Sales of the Healthcare and Specialty Products group increased $363.7
million to $1.34 billion, or 37.1%, principally due to increased sales of the
Tyco Healthcare Group. This increase was primarily due to the inclusion of
Sherwood-Davis & Geck ("Sherwood"), which was acquired in February 1998.
Excluding the impact of Sherwood, sales increased an estimated $118.4 million,
or 9.7%.
Sales of the Fire and Security Services group increased $257.7 million to
$1.38 billion, or 22.9%, principally due to increased sales in the Company's
electronic security services business in the United States and, to a lesser
extent, in the North American fire protection operations and the European fire
protection and security operations. This increase was primarily due to the
higher volume of recurring service revenues and the inclusion of CIPE S.A.
("CIPE"), acquired in May 1998 and Wells Fargo Alarm ("Wells Fargo"), acquired
in June 1998. Excluding the impact of CIPE and Wells Fargo, sales increased an
estimated $130.3 million or 10.4%.
Sales of the Flow Control Products group increased $102.5 million to $652.5
million, or 18.6%, primarily reflecting increased demand for valve products in
North America and Europe and the inclusion of the U.S. Operations of Crosby
Valve, Inc. ("Crosby"), acquired in July 1998, and Rust Environmental and
Infrastructure, Inc. ("Rust"), acquired in September 1998. Excluding the impact
of Crosby and Rust, sales increased an estimated $52.8 million, or 8.8%.
Sales of the Electrical and Electronic Components group increased $105.7
million to $440.0 million, or 31.6%, principally due to increased sales at Tyco
Submarine Systems Ltd ("TSSL"), the inclusion of Sigma
11
<PAGE> 14
Circuits, Inc. ("Sigma"), which was acquired in July 1998, and, to a lesser
extent, increased sales at Tyco Printed Circuit Group. Excluding the impact of
Sigma, sales increased an estimated $82.1 million, or 22.9%
Pre-tax income was $42.2 million for the quarter ended December 31, 1998,
as compared to $380.2 million for the quarter ended December 31, 1997. Pre-tax
income for the quarter ended December 31, 1998 included charges of $434.9
million for merger, restructuring and other non-recurring items and $76.0
million for the impairment of long-lived assets primarily related to the USSC
merger. Pre-tax income for the quarter ended December 31, 1997 included charges
of $12.0 million for restructuring and other non-recurring items related to
USSC's operations. See Notes 7 and 8 to the Consolidated Financial Statements.
Excluding these non-recurring charges, pre-tax income increased $160.9 million,
or 41.0%, to $553.1 million. Amortization expense for goodwill and other
intangible assets was $65.1 million for the quarter ended December 31, 1998 and
$39.6 million for the quarter ended December 31, 1997. The following analysis is
presented exclusive of these non-recurring charges to better portray
management's view of the comparability of continuing operations.
Operating profits for the Healthcare and Specialty Products group increased
$116.5 million to $273.8 million, or 74.1%. Operating profits were 20.4% of
sales in the quarter ended December 31, 1998 as compared to 16.1% in the quarter
ended December 31, 1997. The increase was principally due to increased volume
and margins in the Tyco Healthcare Group, including the effect of the
acquisition of Sherwood, and improved margins at Tyco Plastics and Adhesives.
Operating profits for the Fire and Security Services increased $59.0
million to $205.4 million, or 40.3%. Operating profits were 14.8% of sales in
the quarter ended December 31, 1998 as compared to 13.0% in the quarter ended
December 31, 1997. The overall increase was primarily due to higher service
volume in the Company's worldwide security and fire protection businesses. The
increase in operating profits as a percentage of sales was due to improved
margins in the European security and fire protection operations.
Operating profits for the Flow Control Products group increased $21.6
million to $93.5 million, or 30.0%. Operating profits were 14.3% of sales in the
quarter ended December 31, 1998 as compared to 13.1% in the quarter ended
December 31, 1997. The increase was due to higher volume and margins in the
Company's European flow control products operations and improved margins at
Mueller and Allied Tube & Conduit.
Operating profits for the Electrical and Electronic Components group
increased $23.4 million to $95.0 million, or 32.7%. Operating profits were 21.6%
of sales in the quarter ended December 31, 1998 and 21.4% in the quarter ended
December 31, 1997. The overall increase was principally due to increased sales
at TSSL and higher margins at Allied Electrical Conduit.
The effect of changes in foreign exchange rates during the quarter ended
December 31, 1998 as compared to the quarter ended December 31, 1997 was not
material to the Company's sales and operating profits.
The effective income tax rate was 27.4% during the quarter ended December
31, 1998 and 32.4% during the quarter ended December 31, 1997. The decrease was
due to higher earnings in domiciles with lower income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
As presented in the Consolidated Statement of Cash Flows, cash used in
operating activities net of the effect of acquired assets and liabilities was
$383.8 million during the first quarter of fiscal 1999. The working capital
acquired as a result of acquisitions during the period is included in the cost
of acquisitions in the Consolidated Statement of Cash Flows. The significant
operating changes in working capital were a $367.7 million decrease in accounts
payable and accrued expenses, which resulted principally from the reduction in
trade accounts payable in the ordinary course of business and spending for
merger, restructuring and other non-recurring costs, and a $262.0 million
increase in accounts receivable and contracts in process. The impact of changes
in foreign exchange rates did not materially affect net working capital during
the quarter.
12
<PAGE> 15
During the first quarter of fiscal 1999, the Company used cash of $831.8
million to acquire companies in its Healthcare and Specialty Products, Fire and
Security Services and Flow Control Products segments, $216.3 million to purchase
property, plant and equipment, $234 million to purchase the USSC North Haven
facilities discussed below and $16.3 million to pay dividends to shareholders.
The Company received proceeds of $96.4 million from the exercise of common share
options.
The source of the cash used for acquisitions was primarily from an increase
in total debt. At December 31, 1998, the Company's total debt was $7.35 billion,
as compared to $5.61 billion at September 30, 1998. The increase resulted
principally from the issuance of $800 million private placement notes discussed
below and borrowings under the Company's bank credit agreement and uncommitted
lines of credit. Shareholders' equity was $7.27 billion, or $11.21 per share, at
December 31, 1998, compared to $7.20 billion, or $11.15 per share, at September
30, 1998. Goodwill and other intangible assets were $7.77 billion at December
31, 1998, compared to $7.01 billion at September 30, 1998. Total debt as a
percent of total capitalization (total debt and shareholders' equity) was 50% at
December 31, 1998 and 44% at September 30, 1998.
In October 1998, TIG issued $800 million of debt in a private placement
offering consisting of two series of Notes: $400 million of 5.875% Notes due
November 2004 and $400 million of 6.125% Notes due November 2008. The Notes are
fully and unconditionally guaranteed by Tyco. The net proceeds of approximately
$791.7 million were used to repay borrowings under TIG's $2.25 billion bank
credit facility. At the same time, TIG also entered into an interest rate swap
agreement to hedge the fixed rate terms of the $400 million Notes due 2008.
Under this agreement, which expires in November 2008, TIG will receive payments
at a fixed rate of 6.125% and will make floating rate payments based on LIBOR,
as defined.
In December 1998, the Company assumed the debt related to USSC's North
Haven facilities of approximately $211 million. The assumption of the debt
combined with the settlement of certain other obligations in the amount of $23
million resulted in the Company acquiring ownership of the North Haven property
for a total cost of $234 million.
In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and
$800 million of its 6.875% notes due 2029 utilizing the capacity under its $3.75
billion public shelf registration statement. Interest is payable semi-annually
in January and July. Repayment of amounts outstanding under these securities is
fully and unconditionally guaranteed by Tyco (See Note 13 to the Consolidated
Financial Statements). The net proceeds of approximately $1.17 billion were used
to repay borrowings under the $2.25 billion bank credit facility. At the same
time, TIG also entered into an interest rate swap agreement to hedge the fixed
rate terms of the $400 million notes due 2009. Under the agreement, which
expires in January 2009, TIG will receive payments at a fixed rate of 6.125% and
will make floating rate payments based on an average of three different LIBO
rates, as defined, plus a spread.
In January 1999, TIG initiated a commercial paper program under which it
can issue notes with an aggregate face value of up to $1.75 billion from time to
time outstanding. The Company expects to increase the size of the Commercial
paper program to $3.25 billion in connection with the increase of TIG's credit
agreement discussed below. The notes are unsecured and are fully and
unconditionally guaranteed by Tyco. Proceeds from the sale of the notes will be
used for working capital and other corporate purposes. The Company is required
to maintain an available unused balance under its bank credit agreement
sufficient to support amounts outstanding under this commercial paper program.
In February 1999, TIG renegotiated its $2.25 billion credit agreement with
a group of commercial banks, giving it the right to borrow up to $3.25 billion
until February 11, 2000, with the option to extend to February 11, 2001, and
borrow up to an additional $0.5 billion until February 12, 2003. TIG has the
option to increase the $3.25 billion part of the credit facility up to $4.0
billion. Interest payable on borrowings is variable based upon TIG's option to
select a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a certificate
of deposit rate plus margins ranging from 0.535% to 0.555%, or a base rate, as
defined. If the outstanding principal amount of loans equals or exceeds 25% of
the commitments, the Eurodollar and certificate of deposit margins are increased
by 0.125%. Repayments of amounts outstanding under this agreement are guaranteed
by the Company. The Company plans to use the $3.25 billion part of the credit
facility principally to fully
13
<PAGE> 16
support its commercial paper program discussed above and therefore expects this
part to remain largely undrawn.
The Company believes that its cash flow from operations together with its
existing credit facilities and other credit arrangements, is adequate to fund
its operations.
BACKLOG
The backlog of unfilled orders was approximately $3.9 billion at December
31, 1998 as compared to $4.2 billion at September 30, 1998. The net decrease
principally resulted from a decrease in backlog in the Company's submarine
systems business, due to the timing of contracts, partially offset by an
increase in backlog at Earth Tech and at the Company's worldwide security and
North American fire protection businesses.
YEAR 2000 COMPLIANCE
Year 2000 compliance programs and system modifications were initiated by
the Company in fiscal 1997 in an attempt to ensure that these systems and key
processes will remain functional. The Company is continuing its assessment of
the potential impact of the Year 2000 on date-sensitive information in computer
software programs and operating systems in its product development, financial
business systems and administrative functions, and has begun implementing
strategies to avoid adverse implications. This objective is expected to be
achieved either by modifying present systems using existing internal and
external programming resources or by installing new systems, and by monitoring
supplier, customer and other third-party readiness. Review of the systems
affecting the Company is progressing. The costs of the Company's Year 2000
program to date have not been material, and the Company does not anticipate that
the costs of any required modifications to its information technology or
embedded technology systems will have a material adverse effect on its financial
position, results of operations or liquidity.
In the event that the Company or material third parties fail to complete
their Year 2000 compliance programs successfully and on time, the Company's
ability to operate its businesses, service customers, bill or collect its
revenues or purchase products in a timely manner could be adversely affected.
Although there can be no assurance that the conversion of the Company's systems
will be successful or that the Company's key third-party relationships will have
successful conversion programs, management does not expect that any such failure
would have a material adverse effect on the financial position, results of
operations or liquidity of the Company. The Company has day-to-day operational
contingency plans, and management is in the process of updating these plans for
possible Year 2000 specific operational requirements.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on the
financial position or results of operations of the Company.
CONVERSION TO THE EURO
On January 1, 1999, 11 European countries began using the "euro" as their
single currency, while still continuing to use their own notes and coins for
cash transactions. Banknotes and coins denominated in euros are expected to be
put in circulation during 2002. Uncertainty exists as to the effect the
introduction of the euro and the conversion of cash in circulation into euros
will have on the marketplace. Tyco conducts a significant amount of business in
these countries. The Company has not yet determined the effect, if any, the euro
will have on its operations.
14
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 364-Day Credit Agreement dated as of February 12, 1999 among Tyco
International Group S.A., the Banks named therein and Morgan
Guaranty Trust Company of New York, as Agent
4.2 Parent Guarantee Agreement (as amended) dated as of February 12,
1999 between Tyco International Ltd. and Morgan Guaranty Trust
Company of New York, as Agent
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the registrant on December 10,
1998 to put on file supplemental consolidated financial statements for the
fiscal year ended September 30, 1998 reflecting the restatement for the merger
with United States Surgical Corporation, which was accounted for as a pooling of
interests.
An amended Current Report on Form 8-K/A was filed by the registrant on
December 11, 1998 to amend Exhibit 99.2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, included in the registrant's Form
8-K filed on December 10, 1998.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TYCO INTERNATIONAL LTD.
/s/ MARK H. SWARTZ
------------------------------------
Mark H. Swartz
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL
OFFICER)
Date: February 16, 1999
16
<PAGE> 19
TYCO INTERNATIONAL LTD.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
4.1 364-Day Credit Agreement dated as of February 12, 1999 among
Tyco International Group S.A., the Banks named therein and
Morgan Guaranty Trust Company of New York, as Agent
4.2 Parent Guarantee Agreement (as amended) dated as of February
12, 1999 between Tyco International Ltd. and Morgan Guaranty
Trust Company of New York, as Agent
27 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1
<SEQUENCE>2
<DESCRIPTION>CREDIT AGREEMENT WITH MRGAN GUARANTY TRUST COMPANY
<TEXT>
<PAGE> 1
EXHIBIT 4.1
CONFORMED COPY
$3,250,000,000
364-DAY CREDIT AGREEMENT
dated as of
February 12, 1999
Tyco International Group S.A.,
Borrower
Morgan Guaranty Trust Company of New York,
Administrative Agent
Bank of America National Trust and Savings Association,
The Chase Manhattan Bank
and Commerzbank AG, New York Branch,
Co-Syndication Agents
J.P. Morgan Securities Inc.,
Arranger
<PAGE> 2
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 1
DEFINITIONS
<S> <C> <C>
SECTION 1.01. Definitions......................................................................1
SECTION 1.02. Types of Borrowings.............................................................11
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend.............................................................12
SECTION 2.02. Notice of Committed Borrowing...................................................12
SECTION 2.03. The Money Market Borrowings.....................................................13
SECTION 2.04. Notice to Banks; Funding of Loans...............................................17
SECTION 2.05. Promissory Notes................................................................18
SECTION 2.06. Maturity of Loans...............................................................18
SECTION 2.07. Interest Rates..................................................................19
SECTION 2.08. Facility Fee....................................................................22
SECTION 2.09. Optional Termination or Reduction of Commitments................................22
SECTION 2.10. Mandatory Termination of Commitments............................................23
SECTION 2.11. Optional Prepayments............................................................23
SECTION 2.12. General Provisions as to Payments...............................................23
SECTION 2.13. Funding Losses..................................................................24
SECTION 2.14. Computation of Interest and Fees................................................24
SECTION 2.15. Regulation D Compensation.......................................................25
SECTION 2.16. Method of Electing Interest Rates...............................................25
SECTION 2.17. Optional Increase in Commitments................................................27
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness...................................................................28
SECTION 3.02. Existing Agreements.............................................................29
SECTION 3.03. Borrowings......................................................................31
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power...................................................32
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention...................................................................32
SECTION 4.03. Binding Effect..................................................................32
SECTION 4.04. Litigation......................................................................33
SECTION 4.05. Not an Investment Company.......................................................33
ARTICLE 5
COVENANTS
SECTION 5.01. Information.....................................................................33
SECTION 5.02. Payment of Obligations..........................................................34
SECTION 5.03. Maintenance of Property; Insurance..............................................34
SECTION 5.04. Conduct of Business and Maintenance of Existence................................35
SECTION 5.05. Compliance with Laws............................................................35
SECTION 5.06. Inspection of Property, Books and Records; Confidentiality......................36
SECTION 5.07. Consolidations, Mergers and Sales of Assets.....................................37
SECTION 5.08. Use of Proceeds.................................................................38
SECTION 5.09. Transactions with Affiliates....................................................38
SECTION 5.10. Subsidiary Guarantors...........................................................39
ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults..............................................................39
SECTION 6.02. Notice of Default...............................................................41
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization...................................................42
SECTION 7.02. Agent and Affiliates............................................................42
SECTION 7.03. Action by Agent.................................................................42
SECTION 7.04. Consultation with Experts.......................................................42
SECTION 7.05. Limits of Liability.............................................................42
SECTION 7.06. Indemnification.................................................................43
SECTION 7.07. Credit Decision.................................................................43
SECTION 7.08. Successor Agent.................................................................43
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 7.09. Agent's Fee.....................................................................44
ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair........................44
SECTION 8.02. Illegality......................................................................45
SECTION 8.03. Increased Cost and Reduced Return...............................................45
SECTION 8.04. Taxes...........................................................................47
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.......................49
SECTION 8.06. Substitution of Bank............................................................50
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices.........................................................................50
SECTION 9.02. No Waivers......................................................................51
SECTION 9.03. Expenses; Indemnification.......................................................51
SECTION 9.04. Sharing of Set-Offs.............................................................52
SECTION 9.05. Amendments and Waivers..........................................................52
SECTION 9.06. Successors and Assigns..........................................................52
SECTION 9.07. Collateral......................................................................55
SECTION 9.08. Governing Law...................................................................55
SECTION 9.09. Counterparts; Integration.......................................................55
SECTION 9.10. Waiver of Jury Trial............................................................55
SECTION 9.11. Judgment Currency...............................................................55
SECTION 9.12. Judicial Proceedings............................................................56
Commitment Schedule
Pricing Schedule
Exhibit A - Promissory Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of Chief Corporate Counsel of the Parent Guarantor
Exhibit F - Opinion of Special Counsel for the Borrower
Exhibit G - Opinion of Special Counsel for the Parent Guarantor
Exhibit H - Opinion of Special Counsel for the Agent
Exhibit I - Assignment and Assumption Agreement
Exhibit J - Form of Parent Guarantee
Exhibit K - Existing Five-Year Agreement Pricing Schedule
</TABLE>
iii
<PAGE> 5
364-DAY CREDIT AGREEMENT
AGREEMENT dated as of February 12, 1999 among TYCO INTERNATIONAL GROUP
S.A., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent.
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"ADJUSTED CD RATE" has the meaning set forth in Section 2.07(b).
"ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Borrower (a "Controlling Person") or
(ii) any Person (other than the Borrower or a Subsidiary) which is controlled by
or is under common control with a Controlling Person. As used herein, the term
"control" means possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise. The fact that an
Affiliate of a Person is a member of a law firm that renders services to such
Person or its Affiliates does not mean that the law firm is an Affiliate of such
Person.
"AGENT" means Morgan Guaranty Trust Company of New York in its capacity
as administrative agent for the Banks under the Financing Documents, any
successor agent that becomes the Agent pursuant to Section 7.08, and the
respective corporate successors of the foregoing acting in such capacity.
<PAGE> 6
"APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its
Money Market Loans, its Money Market Lending Office.
"ASSESSMENT RATE" has the meaning set forth in Section 2.07(b).
"ASSIGNEE" has the meaning set forth in Section 9.06(c).
"BANK" means each bank listed on the signature pages hereof, each
financial institution which becomes a Bank pursuant to Section 2.17, each
Assignee which becomes a Bank pursuant to Section 9.06(c), and the respective
corporate successors of the foregoing.
"BANK AFFILIATE" means, with respect to the Agent or any Bank, any
Person controlling, controlled by or under common control with the Agent or such
Bank, as the case may be.
"BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"BASE RATE LOAN" means a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Section 2.07(a) or Article 8.
"BORROWER" means Tyco International Group S.A., a Luxembourg
company, and its successors.
"BORROWING" has the meaning set forth in Section 1.02.
"CD BASE RATE" has the meaning set forth in Section 2.07(b).
"CD LOAN" means a Committed Loan which bears interest at a CD Rate
pursuant to the applicable Notice of Committed Borrowing or Notice of Interest
Rate Election.
"CD MARGIN" means a rate per annum determined daily in accordance with
the Pricing Schedule.
"CD RATE" means a rate of interest determined pursuant to Section
2.07(b) on the basis of an Adjusted CD Rate.
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<PAGE> 7
"CD REFERENCE BANKS" means The Hongkong and Shanghai Banking
Corporation Limited, Commerzbank AG and Morgan Guaranty Trust Company of New
York.
"COMMITMENT" means (i) with respect to each Bank listed on the
Commitment Schedule, the amount set forth opposite the name of such Bank on the
Commitment Schedule and (ii) with respect to any financial institution which
becomes a Bank pursuant to Section 2.17 or any Assignee, the amount of the
Commitment assumed by it pursuant to Section 2.17 or 9.06(c), as the case may
be, in each case as such amount may be changed from time to time pursuant to
Section 2.09, 2.17 or 9.06(c).
"COMMITMENT SCHEDULE" means the Commitment Schedule attached
hereto.
"COMMITTED BORROWING" has the meaning set forth in Section 1.02.
"COMMITTED LOAN" means a loan made by a Bank pursuant to Section 2.01;
provided that, if any such loan or loans (or portions thereof) are combined or
subdivided pursuant to a Notice of Interest Rate Election, the term Committed
Loan shall refer to the combined principal amount resulting from such
combination or to each of the separate principal amounts resulting from such
subdivision, as the case may be.
"CONDUIT" means a special purpose corporation which is engaged in
making, purchasing or otherwise investing in commercial loans in the ordinary
course of its business.
"CONDUIT DESIGNATION" has the meaning set forth in Section 9.06(f).
"CONSENTS" has the meaning set forth in Section 4.01.
"DEBT RATING" means a rating of the Borrower's long-term debt which is
not secured or supported by a guarantee, letter of credit or other form of
credit enhancement. If a Debt Rating by a Rating Agency is required to be at or
above a specified level and such Rating Agency shall have changed its system of
classifications after the date hereof, the requirement will be met if the Debt
Rating by such Rating Agency is at or above the new rating which most closely
corresponds to the specified level under the old rating system.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
3
<PAGE> 8
"DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
"DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent; provided that any Bank may so designate
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
of such offices, as the context may require.
"DOMESTIC LOANS" means CD Loans or Base Rate Loans or both.
"DOMESTIC RESERVE PERCENTAGE" has the meaning set forth in Section
2.07(b).
"EFFECTIVE DATE" means the date this Agreement becomes effective in
accordance with Section 3.01.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, hazardous substances or
wastes into the environment including, without limitation, ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous substances or wastes or the
clean-up or other remediation thereof.
"EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrower and the Agent.
4
<PAGE> 9
"EURO-DOLLAR LOAN" means a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election.
"EURO-DOLLAR MARGIN" means a rate per annum determined daily in
accordance with the Pricing Schedule.
"EURO-DOLLAR RATE" means a rate of interest determined pursuant to
Section 2.07(c) on the basis of a London Interbank Offered Rate.
"EURO-DOLLAR REFERENCE BANKS" means the principal London offices of The
Hongkong and Shanghai Banking Corporation Limited, Commerzbank AG and Morgan
Guaranty Trust Company of New York.
"EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section
2.15.
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01.
"EXISTING CREDIT AGREEMENTS" means the Existing 364-Day Agreement and
the Existing Five-Year Agreement.
"EXISTING FIVE-YEAR AGREEMENT" means the Extendible 364-Day Credit
Agreement dated as of February 13, 1998, among the Borrower, the banks listed
therein and Morgan Guaranty Trust Company of New York, as agent for such banks,
as amended to the Effective Date.
"EXISTING 364-DAY AGREEMENT" means the 364-Day Credit Agreement dated
as of February 13, 1998, among the Borrower, the banks listed therein and Morgan
Guaranty Trust Company of New York, as agent for such banks, as amended to the
Effective Date.
"FACILITY FEE RATE" means a rate per annum determined daily in
accordance with the Pricing Schedule.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding
5
<PAGE> 10
Domestic Business Day, and (ii) if no such rate is so published on such next
succeeding Domestic Business Day, the Federal Funds Rate for such day shall be
the average rate quoted to Morgan Guaranty Trust Company of New York on such day
on such transactions as determined by the Agent.
"FINAL MATURITY DATE" means the first anniversary of the Termination
Date or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-
Dollar Business Day.
"FINANCING DOCUMENTS" means this Agreement, the Subsidiary Guarantees,
the Promissory Notes and the Parent Guarantee.
"FIXED RATE LOANS" means CD Loans or Euro-Dollar Loans or Money Market
Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate
pursuant to Section 8.01(a)) or any combination of the foregoing.
"GROUP OF LOANS" means, at any time, a group of Loans consisting of (i)
all Committed Loans which are Base Rate Loans at such time, (ii) all Euro-Dollar
Loans having the same Interest Period at such time or (iii) all CD Loans having
the same Interest Period at such time, provided that, if a Committed Loan of any
particular Bank is converted to or made as a Base Rate Loan pursuant to Article
8, such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"INDEMNITEE" has the meaning set forth in Section 9.03(b).
"INDENTURE" means the Indenture dated as of April 23, 1998 among the
Borrower, the Parent Guarantor and The Bank of New York, as Trustee, as amended
or supplemented from time to time.
"INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, the
period commencing on the date of borrowing specified in the applicable Notice of
Borrowing or on the date specified in an applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter (or such other
period of time as may at the time be mutually agreed by the Borrower and the
Banks), as the Borrower may elect in such notice; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day; and
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<PAGE> 11
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Euro-Dollar Business Day of a
calendar month;
(2) with respect to each CD Loan, the period commencing on the date of
borrowing specified in the applicable Notice of Borrowing or on the date
specified in an applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter (or such other period of time as may at the time be
mutually agreed by the Borrower and the Banks), as the Borrower may elect in
such notice; provided that any Interest Period which would otherwise end on a
day which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day;
(3) with respect to each Money Market LIBOR Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such whole number of months thereafter as the Borrower may
elect in accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day
which is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business
Day falls in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day; and
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Euro-Dollar Business Day of a
calendar month; and
(4) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 30 days)
as the Borrower may elect in accordance with Section 2.03; provided that any
Interest Period which would otherwise end on a day which is not a Euro-Dollar
Business Day shall be extended to the next succeeding Euro-Dollar Business Day;
and
provided further that:
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<PAGE> 12
(x) any Interest Period applicable to any Loan which begins
before the Termination Date and would otherwise end after the
Termination Date shall end on the Termination Date ; and
(y) any Interest Period applicable to any Loan which would
otherwise end after the Final Maturity Date shall end on the Final
Maturity Date.
"LIBOR AUCTION" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate pursuant
to Section 2.03.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Borrower or any Subsidiary shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement (other than an operating lease)
relating to such asset.
"LOAN" means a Domestic Loan or a Euro-Dollar Loan or a Money Market
Loan and "LOANS" means Domestic Loans or Euro-Dollar Loans or Money Market Loans
or any combination of the foregoing.
"LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section
2.07(c).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, consolidated financial position or consolidated results of operations
of the Parent Guarantor and its Consolidated Subsidiaries, considered as a
whole, or (ii) the ability of the Obligors to perform their obligations under
the Financing Documents.
"MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section
2.03(d).
"MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"MONEY MARKET BORROWING" has the meaning set forth in Section 1.02.
"MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it may
8
<PAGE> 13
hereafter designate as its Money Market Lending Office by notice to the Borrower
and the Agent; provided that any Bank may from time to time by notice to the
Borrower and the Agent designate separate Money Market Lending Offices for its
Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate
Loans, on the other hand, in which case all references herein to the Money
Market Lending Office of such Bank shall be deemed to refer to either or both of
such offices, as the context may require.
"MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to
a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.01(a)).
"MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money
Market Absolute Rate Loan.
"MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d).
"MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.03.
"MOODY'S" means Moody's Investors Service, Inc., or any successor to
such corporation's business of rating debt securities.
"NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined
in Section 2.02 or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section
2.16.
"OBLIGOR" means, at any time, the Borrower, the Parent Guarantor and
each Subsidiary Guarantor at such time.
"PARENT" means, with respect to any Bank, any Person controlling such
Bank.
"PARENT GUARANTOR" means Tyco International Ltd., a Bermuda company,
and its successors.
"PARENT GUARANTEE" means an Amended and Restated Parent Guarantee
Agreement between the Parent Guarantor and the Agent for the benefit of the
Banks, substantially in the form of Exhibit J, as amended from time to time.
9
<PAGE> 14
"PARTICIPANT" has the meaning set forth in Section 9.06(b).
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PRICING SCHEDULE" means the Pricing Schedule attached hereto.
"PRIME RATE" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"PROMISSORY NOTES" means promissory notes of the Borrower,
substantially in the form of Exhibit A hereto, evidencing the obligation of the
Borrower to repay the Loans, and "PROMISSORY NOTE" means any one of such
promissory notes issued hereunder.
"PROPERTY" means any interest of any kind in any property or assets,
whether real, mixed or personal and whether tangible or intangible.
"QUARTERLY PAYMENT DATES" means each March 31, June 30, September 30
and December 31.
"RATING AGENCY" means S&P or Moody's.
"REFERENCE BANKS" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "REFERENCE BANK" means any one
of such Reference Banks.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"REQUIRED BANKS" means at any time Banks having more than 60% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Promissory Notes evidencing more than 60% of the aggregate
unpaid principal amount of the Loans.
"RESPONSIBLE OFFICER" means any of the following: the Chairman,
President, Vice President and Chief Financial Officer, Treasurer or Secretary of
the Borrower or a Managing Director of the Borrower.
"REVOLVING CREDIT LOAN" means a loan made or to be made by a Bank
pursuant to Section 2.01(a).
10
<PAGE> 15
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor to its business of rating debt
securities.
"SIGNIFICANT SUBSIDIARY" means, at any date, any Subsidiary of the
Borrower which is a "Significant Subsidiary" as defined in the Parent Guarantee
at such date.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; unless otherwise specified, Subsidiary means a Subsidiary of the
Borrower.
"SUBSIDIARY GUARANTOR" has the meaning set forth in the Parent
Guarantee.
"TERMINATION DATE" means February 11, 2000, or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
"TERM LOAN" means a loan made or to be made by a Bank pursuant to
Section 2.01(b).
"TYCOLUX DEBT SECURITIES" means any unsecured debt securities issued by
the Borrower pursuant to the Indenture.
"UNITED STATES" means the United States of America, including the
States and the District of Columbia, but excluding its territories and
possessions.
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" has the meaning set forth in
the Parent Guarantee.
SECTION 1.02. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant to
Article 2 on a single date and for a single Interest Period. Borrowings are
classified for purposes of this Agreement either by reference to the pricing of
Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2
under which participation therein is determined (i.e., a "Committed Borrowing"
is a Borrowing under Section 2.01 in which all Banks participate in proportion
to their Commitments, while a "Money Market Borrowing" is a Borrowing under
Section 2.03 in which the Bank participants are determined on the basis of their
bids in accordance therewith) or by reference to the maturity of
11
<PAGE> 16
Loans comprising such Borrowing (e.g., a "TERM BORROWING" is a Borrowing
comprised of Term Loans).
ARTICLE 2
THE CREDITS
SECTION 2.01. Commitments to Lend. (a) Revolving Credit Loans. Each
Bank severally agrees, on the terms and conditions set forth in this Agreement,
to make loans to the Borrower pursuant to this Section 2.01 from time to time
prior to the Termination Date in amounts such that the aggregate principal
amount of Committed Loans by such Bank at any one time outstanding shall not
exceed the amount of its Commitment. Each Borrowing under this Section shall be
in an aggregate principal amount of $10,000,000 or any larger multiple of
$1,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 3.03(b)) and shall be made from the several
Banks ratably in proportion to their respective Commitments. Within the
foregoing limits, the Borrower may borrow under this Section, repay or, to the
extent permitted by Section 2.11, prepay Loans and reborrow at any time prior to
the Termination Date under this Section 2.01.
(b) Term Loans. Each Bank severally agrees, on the terms and conditions
set forth in this Agreement, to make a loan to the Borrower on the Termination
Date in an aggregate amount up to but not exceeding the amount of its
Commitment.
SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give
the Agent notice (a "NOTICE OF COMMITTED BORROWING") not later than 11:00 A.M.
(New York City time) on (x) the date of each Base Rate Borrowing, (y) the second
Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar
Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of
a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to bear interest
initially at the Base Rate, a CD Rate or a Euro-Dollar Rate, and
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<PAGE> 17
(d) in the case of a Fixed Rate Borrowing, the duration of the initial
Interest Period applicable thereto, subject to the provisions of the definition
of Interest Period.
SECTION 2.03. The Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Borrowings
pursuant to Section 2.01, the Borrower may, as set forth in this Section,
request the Banks, at any time prior to the Termination Date, to make offers to
make Money Market Loans to the Borrower. The Banks may, but shall have no
obligation to, make such offers and the Borrower may, but shall have no
obligation to, accept any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to the
Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later than
10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior
to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y)
the Domestic Business Day next preceding the date of Borrowing proposed therein,
in the case of an Absolute Rate Auction (or, in either case, such other time or
date as the Borrower and the Agent shall have mutually agreed and shall have
notified to the Banks not later than the date of the Money Market Quote Request
for the first LIBOR Auction or Absolute Rate Auction for which such change is to
be effective), specifying:
(i) the proposed date of Borrowing, which shall be a
Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic
Business Day in the case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$10,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set
forth a Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market Quote
Request shall be given within five Euro-Dollar Business Days (or such
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other number of days as the Borrower and the Agent may agree) of any other Money
Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the Money
Market Loans to which such Money Market Quote Request relates in accordance with
this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may,
in its sole discretion, submit a Money Market Quote containing an offer or
offers to make Money Market Loans in response to any Invitation for Money Market
Quotes. Each Money Market Quote must comply with the requirements of this
subsection 2.03(d) and must be submitted to the Agent by telex or facsimile
transmission at its offices specified in or pursuant to Section 9.01 not later
than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day
prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y)
9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of
an Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money Market Quote Request for the first
LIBOR Auction or Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by the Agent (or any
affiliate of the Agent) in the capacity of a Bank may be submitted, and may only
be submitted, if the Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x) one hour prior to
the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15
minutes prior to the deadline for the other Banks, in the case of an Absolute
Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall
be irrevocable except with the written consent of the Agent given on the
instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the
form of Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing and the Interest
Period therefor,
(B) the principal amount of the Money Market Loan for
which each such offer is being made, which principal amount
(w) may be greater than or less than the Commitment of the
quoting Bank, (x) must be $5,000,000 or a larger multiple of
$1,000,000,
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(y) may not exceed the principal amount of Money Market Loans
for which offers were requested and (z) may be subject to an
aggregate limitation as to the principal amount of Money
Market Loans for which offers being made by such quoting Bank
may be accepted,
(C) in the case of a LIBOR Auction, the margin above
or below the applicable London Interbank Offered Rate (the
"Money Market Margin") offered for each such Money Market
Loan, expressed as a percentage (specified to the nearest
1/10,000th of 1%) to be added to or subtracted from the
applicable London Interbank Offered Rate,
(D) in the case of an Absolute Rate Auction, the rate
of interest per annum (specified to the nearest 1/10,000th of
1%) (the "Money Market Absolute Rate") offered for each such
Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D
hereto or does not specify all of the information required by
subsection 2.03(d)(ii);
(B) contains qualifying, conditional or similar
language;
(C) proposes terms other than or in addition to those
set forth in the applicable Invitation for Money Market
Quotes; or
(D) arrives after the time set forth in subsection
2.03(d)(i).
(e) Notice to Borrower. The Agent shall promptly notify the Borrower of
the terms (x) of any Money Market Quote submitted by a Bank that is in
accordance with subsection 2.03(d) and (y) of any Money Market Quote that
amends, modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request. Any
such subsequent Money Market Quote shall be disregarded by the
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<PAGE> 20
Agent unless such subsequent Money Market Quote is submitted solely to correct a
manifest error in such former Money Market Quote. The Agent's notice to the
Borrower shall specify (A) the aggregate principal amount of Money Market Loans
for which offers have been received for each Interest Period specified in the
related Money Market Quote Request, (B) the respective principal amounts and
Money Market Margins or Money Market Absolute Rates, as the case may be, so
offered and (C) if applicable, limitations on the aggregate principal amount of
Money Market Loans for which offers in any single Money Market Quote may be
accepted.
(f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the proposed
date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of
Borrowing, in the case of an Absolute Rate Auction (or, in either case, such
other time or date as the Borrower and the Agent shall have mutually agreed and
shall have notified to the Banks not later than the date of the Money Market
Quote Request for the first LIBOR Auction or Absolute Rate Auction for which
such change is to be effective), the Borrower shall notify the Agent of its
acceptance or non-acceptance of the offers so notified to it pursuant to
subsection 2.03(e) (and the failure of the Borrower to give such notice by such
time shall constitute non-acceptance) and the Agent shall promptly notify each
affected Bank. In the case of acceptance, such notice (a "Notice of Money Market
Borrowing") shall specify the aggregate principal amount of offers for each
Interest Period that are accepted. The Borrower may, but shall not be obligated
to, accept any Money Market Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market
Borrowing may not exceed the applicable amount set forth in the related
Money Market Quote Request,
(ii) the principal amount of each Money Market Borrowing must
be $10,000,000 or a larger multiple of $1,000,000,
(iii) acceptance of offers may only be made on the basis of
ascending order of Money Market Margins or Money Market Absolute Rates,
as the case may be, in each case beginning with the lowest rate so
offered, and
(iv) the Borrower may not accept any offer where the Agent has
advised the Borrower that such offer is described in subsection
2.03(d)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
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(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of which
such offers are accepted for the related Interest Period, the principal amount
of Money Market Loans in respect of which such offers are accepted shall be
allocated by the Agent among such Banks as nearly as possible (in multiples of
$1,000,000, as the Agent may deem appropriate) in proportion to the aggregate
principal amounts of such offers. Determinations by the Agent of the amounts of
Money Market Loans shall be conclusive in the absence of manifest error.
SECTION 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly
notify each Bank of the contents thereof and of such Bank's share (if any) of
such Borrowing and such Notice of Borrowing shall not thereafter be revocable by
the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall make available its share of
such Borrowing, in Federal or other funds immediately available in New York
City, to the Agent at its address referred to in Section 9.01. Unless the Agent
determines that any applicable condition specified in Article 3 has not been
satisfied or waived in accordance with Section 9.05, the Agent will make the
funds so received from the Banks available to the Borrower no later than 3:00
P.M. (New York City time) on such date, in Federal or other funds immediately
available in New York City, as directed by the Borrower.
(c) If any Bank makes a new Loan hereunder on any day on which the
Borrower is to repay all or any part of an outstanding Loan from such Bank, such
Bank shall apply the proceeds of its new Loan to make such repayment and only an
amount equal to the difference (if any) between the amount being borrowed and
the amount being repaid shall be made available by such Bank to the Agent as
provided in subsection 2.04(b), or remitted by the Borrower to the Agent as
provided in Section 2.12, as the case may be.
(d) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing that such Bank will not make available to the Agent
such Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsections (b) and (c) of this Section 2.04 and the Agent may,
in reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so made
such share available to the Agent, such Bank and, if such Bank shall not have
paid
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<PAGE> 22
such amount to the Agent within two Domestic Business Days of the Agent's demand
therefor, the Borrower severally agree to repay to the Agent forthwith on demand
such corresponding amount together with interest thereon, for each day from the
date such amount is made available to the Borrower until the date such amount is
repaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement.
(e) The failure of any Bank to make any Loan to be made by it on the
date specified therefor shall not relieve any other Bank of any obligation to
make a Loan on such date.
SECTION 2.05. Promissory Notes. (a) The Loans of each Bank shall be
evidenced by a single Promissory Note payable to the order of such Bank for the
account of its Applicable Lending Office in an amount equal to the aggregate
unpaid principal amount of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type be evidenced by a separate Promissory Note
in an amount equal to the aggregate unpaid principal amount of such Loans. Each
such Promissory Note shall be in substantially the form of Exhibit A hereto with
appropriate modifications to reflect the fact that it evidences solely Loans of
the relevant type. Each reference in this Agreement to the "Promissory Note" of
such Bank shall be deemed to refer to and include any or all of such Promissory
Notes, as the context may require.
(c) Upon receipt of each Bank's Promissory Note pursuant to Section
3.01(b), the Agent shall forward such Promissory Note to such Bank. Each Bank
shall record the date, amount, type and maturity of each Loan made by it and the
date and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Promissory Note, endorse on the schedule forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of any Bank to
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Promissory Notes. Each Bank is hereby
irrevocably authorized by the Borrower so to endorse its Promissory Note and to
attach to and make a part of its Promissory Note a continuation of any such
schedule as and when required.
SECTION 2.06. Maturity of Loans. (a) Each Revolving Credit Loan shall
mature, and the principal amount thereof shall be due and payable (together with
interest accrued thereon), on the Termination Date.
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<PAGE> 23
(b) Each Term Loan shall mature, and the principal amount thereof shall
be due and payable, together with accrued interest thereon, on the Final
Maturity Date.
(c) Each Money Market Loan included in any Money Market Borrowing shall
mature, and the principal amount thereof shall be due and payable (together with
interest accrued thereon), on the last day of the Interest Period applicable to
such Borrowing.
SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the date
such Loan is made until it becomes due, at a rate per annum equal to the Base
Rate for each such day. Such interest shall be payable at maturity, quarterly in
arrears on each Quarterly Payment Date prior to maturity and, with respect to
the principal amount of any Base Rate Loan converted to a CD Loan or a
Euro-Dollar Loan, on the date such amount is so converted. Any overdue principal
of or interest on any Base Rate Loan shall bear interest, payable on demand, for
each day from and including the date payment thereof was due to but excluding
the date of actual payment, at a rate per annum equal to the sum of 2% plus the
rate otherwise applicable to Base Rate Loans for each such day.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the CD Margin for each such day plus the
applicable Adjusted CD Rate for such Interest Period; provided that if any CD
Loan shall, as a result of the further proviso to the definition of Interest
Period, have an Interest Period of less than 30 days, such CD Loan shall bear
interest during such Interest Period at the rate applicable to Base Rate Loans
during such period. Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer than 90 days, at
intervals of 90 days after the first day thereof. Any overdue principal of or
interest on any CD Loan shall bear interest, payable on demand, for each day
from and including the date payment thereof was due to but excluding the date of
actual payment, at a rate per annum equal to the sum of 2% plus the higher of
(i) the sum of the CD Margin for each such day plus the Adjusted CD Rate
applicable to such Loan on the day before such payment was due and (ii) the rate
applicable to Base Rate Loans for each such day.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
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<PAGE> 24
[ CDBR ]*
ACDR = [ ---------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
- ----------
* The amount in brackets being rounded upward, if
necessary, to the next higher 1/100 of 1%
The "CD BASE RATE" applicable to any Interest Period is the rate of
interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid
at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the
first day of such Interest Period by two or more New York certificate of deposit
dealers of recognized standing for the purchase at face value from each CD
Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"DOMESTIC RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"ASSESSMENT RATE" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. ss. 327.4(a) or any successor provision (a "BIF Member") to the Federal
Deposit Insurance Corporation (or any successor) for the Federal Deposit
Insurance Corporation's (or such successor's) insuring time deposits at offices
of such BIF Member in the United States. The Adjusted CD Rate shall be adjusted
automatically on and as of the effective date of any change in the Assessment
Rate.
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(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for each
such day plus the applicable London Interbank Offered Rate for such Interest
Period. Such interest shall be payable for each Interest Period on the last day
thereof and, if such Interest Period is longer than three months, at intervals
of three months after the first day thereof.
The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the
first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
(d) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a rate
per annum equal to the sum of 2% plus the higher of (i) the sum of the
Euro-Dollar Margin for such day plus the London Interbank Offered Rate
applicable to such Loan on the day before such payment was due and (ii) the
Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per
annum at which one day (or, if such amount due remains unpaid more than three
Euro-Dollar Business Days, then for such other period of time not longer than
six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such Euro-Dollar Reference Bank in the London
interbank market for the applicable period determined as provided above by (y)
1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances
described in subsection (a) or (b) of Section 8.01 shall exist, at a rate per
annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for
such day).
(e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for each day during the
Interest Period applicable thereto, at a rate per annum equal to the sum of the
London Interbank Offered Rate for such Interest Period (determined in accordance
with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a
Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the
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<PAGE> 26
Bank making such Loan in accordance with Section 2.03. Each Money Market
Absolute Rate Loan shall bear interest on the outstanding principal amount
thereof, for each day during the Interest Period applicable thereto, at a rate
per annum equal to the Money Market Absolute Rate quoted by the Bank making such
Loan in accordance with Section 2.03. Such interest shall be payable for each
Interest Period on the last day thereof and, if such Interest Period is longer
than three months, at intervals of three months after the first day thereof. Any
overdue principal of or interest on any Money Market Loan shall bear interest,
payable on demand, for each day from and including the date payment thereof was
due to but excluding the date of actual payment, at a rate per annum equal to
the sum of 2% plus the Base Rate for each such day.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(g) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations furnished by the
remaining Reference Bank or Banks or, if none of such quotations is available on
a timely basis, the provisions of Section 8.01 shall apply.
SECTION 2.08. Facility Fee. (a) The Borrower shall pay to the Agent for
the account of the Banks ratably a facility fee at the Facility Fee Rate. Such
facility fee shall accrue (i) from and including the date hereof to but
excluding the Termination Date (or earlier date of termination of the
Commitments in their entirety), on the daily aggregate amount of the Commitments
(whether used or unused) and (ii) from and including the Termination Date (or
earlier date of termination of the Commitments in their entirety) to but
excluding the date the Loans shall be repaid in their entirety, on the daily
aggregate outstanding principal amount of the Loans.
(b) Accrued fees under this Section shall be payable quarterly in
arrears on each Quarterly Payment Date and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be repaid
in their entirety).
SECTION 2.09. Optional Termination or Reduction of Commitments. The
Borrower may, upon at least three Domestic Business Days' notice to the Agent,
(i) terminate the Commitments at any time, if no Loans are outstanding at such
time or (ii) ratably reduce from time to time by an aggregate amount of
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$10,000,000 or any larger multiple thereof, the aggregate amount of the
Commitments in excess of the aggregate outstanding principal amount of the
Loans. Promptly after receiving a notice pursuant to this Section, the Agent
shall notify each Bank of the contents thereof.
SECTION 2.10. Mandatory Termination of Commitments. The Commitments
shall terminate on the Termination Date, and any Revolving Credit Loans then
outstanding (together with accrued interest thereon) shall be due and payable on
such date.
SECTION 2.11. Optional Prepayments. (a) The Borrower may (i) upon at
least one Domestic Business Day's notice to the Agent, prepay any Group of Base
Rate Loans (or any Money Market Borrowing bearing interest at the Base Rate
pursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days'
notice to the Agent, subject to Section 2.13, prepay any Group of CD Loans and
(iii) upon at least three Euro-Dollar Business Days' notice to the Agent,
subject to Section 2.13, prepay any Group of Euro-Dollar Loans, in whole at any
time, or from time to time in part in amounts aggregating $10,000,000 or any
larger multiple of $1,000,000, by paying the principal amount to be prepaid
together with accrued interest thereon to but not including the date of
prepayment. Each such optional prepayment shall be applied to prepay ratably the
Loans of the several Banks included in such Group of Loans (or such Money Market
Borrowing).
(b) Except as provided in Section 2.11(a)(i), the Borrower may not
prepay all or any portion of the principal amount of any Money Market Loan prior
to the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and once notice is so given to
the Banks, the Borrower's notice of prepayment shall not thereafter be revocable
by the Borrower.
SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and of fees
hereunder, not later than 2:00 P.M. (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the Agent
at its address referred to in Section 9.01. The Agent will promptly distribute
to each Bank its ratable share of each such payment received by the Agent for
the respective accounts of the Banks. Whenever any payment of principal of, or
interest on, the Domestic Loans or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next
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succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Loans shall be due on a day which
is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior
to the date on which any payment is due to the Banks hereunder that the Borrower
will not make such payment in full, the Agent may assume that the Borrower has
made such payment in full to the Agent on such date and the Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment, each Bank shall repay to the
Agent forthwith on demand such amount distributed to such Bank together with
interest thereon, for each day from the date such amount is distributed to such
Bank until the date such Bank repays such amount to the Agent, at the Federal
Funds Rate.
SECTION 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a different type of Loan (pursuant to Article 2, 6 or 8 (other than
Section 8.02)) on any day other than the last day of an Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.07(d), or if the Borrower fails to borrow, prepay, convert or continue
any Fixed Rate Loans after notice has been given to any Bank in accordance with
Section 2.04(a), 2.11(c) or 2.16 (other than as a result of default by such
Bank), the Borrower shall reimburse each Bank within 15 days after written
demand for any resulting loss or expense reasonably incurred by it (or by an
existing or prospective Participant in the related Loan) in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after any such payment or conversion or failure to borrow,
prepay, convert or continue; provided that such Bank shall have delivered to the
Borrower a certificate specifying in reasonable detail the calculation of, and
the reasons for, the amount of such loss or expense, which certificate shall be
conclusive in the absence of manifest error.
SECTION 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366
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days in a leap year) and paid for the actual number of days elapsed (including
the first day but excluding the last day). All other interest and fees shall be
computed on the basis of a year of 360 days and paid for the actual number of
days elapsed (including the first day but excluding the last day).
SECTION 2.15. Regulation D Compensation. Each Bank may require the
Borrower to pay, contemporaneously with each payment of interest on the Euro-
Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank
at a rate per annum determined by such Bank up to but not exceeding the excess
of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus
the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank
Offered Rate. Any Bank wishing to require payment of such additional interest
(x) shall so notify the Borrower and the Agent, in which case such additional
interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at
the place indicated in such notice with respect to each Interest Period
commencing at least three Euro-Dollar Business Days after the giving of such
notice, and (y) shall notify the Borrower at least five Euro-Dollar Business
Days prior to each date on which interest is payable on the Euro-Dollar Loans of
the amount then due it under this Section.
"EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents).
SECTION 2.16. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue the
type of interest rate borne by each Group of Loans (subject to subsection
2.16(d) of this Section and the provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may elect
to convert such Loans to CD Loans as of any Domestic Business Day or to
Euro-Dollar Loans as of any Euro-Dollar Business Day;
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(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period,
subject to Section 2.13 if any such conversion is effective on any day
other than the last day of an Interest Period applicable to such Loans;
and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, subject to Section 2.13 if any such conversion is effective on
any day other than the last day of an Interest Period applicable to
such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 10:30 A.M. (New York City time) on
the third Euro-Dollar Business Day before the conversion or continuation
selected in such notice is to be effective (unless the relevant Loans are to be
converted from Domestic Loans of one type to Domestic Loans of the other type or
are CD Loans to be continued as CD Loans for an additional Interest Period, in
which case such notice shall be delivered to the Agent not later than 10:30 A.M.
(New York City time) on the second Domestic Business Day before such conversion
or continuation is to be effective). A Notice of Interest Rate Election may, if
it so specifies, apply to only a portion of the aggregate principal amount of
the relevant Group of Loans; provided that (i) such portion is allocated ratably
among the Loans comprising such Group and (ii) the portion to which such Notice
applies, and the remaining portion to which it does not apply, are each at least
$10,000,000 (unless such portion is comprised of Base Rate Loans). If no such
notice is timely received before the end of an Interest Period for any Group of
CD Loans or Euro-Dollar Loans, the Borrower shall be deemed to have elected that
such Group of Loans be converted to Base Rate Loans at the end of such Interest
Period.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
(ii) the date on which the conversion or continuation selected
in such notice is to be effective, which shall comply with the
applicable clause of subsection 2.16(a) above;
(iii) if the Loans comprising such Group are to be converted,
the new type of Loans and, if the Loans resulting from such conversion
are to be CD Loans or Euro-Dollar Loans, the duration of the next
succeeding Interest Period applicable thereto; and
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(iv) if such Loans are to be continued as CD Loans or
Euro-Dollar Loans for an additional Interest Period, the duration of
such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Promptly after receiving a Notice of Interest Rate Election from
the Borrower pursuant to subsection (a) above, the Agent shall notify each Bank
of the contents thereof and such notice shall not thereafter be revocable by the
Borrower.
(d) The Borrower shall not be entitled to elect to convert any
Committed Loans to, or continue any Committed Loans for an additional Interest
Period as, CD Loans or Euro-Dollar Loans if (i) the aggregate principal amounts
of any Group of CD Loans or Euro-Dollar Loans created or continued as a result
of such election would be less than $10,000,000 or (ii) a Default shall have
occurred and be continuing when the Borrower delivers notice of such election to
the Agent.
SECTION 2.17. Optional Increase in Commitments. At any time, if no
Default shall have occurred and be continuing, the Borrower may, if it so
elects, increase the aggregate amount of the Commitments, either by designating
a financial institution not theretofore a Bank to become a Bank (such
designation to be effective only with the prior written consent of the Agent,
which consent will not be unreasonably withheld) or by agreeing with an existing
Bank that such Bank's Commitment shall be increased. Upon execution and delivery
by the Borrower and such Bank or other financial institution of an instrument in
form reasonably satisfactory to the Agent, such existing Bank shall have a
Commitment as therein set forth or such other financial institution shall become
a Bank with a Commitment as therein set forth and all the rights and obligations
of a Bank with such a Commitment hereunder; provided:
(a) that the Borrower shall provide prompt notice of such increase to
the Agent, who shall promptly notify the Banks;
(b) that no Commitment of any Bank exceeds, as a result of such
increase, 10% of the aggregate amount of the Commitments; and
(c) that the amount of such increase, together with all other increases
in the aggregate amount of the Commitments pursuant to this Section 2.17 since
the date of this Agreement, does not exceed $750,000,000.
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Upon any increase in the aggregate amount of the Commitments pursuant
to this Section 2.17, within five Domestic Business Days, in the case of any
Group of Base Rate Loans then outstanding, and at the end of the then current
Interest Period with respect thereto, in the case of any Group of Euro-Dollar
Loans or CD Loans then outstanding, the Borrower shall prepay such Group in its
entirety and, to the extent the Borrower elects to do so and subject to the
conditions specified in Article 3, the Borrower shall reborrow Committed Loans
from the Banks in proportion to their respective Commitments after giving effect
to such increase, until such time as all outstanding Committed Loans are held by
the Banks in such proportion.
ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness. This Agreement shall become effective on
the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section 9.05):
(a) receipt by the Agent of counterparts hereof signed by each of the
parties hereto (or, in the case of any party as to which an executed counterpart
shall not have been received, receipt by the Agent in form satisfactory to it of
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party);
(b) receipt by the Agent of a duly executed Promissory Note for the
account of each Bank dated on or before the Effective Date complying with the
provisions of Section 2.05;
(c) receipt by the Agent of the Parent Guarantee, duly executed by the
Parent Guarantor;
(d) receipt by the Agent of an opinion of each of (i) Mark A. Belnick,
Executive Vice President and Chief Corporate Counsel of the Parent Guarantor,
substantially in the form of Exhibit E hereto, (ii) Beghin Nothar Feider Loeff
Claeys Verbeke, special Luxembourg counsel for the Borrower, substantially in
the form of Exhibit F hereto and (iii) Appleby, Spurling & Kempe, special
Bermuda counsel for the Parent Guarantor, substantially in the form of Exhibit G
hereto;
(e) receipt by the Agent of an opinion of Davis Polk & Wardwell,
special counsel for the Agent, substantially in the form of Exhibit H hereto and
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covering such additional matters relating to the transactions contemplated
hereby as the Required Banks may reasonably request;
(f) receipt by the Agent of all documents the Agent may reasonably
request relating to the existence of the Borrower and the Parent Guarantor, the
corporate authority for and the validity of this Agreement, the Parent Guarantee
and the Promissory Notes, and any other matters reasonably determined by the
Agent to be relevant hereto, all in form and substance reasonably satisfactory
to the Agent;
(g) receipt by the Agent of evidence satisfactory to it that all
principal of any loans outstanding under, and all accrued interest and fees
under, the Existing 364-Day Agreement shall have been paid in full; and
(h) receipt by the Agent of payment of participation fees for the
account of the Banks in the respective amounts heretofore mutually agreed;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later than
February 15, 1999. The Agent shall promptly notify the Borrower, each Bank and
each other party to the Existing Credit Agreements of the Effective Date, and
such notice shall be conclusive and binding on all parties to the Financing
Documents.
SECTION 3.02. Existing Agreements. (a) On the Effective Date, the
commitments under the Existing 364-Day Agreement shall terminate, without
further action by any party thereto.
(b) On the Effective Date, without further action by any party to the
Existing Five-Year Agreement, the Existing Five-Year Agreement shall be amended
as follows:
(i) The following provisions of the Existing Five-Year
Agreement shall be amended to read exactly as the corresponding
provisions of this Agreement:
(A) the following definitions: Borrower, Financing
Documents, Indenture, Material Adverse Effect, Obligor, Parent
Guarantee, Parent Guarantor, Responsible Officer, Significant
Subsidiary, Subsidiary Guarantor, TycoLux Debt Securities and
Wholly-Owned Consolidated Subsidiary;
(B) subsections (b), (c), (d) and (e) of Section
2.07;
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(C) subsection (d) of Section 3.03;
(D) Articles 4, 5 and 6; and
(E) Section 9.08.
(ii) The following new provisions are added to the Existing
Five- Year Agreement to read exactly as the corresponding provisions of
this Agreement:
(A) the following definitions: CD Margin, Euro-Dollar
Margin, Facility Fee Rate and Pricing Schedule; and
(B) Section 9.12.
(iii) The following portions of the Existing Five-Year
Agreement are deleted:
(A) Exhibits E-1, E-2, F, H, I, L, K and M;
(B) the following definitions: Acquisition,
Applicable Margin, Consolidated Assets, Consolidated Debt,
Consolidated EBIT, Consolidated Interest Expense, Consolidated
Net Income, Consolidated Net Worth, Consolidated Subsidiary,
Consolidated Tangible Assets, Consolidated Tangible Net Worth,
Consolidated Total Capitalization, Debt, Domestic Parent,
ERISA, ERISA Group, Existing Agreements, Existing Five-Year
Agreement, Existing 364-Day Agreement, Existing Tyco US Debt,
Guarantee, Guarantor, Hazardous Substances, Intangible Assets,
Internal Revenue Code, Level I Status, Level II Status, Level
III Status, Level IV Status, Level V Status, Level VI Status,
Material Debt, Material Plan, Multiemployer Plan, New Borrower
Agreement, New Borrower Date, PBGC, Permitted Receivables
Transaction, Plan, Prospects, Refinancing, Related Agreement,
Status, Subsidiary Guarantee, Tyco Luxembourg, Tyco US and
Unfunded Liabilities;
(C) Section 1.02;
(D) subsection (h) of Section 2.07;
(E) the second paragraph of Section 2.08(a) and
(F) Section 3.01, 3.02 and 3.04.
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(iv) The definition of Termination Date is amended to read as
follows:
"TERMINATION DATE" means February 12, 2003; provided that if
such date is not a Euro-Dollar Business Day, the Termination Date shall
be the next preceding Euro-Dollar Business Day.
(v) The pricing schedule set forth as Exhibit K to this
Agreement is added to the Existing Five-Year Agreement as the Pricing
Schedule referred to therein.
(c) The Banks which are parties to the Existing Credit Agreements,
comprising the "Required Banks" as defined therein, hereby (i) waive any
requirement of notice of termination of the commitments pursuant to Section 2.09
of the Existing 364-Day Agreement and of prepayment of Loans to the extent
necessary to give effect to the subsections 3.01(g) and 3.02(a), provided that
any such prepayment of Loans shall be subject to Section 2.13 of the Existing
364- Day Agreement and (ii) agree to the amendments specified in subsection
3.02(b) and the amendment and restatement of the "Parent Guarantee" (as defined
in the Existing Credit Agreements) pursuant to subsection 3.01(c).
SECTION 3.03. Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing is subject to the satisfaction (or waiver in
accordance with Section 9.05) of the following conditions:
(a) receipt by the Agent of a Notice of Borrowing as required by
Section 2.02 or 2.03, as the case may be;
(b) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the aggregate amount
of the Commitments;
(c) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of each Obligor
contained in the Financing Documents (except the representations and warranties
set forth in Section 3.04(a) and (b) of the Parent Guarantee, which are made
only as of the date of the Parent Guarantee) shall be true in all material
respects on and as of the date of such Borrowing.
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Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to the facts specified
in subsections (b), (c) and (d) of this Section.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the Banks that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a company
duly organized and validly existing under the laws of its jurisdiction of
organization. The Borrower has all corporate powers and all governmental
licenses, authorizations, consents and approvals (collectively, the "Consents")
required to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement and the Promissory Notes: (a) are within the Borrower's corporate
powers; (b) have been duly authorized by all necessary corporate action on the
part of the Borrower; (c) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Borrower; and (d) do not contravene, or constitute a default by the Borrower
under, any provision of (i) applicable law or regulation, (ii) the
organizational documents of the Borrower, or (iii) any agreement or instrument
evidencing or governing debt of the Borrower or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Borrower.
SECTION 4.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower and the Promissory Notes, when executed and
delivered in accordance with this Agreement, will constitute valid and binding
obligations of the Borrower.
SECTION 4.04. Litigation. There is no action, suit or proceeding
pending against, or to the knowledge of the Borrower threatened against or
affecting, the Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could, based upon the facts
and circumstances in
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existence at the time this representation and warranty is made or deemed made,
reasonably be expected to have a Material Adverse Effect or which in any manner
draws into question the validity of the Financing Documents.
SECTION 4.05. Not an Investment Company. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
ARTICLE 5
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Promissory Note remains unpaid:
SECTION 5.01. Information. The Borrower will deliver to each of the
Banks:
(a) within five Domestic Business Days after any Responsible Officer
obtains knowledge of any Default, if such Default is then continuing, a
certificate on behalf of the Borrower signed by the chief financial officer, the
chief accounting officer or the treasurer of the Borrower setting forth, in
reasonable detail, the nature thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
(b) promptly upon the filing thereof, copies of all final registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q and 8-K (or
their equivalents) which the Borrower may file with the Securities and Exchange
Commission;
(c) promptly following, and in any event within 10 days of, any change
in a Debt Rating by any Rating Agency, notice thereof; and
(d) from time to time, upon reasonable notice, such additional
information regarding the financial position or business of the Borrower and its
Subsidiaries as the Agent, at the request of any Bank, may reasonably request.
Information required to be delivered pursuant to subsection (b) above
shall be deemed to have been delivered on the date on which the Borrower
provides (or causes to be provided) notice to the Banks that such information
has been posted on the Parent Guarantor's website on the Internet at the website
address listed on
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the signature pages hereof, at sec.gov/edaux/searches.htm or at another website
identified in such notice and accessible by the Banks without charge; provided
that (i) such notice may be included in a certificate delivered pursuant to
Section 4.01(c) of the Parent Guarantee and (ii) the Borrower shall deliver
paper copies of the information referred to in subsection (b) to any Bank which
requests such delivery.
SECTION 5.02. Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where (i) any such failure to so pay
or discharge could not, based upon the facts and circumstances in existence at
the time, reasonably be expected to have a Material Adverse Effect or (ii) such
liabilities or obligations may be contested in good faith by appropriate
proceedings. The Borrower will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of such liabilities or obligations.
SECTION 5.03. Maintenance of Property; Insurance. (a) Except as
permitted by Section 5.04 or 5.07, the Borrower will keep, and will cause each
Subsidiary to keep, all property necessary in its business in good working order
and condition, ordinary wear and tear excepted, unless the failure to so keep
could not, based upon the facts and circumstances existing at the time,
reasonably be expected to have a Material Adverse Effect.
(b) The Borrower will maintain, and will cause each Subsidiary to
maintain, with financially sound and reputable insurers, insurance with respect
to its assets and business against such casualties and contingencies, of such
types (including, without limitation, loss or damage, product liability,
business interruption, larceny, embezzlement or other criminal misappropriation)
and in such amounts as is customary in the case of similarly situated
corporations of established reputations engaged in the same or a similar
business, unless the failure to maintain such insurance could not, based upon
the facts and circumstances existing at the time, reasonably be expected to have
a Material Adverse Effect.
SECTION 5.04. Conduct of Business and Maintenance of Existence. The
Borrower (a) will continue, and will cause each Subsidiary to continue, to
engage in business of the same general type as now conducted by the Borrower and
its Subsidiaries and reasonably related extensions thereof, and (b) will
preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect (x) their
respective corporate existence and (y) their respective rights, privileges and
franchises necessary or
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desirable in the normal conduct of business, unless in the case of either the
failure of the Borrower to comply with subclause (b) (y) of this Section 5.04 or
the failure of a Subsidiary to comply with clauses (a) or (b) of this Section
5.04, such failure could not, based upon the facts and circumstances existing at
the time, reasonably be expected to have a Material Adverse Effect; provided
that nothing in this Section 5.04 shall prohibit (i) the merger or consolidation
of a Subsidiary with or into the Borrower or a Wholly-Owned Consolidated
Subsidiary, (ii) the sale, lease, transfer, assignment or other disposition by a
Subsidiary of all or any part of its assets to the Borrower or to a Wholly-Owned
Consolidated Subsidiary, (iii) the merger or consolidation of a Subsidiary with
or into a Person other than the Borrower or a Wholly-Owned Consolidated
Subsidiary, if the Person surviving such consolidation or merger is a Subsidiary
of the Parent Guarantor and immediately after giving effect thereto, no Default
shall have occurred and be continuing, (iv) the sale, lease, transfer,
assignment or other disposition by a Subsidiary of all or any part of its assets
to a Person other than the Borrower or a Wholly-Owned Consolidated Subsidiary if
the Person to which such sale, lease, transfer, assignment or other disposition
is made is a Subsidiary of the Parent Guarantor and immediately after giving
effect thereto, no Default shall have occurred and be continuing, (v) any
transaction permitted pursuant to Section 5.07, (vi) the termination of the
corporate existence of any Subsidiary if the Borrower in good faith determines
that such termination is in the best interest of the Borrower and is not
materially disadvantageous to the Banks and (vii) the sale, lease, transfer,
assignment or other disposition (including any such transaction by way of merger
or consolidation) by the Borrower of all or any part of its assets to a Person
other than the Borrower or a Subsidiary if (A) immediately after giving effect
thereto, no Default shall have occurred and be continuing and (B) the Borrower
is a Subsidiary of such Person or the Borrower and such Person are Subsidiaries
of the same Person.
SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause
each Subsidiary to comply, in all material respects with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except where (a) noncompliance therewith could not,
based upon the facts and circumstances in existence at the time, reasonably be
expected to have a Material Adverse Effect or (b) the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
SECTION 5.06. Inspection of Property, Books and Records;
Confidentiality. (a) The Borrower will keep, and will cause each Subsidiary to
keep, proper books of record and account in which true and correct entries shall
be made of its business transactions and activities so that financial statements
that
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fairly present its business transactions and activities can be properly prepared
in accordance with generally accepted accounting principles.
(b) The Borrower will permit, and will cause each Subsidiary to permit,
representatives of any Bank at such Bank's expense to visit and inspect any of
their respective properties, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs, finances
and accounts with their respective officers, employees and independent public
accountants, all upon reasonable notice to the Borrower, at such reasonable
times and as often as may reasonably be requested by any Bank.
(c) Each Bank and the Agent shall, by its receipt of Confidential
Information (as defined below) pursuant to or in connection with this Agreement
or its exercise of any of its rights hereunder, be deemed to have agreed (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to (i) keep such information confidential, (ii) (except as
permitted by clause (iii) of this Section 5.06(c)) not disclose such information
to any Person other than an officer, director, employee, legal counsel,
independent auditor or authorized agent or advisor of the Agent or such Bank
needing to know such information (it being understood that any such officer,
director, employee, legal counsel, independent auditor or authorized agent or
advisor shall be informed by the Agent or such Bank of the confidential nature
of such information), (iii) not disclose such information to any Assignee or
Participant (or prospective Assignee or Participant), unless such Assignee or
Participant (or prospective Assignee or Participant) shall agree in writing to
be bound by the provisions of this Section 5.06(c) and (iv) not use any such
information except for purposes relating to this Agreement or the Notes. The
term "Confidential Information" shall mean non-public information furnished by
or on behalf of the Borrower or any of its Subsidiaries to the Agent, any Bank
or other Person exercising rights hereunder or required to be bound hereby
(collectively "Recipients"), but shall not include any such information which
(1) has become or hereafter becomes available to the public other than as a
result of a disclosure by a Recipient, or (2) has become or hereafter becomes
available to a Recipient, on a non-confidential basis, from a source other than
the Borrower or any of its Subsidiaries (or any of their respective
representatives or agents) or any Recipient, which source, to the knowledge of
the Recipient, is not prohibited from disclosing such information by a
confidentiality agreement with, or other legal or fiduciary obligation to, the
Borrower or its Subsidiaries.
The restrictions set forth in the immediately preceding paragraph shall
not prevent the disclosure by a Recipient of any such information:
(A) with the prior written consent of the Borrower,
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(B) at the request of a bank regulatory agency or in
connection with an examination by bank examiners, or
(C) upon order of any court or administrative agency
of competent jurisdiction, to the extent required by such
order and not effectively stayed on appeal or otherwise, or as
otherwise required by law; provided that in the case of any
intended disclosure under this clause (C), the Recipient shall
(unless otherwise required by applicable law) give the
Borrower not less than five Domestic Business Days prior
notice (or such shorter period as may, in the good faith
discretion of the Recipient, be reasonable under the
circumstances or may be required by any court or agency under
the circumstances), specifying the Confidential Information
involved and stating such Recipient's intention to disclose
such Confidential Information (including the manner and extent
of such disclosure) in order to allow the Borrower an
opportunity to seek an appropriate protective order.
Each Recipient shall agree that, in addition to all other remedies
available, the Borrower shall be entitled to specific performance and injunctive
and other equitable relief as a remedy for any breach of this Section 5.06(c) by
such Recipient.
SECTION 5.07. Consolidations, Mergers and Sales of Assets. The
Borrower will not (i) consolidate or merge with or into any other Person or (ii)
sell, lease or otherwise transfer all or substantially all of its assets to any
other Person, unless
(A) the Borrower or a Subsidiary is the surviving
corporation;
(B) the Person (if other than the Borrower) formed by
such consolidation or into which the Borrower is merged, or
the Person which acquires by sale or other transfer, or which
leases, all or substantially all of the assets of the Borrower
(any such Person, the "Successor"), shall be organized and
existing under the laws of Luxembourg, and shall expressly
assume, in a writing executed and delivered to the Agent for
delivery to each of the Banks, in form reasonably satisfactory
to the Agent, the due and punctual payment of the principal of
and interest on the Promissory Notes and the performance of
the other obligations under this Agreement and the Promissory
Notes on the part of the Borrower to be performed or
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observed, as fully as if such Successor were originally named
as the Borrower in this Agreement;
(C) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing;
and
(D) the Borrower has delivered to the Agent a
certificate on behalf of the Borrower signed by a Responsible
Officer and an opinion of counsel (which counsel may be an
employee of the Borrower), each stating that all conditions
provided in this Section 5.07 relating to such transaction
have been satisfied.
The foregoing provisions of this Section 5.07 shall not restrict the
merger or consolidation of any Subsidiary with and into the Borrower.
Upon the satisfaction (or waiver in accordance with Section 9.05) of
the conditions set forth in this Section 5.07, the Successor shall succeed, and
may exercise every right and power of, the Borrower under this Agreement and the
Promissory Notes with the same effect as if the Successor had been originally
named as the Borrower herein and in the Promissory Notes, and the Borrower shall
be relieved of its obligations under this Agreement and the Promissory Notes.
SECTION 5.08. Use of Proceeds. The proceeds of the Loans made under
this Agreement will be used by the Borrower for its general corporate purposes,
including, without limitation, capital expenditures and (subject to the
following sentence) acquisitions. None of such proceeds will be used, directly
or indirectly, for the purpose, whether immediate, incidental or ultimate, of
buying or carrying any "margin stock" within the meaning of Regulation U.
SECTION 5.09. Transactions with Affiliates. The Borrower will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate (collectively, "AFFILIATE TRANSACTIONS"); provided, however, that the
foregoing provisions of this Section 5.09 shall not prohibit the Borrower or any
of its Subsidiaries from: (a) making sales to or purchases from any Affiliate
and, in connection therewith, extending credit or making payments, or from
making payments for services rendered by any Affiliate, if such sales or
purchases are made or such services are rendered in the
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ordinary course of business and on terms and conditions at least as favorable to
the Borrower or such Subsidiary as the terms and conditions which the Borrower
would reasonably expect to be obtained in a similar transaction with a Person
which is not an Affiliate at such time, (b) making payments of principal,
interest and premium on any debt of the Borrower or such Subsidiary held by an
Affiliate if the terms of such debt are at least as favorable to the Borrower or
such Subsidiary as the terms which the Borrower would reasonably expect to have
been obtained at the time of the creation of such debt from a lender which was
not an Affiliate, (c) participating in, or effecting any transaction in
connection with, any joint enterprise or other joint arrangement with any
Affiliate if the Borrower or such Subsidiary participates in the ordinary course
of its business and on a basis no less advantageous than the basis on which such
Affiliate participates, (d) paying or granting reasonable compensation and
benefits to any director, officer, employee or agent of the Borrower or any
Subsidiary, (e) paying reasonable legal fees and expenses to a law firm of which
an Affiliate is a member or (f) engaging in any Affiliate Transaction not
otherwise addressed in subsections (a) - (e) of this Section 5.09, the
consummation of which could not reasonably be expected to have a Material
Adverse Effect.
SECTION 5.10. Subsidiary Guarantors. If any Subsidiary becomes a
guarantor of TycoLux Debt Securities under the Indenture, the Borrower will
cause such Person to become a Subsidiary Guarantor concurrently therewith.
ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults. If one or more of the following
events ("EVENTS OF DEFAULT") shall have occurred and be continuing and shall not
have been waived in accordance with Section 9.05:
(a) any principal of any Loan shall not be paid when due, or any
interest on any Loan or any fees payable hereunder shall not be paid within
three Domestic Business Days of the due date thereof;
(b) the Borrower shall fail to observe or perform any covenant
contained in Section 5.10;
(c) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.07 to 5.09, inclusive, and such failure shall not be
remedied within five days after any Responsible Officer obtains actual knowledge
thereof;
(d) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a),
(b)
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or (c) of this Section 6.01) for 10 days after notice thereof has been given to
the Borrower by the Agent at the request of any Bank;
(e) any representation, warranty, certification or statement made in
writing by the Borrower in the Financing Documents or in any certificate,
financial statement or other document required to be delivered to the Agent or
any of the Banks pursuant to the Financing Documents shall prove to have been
incorrect in any material respect when made (or deemed made);
(f) there shall occur any Guarantor Event of Default (as defined in the
Parent Guarantee);
(g) the Borrower shall (i) commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or substantially all of
its property, or (ii) consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other similar
proceeding commenced against it, or (iii) make a general assignment for the
benefit of creditors, or (iv) fail generally to pay its debts as they become
due, or (v) take corporate action authorizing any of the foregoing;
(h) (i) an involuntary case or other proceeding shall be commenced
against the Borrower seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or substantially all of
its property, and such involuntary case or other proceeding shall remain in
effect and undismissed and unstayed for a period of 60 consecutive days or (ii)
an order for relief shall be entered against the Borrower under the federal
bankruptcy laws as now or hereafter in effect;
(i) a judgment or order for the payment of money in excess of
$30,000,000 (after deducting amounts covered by insurance, except to the extent
that the insurer providing such insurance has declined such coverage) shall be
rendered against the Borrower or any Subsidiary and, within 60 days after entry
thereof, such judgment or order is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay, such
judgment or order is not discharged;
(j) the Borrower shall cease to be a Wholly-Owned Consolidated
Subsidiary of the Parent Guarantor; or
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(k) any Financing Document shall cease to be valid and enforceable
(except for the termination of a Subsidiary Guarantee in accordance with its
terms); or any Obligor shall so assert in writing;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 60% in aggregate amount of the Commitments, by notice to the Borrower
terminate the Commitments and they shall thereupon terminate, and (ii) if
requested by Banks holding Promissory Notes evidencing more than 60% in
aggregate principal amount of the Loans, by notice to the Borrower declare the
Promissory Notes (together with accrued interest thereon) to be, and the
Promissory Notes shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower; provided that in the case of any of the Events of
Default specified in subsection (g) or (h) above or any Guarantor Event of
Default specified in Section 5.01(g) of the Parent Guarantee with respect to any
Obligor, without any notice to the Borrower or any other act by the Agent or the
Banks, the Commitments shall thereupon terminate and the Promissory Notes
(together with accrued interest thereon) shall become immediately due and
payable without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Borrower.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.01(d) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under the Financing Documents as are delegated to the
Agent by the terms hereof or thereof, together with all such powers as are
reasonably incidental thereto.
SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
New York (and any successor acting as Agent) in its capacity as a Bank hereunder
shall have the same rights and powers under the Financing Documents as any other
Bank and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York (and any successor
acting as Agent) and its affiliates may accept deposits from, lend money
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to, and generally engage in any kind of business with the Borrower or any
Subsidiary or affiliate of the Borrower as if it were not the Agent hereunder.
SECTION 7.03. Action by Agent. The obligations of the Agent under the
Financing Documents are only those expressly set forth therein. Without limiting
the generality of the foregoing, the Agent shall not be required to take any
action with respect to any Default, except as expressly provided in Article 6.
SECTION 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
SECTION 7.05. Limits of Liability. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or employees
shall be liable for any action taken or not taken by it in connection herewith
(i) with the consent or at the request of the Required Banks or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Agent nor
any of its affiliates nor any of their respective directors, officers, agents or
employees shall be responsible for or have any duty to ascertain, inquire into
or verify (i) any statement, warranty or representation made in connection with
this Agreement or any borrowing hereunder; (ii) the performance or observance of
any of the covenants or agreements of the Borrower or any Guarantor; (iii) the
satisfaction of any condition specified in Article 3, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Subsidiary Guarantees, the Parent Guarantee,
the Promissory Notes or any other instrument or writing furnished in connection
herewith. The Agent shall not incur any liability by acting in reliance upon any
notice, consent, certificate, statement, or other writing (which may be a bank
wire, telex or similar writing) believed by it in good faith to be genuine or to
be signed by or on behalf of the proper party or parties. Without limiting the
generality of the foregoing, the use of the term "agent" in this Agreement with
reference to the Agent is not intended to connote any fiduciary or other implied
(or express) obligations arising under agency doctrine of any applicable law.
Instead, such term is used merely as a matter of market custom and is intended
to create or reflect only an administrative relationship between independent
contracting parties.
SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by the
Borrower) against any cost, expense (including counsel fees and disbursements),
claim, demand, action, loss or liability (except such as result from such
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indemnitees' gross negligence or willful misconduct) that such indemnitees may
suffer or incur in connection with the Financing Documents or any action taken
or omitted by such indemnitees thereunder.
SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of the Borrower and its Subsidiaries and its own decision to
enter into this Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking any action
under this Agreement.
SECTION 7.08. Successor Agent. The Agent may resign at any time by
giving notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent, subject to
the consent of the Borrower. If no successor Agent shall have been so appointed
by the Required Banks and consented to by the Borrower and shall have accepted
such appointment within 45 days after the retiring Agent gives notice of
resignation, then the retiring Agent may, on behalf of the Banks, appoint a
successor Agent, which shall be a commercial bank organized or licensed under
the laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $50,000,000. Upon the acceptance of its
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under the Financing Documents. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Article
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was acting as the Agent.
SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its
own account fees in the amounts and at the times previously agreed upon in
writing between the Borrower and the Agent.
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ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any CD Loan,
Euro-Dollar Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Reference Banks
in the relevant market for such Interest Period, or
(b) in the case of CD Loans or Euro-Dollar Loans, Banks holding 50% or
more of the aggregate amount of the affected Loans advise the Agent that the
Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as
determined by the Agent will not adequately and fairly reflect the cost to such
Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for
such Interest Period, the Agent shall forthwith give notice thereof to the
Borrower and the Banks, whereupon, until the Agent notifies the Borrower that
the circumstances giving rise to such suspension no longer exist (which the
Agent agrees to do promptly upon such circumstances ceasing to exist), (i) the
obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may
be, or to continue or convert outstanding Loans as or into CD Loans or
Euro-Dollar Loans, as the case may be, shall be suspended and (ii) each
outstanding CD Loan or Euro-Dollar Loan, as the case may be, shall be converted
into a Base Rate Loan on the last day of the then current Interest Period
applicable thereto. Unless the Borrower notifies the Agent at least one Domestic
Business Day before the date of any Fixed Rate Borrowing for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
(i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall
instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing
is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such
Borrowing shall bear interest for each day from and including the first day to
but excluding the last day of the Interest Period applicable thereto at the Base
Rate for such day.
SECTION 8.02. Illegality. If, on or after the date of this Agreement,
any Bank has determined in its reasonable judgment that the adoption of any
applicable law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not having
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the force of law) of any such authority, central bank or comparable agency,
shall make it unlawful or impossible for such Bank (or its Euro-Dollar Lending
Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so
notify the Agent, the Agent shall forthwith give notice specifying the
circumstances giving rise to such suspension to the other Banks and the
Borrower, whereupon, until such Bank notifies the Borrower and the Agent that
the circumstances giving rise to such suspension no longer exist (which such
Bank agrees to do promptly upon such circumstances ceasing to exist), the
obligation of such Bank to make Euro-Dollar Loans, or to continue or convert
outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before
giving any notice to the Agent pursuant to this Section, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will avoid
the need for giving such notice and will not, in the judgment of such Bank in
the good faith exercise of its discretion, be otherwise disadvantageous to such
Bank. If such notice is given, each Euro-Dollar Loan of such Bank then
outstanding shall be converted to a Base Rate Loan either (a) on the last day of
the then current Interest Period applicable to such Euro-Dollar Loan if such
Bank may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan
to such day or (b) immediately if such Bank shall determine that it may not
lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such
day.
SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date of this Agreement, in the case of any Committed Loan or any obligation
to make Committed Loans or (y) the date of the related Money Market Quote, in
the case of any Money Market Loan, any Bank has determined in its reasonable
judgment that the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall impose, modify or deem
applicable any reserve (including, without limitation, any such requirement
imposed by the Board of Governors of the Federal Reserve System, but excluding
(i) with respect to any CD Loan any such requirement included in an applicable
Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any
such requirement with respect to which such Bank is entitled to compensation
during the relevant Interest Period under Section 2.15), special deposit,
insurance assessment (excluding, with respect to any CD Loan, any such
requirement reflected in an applicable Assessment Rate) or similar requirement
against assets of, deposits with or for the account of, or credit extended by,
such Bank (or its Applicable Lending Office) or shall impose on any Bank (or its
Applicable Lending Office) or on the United States market for certificates of
deposit or the London interbank
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market any other condition affecting its Fixed Rate Loans, its Promissory Note
or its obligation to make Fixed Rate Loans and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of
any sum received or receivable by such Bank (or its Applicable Lending Office)
under this Agreement or under its Promissory Note with respect thereto, by an
amount deemed by such Bank to be material to such Bank, then, within 15 days
after written demand by such Bank (with a copy to the Agent), the Borrower shall
pay to such Bank such additional amount or amounts as will compensate such Bank
for such increased cost or reduction.
(b) If any Bank shall have determined that, after the date of this
Agreement, the adoption of any applicable law, rule or regulation regarding
capital adequacy, or any change in any such law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency (including any determination by any such authority, central
bank or comparable agency that, for purposes of capital adequacy requirements,
the Commitments hereunder do not constitute commitments with an original
maturity of one year or less), has or would have the effect of reducing the rate
of return on capital of such Bank (or its Parent) as a consequence of such
Bank's obligations hereunder to a level below that which such Bank (or its
Parent) could have achieved but for such adoption, change, request or directive
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after written demand by such Bank (with a copy to the Agent), the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date of this Agreement,
which will entitle such Bank to compensation pursuant to this Section; provided
that (i) if any Bank fails to give such notice within 90 days after it obtains
actual knowledge of such an event, such Bank shall only be entitled to payment
under this Section 8.03 for costs incurred from and after the date 90 days prior
to the date that such Bank does give such notice and (ii) each such Bank will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank in the good faith exercise of its discretion, be otherwise
disadvantageous to such Bank. A certificate of any Bank claiming compensation
under this Section and setting forth in reasonable detail the additional amount
or amounts to be paid
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to it hereunder and the basis used to determine such amounts shall be conclusive
in the absence of manifest error. In determining such amount, such Bank will use
reasonable averaging and attribution methods and will have a reasonable basis
for any assumptions it makes in connection therewith.
SECTION 8.04. Taxes. (a) Any and all payments by the Borrower to or for
the account of any Bank or the Agent hereunder or under any Promissory Note
shall be made free and clear of and without deduction for any and all present or
future taxes, duties, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding, in the case of each Bank and
the Agent, taxes imposed on or measured by its income, and franchise taxes
imposed on it, by the jurisdiction under the laws of which such Bank or the
Agent (as the case may be) is organized or any political subdivision thereof
and, in the case of each Bank, taxes imposed on or measured by its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as its "TAXES", and all such
excluded taxes being hereinafter referred to as its "DOMESTIC TAXES"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder or under any Promissory Note to any Bank or the Agent, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 8.04 such Bank or the Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the
full amount deducted to the relevant taxation authority or other authority in
accordance with applicable law and (iv) the Borrower shall furnish to the Agent,
at its address referred to in Section 9.01, the original or a certified copy of
a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any present or future stamp
or documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any
Promissory Note or from the execution or delivery of, or otherwise with respect
to, this Agreement or any other Financing Document (hereinafter referred to as
"OTHER TAXES").
(c) The Borrower agrees to indemnify each Bank and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04 paid by such Bank or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto. In addition, on and after the New Borrower Date, the Borrower
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agrees to indemnify the Agent and each Bank for all Domestic Taxes and any
liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, in each case to the extent that such Domestic Taxes result from
any payment or indemnification pursuant to this Section for (i) Taxes or Other
Taxes imposed by any jurisdiction other than the United States or (ii) Domestic
Taxes of the Agent or such Bank, as the case may be. This indemnification shall
be made within 15 days from the date such Bank or the Agent (as the case may be)
makes demand therefor.
(d) At the times indicated herein, each Bank organized under the laws
of a jurisdiction outside the United States shall provide the Borrower with
Internal Revenue Service form 1001 or 4224 (in each case accompanied by any
statements which may be required under applicable Treasury regulations), as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to receive payments under this Agreement
(i) without deduction or withholding of any United States federal income taxes
or (ii) subject to a reduced rate of United States federal withholding tax,
unless, in each case of clause (i) and (ii) of this Section 8.04(d), an event
(including, without limitation, any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders such forms inapplicable or which would prevent the Bank
from duly completing and delivering any such form with respect to it and the
Bank advises the Borrower and the Agent that it is not capable of receiving
payments without any deduction or withholding of such taxes. Such forms shall be
provided (x) on or prior to the date of the Bank's execution and delivery of
this Agreement in the case of each Bank listed on the signature pages hereof,
and on or prior to the date on which it becomes a Bank in the case of each other
Bank, and (y) on or before the date that such form expires or becomes obsolete
or after the occurrence of any event requiring a change in the most recent form
so delivered by the Bank. If the form provided by a Bank at the time such Bank
first becomes a party to this Agreement indicates a United States interest
withholding tax rate in excess of zero, United States withholding tax at such
rate shall be considered excluded from "TAXES" as defined in Section 8.04(a). In
addition, to the extent that for reasons other than a change of treaty, law or
regulation any Bank becomes subject to an increased rate of United States
interest withholding tax while it is a party to this Agreement, United States
withholding tax at such increased rate shall be considered excluded from "Taxes"
as defined in Section 8.04(a).
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form in accordance with Section 8.04(d)
(unless such failure is excused by the terms of Section 8.04(d)), such Bank
shall not be entitled to indemnification under Section 8.04(a) or 8.04(c) with
respect to Taxes imposed by the United States; provided, however, that should a
Bank, which is
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otherwise exempt from or subject to a reduced rate of withholding tax, become
subject to Taxes because of its failure to deliver a form required hereunder,
the Borrower shall take such steps as such Bank shall reasonably request to
assist such Bank to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Bank pursuant to this Section 8.04, then such Bank will change
the jurisdiction of its Applicable Lending Office so as to eliminate or reduce
any such additional payment which may thereafter accrue if such change, in the
judgment of such Bank in the good faith exercise of its discretion, is not
otherwise disadvantageous to such Bank.
SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate
Loans. If (i) the obligation of any Bank to make, or to continue or convert
outstanding Loans as or to Euro-Dollar Loans has been suspended pursuant to
Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or
8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall,
by at least five Euro-Dollar Business Days' prior notice to such Bank through
the Agent, have elected that the provisions of this Section shall apply to such
Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer exist (which such Bank agrees to do promptly upon such circumstances
ceasing to exist), all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be,
shall instead be Base Rate Loans (on which interest and principal shall be
payable contemporaneously with the related Fixed Rate Loans of the other Banks).
If such Bank notifies such Borrower that the circumstances giving rise to such
suspension or demand for compensation no longer exist, the principal amount of
each such Base Rate Loan shall be converted into a CD Loan or Euro-Dollar Loan,
as the case may be, on the first day of the next succeeding Interest Period
applicable to the related CD Loans or Euro-Dollar Loans of the other Banks.
SECTION 8.06. Substitution of Bank. If any Bank (i) has demanded
compensation for increased costs pursuant to Section 8.03 or 8.04 or is entitled
to payments under Section 8.04(a) or (ii) has determined that the making or
maintaining of any Euro-Dollar Loan has become unlawful or impossible pursuant
to Section 8.02 and similar additional interest or compensation has not been
demanded by, or a similar determination has not been made by, all of the Banks,
the Borrower shall have the right (with the assistance of the Agent) to
designate an Assignee which is not an Affiliate of the Borrower to purchase for
cash, pursuant to an Assignment and Assumption Agreement in substantially the
form of Exhibit G hereto, the outstanding Loans and Commitment of such Bank and
to assume all of such Bank's other rights and obligations hereunder without
recourse
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to or warranty by, or expense to, such Bank, for a purchase price equal to the
principal amount of all of such Bank's outstanding Loans plus any accrued but
unpaid interest thereon and the accrued but unpaid fees in respect of that
Bank's Commitment hereunder plus such amount, if any, as would be payable
pursuant to Section 2.13 if the outstanding Loans of such Bank were prepaid in
their entirety on the date of consummation of such assignment.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other communications
to any party provided for hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given to such party: (x) in the case of the Borrower or the Agent, at
its address or facsimile or telex number set forth on the signature pages
hereof, (y) in the case of any Bank, at its address or facsimile or telex number
set forth in its Administrative Questionnaire or (z) in the case of any party,
such other address or facsimile or telex number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by telex,
when such telex is transmitted to the telex number specified in this Section and
the appropriate answerback is received, (ii) if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this Section 9.01
and electronic, telephonic or other appropriate confirmation of receipt is
received by the sender, (iii) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iv) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Agent under
Article 2 or Article 8 shall not be effective until received.
SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any other
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
and therein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i)
all reasonable out-of-pocket expenses of the Agent, including reasonable fees
and disbursements of special counsel for the Agent, in connection with the
preparation and administration of the Financing Documents, any waiver or consent
hereunder
50
<PAGE> 55
or any amendment thereof or any Default or alleged Default hereunder and (ii) if
an Event of Default occurs, all reasonable out-of-pocket expenses incurred by
the Agent and each Bank, including reasonable fees and disbursements of counsel,
in connection with such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Agent and each Bank, their
respective Bank Affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses, including, without limitation, the reasonable fees and disbursements
of counsel, which may be incurred by such Indemnitee (whether or not such
Indemnitee shall be designated a party thereto) arising out of any
investigative, administrative or judicial proceeding (brought or threatened)
relating to or arising out of the Financing Documents, the arrangement,
administration, performance or enforcement thereof or any actual or proposed use
of proceeds of Loans hereunder; provided that no Indemnitee shall have the right
to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction; provided
further that no Indemnitee shall have the right to be indemnified hereunder in
connection with any proceedings between it and another Indemnitee which does not
relate to the Borrower.
(c) If any proceeding or claim shall be brought or asserted against any
Indemnitee in respect of which indemnity may be sought pursuant to the preceding
subsection, such Indemnitee shall promptly notify the Borrower. The Borrower
shall not be liable for any costs or expenses in connection with any settlement
entered into without its consent.
SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate amount of principal and interest due with
respect to any Promissory Note held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest due with respect to any Promissory Note held by such other Bank, the
Bank receiving such proportionately greater payment shall purchase such
participations in the Promissory Notes held by the other Banks, and such other
adjustments shall be made, as may be required, so that all such payments of
principal and interest with respect to the Promissory Notes held by the Banks
shall be shared by the Banks pro rata; provided that nothing in this Section
shall impair the right of any Bank to exercise any right of set-off or
counterclaim it may have and to apply the amount subject to such exercise to the
payment of indebtedness of the Borrower other than its indebtedness under the
Promissory Notes.
51
<PAGE> 56
SECTION 9.05. Amendments and Waivers. Any provision of this Agreement
or the Promissory Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the Agent);
provided that no such amendment or waiver shall, unless signed by all the Banks,
(i) increase or decrease the Commitment of any Bank (except for a ratable
decrease in the Commitments of all Banks) or subject any Bank to any additional
obligation, (ii) reduce the principal of or rate of interest on any Loan or any
fees hereunder, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for termination of any Commitment,
(iv) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Promissory Notes, or the number of Banks, which shall be
required for the Banks or any of them to take any action under this Section or
any other provision of this Agreement or (v) release the Parent Guarantor from
its obligations under the Parent Guarantee.
SECTION 9.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without the
prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrower and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii) or (iv) of Section 9.05 without the consent of the Participant. The
Borrower agrees that each Participant shall, to the extent provided in its
participation agreement and subject to subsection (e), (f) and (g) below, be
entitled to the benefits of Article 8 with respect to its participating
interest. An assignment or other transfer which is not permitted by subsection
9.06(c) or 9.06(d) below shall be given effect for purposes of this Agreement
only to the extent of a participating interest granted in accordance with this
subsection (b).
52
<PAGE> 57
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part (in an amount
equivalent to an original Commitment of not less than $10,000,000) of all, of
its rights and obligations under this Agreement and the Promissory Notes, and
such Assignee shall assume such rights and obligations, pursuant to an
Assignment and Assumption Agreement in substantially the form of Exhibit I
hereto executed by such Assignee and such transferor Bank, with (and subject to)
the subscribed consent of the Borrower and the Agent, which shall not be
unreasonably withheld; provided that if an Assignee is an affiliate of such
transferor Bank, no such consent shall be required; and provided further that
such assignment may, but need not, include rights of the transferor Bank in
respect of outstanding Money Market Loans. Upon execution and delivery of such
instrument and payment by such Assignee to such transferor Bank of an amount
equal to the purchase price agreed between such transferor Bank and such
Assignee, such Assignee shall be a Bank party to this Agreement and shall have
all the rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower
shall make appropriate arrangements so that, if required, a new Promissory Note
is issued to the Assignee. In connection with any such assignment, the
transferor Bank shall pay to the Agent an administrative fee for processing such
assignment in the amount of $2,500. If the Assignee is not incorporated under
the laws of the United States of America or a state thereof, it shall deliver to
the Borrower and the Agent certification as to exemption from deduction or
withholding of any United States federal income taxes in accordance with Section
8.04.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Promissory Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.03 or 8.04 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring
such Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
(f) Notwithstanding anything to the contrary contained in this Section
9.06 but subject to the terms and conditions set forth in this subsection (f),
any
53
<PAGE> 58
Bank may from time to time, elect to designate a Conduit to provide all
or any part of Loans required to be made by such Bank to the Borrower pursuant
to this Agreement or to acquire a participation interest in any Loans extended
by such Bank hereunder (a "CONDUIT DESIGNATION"), provided the designation of a
Conduit by any Bank for purposes of this Section 9.06(f) shall be subject to the
approval of the Borrower, which shall not be unreasonably withheld. No
additional Note shall be required with regard to a Conduit Designation;
provided, however, to the extent any Conduit shall advance funds under a Conduit
Designation, the designating Bank shall be deemed to hold the Note in its
possession as an agent for such Conduit to the extent of the Loan funded by such
Conduit. Notwithstanding any such Conduit Designation, (x) the designating Bank
shall remain solely responsible to the other parties hereto for its obligations
under this Agreement and (y) the Borrower and the Agent may continue to deal
solely and directly with the designating Bank as administrative agent for such
designating Bank's Conduit, in connection with all of such Conduit's rights and
obligations under this Agreement, unless and until the Borrower and the Agent
are notified that the designating Bank has been replaced as administrative agent
for its Conduit; any payments for the benefit of any designating Bank and its
Conduit shall be paid to such designating Bank for itself as administrative
agent for its Conduit, as applicable; provided neither the Borrower nor the
Agent shall be responsible for any designating Bank's application of any such
payments. In addition, any Conduit may (i) with notice to, but without the prior
written consent of the Borrower and the Agent, and without paying any processing
fee therefor, assign all or portions of its interest in any Loans to the Bank
that designated such Conduit or to any financial institutions consented to by
the Borrower and the Agent providing liquidity and/or credit facilities to or
for the account of such Conduit to support the funding or maintenance of Loans
and (ii) disclose on a confidential basis any non-public information relating to
its Loans to any rating agency, commercial paper dealer or provider of any
guarantee, surety, credit or liquidity enhancement to such Conduit.
(g) Each party to this Agreement hereby agrees that, at any time a
Conduit Designation is in effect, it shall not institute against, or join any
other person in instituting against, any Conduit any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceeding or other proceedings under any
federal or state bankruptcy or similar law, for one year and a day after the
latest maturing commercial paper note issued by such Conduit is paid. This
Section 9.06(g) shall survive the termination of this Agreement.
SECTION 9.07. Collateral. Each of the Banks represents to the Agent and
each of the other Banks that it in good faith is not relying upon any "margin
stock" (as defined in Regulation U) as collateral in the extension or
maintenance of the credit provided for in this Agreement.
54
\
<PAGE> 59
SECTION 9.08. Governing Law. THIS AGREEMENT AND EACH PROMISSORY NOTE
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
SECTION 9.09. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement constitutes the entire agreement and understanding among the
parties hereto and supersedes any and all prior agreements and understandings,
oral or written, relating to the subject matter hereof.
SECTION 9.10. Waiver of Jury Trial. EACH OF THE BORROWER, THE AGENT AND
THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 9.11. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Borrower or
for any other reason, any payment under or in connection with this Agreement, is
made or satisfied in a currency (the "Other Currency") other than that in which
the relevant payment is due (the "Required Currency") then, to the extent that
the payment (when converted into the Required Currency at the rate of exchange
on the date of payment or, if it is not practicable for the party entitled
thereto (the "Payee") to purchase the Required Currency with the other Currency
on the date of payment, at the rate of exchange as soon thereafter as it is
practicable for it to do so) actually received by the Payee falls short of the
amount due under the terms of this Agreement, the Borrower shall, to the extent
permitted by law, as a separate and independent obligation, indemnify and hold
harmless the Payee against the amount of such short-fall. For the purpose of
this Section, "rate of exchange" means the rate at which the Payee is able on
the relevant date to purchase the Required Currency with the Other Currency and
shall take into account any premium and other costs of exchange.
SECTION 9.12. Judicial Proceedings. (a) Consent to Jurisdiction. The
Borrower irrevocably submits to the non-exclusive jurisdiction of any federal or
New York State court sitting in New York City over any suit, action or
proceeding arising out of or relating to the Financing Documents. The Borrower
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding brought in such court and any claim that any suit, action or
proceeding brought in such court has been brought in an inconvenient forum. The
Borrower agrees that a final judgment in any such suit, action or proceeding
brought in such a court shall
55
<PAGE> 60
be conclusive and binding upon it and will be given effect in Luxembourg to the
fullest extent permitted by applicable law and may be enforced in any federal or
New York State court sitting in New York City (or any other courts to the
jurisdiction of which the Borrower is or may be subject) by a suit upon such
judgment, provided that service of process is effected upon it in one of the
manners specified herein or as otherwise permitted by law.
(b) Appointment of Agent for Service of Process. The Borrower hereby
irrevocably designates and appoints CT Corporation System having an office on
the date hereof at 1633 Broadway, New York, New York 10019 as its authorized
agent, to accept and acknowledge on its behalf, service of any and all process
which may be served in any suit, action or proceeding of the nature referred to
in subsection (a) above in any federal or New York State court sitting in New
York City. The Borrower represents and warrants that such agent has agreed in
writing to accept such appointment and that a true copy of such designation and
acceptance has been delivered to the Agent. Such designation and appointment
shall be irrevocable until all principal and interest and all other amounts
payable under the Financing Documents shall have been paid in full in accordance
with the provisions hereof. If such agent shall cease so to act, the Borrower
covenants and agrees to designate irrevocably and appoint without delay another
such agent satisfactory to the Agent and to deliver promptly to the Agent
evidence in writing of such other agent's acceptance of such appointment.
(c) Service of Process. The Borrower hereby consents to process being
served in any suit, action, or proceeding of the nature referred to in
subsection (a) above in any federal or New York State court sitting in New York
City by service of process upon the agent of the Borrower, as the case may be,
for service of process in such jurisdiction appointed as provided in subsection
(b) above; provided that, to the extent lawful and possible, written notice of
said service upon such agent shall be mailed by registered airmail, postage
prepaid, return receipt requested, to the Borrower at its address specified on
the signature pages hereof or to any other address of which the Borrower shall
have given written notice to the Agent. The Borrower irrevocably waives, to the
fullest extent permitted by law, all claim of error by reason of any such
service and agrees that such service shall be deemed in every respect effective
service of process upon the Borrower in any such suit, action or proceeding and
shall, to the fullest extent permitted by law, be taken and held to be valid and
personal service upon and personal delivery to the Borrower.
(d) No Limitation on Service or Suit. Nothing in this Section shall
affect the right of the Agent or any Bank to serve process in any other manner
permitted by law or limit the right of the Agent or any Bank to bring
proceedings against the Borrower in the courts of any jurisdiction or
jurisdictions.
56
<PAGE> 61
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TYCO INTERNATIONAL GROUP S.A.
By: /s/ Richard Brann
---------------------------------------
Title: Managing Director
By: /s/ Erik D. Lazar
---------------------------------------
Title: Managing Director
Address: 6 Avenue Emile Reuter
2nd Floor
Luxembourg, 2420
Facsimile number: 352-46-43-50
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ SoVonna L. Day
---------------------------------------
Title: Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/ SoVonna L. Day
---------------------------------------
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention: SoVonna L. Day
Telex number: 177615
Facsimile number: 212-648-5018
<PAGE> 62
Co-Syndication Agents:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ John W. Pocalyko
---------------------------------------
Title: Managing Director
THE CHASE MANHATTAN BANK
By: /s/ Michael Lancia
---------------------------------------
Title: Vice President
COMMERZBANK AG, NEW YORK BRANCH
By: /s/ Robert Donohue
---------------------------------------
Title: Senior Vice President
By: /s/ Peter Doyle
---------------------------------------
Title: Assistant Vice President
Managing Agents:
ABN AMRO BANK N.V.
By: /s/ James S. Adelsheim
---------------------------------------
Title: Group Vice President
By: /s/ David A. Carroll
---------------------------------------
Title: Officer
<PAGE> 63
BARCLAYS BANK PLC
By: /s/ Paul Kavanagh
---------------------------------------
Title: Director
BANKERS TRUST COMPANY
By: /s/ Patricia Hogan
---------------------------------------
Title: Principal
CITIBANK, N.A.
By: /s/ Diane L. Pockaj
---------------------------------------
Title: Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Vladimir Labun
---------------------------------------
Title: First Vice President - Manager
<PAGE> 64
CREDIT SUISSE FIRST BOSTON
By: /s/ David W. Kratovil
---------------------------------------
Title: Director
By: /s/ Robert Hetu
---------------------------------------
Title: Vice President
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By: /s/ A. Richard Morris
---------------------------------------
Title: First Vice President
By: /s/ Ken Hamilton
---------------------------------------
Title: Senior Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Robert McMillan
---------------------------------------
Title: Corporate Banking Officer
FIRST UNION NATIONAL BANK
By: /s/ Mareen Walker Duvall
---------------------------------------
Title: Senior Vice President
<PAGE> 65
ISTITUTO BANCARIO SAN PAOLO DI
TORINO ISTITUTO MOBILIARE
ITALIANO, SPA
By: /s/ Luca Sacchi
---------------------------------------
Title: Vice President
By: /s/ Carlo Persico
---------------------------------------
Title: Deputy General Manager
MARINE MIDLAND BANK
By: /s/ Mark J. Rakov
---------------------------------------
Title: Vice President
MELLON BANK, N.A.
By: /s/ Charles H. Staub
---------------------------------------
Title: First Vice President
SOCIETE GENERALE
By: /s/ Louis P. Laville, III
---------------------------------------
Title: Director
<PAGE> 66
THE BANK OF NOVA SCOTIA
By: /s/ William E. Zarrett
---------------------------------------
Title: Senior Relationship Manager
TORONTO DOMINION (TEXAS), INC.
By: /s/ Anne C. Favoriti
---------------------------------------
Title: Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
By: /s/ Duncan M. Robertson
---------------------------------------
Title: Vice President
By: /s/ Alan S. Bookspan
---------------------------------------
Title: Vice President
Co-Agents:
BANKBOSTON, N.A.
By: /s/ Roberta F. Keeler
---------------------------------------
Title: Vice President
<PAGE> 67
BANQUE NATIONALE DE PARIS
By: /s/ Richard L. Sted
---------------------------------------
Title: Senior Vice President
By: /s/ Richard Pace
---------------------------------------
Title: Vice President
Corporate Banking Division
Lead Managers:
DEN DANSKE BANK AKTIESELSKAB,
CAYMAN ISLANDS BRANCH
By: /s/ Peter L. Hargraves
---------------------------------------
Title: Vice President
By: /s/ Henrik K. Ibsen
---------------------------------------
Title: Vice President
FLEET BANK - NH
By: /s/ Amy LeBlanc Hackett
---------------------------------------
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Frank J. Jancar
---------------------------------------
Title: Vice President
<PAGE> 68
NATIONAL WESTMINSTER BANK PLC
NEW YORK BRANCH
NATIONAL WESTMINSTER BANK PLC
NASSAU BRANCH
By: /s/ B. T. Sharpe
---------------------------------------
Title: Senior Corporate Manager
By: /s/ B. T. Sharpe
---------------------------------------
Title: Senior Corporate Manager
STANDARD CHARTERED BANK
By: /s/ Jacob H. Yahiayan
---------------------------------------
Title: Vice President
Participants:
AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED
By: /s/ Robert Sloan
---------------------------------------
Title: First Vice President
<PAGE> 69
BANCA COMMERCIALE ITALIANA
NEW YORK BRANCH
By: /s/ C. Dougherty
---------------------------------------
Title: Vice President
By: /s/ Karen Purelis
---------------------------------------
Title: Vice President
BANCA POPOLARE DI MILANO
NEW YORK BRANCH
By: /s/ Fulvio Montanari
---------------------------------------
Title: First Vice President
By: /s/ Patrick F. Dillon
---------------------------------------
Title: Vice President
Chief Credit Officer
BBL INTERNATIONAL, (U.K.) LTD
By: /s/ C. F. Wright
---------------------------------------
Title: Authorized Signatory
By: /s/ M-C Swinnen
---------------------------------------
Title: Authorized Signatory
<PAGE> 70
BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ Thomas Fennessey
---------------------------------------
Title: Attorney-in-fact
BAYERISCHE HYPO-UND VEREINSBANK AG,
NEW YORK BRANCH
By: /s/ Marianne Weinzinger
---------------------------------------
Title: Director
By: /s/ Imke Engelmann
---------------------------------------
Title: Associate Director
BAYERISCHE LANDESBANK
GIROZENTRALE CAYMAN ISLANDS
BRANCH
By: /s/ Alexander Kohnert
---------------------------------------
Title: First Vice President
By: /s/ James H. Boyle
---------------------------------------
Title: Senior Vice President
<PAGE> 71
CARIPLO - CASSA DI RISPARMIO DELLE
PROVINCIE LOMBARDE S.p.A.
By: /s/ Anthony F. Giobbi
---------------------------------------
Title: First Vice President
By: /s/ Maria Elena Greene
---------------------------------------
Title: Assistant Vice President
COMERICA BANK
By: /s/ Martin G. Elllis
---------------------------------------
Title: Vice President
CREDIT COMMERCIAL DE FRANCE
NEW YORK BRANCH
By: /s/ J. J. Salomon
---------------------------------------
Title: Senior Vice President
By: /s/ Elizabeth A. Fallon
---------------------------------------
Title: Vice President
<PAGE> 72
NORDDEUTSCHE LANDESBANK
GIROZENTRALE NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By: /s/ Irene A. Burczynski
---------------------------------------
Title: Vice President
By: /s/ Stephen K. Hunter
---------------------------------------
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Donald V. Davis
---------------------------------------
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Thomas C. McCrohan
---------------------------------------
Title: Vice President
THE NORTHERN TRUST COMPANY
By: /s/ Russell R. Rockenbach
---------------------------------------
Title: Second Vice President
<PAGE> 73
UNICREDITO ITALIANO S.p.A.
By: /s/ Harmon P. Butler
---------------------------------------
Title: First Vice President and
Deputy Manager
By: /s/ Gianfranco Bisagni
---------------------------------------
Title: First Vice President
BW CAPITAL MARKETS, INC.
By: /s/ Robert B. Herber
---------------------------------------
Title: Managing Director
By: /s/ Thomas A. Lowe
---------------------------------------
Title: Vice President
THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
By: /s/ Bob Gallagher, Jr.
---------------------------------------
Title: Vice President
WESTPAC BANKING CORPORATION
By: /s/ Kate V. Perry
---------------------------------------
Title: Vice President
<PAGE> 74
COMMITMENT SCHEDULE
<TABLE>
<S> <C>
Morgan Guaranty Trust Company of New York $183,750,000
Bank of America National Trust and Savings Association $108,750,000
The Chase Manhattan Bank $108,750,000
Commerzbank AG, New York Branch $108,750,000
ABN AMRO Bank N.V. $90,000,000
Barclays Bank Plc $90,000,000
Bankers Trust Company $90,000,000
Citibank, N.A. $90,000,000
Credit Lyonnais New York Branch $90,000,000
Credit Suisse First Boston $90,000,000
Dresdner Bank AG, New York and Grand Cayman Branches $90,000,000
The First National Bank of Chicago $90,000,000
First Union National Bank $90,000,000
Istituto Bancario San Paolo di Torino
Istituto Mobiliare Italiano, SpA $90,000,000
Marine Midland Bank $90,000,000
Mellon Bank, N.A. $90,000,000
Societe Generale $90,000,000
The Bank of Nova Scotia $90,000,000
Toronto Dominion (Texas), Inc. $90,000,000
Westdeutsche Landesbank Girozentrale $90,000,000
BankBoston, N.A. $75,000,000
Banque Nationale de Paris $75,000,000
Den Danske Bank Aktieselskab, Cayman Islands Branch $65,000,000
Fleet Bank - NH $65,000,000
KeyBank National Association $65,000,000
National Westminster Bank Plc New York and
Nassau Branches $65,000,000
Standard Chartered Bank $65,000,000
Australia and New Zealand Banking Group Limited $50,000,000
Banca Commerciale Italiana New York Branch $50,000,000
Banca Popolare di Milano New York Branch $50,000,000
BBL International, (U.K.) Ltd $50,000,000
Bank of Tokyo-Mitsubishi, Ltd. $50,000,000
Bayerische Hypo - Und Vereinsbank AG, New York Branch $50,000,000
Bayerische Landesbank Girozentrale Cayman Islands Branch $50,000,000
Cariplo - Cassa Di Risparmio Delle Provincie Lombarde S.p.A. $50,000,000
Comerica Bank $50,000,000
Credit Commercial de France New York Branch $50,000,000
</TABLE>
<PAGE> 75
<TABLE>
<S> <C>
Norddeutsche Landesbank Girozentrale New York Branch
and/or Cayman Islands Branch $50,000,000
PNC Bank, National Association $50,000,000
The Bank of New York $50,000,000
The Northern Trust Company $50,000,000
Unicredito Italiano S.p.A. $50,000,000
BW Capital Markets, Inc. $25,000,000
The Dai-Ichi Kangyo Bank, Ltd., New York Branch $25,000,000
Westpac Banking Corporation $25,000,000
---------------
Total Commitments $ 3,250,000,000
</TABLE>
<PAGE> 76
PRICING SCHEDULE
The "EURO-DOLLAR MARGIN", "CD MARGIN" and "FACILITY FEE RATE" for any
day are the respective percentages set forth below in the applicable row and
column based upon the Utilization and Status that exist on such day (provided
that for any day on or after February 11, 2000, the "Euro-Dollar Margin" and the
"CD Margin" shall be equal to the respective percentages so determined plus (x)
1.00% per annum for any day on which Level I Status, Level II Status, Level III
Status or Level IV Status exists or (y) 2.00% per annum for any day on which
Level V Status or Level VI Status exists):
<TABLE>
<CAPTION>
===============================================================================================================
Level Level Level Level Level Level
Status I II III IV V VI
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Euro-Dollar Margin
Utilization [less than] 25% 0.315% 0.430% 0.535% 0.640% 0.7375% 0.800%
Utilization [greater than
or equal to] 25% 0.440% 0.555% 0.660% 0.765% 0.9875% 1.175%
===============================================================================================================
CD Margin
Utilization [less than] 25% 0.440% 0.555% 0.660% 0.765% 0.8625% 0.925%
Utilization [greater than
or equal to] 25% 0.565% 0.680% 0.785% 0.890% 1.1125% 1.300%
===============================================================================================================
Facility Fee Rate 0.060% 0.070% 0.090% 0.110% 0.1375% 0.200%
===============================================================================================================
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings, subject to the concluding paragraph of this Schedule:
"LEVEL I STATUS" exists at any date if, at such date, the Borrower's
senior unsecured long-term debt is rated A or higher by S&P or A2 or higher by
Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the
Borrower's senior unsecured long-term debt is rated A- or higher by S&P or A3 or
higher by Moody's and (ii) Level I Status does not exist.
"LEVEL III STATUS" exists at any date if, at such date, (i) the
Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P or
Baa1 or higher by Moody's and (ii) neither Level I Status nor Level II Status
exists.
"LEVEL IV STATUS" exists at any date if, at such date, (i) (x) the
Borrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2
or higher by Moody's and (y) the Borrower's commercial paper is rated A2 or
higher by S&P and P2 or higher by Moody's and (ii) none of Level I Status, Level
II Status and Level III Status exists.
<PAGE> 77
"LEVEL V STATUS" exists at any date, if at such date, (i) the
Borrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2
or higher by Moody's and (ii) none of Level I Status, Level II Status, Level III
Status or Level IV Status exists.
"LEVEL VI STATUS" exists at any date if, at such date, no other Status
exists.
"STATUS" refers to the determination of which of Level I Status, Level
II Status, Level III Status, Level IV Status, Level V Status or Level VI Status
exists at any date.
"UTILIZATION" means, at any date, the percentage equivalent of a
fraction (i) the numerator of which is the aggregate outstanding principal
amount of the Loans at such date and (ii) the denominator of which is the
aggregate amount of the Commitments at such date. If for any reason any Loans
remain outstanding following termination of the Commitments, Utilization shall
be deemed to be in excess of 25%.
The credit ratings to be utilized for purposes of this Schedule are
those assigned to the senior unsecured long-term debt securities and/or
commercial paper, as the case may be, of the Borrower without third-party credit
enhancement, and any rating assigned to any other debt security of the Borrower
shall be disregarded. The rating in effect at any date is that in effect at the
close of business on such date. If the Borrower is split-rated and the ratings
differential is one notch, the higher of the two ratings will apply (e.g., A/A3
results in Level I Status). If the Borrower is split-rated and the ratings
differential is more than one notch, the average of the two ratings (or the
higher of two intermediate ratings) shall be used (e.g., A/Baa1 results in Level
II Status, as does A/Baa2).
2
<PAGE> 78
EXHIBIT A
PROMISSORY NOTE
New York, New York
, 1999
For value received, TYCO INTERNATIONAL GROUP S.A., a Luxembourg company
(the "Borrower"), promises to pay to the order of (the "Bank"), for the
account of its Applicable Lending Office, the unpaid principal amount of each
Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred
to below on the maturity date provided for in the Credit Agreement. The Borrower
promises to pay interest on the unpaid principal amount of each such Loan on the
dates and at the rate or rates provided for in the Credit Agreement. All such
payments of principal and interest shall be made in lawful money of the United
States in Federal or other immediately available funds at the office of Morgan
Guaranty Trust Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank and,
if the Bank so elects in connection with any transfer or enforcement hereof,
appropriate notations to evidence the foregoing information with respect to each
such Loan then outstanding may be endorsed by the Bank on the schedule attached
hereto, or on a continuation of such schedule attached to and made a part
hereof; provided that the failure of the Bank to make any such recordation or
endorsement shall not affect the obligations of the Borrower hereunder or under
the Credit Agreement.
This promissory note is one of the Promissory Notes referred to in the
364-Day Credit Agreement dated as of February 12, 1999 among the Borrower, the
<PAGE> 79
banks listed on the signature pages thereof and Morgan Guaranty Trust Company of
New York, as Agent (as the same may be amended from time to time, the "Credit
Agreement"). Terms defined in the Credit Agreement are used herein with the same
meanings. Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
Except as permitted by Section 9.06 of the Credit Agreement, this
Promissory Note may not be assigned by the Bank to any other Person.
This Promissory Note shall be governed by and construed in accordance
with the laws of the State of New York.
TYCO INTERNATIONAL GROUP S.A.
By:
---------------------------------------
Name:
Title:
By:
---------------------------------------
Name:
Title:
2
<PAGE> 80
Promissory Note (cont'd)
LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------------
Amount Type Amount of Unpaid
of of Principal Principal Maturity Notation
Date Loan Loan Repaid Amount Date Made By
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
<PAGE> 81
EXHIBIT B
FORM OF MONEY MARKET QUOTE REQUEST
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: Tyco International Group S.A.
Re: 364-Day Credit Agreement (the "Credit Agreement") dated
as of February 12, 1999 among the Borrower, the Banks
listed on the signature pages thereof and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT* INTEREST PERIOD**
----------------- -----------------
<S> <C>
$
</TABLE>
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Terms used herein have the meanings assigned to them in the Credit
Agreement.
TYCO INTERNATIONAL GROUP S.A.
By
-----------------------------------------
Title:
By
----------------------------------------
Title:
- ------------------------
*Amount must be $10,000,000 or a larger multiple of $1,000,000.
**Not less than one month (LIBOR Auction) or not less than 30 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE> 82
EXHIBIT C
FORM OF INVITATION FOR MONEY MARKET QUOTES
To: [Name of Bank]
Re: Invitation for Money Market Quotes to Tyco International
Group S.A. (the "Borrower")
Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of
February 12, 1999 among the Borrower, the Banks parties thereto and the
undersigned, as Agent (the "Credit Agreement"), we are pleased on behalf of the
Borrower to invite you to submit Money Market Quotes to the Borrower for the
following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT INTEREST PERIOD
---------------- ---------------
<S> <C>
$
</TABLE>
Such Money Market Quotes should offer a Money Market [Margin] [Absolute
Rate]. [The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [2:00 P.M.] [9:30
A.M.] (New York City time) on [date].
Terms used herein have the meanings assigned to them in the Credit
Agreement.
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By
-----------------------------------------
Authorized Officer
<PAGE> 83
EXHIBIT D
FORM OF MONEY MARKET QUOTE
To: Morgan Guaranty Trust Company of New York, as Agent
Re: Money Market Quote to Tyco International Group S.A. (the "Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank:
-----------------------------
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at
the following rates:
Principal Interest Money Market
<TABLE>
<CAPTION>
AMOUNT** PERIOD*** [MARGIN****] [ABSOLUTE RATE*****]
-------- --------- ------------ --------------------
<S> $ <C> <C> <C>
$
</TABLE>
[Provided, that the aggregate principal amount of Money Market Loans
for which the above offers may be accepted shall not exceed $____________.]**
----------
* As specified in the related Invitation.
** Principal amount bid for each Interest Period may not exceed
principal amount requested. Specify aggregate limitation if the sum of the
individual offers exceeds the amount the Bank is willing to lend. Bids must be
made for $5,000,000 or a larger multiple of $1,000,000.
(notes continued on following page)
<PAGE> 84
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the 364-Day Credit
Agreement dated as of February 12, 1999 (the "Credit Agreement") among the
Borrower, the Banks listed on the signature pages thereof and yourselves, as
Agent, irrevocably obligates us to make the Money Market Loan(s) for which any
offer(s) are accepted, in whole or in part, in accordance with Section 2.03(f)
of the Credit Agreement.
Terms used herein have the meanings assigned to them in the Credit
Agreement.
Very truly yours,
[NAME OF BANK]
Dated: By:
--------------------- ---------------------------------
Authorized Officer
- ----------
*** Not less than one month or not less than 30 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined
for the applicable Interest Period. Specify percentage (to the nearest 1/10,000
of 1%) and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).
2
<PAGE> 85
EXHIBIT E
FORM OF OPINION OF CHIEF CORPORATE COUNSEL
OF THE PARENT GUARANTOR
February 12, 1999
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the Executive Vice President and Chief Corporate Counsel of Tyco
International Ltd., a Bermuda company (the "PARENT GUARANTOR"), which owns all
of the outstanding capital stock of Tyco International Group S.A., a Luxembourg
company (the "BORROWER"). I am rendering this opinion in connection with (i)
that certain 364-Day Credit Agreement (the "CREDIT AGREEMENT"), dated as of
February 12, 1999, among the Borrower, the banks listed on the signature pages
thereof (the "BANKS") and Morgan Guaranty Trust Company of New York, as Agent
and (ii) that certain Amended and Restated Parent Guarantee Agreement (the
"PARENT GUARANTEE"), dated as of February 13, 1998 and amended and restated as
of February 12, 1999, entered into by the Parent Guarantor pursuant to the
Credit Agreement. This opinion is being delivered to you pursuant to Section
3.01(d) of the Credit Agreement. Each term defined in the Credit Agreement and
used herein, but not otherwise defined herein, has the meaning ascribed thereto
in the Credit Agreement.
In connection with the opinion set forth herein, I have caused
attorneys employed under my supervision to review the Credit Agreement, the
Promissory Notes of the Borrower, the Parent Guarantee (collectively, the
"FINANCING DOCUMENTS") and the Extendible 364-Day Credit Agreement dated as of
February 13, 1998 among the Borrower, the banks listed therein and Morgan
Guaranty Trust Company of New York, as agent for such banks, as amended to the
Effective Date (the "EXISTING FIVE-YEAR AGREEMENT" and, as further amended by
<PAGE> 86
the Credit Agreement, the "AMENDED FIVE-YEAR AGREEMENT" and together with the
Credit Agreement, the "AGREEMENTS") and have caused attorneys employed under my
supervision to examine originals or copies, certified or otherwise identified to
my satisfaction, of such documents, records, certificates and instruments as I
have deemed relevant and necessary as a basis for the opinion hereinafter
expressed.
In connection with such examination, I have assumed the genuineness of
all signatures on original documents, the authenticity of all documents
submitted for review as originals, the conformity to the originals of all copies
submitted for review as certified, conformed or photostatic copies, and the
authenticity of the originals of such copies. As to various questions of fact
material to this opinion, I have relied, without independent investigation or
verification, upon statements, representations and certificates of officers and
other representatives of the Borrower, the Parent Guarantor and certificates of
public officials. In addition, I have assumed that (i) the Agreements have been
validly authorized, executed and delivered by all parties thereto (other than
the Borrower), (ii) each party to the Agreements (other than the Borrower) has
been duly organized and is a corporation or other entity validly existing and in
good standing (to the extent applicable) under the laws of its respective
jurisdiction of organization, with the full corporate or other organizational
power to execute and deliver the Agreements and to perform its respective
obligations thereunder, (iii) the Agreements constitute the legal, valid and
binding obligations of the respective parties thereto (other than the Borrower)
enforceable against such parties in accordance with their respective terms, (iv)
the execution and delivery of the Agreements by each party thereto (other than
the Borrower) and the performance by such parties of their respective
obligations thereunder do not violate such parties' respective articles or
certificate of incorporation or by-laws, or other organizational documents, and
(v) the execution, delivery and performance by each party to the Agreements
(other than the Borrower) and the performance by such parties of their
respective obligations thereunder do not violate any agreement, judgment,
injunction, decree, order of any governmental authority, other instrument, law
or regulation applicable to such party.
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
1. The execution, delivery and performance by the Borrower of the
Credit Agreement and the Promissory Notes and the performance by the Borrower of
the Amended Five-Year Agreement (a) require no action by or in respect of, or
filing with, any governmental body, agency or official, in each case, on the
part of the Borrower; and (b) do not contravene, or constitute a default by the
Borrower under, any provision of (i) applicable law or regulation, or (ii) any
agreement or
2
<PAGE> 87
instrument evidencing or governing debt of the Borrower, or any other agreement,
judgment, injunction, order, decree or other instrument binding upon the
Borrower.
2. Each of the Credit Agreement and the Amended Five-Year Agreement
constitutes a valid and binding agreement of the Borrower and each Promissory
Note constitutes a valid and binding obligation of the Borrower.
3. The execution, delivery and performance by the Parent Guarantor of
the Parent Guarantee (a) require no action by or in respect of, or filing with,
any governmental body, agency or official, in each case, on the part of the
Parent Guarantor; and (b) do not contravene, or constitute a default by the
Parent Guarantor under, any provision of (i) applicable law or regulation or
(ii) any agreement or instrument evidencing or governing debt of the Parent
Guarantor, or any other agreement, judgment, injunction, order, decree or other
instrument binding upon the Parent Guarantor.
4. The Parent Guarantee constitutes a valid and binding obligation of
the Parent Guarantor.
5. There is no action, suit or proceeding pending against, or, to the
best of my knowledge, threatened against or affecting, the Parent Guarantor or
any of its Subsidiaries before any court or arbitrator or any governmental body,
agency or official, in which there is a reasonable possibility of an adverse
decision which could, based upon the facts and circumstances in existence on the
date hereof, reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of the Financing Documents.
6. Each of the Parent Guarantor's corporate Subsidiaries is a
corporation validly existing and in good standing under the laws of its
jurisdiction of incorporation, except where the failure to be so incorporated,
existing or in good standing could not, based upon the facts and circumstances
existing on the date hereof, reasonably be expected to have a Material Adverse
Effect, and has all corporate powers and all Consents required to carry on its
business as now conducted other than those powers and Consents, the failure of
which to be possessed or obtained could not, based upon the facts and
circumstances in existence on the date hereof, reasonably be expected to have a
Material Adverse Effect.
The opinion set forth herein is subject to the following qualifications
and limitations:
3
<PAGE> 88
(a) The enforceability of the Credit Agreement, the Promissory Notes,
the Parent Guarantee and the Amended Five-Year Agreement may be subject to or
limited by bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance or transfer or other similar laws and court decisions, now
or hereafter in effect, relating to or affecting the rights of creditors
generally.
(b) The enforceability of the Credit Agreement, the Promissory Notes,
the Parent Guarantee and the Amended Five-Year Agreement is or will be subject
to the application of and may be limited by general principles of equity
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether considered in a proceeding in
equity or at law). Such principles of equity are of general application, and in
applying such principles a court, among other things, might not allow a creditor
to accelerate maturity of a debt under certain circumstances including, without
limitation, upon the occurrence of a default deemed immaterial, or might decline
to order the Borrower, the Parent Guarantor or any of the other parties to the
Financing Documents to perform covenants. Such principles as applied by a court
might include a requirement that a creditor act with reasonableness and in good
faith. Thus, I express no opinion as to the validity or enforceability of (i)
provisions restricting access to legal or equitable remedies, such as the
specific performance of executory covenants, (ii) provisions that purport to
establish evidentiary standards, (iii) provisions relating to waivers,
severability, set-off, or delay or omission of enforcement of rights or
remedies, and (iv) provisions purporting to convey rights to persons other than
parties to the Financing Documents.
(c) The remedy of specific performance and injunctive and other forms
of equitable relief are subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and, in rendering the foregoing opinion, I do not
express any opinion as to any laws other than the laws of the State of New York
and the Federal laws of the United States of America. Insofar as the foregoing
opinion involves matters governed by the law of Luxembourg or Bermuda, I have
relied, without independent investigation or verification, upon the respective
opinions of Beghin Nothar Feider Loeff Claeys Verbeke, special Luxembourg
counsel for the Borrower, and of Appleby Spurling & Kempe, special Bermuda
counsel for the Parent Guarantor.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
4
<PAGE> 89
This opinion is being delivered to you solely for your benefit in
connection with the Financing Documents, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
5
<PAGE> 90
DISTRIBUTION LIST
Morgan Guaranty Trust Company of New York
Bank of America National Trust and Savings Association
The Chase Manhattan Bank
Commerzbank AG, New York Branch
ABN AMRO Bank N.V.
Barclays Bank Plc
Bankers Trust Company
Citibank, N.A.
Credit Lyonnais New York Branch
Credit Suisse First Boston
Dresdner Bank AG, New York and Grand Cayman Branches
The First National Bank of Chicago
First Union National Bank
Istituto Bancario San Paolo di Torino Istituto Mobiliare Italiano, SpA
Marine Midland Bank
Mellon Bank, N.A.
Societe Generale
The Bank of Nova Scotia
Toronto Dominion (Texas), Inc.
Westdeutsche Landesbank Girozentrale
BankBoston, N.A.
Banque Nationale de Paris
Den Danske Bank Aktieselskab, Cayman Islands Branch
Fleet Bank - NH
KeyBank National Association
National Westminster Bank Plc New York and Nassau Branches
Standard Chartered Bank
Australia and New Zealand Banking Group Limited
Banca Commerciale Italiana New York Branch
Banca Popolare di Milano New York Branch
BBL International, (U.K.) Ltd
Bank of Tokyo-Mitsubishi, Ltd.
Bayerische Hypo - Und Vereinsbank AG, New York Branch
Bayerische Landesbank Girozentrale Cayman Islands Branch
Cariplo - Cassa Di Risparmio Delle Provincie Lombarde S.p.A.
Comerica Bank
Credit Commercial de France New York Branch
Norddeutsche Landesbank Girozentrale New York Branch and/or Cayman
Islands Branch
PNC Bank, National Association
The Bank of New York
The Northern Trust Company
Unicredito Italiano S.p.A.
BW Capital Markets, Inc.
The Dai-Ichi Kangyo Bank, Ltd., New York Branch
Westpac Banking Corporation
<PAGE> 91
EXHIBIT F
FORM OF OPINION OF SPECIAL COUNSEL
FOR THE BORROWER
To the banks listed on the signature pages
of the Credit Agreement (defined below) and
Morgan Guaranty Trust Company, as Agent
60 Wall Street
New York, New York 10260
Luxembourg, February 12, 1999
TYCO INTERNATIONAL GROUP S.A.
(INCORPORATED WITH LIMITED LIABILITY UNDER THE LAWS OF
THE GRAND-DUCHY OF LUXEMBOURG)
Dear Sirs:
We have acted as your legal advisers in the Grand-Duchy of Luxembourg
("LUXEMBOURG") in connection with the 364-Day Credit Agreement dated as of
February 12, 1999 (the "CREDIT AGREEMENT") among Tyco International Group S.A.,
a Luxembourg company (the "COMPANY"), the Banks listed on the signature pages
thereof and Morgan Guaranty Trust Company of New York, as Agent (the "AGENT").
This opinion is being delivered to you pursuant to Section 3.01(d) of the Credit
Agreement.
We give this opinion on the basis of and subject to the assumptions and
qualifications set out below.
1. Basis of Opinion
(a) This opinion is confined to Luxembourg law currently in
force and applied. This opinion is to be construed in accordance with
the laws of Luxembourg.
(b) For the purpose of giving this opinion, we have examined
copies of the following documents:
(i) the Credit Agreement;
<PAGE> 92
(ii) the Extendible 364-Day Agreement dated as of
February 13, 1998 (the "FIVE-YEAR AGREEMENT") among the
Company, the banks listed therein and Morgan Guaranty Trust
Company of New York, as agent for such banks ("MORGAN"), as
amended by Amendment No.1 thereto dated as of May 4, 1998 and
Amendment No. 2 thereto dated as of September 25, 1998 (such
amendments referred to collectively as the "AMENDMENTS") (the
Five-Year Agreement as amended by the Amendments and as
further amended by the Credit Agreement, the "AMENDED FIVE-
YEAR AGREEMENT"), together with the New Borrower Agreement
Relating to the Extendible 364-Day Agreement dated as of June
30, 1998 (the "NEW BORROWER AGREEMENT") among Tyco
International (US) Inc., a Massachusetts corporation, the
Company and Morgan pursuant to which the Company became a
party to the Five-Year Agreement;
(iii) the Amendments;
(iv) the Amended and Restated Parent Guarantee
Agreement dated as of February 13, 1998 and amended and
restated as of February 12, 1999 between Tyco International
Ltd., a company incorporated under the laws of Bermuda, and
the Agent (the "PARENT GUARANTEE");
(v) the Promissory Notes executed by the Company on
February 12, 1999;
(vi) a copy of the articles of association of the
Company in their version of 30th March 1998, filed with the
Luxembourg Company Register on 22 April 1998 and published in
the Official Gazette (Memorial) C-N(degree) 474 of 29th June
1998, an amendment to the articles of association of the
Company by way of a notarial deed dated 6 July 1998 and
published in the Official Gazette (Memorial) C-N(degree) 733
of 10th October 1998, an amendment to the articles of
association of the Company by way of a notarial deed dated
22nd October 1998, not yet published, and an amendment to the
articles of association of the Company by way of a notarial
deed dated December 4, 1998, not yet published;
(vii) a copy of minutes of a meeting of the board of
directors of the Company held on February 5, 1999 approving
the execution of the Credit Agreement and the Promissory
Notes; and
2
<PAGE> 93
(viii) such other documents, records, certificates and
instruments as we have thought necessary or desirable,
including information gathered at the Luxembourg Company
Register and at the District Court of Luxembourg.
As used herein, the term "FINANCING DOCUMENTS" means the "Financing
Documents" as defined in the Credit Agreement and the "Financing Documents" as
defined in the Amended Five-Year Agreement, collectively. Terms defined in the
Credit Agreement and used herein, but not otherwise defined herein, have the
meanings ascribed thereto in the Credit Agreement.
2. Assumptions
With your consent, we have assumed and we have not verified
independently:
(a) that any copies we have examined are complete and accurate
copies of the originals;
(b) the genuineness and authority of all the signatures,
stamps and seals on all original or copy documents which we have
examined;
(c) that all documents have been duly authorized, executed and
delivered by, and are within the capacity and power of, all the parties
thereto, other than the Company;
(d) that the documents which are not governed by Luxembourg
law are legal, valid, binding and enforceable in accordance with their
terms under their chosen governing law being the laws of the State of
New York; and
(e) that none of the opinions below would be affected by the
laws (including the public policy) of any jurisdiction outside
Luxembourg.
On the above basis and subject to the assumptions and qualifications
set out above and below, and further subject to any matters, documents, or
events not disclosed to us and to undisclosed matters of fact which would affect
the conclusions set out below, we are of the opinion that:
3. Opinion
(a) The Company is a limited liability corporation duly
organized and validly existing under the laws of Luxembourg pursuant to
the articles
3
<PAGE> 94
of association provided in a notarial deed of March 30, 1998, as
amended, and was formerly incorporated under the laws of Gibraltar
under the name of Velum Limited.
(b) The Company has all company powers and all material
governmental licenses, consents and approvals required to carry on its
business as now conducted (other than such powers or consents the
failure of which to be obtained could not reasonably be expected to
have a Material Adverse Effect).
(c) The execution, delivery and performance by the Company of
the Credit Agreement and the Promissory Notes, and the performance by
the Company of the Amended Five-Year Agreement (i) are within the
Company's powers, (ii) have been duly authorized by all necessary
company action, (iii) require no action by or filing with any
governmental body, agency or official, (iv) do not contravene or
constitute a default under (A) applicable law or regulation, (B) the
Company's articles of association or (C) any agreement or instrument
governing debt of the Company or any other material agreement,
judgment, injunction, order, decree or other instrument binding upon
the Company.
(d) Each of the Credit Agreement and the Amended Five-Year
Agreement constitutes a valid and binding agreement of the Company, and
each Promissory Note constitutes a valid and binding obligation of the
Company.
(e) There is no action, suit or proceeding pending or
threatened against or affecting the Company or any of its Subsidiaries
in which there is a reasonable possibility of an adverse decision which
could reasonably be expected to have a Material Adverse Effect or which
in any manner draws into question the validity of the Financing
Documents.
(f) There is no tax, impost, deduction or withholding imposed
by Luxembourg or any political subdivision thereof on or by virtue of
the execution, delivery or enforcement of the Financing Documents or
any other agreement or instrument relating thereto.
(g) Each of the Financing Documents to which the Company is a
party is in proper legal form under the laws of Luxembourg for the
enforcement thereof against the Company under the laws of Luxembourg.
(h) To ensure the legality, validity, enforceability or
admissibility in evidence of the Financing Documents in Luxembourg, it
is not
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necessary that the Financing Documents or any other document be
filed or recorded with any court or other authority in Luxembourg.
(i) The choice of the laws of the State of New York to govern
the Credit Agreement, the Amended Five-Year Agreement and the
Promissory Notes is a valid and binding choice of law and will be
recognized and applied by the courts of Luxembourg.
(j) Any judgment obtained in any federal or New York State
court sitting in New York City, arising out of or in relation to the
obligations of the Company under the Financing Documents would be
enforceable in Luxembourg against the Company.
4. Qualifications
The foregoing opinion is subject to the following qualifications.
(a) Insolvency. This opinion is subject to all insolvency and
other similar laws affecting the rights of creditors vis-a-vis the
Company, including inter alia suspension of payments, bankruptcy,
reorganization or moratorium.
(b) Corporate Benefit. The Company may only validly enter the
Financing Documents to which it is a party if and to the extent that
such entry does not threaten its existence or the rights of its
creditors and that the Company can reasonably hope to draw directly or
indirectly a corporate benefit, at least in the long term, from the
Financing Documents. We have no indication and no reason to believe
that entering the Financing Documents would be other than for the
corporate benefit of the Company.
(c) Choice of Law. The Luxembourg courts (assuming that
litigation were brought to the Luxembourg courts and that Luxembourg
courts had jurisdiction) would not apply a chosen foreign law if:
(i) it were not pleaded and proven; or
(ii) if pleaded and proven, such foreign law would be
contrary to the mandatory rules of Luxembourg law or
manifestly incompatible with Luxembourg public policy.
(d) Enforcement of Judgments. The Luxembourg courts would
enforce a final and conclusive judgment against the Company rendered by
any federal or New York State court sitting in New York City in any
suit,
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action or proceedings arising out of or in relation to the
obligations of the Company under the Financing Documents provided,
however, that such judgment would comply with the conditions imposed by
article 678 of the Luxembourg nouveau code de procedure civile (i.e.,
the exequatur procedure) as currently interpreted by the Luxembourg
courts and doctrine; namely, the foreign judgment
(i) is final and enforceable in the jurisdiction
where it has been rendered and complies with the conditions
posed by any treaty,
(ii) has been rendered in accordance with the legal
formalities applicable in such jurisdiction,
(iii) emanates from a court having both international
(according to Luxembourg's conflict of laws rules) and
national (according to the law of the foreign jurisdiction)
competence,
(iv) applies the substantive law of the country whose
law would be applied according to Luxembourg's conflict of
laws rules; and
(v) is not contrary to Luxembourg public policy or
mandatory rules of Luxembourg law.
(e) Judgment Currency. Any obligation to pay an amount in a
currency other than Luxembourg Francs will be enforceable in Luxembourg
only in terms of Luxembourg Francs, though monetary judgments may be
expressed in a foreign currency and/or its Luxembourg Francs equivalent
at the time of payment, and any loss incurred as a result of a currency
exchange fluctuation can be recovered under Luxembourg law.
(f) Luxembourg Legal Concepts. This opinion shall be construed
in accordance with Luxembourg law and Luxembourg legal concepts are
expressed in English terms and not in their original French terms. The
concepts concerned may not be identical to the concepts described by
the same English terms as they exist under the laws of other
jurisdictions. This opinion may, therefore, only be relied upon under
the express condition that any issues of interpretation arising
thereunder will be governed by Luxembourg law and be brought before a
Luxembourg court.
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(g) Registration. If the Financing Documents are or must be
produced in any court proceedings in Luxembourg or before any official
authority in Luxembourg, registration thereof may be ordered in which
case an ad valorem tax at the rate of 0.24 percent of the amount
mentioned in the registered document or a fixed duty of LUF 500 for
each of the Financing Documents would then be payable upon
registration.
(h) Binding Documents. The opinion expressed under (c)(iv)(C)
is solely based upon a review of documents which have been filed by the
Company with the Luxembourg Company Register and the certificate of the
Managing Directors of the Company attached to this opinion as Appendix
A.
(i) Litigation. The opinion expressed under (e) above is
solely based on oral information received from the registrar of the
district court of Luxembourg.
(j) Set-Off. No opinion can be expressed as to whether the
provisions in the Credit Agreement or the Amended Five-Year Agreement
on set-off (so far as the Company is concerned) would be effective and
enforceable against a Luxembourg insolvency official.
(k) Penalty Clause. It is possible that a Luxembourg court (if
having jurisdiction) would consider Section 2.15 of each of the Credit
Agreement and the Amended Five-Year Agreement whereby the Borrower may
be obliged to pay additional interest on the related Euro-Dollar loan
at a rate per annum determined by the relevant Bank as a penalty clause
(clause penale).
Penalty clauses as governed by article 1152 and articles 1226
et seq. of the Luxembourg civil code are allowed to the extent that
they provide for a reasonable level of damages. The judge has however
the right to reduce (or increase) the amount thereof if it is
unreasonably high (or low).
(l) Language Differences. It is noted that there are always
irreconcilable differences between languages making it impossible to
guarantee a totally accurate translation or interpretation. In
particular, there are always some legal concepts which exist in one
jurisdiction and not in another, and in those cases it is bound to be
difficult to provide a completely satisfactory translation or
interpretation because the vocabulary is missing from the language. We
accept no responsibility for omissions or inaccuracies to the extent
they are attributable to such factors.
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This opinion is as of this date and we undertake no obligation to
update this opinion or advise of changes hereafter occurring.
We express no opinion as to any matters other than those expressly set
forth herein, and no opinion is, or may be, implied or inferred herefrom.
This opinion is given for your benefit as Agent for the Banks and it
may be relied upon by you, the Banks as well as your or their assignees,
successors, and your or their legal advisers. It may also be relied upon by Mark
A Belnick, Executive Vice President and Chief Corporate Counsel to the Parent
Guarantor, for the purposes of issuing the opinion required pursuant to Section
3.01(d)(i) of the Credit Agreement. It may not be relied upon by any other
person. It may not be disclosed to third parties, quoted, referred to or
otherwise used (save as required by law) without our prior written consent.
Yours faithfully,
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EXHIBIT G
FORM OF OPINION OF SPECIAL COUNSEL
FOR THE PARENT GUARANTOR
To the Banks and the Agent
Named on Schedule 1 to this Opinion
c/o Morgan Guaranty Trust Company of New York (as Agent)
60 Wall Street
New York, NY 10260 U.S.A.
Dear Sirs,
Re: TYCO INTERNATIONAL LTD. (THE "COMPANY")
We have been instructed by the Company, a Bermuda corporation, which
owns all of the issued shares of Tyco International Group S.A., a Luxembourg
company (the "BORROWER"), to address this opinion to you in connection with the
Amended and Restated Parent Guarantee Agreement, dated as of February 13, 1998
and amended and restated as of February 12, 1999, (the "GUARANTEE"), entered
into by the Company in connection with all principal of and interest on amounts
loaned to the Borrower under the Financing Documents.
Unless otherwise defined therein, terms defined in the Guarantee have
the same meanings when used in this opinion.
For the purposes of this opinion, we have been supplied with and have
reviewed, and relied upon the following documents:
(A) a copy of the executed US $3,250,000,000 364-Day Credit
Agreement dated as of February 12, 1999 among the Borrower, the Banks
listed on the signature pages thereof and the Agent (the "CREDIT
AGREEMENT");
(B) a copy of the Extendible 364-Day Credit Agreement dated as
of February 13, 1998 among the Borrower, the Banks listed on the
signature pages thereof, and Morgan Guaranty Trust Company of New York,
as agent for such Banks, as amended to the date hereof (the "EXISTING
FIVE-YEAR AGREEMENT");
<PAGE> 100
(C) a copy of the executed Promissory Notes (as defined in the
Credit Agreement and the Existing Five-Year Agreement);
(D) the New Borrower Agreement Relating to the Extendible
364-Day Agreement dated as of June 30, 1998 among Tyco International
(US) Inc., a Massachusetts corporation, the Borrower, and Morgan
Guaranty Trust Company of New York, as agent, pursuant to which the
Borrower became a party to the Existing Five-Year Agreement;
The Documents referred to in (A) through (D) inclusive are together
referred to as the "FINANCING DOCUMENTS".
(E) a copy of the executed Guarantee;
(F) certified copies of the Certificate of Incorporation, the
Certificate evidencing the change of name of the Company from ADT
Limited to TYCO International Ltd. and the Memorandum of Association
and the Bye-laws of the Company;
(G) a certified copy of an extract of the minutes of a meeting
of the Board of Directors of the Company held on February 9, 1999 (the
"RESOLUTIONS"); and
(H) a certified copy of the Share Certificate evidencing
ownership by the Company of the Borrower.
We also examined and relied upon:
(A) A Certificate of Compliance issued by the Registrar of
Companies in Bermuda in respect of the Company on February 10, 1999;
and
(B) Our searches of the documents of public record in relation
to the Company maintained by the Registrar of Companies in Bermuda made
on February 9, 1999 and of the Causes Book maintained by the Registrar
of the Supreme Court of Bermuda made on the same date (the "SEARCHES").
In giving this opinion, we have assumed:
(1) the capacity, power and authority of each of the
parties other than the Company to execute, deliver and perform
its obligations under and the due execution and delivery by
all parties other than the Company of the Financing Documents
and the Guarantee;
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(2) that each party, other than the Company, has duly
authorised, executed, delivered and taken such other action as
may be required by such party to enter into and perform the
Financing Documents and the Guarantee in the form of the
execution copies we have reviewed for the purpose of this
opinion without alteration which is material to this opinion
and that all such actions were duly authorised when taken;
(3) that no authorisation or approval by, or filing
with, any governmental or regulatory authority, other than
such authorisations, approvals and filings as each party other
than the Company has obtained or made, is necessary for such
party to duly execute and deliver, or to duly perform all of
its obligations under the Financing Documents and the
Guarantee, or for the validity and enforceability of the
Financing Documents and the Guarantee;
(4) that each of the Financing Documents and the
Guarantee constitutes the legal, valid and binding obligation
of each party to it, other than the Company, and is
enforceable against each such party in accordance with its
terms;
(5) that the Financing Documents are legal, valid and
binding under the laws by which they are expressed to be
governed and that the Guarantee is legal, valid and binding
under the laws of the State of New York by which it is
expressed to be governed;
(6) that the records which were the subject of the
Searches on February 3, 1999 were complete and accurate at the
time of such searches and disclosed all information which is
material for the purposes of this opinion and such information
has not since such date been materially altered;
(7) that there is no provision of the law of any
jurisdiction, other than Bermuda, which would have any
implication in relation to the opinions herein expressed;
(8) the genuineness of all signatures on the
documents which we have examined;
(9) the conformity to original documents of all
documents produced to us as copies and the authenticity of all
original documents which, or copies of which, have been
submitted to us;
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(10) the accuracy and completeness of all factual
representations made in the Financing Documents, the
Guarantee, the Resolutions, and any certificates or other
documents which we have examined and upon which we have
relied;
(11) that the Resolutions are in full force and
effect and have not been rescinded or altered in any way
material to this opinion; and
(12) that the Company is entering into its
obligations under the Guarantee in good faith and for the
purpose of carrying on its commercial business in the ordinary
course thereof and that there are reasonable grounds for
believing that the transactions contemplated by the Financing
Documents will benefit the Company.
Based upon and subject to the foregoing, and subject to the
reservations set out below, to matters not disclosed to us and matters of fact
which would affect the conclusion set out below and having regard to such legal
considerations as we deem relevant, we are of the opinion that:
(i). The Company is a company duly incorporated, duly organised and
validly existing under the laws of Bermuda. The Memorandum of Association of the
Company has been duly filed in the office of the Registrar of Companies of
Bermuda and no other filing, recording, publishing or other act is necessary or
appropriate in Bermuda in connection with the transaction as described in the
Guarantee except those which have been duly made or performed.
(ii). The Company has the corporate power and authority to enter into
and perform the Guarantee and has taken all corporate action required on its
part to authorise the execution, delivery and performance of the Guarantee.
(iii). The execution, delivery and performance of the Guarantee by the
Company (i) does not and will not violate the Certificate of Incorporation,
Memorandum of Association or Bye-laws of the Company; (ii) conflict with The
Companies Act 1981 or any other law or governmental rule or regulation published
by the Bermuda Government which is applicable to the Company; and (iii) as far
as can be ascertained from the Searches (which are not conclusive) does not and
will not violate or conflict with any judgment, order, decree, injunction or
award of any authority, agency or court in Bermuda to which the Company is
subject.
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(iv). The obligations of the Company as set out in the Guarantee
constitute, legal, valid and binding obligations of the Company.
(v). The Company having been designated as non-resident for the
purposes of the Exchange Control Act 1972, it is not necessary for the consent
of any authority or agency in Bermuda to be obtained to enable the Company to
enter into and perform its obligations set out in the Guarantee.
(vi). The obligations of the Company under the Guarantee will rank at
least pari passu in priority of payment with all other unsecured unsubordinated
indebtedness of the Company other than indebtedness which is preferred by virtue
of any provision of Bermuda law of general application.
(vii). As far as can be ascertained from the Searches (which are not
conclusive), no litigation, arbitration or administrative proceedings of or
before any court, arbitrator or governmental instrumentality of or in Bermuda
is, to the best of our knowledge, pending with respect to the Company in
connection with the Guarantee or the transactions contemplated thereby.
(viii). The Company will be permitted to make all payments under the
Guarantee free of any deduction or withholding therefrom in Bermuda and such
payments will not be subject to any tax imposed by the Government of Bermuda or
any taxing authority thereof or therein.
(ix). The entry into, performance and enforcement of the Guarantee will
not give rise to any registration fee or to any stamp, excise or other similar
tax imposed by the Government of Bermuda or any taxing authority thereof or
therein.
(x). Subject to paragraph (xii) and reservation (f) below, it is not
necessary or advisable under the laws of Bermuda in order to ensure the
validity, effectiveness or enforceability or admissibility in evidence of the
Guarantee that the Guarantee be filed, registered or recorded with any Court,
public office or other Bermuda regulatory authority.
(xi). The choice of the laws of the State of New York to govern the
Guarantee is a proper, valid and binding choice of law and will be recognised
and applied by the courts of Bermuda provided that the point is specifically
pleaded and that such choice of law is a valid and binding choice of law under
the laws of the State of New York.
(xii). A final and conclusive judgment obtained in the Courts of the
State of New York or Federal Courts of the United States of America against the
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Company based upon the Guarantee under which a sum of money is payable (other
than a sum of money payable in respect of taxes or other charges of a like
nature or in respect of a fine or other penalty or in respect of Multiple
Damages as defined in the Protection of Trading Interest Act, 1981) may be the
subject of enforcement proceedings in the Supreme Court of Bermuda, without
re-examination of the merits, under the Common Law Doctrine of Obligation. A
final opinion as to the availability of this remedy should be sought when the
facts surrounding the foreign judgment are known but, on general principles, we
would expect such an application to be successful provided that:
(A) the Court which gave the judgment was competent to hear
the action in accordance with private international law principles as
applied in Bermuda;
(B) the judgment has not been obtained by fraud;
(C) the judgment is not and its enforcement would not be
contrary to public policy of Bermuda;
(D) the judgment has not been obtained in proceedings contrary
to natural justice; and
(E) the correct procedures under the laws of Bermuda are duly
complied with.
Neither the Company nor any of its property or assets (or any portion
thereof) enjoys, under the laws of Bermuda, immunity from suit, execution,
attachment or other legal process in any proceedings in Bermuda in connection
with the Guarantee.
Our reservations are as follows:
(a) We are admitted to practise law in the Islands of Bermuda and we
express no opinion as to any law other than Bermuda law and none of the opinions
expressed herein relates to compliance with or matters governed by the laws of
any jurisdiction except Bermuda.
(b) Where an obligation is to be performed in a jurisdiction other than
Bermuda, the Courts of Bermuda may refuse to enforce it to the extent that such
performance would be illegal or contrary to public policy under the laws of such
other jurisdiction.
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(c) We express no opinion as to the availability of equitable remedies,
such as specific performance or injunctive relief, or as to matters which are
within the discretion of the Courts of Bermuda such as the award of costs or
questions relating to forum non-conveniens. Further, we express no opinion as to
the validity or binding effect of any waiver of or obligation to waive any
provision of law (whether substantive or procedural) or any right or remedy
arising through circumstances not known at the time of entering into the
Financing Documents and the Guarantee.
(d) We express no opinion as to the validity or the binding effect of
any obligations of the Borrower in the Financing Documents which provide for the
payment by the Borrower of a higher rate of interest on overdue amounts than on
amounts which are current. A Bermuda Court, even if it were applying the laws of
the State of New York might not give effect to such provision as being contrary
to public policy if it could be established that the amount expressed as being
payable was such that the provision was in the nature of a penalty; that is to
say a requirement for a stipulated sum to be paid irrespective of, or
necessarily greater than, the loss likely to be sustained. The Court will
determine and award what it considers to be reasonable damages. Section 9 of The
Interest and Credit Charges (Regulations) Act 1975 provides that the Bermuda
Courts have discretion as to the amount of interest if any payable on the amount
of a judgment after the date of judgment. If the Court does not exercise that
discretion, then interest will accrue at the statutory rate which is currently
7% per annum.
(e) The obligations of the Company under the Guarantee will be subject
to any laws from time to time in effect relating to bankruptcy, insolvency or
liquidation or any other laws or other legal procedures affecting generally the
enforcement of creditors' rights and may also be the subject of the statutory
limitation of the time within which such proceedings may be brought.
(f) To the extent that the Financing Documents, the Guarantee or the
transactions contemplated thereunder, create or give rise to the creation of any
charge over any assets of the Company, such charge will be registerable under
Part V of The Companies Act 1981 of Bermuda. The fee payable for registration of
a charge is $425.00. Registration is not compulsory and there is no time limit
within which it must be effected. Any charge which is registerable, and which is
registered, under Section 55 of The Companies Act will have priority based on
the date that it is registered and not on the date of its creation (to the
extent that priority of competing charges are to be determined by reference to
Bermuda law) and will have such priority over any unregistered charge.
Accordingly, it is advisable to register any such charge.
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<PAGE> 106
(g) Any provision in the Financing Documents or the Guarantee that
certain calculations and/or certificates will be conclusive and binding will not
be effective if such calculations are fraudulent or erroneous on their face and
will not necessarily prevent enquiry into the merits of any claim by an
aggrieved party.
(h) Where a party is vested with a discretion or may determine a matter
in its opinion, such discretion may have to be exercised reasonably or such an
opinion may have to be based on reasonable grounds.
(i) Searches in the register of companies at the office of the
Registrar of Companies and in the Supreme Court Causes Book at the Registry of
the Supreme Court are not conclusive and it should be noted that the register of
companies and the Supreme Court Causes Book do not reveal:
(i) whether an application to the Supreme Court for the
appointment of a receiver or manager has been presented;
(ii) details of matters which have been lodged for
registration but have not actually been registered or to the extent
they have been registered have not been disclosed or appear in the
public records at the date the search is concluded;
(iii) details of matters which should have been lodged for
registration but have not been lodged for registration at the date the
search is concluded; or
(iv) whether a receiver or manager has been appointed
privately out of the Supreme Court pursuant to the provisions of a
debenture or other security, unless notice of the fact has been entered
in the register of charges in accordance with the provisions of the
Act.
(j) A Bermuda Court may refuse to give effect to any provisions of the
Financing Documents or Guarantee in respect of costs of unsuccessful litigation
brought before the Court or where that Court has itself made an order for costs.
This opinion is issued on the basis that it will be governed by and
construed in accordance with the provisions of Bermuda law and it is limited to
and is given on the basis of the current law and practice in Bermuda and will
not give rise to action in any other jurisdiction. It is issued solely for your
benefit for the purpose of the transactions described in the Guarantee and it is
not to be relied upon by any other person (other than permitted assigns and
transferees under the Financing Documents), or for any other purpose, without
our written prior consent. Mr. Mark A Belnick, Executive Vice President and
Chief Corporate
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<PAGE> 107
Counsel of the Company, may rely on our opinion as to matters of Bermuda law for
the purpose of issuing his opinion of even date herewith.
Yours faithfully,
9
<PAGE> 108
SCHEDULE 1
Morgan Guaranty Trust Company of New York
Bank of America National Trust and Savings Association
The Chase Manhattan Bank
Commerzbank AG, New York Branch
ABN AMRO Bank N.V.
Barclays Bank Plc
Bankers Trust Company
Citibank, N.A.
Credit Lyonnais New York Branch
Credit Suisse First Boston
Dresdner Bank AG, New York and Grand Cayman Branches
The First National Bank of Chicago
First Union National Bank
Istituto Bancario San Paolo di Torino Istituto Mobiliare Italiano, SpA
Marine Midland Bank
Mellon Bank, N.A.
Societe Generale
The Bank of Nova Scotia
Toronto Dominion (Texas), Inc.
Westdeutsche Landesbank Girozentrale
BankBoston, N.A.
Banque Nationale de Paris
Den Danske Bank Aktieselskab, Cayman Islands Branch
Fleet Bank - NH
KeyBank National Association
National Westminster Bank Plc New York and Nassau Branches
Standard Chartered Bank
Australia and New Zealand Banking Group Limited
Banca Commerciale Italiana New York Branch
Banca Popolare di Milano New York Branch
BBL International, (U.K.) Ltd
Bank of Tokyo-Mitsubishi, Ltd.
Bayerische Hypo - Und Vereinsbank AG, New York Branch
Bayerische Landesbank Girozentrale Cayman
Islands Branch Cariplo - Cassa Di Risparmio Delle Provincie Lombarde S.p.A.
Comerica Bank
Credit Commercial de France New York Branch
Norddeutsche Landesbank Girozentrale New York Branch and/or
Cayman Islands Branch
PNC Bank, National Association
The Bank of New York
The Northern Trust Company
Unicredito Italiano S.p.A.
BW Capital Markets, Inc.
The Dai-Ichi Kangyo Bank, Ltd., New York Branch
Westpac Banking Corporation
<PAGE> 109
EXHIBIT H
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE AGENT
To the Banks and the Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the 364-Day Credit Agreement
dated as of February 12, 1999 among Tyco International Group S.A., a Luxembourg
company (the "Borrower"), the banks listed on the signature pages thereof (the
"Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"),
and have acted as special counsel for the Agent for the purpose of rendering
this opinion pursuant to Section 3.01(e) of the Credit Agreements. Terms defined
in the Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that the Credit
Agreement constitutes a valid and binding agreement of the Borrower, that each
Promissory Note delivered on the date hereof constitutes a valid and binding
obligation of the Borrower and that the Parent Guarantee constitutes a valid and
binding obligation of the Parent Guarantor, in each case enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and by general
principles of equity.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York and the federal laws of
the United States of America. In giving the foregoing opinion, (i) we express no
opinion as to the effect (if any) of any law of any jurisdiction (except the
State of
<PAGE> 110
New York) in which any Bank is located which limits the rate of interest that
such Bank may charge or collect and (ii) insofar as the foregoing opinion
involves matters governed by the laws of Luxembourg or Bermuda, we have relied,
without independent investigation, upon the respective opinions of Beghin Nothar
Feider Loeff Claeys Verbeke, special Luxembourg counsel for the Borrower, and of
Appleby, Spurling & Kempe, special Bermuda counsel for the Parent Guarantor,
copies of which have been delivered to you.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by any other person without our prior written consent, except that
any person who is a permitted successor or assign of a Bank in accordance with
the provisions of the Credit Agreement may rely upon this opinion as if it were
specifically addressed and delivered to such person on the date hereof.
Very truly yours,
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EXHIBIT I
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, ____ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), TYCO INTERNATIONAL GROUP S.A. (the
"Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the 364-Day Credit Agreement dated as of February 12, 1999 among the
Borrower, the Assignor and the other Banks party thereto, as Banks, and the
Agent (the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans to the Borrower in an aggregate principal amount at any
time outstanding not to exceed $__________;
WHEREAS, Committed Loans made to the Borrower by the Assignor under the
Credit Agreement in the aggregate principal amount of $__________ are
outstanding at the date hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of its
Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"),
together with a corresponding portion of its outstanding Committed Loans, and
the Assignee proposes to accept assignment of such rights and assume the
corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
<PAGE> 112
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such assignment
from the Assignor and assumes all of the obligations of the Assignor under the
Credit Agreement to the extent of the Assigned Amount, including the purchase
from the Assignor of the corresponding portion of the principal amount of the
Committed Loans made by the Assignor outstanding at the date hereof. Upon the
execution and delivery hereof by the Assignor, the Assignee, [the Borrower and
the Agent] and the payment of the amounts specified in Section 3 required to be
paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed
to the rights and be obligated to perform the obligations of a Bank under the
Credit Agreement with a Commitment in an amount equal to the Assigned Amount,
and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced
by a like amount and the Assignor released from its obligations under the Credit
Agreement to the extent such obligations have been assumed by the Assignee. The
assignment provided for herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the
date hereof in Federal funds the amount heretofore agreed between them.* It is
understood that facility fees in respect of the Assigned Amount accrued to the
date hereof are for the account of the Assignor and such fees accruing from and
including the date hereof are for the account of the Assignee. Each of the
Assignor and the Assignee hereby agrees that if it receives any amount under the
Credit Agreement which is for the account of the other party hereto, it shall
receive the same for the account of such other party to the extent of such other
party's interest therein and shall promptly pay the same to such other party.
[SECTION 4. Consent of the Borrower and the Agent. This Agreement is
conditioned upon the consent of the Borrower and the Agent pursuant to Section
9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower
and the Agent is evidence of this consent. Pursuant to Section 9.06(c) the
Borrower agrees to execute and deliver a Note payable to the order of the
Assignee to evidence the assignment and assumption provided for herein.]
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no responsibility
- -------------------
*Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any portion of
any upfront fee to be paid by the Assignor to the Assignee. It may be preferable
in an appropriate case to specify these amounts generically or by formula rather
than as a fixed sum.
2
<PAGE> 113
with respect to, the solvency, financial condition, or statements of the
Borrower, or the validity and enforceability of the obligations of the Borrower
in respect of the Credit Agreement or any Note. The Assignee acknowledges that
it has, independently and without reliance on the Assignor, and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and will continue to be
responsible for making its own independent appraisal of the business, affairs
and financial condition of the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
3
<PAGE> 114
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their duly authorized officers as of the
date first above written.
[ASSIGNOR]
By:
----------------------------------------
Title:
[ASSIGNEE]
By:
----------------------------------------
Title:
TYCO INTERNATIONAL GROUP S.A.
By:
----------------------------------------
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
----------------------------------------
Title:
4
<PAGE> 115
EXHIBIT K
EXISTING FIVE-YEAR AGREEMENT
PRICING SCHEDULE
The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any
day are the respective percentages set forth below in the applicable row and
column based upon the Utilization and Status that exist on such day:
<TABLE>
<CAPTION>
=======================================================================================================================
Level Level Level Level Level Level
Status I II III IV V VI
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Euro-Dollar Margin
Utilization [less than] 25% 0.295% 0.410% 0.515% 0.6125% 0.725% 0.750%
Utilization [greater than
or equal to] 25% 0.420% 0.535% 0.640% 0.7375% 0.975% 1.125%
=======================================================================================================================
CD Margin
Utilization [less than] 25% 0.420% 0.535% 0.640% 0.7375% 0.850% 0.875%
Utilization [greater than
or equal to] 25% 0.545% 0.660% 0.765% 0.8625% 1.100% 1.250%
=======================================================================================================================
Facility Fee Rate 0.080% 0.090% 0.110% 0.1375% 0.150% 0.250%
=======================================================================================================================
</TABLE>
For purposes of this Schedule, the following terms have the following
meanings, subject to the concluding paragraph of this Schedule:
"LEVEL I STATUS" exists at any date if, at such date, the Borrower's
senior unsecured long-term debt is rated A or higher by S&P or A2 or higher by
Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) the
Borrower's senior unsecured long-term debt is rated A- or higher by S&P or A3 or
higher by Moody's and (ii) Level I Status does not exist.
"LEVEL III STATUS" exists at any date if, at such date, (i) the
Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P or
Baa1 or higher by Moody's and (ii) neither Level I Status nor Level II Status
exists.
"LEVEL IV STATUS" exists at any date if, at such date, (i) (x) the
Borrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2
or higher by Moody's and (y) the Borrower's commercial paper is rated A2 or
higher by S&P and P2 or higher by Moody's and (ii) none of Level I Status, Level
II Status and Level III Status exists.
"LEVEL V STATUS" exists at any date, if at such date, (i) the
Borrower's senior unsecured long-term debt is rated BBB or higher by S&P or Baa2
or higher by
<PAGE> 116
Moody's and (ii) none of Level I Status, Level II Status, Level III Status or
Level IV Status exists.
"LEVEL VI STATUS" exists at any date if, at such date, no other Status
exists.
"STATUS" refers to the determination of which of Level I Status, Level
II Status, Level III Status, Level IV Status, Level V Status or Level VI Status
exists at any date.
"UTILIZATION" means, at any date, the percentage equivalent of a
fraction (i) the numerator of which is the aggregate outstanding principal
amount of the Loans at such date and (ii) the denominator of which is the
aggregate amount of the Commitments at such date. If for any reason any Loans
remain outstanding following termination of the Commitments, Utilization shall
be deemed to be in excess of 25%.
The credit ratings to be utilized for purposes of this Schedule are
those assigned to the senior unsecured long-term debt securities and/or
commercial paper, as the case may be, of the Borrower without third-party credit
enhancement, and any rating assigned to any other debt security of the Borrower
shall be disregarded. The rating in effect at any date is that in effect at the
close of business on such date. If the Borrower is split-rated and the ratings
differential is one notch, the higher of the two ratings will apply (e.g., A/A3
results in Level I Status). If the Borrower is split-rated and the ratings
differential is more than one notch, the average of the two ratings (or the
higher of two intermediate ratings) shall be used (e.g., A/Baa1 results in Level
II Status, as does A/Baa2).
2
<PAGE> 117
CROSS-REFERENCE TARGET LIST
NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE
TARGET PULL-DOWN LIST.
(This list is for the use of the wordprocessor only, is not a part of this
document and may be discarded.)
ARTICLE/SECTION TARGET NAME
- --------------- -----------
?.....................................................................eff.terma
?......................................................................eff.term
?.................................................................sub.contrib.b
?................................................................subrog.contrib
1.01.......................................................................defs
1.01(b).............................................................int.end.ter
1.02...........................................................types.borrowings
1.02........................................................types.of.borrowings
2.........................................................................assgn
2.01................................................................commit.lend
2.01(a)....................................................revolve.credit.loans
2.01(b)..............................................................term.loans
2.02.............................................................not.commit.brw
2.03........................................................money.market.borrow
2.03(d).....................................................sub.and.cont.of.mon
2.03(d)(i)............................................................sub.mon.i
2.03(d)(ii)..........................................................sub.mon.ii
2.03(d)(iii)........................................................sub.mon.iii
2.03(e)............................................................not.borrower
2.03(f).......................................................Accept.and.notice
2.04(b)....................................................note.bank.make.avail
2.07................................................................inter.rates
2.07(a)......................................................int.rate.base.loan
2.07(b)....................................................int.rate.adj.cd.rate
2.07(b)....................................................int.rate.adj.cd.rate
2.07(b)....................................................int.rate.adj.cd.rate
2.07(c).................................................int.rate.euro.dollar.ln
2.08(a)..........................................................facility.fee.a
2.09.........................................................op.term.red.commit
2.11.................................................................opt.prepay
2.11(c)..................................................opt.prepay.notify.bank
2.13.............................................................funding.losses
2.15..................................................................reg.d.com
2.16............................................................Method.of.elect
2.16(a).......................................................Method.of.elect.a
2.16(d).......................................................Method.of.elect.d
2.17..................................................................op.in.com
3........................................................................paymts
3.01..............................................................effectiveness
3.01(c)....................................................agt.parent.guarantee
3.01(g)...................................................agnt.evidence.satisfy
3.02..............................................................existing.agts
3.02(a).....................................................exist.agts.eff.date
3.02(b)..............................................exist.agts.eff.date.1.sent
3.03.................................................................borrowings
3.03(a)............................................................borrowings.a
3.03(b)............................................................agg.out.prin
3.03(c)............................................................borrowings.c
3.03(d)............................................................borrowings.d
4..............................................................rep.and.warrants
4.03.............................................................binding.effect
5.....................................................................covenants
5.04....................................................conduct.bus.maint.exist
5.06(c)(iv)(C)...............................................inspect.property.C
5.07................................................consol.mergers.sales.assets
5.09.........................................................transact.affiliate
5.10.......................................................subsidiary.guarntors
6......................................................................defaults
6.01.............................................................events.default
6.01(a)..................................................event.default.fail.pay
6.01(d)........................................................event.def.10days
6.02.............................................................notice.default
?...............................................................payment.by.Borr
7.08............................................................successor.agent
8.01...................................................basis.determine.int.rate
8.01(a)..........................................................dep.in.dollars
8.02.................................................................illegality
8.03..............................................increased.cost.reduced.return
8.04(a)............................................................borr.payment
8.04(d)...................................................borrower.irsform.1001
9.01....................................................................notices
9.03.................................................................exp. indem
9.03(b)...........................................................bor.agr.indem
9.05.............................................................amend.and.waiv
9.06.........................................................successors.assigns
9.06(b)............................................................particip.int
9.06(c).....................................................bank.assign.to.inst
9.06(c).....................................................bank.assign.to.inst
9.06(d)................................................................assign.d
9.06(e)................................................................assign.e
9.06(f).......................................................notwithstanding.a
9.06(g)................................................................assign.g
9.08..............................................................governing.law
9.12.......................................................judicial.proceedings
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2
<SEQUENCE>3
<DESCRIPTION>PARENT GUARANTEE AGREEMENT AS AMENDED
<TEXT>
<PAGE> 1
EXHIBIT 4.2
CONFORMED COPY
AMENDED AND RESTATED
PARENT GUARANTEE AGREEMENT
dated as of
February 13, 1998
and amended and restated as of February 12, 1999
between
Tyco International Ltd.
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
<PAGE> 2
TABLE OF CONTENTS
----------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.....................................................1
SECTION 1.02. Accounting Terms and Determinations............................10
ARTICLE 2
GUARANTEE
SECTION 2.01. The Guarantee..................................................11
SECTION 2.02. Guarantee Unconditional........................................11
SECTION 2.03. Discharge Only upon Payment in Full; Reinstatement
in Certain Circumstances.......................................12
SECTION 2.04. Waiver by the Guarantor........................................12
SECTION 2.05. Subrogation....................................................12
SECTION 2.06. Stay of Acceleration...........................................12
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR
SECTION 3.01. Corporate Existence and Power..................................12
SECTION 3.02. Corporate and Governmental Authorization; No Contravention.....13
SECTION 3.03. Binding Effect.................................................13
SECTION 3.04. Financial Information..........................................13
SECTION 3.05. Litigation.....................................................14
SECTION 3.06. Compliance with ERISA..........................................14
SECTION 3.07. Environmental Matters..........................................14
SECTION 3.08. Taxes..........................................................15
SECTION 3.09. Subsidiaries...................................................15
SECTION 3.10. Not an Investment Company......................................15
SECTION 3.11. Full Disclosure................................................15
SECTION 3.12. Obligations to Be Pari Passu...................................15
SECTION 3.13. Year 2000 Compliance...........................................15
ARTICLE 4
COVENANTS
SECTION 4.01. Information....................................................16
SECTION 4.02. Payment of Obligations.........................................17
<PAGE> 3
PAGE
----
SECTION 4.03. Maintenance of Property; Insurance.............................18
SECTION 4.04. Conduct of Business and Maintenance of Existence...............18
SECTION 4.05. Compliance with Laws...........................................19
SECTION 4.06. Inspection of Property, Books and Records; Confidentiality.....19
SECTION 4.07. Limitation on Restrictions on Subsidiary Dividends and Other
Distributions..................................................20
SECTION 4.08. Debt...........................................................22
SECTION 4.09. Fixed Charge Coverage..........................................22
SECTION 4.10. Negative Pledge................................................22
SECTION 4.11. Consolidations, Mergers and Sales of Assets....................24
SECTION 4.12. Transactions with Affiliates...................................25
SECTION 4.13. Restricted Payments............................................26
SECTION 4.14. Subsidiary Guarantors..........................................26
ARTICLE 5
DEFAULTS
SECTION 5.01. Guarantor Events of Defaults...................................26
SECTION 5.02. Notice of Default..............................................29
ARTICLE 6
TAXES
SECTION 6.01. Withholding Taxes..............................................29
SECTION 6.02. Certain Other Taxes............................................29
SECTION 6.03. Reimbursement of Taxes Paid by a Bank..........................29
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Notices........................................................30
SECTION 7.02. No Waivers.....................................................30
SECTION 7.03. Expenses; Indemnification......................................30
SECTION 7.04. Judicial Proceedings...........................................31
SECTION 7.05. Judgment Currency..............................................32
SECTION 7.06. Amendments and Waivers.........................................32
SECTION 7.07. Successors and Assigns.........................................32
SECTION 7.08. GOVERNING LAW..................................................32
SECTION 7.09. Counterparts...................................................33
SECTION 7.10. No Seal........................................................33
SECTION 7.11. WAIVER OF JURY TRIAL...........................................33
ii
<PAGE> 4
PAGE
----
Exhibit A - Form of Subsidiary Guarantee
Exhibit B - Form of Subsidiary Counsel Opinion
iii
<PAGE> 5
AMENDED AND RESTATED
PARENT GUARANTEE AGREEMENT
AGREEMENT dated as of February 13, 1998 and amended and restated as of
February 12, 1999 between TYCO INTERNATIONAL LTD. and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Agent.
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Guarantor hereby agrees with the Agent for
the benefit of the Banks that the Parent Guarantee Agreement between them dated
as of February 13, 1998 is amended and restated to read in its entirety as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"ACQUIRED DEBT" means Debt of a Person (a) existing at the time such
Person becomes a Subsidiary or merges into a Subsidiary and (b) not created in
contemplation of such event.
"AFFILIATE" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Guarantor (a "Controlling Person") or
(ii) any Person (other than the Guarantor or a Subsidiary) which is controlled
by or is under common control with a Controlling Person. As used herein, the
term "control" means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise. The fact
that an Affiliate of a Person is a member of a law firm that renders services to
such Person or its Affiliates does not mean that the law firm is an Affiliate of
such Person.
"AGENT" means Morgan Guaranty Trust Company of New York in its capacity
as administrative agent for the Banks under the Financing Documents, and its
successors in such capacity.
"BANK" means each Person from time to time a "Bank" party to either of
the Credit Agreements.
"BANK DOMESTIC TAXES" means, with respect to any Bank, any taxes,
levies, imposts, duties, charges or withholding of any nature (and any interest,
penalties, or similar liabilities with respect thereto) which are not Bank
Foreign Taxes with respect to such Bank.
<PAGE> 6
"BANK FOREIGN TAXES" means, with respect to any Bank, any taxes,
levies, imposts, duties, charges or withholdings of any nature (and any
interest, penalties or similar liabilities with respect thereto) now or
hereafter imposed by any jurisdiction or taxing authority (including any
possession or territory thereof) other than the jurisdiction of which such Bank
is a citizen or a resident or under the laws of which such Bank is organized or
any political subdivision thereof or taxing authority thereof or therein.
"BERMUDA COMPANIES LAW" means every Bermuda statute from time to time
in force concerning companies insofar as the same applies to the Guarantor.
"BORROWER" means Tyco International Group S.A., a Luxembourg company,
and its successors.
"CONSENTS" has the meaning set forth in Section 3.01.
"CONSOLIDATED ASSETS" means, at any time, the total assets of the
Guarantor and its Consolidated Subsidiaries, determined on a consolidated basis
as of such time.
"CONSOLIDATED DEBT" means, at any date, the aggregate amount of Debt of
the Guarantor and its Consolidated Subsidiaries, determined on a consolidated
basis as of such date; provided that (i) if a Permitted Receivables Transaction
is outstanding at such date and is accounted for as a sale of accounts
receivable under generally accepted accounting principles, Consolidated Debt
determined as aforesaid shall be adjusted to include the additional Debt,
determined on a consolidated basis as of such date, which would have been
outstanding at such date had such Permitted Receivables Transaction been
accounted for as a borrowing at such date and (ii) Consolidated Debt shall in
any event include all Debt of any Person other than the Guarantor or a
Consolidated Subsidiary which is Guaranteed by the Guarantor or a Consolidated
Subsidiary, except that Consolidated Debt shall not include Debt of a joint
venture, partnership or similar entity which is Guaranteed by the Guarantor or a
Consolidated Subsidiary by virtue of the joint venture, partnership or similar
arrangement with respect to such entity or by operation of applicable law (and
not otherwise) so long as the aggregate outstanding principal amount of such
excluded Debt at any date does not exceed $50,000,000.
"CONSOLIDATED EBIT" means, for any fiscal period, Consolidated Net
Income for such period plus, to the extent deducted in determining Consolidated
Net Income for such period, the aggregate amount of (i) Consolidated Interest
Expense and (ii) federal, state and local income tax expense.
"CONSOLIDATED INTEREST EXPENSE" means, for any fiscal period, (without
duplication) (i) the consolidated interest expense of the Guarantor and its
Consolidated Subsidiaries for such period minus (ii) the consolidated interest
income of the Guarantor and its Consolidated Subsidiaries for such period, if,
and only if, such consolidated interest income is equal to or less than
$5,000,000, plus (iii) if a Permitted Receivables Transaction outstanding during
such period
2
<PAGE> 7
is accounted for as a sale of accounts receivable under generally accepted
accounting principles, the additional consolidated interest expense that would
have accrued during such period had such Permitted Receivables Transaction been
accounted for as a borrowing during such period, in each case determined on a
consolidated basis.
"CONSOLIDATED NET INCOME" means, for any fiscal period, the
consolidated net income of the Guarantor and its Consolidated Subsidiaries for
such period, determined on a consolidated basis after eliminating therefrom all
Extraordinary Gains and Losses. "EXTRAORDINARY GAINS AND LOSSES" means and
includes, for any fiscal period, all extraordinary gains and losses and all
other material non-recurring non-cash items of the Guarantor and its
Consolidated Subsidiaries for such period, determined on a consolidated basis
and, in addition, includes, without limitation, gains or losses from the
discontinuance of operations and gains or losses of the Guarantor and its
Consolidated Subsidiaries for such period resulting from the sale, conversion or
other disposition of material assets of the Guarantor or any Consolidated
Subsidiary other than in the ordinary course of business.
"CONSOLIDATED NET WORTH" means, at any date, the consolidated
stockholders' equity of the Guarantor and its Consolidated Subsidiaries,
determined on a consolidated basis as of such date and adjusted so as to exclude
the effect of the currency translation adjustment as of such date.
"CONSOLIDATED SUBSIDIARY" means, at any date, with respect to any
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in its consolidated financial statements
if such statements were prepared as of such date; unless otherwise specified,
Consolidated Subsidiary means a Consolidated Subsidiary of the Guarantor.
"CONSOLIDATED TANGIBLE ASSETS" means, at any time, the total assets
less all Intangible Assets appearing on the most recently prepared balance sheet
of the Guarantor and its Consolidated Subsidiaries as of the end of a fiscal
quarter of the Guarantor, prepared on a consolidated basis in accordance with
United States generally accepted accounting principles as in effect on the date
of calculation.
"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, (i) Consolidated
Net Worth as of such date minus (ii) Intangible Assets as of such date.
"CONSOLIDATED TOTAL CAPITALIZATION" means, at any date, the sum of
Consolidated Debt and Consolidated Net Worth, each determined as of such date.
"CREDIT AGREEMENTS" means (i) the 364-Day Credit Agreement dated as of
February 12, 1999 among the Borrower, the Banks listed on the signature pages
thereof and the Agent and (ii) the Extendible 364-Day Credit Agreement dated as
of February 13, 1998 among the Borrower, the Banks listed on the signature pages
thereof and the Agent, in each case as amended from time to time.
3
<PAGE> 8
"DEBT" of any Person means, at any date, without duplication, (i) the
principal amount of all obligations of such Person for borrowed money, (ii) the
principal amount of all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (it being understood that,
subject to the proviso to this definition of "Debt," performance bonds,
performance guaranties, letters of credit, bank guaranties and similar
instruments shall not constitute Debt of such Person to the extent that the
outstanding reimbursement obligations of such Person in respect thereof are
collateralized by cash or cash equivalents, which cash or cash equivalents would
not be reflected as assets on a balance sheet of such Person prepared in
accordance with generally accepted accounting principles), (iii) all obligations
of such Person to pay the deferred purchase price of property or services
recorded on the books of such Person, except for (a) trade and similar accounts
payable and accrued expenses arising in the ordinary course of business, and (b)
employee compensation and pension obligations, and other obligations arising
from employee benefit programs and agreements or other similar employment
arrangements, (iv) all obligations of such Person as lessee which are
capitalized on the books of such Person in accordance with generally accepted
accounting principles, (v) all Debt secured by a Lien on any asset of such
Person, whether or not such Debt is otherwise an obligation of such Person, and
(vi) all Debt of others Guaranteed by such Person; provided, however, that Debt
shall not include:
(A) contingent reimbursement obligations in
respect of performance bonds, performance
guaranties, bank guaranties or letters of
credit issued in lieu of performance bonds
or performance guaranties or similar
instruments, in each case, incurred by such
Person in the ordinary course of business;
(B) contingent reimbursement obligations in
respect of trade letters of credit, or
similar instruments, in each case, incurred
by such Person in the ordinary course of
business; or
(C) contingent reimbursement obligations in
respect of standby letters of credit or
similar instruments securing self-insurance
obligations of such Person;
in each case, so long as the underlying obligation supported thereby does not
itself constitute Debt.
"ENVIRONMENTAL LAWS" means any and all statutes, laws, judicial
decisions, regulations, ordinances, rules, judgments, orders, decrees, plans,
injunctions, permits, concessions, grants, franchises, licenses, agreements and
other governmental restrictions relating to the environment, the effect of the
environment on human health or to emissions, discharges or releases of
pollutants, contaminants, Hazardous Substances or wastes into the environment
including, without limitation, ambient air, surface water, ground water, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of
4
<PAGE> 9
pollutants, contaminants, Hazardous Substances or wastes or the clean-up or
other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA GROUP" means any Subsidiary and all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with any Subsidiary, are treated as a
single employer under Section 414 of the Internal Revenue Code.
"EXISTING TYCO US DEBT" means publicly held and privately placed debt
securities of Tyco US outstanding at December 22, 1997.
"FINANCING DOCUMENTS" means this Agreement, the Credit Agreements and
each Subsidiary Guarantee, Promissory Note and New Borrower Agreement (each as
defined in either of the Credit Agreements).
"GUARANTEE" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt (whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the holder of such Debt of the
payment thereof or to protect such holder against loss in respect thereof (in
whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"GUARANTOR" means Tyco International Ltd., a Bermuda company, and its
successors.
"GUARANTOR DEFAULT" means any condition or event which constitutes a
Guarantor Event of Default or which with the giving of notice or lapse of time
or both would, unless cured or waived, become a Guarantor Event of Default.
"GUARANTOR EVENT OF DEFAULT" has the meaning set forth in Section 5.01.
"GUARANTOR'S 1998 FORM 10-K" means the Guarantor's transition report on
Form 10-K for the twelve months ended September 30, 1998, as filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
5
<PAGE> 10
"HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"INDEMNITEE" has the meaning set forth in Section 7.03(b).
"INDENTURE" means the Indenture dated as of April 23, 1998 among the
Borrower, the Guarantor and The Bank of New York, as Trustee, as amended or
supplemented from time to time.
"INTANGIBLE ASSETS" means, at any date, the amount (if any) which would
be stated under the heading "Costs in Excess of Net Assets of Acquired
Companies" or under any other heading relating to intangible assets separately
listed, in each case, on the face of a balance sheet of the Guarantor and its
Consolidated Subsidiaries prepared on a consolidated basis as of such date.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Guarantor or any Subsidiary shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement (other than an operating lease)
relating to such asset.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, consolidated financial position or consolidated results of operations
of the Guarantor and its Consolidated Subsidiaries, considered as a whole, or
(ii) the ability of the Guarantor to perform its obligations under this
Agreement.
"MATERIAL DEBT" means Debt (other than (i) any Guarantee by the
Guarantor of Debt of a Subsidiary, (ii) any Guarantee by a Subsidiary of Debt of
the Guarantor or another Subsidiary, (iii) any Debt of the Guarantor owed to a
Wholly-Owned Consolidated Subsidiary or (iv) any Debt of a Subsidiary owed to
the Guarantor or a Wholly-Owned Consolidated Subsidiary) of the Guarantor and/or
one or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate outstanding principal amount exceeding
$50,000,000.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"MULTIEMPLOYER PLAN" means at any time a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA either (i) to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
(ii) has at any time within the preceding five
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plan years been maintained, or contributed to, by any Person who was at such
time a member of the ERISA Group for employees of any Person who was at such
time a member of the ERISA Group.
"OBLIGOR" means, at any time, the Borrower, the Guarantor and each
Subsidiary Guarantor at such time.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ACQUIRED DEBT" means Acquired Debt of a Person which:
(a) remains outstanding no more than 180 days after the date such
Person becomes a Subsidiary or merges into a Subsidiary (the "ACQUISITION
DATE"); or
(b) remains outstanding more than 180 days after the Acquisition
Date, but only if (x) 180 days after the Acquisition Date, the senior unsecured
debt of the Borrower is rated at least BBB- by S&P or Baa3 by Moody's, (y) such
Acquired Debt by its terms is not callable or redeemable prior to its stated
maturity within 180 days after the Acquisition Date and (z) such Person in good
faith has made or caused to be made an offer to acquire all such Acquired Debt,
including, without limitation, an offer to exchange such Acquired Debt for
securities of the Borrower, on terms which, in the opinion of an independent
investment banking firm of national reputation and standing, are consistent with
market practices in existence at the time for offers of a similar nature,
provided that the expiration date of any such offer shall not be later than the
180 days after the Acquisition Date, and provided further that if Acquired Debt
which becomes Permitted Acquired Debt under this clause (b) thereafter becomes
callable or redeemable prior to its stated maturity, such Acquired Debt shall
cease to be Permitted Acquired Debt under this clause (b) 90 days after it
becomes so callable or redeemable; or
(c) remains outstanding more than 180 days after the Acquisition
Date and is not Permitted Acquired Debt under clause (b), but only if and to the
extent that the aggregate outstanding principal amount of Permitted Acquired
Debt under this clause (c) at no time exceeds 5% of the Consolidated Tangible
Assets of the Guarantor.
"PERMITTED RECEIVABLES TRANSACTION" means any sale or sales of,
refinancing of and/or financing secured by, any accounts receivable of the
Guarantor and/or any of its Subsidiaries (the "RECEIVABLES") pursuant to which
the Guarantor and its Subsidiaries realize aggregate net proceeds of not more
than $500,000,000 at any one time outstanding, including, without limitation,
any revolving purchase(s) of Receivables where the maximum aggregate uncollected
purchase price (exclusive of any deferred purchase price) for such Receivables
at any time outstanding does not exceed $500,000,000.
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"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PLAN" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"PROPERTY" means any interest of any kind in any property or assets,
whether real, mixed or personal and whether tangible or intangible.
"PROSPECTS" means, at any time, results of future operations which are
reasonably foreseeable based upon the facts and circumstances in existence at
such time.
"REFINANCING" has the meaning set forth in Section 4.07 (and the term
"REFINANCED" has a correlative meaning).
"RESPONSIBLE OFFICER" means any of the following: the Chairman,
President, Vice President and Chief Financial Officer, Treasurer and Secretary
of the Guarantor.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution on
any shares of the Guarantor's capital stock (except to the extent such dividends
and distributions are payable in shares of its capital stock or Stock
Equivalents) or (ii) any payment (except to the extent payable in shares of the
Guarantor's capital stock or Stock Equivalents) on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the Guarantor's
capital stock or (b) any option, warrant or other right to acquire shares of the
Guarantor's capital stock.
"SIGNIFICANT SUBSIDIARY" means, at any date, (A) any Consolidated
Subsidiary which, including its consolidated subsidiaries, meets any of the
following conditions:
(i) the investments in and advances to such
Consolidated Subsidiary by the Guarantor and its other
Consolidated Subsidiaries exceed 15% of the total assets of
the Guarantor and its Consolidated Subsidiaries, determined on
a consolidated basis as of the end of the most recently
completed fiscal year; or
(ii) the proportionate share attributable to such
Consolidated Subsidiary of the total assets of the Guarantor
and its Consolidated Subsidiaries (after intercompany
eliminations) exceeds 15% of the total assets of the Guarantor
and
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<PAGE> 13
the Consolidated Subsidiaries, determined on a consolidated
basis as of the end of the most recently completed fiscal
year; or
(iii) the Guarantor's and its Consolidated
Subsidiaries' equity in the income of such Consolidated
Subsidiary from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in
accounting principle exceeds 15% of such income of the
Guarantor and its Consolidated Subsidiaries, determined on a
consolidated basis for the most recently completed fiscal
year; and
(B) any other Subsidiary which is an Obligor.
"STOCK EQUIVALENTS" means, with respect to any Person, options,
warrants, calls or other rights entered into or issued by such Person to acquire
any capital stock or equity securities of, or other ownership interests in, or
securities convertible into or exchangeable for, capital stock or equity
securities of, or other ownership interests in, such Person.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; unless otherwise specified, Subsidiary means a Subsidiary of the
Guarantor.
"SUBSIDIARY GUARANTEE" means a Guarantee entered into by a Subsidiary
substantially in the form of Exhibit A hereto.
"SUBSIDIARY GUARANTOR" means, at any time, a Subsidiary which at or
prior to such time shall have delivered to the Agent (i) a Subsidiary Guarantee
duly executed by such Subsidiary, which Subsidiary Guarantee has not terminated
in accordance with its terms, (ii) an opinion of counsel for such Subsidiary
(which counsel may be an employee of the Guarantor or such Subsidiary)
reasonably satisfactory to the Agent with respect to such Subsidiary Guarantee,
substantially in the form of Exhibit B hereto and covering such additional
matters relating to such Subsidiary Guarantee as the Agent may reasonably
request and (iii) all documents the Agent may reasonably request relating to the
existence of such Subsidiary, the corporate authority for and the validity of
such Subsidiary Guarantee, and any other matters reasonably determined by the
Agent to be relevant thereto, all in form and substance reasonably satisfactory
to the Agent.
"TYCO US" means Tyco International (US) Inc., a Massachusetts
corporation, and its successors.
"TYCOLUX DEBT SECURITIES" means any unsecured debt securities issued by
the Borrower pursuant to the Indenture.
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"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or to any other Person under Title IV of ERISA
"WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" means any Consolidated
Subsidiary all of the shares of capital stock or other ownership interests of
which (except directors' qualifying shares and investments by foreign nationals
mandated by applicable law) are at the time beneficially owned, directly or
indirectly, by the Guarantor.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with United
States generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the
Guarantor's independent public accountants) with the then most recent audited
consolidated financial statements of the Guarantor and its Consolidated
Subsidiaries delivered to the Banks; provided that, if either (i) the Guarantor
notifies the Agent that the Guarantor wishes to eliminate the effect of any
change in generally accepted accounting principles on the operation of any
covenant contained in Article 4 or (ii) the Agent notifies the Guarantor that it
wishes to effect such an elimination, then the Guarantor's compliance with such
covenant shall be determined on the basis of generally accepted accounting
principles in effect immediately before the relevant change in generally
accepted accounting principles became effective, until either (A) such notice is
withdrawn by the party giving such notice or (B) such covenant is amended in a
manner satisfactory to the Guarantor and the Agent to reflect such change in
generally accepted accounting principles.
ARTICLE 2
GUARANTEE
SECTION 2.01. The Guarantee. The Guarantor hereby guarantees the full
and punctual payment (whether at stated maturity, upon acceleration or
otherwise) of all principal of and interest on amounts loaned to the Borrower
under the Financing Documents and all other amounts payable by the Borrower
under the Financing Documents. This is a guarantee of payment and not merely of
collection. Upon failure by the Borrower to pay punctually any such amount, the
Guarantor shall forthwith on demand pay the amount not so paid at the place and
in the manner specified in the applicable Financing Document.
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SECTION 2.02. Guarantee Unconditional. The obligations of the Guarantor
hereunder shall be unconditional and absolute, and, without limiting the
generality of the foregoing, shall not be released, discharged or otherwise
affected, at any time by:
(i) any extension, renewal, settlement, compromise,
waiver or release in respect of any obligation of the Borrower under
any Financing Document, by operation of law or otherwise;
(ii) any modification or amendment of or supplement to any
Financing Document;
(iii) any release, impairment, non-perfection or invalidity
of any direct or indirect security for any obligation of the Borrower
under any Financing Document;
(iv) any change in the corporate existence, structure or
ownership of the Borrower, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting the Borrower or
its assets or any resulting release or discharge of any obligation of
the Guarantor or the Borrower contained in any Financing Document;
(v) the existence of any claim, set-off or other rights
which the Guarantor may have at any time against the Borrower, the
Agent, any Bank or any other Person, whether in connection herewith or
any unrelated transactions, provided that nothing herein shall prevent
the assertion of any such claim by separate suit or compulsory
counterclaim;
(vi) any invalidity or unenforceability relating to or
against the Borrower for any reason of any Financing Document, or any
provision of applicable law or regulation purporting to prohibit the
payment by the Borrower of any amount payable by it under any Financing
Document; or
(vii) any other act or omission to act or delay of any kind
by the Borrower, the Agent, any Bank or any other Person or any other
circumstance whatsoever which might, but for the provisions of this
paragraph, constitute a legal or equitable discharge of or defense to
the Guarantor's obligations hereunder.
SECTION 2.03. Discharge Only upon Payment in Full; Reinstatement in
Certain Circumstances. This Agreement shall remain in full force and effect
until the commitments of the Banks under the Credit Agreements shall have
terminated and the principal of and interest on the Promissory Notes (as defined
in either Credit Agreement) and all other amounts payable by the Borrower under
the Financing Documents shall have been paid in full. If at any time any payment
of principal of or interest on any Promissory Note (as defined in either Credit
Agreement) or any other amount payable by the Borrower under the Financing
Documents is rescinded or must be otherwise restored or returned upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise, the
Guarantor's obligations hereunder with respect
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<PAGE> 16
to such payment shall be reinstated at such time as though such payment had been
due but not made at such time.
SECTION 2.04. Waiver by the Guarantor. The Guarantor irrevocably waives
acceptance hereof, presentment, demand, protest and any notice not provided for
herein, as well as any requirement that at any time any action be taken by any
Person against the Borrower or any other Person.
SECTION 2.05. Subrogation. Upon making any payment hereunder with
respect to the Borrower, the Guarantor shall be subrogated to the rights of the
payee against the Borrower with respect to such payment; provided that the
Guarantor shall not enforce any payment by way of subrogation until all amounts
of principal of and interest on the Promissory Notes (as defined in either
Credit Agreement) and all other amounts payable by the Borrower under the
Financing Documents have been paid in full.
SECTION 2.06. Stay of Acceleration. In the event that acceleration of
the time for payment of any amount payable by the Borrower under any Financing
Document is stayed upon insolvency, bankruptcy or reorganization of the
Borrower, all such amounts otherwise subject to acceleration under the terms of
this Agreement shall nonetheless be payable by the Guarantor hereunder forthwith
on demand by the Agent.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR
The Guarantor represents and warrants to the Agent that:
SECTION 3.01. Corporate Existence and Power. The Guarantor is a company
limited by shares duly incorporated and validly existing under the laws of
Bermuda. The Guarantor has all corporate powers and all governmental licenses,
authorizations, consents and approvals (collectively, the "Consents") required
in order to carry on its business as now conducted, other than those powers and
Consents, the failure of which to be possessed or obtained could not, based upon
the facts and circumstances in existence at the time this representation and
warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect.
SECTION 3.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Guarantor of this
Agreement: (a) are within the Guarantor's corporate powers; (b) have been duly
authorized by all necessary corporate action on the part of the Guarantor; (c)
require no action by or in respect of, or filing with, any governmental body,
agency or official, in each case, on the part of the Guarantor; and (d) do not
contravene, or constitute a default by the Guarantor under, any provision of (i)
applicable law or regulation, (ii) the Memorandum of Association or Bye-Laws of
the Guarantor, or (iii) any agreement or instrument evidencing or governing Debt
of the Guarantor or any other material agreement, judgment, injunction, order,
decree or other instrument binding upon the Guarantor.
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SECTION 3.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Guarantor.
SECTION 3.04. Financial Information.
(a) The consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as of September 30, 1998 and the related consolidated
statements of income, of shareholders' equity and of cash flows for the
nine-month period then ended, reported on by PriceWaterhouseCoopers LLP and set
forth in the Guarantor's 1998 Form 10-K, a copy of which has been delivered to
each of the Banks, fairly present, in conformity with generally accepted
accounting principles, the consolidated financial position of the Guarantor and
its Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such period.
(b) The supplemental consolidated balance sheet of the Guarantor
and its Consolidated Subsidiaries as of September 30, 1998 and the related
supplemental consolidated statements of operations, shareholders' equity and
cash flows for the fiscal year then ended, reported on by PriceWaterhouseCoopers
LLP and set forth in the Guarantor's Form 8-K filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 on December
10, 1998, a copy of which has been delivered to each of the Banks, fairly
present, in conformity with generally accepted accounting principles, the
consolidated financial position of the Guarantor and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such period, in each case giving retroactive effect to the merger
with United States Surgical Corporation consummated on October 1, 1998 and
accounted for as a pooling of interests.
(c) Since September 30, 1998 there has been no material adverse
change in the business, financial position, results of operations or Prospects
of the Guarantor and its Consolidated Subsidiaries, considered as a whole.
SECTION 3.05. Litigation. There is no action, suit or proceeding
pending against, or to the knowledge of the Guarantor threatened against or
affecting, the Guarantor or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could, based upon the facts
and circumstances in existence at the time this representation and warranty is
made or deemed made, reasonably be expected to have a Material Adverse Effect or
which in any manner draws into question the validity of the Financing Documents.
SECTION 3.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance, except
where the failure to so comply could not, based upon the facts and circumstances
in existence at the time this representation and warranty is made or deemed
made, reasonably be expected to have a Material Adverse Effect, with the
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<PAGE> 18
presently applicable provisions of ERISA and the Internal Revenue Code with
respect to each Plan. No member of the ERISA Group has (i) sought a waiver of
the minimum funding standard under Section 412 of the Internal Revenue Code in
respect of any Plan, (ii) failed to make any required contribution or payment to
any Plan or Multiemployer Plan, or made any amendment to any Plan, which has
resulted in or could, based upon the facts and circumstances in existence at the
time this representation and warranty is made or deemed made, reasonably be
expected to result in the imposition of a Lien or the posting of a bond or other
security under ERISA or the Internal Revenue Code or (iii) incurred any
liability under Title IV of ERISA (other than a liability to the PBGC for
premiums under Section 4007 of ERISA), which could, based upon the facts and
circumstances existing at the time this representation and warranty is made or
deemed made, reasonably be expected to have a Material Adverse Effect.
SECTION 3.07. Environmental Matters. In the ordinary course of its
business, the Guarantor conducts an ongoing review of the effect of
Environmental Laws on the business, operations and properties of the Guarantor
and its Subsidiaries, in the course of which it identifies and evaluates
associated liabilities and costs (including, without limitation, any capital or
operating expenditures required for clean-up or closure of properties presently
or previously owned, any capital or operating expenditures required to achieve
or maintain compliance with environmental protection standards imposed by law or
as a condition of any license, permit or contract, any related constraints on
operating activities, including any periodic or permanent shutdown of any
facility or reduction in the level of or change in the nature of operations
conducted thereat, any costs or liabilities in connection with off-site disposal
of wastes or Hazardous Substances, and any actual or potential liabilities to
third parties, including employees, and any related costs and expenses). On the
basis of this review, the Guarantor has reasonably concluded that such
associated liabilities and costs, including the costs of compliance with
Environmental Laws, could not, based upon the facts and circumstances existing
at the time this representation and warranty is made or deemed made, reasonably
be expected to have a Material Adverse Effect.
SECTION 3.08. Taxes. The Guarantor and its Significant Subsidiaries
have filed all material tax returns which are required to be filed by them and
have paid all taxes shown on such returns or pursuant to any assessment received
by the Guarantor or any Subsidiary, except those assessments which are being
contested in good faith by appropriate proceedings. The charges, accruals and
reserves on the books of the Guarantor and its Subsidiaries in respect of taxes
or other governmental charges are, in the opinion of the Guarantor, adequate.
SECTION 3.09. Subsidiaries. Each of the Guarantor's corporate
Consolidated Subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation, except
where the failure to be so incorporated, existing or in good standing could not,
based upon the facts and circumstances existing at the time this representation
and warranty is made or deemed made, reasonably be expected to have a Material
Adverse Effect. Each such Subsidiary has all corporate powers and all Consents
required to carry on its business as now conducted, other than those powers and
Consents, the failure of which to
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<PAGE> 19
be possessed or obtained could not, based upon the facts and circumstances in
existence at the time this representation and warranty is made or deemed made,
reasonably be expected to have a Material Adverse Effect.
SECTION 3.10. Not an Investment Company. The Guarantor is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 3.11. Full Disclosure. All information heretofore furnished by
or on behalf of the Obligors to the Agent in connection with this Agreement,
does not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
SECTION 3.12. Obligations to Be Pari Passu. The Guarantor's obligations
under this Agreement rank PARI PASSU as to priority of payment and in all other
respects with all other unsecured and unsubordinated obligations of the
Guarantor.
SECTION 3.13. Year 2000 Compliance. The Guarantor has (i) initiated a
review and assessment of all areas within the business and operations of the
Guarantor and its Subsidiaries that could be adversely affected by the "YEAR
2000 PROBLEM" (that is, the risk that computer applications used by it or any of
its Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem
on a timely basis and (iii) to date, implemented such plan in accordance with
such timetable. The Guarantor reasonably believes that all computer applications
that are material to the business or operations of the Guarantor or any of its
Subsidiaries will on a timely basis be able to perform properly date-sensitive
functions for all dates before and from and after January 1, 2000, except to the
extent that a failure to do so could not reasonably be expected to have a
Material Adverse Effect.
ARTICLE 4
COVENANTS
The Guarantor agrees that:
SECTION 4.01. Information. The Guarantor will deliver to each of the
Banks:
(a) as soon as available and in any event within 120 days after
the end of each fiscal year of the Guarantor, consolidated and consolidating
balance sheets of the Guarantor and its Consolidated Subsidiaries as of the end
of such fiscal year and the related consolidated and consolidating statements of
income, of shareholders' equity and of cash flows for such fiscal year, setting
forth, in each case in comparative form, the figures for the previous fiscal
year, such
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<PAGE> 20
consolidated statements to be reported on by PriceWaterhouseCoopers LLP or other
independent public accountants of internationally recognized standing in a
manner complying with the applicable rules and regulations promulgated by the
Securities and Exchange Commission;
(b) as soon as available and in any event within 60 days after the
end of each of the first three quarters of each fiscal year of the Guarantor,
consolidated and consolidating balance sheets of the Guarantor and its
Consolidated Subsidiaries as of the end of such quarter, the related
consolidated statements of income for such quarter, and the related consolidated
statements of income and of cash flows and consolidating statements of income
for the portion of the Guarantor's fiscal year ended at the end of such quarter,
setting forth in the case of such statements of income and of cash flows in
comparative form the figures for the corresponding quarter (in the case of
consolidated statements of income) and for the corresponding portion of the
Guarantor's previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency on behalf of the Guarantor by the chief financial
officer, the chief accounting officer or the treasurer of the Guarantor;
(c) simultaneously with the delivery of each set of financial
statements referred to in subsections (a) and (b) above, a certificate on behalf
of the Guarantor signed by the chief financial officer, the chief accounting
officer or the treasurer of the Guarantor (i) setting forth in reasonable detail
the calculations required to establish whether the Guarantor was in compliance
with the requirements of Sections 4.08, 4.09, 4.10 and 4.13 on the date of such
financial statements and (ii) stating whether any Guarantor Default exists on
the date of such certificate and, if any Guarantor Default then exists, setting
forth, in reasonable detail, the nature thereof and the action which the
Guarantor is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of financial
statements referred to in subsection (a) above, a statement of the firm of
independent public accountants which reported on such financial statements
stating that, in making the audit necessary for the certification of such
financial statements, such firm of accountants has obtained no knowledge of any
Guarantor Default, or if it has obtained knowledge of such Guarantor Default,
specifying the nature and period of existence thereof; provided such firm of
accountants shall not be liable to any Person by reason of such firm's failure
to obtain knowledge of any Guarantor Default which would not be disclosed in the
course of an audit conducted in accordance with generally accepted accounting
principles;
(e) within five business days after any Responsible Officer
obtains knowledge of any Guarantor Default, if such Guarantor Default is then
continuing, a certificate on behalf of the Guarantor signed by the chief
financial officer, the chief accounting officer or the treasurer of the
Guarantor setting forth, in reasonable detail, the nature thereof and the action
which the Guarantor is taking or proposes to take with respect thereto;
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<PAGE> 21
(f) promptly following the mailing thereof to the shareholders of
the Guarantor generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all final
registration statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and final reports on Forms 10-K, 10-Q
and 8-K (or their equivalents) which the Guarantor shall have filed with the
Securities and Exchange Commission;
(h) promptly upon any Responsible Officer of the Guarantor
obtaining knowledge of the commencement of any action, suit or proceeding before
any court, arbitrator or other governmental body against the Guarantor or any of
its Subsidiaries that, if adversely determined, could reasonably be expected to
have a Material Adverse Effect, a certificate on behalf of the Guarantor
specifying the nature of such action, suit or proceeding and what action the
Guarantor is taking or proposes to take with respect thereto; and
(i) from time to time, upon reasonable notice, such additional
information regarding the financial position or business of the Guarantor and
its Subsidiaries as the Agent, at the request of any Bank, may reasonably
request.
Information required to be delivered pursuant to subsections (a), (b),
(f) or (g) above shall be deemed to have been delivered on the date on which the
Guarantor provides notice to the Banks that such information has been posted on
the Guarantor's website on the Internet at the website address listed on the
signature pages hereof, at sec.gov/edaux/searches.htm or at another website
identified in such notice and accessible by the Banks without charge; provided
that (i) such notice may be included in a certificate delivered pursuant to
subsection 4.01(c) and (ii) the Guarantor shall deliver paper copies of the
information referred to in subsections (a), (b), (f) or (g) to any Bank which
requests such delivery.
SECTION 4.02. Payment of Obligations. The Guarantor will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where (i) any such failure to so pay
or discharge could not, based upon the facts and circumstances in existence at
the time, reasonably be expected to have a Material Adverse Effect or (ii) such
liabilities or obligations may be contested in good faith by appropriate
proceedings. The Guarantor will maintain, and will cause each Subsidiary to
maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of such liabilities or obligations.
SECTION 4.03. Maintenance of Property; Insurance. (a) Except as
permitted by Section 4.04 or 4.09, the Guarantor will keep, and will cause each
Subsidiary to keep, all property necessary in its business in good working order
and condition, ordinary wear and tear excepted, unless the failure to so keep
could not, based upon the facts and circumstances existing at the time,
reasonably be expected to have a Material Adverse Effect.
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(b) The Guarantor will maintain, and will cause each Subsidiary to
maintain, with financially sound and reputable insurers, insurance with respect
to its assets and business against such casualties and contingencies, of such
types (including, without limitation, loss or damage, product liability,
business interruption, larceny, embezzlement or other criminal misappropriation)
and in such amounts as is customary in the case of similarly situated
corporations of established reputations engaged in the same or a similar
business, unless the failure to maintain such insurance could not, based upon
the facts and circumstances existing at the time, reasonably be expected to have
a Material Adverse Effect.
SECTION 4.04. Conduct of Business and Maintenance of Existence. The
Guarantor (a) will not engage in any business other than the holding of stock
and other investments in its Subsidiaries and activities reasonably related
thereto, (b) will cause each Subsidiary to engage in business of the same
general type as now conducted by the Guarantor's Subsidiaries and reasonably
related extensions thereof, and (c) will preserve, renew and keep in full force
and effect, and will cause each Subsidiary to preserve, renew and keep in full
force and effect (x) their respective corporate existence and (y) their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business, unless in the case of either the failure of the
Guarantor to comply with subclause (c) (y) of this Section 4.04 or the failure
of a Subsidiary to comply with clause (b) or (c) of this Section 4.04, such
failure could not, based upon the facts and circumstances existing at the time,
reasonably be expected to have a Material Adverse Effect; provided that nothing
in this Section 4.04 shall prohibit (i) the merger or consolidation of a
Subsidiary with or into the Guarantor or a Wholly-Owned Consolidated Subsidiary,
(ii) the sale, lease, transfer, assignment or other disposition by a Subsidiary
of all or any part of its assets to the Guarantor or to a Wholly-Owned
Consolidated Subsidiary, (iii) the merger or consolidation of a Subsidiary with
or into a Person other than the Guarantor or a Wholly-Owned Consolidated
Subsidiary, if the Person surviving such consolidation or merger is a Subsidiary
and immediately after giving effect thereto, no Guarantor Default shall have
occurred and be continuing, (iv) the sale, lease, transfer, assignment or other
disposition by a Subsidiary of all or any part of its assets to a Person other
than the Guarantor or a Wholly-Owned Consolidated Subsidiary, if the Person to
which such sale, lease, transfer, assignment or other disposition is made is a
Subsidiary and immediately after giving effect thereto, no Guarantor Default
shall have occurred and be continuing, (v) any transaction permitted pursuant to
Section 4.11 or (vi) the termination of the corporate existence of any
Subsidiary if the Guarantor in good faith determines that such termination is in
the best interest of the Guarantor and is not materially disadvantageous to the
Banks.
SECTION 4.05. Compliance with Laws. The Guarantor will comply, and
cause each Subsidiary to comply, in all material respects with all applicable
laws, ordinances, rules, regulations, and requirements of governmental
authorities (including, without limitation, Environmental Laws and ERISA and the
rules and regulations thereunder) except where (a) noncompliance therewith could
not, based upon the facts and circumstances in existence at the time, reasonably
be expected to have a Material Adverse Effect or (b) the necessity of compliance
therewith is contested in good faith by appropriate proceedings.
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SECTION 4.06. Inspection of Property, Books and Records;
Confidentiality. (a) The Guarantor will keep, and will cause each Subsidiary to
keep, proper books of record and account in which true and correct entries shall
be made of its business transactions and activities so that financial statements
that fairly present its business transactions and activities can be properly
prepared in accordance with generally accepted accounting principles.
(b) The Guarantor will permit, and will cause each Subsidiary to
permit, representatives of any Bank at such Bank's expense to visit and inspect
any of their respective properties, to examine and make abstracts from any of
their respective books and records and to discuss their respective affairs,
finances and accounts with their respective officers, employees and independent
public accountants, all upon reasonable notice to the Guarantor, at such
reasonable times and as often as may reasonably be requested by any Bank.
(c) Each Bank and the Agent shall, by its receipt of Confidential
Information (as defined below) pursuant to or in connection with this Agreement
or its exercise of any of its rights hereunder, be deemed to have agreed (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to (i) keep such information confidential, (ii) (except as
permitted by clause (iii) of this Section 4.06(c)) not disclose such information
to any Person other than an officer, director, employee, legal counsel,
independent auditor or authorized agent or advisor of the Agent or such Bank
needing to know such information (it being understood that any such officer,
director, employee, legal counsel, independent auditor or authorized agent or
advisor shall be informed by the Agent or such Bank of the confidential nature
of such information), (iii) not disclose such information to any Assignee or
Participant (or prospective Assignee or Participant), unless such Assignee or
Participant (or prospective Assignee or Participant) shall agree in writing to
be bound by the provisions of this Section 4.06(c) and (iv) not use any such
information except for purposes relating to this Agreement or the Notes. The
term "Confidential Information" shall mean non-public information furnished by
or on behalf of the Guarantor or any of its Subsidiaries to the Agent, any Bank
or other Person exercising rights hereunder or required to be bound hereby
(collectively "Recipients"), but shall not include any such information which
(1) has become or hereafter becomes available to the public other than as a
result of a disclosure by a Recipient, or (2) has become or hereafter becomes
available to a Recipient, on a non-confidential basis, from a source other than
the Guarantor or any of its Subsidiaries (or any of their respective
representatives or agents) or any Recipient, which source, to the knowledge of
the Recipient, is not prohibited from disclosing such information by a
confidentiality agreement with, or other legal or fiduciary obligation to, the
Guarantor or its Subsidiaries.
The restrictions set forth in the immediately preceding paragraph shall
not prevent the disclosure by a Recipient of any such information:
(A) with the prior written consent of the
Guarantor,
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(B) at the request of a bank regulatory agency
or in connection with an examination by bank examiners, or
(C) upon order of any court or administrative
agency of competent jurisdiction, to the extent required by
such order and not effectively stayed on appeal or otherwise,
or as otherwise required by law; provided that in the case of
any intended disclosure under this clause (C), the Recipient
shall (unless otherwise required by applicable law) give the
Guarantor not less than five business days prior notice (or
such shorter period as may, in the good faith discretion of
the Recipient, be reasonable under the circumstances or may be
required by any court or agency under the circumstances),
specifying the Confidential Information involved and stating
such Recipient's intention to disclose such Confidential
Information (including the manner and extent of such
disclosure) in order to allow the Guarantor an opportunity to
seek an appropriate protective order.
Each Recipient shall agree that, in addition to all other remedies
available, the Guarantor shall be entitled to specific performance and
injunctive and other equitable relief as a remedy for any breach of this Section
4.06(c) by such Recipient.
SECTION 4.07. Limitation on Restrictions on Subsidiary Dividends and
Other Distributions. The Guarantor will not, and will not permit any Subsidiary
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Subsidiary
to (a) pay dividends or make any other distributions on its capital stock or any
other interest or participation in its profits, owned by the Guarantor or any
Subsidiary, or pay any Debt owed to the Guarantor or any Subsidiary, (b) make
loans or advances to the Guarantor or any Subsidiary or (c) transfer any of its
properties or assets to the Guarantor or any Subsidiary, except for such
encumbrances or restrictions existing under or by reason of
(i) applicable law, agreements with foreign governments
with respect to assets located in their jurisdiction, or condemnation
or eminent domain proceedings,
(ii) any of the Financing Documents,
(iii) (A) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Guarantor
or a Subsidiary, or (B) customary restrictions imposed on the transfer
of copyrighted or patented materials or provisions in agreements that
restrict the assignment of such agreements or any rights thereunder,
(iv) provisions contained in the instruments evidencing or
governing Debt or other obligations or agreements, in each case
existing on February 12, 1999,
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(v) provisions contained in documents evidencing or
governing any Permitted Receivables Transaction,
(vi) provisions contained in instruments evidencing or
governing Debt or other obligations or agreements of any Person, in
each case, at the time such Person (A) shall be merged or consolidated
with or into the Guarantor or any Subsidiary, (B) shall sell, transfer,
assign, lease or otherwise dispose of all or substantially all of such
Person's assets to the Guarantor or a Subsidiary, or (C) otherwise
becomes a Subsidiary, provided that in the case of clause (A), (B) or
(C), such Debt, obligation or agreement was not incurred or entered
into, or any such provisions adopted, in contemplation of such
transaction,
(vii) provisions contained in instruments amending,
restating, supplementing, extending, renewing, refunding, refinancing,
replacing or otherwise modifying, in whole or in part (collectively,
"REFINANCING"), instruments referred to in clauses (ii), (iv) and (vi)
of this Section 4.07, so long as such provisions are, in the good faith
determination of the Guarantor's board of directors, not materially
more restrictive than those contained in the respective instruments so
Refinanced,
(viii) provisions contained in any instrument evidencing or
governing Debt or other obligations of a Subsidiary Guarantor,
(ix) any encumbrances and restrictions with respect to a
Subsidiary imposed in connection with an agreement which has been
entered into for the sale or disposition of such Subsidiary or its
assets, provided such sale or disposition otherwise complies with this
Agreement,
(x) the subordination (pursuant to its terms) in right
and priority of payment of any Debt owed by any Subsidiary (the
"Indebted Subsidiary") to the Guarantor or any other Subsidiary, to any
other Debt of such Indebted Subsidiary, provided (A) such Debt is
permitted under this Agreement and (B) the Guarantor's board of
directors has determined, in good faith, at the time of the creation of
such encumbrance or restriction, that such encumbrance or restriction
could not, based upon the facts and circumstances in existence at the
time, reasonably be expected to have a Material Adverse Effect,
(xi) provisions governing preferred stock issued by a
Subsidiary, provided that such preferred stock is permitted under
Section 4.08, and
(xii) provisions contained in debt instruments, obligations
or other agreements of any Subsidiary which are not otherwise permitted
pursuant to clauses (i) through (xi) of this Section 4.07, provided
that the aggregate investment of the Guarantor in all such Subsidiaries
(determined in accordance with generally accepted accounting
principles)
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shall at no time exceed the greater of (a) $300,000,000 or (b) 10% of
Consolidated Tangible Net Worth.
The provisions of this Section 4.07 shall not prohibit (x) Liens not prohibited
by Section 4.10 or (y) restrictions on the sale or other disposition of any
property securing Debt of any Subsidiary, provided such Debt is otherwise
permitted by this Agreement.
SECTION 4.08. Debt. Consolidated Debt will at no time exceed (x) prior
to June 30, 1999, 62.5% and (y) on and after June 30, 1999, 52.5% of
Consolidated Total Capitalization. The total Debt of all Consolidated
Subsidiaries (excluding (i) Debt of a Consolidated Subsidiary owed to the
Borrower, to the Guarantor or to a Wholly-Owned Consolidated Subsidiary, (ii)
Debt of the Borrower or a Subsidiary Guarantor, (iii) Permitted Acquired Debt
and (iv) Existing Tyco US Debt) will at no time exceed in aggregate outstanding
principal amount 5% of the Consolidated Tangible Assets of the Guarantor. For
purposes of this Section any preferred stock of a Consolidated Subsidiary held
by a Person other than the Guarantor or a Wholly-Owned Consolidated Subsidiary
shall be included, at the higher of its voluntary or involuntary liquidation
value, in "Consolidated Debt" and in the "Debt" of such Consolidated Subsidiary.
SECTION 4.09. Fixed Charge Coverage. The ratio of Consolidated EBIT to
Consolidated Interest Expense will not, for any period of four consecutive
fiscal quarters, be less than 2.5 to 1.
SECTION 4.10. Negative Pledge. The Guarantor will not, and will not
permit any Subsidiary to, create, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired by it, except:
(a) any Lien existing on any asset on February 12, 1999 securing
Debt outstanding on such date;
(b) any Lien existing on any asset of, or capital stock of, or
other ownership interest in, any Person (such capital stock and other ownership
interests are collectively referred to herein as "Stock") at the time such
Person becomes a Subsidiary, which Lien was not created in contemplation of such
event;
(c) any Lien on any asset securing the payment of all or part of
the purchase price of such asset upon the acquisition thereof by the Guarantor
or a Subsidiary or securing Debt (including any obligation as lessee incurred
under a capital lease) incurred or assumed by the Guarantor or a Subsidiary
prior to, at the time of or within one year after such acquisition (or in the
case of real property, the completion of construction (including any
improvements on an existing property) or the commencement of full operation of
such asset or property, whichever is later), which Debt is incurred or assumed
for the purpose of financing all or part of the cost of acquiring such asset or,
in the case of real property, construction or improvements thereon; provided,
that in the case of any such acquisition, construction or improvement, the Lien
shall
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not apply to any asset theretofore owned by the Guarantor or a Subsidiary, other
than assets so acquired, constructed or improved;
(d) any Lien existing on any asset or Stock of any Person at the
time such Person is merged or consolidated with or into the Guarantor or a
Subsidiary which Lien was not created in contemplation of such event;
(e) any Lien existing on any asset or Stock of any Person at the
time of acquisition thereof by the Guarantor or a Subsidiary, which Lien was not
created in contemplation of such acquisition;
(f) any Lien arising out of the refinancing of any Debt secured by
any Lien permitted by any of the subsections (a) through (e) of this Section
4.10, provided the principal amount of Debt is not increased and is not secured
by any additional assets, except as provided in the last sentence of this
Section 4.10;
(g) any Lien to secure Debt of a Subsidiary to the Guarantor or to
a Wholly-Owned Consolidated Subsidiary;
(h) any Lien created pursuant to a Permitted Receivables
Transaction;
(i) any Lien in favor of any country (or any department, agency,
instrumentality or political subdivision of any country) securing obligations
arising in connection with partial, progress, advance or other payments pursuant
to any contract, statute, rule or regulation or securing obligations incurred
for the purpose of financing all or any part of the purchase price (including
the cost of installation thereof or, in the case of real property, the cost of
construction or improvement or installation of personal property thereon) of the
asset subject to such Lien (including, but not limited to, any Lien incurred in
connection with pollution control, industrial revenue or similar financings);
(j) Liens arising in the ordinary course of its business which (i)
do not secure Debt, (ii) do not secure any single obligation in an amount
exceeding $50,000,000 and (iii) do not in the aggregate materially detract from
the value of its assets or materially impair the use thereof in the operation of
its business; and
(k) Liens not otherwise permitted by the foregoing clauses (a)
through (j) of this Section 4.10 securing Debt (without duplication) in an
aggregate principal amount at any time outstanding not to exceed an amount equal
to the greater of (i) $300,000,000 or (ii) 10% of Consolidated Tangible Net
Worth.
It is understood that any Lien permitted to exist on any asset pursuant to the
foregoing provisions of this Section 4.10 may attach to the proceeds of such
asset and, with respect to Liens permitted pursuant to subsections (a), (b),
(d), (e), (f) (but only with respect to the refinancing of a Debt
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secured by a Lien permitted pursuant to subsections (a), (b), (d) or (e)) or (g)
of this Section 4.10, may attach to an asset acquired in the ordinary course of
business as a replacement of such former asset.
SECTION 4.11. Consolidations, Mergers and Sales of Assets. (a) The
Guarantor will not (i) consolidate or merge with or into any other Person or
(ii) sell, lease or otherwise transfer all or substantially all of its assets to
any other Person, unless
(A) the Guarantor or a Subsidiary is the
surviving corporation;
(B) the Person (if other than the Guarantor)
formed by such consolidation or into which the Guarantor is
merged, or the Person which acquires by sale or other
transfer, or which leases, all or substantially all of the
assets of the Guarantor (any such Person, the "Successor"),
shall be organized and existing under the laws of Bermuda or
of the United States, any state thereof or the District of
Columbia and shall expressly assume, in a writing executed and
delivered to the Agent for delivery to each of the Banks, in
form reasonably satisfactory to the Agent, the due and
punctual payment of the principal of and interest on the
Promissory Notes and the performance of the other obligations
under this Agreement and the Promissory Notes on the part of
the Guarantor to be performed or observed, as fully as if such
Successor were originally named as the Guarantor in this
Agreement;
(C) immediately after giving effect to such
transaction, no Guarantor Default shall have occurred and be
continuing; and
(D) the Guarantor has delivered to the Agent a
certificate on behalf of the Guarantor signed by a Responsible
Officer and an opinion of counsel, each stating that all
conditions provided in this Section 4.11 relating to such
transaction have been satisfied.
The foregoing provisions of this Section 4.11 shall not restrict the
merger or consolidation of any Subsidiary with and into the Guarantor.
(b) The Guarantor will not, and will not permit any Subsidiary to,
sell, lease or otherwise transfer, in any transaction or series of related
transactions, to any Person (other than the Guarantor or a Subsidiary) any
Property (including, without limitation, the stock of any Subsidiary) having a
net book value in excess of 15% of Consolidated Assets determined as of the end
of the fiscal quarter of the Guarantor most recently ended at the time of such
sale or other transaction, or Property (including without limitation, stock of a
Subsidiary) which contributed in excess of 15% of Consolidated EBIT for the
fiscal year of the Guarantor most recently ended at the time of such sale or
other transaction.
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SECTION 4.12. Transactions with Affiliates. The Guarantor will not, and
will not permit any Subsidiary to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate (collectively, "AFFILIATE TRANSACTIONS"); provided, however, that the
foregoing provisions of this Section 4.12 shall not prohibit the Guarantor or
any of its Subsidiaries from (a) making Restricted Payments (including, for this
purpose, transactions expressly excluded from the definition of a Restricted
Payment) permitted by Section 4.13, (b) making sales to or purchases from any
Affiliate and, in connection therewith, extending credit or making payments, or
from making payments for services rendered by any Affiliate, if such sales or
purchases are made or such services are rendered in the ordinary course of
business and on terms and conditions at least as favorable to the Guarantor or
such Subsidiary as the terms and conditions which the Guarantor would reasonably
expect to be obtained in a similar transaction with a Person which is not an
Affiliate at such time, (c) making payments of principal, interest and premium
on any Debt of the Guarantor or such Subsidiary held by an Affiliate if the
terms of such Debt are at least as favorable to the Guarantor or such Subsidiary
as the terms which the Guarantor would reasonably expect to have been obtained
at the time of the creation of such Debt from a lender which was not an
Affiliate, (d) participating in, or effecting any transaction in connection
with, any joint enterprise or other joint arrangement with any Affiliate if the
Guarantor or such Subsidiary participates in the ordinary course of its business
and on a basis no less advantageous than the basis on which such Affiliate
participates, (e) paying or granting reasonable compensation and benefits to any
director, officer, employee or agent of the Guarantor or any Subsidiary, (f)
paying reasonable legal fees and expenses to a law firm of which an Affiliate is
a member or (g) engaging in any Affiliate Transaction not otherwise addressed in
subsections (a) - (f) of this Section 4.12, the terms of which are not less
favorable to the Guarantor or such Subsidiary than those that the Guarantor
would reasonably expect to be obtained in a comparable transaction at such time
with a Person which is not an Affiliate.
SECTION 4.13. Restricted Payments. The Guarantor will not, and will not
permit any Subsidiary to, declare or make any Restricted Payment unless, after
giving effect thereto, the aggregate of all Restricted Payments declared or made
subsequent to the date hereof does not exceed an amount equal to the sum of (a)
$3,100,000,000 plus (b) 50% of Consolidated Net Income (or minus 100% of
Consolidated Net Income, in the event of a net loss for such period) for the
period from October 1, 1998 through the end of the then most recently ended
fiscal quarter of the Guarantor (treated for this purpose as a single accounting
period), plus (c) the aggregate cash proceeds (net of underwriting commissions)
received by the Guarantor (other than from a Subsidiary) from the issuance or
sale after September 30, 1998 of capital stock or Stock Equivalents of the
Guarantor (other than the proceeds of any capital stock or Stock Equivalent
which by its terms is subject to redemption otherwise than at the sole option of
the Guarantor). Nothing in this Section 4.13 shall prohibit the payment of any
dividend or distribution within 60 days after the declaration thereof if such
declaration was not prohibited by this Section 4.13.
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SECTION 4.14. Subsidiary Guarantors. If any Subsidiary becomes a
guarantor of TycoLux Debt Securities under the Indenture, the Guarantor will
cause such Person to become a Subsidiary Guarantor concurrently therewith.
ARTICLE 5
DEFAULTS
SECTION 5.01. Guarantor Events of Defaults. The following events shall
constitute "GUARANTOR EVENTS OF DEFAULT" for purposes of the Financing
Documents:
(a) the Guarantor shall fail to observe or perform any covenant
contained in Section 4.08, 4.09, 4.13 or 4.14;
(b) the Guarantor shall fail to observe or perform any covenant
contained in Section 4.07 or Sections 4.10 to 4.12, inclusive, and such failure
shall not be remedied within five days after any Responsible Officer obtains
actual knowledge thereof;
(c) the Guarantor shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a) or
(b) of this Section 5.01) for 10 days after notice thereof has been given to the
Guarantor by the Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made
in writing by the Guarantor or any Subsidiary Guarantor in the Financing
Documents or in any certificate, financial statement or other document required
to be delivered to the Agent or any of the Banks pursuant to the Financing
Documents shall prove to have been incorrect in any material respect when made
(or deemed made);
(e) the Guarantor or any Subsidiary shall fail to make any payment
in respect of any Material Debt when due (after giving effect to any applicable
grace period);
(f) any event or condition shall occur that results in the
acceleration of the maturity of any Material Debt or that entitles the holder or
holders of any Material Debt or any Person acting on behalf of such holder or
holders to accelerate the maturity thereof;
(g) (i) any corporate action is taken authorizing the winding up,
liquidation, any arrangement or the taking of any other similar action of or
with respect to the Guarantor or authorizing any corporate action to be taken to
facilitate any such winding up, liquidation, arrangement, reorganization or
amalgamation or other similar action or any members' voluntary winding up of the
Guarantor as provided under the Bermuda Companies Law shall be commenced;
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(ii) (A) any petition shall be filed seeking the
liquidation, any arrangement or the taking of any other similar action
of or with respect to the Guarantor by the Registrar of Companies in
Bermuda, or by any other Person or Persons, or (B) any petition shall
be presented for the winding up of the Guarantor to a court of Bermuda
as provided with the Bermuda Companies Law, or (C) any creditors'
winding up of the Guarantor as provided under the Bermuda Companies Law
shall be commenced, or (D) any receiver shall be appointed by a
creditor of the Guarantor or by a court of Bermuda on the application
of a creditor of the Guarantor as provided under any instrument giving
rights for the appointment of a receiver thereto, and in the case of
any such petition, winding up, appointment, order or other matter, such
petition, winding up, appointment, order or other matter, shall remain
undismissed and unstayed for a period of 60 days;
(iii) the Guarantor or any Significant Subsidiary shall (A)
commence a voluntary case or other proceeding seeking liquidation,
winding up, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or substantially
all of its property, or (B) consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other similar proceeding commenced against it, or
(C) make a general assignment for the benefit of creditors, or (D) fail
generally to pay its debts as they become due, or (E) take any
corporate action to authorize any of the foregoing; or
(iv) (A) an involuntary case or other proceeding shall be
commenced against the Guarantor or any Significant Subsidiary seeking
liquidation, winding up, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or
substantially all of its property, and such involuntary case or other
proceeding shall remain in effect and undismissed and unstayed for a
period of 60 days; or (B) an order for relief shall be entered against
the Guarantor or any Significant Subsidiary under the bankruptcy laws
of any jurisdiction as now or hereafter in effect;
(h) a judgment or order for the payment of money in excess of
$30,000,000 (after deducting amounts covered by insurance, except to the extent
that the insurer providing such insurance has declined such coverage) shall be
rendered against the Guarantor or any Subsidiary and, within 60 days after entry
thereof, such judgment or order is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay, such
judgment or order is not discharged;
(i) any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 40% or more of the
outstanding shares of common stock of the Guarantor; or, on the last
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day of any period of twelve consecutive calendar months, a majority of members
of the board of directors of the Guarantor shall no longer be composed of
individuals (i) who were members of said board of directors on the first day of
such twelve consecutive calendar month period or (ii) whose election or
nomination to said board of directors was approved by individuals referred to in
clause (i) above constituting at the time of such election or nomination at
least a majority of said board of directors;
(j) the Guarantor or any Subsidiary shall fail to make any payment
owing by it in respect of any performance bond, performance guaranty or bank
guaranty issued in lieu of a performance bond or performance guaranty (other
than a payment which is disputed by the Guarantor or such Subsidiary in good
faith), and the aggregate of all such defaulted payments shall exceed
$50,000,000 at any one time for the Guarantor and its Subsidiaries; or
(k) any member of the ERISA Group shall fail to pay when due an
amount or amounts aggregating in excess of $5,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the ERISA
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or there shall
occur a complete or partial withdrawal from, or a default, within the meaning of
Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
which could cause one or more members of the ERISA Group to incur a current
payment obligation in excess of $25,000,000.
SECTION 5.02. Notice of Default. The Agent shall give notice to the
Guarantor under Section 5.01(b) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 6
TAXES
SECTION 6.01. Withholding Taxes. Each payment by the Guarantor
hereunder to or for the account of any Bank (a "Payment") shall be made without
any deduction or withholding for any Bank Foreign Taxes with respect to such
Bank; provided that if the Guarantor shall be required by law to make any such
deduction or withholding from any Payment, the Guarantor will:
28
<PAGE> 33
(i) pay such amounts in addition to such Payment as may
be necessary so that the amount received by the payee, after all such
withholdings and deductions, will be equal to the full amount provided
for in this Agreement;
(ii) pay the full amount deducted or withheld to the
relevant taxation or other authorities within the time allowed under
applicable law; and
(iii) furnish within 45 days thereafter to the Agent, the
official receipt or receipts from the relevant taxation or other
authorities for the full amount so deducted or withheld.
SECTION 6.02. Certain Other Taxes. The Guarantor will pay (i) all Bank
Foreign Taxes imposed (otherwise than by deduction or withholding) on any Bank
which constitute Bank Foreign Taxes with respect to such Bank and (ii) all Bank
Domestic Taxes imposed on any Bank which constitute Bank Domestic Taxes with
respect to such Bank to the extent any such Bank Foreign Taxes or Bank Domestic
Taxes result from Bank Foreign Taxes or Bank Domestic Taxes paid or reimbursed
by the Guarantor pursuant to this Article 6.
SECTION 6.03. Reimbursement of Taxes Paid by a Bank. If any Bank
Foreign Taxes or Bank Domestic Taxes to be paid by the Guarantor pursuant to
this Article 6 are imposed on and paid by any Bank, the Guarantor shall, upon
request of such Bank and whether or not such Bank Foreign Taxes or Bank Domestic
Taxes shall have been correctly or legally imposed, reimburse such Bank
therefor, together with any interest, penalties and expenses in connection
therewith, plus interest thereof at the rate specified in the first sentence of
Section 2.07(a) of each Credit Agreement. To the extent that any Bank which is
reimbursed by the Guarantor as provided in this Section thereafter receives any
payment allocated to Bank Foreign Taxes or Bank Domestic Taxes in respect of
which such Bank was so reimbursed from a governmental taxing authority because
such Bank Foreign Taxes or Bank Domestic Taxes were incorrectly or illegally
imposed, such Bank shall return to the Guarantor (without interest) any such
payment.
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Notices. All notices, requests and other communications
to any party provided for hereunder shall be in writing (including, without
limitation, bank wire, telex, facsimile transmission or similar writing) and
shall be given to such party at its address or facsimile or telex number set
forth on the signature pages hereof or such other address or facsimile or telex
number as such party may hereafter specify for the purpose by notice to the
other party. Each such notice, request or other communication shall be effective
(i) if given by telex, when such telex is transmitted to the telex number
specified in this Section and the appropriate answerback is received, (ii) if
given by facsimile, when such facsimile is transmitted to the facsimile number
specified on the signature pages hereof and electronic, telephonic or other
appropriate confirmation of receipt is received by the sender, (iii) if given by
mail, 72 hours
29
<PAGE> 34
after such communication is deposited in the mails with first class postage
prepaid, addressed as aforesaid or (iv) if given by any other means, when
delivered at the address specified on the signature pages hereof.
SECTION 7.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any other
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
and therein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 7.03. Expenses; Indemnification. (a) The Guarantor shall pay
(i) all reasonable out-of-pocket expenses of the Agent, including reasonable
fees and disbursements of special counsel for the Agent, in connection with the
preparation and administration of this Agreement, any waiver or consent
hereunder or any amendment thereof or any default or alleged default hereunder
and (ii) if an Event of Default (as defined in any Credit Agreement) occurs, all
reasonable out-of-pocket expenses incurred by the Agent and each Bank, including
reasonable fees and disbursements of counsel, in connection with such Event of
Default and collection, bankruptcy, insolvency and other enforcement proceedings
in respect of this Agreement resulting therefrom.
(b) The Guarantor agrees to indemnify the Agent and each Bank,
their respective Affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses, including, without limitation, the reasonable fees and disbursements
of counsel, which may be incurred by such Indemnitee (whether or not such
Indemnitee shall be designated a party thereto) arising out of any
investigative, administrative or judicial proceeding (brought or threatened)
relating to or arising out of this Agreement, the arrangement, administration,
performance or enforcement thereof; provided that no Indemnitee shall have the
right to be indemnified hereunder for such Indemnitee's own gross negligence or
willful misconduct as determined by a court of competent jurisdiction; provided
further that no Indemnitee shall have the right to be indemnified hereunder in
connection with any proceedings between it and another Indemnitee which does not
relate to the Guarantor.
(c) If any proceeding or claim shall be brought or asserted
against any Indemnitee in respect of which indemnity may be sought pursuant to
the preceding subsection, such Indemnitee shall promptly notify the Guarantor.
The Guarantor shall not be liable for any costs or expenses in connection with
any settlement entered into without its consent.
SECTION 7.04. Judicial Proceedings. (a) Consent to Jurisdiction. The
Guarantor irrevocably submits to the non-exclusive jurisdiction of any federal
or New York State court sitting in New York City over any suit, action or
proceeding arising out of or relating to this Agreement. The Guarantor
irrevocably waives, to the fullest extent permitted by law, any
30
<PAGE> 35
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding brought in such court and any claim that any
suit, action or proceeding brought in such court has been brought in an
inconvenient forum. The Guarantor agrees that a final judgment in any such suit,
action or proceeding brought in such a court shall be conclusive and binding
upon it and will be given effect in Bermuda to the fullest extent permitted by
applicable law and may be enforced in any federal or New York State court
sitting in New York City (or any other courts to the jurisdiction of which the
Guarantor is or may be subject) by a suit upon such judgment, provided that
service of process is effected upon it in one of the manners specified herein or
as otherwise permitted by law.
(b) Appointment of Agent for Service of Process. The Guarantor
hereby irrevocably designates and appoints CT Corporation System having an
office on the date hereof at 1633 Broadway, New York, New York 10019 as its
authorized agent, to accept and acknowledge on its behalf, service or any and
all process which may be served in any suit, action or proceeding of the nature
referred to in subsection (a) above in any federal or New York State court
sitting in New York City. The Guarantor represents and warrants that such agent
has agreed in writing to accept such appointment and that a true copy of such
designation and acceptance has been delivered to the Agent. Such designation and
appointment shall be irrevocable until all principal and interest and all other
amounts payable hereunder shall have been paid in full in accordance with the
provisions hereof. If such agent shall cease so to act, the Guarantor covenants
and agrees to designate irrevocably and appoint without delay another such agent
satisfactory to the Agent and to deliver promptly to the Agent evidence in
writing of such other agent's acceptance of such appointment.
(c) Service of Process. The Guarantor hereby consents to process
being served in any suit, action, or proceeding of the nature referred to in
subsection (a) above in any federal or New York State court sitting in New York
City by service of process upon the agent of the Guarantor, as the case may be,
for service of process in such jurisdiction appointed as provided in subsection
(b) above; provided that, to the extent lawful and possible, written notice of
said service upon such agent shall be mailed by registered airmail, postage
prepaid, return receipt requested, to the Guarantor at its address specified on
the signature pages hereof or to any other address of which the Guarantor shall
have given written notice to the Agent. The Guarantor irrevocably waives, to the
fullest extent permitted by law, all claim of error by reason of any such
service and agrees that such service shall be deemed in every respect effective
service of process upon the Guarantor in any such suit, action or proceeding and
shall, to the fullest extent permitted by law, be taken and held to be valid and
personal service upon and personal delivery to the Guarantor.
(d) No Limitation on Service or Suit. Nothing in this Section 7.04
shall affect the right of the Agent or any Bank to serve process in any other
manner permitted by law or limit the right of the Agent or any Bank to bring
proceeding against the Guarantor in the courts of any jurisdiction or
jurisdictions.
31
<PAGE> 36
SECTION 7.05. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Guarantor or
for any other reason, any payment under or in connection with this Agreement, is
made or satisfied in a currency (the "Other Currency") other than that in which
the relevant payment is due (the "Required Currency") then, to the extent that
the payment (when converted into the Required Currency at the rate of exchange
on the date of payment or, if it is not practicable for the party entitled
thereto (the "Payee") to purchase the Required Currency with the other Currency
on the date of payment, at the rate of exchange as soon thereafter as it is
practicable for it to do so) actually received by the Payee falls short of the
amount due under the terms of this Agreement, the Guarantor shall, to the extent
permitted by law, as a separate and independent obligation, indemnify and hold
harmless the Payee against the amount of such short-fall. For the purpose of
this Section, "rate of exchange" means the rate at which the Payee is able on
the relevant date to purchase the Required Currency with the Other Currency and
shall take into account any premium and other costs of exchange.
SECTION 7.06. Amendments and Waivers. Any provision of this Agreement
or the Promissory Notes may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Guarantor and the Agent with the
prior written consent of the Required Banks under (and as defined in) each of
the Credit Agreements.
SECTION 7.07. Successors and Assigns. The provisions of this Agreement
shall be binding upon the Guarantor and its successors and shall inure to the
benefit of the Agent and the Banks and their respective successors and assigns.
SECTION 7.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7.09. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 7.10. No Seal. As contemplated by the Bye-Laws of the
Guarantor, this Agreement shall not be required to be issued under the seal of
the Guarantor.
SECTION 7.11. WAIVER OF JURY TRIAL. EACH OF THE GUARANTOR AND THE AGENT
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
32
<PAGE> 37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
TYCO INTERNATIONAL LTD.
By: /s/ Mark Swartz
---------------------------------------------
Title: Executive Vice President and Chief
Financial Officer
Gibbons Building
10 Queen Street
Suite 301
Hamilton HM11
Bermuda
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
By: /s/ Sovonna L. Day
---------------------------------------------
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Attention: SoVonna L. Day
Telex number: 177615
Facsimile number: 212-648-5018
<PAGE> 38
EXHIBIT A
SUBSIDIARY GUARANTEE
Dated as of ____________
WHEREAS, Tyco International Group S.A., a Luxembourg company, has
entered into a 364-Day Credit Agreement dated as of February 12, 1999 and an
Extendible 364-Day Credit Agreement dated as of February 13, 1998 (collectively,
as the same may be amended from time to time, the "Credit Agreements") each
among the Borrower, the banks listed on the signature pages thereof, and Morgan
Guaranty Trust Company of New York, as Agent, pursuant to which the Borrower is
or may be entitled, subject to certain conditions, to borrow up to
$4,500,000,000;
WHEREAS, in conjunction with the transactions contemplated by the
Credit Agreements and in consideration of the financial and other support that
the Borrower has provided, and such financial and other support as the Borrower
may in the future provide, to the undersigned (together with its successors, the
"Guarantor") and in order to induce the Banks and the Agent to enter into the
Credit Agreements and to make Loans thereunder, the Guarantor is willing to
guarantee the obligations of the Borrower under the Credit Agreements and the
Promissory Notes issued thereunder;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby agrees as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. Terms defined in the Credit Agreements and
not otherwise defined herein are used herein as therein defined (e.g., a "Loan"
is a Loan made pursuant to either Credit Agreement and a "Promissory Note" is a
Promissory Note issued pursuant to either Credit Agreement). In addition the
following terms, as used herein, have the following meanings:
"Guaranteed Obligations" means (i) all obligations of the Borrower in
respect of principal of and interest on the Loans and the Promissory Notes, (ii)
all other amounts payable by the Borrower under either Credit Agreement or any
Promissory Note and (iii) all renewals or extensions of the foregoing, in each
case whether now outstanding or hereafter arising. The Guaranteed Obligations
shall include, without limitation, any interest, costs, fees and expenses which
accrue on or with respect to any of the foregoing and are payable by the
Borrower pursuant
Exh. A-1
<PAGE> 39
to either Credit Agreement or any Promissory Note, whether before or after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of any one or more than one of the Obligors, and
any such interest, costs, fees and expenses that would have accrued thereon or
with respect thereto and would have been payable by the Borrower pursuant to
such Credit Agreement or Promissory Note but for the commencement of such case,
proceeding or other action.
ARTICLE 2
GUARANTEE
SECTION 2.01. The Guarantees. Subject to Section 2.03, the Guarantor
hereby unconditionally and irrevocably guarantees to the Banks and the Agent and
to each of them, the due and punctual payment of all Guaranteed Obligations as
and when the same shall become due and payable, whether at maturity, by
declaration or otherwise, according to the terms thereof. This is a guarantee of
payment and not merely of collection. In case of failure by the Borrower
punctually to pay the indebtedness guaranteed hereby, the Guarantor, subject to
Section 2.03, hereby unconditionally agrees to cause such payment to be made
punctually as and when the same shall become due and payable, whether at
maturity or by declaration or otherwise, and as if such payment were made by the
Borrower.
SECTION 2.02. Guarantee unconditional. The obligations of the Guarantor
under this Article 2 shall be unconditional and absolute and, without limiting
the generality of the foregoing, shall not be released, discharged or otherwise
affected by:
(a) any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of any other Obligor under any Financing
Document, by operation of law or otherwise;
(b) any modification or amendment of or supplement to any
Financing Document (other than as specified in an amendment or waiver of this
Subsidiary Guarantee effected in accordance with Section 2.03);
(c) any modification, amendment, waiver, release, non-perfection
or invalidity of any direct or indirect security, or of any guaranty or other
liability of any third party, for any obligation of any other Obligor under any
Financing Document;
(d) any change in the corporate existence, structure or ownership
of any other Obligor, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting any other Obligor or its assets or any resulting
release or discharge of any obligation of any other Obligor contained in any
Financing Document;
Exh. A-2
<PAGE> 40
(e) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against any other Obligor, the Agent, any Bank or
any other Person, whether or not arising in connection with the Financing
Documents; provided that nothing herein shall prevent the assertion of any such
claim by separate suit or compulsory counterclaim;
(f) any invalidity or unenforceability relating to or against any
other Obligor for any reason of any Financing Document, or any provision of
applicable law or regulation purporting to prohibit the payment by any other
Obligor of the principal of or interest on any Promissory Note or any other
amount payable by any other Obligor under any Financing Document; or
(g) any other act or omission to act or delay of any kind by any
other Obligor, the Agent, any Bank or any other Person or any other circumstance
whatsoever that might, but for the provisions of this paragraph, constitute a
legal or equitable discharge of the obligations of the Guarantor under this
Article 2.
SECTION 2.03. Limit of Liability. The Guarantor shall be liable under
this Subsidiary Guarantee only for amounts aggregating up to the largest amount
that would not render its obligations hereunder subject to avoidance under
Section 548 of the United States Bankruptcy Code or any comparable provisions of
any other applicable law.
SECTION 2.04. Discharge; Reinstatement in Certain Circumstances.
Subject to Section 4.06, the Guarantor's obligations under this Article 2 shall
remain in full force and effect until the Commitments are terminated and the
principal of and interest on the Promissory Notes and all other amounts payable
by the Borrower under the Financing Documents shall have been paid in full. If
at any time any payment of the principal of or interest on any Promissory Note
or any other amount payable by the Borrower under any Financing Document is
rescinded or must be otherwise restored or returned upon the insolvency,
bankruptcy or reorganization of any other Obligor or otherwise, the Guarantor's
obligations under this Article 2 with respect to such payment shall be
reinstated at such time as though such payment had become due but had not been
made at such time.
SECTION 2.05. Waiver. The Guarantor irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by any Person
against any other Obligor or any other Person.
SECTION 2.06. Subrogation and Contribution. (a) The Guarantor
irrevocably waives any and all rights to which it may be entitled, by operation
of law or otherwise, upon making any payment hereunder (i) to be subrogated to
the rights of the payee against the Borrower with respect to such payment or
otherwise to be reimbursed, indemnified or exonerated by any other Obligor in
respect thereof or (ii) to receive any payment, in the nature of contribution or
for any other reason, from any other Obligor with respect to such payment
Exh. A-3
<PAGE> 41
(b) Notwithstanding the provision of subsection (a) of this
Section 2.06, the Guarantor shall have and be entitled to (i) all rights of
subrogation or contribution otherwise provided by law in respect of any payment
it may make or be obligated to make under this Subsidiary Guarantee and (ii) all
claims (as defined under Chapter 11 of Title 11 of the United States Code, as
amended, or any successor statute (the "Bankruptcy Code")) it would have against
the Borrower or any other Guarantor (each an "Other Party") in the absence of
subsection (a) of this Section 2.06 and to assert and enforce the same, in each
case on and after, but at no time prior to, the date (the "Subrogation Trigger
Date") which is one year and five days after the Termination Date if, but only
if, (x) no Default or Event of Default of the type described in Section 5.01(g)
of the Parent Guarantee with respect to the relevant Other Party has existed at
any time on and after the date of this Subsidiary Guarantee to and including the
Subrogation Trigger Date and (y) the existence of such Guarantor's rights under
this clause (b) would not make such Guarantor a creditor (as defined in the
Bankruptcy Code) of such Other Party in any insolvency, bankruptcy,
reorganization or similar proceeding commenced on or prior to the Subrogation
Trigger Date.
SECTION 2.07. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under the Financing Documents is
stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all
such amounts otherwise subject to acceleration under the terms of the Financing
Documents shall nonetheless be payable by the Guarantor hereunder forthwith on
demand by the Agent made at the request of the Required Banks.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
The Guarantor represents and warrants to the Agent and the Banks that:
SECTION 3.01. Corporate Existence and Power. The Guarantor is a
corporation duly incorporated, validly existing and in good standing under the
laws of ___________.
SECTION 3.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Guarantor of this
Subsidiary Guarantee:
(a) are within the Guarantor's corporate powers;
(b) have been duly authorized by all necessary corporate action on
the part of the Guarantor;
(c) require no action by or in respect of, or filing with, any
governmental body, agency or official, in each case, on the part of the
Guarantor; and
Exh. A-4
<PAGE> 42
(d) do not contravene, or constitute a default by the Guarantor
under, any provision of (i) applicable law or regulation, (ii) the certificate
of incorporation or by-laws of the Guarantor, or (iii) any agreement or
instrument evidencing or governing Debt of the Guarantor or any other material
agreement, judgment, injunction, order, decree or other instrument binding upon
the Guarantor.
SECTION 3.03. Binding Effect. This Subsidiary Guarantee constitutes a
valid and binding obligation of the Guarantor.
SECTION 3.04. Not an Investment Company. The Guarantor is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
ARTICLE 4
MISCELLANEOUS
SECTION 4.01. Notices. All notices, requests and other communications
to be made to or by the Guarantor hereunder shall be in writing (including,
without limitation, bank wire, telex, facsimile transmission or similar writing)
and shall be given: (a) if to the Guarantor, to it at its address or facsimile
number set forth on the signature pages hereof or such other address or
facsimile number as the Guarantor may hereafter specify for the purpose by
notice to the Agent and (b) if to any party to either Credit Agreement, to it at
its address or telex or facsimile number for notices specified in or pursuant to
such Credit Agreement. Each such notice, request or other communication shall be
effective (i) if given by telex, when such telex is transmitted to the telex
number specified in this Section 4.01 and the appropriate answerback is
received, (ii) if given by facsimile, when such facsimile is transmitted to the
facsimile transmission number specified in this Section 4.01 and electronic,
telephonic or other appropriate confirmation of receipt thereof is received by
the sender, (iii) if given by mail, 72 hours after such communication is
deposited in the mails with first class postage prepaid, addressed as aforesaid
or (iv) if given by any other means, when delivered at the address specified in
this Section 4.01.
SECTION 4.02. No Waiver. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege under this Subsidiary Guarantee or
any other Financing Document shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein and therein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
SECTION 4.03. Amendments and Waivers. Any provision of this Subsidiary
Guarantee may be amended or waived if, and only if, such amendment or waiver is
in writing and is signed by the Guarantor and the Agent with the prior written
consent of the Required Banks under the Credit Agreements.
Exh. A-5
<PAGE> 43
SECTION 4.04. Successors and Assigns. This Subsidiary Guarantee is for
the benefit of the Banks and the Agent and their respective successors and
assigns and in the event of an assignment of the Loans, the Promissory Notes or
other amounts payable under the Financing Documents, the rights hereunder, to
the extent applicable to the indebtedness so assigned, shall be transferred with
such indebtedness. All the provisions of this Subsidiary Guarantee shall be
binding upon the Guarantor and its successors and assigns.
SECTION 4.05. Taxes. All payments by the Guarantor hereunder shall be
made free and clear of Taxes in accordance with Section 8.04 of the Credit
Agreements. If the Guarantor is organized under the laws of, or has its
principal place of business in, a jurisdiction outside the United States, this
Section 4.05 shall be modified in a manner satisfactory to the Agent and the
Guarantor to indemnify for any foreign taxes which may be applicable.
SECTION 4.06. Effectiveness; Termination. (a) This Subsidiary Guarantee
shall become effective when the Agent shall have received a counterpart hereof
signed by the Guarantor.
(b) The Guarantor may at any time elect to terminate this
Subsidiary Guarantee and its obligations hereunder, provided that, after giving
effect thereto, no Default shall have occurred and be continuing; and provided
further that this Subsidiary Guarantee may not be so terminated in respect of
any Guarantor which is at the time a guarantor of TycoLux Debt Securities under
the Indenture. If the Guarantor so elects to terminate this Subsidiary
Guarantee, it shall give the Agent notice to such effect, which notice shall be
accompanied by a certificate of a Responsible Officer to the effect that, after
giving effect to such termination, no Default shall have occurred and be
continuing. The Agent may if it so elects conclusively rely on such certificate.
Upon receipt of such notice and such certificate, unless the Agent determines
that a Default shall have occurred and be continuing, the Agent shall promptly
deliver to the Guarantor the counterpart of this Subsidiary Guarantee delivered
to the Agent pursuant to Section 4.06(a), and upon such delivery this Subsidiary
Guarantee shall terminate and the Guarantor shall have no further obligations
hereunder.
SECTION 4.07. GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS
SUBSIDIARY GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. THE GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES
OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS SUBSIDIARY GUARANTEE
OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT
AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
Exh. A-6
<PAGE> 44
(b) If the Guarantor is not organized under the laws of the United
States of America or a State thereof:
(i) Appointment of Agent for Service of Process. The
Guarantor hereby irrevocably designates and appoints CT Corporation
System having an office on the date hereof at 1633 Broadway, New York,
New York 10019 as its authorized agent, to accept and acknowledge on
its behalf, service or any and all process which may be served in any
suit, action or proceeding of the nature referred to in subsection (a)
above in any federal or New York State court sitting in New York City.
The Guarantor represents and warrants that such agent has agreed in
writing to accept such appointment and that a true copy of such
designation and acceptance has been delivered to the Agent. Such
designation and appointment shall be irrevocable until all principal
and interest and all other amounts payable hereunder shall have been
paid in full in accordance with the provisions hereof. If such agent
shall cease so to act, the Guarantor covenants and agrees to designate
irrevocably and appoint without delay another such agent satisfactory
to the Agent and to deliver promptly to the Agent evidence in writing
of such other agent's acceptance of such appointment.
(ii) Service of Process. The Guarantor hereby consents to
process being served in any suit, action, or proceeding of the nature
referred to in subsection (a) above in any federal or New York State
court sitting in New York City by service of process upon the agent of
the Guarantor, as the case may be, for service of process in such
jurisdiction appointed as provided in subsection (b)(i) above; provided
that, to the extent lawful and possible, written notice of said service
upon such agent shall be mailed by registered airmail, postage prepaid,
return receipt requested, to the Guarantor at its address specified on
the signature pages hereof or to any other address of which the
Guarantor shall have given written notice to the Agent. The Guarantor
irrevocably waives, to the fullest extent permitted by law, all claim
of error by reason of any such service and agrees that such service
shall be deemed in every respect effective service of process upon the
Guarantor in any such suit, action or proceeding and shall, to the
fullest extent permitted by law, be taken and held to be valid and
personal service upon and personal delivery to the Guarantor.
(iii) No Limitation on Service or Suit. Nothing in this
Section 4.07 shall affect the right of the Agent or any Bank to serve
process in any other manner permitted by law or limit the right of the
Agent or any Bank to bring proceeding against the Guarantor in the
courts of any jurisdiction or jurisdictions.
SECTION 4.08. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS SUBSIDIARY GUARANTEE OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Exh. A-7
<PAGE> 45
SECTION 4.09. Judgment Currency. If, under any applicable law and
whether pursuant to a judgment being made or registered against the Guarantor or
for any other reason, any payment under or in connection with this Subsidiary
Guarantee, is made or satisfied in a currency (the "Other Currency") other than
that in which the relevant payment is due (the "Required Currency") then, to the
extent that the payment (when converted into the Required Currency at the rate
of exchange on the date of payment or, if it is not practicable for the party
entitled thereto (the "Payee") to purchase the Required Currency with the other
Currency on the date of payment, at the rate of exchange as soon thereafter as
it is practicable for it to do so) actually received by the Payee falls short of
the amount due under the terms of this Subsidiary Guarantee, the Guarantor
shall, to the extent permitted by law, as a separate and independent obligation,
indemnify and hold harmless the Payee against the amount of such short-fall. For
the purpose of this Section, "rate of exchange" means the rate at which the
Payee is able on the relevant date to purchase the Required Currency with the
Other Currency and shall take into account any premium and other costs of
exchange.
Exh. A-8
<PAGE> 46
IN WITNESS WHEREOF, the Guarantor has caused this instrument to be duly
executed by its authorized officer as of the date first above written.
[GUARANTOR]
By
--------------------------------
Title:
[Address]
Facsimile Number:
Exh. A-9
<PAGE> 47
EXHIBIT B
[Form of Opinion of Counsel for the Subsidiary Guarantor]
To the Banks and the Agent
Named on the Attached Distribution List
c/o Morgan Guaranty Trust Company
of New York, as Agent
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
I am the [Associate] General Counsel of Tyco International Group S.A.,
a Luxembourg company (the "Borrower"), and have acted as counsel for [name of
Subsidiary Guarantor] (the "Guarantor"), and am rendering this opinion in
connection with that certain Subsidiary Guarantee (the "Subsidiary Guarantee"),
dated as of __________, entered into by the Guarantor, pursuant to that certain
364-Day Credit Agreement dated as February 12, 1999 and that certain Extendible
364-Day Credit Agreement dated as of February 13, 1998 (collectively, the
"Credit Agreements"), each among the Borrower, the banks listed on the signature
pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as
Agent. Each term defined in the Subsidiary Guarantee and used herein, but not
otherwise defined herein, has the meaning ascribed thereto in the Subsidiary
Guarantee. This opinion is being delivered to you pursuant to the Credit
Agreements.
In connection with the opinion set forth herein, I have reviewed the
Credit Agreements, the Promissory Notes and the Subsidiary Guarantee and have
examined originals or copies, certified or otherwise identified to my
satisfaction, of (i) the [Certificate of Incorporation] and By-laws of the
Guarantor, each as in effect on the date hereof and (ii) such other documents,
records, certificates and instruments as I have deemed relevant and necessary as
a basis for the opinion hereinafter expressed.
In my examination, I have assumed the genuineness of all signatures on
original documents, the authenticity of all documents submitted to me as
originals, the conformity to the originals of all copies submitted to be as
certified, conformed or photostatic copies, and the authenticity of the
originals of such copies. As to various questions of fact material to this
opinion, I have relied, without independent investigation or verification, upon
statements,
Exh. B-1
<PAGE> 48
representations and certificates of officers and other representatives of the
Guarantor and certificates of public officials.
Based upon the foregoing, and subject to the qualifications and
assumptions set forth herein, it is my opinion that:
(1) The Guarantor is a corporation duly incorporated, validly
existing and in good standing under the laws of _________________.
(2) The execution, delivery and performance by the Guarantor of
the Subsidiary Guarantee (a) are within the Guarantor's corporate powers; (b)
have been duly authorized by all necessary corporate action on the part of the
Guarantor; (c) require no action by or in respect of, or filing on the part of
the Guarantor with, any governmental body, agency or official, in each case, on
the part of the Guarantor; and (d) do not contravene, or constitute a default by
the Guarantor under, any provision of (i) applicable law or regulation, (ii) the
certificate of incorporation or by-laws of the Guarantor or, (iii) any agreement
or instrument evidencing or governing Debt of the Guarantor, or any other
material agreement, judgment, injunction, order, decree or other instrument
binding upon the Guarantor.
(3) The Subsidiary Guarantee constitutes a valid and binding
obligation of the Guarantor.
(4) The Guarantor is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
The opinion set forth herein is subject to the following qualifications
and limitations:
(a) The enforceability of the Subsidiary Guarantee may be subject
to or limited by bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance or transfer or other similar laws and court
decisions, now or hereafter in effect, relating to or affecting the rights of
creditors generally.
(b) The enforceability of the Subsidiary Guarantee is or will be
subject to the application of and may be limited by general principles of equity
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether considered in a proceeding in
equity or at law). Such principles of equity are of general application, and in
applying such principles a court, among other things, might not allow a creditor
to accelerate maturity of a debt under certain circumstances including, without
limitation, upon the occurrence of a default deemed immaterial, or might decline
to order the Guarantor to perform covenants. Such principles as applied by a
court might include a requirement that a creditor act with reasonableness and in
good faith. Thus, I express no opinion as to the validity or enforceability of
(i) provisions restricting access to legal or equitable remedies, such as the
specific performance of executory covenants, (ii) provisions that purport to
Exh. B-2
<PAGE> 49
establish evidentiary standards, (iii) provisions relating to waivers,
severability, set-off, or delay or omission of enforcement of rights or
remedies, and (iv) provisions purporting to convey rights to persons other than
parties to the Subsidiary Guarantee.
(c) The remedy of specific performance and injunctive and other
forms of equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(d) I have not been requested to render, and with your permission
I do not express, any opinion as to the applicability to any provisions of the
Subsidiary Guarantee, of Section 548 of the Federal Bankruptcy Code, Article 10
of the New York Debtor & Creditor Law, or any other fraudulent conveyance,
insolvency or transfer laws or any court decisions with respect to any of the
foregoing.
I call your attention to the fact that I am admitted to practice law
only in the State of New York and the Commonwealth of Massachusetts, and, in
rendering the foregoing opinion, I do not express any opinion as to any laws
other than the laws of [the jurisdiction of incorporation of the Guarantor], the
State of New York, the Commonwealth of Massachusetts and the Federal laws of the
United States of America.
The opinion expressed herein is based upon the laws in effect on the
date hereof, and I assume no obligation to revise or supplement this opinion
should any such law be changed by legislative action, judicial decision, or
otherwise.
This opinion is being delivered to you solely for your benefit in
connection with the Subsidiary Guarantee, and neither this opinion nor any part
hereof may be delivered to, or used, referred to or relied upon, by any other
person or for any other purpose without my express prior written consent, except
that any person who is a permitted successor or assign of a Bank in accordance
with the provisions of the Credit Agreement may rely upon this opinion as if it
were specifically addressed and delivered to such person on the date hereof.
Very truly yours,
Exh. B-3
<PAGE> 50
CROSS-REFERENCE TARGET LIST
NOTE: DUE TO THE NUMBER OF TARGETS SOME TARGET NAMES MAY NOT APPEAR IN THE
TARGET PULL-DOWN LIST.
(This list is for the use of the wordprocessor only, is not a part of this
document and may be discarded.)
ARTICLE/SECTION TARGET NAME
- --------------- -----------
1.01........................................................................defs
1.01.................................................................definitions
1.02...........................................................acct.terms.determ
2...................................................................art.guaranty
2.01..................................................................guarantees
2.02.....................................................guarantee.unconditional
2.02(a)...............................................................unc.guar.a
2.02(b)...............................................................unc.guar.b
2.02(c)...............................................................unc.guar.c
2.02(d)...............................................................unc.guar.d
2.02(e)...............................................................unc.guar.e
2.02(f)...............................................................unc.guar.f
2.02(g)...............................................................unc.guar.g
2.03.............................................................limit.liability
2.06...............................................................stay.of.accel
2.06..............................................................subrog.contrib
2.06(b).......................................................subrog.contribut.b
3.01..............................................................corp.existence
3.02...........................................................corp.gov.authoriz
3.03..............................................................binding.effect
3.04.................................................................finan.infor
3.04(a).............................................................cons.bal.adt
3.05..................................................................litigation
3.07..............................................................envirn.matters
3.08.......................................................................taxes
3.09................................................................subsidiaries
3.10................................................................nt.invest.co
3.11..................................................................full.discl
4.01.................................................................information
4.01................................................................misc.notices
4.01(a).................................................................inform.a
4.01(b).................................................................inform.b
4.01(c).................................................................inform.c
4.02...............................................................payment.oblig
4.03............................................................maint.prop.insur
4.03(a)............................................maint.prop.insur.wrking.order
4.03(b)...................................................maint.prop.reput.insur
4.04.....................................................conduct.bus.maint.exist
4.04(a)............................................conduct.bus.maint.engage.same
4.04(c).....................................................conduct.bus.preserve
4.05...................................................................misc.txes
4.05.............................................................compliance.laws
4.05(a)................................................compliance.non.compliance
4.05(b).....................................................compliance.necessity
4.06....................................................................eff.term
4.06............................................................inspect.property
4.06(a)................................................................eff.terma
4.06(a)..........................................inspect.prop.keep.proper.record
4.06(b)...................................................inspect.permit.inspect
4.06(c)...........................................................inspect.confid
4.06(c)(iv)(C)................................................inspect.property.C
4.07................................................limit.restrict.sub.dividends
4.08........................................................................debt
4.09.......................................................fixed.charge.coverage
4.10..................................................................neg.pledge
4.10(b).........................................................lien.exist.asset
4.10(e)...................................................lien.exist.time.of.acq
4.11.................................................consol.mergers.sales.assets
4.12...........................................................trans.with.affils
4.13...........................................................restrict.payments
4.14.............................................................subs.guarantors
5.01..............................................................events.default
5.01(a)...............................................event.default.fail.observe
5.01(b)..............................................event.default.fail.remedied
5.01(c).........................................................event.def.10days
5.01(d)........................................................event.def.writing
5.01(e)...................................................event.def.pay.mat.debt
5.01(f).....................................................event.def.accelerate
5.01(i)........................................................event.def.ben.own
5.01(j).......................................................event.def.fail.pay
5.01(k)..........................................................event.def.erisa
5.02..............................................................notice.default
6......................................................................art.taxes
7.01.....................................................................notices
7.02..................................................................no.waivers
7.03..................................................................exp. indem
7.03(b)............................................................bor.agr.indem
7.03(c)...........................................................exp.agent.bank
7.04................................................................jud.proceeds
7.06..............................................................amend.and.waiv
7.09................................................................counterparts
7.11................................................................waiver.trial
Exh. B-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT OF TYCO INTERNATIONAL LTD. AS OF AND FOR THE QUARTER
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 834,200
<SECURITIES> 0
<RECEIVABLES> 3,051,000
<ALLOWANCES> 266,900
<INVENTORY> 1,838,800
<CURRENT-ASSETS> 7,075,100
<PP&E> 7,365,900
<DEPRECIATION> 2,864,300
<TOTAL-ASSETS> 20,417,000
<CURRENT-LIABILITIES> 5,328,900
<BONDS> 7,100,900
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 129,700
<OTHER-SE> 7,143,300
<TOTAL-LIABILITY-AND-EQUITY> 20,417,000
<SALES> 3,819,600
<TOTAL-REVENUES> 3,819,600
<CGS> 2,350,400
<TOTAL-COSTS> 2,350,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,400
<INTEREST-EXPENSE> 103,300
<INCOME-PRETAX> 42,200
<INCOME-TAX> 68,200
<INCOME-CONTINUING> (26,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,400)
<CHANGES> 0
<NET-INCOME> (28,400)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| KLAC | https://www.sec.gov/Archives/edgar/data/319201/0000891618-99-000414.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000891618-99-000414.txt : 19990211
<SEC-HEADER>0000891618-99-000414.hdr.sgml : 19990211
ACCESSION NUMBER: 0000891618-99-000414
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990210
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: KLA TENCOR CORP
CENTRAL INDEX KEY: 0000319201
STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827]
IRS NUMBER: 042564110
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-09992
FILM NUMBER: 99527543
BUSINESS ADDRESS:
STREET 1: 160 RIO ROBLES
CITY: SAN JOSE
STATE: CA
ZIP: 95134
BUSINESS PHONE: 4084344200
MAIL ADDRESS:
STREET 1: 160 RIO ROBLES
CITY: SAN JOSE
STATE: CA
ZIP: 95161-9055
FORMER COMPANY:
FORMER CONFORMED NAME: KLA INSTRUMENTS CORP
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR PERIOD ENDED 12/31/98
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-9992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
- ---------------------------------- ----------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
CORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 875-3000
(Registrant's telephone number, including area code)
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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of January 29, 1999 there were 87,813,056 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
- ------ ---------------------
<S> <C> <C>
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
June 30, 1998 and December 31, 1998 ............................. 3
Condensed Consolidated Interim Statements of Operations for
the Three and Six Month Periods Ended December 31, 1997
and 1998 ........................................................ 4
Condensed Consolidated Interim Statements of Cash Flows
for the Six Months Ended December 31, 1997 and 1998 ............. 5
Notes to Condensed Consolidated Interim Financial Statements..... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......... 11
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders................. 12
Item 6 Exhibits and Reports on Form 8-K.................................... 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 215,970 $ 177,626
Short-term investments 92,343 70,015
Accounts receivable, net 304,140 286,010
Inventories 234,565 209,669
Deferred income taxes 90,729 94,252
Other current assets 18,624 14,986
----------- -----------
Total current assets 956,371 852,558
Land, property and equipment, net 140,937 145,295
Marketable securities 415,168 486,115
Other assets 35,921 40,604
----------- -----------
Total assets $ 1,548,397 $ 1,524,572
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 21,482 $ 20,335
Accounts payable 46,353 23,916
Other current liabilities 282,848 292,732
----------- -----------
Total current liabilities 350,683 336,983
----------- -----------
Stockholders' equity:
Common stock and capital in excess of par value 497,583 495,644
Retained earnings 683,836 676,419
Net unrealized gain on investments 26,108 20,367
Cumulative translation adjustment (9,813) (4,841)
----------- -----------
Total stockholders' equity 1,197,714 1,187,589
----------- -----------
Total liabilities and stockholders' equity $ 1,548,397 $ 1,524,572
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
3
<PAGE> 4
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------ -----------------------
1997 1998 1997 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 326,361 $ 193,371 $ 638,781 $398,601
Costs and operating expenses:
Costs of goods sold 150,235 104,909 290,999 217,564
Engineering, research and development 47,280 38,470 92,457 81,396
Selling, general and administrative 61,622 49,966 123,760 102,539
Non-recurring acquisition, restructuring
and other charges -- 42,700 -- 42,700
--------- --------- --------- -------
Total costs and operating expenses 259,137 236,045 507,216 444,199
--------- --------- --------- -------
Income (loss) from operations 67,224 (42,674) 131,565 (45,598)
Interest income and other, net 9,331 14,083 18,116 31,146
--------- --------- --------- -------
Income (loss) before income taxes 76,555 (28,591) 149,681 (14,452)
Provision (benefit) for income taxes 24,497 (10,994) 47,901 (7,035)
--------- --------- --------- -------
Net (loss) income $ 52,058 $ (17,597) $ 101,780 $ (7,417)
========= ========= ========= ========
Earnings (loss) per share:
Basic $ 0.61 $ (0.20) $ 1.20 $ (0.08)
========= ========= ========= ========
Diluted $ 0.59 $ (0.20) $ 1.15 $ (0.08)
========= ========= ========= ========
Weighted average number of shares:
Basic 84,657 87,463 84,470 87,414
========= ========= ========= ========
Diluted 88,105 87,463 88,343 87,414
========= ========= ========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
4
<PAGE> 5
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 101,780 $ (7,417)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 18,228 21,721
Non-recurring acquisition charges -- 7,700
Changes in assets and liabilities:
Accounts receivable, net (122,067) 40,353
Inventories (26,791) 21,976
Other assets (7,217) (627)
Accounts payable 14,007 (23,690)
Other current liabilities 16,300 3,321
--------- ---------
Net cash provided by (used in)
operating activities (5,760) 63,337
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (33,701) (10,173)
Net purchases of available for sale securities (75,738) (54,384)
Acquisition of assets and technology -- (12,522)
--------- ---------
Net cash used in investing activities (109,439) (77,079)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 25,350 18,710
Stock repurchases (7,546) (20,648)
Net payments under debt obligations (1,222) (4,483)
--------- ---------
Net cash provided by financing activities 16,582 (6,421)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 10,525 (18,181)
--------- ---------
Net increase (decrease) in cash and cash equivalents (88,092) (38,344)
Cash and cash equivalents at beginning of period 279,225 215,970
--------- ---------
Cash and cash equivalents at end of period $ 191,133 $ 177,626
--------- ---------
Supplemental cash flow disclosures:
Income taxes paid $ 45,292 $ 6,415
Interest paid $ 1,307 $ 996
</TABLE>
See accompanying notes to unaudited condensed consolidated interim financial
statements.
5
<PAGE> 6
KLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
NOTE 1. In the opinion of the management of KLA-Tencor Corporation (the
Company), the unaudited condensed consolidated interim financial statements
include only those normal recurring adjustments necessary for a fair statement
of results. The results for the three month period ended December 31, 1998 are
not necessarily indicative of results to be expected for the entire year. This
financial information should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
-------- -------------
<S> <C> <C>
Customer service parts $ 31,671 $ 57,159
Raw materials 49,630 42,967
Work-in-process 79,238 54,184
Demonstration equipment 47,234 26,896
Finished goods 26,792 28,463
-------- --------
$234,565 $209,669
======== ========
</TABLE>
NOTE 3. In August 1997, the Company adopted a plan to repurchase shares of its
own Common Stock on the open market the purpose of which is to partially offset
dilution created by employee stock options and stock purchase plans. During the
six month period ended December 31, 1998, the Company repurchased 542,000 shares
of its Common Stock at a cost of $20.6 million.
NOTE 4. As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which
establishes the requirements for reporting and presentation of comprehensive
income and its components. SFAS No. 130 requires accumulated translation
adjustments and net unrealized gains/losses on investments to be included in
other comprehensive income. The adoption of SFAS No. 130 did not impact the
Company's net income (loss) or total stockholders' equity. For the three month
and six month period ended December 31, 1997 and 1998, the components of total
comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------- -------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 52,058 $ (17,597) $ 101,780 $ (7,417)
Foreign currency translation adjustments (4,490) 3,790 (5,054) 4,972
Unrealized gains (losses) on investments,
net of taxes 1,295 (4,759) 9,678 (5,741)
--------- --------- --------- ---------
Other comprehensive income (loss) (3,195) (969) 4,624 (769)
--------- --------- --------- ---------
Total comprehensive income (loss) $ 48,863 $ (18,566) $ 106,404 $ (8,186)
========= ========= ========= =========
</TABLE>
6
<PAGE> 7
NOTE 5. Basic net income (loss) per share, is calculated using the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed in the same manner and additionally gives effect
to all dilutive potential common shares outstanding during the period. Diluted
net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the period; the options outstanding during the
three and six month periods ended December 31, 1998 were excluded from the
computation of diluted net loss per share because the effect in periods with a
net loss would be antidilutive. The reconciling difference between the
computation of basic and diluted earnings per share for the three and six month
period ended December 31, 1997, is the inclusion of the dilutive effect of stock
options issued to employees under employee stock option plans.
NOTE 6. In November 1998, the Company entered into a restructuring plan to
address the downturn in the semiconductor industry. The total restructuring
charge was $35 million or $0.26 cents per share for the three months ended
December 31, 1998. The plan includes consolidation of facilities, a write-down
of assets associated with affected programs and reductions in the Company's
global workforce. Restructuring and related charges were as follows for the
period ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Severance
Facilities Inventory and Benefits Other Total
---------- --------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Restructuring provision $12,491 $ 9,721 $ 8,126 $ 4,662 $35,000
Incurred to date 2,724 6,300 1,710 2,165 12,899
------- ------- ------- ------- -------
Balance at
December 31, 1998 $ 9,767 $ 3,421 $ 6,416 $ 2,497 $22,101
======= ======= ======= ======= =======
</TABLE>
NOTE 7. During the second quarter of fiscal 1999 the Company acquired certain
assets and intellectual property in separate transactions with Keithley
Instruments, Inc. and Uniphase Corporation. These acquisitions were accounted
for using the purchase method of accounting. The aggregate purchase price of
approximately $13 million was allocated to the acquired assets, liabilities
assumed, intangible assets and goodwill and resulted in a pre-tax charge of
approximately $7.7 million for acquired in-process research and development.
NOTE 8. In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement establishes standards for public business enterprises to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments and
related disclosures about products and services, geographic areas, and major
customers. This Statement is required to be adopted in the Company's annual
financial statements for fiscal year ending June 30, 1999. The effect of SFAS
No. 131 is not expected to be material to the Company's financial statement
disclosure.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). It
establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest note swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or stockholders'
equity, depending on the nature of the transaction. The Company is required to
adopt SFAS 133 in the first quarter of its fiscal year ending June 30, 2000. The
effect of SFAS No. 133 is not expected to be material to the Company's financial
statements.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ.
Important factors that could cause actual results to differ are described in the
following discussion and under "Risk Factors" below.
RESULTS OF OPERATIONS
Revenues were $193 million and $399 million for the three and six month periods
ended December 31, 1998, compared to $326 million and $639 million for the same
periods of the prior fiscal year, representing a decrease of 41% and 38% for the
respective periods. The decrease in revenues is primarily attributable to
reductions in capital spending by major semiconductor manufacturers worldwide
due in part to excess manufacturing capacity resulting from smaller dimensions,
reduced demand from Asian markets and continued price competition in response to
oversupply in the DRAM market.
In response to the current market conditions, the Company implemented a
restructuring plan during its second fiscal quarter which resulted in a one-time
charge of $35 million. The charge consisted primarily of costs associated with
the consolidation of facilities, a write-down of assets associated with affected
programs and employee severance and related benefits associated with a reduction
in force completed during the quarter.
Gross margins were 46% and 45% of revenues for the three and six month periods
ended December 31, 1998, compared to 54% of revenues for the same periods in the
prior fiscal year. Gross margins declined year over year primarily due to
reduced capacity utilization resulting from lower business volume. Additionally,
margins were impacted by a shift in product mix away from higher margin product
sales in the wafer inspection products and an increase in the percentage of
sales in the lower margin service business.
Engineering, research and development (R&D) expenses were $38 million and $81
million for the three and six month periods ended December 31, 1998 compared to
$47 million and $92 million for the same periods in the prior fiscal year. As a
percentage of revenues, R&D expenses increased to 20% for the three and six
month periods ended December 31, 1998 compared to 14% for the same periods in
the prior fiscal year. The decrease in absolute dollars is primarily
attributable to the cost reduction measures and the restructuring actions the
Company has executed as result of the current semiconductor industry downturn.
Selling, general and administrative (SG&A) expenses were $50 million and $103
million for the three and six month periods ended December 31, 1998, compared to
$62 million and $124 million for the same periods in the prior fiscal year. The
decrease in dollars during the period is primarily due to cost reduction and
restructuring actions implemented by the Company during fiscal 1999, including
headcount reduction and the consolidation of facilities.
Interest income and other, net, increased $5 million and $13 million for the
three and six month periods ended December 31, 1998, compared to the same
periods in the prior fiscal year. The increase is due primarily to gains
realized on the sale of equity securities held in a former supplier company as
well as increases in interest income on higher average cash equivalents and
investment balances.
8
<PAGE> 9
During the three month period ended December 31, 1998, the Company realized an
effective 38% tax rate for the period which is comprised of a 35% tax benefit
from the effect of non-recurring restructuring and acquisition costs and a 28%
tax rate on income excluding the one-time charge. The Company anticipates
approximately a 28% tax rate in the balance of fiscal 1999 which is lower than
the 32% tax rate incurred in the prior fiscal year due primarily to a higher
proportion of income derived from tax-exempt interest in the current year.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended December 31, 1998, cash, cash equivalents,
short-term investments and marketable securities balances increased
approximately $10 million to $734 million. Cash provided by operations for the
six month period was $63 million, resulting primarily from collections on
accounts receivable and reduced inventory spending. Capital expenditures of $10
million were primarily for manufacturing equipment necessary for the Company's
operations. In addition, the Company paid approximately $13 million for the
acquisition of assets and intellectual property from Keithley Instruments, Inc.
and from Uniphase Corporation during the second quarter of fiscal 1999.
Working capital decreased to $516 million as of December 31, 1998 compared to
$606 million at June 30, 1998 primarily due to a shift of the Company's
investment portfolio to a higher percentage of long-term securities. The Company
believes that existing liquid resources and funds generated from operations
combined with its ability, if necessary, to borrow funds will be adequate to
meet its operating and capital requirements and obligations through the
foreseeable future.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company believes that the majority of its products and systems
are Year 2000 ready or will be brought to a state of readiness prior to the year
2000. Costs to bring its products and systems to a state of compliance with the
year 2000 have not been material and the Company does not anticipate future
costs will have a material impact on the financial statements; however, complete
testing is not feasible and unexpected problems may remain. In addition, the
Company utilizes third-party equipment and software that which are also under
evaluation and planning for Year 2000 readiness. Failure of the Company's
products or third-party equipment or software to operate properly with regard to
the Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business and operating results.
The Company is in the process of contacting its critical suppliers,
manufacturers, distributors, and other vendors to determine if their operations
and the products and services that they provide to the Company are Year 2000
compliant. Where practicable, the Company will attempt to mitigate its risks
with respect to the failure of third parties to be Year 2000 ready, including
developing contingency plans. However, such failures, including failures of any
contingency plans, remain a possibility and could have a material adverse impact
on the Company's results of operations or financial condition. Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products and services such as those offered by the
Company, which could have a material adverse effect on the Company's business
and operating results.
9
<PAGE> 10
RISK FACTORS
During the calendar year operating results have been adversely affected as the
Company experienced declines in orders, revenues and margins due to reduced
capital equipment spending by the semiconductor industry. During the second
quarter of fiscal 1999, the Company implemented a restructuring plan to address
the current downturn in the semiconductor industry which resulted in a
non-recurring pre-tax charge of $35 million. This restructuring plan includes a
consolidation of facilities, a write-down of assets associated with affected
programs and employee severance and related benefits costs. There can be no
assurance that this cost reduction plan will be sufficient to address the
current market conditions. The current semiconductor industry decline is
primarily due to excess semiconductor manufacturing capacity worldwide, coupled
with the Asian financial crisis. The Company's operating results are dependent
on many factors, including economic conditions in the semiconductor and related
industries, both in the US and abroad, the size and timing of orders from
customers, customer cancellations or delays in shipments, the Company's ability
to develop, introduce, and market new and enhanced products on a timely basis,
among others. The Company has experienced reductions in orders, cancellations
and delays in shipments which may continue to adversely affect sales and margins
in future periods. The Company's expense levels are based, in part, on
expectations of future revenues. Operating results have fluctuated in the past
and may fluctuate in the future. If revenue levels in a particular period do not
meet expectations, operating results may be adversely affected and additional
cost reduction measures may be necessary for the Company to remain competitive
in the marketplace.
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to maintain
technological parity with deep sub-micron process technology. Although the
Company is focused on controlling expenses in the current downturn in the
semiconductor industry, the Company continues to believe that its future success
will depend in part upon its ability to develop, manufacture and successfully
introduce new products with improved capabilities (including 300mm wafers and
sub-quarter micron design rules) and to continue to enhance existing products.
The Company must be able to forecast demand for new products while managing the
transition from older products. There can be no assurance that the Company will
successfully or timely develop and manufacture new products or that any such
products will be accepted in the marketplace. If new products have reliability
or quality problems, reduced orders, higher manufacturing costs, delays in
collecting accounts receivable and additional service and warranty expense may
result. Additionally, there can be no assurance that future technologies,
processes or product developments will not render the Company's current product
offerings obsolete. However, if the Company does not continue to successfully
introduce new products, its results of operations will be adversely affected.
The Company expects to continue to make significant investments in research and
development and to sustain its current spending levels for customer support in
fiscal year 1999 to meet current customer requirements and effectively position
the Company for growth when the business cycle turns favorable.
The semiconductor equipment industry is highly competitive and global in nature
and the Company has experienced and expects to continue to face substantial
competition. The Company believes that to remain competitive will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide, and to invest in
product and process research and development. The Company's business depends and
will continue to depend in the future upon the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. The current industry downturn has had an adverse effect on the
semiconductor industry's level of capital expenditures. The Company believes
that it is relatively well positioned for this downturn because of its array of
products, its focus on yield improvement and process development rather than
pure wafer fabrication facility capacity, its sales of metrology products to
non-semiconductor industries and
10
<PAGE> 11
its strong balance sheet. The Company believes that the semiconductor equipment
industry is becoming increasingly dominated by large manufacturers with the
resources to support customers worldwide. Some of these competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing and customer service and support capabilities than the
Company. In addition, there are smaller emerging semiconductor equipment
companies which can provide innovative technology. No assurance can be given
that the Company will be able to compete successfully worldwide or that the
Company will be able to withstand the effects of an industry downturn in the
short term or over an extended period if the downturn is prolonged.
The Company expects that international revenues will continue to represent a
significant percentage of its revenues and international revenues and operations
may be adversely affected by economic conditions specific to each country. The
future performance of the Company depends, in part, upon its ability to continue
to compete successfully worldwide. Asia Pacific is one of the largest regions
for the sale of yield management and process monitoring equipment and countries
in this region, including Japan, Korea and Taiwan, have experienced weaknesses
in their currency, banking and equity markets in recent periods. The US and
Europe have shown relative strength during this downturn; however, weaknesses in
these regions may also adversely affect demand for the Company's products and
the Company's consolidated results of operations. In addition, international
sales may be adversely affected by fluctuations in foreign currency, imposition
of governmental controls, restrictions on export technology, political
instability, trade restrictions, changes in tariffs and the difficulties
associated with staffing and managing international operations. Although the
Company attempts to manage near term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate. These
factors may have a material adverse effect on the Company's future business and
financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures as set forth in its Annual Report on Form
10-K for the year ended June 30, 1998 have not changed significantly.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held on
November 19, 1998 at the Company's offices in Milpitas, California. Of
the 87,321,556 shares outstanding as of September 18, 1988, the record
date, 75,126,534 shares (86%) were present or represented by proxy at
the meeting.
1. The table below presents the results of the election to the Company's
board of directors.
<TABLE>
<CAPTION>
Votes
Votes For Withheld
---------- --------
<S> <C> <C>
James W. Bagley 74,367,931 488,603
Edward W. Barnholt 74,656,074 470,460
Dean O. Morton 74,642,236 484,298
Kenneth L. Schroeder 74,641,810 484,724
</TABLE>
2. The stockholders approved an amendment to the 1997 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by 1,000,000 shares of Common Stock. This proposal received
57,480,851 votes for, 3,456,114 votes against, with 398,961 votes
abstaining, and 13,790,608 broker non-votes.
3. The stockholders approved amendments to the 1997 Employee Stock
Purchase Plan to increase the number of shares of Common Stock reserved
for issuance thereunder on the first day of each subsequent fiscal year
by the lesser of (a) 2,000,000 shares or (b) the number of shares which
the Company estimates (based on the previous 12 month period) it will be
required to issue under the 1997 Purchase Plan during the forthcoming
fiscal year. This proposal received 44,757,829 votes for, 16,174,363
votes against, with 403,734 votes abstaining, and 13,790,608 broker
non-votes.
4. The stockholders approved the 1998 Outside Director Option Plan and
reserved for issuance thereunder 1,000,000 shares of Common Stock. This
proposal received 46,643,026 votes for, 15,245,588 votes against, with
447,312 votes abstaining, and 13,790,608 broker non-votes.
5. The stockholders ratified the appointment of PricewaterhouseCoopers
LLP as the Company's independent accountants for the fiscal year ended
June 30, 1999. This proposal received 74,728,073 votes for, 172,205
votes against, with 226,256 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27.1 Financial Data Schedule.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLA-TENCOR CORPORATION
(Registrant)
February 9, 1999 ROBERT J. BOEHLKE
- ---------------- -------------------------------
(Date) Robert J. Boehlke
Executive Vice President
and Chief Financial Officer
13
<PAGE> 14
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 177,626
<SECURITIES> 556,130
<RECEIVABLES> 286,010
<ALLOWANCES> 0
<INVENTORY> 209,669
<CURRENT-ASSETS> 852,558
<PP&E> 281,612
<DEPRECIATION> 136,317
<TOTAL-ASSETS> 1,524,572
<CURRENT-LIABILITIES> 336,983
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 495,644
<OTHER-SE> 691,945
<TOTAL-LIABILITY-AND-EQUITY> 1,524,572
<SALES> 398,601
<TOTAL-REVENUES> 398,601
<CGS> 217,564
<TOTAL-COSTS> 444,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 805
<INCOME-PRETAX> (14,452)
<INCOME-TAX> (7,035)
<INCOME-CONTINUING> (7,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,417)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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|
1999 | 0QTR1
| LU | https://www.sec.gov/Archives/edgar/data/1006240/0000950116-99-000252.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950116-99-000252.txt : 19990217
<SEC-HEADER>0000950116-99-000252.hdr.sgml : 19990217
ACCESSION NUMBER: 0000950116-99-000252
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990216
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LUCENT TECHNOLOGIES INC
CENTRAL INDEX KEY: 0001006240
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 223408857
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-11639
FILM NUMBER: 99542275
BUSINESS ADDRESS:
STREET 1: 600 MOUNTAIN AVE
CITY: MURRAY HILL
STATE: NJ
ZIP: 07974
BUSINESS PHONE: 9085828500
MAIL ADDRESS:
STREET 1: 600 MOUNTAIN AVE
CITY: MURRAY HILL
STATE: NJ
ZIP: 07974
FORMER COMPANY:
FORMER CONFORMED NAME: NS MPG INC
DATE OF NAME CHANGE: 19960124
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes .X No ....
At January 31, 1999, 1,321,650,166 common shares were outstanding.
<PAGE>
2 Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
December 31,
1998 1997
Revenues............................. $ 9,204 $ 8,724
Costs................................ 4,386 4,519
Gross margin......................... 4,818 4,205
Operating Expenses:
Selling, general and
administrative expenses............ 1,774 1,555
Research and development expenses.... 926 829
In-process research
and development expenses........... 21 427
Total operating expenses............. 2,721 2,811
Operating income..................... 2,097 1,394
Other income - net................... 102 146
Interest expense..................... 78 62
Income before income taxes........... 2,121 1,478
Provision for income taxes........... 721 686
Income before cumulative effect of
accounting change.................. 1,400 792
Cumulative effect of accounting change
(net of income taxes of $842)...... 1,308 -
Net income........................... $ 2,708 $ 792
Earnings per common share - basic:
Income before cumulative effect of
accounting change.................. $ 1.06 $ 0.62
Cumulative effect of accounting
change ............................ 1.00 -
Net income.......................... $ 2.06 $ 0.62
Earnings per common share - diluted:
Income before cumulative effect of
accounting change.................. $ 1.04 $ 0.61
Cumulative effect of accounting
change............................. .96 -
Net Income.......................... $ 2.00 $ 0.61
Dividends declared per common share.. $ 0.08 $ 0.075
See Notes to Consolidated Financial Statements.
<PAGE>
3 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1998 1998
ASSETS
Cash and cash equivalents.............. $ 940 $ 685
Accounts receivable less allowances
of $346 at December 31, 1998 and
$390 at September 30, 1998 ........... 9,185 6,939
Inventories............................ 3,778 3,081
Contracts in process, net of progress
billings of $3,995 at December 31, 1998
and $3,036 at September 30, 1998...... 1,060 1,259
Deferred income taxes - net............ 1,620 1,623
Other current assets................... 768 491
Total current assets................... 17,351 14,078
Property, plant and equipment, net
of accumulated depreciation of
$6,886 at December 31, 1998 and
$6,382 at September 30, 1998.......... 5,645 5,403
Prepaid pension costs.................. 6,068 3,754
Deferred income taxes - net............ - 750
Capitalized software development costs. 306 298
Other assets........................... 2,271 2,437
TOTAL ASSETS........................... $31,641 $26,720
(CONT'D)
See Notes to Consolidated Financial Statements.
<PAGE>
4 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
December 31, September 30,
1998 1998
LIABILITIES
Accounts payable....................... $ 2,468 $ 2,040
Payroll and benefit-related
liabilities.......................... 1,857 2,511
Postretirement and postemployment
benefit liabilities.................. 186 187
Debt maturing within one year.......... 3,763 2,231
Other current liabilities.............. 4,167 3,459
Total current liabilities.............. 12,441 10,428
Postretirement and postemployment
benefit liabilities.................. 6,413 6,380
Long-term debt ........................ 2,404 2,409
Other liabilities...................... 1,946 1,969
Total liabilities ..................... 23,204 21,186
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000
Issued and outstanding shares: none... - -
Common stock-par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
1,320,245,061 at December 31, 1998
1,316,394,169 at September 30, 1998... 13 13
Additional paid-in capital............. 4,728 4,488
Guaranteed ESOP obligation............. (49) (49)
Retained earnings...................... 3,965 1,364
Accumulated other comprehensive
income(loss).......................... (220) (282)
Total shareowners' equity.............. 8,437 5,534
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $31,641 $26,720
See Notes to Consolidated Financial Statements.
<PAGE>
5 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1998 1997
Operating Activities
Net income............................... $2,708 $ 792
Adjustments to reconcile net income
to net cash (used in)provided by
operating activities:
Cumulative effect of
accounting change.................... (1,308) -
Depreciation and amortization......... 344 343
Provision for uncollectibles.......... (15) 54
Deferred income taxes................. 206 (22)
Purchased in-process research and
development......................... 21 427
Increase in accounts receivable - net. (2,235) (1,255)
(Increase)decrease in inventories
and contracts in process - net....... (425) 152
Increase(decrease) in
accounts payable..................... 352 (387)
Changes in other operating assets
and liabilities..................... (501) 512
Other adjustments for non-cash
items - net......................... (248) (231)
Net cash (used in)provided by
operating activities.................... (1,101) 385
Investing Activities
Capital expenditures .................... (343) (261)
Proceeds from the sale or disposal of
property, plant and equipment.......... 28 27
Purchases of equity investments.......... (17) (47)
Sales of equity investments.............. 1 25
Acquisitions of businesses,
net of cash acquired................... (115) -
Dispositions of businesses............... 57 281
Other investing activities - net......... 22 (35)
Net cash used in investing activities.... (367) (10)
Financing Activities
Repayments of long-term debt ............ (8) (20)
Issuance of long-term debt............... 495 3
Proceeds of issuance of common stock..... 239 72
Dividends paid........................... (54) (48)
Increase(decrease) in short-term
borrowings - net....................... 1,041 (485)
Net cash provided by
(used in) financing activities.......... 1,713 (478)
(CONT'D)
See Notes to Consolidated Financial Statements.
<PAGE>
6 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three Months
Ended December 31,
1998 1997
Effect of exchange rate
changes on cash........................ 10 (22)
Net increase(decrease) in cash and
cash equivalents....................... 255 (125)
Cash and cash equivalents
at beginning of period................. 685 1,350
Cash and cash equivalents
at end of period....................... $ 940 $ 1,225
See Notes to Consolidated Financial Statements.
<PAGE>
7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Lucent Technologies Inc. ("Lucent" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of management, include all adjustments necessary for a fair presentation
of the results of operations, financial position and cash flows for each period
shown.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenues and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary. During the three months ended December 31, 1998, improved
performance on multi-year contracts and the resolution of certain contingencies
had a positive impact on the reported results of operations.
The financial statement results for interim periods are not necessarily
indicative of financial results for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Lucent's Annual Report on
Form 10-K for the year ended September 30, 1998.
The financial statements presented have been restated to reflect the two-for-one
split of Lucent's common stock which became effective on April 1, 1998. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
2. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS
Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs. Under the previous accounting method, which recognized only interest and
dividends immediately, all other realized and unrealized gains and losses on
plan assets were included in the calculated market-related value over a
five-year period. The new method changes the manner in which realized and
unrealized gains and losses are included in market-related value over the
five-year period and results in a calculated market-related value of plan assets
that is closer to current fair value, while still mitigating the effects of
annual market value fluctuations. The new method also reduces the substantial
accumulation of unrecognized gains and losses created under the previous method
due to the disparity between fair value and market-related value of plan assets.
The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $1.00 and $0.96 per basic and
diluted share, respectively) is a one-time, non-cash credit to fiscal 1999
earnings. This accounting change also resulted in a reduction in benefit costs
as a result of the change in Lucent's pension and postretirement accounting in
the three months ended December 31, 1998 that increased income by $108 ($65
after-tax, or $0.05 per basic and diluted share) as compared to the previous
accounting method. A comparison of pro forma amounts is presented below showing
the effects if the accounting change were applied retroactively:
Three Months Ended December 31,
1998 1997
------ ------
Net Income $1,400 $ 851
Earnings per share-basic $ 1.06 $ 0.66
Earnings per share-diluted $ 1.04 $ 0.65
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
3. COMPREHENSIVE INCOME
Lucent has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" as of October 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
shareowners' equity. The components of comprehensive income are as follows:
Three Months Ended
December 31,
1998 1997
----------------------------
Net income......................... $ 2,708 $ 792
Other comprehensive income(loss):
Foreign currency translation
adjustments.................... 51 (82)
Unrealized holding gains(losses)
arising during the period...... 11 (21)
Comprehensive income............... $ 2,770 $ 689
The components of accumulated other comprehensive income(loss) are as follows:
<TABLE>
<CAPTION>
Foreign Currency Total Accumulated
Translation Other Comprehensive
Adjustments Other Income(Loss)
------------- ----- -------------------
<S> <C> <C> <C>
Accumulated other comprehensive income
(loss) at September 30, 1998........ $ (279) $ (3) $ (282)
Other comprehensive income
for the period....................... 51 11 62
Accumulated other comprehensive income
(loss) at December 31, 1998......... $ (228) $ 8 $ (220)
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to indefinite investments in non-United States
subsidiaries.
4. ACQUISITION
Quadritek Systems, Inc.
- -----------------------
On October 1, 1998, Lucent completed the purchase of Quadritek Systems, Inc. for
$50 in cash. Quadritek was a privately-held company involved in the development
of Internet Protocol ("IP") network administration software solutions. The
transaction was accounted for under the purchase method of accounting and the
excess purchase price over the estimated fair value of net tangible assets was
allocated to various intangible assets, primarily consisting of developed
technology of $5 and goodwill of $24. These assets are being amortized over six
and eight years, respectively. In addition to the intangible assets acquired,
Lucent recorded a charge of $21 ($14 after-tax), representing the write-off of
in-process research and development ("IPR&D").
The allocation of $21 represents the estimated fair value related to incomplete
projects based on risk-adjusted cash flows. Lucent believes that such fair value
is reasonable and does not exceed the amount a third party would pay for these
projects. At the date of the acquisition, the projects associated with the IPR&D
efforts had not yet reached technological feasibility and had no alternative
future uses. Accordingly, these costs were expensed during the period.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
At the acquisition date, Quadritek was conducting development, engineering, and
testing activities associated with the completion of a number of new product
offerings ("New Product Offerings"). The IPR&D projects were in various stages
of development. Overall, substantial progress had been made. The IPR&D projects
ranged in completion from 20% to 80%. Remaining efforts necessary to complete
the New Product Offerings relate primarily to additional coding, testing, and
addressing performance issues. In total, costs to complete the New Product
Offerings are expected to total approximately $5.
In making its purchase price allocation, Lucent relied upon an independent
third-party valuation which gave consideration to present value calculations of
income, an analysis of project accomplishments and completion costs, an
assessment of overall contributions, as well as project risks. The values
assigned to IPR&D were determined by estimating the costs to develop the
purchased technology into commercially viable products, estimating the resulting
net cash flows from each project, excluding the cash flows related to the
portion of each project that was incomplete at the acquisition date, and
discounting the resulting net cash flows to their present value. Each of the
project forecasts was based upon future discounted cash flows, taking into
account the stage of development of each in-process project, the cost to
complete that project, the expected income stream, the life cycle of the product
ultimately developed, and the associated risks. Projected future net cash flows
attributable to the in-process technology, assuming successful development of
such technologies, were discounted to their present values using a discount rate
of 20%.
The aforementioned estimates are subject to change, given the uncertainties of
the development process, and no assurance can be given that deviations from
these estimates will not occur. Management expects to continue development of
these efforts and believes there is a reasonable chance of successfully
completing such development. However, there is risk associated with the
completion of the in-process projects and there can be no assurance that any of
the projects will meet with either technological or commercial success. Failure
to successfully develop and commercialize the in-process projects would result
in the loss of the expected economic return inherent in the fair value
allocation.
<PAGE>
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at December 31, 1998 and September 30, 1998 were as follows:
December 31, September 30,
1998 1998
------------ -------------
Completed goods ............... $ 1,777 $ 1,578
Work in process and
raw materials................ 2,001 1,503
Total inventories ............. $ 3,778 $ 3,081
6. BUSINESS RESTRUCTURING
For the three months ended December 31, 1998 and 1997, $13 and $26,
respectively, were applied to the 1995 business restructuring reserve. The
remaining reserve for business restructuring at December 31, 1998 was $238.
7. EARNINGS PER COMMON SHARE
Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued.
Earnings per share amounts for the periods presented have been restated to
reflect the two-for-one split of Lucent's common stock which became effective on
April 1, 1998. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three months ended December 31, 1998
and 1997:
<PAGE>
11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three Months Ended
December 31,
1998 1997
-------------------------
Net income $ 2,708 $ 792
Earnings per common share - basic:
Income before cumulative effect
of accounting change $ 1.06 $ 0.62
Cumulative effect of accounting
change 1.00 -
Net Income $ 2.06 $ 0.62
Earnings per common share - diluted:
Income before cumulative effect
of accounting change $ 1.04 $ 0.61
Cumulative effect of accounting
change .96 -
Net Income $ 2.00 $ 0.61
Number of Shares (in millions)
- ---------------------------------
Common shares - basic 1,317.3 1,287.3
Effect of dilutive securities:
Stock options 32.4 18.4
Other 2.4 0.3
Common shares - diluted 1,352.1 1,306.0
Shares excluded from the
computation of earnings
per common share - diluted since
option exercise price was greater
than the average market price of
the common shares for the period 2.8 5.4
8. PHILIPS CONSUMER COMMUNICATIONS ("PCC")
On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. ("Phillips") in exchange
for 40% ownership of PCC. On October 22, 1998, Lucent and Phillips announced
their intention to end the PCC venture and agreed to regain control of their
original businesses. The results of operations and net assets of the remaining
businesses Lucent previously contributed to PCC have been consolidated as of
October 1, 1998. The revenues are included in Other Systems and Products. In
December 1998, Lucent sold certain assets of the wireless handset portion of the
remaining businesses to Motorola. Lucent is continuing to look for opportunities
to sell the remaining consumer products businesses.
<PAGE>
12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at December 31, 1998 cannot be ascertained. While these
matters could affect the operating results of any one quarter when resolved in
future periods and while there can be no assurance with respect thereto,
management believes that after final disposition, any monetary liability or
financial impact to Lucent beyond that provided for at December 31, 1998 would
not be material to the annual consolidated financial statements.
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T Corp. ("AT&T") as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the Separation and Distribution
Agreement ("Separation and Distribution Agreement"), among Lucent, AT&T and NCR
Corporation ("NCR"), dated as of February 1, 1996 as amended and restated,
Lucent is responsible for all liabilities primarily resulting from or relating
to the operation of Lucent's business as conducted at any time prior to or after
the separation from AT&T of the businesses and operations transferred to form
Lucent (the "Separation") including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, without deductions for insurance or
third party indemnity claims. In those cases where insurance carriers or third
party indemnitors have agreed to pay any amounts and management believes that
collectibility of such amounts is probable, the amounts are reflected as
receivables in the financial statements. Although Lucent believes that its
reserves are adequate, there can be no assurance that the amount of capital
expenditures and other expenses which will be required relating to remedial
actions and compliance with applicable environmental laws will not exceed the
amounts reflected in Lucent's reserves or will not have a material adverse
effect on Lucent's financial condition, results of operations or cash flows. Any
amounts of environmental costs that may be incurred in excess of those provided
for at December 31, 1998 cannot be determined.
<PAGE>
13 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
10. SUBSEQUENT EVENTS
Kenan Systems Corporation
- -------------------------
On January 11, 1999, Lucent announced its intention to merge with Kenan Systems
Corporation, a privately held developer of third-party billing and customer care
software, in exchange for 12.88 million shares of Lucent common stock. Lucent
expects that the acquisition will be completed in Lucent's second fiscal quarter
ending March 31, 1999 and be accounted for as a pooling of interests.
Ascend Communications, Inc.
- ---------------------------
On January 13, 1999, Lucent announced that it had entered into a definitive
agreement to merge with Ascend Communications, Inc. Under the terms of the
agreement, which was approved by each company's board of directors, each share
of Ascend common stock will be converted into 0.825 shares of Lucent common
stock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,
the transaction would be valued at approximately $20 billion.
The transaction, which is subject to customary conditions and regulatory
approvals, is expected to be completed during Lucent's third fiscal quarter,
which ends June 30, 1999, and is expected to be accounted for as a pooling of
interests.
WaveAccess Ltd.
- ---------------
On January 22, 1999, Lucent completed the acquisition of the remaining 80
percent of WaveAccess Ltd. for $45 in cash. In May 1998, Lucent had acquired a
20 percent stake in the company. WaveAccess is a developer of high-speed systems
for wireless data communications. The acquisition will be accounted for using
the purchase method of accounting.
The purchase is expected to result in a one-time, non-tax deductible, non-cash
charge to earnings for purchased in-process research and development in the
quarter ending March 31, 1999. The amount of the charge has not yet been
determined. The remaining purchase price will be allocated to tangible assets
and intangible assets, including goodwill and existing technology, less
liabilities assumed.
<PAGE>
14 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
HIGHLIGHTS
Lucent reported net income of $2,708 million, or $2.00 per share (diluted) for
the quarter ended December 31, 1998. Included in net income is a $1,308 million
(or $0.96 per share-diluted) cumulative effect of an accounting change related
to Lucent's pension and postretirement benefits (see Note 2). The year-ago
quarterly net income was $792 million, or $0.61 per share (diluted). Excluding
the one-time gain from the cumulative effect of the accounting change and the
in-process research and development charge associated with the acquisition of
Quadritek, which Lucent completed during the current quarter (see Note 4),
Lucent's net income was $1,414 million, or $1.05 per share (diluted) for the
three months ended December 31, 1998. This compares to net income of $1,124
million, or $0.86 per share (diluted) for the three months ended December 31,
1997, excluding the in-process research and development charge associated with
the acquisition of Livingston and the gain on the sale of Advanced Technology
Systems ("ATS").
Gross margin increased $613 million for the quarter ended December 31, 1998
compared with the year-ago quarter. The increase in gross margin was primarily
due to higher sales volume and improved performance on multi-year contracts
compared with the same quarter last year.
Operating income of $2,097 million reflects an increase of $703 million in the
quarter compared with the same quarter in 1997 and was 22.8% of revenues. The
increase was primarily due to the increased gross margin described above and a
non-cash reduction in benefits costs of $108 million resulting from the change
in Lucent's pension and postretirement accounting as described in Note 2.
On October 1, 1998, Lucent completed the purchase of Quadritek for $50 million
in cash. The acquisition was accounted for using the purchase method of
accounting and has been included in the balance sheet at December 31, 1998.
On January 11, 1999, Lucent announced its intention to merge with Kenan Systems
Corporation, a privately held developer of third-party billing and customer care
software, in exchange for 12.88 million shares of Lucent common stock. Lucent
expects that the acquisition will be completed in Lucent's second fiscal quarter
ending March 31, 1999 and be accounted for as a pooling of interests.
On January 13, 1999, Lucent announced that it had entered into a definitive
agreement to merge with Ascend Communications, Inc. Under the terms of the
agreement, which was approved by each company's board of directors, each share
of Ascend common stock will be converted into 0.825 shares of Lucent common
stock. Based on Lucent's closing stock price of $107-7/8 on January 12, 1999,
the transaction would be valued at approximately $20 billion. The transaction,
which is subject to customary conditions and regulatory approvals, is expected
to be completed during Lucent's third fiscal quarter, which ends June 30, 1999,
and is expected to be accounted for as a pooling of interests.
On January 22, 1999, Lucent completed the acquisition of the remaining 80%
interest in WaveAccess for $45 million in cash. The acquisition will be
accounted for using the purchase method of accounting and will be included in
financial statements for the quarter ending March 31, 1999.
<PAGE>
15 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
KEY BUSINESS CHALLENGES
Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will intensify. Lucent expects that
new competitors will enter its markets as a result of the trend toward global
expansion by foreign and domestic competitors as well as continued changes in
technology and public policy. These competitors may include entrants from the
telecommunications, software, data networking and semiconductor industries.
Existing competitors have, and new competitors may have, strong financial
capability, technological expertise, well-recognized brand names and a global
presence. As a result, Lucent's management periodically assesses market
conditions and redirects the Company's resources to meet the challenges of
competition. Steps Lucent may take include acquiring or investing in new
businesses and ventures, partnering with existing businesses, delivering new
technologies, closing and consolidating facilities, disposing of assets,
reducing work force levels or withdrawing from markets.
Lucent has taken measures to manage the seasonality of its business by changing
the date on which its fiscal year ends and its compensation programs for
employees. As a result, Lucent has achieved a more uniform distribution of
revenues -- accompanied by a related redistribution of earnings -- throughout
the year. Revenues and earnings still remain higher in the first fiscal quarter
primarily because many of Lucent's large customers historically delay a
disproportionate percentage of their capital expenditures until the fourth
quarter of the calendar year (Lucent's first fiscal quarter).
The purchasing behavior of Lucent's largest customers has increasingly been
characterized by the use of fewer, larger contracts. These contracts typically
involve longer negotiating cycles, require the dedication of substantial amounts
of working capital and other resources, and in general require costs that may
substantially precede recognition of associated revenues. Moreover, in return
for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays.
Lucent has increasingly provided or arranged long-term financing for customers
as a condition to obtain or bid on infrastructure projects. Certain multi-year
contracts involve new technologies that may not have been previously deployed on
a large-scale commercial basis. On its multi-year contracts, Lucent may incur
significant initial cost overruns and losses that are recognized in the quarter
in which they become ascertainable. Further, profit estimates on such contracts
are revised periodically over the lives of the contracts, and such revisions can
have a significant impact on reported earnings in any one quarter.
Lucent has been successful in diversifying its customer base and seeking out new
types of customers globally. These new types of customers include competitive
access providers, competitive local exchange carriers, wireless service
providers, cable television network operators and computer manufacturers.
Historically, a limited number of customers have provided a substantial portion
of Lucent's total revenues. The loss of any of these customers, or any
substantial reduction in orders by any of these customers, could materially
adversely affect Lucent's operating results.
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
REVENUES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED
DECEMBER 31, 1997
Total revenues increased 5.5% to $9,204 million in the quarter compared with the
same quarter of 1997, due to increases in sales from Systems for Network
Operators, Business Communications Systems, Microelectronic Products and Other
Systems and Products. For the quarter, sales within the United States decreased
by 9.7% compared with the same quarter in 1997 and sales outside the United
States increased 49.0% compared with the same quarter last year.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended December 31,
1998 and 1997:
Three Months
Ended
December 31,
Dollars in Millions ------------------------------
1998 1997
------------- ------------
Systems for Network Operators........ $6,115 66% $5,943 68%
Business Communications Systems...... 1,975 22 1,930 22
Microelectronic Products............. 821 9 775 9
Other Systems and Products........... 293 3 76 1
Total................................ $9,204 100% $8,724 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $172 million, or 2.9% in
1998 compared with the same quarter in 1997. Revenues were driven by sales of
switching systems with associated software, optical networking systems, data
networking systems for service providers, and services. Continued demand for
data services and Internet access in businesses and residences contributed to
the group's quarterly revenues.
Revenues from Systems for Network Operators in the United States decreased by
19.2% over the year-ago quarter. The revenue decrease in the United States was
primarily due to expected software revenues that were delayed into the second
and third quarters. Another factor was an exceptionally strong comparative
quarter in fiscal 1998 when Lucent benefited from revenues associated with
personal communications services ("PCS") wireless buildouts. Revenues generated
outside the United States increased 66.7% compared with the same quarter in 1997
due to revenue growth in the Europe/Middle East/Africa and Caribbean/Latin
America regions and China. Revenues generated outside the United States
represented 41.6% of revenues for the quarter compared with 25.7% for the same
quarter of 1997.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $45 million, or 2.3%
compared with the year-ago quarter. Increased sales of DEFINITY(R) enterprise
communication servers, including those with Call Center applications, messaging
systems, and enterprise data networking systems contributed to the increased
revenue for the quarter. Sales within the United States increased 3.2% for the
quarter compared with the same quarter of 1997. Revenues generated outside the
United States decreased by 1.7%. Revenues generated outside the United States
represented 17.9% of revenues for the quarter compared with 18.7% in the same
quarter in 1997.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Revenues from MICROELECTRONIC PRODUCTS increased $46 million, or 5.9% compared
with the year-ago quarter driven by sales of chips for high-speed
communications, mass storage, data networking and optoelectronic components.
These increases were partially offset by decreased sales of power systems. Sales
within the United States decreased 7.8% compared to the same quarter in 1997.
Revenues generated outside the United States increased 20.3%. The growth in
revenues outside the United States was driven by sales in the Asia/ Pacific and
Europe/Middle East/Africa regions. Revenues generated outside the United States
represented 55.4% of sales for the quarter compared with 48.8% for the same
quarter of 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS increased $217 million compared with
the year-ago quarter primarily due to the consolidation of the businesses
regained from the PCC venture (see Note 8).
COSTS AND GROSS MARGIN - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS
THREE MONTHS ENDED DECEMBER 31, 1997
Total costs decreased by $133 million, or 2.9% in 1998 compared with the same
quarter in 1997 primarily due to better performance on multi-year contracts and
improved cost management partially offset by the costs related to the high sales
volume. As a percentage of revenue, gross margin increased to 52.3% from 48.2%
in the year-ago quarter. The increase this quarter compared with the same
quarter in 1997 reflects improved performance on multi-year contracts and higher
profits on certain products offset by a delayed recognition of software
revenues. Based on current planning assumptions, Lucent expects that its full
1999 fiscal year gross margin will exceed fiscal year 1998, but at a lower level
than achieved for the first fiscal quarter.
OPERATING EXPENSES - THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS
THREE MONTHS ENDED DECEMBER 31, 1997
Selling, general and administrative expenses as a percentage of revenues were
19.3% for the quarter, up 1.5 percentage points compared with 17.8% for the same
quarter in 1997. Excluding the amortization expense associated with goodwill and
existing technology for both years, selling, general and administrative expenses
as a percentage of revenues was 18.7%, an increase of 1.1 percentage points from
the same quarter in 1997.
Selling, general and administrative expenses increased $219 million, or 14.1%
compared with the same year-ago quarter. This increase was attributed to
investment in growth initiatives as well as the increase in amortization expense
associated with goodwill and existing technology. Amortization expense
associated with goodwill and existing technology was $57 million for the
quarter, an increase of $34 million from the year-ago quarter.
Research and development expenses represented 10.1% of revenues for the quarter
compared with 9.5% of revenues for the same quarter of 1997.
Research and development expenses increased $97 million during the quarter
compared with the same year-ago quarter. This was primarily due to increased
expenditures in support of wireless, data networking, optical networking and
switching and access systems.
The purchased in-process research and development expenses for the quarter were
$21 million associated with the acquisition of Quadritek compared with $427
million related to the acquisition of Livingston for the same quarter of 1997.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31, 1997
Other income - net decreased $44 million to $102 million for the quarter
compared with the same quarter in 1997. The decrease was primarily due to the
gain on ATS recorded in the prior quarter partially offset by lower net equity
losses and lower losses on foreign exchange in the current quarter.
<PAGE>
18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Interest expense for the quarter increased $16 million to $78 million compared
with the same quarter in 1997. The increase in interest expense is due to higher
debt levels for the quarter ended December 31, 1998 compared with the same
quarter in 1997.
The effective income tax rate of 34.0% for the quarter ended December 31, 1998
decreased from 46.4% for the prior year quarter. Excluding the purchased
in-process research and development expenses associated with the Quadritek
acquisition in 1998 and the Livingston acquisition in 1997, the effective income
tax rate remained at 34.0% for the quarter ended December 31, 1998 compared with
36.0% in the prior year quarter. This decrease was primarily due to increased
research and experimentation tax credits and the tax impact of foreign activity.
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $4,921 million, or 18.4%, from fiscal year-end 1998. This
increase was largely due to increases in accounts receivable and prepaid pension
costs of $2,246 million and $2,314 million, respectively. The increase in
accounts receivable was primarily related to higher sales volume in the last
month of the quarter. Prepaid pension costs increased due to the change in
accounting for pensions.
Total liabilities increased $2,018 million, or 9.5% from fiscal year-end 1998.
This increase was due primarily to higher commercial paper balances.
Working capital, defined as current assets less current liabilities, increased
$1,260 million from September 30, 1998, primarily resulting from the increase in
accounts receivable and inventories partially offset by higher commercial paper
balances.
Lucent expects that, from time to time, outstanding commercial paper balances
may be replaced with short- or long-term borrowings as market conditions permit.
At December 31, 1998, Lucent maintained approximately $5,400 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At December 31, 1998, approximately $4,900 million was unused. Future
financings will be arranged to meet Lucent's requirements with the timing,
amount and form of issue depending on the prevailing market and general economic
conditions. Lucent anticipates that borrowings under its bank credit facilities,
the issuance of additional commercial paper, cash generated from operations and
short- and long-term debt financings will be adequate to satisfy its future cash
requirements, although there can be no assurance that this will be the case.
Network operators, inside and outside the United States, increasingly have
required their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
Lucent has increasingly provided or arranged long-term financing for customers.
As market conditions permit, Lucent's intention is to lay off these long-term
financing arrangements, which may include both commitments and drawn down
borrowings, to financial institutions and investors. This enables Lucent to
reduce the amount of its commitments and free up additional financing capacity.
As of December 31, 1998, Lucent had made commitments or entered into an
agreement to extend credit to certain network operators, including PCS and
wireless operators, for an aggregate of approximately $3,190 million. As of
December 31, 1998, approximately $440 million had been advanced and was
outstanding. Included in the $3,190 million is approximately $2,810 million to
twelve network operators for possible future sales. As of December 31, 1998,
approximately $350 million had been advanced and outstanding under seven of
these arrangements.
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
As part of the revenue recognition process, Lucent assesses the collectibility
of its receivables relating to contracts with customers for which Lucent
provides financing.
In addition to the above arrangements, Lucent will continue to provide or commit
to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn down borrowings on
acceptable terms.
Lucent believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory to Lucent and that it will be able to
obtain bid and performance bonds, to arrange or provide customer financing as
necessary, and to engage in hedging transactions on commercially acceptable
terms, although there can be no assurance that this will be the case.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations, financial
condition and cash flow. Lucent manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. Derivative
financial instruments are viewed as risk management tools and are not used for
speculative or trading purposes. In addition, derivative financial instruments
are entered into with a diversified group of major financial institutions in
order to manage Lucent's exposure to nonperformance by the counterparties on
such instruments.
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of December 31, 1998 and
September 30, 1998. Management does not foresee or expect any significant
changes in its exposure to interest rate fluctuations or in how such exposure is
managed in the near future.
CASH FLOWS
Cash used in operating activities for the three months ended December 31, 1998
was $1,101 million compared with cash provided by operating activities of $385
in the same year-ago quarter. This reduction in cash was primarily due to
increases in accounts receivable and inventories, offset by a decrease in
payroll and benefit related liabilities.
Cash payments of $13 million were made for the quarter ended December 31, 1998,
for the 1995 business restructuring charge. Of the 23,000 positions that Lucent
announced it would eliminate in connection with the restructuring charges,
approximately 20,100 positions have been eliminated as of December 31, 1998.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Comparing the quarters ended December 31, 1998 and 1997, cash used in investing
activities increased to $367 million from $10 million primarily due to the cash
used for acquisitions and a reduction in cash from dispositions.
Capital expenditures were $343 million and $261 million for the quarters ended
December 31, 1998 and 1997, respectively. Capital expenditures relate to
expenditures for equipment and facilities used in manufacturing and research and
development, including expansion of manufacturing capacity, and expenditures for
cost reduction efforts and international growth.
Cash provided by financing activities for the quarter ended December 31, 1998
was $1,713 million compared with $478 million used in financing activities in
the same quarter a year-ago. This increase in cash provided by financing
activities was primarily due to increased issuances of both short- and long-term
debt.
The ratio of total debt to total capital (debt plus equity) was 42.2% at
December 31, 1998 compared to 45.6% at September 30, 1998.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
among AT&T, Lucent and NCR Corporation dated as of February 1, 1996, as amended
and restated, Lucent is responsible for all liabilities primarily resulting from
or related to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued or disposed
of prior to the Separation, and Lucent's assets including, without limitation,
those associated with these sites. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted amount of such reserves, without deductions for insurance or
third party indemnity claims. In those cases where insurance carriers or third
party indemnitors have agreed to pay any amounts and
<PAGE>
21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the financial statements. Although Lucent
believes that its reserves are adequate, there can be no assurance that the
amount of capital and other expenditures that will be required relating to
remedial actions and compliance with applicable environmental laws will not
exceed the amounts reflected in Lucent's reserves or will not have a material
adverse effect on Lucent's financial condition, results of operations or cash
flows. Any amounts of environmental costs that may be incurred in excess of
those provided for at December 31, 1998 cannot be determined.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of
Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. Lucent undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and Lucent's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products/services; the achievement of lower costs and expenses; the ability
to successfully integrate the operations and business of Ascend, Kenan and other
acquired companies; the outcome and impact of Year 2000; domestic and foreign
governmental and public policy changes which may affect the level of new
investments and purchases made by customers; changes in environmental and other
domestic and foreign governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers; customer
demand for Lucent's products and services; technological, implementation and
cost/financial risks in the increasing use of large, multi-year contracts; the
cyclical nature of Lucent business; the outcome of pending and future litigation
and governmental proceedings and continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support Lucent's future business. These are representative of
the Future Factors that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
and market conditions and growth rates, general domestic and international
economic conditions including interest rate and currency exchange rate
fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this report
including the other sections referred to and also see the discussion in Lucent's
Form 10-K for the year ended September 30, 1998 in Item 1 in the section
entitled "OUTLOOK-Forward Looking Statements" and the remainder of the OUTLOOK
section.
<PAGE>
22 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Competition:
See discussion above under KEY BUSINESS CHALLENGES.
Dependence On New Product Development:
The markets for Lucent's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for network operators and business customers. Lucent's operating results
will depend to a significant extent on its ability to continue to introduce new
systems, products, software and services successfully on a timely basis and to
reduce costs of existing systems, products, software and services. The success
of these and other new offerings is dependent on several factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of Lucent's competitors and market
acceptance. In addition, new technological innovations generally require a
substantial investment before any assurance is available as to their commercial
viability, including, in some cases, certification by international and domestic
standards-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent is engaged in a major effort to minimize the impact of the Year 2000 date
change on Lucent's products, information technology systems, facilities and
production infrastructure. Lucent has targeted June 30, 1999 for completion of
these efforts.
The Year 2000 challenge is a priority within Lucent at every level of Lucent.
Primary Year 2000 preparedness responsibility rests with program offices which
have been established within each of Lucent's product groups and corporate
centers. A corporate-wide Lucent Year 2000 Program Office ("LYPO") monitors and
reports on the progress of these offices. Each program office has a core of
full-time individuals augmented by a much larger group who have been assigned
specific Year 2000 responsibilities in addition to their regular assignments.
Further, Lucent has engaged third parties to assist in its readiness efforts in
certain cases. LYPO has established a methodology to measure, track and report
Year 2000 readiness status consisting of five steps: inventory; assessment;
remediation; testing and deployment.
Lucent is completing programs to make its new commercially available products
Year 2000 ready and has developed evolution strategies for customers who own
non-Year 2000 ready Lucent products. The majority of the upgrades and new
products needed to support customer migration are already generally available.
By the end of 1998, all but a few of these products were generally available.
Lucent has launched extensive efforts to alert customers who have non-Year 2000
ready products, including direct mailings, phone contacts and participation in
user and industry groups. Lucent also has a Year 2000 website www.lucent.com/y2k
that provides Year 2000 product information. Lucent continues to cooperate in
the Year 2000 information sharing efforts of the Federal Communications
Commission and other governmental bodies.
Lucent believes it has sufficient resources to provide timely support to its
customers that require product migrations or upgrades. However, because this
effort is heavily dependent on customer cooperation, Lucent continues to monitor
customer response and will take steps to improve customer responsiveness, as
necessary. Also, Lucent is continuing contingency planning to address potential
spikes in demand for customer support resulting from the Year 2000 date change.
These plans are targeted for completion by April 30, 1999.
<PAGE>
23 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Lucent has largely completed the inventory and assessment phases of the program
with respect to its factories, information systems, and facilities.
Approximately, two-thirds of the production elements included in the factory
inventory were found to be Year 2000 ready. The factories have commenced the
remediation phase of their effort through a combination of product upgrades and
replacement. Plans have been developed to facilitate the completion of this
work, as well as the related testing and deployment, by June 30, 1999.
Currently, approximately 65% of Lucent's information technology infrastructure
has been determined to be Year 2000 ready and is deployed for use.
Approximately, 65% of our business applications lines of code that are supported
by Lucent's information technology group are now Year 2000 ready and have been
deployed or are awaiting deployment. LYPO is monitoring the progress of
readiness efforts across Lucent, with a special emphasis on the early
identification of any areas where progress to-date could indicate difficulty in
meeting Lucent's June 1999 internal readiness target date. Lucent is developing
specific contingency plans, as appropriate.
Lucent is also assessing the Year 2000 readiness of the large number of
facilities that it owns or leases world-wide. Priority is being placed on
Lucent-owned facilities, leased facilities that Lucent manages and other
critical facilities that house large numbers of employees or significant
operations. Based on the results of these assessment activities, Lucent plans to
complete remediation efforts by March 31, 1999 and complete development of
applicable contingency plans by May 31, 1999.
To ensure the continued delivery of third party products and services, Lucent's
procurement organization has analyzed Lucent's supplier base and has sent
surveys to approximately 5,000 suppliers. Follow-up efforts have commenced to
obtain feedback from critical suppliers. To supplement this effort, Lucent is
conducting readiness reviews of the Year 2000 status of the suppliers ranked as
most critical based on the nature of their relationship with Lucent, the
product/service provided and/or the content of their survey responses. Almost
all of Lucent's suppliers are still deeply engaged in executing their Year 2000
readiness efforts and, as a result, Lucent cannot, at this time, fully evaluate
the Year 2000 risks to its supply chain. Lucent will continue to monitor the
Year 2000 status of its suppliers to minimize this risk and will develop
appropriate contingent responses as the risks become clearer.
The risk to Lucent resulting from the failure of third parties in the public and
private sector to attain Year 2000 readiness is the same as other firms in
Lucent's industry or other business enterprises generally. The following are
representative of the types of risks that could result in the event of one or
more major failures of Lucent's information systems, factories or facilities to
be Year 2000 ready, or similar major failures by one or more major third party
suppliers to Lucent: (1) information systems--could include interruptions or
disruptions of business and transaction processing such as customer billing,
payroll, accounts payable and other operating and information processes, until
systems can be remedied or replaced; (2) factories and facilities--could include
interruptions or disruptions of manufacturing processes and facilities with
delays in delivery of products, until non-compliant conditions or components can
be remedied or replaced; and (3) major suppliers to Lucent--could include
interruptions or disruptions of the supply of raw materials, supplies and Year
2000 ready components which could cause interruptions or disruptions of
manufacturing and delays in delivery of products, until the third party supplier
remedied the problem or contingency measures were implemented. Risks of major
failures of Lucent's principal products could include adverse functional impacts
experienced by customers, the costs and resources for Lucent to remedy problems
or replace products where Lucent is obligated or undertakes to take such action,
and delays in delivery of new products.
<PAGE>
24 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Lucent believes it is taking the necessary steps to resolve Year 2000 issues;
however, given the possible consequences of failure to resolve significant Year
2000 issues, there can be no assurance that any one or more such failures would
not have a material adverse effect on Lucent. Lucent estimates that the costs of
efforts to prepare for Year 2000 from calendar year 1997 through 2000 is about
$535 million, of which an estimated $280 million has been spent as of December
31, 1998. Lucent has been able to reprioritize work projects to largely address
Year 2000 readiness needs within its existing organizations. As a result, most
of these costs represent costs that would have been incurred in any event. These
amounts cover costs of the Year 2000 readiness work for inventory, assessment,
remediation, testing and deployment including fees and charges of contractors
for outsourced work and consultant fees. Costs for previously contemplated
updates and replacements of Lucent's internal systems and information systems
infrastructure have been excluded without attempting to establish whether the
timing of non-Year 2000 replacement or upgrading was accelerated.
While the Year 2000 cost estimates above include additional costs, Lucent
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.
The actual outcomes and results could be affected by Future Factors including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remediate software code problems, critical
suppliers and subcontractors meeting their commitments to be Year 2000 ready and
provide Year 2000 ready products, and timely actions by customers.
European Monetary Union - Euro:
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new common legal currency. As of that date, the Euro is
trading on currency exchanges, and the legacy currencies will remain legal
tender in the participating countries for a transition period between January 1,
1999 and January 1, 2002.
During the transition period, cash-less payments can be made in the Euro, and
parties can elect to pay for goods and services and transact business using
either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002,
the participating countries will introduce Euro notes and coins and withdraw all
legacy currencies so that they will no longer be available.
Lucent has begun planning for the Euro's introduction. For this purpose, Lucent
has in place a joint European-United States team representing affected functions
within the Company.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. Lucent is assessing its pricing/marketing strategy in order
to insure that it remains competitive in a broader European market. Lucent is
also assessing its information technology systems to allow for transactions to
take place in both the legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. Lucent's currency risk and risk management
for operations in participating countries may be reduced as the legacy
currencies are converted to the Euro. Final accounting, tax and governmental
legal and regulatory guidance is not available. Lucent will continue to evaluate
issues involving introduction of the Euro. Based on current information and
Lucent's current assessment, Lucent does not expect that the Euro conversion
will have a material adverse effect on its business or financial condition.
<PAGE>
25 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Employee Relations:
On December 31, 1998, Lucent employed approximately 143,800 persons, of whom 78%
were located in the United States. Of these domestic employees, 40% are
represented by unions, primarily the Communications Workers of America
("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
has concluded new five year agreements with the CWA and IBEW expiring May 31,
2003.
Multi-Year Contracts:
Lucent has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with uncertainties affecting recognition
of revenues, stringent acceptance criteria, implementation of new technologies
and possible significant initial cost overruns and losses. See also discussion
above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, and KEY BUSINESS
CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.
Growth Outside the U.S., Foreign Exchange and Interest Rates:
Lucent intends to continue to pursue growth opportunities in markets outside the
U.S. In many markets outside the U.S., long-standing relationships between
potential customers of Lucent and their local providers, and protective
regulations, including local content requirements and type approvals, create
barriers to entry. In addition, pursuit of such growth opportunities outside the
U.S. may require significant investments for an extended period before returns
on such investments, if any, are realized. Such projects and investments could
be adversely affected by reversals or delays in the opening of foreign markets
to new competitors, exchange controls, currency fluctuations, investment
policies, repatriation of cash, nationalization, social and political risks,
taxation, and other factors, depending on the country in which such opportunity
arises. Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. A significant change in the value of the dollar against the
currency of one or more countries where Lucent sells products to local customers
or makes purchases from local suppliers may materially adversely affect Lucent's
results. Lucent attempts to mitigate any such effects through the use of foreign
currency contracts, although there can be no assurances that such attempts will
be successful.
While Lucent hedges transactions with non-U.S. customers, the decline in value
of the Asia/Pacific currencies, or declines in currency values in other regions,
may, if not reversed, adversely affect future product sales because Lucent's
products may become more expensive to purchase for local customers doing
business in the countries of the affected currencies.
Legal Proceedings and Environmental:
See discussion above in Note 9 - COMMITMENTS AND CONTINGENCIES and OTHER.
<PAGE>
26 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9 amends
SOP 97-2 to require recognition for multiple-element arrangements by means of
the "residual method" in certain circumstances. The provisions of SOP 98-9 that
extend the deferral of certain passages of SOP 97-2 became effective December
15, 1998. All other provisions are effective for transactions entered into in
fiscal years beginning after March 15, 1999. Earlier application for financial
statements or information that has not been issued is permitted and retroactive
application is prohibited. SOP 98-9 is not expected to have a material impact on
Lucent's consolidated results of operations, financial position or cash flows.
<PAGE>
27 Form 10-Q - Part II
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
(12) Computation of Ratio of Earnings to Fixed Charges
(18) Preferability Letter on Accounting Change from
PricewaterhouseCoopers LLP
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K dated October 22, 1998 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits).
<PAGE>
28 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date February 16, 1999
By James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<DESCRIPTION>STATEMENT RE: COMPUTATION OF RATIOS
<TEXT>
<PAGE>
Exhibit 12
Form 10-Q
For the Three
Months Ended
December 31, 1998
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
December 31, 1998
Income Before Income Taxes............................. $ 2,121
Less Interest Capitalized during
the Period........................................... 5
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 1
Add Fixed Charges...................................... 117
Total Earnings ........................................ $ 2,232
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 80
Interest Portion of Rental Expense..................... 37
Total Fixed Charges................................ $ 117
Ratio of Earnings to Fixed Charges..................... 19.1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-18
<SEQUENCE>3
<DESCRIPTION>LETTER RE: CHANGE IN ACCOUNTING PRINCIPLES
<TEXT>
<PAGE>
Exhibit 18
Form 10-Q
For the Three
Months Ended
December 31, 1998
Preferability Letter on Accounting Change from
PricewaterhouseCoopers LLP
Lucent Technologies Inc.
600 Mountain Avenue
Murray Hill, New Jersey 07974
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q for the quarterly period ended December 31, 1998 pursuant to Item 601 of
Regulation S-K.
We have read management's justification for the change in method for determining
the annual expected return on plan assets of the Company's pension and
postretirement plans contained in the Company's Form 10-Q for the quarterly
period ended December 31, 1998. Based on our reading of the data and discussions
with Company officials of business judgment and business planning factors
relating to the change, we believe management's justification to be reasonable.
Accordingly, we concur that the newly adopted accounting principle described
above is preferable in the Company's circumstances to the method previously
applied.
We have not audited any financial statements of Lucent Technologies Inc. as of
any date or for any period subsequent to September 30, 1998 nor have we audited
the application of the change in accounting principle disclosed in Form 10-Q of
Lucent Technologies Inc. for the quarterly period ended December 31, 1998;
accordingly, our comments are subject to revision on completion of an audit of
the consolidated financial statements that include the accounting change.
PricewaterhouseCoopers LLP
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>4
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at December 31, 1998 and the unaudited
consolidated statement of income for the three month period ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
The financial data schedule reflects the two-for-one split of Lucent's common
stock which became effective on April 1, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 940
<SECURITIES> 0
<RECEIVABLES> 9,531
<ALLOWANCES> 346
<INVENTORY> 3,778
<CURRENT-ASSETS> 17,351
<PP&E> 12,531
<DEPRECIATION> 6,886
<TOTAL-ASSETS> 31,641
<CURRENT-LIABILITIES> 12,441
<BONDS> 2,404
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 13
<OTHER-SE> 8,424
<TOTAL-LIABILITY-AND-EQUITY> 31,641
<SALES> 9,204
<TOTAL-REVENUES> 9,204
<CGS> 4,386
<TOTAL-COSTS> 4,386
<OTHER-EXPENSES> 947
<LOSS-PROVISION> (15)
<INTEREST-EXPENSE> 78
<INCOME-PRETAX> 2,121
<INCOME-TAX> 721
<INCOME-CONTINUING> 1,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,308
<NET-INCOME> 2,708
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.00
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|
1999 | 0QTR1
| MCK | https://www.sec.gov/Archives/edgar/data/927653/0000927653-99-000004.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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<SEC-DOCUMENT>0000927653-99-000004.txt : 19990215
<SEC-HEADER>0000927653-99-000004.hdr.sgml : 19990215
ACCESSION NUMBER: 0000927653-99-000004
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990212
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MCKESSON HBOC INC
CENTRAL INDEX KEY: 0000927653
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]
IRS NUMBER: 943207296
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-13252
FILM NUMBER: 99534006
BUSINESS ADDRESS:
STREET 1: ONE POST ST
STREET 2: MCKESSON PLAZA
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104
BUSINESS PHONE: 4159838300
MAIL ADDRESS:
STREET 1: ONE POST ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104
FORMER COMPANY:
FORMER CONFORMED NAME: MCKESSON CORP
DATE OF NAME CHANGE: 19950209
FORMER COMPANY:
FORMER CONFORMED NAME: SP VENTURES INC
DATE OF NAME CHANGE: 19940728
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>QUARTERLY REPORT
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended December 31, 1998
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13252
McKESSON HBOC, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3207296
(IRS Employer Identification No.)
One Post Street, San Francisco, California
(Address of principal executive offices)
94104
(Zip Code)
(415) 983-8300
(Registrant's telephone number, including area code)
McKESSON CORPORATION
(Former name, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class
Common stock, $.01 par value
Outstanding at December 31, 1998
99,730,700 shares
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item Page
1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 and March 31, 1998 3 - 4
Statements of Consolidated Income
Three and nine month periods ended December 31, 5
1998 and 1997
Statements of Consolidated Cash Flows
Nine month periods ended December 31, 1998 and 6 - 7
1997
Financial Notes 8 - 12
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review 13 - 18
3. Quantitative and Qualitative Disclosures about 18
Market Risk
PART II. OTHER INFORMATION
5. Other Information 19
6. Exhibits and Reports on Form 8-K 20
Exhibit Index 22
<PAGE>
PART I. FINANCIAL INFORMATION
The information presented in Part I represents historical information for
McKesson Corporation (the "Company") and does not give effect to the January 12,
1999 merger with HBO & Company ("HBOC") and other acquisitions completed by the
Company and HBOC in fiscal 1999 accounted for under the pooling of interests
method. See Financial Note 8.
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
December 31, March 31,
1998 1998
--------------- ---------------
(in millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 124.0 $ 35.7
Marketable securities available for sale
(Note 2) 29.1 77.9
Receivables 2,046.8 1,380.4
Inventories 3,284.7 2,583.5
Prepaid expenses 45.4 28.1
-------- --------
Total 5,530.0 4,105.6
-------- --------
Property, Plant and Equipment
Land 43.1 35.6
Buildings, machinery and equipment 993.0 834.7
-------- --------
Total 1,036.1 870.3
Accumulated depreciation (522.2) (440.0)
-------- --------
Net 513.9 430.3
Goodwill and Other Intangibles 996.9 752.4
Other Assets 398.9 319.2
-------- --------
Total Assets $ 7,439.7 $ 5,607.5
======== ========
</TABLE>
(Continued)
3
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
December 31, March 31,
1998 1998
-------------- --------------
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Drafts payable $ 532.9 $ 286.2
Accounts payable - trade 2,282.3 1,859.1
Short-term borrowings 841.7 -
Current portion of long-term debt 21.5 10.0
Salaries and wages 46.3 53.9
Taxes 134.6 115.7
Interest and dividends 47.1 29.5
Other 281.6 223.4
-------- --------
Total 4,188.0 2,577.8
-------- --------
Postretirement Obligations and Other Noncurrent
Liabilities 233.4 233.3
-------- --------
Long-Term Debt (Note 2) 1,142.2 1,194.2
-------- --------
McKesson-obligated mandatorily redeemable convertible
preferred securities of subsidiary grantor trust
whose sole assets are junior subordinated debentures
of McKesson (Note 3) 195.4 195.4
-------- -------
Stockholders' Equity
Common stock (400.0 shares authorized, 100.0
issued as of December 31, 1998, 200.0 shares
authorized, 93.4 issued as of March 31, 1998;
par value $0.01) 1.0 0.9
Additional paid-in capital 667.9 440.7
Other capital (54.4) (42.2)
Retained earnings 1,242.8 1,173.2
Accumulated translation adjustment (49.8) (45.4)
ESOP notes and guarantee (115.5) (115.6)
Treasury shares, at cost (11.3) (4.8)
-------- --------
Net 1,680.7 1,406.8
-------- --------
Total Liabilities and Stockholders' Equity $ 7,439.7 $ 5,607.5
======== ========
</TABLE>
See Financial Notes.
(Concluded)
4
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in millions, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES $ 7,978.8 $ 5,373.5 $ 20,791.2 $ 15,496.1
------- -------- --------- ---------
COSTS AND EXPENSES
Cost of sales (Note 4) 7,505.8 4,996.5 19,487.2 14,386.6
Selling, distribution and
administration (Note 4) 371.2 281.6 1,055.3 836.5
Interest 32.4 26.7 89.8 74.8
------- -------- --------- ---------
Total 7,909.4 5,304.8 20,632.3 15,297.9
------- -------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE
AND DIVIDENDS ON PREFERRED
SECURITIES OF SUBSIDIARY TRUST 69.4 68.7 158.9 198.2
INCOME TAX EXPENSE (25.7) (25.1) (60.6) (74.3)
DIVIDENDS ON PREFERRED
SECURITIES OF SUBSIDIARY TRUST (1.5) (1.6) (4.6) (4.7)
------- -------- --------- ---------
NET INCOME $ 42.2 $ 42.0 $ 93.7 $ 119.2
======= ======== ========= =========
EARNINGS PER COMMON SHARE
Diluted $ 0.40 $ 0.43 $ 0.92 $ 1.23
Basic 0.43 0.45 0.97 1.30
DIVIDENDS PER COMMON SHARE $ 0.125 $ 0.125 $ 0.375 $ 0.375
SHARES ON WHICH EARNINGS PER
COMMON SHARE WERE BASED
Diluted 109.1 101.8 107.1 101.1
Basic 98.6 91.6 96.6 91.3
</TABLE>
See Financial Notes.
5
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
<TABLE>
Nine Months Ended
December 31,
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Operating Activities
Net Income $ 93.7 $ 119.2
Adjustments to reconcile to net cash used by
operating activities
Depreciation 56.3 52.3
Amortization 16.3 11.8
Provision for bad debts 11.7 5.8
Deferred taxes on income 5.0 8.4
Other non-cash items 62.8 (0.8)
------ -------
Total 245.8 196.7
------ -------
Effects of changes in
Receivables (640.5) (269.1)
Inventories (669.0) (99.4)
Accounts and drafts payable 646.5 (5.2)
Taxes 44.9 58.6
Other 2.5 (101.5)
------ -------
Total (615.6) (416.6)
------ -------
Net cash used by operating activities (369.8) (219.9)
------ -------
Investing Activities
Purchases of marketable securities (20.4) (1.3)
Maturities of marketable securities 70.9 11.5
Property acquisitions (104.1) (82.5)
Properties sold 20.5 8.0
Acquisitions of businesses, less cash and
short-term investments acquired (303.4) (50.8)
Other (31.3) (42.0)
------ -------
Net cash used by investing activities (367.8) (157.1)
------ -------
</TABLE>
(Continued)
6
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
<TABLE>
Nine Months Ended
December 31,
1998 1997
--------- ---------
(in millions)
<S> <C> <C>
Financing Activities
Proceeds from issuance of debt $ 918.9 $ 397.4
Repayment of debt (153.2) (37.9)
Dividends paid on preferred securities of
subsidiary trust (7.5) (7.8)
Capital stock transactions
Issuances 105.5 3.5
ESOP notes and guarantee 0.1 2.6
Dividends paid (37.9) (34.6)
------- -------
Net cash provided by financing activities 825.9 323.2
------- -------
Net Increase (Decrease) in Cash and Cash 88.3 (53.8)
Equivalents
Cash and Cash Equivalents at beginning of
period 35.7 124.8
------- -------
Cash and Cash Equivalents at end of period $ 124.0 $ 71.0
======= =======
</TABLE>
See Financial Notes.
(Concluded)
7
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
(unaudited)
1. Interim Financial Statements
In the opinion of the Company, these unaudited consolidated financial
statements include all adjustments necessary for a fair presentation of its
financial position as of December 31, 1998, the results of its operations for
the three and nine months ended December 31, 1998 and 1997 and its cash flows
for the nine months ended December 31, 1998 and 1997. Except for certain items
described in Note 4, such adjustments were of a normal recurring nature.
The results of operations for the nine months ended December 31, 1998 and
1997 are not necessarily indicative of the results for the full years.
It is suggested that these interim financial statements be read in
conjunction with the annual audited financial statements and financial notes
thereto included in the Company's 1998 Consolidated Financial Statements which
have previously been filed with the Securities and Exchange Commission.
2. Marketable Securities
The December 31, 1998 marketable securities balance includes $22.8
million held in trust as exchange property for the Company's $37.3 million
principal amount of 4.5% exchangeable subordinated debentures which remain
outstanding.
3. Convertible Preferred Securities
In February 1997, a wholly owned subsidiary trust of the Company issued 4
million shares of preferred securities to the public and 123,720 common
securities to the Company, which are convertible at the holder's option into
McKesson common stock. The proceeds of such issuances were invested by the trust
in $206,186,000 aggregate principal amount of the Company's 5% Convertible
Junior Subordinated Debentures due 2027 (the "Debentures"). The Debentures
represent the sole assets of the trust. The Debentures mature on June 1, 2027,
bear interest at the rate of 5%, payable quarterly, and are redeemable by the
Company beginning in March 2000 at 103.5% of the principal amount thereof.
Holders of the securities are entitled to cumulative cash distributions at
an annual rate of 5% of the liquidation amount of $50 per security. Each
preferred security is convertible at the rate of 1.3418 shares of McKesson
common stock, subject to adjustment in certain circumstances. The preferred
securities will be redeemed upon repayment of the Debentures, and are callable
by the Company at 103.5% of the liquidation amount beginning in March 2000.
The Company has guaranteed, on a subordinated basis, distributions and
other payments due to the preferred securities (the "Guarantee"). The Guarantee,
when taken together with the Company's obligations under the Debentures and in
the indenture pursuant to which the Debentures were issued and the Company's
obligations under the Amended and Restated Declaration of Trust governing the
subsidiary trust, provides a full and unconditional guarantee of amounts due on
the preferred securities.
The Debentures and related trust investment in the Debentures have been
eliminated in consolidation and the preferred securities are reflected as
outstanding in the accompanying consolidated financial statements.
8
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
(unaudited)
4. Charges in Continuing Operations
The Company continues to pursue its stated objective to become the world
leader in health care supply and information management across the entire
continuum of health care. In line with this goal, during the third quarter, the
Company completed the acquisition of Red Line HealthCare Corporation, which was
accounted for as a purchase. During the nine months, the Company acquired
several other companies, including Hawk Medical Supply, Inc., Automated
Prescription Systems, Inc., Med Management, LLC, and J. Knipper and Company,
Inc. (all accounted for as poolings of interests except Med Management, LLC
which was accounted for as a purchase), and also completed the consolidation of
distribution centers, technologies and back office operations related to the
earlier FoxMeyer Corporation and Drug Trading Company, Limited acquisitions. In
conjunction with the acquisitions and related activities, the Company incurred
transaction costs, charges associated with acquired company employee benefit
change of control provisions, restructuring costs and integration costs
(incurred and recorded in the quarter and nine month periods), and wrote down
certain assets (primarily costs of duplicate systems that will be eliminated).
Also in the nine months, the Company, by mutual agreement, terminated its
pending merger agreement with AmeriSource Health Corporation and incurred
related charges.
Charges for these items were recorded in selling, distribution, and
administrative expenses and are summarized below:
Three Months Nine Months
Ended Ended
December 31, 1998 December 31, 1998
------------------ ------------------
(in millions)
<TABLE>
<S> <C> <C>
Transaction costs $ 0.6 $ 18.0
Costs associated with employee benefit change
of control provisions (including noncash
amounts of $7.4 million) 26.7
Employee severance 0.3 3.7
Write-down of assets and other nonrecurring
costs associated with acquisition
integration activities, facility
consolidations, system implementations and
duplicate assets (including noncash charges
of $23.5 million and $41.7 million in the
three and nine months, respectively) 26.2 58.8
------ ------
Pre-tax charges 27.1 107.2
Tax benefit 9.9 37.7
------ ------
After-tax charges $ 17.2 $ 69.5
====== ======
</TABLE>
The Company's growth strategy is to pursue strategic acquisitions that
either expand or complement its business, and the Company routinely reviews such
potential acquisition opportunities. If additional transactions are entered
into, the Company would incur additional acquisition-related costs.
9
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
(unaudited)
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130 "Reporting Comprehensive Income," in the first quarter of fiscal 1999.
Comprehensive income is defined as all changes in stockholders' equity from
nonowner sources. As such, it includes net income and amounts arising from
foreign currency translations, unrecognized pension costs and unrealized gains
or losses on marketable securities classified as available for sale which are
recorded directly to stockholders' equity. Total comprehensive income for the
three and nine months ended December 31, 1998 and 1997 is as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<TABLE>
<S> <C> <C> <C> <C>
Net income $ 42.2 $ 42.0 $ 93.7 $ 119.2
Foreign currency translation
adjustments (1.6) (1.0) (4.4) (1.0)
----- ----- ----- -----
Total comprehensive income $ 40.6 $ 41.0 $ 89.3 $ 118.2
===== ===== ===== =====
</TABLE>
6. Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per common share computations:
Three Months Ended
December 31, 1998 December 31, 1997
----------------------- ---------------------
(in millions, except per share amounts)
<TABLE>
Per Per
Income Shares Share Income Shares Share
-------- ------ ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income $ 42.2 98.6 $ 0.43 $ 42.0 91.6 $ 0.45
===== =====
Effect of Dilutive Securities
Options to purchase common
stock 4.7 4.3
Trust convertible preferred
securities 1.5 5.4 1.6 5.4
Restricted stock 0.4 0.5
----- ----- ----- -----
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 43.7 109.1 $ 0.40 $ 43.6 101.8 $ 0.43
===== ===== ===== ===== ====== =====
</TABLE>
10
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
(unaudited)
<TABLE>
Nine Months Ended
December 31, 1998 December 31, 1997
----------------------- ---------------------
(in millions, except per share amounts)
Per Per
Income Shares Share Income Shares Share
------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Net Income $ 93.7 96.6 $ 0.97 $ 119.2 91.3 $ 1.30
===== =====
Effect of Dilutive Securities
Options to purchase common 4.7 3.9
stock
Trust convertible preferred 4.6 5.4 4.7 5.4
securities
Restricted stock 0.4 0.5
----- ----- ----- -----
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 98.3 107.1 $ 0.92 $ 123.9 101.1 $ 1.23
===== ===== ===== ===== ===== =====
</TABLE>
7. New Accounting Pronouncements
In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers; and SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits and
expands disclosures on changes in benefit obligations and fair values of plan
assets. The Company will implement these statements in its fiscal 1999 annual
financial statements. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures.
In fiscal 1999, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivatives, requiring recognition as either
assets or liabilities on the balance sheet and measurement at fair value. The
Company plans to adopt this statement in fiscal 2001. The Company has not yet
determined the effect adoption of this statement will have on the Company's
consolidated financial position, results of operations or cash flows.
8. Acquisition of HBO & Company
On January 12, 1999, the Company completed a merger with HBO & Company
("HBOC"), a leading health care information technology company, by exchanging
177 million shares of Company common stock for all of the common stock of HBOC.
Each share of HBOC was exchanged for .37 of a share of Company common stock. In
addition, outstanding HBOC employee stock options were converted at the same
exchange factor into options to purchase approximately 10 million shares of
Company common stock. The Company was renamed McKesson HBOC, Inc.
("McKessonHBOC"). The merger constituted a tax-free reorganization and will be
accounted for as a pooling of interests.
11
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL NOTES
(unaudited)
The following table presents pro forma combined revenues, net income and
earnings per share of McKessonHBOC as if the merger had been consummated at the
beginning of the periods presented. The pro forma combined consolidated
financial data also includes all other acquisitions completed by the Company and
HBOC in fiscal 1999 accounted for under the pooling of interests method.
<TABLE>
Three Months Ended Nine Months Ended
December 31 December 31
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions, except per share amount)
<S> <C> <C> <C> <C>
Revenues $ 8,454.6 $ 5,811.6 $ 22,203.7 $ 16,673.6
Net income $ 106.9 $ 77.2 $ 308.3 $ 233.6
Earnings per share
Diluted $ 0.37 $ 0.28 $ 1.08 $ 0.85
Basic 0.39 0.29 1.12 0.88
</TABLE>
Pro forma net income includes special charges of $64.9 million pre-tax
($43.7 million after-tax) and $50.3 million pre-tax ($30.1 million after-tax) in
the three months ended December 31, 1998 and 1997, respectively, and $158.5
million pre-tax ($104.0 million after-tax) and $98.5 million pre-tax ($56.6
million after-tax) in the nine months ended December 31, 1998 and 1997,
respectively, for transaction costs, severance, acquired company employee
benefit change of control provisions, asset write-downs, restructuring,
integration and system implementation costs (incurred and recorded in the
quarter and nine month periods) associated primarily with acquisition-related
activities.
The pro forma combined consolidated financial data does not reflect any
cost savings and other synergies anticipated as a result of the merger or any
merger-related expenses and is not necessarily indicative of the actual results
of the combined entities had the merger and other acquisitions been consummated
at the beginning of the periods presented, nor is it necessarily indicative of
future results of operations.
12
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Segment Results
The revenues and operating profits of the Company by business segment are
as follows:
<TABLE>
Three Months Ended Nine Months Ended
December 31 December 31
------------------------- -------------------------
1998 1997 %chg. 1998 1997 %chg.
-------- -------- ------ -------- -------- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Health Care Supply Management
Pharmaceutical Distribution
& Services
U.S. Health Care(1) $ 6,778.5 $ 4,404.8 53.9 $ 17,418.9 $ 12,697.8 37.2
International 489.1 439.5 11.3 1,483.7 1,204.2 23.2
-------- -------- -------- ---------
Total Pharmaceutical
Distribution & Services 7,267.6 4,844.3 50.0 18,902.6 13,902.0 36.0
Medical/Surgical
Distribution & Services 630.2 461.7 36.5 1,625.2 1,366.9 18.9
-------- -------- -------- ---------
Total Health Care
Supply Management 7,897.8 5,306.0 48.8 20,527.8 15,268.9 34.4
Water Products 79.1 64.8 22.1 256.0 217.5 17.7
Corporate 1.9 2.7 7.4 9.7
-------- -------- -------- ---------
Total $ 7,978.8 $ 5,373.5 48.5 $ 20,791.2 $ 15,496.1 34.2
======== ======== ======== =========
OPERATING PROFIT
Health Care Supply
Management $ 103.8(2) $ 97.0 $ 241.4(3) $ 264.4
Water Products 10.7(4) 10.0 40.7(4) 37.8
------ ------ ------ ------
Total 114.5 107.0 282.1 302.2
Interest-net (5) (31.7) (25.0) (86.4) (70.3)
Corporate and other (13.4) (13.3) (36.8) (33.7)
------ ------ ------ ------
Income before income taxes $ 69.4 $ 68.7 $ 158.9 $ 198.2
====== ====== ====== ======
<FN>
(1) Includes sales to customers' warehouses of $2,206.0 million and $702.7
million in the three months ended December 31, 1998 and 1997, respectively
($4,806.9 million and $2,014.8 million in the nine months, respectively.)
(2) Includes $26.5 million in charges for transaction costs, asset write-downs,
restructuring and integration costs associated with acquisitions.
(3) Includes $105.1 million in charges for transaction costs, acquired company
employee benefit change of control provisions, asset write-downs,
restructuring, integration and system implementation costs associated
primarily with acquisition-related activities.
(4) Includes $0.6 million and $2.1 million in the quarter and nine months,
respectively, for transaction costs and restructuring and integration costs
associated with acquisitions.
(5) Interest expense is shown net of corporate interest income.
</FN>
</TABLE>
13
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Overview of Results
Net income for the third quarter was $42.2 million, $0.40 per diluted
share compared to $42.0 million, $0.43 per share in the prior year. Included in
the current year's third quarter results were $27.1 million in pre-tax charges
($17.2 million after-tax) for transaction costs, asset write-downs (primarily
costs of duplicate systems that will be eliminated), restructuring and
integration costs associated with acquisitions (see Financial Note 4).
For the nine month period, net income was $93.7 million, $0.92 per diluted
share, compared to $119.2 million, $1.23 per share in the prior year. Included
in the current year's results were the $27.1 million in pre-tax charges noted
above, plus $80.1 million in costs incurred in the first and second quarters,
associated with the completion of several acquisitions that were accounted for
as poolings of interests, including Hawk Medical Supply, Inc., J. Knipper and
Company, Inc., and Automated Prescription Systems, Inc., and the terminated
agreement with AmeriSource Health Corporation ("AmeriSource"). The charge also
included amounts for an additional facility closure, non-recurring system
implementation costs and the completion of operational integration activities
associated with earlier acquisitions, which are required to be expensed as
incurred.
The effective income tax rate for the nine months ended December 31, 1998
differed from the effective tax rate for the comparable prior year period
primarily due to certain nondeductible transaction expenses included in the
charges noted above.
Health Care Supply Management
The Health Care Supply Management segment includes the operations of the
Company's U.S. pharmaceutical distribution and services businesses, its
international pharmaceutical operations (Canada and Mexico), and its
medical/surgical distribution and services business. This segment accounted for
99% of consolidated revenues for the three and the nine month periods ended
December 31, 1998.
Pharmaceutical Distribution & Services revenues increased by 50% in the
quarter and 36% in the nine months, reflecting internal growth in the U.S.
direct delivery business of 22% and 17%, increases in U.S. sales to customers'
warehouses of 214% and 139%, and increases in international revenues of 11% and
23%, respectively. Pharmaceutical Distribution & Services revenues, excluding
sales to customers' warehouses, increased 22% and 19% in the three and nine
month periods, respectively. U.S. revenue increases reflect growth in the
existing customer base and the addition of several new major retail chain
customers. International revenue increases reflect the transition of additional
customers of Drug Trading Company, Limited, to Medis Health and Pharmaceutical
Services, Inc., the Company's Canadian health care distribution business.
Medical/Surgical Distribution & Services revenues increased 36% to $630.2
million in the quarter (19% to $1,652.2 million in the nine month period),
including $47.6 million in revenues from Red Line HealthCare, acquired for cash
in a transaction accounted for as a purchase in mid-November. The increase in
revenues reflects several new long-term contracts with major customers.
Operating profit for the Health Care Supply Management segment, excluding
the impact of $26.5 million of previously discussed acquisition-related charges,
increased by 34% in the third quarter (31% for the nine month period, excluding
acquisition-related charges of $105.1 million). Operating profit as a percent of
revenues (calculated excluding acquisition-related charges and sales to
customers' warehouses) increased 18 basis points to 2.29% in the quarter and 21
basis points to 2.20% in the nine months, compared to the respective prior year
periods. The improvement in operating profit margins reflects growth in
procurement profits, operating expense efficiencies and sales of higher-margin
automated drug-dispensing products and manufacturer marketing services.
Including acquisition-related charges, operating profit increased by 7% and
declined by 9% in the quarter and nine month period, respectively.
14
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Water Products
Segment revenues increased by 22% to $79.1 million, and 18% to $256.0
million in the third quarter and the nine month period, respectively (including
internal sales growth of 10% and 11% in the respective periods). Operating
profit increased by 13% to $11.3 million in the quarter and 13% to $42.8 million
in the nine months (before acquisition-related charges of $0.6 million and $2.1
million, respectively), reflecting increased profits in the direct delivery
business and the favorable impact of several small acquisitions during the
current fiscal year. Including the impact of acquisition-related charges,
operating profit increased by 7% and 8% in the quarter and nine month periods,
respectively.
Liquidity and Capital Resources
Cash and marketable securities available for sale were $153.1 million at
December 31, 1998 and $113.6 million at March 31, 1998. The December 31, 1998
marketable securities balance included $22.8 million that is currently
restricted and held in trust as exchange property in connection with the
Company's outstanding exchangeable debentures. Cash and marketable securities
available for sale increased by $39.5 million and total debt increased by $801.2
million during the nine months ended December 31, 1998. The net change of $761.7
million primarily reflects both the increased working capital needs to support
the significant growth in revenue, (48% in the quarter) and cash utilized for
acquisitions.
Interest expense, net of interest income, increased to $31.7 million in
the third quarter and $86.4 million for the nine month period, compared to $25.0
million and $70.3 million, respectively, in the prior year, due to borrowings to
support the increase in working capital and acquisitions.
Stockholders' equity was $1,680.7 million at December 31, 1998, and the
net debt-to-capital ratio was 50% compared with 41% on March 31, 1998. The net
debt-to-capital ratio for both periods was computed by reducing the outstanding
debt amount by the cash and marketable securities at the end of the period.
For the nine month period, average diluted shares increased to 107.1
million from 101.1 million in the prior year due primarily to the issuance of
4.3 million common shares in connection with acquisitions, the sale of 1.3
million shares to the Employee Stock Ownership Plan in the first quarter of
fiscal 1999 and shares issued in connection with other employee benefit plans.
Subsequent Event
On January 12, 1999, the Company completed a merger with HBO & Company, a
leading health care information technology company. The Company was renamed
McKesson HBOC, Inc. The merger constituted a tax-free reorganization and will be
accounted for as a pooling of interests (see Financial Note 8). In connection
with the merger, the Company expects to record charges in the fourth fiscal
quarter for merger (including investment, banking, legal, accounting, and other
related costs), and restructuring costs, and affiliation costs expected to be
incurred in the quarter.
15
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
Year 2000
BACKGROUND
The "Year 2000 problem" refers to the fact that some computer hardware,
software and embedded firmware are designed to read and store dates using only
the last two digits of the year. The Company relies heavily on computer
technologies to operate its business. In 1996, the Company conducted an initial
assessment of its information technology to determine which Year 2000 related
problems might cause processing errors or computer system failures. Based on the
results of that initial analysis, the Company's executive management identified
the Year 2000 problem as a top corporate priority and established a central
office to provide enterprise-wide management of its Year 2000 project (the
"Project"), which is currently estimated to have a total project cost of less
than $45 million (see "--Costs").
The following discussion of the implications of the Year 2000 problem for
the Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the Project and the date on which the Company
plans to complete its internal Year 2000 modifications are based on the
Company's best estimates, which were derived utilizing a number of assumptions
of future events including the continued availability of internal and external
resources, third party modifications and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ. Moreover, although the Company believes it will be able to make the
necessary modifications in advance, there can be no guarantee that the failure
to modify the systems would not have a material adverse effect on the Company.
In addition, the Company places a high degree of reliance on computer
systems of third parties, such as customers, trade suppliers and computer
hardware and commercial software suppliers. Although the Company is assessing
the readiness of these third parties and preparing contingency plans, there can
be no guarantee that the failure of these third parties to modify their systems
in advance of December 31, 1999 would not have a material adverse effect on the
Company.
READINESS
The Project is intended to ensure that all critical systems, devices and
applications, as well as data exchanged with customers, trade suppliers, and
other third parties ("Trading Partners") have been evaluated and will be
suitable for continued use into and beyond the year 2000. In addition to areas
normally associated with information technology ("IT"), the project also
includes areas normally considered outside of IT, but which may have embedded
microprocessors with potential Year 2000 problems. Examples of such non-IT areas
include the 30,000 hand-held order entry devices the Company has provided its
customers, and recently implemented bar-code scanning devices used in warehouse
operations.
Responsibility for implementation of the Project has been divided among
thirteen business units, each with its own IT resources. Each business unit
operates under published corporate standards and progress is monitored by the
corporate Year 2000 central office. Responsibilities have been further
subdivided into functional areas. General priorities have been defined,
dependencies identified, preliminary delivery dates assigned, detailed project
plans developed, and internal and external technical resources assigned or
hired. In addition, internal management reporting requirements have been
established. Plans, and progress against those plans, are reviewed by the
Project's central project office and are reported to the Chief Information
Officer, executive steering committee and the Company's Board of Directors.
16
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
The Project now consists of hundreds of individual projects, varying in
priority and resource requirements from large undertakings, such as replacing
certain financial and electronic commerce (EDI) systems, to smaller projects,
such as certification of telephony systems. Regardless of its size, each
individual project generally progresses through the following seven phases,
which are divided into two stages:
Stage One: Stage Two:
Awareness (Phase 1) Examination and analysis (Phase 3)
Assessment of risk (Phase 2) Modification and/or renovation (Phase 4)
Data conversion (Phase 5)
Acceptance testing (Phase 6)
Redeployment back into production (Phase 7)
The Company has completed Stage One for all identified projects. Because
of the size of the Project at the Company, and variation in assessed risk, some
individual projects have completed all phases while others are at various phases
within Stage Two. Most of the Company's mission critical projects, (i.e., those
projects whose failure to be completed would create a significant business
disruption) are at Phase 6 or higher, and all of its mission critical projects
will be installed by July 31, 1999. A limited number of systems requiring
extended migration, installation or conversion efforts will require work
extending past July 31, 1999 but, in any case, the Company expects to complete
all phases of all identified projects by September 30, 1999. In calendar year
1999, the Company will be conducting a rigorous final level of review called
systems integrated testing under post-Year 2000 conditions.
The Company has conducted and plans to continue to conduct systems testing
with Trading Partners during calendar year 1999. In addition, to insure Year
2000 readiness with trade suppliers, the Company is participating in an industry
effort organized by the National Wholesale Drug Association with special
attention to critical suppliers such as manufacturers of branded pharmaceutical
products.
Since early 1997, the Company has required Year 2000 compliance statements
from all suppliers of the Company's computer hardware and commercial software.
As of January 1999, approximately 75% of the computer hardware and purchased
software used in the Company's core distribution business was certified by the
vendor as compliant. Regardless of the compliance statements, all third party
hardware and software will also be subjected to testing to reconfirm its Year
2000 readiness.
COSTS
The Company incurred costs of approximately $7 million in fiscal 1998 and
$10 million in the nine months ended December 31, 1998, associated with
modifications to the Company's existing systems to make them Year 2000 ready,
related testing and outside consulting. The Company expects to incur costs
between $10 and $15 million in fiscal 1999 and between $10 million and $20
million in fiscal 2000 for a total project cost of less than $45 million. Such
costs are being expensed as incurred. Year 2000 Project costs are difficult to
estimate accurately and the projects cost could change due to unanticipated
technological difficulties, project vendor delays, project vendor cost overruns
and the degree to which systems of newly acquired businesses are compliant.
17
<PAGE>
McKESSON CORPORATION and SUBSIDIARIES
FINANCIAL REVIEW
RISKS
Because of the range of possible issues and the large number of variables
involved (including the Year 2000 readiness of any entities acquired by the
Company), it is impossible to quantify the potential cost of problems should the
Company's remediation efforts or the efforts of those with whom it does business
not be successful. Such costs and any failure of such remediation efforts could
result in a loss of business, damage to the Company's reputation, and legal
liability. Consequently, any such costs or failures could have a material
adverse effect on the Company. The Company, believes that the most likely risks
of serious Year 2000 business disruptions are external in nature, such as (i)
disruptions in telecommunications, electric, or transportation services, (ii)
failure of third party payors or insurers to provide timely reimbursement to the
Company's customers and (iii) noncompliance of smaller trading partners. Of all
the external risks, the Company believes the most reasonably likely worst case
scenario would be a business disruption resulting from an extended and/or
extensive communications failure. With its extensive use of technology, the
Company is now dependent on data and voice communications to receive, process,
track and bill customers orders, move funds, replenish product and complete
other activities critical to the Company's business. Based on the Company's
information regarding the readiness of its major communications carriers and the
redundancy built into the Company's network architecture, as well as the
Company's developing contingency plans, the Company expects that any such
disruption would be likely to be localized and of short duration, and would
therefore not be likely to have a material adverse effect on the Company.
CONTINGENCY PLANS
Business disruptions in the form of floods, blizzards, hurricanes,
earthquakes, and power failures are a normal part of the Company's contingency
planning. In an effort to reduce the risks associated with the Year 2000
problems the Company has established and is currently continuing to develop Year
2000 contingency plans that build upon existing disaster recovery and
contingency plans. Examples of the Company's existing contingency plans include
alternative electronic and manual means for placing and receiving orders, and
alternative power supplies and communication lines. Contingency planning for
possible Year 2000 disruptions will continue to be defined, improved, and
implemented.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's 1998 Consolidated Financial
Statements.
18
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
The ratios of earnings to fixed charges and of earnings to combined fixed
charges and preferred stock dividends amounted to 2.31x and 3.00x for the nine
months ended December 31, 1998 and 1997, respectively. There were no preferred
stock dividends in the nine months ended December 31, 1998 and 1997,
respectively.
The ratio of earnings to fixed charges was computed by dividing fixed
charges (interest expense, the portion of rental expense under operating leases
deemed by the Company to be representative of the interest factor and dividends
on preferred securities of a subsidiary grantor trust) into earnings available
for fixed charges (net income plus income tax expense and fixed charges).
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
2.1 Computation of Ratio of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the
three months ended December 31, 1998:
1. Form 8-K
Date of Report: October 19, 1998 Date Filed: October 19, 1998
Item 5. Other Events
--------------------
The Registrant announced a definitive merger agreement had been
signed for McKesson Corporation to acquire HBO & Company
("HBOC").
2. Form 8-K/A (Amendment No. 1)
Date of Report: October 19, 1998 Date Filed: October 30, 1998
Item 7. Financial Statements, Pro Forma Financial Information
---------------------------------------------------------------
and Exhibits
------------
The Registrant filed financial statements and pro forma financial
information related to the merger agreement between McKesson
Corporation and HBOC.
3. Form 8-K/A (Amendment No. 2)
Date of Report: October 19, 1998 Date Filed: November 6, 1998
Item 7. Financial Statements, Pro Forma Financial Information
---------------------------------------------------------------
and Exhibits
------------
The Registrant filed amended pro forma financial information
related to the merger agreement between McKesson Corporation and
HBOC.
4. Form 8-K
Date of Report: December 4, 1998 Date Filed: December 4, 1998
Item 5. Other Events
--------------------
The Registrant filed certain information regarding the Company
and HBOC in connection with the merger agreement between McKesson
Corporation and HBOC.
20
<PAGE>
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.
McKESSON HBOC, Inc.
(Registrant)
Dated: February 12, 1999 By /s/ Richard H. Hawkins
Richard H. Hawkins
Executive Vice President and
Chief Financial Officer
By /s/ Heidi E. Yodowitz
Heidi E. Yodowitz
Senior Vice President and Controller
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -------------- --------------------------------------------------------
12.1 Computation of Ratio of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
27 Financial Data Schedule
22
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(dollars in millions)
<TABLE>
Nine Months Ended
December 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net Income $ 93.7 $ 119.2
Taxes on Income and Tax Benefit of Dividends on
Preferred Securities of Subsidiary Grantor Trust
of $3.0 in 1998 and 1997 57.6 71.3
Fixed Charges (1) 115.7 95.4
-------- -------
Earnings Available for Fixed Charges $ 267.0 $ 285.9
======== =======
Fixed Charges (1) $ 115.7 $ 95.4
Preferred Stock Dividends - -
-------- -------
Combined Fixed Charges and Preferred Stock
Dividends $ 115.7 $ 95.4
======== =======
Ratio of Earnings to Fixed Charges 2.31x 3.00x
======== =======
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends 2.31x 3.00x
======== =======
<FN>
(1) Fixed charges consist of interest expense incurred, the portion of rental
expense under operating leases deemed by the Company to be representative
of the interest factor and dividends on preferred securities of a
subsidiary grantor trust.
</FN>
</TABLE>
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>2
<DESCRIPTION>FDS --
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927653
<NAME> MCKESSON HBOC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 124000
<SECURITIES> 29100
<RECEIVABLES> 2195700
<ALLOWANCES> 148900
<INVENTORY> 3284700
<CURRENT-ASSETS> 5530000
<PP&E> 1036100
<DEPRECIATION> 522200
<TOTAL-ASSETS> 7439700
<CURRENT-LIABILITIES> 4188000
<BONDS> 1142200
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1000
<OTHER-SE> 1679700
<TOTAL-LIABILITY-AND-EQUITY> 7439700
<SALES> 20791200
<TOTAL-REVENUES> 20791200
<CGS> 19487200
<TOTAL-COSTS> 20632300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11700
<INTEREST-EXPENSE> 89800
<INCOME-PRETAX> 158900
<INCOME-TAX> 60600
<INCOME-CONTINUING> 93700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93700
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.92
</TABLE>
</TEXT>
</DOCUMENT>
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1999 | 0QTR1
| MDP | https://www.sec.gov/Archives/edgar/data/65011/0000065011-99-000003.txt | -----BEGIN PRIVACY-ENHANCED MESSAGE-----
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<SEC-DOCUMENT>0000065011-99-000003.txt : 19990212
<SEC-HEADER>0000065011-99-000003.hdr.sgml : 19990212
ACCESSION NUMBER: 0000065011-99-000003
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 19981230
FILED AS OF DATE: 19990211
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MEREDITH CORP
CENTRAL INDEX KEY: 0000065011
STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721]
IRS NUMBER: 420410230
STATE OF INCORPORATION: IA
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 001-05128
FILM NUMBER: 99531131
BUSINESS ADDRESS:
STREET 1: 1716 LOCUST ST
CITY: DES MOINES
STATE: IA
ZIP: 50309
BUSINESS PHONE: 5152843000
FORMER COMPANY:
FORMER CONFORMED NAME: MEREDITH PUBLISHING CO
DATE OF NAME CHANGE: 19710317
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>12/30/98 10-Q FILING
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
Commission file number 1-5128
Meredith Corporation
(Exact name of registrant as specified in its charter)
Iowa 42-0410230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1716 Locust Street, Des Moines, Iowa 50309-3023
(Address of principal executive offices) (ZIP Code)
515 - 284-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1999
Common Stock, $1 par value 40,922,609
Class B Stock, $1 par value 11,177,191
----------
Total Common and Class B Stock 52,099,800
==========
- 1 -
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Meredith Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
December 31 June 30
Assets 1998 1998
- -------------------------------------------------------------------------------
(in thousands)
Current assets:
Cash and cash equivalents $ 694 $ 4,953
Receivables, net 133,414 138,036
Inventories 45,097 34,765
Subscription acquisition costs 44,188 47,070
Program rights 27,657 14,809
Other current assets 11,954 7,168
---------- -------
Total current assets 263,004 246,801
---------- --------
Property, plant and equipment 273,388 267,488
Less accumulated depreciation (124,956) (116,407)
---------- --------
Net property, plant and equipment 148,432 151,081
---------- --------
Subscription acquisition costs 33,771 36,941
Other assets 49,555 33,808
Goodwill and other intangibles (at original cost
less accumulated amortization of $107,569
on December 31 and $97,716 on June 30) 587,507 597,358
---------- ----------
Total assets $1,082,269 $1,065,989
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
- 2 -
<PAGE>
(Unaudited)
December 31 June 30
Liabilities and Stockholders' Equity 1998 1998
- -------------------------------------------------------------------------------
(in thousands except share data)
Current liabilities:
Short-term bank debt $ 5,000 $ --
Current portion of long-term debt 40,000 40,000
Current portion of long-term program rights payable 30,575 18,934
Accounts payable 33,554 63,171
Accrued taxes and expenses 83,834 82,775
Unearned subscription revenues 145,411 141,989
---------- ----------
Total current liabilities 338,374 346,869
Long-term debt 167,000 175,000
Unearned subscription revenues 91,303 95,603
Deferred income taxes 26,370 20,822
Other deferred items 71,941 49,682
---------- ----------
Total liabilities 694,988 687,976
---------- ----------
Temporary equity: Put option agreements
Common stock, 1,913,018 shares outstanding at
December 31 and 597,878 shares at June 30 72,456 28,063
---------- ----------
Stockholders' equity:
Series preferred stock, par value $1 per share
Authorized 5,000,000 shares; none issued -- --
Common stock, par value $1 per share
Authorized 80,000,000 shares; issued and
outstanding 39,064,832 at December 31 and
40,996,510 at June 30 (net of treasury shares,
27,007,056 at December 31 and 26,274,767
at June 30.) 39,065 40,996
Class B stock, par value $1 per share,
convertible to common stock
Authorized 15,000,000 shares; issued and
outstanding 11,196,350 at December 31 and
11,279,881 at June 30. 11,196 11,280
Retained earnings 267,484 301,200
Accumulated other comprehensive income (878) (1,176)
Unearned compensation (2,042) (2,350)
---------- ----------
Total stockholders' equity 314,825 349,950
---------- ----------
Total liabilities and stockholders' equity $1,082,269 $1,065,989
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
- 3 -
<PAGE>
Meredith Corporation and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
- -----------------------------------------------------------------------------
(in thousands except per share)
Revenues (less returns and allowances):
Advertising $150,600 $141,551 $293,538 $273,191
Circulation 69,066 67,760 136,567 134,932
All other 35,258 39,573 70,656 71,660
-------- -------- -------- --------
Total revenues 254,924 248,884 500,761 479,783
-------- -------- -------- --------
Operating costs and expenses:
Production, distribution and edit 102,267 98,638 209,170 195,030
Selling, general & administrative 94,836 98,087 189,823 196,073
Depreciation and amortization 10,018 9,294 20,060 17,386
-------- -------- -------- --------
Total operating costs and expenses 207,121 206,019 419,053 408,489
-------- -------- -------- --------
Income from operations 47,803 42,865 81,708 71,294
Gain from disposition -- -- 2,375 --
Interest income 132 298 170 766
Interest expense (3,875) (4,250) (7,686) (6,717)
-------- -------- -------- --------
Earnings before income taxes 44,060 38,913 76,567 65,343
Income taxes 18,637 16,581 32,333 27,920
-------- -------- -------- --------
Net earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423
======== ======== ======== ========
Basic earnings per share $ 0.48 $ 0.42 $ 0.84 $ 0.71
======== ======== ======== ========
Basic average shares outstanding 52,304 52,980 52,411 53,048
======== ======== ======== ========
Diluted earnings per share $ 0.47 $ 0.40 $ 0.82 $ 0.67
======== ======== ======== ========
Diluted average shares outstanding 53,849 55,639 54,021 55,511
======== ======== ======== ========
Dividends paid per share $ 0.070 $ 0.065 $ 0.140 $ 0.130
======== ======== ======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
- 4 -
<PAGE>
Meredith Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended December 31 1998 1997
- ---------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net earnings $ 44,234 $ 37,423
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 20,060 17,386
Amortization of program rights 15,651 12,749
Gain from disposition, net of taxes (1,425) --
Changes in assets and liabilities:
Accounts receivable (1,040) (42,515)
Inventories (10,686) 148
Supplies and prepayments (1,289) (2,124)
Subscription acquisition costs 6,052 1,100
Accounts payable (28,440) 860
Accruals 4,050 3,404
Unearned subscription revenues (878) (1,290)
Deferred income taxes 1,776 10,966
Other deferred items 2,864 4,064
-------- --------
Net cash provided by operating activities 50,929 42,171
-------- --------
Cash flows from investing activities:
Redemption of marketable securities -- 50,371
Proceeds from dispositions 9,922 --
Acquisitions of businesses -- (375,000)
Additions to property, plant, and equipment (8,311) (23,363)
Changes in other assets (2,452) (3,689)
-------- --------
Net cash (used) by investing activities (841) (351,681)
-------- --------
Cash flows from financing activities:
Long-term debt incurred -- 270,000
Repayment of long-term debt (8,000) --
Short-term debt incurred, net 5,000 --
Payments for program rights (14,778) (13,199)
Proceeds from common stock issued 1,628 3,433
Purchases of company stock (31,054) (18,496)
Dividends paid (7,335) (6,887)
Other 192 673
-------- --------
Net cash (used) provided by financing activities (54,347) 235,524
-------- --------
Net (decrease) in cash and cash equivalents (4,259) (73,986)
Cash and cash equivalents at beginning of year 4,953 74,498
-------- --------
Cash and cash equivalents at end of period $ 694 $ 512
======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
- 5 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
a. General
The information included in the foregoing interim financial statements is
unaudited. In the opinion of management, all adjustments, which are of a
normal recurring nature and necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year. Readers are referred to the
company's Form 10-K for the year ended June 30, 1998 for complete financial
statements and related notes. Certain prior-year amounts have been restated to
conform with current-year presentation.
b. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
c. Goodwill and other intangibles
Goodwill and other intangibles represent the excess of the purchase price over
the estimated fair values of tangible assets acquired in the purchases of
businesses. As of December 31, 1998, the unamortized portion of these assets
primarily consisted of television Federal Communications Commission (FCC)
licenses ($260.4 million), goodwill ($166.9 million) and television network
affiliation agreements ($141.2 million). Virtually all of these assets were
acquired subsequent to October 31, 1970, and are being amortized by the
straight-line method over the following periods: 40 years for television FCC
licenses; 20 to 40 years for goodwill; and 15 to 40 years for network
affiliation agreements. The company evaluates the recoverability of its
intangible assets as current events or circumstances warrant to determine
whether adjustments are needed to carrying values. Such evaluation may be
based on projected income and cash flows on an undiscounted basis from the
underlying business or from operations of related businesses. Other economic
and market variables are also considered in any evaluation.
- 6 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
2. Comprehensive Income
Meredith adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," effective July 1, 1998. SFAS No. 130
requires companies to report comprehensive income, which includes net income
and certain items that are reported as separate components of shareholders'
equity. The company's comprehensive income includes foreign currency
translation adjustments in addition to net income. Total comprehensive income
(in thousands) for the six-month periods ended December 31, 1998 and 1997, was
$44,532 and $37,423, respectively. Total comprehensive income (in thousands)
for the three-month periods ended December 31, 1998 and 1997, was $25,515 and
$22,332, respectively.
3. Acquisitions and disposition
On August 24, 1998, the company announced that it had agreed to acquire WGNX-
TV, the CBS affiliate serving Atlanta. The planned acquisition involves the
purchase of KCPQ-TV, a FOX affiliate in Seattle currently owned by Kelly
Television Co., and the subsequent trade of KCPQ with Tribune Company for WGNX-
TV in Atlanta. The transactions are subject to regulatory approvals and are
expected to be completed early in calendar 1999. The net price to the company
of this resulting asset purchase is estimated to be $370 million.
Effective July 1, 1998, the company sold the net assets of the Better Homes and
Gardens Real Estate Service to GMAC Home Services, Inc., a subsidiary of GMAC
Financial Services. Fiscal 1999 earnings for the six months ended December 31,
1998, included an after-tax gain of $1.4 million, or 3 cents per diluted share,
from the sale, which closed on July 27, 1998.
4. Inventories
Major components of inventories are summarized below. Of total inventory
values shown, approximately 45 percent are under the LIFO method at
December 31, 1998 and 58 percent at June 30, 1998.
(unaudited)
December 31 June 30
1998 1998
----------- --------
(in thousands)
Raw materials $28,858 $24,777
Work in process 20,169 13,286
Finished goods 5,980 5,446
------- -------
55,007 43,509
Reserve for LIFO cost valuation (9,910) (8,744)
------- -------
Total $45,097 $34,765
======= =======
- 7 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
5. Long-term debt and interest rate swap contracts
The company has an unsecured credit agreement which consists of a $210 million,
60-month variable rate term loan and a $150 million, 60-month variable rate
revolving credit facility. At December 31, 1998, long-term debt outstanding
under this agreement consisted of $185 million outstanding under the term loan
and $22 million outstanding under the revolving credit facility. The credit
agreement contains certain covenants. As of December 31, 1998, the company was
in compliance with all debt covenants.
Meredith utilizes interest rate swap contracts to manage interest cost and risk
associated with possible increases in variable interest rates. The company
amended its existing swap contracts effective December 31, 1998 and entered
into two new swap contracts with effective dates of March 31, 1999. Under the
contracts, Meredith pays fixed rates of interest while receiving floating rates
of interest based on three month LIBOR. These contracts effectively fix the
base interest rate on the existing credit agreement and on the new credit
agreement entered into on December 10, 1998 (see Note 7), although the
applicable margins vary based upon the company's debt-to-EBITDA ratio. These
contracts are held for purposes other than trading. The contracts expire on
June 28, 2002. The weighted average interest rate for the six months ended
December 31, 1998 was 6.75 percent.
The notional amount covered by the contracts was $220 million on December 31,
1998. The notional amount varies over the term of the contracts. The average
notional amount of indebtedness outstanding under these contracts for fiscal
years 1999 through 2002 is as follows: $273 million, $305 million, $223
million and $93 million, respectively.
The company is exposed to credit-related losses in the event of non-performance
by counterparties to the interest rate swap contracts. Management does not
expect any counterparties to fail to meet their obligations given the
creditworthiness of the counterparties to the agreements.
- 8 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
6. Earnings per share
The following table presents the calculations of earnings per share:
(unaudited) (unaudited)
Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
- -----------------------------------------------------------------------------
(in thousands except per share)
Net earnings $25,423 $22,332 $44,234 $37,423
======= ======= ======= =======
Basic average shares outstanding 52,304 52,980 52,411 53,048
Dilutive effect of stock options 1,545 2,659 1,610 2,463
------- ------- ------- -------
Diluted average shares outstanding 53,849 55,639 54,021 55,511
======= ======= ======= =======
Basic earnings per share $ .48 $ .42 $ .84 $ .71
======= ======= ======= =======
Diluted earnings per share $ .47 $ .40 $ .82 $ .67
======= ======= ======= =======
Antidilutive options excluded from the above calculations totaled 550,000
options at December 31, 1998 (with a weighted average exercise price of $41.18)
and 78,000 options at December 31, 1997 (with a weighted average exercise price
of $34.87).
Options to purchase 51,000 shares were exercised during the six months ended
December 31, 1998 (145,000 options were exercised in the six months ended
December 31, 1997).
7. Commitments and Contingent Liabilities
In connection with the acquisition of WGNX-TV in Atlanta, Meredith has arranged
the following financing. On December 10, 1998, the company entered into a $200
million variable rate unsecured credit agreement with a group of seven banks
led by Wachovia Bank, N.A., as agent. The credit agreement provides for a $200
million term loan with required principal payments of $100 million in both
fiscal years 2003 and 2004. One of the conditions to borrowing under the
agreement is the acquisition of WGNX-TV. The commitments to lend expire on
April 30, 1999. No amounts were borrowed under this agreement at December 31,
1998. Interest rates under the credit agreement are based on applicable
- 9 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
margins plus, at the company's option, either adjusted LIBOR or the higher of
Wachovia Bank's prime rate or the overnight federal funds rate plus 0.5
percent. See Note 5 for information regarding interest rate swap contracts
that effectively fix the interest rate on this debt.
The company is also negotiating a private placement offering with five
insurance companies of $200 million in fixed rate unsecured Senior Notes.
These notes are expected to mature as follows: $75 million in 6 years, $50
million in 6.5 years and $75 million in 7 years from the date of closing. The
sale of the Notes is expected to occur on March 1, 1999.
The credit agreement and Senior Notes include certain financial covenants. The
most restrictive covenants require the debt-to-EBITDA ratio to be less than 3.5
to 1.0 and the fixed-charge-coverage ratio not to be less than 2.0 to 1.0. The
fixed charge coverage ratio is defined as EBITDA less capital expenditures
divided by the sum of interest expense, dividends paid and required debt
payments. As a result of these financing arrangements, the weighted-average
interest rate on the debt that will be used to acquire WGNX-TV is expected to
be 6.2 percent.
8. Segment information
Meredith adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective July 1, 1998.
Meredith Corporation is a diversified media company primarily focused on the
home and family marketplace. Based on products and services, the company has
two reportable segments: publishing and broadcasting. The publishing segment
includes magazine and book publishing, brand licensing, custom marketing and
other related operations. The broadcasting segment includes the operations of
11 network-affiliated television stations and syndicated television program
marketing and development. In previously reported segment information,
syndicated television programming operations were reported as unallocated
corporate expenses. Prior-year information has been restated to conform to the
current-year presentation. Intersegment revenues are not material and
virtually all businesses operate in the United States.
- 10 -
<PAGE>
MEREDITH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, continued
(Unaudited)
Revenues, operating profit and depreciation and amortization by industry
segment are shown below:
(unaudited) (unaudited)
Three Months Six Months
Ended December 31 Ended December 31
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Revenues
Publishing $182,858 $182,352 $373,674 $363,102
Broadcasting 72,066 66,532 127,087 116,681
-------- -------- -------- --------
Total revenues $254,924 $248,884 $500,761 $479,783
======== ======== ======== ========
Operating profit
Publishing $ 26,762 $ 22,630 $ 51,581 $ 42,079
Broadcasting 25,915 25,218 38,975 39,739
Unallocated corporate expense (4,874) (4,983) (8,848) (10,524)
-------- -------- -------- --------
Income from operations 47,803 42,865 81,708 71,294
Gain from disposition -- -- 2,375 --
Interest income 132 298 170 766
Interest expense (3,875) (4,250) (7,686) (6,717)
-------- -------- -------- --------
Earnings before income taxes 44,060 38,913 76,567 65,343
Income taxes 18,637 16,581 32,333 27,920
-------- -------- -------- --------
Net Earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423
======== ======== ======== ========
Depreciation and amortization
Publishing $ 2,843 $ 2,458 $ 5,694 $ 4,837
Broadcasting 6,699 6,471 13,379 11,858
Unallocated corporate 476 365 987 691
-------- -------- -------- --------
Total depreciation
and amortization $ 10,018 $ 9,294 $ 20,060 $ 17,386
======== ======== ======== ========
- 11 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following discussion presents the key factors that have affected the
company's business in the second quarter and first six months of fiscal 1999
and fiscal 1998 and compares the results of such periods. This commentary
should be read in conjunction with the consolidated financial statements
presented elsewhere in this report and with the company's Form 10-K for the
year ended June 30, 1998. All per-share amounts refer to diluted earnings per
share and are computed on a post-tax basis.
This section contains certain forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated. Reader's are referred to the company's Form
10-K for the year ended June 30, 1998, for a discussion of such factors.
Significant Events
Fiscal 1999
- -----------
On August 24, 1998, the company announced that it had reached an agreement to
acquire the net assets of WGNX-TV, a CBS network-affiliated television station
serving the Atlanta, Ga., market from Tribune Company. As part of this
transaction, Meredith has agreed to purchase Seattle's KCPQ-TV (FOX) from Kelly
Television Co. and trade the station to Tribune for WGNX-TV. The net price to
the company of this resulting asset purchase is estimated to be $370 million.
The company expects this transaction to close in early calendar year 1999,
subject to regulatory approvals.
Fiscal 1998
- -----------
On July 1, 1997, Meredith purchased the net assets of three television stations
affiliated with the FOX television network from First Media Television, L.P.
(First Media) for $216 million. Those stations are: KPDX-Portland, Ore.;
KFXO-Bend, Ore. (a low power station); and WHNS-Greenville, S.C./Spartanburg,
S.C./Asheville, N.C. On September 4, 1997, Meredith acquired and then
exchanged the net assets of the fourth First Media station, WCPX-TV in Orlando,
for WFSB-TV, a CBS network-affiliated television station serving the
Hartford/New Haven, Conn. market. WFSB-TV was acquired from Post-Newsweek
Stations, Inc. through an exchange of assets plus a $60 million cash payment to
Meredith. The result was a net cost to the company of $159 million for WFSB.
- 12 -
<PAGE>
Results of Operations
Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands except per share)
Total revenues $254,924 $248,884 $500,761 $479,783
======== ======== ======== ========
Income from operations $ 47,803 $ 42,865 $ 81,708 $ 71,294
======== ======== ======== ========
Earnings before
nonrecurring items $ 25,423 $ 22,332 $ 42,809 $ 37,423
======== ======== ======== ========
Net earnings $ 25,423 $ 22,332 $ 44,234 $ 37,423
======== ======== ======== ========
Diluted earnings per share
before nonrecurring items $ 0.47 $ 0.40 $ 0.79 $ 0.67
======== ======== ======== ========
Diluted earnings per share $ 0.47 $ 0.40 $ 0.82 $ 0.67
======== ======== ======== ========
Net earnings of $25.4 million, or 47 cents per share, were recorded in the
quarter ended December 31, 1998, compared to net earnings of $22.3 million, or
40 cents per share, in the prior-year second quarter. For the six months ended
December 31, 1998, net earnings were $44.2 million, or 82 cents per share,
compared to net earnings of $37.4 million, or 67 cents per share, in the prior-
year period. Net earnings for the six months ended December 31, 1998, included
a post-tax gain of $1.4 million, or 3 cents per share, from the sale of the
Better Homes and Gardens Real Estate Service.
Earnings before nonrecurring items for the comparative six-month periods were
$42.8 million, or 79 cents per share, in fiscal 1999 and $37.4 million, or 67
cents per share, in the prior-year period. Fiscal 1999 earnings per share
before nonrecurring items increased 18 percent for both the second quarter and
six-month period compared to the prior-year periods. The weighted average
diluted number of shares outstanding declined 3 percent in both periods
compared to the prior-year periods primarily due to company share repurchases.
Second quarter revenues increased 2 percent and year-to-date revenues were up 4
percent from the comparative prior-year periods. Adjusting for the impacts of
the real estate sale and the fiscal 1998 first quarter acquisition of WFSB-TV
in Hartford/New Haven, Conn., comparable revenues increased 5 percent in the
second quarter and 6 percent in the six-month period. Increased advertising,
custom publishing, consumer book and circulation revenues were the primary
factors in the growth.
- 13 -
<PAGE>
Second quarter operating costs increased slightly to $207.1 million. Higher
paper and editorial costs and increased television programming and news
expenses were nearly offset by the absence of costs from the real estate
operation and lower magazine production and circulation promotion costs. For
the six-month period costs increased 3 percent to $419.1 million due to a full
six months of operating expenses and amortization expense at WFSB-Hartford/New
Haven in the current period, increased television news and programming expenses
and higher paper and custom publishing costs. As in the quarter, the absence
of costs from the real estate operation partially offset the increases in other
areas. The operating profit margin grew from 17 percent in the fiscal 1998
second quarter to 19 percent in the current quarter. For the six months ended
December 31, 1998, the operating profit margin was 16 percent compared to 15
percent in the prior-year period.
Net interest expense in the second quarter decreased slightly from the level of
the prior-year second quarter due to a lower debt level. In the six-month
period ended December 31, 1998, net interest expense increased from the prior-
year period due to the timing of debt incurred for the WFSB-Hartford/New Haven
acquisition.
The company's effective tax rate was 42.2 percent for the six months ended
December 31, 1998, compared with 42.7 percent in the comparable prior-year
period. The decline reflected the diminished impact of nondeductible items
because of an increase in projected earnings.
Publishing
- ----------
Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Revenues
---------
Advertising $ 80,115 $ 78,507 $170,538 $162,685
Circulation 69,066 67,760 136,567 134,932
Other 33,677 36,085 66,569 65,485
-------- -------- -------- --------
Total revenues $182,858 $182,352 $373,674 $363,102
======== ======== ======== ========
Operating profit $ 26,762 $ 22,630 $ 51,581 $ 42,079
======== ======== ======== ========
Publishing revenues increased slightly compared to the prior-year quarter and 3
percent versus the prior-year six month period. Excluding the impact of the
sale of the Better Homes and Gardens Real Estate Service, publishing revenues
increased 3 percent in the second quarter and 6 percent in the six-month
period versus the prior-year periods. Advertising revenues grew 2 percent in
the second quarter and 5 percent in the six-month period ended December 31,
1998. Better Homes and Gardens, the company's largest circulation title,
- 14 -
<PAGE>
reported increased ad revenues in both periods from an increase in ad pages
sold and higher average revenues per page. Other titles reporting solid
increases in ad revenues in both periods included Traditional Home, Country
Home, Family Money and Country Gardens magazines. These increases in ad
revenues were partially offset by lower ad revenues at Ladies' Home Journal
magazine primarily due to fewer ad pages sold. Looking forward, management
expects advertising pages in the women's service field of the magazine industry
to be down in the company's fiscal third quarter versus the prior-year quarter.
While both Better Homes and Gardens and Ladies' Home Journal compete in this
field, management believes the decline will impact Ladies' Home Journal ad
paging more than Better Homes and Gardens. In other titles, third quarter ad
pages are generally trending up over last year. At this time, management
expects overall ad pages for the third quarter to be flat or up slightly. This
is based on current information and could change as the quarter progresses.
Circulation revenues increased slightly in both the quarter and the fiscal
year-to-date period. The second quarter increase reflected higher subscription
revenues due to additional issues of MORE and Country Gardens magazines. The
increase in the six-month period reflected these changes and increased
newsstand sales of most titles. Other publishing revenues declined in the
quarter and increased slightly in the six-month period. The changes reflect
the sale of the Better Homes and Gardens Real Estate Service and higher
consumer book and custom publishing revenues.
Publishing operating profit was up 18 percent in the fiscal 1999 second quarter
and 23 percent for the fiscal year-to-date versus the comparable prior-year
periods. The strong second quarter results were driven primarily by lower
production and circulation costs and increased magazine advertising revenues.
The improvement in the fiscal year-to-date period was primarily a result of
increased advertising revenues. Increased profit from the custom publishing
operations also contributed to improved operating profit.
Paper expense increased in both the second quarter and six-month period,
reflecting increased volumes and higher average prices. The higher average
prices result from the timing of price changes over the last year. Major
suppliers reduced coated groundwood paper prices approximately 4 percent on
January 1, 1999, following an average price decrease of approximately 3.5
percent on October 1, 1998. Coated groundwood paper accounts for more than
two-thirds of the company's paper usage. These price decreases are expected to
have a favorable impact on paper expense in the second half of fiscal 1999.
Postage rates increased on January 10, 1999. Management expects the effective
increase for the company to be less than the 4.6 percent average for magazine
publishers taken as a whole due to the company's efficient mailing processes.
In addition, the third fiscal quarter impact was lessened by mailing
promotional campaigns and magazines prior to the date of the increase when
possible.
- 15 -
<PAGE>
Broadcasting
- ------------ Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
-------- -------- -------- --------
Revenues (in thousands)
---------
Advertising $ 70,485 $ 63,044 $123,000 $110,506
Other 1,581 3,488 4,087 6,175
-------- -------- -------- --------
Total revenues $ 72,066 $ 66,532 $127,087 $116,681
======== ======== ======== ========
Operating profit $ 25,915 $ 25,218 $ 38,975 $ 39,739
======== ======== ======== ========
Broadcasting revenues increased 8 percent in the fiscal 1999 second quarter and
9 percent in the six months ended December 31, 1998 compared to the prior-year
periods. Excluding the impact of the timing of the fiscal 1998 first quarter
acquisition of WFSB-Hartford/New Haven, comparable revenues increased 5 percent
in the six-month period. Operating profit increased 3 percent in the second
quarter. All of the company's stations benefited from political advertising in
the second quarter. In addition CBS affiliates, especially those in KCTV-
Kansas City and WFSB-Hartford/New Haven, benefited from the addition of
National Football League games to network programming. Operating profit
declined 2 percent in the six-month period due primarily to lower ad revenue
resulting from the General Motors labor dispute during the first quarter and
investment spending primarily in programming, local news and sales, marketing
and research activities. Among comparable stations, revenue and operating
profit performance for both periods was led by KPDX-Portland, KCTV-Kansas City
and KVVU-Las Vegas. Looking forward to the fiscal third quarter, the stations
in total are reporting generally flat advertising pacings compared to the prior
year quarter. Increases in some areas are being offset by the absence of
incremental advertising for the Winter Olympics at the company's CBS affiliates
in the prior year. Advertising pacings are as of a point in time and are
subject to change.
Liquidity and Capital Resources
Percent
Six months ended December 31 1998 1997 Change
---------------------------- -------- -------- -------
(in thousands)
Net earnings $ 44,234 $ 37,423 18%
========= ========= ====
Cash flows from operations $ 50,929 $ 42,171 21%
========= ========= ====
Cash flows from investing $ (841) $(351,681) 100%
========= ========= ====
Cash flows from financing $(54,347) $ 235,524 nm
========= ========= ====
Net cash flows $ (4,259) $ (73,986) 94%
========= ========= ====
EBITDA $ 101,768 $ 88,680 15%
========= ========= ====
nm - not meaningful
- 16 -
<PAGE>
Cash and cash equivalents decreased by $4.3 million in the first six months of
fiscal 1999 compared to a decrease in cash of $74.0 million in the comparable
prior-year period. The change reflected cash invested for the acquisition of
four television stations in the prior-year period, net of long-term debt
incurred. Cash provided by operating activities increased 21 percent for the
six month period due to higher operating cash flows (earnings plus depreciation
and amortization) and changes in working capital items that resulted primarily
from the prior-year television station acquisitions.
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is often used to analyze and compare companies on the
basis of operating performance and cash flow. EBITDA for the first six months
of fiscal 1999 increased 15 percent from the prior-year period due to improved
operating results. EBITDA is not adjusted for all noncash expenses or for
working capital changes, capital expenditures or other investment requirements.
EBITDA should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
The company has an unsecured credit agreement which consists of a $210 million,
60-month variable rate term loan and a $150 million, 60-month variable rate
revolving credit facility. At December 31, 1998, long-term debt outstanding
under this agreement consisted of $185 million outstanding under the term loan
and $22 million outstanding under the revolving credit facility. The credit
agreement contains certain covenants. As of December 31, 1998, the company was
in compliance with all debt covenants.
In connection with the acquisition of WGNX-TV in Atlanta, the company entered
into a $200 million variable rate unsecured credit agreement with a group of
seven banks led by Wachovia Bank, N.A., as agent, on December 10, 1998. The
credit agreement provides for a $200 million term loan with required principal
payments of $100 million in both fiscal years 2003 and 2004. One of the
conditions to borrowing under the agreement is the acquisition of WGNX-TV. The
commitments to lend expire on April 30, 1999. No amounts were borrowed under
this agreement at December 31, 1998. Interest rates under the credit agreement
are based on applicable margins plus, at the company's option, either adjusted
LIBOR or the higher of Wachovia Bank's prime rate or the overnight federal
funds rate plus 0.5 percent.
To complete the financing of the acquisition of WGNX-TV, the company is
negotiating a private placement offering with five insurance companies of $200
million in fixed rate unsecured Senior Notes. These notes are expected to
mature as follows: $75 million in 6 years, $50 million in 6.5 years and $75
million in 7 years from the date of closing. The sale of the Notes is expected
to occur on March 1, 1999.
The credit agreement and Senior Notes include certain financial covenants. The
most restrictive covenants require the debt-to-EBITDA ratio to be less than 3.5
to 1.0 and the fixed-charge-coverage ratio not to be less than 2.0 to 1.0. The
fixed-charge-coverage-ratio is defined as EBITDA less capital expenditures
- 17 -
<PAGE>
divided by the sum of interest expense, dividends paid and required debt
payments. As a result of these financing arrangements, the weighted-average
interest rate on the debt that will be used to acquire WGNX-TV is expected to
be 6.2 percent.
Meredith utilizes interest rate swap contracts to manage interest cost and risk
associated with possible increases in variable interest rates. The company
amended its existing swap contracts effective December 31, 1998 and entered
into two new swap contracts with effective dates of March 31, 1999. Under the
contracts, Meredith pays fixed rates of interest while receiving floating rates
of interest based on three month LIBOR. These contracts effectively fix the
base interest rate on the existing credit agreement and on the new credit
agreement entered into on December 10, 1998, although the applicable margins
vary based upon the company's debt-to-EBITDA ratio. These contracts are held
for purposes other than trading. The contracts expire on June 28, 2002. The
weighted average interest rate for the six months ended December 31, 1998 was
6.75 percent.
The notional amount covered by the contracts was $220 million on December 31,
1998. The notional amount varies over the term of the contracts. The average
notional amount of indebtedness outstanding under these contracts for fiscal
years 1999 through 2002 is as follows: $273 million, $305 million, $223
million and $93 million, respectively.
The company is exposed to credit-related losses in the event of non-performance
by counterparties to the interest rate swap contracts. Management does not
expect any counterparties to fail to meet their obligations given the
creditworthiness of the counterparties to the agreements.
At December 31, 1998, the company also had $5.0 million in short-term variable-
rate debt outstanding under a bank line of credit agreement. The interest rate
at December 31, 1998 was approximately 6 percent.
In the first six months of fiscal 1999, the company spent $31.1 million for the
repurchase of 750,000 shares of Meredith Corporation common stock at the then
current market prices. This compares with spending of $18.5 million for the
repurchase of 592,000 shares in the comparable prior-year period. The current
period totals include the repurchase of 297,000 shares under put option
agreements. As of December 31, 1998, the company had put option agreements to
repurchase approximately 1.9 million shares. The market value of these shares
at December 31, 1998, has been reclassified from stockholders' equity to the
temporary equity classification entitled, "Put option agreements." As of
December 31, 1998, approximately 2.3 million shares could be repurchased under
existing authorizations by the board of directors. The status of the
repurchase program is reviewed at each quarterly board of directors meeting.
The company expects to continue to repurchase shares in the foreseeable future,
subject to market conditions.
Dividends paid in the first six months of fiscal 1999 were $7.3 million, or 14
cents per share, compared with $6.9 million, or 13 cents per share, in the
prior-year period. On February 1, 1999, the board of directors increased the
quarterly dividend by 7 percent (one-half cent per share) to 7.5 cents per
- 18 -
<PAGE>
share effective with the dividend payable on March 15, 1999. On an annual
basis, the effect of this quarterly dividend increase would be to increase
dividends paid by approximately $1.0 million at the current number of shares
outstanding.
Spending for property, plant and equipment decreased to $8.3 million in the
first six months of fiscal 1999 from $23.4 million in the prior-year period.
The decrease primarily resulted from prior-year spending for the construction
of a new office building and related improvements in Des Moines. The project
was completed late in fiscal 1998. Total capital expenditures for fiscal 1999
are expected to be 10 to 20 percent lower than fiscal 1998 expenditures.
Spending will increase in the second half as several of the broadcasting
stations begin the conversion to digital technology and two stations prepare
for the expansion of local news programming. Funds for capital expenditures
are expected to be provided by available cash, including cash from operating
activities or, if necessary, borrowings under credit agreements.
At this time, management expects that cash on hand, internally-generated cash
flow and debt from credit agreements will provide funds for any additional
operating and recurring cash needs (e.g., working capital, cash dividends) for
foreseeable periods.
Year 2000
- ---------
The Year 2000 issue, common to most companies, concerns the inability of
information and noninformation systems to recognize and process date sensitive
information due to the use of only the last two digits to refer to a year.
This problem could affect both information systems (software and hardware) and
other equipment that relies on microprocessors. Management completed a
company-wide evaluation of this impact on its computer systems, applications
and other date-sensitive equipment. Systems and equipment that are not Year
2000 compliant have been identified and remediation efforts are in process.
Management estimates that nearly 40 percent of remediation efforts were
completed as of December 31, 1998. All remediation efforts and testing of
systems/equipment are expected to be completed by June 30, 1999.
The company is also in the process of monitoring the progress of material third
parties (vendors and suppliers) in their efforts to become Year 2000 compliant.
These third parties include, but are not limited to: magazine and book
printers, paper suppliers, magazine fulfillment providers, the U.S. Postal
Service, television networks, other television programming suppliers, mainframe
computer services suppliers, financial institutions and utilities. The company
has sought compliance information with respect to vendors and suppliers through
the use of surveys, industry groups, peer reviews and vendor websites.
Management then followed up to obtain more detailed information regarding the
Year 2000 efforts of material third parties. Most of these material third
parties have been cooperative and are supplying Year 2000 project related
information. The company continues to pursue additional information from
material third parties where needed and from those not responding.
- 19 -
<PAGE>
Through December 31, 1998, the company has spent approximately $1.3 million to
address Year 2000 issues. Total costs to address Year 2000 issues are
currently estimated not to exceed $5 million and consist primarily of costs for
the remediation of internal systems and broadcasting equipment. Funds for
these costs are expected to be provided by the operating cash flows of the
company. The majority of the internal system remediation efforts relate to
staff costs of on-staff systems engineers and therefore, are not incremental
costs.
Meredith Corporation could be faced with severe consequences if Year 2000
issues are not identified and resolved in a timely manner by the company and
material third parties. A worst case scenario would result in the short-term
inability of the company to produce/distribute magazines or broadcast
television programming due to unresolved year 2000 issues. This would result
in lost revenues; however, the amount would be dependent on the length and
nature of the disruption, which cannot be predicted or estimated. In light of
the possible consequences, the company is devoting the resources needed to
address Year 2000 issues in a timely manner. Management has contracted with an
outside consultant to monitor the progress of Meredith's Year 2000 efforts and
provide update reports to the audit committee of the board of directors at each
quarterly meeting. While management expects a successful resolution of these
issues, there can be no guarantee that material third parties, on which
Meredith relies, will address all Year 2000 issues on a timely basis or that
their failure to successfully address all issues would not have an adverse
effect on the company.
Meredith is in the process of developing contingency plans in case business
interruptions do occur. Management expects these plans to be completed by June
30, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The company is subject to certain market risks as a result of the use of
financial instruments. The market risk inherent in the company's financial
instruments subject to such risks is the potential market value loss arising
from adverse changes in interest rates and/or the potential effect of changes
in the market price of company common stock on the company's liquidity.
Readers are referred to the company's Form 10-K for the year ended June 30,
1998 for a more complete discussion of these risks.
The company uses interest rate swap agreements to effectively fix the interest
rate on its debt. Therefore, there is no earnings or liquidity risk associated
with changes in interest rates. The fair market value of the interest rate
swaps is the estimated amount, based on discounted cash flows, the company
would pay or receive to terminate the swap agreements. A 10 percent decrease
in interest rates would result in a $3.6 million increase in the December 31,
1998 cost of $4.5 million to terminate the swap agreements.
At December 31, 1998, the company had put option agreements outstanding to
repurchase up to 1.9 million common shares. The risk to the company of an
increase in share price is from a liquidity perspective. Based on the
- 20 -
<PAGE>
December 31, 1998 closing price, a 10 percent increase in share price would
cause the potential repurchase cost for these put options to increase by $9.3
million.
There has been no material change in the market risk associated with program
rights payable since June 30, 1998.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on November 9, 1998, at
the Company's headquarters in Des Moines, Iowa.
(b) The name of each director elected at the Annual Meeting is shown under
Item 4.(c). The other directors whose terms of office continued after
the meeting were: Herbert M. Baum, Barbara U. Charlton, Frederick B.
Henry, William T. Kerr, Robert E. Lee, Nicholas L. Reding, and Jack D.
Rehm.
(c)(1) Proposal 1: Election of four Class III directors for terms expiring in
2001. Each nominee was elected in uncontested elections by the votes
cast as follows:
Number of shareholder votes*
-----------------------------
For Withheld
----------- --------
Class III directors
Mary Sue Coleman 135,146,210 596,843
Joel W. Johnson 135,141,925 601,128
Richard S. Levitt 135,181,126 561,927
E.T. Meredith III 135,192,172 550,881
(c)(2) Proposal 2: Election of one Class I director for a term expiring in
1999. The nominee was elected in an uncontested election by the votes
cast as follows:
Number of shareholder votes*
-----------------------------
For Withheld
----------- --------
Class I director
Philip A. Marineau 135,013,980 729,073
*As specified on the proxy card, if no vote For or Withhold was
specified, the shares were voted For the election of the named
director.
- 21 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2) $200 million Credit Agreement dated as of December 10, 1998, among
Meredith Corporation, and certain banks specified therein, for whom
Wachovia Bank, N.A., is acting as Agent.
27) Financial Data Schedule
99) Additional financial information from the Company's second quarter
press release dated January 19, 1999.
(b) Reports on Form 8-K
No Form 8-K was filed during the quarter ended December 31, 1998.
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.
MEREDITH CORPORATION
Registrant
(Stephen M. Lacy)
Stephen M. Lacy
Vice President - Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: February 11, 1999
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<PAGE>
Index to Exhibits
Exhibit
Number Item
------- -----------------------------------------------------------
2 $200 million Credit Agreement dated as of December 10,
1998, among Meredith Corporation, and certain banks specified
therein, for whom Wachovia Bank, N.A., is acting as Agent*.
27 Financial Data Schedule
99 Additional financial information from the Company's second
quarter press release dated January 19, 1999.
* Supplementary Exhibits and Schedules to this Agreement are not included in
this Form 10-Q filing. Copies of any of the Exhibits and/or Schedules to
this Agreement will be furnished supplementary to the Commission upon
request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 2 FOR 12/30/98 10-Q
<TEXT>
EXHIBIT 2
---------
$200,000,000
CREDIT AGREEMENT
dated as of
December 10, 1998
among
MEREDITH CORPORATION,
The Banks Listed Herein,
WACHOVIA BANK, N.A.,
as Agent and a Bank,
THE FIRST NATIONAL BANK OF CHICAGO,
as Syndication Agent and a Bank,
and
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
as Documentation Agent and a Bank.
- 1 -
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of December 10, 1998 among MEREDITH CORPORATION,
the BANKS listed on the signature pages hereof, WACHOVIA BANK, N.A., as Agent
and as a Bank, THE FIRST NATIONAL BANK OF CHICAGO, as Syndication Agent and a
Bank, and SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION, as
Documentation Agent and a Bank.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. The terms as defined in this Section1.01
shall, for all purposes of this Agreement and any amendment hereto (except as
herein otherwise expressly provided or unless the context otherwise requires),
have the meanings set forth herein:
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.05(c).
"Affiliate" of any Person means (i) any other Person which directly,
or indirectly through one or more intermediaries, controls such Person, (ii)any
other Person which directly, or indirectly through one or more intermediaries,
is controlled by or is under common control with such Person, or (iii)any other
Person of which such Person owns, directly or indirectly, 20% or more of the
common stock or equivalent equity interests. As used herein, the term
"control" means possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"Agent" means Wachovia Bank, N.A., a national banking association
organized under the laws of the United States of America, in its capacity as
agent for the Banks hereunder, and its successors and permitted assigns in such
capacity.
"Agent's Letter Agreement" means that certain letter agreement, dated
as of October 21, 1998, between the Borrower and the Agent and accepted by the
Borrower on October 22, 1998, relating to the structure of the Loans, and
certain fees from time to time payable by the Borrower to the Agent, together
with all amendments and modifications thereto.
"Agreement" means this Credit Agreement, together with all amendments
and supplements hereto.
"Applicable Margin" has the meaning set forth in Section 2.05(a).
"Applicable Unused Fee Rate" shall mean 0.20%, per annum.
"Assignee" has the meaning set forth in Section 9.07(c).
"Assignment and Acceptance" means an Assignment and Acceptance
executed in accordance with Section 9.07(c) in the form attached hereto as
Exhibit G.
- 2 -
<PAGE>
"Authority" has the meaning set forth in Section 8.02.
"Bank" means each bank listed on the signature pages hereof as having
a Commitment, and its successors and assigns.
"Base Rate" means for any Base Rate Loan for any day, the rate per
annum equal to the higher as of such day of (i) the Prime Rate, and (ii) one-
half of one percent above the Federal Funds Rate for such day. For purposes of
determining the Base Rate for any day, changes in the Prime Rate and the
Federal Funds Rate shall be effective on the date of each such change.
"Base Rate Borrowing" means a Borrowing if the advances under such
borrowing bear or are to bear interest calculated by reference to the Base
Rate.
"Base Rate Loan" means Loans which bear or are to bear interest
calculated by reference to the Base Rate.
"Borrower" means Meredith Corporation, a corporation incorporated
under the laws of the State of Iowa, and its successors and permitted assigns.
"Borrower Officer's Certificate" has the meaning set forth in Section
3.01(f).
"Borrowing" shall mean a borrowing under the Commitments consisting
of Loans made to the Borrower at the same time by the Banks pursuant to Article
II. A Borrowing is a "Euro-Dollar Borrowing" if such Loans are made as Euro-
Dollar Loans and a "Base Rate Borrowing" if such Loans are made as Base Rate
Loans.
"Broadcast Licenses" means licenses, permits, authorizations or
certificates now or hereafter held by the Borrower and its Subsidiaries
(including, without limitation, the Broadcast Licenses listed on Schedule 4.19
hereto) to construct, own, operate or promote the Stations granted by the FCC,
the administrative law courts or by any state, county, city, town, village or
other local government authority, and all extensions, additions and renewals
thereto or thereof.
"Capital Expenditures" means for any period the sum of all capital
expenditures incurred during such period by the Borrower and its Consolidated
Subsidiaries, as determined in accordance with GAAP; provided, however, for
purposes of calculating the "Fixed Charge Coverage Ratio" for any Fiscal
Quarter, Capital Expenditures, in an aggregate amount up to $16,000,000,
incurred in connection with the construction of a new facility and expanded
news programming for WGNX will not be included in "Capital Expenditures".
"Capital Stock" means any nonredeemable capital stock of the Borrower
or any Consolidated Subsidiary (to the extent issued to a Person other than the
Borrower), whether common or preferred.
"CERCLA" means the Comprehensive Environmental Response Compensation
and Liability Act, 42 U.S.C. Section 9601 et seq. and its implementing
regulations and amendments.
"CERCLIS" means the Comprehensive Environmental Response Compensation
and Liability Information System established pursuant to CERCLA.
- 3 -
<PAGE>
"Change of Law" shall have the meaning set forth in Section 8.02.
"Closing Certificate" has the meaning set forth in Section 3.01(e).
"Closing Date" means December 10, 1998.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code. Any reference to any provision of the Code shall
also be deemed to be a reference to any successor provision or provisions
thereof.
"Commitment" means, with respect to each Bank, (i) the amount
designated as the Commitment set forth opposite the name of such Bank on the
signature pages hereof, or (ii) as to any Bank which enters into an Assignment
and Acceptance (whether as transferor Bank or as Assignee thereunder), the
amount of such Bank's Commitment after giving effect to such Assignment and
Acceptance, in each case as such amount may be reduced from time to time
pursuant to Section 2.08.
"Commitment Reduction Date" means November 1, 2002, May 1, 2003,
November 1, 2003 and May 1, 2004.
"Compliance Certificate" has the meaning set forth in Section
5.01(c).
"Consolidated Fixed Charges" for any period means the sum of (i)
Consolidated Interest Expense for such period; (ii) all payments of principal
in respect of Debt (excluding principal payments made with respect to any
revolving line of credit) of the Borrower or any of its Consolidated
Subsidiaries for such period; and (iii) all dividends paid by the Borrower and
its Consolidated Subsidiaries for such period.
"Consolidated Funded Debt" means, at any date, the Debt of the
Borrower and its Consolidated Subsidiaries, determined on a consolidated basis
as of such date.
"Consolidated Gross Revenues" means as applied to any Person for any
period, the aggregate gross revenues of such Person for such period, as
determined in accordance with GAAP.
"Consolidated Interest Expense" for any period means interest
expensed in respect of Debt of the Borrower or any of its Consolidated
Subsidiaries outstanding during such period.
"Consolidated Net Income" means, for any period, the Net Income of
the Borrower and its Consolidated Subsidiaries determined on a consolidated
basis, but excluding (i) extraordinary items and (ii) any equity interests of
the Borrower or any Subsidiary in the unremitted earnings of any Person that is
not a Subsidiary.
"Consolidated Net Worth" means, at any time, the shareholders' equity
of the Borrower and its Consolidated Subsidiaries, as set forth or reflected on
the most recent consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable
Preferred Stock of the Borrower or any of its Consolidated Subsidiaries.
Shareholders' equity generally would include, but not be limited to (i) the par
- 4 -
<PAGE>
or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii)
retained earnings, and (iv) various deductions such as (A) purchases of
treasury stock, (B) valuation allowances, (C) receivables due from an employee
stock ownership plan, (D) employee stock ownership plan debt guarantees, and
(E) translation adjustments for foreign currency transactions.
"Consolidated Operating Profits" means, for any period, the Operating
Profits of the Borrower and its Consolidated Subsidiaries.
"Consolidated Subsidiary" means at any date any Subsidiary or other
entity the accounts of which, in accordance with GAAP, would be consolidated
with those of the Borrower in its consolidated financial statements as of such
date.
"Consolidated Total Assets" means, at any time, the total assets of
the Borrower and its Consolidated Subsidiaries, determined on a consolidated
basis, as set forth or reflected on the most recent consolidated balance sheet
of the Borrower and its Consolidated Subsidiaries, prepared in accordance with
GAAP.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee under capital
leases, (v) all obligations of such Person to reimburse any bank or other
Person in respect of amounts payable under a bankers' acceptance, (vi) all
Redeemable Preferred Stock of such Person (in the event such Person is a
corporation), (vii) all obligations (absolute or contingent) of such Person to
reimburse any bank or other Person in respect of amounts paid under a letter of
credit or similar instrument, with an expiration date more than one year from
such date, (viii) all Debt of others secured by a Lien on any asset of such
Person, whether or not such Debt is assumed by such Person, and (ix) all Debt
of others Guaranteed by such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived in writing, become an Event of Default.
"Default Rate" means, with respect to any Loan, on any day, the sum
of 2% plus the then highest interest rate (including the Applicable Margin)
which may be applicable to any Euro-Dollar Loan or Base Rate Loan hereunder
(irrespective of whether any such type of loans are actually outstanding
hereunder).
"Depreciation and Amortization" means for any period the sum of all
depreciation and amortization expenses of the Borrower and its Consolidated
Subsidiaries for such period, as determined in accordance with GAAP.
"Dollars" or "$" means dollars in lawful currency of the United
States of America.
- 5 -
<PAGE>
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in Georgia are authorized or required by
law to close.
"EBITDA" for any period means the sum of: (i) Consolidated Net
Income, (ii) taxes on income, (iii) Consolidated Interest Expense, and (iv)
Depreciation and Amortization, all determined with respect to the Borrower and
its Consolidated Subsidiaries on a consolidated basis for such period and in
accordance with GAAP. In computing EBITDA, any of the foregoing items
realized or accrued for such period and prior to the date of a Permitted
Acquisition (solely for purposes of this definition, Permitted Acquisition
shall be deemed to include the acquisition of any asset) by the Person so
acquired or attributable to the assets so acquired shall be included in EBITDA,
but only to the extent that such items of such Person or attributable to such
assets would have been available to the Borrower or such Subsidiary had the
Borrower or such Subsidiary acquired such Person or such assets at the
beginning of such period.
"Environmental Authority" means any foreign, federal, state, local or
regional government that exercises any form of jurisdiction or authority under
any Environmental Requirement.
"Environmental Authorizations" means all licenses, permits, orders,
approvals, notices, registrations or other legal prerequisites for conducting
the business of the Borrower or any Subsidiary required by any Environmental
Requirement.
"Environmental Judgments and Orders" means all judgments, decrees or
orders arising from or in any way associated with any Environmental
Requirements, whether or not entered upon consent or written agreements with an
Environmental Authority or other entity arising from or in any way associated
with any Environmental Requirement, whether or not incorporated in a judgment,
decree or order.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
other governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
groundwater or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof.
"Environmental Liabilities" means any liabilities, whether accrued,
contingent or otherwise, arising from and in any way associated with any
Environmental Requirements, which when combined with all other Environmental
Liabilities of the Borrower is greater than $500,000.
"Environmental Notices" means notice from any Environmental Authority
or by any other person or entity, of possible or alleged noncompliance with or
liability under any Environmental Requirement, including without limitation any
complaints, citations, demands or requests from any Environmental Authority or
- 6 -
<PAGE>
from any other person or entity for correction of any violation of any
Environmental Requirement or any investigations concerning any violation of any
Environmental Requirement.
"Environmental Proceedings" means any judicial or administrative
proceedings arising from or in any way associated with any Environmental
Requirement.
"Environmental Releases" means releases as defined in CERCLA or under
any applicable state or local environmental law or regulation.
"Environmental Requirements" means any legal requirement relating to
health, safety or the environment and applicable to the Borrower, any
Subsidiary or the Properties, including but not limited to any such requirement
under CERCLA or similar state legislation and all federal, state and local
laws, ordinances, regulations, orders, writs, decrees and common law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law. Any reference to any
provision of ERISA shall also be deemed to be a reference to any successor
provision or provisions thereof.
"E. T. Meredith Family Stockholders" means (a) the lineal descendants
by blood or adoption of E.T. Meredith ("descendants") and the spouses and
surviving spouses of such descendants; (b) any estate, trust, guardianship,
custodianship or other fiduciary arrangement for the primary benefit of any one
or more individuals described in (a) above; and (c) any corporation,
partnership, limited liability company or other business organization so long
as (i) one or more individuals or entities described in clauses (a) and (b)
above possess, directly or indirectly, the power to direct or cause the
direction of, the management and policies of such corporation, partnership,
limited liability company or other business organization and (ii) substantially
all of the ownership, beneficial or other equity interests in such corporation,
partnership, limited liability company or other business organization are
owned, directly or indirectly, by one or more individuals or entities described
in clauses (a) and (b) above.
"Euro-Dollar Borrowing" means a Borrowing if the advances under such
borrowing bear or are to bear interest at a rate based upon the London
Interbank Offered Rate.
"Euro-Dollar Business Day" means any Domestic Business Day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Euro-Dollar Loan" means Loans which bear or are to bear interest at
a rate based upon the London Interbank Offered Rate.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.05(c).
"Event of Default" has the meaning set forth in Section 6.01.
"FCC" means the Federal Communications Commission.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted
- 7 -
<PAGE>
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if the day for which such rate is
to be determined is not a Domestic Business Day, the Federal Funds Rate for
such day shall be such rate on such transactions on the next preceding Domestic
Business Day as so published on the next succeeding Domestic Business Day, and
(ii) if such rate is not so published for any day, the Federal Funds Rate for
such day shall be the average rate charged to Wachovia on such day on such
transactions as determined by the Agent.
"Fiscal Quarter" means any fiscal quarter of the Borrower.
"Fiscal Year" means any fiscal year of the Borrower.
"Fixed Charge Coverage Ratio" means the ratio, measured as of the
last day of each Fiscal Quarter, of: (A) the amount equal to: (i) EBITDA,
calculated for the Fiscal Quarter then ended and the immediately preceding
three Fiscal Quarters, less (ii) Capital Expenditures, calculated for the
Fiscal Quarter then ended and the immediately preceding three Fiscal Quarters,
to (B) Consolidated Fixed Charges for the Fiscal Quarter then ended and the
immediately preceding three Fiscal Quarters.
"Forfeiture Proceeding" means any action, proceeding or investigation
affecting the Borrower or any Subsidiary of the Borrower before any court,
arbitrator or Governmental Authority having jurisdiction over the Borrower or
such Subsidiary or the receipt of notice by any such party that any of them is
a suspect in or a target of any governmental inquiry or investigation, which
may result in: (a) an indictment of any of them; or (b) the seizure or
forfeiture of any of their property which, when combined with all other
property of the Borrower of any Subsidiary of the Borrower seized or forfeited
during the current Fiscal Quarter and the immediately preceding three Fiscal
Quarters has an aggregate fair market value in excess of $500,000.
"Funding Date" means the earliest of the following dates: (i) April
30, 1999; (ii) the date on which the Borrower terminates the Commitments; and
(iii) the Initial Draw Date.
"GAAP" means generally accepted accounting principles applied on a
basis consistent with those which, in accordance with Section 1.02, are to be
used in making the calculations for purposes of determining compliance with the
terms of this Agreement.
"Governmental Authority" means any nation or government, any federal,
state, local or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, or any instrumentality of any of the foregoing.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to secure, purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation (whether arising by
virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, to provide collateral security, to
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take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for the purpose of assuring in any other manner the obligee
of such Debt or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part), provided that
the term Guarantee shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hazardous Materials" includes, without limitation, (a) solid or
hazardous waste, as defined in the Resource Conservation and Recovery Act of
1980, 42 U.S.C. Section 6901 et seq. and its implementing regulations and
amendments, or in any applicable state or local law or regulation, (b) any
"hazardous substance", "pollutant" or "contaminant", as defined in CERCLA, or
in any applicable state or local law or regulation, (c) gasoline, or any other
petroleum product or by-product, including crude oil or any fraction thereof,
(d) toxic substances, as defined in the Toxic Substances Control Act of 1976,
or in any applicable state or local law or regulation and (e) insecticides,
fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide,
and Rodenticide Act of 1975, or in any applicable state or local law or
regulation, as each such Act, statute or regulation may be amended from time to
time.
"Initial Draw Amount" means the aggregate principal amount of all
Loans advanced by the Banks on the Initial Draw Date.
"Initial Draw Date" means the date on which the first Loan is
advanced by the Banks hereunder.
"Interest Payment Date" means each April 1, July 1, October 1 and
January 1.
"Interest Period" means: (1) with respect to each Euro-Dollar
Borrowing, the period commencing on the date of such borrowing and ending on
the numerically corresponding day in the first, second, third or sixth month
thereafter, as the Borrower may elect in the applicable Notice of Borrowing;
provided that:
(a) any Interest Period (subject to clause (c) below) which would
otherwise end on a day which is not a Euro-Dollar Business Day shall be
extended to the next succeeding Euro-Dollar Business Day unless such
Euro-Dollar Business Day falls in another calendar month, in which case
such Interest Period shall end on the next preceding Euro-Dollar Business
Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the appropriate subsequent calendar
month) shall, subject to clause (c) below, end on the last Euro-Dollar
Business Day of the appropriate subsequent calendar month; and
(c) any Interest Period applicable to the Loans which begins before
the Maturity Date and would otherwise end after the Maturity Date shall
end on the Maturity Date.
(2) with respect to each Base Rate Borrowing, the period commencing on the
date of such borrowing and ending 30 days thereafter; provided that:
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(a) any Interest Period (subject to clause (b) below) which would
otherwise end on a day which is not a Domestic Business Day shall be
extended to the next succeeding Domestic Business Day; and
(b) any Interest Period applicable to the Loans which begins before
the Maturity Date and would otherwise end after the Maturity Date shall
end on the Maturity Date.
"Investment" means any investment in any Person, whether by means of
purchase or acquisition of obligations or securities of such Person, capital
contribution to such Person, loan or advance to such Person, making of a time
deposit with such Person, Guarantee or assumption of any obligation of such
Person or otherwise.
"Lending Office" means, as to each Bank, its office located at its
address set forth on the signature pages hereof (or identified on the signature
pages hereof as its Lending Office) or such other office as such Bank may
hereafter designate as its Lending Office by notice to the Borrower and the
Agent.
"Lien" means, with respect to any asset, any mortgage, deed to secure
debt, deed of trust, lien, pledge, charge, security interest, security title,
preferential arrangement which has the practical effect of constituting a
security interest or encumbrance, servitude or encumbrance of any kind in
respect of such asset to secure or assure payment of a Debt or a Guarantee,
whether by consensual agreement or by operation of statute or other law, or by
any agreement, contingent or otherwise, to provide any of the foregoing. For
the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed
to own subject to a Lien any asset which it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement relating to such asset.
"Loan Documents" means this Agreement, the Notes, any other document
evidencing, relating to or securing the Loans, and any other document or
instrument delivered from time to time in connection with this Agreement, the
Notes, or the Loans, as such documents and instruments may be amended or
supplemented from time to time.
"Loans" means the loans made by the Banks under the Commitments and
"Loan" means any one of such Loans.
"London Interbank Offered Rate" has the meaning set forth in Section
2.05(c).
"Margin Stock" means "margin stock" as defined in Regulation T, U or
X of the Board of Governors of the Federal Reserve System, as in effect from
time to time, together with all official rulings and interpretations issued
thereunder.
"Material Adverse Effect" means, with respect to any event, act,
condition or occurrence of whatever nature (including any adverse determination
in any litigation, arbitration, or governmental investigation or proceeding),
whether singly or in conjunction with any other event or events, act or acts,
condition or conditions, occurrence or occurrences, whether or not related, a
material adverse change in, or a material adverse effect upon, any of (a) the
financial condition, operations, business, properties or prospects of the
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Borrower and its Consolidated Subsidiaries taken as a whole, (b) the rights and
remedies of the Agent or the Banks under the Loan Documents, or the ability of
the Borrower to perform its obligations under the Loan Documents to which it is
a party, as applicable, or (c) the legality, validity or enforceability of any
Loan Document.
"Maturity Date" means May 1, 2004.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
"Net Income" means, as applied to any Person for any period, the
aggregate amount of net income of such Person, after taxes, for such period, as
determined in accordance with GAAP.
"Net Proceeds of Capital Stock" means any and all proceeds (whether
cash or non-cash) or other consideration received by the Borrower or a
Consolidated Subsidiary in respect of the issuance of Capital Stock (including,
without limitation, the aggregate amount of any and all Debt converted into
Capital Stock), from a Person other than the Borrower or a Consolidated
Subsidiary, after deducting therefrom all reasonable and customary costs and
expenses incurred by the Borrower or such Consolidated Subsidiary directly in
connection with the issuance of such Capital Stock.
"Non-excluded Taxes" has the meaning set forth in Section 2.11(c).
"Notes" means the promissory notes of the Borrower, substantially in
the form of Exhibit A hereto, evidencing the obligation of the Borrower to
repay the Loans, together with all amendments, consolidations, modifications,
renewals and supplements thereto and "Note" means any one of such Notes.
"Notice of Borrowing" has the meaning set forth in Section 2.02.
"Operating Profits" means, as applied to any Person for any period,
the operating income of such Person for such period, as determined in
accordance with GAAP.
"Participant" has the meaning set forth in Section 9.07(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Acquisition" means the acquisition by the Borrower or any
Subsidiary of the Borrower of shares of capital stock of any Person or assets
from any Person, if: (A) in the case of the acquisition of shares of capital
stock of any Person, immediately after giving effect to such acquisition (i)
such Person is a Consolidated Subsidiary; (ii) the Borrower controls such
Person directly or indirectly through a Subsidiary; (iii) no Default shall have
occurred and be continuing; (iv) the line or lines of business engaged in by
such Person are substantially the same as the lines of business engaged in by
the Borrower and its Subsidiaries on the Closing Date; and (v) such acquisition
is made on a negotiated basis with the approval of the Board of Directors of
the Person to be acquired and, if necessary, the shareholders of the Person to
be acquired; and (B) in the case of the acquisition of assets from any Person,
immediately after giving effect to such acquisition: (i) the assets acquired
by the Borrower or such Subsidiary of the Borrower, shall be used by the
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Borrower or such Subsidiary in a line of business substantially the same as the
lines of business engaged in by the Borrower and its Subsidiaries on the
Closing Date; and (ii) no Default shall have occurred and be continuing.
"Person" means an individual, a corporation, a limited liability
company, a partnership (including without limitation, a joint venture), an
unincorporated association, a trust or any other entity or organization,
including, but not limited to, a government or political subdivision or an
agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding 5 plan years made contributions.
"Prime Rate" refers to that interest rate so denominated and set by
Wachovia from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by Wachovia. Wachovia
lends at interest rates above and below the Prime Rate.
"Properties" means all real property owned, leased or otherwise used
or occupied by the Borrower or any Subsidiary, wherever located.
"Rate Determination Date" has the meaning set forth in Section
2.05(a).
"Redeemable Preferred Stock" of any Person means any preferred stock
issued by such Person which is at any time prior to the Maturity Date either
(i) mandatorily redeemable (by sinking fund or similar payments or otherwise)
or (ii) redeemable at the option of the holder thereof.
"Reported Net Income" means, for any period, the Net Income of the
Borrower and its Consolidated Subsidiaries determined on a consolidated basis.
"Required Banks" means at any time: (1) Banks having at least 51% of
the aggregate amount of the Commitments; or, (2) if the Commitments are no
longer in effect, Banks holding at least 51% of the aggregate outstanding
principal amount of the Notes.
"Stations" means collectively (i) KPHO-TV, a VHF broadcasting station
licensed to Phoenix, Arizona, and serving the Phoenix market, (ii) WOFL-TV, a
UHF broadcasting station licensed to Orlando, Florida, and serving the Orlando-
Daytona-Melbourne-Cocoa-Claremont market; (iii) KCTV, a VHF broadcasting
station licensed to Kansas City, Missouri, and serving the Kansas City market;
(iv) WSMV-TV, a VHF broadcasting station licensed to Nashville, Tennessee, and
serving the Nashville market; (v) WNEM-TV, a VHF broadcasting station licensed
to Bay City, Michigan, and serving the Saginaw-Bay City-Flint market; (vi)
KVVU-TV, a VHF broadcasting station licensed to Henderson, Nevada, and serving
the Las Vegas-Henderson market; (vii) WOGX-TV, a UHF broadcasting station
licensed to Ocala, Florida, and serving the Ocala-Gainesville market; (viii)
WHNS-TV, a UHF broadcasting station licensed to Asheville, North Carolina, and
serving the Asheville, North Carolina-Greenville, South Carolina, market;
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(ix) KPDX, a UHF broadcasting station licensed to Vancouver, Washington, and
serving the Portland, Oregon, market; (x) WFSB, a VHF broadcasting station
licensed to Hartford, Connecticut, and serving the Hartford-New Haven,
Connecticut market; (xi) KFXO-LP, a low power broadcasting station licensed to
Bend, Oregon, and serving the Bend, Oregon market; and (xii) any and all
television, radio or other broadcasting stations, now or hereafter acquired or
controlled, directly or indirectly, by the Borrower.
"Subsidiary" means any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Borrower.
"Third Parties" means all lessees, sublessees, licensees and other
users of the Properties, excluding those users of the Properties in the
ordinary course of the Borrower's business and on a temporary basis.
"Total Assets" of any Person means, at any time, the total assets of
such Person, as set forth or reflected or as should be set forth or reflected
on the most recent balance sheet of such Person, prepared in accordance with
GAAP.
"Transferee" has the meaning set forth in Section 9.07(d).
"Unencumbered Total Assets" of any Person means, at any time, Total
Assets of such Person which are subject to any arrangement specified in 12 CFR
Section 221.2(g)(1).
"Unused Fee Payment Date" means each April 1, July 1, October 1 and
January 1.
"Wachovia" means Wachovia Bank, N.A., a national banking association
and its successors.
"WGNX" means WGNX, a UHF broadcasting station licensed to Atlanta,
Georgia and serving the Atlanta, Georgia market.
"WGNX Acquisition" means the acquisition by KCPQ Acquisition Corp. (a
Consolidated Subsidiary of the Borrower) of all or substantially all of the
assets used in connection with KCPQ-TV (the "KCPQ Assets"), a VHF broadcasting
station serving the Seattle, Washington market and the subsequent exchange of
the KCPQ Assets, for the assets used in connection with the operation of WGNX
and no less than $5,000,000 in cash; which exchange shall occur simultaneously
with the acquisition of the KCPQ Assets.
"Wholly Owned Subsidiary" means any Subsidiary all of the shares of
capital stock or other ownership interests of which (except directors'
qualifying shares) are at the time directly or indirectly owned by the
Borrower.
"Year 2000 Compliant and Ready" as used herein means that (A) the
Borrower's and its Subsidiaries' hardware and software systems with respect to
the operation of its business and its general business plan will in all
material respects: (i) handle date information involving any and all dates
before, during and/or after January 1, 2000, including accepting input,
providing output and performing date calculations in whole or in part;
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(ii) operate, accurately without interruption on and in respect of any and all
dates before, during and/or after January 1, 2000 and without any change in
performance; (iii) store and provide date input information without creating
any ambiguity as to the century and; (B) the Borrower has developed alternative
plans to ensure business continuity in all material respects in the event of
the failure of any or all of items (i) through (iii) above.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all terms of an accounting character used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP, applied on a basis consistent (except for changes
concurred in by the Borrower's independent public accountants or otherwise
required by a change in GAAP) with the most recent audited consolidated
financial statements of the Borrower and its Consolidated Subsidiaries
delivered to the Banks, unless with respect to any such change concurred in by
the Borrower's independent public accountants or required by GAAP, in
determining compliance with any of the provisions of this Agreement or any of
the other Loan Documents: (i) the Borrower shall have objected to determining
such compliance on such basis at the time of delivery of such financial
statements, or (ii) the Required Banks shall so object in writing within 30
days after the delivery of such financial statements, in either of which events
such calculations shall be made on a basis consistent with those used in the
preparation of the latest financial statements as to which such objection shall
not have been made (which, if objection is made in respect of the first
financial statements delivered under Section 5.01 hereof, shall mean the
financial statements referred to in Section 4.04).
SECTION 1.03. Use of Defined Terms. All terms defined in this
Agreement shall have the same meanings when used in any of the other Loan
Documents, unless otherwise defined therein or unless the context shall
otherwise require.
SECTION 1.04. Terminology. All personal pronouns used in this
Agreement, whether used in the masculine, feminine or neuter gender, shall
include all other genders; the singular shall include the plural and the
plural shall include the singular. Titles of Articles and Sections in this
Agreement are for convenience only, and neither limit nor amplify the
provisions of this Agreement.
SECTION 1.05. References. Unless otherwise indicated, references in
this Agreement to "Articles", "Exhibits", "Schedules", and "Sections" are
references to articles, exhibits, schedules and sections hereof.
ARTICLE II
THE CREDITS
SECTION 2.01. Commitments to Lend. Each Bank severally agrees, on
the terms and conditions set forth herein, to make Loans to the Borrower from
time to time before the Maturity Date; provided that, (i) each Bank's
Commitment shall be initially advanced, if at all, in one advance made on the
Funding Date; and (ii) immediately after each Loan is made, the aggregate
outstanding principal amount of the Loans by such Bank shall not exceed such
Bank's Commitment, provided further that the aggregate principal amount of all
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Loans at any one time outstanding shall not exceed the aggregate amount of the
Commitments of all of the Banks at such time. Each Borrowing that is a Euro-
Dollar Borrowing under this Section shall be in an aggregate principal amount
of $5,000,000 or any larger multiple of $1,000,000 and each Borrowing that is
a Base Rate Borrowing under this Section shall be in an aggregate principal
amount of $1,000,000 or any larger multiple of $500,000 and shall be made from
the several Banks ratably in proportion to their respective Commitments.
Within the foregoing limits, the Borrower may borrow under this Section 2.01,
repay or, to the extent permitted by Section 2.08, repay Loans and reborrow
under this Section 2.01 at any time before the Maturity Date; provided,
however, that after the Funding Date: (i) the proceeds of any Borrowing shall
be used exclusively for the purpose of repaying Loans maturing on the date of
such Borrowing and for no other purpose; and (ii) the ability to reborrow may
be limited by the provisions of Section 2.08 hereof.
SECTION 2.02. Method of Borrowing Loans. (a) The Borrower shall
give the Agent notice in the form attached hereto as Exhibit H (a "Notice of
Borrowing") prior to 11:00 A.M. (Atlanta, Georgia time) on the Domestic
Business Day of each Base Rate Borrowing and at least 3 Euro-Dollar Business
Days before each Euro-Dollar Borrowing, specifying:
(i) the date of such borrowing, which shall be a Domestic Business
Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in
the case of a Euro-Dollar Borrowing;
(ii) the aggregate amount of the Borrowing; and
(iii) whether the Loans comprising a Borrowing are to be Base Rate
Loans or Euro-Dollar Loans, and the duration of the Interest Period
applicable thereto, subject to the provisions of the definition of
Interest Period; provided, however, commencing on the Funding Date and
continuing until October 8, 1999, the Loans comprising a Borrowing shall
be Euro-Dollar Loans.
(b) Upon receipt of a Notice of Borrowing, the Agent shall promptly
notify each Bank of the contents thereof and of such Bank's ratable share of
such Borrowing, and such Notice of Borrowing shall not thereafter be revocable
by the Borrower.
(c) Not later than 12:00 P.M. (Atlanta, Georgia time) on the date of
each Borrowing referenced in the Notice of Borrowing, each Bank shall (except
as provided in subsection (d) of this Section) make available its ratable share
of such Borrowing in Federal or other funds immediately available in Atlanta,
Georgia, to the Agent at its address referred to in or specified pursuant to
Section 9.01. Unless the Agent determines that any applicable condition
specified in Article III has not been satisfied, the Agent will make the funds
so received from the Banks available to the Borrower at the Agent's aforesaid
address. Unless the Agent receives notice from a Bank, at the Agent's address
referred to in Section 9.01, no later than 4:00 P.M. (local time at such
address) on the Domestic Business Day before the date of the applicable
Borrowing stating that such Bank will not make the applicable Loan in
connection with such Borrowing, the Agent shall be entitled to assume that such
Bank will make the Loan in connection with such Borrowing and, in reliance on
such assumption, the Agent may (but shall not be obligated to) make available
such Bank's ratable share of such Borrowing to the Borrower for the account of
such Bank. If the Agent makes such Bank's ratable share available to the
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Borrower and such Bank does not in fact make its ratable share of such
Borrowing available on such date, the Agent shall be entitled to recover such
Bank's ratable share from such Bank or the Borrower (and for such purpose shall
be entitled to charge such amount to any account of the Borrower with the
Agent), together with interest thereon for each day during the period from the
date of such Borrowing until such sum shall be paid in full at a rate per annum
equal to the rate at which the Agent determines that it obtained (or could have
obtained) overnight Federal funds to cover such amount for each such day during
such period, provided that any such payment by the Borrower of such Bank's
ratable share and interest thereon shall be without prejudice to any rights
that the Borrower may have against such Bank. If such Bank shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such borrowing for purposes of this Agreement.
(d) If any Bank makes a new Loan hereunder on a day on which the
Borrower is to repay all or any part of an outstanding Loan from such Bank,
such Bank shall apply the proceeds of its new Loan to make such repayment and
only an amount equal to the difference (if any) between the amount being
borrowed and the amount being repaid shall be made available by such Bank to
the Agent as provided in subsection (c) of this Section, or remitted by the
Borrower to the Agent as provided in Section 2.11, as the case may be.
(e) Notwithstanding anything to the contrary contained in this
Agreement, no Euro-Dollar Borrowing may be made if there shall have occurred a
Default or an Event of Default, which Default or Event of Default shall not
have been cured or waived in writing.
(f) In the event that a Notice of Borrowing fails to specify whether
the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar
Loans, such Loans shall be made as Base Rate Loans. If the Borrower is
otherwise entitled under this Agreement to repay any Loans maturing at the end
of an Interest Period applicable thereto with the proceeds of a new Borrowing
and the Borrower fails to repay such Loans using its own moneys and fails to
give a Notice of Borrowing in connection with a new corresponding Borrowing, a
new Borrowing shall be deemed to be made on the date such Loans mature in an
amount equal to the principal amount of the Loans so maturing, and the Loans
comprising such new Borrowing shall be Base Rate Loans.
(g) Notwithstanding anything to the contrary contained herein, (i)
there shall not be more than nine (9) different Interest Periods outstanding at
the same time (for which purpose Interest Periods described in different
numbered clauses of the definition of the term "Interest Period" shall be
deemed to be different Interest Periods even if they are coterminous)
applicable to the Loans; (ii) there shall not be more than eight (8) different
Interest Periods outstanding at the same time (for which purpose Interest
Periods described in different numbered clauses of the definition of the term
"Interest Period" shall be deemed to be different Interest Periods even if they
are coterminous) applicable to the Loans that are Euro-Dollar Loans; and (iii)
the proceeds of any Borrowing that is a Base Rate Borrowing shall be applied
first to repay the unpaid principal amount of all Borrowings that are Base Rate
Loans (if any) outstanding immediately before such Borrowing.
SECTION 2.03. Notes. (a) The Loans of each Bank shall be evidenced
by a single Note payable to the order of such Bank for the account of its
Lending Office in an amount equal to the original principal amount of such
Bank's Commitment.
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(b) Upon receipt of each Bank's Note pursuant to Section 3.01, the
Agent shall deliver such Note to such Bank. Each Bank shall record, and prior
to any transfer of its Note shall endorse on the schedule forming a part
thereof appropriate notations to evidence, the date, amount and maturity of,
and effective interest rate for, each Loan made by it, the date and amount of
each payment of principal made by the Borrower with respect thereto and
whether, in the case of such Bank's Note, such Loan is a Base Rate Loan or
Euro-Dollar Loan, and such schedule shall constitute rebuttable presumptive
evidence of the principal amount owing and unpaid on such Bank's Notes;
provided that the failure of any Bank to make, or any error in making, any such
recordation or endorsement shall not affect the obligation of the Borrower
hereunder or under the Notes or the ability of any Bank to assign its Notes.
Each Bank is hereby irrevocably authorized by the Borrower so to endorse its
Notes and to attach to and make a part of any Note a continuation of any such
schedule as and when required.
SECTION 2.04. Maturity of Loans. Each Loan included in any
Borrowing shall mature, and the principal amount thereof shall be due and
payable, on the first to occur of: (i) the last day of the Interest Period
applicable to such Borrowing; or (ii) the Maturity Date; provided, however,
that the aggregate outstanding principal amount of all Loans at any one time
outstanding shall not exceed the aggregate amount of the Commitments of all of
the Banks at such time.
SECTION 2.05. Interest Rates. (a) Commencing on the Funding Date
and continuing until October 8, 1999, the Applicable Margin shall be .75% for
Euro-Dollar Loans. Commencing on October 8, 1999, and continuing at all times
thereafter, the "Applicable Margin" shall be determined quarterly based upon
the ratio of Consolidated Funded Debt to EBITDA (calculated as of the last day
of each Fiscal Quarter for the Fiscal Quarter then ended and the immediately
preceding three Fiscal Quarters), as follows:
If the Ratio of Consolidated Base
Funded Debt to EBITDA is: Rate Loans Euro-Dollar Loans
- ----------------------------- ---------- -----------------
Greater than or equal to 3.00 0% .90%
Greater than or equal to 2.50
but less than 3.00 0% .75%
Greater than or equal to 2.00
but less than 2.50 0% .625%
Less than 2.0 0% .50%
The Applicable Margin shall be determined effective as of the date (herein, the
"Rate Determination Date") which is 50 days after the last day of the Fiscal
Quarter as of the end of which the foregoing ratios are being determined, based
on the quarterly financial statements for such Fiscal Quarter, and the
Applicable Margin so determined shall remain effective from such Rate
Determination Date until the date which is 50 days after the last day of the
Fiscal Quarter in which such Rate Determination Date falls (which latter date
shall be a new Rate Determination Date); provided that (i) in the case of any
Applicable Margin determined for the fourth and final Fiscal Quarter of a
Fiscal Year, the Rate Determination Date shall be the date which is 100 days
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after the last day of such final Fiscal Quarter and such Applicable Margin
shall be determined based upon the annual audited financial statements for the
Fiscal Year ended on the last day of such final Fiscal Quarter, and (ii) if on
any Rate Determination Date the Borrower shall have failed to deliver to the
Banks the financial statements required to be delivered pursuant to Section
5.01(a) or Section 5.01(b) with respect to the Fiscal Year or Quarter, as the
case maybe, most recently ended prior to such Rate Determination Date, then
for the period beginning on such Rate Determination Date and ending on the
earlier of (A) the date on which the Borrower shall deliver to the Banks the
financial statements to be delivered pursuant to Section 5.01(b) with respect
to such Fiscal Quarter or any subsequent Fiscal Quarter, or (B) the date on
which the Borrower shall deliver to the Banks annual financial statements
required to be delivered pursuant to Section 5.01(a) with respect to the Fiscal
Year which includes such Fiscal Quarter or any subsequent Fiscal Year, the
Applicable Margin shall be determined as if the ratio of Consolidated Funded
Debt to EBITDA was more than 3.00 at all times during such period. Any change
in the Applicable Margin on any Rate Determination Date shall result in a
corresponding change, effective on and as of such Rate Determination Date, in
the interest rate applicable to each Loan outstanding on such Rate
Determination Date; provided that: (i) for Euro-Dollar Loans, changes in
Applicable Margin shall only be effective for Interest Periods commencing on or
after the Rate Determination Date; and (ii) no Applicable Margin shall be
decreased pursuant to this Section 2.05 if a Default is in existence on the
Rate Determination Date.
(b) Each Loan that is a Base Rate Loan shall bear interest on the
outstanding principal amount thereof, for each day from the date such Base Rate
Loan is made until it becomes due, at a rate per annum equal to the Base Rate
for such day plus the Applicable Margin. Such interest shall be payable on the
Interest Payment Date immediately following the last day of such Interest
Period. Any overdue principal of and, to the extent permitted by applicable
law, overdue interest on any Base Rate Loan shall bear interest, payable on
demand, for each day until paid at a rate per annum equal to the Default Rate.
(c) Each Loan that is a Euro-Dollar Loan shall bear interest on the
outstanding principal amount thereof, for the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Applicable Margin plus the
applicable Adjusted London Interbank Offered Rate for such Interest Period;
provided that if any Euro-Dollar Loan shall, as a result of clause (1)(c) of
the definition of Interest Period, have an Interest Period of less than one
month, such Euro-Dollar Loan shall bear interest during such Interest Period at
the rate applicable to Base Rate Loans during such period. Such interest shall
be payable for each Interest Period on the last day thereof and, if such
Interest Period is longer than 3 months, on each Interest Payment Date during
such Interest Period. Any overdue principal of and, to the extent permitted by
applicable law, overdue interest on any Euro-Dollar Loan shall bear interest,
payable on demand, for each day until paid at a rate per annum equal to the
Default Rate.
The "Adjusted London Interbank Offered Rate" applicable to any
Interest Period means a rate per annum equal to the quotient obtained (rounded
upward, if necessary, to the next higher 1/100th of 1%) by dividing (i) the
applicable London Interbank Offered Rate for such Interest Period by (ii) 1.00
minus the Euro-Dollar Reserve Percentage.
The "London Interbank Offered Rate" applicable to any Euro-Dollar
Loan means for the Interest Period of such Euro-Dollar Loan the rate per annum
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determined on the basis of the rate for deposits in Dollars of amounts equal or
comparable to the principal amount of such Euro-Dollar Loan offered for a term
comparable to such Interest Period, which rate appears on the display
designated as Page "3750" of the Telerate Service (or such other page as may
replace page 3750 of that service or such other service or services as may be
nominated by the British Banker's Association for the purpose of displaying
London Interbank Offered Rates for U.S. dollar deposits) determined as of 1:00
p.m. New York City time, 2 Euro-Dollar Business Days prior to the first day of
such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
any Bank to United States residents). The Adjusted London Interbank Offered
Rate shall be adjusted automatically on and as of the effective date of any
change in the Euro-Dollar Reserve Percentage.
(d) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
Banks by telecopy of each rate of interest so determined, and its determination
thereof shall be conclusive in the absence of manifest error.
(e) After the occurrence and during the continuance of a Default,
the principal amount of the Loans (and, to the extent permitted by applicable
law, all accrued interest thereon) may, at the election of the Required Banks,
bear interest at the Default Rate; provided, however, that automatically
whether or not the Required Banks elect to do so, any overdue principal of and,
to the extent permitted by law, overdue interest on any Loan shall bear
interest payable on demand, for each day until paid at a rate per annum equal
to the Default Rate.
(f) Notwithstanding anything herein to the contrary, if one or more
Commitment Reduction Dates are scheduled to occur during an Interest Period in
which the Loans are Euro-Dollar Loans other than on the last day of such
Interest Period, then during such Interest Period a portion of the outstanding
balance of the Loans which is equal to the aggregate amount of the principal
payment due on the Loans on such Commitment Reduction Dates shall be Base Rate
Loans, and only the remaining portion of the outstanding principal of the Loans
shall constitute Euro-Dollar Loans.
SECTION 2.06. Fees.
(a) The Borrower shall pay to the Agent for the ratable account of
each Bank an unused fee equal to the product of: (i) the aggregate of the daily
average amounts of such Bank's Commitment, times (ii) a per annum percentage
equal to the Applicable Unused Fee Rate. Such unused fee shall accrue from and
including the Closing Date to and including the Funding Date. Unused fees
shall be payable quarterly in arrears on each Unused Fee Payment Date and on
the Funding Date, provided that should the Commitments be terminated at any
time prior to the Funding Date for any reason, the entire accrued and unpaid
unused fee shall be paid on the date of such termination.
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(b) (1) On the Closing Date, the Borrower shall pay to the Agent for
the account of each Bank a closing up-front fee equal to the amount set forth
on Schedule 2.06A corresponding to such Bank's name.
(2) On the Initial Draw Date, the Borrower shall pay to the Agent
for the account of each Bank a funding up-front fee equal to the amount set
forth on Schedule 2.06B corresponding to such Bank's name; provided that the
Borrower shall have no obligation to pay any such funding up-front fee in the
event Loans are not advanced under this Agreement.
(c) The Borrower shall pay to the Agent, for the account and sole
benefit of the Agent, such fees and other amounts at such times as set forth in
the Agent's Letter Agreement.
SECTION 2.07. Optional Termination or Reduction of Commitments. At
any time prior to the Initial Draw Date, the Borrower may, upon at least 3
Domestic Business Days' notice to the Agent, terminate at any time, or
proportionately reduce from time to time by an aggregate amount of at least
$5,000,000 or any larger multiple of $1,000,000, the Commitments. If the
Commitments are terminated in their entirety, all accrued fees (as provided
under Section 2.06(a)) shall be payable on the effective date of such
termination.
SECTION 2.08. Mandatory Reduction and Termination of Commitments.
(1) The Commitments shall terminate on the Maturity Date and any
Loans then outstanding (together with accrued interest thereon) shall be due
and payable on such date.
(2) The aggregate amount of the Commitments shall be reduced,
commencing on the first Commitment Reduction Date and continuing on each
Commitment Reduction Date thereafter until and including the Commitment
Reduction Date on the Maturity Date in the amounts set forth below
corresponding to the respective Commitment Reduction Date:
Commitment Amount of
Reduction Date Reduction
-------------- ---------
November 1, 2002 20% of the amount of the Commitment on
the Funding Date (after giving effect to
the reduction in the Commitment, if any,
pursuant to Section 2.08(4)).
May 1, 2003 30% of the amount of the Commitment on
the Funding Date (after giving effect to the
reduction in the Commitment, if any,
pursuant to Section 2.08(4)).
November 1, 2003 20% of the amount of the Commitment on
the Funding Date (after giving effect to the
reduction in the Commitment, if any,
pursuant to Section 2.08(4)).
May 1, 2004 30% of the amount of the Commitment on
the Funding Date (after giving effect to
the reduction in the Commitment, if any,
pursuant to Section 2.08(4)).
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<PAGE>
(3) If the Borrower shall repay or prepay any Loans other than with
the proceeds of a new Borrowing under the Commitments then there shall be a
mandatory reduction of the Commitments to an amount equal to the aggregate
principal amount of all Loans then outstanding (after giving effect to such
repayment or prepayment).
(4) If on the Funding Date the Commitments shall not have been
reduced to a lesser amount pursuant to this Section 2.08, then on the Funding
Date there shall be a mandatory reduction of the Commitments to an amount equal
to the aggregate principal amount of all Loans outstanding on the Funding Date.
(5) Each reduction of the Commitments shall be applied to reduce the
Commitments of the several Banks ratably. Any optional reduction of the
Commitments shall reduce the amount of any subsequent mandatory reductions
pursuant to this Section 2.08 in their inverse chronological order of maturity.
No mandatory reduction of the Commitments pursuant to any paragraph of this
Section 2.08 shall reduce the amount of any subsequent mandatory reduction of
the Commitments pursuant to such paragraph or any other paragraph of this
Section 2.08.
SECTION 2.09. Optional Prepayments of Loans. (a) The Borrower may,
upon at least 1 Domestic Business Day's notice to the Agent, prepay any Loan
that is a Base Rate Borrowing in whole at any time, or from time to time in
part in amounts aggregating at least $1,000,000 or any larger multiple of
$500,000, by paying the principal amount to be prepaid together with accrued
interest thereon to the date of prepayment. Each such optional prepayment
shall be applied to prepay ratably the Loans of the several Banks included in
such Base Rate Borrowing. Any optional or mandatory prepayment of any Loan
pursuant to Section 2.09 or Section 2.10 shall not be reborrowed by Borrower
under this Agreement.
(b) Except as provided in Section 8.02, the Borrower may not prepay
all or any portion of the principal amount of any Euro-Dollar Loan prior to the
last day of an Interest Period applicable thereto.
(c) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share of such prepayment and such notice shall not thereafter be
revocable by the Borrower.
SECTION 2.10. Mandatory Prepayments. On each date on which the
Commitments are reduced or terminated pursuant to Section 2.07 or Section 2.08,
the Borrower shall repay or prepay such principal amount of the outstanding
Loans, if any (together with interest accrued thereon and any amounts due under
Section 8.05(a)), as may be necessary so that after such payment the aggregate
unpaid principal amount of the Loans does not exceed the aggregate amount of
the Commitments as then reduced. Each such payment or prepayment shall be
applied to repay or prepay ratably the Loans of the several Banks; provided
that such prepayment shall be applied to Loans outstanding on the date of such
prepayment (in direct order of maturity).
SECTION 2.11. General Provisions as to Payments. (a) The Borrower
shall make each payment of principal of, and interest on the Loans and of
unused fees hereunder, not later than 11:00 A.M. (Atlanta, Georgia time) on the
date when due, in Federal or other funds immediately available in Atlanta,
Georgia, to the Agent at its address referred to in Section 9.01. The Agent
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<PAGE>
will promptly distribute to each Bank its ratable share of each such payment
received by the Agent for the account of the Banks.
(b) Whenever any payment of principal of, or interest on, the Base
Rate Loans or of fees shall be due on a day which is not a Domestic Business
Day, the date for payment thereof shall be extended to the next succeeding
Domestic Business Day. Whenever any payment of principal of, or interest on,
the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business
Day, the date for payment thereof shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another
calendar month, in which case the date for payment thereof shall be the next
preceding Euro-Dollar Business Day. If the date for any payment of principal
is extended by operation of law or otherwise, interest thereon shall be payable
for such extended time.
(c) All payments of principal, interest and fees and all other
amounts to be made by the Borrower pursuant to this Agreement with respect to
any Loan or fee relating thereto shall be paid without deduction for, and free
from, any tax, imposts, levies, duties, deductions, or withholdings of any
nature now or at anytime hereafter imposed by any governmental authority or by
any taxing authority thereof or therein excluding in the case of each Bank, (i)
taxes imposed on or measured by its net income, (ii) franchise taxes imposed on
it, by the jurisdiction under the laws of which such Bank is organized or any
political subdivision thereof, and (iii) taxes imposed on its income, and
franchise taxes imposed on it, by the jurisdiction of such Bank's applicable
Lending Office or any political subdivision thereof (all such non-excluded
taxes, imposts, levies, duties, deductions or withholdings of any nature being
"Non-excluded Taxes"). In the event that the Borrower is required by
applicable law to make any such withholding or deduction of Non-excluded Taxes
with respect to any Loan or fee or other amount, promptly after receiving
notice thereof, the Borrower shall pay such deduction or withholding to the
applicable taxing authority, shall promptly furnish to any Bank in respect of
which such deduction or withholding is made all receipts and other documents
evidencing such payment and shall pay to such Bank additional amounts as may be
necessary in order that the amount received by such Bank after the required
withholding or other payment shall equal the amount such Bank would have
received had no such withholding or other payment been made. If no withholding
or deduction of Non-excluded Taxes are payable in respect of any Loan or fee
relating thereto, the Borrower shall furnish any Bank, at such Bank's request,
a certificate from each applicable taxing authority or an opinion of counsel
acceptable to such Bank, in either case stating that such payments are exempt
from or not subject to withholding or deduction of Non-excluded Taxes. If the
Borrower fails to provide such original or certified copy of a receipt
evidencing payment of Non-excluded Taxes or certificate(s) or opinion of
counsel of exemption, the Borrower hereby agrees to compensate such Bank for,
and indemnify them with respect to, the tax consequences of the Borrower's
failure to provide evidence of tax payments or tax exemption.
In the event any Bank receives a refund of any Non-excluded Taxes
paid by the Borrower pursuant to this Section 2.11, it will pay to the Borrower
the amount of such refund promptly upon receipt thereof; provided, however, if
at any time thereafter it is required to return such refund, the Borrower shall
promptly repay to it the amount of such refund.
Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
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<PAGE>
this Section 2.11 shall be applicable with respect to any Participant, Assignee
or other Transferee, and any calculations required by such provisions (i) shall
be made based upon the circumstances of such Participant, Assignee or other
Transferee, and (ii) constitute a continuing agreement and shall survive the
termination of this Agreement and the payment in full or cancellation of the
Notes.
SECTION 2.12. Computation of Interest and Fees. Interest on Base
Rate Loans shall be computed on the basis of a year of 360 days and paid for
the actual number of days elapsed (including the first day but excluding the
last day). Interest on Euro-Dollar Loans shall be computed on the basis of a
year of 360 days and paid for the actual number of days elapsed, calculated as
to each Interest Period from and including the first day thereof to but
excluding the last day thereof. Unused fees and any other fees payable
hereunder shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
ARTICLE III
CONDITIONS TO BORROWINGS
SECTION 3.01. Conditions to Closing. On the Closing Date, the
Borrower shall satisfy each of the following conditions:
(a) receipt by the Agent from each of the parties hereto of either
(i) a duly executed counterpart of this Agreement signed by such party or
(ii) a facsimile transmission stating that such party has duly executed a
counterpart of this Agreement and sent such counterpart to the Agent;
(b) receipt by the Agent of a duly executed Note for the account of
each Bank complying with the provisions of Section 2.03;
(c) receipt by the Agent of an opinion (together with any opinions
of local counsel relied on therein) of Thomas Slaughter, General Counsel
of the Borrower, dated as of the Closing Date, substantially in the form
of Exhibit B hereto and covering such additional matters relating to the
transactions contemplated hereby as the Agent or any Bank may reasonably
request;
(d) receipt by the Agent of an opinion of Womble, Carlyle, Sandridge
& Rice, PLLC, special counsel for the Agent, dated as of the Closing Date,
substantially in the form of Exhibit C hereto and covering such additional
matters relating to the transactions contemplated hereby as the Agent may
reasonably request;
(e) receipt by the Agent of a certificate (the "Closing
Certificate"), dated the Closing Date, substantially in the form of
Exhibit D hereto, signed by a principal financial officer of the Borrower,
to the effect that (i) no Default has occurred and is continuing on the
Closing Date; and (ii) the representations and warranties of the Borrower
contained in Article IV are true on and as of the Closing Date;
(f) receipt by the Agent of all documents which the Agent or any
Bank may reasonably request relating to the existence of the Borrower, the
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<PAGE>
corporate authority for and the validity of this Agreement, the Notes, and
any other matters relevant hereto, all in form and substance satisfactory
to the Agent, including without limitation a certificate of incumbency of
the Borrower (the "Borrower Officer's Certificate"), signed by the
Secretary or an Assistant Secretary of the Borrower, substantially in the
form of Exhibit E hereto, certifying as to the names, true signatures and
incumbency of the officer or officers of the Borrower authorized to
execute and deliver the Loan Documents to which it is a party, and
certified copies of the following items: (i) the Borrower's Certificate of
Incorporation, (ii) the Borrower's Bylaws, (iii) a certificate of the
Secretary of State of the State of incorporation of the Borrower as to the
existence of the Borrower as a corporation organized under the laws of
such state, and (iv) the action taken by the Board of Directors of the
Borrower authorizing the Borrower's execution, delivery and performance of
this Agreement, the Notes and the other Loan Documents to which it is a
party;
(g) receipt and satisfactory review by the Agent of all documents,
agreements and other matters and information which the Agent may
reasonably request relating to the WGNX Acquisition;
(h) receipt by the Agent of all fees due and payable under Sections
2.06(b)(1) and (c); and
(i) receipt by the Agent of such other documents, certificates and
other information, as the Agent or any Bank may reasonably request.
SECTION 3.02 Conditions to First Borrowing. The obligation of each
Bank to make a Loan on the occasion of the first Borrowing is subject to the
satisfaction of the conditions set forth in Section 3.03 and the following
additional conditions:
(a) receipt by the Agent of satisfactory evidence that on or before
the date of the first Borrowing, the Borrower shall have consummated the
WGNX Acquisition and acquired WGNX upon terms and conditions substantially
similar to the terms and conditions disclosed by the Borrower to the Agent
and the Banks on or before the Closing Date; and
(b) receipt by the Agent of satisfactory evidence that the Borrower
shall have obtained any and all consents, authorizations and approvals
from or in respect of, and shall have made all filings, registrations and
notices with, any and all governmental authorities, agencies or officials
with respect to the WGNX Acquisition and such WGNX Acquisition shall be in
compliance with and shall not constitute a default under any provision of
applicable law or regulation or of any agreement, judgment, injunction,
order, decree or other instrument binding upon the Borrower; and
(c) receipt by the Agent of all fees due and payable under Sections
2.06(b)(2) and (c); and
(d) the fact that, immediately before and after such Borrowing, no
Default shall have occurred.
SECTION 3.03. Conditions to All Borrowings. The obligation of each
Bank to make a Loan on the occasion of each Borrowing is subject to the
satisfaction of the following conditions:
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(a) except as provided in Section 2.02(f), receipt by the Agent of a
Notice of Borrowing as required by Section 2.02;
(b) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing;
(c) the fact that the representations and warranties of the Borrower
contained in Article IV of this Agreement shall be true on and as of the
date of such Borrowing; and
(d) the fact that, immediately after such Borrowing, (i) the
aggregate outstanding principal amount of the Loans of each Bank will not
exceed the amount of its Commitment and (ii) the aggregate outstanding
principal amount of the Loans will not exceed the aggregate amount of the
Commitments of all of the Banks as of such date.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the truth and accuracy of the
facts specified in clauses (b), (c) and (d) of this Section.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.01. Corporate Existence and Power. The Borrower is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified to transact
business in every jurisdiction where, by the nature of its business, such
qualification is necessary, and has all corporate powers and all governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower of this
Agreement, the Notes and the other Loan Documents (i) are within the Borrower's
corporate powers, (ii) have been duly authorized by all necessary corporate
action, (iii) require no action by or in respect of, or filing with, any
governmental body, agency or official, (iv) do not contravene, or constitute a
default under, any provision of applicable law or regulation or of the articles
of incorporation or by-laws of the Borrower or of any agreement, judgment,
injunction, order, decree or other instrument binding upon the Borrower or any
of its Subsidiaries, and (v) do not result in the creation or imposition of any
Lien on any asset of the Borrower or any of its Subsidiaries.
SECTION 4.03. Binding Effect. This Agreement constitutes a valid
and binding agreement of the Borrower enforceable in accordance with its terms,
and the Notes and the other Loan Documents, when executed and delivered in
accordance with this Agreement, will constitute valid and binding obligations
of the Borrower enforceable in accordance with their respective terms, provided
that the enforceability hereof and thereof is subject in each case to general
principles of equity and to bankruptcy, insolvency and similar laws affecting
the enforcement of creditors' rights generally.
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<PAGE>
SECTION 4.04. Financial Information. (a) The consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1998 and
the related consolidated statements of income, shareholders' equity and cash
flows for the Fiscal Year then ended, reported on by KPMG Peat Marwick, copies
of which have been delivered to each of the Banks, and the unaudited
consolidated financial statements of the Borrower for the interim period ended
September 30, 1998, copies of which have been delivered to each of the Banks,
fairly present, in conformity with GAAP, the consolidated financial position of
the Borrower and its Consolidated Subsidiaries as of such dates and their
consolidated results of operations and cash flows for such periods stated.
(b) Since June 30, 1998, there has been no event, act, condition or
occurrence having a Material Adverse Effect.
SECTION 4.05. Litigation. There is no action, suit or proceeding
pending, or to the knowledge of the Borrower threatened, against or affecting
the Borrower or any of its Subsidiaries before any court or arbitrator or any
governmental body, agency or official which could have a Material Adverse
Effect or which in any manner draws into question the validity or
enforceability of, or could impair the ability of the Borrower to perform its
obligations under, this Agreement, the Notes or any of the other Loan
Documents.
SECTION 4.06. Compliance with ERISA. (a) The Borrower and each
member of the Controlled Group have fulfilled their obligations under the
minimum funding standards of ERISA and the Code with respect to each Plan and
are in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and have not incurred any liability to the
PBGC or a Plan under Title IV of ERISA.
(b) Neither the Borrower nor any member of the Controlled Group has
incurred any withdrawal liability with respect to any Multiemployer Plan under
Title IV of ERISA, and no such liability is expected to be incurred.
SECTION 4.07. Taxes. There have been filed on behalf of the
Borrower and its Subsidiaries all Federal, state and local income, excise,
property and other tax returns which are required to be filed by them and all
taxes due pursuant to such returns or pursuant to any assessment received by or
on behalf of the Borrower or any Subsidiary have been paid. The charges,
accruals and reserves on the books of the Borrower and its Subsidiaries in
respect of taxes or other governmental charges are, in the opinion of the
Borrower, adequate. United States income tax returns of the Borrower and its
Subsidiaries have been examined and closed through the Fiscal Year ended June
30, 1995.
SECTION 4.08. Subsidiaries. Each of the Borrower's Subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, is duly qualified to transact
business in every jurisdiction where, by the nature of its business, such
qualification is necessary (except where the failure to be qualified shall not
cause or be reasonably expected to cause a material adverse effect upon such
Subsidiary's condition (financial, business or other)), and has all corporate
powers and all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted. The Borrower has no
Subsidiaries except those Subsidiaries listed on Schedule 4.08, which
accurately sets forth each such Subsidiary's complete name and jurisdiction of
incorporation.
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SECTION 4.09. Not an Investment Company. Neither the Borrower nor
any of its Subsidiaries is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 4.10 Public Utility Holding Company Act. Neither the
Borrower nor any of its Subsidiaries is a "holding company", or a "subsidiary
company" of a "holding company", or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company", as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended.
SECTION 4.11. Ownership of Property; Liens. Each of the Borrower
and its Consolidated Subsidiaries has title to its properties sufficient for
the conduct of its business, and none of such property is subject to any Lien
except as permitted in Section 5.07.
SECTION 4.12. No Default. Neither the Borrower nor any of its
Consolidated Subsidiaries is in default under or with respect to any agreement,
instrument or undertaking to which it is a party or by which it or any of its
property is bound which could have or cause a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
SECTION 4.13. Full Disclosure. All information heretofore furnished
by the Borrower to the Agent or any Bank for purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all such
information hereafter furnished by the Borrower to the Agent or any Bank will
be, true, accurate and complete in every material respect or based on
reasonable estimates on the date as of which such information is stated or
certified. The Borrower has disclosed to the Banks in writing any and all
facts which could have or cause a Material Adverse Effect.
SECTION 4.14. Environmental Matters. (a) Neither the Borrower nor
any Subsidiary is subject to any Environmental Liability which could have or
cause a Material Adverse Effect and neither the Borrower nor any Subsidiary has
been designated as a potentially responsible party under CERCLA or under any
state statute similar to CERCLA. None of the Properties has been identified on
any current or proposed (i) National Priorities List under 40 C.F.R. Section
300, (ii) CERCLIS list or (iii) any list arising from a state statute similar
to CERCLA.
(b) No Hazardous Materials have been or are being used, produced,
manufactured, processed, treated, recycled, generated, stored, disposed of,
managed or otherwise handled at, or shipped or transported to or from the
Properties or are otherwise present at, on, in or under the Properties, or, to
the best of the knowledge of the Borrower, at or from any adjacent site or
facility, except for Hazardous Materials, such as cleaning solvents, pesticides
and other materials used, produced, manufactured, processed, treated, recycled,
generated, stored, disposed of, and managed or otherwise handled in minimal
amounts in the ordinary course of business in compliance with all applicable
Environmental Requirements.
(c) The Borrower, and each of its Subsidiaries and Affiliates, has
procured all Environmental Authorizations necessary for the conduct of its
business, and is in compliance with all Environmental Requirements in
connection with the operation of the Properties and the Borrower's, and each of
its Subsidiary's and Affiliate's, respective businesses.
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SECTION 4.15. Compliance with Laws. The Borrower and each
Subsidiary is in compliance with all applicable laws, including, without
limitation, all Environmental Laws, except where any failure to comply with any
such laws would not, alone or in the aggregate, have a Material Adverse Effect.
SECTION 4.16. Capital Stock. All Capital Stock, debentures, bonds,
notes and all other securities of the Borrower and its Subsidiaries presently
issued and outstanding are validly and properly issued in accordance with all
applicable laws, including, but not limited to, the "Blue Sky" laws of all
applicable states and the federal securities laws. The issued shares of
Capital Stock of the Borrower's Wholly Owned Subsidiaries are owned by the
Borrower free and clear of any Lien or adverse claim. At least a majority of
the issued shares of capital stock of each of the Borrower's other Subsidiaries
(other than Wholly Owned Subsidiaries) is owned by the Borrower free and clear
of any Lien or adverse claim.
SECTION 4.17. Margin Stock. No part of the proceeds of any Loan
will be used for any purpose which violates, or which is inconsistent with, the
provisions of Regulations T, U or X.
SECTION 4.18. Insolvency. After giving effect to the execution and
delivery of the Loan Documents and the making of the Loans under this
Agreement, the Borrower will not be "insolvent," within the meaning of such
term as used in O.C.G.A. Section 18-2-22 or as defined in Section 101 of Title
11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer
Act, or any other applicable state law pertaining to fraudulent transfers, as
each may be amended from time to time, or be unable to pay its debts generally
as such debts become due, or have an unreasonably small capital to engage in
any business or transaction, whether current or contemplated.
SECTION 4.19. Broadcast Licenses. (a) Each of the Borrower and its
Subsidiaries owns, possesses or has the right to use all of the material
patents, trademarks, service marks, trade names, copyrights, licenses
(including, without limitation, Broadcast Licenses) and material rights with
respect thereto, necessary for the present and currently planned future conduct
of its business, without any known conflict with the rights of others.
(b) (i) Schedule 4.19 to this Agreement accurately lists and
describes each material Broadcast License of the Borrower and its Subsidiaries
which is in existence on the date hereof or which will be in existence on the
Closing Date and the expiration date, if any, of each such material Broadcast
License;
(ii) each such material Broadcast License is, or on the Closing Date
will be, in full force and effect;
(iii) the Borrower and each Subsidiary has fulfilled and performed
all of its obligations, if any, with respect to such material Broadcast
Licenses; and
(iv) no event has occurred which (A) permits, or after notice or
lapse of time or both would permit, revocation or termination of any such
material Broadcast License or (B) causes a Material Adverse Effect or in
the future may (so far as the Borrower can now reasonably foresee) cause a
Material Adverse Effect in any of the rights of the Borrower or any
Subsidiary thereunder. Except to the extent required by the
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Communications Act of 1934, as amended, and the rules and regulations of
the FCC, no Broadcast License or other franchise or license held by the
Borrower or any Subsidiary requires that any present stockholder,
director, officer or employee of the Borrower remain as such or that any
transfer of control of the Borrower or any Subsidiary must be approved by
any public or governmental body.
(c) The Broadcast Licenses described on Schedule 4.19 to this
Agreement constitute all of the main station licenses and low power television
licenses issued by the FCC or any Governmental Authority, necessary for the
operation of the business of the Borrower and each Subsidiary in the same
manner as it is currently conducted and as proposed to be conducted. The
Broadcast Licenses described on Schedule 4.19 to this Agreement are, or on the
Closing Date will be, validly issued and in full force and effect, unimpaired
by any act or omission by the Borrower or any Subsidiary. Except for
rulemakings or similar proceedings of general applicability to entities such as
the Borrower and its Subsidiaries, no Borrower or Subsidiary is a party to any
investigation (to the best of its knowledge), notice of violation, order, or
complaint issued by or before the FCC or any other Governmental Authority, nor
are there any other proceedings involving the Borrower or any one or more of
the Subsidiaries by or before the FCC or any other Governmental Authority,
which investigation, notice, order, complaint or proceeding could in any manner
materially threaten or adversely affect such Broadcast Licenses. Neither the
Borrower nor any Subsidiary has any knowledge of a threat of any such
investigation, notice of violation, order, complaint or proceeding with respect
thereto. Neither the Borrower nor any Subsidiary has any reason to believe
that the Broadcast Licenses listed and described on Schedule 4.19 to this
Agreement will not be renewed in the ordinary course. The Borrower and each
Subsidiary has filed with the FCC and all other applicable Governmental
Authorities all material reports, applications, documents, instruments and
information required to be filed by it pursuant to applicable rules and
regulations or requests of the FCC or such applicable Governmental Authorities.
SECTION 4.20. Y2K Plan. The Borrower has developed a comprehensive
plan (the "Y2K Plan") for insuring that the Borrower's and its Subsidiaries'
software and hardware systems which impact or affect in any way the business
operations of the Borrower and its Subsidiaries will be Year 2000 Compliant and
Ready. The Borrower and its Subsidiaries have met in all material respects the
Y2K Plan milestones such that all hardware and software systems will be Year
2000 Compliant and Ready in accordance with the Y2K Plan.
ARTICLE V
COVENANTS
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Note remains unpaid:
SECTION 5.01. Information. The Borrower will deliver to each of the
Banks:
(a) as soon as available and in any event within 90 days after the
end of each Fiscal Year, a consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of the end of such Fiscal Year and the related
consolidated statements of income, shareholders' equity and cash flows for such
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Fiscal Year, setting forth in each case in comparative form the figures for the
previous fiscal year, all certified by KPMG Peat Marwick or other independent
public accountants of nationally recognized standing, with such certification
to be free of exceptions and qualifications not acceptable to the Required
Banks;
(b) as soon as available and in any event within 45 days after the
end of each of the first 3 Fiscal Quarters of each Fiscal Year, a consolidated
balance sheet of the Borrower and its Consolidated Subsidiaries as of the end
of such Fiscal Quarter and the related statement of income and statement of
cash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended
at the end of such Fiscal Quarter, setting forth in each case in comparative
form the figures for the corresponding Fiscal Quarter and the corresponding
portion of the previous Fiscal Year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, GAAP and consistency by the chief
financial officer or the controller of the Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate,
substantially in the form of Exhibit F (a "Compliance Certificate"), of the
chief financial officer or the treasurer of the Borrower (i) setting forth in
reasonable detail the calculations required to establish whether the Borrower
was in compliance with the requirements of Sections 5.03 through 5.07,
inclusive, and 5.10 and 5.21 on the date of such financial statements, (ii)
setting forth the aggregate amount, as of the date of such certificate, of the
Capital Expenditures incurred in connection with the construction of the new
facility and expanded news programming for WGNX, and (iii) stating whether any
Default exists on the date of such certificate and, if any Default then exists,
setting forth the details thereof and the action which the Borrower is taking
or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of annual financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements to the effect
that nothing has come to their attention to cause them to believe that any
Default existed on the date of such financial statements;
(e) within 5 Domestic Business Days after the Borrower becomes aware
of the occurrence of any Default, a certificate of the chief financial officer
or the treasurer of the Borrower setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect thereto;
(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and annual, quarterly or monthly reports which the
Borrower shall have filed with the Securities and Exchange Commission;
(h) if and when the Borrower or any member of the Controlled Group
(i) gives or is required to give notice to the PBGC of any "reportable event"
(as defined in Section 4043 of ERISA) with respect to any Plan which might
constitute grounds for a termination of such Plan under Title IV of ERISA, or
knows that the plan administrator of any Plan has given or is required to give
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notice of any such reportable event, a copy of the notice of such reportable
event given or required to be given to the PBGC; (ii) receives notice of
complete or partial withdrawal liability under Title IV of ERISA, a copy of
such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of
an intent to terminate or appoint a trustee to administer any Plan, a copy of
such notice;
(i) promptly after the Borrower knows of the commencement thereof,
notice of any litigation, dispute or proceeding involving a claim against the
Borrower and/or any Subsidiary for $5,000,000 or more in excess of amounts
covered in full by applicable insurance; and
(j) promptly after the commencement thereof or promptly after the
Borrower knows of the commencement or threat thereof, notice of any Forfeiture
Proceeding; and
(k) as soon as practicable after the receipt thereof, and in any
event within ten (10) Domestic Business Days after the issuance thereof:
(i) copies of any order or notice of the FCC, a court of
competent jurisdiction or any other Governmental Authority which
designated any Broadcast License of the Borrower or any Subsidiary
or application therefor for a hearing, or which refuses renewal or
extension of any such Broadcast License, or revokes or suspends the
authority of the Borrower or any Subsidiary to operate a broadcast
station;
(ii) a copy of any competing application filed against any
Broadcast License of the Borrower or any Subsidiary or application
therefor;
(iii) copies of any citation, notice of violation or order to
show cause from the FCC, or any material complaint filed by or with
the FCC, in each case, in connection with the Borrower or any
Subsidiary; and
(iv) a copy of any notice or application by the Borrower or any
Subsidiary requesting authority to cease broadcasting on any
broadcast station for any period in excess of forty-eight (48) hours;
and
(l) simultaneously with the delivery of each set of annual and
quarterly financial statements referred to in paragraphs (a) and (b)
above, a statement of the Chief Executive Officer, Chief Financial
Officer, or Chief Technology Officer to the effect that nothing has come
to their attention to cause them to believe that the Y2K Plan milestones
have not been met in a manner such that the Borrower's and its
Subsidiaries hardware and software systems will not be Year 2000 Compliant
and Ready;
(m) within 5 Domestic Business Days after the Borrower becomes aware
of any deviations from the Y2K Plan which would cause the Borrower to not
be Year 2000 Compliant and Ready, a statement of the Chief Executive
Officer, Chief Financial Officer, or Chief Technology Officer setting
forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto;
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(n) promptly upon the receipt thereof, a copy of any third party
assessments of the Borrower's Y2K Plan together with any recommendations
made by such third party with respect to Year 2000 compliance;
(o) from time to time such additional information regarding the
financial position or business of the Borrower or any Subsidiary as the
Agent at the request of any Bank may reasonably request.
SECTION 5.02. Inspection of Property, Books and Records. The
Borrower will (i) keep, and will cause each Subsidiary to keep, proper books of
record and account in which full, true and correct entries in conformity with
GAAP shall be made of all dealings and transactions in relation to its business
and activities; and (ii) permit, and will cause each Subsidiary to permit,
representatives of any Bank at such Bank's expense prior to the occurrence of
an Event of Default and at the Borrower's expense after the occurrence of an
Event of Default to visit and inspect any of their respective properties, to
examine and make abstracts from any of their respective books and records and
to discuss their respective affairs, finances and accounts with their
respective officers, employees and independent public accountants. The
Borrower agrees to cooperate and assist in such visits and inspections, in each
case at such reasonable times and as often as may reasonably be desired.
SECTION 5.03. Ratio of Consolidated Funded Debt to EBITDA. The
ratio of Consolidated Funded Debt to EBITDA (calculated for the Fiscal Quarter
most recently ended and the immediately preceding three Fiscal Quarters) shall
at all times be less than 3.50 to 1.00.
SECTION 5.04. Fixed Charges Coverage. At the end of each Fiscal
Quarter the Fixed Charge Coverage Ratio shall not be less than 2.00 to 1.00 for
the period commencing with the Fiscal Quarter ending September 30, 1998, and
continuing for each Fiscal Quarter thereafter.
SECTION 5.05. Loans or Advances. Neither the Borrower nor any of
its Subsidiaries shall make loans or advances to any Person except: (i) loans
or advances to employees not exceeding Five Million and No/100 Dollars
($5,000,000) in the aggregate outstanding made in the ordinary course of
business and consistently with practices existing on June 30, 1998; (ii)
deposits required by government agencies or public utilities; (iii) loans or
advances to Wholly Owned Subsidiaries; and (iv) loans or advances not otherwise
permitted by the foregoing clauses of this Section, provided that the aggregate
outstanding loans and advances made under this clause (iv) when aggregated with
the Investments made under Section 5.06(vi) shall not at any time exceed
$40,000,000; provided, further, that after giving effect to the making of any
loans, advances or deposits permitted by clause (i), (ii), (iii) or (iv) of
this Section, no Default shall have occurred and be continuing.
SECTION 5.06. Investments. Neither the Borrower nor any of its
Subsidiaries shall make Investments in any Person except as permitted by
Section 5.05 and except Investments in (i) direct obligations of the United
States Government maturing within one year, (ii) certificates of deposit issued
by or money market accounts maintained at a United States bank: (x) whose
long-term certificates of deposit are rated at least AA or the equivalent
thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by
Moody's Investors Service, Inc.; or (y) if the long-term certificates of
deposit of such United States bank are unrated, the long-term debt of the
corporation owning such bank must be rated at least AA or the equivalent
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thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by
Moody's Investors Service, Inc., (iii) commercial paper rated A-1 or the
equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent
thereof by Moody's Investors Service, Inc. and in either case maturing within 9
months after the date of acquisition, (iv) tender bonds the payment of the
principal of and interest on which is fully supported by a letter of credit
issued by a United States bank whose long-term certificates of deposit are
rated at least AA or the equivalent thereof by Standard & Poor's Corporation
and Aa or the equivalent thereof by Moody's Investors Service, Inc., (v)
Permitted Acquisitions; and/or (vi) debt and investment securities not
otherwise permitted by the foregoing clauses of this Section, provided that the
aggregate amount of Investments made under this clause (vi) when aggregated
with the loans and advances made under section 5.05(iv) shall not at any time
exceed $40,000,000.
SECTION 5.07. Negative Pledge. Neither the Borrower nor any
Consolidated Subsidiary will create, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired by it, except:
(a) Liens existing on the date of this Agreement securing Debt
outstanding on the date of this Agreement in an aggregate principal amount not
exceeding $5,000,000;
(b) any Lien existing on any asset of any corporation at the time
such corporation becomes a Consolidated Subsidiary and not created in
contemplation of such event;
(c) any Lien on any asset securing Debt incurred or assumed for the
purpose of financing all or any part of the cost of acquiring or constructing
such asset, provided that such Lien attaches to such asset concurrently with or
within 18 months after the acquisition or completion of construction thereof;
(d) any Lien on any asset of any corporation existing at the time
such corporation is merged or consolidated with or into the Borrower or a
Consolidated Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof
by the Borrower or a Consolidated Subsidiary and not created in contemplation
of such acquisition;
(f) Liens securing Debt owing by any Subsidiary to the Borrower;
(g) any Lien arising out of the refinancing, extension, renewal or
refunding of any Debt secured by any Lien permitted by any of the foregoing
clauses of this Section, provided that (i) such Debt is not secured by any
additional assets, and (ii) the amount of such Debt secured by any such Lien is
not increased;
(h) Liens incidental to the conduct of its business or the ownership
of its assets which (i) do not secure Debt and (ii) do not in the aggregate
materially detract from the value of its assets or materially impair the use
thereof in the operation of its business;
(i) any Lien on Margin Stock; and
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(j) Liens not otherwise permitted by the foregoing clauses of this
Section securing Debt (other than indebtedness represented by the Notes) in an
aggregate principal amount at any time outstanding not to exceed 5% of
Consolidated Net Worth.
SECTION 5.08. Maintenance of Existence. The Borrower shall, and
shall cause each Subsidiary to, maintain its corporate existence and carry on
its business in substantially the same manner and in substantially the same
fields as such business is now carried on and maintained, except through
corporate reorganization to the extent permitted by Section 5.10.
SECTION 5.09. Dissolution. Neither the Borrower nor any of its
Subsidiaries shall suffer or permit dissolution or liquidation either in whole
or in part or redeem or retire any shares of its own stock or that of any
Subsidiary, except through corporate reorganization to the extent permitted by
Section 5.10.
SECTION 5.10. Consolidations, Mergers and Sales of Assets. The
Borrower will not, nor will it permit any Subsidiary to, consolidate or merge
with or into, or sell, lease or otherwise transfer all or any substantial part
of its assets to, any other Person, or discontinue or eliminate any business
line or segment, provided that (a) the Borrower may merge with another Person
if (i) such Person was organized under the laws of the United States of America
or one of its states, (ii) the Borrower is the corporation surviving such
merger and (iii) immediately after giving effect to such merger, no Default
shall have occurred and be continuing, (b) Subsidiaries of the Borrower may
merge with one another, (c) KCPQ Acquisition Corp., a Consolidated Subsidiary
of the Borrower, may merge with Kelly Television Co. if (i) Kelly Television
Co. is organized under the laws of the United States of America or one of its
states, (ii) KCPQ Acquisition Corp. is the corporation surviving such merger,
and (iii) immediately after giving effect to such merger, no Default shall have
occurred and be continuing, and (d) the foregoing limitation on the sale, lease
or other transfer of assets and on the discontinuation or elimination of a
business line or segment shall not prohibit, during any Fiscal Quarter, a
transfer of assets or the discontinuance or elimination of a business line or
segment (in a single transaction or in a series of related transactions) unless
the aggregate assets to be so transferred or utilized in a business line or
segment to be so discontinued, when combined with all other assets transferred,
and all other assets utilized in all other business lines or segments
discontinued, during such Fiscal Quarter and the immediately preceding three
Fiscal Quarters, either (x) contributed more than 20% of Consolidated Gross
Revenues during the 4 Fiscal Quarters immediately preceding such Fiscal
Quarter, or (y) contributed more than 20% of Consolidated Operating Profits
during the 4 consecutive Fiscal Quarters immediately preceding such Fiscal
Quarter; provided, however, that the exchange of assets in connection with the
WGNX Acquisition shall be excluded from any computation made pursuant to this
Section 5.10(c).
SECTION 5.11. Use of Proceeds. No portion of the proceeds of the
Loans will be used by the Borrower or any Subsidiary (i) in connection with,
either directly or indirectly, any tender offer for, or other acquisition of,
stock of any corporation with a view towards obtaining control of such other
corporation, except a Permitted Acquisition or (ii) for any purpose in
violation of any applicable law or regulation. The proceeds of the initial
Borrowing under this Agreement shall be used exclusively to finance or
refinance the WGNX Acquisition.
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SECTION 5.12. Compliance with Laws; Payment of Taxes. (a) The
Borrower will, and will cause each of its Subsidiaries and each member of the
Controlled Group to, comply with applicable laws (including but not limited to
ERISA), regulations and similar requirements of governmental authorities
(including but not limited to PBGC), except where the necessity of such
compliance is being contested in good faith through appropriate proceedings
diligently pursued. The Borrower will, and will cause each of its Subsidiaries
to, pay promptly when due all taxes, assessments, governmental charges, claims
for labor, supplies, rent and other obligations which: (A) if unpaid, might
become a lien against the property of the Borrower or any Subsidiary, except
liabilities being contested in good faith by appropriate proceedings diligently
pursued and against which, if requested by the Agent, the Borrower shall have
set up reserves in accordance with GAAP; or (B) when combined with all other
taxes, assessments, governmental charges, claims for labor, supplies, rent and
other obligations not paid promptly when due during the current Fiscal Quarter
and the immediately preceding three Fiscal Quarters is greater than $500,000.
(b) The Borrower shall not permit the aggregate complete or partial
withdrawal liability under Title IV of ERISA with respect to Multiemployer
Plans incurred by the Borrower and members of the Controlled Group to exceed
$5,000,000 at any time. For purposes of this Section 5.12(b), the amount of
withdrawal liability of the Borrower and members of the Controlled Group at any
date shall be the aggregate present value of the amount claimed to have been
incurred less any portion thereof which: (1) the Borrower and members of the
Controlled Group have paid; or (2) as to which the Borrower reasonably
believes, after appropriate consideration of possible adjustments arising under
Sections 4219 and 4221 of ERISA, it and members of the Controlled Group will
have no liability, provided that the Borrower shall obtain prompt written
advice from independent actuarial consultants supporting any such adjustments
under Sections 4219 and 4221 of ERISA. The Borrower agrees, from time to time
but no more frequently than once each Fiscal Year, upon the request of the
Agent (i) to request and obtain a current statement of the withdrawal liability
of the Borrower and members of the Controlled Group from each Multiemployer
Plan, if any, and (ii) to transmit a copy of such statement to the Agent and
the Banks within fifteen (15) days after the Borrower receives the same.
(c) No portion of the proceeds of the Loans will be used by the
Borrower or any Subsidiary in violation of (or in a manner so as to cause the
Agent or the Banks to be in violation of) any applicable law or regulation,
including without limitation Regulations G, T, U and X. At no time will the
value of Margin Stock purchased or held by the Borrower (including, without
limitation, shares of common stock of the Borrower repurchased by and held by
the Borrower but excluding shares of common stock of the Borrower repurchased
by and immediately retired by the Borrower) exceed 25% of Unencumbered Total
Assets of the Borrower.
SECTION 5.13. Insurance. The Borrower will maintain, and will cause
each of its Subsidiaries to maintain (either in the name of the Borrower or in
such Subsidiary's own name), with financially sound and reputable insurance
companies, insurance on all its Property in at least such amounts and against
at least such risks as are usually insured against in the same general area by
companies of established repute engaged in the same or similar business.
SECTION 5.14. Change in Fiscal Year. The Borrower will not change
its Fiscal Year without the consent of the Required Banks.
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SECTION 5.15. Maintenance of Property. The Borrower shall, and
shall cause each Subsidiary to, maintain all of its properties and assets in
good condition, repair and working order, ordinary wear and tear excepted.
SECTION 5.16. Environmental Notices. The Borrower shall furnish to
the Banks and the Agent prompt written notice of all Environmental Liabilities,
pending, threatened or anticipated Environmental Proceedings, Environmental
Notices, Environmental Judgments and Orders, and Environmental Releases at, on,
in, under or in any way affecting the Properties or any adjacent property, and
all facts, events, or conditions that could lead to any of the foregoing.
SECTION 5.17. Environmental Matters. The Borrower and its
Subsidiaries will not, and will not permit any Third Party to, use, produce,
manufacture, process, treat, recycle, generate, store, dispose of, manage at,
or otherwise handle or ship or transport to or from the Properties any
Hazardous Materials except for Hazardous Materials such as cleaning solvents,
pesticides and other similar materials used, produced, manufactured, processed,
treated, recycled, generated, stored, disposed, managed or otherwise handled in
minimal amounts in the ordinary course of business in compliance with all
applicable Environmental Requirements.
SECTION 5.18. Environmental Release. The Borrower agrees that upon
the occurrence of an Environmental Release at or on any of the Properties it
will act immediately to investigate the extent of, and to take appropriate
remedial action to eliminate, such Environmental Release, whether or not
ordered or otherwise directed to do so by any Environmental Authority.
SECTION 5.19. Transactions with Affiliates. Neither the Borrower
nor any of its Subsidiaries shall enter into, or be a party to, any Affiliate
Transaction, except: (1) as permitted by law; (2) in the ordinary course of
business; and (3) pursuant to reasonable terms which are no less favorable to
Borrower or such Subsidiary than would be obtained in a comparable arm's length
transaction with a Person which is not an Affiliate. As used herein,
"Affiliate Transaction" means a transaction between the Borrower or any of its
Subsidiaries with any Affiliate of the Borrower or any such Subsidiary (which
Affiliate is not the Borrower or a Subsidiary) which transaction when combined
with all other transactions between the Borrower or any of its Subsidiaries and
any Affiliate of the Borrower or a Subsidiary of the Borrower during the
current Fiscal Quarter and the immediately preceding three Fiscal Quarters is
greater than $1,000,000.
SECTION 5.20 Acquisitions. The Borrower will not, nor will it
permit any Subsidiary to purchase, lease or otherwise acquire (in a single
transaction or in a series of transactions), directly or indirectly: (i) all
or any substantial part of the assets or stock of any other Person; (ii) a
business line or segment of any other Person; or (iii) control of any other
Person; provided that the Borrower and it Subsidiaries may enter into a
Permitted Acquisition.
SECTION 5.21. Debt. (a) The Borrower shall not at any time incur,
create, assume, or permit to exist any Debt except: (1) the Loans; (2) Debt
owing to a Subsidiary of the Borrower; (3) Debt outstanding on the date of this
Agreement described on Schedule 5.21; and (4) Debt, in addition to Debt
permitted under clauses (1), (2) and (3) of this Section 5.21(a), provided that
the Borrower shall not incur, create, assume or permit to exist any Debt under
this Section 5.21(a) if the incurrence, creation, assumption or existence of
any such Debt shall result in a Default or Event of Default.
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(b) No Subsidiary of the Borrower shall at any time incur, create,
assume, or permit to exist any Debt except: (1) Debt owing to the Borrower or
another Subsidiary of the Borrower; and (2) Debt, in addition to Debt permitted
under clause (1) of this Section 5.21(b), provided that the aggregate
outstanding principal amount of Debt of all of the Subsidiaries of the Borrower
incurred under this clause (2) of Section 5.21(b) shall not at any time exceed
$1,000,000; provided further that no Subsidiary of the Borrower shall incur,
create, assume, or permit to exist any Debt under this Section 5.21(b) if the
incurrence, creation, assumption or existence of any such Debt shall result in
a Default or Event of Default.
SECTION 5.22. Termination or Loss of Licenses. The Borrower will
not, nor will it permit any Subsidiary to, take or fail to take any action
which permits, or after notice or lapse of time or both would permit,
revocation or termination of any material Broadcast License; except: (1)
revocation or termination of the Broadcast Licenses applicable to the KCPQ
Assets to the extent such revocation or termination is required in connection
with the WGNX Acquisition; and (2) revocation or termination of Broadcast
Licenses applicable to other assets that are transferred by the Borrower to the
extent any such transfer is permitted under this Agreement.
SECTION 5.23. No Activities Leading to Forfeiture. The Borrower
will not, nor will it permit any Subsidiary to, engage in the conduct of any
business or activity which could result in a Forfeiture Proceeding.
SECTION 5.24. Y2K Compliant and Ready. The Borrower will meet the
milestones contained in the Y2K Plan in all material respects and will have all
hardware and software systems Year 2000 Compliant and Ready (including all
material internal and external testing) on or before June 30, 1999.
ARTICLE VI
DEFAULTS
SECTION 6.01. Events of Default. If one or more of the following
events ("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of any
Loan or shall fail to pay any interest on any Loan within five Domestic
Business Days after such interest shall become due, or shall fail to pay
any fee or other amount payable hereunder within five Domestic Business
Days after such fee or other amount becomes due; or
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.01(e), 5.01(m), 5.02(ii), or 5.03 to 5.11,
inclusive, or Section 5.13, or Sections 5.20 to 5.23 inclusive; or
(c) the Borrower shall fail to observe or perform any covenant or
agreement contained or incorporated by reference in this Agreement (other
than those covered by clause (a) or (b) above) for thirty days after the
earlier of (i) the first day on which the Borrower has knowledge of such
failure or (ii) written notice thereof has been given to the Borrower by
the Agent at the request of any Bank; or
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(d) any representation, warranty, certification or statement made or
deemed made by the Borrower in Article IV of this Agreement or in any
certificate, financial statement or other document delivered pursuant to
this Agreement shall prove to have been incorrect or misleading in any
material respect when made (or deemed made); or
(e) the Borrower or any Subsidiary shall fail to make any payment in
respect of Debt outstanding (other than the Notes) in an aggregate
principal amount in excess of $10,000,000 when due or within any
applicable grace period; or
(f) any event or condition shall occur which results in the
acceleration of the maturity of Debt outstanding of the Borrower or any
Subsidiary in an aggregate principal amount in excess of $10,000,000 or
the mandatory prepayment or purchase of such Debt by the Borrower (or its
designee) or such Subsidiary (or its designee) prior to the scheduled
maturity thereof, or enables (or, with the giving of notice or lapse of
time or both, would enable) the holders of such Debt or any Person acting
on such holders' behalf to accelerate the maturity thereof or require the
mandatory prepayment or purchase thereof prior to the scheduled maturity
thereof, without regard to whether such holders or other Person shall have
exercised or waived their right to do so; or
(g) the Borrower or any Subsidiary shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of
a trustee, receiver, liquidator, custodian or other similar official of it
or any substantial part of its property, or shall consent to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally, or shall admit in writing its inability, to pay its debts as
they become due, or shall take any corporate action to authorize any of
the foregoing; or
(h) an involuntary case or other proceeding shall be commenced
against the Borrower or any Subsidiary seeking liquidation, reorganization
or other relief with respect to it or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed
for a period of 60 days; or an order for relief shall be entered against
the Borrower or any Subsidiary under the federal bankruptcy laws as now or
hereafter in effect; or
(i) the Borrower or any member of the Controlled Group shall fail to
pay when due any material amount which it shall have become liable to pay
to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to
terminate a Plan or Plans shall be filed under Title IV of ERISA by the
Borrower, any member of the Controlled Group, any plan administrator or
any combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate or to cause a trustee to be appointed
to administer any such Plan or Plans or a proceeding shall be instituted
by a fiduciary of any such Plan or Plans to enforce Section 515 or
4219(c)(5) of ERISA and such proceeding shall not have been dismissed
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within 30 days thereafter; or a condition shall exist by reason of which
the PBGC would be entitled to obtain a decree adjudicating that any such
Plan or Plans must be terminated; or
(j) one or more judgments or orders for the payment of money in an
aggregate amount in excess of $1,000,000 shall be rendered against the
Borrower or any Subsidiary and such judgment or order shall continue
unsatisfied and unstayed for a period of 30 days; or
(k) a federal tax lien shall be filed against the Borrower or any
Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be
filed against the Borrower or any Subsidiary under Section 4068 of ERISA
and in either case such lien shall remain undischarged for a period of 25
days after the date of filing; or
(l) (i) any Person or two or more Persons (other than the E. T.
Meredith Family Stockholders) acting in concert shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934) of 20%
or more of the outstanding shares of the voting stock of the Borrower; or
(ii) as of any date a majority of the Board of Directors of the Borrower
consists of individuals who were not either (A) directors of the Borrower
as of the corresponding date of the previous year, (B) selected or
nominated to become directors by the Board of Directors of the Borrower of
which a majority consisted of individuals described in clause (A), or (C)
selected or nominated to become directors by the Board of Directors of the
Borrower of which a majority consisted of individuals described in clause
(A) and individuals described in clause (B); or
(m) except as permitted by Section 5.22, if any of the Broadcast
Licenses necessary for the operation of the Stations shall be terminated,
forfeited or revoked or shall fail to be renewed for any reason
whatsoever, or, for any other reason, the Borrower or any Subsidiary of
the Borrower shall at any time fail to be a licensee under any of the
Broadcast Licenses or shall otherwise fail to have all required
authorizations, licenses and permits to construct, own, operate or promote
the Stations pursuant to the Broadcast Licenses; or
(n) if (x) any Forfeiture Proceeding shall have been commenced or the
Borrower shall have given the Bank written notice of the commencement of
any Forfeiture Proceeding as provided in Section 5.01(j) hereof; or (y)
the Bank has a good faith basis to believe that a Forfeiture Proceeding
has been threatened or commenced; or
(o) if, at any time, the FCC or any court of competent jurisdiction
shall have entered any final order or judgment (which, in either case,
shall have been outstanding for any period of more than thirty (30) days
during which enforcement of such order or judgment has not been stayed, by
reason of a pending appeal or otherwise) requiring the Borrower or any
Subsidiary of the Borrower to sell, transfer or divest itself of any
Station, or the assets which comprise any Station, by virtue of any
failure on the part of the Borrower or any Subsidiary of the Borrower to
comply with the Federal Communications Act of 1934, as amended, the rules
and regulations of the FCC promulgated thereunder or any FCC order or any
judgment, and the Borrower or any Subsidiary of the Borrower shall fail to
consummate such sale, transfer or divestiture within the time allotted
therefor;
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then, and in every such event, the Agent shall (i)if requested by the
Required Banks, by notice to the Borrower terminate the Commitments and they
shall thereupon terminate, and (ii) if requested by the Required Banks, by
notice to the Borrower declare the Notes (together with accrued interest
thereon) and all other amounts payable hereunder and under the other Loan
Documents to be, and the Notes (together with all accrued interest thereon) and
all other amounts payable hereunder and under the other Loan Documents shall
thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; provided that if any Event of Default specified in clause (g) or (h)
above occurs with respect to the Borrower, without any notice to the Borrower,
or any other act by the Agent or the Banks, the Commitments shall thereupon
automatically terminate and the Notes (together with accrued interest thereon)
and all other amounts payable hereunder and under the other Loan Documents
shall automatically become immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower. Notwithstanding the foregoing, the Agent shall have available to
it all other remedies at law or equity, and shall exercise any one or all of
them at the request of the Required Banks.
SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower of any Default under Section 6.01(c) promptly upon being requested to
do so by any Bank and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE AGENT
SECTION 7.01. Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under the other Loan Documents with such powers as are specifically delegated
to the Agent by the terms hereof and thereof, together with such other powers
as are reasonably incidental thereto. The Agent: (a) shall have no duties or
responsibilities except as expressly set forth in this Agreement and the other
Loan Documents, and shall not by reason of this Agreement or any other Loan
Document be a trustee for any Bank; (b) shall not be responsible to the Banks
for any recitals, statements, representations or warranties contained in this
Agreement or any other Loan Document, or in any certificate or other document
referred to or provided for in, or received by any Bank under, this Agreement
or any other Loan Document, or for the validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
any other document referred to or provided for herein or therein or for any
failure by the Borrower to perform any of its obligations hereunder or
thereunder; (c) shall not be required to initiate or conduct any litigation or
collection proceedings hereunder or under any other Loan Document except to the
extent requested by the Required Banks, and then only on terms and conditions
satisfactory to the Agent, and (d) shall not be responsible for any action
taken or omitted to be taken by it hereunder or under any other Loan Document
or any other document or instrument referred to or provided for herein or
therein or in connection herewith or therewith, except for its own gross
negligence or willful misconduct. The Agent may employ agents and attorneys-
in-fact and shall not be responsible for the negligence or misconduct of any
such agents or attorneys-in-fact selected by it with reasonable care. The
provisions of this Article VII are solely for the benefit of the Agent and the
Banks, and the Borrower shall not have any rights as a third party beneficiary
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of any of the provisions hereof. In performing its functions and duties under
this Agreement and under the other Loan Documents, the Agent shall act solely
as agent of the Banks and does not assume and shall not be deemed to have
assumed any obligation towards or relationship of agency or trust with or for
the Borrower. The duties of the Agent shall be ministerial and administrative
in nature, and the Agent shall not have by reason of this Agreement or any
other Loan Document a fiduciary relationship in respect of any Bank.
SECTION 7.02. Reliance by Agent. The Agent shall be entitled to
rely upon any certification, notice or other communication (including any
thereof by telephone, telefax, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper
Person or Persons, and upon advice and statements of legal counsel, independent
accountants or other experts selected by the Agent. As to any matters not
expressly provided for by this Agreement or any other Loan Document, the Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder and thereunder in accordance with instructions signed by the Required
Banks, and such instructions of the Required Banks in any action taken or
failure to act pursuant thereto shall be binding on all of the Banks.
SECTION 7.03. Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of a Default or an Event of Default (other than the
non-payment of principal of or interest on the Loans) unless the Agent has
received notice from a Bank or the Borrower specifying such Default or Event of
Default and stating that such notice is a "Notice of Default". In the event
that the Agent receives such a notice of the occurrence of a Default or an
Event of Default, the Agent shall give prompt notice thereof to the Banks. The
Agent shall give each Bank prompt notice of each non-payment of principal of or
interest on the Loans, whether or not it has received any notice of the
occurrence of such non-payment. The Agent shall (subject to Section 9.05) take
such action with respect to such Default or Event of Default as shall be
directed by the Required Banks; provided that, unless and until the Agent shall
have received such directions, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable in the best interests of
the Banks.
SECTION 7.04. Rights of Agent and its Affiliates as a Bank. With
respect to any Loan made by Wachovia or an Affiliate of Wachovia, such
Affiliate and Wachovia in their capacity as a Bank hereunder shall have the
same rights and powers hereunder as any other Bank and may exercise the same as
though it were not an Affiliate of Wachovia (or in Wachovia's case, acting as
the Agent), and the term "Bank" or "Banks" shall, unless the context otherwise
indicates, include such Affiliate of Wachovia or Wachovia in its individual
capacity. Such Affiliate and Wachovia may (without having to account therefor
to any Bank) accept deposits from, lend money to and generally engage in any
kind of banking, trust or other business with the Borrower (and any of its
Affiliates) as if they were not an Affiliate of the Agent or the Agent,
respectively; and such Affiliate and Wachovia may accept fees and other
consideration from the Borrower (in addition to any agency fees and arrangement
fees heretofore agreed to between the Borrower and Wachovia) for services in
connection with this Agreement or any other Loan Document or otherwise without
having to account for the same to the Banks.
SECTION 7.05. Indemnification. Each Bank severally agrees to
indemnify the Agent, to the extent the Agent shall not have been reimbursed by
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the Borrower, ratably in accordance with the aggregate amount of its Commitment
for any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including, without limitation, counsel fees
and disbursements) or disbursements of any kind and nature whatsoever which may
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement or any other Loan Document or any other
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (excluding, unless an Event of Default has
occurred and is continuing, the normal administrative costs and expenses
incident to the performance of its agency duties hereunder) or the enforcement
of any of the terms hereof or thereof or any such other documents; provided,
however, that no Bank shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Agent. If
any indemnity furnished to the Agent for any purpose shall, in the opinion of
the Agent, be insufficient or become impaired, the Agent may call for
additional indemnity and cease, or not commence, to do the acts indemnified
against until such additional indemnity is furnished.
SECTION 7.06. CONSEQUENTIAL DAMAGES. THE AGENT SHALL NOT BE
RESPONSIBLE OR LIABLE TO ANY BANK, THE BORROWER OR ANY OTHER PERSON OR ENTITY
FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A
RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
SECTION 7.07. Payee of Note Treated as Owner. The Agent may deem
and treat the payee of any Note as the owner thereof for all purposes hereof
unless and until a written notice of the assignment or transfer thereof shall
have been filed with the Agent and the provisions of Section 9.07(c) have been
satisfied. Any requests, authority or consent of any Person who at the time of
making such request or giving such authority or consent is the holder of any
Note shall be conclusive and binding on any subsequent holder, transferee or
assignee of that Note or of any Note or Notes issued in exchange therefor or
replacement thereof.
SECTION 7.08. Non-Reliance on Agent and Other Banks. Each Bank
agrees that it has, independently and without reliance on the Agent or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Borrower and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement or any of the
other Loan Documents. The Agent shall not be required to keep itself (or any
Bank) informed as to the performance or observance by the Borrower of this
Agreement or any of the other Loan Documents or any other document referred to
or provided for herein or therein or to inspect the properties or books of the
Borrower or any other Person. Except for notices, reports and other documents
and information expressly required to be furnished to the Banks by the Agent
hereunder or under the other Loan Documents, the Agent shall not have any duty
or responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of the Borrower or any
other Person (or any of their Affiliates) which may come into the possession of
the Agent. Each Bank acknowledges that each Bank designated as a "Syndication
Agent" or "Documentation Agent" on the signature pages of this Agreement shall
have no right, duty or responsibility and shall incur no liability, under this
Agreement in its capacity as a Syndication Agent or Documentation Agent.
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SECTION 7.09. Failure to Act. Except for action expressly required
of the Agent hereunder or under the other Loan Documents, the Agent shall in
all cases be fully justified in failing or refusing to act hereunder and
thereunder unless it shall receive further assurances to its satisfaction by
the Banks of their indemnification obligations under Section 7.05 against any
and all liability and expense which may be incurred by the Agent by reason of
taking, continuing to take, or failing to take any such action.
SECTION 7.10. Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent
may resign at any time by giving notice thereof to the Banks and the Borrower
and the Agent may be removed at any time with or without cause by the Required
Banks. Upon any such resignation or removal, the Required Banks shall have the
right to appoint a successor Agent. If no successor Agent that has been duly
appointed by the Required Banks shall have accepted such appointment within 30
days after the retiring Agent's notice of resignation or the Required Banks'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Banks, appoint a successor Agent. Any successor Agent shall be a bank which
has a combined capital and surplus of at least $500,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Article VII shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent
hereunder.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES; COMPENSATION
SECTION 8.01. Basis for Determining Interest Rate Inadequate or
Unfair. If on or prior to the first day of any Interest Period:
(a) the Agent determines that deposits in Dollars (in the applicable
amounts) are not being offered in the relevant market for such Interest
Period, or
(b) the Required Banks advise the Agent that the London Interbank
Offered Rate, as determined by the Agent will not adequately and fairly
reflect the cost to such Banks of funding the relevant type of Euro-Dollar
Loans for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the
Banks, whereupon: (i) the obligations of the Banks to make the Euro-Dollar
Loans specified in such notice shall be suspended; and (ii) the
obligations of the Banks to make the Euro-Dollar Loans specified in such
notice shall continue to be suspended until the Agent notifies the
Borrower that the circumstances giving rise to such suspension no longer
exist. Unless the Borrower notifies the Agent at least 2 Domestic
Business Days before the date of any Euro-dollar Borrowing for which a
Notice of Borrowing has previously been given that it elects not to borrow
on such date, such borrowing shall instead be made as a Base Rate
Borrowing.
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SECTION 8.02. Illegality. If, after the date hereof, the adoption of any
applicable law, rule or regulation, or any change in any existing or future
law, rule or regulation, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof (any such authority,
bank or agency being referred to as an "Authority" and any such event being
referred to as a "Change of Law"), or compliance by any Bank (or its Lending
Office) with any request or directive (whether or not having the force of law)
of any Authority shall make it unlawful or impossible for any Bank (or its
Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank
shall so notify the Agent, the Agent shall forthwith give notice thereof to the
other Banks and the Borrower, whereupon until such Bank notifies the Borrower
and the Agent that the circumstances giving rise to such suspension no longer
exist, the obligation of such Bank to make Euro-Dollar Loans shall be
suspended. Before giving any notice to the Agent pursuant to this Section,
such Bank shall designate a different Lending Office if such designation will
avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine
that it may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower
shall immediately prepay in full the then outstanding principal amount of each
Euro-Dollar Loan of such Bank, together with accrued interest thereon and any
amount due such Bank pursuant to Section 8.05(a). Concurrently with prepaying
each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an
equal principal amount from such Bank (on which interest and principal shall be
payable contemporaneously with the related Euro-Dollar Loans of the other
Banks), and such Bank shall make such a Base Rate Loan.
SECTION 8.03. Increased Cost and Reduced Return. (a) If after the
date hereof, a Change of Law or compliance by any Bank (or its Lending Office)
with any request or directive (whether or not having the force of law) of any
Authority:
(i) shall subject any Bank (or its Lending Office) to any tax, duty
or other charge with respect to its Euro-Dollar Loans, its Notes or its
obligation to make Euro-Dollar Loans, or shall change the basis of
taxation of payments to any Bank (or its Lending Office) of the principal
of or interest on its Euro-Dollar Loans or any other amounts due under
this Agreement in respect of its Euro-Dollar Loans or its obligation to
make Euro-Dollar Loans (except for changes in the rate of tax on the
overall net income of such Bank or its Lending Office imposed by the
jurisdiction in which such Bank's principal executive office or Lending
Office is located); or
(ii) shall impose, modify or deem applicable any reserve, special
deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve
System, but excluding with respect to any Euro-Dollar Loan any such
requirement included in an applicable Euro-Dollar Reserve Percentage)
against assets of, deposits with or for the account of, or credit extended
by, any Bank (or its Lending Office); or
(iii) shall impose on any Bank (or its Lending Office) or on the
London interbank market any other condition affecting its Euro-Dollar
Loans, its Notes or its obligation to make Euro-Dollar Loans;
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and the result of any of the foregoing is to increase the cost to such Bank (or
its Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce
the amount of any sum received or receivable by such Bank (or its Lending
Office) under this Agreement or under its Notes with respect thereto, by an
amount deemed by such Bank to be material, then, within 15 days after demand by
such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that after the date hereof the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change in any existing or future law, rule or regulation, or any change
in the interpretation or administration thereof, or compliance by any Bank (or
its Lending Office) with any request or directive regarding capital adequacy
(whether or not having the force of law) of any Authority, has or would have
the effect of reducing the rate of return on such Bank's capital as a
consequence of its obligations hereunder to a level below that which such Bank
could have achieved but for such adoption, change or compliance (taking into
consideration such Bank's policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, within 15
days after demand by such Bank, the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such reduction.
(c) Each Bank will promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section and will designate a
different Lending Office if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. A certificate of any Bank claiming
compensation under this Section and setting forth the additional amount or
amounts to be paid to it hereunder shall be conclusive in the absence of
manifest error. In determining such amount, such Bank may use any reasonable
averaging and attribution methods.
(d) The provisions of this Section 8.03 shall be applicable with
respect to any Participant, Assignee or other Transferee, and any calculations
required by such provisions shall be made based upon the circumstances of such
Participant, Assignee or other Transferee.
SECTION 8.04. Base Rate Loans Substituted for Euro-Dollar Loans. If
(i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been
suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation
under Section 8.03, and the Borrower shall, by at least 5 Euro-Dollar Business
Days' prior notice to such Bank through the Agent, have elected that the
provisions of this Section shall apply to such Bank, then, unless and until
such Bank notifies the Borrower that the circumstances giving rise to such
suspension or demand for compensation no longer apply:
(a) all Loans which would otherwise be made by such Bank as
Euro-Dollar Loans shall be made instead as Base Rate Loans (in all cases
interest and principal on such Loans shall be payable contemporaneously
with the related Euro-Dollar Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans has been repaid, all
payments of principal which would otherwise be applied to repay such
Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead.
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In the event that the Borrower shall elect that the provisions of this Section
shall apply to any Bank, the Borrower shall remain liable for, and shall pay to
such Bank as provided herein, all amounts due such Bank under Section 8.03 in
respect of the period preceding the date of conversion of such Bank's Loans
resulting from the Borrower's election.
SECTION 8.05. Compensation. Upon the request of any Bank, delivered
to the Borrower and the Agent, the Borrower shall pay to such Bank such amount
or amounts as shall compensate such Bank for any loss, cost or expense incurred
by such Bank as a result of:
(a) any payment or prepayment (pursuant to Section 2.09, Section
2.10 or otherwise) of a Euro-Dollar Loan on a date other than the last day of
an Interest Period for such Euro-Dollar Loan;
(b) any failure by the Borrower to prepay a Euro-Dollar Loan on the
date for such prepayment specified in the relevant notice of prepayment
hereunder; or
(c) any failure by the Borrower to borrow a Euro-Dollar Loan on the
date for the Euro-Dollar Borrowing of which such Euro-Dollar Loan is a part
specified in the applicable Notice of Borrowing delivered pursuant to Section
2.02;
such compensation to include, without limitation, an amount equal to the
excess, if any, of (x) the amount of interest which would have accrued on the
amount so paid or prepaid or not prepaid or borrowed for the period from the
date of such payment, prepayment or failure to prepay or borrow to the last day
of the then current Interest Period for such Euro-Dollar Loan (or, in the case
of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan
which would have commenced on the date of such failure to prepay or borrow) at
the applicable rate of interest for such Euro-Dollar Loan provided for herein
over (y) the amount of interest (as reasonably determined by such Bank) such
Bank would have paid on deposits in Dollars of comparable amounts having terms
comparable to such period placed with it by leading banks in the London
interbank market.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
transmission or similar writing) and shall be given to such party at its
address or telecopy number set forth on the signature pages hereof or such
other address or telecopy number as such party may hereafter specify for the
purpose by notice to each other party. Each such notice, request or other
communication shall be effective (i) if given by telecopier, when such telecopy
is transmitted to the telecopy number specified in this Section and the
telecopy machine used by the sender provides a written confirmation that such
telecopy has been so transmitted or receipt of such telecopy transmission is
otherwise confirmed, (ii) if given by mail, 72 hours after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid, and (iii) if given by any other means, when delivered at the address
specified in this Section; provided that notices to the Agent under Article II
or Article VIII shall not be effective until received.
- 46 -
<PAGE>
SECTION 9.02. No Waivers. No failure or delay by the Agent or any
Bank in exercising any right, power or privilege hereunder or under any Note or
other Loan Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The
Borrower shall pay (i) all out-of-pocket expenses of the Agent, including fees
and disbursements of special counsel for the Banks and the Agent, in connection
with the preparation of this Agreement and the other Loan Documents, any waiver
or consent hereunder or thereunder or any amendment hereof or thereof or any
Default or alleged Default hereunder or thereunder and (ii) if a Default
occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including
fees and disbursements of counsel to the Agent and each Bank, in connection
with such Default and collection and other enforcement proceedings resulting
therefrom, including out-of-pocket expenses incurred in enforcing this
Agreement and the other Loan Documents.
(b) The Borrower shall indemnify the Agent and each Bank against any
transfer taxes, documentary taxes, assessments or charges made by any Authority
by reason of the execution and delivery of this Agreement or the other Loan
Documents.
(c) The Borrower shall indemnify the Agent, the Banks and each
Affiliate thereof and their respective directors, officers, employees and
agents from, and hold each of them harmless against, any and all losses,
liabilities, claims or damages to which any of them may become subject, insofar
as such losses, liabilities, claims or damages arise out of or result from any
actual or proposed use by the Borrower of the proceeds of any extension of
credit by any Bank hereunder or breach by the Borrower of this Agreement or any
other Loan Document or from any investigation, litigation (including, without
limitation, any actions taken by the Agent or any of the Banks to enforce this
Agreement or any of the other Loan Documents) or other proceeding (including,
without limitation, any threatened investigation or proceeding) relating to the
foregoing, and the Borrower shall reimburse the Agent and each Bank, and each
Affiliate thereof and their respective directors, officers, employees and
agents, upon demand for any expenses (including, without limitation, legal
fees) incurred in connection with any such investigation or proceeding; but
excluding any such losses, liabilities, claims, damages or expenses incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified.
SECTION 9.04. Set-Offs; Sharing of Set-Offs. (a) The Borrower
hereby grants to each Bank, as security for the full and punctual payment and
performance of the obligations of the Borrower under this Agreement, a
continuing lien on and security interest in all deposits and other sums
credited by or due from such Bank to the Borrower or subject to withdrawal by
the Borrower; and regardless of the adequacy of any collateral or other means
of obtaining repayment of such obligations, each Bank may at any time upon or
after the occurrence of any Event of Default, and without notice to the
Borrower, set off the whole or any portion or portions of any or all such
deposits and other sums against such obligations, whether or not any other
Person or Persons could also withdraw money therefrom.
- 47 -
<PAGE>
(b) Each Bank agrees that if it shall, by exercising any right of
set-off or counterclaim or otherwise, receive payment of a proportion of the
aggregate amount of principal and interest owing with respect to the Notes held
by it which is greater than the proportion received by any other Bank in
respect of the aggregate amount of all principal and interest owing with
respect to the Notes held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
held by the other Banks owing to such other Banks, and/or such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the Banks owing to
such other Banks shall be shared by the Banks pro rata; provided that (i)
nothing in this Section shall impair the right of any Bank to exercise any
right of set-off or counterclaim it may have and to apply the amount subject to
such exercise to the payment of indebtedness of the Borrower other than its
indebtedness under the Notes, and (ii) if all or any portion of such payment
received by the purchasing Bank is thereafter recovered from such purchasing
Bank, such purchase from each other Bank shall be rescinded and such other Bank
shall repay to the purchasing Bank the purchase price of such participation to
the extent of such recovery together with an amount equal to such other Bank's
ratable share (according to the proportion of (x) the amount of such other
Bank's required repayment to (y) the total amount so recovered from the
purchasing Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Borrower
agrees, to the fullest extent it may effectively do so under applicable law,
that any holder of a participation in a Note, whether or not acquired pursuant
to the foregoing arrangements, may exercise rights of set-off or counterclaim
and other rights with respect to such participation as fully as if such holder
of a participation were a direct creditor of the Borrower in the amount of such
participation.
SECTION 9.05. Amendments and Waivers. (a) Any provision of this
Agreement, the Notes or any other Loan Documents may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed by the
Borrower and the Required Banks (and, if the rights or duties of the Agent are
affected thereby, by the Agent); provided that no such amendment or waiver
shall, unless signed by all of the Banks, (i) change the Commitment of any Bank
or subject any Bank to any additional obligation, (ii) change the principal of
or decrease the rate of interest on any Loan or change the amount of any fees
hereunder, (iii) change the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder, (iv) change the amount of
principal, interest or fees due on any date fixed for the payment thereof under
this Agreement, the Notes or any other Loan Document, (v) change the percentage
of the Commitment or of the aggregate unpaid principal amount of the Notes, or
the percentage of Banks, which shall be required for the Banks or any of them
to take any action under this Section or any other provision of this Agreement,
(vi) change the manner of application of any payments made under this Agreement
or the Notes, (vii) release or substitute all or any substantial part of the
collateral (if any) held as security for the Loans, (viii) waive any of the
conditions precedent contained in Section 3.01, Section 3.02 or Section 3.03,
(ix) change the date fixed for any reduction or termination of the Commitments
of any Bank, or (x) release, discharge or terminate any guaranty given to
support payment of the Loans.
(b) The Borrower will not solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement unless each Bank shall be informed thereof by the Borrower and shall
- 48 -
<PAGE>
be afforded an opportunity of considering the same and shall be supplied by the
Borrower with sufficient information to enable it to make an informed decision
with respect thereto. Executed or true and correct copies of any waiver or
consent effected pursuant to the provisions of this Agreement shall be
delivered by the Borrower to each Bank forthwith following the date on which
the same shall have been executed and delivered by the requisite percentage of
Banks. The Borrower will not, directly or indirectly, pay or cause to be paid
any remuneration, whether by way of supplemental or additional interest, fee or
otherwise, to any Bank (in its capacity as such) as consideration for or as an
inducement to the entering into by such Bank of any waiver or amendment of any
of the terms and provisions of this Agreement unless such remuneration is
concurrently paid, on the same terms, ratably to all such Banks.
SECTION 9.06. Margin Stock Collateral. Each of the Banks represents
to the Agent and each of the other Banks that it in good faith is not, directly
or indirectly (by negative pledge or otherwise), relying upon any Margin Stock
as collateral in the extension or maintenance of the credit provided for in
this Agreement.
SECTION 9.07. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement, without
the written consent of the Banks and Agent.
(b) Any Bank may at any time sell to one or more Persons (each a
"Participant") participating interests in any Loan owing to such Bank, any Note
held by such Bank, any Commitment hereunder or any other interest of such Bank
hereunder. In the event of any such sale by a Bank of a participating interest
to a Participant, such Bank's obligations under this Agreement shall remain
unchanged, such Bank shall remain solely responsible for the performance
thereof, such Bank shall remain the holder of any such Note for all purposes
under this Agreement, and the Borrower and the Agent shall continue to deal
solely and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement. In no event shall a Bank that sells a
participation be obligated to the Participant to take or refrain from taking
any action hereunder except that such Bank may agree that it will not (except
as provided below), without the consent of the Participant, agree to (i) the
change of any date fixed for the payment of principal of or interest on the
related Loan or Loans, (ii) the change of the amount of any principal, interest
or fees due on any date fixed for the payment thereof with respect to the
related Loan or Loans, (iii) the change of the principal of the related Loan or
Loans or , (iv) any change in the rate at which either interest is payable
thereon or (if the Participant is entitled to any part thereof) facility or
unused fee is payable hereunder from the rate at which the Participant is
entitled to receive interest or facility or unused fee (as the case may be) in
respect of such participation, (v) the release or substitution of all or any
substantial part of the collateral (if any) held as security for the Loans, or
(vi) the release of any guaranty given to support payment of the Loans. Each
Bank selling a participating interest in any Loan, Note, Commitment or other
interest under this Agreement shall, within 10 Domestic Business Days of such
sale, provide the Borrower and the Agent with written notification stating that
such sale has occurred and identifying the Participant and the interest
purchased by such Participant. The Borrower agrees that each Participant shall
be entitled to the benefits of Article VIII with respect to its participation
in Loans outstanding from time to time.
- 49 -
<PAGE>
(c) Any Bank may at any time assign to one or more banks or
financial institutions (each an "Assignee") all, or a proportionate part of
all, of its rights and obligations under this Agreement, the Notes and the
other Loan Documents, and such Assignee shall assume all such rights and
obligations, pursuant to an Assignment and Acceptance in the form attached
hereto as Exhibit G, executed by such Assignee, such transferor Bank and the
Agent (and, in the case of (i) an Assignee that is not then a Bank or an
Affiliate of a Bank; and (ii) an assignment not made during the existence of a
Default or an Event of Default, by the Borrower); provided that (i) the
aggregate amount of the Commitment of the assigning Bank being assigned
pursuant to such assignment (determined as of the effective date of the
assignment) shall be equal to $10,000,000 (or any larger multiple of
$1,000,000), (ii) no interest may be sold by a Bank pursuant to this paragraph
(c) to any Assignee that is not then a Bank or an Affiliate of a Bank without
the consent of the Borrower, which consent shall not be unreasonably withheld,
provided that the Borrower's consent shall not be necessary with respect to any
assignment made during the existence of a Default or an Event of Default; (iii)
a Bank may not, at any one time, have more than two (2)Assignees that either:
(y) are not then Banks or an Affiliate of such a Bank; or (z) that were not
previously Banks; (iv) no interest may be sold by a Bank pursuant to this
paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a
Bank, without the consent of the Agent, which consent shall not be unreasonably
withheld, provided, that, although the Agent's consent may not be necessary
with respect to an Assignee that is then a Bank or an Affiliate of a Bank, no
such assignment shall be effective until the conditions set forth in the
following sentence are satisfied. Upon (A) execution of the Assignment and
Acceptance by such transferor Bank, such Assignee, the Agent and (if
applicable) the Borrower, (B) delivery of an executed copy of the Assignment
and Acceptance to the Borrower and the Agent, (C) payment by such Assignee to
such transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, and (D) payment by the assigning Bank
of a processing and recordation fee of $3,500 to the Agent, such Assignee shall
for all purposes be a Bank party to this Agreement and shall have all the
rights and obligations of a Bank under this Agreement to the same extent as if
it were an original party hereto with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by the Borrower, the Banks or the Agent shall be required. Upon the
consummation of any transfer to an Assignee pursuant to this paragraph (c), the
transferor Bank, the Agent and the Borrower shall make appropriate arrangements
so that, if required, new Notes are issued to each of such Assignee and such
transferor Bank.
(d) Subject to the provisions of Section 9.08, the Borrower
authorizes each Bank to disclose to any Participant, Assignee or other
transferee (each a "Transferee") and any prospective Transferee any and all
financial and other information in such Bank's possession concerning the
Borrower which has been delivered to such Bank by the Borrower pursuant to this
Agreement or which has been delivered to such Bank by the Borrower in
connection with such Bank's credit evaluation prior to entering into this
Agreement.
(e) No Transferee shall be entitled to receive any greater payment
under Section 8.03 than the transferor Bank would have been entitled to receive
with respect to the rights transferred, unless such transfer is made with the
Borrower's prior written consent or by reason of the provisions of Section 8.02
- 50 -
<PAGE>
or 8.03 requiring such Bank to designate a different Lending Office under
certain circumstances or at a time when the circumstances giving rise to such
greater payment did not exist.
(f) Anything in this Section 9.07 to the contrary notwithstanding,
any Bank may assign and pledge all or any portion of the Loans and/or
obligations owing to it to any Federal Reserve Bank or the United States
Treasury as collateral security pursuant to Regulation A of the Board of
Governors of the Federal Reserve System and Operating Circular issued by such
Federal Reserve Bank, provided that any payment in respect of such assigned
Loans and/or obligations made by the Borrower to the assigning and/or pledging
Bank in accordance with the terms of this Agreement shall satisfy the
Borrower's obligations hereunder in respect of such assigned Loans and/or
obligations to the extent of such payment. No such assignment shall release
the assigning and/or pledging Bank from its obligations hereunder.
SECTION 9.08. Confidentiality. Each Bank agrees to exercise its
best efforts to keep any information delivered or made available by the
Borrower to it which is clearly indicated to be confidential information,
confidential from anyone other than persons employed or retained by such Bank
who are or are expected to become engaged in evaluating, approving, structuring
or administering the Loans; provided, however, that nothing herein shall
prevent any Bank from disclosing such information (i) to any other Bank, (ii)
upon the order of any court or administrative agency, (iii) upon the request or
demand of any regulatory agency or authority having jurisdiction over such
Bank, (iv) which has been publicly disclosed, (v) to the extent reasonably
required in connection with any litigation to which the Agent, any Bank or
their respective Affiliates may be a party, (vi) to the extent reasonably
required in connection with the exercise of any remedy hereunder, (vii) to such
Bank's legal counsel, Affiliates and independent auditors and (viii) to any
actual or proposed Participant, Assignee or other Transferee of all or part of
its rights hereunder which has agreed in writing to be bound by the provisions
of this Section 9.08.
SECTION 9.09. Representation by Banks. Each Bank hereby represents
that it is a commercial lender or financial institution which makes loans in
the ordinary course of its business and that it will make its Loans hereunder
for its own account in the ordinary course of such business; provided, however,
that, subject to Section 9.07, the disposition of the Note or Notes held by
that Bank shall at all times be within its exclusive control.
SECTION 9.10. Obligations Several. The obligations of each Bank
hereunder are several, and no Bank shall be responsible for the obligations or
commitment of any other Bank hereunder. Nothing contained in this Agreement
and no action taken by the Banks pursuant hereto shall be deemed to constitute
the Banks to be a partnership, an association, a joint venture or any other
kind of entity. The amounts payable at any time hereunder to each Bank shall
be a separate and independent debt, and each Bank shall be entitled to protect
and enforce its rights arising out of this Agreement or any other Loan Document
and it shall not be necessary for any other Bank to be joined as an additional
party in any proceeding for such purpose.
SECTION 9.11. Survival of Certain Obligations. Sections 8.03(a),
8.03(b), 8.05 and 9.03, and the obligations of the Borrower thereunder, shall
survive, and shall continue to be enforceable notwithstanding, the termination
of this Agreement and the Commitments and the payment in full of the principal
of and interest on all Loans.
- 51 -
<PAGE>
SECTION 9.12. Georgia Law. This Agreement and each Note shall be
construed in accordance with and governed by the law of the State of Georgia.
SECTION 9.13. Severability. In case any one or more of the
provisions contained in this Agreement, the Notes or any of the other Loan
Documents should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein and therein shall not in any way be affected or impaired thereby and
shall be enforced to the greatest extent permitted by law.
SECTION 9.14. Interest. In no event shall the amount of interest
due or payable hereunder or under the Notes exceed the maximum rate of interest
allowed by applicable law, and in the event any such payment is inadvertently
made to any Bank by the Borrower or inadvertently received by any Bank, then
such excess sum shall be credited as a payment of principal, unless the
Borrower shall notify such Bank in writing that it elects to have such excess
sum returned forthwith. It is the express intent hereof that the Borrower not
pay and the Banks not receive, directly or indirectly in any manner whatsoever,
interest in excess of that which may legally be paid by the Borrower under
applicable law.
SECTION 9.15. Interpretation. No provision of this Agreement or any
of the other Loan Documents shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or judicial
authority by reason of such party having or being deemed to have structured or
dictated such provision.
SECTION 9.16. Consent to Jurisdiction. The Borrower (a) submits to
personal jurisdiction in the State of Georgia, the courts thereof and the
United States District Courts sitting therein, for the enforcement of this
Agreement, the Notes and the other Loan Documents, (b) waives any and all
personal rights under the law of any jurisdiction to object on any basis
(including, without limitation, inconvenience of forum) to jurisdiction or
venue within the State of Georgia for the purpose of litigation to enforce this
Agreement, the Notes or the other Loan Documents, and (c) agrees that service
of process may be made upon it in the manner prescribed in Section 9.01 for the
giving of notice to the Borrower. Nothing herein contained, however, shall
prevent the Agent from bringing any action or exercising any rights against any
security and against the Borrower personally, and against any assets of the
Borrower, within any other state or jurisdiction.
SECTION 9.17. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
[Remainder of this page intentionally left blank]
- 52 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, under seal, by their respective authorized officers as of the
day and year first above written.
MEREDITH CORPORATION
ATTEST: By: /s/ Michael A. Sell (SEAL)
-------------------
Title: Treasurer
/s/ Thomas L. Slaughter 1716 Locust Street
- ----------------------- Des Moines, Iowa 50309-3023
Its: Secretary Attention: Michael A. Sell
Telecopy number: 515-284-3828
[CORPORATE SEAL] Telephone number: 515-284-2633
With a copy to:
Meredith Corporation
1716 Locust Street
Des Moines, Iowa 50309-3023
Attention: General Counsel
Telecopy Number: (515) 284-3933
Telephone Number: (515) 284-3056
- 53 -
<PAGE>
COMMITMENTS:
WACHOVIA BANK, N.A., as Agent and as a Bank
Commitment:
$47,500,000 By: /s/ Mark L. Thomas (SEAL)
------------------
Title: Vice President
Wachovia Bank, N.A.
Syndication Services
191 Peachtree Street, N.E., Mail Code GA-0423
Atlanta, Georgia 30303-1757
Attention: Lynn Smith (27th Floor)
Telecopy number: (404) 332-4005
Telephone number: (404) 332-4008
With a copy to:
Wachovia Bank, N.A.
191 Peachtree Street, N.E., Mail Code GA-0370
Atlanta, Georgia 30303-1757
Attention: Mark Thomas (28th Floor)
Telecopy number: (404) 332-6898
Telephone number: (404) 332-6450
[Remainder of this page intentionally left blank]
- 54 -
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO, as
Syndication Agent and a Bank
Commitment:
$32,500,000 By: /s/ Laurie W. Blazek (SEAL)
--------------------
Title: Vice President
Lending Office
--------------
The First National Bank of Chicago
One First National Plaza
Suite 0629
Chicago, IL 60670
Attention: Laurie Blazek
Telecopy number: (312) 732-8587
Telephone number: (312) 732-5475
With a copy to:
BankOne, Colorado, N.A.
1125 17th Street
3rd Floor
MC: CO1-9523
Denver, CO 80202
Attention: Mariel Keane Hough, Vice President
Telecopy number: (303) 244-3351
Telephone number: (303) 244-3225
[Remainder of this page intentionally left blank]
- 55 -
<PAGE>
SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL
ASSOCIATION, as Documentation Agent and a Bank
Commitment:
$32,500,000 By: /s/ Ronald K. Rueve (SEAL)
-------------------
Title: Vice President
Lending Office
--------------
SunTrust Bank, Central Florida, National
Association
Mail Code O-1043
2000 South Trust Bank
Orlando, FL 32801
Attention: Stephen L. Leister, Vice President,
National Banking
Telecopy number: (407) 237-6894
Telephone number: (407) 237-4705
[Remainder of this page intentionally left blank]
- 56 -
<PAGE>
FLEET NATIONAL BANK
Commitment:
$27,500,000 By: /s/ Stephen J. Healey (SEAL)
---------------------
Title: Senior Vice President
Lending Office
--------------
Fleet National Bank
1 Federal Street
MC: MAOFD03D
Boston, MA 02110
Attention: Stephen Healey
Telecopy number: (617) 346-4346
Telephone number: (617) 346-4367
[Remainder of this page intentionally left blank]
- 57 -
<PAGE>
BANQUE NATIONALE de PARIS
Commitment:
$20,000,000 By: /s/ Jo Ellen Bender (SEAL)
-------------------
Title: Senior Vice President & Manager
By: /s/ Arnaud Collin Du Bocage (SEAL)
---------------------------
Title: Executive Vice President & General Manager
Lending Office
--------------
Banque Nationale de Paris
209 South LaSalle Street
Chicago, IL 60604
Attention: Jo Ellen Bender
Telecopy number: (312) 977-1380
Telephone number (312) 977-2225
[Remainder of this page intentionally left blank]
- 58 -
<PAGE>
NORWEST BANK IOWA, N.A.
Commitment:
$20,000,000 By: /s/ Wm C. Green Jr. (SEAL)
-------------------
Title: Vice President
Lending Office
--------------
Norwest Bank Iowa, N.A.
666 Walnut Street
Telecopy number: (515)245-3128
Telephone number: (515)245-3354
[Remainder of this page intentionally left blank]
- 59 -
<PAGE>
THE BANK OF NEW YORK
Commitment:
$20,000,000 By: /s/ B. Todres
-------------
Title: Vice President
Lending Office
--------------
The Bank of New York
One Wall Street
New York, NY 10286
Attention: Benjamin B. Todres
Telecopy number: (212) 635-8593
Telephone number (212) 635-8745
- 60 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<DESCRIPTION>FDS FOR 12/30/98 10-Q
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM the
Consolidated Balance Sheet at December 31, 1998 and the Consolidated Statement
of Earnings for the six months ended December 31, 1998 of Meredith Corporation
and Subsidiaries AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000065011
<NAME> MEREDITH CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 694
<SECURITIES> 0
<RECEIVABLES> 133,414<F1>
<ALLOWANCES> 0
<INVENTORY> 45,097
<CURRENT-ASSETS> 263,004
<PP&E> 273,388
<DEPRECIATION> 124,956
<TOTAL-ASSETS> 1,082,269
<CURRENT-LIABILITIES> 338,374
<BONDS> 167,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 50,261
<OTHER-SE> 264,564
<TOTAL-LIABILITY-AND-EQUITY> 1,082,269
<SALES> 500,761
<TOTAL-REVENUES> 500,761
<CGS> 209,170
<TOTAL-COSTS> 209,170
<OTHER-EXPENSES> 20,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,686
<INCOME-PRETAX> 76,567
<INCOME-TAX> 32,333
<INCOME-CONTINUING> 44,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,234
<EPS-PRIMARY> .84
<EPS-DILUTED> .82
<FN>
<F1>Net of allowances
</FN>
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 99 FOR 12/30/98 10-Q
<TEXT>
Exhibit 99
----------
MEREDITH CORPORATION
FISCAL 1999 SECOND QUARTER AND YEAR-TO-DATE
EARNINGS PER SHARE AT-A-GLANCE
(Note: All figures are adjusted for stock splits)
- -- The chart below depicts comparable quarterly and fiscal-year diluted
earnings per share (EPS) before special items and discontinued operations:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Fiscal Year
-------- -------- -------- -------- -----------
F1993 .06 .09 .10 .10 .35
F1994 .08 .13 .16 .13 .50
F1995 .14 .19 .18 .20 .71
F1996 .17 .22 .24 .28 .91
F1997 .22 .31 .33 .36 1.22
F1998 .27 .40 .37 .42 1.46
F1999 .32 .47
- -- Fiscal 1999 second quarter net earnings increased 18 percent to a record
47 cents per share, compared to 40 cents per share in the prior year.
- -- For the first half of fiscal 1999, earnings per share before non-recurring
items increased 18 percent to 79 cents, compared to 67 cents in fiscal
1998.
- -- Net earnings for the first six months of fiscal 1999 were 82 cents per
share, including an after-tax gain of 3 cents per share from the sale of
the Better Homes and Gardens Real Estate Service in the fiscal 1999 first
quarter.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
|